Current Affairs

Berlin has said it expects to receive a record 800,000 asylum seekers this year, more than the entire EU combined in 2014, laying bare the scale of the biggest refugee crisis to face the continent since the second world war.

Whether you consider this “good news” depends on what you are comparing it to.  Most of all, we would prefer a situation where not so many people wanted asylum.  In the meantime, my fear is that this immigration will not proceed in an orderly manner, and the backlash against immigration will grow stronger yet.  I do not expect 2017 to resemble 2015; “unorthodox arrivals” to Europe were three times higher this July than last and at some point that process will be stopped, no matter what our moral judgment of the situation.

Note this:

Interior minister Thomas de Maizière warned that the Schengen zone, which allows passport-free travel across much of mainland Europe, could not be maintained unless EU states agreed to share asylum seekers.

The Schengen agreement of course has been the best achievement of immigration policy in a long time.  But can the European Union agree on a coherent asylum policy, and furthermore one which removes some of the relative burden from Germany and the UK?  Keeping relatively free immigration does in fact require a good deal of regulation, most of all in Europe, but those same governments are not always good at regulating.

Here is some bad polling news from Sweden.   Trouble is afoot in other corners too:

Authorities in Hungary said this week they would dispatch thousands of “border hunters” to arrest migrants entering the country from Serbia.

The forces, drawn from the Hungary’s police, will patrol the 175km long border with Serbia, where soldiers and labourers are building a 4m high razor-wire fence to keep out an estimated 300,000 migrants expected to arrive in the country this year.

I think of these developments as a good illustration of why an attempt at truly, fully open borders probably would, due to backlash, result in a lower level of immigration than the pro-immigration, immigration-increasing, low-skilled immigration increasing policies I favor.  But the idea of maximizing subject to a backlash constraint is unpopular in libertarian circles, let me tell you, including at GMU lunch table.  Nonetheless we are learning, I am sorry to say, that the backlash constraint is more binding than many of us had thought.

This all remains an under-reported story in many American newspapers,  Even with Donald Trump still leading in the polls, it is not understood what a prominent role images of Calais are playing in British national debate.  I don’t see all this as leading to anything good.

According to the O.E.S., songwriters and music directors saw their average income rise by nearly 60 percent since 1999. The census version of the story, which includes self-­employed musicians, is less stellar: In 2012, musical groups and artists reported only 25 percent more in revenue than they did in 2002, which is basically treading water when you factor in inflation. And yet collectively, the figures seem to suggest that music, the creative field that has been most threatened by technological change, has become more profitable in the post-­Napster era — not for the music industry, of course, but for musicians themselves.

That is from Steven Johnson, the piece is excellent throughout.  And note this:

The new environment may well select for artists who are particularly adept at inventing new career paths rather than single-­mindedly focusing on their craft.

What is China’s Unemployment Rate? 4.1% For what month, what year? Doesn’t matter the answer is still 4.1%. That’s a slight exaggeration but for the last 3 years the unemployment rate has been 4.1% almost every month. Indeed, since 2002 the official unemployment rate has varied between 3.9% and 4.3%, an absurdly smooth series.

In contrast to the unemployment rate, China’s GDP growth rate has had massive swings. As a piece in Quartz puts it the unemployment rate exhibits an eerie stillness.


A new NBER working paper uses a newly available household survey and finds a very different series–the China-UHS series shown in black below. According to these estimates China’s unemployment rate shot up to around 11% in 2002 and has been nearly that high at least until 2009 when unfortunately the new series ends.

UE Rate China

So how high is Chinese unemployment today? No one knows but it could well be closer to 10% than to 4.1%.

Keep an eye on China and don’t be surprised by the unexpected. In China it’s not just the unemployment rate that is more volatile than it appears.

It still seems quite unlikely to me that Trump survives much past Super Tuesday, much less wins anything.  Still, he has done far better than virtually anyone expected.

So in equilibrium I expect another embodiment of his ideas to surface politically, without all of the surrounding personal outrageousness.

Think of him as a trial balloon.  It’s still floating.

We might also see, for the next election cycle, further entry from rich people who mimic the outrageousness of Trump but not the particular ideas.  The signal extraction problem from Trump’s continuing float is not yet solved.

In these senses the media is not wrong to focus on him.  What he embodies — no matter how you interpret it — is what is new this election cycle.  And the multiplicity of possible interpretations make it all the more fodder for the media mill.

A few points on the Amazon story everyone is talking about:

1. First, if the story is somewhat true but exaggerated (a plausible scenario for something anecdotally based), the story may help Amazon with its current (but not prospective) employees.   A lot of people suddenly are feeling better treated than the perceived average, and that may boost their morale and productivity.  Yet they still feel the surrounding pressures to succeed.  As a countervailing force, Amazon is now less of a high status place to work and that may lower productivity and also it may hurt recruiting.

2. Given the existence of a tax wedge, Amazon employees are perhaps treated better than they would be in an optimum.  There is in general an inefficient substitution into non-pecuniary means of reimbursing workers because workplace income is taxed but workplace perks are not.  So arguably Amazon is treating its workers too well.  Think of this as another form of corporate tax arbitrage.

3. There is no right to an upper middle class lifestyle.  And for a large number of people, getting one is not easy.

From the 4th quarter of 2013 to the 2nd quarter of 2015 the Japanese economy grew by a grand total of 0.1%.  And the unemployment rate continued to fall, from 3.7% to 3.4%.  That’s right, over the past 6 quarters the Japanese economy has been growing at above trend.  But that blistering pace can’t go on forever.  The unemployment rate is down to 3.4%, and unless I’m mistaken there is a theoretical “zero lower bound” on unemployment that is even more certain than interest rates. The Japanese economy is like a Galapagos tortoise that has just sprinted 20 meters, and needs a long rest.

That is from Scott Sumner, there is more at the link.

China (Singapore) fact of the day

by on August 17, 2015 at 2:12 am in Current Affairs | Permalink

…the [Singapore] water transport segment…contracted on the back of a decline in sea cargo handled. On quarter, the sector contracted 10.3 percent, after gaining 6.5 percent in the first quarter.

There is more on the Singaporean economy here, finance and IT had robust growth, 7.1 and 4.5 percent respectively for the year.  Retail grew five percent.

I wonder why that water transport figure was down?  The manufacturing sector was strongly down too.

The German economy is only about five percent bigger today than in 2008.  And they are usually considered one of the winners.

In Finland gdp has shrunk in eight out of the last twelve quarters.

Output in France, Italy, Netherlands, and Austria is just barely growing.

And that is with a lot of QE (more than a trillion), a weaker euro, and a favorable oil price shock.

Overall the eurozone economies are one percent smaller than they were in 2008.

estimate China’s budget deficit – including local govt borrowing – at close to 10% of GDP in 2014

Source here.

GF writes:

The Brazilian macroeconomic situation is undoubtedly poor and the medium-term trend for fiscal sustainability is alarming. However, the numbers don’t support an imminent financial crisis, despite it being ‘a tradition’. It’s still an investment grade credit for now.

Gross borrowing requirements/GDP are relatively high at 16.1%, but its is structured with limited foreign currency exposure and the non-resident share of local currency debt is a modest 18.3%. It has large FX reserves ($368bn) – (short term external debt + maturing LT external debt)/FX reserves = 32%, which is ample cover against external financial shocks. The CA deficit, ~4% GDP, are covered by FDI inflows so that (CA +FDI)/GDP ~ -0.3%.

In addition, the banking system is sound. The level of NPLs is relatively low 2.9% and average baseline credit assessment score is investment grade baa3, despite economic weakness. Capital and liquidity ratios have been consistently high.

This being the case, where do you see this financial crisis coming from?

On Twitter, MarketUrbanism makes a separate point:

Canada. Click the “Prices against rents” tab: Huge exposure to oil and China.
When was the last time Canada had a financial crisis?

One of the most common mistakes people make looking at Chinese data is distinguishing between absolute and relative data.  $3.6 trillion is a large amount of reserves in absolute terms but much smaller in relative terms.  According to my calculations, reserves relative to nominal GDP for 1997-8 Asian tigers is 23% compared to China’s current 34.7%.  However, if you compare reserves to M2 money supply the picture is much different. By that measure, China only has reserves equal to 17% of M2 versus 28% in 1997-8 Asian tigers.  Given the large demand to move assets out of China, primarily by Chinese firms and individuals it should be noted, the $3.6 trillion in reserve assets looks much smaller against the enormity of its wealth and asset base.  If Chinese investors and individuals start to feel significant concern about the RMB, the demand for foreign assets could turn into a flood rapidly if the PBOC fails to arrest the decline.  $3.6 trillion is a large number but in the world second largest economy with 1.3 billion, that should be thought of as a small $3.6 trillion.

That is from Christopher Balding.

Sorry people, but Ukraine and Venezuela and Argentina are not eligible for this designation, any more than you can give “Most Likely to Succeed” to LeBron James.  Have I mentioned lately that emerging market corporate debt doubled over the course of 2012-2014?  But where exactly is the pot most likely to boil over next?

Here are a few contenders:

1. Brazil

The currency declined nine percent last month, prompting reactions such as:

“It is incredible to see how dauntingly fast things are deteriorating,” Enestor dos Santos, an economist at BBVA, said from Madrid. “It’s been hard to nail down a projection.”

According to some polls, seventy percent of the population favors the impeachment of President Rousseff; political dysfunction adds to the brew and the various scandals only seem to be growing worse.  Moody’s has downgraded the country to Baa3, right on the margin of junk.  The economy is expected to contract 1.7 percent this year and the current account deficit is coming in higher than forecast.  Financial crises are a tradition.

2. Turkey

The country is headed for snap elections, in light of ongoing political instability, while fighting a two-front war and it has a growing current account deficit.  Hmm…

That said, the economy grew at 2.4 percent last year, exports are relatively diversified, and I suspect the current dire situation will prove manageable.  The Greek and Turkish ten-year yields are now about the same (which country should be happy with that comparison?).  On the down side, the country is especially dependent on short-term financing, which can prove volatile.

3. Russia

What’s to like?

The Russian economy shrank by 4.6 percent in the quarter ending June. Although the media has focused on the stability in Moscow and maybe St. Petersburg, the economic decline in Russian provinces has been much more serious.

Debt in Russia’s 83 regions has risen by 100 to 150 percent since 2010. Russia’s economic minister suggested that possibly 60 of those 83 regions are in crisis mode, and 20 may have already been defaulting on their debt.

The economy still hasn’t recovered from the 2008-2009 crisis, and it doesn’t seem the price of oil will be bouncing back anytime soon.

A few days ago Ivan Krastev wrote: “The Kremlin is populated not by mere survivors of the post-Soviet transition but by survivalists, people who think in terms of worst-case scenarios, who believe that the next disaster is just around the corner, who thrive on crises, who are addicted to extraordinary situations and no-rules politics.”

On the bright side, they have $541 billion in reserves.  I say that’s overrated when everything else is turning sour.

4. Belarus

The economy shrank 3.3 percent in the first half of this year, and the government responded by increasing borrowing.  For further information, see Russia.

5. Greece

They are hanging on, and the freeing up of previously held government payments will deliver the economy a decent burst of stimulus.  Still, they are one EU spat, or one coalitional collapse, away from being back in the doghouse with closed banks, Grexit, higher austerity, and plummeting exports.  That said, the Not Very Serious People turned out to be the Not Very Serious Person and things are looking much better than they did a few weeks ago.  Even the Finns are on board with the bailout.  Staying in the euro may not be good for Greece in the longer run, but for now it means they are unlikely to win this particular tournament.

6. China

For all the current problems, I still don’t think they are next in line.  Their production is crashing, but that’s not the same as a financial crisis.  They don’t seem to have their debt distributed “in just that right way.”  The $3.6 trillion in foreign exchange reserves — down from $4 trillion I might add — doesn’t hurt either.  Still, this year China is on the list of nominees, and for the first time.

The bottom line: I’ve got to go with Russia and Belarus.  Runner-up is Brazil.

Honorable mentions include Indonesia, Jamaica, and Belize (decent growth but a widening current account deficit). The dark horse pick?  Colombia, with a peso down 36 percent against the dollar in the last year and a heavy dependence on oil exports.  Alternatively, Malaysia.  Thailand isn’t doing well, but it seems like more of a slow burn.  South Africans are economically miserable, but the country does not really fit the financial crisis profile.

Here is my discussion from 2014, Ukraine ended up as the exemplar.  The sad thing is that this year’s post is longer than last year’s.

Yes, I call it the paradox of Julian Simon.  He is right about resource prices falling mostly when his optimism about emerging economies is wrong, and vice versa.  The Ultimate Resource was published in 1981, much of the resource price spike didn’t start until the early 1990s, and when Simon published the emerging economies hadn’t yet done so much to emerge.  The world where Simon is wrong about resource prices — think Chinese peak growth years — is probably the more optimistic scenario.  Another way to put this is that manufactured goods are more likely subject to increasing returns to scale than is resource production.

The Bloomberg news report on oil is here.

Loyal MR readers will know that I deliberately avoid a lot of topics related to political candidates, if only because they bore me and they are covered too much elsewhere.  But I did enjoy this article.  First prize goes to Carly Fiorina:

Before heading off to UCLA law school, Carly Fiorina once toyed with the idea of becoming a concert pianist.

I don’t have to tell you who comes in last

Facts about real wages

by on August 11, 2015 at 1:56 pm in Current Affairs, Economics | Permalink

What was lacking — in July, as in every other month in the past several years — was any appreciable growth in wages. Average hourly earnings for all private-sector employees rose by 0.5 cents, to $24.99. Take away the minority of employees who are bosses, and the increase was just 0.3 cents, to $21.01 an hour, or $42,000 a year for a full-time job.

Over all, the average annualized growth rate for wages over the past three months comes to 1.9 percent, barely outpacing inflation.

There is more here, from Teresa Tritch.  And here is a good article on real wages in Spain.  Spain has a well above average recovery in Europe, in part because it is allowing its Great Reset to proceed:

The desperation among job seekers is now so acute that many accept work contracts that pay less than the country’s reduced minimum wage — often by agreeing on paper to work two days a week, but actually working many more unpaid hours, experts say. And some, returning to their old jobs, are finding that they must take huge pay cuts.

“A new figure has emerged in Spain: the employed person who is below the poverty threshold…”