Free exchange: The price of getting back to work

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The triumph of Vladimir Putin

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Free exchange

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Inflation may help determine how fast labour markets recover from recession

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IT IS something of a mystery, and not as happy a one as it sounds. In both America and Britain, the unemployment rate has fallen far faster over the past year than the tepid recoveries in both countries seem to justify. The pace of the decline has already caused difficulties for Mark Carney, the newish governor of the Bank of England, and will soon do so for Janet Yellen, who on February 1st takes over as head of America’s Federal Reserve. Both central banks gave “forward guidance” about when they might consider raising interest rates tied to levels of unemployment that will now be reached much sooner than either expected. Understanding the surprisingly quick fall and responding to it appropriately may be the pivotal task of the two central bankers’ tenure.

On the face of things, …

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European economy guide: Taking Europe’s pulse

Our interactive overview of European GDP, debt and jobs

Europe’s economies

CurrencyEconomyGDP per personUnemploymentYouth unemploymentDebtPublic debtBudget balancePrimary balanceGrowthLatest GDP change2013 GDP forecast2014 GDP forecast

Source: The Economist

Source: Eurostat

Source: Eurostat

*15- to 24-year-olds

Source: Eurostat

Source: European Commission

Source: European Commission

…

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Labour markets: Churnalism

THE world of journalism has been in a constant state of flux since early in the internet era. In the past year, however, there has been a new and intense eruption of activity. A series of name-brand media stars have been given or have gone off to create their own platforms. Nate Silver, the once-independent statistician-blogger who was retained by the New York Times for coverage of the 2012 election, left that venerable publication to launch a site under the ESPN-ABC umbrella. The Times moved to fill the vacuum left by Mr Silver with an internal venture led by David Leonhardt, previously an economics journalist and Washington bureau chief for the paper. Just last week, the media world was stunned to learn that Ezra Klein, founder of the Washington Post’s influential Wonkblog, would be leaving that paper to launch his own media venture.These moves have prompted a broad conversation about the economics of the journalism business in this new media world. I don’t have much to add to that conversation, not least because it is very early days and the business models aren’t entirely clear. But there is another aspect of this mini-revolution that does deserve more discussion.Each of these ventures has generated its own labour demand; Mr Klein’s new site has already attracted Melissa Bell and Dylan Matthews away from the Washington Post and economics writer Matthew …

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Free exchange: Risk off

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China loses its allure

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Why some people are more cautious with their finances than others

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RISK has always had a bit of an image problem. It is associated in the popular mind with gamblers, skydivers and, more recently, the overpaid bankers who crippled the global economy. Yet long-term economic growth would be impossible without people willing to wager all they have by starting a business, expanding an existing one or trying to invent a better mousetrap. Such risk-taking has been disturbingly scarce in America of late: the number of self-employed workers, job-creation at start-ups and the sums invested in businesses have been low.
Though changing appetites for risk are central to booms and busts, economists have found it hard to explain their determinants. Instead, they tend to cite John Maynard Keynes’s catchy but uncrunchy talk of “animal spirits”. Recent advances in behavioural …

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Labour markets: A crazy explanation for what is happening to workers

TODAY Britain’s Office of National Statistics released a new set of labour-market statistics. The numbers reinforce that what has become known as Britain’s “productivity puzzle” has not gone away. The economy added roughly 450,000 new jobs in the year to November of last year, sending employment to a new all-time high. But output has yet to recover its pre-crisis level. Correspondingly, output per hour—productivity—is below the pre-recession level and actually ticked down from the second quarter of last year to the third.Britain’s workers are ever less productive, and firms are snapping up ever more of them. That could only make sense in a world of falling wages. Nominal wages have grown steadily over the last decade, at a pace between 1-2% per year. But prices have risen much faster, leading to a steady erosion in real pay.In a 2012 paper Bill Martin and Robert Rowthorn argued that falling real wages are the critical detail—the key to unlocking this puzzle. They suggest that wage moderation led directly to the labour-intensive nature of the British recovery in three ways. First, it kept firm income higher than it would have been, preventing some firms from going out of business. Second, it made labour hoarding more attractive. And third, at some margin, it led to some substitution of labour for capital in production, or some displacement of production from …

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Secular stagnation: The second best solution

WITH a string of talks and op-ed columns, Larry Summers has revived discussion in the “secular stagnation” hypothesis. Income has become concentrated in the hands of groups, like reserve-accumulating foreign governments and the rich, with low propensities to consume, the thinking goes. That has generated excess saving and pushed down real interest rates until they are substantially negative at many durations. That, in turn, has made life very difficult for central banks, which have struggled to stoke up adequate demand with nominal interest rates wedged up against zero.Mr Summers identifies three broad solutions to the problem. One is to do nothing, or not much anyway, on the demand side. This is not a particularly attractive solution, as it implies a very long slump in which incomes are lower than they need to be, unemployment is higher, and the economy’s potential is eroding. Another is to raise inflation expectations in order to reduce real, or inflation-adjusted, interest rates until demand is where we’d like it to be. This policy is not without its downsides, says Mr Summers. In an interview with Ezra Klein, he noted:First, there are the questions of just how productive will be the investments that are not attractive at a negative real rate but only become attractive at a more negative real rate, and how much incremental investment will be stimulated. Most observers …

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In Appalachia, Poverty Is In The Eye Of The Beholder

Eastern Kentucky is a place known as the poster child of the War on Poverty. When NPR’s Pam Fessler traveled there to report, she was warned that people would be reluctant to talk because they were tired of being depicted as poor. Instead, she got an earful.

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The week ahead: January 17th 2014: Gatherings in Switzerland

GENEVA hosts the latest attempt to solve the Syria crisis, EU accession talks with Serbia begin, California governor Jerry Brown addresses the state of his state and the Davos World Economic Forum kicks off

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Deflation in the euro zone: The euro zone needs a history lesson

Rounding off the contributions to our round-table discussion of the risk of deflation in Europe is Kevin O’Rourke, professor of economic history at Oxford University.

In a recent column in the Financial Times, Wolfgang Münchau discussed the set of choices that appear, as of now, to have been made by Europe’s policy-making elite. These are: to preclude any form of debt mutualisation; to have individual debtor countries pay off their existing debts; and to have them adjust macroeconomically via austerity and deflation. In Münchau’s words, “If you look at this with a knowledge of economic history, this is an awe-inspiring set of choices, to put it mildly.” He’s right.When economic historians teach the history of international monetary relations they often start with the classical gold standard of the pre-1914 period. Under this system, periodic deflation was a feature, not a bug. Deficit countries were supposed to adjust by following the “rules of the game”, raising interest rates and reducing the money supply, thus lowering price levels, depreciating real exchange rates, and improving trade balances. (Alternatively, Humean gold flows could have sparked the same adjustment process automatically.) If such an adjustment mechanism was suitable to any period, it was the decades before World War I. Relatively flexible wages and prices meant that deflation was more feasible …

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Bank capital: A worrying wobble

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Coming to an office near you

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Bank capital

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Bank regulators should not have weakened rules that limit leverage

IN THE immediate aftermath of the financial crisis, politicians and regulators from around the world stood shoulder to shoulder and promised to tame the excesses in the banking system that had brought the global economy to its knees. Among the first of their proposed reforms was to have more loss-absorbing capital in banks to reduce the risks of future taxpayer-funded bail-outs. How quickly memories fade.
On January 12th the Basel committee, a club of central bankers and supervisors, released new rules that are weaker than their previous proposals (see article). The technical tweaks may let big banks—mostly European ones—off the hook of having to raise as much as €70 billion ($96 billion) in capital. Although banks will still have to meet a leverage target of at least 3%, the formula for calculating it has been softened. The next day brought a surge in the share prices of big banks, which had …

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