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

Different Views of Real Median Household Income and Recessions

Using data from Census Bureau Historical Income Table H-08 and CPI data from FRED (index 1982 to 84 = 100), I was able to calculate real median household income (RMHI) from 1984 to 2011.  Graph 1 shows the results – annual data.

 

Graph 1 RMHI – First View – 1982-4 $

 

Except for the bump during the housing bubble, it been a downward track for this century.  During the alleged recovery from the great recession, median income has dropped badly.

From this post at EconoSpeak,I found out that Census Beareau Table H-06 has a greater data range, from 1975 to 2012, and also an RMHI calculation.  So I plotted their data in Graph 2.

 

Graph 2 – RMHI – 2nd View – 2012 $

 

Instead of CPI, the Census Bureau uses CPI-U-RS, a research series based on constant 2012 dollars.  So the numbers are different, but the picture is the same.  I’ve added a trend channel, because I’m amused by that sort of thing.  Presumably, the Great Recession [GR] ended in 2009, but that’s the year that the RMHI value fell below the trend channel lower boundary – possibly forever.  A channel violation that severe almost always indicates that the previous trend is well and truly dead.  The new trend looks pretty dismal.  Welcome to hard times.  By my calculation, RMHI is down by over 8% since 2000.

As far back as the data goes, RMHI has taken a hit in every recession.  In days past, RMHI would recover to a new high after the recession was over.  There was no recovery after the 2001 recession until the bubble years of 2005-7.  That ephemeral gain to a new lower high was completely wiped out by the GR in 2008.  Since then, things have only gotten worse.

In the Econospeak post linked above, poster Econoclast suggests that the standard way of viewing the start and end of recessions is flawed.  His alternative is to consider that a recession is occurring when and as long as RMHI is falling.  He then presents this table.

 

Table 1 – Two Views of Recessions

If we consider recessions as he suggests, then the oxymoronic concept of the jobless recovery can be discarded – and good riddance.

Via Mish, I found Doug Short’s article on the Deflating American Dream.  He presents longer view graphs based on data from Sentier Research, who estimate RMHI on a monthly basis.  Short did a lot of homework, and was able to graph RMHI back to 1967.  He also compared the two inflation series and found that CPI-U-RS understates inflation, relative to the CPI.  The difference is minuscule in recent years back to the mid 90’s, but expands quickly as you go back into earlier years.  Graph 3 shows RMHI as adjusted by these two indexes, and also a third, PCE from BEA.  There’s a lot more in the linked post by Short and in this one, as well.  Both are highly recommended.

 

Graph 3 – RMHI Growth – Three Views

 

The three curves don’t disagree much on the timing of declines and advances, just on the magnitudes. By my count, using CPI as the adjustment index and Econoclast’s idea of recession timing, we have been in recession for 21 of the previous 46 years, or 46% of the time.

There’s your great moderation – I mean stagnation – in one simple, easy to understand picture.

Krugman points out that, “Adjusted for inflation, the income of the top 1 percent rose 31 percent from 2009 to 2012, but the real income of the bottom 40 percent actually fell 6 percent.

By my calculation, based on the data in Graph 2, RMHI fell by 4% from ’09 to ’12.  So the folks below median got hit even harder. In the words of an old song, “There’s nothing surer, The rich get richer and the poor get laid off!

I’ve come to believe that greed really is the root of all evil.

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Why Do People Prefer the Affordable Care Act Over Obamacare?

Affordable Care act versus Obamacare Act

I will give you, there is nothing within this bill that is easy to understand. Along with Maggie Mahar and others, I took the time to read the act and attempt to understand it which even today causes me fits. As shown in this clip, many people can distinguish between the words Affordable Care Act and Obamacare; but they fail to distinquish the content and understand they are the same. Kudos to the propagandist to associate a black President with a particular Law. There should be a Goebbels award somewhere for this type of achievement in skewing  the true intent of an act to just a person’s name. Would it sell better if we called it the Boehner Act or McConnell Act? People are acting against the interests of the whole and their own self interests because of a name. When you get right down to it and you know a large percentage of people within the wealthiest and richest in income nation in the world go without healthcare, why would you object to a plan to provide it because of the name even if it was not single payer, Medicare for all, or Universal etc.?

Maybe we should change the Link to Affordable Care Act to Black Man Care Act? Perhaps then, we might understand the true beliefs of a Congress who would shut down a government and people who might pick one over the other without knowing they are both the same. Hat Tip to Digsby for providing the clip.

The words are solely mine.

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Just a little (semi)-personal note

Just about everyone who knows me well knows that I’m a WWII buff and have a very soft spot for veterans of that war.  So this really touched me. I thought some other Bears and readers, who don’t read the Washington Post regularly and would otherwise miss seeing this, might enjoy this little reason to smile.

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Does targeting low inflation cause higher unemployment?

Does targeting low inflation lead to higher unemployment?

In other words, is it possible that a higher natural rate of unemployment is necessary to maintain a lower rate of inflation?

Output and prices move together to maintain economic momentum. Normally output increases in response to demands in the market, which keeps prices stable. Yet, at those times when output cannot respond to the momentum of the market, prices will rise giving space for output to catch up. A higher natural inflation corresponds to when consumers have strong liquidity. A lower natural inflation corresponds to when consumers have less liquidity and are less able to drive the momentum of the market. When consumers have low liquidity, output finds it easier to respond to demands in the market, so price increases are less needed.

The basic idea is that if prices are constrained from rising when there are inflation pressures from commodities or consumer demand, jobs will be cut short. Firms will not be able to maintain as much labor. The increased pressures from costs not being released through higher prices will cut into production possibilities. Thus, higher unemployment corresponds with a lower inflation target.

Joseph Stiglitz wrote back in 2008…

“Most importantly, both developing and developed countries need to abandon inflation targeting. The struggle to meet rising food and energy prices is hard enough. The weaker economy and higher unemployment that inflation targeting brings won’t have much impact on inflation; it will only make the task of surviving in these conditions more difficult.” (source)

Does inflation have a natural rate? This seems to be the key question. Unemployment has a natural rate. Even GDP has a natural rate. If you push unemployment below its natural rate, you get problems of economic over-heating. If you push GDP above its natural rate, there are risks of inflation and economic over-heating too. What would it mean if the natural rate of inflation for the US was 3%, and the Fed kept trying to push it to 2%?
Here is an analogy. The natural rate of inflation is like a shock absorber on a car. You have bumpy roads where you live. So you have shock absorbers on your car that have a greater range of movement for the bumpy roads. When you keep your car speed commensurate with the conditions of the road, you have a comfortable ride.
Then the roads all start getting paved and made smoother. Over time the shock absorbers stiffen, which creates a more stable ride on smoother roads. You can actually drive faster now too. But if you then try to drive your car on the old bumpy roads, you will have to drive much slower or get tossed around.
A 2% inflation target is like paving the roads and streamlining transportation so that it can move faster with a more stable and smoother ride. But if the road ever gets bumpy, the tight range of the shock absorbers make you slow down much more on bumpy roads. A tighter inflation range restricts leeway in economic adjustments. The result from an economy going slower during rough times would imply higher unemployment. A higher inflation range would allow the economy to move faster on bumpy roads. An economy moving faster means lower unemployment.
The relationship between inflation and unemployment is also found in the Phillips curve, where you have inflation on the y-axis and unemployment on the x-axis. The curve can be vertical or downward-sloping. If the curve is downward-sloping, like the right side of a capital A, then higher inflation would bring the unemployment rate down. But it is a tricky game with monetary policy. If the Federal Reserve sets an inflation target of 2%, and people really expect 2% inflation (Fed policy has credibility) and the inflation rate averages 2%, then people get used to the rhythm of the economy and the inflation target matches the speed.
However, if the Federal Reserve was to set a higher inflation target and not tell anyone, people would feel comfortable even as the economy is moving faster. If the car is riding smooth, could the Fed slowly speed up the car without anyone really noticing and getting nervous? Could the Federal Reserve take advantage of stable inflation expectations?
“Should the central bank try to exploit the downward-sloping long-run Phillips curve and secretly, by being more expansionary, try to keep average inflation somewhat above the target, so as to induce lower average unemployment than for average inflation on target? Such a policy would involve the central bank saying one thing (the target is 2 percent) and deliberately doing another (keeping average inflation above 2 percent). This would be inconsistent with an open and transparent monetary policy. Regardless of the moral quality of the policy, the truth might eventually be leaked or discovered, in which case the inflation target would lose credibility and inflation expectations would rise above the target, in which case the possible benefit of inflation above target would vanish.” (source)
If the Fed tried to temporarily set a higher inflation target when the economy was moving smoothly, as soon as the economy hit some rough roads, the Fed would have to tighten more than if they hadn’t secretly been so loose and free. Some say this is what happened before the crisis.
So back to the original question…
Is it possible that a higher natural rate of unemployment is necessary to maintain a lower natural rate of inflation? Yes it is possible. A higher rate of unemployment puts less pressure on inflation, thus making it easier to keep inflation low.
Another way to look at this is… The Fed has been in a long-term plan to beat inflation down to 2%. By pushing the inflation rate lower for so many years, the economy has now shifted its institutions and dynamics into an equilibrium state of low inflation, which required a rise in the natural rate of unemployment to minimize inflation pressures.
The flip-side of this issue, is that… If the Fed was to now target lower unemployment, they would have to accept higher inflation pressures. Yet, the economy is structured around very low inflation. and We all know the Fed has decided in favor of keeping inflation under control. The trade-off is higher unemployment, subdued wage growth and low demand pressures.
So, to wrap up… the Fed has its 2% inflation stability, which is now projected to last for years. But the economy is needing more adjustment room from prices (inflation) in order to generate more economic momentum for output. More economic momentum for output would translate into more employment. The economy is needing a higher inflation target, but the Fed does not want to raise the inflation target, and even if they wanted a higher inflation target, they couldn’t achieve it, either secretly or openly. The economy is now stabilized at an equilibrium with lower inflation and higher unemployment.

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Italian Right Trying to Out do Republicans

Well today is a busy day. www.healtcare.gov is open for business, the discretionarily funded US Federal Government isn’t. There is a political crisis in Italy (no that doesn’t happen every day anymore) and there are crises both in the Republian party and in the PDL (Silvio Belusconi’s party which he considers his as his shoes are his).

Berlusconi wants to vote no confidence in Prime Minister Enrico Letta and have early elections (whenever he loses an election he demands a rematch starting the next day). Just to make it clear that he thins his party exists to serve him, the issue is whether he be expelled from the Senate because he has finally finally been finally convicted of tax evasion.

Some of the legislators in his party who are tired of being treated as his servants are threatening to split the party and send Berlusconi’s rump …. party into opposition.

All this reported with great delight in Italy’s leading daily La Repubblica (where Berlusconi is especially hated because long ago he tried to buy the paper and fire the staff). But best of all, it isn’t even their top story. They lead with an interview with the Pope (not because they are Catholic but because their former director is the informal leader of Italian atheists)

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