Wait: Maybe Europeans are as Rich as Americans

Yves here. I’ve gotten similar arguments from many Europeans: that when you adjust nominally higher American incomes for how much we spend from our own pockets on healthcare plus the longer hours we work, we aren’t better off. And if you attribute a cost to stress (which you can also see in the level of prescriptions of psychoactive drugs here), it’s not hard to push this thesis further. By Steve Roth. Originally published at Angry Bear ’ve pointed out multiple times that despite Europe’s big, supposedly growth-strangling governments, Europe and the U.S. have grown at the same rate over the last 45 years. Here’s the latest data from the OECD, through 2014 (click for larger): European v. US growth And here’s the spreadsheet. Have your way with it. More discussion and explanation in a previous post. You can cherry-pick brief periods along the bottom diagonal to support any argument you like. But between 1970 and 2014, U.S. real GDP per capita grew 117%. The EU15 grew 115%. (Rounding explains the 1% difference shown above.) Statistically, we call that “the same.” Which brought me back to a question that’s been nagging me for years: why hasn’t Europe caught up? Basic growth theory tells us it should (convergence, Solow, all that). And it did, very impressively, in the thirty years after World War II (interestingly, this during a period when the world lay in tatters, and the U.S. utterly dominated global manufacturing, trade, and commerce). But then in the mid 70s Europe stopped catching up. U.S. GDP per capita today (2014) is $50,620. For Europe it’s $38,870 — only 77% of the U.S. figure, roughly what it’s been since the 70s. What’s with that? Small-government advocates will suggest that the big European governments built after World War II are the culprit; they finally started to bite in the 70s. But then, again: why has Europe grown just as fast as the U.S. since the 70s? It’s a conundrum. I’m thinking the small-government types might be right: it’s about government. But they’ve got the wrong explanation. Think about how GDP is measured. Private-sector output is estimated by spending on final goods and services in the market. But that doesn’t work for government goods, because they aren’t sold in the market. So they’re estimated based on the cost of producing and delivering them. Small-government advocates frequently make this point about the measurement of government production. But they then jump immediately to a foregone conclusion: that the value of government goods are services are being overestimated by this method. (You can see Tyler Cowen doing it here.) That makes no sense to me. What would private output look like if it was measured at the cost of production? Way lower. Is government really so inefficient that its production costs are higher than its output? It’s hard to say, but that seems wildly improbable, strikes me as a pure leap of faith, completely contrary to reasonable Bayesian priors about input versus output in production. Imagine, rather, that the cost-of-production estimation method is underestimating the value of government goods — just as it would (wildly) underestimate private goods if they were measured that way. Now do the math: EU built out governments encompassing about 40% of GDP. The U.S. is about 25%. Think: America’s insanely expensive health care and higher education, much or most of it measured at market prices for GDP purposes, not cost of production as in Europe. Add in our extraordinary spending on financial services — spending which is far lower in Europe, with its more-comprehensive government pension and retirement programs. Feel free to add to the list. All those European government services are measured at cost of production, while equivalent U.S. services are measured at (much higher) market cost. Is it any wonder that U.S. GDP looks higher? I’d be delighted to hear from readers about any measures or studies that have managed to quantify this difficult conundrum. What’s the value or “utility” of government services, designated in dollars (or whatever)? Update: I can’t believe I failed to mention what’s probably the primary cause of the US/EU differential: Europeans work less. A lot less. Like four or six weeks a year less. They’ve chosen free time with their families, time to do things they love with people they love, over square footage and cubic inches. Got family values? I can’t believe I forgot to mention it, because I’ve written about it at least half a dozen times. If Europeans worked as many hours as Americans, their GDP figures would still be roughly 14% below the U.S. But mis-measurement of government output, plus several other GDP-measurement discrepancies across countries, could easily explain that.

Over at Equitable Growth: A Question I Want to Ask Richard Koo: Daily Focus

Re: Richard Koo http://www.oenb.at/dms/oenb/Publikationen/Volkswirtschaft/CEEI/2014/koo_ppp/Koo_PPP.pdf

NewImageOver at Equitable Growth: Conference on European Economic Integration (CEEI)

I am not sure that I can ask this question coherently. So if I do not, please feel free to just say "that was not coherent" and move on to answering the coherent questions...

The conventional arguments of those whom Martin Wolf calls the Austerians runs more-or-less like this: someday QE will succeed in shifting beliefs from an expectation of permanent depression to an expectation of rapid normalization. Savers then look at their holdings of maturing government bonds and roll them over only if they are offered a normal and positive real interest rate. And then the price level will rise very rapidly to a value at which--as John Maynard Keynes said of France during its inflation of the 1920s--real future government primary surpluses discounted at the normal real interest rate are equal to the nominal debt divided by the price level.

In your framework, that would be a sudden very large shift in private-sector net savings behavior from surplus to deficit. And in your framework such a shift is almost inconceivable. But in their framework such a shift seems almost inevitable. Can you tell me why judgments of likelihood of a near-hyperinflationary collapse upon normalization are so different in the two frameworks? I know that 25 years of history strongly suggest that they are wrong, but why? It was, after all, right for France in the 1920s. It was possibly right for peripheral European countries trapped in the eurozone. It was right for Argentina. Why is it not right--or not possible for any reasonable probability--for reserve currency-issuing credible sovereigns? READ MOAR


Koo slides:

Koo PPP pdf

Koo PPP pdf

Koo PPP pdf


UPDATE: perhaps the real issue is that we have three underlying models of macroeconomics. The first is the quantity theory of money MV = PY: the stock of money times its velocity equals the price level times production. The second is the Wicksellian savings-investment equation S = I + (G-T): savings either finances investment or is absorbed by the government deficit. The third is the fiscal theory of the price level D/P = PV(-dp,r): the real stock of debt--the nominal debt divided by the price level--is equal to the present value of future primary surpluses discounted at the real interest rate. All three of these must be true at the same time, which means that at any time two of them are likely to be nearly redundant. For those two, shifts in what are supposed to be their driving variables are neutralized by countervailing forces. Right now, for example, increases in the money stock are offset one-for-one by reductions in velocity, and increases in the nominal debt are offset one-for-one by higher future primary surpluses and reductions in future real interest rates.

From this perspective, the key question of macroeconomics is always: when do each of these three models have primary traction, and why? Richard Koo just said that the state of the economy shifts like the flick of a switch: Enter a balance-sheet recession in which firms are engaged in minimizing debt, and it is S = I + (G-T) and the impact of balance sheets on S and I that governs the state of the economy. Leave--flick the switch--and the quantity theory of money holds for a near-constant velocity, with small shifts in the quantity of money driving adjustments that make the Wicksellian S = I + (G-T) hold.

But when do you enter and when do you leave depression--or balance-sheet--economics, with Wicksell's equation the driver and the other two more-or-less passive adjusters? When do you enter and when you leave monetarist economics? And when do you enter and when do you leave the quasi-hyperinflationary economics that is the fiscal theory of the price level?

Until I figure this out, I am going to have a hard time teaching this stuff. Until I figure this out, I'm going to have a hard time even thinking about this stuff.


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Which Type Trader Are You? (by Market Sniper)

This post may offend many and that is not its intention. This is a think piece I have been formulating in my mind for quite some time now.  Its purpose is to get you to think about your trading methodology(s) and setups in a critical light. To my way of thinking, traders who utilize technical analysis all fall into three broad groups (traders who use purely fundamental analysis are excluded from this type of grouping). The Prognosticator In this group I include Elliot Wave traders, Gann traders and astrological traders. These traders trade in the future. Based on what they say may happen and some go as far as to say what WILL happen. When a trade is a failure, they use misinterpretation of past price action as the excuse for the failed trade. It seems that Elliot wave traders (mostly sellers of the system) are in a constant civil war as to "correct" interpretation. Gann followers can spend their entire trading life searching for his "missing" piece. A lot of legend has been created around WD Gann, promulgated by promoters of his methodology. WD Gann was prolific in his writings and covered a multitude of areas. Regardless of what happens next, some part of his work can be given credit for "calling" the "move." Too bad we lack foresight to know which one! He is also been credited to have died with a tidy fortune due to his trading. Interviews with his son (who happened to have been in the banking business) revealed that he died in modest means and made the bulk of his money promoting his ideas over his life time. The foremost (and longest being tracked) in the astrological trading group is Arch Crawford. In over 25 years of his trading service, he has had flashes of brilliance. However, according to Hulbert, his record, overall, has well under performed the market during the long period tracked. Prognosticators rely on interpretation of price. So much for the prognosticators. The Dreamer In this group I include all those traders who rely on lower studies (MACD, STO, RSI, and hundreds of other lower case studies) and upper case studies (such as Bollinger Bands, Keltner Channels, fibonacci ratios, etc.). these traders trade in the past as ALL those studies are based on market driven price information in the past viewed through different lenses. Add to that, very little, if any, are NOT subject to interpretation and therefore, not objective information.  What do I mean by that? They all have variables within them that can be "adjusted" or "tweaked". IF that is the case, then it cannot be objective information you are viewing. Here are some examples: Number of variables in trend tools: MACD=3 and ADX=3. Number of variables in retracement tools: a) Percentage retracements: Fib ratios=4; Harmonic ratios=2; Arithmetic ratios=2 b) Over bought/oversold indicators:  RSI=3; Socastic oscillator=4 Each input can be changed. So let us say, you put together a trading methodology based on these. Here are some example combinations and the variables involved (Dreamer traders LOVE to use these in combination!): System 1: Moving Average=1 and RSI=3 for a total number of variables of 4. System 2: MACD=3 and Stocastics=4 for a total number of variables of 7 System 3: Moving average=1, ADX=3, Fibs=4 and RSI=3 for a total number of variables of 11. If you can massage the variables, then what you see is NOT objective information. This is the problem with the search for an indicator system Holy Grail. The case CAN be made for a ONE variable trading system. However, once you introduce more than one or two, the probable variations become too large to test. Too many moving parts that are interconnected. The last system would be near impossible to stress test successfully. There are simply too many moving, interconnected, parts to have any confidence that you have hit upon the "correct" variable values. This type of analysis leads to the worst cases of curve fitting historical market data as well and that can be absolutely devastating to trading capital. A brief word about fibonacci retracement levels. Numerous studies have shown that they are no better and no worse than any other set of ratios. No magic there, either. In summary, I would suggest that the trader select measures of trend and retracement that have built-in protection against you fiddling with them. The best measures with this built-in protection are ones without parameters or adjustable variables. The best ones are objective and independent of you. The best ones are fixed and NOT subject to any interpretation. Adjustable parameters are just plain unreliable for making trading decisions. This brings us to the third type of trader. The Pragmatist In this group I include Market Profile traders, Pivot traders, single trade setup traders and to a lesser extent, Chart Pattern traders. Chart pattern traders are a different breed and exist in both Dreamer and Pragmatist camps. The visualization of a pattern is subjective and interpretive in nature but can, if correctly used, create a pragmatic conclusion: it either works or it fails on such a manner that is not subject to interpretation in a trade. The Pragmatic trader trades in the now. Not the future or the past. There is no room for any interpretation. It either works or it fails. Support/resistance holds or it does not, etc.  The idea here is to select objective and fixed measures for determining trend direction and retracement levels. There can be NO interpretation in their use. A 12 year old must "interpret" the same way you would or you must discard it! There is no wiggle room and there are no shades of grey here at all. It must be fixed. Simple. It either IS or it is NOT based on price NOW. This can be historically tested without problems. You can determine expectancy for what you are doing and have confidence in that expectancy. Conclusion And Something Else to Ponder Before any devotees of any methodology get all up in a dither based on my views and observations in any of the above material,  here is something for ALL traders to consider. Could it be we are ALL placebo traders? My intent here is not to tell any trader how they should trade. Personally, I am a pragmatic trader as it has much fewer "problems" and resonates with ME. If you are a successful trader (defined as a trader who consistently extracts capital from markets and has a positive, upward equity curve) regardless of methodology use, could it be that we are using our chosen methodology as a placebo? Are we using our chosen methodology to give us the courage to actively engage markets? Could it be that the successful trader is just a superior trader in spite of the chosen methodology? Could it be that the successful trader is NOT giving himself the credit deserved for being that superior trader and giving undo credit to his chosen methodology? This then leads into the field of trader psychology and away from methodology. This is an area, I believe, deserves some serious thought and consideration. Peace, my fellow traders and may your equity curves trend ever higher! Yours in the never end quest of the trading edge. The Market Sniper.