Wednesday, October 31, 2012

Is Wall Street’s Thirst for Water Really a Dire Threat? Nonsense, Says David Zetland

Journalist Frederick Kaufman made a few waves last week with an article on water markets in Nature and a related interview in Wired. His cautionary story envisions a global water derivatives market that would allow speculators to rake in billions while poor farmers, priced out of the market, would be unable to irrigate their crops. Some typical passages:

Making money come out of the tap means that fresh water must be given a price anywhere it is traded—a global price that can be arbitraged across the continents. Those in Mumbai or midtown Manhattan who understand the increasing value of water in the world economy will speculate on this undervalued ‘asset’, and their investments will drive up the cost everywhere (Nature)

The implications are dire: the destruction of aquatic ecosystems, the extinction of innumerable species and the risk of regional and international conflicts—the much-dreaded  ’water wars’  of the twenty-first century.
Does any of this make sense? Not much, says water economist David Zetland. He explains how little foundation there is for Kaufman’s dire vision. . . >>> Read more

Sunday, October 28, 2012

US Q3 GDP: Good News in the Headline but Bad News in the Details

We all breathed a sigh of relief when yesterday’s advance estimate of U.S. Q3 GDP showed the economy growing at an annual rate of 2 percent. In normal times, 2 percent would be a disappointment; it is a sign of how far we are from normal that we can only think how much worse it could have been.

In fact, it could yet be worse. The advance estimate of real GDP is notoriously subject to revision. The BEA tells us that the average revision, without regard to sign, is 1.3 percentage points from the advance to the latest estimate. A downward revision of no more than average size would put us at 0.7 percent growth, well below the anemic 1.3 percent reported in the third estimate for Q2. Of course, an upward revision is, statistically, equally likely, so let’s hope for the best.

Even as we accept 2 percent growth with relief, there are some discouraging details deeper in the tables that the BEA attaches to its press release. >>>Read more

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

Wednesday, October 24, 2012

Is China Still a Currency Manipulator?

“On day one, I will label them a currency manipulator.” So spoke Mitt Romney during Tuesday’s Presidential debate, threatening, as he has innumerable times, to hit China with new tariffs if it doesn’t stop using a cheap yuan to steal U.S. jobs. But does the label still fit?

We all know the story by heart. Without intervention by China's central bank, market forces would push the value of the yuan higher, making it easier for U.S. producers to compete with Chinese goods. Instead, the People’s Bank of China (PBoC) manipulates the exchange rate by making massive purchases of U.S. dollars for its foreign exchange reserves. The result: huge current account surpluses that enrich China’s politically powerful exporters at the expense of American workers. If we just had a president with the courage to tell them to stop, we could get America moving again.
Unfortunately, although it still sounds great in a stump speech, the story may be out of date. Let’s look at it piece by piece. >>>Read more

Thursday, October 18, 2012

Why do we Need Government to Tell Business to be Energy Efficient?

In response to my interview "The Myth of Affordable Energy," my friend and fellow blogger Gary Alexander asks a question that is so good that I would like to take a separate post to answer it.

Gary asks:

Ed, I need your clarification on a comment you made in the opening section, in which you said that the increase in energy efficiency in the U.S. is "pretty remarkable, considering that we haven’t really had a policy environment that is supportive of efficiency. Think what we could do if we did."

My question: Isn't efficiency (getting more done with the same or less) a constant goal of most businesses? Why would these businesses need an official federal government policy to direct this efficiency from afar? Nearly every technology has increased efficiency and/or lowered cost over time, in the natural course of conducting business in a cost-conscious manner. Or am I missing something?
Excellent question.

The goal of businesses is to make a profit. Part of their strategy for doing that is to adjust their input mix to minimize the total cost of producing their product. I that sense, yes, they are constantly pursuing the goal of efficiency and the government does not need to nudge them to do so.

However, businesses have no inherent goal to economize on any one input. For example, if market prices signal that plastic is cheap and steel is expensive, an automaker will substitute plastic bumpers, door handles, and so on for steel. Vice-versa if plastic is expensive. An automaker has no inherent goal of reducing its use of steel, just reducing costs.

What we need, then, are not government policies that tell businesses to act efficiency in response to market prices. What we need are policies that safeguard the integrity of the price system itself. That is why we need policies that are consistent with the principle of full-cost pricing.

Wednesday, October 17, 2012

Interview: The Myth of Affordable Energy

The following interview was conducted by James Stafford and originally published on It is reproduced here with permission. Access to cheap energy is vital to economic growth. What do you see happening with the economy over the coming years as the time of cheap oil comes to an end?

Ed Dolan: In my view it is a myth that cheap energy--“affordable energy” as many people like to say--is vital to growth. The idea that there is a lockstep relationship between growth of GDP and use of energy is widespread, but the data simply does not bear it out. Instead, what they show is that the world’s best-performing economies have become dramatically more energy efficient over time.
The World Bank uses constant-dollar GDP per kg of oil equivalent as an energy efficiency metric. From 1980 to 2010, the high-income countries in the OECD have increased their average energy efficiency by 55 percent. The United States has done a little better than that, increasing its energy efficiency by 81 percent over that period. That’s pretty remarkable, considering that we haven’t really had a policy environment that is supportive of efficiency.

Think what we could do if we did.

Thursday, October 11, 2012

Forward guidance: Does Bernanke Talk Too Much about How Good his Exit Strategy is?

In an October 1 speech to the Economics Club of Indiana, Chairman Ben Bernanke addressed the risk that the Fed’s latest round of quantitative easing (QE) could lead to inflation. Here is his resolutely reassuring answer, as quoted by Dave Altig on the Atlanta Fed’s Macroblog:
I’m confident that we have the necessary tools to withdraw policy accommodation when needed, and that we can do so in a way that allows us to shrink our balance sheet in a deliberate and orderly way. …
Of course, having effective tools is one thing; using them in a timely way, neither too early nor too late, is another. Determining precisely the right time to ‘take away the punch bowl’ is always a challenge for central bankers, but that is true whether they are using traditional or nontraditional policy tools. I can assure you that my colleagues and I will carefully consider how best to foster both of our mandated objectives, maximum employment and price stability, when the time comes to make these decisions.
I wonder, though, if there is such a thing as being too reassuring. This conclusion, although a bit unconventional, comes from combining two ideas about monetary policy that are increasingly mainstream.>>>Read More

Sunday, October 7, 2012

By One Key Budget Indicator, the Structural Primary Balance, Even Greece is Doing Better than the United States. Why that should Worry us.

We in the United States know that we have a deficit problem, but when we hear news of the ongoing crisis in Europe, we feel a little better. At least we’re in better shape than Greece, Italy, and the other Eurozone basket cases. Aren’t we?

Think again. By one key measure of fiscal health, the structural primary balance (SPB), we are in worse shape than any EU country. In fact, among the members of the OECD, only Japan is deeper in deficit as the following chart shows.
Not just Greece and Italy, but even the Portugal, Ireland, and Spain, the other derisively styled “PIIGS,” score better better than the United States on this chart. That does not mean that their economies are in better shape overall. They have a lot of problems that we do not, which we will come back to later. What their structural primary balances do show is how far they have come in making the fiscal adjustments needed to make their budgets sustainable in the long run . The United States has barely started those adjustments, and Japan has not even thought about them. Let’s look more closely. >>>Read the full post here

Friday, October 5, 2012

September Jobs Report is the Strongest in Months; Unemployment Falls to 7.8 Percent

After a spring and summer when the monthly jobs reports have brought nothing but gloom, the September data are strong across the board. The headline numbers—114,000 new payroll jobs and an unemployment rate of 7.8 percent—are themselves encouraging enough. In many respects, the details behind them look even better.

Let’s begin with the payroll jobs numbers. As shown in the following chart, the September gain of 114,000 nonfarm payroll jobs is respectable, although unspectacular, especially compared with the 202,000 new jobs created in the same month a year ago. But the best news lies not in the figure for September, but in the revisions for July and August. Recall that July payroll jobs were originally reported at 163,000, then revised down to 141,000. That number is now revised up to 181,000. The August job gain, originally reported at just 96,000, is revised up to 142,000. If we add the September preliminary number to the upward revisions, it would be accurate to say that the economy has a full 200,000 more jobs than we thought it had a month ago. >>>Read more

Follow this link to view or download a brief classroom-ready slideshow with charts of the latest BLS jobs data