Brief comments on the elections in Spain

A little closer to Italy. The fragmentation of the vote was the expected and actual result of yesterday's general election. Incumbent Partido Popular (PP - moderate right) won the most votes, but came far short of the majority it had obtained in 2011.

The main other party, Partido Socialista (PSOE - moderate left) might be able to form a government coalition with the new Podemos (far left), but they will still need the support of a motley crew of smaller parties in order to reach the 176-seat majority. Another possibility is a core coalition of PSOE with Ciudadanos (C's - center), plus somebody else. But that seems even less likely, as Ciudadanos promised during the campaign that they wouldn't join forces with either Podemos or nationalist parties. A grand coalition of PP and PSOE, à la Germany, would be unpalatable for PSOE - and its demise as the leading party on the left.

Source: El País.

After the first vote to form a government, which the incumbent prime minister will presumably lose, the parties have two months to form a government coalition before they must call fresh elections.

Any coalition will be uneasy and precarious. Partido Popular has made bitter enemies during its four years in government. It's been an acrimonious election campaign. The programs differ wildly across parties. Whatever government they form, I think significant advances on important legislation are unlikely over the next four years (labor market, changes to the Constitution, education, Catalonia's independence referendum).

Another important (and surprising to me) result was the decline of nationalist parties in Catalunya and Euskadi, and the rise, in those same regions, of the new left-wing party, Podemos. As a pro-referendum force, Podemos could actually do more for the independence cause than either the Catalan or Basque nationalists on their own. Yesterday's elections gave Podemos 69 seats, more than all the nationalist parties combined ever got in any general election. It's still doubtful, however, whether Podemos will be part of the new government. Moreover, those 69 seats won't belong to a single parliamentary group, as Podemos is itself an umbrella brand that includes a cluster of regional, left-wing parties with their own agendas.

Messy. Bumpy. And thoroughly entertaining.

Election results, town by town

Can you spot which two regions are different?

Source: El País.

Graphic content: Unemployment rates town by town, in Spain

Beautiful map on unemployment rates on datosmacro.com. If you go to the website you can click on each town and see its name and unemployment rate.

Notice the clusters of high unemployment in Castilla La Mancha, Cádiz-Huelva-Sevilla, and León-Galicia.

The map, however, is misleading if you try to infer comparisons of regional unemployment. For instance, it would seem that Galicia's (northwest) unemployment rate is much, much higher than Catalonia's (northeast). Wrong: Galicia's jobless rate in 2015:Q1 was 21.8%, whereas Catalonia's was 20.1%.

What caught my eye

1. Spain; 2. Indirect taxes; 3. Housing bubbles; 4. Argument cultures.

1. Spain: Foreign investors enthuse over Spanish bonds again (FT), in part because the economy is doing better. But is the recovery real? Edward Hugh comments on the comeback:

Here I will focus on  three issues that strike me in connection with the latest GDP numbers: the stagnation in the export boom, the difficulties being encountered in reducing the deficit and the ongoing deflation issue. The big question still remains: is this a balanced recovery, an export lead one, or simply a government financed one?

He concludes (hardly a spoiler alert):

As I state at the outset, I have no doubt whatsoever that Spain’s economy is undergoing a modest recovery. Even economy minister Luis de Guindos calls it weak, fragile and uneven. Serious doubts exist about the extent to which we are going to see anything resembling a “classic recovery” in Spain, a recovery where solid export growth eventually broadens out into a wider improvement in domestic consumption and investment, even though this is what financial markets increasingly seem to be pricing in. Press headlines have trumpeted the country’s new found growth, but when you dig under the surface and find that most of the latest growth is either accounted for by a sharp DROP IN IMPORTS, or by a CALENDAR ADJUSTMENT IN GOVERNMENT ACCOUNTING, or by the ESTIMATED ARRIVAL OF DEFLATION then the conclusions you draw are hardly reassuring ones.

2. Everyone seems to be raising indirect taxes. Here's a data table by KPMG, and here's a report by Ernst & Young.

3. Where in the world is there NOT a housing bubble? The Washington Post comments on analysis by Nouriel Roubini.

4. What do Japanese and Jewish people have NOT in common? I'm sure you can think of many things, but Noah Smith compares their argument cultures.

Well worth reading

1. Corruption perceptions. The 2013 results are in. Changes from 2012:

Biggest deterioration*: Syria, Spain, Gambia, Mali, Guinea-Bissau, Libya, Yemen, Mauritius and Eritrea.

Biggest improvement*: Myanmar, Laos, Senegal, and Brunei.

*I list countries with an absolute change of the corruption score of at least five points, with the exception of South Sudan, which did not have a score in 2012.

2. A new measure of U.S. GDP, by Aruoba, Diebold, Nalewaik, Schorfheide, and Song.

GDP can be estimated by measuring either expenditure or income. Since a penny spent is a penny earned, both methods should give the same answer, but there is substantial measurement error in both estimates. This column presents a new method of measuring US GDP that blends these two estimates. According to the new measure, GDP growth is about twice as persistent as the current headline measure implies. The new measure also makes the current recovery look stronger, especially in 2013.

3. Educating the economists of the future. What's wrong with Econ 101, by Matthew Klein at Bloomberg.

4. I enjoyed this interview with Richard Thaler by Douglas Clement at The Region. 

Take quantitative models, quantitative investing strategies. I think what we’ve learned—especially in the last five years or so—is there’s essentially one quantitative model. 

I don't agree with Thaler's assertion that every economist thinks that interest rates in ten years will be substantially higher than they are today.

5. Why high land prices in China are not (necessarily) a bubble, by Joseph Gyourko. The land price index that Gyourko has constructed is available here.

20130926 Links: debt ceiling; noses; interview with Spain's PM; why do we work so much; the Sagrada Familia

1. Americans think that the raising the debt ceiling should not be unconditional, by Bloomberg (hat tip to Tyler Cowen at MR). I agree with Tyler: it's time to elect a new people.

2. Man gets a new nose grown on his forehead, from BBC news. His original nose was damaged, so surgeons grew a new one. It will be transplanted to its usual location soon.

3. Rare interview of Spain's prime minister Rajoy with the media. Sara Eisen from Bloomberg speaks with him about the economy and about the corruption scandal facing his party.

Here's Bloomberg's highlights of the interview, mostly about the economy. El País zeroes in his comments (in Spanish) about the Bárcenas case.

4. The Economist interviews the Skidelskys (father and son). (Skidelsky Sr. is an authority on John M. Keynes). They talk about Keynes' prediction that by 2030, given reasonable expectations for economic growth, we would be productive enough that we only would need to work 15 hours a week. Although 2030 is still quite a few years ago, most people would agree that his prediction will be quite a bit off the mark. Why do we work so much? The Skydelskys, who published a book on the subject, point out to concern for relative wealth, as well as the fact that, even though the average standard of living has risen a lot since Keynes' day, the standard of living of a lot of people is still rather low. in a large chunk of the income distribution has risen at lot less (i.e. inequality has increased).



5. What will the Sagrada Familia temple look like when it's finished? By 2026, and if the construction workers work longer hours than Keynes thought they would, it might look like this:

20130920 Links: Spain's royal family; new paper by John Cochrane; student loans

1. Nice, fairly balanced account of the past and present of the Spanish royal family, by Bob Colacello on Vanity Fair.

2. John Cochrane works seriously through the new-Keynesian model to show how absurd some of those liquidity-trap implications can be. Hint: there is more than equilibrium in this model, and you may be picking the "wrong" one. Blog post. Paper.

3. All that student-loan money gets spent somewhere (from Al Jazeera America).

The dismal outlook for Spanish unemployment, according to the IMF

Spanish unemployment in one picture, according to the IMF (via the Financial Times):

That is from the 2013 Article IV Consultation. From the online front page (emphasis mine):

Key imbalances are correcting rapidly. Sovereign yields fell sharply since the European Central Bank’s announcements about Outright Monetary Transactions (OMT), the current account swung into surplus, the fiscal deficit fell sharply in 2012 despite the recession, private sector debt declined, and the banking system is stronger. But the adjustment process is proving slow and difficult. Growth has been negative in the last seven quarters, unemployment has reached unacceptably high levels, and financing conditions remain tight for small firms. 

The reform process has accelerated and deepened. Decisive reforms in the labor, financial, and fiscal sectors, in line with past staff recommendations, is helping stabilize the economy. 

Determined action has been taken to help clean up banks in the context of a financial sector program from the European Stability Mechanism, for which the IMF is providing technical assistance. Provisions and capital were greatly increased following an independent stress test and asset quality review in summer 2012. Weak banks are being restructured and much of their real estate assets have been transferred to an asset management company (SAREB). Regulation and supervision was also enhanced. 

Fiscal frameworks and transparency have been substantially upgraded. An independent council is being introduced and a commission of experts has issued a proposal to ensure pension system sustainability. Early and partial retirement rules were further tightened. Monthly reports are now available for all major levels of government. 

On labor market policy, a major reform was instituted in July 2012 to improve firms’ ability to adjust working conditions (including wages), reduce duality, and promote job matching and training. Unemployment insurance was reduced by 17 percent after 6 months of benefits, and hiring subsidies were reformed. In February 2013, the government announced more flexible hiring arrangements for youth and tax incentives to support youth employment and entrepreneurship. 

Product and service market reforms are underway. The government liberalized the establishment of small retail stores and retail business hours. Further reforms have been announced to remove regulations that fragment the domestic market, to liberalize professional services, and to foster entrepreneurship. 

Executive Directors commended the authorities for strong progress on critical reforms amid challenging conditions, which is helping to stabilize the economy. External and fiscal imbalances are correcting rapidly. However the economy remains in recession, with unacceptably high unemployment, and the outlook remains difficult. Directors stressed the need for decisive further action to generate growth and jobs, both by Spain and Europe, and continued strong commitment to the reform effort. 

Directors welcomed the 2012 labor market reform, which appears to be gradually delivering results. However, they underscored that labor market dynamics need to improve further in order to reduce unemployment sufficiently, including by enhancing internal flexibility, reducing duality, and improving active labor market policies. Many Directors generally saw merit in exploring a social agreement between unions and employers to bring forward the employment gains from structural reforms, while they noted that it would be difficult to achieve. However, such an agreement should not delay the needed structural reforms. Directors also underscored the need to improve the business environment and boost competition, including through product and service markets reform. They looked forward to timely implementation of the plans envisaged under the National Reform Program. 

Directors welcomed the authorities’ commitment to fiscal consolidation and agreed that the new medium-term structural targets strike a reasonable balance between reducing the deficit and supporting growth in the short term. They encouraged the authorities to specify how the targets will be achieved and to ensure that the measures are as growth-friendly as possible. In this context, they looked forward to the tax and expenditure reviews. A number of Directors also recommended flexibility in meeting the targets should growth disappoint. Directors welcomed progress on structural fiscal reforms, such as the fiscal council, and highlighted the need to follow through with ambitious legislation and rigorous implementation. Many Directors also looked forward to further progress on developing the enforcement of the Organic Budget Stability Law, and securing the sustainability of the pension system. 

Directors stressed the importance of facilitating private sector deleveraging. The insolvency regime should continue to be improved. A number of Directors encouraged the authorities to consider in the future introducing a personal insolvency regime. Directors highlighted that banks also need to play their part by promptly recognizing losses and selling distressed assets. They welcomed the progress made in the clean-up of the financial system but stressed the need to remain vigilant to risks to financial stability and to protect the hard-won solvency. Priority should be given to removing supply constraints, supporting access to credit to small and medium enterprises, implementing scenario exercises on bank resilience to guide supervisory action, and determining, in the context of the forthcoming European balance sheet review, any needs for further capital reinforcement. Directors stressed that actions at the European level, including initiatives aimed at improving monetary transmission, reversing financial fragmentation, and making progress toward a banking union are essential to support Spain’s adjustment effort.

The text is followed by a large table with projected macro figures for Spain up to 2018. I find particularly eye-catching that:

• Potential output growth is negative until 2014, and below 0.5% through 2018.
• The unemployment rate, although peaking in 2013, will stay north of 25% through 2018.
• The current account deficit will top 6% by 2018.
• Labor productivity will pretty much stagnate after 2014, after rapid growth in prior years.

Spain's pension piggy bank

Bloomberg published this good summary of the situation of Spain's "pension piggy bank."

My intro to and summary of the topic: 
In year 2000 the Spanish government set up a surplus fund (the Fondo de Reserva) for retirees' pensions. It was designed to address future shortfalls between Social Security tax receipts and retirees pensions. Until 2010ish, the Social Security (SS) system ran an annual surplus: more tax revenues were coming in than pension payments were going out, so the piggy grew fatter and fatter. 

By 2011 the crisis had been going on for quite a while. By then the SS system did not run an annual surplus anymore, and in fact it starting running deficits, because the unemployment rate is so high (which means less tax revenue for the SS), but the number of retirees goes relentlessly up. So the government has been tapping the surplus fund, every now and then, to pay the retirees' pensions.

How large is this piggy bank now? To give you an idea, if the SS had to pay retirees out of the Fondo de Reserva alone, without using any tax revenues, it would last eight months. At the pace the government has been tapping the fund over the last 12 months (about 10 billion euros), the fund would run out by the summer of 2019. In the short run, that pace may actually increase, as unemployment has kept rising, but in the medium term (beyond 2014), it is reasonable (I think) that the deficit of the system will start shrinking, and the fund may actually not be completely depleted. One thing seems certain: the piggy will be a lot thinner by the end of 2014 than it was in 2010.

To make matters worse, 97.5% of the fund is invested in Spanish sovereign debt, which has gone down in value since the early 2000s, as yields soared. The strategy of divesting from non-Spanish debt and investing into Spanish debt, back in 2011, may have lent some support to yields, but that balloon of oxygen for the sovereign is now exhausted, and all that is left is a Fondo de Reserva that is tremendously exposed to the credit risk and duration risk of Spanish sovereign debt.

The long-term solution, of course, is to get the Social Security system in order, by increasing the retirement age (faster than they are already doing it), finishing off the reform of the labor market, and steering the system away from a pay-as-you-go system to a capitalization system (I won't get into a discussion of whether that should be sponsored by employers or by the government--the important matter is to gradually downsize and eventually eliminate the pay-as-you-go scheme as the main source of pensions for Spanish retirees).