Components of Iceland's CPI

This graph is badly labeled, the dates shown are Jan 2007 - Feb 2010.

Huey Dewey and Louie Learn About Inflation

Thanks to David for this:

Bear in mind this is only one potential cause of inflation. Also, ignore the text, it's unfortunate that the only people who want to talk about the money supply (besides the writers of DuckTales) are people who a freaking out about it.

Productivity, Compensation and Wages in the US.

John Taylor's blog post

Greek Public Finance.

This isn't much of an entry. It's just a bunch of graphs about the Greek economy.

Greek Public Debt as % of GDP

Short Description: EU definition: the general government sector comprises the subsectors of central government, state government, local government and social security funds. GDP used as a denominator is the gross domestic product at current market prices. Debt is valued at nominal (face) value, and foreign currency debt is converted into national currency using end-year market exchange rates (though special rules apply to contracts). The national data for the general government sector are consolidated between the sub-sectors. Basic data are expressed in national currency, converted into euro using end-year exchange rates for the euro provided by the European Central Bank.

Interactive graph

Interactive Graph

The Unemployment Rate

I just wanted to clarify a couple of things that came up in class and offer some criticisms (by others) of the unemployment rate.

For my own benefit, Alternative measures of the unemployment rate: Table A-12 has been changed to A-15.

A couple of graphs first:



U-3 vs U-6 unemployment since Jan 2007.



U-6 as a percentage of U-3 since Jan 2007

Finally, here is a comparison between the seasonally adjusted numbers and the "raw" series (this is U3).


Seasonally Adjusted and Unadjusted

Okay, I want to clarify "marginally attached" and "discouraged workers". Discourages workers make up about half of marginally attached workers. Also note that to be considered either marginally attached or discourages you either have to have been employed or have looked for a job within the last year. Otherwise you are not part of the labor force at all.

From the BLS glossary:

Marginally attached workers (Current Population Survey)
Persons not in the labor force who want and are available for work, and who have looked for a job sometime in the prior 12 months (or since the end of their last job if they held one within the past 12 months), but were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Discouraged workers are a subset of the marginally attached.

Discouraged workers (Current Population Survey)
Persons not in the labor force who want and are available for a job and who have looked for work sometime in the past 12 months (or since the end of their last job if they held one within the past 12 months), but who are not currently looking because they believe there are no jobs available or there are none for which they would qualify.

Someone had also asked about how illegal immigrants are counted. From the Q&A page:

Does the household survey count illegal immigrants?
The BLS cannot determine to what extent illegal immigrants are reflected in the household survey, though it is likely that it does include some illegal immigrants. The household survey does not include questions to identify one’s legal status, but it does include questions about whether respondents were born outside the U.S. The CPS shows that foreign-born workers (whether legal or illegal) accounted for about 16 percent of the labor force in 2007 and about 48 percent of the net increase in the labor force from 2000 to 2007.


Okay so time for some criticism:

Eric from Sunday Macro sent me a couple of articles by a NY Post columnist John Crudele. One of them outlines a number of things that are worth addressing. Bear in mind that this was written after the December unemployment numbers was released. I essentially agree with Crudele except his tone and his complaints about the "birth/death" model which as far as I can tell has nothing to do with the "headline" unemployment number.

The birth/death model is a statistical tweaking of the Current Employment Survey (CES) which is a survey of businesses. The CES numbers accompany the unemployment press release but does not factor into the "unemployment rate" that comes from the Current Population Survey (CPS) which is a survey of households. The CES contains a lot of information about hiring and firing in industries and gives an overall picture of "jobs created or lost" but it is separate measure. They fill in gaps in their ability to survey new business or firms that have go out of business with an estimation, this birth/death model.

Its important to keep this in mind because often news reports will say "x numbers of jobs lost" which comes from the CES (business survey) and then the "unemployment rate" which comes form the CPS (household data). Those numbers may not make sense when put together but its reasonable that they do not since they measure different things.

As far a Crudele's tone. I'm perfectly fine with criticizing the statistical measures. However, because these are statistical measures (not facts!) there are necessarily somewhat arbitrary judgments that need to be made and it is impossible to make such judgments in a way that defy criticism.

I agree that there is probably some amount of "politicking" going on with the numbers to engineer them to look better. The Goolsbee anecdote in the article though is a good example of the politicking involved in criticizing the number too. One thing that bugs me about Crudele is that he often invokes John Williams' who runs Shadow Government Statistics (SGS). SGS publishes alternative economic indicators (such as unemployment and inflation). The SGS numbers always look worse than the official numbers and John Williams has made some apocalyptic claims that garnered a lot of attention like in this Reuters article from January of last year:

By his count, if unemployment were still tallied the way it was in the 1930s, today's jobless rate would be closer to 16.5 percent -- more than double the stated rate.

I expect that unemployment in the current downturn, which will be particularly deep and protracted, eventually will rival, if not top, the 25 percent seen in the Great Depression," Williams said.

Ignoring the fact that the BLS did not calculate the unemployment rate in the 30s my big issue with John Williams is that--try as I might--I have not found any hints to his methodology for his alternative measures. The BLS on the other hand has wholly transparent data and methodology which is for my money the best and most honest thing you can do with any kind of statistical work. Such a thing requires a lot of work by the press and by citizens, which I suppose is the real problem.

Anyway here is the article. It reiterates a lot of the stuff I brought up in class:

How the Nation's True Jobless Rate is Closer to 22%

Jan 12, 2010

This'll make you laugh.
Back in November 2003 an economist named Austan Goolsbee from the University of Chicago wrote an op-ed piece for The New York Times criticizing a Labor Department announcement about job growth the month before.

And he attacked the idea that the country had just experienced nothing more than a mild recession.

"Unfortunately, underreporting unemployment has served the interest of both political parties," wrote Goolsbee. "The situation has grown so dire, though, that we can't tell whether the job market is recovering."

OK, I promised you a laugh. So here it comes.

Goolsbee no longer works at the University of Chicago. He now has a job at the White House as President Obama's top economic adviser.

So the president and Goolsbee will now have to convince the American public that the slight statistical improvement in the employment situation over the past year really is credible -- even if Goolsbee doesn't believe it.

Laughing yet? Of course not. There's nothing funny about what we went through either back in 2003 after the 9/11 terrorist attacks or what we are experiencing now.

As you already know the Labor Department last Friday announced that another 85,000 jobs disappeared from the economy in December and that the unemployment rate stayed, unbelievably, at 10 percent.

On one level it was -- to say the least -- a disappointment for the White House, Wall Street and every American who is out of work or thinks they might be.

Yet on another level, the negative 85,000 figure was a blessing for Goolsbee and President Obama.

At least, as they are quick to point out, this job loss wasn't as bad as the hundreds of thousands per month that were coming earlier this year.

As any regular reader of this column already knows, I take the side that Prof. Goolsbee took when he was in Chicago -- the government's employment numbers aren't believable.
I thought it would be interesting today to present a few (not-so) fun facts about the jobs market.

Fact 1: The next employment report will be worse.

When the Labor Department puts out the January employment figures on Feb. 4, they will include an assumption that a lot of companies went out of business.
This is something called the birth/death model that is used by the department. Last year it caused 356,000 jobs to be subtracted from the January job count.
So, the next employment figure should be shockingly bad.

Fact 2: The birth/death model will then turn optimistic in the spring, causing jobs that really don't exist to be added to the Labor Department's count.

It won't make the people who are unemployed feel any better. But it could give Wall Street another excuse to rally and, really, isn't that what it is all about?

Fact 3: Nobody in the media will pick up on this, but the Labor De partment will also do something called a benchmark revision on Feb. 4 that will subtract around 840,000 jobs that the government thought existed, but really don't.

This will mostly make up for the mistakes created by the birth/death model.

Fact 4: That 840,000 job adjustment will only correct errors up to March 2009. Mistakes for the April 2009 to March 2110 period will be corrected next year.

Fact 5: You keep reading that the unemployment rate stayed at 10 percent. But the press has been playing up the 17.3 percent rate that includes those "underemployed," meaning they can't find a full-time job but want one.

I've been mentioning that under-employed figure -- called U-6 by the Labor Department -- for years and I'm glad everyone else has finally caught up.

But that larger figure doesn't include a huge number of unemployed folks who have given up looking for work because they feel the search is hopeless. Last Friday's report said 661,000 such people left the labor force in December.

If you count these hopelessly unemployed, the real jobless rate is probably close to 22 percent. If these all weren't such important issues, this would all be a big joke.

Inequality

I was very dismissive about what kind of insights economists can make into inequality. I stick by that in a general sense and I think it's important to notice whats missing in our discussion of efficiency in markets and the aggregate economy.

However, recently I've come across two very interesting projects that try to look at equality. Below is a except from a piece about the economist Samuel Bowles (I saw this post on a blog called "Economist's View"). The second project I heard about on the Brian Lehrer Show (wnyc.org). He interviewed and epidemiologist named Kate Pickett who authored a book called The Spirit Level: Why Greater Equality Makes Stronger Societies. She basically makes an economic argument for more equality. She was on the the February 1st show which is readily available on ITunes.


Feb 04, 2010

Inequality and "Guard Labor"

This is from a profile of Samuel Bowles:

Born Poor?, by: Corey Pein: ...Bowles’ most recent paper ... examines how wealth is transferred from parents to children in hunter-gatherer societies versus agricultural societies. That might seem distant... But everyone can relate to his chosen subject: inequality. ...

Bowles’ course was set in 1968, when he was an assistant professor at Harvard, and the Rev. Dr. Martin Luther King Jr. came to his department looking for advice on the next stage of his social justice campaign.

“We were just elated that we could use economics, which we had so painstakingly learned, to answer questions that Dr. King thought were important,” Bowles tells SFR. “We were also extremely angry that we were totally unable to answer the questions on the basis of having gotten a PhD at Harvard.”

King’s assassination that year cut short the equality movement. ...

Most economists in 1968 thought of inequality as “somebody else’s problem,” Bowles tells SFR. “I actually was denied the right to teach a graduate course in inequality because it was said not to be economics.” It wasn’t always thus.

“The founders of the discipline of economics, almost to a man—and they were only men—thought that the problem of distribution between classes—they used the word classes—was the key to understanding why nations grew or not,” Bowles says. What Bowles sees as the essence of his profession [is] problems of wealth distribution...

Isn’t inequality merely the price of America being No. 1?

“That’s almost certainly false,” Bowles tells SFR. “Prior to about 20 years ago, most economists thought that inequality just greased the wheels of progress. Overwhelmingly now, people who study it empirically think that it’s sand in the wheels.” ... Bowles offers a key reason why this is so. “Inequality breeds conflict, and conflict breeds wasted resources,” he says.

In short, in a very unequal society, the people at the top have to spend a lot of time and energy keeping the lower classes obedient and productive.

Inequality leads to an excess of what Bowles calls “guard labor.” In a 2007 paper on the subject, he and co-author Arjun Jayadev, an assistant professor at the University of Massachusetts, make an astonishing claim: Roughly 1 in 4 Americans is employed to keep fellow citizens in line and protect private wealth from would-be Robin Hoods.




Guard Labor versus Inequaltiy (Gini) across States
The job descriptions of guard labor range from “imposing work discipline”—think of the corporate IT spies who keep desk jockeys from slacking off online—to enforcing laws... The greater the inequalities in a society, the more guard labor it requires, Bowles finds. ...

The problem, Bowles argues, is that too much guard labor sustains “illegitimate inequalities,” creating a drag on the economy. All of the people in guard labor jobs could be doing something more productive with their time—perhaps starting their own businesses...

Liberals tend to think of inequality as a matter of class and race—and that’s true, he says. But individual success hinges on a big X factor: “There’s a lot of luck involved,” Bowles says.

No politician’s promise can remove that element of unpredictability. Which means the smart policy, in Bowles’ view, is for the government to care for people who suffer misfortune through no fault of their own. ... “The whole idea of social security,” Bowles says, “is to insure the unlucky by having the lucky pay a little extra.” ... [more here]

With progressive taxes the lucky do pay a little extra, and that allows society to provide social insurance to the unlucky.

There are many additional ways to justify progressive taxation, e.g. the principle of equal marginal sacrifice, and if the guard labor hypothesis is correct, it provides yet another rationale for a progressive tax code.

Courtesy of Bradford DeLong (Grasping Reality With Both Hands)

Paul Krugman (NY Times): Good and Boring

Good and Boring

By PAUL KRUGMAN
In times of crisis, good news is no news. Iceland’s meltdown made headlines; the remarkable stability of Canada’s banks, not so much.

Yet as the world’s attention shifts from financial rescue to financial reform, the quiet success stories deserve at least as much attention as the spectacular failures. We need to learn from those countries that evidently did it right. And leading that list is our neighbor to the north. Right now, Canada is a very important role model.

Yes, I know, Canada is supposed to be dull. The New Republic famously pronounced “Worthwhile Canadian Initiative” (from a Times Op-Ed column in the ’80s) the world’s most boring headline. But I’ve always considered Canada fascinating, precisely because it’s similar to the United States in many but not all ways. The point is that when Canadian and U.S. experience diverge, it’s a very good bet that policy differences, rather than differences in culture or economic structure, are responsible for that divergence.

And anyway, when it comes to banking, boring is good.

First, some background. Over the past decade the United States and Canada faced the same global environment. Both were confronted with the same flood of cheap goods and cheap money from Asia. Economists in both countries cheerfully declared that the era of severe recessions was over.

But when things fell apart, the consequences were very different here and there. In the United States, mortgage defaults soared, some major financial institutions collapsed, and others survived only thanks to huge government bailouts. In Canada, none of that happened. What did the Canadians do differently?

It wasn’t interest rate policy. Many commentators have blamed the Federal Reserve for the financial crisis, claiming that the Fed created a disastrous bubble by keeping interest rates too low for too long. But Canadian interest rates have tracked U.S. rates quite closely, so it seems that low rates aren’t enough by themselves to produce a financial crisis.

Canada’s experience also seems to refute the view, forcefully pushed by Paul Volcker, the formidable former Fed chairman, that the roots of our crisis lay in the scale and scope of our financial institutions — in the existence of banks that were “too big to fail.” For in Canada essentially all the banks are too big to fail: just five banking groups dominate the financial scene.

On the other hand, Canada’s experience does seem to support the views of people like Elizabeth Warren, the head of the Congressional panel overseeing the bank bailout, who place much of the blame for the crisis on failure to protect consumers from deceptive lending. Canada has an independent Financial Consumer Agency, and it has sharply restricted subprime-type lending.

Above all, Canada’s experience seems to support those who say that the way to keep banking safe is to keep it boring — that is, to limit the extent to which banks can take on risk. The United States used to have a boring banking system, but Reagan-era deregulation made things dangerously interesting. Canada, by contrast, has maintained a happy tedium.

More specifically, Canada has been much stricter about limiting banks’ leverage, the extent to which they can rely on borrowed funds. It has also limited the process of securitization, in which banks package and resell claims on their loans outstanding — a process that was supposed to help banks reduce their risk by spreading it, but has turned out in practice to be a way for banks to make ever-bigger wagers with other people’s money.

There’s no question that in recent years these restrictions meant fewer opportunities for bankers to come up with clever ideas than would have been available if Canada had emulated America’s deregulatory zeal. But that, it turns out, was all to the good.

So what are the chances that the United States will learn from Canada’s success?

Actually, the financial reform bill that the House of Representatives passed in December would significantly Canadianize the U.S. system. It would create an independent Consumer Financial Protection Agency, it would establish limits on leverage, and it would limit securitization by requiring that lenders hold on to some of their loans.

But prospects for a comparable bill getting the 60 votes now needed to push anything through the Senate are doubtful. Republicans are clearly dead set against any significant financial reform — not a single Republican voted for the House bill — and some Democrats are ambivalent, too.

So there’s a good chance that we’ll do nothing, or nothing much, to prevent future banking crises. But it won’t be because we don’t know what to do: we’ve got a clear example of how to keep banking safe sitting right next door.