Global Economic Watch

Lagarde: "Stability and Growth for Poverty Reduction"

Graham Griffith — Mon, 20 May 2013 12:01:00 GMT

The focus at last week's Bretton Woods Committee's Annual Meeting was on poverty reduction. IMF Director Christine Lagarde discussed her organization's role in the effort to fight poverty around the globe, and she outlined three areas key arguments that are central to the IMF efforts:

1) Economic stability is essential for poverty reduction.

2) Growth and equity are mutually reinforcing, and necessary for sustainability.

3) Fiscal policies can improve equity and lower poverty.

Here is Lagarde's speech:

Central Bankers Failing to Hit Inflation Targets

Graham Griffith — Mon, 20 May 2013 11:39:00 GMT

With the CPI release last week showing prices in the U.S. have risen just 1.1 percent over the last year, The Washington Post's Neil Irwin notes that there is an inflation problem in developed economies around the globe. Inflation, Irwin writes, "is too low."

The below-trend inflation is partly attributable to falling commodities prices, and just as policy shouldn’t overreact when a short-term commodity blip causes inflation, it shouldn’t make the same mistake in reverse. But even excluding food and energy, U.S. CPI was up only 1.7 percent, still below the level of inflation the Federal Reserve is aiming for. And the situation in Europe is particularly worrisome; if the euro zone is going to have any hope of rebalancing its economy without a prolonged depression, it will need higher inflation in core European countries like Germany and France, offset by lower inflation in countries like Greece and Spain. Instead, prices are rising too slowly even in the core, and there is deflation, or falling prices, in Greece.

The biggest conclusion to draw from all of this is that warnings that massive quantitative easing efforts would spark explosive inflation are turning out to be as wrongheaded as can be. In the United States and Japan, central banks now have open-ended policies of printing money to buy assets. But while the money seems to be finding its way into asset markets, such as for stocks and corporate debt, it isn’t being circulated so widely as to drive up prices for consumers.

This is the opposite of what the currency war alarmists have warned about. Instead of creating rounds of vicious inflation while trying to expand the money supply in a race to the bottom, central banks are all trying to get inflation up to their target and coming up short. Deflation is looking like a greater risk that inflation, despite the extensive hand-wringing over the latter in the last several years. It’s a currency war in which almost every country is losing.

Read Surprise! Inflation is too low almost everywhere on earth here.

CPI Drops Again in April

Graham Griffith — Fri, 17 May 2013 11:58:00 GMT

After a bit of a jump earlier this year, the Consumer Price Index for All Urban Consumers dropped for the second month in a row in April. A drop in the gasoline index was key as CPI decreased 0.4%. The index is up 1.1% over April 2012. Fom the Bureau of Labor Statistics release:

As was the case in March, a sharp decrease in the gasoline index was the primary cause of the decline in the seasonally adjusted all items index. The fuel oil index also declined while the electricity and natural gas indexes increased; the net result was a 4.3 percent decrease in the energy index. The food index, unchanged in March, rose 0.2 percent in April.

The index for all items less food and energy increased 0.1 percent in April, the same increase as in March. The indexes for shelter, used cars and trucks, new vehicles, and tobacco all increased in April. These increases were partially offset by declines in the indexes for apparel, airline fares, and recreation.

The all items index increased 1.1 percent over the last 12 months, the smallest 12-month increase since November 2010. The index for all items less food and energy increased 1.7 percent over the span; this was its smallest 12-month increase since June 2011. The food index rose 1.5 percent while the energy index declined 4.3 percent.

Here's a look at the CPI for All Urban Consumers over the last year:

Read the full release here.

Cleveland Fed: The Past, Present, and Future of the Federal Reserve

Graham Griffith — Fri, 17 May 2013 11:40:00 GMT

On the occasion of the Federal Reserve's centennial, the Cleveland Fed turned its latest annual report into a helpful historical summary. Cleveland Fed President Susan Pianalto writes, "we cannot hope to understand modern-day Federal Reserve policies without this context. You can read the full report here.

There are also several videos that accompany the report. This one features economists discussing the past, present and future of the Fed:

American Household Debt Drops, But Student Debt Grows

Graham Griffith — Thu, 16 May 2013 11:27:00 GMT

Household debt declined a whopping $110 billion across the U.S. during the first quarter, according to the New York Fed. That's a 1% drop. Overall, Americans are getting better control over their outstanding debt. But one area continues to grow: student loans. From the NY Fed quarterly report:

The problem is greater in some states than others, as this map shows:

Read the full report here.

EU GDP Drops Again

Graham Griffith — Wed, 15 May 2013 14:35:00 GMT

We have some disappointing numbers out of Eurostat this morning. GDP across the Euro Area declined 0.2% in the first quarter. The year over year drop was 1.0%.

France, the euro zone's second largest economy, saw its GDP drop for the second quarter in a row. The data for each country is available here.

The Power to Predict

Graham Griffith — Wed, 15 May 2013 12:14:00 GMT

Having a lot of data is only helpful if you know how to use it. With each passing month of the big data era, organizations are getting better and better at learning how to find the right bits of information and then use those bits effectively. In his book, Predictive Analysis: The power to predict who will click, buy, live or die, Eric Siegel explains how organizations are mining data to predict consumer behavior. He spoke about his findings with BigThink:

Fast Company Names Nate Silver 2013's Most Creative Person in Business

Graham Griffith — Wed, 15 May 2013 12:00:00 GMT

In a win for the social sciences, Fast Company has put Nate Silver in the top slot of their 100 Most Creative People in Business list for 2013. Silver is best known as the former baseball stats genius who applied his modeling skills to predicting likely outcomes in political races. His coldly analytical approach proved much more instructive than all of the bluster and narrative of the omnipresent punditry. And his work contains a lot of useful lessons in how to apply data across all sectors. Fast Company's Jon Gertner:

Silver is by no means the first to mine interesting conclusions from big data sets. Nor is he the first to become known for using statistical models as an innovative tool. Depending on how you define it, big data has been around for a while. It was a crucial element in tracking patterns in early epidemics (such as the black plague in London in the 1600s) as well as trends in the U.S. census (beginning in the late 1800s). You might consider the D-Day invasion at Normandy, or even the Apollo lunar missions, as strategic triumphs of complex problem solving and big-data analytics. In the early 1970s, a group of academics published a book called The Limits to Growth that used a fairly sophisticated statistical model to test the sustainability of Earth. (The planet and society are likely doomed, the program concluded.) In his book and in conversation, Silver is quick to point out that the most familiar, and arguably most successful, applications of big data involve National Weather Service predictions and hurricane warnings, which rely on huge data sets and wizardly models and have become increasingly accurate and precise. But other familiar examples abound too. The quants on Wall Street have been helping hedge funds interpret complex trading data for years. Watson, the IBM computer that won at Jeopardy! and is now being applied to medical treatment and financial planning, is a success with a certain kind of big data--"unstructured data," as IBM likes to call it, which describes information formatted as natural language rather than numerical figures. Palantir, a willfully obscure company that crunches big data in the name of national security, is another. Above all are Amazon, Facebook, Google, and Twitter, which stand as the foremost practitioners at making informed conclusions from customer data. By vacuuming up the exhaust from web users, such companies have made extraordinary gains in efficiency, trend-spotting, sales, and--at least in Google's case--research that sometimes translates into societal rather than corporate advantages. "Google is doing a better job predicting the flu than the CDC," observes D.J. Patil, the former chief data scientist at LinkedIn, who now works at venture capital firm Greylock Partners.

Silver is taking on such challenges as a solo practitioner, though he places his work more in the realm of "medium data," involving, say, hundreds of thousands of data points rather than the millions or billions mined by researchers at Google or Amazon. But the size of the information pile matters less than the measure of clarity it can yield. As a kid in East Lansing, Michigan, Silver grew up a sports fanatic but wasn't much of an athlete. "I played soccer up through eighth grade," he tells me. "It was my least worst sport." After earning a bachelor's degree in economics at the University of Chicago, he took a job with a consulting company that left him frustrated and unfulfilled. So he began to work on his PECOTA statistical system in the evenings. The choice of baseball, a sport unusually rich in statistics and measurement, was fortuitous (this abundance is why the sport also lent itself, more famously, to Billy Beane's predictive calculations chronicled in Michael Lewis's book Moneyball). After gaining a reputation for expertly dicing baseball stats, Silver wondered whether he could do a better job of predicting political elections than the Beltway pundits. In 2007, he started sifting through poll data and posted his analyses anonymously, at first on the Daily Kos blog under the name Poblano. (A fan of Mexican food, he once created a website to rate Chicago's burritos.) Eventually Silver revealed himself as the author, set up the independent FiveThirtyEight blog (named after the number of voters in the electoral college), and became a minor celebrity outside the insular world of baseball statistics. A few years later, the editor of The New York Times Magazine ran into Silver on a train platform in Boston and invited him to bring his now high-traffic blog to the Times, which is where he remains, for the moment.

Read the Silver profile and access the full list here.

NFIB: Small Business Optimism Index Rises

Graham Griffith — Tue, 14 May 2013 12:21:00 GMT

Small business owners are a bit more optimistic than they were a month ago, according to the National Federation of Independent Business. The NFIB's Small Business Optimism Index is now at 92.1. That is a rise of 2.6 points from last month:

Here's NFIB's Holly Wade breaking down some of the survey findings:

You can download the full report here.

Measuring the Effect of Patent Rights on Innovation

Graham Griffith — Tue, 14 May 2013 11:56:00 GMT

At Vox, Alberto Galasso and Mark Schankerman share some findings from their research into the impact of patent rights on innovation. While once economists thought that protecting patent rights was essential to encourage innovation, that now seems less clear. In fact, Galasso and Schankerman write that some scaling back of patent rights could spark more innovation, especially in the tech sector:

We find that the loss of patent protection leads to about a 50% increase in subsequent citations to the focal patent, on average. This evidence shows that, at least on average, patents block cumulative innovation. One may be concerned that this is a publicity effect from the court's decision. However, we show that this impact begins only after about two years following the court decision, which is consistent with the onset on follow-on innovation rather than simply being a ‘media effect’ from press coverage associated with the court decision.

We also find that the impact of patent invalidation on subsequent innovation is highly heterogeneous. There is substantial variation across broad technology areas. As illustrated by the figure below, patent invalidation has a large and statistically significant impact on cumulative innovation in the fields of computers and communications, electronics, and medical instruments (including biotechnology). However, we find only a small and statistically insignificant effect in the chemical, pharmaceutical, or mechanical technology field.

We investigate the source of this heterogeneous effect and find that the technology fields where the impact of patent invalidation is strongest are characterised by two features: complex technology (where new products rely on numerous patentable elements) and high fragmentation of patent ownership among diverse firms. This ﬁnding is consistent with predictions of the economic theories that emphasise bargaining failure in licensing as the source of blockage.

Read Do patent rights impede follow-on innovation? here.

Happy Birthday to the $20 Bill

Graham Griffith — Mon, 13 May 2013 15:13:00 GMT

The new twenty dollar bill turns 10 years old today. When the twenty was updated, it represented a significant shift in how US currency looks and feels. Now the one hundred dollar bill is poised to follow the twenty's lead, by adding new color and material to make it more difficult to forge. Mark Garrison discussed the importance of the twenty's pioneering look on the Marketplace Tech Report:

IMF Projecting Strong Growth in Sub-Saharan Africa

Graham Griffith — Mon, 13 May 2013 10:34:00 GMT

Developing Asia continues to lead the way in growth rate. But you might be surprised at what region is second: sub-Saharan Africa. From the IMF:

The IMF’s Regional Economic Outlook for sub-Saharan Africa projects regional economic growth of 5 ½ percent in 2013–2014, compared with 5 percent in 2012. Investment is expected to remain a key driver of growth, while measured activity in 2013 will also be boosted by one-off factors in some countries, including rebound effects from floods in Nigeria and recovery of agriculture in regions previously affected by drought.

Upper middle–income countries are expected to continue grappling with sluggish growth, while activity should gradually normalize in some fragile economies that were negatively affected by political instability.

The region’s downtrend in inflation is set to extend into 2013–14. This forecast is premised on moderating nonoil commodity prices, productive local crops, and inflation-focused monetary policy. Gains made in combating inflation in eastern Africa are expected to be consolidated, while the pace of price rises is projected to slow in countries that experienced inflation flare-ups.

Read Sub-Saharan Africa Builds Momentum in Multi-speed World here.

Not All Capital is Good Capital: Why Regulators Need to Look at Equity When Evaluating Banks

Graham Griffith — Fri, 10 May 2013 12:34:00 GMT

Sometimes financial institutions go under even though it looks like they have plenty of capital, and we all wonder how it happened. Wharton School professor of finance Richard Herring says that is because we are looking at the wrong numbers. We should be looking at equity, and he believes new regulatory frameworks proposed at Basel III are a step in the right direction. But he fears that some policymakers are eager to return to the old definitions of capital and liquidity. He speaks about the best ways to measure financial stability in this interview with Knowledge@Wharton Steve Sherretta:

Moms: A Driving Force in Mobile Media

Graham Griffith — Thu, 09 May 2013 12:18:00 GMT

In many homes the CEO, CTO, and CFO goes by another three letter title: M O M. Moms get credit for a lot of things, but they rarely are mentioned as driving forces of innovation and early tech adoption. At Marketing Profs, Ayaz Nanji shares some data that shows the impact moms have on mobile commerce and social media. Here's a sample:

-Compared with the general population, 49% more moms have smartphones (81% vs. 54%).
-In a year-over-year comparison, smartphone ownership by moms is up 25% and tablet ownership is up 79%.
-89% of moms with smartphones access Facebook on those phones, and moms are four times more likely to prefer to check social media on their smartphones.
-45% of moms say they are emailing less and communicating more through social media.

Don't forget that moms have the purchasing power in most households. So social engagement leads to online spending. Read Moms More Likely to Use Social Media and Mobile, and to Shop Online here.

Quartz: Manicures, Immigrant Workers, and Innovation Driven Growth

Graham Griffith — Thu, 09 May 2013 12:00:00 GMT

In assessing the possible economic benefits of immigration reform, Quartz's Tim Fernholz chooses to look at an industry we've not thought about: manicures. Fernholz shares some key takeaways from a study on manicure businesses in California, and reveals that it is a thriving business. And the growth has been driven by Vietnamese immigrant workers:

Fernholz writes:

Why was this possible? Because the immigrants were—wait for it—innovators in the manicure space. They developed the idea of the standalone nail salon that reduced costs, “making a once-exclusive service commonplace.” That meant more nails to paint, not just more workers per nail. The benefits of immigration accrued to people who got their nails painted, to the new immigrants, and even to the remaining non-Vietnamese manicurists.

While nail-care business might not be the perfect stand-in for all low-income work, it does reflect what economists find more broadly: When new immigrants come, it does mean new competition for similarly-skilled local workers, but the new immigrants may also create opportunities that lead to more investment, which maintains wage growth and leads to economic growth. Indeed, with more immigration, average wages seem to rise, not fall.

But the American workers most similar to low-skilled immigrants are uneducated Americans. Economists looked at how immigration affected them between 1990 and 2006, when a lot of unauthorized workers were coming into the country. If they assumed every new immigrant had the exact same abilities as a native worker (which obviously isn’t true, starting on the language front), the effect of immigration on the wages of native workers who didn’t finish high school fell 0.6% over 16 years, while those of everyone else improved. In a more accurate simulation, they found that less-educated natives saw their wages increase by 0.3% due to immigration, and average wages increased 0.5%. That’s not so bad at all.

Read How manicures explain the benefit of low-skilled immigration here.