Monday, April 20, 2015

Recommended reading

I can highly recommend John Tamny's new book, Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You about Economics. John is a long-time supply-side friend and a solid thinker who knows how to make complex issues simple to understand.

George Will praised Tamny's book in a recent column, calling him "a one-man antidote to economic obfuscation and mystification." George Leef also praised the book, and proffers a good distillation of its contents.

This book should be required reading for high school, college, and graduate school econ classes. Instead of signing pledges, politicians should simply declare they have read the book and can't find anything wrong with it. It's especially timely, since many of the issues discussed in the book are at the heart of important national debates (e.g., wealth inequality, the estate tax, government regulation, progressive taxation).

To compile this sampling of the many economic truths he lays out and explains in simple terms with examples that come straight from daily life, I've simply drawn from the titles of the books' chapters:
Taxes are nothing more than a price placed on work 
When we tax corporations, we rob them of their future
Government spending has never created a job 
Budget deficits don't really matter—government spending does
Capital gains are what really drive innovation 
The best way to "spread the wealth" is to abolish the estate tax 
Weath inequality is beautiful 
Government regulation almost never works 
Anti-trust laws are counter-productive 
Outsourcing is great for workers 
Falling prices for computers are not deflationary
Energy independence would be economically crippling 

If some of these strike you as very wrong (and I'm sure many will), I urge you to read the book. There's a good chance you will discover you haven't thought about these issues in the right way.

Thanks, John, for this much-needed contribution to economic wisdom.

Friday, April 17, 2015

2% inflation is alive and well

The prevailing inflation meme is that it is dangerously low, and for years central banks have been trying very hard—without much success—to get it to rise. The reality—at least in the U.S.—is that the underlying "core" rate of consumer inflation has been running at close to 2% for over a decade. Energy prices have been the principal cause of variations from this trend. 

The chart above shows the 6-mo. annualized rate of inflation according to the CPI and the Core CPI (ex-food and energy). The experience of the past decade is a great example of why it pays to ignore big swings in food and energy prices. The core rate of inflation has been much more stable, and inflation according to these two indices has been exactly the same since 1986 (2.7% annualized per year). The core CPI is up 1.75% in the past year, and in the past six months it has risen at an annualized rate of 1.77%. It's very likely that the overall CPI will soon be averaging about the same rate.

If we look at the ex-energy rate of consumer price inflation (see charts above), it has averaged very close to 2% per year since 2003. The 10-yr annualized rate of ex-energy inflation currently registers 1.99%, and the year over year rate of ex-energy inflation is 1.84%.

Unsurprisingly, the bond market is very much aware of these underlying trends. As the chart above shows, the expected rate of CPI inflation over the next 5 years (as embedded in 5-yr TIPS and Treasury prices) is currently 1.89%.

The chart above shows the bond market's expected rate of CPI inflation over the next 10 years, which is currently 1.92%.

Inflation is not dangerously low. It is running just below 2%, and that's where it's been for many years and where the bond market expects it to be for at least the next decade. There is no reason for the Fed to be trying to boost inflation. 

Wednesday, April 15, 2015

Why the drop in industrial production is actually good news

Industrial production fell much more than expected in March (-0.6% vs. -0.3%), but the weakness was driven by good news: lower oil prices and better weather.

The chart above compares industrial production in the U.S. and in the Eurozone. The U.S. has registered a staggering amount of growth in recent years, leaving the Eurozone in the dust. One piece of good news is that the Eurozone economy is now beginning to grow again after languishing for the past five years. Production in the U.S. has been soft (down 1%) for the past four months, however. Is this the beginning of another economic downturn? No, and here's why:

The chart above is the oil and gas well drilling subcomponent of the the industrial production index. It's down 40% in the past four months, and the Baker Hughes U.S. rotary rig count is down 50% over the same period. The huge decline in oil and gas drilling activity is directly attributable to the 50% drop in oil prices that began last summer. The world now enjoys a glut of oil and sharply lower oil prices, and that's great news. We can now devote more of our economy's scarce resources to the production of other, more useful things.

The chart above shows the utility subcomponent of the industrial production index. March weather was much better than February's, with the result that the output of the utility industry fell almost 6% in March. That's more good news.

Manufacturing production (which excludes utilities), shown in the chart above, was up in March and is only down 0.7% in the past four months. That could easily be attributable to the west coast port slowdowns, but in any event is in keeping with the normal historical volatility of this index. It's still up 2.4% over the past year.

Business equipment production, shown above, was also up in March and a little soft in recent months, but not by a significant amount. It's still up 3.2% in the past year, which is a bit more than overall GDP growth.