http://feedproxy.google.com/~r/fistfulofeuros/bBvg/~3/y7bdaE0DDOY/

http://fistfulofeuros.net/?p=6684

The Latvian government is getting nervous about the level of lending coming from Swedish banks. According to the Financial Times, “Latvia’s prime minister has warned Swedish banks they risk choking off recovery in the Baltic state’s crisis-hit economy unless they resume lending”. The Latvian authorities are complaining, it seems, that banks such as Swedbank and SEB, which dominate the Latvian market, have reined in credit as they struggle to contain rising bad loans amid the deepest recession in the European Union.

“The . . . abrupt stopping of credit is a very problematic issue,” said Valdis Dombrovskis, the prime minister. “We expect Swedish banks to start [lending] again. “Of course you can say that Latvians were borrowing irresponsibly but to borrow irresponsibly you need someone to lend irresponsibly,” he said. “We had very easy credit in a very overheated economy. Now we have almost no credit in a very deep recession.”

Well, here is some of the background. After an extended period when private credit was rising at nearly 60% a year, the Latvian credit bubble suddenly burst, with very unpleasant consequences for everyone. Since mid 2007 the annual rate of new credit has been falling rapidly, and turned negative in June this year. In fact total credit has been falling since October 2008.

Lending to households alone has also fallen back, after shooting up dramatically over several years.

And Latvian base money (M1) has also been falling.

In fact, and unsurprisingly (given that it is what we are seeing everywhere in the exploded bubble economies) the only sector which isn’t deleveraging at this point is the government one.

So it seems hard to me to simply blame mean banks for not doing enough about a situation which many saw coming, but few were willing to do anything to avoid. Sure, the banks made a lot of bad decisions, but so did many other people, and each and every party is trying to extricate themselves from the mess as best they cab. In fact total Latvia debt is not in fact falling at this point in time, since while many individual Latvians have been frantically deleveraging, the government has been borrowing at a faster rate than ever, in part to bail out Parex bank, and in part to fund the ongoing fiscal deficit. In the meantime Latvian GDP has dropped sharply, falling back again in the third quarter at an even faster rate than in the second one. Which means that despite the fact that private indebtedness is falling, the level of private debt to GDP is still probably rising.

This unfortunate situation is only further reinforced by the fact that prices are falling - not too fast as yet, only an annual 1.4% in November, but they are falling, and they will fall further, and this means that the percentage of debt to GDP will again rise, and this is especially bad news for the Latvian government (even though the drop in prices is a desired objective, no win-win strategy left to use now) since any fall beyond that anticipated is likely to push up the total debt level of 60.4% of GDP currently being forecast by the EU Commission for 2011.

And the pain doesn’t stop, since having cut 500 million lati ($1 billion) in spending in its 2009 supplementary budget, the government initially resisted the idea of finding an additional 500 million lati of savings in the 2010 budget arguing that with no policy change the deficit was expected to be lower than the 8.5 percent target. Valdis Dombrovskis said in October his government could cut only 325 million lati in the 2010 budget and still meet the 8.5 percent target agreed with international lenders. The lenders did not agree, and Swedish Premier Fredrik Reinfeldt even intervened to tell Latvia it “must correct” its deficit. Following the rebuke further measures were passed equal to 500 million lati for 2010, and the country now targets a deficit of 7.6 percent of GDP. This is to be followed by a budget deficit target of 6 percent of gross domestic product in 2011, in order to finally arrive at the magic number of 3 percent deficit in 2012.

But considerable doubt exists over the ability of the Latvian authorities to fulfil these objectives. Which is why Mark Griffiths, IMF mission head in Latvia, describes the situation facing the government as challenging, and why the EU Commission base their Autumn forecasts on much higher deficit levels. The problem is that with domestic prive deflation (which is, remember, what Latvia is aiming for, the so called “internal devaluation” what is called nominal GDP (that is current price, unadjusted GDP) is likely to fall faster that the so called “real” GDP (adjusted for inflation) and this has two very undersireable consequences. In the first place debt to GDP goes up even faster, and the revenue which government receives (which is based on actual prices) drops faster than GDP, causing more instability in public finances. The deflator has shown falling prices since early this year and the EU commission is forecasting a drop of 5% for 2010.

So basically, in this climate, with unemployment rising, and wages falling, and an economy contracting at nearly 20% a year, it isn’t hard to understand why not that much new bank lending is going on. Those who are creditworthy are trying hard to save, while those who need to borrow normally aren’t that creditworthy, so Dombrovskis’ plea is rather like asking the bank to subsidise new bad debts, and that is really not something you can do, and especially not when you are going along the course you are following because you wanted to, and against one hell of a lot of external advice. What kicked the whole process off was a short sharp credit crunch, but now it is the contraction in the real economy which is following its own dynamic, till someone finds a way to put a stop to it. It is the drop in output that is preventing banks from lending, and not banks being unwilling to lend that is causing the contraction to continue.

But there is another point in the FT article which should give food for thought.

Mr Dombrovskis…ruled out devaluation of the lat. While breaking the currency’s fixed exchange rate with the euro would help Latvia’s exporters, it would increase the burden of euro-denominated loans, which account for 85 per cent of lending, he said.

“We would not see much benefit from devaluation because we are a very small and open economy which means that any competitiveness gains we may get would be very short-lived,” he said. “We would redistribute wealth from pretty much all the population to a few exporters.”

Well, we haven’t advanced too far in all these months, now have we, if we are still wheeling out the argument that “external” devaluation will hit holders of euro denominated loans, since it should be generally recognised that the (very painful) internal devaluation which is now taking place is hitting Euro loan and Lati loan holders alike. And the argument is a strange one to use just shortly after the statistics office announced that due to the rapid reduction in the number of those employed and to the fact that many of them changed their working conditions from full-time to part-time, the number of hours worked in the 3rd quarter of 2009 fell by an annual 27.3%, while labour costs fell during the same time period by 30.1%. This fall in disposable income, and the continuing prolongation thereof, poses a far greater threat to the continuity of Latvian loan payments than the 15% reduction in the value of the Lat as compared to the Euro which the IMF proposed in the autum of last year would have done. Indeed, it is, in and of itself, one of the pernicious consequences of having resigned yourself to an “L” shape non-recovery. Stress on the banking system only goes up and up, as incomes and employment fall, and the government has less and less ammunition left to counteract the contractionary pressure.

It is like sitting it out in freezing weather at the North Pole, in the vain hope that help will arrive. But help will not arrive, and the cruel truth about the post-crisis shock world we live in, is that nobody is coming to help you if you will not help yourself. In this sense, what Latvia doesn’t need is more international borrowing (hasn’t there been enough of that already) but some kind of meaningful strategy to start paying back the debt. But this means putting people back to work, and selling abroad, and financing Latvian lending from Latvian savings, and not pleading for yet more capital inflows to finance non-productive activities (attracting investment would be another matter, but as things stand right now the environment is far from “appetising”, and according to the latest data from the Statistics Office, non-financial investment in Latvia was only 402.8 mln lats in the third quarter, a fall of 39% on the 3rd quarter of 2008).

And just to be clear, what we have seen to date is not a 30% drop in unit labour costs (which would, of course, mean a great boost to competitiveness), rather it is a drop in earnings due to the fact that the output people could have produced just isn’t needed, since no one is willing and able to buy it. In fact according to the data of the Statistics Office to hourly labour costs fell by only 3.9% in the 3rd quarter when compared with the same period a year earlier. Hardly a massive drop, and especially not when the large annual increases of ealier quarters are taken into account (see chart below). The internal devaluation has a long course still to run!

Pensions Dilemma

But Latvia is back in the news today for more reasons, since the constitutional court has just ruled against the government pension cuts, drawing a question mark over Latvia’s ability to meet the terms of its international lending commitments.

“The decision to cut pensions violated the individual’s right to social security and the principle of the rule of law,” the court said in its judgement, which cannot be appealed. The pension cuts - in place since July - formed a vital part of the Latvian government’s list of austerity measures, as it struggles comply with terms of the IMF-lead bailout, and the constitutional inability to implement them is another hammer blow against the credibility of the current Latvian administration.

According to the Baltic Course, Valdis Dombrovskis told Latvian State Radio that the Constitutional Court’s ruling on pensions must be carried out, and not debated. I am sure this will really come as music to the ears of people in Brussels and Washington. Basically pension reform forms a key part of the mid term strategy for sustainability of Latvian finances, and without the ability of the Latvian government to carry these out, then frankly the coherence of the whole strategy falls apart. If the Latvian constitution does not permit pension changes, then the Latvian constitution has to be changed, and the only surprising thing is that all this wasn’t forseen when the initial loan negotiations took place in late 2008. Basically, it is impossible for the EU Commission and the IMF to accept any other view, since if any state could ring fence a whole part of social provision before entering debt negotiations, then non of the structural reform programmes could possibly work. This may seem harsh, but it is the price you have to pay for becoming insolvent as a society. Latvia’s problems are NOT short term liquidity ones, but problems of the sustainability of an entire economic and demographic model, and, as in the case of Greece, these problems will not be solved by two or three years of (rather painful) fiscal deficit cosmetics. Real changes need to be made, and especially in raising the long term growth potential of the country, and frankly it is these changes which we have yet to see evidence for.

The issue is not simply one of limping into the Euro in 2012, even if as Mark Griffiths, the IMF’s mission head in Latvia, said in Riga last week the Latvian government does face a lot of “hard work” in trimming the budget deficit enough to qualify for euro adoption, and how much more so if they cannot constitutionally implement the cuts they agree to.

“The key is meeting the deficit targets, and meeting the Maastricht criteria and euro adoption, that’s the path,” Griffiths said. “The government needs to work hard over the next year to find the measures which will deliver that adjustment to meet those targets. It’s going to be a challenging task.”

Oh yes, and Latvia was also in the news yesterday for another reason, since Latvian stocks dropped the most among equity markets worldwide as small investors sold stocks before the government starts to tax investment gains. The OMX Riga Index fell as much as 4.3 percent to 271.55, its lowest intraday level since August 21. In dollar terms, the drop was the biggest among 90 benchmark indexes tracked by Bloomberg. The reason for the sell off was that Latvia’s 2010 budget includes measures which will impose taxes on dividends, gains from trading stocks and bonds and interest income. These measures were agreed to in order to ensure the continued transfer of the 7.5 billion-euro bailout from the European Commission and the International Monetary Fund.

Latvian investors have increasingly sold their holdings ahead of the Dec. 31 deadline. Dividends and interest income will be taxed at 10 percent, while tax on gains from trading stocks and bonds will be 15 percent.

As Unemployment Climbs, Latvians Start To Pack Their Bags

Finally one that wasn’t in the news, but should have been, since while everyone knows that at 20.3% Latvia’s unemployment is the highest in the European Union (see chart below), what they don’t know is that more Latvian’s than even are now being forced to leave their country in search of work.

According to a report by Oļegs Krasnopjorovs, economist with the Bank of Latvia, during the first half of 2009 8,300 Latvian residents left for Great Britain, a twofold increase over the year earlier period. 3,600 people emigrated to crisis-ridden Ireland in the first 11 months of 2009 - 3% more year-on-year. Among the new EU member states, Latvia has seen the sharpest increase in emigration to these two countries.

According to Krasnopjorovs, the data (which comes from the UK and Irish social security systems) confirm the trend identified by the Latvian Statistics Office, who examined data on long-term migration. In the first ten months of 2009, the number of long-term emigrants was 6,300, up 18% more year-on-year; moreover the steepest rise took place in the last few months, reaching a ten-year peak. For several years now the number of emigrants has exceeded that of immigrants in Latvia, with the exception of the second half of 2007 when a sharp rise in salaries and a steep drop in unemployment were fuelled by the credit and construction boom, leading to labour force shortages and the expectation that incomes would rise even further.

Exports Still The Key

The real problem here, of course, is that the Latvian economy remains mired in deep recession, and shows few signs of real recovery, something which is not surprising given that domestic consumption is in limbo land (where it is likely to stay), while the Prime Minister seems to attach little priority to boosting exports, and regaining competitiveness. Indeed, the contraction has rather gathered than lost momentum in recent months, and on a seasonally adjusted basis Latvian GDP fell another 4% between the second and third quarters of 2009. This was much faster than the 0.2% contraction between Q1 and Q2.

Year on year Latvian GDP fell by 19.0% in the third quarter.The decrease was largely due to a 28.7% drop in external trade (share in GDP 15.6%), a 18.2% one in transport and communications (12.5% GDP share), an 17.4% fall in manufacturing (10.2% GDP share, incredible) and by a 36% drop in construction (7.5% GDP share, not far below manufacturing).

Private final consumption fell by 28.1%. Government final consumption decreased by 12.4%, while expenditure on gross capital formation fell 39.4%. Goods exports (68.2% of total exports) fell by 11.7% and services exports by 20.5%. Goods imports (82.1 % of total imports) were down much more sharply - by 36.6% -and services imports by 29.1%. Which meant net trade was positive, otherwise the fall in GDP would have been greater, and nearer to the levels seen in domestic demand.

And entering the fourth quarter there were few signs of any real improvement. Retail sales fell in October by 1.3% from September (on a seasonally adjusted, constant price basis).

As compared to October 2008 sales were down by 29.1%. The drop was even larger in the non-food product group – 32.3%. According to Eurostat data, sales are now down nearly 35% from their April 2008 peak.

Industrial output, however, seems to be holding up a little better, and output has stabilised since the spring. The problem is that manufacturing industry is now such a small share in GDP that it will be hard to pull the entire economy on the basis of anything other than very strong rates of increase. Industrial production was up in October by 0.1% over September, marginal, but at least it wasn’t a fall. Unfortunately most of the increase was in the energy sector, with electricity and gas up by 10.3%, mining and quarrying contracted, by 2.1% as did manufacturing, by 1.9%.

Compared to October 2008 industrial output was down by 13.5%, Output in manufacturing fell by 15.8%, in mining and quarrying by 11%, while in electricity and gas output was only down by 2%. Output is now down around 21% since the February 2008 peak.

There is one positive glimmer on the Latvian horizon at the present time, and that is, of course, exports which were up by more than 4.4% (or 31.7 mln lats) when compared with September.

As a result, the surplus in the current account of Latvia’s balance of payments reached 10.1% of gross domestic product (or LVL 327.9 million) in the third quarter. The surplus is however rather smaller than in the second quarter, which was 14.2% of GDP.

With export growth exceeding that of imports, the combined goods and services balance was positive for the second consecutive quarter, standing at 0.3% of GDP (or LVL 11.2 million). This effect is more due to services than to goods exports, since the goods trade balance is still in deficit (see chart), so there is still a long road to travel.

The largest third quarter capital inflows registered under the capital and financial account were the result of government borrowing from the IMF-lead support programme. There was some new foreign direct investment in Latvian companies to the amount of LVL 370.2 million, which to some extent offset direct investment outflows. Net external debt shrank by LVL 0.5 billion in nominal terms, but due to the fall in GDP (as I explained earlier) the ratio of net external debt to GDP posted only a tiny drop, reaching 56.4%, and gross external debt to GDP (excluding foreign assets) was up, reaching 145.8%.

So, as I say, a start has been made, even if there is still a long, long road to travel. Internal devaluation is the chosen path of the Latvian people, the best thing I can suggest at this point is to get it moving in earnest (in fact there is some evidence from November producer prices that the rate of price fall is now accelerating), and that Latvia’s leaders start to value what they have (that is, export potential) instead of dreaming of what they can no longer have (dynamic domestic consumption driving growth). Living in the past is never a good idea, not even in the sentimental moments of Yuletide. A Merry Xmas to you all!

http://crookedtimber.org/2009/12/23/star-trek-and-moral-judgment/

http://crookedtimber.org/?p=14244

Kevin Drum is amused, and rightly so, by this bit from the Corner’s Mike Potemra:

I have over the past couple of months been watching DVDs of Star Trek: The Next Generation, a show I missed completely in its run of 1987 to 1994; and I confess myself amazed that so many conservatives are fond of it. Its messages are unabashedly liberal ones of the early post-Cold War era – peace, tolerance, due process, progress (as opposed to skepticism about human perfectibility).

Kevin notes it is not every day you get conservatives to admit they oppose (or at least dislike) peace, tolerance, due process and progress. But the hole Potemra digs is deeper, and I think there’s actually a (semi) serious point to make here. Poterma forges on: “I asked an NR colleague about it, and he speculated that the show’s appeal for conservatives lay largely in the toughness of the main character: Jean-Luc Picard was a moral hardass where the Captain Kirk of the earlier show was more of an easygoing, cheerful swashbuckler. I think there’s something to that: Patrick Stewart did indeed create, in that character, a believable and compelling portrait of ethical uprightness.”

But surely the proper conclusion to be drawn, then, is that being an ethically upright and generally virtuous person is, however surprising this result may be, consistent with being tolerant, peace-loving, even with upholding due process. And there is no particular difficulty to the trick of being in favor of progress while being skeptical about human perfectibility. I say this is a semi-serious point because I think, for some conservatives, the main objection to a somewhat vaguely conceived set of liberal values really is a strong sense that they are inconsistent with a certain sort of hardassery in the virtue ethics department. End of story. But then Star Trek TNG ought, by rights, to be the ultimate anti-conservative series. At least for the likes of Potemra.

Potemra then pens a sort of Hail Mary follow-up post in which he asserts, if I have understood him aright, that basically Burkeanism is equal to a kind of (Spinozist?) view sub specie aeternitatis, all of which again redounds to the credit of conservatism and the good captain. And they all lived happily ever after in an old village in France. (I remember that episode.)

http://laurietobyedison.com/discuss/?p=2228

Laurie and Debbie say:

This list is for those of us fortunate enough to have people and resources to celebrate with. And if you love the holidays, love your family, and are looking forward to the next ten days, this list is not for you.

If you’re still reading:

1) To the extent possible, do as much or as little holiday stuff as you want; it’s supposed to a celebration, not an obligation.
2) If you have enough to give to someone who has less, this is a good year for it.
3) Eat what you enjoy. Desserts are not sinful, they’re just desserts. If other people want to tell you what to eat or not to eat, that’s their problem.
4) Wear what you think you look terrific in.
5) Spend time with people you love and who are good to you.
6) If you must spend time with awful people, remind yourself three times (out loud) before you walk in the door that they are awful people. Then do something really nice for yourself the minute you can walk out the door. (If the people are not just awful but abusive, here’s some good advice.)
7) Plan your responses to inevitable comments beforehand. For example, if you know that your mother will overfeed you and then, just as dessert is being cleared off the table, say “You look like you’ve gained weight,” try, “That was really a fabulous meal. Excuse me, I haven’t had a minute to talk with Aunt Mabel.”
8) If the holidays make you sad, or you just hate them, you’re not alone. Participate as little as possible. They’ll be over soon.
9) If you enjoy the kids, they’re a great escape from the adult follies. If they drive you crazy, be as patient with them as you can: they didn’t overstimulate themselves with sugar and toys–they had help.
10) You have a right to enjoy things in your own way.
11) Be effusive about every gift you get; then be rude about the awful ones later to your friends. If they’re really awful, throw them off a bridge in the middle of the night.

If these aren’t your holidays, have a great Chinese meal and enjoy the movie!

We’ll be back in the beginning of the New Year.

http://crookedtimber.org/2009/12/23/presumed-consent-again/

http://crookedtimber.org/?p=14242

Some work of mine on presumed and informed consent for organ donation has been picked up by Catherine Rampell at the New York Times’ Economix blog. It’s a good summary of the paper. We’ve had some discussion before about this stuff on CT, in the context of the possible introduction of a presumed consent rule in Britain.

http://www.newyorker.com/humor/issuecartoons/2009/12/28/desert_island_winners

http://feedproxy.google.com/~r/fistfulofeuros/bBvg/~3/PBLoi5YkzOo/

http://fistfulofeuros.net/?p=6676

The Greek government is having a hard time of it at the moment. Only today the Finance Ministry issued a statement that it was ready to “intensify its efforts to restore the viability of fiscal and economic trends in Greece” in response to the Moody’s decision to downgrade the country’s credit rating, while just one week ago the Finance Minister was accusing Standard & Poor’s of failing to “assess correctly” new moves by Athens to tackle its swollen budget deficit - echoing a similar response from Spanish Prime Minister José Luis Rodriguez Zapatero. George Papaconstantinou’s critical outburst followed the earlier downgrade decision by the rating agency of the nation’s long-term sovereign debt. Today, the Greek Government got the answer they should have expected, since Moody’s effectively followed the path of the other two main agencies (Fitch already have the Hellenic Republic on BBB+) and downgraded Greece to A2 from A1. The move means Greek debt is one step closer to being cut off from eligibility as ECB collateral, since Moody’s have put the rating on negative outlook, which means they consider a further downgrade more likely than an upgrade over the next twelve to eighteen months, while the ECB are scheduled to revert to the pre-crisis criteria of only accepting Sovereign Bonds which retain at least one A- from one of the main ratings agencies as collateral for lending. Certainly Lucas Papademos, ECB vice president, said last week that the ECB would not change plans to tighten its collateral rules in December 2010 simply to accommodate Greece.

My reading of the situation is that Greece now has till December 2010 to convince the Ratings Agencies, the EU Commission and the ECB that they mean business and have a viable plan, or they are off to the IMF. And in fact I am not very optimistic they can comply with this constraint. Moody’s takes a rather different view however.

“Moody’s believes that Greece is extremely unlikely to face short-term liquidity/refinancing problems unless the European Central Bank decides to take the unusual step of making the sovereign debt of a member state ineligible as collateral for bank repurchase operations — a risk that we consider very remote,” according to Arnaud Mares, Senior Vice President in Moody’s Sovereign Risk Group.

What I can’t see is how the ECB can credibly avoid taking this step, since when it announced back in 2005 that it would not accept collateral without the A- rating, it was exactly this sort of situation it had in mind. Any backtracking now would be perceived by markets which are becoming extremely nervous about the topic of long term sovereign risk as a sign of weakness, one which was likely to open the door to more fiscal abuse in other states, and indeed it would be a decision which would be hard to understand for voters in Germany and France who may at some stage be asked to chip-in, and sort the growing mess out. So, indeed, I can’t see how the ECB could credibly afford to not implement its threat.

Reading between the lines in the EU Commission documentation at this point, I would say that EU institutions are steadily trying to put a procedure with teeth in place in order to avoid the need to send countries to the IMF, but this institutional hardening may not come in time to save Greece from humiliation. I believe that while there is not a complete consensus at this point, the eventuality of sending a eurozone member state over to Washington, while not being desireable, and being a sign of weakness, would in fact be seen as a lesser evil to that of allowing the situation to deteriorate further. It will have escaped no one’s notice that Spain is very much in the early stages of a similar procedure, with any slippage in deficit targets putting the country straight back into the Excess Deficits Procedure with a fast-track enhancement, and what I feel no one wants to see happen is the situation in Spain deteriorating to the point it has now reached in Greece.

We should also not fail to notice that Greece also had to raise 2 billion euros in debt via a private placement with banks last week, against a backdrop of credit downgrades and steadily rising spreads. The ECB undoubtedly agreed to this given the degree of policy coordination which must exist behind the scenes, since they are the ones who are financing the Greek banks, but it does highlight just how things have moved on in recent months, since only last year it was imagined that the Eurozone in and of itself gave protection from this kind of financing crisis, which was why only eurozone non-members, like Latvia and Hungary, were sent to the IMF. Now it is clear that while the ECB could keep protecting Greece from trouble till the cows come home, they cannot simply keep financing unsustainable external deficits and retain credibility (see this post for more background on all this). In this sense the financial crisis has now “leaked” into the Eurozone. And this has implications I would have thought, for countries like Estonia, who see eurozone membership as a “save all”. And obviously, the EU authorities badly need to plug this hole in their armour, or the entire concept of the eurosystem can be placed at risk, which is why I think we won’t see an explicit slackening in the minimum acceptable rating criteria.

Fiscal Restraint No Longer Enough

On Wednesday last week S&P reduced Greece’s sovereign rating from A- to BBB+, and explicitly stated the measures announced the previous Monday were “unlikely on their own to lead to a sustainable reduction in the public debt”. Moody’s add their weight to this and stress that the Greece’s longer-term sovereign risks have only partly been offset by the government’s announced policy response. Fitch Ratings cut Greek debt to BBB+ on December 8.

George Papaconstantinou, finance minister, responded in fighting spirit, and is quoted as saying “we don’t think this [the S&P rating downgrade] reflects the efforts the new government is making to stabilise public finances which had derailed” - a reference to a collapse in revenue collection and excessive spending under the previous government. “It didn’t take into consideration and didn’t assess correctly what is happening at this point.” But the whole point is that it was not only Greek finances which became derailed over the last decade, but the whole economic model on which Greek society has been based, and it is this derailment which needs to be fixed, and it is in this context that the measures which have been proposed fail to convince.

Strangely many analysts seem to think today’s decision by Moody’s offers respite, and almost aid and comfort, to a hard pressed Greek government, simply because they only downgraded by one notch. Certainly Greek bond markets rallied sharply on the news, and the benchmark 10-year Greek government bonds jumped in price, pushing their yields down 22 basis points to 5.724 per cent, while 2-year yields fell 10bp to 3.359 per cent. This left the spread between German and Greek 10-year yields – a widely followed measure of european sovereign risk – at 2.5 percentage points, its lowest since last Thursday.

Basically such observers seem to have been worried that if Moody’s downgraded Greece into ‘B’ territory, as Fitch and S&P have already done, then Greek banks would no longer be able to exchange Greek government debt for cash in ECB refinancing operations. But I feel that these observers have - as is so often the case - gotten ahead of themselves. It was never really probable or credible that Moody’s would go the whole hog in one foul swoop. The ECB strategy of cajoling Greece into making changes rests on the “carrot and stick” approach, and it is hard to see how the stick would work, if the carrot was suddenly removed. But remember, the threat is still there, since as I say, the outlook is still negative, and as Moody’s themselves point out “the question of whether the negative outlook will evolve into a stable outlook or into a further downgrade will depend on the Greek government’s plan being followed through — as demonstrated for instance by a sustained increase in tax revenues and/or the effectiveness in reining-in expenditure”.

It’s Long Term Liabilities and Low Growth That Are The Real Problem

Prime Minister George Papandreou had vowed “radical” measures to fix Greece’s finances, and Finance Minister Papaconstantinou lifted the 2010 deficit-reduction target to 4 percentage points from 3.6 percentage points. That would lower the deficit to 8.7 percent of gross domestic product, still almost three times the EU limit of 3 percent, but a sizeable chunk of reduction for one single year, and a reduction which will almost certainly ensure that Greece remains mired in recession for most of 2010.

Moody’s however, seem to be focused on much longer term issues, like demography:

The combination of a global post-crisis environment that is less favourable to Greek public finance dynamics (with increased risk discrimination and muted global demand) and an equally challenging domestic environment (with accelerating demographic pressure on public finances in coming years) will make any fiscal adjustment increasingly difficult and costly to postpone.

Basically Greece is one of the EU countries which will be most severely affected by the ageing process, as can be seen in the two comparative pyramids below. Simply put, in the space of thirty years it will move from being a society with a preponderance of young people to being one, where the over 50s predominate (the charts come from the US Census Bureau IDB population data base).

The principal reason for this dramatic shift has been the sharp fall in Greece’s underlying fertility rate.

This, and increasing life expectancy mean that the median population age is projected to rise rapidly, making Greece - with a median age of over 45 - one of the oldest European societies (as well as civizations) by 2020.

The older cohorts of the Greek Labour force will start retiring at a rapid pace after 2015, without an offsetting inflow among the younger cohorts. Total population is projected to peak in 2017 at over 11 million, and than to decline gradually to just around 10 million by the late-2050s. Working-age population will in fact peak in 2010, before declining somewhat faster than overall population. The structure of the population thus gradually shifts to more dependents (especially elderly). The dependency rate increases over time, implying additional pressures on pensions, health, and other entitlements. As can be seen in the chart below, without those much needed pension reforms, Greek pensions will consume a far higher proportion of national output in the years to come than the average level for the rest of the EU 15.

So the Greek crisis is about much more than short term fiscal deficit issues, it is about the long term sustainability of a whole economic and demographic model. As such, Moody’s are surely right, the short term liquidity problems undoubtedly have solutions, and it is the long term solvency ones we should be concerned about. During the years of easy borrowing, Greek industry became very uncompetitive, and Greek society dependent on imports. As a result the external debt went up and up, and currently stands at about 160% of GDP (gross) and 85% of GDP (net). Meanwhile Europe’s leaders are caught between trying to reassure financial markets Greece won’t default on its debt while at the same time keeping up pressure on the country to put its house in order. German Chancellor Angela Merkel said on December 10 Europe has a “responsibility” to help Greece. The following day, European Central Bank President Jean-Claude Trichet said the country must take “courageous action.” Both things are needed, but how I wish those responsible for policymaking in Greece would show more awareness of just how complicated this is going to be, for all of us.

Other background posts to this situation are:

Europe Needs Action Not Words From The Greek Finance Minister

So What’s It All About, Costas?

The Velocity Of Modern Financial Crises

That Which The ECB Hath Separated, Let No Man Join Together Again!

It’s All Greek To Me

http://feedproxy.google.com/~r/fistfulofeuros/bBvg/~3/qbZ2YAGFiII/

http://fistfulofeuros.net/?p=6674

Caveat emptor, Spanish based blogger Mathew Bennett and I have started doing podcasts, and you can find the first one here. At this point in time we are concentrating on Spain. Among the points we cover are:

- How does what’s happened in Dubai affect the economic situation in Greece, Spain and the EU?

- Are left- or right-wing political parties causing or solving more problems during the recess…ion?

- Will the Germans, the French or the EU be able to bailout several European countries at the same time if there are several sovereign defaults?

- Are the ECB and the EU trying to pre-empt the IMF in Greece and Spain?

- What are the underlying structural problems with the eurozone funding plan?

- Why is the ECB channelling funds through monetary and financial institutions to buy up government debt in the eurozone?

- How the ECB is trying to use a carrot and stick approach with eurozone governments to control national government deficits and public policy?

- Is IMF intervention now inevitable in Greece?

- Will the ECB will try to play politics and pressure Zapatero in the run up to the 2012 general elections in Spain?

- Is the situation in Spain similar to the situation in Greece?

- Why don’t Zapatero and the Spanish government seem to be reacting?

- Why is there no coherent plan to get Spain back on its feet?

- What is going on with Spanish banks?

- Will unemployment in Spain reach 25% by the end of 2010?

- Which is more important in Spanish economics: image or hard data?

- Will it be possible for the Spanish government to reduce the deficit from over 10% of GDP to less than 3% by 2012 or 2013?

- What state will the Spanish economy be in by the end of 2010?

- What will happen to Spain when the ECB raises eurozone interest rates?

- Might Spain soon be in a worse economic position than Greece?

- What are the ratings agencies trying to achieve with their warnings on Spain?

- Why won’t the Spanish government tell the Spanish people the truth about what’s going on with the Spanish economy?

- Is José Luis Zapatero really the biggest problem for the Spanish economy right now?

Obviously many of these points run parallel to those raised in my recent post “Why Standard and Poor’s Are Right To Worry About Spanish Finances“, but maybe, if you have 40 minutes or so to spare, you might enjoy listening to them being made in Podcast format.

http://crookedtimber.org/2009/12/22/i-dont-mind-who-writes-the-laws-of-the-future-if-i-can-write-and-sing-the-theme-tune/

http://crookedtimber.org/?p=14236

Let’s try and put ourselves in the shoes of a member of the John Birch Society, circa 1968. What would the basis of such a person’s political worldview be? Basically, that the USA was ruled by a small cabal of educated elites, who were systematically undermining the USA’s advantages against Soviet Russia, and sabotaging the efforts of the military to protect the USA from the danger of Soviet attack. This person might also believe that the truth about the Kennedy assassination was covered up by this same elite cabal.

And such a person would be correct, of course.

Not joking. The historical facts are quite easy to establish here, they’ve been on public record for years (since the publication of “Secrets” by Daniel Ellsberg) and they’re ably summarised in James Galbraith’s obituary of Robert McNamara, among other places. In the early 1960s, the USA had sufficient superiority over the USSR to win (or at least, survive) a first-strike nuclear war, and the main war-fighting plan of the US armed forces did in fact revolve around such a “preventive” first-strike war; it was believed that the USA would lose several cities but had enough ICBM superiority to destroy both Russia and China. This was, of course, horrifying, and the educated elites who came to power with the Kennedy government in 1961 were horrified by it. The Kennedy and Johnson administrations adopted a no-first-use policy (which was kept secret and which contradicted the stated NATO doctrine), and spent the next six years playing for time, while the USSR acquired a second-strike capability, after which point the Cold War was bound to play out as a mutual deterrence game. Achieving this new equilibrium (during a period over which the Cuban missile crisis happened and the USA’s involvement in Vietnam began), obviously required Kennedy, Johnson and McNamara to systematically plan for the USA to lose its missile dominance, and to overrule the substantial military lobby in favour of using nuclear weapons before the USSR acquired second-strike capability.

Furthermore, when Kennedy was assassinated in 1963 (in circumstances which made it look very much as if the responsibility lay with the Cuban government, and thereby with the Soviets), Lyndon Johnson’s immediate priority was to ensure that a train of events was not set in place which might end in his losing control of the country’s slide into nuclear war; in a telephone conversation recruiting members to the Warren Commission, he actually said ” this is a question that has a good many more ramifications than on the surface and we’ve got to take this out of the arena where they’re testifying that Khrushchev and Castro did this and did that and chuck us into a war that can kill 40 million Americans in an hour”.

So does this mean that the John Birch Society had it right? Well basically of course not. Although on the specific facts of what happened during the 1960s, your average Bircher is a lot closer to the objective truth than, say, David Aaronovitch, the worldview that sees the actions of Kennedy, Johnson and McNamara as a treasonous stab in the back of the American military rather than a scrambled and deeply honourable attempt to literally save the world, is totally skewed – the Bircher view is made up of real events, but it’s got the wrong background music playing behind it, like one of those joke film trailers.

This is why I’m basically a relativist about a lot of things; if you lot can put your Richard Dawkins books down for a minute and perhaps save that hilarious joke about stepping out of a ninth floor window[1], I might get a breath to explain that the whole point about postmodernism is not that all interpretations are as good as any others, it’s about recognising that the choice of “mood music” is at least as important as the physical facts of what happened, and that this relative importance, paradoxically[2] is an objective fact. To take a topical example, it’s very clear that a lot more than twelve million people are under threat from a 2 degrees centigrade increase in global temperature, and that such an increase in temperature, if it occurs, will largely be as a result of policy choices taken by Western policymakers in full knowledge of the effects they will have. I don’t hear the same music playing behind these more or less uncontroversial statements that Lumumba Stanislaus Di-Aping[4] does, but one has to realise that Miles’ Law is applicable here (“where you stand, depends on where you sit”). To take another example, consider the outright impossibility of getting a sensible discussion of any subject related to the Middle East; both sides are watching the same movie, but the minor key orchestra hits and string tremeloes aren’t showing up synchronised to the same characters.

All of which is preliminary to the announcement that a couple of weeks ago, probably on that interminable Cornel West sublime and funky love thread, CT logged up its 250,000th comment. This is a large enough dataset for Kieran to get working on, and in the New Year we’ll be able to tell you if the experiment with comments has been a success. I kid, I kid, of course. Congratulations. A happy festive season to all our readers, contributors and commenters, whether you are celebrating Christmas, Hanukah, Eid, Diwali, Kwanzaa, Yül or just the stern exercise of your own rationality. And a happy New Year too. We’ve got rhythm, we’ve got music, we’ve got you guys, who could ask for anything more? I leave you with this semi-connected Youtube link.

[1] Still finding it strange that so many hard-line anti-relativist types choose Newtonian gravity as their favourite example of something that’s objectively true rather than a particular description that happens to be convenient for a subset of practical purposes.

[2] Paradoxically, that is, for people who enjoy puzzle books[3] and who find Russell’s Paradox more enlightening than, say, a couple of ounces of mushrooms. Perhaps if Wittgenstein had been a slightly more robust and less well-brought-up character, he could just have told such characters to “fuck off”, and he could have saved himself a whole book and saved the taxpayer a small percentage of the last fifty years of higher education funding for philosophy departments.

[3] Who are often exactly the same individuals as militant anti-relativists, “brights”, the Decent Left and other impedimenta to a sensible discussion of nearly any subject into which the word “Enlightenment” can be shoehorned; I have a lot of time for Martin Gardner and Douglas Hofstadter’s books, but my god they didn’t half set a couple of hares running.

[4] You might want to read this biographical note

http://feedproxy.google.com/~r/fistfulofeuros/bBvg/~3/OMfRWfGxtaY/

http://fistfulofeuros.net/?p=6669

“Spain’s weaknesses over the developing crisis reflect mainly the reversal of the continuous domestic demand expansion of over a decade, which was associated with high indebtedness of the private sector, large external deficits and debt, an oversized housing sector compared with the euro area average and fast rising asset prices, notably of real estate assets.”
European Commission assessment of Spain’s Response to the Excess Deficit Procedure, Brussels 11 November 2009.

“The latest services PMI data suggests that the Spanish economy remains on a downward trajectory. The fact that variables such as activity, new orders and employment all fell at sharper rates during November is real cause for concern, with the prospects for 2010 becoming increasingly gloomy. Businesses report that consumers remain cautious of making any major purchases, particularly those requiring credit. It appears that any economic recovery over the next twelve months will be gradual and drawn-out.”
Andrew Harker, economist at Markit commenting on the November Spanish Services PMI survey.

According to Spanish Prime Minister José Luis Rodriguez Zapatero Spain’s government is firmly committed to reducing its fiscal deficit, and is intent on lowering it as requested by the EU Commission by 1.5% of GDP annually, until it finally brings it within the EU 3 per cent of gross domestic product limit by 2013 at the latest. What’s more he is quite explicit about how this is going to be possible: Spain is right now, and even as I write, on the verge of emerging from the long night of recession in whose grip it has been for the last several quarters. As such it will soon resume its old and normal path onwards down the highway of high speed growth. There is only one snag here: few external observers are prepared to share Mr Zapatero’s optimism.

“The return to growth and the expected fiscal consolidation will allow us to reach the stability pact objectives by 2013,” Mr Zapatero said in a speech last week, using a rhetoric by which few outside Spain are now convinced, and indeed only the day before the credit rating agency Standard & Poor’s had revised its outlook for Kingdom of Spain sovereign debt to negative from stable. The decision followed their earlier move last January to downgrade Spanish debt by revising their long term rating from AAA to AA+. S&Ps justified their latest decision by stating that they now believe Spain will experience a more pronounced and persistent deterioration in its public finances and a more prolonged period of economic weakness versus its peers than looked probable at the start of the year. So things have been getting worse and not better, and indeed, the EU Commission themsleves seem to take a similar view, since while they have lifted their immediate excess deficit procedure in the short term (see below) their longer term worries have only grown.

Standard and Poor’s feel that reducing Spain’s sizable fiscal and economic imbalances requires strong policy actions, actions which have yet to materialize, and the EU Commission and just about everyone else agree, and the only people who seem to take the view that the current policy mix is “just fine” are José Luis Zapatero, and the political party that maintains him in office.

Effectively S&P’s are concerned about two things: i) growing fiscal deficits; and ii) growth prospects:

The change in the outlook stems from our expectation of significantly lower GDP growth and persistently high fiscal deficits relative to peers over the medium term, in the absence of more aggressive fiscal consolidation efforts and a stronger policy focus on enhancing medium-term growth prospects.

Compared to its rated peers, we believe that Spain faces a prolonged period of below-par economic performance, with trend GDP growth below 1% annually, due to high private sector indebtedness (177% of GDP in 2009) and an inflexible labor market. These factors, in turn, suggest to us that deflationary pressures could be more persistent in Spain than in most other Eurozone sovereigns, which we expect would further slow the pace of fiscal consolidation in the medium term.

Even some inside Spain are now openly questioning the viability of the government’s strategy. The downward revisision in Spain’s credit outlook, was “hard to deny,” according to Spanish representative on the European Central Bank Governing Council, Jose Manuel Gonzalez-Paramo - “The ECB is not taking issue with whether Standard & Poor’s should cut Spain’s rating, but the report that accompanies this warning is hard to deny” he told the Spanish Press agancy EFE, adding that he was “convinced that the Spanish authorities share this analysis and will do whatever is needed to avoid S&P’s negative outlook resulting in a change in rating”. However Standard and Poor’s explicitly justified the negative outlook by referring to the fact that Spain was not showing signs of taking adequate action to cut its longer term fiscal deficit as required by the EU Commission, and Spanish Prime Minister Jose Luis Rodriguez Zapatero himself stated he could see no no reason why ratings agency Standard & Poor’s should downgrade the long-term sovereign debt rating of Spain. So it is hard to share Gomez-Paramo’s (rather diplomatic) optimism at this point.

The World Turned Inside Out

Just how realistic is the view being taking by the Spanish administration at this point, and just what are the prospects of that imminent and sutainable return to growth in the Spanish economy on which everything seems to depend? That is the question we will try to ask ourselves in that follows. Certainly the situation we are looking at is a rather peculiar one, since Mr Zapatero’s recovery hope seems to be a widely shared one inside Spain. Certainly, if the ICO Consumer Confidence reading is anything to go by, Spaniards are feeling pretty hopeful at this point that the worst of the economic crisis is now behind them. Evidently confidence is still not back to its old pre-crisis level, but it is now well up from its July 2008 lows.

What is even more interesting is to look at the breakdown of some of the ICO consumer confidence index components. According to the ICO data series I looked at, the expectations index has only been above the present level three times since the series started in January 2004 (in September 2004, in January 2005, and in August 2009). That is, the Spanish people currently have the third highest level of expectations about the future registered at any point over the last five years. I find that pretty incredible. Evidently Mr Zapatero is not alone in assuming that S&P’s have it wrong.

But is such a viewpoint rationally founded, and even more to the point, is there any economic justification which lies behind it? What could explain such dyed-in-the-wool optimism? It is hard to understand, unless, perhaps, the alternative - that Spain is in for a long and difficult economic correction, after many years of relatively “painless” economic growth - is very hard to contemplate for a population who are severely unaccustomed to such pressures.

Possibly the Financial Times’ Victor Mallet puts his finger on another important ingredient - after two years of being told that they have been living though the worst crisis in recent memory, many Spaniards have quite simply never had it so good, so how could anything horrible possibly happen now?

The pre-Christmas mood in Madrid is a curious mixture of pessimism and cheeriness.On the one hand, anxious Spaniards are told they are suffering the worst economic crisis in 50 years and fear for their jobs. On the other, those still in employment have rarely had more money to spend. It is not surprising that the city’s restaurants are packed with noisy but neurotic diners as the holiday season approaches.

The reasons for this odd combination of economic gloom and robust personal consumption are no secret. Unemployment has risen sharply – to 18 per cent of the workforce in Spain – but emergency measures around the world to avert another depression have kept economies flush with liquidity and cut interest rates (and monthly mortgage payments) to historically low levels. Inflation is low or negative.

Low interest rates, safe jobs (or pensions) and salaries rising faster than the rate of inflation all combine to make “the worst” not that bad at all, especially if the government are shelling out 12% percent of GDP per annum to pay for it all. But as Javier Díaz-Giménez, economy professor at IESE business school says (and S&P’s well know) “It is easy to raise the deficit to 10 per cent of GDP….But we really don’t know how to get back down to a deficit of 3 per cent of GDP.” This then is the problem, especially as a reducing deficit, rising taxes and utility charges, and eventually rising interest rates all make the task of restoring economic growth seem a rather daunting one.

Think about it this way: Spain’s construction industry amounted to around 12 percent of GDP, now government borrowing of around the same size has stepped in to fill the gap, but once this poly-filla solution no longer holds, where is the employment creating activity to come from? As Michael Hennigan, Founder and Editor of Finfacts Ireland says in the (similar) Irish context:

“The scale of the task of creating sustainable jobs in the international tradable goods and services sectors, is illustrated… by stark statistics from State agency, Forfás, which show that in the ten years to 2008, less than 4,000 net new jobs were added by foreign and Irish-owned firms, while overall employment in construction, the public sector, retail and distribution, expanded by over half a million……Total Irish employment in December 1998 was 1.54 million and was 2.05 million in December 2008 - a surge of 33 per cent. In the peak boom year of 2006, 83,000 new jobs were added in the economy while direct job creation in the export sectors was less than 6,000.”

I don’t have the comparable Spanish figures to hand, but the situation is surely not that different.

Meanwhile Spanish Industry and Services Show No Real Signs Of Recovery

There was no let up in the contraction in the Spanish manufacturing sector in November, and PMI data pointed to a further deterioration of operating conditions. Moreover, the rates of decline of key variables such as output, new orders and employment all accelerated during the month, with the seasonally adjusted Markit Purchasing Managers’ Index falling to 45.3, from 46.3 in October. The Spanish manufacturing PMI has now been below the neutral 50.0 mark for two years, with the latest reading being the lowest since last June.

Commenting on the Spanish Manufacturing PMI survey data, Andrew Harker,
economist at Markit, said:

“The Spanish manufacturing sector looks set to endure a bleak winter period, characterised by falling new business, job cuts and heavy price discounting. The glimpse of a possible recovery seen during the summer appears to have been only a temporary reprieve, with even the stabilisation of demand now seeming some way off again.”

The impression gained from the PMI data is broadly confirmed by the monthly output statistics supplied by the Spanish statistics office (INE) to Eurostat. True, in October the output index was up fractionally over September (a preliminary 0.29% on a seasonal and calendar adjusted basis), but there is no sign of any sort of recovery and the drift is still downwards.

Output has now fallen around 32% from its July 2007 peak.

Nor is the situation in the Spanish services sector much better, and November PMI data indicated that operating conditions among Spanish service providers worsened again during the month, and at a sharper pace than in the previous survey period. Business activity, new business and employment all fell more quickly than in October. The headline seasonally adjusted Business Activity Index – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago – dropped to 46.1 in November, from 47.7 in the previous month. The latest reading pointed to the fastest rate of decline since August.

The situation is also confirmed by the Spanish INE Services Activity Index, which shows that activity was down 7.9% in October over October 2008, following a 9.8% drop in October 2008 over October 2007.

Which means that activity was own a total of 17.4% from the July 2007 peak, or an average of 23% over the three months August - October, just better than the 25% average drop registered in January to March. Which means that while there is plenty of evidence that the contraction has stabilised during the last six months, this seems to be stability with a negative (and not a positive) outlook, given that things have now started to deteriorate again, and we must never forget that this stability has been achieved via a massive fiscal injection from the government, an injection which cannot be sustained indefinitely.

Construction Activity and House Prices Continue to Fall

Activity fell around one percent in October over September.

While total output is now down nearly 35 percent from the July 2006 peak. That is to say, this Christmas Spanish construction output will have been falling for nearly three and a half years, and this decline is going to be permanent, the only outsanding issue is what activity is going to replace it.

Spain’s Employment Minister Celestino Corbacho was widely quoted in the Spanish press last week as saying that he could see clear signs that the housing market had “bottomed”. I would really badly like to know where he is finding such signs.

In the first place Spain’s residential construction sector continues to shrink at an unprecedented rate. Housing starts fell by 47% (to 33,140) in Q3 compared to the same period in 2008, according to the latest figure from the Ministry of Housing. If we exclude social housing the fall was much greater - 61% less homes started in the period, and evn 20% down compared to the second quarter.

At the other end of the production line the Housing Ministry reported 83,500 construction completions in the third quarter (excluding social housing), 41% down year on the same time last year and 13% down on the previous quarter. Over a 12 month period construction completions were down 35% to 444,544, and this in a market where sales of new properties are running at a rate of something like 200,000 properties a year. That is to say, the stock of unsold houses continues to swell.

And prices continue to fall, since even though the Tinsa property price index for November showed that average prices fell by only 6.6% over the previous 12 months (down from 7.4% last month - the smallest annual fall in a year) this piece of data is not that illuminating in a market where prices have now been falling for more than twelve months. So while TINSA’s own annual price graphs make for a very encouraging looking trend line, you need to remember that they plot the percentage change in house prices on an annual basis. If we look at the overall index (below) we see pretty much the same picture as with everything else, slower decline, but decline nonetheless. No bottom hit yet.

And, of course, if we look at the peak to present chart, then the percentage fall simply continues, and house prices are now down 14.75% on the December 2007 peak.

And it isn’t only sceptics like me who think there is still a long, long way to go with Spain’s house price adjustment. According to the latest report on the housing market by BBVA, Spanish property prices were 30% over-valued at the end of 2007, since they only fell by something like 10% in 2008, they have another 20% or so to drop before the correction is over. BBVA thus expect prices to fall by 7% in 2009, 8% next year, and 5% in 2011 Prices won’t stabilise until 2012, and the price correction is likely to be a protracted and long drawn out affair. What the likely impact of this on the real economy, and on their balance sheet, is likely to be they don’t say.

BBVA mentions another key reason why the fall in Spanish house prices is far from over - the high ratio of house prices to annual disposable income. This ratio (house prices / annual disposable income) rose to 7.7 years at the height of the boom, and has now fallen back to 6.6 years. But that is a long way off the historical average of 4, not to mention the 3.5 it has fallen to in the US.

Meanwhile, a new report from BNP Paribas Real Estate, the real estate arm of French bank BNP Paribas, argues that banks in Spain (currently the largest holders of unwanted real estate) will need to start offering bigger discounts (of up to 50% in 2010 they suggest) if they are to really start to move their stock of property. Spain’s banks claim to be offering discounts to buyers, but as BNP Paribas Real Estate argue, judging by the growing inventory they hold, these are not big enough to attract the volume of sales they really need.

In fact, after several months of dithering towards a recovery the Spanish housing market fnally relapsed again in October, with the number of houses falling by 24% compared to the same month last year, according to the latest figures from the National Institute of Statistics (INE).

In fact sales in October fell below the 30,000 transactions per month rate for the first time since last April. Sales were down by 10% over September. According to Mark Stucklin of Spanish Property Insight the explanation for this relapse is to be found in the breakdown between new build and resales. During the first half of 2009 sales of newly built homes were significantly higher than resales, whereas in normal years it’s the other way around. Indeed, if new build sales hadn’t been higher this year the market crash would have been significantly worse. But many of the new build sales recorded this year were actually sold off plan during the boom, and many others were banks buying properties from developers to keep them afloat, so not they were not really sales at all. Naturally, as those sources of sales start to dry up (either as the stock of sold off plan evaporates, or banks cannot accept too many more), then new build sales begin to head south.

As you can see from the above chart which Mark produced for his post, new build sales dropped sharply in October, almost to the level of resales. And if we look at the rate of monthly house sales in the P2P chart below, you will see that monthly sales have now dropped by neary 60% from their peak. That is to say, we are still having something over 400,000 new houses coming off the production line, and only a maximum of 200,000 new home purchases. Even as output drops towards an annual 100,000, this level of sales would only clear off the backlog at a rate of something like 100,000 a year, which mean we would be well over a decade clearing off that massive backlog, and meantime who foots the bill for maintaining such a large stock?

The chart above tells the story eloquently. It shows cumulative sales over 12 months to the end of every quarter, and you can see how the market has shrunk from just above 1 million sales over the 12 months to the end of Q1 2006, to just above 400,000 sales at the end of Q3 this year. In terms of transactions, the market has shrunk by around 60% over that period.

And we get a similar picture on the mortgages front, with the volume of new residential mortgages signed in September being 62,411, down 4.2% compared to the same month last year. In value terms the fall was more pronounced, with new residential mortgages dropping 16% to 7.3 billion Euros. The good news is the annual decline in new mortgage lending has been bottoming out in the last few months. It fell 31% in June, 19% in July, 7% in August, and 4.% in September.

And looking towards the future again, the number of new homes started in the third quarter was down 54% compared to the same period in 2008, according to the latest figures from Spain’s College of Architects. Excluding social housing, there were just 17,500 planning approvals in the third quarter, compared to 28,400 last year. To put this into perspective, planning approvals were down by 94% from the 287,000 granted in the third quarter of 2006, at the height of Spain’s construction boom. The chart (below, and which comes again from Mark Stucklin) shows just how dramatically Spain’s residential construction production chain has collapsed in the last few years. This year there are likely to be a total of just over 100,000 planning approvals, the lowest level in more than 20 years.

Unemployment Rising Towards the 20 Percent Mark and Beyond

Spain’s registered jobless total rose for the fourth consecutive month in November according to data from the employment office INEM, and is obviously bound to rise further as the recession drags on and the multi-billion euro stimulus package gradually loses steam. Seasonally unadjusted data showed Spanish jobless claims rose by 60,593 in November from October to reach a total of almost 3.9 million people, almost a million more than a year ago.

The rise was milder than the almost 100,000 layoffs in October and leap of around 170,000 seen in November 2008, but this should not be taken as a sign the economy will begin to create jobs any time soon. Data showed the jobless rate in the service industry rose 1.7 percent month-on-month and by 1.3 percent in construction. Joblessness also increased by 0.6 percent in the industrial sector and by 2.6 percent in agriculture.

The Spanish government has injected some 8 billion euros (nearly one percent of GDP) into the economy this year in order to create more than 400,000 mostly low-skilled jobs in order to put a temporary patch on the hole left by the paralysed housing sector. The 30,000 or so infrastructure contracts created under what is know as plan E will be completed by the end of the year, and with little sign of a general return to growth, or a revival in job creating activity the majority of those employed on these projects will surely soon be finding their way back onto the dole queues. The government has announced plans for a new 5 billion euro stimulus plan for 2010, but this, in theory, will be aimed at sustainable long-term growth sectors like renewable energy, environmental tourism and new technologies.

November’s 1.5% rise in jobless claims is nonetheless weaker than the 2.6 percent rise in October, the 2.2 percent in September and the 2.4 percent in August. And the annual rate of increase fell sharply, from 42.7% in October to 29.43% in November. But does the month mark a new trend, or will we see renewed deterioration as the winter advances? The Spanish administration officially provides only quarterly (unadjusted) data on the unemployment rate but does forward a monthly (and seasonally adjusted) rate to according to the European Union statistics agency Eurostat, based on the Labour Force Survey (which is generally regarded as a more accurate (and internationally comparable) assessment of the true level of unemployment than simple Labour Office signings. This stood at 19.3 percent in October, the second highest rate in the entire EU, and behind only Latvia.

Of course, as ever with this administration, hope springs eternal. The Spanish economy will likely return to growth early next year and start creating new jobs toward the end of next year, according to Finance Minister Elena Salgado: “I think there is a high probability we will start to grow in early 2010,” she told the Cadena Ser radio station, although she did admit that the trend of rising unemployment will not likely be broken until late 2010 or early 2011. “We think we will start to see net job creation in some sectors at the end of 2010, and more clearly in 2011,” she said. This realism about job creation is, of course, a by-product of the very low 2010 growth rate envisaged by even the optimistic forecast of the Spanish government (less than one percent), which given the need for drastic productivity improvement in Spain would evidently not be enough to create new employment. And, of course, others are less optimistic, with both the EU Commission and the IMF foreseeing negative growth in 2010. Indeed the EU Commission still anticipates unemployment to be over 20 percent in 2011.

Basically the outlook is bleak, and unemployment is far more likely to continue rising than it is to fall. My own current estimate (which in part depends on how much consumer prices fall, on how seriously the government follows the agreed 1.5% reduction in the fiscal debt, and on how rapidly interest rate expectations rise at the ECB) is that we should be moving towards the 25% range around next summer.

Domestic Consumption Continues To Decline

Despite the best efforts of the Spanish government stimulus programme household consumption continues to decline, at a slower rate in the third quarter, but still decline. The quarter on quarter drop was 0.1% as compared with a 1.5% drop in the second quarter, and a 2.4% fall in the first one. On an annual basic household consumption was down 4.2% in the third quarter following a 7.5% drop in the second one (see chart).

And retail sales simply keep falling, more slowly than before, but down and down they go.

In October they fell back again over September, and were down a total of 10.3% from their November 2007 peak.

So Why Should We Expect Recovery In 2010?

Or better put, why should we suspect that we might not see a Spanish economic recovery in 2010? Well, let’s take a quick look at some of the structural features of Spanish GDP. As the Spanish administration never lose an opportunity to point out, Spain’s economic contraction to date has been significantly less extreme than both the Eurozone 16 and the EU 27 averages. GDP never actually declined as dramatically as it did in some other countries.

But looking at the situation in this way is rather misleading, since in fact, as can be seen in the chart below (which comes from the Spanish statistical office - the INE - as does the chart above) in fact domestic demand in the Spanish economy fell every bit as rapidly as in other European countries, but this was offset by changes in the external balance which moved in such a way as to add percentage points to the final GDP reading.

On analysing the two main components of Spanish GDP from the expenditure side in in the third quarter, the INE found, on the one hand, that national demand reduced its negative contribution to annual GDP movements by nine tenths as compared with the previous quarter, from minus 7.4 to minus 6.5 points, whereas conversely, the external balance reduced its positive contribution to aggregate growth by seven points, from 3.2 to 2.5 percentage points.

Now all of this is, as I say, rather strange to those unaccustomed to the niceties of GDP analysis, since the positive contribution from external trade to GDP growth has got nothing to do with extra exports, but rather it is a product of the fact that Spain was running a whopping trade deficit, and simply reducing this trade deficit gave the positive impetus to GDP, whereas the third quarter negative impact of external trade was the product of, guess what, a further deterioration in the trade balance as imports once more started to rise more rapidly than exports (see chart below). It is this dynamic - of yet another deterioration in the trade balance as the ression slows and as the government pumps demand into the economy - which raises concerns about long term economic stability, since obviously no susbtantial recovery in competitiveness has taken place.

The thing is, behind this whole situation there lies the problem of debt, and indebtedness. Basically, despite the fact that many, many Spaniards have never had it so good as they did in 2009, Spanish living standards have actually been falling since the amount of money available for current spending has been falling. What we need to take into account here is the sum of actual earned income PLUS what Spanish citizens are able to borrow during any given time period. Essentially when you borrow you shift disposable income from one time period to another. This is why Franco Mogigliani advanced what has come to be called the life cycle theory of saving and borrowing, since patterns change across the age groups, and naturally as whole populations age the pattern of any particular country changes. A younger country - Ireland, the US - is much more likely to be a net borrower, while an older country - Japan, Sweden, Germany - is much more likely to be a net saver.

So why is all this important. Well, during the years you borrow, you spend more. I think this is obvious, and this is also why when there are less capital inflows there are less imports. Capital flows are to finance borrowing, and borrowing improves living standards in the short term, until it has to be paid back. Remember the saying, “I am a rich man till the day I have to pay my debts”. Spain was rich in this sense, as José Luis Zapatero never ceased to remind its citizens. But Spain’s citizens were rich based on very heavy borrowing levels - households owed about 100% of GDP, and corporates around 120% - borrowing which had been used to inflate land, house and commercial property values to well beyond their true market equivalents, and hence these “riches” were in fact very unreal.

The impact of the sort of capital flows Spain was receiving is that in the short term your disposable income goes up (someone gives you money to spend), while later on it goes down (as you have to subtract from earned income to pay back). This latter situation is where Spain is now. The capital flows have been sustained in the short term via the ECB liquidity process, which has fuelled domestic demand via government borrowing and spending, but at some point all of this needs to be reversed and the debts need to be paid down, and that will mean lower disposable income (in terms of money to spend) for the internal population as a whole, which is why without sales abroad domestic consumption will only continue to fall and unemployment will continue to rise. The only way to compensate for this is to export and run a trade surplus, since in this way the debt payments can be made without subtracting from current income. Indeed, as we can see from the chart below, despite the fact that households and corporates have now started deleveraging, total Spanish indebtedness (as a % of GDP) continues to rise, thanks in part to the growing indebtedness of the state (which is, in the end, a liability for all Spain’s citizens), and in part to the fact that GDP is itself contracting. This is Keynes paradox of thrift at work if ever there was a case, since the more Spanish savings rise, the more indebted Spain becomes. And now, as the fiscal stimulus is withdrawn, if GDP falls faster, then the position may well not improve, especially if prices fall and Spain enters a deflationary spiral.

Of course, borrowing is not income neutral in the longer term either, since it all depends what the borrowed funds are spent on. If you spend the borrowed money on infrastructure, education and new productive capacity (ie useful investment) then evidently you can raise the trajectory of GDP in the longer term, while if you only use it to finance short term consumption - or invest in a lot of houses no one really needs - then you simply get a destruction of internal productive capacity, massive price distortions and long term GDP on a lower trajectory. This is where Spain, Greece and much of Eastern Europe are now.

Basically, for those countries who lack their own currencies there is now real alternative to a rather painful “internal devaluation” to restore export competitiveness and the trade surplus. And this of course is why everyone from Standard and Poor’s to the EU Commission and the ECB are now insisting not only on a return to fiscal order, but deep structural reforms to restore competitiveness.

EU Excessive Deficit Procedure Now The Key

On 27 April 2009 the European Council (Ecofin, the Finance Ministers of member states basically) decided, in accordance with Article 104(6) of the Treaty establishing the European Community, that an excessive deficit existed in Spain and issued recommendations to correct the excessive deficit by 2012 at the latest. At the time this appeared to imply an average annual fiscal reduction of 1.25 % of GDP would be required over the period 2010-2013. The Council also established a deadline of 27 October 2009 for effective action to be taken.

According to the Commission January 2009 interim forecast, Spain’s GDP was projected to decline in by 2 % in 2009 and by a further 0.2 % in 2010. However, Spain’s economic outlook deteriorated rapidly during the course of 2009 and the Commission autumn forecast projected a GDP decline of 3.7 % in 2009 and a further decline of 0.8 % in 2010 (basically the same as the IMF October outlook). As the Commission stress, the downward revision in nominal (current price) terms has been even stronger, since prices (and the GDP deflator) have been falling over the period, and this is a strong negative factor for both revenue and outstanding debt to GDP levels.

Spain’s fiscal outlook also worsened in the course of 2009 reflecting this sharper-than-expected fall in economic activity. Notably, the Commission autumn forecast project the 2009 general government deficit to come in at 11.2 % of GDP, compared with the 6.2 % deficit envisioned in the January forecast. In particular, revenue has fallen sharply more than expected, as the result of the stronger-than-assumed fall in activity and of the fact that tax proceeds are reflecting falling activity much more strongly than the normal long-term tax elasticity considerations would have suggested.

Thus in the Commission review of the Spanish Excess Deficit Procedure carried out at the end of October, they found that the plans for government expenditure foreseen in the January 2009 update of the Spanish stability programme had been broadly observed (and this is the big difference with the Greek case) although the expenditure-to-GDP ratio increased on account of the lower-than-expected nominal GDP level.

The Commission now expect the 2009 deterioration in the fiscal outlook to continue into 2010, although the discretionary fiscal measures adopted by the Spanish government post January 2009 were considered to have played no role in the intervening deterioration in the fiscal outlook. They thus took the view that “unexpected adverse economic events with major unfavourable consequences for government finances” had occurred and thus recommended a provisional lifting of the Excess Deficit Procedure, conditional on substantial further progress in bringing the deficit within the 3% of GDP limit by 2013.

Looking ahead to 2010, the Commission took the view that the draft 2010 Budget Law published in late September 2009, which targeted a general government deficit of 8.1 % of GDP in 2010. was credible, given that the combined impact of the withdrawal of the temporary stimulus measures, on the one hand, and of the new discretionary measures presented in the draft 2010 Budget Law, on the other, could yield a significant improvement of the fiscal balance by some 1.75 % of GDP in 2010. Further in the light of the unanticipated deterioration in Spanish government finances an average annual fiscal effort in excess of that originally recommended - at least 1.25 % of GDP - is needed between 2010 and 2013 in order to bring the headline government deficit below the 3 % of GDP reference value by 2013. The Commission aregue that this correction would represent an average annual fiscal effort of above 1.5 % of GDP over the period 2010-2013.

The Commission autumn forecast, projects a government deficit of 11.2 % of GDP in 2009 and 10.1 % of GDP in 2010. Assuming unchanged policies, and GDP growth of 1 % in 2011, the deficit would then be 9.8 % of GDP. A credible and sustained adjustment path thus requires the Spanish authorities to implement the budgetary plans outlined in the draft 2010 Budget Law; ensure an average annual fiscal effort of above 1.5 % of GDP over the period 2010-2013; and, most importantly, to specify the measures that are necessary to achieve the correction of the excessive deficit by 2013.

As the Spanish administration constantly point out, Spain’s accumulated national debt is a lot lower as a percentage of GDP than that of many other EU member states, and even after 2011 will remain below the EU average. However, as given the difficult situation likely to be faced by Spanish banks and the heavier than average weight of ageing in Spain, the burden of Spain’s finances in the context of an economy which may struggle to find growth over the next decade should not be underestimated.

According to the Commission autumn forecast, general government debt is projected to reach 54.3 % of GDP in 2009, up from 39.7 % in 2008. Although it is currently still below the 60 % of GDP EU reference value, debt is expected to increase further in 2010 and 2011 to 66 % and 74 % of GDP respectively. And evidently there is strong downside risk here should growth be lower than anticipated, and/or prices fall, this number could rise significantly, and it could should Spain’s banks need a substantial bailout at some point.

As the Commission point out, the long-term budgetary impact of ageing in Spain is well above the EU average - mainly as the result of a projected high increase in pension expenditure as a share of GDP over the coming decades. The budgetary position in 2009 compounds the budgetary impact of population ageing on the sustainability gap. The Commission thus stresses the importance of improving the primary balance over the medium term and of further reforms to Spain’s old-age pension and health-care systems in order to reduce the risk to the long-term sustainability of public finances.

Indeed, the Council of Finance Ministers (Ecofin) specifically “invited” the Spanish authorities to improve the long-term sustainability of public finances by implementing further old-age pension and health care reform measures when they lifted the Excess Deficit Procedure at the start of December. The Council also invited the Spanish authorities to implement reforms with a view to raising potential GDP growth.

As Standard and Poor’s stressed, their decision to revise the Spanish sovereign outlook to negative reflected the perceived risk of a further downgrade within the next two years in the absence of more aggressive actions by the authorities to tackle fiscal and external imbalances. It is the continuing silence which surrounds this absence which is so ominous, and makes the concerns of the EU Commission and the various ratings agencies at this point more than understandable.

http://crookedtimber.org/2009/12/22/santa-and-moral-judgment/

http://crookedtimber.org/?p=14233

Watched the classic Rudolph the Red-Nosed Reindeer X-Mas special with the kids last night. I wonder: was such a message of tolerance, across color lines, considered faintly radical in 1964? (Did anyone object to this X-Mas special when it came out?) Well, anyway, Zoë (the 8-year old) was disturbed by the fact that Santa was morally in the wrong for most of the show, incapable of distinguishing naughty from nice. She expressed concern about the integrity of the system by which she is to receive her due. If Santa thinks it’s ‘nice’ not to let Rudolph join in any reindeer games, etc., until he needs the guy, he might “give all her presents to some racist.”

On the other hand, Rudolph may be one of those rare examples of a clearly color-coded ‘other’ who “switches sides at the last minute, assimilating into the alien culture and becoming its savior” – only this time its the Great White Father, Santa himself, who is led by the tactically-acute, colorful alien.

Ideally speaking, what should Santa’s theory of naughty/nice be, do you think?

I’ll get the rest of the Dickens scans up a bit later.

http://crookedtimber.org/2009/12/22/steve-the-ottowanians/

http://crookedtimber.org/?p=14231

Via David Friedman, a cool interactive music video.

http://crookedtimber.org/2009/12/21/sunnyside-best-book-of-the-year/

http://crookedtimber.org/?p=14219

Sunnyside by David Glen Gold is the best book I’ve read this year. Gold’s first novel was the magical Carter Beats the Devil, a lean and muscular piece of plotting. Sunnyside is a fat, thumping tome set again in 1920s California and bursting out with living characters, zany but true events and a wry and humane take on the meaning, if any, of the examined life. It had me gasping out loud, talking back to the characters, marveling at the sheer craft but never awakening from the spell.

It begins with a thrilling set piece; a real-life episode of mass hysteria that caused hundreds of simultaneous sightings of Charlie Chaplin across America. This sequence is a first cousin to DeLillo’s Underworld opening in Dodger Stadium and Pynchon’s Against the Day visit to the Chicago World’s Fair. Each of the trio evokes a perfect moment of twentieth century Americana, and announces straight off a big book that will not be about small things. (And just as J. Edgar Hoover is the G-man Greek chorus of Underworld’s themes, Gold’s Treasury Secretary McAdoo stands in for the reader, trying to make sense of Chaplin’s Hollywood and what movies mean for the world.)

Sunnyside follows the fortunes of three men through America’s belated involvement in World War I: Charlie Chaplin’s struggle to do work ‘as good as he is’, find or at least recognize true love and avoid dealing with his mummy issues; Leland Wheeler, a handsome movie star in the making whose mother insists otherwise; and Hugo Black, a mummy’s boy misanthrope who enlists in Detroit’s 339th after a drunken evening of Whitman. Woven through is the story of a young girl from an immigrant Jewish crime family who is growing up to be a criminal mastermind. The stories sometimes overlap as each of the characters each lose his innocence in some way and as the America of 1916 grows up and into the century of mass culture, celebrity and total war.

Gold has a magpie’s eye for shiny titbits of historical research that make you whoop in amazement and run to the index and wikipedia. There are White Russians seeking work as movie extras, too good to be true footage of Trotsky at a New York anarchist rally, and a Wild West show detained in Germany by Wilhelm II. One plotline features America’s invasion of Russia in 1918, a half-hearted attempt to open up a front on Bolshevism that Gold describes with the glee of a boy’s own adventure. In Archangel, Hugo Black and his platoon go Bolo-hunting in the Siberian forest. They undergo several reversals of fortune involving a burning bridge, a train that won’t go backwards, a Bolshevik ambush of 200 men and heavy artillery and a ‘nonstrategic retreat’ worthy of Monty Python.

Later, an extraordinary and historic character enters the Russian theatre; the English General Ironside, a polyglot prodigy sent to lead the Allied Forces in Archangel. He adores his wife and describes himself in his letters as looking like a large and unscrupulous baby. Puzzling over what his mission actually is, Ironside asks himself “Was it for defense? Were we really going to graft democracy onto another country?”

But Gold won’t allow simplistic parallels with the present. Dealing with a mutiny of Russian soldiers, Ironside muses about the phrase that history repeats itself;

“The problem with that nostrum was, you never knew what piece of history you were in. There were a limited number of outcomes, and yet there never seemed to be a way to learn a lesson. You were never at the beginning or end of anything. You were always in the middle, in a mist, and it was always up to someone else to announce later what your time on earth had meant. There was a thin line, for instance, between tenacity and stupidity. A mutiny was a stroke of genius or it wasn’t. How sad to make the effort.”

Using the authority of his voice alone, Ironside shames the mutiny’s leaders into stepping forward. He tells them they are men of dignity whose acceptance of responsibility is admirable. Then he has them shot where they stand.

The smaller characters swell the scenes beautifully. Mary Pickford is a pert and shrewd businesswoman who bottles and sells ‘ingenue’ to the masses and ably out-thinks and out-manouevres a producers’ cartel. She terrifies Chaplin almost as much as his mother does, and their mutual dislike, vulnerability and unique ability to wound each other illustrates perfectly how lifelong rivalries are fuelled. Gold’s description of Chaplin unkindly mimicking Pickford is so vivid I can still see it. Hugo Munsterburg is an early film theorist who makes a short career rationalizing his carnal desire for a film actress, lending intellectual heft to the new enterprise of celebrity and being literally consumed by the new mass phenomenon he tries to explain. But above all, Sunnyside is about Charlie Chaplin, what America thinks of him and what he thinks of that. He munches the scenery as a wannabe intellectual who carries vocabulary cards to beach parties and does a perfect imitation of the campaigning Trotsky, stopping short when he remembers that as a studio head, Chaplin himself owns the means of production and doesn’t want to relinquish it.

What does it all mean? Sunnyside is a colourful explosion of historical trinkets and big ideas, not a plot-driven book. Some readers felt oppressed by its length because Sunnyside doesn’t seem to drive towards anything much. The different characters and their stories are linked mostly by coincidence as they share the enormous collective experience of movies and war. The stories don’t conclude so much as come to an agreeable resting point. In a heartbreaking sequence towards the end, the young reverend overseeing a piteous funeral says terrible things happen for no reason;

“… when something awful happens, we must put aside needing to understand or to fit it into a system where the world’s cruelties make sense. Perhaps, after life is over, it will all be explained. Or not.”

But perhaps life does have meaning. Or at least some novels do. Three days later, Chaplin begins his first film as good as he was.

Sunnyside was published six months ago and is only available in hardback in the US but can be bought in paperback in Waterstones in Ireland and possibly the UK. It was widely but a little equivocally reviewed during the summer, which may explain why it’s not in every bookshop window nor on every end of year list. Some reviewers loved moments, but thought the book as a whole – in so far as they conceded it was a whole – baggy and lacking focus. I found Sunnyside’s digressions and shaggy dog stories entertaining and often brimming with pathos. Rather than prosecute an argument, Gold winkles out correlations and coincidence and sets them out beautifully for the reader to enjoy.

Several reviews had a regretful tone, implying that Gold has set out to do something very ambitious with his second novel and that his failure is noble and beautiful. It’s easy to argue that a book that’s not as loved by others is simply misunderstood, but I do think many reviewers missed the point. After pointing out that the novel makes the reader work to hard to figure out what it’s all about, the WaPo reviewer notes that in Sunnyside’s “strange moments, the cascading pieces of this novel suddenly lock into place in the most evocative ways. Gold manages to convey how the reproduction and distribution of moving images enflames our imaginations and alters our nature like nothing else since the dawn of religion.”

Michael Dirda spoke recently in Locus about Neal Stephenson’s Anathem, a book he didn’t really get but couldn’t completely dismiss. Perhaps Sunnyside is one of these:

“The books we can’t make sense of, that knock us off-kilter, that we don’t accept readily, will often be the books that matter most to the next generation. In fact, that’s the sign of a really important book: it doesn’t fit into our received expectations, it bothers us, it ‘doesn’t work’. Sometimes an ambitious failure is more worth having than a successful little book that is perfectly done.”

(Michael Dirda, International Man of Mystery and Sophisticated Boulevardier)

I don’t accept that Sunnyside is an ambitious failure, however regretful the tone of its reviews. Nor am I the best advocate the book can have, since I enjoyed it far too much to do very much of the intellectual heavy lifting needed to derive its deeper motives. But I’ll leave you with this.

Novels are supposed to be big! I’m bored with novels about disintegrating marriages and quiet, kitchen table regrets. Sunnyside is a big book about big themes in a big country. It’s about the movies when they were new, the collective loss of innocence, fame transmogrified from monarchs through starlets, and what, if any, meaning work lends to life, especially if you’re a genius and haven’t yet produced something as good as you are. So much of life is in this book. I think you should read it.

http://crookedtimber.org/2009/12/21/would-bacons-hamlet-be-hamlet/

http://crookedtimber.org/?p=13595

In the course of an interesting piece by Richard Dorment in the NY Review of Books on the authenticity or otherwise of works by Andy Warhol, I came across a striking passage

The single most important thing you can say about a work of art is that it is real, that the artist to whom it is attributed made it. Until you are certain that a work of art is authentic, it is impossible to say much else that is meaningful about it.

But what if Bacon wrote the tragedies and comedies, but Shakespeare wrote the history plays? At one level, it ought not to make any difference. But clearly it would. There are some good passages in the history plays, and at least one great character, but if that was all Shakespeare had written, he would probably be remembered as a Tudor propagandist of mostly historical interest, and the plays treated accordingly.

Still, unless you buy the Romantic idea of the artist as transcendent genius the question of who wrote what seems to be of secondary interest compared to the work itself. I suspect, Dorment’s claim is really one about the market for collectibles, a class that happens to include paintings.

http://laurietobyedison.com/discuss/?p=2220

Laurie and Debbie say:

We weren’t familiar with the blog Sylvia Has a Problem, but judging by this one brilliant post on a tough subject, we need to be.

This is the appalling story of Hope Witsell, a 13-year-old girl who committed suicide after a cascade of events which started when she sent a boy a picture of her naked breasts via cell phone.

As Sylvia points out, the MSNBC news story consistently poses Hope as the villain in her own story.

In the lede we discover that it was the showing of her boobs to a boy that — let’s look at that one more time in full — “robbed Hope of her childhood, and eventually, her life.”

Does she get the blame just once? No, no, let’s go down a few more paragraphs.

She got INVOLVED in a DANGEROUS GAME. She gave a boy a picture of her boobs, you see. And that was the dangerous act.

Read all of Sylvia’s post, in which she carefully outlines the role of bullying students (acknowledged in the headline, but not in the story proper), the role of school administrators, the role of parents, the role of all the adults in her life.

And of course it wasn’t a slut-shaming, woman-hating, sex-hating culture that divides young women into “good” (virginal) and “bad” (fallen) and allowed a 13-year-old girl to believe that she had ruined her life forever by showing a boy her tits.

From where we are now, it’s almost impossible to imagine how the initial experience with the cell-phone picture could be different, how she could have avoided the sense that her body was currency, something she had that would attract the attention of a boy she liked. Boys send pictures of their penises around the internet all the time, and while they may be criticized or disciplined, they aren’t shamed and bullied, because penises are just private, personal body parts, but boys control their own bodies, and society owns women’s bodies, so the society–not the individual–gets to decide where and how they get seen, and who sees them.

No, it was her “impetuous move” and somehow also the dangers of the INTERNET (even though the internet was not involved, except in that her internet access, probably one of her major sources of social support, was taken away by her “churchgoing family” as a punishment for an act that they had no goddamn fucking idea what it even was or what technology it used).

Every time you turn on the TV or surf to a news site, you get a story about the dangers of social networking, the viciousness of teens to one another (which can certainly be true), the ways in which our children are destroying themselves and each other.

You almost never see something like this, which points out that adults hold far more power over teen lives than the teenager’s peer group does. Parents have very direct power over what a teenager can hear, see, interact with, learn from. Teachers and school staff have the power to close their eyes to bullying, to strengthen and back up some student values over others, to decide what can go on and what must be stopped. And the system of laws says how old you can be before you have sex, what chemicals you can put into your body legally, how long it will be that these other people have power over you. And far too often, adults will engage in adultism: using that power in ways that are profoundly damaging to teenagers.

It was you, adults, all the adults in her life. The high school assholes too, but they’re in high school. You’re adults. She was thirteen years old and she was driven to her grave for nothing and there was nothing inevitable about this.

She’s never coming back. … She wasn’t killed by this year’s sexy scary cyber-youth-trend. You could have saved her if you hadn’t ALL been so busy reinforcing values that are killing our daughters.

Again, Sylvia says the thing that never gets said: she didn’t kill herself in a vacuum. She didn’t kill herself by putting a picture of her chest on her cell phone and sending it to one person. She killed herself in a societal context that told her exactly what she wasn’t worth, and exactly how few choices she had.

It does not have to be this way.

Stop killing our daughters. Stop killing our daughters. Stop killing our daughters. Stop killing our daughters. Stop killing our daughters.

Stop.

http://crookedtimber.org/2009/12/19/christmascarolchimes/

http://crookedtimber.org/?p=14199

Merry Christmas and a Happy New Year!

Well, not quite yet (you might remonstrate).

But it’s coming up (you must concede). So I’ve undertaken a seasonal graphic project that doesn’t involve Photoshopping squid. I love Dickens, and “A Christmas Carol” isn’t the only good Christmas story he wrote. I also like all the old, original illustrations for his books and stories. But they tend to be printed on cheap paper, and at small sizes. So I have kindly taken the trouble of scanning them in at high resolution, cleaning them up and generally making them easier to see and appreciate in all their glory. Really, a lot of these images are full of fun little details.

For tonight, two tales worth. First, “A Christmas Carol”. Second – I love the wild title page and frontispiece for this one – “The Chimes”. A New Year’s tale, technically speaking. “A Goblin Story of Some Bells that Rang an Old Year Out and a New Year In.” Kind of an odd tale, really. (As one of my fellow Valve bloggers noted last year: the moral is a bit nuts. But I still love it.)

Obviously not just these old images but the stories themselves are very much in the public domain, hence available from lots of sources as well as your local, friendly neighborhood bookstore or library. Discuss!

http://crookedtimber.org/2009/12/18/farewell-tel/

http://crookedtimber.org/?p=14190

The greatest living Irishman signs off. (Has anyone else noticed that the volume on the bbc iplayer goes to 11?)

His was the first music show I was aware of on the radio, because once in a while our neighbour, Charles Lossock, would drive me to school listening to Radio 2. (Lossock was a “carpet salesman” who seemed to make regular trips behind the Iron Curtain, and was, I think, the first passionate anti-anti-semite I was aware of. A spy, I always figured when I was older). Later, I would pass Wogan’s house on the way to and from school, and every couple of weeks we’d meet, me on my bike, he in his Rolls that didn’t really fit the one-lane road, and I would be pushed into the hedge. It never bothered me. I never thought he suited TV, myself – Blankety Blank was, of course, great, but I always thought Wogan was not very good (though reading the wiki entry makes me wonder if I watched it enough)—talented as he is, it was impossible to find the dull-witted celebrities he interviewed half as interesting or amusing as he was (one of the most uncomfortable bits of TV I’ve ever seen was watching Wogan try to interview a monosyllabic James Bolam, who just had nothing at all to say, and nothing Wogan could do would get him to open up). During our stay in the UK early this decade I wrote most of a whole book (this one) while listening to Wogan on the X90 to London. And since he’s been available on listen again (I’m not about to wake up at 1 am to listen to him being streamed), I’ve listened twice a week or so, delighting in his flights of fancy. I suspect him of voting Tory his whole life; and surely the TOGs who correspond with him must be almost entirely Tories and UKIPers. Still, he’s brought me a lot of fun.My daughter, last night, became the only person in the history of the world to utter the following: “I hope that Terry Wogan’s retirement isn’t like Brett Favre’s retirement. Dad, we were made to watch Brett Favre’s retirement on TV at school. And it wasn’t even real. Oh, well, I suppose that means it would be good if Terry Wogan’s retirement is like Brett Favre’s”.

I presume that Clifford T Ward was a Tory, too. But then, I’d have guessed the same about Clive Dunn, and nothing could be further from the truth.

http://crookedtimber.org/2009/12/18/reason-and-persuasion-in-ndpr-hey-kids-plato-once-again/

http://crookedtimber.org/?p=14177

Hey, did I mention that I (we – Belle and I) published a Plato textbook [amazon]? And that, thanks to me courageously refusing to settle for less, you can read the whole thing free online, even download a complete PDF (print-locked).

Well, I’m mentioning it again because we just got a favorable review for Reason and Persuasion from NDPR, which is very welcome development. “There is no dearth of textbooks offering an introduction to Plato’s thought, but Holbo’s stands apart in the scope of its introductory material and its user-friendly style …” And Belle’s translations get favorable notice as well.

Our book, y’see, contains a larger number of cartoon-y illustrations than your average academic publication, hence risks not getting taken quite seriously, or else getting lumped in with a lot of other cartoon-y illustrated Intros to So-and-So. (That lot are often alright as far as they go, but usually that’s not quite far enough … not for course use.) So I’m happy to read this sort of thing. “One concern I had reading the text with a mind to possibly adopting it for a course is that the introductory material is almost too thorough.”

I’ll take that as a compliment.

Anyway, I am very grateful to NDPR for seeing fit to review the thing, despite its cartooniness; and grateful to the reviewer – Paul Carelli – for taking it straight as well. (Some of my other recent scholarly work is taken less seriously, I fear. Pretty pictures cause small minds to miss a serious message!)

More seasonal, X-Mas posting to follow shortly. (Sorry for light posting. We just moved house.)

http://crookedtimber.org/2009/12/18/notes-on-a-class/

http://crookedtimber.org/?p=14155

I’ve just finished my most enjoyable sustained teaching experience so far. In Fall 2007 I taught a small freshman seminar (with 20 students) on Children, Marriage and the Family. This is part of a program my university has called the Freshman Interest Group (FIG) program (about which more here). 20 students all take a seminar together, and during the same semester they simultaneously take 2 other classes together, usually large lectures in which they are all in a single discussion section. The professor of the core seminar designates the associated classes, which usually, but not always, have some intellectual connection to the core seminar (in my case, they took Sociology of Marriage and the Family, also, unusually, in a 20-person class, and an Ed Psych course on child development in large lecture format). The point of it is not to give them a coherent intellectual experience, though that is a hoped-for component—but to provide them with a “natural” peer group, people with whom to identify in an otherwise large and anonymous campus. Ultimately the idea is to construct an element of their experience which matches the experiences they would normally have in a small undergraduate college. [That said, the integration between the classes was unusually good—even the timing worked out well, without much coordination (for several topics they covered the relevant sociological material just one or two weeks before they covered the corresponding material in the philosophy class).]

I did not do a brilliant job.

I had only taught freshmen once before, and misjudged some of the material. It also took me time to adjust away from the lecture-driven format that dominates my lower-division experience (in upper division classes I also tend to dominate the classroom in presentation, but somehow have managed to figure out how to prompt a lot of engagement and discussion—which is easier with students who have more experience and are more opinionated, and many of whom are philosophy majors). I gave them too much reading (most of which most of them did), and was too slow in returning their written work. I was also unusually unsettled for various reasons (now resolved) unrelated to the students, and always felt that I was not quite up to par.

That said, I enjoyed it enormously. At one point, about 6 weeks in, someone made a comment about how capable and motivated UW students were, and that they wouldn’t be here if they weren’t: he was immediately contradicted by another student who commented “look around this room; this is not a representative group of UW students. We’re in this class for a reason.”. Much as I admire many of the students I encounter here, she was right (and I was surprised at her perceptiveness)—this was a very highly motivated and capable group, and that’s always delightful.

I had a budget associated with the course, and a friend of mine suggested that I use part of it to take them to dinner the following spring. They almost all attended, and a day later one of the students (who had already become, and remains, a conduit between me and the class) told me that as they walked home they had chatted about wanting to repeat the experience, and asked if I could figure out how to do it. So, this Fall I offered a version of my usual Contemporary Moral Issues class that was only available to them (in addition to my regular courses—I couldn’t really justify teaching such a restricted enrollment course as part of my regular load). Of the original 20, 1 was in Australia, a couple couldn’t fit it into their schedules, and some others, no doubt, found it unappealing—13, though, took it. This is not a class of, or for, Philosophy majors – their majors are psych, elementary ed, human development and family studies, communication, and nursing. The content was a mix of what I regularly teach in Contemporary Moral Issues (abortion, educational inequality and school choice, should parents be licensed?) and revisiting issues that they had dealt with two years before (concerning childhood, marriage and the family). I was also able to do things that I otherwise could quite feel comfortable about doing—one week I made them read Derek Bok’s Our Underachieving Colleges which I discuss, briefly, here, but which I’ve never really talked with students about (Class begins—HB: Well, what did you make of this book?; Student: “Well, it made me think that our education here has kind of sucked”; HB: “Yes, that’s the book I meant”).

It’s enjoyable to teach a class to students who have not only selected in, but asked you to teach the class. Its always seemed to me that one reason that professors at research universities put less energy and expertise into teaching than you might (and Bok does) think they ought to is that the intrinsic rewards of teaching reasonably, but not brilliantly, well, are not great. Reflecting on my own experience, whereas I get repeated positive signals concerning my research and service work from people I know reasonably well and respect, I get very little positive feedback about my teaching from such people. A key reason for this is that the only people who really know anything about my teaching are my students, and I simply don’t get to know many of them well enough for them to be people I know reasonably well and respect. 16 weeks with a class of 160, or 80, or even 20 students is not long enough to develop the kind of relationship in which positive feedback is strong and highly motivating. I get very few repeat students over time, and only a very few who repeat in groups. By positive feedback I don’t mean pats on the back, so much as observation of improvement and growth which gives one a sense that one’s efforts are part of a process that is having a real effect.

So teaching 13 students whom I’ve known somewhat well for a couple of years was great. It also helped that they knew each other. Several had made friendships in that first class which had become close, and most of them had maintained casual acquaintanceship with most of the others. What made this especially valuable was the effect on class discussion. A level of trust was there, pretty much from the start, that mean they were able to consider and entertain ideas that they knew others would reject and even find offensive, without inhibition. I think it is the only class in which a student has said something that implied an insult to several other people in the room and I have felt able to prompt the others to express that they felt insulted and to explain why (this was about religious belief and commitment), with really good results.

What did I learn from the class. First, it seems that some sort of intellectual development really does happen between that first semester and junior year. All of them were more confident, and had more justification for being confident, this time around. They were still a little more deferential to me than they should be. But, second, knowing the professor reasonably well does help. After one class in which I talked too much and they talked too little, two of them quite uncomplainingly expressed their disappointment—thus confirming my own impression, and helping me to prepare the next time. Third, what you get in a semester is just a snapshot of the student, and it is not necessarily representative of who they are. Two of the weaker students in the freshman semester turned out to be two of the strongest (of a strong group of) students in this semester. Each had changed in surprising ways. One was very quiet and unintrusive the first semester, but this time had become one of those students you know you can turn to in a lull, and get to say something interesting that would prompt other students to talk. The other had, to me quite unexpectedly, developed an appetite for the abstract—one of the best moments of the class, for me, was watching her eyes get wider and wider as she turned to the third version of a trolley problem on one of my handouts, and saw the thrill she was experiencing as she tried to get to grips with it. Fourth, 18 months or so is long enough for them to have a different reaction to material they are re-encountering. Several of them said that they had quite different views about whether parents should be licensed than they had the first time around. I think that revisiting a debate like that in a formal setting was valuable in helping them to reflect on their former selves. The most important lesson for me is not really something I can articulate. I learned from the situation a lot about how to present and discuss philosophical ideas to students who are not going to be philosophy majors, but who can make use of the skills and knowledge that we can provide, if it is presented in the right way and in the right context. One of Bok’s many observations is that we tend to design our curriculum around the needs of the major, and target among our majors those students who might be bound for graduate school in our discipline; but then we press for our classes to fulfil requirements that other students have to meet. If we want these students to be encouraged or required to take our classes, we should design our classes with their needs and interests in mind. The intense situation, and the fact that I can ask them, directly, what they think about any element of the course and get a direct and honest answer, has given me more insight than I had before about what works with them, and how to make what works work.

More frivolously, I learned that students really appreciate that you remember what they say. Early on in this semester, in a discussion of children’s interests and children’s rights, I was about to say something, and then realised that what I was going to say was something a particular student had volunteered the first time we’d discussed the issue. So I looked at her and said

“well, this is the point you made, isn’t it?”
Student: “um, when did I make it?”
HB: “you know, the first time we discussed this, in the third week of the FIG”
Student: “You mean in the freshman year”
HB: “yes”
Silence.
Student: “You mean you remember something I said two years ago?”
HB: “Yes. I remember a lot of what a lot of you said”
Student: “But I don’t remember any of what I said”
HB: “Well, for all you know I could be completely making it up”
Student: “Oh no. That’s definitely something I would have said”.

I felt a bit embarrassed, and refrained from pointing out that they had just learned more about how uninteresting my life is than about how good my memory is. Though that too.

The class ended a bit damply. Our last class session was supposed to be a discussion of The Disappearance of Childhood, which had been my inspiration for the original course, and had prompted a lot of thoughtful discussion the first time round. This was to be last Wednesday—and, instead, the campus closed because of snow for the first time in a generation. But most of them came over to my house for dinner last night, mostly to be entertained by my children, but also to eat my bakewell tart and mince pie (sans walnuts for allergy reasons). I grilled them as to what they found most interesting in the course. One student said it was the abortion readings (Thomson and Marquis) which she forced her room-mates to read, thus shutting down the constant bickering about abortion in her house. Two of them, though, said the most interesting thing was the one thing I did entirely for myself and not for them at all—reading Our Underachieving Colleges which, they said, explained a lot about their college experience and made them feel less crazy because someone important agreed with them about the defects of the place.

I’m teaching the freshman version of the course again next Fall. The current students are eager to be engaged with the next group, so I’ll plan a couple of common social events, and get the current lot to come in and make presentations and lead discussions. If it goes ok I’ll figure out a way of reconvening the next group in their junior year.

http://crookedtimber.org/2009/12/17/top-political-philosophy-books-of-the-noughties/

http://crookedtimber.org/?p=14169

Jacob Levy is asking his Facebook friends to nominate their tips for the best political philosophy books (best, most enduring, most interesting) of the decade that Brits are now referring to as “the noughties”. Global justice has obviously been the defining topic, but, whist there have been some good books on the issue, I can’t bring myself to think that any of them will be thought of as essential reading in 20 years or so, in the way that some of the offerings of the 1970s and 1980s still are today. I can’t really think beyond If You’re an Egalitarian, How Come You’re So Rich? (2000) and Rescuing Justice and Equality (2008). But then, as a former Jerry Cohen pupil, I’m biased. Nominations?

http://crookedtimber.org/2009/12/17/bookblogging-the-failure-of-trickle-down/

http://crookedtimber.org/?p=14167

Another section of my book-in-progress, looking at the failure of the trickle-down hypothesis. Comments and criticism welcome as always.

Failure

Although the trickle-down hypothesis never had much in the way of supporting evidence, empirical testing was difficult because its proponents never specified the time period over which the benefits of growth were supposed to percolate through to the poor. But, just as the crises of the 1970s marked the end of the Bretton Woods era, the global financial crisis marks the end of the era of finance-driven market liberalism. To the extent that any assessment of the distributional effects of market liberal policies will ever be possible, it is possible now.

The trickle-down theory can be examined using the tools of econometrics. But, at least for the US, no such sophisticated analysis is required. The raw data on income distribution shows that households in the bottom half of the income distribution gained nothing from the decades of market liberalism. Although apologists for market liberalism have offered various arguments to suggest that the raw data gives the wrong impression, none of these arguments stand up to scrutiny. All the evidence supports the commonsense conclusion that policies designed to benefit the rich at the expense of the poor have done precisely that.

#

The US since 1970

US experience during the decades of neoliberalism gives little support for this view. In the period since the economic crisis of the early 1970s, US GDP has grown solidy, if not as rapidly as during the Keynesian postwar boom. More relevantly to the trickle-down hypothesis, the incomes and wealth of the richest Americans has grown spectacularly. Incomes at the 5th percentile of the income distribution doubled and those for the top 0.1 per cent quadrupled

By contrast, the gains to households in the middle of the income distribution have been much more modest. Between 1973 (the last year of the long postwar expansion) and 2008, median household income rose from $45 000 to just over $50 000, an annual rate of increase of 0.4 per cent.

For those at the bottom of the income distribution, there have been no gains at all. Real incomes for the lower half of the distribution have stagnated. The same picture emerges if we look at wages. Median earnings for full-time year-round male workers have not grown since 1974. For males with high school education or less, real wages have actually declined.

One result has been that the proportion of households living below the poverty line [1] , which declined drastically during the postwar Keynesian era has remained essentially static since 1970, falling in booms, but rising again in recessions.

The proportion of Americans below this fixed poverty line fell from 25 per cent in the late 1950s to 11 per cent in 1974. Since then it has fluctuated, reaching 13.2 per cent in 2008, a level that is certain to rise further as a result of the financial crisis and recession now taking place. Since the poverty line has remained unchanged, this means that the incomes accruing to the poorest 10 per cent of Americans have actually fallen over the last 30 years.

These outcomes are reflected in measures of the numbers of Americans who lack access to the basics of life: food, shelter and adequate medical care.

In 2008, 49.1 million Americans live in households classified as ‘food insecure’, meaning that they lacked access to enough food to fully meet basic needs at all times due to lack of financial resources. 17.3 million people lived in households that were considered to have “very low food security,” a USDA term (previously denominated “food insecure with hunger”) that means one or more people in the household were hungry over the course of the year because of the inability to afford enough food. This number had doubled since 2000, and has almost certainly increased further as a result of the recession. http://www.frac.org/html/hunger_in_the_us/hunger_index.html

The number of people without health insurance has risen steadily over the period of market liberalism, both in absolute terms and as a proportion of the population, reaching a peak of 46 million or 15 per cent of the population. Among the insured, an increasing proportion are reliant on government programs. The traditional model of employment-based private health insurance, which was developed as part of the New Deal, and covered most of the population during the Keynesian era, has been eroded to the point of collapse. At the time of writing, it remains to be seen whether Congress will pass legislation to extend health insurance to the entire population.

http://www.census.gov/hhes/www/hlthins/hlthin08.html

Homelessness is almost entirely a phenomenon of the era of market liberalism. During the decades of full employments, homelessness was confined to a tiny population of transients, mostly older males with mental health and substance abuse problems. In 2007, 1.6 million people spent time in homeless shelters, and about 40 per cent of the homeless population were families with children. And this was actually an improvement – homelessness is one of the few social problems where policy interventions have been sustained and at least partially successful in the US.

In summary, the experience of the US in the era of market liberalism has been as thorough a refutation of the trickle-down hypothesis as can reasonably be imagined. The well off have become better off, and the rich have become super-rich. But despite impressive technological progress (the most striking elements due, as we have seen, to the public and non-profit sectors) those in the middle of the income distributions have struggled to stay in place, and those at the bottom have actually become worse off in crucial respects.

Naturally, there have been plenty of attempts to deny the evidence presented above, or to argue that things are not as bad as they seem. Some of these attempts can be dismissed out of hand. Among the most popular and the silliest, is the observation that even the poor now have more access to consumer goods, such as televisions and refrigerators than they had in the past. For example, Cox and Alm in their book Myths of Rich and Poor observe that n spite of the rise in inequality a poor household in the 1990’s was more likely than an average household in the 1970’s to have a washing machine, clothes dryer, dishwasher, refrigerator, stove, color television, personal computer, or telephone. ”

The common feature of all the items listed in this quote is that their price has fallen dramatically relative to to the general price level. This means that even if incomes were exactly the same as in 1970 we would expect to see a big increase in consumption of these items. And, obviously, if these items have become relatively cheaper, others, such as health care have become relatively dearer. Unsurprisingly, we find that it is in access to health care E[2] that poor and middle class households have become worse off over time.

There are some adjustments that should be made to the data, and make the picture look a little better than suggested by the statistics quoted above.

Household size has decreased, mainly due to declining birth rates. The most appropriate measure of household size for the purpose of assessing living standards is the number of “equivalent adults” derived from a formula that takes account of the fact that children cost less to feed and clothe than adults and that two or more adults living together can do so more cheaply than adults in separate households.The average household contained 1.86 equivalent adults in 1974 and 1.68 equivalent adults in 2007 (my calculations on US census data). Income per equivalent adult rose at an annual rate of 0.7 per cent over this period.

In earnings terms, women have done a little better than men, with median earnings for full-time year-round workers rising by about 0.9 per year over this period. Relatedly, the main factors sustaining growth in incomes for American households outside the top 20 per cent has been an increase in the labour force participation of women and a decline in household savings. Over the period since 1999, consumption financed by borrowing against home equity has been the main factor offsetting stagnant or declining median household incomes.

Finally, until the 1990s, the consumer price index took inadequate account of changes in product quality, so the decline in real wages was overstated somewhat. The Boskin Commission introduced changes to the CPI which, not incidentally, reduced the cost of adjsuting Social Security and other welfare payments for inflation. So, while the stagnation of the 1970s and 1980s might be overstated, that of the 1990s and 2000s is not.

#

The bankruptcy boom

The failure of the trickle-down approach has been even more severe in relation to consumer finance. The idea that increasing income inequality was unimportant when households could borrow to finance growing consumption was never defensible. The gap between income and consumption had to be filled by a massive increase in debt. With sufficiently optimistic assumptions about social mobility (that low-income households were in that state only temporarily) and asset appreciation (that the stagnation of median incomes would be offset by capital gains on houses and other investments)these increases in debt could be made to appear manageable, but once asset prices stopped rising they were shown to be unsustainable.

In the US context, these contradictions have been resolved for individual households by a massive increase in financial breakdowns. Until 2005, this mainly took the form of a steady increase in bankruptcy, to the point where, as John Edwards pointed out in 2003, Americans were more likely to go bankrupt than to get divorced. Restrictive reforms introduced at the behest of the credit card industry produced a dramatic drop in bankruptcy (in part, the lagged counterpart a massive upsurge in 2003 and 2004 as people rushed to get in under the old rules). From 2006, onwards, bankruptcy rates resumed their upward trend, reaching 1.1 million per year in 2008 and appearing likely to match or exceed pre-reform levels in 2009.

In normal times the failure of bankruptcy reform, and the renewed surge in bankruptcy would have been a major issue. But in the crisis of 2008 and 2009, the upward trend has been overshadowed by foreclosures on home mortgages. During the boom, when overstretched householders could normally sell at a profit and repay their debts, foreclosures were rare. From 2007 onwards, however, they increased dramatically, initially among low-income ‘subprime’ borrowers but spreading ever more broadly. 2.3 million houses were affected by foreclosure action in 2008. In hard-hit areas of California, more than 5 per cent of houses went into foreclosure in a single year.

The myth of trickle down was sustained, in large part, by the availability of easy credit. Now that the days of easy credit are gone, presumably for a long time to come, reality may reassert itself.

#

Econometric studies

The relationship between inequality and economic growth has been the subject of a vast number of econometric studies, which have, as so often with econometric studies, yielded conflicting results. Early studies focused on the relationship between initial levels of inequality and subsequent levels of growth. These studies consistently found a negative relationship between inequality and growth. On the other hand, increases in inequality appeared to be favorable to growth.

It is perhaps, not surprising that the initial impact of an increase in inequality should be favorable to economic growth. For example, if tax rates on high-income earners are reduced, they are likely to spend less money and resources on low-productivity investments designed to minimise tax. More importantly, perhaps, in the late 20th century, growth in inequality was closely associated with financial deregulation and the growth of the financial sector. The short-term effects of financial deregulation have almost everywhere been favorable, while the negative consequences take years or even decades to manifest themselves. So, it is unsurprising to observe a positive correlation between changes in inequality and changes in economic growth rates in the short term and medium term.

It is only relatively recently that studies of this kind of explicitly examined the trickle-down hypothesis. Perhaps the most directly relevant work is that of Dan Andrews and Christopher Jencks of the Kennedy School of Government at ANU, and Andrew Leigh of the Australian National University who ask, and attempt to answer, the question ‘Do Rising Top Incomes Lift All Boats’. Andrews, Jencks and Leigh , find no systematic relationship between top income shares and economic growth in a panel of 12 developed nations observed for between 22 and 85 years between 1905 and 2000. After 1960, there is a small, but statistically significant relationship between changes in inequality and the rate of economic growth. However, the benefits to lower income groups flow through so slowly that, as income inequality increases, they may never catch up the ground they lose initially.

Andrews, Jencks and Leigh simulate some results for the US suggesting that even assuming that the increased inequality in the US after 1970 produced permanently higher economic growth, those outside the top 10 per cent of the income distribution would not have gained enough to offset their smaller share of total income over the 30 years to 2000.

And, as Andrews, Jencks and Leigh note the situation is much worse when the distribution of income within the bottom 90 per cent is considered. Households at or below the median income level (that is, those in the bottom half of the income distribution) have lost ground relative to those above the median, even as the population as a whole has lost ground relative to the top 10 per cent. And there is evidence to suggest significant adverse growth effects when inequality between the bottom and middle of the income distribution increases.

More importantly, the financial crisis, which was the inevitable result of the policies that generated the huge growth in US inequality, has wiped out years of income growth and asset accumulation for US households.

#

Social mobility

The evidence that the United States, compared to other developed countries, is characterized by highly unequal economic outcomes, and that these outcomes have grown more unequal during the era of market liberalism is undeniable. Of course, that hasn’t stopped people denying it, especially when they are paid to do so, but at least such denials must be presented, in contrarian fashion, as showing that ‘everything you know about income inequality is wrong’. By contrast, the belief that this inequality is offset by high levels of social mobility is widely held in and outside the United States, and reflected in such epithets as ‘land of opportunity’.

In the late 19th century, the US was indeed a land of opportunity compared to the hierarchical societies of Europe, and many believe that this is still the case. But the evidence of international comparative studies is clear. Among the developed countries, the US has the lowest social mobility on nearly all measures, and the European social democracies the highest.

Ron Haskins and Isabel Sawhill of the Brookings Institution found 42% of American men with fathers in the bottom fifth of the income distribution remain there as compared to: Denmark, 25%; Sweden, 26%; Finland, 28%; Norway, 28%; and the United Kingdom, 30%. Other studies, using different measures of mobility, find the same outcome

Moreover, as market liberal policies have become entrenched, social mobility has declined. Not only have the well-off pulled away from the rest of the community in terms of income share, they have managed to pull up the ladder behind them, ensuring that their children have better life-chances than those born to poorer parents.

The evidence suggests that the distinction between equality of outcomes and equality of opportunity, a central theme in market liberal rhetoric, is inconsistent with empirical reality. More equal opportunities make for more equal outcomes, and vice versa.

It’s not hard to see why this should be so. The highly unequal outcomes of market liberal policies are often supposed to be offset by an education system available to all and by laws that prevent discrimination and encourage merit-based employment and promotion.

That might work for one generation, but in the second generation the rich parents will be looking to buy a headstart for their less-able children, for example by sending them to private schools where they will be coached in examination skills and equipped with an old school tie.

One generation more and the wealthy will be fighting to stop their tax dollars back from being wasted on public education systems from which they no longer benefit. Those who remain in the public system will lobby to get their own children into good public schools and ensure that these schools attract and retain the best teachers, benefit from fundraising activity and so on.

Education has traditionally been seen as the most promising route to upwards social mobility. But as inequality has increased, wealthy parents have sought, naturally enough, to secure the best educational outcomes for their children, most obviously through private schooling, expansion of which has been a central demand of market liberals. As a result, both the importance of ability as a determinant of educational attainment, and the importance of educational attainment as a source of social mobility have declined over time. A UK study found that ‘low ability children with high economic status’ (or, in more colloquial terms, the ‘dumb rich’) experienced the largest increases in educational attainment. This is reinforced, particularly in the US, by the increasing segregation of higher education on class lines.

The inequalities are even more evident in higher education. Thanks to scholarship programs, a handful of able students from poor backgrounds make it into Ivy League colleges like Harvard and Yale every year. But they are far outweighed by the mass of students from families in the top 10 per cent of the income distribution who have the financial resources to afford hefty fees the high quality high school education that gives them the grades needed for admission and the cultural capital required to navigate the complex admissions process. And of course, those with old money but less than stellar intellectual resources have their highly effective affirmative action program – the legacy admission system by which the children of alumni gain preferential admission. In the 1998 book The Shape of the River: Long-Term Consequences of Considering Race in College and University Admissions, authors William G. Bowen, former Princeton University president, and Derek Bok, former Harvard University president, found “the overall admission rate for legacies was almost twice that for all other candidates.” If inequality of outcomes is entrenched for a long period, it inexorably erodes equality of opportunity. Parents want the best for their children, and, in a highly unequal society, wealthy parents will always find a way to guarantee their children a substantial headstart.

While education is critical, high levels of inequality naturally perpetuate themselves through other, more subtle channels like health status. Barbara Ehrenreich’s Nickel and Dimed discusses the plight of the uninsured working poor in the United States. While the problem is worse in the US than elsewhere because of highly unequal access to health care, high levels of inequality produce unequal health outcomes even in countries with universal public systems. Children growing up with the poor health that is systematically associated with poverty can never be said to have a truly equal opportunity.

There are other factors at work. A widely dispersed income distribution means that a much bigger change in income is needed to move the same distance in the income distribution, say from the bottom quintile to the middle, or from the middle to the top. So, unequal outcomes represent a direct obstacle to social mobility.

Once you think about the many and various advantages of growing up rich rather than poor, it’s not at all surprising that widening the gap between the rich and the poor should also make it harder for the poor to become rich (or, for that matter, vice versa) so the evidence that, under market liberalism, social mobility is low and declining, should not surprise anyone. On the other hand, it is disappointing, if not surprising, that the myth of equal opportunity continues to be believed so many decades after it has ceased to have a basis in fact.

#

The unhealthiness of hierarchies

Some of the most striking evidence against the trickle down hypotheses has come from studies of social outcomes such as health status, crime and social cohesion. Not surprisingly, the poor do worse on most such measures than the rich. More strikingly, though, a highly unequal society produces bad social outcomes even for those in higher income groups, who are better off, in purely monetary terns, than those with a similar relative position in more equal societies. Only for the very well-off do the direct benefits of higher income outweigh the adverse effects of living in an unequal society.

It is commonly thought that, while it is better to be at the top of the hierarchy than at the bottom, there are some offsetting disadvantages, particularly in relation to health. While the poor suffer from lack of access to good medical care and other problems, the rich are supposed to suffer from ‘diseases of affluence’ like heart disease, compounded by the stresses of life at the top. ‘Executive stress’ has become a cliché. So, to some extent there is thought to be a trade-off between health and wealth.

In place of this somewhat comforting picture, Michael Marmot has some disturbing news. People at the top of status hierarchies live longer and have better health than those at the bottom. This is true for a broad range of illnesses and causes of death. Moreover, the effect isn’t confined to the extremes of the distribution. At any point in a status hierarchy, people have, on average, better health than those a little below them and worse health than those a little above them.

Marmot’s work began with a study of British civil servants. The study population is interesting for two reasons. First, it excludes extremes of wealth and poverty. The civil service is not a road to riches, but even the lowest-ranking civil servants are not poor, on most understandings of the term. Second, the public service provides a clear-cut status hierarchy with very fine gradations.

Marmot’s study found, not surprisingly, that senior public servants, at the top of the status hierarchy, were healthier than those at the bottom. More strikingly, he found that, right through the hierarchy, relatively small differences in pay and status were associated with significant differences in life expectancy and other measures of health.

The same finding has been replicated across all sorts of different status hierarchies. As you move from the slums of South-East Washington DC to the leafy suburbs of Montgomery County, 20 miles away, life expectancy rises a year for every mile travelled. Among actors, Academy-award winners live, on average, four years longer than their Oscarless co-stars.

Along the way, Marmot demolishes the myth of executive stress. Despite their busy lives, Type A personalities and so on, senior managers are considerably less likely to die of heart attacks than the workers they order around. This is not a new finding, but the myth is sufficiently tenacious that Marmot needs to spend some time knocking it down yet again.

Marmot, along with others who have studied the problem, concludes that the crucial benefit of high-status positions is autonomy, that is, the amount of control people have over their own lives. Marmot’s analysis is not focused exclusively on autonomy. For example, he has a good discussion of social isolation and its relationship to social status. Nevertheless, his main point concerns autonomy, and this is by far the most interesting and novel feature of the book.

There is a complex web of relationships between health status autonomy, both self-perceived and measured by objective job characteristics. Low levels of autonomy are associated, not only with poorer access to health care, but with more of all the risk factors that contribute to poor health, from homicide to poor diet.

The centrality of autonomy is not, on reflection, all that surprising. Autonomy, or something like it, is at the root of many of the concerns commonly seen as part of notions like freedom, security and democratic participation. When we talk about a free society, for example, we usually have in mind a place in which people are free to pursue a wide range of projects. The distinction between negative and positive liberty, popularised by Berlin goes part of the way towards capturing this point, but a focus on autonomy does better.

The points are clearest in relation to employment. Early on, Marmot debunks the Marxian notion of exploitation (capitalists taking surplus value from workers) and says that what matters in Marx is alienation. He doesn’t develop this in detail, and the point is not new by any means, but he’s spot on here. It’s the fact that the boss is a boss, and not the fact that capitalists are extracting profit, that makes the employment relationship so troublesome. The more bossy the boss, the worse, as a rule is the job. This is why developments like managerialism, which celebrates the bossiness of bosses, have been met with such hostility.

So part of autonomy is not being bossed around. But like Berlin’s concept of ‘negative liberty’, this is only part of the story. Most of the time it’s better to be an employee with a boss than to sell your labour piecemeal on a market that fluctuates for reasons that are totally outside your control, understanding or prediction. This is where a concept of autonomy does better than liberty, negative or positive. To have autonomy, you must be operating in an environment that is reasonably predictable and amenable to your control.

Of course, the environment consists largely of other people. So one way of increasing your autonomy is by reducing that of other people, for example by moving up an existing hierarchy at their expense. Similarly when employers talk about increased flexibility in the workplace, they generally mean an increase in their control over when, where and how their employees do their job. Workers typically experience this as a loss of flexibility in their personal lives. In short, within a given social structure, autonomy is largely a zero-sum good.

But some social structures give more people more autonomy than others, and this is reflected both in average life expectancy and in the steepness or otherwise of status gradients in health. In general, higher levels of inequality on various dimensions are associated with lower average life expectancy and steeper status gradients.

In The Spirit Level, Richard Wilkinson and Kate Pickett build on Marmot’s work and other statistical evidence to produce a comprehensive case for the proposition that inequalities in income and status have far-reaching and damaging effects on a wide range of measures of social wellbeing, effects that are felt even by those who are relatively high in the income distributions.

Wilkinson and Pickett report two main types of statistical evidence. Following Marmot, they examine social gradients, that is, the relationship between individual outcomes and positions on the social ladder. Here there are two main results. First, in all countries, there is a strong relationship between social outcomes and social rank, much greater than can be explained by income differences alone. Second, greater inequality within a country is associated with a steeper social gradient.

Wilkinson and Pickett also report cross-section studies in which a number of countries, or other jurisdictions such as US states, are compared. The standard statistical approach here is regression analysis, in which differences in social outcomes such as life expectancy are statistically related to inequality levels, in a way that controls for other sources of variation, such as mean income levels. Among the outcome variables considered are measures of life expectancy and health status, crime and measures of ‘social capital’, such as trust.

The results are striking. Wilkinson and Pickett find a strong negative relationship between inequality and measures of social outcomes. The relationship is statistically significant, and undiminished by the inclusion of relevant control variables. [3]This result is, on the whole, unsurprising. If we consider the kinds of social relationships that contribute to hierarchical attitudes, stressful low-status jobs and so on, it seems unlikely that they will variations in income over the course of a few years, or even a few macroeconomic cycles. This is even more obvious in relation to the social outcomes such as life expectancy, it seems clear that they are the product of lifetime experience, rather than current income.

The United States is the obvious outlier in almost all studies of this kind. It is the wealthiest country in the world, the most unequal of the rich countries, and does poorly on a wide range of measures of social wellbeing, from life expectancy to serious crime and even on such objective measures as average height. In some cases, the poor performance primarily reflects the continuing black-white divide. In other cases, however, all but the very richest groups of Americans have worse average outcome than people with a comparable position in the income distribution in more equal countries, even though the average income of the non-Americans in these groups is much lower than that of the corresponding Americans.

Leigh, A. and Jencks, C. (2007), ‘Inequality and mortality: Long-run evidence from a panel of countries’, Journal of health economics, 26(1), 1-24.

Wilkinson, R. and Pickett, K. (2009) The Spirit Level: Why More Equal Societies Almost Always Do Better, Allen Lane, London.

[1] Unlike most developed countries, the US has a poverty line fixed in real terms, and based on an assessment of a poverty-line standard of living undertaken in 1963.

[2] mergency health care remains generally accessible, and has benefitted from technical progress, which has contributed to declining mortality. But regular health care has become unaffordable for many, with the result that a wide variety of chronic conditions go untreated.

[3] Some other econometric adjustments, such as the inclusion of ‘fixed effects’ do weaken the findings. The interpretation of these adjustments remains controversial.