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Cost of Living Adjustments: Social Security

Posted on Oct 23, 2014 | 0 comments

The Social Security Administration (SSA) on Wednesday announced that existing social security recipients are to get a 1.7 percent annual cost of living adjustment (COLA) for 2015.

The social security COLA is determined by the changes in prices of urban wage earners and clerical workers, known as the CPI-W. The figure below shows three measures of inflation. In the top chart, the WSJ plots the annual change in the CPI-U and the annual change in the core CPI-U, which excludes food and energy price changes. Both of these indexes report an inflation rate of 1.7 percent.

In the bottom chart, the WSJ plots the annual change in quarterly average CPI-W. It also includes circles that represent the actual social security COLA since 2004. The data for September 2014 shows an inflation rate of 1.7 percent.

What is most interesting about the figure is the period just after the Great Recession: 2010-2012. Because COLAs cannot be negative, social security recipients received no COLA in 2010 and 2011 and a COLA less than the annual change in quarterly average CPI-W in 2012. During this three-year period, actual benefits increased in real terms.

SS inflationDiscussion questions:

1) Explain the difference between nominal and real price increases.

2) All else equal, is the COLA increase of 0 percent in 2010 better or worse than a COLA of 1.7% in 2015? Explain

Falling Oil Prices

Posted on Oct 15, 2014 | 0 comments

Global oil prices have fallen over 20 percent since June. The exclamation point came on Tuesday when oil prices declined 4.5 percent—the biggest one-day drop in nearly two years.

Two factors are at play in the oil market.

First, over the near term, worldwide demand is not expected to increase much, if at all. Indeed, the International Energy Agency forecasts oil-demand growth to be the lowest level in five years. Demand is stalling because of global economic worries.

Second, there is a glut of oil. Oil production continues to rise because hydraulic fracturing has made it a lot easier to extract hard to reach oil. Hydraulic fracturing has enabled the U.S. to become the number one producer of oil in the world. In addition, it appears that OPEC (organization of petroleum exporting countries) is no longer willing to cut their oil production to slow the price slide.

All together then, the figures below (from the WSJ; click here to read the related article) show the story: prices are falling while output is rising.

oil 1oil 2

Discussion question:

Sketch a supply and demand diagram for the global oil market. Demonstrate in your diagram how slowing growth in demand and an increasing glut of oil affect the market equilibrium price and quantity.

2014 Nobel Prize in Economics

Posted on Oct 14, 2014 | 0 comments

Goes to…Jean Tirole for his analysis of market power and regulation. Click here and here to read the announcements.

The prize committee writes that Jean Tirole is one of the most influential economists of our time. He has made important theoretical research contributions in a number of areas, but most of all he has clarified how to understand and regulate industries with a few powerful firms.

Click here to watch one of Tirole lectures on two-sided markets.

The Fiscal Multiplier

Posted on Oct 8, 2014 | Comments Off

A recent NBER working paper shows that to properly compute the fiscal multiplier in expansionary and recessionary periods, it is important to distinguish between increases and decreases in government spending. Click here to read the paper.

The fiscal multiplier tells us the amount by which GDP increases when government spending increases by a dollar.

The NBER paper shows that the long-run multiplier for recession and government spending going up is 2.3. On the other hand, when the direction (increase or decrease) of government spending was not controlled for, then the fiscal multiplier during recession was only 1.3.

Discussion questions:

1) Explain what it means to state that the fiscal multiplier is 2.3.

2) Discuss why the fiscal multiplier is greater than 1 for recession and government spending going up.

Global Economic Growth Struggles

Posted on Oct 8, 2014 | Comments Off

The International Monetary Fund (IMF) released its latest World Economic Outlook (WEO) this week. Click here to read the report.

The IMF writes, “[d]espite setbacks, an uneven global recovery continues. Largely due to weaker-than-expected global activity in the first half of 2014, the growth forecast for the world economy has been revised downward to 3.3 percent for this year, 0.4 percentage point lower than in the April 2014 World Economic Outlook (WEO). The global projection for 2015 was lowered to 3.8 percent.”

Here is a snapshot of the IMF’s latest projections.

IMF_WEO Forecast

Discussion question: Peruse the WEO report. Discuss a few of the reasons why global economic growth has been downgraded.

Is the Traditional Taxicab an Endangered Species?

Posted on Oct 3, 2014 | Comments Off

Paul Solman’s Making Sense of financial news piece looks at how the long-regulated taxi industry and its drivers are under siege from new technology and new competitors.

September Jobs Report

Posted on Oct 3, 2014 | Comments Off

The Bureau of Labor Statistics (BLS) released its September 2014 jobs report. Read the BLS report here.

The U.S. added 248,000 jobs in September 2014, compared with an average monthly gain of 213,000 over the prior 12 months.

The unemployment rate in September decreased to 5.9 percent.

Once again, the labor force participation rate in September was little changed at 62.7 percent and the employment-population ratio was unchanged at 59 percent.

Here are other highlights from the September report:

The number of long-term unemployed (those jobless for 27 weeks or more) was unchanged at 3 million persons. The number of long-term unemployed has decreased by 1.2 million over the last 12 months. They account for 31.9 percent of the unemployed.

Individuals working part time because their hours had been cut back or because they were unable to find a full-time job, at 7.1 million persons, was little changed in September.

The number of discouraged workers in September 2014 was 698,000 persons, down by 154,000 from a year earlier. Discouraged workers are persons not currently looking for work because they believe no jobs are available for them.

Case-Shiller HPI: Minneapolis, MN

Posted on Oct 2, 2014 | Comments Off

Minneapolis’s Case-Shiller housing price index (HPI) from January 1989 to July 2014 is shown in the figure below.

Minneapolis HPI

Minneapolis’s pre-recession housing market peak was April 2006. Similar to the rest of the U.S., Minneapolis’s housing market declined after 2006 and it has subsequently recovered.

If the Minneapolis housing market is split into thirds, the pattern observed is similar to that of other U.S. housing markets: relative to the high and middle tiers, the low tier experienced the greatest decline after the housing bust and is now experiencing the strongest growth rate.

The top third of Minneapolis’s housing market—the high tier segment—reached a maximum value of 168 in April 2006. The high tier declined 30 percent to reach its lowest HPI value of 116 in November 2011. As of July 2014, this segment of Minneapolis’s housing market has increased 17 percent from its 2011 low.

The middle third of Minneapolis’s housing market—the middle tier segment—reached a maximum value of 170 in April 2006. The middle tier declined 39 percent to reach its lowest HPI value of 104 in April 2011. As of July 2014, this segment of Minneapolis’s housing market has increased 32 percent from its 2011 low.

The bottom third of Minneapolis’s housing market—the low tier segment—reached a maximum value of 191 in April 2006. The low tier declined 55 percent to reach its lowest HPI value of 87 in May 2011. As of July 2014, this segment of the Minneapolis’s housing market has increased 64 percent from its 2011 low.

Jobs Report: Dallas, TX

Posted on Oct 1, 2014 | Comments Off

The figure below shows the monthly year-on-year change in the number of nonfarm employees in the U.S. (blue line), Texas (red line) and the Dallas metro area (green line) between January 2004 and August 2014.

Texas has experienced monthly increases in this employment measure since May 2010, the Dallas metro area has experienced a monthly increase in this employment measure since June 2010, and the U.S. has experienced a monthly increase in this employment measure since August 2010.

Dallas labor mkt

The most recent data (August 2014) reveal that year-on-year employment growth continues in the Dallas metro area (3.3 percent), Texas (3.5 percent) and the U.S. (1.8 percent).

As of August 2014, the number of nonfarm employees in the Dallas metro area is 985,300 greater than the peek level observed during the great recession in August 2008.

GDP Increases 4.6% in Second Quarter (Third Estimate)

Posted on Sep 26, 2014 | Comments Off

Real gross domestic product (GDP) increased 4.6 percent in the second quarter of 2014, according to the Bureau of Economic Analysis’s third estimate. Click here to read the BEA’s September 26 news release.

According to the BEA’s news release the increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures, exports, private inventory investment, nonresidential fixed investment, state and local government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 2.0 percent in the second quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 1.7 percent.

Behind the Fed’s Dovish Turn on Rates

Posted on Sep 23, 2014 | Comments Off

Alan Blinder has an interesting article in today’s Wall Street Journal on the battle that is ongoing at the Fed’s Federal Open Market Committee (FOMC). The battle is between the hawks and doves. Click here to read the article.

Hawks on the FOMC are concerned about rising inflation. Doves on the FOMC are concerned with too much slack in the U.S. labor market.

Blinder believes that the Fed’s September FOMC statement reveals that the doves won the battle in September. He points to the following three items.  First, the phrase “significant underutilization of labor” remained in the September FOMC statement. The hawks wanted that language removed; it stayed. Second, the FOMC statement tells us that interest rates will remain at their current superlow level “for a considerable time” after asset purchases end next month. The hawks had wanted that language removed; it stayed.  Third, the hawks want the Fed to stop saying that it expects to keep interest rates low “for some time” after the economy returns to normal. It too remained in the statement.

So, what does it all mean? It means there is a deep division at the Fed. Only time will tell how the story ends.

 

Evidence of Sticky Wages in the U.S.

Posted on Sep 19, 2014 | Comments Off

Brendan Greeley has an interesting article in Bloomberg Businessweek. Click here to read it.

Sticky wages is a concept stressed by John Maynard Keynes in the 1930s. The idea is that workers resist pay cuts even when times are bad, forcing businesses to save money instead through layoffs. Keynes argued that workers really dislike nominal wage cuts. But if wages remain the same while inflation increases, then employees become less costly to the employer, which in turn makes it easier to retain the workers. With an increase in inflation, workers are essentially fooled—they experience a real wage decrease, but no change in their nominal wage.

William Dickens, a Northeastern University economist, took at look at data from the great recession and calculated the percentage change in wages from 2007 to 2008. He found that of all the possible outcomes between a huge raise and a huge pay cut, the largest number of workers have seen zero change in their wages, according to “The Incredible Stickiness of Wages” (Bloomberg Businessweek, September 22-28, 2014). See the figure below. His results seem to support the sticky wage theory.

stickyDiscussion question:

Read the Brendan Greeley’s article. Discuss what economists have uncovered about sticky wages in the U.K and Ireland.

September FOMC Statement

Posted on Sep 17, 2014 | Comments Off

The Federal Reserve concluded its latest Federal Open Market Committee (FOMC) meeting on Wednesday. The Fed announced that it will reduce its monthly asset purchases by another $10 billion to $15 billion: $5 billion for mortgage backed securities and $10 billion of longer-term Treasury securities.

Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. On balance, labor market conditions improved somewhat further; however, the unemployment rate is little changed and a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee’s longer-run objective. Longer-term inflation expectations have remained stable.

Read the complete announcement here.

CPI: August 2014

Posted on Sep 17, 2014 | Comments Off

The Bureau of Labor Statistics (BLS) released its August 2014 Consumer Price Index (CPI) report. Click here to read the report.

The CPI increased 1.7 percent over the last 12 months (see the figure below). This reading is at the Fed’s inflation target of 2 percent.

Core CPI–which excludes food and energy prices–increased 1.7 percent over the last 12 months.

The following figure shows both CPI and Core CPI since August 2013.

CPI

Los Angeles Jobs Report

Posted on Sep 10, 2014 | Comments Off

The figure below shows the monthly year-on-year change in the number of nonfarm employees in the U.S. (blue line), California (red line) and the Los Angeles metro area (green line) between January 2004 and August 2014.

jobs-la

The U.S. and California have observed monthly increases in this employment measure since August 2010, while the Los Angeles metro area has observed a monthly increase in this employment measure since October 2010.

The most recent data reveal that year-on-year employment growth continues in the Los Angeles metro area (1.7 percent, July 2014), California (2.1 percent, July 2014) and the U.S. (1.8 percent, August 2014).

As of July 2014, the number of nonfarm employees in the Los Angeles metro area is 202,000 lower than the peek level observed prior to the great recession in December 2007.

Corn Prices Fall as Expected Supply Grows

Posted on Sep 9, 2014 | Comments Off

Jesse Newman reports on the state of the U.S. corn crop in this Wall Street Journal article. Corn prices have fallen to the lowest level in four years as expectations of a record harvest mount, according to the article.

Discussion questions:

1) Using the model of supply and demand, sketch how the corn market has changed relative to last year. Does it make sense that the price of corn has decreased as the expected supply has increased? Explain.

2) “Eventually, we’re going to have to send a signal to the world farmer: Don’t plant any more corn,” according to the article. If this statement is true, is the price elasticity of demand for corn likely elastic or inelastic? Explain how you know.

 

Japan’s GDP Drops 7.1% in Second Quarter (Second Estimate)

Posted on Sep 8, 2014 | Comments Off

It appears that the 60 percent increase in Japan’s consumption tax has done more harm to its econmy than first estimated. In the second quarter of 2014, Japan’s GDP declined by 7.1 percent at an annualized rate, which is the largest decrease in GDP since early 2009 (when GDP declined 15 percent, at an annualized rate).

The figure below is from the Financial Times. Read a related news report here.

Japan

August Jobs Report

Posted on Sep 5, 2014 | Comments Off

The Bureau of Labor Statistics (BLS) released its August 2014 jobs report. Read the BLS report here.

The U.S. added 142,000 jobs in August 2014, compared with an average monthly gain of 212,000 over the prior 12 months.

The unemployment rate in August decreased to 6.1 percent.

Importantly, the labor force participation rate in July was little changed at 62.8 percent and the employment-population ratio was unchanged at 59 percent.

Here are other highlights from the August report:

The number of long-term unemployed (those jobless for 27 weeks or more) declined to 3 million persons. The number of long-term unemployed has decreased by 1.3 million over the last 12 months. They account for 31.2 percent of the unemployed.

Individuals working part time because their hours had been cut back or because they were unable to find a full-time job, at 7.3 million persons, was little changed in August.

The number of discouraged workers in August 2014 was 775,000 persons, little changed from a year earlier. Discouraged workers are persons not currently looking for work because they believe no jobs are available for them.

Case-Shiller HPI: Los Angeles, CA

Posted on Sep 3, 2014 | Comments Off

Los Angeles’s Case-Shiller housing price index (HPI) from January 1987 to June 2014 is shown in the figure below.

la

Los Angeles’s pre-recession housing market peak was April 2006. Similar to the rest of the U.S., Los Angeles’s housing market declined after 2006 and it has subsequently recovered.

If the Los Angeles housing market is split into thirds, the pattern observed is similar to that of other U.S. housing markets: relative to the high and middle tiers, the low tier experienced the greatest decline after the housing bust and is now experiencing the strongest growth rate.

The top third of Los Angeles’s housing market—the high tier segment—reached a maximum value of 240 in April 2006. The high tier declined 32 percent to reach its lowest HPI value of 163 in March 2012. As of June 2014, this segment of Los Angeles’s housing market has increased 32 percent from its 2012 low.

The middle third of Los Angeles’s housing market—the middle tier segment—reached a maximum value of 282 in April 2006. The middle tier declined 42 percent to reach its lowest HPI value of 164 in January 2012. As of June 2014, this segment of Los Angeles’s housing market has increased 37 percent from its 2012 low.

The bottom third of Los Angeles’s housing market—the low tier segment—reached a maximum value of 339 in February 2007. The low tier declined 56 percent to reach its lowest HPI value of 148 in June 2009. As of June 2014, this segment of the Los Angeles’s housing market has increased 57 percent from its 2009 low.

Coase Theorem Case Study: Reclining Airplane Seats

Posted on Aug 28, 2014 | Comments Off

Josh Barro has a very interesting piece applying the Coase theorem to the problem of reclining airline seats. Click here to read the article.

Barro writes: he owns the right to recline, and if his reclining bothers you, you can pay him to stop. We could (but don’t) have an alternative system in which the passenger sitting behind him owns the reclining rights. In that circumstance, if Barro really cared about being allowed to recline, he could pay the passenger sitting behind him to let him recline. In either case, the same outcome would occur.  That is, unless the transaction costs are too high–a point Barro discusses in his article.

GDP Increases 4.2 Percent in Second Quarter (Second Estimate)

Posted on Aug 28, 2014 | Comments Off

Real gross domestic product (GDP) increased 4.2 percent in the second quarter of 2014 (see table below), according to the Bureau of Economic Analysis’s second estimate. Click here to read the BEA’s August 28 news release.

GDP

According to the BEA’s news release the increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

New Steel Tariffs Confirmed

Posted on Aug 24, 2014 | Comments Off

On Friday, the International Trade Commission confirmed the imposition of steel tariffs on imported steel pipe and tube from South Korea, India, Taiwan, Turkey, Ukraine and Vietnam. Click here to read about it in the WSJ.

The heart of the matter is: foreign steel prices have been as much as 20 percent lower that U.S. steel prices. As a result of the significant price difference, there has been a surge in steel imports into the US. However, the impact of the steel tariffs will cause the price of imported steel to increase.

Discussion questions:

Reference Karlan and Morduch’s International Trade chapter for the following questions.

1) As imports increase, explain what happens to total surplus in the domestic economy.

2) As imports increase, explain how consumer surplus and producer surplus change.

3) As imports increase, are producers or consumers more likely to claim trade is unfair? Why?

4) If a tariff on imported steel is imposed, who are the winners and who are the losers in the domestic economy? Explain.

Monetary Policy Challenges

Posted on Aug 22, 2014 | Comments Off

The figure below shows average GDP growth over the previous four years, adjusted for inflation.

growth

The second figure shows average consumer-price inflation over the previous four years.

inflation

The recent slowing of GDP growth and inflation comes at a time with central bankers in the U.S. and around the globe wrestle with making changes to monetary policy. Recent GDP and inflation data are making central bankers reluctant in some places (US, UK, China) and unable in others (EU, Japan) to dial back the easy money employed since the great recession.

Discussion questions:

1) Discuss why recent data make central bankers reluctant to dial back easy money policies in the US and UK.

2) Discuss why recent data make central bankers unable to dial back easy money polices in Japan and the EU.

CPI: July 2014

Posted on Aug 20, 2014 | Comments Off

The Bureau of Labor Statistics (BLS) released its July 2014 Consumer Price Index (CPI) report. Click here to read the report.

The CPI increased 2.0 percent over the last 12 months (see the figure below). This reading is at the Fed’s inflation target of 2 percent.

Core CPI–which excludes food and energy prices–increased 1.9 percent over the last 12 months.

The following figure shows both CPI and Core CPI since July 2013.

cpi

The Eurozone’s Economy Stalls

Posted on Aug 14, 2014 | Comments Off

The Eurozone has slowed to a halt. Gross domestic product in the 18-member currency bloc was flat in the second quarter of 2014, compared with the growth of 0.2 percent in the first quarter of 2014. That translated into 0.2 percent growth in annualized terms, down from the first quarter’s 0.8 percent pace.

The figure below shows recent GDP growth for the Eurozone, Germany, France, Italy, and Spain.

europe

Click here and here for related news articles.

 

Japan’s GDP declines

Posted on Aug 13, 2014 | Comments Off

Japan’s gross domestic product shrank 6.8 percent on an annualized basis in the second quarter of 2014. See the figure below.

japan

It was the largest decline since the first quarter of 2011. The significant decline in GDP occurred in the quarter that the national sales increased 60 percent (from 5 to 8 percent). Click here and here to read related news reports.

Discussion question:

Discuss why a 60 percent increase in Japan’s national tax rate likely caused its GDP to decline.