Wednesday, April 1, 2015

What ShadowStats Gets Right and What it Gets Wrong

It is hard to think of a website so loved by its followers and so scorned by economists as John Williams' ShadowStats, a widely cited source of alternative economic data on inflation and other economic indicators. Any econ blogger who has ever written a line about inflation is familiar with ShadowStats. Time and again, readers cite it in comments, not infrequently paranoid in their tone and rude in their language.

Brief replies that cast doubt on some of more extreme claims made by ShadowStats fans don’t seem to have much effect. After a recent round of comments, I promised the editor of one website to undertake a thorough deconstruction of ShadownStats. Here is the result.


What ShadowStats Gets Right: The CPI is a Flawed Measure of the Cost of Living

ShadowStats is Williams’ attempt to provide an alternative to the official consumer price index (CPI), which he views as a flawed measure of what members of the general public have in mind when they think of the cost of living. Let me start by saying that although I share the skepticism of many economists about the specific numbers published on ShadowStats, I agree that the official data do not tell the whole story. I support Williams’ attempt to provide an alternative to the official consumer price index that more closely reflects pubic perceptions of inflation.  Here, in his own words, is how Williams explains his undertaking: >>>Read more

Wednesday, March 25, 2015

Does Putin's Proposed Eurasian Currency Area Make Sense?

At a meeting in Kazakhstan last week,  Russian  President Vladimir Putin proposed a currency union for the members of the Eurasian Economic Union (EAEU).  Russia, Kazakhstan, Belarus, and Armenia are the current members, and Kyrgyzstan is scheduled to join later this spring. Does a common currency for the EAEU make sense? Not in economic terms, but perhaps there is a political subtext that makes the proposal more understandable.

Some currency union basics

A currency union is simply a group of countries that share a common currency. The Eurozone (EZ) is the best-known example. The much smaller Common Monetary Area, based on the South African Rand, is another. The 50 states of the United States are sometimes viewed as a currency union for economic purposes, even though the members are not sovereign countries.

Currency unions have both advantages and drawbacks. On the plus side, currency unions facilitate trade and integration. They reduce the costs of currency exchange for travel and trade. They remove the risk that a change in exchange rates will render import-export deals or foreign investment projects unprofitable before they are completed. They eliminate costs of hedging against currency risks. The major disadvantage is that a currency union takes away exchange rate changes as an instrument for adjusting to external economic shocks, such as changes in the relative prices of a country’s imports and exports, or sudden surges in capital inflows or outflows.

There is a well-developed theory of optimum currency areas, growing out of a seminal 1961 article by Robert Mundell,  that explores the conditions under which the advantages of a union outweigh the disadvantages. Three of the most important conditions are structural similarities, flexible markets, and fiscal centralization. >>>Read more

Follow this link to view or download a related slideshow, "The Breakup of the Ruble Area."

Sunday, March 8, 2015

Job Surge Spooks Markets as Unemployment Approaches the NAIRU

The BLS announced Friday that the US economy added 295,000 jobs in February, bringing the unemployment rate to 5.5 percent, a new low for the recovery. The leading stock indexes immediately plunged. The Dow lost 1.5 percent, the S&P 500 1.4 percent, and the NASDAQ 1.1 percent. Why  the negative reaction to such good news?

The answer may lie in an obscure economic indicator known as the non-accelerating inflation rate of unemployment, or NAIRU. The NAIRU gets its name from the fact that when unemployment hits that level, the rate of inflation begins to accelerate. Market participants know that the Fed has a dual mandate to maintain full employment and price stability, and some of them interpret that to mean that it will begin to raise interest rates as soon as the unemployment rate hits the NAIRU. As the chart shows, that could happen any time now. The Congressional Budget Office estimates that the NAIRU is currently 5.39 percent, within easy reach of February’s current unemployment rate of 5.5 percent. >>>Read more

Follow this link to view or download a brief slideshow with additional charts of the latest US employment situation

Saturday, February 7, 2015

US Job Growth Fastest Since Dot-Com Boom of the 1990s

Strong upward revisions reported yesterday by the Bureau of Labor Statistics pushed US payroll job gains to levels not seen since the dot.com boom of the 1990s. According to preliminary data, the economy added 257,000 total payroll jobs in January 2015. The report revised gains for November upward from 353,000 to 423,000 and those from December from 252,000 to 329,000.

The government sector lost 10,000 jobs in January. The government sector had added jobs in November and December, but over the year since January 2014, government jobs were down by 17,000. All levels of government shed jobs in January, but the federal government showed the largest losses. All told, the government sector has lost 688,000 jobs, including a net loss of 55,000 at the federal level, since the inauguration of President Barak Obama six years ago, contrary to his opponents’ idea that his administration would give rise to an “explosive growth of government jobs.”

Meanwhile, private sector jobs have boomed. The economy added 3,127,000 private payroll jobs between January 2014 and January 2015. That easily eclipsed the peak rate of job creation during the housing bubble of the early 2000’s, and was the strongest 12-month showing since 1997, at the height of the dot.com boom. >>>Read more

Follow this link to view or download a slideshow with additional charts of the latest US employment situation

Monday, February 2, 2015

Fifty Years of Macroeconomic Misery: Arthur Okun's Misery Index and Modern Variants

Remember the 1960s? The 1970s? Back then, inflation surged from one peak to another but failed to deliver the low unemployment rates promised by the Phillips curve. In fit of frustration, economist Arthur Okun invented what he called the misery index—the sum of the inflation and unemployment rates. As the chart shows, those were miserable years indeed.

Today we don’t hear much about the misery index. True, the index hit a 20-year peak in the depths of the Great Recession, but people hardly noticed. Now it is back to a relatively comfortable level and still headed down. In an era of chronically low inflation, Okun’s index just isn’t miserable enough to make the headlines. Couldn’t we add something to spice it up a little?

Spicing Up the Misery Index

Economists Robert Barro, and more recently, Steve Hanke, have tried to do just that. Both have added measures of real output growth and an interest rate to the misery index in an attempt to capture macroeconomic factors other than inflation and unemployment that make people unhappy. >>>Read more

Follow this link to view or download a slideshow version of this post

Friday, January 30, 2015

As US Growth Slows in Q4, Inflation Turns Negative

The Bureau of Economic Analysis reported today that the growth rate of real GDP slowed to anannual rate of 2.6 percent in the fourth quarter of 2014. That is barely half of the 5 percent rate reported for the third quarter, but still a bit above the 2.4 percent average growth rate since the recovery began in mid-2009. Today’s advance estimate is based on preliminary data and is subject to revision. The average revision from the advance to the third estimate, without regard to sign, is 0.6 percentage points.

Today’s release from the BEA includes a set of inflation estimates that are based on data from the national income accounts and thus represent an independent check on the more widely reported consumer price index compiled by the Bureau of Labor Statistics. The most closely watched of the BEA’s inflation indicators is the index for personal consumption expenditures (PCE index), which is used by the Federal Reserve as a guide to monetary policy. The PCE index decreased at a -0.5 percent annual rate in the quarter, putting it far below the Fed’s official target of +2 percent. A supplementary market-based version of the PCE index fell even more rapidly, at -1.1 percent. The market-based index excludes financial services and other items for which there are no observable market prices. >>>Read more

Follow this link to view or download a slideshow with additional charts from the latest GDP report

Monday, January 19, 2015

Consumer and Producer Surplus: A Slideshow-Tutorial

Consumer and producer surplus are useful concepts for explaining many points of microeconomic theory and policy. Applications include gains from trade in both domestic and international markets, the incidence and excess burden of a tax, and the deadweight loss from externalities.

Unfortunately, producer and consumer surplus are not always explained well in introductory micro textbooks. One problem (this applies to my own text as much as to others) is that there is only room in a conventional textbook for a limited number of graphs. A slideshow format works better because you can explain the concepts step by step, building your graphs piece by piece as you go along.

I wrote a slideshow-tutorial on consumer and producer surplus several years ago when I was teaching an MBA economics course in Zagreb, but I never posted it anywhere for easy public access. Earlier today, while I was working on my post and slideshow on the soda tax, I realized it would be useful to make the consumer and producer surplus tutorial available as a backgrounder, so here it is.

Follow this link to view or download a classroom-ready slideshow-tutorial on consumer and producer surplus