Wednesday, April 19, 2017

Why Did The Value Of The Dollar Rise More Than 20% From July 2014 To March 2015?

On June 30, 2014 , the Trade Weighted U.S. Dollar Index: Major Currencies (DTWEXM) was 75.7 (the index starts in 1973 at 100, so the dollar was lower in value compared to other major currencies in 2014 than it was in 1973).

See Trade Weighted U.S. Dollar Index: Major Currencies (DTWEXM) from the St. Louis Federal Reserve Bank.

But by March 16, 2015, it was at 93.1, just about a 23% increase in value.

Why did the dollar rise? Here is what The Economist magazine said:
"The principal reasons for the greenback’s rapid strengthening are simple to grasp. With Europe and Japan stuck in the doldrums, and China and other emerging markets slowing, America’s economy looks relatively strong. The IMF expects it to grow by 3.6% this year. The Federal Reserve has already begun to tighten monetary policy, by stopping its programme of asset purchases, and is now preparing the ground to go further. This week the Fed altered the wording it uses to describe its plans (see article), giving itself room to raise interest rates later this year—the first rise since 2006. With American monetary policy tightening, and other central banks still loosening, investors can make higher returns from dollar-denominated assets. In capital floods, and up the dollar goes."
See Mismatch point: The rise of the dollar will punish borrowers in emerging markets.

Here is another view from Andrew Hecht. He is an international commodity trader, an options expert and analyst.
"There are many reasons that the dollar has appreciated over recent months. The U.S. economy is still the largest in the world. Despite demographics, the U.S. remains the strongest economic nation in the world. The U.S. remains a powerful nation even though less than five percent of the world's population live within U.S. borders. The dollar is the reserve currency of the world. Many other nations hold dollars as a key part of their reserves due to the political and economic stability in the United States. Dollar strength has been the result of moderate growth in the U.S. economy. While European growth remains lethargic, the nation that experienced the highest degree of growth in recent years, China, has seen its growth rate slow. The Chinese economic has shifted from heavy manufacturing to a consumer based economy. As the size of the Chinese economy swells, it becomes harder to grow on a percentage basis as it has in the past.

Think of it this way, it is easier to make a seven percent return on one million dollars than it is to make a commensurate return on one trillion dollars. The sheer size of the Chinese economy makes the percentage growth rate seen in years past almost impossible to sustain. Therefore, Chinese economic growth has slowed on a percentage basis.

Relative strength of the U.S. economy, when compared to those of Europe and China, is a positive factor for the dollar.

A bear market in commodity prices has also been supportive for the dollar. The U.S. is a major consumer of raw materials and lower prices amount to stimulus for the American economy. At the same time, the currencies of nations that depend on commodity revenues have suffered because of lower prices. Canada, Australia, Brazil, Russia, South Africa as well as other commodity producing nations have seen their currency values depreciate alongside raw material prices.

Another positive influence for the dollar is the relative rate of interest paid on the U.S. currency when compared to other currencies. For the first time in nine years, the U.S. central bank raised short-term interest rates in the United States in December 2015. The Federal Reserve also stated their intention that rates will continue to head higher in the months and years ahead. Short-term interest rates in the U.S. went to zero in the aftermath of the housing and global financial crisis in 2008. Growth in the U.S. economy no longer supports such accommodative monetary policy. As the dollar has offered the opportunity for capital growth, in terms of its appreciation versus other currencies since May 2014, higher interest rates add additional support in that they increase the yield on the currency for holders."

Friday, April 14, 2017

Is There Economic And Political Meaning In "The Wizard of Oz?"

We covered international trade in my micro class recently and the text book has something about this in that chapter.

To get a handle on this, you can read Money and Politics in the Land of Oz By Quentin P. Taylor. Also, for my students, there is an article in chapter 15 of the micro book by Tucker and in chapter 18 in the macro book.Below is an excerpt from the Taylor paper:

"Dorothy, the protagonist of the story, represents an individualized ideal of the American people. She is each of us at our best-kind but self-respecting, guileless but levelheaded, wholesome but plucky. She is akin to Everyman, or, in modern parlance, “the girl next door.” Dorothy lives in Kansas, where virtually everything-the treeless prairie, the sun-beaten grass, the paint-stripped house, even Aunt Em and Uncle Henry-is a dull, drab, lifeless gray. This grim depiction reflects the forlorn condition of Kansas in the late 1880s and early 1890s, when a combination of scorching droughts, severe winters, and an invasion of grasshoppers reduced the prairie to an uninhabitable wasteland. The result for farmers and all who depended on agriculture for their livelihood was devastating. Many ascribed their misfortune to the natural elements, called it quits, and moved on. Others blamed the hard times on bankers, the railroads, and various middlemen who seemed to profit at the farmers’ expense. Angry victims of the Kansas calamity also took aim at the politicians, who often appeared indifferent to their plight. Around these economic and political grievances, the Populist movement coalesced.

In the late 1880s and early 1890s, Populism spread rapidly throughout the Midwest and into the South, but Kansas was always the site of its most popular and radical elements. In 1890, Populist candidates began winning seats in state legislatures and Congress, and two years later Populists in Kansas gained control of the lower house of the state assembly, elected a Populist governor, and sent a Populist to the U.S. Senate. The twister that carries Dorothy to Oz symbolizes the Populist cyclone that swept across Kansas in the early 1890s. Baum was not the first to use the metaphor. Mary E. Lease, a fire-breathing Populist orator, was often referred to as the “Kansas Cyclone,” and the free-silver movement was often likened to a political whirlwind that had taken the nation by storm. Although Dorothy does not stand for Lease, Baum did give her (in the stage version) the last name “Gale”-a further pun on the cyclone metaphor.

The name of Dorothy’s canine companion, Toto, is also a pun, a play on teetotaler. Prohibitionists were among the Populists’ most faithful allies, and the Populist hope William Jennings Bryan was himself a “dry.” As Dorothy embarks on the Yellow Brick Road, Toto trots “soberly” behind her, just as the Prohibitionists soberly followed the Populists.

When Dorothy’s twister-tossed house comes to rest in Oz, it lands squarely on the wicked Witch of the East, killing her instantly. The startled girl emerges from the abode to find herself in a strange land of remarkable beauty, whose inhabitants, the diminutive Munchkins, rejoice at the death of the Witch. The Witch represents eastern financial-industrial interests and their gold-standard political allies, the main targets of Populist venom. Midwestern farmers often blamed their woes on the nefarious practices of Wall Street bankers and the captains of industry, whom they believed were engaged in a conspiracy to “enslave” the “little people,” just as the Witch of the East had enslaved the Munchkins. Populists viewed establishment politicians, including presidents, as helpless pawns or willing accomplices. Had not President Cleveland bowed to eastern bankers by repealing the Silver Purchase Act in 1893, thus further restricting much-needed credit? Had not McKinley (prompted by the wealthy industrialist Mark Hanna) made the gold standard the centerpiece of his campaign against Bryan and free silver?"
Now an excerpt from Tucker:
"Gold is always a fascinating story: The Wonderful Wizard of Oz was first published in 1900 and this children's tale has been interpreted as an allegory for political and economic events of the 1890s. For example, the Yellow Brick Road represents the gold standard, Oz in the title is an abbreviation for ounce, Dorothy is the naive public, Emerald City symbolizes Washington, D.C., the Tin Woodman represents the industrial worker, the Scarecrow is the farmer, and the Cyclone is a metaphor for a political revolution. In the end, Dorothy discovers magical powers in her silver shoes (changed to ruby in the 1939 film) to find her way home and not the fallacy of the Yellow Brick Road. Although the author of the story, L. Frank Baum, never stated it was his intention, it can be argued that the issue of the story concerns the election of 1896. Democratic presidential nominee William Jennings Bryan (the Cowardly Lion) supported fixing the value of the dollar to both gold and silver (bimetallism), but Republican William McKinley (the Wicked Witch) advocated using only the gold standard. Since McKinley won, the United States remained on the Yellow Brick Road."
But not everyone agrees with this. Economist Bradley Hansen wrote an article titled The Fable of the Allegory: The Wizard of Oz in Economics in the Journal of Economic Education in 2002. Here is his conclusion:
"Rockoff noted that the empirical evidence that Baum wrote The Wonderful Wizard of Oz as an allegory was slim, but he compared an allegorical interpretation to a model and suggested that “economists should not have any difficulty accepting, at least provisionally, an elegant but controversial model” (Rockoff 1990, 757). He was right—we did not have any difficulty accepting it. Despite Rockoff’s warning, we appear to have accepted the story wholeheartedly rather than provisionally, simply because of its elegance. It is as difficult to prove that The Wonderful Wizard of Oz was not a monetary allegory as it is to prove that it was. In the end, we will never know for certain what Baum was thinking when he wrote the book. I suggest that the vast majority of the evidence weighs heavily against the allegorical interpretation. It should be remembered that no record exists that Baum ever acknowledged any political meanings in the story and that no one even suggested such an interpretation until the 1960s. There certainly does not seem to be sufficient evidence to overwhelm Baum’s explicit statement in the introduction of The Wonderful Wizard of Oz that his sole purpose was to entertain children and not to impress upon them some moral. The Wonderful Wizard of Oz is a great story. Telling students that the Populist movement was like The Wonderful Wizard of Oz does seem to catch their attention. It may be a useful pedagogical tool to illuminate the debate on bimetallism, but we should stop telling our students that it was written for that purpose."
I found a review of the book in the NY Times from 1900 and it does not mention anything about OZ having political or economic meaning. The book was also made into a musical a few years later and none of the reviews of the musical mention any political or economic meaning.

Thursday, April 06, 2017

How Odysseus Started The Industrial Revolution

Factory work may have been a commitment device to get everyone to work hard. Odysseus tying himself to the mast was also a commitment device. Dean Karlan, Yale economics professor explains how commitment devices work:

"This idea of forcing one’s own future behavior dates back in our culture at least to Odysseus, who had his crew tie him to the ship’s mast so he wouldn’t be tempted by the sirens; and Cortes, who burned his ships to show his army that there would be no going back.

Economists call this method of pushing your future self into some behavior a “commitment device.” [Related: a Freakonomics podcast on the topic is called "Save Me From Myself."] From my WSJ op-ed:
Most of us don’t have crews and soldiers at our disposal, but many people still find ways to influence their future selves. Some compulsive shoppers will freeze their credit cards in blocks of ice to make sure they can’t get at them too readily when tempted. Some who are particularly prone to the siren song of their pillows in the morning place their alarm clock far from their bed, on the other side of the room, forcing their future self out of bed to shut it off. When MIT graduate student Guri Nanda developed an alarm clock, Clocky, that rolls off a night stand and hides when it goes off, the market beat a path to her door."
 See What Can We Learn From Congress and African Farmers About Losing Weight?

Something like this came up recently in the New York Times, in reference to factory work and the Industrial Revolution. See Looking at Productivity as a State of Mind. From the NY Times, 9-27. By SENDHIL MULLAINATHAN, a professor of economics at Harvard. Excerpts:
"Greg Clark, a professor of economics at the University of California, Davis, has gone so far as to argue that the Industrial Revolution was in part a self-control revolution. Many economists, beginning with Adam Smith, have argued that factories — an important innovation of the Industrial Revolution — blossomed because they allowed workers to specialize and be more productive.

Professor Clark argues that work rules truly differentiated the factory. People working at home could start and finish when they wanted, a very appealing sort of flexibility, but it had a major drawback, he said. People ended up doing less work that way.

Factories imposed discipline. They enforced strict work hours. There were rules for when you could go home and for when you had to show up at the beginning of your shift. If you arrived late you could be locked out for the day. For workers being paid piece rates, this certainly got them up and at work on time. You can even see something similar with the assembly line. Those operations dictate a certain pace of work. Like a running partner, an assembly line enforces a certain speed.

As Professor Clark provocatively puts it: “Workers effectively hired capitalists to make them work harder. They lacked the self-control to achieve higher earnings on their own.”

The data entry workers in our study, centuries later, might have agreed with that statement. In fact, 73 percent of them did agree to this statement: “It would be good if there were rules against being absent because it would help me come to work more often.”"
The workers, like Odyssues, tied themselves to the mast to resist the temptation of slacking. This made it possible for factories to generate the large output of the Industrial Revolution.

Wednesday, March 29, 2017

Joseph Schumpeter And Me

Jeffery S. McMullen of Indiana University just published an article in the academic journal "Business Horizons." It is titled

"Are we confounding heroism and individualism? Entrepreneurs may not be lone rangers, but they are heroic nonetheless."

I have some information below on how to access this article.

McMullen cites a paper I wrote in the 1990s and mentions my name in the same sentence as Joseph Schumpeter, an important economist from the 20th century.

Click here to read a short bio of him

A few years ago I wrote a post called "My Favorite Economist Is Joseph Schumpeter."  Here it is

""Why is this blog called The Dangerous Economist? Back in the early 1990s, I wrote a paper called "The Creative-Destroyers: Are Entrepreneurs Mythological Heroes?" It compares the entrepreneur in capitalism to the hero in mythology. I was never able to get it published in an academic journal. One referee even said the idea was dangerous. I doubt much harm would have befallen the U.S. economy had this paper been published. It is now online at

Creative Destroyers

A shorter version is at

Shorter Version

If you clicked on the link about why I chose this name for my blog and then these articles and read them you would have discovered some of the things that I list below and they would have pointed you to Schumpeter.

The process whereby innovations occur was called "Creative Destruction" by Schumpeter in his book Capitalism, Socialism, and Democracy. "Creative Destruction" was

"The opening of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U. S. Steel illustrate the same process of industrial mutation if I may use that biological term-that incessantly revolutionizes the economic structure from with in, incessantly destroying the old one, incessantly creating the new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in" (p. 83).

In his book The Hero with a Thousand Faces, Joseph Campbell described the action of the hero with

"The standard path of the mythological adventure of the hero is a magnification of the formula represented in the rites of passage: separation-initiation-return: which might be named the nuclear unit of the monomyth. A hero ventures forth from the world of common day into a region of supernatural wonder: fabulous forces are there encountered and a decisive victory is won: the hero comes back from this mysterious adventure with the power to bestow boons on his fellow man. "(p. 30)

Campbell (1968) also has a section called "The Cosmogonic Cycle" which "unrolls the great vision of the creation and destruction of the world which is vouchsafed as revelation to the successful hero" (p. 38). The connection to Schumpeter's theory of creative destruction is clear. A successful entrepreneur simultaneously destroys and creates a new world, or at least a new way of life. Henry Ford, for example, destroyed the horse and buggy age while creating the age of the automobile. But even more to the point is the fact that the hero finds that the world "suffers from a symbolical deficiency" (p. 37) and that "the hero appears on the scene in various forms according to the changing needs of the race" (p. 38). The changing needs and the deficiency may directly correspond to the changing market conditions or the changing desires for products. The entrepreneur IS the first person to perceive the need or opportunity for market profits.

Joseph Campbell's book inspired George Lucas to make the Star Wars movies."

Now here is the info on how to access the McMullen article.

The first link below is just some general info about the article. But the article itself is not readable online (unless you want to pay $35). If you go to the second link at ResearchGate, you can see his article listed. If you sign up for the service (it is free) you can request that the author send you a copy (that is how I got mine).

General info about the McMullen article

The second link at ResearchGate to request the article

Friday, March 24, 2017

How Long Have Economists Known About The Shortcomings Of GDP?

I occasionally hear about people who say we need a better measure of our economic welfare than GDP. But economists are not blind to its shortcomings. The textbook I use for my macro class includes a discussion of these issues. For example, GDP does not take into account how the quality of goods changes over time or how much leisure time we have and how that has changed over time.

There is also production that takes place outside of the market place. Economists have been aware of this since GDP was first created.

See What's the Value of US Household Production? by Timothy Taylor, Managing editor of the Journal of Economic Perspectives. He presents some comments made by economist Simon Kuznets in 1934. Kuznets was the author of the 1934 report to Congress "National Income, 1929-1932." He also won a Nobel Prize in Economics in 1971.

Here is one part of that report, from Mr Taylor's post:

"Kuznets wrote in 1934:
"The volume of services rendered by housewives and other members of the  household toward the satisfaction of wants must be imposing indeed,  when totaled for the 30 million families comprising the population of  this country; and the item is thus large enough to affect materially any estimate of national income. But the organization of these services  render them an integral part of family life at large, rather than of the specifically business life of the nation. Such services are, therefore, quite removed from those which gainfully occupied groups undertake to perform in return for wages, salaries, or profits. It was considered  best to omit this large group of services from national income, especially  since no reliable basis is available for estimating their value. This  omission, unavoidable though it is, lowers the value of national income  measurements as indexes of the nation's productivity in conditions  of recent years when the contraction of the market economy was accompanied by an expansion of activity within the family. ... Thus, the estimates submitted in the present study define income in such a way as to cover primarily only  efforts whose results appear on the market place of our economy.  A student of social affairs who is interested in the total productivity  of the nation, including those efforts which, like housewives' services,  do not appear on the market, can therefore use our measures only with some qualifications.""
Taylor also mentions "The value of household services was equal to about 37% of GDP in 1965, but is currently equal to about 23% of GDP."

Click here to learn more about Kuznets' contributions to economics

Friday, March 10, 2017

The percentage of 25-54 year-olds employed increased in February

One weakness of the unemployment rate is that if people drop out of the labor force they cannot be counted as an unemployed person and the unemployment rate goes down. They are no longer actively seeking work and it might be because they are discouraged workers. The lower unemployment rate can be misleading in this case. People dropping out of the labor force might indicate a weak labor market.

We could look at the employment to population ratio instead, since that includes those not in the labor force. But that includes everyone over 16 and that means that senior citizens are in the group but many of them have retired. The more that retire, the lower this ratio would be and that might be misleading. It would not necessarily mean the labor market is weak.

But we have this ratio for people age 25-54 (which also eliminates college age people who might not be looking for work)

The percentage of 25-54 year-olds employed is 78.3% for February. It was 78.2% in January. It is still below the 79.7% in December 2007 when the recession started.  Click here to see the BLS data. The unemployment rate was 4.7% in February. Click here to go to that data.

Here is the timeline graph of the percentage of 25-54 year-olds employed since 2007. Notice how we had been rising before 2016 but it seems to be flattening out.

Here it is going all the way back to 1948

Thursday, March 02, 2017

What Industries Have The Highest Profit Rates?

See The Most Profitable Industries in 2016 by Mary Ellen Biery of Forbes. A student asked about profit rates in class recently since this comes up when we cover market structures. For example, we expect firms in perfect competition to earn an average profit rate or rate of return because, if they are above average, more firms enter, driving prices and the profit rate back down. When there is not enough competition, firms can stay above average. Excerpts:

"Which U.S. industries are the most lucrative? The answer depends on how it’s measured, but based on pre-tax net profit margin, the top money-makers include specialty service providers in accounting, law, health care and real estate, according to the latest ranking from Sageworks, a financial information company.

Accounting-related companies (accounting, tax preparation, bookkeeping and payroll service companies) are the most profitable, with net profit amounting to 18.3 percent of sales, on average, based on a financial-statement analysis for privately held companies for the 12 months ended June 30.  Legal services firms and real-estate leasing companies are tied for second and third in profitability, with average net profit margins of 17.4 percent. These industries often make the cut for Sageworks’ annual ranking.
Sageworks Most Profitable Industries 2016

“Some businesses tend to have healthier bottom lines by the very nature of the industries that they operate in,” said Sageworks analyst James Noe. Many of the most profitable industries sell services rather than products, he noted, so their operations don’t require raw materials or other up-front costs that would wind up in the middle of their income statements and eat into the bottom line. “They don’t sell or produce finished goods,” he said. “They don’t make the tractors to sell to farmers or they don’t buy groceries to sell to consumers. In other words, you don’t need plastic to provide an audit for a company; it’s just mostly human capital that’s being utilized, and that lends to a high margin generally.”

Among privately held companies across all industries, the average net profit margin for the 12 months ended June 30 was 7.7 percent. Through its cooperative data model, Sageworks collects and aggregates private-company financial statements from accounting firms, banks and credit unions. Net profit margin has been adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries. These adjustments are commonly made to private-company financials in order to provide a more accurate picture of the companies’ operational performance."

Here is the 2015 list

Here is another good link on profit rates