To seek the causes of poverty... is to enter an intellectual dead end because poverty has no causes. The great cold of poverty and economic stagnation is merely the absence of economic development. It can be overcome only if the relevant economic processes are in motion.
—Jane Jacobs
No balanced budget in sight yet, but the deficit (1.5% GDP) is low enough to keep the debt ratio essentially in balance (debt ratio = debt/GDP).
Nothing from any of the candidates about that, of course, because during an election year, dollars of debt accumulated by the "bad guys" is always the headliner. Nothing about our ability to service debt, nothing about the size of the economy, nothing about debt incurred by the government being the same thing as credit extended by the lenders—just dollars of debt. Single-entry accounting, in other words. It's financial nonsense, but the scare factor nonetheless makes it a political goldmine.
I suppose it's time for some election-conscious journalist to calculate which planet all those debt dollars would stretch to if they were laid end-to-end. Probably Jupiter or so. (Good thing our GDP would stretch way beyond that—to Saturn or so—isn't it?)
In any case, the burden of the debt is still one-third lower than it was in the mid-1990s (burden = percentage of tax receipts it takes to pay the interest). Below are the charts; click to enlarge.
As of March, the number of private nonfarm jobs in the economy is just barely greater than year ago. Unemployment is up to 5.1% (vs. 4.4% year ago). Not encouraging.
Here are the latest charts; click to enlarge. (Keep in mind I'm no longer going to calculate the average wage rate of jobs lost vs jobs gained.) The construction jobs situation is more evidence that we need the housing sector to turn around before things will get much better.
Two minor bright spots: average wage increases beat PCE inflation, and the labor force participation rate is up a notch -- for what it's worth.
I'm still waiting for inflation to reveal itself. The Dallas Fed just published some new PCE inflation results, and I also checked the Cleveland Fed's CPI inflation. (PCE = personal consumption expenditures; CPI = consumer price index.) It still seems to be hiding just around the corner.
Keeping in mind that the proper goal is controlling inflation to within a band of 2%-3%, I see even less evidence of inflation danger in the latest numbers than I did a few days ago. (As I've said before, I like the trimmed-mean methodology, because it trims the month-to-month, near-meaningless noise out of the results.)
The charts are below. Can you spot any problem yet? I can't; as long as prices and wages inflate at a predictable 2.5%, we don't have a problem.
Click to enlarge:
On the other hand, I do not try to forecast inflation or interest rates, so I'll just have to keep a close eye on the actuals. Lots of pundits (and also lots of journalists) are still forecasting an inflation spike. Hmm, maybe next month...
I waited too long to update the inflation and interest rate tracking charts, but here they are. First thing that hit me last night after posting the numbers was: Where the heck is the inflation that's been making so many headlines? Or, more precisely, why isn't the higher than normal CPI inflation showing up in any of the other inflation indicators?
Click to enlarge:
Nominal interest rates are falling across the board, the bond market thinks inflation is 2.3%, and the trimmed mean PCE inflation rates are between 2% and 3%, just where we'd like to see them. As I've said before, there's not a single best indicator of inflation, but if I had to pick one, it would be the trimmed mean PCE (the two red lines in the second chart); sorry, I don't see an inflation problem.
Not yet, anyway. If inflation is supposedly just around the corner... well, that's where doomsday has been lurking for the forty years I've been watching, so I guess it's not a surprise.
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By the way, send me a private email and tell me what you think of the TypeKey authentication system for comments.
I think those people who say they believe in a gold standard are fundamentally being very anti-libertarian because what they mean by a gold standard is a governmentally fixed price for gold.
—Milton Friedman
Monetary economics confuses just about everybody, including economists. But I hope it will confuse a lot fewer people now that Tyler Cowen has given us 68 minutes of his time to explain it in the most concise and accurate fashion I've ever come across. I listened to the interview yesterday (Russ Roberts questioning Cowen), and plan to listen to it again today.
The first 45% of the interview is about the Fed: mistakes it has made in the past, how it's been performing in recent decades, why its discount rate is essentially ineffective, why its (target) fed funds rate is THE KEY to monetary policy, and why an inflation target of 2%-3% is just about optimum.
The next 45% of the interview is about fiat money vs. the gold standard. On the objectivity scale, I rate Cowen in the top 1% (and Roberts, too, for that matter); Cowen explains in easy-to-understand language why a gold standard would make little or no sense, and why our fiat money system, managed by the Federal Reserve, is working just fine, thank you very much. I hope Ron Paul and his Fed-bashing supporters listen to it, even if they decide not to admit they did.
The last 10% is about the political economy of monetary policy. Politics is always in the picture, isn't it?
Here's the link: Cowen on Monetary Policy, at Russ Roberts's EconTalk website.
The whole interview is the best 68 minutes you could spend if you're the least bit interested in (but slightly confused by) how our money system works. Russ Roberts is a maestro at conducting objective interview sessions on timely economics topics, and whenever his opinion differs from that of his interviewee, he has always known how to disagree without being disagreeable. That is a rare talent, in case you haven't noticed from your web surfing. I hope Russ keeps up his EconTalk effort indefinitely; he deserves some kind of award for this valuable project.
Lastly, don't miss Tyler Cowen's blog, Marginal Revolution, if you haven't been there before.
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End note: The power of "belief preservation"
I seriously doubt that Cowen's levelheaded, objective debunking of the gold standard idea will have much impact on anyone who is committed to preserving their chosen belief that the Fed is a sinister conspiracy, and that replacing the gold standard with fiat money was a tragedy. Reason: "Belief Preservation" is one of the most powerful psychological forces going, and it affects all of us in varying degrees. Belief preservation is resistance to change. It's when we make up our minds—then subsequently spend inordinate amounts of mental energy fighting off any challenges to the mental commitment we've made, by taking in all evidence and arguments confirming our belief, and by ignoring evidence and arguments to the contrary. It affects political blogs, left-leaning and right-leaning economics blogs, and just about anyone who has ever analyzed a problem and drawn a conclusion. Belief preservation is especially powerful when we've made a commitment, in public or in writing, to a specific conclusion. [Think which presidential candidate you're for—then try to think how big of a fall-campaign gaffe it would take to change your mind if your candidate won the nomination. It would have to be a huge one—highly unlikely at that stage—and that's largely due to belief preservation.]
That's why, even if Ron Paul and his supporters do listen to the Tyler Cowen interview, I do not expect many of them to admit it. That's okay with me; I'd be happy if it just keeps them bottled up a little tighter in their conspiracy forums, and reduces the number of Fed-bashing sermons posted here in my comments section.
[My position on the gold standard is summarized at the bottom of this article. Two different definitions of "inflation" are discussed in this article.]
There's nothing optimistic about the latest deficit numbers. The economy's slowdown has caused receipts and outlays to diverge at a quickening pace. The only half-decent news is that the deficit, at 1.9% GDP, is just about right for keeping the debt/GDP ratio level, for whatever that's worth.
Food for thought: It's obvious that the slowing economy is causing tax receipts to slow down, even with no change in tax rates. Question for fiscal pundits: What would seem likely to happen to the economy, and therefore tax receipts, if tax rates were allowed to increase in 2010? Question for political pundits: When do you think we'll start hearing about that from more than one of the three presidential candidates?
Because of all the headlines about the dollar's drop, I thought it was time to check the official numbers again. Sure enough, it's off its peak, back down to its 1996 level. The good news: it's nowhere near zero yet.
Here's the chart from the St. Louis Fed's website (link), to which I added the items in red. Click to enlarge.
A few days late, but here's (a) the chart of 12-month change in jobs by major category, followed by (b) the trends in jobs created and labor force participation rate. Click to enlarge.
I've decided to quit calculating the average wage rates of the jobs lost versus jobs gained. Any one of several algorithms can be chosen to spin the numbers in whichever direction one's chosen political ideology needs it to go—but I'm not into shooting an arrow into the wall, then carefully painting a red bullseye around the spot where it went in. To avoid giving anyone that impression, the simple algorithm I had been using is now dead meat—so please draw whatever conclusions you'd like from the first chart.
My take: The trends don't look as good as most of us would like, but these are not necessarily indicative of a recession yet. I'll defer to Brian Wesbury's explanation, which can be found in the pdf file that will download by clicking this link.
