• Atlantic Cities: 'How Poverty Taxes the Brain'


    At the Atlantic Cities blog, Emily Badger highlights an interesting new study that sits at the crossroads of neuroscience and behavioral economics.  The research suggests a possible link between poverty and decision-making.  That is, the impact poverty has on decision making skills--though the researchers are rightly concerned that people will turn the findings around.  As Badger quotes one researcher, Eldar Shafir, "“All the data shows it isn't about poor people, it’s about people who happen to be in poverty. All the data suggests it is not the person, it's the context they’re inhabiting.”


    In a series of experiments run by researchers at Princeton, Harvard, and the University of Warwick, low-income people who were primed to think about financial problems performed poorly on a series of cognition tests, saddled with a mental load that was the equivalent of losing an entire night’s sleep. Put another way, the condition of poverty imposed a mental burden akin to losing 13 IQ points, or comparable to the cognitive difference that’s been observed between chronic alcoholics and normal adults.

    The finding further undercuts the theory that poor people, through inherent weakness, are responsible for their own poverty – or that they ought to be able to lift themselves out of it with enough effort. This research suggests that the reality of poverty actually makes it harder to execute fundamental life skills. Being poor means, as the authors write, “coping with not just a shortfall of money, but also with a concurrent shortfall of cognitive resources.”

    This explains, for example, why poor people who aren’t good with money might also struggle to be good parents. The two problems aren’t unconnected.

    “It’s the same bandwidth," says Princeton’s Eldar Shafir, one of the authors of the study alongside Anandi ManiSendhil Mullainathan, and Jiaying Zhao. Poor people live in a constant state of scarcity (in this case, scarce mental bandwidth), a debilitating environment that Shafir and Mullainathan describe in a book to be published next week, Scarcity: Why having too little means so much.

    Read the full article here

  • BEA: With Wages Down, Personal Income Only Up Slightly in July

    Income rose slightly in July--$14.1 billion in total--but not at a rate that will get economists excited.  Personal income was up 0.1 percent, according to the Bureau of Economic Analysis.  Disposable personal income (DPI) rose 0.2 percent ($21.7 billion).  In June, personal income rose 0.3 percent, while DPI rose 0.2 percent.  With income growth so low, personal consumption expenditures (PCE) remained flat. Personal saving as a percent of DPI was 4.4 percent in July.

    Wages have not been faring well this summer.  From the BEA release:

    Private wages and salaries decreased $15.3 billion in July, in contrast to an increase of $31.3 billion in June. Goods-producing industries' payrolls decreased $4.2 billion, in contrast to an increase of $7.6 billion; manufacturing payrolls decreased $3.7 billion, in contrast to an increase of $5.3 billion. Services-producing industries' payrolls decreased $11.2 billion, in contrast to an increase of $23.8 billion.

    Government wages and salaries decreased $6.4 billion in July, compared with a decrease of $0.8 billion in June. Government wages were reduced by $7.7 billion in July and $0.7 billion in June due to furloughs that impacted several federal government agencies.

    Read the full release here.

  • Opportunities for Growth in Infrastructure Investment

    Earlier this summer, the McKinsey Global Institute released an interesting report on potential growth activators for the global economy.  The report focused on five areas--"game changers" for economies to switch into a higher gear.  Infrastructure investment was one of the featured game changers.  In this video, Cal-Berkeley professor Laura D'Andrea Tyson, an adviser to the McKinsey Global Institute, discussed the potential benefits of infrastructure investment to the U.S. economy:

  • Growth of Real GDP in Second Quarter Revised Upward

    Real Gross Domestic Product expanded at an annual rate of 2.5% in the second quarter of 2013, according to a second estimate just released by the Commerce Department. This was .8% higher than the advanced estimate released last month.  The positive revision seems to be largely due to new, improved export data.  From the Bureau of Economic Analysis report:

    -An upward revision to exports of goods, mainly nonautomotive capital goods, industrial supplies and materials, and nonautomotive consumer goods.

    -A downward revision to imports; nonautomotive consumer goods and petroleum products were the top contributors.

    -An upward revision to inventory investment, reflecting upward revisions to inventory investment at auto dealerships and general merchandise stores.

    Meanwhile, government spending was revised down.

    Here is a look at the trend:

    Read the BEA release here.

  • A Potential Model for Putting the International back in International Banks

    The international bank, as we knew it before 2008, seems to have gone away.  Instead, it has been replaced by banks that Dirk Schoenmaker refers to as multinational banks, "under which the national subsidiaries are supervised separately."  Schoenmaker--Dean of the Duisenberg School of Finance and Professor of Finance, Banking and Insurance at the VU University Amsterdam, and author of Governance of International Banking--thinks this may be temporary, and he believes that international banking will again be international.  Writing at Vox, he outlines the model he expects:

    The solution is a supranational approach for supervision and resolution. The bottom line is to arrange an appropriate fiscal backstop through burden sharing (see also, Goodhart and Schoenmaker 2009). The Banking Union in Europe is moving into that direction with proposals for a European Resolution Board, backed up by the European Stability Mechanism. The Banking Union will save the international banking model for the Eurozone. Figure 2 shows the improvement in resolution. The starting point is that a recapitalisation is efficient when the benefits (in the form of financial stability) exceed the costs. The solid diagonal in Figure 2 represents the line where benefits (B) and costs (C) are equal. The left dashed line measures the home country benefits.1

    Basically, the home country only considers their local share of the benefits, ignoring the cross-border impact of averting bank failure. In the diagram area A – where there is no bank recapitalisation since the costs outweigh the benefit – there is an efficient outcome. Area B – where there is a recapitalisation – is, similarly, efficient. Area C, however, involves inefficiency. This is where the recapitalisation would be socially efficient considering spillovers but the costs for one nation exceed the one-nation benefit. Put simply, the home country will not do the recapitalisation.

    In the supranational approach (all benefits in the home country and the rest of Europe are incorporated by the supranational body), area C, which indicates the area of inefficiency, is smaller under the supranational line than under the home country line.

    Read Is there a future for international banks here.

  • Kauffman Sketchbook: 'Passion Incorporated'; Ingredients for a Successful Startup

    Neil Grimmer is the CEO and co-founder of Plum Organics, so he knows how much people--or at least the people who have helped make his company a fast-growing brand--care about ingredients.  So for this Kauffman Sketchbook video, Grimmer talks about the ingredients for success in product development and building a strong new company:

  • Case Shiller: 'Housing prices rising but the pace may be slowing"

    Home prices continued to rise in June, though at a slightly slower pace than previous months, according to the latest Case-Shiller Home Price Indices release.  Average home prices rose 2.2% for the Case-Shiller 10-city and 20 city composites.  On an annual basis, prices rose 11.9% for the 10-city composite index and 12.1% for the 20-city composite.  Prices rose in all 20 top metro areas, with Atlanta, Las Vegas, San Diego, and San Francisco all posting monthly growth at or above 2.7%.  Here's a look at the long term trend:

    From the release: 

    “National home prices rose more than 10% annually in each of the last two quarters,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “However, the monthly city by city data show the pace of price increases is moderating.

    “The Southwest and California have consistently led the recovery with Las Vegas, Los Angeles, Phoenix and San Francisco posting at least 15 months of gains. Looking at the cities, New York recorded its highest monthly return since 2002. Atlanta was up the most at +3.4% and Washington DC had the lowest return at +1.0%. In terms of annual rates of change, San Francisco lost its leadership position with Las Vegas showing the highest post-recession gain of 24.9%.

    “Overall, the report shows that housing prices are rising but the pace may be slowing. Thirteen out of twenty cities saw their returns weaken from May to June. As we are in the middle of a seasonal buying period, we should expect to see the most gains. With interest rates rising to almost 4.6%, home buyers may be discouraged and sharp increases may be dampened.

    “Other housing news is positive, but not as robust as last spring. Starts and sales of new homes continue to lag the stronger pace set by existing homes. Despite recent increases in mortgage interest rates, affordability is still good as credit qualifications have eased somewhat.”

    Read the full release here.

  • Mark Thoma on Lessons from the Great Recession

    At the Fiscal Times, Mark Thoma points to Milton Friedman and Anna Schwartz's seminal work, A Monetary History of the United States, for making the Federal Reserve's responsibility for the severity of the Great Depression clear.  As for the Great Recession, Thoma notes the following lessons:

    However, while the Fed’s actions were certainly important and necessary – I would not have wanted to experience a repeat of the Fed’s failures during the Great Depression – the improved policy response from the Fed is not the only reason we avoided Great Depression type problems.

    First, when the recession hit this time around, we had a much, much higher level of societal wealth, and hence a much larger cushion to absorb the shocks than we had during the Great Recession Depression.

    Second, and importantly, the presence of automatic stabilizers, particularly those that come in the form of social insurance programs, made a big difference to people hit by the recession. Programs such as unemployment compensation and food stamps that did not exist during the Great Depression played a large role in cushioning the blow for the millions and millions of people who lost jobs or were otherwise affected by the severe downturn in the economy.

    Third, it’s not as though the Fed created a miracle recovery. Even with the improved monetary policy during the recent downturn, the recession has still been very deep and very prolonged, and the end of our troubles, while perhaps in sight, is still far, far away. So while it’s true that things could have been much worse, it does not appear to be the case that improved monetary policy avoids the severe problems associated with financial panics.

    The improved response of monetary authorities and the existence of automatic stabilizers certainly made the downturn far less severe than it might have been, but a big lesson from our recent experience is that these policies alone are not enough to turn the economy around. Help from fiscal policy is needed.

    Read The Great Lesson from the Great Recession here.

  • The Economist: 'No Hard Landing' for China's Economy

    What if we were to tell you we are predicting 7.5% growth for your economy?  You'd be pretty happy, right?  Unless maybe you were in China.  There has been a fair bit of hand-wringing this summer over the relative leveling off of economic indicators out of the world's second largest economy.  Economist correspondents Ryan Avent and Simon Cox recently discussed the state of China's economy.  At present, Cox says, the traditional indicators are quite strong.  But there are some troubling signs when it comes to credit levels. 

  • New Home Sales and the Narrowing of the 'Distressing Gap'

    On Friday the Census Bureau reported that new home sales for July were at a seasonally adjusted annual rate of 394,000.  This seems like a small number, well below the 455,000 new home sales reported for June.  Bill McBride wants us all to relax.  As he often points out at Calculated Risk, this is "one month's data."  Besides, the longer trend shows that yes, the housing recovery is still on.  McBride:

    And even though there has been a large increase in the sales rate, sales are just above the lows for previous recessions. This suggests significant upside over the next few years. Based on estimates of household formation and demographics, I expect sales to increase to 750 to 800 thousand over the next several years - substantially higher than the current sales rate.

    And here is another update to the "distressing gap" graph that I first started posting over four years ago to show the emerging gap caused by distressed sales. Now I'm looking for the gap to close over the next few years.

    The "distressing gap" graph (below) shows existing home sales (left axis) and new home sales (right axis) through June 2013. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.

    Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales. The flood of distressed sales kept existing home sales elevated, and depressed new home sales since builders weren't able to compete with the low prices of all the foreclosed properties.

    I don't expect much of an increase in existing home sales (distressed sales will slowly decline and be offset by more conventional sales). But I do expect this gap to continue to close - mostly from an increase in new home sales.

    Read the full post here.

  • MarketingProfs: Purchasing Plans of Frugal College Students

    Millenials waking up from summer slumbers, whether at fancy internships or minimum-wage seasonal jobs, have a lot of pressure on them during these final weeks of August.  On top of getting their course-loads straight, the economy needs them to do their fair share of consuming.  They need to buy the books, the clothes, the dorm accessories, the new computers.  Or not.

    MarketingProfs has a new infographic that shows millenials returning to college this year are planning on spending less.  It makes sense to us.  With all the reports about how hard it is to find a job following graduation, and the burdens of debt, it stands to reason that college students are getting more frugal (even if it never seems that way to their parents):

    See the full size graphic here

  • Way Way Way Too Big to Fail?: The People's Bank of China's Influence on Global and U.S. Economy

    As Global Chief Investment Officer for UBS Wealth Management, Alexander Friedman watches China closely.  He has bought into the clever (though perhaps too simple) idea of "Chimerica"--China and and the U.S. operating in a symbiotic relationship based on China's need for exports and the U.S. need to consume.  At Project Syndicate, he shares his prediction that the Federal Reserve will soon have to deal with a new twist on an old problem.  Big banks selling off large amounts of debt.  Only now the banks are in China:

    Over the last decade, the vast quantities of short-term capital that were being pumped into China’s banking system drove commercial banks and other financial institutions to expand credit substantially, especially through the shadow-banking system, leading to a massive credit bubble and severe over-investment. In order to manage the resulting increase in risk, China’s new leaders are now refusing to provide further liquidity injections, as well as curbing loans to unprofitable sectors.

    But these efforts could trigger a financial crisis, requiring China to initiate a major recapitalization of the banking system. In such a scenario, non-performing loans in China’s banking system would probably amount to roughly $1 trillion.

    The most obvious means of recapitalizing China’s banks would be to inject renminbi-denominated government debt into the banking sector. But China’s total public debt, including off-balance-sheet local-government financing vehicles, probably amounts to around 70% of GDP already. Despite debate over the details, the conclusion of Carmen Reinhart and Kenneth Rogoff – that a high debt/GDP ratio can inhibit economic growth – remains widely accepted; so it is unlikely that raising the debt ratio to 100% would be in China’s long-term interest.

    Even if China’s leaders decided that they had the necessary fiscal latitude to pursue such a strategy, they probably would not, owing to the risk of inflation, which, perhaps more than any other economic variable, tends to lead to social unrest.

    Given this, in the event of a crisis, China would most likely have to begin selling off its massive store of US debt. Fortunately for China, the negative consequences of such a move would probably be far less severe than previously thought.

    Read China's American Bailout? here.

  • Antonio Fatas on Teaching About Inflation

    Antonio Fatas seems ready for the next school year to begin.  After all, he just wrote that teaching inflation is "fun."  But he quickly points out that there is a danger in the way that most economists are teaching inflation today.  And he is pushing for a new approach, one that brings contemporary information forward more quickly.  Fatas:

    The notion that inflation is (mainly) a monetary phenomenon is new to many students and going through the history of inflation and monetary policy regimes is a very rewarding exercise for a teacher.

    But there is a problem with the way we teach inflation: in many countries inflation has been under control for decades now. And this control does not come from the fact that monetary policy was anchored to a physical commodity such as gold but from the actions and credibility of the central bank. Here is a nice chart from recent work from Jan Groen and Menno Middeldorp that measures inflation expectations in the US going back to 1970.

    After the early 90s the line becomes flat, there is very little to say about either the level or the volatility of inflation. In this environment, inflation is almost constant and the correlation between money supply and inflation is inexistent. But we leave this fact for the last five minutes of the class given how much fun it was to talk about Germany in 1923, Hungary in 1946 and Zimbabwe in 2008.

    Read Teaching about inflation is fun (but dangerous) here.

  • Is College Still Affordable in the U.S.?

    With President Obama embarking on a bus tour to promote a new college cost plan, Wall Street Journal economics editor David Wessel sat down with Peter McPherson--president of the Association of Public and Land Grant Institutions--for an interesting conversation about college costs, and the economics of higher education.  In this excerpt, they tackle the basic question on our minds: "Is a college degree still affordable?"

  • Federal Reserve Watching: FOMC July Minutes

    The Federal Reserve released the minutes from the July Federal Open Market Committee meeting yesterday to great anticipation.  Bankers, investors, policymakers, and econobloggers around the world are trying to gauge just when the Fed will pull back from large scale asset purchases.  We find it interesting that so many people refer to following the FOMC minutes as "reading tea leaves," when the minutes themselves, while not the most entertaining read, are often quite detailed and clear.  Perhaps we are being naive to think that members of the committee, at least as a whole, are reluctant to predict the future and instead really, truly are watching the economic indicators they tell us they are before activating changes in policy.  In yesterday's minutes, for example, one can just look at all the references to employment statistics and know what most members of the committee are watching.  

    Here are a few key concluding paragraphs from the minutes:

    In looking ahead, meeting participants commented on several considerations pertaining to the course of monetary policy. First, almost all participants confirmed that they were broadly comfortable with the characterization of the contingent outlook for asset purchases that was presented in the June postmeeting press conference and in the July monetary policy testimony. Under that outlook, if economic conditions improved broadly as expected, the Committee would moderate the pace of its securities purchases later this year. And if economic conditions continued to develop broadly as anticipated, the Committee would reduce the pace of purchases in measured steps and conclude the purchase program around the middle of 2014. At that point, if the economy evolved along the lines anticipated, the recovery would have gained further momentum, unemployment would be in the vicinity of 7 percent, and inflation would be moving toward the Committee's 2 percent objective. While participants viewed the future path of purchases as contingent on economic and financial developments, one participant indicated discomfort with the contingent plan on the grounds that the references to specific dates could be misinterpreted by the public as suggesting that the purchase program would be wound down on a more-or-less preset schedule rather than in a manner dependent on the state of the economy. Generally, however, participants were satisfied that investors had come to understand the data-dependent nature of the Committee's thinking about asset purchases. A few participants, while comfortable with the plan, stressed the need to avoid putting too much emphasis on the 7 percent value for the unemployment rate, which they saw only as illustrative of conditions that could obtain at the time when the asset purchases are completed.

    Second, participants considered whether it would be desirable to include in the Committee's policy statement additional information regarding the Committee's contingent outlook for asset purchases. Most participants saw the provision of such information, which would reaffirm the contingent outlook presented following the June meeting, as potentially useful; however, many also saw possible difficulties, such as the challenge of conveying the desired information succinctly and with adequate nuance, and the associated risk of again raising uncertainty about the Committee's policy intentions. A few participants saw other forms of communication as better suited for this purpose. Several participants favored including such additional information in the policy statement to be released following the current meeting; several others indicated that providing such information would be most useful when the time came for the Committee to begin reducing the pace of its securities purchases, reasoning that earlier inclusion might trigger an unintended tightening of financial conditions.

    Finally, the potential for clarifying or strengthening the Committee's forward guidance for the federal funds rate was discussed. In general, there was support for maintaining the current numerical thresholds in the forward guidance. A few participants expressed concern that a decision to lower the unemployment threshold could potentially lead the public to view the unemployment threshold as a policy variable that could not only be moved down but also up, thereby calling into question the credibility of the thresholds and undermining their effectiveness. Nonetheless, several participants were willing to contemplate lowering the unemployment threshold if additional accommodation were to become necessary or if the Committee wanted to adjust the mix of policy tools used to provide the appropriate level of accommodation. A number of participants also remarked on the possible usefulness of providing additional information on the Committee's intentions regarding adjustments to the federal funds rate after the 6-1/2 percent unemployment rate threshold was reached, in order to strengthen or clarify the Committee's forward guidance. One participant suggested that the Committee could announce an additional, lower set of thresholds for inflation and unemployment; another indicated that the Committee could provide guidance stating that it would not raise its target for the federal funds rate if the inflation rate was expected to run below a given level at a specific horizon. The latter enhancement to the forward guidance might be seen as reinforcing the message that the Committee was willing to defend its longer-term inflation goal from below as well as from above.

    Read the full release here.

  • Foreign Investment Starts to Flow Out of Emerging Markets

    At Quartz, Matt Phillips shares the following grim image.  It is of emerging market mutual funds:


    As the rip-tide of liquidity pours out of a country, it drives the value of the currency lower. That makes imports of crucial foreign products—such as energy—costlier. The surge in spending on imports worsens the current account deficit. That prompts still more worries about investing, setting off a further outflow of investor cash. The decline of the currency gets deeper. A spiral can ensue until you hit something known as a “sudden stop,” which pushes a country into default.

    Such tidal waves of foreign investment into and out of emerging markets are a well-known problem, leading to a range of banking collapses, inflationary spirals, sovereign defaults and currency crashes. (Some have referred to them as “capital-flow bonanzas.”) They were at the heart of a slew of crises in the 1990s: Argentina, Thailand, Korea, Mexico, Turkey, Chile and, yes, Indonesia.

    But, of course, the story now goes well beyond Indonesia right to the heart of the so-called BRICs—onetime market darlings Brazil, Russia, India and China—that were supposed to represent a new sort of emerging market.

    Read Investors in emerging markets would like their money back now thanks here.

  • Forbes: NFL Franchise Values Keep Climbing

    Yes, we're ready for some football.  Americans seem to be always ready, judging by how recession-proof the NFL has proven itself to be.

    Much to the chagrin of Giants fans everywhere, the Cowboys seem to find a way to be number one even when their performance on the field is mediocre.  Forbes has come out with their evaluation of each National Football League franchise's value, and the Cowboys are now worth roughly $2.3 billion.  But there really don't seem to be losers--off the field--in America's most successful professional sports league.  Five teams saw double digit increases in value over the last year.  In this slow recovery, that should make for a lot of jealousy among owners of businesses who don't have quite the same control over pay structures.  

    In this Forbes video, Michael Ozanian and Kurt Badenhausen discuss the high values in the NFL, and what is driving the strong growth of the business. 

  • The Curious Case of Lobster Prices

    In New England, August means corn, tomatoes, and lobster.  We're interested in all three, but it is the economics of the lobster that we find most confusing and interesting.  Why is it that one can drive past a sign that reads "lobster, 2.99/lb" on a way to a lobster shack charging over $15 for a lobster roll?  Or a restaurant that charges $30 for a lobster dinner?  With another good year for lobster catches, why has supply not had much of an impact on dining prices? Mainers--especially those catching the lobsters--like to blame tourists and other people "from away," but they may want to look at some of their fellow residents, along with restauranteurs around the world.  James Surowiecki chalks it up to restaurants wanting to protect the brand of lobster as a high-end, rare treat.  From The New Yorker's  Financial Page:

    Studies dating back to the nineteen-forties show that when people can’t objectively evaluate a product before they buy it (as is the case with a meal) they often assume a correlation between price and quality. Since most customers don’t know what’s been happening to the wholesale price of lobster, cutting the price could send the wrong signal: people might think your lobster is inferior to that of your competitors. A 1996 study found that restaurants wouldn’t place more orders with wholesalers even if lobster prices fell twenty-five per cent. As the study’s authors put it, “A low price creates suspicion.” This helps explain one of the interesting strategies that restaurants have adopted to take advantage of the lower price for lobster: they keep the price of lobster entrées high, but add lower-priced items—lobster bisque, lobster mac-and-cheese, a lobster B.L.T—to the menu. That way, they can generate more business without endangering lobster’s exclusive image.

    Lobster has also stayed expensive because it makes other menu items, particularly seafood dishes, look more reasonably priced. A classic experiment described by Itamar Simonson and Amos Tversky showed that if you asked people to choose between a mid-priced microwave oven and a lower-priced one sales of the products were roughly split. But adding a higher-priced oven to the mix increased sales of the mid-priced product by forty per cent—the mere presence of a more expensive option made the moderate one look like a better buy. So any restaurant that cuts lobster prices significantly runs the risk of making that sesame-crusted tuna look too pricey.

    Setting lobster prices is not, in other words, a matter of just adding a markup to costs. It’s a surprisingly complex attempt to both respond to and shape what customers want. The key, though, is that restaurants are able to adopt such strategies only because the restaurant business is not, at heart, a commodity market. Gas stations can try all sorts of approaches to bring customers in, but the retail price for gasoline rises and falls in line with supply costs, because gas is gas, and if you charge too much for it people will go to your competitor down the street. In the case of restaurants, there’s lots of competition, but there are few customers who are making decisions about where to go based solely on the price of lobster. And restaurants, obviously, can add value to the lobster they serve with unique recipes, décor, dockside location, and so on. They’re still in a very tough business, but at least they have some way of differentiating themselves, and some measure of pricing power. Commodity producers, by contrast, can make lots of money if the conditions are right, but their fate ultimately depends on the broader economy. Restaurants are trying to insulate themselves from the market; lobstermen are at the mercy of it.

    Read Clawback here.

  • IMF: Global Impact of Top Five Economies

    Earlier we shared some analysis about the impact of programs like quantitative easing on the US. economy.  But it isn't just people concerned about the US economy watching the Fed's actions closely.  There is global concern about the Fed's moves because the effects of any action will be felt elsewhere.  This is known as "spillover effect."  The IMF tracks spillover effect in an annual report.  The focus is on the top five economies, or the S5--the US, China, EU, Japan, and the UK.  The big dogs get good grades in the latest report, but that doesn't mean they are off the hook for making smart decisions moving forward.  From the 2013 IMF Spillover Report:

    The key questions for this year’s spillover report, therefore, are: to what extent have policies of the S5 over the past year—e.g., the Outright Monetary Transactions (OMT) program and steps toward a Banking Union, more quantitative or credit easing, Abenomics, fiscal consolidation—had positive spillovers, and how do they net out with any adverse side effects? Considering both current policies and future plans, are positive spillovers sustainable, or are there adverse spillover risks to worry about? And might different policies in the S5 be preferable from the global standpoint?

    The report finds that recent S5 policies have mostly had positive near-term spillover effects on their own growth and globally (in particular, avoiding tail risks feared last year that could have cost the global economy several points of GDP). However, policy spillovers may well turn adverse again. This reflects two elements: first, the inherent risks of very accommodative monetary policies, namely the potential build up of vulnerabilities that might unravel messily when monetary stimulus is tapered off—the increased volatility seen in recent weeks highlights the risks here; and second, the significant incompleteness of other policies in place, notably fiscal and structural, which could lead to protracted low growth and sovereign debt stress.

    Adoption by the S5 of more complete policies would reduce the need to rely on ultraaccommodative monetary policy along with its side-effects, and would materially lower risks of large adverse spillovers (from S5 shocks, some of which could cost the global economy several points of GDP). It would also generate positive ones (with global GDP 3 percent higher than in the baseline in the long run), with the benefits optimized if these policies were adopted by all the S5 together.

  • Economic Letter: Economic Impact of Large-Scale Asset Purchases

    With GDP growing--albeit slowly--and employment picking up--ditto--Fed watchers are on alert for an announcement to the effect that long-scale asset purchases (LSAPs) will come to a halt.  Vasco Curdia, senior economist at the Federal Reserve Bank of San Francisco, and Andrea Ferrero, senior economist at the Federal Reserve Bank of New York, have been looking into the impact of the Fed's quantitative easing programs on the economy.  And they find it is less of an impact than the Fed's routine "interest rate forward guidance."  From their Economic Letter for the San Francisco Fed:

    How do LSAP effects compare with those of a conventional federal funds rate cut? Figure 2 shows the effects of a standard 0.25 percentage point temporary federal funds rate cut. GDP growth increases about 0.26 percentage point and inflation rises about 0.04 percentage point. This suggests that a program like QE2 stimulates GDP growth only about half as much as a 0.25 percentage point interest rate cut. Both policy tools have similar effects on inflation. However, if we pair the LSAP program with a commitment to keep the federal funds rate near zero for five quarters instead of four quarters, then the median effects on real GDP growth and inflation are similar to those of the 0.25 percentage point interest rate cut.

    Importantly, uncertainty about the effects of LSAPs on economic growth is much higher than uncertainty about the impact of a federal funds rate cut, as can be seen by comparing the shaded bands in Figures 1 and 2. Our simulations suggest that the main reason for this difference is substantial uncertainty about the degree of financial segmentation. Segmentation is crucial for the effects of asset purchases, but is irrelevant for the impact of a federal funds rate cut on the economy.


    Asset purchase programs like QE2 appear to have, at best, moderate effects on economic growth and inflation. Research suggests that the key reason these effects are limited is that bond market segmentation is small. Moreover, the magnitude of LSAP effects depends greatly on expectations for interest rate policy, but those effects are weaker and more uncertain than conventional interest rate policy. This suggests that communication about the beginning of federal funds rate increases will have stronger effects than guidance about the end of asset purchases.

    Read  How Stimulatory are Large-Scale Asset Purchases here.

  • Marketing Profs: The 'Super Powers' of Top Social Media Marketers

    We have not seen any strong figures, but it sure seems that marketer has to be among the fastest growing jobs of this century.  The anecdotal evidence is in your email inbox every morning, maybe every hour.  This suggests that the market will place a premium on those marketers who truly understand how to win the signal-to-noise challenge and really hold our attention and drive us to action.

    Marketing Profs has put together an infographic highlighting the traits of a marketing superhero.  We think it strikes a bit of an optimistic tone in parts, but it is a good conversation starter on what sort of economic impact social media marketing can have, and what approaches will spark productive business-to-consumer interaction.  Take a look:

    (Full size infographic is at Marketing Profs, here)

  • CPI Continues to Rise

    The Consumer Price Index for All Urban Consumers rose 0.2% in July, according to the Bureau of Labor Statistics.  CPI has now risen for three months in a row.  From the Bureau of Labor Statistics release:

    The rise in the seasonally adjusted all items index was the result of increases in a broad array of indexes including shelter, gasoline, apparel, and food. Despite the gasoline increase, the energy index rose only 0.2 percent as the natural gas and electricity indexes declined. The increase in the food index was caused by a sharp rise in the fruits and vegetables index; other food indexes were mixed. The index for all items less food and energy rose 0.2 percent in July, the third straight such increase.

    Along with the advances in the shelter and apparel indexes, the indexes for medical care, tobacco, and new vehicles all rose. In contrast, the indexes for household furnishings and operations, airline fares, and used cars and trucks all declined in July.

    The all items index increased 2.0 percent over the last 12 months. The index for all items less food and energy has risen 1.7 percent over the last year; this compares to 1.6 percent for the 12 months ending June. The energy index has risen 4.7 percent over the last 12 months, its largest increase since the 12 months ending February 2012. The food index has risen 1.4 percent, the same figure as in May and June.

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

    Read the full release here.

  • Marketplace: 4 Reasons Americans Are Paying Credit Card Bills On Time

    More and more, Americans are paying their credit card bills ON TIME.  Yes.  You heard that right.  Marketplace reports that rate of late payments to credit card companies has dropped to a 20-year-low.  Think you know why?  Then step right up and be the next contestant on Marketplace's [knockoff] Price is Right, with Adriene Hill channeling her inner Richard Dawson (or whoever the host is now):

  • Case Study: The Fall of the Blackberry

    Not long ago the Blackberry was as ubiquitous in offices as the necktie.  Research In Motion had produced an innovative product that was credited with increasing productivity in a business culture that more and more depended on 24/7/365 connectivity.  Then the Canadian success story changed.  The once-breakthrough phone/email-retrieval-device was out innovated and outsmarted by the iPhone and other smartphones.  And now, its days appear to be over. One lesson: in a consumer driven marketplace, if your product's success has more to do with the choice of companies rather than the end user, you might be in trouble.

    The New Yorker's Vauhini Vara reports on the decline:

    As early as 2009, BlackBerry’s share price had fallen to less than fifty dollars, from its high of two hundred and thirty-six dollars in the summer of 2007. The “consumerization” of business technology was already underway, and the company had failed to come to grips with it: when BlackBerry users returned home and pulled off their ties, they picked up iPhones, which were a lot more fun to use. Soon, they wanted to use iPhones at work. Simultaneously, companies realized that workers would be happier and more productive buying the device of their choice, and the firms themselves, spared the expense of providing their employees with phones, would save money.

    By the time BlackBerry realized it needed to reach consumers directly, it was too late. In November, 2008, the company released its first touchscreen phone, the Storm, to middling reviews. BlackBerry then turned its focus to Asia and Latin America, where the smartphone market continued to explode. For several months, the strategy worked. In Indonesia, where the company made a special push, its products held forty-seven per cent of the market by the first half of 2011, up from only nine per cent in the first half of 2009, according to the research firm Canalys. The decline in the company’s stock price finally started to level off. But the plateau was short-lived: soon, a new crop of Asian companies started to build cheaper smartphones.

    Around the time that BlackBerry deepened its efforts in emerging markets, it also bought QNX Software Systems, whose operating systems powered technology ranging from medical devices to computerized automobile interfaces. BlackBerry hoped to augment its own operating-system expertise—but in April of 2011, when the company introduced a tablet powered by a QNX-based operating system, the PlayBook, it flopped.

    Then BlackBerry appointed a new C.E.O., Thorsten Heins, at the start of 2012. It would take a year for the firm to throw what David Pogue, the Times technology critic, called “BlackBerry’s Hail Mary pass”: this January, the company launched the Q10 and Z10, its most serious attempts at high-end phones that would actually be attractive to everyday consumers. While some critics praised the phones—Pogue called the Z10 “lovely, fast and efficient, bristling with fresh, useful ideas”—they have failed to sell as well as the company had hoped. In its most recent quarter, BlackBerry shipped only 6.8 million smartphones—roughly a fifth of what Apple sold during the same period.

    Read How Blackberry Fell here.

  • AthenaHealth's Jonathan Bush on Profits and Healthcare

    When Jonathan Bush co-founded AthenaHealth in 1997, his goal was to bring some basic business practices into medical offices and allow doctors to focus on being doctors rather than small business owners.  We know Jonathan, and so we have watched him grow as a CEO, and AthenaHealth grow as a company.  As with many successful startups, the business has changed its approach a few times.  But Bush's basic push to make healthcare more efficient, as a business, remains. 

    In this TedMed talk, Bush shares his views on the business side of medical care, and the role of profit motives for hospitals, doctors, and healthcare providers: