Forecasting GDP

Using the Skeptical Optimist’s “Climbing Limo” method for forecasting GDP, I believe that the economy will grow at 1.9% in the fourth quarter. (You too can do this with very little effort here).

So what does this mean?

First, I believe that this estimate is likely to be accurate. The economy is slowing a bit, but consumers are still spending.

Second, the GDP deflator for the previous quarter was below 2% — as is the Trimmed Mean PCE Inflation Rate.

Slowing growth coupling with slowing real GDP suggests that the Federal Reserve will be reversing course soon and cutting interest rates.

Squeezing the Middle Class?

Barry Ritholtz looks at the middle-class squeeze. I am very skeptical of this so-called squeeze — perhaps it is my utter hatred of the use of the term by politicians who insist that the government can solve it.

My view is that it is hard to group individuals with similar incomes because they often have very different behaviors. In fact, those with the same levels of income often end up with differing levels of wealth. Steven Venti and David Wise, for example, showed that,

the bulk of the dispersion must be attributed to differences to in the amount that households choose to save. The differences in saving choices among households with similar lifetime earnings lead to vastly different levels of asset accumulation by the time retirement age approaches.

Therein lies the problem with grouping individuals together on the basis of income.

Climate Change

The New Economist has a round-up of the economics of climate change.

UPDATE: Arnold Kling discusses climate change:

My guess is that if you think outside the box, you can eliminate global warming for a lot less money. Suppose you told scientists and engineers to come up with a way to monkey around with chemicals and stuff to reduce global average temperature. My guess is that the total cost of that approach, including research and implementation, would be only a few billion bucks, give or take.

Fighting man-made climate change with more man-made climate change almost has to be more cost-effective than fighting man-made climate change by trying to de-industrialize. But it would not satisfy the religious and political longings that are at the heart of the global warming crusade.

That last sentence sums up the problem with this issue.

Not Surprising

According to CNN, a majority of the general public believes that the government is too large.

Of course CNN considers it a problem unique to the Bush administration.

HT: Greg Mankiw

Second, again

Detroit finished second to St. Louis. Again.

Detroit was named the second most dangerous city in the United States. St. Louis finished first.

International Price Discrimination?

The New Economist points to a new paper that reveals higher prices on Amazon for the same textbooks in the United States than are charged in the UK:

The paper finds that although books for general audiences are similarly priced internationally, “textbooks are substantially more expensive in the United States” (on amazon.com) than the UK (amazon.co.uk). They argue that “cost factors cannot explain this phenomenon and discuss several demand-side explanations.”

Are their loopholes in the discrimination? It appears so. The blog also lists textbooks that would be cheaper for U.S. citizens to purchase even with international shipping rates.

Here is a link to the paper.

More on protectionism?

In my response to John Konop, I asked rather rhetorically whether we should even try to compete with lower international wages. Walter Williams, one of America’s most articulate economists, provides the answers in the Washington Times:

No one denies that international trade has unpleasant consequences for some workers. They have to find other jobs that might not pay as much, but should we protect those jobs through trade restrictions?

The Washington-based Institute for International Economics has assembled data that might help with the answer. Tariffs and quotas on imported sugar saved 2,261 jobs during the 1990s. As a result of those restrictions, the average household pays $21 more per year for sugar. The total cost, nationally, sums to $826,000 for each job saved. Trade restrictions on luggage saved 226 jobs and cost consumers $1.2 million in higher prices for each job saved. Restrictions on apparel and textiles saved 168,786 jobs at a cost of nearly $200,000 for each job saved.

Learning How to Win

Conservatives may love the fact that Bill Clinton has been in the news recently, but I think that this is a dire mistake. Clinton beats Howard Dean any day of the week. As much as the Kos kids may hate it, the Democrats are largely shifting to the center. This shift is what the Dems need to win. Guys like Harold Ford and Barrack Obama are — or at least should be — the new face of the Democratic Party.

Newsweek reports on the shift:

At Howard Dean’s Democratic National Committee—well, who’s even heard anything from Howard Dean? He’s largely taken a back seat to Bill Clinton and Barack Obama in making the Democrats’ prime-time case. “The days of Democrats’ having to check 28 boxes before they run are over,” Schumer says. “We want to win.”

Schumer hits the nail on the head. It may please the base to move left, but such a shift does not lead to victory. Clinton was a master of playing to the center and if the Dems want to win control of Congress and the White House, they should follow his strategy.

Economics 101

John Konop asks:

Do you think the trade deals are working with soaring trade debt and falling wages?

Here is my response:

First, a trade deficit is merely a capital surplus. For example, if we export lumber and steel to Brazil for the production of a factory, this is a trade surplus. However, if we import the lumber and steel from Brazil to build a factory in the U.S. and then it is bought by Brazilian investors, we say that we have a trade deficit. What is the difference? A Brazilian-owned factory was built. Does it matter where it was built? Why is it better for the Brazilians to build factories in their own country?

When exports fall, investment in the United States rises. We pay for goods from China with U.S. dollars. These dollars must be used to buy U.S. goods or assets.

A trade deficit does not create debt. If I buy a good that was made in China and the maker of that toy purchases a factory in the United States or shares of a publicly traded company, a trade deficit exists. But where is the debt?

If I purchase a good that was made in the U.S. and the company uses the money to purchase a factory or shares of stock, is debt created? Why is it any different if I buy the good from a foreign company?

Second, it is insufficient to look at earnings in terms of wages. Earnings must be looked at in terms of total compensation because workers are not paid wages alone. So while real wages may have declined, total compensation has not. You still may consider it a bad thing to see wages fall, but it is merely a reflection of the preferences of U.S. workers.

Konop responds:

Josh, tell how we compete with $723 a year wages in China? Tell me why real wages are flat to down for 80% of Americans? Tell me why the national savings rate is negative 1 % for the average American Family?

BTW you missed the concept of wages. If wages drop faster than price break you have a problem. So we do funky interest only and arm loans to make up for the wage shortfull. But hey the banks do not like the latest debt to equity ratio, so interest rates go up. And when the new loan is due Sally has no money!!!! Am I missing something? This is the real world!

First of all, let’s keep the debate confined to economics. “This is the real world!” is not an argument.

Second, why should we pay Americans thousands of dollars to produce goods that the Chinese can produce for a couple hundred dollars per year? The lower labor costs lead to lower prices and is better for consumers. Further, by having the Chinese produce the goods, the United States has additional resources to produce goods in which it has a competitive advantage.

Third, the national saving rate is worthless. It considers saving to be:

Saving (S) = Income (Y) – Consumption (C)

However, they classify things like tuition as being consumption. Tuition is an investment in human capital and is clearly different from purchasing cans of peaches. The government makes no such differentiation.

Additionally, saving is a stock, which means it is a value at a specific point in time. We are much more concerned with savings (with an “s”) because it is a flow — something that occurs over time. Thus, what is important to look at with respect to savings is the marginal propensity to consume. This the the change in consumption due to a change in income. The marginal propensity to consume is less than one which means that when income increases, we spend only a fraction of the new income (albeit a large portion).

Fourth, since NAFTA was enacted in January 1994, wages have risen over 50% (seasonally adjusted). And while real wages have fallen recently, total compensation has increased. Also, when programs like NAFTA are the ones being criticized, it would be helpful to look at the data for wages since the change rather than cherry-picking data. Selective data may make for great conversation in Washington and other political circles, but isn’t useful for those with about five minutes and an internet connection.

Finally, I do not live in a world where when my income falls I take out an interest only or ARM loan. Blaming free trade for individual choices to take out adjustable rate mortgages and interest only loans is wreckless, baseless, and utterly incorrect. If you want to blame someone for the prevalence of these types of loans, blame the bankers.

Additionally, the amount owed to the bank declines in real terms when inflation rises (just like the real wage) if one is smart enough to lock in a fixed rate. Therefore, inflation does not make it harder to pay for loans. Deflation — a negative rate of inflation — makes it harder to pay for loans because it pushes nominal wages down while the amount of the loan increases in real terms.

Class dismissed!

Are Economists Ruining America?

John Konop thinks so. It’s mostly the usual protectionist rhetoric. However, you have to love when the conclusion to such a post begins:

Now more than ever, Americans need their economists . . .