Wednesday, June 13, 2012

Measuring Inflation

Measuring the change of prices is a difficult task.  There is no way to obtain a completely objective overall change in prices.  Every measure will have some kind of bias, and can be argued to be over or underestimated. 

Over the decades there have been changes in the way the government measures the consumer price index (CPI).  One change was to incorporate substitution effects.  This means that if the price of steak increases, and people consumer more beef, then beef is now a larger part of the economy and should have a bigger weighting in the CPI.  A second change is to incorporate qualitative changes into the CPI.  Thus, if the computer speed doubles in 2 years, but the average computer price remains the same, then the CPI will record a reduction in price for computers.

I wanted to take my own measurement of inflation using items that would not be affected by either of these 2 changes.  I wanted to see how much smaller the government inflation number is compared to the modified CPI number.  I also wanted to see if there was a change from decade to decade from the 60s to the 2000s, to see if there is an increase in the difference between the two numbers over the decades as the government implemented more changes.

Saturday, April 28, 2012

Measuring the Effectiveness of Political Parties at the State Level in the U.S. (Part 2)

I wanted to revisit the topic of comparing the dominance of a political party in charge of the state house and senate and looking at the pattern of internal migration. I will do two regressions. The first looks at the average exact percentage of the number of Democrats in both chambers and then takes the average of those percentages. So if the Democrats control 60% of the house and 70% of the senate in State A, then State A will have the number 65 assigned to it for the PolAvg variable. I look at two time periods. I take the average political dominance for the 1990s and the 2000s. I then run a pooled regression, using Is2000s as a dummy variable. The data shows coefficient, then p-value. The results are:

PopChange %




Adjusted R-squared: 0.068

 The results show that on average the population of each state is increasing by 7.127% when the state legislature is controlled by all Republicans.  If the state legislature turns from entirely Republican to entirely Democrat, the state's population increase will fall by 10.04 percentage points so that the state will over the decade be losing population at a rate of -2.913.  The result is statistically significant with a two sided T-Test with a P-Value of .0129.  The R-Squared is low at .068 which suggests that there are many other reasons for leaving a state besides the ruling political party.  The low R-Squared is a weakness in this regression.

Sunday, November 27, 2011

Comparing Inflation Rates by Country

I wanted to compare average inflation rates with the average change in price of gold for a number of countries. I don't want to imply that the average change in gold price should always equal the average change in the prices of all goods and services (the inflation rate). However, the change in gold price is an objective indicator of currency strength. If the price of gold goes up more in country A than in country B, then that means that country B has a stronger currency than country A. This suggests that inflation should be higher in country A than in country B. If country A reports lower inflation than country B, then that suggests that country A in underestimating inflation, or that country B is overestimating inflation.

The data below shows the country name, and currency abbreviation. It then has the number of years of data that I have for that country. So if years equals 5, then I have 5 years of data for the change in gold price and inflation. The start year is the year that data starts. For the Euro, many countries start in 1999. I then have the average change in the price of gold, and then the average change in inflation. The last column is the difference: average change in the price of gold minus the average inflation rate. The data is sorted by the difference column and the rank is shown as the first column.

Friday, November 18, 2011

Does Devaluation Help GDP Growth?

One of the biggest economic fallacies is the belief that devaluing a currency is the path to economic growth. This mercantilist argument is seen everywhere by all sides of the political spectrum. The argument is that by devaluing its domestic currency, a country will boost exports and reduce imports. Domestic companies will be able to better compete both at home and abroad. Thus, they will expand production and hire more people. Typically, they argue that the only downside is that travelers visiting foreign countries will be faced with higher prices.

I would like to add a few more negative consequences to the devaluation idea. First, all imports will become more expensive. And not only imports, but all exportable goods will become more expensive. Thus, even if the economy produces a surplus of oil, coal, food, cars, etc. - all of these goods can be exported. If they can be exported, and the local currency is devalued, then companies are more likely to export these goods rather than sell them in the domestic economy. This will lower the supply and thus raise the price of all exportable goods.

Higher prices for imports and exportable goods hurt the local economy in two ways. First, companies that have these goods as part of their costs will see their costs rise. If a firm's cost rise, then all else being equal, the firm will reduce production compared to what they would have done without the rise in costs. Now the devaluation supporter will argue that the firm's sales will increase, but this will not be true of all firms. Some firms such as restaurants will see their costs of food go up, and since they do not compete with foreign entities, then they will not gain any benefit from devaluation. Other firms like airlines or computer manufacturers will see costs go up and possibly sales go up. But how can we be sure that the increase in sales will offset the increase in costs? How can the supporters of devaluation know that the overall benefits will exceed the overall costs? I don't believe there is any way to know for sure. Below, however, we will see some regressions testing to see whether countries benefit from devaluation.

Thursday, November 17, 2011

Do Savings Help Economic Growth?

There is a debate among economists over whether savings are useful for economic growth.  The argument that savings are helpful (even necessary) is held by Classical, Neoclassical, and Austrian economists.  The view states that there is a certain amount of production in a given time period for an economy.  This production can be used for either consumption or savings.  Savings are used to both maintain and increase the capital stock which increases the productive capacity for the future.  If not enough savings exist to maintain the existing capital stock, then the capital stock will be reduced and total output in the future will fall.

Keynesian economists argues that savings are not necessary for investment.  In a modern economy with fiat money and fractional reserve banking, money can be created out of thin air and this can be lent to companies wanting to expand or maintain their capital stock.  While Keynesian economists will admit that savings used to be required while on a gold standard and a 100% reserve banking, with these "barbaric relics" gone savings is no longer necessary.

The counterargument to the Keynesian argument is that to make these loans without savings requires expanding the money supply (either through printing or factional reserve banking).  This will lower interest rates and increase demand for products across the entire structure of production.  This means the demand for lower order products, those products closer to actual consumption, will increase at the same time as demand for higher order products.  The eventual result is the demand for raw materials will be bid up and inflation will result.  Also, companies will find they do not have enough consumers for their products because consumers don't have the savings to buy the new production.  Thus, the Keynesian argument is actually the cause of the business cycle itself according to Austrian economists.

Measuring the Effectiveness of Political Parties at the State Level in the U.S.

I wanted to determine if Democrats or Republicans are better at governing at the state level.  In order to test this, I run two cross-sectional regressions.  As an independent variable, I collect data from the U.S. Census website to create a percentage of Democrat power for each state over a 10 year period: 1999-2009.  If the Democrats held a majority of the seats in the house, then they would be awarded a 1 for that year.  If the Republicans held a majority, then that state would get a 0 for that year.  If the house was split evenly 50/50, then it would be assigned .5 for that year.  I then take the average for the house over that 10 year period.  I do the same process with the Senate.  I then take the average of the House number and the Senate number and I get my percentage of Democrat control at the state level for each state.  Nebraska does not have party affiliation at the state level so they are excluded from all regressions.

For the first regression, the dependent variable is the sum of total debt and unfunded liabilities per capita for that state.   The argument is that better managed states should look for the best long term fiscal health of the state and keep their debt down.  A poorly run state government will use the promises of debt and unfunded liabilities to buy votes to keep themselves in power and thus run up their debts.  The data for debt and unfunded liabilities comes from the Forbes website.  The debt numbers are as of January 2010.