Latest Economic Growth Data Give Cheer to Market Monetarists, or, What is the NGDP Gap and Why do we Care?

The headlines for the latest report on U.S. economic growth mostly focused on the revised 4.1 percent growth rate for real GDP. As the following chart shows, that made it the best quarter in two years, and only the second quarter since the recovery began in which growth hit the 4 percent mark or better. A deeper look into the tables put out by the Bureau of Economic Analysis reveals another number that will bring even more holiday cheer to at least some economists:  Nominal GDP growth has also begun to accelerate and the NGDP gap has finally started to close.

What is the NGDP gap and why do we care?
If you’re a real econ wonk, you can skip this section. Otherwise you’re probably wondering just what the NGDP gap is, and why we should care. Here goes. >>>Read more

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

Update: Fed's Taper Puts Brazil's Currency Volatility Back in the Spotlight

Brazil’s volatile currency is back in the spotlight, thanks to the Fed's announcement that it will soon begin to taper its program of asset purchases known as Q3. The following chart shows that the exchange rate for Brazil's currency, the real, is approaching the low reached after the August taper scare and is almost back to the five-year low reached in March 2009.

An article in the Financial Times puts Brazil at the head of what it calls the "fragile five," along with India, Indonesia, South Africa, and Turkey. To say that the Brazilian government is nervous about the situation would be a grave understatement, with a national election and the World Cup coming up next year.

If the weak real is causing despair in Brazil today, the country must have been dancing in the streets with joy two years ago when the currency was headed for record highs. But no--the it was in despair then, too. At that time, its finance minister, Guido Mantega, characterized the Fed's policy of quantitative easing as a “currency war” at his country’s expense.

What explains the paradox that both appreciation and depreciation of a country's currency are both perceived as harmful to the economy? I wrote about this back in August when tapering was only a threat on the horizon. Now that it is actually about to start, the issue takeson a new relevance. Here is a somewhat abbreviated version of the earlier post. >>>Read more

Budget Deal Locks in Procyclical Fiscal Austerity

A proposed budget deal brokered by Senator Patty Murray and Representative Paul Ryan is headed for the Senate after passing a the House on a bipartisan vote yesterday. Not everyone is happy about it. Conservatives would have liked to see more new deficit cutting measures. “In the coming days, members of Congress will have to explain to their constituents what exactly they achieved by increasing spending, increasing fees and offering up another round of promises waiting to be broken,” grumbled Michael Needham of Heritage Action. Many liberals are unhappy with the deal, too. “Here we are still having the conversation about how to cut government instead of how to improve the prospects of the long-term unemployed and improve the overall economy, which would take expanding spending, not shrinking it," economist Laura Dresser lamented to The Progressive. 

With both the right and the left denouncing the deal, who is the real winner? If we look at the numbers, it is hard not to conclude that the pending deal, which would lock in the status quo, is a victory for the deficit hawks who have pretty much had their way with fiscal policy in recent years. True, on the downslope of the recession, first the Bush and then the Obama administrations tried fiscal stimulus. Without their actions, the downturn would very likely have been even deeper. However, the stimulus has long since run its course. Since the recovery officially began in mid-2009, fiscal policy has tightened markedly.

Some people evidently don’t believe that. The Tea Party News Network, for example, continues to rant about “years marked by runaway spending and out-of-control deficits,” but those years ended some time ago. To see what has really been going on, we need to take a closer look at the evolution of fiscal policy over the course of the Great Recession and the still-incomplete recovery from it. >>>Read more

Follow this link to view or download a classroom-ready slideshow with charts and analysis of the budget deal

Are Cheap Fossil Fuels Really a Such a Boon to the World’s Poor? A Reply to Bjørn Lomborg

How can we make life better for the world’s poor? Environmentalists often tell us that one way would be to slow climate change by cutting fossil fuel use. They warn that the poorest people in the poorest countries are likely to bear the brunt of rising sea levels, droughts, and storms. Carbon taxes or other policies that would raise the prices of fossil fuels would help by reducing demand for coal and oil and spurring investment in green alternatives.

Skeptical environmentalist Bjørn Lomborg seems to think otherwise. Writing recently in The New York Times, he argues that people who care about the world’s poor should work to lower the price of fossil fuels, not raise them. He points out that 3.5 million people around the world die from indoor air pollution caused when they burn wood, dung and other traditional fuels in open fires or leaky stoves to cook and heat their homes—more than die from outdoor air pollution. “There’s no question that burning fossil fuels is leading to a warmer climate and that addressing this problem is important,” he goes on, “but doing so is a question of timing and priority. For many parts of the world, fossil fuels are still vital and will be for the next few decades, because they are the only means to lift people out of the smoke and darkness of energy poverty.”

Is Lomborg right? Although we should not dismiss the problem of indoor air pollution lightly, I think that much of what he says fails to stand up to scrutiny. >>>Read more

US Recovery Shows New Strength with GDP Growth up to 3.6 Percent and Unemployment Down to 7 Percent

Data released this week by the Bureau of Economic Analysis showed that the U.S. economy grew at a respectable annual rate of 3.6 percent in the third quarter of 2013. That made it the first quarter since early 2012 for which growth was fast enough to make a significant dent in the output gap. The advance estimate released last month had put growth at 2.5 percent.



The upward revision should be interpreted with caution, since, as the following table shows, it was due almost entirely to an increase in the estimated growth of inventories. Faster inventory growth is an ambiguous indicator. In some cases, it can mean that businesses are stocking up in anticipation of higher future sales, but inventories can also grow when firms produce more than they had hoped to sell or order raw materials but fail to use them at the rate they had expected. On a more positive note, the contribution of fixed investment was also revised upward, with residential and nonresidential structures leading the way.