The Euro area is ‘miserable’
For all of our economic problems here in the US, a simple measure of ‘misery’ illustrates that US households are less miserable in March 2011 than those in the Euro area.
The chart below illustrates the simple ‘misery index’, which is the unemployment rate plus inflation. The blue line is a 45-degree line; those countries below it have seen their misery index fall on a y/y basis. Not one Euro area economy misery index fell since this time last year – French and German misery indices are unchanged despite improving employment. In contrast, the US misery index improved over the year with labor market conditions.
The problem is, that European fiscal austerity is clinching aggregate demand, raising inflation (via higher taxes) and producing unemployment. Consumers and firms alike are feeling this in Europe.
In the US, fiscal policy has been accommodative enough to allow for private sector deleveraging while keeping the economy on an upward trajectory. However, food and energy price inflation in April stabilized the misery index compared to last year (not shown) – i.e., it’s no longer improving. Unless the labor market shows marked improvement in coming months, US misery will turn “Euro” as inflation batters consumers amid elevated unemployment. Please see Marshall Auerback’s piece at the New Deal 2.0 regarding QE2 – QE2: The Slogan Masquerading as a Serious Policy.
Rebecca Wilder
Rebecca,
I’m enourmously disapointed that you implicitly think Marshall Auerback has a point in his post. It reflects the usual mind numbing focus on the interest rate and credit channels of monetary policy that one sees so frequently in Democratic circles . Given New Deal 2.0’s name you think they would be aware of the prime importance of monetary policy in initiating a recovery during 1933-1937 when real GDP growth averaged 9.5% a year despite the extremely modest size of the fiscal expansion. As Christina Romer wrote:
“Monetary developments were a crucial source of the recovery from the Great Depression. Fiscal policy, in contrast contributed almost nothing to the recovery before 1942.”
http://www.dss.uniud.it/utenti/lines/What_ended.pdf
But it seems no amount of stakes through the heart will kill the zombie myth of the liquidity trap.
So you believe numbers produced by the American governmnent?
Truly fascinating.
Look at this post in two months. Asset deflation will then be the issue. It will accompany much higher unemployment. Debt load under such circumstances will be so much more oppressive.
This is the predictive advantage of saturation macroeconomics.
Mark, The banking system in the 1930’s is incomparable to that now. What I think is insightful of Auerback’s post is the reference to modern banking. Banks don’t react, i.e., lend out when the Federal Reserve is increasing reserves. Nor does a bank cease to lend in times when it deems lending profitable just because it is short on reserves – banks just borrow on the repo market, and that’s that. Fed policy has created commodity and food price inflation. And because global central banks are pursuing equally easy monetary policy through fixed exchange rates, imported inflation is likely here to stay. This can be chalked up to QE2 at some level. The Fed dropping the gold standard allowed US consumers and firms access to cheaper global goods in the 1930s. QE2 has buffeted asset prices and created liquidity that is challenging global financial markets.
My point is, is 1930s monetary policy is not comparable to current day policy via a very very different banking construct.
Rebecca
Mark, The banking system in the 1930’s is incomparable to that now. What I think is insightful of Auerback’s post is the reference to modern banking. Banks don’t react, i.e., lend out when the Federal Reserve is increasing reserves. Nor does a bank cease to lend in times when it deems lending profitable just because it is short on reserves – banks just borrow on the repo market, and that’s that. Fed policy has created commodity and food price inflation. And because global central banks are pursuing equally easy monetary policy through fixed exchange rates, imported inflation is likely here to stay. This can be chalked up to QE2 at some level. QE2 has buffeted asset prices and created liquidity that is challenging global financial markets.
My point is, is 1930s monetary policy is not comparable to current day policy via a very very different banking construct.
Rebecca
Rebecca,
Yes our banking system has changed a great deal. But excess reserves are hardly a problem unique to our time. Between February 1933 and July 1936 reserves increased from $1.3 billion to $4.0 billion at a time when nominal GDP was was only $80 billion. And this happened without our current policy of paying 0.25% interest (more than 1,3, or 6 month T-bills or most short term commercial paper). And yet the devaluing of the dollar in 1933 led to a rapid recovery from the Great Depression. Consequently I don’t think Marshall Auerbach brings any great insights to the matter. He’s just another interest rate/credit channel freak.
Since Bernanke’s Jackson Hole speech the steep rise in stock prices has increased household wealth by some $5 trillion. The rise in inflation expectations has helped to ease the household debt deflation problem. Consumption has been the bright story in the BEA numbers last two quarters, that other wise have been held back by the steep decline in government consumption and investment as the discretionary fiscal stimulus has been rapidly withdrawn. And yet, according to the household survey, of the 1.7 million jobs created between December 2009 and April of 2011, over 1.4 million were created in December 2010 through March 2011 alone (counting the population correction factor).
China, India and Brazil are growing much too fast (inflation is double digit in India) and the prices of oil and food, which are determined in global markets and are largely driven by demand from those emerging nations,That can hardly be blamed on the monetary policies of the US, the EU and Japan. It’s telling that Auerbach cites inflation hawks Dallas Fed President Richard Fisher and former Kansas President Tom Hoenig to support the notion that QE2 is somehow responsible for the commodity price boom, which in any case is not without precedent.
QE2 at least has taken an economy that was stuck in neutral and thrown it into first gear. Suggesting that it has accomplished nothing, or that it is harmful seems to me, well, Austrian, for lack of a better word.
Rebecca,
Yes our banking system has changed a great deal. But excess reserves are hardly a problem unique to our time. Between February 1933 and July 1936 reserves increased from $1.3 billion to $4.0 billion at a time when nominal GDP was was only $80 billion. And this happened without our current policy of paying 0.25% interest (more than 1,3, or 6 month T-bills or most short term commercial paper). And yet the devaluing of the dollar in 1933 led to a rapid recovery from the Great Depression. Consequently I don’t think Marshall Auerbach brings any great insights to the matter. He’s just another interest rate/credit channel freak.
Since Bernanke’s Jackson Hole speech the steep rise in stock prices has increased household wealth by some $5 trillion. The rise in inflation expectations has helped to ease the household debt deflation problem. Consumption has been the bright story in the BEA numbers last two quarters, that otherwise have been held back by the steep decline in government consumption and investment as the discretionary fiscal stimulus has been rapidly withdrawn. And yet, according to the household survey, of the 1.7 million jobs created between December 2009 and April of 2011, over 1.4 million were created in December 2010 through March 2011 alone (counting the population correction factor).
China, India and Brazil are growing much too fast (inflation is double digit in India) and the prices of oil and food are determined in global markets and are largely driven by demand from those emerging nations. That can hardly be blamed on the monetary policies of the US, the EU and Japan. It’s telling that Auerbach cites inflation hawks Dallas Fed President Richard Fisher and former Kansas President Tom Hoenig to support the notion that QE2 is somehow responsible for the commodity price boom, which in any case is not without precedent.
QE2 at least has taken an economy that was stuck in neutral and thrown it into first gear. Suggesting that it has accomplished nothing, or that it is harmful seems to me, well, Austrian, for lack of a better word.
I think you should reconsider your proposition that there is something better happening in the US than in much of Europe based upon the data presented in the misery index graph. Given the likelihood of some imprecise level of error in the measurement of such data the US can hardly be said to have experienced some reduced level of misery. The US virtually hugs the line in the graph, doing little better than France. And France and all those falling along the lower portion of the 45 degree line have been, and are still, at lower levels of misery as measured by the graph. How is that a good thing and how does it imply some sort of improved economic circumstances for US workers? Which then leads to the question of who it is in any specific country that is experiencing any reduction of economic misery? Based on my own eyeball measurement, based upon strong sales of expensive cars (high gas prices be damned), the rich are not experiencing any significant level of economic misery. To suggest some general level of improvement in the US is absurd. Only an economist could see some good in our current economic situation. Improvement, like income distribution, is seriously skewed.
HI Mark,
“China, India and Brazil are growing much too fast (inflation is double digit in India) and the prices of oil and food are determined in global markets and are largely driven by demand from those emerging nations.”
And why do you think that is happening? One very important reason is that capital flows into India and Brazil are fierce, as investors (the banks) in the US and other developed economies search for yield. They’re not lending domestically, they’re lending abroad where they can get real yield well above the negative yield here in the States.
In China (and other countries implicitly), they’ve pegged their policy to ours, so its entirely too loose. That is, of course, passing through to global asset prices and hard commodity prices. This is unstable and is unlikely to see a soft landing if liquidity dries up quickly (for example, the Fed dropping its balance sheet). So yes, it’s global growth that’s raising commodity prices, but the causation as to where and why the global growth is firm is murky. One cannot discount the effects of easy developed market policy.
“Since Bernanke’s Jackson Hole speech the steep rise in stock prices has increased household wealth by some $5 trillion.”
I would argue that the Fed ‘needs’ higher stock prices in order to keep consumption on a steady path. Since the lows (early september), the S&P is up 28% through February 18. Since February 18, the S&P is down 0.39% (through Friday). Unless labor conditions surge over the near term, I bet that a pullback in consumer spending is on the horizon with that of asset prices.
So the point I would argue is that while the Fed’s measures certainly have driven consumer wealth (I’ve highlighted this before – see this chart that I posted which illustrates from the Q4 flow of funds how topheavy is equity returns in driving household net worth), the sustainability of these asset price movements, hence the economic recoevry as tied to QE2, have yet to be determined.
What I do know, is that next year we’re going to feel a sharp fiscal retrenchment – according to the fiscal monitor the fiscal deficit’s to fall 3.3% of GDP next year, which is far more than any other advanced economy from quick glance.
Rebecca
Jack,
“Given the likelihood of some imprecise level of error in the measurement of such data the US can hardly be said to have experienced some reduced level of misery.”
I fully agree, which is why I stress at the end of the article that this feat is tenuous at best – in April 3.1% inflation and a boost to the unemployment rate reduced the US’s status as ‘least miserable’.
There’s a real problem with income inequality here in the US, I completely agree. That is one reason that the Fed’s policy has been somewhat deleterious – it favors those who can buy the S&P. Households that are underwater and facing job loss are not prepared to ‘save’ and enjoy the stock returns, just ‘save’ by default (in the aggregate numbers defaulting to drop your mortgage debt and raise net worth is the same as seeing stock gains to raise net worth).
Misery across income levels…hmm, the best I can do off the cuff is misery across education levels. Clearly, the average worker with a BA who faces a labor market with a 4.5% unemployment rate is not as ‘miserable’ as the worker with a high school diploma only (9.7% unemployment rate).
Rebecca
This post on the “misery index” — seemingly meant to be taken as a realistic comparison of, well, economic misery on this side of the Pond compared to the other side — is almost enough to make me give up forever on ever getting the slightest bit of common sense out of our economic (supposed?) progressives.
I mean this with all of my heart — ready to give up on you all.
Please do a graph which shows the doubling of average income as one line on the chart going up at a 45 degree angle contrasted to the 20 percent increase in the median (average person’s wage) going up at a 9 degree (?) angle over the same 43 years. Not to mention the complete political disempowerment that goes with a unionless work force (ever hear of legislatively mandated SECTOR-WIDE LABOR AGREEMENTS — airline and supermarket workers would kill to get them; good place to start, but somebody’s got to tell them about the possibility).
Please do a Malthusian chart tracking wages dropping 33% as population increased 50% since 1968 contrasted to the drop in the US federal minimum wage of almost 50% by early 2007. Not to mention the Crips and the Bloods couldn’t whip a decent paying Ronald McDonald ($15/hr minimum wage — mere 50% increase as per capita income doubled — would raise the price of what in the poorest part of the country?).
Call them the “Nakba” indexes (or the “Great Wage Depression” indexes).
We — Americans below 90 percentile income are suffering alright. Do you guys know anybody below 90 percentile income? What the deuce is wrong with you?
REPLY TO MYSELF — RELEVANT “PSYCHOLOGICAL” POINT:
Endless reports of violence and non-performance in Berkeley public schools? Does this concern the Berkeley economic faculty? Not really their world right? Why, then, could anyone expect them to be concerned about poor side of town high schools in Detroit — though I am sure their interests would perk right up about the goings in any elite high in Detroit — or France.
I worry about the tragedy of poor side of town schools in New York and Chicago (core problem: nobody will prepare hard for a labor market that offers them nothing now and less for more work later if things keep going on that way on this side of the Pond). You would accordingly expect me to worry about troubles in Berkeley schools — from thousands of miles away.
Get the “psychological” point. All the learning does no good if you don’t know what to care about — midbrain motivates forebrain to get what midbrain desires; not the other way around.
“Misery index”? Is this a measure we’re supposed to take seriously?
Even your linked definition says
“A 2001 paper looking at large-scale surveys in Europe and the United States concluded that the basic misery index underweights the unhappiness caused by joblessness: “the estimates suggest that people would trade off a 1-percentage-point increase in the unemployment rate for a 1.7-percentage-point increase in the inflation rate.”[3]“
Can’t wait for the simple definition of the “Natural rate of misery” next.
Rebecca,
You wrote:
“One cannot discount the effects of easy developed market policy.”
Well, I can and I do. Real yields are so high in the emerging markets precisely because it is they who are the ones committed to a wildly loose monetary policy. If they tightened monetary policy (and let their currencies float upward) real yields would eventually fall, the flow of capital would decline and we would not be seeing this explosive growth in commodities prices partly induced by speculation.
Otherwise we’re committing to letting China, India and brazil run our monetary policy for us and I think you can guess what the outcome of that would be.
You wrote:
“…the sustainability of these asset price movements, hence the economic recoevry as tied to QE2, have yet to be determined.”
It’s sustainable as long as the Fed commits to keeping expectations rising. As they are about to cease QE2 I have a pretty good idea where things are going to go next.
You wrote:
“What I do know, is that next year we’re going to feel a sharp fiscal retrenchment “
It’s already started. Look at the effect of government consumption and investment on growth in the first quarter.
Just a quick comment on the Misery Index.
Estonia is still in deflation. Do Estonians feel less miserable because their price level is falling?
This has been one of my biggest criticisms of the Misery Index concept. In January 1932, for example, yoy CPI in the US was -10%. With unemployment probably about 19% that meant the Misery Index was only about 9. In April 1980 yoy CPI was 14.6% and the unemployment rate was 6.9% yielding a Misery Index of 21.5. Does anyone really believe things were over twice as miserable in 1980 as in 1932?
You’re still miserable if a cup of coffee is only 9 cents instead of a dime and you don’t have two nickels to rub together.
Thus, in my opinion, the scatterplot understates the degree of misery in Estonia right now.