Real-World Economics Review Blog

from Merijn Knibbe

As a matter of routine Eurostat publishes data on the monthly change in the number of unemployed in the Eurozone (the blue lines) and in the entire European Union (the yellow lines). The difference between the two lines is the change in the number of EU-unemployed outside the Eurozone. During the 2008/2009 crisis EU-unemployment inside as well as outside the Eurozone increased. The present crisis is different. Unemployment inside the Eurozone is increasing fast and continously, EU-unemployment outside the Eurozone is increasing much less. The question: is this an Euro or an Eurozone problem? Or both? Meta: Eurozone vs. non-Eurozone population numbers are very roughly 2 to 1.

Figure 1: Change in the number of unemployed persons (compared to previous month, in thousands), seasonally adjusted,

from Dean Baker

One of the major growth industries in Washington is the promotion of budget hysteria. Well-funded groups have weekly, if not daily, events designed to hype the country’s budget situation. Much of the national media, most importantly the Washington Post, have enlisted in this effort, devoting both their opinion and news sections toward this goal.

Unfortunately for the deficit-crisis industry, the facts may stubbornly refuse to cooperate. Any discussion of the deficit requires separating out the short-term and the long-term story. The short-term story is very simple. The economy collapsed in 2008 when the housing bubble burst. That is the story of the large budget deficits that we have seen in the last five years: full stop.   Read more…

from Merijn Knibbe

After 2008 Poland and Romania devaluated their currency. Other countries tried ‘internal devaluation’ (Spain, Portugal, Greece, Ireland, The Baltic states). Are there any differences when it comes to unemployment (source: the new Eurostat data which revised unemployment in august with +0,1% and showed an additional 0,1% rise in september)? According to me, the evidence is at least suggestive. By the way – unemployment in Greece and Spain might soon reach 30 and maybe even 35%. Is the Euro going to survive this?

from Merijn Knibbe
Taxes are a considerable part of prices. Quite some European countries increased indirect taxes (VAT, excises) to increase revenue, by changing rates and by shifting articles from low to high rates (in Greek tourism: also the other way around). As a consequence, the price level increased. How much did this price level increase, in the Eurozone and are there any significant differences between countries? On the Eurozone-level the increase was limited (+0,7%). In individual countries, it sometimes however increased the price level with a whopping 7% (Greece, Romania). The UK also relied on indirect taxes to increase government revenue.

Read more…

from Merijn Knibbe

At this moment, NGDP-targeting is all the rage. According to this idea, central banks have to target the level of Nominal Gross Domestic Product instead of the interest rate or inflation, with as one of the implications that monetary policy is perceived to be ‘tight’ when interest rates are low – but NGDP is declining. This has interesting implications and I’m not sure wheter the proponents of NGDP targeting are aware of these:

Read more…

from Dean Baker

There are few issues that matter more to the public than Social Security. It is a hugely popular and hugely successful program.

Social Security was set up to provide retirees and disabled workers with a core income either in retirement or in the event a disability made them unable to work. This is exactly what the program does. In its seven decades of existence it has lifted tens of millions of retirees out of poverty and allowed millions of disabled workers to maintain a modest standard of living.

It accomplishes these goals with a minimal amount of fraud and in a highly efficient manner. Its administrative costs are less one-tenth as a high as those of private sector insurers.

This is the reason that the program enjoys enormous popularity across the political and ideological spectrum. Not only Democrats, but the overwhelming majority of independent and Republicans consistently tell pollsters that they support Social Security and do not want to see benefits cut. Conservatives and even self-identified supporters of the Tea Party also oppose cuts to the program.

This is why it is striking that Governor Romney has explicitly called for large cuts to the program. It is perhaps even more striking that President Obama indicated in his first debate that he agrees with these cuts.  Read more…

from David Ruccio

With ongoing discussions of Henry Wiencek’s new book [ht: sm], Master of the Mountain, we learn more and more about Thomas Jefferson, the economy of Monticello, and the profits and punishments of the slave south.

One of the incontestable strengths of Wiencek’s book is the way it transports readers deep into the hierarchical world of Jefferson’s Monticello — an earthly paradise of rationality, built and maintained on foundations of barbarism. Jefferson has been characterized as a progressive master, but “the Monticello machine,” Wiencek says, “operated on calibrated violence.” Among many other sources, he points to a formerly deleted passage in Jefferson’s Farm Book, a daily compendium of working life at Monticello. That report describes how the output of the nail forge was improving because “the small ones” who worked there were being whipped. Those “small ones” were slave boys of between 10 and 12 years old.   Read more…

Government debt in Greece is 150% of GDP. Will they be able to pay these debts back? Of course not. On top of a severe economic crisis – prices are deflating too. GDP-deflation is, at the moment of writing, -0,7%. This alone will cause the debtlevel to increase with 1% of GDP…

And things won’t get better. The relation between money and inflation is complicated and holds – as we all should know – only in the medium run and especialy when the rate of money growth is relatively high, i.e. over 20%, while causality sometimes runs from prices to money growth. As is clearly shown during the housing bubble: higher house prices en expectations of even higher prices enabled and enticed people to borrow more  and, therewith, led to an increase in the amount of money. Sometimes, however, the causality may be the other way around, for instance in a situation of capital flight from a country. In Greece, this contributed to a severe contraction of activity and unacceptable unemployment: no ‘neutrality’ of money in Greece. It leads, at this moment, also to deflation (consumer prices are still rising slightly, but the broader GDP-deflator declines). Which makes things worse.

Anyway – despite low interest rates in Frankfurt money in Greece is extremely ‘tight’.

from Dean Baker

It is remarkable that Social Security hasn’t been a more prominent issue in the presidential race. After all, Governor Romney has proposed a plan that would imply cuts of more than 40 percent for middle-class workers just entering the labor force. Since Social Security is hugely popular across the political spectrum, it would seem that President Obama could gain an enormous advantage by clearly proclaiming his support for the program.

But President Obama has consistently refused to rise to the defense of Social Security. In fact, in the first debate he explicitly took the issue off the table telling the American people that there is not much difference between his stand on Social Security and Romney’s.  Read more…

from Merijn Knibbe

Hans Werner Sinn is a leading German economists. He has rightly opened out eyes to the importance of the Target2 balances which at this moment provide the liquidity which keeps the Eurozone afloat. But ccording to Sinn, in a recent article in which he laments the past and regrets the future, interest rates in the Eurozone periphery countries should have been higher, private investments should have been lower and government expenditure should have been slashed even more. This would have caused a faster improvement of the large current account deficits of these countries and possibly smaller Target2 imbalances today. Nothing about more spending in Germany…

On a psychological level, he sounds like somebody who to his abhorrence has discovered that, well, the world did not work the way he supposed it to work, feels betrayed, loathes his own stupidity and now, panicking, tries to cover his losses not by doing the right thing (spend the money!) but by doing the wrong thing (restrickting spending and a flight into safety, i.e. changing Target2 debts into something more tangible ‘non-fiat money’). But is Sinn right on an economic level? First things first: even the economic costs alone of years and possibly decades of 25 to 35% unemployment in the periphery countries are a multiple of the costs Sinn is afraid of. Also, Sinn is by now clearly aware that German banks are of the hook. The ‘Target2′ claims effectively bailed out these, i.e. the current account debts were transferred from private southern and northern European companies and banks to the central banks. And when you read Sinn carefully he also seems to understand that transferring debt is not net-money creation on the Eurozone scale, despite his use of the term ‘printing press’ when it comes to the financing of still existing current account deficits. But he’s still panicking: “what if the Eurozone breaks up?”. Well, unemployment might go down surprisingly fast, in Spain and Portugal and Greece. But that’s not the question here. The question is if Sinn is right about the fact that ‘frontloading’ austerity like the Baltic countries did would have caused current account deficits to decrease faster, which would have caused Target2 imbalances to be slightly smaller today.

Let’s take a look at these deficits (graph 1).

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