Current Affairs

In Arkansas, the median hourly wage is $14.01. In Mississippi, it’s an astoundingly low $13.76. It’s likewise below $15 in six other states, and three U.S. territories.

That is from Catherine Rampell.  In such situations, a $15 an hour minimum wage is…shall we say…risky?

China fact of the day

by on July 21, 2015 at 9:48 am in Current Affairs, Economics | Permalink

bailout support now stands at 9.8 trillion RMB or $1.6t USD

That is from Christopher Balding, and that is [to correct a claim from an earlier version of this post] combining both the stocks bailout and the ongoing municipal bailouts.

There are plans to legally restrict the export of some paintings from Germany, and so far the proposed policy is not working out well.  Collectors are rushing to take their loans off museum walls and get them out of the country, or hold them incognito.

The law would apply to works of historical importance more than fifty years old, worth more than 150,000 euros, and judged by regional boards to be of historic importance.  It is interesting which works may fall under this designation:

In one interview, she [Germany’s culture minister] raised the prospect that foreign works could be classified as national treasures. For example, she said the Warhol silk-screens of Elvis Presley and Marlon Brando that were sold by the state-owned casino were “emblematic” of the collecting history of the Rhineland.

Apparently Gerhardt Richter is a hard-core libertarian, like most other painters, because he asserted: “No one has the right to tell me what I do with my images.”

For the pointer I thank Cyril Morong, a loyal MR reader.

Mr Rouhani’s cabinet boasts more American doctorates than Mr Obama’s.

There are some more general remarks on Iran here.

Obstfeld is the former chair of the department of economics at the University of California, Berkeley. He is currently a member of President Obama’s Council of Economic Advisers.

Like Blanchard, Obstfeld’s background is largely as an academic economist.

He is the co-author of two textbooks on international economics—Foundations of International Macroeconomics with former IMF chief economist Kenneth Rogoff, and International Economics with Paul Krugman and Marc Melitz.

Here is the FT coverage, here is the IMF announcement, and here is Obstfeld’s home page.  He wrote this on the eurozone.  Overall I would say this reflects the continuing preeminence of MIT-style macroeconomics in the current policy community, his MIT Ph.d. is from 1979 and his work has been very much in that vein.

The Commuter Graciousness Index, now in its third year, found that graciousness levels rose to 61.3 per cent in 2014, up from 42 per cent the year before. In 2012, the index stood at 38.6 per cent.

The index measures the perceived change in behaviour of commuters on public transport, and looks at three core behaviours: queuing up and giving way to fellow commuters, giving up seats to those who need them more, and moving in to allow more passengers to boardthe bus and train.

…In 2014, the LTA launched five cartoon mascots to promote more gracious behaviour among commuters: Stand-up Stacey, Give-Way Glenda, Move-in Martin, Bag-Down Benny and Hush-Hush Hannah.

They will continue to front the graciousness campaign, the LTA said, with a new three-dimensional look.

The full story is here, via Andrew Jackson.

Yemen’s capital, Sanaa, may run out of economically viable water supplies by 2017 as available groundwater is unable to keep pace with the needs of a fast-growing population, experts warn.

Per capita water consumption is right now about two hundred cubic meters per year, compared to a scarcity threshold of 1700 cubic meters per year.

The cost of water has tripled in the last year, and the population of the city is expected to double within the next ten years.

There has been talk of moving the capital, as well as desalinating seawater on the coast and pumping it 2,000 metres uphill to Sanaa. But there are no concrete plans.

It may be too late for the removal of various water subsidies to make a difference, even assuming that were to happen.  In the meantime, there have been few positive developments and of course the war is a huge negative.

It would be tragic, and in modern times unprecedented, if and when a major city simply runs out of water, and that could happen in about two years’ time.  Here is further coverage.

In my opinion, neither will stick, and from surface indications neither arrangement sounds very effective.  But probably both have to be tried.  One deal opens the way for true Grexit, if the deal fails.  The U.S.-Iran agreement opens the way for an actual attack on Iran, or some other non-constructive form of engagement (in a proxy war?), if the deal fails.  These deals thus each contain a very real streak of danger.

I give each deal about a 30-40% chance of succeeding.  Above all, these deals show the limits of what is possible, and not possible, in international affairs where there is not an obvious concordance of self-interest.

You will read much about whether these are good or bad deals.  But sometimes the positive perspective is more illuminating than the normative.  In both cases, the relevant participants still “have a deal in their system,” and so we will be working through the logic of these agreements, for better or worse.

Keep your fingers crossed.  In the meantime, even if you think, as I do, that both of these deals will fail, these are still — stochastically speaking — big wins for Obama.  Let’s just call July “Obama’s month.”

Hugo Dixon offers some very useful remarks.  And here is a good running survey from Politico.  I’ll add two points.  First, all of a sudden Merkel has lost the “blame game” battle.  [Update: But the actual reality now seems to be a deal will be reached, and I suspect the process will be forgotten, or judged only on the basis of whether the deal works.]  Second, I am reading many, many dramatic remarks about the collapse of European institutions, etc.  Will these be retracted if they are not supported by market prices upon opening?  I don’t think so.

The Economist had a good feature story on this topic, here are a few points:

1. According to the IMF, Latin America will grow at only 0.9% this year.

2. Brazil may do -1.25%, while Argentina and Venezuela continue to deteriorate.

3. Given the location of South America, it is harder for those countries to plug into global supply chains.  Of the Latin countries, only Mexico has managed this, largely because of its proximity to the United States.  Yet even Mexico has grown an average of only 2.4% a year over the last twenty years.

4. Latin American productivity levels were closer to those of the United States in 1960 than they are today.

5. There is far too much labor in the informal economy.

6. Latin America as a whole invests only 3% of its gdp in infrastructure, compared to 6% for India and 9% for China.

That is the latest development, albeit not the final word:

Should no deal be forthcoming, the German government has made preparations to negotiate a temporary five-year euro exit, providing Greece with humanitarian aid while it makes the transition.

An incendiary plan drafted by Berlin’s finance ministry, with the backing of Angela Merkel, laid out two stark options for Greece: either the government submits to drastic measures such as placing €50bn of its assets in a trust fund to pay off its debts, and have Brussels take over its public administration, or agree to a “time-out” solution where it would be expelled from the eurozone.

Finland, the Netherlands, and Slovakia, among others, don’t seem keen to have Greece continuing in the eurozone.  And so yet another “final deadline” is approaching…

One of the most stunning and shocking findings of the Icelandic SIC report was the widespread use of shares as collaterals for loans in all Icelandic banks, small and large but most notably the three largest ones – Kaupthing, Landsbanki and Glitnir.

It is necessary to distinguish between two types of lending against shares as practiced in Iceland: one is a bank funding purchase of its own shares, with only the shares as collaterals. The other type is taking other shares as collaterals.

These loans with shares as collaterals were mainly offered to the banks’ largest shareholders – in the big banks these were the main Icelandic business leaders – their partners and bank managers. In the smaller banks local business magnates who in many cases were partners to those Icelandic businessmen who operated abroad, as well as in Iceland. Thus, this practice defined a two tier banking system: with services like these to a small group of clients – that I have called the “favoured clients” – and then normal services for anyone else.

As a general banking model it would not make sense – the risk is far too great.

That is from Sigrún Davíðsdóttir, there is much more at the link.

From his Facebook page:

I am angry Mr Tsipras, because let’s face it. We have been sleepwalking towards a Grexit. For five years now. And the past months we are even running towards it, with our eyes open.
With your eyes open. But, it is not you who is going to pay the bill. Who is going to pay the bill are the ordinary Greeks! Losing 30 – 40 per cent of their purchasing power, of their income.
I am going to be very clear today on what we have to but especially what you have to do. And you know it very well, from the beginning. You have to deliver a package of in depth structural reforms. And when I’m talking a package, I am talking about a precise plan. A roadmap. A clear calendar. No more intentions. We are 6 months after the elections and we have seen nothing.
Do you want a Grexit maybe? It is certainly not what your people want.
What Greece needs are
– concrete proposals to get rid of the clientelistic system. And concrete measures to fight corruption.
– a roadmap to dramatically downsize the public sector: we need to see the exact number of civil servants that won’t be replaced.
– to transform the public banks into a healthy private financial sector
– to open the markets and jobs currently closed for too many young people.
We need to see an end date on when this is going to happen. also here no intentions We need to see the texts of the legal proposals, calendar, legislation.
– to end the privileges of the shipowners, the military, the orthodox church, the Greek islands and not to forget the politcial parties, including yours because you also have the loan of a public bank. I do not see the difference between you and Samaras, physically yes, but not on the content on the substance.
Another difference is that you have a mandate. Never there was a Greek prime minister with such as strong mandate. A double mandate. One in the parliamentary elections. One from the referendum.
The Greek people are fed up with the way Greece has be run the last decades. Change it!
But we also have our responsibility. The euro group need to respond to it with a new approach. We need to create what every currency union has: a real political and economic union. With a debt redemption fund for everybody, every member state not only for Greece. Like it exists in every sustainable currency union.
Mr Tsipras, but first thing first. You have to come forward with your reform program. This is not a chicken and the egg discussion.
It is your choice.
How do you want to be remembered? As an electoral accident who made its people poorer? Or as a real revolutionary reformer?
Don’t fall in the PASOK trap. Don’t betray your people.
Because 80 percent want to stay in the euro.
Show that you are a real leader and not a false prophet.
(My speech in the Eplenary this morning)

The pointer is from the heroic Hugo Dixon.  And here is Guy on video, via Michael Creswell.

How many China share halts r due to shares pledged as collateral by controlling shareholder who now faces loans called in and losing stake?

That is from @merysavery, via Christopher Balding.  By the way, the Chinese central bank is now doing open market operations for ailing stocks.

I don’t mean this to apply to any specific country, but the recent reaction of Chinese policymakers to their stock market crash got me thinking.

Imagine two equilibria.  In the first, repression is harsh.  Policymakers don’t have to do such a good job with the economy, because they keep their jobs no matter what.

In the second equilibrium, people recently have come out of the first equilibrium, and so they do not trust policymakers very much.  They judge policymakers by outcomes, and so policymakers feel compelled to perform and to deliver high rates of economic growth.

When the tailwinds are positive, political stability is fairly high and policy is good and growth is robust too, the best of all possible worlds.   Policymakers take a long-term perspective because the favorable tailwinds still enable them to meet the expectations of the citizenry, and the long-term perspective keeps them in power for a while to come.  Of course you can think of catch-up growth, and the seizing of low-hanging fruit, as one form of positive tailwinds.

But recall that the “citizen trust contract” with policymakers is ultimately a fragile one and based on a series of quite short-term evaluations.  When the tailwinds are less positive, the policymakers must take on a much shorter time horizon.  They will prop up stock prices now, or try to, even if that is foolish.  They are quite afraid to show their impotency as policymakers in some realms, for fear of looking weak more generally.  Their favorable performance in the previous periods was in fact based on relatively modest levels of talent advantage, relative to other potential leaders, and so they are reluctant to see the citizens asking so many questions.  They want to keep all of the economic reports positive, rather than look like people who would allow 80 million citizens to lose most of their savings.

But avoiding the unpleasant outcome is not possible, and so these bad policies in turn make the tailwinds yet more negative.  An unwinding begins, as both policies and outcomes become less positive, and the contract with the citizens is based on actual trust less and less.

The same leadership structure can perform either very well or very poorly, with both the same leaders and the same citizens.  And the switch can come fairly quickly, and be occasioned by events which are significant but not transformative on a world-historic or even a country-historic scale.

But fortunately this is a model only, and as well all know, models are false.

Addendum: Here is Christopher Balding on recent developments in China.  But he seems to be more worried since he wrote that post.  At the moment, trading in 89% of the stocks on the Chinese market is halted.  My own tweet was: “One subtext is how much the 2008 crash caused Chinese loss of faith in the USA.”