Latest Revisions Show Stronger Growth of both Real and Nominal GDP

The third estimate of Q3 2012 US GDP came out on December 20, just as the holiday season was in full swing and as the limited public appetite for economic news was focused on the fiscal cliff. The report deserved more notice than it got. The Bureau of Economic Analysis revised its estimate of real GDP growth upward to a respectable 3.1 percent from the 2.7 percent of the second estimate, which came out in November. The latest estimate looked even better set against the anemic 2.0 percent reported in October’s advance estimate. The latest report also revised the estimate for nominal GDP growth upward to 5.9 percent, the fastest in almost four years. >>>Read more

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

Classroom Debate Topic: Should We Keep the Charitable Deduction or Scrap It?

Here's a great topic for a debate that will fit in either your micro class (altruism, poverty, preferences) or your macro class (tax reform, fiscal cliff): What should we do about the charitable deduction? Keep it or scrap it?

Yale University's Robert J. Shiller has just weighed in with a New York Times op-ed titled "Please Don't Mess with the Charitable Deduction." He defends the deduction as an essential part of the great American tradition of giving.

Earlier this year I took the opposite position in a pair of posts. (Part 1 and Part 2). I argued that the popularity of the charitable deduction rests on a set of false premises. In reality, the deduction is best viewed not as a tax expenditure, and that not more than a third of the giving that qualifies for the deduction goes to truly charitable purposes. Furthermore, warnings that the nonprofit sector would face collapse without the charitable deduction are greatly exaggerated, if not altogether baseless.

What do your students think? Using these opposing pieces as a starting point, put them to work doing their own research and then let them try out their debating skills.

US CPI Drops Sharply in November; Inflation Expectations Remain Well Anchored

U.S. Consumer price inflation, which has been unusually volatile over the past year, turned sharply negative in November. According to data released today by the Bureau of Labor Statistics, the all-items CPI fell at an annual rate of 3.7 percent during the month of November. That was the most rapid rate of decrease since the worst months of recession in late 2008.

Much of the recent volatility in the CPI has come from the energy sector, particularly gasoline. Consumer inflation spiked at the end of the summer when gasoline prices rose 8.6 percent in August and 6.7 percent in September. Gas prices then fell by 0.5 percent in October and by 6.9 percent in November. >>>Read More

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

Michael Levi talks to James Stafford about Falling Oil Prices, the Shale Boom, and Carbon Pricing

In this exclusive interview, Oilprice.com publisher James Stafford talks with energy security expert Michael Levi, the David M. Rubenstein Senior Fellow for Energy and the Environment and Director of the Program on Energy Security and Climate Change at the Council on Foreign Relations (CFR), discusses. The interview was originally posted on Oilprice.com and is reproduced here with permission.

There’s been plenty of talk about potentially radical US foreign policy changes as a result of the shale boom. While one shouldn’t expect any dramatic US foreign policy move away from the Middle East, factors are influencing a greater focus on Asia. Only one thing is certain in this transforming world: The shale boom is real and the implications are many and difficult to predict.

In an exclusive interview with Oilprice.com publisher James Stafford, energy security expert Michael Levi, the David M. Rubenstein Senior Fellow for Energy and the Environment and Director of the Program on Energy Security and Climate Change at the Council on Foreign Relations (CFR), discusses:  

•    Why oil price stability is still all about the Middle East
•    Why the oil and gas industry is heading towards transformation
•    Why oil prices could drop substantially
•    Why the US shale boom is real
•    Why the shale oil boom won’t lead to major US foreign policy changes
•    Why Keystone XL is pretty much non-essential
•    Why we won’t see any radical change in renewables in the next five years
•    The carbon pricing remains the best way to achieve meaningful results on climate change

Green Illusions: The Good, the Bad, and the Ugly of Alternative Energy

Are solar, wind, and other alternatives the magic bullets that will solve the world’s environmental and energy problems? Take a closer look, says Ozzie Zehner in Green Illusions . Zehner not only argues that green energy has technological, environmental and economic limits, but also that without an appropriate policy context, some forms of alternative energy could do more harm than good.

The dirty secrets of clean energy

The first part of Zehner’s book—by far the best—is devoted to explaining why neither photovoltaic, nor wind, nor biomass, nor any of the other alternatives to fossil fuels will be able to deliver a future of abundant, cheap, clean energy. Chapter by chapter, he brings out the environmental and economic limitations of each technology. Among the highlights— Read more  

Update, May 2020: This book review was originally posted on the now-defunct Economonitor.com. I have reposted the review in full here.

US Unemployment Drops to 7.7 Percent, Lowest Since January 2009; Payroll Jobs Continue Steady Rise

The U.S. unemployment rate dropped to 7.7 percent in November, according to today’s data release from the Bureau of Labor Statistics. That was down 0.2 percent since October, and was the lowest rate reported since January 2009. Payroll jobs increased by 146,000 in the month, continuing a moderate but steady trend.

The unemployment rate is the ratio of unemployed persons to the civilian labor force, based on a monthly survey of households. Both the numerator and denominator of the ratio decreased in November. The ratio fell because the number of unemployed persons decreased by more than the number of the employed. Both the labor force participation rate and the employment-population ratio decreased slightly, with both figures returning to the values reported in September. >>>Read more

How Can We Tell if Fiscal Policy is Sustainable? Three Views

As negotiations over fiscal policy heat up, one thing nearly everyone agrees on is that U.S. fiscal policy should be sustainable. The trouble is, there are sharp disagreements about just what sustainability means. This post explores three different meanings of fiscal policy sustainability and explores their significance for current budget debates.

Sustainability as solvency

 The first, and simplest, meaning of sustainability makes it a synonym for solvency. The proposition that we do not have to worry about debts and deficits because the government can never “run out of money” has become a mantra among followers of Modern Monetary Theory (MMT). >>>Read more

Follow this link to view or download a classroom-ready slideshow with simulations of debt dynamics under various fiscal policy assumptions

Recommended for your Classroom Discussion of the Fiscal Cliff: Lee Arnold’s New Video on the Debt and Deficit

This new video from Lee Arnold is a great tool to spark a classroom discussion on the budget negotiations underway as the United States approaches the “fiscal cliff.” It uses great animated graphics and a polished voice-over to lay out the way that the CBO baseline revenue projections would interact with scheduled changes in spending to determine the future course of the debt and deficit.

Many students will be surprised to find that the CBO baseline projections produce future budget surpluses that would bring the debt down to nothing over time. Economists familiar with the CBO methodology will understand how this happens. The projections are based on the assumptions that all laws on the book as of late 2012 will come into force without further changes.

US CPI Data: Late Summer Inflation Spike Ends in October; Deflation Risk Nosedives on Election Results

U.S. inflation data released yesterday by the Bureau of Labor Statistics show that a two-month spike in headline inflation seems to have run its course. Both headline and core inflation measures are now close to or below the Fed’s 2 percent target. In a related development, the Atlanta Fed reports that deflation probabilities have nosedived since President Obama won re-election earlier this month.

The headline all-items CPI increased at an annual rate of just 1.81 percent in October, down from 7.48 percent in August and 7.06 percent in September. Most of the decrease came from a drop in energy prices, which had soared in the previous two months. New and used car prices also fell. Increases in the prices of food and apparel partly offset the decreases in energy and vehicles.

Measures of underlying inflation, which had not followed the late-summer spike of the all-items CPI, remained moderate.>>>Read more

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

Austerity Bomb? Don't Panic. Keep Your Eyes on Real Fiscal Reform

Austerity bomb” is the metaphor of the day. First introduced by Brian Beutler, it has now been endorsed by Paul Krugman as a replacement for “fiscal cliff.” Both are bad metaphors. They invite us to think that the most important thing on the national agenda is to avoid the cliff or defuse the bomb before disaster strikes. Instead, we need to stay calm keep our eyes on the prize, that is, on real reform of our muddled fiscal policy. Unless we are willing to look beyond what happens at the end of the year, we risk being panicked into a deal that will leave us in an even worse fiscal mess than we are in now. Here are the three long-term considerations that should be at the center of budget negotiations: >>>Read More

October Data Show Stronger Labor Market as Workers Return and Part-Time Work Falls

The October jobs figures released today by the BLS showed a stronger U.S. labor market. The unemployment rate edged up by 0.08 percentage points, just enough to raise the headline rate from 7.8 to 7.9 percent. However, a look at the underlying data showed that the uptick in the headline rate was a “good” increase of the kind that we often see  as previously discouraged workers return to a strengthening labor market.

The labor force increased by 578,000 workers in October. The number of employed persons, as measured by the household survey from which these data come, increased by 410,000.>>>Read more

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

Bringing Hurricane Sandy into your Econonomics Class: Links on Price Gouging and Climate Change

Hurricane Sandy has dominated the news this week. How can you tie the storm into your econ class? Here are some links that should help.

• In this post on Slate, Matthew Yglesias gives a brilliant explanation of why "price gouging" laws make it harder to prepare for and respond to natural disasters.
• Writing for the blog of the Council for Foreign Relations, Michael Levi reminds us that measures to reduce CO2 in the atmosphere do not have immediate effect. Because of climate inertia, they take decades to affect air temperatures and even longer to affect ocean levels. Reducing methane emissions works a little faster, but not tomorrow. In short, don't expect measures to mitigate climate change to stop storms like Sandy. Investment in more resilient infrastructure has to be part of the package.
• In "Playing God," Written for Foreign Policy, economists Gernot Wagner and Martin L. Weitzman write that with efforts to halt climate change on life support, scientists are looking at some radical geoengineering options to save our planet. But could the cure be worse than the disease?

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

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

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

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.

Interview: The Myth of Affordable Energy

The following interview was conducted by James Stafford and originally published on Oilprice.com. It is reproduced here with permission.

Oilprice.com: 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.

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

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

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
 

Latest GDP Revision Carries a Mixed Message for the Election: Economy Weak, but Corporate Profits Strong

The revised third estimate of GDP for Q2 2012, released Thursday by the Bureau of Economic Analysis, carries a mixed message for the election campaign.

The revised data show real GDP growing at an annual rate of just 1.3 percent in Q2, down from the already weak 1.7 percent of the previous estimate. The slowdown supports the GOP contention that the economy as a whole remains weak despite the Obama team’s efforts.

At the same time, corporate profits after taxes grew faster than previously estimated. They continued to grow faster than the economy as a whole and remain near the all-time highs reached later last year. Taxes paid by corporations actually fell in the second quarter while total profits grew. All of those data bolster the Democratic narrative that corporate managers and shareholders are doing quite nicely, thank you, while the rest struggle. True, economic policy needs a tune-up, but are tax cuts for wealthy “job creators” really what we need most? >>>Read more

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

Looming Demise of Wind Power Subsidy Shows the Need to Rethink Both Energy and Tax Policy

Wind power has been a success story of green energy. After several years of rapid growth, it now accounts for about 3 percent of all electricity produced in the United States. It has benefitted from federal support, but that support is scheduled to end on December 31, throwing the industry into a crisis of layoffs and cancelled installations.

The country needs wind power, and wind power needs a favorable policy environment. For those reasons, it is tempting to support a simple extension of the current policy. However, it would be even better to use the looming deadline as an occasion to rethink both energy policy and tax policy.

Makers, Takers, and Energy Policy

It has become fashionable during this presidential campaign to glorify “makers” and disparage “takers.” The distinction applies as much to energy as to any other industry. Makers are those who produce energy that has a value to users that exceeds its costs. Takers are those who make a profit from producing energy that costs more than it is worth by shifting part of those costs to others. >>>Read more

Could QE3 Cause the Fed to Go Broke?

Each time the Fed undertakes a new program of quantitative easing, questions arise about the possible impact on its solvency. I addressed that concern in November 2010, at the time QE2 was announced. Here is an updated version of that post that looks at the solvency issue in the context of QE3.

The Fed’s new program of quantitative easing, QE3, once again raises an old question: Can central banks go broke? Conventional analysis, aptly summarized by Willem Buiter in a 2008 report, says “Never–Well, hardly ever.” The Fed is most assuredly not going to suffer a run or become unable to meet its obligations, but under some scenarios, keeping it from going going broke could raise difficult political issues and perhaps even threaten its independence. >>>Read more

Follow this link to view or download a classroom-ready presentation of the material from this post, including detailed balance sheets

Quantitative Easing: A Tutorial

On September 13, 2012, the Fed announced a further program of quantitative easing, or QE. The program, which we will all call by its unofficial name, QE3, will consist of purchases of some $40 billion in mortgage-backed securities each month plus continuation of some existing asset purchase programs. We are told that QE is the most powerful weapon left in the Fed’s arsenal—but it is also among the least understood. For the benefit of everyone who wants to understand the mechanics of QE and review its effects on the economy to date, I am posting a QE tutorial in the form of a brief slideshow.

Will QE3 work? All but one of the voting members of the Federal Open Market Commission appear to think it is at least worth a try. In his August 31 speech at Jackson Hole, Fed Chairman Ben Bernanke cited estimates that QE1 and QE2 together have lowered long-term interest rates by 0.8 to 1.2 percentage points. He also suggested that output is 3 percent higher than it otherwise would be and that about 2 million additional jobs have been created as a result of QE1 and QE2.

However, Bernanke also warns that the Fed cannot solve the country’s economic problems alone. >>>Read more

Follow this link to download the classroom-ready tutorial in slideshow format

Does the August Inflation Spike Mean QE3 was a Mistake?

One day after the Fed announced a new program of quantitative easing (QE3), the BLS reported that headline inflation spiked to an annual rate of 7.44 percent in August. Does that mean that QE3 was a mistake?

Superficially, it might seem so. After all, the announced justification for QE3 was that both parts of the Fed’s dual mandate—unemployment and inflation—have been running well below target. If one of them, inflation, is now above target, that could be taken as a sign for cautious watching and waiting, not a bold new program of monetary stimulus. But not so fast. >>>Read more

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

U.S. Job Growth Weak in August but Unemployment Indicators Improve

The August job numbers released today by the BLS will come as a disappointment, especially to Democrats who were hoping for a strong headline number during their convention week. The U.S. economy created just 96,000 new payroll jobs last month. An increase of 103,000 private-sector jobs was partly offset by a loss of 7,000 government jobs. Private-sector goods-producing jobs actually fell by 16,000. To make matters worse, the June jobs number was revised downward by 19,000 to a very weak 45,000, and the July jobs gain was revised downward by 22,000 to a more modest 141,000.

The unemployment rate decreased from 8.3 percent to 8.1 percent, but there was not as much good news in that number as it might seem. For one thing, the unemployment rate had already hit 8.1 percent once before, in April, so the August number did not break new ground. Also, much of the drop in the unemployment rate was due to a decrease in the size of the labor force. The number of employed persons, according to the household survey on which the unemployment rate is based, actually fell by 119,000 in August. The unemployment rate is based on a survey of household that is entirely separate from the establishment survey on which the payroll jobs report is based. The two surveys can produce numbers on job loss or gain that differ substantially, partly for methodological reasons and partly because the household survey, unlike the payroll survey, includes farm workers and self-employed persons. >>>Read more

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

Do the Latest GDP and Profit Data Justify Tax Cuts for ‘Job Creators’?

This week’s second estimate of US GDP shows a disappointing Q2 growth rate of 1.7 percent, just slightly faster than the 1.5 percent of the advance estimate released a month ago (see attached slideshow for details). These latest data ensure that weak GDP growth and what to do about it will remain major issues in the presidential election campaign.

 On the GOP side, the leading proposal for getting growth back on track is to cut taxes for ‘job creators,’ to use the favored code word for top income earners. The idea has a certain logic to it. We know that growth comes from investment. We know that profits motivate investment and profits taxes reduce that motivation. It stands to reason, then, that weak profits and high taxes would be likely culprits for slow growth–except for one awkward fact.

The awkward fact is that corporate profits, both before and after taxes, are running at or close to record levels. >>>Read more

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

Court Rejects EPA's Latest Rule for SO2 Emissions Trading. Where to Next?

Last week, the United States Court of Appeals for the District of Columbia rejected an EPA rule known as the Cross-State Air Pollution Rule (CSAPR). The rule was supposed to have gone into effect at the beginning of 2012, but the same court had previously stayed its implementation on procedural grounds. Last week’s ruling is the first to address CSAPR on its merits.

CSAPR governed emissions of sulfur dioxide (SO2) from Midwestern coal-fired power plants and other sources. SO2, along with oxides of nitrogen (NOx) and others is a precursor of acid rain, which causes widespread environmental damage not only in the states where the sources are located, but also those downwind. >>>Read more

Latest CBO Projections Underline Need for a Goldilocks Budget Deal

The latest analysis from the Congressional Budget Office (CBO) shows a sharp divergence between  a baseline projection and an alternative fiscal scenario for the U.S. economy. To put it in language a child could understand, the baseline projection is too cold while the alternative scenario is too hot. It is clear from the report that we need a Goldilocks budget deal to get things just right.

The CBO’s baseline assumes no changes in current law. Paradoxically, no change in the law would mean big changes in policy. That is because we are facing the so-called fiscal cliff–a set of measures that include  allowing the Bush tax cuts to expire as scheduled, making sharp cuts in Medicare payments to doctors, ending extended unemployment benefits, and allowing mandatory cuts to defense and nondefense spending to come into force. The CBO projects that those changes would shrink the budget deficit to about 4.0 percent of GDP, compared with a projected 7.3 percent for 2012. The deficit would decline to 1 percent of GDP by 2016. >>>Read more

Economists Should Love Paul Ryan’s Support of Policy Rules—but are they the Right Rules?

Economists love the idea of rules for monetary and fiscal policy. Many politicians hate them, preferring the discretion to do whatever seems like a good idea at the time. For that reason, if no other, economists should love Paul Ryan, an atypical politician who supports policy rules. But there is a catch—are the rules that Ryan backs the right ones?

Why We Like Policy Rules

Economists prefer rules to unlimited political discretion because they improve the chance that policy will be appropriate and timely.
Some of the reasons are technical. Lags in data collection and decision making make it hard to take monetary or fiscal policy actions until well after a problem begins to develop.>>>Read more

It’s Unanimous: All Indicators Show Inflation is Slowing, Even the Index of Sticky Prices

To no one’s surprise, today’s inflation numbers from the BLS showed that U.S. inflation is slowing according to almost every indicator anyone has thought to report. Seasonally adjusted monthly data for the headline consumer price index, the core CPI and the Cleveland Fed’s trimmed-mean CPI are running well below the Fed’s 2 percent target. The year-on-year versions of the same indicators are also falling, and are all now running at or below the target. . . .

 Continue reading the full analysis here; follow this link to view or download the latest inflation charts and data in a convenient, classroom-ready slideshow format.

Why We Should Repeal the Ethanol Mandate and Replace it With a Carbon Tax

During the debate over the Obama administration’s health care policy, Republicans came up with the catchy phrase “repeal and replace.” I’ll get back to health care in another post, but for now, I’d like to filch the phrase for the increasingly lively debate over the federal ethanol mandate, or Renewable Fuels Standard (RFS), as it is formally known. “Repeal and replace” is the right approach when a problem is real and existing policy addresses it in so a clumsy a way as to make it worse.

With every passing day of drought in the American Midwest, the outcry against the RFS grows louder. The latest to weigh in is Jose Graziano da Silva, Director-General of the Food and Agricultural Organization of the United Nations. Writing in the Financial Times, he urges the U.S. government to suspend the ethanol mandate, which is expected to consume up to 40 percent of the reduced 2012 corn crop. Otherwise, he fears, the world will approach a tipping point where further supply shocks could cause a global food crisis.

Worries about corn state votes have so far kept both major party presidential candidates on the side of ethanol, but opponents of the RFS also have significant support in Washington. Backed by livestock interests, among others, more than 150 members of Congress have urged the EPA to suspend the ethanol mandate for the duration of the drought. Some livestock producers are hoping that emergency drought-relief legislation will include a clause forcing the EPA to act.

Suspending the RFS for the duration of the drought is not enough, however. The ethanol mandate is bad policy that should be scrapped permanently. It should be replaced with a policy that directly addresses the problem of overconsumption of carbon-based fuels. A carbon tax on transportation fuels—or better, on all forms of energy—would be an excellent choice. >>>Read more

Choice of Ryan as VP Puts Tax Reform Back on the Table. How Will They Handle It?

I am thrilled by Mitt Romney’s selection of Paul Ryan as his running mate. I say that not because of its effect on the outcome of the election, which has yet to play out, but because it puts tax reform squarely back on the table.

Fixing the tax code is a two-part process that simultaneously lowers tax rates and broadens the base by closing loopholes. Those elements of reform are essential whether they are implemented in a way that increases revenue or is revenue neutral. Ryan has been very clear about the first element. He advocates a two-bracket personal income tax with 10 and 25 percent rates. He is not so clear about the second. In principle, he also endorses broadening the base, but he has refused to specify just which deductions, exclusions and preferences will have to go.

As long as he was just Congressman Ryan, head of the Budget Committee, he had a convenient alibi for his reluctance to be specific. As he told Fox News back in March, ““That’s what the Ways and Means Committee is supposed to do. That’s not the job of the Budget Committee.”

It was the old Wernher von Braun defense. In the words of Tom Lehrer’s song, “Once the rockets are up, who cares where they come down. That’s not my department, says Wernher von Braun.”

As vice-presidential candidate, Ryan will find it harder to use that dodge. The presidential team is supposed to lead, not sit back and wait for Congress to make back-room deals. If an interviewer or debate opponent asks just which tax breaks should go, there is no place for Ryan to hide, nor is there any place for Romney to hide, since he is the one who put tax reform back on the table by choosing the Wisconsin Congressman.

That brings us to Romney’s own tax situation. Things would be easier for the GOP team if his failure to release more returns indicated nothing more than a character defect, but that is not all that is at stake. As I argued back in January, Romney’s taxes highlight what is wrong with the whole system, especially the perverse way that high corporate tax rates interact with low personal rates on capital income.

Candidate Ryan is going to face frequent, pointed questions about his often-stated views on tax reform. How is he going to answer? I see three possibilities:

1.       “Don’t be frightened off by my rhetoric. We aren’t really serious about tax reform; we’ll be happy just to keep rates low for top earners and leave the rest of the system as it is.”

2.       “I was serious when I told The New York Tmes that ‘The tax code is patently unfair: many of the deductions and preferences in the system — which serve to narrow the tax base — were lobbied for and are mainly used by a relatively small group of mostly higher-income individuals.’ I stick by what I have said: the wealthiest Americans should pay an effective tax rate of around 25 percent, and that starts with my running mate.”

3.       “As a team, we’re serious about the concept of tax reform, but we’re going to let Congress fill in the details. If you’re among the 16 percent of Americans who think Congress has been doing a good job, vote Romney-Ryan!”

Somehow, all of these answers seem awkward, but Paul Ryan is a smart guy. Maybe he’ll think of something better.

Update: Since this was first published on Economonitor.com, the Romney campaign has issued a set of talking points that distances the campaign from details of the Ryan budget plan and includes extremely vague language on tax reform.

Will the Dutch Disease Kill Hopes Raised by Colombia's Free Trade Agreement?

After a torturous journey through Congress, the United States-Colombia Trade Promotion Agreement (CTPA), first signed in 2006, came into effect on May 15 of this year. The agreement has raised high hopes in Colombia, for which the United States is by far the largest trading partner. However, while the CTPA was fighting its way through a six-year obstacle course, a new threat to Colombia’s economy has emerged in the form of the dreaded Dutch Disease, which afflicts resource-rich countries in many parts of the world. >>>Read more

TEN BILLION: Return of the Population Bomb?

A generation ago—no, two generations ago, already—Paul Ehrlich scared us all out of our wits with his book, The Population Bomb. It turned out to be a bomb that we gradually learned to live with. Yes, it exploded—the world’s population did double between 1960 and 2000, the shortest doubling time in human history. No—it didn’t kill us.

As University of Michigan professor Donald Lam told us in a 2011 presidential address to the Population Association of America, the shift from large families making low investments in their children to small families making high investments in their children is a fundamental dimension of economic development that gives us reasons to be optimistic about the future.

Now the population bomb is back, this time in the unlikely form of a sold-out, one-man play, entitled TEN BILL10N, at London’s Royal Court theatre. I haven’t seen the play, but I would like to comment on the reviews, which, after all, are likely to be as influential as the play itself.

US Job Growth Improves in July but Unemployment Rate Rises a Bit

A recent on-line discussion of the Fed’s continued inaction in the face of worsening economic data included the following exchange of comments:

Commenter 1: When you got nothin’ but blanks left you just stand there with the gun and pretend you might pull the trigger
Commenter 2: Maybe Bernanke should just throw the gun

Now, two days after the Federal Open Market Committee’s midweek meeting, we get another weak jobs report. True, the BLS news release tries to put a good face on things, headlining a gain of 163,000 payroll jobs and reporting that the unemployment rate was “essentially unchanged.” A closer look at the numbers, though, shows that the report contains more bad news than good. >>> Read more

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

Case Study in Supply and Demand: Will Fracking Enrich India's Guar Farmers?

The following post was originally published on Economonitor It is reproduced here for classroom use, along with a slideshow that demonstrate how the theory of supply and demand can be applied to events in the guar market. The slideshow is ready to cut-and-paste into your lecture. Follow this link for the classroom-ready slideshow.

A New York Times story last week featured a picture of a happy Indian farmer in his new house, a replacement for a miserable mud hut. His sister, a scarf modestly hiding her face from the photographer, extends her arm to show a new silver bracelet and ring. The house and the silver were bought with profits from guar, a crop for which India holds a global market share of 80 percent or more. The price of guar has soared recently, largely because it is a key ingredient in fracking fluid.

What is going on here? Will India’s near-monopoly of guar production be a lasting source of riches for India’s farmers? Will it be a lasting strategic headache for advanced economies, something like China’s monopoly of rare earth elements? A look at the factors behind the recent run-up in guar prices will show why the gains to India’s guar farmers are likely to be transient.

Remembering Milton Friedman and Other Links for Your Classroom

• July 31, 2012 is Milton Friedman’s 100^th birthday. Here are two readings to celebrate the occasion: Remembering the Real Milton Friedman (David Beckworth); and NGDP Targeting is the Natural Heir to Monetarism (yours truly).
• Should the German public be angry about the euro crisis? Yes, but mad at whom? In this post, Josh Rosner gives a list—mad at EU technocrats who designed a bad system, mad at banks that made reckless investments, and others. Hat tip to Yves Smith via Economonitor.com for a good summary.
• Richard A. Muller, Prof. of Physics at UC Berkeley, used to be a climate skeptic. His studies of climate records led him to doubt the very existence of global warming. However, he believes that the duty of a scientist is to be skeptical. In this article from The New York Times, he explains how further research has convinced him that climate change is not only real, but is caused almost entirely by human activity.

Financial Reform: Five Reasons Why We're Screwed

This past week brought a spate of articles on the woes of financial regulation. John Kay writes that the regulation we are getting “is at once extensive and intrusive, yet ineffective and largely captured by financial sector interests.” James Kwak thinks that crude capture at the level of Congress is exacerbated by intellectual capture at the level of regulatory staff. John Gapper sees a slightly different form of intellectual capture in which “any oversight that is biased towards preserving stability will often shy away from making life too difficult for banks.”  Randal Wray sees outright fraud—a system in which top corporate managers run their institutions as weapons to loot shareholders and customers for their own benefit. Although some of these writers use more measured language than others, all of them seem to agree with Wray on one point: We’re screwed.

So, can financial regulation be fixed, or not? Each writer points out reasons why effective financial regulation may be impossible, and I would add one more. As I see it, one of the biggest problems is that too many regulations, even those that are not tainted by capture, are prohibitions of specific risky activities, such as ownership of hedge funds or proprietary trading. This approach has two kinds of unintended consequences.

One is that prohibiting specific kinds of risks increases the incentives for fraudulently hiding them from investors, shareholders, and regulators. The other stems from the fact that financial institutions have an infinite menu of risky activities to choose from. If regulations prohibit some of them without curbing their inherent appetite for risk, they just move on to the next activity on their menu. Unfortunately, that activity may have a risk-return profile that is inferior both from financial managers’ own point of view and from that of the public interest.

It is like a parent who tries to get an obese child to take some weight off by saying, “No more chocolate ice cream, no more Big Macs.” The child just switches to mint chip ice cream and pizza.

In an earlier post, I used this diagram to illustrate the point. Regulators and bankers have different preferences so they seek different optimal points along the risk-return frontier. Ideally, regulators would like to find a way to induce banks to slide down and to the left along the frontier to a less risky point. Instead, by outlawing the specific strategies banks have used in the past, all they do is to drive them inward, away from the frontier and toward some new set of still risky but less efficient strategies. Both sides end up worse off.

The implication is that only two kinds of regulations could ever do any real good. One would be those that curb the risk appetite directly, for example, by changing compensation practices, by exposing financial executives to personal legal risks, or by other reforms of corporate governance. The other would be to break up institutions into small enough units that their failure can be tolerated. Of course, crude capture might make that kind of reform exactly the hardest to achieve. If so, then we really are screwed.

This post originally appeared in the "What's On Your Mind" department of Economonitor.com

How Flawed Leadership Selection Harms the Economies of China and the US

Sometimes you read one thing in isolation and it doesn’t make much impression, but then you read something else and the pieces click together. That was the case for me this week with two disparate articles on how nations select leaders.

The first was written by Jon Huntsman, former Governor of Utah, Ambassador to China, and Republican presidential candidate. During the GOP primaries, Huntsman’s candidacy was distinguished by two things: An unusually high ratio of sense to nonsense during the debates, and an unusually low number of votes at the polls. Now he is free to speak out. In a Financial Times comment this week entitled “True Conservatives Despise America’s Crony Capitalism,” he wrote that Republicans should do the following:

• Protect America’s economic dynamism by rolling back the power of incumbent business and political interests
• Reform the tax code by closing loopholes and flattening individual rates
• Open markets to allow clean fuels to compete with gasoline and diesel
• Reform the financial system so that the country is not held hostage by banks that are too big to fail
• Instead of pointlessly ranting against “Obamacare,” start slogging toward alternative healthcare solutions, with an emphasis on cost control measures like ending fee-for-service medicine
• Make sure defense budgets are driven by long-term strategic threats, not lobbyists
• Endorse term limits for Congress, campaign finance reform, and an end to the revolving door that blurs the distinction between regulators and regulated

Great ideas, all of them, but in the unlikely event Huntsman had won the nomination, how many of these points would he have dared to hammer away at in his campaign speeches? How much money would his Super PACs have brought in if he had openly backed all of them?

The second article was by Minxin Pei, a professor of government at Claremont McKenna College. Pei’s article asks why China can’t pick good leaders.

China, like the United States, needs structural reforms. It has a housing bubble that is proving hard to deflate in an orderly manner, a fragile financial system, and a distribution of income that is becoming ever more unequal. Pei doubts that the leadership is up to dealing with these issues.

Of course, China’s political system is different from that of the United States in many ways. Where China has a one-party, authoritarian government with scheduled changes of leadership, the United States has a two-party, democratic government with scheduled changes of leadership. Beneath these obvious differences, though, there are similarities.

Pei thinks China’s problem lies in the fact that it does not select leaders on the basis of demonstrated abilities, but rather, on the basis of political patronage and ties to powerful interest groups. He writes that the most damaging effect of this Byzantine system is a “leadership prone to factional compromise, even policy paralysis.” That is why China has failed to undertake much-needed economic reforms to rebalance its economy.

The problem that afflicts both countries is one that Mancur Olson wrote about in The Rise and Decline of Nations. As economies grow strong and political systems mature, leadership becomes more and more beholden to coalitions of special interests that are more interested in dividing up the pie than in enlarging it or improving the quality of the stuff it is filled with. Once interest group politics becomes entrenched, nations decline.

It has been a quarter of a century now since Olson wrote that book. In the United States, factionalism has hardened and policy paralysis has become the norm. Over the same period, China has had a run of success that Olson could hardly have imagined, but it, too, is showing signs of the same factionalism and paralysis. In both countries, very different but equally flawed systems for selecting leaders exacerbate the problem.

Originally posted at Economonitor.com