Unemployment and Our Dumb Politics

Politics and religion
21

Here in Missouri our department of transportation just announced 1200 job cuts. That’s 1200 families that will be spending less. When the government starts shedding jobs, it’s not going to be a short-term benefit to the economy.

I would have preferred not worrying about the deficit at this point and instead wish we were more focused on getting the economy stronger. Once we achieve that, then start to cut into the deficit.

And for goodness sakes, people have to accept cuts in entitlements and tax increases through tax hikes and through eliminating tax breaks if we really want to do something about the deficit. I’m pessimistic. The Republicans will block any tax increases. The Democrats will block most cuts to entitlements. And the elderly will vote out anyone who talks of touching their entitlements.

22

Some light reading.

Also, minor question. Do you actually think that millions of newly employed Chinese laborers making money aren’t going to consume stuff? And, no shit, are you seriously unhappy that Chinese people are throwing money at companies? Do you not get how people make money? It’s not by waving a wand; well, not unless you’re Ben Bernanke saving the world with QE.

Addendum: did you know that China and America both account for 1/5th of global industrial output, and that America achieves that stupendous figure with a tenth of the number of people China needs?

http://www.suomenpankki.fi/bofit_en/seuranta/seuranta-aineisto/pages/vw112011_7.aspx

Thanks, Finland!

23

Bubble is hard to believe. If anything, prices are returning to trend post MEGARECESSION. Supply outpaced by demand, overbidding occurs. Remember that prior to crash their were stories of people rioting for lack of food and high oil prices, and now we’re seeing something similar in a much weaker economic climate.

Speculators have a fixed time horizon for how long they can hold commodities before they spoil. They can delay goods coming onto the market, but they can’t affect supply. All they do is serve as market makers, buying from the one and selling to the other.

  1. Increasing commodity prices are not inflation. They may lead to cost push inflation as manufacturers pass on the expense to consumers. If that’s happening, it’s not happening yet.

Correct. Also not being transferred to wages, the armageddon scenario.

  1. By some measures of inflation this is irrelevant. The Federal Reserve uses the PCEPI (core inflation), which iirc doesn’t include fuel and food because these items are subject to external supply shocks. From an economic policy perspective the price of oil going up because we’re bombing Libya doesn’t actually cause inflation (even though it spikes fuel prices).

True and untrue. Not included in PCE, definitely included in CPI, another massively important statistic. Sure PCE is favored these days, but CPI is most certainly not being ignored.

  1. The current indicators for inflation (CPI, PCEPI) show low to very low rates of inflation. The bond market doesn’t seem to expect anything out of the ordinary regarding inflation. Maybe this will change someday - lots of people sure seem to think so! But nobody that I’m aware of has made a compelling case for inflation other than “I feel like it might be happening.”

Yet gold is exploding, and gold is considered another hedge position for inflation. A lot of the big names are having trouble squaring the circle here, where bonds are low yield, gold is roaring and the equities market is doing “great”.

Low yields means no faith in future growth (or people would be charging more for not putting their money to alternate uses), strong equities means faith in future and gold is typically a hedge against inflation or future shocks. All three at the same time sends some mixed signals indeed.

24

I am pretty confident that prices of many if not most consumer goods will start increasing pretty radically unless something we don’t foresee (we track these things at work via ICIS and other national and global databases, as well as industry forecasts - this was a major topic this week of the committee meeting I was in while in Washington D.C.) causes the raw materials and goods prices to drop dramatically. Right now forecasts are that they will continue to escalate at historically high rates through 2012. Manufacturers just can’t afford to eat the costs when they are this radical.

I understand why the core inflation index is the one the fed focuses on, because they consider it to be the barometer by which they decide on economic policy. Unfortunately, the average consumer is really hurting due to the high fuel costs and food costs. We just gave all of our mid to lower paid employees a special “gas bonus” just to help them cope with how much it costs just to get back and forth to work, even with carpooling, etc.

My compelling case isn’t feelings, it is the actual measured dramatic increases in prices of raw materials in both manufactured good and foods and food byproducts, as well as projected trends for the next 18 months. Again, this is being observed by most companies that “make and sell stuff.” The real question on the impact on consumer pricing, however, will be whether the economy and consumers (especially faced with such high unemployment and underemployment) can support the inevitable price increases. Companies like Whirlpool, for example, have tried raising prices because they are struggling with their cost increases from materials cost increases. Other companies are following suit.

What is challenging is that companies are facing this serious cost inflation, and it is hurting them financially, and in some cases is slowing down their going back to the hiring pool as fast as they would like. If they could pass more of these costs on, they could then get back to “normal” (or, as the new cliche’ is these days, the “New Normal”) in terms of hiring, as well as purchasing from their OEMs. But the poor economy hinders passing along the costs the way they would in a “normal” market, so you end up with a real chicken and egg situation. The scary thing is that a lot of companies have a huge pent up need to raise prices and will do it as fast as the economy will allow it.

So who knows what will happen. I don’t put a lot of stock in the Federal inflation index alone, obviously there are a lot of “PIs” that you have to study in concert to get the big picture.

Caveat: I am the world’s worse predictor. In just about everything.

25

Inflation for Dummies

Here’s a little history lesson that may help in this discussion. Essentially, everyone knows what inflation is. But due to changes made during the Clinton administration on the way inflation is measured, our inflationary statistics have been hugely unreliable and have likely understated inflation significantly since that time.

In the mid-90s, the Boskin Commission met and suggested ways that future Social Security increases could be limited. SS is tied to the Consumer Price Index, which is a typical “market basket” on which prices are tracked. If the basket costs more to buy, inflation is up. If it costs less, inflation is down. Easy, right?

Well, to limit increases, they decided to change the way the basket is calculated. They threw in quite a few new variables, but my two favorites are:

Hedonic Adjustments - As new features are rolled out, the new item is superior to the old one. Up until the 90s, these improvements were simply treated as quality improvements. This is historically accurate. After all, we can’t buy an IBM XT today even if we wanted to. Eventually, improvements are so inexpensive that the entire marketplace incorporates those improvements.

But due to the Boskin Commission, the Republican Congress and President Clinton, the CPI is now adjusted - always downward - for product improvements. With Hedonic Adjustments, the market basket rates the new computer as much less expensive as an old one, even if the old one was $1000 5 years ago and the new one was $1050 today. Hedonic Adjustments even apply to governmental regulations. If there’s a new air quality tax that costs dirty manufacturer’s products to cost more, there’s no CPI increase due to the “hedonistic effects” of breathing cleaner air.

Substitutions - My personal favorite. Since the mid 90s, the CPI allows for product substitutions. In essence, if steak gets too expensive in the market basket, they can substitute in hamburger and adjust the CPI downward. This is absolute proof of inflation! But now it actually can be used to show deflation. After all, that $6/lb of steak is now seen as a $3/lb of hamburger. This can be done with any number of goods and it’s entirely intellectually dishonest.

This isn’t the first time the CPI has been “adjusted”. It was done under Reagan’s term as well. But the changes done in the mid-90s were an absolute travesty. It tells you something that of all the external factors that can adjust the CPI, NONE of them are allowed to adjust it upwards. That’s right, the number can only be lowered. Many economists think that you should essentially double the CPI to come up with a more accurate inflationary number. Others think it’s more the CPI+7%. I.e., if they say inflation is 2.2%, it’s really 9.2%.

Think inflation hasn’t been that bad? Go back and look at the price of sample goods in advertisements from years past as to today. A Hershey Bar in 1995 cost $.50. It’s double that today. You could buy 18oz of Corn Flakes for $2.99 in 2000. It’s $3.79 for 12oz today. This holds true for virtually every core consumer good over the last 15 years.

So consider these variables when talking about inflation, because if you’re saying that the prices of consumer goods has been pretty stable the last few years, you’re sorely mistaken.

26

The reality based community loves themselves some hedonic adjustments.

27

Am I the only one who initially read that as “Hedonistic Adjustments” and was all like “FUCK YEAH!” and then got really disappointed when they realized the “-ist-” was missing?

28

I heard some talking head on the radio today (can’t remember which one, sadly) say that the dollar is up recently. Is this true? Also, barrels of oil are down, even though gas prices are staying high (for now).

Apparently, cost of raw materials isn’t always reflected in the cost of the final product. Who knew?

29

It’s basically the same thing though, so feel free to exclaim away!

30

This isn’t the first time the CPI has been “adjusted”. It was done under Reagan’s term as well. But the changes done in the mid-90s were an absolute travesty. It tells you something that of all the external factors that can adjust the CPI, NONE of them are allowed to adjust it upwards. That’s right, the number can only be lowered. Many economists think that you should essentially double the CPI to come up with a more accurate inflationary number. Others think it’s more the CPI+7%. I.e., if they say inflation is 2.2%, it’s really 9.2%.

So what you’re saying is that we haven’t had real GDP growth in a couple of decades?

31

All of what Blackadar quoted is pretty much straight from Shadowstats which has largely been debunked. I was always suspicious of his data which if you ever analyze it yourself is always shifted in a ‘negative’ fashion on every measurable metric. The fact that he sells a doomsday newsletter doesn’t help his credibility much.

It’s total garbage.

32

Yeah when I did some googling to look into what Blackadr had said I came up with a bunch of fairly dubious hits.

Additionally: if we just assume inflation has been 7% higher than CPI states, that’s probably enough to wipe out all economic growth for the past few decades. That seems kind of nutty to me!

33

No.

It doesn’t help that Clinton was the one who started it.

34

If you wildly change the definition of inflation that doesn’t make the statement “inflation has gone up a bunch in the last few years” true.

35

One article doesn’t make it “debunked” and this has been widely argued long before a site like Shadowstats was ever created. Hell, it was argued in '96 when it was passed to lower SS benefit payouts. It’s been argued since the first adjustments in 80s. Even the government itself says that BLS adjustments have resulted in inflationary rates lower than under the newer models.

http://www.bls.gov/opub/mlr/1999/06/art4full.pdf

Even MIT’s Billion Price Project shows CPI to be understated.

CPI-U-RS, which incorporates many of the changes applied retroactively, even shows a greater inflationary gain than CPI-U.

Garbage? Hardly. Do I believe shadowstats? No. Until today, I’d never even heard of the website. Do I believe the CPI-U is accurate? No. The decision to lower it was entirely driven by political decisions and I think it has understated inflation by a not-insignificant amount - probably around 1.1% to 1.5%, which was Boskin’s aim back in '96. Have I done any scientific studies on the matter? No. It’s more of a gut feeling, backed by observation and conversations with others who have done more research into this particular area.

IMO, in all probability we haven’t had any significant economic growth in a decade. When you look at a lot of other ancillary statistics - wages, commodity prices, etc. - it’s really hard to conclude the US has had significant growth. Or if we have, it’s so concentrated at the top as to make that growth entirely irrelevant.

36

I’m not asking for a scientific study, but could you offer any specific examples to back up your assertions?

For example, you stated: “In essence, if steak gets too expensive in the market basket, they can substitute in hamburger and adjust the CPI downward.” The specific substitution of hamburger for steak is explicitly rejected by malchior’s link. Can you offer an example of a substitution that was made, but should not have been? Just one will do.

37

Nope.

38

The party that tackles and passes entitlement cuts is going to be faced with the prospect that they’re going to take it in the boyshorts the next time people get to vote. Doing the “right” thing and losing your job isn’t really a viable career plan.

39

Something similar happened in the early 70’s in UK - the stat bureaus kept on taking things out of inflation stats because they were “one off supply shocks”.

One description was “inflation with all the inflation taken out”

40

A conspiracy theory? In a world with numerous economic research institutes? Over multiple decades, from a government that couldn’t hide breaking and entering or selling coke to fund terrorists or beating and raping prisoners half a world away?

Here’s a simple way to falsify your claims. Argentina is doing exactly what you’re suggesting (heavily fudging inflation numbers) the US is doing and they’ve been called on it everywhere that matters. If the US was doing it, economists would be trampling one another in their haste to publish the fact, and foreign governments (such as China) would be shitting themselves with glee at such a boneheaded misstep.

Inflation is closely watched because it has a serious impact on the profitability of the sorts of institutions with the financial firepower to check up on it. You can be confident that even if the numbers are slightly off on occasion, they are within a standard deviation or two of the correct answer.

Now, if you wanted an area where there is a bit of fudging, you’d look at how GDP is calculated here in the states versus how it is done in Europe. Here, it’s traditional for GDP to be revised downward after more data is collected, while across the pond the numbers get revised upward. Since the initial numbers are the ones that matter for investors and papers and no one gives a shit about revisions, that’s duplicity with a purpose that no one particularly worries about.

edit: Final point. Your candy bar that went from .5 to a buck over the past decade? The standard measure indicates that the price would be .71 right now. I’m pretty sure we can assume that the rest can be explained by the rise in cocoa prices over the same period, considering the enormous bull market in commodities and the massive increase in the prices of most every commodity over the period. Or you could pin it down to dark wizards manipulating the numbers.