U.S. GDP growth for the second quarter of 2011 was revised upward to a 1.3 percent annual rate from the 1.0 percent second estimate reported last month. The upward revision, which returned GDP growth to the same rate as the advance estimate released in July, was a relief to some observers, even though it was still very weak . About 2.5 percent growth is generally considered necessary to keep unemployment from rising, when growth of the labor force is taken into account.
Although a recovery has been underway for two years, the level of U.S. real GDP has not yet reached its peak level of mid-2007, before the recession. When GDP finally reaches its previous peak, the economy will have been considered to make the transition from the recovery phase of the business cycle to the expansion phase.
Investment remained a relative bright spot in the GDP data, accounting for .79 percentage points of the 1.3 percent growth in the quarter. Business fixed investment was relatively strong while housing investment remained weak. Consumption grew by about 0.49 percentage points, with personal expenditures on healthcare services leading the way. The government sector contracted. Federal defense expenditures rose, but they were more than offset by decreases in federal nondefense spending and in state and local government purchases. Net exports performed better than previously estimated. Exports were revised upward and imports downward compared with the August report.
Follow this link to view or download a set of classroom-ready slides with graphical presentations of the latest GDP estimates.
Kamis, 29 September 2011
Natural Gas Flaring, Carbon Taxes, and the Risk of Alien Invasion
To an alien orbiting Earth in a flying saucer, natural gas flares would be one of the most visible signs of human life on earth. Notice I said "human life," not "intelligent life."
Flaring is the practice of burning off the natural gas that is produced in association with oil rather than piping it to market, using it at the wellhead, or reinjecting into the ground. Flaring was once common, but in more recent times, it has largely been limited to places like Russia and Nigeria. Now, though, it is becoming a big source of controversy in the United States. According to a recent New York Times article, some 30 percent of natural gas produced from rapidly expanding North Dakota oil fields will be flared this year—more than enough to heat every home in North Dakota through the state's harsh winters. Elsewhere in this country, less than one percent of gas is flared. READ MORE>>>
For more environmental topics, check out my new book, TANSTAAFL: A Libertarian Perspective on Environmental Economics.
Flaring is the practice of burning off the natural gas that is produced in association with oil rather than piping it to market, using it at the wellhead, or reinjecting into the ground. Flaring was once common, but in more recent times, it has largely been limited to places like Russia and Nigeria. Now, though, it is becoming a big source of controversy in the United States. According to a recent New York Times article, some 30 percent of natural gas produced from rapidly expanding North Dakota oil fields will be flared this year—more than enough to heat every home in North Dakota through the state's harsh winters. Elsewhere in this country, less than one percent of gas is flared. READ MORE>>>
For more environmental topics, check out my new book, TANSTAAFL: A Libertarian Perspective on Environmental Economics.
Selasa, 20 September 2011
The UBS-Adoboli Scandal Shows the Problem of Negatively-Skewed Risk is Still With Us
In my banking courses, I point to negatively skewed trading strategies as a key cause of the crash of 2008. The recent loss of more than $2 billion attributed to rogue trades by Kweku Adoboli at Swiss banking giant UBS shows that the problem of negatively skewed risk is still with us. It is an old story, but with a new twist.
The problem of negatively skewed risk arises from the way incentives change when you gamble with someone else's money. >>>Read more
The problem of negatively skewed risk arises from the way incentives change when you gamble with someone else's money. >>>Read more
Jumat, 16 September 2011
US Inflation Data: Headline CPI Inflation Slows, Core Inflation Up a Bit in August
The Consumer Price Index for all items purchased by U.S. urban consumers rose at a seasonally adjusted annual rate of 4.6 percent in August, somewhat slower than the July rate of 6.2%. Gasoline and food prices added significantly to inflation in August, as in the previous month.
Food and energy prices are highly volatile and account for much of the month-to month variation in the CPI. Their effect can be removed by taking the food and energy components out of the CPI. The result, called the core inflation rate, was 2.97 in August, slightly faster than in July.
Another way to remove volatility from the CPI series is the 16 percent trimmed mean CPI published by the Cleveland Fed. That index removes the 8 percent of prices that increase most and the 8 percent that increase least each month, whether they are energy, food, or something else. In July trimmed-mean inflation rose slightly. At 3.6 percent, it remained slightly above core inflation, as it has for most of the year.
There is no "right" and "wrong" way to measure inflation. Each index answers a somewhat different question. Economists often look at the core or trimmed mean measures to judge the effects of monetary policy. The all-items CPI includes food and energy prices that are set in global markets, beyond direct control of domestic policy.
Although inflation is beginning to rise, it is not yet a great cause for concern. The Fed does not set an explicit target rate for inflation, but it tends to view 2 percent inflation as consistent with prudent monetary policy in the long run. After slowing to a crawl during the recession, headline inflation is now running about 3 percent on a year-on-year basis, while core measures have not yet reached the 2 percent threshold.
Follow this link to view or download a set of classroom-ready slides with graphical presentation of inflation data.
Food and energy prices are highly volatile and account for much of the month-to month variation in the CPI. Their effect can be removed by taking the food and energy components out of the CPI. The result, called the core inflation rate, was 2.97 in August, slightly faster than in July.
Another way to remove volatility from the CPI series is the 16 percent trimmed mean CPI published by the Cleveland Fed. That index removes the 8 percent of prices that increase most and the 8 percent that increase least each month, whether they are energy, food, or something else. In July trimmed-mean inflation rose slightly. At 3.6 percent, it remained slightly above core inflation, as it has for most of the year.
There is no "right" and "wrong" way to measure inflation. Each index answers a somewhat different question. Economists often look at the core or trimmed mean measures to judge the effects of monetary policy. The all-items CPI includes food and energy prices that are set in global markets, beyond direct control of domestic policy.
Although inflation is beginning to rise, it is not yet a great cause for concern. The Fed does not set an explicit target rate for inflation, but it tends to view 2 percent inflation as consistent with prudent monetary policy in the long run. After slowing to a crawl during the recession, headline inflation is now running about 3 percent on a year-on-year basis, while core measures have not yet reached the 2 percent threshold.
Follow this link to view or download a set of classroom-ready slides with graphical presentation of inflation data.
Selasa, 13 September 2011
US Working-Age Poverty Hits a Record High: What it Means for the Budget Debate
Adding to the gloom from recent labor market data, the Census Bureau reported today that the poverty rate among working-age Americans hit a record high in 2010. Last year some 13.7 percent of the U.S. population aged 18-64 years fell below the poverty threshold of $22,314 for a family of four. That was up from 12.9 percent in 2009, also a record. The Bureau has reported working-age poverty figures since 1966, at which time the rate was 10.5 percent. Read the full post>>>
Senin, 12 September 2011
The Truth About Taxes: What are Our Choices?
This post is an abbreviated version of a recent presentation to the League of Women Voters of San Juan County, Washington. You will find a link to the slideshow version at the end of the post.
The question we most often hear about taxes is, are they too high, or too low? The answer to both questions is YES. How can that be?
Taxes are too high in the sense that they distort the decisions made by households and businesses. At the same time, they are too low in the sense that they do not bring in enough revenue to pay for government as we know it. We cannot continue to operate the government that way.
Economists measure the sustainability of the federal budget in terms of the cyclically adjusted primary balance (CAPB). That is the deficit or surplus averaged over the business cycle, without including interest payments. To be sustainable, the CAPB should be near zero, or slightly in surplus.
As of 2011 the United States has a CAPB of -6.8 percent, the largest deficit of any developed country. That means we need to cut nearly 7% from the deficit, through spending cuts or tax increases, to achieve sustainability. Failing to do so will cause the government debt to grow out of control. We will inevitably end up like Greece, or worse. Not tomorrow maybe, but not in the far distant future, either.
Where to start? The first choice we have to make is, how big a government do we want? Opinions differ. Some people are happy with the size of federal government we have now. At 23 percent of GDP (cyclically adjusted), it is about the same size relative to the economy as in the 1980s, although it is larger than it was in that lucky period between the end of the cold war and the start of the wars in Iraq and Afghanistan. Others would like to cap total federal spending at 18% of GDP, about where it was in the last year of the Eisenhower administration. Economists can't answer the question of how big the government should be; only voters can.
Once we decide how big a government we want, we need a tax system that can pay for it. Our current tax system cannot do the job. Its tax rates are too high. They distort the decisons of consumers, savers, employers, producers, everyone.
What we need is tax reform that lowers tax rates and broadens the tax base.
One approach to tax reform is to lower marginal tax rates for everyone while eliminating loopholes. There are lots and lots of loopholes.
Another approach to tax reform is to replace existing taxes like payroll taxes and the corporate income tax that distort incentives, while replacing the lost revenue with broad-based taxes like energy taxes or value added taxes.
The bottom line: Tax reform is a must. It is good for liberals, it is good for conservatives. It should not be hard to find a compromise. Remember, continuing business as usual is NOT a viable option.
Follow this link to view or download the slideshow version of this presentation.
The question we most often hear about taxes is, are they too high, or too low? The answer to both questions is YES. How can that be?
Taxes are too high in the sense that they distort the decisions made by households and businesses. At the same time, they are too low in the sense that they do not bring in enough revenue to pay for government as we know it. We cannot continue to operate the government that way.
Economists measure the sustainability of the federal budget in terms of the cyclically adjusted primary balance (CAPB). That is the deficit or surplus averaged over the business cycle, without including interest payments. To be sustainable, the CAPB should be near zero, or slightly in surplus.
As of 2011 the United States has a CAPB of -6.8 percent, the largest deficit of any developed country. That means we need to cut nearly 7% from the deficit, through spending cuts or tax increases, to achieve sustainability. Failing to do so will cause the government debt to grow out of control. We will inevitably end up like Greece, or worse. Not tomorrow maybe, but not in the far distant future, either.
Where to start? The first choice we have to make is, how big a government do we want? Opinions differ. Some people are happy with the size of federal government we have now. At 23 percent of GDP (cyclically adjusted), it is about the same size relative to the economy as in the 1980s, although it is larger than it was in that lucky period between the end of the cold war and the start of the wars in Iraq and Afghanistan. Others would like to cap total federal spending at 18% of GDP, about where it was in the last year of the Eisenhower administration. Economists can't answer the question of how big the government should be; only voters can.
Once we decide how big a government we want, we need a tax system that can pay for it. Our current tax system cannot do the job. Its tax rates are too high. They distort the decisons of consumers, savers, employers, producers, everyone.
What we need is tax reform that lowers tax rates and broadens the tax base.
One approach to tax reform is to lower marginal tax rates for everyone while eliminating loopholes. There are lots and lots of loopholes.
Another approach to tax reform is to replace existing taxes like payroll taxes and the corporate income tax that distort incentives, while replacing the lost revenue with broad-based taxes like energy taxes or value added taxes.
The bottom line: Tax reform is a must. It is good for liberals, it is good for conservatives. It should not be hard to find a compromise. Remember, continuing business as usual is NOT a viable option.
Follow this link to view or download the slideshow version of this presentation.
Minggu, 11 September 2011
Why Rolling Back Environmental Protection is the Wrong Fix for Jobs
Originally published on Economonitor.com.
Just when it seemed nothing could do it, persistently high U.S. unemployment has produced bipartisan agreement in Washington—agreement to roll back environmental protection in an attempt to save jobs and create new ones.
The White House, shrugging off off environmentalist opposition, has quashed a major EPA initiative that would have strengthened ozone regulations and is reportedly leaning toward endorsement of the Keystone XL pipeline to carry petroleum from Canadian oil sands. Republicans have applauded and issued their own list of proposals, including rollbacks of regulations for coal ash, farm dust, greenhouse gasses, and cement plants, among others.
None of this is good news, either for the environment or the economy. Rolling back environmental regulations is the wrong way to fix the jobs problem. Here's why.
Jobs are created when businesses hire workers, combine their labor with capital and natural resources, and use them to produce goods or services. If the products that come out are worth more than the inputs that are used up, the process adds value to the economy. Businesses make profits, workers get jobs, and consumers get goods or services that enhance their standard of living.
Right now, though, not enough jobs are being created that way to bring the unemployment rate down. High unemployment is creating a lot of pressure on the government to force-feed the job creation process. But how to do it?
One approach would a program of federally financed infrastructure investment. As discussed in an earlier post, there is reason to think there are plenty of projects, from repairing dams and sewers to modernizing the electric grid, that would both create jobs and add value to the economy. The Obama administration's new jobs initiative includes some of them. Many independent economists endorse immediate infrastructure spending, paired with a credible commitment to medium-term deficit reduction, as components of a sensible fiscal strategy.
Unfortunately, the costs of infrastructure projects are highly visible. They must either be covered by borrowing or by raising new revenue, but right now too many politicians have sworn to do neither. That is why the search is on for programs that would create jobs—or at least appear to do so—while hiding the costs.
Rollbacks of environmental regulations are a perfect vehicle for that purpose. The jobs they save or create are highly visible. Without regulatory relief, jobs would be lost at cement plants that might have to close, utilities that would sell less power if they couldn't keep costs artificially low, and farms that could export less if they had to worry about environmental compliance. The costs of rollbacks are less visible. They take the form of damages to health, property, or other environmental values that are collectively large but widely spread in space and time. Furthermore, if rollbacks, although saving some jobs, cause others to be lost—for example, jobs that would have been created to produce pollution control equipment or energy from alternative sources—those would-have-been jobs, too, are less visible. Taken together, it easy to exaggerate the net job creation from any given reversal of environmental protection.
The trouble is, when producers are allowed to capture the benefits of increased output of cement, energy, crops, or whatever while shifting the costs to others, they produce too much. They expand production up to the point where the value of additional output is just equal to the visible cost of production (the internal costs, to use the economic term), but not enough to cover the invisible (external) costs. That means that even if they create net jobs, rolling back environmental regulations subtracts value from the economy, rather than adding it. Not a good idea.
In fact, if creating jobs by subtracting value and shifting costs were a good idea, we would have no jobs problem. Job creation would be easy, at zero cost the federal budget. Here are three suggestions:
Originally published on Economonitor.com.
*Follow this link to get a copy of my new book TANSTAAFL: A Libertarian Perspective on Environmental Policy
Just when it seemed nothing could do it, persistently high U.S. unemployment has produced bipartisan agreement in Washington—agreement to roll back environmental protection in an attempt to save jobs and create new ones.
The White House, shrugging off off environmentalist opposition, has quashed a major EPA initiative that would have strengthened ozone regulations and is reportedly leaning toward endorsement of the Keystone XL pipeline to carry petroleum from Canadian oil sands. Republicans have applauded and issued their own list of proposals, including rollbacks of regulations for coal ash, farm dust, greenhouse gasses, and cement plants, among others.
None of this is good news, either for the environment or the economy. Rolling back environmental regulations is the wrong way to fix the jobs problem. Here's why.
Jobs are created when businesses hire workers, combine their labor with capital and natural resources, and use them to produce goods or services. If the products that come out are worth more than the inputs that are used up, the process adds value to the economy. Businesses make profits, workers get jobs, and consumers get goods or services that enhance their standard of living.
Right now, though, not enough jobs are being created that way to bring the unemployment rate down. High unemployment is creating a lot of pressure on the government to force-feed the job creation process. But how to do it?
One approach would a program of federally financed infrastructure investment. As discussed in an earlier post, there is reason to think there are plenty of projects, from repairing dams and sewers to modernizing the electric grid, that would both create jobs and add value to the economy. The Obama administration's new jobs initiative includes some of them. Many independent economists endorse immediate infrastructure spending, paired with a credible commitment to medium-term deficit reduction, as components of a sensible fiscal strategy.
Unfortunately, the costs of infrastructure projects are highly visible. They must either be covered by borrowing or by raising new revenue, but right now too many politicians have sworn to do neither. That is why the search is on for programs that would create jobs—or at least appear to do so—while hiding the costs.
Rollbacks of environmental regulations are a perfect vehicle for that purpose. The jobs they save or create are highly visible. Without regulatory relief, jobs would be lost at cement plants that might have to close, utilities that would sell less power if they couldn't keep costs artificially low, and farms that could export less if they had to worry about environmental compliance. The costs of rollbacks are less visible. They take the form of damages to health, property, or other environmental values that are collectively large but widely spread in space and time. Furthermore, if rollbacks, although saving some jobs, cause others to be lost—for example, jobs that would have been created to produce pollution control equipment or energy from alternative sources—those would-have-been jobs, too, are less visible. Taken together, it easy to exaggerate the net job creation from any given reversal of environmental protection.
The trouble is, when producers are allowed to capture the benefits of increased output of cement, energy, crops, or whatever while shifting the costs to others, they produce too much. They expand production up to the point where the value of additional output is just equal to the visible cost of production (the internal costs, to use the economic term), but not enough to cover the invisible (external) costs. That means that even if they create net jobs, rolling back environmental regulations subtracts value from the economy, rather than adding it. Not a good idea.
In fact, if creating jobs by subtracting value and shifting costs were a good idea, we would have no jobs problem. Job creation would be easy, at zero cost the federal budget. Here are three suggestions:
- For unemployed urban youths, a Licensed Shoplifter Corps. LSC members would have immunity from prosecution for theft. They could appropriate cell phones, Levis, and canned goods from local stores and sell them at discounted prices in special neighborhood shops. Jobs would be created both for LSC members and for workers who resold the stolen goods.
- For unemployed rural youths, a Biofuel Expansion Initiative. BFI participants would be given permits to cut trees (without paying for them) on anyone's property, or any public land, and chop them up for firewood. Jobs would be created not just in harvesting the trees, but in hauling them, making chainsaws and wood splitters, and other steps in the supply chain.
- For properly qualified unemployed professionals, a designation of Certified Public Embezzler. CPE members would receive immunity to hack into people's bank and credit card accounts and divert funds to their own purposes. As self-employed professionals, CPE members would disappear from the unemployment statistics, and, in addition, would create jobs in subsidiary markets for computer services and hardware.
Originally published on Economonitor.com.
*Follow this link to get a copy of my new book TANSTAAFL: A Libertarian Perspective on Environmental Policy
Senin, 05 September 2011
Data for the Classroom: No New Payroll Jobs in August
Private payroll job growth for August was zero, the worst showing since since September 2010. Adding to the gloom, the job growth numbers for May and June were revised downward by a total of 52,000 jobs. Private nonfarm jobs increased by a slim 17,000 but that gain was offset by a loss of 17,000 government jobs.
The labor force, which includes both employed and unemployed persons, grew by 366,000. Of these 331,000 found jobs and 35,000 were added to the officially unemployed as soon as they started looking for work. The unemployment rate, which is the ratio of unemployed persons to the labor force, remained unchanged at 9.1 percent.
The unemployment rate is based on a survey of households. It uses a different methodology than the payroll job report, which is based on a survey of employers. Among other things, the household survey includes farm workers and self-employed persons. It is not unusual for the two surveys to point in different directions in any given month, as was the case in August.
The government also calculates a broader measure of unemployment called U-6. The numerator of U-6 includes unemployed persons, marginally attached persons who would like to work but are not looking because they think there are no jobs, and part-time workers who would prefer full-time work but can’t find it. The denominator includes the labor force plus the marginally attached. A shorter average work week led to an increase in involuntary part-time workers and caused U-6 to rise in August.
The employment to population ratio ticked up to 58.2 percent, just above the all-time low reached in July. The long decline in the ratio reflects several factors, including slow job growth; more discouraged workers, who do not look for jobs because they think none are available; and more retired persons as the population ages. For a full discussion of the trend in the employment to population ration, see this earlier post.
Follow this link to view or download a set of classroom-ready slides with graphical presentation of the latest unemployment data.
The labor force, which includes both employed and unemployed persons, grew by 366,000. Of these 331,000 found jobs and 35,000 were added to the officially unemployed as soon as they started looking for work. The unemployment rate, which is the ratio of unemployed persons to the labor force, remained unchanged at 9.1 percent.
The unemployment rate is based on a survey of households. It uses a different methodology than the payroll job report, which is based on a survey of employers. Among other things, the household survey includes farm workers and self-employed persons. It is not unusual for the two surveys to point in different directions in any given month, as was the case in August.
The government also calculates a broader measure of unemployment called U-6. The numerator of U-6 includes unemployed persons, marginally attached persons who would like to work but are not looking because they think there are no jobs, and part-time workers who would prefer full-time work but can’t find it. The denominator includes the labor force plus the marginally attached. A shorter average work week led to an increase in involuntary part-time workers and caused U-6 to rise in August.
The employment to population ratio ticked up to 58.2 percent, just above the all-time low reached in July. The long decline in the ratio reflects several factors, including slow job growth; more discouraged workers, who do not look for jobs because they think none are available; and more retired persons as the population ages. For a full discussion of the trend in the employment to population ration, see this earlier post.
Follow this link to view or download a set of classroom-ready slides with graphical presentation of the latest unemployment data.
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