Tuesday, March 31, 2015

Is Finland's Economy Suffering From Secular Stagnation?

"After the Great Depression, secular stagnation turned out to be a figment of economists’ imaginations........it is still too soon to tell if this will also be the case after the Great Recession. However, the risks of secular stagnation are much greater in depressed Eurozone economies than in the US, due to less favourable demographics, lower productivity growth, the burden of fiscal consolidation, and the ECB’s strict focus on low inflation."
Nick Crafts - Secular stagnation: US hypochondria, European disease? - In Secular Stagnation: Facts, Causes and Cures, Edited by Coen Teulings and Richard Baldwin
 Finland's economy has been attracting a lot of interest of late. And not for the right reasons, unfortunately. The economy in a country previously renowned for being highly placed in the World Bank's "Ease of Doing Business Index" has just contracted for the third consecutive year. Once famous for being a symbol of "ultra competitiveness" (it came number 4 in the latest edition of the WEF Global Competitiveness Index) the country is now fast becoming the flagship example of another, less commendable, phenomenon: secular stagnation.The origins of the theory of secular stagnation go back to the US economist Alvin Hansen (see here) who first used the expression in the 1930s. The hallmark of secular stagnation, he said, was a series of sick "recoveries which die in their infancy and depressions which feed on themselves and leave a hard and seemingly immovable core of unemployment." This seems to fit the Finish case to a T.

After the global crisis the economy seemed to recover, but after the second Euro Area recession the country's economy hasn't been able to lift its head again.

In fact GDP still languishes about 5% below the 2008 peak.

Unemployment, on the other hand, has remained stubbornly high, and - at 9.1% - has recently passed just above the crisis peak.

Hansen surmised that the big driver of US economic growth prior to the 1930s had been population growth. Given the fact that he expected US population to fall he, not unrealistically, came to the conclusion that "We are thus rapidly entering a world in which we must fall back upon a more rapid advance of technology than in the past if we are to find private investment opportunities adequate to maintain full employment. ..."

He thought technological advance could stimulate investment to fill a gap left by the lack of natural investment growth. Following Adam Smith he recognized that the "rate of investment" is conditioned by the extent of the market (or rather the rate of expansion of the "extent of the market"), but if population was falling rather than rising then the incentive to invest like before wouldn't be there, since the market wouldn't be increasing in "extent". So technology and innovation became more, not less important, just like the situation we face now.

Hansen was wrong about the demographic dynamics - he didn't foresee the post war baby boom, but then neither did the demographers he relied on. (For more on this see Richard Easterlin,"The American Baby Boomin Historical Perspective", 1962). But if we look at the situation we face today there is a lot less uncertainty about the population outlook over the next 10 to 20 years, especially when it comes to working age population dynamics. From the experience in Japan it seems it is working age population and not total population that really matters in terms of macroeconomic effects. Declining inflation/deflation correlates much more strongly with working age population dynamics than it does with monetary policy.(See Bank of Japan former Governor Masaaki Shirakawa here).

In fact, Finland's working age population peaked during 2010, and it has since been declining rapidly. So it fits the picture described by Hansen admirably.

And indeed the Finnish economy is now starting to flirt with deflation.

Loss Of Competitiveness.
"Finland’s economy has fallen behind its Nordic neighbors and euro peers, in what Prime Minister Alexander Stubb has called a “lost decade.” Pay increases are on hold after a wage boom during Nokia’s glory days opened up a salary gap of about 20 percent with the country’s main trading partners, Sweden and Germany. “We need to bridge the cost gap with our competition,” said Jyri Hakamies, who heads the Confederation of Finnish Industries, the main business group. “That will take years. At the same time, labor agreements must be made more flexible and productivity must improve to kick-start economic growth and create jobs”"
Bloomberg News: Nokia-Fueled Boom Years Leave Finns With Stagnant Pay
In 2007, when the countries export-led technology industry was booming workers representatives hammered out an 8.5 percent wage increase that was implemented over two years. That deal led to an upward spiral where other industries and then the public sector pushed for ever higher compensation. As a result of agreements like these unit labor costs have been growing sharply for more than a decade. They diverged from levels seen in Sweden and Germany in 2007, just as the woes of Nokia and the paper industry intensified and exports slumped.

Since 2008, Finland has lost competitiveness against all EU countries as its wage costs have rocketed. As the unit labour costs of Ireland and Spain have fallen, Finland’s have increased by about 20 per cent.  Productivity has suffered correspondingly. The Conference Board calculate that from 2007 to 2012 Finland’s unit labour costs in manufacturing rose by 6.3 per cent a year, faster than any of the countries surveyed except Australia and Japan. At the same time, Finland’s productivity fell by 3.9 per cent a year, far more than in any other country. Richard Milne (in an FT Op-Ed) produces the following chart to illustrate the situation.

The chart is slightly misleading, illustrating just one more time how there is no such thing as an economic "fact", since he has rebased the index to 2007, just when Spanish unemployment started to rise much more rapidly than measured GDP fell, provoking a substantial downward adjustment in ULCs.  So Spanish and Finnish ULCs have seriously parted company, but not by as much as the chart suggests, since in 2007 Spain's ULCs had grown to absurdly high levels.

Just to illustrate how in a pre-scientific, ideologically divided discipline like economics there are no (consenual) facts, only interpretations, I have rebased the ULC data to 2000 in the chart below. This still shows how serious the Finnish situation is, but puts the Spanish development in a rather different light. Finland wasn't THAT uncompetitive until 2011.

In fact Finland has transited from being a country with a significant goods trade surplus, to being one with a structural deficit.

Even the current account balance has now turned negative.

And the country's Net International Investment Position is also turning negative. This is an especially worrying phenomenon in the case of a country with a rapidly rising elderly dependent population, as income from external investments can help maintain living and welfare standards. Net negative income payments will only leave less money available for social policies.

 Housing and Consumption Boom

As in earlier similar cases, the loss of competitiveness and export prowess was compensated for in the short run by a modest consumption and housing boom. House prices rose sharply - possibly helped by the availability of low interest mortgages driven by ECB monetary policy - from 2008 to 2013. But now prices have begun to stagnate, and even decline slightly.

The number of building permits issued has slumped.

While the rate of demand for new mortgages has been steadily dropping off.

What To Do About The Situation?

The whole topic of secular stagnation is a highly controversial one at the present time. In the first place there is no general agreement that this is what is affecting a country like Finland. Those, like Prime Minister Alexander Stubb would argue that it is simply a question of the country having lived beyond its means, and hence lost competitiveness. Thus, in his opinion, what it now needs is a lengthy process of internal devaluation and austerity.  Curiously - in a country that was busy recommending sharp austerity to others - he blames rising debt and lax fiscal policies for the situation. Finland's economy could flat-line through the 2020s, he suggests,  if politicians fail to curb taxes and government debt.
The government debt of Finland has almost doubled since 2008, from 28 percent of gross domestic product to 48 percent at the end of 2014. Taxes have risen 3 percentage points over the same period as different administrations tried to preserve benefits without resorting to deep cuts. The jobless rate this year will rise slightly to over 9.1 percent, the government estimates. GDP languishes below its 2008 level - Bloomberg News.
Certainly, having not adequately analyzed what was happening, the country has been running a series of fiscal deficits which continued beyond the crisis as the momentum provided by the housing boom has waned.

Naturally, with no growth and low inflation the government debt level has been rising rapidly.The level is still low - the IMF forecast it will hit the 60% of GDP EU limit this year - but if it continues rising at this rate it won't stay low for long.

Another hypothesis could be that of a balance sheet recession, but with government debt under 60% of GDP, and total private sector debt only around 100% GDP, this hardly seems plausible. Neither, for the same reason, does the idea that the country is simply trapped in a liquidity trap.

So, what do you do about the problem of secular stagnation, if that is what it is? Again here there is divergence of opinion. Some still seek to treat the phenomenon as if it were a variant of the liquidity trap issue. Most notably Paul Krugman, who continues to hope that massive quantitative easing backed by strong fiscal stimulus will push economies like the Finnish one back onto a healthy path. But if the issue is secular stagnation, and the root is population ageing and shrinking, it is hard to see how this can be. The fact that Japan is just about to fall back into deflation 2 years after applying a monumental Quantitative Easing problem seems to endorse the idea that the problem may have no "solution" in the classical sense of the term. In Stagnation Without End, Amen, as if in response to this, Krugman contemplates the possibility that the natural rate of interest might be permanently negative, and concludes:

"I need to work a lot more on the mechanics of this paper; I’m wondering in particular whether there is a possibility of sustaining the economy with permanent fiscal expansion."

At first sight the idea of permanent stimulus seems weird, especially given the fact that it won't stimulate (in the normal sense) and also due to the longer term debt implications. But then, the possibility exists that secular stagnation is associated with constant deflation, in which case the central bank could print money for an extended period of time without causing inflation. I explore this possibility in my piece EuroGroup - Money For Nothing And Your Debt For Free?

Leaving the Euro - which I think no one is suggesting - wouldn't be an advantage, since apart from losing the firepower of a large central bank for the debt scenario, the country would be unlikely to achieve meaningful devaluation. All the other Scandinavian countries are currently having to fight hard to avoid revaluation - largely due to being neighbours of the ECB - as I explain in my post on negative interest rates. The old debate about having monetary policy sovereignty is a bit out of date, especially at a time when even Janet Yellen is hesisitating to raise rates due to concerns about the currency impact of ECB action. How much more would a small open economy like Finland be at risk?

Is There A Temporary "Free Lunch"

Nothing ever comes entirely free, and one of the issues which arises with permanent QE is that it may be applied only at the cost of generating bubble type problems elsewhere, and issue which I look at in Secular Stagnation - On Bubble Business Bound. But developed economies are in a bind, and they do need to find some path to move forward along.

Larry Summers - who was the first to use the expression secular stagnation in the current context - advocates infrastructural spending to overcome the investment shortfall, but I'm still not sure whether he recognises that this spending would need to become permanent, so we still end up with mounting debt. The Catalan economist Jordi Galí makes a similar proposal to the one Summers proposes, but again with a limited stimulus objective. However in one sense he does go farther. In "Thinking the unthinkable: The effects of a money-financed fiscal stimulus" he argues that the proposals he advances "contrast with the experience with quantitative easing and other unconventional monetary policies, which do not affect aggregate demand directly and which, as a result, have failed to jumpstart the depressed economies of many countries, especially in the Eurozone."

He goes on to say, "An additional advantage of a money-financed fiscal stimulus, particularly relevant for a monetary union, is that the associated increase in government purchases may be targeted at the regions with higher unemployment and lower inflation (or higher risk of persistent deflation)."

At the end of the day, only two things can be said with a fair degree of certainty: short term fiscal austerity won't make any significant improvement to Finland's situation, and it could help make things worse (this whole discourse is based on a misunderstanding about what the problem is) while, on the other hand, what short term stimulus won't do is stimulate.

Structural reforms - aimed to increase labour market participation rates, and extend working lives - can help. So can measures to improve the quality of education, and the effectiveness of investment into new technologies. But if we look at Japan, even these offer no simple panacea.

Finnish society, like many other European ones, is in the throes of a major transition. More debate needs to be held on what to do to facilitate the transition, and in the meantime deficit spending to make investments in future productivity improvements seems not to be a bad idea. Running deficits in order not to change, in contrast, would be.

Thursday, March 26, 2015

On Jollibee, the Philippines, and diaspora economics

Over on my blog this evening, I noted that Philippines I based fast food chain Jollibee was set to open its first Canadian location later this year in Toronto. Apparently part of the chain's plans for global exchange expansion, with more locations slated to open up in the United States, Europe, Japan, and the Middle East, the Toronto restaurant is being created as part of a diaspora events red strategy. instead of competing head-on with established chains, for the foreseeable future Jollibee in Canada--and elsewhere?--will be targeting communities with larger Filipino populations. Already familiar with the chain, the thinking seems to be that these communities will hopefully serve as the base for future growth.

This strategy makes sense to me. Is Jollibee's expansion globally based on a similar strategy? If so, I wonder if a South Korea with its own rapidly growing ties with the Philippines might also be targeted. One strategy common to many immigrant groups around the world, as they grow in number and start to become business owners s, is to specialize in food. To the best of my knowledge, Jollibee is unique in being a fast food chain. Are there comparable cases elsewhere in the world that I am missing? I am quite curious. I also wonder if, given likely future growth in Filipino-originating communities around the world, Jollibee might be a good investment.

Wednesday, March 25, 2015

Two news articles on the demographic exception that is France

Tonight I thought I'd share two links to English-language articles taking a look at the demographic exception that is France, specifically to a period TFR now somewhat higher than the United States'.

The first is Noah Smith's Bloomberg View article "Fixing America's Baby Bust". In this article, the United States is contrasted negatively with France.

What is France’s secret sauce? It helps to think about the reasons that it’s so hard to raise a family in a developed country. Raising a kid costs huge amounts of money. First of all, you probably have to get a bigger house. Food and transportation are big expenses. Health care, including extras like braces, takes a big bite. And then there’s college, which is becoming out of reach for more and more families.

But the biggest cost of raising a child may simply be time. Time that you spend taking care of the kids is time that you don’t spend at work earning money. In the ideal situation, both parents would have flexible work situations, and both would take time off to share child-care duties. Unfortunately, most of us don’t live that dream. Many have rigid work schedules, and often put in many extra hours at home or at the office -- Americans work longer hours than almost anyone in the developed world. And many are single parents. What that means is that a lot of American parents are forced to make an all-or-nothing choice between the workplace and child care.

The demanding U.S. workplace may also be preventing women from fully joining the workforce. French women don’t just have more babies than American women, they also are more likely to get a job. The U.S., which was a leader in female labor force participation in the 1990s, has fallen behind. These days, even Japanese women are more likely to work than their American counterparts.

The second, longer article is over at The Guardian, Anne Chemin's "France’s baby boom secret: get women into work and ditch rigid family norms". Drawing heavily on interviewers with French demographers, it makes the argument that polities and cultures which exhibit greater flexibility around the idea of what a family could be are likely to see greater rates of family formation and reproduction than their more rigid counterparts.

[T]here is nothing mysterious about the approach that is working in both France and Scandinavia. It combines the idea of a modern family based on gender equality and powerful government policies. “Nowadays, both ingredients are needed to sustain the population,” Lesthaeghe asserts. “At first sight it seems a simple recipe, but it’s far from easy to put into practice: it takes a lot of time to design and establish a new family model.”

There is nothing straightforward or natural about “the family”. It is a very complex world based on social norms, what the American sociologist Ronald Rindfuss calls the “family package”. “In Japan, for instance, this package involves many constraints,” says Ined demographer Laurent Toulemon. “A woman entering into a relationship must also accept marriage, obey her husband, have a child, stop working after it is born and make room for her ageing in-laws. It’s a case of all or nothing. In France the package is more flexible: one doesn’t have to get married or have children. Norms are more open and families more diverse.”

Most countries in southern Europe are based on something akin to the Japanese package, with fairly rigid family norms in Italy, Spain, Portugal, Cyprus, Malta and Greece. There is social pressure on women not to work while their children are still young, just as it is ill-thought of to live with someone or have a baby outside wedlock. In all these countries the proportion of births outside marriage is below 30%, whereas in France, Sweden and Norway it exceeds 50%. In Japan the traditional family package clearly has a dramatic impact on fertility, with fewer than 1.4 births per woman.

The picture is very different in Scandinavia and France. “In these countries the family norm is much more flexible, with late marriages, reconstituted families, single parents, much more frequent births outside marriage and divorces than further south,” Toulemon adds. “People are far less concerned about the outlook for the family [as an institution].” The positive impact of this open-ended approach to families on fertility is borne out by the statistics, at more than 1.8 children per woman in Sweden, Norway, Finland and France.

The principle of gender equality and the necessary corollary of women being free to work are the key factors in this family model that emerged at the end of the 20th century. Yet in the 1960s-70s advocates of traditional family values claimed that the birthrate would be the first thing to suffer from this trend. Fifty years on it seems they were mistaken: fertility in Europe is higher in countries where women go out to work, lower in those where they generally stay at home. “Women’s freedom of decision is essential to this system,” Toulemon asserts.

The underlying theme of both of these articles is the question of whether or not what we might call the Franco-Nordic model can be copied easily, to other European countries, to high-income East Asia (Chemin specifically mentions Japan and South Korea), and beyond. An additional, interesting, question is whether or not this would make a difference. Even if Germany did switch tomorrow to the high-fertility French model, there would still be much demographic momentum tending towards poulation decline needing to be overcome. Thoughts?

Tuesday, March 24, 2015

On the case of Open Borders

Last Monday at the American libertarian blog The Volokh Conspiracy, Ilya Somin made a post announcing his support for the thesis of the Open Borders NGO that migration should be as unhindered as possible. Linking to various authors' arguments in favour of this thesis, Somin makes the argument that the tendency worldwide should be not to raise barriers to migration but to lower them.

As the Open Borders Manifesto notes, and as I have said in the past, most open borders advocates do not claim that the right to free migration is absolute and always trumps opposing considerations. Just as I reject absolute property rights or absolute freedom of speech, so too I reject absolute rights to free migration. But we do believe there should be a strong presumption in favor of free migration that can only be overcome by strong evidence that restriction is the only way to prevent a harm great enough to outweigh the vast benefits of freedom to natives and migrants alike.

Many of the commenters at the Volokh Conspiracy are unconvinced, arguing that the author underestimates the costs involved. I myself am undecided about the thesis: There do seem to be great potential gains in GDP globally if there was a freer global market in labour alongside other global markets, but I'm also quite aware that there could be significant political costs if these associated migrations ever became problematic.

What do you, readers of Demography Matters, think of the argument?

Wednesday, March 18, 2015

Some St. Patrick's Day notes on how Irish immigrants became integrated into Toronto

I'm writing this post in the dying minute of St. Patrick's Day. (No, I'm not celebrating today. I save that for the weekend.) I found a few interesting links on the subject of the holiday. I liked this CBC analysis of the extent to which the modern holiday is actually a product of Irish-Americans seeking to consolidate their community and assert their identity in the face of a skeptical majority, or a pair of blog posts observing the notable divergence between Ireland and Irish-Americans on matters of sexual orientation, or a Universe Today post noting the green and red aurorae visible from Alaska complete with photos.

Here in Toronto, St. Patrick's Day is notable, not least as one of the first "ethnic" holidays brought by immigration. I've made two posts here, one in November 2012 and another in March 2013, commenting on modern-day Irish migration to Toronto and to Canada, concentrating on how, among other things, Gaelic football helped migrants find jobs. (This immigration is still going on, incidentally. The Irish Independent notes that Canada is becoming a major destination for migrants.) The origins of Toronto's Irish Catholic community in the catastrophe of the 1840s was described today by blogTO's Chris Bateman.

The vessels that carried roughly a million Irish across the Atlantic were called "coffin ships" for a reason. Hellish conditions that bred typhus, dysentery, and lice, were common. Coupled with a lack of food or water, hundreds died during the six-week crossing. Many were buried at sea or at the quarantine station on Grosse Isle in the St. Lawrence--the first port of call in Canada.

Those that made it Toronto still faced an uphill battle. In 1847, 38,560 Irish--roughly twice the existing population of the city--stepped from ships, many of them sick with deadly typhus, a disease spread by bites from infected lice. The diseas was characterized by a severe fever that, without an effective treatment, frequently resulted in death.

[. . .]

Within five years of the 1847 migration, roughly a quarter of Toronto was Irish Catholic. As Allan Levine writes in his book
Toronto: Biography of a City, the sudden rise of Catholicism resulted in a push back from the city's established Protestant population. Signs reading "No Irish Need Apply" on the outside of businesses were common.

Levine writes that "irrational fears about the power of the pope to usurp Protestantism across the world; highly exaggerated notions that all Irish Catholics were supporters of Fenianism, the early IRA-style anti-British radical militant movement based in the United States ... and the linking of Irish poverty with widely held stereotypes of Irish Catholic social ills and immorality" were also factors in the anti-Irish sentiment of the late 1800s.

George Brown, the founder of the Globe newspaper and the namesake of the modern day college, was also publicly sceptical of Catholicism. "Rome means tyranny, and has for its mission the subversion of the civil and religious liberty of the masses," he wrote in 1857. At the height of the typhus crisis, Brown's Globe suggested the newcomers would soon "sink down into the sloth to which they had been accustomed at home." Headlines in the paper called them "the curse of the land."

In an article published this weekend in the Toronto Star, Eric Andrew-Gee described in the article "19th-century Toronto Irish immigrants a lesson in upward mobility" how these immigrants, starting with so little and living in the face of strong hostility, ended up becoming a well-integrated--while still distinctive--component of Toronto's community.

It surely helped that the Irish spoke English, allowing them to sidestep the language barrier that would slow the integration of later generations of newcomers.

Physical mobility was another Irish advantage. Corktown and neighbourhoods like it may have served as landing pads for the new immigrants, but they rarely stayed in one place for long.

“By the 1890s, they’re everywhere,” said McGowan, himself descended from famine refugees. “If you went to an American city, there would be these long-standing Irish enclaves. You don’t have that here.” This geographic dispersal helped bring Catholics and Protestants into closer contact, driving mutual understanding and even encouraging intermarriage. “Cupid was probably more important than denomination at a certain point,” McGowan said.

At the same time, immigrants from other parts of the world began trickling into Toronto, loosening the Irish monopoly on the fears and resentments of the WASP majority.

“From the 1880s, Toronto started getting immigrants who were even more scary from the majority perspective,” said Allan Levine, author of Toronto: Biography of a City.

“Number one, Catholic Irish immigration peters out, so there are fewer paddies with cloth caps and accents in the downtown area,” said William Jenkins, a professor of North American Irish history at York University, and himself the proud owner of a lilting Irish accent. “People basically just forget about the Irish.”

In the meantime, the community was working doggedly to improve its lot. Mutual aid societies, church parishes, sports teams, card parties, and temperance leagues created a thick support net for Catholics trying to climb the social ladder or simply to avoid destitution.

“They created their own infrastructure,” said Levine. “They looked after themselves.”

All kinds of lessons can be taken from this particular experience.

Wednesday, March 11, 2015

Why Is Spain's Population Loss An Economic Problem?

"Growth theory was invented to provide a systematic way to talk about and to compare equilibrium paths for the economy. In that task it succeeded reasonably well. In doing so, however, it failed to come to grips adequately with an equally important and interesting problem: the right way to deal with deviations from equilibrium growth……..if one looks at substantial more-than-quarterly departures from equilibrium growth……….. it is impossible to believe that the equilibrium growth path itself is unaffected by the short- to medium-run experience…….So a simultaneous analysis of trend and fluctuations really does involve an integration of long-run and short-run, or equilibrium and disequilibrium. "
Robert Solow, Nobel Acceptance Speech

When the IMF said last year that Spain's unemployment level was unacceptably high, I was pretty critical of the fact that they didn't spell out the consequences of this, or offer any substantial policy alternative. The most obvious impact of this failure to find an alternative is being seen right now, with the emergence of political movements which could well turn the country's two party system completely upside down, and the steady flow of talented young people out of the country in search of work. This blog post will focus on the latter issue, and will argue that the country's participation in a currency union with no possibility of devaluing against main trading partners has the consequence that the country's economic adjustment after a massive housing bubble is being forced to take place through the demographic channel, with serious long term consequences for the economic growth rate and the sustainability of the pension system.

The Price Of Doing Nothing

The social and political risks associated with Spain  having conducted a far from complete economic adjustment are now becoming apparent, but there are also long term economic consequences, ones which may not be very evident at this point. People are often too busy celebrating a short term return to growth to ask themselves the tricky question of where all this is leading.

The most obvious result of having such a high level of unemployment over such a long period of time - Spain's overall rate won't be below 20% before 2017 at the earliest - is that people are steadily leaving the country in search of better opportunities elsewhere. Initially this new development was officially denied, and since there is little policy interest in the topic we still don't have any adequate measure of just how many young educated Spaniards are now working outside their home country.  Anecdotal evidence, however, backs the idea that the number is large and the phenomenon widespread. All too often articles in the popular press are misleading simply because journalists have no better data to work from than anyone else. On the other hand work like this from researchers at the Bank of Spain (Spain: From (massive) immigration to (vast) emigration? - 2013) only serves to illustrate how little we know, especially about movement among Spanish nationals.

On the other hand, when it comes to migration flows among non Spanish nationals we do have a lot better quality information due to the existence of the  the municipal register electronic database. Everyone who wishes to be included in the health system needs  to register with it (whether they are a regular or an irregular immigrant), and non Spanish nationals need to re-register with a certain frequency (so the authorities know if they leave).

More than an economic phenomenon, Spain's property boom was a demographic one. Since births only just exceeded deaths, between 1980 and 2000 Spain's population rose slowly, by just over 2 million people. Then between 2000 and 2009 it suddenly surged by 7 million. This was almost entirely due to immigration, with workers coming to the country from all over the globe attracted by the booming jobs market. Then in 2008 the boom came to an abrupt end, and unemployment went through the roof causing the trend to reverse. Since 2010 more people have left the country every year than have arrived, with the consequence that the population is now falling. Given that in 2015 the statistics office forecast that for the first time deaths will exceed births, it is most likely that this decline will continue and continue.

In fact the overall migration number - a net 251 thousand people emigrated in 2013 according to official data - only tells part of the story. The majority of young Spanish people working abroad are not included in these numbers (unless they have explicitly informed the Spanish authorities they are leaving, and few do this, partly because they do not consider themselves "emigrants"), but just as importantly the net balance masks very large movements in both directions. According to the national statistics office over half a million people (532 thousand to be precise) emigrated from Spain in 2013, while 285 thousand people entered the country as immigrants. So the net migration statistic covers over what are really very large flows.

The number of annual births in Spain has been steadily falling since the mid 1970s. They accelerated again slightly in the first years of this century, partly due to the shadow effect of an earlier boom in the 1970s, and partly because the incoming immigrants had a slightly higher birth rate. Coinciding with the outbreak of the crisis births peaked again in 2008 (after an initial peak in 1976 - ie 32 years later, average age at first childbirth is now just above 30) , and now the statistics office forecast a continuous decline.

The statistics office estimate there were just 2,280 more births than deaths in the first six months of 2014, which suggests that for 2015 as a whole the balance will probably be negative, as it will be in the years to come since the birthrate is around 1.35 children per woman of childbearing age. The drill-down effect means that since every generation is smaller, and there is only a replacement rate of about two thirds, the base of the population pyramid gets smaller and smaller over time.

The current data we have for Spain show the share of the population aged 65+ currently stands at 17% (or something over 7 million people, Instituto Nacional de Estadística-INE, 2008), of whom approximately 25% are aged over eighty. Furthermore, INE projections suggest the over-65s will make up more than 30% of the population by 2050 (almost 13 million people) and the number of over-eighties will exceed 4 million, thus representing more than 30% of the total 65+ population.

International studies have produced even more pessimistic estimates and the United Nations projects that Spain will be the world’s oldest country in 2050, with 40% of its population aged over 60. At the present time the oldest countries in Europe are Germany and Italy, but Spain is catching up fast.

In their most recent long term population projections the national statistics office suggested that Spain's population would fall to 41.6 million by 2052 (a 10% drop over current levels). While the number of over 80s rises sharply the number of people under 15 is forecast to fall to just over 5 million, a drop of about 25%.
But these long term projections only give an us an indication of what might happen given that there could be major changes in trend. Population movements are governed by two factors: the birth/death difference and by net migration. Since we are unlikely to see any substantial movement in the birth rate, migration becomes the critical variable. And what does migration depend on? Evidently the job market. This is why this issue is so important.

At present the rate of outward migration from Spain seems to be slowing as the economy starts to create jobs. But just how stable and sustainable is this trend? This is why the issue of whether or not Spain has taken enough measures to ensure a better longer term growth rate (a growth outlook which moves beyond picking the low lying fruit after the recession) becomes important. In the short term population projections published in November 2013 by the statistics office, Spain's population was forecast to fall by 2.6 million (5.6% of the present population)  over the 2013-2023 decade. The largest population decline was expected to be in the 20 to 49 age group, which was expected to fall by 4.7 million (or 22.7%).

These are dramatic numbers, but it must be emphasized that they are very sensitive to emigration rates. For the moment the improving job market means the outflow numbers (while remaining large) are decreasing, although again it must be emphasized once more that we have very little knowledge about the actual migration rates of young educated Spanish citizens.

Whatever way you look at it this state of affairs is highly undesirable, and raises serious questions about the sustainability into the medium term of Spain's current economic recovery. If the level of unemployment is "unacceptably" high, this is partly because of the damage it will do to Spain's economic outlook in the longer term.

But won't they all come back? This is the answer I get time and time again. Such an outcome is far from guaranteed, even if it is what policymakers implicitly assume. As I am trying to suggest, whether those who are leaving come back or not depends on the state of the Spanish job market, and despite the fact jobs are now being created the size of the problem means the situation on the ground will remain difficult for many, many years to come. Some point to surveys, like the one shown in the chart below carried out by recruitment experts Hays, which show that a large majority of those leaving want to return. But wanting is not the same as being able. Few want to leave their home countries and their families to start a new life in a distant land, but many are now being forced to do so. Most initially don't see themselves as emigrants, but as time passes there is a growing possibility that that is exactly what they will become.

So What Are The Probable Economic Consequences of Doing Nothing?

What matters in Spain is not the fact that the economy is recovering. More important is how it is recovering, and how quickly the jobs market could get back to normal. Otherwise the risk exists that the longer run growth potential could fall even as the unemployment rate remains high.

It is a simple fact that as Spain's working age population falls so will the long term potential growth rate also fall.  And if growth is lower, then new jobs will be less. As can be seen in the diagram below (which illustrates how EU Commission calculates potential growth rates). There are three inputs which matter a) the existing capital stock, b) labour force growth (which is a function of working age population), and productivity.

Now it is clear that as working age population turns negative (which basically happened in Spain around 2012) the dynamic also becomes negative for potential economic growth, and the only real hope of sustaining it in the longer term is via (total factor) productivity growth. But this - the  "oh well, we'll raise productivity" argument - isn't as easy as it seems. The following chart which was produced by Fulcrum research based on Conference Board and IMF data and shows clearly how the trend towards lower productivity growth in developed economies is now decades long. It simply isn't credible to imagine that this trend is going to be turned around at the click of a finger.

So one of the obvious consequences of this population loss is a permanent fall in the long run trend growth rate. This situation is concealed at the moment as the very high unemployment rate means that in the short term an above trend rate of growth is possible, but this favorable situation won't last forever.

Housing Issues

The most obvious area of the economy to be affected by population decline is the housing sector. Spain has a very large stock of empty houses (well over a million, possibly two, between new and second hand), and the rate of home sales while rising is still very low.

During the boom years the fact that a very large "boom" cohort was in the household formation a group and then that a large number of immigrants arrived to set up their homes was a key factor in fueling the boom.

During 2007 474,000 new households were set up. In 2014 the equivalent figure was 117,000. Given this new dynamic it is very difficult to see how the outstanding stock of houses can be sold, how prices can recover, and how new building construction activity can take off again.

And Then, What Happens To Pensions?

Spain's pension system is on the rocks. Before the crisis it was running constant surpluses, but now the trend has reversed, and  it is in constant deficit, and the shortfalls look set to stretch forwards as far as the eye can see. The policy response to this under-financing has been twofold. Under the previous socialist government the funding gap was financed out of the general government deficit, but since the arrival of the PP government  it has been funded by drawing down on the Reserve Fund which is meant to ensure the long term sustainability of the system. This helps the headline fiscal deficit number, but the decline in the Reserve Fund is starting to make a growing number of Spaniards increasingly nervous.

Part of the problem the system is having is simply the result of population ageing: the balance shifts as the number of pensioners rises and the number of contributors for each pensioner falls. Another part is the result of the recent economic crisis (since with so much unemployment less people contribute) while a third contributing factor is the changes in the labour market which mean that young people earn a lot less than those retiring, leading average contributions to fall, while average pensions rise.

Some of the results of this sea change  can be seen in the chart below (sorry about the Spanish, but I think the main points are easily grasped). The number of contributors for each pensioner hit a high of 2.71 in 2007, since then it has been falling and was at 2.25 in 2014. The number of pensioners has risen from 7.6 million in 2007 to 8.4 million in 2014.

The average pension paid is also rising. In February 2015 the total amount paid out by the system in pensions was up 3.1% year on year. But the number of pensioners was only up 1.3%, so the average pension went up by 2.1% due to the fact that the most recent retirees have been earning more than earlier cohorts and are thus entitled to higher pensions. We don't have data on this year's pension system income yet, but at the end of last year it was rising at about 1.5% a year, leaving a sizeable shortfall for the system to cover.

As I said, under the former PSOE  the shortfall was funded out of the general government budget, and possibly 1.5 percentage points of the 9.6% 2011 fiscal deficit were the result of this financing. With the arrival of the PP in government this policy changed, and pension financing moved over to the Reserve Fund.

The attrition has been constant and the Fund is now starting to dwindle. In 2012 7 billion euros were withdrawn from the Fund, in 2013 it was 11.6 billion euros and in 2014 15.3 billion euros (or 1.5% of GDP). If you want to compare apples with apples and pears with pears, you would need to add this 1.5% of GDP to the 5.6% fiscal deficit, giving a 7.1% deficit using the same accounting criteria as 2011. Put another way the deficit has really been reduced from 9.6% to 7.1% in 3 years, hardly dramatic austerity. Instead of paying the pensions gap out of current income the government are using a credit card issued by "future pensions" to keep payments up even though the situation is obviously getting worse, meaning it will be even more difficult to pay current pension levels in the future than it is now.

As a result of all these withdrawals the Reserve Fund - which was established in 2000 and grew via  the surpluses generated in the boom years - has fallen from its 66.8 billion euro peak in 2011 to the current level of 41.6 billion euros. At the moment the government have budgeted for another 8.4 billion euro withdrawal this year, but this number could easily turn out to be larger.  So 2015 should close with around 30 billion euros outstanding - about 3 years more money at the current rate. It is clear that soon after the election changes will have to be made.

There was a pension reform in 2013 which was intended to address the problem making the system self financing. A complicated formula was introduced whose intention was to ensure that more money didn't go out - on a structural basis - than came in. But this was in the era when Spaniards still expected inflation as their economic default setting, so a minimum increase of 0.25% was set. Last December consumer prices were down 1.5% over a year earlier, and as a result the minimum rise was a generous "vote winning"  increase of 1.75% at a time when the system itself was running at a huge loss. Something similar will happen this year, giving at least one part of the explanation as to why retail sales are doing better - in part these increased sales are being paid for with future pensions.

Madrid Fiddling While The Future Disappears Under Its Feet?

In principle, the fact that people are moving around looking farther afield for work is a good thing isn’t it? Simple economic theory suggests it should be. Indeed one of the habitual criticisms made by outside observers about the way in which the Euro currency union operated during the first decade of its existence concerned the absence of labour mobility within the region. Labour mobility as an adjustment mechanism in the face of economic shocks has been a leading topic in the economic literature on currency unions, both in the United States and in Europe. More than 50 years ago, in his seminal paper on optimum currency areas, Robert Mundell stressed the need for high labour and capital mobility as a shock absorber within a currency union: he even went so far as to argue that a high degree of factor mobility, especially labour mobility, is the defining characteristic of an optimum currency area – i.e. one that works well. Thus, a key question when evaluating whether the Eurozone is an optimal currency area has always been: how important is labour mobility as an adjustment mechanism in Europe compared with, say, the United States?

So now that people are finally moving from one Euro Area country to another in search of work the currency union is working better, isn't it?

If only life were so simple. Two issues arise in the case of labour migration within the EU that make the situation different to that of movement from one US state to another. In the first place US states are inside one and the same country. This is important when we come to think about things like unemployment benefits, health systems and pension rights. In the second place US fertility still hovers round about population replacement level (2.1 total fertility rate). In most of the countries on the EU periphery fertility levels are significantly below 1.5 children per woman of childbearing age (Tfr), and have been for decades.

More recent evidence, however, suggests that things are now changing even there with 2011/2012 marking a turning point in migration patterns and population momentum all across the southern rim. The number of newly registered migrants into Germany from Italy and Spain, for example, rose by about 40% between the first half of 2012 and the first half of 2013. The number from Portugal rose by more than 25% over the same period and since then the process has accelerated. Numbers for London and Paris reveal a similar pattern.

Since unemployment in the Euro Area currently ranges from about 5% in Austria and Germany to over 25% in Greece and Spain there is plenty of potential for imbalance adjustment. Half-a-century after Mundell’s original article was published, the most ambitious attempt yet to create a single currency spanning a wide variety of national boundaries is about to see “optimal” labour mobility. But is it really so optimal? Is it as desirable as many assume to correct imbalances between countries through working age population flows rather than through devaluation? Is there any way to evaluate outcomes? Are there hidden costs in doing it in the former rather than the latter way?

As Nobel economist Robert Solow puts it in the quote with which I start this post, it is impossible to believe that the longer term path of an economy is unaffected by the trajectory taken during periods of deviation from trend - whether upwards or downwards. Emigration, and with it negative working age population dynamics, are being promoted by the ongoing labour market crisis in the worst affected countries. The question is just how far the longer term future of these countries is being put at risk by the form in which the adjustment is taking place. In allowing this to happen instead of addressing excessive indebtedness issues, are we simply replacing short term debt defaults with longer term pension and health system ones?

Young people are moving from the weak economies on the periphery to the comparatively stronger ones in the core, or even out of an ever older EU altogether. This has the simple consequence that the fiscal deficit issues in the core are reduced, while pressures on those on the periphery are only liable to get worse as welfare systems become ever less affordable. Meanwhile, more and more young people could follow the lead of Gerard Depardieu and look for somewhere where there isn't such a high fiscal burden, preferably where the elderly dependency ratio isn't shooting up so fast.

What impact are the migration trends within the Euro Area going to have on trend GDP growth and structural budget deficits in the respective member countries in the longer term? These questions are just not being asked.

As often happens in economic matters, solutions to one problem are inadvertently promoting the creation of another. Avoiding radical debt restructuring on the periphery, and going for a "slowly slowly" correction doesn’t necessarily mean that all other things remain equal. The Euro is being held together by allowing unemployment rates to adjust towards a narrower range via population flows.

The question is, is this good news? Obviously in one sense it is, if this is needed to make the Euro work it has to happen. But there is a downside: changes in the political process are lagging well behind developments in other areas, and especially in the migration one. It has been clear since the Euro debt crisis that a common treasury was a necessity for the good functioning of the currency union, that all participants would need to make sacrifices in this regard, yet progress towards this objective has been painfully slow, and full of bitter recrimination. At the end of the day the  migration problem might just the issue that brings this simmering problem right to a head.  Postscript

Many of the above arguments are developed in detail and at greater length in my recent book "Is The Euro Crisis Really Over? - will doing whatever it takes be enough" - on sale in various formats - including Kindle - at Amazon.

Wednesday, March 04, 2015

On the potential demise of the quinquennial census of Australia

The Guardian's Oliver Milman reported last month that the Australian Bureau of Statistics might reduce the frequency of national census-taking. At present, an Australian census is held every five years, the most recent being in 2011. The plan to shift to a ten-year census cycle, with frequent surveys in between censuses to maintain data, is apparently quite controversial, for the same sort of reasons that I recognize in Canada in the debate over the long-form census. I do admit to wondering if a five-year census is practical, but I also admit to envying Australia its thorough data-collection processes.

The compilation of the 2016 census is in doubt, with the Australian Bureau of Statistics (ABS) in talks with the federal government over changes to the mass data collection exercise.

The ABS is understood to favour a shift to taking a full census once every 10 years, rather than every five years, bringing Australia into line with the US and Britain.

In the interim, the ABS would conduct smaller sample surveys on a quarterly basis to provide information on Australia’s demographics.

The ABS’s last census was in 2011, deploying 29,000 people to record the details of people living in Australia.

[. . .]

The ABS is required by an act of parliament to conduct a census every five years, and the results are used to frame various policy and spending decisions, meaning a change in the law would be required to switch to the 10-year model.

The Community and Public Sector Union said a $78m cut to the budget of the ABS over the past two years has resulted in 10% of staff leaving and the remaining workforce deals with “antiquated” computer systems.

“The news that the census might be cut or scaled back is deeply disturbing and will send shockwaves throughout the community,” said a union spokesman, Alistair Waters. “It is the bedrock of much of what the ABS does and it plays a vital role in business and society.

Tuesday, March 03, 2015

"The Tragedy of Canada's Census"

Aarian Marshall's CityLab article does a great job of examining the consequences and the causes of Canada's census mayhem. Reducing the amount of hard data reduces the ability of governent to deal with issues. That might have been the whole point.

Rosana Pellizzari, the medical officer of health of Peterborough, Ontario, knows a thing or two about bad data. The public health office she oversees is charged with running policy-driven health programs and services for the mid-size city and county, population 123,000, which makes it the 33rd largest metro in Canada, if that country's most recent census is to be believed.

Trouble is, she's not sure it can be. In 2010, with little fanfare or preparation, Prime Minister Stephen Harper’s conservative government decided that the next long-form census, completed in Canada every five years, would not be mandatory. As officials told the story, without citing any specific polls, the public had expressed concerns about their privacy when filling out the long-form census, as well as the threat of jail time should they decline to fill it out.

“We were all shocked,” says Marni Cappe, who in 2010 was the president of the Canadian Institute of Planners. “It sent a ripple through the community … They did it on a [June] afternoon when they thought, ‘Who would be paying attention?’”

So in 2011, Statistics Canada, the governmental body responsible for collecting and analyzing all of Canada’s statistics, sent out two versions of the census. The first, a mandatory short-form questionnaire, asked Canadians about their about age, sex, marital status, mother tongue, and the languages spoken at home. The second was the National Household Survey (NHS), a 40-page voluntary survey sent to 30 percent of Canadians. Munir Sheikh, then the head of Statistics Canada, resigned over the change in policy. “I want to take this opportunity to comment on a technical statistical issue which has become the subject of media discussion ... the question of whether a voluntary survey can become a substitute for a mandatory census," he wrote. "It can not.”

Today, four years after Canada’s first voluntary long-form census, and one year away from what looks to be its second, Rosana Pellizzari is still wondering how to deal with the dearth of data. Thirty-six percent of Peterborough residents sent the voluntary survey did not return it, which gave the metro the lowest NHS response rate of all Canadian cities.

Marshall does an excellent job placing this change in its full Canadian political context, and notes the worrisome possibility that it might be imitated in other countries. This is strongly recommended: go read it.