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Conflation and non sequiturs, thy name is Mitt Romney

Here’s an exchange between Tim Worstall and me in the comments to my post below titled “Spain. Please,Mr. Obama, talk about Spain. Please.”:

WORSTALL: If you’re going to comment on the Spanish economy might help if you knew something about it.

The big three banks, the equivalent of the Wall Street ones? They’re just fine. 

Know which part of he banking system screwed up? The Main Street one. The one that was run not for profit (the cajas were not for profits, usually owned by a charitable foundation). Run by the local politicians in fact. The community organisers you might say.

That’s the part of the Spanish banking system that is hopelessly bust. Not a single piece of deregulation in sight. No CDOs, no CDS, no nothing except too many loans out to people who cannot repay.

This may be many things but a rerun of Wall Street in the 90s and 00s it ain’t.

ME:  Hmm, Tim.  Did you say in your comment that the percentage of the Spanish economy that is spent on government has even the slightest thing at all to do with the economic situation in Spain?  Was that in code language somewhere in what you said?  If so, I didn’t pick it up.

And, if there was no a single piece of deregulation in sight—No CDOs, no CDS, no nothing except too many loans out to people who cannot repay—then maybe it’s that there wasn’t enough regulation of the banking system, to begin with?  And I’m sorta wondering what the difference in outcome was between a bank controlled by pols who screwed up (in Spain) and pols controlled by a banking system (here)?  And, y’know, what all it has to do with the percentage of the economy that is spent on government—which is what Romney claims.

Conflation and non sequiturs, thy name is Mitt Romney.  Remove the incessant conflations and non sequiturs, and what do you have, Tim?  Do tell.

Do tell. 

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Spain. Please, Mr. Obama, talk about Spain. Please.

ROMNEY: Look, the revenue I get is by more people working, getting higher pay, paying more taxes. That’s how we get growth and how we balance the budget. But the idea of taxing people more, putting more people out of work, you’ll never get there. You’ll never balance the budget by raising taxes.

Spain — Spain spends 42 percent of their total economy on government. We’re now spending 42 percent of our economy on government. I don’t want to go down the path to Spain. I want to go down the path of growth that puts Americans to work with more money coming in because they’re working.

LEHRER: But — but Mr. President, you’re saying in order to — to get the job done, it’s got to be balanced. You’ve got to have…


Romney doesn’t want to go down the path to Spain?  Oh?  Well, since, actually, the percent of Spain’s total economy that they spend on government has nothing at all to do with Spain’s situation now, and instead has everythingto do with the fact that they had a huge, huge housing bubble, worse even than ours, and since their housing bubble is—like ours—the main cause of their economic problems, and since Romney wants to repeal the Dodd-Frank Wall Street and Mortgage-lending regulations and replace them with regulations that favor Wall Street … then, yes, Romney does want to go down the path of Spain. 

Or at least down the path we took during our deregulation juggernaut.

OK, here’s the thing: Romney and his campaign aides recognized that that debate forum would present a perfect opportunity for him to just rattle off statements without any challenge.  Just a steady stream of nonsense, without any real risk of being confronted with actual challenges to any of it.  They knew, as I did, that Lehrer—I still remember his nauseating role in the first Bush/Gore debate in 2000—does nothing but ask the candidates to state their positions on whatever.  Open-ended questions in which each one is supposed to state his policy proposal on, say, taxes, or “jobs.” There’s no actual questioning about the proposal.  None.  None.

So, Romney gets to state, free and clear, a completely false inference of fact about the cause of Spain’s economic problems.  And he gets to say, free and clear:

Look, the revenue I get is by more people working, getting higher pay, paying more taxes. That’s how we get growth and how we balance the budget. But the idea of taxing people more, putting more people out of work, you’ll never get there. You’ll never balance the budget by raising taxes.

Really?  You’ll never balance the budget by raising taxes?  Oh? Didn’t we do exactly that during the Clinton administration?

And, the revenue he gets is by more people working, getting higher pay, paying more taxes?  Oh? Through the same policies as George W. Bush did?  Really?

And so forth. 

Like, that Romney is going to cut tax rates across the board by 20%.  But he’s not going to lower tax revenue from the wealthy at all.  And so forth.

What Obama needs to do—really, really needs to do—is put up a series of ads juxtaposing Romney’s earlier statements with his gibberish from last night. (I strongly urge using a clip from Romney’s speech to the Detroit Economic Club in February, and a similar speech that same week in Arizona; Michigan and Arizona had their primaries on the same Tuesday.)  But rather than just suggesting that Romney is a slippery liar who’s trying to trick voters into putting into office a team that would put in place drastic, basic changes that he knows a substantial majority of the public doesn’t want, Obama should pretend that Romney just doesn’t know the facts and can’t do simple math.  He is, in other words, not very smart, or at least not very well-informed. 

The public, of course, will recognize that Romney’s a sleaze bucket. But Obama can just say, for example, that if Romney doesn’t know that during the Clinton years, we had a balanced budget, he’s too ill-informed to be president.

And, about that Spain thing: The final debate will be about foreign policy.  Which, Obama should point out, requires some knowledge of such things as what actuallycaused Spain’s economy to crash. And then he should educate the public about it.  He can do that in two or three sentences of medium length.  If he wants to see how it’s done, he can read any one of several Paul Krugman columns in which Krugman did exactly that.  It’s not rocket science.  It’s not even economic science.  It’s simple, established fact.  Of exactly the sort that not long ago Romney’s pollster said the Romney campaign wouldn’t trouble itself about, and that it would instead continue to make up its own facts.

Speaking of good way for the Obama campaign to get a message across in an ad ….

The bottom line: Obama can easily turn Romney’s performance last night into a plus. 

Easily.  Really.

Typo-corrected 10/5.

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Policy transmission mechanism: Broken in Italy, better in Spain

by Rebecca Wilder

Policy transmission mechanism: Broken in Italy, better in Spain
Yesterday, the Financial Times reported that borrowing costs for small businesses in the periphery were rising relative to the core using the ECB’s release of July MFI interest rate data. I highlighted this point exactly on August 1 following Draghi’s now famous London speech, where he cautioned that monetary transmission mechanism is ‘hampered’.

As opposed to the FT, though, I would argue that the transmission mechanism is at least not getting worse in Spain and Portugal, and worsening in Italy. Italy is the only periphery economy (where data is made available) where the corporate borrowing costs are higher since the peak of corporate lending rates in the Euro area in July 2011.

The FT is wrong. It takes Spain as the case study and uses the incorrect corporate lending rate information. Specifically, according to the FT (bolded by RW):

The interest rate charged by banks on a corporate loan of up to €1m lasting between one and five years – which would typically be taken out by a small business – was 6.5 per cent in July in Spain, according to the ECB figures.

True, the rate on new business loans up to and including €1 mn with maturity of 1-5 years did see an average borrowing rate of 6.5% in July. However, corporate loans up to and including €1 mn with maturity of greater than 5 years saw a drop in borrowing costs of 1.4% in July to 5.17% . The 5.17% rate is the rate that should be quoted, rather than the 6.5% rate.

The 2012 Euro area stock of outstanding debt shows clearly that 57% of corporate loans had been made with maturity of greater than 5 years – the ECB provides no breakdown of loan data by maturity at the country level, so the FT must have been referring to the ECB’s Euro area data as the ‘typical loan’.

As demonstrated in the chart below, the story is much more complicated than the FT curtly portrays – it’s not just ‘Spain’ versus ‘Germany’. French corporate borrowing costs barely budged since July 2011. Furthermore, the corporate borrowing rates in Spain are improving rather materially compared to those in Italy and Portugal.

Italian corporate borrowing are up 0.67% since the peak of EA corporate lending rates in July 2011 (the ECB hiked its policy rate on July 13). Spanish corporates, on the other hand, saw corporate borrowing costs fall the most of all the periphery economies, -1.35% since July 2011.
As demonstrated in the illustration below, the core is benefiting largely from ECB rate cuts compared to the periphery (chart 1 below). However, on a 3-month moving average (the rates moves are pretty choppy in Spain), the transmission mechanism in Spain is improving relative to that Italy and Portugal (chart 2 below). Using the correct data, the FT should have included this information in their article.

Rebecca Wilder
The Wilder View…Economonitors

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Spanish consumers AND savers take a forced siesta

by Rebecca Wilder

Recently we saw retail sales figures come out of Spain, Germany, France, and Italy. Across Europe, the seasonally-adjusted pattern of real retail sales is diverging.

The chart above illustrates the real seasonally-adjusted and working-day-adjusted (for Europe) level of retail sales across key countries in Europe and the US (for comparison). The raw data is indexed to 2007 for comparison. Euro area retail sales closely track those of Germany, so I’ll speak to Germany alone in this post. The final data point for sales in Italy, France, and the euro area is June 2011, while that for Spain, Germany, and the US is July 2011. Finally, Spain’s retail sales are released on a working-day but not seasonally adjusted basis. I adjust the figures for seasonal factors using a simple Census X12 ARIMA algorithm in EViews.

German and French consumers are hitting the retailers, while Italian and Spanish consumers are cutting back. In this post, I argued that the timing of the second drop in Spanish retail sales (following the recession) eerily coincides with the outset of fiscal austerity in Europe. US retail trade has outperformed that in Italy and Spain since the 2009 trough.

Spanish and US consumers have something in common: household saving rates fell in order to support retail shopping. In contrast to US consumers, though, Spanish consumers were forced to cut back both on retail spending AND savings. In Spain, there’s not enough income to increase retail spending and/or saving rates.

The chart illustrates household saving ratios (saving as a percentage of disposable income). Although the levels cannot be directly compared, since each are released in either gross or net form (net being gross ex depreciation), the trends are illustrative. Spanish saving plummeted since its peak in 2009. As of Q1 2011, the saving rate is already at the level forecasted by the OECD for all of 2011.

This is not going to end well. As the Spanish government struggles to meet its deficit target amid a battered economy, it does so at the cost of the domestic saving rate. Households will be forced to draw down saving further as a share of income in order to facilitate the government’s deficit objectives.

This deflationary policy is NOT sustainable.

Rebecca Wilder

Also published at Newsneconomics

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Europe’s industrial new orders: 3 very different stories

Spain vs. Germany vs. UK: production trends showing holes in some growth stories

Eurostat reports new orders for January:

In January 2011 compared with December 2010, the euro area1 (EA17) industrial new orders index2 rose by 0.1%. In December 20103 the index grew by 2.7%. In the EU271, new orders increased by 0.2% in January 2011, after a rise of 2.9% in December 20103. Excluding ships, railway & aerospace equipment4, for which changes tend to be more volatile, industrial new orders increased by 1.6% in the euro area and by 1.9% in the EU27.

This was a disappointing report, as Bloomberg consensus was expecting a 1% monthly gain. The Eurostat press release reports new orders by country and production type only(capital, consumer, intermediate, durable, and nondurable). However, I look at the origination of orders by region: domestic, non-domestic extra-euro (which is the same as non-domestic for the Euro area as a whole), and non-domestic intra-euro.

The idea is, that with ubiquitous fiscal austerity, Euro area countries rely on external demand for growth. So here’s my question: how’s Spain to survive? (more after the jump)

Exhibit 1: Spain’s industrial sector is barely growing amid fiscal austerity

No industrial production growth = a big problem. It’s not just fiscal austerity, per se, it’s that the economy needs plenty of nominal income gains to improve the cyclical budget deficit in order to even see the benefits of structural adjustment. The structural balance cyclically adjusts the government deficit (or surplus) for non-structural items to leave just the structural deficit (net spending on pension payments, unemployment insurance, normal capital expenditures, etc.).

Without growth to increase nominal revenues, the negative cyclical balance will keep the overall balance very much in the red. Spain needs growth! Apparently, it’s not coming from the industrial sector.

Spain was deriving quite a bit of industrial demand from within the Eurozone (the red line in the chart above) through the end of September 2010; however, that source of order growth is tapering off. Now, it seems that extra-euro industrial orders growth (the green line) may start a sideways trend, too. Normally I wouldn’t put too much stock in one data point – but with tightening across Asia and possibly the UK (not the US for a bit), slower orders growth is inevitable.

Exhibit 2: The German industrial machine

The German machine is also deriving industrial production growth from extra-euro orders. Notably, too, domestic orders have been strong. But for all of the talk about Germany’s overheating export sector, industrial production is still near 6% below its Q1 2008 level.

And finally,

Exhibit 3: The poster child for fiscal austerity, the UK.

Why? Because they’re nominal exchange rate depreciated quite markedly, allowing the trade-sensitive industrial base to find a very shallow bottom. On a trade-weighted basis, the British pound is 24% lower than in mid-2007, according to the JP Morgan nominal effective exchange rate index.

I’d like to hear how you all think that Spain’s going to get through this as the ECB raises short-term rates (for those of you who do not know my Euro-centric commentary, you can see a list of my recent commentary on the Eurozone, which includes articles on the ECB by my name on the AB sidebar), Germany slows, the US struggles to keep the consumer alive, and emerging Asia tightens its belt.

Spain’s a trillion dollar economy, and the fourth in terms of GDP in the Eurozone…

Rebecca Wilder

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European policy…really?

This week Trichet laid down the ECB’s hand, (effectively) announcing his intention to maintain inflation at the ECB’s target rather than allow it to overshoot. For all intents and purposes, 2% inflation stabilizes the real exchange rate rather than furthering real depreciation in the Periphery and real appreciation in Germany (or the Core).

Ambrose Evans-Pritchard agrees with my interpretations of Trichet’s speech:

Mr Trichet’s fire-breathing rhetoric can be taken as a signal that the ECB will continue to run monetary policy for German needs and tastes, refusing to accommodate a little slippage on inflation to let Club Med regain lost competitiveness without having to endure the agony of debt-deflation. Indeed, the ECB seems to have picked up some of the worst habits of its mentor.

Only the rebalancing of inter-euro current accounts will bring stable fiscal finances for debtor and creditor countries alike, something made more difficult with 2% average inflation! Trichet, in an interview with German newspaper,, doesn’t acknowledge this fact (bolded by RW):

Let me be very clear: this is not a crisis of the euro. Rather, what we have is a crisis related to the public finances of a number of euro area countries. All governments have to put their finances in order, and above all those governments and countries which have lived well beyond their means in the past.

Really? On the aggregate, Euro zone economies ‘living well beyond their means’ are now doing so in two respects: the current account deficit and public deficits. They’re not the same. Don’t even start with the ‘twin deficit’ story – Rob Parenteau refuted that some time ago.

It’s not about government dissaving, per se. For countries like Spain, or any other Euro area economy with years of accumulated private sector leverage, the only way for the public sector to simultaneously reduce fiscal and private deficits is for Germany foreigners to dissave (foreigners run large CA deficits). (See a previous post of the 3-sector financial balances model here.)

Given the close trade ties in the Euro zone, growing income from abroad effectively means a transfer of saving from the Eurozone Core to the Periphery via the current. This requires real appreciation in Germany, for example, and real depreciation in Spain.

First, real appreciation/depreciation could have been given a fighting chance with a lapse of the inflation target. Trichet made it quite clear where the ECB stands on this front: NEIN.

Portugal, Greece, and Spain have essentially no chance if left to their own accord.

Spain along with other Periphery economies are relatively “closed” compared to the German export powerhouse; that needs to change.

The chart above illustrates the degree of openness across the Eurozone, as measured by (exports + imports) divided by GDP. Spain, Greece, Italy, and France (expected to run budget deficits the size of Spain this year) are the most ‘closed’ of the Euro area (16, not including Estonia). In Greece, Spain, and Italy, the GDP share of export income has decreased over the last decade; furthermore, it’s imports, rather than exports, that make the larger contribution to economic openness.

Export share
(Q3 2010)
Import share
(Q3 2010)
Greece 20.2 26
Spain 26.1 27.5
Italy 27.0 28.5

Even if Spain was more ‘open’, real appreciation is ingrained in the economy, as represented by unit labor costs. Structural reform is required on many fronts, private and public.

Since 2001, Spanish unit labor nearly doubled, +46%, while those in Germany grew just 17%. Recently, unit labor costs in Spain have stabilized. This is due to the contraction of the construction sector, which dragged productivity in recent years. Going forward, more is needed.

The EU made several recommendations in their 2010 Surveillance of Intra-Euro-Area Competitiveness and Imbalances (pg. 78):

Enhancing productivity in a more sustainable way would involve further investment in and enhancing the efficiency of expenditure in research, development and innovation, as well as improving the efficiency of R&D expenditure are crucial for achieving productivity advances. Further improvements of the education and life-long learning systems and investment in human capital should also be envisaged. This may be achieved inter alia, by ensuring the effective, implementation of widespread education reforms in addition to upgrading the skills and increasing mobility of the labour force to promote a swift transition into employment, and reducing segmentation in the labour market.

Nowhere does the report say that competitiveness should be achieved by getting public finances ‘in order’. In fact, I’d deduce from these comments that more, rather than less, government spending is needed.

Without > 2% inflation, these countries don’t stand a chance.

Rebecca Wilder

Appendix: Another measure of relative price competitiveness, the GDP deflator.

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