Thursday, May 24, 2012

Economic Follies of the 1960s Echo in the 2012 Presidential Campaign

The 2012 presidential campaign is gaining momentum. Both sides agree that the economy will be the central issue. Mitt Romney is promising to get unemployment down to 6 percent by the end of his first term and eventually to 4 percent. Barack Obama is hesitant to set a numerical target, having been burned doing that early in his term, but he makes it clear he thinks he can do better than the GOP candidate.  I hear echoes of the 1960s, when John Kennedy won the presidency with a promise to get the country moving again. It may be a good time to take a look back at that period. Read more>>>

Sunday, May 20, 2012

US Inflation Data: Seasonally Adjusted CPI Shows Zero Change for April

The headline number in the latest inflation report from the Bureau of Labor Statistics, the Consumer Price Index for all urban consumers, seasonally adjusted, showed zero change for April 2012. Unrounded data for the month, restated at an annual rate, showed inflation of 0.36 percent, down from 3.54 percent in March.

Without seasonal adjustment, the inflation rate for April was 3.7 percent. Motor fuel prices contributed to the difference between the rates with and without seasonal adjustment. Motor fuel prices usually rise in April, but this year, they rose much less than usual. The unadjusted increase was 1.8 percent, but the seasonally adjusted change was -2.6 percent. 

Food and energy prices are volatile and usually account for much of the month-to-month change in the CPI. We can remove their effect by taking food and energy out of the CPI. Economists call the result the core inflation rate. The monthly change in core inflation, stated at an annual rate, was 2.92 percent in April, about the same as in March.

Another way to remove volatility is the 16% trimmed mean CPI published by the Federal Reserve Bank of Cleveland. It removes the 8% of prices that increase most and the 8% that increase least in each month, whatever they are. The 16 percent trimmed mean CPI increased at an annual rate of 1.94 percent in April, down about half a point from the March rate.

Economists use adjusted measures of inflation, such as the seasonally adjusted, core, and 16 percent trimmed mean indexes, because they are looking for underlying trends that are relevant to the formulation of economic policy. Changes caused by seasonal factors, and changes like the price of oil, which are determined in world markets, are not highly relevant to policy making. Consumers, on the other hand, look at price changes as they happen in the real world, without seasonal adjustment. Far from ignoring prices that change more than usual, they may give them exaggerated importance. For that reason, the rate of inflation as perceived by consumers is often higher than inflation as measured by economists. For a detailed discussion of the difference between perceived and measured inflation, see this earlier post.

To see longer-term trends in inflation, it is useful to look at year-on-year changes, which compare each month’s price level with that of the same month in the year before. All year-on-year measures of inflation rates slowed during the global recession then rose again for most of 2011. All-items and core inflation have converged to rates of just over 2 percent in 2012. The Fed considers inflation of about 2 percent to be consistent with its mandate to maintain price stability.

Follow this link to view or download a classroom-ready slideshow with charts of all the latest inflation data.

Thursday, May 17, 2012

Inflation is Quiet, So Why are People Still Feeling its Pain?

This week’s report from the Bureau of Labor Statistics shows no change in the seasonally adjusted U.S. consumer price index for April. Real average hourly earnings were also unchanged. On the face of it, those numbers should take inflation off the list of things people have to worry about, but they don’t. Instead, every time I post numbers that show inflation is low, I get comments like these:
“Inflation is creeping in. Businesses are holding back. People are up against the wall.”
“Those who live in ivory towers and pontificate about the ‘real’ economy while being totally removed from it should really experience how the 99 percent live.”
“If you believe the BS stats, you are in the minority. Consumers KNOW differently. Core CPI, etc. What a pile of cowdung!” >>>Read more

Saturday, May 12, 2012

Costs of the employer health care deduction and other links

  • Writing in Forbes, Avik Roy explains how the employer health care deduction drives up health care costs for everyone, in part by increasing the bargaining power of major hospitals and weakening the incentive of insurers to resist that bargaining power. "Fourth-party insurance is worth than third-party insurance," says Roy.
  • John Kay of the Financial Times writes that it is time to reform banking regulation to encourage more innovation and competition. What particularly gets him going are regulatory requirements that force anyone who wants to start a new bank to make it just like other banks. Imagine what it would be like, says Kay, if there were a software regulatory agency that had required Bill Gates to work for several years at IBM and finish his Harvard degree before starting his own software firm.
  • Simon Johnson sees the $2 billion trading loss at JP Morgan as a sign that banks can't be trusted to manage risks wisely. The disaster at the bank that was supposed to be the best risk manager strengthens the case for stronger regulation of proprietary trading.

Thursday, May 10, 2012

How the Latin Triangle Swallowed the Euro

Back in 1996, Rudiger Dornbusch wrote a paper about the political economy of exchange rates in Latin America. He called it “The Latin Triangle”. It describes a cycle in which governments become trapped in inappropriate fixed-exchange rates that inevitably end unhappily. Latin America has put that particular form of economic instability behind it, but a new version of the Latin triangle seems to be playing itself out in Europe today, both in the weaker members of the euro area (the so-called PIIGS) and in some of the newer member states that chose fixed rates (the BELLs—Bulgaria, Estonia, Latvia and Lithuania). This post explores the implications of the Latin American experience for Europe today. >>>Read More

Saturday, May 5, 2012

Looking for the Good News in the April Jobs Report

The April jobs report from the Bureau of Labor Statistics is not a strong one. Most comments have focused on the bad news, especially the modest 115,000 increase in payroll jobs. If you look hard, there is some good news, too, although not as much or as easy to find as we would like.

Start my looking more closely at the numbers for payroll jobs. The headline number was admittedly paltry. However, there were some welcome upward revisions for earlier months.  The March number was revised up by 34,000, to 154,000, and February’s by 19,000, to 259,000. All in all, the April report revealed 168,000 new jobs that we didn’t previously know about. That sounds at least a little better. Read more>>>

Follow this link to view or download a brief classroom-ready slideshow with charts of the latest employment numbers.

Thursday, May 3, 2012

Fracking and the Environment: An Economic Perspective

When people look at “fracking”—the production of natural gas through hydraulic fracturing techniques--they see different things. Critics see polluted wells, exploding houses, and earthquakes—an environmental disaster in the making. These anti-frackers have a simple solution: ban it. In contrast, industry supporters see hydraulic fracturing as a safe technology that drillers have been using for decades without controversy and that now promises a new era of energy abundance. The pro-frackers, too, have a simple solution: get the government out of the way and drill baby, drill.

As an economist, I see something still different: a familiar pattern of negative externalities and missing market signals, to which the appropriate response is unlikely to be either prohibition or laissez-faire. >>>Read more