The Great Axis Stagnation

The post-1990 stagnation in Japan has been much discussed, analyzed, and ballyhooed. Yet, comparatively little attention has been given to the other Axis powers, Germany and Italy, which are nearly equally stagnant (Italy more so, Germany slightly less). The reason is that Japan’s stagnation started earlier and then decelerated, while Germany’s and Italy’s started and accelerated later. Let us look at the RGDP/worker of these countries in relation to that in the United States (peak=1):

Screenshot (26)
https://fred.stlouisfed.org/graph/?g=p4W3

Compare this to the same variable in, for example, Sweden:
Screenshot (27)
http://research.stlouisfed.org/fred2/graph/?g=1EMr
Basically, Sweden has little more than an exaggerated version of the U.S. trend. So what is going on in the Axis countries?

Whatever it is, it probably has nothing whatsoever to do with aggregate demand, and probably has to do with anything financial only on a tangential level. Since 1995, the highest rate of inflation among the Axis countries has been in Italy, yet it has had the worst stagnation. By simply glancing at inflation, it is clear that Italy only began to suffer unique aggregate demand problems in April 2013-precisely when Italy’s output per worker bottomed out! Also, as pointed out by Mark Sadowski, a huge (and successful) aggregate demand stimulus effort carried out by the Bank of Japan in 2012-2015 failed to significantly boost the rate of real GDP growth, while it did successfully boost the rate of nominal GDP growth.

Screenshot (28)
http://research.stlouisfed.org/fred2/graph/?g=1EV9

Thus, in Italy, anything that happened before 2013 was an aggregate supply crisis with rough parallels to that in Indonesia in 1997-8, disguised by a single currency combined with relatively tight European Central Bank monetary policy, combined with increasing malinvestment resulting from flawed European integration both before and during the Eurozone depression, as is evident from its falling behind Germany in its RGDP/worker precisely when its currency became pegged to the Euro. Indeed, it is clear that in Italy, hourly compensation has risen faster than productivity since at least 2000.

Speaking of 1997, it’s pretty clear that Japan suffered mightily during the crash, which fairly few people discussing the Japanese stagnation in broad terms have seen fit to mention. Sometimes, Japan’s suffering in 1997 is blamed on the sales tax hike, but this is nonsense, as the 2014 sales tax hike, which was even greater, led to a much, much tinier crash in RGDP per worker. Unlike the German and Italian stagnations, which have been more or less continuous, the Japanese productivity stagnation has taken place in three discrete phases, all coinciding with financial crises: the post-bubble period of 1991-1993, while the Yen was strongly appreciating, the 1997 crisis and aftermath in 1997-1999, when the Yen strongly depreciated, and the deflationary period of the Great Recession, Q4 2008-Q1 2009, when the Yen strongly appreciated. It seems to me that the simplest explanation for Japan’s stagnation is that each great financial crisis Japan suffers through hits its high-productivity industries hardest, leading them to shed jobs and lead Japan’s average productivity to regress behind the U.S. Also, that Japan ended its natural productivity convergence with the U.S. in or around 1990. The natural pricing powers of the free market don’t bring productivity back to U.S. levels in a process of reconvergence due to notorious Japanese protectionism, which keeps the Japanese export-to-GDP ratio smaller than that of the U.K., Palestine, Australia, Mexico, Russia, or the Philippines.

The famous correlations all too many people have in mind:

Screenshot (29)
Screenshot (30)
http://research.stlouisfed.org/fred2/graph/?g=1E1d

are little more than illusions. Japan’s productivity stagnation is not causally linked to its employment stagnation, and its CPI stagnation is not causally linked to its productivity stagnation. Had it had higher inflation, it would not have had higher growth. Had it had higher growth, it would not have had higher inflation. Had it had higher productivity growth, it would not (necessarily) have higher employment. Had it had higher employment growth, it would not (necessarily) have higher productivity.

If it’s Japan’s population size which makes Japan’s stagnation such a disproportionate topic of discussion in the English-speaking world, then I know a country of 124 million people who’s productivity stagnation has been longer (by a decade) and much, much harder than that of Japan, and which is thousands of miles nearer to the U.S., and whose stagnation is much less discussed: Mexico:

Screenshot (31)
Screenshot (32)
Screenshot (33)
Screenshot (34)
http://www.minneapolisfed.org/research/wp/wp69

Click to access MGI_Mexico_Full_report_March_2014.ashx3.pdf

But why does the former Sick Man of Europe and the present Healthy Man of Europe, Germany, have a similar history of GDP/worker rise and stagnation as Italy, only milder? From the data, it seems that Germany has been holding on to manufacturing jobs harder than the United States. My first thought was guessing working hours fell harder in Germany, but that turned out to be precisely the wrong explanation. The idea that Germany’s falling behind the U.S. in output per worker is due to different labor market fates in these countries is contradicted by a lot of the German productivity stagnation taking place before Germany’s labor market sclerosis began to subside in 2005. So my present guess is that Germany has been falling behind the United States due to its failure to move quickly from manufacturing into high-value-added services. Perhaps most of the Axis productivity stagnation can be explained via three factors: over-reliance on high-wage manufacturing, insufficient labor market churn, and an aging, more risk-averse working population.

It now seems time to give some charts of the labor force sizes of the Axis countries, as well as that of the United States:

Screenshot (37)
http://research.stlouisfed.org/fred2/graph/?g=1Erx
Screenshot (38)
http://research.stlouisfed.org/fred2/graph/?g=1Ers
Screenshot (39)
http://research.stlouisfed.org/fred2/graph/?g=1Eu7
Screenshot (40)
http://research.stlouisfed.org/fred2/graph/?g=1FUm

Nothing here to clearly relate to productivity differences. Aw, well.

From these charts, it seems clear that variation in unemployment rates between countries really is mostly a structural issue, not one related to the rate of growth of the size of the labor force.

Fastest Year-To-Year Decline in US Unemployment Since 1984

In the United States, October 2014 had the fastest year-to-year decline in unemployment in over thirty years and the fastest job growth since 2000.

Screenshot (11)
http://research.stlouisfed.org/fred2/graph/?g=1ygT

Screenshot (10)
http://research.stlouisfed.org/fred2/graph/?g=1ygS

Considering the length of the “jobless recovery” in the United States that lasted from October 2009 until the end of the government slimdown in October 2013, this is extraordinary. Of course, as the U.S. gets closer to full employment, employment gains must necessarily slow down.

The Great Stagnation: Signs of the Times

Recently, I viewed Tyler Cowen’s TEDx talk on the post-1973 Great Stagnation in the U.S. (and, therefore, the rest of the First World). I wrote a few sentences on this stagnation in a post Tyler Cowen ended up linking to, thus setting a new record of daily pageviews for this blog. I tried at first to write a post on the causes of this Great Stagnation, but before I could do that, I had to identify the trends of this era. Since I’m more familiar with the country I live in than with countries in which I do not, this post will focus almost exclusively on U.S. trends. It’s not like trends in any other country besides Singapore are significantly better; there is no country with a higher per capita GDP (PPP) than the U.S. that is neither a tax shelter, a gambling island, nor an oil kingdom/oligarchy. This post took me about three days to write.

The post-1973 trends I find relevant to this Great Stagnation are:

*No more military conscription (or its effect on the unemployment statistics) since 1973.
*A rising consumption share of GDP (slowing nondurable goods consumption drove the fall in the consumption share of GDP before 1968/73; you can check).
*Complete and permanent stagnation in U.S. per consumer nondurable consumer goods production, with a very sharp turn in 1973, as well as stagnation in U.S. per consumer durable consumer goods production, with a very sharp turn in 1973, with the exception of significant growth during the 1991-1999 period and the post-Great Recession era.
*No (or hardly any) general stagnation or slowdown in per-manufacturing-worker U.S. manufacturing productivity, at least, as of 2007, as there has been a productivity slowdown since the Great Recession. Some stagnation is evident in the 1973-1981 period, but this was made up for later.
*More gradual stagnation or slowdown (depends on price index; see below) in per consumer nondurable goods consumption, clear slowdown in per consumer services consumption, and per consumer durable goods consumption being almost on (exponential) track, if the PCE durables price index is used. Similar results if you look at U.S. Multifactor Productivity.
*Definite stagnation in per consumer food and energy consumption.
*Falling labor compensation share of GDP (this has accelerated since the Great Recession).
*Average production and nonsupervisory worker compensation falling behind GDP.
*Rising share of production and nonsupervisory workers in the labor market.
*Stagnating government share of employment after a peak in 1975.
*The 1947-1973 boom’s picket fence of equitable earnings growth being replaced by a stepladder of both labor and capital income concentration.
*Black-White income gap slightly narrowing (see above link).
*More slowly growing consumption inequality than earnings inequality.
*Greater divergence between price deflators (CPI starts rising significantly above PCE deflator in 1973; PCE deflator starts rising significantly above nonfarm business output deflator in 1983). Most of this, as a useful table from the BEA points out, is due to the weight effect; that is, the CPI gives more weight to goods and services with greater price increases than the PCE price index.
*Stagnating per-worker total carbon dioxide emissions in the U.S. (since 1973) along with stagnating per capita energy consumption (since 1979 and especially since 1999).
*Stagnating worldwide per capita oil consumption (since 1979).
*Growing immigrant share of labor force.
*Declining unionized share of labor force since peak in 1954.
*Increased imports (with stagnation after mid-2008).
*Growing financialization of economy (since 1979), with hourly compensation of production&nonsupervisory workers in finance growing faster than those of production&nonsupervisory workers in any other sector.
*Booming stock market (since 1979; after a bearish stock market between 1973 and 1978), with the exception of the 2000-2003 and 2007-9 stock market deflations. Great divergence between DJIA and industrial production.
*Newly rich replacing heirs in top of wealth distribution.
*An explosion of Federal regulation beginning in the early 1970s, which continues unto this day.
*Stagnating U.S. High School graduation rates since the mid-to-late 1960s.

A note: U.S. pre-tax, pre-transfer income inequality is by no means unique in the developed world. What is unique are its unusually low taxes and transfers.

Another note: As you can see, I’m using total civilian employment and the labor force as rough proxys for the number of U.S. consumers. You can easily change the charts if you want to use some other series in place of these.

The Congressional Hearing on the Rise of ISIS

Only a couple hours after I left D.C.’s White House North Lawn to drive home, a Congressional hearing on the rise of the ISIS began less than three kilometers away from where I was. It is only fair to comment on it here.

1. James Franklin Jeffrey of the Washington Institute for Near East Policy recognizes the threat of ISIS (which I also do), supports the White House’s decision to attempt the overthrow of Maliki (which I oppose), opposes Kurdish independence (which I support), supports greater oil revenue distribution with the Iraqi Arab Sunnis (which I also support), and supports a serious activist anti-ISIS policy (which I support, but Obama doesn’t). He fails to see that it is Turkey that is the Middle East’s rouge state, not Iran, which, aside from its occasional support for Hezbollah’s attacks on Israel and U.S. citizens, is harmless to the U.S.. Money quotes:

Importantly, our allies in the common struggle for stability—Turkey, Israel, and the Sunni Arab states— see Iran as at least an equal threat to their survival as Al Qaeda, and we must respect that to gain their essential cooperation.

As we’ve experienced, from Al Qaeda before 9/11 to Iraq since 2011, problems in the region absent decisive, heads up engagement by the US will keep getting worse to the point when, very late, and at great cost, the US will be compelled to act at far greater cost and risk than if acting earlier.

2. The retired General Jack Keane of the neocon (and very informative) Institute for the Study of War gives an occasionally flawed, but generally correct, informative, and commendable testimony. His is the testimony at this hearing closest to my own views. It is the only one of the four testimonies to not throw Maliki under the bus. Unfortunately, this testimony contains blatant falsehoods: Syrian military-ISIS conflict is not uncommon (though it is true that the Assad regime has helped Syrian militant Islamist fundamentalists) and the FSA was definitely not “the only force in Syria that fought ISIL” (Kurds? Nusra? Syrian Army?). Keane also, sadly, fails to mention the crucial role of Turkey. Money quotes:

U.S. intelligence agencies have been quite aware of this threat, this is the failure of policy makers who ignored it.

AQI was defeated in Iraq by 2009, an admission they made repeatedly in message traffic, calling off the flow of the foreign fighters.

Key policy decisions in 2009 to disengage from Iraq politically and to no longer help shape Iraq’s political future was disastrous. Particularly in light of previous success in other post conflicts; Germany, Italy, Japan, South Korea, the Philippines, and Bosnia Herzegovina.

Russia desires to be a key player in the Middle East and influence other actions as they are doing successfully in Syria and Iran desires Iraq to be a client state similar to Syria. Maliki has brought them in as significant international supporters to assist with operations against ISIL which only enhances Maliki’s political position due to the lack of tangible support by the US.

3. Doug Bandow of the Friedman/Koch libertarian Cato Institute makes an unconvincing case for abstinence. He comes closest to my views while the U.S. occupation of Iraq, which I then saw as stupidity on a massive scale and today accept as necessary to clean up the mess the U.S. left behind after its reckless toppling of Saddam, was still going on. He correctly points out that the ISIS has plenty of problems, is more committed to expanding in the Fertile Crescent than striking the U.S., and cannot conquer most of Iraq’s population. However, the ISIS can easily triumph over its Baathist allies if they rebel, as it already has done in Syria. Bandow also points out that U.S. intervention is a band-aid over a much larger Iraqi credibility problem. However, if the Iraqi government is unable to become credible, there’s always the well-funded Kurdish Regional Government the U.S. can rely on to defeat the ISIS in northern Iraq. Bandow’s statement that “Today ISIL is too big to simply decapitate.” raises the prospect of a civil war in the Islamic State, which, while terrible to contemplate, is quite plausible. Unfortunately, Bandow wrongly throws Maliki under the bus. He fails to understand the consequences of his two statements: “In Syria the ISIL radicals face simultaneous military challenges from the government, moderate opposition forces, and even slightly less extreme jihadists, as well as the political task of establishing a functioning government in areas under its control.” and “Turkey is a Muslim nation with significant military capabilities which borders both Iraq and Syria.”. It is Erdogan, not Maliki, who is the Middle Eastern leader most responsible for the rise of ISIS. Fortunately, Bandow makes up for his mistake by pointing out the dubious prospects for a replacement for Maliki. He also correctly points out that the Middle East is in flux and that partition should not be off the table. Bandow is only partly correct in his objection to funding Syria’s rebels: the risk is that weapons may fall into the hands of Nusra, but supporting more secular humanist forces in Syria decreases Nusra’s advantage. Likewise, weapons falling into the hands of the enemy is an inevitable risk in any violent conflict. Bandow’s statement regarding Israel, Jordan, and Lebanon “However, Washington should be burning the diplomatic wires to encourage them to take action according to their interests and abilities. The U.S. has enough challenges in the Middle East and elsewhere around the world to jump into another conflict.” is 180 degrees from the truth. It would be foolish for these states to fight the ISIS, as all of them are smaller in territory than the ISIS and have no access to the Turkish border. The U.S., however, has enough pressure to force Turkey to allow the U.S. to conduct coercive operations against the ISIS from Turkish territory. If anything, Bandow is too supportive of Iran, though he does correctly state that “the Obama administration should quietly ensure that any U.S. military involvement does not clash with actions taken by Tehran”. Though Bandow does state that “ISIL has grown most obviously out of past U.S. policy mistakes”, he fails to state that it had shrunk during and after the late 2007 surge out of past U.S. policy successes. Money quotes:

To the extent that the organization establishes effective control over a territory, which remains problematic, it will have less incentive to strike the U.S., since doing so would, as with the Taliban in Afghanistan, risk its geopolitical gains. The group continues to pose a serious challenge, and one which could morph into something different and more menacing over time. But today Washington has an opportunity for a considered, restrained, and measured response.

Iraq’s most serious problem today is that the state lacks credibility and will, and the military lacks leadership and commitment. These America cannot provide.

Moreover, appearing to reflexively back Baghdad risks foreclosing potential solutions, including some form of federalism or even partition. The Iraqi Humpty Dumpty has fallen off of the wall. The Kurds are moving toward a vote over independence. The willingness of mainstream Sunnis to back ISIL demonstrates the depth of their alienation from Baghdad. The collapse of the Iraqi military suggests that the national government is unlikely to quickly reassert its authority. The U.S. and other interested parties, including Jordan, Israel, Turkey, and Iran should be talking informally and quietly about options to defuse the potential sectarian explosion. While Washington could help advance such an approach, no plan will succeed without support of regional states and local peoples. All options should be in play.

Washington’s reluctance to countenance Tehran’s involvement in Iraq is understandable but irrelevant. Hussein’s loss always was going to be Iran’s gain, the Bush administration’s intentions notwithstanding. There is nothing Washington can do to change that today. The more America is willing to tie itself to the Maliki government the less the latter might need to rely on Iran, but the impact likely would be marginal. The overwhelming religious, cultural, personal, economic, and geopolitical ties would remain. The U.S. always will be a distant and alien power.

America’s role should remain advisory, at most, but it would be best to ensure no inadvertent complications. The crisis in Iraq has placed a greater premium on improving relations with Iran—and especially resolving the nuclear issue, if possible.

4. Michael Eisenstadt of the Washington Institute for Near East Policy comes closest to Obama’s views, but refuses to mention the crucial role of Turkey (if ISIS is equivalent to Viet Minh, Turkey is equivalent to North Vietnam and the U.S. is equivalent to the U.S.S.R.). He points out that direct U.S. intervention in Iraq would simply lead to more ISIS recruitment, but I say that this is a good thing! The more ISIS jihadis killed this time, the fewer the Iraqi government has to kill later. His testimony is mostly perceptive and quite frank. He does understand that “The road to liberating Iraq passes through Syria.”. He supports Obama’s half-billion dollar package to aid Syrian rebels, which I dismiss as duplicitous, and way too much and too late. Money quotes:

Thus, the U.S. should allow Prime Minister Maliki to twist in the wind as long as he is not willing to work to achieve a cross-sectarian coalition government, while quietly pushing for an alternative to him who would be willing to work on that basis. It should, however, hold out the prospect of expedited weapons deliveries, and even U.S. drone and air strikes against IS positions in Sunni-only areas in the north as an incentive.

And thanks to its rapid success, IS was transformed overnight from perhaps the richest terrorist group in the world, to one of the poorest (de facto) states in the world.

IS’s defeat of the ISF was also a major setback for Iran. And IS’s rise threatens the so-called ‘axis of resistance,’ from the Levant to Iran, as IS is active in Lebanon, Syria, Iraq, and its recent victories might inspire violent Salafists already active in Iran.11 This is yet another reason, barring any major change in policy by Baghdad, not to move too quickly to lavish military support on the Iraqi government, as it is worth letting Tehran consider how its own policies have contributed to the current state of affairs there.

In conclusion: Michael Eisenstadt has spoken. The ISIS is staying. Thousands of antiquities in its territory are doomed to be either sold or destroyed.