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

Economics Cannot Find Racism; Just Move Along

One of my favorite paper presentations ever was by Daniel Parent, who is a good enough reason in himself for pending Labor Economists to apply to HEC. He was trying to present data on income inequalities in the Financial Services industry and was forced to note—all right, I asked—that they didn’t have the data to determine if there was a racial difference in earnings because there wasn’t enough data on high-earning Blacks in the sample to be “statistically significant.” Since the sample used IRS data, among other sources, the answer was clear.

Now (via Tyler Cowen), I see that “not statistically significant” is not just for Financial Services Executives; the WSJ’s markets blog notes:

On average, Republican professors gave black students grades that were .2 of a grade point lower than their Democratic colleagues, or about two-thirds of the distance between a B and a B-minus.

(Among eleven black professors in the sample, there were no Republicans, and the Democrats appeared to grade white and black students as their white-Democratic peers did. But there were too few black professors to make that finding statistically significant.)

Again, the finding may not be statistically significant, but the sample, er, complection is.

Their data set is available here.

UPDATE: Thoreau riffs on the subject and finds a link to the paper.

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Greece is in a pickle

There is growing discord between the ECB and national politicians over a ‘soft restructuring’ of Greek debt. The ECB doesn’t want it, while national policy makers grapple over it.

And just in case you were wondering what a soft restructuring actually is, Joseph Cotterill at FT Alphaville explains.

Beyond the gobbledygook restructuring talk is a simple story of incentives and the outlook for the Greek economy in the face of default. Over at Roubini Global Economics, Edward Hugh investigates the issue:

Put another way, if the most valid argument against going back to the Drachma always was that this would imply default, now that default is coming, why not allow Greece to devalue?

The problem is that Greece’s manufacturing sector is NOT competitive, nor will it be under even the most severe fiscal austerity measures…not to mention that the fiscal austerity measures make their problems worse by deepening the domestic recession. Barring permanent fiscal transfers, they need a currency devaluation in order to gain any sort of competitiveness back.

According to the Surveillance of Intra-Euro-Area Competitiveness and Imbalances (.pdf here), Greece faces the following:

In view of Greece’s weakened competitiveness in the euro area and its persistent current account deficit, adjustment in the context of the euro area would be facilitated by relative price and cost adjustments and a shift of resources from the nontradable to the tradable sector.

This is difficult to do without devaluation. An it’s not going to improve with a lower stock of debt (through restructuring)!

According to Eurostat, the 4-quarter MA (Angry Bear blog calculations) of Greece’s export base as a share of GDP has improved by just 0.6% of GDP from its low, while Ireland’s export base as a share of GDP has improved a large 22% of GDP.

Greece is getting most of the impetus to net exports via a sharp drop in import demand. A squeeze in import demand can technically grow GDP, but only so far.

Again – how’s the economy to grow after default? Greece needs a devaluation to shift resources from the nontradable to the tradable sector. (from the EU report)

Rebecca Wilder

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Optimal Tax Rates for Generating Economic Growth According to Barro-Sahasakul Tax Data

By Mike Kimel

Optimal Tax Rates for Generating Economic Growth According to Barro-Sahasakul Tax Data

This piece is a bit more wonky than what I normally post.

I recently re-read “Macroeconomic Effects from Government Purchases and Taxes” by Barro & Redlick. I was struck by how different the conclusions they make about taxes are from what you get if you simply make a bar chart of the top marginal rate at any given time versus the growth rate over the next year.

Now, obviously, Barro & Redlick take a completely different approach… but at the bottom of everything is the data set they use (see Table 1 of the above referenced paper and this explanation of the “Barro-Sahasakul” data set). To cut to the chase, they use estimates of the average marginal tax rates paid by taxpayers rather than the top marginal rate that I used in the bar chart referenced above. Their overall marginal rate is made up of not just federal tax rates, but also social security tax rates, and even estimates of the state tax rates. It should be noted the Barro is an average rate, and since the average includes non-filers (who pay zero), the Barro rate is often well below the top marginal rate. The top Barro rate is 41.8% which occurred in 1981 (compared to top marginal rates of 90%+ from 1951 and through 1963). The Barro rate is also not correlated with the top marginal income tax rate (correlation going back to 1929 is -30%).

A lot of work clearly went into producing this overall marginal rate (I’m going to call it the “Barro tax rate” for simplicity). But does it explain economic growth rates any better than the top marginal rate?

I ran a quick and dirty regression…

Growth in real GDP from t to t+1 = f(Barro Tax Rate, Barro Tax Rate Squared, Top Marginal Income Tax Rate, Top Marginal Income Tax Rate Squared)

Data ran back to 1929, the first year for which real GDP was computed by the BEA. Top marginal rates came from the IRS Statistics of Income Table 23. And the Barro Tax Rate came from Table 1 of the Barro & Redlick paper. Since Barro rates are computed only through 2005, that’s when the analysis stops.

Results were as follows:

Figure 1

(Note… the errors got big during leading up to WW2, but I don’t think that invalidates this quick and dirty look.)

Here’s what I get out of this:

1. There is definitely a quadratic relationship between tax rates in one period and real economic growth the next.
2. If you’re going to pick either the Barro rate or the top marginal income tax rate, go with the latter. Its clearly better at explaining economic growth rates.
3. There may be something to be said about using the Barro rate and the top marginal income tax rate together. They do explain different things.

If you compute the “optimal tax rate” – the rate that maximizes economic growth implied by the regression – you get a Barro rate of 25% and a top marginal income tax rate of 64%. The optimal Barro rate was last seen in 1966, when the top marginal rate was 70% and the bottom rate was 14%. I’m guessing from this, and from looking at the Barro rate series, that this would imply that if you want to maximize growth, the top rate should be raised to about 64% and the tax burden on folks at the lower end of the income scale should be lowered. I’m not sure Barro would be pleased with these results.

I may return to this, but my next post should be the next in the series on GDP growth and the S&P 500.

As always, if you want my spreadsheet, drop me a line with the name of this post. I’m at my first name (mike), my last name (kimel – with only one m) at BTW… this spreadsheet contains a lot more wonky goodness!

Thanks to Sandi Saunders for getting me started wading through this particular pile of weeds.

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The Difference Between Defending DOMA and Neo-Nazis and the ACA

by Beverly Mann

The Difference Between Defending DOMA and Defending Neo-Nazis and the ACA

A post via Blog of Legal Times on Wednesday titled “King & Spalding Offers New Details on Marriage Mess,” which summarizes a report that day in one of its sister ALM (American Law Media) publications, the Atlanta-based Daily Report Online by staffer Meredith Hobbs begins (subscription needed):

The head of King & Spalding’s Washington office is accepting blame for what he calls the “misunderstanding” that led the firm last month to accept, and then drop, the U.S. House of Representatives as a client in same-sex marriage litigation.

(Rdan…slight corrections for readability and sourcing original material)

King & Spalding is a mega-law-firm based in Atlanta that in late 2008 won the derby to hire Paul Clement, Bush’s solicitor general since 2005 who had left the Justice Dept. in June 2008, to head its Supreme Court and appellate division. The deal involved a reported $5 million signing bonus, well worth the price because petitions (known as “cert.” petitions) asking the Supreme Court to agree to hear the case, when filed on behalf of clients by former Justice Dept. solicitors general—the Office of Solicitor General is the division of the Justice Dept. that argues cases before the Supreme Court on behalf of the United States—are guaranteed to actually be read by the justices, and the Court is more likely to grant the petition to hear the case even than petitions filed by former law clerks to Supreme Court justices. Which is saying quite a bit, because former law clerks to Supreme Court justices now hold a near-monopoly on getting private clients’ cert. petitions granted.

Clement, in keeping with modern tradition for former solicitors general, is a two-fer. He clerked for Scalia for a year after clerking the year before—his first year out of law school—for a lower federal appellate judge, a de facto prerequisite to a Supreme Court clerkship. So he’s really, really valuable to clients who want their cert. petitions read by justices, and granted. And to law firms that want to be known as a “presence” at the Court.

The referenced marriage mess is that last month, after the Obama administration announced that it (i.e., the Solicitor General’s office) would not be defending the constitutionality of the Defense of Marriage Act (DOMA), which defines marriage as between a man and a woman, against lawsuits challenging the statute’s constitutionality, a group of Republican House members hired Clement to represent them in defending the statute’s constitutionality, notwithstanding that they’re not parties to these lawsuits. But Clement signed the retainer contract without first getting authorization from the firm’s five-member committee that vets potential new clients and cases. And the contract itself contained an unusual and weird clause, now infamously known in legal-pundit circles as the “gag” provision, barring employees of the firm—attorneys, staff members and, I guess, the mailroom folks and couriers—from speaking ill of the statute.

When mass mutiny, by firm employees and corporate firm clients, including longtime client Coca-Cola (virtually all of the firm’s clients are corporations), threatened, upon the public announcement of the firm’s representation, escalating in intensity after the gag provision was disclosed, the firm announced that it would attempt to withdraw from the representation. The firm said the prospective representation hadn’t been submitted through the firm’s normal channels and hadn’t been vetted, and that, had it been, the firm would have declined the case. Clement, in turn, saying he had been led to believe that the firm supported the representation, resigned from the firm, saying that he could not ethically withdraw his representation. He joined a small firm comprised mostly of former Bush administration War on Terrorism veterans.

He then issued a public statement, seconded by several legal pundits, including some, such as Slate’s Dahlia Lithwick, whom I admire and whose writings I usually agree with, argued that it sets a dangerous precedent for a law firm to succumb to public pressure to decline to represent (or, as here, to withdraw from representation of) an unpopular client or an unpopular cause.

I’ve admired Clement himself, actually. As solicitor general, he was not an automatic supporter of rightwing legal positions when the Supreme Court, as is its custom, would ask the Solicitor General’s office for its view on whether the Court should agree to hear a particular case, usually concerning interpretation of a federal statute, in a case in which the federal government is not a party. The solicitor general is not the one who makes the final decision on this; the attorney general and sometimes the president himself is, if the issue is important ideologically or for, say, law enforcement purposes. But in cases in which it seems likely that the decision was left up to Clement, he didn’t always favor the conservative position.

In one important access-to-court case, for example, Winkelman v. Parma City School District, Clement filed a brief in support of a cert. petition filed by the parents of an autistic child who tried, without retaining counsel, to sue their local school district on their son’s behalf asking for injunctive relief to force the district to comply with a particular provision of the Individuals with Disabilities Education Act that the parents said the district was ignoring. The issue was whether the parents could “represent” their son in the lawsuit or whether instead they must hire a lawyer to that, rendering the right to sue dependent on the family’s ability to pay substantial legal fees. The Court, probably persuaded partly by Clement’s brief, agreed to hear the case, and, then probably influenced by Clement’s friend of court brief after the Court agreed to hear the case, ruled for the parents and their son. The opinion has implications for similar access to court by, say, elderly adults “represented” as “next friend” by one of their adult children, and asking for injunctive relief under various laws.

And in another case involving access to court by the non-wealthy, Clement, during his King & Spalding years, argued—unsuccessfully—in favor of possible higher contingent compensation from losing governments under certain circumstances, under a federal statute that requires a losing government in a constitutional civil rights case to pay fair-value attorneys’ fees to the lawyer who represented the plaintiff. Currently, he is among the lawyers representing a group of California state prisoners before the Supreme Court in a case in which the prisoners won on their claim for injunctive relief in the lower federal courts, claiming that California’s decades-long, extreme overcrowding in their prisons caused a lack of adequate health care so severe that it resulted in numerous deaths, in violation of the Eleventh Amendment’s prohibition of cruel and unusual punishment.

And Clement’s not just a “name.” Judging from journalists’ reports on his recent high-profile oral arguments at the Court, he strikes me as brilliant analytically, and he’s wonderfully quick-witted.

So I was disappointed when a few weeks before the DOMA controversy broke, it was announced that he would be representing the challengers to the Affordable Care Act’s constitutionality on appeal in the case in which a federal trial-court judge in Florida pronounced the entire statute unconstitutional earlier this year. It’s not that the Supreme Court justices will actually cast their vote based on any argument that has not already been made and thoroughly dissected. But if anyone can make a Supreme Court majority vote to strike down this law as unconstitutional seem like anything but Bush v. Gore redux, it is Clement.

But my disappointment about his representation of the ACA challengers is just a personal one. After all, in the ACA case, he’s playing a standard role as counsel, representing clients who claim that Congress exceeded its constitutional authority and that the result violates their individual rights.

In fact, the classic examples used to skewer King & Spalding’s action in the marriage mess all are of cases in which the lawyer is attempting to help an unpopular individual or group vindicate a constitutional right—the right of an accused mass murderer to a fair trial; the First Amendment right of neo-Nazis to march through Skokie, Illinois, then home to a substantial number of Holocaust survivors; recently, the claimed First Amendment right of the members of that absurd Kansas-based church to protest gay rights by parading at the funerals of soldiers killed in action in Iraq or Afghanistan, holding signs saying that the death was god’s retribution. (E.g., “Thank God for dead soldiers.”)

But every time I read a new contribution to the body of literature on the marriage mess, I wonder momentarily whether Clement’s decision to represent the group of House members, and the law firm’s decision to remove itself from that representation, really are the equivalent of, say, the ACLU lawyers who represented the neo-Nazis in the Skokie-march case and the people who thought the ACLU should not have represented them.

The neo-Nazis’ own cause, the message they wanted to spread, was abhorrent, but the cause the lawyers were championing was free speech. Clement, in his public statement, said his own opinion about the propriety of the DOMA as statutory policy is irrelevant (and sort of hinted that he personally doesn’t favor that legislation). And he’s right, of course; all that’s at issue is whether the statute is constitutional.

But I think he’s wrong that there’s no distinction between a lawyer’s representation of a party whose rights are at issue and a non-government lawyer’s representation of a group of members of Congress in order to defend the constitutionality of a law whose intended effect is to constrain the rights of others. What’s different is, first, that legal representation of members of Congress who are claiming that a statute is constitutional is more like a legislative or lobbying act than legal representation of a client. That’s true even when the purpose of the statute at issue isn’t to limit others’ rights. And, second, when, as here, the sole purpose of the statute is to limit others’ rights, it’s really not equivalent to representation of a party who’s own rights are at issue and whose case might, if that party is successful in the litigation, expand the rights of others.

I don’t suggest that there is something wrong with Clement’s decision to accept the case. What I do suggest is that the decision was more freighted with substance than the quick analogies suggest, and that King & Spalding was not wrong to view it that way.

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Health Care Thoughts: Accountable Care "Smackdown" Part II

by Tom aka Rusty Rustbelt

Health Care Thoughts: Accountable Care “Smackdown” Part II

While the feds were developing regulations for Medicare ACOs, both the feds and the American Hospital Association were developing cost numbers for ACO start-ups.

Today the AHA published its preliminary numbers, listing 23 major competencies to form and operate a hospital-based ACO (the AHA has been generally supportive of reform efforts, seeing a grim future).

The AHA costs estimates ranged from 600% and 1400% higher than the DHHS-CMS estimates. Both estimates are preliminary, but that is a huge difference. In my opinion (without deep analysis) the federal estimates have the substance of cotton candy.

On the list of 23 competencies, some were for formation only but most for formation and operations (my own list was 13 major competencies for on-going operations). The ACO is a very complex business model.

If ACOs do not fly, the major objectives of PPACA (Obamacare) will be difficult if not impossible to achieve.

Smackdown I

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Euro area inflation: gaining momentum below the hood

Today Eurostat released April 2011 inflation for the Euro area. Prices are increasing at a 2.8% annual pace, up from 2.7% in March and very much above the ECB’s comfort zone of around but slightly below 2%.

Today’s report is the second release and includes the cross section of price gains below the headline number. The first ‘flash’ estimate does not specify the breakdown.

Inflation’s hitting all sectors, goods (primarily) and services alike, via inputs to production.

READ MORE AFTER THE JUMP!April core prices rose 1.6% over the year. The goods-price inflation is flowing into the the service-sector as well – headline service-sector inflation is 2.0% in April, up from its low of 1.2% one year ago. There may be some seasonal distortions here associated with the Easter holiday, but the upward momentum has been established.

Price gains at the country level are broad based.

2% annual inflation is increasingly ubiquitous for key countries, Periphery and Core core alike. Below is the diffusion of 2% annual price gains, where an index value above 50 indicates that the majority of component prices are rising at a 2% rate. The legend indicates the longer-term average diffusion of price gains.

Germany is still seeing the majority of annual price gains below 2% – the current index is 43 – but the breadth of 2% inflation is increasing beyond its longer-term average of 34.8. In Spain and Italy, current inflation diffusion indices are likewise increasing, where Spanish price gains are broad, 55.6 in April.

And it’s not just VAT taxes.

The chart below illustrates the tax-adjusted inflation rate across the Eurozone (ex Ireland, unfortunately, whose data is unavailable, Austria, Estonia and Cyprus). This series is lagged one month.

The tax-adjusted inflation rate assumes that all tax hikes are passed fully through to final goods prices. It gives a proxy for the inflation effect of fiscal austerity (hike in VAT, for example).

Although the uptick in inflation is warranted at this stage in the recovery, especially in the core, the momentum in prices can no longer be attributed to taxes only – it’s broader than that. Greece, for example, saw its inflation rate peak around 5.6% in September 2010 when its tax-adjusted inflation rate (inflation excluding VAT) was just 1.1%. Now, however, the headline and tax-adjusted inflation rates are converging, 4.5% vs 1.7% in March. Much of the tax-adjusted inflation can be attributed to food and energy; nevertheless, the base effects of the VAT hikes are wearing off.

Tricky times for Euro area policy makers when the Core AND the Periphery are showing such broad price gains. Meanwhile, the Periphery are contributing little by way of growth.

Rebecca Wilder

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The Historical Relationship Between the Economy and the S&P 500, Part 1

by Mike Kimel

The Historical Relationship Between the Economy and the S&P 500, Part 1

This post is the first in a series on the historical relationship between the economy and the stock market. Data used in this post is the adjusted close of the S&P 500 going back to 1950 and quarterly nominal GDP going back to the same date. Because quarterly GDP figures measure the economy at the midpoint of the quarter, the S&P 500 for February, May, August and November are considered the analogous “quarterly” S&P 500 figures.

The following graph shows how the two series have evolved since 1950.

Figure 1

A simple eyeball test does indicate that historically, the two series have mostly moved together. And in fact, the correlation between the two series has been 93.5%, which is extremely high.

But which series has led and which has followed? For that, we look at the next graph:

Figure 2.

The black line shows the correlation between GDP and the S&P 500 x quarters hence, where x = 0, 1, … 24. In other words, it shows the correlation between GDP and the S&P 500 in the same period, the correlation between GDP and the S&P 500 lagged by a quarter, the correlation between GDP and the S&P 500 lagged two quarters, etc. As the black line shows, historically, GDP seems to have led the S&P 500 by about 16 quarters, or about four years; the correlation between GDP and the S&P 500 16 quarters out is about 94.1%. One possible reason… historically, when the economy grew, it encouraged more investment in corporations, but in many instances, investments take a long time (four years) to show up in ways that boost the market.

The red line looks at the relationship the other way – it looks at the correlation between the two series with the S&P 500 leading GDP. It shows that the correlation between the S&P 500 and the lagged GDP reached a peak of 95.2% when GDP was lagged by 10 quarters, or about two years. One possible explanation… historically, a growing stock market has made people feel wealthier, which in turn caused them to buy more stuff.

The conclusion from this… going back to 1950, GDP has led the S&P 500 and vice versa.

In the next post in this series, I’ll take a look at how this relationship has changed over time.
A few notes…
1. I’m not a financial advisor. I strongly suggest against making investments based on anything written above.
2. If you want my spreadsheet, drop me a line via e-mail with the name of this post. My e-mail address is my first name (mike), my last name (kimel – with one m only), and I’m at

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Monetary policy. I’m sorry, it’s just not doing it for me.

By Daniel Becker
Stock market is up, Profits are up and banks are safe. So what? Unemployment is somewhere between going down and I can’t get no satisfaction. Housing values are still falling

A new nationwide survey from real estate Web site says the value of U.S. homes fell 3% from January 1 to March 30 — the steepest quarterly decline since 2008.

I know, I’m suppose to care. Bigger picture and all. But frankly, when I read comments such as that by Mark Sadowski’s:

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,…

I just get all “A vineyard? Really?” Now I know Rebecca’s post is about looking for some indication that things are better though tipsy and Mark is responding that with: No, things are rather solid in the “we’re moving forward” category.
I’m going to be bold here and state right out that I’m speaking for the middle-class. (Those of this class can correct me if I’m wrong.) Five trillion dollar in new stock market wealth is not reaching us. I’m happy for you all that are now more wealthy, but really, you’re only a small percentage of the population and thus your success is not representative of how well We the People in total are doing.

Before I go further, let us do a little simple math (for you stat manipulators, the key word: simple. Add more complication as you wish in comments.) I am allowed to do this, keep it simple because I’m not an economist. Or am I?
Let’s say that 81.2% of all stock is owned by the top 10% of wealth gatherers. (table 9). Let’s say there was 100 shares at $1 each for a total value in stock on 8/31/10 of $100. That $100 became $129.80 by 5/2/11.(S&P closing numbers)  But, I’m going to round off all of this to keep it really simple. 100 shares. 80 shares owned by 10 people. 20 shares owned by 90 people. Fast forward 9 months and now the $100 is $120. Still 100 shares. (We’re excluding splits, initial offerings and anything else that would increase the number of shares, simple.)
So, 10 people now have a total worth of $96. The 90 people are splitting up $24. Both saw a 20% rise. Hooray! But here’s the issue, an additional $1.60 will do a lot more than an additional $0.04. The issue is coin in the pocket. For the middle-class, it’s just not happening.
Let’s add a some more fun facts to this Yahoo party.   I used:  Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze—an Update to 2007 by Edward N. Wolff, Levy Economics Institute of Bard College, March 2010

As of 2007, 38% of all households have stock via pensions and of that group it represents 31.4 % of all stock. (Table 14b, 14c) Unfortunately, the middle 3 quintiles 65.1% of their assets are their house, 12.9% is pension, 3.6% is stock held in some form. Darn few of the middle-class have any stock at all and what they have is tied up.
So again, that 29.8% rise… ain’t feeling it. I ain’t feeling it in customers in my shop. I ain’t feeling it in volume of sales in my shop. I ain’t feeling it in dollar’s per sale in my shop. Guess what I ain’t gonna do? I ain’t gonna hire anyone.
Let me leave you with this. Let’s say we manage to move 5 more people into the group that has 80% of the stock for a total of 15 people. They each have $5.333.  (Finance likes to measure as if they are using micrometers.) The remaining 85 have $0.235. The 85 have 5.9% more wealth to start. 9 months later, the 15 people have $6.40 each. They have $1.067 more. The 85 have $0.282.
Certainly $0.047 more to those in the 85 group is not going to make them go out and buy flowers. However, 5 more people have more than a buck to spend and in my shop that buys one carnation that will last 2 to 3 weeks.  As I noted before, buying that flower for one’s self has major positive benefits for one’s personality. I have a better shot at selling that 1 carnation when there are 15 people that could purchase it than when there are 10. That mean’s there is a better chance that there will be one more happy person and thus push the consumer confidence index up.
That my middle-class friends, is the power of policy designed to promote income and wealth equality vs just wealth increases.  I want me some of that there policy. 
A vineyard. Really?

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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

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