Tuesday, May 14, 2019

A Shopping Trip to the Past Reveals an Important Truth About Inflation

Inflation has been pretty well contained lately, averaging well below the Fed’s target rate of 2 percent. But could the true rate of inflation be even lower than that? In a recent piece for The Wall Street Journal, Andy Kessler explains why.

Kessler sees quality adjustment as the big flaw in the CPI and other standard inflation. Government statisticians try to make quality adjustments, but, as Kessler says, “by the time the BLS puts something new in the CPI basket, it’s already cheap.” As a result, he thinks, the CPI overstates the true rate of inflation by about 2 percentage points.
Is he right? Even the best econometricians aren’t sure. That’s not because they aren’t good at what they do. Rather, it’s because quality adjustment is fundamentally subjective.

With that in mind, I’ve developed my own purely subjective approach to gauging inflation, based on a fantasy shopping trip to the past. Off you go, into the time machine. All I ask is that you bring back an answer to this question:
If you could choose between shopping today at today’s prices, or shopping in the past at past prices, what items, if any, would you buy from the past?
Although I can’t give you a seat in a real time machine, I can give you the next best thing: An old Sears Catalog. A great website, www.wishbookweb.com, keeps an archive of page-by-page images for these “Wishbooks” going all the way back to 1937. I won’t take you back that far, just to 1962. I pick that year because that was before the “Great Inflation” of the 1960s and 1970s, which tripled the U.S. consumer price level over the next two decades. All prices quoted from the 1962 catalog are the actual nominal prices of that year, with no adjustments for inflation.

Let’s go shopping!

Sunday, May 12, 2019

In Search of a Better Measure of Labor Market Slack

Every month we watch for changes in the unemployment rate. Most people cheer when the unemployment rate falls — how can we not like it when more of those who want to work can actually find a job? But low unemployment makes economists and policy makers nervous. Is there enough slack for further growth? Is the economy overheating? Does the Fed need to apply the brakes?

To understand what is really going on, we we need to think more about whether the official data from the Bureau of Labor Statistics are really the right numbers to cheer or to get nervous about. Not necessarily. Here is a short tutorial on how the government measures the degree of slack in the labor market, and how it could be done better.

How the BLS measures labor market slack

The standard unemployment rate counts people as unemployed only if they are not working but have actively looked for work in the previous four weeks. That leaves out two important reserves of willing labor.

Wednesday, May 1, 2019

Rep. Paul Tonko's Nine Principles of Climate Change are a Call to Action. So Let's Act!

Rep. Paul Tonko, who chairs a House subcommittee on Environment & Climate Change Subcommittee, has published a list of nine principles of climate action. He prefaces his list with these remarks:

Americans are living, and dying, in the path of unprecedented flooding, raging wildfires, and battering storms driven by Earth’s changing climate. Regardless of the origins of our predicament, we have inherited these conditions. It falls to us to set aside past disagreements and rise together to meet this challenge. We agree that climate change is real.

We agree humans are driving it. We agree that we need to build solutions that meet the scale and urgency of the crisis we face. The principles outlined in this document are meant to provide a framework that moves the lines of our agreement forward and helps us build a comprehensive national climate action plan together.

As we assess the ideas before us, no options should be off the table. Rather, I submit that any climate proposal we consider should be measured against the principles enclosed here. They reflect extensive conversations with Members of Congress and stakeholders. I present them to you for your consideration, reflection, and feedback.

As a strong backer of climate action, here are my responses. (Words in italics at the beginning of each section are Tonko’s, either full quotes or slightly edited for length.)

1. Adopt Science-Based Targets for Greenhouse Gas Neutrality by Mid-Century

We certainly need a radical reduction in GHG emissions by mid-century, but full net carbon neutrality may be an overreach. Emissions reduction, like many economic and engineering processes, tends to follow an 80/20 pattern, wherein the first 80 percent of the cleanup absorbs half the cost while the remaining 20 percent costs as much again as the first 80. Even within the last 20 percent, most of the cost is in the last few percentage points. For example, something like the schedule of reductions given in HR 763, a fee-and-dividend approach backed by the Citizens’ Climate Lobby, which calls for roughly an 88 percent reduction by 2050, would be more realistic.