Tag Archives: inflation

See America’s income inequality grow during 1979-2011, a driver of Campaign 2016

Summary: To understand this election we must see the accumulated stresses which produced the insurgencies in both parties. Rising income inequality — “the hollowing out” of the middle class and rise of the 1% — is probably the biggest, yet still poorly understood (until recently conservatives denied it). This great study by one of our top economists describes the dismal picture, essential for us to understand if we are to begin the reform of America.

Income growth by quintile — and by percentile for the top quintile

Income Growth 1979 - 2011

Growth of income and welfare in the U.S, 1979-2011

By John Komlos. Published by the NBER, April 2016
Excerpts. Red emphasis added.

Conclusions

{These} estimates have to be considered preliminary. Nonetheless, there are a few consistent patterns in which we have confidence that they will survive successive improvements.

These include most vividly what in the colloquial is referred to as the “hollowing out” of the middle class. The lower-middle class 2nd quintile and the middle class 3rd quintile fared the worst in all specifications: their income increased at a rate of between 0.1% and 0.7% per annum (Figure 1). In contrast, the only group whose income grew remarkably was the 5th quintile and especially the top 1% whose income registered an astonishing growth rate of between 3.4% and 3.9% per annum, reaching an average value of $918,000 by the end of the period under consideration.

Somewhat surprising is the consistently positive growth of the income of the lowest quintile. The poorest group registered an income growth estimated to be between 0.5% and 1%, i.e., consistently above that of the 2nd and 3rd quintiles, and equaling that of the 4th quintile (Figure 1). This is all the more surprising insofar as their net transfers decreased over time while those of the three middle class quintiles increased by as much as $9,000 per annum (Table 4).

… However, it is astounding that the relative income of the rest of the 5th quintile besides the top 1% did not experience such humongous growth. Only the top 1% increased enormously from a factor of 21 to a factor of 51, a surge of no less than 144%.

… Another recurring pattern is that the income of the 2nd and 3rd quintiles consistently lagged behind the other quintiles. This is referred to in conventional parlance as the “hollowing out of the middle class”. … According to the low estimates, it would take about 600 years for incomes in the 2nd quintile to double and on the order of a millennium for welfare to double. These are growth rates that are reminiscent of those that prevailed prior to the Industrial Revolution.

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The US economy flies into the “coffin corner”, but we don’t mind!

Summary: Every year Wall Street economists see a spike in a few indicators and announce an imminent boom. This slowly fades away, leaving another year of slow growth — preventing full recovery from the crash. Readers of the FM website have seen this accurately reported since the crash, avoiding the boom-bust cycle of of crushed euphoria. Here’s a new update, as we start another slowing cycle. Eventually, inevitably, we will hit a bump that pushes slow growth to outright decline. Then, when we no longer can prepare, economic news will become exciting.

Economy

Contents

  1. Seeing the US economy as it is
  2. What might spark a crisis?
  3. Graphs: see the pulse of America’s economy
  4. For More Information

(1)  Seeing the US economy as it is

Slowly economists see the dilemma facing the Fed’s governors): they’re desperate to raise interest rates, but the US economy can grow only slowly, and so remains vulnerable to a shock that knocks it into a recession (probably a severe downturn, given its weakness).

Seven years of the Fed’s Zero Interest Rate Policy (ZIRP, since December 2008) have distorted America’s large and dysfunctional capital markets. Not just in the obvious bubbles in the stock market (e.g, biotech and social media stocks), in equity investors’ mad belief that bad news is good news (small cap stocks up 5% after the ugly jobs data), but also in ways we can only dimly see today.

Worse, ZIRP means that in the next recession the Fed will have to take America to negative interest rates — with consequences impossible to foresee (so far only small nations have crossed this Rubicon). Long experience in the US, Europe, and Japan has proven the ineffectiveness of their only other tool, quantitative easing.

On the other hand, the data suggests that raising rates now would be insane: near-zero inflation, a too-strong US dollar (already depressing exports), and slow growth (even slower on a per capita basis).

We’re in the coffin corner: can’t accelerate, can’t continue at this speed, and can’t afford to decelerate. All that maintains public confidence is the happy talk of the Fed governors and Wall Street’s gurus, at the long-term cost of destroying their credibility when it proves false. The only hint the Fed has given us is the slow downward ratchet in their forecast of US long-term growth.

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3 graphs tell the story about the US economy, hidden amidst the noise of the jobs report

Summary:  We’ve reached a critical point in this business cycle. We enjoyed the years of fiscal and monetary stimulus; now comes the dismount. Only after the stimulus ends will we learn the true strength of our economy. Today we look at the monthly jobs report, perhaps the single most important indicator. Three graphs tell the story, cutting through the fog of confusion spread by the news media.

Economy

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Contents

  1. Why we’re ignorant and confused
  2. The weak good news: more employed
  3. The bad news: percent employed
  4. More bad news: wages
  5. For More Information

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(1) Why we’re ignorant and confused

Reports about the monthly jobs report illustrate why we’re confused and so often ignorant about important aspects of our lives.

  1. We get numbers without context. Raw numbers by themselves tell us little; the percent change has meaning. Also useful are descriptions of the trend and adjustments for inflation (vital when looking at long-term changes).
  2. We get detailed analysis of noise, lavish attention to tiny monthly fluctuations — changes usually smaller than the data’s error bars.

Instead let’s focus on the big things. Three graphs tell the story about the September jobs report. I have been showing readers these numbers for years. The first big story is that these trends have not changed.

Before we start, remember the price paid for this expansion. Five years of near-zero interest rates (since December 2008) — ending in Q2 or Q3 of 2015). Three rounds of quantitative easing — ending this month. And an mind-bending expansion of the Federal public debt — $809 billion added during the fiscal year just ended (a 6.8% increase, equal to 4.7% of GDP). That the economy needs such large stimulus in the sixth year of an expansion is unprecedented (usually by now the economy has overheated from too-fast growth) — and is the second big story.

Now comes the dismount, when we must dial the stimulus down to zero. Understanding the trend helps us prepare for what might happen next.

(2)  The weak good news: more employed

Steady slow growth at about 2% now in its fourth year. We’re not in a recession. No signs of the often-predicted acceleration.

Jobs: percent change

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(3)  The bad news: per cent employed

The percent of people in their prime years (16 – 64) who are employed peaked in 2006, fell in 2007 – 2011, and has only weakly recovered since then (back to the level of 1984, reversing much of the long increase from women entering the work force). There are many factors affecting this, but the trend since 2006 probably reflects weakness not strength in the US economy.

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The Economist recommends taking the easy path to inflation. But what if it’s closed?

Summary:  If the great monetary experiments underway in Japan and America succeed, then the world will change. Aggressive fiscal and monetary stimulus will become routine, even normal. For better or worse. Already the normalization process has begun by people unaware that in this new century the easy path to inflation has been closed, with as yet unknown consequences.

Money whirlpool

Christian Science Monitor, 8 November 2010

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Contents

  1. The world has changed, yet they still dream of monetary magic
  2. About inflation
  3. The Boomers’ secret lust for inflation
  4. For more information

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(1)  The world has changed, yet they still dream of monetary magic

QE3 will raise the Federal Reserve’s assets by almost 40% in its first year. Japan has adopted an even bolder strategy. One of the two arrows of the three arrows to Abenomics is doubling the money supply in two years in order to raise inflation to 2%. If these monetary experiments work, then the world will change. Already the yearnings for inflation, simmering since the crash (but expressed in euphemisms), are now expressed openly.

Secular stagnation: The second best solution“, The Economist, 21 January 2014  — Excerpt:

WITH a string of talks and op-ed columns, Larry Summers has revived discussion in the “secular stagnation” hypothesis. Income has become concentrated in the hands of groups, like reserve-accumulating foreign governments and the rich, with low propensities to consume, the thinking goes. That has generated excess saving and pushed down real interest rates until they are substantially negative at many durations. That, in turn, has made life very difficult for central banks, which have struggled to stoke up adequate demand with nominal interest rates wedged up against zero.

Mr Summers identifies three broad solutions to the problem.

  • One is to do nothing, or not much anyway, on the demand side. This is not a particularly attractive solution, as it implies a very long slump in which incomes are lower than they need to be, unemployment is higher, and the economy’s potential is eroding.
  • Another is to raise inflation expectations in order to reduce real, or inflation-adjusted, interest rates until demand is where we’d like it to be. This policy is not without its downsides …
  • The last option to address stagnation is to have the government soak up excess savings and boost demand through deficit-financed public investment.

The third option is quite clearly Mr Summers’ preferred course of action. And it is a very attractive option. It is a rare rich country that doesn’t have a list of infrastructure needs that could justifiably be addressed in the best of times. Pulling those off the shelf and taking them on amid rock-bottom interest rates and weak demand is a no-brainer. Unfortunately, governments are discinclined to seize these opportunities. That makes it very important to sort out the relative attractiveness of alternative solutions to stagnation.

My sense is that Mr Summers reckons the inflation strategy is not as easy to deploy successfully as I make it out to be. QE purchases focused on safe assets might have an ambiguous effect on the economy: boosting asset prices through portfolio balance effects but limiting lending growth by sucking up the supply of good collateral. And as Brad DeLong notes, high inflation could conceivably undermine the safe-asset status of some government securities. Meanwhile, central banks might not be comfortable mustering the bluster to convince markets that higher inflation is ahead. And if they did, increases in long nominal rates could create their own financial difficulties.

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Are we following Japan into an era of slow growth, even stagnation?

Summary: Understanding events requires not just see what’s happening today and guessing about the future, but also grading past expectations vs the actuals. Otherwise we live in the now, like cats, with little ability to shape our world. This is one way, perhaps the best way, to evaluate experts in fields other than our own. Doing so takes us from the warmth of their confident words, and opens us to see surprises, valuable since experts seldom confess to them. Today we’ll examine the big macroeconomic surprise in 2013, and its warning.

Japan: Help

Ask not for whom the bell rings, for it rings for thee

“Perchance he for whom this bell tolls may be so ill, as that he knows not it tolls for him; and perchance I may think myself so much better than I am, as that they who are about me, and see my state, may have caused it to toll for me, and I know not that.”
— John Donne (1572-1631), Devotions Upon Emergent Occasions

Contents

  1. The big macroeconomic surprise of 2013
  2. The ECRI points to Japan
  3. Larry Summers points to Japan
  4. Other economists speak up
  5. For More Information

(1) The big macroeconomic surprise of 2013: falling inflation

This graph of  US inflation tells an interesting story. In 2011, as inflation rose, conservatives prepared themselves for the I-told-you-so rapture of dollar collapse and hyperinflation (this was the opening salvo, on 11/15/10). Niall Ferguson cleared a space on his mantel for a Nobel. But inflation peaked in January 2012, entering a steep decline. In the 4th quarter of 2012 everybody expected that the Fed adding a trillion dollars to its balance sheet would change that. So far it has made little difference.

This is Core Personal Consumption Expenditure Index, which provides one of the best available measures of inflation and its momentum.

FRED: PCE core

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This is a shocking surprise. The Fed began the third round of quantitative easing (QE), a form of unconventional monetary policy, in September 2012 at $40B/month, and boosted it to $85B in December. Here’s what economists expected to see in 2013, as measured by the Core Personal Consumption Expenditure Index:

After a year of QE, the Fed pumping out a trillion dollars, economists have lowered their forecasts for inflation. We live in a world of wonders.

Take a moment to absorb this. For five years inflation has been below the Fed’s 2% floor, despite three rounds of QE. That’s bad. They set a floor for a good reason: deflation is lethal for a high-debt economy like ours. A steady 2% inflation does little or no harm (despite giving conservatives reason to whine about the 20th century’s drop in the US dollar (during which time the US became the world’s superpower). A 2% floor gives the Fed a cushion of time to act when it’s breached, and time for their actions to have effect.

What insights can we draw from this? Opinions differ. There is one theory, obvious for several years but seldom mentioned (too scary): we now follow Japan down a path of slow growth and deflationary tendencies. In June 2010, during the euphoria about our “V” shaped recovery, I wrote about it: We are following Japan’s path of decline. The real test comes later this year.

After three years of slow growth despite intense stimulus, now a few bold economists warn us of this danger.

(2)  The Economic Cycle Research Institute points to Japan

Becoming Japan – part 2“, ECRI, 4 November 2013:

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