Relevant and even prescient commentary on news, politics and the economy.

George Will on “Low” Gasoline Prices

Having watched the various pundits on Sunday morning’s talk shows, I wanted to pass along a couple of the items I learned from the rightwing masters of spin as well as provide a graph. Alas, I’m not sure how to graph Fitzmas so that will have to await until tomorrow, but I was able to find an excuse to provide a graph of retail prices for regular gasoline (my source).

My excuse was George Will’s comment on This Week yesterday that we Democrats are really dumb. His example of our stupidity was a comment a couple of weeks ago by Senator Reid that gasoline prices were quite high. Will claimed that at the time the Senator had made this speech, we had just witnessed a record decline in prices. It would seem that prices have come down since then too – but would you call them low?

Update: AB reader Eclaire makes an excellent point – my series is in nominal terms so a careful analysis would adjust for inflation. Back in August 1990, a nominal price of $1.20 translates into today’s dollar into an inflation-adjusted price of $1.65. In the spring of 2001, the nominal price was $1.70, which translates into an inflation-adjusted price of $1.87. Of course, it costs about $2.50 a gallon for regular gasoline today, which is not as bad as $3 a gallon in early September. But then the September 2005 price was about twice what we were paying in late 2003 – even inflation-adjusted. So wouldn’t one expect prices to have fallen from their September 2005 levels?

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Slowing Growth?

The latest data regarding the personal income received by Americans has me slightly worried. The headlines of stories about today’s BEA news release have been along the lines of “Real spending falls 2 months in a row“. But I’m actually more concerned about real income growth.

Take a look at the following picture. It shows the 12-month growth in real disposable personal income. After two years of pretty good income growth, this year has seen a decided slowdown in such growth. Over the past 12 months real income grew by just 1.5%. Meanwhile, the savings rate was actually negative for the full third quarter – the first negative quarterly savings rate on record.

A negative savings rate is only sustainable for a short period of time, and depends on rapidly rising asset prices. If you add together slowing income growth with the fact that the savings rate will almost certainly rise as the housing bubble slows (or pops), the likely conclusion is that consumption spending will slow.

Meanwhile, Calculated Risk has outlined how the economy is likely to respond to the apparent slowdown in the housing market. Furthermore, business spending is showing some signs of gradual cooling (as I mentioned last week), and in general the economy seems to be slowing slightly from its 2004 pace. Finally, the risk of a coming upturn in the core rate of inflation seems real.

Add all of these trends together, and I’m starting to worry about the economic outlook for 2006. Slowing growth, with possibly higher core inflation… Ben Bernanke may start his tenure as Fed chair with some tricky monetary policy management to do.


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Family Values

The opinion of Bush’s newest nomination to the Supreme Court, Samuel Alito, regarding the abortion issue will undoubtedly receive a flood of attention in coming weeks. But Alito’s opinion regarding the Family and Medical Leave Act (FMLA), signed into law in 1993 by Bill Clinton, also seems deserving of close scrutiny – particularly since it highlights one of my greatest frustrations regarding political stereotypes: the notion that conservatives are better defenders of family values than liberals are.

In 2000, Alito authored an opinion in which he ruled that the FMLA was an instance of unconstitutional congressional overreach. In particular, he said that the FMLA was unconstitutional because there was no evidence for the notion that women are disadvantaged in the workplace when they are not allowed to take family leave. Furthermore, he argued, the requirement that everyone be guaranteed 12 weeks of unpaid family leave was a disproportionately strong remedy:

Notably absent [from the FMLA] is any finding concerning the existence, much less the prevalence, in public employment of personal sick leave practices that amounted to intentional gender discrimination in violation of the Equal Protection Clause.

…Moreover, even if there were relevant findings or evidence, the FMLA provisions at issue here would not be congruent or proportional.

Alito’s idea that women are not disadvantaged when they can not take maternity leave seems absurd, both intellectually and factually. Even William Rehnquist, who wrote the Supreme Court’s 6-3 opinion in 2003 overturning Alito’s ruling, found Alito’s argument deeply flawed.

In the Supreme Court majority opinion, Rehnquist cited the extensive evidence that was presented during the debate about the FMLA in Congress, and that clearly documented the pervasive discrimination implicit in unregulated family leave policies. Furthermore, Rehnquist argued that the FMLA was an entirely appropriate remedy to this subtle form of discrimination. These powerful paragraphs summarize the argument:

Stereotypes about women’s domestic roles are reinforced by parallel stereotypes presuming a lack of domestic responsibilities for men. Because employers continued to regard the family as the woman’s domain, they often denied men similar accommodations or discouraged them from taking leave. These mutually reinforcing stereotypes created a self-fulfilling cycle of discrimination that forced women to continue to assume the role of primary family caregiver, and fostered employers’ stereotypical views about women’s commitment to work and their value as employees. Those perceptions, in turn, Congress reasoned, lead to subtle discrimination that may be difficult to detect on a case-by-case basis.

…By creating an across-the-board, routine employment benefit for all eligible employees, Congress sought to ensure that family-care leave would no longer be stigmatized as an inordinate drain on the workplace caused by female employees, and that employers could not evade leave obligations simply by hiring men. By setting a minimum standard of family leave for all eligible employees, irrespective of gender, the FMLA attacks the formerly state-sanctioned stereotype that only women are responsible for family caregiving, thereby reducing employers’ incentives to engage in discrimination by basing hiring and promotion decisions on stereotypes.

While Rehnquist provided the legal rationale explaining why the Congress has the authority to make laws such as the FMLA, I think that the most powerful argument in favor of the FMLA is simply this: a society that values families should try to help parents spend more time with their children, not put obstacles in their way.

It is worth noting that the most common complaint that opponents to the FMLA voice is that it imposes expensive burdens on businesses. (This suggests something bizarre about the conservative notion of family values, by the way: it seems that families spending time together is of secondary concern to business profitability.) But it turns out that economists studying this issue have generally found that family leave does not hurt businesses’ bottom line, or economic growth more generally. If anything, more generous family leave seems to be modestly correlated to greater productivity, not reduced productivity. (See this paper by Christopher Ruhm and Jackqueline Teague for an example.)

Alito’s opinion regarding the FMLA is therefore troubling to me in several respects: he denies the obvious logic and evidence that indicates that the family leave provisions (or lack thereof) that workers faced prior to 1993 had profound and different effects on working men and women; he is far out of the mainstream of American public opinion (for example, surveys suggest that a large majority of Americans believe the Congress should mandate paid family leave, not to mention the unpaid leave stipulated by the FMLA); he is out of the mainstream of American conservative legal opinion (as represented by William Rehnquist, at least); and when he wrote that the provisions of the FMLA constituted a “disproportionate” requirement, he implicitly contradicted the economic evidence that indicates that the requirements of the FMLA are actually very modest and place little or no burden on businesses.

All in all, my first foray into learning about Samuel Alito was not an encouraging one.


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GDP and Housing

On Friday, the BEA reported GDP (advance) for the third quarter 2005. The BEA reported that Residential Investment was still robust at an annual rate of $761.5 Billion or 6.05% of GDP.

The following graph shows Residential Investment as a % of GDP for the last 40 years. The booms and busts of the housing cycle are very clear. Note: 2005 plotted at Q3 2005 percent of GDP.

Click on graph for larger image.

Residential investment as a % of GDP really took off in early 2003. Based on fundamentals, UCLA’s Dr. Thornberg argues:

… housing prices should have basically gone flat as of Q4 2002, and instead they have grown at an unprecedented pace. … we can guesstimate that property in California is now overvalued by something close to 35 or 40%.

I expect that Q3 Residential Investment will be the peak of the current housing cycle. This prediction is based primarily on rising inventories and slowing sales, but also on other factors like rising interest rates, the extensive use of ‘exotic’ mortgages (speculation), the negative savings rate and record household debt service and financial obligations ratios, even with low interest rates (See: Federal Reserve DSR and FOR).

How soon will the housing slowdown impact the overall economy? Dr. Thornberg argues that typically a housing slowdown spills over into the overall economy “within three to six quarters” after “inventories rise and sales start to fall”.

The following three graphs show New Home Sales and the last three consumer recessions (four counting the ’80s double dip). The gray area signifies that the economy was in recession based on the National Bureau of Economic Research’s cycle dates. Note: the graphs do not start at zero to better show the change in sales.

The previous housing slowdowns appear to support Dr. Thronberg’s view of a three to six quarter lag from the peak of the housing cycle to an impact on the overall economy.

For the current cycle, it appears housing sales peaked in July 2005.

Best Regards, CR Calculated Risk

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PlameGate: Will the Final Phase be a Pardon for Scooter?

For a moment, I thought the National Review’s Andrew McCarthy had a major change of heart on this matter:

The claim that Libby is being smeared with the allegation that he leaked classified information even though he hasn’t been charged with it, and that because he has not been charged he has no way to get his good name back from the said smearing, is specious. This is not a case where a person has not been charged with any crimes at all, where the government doesn’t have the nerve to put its money where its mouth is, or where the government itself is leaking out damaging innuendo. The government has not filed a bare-bones indictment, as it could legally have done. Instead, the special prosecutor has given Libby elaborate notice, extensively describing his alleged conduct.

Josh Marshall notices others at the Corner actually saying Fitzgerald is doing a fine job. It’s amazing that this Borg-like group of Bush cheerleaders has flipped from attacking the efforts of the prosecutor and saying what the White House culprits did was no biggie to what seems to be a principled position for the first time in the NRO-Borg existence. But read more carefully – they seem to be piling it on Scooter all by his lonesome.

Then I recalled something James Wolcott said. That must be it – the White House attack squad is now using Scooter as shark bait – hoping the investigation stops with him falling on the sword.

But wait – couldn’t this play into Fitzgerald’s hands as he tries to pressure Scooter to flip? UNLESS – the White House has already promised Scooter a pardon. No way I said until something Brad DeLong said. Let’s see – these traitors in the White House have already outed CIA operatives. Heck – they even started a war that made us worse off in the GWOT to win the 2002 and 2004 elections. So what’s to stop President Bush from issuing a pardon to cover up this crime? Maybe the 2006 elections? No, Scooter will serve a little jail time. But recall the 1974 pardon of Nixon contributed to Gerald Ford’s loss in 1976. Scooter – you’ll have to wait until late November 2008 to get your pardon. Or you could put country ahead of your partisan buddies for the first time in your life.

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Will Bernanke Follow a Price-Rule Approach?

Tom Nugent joins Victor Canto in praising the appointment of Ben Bernanke to head the Federal Reserve:

Bernanke, like Greenspan and Volcker, will take a price-rule approach … Since 1982, some supply-siders have believed that the Fed shifted from a quantity rule for monetary policy to a price rule. In other words, the Fed gave up trying to control the supply of money, an approach recommended by Milton Friedman, and shifted to the use of one or more measures of inflation to guide the management of the fed funds rate to control inflation. For the period between 1982 and the present, a lot can be said about the approach of Fed chairmen Paul Volcker and Greenspan to managing the economy and inflation through the implementation of a price rule. A careful analysis of the relationship between the price rule, inflation, interest rates, and the stock market reveals that a price rule for monetary policy has made a lot more sense than a quantity rule for money … By adopting a price rule for monetary policy (which I consider on par with inflation targeting), the Fed, by definition, must give up attempting to control the quantity of money.

I suspect this form of praise hurts more than all the goofy criticism from the National Review. Brad DeLong, however, observes:

October of 1979 saw not an abandonment of the Federal Reserve’s monetarist targeting of monetary aggregates, but a reinforcement of them: a downweighting of indicators of market prices – interest rates – and an upweighting of indicators of liquidity quantities – the money stock measures. Canto has it exactly backward.

David Altig examines the historical record and counters Nugent’s claim that targeting inflation and targeting the price-level are the same thing:

The picture is pretty clear. If you believe that the FOMC has had an implicit inflation target of about 2%, the data since about 1992 would give you no argument. You have a little more trouble going back to the Volcker/early-Greenspan years … Which brings us to the key distinction between an inflation target and a price-level target. A central bank operating under an inflation target will let bygones be bygones: If inflation comes in above target is in any particular year, no conscious effort is made to undo the the effects on the level of prices by subsequently engineering inflation below the target … The actual average rate of PCE inflation over the period since 1992 has been just a tad over 2%. As a simple matter of arithmetic, a price-level target that allows the price level to grow at 2% will look almost exactly like a successfully maintained average-inflation target of 2%.

OK, the inflation rate has averaged 2% since 1992 – but that does not mean the Federal Reserve has adopted a price-level target. But suppose that did. Just imagine how much extra output variance we would get. While most economists would argue output variance is bad, the Bush cheerleaders and free-lunch supply-side crowd seems to love variance as it gives them the opportunity to cherry-pick data – as in that claim that the economy in late 20003 was the best we have had in twenty years.

A reader of Brad’s blog points us to some spin from Art Laffer:

In October 1982, on this page, I described Mr. Volcker’s version of a price rule for monetary policy. Essentially, the Fed targeted spot commodity prices by altering the rate of growth of the monetary base. And it still does today. This modified version of Milton Friedman’s monetary rule worked like a dream.”

Now I get it! By “it”, I mean Canto’s obsession with a commodity price-rule, which the rest of the nitwits at the National Review feel compelled to follow. Canto’s career has been trying to yield some credibility to Laffer’s nonsense. Laffer is a gold bug so Canto must be a gold bug.

Laffer claims today that Volker’s policy worked like a dream. He and his fellow supply-siders back in 1983 were singing a different tune at a conference on Reaganomics where the economists fell into three basic camps. One camp of conservative economists (let’s call them the new classical camp) were singing the praises of Volcker’s tight monetary policy, while a second camp (let’s call them the Keynesian camp) were cursing the same monetary policy on the grounds that it caused a deep recession. Laffer and his camp were singing the praises of how the Reagan fiscal stimulus would lead to incredible output growth. When the other two camps said “huh” – the Laffer camp joined with the Keynesian camp condemning Federal Reserve policy. But then Laffer took the podium and said there was little difference between the Keynesian view of fiscal policy and his view. At that point, the new classical and Keynesian camps just shook their heads at Laffer’s lack of integrity.

Over the years, I have grown a little softer on the Volcker FED understanding that his second dip of monetary contraction was a reaction (make that an overreaction) to Reagan’s fiscal irresponsibility. And while the floating exchange rate policy tended to soften the amount of investment crowding-out by having a second transmission channel in terms of net export crowding-out, the same exchange rate regime made the contractionary monetary policy even more potent.

Alas – Bernanke faces a similar problem with continued fiscal irresponsibility and a huge current account deficit. Do the National Review gold bugs really want us to adopt a Chinese style policy of making sure the dollar gets pegged to something that is undervalued given the state of fiscal policy? Is that their only cure for the current account deficit – since this “supply-side” crowd is incapable of endorsing fiscal responsibility?

But as think back to the difficult situation the Volcker FED was in at this time, I recall an excellent memo from two staff economists at Reagan’s Council of Economic Advisors. To be fair, Donald Luskin just reminded me that he neither understood what was on the first page of this memo nor realized that there were more pages.

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On Real GDP Growth

Kash provided a few details as to the news about real GDP growth during the third quarter. William Polley compares this news to the news for last quarter noting what we said back then:

Final sales of domestic product grew at a 5.8% annualized rate with the difference between growth in sales and the growth in production coming from a “negative contribution from private inventory investment”. Could this news be a harbinger of an export and investment led recovery, which would might increase the employment to population ratio to 63% by year end? One can only hope!

For the third quarter, final sales of domestic product grew at a 4.4% annualized rate. Hopefully, this means we will continue to inch closer to full employment. We might also note that government purchases, which had been growing rather slowly, grew at a 3.2% annualized rate. With strong consumption growth, this means the low national savings rate remains low.

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New GDP Figures

This morning the BEA released its very first stab at estimating economic growth during the summer of 2005 (July, August, and September). From the news release:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.8 percent in the third quarter of 2005, according to advance estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.3 percent.

…The acceleration in real GDP growth in the third quarter primarily reflected a smaller decrease in private inventory investment and accelerations in PCE and in federal government spending that were partly offset by decelerations in exports, in residential fixed investment, and in state and local government spending.

The first obvious point to make is simply to note that if there was a Katrina effect, it was not large enough to substantially dampen robust consumption growth during the quarter.

Household consumption spending showed no signs of slowing (rising at a 3.9% annualized rate), and business spending was solid, though not spectacular (rising at a 6.2% annualized rate for nonresidential spending). Interestingly, imports were stagnant for the second quarter in a row, when adjusted for inflation (though they went up substantially in nominal $ terms). Unfortunately, US real exports barely grew during the quarter as well. Note that this data also shows no sign of rising inflation outside of the energy sector.

The following picture shows year-on-year changes in the major components of GDP.

All in all, this report describes an economy that is still cruising along at a reasonable rate of growth, though clearly the current economic expansion is quite mature at this point and the economy is gradually slowing from the initial post-recession “boom”. This report does not contain anything dramatic to suggest that the current economic expansion began to wind down during the summer of 2005.


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Starve the Beast Theory Revisited

Kash has motivated me to do a little Google searching on something called “starve the beast” theory. How Tax Cuts Feed the Beast by Daniel Shaviro is a neat title but does not get to the point raised by Daniel Lambo. Shaviro does note:

On the campaign trail, President Bush is busy telling voters that he wants to keep making government ”smaller and more efficient” and that his opponent, John Kerry, wants a return to the days of big government. Forget the profligate spending of the past four years, he seems to suggest; instead, think of the many tax cuts that have been pushed through and how in time, as the saying goes, they will ”starve the beast.” But in fact the Bush tax cuts will do nothing of the kind. Counterintuitive though it may seem, they will inevitably end up increasing the size of government. When we talk about ”big government,” we shouldn’t be talking simply about how many agencies are in Washington or how many employees they have. Rather, we should consider government’s effects on society as a whole. If the government were to hire a lot of employees to redistribute wealth, everyone would agree that government had grown. But if the government instead used regulation for the same purpose, it might have fewer bureaucrats but it would not be smaller–it would simply have outsourced its ”big government” activity by making private workers subject to new government authority. In the same way, tax cuts can be used in lieu of spending to redistribute wealth and shape the economy. And, intentionally or not, that is exactly what Mr. Bush is doing.

It seems Shaviro agrees with Kash. Richard Vedder is often credited with Starve the Beast theory. The evidence put forth by Vedder is simply that higher taxes (T) are correlated with higher government spending (G). But does that mean T causes G or does not mean G causes T? It would seem that George von Furstenberg might argue G causes T – at least over the long-run given that the present value of taxes must equal the present value of government spending. This CBO discussion provides data, graphs, and a very good discussion of why Vedder’s correlations are not necessarily clear evidence of causation.

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I can’t believe that a someone who writes things like the garbage that Donald Lambro offered up today can still claim to be a “nationally syndicated columnist”:

Mr. Riedl and the GOP’s other critics are right to keep the heat on Congress to curb spending, but in the end — as Mr. Bush has shown — tax cuts are the most effective weapon in this fight. When you take away their money, they have less to spend.

Tax cuts are the most effective way to curb spending? Mr. Bush has shown this?

If there could ever be a perfect refutation of the quaint notion that cutting taxes forces the President and Congress to spend less money, it has been the experience of the past four years under Bush and the Republican Congress.


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