Tag Archives: economics

The inflation numbers from 2022

FiveThirtyEight has a simple rundown of the inflation and interest rate numbers from 2022:

One of the most important numbers of 2022 was 9.1 percent. That was the inflation rate in June — the highest yearly increase since 1981…

Inflation has since cooled a bit, but as of November, consumer prices were still 7.1 percent higher than they were at the same time last year. And that’s affected the way families are celebrating the holidays. In a poll from before Christmas, 57 percent of those surveyed said that it was harder to afford the gifts they wanted to buy, up from 40 percent the year before. And 11 percent of respondents in another poll said they anticipated taking on some amount of debt for their holiday shopping…

To control this high inflation, the Federal Reserve raised its benchmark interest rate more than 4 percentage points over the course of the year, to the highest point in 15 years. Most observers agree that’s likely to cause a recession. What’s less clear is how bad it will be, and whether it curbs inflation as it’s intended to do. These are the unknown questions 2023 is poised to answer, and why the inflation rate is one of the most important numbers of the past year.

FiveThirtyEight

I found myself dipping into what are supposed to be emergency funds to cover my family’s normal living expenses toward the end of 2022, so yes I can understand that people who were barely making ends meet at the beginning of the year might be in trouble at the end of it. The good news is that almost anyone who wants a job should be able to find one, at least for now, and maybe not at the level of pay they prefer. The real pain comes if unemployment spikes while inflation is still high. The hope for 2023 would be that inflation continues to tick down toward a “normal” level of say 2-3%, while unemployment stays in its low range of say 3-5%. If that is where we are a year from now, our economy and society will feel more stable although of course we will still have serious inequality and social problems to work on.

And by the way, does “growth” really matter if people are employed and are able to buy the things they need and a reasonable amount of the things they want? I don’t see why, it seems like a very indirect measure.

a ship being built

It’s fun to watch construction cameras in fast forward. This is a ship being built at Philly Shipyard Inc. (and by way, you can argue whether it is lazy to use the abbreviation for Philadelphia and whether “ship yard” should be one word or two, but this is the actual name of the company.

Youtube

I learned from this (paywalled) Philadelphia Inquirer article that U.S. shipyards are not competitive in the market for international oceangoing cargo vessels. However, there is something called the Jones Act that requires domestic trade to be done on U.S.-built and U.S.-crewed ships. So this includes trade between the U.S. mainland, Hawaii, and Guam for example. This seems a bit inefficient to me, but I can also see an argument to maintain the ability to build technology domestically with obvious military use. The shipyard also has military and government contracts which, and so sorry I just can’t resist the terrible pun, keep it afloat. I am a dad after all, and I have to keep my dad jokes at the ready.

eeney miney mini max

This article talks about using “mini max regret” in climate planning. Basically this sounds like a form of cost-benefit analysis incorporating uncertainty of key inputs including the discount rate. They conclude that 2% is a reasonable intergenerational discount rate.

Note that discounting is one way of handling that issue of the needs of the present population vs. all the teeming trillions who might exist in the future. It doesn’t quite work for existential risks though, because if no humans are around there are by definition no costs or benefits until the cockroaches develop economics.

measuring inflation is hard

Measuring inflation is hard for a variety of reasons, and it gets even harder when you try to compare across countries and regions. Some of the reasons include methodological choices in averaging, weighting, how housing and transportation are accounted for, how urban and rural consumers are included, and many others. There is a measure called the Harmonized Index of Consumer Prices (HICP) that is used to try to compare across countries and regions. This differs from the U.S. CPI in a variety of ways.

mathy inflation hand waving headlines

Breitbart headline: Wholesale Inventories Rose More Than Expected, Pointing to Even More Inflation Ahead

Okay Breitbart, but couldn’t an increase in inventories indicate that supply is starting to catch up with demand, which would put downward pressure on inflation? Or it could indicate a sudden drop in demand, which would also hopefully put downward pressure on inflation, although maybe not right away, which could lead to the dreaded “stagflation”. Either way, this headline is either stupid or intentionally misleading. Either the logical relationship is the opposite of what they are suggesting, or there is no relationship at all.

In the actual article,

Economists had expected many businesses to go into liquidation mode to rid themselves of unwanted inventories in the first quarter of this year. Indeed, declining or decelerating inventories were widely expected to be a drag on GDP as well as a moderating factor on inflation. Instead, inventories have been building faster than expected, which will likely force GDP expectations and inflation to rise.

Wholesalers act as middlemen between producers of goods and retailers. The business requires speculation about future demand. A rising wholesale inventory generally indicates expectations for robust demand from consumers for goods. It can go awry, however, if consumer spending is weaker than expected and wholesalers are left with unwanted stockpiles of goods. For this reason, economists watch the inventory to sales ratio, which remains at a historically low level that indicates wholesalers have not built up big piles of goods in compared to consumer activity.

Breitbart

Let’s try to follow this convoluted logic. I don’t see why declining inventories would put downward pressure on inflation, unless businesses are expecting a big slowdown in demand in the near future so they preemptively stop ordering goods. We hear speculation that inflation and interest rate hikes could trigger a recession, but businesses tend to react to economic fluctuations rather than gamble on what they think might happen. At the moment, both supply and demand are picking up, but demand is picking up faster and causing inflation.

Inventory to sales ratio is at a historic low – this again would suggest demand is picking up and supply is still struggling, triggering inflation. This is logical – and the exact opposite of the headline, which is completely illogical! People who read only the headline or only skim the text (probably most people) are going to get the exact opposite of the right idea. I am going to stamp this as naked propaganda and shame on Breitbart.

U.S. labor market growth

Axios has a brief piece on the demographics of the labor force in the U.S. A tight labor market is not just a short-term phenomenon during the pandemic recovery.

In the 2010s, the massive millennial generation was entering the workforce, the massive baby bo0m generation was still hard at work, and there was a multi-year hangover from the deep recession caused by the global financial crisis. But now, boomers are retiring, millennials are approaching middle age, and the Gen Z that follows them is comparatively small.

Axios

So combine this trend with anti-immigrant politics, and we may have a problem. It could lead to the double-edged sword of higher wages and inflation, a trend toward toward greater automation and technological innovation, a general drag on economic growth (which could ultimately lead to deflation), left wing politics, right wing politics, business pressure for more globalization/offshoring, or some combination of any of these (other than inflation and deflation, but maybe it is possible to have a sudden reversal between these and hard for policy to react quickly even if we knew what to do). It is hard to know what to do, but rational immigration policies based on skills and education to fill jobs available would be a start.

supply, demand, and prices do not really exist

This statement by James Galbraith makes my head spin a bit.

Just as Einstein had erased Euclid’s axiom of parallels, Keynes’s General Theory had long since obliterated the supply curves for labor and saving, thereby eliminating the supposed markets for labor and capital.

It followed that the prices of production were set by costs (mostly labor costs and interest rates), while quantities were determined by effective demand. Markets were not treated as if they were magical. It was obvious that most resources and components did not move under the influence of an invisible hand. Rather, they moved according to contracts between companies on terms set by negotiation, as had been the case for more than a hundred years. Technology was managed by organizations – mostly by large corporations – in what was sometimes called “the new industrial state.”

Project Syndicate

This is in a review of a book arguing that prices are really important. It’s a bit disturbing to me to think that there might not be a consensus among economists about how the economy actually works. We ordinary people can grasp theories like prices equilibrating supply and demand, and even how interest rates are related to the money supply and inflation, if we try really hard. But we assume the experts understand this stuff on a much deeper level, and that it is fundamentally science. If our understanding of civilization turns out to be based on pseudoscience, we might be in trouble.

the Simon-Ehrlich bet

Paul Ehrlich has probably won his 1980 bet with Julian Simon in a number of parallel universes, according to this analysis:

Better lucky than good: The Simon-Ehrlich bet through the lens of financial economics

In 1980, Julian Simon and Paul Ehrlich bet on the future of natural resource prices as a vehicle for their public debate about mankind’s future. Simon ultimately won, and his victory has been used as evidence that innovation can offset material scarcity induced by human economic activity. But does the outcome of the bet truly suggest this? We recast the bet as a short-sale by Simon of Ehrlich’s portfolio of assets, allowing us to carefully analyze the choices made in the bet, including the resources chosen and their amounts and the period of the bet, conditioned on the information available to each man in 1980. We also investigate the role of randomness in the outcome of the bet. We find that, with careful portfolio construction, Ehrlich should win this bet more often than not, validating the age-old adage that it’s better to be lucky than good.

Ecological Economics

Does this mean that humanity as a whole is better off than we maybe “should be” on average? Hard to say.

the (thing everybody calls the) Nobel Prize in economics

This year’s Nobel prize for economics, which we are supposed to call the “Sveriges Riksbank Prize in Economic Sciences”, is for a method of identifying natural experiments in data. The importance of this is to get over the “correlation is not causation” hump and actually be able to make some statements about causation. In my very simplistic understanding, you would find at least two data sets where at least two variables are correlated in one but not the other, and the state of the system they represent is roughly the same except for one other variable. Then you can infer that other variable had some role in causing the correlation or lack thereof. This is how you design an experiment of course, but in this case you are looking in existing data sets for cases where this occurred “naturally”.

That’s my simplistic understanding. Let’s look at how Nature describes it.

In 1994, Angrist and Imbens developed a mathematical formalization for extracting reliable information about causation from natural experiments, even if their ‘design’ is limited and compromised by unknown circumstances such as incomplete compliance by participants3. Their approach showed which causal conclusions could and could not be supported in a given situation.

Nature

It seems like this would have applications well beyond economics and social science. For example, ecology, and environmental science in general, where there are just so many variables and complex interactions that setting up randomized controlled experiments in daunting. (Although it can be done – in ecological microcosms, for example). It must have evil applications too of course, from advertising to politics.

What is infrastructure?

This apparently is a political question. I am not an expert on all types of infrastructure, or a financial expert, but I am somewhat of an expert on urban water infrastructure. The definition of infrastructure I typically use is from the Statement No. 34 of the Governmental Accounting Standards Board: Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments. Here is how it goes:

As used in this Statement, the term capital assets includes land, improvements to land, easements, buildings, building improvements, vehicles, machinery, equipment, works of art and historical treasures, infrastructure, and all other tangible or intangible assets that are used in operations and that have initial useful lives extending beyond a single reporting period. Infrastructure assets are long-lived capital assets that normally are stationary in nature and normally can be preserved for a significantly greater number of years than most capital assets. Examples of infrastructure assets include roads, bridges, tunnels, drainage systems, water and sewer systems, dams, and lighting systems. Buildings, except those that are an ancillary part of a network of infrastructure assets, should not be considered infrastructure assets for purposes of this Statement.

GASB 34

This seems like as good a definition as any. So Biden’s proposed bill is really a capital assets bill. Which doesn’t have much of a ring to it. But neither did infrastructure, it’s a bizarre word that we’ve just been saying a lot so it has started to sound less bizarre. Capital assets, I learned in my undergraduate economics classes, are the economy’s food, and as it consumes them we have to add more just to keep the amount of them level (maintain, repair, rehabilitate, or replace when the time comes). We can increase economic output up to a point by adding even more capital assets to increase the absolute level, although there is such a thing as adding too much (looking at you, old Soviet Union, and possibly modern Japan), and we are almost certainly way below the point that would be too much. It makes total sense to borrow at a reasonable interest rate and invest in capital assets that will provide a return on that investment, and if you can borrow at no interest or even a slight negative interest rate, and you are below that optimal level of capital assets, warm up those printing presses! You can also, in theory, incentivize the private sector to make appropriate capital investments on their side. Investments in education, training, research and development then round out the investment in capital assets by providing the work force and capacity to innovate that set the stage for long term investment. Oh, and you want to try to do all this without irreversibly fucking up the atmosphere and oceans. Easy peasy!

What infrastructure is definitely not is only roads, bridges, and highways. That has been the limit of imagination of many of our elected officials when talking about infrastructure. So good for this administration for taking a more expansive view, and seizing the initiative. We’ll see if this is the one big thing this administration manages to get done in its two year “grace period”. Why do we have a system where we can only do one thing every 8 years?