24/8/2014: Italy: A Lifeless Liner on Economic Growth Rocks: Part 1

This is part 1 of the two-parts post on the current economic conditions in Italy.


A North-Eastern Italian provincial capital - a normally buzzing and lively medieval city with proud Roman history and previously vibrant high value-added industries and high tech services sits quiet and semi-deserted on the weekend afternoon. This August, a slow month by normal metrics of shoppers numbers and restaurants and cafe's patrons counts, is marked by the waves of recent closures of small businesses across the province. It is also marked by the official return of Italy to a recession - its third one since 2008.


The two halves of the pedestrianised main street tell the tale of the country-wide economic demise.

On the South side of the old piazza, the main street is dotted with few empty shop fronts. Established as a trading centre of the city centuries ago, this section of the city centre is primarily occupied by shops and businesses that owned their buildings over generations. No rent to pay means the businesses remain open, even as international and Italian brands are shutting down their local operations. The vacancy rate of shopfronts is running at around 10% here.

The Northern side of the street is smarter, better designed and more modernised. It was 'regenerated' in the mid-2000s and populated by trendier shops and eateries catering to Yuppie customers. Back in 2007-2008, the street was abuzz with activity: well-dressed patrons, predominantly under the age of 40 browsing in the cutting edge designer stores and boutiques, while visitors from the province and beyond soaked in the atmosphere of the new social hub in cafes, enoteche and trattorie. This year, more than three out of four businesses are shut, empty windows and closed doors greet a rare passerby. Unable to fund rents, as well as high taxes and charges, smaller business owners have gone under. Those supplying locally-demanded daily goods, such as fresh groceries, are trading elsewhere, some dealing exclusively in cash with their established customers. Majority are simply gone.

Consumer demand is weak. As the result, Italy's HICP inflation is down to 0.0% in July 2014 - the fifth weakest inflation performance in the euro area and down from 1.2% in July 2013 and 12 months average of 0.6% for the 12 months period through the end of last month. At -2.1% monthly rate of HICP inflation in Italy is the worst of all euro area states. Aptly, Italy's retail sales PMI remains below 50.0 line without interruption since Q2 2011. July reading was 43.4 down from 43.8 in June. Since January 2014, through May 2014, retail sales have risen by 0.1% cumulatively, with may posting 0.3% m/m decline. In real (inflation-adjusted) terms, turnover index in the retail trade in May 2014 stood at 92.6 below 93.8 recorded in June 2011 (based on working day adjusted non-seasonally adjusted data), but ahead of June 2013 level of 88.9.

Few kilometres down the road, another wealthy Northern Italian town is showing the same signs of decline. A builder, having completed an apartment block in 2009, was forced out of business by the city authorities saddling his business with the staggering cost of rectifying a planning error committed by… you guessed it, the city authorities. After sitting on the market for 4 years with no takers, the apartments went for auction  earlier this spring. Guiding prices ranged from EUR20,000 for a one-bedroom to EUR46,000 for three bedroom flats. Back in 2004-2006 these properties would be sold off-plans for around EUR150,000 one-beds and EUR280,000 for three-beds. The auction flopped: out of 21 properties on the market, only 9 sold. Prime city-centre retail space on the ground floor of the building remains only 1/5th occupied.

Country construction sector activity is still down 43% on the pre-crisis peak (the sixth largest decline in the euro area) with Q1 2014 reading marking all-time low, the only country in the euro area with construction posting historical low in 2014. And housing markets are singing blues. From the beginning of Q2 2013 and through the end of Q1 2014, Italian house prices fell 4.43%, while euro area as a whole experienced house price deflation of just 0.3%. Within the euro area, only Cyprus and Slovenia posted worse 12 months cumulative performance.


Four internationally trading factories, including two suppliers of high-tech household equipment with export markets around the world, have shut doors since the onset of the Great Recession - all employed more than 200 people each at the peak and all have been in business for decades. In a telling sign of the times, one smaller family firm, counting five generations in business and trading with some exports, closed down while the proprietors continue to trade on a highly reduced volume. New trade is all local and cash-only. Across the area, work supplied directly to consumers is now being routinely quoted priced 'with receipt or without' and in many cases, even registered sales of goods and services are openly under-declared on invoices to avoid VAT and profit taxes.

Italy's industrial production stood at 106.6 in H1 2011, by H1 2014 this fell to 97.2. On average, industrial production fell in Italy at an annual rate of 2.98% between the first half of 2011 and the end of June 2014. Italian Manufacturing PMIs fell from 52.6 in June to 51.9 in July although index remains above 50 line continuously since Q3 2013. Ditto for services PMI which fell from the 43-month high of 53.9 in June to 52.8 in July.

Activity down and margins are slipping. Industrial production prices rose 0.1% in June 2014 m/m marking the first month of positive inflation after four consecutive months of producer prices deflation. Since January 1, 2014, industrial producer prices are down 0.5% cumulatively, which is not helping companies profitability or their ability to sustain debt servicing and employment. How bad profitability margins are? In June 2014, index of industrial producer prices for domestic market in Italy stood at 106.5. This is below June 2012 reading (109.2) and June 2013 reading (108.6). Industrial producer prices excluding energy sector are virtually flat in June 2014 compared too June 2013.

Industrial parks strewn across rural countryside - once sporting new buildings and full parking lots for staff cars - are half-empty, with weeds taking over front gardens and previously carefully landscaped lots. Empty crates, unsold inventories and rusting machinery still sit around the worker-less buildings bearing the names of larger family businesses.

An area once a magnet for labour migrants from Italian South, Eastern Europe and Asia is now once again sending emigrants to Germany, the UK, US and Australia.


On the good news side, Italy's trade surplus (goods only) is up from EUR8.2 billion in January-May 2013 to EUR14.1 billion in January-May 2014, but more than half of this improvement (EUR3.7 billion) was down to decline in imports, with exports increases accounting for just EUR2.2 billion. On a seasonally-adjusted basis, Italian exports were down 3% m/m in June 2014 and country trade balance has deteriorated from EUR1.9 billion surplus in May 2014 to EUR1.7 billion in June.

These figures are not reflective of the Russian sanctions against the EU that came into effect in July 2014. In my conversations with a number of local residents, sanctions loom large. Local area businesses supply higher-end luxury household goods to Russia and via Russia, the rest of the CIS. Some - such as producers of luxury bathtubs and bathroom equipment - are impacted only indirectly, via general slowdown in Russian demand. Others - such as suppliers of premium food and wine - are fearing for their business in the wake of Russian government retaliatory sanctions of agricultural and food imports from EU. All are worrying about energy costs impact of the Ukrainian mess.


Then there's Italian Government. The country fiscal problems are epic even by already stretched euro area standards. IMF forecasts 2014 General Government debt to reach 134.5% of GDP even before the latest data pointing to a possible economic contraction for the full year GDP. That is the second highest public debt burden in the common currency area after Greece. Between 2012 and 2014, Italy's Government debt is forecast to increase by EUR144.2 billion with cumulated Government deficits amounting to EUR193.9 billion in 2011-2014, of these EUR105 billion is structural deficits. Country structural deficits are rising, not falling, up from EUR5.5 billion in 2013 to the projected EUR13.3 billion in 2014. At current bond yields, Italy needs ca 2.5% annual growth in GDP just to stay on a flat debt trajectory. Based on its current outstanding debt mix (referencing maturities and associated yields), this number rises to over 3.3%.

While on debt topic, corporate indebtedness is not improving either, despite years of austerity and financial repression. Here's the latest summary from the IMF (July 2014) covering leveraging levels across main euro area economies. Italy's corporate leverage is getting worse faster than any other euro area economy, save Greece and Portugal.

And while the nominal cost of capital to corporates has declined over time from the crisis peak levels, owing to extraordinary monetary accommodation by the ECB, real cost of capital is now trending above the crisis peak and well above long-term averages:

This means two things: firms are having difficulties funding replacement and expansion capital, technological modernisation stalled productivity across factors of production is going nowhere; and employment is unlikely to improve as cash flows are constrained by the need to sustain amortisation and depreciation in the environment of the high real cost of funding capital (which in part reflects also depressed margins).

Continued in the second part http://trueeconomics.blogspot.ie/2014/08/2482014-italy-lifeless-liner-on_24.html

23/8/2014: WLASze: Weekend Links on Arts, Sciences & zero economics

This is WLASze: Weekend Links on Arts, Sciences and zero economics.

First to start with - a major scientific breakthrough in physics coming from Yale. As the official website claims, "It’s official. Yale physicists have chilled the world’s coolest molecules. The tiny titans in question are bits of strontium monofluoride, dropped to 2.5 thousandths of a degree above absolute zero through a laser cooling and isolating process called magneto-optical trapping (MOT). They are the coldest molecules ever achieved through direct cooling, and they represent a physics milestone likely to prompt new research in areas ranging from quantum chemistry to tests of the most basic theories in particle physics."

Link: http://news.yale.edu/2014/08/20/yale-s-cool-molecules-are-hot-item

MOT jargon - for those inclined - here: http://www.nature.com/nature/journal/v512/n7514/full/nature13634.html

Meanwhile, in Australia, same cooling method is reportedly being used to improve performance of super-high resolution microscopes: http://www.wallstreetotc.com/laser-microscopes-20-times-more-sensitive-and-advanced-scientists/27412/

All in one week of cooling… and it is still summer...


Super cooling in physics, is not as cool as super structures in architecture, especially nostalgically grandiose (even when small enough to be just a summer camp for kids) architecture of the USSR. Here's a site that compiled some of the lesser-known examples: http://geliopolis.su/data.shtml

My favourite: the said camp, built in Vladivostok in 1975… it's human and ambitious and unorthodox at the same time…

And while on the same site, check out their 'Timeline' page http://geliopolis.su/time.shtml it is simply brilliant.


While architectural relics of ideologically-anchored aesthetics might be heftily cool, and super cool particles might be air-like brilliant, sometimes merging science, tech and creativity produces flashes of brilliant horror. And more often than not these can be found on wordlessTech website where editors have a never ending penchant for grotesque, macabre and outlandish without a moderating dose of taste.

Here is an example: http://wordlesstech.com/2014/08/12/faraday-cage-dress/

She looks cool, she looks super-techy-geeky-beautiful in that sense that just might get the entire Dublin WebSummit stop scratching and tapping their iPads for a minute… but don't try wearing this outfit on your local bus, or to a date… unless you want to fry an entire neighbourhood.

There is no point of asking why on earth would anyone want to make a 1 million volt outfit statement. It is neither abstract nor conceptual enough to be art and it is certainly not forward-thinking enough to be haute couture. It is, in fact, like merging a DNA of a dinosaur with GM corn - it won't roar and it won't taste good either... not cool enough and over-laboured…

23/8/2014: Real Cost of Capital: Euro 'Periphery' Dilemma

Staying on the topic of debt (see earlier post: http://trueeconomics.blogspot.ie/2014/08/2382014-that-pesky-problem-of-real-debt.html) here is IMF research on real cost of corporate capital (linked to the cost of debt) in the Euro area 'periphery' (this is from an IMF July 2014 publication that accompanied its Article 4 paper on Euro Area).

I highlighted with the red the range of recent capital costs range in each country to trace out historical comparatives.

Starting with the Euro area as a whole:

Two points:

• Current real cost of capital across the euro area is relatively benign, compared to both 1990s - early 2000s period and shows low volatility in recent (crisis) years post 2009 peak
• 2009 peak is pronounced but moderate compared to the one found in some 'peripheral' countries.

In basic terms, this means that euro area's capital costs are benign - above the 2004-2007 trough, but historically well below those observed in the 1990s.

Spain:

 Two points:

• Current capital cost levels are consistent with crisis peak 
• Capital today is as expensive in real terms as in the pre-euro era.

Which means that Spanish real cost of capital is now as bad as in the pre-euro period and is much worse than during the credit boom of the late 1990s-early 2000s.

Italy:

 Two points:

• Just as in Spain, real capital costs in Italy are comparable with peak of the crisis and 
• Capital costs today are more expensive than in the 2000s, but less expensive than in pre-euro era.

Italy's overall real cost of capital is currently comparable to the one observed in the late 1990s, and is higher than the one experienced in the credit expansion period of the early 2000s. That said, the cost uplift on 2000s is relatively moderate.

Portugal:

Two points:

• Capital costs today is below the peak levels of the crisis in real terms, but is severely elevated relative to 2000s and on-par with pre-euro era costs;
• Capital cost volatility is high and it was high during the entire euro era.

Thus, Portugal's real cost of capital is highly volatile, but on average is higher today than in the entire period from 1997 through 2010.

Ireland:

Ireland is clearly 'unique' compared to both the Euro area and the rest of the 'periphery' when it comes to the real cost of capital.

• The crisis peak in real cost of capital is massively out of line with historical trends.
• Ignoring the crisis peak, current real cost of capital is running well above the pre-crisis historical levels;
• Since the introduction of the euro, real cost of capital in Ireland trended above the pre-euro period levels

In summary, real cost of capital across the euro area 'periphery' shows one simple thing: investment is still a very costly proposition for businesses, especially compared to the pre-crisis period. Worse, it is now as expensive than (or comparable to) the cost averages for the pre-euro area period.

The above puts stark contrast between the cost of funding the banks (low) and Governments (historically low today) and real businesses (high).

23/8/2014: That Pesky Problem of Real Debt...

Again, revisiting IMF's Article 4 consultation paper for Euro Area, published in July 2014, here is a summary of the Euro area 'peripheral' countries debt overhang.

First real economic debt (debt of non-financial companies, households and public sector):

 Points of note:

1. Ireland's debt overhang is severe. More severe than of any other 'peripheral' country. Bet you forgot that little bit with all the 'best-in-class' growth performance droning in the media. Ah, and worse, remember, not the level alone, but the rate of debt increases over time, also matters. And by this metric, we too are the worst in the group, both for debt increases on 2003 levels and debt increases on 2008 levels.
2. Ireland's households' debt has declined over 2008-2013, more so than in Portugal and Spain. But it remains second highest after the Netherlands' and this decline masks true extent of debt problem because 2013 figure no longer counts household debts issued by banks that left Ireland and books of loans sold to investment funds. This also excludes some securitised debt.
3. Ireland's corporate debt problem is potentially overstating true extent of real debt in the economy, as it includes a small share of MNCs debt - debt issued by Irish institutions. This is likely to be relatively minor, in my view, as MNCs largely do not do debt intermediation via Irish domestic institutions. 

Now on to our household debt deleveraging in more detail:

Good news is, when it comes to our households, we are aggressively deleveraging compared to pre-crisis debt peak. As aggressively (in rate terms) as the U.S. Caveats mentioned above apply.

But there is a problem with all the debt legacy:

In the above 'PS' stands for private sector, not public sector. So private sector debt legacy is associated with negative subsequent economic growth, in general. But as above shows, for the peripheral countries, including the basket case outside Troika capture, Slovenia, and the rarely mentioned case of Finland (see chart below) it is also compounding structurally weak fundamentals other than debt alone.

So a timely reminder: that debt problem - it has not gone away. Not by any measure and most certainly not for Ireland.

Note: to see the problem in Finland consider the following chart:

23/8/2014: Labour Costs and Euro area's myth of 'productivity' gains

Looking back at July 2014 IMF Article 4 paper on Euro area (most of which I covered back when it was published), here is an interesting chart mapping changes in the euro area countries' unit labour costs.

The chart is complex, so let me point out few things in it:

Firstly: improvements in the unit labour costs (ULCs) is reflected in the vertical distance between the black dot (accumulated change in ULCs over 2000-2007 period: higher level of the dot reflects lower competitiveness or higher ULCs compared to EA17 levels) and the black bar (accumulated change in ULCs over 2008-Q3 2013 period).

1. This shows that Ireland has delivered (a) the highest ULCs deterioration of the sample of countries reported over 2000-2007 period, and (b) since 2008, Ireland has delivered the largest improvement in competitiveness (ULCs drop) of the sample. 
2. Second largest improvement in ULCs was recorded in Greece and it is comparable to, but modestly shallower than in Ireland; third and virtually indistinguishable from the second - in Spain and fourth in Portugal.
3. The above two facts suggest that improvements in the ULCs are indeed related to the rates of increases in  unemployment: all countries with significant improvements have seen dramatic rises in unemployment. Jobs destruction 'helps' competitiveness.

Secondly, coloured bars show composition of gains over two periods. Here, the following points arise:

1. Labour costs declines have been responsible for the lion's share of ULCs gains in Greece, followed by Ireland, Italy, Portugal and Spain.
2. Labour costs declines are dramatic in the case of only two countries: Greece and Ireland.
3. The above two facts suggests that jobs destruction impacted dramatically in the sectors that were employment/labour-intensive, allowing for substantial moderation of labour costs across the remaining economy on average. So 'concentrated' jobs destruction 'helps' improve competitiveness a lot.
4. Meanwhile, productivity gains in economy were significant contributors to improved competitiveness in Spain, followed - by some margin of difference - by Ireland, and Portugal.
5. Points 1-2 and 4 together strongly suggest that in Ireland and Spain (and to a lesser extent Portugal) gains in competitiveness came about not because the remaining working population suddenly became more productive, but because the new jobless were working in sectors that were less productive, plus because remaining workers got paid less on average.

One more point: of course, our (and other euro area 'peripherals') gains here are measured not in absolute terms, but against EA17 aggregate levels of competitiveness, so to a large extent, our gains in the chart above are also down to their (other euro area countries') losses in competitiveness. This is exactly what the above figure shows for Austria, Germany, Belgium and the Netherlands.

That's happy times of productivity growth in the euro area 'periphery', then... down to throwing people off the employment bus and bragging about fabled improved productivity for the remaining passengers...

23/8/2014: Two charts: US Oil

Two charts for trend spotting:

First one shows US production of oil from 1983 through today:

This shows the reversal of the 45% decline in oil output suffered from 1984-1986 through 2008 in just a few years (2009-present).

The second one maps development of oil pipelines network in the US to match this expansion of production and re-orient infrastructure toward exports:

That's shale & sands impact in just two charts...

23/8/2014: BlackRock Institute Survey: EMEA, August 2014

BlackRock Investment Institute released the latest Economic Cycle Survey results for North America and Western Europe (covered here: http://trueeconomics.blogspot.ie/2014/08/2382014-blackrock-institute-survey-n.html). Here are the survey results for EMEA:

"…this month’s EMEA Economic Cycle Survey presented a mixed outlook for the region. The consensus of respondents describe Croatia and the Ukraine in a recessionary state, with an even split of economists gauging Russia, Hungary and Turkey to be in a recessionary or contraction phase."

6 months out: "Over the next two quarters, the consensus shifts toward expansion for Russia and Hungary and an even split between expansion or recession for Turkey."

12 month out: "At the 12 month horizon, the consensus expecting all EMEA countries to strengthen or remain the same with the exception of Russia, Hungary, Turkey and the Ukraine."

Global: "Globally, respondents remain positive on the global growth cycle with a net 59% of 32 respondents expecting a strengthening world economy over the next 12 months – an 26% decrease from the net 85% figure last month. The consensus of economists project mid-cycle expansion over the next 6 months for the global economy."

Two charts to illustrate:

Note: Red dot represents Czech Republic, Kazakhstan, Romania, Israel, Egypt, Poland, Slovenia and Slovakia.

Previous month results are here: http://trueeconomics.blogspot.ie/2014/07/1172014-blackrock-institute-survey-emea.html

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

23/8/2014: BlackRock Institute Survey: N. America & W. Europe, August 2014

BlackRock Investment Institute released the latest Economic Cycle Survey results for North America and Western Europe. Here are the main points (emphasis mine):

"This month’s North America and Western Europe Economic Cycle Survey presented a positive outlook on global growth, with a net of 59% of 74 economists expecting the world economy will get stronger over the next year, compared to net 81% figure in last month’s report."

Global outlook: "The consensus of economists project mid-cycle expansion over the next 6 months for the global economy. At the 12 month horizon, the positive theme continued with the consensus expecting all economies spanned by the survey to strengthen or stay the same."

Regional outlook for Euro area: "Eurozone is described to be in an expansionary phase of the cycle and expected to remain so over the next 2 quarters. Within the bloc, most respondents described Greece, Italy and France to be in a recessionary state, with the even split between contraction or recession for Portugal and Finland. Over the next 6 months, the consensus shifts toward expansion for Finland, France and Italy and an even split between contraction or recession for Greece and Portugal.

US and North America: "Over the Atlantic, the consensus view is firmly that North America as a whole is in mid-cycle expansion and is to remain so over the next 6 months."

Two charts to illustrate:

Note: Red dot denotes Austria, Belgium, Canada, Denmark, Norway, Spain, Sweden and Switzerland.

Previous month results are here: http://trueeconomics.blogspot.ie/2014/07/1672014-blackrock-institute-survey-n.html

Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

22/8/2014: Minimum Wage and Employment: Recent Study

The effects of minimum wage laws on employment levels and employment prospects for various categories of workers are subject of voluminous literature in economics. Still, little consensus exists on whether higher minimum wages impede new jobs creation or destroy existent jobs or suppress earnings growth for lower wage employees.

A recent paper by Meer, Jonathan and West, Jeremy, titled "Effects of the Minimum Wage on Employment Dynamics" (June 26, 2012, http://ssrn.com/abstract=2094726) offers estimates "how the minimum wage affects both employment levels and dynamics... To do so, we employ the Business Dynamics Statistics, a long (1977-2009) panel of administrative data on the aggregate population of non-agriculture private-sector employers in the United States, broken out based on establishment location. These data offer the ability to examine gross job creation and destruction separately, an important advantage."

The authors first discuss "why even a carefully-designed study may not find a statistically significant effect of the minimum wage on employment levels":

1) "…Newly hired employees within a company are more likely to be paid minimum wage than are more senior employees. …It follows that minimum wage employees are likely to be relatively recent hires. …A direct implication is that minimum wage increases are most likely to affect workers who are (or would be) recent hires."

2)"…any reduction in new employment should also be reflected in total employment, so theoretically the decision of which of these outcomes to analyze is arbitrary. However, for estimates using a finite panel of real-world data, the distinction becomes much more important because the impact of an unrelated shock to total employment may easily overwhelm an effect of the minimum wage. Furthermore, …relatively rapid transitions to higher wages are common for minimum wage workers; we… calculate that nearly two-thirds of minimum wage workers who remain employed after one year earn more than the minimum wage. This illustrates the policy importance of focusing on the job creation margin; if higher minimum wages reduce employment entry by these workers, they never have the opportunity to develop the skills or tenure to earn even higher wages."

3) "…inflation can inhibit identification of statistically significant employment effects,
especially in studies relying on data from the 1970s-1980s, which experienced relatively
high rates of inflation. Historically, minimum wages have been set in nominal dollars and not adjusted for inflation, so any nominal wage differential between two states will become economically less meaningful over time."

4) "…sooner or later every state experiences a nominal increase in its minimum wage, either due to a revision to a state law or because the federal minimum wage increases. Unlike the slow erosion of nominal minimum wage gaps brought about by inflation, a discrete increase to the counterfactual's minimum wage may quickly close or even reverse this gap. To put this another way: in the long run, there is no permanent control group. This situation would not be problematic if the minimum wage affected employment in an abrupt, discrete manner. But if the minimum wage primarily affects new employment, then it may take years to observe a statistically significant effect on total employment."

So the authors conclude that "considered together, we believe that examining employee hiring and job growth directly provides for a more accurate assessment of minimum wage effects than examining total
employment. There are also theoretical arguments for why minimum wages are more likely to impact employment dynamics than employment levels."

The authors find that "…the minimum wage significantly reduces rates of job growth, that this occurs primarily through reductions in job creation, and that this effect is somewhat more pronounced in continuing establishments than for establishment births. We also find that the reduction in job creation cannot be attributed to reductions in employee turnover, as well as no effects on the entry and exit of establishments."

21/8/2014: Capital v Labour Taxes: Time to Scratch that Cabbage Head, Mr. Politico

Ireland, like majority of other small open economies, runs a tax regime that is punitive to highly skilled workers and benign to capital owners. This, as I explain in part here (http://trueeconomics.blogspot.ie/2014/08/2182014-thomas-piketty-powerful.html), spells bad news for wealth distribution. It is simply a tax transfer from one form of capital (human capital) to other forms of capital (financial, IP and physical capital). Still, majority of small economies around the world continue to argue in favour of skinning alive their human capital and subsidising (in either relative or absolute terms) other forms of capital, based on a simple argument: in modern world, financial, IP and technological forms of capital are highly mobile (tax them and they will run for the border, goes the argument), even physical capital is mobile over the long run (tax it and investment will flow somewhere else), while labour is tied to its chair by the chains of visas, work permits etc (tax workers and they have nowhere to go).

Of course, in the real world, labour is mobile and highly skilled labour is highly mobile. That is something our outdated, outsmarted and out-of-touch political classes do not comprehend. But some academics do. Here's an example: Aghion, Philippe and Akcigit, Ufuk and Fernández-Villaverde, Jesús, paper, titled "Optimal Capital Versus Labor Taxation with Innovation-Led Growth" (May 31, 2013. PIER Working Paper No. 13-025. http://ssrn.com/abstract=2272651) shows that in presence of mobile labour force, capital subsidies are suboptimal from the revenue point off view. And worse, the more innovation-driven is your growth (the more reliant it is on human capital and the more mobile that human capital is), the lower is efficiency of capital supports.

"Chamley (1986) and Judd (1985) showed that, in a standard neoclassical growth model with capital accumulation and infinitely lived agents, either taxing or subsidizing capital cannot be optimal in the steady state. In this paper, we introduce innovation-led growth into the Chamley-Judd framework, using a Schumpeterian growth model where productivity-enhancing innovations result from pro.t-motivated R&D investment."

Enough of mumbo-jumbo. "Our main result is that, for a given required trend of public expenditure, a zero tax/subsidy on capital becomes suboptimal. In particular, the higher the level of public expenditure and the income elasticity of labor supply, the less should capital income be subsidized and the more it should be taxed. Not taxing capital implies that labor must be taxed at a higher rate. This in turn has a detrimental effect on labor supply and therefore on the market size for innovation. At the same time, for a given labor supply, taxing capital also reduces innovation incentives, so that for low levels of public expenditure and/or labor supply elasticity it becomes optimal to subsidize capital income."

Of course, labour supply is even more income elastic when it is related to high quality human capital (that can be marketed internationally), and worse, when it is related to innovation (the one that is sought after by dozens of advanced economies bidding over each other to attract the right talent in).

Now, give it a thought:
* Irish tax system literally destroys returns to human capital through punitive levels of taxation of returns on high skills;
* Irish labour markets are open to migration (including emigration of highly skilled);
* Irish economy competes for high skills with scores of other similar economies; and
* Irish state is subsidising in relative terms returns to physical and financial capital, while our tax codes also subsidise IP returns.

Time to scratch that cabbage head, Mr. Politico?

21/8/2014: G20: Does it matter?

To many analysts and observers, in recent years, G20 has emerged as a broader and more inclusive alternative to the restricted club of advanced super-economies of G7 or G8 (see my earlier note on G8 here: http://trueeconomics.blogspot.ie/2014/03/2332014-about-that-kicking-russia-out.html).

A new ECB paper by  Lo Duca, Marco and Stracca, Livio, titled "The Effect of G20 Summits on Global Financial Markets" (February 18, 2014, ECB Working Paper No. 1668: http://ssrn.com/abstract=2397893) acknowledges that "In the wake of the global financial crisis, the G20 has become the most important forum of global governance and cooperation, largely replacing the once powerful G7."

All good so far but the question is: does G20 matter to the financial markets? Do summits and new announcements coming from G20 move the markets? "In this paper we run an event study to test whether G20 meetings at ministerial and Leaders level have had an impact on global financial markets. We focus on the period from 2007 to 2013, looking at equity returns, bond yields and measures of market risk such as implied volatility, skewness and kurtosis. Our main finding is that G20 summits have not had a strong, consistent and durable effect on any of the markets that we consider, suggesting that the information and decision content of G20 summits is of limited relevance for market participants."

Of course, the sample covers primarily the period of the Global Financial Crisis and the Great Recession, so one might think that G20 announcements might be swamped by other, more market-linked news. The problem with this is that during the crises, information - any information - acquires more significant value: http://trueeconomics.blogspot.ie/2014/05/1552014-innovation-employment-growth.html (see box-out). So, no, the sample period is not at fault... 

21/8/2014: Consumption of Technology: Revolutions to Evolutions

Neat, although out of date by now, chart showing long-run evolution of consumer utilisation of technology:

Click on image to enlarge...