To measure policy-related economic uncertainty, the Economic Policy Uncertainty construct an index from three types of underlying components.
1. The first component is an index of search results from 10 large newspapers. The newspapers included in our index are USA Today, the Miami Herald, the Chicago Tribune, the Washington Post, the Los Angeles Times, the Boston Globe, the San Francisco Chronicle, the Dallas Morning News, the New York Times, and the Wall Street Journal. From these papers, they construct a normalized index of the volume of news articles discussing economic policy uncertainty.
2. The second component of our index draws on reports by the Congressional Budget Office (CBO) that compile lists of temporary federal tax code provisions. They create annual dollar-weighted numbers of tax code provisions scheduled to expire over the next 10 years, giving a measure of the level of uncertainty regarding the path that the federal tax code will take in the future.
3. The third component of our policy-related uncertainty index draws on the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters. Here, they utilize the dispersion between individual forecasters’ predictions about future levels of the Consumer Price Index, Federal Expenditures, and State and Local Expenditures to construct indices of uncertainty about policy-related macroeconomic variables.
They find that current levels of economic policy uncertainty are at extremely elevated levels compared to recent history. Since 2008, economic policy uncertainty has averaged about twice the level of the previous 23 years. See animation from The Economist below.
America’s debt row makes economic policy more uncertain than amid actual war.
A hat tip to colleague David Parr for this great graphic. It shows which administrations have been America’s biggest borrowers from 1940-2012. What is interesting to note is the level of borrowing during recessions – grey columns. During the 1970′s there was very little borrowing as the policy of the day was to reduce the inflationary pressure and cut the money supply. Compare that with 2002 onwards and you will see an increase in debt to get out of the recessionary periods. Click the link below to go to the enlarged image.
Here is a chart from WSJ Graphics which shows the level of interest rates in the US from 1980 to today. With the stagflation of the 1970′s Paul Volcker was faced with some very tough decisions. Below is an extract from an interview with him on the PBS Commanding Heights documentary.
It came to be considered part of Keynesian doctrine that a little bit of inflation is a good thing. And of course what happens then, you get a little bit of inflation, then you need a little more, because it peps up the economy. People get used to it, and it loses its effectiveness. Like an antibiotic, you need a new one; you need a new one. Well, I certainly thought that inflation was a dragon that was eating at our innards, so the need was to slay that dragon.
If you had told me in August of 1979 that interest rates, the prime rate would get to 21.5 percent, I probably would have crawled into a hole. I would have crawled into a hole and cried, I suppose. But then we lived through it.
PBS Newshour Economics correspondent Paul Solman talks to Robert Reich about “Inequality for All,” a documentary about the former labour secretary’s personal crusade to explain to Americans why everyone should care about the nation’s growing economic disparity and divisiveness. Here is part of the interview in which Reich states what is bad about inequality.
Well it’s a bad thing in two regards, even if you don’t particularly worry about issues of fairness or public morality. It’s bad, number one, because no economy can continue to function when the vast middle class and everybody else don’t have enough purchasing power to buy what the economy is capable of producing without going deeper and deeper into debt. Seventy percent of the entire economy is basically consumer spending. And if consumers don’t have the wherewithal to spend because all the money’s going to the top, and the people at the top only spend a very small fraction of what they earn, then the economy is almost inevitably destined to slow.
If lawmakers fail to avert a debt default, there could be a devastating impact on the national economy: mortgages soaring, consumers unable to borrow, the government forced to pay more to borrow more, plunging us deeper into debt. PBS Economics correspondent Paul Solman reports on how the bond market is anticipating the situation. Features former IMF Chief Economist and now MIT Professor Simon Johnson.
Interesting post on the Credit Writedowns site by Aussie economist Steve Keen in which he explains why America has gone through ‘the Great Moderation’ since 2008. Below is a very good graph to justify his statement and part of his post.
the Great Moderation occured because Americans borrowed up big from 1993 till 2008, increasing private debt from $10 trillion to $40 trillion when GDP rose from $6 trillion to $14 trillion. It’s also why ‘the Great Recession’ occurred – because when Americans stopped borrowing and instead started to reduce their debt, demand (for both goods and services and assets like houses and shares) collapsed.
So contra Bernanke’s belief that the aggregate level of private debt doesn’t matter, it matters a great deal. That in turn means that Americans are very unlikely to spend more because of QE, because they’re already straining under a level of private debt that is unprecedented – even after several years of deleveraging, the level of private debt compared to GDP is higher than it ever was during the Great Depression.
Some alarming figures have been banded about with regard to America’s infrastructure. It is estimated that over 700,000 bridges are rated as structurally deficient. In 2009 Americans lost approximately $78 billion to traffic delays – inefficient use of time and petrol costs. Also crashes which to a large extent have been caused by road conditions, cost a further $230 billion.
According to the American Society of Civil Engineers the US needs to spend $2.2 trillion bring their infrastructure up to standard. The Congressional Budget Office estimated in 2011 that for every dollar the federal government spent on infrastructure the multiplier effect was up to 2.5. Other indicators state that every $1 billion spent on infrastructure creates 18,000 jobs, almost 30% more than if the same amount were used to cut personal income taxes. – The Economist
Positive Externalities from infrastructure.
Investment in infrastructure has a lot of positive externalities – faster traveling time for consumers and companies, spending less time on maintenance. Research has shown that the completion of a road led to an increase in economic activity between 3 and 8 times bigger than it initial outlay with eight years after its completion. But what must be considered is that now is the best time to invest in infrastructure as it is very cheap – much cheaper than it will be when the economy is going through a boom period.
The media last week were championing the fact that America most-cited benchmark, the Dow Jones Industrial Average (consists of the biggest 30 companies on Wall Street), had surpassed the peak that it reached prior to the Global Financial Crisis in 2008. Although the DJIA has doubled since March 2009 the American economy has only grown over the same period by 7% in real terms. Ultimately there is no real correlation between GDP growth and stock market returns The Economist stated main reason for this is that central banks worldwide have been forcing down the returns on Government bonds hoping to get investors to put money into more risky assets and therefore restore confidence amongst businesses and consumers.
Do the figures stack up?
Although the DIJA has hit a record high numerically, has inflation been factored into the calculation? If you look at the real figures (adjusted for inflation) the Dow Jones is approximately 9% below where it was in October 2007. Therefore the purchasing power of your shares in October 2007 is greater than that of today.
In real terms DIJA would be around 12,900 instead of the peak of 14,253.77 on Tuesday 5th March.
Justin Lahart in the Wall Street Journal stated last week that when you included the dividends earned (with investments in the DIJA) over the past five and half years and if they were reinvested the DIJA would be at 16,000. Adjusting for both inflation and dividends would put the DIJA around 15,000 – up approximately 5%.
Another consideration that he alluded to was that the DIJA doesn’t really reflect how well the average stock is doing. Companies with high market capitalisations like Apple are worth more than others also stocks like International Business Machines are worth more than others. Therefore stocks with the largest weightings have tended to weigh on the DIJA. If you put all stocks on the same footing since DIJA’s old record, and the index would have performed much better. The equal-weighted DIJA now stands at 16,683.44 which is 2,518.91 points higher than its 2007 high of 14,164.53 – see graph below.
Gross ‘World’ Product – total GNP of each country
Gross ‘World’ National Income – this is GDP plus net remittances from abraod. That is money which is earned abroad and sent back to family members minus remittances sent out of the country. In some developing countries this can amount to some 10% of GDP.
The actual figures:
Gross ‘World’ Product – US$63,242bn – 2010
Gross ‘World’ National Income – US$76,296 – 2010
PPP = Purchasing Power Parity which focuses on establishing a value of the goods and services that can be purchased using one unit of each currency.
Sone interesting things to note from the table:
- 48% of world output occured in just 5 nations
- Of those 5 nations they have 44.7% of the world’s population
- In 2010 China, India, Brazil, Turkey and Indonesia all increased their percentage contribution to global production.
- Italy and the UK experienced the greatest fall in (0.2%) in their contribution to global output.
- Although China is approaching the USA with regard to global output but is lagging when you consider GDP/Person
Regional Break-up of global GDP from the above table
Asia and Oceania – 30.9%
North and Central America – 23%
Europe – 21.4%
South America – 3.6%
Africa – 0%
Source: Updated Economics 2013 Edition
Here is a recent chart from The Economist. This is the first data on inequality to come out of China for 12 years – remember 0=perfect equality and 1=perfect inequality (all the income is earned by one person). It seems that poorer countries like South Africa, Nigeria and Brazil have benefitted from growth over the last few years but it hasn’t trickled down to lower income groups. As well as being better off Japan and Sweden seems to be more equal societies as opposed to India and China where most people are equally poor.
This has become popular with a lot of governments worldwide especially in the UK and USA. Late last year I attended a conference at the University of Waikato and Professor Les Oxley took a session entitled
“Is GDP an appropriate measure of wellbeing?
….. and is anything else better?”
Traditionally we have used Gross Domestic Product as it measures:
- The total value of final goods and services produced in the economy
- The total of incomes earned in producing that output
The final purchases by households, business, and government by summing consumption, investment, government spending, and net exports
Historically origins of GDP
In the 1930′s, in response to the information gap revealed by the Great Depression, Simon Kuznets developed a set of national income accounts.
In the 1940′s, World War II planning needs were the impetus for the development of product or expenditure estimates (gross national product); by the mid-1940′s, the accounts had evolved into a consolidated set of income and product accounts, providing an integrated birds-eye view of the economy.
In the late 1950′s and early 1960′s, interest in stimulating economic growth and in the sources of growth led to the development of official input-output tables· In the late 1960′s and 1970′s, accelerating inflation prompted the development of improved measures of prices and inflation- adjusted output.
However there are negatives to GDP as a measurement which was outlined by President Kennedy in 1968.
“The Gross National Product counts special locks for our doors and the jails for those who break them … the destruction of the redwood and the loss of our natural wonder in chaotic sprawl … Yet (it) does not allow for the health of our children, the quality of their education, or the joy of their play … the beauty of our poetry or the strength of our marriages … it measures everything, in short, except that which makes life worthwhile.” President Kennedy 1968
Les Oxley produced a comparison of wellbeing between the USA and France – Are GDP and other measures highly correlated?
* GDP was not designed to measure wellbeing, especially at the individual level
* We continue to use it because we can measure it quite easily and use it for comparisons over time and space
* BUT it can mislead and potentially lead to mismanagement
* There are alternatives to complement GDP
* The complements are not freaky or the realm of weirdos in and out of economics – they are becoming more mainstream and the problems of using GDP for purposes for which it was not intended are becoming public
* Some of the best minds are trying to shift us away from SOLE use of GDP as an INDIRECT measure of wellbeing
I am off to the beach again for a few days – back again on 19th January.
Negotiations over the US Fiscal Cliff continue with hopes rising that a compromise will be averted. During the week, Fed Chairman Ben Bernanke said that the ‘fiscal cliff’ is a substantial risk to the outlook for America. However he also pointed out that if America’s fiscal issues could be sorted out then “the US economy might be in for a very good year” ahead. In negotiating with the Republicans to avoid the fiscal cliff, Obama has said that he will refuse to sign legislation that extends the current top rates on incomes over US$200,000 for individuals and US250,000 for couples. However he has asked for an extension of tax cuts to middle and low income earners.
From the chart below you can see that the main factor behind the fiscal cliff is the expiring of tax cuts.
With the US debt currently standing at 16 billion dollars and the prospect of a fiscal cliff – slashed spending and higher taxes – is it sustainable to keep on borrowing money? Historically Americans have preferred debt to taxes – you could say that it all started with the Boston Tea Party where they disposed of tea in the harbour because of the tax policy of the British government and the East India Company that controlled all the tea imported into the colonies. The video clip below from PBS News has MIT economist Simon Johnson talking about his recent book “White House Burning” which discusses the history of US debt – 225 years of it. He states that if we want to keep Social Security and Medicare we need to think how you are going to pay for it. The answer is NOT selling more debt to the Chinese but to pay the taxes to support social insurance programmes. He also mentions that if you go over the fiscal cliff in a disorganised way, with significant political confrontation, it will be a disaster. Quite simply the US government needs to acquire more tax revenue and bring its spending under control.
Another really good video from Paul Solman of PBS, this time he talks with Wall Street Journal journalist David Wessel about America’s debt. Some noteworthy facts include:
* 63 percent the government spent went out the door without a vote of Congress
* 20 percent of the federal budget is spent on defense – $700 billion last year, more than the combined defense budgets of the next 17 largest defense budgets of other countries
* Each aircraft carrier is $11 billion. This is enough to replace 750,000 shoulder, knee, and hip joints for people on Medicare.
* In 2011 the government took in $1.3 trillion in tax revenue, but the Treasury adds up the value of all the loopholes, deductions and credits, and they amounted to $1.1 trillion.
Below is a graphic showing the levels of unemployment for each month since 1948 and if the economy during that time was in a recession (square in cell). Some points of note:
*In 1953 the level of unemployment was between 2-3% but the US economy was in a recession for the latter part of the year
*The majority of 1960 saw recessionary conditions with unemployment around 6-7%
*1974-75 the economy experienced stagflation – high unemployment and high inflation
*1980-83 periods of high unemployment – the early Reagan years and free market policies.
*1998-2001 – very low levels of unemployment followed by the impact of the 9/11 attacks and the recession that followed
*The financial crisis of 2008 saw 19 consecutive months of recession and unemployment reached between 10-11% in 2009. Since then it has been above 7%.
Here is a recent clip from Paul Solman of PBS which looks at free trade being the cause of the demise of America’s middle class. A new book entitled “The Betrayal of the American Dream,” by investigative reporters Donald Barlett and James Steele suggest that as manufacturing jobs went to developing countries overseas the middle class in America has seen their standard of living drop. As Donald Bartlett states –
The real bottom-line question is, what kind of a society do we want? Do we want a society built on the principle that the only thing that matters is the lowest possible price or a society built on the principle that everyone should have a living wage?
And those are going to be two very different societies. And this goes back again so what we’re talking about. The people up here, they don’t want everyone to have a living wage.
In order to protect Americans jobs the government needs to get tougher on free trade and impose some barriers to trade like quotas and tariffs.
Here is a clip from the PBS News in the US concerning the improving job figures out of the UAS. While President Obama lauded the September job numbers which showed unemployment at 7.8 percent, Mitt Romney remained critical, saying the numbers alone do not paint an accurate picture of the economy. Jeff Brown asks the Washington Post’s Neil Irwin and Mesirow Financial’s Diane Swonk if the latest report is a sign of recovery. A bit of information on the 2 ways calculating the unemployment rates:
1. Household Survey
The household survey in which the Labour Department go to 60,000 households every month and ask, do you have a job, do you want a job, are you looking for a job? And from that, they construct the unemployment rate.
2. The Survey of Employers
This captures many thousands of employers around the country, showed a more modest job gain, 114,000 jobs added. That’s not that great. That is actually below what you need every month to match population growth.
Neil Irwin summed it up quite well by saying that
“So, the president, President Obama has a very easy story, his campaign, out of this report: The unemployment rate came down, and for good reasons, because people got jobs, not because people dropped out of the labor force.
What Mitt Romney has is a case that has some merit as well: Look, unemployment is 7.8 percent. That’s still way too high. That’s much higher than what we want to see. The broader definition of unemployment called U6, that includes people working part-time who want full-time jobs, people who have given up looking out of frustration. That’s at 14.7 percent. That was unchanged last month.
This is a better report than most people expected. Happy days are not here again. And that’s what they will be arguing about on the trail.”
Here is a great image from The Economist showing the competitiveness and GDP per person. New Zealand comes in at 25th in Global Competitiveness ranking – see red arrow on graph. Notice that Switzerland is the top country followed by Singapore with Finland in third place. Amongst the emerging economies China is top with Brazil in second place.
The most striking fall is the United States, which has dropped in the rankings for four years in a row. It is now seventh. The rankings are based on criteria such as institutions, infrastructure, financial systems, flexible labour markets, economic stability, innovations and public services. Plotting the scores against GDP per person reveals an unsurprising correlation: competitiveness brings wealth, but rich countries can most easily afford to provide the conditions for it. They can squander competitiveness too.
Here is a graph I got from the Business Insider website. The American Trucking Association (ATA) Index measures tonnage being moved in the US and its movements correlate quite nicely with that of economic growth in the economy. ATA Chief Economist Bob Costello said. “Manufacturing output was strong in June, which helped tonnage levels.”
Costello said he’s still concerned about businesses sitting on cash instead of hiring more workers or spending it on capital, both of which would give the economy and tonnage a shot in the arm, as they are worried about Europe and the U.S. fiscal cliff at the end of the year. Costello lowered his tonnage outlook for 2012 to the 3% to 3.5% range due to recent economic weakness.