At the end of January, I posted about the BEA's 2012 fourth quarter GDP growth estimate. It was -0.1% annualized. Most of the decrease was due to cuts in government spending, and reductions in private business inventories (which is typically a sign of negative expectations). Positive contributors to GDP included nonresidential and residential fixed investment.
The thing was, job numbers and stock market performance were suggestive of positive GDP growth. I expected that GDP growth would be revised up. It was; instead of contracting by 0.1%, the economy grew by 0.1%. It is still a bad number and still out of line with the job market performance. On the other hand inflation growth is slowing, and in urban areas has sat at 0% for a couple months now, which can indicate slowing growth.
Basically who knows.
February 28, 2013
February 8, 2013
Medical Malpractice
Here's a long post, it's about medical malpractice:
February 2, 2013
January Jobs Report
The January Jobs report came out Friday along with annual revisions to past jobs numbers. Job growth in January was 157,000, a relatively average number for the current recovery. The unemployment rate went up by 0.1% due to revisions to population and labor force estimates. The better news is the direction of the revisions to past numbers. November was revised up from 161,000 to 247,000 jobs added, a strong performance in the context of the recovery. December was revised up from 155,000 to 196,000. Generally speaking, the revisions to older months were upwards in direction. There were even a couple months of job growth above 300,000.
The graph below shows the revised numbers in white, and the previous numbers in red.
The jobs report gives further evidence in conflict with the fourth quarter contraction in GDP indicated in the BEA's preliminary estimates. As I noted in the previous post, these estimates are always revised to some degree, sometimes by over a percentage point. When looking at other indicators of economic strength, it seems very likely that GDP did in fact expand in the fourth quarter.
The graph below shows the revised numbers in white, and the previous numbers in red.
The jobs report gives further evidence in conflict with the fourth quarter contraction in GDP indicated in the BEA's preliminary estimates. As I noted in the previous post, these estimates are always revised to some degree, sometimes by over a percentage point. When looking at other indicators of economic strength, it seems very likely that GDP did in fact expand in the fourth quarter.
January 30, 2013
Wha??
According to the Bureau of Economic Analysis, the economy is, well was in the fourth quarter, contracting for the first time since 2009. It comes as quite a surprise to any non-doomsayer. The economy grew by 3.1% annualized in the third quarter, in the fourth it contracted by 0.1%. Granted, the "advance" report is revised multiple times; initially the advance report put third quarter GDP growth at 2% annualized. The fourth quarter number could be revised up, but will still be poor.
The reported contraction was due in large part to reductions in government spending (mostly defense, which alone knocked 1.28% off growth), and in inventories. The reduction in inventories could indicate an expectation of worse growth going forward. Exports also took a hit, owing to a weak world economy.
On the other hand, the jobs data had the same middling growth during the fourth quarter, as in not indicating a worsening situation. Consumer spending and residential investment put in strong numbers as well.
It should become a bit clearer whether the good signs will be revised down or the bad signs revised up when the January jobs report and previous month revisions come out on Friday.
The reported contraction was due in large part to reductions in government spending (mostly defense, which alone knocked 1.28% off growth), and in inventories. The reduction in inventories could indicate an expectation of worse growth going forward. Exports also took a hit, owing to a weak world economy.
On the other hand, the jobs data had the same middling growth during the fourth quarter, as in not indicating a worsening situation. Consumer spending and residential investment put in strong numbers as well.
It should become a bit clearer whether the good signs will be revised down or the bad signs revised up when the January jobs report and previous month revisions come out on Friday.
January 17, 2013
January 10, 2013
This Year Should be Better
Economically, this year should be better than last; it should be the best year of the recovery so far. There are two main reasons why: the housing market and the Federal Reserve.
The massive debt brought on by the crash is still slowly but surely being paid off. The number of homeowners who are delinquent or in foreclosure continues to drop, making housing investments less and less risky.
The Federal Reserve has been buying assets to create $40 billion of new money each month since September, and last month increased that amount to $85 billion. They have committed themselves to this level of money creation until unemployment is below 6.5%, so long as inflation remains stable. This will reduce the cost of borrowing and investing, and a bit of higher inflation would reduce the real value of debt over time and make exports more competitive. Generally speaking, it takes about six months for changes in Fed policy to have a real effect.
The massive debt brought on by the crash is still slowly but surely being paid off. The number of homeowners who are delinquent or in foreclosure continues to drop, making housing investments less and less risky.
 |
| Data is for the New York Fed district and not the whole county, but the general trend is the same. |
Housing prices in real terms[1] and as a ratio to rental prices have dropped to pre-bubble levels.
The average amount of time a home sits on the market before being bought has returned to average levels as well (between 4 and 5 months). Eventually simple demographics will take hold. The population of the United States continues to grow, and the number of people per household remains above average. The consultancy Macroeconomic Advisers projects that the United States will need an average of 1.6 million new houses per year over the next decade; in 2012 1 million were built.
The Federal Reserve has been buying assets to create $40 billion of new money each month since September, and last month increased that amount to $85 billion. They have committed themselves to this level of money creation until unemployment is below 6.5%, so long as inflation remains stable. This will reduce the cost of borrowing and investing, and a bit of higher inflation would reduce the real value of debt over time and make exports more competitive. Generally speaking, it takes about six months for changes in Fed policy to have a real effect.
So 2013 should be better than 2012, however politicians can still ruin it.
January 7, 2013
December Jobs Report
155,000 jobs were created in December. The number is
incredibly average for the disappointing recovery. The monthly average for 2012
was 152,900; the average for 2011 was 153,300. Such weak and consistent job
growth puts the economy on track to recover all the jobs lost in the recession
by March of 2015. But the population will be larger, so recovery to the rate of
unemployment seen before the recession will take even longer.
December 21, 2012
Life in Kibera
I try to do a little more than just link to other people's writings, but this is one of the best articles I've read in a while:
Upwardly Mobile Africa: Boomtown Slum
And the correspondent undoubtedly knows a lot more on the subject than I do. The article tells the story of a day in Kibera, the largest shanty town slum in Africa. It is part of Nairobi, the capitol of Kenya. Around 1 million people live informally (i.e. as squatters), without a sign of the government, in one square mile.
The point of the article is that this is not a pit of humanity festering in poverty. It is a very poor place, but has a very entrepreneurial and growing economy. Signs of growth can be found all over, and new residents come from the country side to seek a better life. Many in Kibera have incomes above the poverty threshold (of $1.25 a day), many residents are counted among the middle class according to the World Banks threshold of $10 a day.
Before anyone gets too libertarian about it, the government can make these people better off. Their richer neighbors in Nairobi pay less for water and electricity because they don't rely on informal businesses to tap into the grid. But what can a cash-strapped government do? Formalizing the shanty town and giving property ownership to the residents would immediately boost their wealth and give the countless entrepreneurs access to capital.
Upwardly Mobile Africa: Boomtown Slum
And the correspondent undoubtedly knows a lot more on the subject than I do. The article tells the story of a day in Kibera, the largest shanty town slum in Africa. It is part of Nairobi, the capitol of Kenya. Around 1 million people live informally (i.e. as squatters), without a sign of the government, in one square mile.
The point of the article is that this is not a pit of humanity festering in poverty. It is a very poor place, but has a very entrepreneurial and growing economy. Signs of growth can be found all over, and new residents come from the country side to seek a better life. Many in Kibera have incomes above the poverty threshold (of $1.25 a day), many residents are counted among the middle class according to the World Banks threshold of $10 a day.
Before anyone gets too libertarian about it, the government can make these people better off. Their richer neighbors in Nairobi pay less for water and electricity because they don't rely on informal businesses to tap into the grid. But what can a cash-strapped government do? Formalizing the shanty town and giving property ownership to the residents would immediately boost their wealth and give the countless entrepreneurs access to capital.
December 19, 2012
Ayn Rand
A random thought hit me today. It’s about Ayn Rand, but don’t let that stop you from reading this. Ayn Rand argued that true morality was to not care about anyone’s interest but your own. Everyone pursuing self-interest would end up maximizing their own benefit. And if everyone’s benefit is maximized, society is best off. This logic comes from the First Fundamental Theorem of Welfare Economics, which holds that “competitive equilibrium is Pareto Efficient”. Competitive equilibrium means markets are perfectly competitive (no one firm has market power), and all in equilibrium (supply equals demand, no shortages or surpluses). Pareto Efficient means that no one person can be made better off without making someone else worse off.
There you have it, one paragraph. So if you were considering reading Atlas Shrugged, don’t worry about it. But there are a few essential requirements for the First Fundamental Theorem to work; and they can't possibly exist in the real world:
1. All markets are in equilibrium – The economist Leon Walras proved that if all but one market is in equilibrium (say, theoretically, 9 out of 10) the remaining unstudied market must also be in equilibrium. The flip side is that if any one market isn’t in equilibrium, other markets must also be in disequilibrium. Which sounds more likely?
2. No externalities/market failures/public goods – This condition can’t possibly be true in the real world. Think of pollution, without government regulation a coal power plant suffers no cost for pollution, but the wider public does. This means from the point of view of society, the power plant over-produces because its monetary cost of production is less than the true cost of production. This externality breaks the no surpluses condition of equilibrium. There are clearly market failures, asymmetry of information being a classic example. There are clearly public goods, such as education.
3. No interdependent utility – This is the condition Rand was so in to[1]. It means no one’s utility, or personal well-being, depends on anyone else’s. Parents don’t care about kids, friends don’t care about friends, etc. It clearly isn't the case.
So it’s impossible for the First Fundamental Theorem to exist in the real world, though it is a very useful model for studying economics theoretically. And it’s a shame people can’t distinguish between a thought experiment and legitimate policy. Pareto’s theories were eagerly adopted by supporters of planned economies because they can show that optimal efficiency can never be brought about by purely unregulated markets (which will not be perfectly competitive)[2].
The reason I bring this up is the last condition, no interdependent utility. Rand argued that an individual’s utility shouldn't be influenced by other individuals. She spent a lot of time on it, wrote rambling monologues on it, yelled “compromiser!” at Friedrich Hayek the only time they met. She cared that he wasn’t as much an ideologue as she was[3]. She cared about spreading her ideas, and convincing people to believe them. You could say that part of her utility depended on what other people thought and did. This of course violates the 3rd condition for the theory she espoused to be true. It simply can never exist; humans just don’t act that way.
There you have it, one paragraph. So if you were considering reading Atlas Shrugged, don’t worry about it. But there are a few essential requirements for the First Fundamental Theorem to work; and they can't possibly exist in the real world:
1. All markets are in equilibrium – The economist Leon Walras proved that if all but one market is in equilibrium (say, theoretically, 9 out of 10) the remaining unstudied market must also be in equilibrium. The flip side is that if any one market isn’t in equilibrium, other markets must also be in disequilibrium. Which sounds more likely?
2. No externalities/market failures/public goods – This condition can’t possibly be true in the real world. Think of pollution, without government regulation a coal power plant suffers no cost for pollution, but the wider public does. This means from the point of view of society, the power plant over-produces because its monetary cost of production is less than the true cost of production. This externality breaks the no surpluses condition of equilibrium. There are clearly market failures, asymmetry of information being a classic example. There are clearly public goods, such as education.
3. No interdependent utility – This is the condition Rand was so in to[1]. It means no one’s utility, or personal well-being, depends on anyone else’s. Parents don’t care about kids, friends don’t care about friends, etc. It clearly isn't the case.
So it’s impossible for the First Fundamental Theorem to exist in the real world, though it is a very useful model for studying economics theoretically. And it’s a shame people can’t distinguish between a thought experiment and legitimate policy. Pareto’s theories were eagerly adopted by supporters of planned economies because they can show that optimal efficiency can never be brought about by purely unregulated markets (which will not be perfectly competitive)[2].
The reason I bring this up is the last condition, no interdependent utility. Rand argued that an individual’s utility shouldn't be influenced by other individuals. She spent a lot of time on it, wrote rambling monologues on it, yelled “compromiser!” at Friedrich Hayek the only time they met. She cared that he wasn’t as much an ideologue as she was[3]. She cared about spreading her ideas, and convincing people to believe them. You could say that part of her utility depended on what other people thought and did. This of course violates the 3rd condition for the theory she espoused to be true. It simply can never exist; humans just don’t act that way.
December 14, 2012
Update on the Federal Reserve
This week the Federal Reserve has taken further unconventional action to attempt to stimulate the economy. In September the Fed announced it would buy bonds and other securities with newly created money to increase the money supply (more details here). With not much sign of things getting better yet, the Fed has expanded its asset purchasing (as in money creation) from $40 billion to $85 billion per month.
But that is only half the story. In September the Fed said it would continue making new money until unemployment falls back to "normal" levels, but only if inflation stays low. The limitations and thresholds were somewhat vague, which dulls the effect of the policy. However, this time, the Fed explicitly stated that it will continue creating money until unemployment goes below 7%, and keep interest rates near 0% until it goes below 6.5%. And even when it does they will not stop immediately, but rather gradually wind down the program. This is conditional on inflation staying near or below 2.5% in the short run[1]. The benefit of this policy is that the Fed is now committed in a clear manner to its stimulus. And as conditions change economic actors will know at what point the Fed policy will change.
I previously spoke of how large a change outlining policy in this manner is for the Fed. This is the first time ever the Fed has set an unemployment rate target[1]. Past efforts have involved set dollar amounts and calendar deadlines. Now the policy is still clear and predictable, but flexible and limited only by the accomplishment of its goals (you can find information on how monetary stimulus helps the economy here and here). I am a huge supporter of the Feds recent policy changes. While its no magic bullet and the magnitude of the effect is a matter of debate, it speaks well of our monetary institution that the Fed has been so able to adapt and act to economic conditions.
My only present concern is the focus on keeping inflation near or below 2.5%[2]. I've posted about why inflation is not a threat in this weak economy here and here. We would not be hurt by inflation in the 3 - 4 % range, inflation has been that high numerous times in the past two decades. Keeping inflation relatively low will dull the stimulative effect because the Fed can only reduce inflation by slowing down the economy. The low inflation ceiling could lead people to expect that stimulus will be withdrawn too early. Metaphorically, the Fed is giving the economy more gas while still keeping a foot slightly on the breaks.
But that is only half the story. In September the Fed said it would continue making new money until unemployment falls back to "normal" levels, but only if inflation stays low. The limitations and thresholds were somewhat vague, which dulls the effect of the policy. However, this time, the Fed explicitly stated that it will continue creating money until unemployment goes below 7%, and keep interest rates near 0% until it goes below 6.5%. And even when it does they will not stop immediately, but rather gradually wind down the program. This is conditional on inflation staying near or below 2.5% in the short run[1]. The benefit of this policy is that the Fed is now committed in a clear manner to its stimulus. And as conditions change economic actors will know at what point the Fed policy will change.
I previously spoke of how large a change outlining policy in this manner is for the Fed. This is the first time ever the Fed has set an unemployment rate target[1]. Past efforts have involved set dollar amounts and calendar deadlines. Now the policy is still clear and predictable, but flexible and limited only by the accomplishment of its goals (you can find information on how monetary stimulus helps the economy here and here). I am a huge supporter of the Feds recent policy changes. While its no magic bullet and the magnitude of the effect is a matter of debate, it speaks well of our monetary institution that the Fed has been so able to adapt and act to economic conditions.
My only present concern is the focus on keeping inflation near or below 2.5%[2]. I've posted about why inflation is not a threat in this weak economy here and here. We would not be hurt by inflation in the 3 - 4 % range, inflation has been that high numerous times in the past two decades. Keeping inflation relatively low will dull the stimulative effect because the Fed can only reduce inflation by slowing down the economy. The low inflation ceiling could lead people to expect that stimulus will be withdrawn too early. Metaphorically, the Fed is giving the economy more gas while still keeping a foot slightly on the breaks.
December 7, 2012
November Jobs Report
Middling is a good way to put it. 146,000 jobs were added in November, which is pretty close to average. In the face of the uncertainty of the fiscal cliff, depending what effect that uncertainty has, average could be better than it seems. According to the BLS, hurricane Sandy had little effect on employment.
But the situation looks a bit worse once one looks deeper. The labor force participation rate declined, off-setting October's increase. This, and the added jobs, has brought the unemployment rate down to 7.7%. The data for the months of September and October were revised down by a combined 49,000 jobs, the first downward revision since April. The revision brings the monthly average job growth so far this year to 151,000, compared to 2011's 153,000.
But the situation looks a bit worse once one looks deeper. The labor force participation rate declined, off-setting October's increase. This, and the added jobs, has brought the unemployment rate down to 7.7%. The data for the months of September and October were revised down by a combined 49,000 jobs, the first downward revision since April. The revision brings the monthly average job growth so far this year to 151,000, compared to 2011's 153,000.
November 28, 2012
Politics
Guess which continent wasn't politically important enough for UN Secretary Dag Hammarskjöld's head to not block in this posed picture.
That's a bit unfair. He died in a plane crash in Africa on his was to the Democratic Republic of the Congo to negotiate a cease fire between factions that were tearing the country apart in the "Congo Crisis". Granted, UN members such as the United States, Belgium and the Soviet Union were using it as a playground for the Cold War, and completely undermined anything a neutral member of the UN could do. Also Dag was an economist so he couldn't have been that bad. Then again:
That's a bit unfair. He died in a plane crash in Africa on his was to the Democratic Republic of the Congo to negotiate a cease fire between factions that were tearing the country apart in the "Congo Crisis". Granted, UN members such as the United States, Belgium and the Soviet Union were using it as a playground for the Cold War, and completely undermined anything a neutral member of the UN could do. Also Dag was an economist so he couldn't have been that bad. Then again:
November 21, 2012
Fiscal Cliff Update
Because of the timing, I’d like to expand on a previous post about the fiscal cliff, seen here.
The CBO has released a new report about how terrible the fiscal cliff will be unless congress acts to prevent it. The basic story is the same, but there are a few key details worth dwelling on. The figure below provides a nice summation of them. The column on the left is dollars of GDP lost per dollar cut; the column on the right is essentially how many full time “equivalent” jobs will be lost per million dollars of cuts.
The first thing noticeable is that the spending cuts that were part of the deficit ceiling deal will be the most damaging to the economy and employment. This is because discretionary spending (spending subject to the annual appropriations process in congress) is below its 40 year average, each additional cut will damage the economy more. The mirror of this is that tax increases will have less damaging effects per dollar of the deficit reduced. This is because taxes are below their 40 year average.
Furthermore, when “Extend Most Expiring Tax Provisions and Index the AMT to Inflation” is compared to the same policy “Except for the Lower Tax Rates on Income Above Certain Thresholds” (or, let the Bush Tax Cuts expire for the rich) there is little effect. In terms of GDP, the average difference in growth will be $0.10 per tax dollar forgone – notice though that the estimated range for increasing or not increasing taxes on the rich is the same. In terms of employment, increasing taxes on the rich is estimated to have no effect. It’s almost as if “the Job Creators” will keep working even if they keep a few percent less of their incomes each year.
The CBO has released a new report about how terrible the fiscal cliff will be unless congress acts to prevent it. The basic story is the same, but there are a few key details worth dwelling on. The figure below provides a nice summation of them. The column on the left is dollars of GDP lost per dollar cut; the column on the right is essentially how many full time “equivalent” jobs will be lost per million dollars of cuts.
The first thing noticeable is that the spending cuts that were part of the deficit ceiling deal will be the most damaging to the economy and employment. This is because discretionary spending (spending subject to the annual appropriations process in congress) is below its 40 year average, each additional cut will damage the economy more. The mirror of this is that tax increases will have less damaging effects per dollar of the deficit reduced. This is because taxes are below their 40 year average.
Furthermore, when “Extend Most Expiring Tax Provisions and Index the AMT to Inflation” is compared to the same policy “Except for the Lower Tax Rates on Income Above Certain Thresholds” (or, let the Bush Tax Cuts expire for the rich) there is little effect. In terms of GDP, the average difference in growth will be $0.10 per tax dollar forgone – notice though that the estimated range for increasing or not increasing taxes on the rich is the same. In terms of employment, increasing taxes on the rich is estimated to have no effect. It’s almost as if “the Job Creators” will keep working even if they keep a few percent less of their incomes each year.
November 15, 2012
Poverty
Here's a simple post. There's a lot that's wrong in the world; but we should keep things in context. Poverty world wide is decreasing at the most rapid pace ever observed. It shows what good can be done when markets work, as opposed to corporatism masquerading as capitalism. No system has a better track record.
At the same time, this raises the question of what is happening in the United States. Whereas global inequality is decreasing, in the United States it is increasing. Whereas global poverty is decreasing, in the United States it is increasing (mostly due to the Great Recession but considering that it is at least not decreasing). As the graph below shows, while the United States has a lower poverty rate than many countries, it has a higher rate than pretty much every other developed country. And in a country of 310 million-ish people that results in a very large population in poverty.
At the same time, this raises the question of what is happening in the United States. Whereas global inequality is decreasing, in the United States it is increasing. Whereas global poverty is decreasing, in the United States it is increasing (mostly due to the Great Recession but considering that it is at least not decreasing). As the graph below shows, while the United States has a lower poverty rate than many countries, it has a higher rate than pretty much every other developed country. And in a country of 310 million-ish people that results in a very large population in poverty.
November 8, 2012
So, the election, requisite post:
Obama wins, about 52% in the popular vote but barely a dent in his Electoral College count from last time, etc.
Conservatives: will blame Romney for not being conservative enough. One of the few relative "moderates" left has some insight on that:
“If I hear anybody say it was because Romney wasn’t conservative enough I’m going to go nuts. We’re not losing 95% of African-Americans and two-thirds of Hispanics and voters under 30 because we’re not being hard-ass enough.” – Lindsey Graham
But they’ll probably say that anyway despite two senate elections lost due to very conservative candidates' offensive ignorance about women and rape. Also worth mentioning: the states of Washington and Colorado decided to pursue sensible public policy by legalizing and regulating the sale and possession of marijuana.
Anyway, what about Maryland? In Maryland voters upheld a law giving illegal immigrants a pathway to receive in-state tuition rates at public colleges and universities. I’ve recently posted on the benefits of immigration and the difficulties of legal immigration. And education is the ultimate public good, higher levels of education make everyone better off. Additionally, Marylanders voted to uphold the state law allowing same sex marriages, or rather, upheld a law allowing equal access to the legal status given to people who receive marriage licenses. Maryland is indeed a great state, where a majority of people came out to vote for better public policy and the furthering of equality before the law.
In fact election night was a big night for gay rights and equality. After losing every previous referendum on gay marriage, referendums supported it in Maryland, Maine, and Washington; and a referendum to establish a constitutional ban on gay marriage in Minnesota failed – a veritable sweep. Furthermore, voters in Wisconsin elected Tammy Baldwin to the senate. Unless a current senator comes out in the next couple months she will be the first openly gay U.S. senator. All in all, a good night for progress.
Conservatives: will blame Romney for not being conservative enough. One of the few relative "moderates" left has some insight on that:
“If I hear anybody say it was because Romney wasn’t conservative enough I’m going to go nuts. We’re not losing 95% of African-Americans and two-thirds of Hispanics and voters under 30 because we’re not being hard-ass enough.” – Lindsey Graham
But they’ll probably say that anyway despite two senate elections lost due to very conservative candidates' offensive ignorance about women and rape. Also worth mentioning: the states of Washington and Colorado decided to pursue sensible public policy by legalizing and regulating the sale and possession of marijuana.
Anyway, what about Maryland? In Maryland voters upheld a law giving illegal immigrants a pathway to receive in-state tuition rates at public colleges and universities. I’ve recently posted on the benefits of immigration and the difficulties of legal immigration. And education is the ultimate public good, higher levels of education make everyone better off. Additionally, Marylanders voted to uphold the state law allowing same sex marriages, or rather, upheld a law allowing equal access to the legal status given to people who receive marriage licenses. Maryland is indeed a great state, where a majority of people came out to vote for better public policy and the furthering of equality before the law.
In fact election night was a big night for gay rights and equality. After losing every previous referendum on gay marriage, referendums supported it in Maryland, Maine, and Washington; and a referendum to establish a constitutional ban on gay marriage in Minnesota failed – a veritable sweep. Furthermore, voters in Wisconsin elected Tammy Baldwin to the senate. Unless a current senator comes out in the next couple months she will be the first openly gay U.S. senator. All in all, a good night for progress.
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