New Slideshow: US Unemployment Rate Falls to 7.7 Percent in February, Economy Adds 236,000 Jobs

The Bureau of Labor Statistics reported Friday that the U.S. unemployment rate fell to 7.7 percent. For the first time that puts it at a level below where it was when President Barack Obama was inaugurated. Once before, in November, the BLS had reported a rate of 7.7 percent, but that was later revised upward as part of a year-end rebenchmarking. The broad unemployment rate, U-6, also fell to its lowest level since 2008.

The economy added 246,000 payroll jobs in the month, for a net gain of 236,000, taking into account a decrease of 10,000 jobs in federal, state, and local government. The increase in payroll jobs was broadly based, with both goods-producing and service sectors contributing.

Not all the news was good, however. The number of people working part-time for economic reasons increased, as did the percentage of unemployed workers who had been out of a job for 27 weeks or more. Both indicators have been stubbornly high throughout the recovery.

Follow this link to view or download a classroom-ready slideshow with charts of all the latest jobs data.
 

Are Banks Safe? Do we Really Know? Thoughts on Risk Weighting and Regulatory Arbitrage

During the global financial crisis, people in the United States, Ireland, Iceland, and many other countries learned that undercapitalized banks can spell trouble for the whole economy. The Basel II rules that were supposed to prevent widespread bank failures proved inadequate. In response to the crisis, the world’s central bankers and bank regulators started work on a new set of rules, Basel III, that they have promised will make us safer.

Now Basel III has reached the crucial phase of writing the technical rules to implement the agreed principles. Many observers are worried that each round of rule-making will provide an opportunity for watering down the regulations until what is left is no more effective than Basel II was. This post looks at one key aspect of the new rules, the regulation of bank capital, as an illustration of the broader difficulties facing the effort to regulate banking risk more effectively. >>>Read more

If you liked this post, be sure to check out these related slideshows, both newly updated:
What is Basel III and Why Should we Regulate Bank Capital?
More on Financial Regulation and Basel III: Regulating Bank Liquidity

Quantitative Easing: A Tutorial (Updated)

One of the most popular slideshows from Ed Dolan's Econ Blog has been a tutorial on quantitative easing. The sideshow, first published two years ago, has now been updated with new charts, new data, new sources, and a discussion of the Fed's latest program of massive asset purchases. Econ instructors throughout the country have incorporated this slideshow in their lectures or assigned it as a reading for their students (more than 5,000 student views to date).

Follow this link to view or download the latest version of Quantitative Easing: A Tutorial

What May Be Good About the Sequester

The Sunday morning talk shows this week were full of hand wringing about the sequester. Depending on who you listen to, it’s either dumb or stupid. Everyone seems to agree there has to be a better way. So could there be anything good about it? Maybe. As a diagnostic exercise, the sequester could turn out to be a stroke of genius.

Let me give an analogy. When my horse comes up lame, the vet has a problem. She can’t just ask the horse, “Where does it hurt?” Instead, she starts pinching up and down his leg until he flinches. She doesn’t want to hurt him, but it’s the only way to find out where the sore spot is.

The sequester is like that. Everyone agrees that there are sore spots in the budget, but not exactly where they are. Everyone is against waste, fraud, and abuse, but no elected politician dares come up with a list of what should go and what should stay. Why not perform an economic experiment: Pinch everything 10 percent, then see which pinches cause a flinch, and which do not? >>>Read more

The Sunday morning talk shows this week were full of hand wringing about the sequester. Depending on who you listen to, it’s either dumb or stupid. Everyone seems to agree there has to be a better way. So could there be anything good about it? Maybe. As a diagnostic exercise, the sequester could turn out to be a stroke of genius.
Let me give an analogy. When my horse comes up lame, the vet has a problem. She can’t just ask the horse, “Where does it hurt?” Instead, she starts pinching up and down his leg until he flinches. She doesn’t want to hurt him, but it’s the only way to find out where the sore spot is.
The sequester is like that. Everyone agrees that there are sore spots in the budget, but not exactly where they are. Everyone is against waste, fraud, and abuse, but no elected politician dares come up with a list of what should go and what should stay. Why not perform an economic experiment: Pinch everything 10 percent, then see which pinches cause a flinch, and which do not?
- See more at: http://www.economonitor.com/dolanecon/2013/03/04/what-may-be-good-about-the-sequester/#sthash.hcLnce0r.dpuf

The Sunday morning talk shows this week were full of hand wringing about the sequester. Depending on who you listen to, it’s either dumb or stupid. Everyone seems to agree there has to be a better way. So could there be anything good about it? Maybe. As a diagnostic exercise, the sequester could turn out to be a stroke of genius.
Let me give an analogy. When my horse comes up lame, the vet has a problem. She can’t just ask the horse, “Where does it hurt?” Instead, she starts pinching up and down his leg until he flinches. She doesn’t want to hurt him, but it’s the only way to find out where the sore spot is.
The sequester is like that. Everyone agrees that there are sore spots in the budget, but not exactly where they are. Everyone is against waste, fraud, and abuse, but no elected politician dares come up with a list of what should go and what should stay. Why not perform an economic experiment: Pinch everything 10 percent, then see which pinches cause a flinch, and which do not?
- See more at: http://www.economonitor.com/dolanecon/2013/03/04/what-may-be-good-about-the-sequester/#sthash.hcLnce0r.dpuf

The Sunday morning talk shows this week were full of hand wringing about the sequester. Depending on who you listen to, it’s either dumb or stupid. Everyone seems to agree there has to be a better way. So could there be anything good about it? Maybe. As a diagnostic exercise, the sequester could turn out to be a stroke of genius.
Let me give an analogy. When my horse comes up lame, the vet has a problem. She can’t just ask the horse, “Where does it hurt?” Instead, she starts pinching up and down his leg until he flinches. She doesn’t want to hurt him, but it’s the only way to find out where the sore spot is.
The sequester is like that. Everyone agrees that there are sore spots in the budget, but not exactly where they are. Everyone is against waste, fraud, and abuse, but no elected politician dares come up with a list of what should go and what should stay. Why not perform an economic experiment: Pinch everything 10 percent, then see which pinches cause a flinch, and which do not?
- See more at: http://www.economonitor.com/dolanecon/2013/03/04/what-may-be-good-about-the-sequester/#sthash.hcLnce0r.dpuf.

The Sunday morning talk shows this week were full of hand wringing about the sequester. Depending on who you listen to, it’s either dumb or stupid. Everyone seems to agree there has to be a better way. So could there be anything good about it? Maybe. As a diagnostic exercise, the sequester could turn out to be a stroke of genius.
Let me give an analogy. When my horse comes up lame, the vet has a problem. She can’t just ask the horse, “Where does it hurt?” Instead, she starts pinching up and down his leg until he flinches. She doesn’t want to hurt him, but it’s the only way to find out where the sore spot is.
The sequester is like that. Everyone agrees that there are sore spots in the budget, but not exactly where they are. Everyone is against waste, fraud, and abuse, but no elected politician dares come up with a list of what should go and what should stay. Why not perform an economic experiment: Pinch everything 10 percent, then see which pinches cause a flinch, and which do not?
- See more at: http://www.economonitor.com/dolanecon/2013/03/04/what-may-be-good-about-the-sequester/#sthash.hcLnce0r.dpuf

The Sunday morning talk shows this week were full of hand wringing about the sequester. Depending on who you listen to, it’s either dumb or stupid. Everyone seems to agree there has to be a better way. So could there be anything good about it? Maybe. As a diagnostic exercise, the sequester could turn out to be a stroke of genius.
Let me give an analogy. When my horse comes up lame, the vet has a problem. She can’t just ask the horse, “Where does it hurt?” Instead, she starts pinching up and down his leg until he flinches. She doesn’t want to hurt him, but it’s the only way to find out where the sore spot is.
The sequester is like that. Everyone agrees that there are sore spots in the budget, but not exactly where they are. Everyone is against waste, fraud, and abuse, but no elected politician dares come up with a list of what should go and what should stay. Why not perform an economic experiment: Pinch everything 10 percent, then see which pinches cause a flinch, and which do not?
- See more at: http://www.economonitor.com/dolanecon/2013/03/04/what-may-be-good-about-the-sequester/#sthash.hcLnce0r.dpuf

The Sunday morning talk shows this week were full of hand wringing about the sequester. Depending on who you listen to, it’s either dumb or stupid. Everyone seems to agree there has to be a better way. So could there be anything good about it? Maybe. As a diagnostic exercise, the sequester could turn out to be a stroke of genius.
Let me give an analogy. When my horse comes up lame, the vet has a problem. She can’t just ask the horse, “Where does it hurt?” Instead, she starts pinching up and down his leg until he flinches. She doesn’t want to hurt him, but it’s the only way to find out where the sore spot is.
The sequester is like that. Everyone agrees that there are sore spots in the budget, but not exactly where they are. Everyone is against waste, fraud, and abuse, but no elected politician dares come up with a list of what should go and what should stay. Why not perform an economic experiment: Pinch everything 10 percent, then see which pinches cause a flinch, and which do not?
- See more at: http://www.economonitor.com/dolanecon/2013/03/04/what-may-be-good-about-the-sequester/#sthash.hcLnce0r.dpuf

US GDP Barely Grows in Q4 2012; Recovery on Life Support

Today’s second estimate of U.S. GDP for the fourth quarter of 2012 showed growth moving from the -0.1 percent of the preliminary estimate to +0.1. Positive is better than negative, but a look at the details shows that the recovery is extremely weak. The following table shows how much each of the economy’s main sectors contributed to GDP growth in Q4.



Consumption, which has been the main driver of growth throughout the recovery, contributed slightly less in Q4 than previously reported. The categories housing and utilities, gasoline and other energy goods, and clothing and footwear all experienced absolute declines. These figures refer to real expenditures, so they reflect more than just the recent decreases in energy prices. The news is perhaps good for environmentalists, who will be glad to see a continuation of the gradual trend toward lower energy-intensity of GDP. It is not so good for anyone who hopes for consumer-led growth to reduce the stubbornly high unemployment rate. >>>Read more

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

Today’s second estimate of U.S. GDP for the fourth quarter of 2012 showed growth moving from the -0.1 percent of the preliminary estimate to +0.1. Positive is better than negative, but a look at the details shows that the recovery is extremely weak. The following table shows how much each of the economy’s main sectors contributed to GDP growth in Q4.

Consumption, which has been the main driver of growth throughout the recovery, contributed slightly less in Q4 than previously reported. The categories housing and utilities, gasoline and other energy goods, and clothing and footwear all experienced absolute declines. These figures refer to real expenditures, so they reflect more than just the recent decreases in energy prices. The news is perhaps good for environmentalists, who will be glad to see a continuation of the gradual trend toward lower energy-intensity of GDP. It is not so good for anyone who hopes for consumer-led growth to reduce the stubbornly high unemployment rate.
- See more at: http://www.economonitor.com/dolanecon/2013/02/28/q4-gdp-moves-from-negative-to-positive-but-details-show-recovery-still-on-life-support/#sthash.n7KleCy2.dpuf

Understanding the Plutocrats: Talent vs. Capital, The Illusion of Skill, and the Winner’s Curse

In my spare time, I have been reading Chrystia Freeland’s The Plutocrats. A refreshingly nonjudgmental book, it seeks neither to condemn nor defend the super-rich, but simply to understand them. The author’s brisk, journalistic prose, with references hidden away at the end by page number, belies the fact that she has done her homework in the economic, sociological, and historical literature. The text is further enriched with material drawn from Freeland’s own interviews with many of the world’s wealthy. The result is both entertaining and full of real insights.

The Working Rich, Then and Now

One of Freeland’s central questions is why today’s super-rich have so much more money than the wealthy of old. She begins by noting that hereditary wealth has little to do with it. Our plutocrats are, by and large, the working rich. They not only show up at the office every day, but work longer hours than most of their subordinates.

Of course, working rich are not a new phenomenon, especially in America, land of the Carnegies and Rockefellers. Still, even the legendary Robber Barons were not all that wealthy by modern standards. Freeland borrows a yardstick proposed by Branko Milanovic that measures a person’s wealth according to the number of fellow citizens whose labor it could purchase. Andrew Carnegie, at his best, could command the labor of 48,000 Americans, and John D. Rockefeller 116,000. By comparison, before his arrest in 2003, Mikhail Khodorkovsky had wealth equivalent to a year’s labor of 250,000 Russians and Carlos Slim, now the world’s wealthiest person, is worth the annual income of 400,000 Mexicans.

Some plutocrats have become rich by feeding off modern states that are themselves richer than those of former times. Freeland devotes a long chapter to rent-seeking, corrupt privatization, and other forms of political parasitism. She traces at least some of the wealth of both Slim and Khodorkovsky to advantageous privatization deals, and notes that writers like Simon Johnson have rated the rent-seeking prowess of American bankers as equal to that of emerging-market oligarchs.
Without belittling political considerations, however, the parts of The Plutocrats that I found most interesting concern sources of super-wealth that arise from within the market system itself. >>>Read more

US Inflation Remains Near Zero as Sequester Looms

Friday's report from the Bureau of Labor Statistics showed U.S. inflation near zero for January. Stated as an annual rate using unrounded data, inflation was 0.36 percent, exactly the same as December. Increases in prices for apparel and transportation services helped to offset lower energy prices. Follow this link to view or download a classroom ready slideshow of the latest U.S. inflation data.

According to the textbook prescription, the ideal time to cut government spending and tighten monetary policy is when the economy begins to approach full employment and the first signs of excessive inflation appear. Economists call that kind of preemptive policy countercyclical  because it helps to keep an impending boom from running out of control. On the other hand, premature tightening when a recovery is still incomplete is procyclical. A procyclical policy makes slumps deeper, recoveries slower, and booms hotter than they would be if the economy were left to its own devices.

This week’s news from Washington suggests a turn from countercyclical to procyclical in macroeconomic policy, despite the fact that inflation is near zero, unemployment remains stubbornly high, and GDP is barely growing, if it is growing at all.

As far as fiscal policy is concerned, all eyes are focused on the package of across-the-board spending cuts known as the sequester, which will come into effect on March first if nothing is done. Yes, another midnight deal might modify the sequester, but fiscal policy will be tightened in any event, for the simple reason that both parties want it to be. The only difference between them is that the Republicans want tightening via spending cuts alone, while the Democrats would like the throw some tax increases into the mix.

Over at the Fed, the indications of a change in monetary policy are more subtle. Don’t expect a dramatic boost to interest rates any time soon. Still, the pendulum does seem to be swinging away from the strongly accommodative quantitative easing of the past few years.

Inflation, as measured by the CPI, is not the worry. According to the minutes of their January meeting, released this week, most members of the policy-setting Federal Open Market Committee expect inflation to run at or below the Fed’s target of 2 percent for the foreseeable future. Only a few members see any upside risk to prices in the medium or even the long term. However, several participants in the January meeting expressed concern that the Fed’s huge portfolio of securities could expose it to a risk of large capital losses in case of a future reversal of policy. A few others expressed concerns that the Fed’s program of large-scale asset purchases could lead to the disruption of financial markets.

What lies behind least some of these concerns is a fear of asset bubbles. Asset bubbles are sharp increases in the prices of securities, real estate, or global commodities that can occur even when consumer price inflation remains low. Usually, they pose the greatest risk when the economy is running at or above its level of potential GDP, as during the dot.com bubble in the 1990s and the housing bubble in the early 2000s. Today, at least as measured by the Congressional Budget Office, the U.S. economy is still well below potential GDP, but not everyone trusts those estimates. The FOMC minutes tell us that some members noted “uncertainties concerning both the level of, and the source of shifts in, potential output.” It is worth noting that the concern over asset bubbles is shared by some private observers, including Nouriel Roubini.

The recently-released FOMC minutes summarize the concerns of its members in this key sentence:

A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred.

In the Fed’s closely guarded language, “a number of participants” is more than “several” or “a few.” Market participants took that to indicate that the Fed’s determination to stick with aggressive accommodation until labor market conditions improve is weakening. In monetary policy these days, when actual changes in interest rates are unthinkable, subtle signals about what the Fed is likely to do in the future take on added importance. Monetary economists like Michael Woodford consider such “forward guidance” to be the main channel through which the Fed can affect the economy when interest rates are at or near zero, as they are now.

The bottom line: All of this week’s news put together—flat inflation, the looming sequester, and the increasing caution of forward guidance from the Fed—point to a distinct procyclical turn in macroeconomic policy. That may or may not mean an actual return to recession, but even if not, gains in output and employment are likely to come even more slowly this year than last.

An earlier version of this commentary, was posted to Economonitor.