


Good Morning!!


Quoted at Think Progress:














Like the Aaron Swartz prosecution, for example?





The bill propopsed by CA Sen. Diane Feinstein































Thanks to Dakinikat for alerting me to this story.




Sen. Dan Inouye reads with children

Sen. Dan Inouye reads with children

Good Morning!!















Read more at the link.




















Dr. Dakinikat would probably agree with that.






Misery Index hits Reagan Years High

One of the measurements of economic well-being that got some play in the Carter/Reagan years was the Misery Index.  It basically measures the impact of price increases and unemployment on people. There’s some new information coming out of this index. It seems it’s as bad as it was in 1983.


We’ve changed a lot of the way we measure inflation and unemployment since then partially because we’ve tried to focus more narrowly on measures of both inflation and unemployment but also because the measures were consistently high during the 1970s and 1980s.  The inflation rate as stated by the CPI was frequently overstated because of its use of a base market basket that didn’t always reflect the introduction of new goods and services, the places people shop, and the switching or substitution behavior of people.  It had a fix budget apportionment that was used to weight prices and those weights were frequently stale.

The changes in the way the unemployment rate was measured had to do with the shift away from  reliance on the traditional 40 hour work week job by both businesses and job seekers.  The unemployment rate was changed so that you only had to work at least one hour a week at paid work to be excluded.   This is why economists look at a bunch of different statistics to get a handle on the job market.  People that don’t want to work part time but are stuck there are now considered underemployed and are tracked separately.  If you visit Shadow Government Statistics you can see comparisons of the old and the new way of doing things.

Some of the most salient points are that long-term, discouraged workers were taken out of the unemployment statistic in 1994.  SGS calls this being “defined out of existence”.  Again, the statistic is still being tracked so you have to go look for it at the BLS.  I will say that economics reporters have been doing a better job of providing more than just the unemployment rate in their analysis.  You  have to look at the underemployed and the discouraged worker to get a good idea of what’s going on.  We’ve talked about the changes in the make up of the labor force around here because it’s one of the reasons that you’re seeing the unemployment rate go up and down recently.  When discouraged workers re-enter the labor force, the new unemployment rate will go up because the number of people in the labor force–the denominator in the statistic–goes up.

I actually have less problems with the changes in the inflation right but then again, the problem is that people need to realize that the definitions of the measures have changed and narrowed so it is important to look at more than just one rate.  This does explain, however, why people whose budgets are being impacted by food and gas prices  aren’t seeing the pain in the new inflation rates.  We’ve talked about this before also.

So, what does this mean?  I think it’s significant that the Misery Index is basically at similar levels to the last time the country was expressing discontent with the economy because it gives us a historical perspective. Ronald Reagan probably would not have won a second term if the Federal Reserve didn’t start significantly loosing monetary policy during that same time which brought down the inflation included in the Misery Index.The first Reagan term was the last time the economy was this bad.  Changes in monetary policy were the real reason for the worst of the Carter Recession and much of the eventual Reagan Recovery although some of the Reagan Recovery was due to the incredible increase in government purchases which are typical Keynesian economic aggregate demand stimulation policies.   Paul Volcker and the Fed brought on a recession by increasing interest rates in an attempt to reign in inflation and inflation expectations.  They did so. It happened with some extreme economic pain and that was what the Misery Index was supposed to reflect at the time.  The drivers for the misery right now are different.  We have record loose monetary policy.  The incredible shock to the economy of the financial crisis is the root of our issues now.

A First: Fed Chair Presser

I’m watching Bernanke do a presser.  Wow.   (It’s a live blog … updates and explanations will be provided.)  I can’t believe the press sent political reporters to this.  What an amazing number of really rotten questions!!!

Some key points from the morning’s congressional testimony.

On Unemployment: We do see some grounds for optimism, including a decline to the unemployment rate, declines in the new unemployment insurance claims and improvements in firms’ reported hiring plans. But, even so, it could take quite a while for unemployment to come down to desired levels at current expected growth rates and, in particular, the FOMC projects unemployment still to be in the range of seven and-a-half to eight percent by the end of 2012. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.

On Inflation: “I want to go back over this whole line of interventions, including today quantitative easing. And there have been a series of criticisms that have been made and negative predictions, and my view is that none of them have come true. And I think it is important for us to — to note that. And — and I know you’ve talked about this. I know you mentioned in your statement some of the points. But we were told, for instance, that it was going to be very inflationary. And I know it is your view as of now, and I think supported by the facts, that inflation is not now a problem, and we do not see inflation, certainly not one caused by any of what’s been done going forward. We were told this was going to be extraordinarily expensive, that it was going to cost a lot of money. I believe the answer is that on many of these things the federal government has made a profit by the — by the intervention.”

On Crude Oil: “The relative price of oil, again, is primarily due to global supply and demand. I think it’s important to note that the United States is consuming less oil today, importing less oil and producing more oil than it did before the crisis. That all the increase in demand from outside the United States, particularly in the emerging markets. And so there’s limited amount of what the Fed can do about oil prices alone. Again though, we want to be very sure that it doesn’t feed into overall inflation. We will make sure that doesn’t happen.”

On the Dollar: If the dollar was no longer reserve currency there would – it would on the margin probably mean that we would have to pay highest interest rates to finance the federal debt, and that would be a negative obviously. On other other hand, we might not suffer some of the capital inflows that contributed to the boom and the bust in the recent crisis. But again, I know there was also a countervailing argument in the Journal this morning as well. And I – I just don’t see at this point that there is a major shift away from the dollar.

On the Consumer: We understand the visibility of gas prices and food prices and we want to be sure that people’s expectations aren’t adversely affected. I think it’s important to note that, according for example, to the Michigan survey of consumers, that long term inflation expectations have been basically flat. I mean, they haven’t moved, notwithstanding ups and downs in gas prices, for example.

On the U.S. Fiscal Situation: While I understand these are difficult decisions and we certainly can’t solve it all in the current fiscal year, I do think we need to look forward and I know the House Budget Committee and others will be setting up a 10 year proposal. It’s very important and would be very constructive for Congress to lay out a plan that would be credible that will help bring us to sustainability over the next few years. In particular, one rule of thumb is cutting enough that the ratio of the debt to GDP stops rising. Because currently it’s rising relatively quickly. If we could stabilize that, I think that would do a lot to increase confidence in our government and in our fiscal policies.

Obviously, Bernanke needs to drill baby drill to get rid of inflation … so simple!!!

or this:

ezrakleinEzra Klein
Bottom line: Congress is embracing austerity. The Fed is going to start tapping the brakes. Sucks to be you, unemployed people. #fedpresser

Background information on the Fed Presser from NYT and David Leonhardt.

On Wednesday at 2:15 p.m., Ben Bernanke will do something that previous Federal Reserve chairmen considered a terrible idea. He will hold a news conference.

Mr. Bernanke spent much of his academic career arguing that the Fed should be less opaque, and, as chairman, he has put his ideas into action. Now it’s time for those of us in the media to hold up our end of bargain. In the spirit of democratic accountability, we should ask hard questions — and we shouldn’t let him get away with the evasions and half-answers that members of Congress too often allow Fed chairmen during their appearances on Capitol Hill.

One question more than any than other is crying out for an answer: Why has Mr. Bernanke decided to accept widespread unemployment for years on end, even though he believes he has the power to reduce it?

Here’s Paul Krugman’s take on the presser:  Bernanke Wimps Out. He’s got the same questions I do about the inflation v. unemployment .  (See my comments in the thread below.)

So Bernanke did get asked why, given low inflation and high unemployment, the Fed isn’t doing more. And his answer was disheartening.

As far as I can tell, his analytical framework isn’t too different from mine. The inflation rate to worry about is some underlying, inertial rate rather than the headline rate; the Fed likes the core personal consumer expenditures deflator; and this rate has actually been running below target, indicating that inflation isn’t a concern …

Food and Gas Prices are on the Rise

The labor department released price indexes that show that how tame inflation has been in every area except two essential things:  food and oil.  Most consumers do not follow the Wholesale Price Index.  This is because it takes awhile for price increases in wholesale items to translate into inflation at the retail level.  It doesn’t  translate into a one to one increase either so it’s not a precise indicator of future inflation.  Economists are interested in the wholesale index because its usually a precursor to future general price movement.  The index was up 1.6 percent with most of the increase attributable to food or energy.  These are price increases considered outside ‘core’ inflation.  I wanted to explain some differences in inflation measures to you so you know how to understand this information.

Economists generally track the GDP deflator and the core PCE.  The GDP deflator is the broadest of all the price indexes that measure inflation (price increases) or deflation (price decreases).  It’s a weighted index that relies on the buying habits of current year/quarter/month GDP to weight the various contributions of price changes of goods and services.  Thing bought more frequently or with larger prices have a larger weight in the index.  The Consumer Price Index or CPI relies on a fixed basket or typical budget to weight the contributions of price changes to the selected group of consumer items in that index.  The Personal Consumption Expenditure index or PCE is similar to the CPI in that it measures just retail prices like the CPI but it uses the average prices increases using weights on each price from the current and preceding periods.  It does not rely on the fixed basket which can be seen as a typical household budget.   This index removes some of the problems inherent with using the CPI that relies on its fixed basket.   The most notable problem is the substitution impact which means people move their budgets around when prices change.  They substitute one item for another.  This switch isn’t captured when the index relies on a fixed basket that doesn’t change very often.

The importance of the ‘core’ inflation measures cannot be understated here. Core indexes don’t include the most volatile items. Food and energy prices are typically removed from core indexes because they are subject to ‘shocks’ from bad weather and supply disruptions.  We’re seeing a large number of disruptions right now from both weather and the political unrest in oil producing countries.  Future inflation at the retail level will show up first in wholesale prices so the Wholesale Price index is seen as a predictor of future, overall, inflation.  What we’re seeing now is the impact of price instability from food and energy which are not part of  core inflation  but are highly essential to both businesses and households.  Energy is obviously important to developed economies.  Food is an essential expenditure in developing nations both as an important and export.







So, what does this mean besides higher grocery bills and fill ups at the gas station?  Well, first it means that households will have to rearrange their budgets so more money will go to these things than other things.  But, there’s other news that could offset some of this.  Oil prices are actually falling on the news of Japan’s nuclear problems.




There are several other things in this report. First, most of the food price increases appear to be due to really bad weather in several countries.  The other more worrying contributor was the increased demand by ethanol producers for crops.  This is due to increased subsidies.  It seems really weird that we’re willing to cause hunger just for some energy production but that appears to be a building, long term issue.  Second, the cost of clothing appears to be on the increase.  This may be due to the increased costs of transportation coming with the oil or it might be an indication of future inflation.  Prices rose 1 percent for clothing.  That was the most in 21 years. Costs also increased for cars, jewelry, and consumer plastics.  Many of these items also use petroleum products as well as require transportation.  That’s a possible explanation for the price change so that would be more temporary than permanent.   So, while its cheaper to buy electronics and such, it’s much more expensive to eat and drive around for the time being.  Too bad we can’t eat our MP3 players.

I’m sure the FED is watching this since many gold bugs will see this as proof that the QE2 is ratcheting up the money supply and creating inflation.  The problem with this explanation is that the majority of these price increases can be attributable to fundamentals in markets that are typically volatile anyway.  At this point, I still wouldn’t worry about inflation if I were in charge of policy.  I’m still focused on the horrible unemployment rate and the recessionary pressures that decreased state and federal spending will bring.  My best guess is that as folks adjust their budgets for food and gas price increases that we’ll see some pretty good sales on other things.  You’ll feel these price increases more  if you’re poorer and your budget is mostly food and gas expenditures.  Otherwise, you’ll see offsets in other expenditures so it will just shift your expenditures around.

If the Turkey didn’t put you to sleep …

Economics doesn’t take holidays.  It’s probably why we economists are so grim.  Just in case you need a good nap, here’s some of my pointy head friends with bow ties discussing things economic.  I was going to try to spare you out of holiday cheer, but Mark Thoma reeled me in and now I must share.

I’ve mentioned recently how absolutely baffled I am by the number of “conservative”  (i.e. radical) Republicans who keep buying into economic fallacies that even conservative (i.e. authentically conservative) economists can’t support.  I mentioned Nobel Prize winning and father of the Monetarists Milton Friedman’s huge study on the Great Depression.  His thesis was that very poor Fed policy made the Great Depression.  In 2002, Bernake even agreed and apologized to him for the FED’s errant ways. Friedman was a consummate free marketer and wrote pop books and pop Newsweek columns during his heyday as a conservative icon. I’m sure he would not be suffering these fools were he alive today.

Thoma points to two recent columns by two former Reagan Team economists.  One article is from Martin Feldstein who is probably the closest thing remaining to Milton Friedman in terms of conservative, free market, economic thought.  The other is from Bruce Bartlett who was one of the fathers of Supply Side economics during the Reagan years but has since repented.  He’s really adapted the Friedman statement “We’re all Keynesians now”.  Both economists are intent on stopping this current batch of policy nincompoops from recreating The Great Depression.

The first Thoma thread references Feldstein who writes on the QE2 at Project Syndicate.  Feldstein was Chair of Reagan’s Council of Economic Advisors and was President of the NBER.  You  may recall that NBER dates business cycles for the country.  I want to hit his bottom line first so those of you that are using this for nap material can see that it’s ludicrous to think the QE2 is wild-eyed and out-there policy experimentation.

In short, the Fed’s policy of quantitative easing is likely to accelerate the rise of the renminbi – an outcome that is in China’s interest no less than it is in America’s. But don’t expect US officials to proclaim that goal openly, or Chinese officials to express their gratitude.

China is experiencing inflation.  We are experiencing deflation.  The reason this is good for both countries is that it will offset each of these pressures.  Feldstein explains the goal of the QE2 in terms of US policy first.  I’ll cover that quote.  You’ll need to go read the explanation for the China side of the equation too.

The United States Federal Reserve’s policy of “quantitative easing” is reducing the value of the dollar relative to other currencies that have floating exchange rates. But what does the new Fed policy mean for one of the most important exchange rates of all – that of the renminbi relative to the dollar and to other currencies?

The effect of quantitative easing on exchange rates between the dollar and the floating-rate currencies is a predictable result of the Fed’s plan to increase the supply of dollars. The rise in the volume of dollars is causing the value of each dollar to fall relative to these currencies, whose volume has remained constant or risen more slowly.

The Fed’s goal may be to stimulate domestic activity in the US and to reduce the risk of deflation. But, intended or not, the increased supply of dollars also affects the international value of the dollar. American investors who sell bonds to the Fed will want to diversify the dollars that they receive from it. One form of that diversification is to buy foreign bonds and stocks, driving up the value of those currencies.

The result of this move will be to make our exports more competitive abroad and to make every one else’s exports–including those countries that have pegged their currencies to the dollar in an unfair manner–less competitive. We are simply turning the tables on the beggar-thy-neighbor growth policy China and others have adopted. The Fed is doing this because there is no will on the part of domestic policy makers to stimulate the demand in our country for consumers or government.  There are 4 major parts of GDP.  If fiscal policy doesn’t stimulate Consumption or Government demand, then there remain Investment and Exports.  Investment is the least reliable form of demand and is rather small compared to the rest of the economy.  The Fed is trying to tackle the  aggregate demand shortage as best it can in response to the laws that compel it to act when unemployment is high.

Which brings me to the Bruce Bartlett thread.  Bartlett has a piece today up at The Fiscal Times called ‘Starve the Beast: Just Bull, not Good Economics’.  As some one who is currently suffering from a governor who has selectively adopted the policy as a path to the White House, I personally can tell you that it is very much Bull and causes a lot of undue suffering.  It is ideology chosen over fact, logic, and above all, compassion.  Bartlett goes straight to the heart of Voodoo Economics by using data to show that Dubya  Bush’s embrace of  of tax cuts in his first term as president did nothing to further economic growth and did everything to drive us in to unnecessary deficit spending.

It ought to be obvious from the experience of the George W. Bush administration that cutting taxes has no effect whatsoever even on restraining spending, let alone actually bringing it down. Just to remind people, Bush inherited a budget surplus of 1.3 percent of the gross domestic product from Bill Clinton in fiscal year 2001. The previous year, revenues had been 20.6 percent of GDP, spending had been 18.2 percent, and there had been a budget surplus of 2.4 percent.



There is nothing better than an addict who has fought their demons and comes out the other side to explain exactly why the demon should die.  Bartlett succinctly explains why the Republicans continue to support the ideology and the drivel despite evidence that everything they believe is quite false.

Nor was Bush’s budgetary profligacy limited to programs that could be justified, however loosely, on national security grounds. As I detailed last week, he and a Republican Congress created a massive new entitlement program, Medicare Part D, to buy the votes of seniors and buy themselves reelection in 2004. Among those voting for this monstrosity were many Republicans still in Congress today who are unjustly considered to be staunch fiscal conservatives, including incoming Speaker of the House John Boehner, House Majority Leader Eric Cantor, and House Budget Committee chairman Paul Ryan.


Both of these men have written tractable–albeit, tough–reads on policy decisions that people really need to understand.  I know there is a tendency this time of year to wallow in football games, shopping binges, and short term feel good embrace of childhood memories, but really, there is a lame duck congress in session and an incoming group of Congressional morons with a President in office who wants to play Let’s Make a Deal with them.

If you can awake from tryptophan dreams long enough to read these two articles thoroughly, please do so.  We can’t afford any more Voodoo policy mistakes.

Inflation: Not a Problem

Core Inflation: the Japanese Stagnation compared to the U.S. Great Recession via the SF Fed and Mary Daly.

This is one of the posts that I want to use to debunk that stupid cartoon that I keep seeing on Facebook.   That cartoon also brought on many comments that come under the classification of  ‘fallacy’. A fallacy is a type of error in reasoning. I have to identify the common ones we see when folks discuss economics when teaching economics.  The fallacy associated with comments I see about inflation recently come under the heading of  unrepresentative samples.  People make hasty generalizations that because one thing they experience is true, they can generalize that experience to everything.

These inflation fallacies pretty much fall into line.  It’s like, I went to the grocery store, I’ve been keeping track  of what I’ve been paying for meat and that’s going up.  Therefore, inflation must be a problem.   (The other one I’ve been hearing is about rising taxes which I’ll debunk in another post. Let me stick to this one first.)  So, first, inflation is not just the increase in one or two prices, it’s the increase in the average price levels in a country.  That means everything.  Not only the meat at the grocery store in your town, but the average prices every where in the country for the price of meat and everything else.  While, your meat is going up, I’ll raise you that pound of brisket and tell you how cheap it is to buy a HD TV or a normal pair of jeans these days, or for that matter any apparel. But then,  I’d just be engaging in the same fallacy.  So, instead I’ll go with defining inflation, showing you how we measure it as economists, and then letting you look at the numbers.  That graph top left is a good illustration of the average prices in the country as measured by the CPI or Consumer Price Index through September.    Average Prices as measured by this index–which is the index quoted in that silly cartoon–show a distinct downward trend.  This indicates deflation not inflation.

That’s just the CPI which actually tends to overstate prices which is why economists and the FED don’t use the CPI to gauge inflation.  It’s been discredited since the 1980s as having distinct biases. Part of this is because it only applies to retail prices.  Another part is that it uses a basket of typically purchased consumer goods and until the basket is changed, the weights of each price in the index reflect the basket.  For example, if the basket still had VCR players in it, that would be a problem.  The basket has to be re-arranged ever so often or it doesn’t reflect the actual buying patterns or budgets of typical U.S. consumers in the top 40 cities where the prices are collected by the BLS. The Fed doesn’t even collect the inflation numbers, the BLS does.  The BLS also collects the unemployment and jobs market information.  The FED reports them in addition to the BLS and uses them for their studies.

The three main inflation indexes most people hear about are the CPI(the Consumer Price Index), the PPI (the Producer Price Index) and the GDP Deflator. The CPI only tracks retail prices.  The PPI tracks whole sale prices. The GDP Deflator tracks and weights all prices by what they represent of the current period GDP.  It’s the most broad-based and least biased because of that weighting system instead of the basket. It reflects “average prices” of everything in the country.  Most economists use the GDP Deflator unless they are specifically interested in how prices impact households.

The FED uses the PCEPI or Personal Consumption Expenditures Price Index to measure inflation for households. It is less volatile than the CPI and looks at ‘core inflation’.  It is also a chained index which  means there is no fixed base and it looks at inflation from quarter to quarter.  The other indexes use base  years which is why you typically see things like REAL (meaning it’s deflated) GDP in 1984 dollars or 1991 dollars.  That means those measures are tied to the purchasing power of the base year of the index.

The FED uses the PCE–and has since 2000-which has indicated about 1/3 less inflation than the CPI. This is because of those statistical biases we mentioned above in the way the CPI is calculated (not a chain index) and in the way it uses a basket.  The reason that the FED pays attention to “core” prices is because of seasonality that is present in things like food prices and gas prices.  Food prices tend to change based on season for obvious reasons and people will substitute in and out of products that are lower in price and ‘in’ season.  The CPI does  not reflect this because of its use of the constant basket.  It has a ‘substitution’ bias.

Economists detect and detrend series like these for seasonality.  The biggest example of seasonality is in retail sales which typically peak extensively in November and December.  It’s not part of an overall trend in the series.  It’s just a recurring blip that we can account for by figuring out what magnitude it tends to be each season.

So let me go back to FedViews and an article over at Mark Thoma’s Economist’s View and talk about why inflation is not a problem, even though the meat prices at your market may be.  Then there’ this from the Clelevand FED’s expectations of future inflation today.


The FT puts this in perspective.

Expected inflation over every time horizon longer than six years is now at its record low in the period since 1982 that the series covers. Expected inflation over the next ten years is now down to 1.5 per cent per annum.

The Cleveland Fed index is not the last word on inflation expectations but it is certainly reason to think that those QE2 = hyperinflation fears are somewhat misplaced…

Mark Thoma responds to an outrageous letter by a bunch of miscreants at the WSJ that have the audacity to scare people with inflation fears.  It links to this “Open Letter To Ben Bernanke” and includes such ‘distinguished’ economists as “William Kristol, Editor, The Weekly Standard“.  Actually, the signatories aren’t distinguished economists at all.  They’re mostly political hacks and conservative policy ideologues.

I doubt the invisible inflation vigilantes will change their tune, but it’s hard to find evidence of inflation worries in the data. If anything, markets are reassessing the Fed’s ability to stop disinflation.

You can also see that Paul Krugman has disinflation concerns and he has a nifty graph up also. There is no inflation, there is deflation or disinflation.

The people who put out that cartoon also fall under the heading of ideologues and miscreants.  The cartoon uses cute little funny speaking creatures to lead you into logical fallacies.  You watch them and think, why yes this must be true because I just paid more for a pack of pork chops last week when the price most likely reflected the hog cycle. (Yes, hogs have gestational periods and some times even the best farmers don’t plan pig pregnancies at opportune times for household demand.)

So, I hope this gives you enough information on inflation to know that it is not a problem for the country.  You really don’t want me to make you do the underlying calculations to all these indexes, but if you want to torture yourself, any Principles of Economics textbooks will put you through the paces. Oh, and don’t buy used cars or the Brooklyn Bridge from any of the shiesters who signed that WSJ editorial or any of them that put out that silly cartoon.


Update: Here’s some data on State Revenues from taxes even though I said I’d wait for another post to debunk that portion of that silly little cartoon.  I’ve already explained how quantitative easing is not printing money, but I’ll do it again shortly because the blasted cartoon is getting more steam. It’s like some stupid chain letter now!

The data is from The Nelson Rockefeller Institute of Government at NYU-Albany and it shows how revenues from taxes are way down from the pre-recession period although slightly up this year from last.  That includes all forms of taxes taken in at the state level.  You can see if your state’s tax revenues are up or down in a Table 3.