Monday, December 7, 2015

Parsing the Polls: Does US Public Opinion Realy Support a Strong Climate Policy?

The latest polls of US public opinion bring both good news and bad for the success of the COP21 climate talks now underway in Paris.

On the positive side, a new New York Times/CBS News poll finds that two-thirds of Americans think their country should join an international treaty requiring it to reduce emissions in an effort to fight global warming. That includes a slim majority of Republicans. When pollsters pointed out that such a treaty is likely to involve tradeoffs between stimulating the economy and protecting the environment, respondents favored protecting the environment by 54 to 34 percent.

Those numbers suggest the kind of strong public backing that US negotiators would need to achieve a treaty with real teeth in it. To most economists, whether conservative, progressive, or libertarian, “real teeth” can only mean carbon taxes or some other mechanism to subject frontline decision makers in households, businesses, and governments to the grinding, day-to-day pressure of market prices. Are you going to drive your Prius instead of your SUV to the store today? Are you going to serve a smaller steak for dinner? Are you going to diversify your giant energy company away from fossil fuels before it goes the way of Kodak? Probably not, if failing to act costs you nothing.


But before you get the your hopes up, let’s take a closer look at those opinion polls. US public support for strong action on climate change may be broad, but there are indications that it is also shallow and fragile. >>>Read more

Tuesday, December 1, 2015

Is the Federal Debt Out of Control? Here is Why it is Not

Note to Readers: Ed Dolan's Econ Blog is back, now that I have finished a time-consuming revision of my econ textbook (to be released soon). Thank you for your patience.
 
The GOP primary has become an orgy of fear mongering, and not just about immigrants and terrorists. The candidates regularly portray the federal debt, too, as a dire threat to America’s future. Some samples:
  • Marco Rubio: “We have a $19 trillion bipartisan debt and it continues to grow as we borrow money from countries that do not like us to pay for government we cannot afford. . . The time to act is now. The time to turn the page is now. If we — if we don’t act now, we are going to be the first generation in American history that leaves our children worse off than ourselves.”
  • Chris Christie: “We have $19 trillion in debt. . . And we’re talking about fantasy football? Can we stop? . . . Are you concerned like I am that the debt and deficits of Washington, D.C. are endangering America’s future?”
  • Mike Huckabee: “I do not want to walk my five grandkids through the charred remains of a once great country called America, and say, ‘Here you go, $20 trillion dollars of debt. Good luck making something out of this mess.’ ”
  • Rand Paul: “You know, I left my medical practice and ran for office because I was concerned about an $18 trillion debt. We borrow a million dollars a minute. Now, on the floor of the Congress, the Washington establishment from both parties puts forward a bill that will explode the deficit. It allows President Obama to borrow unlimited amounts of money. I will stand firm. I will spend every ounce of energy to stop it. I will begin tomorrow to filibuster it. And I ask everyone in America to call Congress tomorrow and say enough is enough; no more debt.”
An exploding debt certainly sounds scary, but are federal finances that far out of control? Not really. If we look at the numbers, we can see that the debt is far from the dire threat the Republican candidates make it out to be. >>>Read more

Follow this link to view or download a slideshow tutorial with additional examples and charts related to sustainability of the federal debt.

Wednesday, July 15, 2015

Why Greece is More Like Argentina than Like Israel

Bernard Avishai, who teaches business at the Hebrew University in Jerusalem, published an article in The New Yorker this week titled “Why Greece Needs the Euro.” A key part of his argument hinges on a comparison between Greece and Italy. In fact, Avishai has it backwards. A closer look at the Israeli experience shows that Greece does not need the euro. Here is why:


After considering the argument that Canada’s flexible exchange rate helped it recover rapidly from the global crisis of 2008, Avishai writes that “Israel is a more telling example than Canada, having suffered an economic crisis much like Greece’s, in the early eighties.” In response to the crisis, he explains, Prime Minister Simon Peres introduced a new shekel pegged to the dollar. “The Israeli government’s decision to keep the new shekel constant and to seek free access to American and European markets was the foundation of the entrepreneurial economy that emerged in Israel during the nineties,” he concludes.

A strange argument. What Avishai inexplicably fails to mention is that Israel quickly abandoned its fixed exchange rate as unsustainable. >>>Read more

Tuesday, July 7, 2015

Trump Blames US Export Woes on Chinese Currency Manipulation. Really?

Donald Trump is surging in the GOP primary polls, partly on the basis of a carefully crafted reputation for telling it as it is. Even rival Ted Cruz thinks Trump is “teriffic” and “brash,” saying, “I think he tells the truth.” But when he comes to China’s exchange rate policy, he is about as far from the truth as he could get.

Last week Jake Tapper, host of  CNN's "State of the Union," interviewed Trump on a wide range of issues. It wasn’t long before the conversation turned to trade, jobs, and China. “You have to take the jobs back from China” before you can even begin to solve problems like the national debt and healthcare, Trump asserted.

Tapper slyly pointed to a Trump necktie he had put on for the occasion. “Isn’t it hypocritical of you to talk about this,” he asked, “while you’re manufacturing your clothes in China?”

“Not at all,” Trump replied. “A lot of them are made in China, because they've manipulated their currency to such a point that it's impossible for our companies to compete with them.”
So, does China really manipulate its currency? Can we blame China for the lack of American competitiveness? We’re going to hear a lot about Chinese currency manipulation before this presidential campaign is over, so it might be a good idea to do some fact checking right at the outset. >>>Read more

Tuesday, June 30, 2015

Program Notes for the Greek Endgame: Austerity, Cyprus, and How to Exit a Currency Area

The Greek government has rejected the latest austerity and reform proposals from the EU, the ECB, and the IMF.  It has declared a national referendum, scheduled for Sunday, and urges a "No" vote. "We ask you to reject it with all the might of your soul, with the greatest margin possible," says Prime Minister Alexis Tsipras. Greek banks, which have been hit by an accelerating run, are to remain closed until after the vote. Yet rumors swirl of behind-the-scenes talk and a last minute deal.

We don’t yet know what lies ahead—default? Exit from the euro? Exit from the EU? Some kind of muddling through with a parallel currency and a declaration that any default is “only technical”? Answers to those questions will come only after Greek voters make a choice.

Meanwhile, here are some program notes and links to background material that should help place the Greek crisis in the context of similar episodes elsewhere.

How Tough has Greek Austerity Really Been?

To hear Greeks tell it, their country has undergone a deeper slump and tougher austerity measures than any other European country. Some of their EU partners, on the other hand, portray the Greek government as unwilling to take moderate, common-sense measures that everyone else has already successfully implemented. What do the numbers say?

This post, published at the time of the elections that brought the radical left Syriza party to power, shows that the Greek perception is largely correct. The slump in Greece, as measured by the gap between current and full-employment levels of GDP, has been catastrophic, a plunge of more than 20 percentage points. At the same time, budget cuts and tax increases have moved the best indicator of austerity—the underlying primary budget balance—nearly 20 percentage points toward surplus. Those movements far exceed what has happened in the United States or in any other European country. Read more

Wednesday, June 17, 2015

A Critique of the ShadowStats Alternate Unemployment Rate

A few weeks ago, I posted a critique of the alternate inflation measure devised by John Williams for his popular website ShadowStats.com. Several responders asked if I could also comment on Williams’ alternate unemployment rate.

Here, reproduced with permission is the latest unemployment chart from ShadowStats. Like William’s inflation rate, his unemployment numbers run far higher than the official data from the Bureau of Labor Statistics (BLS). This post addresses two questions: First, what is the intended purpose of the ShadowStats alternate unemployment indicator? Second, given what it tries to do, is it calculated in a reasonable way?

 In search of the employment gap
The standard unemployment rate from the BLS, known as U-3, focuses on a very narrow segment of the labor market. It tells us how many people are not working but who have actively looked for work in the past four weeks, expressed as a percentage of the civilian labor force. (The civilian labor force includes all people 16 years and older who are not in prison or the armed services.)The ratio of active job seekers to the labor force is highly sensitive to ups and downs in the business cycle. For that reason, monetary and fiscal policymakers watch it closely in deciding whether the economy needs stimulus or restraint. It is not perfect, but if what we want is a short-term business cycle indicator, it is probably good enough.

Williams, however, is looking for something different. His alternate unemployment rate should be understood as a broad measure of the employment gapthe difference between the amount of work that people would like to do and the amount they actually do. >>>Read more

Monday, June 1, 2015

Spillover from Russian Crisis Hits Latvian Economy, but So Far the Damage is Limited

From the beginning, it was clear that the economic crisis in Russia would pose multiple problems for Latvia and its Baltic neighbors. Until recently, many businesspeople in Latvia had seen close trade, transportation, and financial linkages as strengths that allowed their country to serve as Russia’s economic portal to the EU. Since the middle of last year, a collapse in oil prices, compounded by sanctions and countersanctions arising from the Ukraine conflict, have sent the Russian economy into a tailspin. Latvian ties to Russia have become liabilities rather than assets.

As the chart shows, growth of the Latvian economy has slowed since the Ukraine conflict began in the spring of 2014, but not come to a halt. According to preliminary data for the first quarter of this year, growth remains equal to the Eurozone average, which itself is improving. In that regard, Latvia has done better than neighboring Estonia and Lithuania, which have also felt the impact of conditions in Russia. >>>Read more

Wednesday, May 27, 2015

How to Maximize the International Impact of US Climate Mitigation Policy

A recent post by David Bailey and David Bookbinder on the Niskanen Center blog Climate Unplugged addresses a common Conservative criticism of unilateral climate mitigation efforts by the United States or other developed countries. As the critics point out, emissions from developing countries are expected to grow so rapidly that even if the US or EU reached zero carbon, it would reduce global temperatures in 2100 by only a few one-hundredths of a degree.

Bailey and Bookbinder acknowledge that developed countries cannot do the job by themselves. However, they argue that our mitigation efforts are not wasted, since US leadership is needed to induce others to act in concert:
Without the industrialized countries acting to—as the developing nations would say—put their own houses in order, it is impossible to believe that developing countries will act on their own. Action by the industrialized nations is thus necessary in order to secure the required collective action, while being insufficient on its own.
They make a valid point, but I would like to add that in order to maximize the effectiveness of US leadership, we need to pursue the right kind of mitigation policy. A comment on the Bailey-Bookbinder post by the Cato Institute’s Chip Knappenberger explains why. Knappenberger agrees that that unilateral US emissions reductions have little if any direct impact. He says that their purpose, instead,
is to attempt to spur technological innovation and set an example as to what can be done to reduce emissions—with Americans serving both as the experimenters and the  guinea pigs. It is not the climate impact of our experiment that is of any significance, but instead it is the tools that we may develop in attempting to achieve major emissions reductions. For the only truly effective course of action we have available to us in attempting to control the future course of global climate is to tell the rest of the world what to do and how to do it.
What we see here is that there are two mechanisms by which unilateral US efforts could induce others to act in concert, one diplomatic and one technological. The two have different implications for the kind of policy that would be most effective. >>>Read more

Wednesday, May 13, 2015

A Case Study in Natural Monopoly: China's Fading Dominance of Rare Earths

Rare earth elements (REEs) are a group of seventeen elements with exotic names like neodymium and yttrium that are key ingredients in many high-tech products, many important for national defense. Imagine the consternation of Western officials when they woke up one morning in September 2010 to learn that China held a near-monopoly in the production of these vital materials. In retaliation for the collision of a Chinese fishing boat with a Japanese Coast Guard vessel near a group of disputed islands in the East China Sea, China threatened an embargo. Prices of REEs soared.

How did China become the world’s leading producer of REEs? Did the 97 percent market share it held in 2010 represent a true natural monopoly? At the time, I wrote that its hold on the market was more fragile than it appeared. The erosion of China’s dominance of REEs holds important lessons for all supposed natural monopolies.

The first clue should have been that rare elements are not really rare. All seventeen rare earth elements are more abundant in the earth’s crust than gold, and some of them are as abundant as lead. The thing that makes them hard to mine is the fact that they do not occur in highly concentrated deposits like gold and lead. Even the best REE ores have very low concentrations. On the other hand, such ores exist widely throughout the world. Until the 1960s, India, Brazil, and South Africa were the leading producers. From the 1960s to the 1990s, the Mountain Pass Mine in California was the biggest source. China’s began to dominate of REE production only in the late 1990s. >>>Read more

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

Thursday, April 16, 2015

Open Memo to Rand Paul: An Outline for a Libertarian Fiscal Policy

“As President,” says candidate Rand Paul, “I will work to authorize common sense solutions that will solve our nation's fiscal crisis.” He has floated a broad proposal for a constitutional amendment that would require the federal government to balance its budget. Soon he will need to start filling in the specifics. Here are some ideas that would combine common sense and fiscal prudence while remaining true to Paul’s libertarian principles.

Toward a Libertarian Fiscal Policy

Rand Paul is no anarcho-capitalist. He sees a legitimate, but limited, role for government in national defense, law enforcement, the justice system, and certain other areas. As Ralph Benko notes in a recent Forbes article, that places him in the classical liberal wing of the libertarian movement. With the option of zero government off the table, the remaining minimal state must raise revenue and spend it. A libertarian of classical liberal inclinations cannot get along without some kind of fiscal policy, so what should it look like?

The first principle should be, “Do no harm.” In a medical context, that precept will be familiar to a physician like Senator Paul.  In economics, “do no harm” means a policy of fiscal neutrality—one of managing both the revenue and spending sides of the budget in a way that disrupts the functioning of the market economy as little as possible.

Unfortunately, many past Republican proposals for budget balancing do not meet the standard of fiscal neutrality. Take, for example, the balanced budget amendment proposed not long ago by Utah Senators Orin Hatch and Mike Lee. As I discussed in an earlier post, that proposal, and others that would require  the federal budget to be exactly balanced each year, would be the opposite of neutral.

Because tax revenue falls when the economy contracts, a rule like Hatch-Lee would mandate sharp cuts in spending or increases in taxes each time the economy entered a recession. Those measures would deepen the slump and prolong the recovery. Even worse, from a libertarian perspective, they would provide little or no restraint on spending when tax revenues rose in good times. Lobbyists would descend on Washington like locusts, full of ideas on how to spend the surplus. In short, requiring strict annual balance for the current budget is anything but common sense. >>>Read more

Wednesday, April 8, 2015

UK Election: Did Austerity Work? This Chart Casts Doubt on the Claim

The general election campaign is in full swing in Britain, and it seems it’s all about austerity. From London, The New York Times reports that the campaign revolves around a single issue: the economy, and whether its rebound is the result of an austerity policy championed by the Conservative-led government of David Cameron, or in spite of it.

When in doubt, we should let the facts speak for themselves. This chart tells it all:

The points in the chart represent thirty of the high-income democracies that comprise the OECD. It covers the years 2010-2014, the Cameron government’s term in office. The vertical axis shows the average annual rate of growth during the period. The horizontal axis shows the degree of austerity, or fiscal consolidation, as economists prefer to call it, applied in each country. The UK is right in the middle, just slightly below average in terms both of austerity and growth. >>>Read more

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

The Economics of a Soda Tax

The idea of a soda tax is not new. Such a tax is supposed to have a double dividend by raising revenue and, at the same time, attacking the problems of diabetes and obesity.

Despite these features, soda taxes have been hard to implement. Washington State passed such a tax in April 2010 only to see it overturned by a ballot measure in November of the same year. Resistance to soda taxes has been fueled in part by heavy lobbying by the American Beverage Association, which is said to have spent $14 million to defeat the Washington tax and $10 million in an unsuccessful effort to derail the Berkeley version. Industry lobbying also helped quash New York Mayor Bloomberg's attempt to outlaw super-size servings of sweetened beverages.

In the classroom, the soda tax can serve as a vehicle to illustrate several key microeconomic concepts, including supply and demand, elasticity, tax incidence, consumer and producer surplus, excess burden, and externalities of consumption. I have just posted an updated version of my popular 2010 sideshow on the economics of the soda tax. Check it out: Cut-and-paste it into your lecture slides or assign it to your students as a reading. Enjoy!

Follow this link to view or download a classroom-ready slideshow on the economics of a soda tax.

Sunday, January 18, 2015

Prices are Falling in the Eurozone, but is it "Real" Deflation?

The Eurozone has been on the brink of deflation for months. The latest data show that for the first time, consumer prices for the currency area as a whole (and for 12 of its 19 member countries) were actually lower in December than a year earlier. But is it “real” deflation?

In a pair of posts [1] [2] last fall, when EZ inflation was merely low, but not yet negative, I explained that there are two kinds of deflation.
The nasty kind of deflation, which everyone rightly fears, is driven by falling aggregate nominal demand. As demand collapses, it drags both real output and the price level down with it. There is a serious risk of a self-reinforcing downward spiral in which debtors can’t repay their loans, defaults and falling asset prices undermine the financial system, zero interest rates render monetary policy powerless, and rising unemployment sparks social unrest.

However, there is also a benign kind of deflation, driven by rising productivity. In that scenario, conservative monetary policy restrains the growth of nominal GDP while real output surges ahead. The rate of inflation is negative, but growing output provides borrowers with the cash flow they need to repay their loans, rising productivity allows real wages to rise, and nominal interest rates, although low, do not need to fall all the way to the zero bound. In the US and UK, such productivity-driven deflation was the norm during much of the nineteenth century and reappeared again, more briefly, in the prosperous 1920s.

So which kind of deflation is Europe facing now? The bad, demand-driven kind,  or the good, supply-driven variety? A little of each, it seems. >>>Read more

Follow this link to view or download a slideshow-tutorial, "Why Fear Deflation?".

 

Saturday, January 10, 2015

As Unemployment Rate Falls to New Low, How Much Slack Remains in the Labor Market?

The Bureau of Labor Statistics reported today that the unemployment rate dropped to 5.6 percent in December, a new low for the recovery. For the first time in years, the unemployment rate has fallen to the range of 5.25-5.75 percent that the Fed considers consistent with its mandate to maintain full employment. A broader measure of unemployment, U-6, also fell to a new low.

In the same release, the BLS reported that payroll jobs increased by a robust 252,000 in December. On top of that, it made upward adjustments totalling 50,000 to the already-strong job gains for October and November. That brought the 12-month gain in payroll jobs to 2,952,000, the best annual gain since 1999.

These latest data raise a critical question: How much slack remains in the US labor market? Is it time to start tightening policy to forestall an outbreak of inflation, or is there room for employment to expand further without inflationary pressure? To answer these questions, we need to look beyond the headlines to some of the less familiar indicators of the employment situation. >>>Read more

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

Tuesday, January 6, 2015

Where has Fiscal Policy Been Worse, Greece or the US?

The snap election in Greece is shaping up as a referendum on five years of austerity that many Greeks view as a disaster. The US economy is much healthier, but that has not stopped many American economists from arguing that fiscal policy here has been little better than that of Greece (see this post by Paul Krugman, for example).

In both countries, critics charge that fiscal policies have been procyclical. By this, they mean that overly expansionary policy set up the crisis by amplifying the boom, while ill-timed deficit cutting since has deepended the recession and slowed the recovery. Are they right? The following charts tell the story.

The first indicator in each chart is the output gap. The gap is the amount by which real GDP is above or below a long-run trend, known as potential real output, that is estimated to be consistent with full employment and price stability.

The second indicator is the underlying primary budget balance (UPB). The UPB is the surplus or deficit of the budget that is adjusted for the effects of the business cycle on tax revenues and cyclically sensitive spending like unemployment benefits. It also omits interest payments on government debt, and one-off measures like privatization or tax amnesties. (Without the adjustment for one-off measures, the UPB is called the cyclicaly adjusted primary balance or structural primary balance. One-off measures are insignificant for the United States but important for Greece.) >>>Read more