Kruse Kronicle

The U.S. Content of “Made in China”

Federal Reserve Bank of San Francisco: The U.S. Content of “Made in China”

Abstract

Goods and services from China accounted for only 2.7% of U.S. personal consumption expenditures in 2010, of which less than half reflected the actual costs of Chinese imports. The rest went to U.S. businesses and workers transporting, selling, and marketing goods carrying the "Made in China" label. Although the fraction is higher when the imported content of goods made in the United States is considered, Chinese imports still make up only a small share of total U.S. consumer spending. This suggests that Chinese inflation will have little direct effect on U.S. consumer prices.

Article

The United States is running a record trade deficit with China. This is no surprise, given the wide array of items in stores labeled “Made in China.” This Economic Letter examines what fraction of U.S. consumer spending goes for Chinese goods and what part of that fraction reflects the actual cost of imports from China. We perform a similar exercise to determine the foreign and domestic content of all U.S. imports.

In our analysis, we combine data from several sources: Census Bureau 2011 U.S. International Trade Data; the Bureau of Labor Statistics 2010 input-output matrix; and personal consumption expenditures (PCE) by category from the U.S. national accounts of the Commerce Department’s Bureau of Economic Analysis. We use the combined data to answer three questions:

•  What fraction of U.S. consumer spending goes for goods labeled “Made in China” and what fraction is spent on goods “Made in the USA”?

•  What part of the cost of goods “Made in China” is actually due to the cost of these imports and what part reflects the value added by U.S. transportation, wholesale, and retail activities? That is, what is the U.S. content of “Made in China”?

•  What part of U.S. consumer spending can be traced to the cost of goods imported from China, taking into account not only goods sold directly to consumers, but also goods used as inputs in intermediate stages of production in the United States?

Answers?

Although globalization is widely recognized these days, the U.S. economy actually remains relatively closed. The vast majority of goods and services sold in the United States is produced here. In 2010, imports were about 16% of U.S. GDP. Imports from China amounted to 2.5% of GDP. ...

... Obviously, if a pair of sneakers made in China costs $70 in the United States, not all of that retail price goes to the Chinese manufacturer. In fact, the bulk of the retail price pays for transportation of the sneakers in the United States, rent for the store where they are sold, profits for shareholders of the U.S. retailer, and the cost of marketing the sneakers. These costs include the salaries, wages, and benefits paid to the U.S. workers and managers who staff these operations. ...

... This U.S. fraction is much higher for imports from China. Whereas goods labeled “Made in China” make up 2.7% of U.S. consumer spending, only 1.2% actually reflects the cost of the imported goods. Thus, on average, of every dollar spent on an item labeled “Made in China,” 55 cents go for services produced in the United States. In other words, the U.S. content of “Made in China” is about 55%. The fact that the U.S. content of Chinese goods is much higher than for imports as a whole is mainly due to higher retail and wholesale margins on consumer electronics and clothing than on most other goods and services. ...

Conclusion

Figure 2 shows the share of U.S. PCE [personal consumption expenditures] based on where goods were produced, taking into account intermediate goods production, and the domestic and foreign content of imports. Of the 2.7% of U.S. consumer purchases going to goods labeled “Made in China,” only 1.2% actually represents China-produced content. If we take into account imported intermediate goods, about 13.9% of U.S. consumer spending is attributable to imports, including 1.9% imported from China.

Since the share of PCE attributable to imports from China is less than 2% and some of this can be traced to production in other countries, it is unlikely that recent increases in labor costs and inflation in China will generate broad-based inflationary pressures in the United States.

Average Home Size Shrinks

Source: Carpe Diem

Why companies won't hire - David Frum

CNN: Why companies won't hire

... In fact, on our current trajectory, the U.S. will catch up to 2007 levels of economic output sometime in the next couple of months. Yet at the current job creation rate of a little north of 100,000 jobs per month, the U.S. economy will not recover its 2008-2009 job losses until the middle of the decade. And because so many distressed workers have quit the labor force altogether, the pace of job creation would have to double for the U.S. to see total employment rates return to pre-crisis levels before 2015.

What's the problem? Consider just these factors:

1. This past recession delivered its hardest blow to some especially labor-intensive industries: construction and retailing. Even as economic activity recovers, we're not going to see lots of new home building. Nor will we see people using their cash-out refinancings to go shopping at Best Buy. Americans are saving again. Those who have jobs are paying down debt.

2. Recessions lead to consolidations. Weak firms go broke, strong firms gain market share. The strong firms hire, the weak firms fire. But because the strong firms are more productive (that's why they are strong!), they do not hire nearly as many people as the weak firms have laid off.

3. A catastrophic experience like the 2008-2009 recession changes an employer's expectations about the future. Caution and self-protection become the guiding rules of business management. Companies decide it's safer to have one worker too few than one too many. They may not recover their exuberance and optimism for years.

4. Last and most important: The economy, although growing, is not growing very fast. The rule of thumb is to reduce unemployment by 1 point, the economy must grow 2 points over trend. Right now, the U.S. economy is still growing below trend. The engine is just not revving fast enough to move the car.

Then there's public policy. Employers must fear that the future probably holds heavier taxes, more regulation and higher employee health care costs. The outlook might be worse under a President Obama than a President Romney, but it looks sufficiently ugly either way.

As I said: That's the optimistic scenario, the 1936 scenario.

Don't get me started on the other.

Who Holds the Federal Debt?

CQ.com: Who Holds the Federal Debt

As of the end of March, the federal government owed $14.27 trillion to a wide variety of holders of U.S. Treasury securities. This graphic depicts who those creditors are and the amount they have bought in treasuries. Click on the arrows next to a category to expand its subcategories.

Check out the graph at the link above.

Multinational manufacturers: Moving back to America

Economist: Multinational manufacturers: Moving back to America

The dwindling allure of building factories offshore.

“WHEN clients are considering opening another manufacturing plant in China, I’ve started to urge them to consider alternative locations,” says Hal Sirkin of the Boston Consulting Group (BCG). “Have they thought about Vietnam, say? Or maybe [they could] even try Made in USA?” When clients are American firms looking to build factories to serve American customers, Mr Sirkin is increasingly likely to suggest they stay at home, not for patriotic reasons but because the economics of globalisation are changing fast.

Labour arbitrage—taking advantage of lower wages abroad, especially in poor countries—has never been the only force pushing multinationals to locate offshore, but it has certainly played a big part. Now, however, as emerging economies boom, wages there are rising. Pay for factory workers in China, for example, soared by 69% between 2005 and 2010. So the gains from labour arbitrage are starting to shrink, in some cases to the point of irrelevance, according to a new study by BCG.

“Sometime around 2015, manufacturers will be indifferent between locating in America or China for production for consumption in America,” says Mr Sirkin. That calculation assumes that wage growth will continue at around 17% a year in China but remain relatively slow in America, and that productivity growth will continue on current trends in both countries. It also assumes a modest appreciation of the yuan against the dollar. ...

... Many multinationals will continue to build most of their new factories in emerging markets, not to export stuff back home but because that is where demand is growing fastest. And companies from other rich countries will probably continue to enjoy the opportunity for labour arbitrage for longer than American ones, says Mr Sirkin. Their labour costs are higher than America’s and will remain so unless the euro falls sharply against the yuan. ...

Americans shed mortgage debt at record pace

USA Today: Americans shed mortgage debt at record pace

Americans are reducing mortgage payments at a record clip, directing cash that once went for debt into consumer spending and savings.

Low interest rates, defaults and refinancings have shaved more than $100 billion off the nation's annual mortgage bill — an amount comparable to all unemployment benefits for one year or this year's Social Security payroll tax cut.

"This is a form of economic stimulus that goes to Main Street rather than Wall Street," says Nicholas Carroll, a journalist on consumer finance and author of Walk Away From Debt for a Better Future. When freed from a mortgage payment, people's first purchases tend to be necessities, such as socks and underwear, he says....

... Economic effects of lower mortgage debt:

•Savings. For the first time since 1998, households are saving more than they're spending on mortgage interest.

•Interest. Mortgage interest consumes 5.27% of the nation's after-tax income, the lowest since 2004 and comparable to the 1980s and '90s.

•Rates. The average interest rate on all mortgages — not just new ones — has fallen for 16 consecutive quarters to 5.96%, the lowest since the government started keeping track in 1977. The tumbling rate reflects borrowers restructuring loans to become better credit risks and shortening 30-year mortgages to 15-year loans.

Kids Moving Out Are a Boon to the Economy

BusinessWeek: Kids Moving Out Are a Boon to the Economy

As employment picks up, more young people are setting up house. That's lifting consumer spending.

... About 20 million adult children in the U.S. live with their parents, and most are eager to move, says Peter Francese, a demographic analyst for advertising agency Ogilvy & Mather. "Most guys who live at home beyond some young age walk around with a great big 'L' [for "loser"] on their forehead," Francese says. "As more young people feel they will be able to keep a job, bingo, they're gone."

This year, nearly 1 million new households will be created, UBS Securities (UBS) predicts, up from the 357,000 in the year ended March 2010, the lowest number for a 12-month period on record since the Census Bureau started tracking household starts in 1960. New households will help increase housing starts to about 648,000 this year and to nearly 900,000 in 2012, vs. 586,800 last year, estimates researcher Metrostudy. U.S. household formation in the three years ended March 2010 was roughly 40 percent of the long-term average, or about 500,000 annually, according to Census data. "Household-formation rates are already tipping back upward" as job gains allow some people "to spread out," says Brad Hunter, Metrostudy's chief economist. "The demographic component of housing demand is strong; it's just the economic and psychological components that are holding things back."

When people move into a new home, they tend to spend. A typical new renter spends $600 to $1,900 on furniture, appliances, and other stuff related to setting up housekeeping in the first six months, says C. Britt Beemer, chairman of America's Research Group in Charleston, S.C. ...

... Another demographic shift should play a role as well: more divorces, which also create new households. The number of divorces dropped to 6.8 per 1,000 people in 2009 from 7.4 in 2006, prior to the recession, government figures show. A survey this year by the National Marriage Project at the University of Virginia found that 38 percent of people considering a divorce or separation put aside those plans because of the recession. St. Louis-based divorce-law specialist Cordell & Cordell says its customer count rose by about 20 percent in the first quarter. "We see things moving in a positive direction, from our perspective," says principal partner Joseph E. Cordell.

German exports rise to all-time high

BBC: German exports rise to all-time high

German exports surged in March to their highest level since records began, as the growing global economy lifted demand for its products and services.

The country's exports for the month totalled 98.3bn euros ($142bn; £87bn), 7.3% higher than February.

Its imports also reached an all-time high, up 3.1% to 79.4bn euros. Both imports and exports are the most since data started to be collected in 1950.

Germany is the world's second-largest exporter.

Only China exports more than the European nation, and the latest monthly figure for German exports was much higher than market expectations. ...

 

Rich and poor, growing apart

The Economist: Rich and poor, growing apart

Dimming Optimism for Today’s Youth

New York Times - Economix: Dimming Optimism for Today's Youth

Unfortunately, this data set only goes back to 1983. I'm quite sure that if you asked this question in the 1979-1981 era, you would see similar low numbers. In fact, I'm pretty sure I remember such survey data being reported by other groups at that time.

I think the response to this question is more reflective of a mood than an indicator of what the future will be. I have virtually no doubt that youth will live better than their parents over the course of their respective lives. I'm doubtful they will live happier lives. (See yesterday's post.)

 

 

 

Decline in Manufacturing as Percentage of GDP

Carpe Diem

Income Growth and Inequality, 1979-2007

We are consistently confronted with income statistics that say the U.S. income inequality is widening and that while the rich have gotten richer, the poor are getting poorer. But measures of income and inequality are notoriously slippery. The numbers are almost always reported in terms of household pre-tax incomes without consideration of taxes, transfers, or changes in household composition over time.

Richard V. Burkhauser has just published a report that contains research on the minimum wage and income inequality in the Journal of Policy Analysis and Management called Evaluating the Questions That Alternative Policy Success Measures Answer. That article contains the following table. The column on the left shows the unadjusted change in household income by quintile from 1979-2007. The right column shows the change adjusting for household size, taxes, transfers, and non-cash benefits.

The Conclusion of the report says:

CONCLUSIONS

The iconoclastic research of Card and Krueger at the heart of their book Myth and Measurement, published in 1995, resulted in a rejuvenation of interest by a new generation of researchers in better determining the behavioral and distributional consequences of minimum wage increases. After 15 years, this new generation of research provides more plausible evidence that such increases are a poor way of helping the working poor, especially when compared with increases in the Earned Income Tax Credit.

The iconoclastic research of Piketty and Saez has had a similar impact on the income inequality literature. It too has resulted in a rejuvenation of interest by a new generation of researchers in better measuring levels and trends in income inequality. What Burkhauser et al. (in press, b) and Tables 1 and 2 demonstrate is that it is not primarily differences between the CPS and IRS data that are responsible for the dramatically different levels and trends in income and income inequality found by researchers using these data sets, but in the questions they have used these data to answer. It remains to be seen which of these questions will be more salient in informing future public policies meant to affect trends in the level and distribution of income. What is certain is that you can’t answer questions about how the household size–adjusted resources available to people have changed using answers to a different question.

RICHARD V. BURKHAUSER, who is at Cornell University, presented this Presidential Address on November 5, 2010, at the Annual Meeting of the Association for Public Policy Analysis and Management, Boston, MA.

Dead Suit Walking (Can Manhood Survive the Latest Recession?)

Newsweek: Dead Suit Walking

If this isn't the Great Depression, it is the Great Humbling. Can manhood survive the lost decade?

... The suits are “doing worse than they have at any time since the Great Depression,” says Heidi Shierholz, a labor economist at the Economic Policy Institute. And while economists don’t have fine-grain data on the number of these men who are jobless—many, being men, would rather not admit to it—by all indications this hitherto privileged demo isn’t just on its knees, it’s flat on its face. Maybe permanently. Once college-educated workers hit 45, notes a post on the professional-finance blog Calculated Risk, “if they lose their job, they are toast.”

The same guys who once drove BMWs, in other words, have now been downsized to BWMs: Beached White Males.

Through the first quarter of 2011, nearly 600,000 college-educated white men ages 35 to 64 were unemployed, according to previously unpublished Labor Department stats. That’s more than 5 percent jobless—double the group’s pre-recession rate. That might not sound bad compared with the plight of younger, less-educated workers and minorities, but it’s a historic change from the last recession, when about half as many lost their oxford shirts. The number of college-educated men unemployed for at least a year is five times higher today than after the dotcom bubble. In New York City, men in the 35-to-54 kill zone have lost jobs faster than any other group, including teenage girls, according to new data from the Fiscal Policy Institute. ...

Also, see chart about a survey, Sorry, He's Toast

Recent studies have shown that the wage gap shrinks—or even reverses—when relevant factors are taken into account and comparisons are made between men and women in similar circumstances. ...

Wall Street Journal: There Is No Male-Female Wage Gap

A study of single, childless urban workers between the ages of 22 and 30 found that women earned 8% more than men.

... Thus the mantra that women make only 77% of what men earn for equal work. But even a cursory review of the data proves this assumption false.

The Department of Labor's Time Use survey shows that full-time working women spend an average of 8.01 hours per day on the job, compared to 8.75 hours for full-time working men. One would expect that someone who works 9% more would also earn more. This one fact alone accounts for more than a third of the wage gap.

Choice of occupation also plays an important role in earnings. While feminists suggest that women are coerced into lower-paying job sectors, most women know that something else is often at work. Women gravitate toward jobs with fewer risks, more comfortable conditions, regular hours, more personal fulfillment and greater flexibility. Simply put, many women—not all, but enough to have a big impact on the statistics—are willing to trade higher pay for other desirable job characteristics.

Men, by contrast, often take on jobs that involve physical labor, outdoor work, overnight shifts, and dangerous conditions (which is also why men suffer the overwhelming majority of injuries and deaths at the workplace). They put up with these unpleasant factors so that they can earn more.

Recent studies have shown that the wage gap shrinks—or even reverses—when relevant factors are taken into account and comparisons are made between men and women in similar circumstances. ...

Luckas is the executive director of the conservative forum, but from what I've read of economists, I think she is mostly correct. There may be something undesirable about the different choices the sexes make in employment in the aggregate, but the issue of discriminating pay for identical work is minimal.

Burden of student loans squeezing grads

New York Times: Burden of student loans squeezing grads

In some circles, student debt is known as the anti-dowry.

Student loan debt outpaced credit card debt for the first time last year and is likely to top a trillion dollars this year as more students go to college and a growing share borrow money to do so.

While many economists say student debt should be seen in a more favorable light, the rising loan bills nevertheless mean that many graduates will be paying them for a longer time.

“In the coming years, a lot of people will still be paying off their student loans when it’s time for their kids to go to college,” said Mark Kantrowitz, the publisher of FinAid.org and Fastweb.com, who has compiled the estimates of student debt, including federal and private loans.

Two-thirds of bachelor’s degree recipients graduated with debt in 2008, compared with less than half in 1993. Last year, graduates who took out loans left college with an average of $24,000 in debt. Default rates are rising, especially among those who attended for-profit colleges.

The mountain of debt is likely to grow more quickly with the coming round of budget-slashing. Pell grants for low-income students are expected to be cut and tuition at public universities will probably increase as states with pinched budgets cut back on the money they give to colleges. ...

And there is this little detail ...

Unlike most other debt, student loans generally cannot be discharged in bankruptcy, and the government can garnish wages or take tax refunds or Social Security payments to recover the money owed.

Brazil’s Potential in the Rousseff Era

The Globalist: Brazil’s Potential in the Rousseff Era

In 2003, President Lula inherited a poor, resigned nation on the verge of an economic implosion. Eight years later, Brazil’s new president, Dilma Rousseff, leads an emerging, optimistic nation. Dan Steinbock explores how Brazil can realize its full growth potential in the post-crisis landscape.

One interesting note is the continued decoupling of the rest of the world from the American economy.

When Lula won the presidency in 2002, Brazil’s main trading partners were the United States (25.5%), the Netherlands (5.3%), Germany (4.2%) and China (4.2%).

Over the eight years, the U.S. share collapsed, while the Chinese share more than tripled. By 2009, Brazil’s main trading partners were China (13.2%), the United States (9.6%), Argentina (7.8%) and the Netherlands (5.0%).

Steinbock's prescription for Brazil's economic health?

In order to realize its full BRIC potential, Brazil has to undertake seven critical steps. First, reduce the importance of the informal sector. Second, correct macroeconomic deficiencies (including the high interest rate and a relatively high government-debt-to-GDP ratio).

Third, reduce the notorious red tape. Fourth, streamline the labor code. Fifth, contain political corruption. Sixth, improve the quality of public services (e.g., education, justice and security). And seventh, develop new infrastructure.

In order to engage in the Asian trajectory of growth, however, even more reforms are needed, including far greater trade openness, significantly higher investment and savings and substantially lower public and foreign debt.

As China Grows, So Does Its Appetite for American-Made Products

New York Times Economix: As China Grows, So Does Its Appetite for American-Made Products

SHANGHAI — America’s huge trade deficit with China has raised concerns about American competitiveness and jobs moving overseas. But a new study offers a glimmer of hope to Americans: Last year, American exports to China soared 32 percent to a record $91.9 billion.

A study by a trade group called the U.S.- China Business Council says China is now the world’s fastest-growing destination for American exports. ...

Men's earnings have NOT declined by 28 percent since 1969

Scott Winship Web: Men's earnings have NOT declined by 28 percent since 1969

... But he ends by trumpeting Hamilton Project analyses claiming to show that men's earnings declined by 28 percent between 1969 and 2009.  This claim, like the Mandel analyses, reinforces Cowen's argument that we are in a Great Stagnation, but it's not true! ...

... Here's the basic problem: the analyses assign all nonworking men annual earnings of $0, and since labor force participation among men has declined, the result is a big drop in median earnings over time.  But a lot of that decline in labor force participation is attributable to earlier retirement (they include men as old as 64), later and longer school enrollment (they include men as young as 25), rising "disability" rates (which do not correspond in any obvious way with changes in health or job demands but which do correspond with increasing generosity in disability benefits), and other factors having nothing to do with the strength of labor markets. ...

... Note, however, that comparing 1969 and 2009 holds up a likely peak year (when the business cycle was at a high) to a trough year (when it was at a low).  Comparing 1969 to 2007 is apples-to-apples, and when I did that, the median was EXACTLY the same in both years (to the dollar, which is a pretty crazy coincidence).  Finally, if I use the Bureau of Economic Analysis "personal consumption expenditures" deflator, which I think overstates inflation somewhat less than other commonly-used deflators, median earnings among men rose 7 percent from 1969 to 2007.

Seven percent is no great shakes, but this figure is also too small for assessing how men's economic fortunes have changed over time.  None of these analyses account for the fact that as a group, husbands reduced their hours over time in response to rising work and wages among wives.  Nor do they account for the rising share of non-wage benefits in total compensation (health and retirement benefits have eaten into wages, presumably following the preferences of the median worker).  Nor do they include the impact of taxes (which have declined) and tax credits (which have increased).  In addition, even my figures may overstate inflation, ...

More Americans Dropping Out of the Labor Force

New York Times Economix: More Americans Dropping Out of the Labor Force

I’ve written before about the very low share of Americans who are in the labor force right now. In February, for example, just 64.2 percent of adults were either in a job or actively looking for one, representing the lowest participation rate in 25 years.

This milestone has largely been attributed to the sour job market, which has discouraged many people from even looking for jobs. But to some extent the low participation rate may reflect more permanent changes to the work force. A new report from the Congressional Budget Office, for example, projects that the participation rate will continue to fall in the years ahead: ...

The report observes that the participation rate peaked at about 67 percent during the late 1990s and in 2000, since that’s when baby boomers were in their prime working-age years of 25 to 54. Women had also been entering the labor force at a rapid clip.

But since then the share of women who choose to work has fallen. In fact, it’s now at the lowest level in nearly 20 years. Meanwhile baby boomers are reaching retirement age and dropping out of the labor force. Additionally, the share of people under age 25 who are working or looking for work has also fallen: ...

This decline in labor force participation rates among the nation’s young people isn’t necessarily a bad thing.

“That change appears mostly to reflect a long-term increase in school enrollment (particularly among teens in the summer months) and a declining tendency for students to work while they are enrolled in school,” the report says.

Still, the underlying structural changes mean in the coming decade there will be an ever-larger share of nonworking Americans supported by a shrinking share of working Americans.

Do I hear a renewed immigration debate coming?

Check out the article for several good graphs.

Taming Leviathan (A special report on the future of the state)

Economist: Taming Leviathan

THE argument sounds familiar. The disruptive reforms that have so changed the private sector should now be let loose on the public sector. The relationship between government and civil society has been that between master and servant; instead, it should be a partnership, with the state creating the right environment for companies and charities to do more of its work. The conclusion: “We are in a transition from a big state to a small state, and from a small society to a big society.”

A Republican presidential candidate in America? David Cameron rallying Britain’s Tories? Neither: the speaker is supposedly China’s most highly regarded bureaucrat. Last year Ma Hong won the country’s national award for government innovation—a great coup for her department, which is trying to get more non-governmental organisations (NGOs) to take over parts of welfare, health and education services in the city of Shenzhen, just across the border from Hong Kong.

The award partly reflects the whirl of activity that is Ms Ma. She has dismantled most of the controls on local NGOs: rather than be sponsored by some government department, all they have to do is register with her. She began in 2004 with industrial associations, but has extended the net to include independent charities. Almost 4,000 “social groups” are now registered—nearly double the number in 2002, when they were all tied to the state. ...

... It is not hard to poke holes in China’s version of the Big Society, as we shall see later in this special report. But there is plainly a drive to make government work a little more like the private sector. “Just as a human has two legs, China has a very long economic one and a very short social one,” observes Ms Ma. “They should be of equal length.” ...

Very interesting article. Just starting in on the other articles that are part of the special report.

Change in CPI Components

From the Wall Street Journal via Carpe Diem:

Regional inequality

Economist: Internal affairs: Regional inequality

The gap between many rich and poor regions widened because of the recession.

THE differences between countries are often not as great as the disparities within them: each nation is divided by a common economy. An analysis by The Economist suggests that the gap between poorer and richer regions increased during the downturn in some developed economies. And the income gap between richer and poorer areas is likely to widen further as government-spending cuts disproportionately hurt less prosperous parts.

Regional data come with various health warnings attached. Comparing regions in different countries is tricky, because their size varies hugely. We mainly use the OECD definition of "small areas" (Britain is broken into more than 100 regions), except for America where data are available only on a state-by-state basis. Crude income numbers also ignore the fact that the cost of living is cheaper in rural parts than in big cities, which has the effect of exaggerating inequality. Urban areas are always likely to be wealthier than rural ones because of their higher productivity and their greater ability to attract companies and employees. ...

Lots of caveats to go with these stats. I'm not sure counting D.C. as a state is helpful. Considering only twenty years of unification, I thought the relative equality in Germany was interesting.

Rustbelt recovery

Economist: Rustbelt recovery

Against all the odds, American factories are coming back to life. Thank the rest of the world for that.

... For the first time in many years, American manufacturing is doing better than the rest of the economy. Manufacturing output tumbled 15% over the course of the recession, from December 2007 to the end of June 2009. Since then it has recovered two-thirds of that drop; production is now just 5% below its peak level (see chart 1).

Factory employment has been slower to recover than output, since productivity has risen. Nonetheless, that too is growing. In February factory payrolls rose by 33,000 from January. In the past year manufacturing employment has gone up by 189,000, or 1.6%, the biggest gain since the late 1990s. Total employment rose just 1% in that period. Unemployment has fallen more sharply than the national average in Illinois, Ohio and Michigan, which are relatively dependent on manufacturing. ...

... Beyond this cyclical bounce-back, though, a structural shift may also be under way. Makers of floorings, furniture and glass, all of which go into houses, were especially hard hit and have yet to start hiring again. But those that make things for businesses or customers overseas—computers, machinery, electronic equipment, heavy-duty trucks—are thriving. Cisco Systems and Intel Corporation notched up record sales last year. Caterpillar and John Deere, which makes diggers, bulldozers and farm equipment, saw sales leap. ...

 

Inequality and mobility at the top

Consider the Evidence: Inequality and mobility at the top

For the bulk of the population — everyone but the richest — we have multiple sources of mobility data. One is the Panel Study of Income Dynamics (PSID); another is earnings records from the Social Security Administration. Both indicate that there has been no increase in income mobility in recent decades (see also here).

What about at the top? A good bit of the past generation’s rise in inequality consists of growing separation between the rich, especially the top 1%, and the rest of America. But has this been accompanied by increased churn among those at the top? ...

... The large increase in income inequality has not been offset by a rise in mobility at the top.

China Catches Up to 1878 U.S.

From Carpe Diem

In Part-Time Jobs, Women Out-Earn Men

New York Times: In Part-Time Jobs, Women Out-Earn Men

This article is several months old, but I thought it offered some fascinating data.

The article notes:

... Additionally, men and women are not equally distributed amongst these different workweek lengths. Women are much more likely to be in part-time jobs than men. In fact, in 2009, 66.6 percent (about two-thirds) of American workers logging fewer than 35 hours in the typical workweek were women. By comparison, just 45.1 percent of workers logging more than 35 hours a week were women.

In other words,the “typical” workweek length for men versus women is very different. Men who work part-time are deviating from the “male” workweek norm, a fact that may say something about their quality, ambition or priorities, or at the very least how employers view their quality, ambition or priorities. Likewise with women who deviate from the “female” norm and work full-time.

We frequently hear that women earn 75-80% of what a man earns when we compare salaries in the aggregate. But when we look at hours worked in the aggregate, women work forty hours for every forty-four hours men work. That accounts for a big chunk of the pay difference. Other studies show that single women in their twenties and early thirties make more than their male counterparts.

Men and women, in the aggregate, do seem to use different criteria for work decisions over their working lives. It can be argued that some unhealthy gender expectations lead to those decisions. But I doubt that much of the pay differences stem from discrimination.

Why Are Food Prices Going Crazy?

NPR: Why Are Food Prices Going Crazy?

... I recently put these questions to Abdolreza Abbassian, a food economist at the UN's Food and Agriculture Organization. Here's what he told me.

Skyrocketing Prices

Abbassian attributed the price rise to several factors — some familiar to me (and probably to you), some less familiar.

1. The rise of biofuels, like ethanol made from corn. This market, driven largely by government subsidies, has created demand that is what economists call "price inelastic" — demand stays strong even as prices rise.

2. More demand from the developing world, particularly for meat. Livestock eat grain, so increasing demand for meat means increasing demand for grain. This source of demand has also been price inelastic, Abbassian said.

3. Disappearing stockpiles.

Because of WTO rules, the U.S. and Europe have been moving away from subsidies that led to vast reserves of wheat and corn.

Subsidies still exist in the U.S. and Europe, but they've taken a different form. Governments used to buy and stockpile surplus food from farmers. Now it's more common for governments to give farmers subsidy payments without actually buying any of the food they produce, Abbassian told me.

This sounds super wonky, but it has a huge impact on the price of food.

Big stockpiles mean that the supply of food remains relatively constant, even when there are disasters like the vast fires that destroyed last summer's Russian wheat crop.

But in the absence of stockpiles, unexpected shocks like those fires in Russia last summer have a huge impact on supply. That, in turn, contributes to huge price spikes.

"What you get is a world market that is increasingly tight, without much of a buffer," Abbassian told me. "Without a buffer, you have volatility. It's as simple as that."

4. Speculation

The volatility created by declining stocks is in turn compounded by speculation — traders betting on the rise or fall of prices.

Abbassian argued that bringing more transparency to commodities futures markets might mitigate this issue.

"If we know who is buying it and what are they buying it for, that may get those who are just there to gamble to be more cautious about their positions," he said.

Who is going to go hungry?

At any given moment, there are about a billion people in the world who don't have enough food to eat. When food prices go up, more people do go hungry — but the increase isn't as dramatic as you might think.

That's partly because many of the world's poorest people simply have no money and no access to food. Many live in countries where wars and other crises make it hard to get food to people. They would be hungry even if the price of food had not spiked.

What's more, in many poor countries, the local harvest is a more important factor than the price of global commodities. And many countries in Africa have had strong harvests of staples such as white corn and cassava.

One often overlooked region likely to be hit hard by the price increases is Central Asia, Abbassian said. This recent FAO report has lots of region-by-region detail. ...

China Replaced Japan in 2010 as No. 2 Economy

New York Times: China Replaced Japan in 2010 as No. 2 Economy

TOKYO — Japan’s economy contracted in the fourth quarter when compared with the previous three months, though analysts are optimistic about the country’s prospects for the rest of the year.

Japan’s gross domestic product fell 0.3 percent in the October-December quarter as the end of generous government incentives on environmentally friendly cars resulted in a temporary decline in spending. At an annualized rate, Japan’s economy shrank 1.1 percent from the previous quarter.

The contraction, the first in five quarters, brought Japan’s economy for 2010 to $5.47 trillion, the Japanese Cabinet Office said. That compared with a $5.88 trillion economy for fast-growing China. The latest numbers were further evidence of China’s rapid ascent as an economic superpower, as China surpassed Japan last summer after the half-year gross domestic product numbers were released. Just five years ago, China’s gross domestic product was around $2.3 trillion, about half Japan’s.

Japan’s economy has stagnated over the last two decades, reflecting its continued decline in economic and political clout.

The country had the world’s second-largest economy after the United States for much of the last four decades. In the 1980s, its rapid growth even led to talk of the Japanese economy’s overtaking that of the United States. ...

Made in the USA

Boston.com: Made in the USA

US manufacturing still tops China’s by nearly 46 percent

... A recent Heartland Monitor survey finds “clear anxiety about the decades-long employment shift away from manufacturing to service jobs,’’ National Journal’s Ron Brownstein reported in December. The “decline of US manufacturing’’ is giving Americans a “sense of economic precariousness’’ — only one in five believe that the United States has the world’s strongest economy, versus nearly half who think China is in the lead. “Near the root of the unease for many of those polled is the worry that the United States no longer makes enough stuff.’’ When asked why US manufacturing jobs have declined, 58 percent cite off-shoring by American companies to take advantage of lower labor costs.

There’s just one problem with all the gloom and doom about American manufacturing. It’s wrong.

Americans make more “stuff’’ than any other nation on earth, and by a wide margin. According to the United Nations’ comprehensive database of international economic data, America’s manufacturing output in 2009 (expressed in constant 2005 dollars) was $2.15 trillion. That surpassed China’s output of $1.48 trillion by nearly 46 percent. China’s industries may be booming, but the United States still accounted for 20 percent of the world’s manufacturing output in 2009 — only a hair below its 1990 share of 21 percent. ...

... So why do so many Americans fear that the Chinese are eating our lunch?

Part of the reason is that fewer Americans work in factories. Millions of industrial jobs have vanished in recent decades, and there is no denying the hardship and stress that has meant for many families. But factory employment has declined because factory productivity has so dramatically skyrocketed: Revolutions in technology enable an American worker today to produce far more than his counterpart did a generation ago. Consequently, even as America’s manufacturing sector out-produces every other country on earth, millions of young Americans can aspire to become not factory hands or assembly workers, but doctors and lawyers, architects and engineers.

Perceptions also feed the gloom and doom. In its story on Americans’ economic anxiety, National Journal quotes a Florida teacher who says, “It seems like everything I pick up says ‘Made in China’ on it.’’ To someone shopping for toys, shoes, or sporting equipment, it often can seem that way. But that’s because Chinese factories tend to specialize in low-tech, labor-intensive goods — items that typically don’t require the more advanced and sophisticated manufacturing capabilities of modern American plants.

A vast amount of “stuff’’ is still made in the USA, albeit not the inexpensive consumer goods that fill the shelves in Target or Walgreens. American factories make fighter jets and air conditioners, automobiles and pharmaceuticals, industrial lathes and semiconductors. Not the sort of things on your weekly shopping list? Maybe not. But that doesn’t change economic reality. They may have “clos[ed] down the textile mill across the railroad tracks.’’ But America’s manufacturing glory is far from a thing of the past.

Is Poverty Up or Not?

New York Times Economix: Is Poverty Up or Not? Nancy Folbre

It's not easy to figure out from aggregate statistics what the business cycle does to any of us. The recession of 2008-9 officially ended in June 2009, though official unemployment today remains close to the level of 9.5 percent that it reached that month.

The effect of the recession on poverty rates — like everything else – depends on official definitions. And currently, as I pointed out in an earlier post, the Census Bureau defines poverty in several different ways, some of which are labeled "experimental."

By the traditional non-experimental measure, poverty jumped to 14.3 percent in 2009 from 13.2 percent in 2008. This measure, however, does not include the value of in-kind benefits, such as food stamps (under the Supplemental Nutrition Assistance Program), tax benefits such as the Earned Income Tax Credit, and some other government programs that received a special boost from the federal stimulus put into effect in 2009.

So this measure understates the positive impact of public policies intended to buffer the recession's impact.

Good thing we have the experimental measures of poverty, which were designed, in part, to address this problem. Most of these measures indicate little if any change between 2008 and 2009, indicating that public antipoverty programs did their job pretty well. (An editorial in The New York Times recently celebrated this accomplishment.) ...

She goes on to show some other less happy nuances about how people are negatively impacted that don't show up in poverty measures, like losing health coverage.

... The technical issues may seem daunting, but remember this: prosperity is just as hard to define as poverty. The Great Recession has revealed flaws in many of our measures of economic well-being – including the concept of "recovery."

Experiments should enable us to learn from failure, as well as from success. Unfortunately, I fear that many Americans are sinking toward poverty, even though we can't agree on how, exactly, its depths should be defined.

West Africa Rising: Will a sovereign wealth fund really help reverse Nigeria's 'oil curse'?

Christian Science Monitor: West Africa Rising: Will a sovereign wealth fund really help reverse Nigeria's 'oil curse'?

On Dec. 1 last year, Nigeria’s cabinet approved the creation of a sovereign wealth fund that would invest any excess revenues generated from the sale of the country’s oil.

Heard this one before?

A developing country is blessed with natural resources worth billions of dollars on the global market, but the revenues are lost to corruption, conflict, or simple mismanagement. Meanwhile, the bulk of the country’s citizens can’t seem to scratch their way out of poverty.

This paradox, often described as the “resource curse,” has played out in countries across Africa, from Angola to Zambia, and it doesn’t seem to be going away any time soon.

Nigeria, Africa’s biggest oil exporter and third-largest economy, is often seen as the poster child for the phenomenon. But now, the country is trying to change.

On Dec. 1 last year, Nigeria’s cabinet approved the creation of a sovereign wealth fund that would invest any excess revenues generated from the sale of the country’s oil, which it exports at a rate of roughly two million barrels per day.

The revenues from those investments would be funneled in three directions. The biggest chunk of money would be used to build Nigeria’s physical infrastructure. A second and smaller portion would fund an economic stabilization program, while a third would be set aside “for future generations.”

The proposal for the fund is now before the Nigerian Parliament. A vote is expected before the country’s presidential election, which is set for April 9. ...

The Haves and the Have-Nots

New York Times Economix: The Haves and the Have-Nots

This is a fascinating chart, but it is like one of those pictures with all the dots. You look at it long enough, and a dolphin appears.

Across the horizontal axis are ventiles (and no, they aren't related to Gentiles.) Each ventile is 1/20, or 5%, of the population, ranked from least to most income. The verticle axis is the percentile of the world income distribution (All income is in inflation-adjusted international dollars.)

So, the poorest ventile in the USA still receives more than 68% of the rest of the world. Brazil has a wide income disparity, with the bottom ventile at the bottom of the world distribution and the top ventile nearly on a par with the USA's top ventile. India's top ventile doesn't even make it the level of the lowest ventile in the USA.

Among other things, we can see how much greater the income inequality in emerging giants is, but their lines will likely mirror the USA line in the coming years.

 

Why Business is Stuck on Income Inequality

Harvard Business Review: Why Business is Stuck on Income Inequality

... This underscores a bigger dilemma facing the business community. The big rise in economic inequality over the past four decades is partly the result of impersonal economic forces — technological change, mostly — but political decisions have played a crucial role as well. Financial market deregulation, tax-code changes, and all manner of other policy choices in the have promoted inequality in the U.S., as Jacob S. Hacker and Paul Pierson demonstrated pretty convincingly in their 2010 book Winner-Take-All Politics. And similar moves were made in much of the rest of the world.

Who pushed for these changes? Well, businesspeople, of course. Often for very good reason: to spur economic growth, to increase a particular country's economic competitiveness, even to promote personal freedom in the face of a stifling government. But pendulums always swing too far. Economist Mark Thoma put it well earlier this month:

There is an equivalent of a Laffer curve for inequality, but the variable of interest is economic growth rather than tax revenue. We know that a society with perfect equality does not grow at the fastest possible rate. When everyone gets an equal share of income, people lose the incentive to try and get ahead of others. We also know that a society where one person has almost everything while everyone else struggles to survive — the most unequal distribution of income imaginable — will not grow at the fastest possible rate either. Thus, the growth-maximizing level of inequality must lie somewhere between these two extremes.

Assuming we're near or have passed that growth-maximizing level of inequality, in the U.S. at least, the business community as a whole would be better off if the trend toward inequality slowed or reversed. But business people are accustomed to pushing for policies that tend to increase inequality, and are loathe to reverse their stances on tax rates, free trade, and free financial markets. As a result, businesspeople who worry about inequality have over the years tended to focus on improving educational opportunities. But you can't say those efforts have made a noticeable dent in the inequality trend.

Business folks would seem to be stuck. They need a more equal distribution of wealth and income to continue thriving. But it doesn't seem to be in any businessperson's immediate interest — and in many cases contradicts deeply held beliefs — to make the sort of decisions or support the sorts of government policies that might halt the trend toward more inequality.

As I've posted before, inequality among the bottom 99% of the population has not changed that much in the last thirty years. The change is with the top 1%, especially the top .1%. I think poor regulation of the financial markets is a key piece of this.

DJIA, CPI, and U. S. History - 1913 to Present

Check out this graph by Joshua Brown at Christian Science Monitor.

2011 Index of Economic Freedom

The 2011 Index of Economic Freedom report is out.

103K new jobs in Dec. point to slow, steady growth

Yahoo! News: 103K new jobs in Dec. point to slow, steady growth

WASHINGTON – The nation's added 103,000 jobs in December and the unemployment rate dropped to 9.4 percent last month, its lowest level in 19 months.

But the job growth fell short of expectations based on a strengthening economy. And the drop in unemployment was mainly because people stopped looking for work.

Private employers added a net total of 113,000 jobs last month and the government shed 10,000 jobs, the Labor Department said Friday.

"It's a bit of a mixed bag," said Ryan Sweet, an economist at Moody's Analytics. Many analysts hoped to see larger job gains, and the drop in the unemployment rate is unlikely to be sustained, he said. ...

The lion kings?

Economist: The lion kings?

Africa is now one of the world’s fastest-growing regions.

MUCH has been written about the rise of the BRICs (Brazil, Russia, India and China) and the shift in economic power eastward as Asia outruns the rest of the world. But the surprising success story of the past decade lies elsewhere. An analysis by The Economist finds that over the ten years to 2010, no fewer than six of the world’s ten fastest-growing economies were in sub-Saharan Africa (see table).

The only BRIC country to make the top ten was China, in second place behind Angola. The other five African sprinters were Nigeria, Ethiopia, Chad, Mozambique and Rwanda, all with annual growth rates of around 8% or more. During the two decades to 2000 only one African economy (Uganda) made the top ten, against nine from Asia. On IMF forecasts Africa will grab seven of the top ten places over the next five years (our ranking excludes countries with a population of less than 10m as well as Iraq and Afghanistan, which could both rebound strongly in the years ahead). ...

Economic Optimism? Yes, I’ll Take That Bet

New York Times: Economic Optimism? Yes, I’ll Take That Bet

Five years ago, Matthew R. Simmons and I bet $5,000. It was a wager about the future of energy supplies — a Malthusian pessimist versus a Cornucopian optimist — and now the day of reckoning is nigh: Jan. 1, 2011. ...

Simmons lost.

... It’s true that the real price of oil is slightly higher now than it was in 2005, and it’s always possible that oil prices will spike again in the future. But the overall energy situation today looks a lot like a Cornucopian feast, as my colleagues Matt Wald and Cliff Krauss have recently reported. Giant new oil fields have been discovered off the coasts of Africa and Brazil. The new oil sands projects in Canada now supply more oil to the United States than Saudi Arabia does. Oil production in the United States increased last year, and the Department of Energy projects further increases over the next two decades.

The really good news is the discovery of vast quantities of natural gas. It’s now selling for less than half of what it was five years ago. There’s so much available that the Energy Department is predicting low prices for gas and electricity for the next quarter-century. Lobbyists for wind farms, once again, have been telling Washington that the “sustainable energy” industry can’t sustain itself without further subsidies.

As gas replaces dirtier fossil fuels, the rise in greenhouse gas emissions will be tempered, according to the Department of Energy. It projects that no new coal power plants will be built, and that the level of carbon dioxide emissions in the United States will remain below the rate of 2005 for the next 15 years even if no new restrictions are imposed.

Maybe something unexpected will change these happy trends, but for now I’d say that Julian Simon’s advice remains as good as ever. You can always make news with doomsday predictions, but you can usually make money betting against them.

I love that last sentence.

 

A year in nine pictures

Economist: A year in nine pictures

THE global property bust that pulled the world into recession in 2008 began to lift in 2010. House prices turned up in Britain and stabilised in America (chart 1) but slid further in Spain. The process of deleveraging kept rich-world inflation subdued (chart 2). ...

Jon Stewart on Printing Money

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Countries Ranked by 2009 GDP

Source: Ranking America

The world economy: Three-way split

The Economist: The world economy: Three-way split

America, the euro zone and the emerging world are heading in different directions.

THIS year has turned out to be a surprisingly good one for the world economy. Global output has probably risen by close to 5%, well above its trend rate and a lot faster than forecasters were expecting 12 months ago. Most of the dangers that frightened financial markets during the year have failed to materialise. China’s economy has not suffered a hard landing. America’s mid-year slowdown did not become a double-dip recession. Granted, the troubles of the euro area’s peripheral economies have proved all too real. Yet the euro zone as a whole has grown at a decent rate for an ageing continent, thanks to oomph from Germany, the fastest-growing big rich economy in 2010.

The question now is whether 2011 will follow the same pattern. Many people seem to think so. Consumer and business confidence is rising in most parts of the world; global manufacturing is accelerating; and financial markets are buoyant. The MSCI index of global share prices has climbed by 20% since early July. Investors today are shrugging off news far more ominous than that which rattled them earlier this year, from the soaring debt yields in the euro zone’s periphery to news of rising inflation in China.

Earlier this year investors were too pessimistic. Now their breezy confidence seems misplaced. To oversimplify a little, the performance of the world economy in 2011 depends on what happens in three places: the big emerging markets, the euro area and America. (Yes, Japan is still an economic heavyweight, but it is less likely to yield surprises.) These big three are heading in very different directions, with very different growth prospects and contradictory policy choices. Some of this divergence is inevitable: even to the casual observer, India’s economy has always been rather different from America’s. But new splits are opening up, especially in the rich world, and with them come ever more chances for friction. ...

Greg Mankiw on the Tax Deal

Greg Mankiw: Greg Mankiw on the Tax Deal

I am generally pleased with the compromise over taxes the President and Republicans struck yesterday.  (The President should be too, but he seemed dejected at his news conference.  Buck up, Mr President!  You don't want anyone to start thinking of the word "malaise.")

One aspect of the deal struck me as worth discussing with econ students: The compromise includes a one-year cut in the payroll tax by 2 percentage points.  The tax cut will be entirely in the employees' share.  Why do you think they designed the policy in this way?  Was it the right choice?

One basic lesson of microeconomics is that it doesn't matter which side of a market the government taxes.  As a result, you might think it doesn't really matter which side of the payroll tax is cut. ...

Job Openings Increasing

Carpe Diem: Job Openings Increasing

The BLS reported yesterday that job openings rose to 3,362,000 in October, which was the highest level since August 2008, more than two years ago.  Compared to the cyclical low of 2,338,000 in July of last year, job openings have risen by more than one million and by 44% through October of this year.  ...

 

The Rise of the Sheconomy

Time: The Rise of the Sheconomy

In the hierarchy of activities that people despise, getting a car repaired is in pole position, sort of the auto equivalent of having a tooth pulled, except you bleed money and don't get a smiley sticker as you leave. Garry Rosenfeldt, marketing-research director for Midas International, knew this. After their cars were fixed, only 1 in 4 Midas customers returned to buy other services. Even dentists see their customers more often than that.

To ascertain what might make it more pleasant — or at least less odious — for customers, Rosenfeldt set up an experiment in late 2008 in which customers were recorded before and after they brought their cars in for repairs. He found that while auto shops inspired fear and loathing in men and women alike, the two sexes had different ideas about how to improve the experience. (See an infographic of the growing buying power of women.)

Since Midas is in the testosterone-y world of engine blocks and overhead camshafts, it needed to aim for what the men wanted, right? Nuh-uh. "From a financial point of view, I'd rather have a woman in the shop than a man," says Rosenfeldt. They're better customers, he believes, more loyal and evangelistic. "They talk about looking for 'their guy,'" he says. And once they find him and trust him, he adds, "they spend more."

Over at Best Buy, Julie Gilbert, a senior vice president whose job it was to figure out high-end male consumers, had already come to the same conclusion. She liked to do her research in living rooms, so she got herself invited to a couple of rich guys' homes to figure out why they'd buy widgets and peripherals at Best Buy but not pricey home theaters. Almost from the first home she visited, she realized she was talking to the wrong person. "The women took over the conversation," Gilbert says. "They had incredible passion and intensity about the store experience, and for every issue they also had a solution."

What these two and many other businesses discovered is the Sheconomy.

Everyone knows, or has long suspected, that the purse strings are held by women. It's oft repeated that they make 85% of the buying decisions or are the chief purchasing officers of their households. The difference today — one that has enormous consequences across global economies — is that women are also the earners. ...

... To appeal to women, the changes in a product or service or even the way a company is run have to be more profound. "Women have a more comprehensive decision process," says Barletta. A guy, she suggests, is a targeted shopper. He will book the first hotel room he finds at his price point. For a woman, the secondary characteristics are key: the gym, the spa, the sustainability, the thread count. Get the guy right and you've made a sale; get the woman right and you have a customer. ...

...Midas' retooled approach was oddly similar: change the balance of power in the relationship in favor of customers. Let them in on the process. The company instituted a program called the Midas Way. Using Philadelphia as its pilot city, it personalized the business, making Midas stores, ironically, more like dentists' offices, with appointments and checkups and lots of explaining. Employees of Midas stores, including mechanics, were offered training. Smile, they were told, even when talking on the phone. Most of all, make sure every customer who comes in, even just for the $21.99 oil-change-and-tire-rotation special, is shown exactly what will be done on a checklist. "The benchmark for success is, we ask the customer: Would you be able to explain what happened at Midas to your mother?" says Rosenfeldt.

While it's still early, and the auto business is still tough, the results are marked. In Philadelphia, Midas' retail sales are up an average 13% since December, when the program was instituted. "Some stores completely did a 180, literally, to the month that we started this program," says Rosenfeldt. Cautious that it might be a fluke, Midas tried the program in St. Louis and got similarly encouraging results. The Midas Way is now being rolled out to the rest of the U.S. The women's input "spawned a whole different way we execute our retail model," says Rosenfeldt. ...

Greg Mankiw on QE2

Greg Mankiw's Blog: QE2

Mankiw is a professor at Harvard, author of the leading college economics textbook, and served as member of Bush's economic advisors.

Several people have asked my opinion of the Federal Reserve's new round of quantitative easing. In particular, some have noted that I did not sign the open letter by conservative economists critical of recent Fed actions.

My view is that QE2 is a modestly good idea. I say it is a "good idea" because, like Ben Bernanke, I am more worried at the moment about Japanese-style deflation and stagnation than I am about excessive inflation. By lowering long-term real interest rates below where they otherwise would be, QE2 should help expand aggregate demand. I include the modifier "modestly" because I don't expect these actions to have a very large effect.

Moreover, I do see some potential downsides. In particular, the Fed is making its portfolio riskier. By borrowing short and investing long, the Fed is in some ways becoming the hedge fund of last resort. If future events require higher interest rates, the Fed will end up making losses on its portfolio. And even if doesn't recognize these losses (by not marking to market), it could end up paying more interest on newly expanded reserves than it is earning on its newly acquired portfolio of long bonds. Such a cash-flow deficit could potentially undermine the Fed's political independence (which is already not very popular in some circles). Yet if the Fed tries to avoid these losses by failing to raise rates when needed, inflation could indeed become a problem down the road. I trust the team at the Fed enough to think they will avoid that mistake.

So, in the end, I judge QE2 to be a small but risky step in the right direction.

This pretty much sums up my take, although he may be a shade more optimistic than I am. The "hedge fund of last resort" analogy is a great good way to put it.

 

What the Fed is fighting

The Economist: What the Fed is fighting

THE Bureau of Labour Statistics just released its October consumer price index data. Here's a chart of the year-over-year change in core prices:

In the twelve months to October, core consumer prices rose 0.6%. That's the smallest increase in the history of the index, which began in 1957. That's what the Fed is trying to change, and that's what you need to keep in mind when you hear people warning about runaway inflation.

Never enough

The Economist: Never enough

Emerging economies continue to drive energy demand

 

Why growth will stay too weak to ease unemployment

Yahoo! Finance: Why growth will stay too weak to ease unemployment

WASHINGTON (AP) -- An economy growing 2 percent a year might be tolerable in normal times. Today, it's a near-disaster.

A growth rate of 5 percent or higher is needed to put a major dent in the nation's 9.6 percent unemployment rate. Two reasons why that's unlikely well into next year and maybe beyond:

-- Construction -- both residential and commercial -- collapsed last year. And it isn't expected to regain its strength for years. Typically after recessions end, construction booms and powers a new economic expansion.

-- The recession that began in December 2007, after the housing bubble burst, became the Great Recession once the financial crisis erupted in September 2008. Economic recoveries that follow a financial crisis are typically sluggish. Banks usually take years to resume lending normally.

"To really get 'Morning in America' and get people feeling like jobs are really coming back, I would want to see something close to 5 percent" annual economic growth, says economist Josh Bivens of the Economic Policy Institute, referring to the iconic 1984 Reagan re-election ad.

That isn't likely to happen soon. Macroeconomic Advisers doesn't expect the labor market to recover all the lost jobs until at least 2013. Other economists say it could be 2018 or longer. ...

Uganda cuts poverty by 15 pct in four years

Reuters: Uganda cuts poverty by 15 pct in four years

KAMPALA, Oct 27 (Reuters) - Uganda's sustained economic growth has reduced the number of people in poverty by 15 percent in four years, according to the state-run National Bureau of Statistics.

A 2009-10 survey seen by Reuters on Wednesday showed the number of people in poverty in east Africa's third largest economy was 7.1 million, down from 8.4 million at the time of the last survey in 2005-06, when the population was smaller.

Uganda's economy has been invigorated by the discovery of commercial oil deposits in the Albertine Rift basin on the border with the Democratic Republic of Congo in 2006.

The lead explorer, Tullow Oil <TLW.L>, has said it expects to start commercial production in the last quarter of 2011, although a lingering tax dispute risks pushing back that target.

"Growth effect contributed more to poverty reduction than redistribution. In other words, poverty reduction continues to be driven by growth," one of the report's authors, Sarah Ssewanyana, said in a commentary.

With an estimated population of about 31 million, Uganda has maintained a strong growth momentum over the last decade, spurred by liberal economic policies, an expanding private sector and a steady inflow of aid and foreign investment.

The government forecasts growth will hit 6.7 percent in the 2010-11 (July-June) financial year and economic analysts say the anticipated petrodollar bonanza will turbo charge economic expansion and accelerate the reduction in poverty.

"Despite significant reduction in poverty, the northern region remains a home for the majority of the poor," Ssewanyana said. According to the survey, poverty levels there stood at 46.2 percent, down from 60.7 percent in the 2005-06 survey. ...