Category: Current Affairs
Amazon employment and the tax wedge
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.
The greatest stagnation, the economy that is Japan
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
…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 very slow European recovery
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.
China fact of the day
In defense of Brazil (from the comments)
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: http://www.economist.com/blogs/dailychart/2011/11/global-house-prices … Huge exposure to oil and China.
China comparisons of the day
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.
Which country is most likely to have the next financial crisis?
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
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.
Oil falls below $42 a barrel (the paradox of Julian Simon)
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.
The strange musical histories of the GOP presidential candidates
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
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…”
Six thoughts about the Yuan devaluation
1. The Australian and Singaporean dollars are weakening, as are many emerging market currencies. Take this to be a signal of Chinese weakness. Overall this is a sign of surrender to the market.
2. Offshore-RMB is down more than the size of the devaluation, a clear sign the market believes the currency will continue to decline in value. Take this to be a signal of Chinese weakness.
3. “Gold related stocks” are being called “the biggest winner.” Take this to be a signal of global weakness. Commodity prices are falling and there is a general flight to safety.
4. A panicky flight of capital still is not the most likely scenario for China. Still, the chance of that scenario just went up, and the leadership knows this, thus the negative signal about underlying economic conditions. That exchange rate “currency wars” stimulus really must be needed.
5. There has never been a better time to visit China. As for Chinese leaving the country to finance Paris and Bangkok, the index of Chinese airline stocks just fell 9.6 percent.
6. U.S. monetary policy just got harder, that is the dollar is up once again.
A summary of the currency move is here, I believe it is the single biggest drop in the modern history of the Chinese currency.
Addendum: Here are thoughts from Christopher Balding.
Singapore fact of the day
According to Morgan Stanley, Singapore’s public spending on education amounts to about 3 per cent of GDP — far behind the Nordic countries, which spend 7 per cent or more, and even Malaysia at its 6 per cent. For wider comparison, the US spends about 5.5 per cent and Hong Kong 3.5 per cent.
The FT story on Singapore’s 50th birthday is here.
India Fact of the Day
In India, for example, the number of taxpayers in relation to voters in the economy has been about 4-4.5% for a long time.
That is from an in-depth discussion about the Indian economy between Karthik Muralidharan and Arvind Subramanian (Chief Economic Adviser, Government of India). The reference is to income tax, of course. It’s a great discussion and the best place to begin if you want to understand the Indian economy today.
China fact of the day
The scale and scope of the troubles are now pretty close to public information:
Chinese exports fell far more than expected in July, along with imports, reinforcing expectations that the government will roll out more stimulus to support the world’s second-largest economy.
Exports slumped 8.3 percent from a year earlier, weaker than expectations for a 1 percent decline in a Reuters poll, and reversing a 2.8 percent gain in June.
Imports fell 8.1 percent, in line with expectations of an 8 percent drop, after a 6.1 percent decline in June, highlighting soft domestic demand and lower commodity prices.
There is more here, and China’s foreign exchange reserves are down for the third month in a row. They used to be about $4 trillion, now down to $3.65 trillion, when you are trying to run various pegs for such a large economy that is a much smaller sum than it sounds.