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February 4, 2013

Latest Posts from Economist's View


Latest Posts from Economist's View


Posted: 01 Feb 2013 12:24 AM PST
The advocates of fiscal austerity can't admit that contractionary policy is contractionary despite the evidence that has stacked up against their policy prescriptions:
Looking for Mister Goodpain, by Paul Krugman, Commentary, NY Times: ... In recent columns, I've argued that worries about the deficit are, in fact, greatly exaggerated — and have documented the increasingly desperate efforts of the deficit scolds to keep fear alive. Today,... I'd like to talk about a different but related kind of desperation: the frantic effort to find some example, somewhere, of austerity policies that succeeded. For the advocates of fiscal austerity — the austerians — made promises as well as threats: austerity, they claimed, would both avert crisis and lead to prosperity.
And let nobody accuse the austerians of lacking a sense of romance; in fact, they've spent years looking for Mr. Goodpain.
The search began with a passionate fling between the austerians and the Republic of Ireland, which turned to harsh spending cuts soon after its real estate bubble burst, and which for a while was held up as the ultimate exemplar of economic virtue. ... Since then, every uptick in the Irish economy has been hailed as proof that the nation is recovering — but as of last month the unemployment rate was 14.6 percent...
After Ireland came Britain... Unlike Ireland, Britain had no particular need to adopt austerity... Nonetheless, the government of Prime Minister David Cameron insisted ... that it would actually boost the economy by inspiring confidence. What actually happened was an economic stall. ...
At this point, you might have expected austerity advocates to consider the possibility that there was something wrong with their analysis... But no. They went looking for new heroes and found them in the small Baltic nations, Latvia in particular... Latvians,... however,... have only regained part of the lost ground..., and the unemployment rate is still 14 percent. If this is the austerians' idea of an economic miracle, they truly are the children of a lesser god.
Oh, and if we're going to invoke the experience of small nations as evidence about what economic policies work, let's not forget the true economic miracle that is Iceland — a nation that was at ground zero of the financial crisis, but which, thanks to its embrace of unorthodox policies, has almost fully recovered.
So what do we learn from the rather pathetic search for austerity success stories? We learn that the doctrine that has dominated elite economic discourse for the past three years is wrong on all fronts. ... It's time to put the deficit obsession aside and get back to dealing with the real problem — namely, unacceptably high unemployment.

Posted: 01 Feb 2013 12:06 AM PST
Posted: 31 Jan 2013 06:36 PM PST
Annualized 6 and 12 Month Trimmed Mean
PCE Inflation Rates from 1/12 - 12/12

6-month 12-month
Jan-12 2.02 2.08
Feb-12 1.86 2.02
Mar-12 1.97 2.02
Apr-12 1.96 1.94
May-12 1.85 1.89
Jun-12 1.75 1.87
Jul-12 1.62 1.82
Aug-12 1.62 1.74
Sep-12 1.54 1.75
Oct-12 1.44 1.70
Nov-12 1.45 1.65
Dec-12 1.34 1.55
Posted: 31 Jan 2013 02:02 PM PST
One more from Tim Duy:
Interesting Anecdote, by Tim Duy: Looking at the Reuters report on the latest consumer confidence numbers, this caught my attention:
"The increase in the payroll tax has undoubtedly dampened consumers' spirits and it may take a while for confidence to rebound and consumers to recover from their initial paycheck shock," Lynn Franco, director of economic indicators at The Conference Board, said in a statement.
One of the more interesting anecdotes I picked up last week was from a businessman who said that after his firm issued the first paychecks of the year, virtually every employee came to the payroll office and asked why their paychecks were lower, evidently unaware that the payroll tax cut had expired.
If the expiration does come as a surprise to a large proportion of the workforce, perhaps consumer spending in the first quarter will be somewhat softer than current estimates. Something to watch for.
Posted: 31 Jan 2013 02:01 PM PST
Tim Duy:
Room For Upside in Tomorrow's ISM Report?, by Tim Duy: Calculated Risk has the run down on tomorrow's employment report, opting to bet on the high side of the forecast. Likewise, I am inclined to bet on the high side of the ISM forecast of 50.7, up from 50.5 the previous month. A couple of things to keep in mind:
1. Industrial production firmed in recent months:
Ip
Those that thought the mid-year slowdown in production bolstered their case for an imminent recession need to head back to the drawing board.
2. Core durable goods orders are stronger:
Neworder
A significant portion of the sharp slowdown this year has been reversed. Eventually, this will impact the ISM index.
3. The Chicago PMI surprised on the upside, gaining sharply to 55.6 from 50.0 in December.
4. The Markit PMI has tended to the strong side in recent months:
Markit
All in all, it looks like manufacturing is shaking off some of those mid-year doldrums. Consequently, I would expect the ISM index to come in ahead of expectations.
Posted: 31 Jan 2013 10:50 AM PST
Chris Dillow:
Wages, fairness & productivity: Do higher wages motivate workers to work harder? A recent experiment conducted on Swiss newspaper distributors suggests the answer's yes, but only partially so:
Workers who perceive being underpaid at the base wage increase their performance if the hourly wage increases, while those who feel adequately paid or overpaid at the base wage do not change their performance.
This suggests that people are motivated not so much by the cold cash nexus as by feelings of reciprocal fairness...
Posted: 31 Jan 2013 10:04 AM PST
Larry Kudlow tries to use the fact that the fall government spending in the fourth quarter of last year was associated with a big drop in GDP growth to argue that lower government spending is good for the economy. Antonio Fatas correct his misguided thinking:
Celebrating negative growth, by Antonio Fatas: GDP growth during the last quarter of 2012 turned negative in the US (-0.1%)... Looking at the different components of GDP, the biggest decline happened in government spending and in net exports (due to the weakness in other economies). This is just one quarter and the data is likely to be revised later in the year, but what is to be learned from the data? The answer is whatever justifies your priors. Here is the interpretation that Larry Kudlow does in CNBC...
He makes the claim that this is indeed a good quarter because private spending (consumption and investment) grew at about 3.4% - after removing inventories that fell significantly. From here he concludes:
"Even with the fourth-quarter contraction, the latest GDP report shows that falling government spending can coexist with rising private economic activity. This is an important point in terms of the upcoming spending sequester. Lower federal spending, limited government, and a smaller spending-to-GDP ratio will be good for growth. The military spending plunge will not likely be repeated. But by keeping resources in private hands, rather than transferring them to the inefficient government sector, the spending sequester is actually pro-growth."
So this is an interesting test that he is using to prove that decreasing government spending is good for growth. As long as we see any growth in private spending it means that the decrease in government spending is helping the private sector grow. Of course, the real test is to compare the -0.1% to what would have happened to GDP growth if government spending had not decreased. Reading Larry Kudlow's article it sounds as if GDP growth would have been even lower (although his statement is not as precise as this). Yes, consumption grew and investment (once we exclude inventories) grew as well, but how much? Not enough to compensate the decrease in government spending so the final outcome is a negative (literally negative) performance for GDP growth. ...
We see that government spending fell and this is a component of GDP. A natural reaction might be to argue that the fall in government spending had a negative effect on GDP. Given that the GDP growth number is so low (and lower than expected), this is a reason to believe that the multiplier is positive and possibly large. But, as Larry Kudlow shows, there are always other interpretations.
According to Kudlow's theory (which is contrary to the empirical evidence, but why should actual data matter when there's ideology to promote...note how he tosses inventories aside when they don't agree with his priors, doubt he does that if it is helpful to his case), a decline in government spending should cause the private sector to boom by more than enough to offset the decline in government spending (otherwise growth would fall on net). Yet he is pleased that the decline in government spending didn't cause a decline in the private sector ("shows that falling government spending can coexist with rising private economic activity"), as though that somehow supports his case. It doesn't. Government spending fell, the private sector didn't boom by anywhere near enough to offset it, and the net result was a decline in GDP growth.
[Note: As Antonio points out, "we should not be doing this, to understand fiscal multipliers we need more than one quarter of data, but I am just trying to follow his logic." For example, to qualify this is a way that could be helpful to Kudlow, there may be lags between changes in government spending and changes in private sector activity that cannot be captured in a single quarter of data. But as noted above, this actually doesn't help -- when the empirical analysis is done correctly, government spending multipliers in a depressed economy appear to be relatively large.
Let me add one more thing. I'm all for maximizing growth (with externalities internalized), but I'm also for full employment and sometimes a temporary increase in government spending in the short-run to put people back to work is the best course for long-run economic growth. This is one of those times, especially spending focused on infrastructure. Addressing our short-run problems in this way is, if anything, and contra the Kudlows, helpful for growth.
I don't have any problem asking question such as "what is the best way to raise a given amount of revenue," i.e. trying to minimize inefficiencies and inequities in the tax code with an eye toward growth. I also think it's worthwhile to think about what size of government we want to have, and figure out the best way to support it. I do have a problem with high unemployment, especially when there are steps we could take to put people to work, and even more so when theories about long-run growth that have been rejected by the data are used to institute policies that work against helping people find employment in a depressed economy (e.g. austerity). In any case, with all of our employment problems, why would anyone cheer -.1 percent growth unless "those people" don't matter?]

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