Saturday, January 31, 2009

Unemployment and Recessions

A soaring unemployment rate signals a recession. Notice that the unemployment rate in 1980-81 was well over 10%. Currently, we stand at 7.2%. In 1932, unemployment stood at 25%. We've seen worse times.

Capital Inflows and Net Exports

A trade deficit infers huge capital inflows. Capital mobility allows nations to consume more than national savings. When national savings are low, foreign countries use the money they receive from their exports to buy US capital (both assets and financial instruments.) Rearranging national income accounts yields the identity: S - I = Nx where S is national savings, I is investment, and Nx is the trade balance. Here one can observe that a low rate of savings must mean a high capital inflow in investment to buy imported goods. It's interesting to me that while household saving is low, business saving is high and there's been little change in private saving as a percentage of GDP.

With fuel prices low, our trade balance is improving. Falling incomes and a stronger USD should also mean less imported goods and a decrease in the trade deficit. (This graph was produced using the FRED data base at the St. Louis FED.)

Decline Sign

I'm waiting for the Dow to drop 666 points in a day. This cartoon by Rodrigo captures my opinion. I wonder how you value a stock? Future earnings. P/E ratio? CEO Chairman? In economics we weigh the relative cost. I will say this until I'm worm food--keep buying stock for the long run. I'm no expert, but when the Dow turns up, it will go higher than ever.

Friday, January 30, 2009

Bar Code

What's wrong with deflation? When consumers expect prices to be lower in the future, they delay purchases today. This will cause further price cuts. To the individual lower prices mean that income buys more and consumers are in effect richer. But to the economy, if consumers are not buying merchandise, then stores do not need workers and factories do not need labor. Deflation is a problem since 70% of GDP is composed of consumtion. At the last FOMC, the FED stated that they held no inflation worries and left short-term rates alone. This cartoon, and many like it can be found at Registration is required.

Thursday, January 29, 2009

Fox Video

Former Dallas Fed Chairman, Robert McTeer, on the FOMC meeting is here. Should the FED buy damaged assets?

Tuesday, January 27, 2009

Econ 101

The Marshall-Lerner condition predicts that as the domestic currency depreciates, exports increase. Does the M-L condition hold. In the graph I've plotted US exports since 1999. During that time the USD depreciated 16.56% against the Euro. Lately, the USD has appreciated, and exports have fallen.

Sunday, January 25, 2009

Wage Differentials

One reason why women earn less than men is women take care of the children. Who do children call when they are sick? They call mom at work. The wage reflects these interruptions at work. This is one theory.

Current Account

The Balance of Payments for the third quarter, 2008, is shown. The source is the Bureau of Economic Analysis. I didn't understand the financial account which I thought was called, "Official Reserve Account." The point 2 billion includes foreign currency, gold, special drawing rights, and other assets and accounts for the .2 discrepency when you sum up BOP components.
I wanted to show that Capital Inflows, KI, were equal to the trade deficit, NX, to show how double entry accounting was used in national income accounts. I have said for a long time that an economist sees something working in reality and wonders if it works in theory.

Friday, January 23, 2009

Credit Crunch?

The great Rodrigo expresses my thoughts on the current recession. I think we are in a liquidity trap. I was wondering if Batman and Robin could be monetary and fiscal policy since both will be ineffective.

Wednesday, January 21, 2009

Tuesday, January 20, 2009

Radioactive Fallout


Give me too much time and I walk into a nuclear meltdown. Look at me as the radioactive iostopes glow in pastel embers dissolving me into waste. This video was shot with a Logitech Quickcam and then video effects were added to give the appearance of a Halloween mask. I bought this to use with my Skype. If you want to talk to me on skype, search for me on the Skype contacts then page me.

M1 vs. CPI

Has the growth in the M1 money aggregate fueled inflation? It does not look like it. The CPI, less food and energy, is the blue line. The M1, the red. Notice the tight relation between the two prior to the official start of the recession. I think economic hardships cause the usual rational relationships to break down. As the two variables converge, you will see an end to the recession.

Monday, January 19, 2009

Velocity of M1

Data sows that the velocity of the M1 Money Supply is increasing. M1 is a composite of currency, checking account balances, and traveler's checks. To calculate the velocity, divide nominal GDP by M1. This calculation reveals how many times M1 must be spent to buy nominal GDP. As a worried economy holds less cash for transactions, the M1 must turn over faster to purchase the economy's aggregate output.
Changes in financial institutions such as the use of credit cards to pay bills at the end of the month and ATM cards make it more convenient for buyers to carry less cash. Perhaps this is why the velocity has increased.
Velocity also increases during times of hyperinflation as consumers want to spend their money before it becomes worthless. MIT economist Oliver Blanchard writes in his textbook that it's the expected inflation that causes a rapid increase in the money supply. Do you think the economic actors in today's economy are expecting a return to the high inflation of the 70"s? Wade Rousse, at the Chicago Federal Reserve Bank, thinks not. Read his blog here.

Sunday, January 18, 2009


America's trade deficit with the world improved as oil became cheaper making the cost of imports less. If alternate forms of fuel are found, many countries will lose their place in world politics. Paraphrasing Thomas Friedman, countries that trade with each other do not go to war with each other.

Freakonomics Contests

What does an economist have in common with trash? Read the comments here.

Saturday, January 17, 2009

Implicit Money Multiplier

As worried consumers and business hold on to their money in the form of currency, less reserves are available to loan as excess reserves. My data, using the FRED data base at the St. Louis FED, shows that the Money Multiplier is actually falling. The money supply is increasing to combat unemployment and falling GDP. This data suggests to me a liquidity trap and the ineffectiveness of monetary policy at the current time. More on this topic later.

Friday, January 16, 2009

CPI Monthyly Percent Change

The graph and data ( a large change in the Consumer Price Index in the United States. Consumer confidence about the future increased savings. Job loss and low GDP growth have contributed to a decline in the price level. What happens if deflationary expectations become entrenched?

I have mixed economic emotions about the data. I see wages declining with prices so I expect to see my wages decline. Already, I'm being asked to take a 1.5% price cut. I also see massive amounts of cash flooding the economy so one should observe an increase in the price level. Fiscal policy is always too slow to help the short-run so inflation will be looming two years from now. In the great depression, the growth in the money supply was not great enough when worried consumers began hoarding their money. In the depression, the M1 money supply actually increased but banks failed leaving consumers holding money in coffee cans and in lock boxes buried in the back yard. The money multiplier was less so investment fell causing further decay of income, production, and growth.

Banks are failing now, people are saving, massive layoffs continue, labor are asked to make wage concessions, and pundits are saying that the fiscal stimulus is not enough. If deflationary expectations get built into bargaining units and spending habits, could a depression be too far away?

Thursday, January 15, 2009

Long-Term Unemployment

Suppose that you are a freshman in high school thinking about asking a young lady to the homecoming dance. If you were repeatedly turned down, how long would you continue to find a date? Many would quit looking for a date. This is the analogy that Wayne McCaffery uses when he teaches how the duration of unemployment affects the long-term growth.

According to Mr. McCaffery, "...duration of Unemployment. Median duration of unemployment was 8.3 weeks a year ago, and now it is 10.6 weeks, not good. And of those 7.2% unemployed, 17.3% of them were unemployed for 27 weeks or more one year ago. And now 23.2% of the unemployed have been there for 27 weeks or more. This is a major source of the "marginally attached" to the labor force, the discouraged worker. Try looking for work, applying for jobs for 27 or more weeks. Pretty depressing."

What are the effects on the natural rate of unemployment? As Mr. McCaffery noted, there are human costs that include attrition of job skills. An unemployed worker will also lose the opportunity to acquire new skills. As a result many employers will be reluctant to hire the long term unemployed who give up looking for work and become discouraged. (Discouraged workers are not counted as part of the labor force.) Some of the chronically unemployed may become depressed.

Another effect of long-term unemployment is the increase in the natural rate of unemployment. The chronically unemployed will be unemployable. These discouraged workers will not pose a credible threat to employers by asking for higher wages. In fact, those still employed will exert an upward pressure on wages increasing the natural rate of unemployment. This theory is called Hysteresis and is used to explain why unemployment is higher in Europe than the US.

In periods of disinflation, which is what I expect to happen, the costs are larger. If one defines the real wage as W/P where W is the nominal wage and P is the price, a declining P, price level, will raise real wages and the cost of hiring more workers. Probably, the sub-group most hurt are the young who move from job to job quickly to take advantage of income differentials.

(This blog is dedicated to Wayne McCaffery who always inspires me to reach my potential.)

How Cold Is It?

The thermometer reads -15 along the Mississippi in Muscatine as I write this. How cold is -15?

The hydraulic part of the storm door was almost frozen. I could barely push it open and as i pushed the door open, I slammed into the door.
I was wearing two sets of gloves to scrape the cars, yet my finger tips started to tingle after two minutes.
Blocks of ice were as solid as bricks.
I saw a squirrel stuck to a metal bird feeder.
The snow is blue.
All of the windows in my home are frosted so I can't see out.
We are hoping for a high of -8 today which will feel like summer.
All of the eagles have vacated the area.
Air hangs when people talk like cartoon balloons.
I could use an icicle as a razor to shave.
I can hear HNI machinery 2 miles away.
In 1932 Niagara Falls froze completely.
I have a lot to be thankful.

Wednesday, January 14, 2009


In Japan, the liquidity trap motivated innovative methods to spur investment demand. New banking restructuring might encourage more lending. Do you think micro lending would work in the US?

Okun's Law--Lessons From the Depression

I've plotted the data from 1934 to 1942 and derived a linear regression line to show the length of time it will take for long term unemployment to decline. I believe this recession mirrors the great depression so I've been researching the data from the 1930's. When a worker becomes unemployed, she loses valuable job skills that makes the worker even more unemployable. According to my graph, it'll take a long time at high growth to reduce the unemployment rate. (Examine the top graph)
Okun law resembles the bottom graph where dUn=-.4(g - 3) where the change in unemployment equals -.4 the GDP deviation from the normal 3% growth.

Tuesday, January 13, 2009

Market Structures

Today's Livescribe lecture is here.


A Luddite is someone who is afraid of technology. Technology scares people because they don’t know how to use it. In addition, workers fear that they will be replaced. The latter is true if the technology allows the employer to produce more will less workers. Sometimes a new innovation will allow a producer to produce more with the same amount. In this case technology enhances the worker. In the long run, after all costs have been internalized, technology does not affect the natural rate of unemployment. How long and what costs are involved in this long-run adjustment?
Usually, an unemployed worker needs six weeks to find employment. If technology replaces an older worker, the costs of retraining and finding employment, might cause a pyschic cost that will make the displaced worker exit the labor market. For some workers the new technology will create new opportunities. I think the effects of technology is how workers perceive it.

Monday, January 12, 2009

Sunday, January 11, 2009

National Debt

Cartooning sensation, Haleigh Yonish, drew this cartoon to reflect that the national debt represents a negative externality on future generations. In other words, consumption today comes at a cost of future consumption. The current generation of high school students will have to bear the burden of excess consumption by their parents.

This argument is always debatable. Do parents save and give bequests to their children to help pay for future debt? There's always the argument that the real national debt adjusted for inflation is not a high as the national debt clock suggests.

Excellent job, Haleigh.

Marshall-Lerner Condition?

I think the Marshall-Lerner condition holds by examining the data. As the USD depreciates, the trade balance (Exports-Imports*e)worsens. There are times when the price effect dominates and the strength of the elasticities actually cause a decrease or a worsening of the trade deficit. But over time, as the USD appreciates, one would observe the US moving to a trade balance which has been the case lately.

GDP vs. Unemployment Rate

Macro theory predicts that when unemployment increases, Gross Domestic Product, GDP, will fall. Economists like to observe behavior in reality and wonder if the same behavior can be modeled in theory. Using the graph generated from the FRED data base at the St. Louis FED, I plotted both variables. The vertical shaded lines indicated recessions. Does the theory predict? In my opinion, theory predicts that a rise in unemployment will result in a decline in GDP.

Saturday, January 10, 2009

Unemployment Data

The New York Times reports that US Unemployment is 7.2%. How is the unemployment rate calculated?

Begin by subtracting from the US population those who are not counted including those serving in the armed forces, less than 16 years of age, and those institutionalized. The result is the Civilian Non institutional Population. Some of these eligible workers have given up looking for work so when we subtract those 80,588,000 workers, the remaining is the labor force. Those actively looking for work, temporarily out of work, are considered unemployed. According to the Bureau of Labor Statistics, BLS, 11,108,000 are unemployed. Dividing the unemployed by the labor force of 154,447,000 equals .07192, 7.2%, unemployment rate that the NYT reported. (Click to enlarge the graphic.)

Addendum: The Congressional Budget Office estimates the number of incarcerated population at 1.9 million. The CBO estimates the natural rate of unemployment at 5% over the last 20 years. The research is here.

Does Spending Impact Employoment?

If consumers spend less, then less workers are needed to produce GDP and Aggregate Demand shifts to the left. The data shows a 1.4% decline in wages and a 2% decrease in consumption--just what the model predicts. I can't wait to see if Okun's Law and the Phillips Curve also predicts the same outcome. For this analysis, I will use the FRED data base available on the St. Louis FED website.

Friday, January 09, 2009

Should Mike and Kathy Split the Bill?

Mike earns a lot less than his wife Kathy. When they go out to a fancy menu, should they split the bill? The lecture is here. The lectue is taken from Bernanke and Frank's Macroeconomics book.

Thursday, January 08, 2009

The Provision of a Public Good.

Today's Livescribe Lecture is here. Deriving the Marginal Social Benefit curve for a good that is nonrival in consumption and nonexcludable is the vertical summation of societies marginal benefits. In the lecture, Flad derives a MSB curve for Beavis and Butthead while Juan looks on.

Housing Market

For everything you want to know about housing, here it is. New residential housing is considered investment. Even with low interest rates, investment is declining.

Tuesday, January 06, 2009

Fiscal Policy

Cartoonist, Haleigh Yonish, depicted fiscal policy as a salt truck trying to keep the economy on a safe track. Like a salt truck, the trucks are slow to salt. Fiscal policy suffers from all sort of lags like getting approval then implementing. There's the lag that it takes time to work.

Positive Externalities

In this lecture, I explain how the market fails to produce the socially optimal quantity of a good that provides positive externalities.

Economics Experiments

Wikipedia has a great list here. A thanks to The Teaching Economist, William Mceachern, for this tip.

Monday, January 05, 2009

Negative Externality Lecture

Here are my class notes on a negative externality. In this lecture I describe the impact that individuals have on innocent third parties who are neither a buyer or a seller of a good.

Economic Links to Videos

Some very good white board lectures on various topics here. Watch the one on quantitive easing for your homework.
This paper will make you think about inflation and long-term recovery.
How to make a Smart Board for $50. Here. To see Johnny Lee at TED Talk, click here.

Sunday, January 04, 2009

What Has Microeconomics Taught Me

Microeconomics has taught me the power of marginal thinking. Marginal thinking is like the straw that breaks the camel's back. The straw builds until a critical mass is reached then great breakthroughs are obtained. Tim Schilling, Powell Center for Economic Literacy, says that "thinking at the margin is the deal maker or deal breaker." My personal mission statement is "to make daily marginal improvements." If I make a 1% improvement daily, then over a year, I've make a 360% gain. This is significant. The picture is from and is intended to show the impact that a single drop can make on the whole.

Saturday, January 03, 2009

Interesting Times

Rex May is a darn good cartoonist. This toon captures the "present."

Friday, January 02, 2009

Spending Hangover

The statistics I see is that North Americans spend 98% of their disposable income. Approximately 70% of GDP is consumption. So many consumers I see live way above their means by using credit cards or refinancing their homes. Looks like the party is over and the effects will last way into 2009.

FYI: While trying to optimize Google's search engine, I completely messed up my blog. I am constructing anoter blog at: