Did you hear about how Tennessee Republican Rep. Marsh Blackburn tried to argue against President Obama’s proposal to increase the minimum wage and then index it to inflation–and then ended up demonstrating why the increase is desperately needed? She claimed that we need to lower the minimum wage to help young kids get into the work force–the way it was back in the late 1960s or early 1970s when she got her first job in Mississippi and the minimum wage was $2.15.
Quoted at Think Progress:
BLACKBURN: What we’re hearing from moms and from school teachers is that there needs to be a lower entry level, so that you can get 16-, 17-, 18-year-olds into the process. Chuck, I remember my first job, when I was working in a retail store, down there, growing up in Laurel, Mississippi. I was making like $2.15 an hour. And I was taught how to responsibly handle those customer interactions. And I appreciated that opportunity.
Too bad Blackburn forgot (or didn’t know) that $2.15 was worth a hell of lot more in 1968 than it is in 2013.
Blackburn was born in 1952, so she likely took that retail job at some point between 1968 and 1970. And according to the Bureau of Labor Statistics’ inflation calculator, the $2.15 an hour Blackburn made then is worth somewhere between $12.72 and $14.18 an hour in today’s dollars, depending on which year she started.
At that time, the minimum wage was $1.60, equivalent to $10.56 in today’s terms. Today’s minimum wage is equivalent to just $1.10 an hour in 1968 dollars, meaning the teenage Blackburn managed to enter the workforce making almost double the wage she now says is keeping teenagers out of the workforce.
These poor math-challenged Republicans just can’t help themselves. They’re stuck on stupid.
Yesterday Dakinikat posted about Elizabeth Warren’s questioning of bank regulators during her first appearance at a Banking, Housing and Urban Affairs Committee hearing. Oh my, the big bankers are freaking out about it. From HuffPo:
Sen. Elizabeth Warren’s (D-Mass.) meeting with bank regulators Thursday left bankers reeling, after she questioned why regulators had not prosecuted a bank since the financial crisis.
At one point, Warren asked why the book value of big banks was lower, when most corporations trade above book value, saying there could be only two reasons for it.
“One would be because nobody believes that the banks’ books are honest,” she said. “Second, would be that nobody believes that the banks are really manageable. That is, if they are too complex either for their own institutions to manage them or for the regulators to manage them.”
That set off angry responses to Politico’s Morning Money. “While Senator Warren had every right to ask pointed questions at today’s Senate Banking Committee hearing, her claim that ‘nobody believes’ that bank books are honest is just plain wrong,” a “top executive” emailed the financial newsletter. “Perhaps someone ought to remind the Senator that the campaign is over and she should act accordingly if she wants to be taken seriously.”
So if she wants to be “taken seriously,” she should act like a doormat and let bankers walk all over her?
During the hearing, Warren asked why ordinary people often faced prosecution while banks do not.
“You know, I just want to note on this. There are district attorneys and U.S. attorneys who are out there every day squeezing ordinary citizens on sometimes very thin grounds. And taking them to trial in order to make an example, as they put it. I’m really concerned that too big to fail has become too big for trial,” she said. “That just seems wrong to me.”
Like the Aaron Swartz prosecution, for example?
According to an article in the Washington Post this morning, the proposed new assault weapons ban isn’t likely to be particularly effective: Latest try at new assault weapons ban would exempt more than 2,200 specific firearms
Congress’ latest crack at a new assault weapons ban would protect more than 2,200 specific firearms, including a semi-automatic rifle that is nearly identical to one of the guns used in the bloodiest shootout in FBI history.
One model of that firearm, the Ruger .223 caliber Mini-14, is on the proposed list to be banned, while a different model of the same gun is on a list of exempted firearms in legislation the Senate is considering. The gun that would be protected from the ban has fixed physical features and can’t be folded to be more compact. Yet the two firearms are equally deadly.
“What a joke,” said former FBI agent John Hanlon, who survived the 1986 shootout in Miami. He was shot in the head, hand, groin and hip with a Ruger Mini-14 that had a folding stock. Two FBI agents died and five others were wounded.
The bill propopsed by CA Sen. Diane Feinstein
…would ban 157 specific firearms designed for military and law enforcement use and exempt others made for hunting purposes. It also would ban ammunition magazines that hold more than 10 rounds.
Yet there are firearms that would be protected under Feinstein’s proposal that can take large capacity magazines like the ones used in mass shootings that enable a gunman to fire dozens of rounds of ammunition without reloading.
Feinstein said in a written response to questions from The Associated Press that the list of more than 2,200 exempted firearms was designed to “make crystal clear” that the bill would not affect hunting and sporting weapons.
A couple of days ago, Molly Ball of The Atlantic tried to figure out why 22 conservative Republicans voted against the Violence Against Women Act when do so has the effect of making Republicans “look bad.”
Surely Republicans, whatever you may think of them, are not actually in favor of violence against women. But if they’re going to absorb all this terrible publicity, they must have significant substantive objections to the legislation in question, right?
If you say so, Molly. I think they’re just plain mean and stupid.
The objections can be grouped in two broadly ideological areas — that the law is an unnecessary overreach by the federal government, and that it represents a “feminist” attack on family values. “The ideological foundations of the law are flawed and have led to an inability to help victims effectively,” Christina Villegas, a visiting fellow at the conservative Independent Women’s Forum and adjunct professor of political science at Cal State San Bernadino, told me.
VAWA, Villegas said, is premised on the theory that violence against women is a product of sexism and patriarchy — “men’s desire to keep women down” and the sexes’ unequal social status. But research shows that such violence has many sources, from substance abuse to marital conflict, according to Villegas. “VAWA provides so much funding [based on this model] that could be so much more effective if it focused on the proven causes of violence,” she said.
And so on, you can read the rest at the link. But what Ball’s straight-faced reporting of conservative objections to the bill really demonstrates is that their excuses are just cover for the simple truth that a lot of Republicans think that protecting them from rape, murder, and beatings by husbands and boyfriends violates men’s “rights.” As Amanda Marcotte wrote in her response to Ball’s piece, Republicans “have issues.”
Molly Ball of the Atlantic decided to delve into why it is that Republicans have caved into conservative pressure groups who oppose the Violence Against Women Act. The reasons that conservatives gave her were, she had to admit, shallow and idiotic and, if she delved in deeper (the claim that VAWA is making domestic violence worse is simply not true), straight up dishonest, but she didn’t make the obvious leap and realize that perhaps conservatives oppose VAWA because they are misogynist, and that all the excuses they give are attempts to deflect people from seeing the obvious.
But in case you are still struggling to accept that straight-up misogyny might be driving the fight against VAWA, consider this: Talking Points Memo discovered the conservative super-PAC and advocacy group [that] has been behind the push against VAWA. You don’t have to dig very deep to discover that their reasons are blunt force misogyny:
In a blog post, FreedomWorks criticized the cost of the legislation — $660 million — and pointed out that domestic violence is “already illegal in all 50 states.” It added: “Supporters of the VAWA portray women as helpless victims – this is the kind of attitude that is setting women back.”
Well what do you know? Freedom Works again. Marcotte continues:
In other words, the solution to domestic violence is to simply refuse to label a woman whose partner is beating her a “victim”. Got it. I’m curious if FreedomWorks is willing to expand this attitude towards other crimes. Mugged? Well, it’s disempowering and bad for you to call you a “victim”—god forbid!—so let’s just say you’re generous to people who wield guns and call it a day. FreedomWorks also claims that simply having laws on the books banning domestic violence is enough—as long as we formally say we’re against it, we don’t need to do anything silly like make sure the laws are enforced by directing resources to them. They also make the facetious claim that feminists are demanding that men be thrown in jail for merely yelling at women. It’s an amazing show of minimizing domestic violence, pretending that it’s just couples fighting, and seeking any way possible to make sure that abusive men aren’t held accountable.
And from the annals of rape culture, Alternet reports on “How police treat rape in America.”
In some of the most disturbing and sickening news of the day, New York state police have decided that a 15-year-old girl who was sexually assaulted by three boys was in fact not sexually assaulted because both she and the boys are mentally handicapped.
In May of last year, three boys attacked a 15-year-old mentally challenged student at Martin De Porres Academy, a school for students with special needs in Long Island. According to the police report, one of the boys repeatedly banged her head against the table while the other two forced her to give them oral sex and then tried to have forcible anal sex with her. In interviews with the police, the girl explained how she repeatedly said “no” and “stop” but that the boys continued to assault her. When she came home from school that day, her mother noticed that she had blood on her underwear.
But when the police learned that the alleged rapists were also mentally challenged, they withdrew the charges.
The department’s spokesperson told the New York Daily News , “It was more of a consensual situation with their mental capabilities.”
Of course, head-banging, blood and repeated pleas to “stop” are never consensual situations–regardless of the IQ level of the attackers. But, in this case, the police department is even further off target. As the family’s lawyer explained, the girl has an IQ of about 50 points, which puts her below the cognitive functioning level to consent to sex at all.
Here’s another outrageous child abuse story from the Smoking Gun: FBI: Man Slapped Crying Toddler On Delta Flight
After demanding that the mother of a crying toddler “shut that nigger baby up,” a male passenger allegedly slapped the 19-month-old across the face as a flight prepared to land in Atlanta last Friday evening, The Smoking Gun has learned.
The shocking February 8 incident aboard Delta Airlines Flight 721 resulted in Joe Rickey Hundley, 60, being charged with simple assault, according to a U.S. District Court affidavit. Hundley…is president of an aircraft parts manufacturer headquartered in Hayden, Idaho.
Can you believe that? I guess the FBI got involved because this may be a hate crime.
As detailed by FBI Agent Daron Cheney, Hundley was traveling to Atlanta from Minneapolis in seat 28A on the MD-90 twin-engine jet. He was seated next to Jessica Bennett, who shared seat 28B with her son Jonah.
Bennett, 33, told investigators that the “aircraft was in final descent” to Hartsfield-Jackson International Airport when her child “started to cry due to the altitude change.” Bennett added that she “was trying to get [her son] to stop crying, but he continued.”
At this point, Bennett recalled, Hundley used the racial epithet as he told her to shut the child up. He then allegedly “turned around and slapped” the toddler in the face “with an open hand, which caused the juvenile victim to scream even louder.” The slap, Bennett said, “caused a scratch below [the child’s] right eye.”
Thanks to Dakinikat for alerting me to this story.
And thanks to JJ for this one from The Guardian UK: Every meteorite fall [that we know about] on earth mapped. Please go check it out. The known incidents go all the way back to 2,300 BC!
Those are my recommendations for today. What’s on your reading and blogging list? I look forward to clicking on your links!
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.
John Williams, over at Shadow Stats, compiles economic data for inflation and unemployment the way it used to be calculated pre-1990. Based on that data, the CPI inflation rate is over 10%, and the unemployment rate is over 15% (see charts). The Misery Index is the sum of the current inflation rate and the unemployment rate. If it were to be calculated using the older methods, the Index would now be over 25, a record high. It surpasses the old index high of 21.98, which occurred in June 1980, when Jimmy Carter was president. Most believe the height of the Index along with the Iranian hostage crisis is what caused Carter to lose his re-election bid.
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.
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!!!
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 …
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.
The Labor Department said Wednesday that the Producer Price Index rose a seasonally adjusted 1.6 percent in February — double the 0.8 percent rise in the previous month. Outside of food and energy costs, the core index ticked up 0.2 percent, less than January’s 0.5 percent rise.
Food prices soared 3.9 percent last month, the biggest gain since November 1974. Most of that increase was due to a sharp rise in vegetable costs, which increased nearly 50 percent. That was the most in almost a year. Meat and dairy products also rose.
Energy prices rose 3.3 percent last month, led by a 3.7 percent increase in gasoline costs.
Separately, the Commerce Department said home construction plunged to a seasonally adjusted 479,000 homes last month, down 22.5 percent from the previous month. It was lowest level since April 2009, and the second-lowest on records dating back more than a half-century.
The building pace is far below the 1.2 million units a year that economists consider healthy.
There was little sign of inflationary pressures outside of food and energy. Core prices have increased 1.8 percent in the past 12 months.
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.
Gas prices spiked in February and are even higher now. The national average price was $3.56 a gallon Tuesday, up 43 cents, or 13.7 percent, from a month earlier, according to the AAA’s Daily Fuel Gauge. Rising demand for oil in fast-growing emerging economies such as China and India has pushed up prices in recent months. Turmoil in Libya, Egypt and other Middle Eastern countries has also sent prices higher.
But economists expect the earthquake in Japan to lower oil prices for the next month or two, which should temper increases in wholesale prices in coming months. Japan is a big oil consumer, and its economy will suffer in the aftermath of the quake. But as the country begins to rebuild later this year, the cost of oil and other raw materials, such as steel and cement, could rise.
Oil prices fell sharply Tuesday as fears about Japan’s nuclear crisis intensified. Oil dropped $4.01, or 4 percent, to settle at $97.18 per barrel on the New York Mercantile Exchange.
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.
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.
When Bush took office in January 2001, we were already well into fiscal year 2001, which began on Oct. 1, 2000. He immediately pushed for a huge tax cut, which Congress enacted. In 2002 and 2003, Bush demanded still more tax cuts, even as the economy showed no signs of having been stimulated by his previous tax cuts. The tax cuts and the slow economy caused revenues to evaporate. By 2004, they were down to 16.1 percent of GDP. The postwar average is about 18.5 percent of GDP.
Spending did not fall in response to the STB decimation of federal revenues; in fact, spending rose from 18.2 percent of GDP in 2001 to 19.6 percent in 2004, and would continue to rise to 20.7 percent of GDP in 2008. Insofar as the Bush administration was a test of STB, the evidence clearly shows not only that the theory doesn’t work at all, but is in fact perverse.
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.
Because of its obvious ridiculousness, one seldom hears conservatives say openly that tax cuts automatically reduce spending. But it still underpins the entire Republican budget strategy — tax cuts never have to be paid for, no meaningful spending cuts are ever put forward, earmarks and foreign aid are said to be the primary sources of budget deficits, and similar absurdities.
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.
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 Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.50 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade.
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.
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.