Tag Archives: policy

The Foil to Russian Energy Stranglehold (Part 2)

As mentioned in my earlier post, Russia’s foreign policy strength relies on its control of the natural gas that supplies Europe.  Unfortunately, this control allows for Russia to exert their influence and will over many issues, as seen with Crimea.  European fracking has the ability to change the landscape of political power between Europe and Russia.  Germany is one of the largest importers of Russian gas and is struggling with rising energy prices, making it significantly difficult for them to wane themselves off of Russian energy.  Where Germany is struggling with moving towards shale exploration and extraction, Poland is embracing fracking with open arms.  This past month, the Prime Minister of Poland signed a tax freeze on special taxes that used to be in place on the shale industry.  Both Britain and Poland are the leading proponents to allow for fracking.  The EU recently released guidelines on fracking instead of banning it, which is favorable for England and Poland in their hopes to employ fracking.

While I believe that fracking offers the European countries a way to reduce their reliance on Russian gas, there are many other factors that the EU and countries needs to take into consideration.  The projected reserves for shale gas and oil is often seen as an imperfect measure.  Poland’s project shale reserves have recently been revised significantly downward.  Many of the companies that Poland awarded exploration permits have abandoned Poland due to exploration and extraction not being commercially viable.  I believe though that these companies will soon be back.  The increasing natural gas prices due to global warming and Russian aggression will soon raise the price high enough that Poland’s shale reserves will become economically viable.  Another issue that many opponents of fracking have in Europe is that it will ruin the environment and destroy the English countryside.  Unfortunately, this again becomes a question of how much people value the environment.  How high will natural gas prices have to rise before the EU gives the green light to begin fracking.

Shale gas, while not environmentally friendly, looks to be the next global energy boom.  As prices in Europe continue to rise, it makes sense that Europe would look to take advantage of the large shale reserves that are present in Europe.  Africa looks to be the next continent to look towards shale energy with its large South African reserves, projected at 390 trillion cubic feet.  At this point, I believe that African shale extraction and exploration will come about more quickly than Europe due to the low regulation in Africa.  As of now, it looks like natural gas will be the next big energy supplier until renewable, green energies become more cost efficient.  The ability for Europe to become less reliant on Russia is extremely important for energy security in the future.  Unfortunately, economists project that it will take 4 years to a decade once for Europe’s shale boom to reach the same level as the US.  It took the US 25 years to reach the shale energy boom that we are now experiencing.  With the innovations that the US has come across with fracking, I believe that it will take Europe and Africa a lot less time to reach the shale boom.  Once Europe can stop relying on Russia for natural gas, it will be free of Russian influence through Gazprom.

(Revised) What The Jobs’ Report Means in the Short Run

After a rapid three months to start off 2014, we can finally look back to analyze where we might be headed for the rest of the year. According to The New York Times, there was an “addition of 192,000 jobs last month, all from private employers.” The weather did not seem to slow down the rise in jobs. However, it is also true that the level is still far below what is needed to fully accommodate the millions of people who have joined the work force since the recession and those who still have been jobless as well. Will the number of jobs added in April slow down? I believe our government can play a key role in aiding our economy and its’ job growth. However, they are currently doing very little in attacking fiscal policy changes to keep a steady pace for the coming months.

Although individuals like chief economist Jed Kolko at Trulia, mentions in The Wall Street Journal that there were improvements in jobs like construction and that young-adult employment is slowly making its way back to ‘normal’ levels, many others are convinced that the areas like the housing market may be cooling down  and that we aren’t being led in the right direction.

Throughout the beginning of 2014, we have been continuing to approach the employment level the economy was at when the down turn of jobs started to fall in 2008. However, our government cannot slow down its work and needs to “step on the accelerator” to continue to keep moving the economy. With this in mind, the market it still sensitive to the economy and our government needs to increase their activity and work together. Our government seems to be sitting back on work that’s already been completed.

Dallas Federal Reserve Bank President Richard Fisher accused U.S. politicians on Friday about their inability to cooperate and “accused them of impeding jobs growth.” Fisher added, “If the U.S. had the right fiscal policy, the country would have an ‘incredibly fast-moving economy.’”

Has U.S. stepped on the brakes and let the economy play out?

Fisher backed himself up adding that “the U.S. Federal Reserve must avoid being locked into calendar-based policy commitments and instead ensure its forward guidance is flexible enough to allow it to respond to changing conditions.”

I believe that we, in fact, should be worried that predictable commitments are unsound policy. This in turn would lead to false complacency and market instability. Our economy cannot afford to take this extra weight.

Some, like Fed Chair Janet Yellen, found the market’s sensitivity to be true when proclaiming an interest rate hike could follow around six months after the central bank ends its bond-buying stimulus. This time period was earlier than investors had expected causing stock, bond, and currency markets to take a hit from this very instance. I believe we are witnessing a pause on our economy from here on out. With our government lacking the ability to be able to work together, we may find ourselves at a standstill throughout the summer months. Our government cannot implement a plan and expect it will work everything out for the next couple years. They must continue activity and working to build the economy even as we still grow today. Otherwise volatility might be the theme for the coming months in the markets and I don’t believe last year’s rally will occur again this year.

Are We Heading to a More Stable Business Environment?

In the past few months, the Fed’s exit strategy has been dominating the headline. Fortunately, the tapering process went from the nontransparent phase in the fourth quarter of 2013, during which time the market was struggling with prospective liquidity squeeze, to the more transparent, understandable period in early 2014, as the decrease in monthly purchases of longer-term government bonds and mortgage-backed securities were getting closer to market forecasts.

So can we say that we are heading to a more stable business environment?

Apparently, the answer is no because the Ukraine Crisis has triggered concern on geopolitical instability.

Last Sunday, Crimean voters overwhelmingly approved a referendum to secede from Ukraine and join Russia. Following that, the Obama administration Monday enacted what it called the most comprehensive sanctions to punish Russia since the end of the Cold War. It targeted 11 Russian and Ukrainian officials, including some of Mr. Putin’s top advisers and the ousted former president of Ukraine, Viktor Yanukovych, a close Kremlin ally. Similarly, the European Union blacklisted 21 individuals, despite its deeper business ties with Russia.

At this point, the sanctions seem weak because those selected politicians are widely believed to have no overseas assets that could be targeted. However, the magnitude of sanctions could increase as President Obama prepares to launch a much-broader financial war with Moscow in the coming months, depending on Kremlin’s next step.

Regardless of the prospective shape of the Crisis, it is certainly creating global ripples, given the fact of turbulence in Russia’s financial markets and in the global commodity markets.

But do we have any good news? Yes we do.

First, the uncertainty about economic policy is decreasing. As shown by the graph above, the Economic Policy Uncertainty Index has dropped to levels not seen since the earliest days of the 2008 recession.

The index surged in late 2012 just before lawmakers finally compromised to reach a deal to avert automatic tax increases and spending cuts, known as the fiscal cliff. Currently, recent budget deals and distance from last year’s spending cuts and government shutdown, along with the manageable tapering process, have sharply diminished the fear of more curveballs from Washington.

Second, companies are taking advantage of advanced data analytics to manage their business on everything from hiring and supply chains to shipment orders and routing.

Data allows businesses to “sync up supply and demand as never before,” said Paul Ballew, chief data and analytic officer at Dun & Bradstreet. Market research decades ago involved considerable “trial and error,” Mr. Ballew said. “Now there is far more science in it.”

As a result, companies could execute decisions more effectively based on more accurate forecasts and useful information about the past performances of themselves and others.

In conclusion, I believe we are indeed heading to a more stable business environment because of policy stability and technological progress, despite some short-term headwinds due to geopolitical issues.

(Revised) Rising Inequality Explains the Weak Recovery, Not Vice Versa

In this article, I will not passionately try to convince you of the post title. Instead, I will make points on how John B. Taylor’s argument on the topic fails under more scrutiny. In his article in the Wall Street Journal, titled “The Weak Recovery Explains Rising Inequality, Not Vice Versa”, John B. Taylor makes following use of data to make his point that today’s inequality isn’t a cause of the type of recovery we are witnessing. First, he explains what the people who he is arguing against say: the slow recovery has been a result of growing inequality. He writes down their argument as follows:

“The key causal factor of the middle-out view is that a wider income distribution slows economic growth by lowering consumption demand. Saving rates rise and consumption falls if the share of income shifts toward the top, according to middle-out reasoning, because people with higher incomes tend to save more than those with lower incomes.”

And then he goes on to counteract this view by data he collected and put some make up on. He gives what his data shows:

“The data for the recovery since mid-2009 do not support this view. The 5.4% overall savings rate during this recovery is not high compared with the 8.4% average since 1960. It is relatively low compared to past recoveries, such as the 9.3% savings rate during a comparable period during the recovery in the early 1980s.”

In my curiosity, I was able to look at the data he worked on. It is data on personal saving ratio-the ratio of personal saving to disposable personal income. The following graph shows what the saving rate has been.
PSAVERT_Max_630_378John Taylor is correct on that the saving rate has been averaging 5.4% since the end of the latest recession. However, when he tried to compare this rate to the 8.4% average rate since the 1960, he makes wrong comparison. Due to the general downward trend of this rate over the last decades, he shouldn’t compare this 5.4% average rate of saving during the recovery to the all time average saving rate. But if we compare the 5.4% average rate during the recovery with the average saving rate between the end of 2001 and the start of the recession, which is 3.9%, we can see that the saving rate today is higher than its pre-recession level. Therefore, we have just disproved his claim by using the same argument he tried to use. In other words, with data on how the income inequality has grown, we have further see that the saving rate also increased after the recession.

10economix-sub-wealth-blog480Hence, we are able to claim that the increase in inequality indeed increased the saving rate; therefore, the total consumption demand has declined, which is exactly what the people he argued against said.

One could argue that increased personal saving rate isn’t caused by the increasing inequality . It is possible that because people might be willing to save more than what it was saving before the crisis to use their saving when another crisis comes during the recovery and uncertainty. Therefore, one could say inequality isn’t playing a much role in hindering a recovery today.

However, this surge in the saving rate after any given recession has been witnessed only twice, once after 2001 and again after 2007-2009 recessions.  The prior recoveries experienced the saving rate which was actually lower than its level before the crises. If we look at the average saving rate between November 1970 and November 1973, it was 12.8% which is higher than the saving rate after the recession, between April 1975 to December 1979, which is 10.8%. The same decrease in the saving rate was seen also during the early 1980’s recovery. We can see this trend of decrease in the saving rate following any recession in the above graph except for the last two recoveries. In last two recoveries, the saving rate surged and stayed at the higher level than it was before the recessions.

In my very first blog post, I compared the income inequality during the pre-recession periods for the Great Depression and the Great Recession and argued the recovery the economy is going through now is unhealthy one. One could agree with John Taylor on that the weak recovery is causing the widening inequality and the first problem policymakers should tackle is to boost the recovery by any means. However, the increasing inequality could be the heart of the problem, and the policymakers should prioritize equality to change the speed of the recovery. But how the inequality must be tackled should be devoted to a number of blog posts itself. I believe recent discussions and steps toward solving the inequality is a way to fasten the recovery.

Rising Inequality Explains the Weak Recovery, Not Vice Versa

In this article, I will not passionately try to convince you of the post title. Instead, I will make points on how John B. Taylor’s argument on the topic fails under more scrutiny. In his article in the Wall Street Journal, titled “The Weak Recovery Explains Rising Inequality, Not Vice Versa”, John B. Taylor makes following use of data to make his point that today’s inequality isn’t a cause of the type of recovery we are witnessing. First, he explains what the people who he is arguing against say: the slow recovery has been a result of growing inequality. He writes down their argument as follows:

“The key causal factor of the middle-out view is that a wider income distribution slows economic growth by lowering consumption demand. Saving rates rise and consumption falls if the share of income shifts toward the top, according to middle-out reasoning, because people with higher incomes tend to save more than those with lower incomes.”

And then he goes on to counteract this view by data he collected and put some make up on. He gives what his data shows:

“The data for the recovery since mid-2009 do not support this view. The 5.4% overall savings rate during this recovery is not high compared with the 8.4% average since 1960. It is relatively low compared to past recoveries, such as the 9.3% savings rate during a comparable period during the recovery in the early 1980s.”

In my curiosity, I was able to look at the data he worked on. It is data on personal saving ratio-the ratio of personal saving to disposable personal income. The following graph shows what the saving rate has been.
PSAVERT_Max_630_378 John Taylor is correct on that the saving rate has been averaging 5.4% since the end of the latest recession. However, when he tried to compare this rate to the 8.4% average rate since the 1960, he makes wrong comparison. Due to the general downward trend of this rate over the last decades, he shouldn’t compare this 5.4% average rate of saving during the recovery to the all time average saving rate. But if we compare the 5.4% average rate during the recovery with the average saving rate between the end of 2001 and the start of the recession, which is 3.9%, we can see that the saving rate today is higher than its pre-recession level. Therefore, we have just disproved his claim by using the same argument he tried to use. In other words, with data on how the income inequality has grown, we have further see that the saving rate also increased after the recession.

10economix-sub-wealth-blog480Hence, we are able to claim that the increase in inequality indeed increased the saving rate; therefore, the total consumption demand has declined, which is exactly what the people he argued against said.

One could argue that  because people might be willing to save more than what it was saving before the crisis to use their saving when another crisis comes during the recovery and uncertainty, the higher saving rate doesn’t say that inequality is hindering the recovery. But this surge in the saving rate after a recession has been witnessed only twice, after 2001 and 2007-2009 recessions. Prior recoveries experienced the saving rate which was actually lower than its level before the crises. If we look at the average saving rate between November 1970 and November 1973, it was 12.8% which is higher than the saving rate after the recession, between April 1975 to December 1979, which is 10.8%. The same decrease in the saving rate was seen also during the early 1980’s recovery. We can see this trend of decrease in the saving rate following the recession in the above graph except during the latest two recoveries.

In my very first blog post, I compared the income inequality during the pre-recession periods for the Great Depression and the Great Recession and argued the recovery the economy is going through is unhealthy one. One could agree with John Taylor on that the weak recovery is causing the widening inequality and the first problem policymakers should tackle is to boost the recovery by any means. However, the increasing inequality could be the heart of the problem, and the policymakers should prioritize equality to change the speed of the recovery.

Latest Issues with Healthcare Laws

I know this is a controversial topic; I am not writing to step on any toes, just some observations as of late.

When the Affordable care act was introduced it was heralded by many as their own saving grace and was portrayed by our the presidential party as something that could define Mr. Obama’s entire presidency and political career as a whole. Obviously these ideas and the law itself are heavily refuted or favored depending on who one talks with, but one thing is for certain: there have been numerous issues with the implementation of both the website that houses the “exchange” as well as with the program itself.

One of the most economically interesting claims from president about the health care law, has been that the price of healthcare would actually go down due to the competition between insurance providers as well as their newfound inability to discriminate based on certain preexisting conditions. A recent Forbes article compiles some of the quotes from President Obama from the last couple of years talking about the program including two quotes that talk about the benefits that preventative care will have on overall healthcare costs as well as talking about needing people of all different ages to participate in the health care exchange in order to balance out the costs for everyone. (Link) The problem with this initial claim having to do with preventative care is that recent data from the same article from a study in Oregon seem to prove differently. The study, looked at expanding Medicaid coverage given to low income families, did not actually reduce their visits to the emergency room as the president promised, but instead increased them upwards of 40%. What about the talk of everyone participating in order to keep costs down? Well, a WSJ article looking at the demographics of the recent enrollees does little for the hope of cheaper insurance. According to the article, more than half of those people signing up for the healthcare plan are at least 45 years old. (WSJ Link) These demographics differ from state to state and admittedly will change at least a little as the signup times come to a close in March, but this is a disturbing sign. With so many different promises from our leader about what to expect from this law being put into place, including not having to give up one’s old plan, the public has a concrete picture of what to expect– thus far it is not up to par.

It is slightly ironic I think, that now we have fostered a situation in which the healthcare companies–who’s prices we were supposed to be reigning in– have seen their insurable pools expand due to the nature of the law and now will get to raise rates due to the ages etc of the people enrolling due to the law. I do think that everyone should have access to healthcare, but we the American people have accepted so many “promises” that at this point, do not seem to be coming through in the end product and there truly is no such thing as a free lunch.

Deceptive Employment Statistics

According to the United States Department of Labor and Justin Lahart of the Wall Street Journal, 74,000 jobs were added to the economy in the month of December 2013. This is the lowest in the past three years. Furthermore, this was much less than anticipated. A potential contributing factor to this is bad weather. The Federal Reserve is ignoring this statistic. The unemployment rate dropped from 7 percent to 6.7 percent. This is important because 6.5 percent is the target rate for policymakers. Labor force participation has been declining since 2007. Two contributing factors are the baby boomer generation reaching retirement age and people staying in school longer than they used to. The prime range of ages to be employed are between 25 and 54. Normally people in this age group’s participation is not affected as easily, but participation has fallen by roughly 3 percent.

Interestingly enough, women were the winners in the month of December 2013. According to Catherine Rampell of the New York Times. Rampell’s article: “All December Job Gains Went to Women” states that women gained 75,000 jobs, on net, while men lost 1,000 jobs, on net. She then states that women represented fifty-six percent of the net gain of jobs in the past year.

All of these facts about recent addition of jobs to the economy can leave one with mixed feelings. 74,000 jobs is sub par and unexpected. Jared Bernstein of the New York Times mentions that the expected number of jobs added was 200,000 in his article titled: “Underlining the Recovery’s Shortfall”. However, it did lower the unemployment rate closer to the target 6.5 percent. This could cause optimism because the unemployment rate is closer to what policymakers want it to be. The fact of the matter is that 6.5% is not a healthy rate of unemployment. Jared Bernstein continues to mention, in his article, that the Congressional Budget Office determines that full-employment has a rate of 5.5 percent unemployment. In my opinion, that is what the policymakers need to target. By targeting a rate of 6.5 percent, they are accepting less than what is best for the country. The job market has undoubtedly been a huge concern since 2007, and these concerns need to be put at ease. That will not be done by targeting an unemployment rate that is 1 percent higher than the natural.

it is also interesting that women have been receiving the bulk of the spoils of new jobs in the economy. Maybe this could be a step towards the glass ceiling being overcome. The statistics shared in Rampell’s article could put some feminists at ease.

http://online.wsj.com/news/articles/SB10001424052702303754404579312733039381474?mod=WSJ_economy_LeftTopHighlights

http://economix.blogs.nytimes.com/2014/01/10/underlining-the-recoverys-shortfall/

http://economix.blogs.nytimes.com/2014/01/10/all-december-job-gains-went-to-women/