The Phillips Curve -- Finally?

[Beet]

(RTTNews.com) - Greece's inflation declined for the fifth consecutive month in February, data from the Hellenic Statistical Authority showed Friday.

The consumer price index increased 2.1 percent annually, slower than the 2.3 percent gain in January. The latest figure is the slowest since August, when prices rose 1.7 percent.

Month-on-month, prices fell 1.5 percent in February, following a 0.8 percent decline in January. Prices declined for the third month in a row.

The harmonized index of consumer prices measured for EU comparison purposes, increased 1.7 percent year-on-year in February, after rising 2.1 percent in January. Month-on-month, the index fell 1.7 percent in February, after declining 1.1 percent in the previous month.

http://www.nasdaq.com/article/greece-inflation-lowest-in-7-months-20120309-00178

Key month-on-month data suggest the CPI is now falling in Greece, although the annual rate is still positive. For comparison, at the low point of the Irish 'internal devaluation' in late 2009, the CPI was falling at a rate of 6% per annum. To keep this going, the key point is to avoid further tax hikes. Although internal deflation will make it harder for Greece to pay its debts, it is necessary to help Greece improve its external accounts, and has been at the heart (although unspoken) of the Troika/IMF strategy from the beginning. The failure of the Keynesian Phillips curve to manifest itself (i.e., if you pay the social cost of high unemployment, you will be rewarded with falling prices) has so far been the primary statistical manifestation of the failure of the Greek adjustment package. Still, it is not clear whether this will continue, and if it does, whether or not it comes too late.

[opebo]

Falling prices are a terrible negative in an economy.

[ag]

Falling prices are a terrible negative in an economy.

Short of leaving the euro, though, they are inevitable for Greece: unless the euro prices of Greek goods and services actually do go down, they will never grow. Actually, that's precisely the main reason to think that shifting to drachma might be of use: the euro prices will go down if it happens.

Anyway, until now the problem was that the prices in Greece continued growing - and not too slowly at that. They got into a depression before the inflation started even to go down.

[opebo]

Falling prices are a terrible negative in an economy.

Short of leaving the euro, though, they are inevitable for Greece: unless the euro prices of Greek goods and services actually do go down, they will never grow. Actually, that's precisely the main reason to think that shifting to drachma might be of use: the euro prices will go down if it happens.

Precisely - devaluation is fine, its only when nominal prices go down that you have disaster.

[Beet]

http://www.nasdaq.com/article/greek-inflation-drops-to-7-month-low-20120409-00069

Nope. Still no persistent deflation. If there's hope to be had it'll have to come from the labor and current account statistics.

[Democratic Hawk]

http://www.nasdaq.com/article/greek-inflation-drops-to-7-month-low-20120409-00069

Nope. Still no persistent deflation. If there's hope to be had it'll have to come from the labor and current account statistics.

Greek unemployment hits 21.8 percent in January, 350,000 lose job in past year

http://www.washingtonpost.com/business/markets/greek-unemployment-hits-218-percent-in-january-350000-lose-job-in-past-year/2012/04/12/gIQAAX4WCT_story.html

ATHENS, Greece — Greece’s unemployment rate increased to 21.8 percent in January, with nearly 350,000 people losing their jobs in the past year while the debt-strapped country’s economy remains stuck in recession.

The Greek Statistical Authority said Thursday that 1,084,668 people were out of work in the first month of 2012 — with 344,913 people losing their jobs since January 2011 — nearly 1,000 per day.

Greece is suffering a fifth year of recession, largely due to harsh austerity measures demanded in return for international bailout loans required to avoid default.

[Beet]

It absolutely astonishes me how unemployment can be at 22% and yet you see no drop in labor market costs sufficient to correct the country's current account. The labor 'market' there must be a monster. The political games that must be going on would have to boggle the mind. Or, the American mind at least.

[opebo]

It absolutely astonishes me how unemployment can be at 22% and yet you see no drop in labor market costs sufficient to correct the country's current account. The labor 'market' there must be a monster. The political games that must be going on would have to boggle the mind. Or, the American mind at least.

It is testimony to the true grit, pride, and self-respect of the Greek people that they have not stooped to work for less.

[Beet]

Greece's January-February current account deficit was down 44% year-over-year. Alas, it needs to be down over 100%.

[Beet]

Greece's March current account deifict was only down 17% year-over-year. Some of the slowdown in adjustment will no doubt be attributed to higher fuel prices, which have since come down, although the euro has also come down. Still at this rate, it will take Greece six years to reach self-sufficiency. On a quarterly basis, the drop was a better 35% while GDP was down 6.5%. A the present ratio, GDP would have to fall about 12% further for Greece to reach self-sufficiency.

In slightly better news, year on year inflation slowed to 1.4%, the lowest since October 2009. On a monthly basis, prices resumed a downward shift as well.

It is unclear why prices in Greece are rising at all. For example, clothing and footwear prices in Greece are up 1.4% YoY. However, when one considers the massive discontent in Greece, one would naturally think that the Greek people's ability to afford clothing and footwear has fallen, final sales have fallen, and thus stores should be lowering prices. Why are stores then not lowering prices? The problem is that the market here is not working. Lower demand is not leading to lower prices, are should be occurring under market dictates.

Further one sees that housing costs have increased 5.8% year on year. Again, we need more detailed information on how the Greek economy works, to be able to discuss what exact reforms need to be implemented. Ever since the beginning of this crisis in 2010 there has not been enough information. The media only speaks in broad terms like austerity, deficits, but what does this really mean? What is happening, precisely, on the ground? Show us, industry by industry, what is happening.

[opebo]

It is unclear why prices in Greece are rising at all. For example, clothing and footwear prices in Greece are up 1.4% YoY. However, when one considers the massive discontent in Greece, one would naturally think that the Greek people's ability to afford clothing and footwear has fallen, final sales have fallen, and thus stores should be lowering prices. Why are stores then not lowering prices? The problem is that the market here is not working. Lower demand is not leading to lower prices, are should be occurring under market dictates.

Further one sees that housing costs have increased 5.8% year on year. Again, we need more detailed information on how the Greek economy works, to be able to discuss what exact reforms need to be implemented. Ever since the beginning of this crisis in 2010 there has not been enough information. The media only speaks in broad terms like austerity, deficits, but what does this really mean? What is happening, precisely, on the ground? Show us, industry by industry, what is happening.

What is happening is yet another case where it is revealed to us that the myth of the market as some kind of self-leveling/stabilizing machine is utter fiction and propaganda.   The market can only 'work' if the State makes it work - and the austerity policies do not work.  

Prices are mostly inelastic - for example a shoe.  What does it matter how little demand for a shoe there is?  It won't effect the price of the shoe, it just means that no more shoes are made, and everyone except the rich go barefoot.

The demand for shoes or anything else is set by the State - austerity sets that demand at a very low level (only the rich are vouchsafed anything).  Thus, a downward spiral to full unemployment is inevitable.  There is no way the shoe can get any cheaper - shoes are already made for next to nothing by slave labor - and there is no way for wages to get any lower, because the workers will die off.

[Beet]

Nonsense. Downward wage rigidity has been called out as an exception to market rules, but downward price rigidity across the economy? That does not make sense. Ireland, for instance, experienced considerable deflation. Actually, Greece itself experienced some deflation in 2009-- Greece had more deflation from the Lehman crisis than it did from its own crisis.

You cannot generalize about this. Theory will not provide the answers. We need detailed, microeconomic, industry by industry level data that gives us a picture of what is actually happening on the ground on this. All of the financial rags have been AWOL here. The real problem is hidden inside a black box.

[Torie]

There are different kinds of shoes opebo (check out the ones at Walmart). I am a bit confused as to just how you get to your utopia of a high standard of living with lots of leisure time for everyone. I mean by my math, you don't get there even if you assume that you take away 90% of what "the rich" earn, and they keep on working like sled dog huskies for their 10% share, and stay put. Maybe the one thing in the Bible that you believe, is the conversion of water into wine "happening," which then to Catholics under certain circumstances can be transubstantiated into blood.

[Beet]

Check that-- it appears that there are some downward price rigidities there beyond what I thought-- or at least this guy is saying it:

http://www.social-europe.eu/2012/02/deflation-in-greece-what-do-they-not-know/

Still, I suppose high prices for consumer goods such as German fridges is not a problem from an adjustment standpoint, where wages and other production input prices are all that matter. But it does increase the suffering of the Greek people if their lower wages cannot be matched by a fall in prices, at least for domestically produced goods.

[Torie]

Check that-- it appears that there are some downward price rigidities there beyond what I thought-- or at least this guy is saying it:

http://www.social-europe.eu/2012/02/deflation-in-greece-what-do-they-not-know/

Still, I suppose high prices for consumer goods such as German fridges is not a problem from an adjustment standpoint, where wages and other production input prices are all that matter. But it does increase the suffering of the Greek people if their lower wages cannot be matched by a fall in prices, at least for domestically produced goods.

If the Greek "currency" cannot deflate (because they don't have one), the only equilibrating mechanism is a fall in prices. However in time, absent the place becoming more productive, what will happen is that the basket of goods that are purchased will change. Things of "value" produced domestically will just be exported to those who can pay more.

[Beet]

When I say deflation, I mean a fall in prices. Introduction of the drachma would be devaluation, and would cause massive inflation, possibly even hyperinflation for a time. And yes, the whole point is for the basket of goods they consume to change and export things produced domestically to Germany.

[opebo]

...I am a bit confused as to just how you get to your utopia of a high standard of living with lots of leisure time for everyone. I mean by my math, you don't get there even if you assume that you take away 90% of what "the rich" earn, and they keep on working like sled dog huskies for their 10% share, and stay put.

The rich don't work Torie, they take a portion of the production of those that do work in the form of return on capital.

In any case none of this has any bearing on any utopia I might envision (as you may recall it was my envisioning a utopia which recently led to quite a vale of tears for your dear opebo).

[TheDeadFlagBlues]

When I say deflation, I mean a fall in prices. Introduction of the drachma would be devaluation, and would cause massive inflation, possibly even hyperinflation for a time. And yes, the whole point is for the basket of goods they consume to change and export things produced domestically to Germany.

My cursory reading on Greece and its economic history says that expecting mere deflation to force Greece into building up a significant manufacturing base is misguided. Even if Greece's labor market became competitive, where would their comparative advantage lie in exports that could produce a major economic recovery that could wipe away this contraction?

[Gustaf]

When I say deflation, I mean a fall in prices. Introduction of the drachma would be devaluation, and would cause massive inflation, possibly even hyperinflation for a time. And yes, the whole point is for the basket of goods they consume to change and export things produced domestically to Germany.

My cursory reading on Greece and its economic history says that expecting mere deflation to force Greece into building up a significant manufacturing base is misguided. Even if Greece's labor market became competitive, where would their comparative advantage lie in exports that could produce a major economic recovery that could wipe away this contraction?

How could they not have a comparative advantage in something if their labour market becomes competitive?

[Beet]

I guess DeadFlagBlues means if there are structural barriers preventing them from taking advantage of their price competitiveness. Africa has low wages, but you don't see them as a manufacturing powerhouse. On a less extreme but still conceptually similar level, Greece probably lacks the infrastructure and know-how to quickly ramp up quality industrial manufacturing of the kind done by the likes of the German Mittelstand model. Of course, over the long term, these things could be built up with the right policies, but don't expect it to happen in time to be relevant for the present crisis.

Perhaps a more immediate reward-- in theory -- to deflation would be in the tourism industry. A decline in prices across the Greek economy would make it cheaper for tourists and, if tourists are price-conscious it would increase tourism to Greece. This would be counted as Greek exports, and it would be significant due to the large size of tourism as a percentage of the Greek economy. I have always felt that one easy way to help alleviate the crisis would be for the German government to print euros and use it to give its own people a tax credit to take vacations in Greece. This way, Germany is not transferring money to Greece directly, it is forcing the Greeks to work for the Germans if the Greeks want the money. But on the other hand, by forcing Greeks to work it lowers Greece's unemployment levels and helps Greece earn back some income to pay down its debt. Germans get essentially free vacations, and Greeks get some income. Win-win.

However, the reality of the matter is that tourism to Greece is down in the past year owing to [1] the general European recession, and [2] reports of anti-German sentiment, strikes, and the overall headlines. The Greeks are shooting themselves in the foot even more with their Germany-hatred, as they need the 2.2 million German tourists. Still, the best way to allow Greeks to earn income in the medium term is not internal deflation in Greece, but reflation of the rest of the euro-zone, focusing on things like restoring GDP growth in France, Italy and Spain, and raising wages for Germans.

[Gustaf]

I guess DeadFlagBlues means if there are structural barriers preventing them from taking advantage of their price competitiveness. Africa has low wages, but you don't see them as a manufacturing powerhouse. On a less extreme but still conceptually similar level, Greece probably lacks the infrastructure and know-how to quickly ramp up quality industrial manufacturing of the kind done by the likes of the German Mittelstand model. Of course, over the long term, these things could be built up with the right policies, but don't expect it to happen in time to be relevant for the present crisis.

Perhaps a more immediate reward-- in theory -- to deflation would be in the tourism industry. A decline in prices across the Greek economy would make it cheaper for tourists and, if tourists are price-conscious it would increase tourism to Greece. This would be counted as Greek exports, and it would be significant due to the large size of tourism as a percentage of the Greek economy. I have always felt that one easy way to help alleviate the crisis would be for the German government to print euros and use it to give its own people a tax credit to take vacations in Greece. This way, Germany is not transferring money to Greece directly, it is forcing the Greeks to work for the Germans if the Greeks want the money. But on the other hand, by forcing Greeks to work it lowers Greece's unemployment levels and helps Greece earn back some income to pay down its debt. Germans get essentially free vacations, and Greeks get some income. Win-win.

However, the reality of the matter is that tourism to Greece is down in the past year owing to [1] the general European recession, and [2] reports of anti-German sentiment, strikes, and the overall headlines. The Greeks are shooting themselves in the foot even more with their Germany-hatred, as they need the 2.2 million German tourists. Still, the best way to allow Greeks to earn income in the medium term is not internal deflation in Greece, but reflation of the rest of the euro-zone, focusing on things like restoring GDP growth in France, Italy and Spain, and raising wages for Germans.

Come on, Beet. You know as well as I do that competitiveness = low wage. You're sounding like Opebo now.

Competitiveness, in my book, means that wages are in line with productivity. Which in turn means having a comparative advantage in something, presumably.

Otherwise, sure, me and my flatmate had the same idea about sending Germans on vacation in Greece.

[Beet]

DeadFlagBlues was talking about what it would take to produce an economic recovery in Greece. The narrow definition of competitiveness by itself, does not answer this question.

[Gustaf]

DeadFlagBlues was talking about what it would take to produce an economic recovery in Greece. The narrow definition of competitiveness by itself, does not answer this question.

It's probably true that they can't just become competitive over night. It also might well be true that the kind of economy they could have a comparative advantage in, given the current situation, is not one they would like.

[opebo]

competitiveness = low wage. You're sounding like Opebo now.

I've never said that competitiveness = low wages, I have only said that low wages are competitive and that competition militates towards the lowest possible wages.

[TheDeadFlagBlues]

DeadFlagBlues was talking about what it would take to produce an economic recovery in Greece. The narrow definition of competitiveness by itself, does not answer this question.

Yes and the sad fact is that I feel that many pushing for wage contraction disingenuously state that increased competitiveness would lead to a stronger recovery. I think the reality is that these deflationary policies will only lead to a decade, if not longer, of sustained pain that Greece could possibly not absorb unless they had a heavy-fisted authoritarian government. I think it's inevitable that there will either be a major electoral shift away from any sort of centrist-consensus party system or a coup. Perhaps I'm just being hysterically pessimistic though.