Current Affairs

WHEN do individual pieces of data become a trend? In the past few days, we have seen a surprise 1.3% monthly slump in British factory output, a 1.8% decline in German industrial production, a 1.7% decline in France, and a 1.2% drop in Italy. No one can blame the weather for these numbers, as they did for first-quarter US GDP.

European stocks have been weaker, although a cumulative 2.6% drop is hardly a sign of panic.

That is from Buttonwood.  The Espirito Santo debt problem in Portugal is probably not a major event in its own terms, but slotted into this overall picture it is worrying nonetheless.  Is this what the end of QE looks like?  Or is this turn in events caused by something else?

Haaretz reports that some of the current rockets have a range of 150 km, which is longer than most of what has been fired in the past.  So here is my question: when do those rockets become sufficiently powerful and numerous that they can close down Tel Aviv Airport, which is of course the main route in and out of Israel, especially for well-off people.  If that can happen, is this not like a housing bubble game, where things can go very sour very quickly?  And in the meantime, will the Israel government attempt “lower the mean, increase the variance” strategies, if only to forestall what is to them an obviously unacceptable outcome, namely that Hamas can could close Tel Aviv airport at will?  Are we already at the point of seeing such mean-reducing strategies?  If not, how much worse will things be when we get there?

In March 1917, the EEF [Egyptian Expeditionary Force, from Great Britain] launched offensive operations in southern Palestine.

That is from the new and noteworthy book by Kristian Coates Unrichsen, The First World War in the Middle East.  I wouldn’t say it is a fun book, but it is clear, well-written, and very good background reading on a number of today’s crises.

According to the Central Statistics Office, residential house prices in Dublin rose 22 per cent in the year to May. The last time Irish house prices were rising so fast was between 2002 and 2005, the years immediately before the crash. This is sparking talks of a new price bubble – mostly, so far, around the dinner table.

That doesn’t have to be a new bubble, and you will note that these prices remain well below their pre-crash peaks.  Still, prices seem to be moving pretty fast in the market.  It remains my view that some regions of the U.S. did not have a real estate bubble at all, and that for these regions it is the price bust which is the anomaly, not the initial run-up.  It is an interesting question what percentage of the world that might hold for.

The FT story is here.

He reports:

The past two years Kansas reduced its state income tax rates. As a result, the top rate of income tax faced by Kansas residents (combined state and federal) rose from 41.45% in 2012 to 48.3% in 2013 and then fell a tad to 48.2% in 2014 (if they don’t itemize.) That’s a pretty tiny drop in the top marginal tax rate in 2014, and a much bigger rise in 2013.

I consider myself a moderate supply-sider, but I certainly wouldn’t expect such a tiny tax cut to significantly affect behavior. And any effects that did occur would happen very gradually, over a period of many years. For instance, firms might be slightly more likely to move to Kansas. But even after the tax cut, the top rate is almost as high as in Massachusetts, so Kansas is certainly not a tax haven like Washington or Texas, which have no state income tax.

I can’t imagine any serious economist predicting that the Kansas rate cut would boost Kansas GDP by 25% or more. Why did I pick that figure? Because the Kansas state income tax top rate fell from 6.45% in 2012 to 4.8% in 2014, which is roughly a 25% rate cut. In order for that rate cut to boost Kansas tax revenues, you’d have to see Kansas GDP rise by more than 25%. That’s obviously absurd.

There is more here.

…the data shows that less than one-third of the Bank’s FY 2013 portfolio goes towards the stated goal of “meet[ing] competition from a foreign, officially sponsored export credit agency.”

That is from Veronique DeRugy, there is more here.

Here is one of them, coming to me in an email from the Sinocism China Newsletter, about the growing demands for democracy in Hong Kong:

Any public suggestion that the People’s Liberation Army might intervene here was politically unacceptable until very recently, but it is now raised as a possibility by some of Beijing’s advisers. “A showdown is getting more and more inevitable by the day, and some degree of violence is imminent,” said Lau Nai-keung, one of Beijing’s most prominent allies in Hong Kong. “If worst comes to worst, the P.L.A. will come out of its barracks.” Mr. Lau is one of the six Hong Kong members of the Basic Law Committee, a group under the National People’s Congress Standing Committee in Beijing that sets policies relating to Hong Kong’s mini-constitution, the Basic Law.

An associated NYT story is here.  Uighur terrorism has been another story that has snuck up on us.  How many more China stories will be sneaking up on us this year?  Next?

Fashionistas no longer have to choose between looking stylish and protecting their lungs.

Next week, Beijing- and Hong Kong-based designer Nina Griffee, owner of face-painting and body art company Face Slap, will introduce a new line of outfits that incorporate face masks on the runway as part of a collection at Hong Kong Fashion Week.

Even the designer, who was born in England, admits that the eight outfits she’s created to launch the line – which look something like burkas for the space age – might not be everyone’s cup of tea. “There’s a fine line between fashion and costume,” she says. “I’m not entirely sure we made it completely into the fashion category.”

Though it isn’t the first time models will have appeared on stage wearing masks, it appears to be the first time the effect is so deliberate.

The outfits incorporate Vogmask pollution masks—already a choice among many of the pollution cognoscenti as the most stylish face coverings—attached by a zipper to shawls, dresses and ponchos. The zipper allows the wearer to remove the mask to dine, for instance, while retaining the high-fashion look.

There is more here, with good stylish photos too.

For the case of the public sector, the probability of involuntary separation is just 1.3 percent, which is one-third as high as the probability in the private sector case. I then calculate the difference in compensation between the public sector (low unemployment case) and the private sector, such that a worker would be indifferent between working in either sector. I find that workers would be willing to work for about 10 percent less compensation in the public sector, given the additional benefit of much higher job security. This estimate is conservative in terms of considering today’s labor market, as average unemployment duration today is much higher than its historical average.

This analysis suggests the possibility that public sector compensation may be significantly higher than competitive levels. Moreover, the fact that public sector workers are only about one-third as likely to voluntarily leave their job as private sector workers is consistent with the conclusion that average public sector compensation rates are in excess of competitive levels, indicating that there are relatively few external employment opportunities that dominate public sector workers’ jobs. The fact that average public compensation is higher than average private sector compensation suggests that public sector worker compensation may be well above competitive levels and indicates that public sector wages could be reduced without significantly impacting public sector employment. For example, I’ve calculated the impact of a 5 percent wage reduction for all public employees in California, a state with one of the most severe fiscal crises in the country. A 5 percent wage cut would reduce state spending by $1.33 billion, which would reduce California’s 2011 state budget deficit by nearly 15 percent.

There is more here, interesting throughout.  There is further relevant information here.  Here is the news on today’s Supreme Court decision on public sector unions: “Supreme Court drastically curtails public sector unions.”

Portugal may have 15 percent unemployment, but that does not mean that Reiter Affiliated Companies, an American fruit producer, can find local people to pick berries on its 76-hectare farm here.

Last year, the company, also known as RAC, began a nationwide recruitment campaign and hired 40 Portuguese. Half quit after the first day. By the end of the week, not a single one was left.

“They wanted a job, but this wasn’t what they were looking for, because it was basically too hard for too little money,” said Arnulfo Murillo, the farm’s production manager. “Farming here isn’t harder than in America, but the big difference is that being unemployed in the U.S. is a lot harder and in no way an attractive alternative.”

Instead, the farm has imported a third of its labor force all the way from Thailand — 160 of 450 employees — a more expensive alternative, but one that has filled its ranks.

Please note people, this is not (mainly) a post about immigration, which is only one possible channel for factor price equalization.  The full story is here.

Everyone else is covering this, still it seems worthy of mention in this space too:

Just weeks before Blackwater guards fatally shot 17 civilians at Baghdad’s Nisour Square in 2007, the State Department began investigating the security contractor’s operations in Iraq. But the inquiry was abandoned after Blackwater’s top manager there issued a threat: “that he could kill” the government’s chief investigator and “no one could or would do anything about it as we were in Iraq,” according to department reports.

American Embassy officials in Baghdad sided with Blackwater rather than the State Department investigators as a dispute over the probe escalated in August 2007, the previously undisclosed documents show.

The full story is here, and also it seems the U.S. government is trying to put that reporter in jail for his work.  And here is my 2007 column on Blackwater: “Private contractors may not respect virtue for its own sake, but like most businesses, they will respect the wishes of their most powerful customers, in this case governments. What is wrong with Blackwater may, most of all, mirror what is wrong with Uncle Sam.”

Addendum: The documents by the way are here.  Check out p.6, it reads to me a bit less threatening, and more commentary on the chaos of Iraq, than some accounts are making it out to be.

In the major fields of domestic policy responsibility assigned to the new devolved institutions, such as health, education, local government, there have been remarkably few initiatives. A system of local government, reorganised in 1996 on the basis of 32 multi-purpose local authorities and designed by the preceding Conservative UK government, has been largely left untouched. As in England a grossly inadequate system of council tax inherited from the preceding Conservative government and crying out for reform, has been left untouched by the first two Labour/Liberal Democratic administrations and the two successor SNP administrations. And under the latter the system has been shored up by Scottish government funding to facilitate a council tax freeze and containment of local government expenditure.

Or try this:

A 2012 Audit Scotland report has also indicated little change in health inequalities within Scotland in the last decade. Despite avoiding the major structural reorganisations experienced by the NHS in England, and being more generously endowed with public funds, the NHS in Scotland does not seem to have made, under devolution, any fundamental change to the pattern of relatively poor health outcomes. Devolution did not involve much change in the governance of health in Scotland in as much as the ministerial, civil service and medical leadership continued as before but within a new ministerial structure. What was new was the Scottish Parliament and it does not seem to have made much difference.

There is more here, by Norman Bonney, interesting throughout.  The pointer is from www.macrodigest.com.

The sharing of intelligence information has exploded since 9/11, so one way to avoid national restrictions on your intelligence service is to have someone else’s intelligence service do the actual spying.  Henry Farrell reports:

There’s been relatively little discussion of whether there is a problem in principle with international surveillance, and most of what there has been has concerned the question of whether or not privacy is a universalhumanright. But the recent Der Spiegel revelations combined with some earlier material points to a narrower but very troubling set of problems for liberal democracies. Cross national cooperation between intelligence services has exploded post-September 11. This cooperation is not only outside the public space but, very often, isn’t well known to politicians either. Such cooperation in turn means that intelligence services are in practice able to evade national controls on the things that they do or do not do, directly weakening democracy.

Henry concludes:

This implies that national security liberalism, to the extent that it ever was a credible position, isn’t any more. Liberals who embrace national security and extensive foreign intelligence gathering do so on the rationale that there is a clear distinction between national politics (where we owe obligations to our fellow citizens not to torture them or invade their privacy) and international politics (where they believe that at best a much weaker set of rights and obligations applies). But if national intelligence agencies are working across borders, creating a pool of shared information that systematically undermines national protections, then national security liberalism is at best incoherent, and at worst active apologetics on behalf of measures that not only corrode global rights, but the national level rights that they claim to care about too.

There is more here.

I was disappointed but not surprised by this passage by Gary Silverman:

What I like about Obamacare is that it shows some respect for “those people” – as Hudson called them in Giant – who are good enough to work the fields and mow the lawns, and build the roads and sew the clothes, and diaper the babies and wash the dishes, but somehow aren’t good enough to see a doctor from time to time to make sure there is nothing wrong inside.

That is in fact what most of politics is about, namely debates over which groups should enjoy higher social status and which groups should receive lower social status.  Of course critics of Obamacare have their own versions of desired status reallocation, typically involving higher status for the economically productive.

Here is another example of the argument from sympathy, by Norman Podhoretz, applied to a very different field of discourse:

Provoked by the predictable collapse of the farcical negotiations forced by Secretary of State John Kerry on the Palestinians and the Israelis, I wish to make a confession: I have no sympathy—none—for the Palestinians. Furthermore, I do not believe they deserve any.

I am not in this post seeking to adjudicate ACA or U.S. policy in the Middle East.  The easy target is to go after these two authors, but I am interested in different game.  The deeper point is that virtually all of us argue this way, albeit with more subtlety.  A lot of the more innocuous-sounding arguments we use all the time come perilously close to committing the same fallacies as do these quite transparent and I would say quite obnoxious mistaken excerpts.  One of the best paths for becoming a good reader of economics and politics blog posts (and other material) is to learn when you are encountering these kinds of arguments in disguised form.

Responding to the recent Henry Paulson piece, Paul Krugman writes today:

In policy terms, climate action — if it happens at all — will probably look like health reform. That is, it will be an awkward compromise dictated in part by the need to appease special interests, not the clean, simple solution you would have implemented if you could have started from scratch. It will be the subject of intense partisanship, relying overwhelmingly on support from just one party, and will be the subject of constant, hysterical attacks. And it will, if we’re lucky, nonetheless do the job.

I would put it this way: climate change is like neither the financial crisis nor the Obama health care plan, but above all it is an international problem requiring an international solution.  And it’s not like banning land mines, where most countries have little reason to continue with the practice.  It is also not like ozone, where a coordinated solution is relatively low cost, more or less invisible to voters, threatens few jobs, and involves few incentives for defection.  A climate change solution requires a lot of countries to turn their back on coal-generated pollution long before we did (as measured in per capita income terms) and long before the Kuznets curve suggests they otherwise are going to.  A climate change solution, if done the wrong way, will look to China like a major attempt to unfairly deindustrialize them and, if it is backed by trade sanctions, it will look like an act of war.  Trade agreements do best when most or all of the countries already wish to act cooperatively toward much lower tariffs.  For a green energy solution, China (among others) in fact has to want to solve the problem, as do we.  And the already-installed or in-process coal base in China is…forbidding.

The problem isn’t just coming up with “something better.”  Think of today’s fossil fuels as a stock in the ground.  The problem is coming up with something “better than the lower and falling prices for the fossil fuel stock once some countries start going green.”  That’s really tough, because it means competing against a lower fossil fuel price than what we see today.  What will Africa choose?

In other words, a climate change solution has to involve a relatively cheap form of energy, relative to the status quo.  Not just cheap to citizens because it is subsidized, but cheap to governments and cheap at the national level too.  Alternatively, you could regard all of this as reason to be pessimistic.  But in the meantime, it is entirely reasonable to insist on solutions which can generalized, and that means solutions which are relatively cost-effective.