In the Washington Post, Stephen Moore recounts the tale of the most famous napkin in US economic history:
It was 40 years ago this month that two of President Gerald Ford’s top White House advisers, Dick Cheney and Don Rumsfeld, gathered for a steak dinner at the Two Continents restaurant in Washington with Wall Street Journal editorial writer Jude Wanniski and Arthur Laffer, former chief economist at the Office of Management and Budget. The United States was in the grip of a gut-wrenching recession, and Laffer lectured to his dinner companions that the federal government’s 70 percent marginal tax rates were an economic toll booth slowing growth to a crawl.
To punctuate his point, he grabbed a pen and a cloth cocktail napkin and drew a chart showing that when tax rates get too high, they penalize work and investment and can actually lead to revenue losses for the government. Four years later, that napkin became immortalized as “the Laffer Curve” in an article Wanniski wrote for the Public Interest magazine. (Wanniski would later grouse only half-jokingly that he should have called it the Wanniski Curve.)
This was the first real post-World War II intellectual challenge to the reigning orthodoxy of Keynesian economics, which preached that when the economy is growing too slowly, the government should stimulate demand for products with surges in spending. The Laffer model countered that the primary problem is rarely demand — after all, poor nations have plenty of demand — but rather the impediments, in the form of heavy taxes and regulatory burdens, to producing goods and services.
Solid supporting evidence came during the Reagan years. President Ronald Reagan adopted the Laffer Curve message, telling Americans that when 70 to 80 cents of an extra dollar earned goes to the government, it’s understandable that people wonder: Why keep working? He recalled that as an actor in Hollywood, he would stop making movies in a given year once he hit Uncle Sam’s confiscatory tax rates.
When Reagan left the White House in 1989, the highest tax rate had been slashed from 70 percent in 1981 to 28 percent. (Even liberal senators such as Ted Kennedy and Howard Metzenbaum voted for those low rates.) And contrary to the claims of voodoo, the government’s budget numbers show that tax receipts expanded from $517 billion in 1980 to $909 billion in 1988 — close to a 75 percent change (25 percent after inflation). Economist Larry Lindsey has documented from IRS data that tax collections from the rich surged much faster than that.
The graph in that blog post showed two things. First, Italy’s real GDP lose in the recent crisis has been bigger than during 1930s and second that monetary easing (a 41% devaluation) brought Italy out of the crisis in 1936.
I have been asked if I could do a similar graph on Finland. I have done so — but I have also added the a third Finnish “Depression” and that is the crisis in the early 1990s related to the collapse of the Soviet Union and the Nordic banking crisis. The graph below shows the three periods.
The most interesting story in the graph undoubtedly is the difference in the monetary response during the 1930s and during the present crisis.
In October 1931 the Finnish government decided to follow the example of the other Nordic countries and the UK and give up (or officially suspend) the gold standard.
The economic impact was significant and is very clearly illustrate in the graph (look at the blue line from year 2-3).
We have nearly imitate take off. I am not claiming the devaluation was the only driver of this economic recovery, but it surely looks like monetary easing played a very significant part in the Finnish economic recovery from 1931-32.
Italy learnt it was no longer in a recession on Wednesday thanks to a change in data calculations across the European Union which includes illegal economic activities such as prostitution and drugs in the GDP measure.
Adding illegal revenue from hookers, narcotics and black market cigarettes and alcohol to the eurozone’s third-biggest economy boosted gross domestic product figures.
GDP rose slightly from a 0.1 percent decline for the first quarter to a flat reading, the national institute of statistics said.
Although ISTAT confirmed a 0.2 percent decline for the second quarter, the revision of the first quarter data meant Italy had escaped its third recession in the last six years.
The economy must contract for two consecutive quarters, from output in the previous quarter, for a country to be technically in recession.
It’s merely a change in the statistical measurement, not an actual increase in Italian economic activity. And, given that illegal revenue pretty much by definition isn’t (and can’t be) accurately tracked, it’s only an estimated value anyway.
Imagine you’re a college graduate stuck in a perpetually lousy economy. That’s a problem Japanese twenty-somethings have faced for more than 20 years. Two decades of stagnation after the collapse of the 1980s real-estate and stock bubbles — combined with labor laws making it tough to fire older workers — have relegated vast numbers of Japanese young adults to low-paying, temporary contract jobs. Many find themselves living with their parents well into their twenties and beyond, unmarried and childless.
Then again, they do have plenty of time to dress up like wand-wielding sailor girls and cybernetic alchemist soldiers from the colorful world of anime cartoons and manga comics. Indeed, Japan’s Lost Decades have coincided with a major spike in “people escaping to virtual worlds of games, animation, and costume play,” Masahiro Yamada, a sociology professor at Chuo University in Tokyo, recently told the Financial Times. “Here, even the young and poor can feel as though they are a hero.”
It’s hard to blame them. After all, it’s not that these young adults in Japan are resisting becoming productive members of the economy — it’s that there just aren’t enough opportunities for them. So an increasingly large number of them spend an increasingly large amount of time living in make-believe fantasy worlds, pretending they are someone else, somewhere else. This is a very bad thing for the Japanese economy.
And guess what: America has a growing number of make-believe “cosplay” heroes, too. Many of the 130,000 people who attend the San Diego Comic Con every year invest big bucks in elaborate outfits as a way of showing off their favorite Japanese characters, as well as those from American superhero movies, comics, and “genre” televisions shows such as Game of Thrones. And this trend is growing — the crowd at Comic Con was one-third this size in 2000. In 2013, the SyFy channel even created a reality show about the trend, Heroes of Cosplay.
Michael Snyder says the official unemployment rate actually conceals more than it reveals:
According to shocking new numbers that were just released by the Bureau of Labor Statistics [PDF], 20 percent of American families do not have a single person that is working. So when someone tries to tell you that the unemployment rate in the United States is about 7 percent, you should just laugh. One-fifth of the families in the entire country do not have a single member with a job. That is absolutely astonishing. How can a family survive if nobody is making any money? Well, the answer to that question is actually quite easy. There is a reason why government dependence has reached epidemic levels in the United States. Without enough jobs, tens of millions of additional Americans have been forced to reach out to the government for help. At this point, if you can believe it, the number of Americans getting money or benefits from the federal government each month exceeds the number of full-time workers in the private sector by more than 60 million.
A number that I find much more useful is the employment-population ratio. According to the employment-population ratio, the percentage of working age Americans that actually have a job has been below 59 percent for more than four years in a row…
That means that more than 41 percent of all working age Americans do not have a job.
When people can’t take care of themselves, it becomes necessary for the government to take care of them. And what we have seen in recent years is government dependence soar to unprecedented levels. In fact, welfare spending and entitlement payments now make up 69 percent of the entire federal budget.
In Maclean’s, Debbie DownerColin Campbell takes a survey of the state of Canada’s economy:
A key qualification for landing a job at the Bank of Canada, it seems, is an unfailing sense of optimism. In 2009, the bank forecast the economy would grow 3.3 per cent in 2011. It grew 2.5 per cent. In 2011, it said the economy would grow 2.9 per cent in 2013. It will likely be just 1.6 per cent. Now it says the economy will grow 2.3 per cent next year. How likely is that? The bank has consistently viewed the economy through rose-coloured glasses in recent years, perhaps believing its low-interest-rate policy will eventually bear fruit. Rates have been held at one per cent for three years now. But the economy seems only to be getting worse.
It grew 0.3 per cent in August, Statistics Canada said last week — mostly attributed to a familiar crutch, the oil business. Elsewhere, things aren’t looking up. A new TD Bank report said corporate Canada is “in a slump,” with profits down 16 per cent from their post-recession peak in 2011. Some observers point out that Canada is still doing better than Europe and Japan. But so are most countries that aren’t in a recession, from South Africa and New Zealand to Equatorial Guinea and Guatemala. After breezing through the recession, Canada is back to old habits: hoping its fortunes (i.e., exports) will rise along with America’s comeback. But the U.S., too, is back in a rut. Last week, the Federal Reserve said it would continue with its $85-billion-a-month bond-buying stimulus program.
With the economy sputtering, Ottawa has meanwhile remained preoccupied with fiscal restraint and balancing the budget within two years. So, with neither low interest rates nor government spending providing a boost, the outcome seems predictable: Official growth forecasts will look nice, but will keep missing the mark.
Charles Hugh Smith on the next big financial crisis and the way we’ve carefully put the worst people in place to cope with it:
Brenton Smith (no relation) recently identified a key driver of the next financial crisis: Economic Darwinism. Just as natural selection selects for traits that improve the odds of success/survival in the natural world, Economic Darwinism advances people and policies that boost profits and power within the dominant environment.
As Brenton explains in his essay The One Phrase That Explains the Great Recession, “The Federal Reserve’s 20-year policy of easy money created an environment virtually assured to select bankers, bureaucrats, educators, and elected officials who least understood the consequences of a credit crisis.”
In other words, a hyper-financialized environment of near-zero interest and abundant credit rewarded those people and policies that succeed in that environment. Once the environment changes from “risk-on” to “risk-off,” the people and policies in charge are the worst possible choices for leadership, as the traits that enable successful management of credit crises have been selected out of the leadership pool.
This has political as well as financial consequences. As Brenton noted in an email exchange, Economic Darwinism creates an “incestuous relationship between Wall Street and Washington D.C., where success on Wall Street leads to a career in D.C.” This is a self-reinforcing process, as all those who are unwilling to keep dancing during the risk-on speculative orgy are weeded out of both the financial and political sectors, while those who dance the hardest gain political power, which they use to keep the music playing regardless of the increasing risks or consequences to the nation.
In the Guardian, Larry Elliott, Phillip Inman and Helena Smith round up the IMF’s self-criticisms over the handling of the bailout package imposed on Greece:
In an assessment of the rescue conducted jointly with the European Central Bank (ECB) and the European commission, the IMF said it had been forced to override its normal rules for providing financial assistance in order to put money into Greece.
Fund officials had severe doubts about whether Greece’s debt would be sustainable even after the first bailout was provided in May 2010 and only agreed to the plan because of fears of contagion.
While it succeeded in keeping Greece in the eurozone, the report admitted the bailout included notable failures.
“Market confidence was not restored, the banking system lost 30% of its deposits and the economy encountered a much deeper than expected recession with exceptionally high unemployment.”
In Athens, officials reacted with barely disguised glee to the report, saying it confirmed that the price exacted for the €110bn (£93bn) emergency package was too high for a country beset by massive debts, tax evasion and a large black economy.”
Under the weight of such measures — applied across the board and hitting the poorest hardest — the economy, they said, was always bound to dive into an economic death spiral.
Prof. Cowen explains why one economic model isn’t sufficient to explain the economic downturn. He shows how several different economic models can be used to explain both the cause and the effects of the recession.
Last year South Korea lost its decade long battle with China to retain its lead in ship building. Because of a five year depression in the world market for shipping, South Korean ship exports fell 30 percent last year, to $37.8 billion. China, helped by government subsidies, saw ship exports fall only 10.3 percent, leaving China with $39.2 billion in export sales. The Chinese government has also been giving its ship builders lots of new orders for warships, which made its yards more profitable and better able to beat South Korea on price. The Chinese government also provides its ship builders with more loans, allowing the builders to offer better credit terms to customers. South Korea is still ahead of China in total orders for ships. As of last year South Korea had 35 percent of these orders versus 33.3 percent for China.
China has been helping its shipyards for over a decade and that has enabled Chinese ship builders to gradually catch up to South Korea and Japan. It was only four years ago, sooner than anyone expected, that China surpassed South Korea as the world’s largest shipbuilder in terms of tonnage. In late 2009, Chinese yards had orders for 54.96 million CGT of ships, compared to 53.63 million CGT for South Korea. Thus China had 34.7 percent of the world market. In 2000, South Korea took the lead from Japan by having the largest share of the world shipbuilding market.
CGT stands for Compensated Gross Tons. This is a new standard for measuring shipyard effort. Gross tons has long been used as a measure of the volume within a ship. CGT expands on this by adding adjustments for the complexity of the ship design. Thus a chemical tanker would end up with a value four times that of a container ship. China is producing far more ships, in terms of tonnage of steel and internal volume, than South Korea, mainly because a much larger portion of Chinese ships are simple designs. South Korea has, over the years, pioneered the design, and construction, of more complex ships (chemical, and Liquid Natural gas carriers.)
David Harsanyi discusses the named (by the mainstream media) culprits for the unexpected drop in US fourth-quarter GDP:
So, U.S. consumer confidence unexpectedly plunged in January to its lowest level in more than a year. The U.S. economy unexpectedly posted a contraction in the fourth quarter of 2012 — for the first time since the recession — “defying” expectations that economic growth is in our future.
If the economy were as vibrant as President Barack Obama has told us it is, a belt tightening in a single sector of government surely wouldn’t be enough to bring about “negative growth.” But one did. Unexpectedly. No worries, though. Pundits on the left tell us that this contraction was good news — possibly the best contraction in the history of all contractions. The White House blamed Republicans and, I kid you not, corporate jet owners because — well, who else? But mostly, the left is bellyaching about the end of temporary military spending and a brutal austerity that’s enveloped a once great nation.
There’s a small problem with that argument. There is no austerity. In the fourth quarter of 2012, Washington spent $908 billion, which was $30 billion more than it spent in the last quarter of 2011 and nearly $100 billion more than it spent in the third quarter of 2012. Taxpayers took on another $400 billion in debt during the quarter. If this is poverty, can you imagine what robust spending looks like?
As always, for “austerity” to take the blame, there’d actually have to have been some austerity to start with. The US government certainly hasn’t been practicing austerity over the last four years.
Feeling optimistic about the future? Bryan Goldberg is here to slap that silly optimistic grin off your face:
Hey kids, you’ve all read “The Hunger Games,” right? Almost all young people have read the best-selling books or seen the Hollywood movie about Katniss Everdeen, a smart and ambitious young lady whose life prospects are diminished by historical events that predate her. What little hope she has is seemingly reduced to nil when a bunch of old people drop her into an arena and force her to fight with her fellow children in a battle royale to the death.
But that’s just fiction, right? Your loving parents and grandparents would never screw up their world and then throw you kids under the bus…or would they?
Actually, they already have.
Last week, the economics blog Calculated Risk ran a chart that tells a pretty compelling story. To an economist, this chart means that the magnitude and duration of the 2007 recession’s impact on unemployment outpaces that of any prior post-war recession. To young people, it simply means this…
You kids are screwed.
In fact, teenagers today probably aren’t old enough to remember the “Dot Bomb” recession of twelve years ago. But even at its peak, that really bad recession did not reach a level of unemployment that matched the one we are still currently experiencing. With the Federal Reserve losing its appetite for quantitative easing, the last bullet in their holster, and both political parties deciding to half-ass the fiscal policy debate, it’s safe to say that…
You kids are really screwed.
Pay careful attention to Lesson No. 4: it’s even more important than you think it is.
H/T to Jon, my former virtual landlord, for the link.
Tyler Cowen discusses his book The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick and Will (Eventually) Feel Better. Andrew Coyne (National Post) presents a rebuttal and the pair discuss Cowen’s thesis focusing on issues of productivity, innovation and government policy (moderated by Wendy Dobson).
The world remains in barely contained slump. Industrial output is still below earlier peaks in Germany (-2), US (-3), Canada (-8) France (-9), Sweden (-10), Britain (-11), Belgium (-12), Japan (-15), Hungary (-15) Italy (-17), Spain (-22), Greece (-27), according to St Louis Fed data. By that gauge this is proving more intractable than the Great Depression.
[. . .]
The original trigger for the Great Recession has since faded into insignificance. America’s house price bubble — modest by European or Chinese standards — has by now entirely deflated. Warren Buffett is betting on a rebound. Fannie and Freddie are making money again.
Five years on it is clear that subprime was merely the first bubble to pop, a symptom not a cause. Europe had its own parallel follies. Britons were extracting almost 5pc of GDP each year in home equity by the end. Spain built 800,00 homes in 2007 for a market of 250,000. Iceland ran amok, so did Latvia and Hungary. The credit debacle was global. If there was an epicentre, it was Europe’s €35 trillion banking nexus.
[. . .]
A study by Stephen Cecchetti at the Bank for International Settlements concludes that debt turns “bad” at roughly 85pc of GDP for public debt, 85pc for household debt, and 90pc corporate debt. If all three break the limit together, the system loses its shock absorbers.
“Debt is a two-edged sword. Used wisely and in moderation, it clearly improves welfare. Used imprudently and in excess, the result can be disaster,” he said.