Why Brexit has led to falling real wages [feedly]

Why Brexit has led to falling real wages
http://mainlymacro.blogspot.com/2017/08/why-brexit-has-led-to-falling-real-wages.html

This might seem easy. The depreciation immediately after Brexit, plus subsequent declines in the number of Euros you can buy with a £, are pushing up import prices which feed into consumer prices (with a lag) which reduce real wages. But real wages depend on nominal wages as well as prices. So why are nominal wages staying unchanged in response to this increase in prices?

Before answering that, let me ask a second question. Why hasn't the depreciation led to a fall in the trade deficit? Below are the contributions to UK GDP from the national accounts data. Net exports are very erratic, but averaging this out they have contributed nothing to economic growth since the Brexit depreciation.

The belief that the depreciation should benefit UK exports is based partly on the idea that exporters will cut their prices in overseas currency terms, making them more competitive. Yet at the moment UK the majority of exporters seem to be responding to the depreciation not by cutting prices but by taking extra profits. If they keep their prices constant in overseas currency terms (from currency denominationdata almost as many exports are priced in overseas currency as imports), sales will stay the same but profits in sterling will rise.

While this helps account for the lack of improvement in net trade, it increases the puzzle over why nominal wages are not responding to higher import prices. If exporting firms profits are rising because of the depreciation, why not pass some of that on to their workers?

One perfectly good answer is that the labour market is weak, and what has stopped real wages falling further is that firms do not like to cut nominal wages. In these circumstances there would be no reason for exporters to share their higher profits with their workforce. So the immediate impact of the depreciation has not been a decline in the terms of trade (export prices/import prices), but instead a shift in the distribution between wages and profits. But many people believe that, with unemployment falling rapidly, the labour market is not weak.

There is another reason why exporters might be increasing profits but not sales, and not passing higher profits on to higher wages, which goes back to a point I have stressed before. We need to ask why the depreciation happened in the first place. To some extent the markets were responding to lower anticipated interest rates set by the Bank of England, but there is more to it than that. Brexit, by making trade with the EU more difficult, will reduce the extent of UK-EU trade. Furthermore there are two reasons why Brexit is likely to reduce UK exports by more than UK imports.

The first is specialisation. Because countries tend to specialise in what they produce, they may not have firms that produce alternatives to many imports, making substitution more difficult. The EU produces many more varieties of goods than the UK, so they are more likely to be able to substitute their own goods to replace UK exports. The second is the importance for UK exports of services, and the key role that the Single Market has in enabling that. On both counts, to offset exports falling by more than imports after Brexit we need a real depreciation in sterling. Exporters will have to cut their prices in overseas currency terms, and a depreciation allows them to do this.

Of course Brexit has not happened yet. We still get a depreciation because otherwise holders of sterling currency would make a loss. So firms do not need to cut their prices in overseas currency yet, allowing them to make higher profits. But these higher profits will be temporary, disappearing once Brexit happens. It would therefore be foolish to raise wages now only to have to cut them later when Brexit happens (no one likes nominal wage cuts). To restate this in more technical language, when Brexit does happen the UK's terms of trade will deteriorate as a response to export volumes falling by more than import volumes. Firms are in a sense anticipating that decline in the terms of trade by not allowing nominal wages to rise to compensate for higher import prices.

So before Brexit happens we are seeing a distributional shiftbetween wages and profits, but once Brexit happens profits will fall back and we will all be worse off. For Leave voters who think this is all still just 'Project Fear', have a look at the national accounts data releasethat the chart above came from. It shows clearly that UK growth in the first half of this year has been slower than that in the US, Germany, France, Italy and Japan by a wide margin. What Leave campaigners called Project Fear is real and it is happening right now, but do not expect your government or some of your newspapers to tell you that. 

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Jobs report comes in slightly weaker than expected, but the real problem is slow wage growth [feedly]

Jobs report comes in slightly weaker than expected, but the real problem is slow wage growth
http://jaredbernsteinblog.com/jobs-report-comes-in-slightly-weaker-than-expect-but-the-real-problem-is-slow-wage-growth/

The nation's payrolls climbed 156,000 last month and the unemployment rate ticked up slightly to 4.4 percent, in a slightly weaker-than-expected jobs report. Wage growth is still stuck at an annual growth rate of 2.5%, the length of the average work week ticked down slightly, and payroll gains for June and July were revised down 41,000. (Note: Hurricane Harvey's impact is NOT present in today's jobs numbers, as the storm struck well after the survey date. See comments below.)

Though the report on job growth in August comes in below expectations, the labor market continues to tighten at a good clip, generating job, wage, and income growth that will continue to support the expansion. However, there are soft spots, most notably the fact that wage growth has been uncharacteristically unresponsive to persistently low unemployment.

Smoothing out the statistical noise from the monthly data is a useful way to get a clearer signal as to the trend of employment growth. JB's monthly smoother shows that over the past three months, monthly gains averaged 185,000, a slight acceleration over the longer-term trends, and a number that's thoroughly consistent with continued improvement and tightening in the job market.

And yet, hourly wages can't catch a buzz. As the figures below show, for all private-sector workers, nominal wage growth was stuck at 2% throughout much of the recovery, before taking off about two years ago, climbing to 2.5%, where it has been stuck, if not decelerating a bit (as per the smoother, a 6-month rolling average). For lower-paid workers (bottom figure: the 80% of the workforce that's blue-collar production workers and non-managers in services), the pattern is similar, though the recent deceleration looks a bit clearer.

Given that inflation is still on the low side—prices rose 1.7% in the most recent CPI report—these growth rates still imply rising real earnings, though less than 1%, year-over-year. In other words, most workers simply are not sharing in as much of the economy's growth as would be expected given the apparent tightness of the labor market. Why that is the case remains among the most important economic questions of the moment.

One cogent explanation is that while the job market is unquestionably tightening, it is not yet at full employment and there's more "room-to-run" than the 4.4% unemployment rate implies. The most telling indicator for this argument (along with the wage results) is the employment rate for prime-age workers. It fell three-tenths of a percentage point last month, though it's 3.6, 4.5, and 3.4 percentage points above its trough value for all, men, and women, respectively. Yet, it still remains 1.9, 3.1, and 0.7 points below its pre-recession peak.

Other explanations include slow productivity growth, which restrains average wage gains, and, even at low unemployment, weak worker bargaining power.

These indicators, in tandem with notably weak price pressures, should definitely lead the Federal Reserve to question the necessity of tapping the economic brakes by continuing their "normalization" of interest rates, i.e., their series of planned rate hikes.

As today marks the start of the Labor Day weekend, this last point is worth digging into a bit. As I stress here, unionization remains at historically low levels, in no small part due to aggressive anti-union activities. Meanwhile, the Trump administration has consistently been pursuing anti-worker measures, such as failing to raise the salary threshold for overtime work or the minimum wage, while deregulating labor standards and worker protections.

Note this timely comment from the president in a speech from earlier this week selling his tax cut plan (which does not yet exist); he asserted that "It's time to give American workers the pay raise that they've been looking for, for many, many years." I agree. Yet, none of the components of the plan that have been floated thus far—eliminating the estate tax (!!) and the alternative minimum tax (measures that would help those like Trump and his heirs), cutting corporate taxes, zeroing out taxes on foreign earnings of US multinationals—come anywhere close to helping families that depend on paychecks as opposed to stock portfolios.

What's needed are measures that will boost the bargaining power of many in the workforce, not tax cuts for corporations and the wealthy.

The impact of Hurricane Harvey

The disastrous flooding in Texas comes at great human cost, of course. But its impact on the economy in general, and the jobs data, is likely to be more nuanced. Here are some key points on Harvey's data impact:

–The impact of the hurricane is not present in today's numbers. The employment surveys take place in the week that includes the 12^th of the month – in this case, well before the storm hit.

–Large storms like Harvey typically show up first in weekly unemployment claims, which are likely to spike in coming weeks.

–September's jobs report (released on October 6^th) may reflect some impacts of the storm, though they could be offsetting. That is, employment in the affected areas will be disrupted, of course, which could show up in slightly reduced payrolls or fewer hours worked per week. Conversely, by the September survey week, some clean-up efforts will be underway, and those could create perhaps 10,000-20,000 temporary jobs. All told, I doubt that Harvey will be a significant, direct factor in forthcoming jobs reports.

–There could, however, be indirect economic impacts from the storm, though these too could be offsetting. First, the temporary loss of a third of the nation's refining capacity has led to a spike in gas prices, which hit a two-year high yesterday, up 14 cents from a week ago, to a national average of $2.49. Higher gas prices cut into disposable income and could temporarily dent consumer spending. Conversely, rebuilding and replacing damaged cars, structures, roads, etc. will boost economic activity in coming months. Harvey could shave maybe 20 basis points off of Q3 GDP, which would later be made up in future growth numbers.

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Enlighten Radio:Labor Day 2017 Special Poetry Show -- Monday, 9/4

John Case has sent you a link to a blog:



Blog: Enlighten Radio
Post: Labor Day 2017 Special Poetry Show -- Monday, 9/4
Link: http://www.enlightenradio.org/2017/09/labor-day-2017-special-poetry-show.html

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Trump administration and congressional GOP will return to a packed schedule, but maintain attack on working people [feedly]

Trump administration and congressional GOP will return to a packed schedule, but maintain attack on working people
http://www.epi.org/blog/trump-administration-and-congressional-gop-will-return-to-a-packed-schedule-but-maintain-attack-on-working-people/

Congress returns from a month-long recess next week to a packed agenda. Lawmakers must pass a government spending bill by September 30 in order to avert a federal government shutdown.  They must also increase the debt ceiling or risk defaulting on the national debt. In spite of Republican control in both chambers of Congress, action on these critical measures is complicated by divisions within the party over whether to tie the debt limit vote to spending cuts. Funding for President Trump's border wall and the need to consider disaster relief funding for those areas impacted by Hurricane Harvey loom over any government spending measure. One thing is clear—September is likely to be filled with congressional chaos. In the midst of that chaos, the Trump administration and congressional Republicans will continue to advance the anti-worker agenda they have been working to carry-out since taking office. While those actions may not get attention proportional to their impact, EPI will continue to monitor and report on these important issues. Here are some critical actions to look out for this month:

Trump continues to attack workers' retirement, costing them billions in retirement savings

Just this week, the Department of Labor (DOL) published a proposal to delay full implementation of the fiduciary rule (the rule that requires financial advisers to act in the best interest of their clients) for another 18 months. This delay would cost retirement-savers 10.9 billion over the next 30 years. Public comments on the proposal are due September 15. It is expected that DOL will quickly finalize this delay. Workers should be able to invest for retirement without worrying about their financial advisers steering them toward investments that pay a lower rate of return for the saver, but offer a higher commission to the adviser. The only people who will benefit from the Trump administration's DOL actions here are unscrupulous financial advisers and financial services companies.

Trump continues efforts to take away the rights of millions of workers to get paid for working overtime  Read more

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The Migration Question: A Highly Politicized Issue threatening to Split the European Union [feedly]

The Migration Question: A Highly Politicized Issue threatening to Split the European Union
http://www.globalpolicyjournal.com/blog/29/08/2017/migration-question-highly-politicized-issue-threatening-split-european-union

This is the second of a four-part series of posts on Poland's, Hungary's and the Czech Republic's perilous play with the EU's refugee relocation agreement.

This is not the first time the European Commission reverted to the instrument of the law infringement procedure in the field of migration policy. In 2008, the EU initiated a similar procedure against Greece. Athens was criticized for the lack of sufficient legal guarantees regarding the examination of asylum applications, which became a problem in particular after the transfer of asylum seekers from another member state to Greece under the Dublin regulation. The Dublin regulation stipulates that in principle asylum-seekers will be returned to the EU country in which they entered the EU territory for the processing their asylum application. Also, there was a similar procedure against Germany in 2012, as Berlin was dragging its feet with the implementation of the so-called "Blue-Card" directive, regulating legal third country migration into the EU. Both procedures were successful, as Athens and Berlin adopted the necessary legal adjustments and never questioned the legality of the procedure.

In contrast, the current infringement procedure is quite different, as it is of highly politicized nature. The defiant countries stress the oppressive nature of the relocation scheme on the one hand, and oppose the "EU dictating" and interfering with the realm of national sovereignty in principle. On the other hand, the procedure reflects the annoyance of Brussels over the slow response to the relocation scheme, not just in the Central Eastern European (CEE) area but in all EU countries. While the initial aim of 120,000 refugees to be relocated was not very ambitious, only 20,000 asylum seekers have been moved so far. Positions on the measure also differ among Western EU member states. As of 21 August 2017 Austria has relocated no refugees at all, France has still to take in 15,614 refugees (out of the agreed 19,714), Germany 20,146 (out of the agreed 27,536), Sweden 2,201 (out of the agreed 3,766) and the Netherlands 3,744 (out of the agreed 5,947). The reason for the lackluster response in all the EU has been attributed mainly to the presidential elections in Austria in October/December 2016 and its upcoming general elections in November 2017, the elections in the Netherlands in April 2017, in France in April/May 2017 and in Germany in October 2017, with the migration-critical parties in all these countries threatening to take over central political institutions such as the presidency (in Austria and France) or challenge the established parties (such as in the Netherlands and in Germany). Against this backdrop, the EU is well aware of the highly politicized nature of the relocation scheme and how Eurosceptic parties may capitalize on it in order to shift political balances to the right, i.e. towards nationalist and anti-EU positions in most EU member nations.

Nevertheless, the EU decided to make an example of Poland, Hungary and the Czech Republic which object the scheme completely, in order to "motivate" other countries to take the plan more seriously, in particular given that the scheme expires in September 2017. Not taking any steps would be acknowledging a serious political failure of the bloc. The EU has already a problem of credibility among its member states, as it cannot effectively move against Hungary and Poland concerning the rule of law violation in both countries, as for this the bloc would need an agreement of all member states (minus the countries in question) to impose concrete sanctions. Such an agreement is highly improbable.

Despite the infringement procedure, the CEE governments remain critical of the relocation scheme, stressing that it was never working due to its ill-conceived nature, and that it constitutes a violation of basic EU law. Firstly, according to Warsaw, Budapest and Prague, the scheme was politically "nonsensical" aggravating the refugee crisis, rather than solving it, since the EU's relocation plan would actually represent a pull factor, encouraging more migrants to come to Europe thus contributing to a probable collapse of the entire Schengen zone, i.e. the principle of border-free movement within the EU, since many countries would start to re-introduce border controls to prevent illegal mass-migration which continues to get 100,000s per year mainly to the shores of Italy across the Mediterranean. This argument highlights that the majority of the asylum-seekers from the MENA region coming to Europe in 2015 and 2016 were actually economic migrants targeting the wealthy welfare states of the EU such as Germany and Sweden, rather than the poorer ones such as Poland and Hungary. This analysis is sustained by the fact that less than a third of the 300,000-400,000 illegal migrants arriving in Italy per year submitted an asylum request at all since 2014. The migrants arrive with the help of a massive fleet of NGO ships, i.e. of private rescue organizations not controlled democratically nor by the European member nations nor the EU who are able to professionally transfer around 1000 illegal migrants per day across the Mediterranean, i.e. as a gigantic illegal "transfer industry" which according to the Italian authorities has been partly cooperating with human traffickers and is making a business out of mass-migration to Europe worth around 35 billion US$ a year according to official estimates by the International Organization for Migration (IOM).

Secondly, the three defiant countries point out that the EU decision of September 2015 to establish forced relocation to be imposed to its member states was illegal, as, among others, the Council applied a majority decision instead of unanimity and did not consult the European Parliament sufficiently. For years, the EU has applied a rule according to which with regard to highly controversial issues the member states would seek unanimity even though formally a majority decision might be possible. If, however, a controversial majority decision is enforced on others, then according to the V4 states it would equal "a tyranny of majority".

Thirdly, Poland, Hungary and the Czech Republic argue that since the bulk of the refugees prefer the welfare state countries such as Germany, Italy and Sweden who give them immediate and unrestricted full access to all services and features without any previous contributions, they would prefer to leave the poorer ones such as Poland, Hungary and Romania after the resettlement anyway, and these countries would need to stop them against their will and thus violate the Geneva Convention.

Fourthly, according to the V4 there is an increased threat of terrorism as a result of the relocation scheme, as, for instance, IS terrorists are known to infiltrate the migration routes particularly from Libya, Tunisia and Egypt across the Mediterranean to Italy and recruit young male refugees, many of whom come to Europe without any parental company. As the Italian authorities analyzed in July 2017, there were connections between terrorist organizations in Northern Africa and the Mafia criminal organization in Sicily and the Italian South who founded appropriate NGO's to host the migrants in its own structures paid for by the state, i.e. making a business out of the Italian law that guarantees every migrant 35 Euro per day, i.e. 1000 Euro per month which is more than many Southern Italian pensioners get after 40 years of work. According to the International Organization for Migration, illegal mass migration has become the third most profitable, but much less dangerous business for the Mafia after the smuggling of drugs and weapons. Italian conservative commentators have long speculated that while most bigger other EU nations were hit and although Italy accepts the largest numbers of migrants by keeping its sea borders open and as the only country which offers its ports to the NGO ships carrying mass migrant waves, there were no terror attacks in Italy exactly because due to this policy Italy serves as an easy entry and exit area from and into the EU for fundamentalists not interested in putting the status quo at risk by attacking the Italian peninsula. That is why the relocation plan, according to Warsaw, Budapest and Prague, is dangerous and could endanger the national security also of their countries.

 

 

Ireneusz Pawel Karolewski, Dr., is Chair of Political Science at the Willy Brandt Centre for European Studies of the University of Wroclaw, and Associate Professor of Political Science at the University of Potsdam. Author of "European Identity Revisited: New approaches and recent empirical evidence" (Routledge 2016). Contact: karole@uni-potsdam.de. Roland Benedikter (corresponding author), Dr. Dr. Dr., is Research Professor of Political Analysis in residence at the Willy Brandt Centre for European Studies of the University of Wroclaw, and Global Futures Scholar at Eurac Research Bolzano-Bozen, Autonomous Province of South Tyrol, Italy. Contact: rolandbenedikter@yahoo.de.

Part 1 is available here. 

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Jared Bernstein: #Fiscal_Friday: Three fiscal points to absorb before you start your weekend [feedly]

#Fiscal_Friday: Three fiscal points to absorb before you start your weekend
http://jaredbernsteinblog.com/fiscal_friday-three-fiscal-points-to-absorb-before-you-start-your-weekend/

–Deficit neutral vs. revenue neutral: This is really important and while the distinction is straightforward, I'm seeing some confusion out there. The R's get this and they're clearly, though subtly, shifting their rhetoric from rev neutrality to deficit neutrality.

To pass their tax cuts under budget rules that allow them to evade a Senate filibuster, the cuts cannot raise the deficit outside the 10 year budget window. There are two ways to do so. One way, revenue neutrality, is to raise other revenues through base broadening to offset the cost of the rate cuts. The other way to cut taxes and hold the deficit constant is to cut spending. That's deficit neutrality, and since federal taxes and spending are both progressive, cutting spending to pay for cutting taxes is doubly regressive, as I argue here.

I've also argued that, given our demography, climate change, inequality, geopolitics, infrastructure needs, etc., we're going to need more, not less (and not even the same amount of) revenues going forward – at least, as long as we boomers remain in the system. So revenue neutrality is, in my view, already too low a bar. But deficit neutrality is no bar at all.

–A quick point about the debt ceiling: If you read this blog, then you surely know this already. But just in case, here it is: Congress must raise the debt ceiling to pay for spending they've already approved. As the date that the ceiling must be raised approaches, you'll hear some Republicans argue that raising the debt ceiling is fiscally irresponsible and just encourages more spending. That argument is perfectly analogous to this one: paying your restaurant bill after you've eaten is irresponsible and just encourages more dining out.

–This one is particularly technical, but there's a budget scheme R's are flirting with that could artificially make their tax cuts look $440 billion cheaper than they really are. The jargon here is that in scoring the cost of their cuts, they're talking about using a "current policy baseline" versus a "current law baseline." The reason they'd do so is so they don't have to come up with a bunch more revenue to pay for expiring tax breaks that they plan to keep in place. Simply assume, contrary to the law, that the cuts remain in place and you don't have to raise more taxes to pay for them. CBO won't buy it, but if they try to pull this off in their own scores, we'll be blowing the whistle.

Here's the explanation from my CBPP colleagues:

That $439 billion figure represents the cost of extending, through the next decade, dozens of corporate and individual tax provisions that would otherwise expire or have already expired under current law.  A current law baseline reflects their scheduled expiration, so proposals to extend them would cost money.  A current policy baseline, by contrast, assumes that they will remain in effect indefinitely, so proposals to extend them would not lose revenues.  That could help a Republican tax bill appear to be less costly than if it were assessed relative to current law — and could be crucial for hitting a desired revenue target, particularly one that facilitates the use of a privileged, fast-track status in the Senate that would allow the bill to pass without any Democratic support.

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IMF Blog: Off the Charts: Your Favorite 5 Charts [feedly]

Off the Charts: Your Favorite 5 Charts
https://blogs.imf.org/2017/08/28/off-the-charts-your-favorite-5-charts/

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By IMFBlog

August 28, 2017

(photo: iStock by Getty Images).

Much as sailors use nautical charts to determine their location at sea, economists use charts to show who we are, where we are, and where we might be going.

In the Spring, we began our Chart of the Week feature on the blog: snapshots in time and over time of how economies work to help illuminate the uncharted waters ahead for the global economy.

Here are our top five charts of the week, based on readership:

Chart of the Week: FDI in Financial Centers

Chart of the Week: Electric Takeover in Transportation

 

 Chart of the Week: Brexit and The City

 

Chart of the Week: Iceland's Tourism Eruption

 

Chart of the Week: The Cost of Asia's Aging