US Inflation Near Zero in June, Deflation Risk Rises

The latest inflation data from the Bureau of Labor Statistics show the CPI unchanged in June, following a 0.3 percent decrease in May. For the full year, the CPI has risen just 1.7 percent, well below the Fed’s target of 2 percent. Since the beginning of June, an important indicator of the risk of Japanese-style deflation has begun to rise for the first time in two years. >>>Read more

Follow this link to view or download a slideshow with the latest charts of inflation and deflation risk

Manipulating the Numbers: Motive, Means and Opportunity

I have been thinking about some important parallels between the Libor scandal and the failure of ratings for structured securities. The parallels arise from the existence, in both cases, of the motive, means, and opportunity to manipulate the numbers for private gain.

The means and opportunity arise from the fact that neither Libor nor ratings are objective reports of past events. Compare them, in that respect, to numbers like exchange rates or the outcome of T-bill auctions. The latter are reports of transactions that someone actually carried out. Libor and ratings, instead, are reports of transactions that someone thinks could possibly take place—borrowing that a bank could undertake if it wanted to in the case of Libor or future fulfillment of a financial obligations in the case of ratings. If someone says that something could happen, is that what they really think, or not? There is no way to check.

The motive for manipulation comes from two sources. One is the fact that the values of many financial instruments are pegged to these numbers. For example, the value of an interest rate swap changes as Libor changes, and the value of a credit default swap changes as ratings change. The other motive comes from regulatory reliance on the numbers. Banks (Barclays in particular) thought they could relieve regulatory pressure if they reported an ability to borrow cheaply. In other cases, financial institutions knowingly bought overrated securities so that they could indulge their appetite for risk while minimizing regulatory capital requirements.

With motive, means, and opportunity aligned in so tidy a fashion, is there any wonder that fraud took place?

All this makes one wonder about a different category of numbers that move markets, numbers like unemployment and inflation rates. Those, in principle, are objective reports of past events, unlike Libor or securities ratings. However, unlike exchange rates or T-bill prices, outsiders cannot easily verify them. The raw data are not easily accessible; and even if the raw data could be verified, the methodology of deriving the final numbers could be subject to manipulation.

Observers of emerging market economies, such as Argentina or China, frequently express doubts about reported inflation rates and other data. So do many people in the United States. Anyone who has ever blogged about inflation or unemployment rates is used to a hailstorm of comments along the lines of “Gummint lyin’ to us again!”

So far, though, most economists think our government number crunchers are doing an honest job, as best they can, given the inherent methodological difficulties and the budget constraints they face. (In support of that view, check out various bits of Congressional testimony by Keith Hall, posted here. Hall was Chief Economist of the Council of Economic Advisers from 2005 to 2008 and Commissioner of Labor Statistics from 2008 until earlier this year.)

I hope this professionalism lasts. If we learned from some whistleblower that the BLS had falsified a jobs report on the eve of an election, we would have a scandal that would make the Libor manipulation look like a tempest in a teapot.

Originally posted at Economonitor.com

The Illusory Benefits of Bringing Back the Draft

Writing in Tuesday’s New York Times, Thomas E. Ricks makes a plea for reinstating the draft. His argument is largely based on supposed economic benefits that I find questionable. Here is why.

Ricks’ proposal would expand the draft beyond the military to make it a form of near-universal national service. Under his plan, combat units would continue to be filled by volunteers who would receive full military training, pay, and benefits, much as they do now. In addition, Ricks would add two new categories of service. >>>Read More

Readers who are interested in a longer analysis of the history and economics of conscription may want to consult this nice backgrounder by Joshua C. Hall of Beloit College

More Weak Job Data: Have we Reached the Natural Rate? Is this as Good as it Gets?

The June report from the Bureau of Labor Statistics shows continued weak growth of payroll jobs. Just 80,000 new jobs were reported for the month, while an upward revision to the May data was cancelled by a downward revision for April. The unemployment rate remains stuck at 8.2 percent. What is more, the broad measure of unemployment, U-6, is actually climbing again, after three years of decline. The broad measure includes discouraged workers and those involuntarily working part time. Is this as good as it is going to get? >>>Read more

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

The Moral Limits of Markets: When is Standing in Line Better than Paying a Price?

In his book What Money Can’t Buy: The Moral Limits of Markets, Harvard Professor Michael J. Sandel invites us to engage in a public debate on the proper role of markets in society. It is a question, he says, to which economists do not give enough thought. I agree. I am happy to join the debate.

First of all, I should make it clear that despite the title, the debate is not about what money can’t buy. There is little controversy about that. Sandel correctly points out that money can buy companionship but not friendship; sex but not love; or a statuette but not the honor associated with selection as the year’s best actor. The heart of Sandel’s argument is really about what money should not buy, or more precisely, what we should not offer for sale or buy if it is offered. The book covers a lot of ground—far too much to deal with all at once. This post will address the ethics of queuing, a method of allocating scarce goods that Sandel sees as morally superior to pricing for many purposes. I hope to take up other issues he raises in future posts. >>>Read more

Latest Data Show Slow GDP Growth, Falling Profits

The final estimate from the Bureau of Economic Analysis shows U.S. real GDP growing at a sluggish 1.9 percent annual rate in Q1 2012, the same as in the second estimate released at the end of May.  Nominal GDP grew at a 3.9 percent annual rate. That is slightly faster than previously estimated but still well below the rate that NGDP targeters consider necessary to close a persistent output gap and return the economy to full employment. The BEA also released revised data showing that corporate profits in Q1 were weaker than previously thought. >>>Read More


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

Fourteen Minutes a Day: What the Great Recession has Done to the Way we Spend Our Time

Writers of economics textbooks like to remind us that official employment and GDP data are not very good measures of how hard we work or of the goods and services we produce, but what alternatives do we have? One little­-noticed alterative is the annual American Time Use Survey from the Bureau of Labor Statistics, which provides 24/7 coverage of the activities of the civilian population aged 15 and older. The BLS released the 2011 survey last Friday. Comparing it to the 2007 data provides an interesting perspective on how the Great Recession has affected our lives. >>>Read more