Wednesday, July 23, 2014

US CPI Rises at 3.1 Percent Annual Rate in June. What Does That Mean? An Increase in the Cost of Living, or Inflation?

On Tuesday, the Bureau of Labor Statistics announced that the US Consumer Price Index (CPI) rose Mike Bryan on the Atlanta Fed’s Macroblog has made me think again.
at a seasonally adjusted annual rate of 3.13 percent in June. What does such a figure really mean? Is it a measure of inflation or of the change in the cost of living? Until recently, I would have answered that there was no difference, but a recent series of posts by

What’s the difference?

As Bryan explains it, the cost-of-living concept arises from the role of money as a medium of exchange. When we say the cost of living increases, we mean that it gets harder to maintain a given standard of living on a given income. Either we have to be satisfied with fewer goods or services, or save less, or work harder. In the language of economics, a change in the cost of living is a real phenomenon.

On the other hand, we can best understand inflation as a change in the value of our unit of account, the dollar. When there is inflation, the value of the unit is smaller each day than it was the day before, for all transactions. This earlier post includes a chart showing how dramatically the value of our unit of account has changed over the past 100 years.

Imagine that you woke up one morning to find that someone had chopped an inch off all our rulers, so that today’s foot was now only as long as yesterday’s eleven inches. You might go from being six feet tall to six-foot-six, but it wouldn’t be any easier for you to reach the top shelf in the kitchen without a footstool. Similarly, if inflation raises both your income and the prices of everything you buy by the same percentage, the value of a dollar as an economic ruler shrinks, but it is neither harder nor easier to maintain the same real standard of living. In that sense, inflation is a purely nominal phenomenon. >>>Read more

Follow this link to view or download a brief slideshow with charts of the latest CPI data

Monday, July 14, 2014

Facial Justice: A Dystopian Classic of Beauty, Envy and Equality with a Solid Basis in Economics

I spent last week reading about beauty—not from the perspective of poetry or art history, but from
that of economics and social commentary.

The first of two books I read on the subject was Beauty Pays by my old classmate Daniel Hammermesh—a brisk, popular survey of research by the author and others on the question of why attractive people are more successful in the labor market. When I mentioned that book to my wife, the political scientist and ethicist of our family, she said I ought also to read L. P. Hartley’s Facial Justice, a 1960 dystopian novel in the genre of George Orwell’s 1984, but funnier, or Kurt Vonnegut’s story “Harrison Bergeron,” but more subtle. Although the literary styles of Hartley and Hammermesh couldn’t be more different, they share the premise that beauty is scarce and valuable.

The value of beauty

In Hartley’ post-World War III England, life is grim, but beauty still pays. The good jobs go to the good-looking Alphas, while the homely Gammas are lucky if they can find work as temporary subs for the better looking. The majority of average-lookers, the Betas, resent the Alphas and condescend to the Gammas. Most sinister of all, only Alphas can aspire to enter the privileged ranks of inspectors, who help the Dictator run the place. The heroine of the novel is a “failed Alpha”—a pretty girl who has just missed the cut to become an inspector because, she thinks, her nose is just a bit too retrouss√©. >>>Read more

Thursday, July 10, 2014

The Economics of Legal Marijuana in Washington State and Elsewhere

Like a majority of my neighbors, I voted in favor of Initiative 502, legalizing the sale of marijuana, in
the 2012 general election. Some voted for the measure so that they could get canabis of reliable quality at a reasonable price without risk of arrest. I voted for it because I believe in markets.

For the better part of two years, nothing happened. There is still no marijuana shop in our village shopping center. But this week things are starting to change—or are they? On Monday, the first licenses were issued for legal marijuana outlets. Will users get the safe and reasonably priced product they need? Will nonusers be free of the spillover of violence from drug criminals and the waste of law enforcement resources devoted to failed efforts to suppress them? The news says, “no.” Instead, at least in the short run, it looks like we are going to get shortages and high prices for the trickle of product that makes it into the handful of legal shops, while criminal purveyors continue business as usual.

Here is how I would explain what is going on to my Econ 101 students: >>>Read more

Follow this link to view or download a classroom-ready slideshow on the economics of legal marijuana markets

Saturday, July 5, 2014

US Job Market Shows Strong Gains, but Why is Part-Time Work Rising?

With improvement in all the headline indicators, today’s report on the US employment situation was
one of the strongest of the recovery. The unemployment rate fell 6.1 percent, a new low for the recovery. Payroll jobs rose by 288,000 in June. The broad unemployment rate and long-term unemployment also fell to new lows. At the same time, though, the number of people working part-time rose sharply. How should we understand the increase in part-time work even as the job market improves?

First, a look at the numbers

The monthly survey of business establishments showed gains in payroll jobs throughout the economy. The main goods-producing sectors--mining, construction, and manufacturing—all added jobs. In the service sector, retail trade and healthcare showed the largest gains. Government employment, which has been on a downward trend throughout most of the recovery, added 26,000 jobs, with local government, especially education, accounting for most of them. >>>Read more

Follow this link to view or download a slideshow with complete charts and commentary on the latest employment situation

Monday, June 30, 2014

Depending on How We Define "Recovery," the US Economy Has Already Recovered, May Recover Soon, or May Never Do So

According to the latest public opinion poll from CNNMoney, 61 percent of Americans think it will this slideshow for charts and analysis of the latest GDP revisions.)
take three more years for the U.S. economy to recover fully from the Great Recession. Only 3 percent think that it has already recovered, while 16 percent think it will never recover. And that was before last week’s news from the Bureau of Economic Analysis, which revised growth for the first quarter of 2014 downward to minus 2.9 percent. (See

Are the opinions of those who responded to the poll reasonable? How do their views stack up against those of professional economists?

What is a “recovery”?

The logical way to start this post would be to cite an official definition of “economic recovery,” but it turns out there isn’t one.  The Business Cycle Dating Committee of the National Bureau of Economic Research, which is the group that calls the economy’s cyclical turning points, does not use the term “recovery” at all. In the committee’s words, “a recession is a period between a peak and a trough, and an expansion is a period between a trough and a peak.” That leaves no room anywhere for “recovery.” >>>Read more
According to the latest public opinion poll from CNNMoney, 61 percent of Americans think it will take three more years for the U.S. economy to recover fully from the Great Recession. Only 3 percent think that it has already recovered, while 16 percent think it will never recover. And that was before last week’s news from the Bureau of Economic Analysis, which revised growth for the first quarter of 2014 downward to minus 2.9 percent. (See this slideshow for charts and analysis of the latest GDP revisions.)
Are the opinions of those who responded to the poll reasonable? How do their views stack up against those of professional economists?
What is a “recovery”?
The logical way to start this post would be to cite an official definition of “economic recovery,” but it turns out there isn’t one.  The Business Cycle Dating Committee of the National Bureau of Economic Research, which is the group that calls the economy’s cyclical turning points, does not use the term “recovery” at all. In the committee’s words, “a recession is a period between a peak and a trough, and an expansion is a period between a trough and a peak.” That leaves no room anywhere for “recovery.”
- See more at: http://www.economonitor.com/dolanecon/2014/06/30/when-will-the-economy-recover-what-does-economic-recovery-mean-anyway-public-and-professional-views/#sthash.PtfTh8YV.dpuf
According to the latest public opinion poll from CNNMoney, 61 percent of Americans think it will take three more years for the U.S. economy to recover fully from the Great Recession. Only 3 percent think that it has already recovered, while 16 percent think it will never recover. And that was before last week’s news from the Bureau of Economic Analysis, which revised growth for the first quarter of 2014 downward to minus 2.9 percent. (See this slideshow for charts and analysis of the latest GDP revisions.)
Are the opinions of those who responded to the poll reasonable? How do their views stack up against those of professional economists?
What is a “recovery”?
The logical way to start this post would be to cite an official definition of “economic recovery,” but it turns out there isn’t one.  The Business Cycle Dating Committee of the National Bureau of Economic Research, which is the group that calls the economy’s cyclical turning points, does not use the term “recovery” at all. In the committee’s words, “a recession is a period between a peak and a trough, and an expansion is a period between a trough and a peak.” That leaves no room anywhere for “recovery.”
- See more at: http://www.economonitor.com/dolanecon/2014/06/30/when-will-the-economy-recover-what-does-economic-recovery-mean-anyway-public-and-professional-views/#sthash.PtfTh8YV.dpuf

Saturday, June 28, 2014

Revisions for Q1 Show Biggest Drop in US GDP in Five Years

The third estimate of U.S. real GDP for Q1 2014, released this week by the Bureau of Economic Analysis, showed that the economy contracted at a 2.9 percent annual rate in the quarter. That was the fastest rate of contraction since the recovery began five years ago. The second estimate, released in May, had indicated a rate of contraction of just 1 percent.

The pause in the economic expansion had several causes. Unusually severe winter weather hurt the economy across the board. Exports, which had been a positive factor through most of the recovery, slowed sharply in the first quarter. A decrease in inventories adversely affected investment. Finally, although personal consumption continued to grow, the rate was slower than previously estimated, in part because of technical changes in the measurement of spending on healthcare.

The third revision confirmed a sharp decrease in corporate profits that had been reported previously. Profits fell by more than 9 percent before taxes, and nearly as much after taxes. Despite the drop, after-tax profits, which had been running at record levels in recent years, are still higher than the peak reached during the prerecession boom.

Observers believe that many of the factors leading to the first quarter decline in GDP are temporary. Relatively strong labor market performance during April and May make it very likely that growth will resume in Q2. Still, the weakness early in the year has caused the Federal Reserve to reduce its forecast of growth for the full year from a range of 2.8 to 3.0 percent down to a range of 2.1 to 2.3 percent.

Follow this link to view or download a classroom ready slideshow with additional charts and analysis of the Q1 2014 national income accounts.





Wednesday, June 25, 2014

Does Inherited Wealth Really Help the Economy? A Reply to Greg Mankiw

Writing for the Upshot section of the New York Times, Harvard economist Greg Mankiw has weighed
in on the Pikkety debate. He accepts Pikkety’s scenario of ever increasing inequality as at least a “provocative speculation,” if not established fact, but then asks, So what? What is wrong with inequality and inherited wealth?

Nothing, says Mankiw. In fact, he maintains that if we consider not only the direct effects on the family but also the indirect effects on the broader economy, inherited wealth is good not just for the rich but for the rest of us as well:
When a family saves for future generations, it provides resources to finance capital investments, like the start-up of new businesses and the expansion of old ones. Greater capital, in turn, affects the earnings of both existing capital and workers.
Because capital is subject to diminishing returns, an increase in its supply causes each unit of capital to earn less. And because increased capital raises labor productivity, workers enjoy higher wages. In other words, by saving rather than spending, those who leave an estate to their heirs induce an unintended redistribution of income from other owners of capital toward workers.
This may be good textbook economics, but it should not be allowed to pass without three major caveats. >>>Read more