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Friday, July 25, 2003

The Age of Innocence?

Going back in time to a point Eddie once made about his children:

My kids are 9 and 6. Often I wonder if their childhood is passing too quickly & that they spend too much time doing homework. They have fallen behind pretty relentless schoolwork. So Daddy comes and gives them a push. They’ve got years ahead of them, to learn and educate themselves. But kids get streamed at 10yrs here. So much for the family

And to a response from Manard, which although I would perhaps put it differently, has an important argument behind it. What is childhood?

As all good Orwellians know, the way to win a debate is take charge of it by stating the controversial points in a way that makes it seem that they are generally agreed upon, and relegate some minor issue to the focus of the debate. The above is a perfect example. The implicit assumption is that there is a real "thing" called childhood, and that it is somehow important that it be spent doing something other than homework. These are not inarguable facts, they are assumptions based on a particular, western world view, that got this that way because of some accidents of history in the west. ..............However there are other cultures out there that did not get to the 21st century along the same path as the West, and they see things differently.

I will leave aside the fact that Eddie, who is of course from Singapore, will probably have a particularly Janus-like view of the western tradition Maynard has in mind, and go for the fundamentals.

I think they are both right, and for non-Orwellian reasons. Eddie is right to raise the question of homework and childhood, not because of some 'essentialist' notion of what childhood is about, but because things are clearly changing. The pressure today is greater. The more homework jibe is a reflection of a reality which lies behind the talk about the increasing need to realise our 'human capital advantage' in the OECD countries, fewer children are going to be under pressure to achieve far more. At the same time the arrival of a global mass media has had what appears to be a dual impact: a growing 'worldiness' at ever younger ages (the Britney Spears Karaoke effect), and a later emotional maturity, as evidenced by a tendency to form stable couples later and a growing dependence on the 'family nest' until ever older ages. The childhood reality is changing. But again, Maynard is right too, since it always has been.

In order to put things in context, I would like to return to my now favoured source: Bo Malmberg, and the Four Phases of the Demographic Transition

So let us turn, first, to the child phase, the period of child abundance that initiates the age transition. England was among the first countries in the world to enter this phase of rapid population growth and child abundance. This happened around 1800, in the time of Malthus, whose influential – and largely pessimistic – analyses of population growth was based on this very experience.9 As regards our main case, Sweden, the most clear-cut effects of an increasing number of children can be found somewhat later, from the 1820s. At this time, Sweden entered the demographic transition, and with declining mortality rates, larger cohorts of children survived...................

If one were asked to enumerate characteristics common to child abundant countries, such as Sweden in the 19th century, a first observation to be made is that child abundance is closely related to poverty. In Sweden, the period from the 1830s up to the early 1870s was marked by recurring political struggles around ”the poverty question”. Contemporary evidence tells the story of a country challenged by an unexpected population growth and alarming signs of disintegration and destitution.11 The connection between children and rural poverty in 19th century Sweden is confirmed by the fact that the share of children (0-14 years of age) in Swedish counties around 1870 is strongly correlated with the poverty rate (defined as the share of adults unable to pay taxes). A statistical analysis shows that a one- percent increase in the share of children corresponds to a 2.5 percent increase in the poverty rate. The share of children explains slightly more than 50 percent of the regional variation in poverty.12 Today, this close relationship between child abundance and poverty can be found again in many parts of the world, not least in sub-Saharan Africa. The sub-Saharan African states have at present remarkably high child dependency rates, and these countries are also among the poorest in the world.

Another characteristic feature of child abundant economies is the occurrence of child labour, a phenomenon clearly connected to the state of poverty. In Sweden, child labour was widespread during the child phase, and regional analyses indicate that the incidence of child labour peaked in different regions when the share of children in the population was at the heighest.15 The demographic transition in Sweden started in the south, in the first half of the 19th century, and as the number of children rose in this part of the country, the incidence of child labour appears to have risen as well. For example, child labour in Swedish urban industry, that was mostly located in the south, peaked in the 1850s. In northern Sweden, by contrast, where the child phase occurred later, child labour continued to exist well into the 20th century. Northern children worked within agriculture and lumbering, but also in the sawmill industry.16 Today, when child labour is no longer an issue in Sweden and other ageing countries, child labour has instead become very important in poor countries in Africa, Asia and Latin America, where child dependency rates are still high. As could be expected, the highest activity rates are found in sub-Saharan Africa. Here, more than 30 percent of children aged 10-14 years are consiedered part of the labour force. The highest incidence of child labour is registered in Burkina Faso, where 59 percent of children aged 10 to 14 are included in the economically active population.
Source: Bo Malmberg, Four Phases in the Demographic Transition

Now the point I want to make with Malmberg is that attitudes to childhood seem to track demographics. In child super-abundant societies there is no 'childhood' as we knew it in the US and Western Europe in the 1970's and 1980's. Children have to work, or fight, as we see all too often on our TV screens (and this point also applies to my reply to Elliott earlier in the week). At the same time, as children become scarce, 'childhood' once more comes under pressure, whether the children are squeezed as an easy pathway to their parents pockets, or as a future source of acquired value for the society into which they are born.

News From the Bond Markets: Close Encounters of the Dangerous Kind

The great bull run in the bond markets is over, that much is clear. The only detail left to clarify is who has the blame. As I often suggest, pointing the finger is always easy. For many the prime culprit is that habitual re-offender Alan Greenspan. Perhaps there is an argument to be made here. Certainly Roach is cogent when he argues that decisions, on the one hand, to suggest to the markets that 'unconventional measures' (which would of course imply keeping long bond rates down, and hence bond prices up) were becoming less likely, and then to follow this up, on the other, with the insinuation that there was no interest rate floor at 0.75% could well provide us with what the Greek historian Thucydides would have termed the efficient (immediate) cause, but as Roach also argues the real 'final' cause ought 'even handedly' to be located in the difficulties inherent in managing monetary policy in a strongly-disinflationary climate as interest rates progressively drop towards zero.

At 10:30 a.m. on Dec. 7, 1981, a 61- year-old man carrying a .38 caliber pistol, two sawed-off shotguns and a hunting knife walked into a building at Constitution Avenue NW and 21st Street in Washington. The New Hampshire resident proceeded to the second floor of the Marriner Eccles Building, where he intended to take the cloistered members of the Federal Reserve Board hostage to focus media attention on the damage near-record interest rates were having on the U.S. economy. Little did he know that "interest rates had peaked some nine weeks previous and had embarked on their greatest down move in history,'' says Paul McCrae Montgomery, a market analyst in Newport News, Virginia, who publishes Universal Economics. Two weeks ago, a 63-year-old Hong Kong man burned 22,000 Hong Kong dollars ($2,821) to protest near-record low interest rates. His nest egg of HK$346,580.05 had generated a paltry HK$17.50 in interest at HSBC Bank during the past six months. Interest rates have plummeted in Hong Kong, which links its currency to the U.S. dollar. The two sexagenarian interest-rate protesters may be bookends to the biggest bond bull market in history, which started in September 1981 with the 30-year bond yield at 15.31 percent and the 10-year note yield at 15.84 percent. The bull market may have ended on June 16, 2003, when the yield on the 10-year note and 30-year bond touched a 45-year low of 3.07 percent and 4.14 percent, respectively.

"The price structure is compatible with the end of the bull market,'' Montgomery says. "You get confirmation when all markets are moving together.'' What greater confirmation can there be than all the world bonds markets turning in sync? Since last month's low in yield/high in price, bond markets in the U.K., Germany, France, Spain, Canada, Japan and Australia, to name a few, have all declined. "We worry too much about what (Fed Chairman Alan) Greenspan says and what our economy is doing, because the world's credit markets are not nearly that parochial,'' Montgomery says. "Major movements in interest rates are tidal affairs.'' In retrospect, the final leg of the rally that kicked off with the Fed's statement on May 6 about "an unwelcome substantial fall in inflation'' had such force it couldn't have been sparked by fears of deflation. "You don't get a rally like that on a concept,'' says Jim Glassman, senior U.S. economist at J.P. Morgan Chase & Co. "Inflation expectations don't change that rapidly,'' which is something Fed Governor Ben Bernanke pointed out in a speech on Wednesday. Rather, the rally was driven by an expectation the Fed would resort to "unconventional measures'' to stimulate the economy (buy long-term bonds), and by what Montgomery described at the time as the law of increasing returns. Normal market dynamics can be defined by the law of diminishing returns, "wherein a rally in prices and a drop in yields decreases demand,'' he says. "The type of buying that drove bonds to their June 16 top was of a dangerous sort and subject to reverse itself in an equally dynamic move to the downside.'' Higher prices begat more buying as mortgage portfolios were forced to beef up their duration, a measure of risk, by buying non- callable Treasuries to offset the mortgage-backed securities being called away when homeowners prepaid their mortgages and refinanced at a lower rate.

The second kicker came from the pools of commodity trading advisers, whose black-box models are driven by market momentum and other technical indicators. A third supercharger came from the "carry trade,'' with traders borrowing money at low short-term rates and buying long- term notes and bonds to benefit from the steep yield curve. "The problem comes when one isn't satisfied to earn 100 to 200 basis points of spread and decides to leverage up 10 or 20 to one,'' Montgomery says. The force of the rally drove Treasury yields below those on tax-free municipal bonds, a rare occurrence. "Once the market gets leveraged up in this fashion, it doesn't take much price weakness to generate a cascade of selling,'' Montgomery says. And it didn't. Yields rose further, faster than anyone expected. Now there's seven times as much money invested in Treasury bond puts than in calls, Montgomery says. That compares with a 13-to-1 weighting in favor of calls, a bet on higher prices, at the June top. The rise in yields is already sparking the usual warnings that higher rates are going to nip the nascent economic recovery in the bud. To put the 100 basis-point rise in long yields in perspective, for anyone who left the country on May 6 to go trekking in Nepal and came back this week, interest rates are still historically low. That's what the Hong Kong protester was saying when he put match to money.
Source: Bloomberg

Regardless of the ins and outs of who sparked this off, the situation is far from stable. Among other factors, unduly high lmedium and long term rates can adversly affect whatever recovery may be coming. Among those who are worried is, of course, Stephen Roach.

The current rout in the US bond market is starting to reach epic proportions. Yields on 10-year Treasuries have backed up an astonishing 108 bp in just five weeks. Given the record low yields that were prevailing on June 13 (daily close of 3.11%), this sell-off is far worse on a percentage change basis -- a 35% surge in long-term government interest rates. It’s a carnage that is now taking on the trappings of the worst sell-off of them all -- the great bond market rout of 1994, when yields on 10-year Treasuries rose by 44% (or 246 bp from 5.57% in January 1994 to 8.03% in November 1994). Needless to say, if the rout continues, all bets could be off on other asset markets, to say nothing of the nascent recovery in the US economy...........

One of my most seasoned trader compatriots has always warned that a yield curve which “steepens in a downtrade” is emblematic of the most virulent of bear markets. And that’s exactly what is going on today. The spread between 2s and 10s in the Treasury market hit 259 bp at the close on 21 July -- equaling the yield gap last seen in 1992. The traders are telling me that this “bear spasm” is now at risk of feeding on itself -- until or unless it is stopped by an unexpected weakening in the economy or by direct intervention by the authorities.

This is hardly an outcome that the Fed, or any of us, would deem desirable in the current climate. It runs the very real risk of spilling over into other asset markets -- especially given the mounting potential for an a further sell-off in the US dollar as part and parcel of America’s long overdue current-account adjustment. Moreover, a sharp additional back-up in long rates poses a serious threat to a nascent recovery in the US economy -- not only crimping the credit-sensitive sectors of homebuilding, capital spending, and consumer durables but also aborting the home mortgage refinancing cycle that has been so supportive of consumer demand. We tend to forget that the US economy is still closer to the brink of deflation than inflation. Wouldn’t it be ironic -- and tragic -- if the perils of deflation were compounded by a rout in the bond market?

In my view, all this is indicative of what happens when deflationary risks of post-bubble economies take monetary policy into uncharted waters. As short-term nominal interest rates approach zero, central banks start to lose control of financial markets and the real economy. That’s precisely what has happened in Japan under the BOJ’s zero-interest-rate regime. And the rout in America’s bond market may well be a warning sign of a similar fate for the Fed.
Source: Morgan Stanley Global Economic Forum

Mind Your Label

I really don't know what to make of this one. On the one hand I am very anti-protectionism, and on the other I find some of my favourite products on the list, and why not. Stilton cheese, which is surely one of the seven wonders of the UK (Chrismas Pudding being among the others) is not sufficiently appreciated for the wonder it is here in continental Europe, Roquefort is Roquefort is Roquefort (try it with endives and mayonaise, a traditional Catalan recipe) and Feta is Feta (except in Bulragia where it is known as Sirene) and from here on in the problems only increase:

Food and wine producers round the world would be banned from using 35 of the most famous names to advertise and label their products - including Champagne and Roquefort cheese - under proposals being drawn up by the European Union. EU member states will today meet to try to determine a final list of names, known as geographical indications, and are planning to submit the document to the World Trade Organisation. The preliminary list, a copy of which has been obtained by the Financial Times, contains what the EU says are the most valuable and most widely copied products, such as the wines and spirits Bordeaux, Cognac, Porto and Sherry; and Gorgonzola, Parmesan, and Stilton cheeses. It could force thousands of producers to relinquish brands and trademarks. The EU has already urged the WTO to adopt measures to increase protection for the names, but the list represents the first attempt to win "absolute" protection for its most cherished brands. The latest move is likely to infuriate some of Europe's biggest trading partners, including the US and Australia, which have long argued that the EU's carefully co-ordinated drive to win better protection for its regional food manufacturers is trade-distorting and anti-competitive. Pascal Lamy, EU trade commissioner, is determined to push the issue on to the agenda of the Doha world trade round, and will press for the list to be adopted at a WTO summit in September.
Source: Financial Times

However idly googling and looking for the Bulgarian name for Feta I came across the the piece below, which shows what a minefield all this is. It strikes me that these regulations are a bit like patents, those who arrive in the global market first plant a flag and then ring-fence, leaving less space for those who would follow. Australian Chardonnay and Bulgarian and Chilean Cabernet Sauvignan are widely appreciated, as is a local product here in Catalonia, cava, which is only allowed to claim that it is produced with the Champagne method.

“...Feta cheese is considered ( also ) Bulgarian product and what you call "Greek salad" is known in West Europe as "Macedonian salad" and in Bulgaria "Russian salad". The Greek feta is made of cow milk and is definitely inferior to the Bulgarian sheep milk feta. Give it a try !”

Hi James: I just read your article on feta. Just to clarify a few things, I would like to mention that feta is produced in Romania, Bulgaria, Greece, and Turkey. They are the best known of all. Some claim the best to be Bulgarian but it is debatable and a matter of personal opinion. However, France and Denmark also produce feta. They are processed and packaged. Obviosuly they lack a semblance to the original product. The origins of feta are also unclear, while some claim it to be Greek others place the origin in Macedonia which partially is in Greece and now independent.
Regards H berberoglu

To those who have commented about the initial email, please note that the writer does NOT claim that Feta did not originate in Greece. He is making claims about how Feta is viewed in some other countries, and what is commonly known as ’Greek Salad’ is called in those countries. These statements may or not be accurate. He DOES claim that Bulgarian sheep’s milk Feta is superior to commercially made cow’s milk Greek Feta. He does not (as he should have) compare sheep’s milk Feta from both countries.

If you wish to contribute anything to this discussion, please do not send emails berating the writer for saying Feta Cheese is not Greek HE DID NOT SAY THAT. Cheeses like Roquefort and Stilton are regulated as to production methods, location, etc. and who can use the name. Feta cheese production is not governed by similar regulations. Today, Feta cheese is made in many parts of the world. If anyone would like to send me sheep’s milk Feta from Greece and sheep’s milk Feta from Bulgaria, I would be more than happy and delighted to hold a cheese tasting with several chef’s here in Key West to give our opinion.
Source: Food Reference Website

Please feel free to send your candidates for long-neglected products which deserve wider recognition in Brussels and elsewhere.

Thursday, July 24, 2003

A Creative Alternative to Rinban Revaluation

Andy Xie, on why China may have available a very interesting alternative to Rinban revaluation. While some of the details here may be of the 'hard to follow' variety for the non economist, the main point should be clear: an extraordinarily favourable global headwind has pushed up rinban revaluation expectations, in default of any serious contender. This gives the Chinese authorities an exceptional opportunity to clean up the financial system based on the ability to take advantage of the currency revaluation expectations. Could this mean there is 'good' and 'bad' speculation, just like there is good and bad deflation? In any event look at the credit/GDP ratio (157%), a number which in normal conditions would provoke fear of extreme inflationary implications. Now there is some debate about the possibility of rising inflation in China, especially, as Andy Xie notes, due to its heavy dependence on raw material (commodity) imports, and this is a theme which may well be worth exploring on a subsequent occassion (what for example will be the impact of a secular rise in raw material prices on other developing countries: my feeling in general is that China's impact will be felt as much in the third world as it is in the OECD countries). All this being said, the unprecedented upward movement in the Chinese economy would be hard to understand without an appreciation of the underlying demography, and without the aid of something like the Mamlberg model. Those who don't take note are sailing in the open sea with neither charts nor compass - and in many cases with little ability to navigate using only the stars as a guide. (One clear example of someone who although apparently bereft of charts and compass, is good at 'star gazing' is of course Andy's boss: Stephen Roach.

According to Chinese local press reports, China may announce a schedule for the proposed sale of US$240 billion of state holdings in A-share listed companies, which is to be confirmed. This substantial amount of RMB asset supply would completely remove pressure on the RMB to appreciate for the next two years, in my view. Indeed, China could sell down its NPLs (estimated at 25-40% of state bank loans or US$250-500 billion, according to various sources) to further increase the supply of RMB assets. In my view, the additional liquidity inflow due to speculation on RMB appreciation is a golden opportunity for China to come to grips with problems within its financial sector. China could solve its financial sector problems with subsidies from foreign speculators. Financial reform would normally require devaluation. The currency market is paying 2% for the privilege to buy RMB at the current rate one year from now. Why shouldn’t China use liquidity arising from currency speculation on the RMB to repair its financial system?

China’s foreign exchange reserves increased by US$53.7 billion in the first five months of 2003, while its net foreign assets increased by US$21.3 billion. The change in net foreign assets reflects FDI and the trade balance (totaling US$25.5 billion in the first five months). A slower increase in foreign currency deposits and reduction in banking sector net foreign assets have contributed to the excess increase in foreign exchange reserves. The trends reflect the fact (1) that Chinese banks are worried about RMB appreciation, which would entail huge financial losses for them, and (2) that Chinese enterprises and households are not increasing US dollar deposits, as was the case previously, amid talk of RMB appreciation. In short, the rapid increase in foreign exchange reserves appears to be due to expectation shifts rather than a change in fundamentals. Indeed, China’s foreign exchange reserves tend to rise in tandem with capital inflows rather than trade surpluses. When China runs large trade surpluses, as was the case between 1997 and 1999, its foreign exchange reserves did not increase in tandem. Indeed, rising trade surpluses in China usually reflect pressure on the currency and, hence, deflationary pressure results in a rising trade surplus to meet capital outflow demand.

The rapid increase in foreign exchange reserves this year fits the old pattern. As the economy is doing well, there is more speculative demand for RMB. China and Hong Kong combined are running a trade deficit this year. As long as commodity prices remain high, as we expect, China and Hong Kong combined will continue to run a trade deficit. Currency speculators have pushed up the RMB in Singapore’s non-deliverable forwards (NDF) market. The implied interest rate for RMB is -1% for the one-year maturity. This indicates foreign speculative demand for RMB is strong, which should keep China’s financial conditions loose. Ample liquidity in the system can cause overheating and bubbles. We are already seeing some symptoms. Domestic credit has risen by 18.5% YoY in the first five months of this year. It rose by 30.3% YoY last year. With domestic credit at 157% of estimated 2003 GDP, such a rapid increase could certainly lead to tremendous demand creation.

The rapid increase in credit is causing strong investment growth. Most industries are witnessing steep increases in capacity. Property investment increased by 35.2% in the first half from last year. Most major cities are about to face excess supply. Car production increased to 902,000 vehicles in the first half, up from 441,000 a year ago. What is taking place is that income from the 30% increase in exports is being transformed into property and industrial capacity. China is spending its export income and, hence, keeping its trade surplus down via increasing imports. As investments in industry and property rise with export income, imports of raw materials and machinery increase in tandem with exports to keep trade in balance.

Overinvestment is considered a convincing sign of overheating, and currency appreciation is recommended as an option to cool down the economy. However, currency appreciation could backfire and cause further overheating, as the inflow of speculative capital increases, thus making the property sector even more overextended, which in turn could cause problems further down the road.

Overinvestment using export income is a familiar theme, and one that we observed in Southeast Asia prior to the 1997-98 financial crisis. The fundamental cause of overinvestment, however, has more to do with the lack of risk management in the banking system than export strength. Currency appreciation thus cannot solve the problem. Rather, the solution is financial reform, which would lead to better capital allocation. Thus, floating the currency should only follow not lead financial reform. I believe that the current situation presents a golden opportunity for China to solve its two major problems: (1) the high level of non-performing assets in the financial system and (2) the current concentration of economic growth along the Eastern Seaboard.

The current favorable liquidity environment offers a golden opportunity for China to address problems in its financial sector. The huge amount of NPLs in the banking system and the overhang of state shares in the A-share market are the twin legacy problems for China’s financial sector. To unwind the two would require the injection of sizable liquidity by the central bank into the system. This would normally lead to currency devaluation. However, the current strong demand for RMB could allow China to tackle the two problems without depreciating its currency. The value of state shares in the A-share market is around US$240 billion at current prices; however, it is impossible to calculate their value at the market-clearing price. Their sale would help strengthen the national pension system, and would also allow the government to pay laid-off workers. In a way, the sale of state shares would translate foreign liquidity inflow into income for laid-off state enterprise workers. China’s NPLs are currently estimated at 25-40% of the state banks’ loan book, or US$250-500 billion. China has already started to sell some of the NPLs to foreign JVs. However, the amount sold so far is small relative to the total stock. The current favorable liquidity conditions thus allow China to accelerate NPL disposal without having to depreciate its currency.

The five provinces along the Eastern Seaboard (Guangdong, Fujian, Zhejiang, Shanghai and Jiangsu) accounted for 76.4% of China’s export increase in the first five months of 2003, even though they account for only 20% of the country’s population. The other four coastal provinces (Shandong, Tianjin, Hebei, and Liaoning) contributed to 13.8% of the export increase, with 16% of the population. The remaining two-thirds of the population are not in the global economy and live off the income from the coastal provinces, in the form of fiscal transfers and credit redistribution through the state banking system.

China’s economy is less evenly distributed than the euro-zone economy. Per capita income in the richest province in China is 10 times that in the poorest province, while per capita income in the richest economy in the euro-zone, Germany, is about 3 times that in the poorest economy, Portugal. While rapid export growth may make China’s Eastern Seaboard appear to be overheating, the rest of the country is still quite depressed. China can cool down the Eastern Seaboard and transfer growth to its interior provinces by phasing out the preferential tax treatment for foreign and/or export companies there and retaining such privileges in the interior provinces. Such a policy change could both dampen the investment bubble along the coast and increase economic growth in the interior provinces, thus reversing the widening income gap between coastal and interior provinces.
Source: Morgan Stanley Global Economic Forum

Ageing and Productivity

OK, Eddie sent me a point a couple of weeks ago that I think is worth addressing:

How would you reconcile what you considered an obvious conclusion from the EU study …

“ the marginal productivity of workers tends to start to decline in their early to mid 50’s; and worries that enthusiasm for reform and overall levels of dynamism and innovation in an economy may be detrimentally affected by having an ageing labourforce. “

with Kurweil’s law of accelerating returns?

If we get the exponential within exponential and within just a few decades, then there’s that intriguing possibility that the marginal productivity of workers doesn’t necessarily decline with an ageing labor force? Technological progress takes on a life of it’s own? (You made a reference to the question of limitations) And I wonder if in the process of businesses fighting for survival, we’d see an acceleration in extracting greater value from technology.

As usual eddie puts his finger on an important question. The first point I would wish to make is that when I talk about the future, I try very much to restrict myself to what I regard as the immediate future. This for me means between now and 2005, and the medium term, which means between now and 2010 (say). Outside of noting that the demographic background (which is in large part already determined) has certain defined characteristics which will be unlikely to change, I am not prepared to enter into speculation about a longer term future, in part because I am not a futurologist, and since I have difficulty extrapolating forwards to 2005, long-term long-term, the only thing I know is that, as the man said, we are all dead. And even this sems to be in question if you read the most ambitious claims of the genetic-bio-engineering enthusiasts.

So what I am concerned about is the future as we can see it now. What we know is that the OECD countries are living through an important demographic change, and that that demographic change is having an impact not in 2012 but now. This is the only real explanation I can see for the problems of eg Germany, Switzerland, Taiwan, Hong Kong etc (and if, as I keep saying, Italy takes a surprise hit, then I'll damn well know I'm right).

Now the point I am trying to make is that the changes I am talking about are arriving in the here and now, and that it is the flexibility of our ageing population in this relatively short term which preoccupies me. Here in Europe I see a large group of people arriving at the mid-fiftees with one thought in mind: retirement. They are often more psychologically than physically exhausted. Stress appears to be a major factor. Now what I find hard to believe is that on the basis of a short term labour and pension reform, this group is going suddenly a find a new sense of life, and a new enthusiasm for a second working career, possibly as a tennis playing entrepreneur. Going back for a moment to Eamonn, I too saw Lance Armstrong fall off his bike and climb straight back on. Some heroic individuals are capable of this, but allow me to doubt how many.

Now this is important. Techology changes, enterprise organisation changes, and we change, but all three perhaps do not change at the same pace. Attitudes to change are culturally driven. This I feel is the fundamental US error in Iraq. This is what my hero Luigi Cavalli Sforza discovered when he went to look at the African rain forest pygmees: he found in fact that this group did not change, despite having the world of agriculture right under their noses, so to speak.

Long term we are part of an evolving complex system, and we will adapt to all the extra longevity we may have. Clearly there is a lot to be said for a working life that starts at thirty and goes on to eighty. I will vote for it any day you want. But we are not there yet. the generation arriving now at the threshold of their sixties has lived another epoch, and I doubt they will change so quickly.

There is another point. All this is not happening in a void. We are in a period of global restructuring - again the question is only of timing, of when. But some countries with a plentiful supply of young people are about to come on line eonomically speaking. My feeling is that some of these countries will be able to take very good advantage of the technological exponential over exponential that Kurzweil talks about. I mean it is anecdotal, but the likes of Google, Amazon, Yahoo etc were not founded by ageing hippees, but by bright young well educated people. The ageing hippees of the likes of Vivendi, Bertellsman, Terra-Lycos etc here in Europe have not been a notable success. Obviously this is a topic where some empirical investigation would be interesting, but until someone really shows me the contrary I continue to believe that the young are the natural 'early adopters'.

Now this doesn't mean that there isn't a bright new, technological future a la Kurzweil, it's just that maybe the OECD countries won't be the best positioned to take advantage of it.

US Labourforce Demographics

hanks to Joerg for forwarding this piece about the demograpghics of labour market participation in the US. The point about the rising proportion of older people in the labour force is to be anticipated, especially with growing insecurity about pension schemes. The detail at the end about young people entering later is also consistent with the idea of increasing education being necessary to raise the acquired human capital values, with increasing skill and education bias in the salary structure.

Older workers staying in the labor force

A recent labor market trend is that more and more older people are remaining in the labor force. By the end of 2002, the share of those between the ages of 55 and 64 who were in the labor force-either working or unemployed-rose to 62.9%, its highest level during the post-war era. Although there has been a steady increase in the share of the near elderly (those between the ages of 55 and 64) in the labor force since 1985, their share has grown rapidly in recent years. From the end of 2000 to the end of 2002, the number of near elderly in the workforce has increased 3.1 percentage points—1.6 percentage points per year. In the previous 15 years, the increase in the number of near elderly in the workforce totaled only 5.5 percentage points, or 0.4 percentage points per year.

The acceleration of the share of the near elderly in the labor force has been attributed to a loss in retirement savings as the stock market crashed in early 2000, decreasing access to health insurance for early retirees, and rising health care costs for the near elderly and the elderly.

More of the near elderly are in the labor force because older workers are staying in the labor force longer instead of retiring, not because people who had already been retired are returning to the labor force. While there has been a clear trend of rising numbers of near elderly in the labor force, there has also has been a gradual trend toward a smaller share of near-elderly reentrants into the labor force. Thus, the loss of retirement wealth, and more importantly, the loss of access to retiree health insurance, keeps older workers in the labor force longer than before.

The EBRI data show there was a big drop in labor force participation among the youngest male workers (ages 16-24) from nearly 75 percent to less than 65 percent between 1980 and 2002. The biggest increase -- from 41 percent to 55 percent -- was recorded among women age 55 to 64.
Source:Bureau of Labor Statistics, Current Population Survey.

Times Getting Harder For Japanese Exports

News from Japan has been slow in recent weeks, the markets have rallied, and expectations and confidence have been up. This increase in moral has in large part been based on hopes for an export lead expansion riding on the backs of a US recovery. With the Yen rising steadily against the dollar, and the US recovery being more muted to date than widely expected, this was always a hard one to swallow. The news on June exports from Japan seems to add some solidity to the skepticism.

Japanese export growth sputtered in June, coming to a virtual halt and casting doubt on the possibility of an economic turnaround led thus far by external demand. June exports were flat compared with the previous month, following 13 consecutive months of increases, according to the ministry of finance.

Though exports to Asia rose 3.8 per cent, it marked the fourth straight month of declining growth overall. Exports to the US, Japan's single largest trade partner, fell 12 per cent in value and 10.5 per cent in volume. The figures cast a dark spell over recent economic data and a month-long rally in the stock market that had suggested the economy was on the road to recovery.

The Bank of Japan earlier this month upgraded its assessment of the economy for the first time in a year, citing a pick-up in exports and an improvement in capital spending by companies. Richard Jerram, economist at ING in Tokyo, said on Thursday in a note to clients: "Apart from the impact from Sars, the prospects for exports in the remainder of [fiscal 2003] have not notably brightened in recent weeks, as a revival in US demand has long been expected."

In the first six months of 2003, however, exports to Asia increased 11.6 per cent to Y11,880bn ($99bn), the highest level ever for a half-year period, according to the ministry of finance. During the period, exports to China increased 36.4 per cent. China last year ousted the US as the world's biggest exporter to Japan. In comparison, Japan's trade surplus with the US shrank 12.9 per cent to Y3,200bn, while its trade surplus with the European Union increased 25.4 per cent to Y1,410bn, caused in part by the euro's appreciation against the yen.Most economists forecast growth in the Japanese economy this year, on a moderate improvement in exports and continued private sector domestic demand growth. ING expects gross domestic product to expand by 1.7 per cent.
Source: Financial Times

The above picture only seems to be confirmed by the latest news from

The drip feed of bad news from Mitsubishi Motors, the Japanese carmaker 37 per cent owned by DaimlerChrysler, continued on Thursday after it announced a sharp downward revision to its full-year profit forecast and cut projected sales in North America. The company said it expected to report a net profit for 2003 of ¥10bn ($84m), down from its earlier forecast of ¥40bn on consolidated net sales of ¥Y2,720bn, compared with an earlier estimate of ¥2,900bn.

The drastic cut in its full-year forecast will come as no surprise to institutional investors who have become used to MMC issuing disappointing news just as it was starting to appear that it might be getting back on its feet. The company attributed the downward revision to a one-off ¥50bn payment to cover bad loans made to customers of Mitsubishi Motors Credit of America (MMCA). This charge comes on top of a ¥295bn payment made for the same reason in the last fiscal year.

The problems emerged after MMCA offered loans to low-income customers with little or no credit checks, resulting in a huge default rate. A spokesman said the latest ¥50bn payment would cover future defaults. "As far as new business is concerned, there is nothing to fear," he said. The downward revision in unit sales in North America from 370,000 to 340,000 is partly attributable to the reduction in sales that will result from the decision to tighten its lending criteria, but also reflects a slowdown in the US economy, MMC said.

The constant bad news emerging from MMC has detracted attention from the achievements of the company's new management. It reported its first growth in net sales since 1997 when it announced results for last year on May 26. Headcount is down 14 per cent, material costs down 15 per cent and domestic production capacity down 20 per cent - all 12 months ahead of schedule - and operating profit doubled to ¥83bn and net profit tripled to ¥97bn. Rolf Eckrodt, chief executive, has also committed the company to a top-line revival driven by a move from 15 platforms to 10 and increasing volume from 100,000 to 200,000 per platform while increasing overall volume from 1.5m to 2m in five years time. But these moves continue to be overshadowed by a cover-up scandal, a huge global recall of 2.5m vehicles and the enormous costs arising from its US finance operations.
Source: Financial Times

On the Generation Gap: Part 4

I can't believe it! He's still trying to tell me how to do things. Who, my own son. I've heard of the arrogance of youth, but this is getting ridiculous. It all started with a throwaway comment that I have to learn not to talk so much when interviewing people. (When pushed, I blame my garrilous excesses on my Welsh upbringing). So he comes back at me virtually accusing me of trying to 'steer' people, and sends me a host of transcripts across the pipe-waves (which incidentally all but crash my mailbox) with some very informative viewpoints on the state of the Georgian health system by some highly intelligent doctors there. I write back protesting that it is not quite the same thing interviewing barely-legal immigrants who are nervous about being interviewed, and may need verbal re-assurance to talk, and look what I get for my pains:

" Immigrants who are not completely legal and secure, are another matter".... - not at all, surely my point is even more relevant here. You keep stum and let them talk otherwise you may lead them too much. They say what they expect you want to hear. Its very easily done. There is a balancing act where you have to allow some insight to be developed but also get to the heart of the issues you are trying to find out about.

Try Handing over control of the conversation and allow a rapport to develop?. I don't rate social science research as particularly valuable when it relies heavily on interview and informal qualitative methods but then again how else can you investigate certain phenomena? what exactly are you trying to investigate and how?

So I try to clarify as follows:

"I don't rate social science research as particularly valuable when it relies heavily on interview"

But as you say, what else have we got. Looking at economics where there is a lot of conjecture about how people behave and form expectations, what is most noticeable is the lack of investigation on the ground of what people actually do. This is pretty incredible, especially considering how much money is at stake, and how cheap good qualitative surveys are. The quantitative surveys I see really are very limited. No, I don't agree with you, I'm impressed with what I am learning.

And what to you imagine I get for my pains, another lecture:

Again you are right ... qualitative surveys are bloody useful. But i always ask myself "for what?"

And i agree that quantitative methods when done badly are a waste of time. Economics is a great example here. The problem with economics is the difficulty in putting a 'value' figure on things (obviously in the perfect market the market dictates the value by ascribing a price. but as we have discussed this often doesn't apply). Just as in medicine how do u actually find out how valuable an extra year of life is to a particular individual? You can sort of do it (using stuff like those quality adjusted life year questionnaires and doing cost benefit analyses.... however the difficulty again is how to actually 'value' the cost and the benefit when applying value to more abstract less quantifiable things such as time and quality of life). For me there is no accurate tool to do this. You can apply the tool (for example a EuroQol health index score) to the same person numerous times and each time you may get a different value (not repeatable or empirical) or else you may get different values for different persons who may appear to be in similar circumstances or from different cultures ( i.e. not generalisable).

Furthermore if you are trying to assess the usefulness of an intervention that you can't go out and measure discreetly (as you might with a blood test)....a good example might be the level of depression a person has.... and you are conducting research into a talking therapy that you have developed there are issues of value freedom. For example, If i am conducting research into something I believe will work then I have a value base.

Now by applying that intervention I will automatically be affecting the level of successful outcomes (purely through my behaviour). I believe it is important for this intervention to be a success and so immediately i affect the experimental environment and the intervention looses its generalisability. Problems. Particularly if there is a large degree of subjectivity in intervention style and outcome assessment. The qualitative paradigm looses out because it is not empirical or objective enough.

So where does all this leave me..... well a bit stranded. As Popper points out how do you measure the outcome of a work of art, or rather how do you falsify a work of art... I mean you can't. (i don't think any measure would ever be particularly useful anyway). I suppose neitzchse would be content and say well we have uneducated ourselves about the problem now we can start actually learning from a clear and unpolluted starting point. How do we figure out the problem? (or on the other hand he could just faint in an opium induced psychosis!) the problem is essentially one of perception: either the external (human) world exists externally and thats its properties can be measured through objective methods rather than being inferred subjectively or through intuition.


the social world is very different from the natural world and the key task is to develop insight into social reality or perception. Now the latter is obviously relevant and useful (as well as important) as it allows us essentially a pragmantic way of dealing and resolving issues of social inequalities and allocation of welfare resources etc.However The former is a larger question no? and essentially a metaphysical one i think. Can we merge the two?

It also strikes me that much of this stuff is and has been debated for a long time with not much headway. I'll leave you with this quote from some Piaget i was reading briefly (before it got too complicated):

"Every psychological explanation comes sooner or later to lean either on biology or on logic (or on sociology, but this in turn leads to the same alternatives). For some writers mental phenomena become intelligible only when realted to the organism. This view is of course inescapable when we study the elementary functions (perception, motor functions, etc.) in which intelligence originates. But we can hardly see neurology explaining why 2 and 2 make 4, or why the laws of deduction are forced on the mind of necessity. Thus arises the second tendency, which consists in regarding logical and mathematical relations as irreducible, and in making an analysis of the higher intellectual functions depend on an analysis of them. But it is questionable whether logic, regarded as something eluding the attempts of experimental psychology to explain it, can in its turn legitametely explain anything in psychological experience. Formal logic, or logistics, is simply the axiomatics of states of equilibrium of thought, and the positive science correspondingto this axiomatics is none other than the psychology of thought"

am I making sense here?

Is he making sense, well only sort of. In my day medical students tended to restrict themselves to playing rugby, throwing paper darts in class, drinking voluminous quantities of beer, and flirting with the nurses (male or female) on their days off (oh yes, and downing lots of amphetamines at exam time). But please remember that in the case of those 'quality of an extra year of life' assessments, the intervention he is talking about might be yours. Meantime, anyone got any adoption papers handy!!

Wednesday, July 23, 2003

Bernanke Warns: Fed May Not Be Done Yet

Ben Bernanke sent a few mild shockwaves through the equity and currency markets today with his affirmation that "Monetary ease appears to be indicated for a considerable period", and that "We're not done yet". Unlike some central bank spokesmen (who shall remain nameless) both Greenspan and Bernanke do not open their mouths without thinking hard first about what they are going to say, so what is worrying Ben, and what is he trying to achieve?

Speaking to a university audience, Bernanke said if the Fed were to reduce overnight borrowing costs to zero, it would look at so-called nontraditional methods of trying to spur growth such as buying long-term bonds. He expressed confidence those methods would work if the Fed needed to turn to them. But policymakers still appear focused on using their central tool of controlling short-term interest rates for now.

"Monetary ease appears to be indicated for a considerable period," Bernanke said. "Keeping the federal funds target at or near its current level may be sufficient. "Alternatively, as Chairman (Alan) Greenspan testified last week, we could certainly cut the rate from where it is now," he told the Economics Roundtable of the University of California at San Diego.

During a question-and-answer period, Bernanke again said he considered the Fed has room to keep trimming the federal funds rate, which is charged on overnight loans between banks, from its current 45-year low of 1 percent. "We're not done yet," he said. Fed policymakers reduced the fed funds rate a quarter percentage point on June 25, citing concern about the economic risks from a further fall in inflation, and are next scheduled to meet on Aug. 12. The dollar sank in value on currency markets following Bernanke's comments, apparently fearful that cheaper U.S. credit makes the currency less attractive, while bond prices rallied as investors looked for a safer haven.

Bernanke said he personally did not foresee "a drastic change" in the inflation rate and said he considered deflation a "remote" possibility. "Should further declines occur, a more gradual downward drift over a period of one to two years would be the more likely scenario, " he said. Bernanke said he was well aware that reducing short-term interest rates closer to zero would carry some cost, including reducing interest income for savers like senior citizens and eroding profits in money markets. But, he emphasized: "We should be willing to cut the funds rate to zero, should that prove necessary to provide the required support to the economy."
Source: Yahoo News

He couldn't by any chance be trying to respond to recent criticism aand give a bit of support to the bond markets by emphasising downside risk, while at the same time putting a gentle brake on the equity markets 'just in case', now could he? In any event the Financial Times sees it like this:

The dollar staged a broad retreat on Wednesday as uncertainty over the global economic outlook was highlighted by faltering stock prices and renewed fears of a fall in inflation.

Ben Bernanke, Federal Reserve board governor, said that easy monetary policy "appears to be indicated for a considerable period", reiterating the message last week of Alan Greenspan, Fed chairman.Mr Bernanke's remarks appeared to confirm analysts' suggestions that investors were shifting their focus to fundamentals despite the lack of fresh data on the US economy this week."Expectations for a turnround in the economy and earnings have reached saturation point," said Laurie Cameron, global currencies strategist at JP Morgan's private bank. She added that recent market rallies in equities and for the dollar were not consistent with economic reality in the US.

"Easing geopolitical risks are being overlooked and investors are returning their focus to the financial risks of a growing budget deficit. When people focus on real prospects for the US, it doesn't seem to be as encouraging as it was last month," she said.The euro rose to its day's highs against the greenback after Mr Bernanke's comments, and by midday in New York was at $1.1472, from $1.1354 at the close on Tuesday.
Source: Financial Times

Some Background on the Bulgarian Economy

Oh no, not more about Bulgaria! I'm afraid so. Here's some general economic background for those who are interested. It is background up to the year 1998, which is when the most recent wave of out migration really got going. Note the inflation rate in 1997, 1,028%, much of this in a matter of weeks.

From the onset of transition, the economy of Bulgaria has been characterised by delays in introducing reforms and macro-economic imbalances. Failure to restructure or privatise loss-making state firms created a growing burden of bad debts in the banking sector, aggravated by soft loans to influential private-sector players and lax central bank refinancing. Banks operating under distorted incentives and lax supervision and excessive central bank refinancing left few resources for serious investment.

The local currency, the Bulgarian Lev (BGL), crashed in 1996 leading to a major liquidity crisis, followed by a crisis of confidence in the banking system and in the local currency. Significant losses of private savings caused serious distress among the public. GDP per capita fell from USD 1,637 in 1991 to USD 1,230 in 1998, while the average rate of growth of private consumption per capita during 1990-98 was –0.8%.
By 1996 the rate of inflation that had been high throughout the transition period accelerated to 121% and reached hyperinflationary levels in early 1997. The economic crisis at the end of 1996 and early 1997 was aggravated by political factors, namely the lack of confidence in the Government. In April 1997 the Government of Bulgaria (GOB) signed a stand-by agreement with the IMF (the fifth) and in June 1997 a currency board was introduced, by pegging the national currency to the DM. These measures restored financial stability. While the inflation rate in 1997 was 1028%, it fell to 18.9% in the first year after the introduction of the currency board, and has declined to single digit levels since then. Since 1997, there has been a reversal of the disastrous economic situation of 1996-97 and before. Real GDP, which fell by 10.1% in 1996 and 6.9% in 1997 is estimated to have increased by 4.1% in 1998 and 3% in 1999. Gross fixed capital formation, that fell by 13.5% in 1996 and 22.1% in 1997, is estimated to have increased by 9.2% in 1998. The official unemployment rate, which reached 16% in 1993, and was 11.1% in 1995 to 12.5% in 1996 and 13.7% in 1997 declined to 12.2% in 1998, and the average annual wage increased from 1,051 USD in 1996 and 995 USD in 1997 to 1,328 USD in 1998.

Real incomes in Bulgaria declined considerably since 1989, and lost a great part of their purchasing power due to high inflation between mid-1996 to early 1997, and this affected the real level of consumption negatively. There was a massive wage erosion in the period 1990-1995 that encompassed the whole public sector. The average reduction in the wage purchasing power for the period 1990-1994 was 42.8%. A recent International Labour Organisation - United Nations development Programme (ILO-UNDP) report indicated that income distribution has worsened considerably since 1992, and poverty has risen dramatically (ILO, UNDP, 1998). It is these developments that gave rise to considerable emigration of Bulgarians abroad.
Source: Evgenia Markhova, Earnings Performance of Bulgarian Immigrants in Greece

Hyper Realism and the Rite of Passage

Well, having crossed swords with Eamonn last week over Tony Blair (I would deeply love Eamonn's version of the 'road to greatness' to be right, but somehow looking at that smile and the deliberate fixedness of the eyes I can't bring myself to believe in it), it's surely time to agree with him again. On this occasion the topic is Cormac McCarthy, and in particular the comparison between Lampedusa's and McCarthy's interpretations of aristocracy and tradition.

Many would argue that he's the most challenging of contemporary American novelists. To say that his hyper-realism is unique borders on the banal. What Cormac McCarthy has achieved goes beyond, far beyond, style, although it's an important part of the entire picture. No, McCarthy's finest achievement is how his protagonists deal with the modern in settings where tradition governs men's lives. The violence of change is central in McCarthy's world and his men and women accept this fact with honesty and bravery. Today, on the occasion of his 70th birthday, we wish him well.........

Cormac McCarthy's masterpiece begins in the years just before the United States enters the Second World War. The figurative leopard of Don Fabrizio's Sicily is replaced by the real wolf 16-year-old Billy Parham rescues from a trap, tames, and leads across the border to Mexico. This is the first of three border crossings the young man will make in the course of the novel. Each one will sear him with life's hazards and hardships.

McCarthy's aristocrats are animals: wolves and horses. They are nature's nobility, superior in every way to the venal humans who use and abuse them.
Source: Eamonn's Rainy Day

It might seem almost trivial to note that both Lampedusa's 'Leopard' and McCarthy's 'All the Pretty Horses' have given rise to surprisingly good film versions. For sure this is a comparison the purists won't accept. The former being a widely acknowledged masterpiece from Visconti, while the latter is in fact a more controversial, but in my book equally interesting first stab from Billy Bob Thornton. Still, maybe Matt Damion and Penelope Cruz are not to everyone's taste. It could be noted that the now widely acclaimed 'Heavens Gate' did not exactly meet with universal enthusiasm in the early years either. At the very least both films could be categorised as highly original 'initiation' movies. Still it would probably be stretching the point a little to suggest that Thornton ever achieves the 'grandeur' to be found in the Visconti dance scene. Personally I cannot help agreeing with an Amazon reviewer:

Director Thornton (Sling Blade) wants us to empathize with his young protagonists: They're more than boys but not yet men, yearning to be part of a tradition already receding into history. A contemporary evocation of western-movie themes, All the Pretty Horses is also a lovingly crafted, occasionally plaintive celebration of an all-but-vanished way of life.......You can see how this movie could have been jacked up into a one-level action picture, but what makes it special is how Thornton modulates the material. Even the prison knife-fight scenes aren't staged as action confrontations, but as quick, desperate and strangely intimate. A rare and exemplary film.

What I appreciate in Rainy Day is the fact that it's pulling me back away from all that turgid economic data, back towards the world of civilisation and culture........ at least while I'm away on holiday. (Incidentally today I'm in the ominously silent public library, since the Brazilians have decided that Wednesday is a good day for a day off - I don't know if they've sneaked down to Barcelona to try and catch a quick glimpse of Ronaldinho!). Now I think I'd better shut up, or they'll accuse us of founding a mutual admiration society.

The End of AOL Internet

Following the recent AOL decision to, in Eamonn's
words, cut off life support to Netscape, it now appears that the staff of the entire internet unit may be following down the same road as the subscriber base takes a nose dive.

America Online's subscriber base plunged in the second quarter, as nearly one million customers fled the service for cheaper or faster Internet connections. Despite efforts to stem the loss of subscribers, AOL shed 846,000 dial-up customers in the three months that ended June 30, according to figures released this morning by its parent company, AOL Time Warner Inc. That leaves the service down 1.2 million subscribers compared to the same period last year.

While AOL Time Warner reported strong quarterly financial results for the company as a whole, the Dulles-based AOL division remains its single biggest problem. In addition to losing subscribers at a faster-than-expected rate, AOL also is projecting that its online advertising revenue will drop 40 to 50 percent in 2003. Only six months ago, the company had projected that AOL's ad revenues would be stable.

AOL Time Warner also disclosed that federal investigations into questionable accounting practices are continuing and may lead to significant financial penalties. The company said that the Securities and Exchange Commission refused to back down from its position that AOL had improperly accounted for hundreds of millions of dollars of revenue from two deals with Bertelsmann AG.

AOL Time Warner said its efforts to convince the SEC to change its views had failed and that AOL Time Warner probably "would be forced to reconsider its views of the accounting of these transactions." As a result, the company said it may be forced to restate revenue and profits for prior periods. The company said the SEC would prohibit it from moving forward with plans to raise cash by spinning off a portion of its cable television business until aspects of the investigation of the Bertelsmann deals are resolved.

AOL Time Warner, which released its financial results for the second quarter prior to the opening of stock trading this morning, beat Wall Street estimates for earnings, as its cable television, motion picture and publishing businesses thrived. "Our solid results in this quarter and the first half of the year give us confidence that we can deliver on all of our 2003 financial objectives," said Richard Parsons, the company's chairman and chief executive officer. "Our goal for the remainder of this year is to keep laying the foundation that will enable us to exit 2003 with more momentum than we had when we entered it, with an eye toward achieving, strong sustainable growth next year and beyond."

Despite heavy investment in the new "AOL for Broadband," AOL was able to show only modest progress in retaining some high-speed subscribers. The company said that about 45 percent of the decline in dial-up subscribers during this quarter came from intentionally pruning unprofitable customers. Overall, America Online has between 25 and 26 million U.S. subscribers. AOL Time Warner reported profits of $1.1 billion for the second quarter on revenue of $10.8 billion. Revenue grew by six percent, and the company successfully continued to reduce its hefty debt load by both selling various non-core business units and utilizing its robust cash flow.
Source: Washington Post

Tuesday, July 22, 2003

Some Reflections on the Inflation Targeting Approach

Following my last post it may well be interesting to clarify some of my differences with Paul Krugman, as I have apreviously tried to make clear in my posts, my differences do not especially relate to his ‘push this button’ , inflation targeting approach. This may, or may not, work, I am not especially against giving it a try. There are, of course, pros and cons. Among these is the question of time, we may loose time and confidence if we keep trying solutions with a low probability of definitive success. Also, using a rather violent metaphor from the late Rudi Dornbusch, there is the question of how many bullets we have left in the magazine. Wasting one, leaves us with one less.

My preoccupation is that science would seem to require of us that we try and understand why, and not simply that we concentrate only on ‘how’. If the telly isn’t working properly, and we remember that giving it a knock once seemed to help, it may not be the best approach to pick up the hammer we have handy, simply because we have it handy, and see what happens. So if, as I feel, we are now entering a period of global deflation, one which carries with it the accompanying problem of producing a liquidity trap, it does not seem to be sufficient to content ourselves with a close examination of techniques we might use for ‘springing the trap’. By the same token, Lars Svennson’s foolproof path, may well be foolproof in the case of an isolated case, as Japan might appear to have been some years ago, but can hardly serve as a guide in a case of generalized global deflation.

I have therefore sought to go to the root of the problem by beginning to examine what might be the causes of this phenomenon. So far, as can be seen on my deflation page, I have come up with a list of three ‘usual suspects’: the decline in tech prices, the rise of China and India in the global economy, and the ageing process in the OECD countries. I do not pretend that these are exhaustive, but they are a starting point.

Clearly I am arguing a number of things, not all of which may be music to everyone's ears. One of the important points that I feel stands clearly out is that macro economic processes cannot be understood in terms of an abstract state space. Here I am certainly planting my flag on the path-dependent and evolutionary side of the fence. Time, for better or worse, does come with an arrow.

Now many would make the case for ‘good’ and ‘bad’ deflation. In this sense both IT and China and India might be thought to be examples of ‘good’ deflation. My response would be to nuance just a little by suggesting that this depends on where you are situated. Clearly inside China and India themselves the deflation produced by large scale labour market and structural reforms and declining IT hardware (China) and software (India) costs may be only short-lived as a rapid expansion of the internal market lifts upwards both boats, but the impact on the OECD countries with falling global prices and contracting real internal GDP (as the labour force declines), will surely be a deflationary encounter of the worst kind.

Many hope to counter this tendency by increasing human capital, and increasing the capital-labour ratio. On the latter argument, even conventional neo-classical theory would suggest that you can only increase the capital-labour so far without running into diminishing returns. On the human capital side, much could be said, but perhaps the most important point is that there is a trade-off. Human capital needs time to acquire, and while you are acquiring you are out of the labour market. With the pace of technological change accelerating this factor becomes even more problematic. Also young people would seem to be more ‘quick on the uptake’ in general, therefore younger societies would seem to have an advantage here. Finally, increasing ‘participation rates’ may be fine, but there is the problem of labour quality. One has to be careful here, as I do not want to say anything perjorative, and do not wish to hurt feelings, but the point should be obvious. Dornbusch used to joke that the German worker doesn’t work too often, but when s/he does s/he’s highly productive. The implication is that if the participation rates went up in Germany, the productivity would probably go down.

I have learnt a great deal recently by thinking about the four phases approach proposed by Malmberg. This model can also help us understand that the two problems, that of the entry of China and India, and that of the OECD stagnation are interconnected, and that the connecting link is demography.

So while I am arguing that ‘springing the liquidity trap’ is fine by me, the assumption which Paul appears to be making is that there is a natural growth path which can then be resumed. This may be wrong. It is certainly ‘a-historical’. It is more probable that the OECD economies are following their ‘historical’ path, and that pushing the button will only succeed in throwing them off course temporarily before they then fall back into their former trajectory. I suppose here I am very near to being a fully fledged heretic, since I am implicitly questioning the mantra coming from Ahearne et al, that cutting early and cutting often would have saved Japan.

Before leaving this topic, there is one more strong negative attached to a short sharp shock of inflation therapy: the likely distributional consequences. I noticed very clearly in the 1970’s that the different age cohorts do not see inflation in the same light. Younger, and more indebted, cohorts tend to react more favourably, at least to mild inflation. The reaction among the older cohorts is clearly different. Once savings are ‘burnt off’ they are not recovered, and, if Japan will never be a young society again, this may have important economic AND political consequences. I think it is important to remember that Argentina is currently suffering from an acute form of political, path dependent, lock-in. The responsible politicians burnt up what political capital they had defending a peso-dollar peg that was clearly indefensible. Argentina is now stuck with a collection of irresponsible politicians, a public which is in denial over what has happened, and no easy way out. It would be a bad mistake to send Japan down the same path.

So what then am I suggesting. Above all else I am suggesting the politically unthinkable in Europe and Japan: systematic immigration. This will not be a permanent solution, but will alleviate the problem somewhat, and buy some time. Since all our theory seems so wide of the mark, time is something we badly need. Pension and labour market reforms will be necessary, but the impact of these is only likely to be more deflation.

All of this explains some of my recent obsessions with Bulgaria. What is important is the demographic profile of Bulgaria, and indeed of the whole of Eastern Europe. Bulgarian immigrants do not therefore fit the stylized fact of immigration from a country with a large surplus of young people, quite the contrary. What is also interesting is to note that the latest (post 1998) wave of migration comes after a major period of hyperinflation followed by serious pension and labour market – structural – reforms. Certain questions inevitably arise: is Bulgaria unique, or will there be more? Is Bulgaria dying? What are the role of the pension and labour market reforms in the current tragedy? What can we learn from Bulgaria about the future of western Europe?

Is the future I am painting an appetising one for the OECD vountries. Probably not. But distaste cannot be a reason for not investigating.

Boosting Japan's Services Sector

Joerg sends an unconventional 'solution' to the Japanese problem from two government and foreign affairs professors at the University of Virginia. I don't buy the fix, but I don't discard it completely. I don't accept the assumption that the Japanese internally have nothing left to buy. This seems to be based on a very static theory of need and consumption which seems to rule out the role of technological change in creating ever new needs. The problem is, of course, that most of the new products are actually falling in price, and demand, at least partly for demographic reasons, is not increasing fast enough to expand product markets in gross value terms. The criticisms of Paul Krugman are also a little unfair I feel as he is pretty aware of many of the deficiencies of simple market mechanisms, and especially of the problems with the Japanese banking system. I think it is also unfair to say that he only advocates 'springing the trap', he is also strong on fiscal stimulus, and institutional reform. Also he doesn't suggest inflation as a fix for deficient demand, but as a means of dropping the real interest rate sufficiently to 'bounce' Japan to a better - higher GDP - equilibrium.

The unconventional solution, increasing participation rates by subsidising services - it isn't clear to me whether they understand the 'steralisation' problem - could be interesting on one condition, that the voucher was only redeemable by a new immigrant. That would certainly help with the demographic problem, free Japanese women to enter the labour market and work in 'higher end' services which elderly care etc unfortunately are not. Bottom line: a constructive proposal, a little wide of the mark due to insufficient understanding of the problem, but with potential to be changed into a truly constructive initiative.

Ignite Japan's service sector

Special to The Japan Times

For several years, Princeton economist Paul Krugman has been preaching that what Japan needs to fix its economy is a good dose of inflation to cure its demand-side problems. Japanese policymakers -- along with most mainstream economic experts -- dismissed his initial 1998 proposals as unnecessary, difficult to pull off and potentially dangerous. This July, however, Krugman was welcomed as a far-sighted prophet on a visit to Tokyo, and Prime Minister Junichiro Koizumi, strengthened by an Upper House electoral victory, is likely to consider his inflation solution seriously. Krugman is certainly right that Japan needs to boost demand. But his prescription is incomplete. Without a coordinated dose of true supply-side reform, his inflationary medicine will only prolong Japan's decade of economic stagnation. Japan needs supply-side reform to shift its economy away from its current reliance on deflation-prone manufacturing sectors toward increased emphasis on services. Absent this, additional purchasing power in the Japanese economy will only prop up inefficient industries, while shifting some of Japan's domestic macro-economic imbalances onto its global trade partners.

Why has Krugman suggested inflation as a fix for Japan's economic problems? Other potential solutions -- most notably bank recapitalization and fiscal pump-priming -- have been tried and failed. These fixes have not reduced the volume of bad loans at Japan's near-insolvent banks, but they have pushed Japan's public debt to 130 percent of GDP by wasting
trillions of yen on useless public works. Krugman argues that a little inflation, about 4 percent a year, would reduce the burden of all of these debts, making them easier to service. Inflationary expectations would also push Japanese consumers and firms to begin spending and investing their money, rather than hoarding their cash in anticipation of continued deflation.

But Japanese consumers are not hoarding cash merely because they anticipate falling prices, but also because they have nothing to spend on. Fear of rising TV and automobile prices won't make them rush out to buy more when their houses are already full of electronic equipment and there's no room to park a second car. This is why Japan needs a supply-side solution that complements efforts to generate inflation. An "unorthodox" supply-side reform would couple
Krugman's inflationary stimulus to policies designed to spur the expansion of new service firms. Instead of purchasing government bonds from banks and relying on them to channel new money into the economy, as Krugman proposes, the government should print vouchers for a variety of under-provided services like day care, elder care, and education and
training for mature workers. These would be distributed to needy citizens and would be redeemable for the specified services only. Service providers would trade in the vouchers they received for newly printed yen from the BOJ.

This kind of program would stimulate the economy, like Krugman's proposal, but would shift it in the direction of less deflation-prone service sectors that need to grow if Japan is to overcome its long-term demographic problems. The program would address the "demand problem" by pulling unemployed manufacturing workers and full-time housewives into the workforce to staff voucher-funded services. It would also alleviate the long-term labor shortage expected as baby boomers retire in large numbers by providing women with the care services they need to participate in the full-time workforce.

Education and training vouchers for mature workers -- a "G.I. Bill" for demobilized corporate warriors, if you will -- would also assist this service sector initiative by providing unemployed workers with skills they need for work in new sectors of the economy. This program would also force educational institutions to reinvent themselves to provide the kind of training workers actually need to survive in today's world.

Krugman recommends starting the inflation process by having the Bank of Japan purchase massive amounts of dollars, without sterilization, on international currency markets. Flooding the world economy with yen would create inflationary pressures at home as the value of the yen fell. This program is designed to create inflationary expectations, driving real
interest rates down to a level where banks and borrowers might actually have an incentive to begin lending and spending again.

The flaw in Krugman's approach lies in a feature that makes it appealing to most economists: its apparent "neutrality" with regard to the question of credit allocation. Krugman doesn't care where the money goes, as long as it goes somewhere and starts stimulating the economy. Once real interest rates fall low enough, it would be up to "the market"
(banks and individual borrowers) to decide which goods and services are actually produced and purchased.

In fact, however, the Japanese financial system is far from being the "neutral" intermediary assumed by Krugman. The most likely recipients of new loans are the same old-economy firms privileged under the system that got Japan into trouble in the first place. Shaky construction firms and over-expanded manufacturers will get a new lease on life, validating their low- (or negative-) return investments. Simple inflation won't fix the structural problems that generated
deflationary pressures in the first place, so Japan may end up eating up pensioners' savings without fixing its fundamental problems or providing the services Japanese citizens want and need. Internationally, a falling yen would generate more exports and stimulate the Japanese economy. But this would hurt competing exporters in Asia and also lead to a larger trade deficit for the U.S. Japan would import fewer goods from those economies while flooding them with cheaper Japanese goods. It might knock shaky Asian economies into a new debt crisis and slow U.S. recovery
from its own recession.

In contrast, a service sector-led reflation program would divert Japan's economic resources into its own domestic economy. It would provide Japanese consumers with something to buy and, by creating new uses for existing properties, it would revalue them, allowing banks to recover some of the money they lost when the property bubble burst. A retrained, feminized, better-cared-for workforce might pull the economy up by its own bootstraps.

UK Housing Update

Real economic news is still a bit thin on the ground at the moment. The positive mood in the equity markets continues, and most of the world seems to be taking it as read that we're in motion for a nice steady recovery. I wonder? Meantime, a bit of detail on the current state of the UK housing market, which will certainly be one of the flashpoints if there are problems. At the moment the drift is downwards, but the extent and duration is far from clear. Perhaps one of the interesting questions is what impact if any this modest correction will have on UK consumption.

The number of unsold homes on surveyors' books rose to the highest level in almost three years in June as the number of house sales continued to fall, according to a survey. But there were signs of a return in confidence in the housing market, the Royal Institution of Chartered Surveyors said on Monday. Its monthly housing market survey indicated house prices fell at a slower rate in June, while there was a rise in the number of buyer inquiries. "Buyer interest has perked up most in London, following a very depressed few months around the time of the war in Iraq," the survey said.

The number of surveyors in England and Wales reporting price falls in the three months to June outnumbered those who reported rises by 12 per cent. That compares with May's more dramatic 26 per cent increase in recorded declines. Rics said there had been a "substantial" slowdown in the number of new sellers as fears about large house price falls had receded. That was likely to limit further rises in stocks, which last month were running at their highest level since September 2000. While it might also be expected to put upward pressure on prices, Rics cautioned that a lack of first-time buyers was helping to keep a lid on prices.

The survey suggested the slowing in the pace of house price falls was particularly marked in the south. Prices continued to rise in the northern regions and in Wales, but were almost unchanged in the Midlands. Although London house prices fell for the sixth month in a row, surveyors in the capital reported "much more" interest from potential buyers in June, and expected a small rise in prices over the summer. "Surveyors are still feeling confident of a rebound in the market based on low interest rates and a steady labour market," said Ian Perry, Rics spokesman.

"In London, in particular, some of this increased confidence over the last three to four months may be down to a recovery in the stock market and less instability in the City job market. The share price recovery may also have helped to stabilise demand across other southern markets as well." Recent Rics surveys indicating monthly house price falls have intensified fears that the market could be heading for a sharper-than-expected downturn, although they have been more downbeat than other house price surveys. Both Nationwide and Halifax have continued to report monthly house price rises, albeit at a slower pace. In May, the Bank of England revised its forecasts to predict house price growth would come to a halt next year, although it said there was little chance of a sharp correction.
Source: Financial Times

Monday, July 21, 2003

In Lighter Vein

Seeing Margy in somewhat melancholic mood back home in Bulgaria with lonesome Bob, I wrote to try and cheer her up. The gist of the mail was the following:

Cheer up. I have a title for a book:

'Bulgaria the First Virtual Country'.

You are the new chosen people. Chosen to show the way to the rest. And your people are and will be strong, strengthened by all the suffering. (I am in Nietzschean mood today! - probably the imminence of holidays).

I feel well with them, they are much better adapted to the new future than many other Europeans.

To which Margy replies:

What a difference the field work has made !!!!!!
Lovely title for a book - inpatient to write and read it.

The essential point is that if we really get into trouble, could there be an evolutionary advantage in always having your bag packed and being ready to move on!!!

Never Say Die

Joerg just won't give up. There are two many points here for me to come back on, some I think are well founded, and others I can't swallow. I don't, for eg see how the unions are going to get anywhere with things like shorter working weeks etc, when, as Joerg himself says 'labour is the buffer', and what we are going to have is labour market reform, of both the 'good' and the 'bad' type all round. On the japanese car industry, again i'm sure he's right, this is a sector where the Japanese operate 'final product' control to perfection. But eg Richard Katz has some interesting, and to me relatively convincing arguments about how things aren't so clearcut upstream. Productivity is a very tricky question, there are no clear answers, Joerg is quite right that you can read the data in ever so many different ways. Also, I don't want to box myself too much into a corner, clearly there is potential for us to work and enjoy life longer, and this will help ease the demographic situation. It's is just I'm not sure how far and how fast this can go, when the reality seems to be that the real problem is just around the next bend. And anyway, it's hot, and I'm on holiday, and I'm going to take a rain check:

"My riposte, I suppose, would be, the envigourated old-age model should be indentifiable in the productivity numbers, Japan doesn't seem to be too encouraging in that regard, and Germany still remains an unknown entity."

The productivity numbers hide substantial methodological problems. The first one is the use of nominal values - plainly an absurdity. Secondly, if we look at the real world, we see that twenty years ago the Japanese car industry had an 80% productivity advantage over the U.S. Has it lost that advantage? No. The Japanese still beat everybody else in terms of time-to-market, technical innovation, just-in-time production, energy efficiency, reliability etc. What changes there have been seem to be partly attributable to American outsourcing of components manufacturing to China and Japanese FDI in the U.S. - plus the Daimler merger. (The picture is largely similar across a wide range of industries, with only two major exceptions.) The methodology used to determine productivity is definitely not sophisticated enough to accurately portray this situation. I could easily construct more reliable indicators for projecting future market share by just taking a look at trade journals and incorporating some of the comparative indices available there into a new composite measure. Another problem to deal with is that some facts about the future are knowable - e.g., the increasing importance of energy efficiency in an environment where resources become scarcer and more expensive. In other words: the U.S. automobile industry is mainly profiting from its output of SUVs - a class of vehicles that will lose most of its market share within the next few years, with part of the rest going to the new - technically and environmentally superior - Japanese competition in the segment. In the field of supercomputing, Japan is perceived as delivering the equivalent of the "sputnik shock" to the U.S. Etc. How about including imported productivity in the numbers? The fact that the U.S. will either have to import less in the future or not be able to continue profiting from foreign advances in productivity at all also casts doubt upon optimistic interpretations of the U.S. situation with regard to its productivity ranking. While some of the factors I mentioned could more accurately be subsumed under a term like "adaptability to market evolution", another reason that "the envigourated old-age model" is not necessarily identifiable in the productivity numbers is the snapshot character of this statistic which doesn´t reflect the nature of the phenomenon it purports to capture too well. Consider how Konosuke Matsushita built his company. When confronted with the decision to lay off thousands of factory workers during the Great Depression he instead chose to have them sell lightbulbs and promote electricity among the farmers in the countryside - clearly demonstrating that there is a trade-off between present and future productivity following from different modes of response to market pressures.

The same logic is operative - although in reverse direction - in the U.S. tendency to trash its social capital, as evident in, e.g., its decision to start furiously investing in prisons rather than education (a similarly inadvisable but not quite as detrimental practice is putting people on the dole for the long run rather than retraining them). I hope to present a table of the respective numbers sometime soon - these data are real eye-openers. (And, no, George Bush is not Reagan redivivus. That comparison is like claiming that Wilhelm II just continued in Bismarck´s path. Similar observations apply to Clinton in relation to former Democratic presidents.)

"Germany still remains an unknown entity": Not quite. Its ranking is somewhere midway between the U.S. and Japan - probably a bit closer to the losing (the U.S.) side than the winning (Asian) side. (However, at a birthday party on Saturday I heard a lady mention the fact that she had just taken a job with a 79-year-old architect who had told her that last year he had done more business than ever before - so she shouldn´t underestimate the volume of work ahead...) "Equally, again as I keep insisting, it is one thing declaring that people should work longer, and another getting the labour market (ie those who seek to employ) to agree to this": But that is exactly the point! By dint of not "agreeing", the market would prove that the demand for labour is not as large as the projections of a diminishing ability to support old people would imply - due to advances in productivity. There is, however, no way to sell the notion that self-employed people should keep on working ever longer while workers retire decades earlier. There are many other options available to the unions. In the U.S., the AFL-CIO could start calling for a shorter workweek and longer vacations to catch up with Europe. In Europe, much more could be done with regard to retraining, sabbaticals, flexible employment for women etc. - the last one being an issue that has a heavy impact on the fertility rate among
European and Japanese academics!

"what my brother once referred to as my tendency towards the 'single minded and relentless pursuit of an idea to its logical end' has both pro's and con's." I guess I could use some of that ability to indulge in consequentialism. For a long time now I have wanted to stop following everyday news and instead elaborate on a few fundamental links between what Keynes termed the "monetary theory of production", Popper´s logic of discovery and Luhmann´s sociology. I think the prize would be an understanding of economic sociology that offered an alternative to both leftist idealism a la Habermas and Hayekian pseudo-libertarianism (which nowadays wins far too many arguments even among people who are not principally inclined to support it - just because the other option seems to be starry-eyed wishful thinking.)

BTW, not voting doesn´t seem to be a successful way of practising Popperian falsificationism to me - I would think I´d have much more trouble identifying my errors of political judgment when not committing myself to taking a position, but could only feel tempted to blame myself for any catastrophic outcomes if I had really cast the decisive vote...

From the Dungeons of Brad's Comments Section

My recent comments about the asymmetries of demographic transitions continue to reverberate in Brads comments section. Firstly Elliott Oti takes me to task about Nigeria:

Edward Hughes wrote:
"Society A, with lots of young non-workers can borrow on the anticipated future earnings of the young non-workers, and invest some of this in education. Society B can only effectively dis-save, or send the educated young out to work in more productive societies to send money back to employ less well educated migrants to care for their ageing parents."

I disagree here. Societies with an excess of young workers (case in point: Nigeria where 50% of the population is under 15, and 75% is under 25) are effectively large colonies of children and youths. Children have accumulated no capital. They have no experience or skills. They can offer nothing except unskilled manual labour. In agrarian communities this is fine. In the so-called modern economy, this is a disaster.

To put it somewhat simplistically, Nigerians cannot borrow against earnings of future generations because (i) there are no sources of capital to a first approximation, short of printing money, in a country where 75% of the population are either unskilled penniless youths or underage dependents (ii) until such a point in the future where the demographic outlook for Ngeria alters to include less dependents and more producers, a return on investment is not guaranteed. And the carnage AIDS is causing to life expectancy in sub-Saharan Africa is pushing that picture in the wrong direction.

Elliott is of course right in one sense. my answer is it's all a question of scale, and where you are in the transition. Clearly the biggest obstacle to take off among the LDC's is the enormous quantity of children under 15. But this I imagine we all understand. Elliott is undoubtedly right about Nigeria at present. But at some stage or another Nigeria will have a demographic transition, and will likely enter a stage of economic growth, and possibly prosperity. But those societies which we are talking about have already past through this, they are now ageing, almost elderly societies, and it is not clear that they will ever be young again. So maybe it would be better to compare Germany and Japan with Brazil or India which both might be about to 'take off', at least demographically.

Then Kevin wades in, rightly drawing attention to my subjective 'emotiveism':

The (mostly rhetorical, I suspect) issue of whether we care more for our children than our parents isn't really the point here. When Social Security and related programs were instituted, far more of the elderly were directly dependent on and living with their adult children than is now the case. With the program now older than most of us, it is an institution with its own political inertia. The points about various government programs, federal (mostly elderly) vs state (mostly children) may be correct, but there is the huge problem of tallying up private transfers. But again, there are institutions in place which take decisions out of the hands of individuals, make them collective, and provide them with constituencies which makes a simple majoritarian decision to change them unlikely. This is so much more complex than "whom do you love most?" that the question is almost a red herring.

Again, Kevin is absolutely right. Both Brad and I have fallen into the trap of talking about love, maybe we're just ageing romantics at heart. Really what we should be talking about is bonding and kinship. Love, I guess, is purely subjective, and emotive. Kinship is widely and rigourously studied by anthropologists. Brad's throwaway did indicate what might be considered an American view. Certainly it helps explain the notorious 'labour market flexibility' you enjoy. As my fellow Spainsh resident Antoni Jaume points out - "the grand-parents can help in bringing up their children offspring. Allowing both parents to realize money remunerated works at a lower cost than if they resorted to external nursing" - it's easier for Americans to leave the 'old folks back home' than it is for South Europeans. This factor may also help explain the high return rates of would-be migrants from Southern Europe to the New World. Not 'sentimentality', but different kinship bonds. This, among other things, is why I find it difficult to do economics without sociology, anthropology and demography.

On the other hand the point about changes in familiy structure in the US since the time the social security system was created is an important and interesting one.