Saturday, August 20, 2016

Some pictures from the John Muir Trail in Yosemite National Park

Last week I hiked a short section of the John Muir Trail in Yosemite National Park. These pictures are from the Lyell Canyon area south of Tuolumne Meadows.

This area is within a few hours of the road, so no overnight camping is required.

Wednesday, August 10, 2016

A relationship between inflation and growth in wages and employment for the US economy

Some folks are speculating that the US economy is approaching full employment. In this post I'm going to explain why I don't believe that is so. I'm going to describe a Phillips curve like relationship between the core rate of inflation, wage growth and job growth. This is something of a work in progress. It seems to work well for the US economy, and a very similar approach appears to work for the UK, but I have not applied it to other economies yet.

On the y-axis I will plot the percentage growth in the product of wages and employment. For example, for January 1965 wage growth is 3.2% and employment growth is 3.6%. The quantity (wages*employment) grows by a 7% and this I plot on the y-axis.

The US economy seems to take time to respond to changes in employment and wages. On the  x-axis I will plot core inflation delayed by 21 months. For example, for the January 1965 data point I use the inflation from October 1966.

The best fit line shown on the chart predicts 2.2% inflation in October 2017 based on current rates of wage and job growth.  The growth in (wages*employment) is currently 4.4%, and it has never gone above 7% since 1992. In that time inflation has stayed under 3%.

Under what circumstances should we be concerned about a return of inflation? When inflation took off in the late 1960s the  growth of (wages*employment) was a little over 8%. From 1972 until 1981 it never fell below 7%. As long as it stays under 7%, inflation should stay low.

With growth in (wages*employment) at 4.4% as of January 2016, there is clearly a lot of room for stimulating the economy. When we approach full employment, wage growth should rise substantially.

 Notes and data sources

1/ All data is from FRED. For wages I am using the  "Average hourly earnings of production and non-supervisory employees: Total Private (AHETPI) " The data is seasonally adjusted. For January of each year I take the percent change from the previous year.

2/ For employment I am using "All employees : total nonfarm payrolls (PAYEMS)" seasonally adjusted. For January of each year I take the percentage change from the previous year.

3/ For core inflation I am using "Consumer Price Index for All Urban Consumers: All Items Less Food and Energy (CPILFESL)" I take the annual rate of change delayed by 21 months. For example, (earnings growth * employment growth) for January 1965 is plotted against inflation for October 1966.

4/ Care needs to be taken with the arithmetic. For example, wage growth of 3.2% is a factor of 1.032. Employment growth of 3.6% is a factor of 1.036. Earnings growth * employment growth = 1.032*1.036 = 1.069 which is equivalent to 6.9%.

Friday, June 5, 2015

California vesus Texas Job Growth: 2015 update: Why is California doing so well?

In the first decade of the 21st century California struggled to create new sustainable jobs. The housing boom created jobs for a time, but those disappeared when housing went bust, leaving employment little higher than it had been in 2002.

One welcome surprise during the past few years has been how strongly Californian employment has grown. A state that some feared was headed for stagnation has shown it can still create a lot of jobs when times are good. It remains to be seen how many of the new jobs will survive the next downturn.

Northern California is currently enjoying another tech boom, and it is tempting to credit the Californian recovery to the success of Silicon Valley.  That however is not the whole story. California is a very large and diverse state. Los Angeles is a different economy from the Bay Area, and the Central Valley is different again.  To better understand things, I have looked at job growth by region using data for metro areas.

What I found was that the San Francisco area, which contains Silicon Valley, was only responsible for a fraction of the state's job growth. The Los Angeles area and the Central Valley also created lots of jobs.
If we look at employment growth per 1000 population the exceptional performance of the tech powered San Francisco area becomes clear. However, LA and the Central Valley are also doing well and compare favorably to the growth rates in other states over the same period.

Why is California doing so well? One reason is that it is a highly urbanized state, with few people living in struggling rural areas. Californian cities tend to be large, and nationwide larger cities tend to be more attractive to employers than small ones. Another point is that Californian wages are not particularly high, perhaps because of the housing bust.

Monday, March 30, 2015

California versus Texas Job growth: 2015 update: Part 1

This is an update to a series of posts I did four years ago, which tried to understand why some states produced jobs and others didn't. At the time, a lot of people pointed to the success of Texas in creating jobs, while California was seen as an example of stagnation.

Texas continues to be one of the leading job creating states in the country.  However, California has had a big comeback, and is now doing almost as well as Texas at job creation.

To properly compare states, I have calculated the job growth per 1000 residents from January 2011 to January 2015. Thanks to oil development, North Dakota comes top.  Utah and Texas continue to do very well, as they did  from 2002 to 2009. Rural southern states like West Virginia and Mississippi continue to bleed jobs, as they have for years. Massachusetts and especially California are the most improved.

The Sunbelt continues to do well, while the Northeast apart from Massachusetts continues to lag.  The Midwest has bounced back from the auto industry crisis and bail out.

(Technical notes: Employment data from Department of Labor. Population data from  Census Bureau . I am using state populations as of  April 2010)

US Inflation? Still not happening!

With US unemployment dropping to 5.5%, there has been some concern about a possible acceleration of inflation. I'm going to explain why I don't think there is any risk. The chart below shows inflation in red and unemployment in blue. Inflation is at levels unseen since the 1960s.  In the past 20 years unemployment has dipped below 5% on a couple of occasions without causing inflation problems.

The next chart shows the annual percentage increase in wages in blue and the unemployment rate in red. In the past 50 years, wage growth has never been this low for this long. This a sign of a labor market which is weaker than the unemployment rate indicates.

The next chart shows just how badly the labor market was damaged by the great recession. It also shows that the recession is far from over for the American worker.  The red line shows the mean duration of unemployment, which soared in the Great Recession, and has yet to come back to normal levels.  The blue line shows the percentage of the population between 25-54 years of age who is employed.  This plunged in the Great Recession, and only about half of the damage done has been repaired.

House building and the auto industry are two of the  big motors for the economy. The next chart shows that housing starts, in blue, are still at recessionary levels. The red line shows auto sales which have fully recovered.

The financial world's concern about inflation can be gauged by looking at the difference between ordinary bonds, in blue, and inflation indexed bonds shown in red.  Clearly Wall Street is unconcerned by the US inflation outlook. They seem to be expecting inflation to stay under 2% for the next decade.

What surprised me most when I made these charts, is how much damage the economy still has from the 2008 financial crisis. There is currently some talk of the Fed raising interest rates. I hope they delay that until the economy has fully recovered.

Tuesday, December 31, 2013

Did income inequality lead to the collapse of ancient Rome?

In 2013 a consensus developed among American liberals that the problem of income inequality should be a top priority. President Obama stated that income inequality was the 'defining challenge of our time'.

Income inequality was also a major issue when ancient Rome was at the height of its power.  Political struggles over income inequality destabilized the Roman system, and lead to irreversible political changes that fatally undermined Roman civilization.

The Roman city state was founded in the eighth century BC as a kingdom. After a particularly obnoxious king, the monarch was overthrown in 509 BC. Instead of replacing him with another king, the citizens of Rome did something revolutionary.  They swore an oath that no one man would ever again be allowed to rule Rome. They set up a system where no man had absolute power and where the government was accountable to the people. It was similar in many ways to our modern American system. They called it a Republic.

The Republic seems to have been very good for business. Modern science has given us some insight into Roman economic activity through the study of shipwrecks and ice cores. What is really interesting is that both unrelated datasets tell the same story. The Roman economy grew for about 500 years from 500 BC to a peak at 1AD, and then shrank away to nothing by 500 AD.

The data on lead production comes from Greenland ice cores. Lead smelting released pollution, which found its way to the Greenland icecap. The Romans were mining lead so they could use that lead to extract silver from its ore. The Romans needed silver because their monetary system was based on silver coins.

The growth in the Roman economy roughly coincides with the existence of the Roman Republic, which started with the overthrow of the king in 509 BC  and came to an end in 27 BC when the Republic was overthrown. Good institutions are vital to economic growth in the third world today, and the Republic was likely key to the success of Rome.

Much has been written about why Rome fell. What the modern data reveals, is that the economy had been shrinking for centuries before the final collapse of the Roman state. When the last Roman emperor was overthrown in 476 AD, the economy had withered away. The data also shows that the economy peaked around 1 AD, so the cause of the eventual collapse of Rome dates to that era.  The replacement of the Republic with emperors seems to be the most likely reason. Kings and emperors are very common in history, while republics are rare.

Why did the Republic fall?

What seems to have destabilized the Republic was growing income inequality.  By the middle of the second century, the economic situation for the average Roman was declining. The backbone of Rome was small farmers who owned their own land. These small farms started going bankrupt, and they sold their land to aristocrats who set up  large estates worked by imported slave labor. The displaced farmers went to the cities looking for work, but they didn't find many jobs, and ended up dependent on government welfare.

In 133 BC these unemployed people elected a populist called Tiberius Gracchus who promised them land reform. The wealthy elite resisted the reforms, and Tiberius was assassinated. This started a series of political assassinations and military coups which lead to the dismantling of the Republic by 27AD. The whole process took over a hundred years.

Tuesday, July 17, 2012

Who's afraid of inflation?: Part 2

This chart covers the US economy  from 1960 through to the present day. Core inflation is shown in red, and year over year wage growth is shown in blue.

The first point here is that inflation problems go hand in hand with stong wage growth. In the high inflation period of the 1970s, wage growth was never less than 7.5% per year. Strong wage growth in the late 60s preceded the slide into high inflation. Inflation is a problem that tends to appear in the late stages of an economic boom, not when the economy is deeply depressed. Wage growth at present is very low.

The second point is that the Fed's current target for inflation, at 2.5%, is far lower than the 3-5% inflation that prevailed during Reagan's presidency. Nobody saw inflation as a problem at the time, even though it was far above the level which the Fed now regards as acceptable. And job growth in the Reagan recovery was far better than anything which we have seen in the past few years.

Clearly the Bernanke Fed has prioritized low inflation over fighting unemployment. I believe this reflects a lack of accountability to the American public.

Wage growth isn't likely to be a problem any time soon

This chart shows wage growth in blue and the unemployment rate in green. Wages seem to take off when unemployment gets below about 5%. There is no chance of that happening in the near future because unemployment remains far too high. If wage growth stays low, so will inflation.