Economic Indicators - Married Male, Spouse @ Home, and the BS they Indicate.

[A-Unit]

Perhaps it blew RIIIIGHT past me, but I never realized how intricate we get with indicators and economics, as if some even have an impact on profit. I am watching CNBC, and they brought up the "Married Male, Spouse at Home, Job Stability Indicator." Apparently it had fallen recently, and married men, with a spouse at home has lost 2.0% per month for the last few months, meaning fewer married men experienced job stability. Of course, my point wasn't to relate it to economics or even suggest that this meaningless indicator can benefit you financially, but how it benefits you SOCIALLY.

In a social context, marriage = stability, but it also equals the man still, generally pays for everything, with the assumption his wife won't be a louse.

And beyond the social ramifications, it's to "enlighten" people that everything behind their Social Security number only further establishes them as an Economic Unit of the Total Economic System. Is this good, or bad? Well, it depends. If you seek to profit off of the rest of the country, sure. The Census Department's sole job is to count things, people, "economic units," so that the economy itself is guided in a specified direction. Also, to extract the greatest taxes to service the innumerable debt we owe, not only on notes to England/Europe, but on debt international, to our socialist system, and to the private banks who create money out of thin air, without our consent.

There are some indicators which can mark the progress of profits in the stock market or bond market. If you're seeking to expand your Financial/Economic savy, get the books by Martin Zweig, who runs his own fund. He doesn't show so much as what to SPECIFICALLY do with stocks, but he does demonstrate different tracks you can take based on what the economic indicators are doing, he defines them for the newbie, and they're fairly simple so that you can extract them from the basic newspaper, maybe a WSJ or IBD paper, without laying too much money on the line to acquire this information.

Economic Indicators are more powerful for major business owners that want to lobby for certain priviledges, for the White House to pat themselves on the back for jobs well-done, and for the planning of society as a whole. There are some that can be used to determine HOW it's doing, but some are outdated, such as CPI, which is the inflation index. Much of what comprises this basket is outdated; that much I learned in college eco-courses. Essentially, for those NOT knowing, the CPI is a bucket of basic goods we Americans buy, that is watched for price increases. A weighted average is applied, and the number is then arrived at. They also do it without the calculation of REAL estate, or HOUSING and a few other goods.

Our country, despite all the plugs of CNBC and Kramer's mad money is more socialist, than capitalist. The government plays quite frequently, with many pieces of the economy, from the money supply to interest rates. That impact alone is quite substantial, and normally the full effect isn't felt for months coming. I hear on news outlets and SIRIUS CNBC, ' THE CAPITALIST ECONOMY, yet much of it is planned, the government has a greater role in planning the economy, in directing it, and determing its direction. This was only a sidebar to the bogus, bs sputtering that economic indicators pretend to be.



A-Unit

 

[CLOONEY]

The government plays quite frequently, with many pieces of the economy, from the money supply to interest rates. That impact alone is quite substantial, and normally the full effect isn't felt for months coming.

A-Unit

Actually, It is estimated output growth falls by 1/3 of a percent in the first and second years, and 1-6 of a percent in the third year, after a 1 percent increase in the short term interest rate (IR). So therefore, it effectively takes upto 3 years until the full effect of monetary policy is seen. As for Fiscal policy, the lags are even longer.

Here is a paper I wrote on time lags encase anyone is remotely interested. Its actually pretty interesting, though the graphs wont be able to be cut and pasted over.

“Time lags involved make a counter-cyclical macroeconomic policy impractical.”

The business cycle is characterised by four stages and is driven by investment and the accumulation of capital. Governments believe the business cycle can be fine-tuned through the use of fiscal and monetary policy. Fiscal policy is a plan to be administered over numerous years and its blunt nature is shown using 2 examples of policy in the 1991/92 recession. Fiscal policy writers face both recognition and administrative/political time lags. Fiscal policy’ crowding out effect is a further lag, leading to added difficulties for policy writers. Real-time output gaps and quarterly national accounts data are analysed for the use of monetary policy, followed by an analysis of monetary policy time lags. Finally, a practical example of the Australian economy in the early 90s is used to show how the complex nature of the economic system and time lags lead to macroeconomic policy impracticality.

A business cycle is characterised by an expansion, peak, contraction and trough. There are several theories attempting to explain the business cycle, the main theories being Keynesian theory, Monetarist theory and Rational Expectations theory. However, all agree that investment and the accumulation of capital play a crucial role in the business cycle. When a shock hits the economy, such as the dot.com bubble burst, investment is hit. When investment in new capital slows, recessions begin and vice-versa when investment accelerates, as viewed in figures 1) and 2), of which further show 5 business cycles over the past two decades in Australia.
In an expansion, investment increases quickly and the stock of capital grows rapidly. This rapid capital growth means that capital per hour of labour is growing. Thus labour becomes more productive and the law of diminishing returns begins, therefore, whilst the quantity of capital increases, the quantity of labour remains constant, and eventually productivity per unit of capital falls. Leading to a fall in profits and less incentive to invest. Investment falls over time, and when it falls by a large amount, recession begins. With slow/falling capital growth per hour of labour, businesses see opportunity for profitable investment and the pace of investment accelerates, thus leading to an expansion. (McTaggart, 2003).

Figure(s) 1), 2)


Governments believe through the use of both monetary and fiscal policy, economic cycles can be “fine-tuned”, thus reducing threat of recession and ultimately enabling long-term sustainable economic growth.
Fiscal policy is defined as, the government’s attempt to influence the economy by varying its purchases of goods and services and taxes to smooth the fluctuations in aggregate expenditure. (McTaggart, 2003, p831).
Monetary policy is defined as, the attempt to control inflation and the foreign exchange value of the domestic currency and to moderate the business cycle by changing the quantity of money in circulation and adjusting the interest rate. (McTaggart, 2003, p835).

As the budget is a plan of government expenditure to be administered over a period anywhere from one to four or more years, the flexibility of the budget and therefore fiscal policy is rather limited. Unlike its counterpart monetary policy, fiscal policy is incapable of rapid adjustment when it becomes necessary to respond to emerging developments. Otherwise known as a “blunt” tool. (John, 2002). This was seen in the 91-92 Australian recession, where 2 fiscal policy packages were observed.
1. 1 nation package – proposed infrastructure spending, on ports, railways, airports etc. The package was intended to be counter-cyclical, however by the time decisions were made, plans were developed and policy was implemented, the money was spent a couple of years after the recession was noticed. (Applegate, 2005)
2. Working nations package – focused on training and skills development of workers, a large focus was also on reducing the NAIRU. Money in this plan was spent faster than the 1 nation package, however planning was still involved and unemployment had moved up by the time the plan was implemented. (Applegate, 2005). Overall, though, the most important conclusion yielded by a study of these packages is that neither will have more than a marginal impact on the economic problems facing Australia and particularly on unemployment. (Quiggin, 1997).


The business Council of Australia recognised two problems with fiscal policy in its 1999 submission of 'Avoiding boom/bust: macroeconomic reform in a globalised economy'. They were a time lag in policy development and implementation, and a distinct link to political decisions. (John, 2002)
A recognition time lag, most often than not, has accompanied fiscal policy in that the economy may already be more than six months into a recession or inflation before the fact appears in the relevant data and is acknowledged. (Jackson, 1998). I.e. employment numbers lag behind the economy. At first employers work their employees harder when business increases (expansion), in time, new employees are hired. Vice-versa occurs in a contraction/recession. Thus loan approvals, confidence surveys (both consumer and business confidence), employment forecasts and investment intentions are used in order to attempt to predict numbers in advance. Forecasts are however, not good at picking turning points in the business cycle. (Applegate, 2005).
Administrative and political time lags are evident as there is a clear link between the time fiscal action is recognised and the time it is actually implemented. (Jackson, 1998). Also known as decision lags, of which are lengthy, as tax and expenditure changes have to go through a lengthy parliamentary decision-making process. (Calmfors, 2003). Tax cuts are faster to hit the economy, however if assumed to be a one off cut, may simply be saved. (Applegate, 2005).
Such delays reduce the flexibility of fiscal policy prompting many, including the Business Council of Australia, to suggest the creation of an autonomous government body. Similar to the Reserve Bank of Australia, this body would have the powers to make small across the board adjustments to tax rates within one or more major tax areas. This is a minority view. (John, 2002). It is however, hard to know the impact of tax cuts, if seen as temporary they might be saved, furthermore, the cuts could be spent on imports, thus it is hard to predict the multiplier.

Another major source of debate, pointing to the impracticality of fiscal policy in the medium run is shown below in figure 1.

An increase in government spending leads to an increase in demand, leading to an increase in output. As output increases, so does the demand for money, leading to an upward pressure on the interest rate, moving the equilibrium point form A to A' in the ISLM model graph. The increase in the interest rate, which makes domestic bonds more attractive, also leads to an appreciation of the domestic currency, represented by the movement along the interest parity cure from point A to A', reflecting the same change in the interest rate from the ISLM model graph.
Both the higher interest rate and the appreciation decrease the domestic demand for goods, off setting some of the effect of government spending on demand and output. (Blanchard, 2000). This effect, known as the “crowding out” effect, is not experienced for some time after the initial change in government spending, further making it difficult for policy makers to accurately and successfully implement counter-cyclical macroeconomic policy.

 

[CLOONEY]

Successful macroeconomic management involves a process of continual reassessment of the state of the macro-economy. Among many things that policy-makers would like to know about the current state of the economy is the extent to which the level of aggregate economic activity exceeds (or falls short of) the economy’s productive capacity. (Gruen, 2002, p1). The gap between actual output and the economy’s potential output, is the output gap. This output gap, must however, be able to be measured with relative accuracy in real-time, not only in hindsight. It is difficult to measure the output gap either in real-time or in hindsight, simply because the level of potential output on which they are based is unobservable, including problems such as the uncertainty pertaining to the true structure of the economy and hence the relationship between potential output and economic data on actual output and inflation etc. (Gruen, 2002). On a paper written by Gruen, Robinson and Stone: Output gaps in real time: are they reliable enough to use for monetary policy?, it has been concluded using results from 121 vintages over a period of 30 years, from 1971 – 2001, that estimates of the output gap in real-time are relatively accurate. (Gruen, 2002). Gruen however, also states common logic in his paper, there remains an irreducible degree of uncertainty associated with output gaps generated in real time. The problem of ‘not knowing the future’ is still an important one and there will always be times when the best available estimates of the output gap made in real time will turn out, with the benefit of hindsight, to have been badly flawed. (Gruen, 2002, p32).
Furthermore, estimates of quarterly national accounts are a useful guideline for the implementation of macroeconomic counter-cyclical policy. However, an RBA discussion paper written by Stone and Wardrop states: Initial mismeasurement has also frequently been quite persistent, often largely remaining even several years after the period being measured. (Stone, 2002, p21). Thus, quarterly measurements of the national accounts cannot be taken seriously when implementing monetary policy due to time lags in the attainment of accurate information, as shown with the use of the Taylor Rule at the time of monetary policy implementation and using the same formula with numbers gained from hindsight. Orphanides pointed to this flaw in the Taylor rule and further states in relation to the use of quarterly national accounts figures, they indicate ‘the profound importance of appreciating the information problem for successful policy design’. (Stone, 2002, p21). Finally, it is of paramount importance to remember that uncertainty pertaining to the economy is not only derived from the difficulty of measuring future paths of key economic variables such as aggregate output, but further, in knowing where those variables are now, and where they have been in the past. (Stone, 2002).

A recognition time lag is observed when implementing monetary policy, in that data simply gives a “rearview mirror” through which to view the economy. An impact lag is further evident, in that there are several quarters between a cut in interest rates and the response on aggregate demand.
It is estimated output growth falls by 1/3 of a percent in the first and second years, and 1-6 of a percent in the third year, after a 1 percent increase in the short term interest rate (IR). (Gruen, 1997). Therefore, the majority of the effect on growth occurs more than a year after a change in the IR. IR changes further have a lagging effect on the exchange rate, further complicating counter-cyclical macroeconomic policy.
For example, a fall in the IR is supposed to raise the cost of foreign goods, in that it deprecates the Australian dollar (AUD), however it may take a while before domestic buyers switch from imported products to domestic products.
Furthermore, we do not know the "natural rate of unemployment," which is the rate below which we would start to experience increasing inflation. We further, do not know the exact relationship between interest rates and aggregate demand. (King, 2003). This is known as model uncertainty. The combination of model uncertainty and time lags makes a mockery of the notion of "fine tuning" the economy to always be at optimum performance. (King, 2003).
A research article published at the RBA agrees with the notion it is impractical to fine-tune the business cycle and states: “These relatively long lags, combined with the problems inherent in forecasting economic growth more than a year into the future, point to the difficulty of trying to use monetary policy to iron-out fluctuations in the business cycle.” (Gruen, 1997, p24).

Furthermore, monetary policy aims to achieve medium-term price stability. While output is a leading indicator of inflation, success in the persuit of medium-term price stability does not depend on being able to “fine tune” the business cycle. (Gruen, 1997). “Prolonged swings in output can and should be avoided, but the policy lags are long enough, and uncertain enough, that it is futile to try to use monetary policy to finetune the business cycle.” (Gruen, 1997, p24).

A practical example of why time lags lead to ineffective counter-cyclical macroeconomic policy when interacting with the complexity of the domestic economy and global shocks (both demand and supply side), is the example of the recession in Australia during 1990/91.
Australian recession 1990/91 – firstly the United States experienced a recession, as it is the largest economy in the world, this dramatically impacted negatively on the Australian economy, as both Australian and US Gross Domestic Product (GDP) generally interact very closely. Further, in 1988 the Australian economy was growing rapidly, inflation was already high and there were fears of it growing further due to demand pressures. The RBA began to increase interest rates. However, as part of the general move towards financial deregulation, the link between base money and broader monetary aggregates broke down. (McTaggart, 2002, 767). Illustrated in Figure 3). M3 continued to grow whilst the money base contracted, meaning contractionary effects of monetary tightening weren’t felt for some time and the economy continued to grow. Figure 4) illustrates the recession Australia felt in 1990/91. The recession was caused by a decrease in both aggregate demand (AD) and aggregate supply (AS). AD fell due to the slowdown in the US economy, leading to a fall in exports and a slowdown in the growth rate of the quantity of money, leading to an increase in the IR and a decline in investment. Hence, to a leftward shift in AD from AD0 to AD1. AS decreased because the money wage rate continued to increase throughout 1990 at a similar rate to that of 1989. Shown by a shift of the AS curve to Short-Run Aggregate Supply 1 (SAS1). Note: Long-run AS curve is not shown. The combined effect was a fall in real GDP of $3 billion, from $451 billion to $448 billion and an increase in the price level from 88 to 90.
During the recession, real wages rose and so did unemployment as shown in Figure 5). This was due to the Accord, with wage increases being granted on expected future outcomes, however the rapid fall in inflation due to monetary tightening in 1988 was unexpected, hence although money wage increases were moderate, the real wage rose rapidly as the price level hadn’t risen nearly as high as expected. (McTaggart, 2002).

Figure 3) Figure 4)


Figure 5)



The way the system of the economy operates is complex, time lags add to the complexity policy writers face, these factors combined make counter-cyclical macroeconomic policy impractical, as witnessed in the above example. In some cases governmental actions can actually worsen the state of the economy when trying to use monetary and fiscal policy to “fine tune” the business cycle.

Finally, effects of policy taken today will impact on the economy over years, however, no-one is accurately able to forecast that far ahead. The forecast horizon of policy makers is less than one year. (McTaggart, 2002, 790). Furthermore, it is not possible to predict the exact timing and magnitute of the effects policy will have on the economy. (McTaggart, 2002). Clearly it is evident time lags make counter-cyclical macroeconomic policy impractical.

The business cycle is inherent to any economy, characterised by expansion, peak, contraction and trough and driven by investment and the accumulation of capital. Governments use fiscal and monetary policy in order to attempt to fine-tune the business cycle. Fiscal policy is however, a plan for expenditures over multiple years and due to both recognition and administrative/political time lags is ineffective in the use of counter-cyclical policy. The crowding out effect further lags behind initial expenditures/tax cuts, leading to difficulties measuring the magnitute of economic effects for policy writers. Real-time output gaps can be measured relatively accurately, however the fact that no-one can ever predict the future leads to the notion that even the best forecasts may be badly flawed in hindsight. Quarterly national accounts data is further unreliable for economic estimates due to the time lags in the attainment of useful data. Furthermore, the majority of effects of monetary policy hit the economy over a year after initial action, thus due to time lags and the problems inherent in forecasting economic growth more than a year into the future, make “fine-tuning” the business cycle impractical. Finally, an example of the Australian economy in the early 90s recession, highlights the fact that time lags combined with the complex nature of the economy lead to policy producing detrimental economic results.