Best Economics News Story of the Year: Dickens Meets Hayek in a Mumbai Slum

My one-man committee has met and made a decision: The award for best economics news story of the year goes to Jim Yardley of The New York Times for an article titled “In One Slum, Misery, Work, Politics and Hope,” published in the December 29 issue.
It is a story about Dharavi, Mumbai’s most famous slum, a seething hive where perhaps as many as a million people live in 60,000 structures on an area smaller than central park. Not surprisingly, in every alley, there are scenes of appalling poverty: Read more>>>

Choral Singing, Malpractice, Italy: More Links for Your Classroom

• Most economists are familiar with the distinction between coordination via spontaneous order and coordination via hierarchy. (See, e.g., discussion in Ch. 1 of my textbook.) In the real world, coordination often involves a mix of the two. This post from Lynne Kiesling of The Knowledege Problem  illustrates the coordination issue with the example of choral singing. If you scroll down the comments, you will see one I have added.
• The euro crisis is not about tiny Greece, Ireland, or Portugal; it is about Italy. Italy is not only too big to fail, it is too big to rescue. In this post from Economonitor Ed Hugh digs deep into the Italian problem and explains why the euro's ultimate fate will depend on whether Italy can pull itself out of the very deep hole it is in. Hint: Government finance is only part of the story.
• Everyone agrees it would be good to slow the runaway growth of medical costs, but where to attack the problem? Conservatives often single out the need to reign in excessive medical malpractice suits. Others dismiss malpractice as a minor problem, citing data that malpractice legal costs and awards amount to only 2.4 percent of medical spending. This interesting post from the NY Times by Pauline W. Chen, M.C., a practicing physician, explains that the damage done to the medical system by excessive malpractice suits may be far greater than the measured 2.4 percent if one takes into account the way doctors respond to the fear of malpractice claims.

US GDP: Can We Blame the Grinch for Yet Another Downward Revision of Growth?

The third estimate of US real GDP for Q3 2011 brought yet another downward revision. Can we blame the Grinch who Stole Christmas?

GDP is now reported to have grown at an estimated 1.8% annual rate in Q3 2011, less than the 2.0% second estimate released in November and less still than the 2.5% preliminary estimate reported in October Although slowing, the July-September 2011 quarter was the 9th consecutive quarter of growth since the end of the recession that lasted from Dec 2007 to Jun 2009.

Even after the revision, Q3 GDP was still above its pre-recession peak reached in Q4 2007, although only by a razor-thin 0.04%. According to standard business cycle terminology, the recession phase of the business cycle is the downward movement of GDP from its previous peak. The recovery phase is the upward movement from the trough (low point) of the recession and continues until GDP again reaches its previous peak. Once GDP moves above its previous peak, the expansion phase begins. The revised Q3 data still suggest that after a recovery of 2 years duration, the expansion phase has now begun.

Consumption was revised downward but still accounted for much of the growth in Q3. Investment was revised up to weakly positive compared with the negative number in last month’s second estimate. Federal government defense spending grew but was offset by continued decline of federal nondefense spending and state and local government spending. Exports grew even more strongly than previously reported, but they were offset by an upward revision of imports (a negative entry in the GDP accounts).

The revised growth of nominal GDP (NGDP) was 3.9% in Q3. NGDP growth consisted of 1.8% real growth and 2.1% inflation. An increasing number of economists focus on NGDP growth as a key policy target. Over the long run, NGDP growth of about 4.5% would allow real GDP to track its potential level with about 2% inflation. The Q3 NGDP growth of 3.9% suggests that the gap between actual and potential GDP that opened during the recession continued to widen.

Follow this link to view or download a classroom-ready slideshow presentation of the latest GDP data

Linking Keystone XL to the Payroll Tax Only Shows Why we Need a Real Energy Policy

The administration is coming under increasing pressure to accelerate approval of the Keystone XL pipeline, designed to carry increased U.S. imports of bitumen from Canadian oil sands. The latest form of pressure is a Senate bill that would fast-track KXL in exchange for a two-month extension of the payroll tax cut and other items. After some resistance, it now appears the House will go along with the proposal. It is a bad idea. READ MORE>>>

Latest Price Data Show US on Brink of Deflation as World Economy Slows

The most widely watched U.S. inflation indicator, the seasonally adjusted all-items CPI for urban consumers, fell in November at an annual rate of 0.23 percent. The decrease was small enough that it will hit the headlines as no change, based on the rounded monthly data reported in the press release from the Bureau of Labor Statistics. (All inflation data in this post are month-to-month changes stated as annual rates, based on the three-decimal version of the data released by the Cleveland Fed.) November marked the second consecutive month of negative inflation, following a decrease of 0.96 percent in October. >>>Read more

Follow this link to view or download the latest inflation charts and data in slideshow format

Huger Rises in American Cities and Other Links for Your Econ Classroom

• The US Conference of Mayors has released a new report that shows increased hunger and homelessness in U.S. cities. Unemployment is the leading cause of both, but many hungry and some homeless are employed. (For more on the relationship between poverty and labor market conditions, type "poverty" in the search box on this blog)
• It's hard to keep up with the fast-changing situation in Europe, so now and then I like to give a link to a piece that summarizes the situation well for those who can't read everything. Tim Duy's post in today's Economonitor fits that pattern. Duy explains why the euro has deep-rooted structural problems that are not addressed by the latest Franco-German plan. "I don't see where this ends well," concludes Duy. (BTW, Duy also spikes the rumor that the Fed is about to rescue European banks.)
• While the crisis in Europe has attracted the most attention, China is having its problems, too. Here are two good posts to keep up to date on the China scene. In the first, Michael Pettis explains just how we know that China is overinvesting. In this next one, Patrick Chovanec provides the latest data on the collapse of China's housing bubble.

What do the Russian Protesters Want? One Observer’s View of Problems and Needed Reforms

Commentators have compared the recent Russian protests to those of Tahrir Square and Occupy Wall Street. There are differences, of course, but certain similarities stand out. For one thing, these recent movements differ from, say, Ukraine’s Orange Revolution, in that none of them has a clear leader. Instead, they have coalesced around negatives: Egypt without Mubarek, Russian without Putin, America without Wall Street. They all see the existing political system as corrupt, but they are much less specific about what should replace it.

Although these movements may lack leaders, they do not lack thinkers and opinion makers whose writings provide useful insights into what the protesters want. This post looks at the views of one Russian opposition figure, the journalist and writer Yulia Latynina, as expressed in a recent essay titled “Russian Baker, or Ownerocracy.” READ MORE>>>

Can New Fiscal Rules Save the Euro? Three Details to Watch For

Yesterday  Angela Merkel and Nicolas Sarkozy announced a new set of fiscal rules, their latest idea to save the euro.  The new rules would replace the unworkable Stability and Growth Pact (SGP), which mandates a deficit of no more than 3 percent of GDP and debt of no more than 60 percent of GDP. Yesterday’s announcement was short on specifics, but here are three crucial things to watch for that will determine whether the new rules will have any chance of working. READ MORE>>>

China is Overinvesting in Electric Cars and Other Links to Eliven Your Econ Course

• The US government has been roundly criticized for its investment in Solyndra's failed solar panel venture, yet many people think the Chinese government is oh-so-clever when it pours money into "economy of the future" investments of its own. Think again. Governments everywhere are prone to pouring money into the sand. This excellent long post by Michael Pettis explains how the Chinese government has overinvested in the electric car industry and in other sectors as well.
• Defender's of Wall Street often defend princely salaries by arguing that a highly efficient U.S. financial sector is adding hugely to the strength of the economy. This nice piece of research by NYU's Thomas Phillippon blows that argument out of the water. It argues that financial sector costs are rising faster than its output, and that the resulting loss of productivity is a drag on the economy at large, not a boost. The comparison of productivity-enhancing IT investment in retail trade with productivity-sapping IT investment in the financial sector is especially interesting.
• Last week the stock market got a boost when the Fed announced it would lower the interest rate charged to loan dollars to European banks. Every wonder why European banks need dollars? This report by Binyamin Appelbaum of the New York Times explains some of the reasons.

US Employment Data: Stronger November Report Shows Economy Struggling to Resist Global Weakness

The latest employment report from the Bureau of Labor Statistics shows stronger, but still moderate, job growth for November. The unemployment rate fell to 8.6 percent, its lowest since March 2009. On the whole, the report shows a U.S. economy struggling to resist being dragged down by even weaker economies in Europe and Japan, and by a still strong but slowing China.

Afghanistan's Economic Future, Aid, and the Curse of Riches

We hear a lot about the future of Afghanistan after NATO withdrawal in 2014. Most of the speculation focuses on security and politics. Too little of it concerns economics. A pair of new reports, one from the World Bank and the other from the IMF, help fill the gap. If you thought the security and political prognosis was problematic, wait until you read what lies ahead for the country’s economy. READ MORE>>>