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When economists try to predict future economic growth, they look to manufacturing output.  According to the Wall Street Journal’s Real Time Economics, the Federal Reserve reported a surprising rebound in output with a growth rate of 0.8 percent.  That almost erased the loss of 0.9 percent decline from the last month.  Overall, industrial activity rose by 0.6 percent.

Economic growth is highly correlated with the production of goods.  Over the last couple of months, we saw a decline in manufacturing, which caused concern that our economic recovery could be weakening.  However, February’s data gives credence that the decline could have been due to poor weather.

When industrial output rises, that indicates that businesses are ramping up production in anticipation of consumers buying more goods.  If more sales activity occurs, then that will lead to more hiring and incomes will rise.  That is why we should be encouraged by this data.

Not all of the news was good, though.  Home-related durable goods production fell for the second month.  Even though this could also be weather-related, it is also possible that this could be a precursor to a slowdown in home sales.  If that happens, then that will be a drag on economic activity.

When home sales fall, then that will lead to less spending on household goods and home furnishings.  Both are necessary to drive economic growth.  Therefore, let us hope that these last two months of decline do not become a pattern.

Only the future will tell us whether the trend in manufacturing will offset the slowdown in home-related goods.

Money Made Fun for Kids

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Developing good money habits ideally starts at an early age.  With our new generation being tech-savvy, we must meet them where they are.  Here is a listing of fun money games geared for various ages:

ABCya! Learn to Count Money – Recommended for Grades 3-5 from ABCya website.

  • Teaches you how to count coins.

Save Perry’s Pennies – Recommended for Grades 3-5 from TreasuryDirect Kids website

  • Tests your motor skills while learning how to distinguish between coin values.

Test Your Money Memory – Recommended for Grades 4-7 from TreasuryDirect Kids website

  • Improves memory skills through using basic money terms.

Mad Money – Recommended for Grades 3-5 from PBS Kids website.

  • Teaches you the value of money

Dollar Dive – Recommended for Grades 3-6 from USMint Kids website.

  • Helps motor skills while learning to distinguish between coin values.

Coin-doku – Recommended for Grades 7-12 from USMint Kids website.

  • Similar to Sudoku, but uses coins rather than numbers.

Let’s close the digital divide by showing our children how to utilize technology in order to be financially savvy.  Showing children the value of money must start at an early age because habits are hard to break.  Might as well make those habits good ones.

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Georgianna Vaughn of Global Risk Insights highlights the problem of corruption in the Eurozone.  The Eurozone is comprised of 18 member states:  Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain.  Specifically, a new study from the European Commission (EC) shed a new light to unethical behavior that has been estimated to 120 billion in lost tax revenue.

This highlights the importance of establishing effective institutions that promote the rule of law and protect private property rights.  When global investors are compelled to bribe government officials to win development contracts, they are less likely to invest because they are unsure of the ground rules.  Therefore, developing countries are the beneficiaries as global investors take their funds away from Europe and pour them into Asia, Africa, and South America.

Vaughn also pointed out varying levels of adherence to anti-corruption laws.  With countries such as Croatia and Latvia taking on new action to minimize corruption, there are other countries, such as Sweden, Finland, Denmark, and Luxembourg, who consistently score high in low incidents of corruption.  On the other hand, there is rising concern that Germany, Estonia, the Netherlands, Belgium, and France are not doing enough to curb this damaging behavior.

In summary, all of Europe must act to prevent corruption or else as quoted by Georgianna Vaughn, they’ll be asking this question, “Why make a risky investment in Europe, when you can take a similar risk with the prospect of higher returns in the developing world?”

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When reviewing living standards, a key component is boosting productivity rates.  There are various ways to measure that, but the current crisis in Ukraine touches on one key theme.  Markets hate uncertainty and Russian troops mobilizing along the eastern part of Ukraine hampers political stability.  Even though this is happening across the globe, it is affecting U.S. stock markets that have experienced their worst day in a month.  Until this issue stabilizes, expect a volatile ride on Wall street.

Political stability is huge because investors and markets like certainty.  With the survival of political sovereignty at stake, there is a real possibility that the current government will collapse.  With that scenario present, the whole economic system could be toppled.   Relations between Russia with Europe and the U.S. have grown icy cold with economic sanctions expected  That can affect crude oil prices worldwide, so do not be surprised to see gas prices rise.

Aaron Johnson:

My latest contribution to Global Risk Insights examines whether monetary policy alone can cure the problem of chronic unemployment.  Key points include:

  • Can infer that new Fed Chair Janet Yellen will maintain current monetary policy due to continued labor market weakness, even though the unemployment rate is falling.
  • Impact of U.S. monetary policy can have negative consequences to emerging markets in Asia, Africa, and South America.
  • Questionable whether monetary policy can effectively address long-term unemployment.
  • Fiscal policy should be tailored to specifically address the needs of the low-to-medium skilled worker.

Originally posted on Global Risk Insights:

With Janet Yellen newly confirmed as Chairman of the Federal Reserve, investors are now parsing her testimony to gain insight on the future direction of interest rates.  

One particularly interesting piece of her testimony involved the persistence of long-term unemployment and a high number of part-time workers: “These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the U.S. labor market.”

This statement is significant because previous Fed Chairman Ben Bernanke identified a threshold of 6.5% unemployment rate as a starting point for reversing bond purchases aimed at stimulating employment. Currently, the U.S. unemployment rate is very close at 6.6%, but it now looks as if the Fed is hedging its bets.

By continuing to purchase long-term bonds even if it is at a slower pace, the Fed will drive down the interest rate of the 30-year Treasury bonds. Since mortgage rates and…

View original 529 more words

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Tiia Lehto of Global Risk Insights offers an insightful primer on Ukraine, which is currently embroiled in civil unrest where its President Viktor Yanukovych was officially removed from office by the Ukraine Parliament on Saturday, February 22nd.  Chaos ensued when Mr. Yanukovych decided to renege on an agreement to join the European Union.  While this move appeased Russian President Vladimir Putin who would like them to join the Eurasian Union, mass groups of protests led to Yanukovych’s ouster. When perusing Lehto’s piece, you learn about:

  • Distinctions between the European Union and the U.S.;
  • Negotiations for Ukraine to join the European Union;
  • Diverse cultures that are in conflict with each other.

Distinctions between European Union and the U.S.

Lehto characterizes the European Union as being more passive than the U.S. when it comes influencing Ukraine away from the tight reins of Russia.  It appears that the Europe is reluctant to raise tension with their eastern rival.  However, sustained violence met by protesters during Yanukovych’s reign is drawing both the U.S. and Europe together as they seek targeted sanctions against Ukrainian officials responsible for the violence.

Negotiations for Ukraine to join the European Union

Four factors were identified as obstacles to Ukraine joining the European Union (EU):

  1. Expansion fatigue with the EU reluctant to expand beyond it current membership of 28 countries, which is significantly different from its initial group of six countries.
  2. Concern about losing their identity where some believe accepting Ukraine would cater to U.S. and western influences.
  3. Reluctant to risk offending Russia.
  4. Worried that Ukraine has not instituted enough reforms to ensure smooth integration.

Diverse cultures that are in conflict with each other

Lehto also mentioned the cultural divide that is tearing the country at each seams.  While the western part of the country is pro-Western, the southeast portion is leans to Russian influence.  We can see that through evaluating three maps. The first map shows Yanukovych losing to Viktor Yushchenko in 2004.  The area coded in beige favored Yushchenko, while Yanukovych depended on the blue areas for most of his support.

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The second map makes a distinction between Ethnic Lithuanians that lean toward Western influence, while the Ethnic Russians are tied to Russia.

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The last map highlights where most of the protests and chaos is taking place.  As you can see, all of the violence is occurring in the western section of Ukraine.

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It does not appear that political stability will happen soon in Ukraine and this will be a thorn in the side of U.S. and European leadership as they await Putin’s response to Ukraine’s new leadership.  As Tiia Lehto put it, “Ukraine’s future is very uncertain.”

Do Jobless Benefits Hurt Or Help?

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This is a key debate that is covered in my Principles of Macroeconomics course.  Ben Leubsdorf of Wall Street Journal’s Real Time Economics cites two separate studies that suggest that extending unemployment insurance beyond twenty-six weeks caused the unemployment rate to rise up to 1.2 percent more.  They also qualify their findings by referring that this effect is stronger among higher educated workers.

Critics of extending jobless benefits will embrace these two studies and call for Congress to end extending unemployment insurance beyond 26 weeks because:

  • It causes people to slack on their job search because they have a safety net to delay reentering the labor force.
  • This effect was even present among higher educated workers, who conceivably would have an easier time finding a job than those with limited skills.

Supporters of extending jobless benefits will dismiss both studies and urge Congress to continue extending unemployment insurance beyond 26 weeks because:

  • Ignores the catastrophic effects of a financial crisis where firms were fighting for survival and not capable of taking on more payroll.
  • Neither study considered whether reentering the labor force quickly would result in underemployment where they find a job that is beneath their qualifications and skills.

If you believe that being out of work for an extended period of time will compromise the long-term job marketability of workers, then refusing to extend jobless benefits is the right course of action.  However, if you feel that the extended time is needed to find a job that matches their skills, then an extension remains necessary.

Yellen Infers Easy Money Strategy

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With newly confirmed Federal Reserve Chairman Janet Yellen, investors often parse her testimony to gain insight on the future direction of interest rates.  In last week’s testimony, Yellen inferred that easy money policy is still plausible because labor markets remain slack.  Here’s Jon Hilsenrath of Wall Street Journal’s Real Time Economics take,

“In her testimony to Congress Tuesday, Federal Reserve Chairwoman Janet Yellen said high levels of long-term U.S. unemployment signaled high levels of slack in the economy which will keep inflation low.”

First, Janet Yellen heads up the Federal Open Market Committee that influences interest rates through their monetary policy.  They have a dual mandate of stabilizing prices and achieving full employment.  While both are attractive, it is very difficult to choose a strategy that can accomplish both.

By saying that U.S. long-term unemployment remains high, while inflation is low, we can guess that Yellen will maintain an easy money strategy, as opposed to a tight money strategy.  This means that access to credit for consumers and businesses will continue to be relatively cheap, thus interest rates should not rise much based on the announcement.  It is hoped that this action will improve labor markets and alleviate the plight of the long-term unemployed.

The downside of this strategy is that it might continue to create turmoil in emerging countries.  Their concerns are rooted in U.S. exports being cheaper than theirs.  In order for them to compete more effectively, they might choose to devalue their currencies, which could result in rapid inflation, which erodes living standards and impedes growth.  Therefore, this policy can still be problematic even if current labor markets are keeping wages depressed, thus minimizing the impact of higher U.S. inflation.

With the U.S. economy so interconnected with the rest of the world, the long-term implications can be severe for the U.S., even if it might be bright in the near future.

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While there might be a select few that believe there is no instance of discrimination in a post-racial society where an African-American president was elected, most people recognize that some form of prejudice will always exist.  It is natural for the human mind to draw distorted views based on limited observation.  For instance, the short kid with crooked glasses; outdated clothes; and shy nature will normally not be picked first on a playground basketball game.  However, looks can be deceiving and he could surprise with wizardry dribbling skills and a potent outside shot.  The same can be said within society where some people resort to stereotypes that consciously or sub-consciously lead to hiring practices that wrongly penalize women and minorities.  The question is to what extent do our prejudices explain the gender and racial gap, which is not as straight forward as it looks.

In order to prove discrimination, some believe statistical disparities offer enough proof.  Harvard economist Ronald Fryer attempts to explain the reasons for the black-white wage gap that shows blacks earn wages that are 30% less than whites.  While that appears to prove that racial discrimination still exists, there might be a reasonable rationale behind the pay disparity.  As detailed by Dr. Fryer’s study, a portion of this difference is due to differences in human capital.  However, his findings suggest that a third of the gap can be attributed to labor market discrimination, thus suggesting that government intervention is still necessary.

Then there is the issue of the gender wage gap.  Anna Chu and Charles Posner of Center for American Progress reports that women earn 77 cents for every dollar paid to men.  There are wide disparities among states with the best equity occurring in Vermont and the widest disparity occurring in Wyoming.

While both appear to suggest that a healthy amount of discriminating activity is taking place, there is another side to the equation.  June O’Neill of the American Enterprise Institute offers an alternative reason for the disparities for both race and gender.

Dr. O’Neill attributes most of the racial wage gap to human capital differences.  While acknowledging the advances made by African Americans in various fields, she believes that there are variances in cognitive skills between races.  For instance, Dr. O’Neill cites evidence that shows that blacks score approximately 100 points lower than whites on various components of the college preparatory test (SAT).  Also, a separate Armed Forces Qualifications Test showed that pay differences can be explained through divergent scores on cognitive skills.  Lastly,when correcting for these human capital differences, she maintains that there is minimal differences in pay.

As for gender pay, Dr. O’Neill believes the wage differentials are a result of family choices, rather than discrimination or human capital differences.  While there has been improvement where women now earn approximately 81 percent as much as men compared to 59 percent in 1960, this current gap is due to career disruptions as women are more likely than men to leave the labor force temporarily to raise their children or work part-time.  If that is the case, then that can explain why efforts, such as the Civil Rights Act of 1964 and federal anti-discrimination regulations have not been able to fully close the gap.

Even though it is encouraging to see the gains made by women over the last few decades, a Brookings report from Richard Reeves and Joanna Venator shows that additional concerns remain.  Despite the gains in college degrees and pay, women remain less mobile than men.  This means that they are more likely to earn less than the families they grew up in.  They suggest that one possible reason for this is that women are more likely to be single parents than men.  Therefore, addressing family composition and encouraging marriage before having children could narrow the gap.

Alternatively, Jane Ferrell and Sarah Jane Glynn of Center for American Progress infer that labor market discrimination of women is still present.  Their study suggests that differences in gender pay go beyond family choices and infer that discrimination can be a factor.  Their assertions are supported by data showing that 41.1 percent of wage differences are unexplained, thus legislation, such as passing the Paycheck Fairness Act where employment discrimination faces stiffer penalties and a lower burden of proof, is critical.

While the racial and gender gap remains persistent today, opinions vary on cause and course of action.  If labor market discrimination remains prevalent, then affirmative action or anti-discriminatory measures remain the best course of action in addressing any racial or gender wage deficiencies.  If the racial gap is primarily due to human capital differences, then emphasis should be placed on  education and labor force development strategies, rather than burdensome regulations.  If the gender gap is due to personal choice, then further legislation would not be necessary since their decisions are voluntary and unrelated to bias.

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As we enter into the second week of the government shutdown, a more ominous threat looms as the U.S. approaches the debt ceiling.  The debt ceiling has always existed as one of the powers of the U.S. Congress in controlling the spending and taxation activities of the government.  Even though the Executive office can create legislation with a President’s signature, Congress can prohibit its funding by imposing a debt limit which limits the U.S. Treasury’s ability to finance current obligations.

We have already reached the debt ceiling, but Treasury Secretary Jack Lew has been able to employ ‘extraordinary measures’ to prevent the U.S. from not being able to pay for funding already authorized by Congressional legislation.  These measures include underinvesting in certain government funds, suspending the sales of nonmarketable debt, and trimming or delaying the auctions of securities.  However, these methods will be exhausted by October 17th.

While it is highly doubtful that not raising the debt ceiling will result in the U.S. defaulting on its interest payments of U.S. Treasuries, there is concern how global investors will react to the potential turmoil inflicted by the U.S. government not paying all of its bills. As stated by Daniel Mitchell of the Cato Institute, the U.S. collects tax revenues exceeding $3 trillion a year, which is more than capable of servicing our U.S. Treasury annual debt service of about $230 billion.  However, it is not sufficient to cover a broad range of government expenditures ranging from national defense, social spending, and transportation.  This disruption in funding could affect credit markets and dampen consumer and business spending that is already hampered by a tepid recovery.

There are a few scenarios that they can pursue, such as either significantly raising taxes or gutting government spending, though either action would have severe consequences to the economy in the short-run.  Federal employees, civilian contractors, educators, and non-profit organizations would all likely feel the negative consequences of dramatic funding cuts.  Unemployed workers and Social Security recipients would also be at risk of delayed payments or benefits.  Another possibility would be the U.S. selling its financial assets to temporarily fund governmental operations, however those options carry legal and practical obstacles.

One must also realize that politically astute moves do not necessarily equate to good economics, especially in the short-term.   In gerrymandered House districts that are highly conservative, there are significant costs to compromising core beliefs.  Voting for a clean continuing resolution that funds the federal government without defunding or delaying the Affordable Care Act are embedded with significant political risks.  Highly financed conservative political action committees will react negatively to any vote that does not impact health care reform and can redirect campaign financing to the opposition in the 2014 primaries.  That places pressure to not compromise and find common ground with the collateral damage being slowed economic growth and higher unemployment.  Though it should be acknowledged that this strategy of self-inflicted wounds to the economy will be worthwhile to some Republicans if it results in sabotaging health care reform or substantive deficit reduction.

On the other hand, Democrats are just as unyielding when considering delaying the individual mandate for a year or waiving the medical device tax.  Both are necessary to generate the revenues necessary to bring down health premium costs that will otherwise rise due to enhanced mandatory health coverage; prohibiting private health insurance companies from denying coverage due to preexisting conditions; and changing demographics that are placing upward pressures on health care services.  That is why Democrats are hesitant to agree to any changes in health care reform that would undercut its effectiveness.

While it appears there is movement within the Senate to extend the debt ceiling to the early part of 2014, that is still a relatively short time frame that compromises business confidence.  Then there is the concern that House Republicans will not see much political benefit in accepting an agreement where Democrats have yielded little in terms of spending cuts or changes to health care reform.  However, the government shutdown would end with funding available until January 15th and there would be an extension of the debt ceiling to mid-February.

If those talks break down, it is not known how financial markets will react.  The worst case scenario would be a dramatic sell-off of U.S. Treasury bonds.  That occurs If global investors are rattled, then credit costs could skyrocket and slow down the rising momentum in U.S. housing, along with compromising future job creation.   The U.S. dollar could plummet and lead to global panic where a deep recession envelopes the globe.  If that occurs, then even a quick resolution among politicians would be too late to minimize damage that could take decades to recover from.

As the clock ticks, the gamesmanship of debt negotiations leaves the global economy teetering on the balance.


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