Krugman Baltic Bashing 2.0

It would seem that after a tweeter row with Estonian President, Krugman hasn’t had enough fun senselessly putting down Baltic States. In his new blog post, Krugman turns against Latvia in his anti-austerity tirades. While he initially criticized pro-austerity commentators for ‘lionizing’ Estonia as a standard bearer for successful austerity policies, he know seems to believe that Latvia was the lionized example for austerity. Leaving aside Krugman’s inability to decide which austerity policy orientated government is easiest to criticize let’s take a closer look at his accusations.

Krugman quotes Eurostat numbers for real GDP levels, showing that Latvia has had the deepest contraction of the Baltic States, Ireland and Iceland, also showing Latvia having the smallest recovery of pre-crisis level GDP. A few notes must be added to his demonstration. Firstly, both Ireland and Iceland received EU/IMF bailouts to stabilize GDP and also e currency’s value in Iceland’s case, none of the Baltic States received such external inflow of capital to buttress government spending.

Furthermore, both Latvia and Lithuania racked in relatively big budget deficits during the crisis in comparison to Estonia. Why attack the Baltics states least keen on austerity for their austerity policies, why stop talking about Estonia, the real standard bearer for fiscal hawkishness. Again leaving aside this Krugmanesque inconsistency let us look at Baltic States in Comparison to other Euro economies many of which signed on to the G20 pledge for stimulus spending during the crisis.

 Here, seasonably and daily adjusted quarterly per capita real GDP numbers from Eurostat (same source as P. Krugman) tell a different story. This chart shows that while the recession was deep in the Baltic States the recovery was strong, leading all Baltic Nations to have caught to their pre crisis levels (per capita of course) and to the EU as a whole. While Germany, arguably the strongest economy in Europe is above its pre crisis level, there should be no denying that the Ba;tic States chose to bite the bullet early but recover quickly. One wonders if so much can be said for the PIIGS. So without a European bailout Latvia and its Baltic colleagues don’t seem to be doing all that bad. As has been argued before Krugman fails to take into consideration decline population into his thinking when using national GDP numbers. A guess can also be ventured that depending on what time series he chooses to use (constant vs market prices) numbers may vary substantially when evaluating economic performance, no nuancing words from him on that subject.

In any case to better understand recovery dynamics between nations attention must be paid to the depth of contraction as well as the magnitude of recovery. The above chart shows the ratio of real per capita GDP recovery to real per capita GDP contraction. With an EU average a smudge over 1, one can see that the strength of the recovery has been stronger in the Baltic States than in most of Europe. Only the Norther nations of Germany, Austria, Finland, Luxembourg and a few others have been stronger.

So how to explain the difference between austerity in the south and in the Baltic region. The most obvious answer is that states that don’t rely heavily on Government spending during the good times stand to loose less from tight fiscal policy in the bad times. Ireland and Spain do of course buck that trend but the conjecture of their recessions were different in nature than in most of Europe. 

Again it must be repeated that much of the superficial weakness in the Baltic States must be attributed to Europe in general and the rest of the sluggish growth in the World. As export dependent nations they should not be expected to outgrow other regions when there is only week growth in consumption outside their borders. There is however much hope for the Baltic tigers future prospects. As export dependent nations who have refused to transition to internal consumption driven economies, they remain leveraged to an eventual uptick in World growth and are less dependent on foreign capital flows to pay for their growth.

Small open economies the World over should learn from the Baltic experiment that is unfolding and look forward to the next chapter that will surely put stubbornly uncompetitive economies to shame. Let’s hope Krugman can remember his own writings when that happens, so that the rest of us can enjoy his efforts at keeping a straight face when attempting to convince us he was right all along.

Is the UN Marxist?

Dr. Flassbeck

I recently stumble upon an interview of Dr. Heiner Flassbeck the Director of  the United Nations Conference on Trade and Development’s department on Globalization and Development Strategies. In that interview he raised two points (at least in the first 5 minutes I forced myself to watch). The first one was that wages were broadly stagnant. The second point was that a struggle was occurring: not between north and south, not between developed and developing but between labor and capital! I’d first like to point out that he did not credit Marx with his assertion (plagiarizing a**). His ”refuses to die” idea was backed up with a chart of logged real wages and productivity from a speech given at the University of Berkeley by Damon Silvers. The chart showed that both variables tracked each other fairly precisely until the 1970’s at which point the growth trend of real wages unperformed that of productivity.

Now if we assume that the un-referenced data is correct and that by productivity it is implied labor productivity and that we are discussing about a chart describing the American labor situation, at face value it would seem that Dr. Flassbeck is right. But before throwing in the towel and replacing all our Bibles with Das Kapital (if you own a Bible), let’s examine the issue a little closer. Using a super standard macroeconomic growth model:

 where α and 1-α are the proportions of capital and labor respectively used to produce GDP (here Y) and with the entrepreneur/employer/firm/corporation/capitalist/slave driver trying to maximize profit through:

  we can derive what actually drives output growth per worker! It turns out it isn’t capital, it isn’t labor, it isn’t the choice of using one over the other it is… drum roll please… technology. So macro 101 tells us that productivity growth in the long run occurs because of improvements in technology. Even a business grad could have told you that. The crux of the problem however is that this very same econ 101 lesson would have told you that labor wage equals the productivity of that labor, like in the first 20 years of the chart.

Everything converges to trend eventually

The thing about this model is that it counts all labor as being the same. Try telling a German worker he’s the same as a Greek one. The real catalyst for the dichotomy resides in globalization, something Flassbeck seems to deny. If instead of calculating the productivity of labor  we calculate the productivity of capital we see that it is dependent on labor. A typewriter doesn’t write scripts without a writer. Let’s say as a publisher you can print 10,000 copies of a good book written by a French philosopher in the 18th century. Let’s say that suddenly an American writer comes along and is willing to be payed a quarter of the Frenchmen’s wage. While the French Voltaire still writes better books (is more productive) he has to convince you that your printing presses will make more money printing his book than say an increasingly popular Jefferson’s (increasingly productive). While for arguments sake the french 18th century writers are better than their american counterparts to not let the latter look like a good bargain the French will have to drop their wage demands. Similarly American workers need to start asking for less even if they are more productive than their Chinese rivals.

The reason for this is that we cannot look at the productivity of labor and wages in a closed circuit but rather in a World wide context. So while I’m sure the communist chart is correct in it’s assertion that industrialized wages aren’t keeping up with its equivalent productivity, I’m quite certain that on a global basis the gap between the real wage and labor productivity is shrinking. Just to be sure I’ll be crunching some numbers and getting back to you on this after exams.

A Montreal Manifesto

Yesterday I chose to walk home from school. It’s not an entirely short walk, walking from Guy street downtown to Monkland avenue and Girouard street in the Notre-Dame de Grâce neighbourghood will take the common walker an hour to cover the 5 kilometer distance. The walk wasn’t entirely unpleasant from a nationalist economic point of view. Signs of development abounded.

The very beginning of my walk began in the heart of Concordia University’s downtown campus. One is surrounded by the new glimmering Business School building, the slightly aged but just as freshly sophisticated Fine Art’s and Engineering building and the 70’s designed work of horror administrative building, being actively given a contemporary face lift. Walking westwards along Maisonneuve street one eventually reaches just north of the old Seville Theater block. Pausing for a moment I could not help but feel proud of seeing the old decrepit structure vanished, replaced with a massive hole in the ground from which a giant crane was erecting new 10 story condo development. Turning away from the Westmount city hall and walking past the illustrious Selwyn House school for boys I began the St-Antoine street climb. Halfway up the side of Mount Royal, the middle of the island historical mountain overlooking downtown, and peering south down one of Westmount’s steep streets, I caught a glimpse of an army of cranes in the distance.  The next street provided a better view of what is to be one of Montreal’s two Super Hospitals. Half a dozen tall cranes were churning and jostling in the air over the largest construction sight I’d ever laid eyes upon.

Finally reaching my own neighbourghood and the avenue us locals call Monkland Village, looking westwards along Monkland my gaze was met with the sight of not one, not two but three different developments of mixed residential and commercial use. This street which had not seen any change in the last decade, asides from a butchery moving and a store or two closing, was now alive with construction and development. Arriving at my house and picking up the day’s Gazette I hadn’t finished, I read an editorial of a popular and recurring idea in the Montreal media. Montreal is renewing! The editorial listed all the great developments of the city: Two Super Hospitals in the building, extension of the southern belt 30 highway, a new bridge linking Montreal and Laval islands (actually called Isle Jesus), announcement of a Champlain bridge replacement, refurbishing of the Montreal airport and surrounding highway circle, extension of the public transit systems, replacement of the Turcotte interchange, new skyscrapers in the works (none built since 1992) and a great many other examples of urban renewal. However, are these really the mark of a resurgent Montreal?

A few details escaped the description of my homeward walk, so banal they were to the average born and bred Montrealer that I am. The first was that while standing in the middle of Concordia’s campus, staring at its newer features my back was turned to its flagship buildings, the Hall and Library buildings. These buildings are of such a particular ugliness most of us stop looking up as we walk past them. Nor did I pay much attention to the multitude of grey apartment buildings surrounding the campus. It is actually hard not to draw parallels between this part of downtown and Beirut. That resemblance is further accentuated by the massive pot-holes lining the streets ad nauseam, reminding us of Lebanon circa 2006 (apologies to the Lebanese for the hyperbole). Another over looked detail is the neighbourghood hiding in the shadow of the old Seville Theater development, Shaughnessy Village. One of the more depressingly poor and socially ill quarters of town, with its streets strewn with drug users, aboriginal poor and its sad overcrowded women’s shelters. Even Westmount the richest neighbourghood in Montreal as decaying streets filled with cracks and pot-holes.

While the certain media gushes about urban renewal, most journalists and commentators know this to be superficial. Underneath the glimmer and hope of new construction, lays a deep corruption. Montreal’s construction industry is one of the most corrupt in the western world and openly so. Foreigners reading our press may be confused as to whether they are reading a Canadian daily or a southern Italian one on most days. Most city procurement or maintenance contracts are rigged. These problems are small in comparison to the larger issues facing the city. While once the most populous city in Canada and first to reach a million inhabitants, Montreal lost that title to Toronto in 1976. While Montreal used to be a commercially imperial city second in clout only to London in all of the British Empire, Montreal long ago relinquished those epithets to the likes of Toronto, Hong-Kong, Singapore, Sydney, Mumbai and Johannesburg. Montreal also used to be home to some of the greatest corporations in Canada, many of whom have left. Adding insult to injury some of the great names that left were named after the city: Bank of Montreal, The Sun Insurance Company of Montreal.

Although Montreal has been the subject of some renaissance of activity, undeniably the city endures a stagnant state of affairs when compared to thriving cities like Toronto, Vancouver or Calgary. The causes of Montreal’s ‘greatness’ demise are all documented and obvious. The advent of a separatist and anglophobic  mouvement in Quebec’s political life are the main culprit. Separatists have always believed that Quebec and Montreal by extension were great because they are francophone. Nothing could be further from the truth. What makes Montreal great is its bilingual and bi-cultural identities (now more multicultural than ever). The attempts by ethnocentrical separatists to preserve french or more exactly to enhance Montreal’s french heritage has been an attack on Montreal’s very soul. This situation has arisen because governments in Quebec are formed by constituencies outside of Montreal in its francophone heartland. The government’s vicious cultural and economic attacks on the city have been further compounded because the seat of governmental power resides outside of Montreal, where ignorance about the true strengths of the city are rife.

Montrealers need to wake up and understand that what plagues their fair city is the city’s lack of sovereignty. Quebeckers once led political and constitutional battles to become as they would say: “Maitre chez nous!”. Or master in their own house. It is high time Montreal embarked on such a quest for economic and cultural independence. As an anglophone friend of mine was telling me the other day, she is tired of our province’s petty and destructive language wars and she is considering moving to another province for better work and more ‘political peace of mind’. What I heard in her lament was disheartening to say the least. Many Montrealers feel the same, they are tired of having people in Saguenay or in Gaspésie telling them what language they need to work in and what culture they should be instilling in their children. Enough with the outside influence already.

What Montreal needs is to become a Chartered City. Like Hong-Kong being freed from China to pursue its own destiny Montreal needs to be free from the cultural dictatorship that strangles it. Montreal needs to be free from the petty politics of separation. Montreal needs to be free to work and grow in the language that bests suits its aspiration to rival some of the Worlds great metropolises. Montreal needs to free itself from the pervasive anti-business, anti-wealth mentality that corrupts this province. Montreal needs to stop waiting for a distant government to prosecute the criminals that daily rape the islands treasury and tax payers, she must do it herself. Montreal needs to be free from the ineptitude of its provincial political duopoly.

To move forward and become the great metropolis it was destined to become Montreal needs to take back the assets that make it great away from those that would have them be chains. French should have made Montreal greater than just another anglophone city in North America, instead, it has become its greatest drag, a secular dogma weighting it down and prohibiting enlightenment. Montreal must become a “Bill 101 free zone”, it must become a separatist free zone, it must invite the legions of hard working industrious anglos to come back to their native island. It must demand that all infrastructure building and conceptualizing be repatriated away from Quebec City. It must firmly but curtly ask the rest of Quebec to butt out of its affairs. Montreal needs to start thinking of itself as an aspiring city of Lights. Hope and ambition are the greatest fuels for change and progress. Let us together reclaim the spirit that made Montreal the center of the Universe in 1967.

Montrealers could not tell you why they believe their city is the greatest. Montrealers cannot describe why they have faith Montreal will some day erupt into one of the greatest urban cores of the World.  Montrealers wont even tell you about this faith so crazy the notion must seem to outsiders. It is time for us to grab our pride by the buckles, raise our heads and forge ahead to where our true destiny resides. Our mission should be: to never again let an off-islander impose their timidity or apathy on us and to never let one of us leave because the pastures are greening faster on the other side.