First GDP Data for Q2 2014 Show US Economy was Stronger Than Previously Thought

Today’s report from the Bureau of Economic Analysis shows the US economy to be much stronger than previously thought. The advance estimate for the second quarter of 2014 showed real GDP expanding at an annual rate of 4 percent. The new data revised the dip in GDP for Q1 from -2.9 percent to -2.1 percent, and raised the estimated growth rate for three out of four quarters in 2013. The following chart shows previously reported and revised data for the past seven years.

As the following table shows, the turnaround in the economy was very broadly based. Consumption contributed 1.69 percentage points to the growth of GDP, a little above the average of the past two years. Investment was very strong, contributing 2.57 percentage points to growth, far above its recent average. Both fixed investment and inventory investment reversed their declines of Q1. >>>Read more

Follow this link to view or download a short slideshow with additional charts related to this post
 

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

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 retroussé. >>>Read more

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

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