Wednesday, May 23, 2018

Has the Fed Flattened the Phillips Curve?

See How the Unfettered Fed Flattened the Phillips Curve: Insulating the central bank from politics made it possible to keep inflation and unemployment low by Neel Kashkari. He is president of the Federal Reserve Bank of Minneapolis.

I have had some recent posts on inflation, unemployment and their tradeoff (The Phillips Curve). After some excerpts, I show a Phillips curve and how, if it is flattened, that reducing the unemployment rate will result in a smaller percentage point increase in the inflation rate.

"Until the early 1980s the Phillips curve predicted price and wage growth with reasonable accuracy, but since then the economy has wandered far from the traditional relationship. Wages and inflation haven’t grown nearly as much as it would predict, given the sinking jobless rate."

"This curve is flatter than it used to be, simply because the Fed has gotten better at managing inflation. When unemployment shot up from 4.6% in 2007 to 10% in 2009, the normal curve predicted deep deflation. But the Fed’s aggressive interventions stabilized core inflation, which never fell below 0.9%."

"On the other hand, the “underlying” Phillips curve represents the intrinsic relationship between inflation and the fundamental supply and demand for labor. Even when the Fed keeps actual inflation in check, inflationary pressures can build, and the underlying Phillips curve might remain steep."

"The underlying Phillips curve began to flatten, or lose its power to forecast inflation, in the mid-1980s, and the trend has continued."

"As market participants have gained confidence that the Fed will make decisions based on economic data rather than short-term political considerations, inflation has become more predictable, and wages and prices have become less subject to short-term changes in employment."

In the graph below, on the steep Phillips curve, if the unemployment rate is 8%, and the inflation rate is 3% (point A), to get the unemployment rate to 4%, the inflation rate would have to rise to 7% (point B). That is a three percentage point increase.

But if the Phillips curve becomes flatter, then getting the unemployment rate to 4% means the inflation rate only has to rise to about 3.5% (point C). That is only a 1.5 percentage point increase.

Related posts

Nobody knows what the natural rate of unemployment is today

More on the natural rate of unemployment

How Central Banks Differ In Their Methods Of Calculating Inflation

Tuesday, May 22, 2018

Supply Means Producing A Good And Customers Being Able To Purchase It

When I teach the shift factors for supply and demand, one is expectation of future price. If buyers expect a significant increase in price in the near future, demand today will rise since consumers will want to beat the higher price.

But firms will reduce supply today, since they would rather wait just a bit and sell at a higher price. That is, the amount they offer for sale today will fall. One textbook, which I think was wrong, said that supply would increase since firms will want to have more to sell when the higher price comes.

But supply means that customers have to be able to buy the product. If a firm produces more, but keeps the goods locked in a warehouse until the price rises, supply has not increased today.

Something like this is happening with oil right now. See Trans-Atlantic Oil-Price Spread Soars as Supply Glut Disappears: Divergence is a sign of how stretched global supplies have become even as U.S. output has marched higher by Alison Sider of The WSJ.

World oil prices are rising and it seems like that would cause U.S. prices to rise. But U.S. prices are lagging behind. Here is an excerpt from the article:

"U.S. oil prices are lagging behind global oil prices climbing toward $80 a barrel, the latest sign of a market that has gone from glutted to exceptionally tight in the past year.

U.S. oil futures are trailing Brent, the global benchmark, by nearly $7 a barrel, settling at $72.24 a barrel on Monday. Last week, the difference was even wider, approaching $8 a barrel, based on closing prices. The two benchmarks haven’t been that far apart since 2015, before U.S. crude could be freely exported.

The divergence is a sign of how stretched global oil supplies have become even as U.S. output has marched higher, overtaking Saudi Arabia and rivaling Russia. That has contributed to soaring U.S. exports, which have hit a record of nearly 2.6 million barrels a day as users clamor for it."


"Lately, Brent has been pulling ahead of West Texas Intermediate, the U.S. benchmark. Tensions in the Middle East and anticipation that renewed sanctions will crimp Iran’s oil exports are having an outsize impact on global prices."


"U.S. oil producers that can get their oil to the Gulf Coast to be loaded onto tankers are reaping the benefits. Pioneer Natural Resources Co. , for example, told investors recently that 95% of its West Texas production flows toward refineries and export facilities at the Gulf, where it fetches prices linked to Brent. That added $16 million to its cash flow in the first quarter.

But others aren’t so lucky: A lot of oil is backing up in West Texas, where there aren’t enough pipelines to get all of the oil to market."

Not all the oil can get to a place where the customers can buy. So it is being produced but not supplied to the market. If it were supplied to the market outside the U.S., that would reduce the world price and there would be less of a gap between the Brent price and the West Texas Intermediate price.

Again, production does not necessarily mean supply. The goods have to be where the customers can buy them.

Sunday, May 20, 2018

A number of women who put off having babies after the 2007-09 recession are forgoing them altogether; more educated women and student debt also contribute to decline in birth rates

See U.S. Births Hit Lowest Number Since 1987: Last year’s fertility-rate drop was the largest one-year decline since 2010 by Janet Adamy of The WSJ.
"American women are having children at the lowest rate on record, with the number of babies born in the U.S. last year dropping to a 30-year low, federal figures released Thursday showed.

Some 3.85 million babies were born last year, down 2% from 2016 and the lowest number since 1987, according to the Centers for Disease Control and Prevention’s National Center for Health Statistics. The general fertility rate for women age 15 to 44 was 60.2 births per 1,000 women—the lowest rate since the government began tracking it more than a century ago, said Brady Hamilton, a statistician at the center.

The figures suggest that a number of women who put off having babies after the 2007-09 recession are forgoing them altogether. Kenneth M. Johnson, senior demographer at the University of New Hampshire, estimates 4.8 million fewer babies were born after the recession than would have been born had fertility rates stayed at prerecession levels."

"The postrecession baby lull appeared to be ending when births ticked up in 2014. But they’ve now fallen for three straight years, and last year’s fertility-rate drop was the largest one-year decline since 2010."

"One bright spot in Thursday’s figures, which are preliminary, is a continued sharp decline in teen births, which fell 7% last year. Since 2007, the teen birthrate has declined by 55%, and is down 70% since its peak in 1991. Children born to adolescents are more likely to have poorer educational, behavioral and health outcomes throughout their life."

"lower teen fertility accounts for about one-third of the overall decline in births among U.S. women.

The increase in women attending college is another force behind the birth decline, researchers say. Those with more skills face a greater trade-off if they interrupt their careers to have children.

“People are coming out with a lot of debt,” said Jennie Brand, professor of sociology and statistics at UCLA who has studied the impact of education on fertility. That gives them an incentive to keep working. “It’s another thing they have to grapple with before they might think about starting a family.”"

Related posts:

The Economy Affects The Birth Rate (2010)

Did The Recession Help Lower The Birth Rate? (2011)

U.S. Fertility Rate Hits Lowest Level on Record (2012)

Thursday, May 17, 2018

Has An Increase In Supply Reduced The Economic Value Of Recycling?

See Recycling, Once Embraced by Businesses and Environmentalists, Now Under Siege: Local officials raise fees and send recyclables to landfills as economics erode by Bob Tita of The WSJ. It seems like there is so much of it that the price has fallen and it is not worth the cost of sorting, etc. The article has a graph that shows that just in the last two years the price of cardboard has fallen by 50% while it has fallen even more for mixed paper. Excerpts:
"The U.S. recycling industry is breaking down.

Prices for scrap paper and plastic have collapsed, leading local officials across the country to charge residents more to collect recyclables and send some to landfills. Used newspapers, cardboard boxes and plastic bottles are piling up at plants that can’t make a profit processing them for export or domestic markets.

“Recycling as we know it isn’t working,” said James Warner, chief executive of the Solid Waste Management Authority in Lancaster County, Pa. “There’s always been ups and downs in the market, but this is the biggest disruption that I can recall.”"

"As cities aggressively expanded recycling programs to keep more discarded household items out of landfills, the purity of U.S. scrap deteriorated as more trash infiltrated the recyclables. Discarded food, liquid-soaked paper and other contaminants recently accounted for as much as 20% of the material shipped to China, according to Waste Management Inc.’s estimates, double from five years ago.

The tedious and sometimes dangerous work of separating out that detritus at processing plants in China prompted officials there to slash the contaminants limit this year to 0.5%. China early this month suspended all imports of U.S. recycled materials until June 4, regardless of the quality. The recycling industry interpreted the move as part of the growing rift between the U.S. and China over trade policies and tariffs.

The changes have effectively cut off exports from the U.S., the world’s largest generator of scrap paper and plastic. Collectors, processors and the municipal governments that hire them are reconsidering what they will accept to recycle and how much homeowners will pay for that service. Many trash haulers and city agencies that paid for curbside collection by selling scrap said they are now losing money on almost every ton they handle."

"The waste-management authority in Lancaster County this spring more than doubled the charge per ton that residential trash collectors must pay to deposit recyclables at its transfer station, starting June 1. The higher cost is expected to be passed on to residents though a 3% increase in the fees that haulers charge households for trash collection and disposal."

"Mr. Warner may limit the recyclable items collected from Lancaster County’s 500,000 residents to those that have retained some value, such as cans and corrugated cardboard. He said mixed plastic isn’t worth processing."

"the more intensive sorting process takes too long to process scrap profitably."
Interesting that the article mentions that few items still have value, including cans and  corrugated cardboard. It reminds me of a 2015 New York Times article by John Tierney called The Reign of Recycling. Excerpt:
"According to the E.P.A.’s estimates, virtually all the greenhouse benefits — more than 90 percent — come from just a few materials: paper, cardboard and metals like the aluminum in soda cans. That’s because recycling one ton of metal or paper saves about three tons of carbon dioxide, a much bigger payoff than the other materials analyzed by the E.P.A. Recycling one ton of plastic saves only slightly more than one ton of carbon dioxide. A ton of food saves a little less than a ton. For glass, you have to recycle three tons in order to get about one ton of greenhouse benefits. Worst of all is yard waste: it takes 20 tons of it to save a single ton of carbon dioxide.
Once you exclude paper products and metals, the total annual savings in the United States from recycling everything else in municipal trash — plastics, glass, food, yard trimmings, textiles, rubber, leather — is only two-tenths of 1 percent of America’s carbon footprint.
As a business, recycling is on the wrong side of two long-term global economic trends. For centuries, the real cost of labor has been increasing while the real cost of raw materials has been declining. That’s why we can afford to buy so much more stuff than our ancestors could. As a labor-intensive activity, recycling is an increasingly expensive way to produce materials that are less and less valuable.

Recyclers have tried to improve the economics by automating the sorting process, but they’ve been frustrated by politicians eager to increase recycling rates by adding new materials of little value. The more types of trash that are recycled, the more difficult it becomes to sort the valuable from the worthless.
In New York City, the net cost of recycling a ton of trash is now $300 more than it would cost to bury the trash instead. That adds up to millions of extra dollars per year — about half the budget of the parks department — that New Yorkers are spending for the privilege of recycling. That money could buy far more valuable benefits, including more significant reductions in greenhouse emissions."
See also his 1996 article Recycling Is Garbage.

Wednesday, May 16, 2018

Have Performers Found A Way To Beat Ticket Scalpers?

It seems like it has been going on for a long time. Pop stars put tickets on sale and a concert is sold out quickly. But many of the the tickets are bought by scalpers who turn around and sell them for a higher price.

Why wouldn't the performers just raise the price to what fans end up paying anyway? Then there is no margin for the scalpers. The pop stars have long wanted the publicity of the instant sell out and also might not have wanted to alienate their fans with high prices.

But now, it seems like there are ways to verify who the "real" fans are online who buy early. They get discounts and it prevents the scalpers from buying up large blocks of tickets early on.

See Why Empty Seats at Taylor Swift’s Concerts Are Good for Business: Pricier tickets aimed at squeezing out scalpers and delivering higher returns to promoters are producing fewer instant sellouts by Anne Steele of The WSJ. The new policy seems to be working because Swift has already made 15% more than her last tour. Excerpts:
"The strategy, which could reset how tickets to high-profile tours are sold, is to use aggressive pricing to limit the ability of scalpers to purchase tickets and later sell them at higher prices. In addition, a program from Ticketmaster is aimed at giving passionate fans earlier access to tickets at discounted prices."

"For the current Taylor Swift tour, would-be concertgoers were encouraged to register for Ticketmaster’s Verified Fan program months before tickets went on sale. They could boost their standing in the ticket queue by watching music videos and purchasing the “Reputation” album or merchandise. Users then received codes that allowed them the chance to purchase discounted tickets over a six-day presale period."

"Half of Ms. Swift’s tickets were allocated to the Verified Fan presale. Ticketmaster said soon after the presale that only 3% of those tickets had made their way to secondary websites such as StubHub, compared with an average of 30% to 50% of tickets for high-demand artists. It is unclear whether that statistic has held up; several of the dates now have upward of 3,000 tickets listed on StubHub."

"many artists have been hesitant to raise prices for fear of appearing greedy.

With tickets priced closer to their market value, scalpers—who not only profit but also absorb the risk on tickets that go unsold—have less incentive to try to flip them."

"with artists pricing closer to market value, he said, the fan experience is little changed compared with what it might have been buying tickets on the secondary market."
See a post from 2009 Miley Cyrus vs. The Ticket Scalpers.

Tuesday, May 15, 2018

How Central Banks Differ In Their Methods Of Calculating Inflation

My last two posts covered the uncertainty about the natural rate of unemployment. That is the lowest rate of unemployment compatible with price stability or a low level of inflation. That implies that, if the policy makers try to get the unemployment rate too low, the inflation rate will go over some target, like 2% (the Fed's target).

But it also appears that there is no "right" way to calculate inflation. See Lies, Damn Lies and Inflation: CPI figures have different meanings in the U.S. and Europe, thanks to different treatment of housing and health care by James Mackintosh of The WSJ. Excerpt:
"It is less well understood that the inflation figures have quite different meanings, thanks to different treatment of housing and, to a lesser extent, health care. The most dramatic difference is housing: In the U.S., shelter makes up a third of the consumer-price index, because it includes an imputed rent for homeowners. In Europe only actual rents are measured, at a weight of just 6% of the basket of goods and services underlying the price index.

Measure both using the European approach, and overall prices have risen the same amount since 2011. It is true that using this measure—known as the harmonized index of consumer prices, or HICP—U.S. prices have risen faster since last summer. But that appears to be in large part due to energy, where the weak dollar has pushed oil prices up faster than in Europe. There aren’t any detailed breakdowns available for U.S. HICP, which is still an experimental statistic, but the CPI excluding shelter, food and energy is the best equivalent to core eurozone inflation, and exactly the same at 1.2%.

Another indication of the importance of housing comes from the Cleveland Fed’s median CPI, which takes the middle price rise from a ranking of the CPI components. It drops from 2.6% to 1.7% when imputed rents are excluded, although in recent months it, too, has accelerated.

The Fed’s preferred inflation gauge, the PCE price index, takes a sixth of its weight from rent and imputed rent. The gap from CPI weights is made up mostly by including employers’ health-care costs to get a health-care weight of a fifth. In Europe the equivalent health-care costs, mostly borne by government, are ignored in HICP, and booze and smokes are almost as important as health-care in determining inflation.

Statisticians have argued for years about how to include housing costs, and they keep changing their minds. The Swedish central bank switched its target last year to a different measure of inflation in order to exclude mortgage rates, while the British statistical agency last year started promoting a measure of inflation including imputed rents, with mixed success."

Monday, May 14, 2018

More on the natural rate of unemployment

The WSJ printed a letter about the article I linked in the previous post and then had a related article. See Was the Phillips Curve Ever a Reliable Tool?

Here is the letter:
"Prof. Blinder suggests nobody knows what the nonaccelerating rate of unemployment (Nairu), the neutral (natural) rate of interest (aka r-star or r*) and the Phillips curve are today. This is hardly new. Estimates of Nairu and the Phillips curve have changed constantly over the last 50 years. Alan Greenspan noted this fact at the December 1995 Federal Open Market Committee meeting: “saying that the Nairu has fallen, which is what we tend to do, is not very helpful. That’s because whenever we miss the inflation forecast, we say the Nairu fell.” Other FOMC participants made similar comments at other meetings, e.g., at the February 1999 meeting William Poole, president of the St. Louis Fed, said, “the Phillips curve is an unreliable policy guide”; Edward Boehne, president of the Philadelphia Fed, said “Nairu . . . has about zero value in terms of making policy.” The natural rate of interest is also essentially impossible to measure and, hence, a useless guide for policy.

The truth is making monetary policy is no more difficult or easier today than it ever was. The problem is Mr. Blinder and others have deluded themselves into believing that measures of these concepts have been useful for making policy, even though he notes that the correlation between the unemployment rate and changes in inflation has been essentially zero for nearly 30 years. Inexplicably, he and others choose to ignore the fact that these concepts have had to be re-estimated continuously when their forecasts proved to be wrong.

Dan Thornton, Ph.D.
Valley Park, Mo.
Mr. Thornton is a retired vice president of the Federal Reserve Bank of St. Louis."
See also Unemployment Plunge Raises Stakes in Fed’s Goldilocks Conundrum: Danger of an overheating economy looms ever closer—or not, as theories increasingly come up short by Harriet Torry of The WSJ. Excerpts:
"Ryan Sweet, an economist at Moody’s Analytics, says Nairu is the economics profession’s Loch Ness monster: You might think you’ve seen it, but it’s always hard to know.

Over the past seven decades, Nairu has ranged from about 4.6% to just over 6%, according to the Congressional Budget Office’s economic projections.

Complicating matters, Nairu estimates rely on a contentious theory that falling unemployment pushes up prices and wages. That relationship appears to have broken down in recent years, when inflation remained below the Federal Reserve’s 2% target even as the jobless rate steadily declined.
There are several explanations for why. Nairu itself might not be a useful guide. Or the U.S. might not be at full employment yet. The White House’s chief economist, Kevin Hassett, said last month that full employment “could be in the threes now.”

A broader measure of unemployment that includes workers stuck in part-time jobs or too discouraged to search for work remains high, suggesting slack remains in the labor market. The measure fell to 7.8% in April from 8% in March, whereas in December 2000 it stood at 6.9%.

Former Fed Vice Chairman Alan Blinder points to his “traumatized worker” theory. “Workers still remember the bad old days and they’re more interested in job security than they are in seeking out a raise,” he said.

The Fed’s rough estimate for Nairu is now around 4.5%. Officials project the actual jobless rate will drop to 3.8% by end of this year and reach 3.6% in 2019 and 2020."