US Q1 GDP Growth Revised down to 1.8 Percent on Falling Exports

Today’s GDP report from the Bureau of Economic Analysis revised the estimate for Q1 growth sharply downward, from 2.4 percent to 1.8 percent. As the following chart shows, the revision makes the rebound from the slowdown at the end of last year look less robust.



The early estimates for each quarter are based on incomplete data supplemented by extrapolations from historical trends, and revisions are common. The revision announced today was larger than usual, however. The average revision (without regard for sign) is 0.2 percentage points from the second estimate to the third. This time it was 0.6 points. The change from April's advance estimate of 2.5 percent was even larger. How can we explain it? >>>Read more

Follow this link to view or download a classroom-ready slideshow with charts and analysis of the latest GDP data

The Economics of the Good Life: A Critique of Growth

In the first part of my review of Robert and Edward Skidelsky’s How Much is Enough? I looked at the puzzle of leisure. Why, the Skidelskys ask, do we work so hard, even when we are well enough off to afford the additional leisure we need to live a good life? Beyond that follow some even more important questions:  What is a good life, anyway? Does endless economic growth make it easier or harder to live a good life? What kinds of public policy could help us live better? These questions contain both economic and philosophical elements, a combination that the Skidelsky team—the father, an economist, the son a philosopher—are eminently qualified to take on. This second part of my review explores some of their answers. >>>Read more

In the first part of my review of Robert and Edward Skidelsky’s How Much is Enough? I looked at the puzzle of leisure. Why, the Skidelskys ask, do we work so hard, even when we are well enough off to afford the additional leisure we need to live a good life? Beyond that follow some even more important questions:  What is a good life, anyway? Does endless economic growth make it easier or harder to live a good life? What kinds of public policy could help us live better? These questions contain both economic and philosophical elements, a combination that the Skidelsky team—the father, an economist, the son a philosopher—are eminently qualified to take on. This second part of my review explores some of their answers. - See more at: http://www.economonitor.com/dolanecon/2013/06/24/growth-public-policy-and-the-economics-of-the-good-life/#sthash.mZ8YvuZg.dpuf

Solving the Mystery of Keynes' "Mistaken" Prediction: Why Don't we Work Less and Take More Leisure

Robert Skidelsky is best known for his definitive three-volume biography of John Maynard Keynes. It hardly surprising, then, that he begins his latest book, How Much is Enough? (co-authored with his son, the philosopher Edward Skidelsky), with a puzzle posed by the master himself. Why is it that we work so many hours each week and enjoy so little leisure?

Keynes’ “mistaken” prediction

In 1928, Keynes gave a talk to a group of Cambridge undergraduates on the theme, “The Economic Possibilities for our Grandchildren.” Eschewing models and data, his message was that if people were wise enough to avoid ruinous wars, those living a hundred years in the future would enjoy a standard of living four to eight times higher than those living in 1928. Here are some key passages that catch the flavor of his remarks:

We may be on the eve of improvements in the efficiency of food production as great as those which have already taken place in mining, manufacture, and transport. In quite a few years—in in our own lifetimes I mean—we may be able to perform all the operations of agriculture, mining, and manufacture with a quarter of the human effort to which we have been accustomed. . . .

Thus for the first time since his creation man will be faced with his real, his permanent problem—how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well. . . .

Three-hour shifts or a fifteen-hour week . . . is quite enough to satisfy the old Adam in most of us!

>>>Read more

Robert Skidelsky is best known for his definitive three-volume biography of John Maynard Keynes. It hardly surprising, then, that he begins his latest book, How Much is Enough? (co-authored with his son, the philosopher Edward Skidelsky), with a puzzle posed by the master himself. Why is it that we work so many hours each week and enjoy so little leisure?
Keynes’ “mistaken” prediction
In 1928, Keynes gave a talk to a group of Cambridge undergraduates on the theme, “The Economic Possibilities for our Grandchildren.” Eschewing models and data, his message was that if people were wise enough to avoid ruinous wars, those living a hundred years in the future would enjoy a standard of living four to eight times higher than those living in 1928. Here are some key passages that catch the flavor of his remarks:

We may be on the eve of improvements in the efficiency of food production as great as those which have already taken place in mining, manufacture, and transport. In quite a few years—in in our own lifetimes I mean—we may be able to perform all the operations of agriculture, mining, and manufacture with a quarter of the human effort to which we have been accustomed. . . .
Thus for the first time since his creation man will be faced with his real, his permanent problem—how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well. . . .
Three-hour shifts or a fifteen-hour week . . . is quite enough to satisfy the old Adam in most of us!

- See more at: http://www.economonitor.com/dolanecon/2013/06/17/how-much-is-enough-why-do-we-work-so-much-and-enjoy-so-little-leisure/#sthash.79FObQO3.dpuf

Case Study in Hyperinflation: Venezuela on the Brink

The Central Bank of Venezuela recently reported an inflation rate for May of 6.9 percent, equivalent to an annualized rate of more than 100 percent. Does this mean that Venezuela is on the brink of hyperinflation? A quick look at the relevant economic concepts suggests that hyperinflation is in fact a real danger.

What is hyperinflation and where does it come from?

Hyperinflation has a long history, but no official definition. In an influential 1956 paper, Phillip Cagan suggested limiting the term to a rate of inflation of 50 percent per month or more, which is equivalent to an annual compound rate of about 14,000 percent. That would fit extreme cases like Weimar Germany, Hungary after World War II, or, more recently, Zimbabwe, in which inflation rates reached millions or trillions of percent per year.

Although some economists still adhere to Cagan’s guideline, others prefer a more flexible definition. I like to apply the term hyperinflation to any case in which inflation seriously undermines the ability of money to serve its classic functions as a store of value, a unit of account, and a medium of exchange. That can begin to happen at rates of inflation of 100 percent per year or even less. Less extreme cases like Russia, Argentina, and Bulgaria in the 1990s would qualify, even though inflation reached only the low thousands of percent per year. Venezuela may well be approaching such an episode now.

... Orginally posted by Economonitor.com, site no longer active. See here for an updated (2018) version of this post.

The Central Bank of Venezuela recently reported an inflation rate for May of 6.9 percent, equivalent to an annualized rate of more than 100 percent. Does this mean that Venezuela is on the brink of hyperinflation? A quick look at the relevant economic concepts suggests that hyperinflation is in fact a real danger.
What is hyperinflation and where does it come from?
Hyperinflation has a long history, but no official definition. In an influential 1956 paper, Phillip Cagan suggested limiting the term to a rate of inflation of 50 percent per month or more, which is equivalent to an annual compound rate of about 14,000 percent. That would fit extreme cases like Weimar Germany, Hungary after World War II, or, more recently, Zimbabwe, in which inflation rates reached millions or trillions of percent per year.
Although some economists still adhere to Cagan’s guideline, others prefer a more flexible definition. I like to apply the term hyperinflation to any case in which inflation seriously undermines the ability of money to serve its classic functions as a store of value, a unit of account, and a medium of exchange. That can begin to happen at rates of inflation of 100 percent per year or even less. Less extreme cases like Russia, Argentina, and Bulgaria in the 1990s would qualify, even though inflation reached only the low thousands of percent per year. Venezuela may well be approaching such an episode now.
- See more at: http://www.economonitor.com/dolanecon/2013/06/14/venezuela-on-the-brink-of-hyperinflation/#sthash.Cex9VBxj.dpuf

The Central Bank of Venezuela recently reported an inflation rate for May of 6.9 percent, equivalent to an annualized rate of more than 100 percent. Does this mean that Venezuela is on the brink of hyperinflation? A quick look at the relevant economic concepts suggests that hyperinflation is in fact a real danger.
What is hyperinflation and where does it come from?
Hyperinflation has a long history, but no official definition. In an influential 1956 paper, Phillip Cagan suggested limiting the term to a rate of inflation of 50 percent per month or more, which is equivalent to an annual compound rate of about 14,000 percent. That would fit extreme cases like Weimar Germany, Hungary after World War II, or, more recently, Zimbabwe, in which inflation rates reached millions or trillions of percent per year.
Although some economists still adhere to Cagan’s guideline, others prefer a more flexible definition. I like to apply the term hyperinflation to any case in which inflation seriously undermines the ability of money to serve its classic functions as a store of value, a unit of account, and a medium of exchange. That can begin to happen at rates of inflation of 100 percent per year or even less. Less extreme cases like Russia, Argentina, and Bulgaria in the 1990s would qualify, even though inflation reached only the low thousands of percent per year. Venezuela may well be approaching such an episode now.
- See more at: http://www.economonitor.com/dolanecon/2013/06/14/venezuela-on-the-brink-of-hyperinflation/#sthash.Cex9VBxj.dpuf

The Central Bank of Venezuela recently reported an inflation rate for May of 6.9 percent, equivalent to an annualized rate of more than 100 percent. Does this mean that Venezuela is on the brink of hyperinflation? A quick look at the relevant economic concepts suggests that hyperinflation is in fact a real danger.
What is hyperinflation and where does it come from?
Hyperinflation has a long history, but no official definition. In an influential 1956 paper, Phillip Cagan suggested limiting the term to a rate of inflation of 50 percent per month or more, which is equivalent to an annual compound rate of about 14,000 percent. That would fit extreme cases like Weimar Germany, Hungary after World War II, or, more recently, Zimbabwe, in which inflation rates reached millions or trillions of percent per year.
Although some economists still adhere to Cagan’s guideline, others prefer a more flexible definition. I like to apply the term hyperinflation to any case in which inflation seriously undermines the ability of money to serve its classic functions as a store of value, a unit of account, and a medium of exchange. That can begin to happen at rates of inflation of 100 percent per year or even less. Less extreme cases like Russia, Argentina, and Bulgaria in the 1990s would qualify, even though inflation reached only the low thousands of percent per year. Venezuela may well be approaching such an episode now.
- See more at: http://www.economonitor.com/dolanecon/2013/06/14/venezuela-on-the-brink-of-hyperinflation/#sthash.Cex9VBxj.dpuf

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The Central Bank of Venezuela recently reported an inflation rate for May of 6.9 percent, equivalent to an annualized rate of more than 100 percent. Does this mean that Venezuela is on the brink of hyperinflation? A quick look at the relevant economic concepts suggests that hyperinflation is in fact a real danger.
What is hyperinflation and where does it come from?
Hyperinflation has a long history, but no official definition. In an influential 1956 paper, Phillip Cagan suggested limiting the term to a rate of inflation of 50 percent per month or more, which is equivalent to an annual compound rate of about 14,000 percent. That would fit extreme cases like Weimar Germany, Hungary after World War II, or, more recently, Zimbabwe, in which inflation rates reached millions or trillions of percent per year.
Although some economists still adhere to Cagan’s guideline, others prefer a more flexible definition. I like to apply the term hyperinflation to any case in which inflation seriously undermines the ability of money to serve its classic functions as a store of value, a unit of account, and a medium of exchange. That can begin to happen at rates of inflation of 100 percent per year or even less. Less extreme cases like Russia, Argentina, and Bulgaria in the 1990s would qualify, even though inflation reached only the low thousands of percent per year. Venezuela may well be approaching such an episode now.
- See more at: http://www.economonitor.com/dolanecon/2013/06/14/venezuela-on-the-brink-of-hyperinflation/#sthash.Cex9VBxj.dpuf

Breakup of the Ruble Area (1991-1993): A Cautionary Tale for the Euro

Good news: The euro crisis is over. At least that is how French President Francois Hollande sees it, according to remarks he made during his recent trip to Japan. Latvia's pending entry is another piece of news for the battered currency area. Never mind minor problems like a deepening recession in many countries, unsustainable government debts in others, and faltering export performance in still others.

The good news/bad news situation of the euro should serve to remind us that currency areas do not necessarily last forever. The biggest currency area collapse in recent times was the fifteen-nation ruble area, which existed briefly following the breakup of the Soviet Union. It seems like a good time to update a little slideshow I wrote a few years ago on the breakup of the ruble area and its lessons for the euro.

This is an updated version of a slideshow first published in January 2010. Click on the image to view the full updated slideshow

Good news: The euro crisis is over. At least that is how French President Francois Hollande sees it, according to remarks he made during his recent trip to Japan. Latvia’s pending entry is another piece of news for the battered currency area. Never mind minor problems like a deepening recession in many countries, unsustainable government debts in others, and faltering export performance in still others.
The good news/bad news situation of the euro should serve to remind us that currency areas do not necessarily last forever. The biggest currency area collapse in recent times was the fifteen-nation ruble area, which existed briefly following the breakup of the Soviet Union. It seems like a good time to update a little slideshow I wrote a few years ago on the breakup of the ruble area and its lessons for the euro.
Click on the image to view the full slideshow
- See more at: http://www.economonitor.com/dolanecon/2013/06/12/breakup-of-the-ruble-area-1991-1993-a-cautionary-tale-for-the-euro/#sthash.XlgnucI0.dpuf

Good news: The euro crisis is over. At least that is how French President Francois Hollande sees it, according to remarks he made during his recent trip to Japan. Latvia’s pending entry is another piece of news for the battered currency area. Never mind minor problems like a deepening recession in many countries, unsustainable government debts in others, and faltering export performance in still others.
The good news/bad news situation of the euro should serve to remind us that currency areas do not necessarily last forever. The biggest currency area collapse in recent times was the fifteen-nation ruble area, which existed briefly following the breakup of the Soviet Union. It seems like a good time to update a little slideshow I wrote a few years ago on the breakup of the ruble area and its lessons for the euro.
Click on the image to view the full slideshow

- See more at: http://www.economonitor.com/dolanecon/2013/06/12/breakup-of-the-ruble-area-1991-1993-a-cautionary-tale-for-the-euro/#sthash.XlgnucI0.dpuf

Good news: The euro crisis is over. At least that is how French President Francois Hollande sees it, according to remarks he made during his recent trip to Japan. Latvia’s pending entry is another piece of news for the battered currency area. Never mind minor problems like a deepening recession in many countries, unsustainable government debts in others, and faltering export performance in still others.
The good news/bad news situation of the euro should serve to remind us that currency areas do not necessarily last forever. The biggest currency area collapse in recent times was the fifteen-nation ruble area, which existed briefly following the breakup of the Soviet Union. It seems like a good time to update a little slideshow I wrote a few years ago on the breakup of the ruble area and its lessons for the euro.
Click on the image to view the full slideshow

- See more at: http://www.economonitor.com/dolanecon/2013/06/12/breakup-of-the-ruble-area-1991-1993-a-cautionary-tale-for-the-euro/#sthash.XlgnucI0.dpuf

Good news: The euro crisis is over. At least that is how French President Francois Hollande sees it, according to remarks he made during his recent trip to Japan. Latvia’s pending entry is another piece of news for the battered currency area. Never mind minor problems like a deepening recession in many countries, unsustainable government debts in others, and faltering export performance in still others.
The good news/bad news situation of the euro should serve to remind us that currency areas do not necessarily last forever. The biggest currency area collapse in recent times was the fifteen-nation ruble area, which existed briefly following the breakup of the Soviet Union. It seems like a good time to update a little slideshow I wrote a few years ago on the breakup of the ruble area and its lessons for the euro.
Click on the image to view the full slideshow

- See more at: http://www.economonitor.com/dolanecon/2013/06/12/breakup-of-the-ruble-area-1991-1993-a-cautionary-tale-for-the-euro/#sthash.XlgnucI0.dpuf

Good news: The euro crisis is over. At least that is how French President Francois Hollande sees it, according to remarks he made during his recent trip to Japan. Latvia’s pending entry is another piece of news for the battered currency area. Never mind minor problems like a deepening recession in many countries, unsustainable government debts in others, and faltering export performance in still others.
The good news/bad news situation of the euro should serve to remind us that currency areas do not necessarily last forever. The biggest currency area collapse in recent times was the fifteen-nation ruble area, which existed briefly following the breakup of the Soviet Union. It seems like a good time to update a little slideshow I wrote a few years ago on the breakup of the ruble area and its lessons for the euro.
Click on the image to view the full slideshow

- See more at: http://www.economonitor.com/dolanecon/2013/06/12/breakup-of-the-ruble-area-1991-1993-a-cautionary-tale-for-the-euro/#sthash.XlgnucI0.dpuf

Why Latvia's Decision to Join the Euro Makes Sense

Last week’s convergence report from the European Commission gave Latvia the green light to become the eighteenth member of the eurozone as of next January. “The eurozone is again a club with a queue–not at the exit but at the entrance,” crowed Herman Van Rompuy, president of the European Council. “Joining the eurozone will foster Latvia’s economic growth, for sure,” Latvian Prime Minister Valdis Dombrovskis said in Riga. Yet Latvians on the street are less certain. Public opinion polls show that only about 35 percent of respondents favor the switch, and opposition parties that oppose the euro have done well in recent local elections.

Who is right? Is it really a good idea for Latvia to sign on for membership in Europe’s troubled currency union? Let’s look at some of the factors that would make the answer “yes” or “no.”

Criteria for an optimal currency area

We can begin by setting Latvia and the euro to one side to look at the broader question of which countries or regions might benefit from common currencies. Imagine that we sit down with a blank outline map of the world and try to fill it in so that countries and regions that are better off sharing currencies are assigned the same color. We ask questions like these: Should Maryland and Virginia both use the dollar? If yes, color them both green. Should Russia and Ukraine both use the ruble? If yes, color them both red, and so on. When our map is finished, the regions with the same color—whether they are sovereign nations, groups of nations, or regions that overlap national borders—are what economists call optimal currency areas.>>>Read More

US Labor Market Shows Moderate Gains in May

The US labor market continued its gradual improvement in May. The economy added 175,000 new payroll jobs, somewhat more than in March and April, as shown in the following chart. Payroll job growth was strongest in service sectors, with retail trade, professional and business services, and leisure and hospitality all showing strong growth. Construction added 7,000 jobs but those were offset by a decrease in manufacturing jobs, so that there was no net job growth in the goods-producing sectors. The addition of 13,000 local government jobs helped to offset continued job cuts at the federal and state levels.



The household survey, which includes self-employed persons and farm workers, showed an increase of 319,000 jobs. Some 420,000 new workers entered or re-entered the labor force, bringing the employment-population ratio up slightly. Since the labor force increased by more than the number of employed workers, the number of unemployed also increased. The unemployment rate, which is the ratio of unemployed workers to the labor force, rose fractionally from 7.513 percent to 7.553 percent. That will be enough for news headlines, which usually show the unemployment rate rounded to the nearest tenth of a percent, to report an increase from 7.5 to 7.6 percent. >>>Read more

Follow this link to view or download a classroom-ready slideshow with complete charts of the latest employment situation

Corporate Profits Soar as Proprietors’ Income Stagnates: The Decline of Small Business and what to do about it.

Americans have long seen small businesses as the heart and soul of their economy, but small firms have not fared well in recent years. Corporations, in contrast, seem to be on a roll, with profits and stock prices soaring to record highs. Is small business really in decline, and if so, what should we do about it?

First, some data

One striking indication that small business is falling behind is the divergence between corporate profits and proprietors’ income. The trend is evident in data, shown in the following chart, that were released last week by the Bureau of Economic Analysis.



It is true that the two series in the chart correspond only approximately to the popular distinction between big and small business. Proprietors’ income includes the current income of unincorporated businesses that have the legal forms of proprietorships, partnerships, and tax-exempt cooperatives. It does not perfectly match up with small firm size because some small firms are incorporated and some proprietorships, partnerships, and cooperatives are large. Also, proprietors’ income is not, in an economic sense, a pure measure of the profits of small businesses, since it includes the imputed income of small business owners who live off the net proceeds of their enterprises without paying themselves a salary or interest on funds they have loaned to their firms. >>>Read more