Should Hamburgers and French Fries be heavily taxed?

Fighting youth body fatness: The role of food prices 

 

Michael Grossman, Erdal Tekin, Roy Wada, 28 September 2013

Childhood obesity is a major health concern whose effects persist into adulthood. Targeted taxation of unhealthy foods has been shown to reduce body mass index (BMI), but this is an imperfect measure of obesity. This column provides evidence that taxation affects percentage body fat (PBF), a more direct measure. This evidence strengthens the argument in favour of tax-based incentives as a policy tool.

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According to the World Health Organization, childhood obesity is one of the most serious public-health problems of the 21st century. The prevalence of obesity among children has been on the rise globally over the last several decades and is now an epidemic in the US.

• Since the mid-1970s, the proportion of children aged 12 to 19 who are obese has more than tripled from 5.0% to 18.1% in the US (Ogden et al. 2010).

These trends are extremely alarming.

• Childhood obesity has been associated with a host of chronic health problems, such as high blood pressure, hypertension, gallbladder disease, and Type 2 diabetes as early as adolescence (Serdula et al. 1993; Freedman et al. 1999; 2007; Hill, Catenacci, and Wyatt 2006).

Children who are obese during early childhood are likely to be obese during adulthood. This not only exacerbates the aforementioned health problems, but also leads to negative long-term psychological and labour market outcomes ranging from poor self-esteem and depression to discrimination and lower wages (Daniels 2006; Mocan and Tekin 2011; Dietz 1998; Strauss 2000).

Why the extra weight?

There is a long list of explanations offered for the rapid rise in childhood obesity and overweightness. These include:

• Falling food prices.
• Increased demand for sugary drinks.
• Advertising of unhealthy foods targeted at children.
• Increased time spent in sedentary activities, such as watching TV or videos, using a computer, or playing computer games.
• Lack of vigorous physical activity.
• Increased food-portion sizes.

Just as there is no single explanation for the obesity epidemic, there is no single or simple solution. Most public interventions aimed at improving child and adolescent health generally take the form of policies that limit access and provide price incentives or disincentives.

The latest policy proposals for reducing childhood obesity rates involve raising the prices of unhealthy, nutrient-dense food items such as sugar-sweetened beverages and fast-foods through taxations. Such policy proposals are based on findings that selective applications of taxation and subsidies are effective in shifting food consumption away from unhealthy food towards healthier alternatives (Cawley 2010; Powell and Chaloupka 2009).

• In general, empirical studies that examined the effects of prices on obesity found stronger effects than studies that examined the effects of food taxes (Powell, Chriqui, and Chaloupka 2009; Fletcher, Frisvold, and Tefft 2010).¹
• There is also reasonably consistent evidence demonstrating that fruit and vegetable prices, particularly of the non-starch variety, are associated with lower weight outcomes while fast-food prices are associated with higher weight outcomes for the adolescent population (Powell et al. 2013).

Moreover, these effects tend to be larger for minorities, children in lower-income families, and children whose mothers have less than a high school education.

Problems with the BMI as an indicator of obesity

The existing evidence almost exclusively comes from studies that rely solely on body mass index (BMI) as the measure of obesity. This is not surprising since BMI is easy to calculate and readily available from many social science datasets, but its reliability for use in epidemiological studies has come into question recently.

• It is argued that some of the weak or mixed results documented by studies using BMI may be due to its limited ability to correctly distinguish body fat from lean body mass (e.g., Yusuf et al. 2004, 2005; Romero-Corral et al. 2006, 2007).

Since it is body fat (and not fat-free mass) that is responsible for the detrimental health effects of obesity, several studies caution against a sole reliance on BMI and point to a need for using direct measures of body composition in obesity studies (e.g. Smalley et al. 1990; Romero-Corral et al. 2006).

Our contribution

In a recent paper, we use clinically obtained body composition measures to conduct a comprehensive and comparative analysis of the effects of various food prices on body fatness among youths ages 12 through 18 and compare the sensitivity of our findings to results using BMI (Grossman, Tekin, and Wada 2013). Ours is the first study to consider clinically measured levels of body composition to examine the effects of food prices on body fatness among youths. It is important to assess the extent to which alternative body fat measurements are reliable and precise in the identification of the degree of obesity among youths in order to better understand the risk factors associated with obesity and develop policies to counter these risk factors.

The body composition measure that we employ is percentage body fat (PBF). We derive our PBF measure from three separate sources, two of which rely upon bioelectrical impedance analysis (BIA) and one of which relies upon dual energy x-ray absorptiometry (DXA). We also employ clinically measured height and weight to estimate the effects of prices on BMI. We draw on data from the restricted-use versions of National Health and Nutrition Examination Survey (NHANES) to merge various county-level time-varying price variables.

Results

Our findings suggest that:

• Increases in the real price of one calorie of food for home consumption and the real price of fast-food restaurant food result in significant reductions in the in PBF among youths.
• An increase in the real price of fruits and vegetables has negative consequences for these outcomes.
• Measures of PBF derived from BIA and DXA are no less sensitive and in some cases more sensitive to the food prices just mentioned than BMI, and serve an important role in demonstrating that rising food prices (except for those of fruits and vegetables) are associated with reductions in obesity rather than in body-size proportions alone.

Policy implications

These findings have important implications for the optimal targeting of public policies designed to reverse the epidemic of childhood obesity. In particular, they have implications for how changes in agricultural, tax, and subsidy policies might affect food and beverage consumption patterns. 

• We show that selective taxes or subsidies may be able to accomplish part of this goal through changes in food prices.

We also document that uniform increases or decreases in the price of food have the expected impacts on body fatness.

• It should be kept in mind that taxes are blunt instruments that impose significant welfare costs on individuals who consume food in moderation.

There is also the question as to whether parents may more easily and immediately affect the choices made by their children than the government policies.

Some of our results point to higher rates of time preference and lower expected future wage rates among non-white parents and youths as explanations of why minorities are more sensitive to fast-food prices and less sensitive to fruits and vegetables prices than whites. These interpretations add to the existing evidence on the wide range of benefits to early childhood intervention programs emphasised by Heckman and colleagues (e.g., Conti and Heckman 2012). We view our contribution as an important input into the policy debate concerning the most effective ways to reverse the upward trend in obesity.

Interest Rates and Home Sales

 

 (The following article is an interesting read since it demonstrates the fact that two opposite conclusions are arrived at from looking at the same data)

Are Higher Mortgage Rates Boosting Home Sales? Nobody Knows.

John Maxfield
September 22, 2013

Are higher mortgage rates helping or hurting home sales? That's been one of the biggest unexpected conundrums that economists have run into of late, as there's data to support both conclusions.
Just so we're all on the same page, let's review what's happened to mortgage rates over the past few months.

We started the year out at historically low levels. Weekly data collected by Freddie Mac shows that the average rate on a 30-year fixed rate mortgage oscillated around 3.5% for much of the first half of the year, even dipping below 3.4% on two occasions.
All this changed, however, in May, as investors convinced themselves that the Federal Reserve would reduce its support for the economy and thereby drive long-term borrowing costs higher. Needless to say, it was a self-fulfilling prophecy.
In the months that followed, the cost of a home loan shot up by more than 100 basis points, ultimately settling in around 4.5%.
Looking at that chart, one would be excused for thinking that the housing market must be suffering. Like anything else, mortgage volumes are a function of supply and demand. And demand is a function of price -- that is, the interest rate. As the price goes up, demand goes down.
This is exactly what we've seen.
Since the beginning of May, purchase-money mortgage applications are down by 16%, says the Mortgage Bankers Association. And many of the nation's largest mortgage lenders are forecasting even sharper declines for overall mortgage activity.

At a recent industry conference, Timothy Sloan, the chief financial officer of Wells Fargo (NYSE: WFC), predicted that the bank's home loan volumes would drop to $80 billion in the third quarter. That's off the more than $100 billion that it's originated for each of the past seven quarters.
Sloan's counterpart at JPMorgan Chase (NYSE: JPM) made things sound even worse. "In the second quarter, we told you that if rates remained at these levels, we would expect volumes to be reduced by 30% to 40% in the second half of this year versus the first half on the back of a dramatic reduction in refinance volume," CFO Marianne Lake said.
"This is indeed ... what we're experiencing, and all of Fannie, Freddie, and the [Mortgage Bankers Association] agree that the volume reduction will be 35% flat."
But here's where it gets interesting.
The underlying data from the housing market itself appears to be accelerating in the face of these headwinds. Just last week, the National Association of Realtors released its estimate of existing-home sales for the month of August.
How do you think they fared?
Even though July witnessed a 6.5% sequential surge in sales of previously owned homes, they continued to climb in August. On a year-over-year basis, they were up by more than 13%, coming in at the highest level in six and a half years.

The reason? According to the trade group's chief economist, Lawrence Yun, "Rising mortgage interest rates pushed more buyers to close deals."
On top of this, data on the homebuilding front is, for the most part, similarly upbeat.
Earlier this year, the CEO of PulteGroup (NYSE: PHM), the nation's second largest homebuilder by volume (click here to see a graphic of the top five), noted that "[i]n a number of communities across the country, demand has been so strong that we have taken action to slow the overall pace of sales."
Addressing interest rates specifically, he said in the second-quarter earnings release that "[e]ven the recent rise in interest rates has had little effect on overall activity, as consumers continue to perceive good values, amid limited supply and generally rising sales prices, combined with the reality of high lease rates in the rental market."
The head of Lennar (NYSE: LEN), the third largest builder, chimed in as well, noting that "there are too few dwellings for a growing population and for normalized household formation." Not coincidentally, Lennar's second-quarter home deliveries jumped by 39% over to the same period last year.
Whether higher mortgage rates are going to help or hurt home sales simply isn't answerable right now. Despite the evidence that they're doing the former, I can't help believing that this relationship will reverse in the not-too-distant future.

National Debt: Why Is It $16 Trillion ?

The National Debt Clock in New York on Dec. 31, 2012. (JUSTIN LANE/EPA - EPA)
“Our government has built up too much debt. …At $16 trillion and rising, our national debt is draining free enterprise and weakening the ship of state.”
— House Speaker John A. Boehner, Jan. 3, 2013
With a debt ceiling limit looming in the next two months, Congress and the Obama administration appear set to have another bruising battle over spending priorities.
 Before embarking on that course, lawmakers might want to re-read the Standard & Poor’s report on why it reduced the nation’s debt rating after the 2011 deal that ended the last conflict over the debt ceiling. The report offered two key reasons:
 

1) “The downgrade reflects our opinion that the fiscal consolidation plan  that Congress and the Administration recently agreed to falls short of  what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.”

 2) “More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.”

As part of its analysis, S&P assumed Republicans in Congress would never agree to raise taxes, but that actually happened as part of the “fiscal cliff’ negotiations. But S&P was also worried Congress would not fulfill the second half of promised spending cuts — and those have now been deferred for two months.
In any case, S&P was clearly looking for more signs of cooperation on restraining the debt — not confrontation.
As a refresher course, let’s look anew at the sources of this $16 trillion in debt.

The Facts

 While polls indicate that many Americans continue to believe that foreign aid is a large part of government spending, it actually constitutes less than 1 percent of the budget. And, no, the deficit can’t be eliminated by just cracking down on “waste, fraud and abuse.” We once awarded the American public Four Pinocchios for ignorance about the federal budget.
So where does the debt come from? This clever Washington Post interactive feature provides some clues — much of it comes from promises made to keep paying Social Security and Medicare. The programs annually funded by Congress generally have become a smaller share of the U.S. economy, even with funding two wars.
 (An aside: the national debt is made up of publicly held debt and money that the government owes to itself. Boehner’s $16 trillion number is this “gross debt” figure. About $11.5 trillion is public debt and the rest comes from bonds held by Social Security, Medicare and other trust funds. You can have an endless debate about whether these bonds are real or not — read our Social Security primer — but ultimately these are obligations that must be paid with either new debt or general government funds, thus taking away from other programs. There is also dispute over whether gross debt is really the best picture of the U.S. debt load, as economists often focus mostly on publicly traded debt.)
Using the White House’s historical budget tables, let’s look at what has happened to the growth of the debt under various presidents — both the overall debt and the debt that government owes to itself. The figures are for the end of each presidential term, except for Obama. The figure for Obama is as of Jan. 2, based on the Treasury’s debt-to-the-penny Web site.
                                           Size of gross debt           Federal account debt
Before Reagan                           $1 trillion                            $250 billion
Ronald Reagan                          $2.9 trillion                         $677 billion
George H.W. Bush                    $4 trillion                             $1 trillion
Bill Clinton                                 $5.6 trillion                          $2.2 trillion
George W. Bush                         $10.6 trillion                       $4.3 trillion
Barack Obama                          $16.4 trillion                       $4.9 trillion
 While raw numbers are interesting, the more telling statistic is when debt is expressed as a percentage of the overall economy (gross domestic product). We’ve rounded the numbers to keep it simple.
                                             Size of gross debt           Federal account debt
Before Reagan                           33 percent                          7 percent
Ronald Reagan                          53 percent                         12.5 percent
George H.W. Bush                    64 percent                          16 percent
Bill Clinton                                 56.5 percent                        24 percent
George W. Bush                        77 percent                          30 percent
Barack Obama                          105 percent                         31 percent

The Bottom Line

The data show that the growth of the debt in the last three decades certainly has been a bipartisan enterprise, with only Clinton reducing debt as a percentage of the U.S. economy. But even then, debt owed to Social Security, Medicare and the like kept climbing as a share of the U.S. economy.
Moreover, an increasingly large portion of the debt is money that the government owes to itself because of borrowing from large entitlement programs such as Social Security and the Medicare. That’s because the money spent on discretionary programs has generally declined, as a share of the economy, while spending on mandatory programs has soared — and will only consume a larger share of the economy as the Baby Boom generation heads into retirement.
In fact, the debt owed to entitlement programs is now almost as large a share of the economy as all U.S. government debt before Ronald Reagan became president.
Willie Sutton once supposedly said he robbed banks because “that’s where the money is.” By the numbers, some restraint on the growth of entitlements will be needed in order to control the growth of the national debt.

 

What Is Economics Good For?

By ALEX ROSENBERG and TYLER CURTAIN

Recent debates over who is most qualified to serve as the next chairman of the Federal Reserve have focused on more than just the candidates’ theory-driven economic expertise. They have touched on matters of personality and character as well. This is as it should be. Given the nature of economies, and our ability to understand them, the task of the Fed’s next leader will be more a matter of craft and wisdom than of science.
When we put a satellite in orbit around Mars, we have the scientific knowledge that guarantees accuracy and precision in the prediction of its orbit. Achieving a comparable level of certainty about the outcomes of an economy is far dicier.
The fact that the discipline of economics hasn’t helped us improve our predictive abilities suggests it is still far from being a science, and may never be. Still, the misperceptions persist. A student who graduates with a degree in economics leaves college with a bachelor of science, but possesses nothing so firm as the student of the real world processes of chemistry or even agriculture.
Before the 1970s, the discussion of how to make economics a science was left mostly to economists. But like war, which is too important to be left to the generals, economics was too important to be left to the Nobel-winning members of the University of Chicago faculty. Over time, the question of why economics has not (yet) qualified as a science has become an obsession among theorists, including philosophers of science like us.
It’s easy to understand why economics might be mistaken for science. It uses quantitative expression in mathematics and the succinct statement of its theories in axioms and derived “theorems,” so economics looks a lot like the models of science we are familiar with from physics. Its approach to economic outcomes — determined from the choices of a large number of “atomic” individuals — recalls the way atomic theory explains chemical reactions. Economics employs partial differential equations like those in a Black-Scholes account of derivatives markets, equations that look remarkably like ones familiar from physics. The trouble with economics is that it lacks the most important of science’s characteristics — a record of improvement in predictive range and accuracy.
This is what makes economics a subject of special interest among philosophers of science. None of our models of science really fit economics at all.
The irony is that for a long time economists announced a semiofficial allegiance to Karl Popper’s demand for falsifiability as the litmus test for science, and adopted Milton Friedman’s thesis that the only thing that mattered in science was predictive power. Mr. Friedman was reacting to a criticism made by Marxist economists and historical economists that mathematical economics was useless because it made so many idealized assumptions about economic processes: perfect rationality, infinite divisibility of commodities, constant returns to scale, complete information, no price setting.
Mr. Friedman argued that false assumptions didn’t matter any more in economics than they did in physics. Like the “ideal gas,” “frictionless plane” and “center of gravity” in physics, idealizations in economics are both harmless and necessary. They are indispensable calculating devices and approximations that enable the economist to make predictions about markets, industries and economies the way they enable physicists to predict eclipses and tides, or prevent bridge collapses and power failures.
But economics has never been able to show the record of improvement in predictive successes that physical science has shown through its use of harmless idealizations. In fact, when it comes to economic theory’s track record, there isn’t much predictive success to speak of at all.
Moreover, many economists don’t seem troubled when they make predictions that go wrong. Readers of Paul Krugman and other like-minded commentators are familiar with their repeated complaints about the refusal of economists to revise their theories in the face of recalcitrant facts. Philosophers of science are puzzled by the same question. What is economics up to if it isn’t interested enough in predictive success to adjust its theories the way a science does when its predictions go wrong?
Unlike the physical world, the domain of economics includes a wide range of social “constructions” — institutions like markets and objects like currency and stock shares — that even when idealized don’t behave uniformly. They are made up of unrecognized but artificial conventions that people persistently change and even destroy in ways that no social scientist can really anticipate. We can exploit gravity, but we can’t change it or destroy it. No one can say the same for the socially constructed causes and effects of our choices that economics deals with.
Another factor economics has never been able to tame is science itself. These are the drivers of economic growth, the “creative destruction” of capitalism. But no one can predict the direction of scientific discovery and its technological application. That was Popper’s key insight. Philosophers and historians of science like Thomas S. Kuhn have helped us see why scientific paradigm shifts seem to come almost out of nowhere. As the rate of acceleration of innovation increases, the prospects of an economic theory that tames the economy’s most powerful forces must diminish — and with it, any hope of improvements in prediction declines as well.
SO if predictive power is not in the cards for economics, what is it good for?
Social and political philosophers have helped us answer this question, and so understand what economics is really all about. Since Hobbes, philosophers have been concerned about the design and management of institutions that will protect us from “the knave” within us all, those parts of our selves tempted to opportunism, free riding and generally avoiding the costs of civil life while securing its benefits. Hobbes and, later, Hume — along with modern philosophers like John Rawls and Robert Nozick — recognized that an economic approach had much to contribute to the design and creative management of such institutions. Fixing bad economic and political institutions (concentrations of power, collusions and monopolies), improving good ones (like the Fed’s open-market operations), designing new ones (like electromagnetic bandwidth auctions), in the private and public sectors, are all attainable tasks of economic theory.
Which brings us back to the Fed. An effective chair of the central bank will be one who understands that economics is not yet a science and may never be. At this point it is a craft, to be executed with wisdom, not algorithms, in the design and management of institutions. What made Ben S. Bernanke, the current chairman, successful was his willingness to use methods — like “quantitative easing,” buying bonds to lower long-term interest rates — that demanded a feeling for the economy, one that mere rational-expectations macroeconomics would have denied him.
For the foreseeable future economic theory should be understood more on the model of music theory than Newtonian theory. The Fed chairman must, like a first violinist tuning the orchestra, have the rare ear to fine-tune complexity (probably a Keynesian ability to fine-tune at that). Like musicians’, economists’ expertise is still a matter of craft. They must avoid the hubris of thinking their theory is perfectly suited to the task, while employing it wisely enough to produce some harmony amid the cacophony.

Does the World Need an Inflation ?

Many economists have suggested over the past few years that there are essentially two policies that would help the developed countries out of their present situation of large deficits, large sovereign debt and low growth. Many have dared suggest that a combination of financial repression and moderate inflation are the path to salvation. Financial repression occurs when the Fed (Central Banks) maintain an artificially low interest rate . This lowers the burden of servicing the sovereign debt substantially. Ex: If the US national debt of $15 Trillion is to be financed at an average interest rate of say 7% then over a $1 trillion worth of interest will have to be paid each year. If on the other had the average interest rate is to be about 1% then refinancing burden would be only $150 billion i.e. a drop of about $900 billion. That is not bad. What do you think?

The following is a brief article by Professor Scott Summer at Waltham Bentley University.

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THERE have recently been a number of calls for a higher inflation target. The proponents claim that this would stimulate economic growth and also ease sovereign-debt crises. I have mixed feelings about these proposals. There are clear advantages to adopting more expansionary monetary policies in the US, Europe, and Japan, but it’s a mistake to target inflation directly, or even to describe the advantages of monetary stimulus in terms of higher inflation.

Inflation can rise due to either supply or demand-side factors. Because most consumers visualise inflation as a supply-side phenomenon (implicitly holding their own nominal income constant) they see inflation as a problem, not a solution. Thus any calls for a higher inflation target are likely to be highly controversial, which makes it unlikely they would be adopted by conservative central bankers.

A much better solution to frankly admit what a growing number of economists are saying; inflation targeting was a mistake from the beginning, and the major central banks should instead be targeting nominal income growth (preferably level targeting). All of the advantages of higher inflation (economic stimulus, lower real debt loads, etc.) are actually more closely linked to rising nominal incomes. A switch to NGDP targeting would not require the major central banks to adopt a new and higher inflation target, with the associated loss of credibility. Instead they should estimate an NGDP target likely to produce 2% inflation in the long run, that is, an NGDP growth rate target of perhaps 4.5% per year in the US, 4% in Europe, and 2.5% in Japan. If the central bank believes there is a need for some “catch-up growth” (and surely that’s the case in the US and Europe, then they should start the trend line from 2008 or 2009, to allow for higher NGDP growth for the next several years.

Some might argue that this is just a back door way of raising the inflation target. Not so. Inflation targeting is what got us into this mess. If we had been targeting NGDP in 2008, level targeting, then monetary policy would have been far more stimulative, the recession would have been much milder, and the sovereign debt crisis would have been confined to Greece and perhaps one other country. We don’t need an expedient like a temporarily higher inflation target, which will further erode central bank credibility. Rather we need an entirely new policy rule, a rule that will be so robust that it doesn’t have to be abandoned every time we face a recession or a debt crisis. A rule that is consistent with 2% inflation in the long run. Nominal income targeting is the policy rule that is most likely to fit that description.

For Richer for Poorer.

As probably many of you know, there is a cloud hanging over the future of the US and many other countries, the cloud of wealth concentration. There is nothing in life that will not be affected by this phenomenon. It obviously affects our allocation of resources and  it will have tremendous influence on who gets what. It would affect the relations between the social classes and could lead to social unrest if we allow the fissure between the haves and have nots to increase. The following is only one part of an excellent article that speaks to this issue.

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Growing inequality is one of the biggest social, economic and political challenges of our time. But it is not inevitable, says Zanny Minton Beddoes

Oct 13th 2012 | from the print edition of The Economist

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IN 1889, AT the height of America’s first Gilded Age, George Vanderbilt II, grandson of the original railway magnate, set out to build a country estate in the Blue Ridge mountains of North Carolina. He hired the most prominent architect of the time, toured the chateaux of the Loire for inspiration, laid a railway to bring in limestone from Indiana and employed more than 1,000 labourers. Six years later “Biltmore” was completed. With 250 rooms spread over 175,000 square feet (16,000 square metres), the mansion was 300 times bigger than the average dwelling of its day. It had central heating, an indoor swimming pool, a bowling alley, lifts and an intercom system at a time when most American homes had neither electricity nor indoor plumbing.

A bit over a century later, America’s second Gilded Age has nothing quite like the Vanderbilt extravaganza. Bill Gates’s home near Seattle is full of high-tech gizmos, but, at 66,000 square feet, it is a mere 30 times bigger than the average modern American home. Disparities in wealth are less visible in Americans’ everyday lives today than they were a century ago. Even poor people have televisions, air conditioners and cars.

But appearances deceive. The democratisation of living standards has masked a dramatic concentration of incomes over the past 30 years, on a scale that matches, or even exceeds, the first Gilded Age. Including capital gains, the share of national income going to the richest 1% of Americans has doubled since 1980, from 10% to 20%, roughly where it was a century ago. Even more striking, the share going to the top 0.01%—some 16,000 families with an average income of $24m—has quadrupled, from just over 1% to almost 5%. That is a bigger slice of the national pie than the top 0.01% received 100 years ago.
This is an extraordinary development, and it is not confined to America. Many countries, including Britain, Canada, China, India and even egalitarian Sweden, have seen a rise in the share of national income taken by the top 1%. The numbers of the ultra-wealthy have soared around the globe. According to Forbes magazine’s rich list, America has some 421 billionaires, Russia 96, China 95 and India 48. The world’s richest man is a Mexican (Carlos Slim, worth some $69 billion). The world’s largest new house belongs to an Indian. Mukesh Ambani’s 27-storey skyscraper in Mumbai occupies 400,000 square feet, making it 1,300 times bigger than the average shack in the slums that surround it.

The concentration of wealth at the very top is part of a much broader rise in disparities all along the income distribution. The best-known way of measuring inequality is the Gini coefficient, named after an Italian statistician called Corrado Gini. It aggregates the gaps between people’s incomes into a single measure. If everyone in a group has the same income, the Gini coefficient is 0; if all income goes to one person, it is 1.
The level of inequality differs widely around the world. Emerging economies are more unequal than rich ones. Scandinavian countries have the smallest income disparities, with a Gini coefficient for disposable income of around 0.25. At the other end of the spectrum the world’s most unequal, such as South Africa, register Ginis of around 0.6. (Because of the way the scale is constructed, a modest-sounding difference in the Gini ratio implies a big difference in inequality.)

Employment Conundrum

As soon as the US government released the unemployment results for September showing that nonfarm employment increased by 114,000 (anemic) but yet the rate of unemployment dropped substantially from 8.1 to 7.8 many of the conservative politicians and econimic analysts cried foul. Jack Welsh, the former GE CEO tweeted"If you can't debate then you fix the numbers"  and a CNBC personality said: "I told you that they would get the number below 8% just before the elections". All of the above comes under the category of sour grapes. No one who knows anything about the BLS would ever make such an accusation because it is baseless and is something that will be next to impossible to achieve . Over 50 different individuals work on these figures and not a single one has the power to manipulate them. The following is a great explanation of what the unemployment figures mean, as presented by Greg Manikw one of "star" economists in the US.


If you go to the recent release from the BLS, you can find these two sentences a few paragraphs apart:

Total employment rose by 873,000 in September.

Total nonfarm payroll employment increased by 114,000 in September.

To a layman, this may seem confusing.  The first statement suggests a robust labor market, the second a more lackluster one.  What is going on?

The issue is that there are two surveys.  The first estimate of employment comes from the survey of households; the second is from the survey of establishments.  I thought readers might like to hear what my favorite intermediate macro textbook says about this issue.  Here is an excerpt:

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Because the BLS conducts two surveys of labor-market conditions, it produces two measures of total employment. From the household survey, it obtains an estimate of the number of people who say they are working. From the establishment survey, it obtains an estimate of the number of workers firms have on their payrolls.

One might expect these two measures of employment to be identical, but that is not the case. Although they are positively correlated, the two measures can diverge, especially over short periods of time. A particularly large divergence occurred in the early 2000s, as the economy recovered from the recession of 2001. From November 2001 to August 2003, the establishment survey showed a decline in employment of 1.0 million, while the household survey showed an increase of 1.4 million. Some commentators said the economy was experiencing a “jobless recovery,” but this description applied only to the establishment data, not to the household data.

Why might these two measures of employment diverge? Part of the explanation is that the surveys measure different things. For example, a person who runs his or her own business is self-employed. The household survey counts that person as working, whereas the establishment survey does not because that person does not show up on any firm’s payroll. As another example, a person who holds two jobs is counted as one employed person in the household survey but is counted twice in the establishment survey because that person would show up on the payroll of two firms.

Another part of the explanation for the divergence is that surveys are imperfect. For example, when new firms start up, it may take some time before those firms are included in the establishment survey. The BLS tries to estimate employment at start-ups, but the model it uses to produce these estimates is one possible source of error. A different problem arises from how the household survey extrapolates employment among the surveyed households to the entire population. If the BLS uses incorrect estimates of the size of the population, these errors will be reflected in its estimates of household employment. One possible source of incorrect population estimates is changes in the rate of immigration, both legal and illegal.

In the end, the divergence between the household and establishment surveys from 2001 to 2003 remains a mystery. Some economists believe that the establishment survey is the more accurate one because it has a larger sample. Yet one recent study suggests that the best measure of employment is an average of the two surveys. [George Perry, “Gauging Employment: Is the Professional Wisdom Wrong?,” Brookings Papers on Economic Activity (2005): 2.]

More important than the specifics of these surveys or this particular episode when they diverged is the broader lesson: all economic statistics are imperfect. Although they contain valuable information about what is happening in the economy, each one should be interpreted with a healthy dose of caution and a bit of skepticism.

QE3 and the Economy

 

Fed’s Evans Says QE3 Will Make Economy More Resilient

By Joshua Zumbrun and Mark Clothier - Sep 18, 2012

Federal Reserve Bank of Chicago President Charles Evans said the central bank’s third round of quantitative easing will help the economy keep growing despite headwinds from Europe’s debt crisis as well as potential U.S. tax increases and spending cuts.
“Given the slow and fragile recovery, the large resource gaps that still exist, and the large risks we face, it remains clear that we needed a more resilient economy,” Evans said today according to prepared text of a speech in Ann Arbor, Michigan. The Fed’s actions last week “provided a more accommodative monetary policy that can help us achieve such resilience.”
Evans has been among the most outspoken advocates for additional monetary stimulus from the Fed in the past year. In an Aug. 27 speech he called for the Federal Open Market Committee to engage in open-ended asset purchases, a strategy that was adopted by the Fed in its Sept. 13 decision to purchase $40 billion a month in mortgage debt until the labor market improves.
“We’re going to look at the labor market and the way the economy is going and also inflation pressures, and if it seems like we need to continue to do this, we’ll continue to do this next year,” Evans said in response to audience questions.

Operation Twist

The central bank will have to consider continuing the mortgage-debt purchases into 2013 and should purchase additional Treasuries once the central bank’s Operation Twist program expires in December, Evans said.
The Fed maintained Operation Twist, selling about $45 billion of short-term Treasury securities a month and buying about $45 billion of longer-term Treasuries, even as it began purchasing $40 billion a month of mortgage-backed securities.
Evans told reporters after the speech that a pace of $85 billion in mortgage-backed securities and Treasury securities may be appropriate into 2013.
“We’re looking for stronger employment growth, some beginning declines in the unemployment rate and stronger growth,” Evans said. “I’d be surprised if we would see enough evidence of that by the end of this year. So under that conditioning, I would expect that we would continue at something like an $85 billion pace of purchases post December.”
The Chicago Fed chief renewed his call for the policy makers to provide accommodation as long as unemployment remains above 7 percent and the inflation outlook is under 3 percent. Evans said that although the Fed did not adopt this policy last week he supports the QE3 decision “wholeheartedly.”

Disappointing Growth

Evans said the Fed’s actions will help strengthen a pace of growth that has been “disappointing” and help counteract “greater downside risks posed by the slowdown in global economic growth, the economic turmoil in Europe and the fast- approaching U.S. fiscal cliff.” If Congress doesn’t act, more than $600 billion in automatic tax increases and spending cuts will take effect starting in January.
Evans raised his growth and inflation forecasts in response to the Fed’s new program and now sees the unemployment rate falling faster, the policy maker told reporters.
“My own projections did have somewhat stronger growth because of that,” Evans said. “If I’m looking for -- as one benchmark -- seeing the unemployment rate fall below 7 percent, I think it will happen much sooner than if we had not undertaken that action.”

‘Heroic Forecast’

Evans said unemployment could fall below 7 percent by the end of 2014.
“I don’t think that’s a heroic forecast,” he said.
The FOMC took action last week following a Sept. 7 Labor Department report showing the economy added 96,000 jobs in August. The unemployment rate dropped to 8.1 percent from 8.3 percent as 368,000 people left the labor force.
Evans said that the central bank’s policy has been unable to have its full effect on the economy because not all mortgage holders have been able to refinance.
“We’ve been fighting against a variety of issues that are clogging the effectiveness of the monetary policy transmission channel,” Evans said in response to audience questions. “Normally it’s the case that when you have such a large amount of monetary stimulus in place we would have seen an enormous refinancing wave of mortgages.”

Underwater Borrowers

Yet many borrowers who are underwater, or owe more on their mortgage than the value of their home, are unable to refinance and “if there were adjustments made in those refinancing programs we could deliver much more effectiveness of our policy accommodation,” he said.
In addition to undertaking QE3, the Fed said last week that economic conditions would likely warrant holding their target interest rate near zero through at least mid-2015, extending a previous date of late 2014. The Fed said low interest rates will remain appropriate for a “considerable time” after growth strengthens.
The Fed is contending with a slowing economy. Gross domestic product climbed by 1.7 percent in the second quarter, down from 2 percent in the first quarter and 4.1 percent in the fourth quarter of last year.

Highly Accommodative

“Stating that we expect to keep a highly accommodative stance for policy for a considerable time after the recovery strengthens is an important reassurance to households and businesses that Fed policy will not tighten prematurely,” Evans said.
Stocks and commodities have rallied since the Fed said on Aug. 1 that it would “provide additional accommodation as needed to promote a stronger economic recovery,” foreshadowing the launch of QE3 last week.
The Standard & Poor’s 500 (SPX) Index rose 6.3 percent from Aug. 1 to yesterday. The S&P GSCI index of 24 commodities has risen 6.4 percent in that time period.
Evans said the Fed should be willing to risk a little more inflation in order to help improve the labor market. The Fed should “not be resistant” to policies that lower unemployment closer to its longer-run level “but run the risk of inflation running only a few tenths above our 2 percent goal.”
Evans, 54, became president of the Chicago Fed in 2007 after serving as the bank’s director of research. Fed presidents rotate voting on monetary policy with Evans voting next year.

The Coming Economic Boom

                                                      The Coming Boom in the US

           Roger Altman has written an OpEd in the Financial Times in which he argued that a Boom is coming our way in the United States for the following five reasons. Please read and comment . Be sure to use your real name, Non Anons!!!
  

Rising home prices. Home prices are rising in half of the major housing markets in the U.S.

Booming energy production. Gas and oil production in the U.S. has increased at “breathtaking” rates.

Financial sector health. The banking sector, nearly nationalized while on its deathbed just a few years ago, has recovered faster than anyone thought possible.

Competitiveness. A few years ago, we were becoming a post-industrial nation. Now we’re back in the game of making big, hard things.

Budget balancing. Here Altman gets a bit partisan, predicting that an Obama re-election could result in a budget deal that brings down our mounting debt levels.

What Needs To Be Done To Cut The Deficit

I was about to write a brief post that sums up the difficulty of eliminating the federal budget deficit when I ran across a rather lengthy but a very clearly written article by Chris Farrell of the Market Money fame program on Public Radio. I think that you will benefit from reading his unabridged post. As this article makes clear and as we have hinted at in class the most significant obstacle to overcome; not that the others are easy; is the level of expenditures related to Medicare.




The size of the federal deficit is repeated so often by politicians and the news media that it's easy to become numb to the sheer magnitude of the number — an estimated $1.29 trillion for the fiscal year which ended on September 30, according to the new figures released today by the Obama Administration.

While that's a drop from the record $1.4 trillion deficit recorded for fiscal 2009, it's still the second largest deficit in history. No one is happy about the tidal wave of red ink:

* The issue helped Tea Party activists angry about out the deficit to seize the political spotlight.
* The Republican's "Pledge to America" promises to "stop out-of-control spending and reduce the size of government" if the party wins big in the November mid-term elections.
* President Obama on a recent stop in Richmond, Va., talked about the need to "get control of our budget.

Here's the rub: The deficit-hating oratory is heated but the deficit-reducing specifics are glaringly absent.

"The turn hasn't gone from highlighting the deficit to actually doing something about it," says Maya MacGuineas, president of the Committee for a Responsible Federal Budget in Washington, D.C. Adds Veronique de Rugy, senior research fellow at the Marcatus Center at George Mason University: "We are still in the realm of rhetoric."

The reason for the reluctance? Simple political calculation. As the late Nobel laureate Milton Friedman was fond of saying, "there is no free lunch." Or, as Mick Jagger of the Rolling Stones, a graduate of the London School of Economics, put it, "you can't always get what you want."

Eventually, however, the size and rapid growth of the deficit mean that it will have to be dealt with and that painful trade-offs will have to be made. The only real question is whether those decisions get made before the U.S. tumbles into a fiscal crisis.

"Those who say this won't be good for me because I'll pay higher taxes or I'll get a smaller benefit ignore the fact that we can't keep doing what we're doing," says James Horney Center on Budget and Policy Priorities.

So what are the realistic options? You won't get many details from the majority of the politicians up for election on Nov. 2, but here are some of the ideas making the rounds in Washington:

Let the Bush Tax Cuts Expire

It's easy to fall into deep despair about the deficit, but Obama's former budget director, Peter Orszag, recently grabbed the fiscal spotlight with a remarkably easy solution: Let the 2001 and 2003 tax cuts expire for everyone.

By allowing taxes to return to the pre-Bush era levels for taxpayers, the federal budget would be close to balance by 2015.

"If we actually ended the Bush-era tax cuts, that would pretty much do it," Orszag said in an interview with CNN's Fareed Zakaria. "If you do a bit on the spending side and then end the tax cuts, you pretty much get there."

The virtue of this approach is that it doesn't require any special legislation or deal-cutting among special interest groups. Congress could then devote its legislative energy to addressing major reforms needed in entitlement programs like Medicare, Medicaid and Social Security, which everyone agrees is necessary.

That said, the idea is DOA. One reason is the risk that higher taxes could send a fragile economy spiraling lower. But the politics may be even more important. Since the earliest days of his campaign, President Obama has committed to not raise taxes on any family earning less than $250,000. Going back on that pledge could be electoral suicide —especially as Republicans are vehemently against all tax hikes. Still, it's an intriguing litmus test to see how serious a politician is about addressing the problem.

What About Other Tax Changes?

Few dispute that America's income tax code is Byzantine, a complicated stew chock full of credits, deductions, phase-ins and phase-outs. Reigning in these so-called "tax expenditures" that clutter up the federal tax code could go a long way toward attacking the deficit "Tax expenditures are bad tax policy," says MacGuineas. She and others point out that a tax credit that reduces Uncle Sam's revenues causes the deficit to rise just as surely as does a spending increase — it's just more politically palatable.

For example, Martin Feldstein, economist at Harvard University and former chairman of the White House Council of Economic Advisors under President Reagan, estimates that simply reducing the size of tax expenditures from the current 6 percent to 4 percent of GDP would bring the projected 2020 debt down from 90 percent to 72 percent.

Sounds good, right? Who doesn't want a cleaner, less complicated tax code (especially come April)? Problem is, these loopholes support many activities people like. For instance, the education credit helps parents save for the high cost of college. The mortgage interest deduction is almost sacred to homeowners. The child care tax credit can be a much needed boon to new parents.

What's more, many Republicans look at moves toward reducing tax expenditures as the equivalent of a tax hike.

Entitlement Reform

America is aging, with the leading edge of the baby boom generation reaching its retirement years. It's well-known that to eventually bring the long-term deficit under control, the government will have to address the three main entitlement programs -- Social Security, Medicare and Medicaid.

Now, despite rhetoric to the contrary, there really is no Social Security crisis. There's financial trouble down the road but it's manageable. Still, the general outline of a compromise for shoring up Social Security's finances has emerged in recent years. It essentially relies on hiking the retirement age, lifting the cap on annual wages subject to the payroll tax, and making the cost of living index less generous. (The Congressional Budget Office offers a list of options in its July 2010 report, Social Security Policy Options at http://www.cbo.gov/ftpdocs/115xx/doc11580/07-01-SSOptions_forWeb.pdf.). Yet many people don't buy into the compromise because it means retiring later or paying more in taxes. Ultimately, however, one — or both — will likely have to happen.

The real long-term budget pressure comes from higher health care spending. To give a sense of the scale of the problem, the benchmark 75-year projection by the Social Security Trustees guesstimates the cost of Medicare alone will swell to 11.4 percent of gross domestic product in 2083 — 94 percent larger than Social Security's cost. "We need to slow the rate of growth in healthcare," says Horney.

He's right, but the kinds of changes in healthcare required to do so will make the controversy over Obamacare a stroll through the park. Salaried doctors? Universal healthcare? Healthcare vouchers for everyone? The debate has only begun.

Cut Back on Defense Spending

Defense accounts for 20 percent of the budget. Last April Defense Secretary Robert Gates targeted more than 20 programs for termination or cutbacks, and the Defense Department is looking for more cuts. A reduction the nation's nuclear arsenal and missile defense systems could end up on the table, while military compensation is another possible target. The reason: military personnel earn average cash compensation that beats 75 percent of their civilian peers of comparable age and education . Benefits are also better than for most civilian jobs. One solution would be to cap the growth future in military compensation at the rate prevailing in the rest of the economy.

"The U.S. spends the biggest share in the world on defense," says the Marcatus Center's de Rugy. "We can cut it a lot."

Yet slashing into defense spending is always difficult, especially with troops at war in Afghanistan and still engaged in a mission in Iraq. Cuts in defense programs also quickly translate into job losses elsewhere in the economy as military contractors cutback — something few politicians willingly allow without a fight.

A Baseline Scenario

Here's one way to start thinking through the trade-offs. A centrist approach was released on Sept. 30 by William Galston of the Brookings Institution and MacGuineas. Their goal is to get debt back down to 60 percent of GDP by the end of the current decade. Their blueprint relies half on spending cuts and half on raising taxes.(http://www.brookings.edu/papers/2010/0930_public_debt_galston.aspx ) They would do everything from slashing deep into defense spending to embracing carbon taxes.

Others would take a very different tack, however. De Rugy, for one, is against raising taxes to tackle the deficit. Instead, she advocates pushing a lot of federal responsibilities back to the states, such as education and transportation, as well as pushing entitlements more toward a private voucher system.

Where do you stand? Would you cut spending? If so which programs would get trimmed? Would you raise taxes? Which ones? Change entitlements? How?

And then there are these questions: When -- if ever -- will politicians stake their fortunes on backing concrete solutions? And if they do, will voters reward them for taking action?

Nobel Prize in Economics 2010

2010 did not look very promising for US citizens as far as the 2010 Nobel prizes go. At times most of the Nobel laureates turn out to be US citizens but none of the awards this year was given to an American until today. The last prize is the one given in Economics and two of the recepients are American while the third is a British Cypriot.

The Economics award went this year to Peter Diamond, Dale Mortensen and Christopher Pissarides for their work on unemployment. The three professors will share the $1.5 million prize that was established in 1968 by the Royal Sweedish Academy of Sciences.

The Academy praised in its statement the work that the three award recepients had done in explaining how job vacancies and wages react to economic policy and government regulation.

"According to a classical view of the market, buyers and sellers find one another immediately, without cost, and have perfect information about the prices of all goods and services... But this is not what happens in the real world," the prize committee said in a statement.

It said the trio's work enhanced understanding of "search markets" where frictions exist as demands of some buyers are not met and some sellers cannot sell as much as they want.

This could involve simple cases of a buyer and a seller of a product as well as more complex relations between employers and job seekers, or between firms and suppliers.

On the labor market, the laureates' models help understand how unemployment, job vacancies and wages are affected by regulation and economic policy, including the size of jobless benefits, the committee said.

Their theories can also be applied to housing markets, as both vacancies and the time to sell a home vary over time.

Who Is Rich?

Wealth is often confused with income although they are different concepts. Wealth is a stock, it measures what has been accumulated as of a particular point in time. Income on the other hand is a flow, it measure the rate at which ones income flows in a certain period of time, say a year.

As is to be expected wealth is much more concentrated than income in the US. The results of the 2010 census confirmed what many have feared for a while. The top 20% of wage earners get 49.5% of all wages in the US while the lowest 20% of the labour force has to settle for a miserly 3%. If these figures are not jarring enough then please note that the top 1 % of Americans receive 24% of income when in 1915 the top 1% took away 18% of income.What is most disturbing about this disparity is the fact that a large proportion of children are caught in this unforgiving circle of poverty. It is estimated that 37% of the children in the nation are covered by Medicaid.

If you guessed that wealth is even more inequitably distributed then you would be right. The latest studies suggest that the top 20% of Americans own 85% of the wealth in the land while the top 1% claim 35% of the wealth of the nation. As the above figures suggest the bottom 80% of the Americans have to split the remaining 15% of wealth, and yes that means that the bottom half have no net worth .

The recent discussions regarding whether the Bush tax cuts should be renewed and if so for whom is very much related to the income and wealth distribution in the US. Some politicians favour making the tax cuts permanent while others believe that the tax cuts should be renewed only for those households making up to $250,000 a year. The popular rationale for this income level is that people who earn this much are not wealthy. But a quick examination of income distribution reveals that households whose annual income is $250,000 belong to the topd 2.5% of all Americans. Are we suggesting the there is no difference between those that make $50,000 per year and those that make five times as much? I am afraid that we are suggesting just that.
So what do you think? What income level qualifies an individual to be privileged?

Downhill With The GOP

The following Paul Krugman column appeared in the Sept 23, 2010 issue of the NYT. Paul Krugman, as you all know is a Nobel laureate in Economics and one of the most widely read NYT OpEd page regulars. Read this article for a quick analysis about the Republican "Pledge to Amaerica".

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Once upon a time, a Latin American political party promised to help motorists save money on gasoline. How? By building highways that ran only downhill.

I’ve always liked that story, but the truth is that the party received hardly any votes. And that means that the joke is really on us. For these days one of America’s two great political parties routinely makes equally nonsensical promises. Never mind the war on terror, the party’s main concern seems to be the war on arithmetic. And this party has a better than even chance of retaking at least one house of Congress this November.

Banana republic, here we come.

On Thursday, House Republicans released their “Pledge to America,” supposedly outlining their policy agenda. In essence, what they say is, “Deficits are a terrible thing. Let’s make them much bigger.” The document repeatedly condemns federal debt — 16 times, by my count. But the main substantive policy proposal is to make the Bush tax cuts permanent, which independent estimates say would add about $3.7 trillion to the debt over the next decade — about $700 billion more than the Obama administration’s tax proposals.

True, the document talks about the need to cut spending. But as far as I can see, there’s only one specific cut proposed — canceling the rest of the Troubled Asset Relief Program, which Republicans claim (implausibly) would save $16 billion. That’s less than half of 1 percent of the budget cost of those tax cuts. As for the rest, everything must be cut, in ways not specified — “except for common-sense exceptions for seniors, veterans, and our troops.” In other words, Social Security, Medicare and the defense budget are off-limits.

So what’s left? Howard Gleckman of the nonpartisan Tax Policy Center has done the math. As he points out, the only way to balance the budget by 2020, while simultaneously (a) making the Bush tax cuts permanent and (b) protecting all the programs Republicans say they won’t cut, is to completely abolish the rest of the federal government: “No more national parks, no more Small Business Administration loans, no more export subsidies, no more N.I.H. No more Medicaid (one-third of its budget pays for long-term care for our parents and others with disabilities). No more child health or child nutrition programs. No more highway construction. No more homeland security. Oh, and no more Congress.”

The “pledge,” then, is nonsense. But isn’t that true of all political platforms? The answer is, not to anything like the same extent. Many independent analysts believe that the Obama administration’s long-run budget projections are somewhat too optimistic — but, if so, it’s a matter of technical details. Neither President Obama nor any other leading Democrat, as far as I can recall, has ever claimed that up is down, that you can sharply reduce revenue, protect all the programs voters like, and still balance the budget.

And the G.O.P. itself used to make more sense than it does now. Ronald Reagan’s claim that cutting taxes would actually increase revenue was wishful thinking, but at least he had some kind of theory behind his proposals. When former President George W. Bush campaigned for big tax cuts in 2000, he claimed that these cuts were affordable given (unrealistic) projections of future budget surpluses. Now, however, Republicans aren’t even pretending that their numbers add up.

So how did we get to the point where one of our two major political parties isn’t even trying to make sense?

The answer isn’t a secret. The late Irving Kristol, one of the intellectual godfathers of modern conservatism, once wrote frankly about why he threw his support behind tax cuts that would worsen the budget deficit: his task, as he saw it, was to create a Republican majority, “so political effectiveness was the priority, not the accounting deficiencies of government.” In short, say whatever it takes to gain power. That’s a philosophy that now, more than ever, holds sway in the movement Kristol helped shape.

And what happens once the movement achieves the power it seeks? The answer, presumably, is that it turns to its real, not-so-secret agenda, which mainly involves privatizing and dismantling Medicare and Social Security.

Realistically, though, Republicans aren’t going to have the power to enact their true agenda any time soon — if ever. Remember, the Bush administration’s attack on Social Security was a fiasco, despite its large majority in Congress — and it actually increased Medicare spending.

So the clear and present danger isn’t that the G.O.P. will be able to achieve its long-run goals. It is, rather, that Republicans will gain just enough power to make the country ungovernable, unable to address its fiscal problems or anything else in a serious way. As I said, banana republic, here we come.

How Important Is the Stock Market for the Average Retiree?

Contrary to most of what you hear on the radio and you read in newspapers and magazines the typical American retiree is not as dependent on the performance of the stock market as many people think. The following is a table of the sources of income among the second quartile of older Americans, that is, from the 50th to the 75th percentile:

Social Security benefits....... 54.60%
Pensions....................... 22.00%
Earnings....................... 11.70%
Assets......................... 09.00%
Other Income................... 02.60%
Public Assistance.............. 00.30%


As the above table illustrates very clearly this group — which is above median, although not at the top — is highly dependent on Social Security benefits for more than half of their income.Asset income is, on the other hand , is rather small. Obviously as one moves down to the third quartile and then the fifth quartile then the share of income derived from the stock market disappears.

Of course the portion of income derived from pensions is affected by the stock market but for most Americans the day to day fluctuations in stock prices are not as seminal as those on Wall Street would like us to believe that they are. What do you think?

HDI 2009 CPI components

Although the GDP was not developed to measure the level; of welfare of a society it has been often used to imply that a larger GDP/Capita means a better quality of life. There have been many efforts over the years to adjust the GDP and/or modify it is such a way as to make it responsive to some of the criticisms leveled at it.

One of the most successful efforts at creating an alternative measure of welfare is the Human Development Index (HDI) that was introduced 20 years ago. The HDI is a relatively simple index that combines the money measure of the GDP/Capita, life expectancy at birth and degree of literacy to rank countries relative to the combined score that they attain. Obviously the highest possible score is 1. This kind of ranking raises the importance of heath care services in addition to education but it deemphasizes the role of money income as the most important factor in determining the quality of life. The final rankings demonstrate clearly that it is possible to have a relatively low GDP/capita and yet enjoy a high quality of life if the access to health care results in longer and healthier life combined with a high degree of literacy.

Those among you who are interested in the latest such report by the UNDP should visit the following web site for the full report and all its data:

http://hdr.undp.org/en/statistics/



Components of Consumer Price Index

The Bureau of Labor Statistics provides the following description of the major eight categories and 200 categories that are currently used in computing the CPI.
"
Major groups and examples of categories in each are as follows:

* FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)

* HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)

* APPAREL (men's shirts and sweaters, women's dresses, jewelry)

* TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)

* MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)

* RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);

* EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);

* OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses)."

Eight out of Ten Ain't Bad.

No one can doubt that the economic meltdown that started in the United States a couple of years ago and then spread all over the globe has been a wrenching experience. Tens of millions have lost their jobs, retirement plans had to be adjusted, poverty has increased, malnutrition has become more widely spread and governments have had to bailout banks, automobile manufacturing giants, subsidize agriculture and mortgages. Besides all the painful current adjustments that individuals and households have had to make, the future does not look to be very clear either, considering all the additional borrowing that governments had to undertake. As of this writting the US national debt is 12 Trillion dollars ( $12,000,000,000,000)and is slated to keep on increasing. What would be the effect of such a high level of indebtedness on both the domestic and ultimately the world economy is still not clear.

As a result of the severity of the global economic contraction many are questioning the viability of capitalism as it is currently structured. One inevitable result of these discussions is the emergence of the view that the US dominance is ending and that the unipolar moment has already come and gone. All of the above might prove to be true but as Mark Twain once said" The report of my death has been exaggerated".

American military power has been challenged in Iraq and Afghanistan, its political power is being challenged in Iran, the Arab world, parts of Latin America and in Eastern Europe. All of that while the value of the dollar sets new lows on the foreign exchange markets on a daily basis and its moral leadership is often questioned in the halls of the United Nations and in the Climate Change negotiations.

Yet inspite of all the above "negativism" eight of the top ten Global Brands according to the rankings by Business Week are common American household names. The results of these rankings come close to an unprecedented sweep and a recognition of American ingenuity and ability to innovate but it is also a clear demonstration of interdependence and a growing integration of the world economy.

The following is the list of the Top Ten:

1. Coca Cola (KO)
2. IBM (IBM)
3. Microsoft (MSFT)
4. GE (GE)
5. Nokia (NOK)
6. McDonald’s (MCD)
7. Google (GOOG)
8. Toyota (TM)
9. Intel (INTC)
10. Disney (DIS)

Do we need another stimulus?

The following is the full transcript of A Conscience of a Liberal of Oct. 3, 2009. Please read very carefully. Paul Krugman, the Nobel laureate, is not pleased with the latest unemployment report. What does the future hold?
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Obama’s Anzio

I’m late on this, due to festschrifting. But another bad employment report yesterday. I’m feeling pretty bleak about this.

And the worst of it is that it was more or less predictable. I went back to my first blog post — January 6, 2009 — worrying that the Obama economic plan was too cautious. I wrote:

This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

Let’s hope I’ve got this wrong.

Alas, I didn’t have it wrong — except that unemployment will, if we’re lucky, peak around 10 percent, not 9.

There was a lot of talk about health care being Obama’s Waterloo. It won’t, I think and hope. But stimulus is starting to look like Obama’s Anzio — the battle in which the American commander got himself into terrible trouble by being too cautious.

And right now Obama is pinned down in his too-small beachhead, taking heavy casualties.

Green Shoots

As has been expected this prolonged period of economic decline has been the most severe and the longest downturn in the last 80 years. Unemployment is approaching 10 %, the Federal deficit is setting new records and so is the projected national debt. But many economists, including Mr. Bernanke of the Federal Reserves have been talking increasingly about “green shoots”.
The fact of the matter is that there have been many “green shoots” sightings but most have proven to be almost as elusive as the UFO variety. Although home sales of both existing and new homes have been on the increase for a few months they seem to have stalled during August and durable good orders were below expectations. Add to the above the fear generated from what are the long run implications of the massive amounts of money that has been printed (read inflation and weak dollar) and the high prospects for a jobless slow rebound and the greenness of these shoots start to pale. They are not dead yet but the short term expectations should be tempered until the quality of the “sighting” improve.


I would be interested in your opinion of the movie "Capitalism: A Love Story" if you have seen it.

Would You Buy American Iron?

As difficult as it might be to believe,at one time, American made cars used to account for over 90% of the cars on the road in the US of A. Actually at times, GM's share alone was close to 60%. Fast forward to last year when GM and Chrysler filed for bankruptcy under chapter 11 and were able to avoid liquidation only with massive help from the federal government. Ford fared better but could not avoid receiving some major body blows that left it gasping for air.

Most analysts seem to think that Ford has learned its expensive lesson and is on the road to recovery but the jury is still out regarding the prospects for GM and Chrysler. Many think that GM will survive and possibly prosper but as a much smaller company than it used to be. GM had to shed Saab, Hummer, Pontiac, Saturn and they had to sell their stake in Suzuki and most of Opel. Chrysler on the other hand is eliminating marginal models such as the Pacifica and the Viper. The real question is whether GM and Chrysler will survive or whether all the tens of billions of dollars spent by the feds were for naught.
The next two years will be instrumental to the industry. Ford is planning to become profitable late next year or by early 2011 by the latest as a result of its new line of cars. GM hopes to break even when the market for new cars climbs back to 11.5 million units a year. They are hoping to ride the buz from from the plug in Volt next year while Chrysler is counting on the Fiat cars that could start appearing in the show rooms in a year from now.

A quick review of some of car magazines and car reviewers for the new model year seems to show that the American car companies have a fighting chance. Four of the most important new cars are :

Buick Lacrosse

Ford Taurus especially the SHO

Ford Fusion Hybrid

Chevrolet Equinox

Have you looked at any of these models and if so would you buy any of them? It is going to be your purchasing habit that will decide the fate of Detroit over the next 3-5 years. What do you think, would any or all of the 3 American car manufacturers survive and prosper?