And as we know from development economics, the presence of informal labour markets often is a signal that something is terribly wrong (and usually over-regulated) at the formal markets... and de-regulation often leads to increased formality and gains for workers. With no sign of de-regulation ahead, many are just dropping out of the formal workforce. Institutions matter.
I almost forgot to comment on the US jobs report on Friday, which was predictably disappointing. Of course, much of the commentary out there now (including the Bloomberg piece I just linked to) is focused on how this report puts a crimp in the Fed's plan to ground the helicopter. I think a more salient point that needs to be understood is the interaction of labour market and monetary policy institutions goes far beyond this mere blip in the Fed's plan to pull back on the tsunami of dollars. The labour market has already been pounded by fiscal "stimulus" and bad policies (minimum wages, vitiated property rights), and recent monetary policy has both increased the cost of living and eroded real wages. Put together, you've got stagnation in investment, meaning no real job creation, and discouragement - with the labour force participation rate in the US as low as it was in the Carter era, it would appear that the informal labour market may now be in ascendancy.
And as we know from development economics, the presence of informal labour markets often is a signal that something is terribly wrong (and usually over-regulated) at the formal markets... and de-regulation often leads to increased formality and gains for workers. With no sign of de-regulation ahead, many are just dropping out of the formal workforce. Institutions matter.
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Mexico also looks like it's heading down the road of fiscal suicide:
"...the president said the reform package, which he unveiled on Sunday night flanked by opposition parties, nonetheless included green taxes on fuel, a fat tax on sugary drinks and a stock market gains tax. The reform package has been presented as a decisive step towards funding universal social security and making the tax system fairer and clearer." Appears that the policy reforms proposed will make the tax clearer (nothing is beyond taxes) and fairer (everyone is getting it in the tuckus). I wonder what happened to the wave of flat tax reforms, and why they have cratered so badly in the wake of the global financial crisis. Apparently said the Prime Minister of Japan:
Japan’s economy expanded at a significantly faster rate in the second quarter than initially reported, the government said on Monday, increasing the chances that Shinzo Abe, prime minister, will press ahead with a contentious sales tax increase. So to recap, an economy finally regains its footing - or, rather, after years of policy-induced stagnation, finally shows a glimmer of hope. And the government wishes to crush that incipient bud with a tax increase. When discussing institutions, always keep an eye on incentives - the incentive of government is to grow. See: Scenario 1: The economy is in recession Solution: The government needs funds to help spur on the economy! Raise taxes! Scenario 2: The economy is improving. Solution: With everything getting better, we can now recoup revenue losses during the recession. Raise taxes! It's the "to a man with a hammer, everything looks like a nail" problem. Simply put, there is no government organ anywhere that has the institutional incentive to a) lose power, b) shrink its own budget, and c) make itself irrelevant. Abe-onomics, indeed. A recipe for another long, cold winter in Tokyo. Looks like Australia has done something right (or that is, less wrong), and Tony Abbott is going to be PM by a wide margin. Rudd and Gillard may have had some things to recommend them, but economic acumen was not one of them. I think it is yet to be seen how Mr. Abbott performs on economic policies, but I would feel more confident with him in power as the country faces a great challenge - the mining boom is winding down, and thus there needs to be a diversification away from resource-based wealth. And, of course, the growth of government that resource booms generally engenders might be tapered somewhat by a Conservative rather than a Labourite (although George W. Bush in the US showed that this isn't always the case). Either way, congrats Mr. Abbott - perhaps your first term might be better spent focusing on why the Wallabies are just bloody awful rather than mucking about with carbon taxes.
My talk with Vedomosti on what the EU-Ukraine association agreement means.
Interesting proposal from David Stockman, Reagan's OMB head from 1981 to 1985: "One way to reverse this dangerous and unstable deformation of policy would be to return to the vision of Carter Glass, and employ the Fed as a 'banker’s bank.' In such a situation, the Fed takes its cues from the market. The market sets prices (i.e., interest rates on money and debt), and the Fed only provides additional liquidity, in exchange for sound collateral, at a penalty rate, when the banks needed liquidity." His book appears to be a pretty good read, too.
There's some reason to think so - employment numbers and the rebirth of the service sector point to cautious optimism that the shakeout is coming to an end. Ireland always had done a better job than its Continental Eurozone partners in building appropriate institutions, with a much more laissez-faire touch. Whether it can resume its growth path by following that approach again remains to be seen, but I'm hopeful. After all, small countries tend to be able to bounce back more quickly (smaller scale of damage, absolutely) and, more importantly, can overcome the political hurdles needed to put in place necessary reforms (less people to get on-board). It's why you see New Zealand, Hong Kong, Singapore, Denmark, Estonia, S. Korea, and other small countries dominating both the growth rates and the Doing Business rankings.
Go n'eiri an t-adh leat, Ireland!
With apologies to Foxy Shazam
Living in Russia, working for an emerging markets think tank, and being paid in rubles, makes you acutely aware of geopolitical tensions, emerging market ripples, and Russia-specific factors. This has been especially true over the summer as, to be polite about it, the ruble plummeted against the US dollar. Now, there's usually a good amount of seasonality for the ruble/USD exchange rate, with drops in the summer due to the lower price of oil and, of course, the fact that the Russians book it out of Moscow as fast as their private jets will take them (meaning more demand for foreign currencies and less for rubles). But this summer, the bottom dropped out: From just about the 29.8 mark in February, the ruble is now at about 33.40 and climbing daily (with bank premia for foreign exchange, you can sell ruble at about 33.85 this morning with Raiffeisen). That's a loss of 12% (hellooooo depreciated paycheck), not gigantic by historical standards but still a pretty hefty drop in a market where the price of oil hasn't seen major swings. But is this an aberration? Well, yes and no - looking at the Ruble since it became "new" in 1998, we're basically part of a trend that started during the global financial crisis and shows no signs of abating: So we're not as weak as we were, not as strong as we were, just somewhat bouncing around in the 30-35 range. And this is in line with a general sell-off from emerging markets, as the financial world starts to believe that Ben Bernanke's money spigot won't run forever and "quantitative easing" might actually recede from the US. Russia is just part of a general trend of emerging market pullback.
That's the no, this is not an aberration. But the yes is that, for some reason, the world seems to be waking up to the unsustainable nature of Putin's economy, and we have a big shift in momentum just over the past two months. Putin hasn't helped any, as his new Central Bank head is fairly similar to those in Western countries; i.e. looser monetary policy somehow grows economies magically! And Russia has always been willing to use its economic riches for geopolitical gain (although, as a colleague of mine detailed in RBK Daily earlier this year, the Russian stance on Syria actually caused it some problems with the Saudis, who retaliated by ramping up their oil production to depress prices). The question is, can the almost completely un-diversified Russian economy survive the next round of economic uncertainty? The best part of this is also the bit that makes me so angry - the structure of the Russian economy has been basically frozen in place during Putin's reign, due to uncertain property rights, bureaucratic nightmares (one need only look at Russia's place in Doing Business), and a widespread perception of corruption. And, of course, the institutions needed for a market economy are still fledgling here, subsumed to the formal bureaucratic apparatus of the state. Transaction costs may not have been spawned in Russia, but by golly this place perfected them. So why are traders and the world starting to fret now about Russia? Why is the ruble sliding now? Why have Russia's revised growth estimates suddenly taken the world by storm? Better renegotiate my contract, because I sense that 34-35 rubles to the dollar isn't far off. As noted in my earlier post on the Taylor rule paper, the head of a Central Bank can do a LOT of damage. Which is why I am surprised that the Economist is full-throated in favour of Janet Yellen as the next Head of the Fed. The biggest plus seems to be that she would be a continuation of Bernanke's tenure, albeit a bit more diplomatic. Indeed, even some of my fellow libertarian-inflected colleagues at my former employer (Reason) seem to be fairly on-board with Dr. Yellen, seeing her also as a pragmatist.
I'm not convinced (along with Robert Murphy, the Wall Street Journal, and others) - if anything, the fact that Yellen would be a continuation of Helicopter Ben's policies should automatically raise suspicion. She is already on record as part of the "a little inflation now and then is a good thing" school, which would in and of itself be problematic... but is even worse with a Fed actively stoking the fires of hyperinflation and basing its policy decisions on perhaps the wrong metrics. In fact, as noted in this article, "I think it’s a fair reading of a typical Janet Yellen speech that she’s more concerned about high unemployment.” This is precisely the central bank mentality that led to stagflation of the 1970s. Besides, anyone who Joseph Stiglitz likes already has two strikes against them. With the G20 meetings in full swing, most eyes have been turned towards the contortions of the world on Syria. But that doesn't mean that there isn't economics being discussed. And from the Dutch, ironically the home of the modern trader-state, comes a horrific proposal to direct energy towards tax evasion. I would say building the supra-national tax administration, able to punish tax evaders anywhere in the world, should be less of a priority than, say, growth-enhancing policies. Or stable monetary policy. Or improved business environments. Or labour market flexibility. Or about a million other things.
Predictably, the OECD approves. |
AuthorDr. Christopher Hartwell is an institutional economist and President of CASE Warsaw. All commentary on this page is exclusively his own and in no way represents the views of CASE, his wife, his dog, or anyone else. Especially not his wife or his dog. Archives
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