Tuesday, August 26, 2008

UM Predicts Job Boom: 3.5m New Jobs in 2009-10

In their annual summer forecast of the U.S. economy, University of Michigan economists say that three factors have helped our economy stave off a full-blown recession: 1) strong and timely action by the Federal Reserve to prevent financial collapse, 2) temporary tax breaks for households and businesses, and 3) strong demand for our products abroad.

The U-M economists predict annualized increases in real GDP growth of 2.6% in the first half of 2009, 3.3% in the second half and 3.6% during 2010. This translates into an increase of 900,000 payroll jobs during 2009 and 2.6 million jobs during 2010, after a loss of 700,000 jobs this year. Even so, the unemployment rate will increase next year to an average of 6.3%, but will fall to 5.6% by the end of 2010.

Along with the creation of 3.5 million jobs, rising GDP and slowing consumer price inflation over the next two years, the U.S. economy will show some signs of improvement in the housing market, oil prices and vehicle sales.

OFHEO: Home Prices Increased in 30 Out of 50 States Over Last Year, From 2007:Q2 to 2008:Q2

The map above (click to enlarge) is from the latest housing report from the Office of Federal Housing Enterprise Oversight (OFHEO), showing the "Four-Quarter Price Change by State" from 2007:Q2 to 2008:Q2 in the OFEHO House Price Index, which averaged -1.7% for the country.

However, notice that the biggest price decreases over the last year in the OFHEO House Price Index (HPI) have taken place in 4 states: CA (-15.8%), NV (-14.1%), FL (-12.4%) and AZ (-9.2%), see previous CD post (data through 2008:Q1 for that post). After those four states, the next closest price decline was the -4.85% decline in Rhode Island, after AZ (-9.2%). If you take out those four states (CA, NV, FL, AZ) the overall price decline over the last year was only -.75%. That is, the huge price decreases in the four states contributed about -1% to the overall national decline of -1.7% (without weighting for the size of each state).

Further, house prices have increased over the last year in 30 states, ranging from +0.56% for WA to +4.93% in OK, including increases of more than 4% for two states (OK and WY), and increases at or above 3% for 12 states (OK, WY, TX, OK, SD, ND, MS, AL, NC, SC, KY, WV). Finally, more than half of the states (27) have experienced home price increases of 1% or greater.

Comment: The way it gets reported in the media, you would think the entire national real estate is crashing, with home prices everywhere in "free fall," when the reality is slightly different: Over the last year, there have been significant home price corrections in only 4 states of between -9 and -16%, moderate price declines of between -2 to -5% in 9 states, and price increases in 30 states of between +0.56% and +4.93%.

Mr. Mayor: How Do You Define "American-Made"?

My decision to strongly urge all Warren mayoral appointees to buy American-made vehicles was based on what I call "economic patriotism."

~Mayor Jim Fouts of Warren, MI, in today's Detroit Free Press

Dear Mr. Mayor:

What about these American-made vehicles produced by UAW workers in American factories for foreign car companies, do they count as "American-made" or not?

American-made UAW vehicles:
Mazda 6
Mitsubishi Eclipse
Mitsubishi Galant
Toyota Corolla
Isuzu i-Series Truck
Mazda B-series Truck
Mitsubishi Raider Truck
Toyota Tacoma Truck

What about these Canadian-made vehicles, produced by UAW brothers and sisters at factories in Canada, do they qualify as "American-Made"? Isn't Canada a foreign country?:

Canadian-made UAW vehicles:
Buick Lacrosse
Chevrolet Impala
Chrysler 300
Dodge Challenger
Dodge Charger
Ford Crown Victoria

Lincoln Town Car
Mercury Grand Marquis
Pontiac Grand Prix

Update: What about the Chevy Aveo, which is built by Korean automaker Daewoo?

Update: What about the 2008 Honda Pilot and Honda Civics, built in the U.S. with higher domestic content (70%) than the 2008 Dodge Ram (68%)?

Economic Patriotism = Economic Racism/Bigotry

I am going to insist that all of the mayoral appointees buy American-made vehicles when they purchase new vehicles.

~Jim Fouts, Mayor of Warren, Michigan, in today's Detroit Free Press

Both major political parties are infested with protectionists who would discriminate on the basis of national origin no less virulently than David Duke or any other racist would discriminate on the basis of skin color.

~Economist Steven Landsburg

Giving preference to American-made products over German or Japanese products is the same injustice as giving preference to products made by whites over those made by blacks. Economic nationalism, like racism, means judging men and their products by the group from which they come, not by merit.

~Ayn Rand Institute

Quotes of the Day II

1. The reason so many people misunderstand so many issues is not that these issues are so complex, but that people do not want a factual or analytical explanation that leaves them emotionally unsatisfied. They want villains to hate and heroes to cheer-- and they don't want explanations that do not give them that.

2. There are countries in Europe that would love to have their unemployment rate fall to the 5.7% unemployment rate to which ours has risen. Yet those who seem to want us to imitate European economic and social policies never seem to want to consider the actual consequences of those policies.

~Thomas Sowell

Quote of the Day:Well-Earned, Richly Deserved Tax

"Windfall," of course, is just another word for "undeserved," which is why windfall profits are defined as the profits earned by someone other than you. If we were honest with the people having their profits yanked away, we'd call it the "well-earned and richly deserved profits tax."

~Jonah Goldberg

Over 100 Years, Food Prices Have FALLEN By 82%

Do a Google search for "rising food prices" and you'll get 391,000 results, while a search for "falling real food prices" gets about 144 results, a ratio of 2,700:1. Maybe we get so focused on the most recent year or two of rising prices for products like eggs that we lose sight of the longer term, historical trends.

The chart above shows the real, inflation-adjusted prices of eggs (in 2008 dollars), annually back to 1890. The price we're paying today for eggs (in real dollars) is about 1/7 of the price 100 years ago, a decline of 85% compared to the price our grandparents, great-grandparents or great-great grandparents paid in the early 1900s.

And it's not just egg prices that have fallen over the last 100 years. Grocery prices in general fell in real price by 82% between 1919 and 2007, measured in the number of hours worked (9.5 to 1.7 hours, another way to adjust for inflation) to purchase a 12-item basket of groceries, according to the Dallas Fed (see graph below).

Monday, August 25, 2008

Gas Falls Below $3 Per Gallon in Mississippi!!

"Divine Intervention": Drilling Boom Revives Hope for Natural Gas, Prices Fall By 42% in Two Months

NY TIMES -- American natural gas production is rising at a clip not seen in half a century, pushing down prices of the fuel and reversing conventional wisdom that domestic gas fields were in irreversible decline.

The new drilling boom uses advanced technology to release gas trapped in huge shale beds found throughout North America — gas long believed to be out of reach. Natural gas is the cleanest fossil fuel, releasing less of the emissions that cause global warming than coal or oil.

Rising production of natural gas has significant long-range implications for American consumers and businesses. A sustained increase in gas supplies over the next decade could slow the rise of utility bills, obviate the need to import gas and make energy-intensive industries more competitive.

“It’s almost divine intervention,” said Aubrey K. McClendon, chairman and chief executive of the Chesapeake Energy Corporation, one of the nation’s largest natural gas producers. “Right at the time oil prices are skyrocketing, we’re struggling with the economy, we’re concerned about global warming, and national security threats remain intense, we wake up and we’ve got this abundance of natural gas around us.”

Domestic natural gas prices have already plunged 42% since early July, an even faster drop in price than oil or most other commodities, in part because the rapid supply growth has begun to influence the market (see chart above, prices have fallen to the lowest levels since early January 2008).

MP: One more reason that inflation's not a problem: energy prices are plummeting. Natural gas has fallen by more than 42% in two months, and gasoline was spotted for $2.99 per gallon this morning in Mississippi.

Reality Check: Dude, Where's My 2008 Recession?

Monthly US data on payroll employment, civilian employment, industrial production and the unemployment rate are used to define a recession-dating algorithm that nearly perfectly reproduces the NBER official peak and trough dates. The only substantial point of disagreement is with respect to the NBER November 1973 peak. The algorithm prefers September 1974. In addition, this algorithm indicates that the data through June 2008 do not yet exceed the recession threshold, and will do so only if things get much worse.

Abstract from "What's a Recession, Anyway?" by UCLA Professor Edward E. Leamer, NBER Working Paper, August 2008

Gas at $3.15

In Tennessee.

Updated, thanks to Anonyomous.

Markets in Everything: Mobile Human Phone Booths

One of the most interesting service you find on the street in Peru is the “llamadas”. It’s generally women or teenagers with a bundle of mobile phones and a stop-watch who act as human pay phones. They wear colorful clothes with mobile carriers brands (see photo above) and the “llamadas” logo (that they also shout when you pass by).

HT: Ben Cunningham

Former USSR Would Have Dominated the Olypmics

If the former Soviet Union had not broken up, it would have dominated the medal count in the 2008 Beijing Olympics. If the USSR did not shatter into 15 different countries in the early 1990s, their medal count in Beijing would be staggering. As you can see in the chart below, the countries that made up the former Soviet Union won an amazing 171 medals. They did not win more gold medals than China, but their total medal haul was nearly 50% more than the next-place finisher — the United States!

HT: Sera Jones

Sunday, August 24, 2008

Gallup vs. Intrade: Pretty Big Difference

Most Recent Gallup Poll: Obama 45%, McCain 45%

Most Recent Intrade Odds: Obama 61.5%, McCain 38.4%

Voter Turnout By Age

Interesting graphic above showing voter turnout by age (click to enlarge), from Political Arithmetik. Note that voter turnout for the 60-70 year old group (about 70%) is about twice the 35-40% turnout for the 25-30 year old group.

The reason that might be important? The most recent Gallup weekly estimate shows Obama leading 60%-33% among 18-29 year olds (very low voter turnout), while McCain leads 46%-38% among those 65 and older (very high voter turnout).

HT: Ben Cunningham

Swimmers and Sprinters Keep on Getting Faster

The Economist.

Wage-Price Spiral? Not Even Close.

Brian Wesbury in the WSJ last week: "The most painful and frustrating economic policy blunder of the past 50 years was the Great Inflation of the 1970s. Painful, because it was the catalyst for three damaging recessions (1973-75, 1980, 1981-82, see shaded areas above), all the while eroding living standards and seriously undermining confidence in America.

Today, the U.S. (and through it the world) faces its greatest threat from inflation in 30 years. And as in the past, this threat is being met with denial and political expediency."

I have argued against the "inflation threat" in posts here, here, here, here and here, some of which have made the case that for inflation to be a real threat, we would have to see both measures of inflation rising simultaneously: headline and core, which hasn't yet happened.

Another variation of this argument is that for inflation to be a threat, we could have to see simultaneous increases in: a) headline inflation, b) core inflation and c) wage inflation, which certainly did happen in the 1970s, but is not happening now.

The chart above shows the year-to-year percentage increases in the monthly wage series "Average Hourly Earnings: Total Private Industries" (BLS data here). A wage is simply a price, the price of labor, and significant inflationary pressure would affect wages just like it would affect the price of oil, food and core prices. Notice in the chart above that wage increases in the inflationary 1970s were between 6 and 9 percent annually for a full decade (the "wage-price spiral"), and far in excess of the 2-4% range during the last two decades. Further, wages increases have been declining in both 2007 and 2008, and are currently at the lowest level (3.4%) since late 2005. Where's the wage inflation?

By definition, inflation is a general increase in the price level, when all goods and services are rising simultaneously, in general and on average. Therefore, for inflation to be a serious threat we would have to see all prices rising, including: a) core inflation (without food and energy) and b) wages, neither of which has been increasing at a rate suggesting that inflation is a clear and present danger.

Bottom Line: Unless, and until, we see core inflation and wage inflation rising, inflation can't be a serious threat to the economy. A wage-price spiral? Not even close.

Related article here, "Inflation's Last Hurrah," in The Economist.

Quote of the Day

Obama has also promised that "we will get 1 million 150-mile-per-gallon plug-in hybrids on our roads within six years." What a tranquilizing verb "get" is. This senator, who has never run so much as a Dairy Queen, is going to get a huge, complex industry to produce, and is going to get a million consumers to buy, these cars. How? Almost certainly by federal financial incentives for both -- billions of dollars of tax subsidies for automakers, and billions more to bribe customers to buy these cars they otherwise would spurn.

~George Will

US Medals: Olympics =108, Education Olympics =1

Over the last few decades, the United States has trailed other developed (and some developing) nations on international measures that assess student performance in reading, mathematics, and science. The purpose of the Education Olympics is to contrast America’s tepid academic performance with its athletic dominance. While America’s athletes bring home a trove of medals from Beijing, its student competitors are expected to be relatively barren of jewelry (see chart above). We want to ask: What will the United States do to turn around this critical situation?

The data on which the events in the Education Olympics are based come from four main international measures, the Trends in International Mathematics and Science Study (TIMSS), the Progress in International Reading Literacy Study (PIRLS), the Programme for International Student Assessment (PISA), and the Civic Education Study (CIVED). There are 58 events, each based on test scores from a section of one of the above exams, except for a handful of events that reflect measures of educational attainment.

MP: The U.S. has won 101 medals this year at the 2008 Summer Olympics, but only a single medal in the 2008 Education Olympics, according to the
Thomas Fordham Institute. The U.S. had the highest 9th grade scores on the CivEd subtest—civic skills. Unfortunately, in the 24 different science and math categories, the U.S. ranked in the top ten only three times, and never ranked higher than 7th place.

It's the Lake Wobegon Effect: Almost All Public School Teachers Are Way Above Average

David Whitman, in his book "Sweating the Small Stuff: Inner-City Schools and the New Paternalism," reports that in Chicago, from 2003 through 2006, just three of every 1,000 teachers received an "unsatisfactory" rating in annual evaluations; in 87 "failing schools" -- with below average and declining test scores -- 69 had no teachers rated unsatisfactory; in all of Chicago, just nine teachers received more than one unsatisfactory rating and none of them was dismissed.

From George Will's column in today's Washington Post

Saturday, August 23, 2008

Real Estate Bubble? Only 4 States: CA, FL, NV, AZ

Tyler Cowen writes in today's NY Times:

A bursting real estate bubble set off the Japanese recession of the 1990s, which deepened as ailing banks languished. It took Japan’s economy more than a decade to resume steady, noticeable growth.

Will this happen to the United States? Probably not, but we may face a protracted process of recovery, stretching longer than the two or so years usually required to climb out of recession.

Behind every financial crisis there is usually a crisis in the real economy, based in some underlying structural deficiency. Even if the financial crisis is bottoming out, sooner or later the real crisis must be faced.

The fundamental problem in the American economy is that, for years, people treated rising asset prices as a substitute for personal savings. The thinking went something like this: As long as your home’s value rose every year, you didn’t have to set aside so much from your paycheck.

Of course, asset prices haven’t been rising much lately, so many people will need more savings for their retirement or for possible emergencies.

MP: I'm not disagreeing with Tyler, but his comments made me think about the possibility of a U.S. real estate bubble, and the possibility that even without a real estate bubble/crash, we could experience sustained falling home prices nationally. But there really is no "national real estate market," since all real estate is local (and even varies within an individual zip code), and what is happening in Florida or Nevada could be much different than what is happening in Texas and Michigan.

Using the Office of Federal Housing Enterprise Oversight (OFHEO) quarterly real estate price indexes for U.S. states through the first quarter of 2008 (data available at the St. Louis Fed), I inspected the graphs for the housing price index in each of the 50 states, and found the following:

For four states (Arizona, California, Florida and Nevada) there has definitely been a real estate bubble with a definite crash in prices in in recent quarters (see top chart above of Nevada). For six other states (Hawaii, Maryland, Massachusetts, Michigan, Rhode Island and Virginia), there's some correction in prices going on, but not enough of a price drop to make it a crash (subjective opinion, see middle chart above). For the other forty states, it seems clear that there hasn't been a crash at all, and real estate prices have continued to increase in most of those forty states (see bottom chart above), or have leveled out.

Bottom Line: To the extent that there has been a real estate bubble in the U.S., and a subsequent crash in home prices, it's been pretty isolated to a small group of states like CA, FL, NV and AZ, and most of the country has seen home prices continue to rise, or flatten out. See graphs of each state below:


Famous Olympic Champion vs. Notorious Food Cop

Consider Michael Phelps. Eating a diet loaded with so-called “junk” foods (white bread, fried eggs, and pasta by the pound), the famous Olympic champion downs an astonishing 12,000 calories each day. However, at 6’4” and 195 lbs, Phelps is far from obese or unhealthy. The swimmer’s big appetite and lean physique seems to contradict the dietary rules eschewed in obesity policies. The explanation is balance. Phelps offsets the energy he eats with the energy he burns.

Food cops, like Michael Jacobson from the Center for Science in the Public Interest, and other “obesity” experts single out “junk food” as the culprit behind our burgeoning behinds. Pushing a food-only approach, these sticklers lobby for highly restrictive public health policies that leave no room for common sense (and diets that leave no room for dessert). But the nutritionally risqué diets of Phelps and other top-performing athletes show that any food can be part of an active lifestyle.

Click on the "Michael Phelps vs. Michael Jacobson" graphic above to enlarge.

Free Market, Though Imperfect, Is Self-Correcting

The superiority of free markets to government regulation is not based upon a magical ability of businesses or even markets to operate flawlessly or at optimal efficiency at all times. Businesses often make huge mistakes, and we have known for centuries that markets are constantly fluctuating, even wildly. Recently the tech bubble and now the housing bubble show that even entire segments of the market get so out of whack that we all wind up suffering painful corrections.

Markets, though, correct. Because they are ultimately tied to basic forces such as supply and demand, customer desires, and of course competition, they are anchored to real forces within the economy as a whole. No matter how out of whack they get, the long-term trend is always going to be in the right direction. More economic growth, satisfying customer demands, better quality at lower prices, and increased productivity and efficiency.

Markets work well—not perfectly, but well—because they are not engineered from the top-down. They are chaotic. They encourage experimentation. They allow mistakes. In markets, even the mighty can fall.

~David Strom "Is the Free Market Perfect?"

More On Medal Inequality at the 2008 Olympics

The chart above shows income shares from 2006 IRS data (most recent data available), and the most recent medal shares from the 2008 Olympics (as of 9 a.m. today). Notice the amazingly similar outcome between shares of adjusted gross income earned by the top 5, 10 and 25% of Americans, and the shares of the 906 Olympic medals in 2008 earned by the top 5, 10 and 15% of medal-earning countries.

The "income inequality" that seems to disturb so many people is almost exactly replicated in "Olympic medal inequality," and yet seems to cause no objections or concerns about inequality, and generates no calls for "medal taxes" or "medal redistribution," etc.

The diagram below shows that the distribution of 2008 Olympic medals, like the distribution of income, clearly follows a standard Pareto distribution, and not a normal distribution.

In a Pareto distribution, there is an "emphasis on the extreme," in contrast to an "emphasis on the average," in a normal distribution (see chart above).

Is it possible that underlying the widespread objections to income inequality is the assumption that income should be distributed normally, and not according to a Pareto distribution? After all, an income distribution with an "emphasis on the average" sounds a lot better (at least to many leftists and redistributionists) than a distribution with an "emphasis on the extreme." Perhaps if more people could understand that Pareto-distributed outcomes are often the norm in both nature (see
examples here like sizes of sand particle, and sizes of meteorites) and in competitive sports like the Olympics (and see NBA example here), we would have a better understanding that it is natural that income will always be Pareto-distributed. Let's just accept it, and not spend time worrying about income inequality, just like we accept Olympic medal inequality.

And perhaps all of the redistributionist tax policies and progressive income tax schedules are really an attempt to take a naturally occurring Pareto-distributed outcome for income, and artificially impose a normal distribution.

Imagine for a moment how "Olympic medal taxes," and especially a "progressive Olympic medal tax," with subsequent "medal redistribution" at the Final Ceremony to achieve a more "normal distribution of medals" would quickly destroy the competitive spirit of the Olympics and reduce the overall level of athletic performance, especially on the "extreme," world-class athletes at the top like Michael Phelps. If the final ceremony at the Olympics included imposing a medal tax on an "extreme athlete" like Michael Phelps, and redistributing some of his gold medals to countries that earned "too few" medals by some consensus, you can imagine what might happen - he might not show up at the next Olympics, or certainly wouldn't have the same incentive to train as hard.

We might get the same outcome when we attempt to tax the top, or "extreme income earners" - they'll stop working or won't have the same incentive to work as hard.

Bottom Line: The Olympic medal winners are respected and admired, despite the inequality of the Pareto-distributed outcome in those competitions, with an "emphasis on the extreme" athlete. Instead of always vilifying them, perhaps we should pay the same respect to the Pareto-distributed winners of our free enterprise system - the successful, world-class, "extreme" workers at the top of our economic ladder.

Friday, August 22, 2008

Intrade Predicts Biden As VP

Last trade: 71% odds for Biden.

Annual M2 Growth: It's Nothing Like the 1970s

The chart above shows annual M2 growth rates (monthly data here) based on the average M2 level in each year, except for 2008, which shows the growth rate of M2 from July 2007 to July 2008.

Notice that in the inflationary 1970s period, there were 5 years of M2 growth above 12% (1971, 1972, 1976, 1977 and 1983), 12 consecutive years of above average M2 growth between 1975 and 1986, above average growth in 15 out of 16 years between 1971 and 1986. More recently, we've had five years of slightly above-average M2 growth between 1998 and 2003, and below average M2 growth for the last 5 years.

Bottom Line: Today's inflationary environment is nothing like the 1970s.

The Flower Cartel in Louisiana, Vet Cartel in MD

1. In Louisiana it is illegal to sell and arrange flowers without permission from the government. Aspiring florists must pass a subjective licensing exam that is graded by existing florists, who have a direct incentive to keep new competitors from entering the market. Thus the failure rate is higher than that of the Louisiana bar, which results in hundreds of well-qualified would-be entrepreneurs being denied the ability to work in their chosen profession.

No one can honestly believe that Louisiana’s flower cartel is necessary to protect consumers from renegade flower sellers. Rather, it is a classic case of protecting favored groups at the expense of consumers and entry-level entrepreneurs.

2. Mercedes Clemens was threatened with thousands of dollars in fines and criminal prosecution unless she stopped . . . massaging horses. In Maryland two powerful groups decided to monopolize the growing field of animal massage by requiring all practitioners to spend four years in veterinary school -- where massage is not even taught.

Suggesting that only people with veterinary degrees are capable of massaging animals is like suggesting that only people with medical degrees are capable of massaging humans. Preventing Clemens -- who is a licensed human-massage therapist and certified in equine massage -- from working in her chosen trade has absolutely nothing to do with consumer or animal safety and everything to do with the financial interests of the veterinary cartel.

Read more here.

Milton Friedman, in his book Capitalism and Freedom (Occupational Licensure chapter), wrote "Licensure therefore frequently establishes essentially the medieval guild kind of regulation in which the state assigns power to the members of the profession. In practice, the considerations taken into account in determining who shall get a license often involve matters that, so far as a layman can see, have no relation whatsoever to professional competence."

CD Milestone: 3,000 Posts

CD Post #1 was made on September 20, 2006 (702 days ago), and this is CD Post #3,000. That works out to 4.3 CD posts per day, on average. Figure about one hour per post on average to find something interesting, create and write a post, often with graphs, charts, or tables, which requires finding and downloading data, etc., and that's 3,000 hours of bloggin'!

Thursday, August 21, 2008

M1, M2, Real GDP and CPI Growth: 1970s vs. Now

The chart above shows a comparison of the percentage growth in M1, M2, Real GDP and CPI during two ten-year periods: July 1972 to July 1982, and the most recent 10-year period from July 1998 to July 2008 for M1, M2 and CPI; and 1972:QII to 1982:QII and 1998:QI to 2008:QII for real GDP.

What the data show is that:

1. The percentage growth in M1 was about 3X greater in the 1972-82 period than the 1998-2008 period.

2. The percentage growth in M2 was almost twice as high in the earlier 10-year period.

3. Real GDP growth was roughly the same during both 10-year periods, but slighly higher in the most recent 10-year period.

4. The percentage increase in prices during the 1972-1982 period (132.7%) was almost 4X greater than the increase during the last ten-years (34.8%).

Despite the burst of monetary expansion in 2001 when M2 grew slightly above 10% for three months (calculated from the same month in the previous year) in response to the recession, that monetary expansion 7 years ago wasn't anything like the monetary expansion that took place between 1975 and 1982, when M2 growth exceeded 10% in 45 different months, and exceeded 8% in 115 months between the early 1970s and 1983.

Bottom Line: We're not anywhere close to the monetary expansion and subsequent inflationary environment of the 1970s, and since it's been 7 years since the very moderate monetary expansion of 2001, we won't get there anytime soon.

The New CPI is Better, More Precise Than Old CPI

In a comment Thomas Blair said: "The way CPI is calculated has changed, which makes comparisons between eras or even years irrelevant."

An anonymous commenter writes "Your reasoning is so specious. Firstly you have to recognize that inflation (CPI) is measured differently from the 70s so you're comparing apples to oranges."

The BLS provides CPI data here going back to 1978 using the new CPI-U-RS, which allows for a comparison of inflation calculated in the late 1970s using the old CPI (CPI-U) to inflation calculated using the new CPI (CPI-U-RS), see top chart above for a comparison of the two different CPIs between 1977 and 1998 and bottom chart for a comparison of inflation rates from December 1978 to December 2007 (blue line is inflation using the old CPI and red line is inflation using the new CPI).

Yes, it is true that the old CPI overstated inflation (see top chart above) and it is true that inflation was overstated in some years using the old CPI (see 1979, 1980 and 1981 in bottom chart, when the blue line is above the red line), but then actually understated inflation in the 1983-1984 period (blue line is below red line), and was about the same using either method for most of 1982 and in 1985-1986.

Bottom Line: The old CPI slightly overstated inflation, and revisions were made to correct for the slight upward bias and make the new CPI a more accurate measure of inflation. Some reports seem to suggest that the new CPI creates a downward bias for the way inflation is now reported, and that it would be higher today if it was calculated using the old, upwardly biased method. I think it's better to think of today's CPI and inflation rates as being better, more precise and more accurate measures than those in the past, and any adjustments should be made to previous years' inflation, not today's rates.

Further, I don't think the differences in the old CPI-U and the new CPI-U-RS are meaningful in any way that contributes to the discussion about comparing today's inflation to the 1970s inflation. It's far from a specious, irrelevant, apple to orange comparison, it's much more like comparing one variety of apples to a newer, better variety of apple. Inflation in the late 1970s was at double-digit level by either CPI, and inflation today, measured more accurately than ever before, is nowwhere near double-digits.

Does Inflation from the Old vs. New CPI Matter? NO

Some of the recent CD discussion has focused on the possible difficulties of comparing today's inflation rates to the inflationary 1970s period because of the changes that have been made to the way the BLS calculates the CPI. There was also some discussion about the timing of the changes to the CPI. Thanks to CD reader Spencer for the suggestion to check the BLS website for a comparison of the CPI-U-RS series (new) vs. the CPI-U series (old).

I was able to locate the BLS study "Consumer Price Index Research Series: Using Current Methods, 1978-1998," which finds that "the measured rate of inflation would have been lower since 1978 if methods currently used in calculating the Consumer Price Index for All Urban Consumers had been in place from that year to the present."

In other words, the old BLS method of calculating the CPI-U overstated inflation (which has been taught in Principles of Macro for decades), and various adjustments (14 in all, see Exhibit 1 in the study) made between 1983 ("changed homeowners’ component from cost of purchase to to value of rental services) and 1999 (the last 5 in 1998-1999 were maybe in response to the 1996
Boskin Commission Report?) attempted to make the CPI/inflation more accurate.

How big were the changes between the old CPI-U and the new CPI-U-RS after the 14 changes? Table 2 above tells the story:

1. Although most changes to the CPI lowered inflation rates under the revisions, some of the changes to the CPI actually increased inflation rates (see the row above titled "Effects of all other changes" that adjusted for the fact that the old series "understated" inflation in some ways).

2. Although the net effects in each period above were negative, meaning that inflation was overstated under the old methodology, the differences in inflation rates were relatively minor. For example, inflation from 1978 to 1982 averaged 9.46% annually under the old method and 8.46% under the new method, suggesting that the old method overstated inflation by about 1% per year.

For the other periods, the annual differences between old and new CPI inflation were relatively lower: -0.13% from 1983-1986; -0.35% from 1987-1997; and -0.23% in 1998, or an average of about 1/4 of 1% per year!

Bottom Line: With reasonable accuracy, we can fairly compare today's inflation rates calculated from the CPI-U-RS used by the BLS today to the inflation rates of the 1970s that used the old CPI-U, with a possible difference annually of only about 1% at the most. In other words, if you subtract 1% from the double-digit 10-14% annual core inflation in the mid- and late-1970s, you still get inflation way, way higher than the 1.5%-2.5% range of core inflation over the last ten years.

My position remains that unless, and until, we have core inflation approaching double-digits, inflation is not a problem. And I don't think there is near enough of a difference between the old CPI-U and the new CPI-U-RS to have that issue make any significant contribution to the inflation discussion.

What Do US, Jamaica, Zimbabwe Have in Common?

Real Olympic Medal Count shows Olympic medals: a) per country (US is #1), b) per million inhabitants (Jamaica is #1), and c) per million dollars of GDP (Zimbabwe is #1).

Update: Results will change as new medals are awarded, results above were valid this morning about 9 a.m. ET, but have already changed - Jamaica is now ahead of Zimbabwe for medals per million dollars of GDP.

Wednesday, August 20, 2008

It's Almost Like a 2% Inflation Target Since 1993

The chart above shows annual inflation since 1973, calculated from the BEA's monthly personal consumption expenditures price index, less food and energy (data here), showing 15 years of extremely stable inflation at around 2%. In fact, it's almost as if the Fed has been following a 2% inflation target since 1993 (based on this price index), and provides more evidence that core inflation is low and stable, and nothing like the inflationary 1970s.

Update: A few people have pointed out that CPI inflation (both core and overall) is calculated differently today by the BLS than in the 1970s, distorting a comparison of today's inflation levels to those of that period. But core inflation calculated from the BEA's "personal consumption price index, less food and energy" (see chart above and the post below) tells exactly the same story as the BLS's core inflation: low and stable for the last ten years, and nothing close to the 1970s.

Q: Did both the BLS and BEA change price index calculations, distorting a comparison to the 1970s inflation by either measure?

More on Brian Wesbury's Concern About Inflation

Brian Wesbury asks: "How can monetary base growth slow for seven straight years without pushing inflation down? If you agree with Friedman, it should have caused a decline in inflation, but every measure of inflation is higher, not lower."

MP: What about annual core inflation? It's been flat for 10 years now at about 2%, see chart above, is lower now than it was several years ago, and less than 50% of the long-term 4.58%average.

As I suggested before on several posts, unless and until core inflation rises like it did in the 1970s (see chart above), inflation can't be "a clear and present danger," as Brian suggests.

Birth Rate 3X Higher for Women Receiving Welfare

The 1996 Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) gave states greater flexibility to formulate and implement initiatives to reduce welfare dependency and encourage employment for members of low-income families with children. For the nation, in 2006, 10 years after passage of the Act, the birth rate for women 15 to 50 years old receiving public assistance income in the last 12 months was 155 births per 1,000 women, about three times the rate for women not receiving public assistance (53 births per 1,000 women).

From the August 2008 Census Bureau study "Fertility of American Women: 2006."

HT: Ben Cunningham

Vehicle Discrimination: Old School vs. New School

Old School: Discrimination against foreign-made vehicles, in Michigan.
New School: Discrimination in favor of the foreign-made Lexus, in Florida.

Tuesday, August 19, 2008

Amateurs Often Outperform Professional "Experts"

When amateurs outperform professionals, there is something wrong with that profession. Two examples:

1. If ordinary people, with no medical training, could perform surgery in their kitchens with steak knives, and get results that were better than those of surgeons in hospital operating rooms, the whole medical profession would be discredited.

Yet it is common for ordinary parents, with no training in education, to homeschool their children and consistently produce better academic results than those of children educated by teachers with Master's degrees and in schools spending upwards of $10,000 a year per student-- which is to say, more than a million dollars to educate ten kids from K through 12.

Nevertheless, we continue to take seriously the pretensions of educators who fail to educate, but who put on airs of having "professional" expertise beyond the understanding of mere parents.

2. Central planners in the days of the Soviet Union had to set over 24 million prices. Nobody is capable of setting and changing 24 million prices in a way that will direct resources and output in an efficient manner.

For that, each of the 24 million prices would have to be weighed and set against each of the other 24 million prices. in order to provide incentives for resources to go where they were most in demand by producers and output to go where it was most in demand by consumers.

In a market economy, however, nobody has to take on such an impossible task. Each producer and each consumer need only be concerned with the relatively few prices relevant to their own decisions, with coordination of the economy being left to supply and demand.

In short, amateurs were able to outperform professionals in the economy because the amateurs did not take on tasks beyond the capability of any human being or any manageable group of human beings.

~Thomas Sowell "Amateurs Outdoing Professionals"

Mindset List for the College Class of 2012

This month, almost 2 million first-year students will head off to college campuses around the country. Most of them will be about 18 years old, born in 1990. Each August for the past 11 years, Beloit College in Beloit, Wis., has released the Beloit College Mindset List. It provides a look at the cultural touchstones that shape the lives of students entering college.

The class of 2012 has grown up in an era where computers and rapid communication are the norm, and colleges no longer trumpet the fact that residence halls are “wired” and equipped with the latest hardware. These students will hardly recognize the availability of telephones in their rooms since they have seldom utilized landlines during their adolescence. They will continue to live on their cell phones and communicate via texting. Roommates, few of whom have ever shared a bedroom, have already checked out each other on Facebook where they have shared their most personal thoughts with the whole world.

This year's Mindset List
for the Class of 2012 has 60 items, including the following:

Gas stations have never fixed flats, but most serve cappuccino.

Electronic filing of tax returns has always been an option.

WWW has never stood for World Wide Wrestling.

IBM has never made typewriters.

There have always been charter schools.

Full list here (and previous years as well).

Inflation Is a Clear and Present Danger? No Way

Data here for M2.

Data here for Base.

Brian Wesbury writes in today's WSJ article, "Inflation Is a Clear and Present Danger":

The most painful and frustrating economic policy blunder of the past 50 years was the Great Inflation of the 1970s. Painful, because it was the catalyst for three damaging recessions (1973-75, 1980, 1981-82), all the while eroding living standards and seriously undermining confidence in America.

It was also deeply frustrating. Despite the teaching of Milton Friedman -- which clearly explained that inflation was caused by too much money chasing too few goods -- a combination of bad economic models, denial and political expediency allowed it to happen.

Unfortunately, the lessons seem to be fading. Today, the U.S. (and through it the world) faces its greatest threat from inflation in 30 years. And as in the past, this threat is being met with denial and political expediency.

MP: Brian invokes Milton Friedman's monetarism to explain the inflationary 1970s, but then fails to apply it accurately to today's monetary aggregates (M2 and the monetary base, shown in the above charts), in my opinion.

Exhibit A: During the inflationary 1970s and early 1980s, M2 was growing at double-digit annual rates for much of the time, especially in the three periods circled in red in the top chart above during that period. There was a brief spike of 10% annual M2 growth during the 2001 recession and around 9-11, but M2 has been growing fairly moderately recently, in the 4-7% range for the last 5 years, suggesting that money growth is nowwhere near the double-digit levels required to replicate 1970s-era inflation.

Exhibit B: The monetary base, the "raw ingredient" of money supply and the one monetary aggregate that the Fed can control directly through its open market operations, has been on a contractionary trend since early 2002, almost 7 years ago. From 10% annual growth in early 2002, the growth of monetary base money has declined steadily, and has been around 2% since early 2007. In contrast, the monetary base was growing at around 10-12% annually in the inflationary 1970s.

Bottom Line: Invoking Friedman's monetarist theory (summarized as "inflation is always and everywhere a monetary phenomenon," and "inflation is caused by too much money chasing too few goods") clearly suggests to me that there just hasn't been large enough, recent enough increases in either: a) M2 or b) the monetary base, to fuel a return to the levels of inflation in the 1970s.

In other words, if inflation is a monetary phenomenon, where's the recent money growth that will cause it? It's just not there.

Markets In Everything: Outsourcing Company Blogs

There’s no question entrepreneurs are strapped for time and can benefit by outsourcing things like payroll or administrative work. But, outsourcing your company blog?

Some technology consultants are pitching “blog management” services to companies they say want the benefits of blogging but are too busy to manage a blog themselves. They do everything from writing pithy, thought-provoking posts about a company or industry to managing comments and getting a blog better play on search engines.

Monday, August 18, 2008

Markets In Everything: Australian Mayor Pleads For Beauty-Disadvantaged Women


HT: Clover Aguayo

M2 Growth Suggests 1970s Inflation Won't Return

There has been a lot of concern lately about U.S. inflation, and a lot of comparisons to the inflationary 1970s, but here's why that concern might be overblown:

The chart above shows the annual growth in money supply (M2) from 1969 to 2008, and it is easy to see that money growth in the 1970s was much different than today. Notice the three periods in the: a) early 1970s, b) mid-1970s and c) early 1980s of sustained, double-digit money growth (circled in red). Since the early 1980s, money supply growth has been in single digits, except for a brief, double-digit spike around 9-11, and has been growing at around 4-7% for the last 3 years.

To the extent that inflation is a monetary phenomenon, and to the extent that inflation is related to the growth of M2, inflation can't and won't return to the levels of the 1970s - there just hasn't been enough double-digit money growth to make it happen.

Zimbabwe Prices Now Quoted in Liters of Gasoline

Reeling from the highest inflation rate in the world, barred by the government from using U.S. dollars for purchases, Zimbabweans turned to a new money source Wednesday: gasoline coupons.

Private financial institutions say Zimbabwe's inflation rate was about 12.5 million percent in May and estimate that it has probably climbed to 50 million percent this month.

Embattled restaurants were offering discounts of up to 80% for either U.S. dollars or local cash because of shortages of both. They also added a penalty fee of up to 80% on top of the bill for those who paid by check, estimating price rises in the five days it takes a check to clear.

Infant Mortality: Measurements Not Consistent

In international comparisons of infant mortality, the U.S. usually ranks behind most other countries, many of whom have socialized medicine (see chart above, click to enlarge). But do countries around the world measure infant mortality consisently and uniformly? Apparently not, see explanation below from a doctor:

The main factors affecting early infant survival are birth weight and prematurity. The way that these factors are reported — and how such babies are treated statistically — tells a different story than what the numbers reveal.

Low birth weight infants are not counted against the “live birth” statistics for many countries reporting low infant mortality rates.

According to the way statistics are calculated in Canada, Germany, and Austria, a premature baby weighing less than 500 kg is not considered a living child.

But in the U.S., such very low birth weight babies are considered live births. The mortality rate of such babies — considered “unsalvageable” outside of the U.S. and therefore never alive — is extraordinarily high; up to 869 per 1,000 in the first month of life alone. This skews U.S. infant mortality statistics.

Norway boasts one of the lowest infant mortality rates in the world. But when the main determinant of mortality — weight at birth — is factored in, Norway has no better survival rates than the United States.

Read more here.

Thanks to Craig Newmark for the pointer.