Monday, August 19, 2019

A Little-Noticed Inflation Indicator That is Worth a Closer Look

 As talk of a new recession grows louder, everyone is watching some favorite indicator. The yield curve, claims for unemployment, the quits rate — you name it. What surprises me is how few people are watching an underappreciated indicator from the New York Fed that uses more than just price data to tell us what is happening with inflation.

What makes the Underlying Inflation Gauge (UIG) unique is its power to distinguish between changes in the cost of living and changes in the rate of inflation. Did you think those were the same thing? Think again, and read on.

What’s the difference?

The concept of the cost-of-living stems from the first of those role of money as a medium of exchange. When we say the cost of living increases, we mean that it gets harder to maintain a given standard of living on a given income. Either we have to be satisfied with fewer goods or services, or save less, or work harder. In the language of economics, a change in the cost of living is a real phenomenon.

Inflation, in concept, is best understood a change in the value of our unit of account, the dollar. When there is inflation, the value of the unit is smaller each day than it was the day before, for all transactions.

Imagine that you woke up one morning to find that someone had chopped an inch off all our rulers, so that today’s foot was now only as long as yesterday’s eleven inches. You might go from being six feet tall to six-foot-six, but it wouldn’t be any easier for you to reach the top shelf in the kitchen without a footstool. Similarly, if inflation raises both your income and the prices of everything you buy by the same percentage, the value of a dollar as an economic ruler shrinks, but it is neither harder nor easier to maintain the same real standard of living. In that sense, inflation does not measure anything real. It is a purely nominal phenomenon.

Saturday, August 17, 2019

Investment and Exports Explain Why the economy Isn’t Taking Off Like a Rocket

President Donald Trump’s huge tax cut, signed into law in December 2017, was supposed to make the economy take off “like a rocket ship.” As the foislowing chart shows, it hasn’t worked out that way. Instead, the growth trend has turned down since the tax cut went into effect. The advance estimate for the second quarter of 2019 year shows growth of just 2.1 percent.

What went wrong? First, let’s see what happened and then speculate about why.

What: Weak fixed investment

Backers of the big cut in corporate tax rates promised an investment boom. Companies were supposed to use the money they saved in taxes to build new plants and buy new equipment – what government statisticians call “fixed investment.” That didn’t happen.

Sunday, August 4, 2019

Trends in the Distribution of Weath Are Even Scarier Than Trends in Income

“We have an economy in this country that is not working for working people,” says Sen. Kamala Harris, a Democratic candidate for President. It is a common refrain. As the following chart shows, when adjusted for inflation, average hourly earnings of ordinary U.S. workers have grown just 15 percent over the past 30 years. Weekly earnings of full-time employees have grown even less, just 10 percent.

 Meanwhile, the pay of top earners has soared. According to a study from the Economic Policy Institute, in 1989, the pay of corporate CEOs was 59 times as high as that of production workers. By 2016, it had risen to 270 times higher than workers’ pay.

No wonder a lot of Americans are feeling left behind by a booming economy. But wages are not the whole story. Would you believe, there are other data that make the “left behind” narrative look even worse?

It’s not the wages, it’s the wealth

The trend that is even scarier than that of wages is the trend in wealth. “Wealth,” in this sense, means net worth, that is, total assets minus total debts. It’s not what you own that matters, but the difference between what you own and what you owe.