Global wage growth robust at 2.5% real in 2015 but varies considerably by region

India 4.7%, China 6.2% and Asia overall 3.5%. World 2.5%. Germany 2.5%. Africa 8%.
Low inflation is creating an illusion of stagnant salaries in some countries. In reality, wage growth is the best since 2008, but skewed toward Africa and Asia.
Lincoln

Strong dollar claims another victim

At a Xmas party this weekend, a small "middelstand" businessman here in Hingham, an OEM that provides metal plating to the US electronics and other industrial industries, who has been in this business for decades, said, "I always thought my business would be my retirement fund, because I could sell it. I can't sell it now; my customers are rapidly disappearing. Production is going offshore."

His business is fading like a cheap Chinese knock-off Star Wars Xlarge t-shirt worn by an out-of-shape American tourist at the Great Wall on a sunny day, there enjoying the momentary benefits of the strong dollar that may have eliminated his job by the time he returns stateside.

We need to manufacture more debt to offset these losses in the real economy. The Fed will buy this debt and hand us strong dollars in exchange. That way all will be well.

Prof. Summers says ZIRP should continue for the next decade.

In the FT this morning, Summers says:

". . . for reasons rooted in technological and demographic change and reinforced by greater regulation of the financial sector, the global economy has difficulty generating demand for all that can be produced. This is the 'secular stagnation' diagnosis, or the very similar idea that Ben Bernanke, former Fed chairman, has urged of a 'savings glut'. Satisfactory growth, if it can be achieved, requires very low interest rates that historically we have only seen during economic crises. This is why long term bond markets are telling us that real interest rates are expected to be close to zero in the industrialised world over the next decade."

So I guess that may be it. It is interesting, and to me questionable, however, that financial repression and ZIRP are compatible with financial stability in the long run, as Prof. Summers may assume.

"Good fences make good neighbors"

Robert Frost wrote this in “Mending Fences,” and he also remarked that “Something there is that doesn’t love a wall. . . elves, maybe.”

The Weekend FT had an interesting article, “Hungary erects a border fence to plug migrant flow.” So far this year, 80,000 illegal immigrants have entered this country by crossing the border with Serbia, which is quite a lot for a small country about the same size as Indiana and with a population of less than 10 million, and declining fast. (Hungary’s population has been declining since the 1980 census; the net reproduction rate has dropped to 0.6 while the net death rate has remained stubbornly fixed at 1.0/capita.)

The Hungarians are a little paranoid. The country, which is 98% ethnic Hungarian, has not been a melting pot since the Treaty of Trianon in 1920 when it lost 64% of its territory and 30% of its ethnic Hungarian population, according to the article.

So the Hungarians are doing two things: 1. They are building a 175 km steel fence to seal the entire border with Serbia; the fence should be finished by November. 2. They are pushing as many of the migrants north into Austria and Slovakia as fast as possible.(Church groups are giving them sandwiches and water at the train stations.) (Final destination: Germany)

The Schengen Area with no border controls means that Austria and Slovenia have no way to stop the migration. (26 countries are members of the area, including all the main EU states, except Ireland and the UK, which have opted out. (Iceland has joined, but the North Atlantic provides an alternative border control.) Since the Schengen Area as designed can be no stronger than its weakest link with an external border, it seems reasonable to expect that Schengen’s days are numbered.

Migration is pulling the EU apart. It is making the idea of the EU unpopular with the populations of its member countries.

Here is a European poll taken at the end of last year:




http://www.europarl.europa.eu/pdf/eurobarometre/2015/major_change/eb_historical_deskresearch_en.pdf

This is a very serious matter that no amount of bombing can easily solve. (Mr. Cameron seems to think differently as I read this morning he has just asked the UK parliament for permission to bomb Syria.)

Chaos Theory: If a National Security Advisor flapped its tiny wings at the equator, could it trigger a storm that would break up the European Union?

Over the weekend, there was an article in the FT with the headline: “Renzi vents anger as migrant summit ends with modest accord.” The EU is being flooded with illegal immigrants, the great bulk coming through Libya to Italy, which got 170,000 last year. (50,000 in Sicily so far this year.) In addition, there are over 600,000 EU asylum applications annually. The problem is that while the EU will provide Italy with financial support, no other EU country wants to accept these people physically. Renzi said at last week’s migration summit, “If this is Europe, you can keep it.” The president of Lithuania told Renzi that that the immigrants are “your problem.”

It’s not only illegal immigration into the EU that is controversial but also migration among European states. The UK wants to negotiate its treaty relationships so that it can reduce or deny benefits to citizens of other EU countries. Both parties in the Danish election are saying they will re-establish border checks with Germany if elected. (Border checks were gradually abolished by the Schengen Agreement in 1985, which now includes 26 countries, including non-EU members Iceland, Norway and Switzerland.)

The problem arises from the fact that individual countries are responsible for policing their borders while the EU generally is theoretically responsible for welcoming the newcomers and supporting them financially. This is an example of a failure to apply the Public Interest Theory in economics. (As an example, Roger Coase asked, “Who should pay for the lighthouse?” Why devote a lot of resources to policing the borders if a failure to do so is not your problem?)

Here is where the butterfly effect comes in: The immediate crisis was triggered by the overthrow of Gaddafi in Libya as almost all the illegal migrants pass through the territory formerly known as Libya. (Now it has at least two governments and many other groups that don’t recognize either of them.) It costs migrants $200-$1,000 to get to Libya from West Africa or Somalia and another $200-$1,000 to get on a boat in Libya, according to the Economist. The boats issue distress calls once they clear the Libyan coast and migrants are either put on rubber rafts or left on board while the crews abandon ship. Then the Italians come and rescue them. There is a 5% chance of drowning, which are odds I would readily accept were I in the same situation.

The Libyan problem, in turn, arose from the elimination of Gaddafi. So why did we take out Gaddafi? The French and British wanted to do so for some reason, but they needed US support. The State Department was opposed and Obama was reluctant, but the big push came from Samantha Power at the National Security Council. Power was not an expert on Libya and probably didn’t know that the Benghazi freedom fighters represented a small religious faction and that the rest of Libyans would not support them. (This is not to detract, however, from her acknowledged expertise on LBGT rights and women’s issues, and she’s probably learned a lot about foreign policy now that she is ambassador to the UN.) We got the Russians and Chinese to acquiesce in a no-fly policy at the UN, but when it became clear that Gaddafi would be able to suppress the rebellion easily without air support, we bombed Libya back into the Stone Age, thus creating the present situation.

Another unforeseen consequence of the Libyan mistake is that Russia and China feel they were snookered in the UN and this has increased their reluctance to support us in Iran, Syria, and elsewhere.

Of course, knowing that a butterfly might cause a hurricane does not tell us whether it will or not. I guess the only lesson we can draw is that we should be very humble about our ability to predict the consequences of our and other’s actions.

But this is all past wind under the butterfly’s wings. Migration issues, including internal migration, are dividing the EU. Isn’t this a much bigger threat than Greece?

Are the Greeks the best decision-makers in Europe?

The FT recently reported that Greece’s suicide rate jumped 35% between 2010 and 2012, mostly due to older men and women. Unemployment is 26%, the highest in Europe. (Under 25 it is 40%.) 100,000 young people have gone abroad, which a lot in a country of 11 million with only 1 million between ages 15 and 25. Deaths exceed births by a wide margin. (11 deaths for every 8.8 births)

Clearly, the Greeks are not as happy and optimistic as they might be. But are they realistic?

When I work out at the gym, I like to listen to philosophy podcasts in order to get a good rhythm going. I download them from iTunes. (It’s interesting that philosophy podcasts seem to reflect national traits: Philosophy Bites out of the UK is eclectic while The History of Philosophy Without any Gaps out of Munich, now running at over 200 lectures, is massive and systematic. On the other hand, The Philosopher’s Zone from Australia is fun-filled and whimsical. (A recent Aussie episode dealt with the moral issues raised by Buffy the Vampire Slayer and the problem of evil. The philosophy department at Marquette University in Chicago apparently publishes a journal on the philosophical issues in the “Buffiverse.”)

Recently at the gym I was listening to Philosophy Bites and a philosophy prof at the University of Birmingham named Lisa Bortolotti (educated at Alma Mater Studiorum (Bologna), Kings College London, Oxford, Nat. Univ. of Australia), whose field is rationality.

She said that the untrained individual is bad at making rational judgments.

She cited the famous “Linda Problem” of Tversky and Kahneman:

Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.

Which is more probable?

1. Linda is a bank teller.

2. Linda is a bank teller and is active in the feminist movement.

The great majority of people chose the second item as the more probable, while it is the first that is correct. (The probability of two things occurring in conjunction is always less than that of one of them occurring alone.) (How did you do? Everyone I have asked got it wrong.)

She also made the following interesting points:

1. Decisions are generally worse when we are told in advance that we will have to explain our reasons.

2. We assign higher probability to desired outcomes than is warranted by the facts.

3. The higher our self-esteem, the worse our forecasting ability.

4. Pessimists, especially those with low self-esteem bordering on clinical depression, make the best assessments of future probabilities.

Points 3 and 4 are important. One may conclude that the Greeks are being more realistic than other Eurozone members in their negotiations, which the Greeks believe to be futile.

More importantly, should we only listen to Greek forecasters?

Greece and the Art of the Deal

Last week the FT reported, under the headline “Resentment and a collapse of trust make last-ditch deal more difficult” (6/20, p.2), that one night, when the Brussels bureaucrats were burning the midnight oil waiting for the Greeks to fill out their very sketchy last-ditch proposal, the Hellenes were spotted strolling around the Sablon restaurant district recreating themselves. A couple of days ago, FT writer James Mackintosh added the following: “Another day, another missed deadline. Greece has finally jotted down a few rough notes, so eurozone leaders offered their least-favorite pupil yet another homework extension, hoping it will be turned into a deal this week.”

The Greek crisis provides superior entertainment in that it is both interesting and unimportant. It is clear, however, that the present Greek government is committed neither emotionally nor philosophically to a solution that is compatible with the Germanic requirements of a single currency.

I wonder what sort of solution we would want if we were Greek?