• CEPR not sure if recession phase of business cycle has ended in euro area

    The Reason That Recession Dates Matter

    Jun 20 • Businesses, Economic Debates, Economic Growth, Economic History, Government, Labor, Macroeconomic Measurement, Money and Monetary Policy, Regulation • 233 Views

    Asked to define a recession, you can give the mechanical answer. It is 2 or more adjacent quarters of a real GDP decline. So, if Q1 GDP grows by 3%, Q2 by 2% and then Q3 by 1%, is that a recession? (I always use that as a tricky quiz question.) No, it is not a recession because GDP has still grown. The rate has just decelerated.

    After reading “The Upshot” NY Times column about a possible “prolonged pause” in a euro area recession, I started thinking about the impact of business cycle dates. For the euro area, the austerity debate could resurface with some saying spend more and others calling for less sovereign debt.

    In the US, the National Bureau of Economic Research (NBER) is the official source of business cycle dating while for the EU, it is the Center for Economic Policy Research (CEPR). Both say that when they determine the start and end of a recession, yes, GDP dips are important. But also they care about the depth and duration of the GDP drop, unemployment data and, less crucially, a range of other indicators. For several quarters during the 1980-1982 recession, GDP even grew.

    And therein lies the problem.

    The further we depart from the mechanical definition, the tougher it becomes to decide. After all, what is a significant real GDP decline? When does unemployment take us across that recessionary line? And what if several of the euro area countries are in recession while others are not?

    It appears that at the moment we are in the midst of a euro area statistical dilemma. In their June 16th report, the CEPR said they are just not sure where the euro area is in the business cycle. It could be in the midst of a prolonged recessionary pause or the recovery could have begun.

    Euro area business cycle

    From: CEPR

    Below, I have noted the 2 possibilities within the 4 phases of the business cycle. If they are at Point A, the trough is yet to come. However, being at Point B means the worst is behind them.

    The Eurozone's business cycle might be in a recession pause phase.

    Our bottom line? Business cycle dates have political implications that shape fiscal and monetary decisions. For that reason, it matters whether the CEPR says the euro area recession has ended.

    According to the NBER, the US recession dates were December 2007-June 2009. Please let us know in a comment if, anecdotally, you disagree.

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  • A Janet Yellen Dashboard of economic indicators lets us graph Fed decision-making

    What We Should Know About Monetary Policy

    Jun 19 • Businesses, Economic History, Economic Thinkers, Financial Markets, Government, Households, Labor, Macroeconomic Measurement, Money and Monetary Policy • 242 Views

    Having heard Janet Yellen’s press conference yesterday, I learned that the Federal Reserve expects that the economy will improve, their bond buying will diminish and, during the foreseeable future, interest rates will start to ascend. And yes, she spoke about unemployment and housing and financial markets and inflation targets.

    But where can you and I go from there? How better to grasp monetary policy?

    In class, we start by distinguishing fiscal and monetary policy. While fiscal policy is all about how the President and the Congress spend, tax and borrow, monetary policy takes us to the supply of money and credit in the economy.

    From there, our next step is to identify the 3 goals of the Federal Reserve’s monetary policy:

    • Economic growth
    • Price stability
    • Low unemployment

    Okay, so that’s the stuff to be memorized. But what really is going on in this hugely complex monetary world. What does the Fed really do?

    Happily, several weeks ago, financial writer David Wessel at the Brookings Institution provided a wonderful interactive for us to understand what monetary policy is all about. Using Janet Yellen’s “Dashboard,” he places us in the “cockpit” of her “airplane.” Looking over her shoulder, we can see the indicators that let her decide whether to brake or accelerate the economy.

    Here, Wessel introduces the dashboard:

    The dashboard interactive starts with 4 basic indicators:

    Monetary Policy Indicators from Janet Yellen's Dashboard

    From: Brookings Institution

    If you click on Markets, this is the next image:

    Monetary Policy Markets Indicators

    From: Brookings Institution Illustration by Lauren Nassef

    And finally, the dashboard indicator of “Wealth,” takes you to the S&P and housing:

    Monetary Policy Indicators Household Wealth

    From: Brookings Institution

    Our bottom line: We can understand Fed monetary policy by looking at the economic indicators that shape their decisions.

    Knowing that there is considerable disagreement between economists who care about controlling inflation and those who would first solve unemployment, if you were Janet Yellen, which indicator do you think is most crucial? Please let us know in a comment.

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  • On ABC's Shark Tank, millionaires search to find the next big entrepreneur in the start-up world

    ABC’s Shark Tank

    Jun 18 • The Pulse • 230 Views

    On ABC’s hit reality show, millionaires and billionaires invest their own money into America’s most-promising start up companies.  Vote and comment!

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  • As a Pigovian tax, the carbon tax generates good behavior and revenue but is controversial.

    Could You Like a Carbon Tax?

    Jun 18 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic Thinkers, Environment, Government, Labor, Lifestyle, Regulation, Thinking Economically • 223 Views

    Our Wednesday environment focus

    Here is my “To Do” list for reducing carbon emissions:

    • Buy a Prius.
    • Install solar panels.
    • Take the train to NYC.
    • Lower my thermostat to 60 degrees during the winter.
    • Raise my AC thermostat to 78 during the summer.
    • Turn off the lights when I leave a room.
    • Eliminate meat from my diet.

    Having not felt a sufficiently powerful “nudge” that would make me reduce my carbon footprint substantially, I wondered what would get me started. Many economists propose a carbon tax.

    Economists like a carbon tax because of its simplicity, efficacy and revenue. A concise piece of legislation, perhaps only a page long, could mandate a carbon tax. Its only objective would be to tax fossil fuels based on the amount of carbon they emit. The tax could work because higher prices provide the nudge that makes us demand a lower quantity. But then, as an MIT economist suggests, we could be “repaid” if the tax revenue were returned to us through lower payroll taxes or income taxes.

    Two years ago, Australia actually did implement a carbon tax of $23 a ton but then, just this month, a new government voted to abolish it. Reading about its repeal, I saw our abstract discussion of a seemingly good idea become a heated economic debate about businesses, consumers, exports and inflation. The following graph implies that the tax reduced emissions but the trend had already begun.

    A controversial Pigovian tax, Australia's carbon tax has been repealed.

    From: Bloomberg View

    Instead of macroeconomic issues, for Planet Money, the carbon tax was all about you and me. Below, they estimated what an annually escalating carbon tax would cost a typical consumer during its first year:

    • gasoline $125
    • electricity: $60
    • heating: $100
    • airplane flights: $75
    • food: $50.00

    Sadly, they mentioned but decided to ignore the rather high costs that some industries would experience. With its huge carbon footprint, cement fabrication, for example, could see a 25% price hike.

    Our bottom line? A carbon tax is a Pigovian tax. Named after British economist Arthur Pigou (1877-1959), Pigovian taxes accomplish some good because they encourage socially responsible behavior while generating revenue that can be used productively. The carbon tax evokes some social responsibility from us by creating the incentive to consume less. Correspondingly, it raises revenue that could actually be returned to us through tax reductions.

    For each item on your carbon “To Do” list, how would a carbon tax impact your consumption? Please let us know in a comment.

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  • Looking at Australia, the area where she is #1 or #2 display why she is a developed nation.

    Six Facts About Australia From The “World Cup of Everything Else”

    Jun 17 • Developing Economies, Economic Growth, Education, Macroeconomic Measurement, Tech • 267 Views

    In a long list of categories that they called, “The World Cup of Everything Else,” WSJ created brackets from the 32 World Cup teams and determined the winners. In 6 areas, Australia was #1 or #2:

    For life expectancy, Australia comes in 2nd:

    As a developed nation, Australia's life expectancy is relatively high.

    From: WSJ

    Here she is #1:

    As a developed nation, Australia's low population density is not typical.

    From: WSJ

    For GDP per capita, among the Word Cup teams, Australia is #2.

    A developed nation, Australia has a high per capita GDP.

    From: WSJ

    Compared to other World Cup teams, Australia has many cars per person:

    As a developed nation, Austral has many cars.

    Perhaps predictably, she has relatively high CO2 emissions:

    As a developed nation, Australia has relatively high CO2 emissions.

    From: WSJ

    And finally, Australia is almost at the top for the number of McDonalds for each person (but not Starbucks–The US is #1 and South Korea #2)

    As a developed nation, Australia has a high number of McDonalds per person

    From: WSJ

    Our bottom line: The characteristics that Australia shared with her “toughest competition” in this WSJ tournament were typical of developed nations. We only needed to add an educated populace and advanced technology.

    The brackets convey a wealth of information. Please let us know in a comment any conclusions you would add.

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