US GDP Growth Stalls in Q1 as Fed Misses its Dual Targets by a Wide Margin

The advance estimate released today by the Bureau of Economic Analysis showed U.S. real GDP growth falling to an annual rate of just 0.1 percent in the first quarter of 2014. If confirmed by later revisions, that would be weakest quarterly growth since the end of 2012.

The slowdown was remarkably widespread. The contribution to real growth from consumer spending, which was 2.22 percentage points in Q4, slowed to 2.04 percentage points in Q1—and that was the good news. The contribution of investment spending flipped from a positive 0.41 percentage points to negative -1.01 points, with fixed investment, inventory investment, and residential investment all in the minus column. The contribution to growth of exports, which have been an element of strength throughout the recovery, dropped from +1.23 percentage points to -1.07 points, only partly offset by a small decrease in imports. Finally, the contribution to growth of state and local government expenditures, which, for the first time in the recovery, had been positive in the final three quarters of 2013, turned negative again. A tiny 0.05 percent boost from federal government spending was not enough to offset the negative growth at lower levels of government.

Today’s data release also includes the first estimate for personal consumption expenditure (PCE) inflation for Q1. The PCE inflation index and the unemployment rate are the Fed’s two main policy targets under its dual mandate to promote price stability and full employment. Currently, the Fed defines price stability as inflation of 2 percent for the PCE index and full employment as a range of 5.25 to 5.75 percent for unemployment rate.>>>Read more

Follow this link to view or download a classroom ready slideshow with complete charts of the latest GDP data

Living with Water Scarcity: Water Rights, Human Rights, and Property Rights

Review of David Zetland, Living with Water Scarcity, Aguanomics Press, 2014

Whether it’s cowboys facing off over a muddy water hole in an old Western, or the dirty looks you get if you fill your supermarket basket with bottled water, no one ever denied that people feel strongly about water. David Zetland’s new book, Living with Water Scarcity, explores hot-button water issues in a refreshingly pragmatic way. There are no “-isms,” no blanket condemnations of government or capital. Zetland does care about water—he cares passionately—but he keeps his rhetoric cool while he explains how government water managers have too often failed to do their job while markets, which have worked where they have been tried, need to be used more widely.

The right price

Zetland begins with a simple distinction between scarcity and shortage. Water is scarce in the sense that different people have different purposes for it—drinking, growing crops, sustaining flows to streams and wetlands—but there is not enough to meet all of them all in full. Water is not unique in that regard. We spend our time and money in pursuit of scarce goods every day. We would always like to have more time and money, but we live with what we have.

Shortage is different. A shortage means you can’t get the water you want no matter how much time and money you have. A shortage is a sign of failure to manage scarcity.>>>Read more

Econ profs: "Living with Water Scarcity" can serve as a parable for scarcity in general. At just 114 pages and $5 for the e-book (discounts available for 20 or more copies), you might consider using it as a supplement for you principles of micro course.

The Curse of Riches: Resource Wealth and Social Progress

The curse of riches or resource curse has been a staple of development economics for decades. The curse refers to the striking fact that many resource rich states, such as Nigeria and Congo, are conflict-ridden basket cases while some of the world’s best performing economies are islands or city-states, such as Japan, Taiwan, and Hong Kong.

Numerous empirical studies have confirmed the existence of a curse, most famously a 1995 NBER working paper by Jeffrey Sachs and Andrew Warner. Sachs and Warner noted that over the 20-year period from 1970 to 1990, countries with a high percentage of natural resource exports grew systematically slower than did those with few resources. The following chart replots the data from their paper:

Over the years, development economists have suggested several ways in which resource wealth might lead to poor economic outcomes. Two mechanisms seem especially important, one of them focusing on exchange rates and the so-called Dutch disease, and the other on political economy and impediments to social progress. This post uses the recently released Social Progress Index (SPI) to shed new light on their relative importance. >>>Read more

Follow this link to view or download a classroom ready slideshow version of this post

US Inflation Edges up in March but Inflation Expectations Remain Moderate

The latest data from the Bureau of Labor Statistics shows an uptick in consumer price inflation for the month of March. Separately, estimates by the Cleveland Fed show that inflation expectations remain flat and well below the Fed’s target of 2 percent.

As the following chart shows, the all-items consumer price index rose at a seasonally adjusted annual rate of 2.43 percent last month, up from 1.21 percent in January. Food prices helped push the CPI upward, as they did in the previous month. Energy prices, which had fallen by 0.5 percent in February, decreased by just 0.1 percent in March. The core inflation rate, which removes the effect of food and energy prices, rose by 2.48 percent for the month. If we look hard, we can construe the latest inflation data to be consistent with a slight upward trend, as represented by the chart’s fourth-order polynomial trend lines, which just brush 2 percent in March. >>>Read more

Follow this link to view or download a brief slideshow with charts of the latest inflation data

Comparing the Ukrainian and Russian Economies. How will Ukraine's Weakness Affect Voters?

Last month residents of Crimea voted to secede from Ukraine and join the Russian Federation. Although many in the West have questioned the freedom and fairness of the referendum, which was held in the intimidating presence of Russian troops, no one doubts that many Crimean residents did have a true preference for the Russian option. Historical, linguistic, and cultural considerations were presumably decisive for many voters, but according to reports, economic factors also played a role.

By conventional indicators, Russia is a much wealthier country than Ukraine. According to the latest data from the IMF, Russia’s per capita GDP, measured at purchasing power parity, was $17,884 in 2013. That is nearly two-and-a-half times higher than the $7,423 per capita for Ukraine. Russian wages and pensions are correspondingly higher. Russian Prime Minister Dmitry Medvedev made a point of flying to Crimea soon after the vote to announce in person the decision to raise pensions and wages for government employees to Russian standards.

More votes are coming. Demonstrators in Eastern Ukrainian cities, encouraged by television and political tourists from the Russian side of the border, are demanding referendums similar to that in Crimea. Even if those do not come about, Ukraine as a whole will hold a presidential vote in May that will itself be seen as a referendum on a turn toward the East or toward the West. Whatever the circumstances, economic issues will be on voters’ minds as they set out for their polling stations. Which side of the scales do they weigh on?>>>Read more

Law Enforcement Officials and Economists Agree on Need to End the War on Drugs

Last week Darby Beck of LEAP (Law Enforcement Against Prohibition) sent me a statement on drug legalization by Major Neill Franklin (Ret.) Franklin, now LEAP’s executive director, is a 34-year veteran of the Maryland State Police and the Baltimore Police Department. Like other members of his organization, he now advocates ending the war on drugs, after years of fighting on its front lines.

While reading Franklin’s statement, it struck me that although law enforcement officials and economists start from contrasting perspectives, they reach many of the same conclusions.
Here is how the war on drugs looks to those who, like Franklin, have a street-level view of U.S. drug policy:

Before Nixon declared the war on drugs in the early 1970s, policing was a different creature altogether. Police were the “good guys” going after the “bad guys”—the rapists, the murderers, the child molesters— [the ones] most people could agree society was better without. Since that time, the very nature of policing has changed. . .
All of this has caused society generally and our communities of color specifically to look upon us as people to be feared rather than as public servants advancing public safety, and that distrust, far from being merely an abstract concept, makes our jobs infinitely more difficult as community members shy from cooperating in investigations.

For Franklin, the broken relationship between police and the communities they serve is unintended consequence number one of the war on drugs. He also points to a second unintended consequence—the way drug policy enriches criminals.

Will the legalization of marijuana and other drugs lead to a reduction in the power of street gangs and cartels that terrorize our cities? I believe that most officers brave enough to be honest with themselves can only answer in the affirmative . . . The prohibition of drugs, just like the prohibition of alcohol, is what provides the tremendous profits to the criminal organizations that provide the drugs on our streets.

Economists, in their own way, make the same point. They see the wealth and power of the drug gangs in terms of elasticity of demand. If demand for a good is elastic, a small increase in price causes a big drop in sales, and the total revenue of the seller goes down. If demand is inelastic, which is the case for illegal drugs, even a large increase in price makes only a small dent in the quantity sold, so the revenue of the seller goes up.