Category: Economic Performance

Deflation and Housing Costs

Today’s CPI release shows an eye-popping 4.7% year-over-year decline in the headline price index.  Most of the decline is due to a 42% year-over-year decline in mortgage interest (which has a weight of 6.7% in the index.)  Excluding mortgage interest, the rate of deflation is 1.2 percent. 

This brings up an issue which has been an old chestnut among economists of a certain disposition, namely the appropriate treatment of housing costs in a cost-of-living index. My opinion on this (drummed into me years ago while a junior lackey at the Fed) is that mortgage interest rates should not be used to measure the cost of housing and that housing costs are best proxied by matching housing units with equivalent rental properties.  This owners-equivalent rent is a major element of the US CPI.

The idea here is that the cost of living index should not depend on the particular financing method that people use to buy homes. If, for instance, we all inherited a large lump sum tomorrow and paid off our mortgages, then the mortgage interest element of the CPI would disappear (once re-based).  However, this would not mean that housing had no cost—the decision to pay off the mortgage is a financial one and the money could have been invested in other financial instruments.  (For similar reasons, I have also never agreed with people who argue that house prices should be included in cost of living indexes.)

In any case, it’s interesting to note that rents are also well down over the past year, declining 16.4% over the past year (see page 4 of this release).  So using this figure in place of the mortgage interest cost would still imply deflation of 2.2%.  (Of course, this is a crude calculation since the rental sample is different from the sample of owner-occupied homes and if you were doing all this correctly, you’d probably have different weights.)

One reason this issue matters is in relation to welfare benefits.  Those on welfare who don’t own their own home have not experienced a 4.7% decline in their cost of living and this is one reason to be careful in arguing, as many have, that the falling CPI has implied real benefit increases of whatever percent for recipients.

Fiscal Implications of the Global Crisis

The IMF has released a new staff position note which focuses on the fiscal implications of the global crisis.  It provides very useful comparative data on various dimensions of fiscal interventions, including the costs of banking sector policies.  You can download it here.

Perspective on the Labour Market

As readers will be well aware, the Irish unemployment has soared since the end of 2007. Most of the short-run commentary focuses on the monthly Live Register (LR) figures, which we know contain many landmines of interpretation.  The Quarterly National Household Survey (QNHS) data are based on more economically meaningful (ILO) definitions, but these too need to be handled with care. (For example, anyone working for pay or profit for one hour a week or more is classified as employed.)

The survey data allow us to look at the employment rate  – that is, the proportion of the adult population in employment – and this is probably more meaningful as a current economic indicator than the unemployment rate.  (The employment rate is the product of the labour force participation rate and (one minus) the unemployment rate.)

A look back at the employment rate over the past twelve years is interesting.  The male employment rate has fallen by five percentage points – from 70.5% to 65.5% – since the third quarter of 2007.   (N.B. These figures are not seasonally adjusted, but I do show the four-quarter moving average.) 

This brings it back to where it was in the late 1990s.  The female employment rate dropped by only two percentage points – from 52.7% to 50.7% – over the same period.  This leaves it where it was in 2006. The overall rate fell by three and a half percentage points, from 61.5% to 58.0%, so it is back to here it was in 2004. Female participation held up well in 2008, but male unemployment has risen, and participation fallen, faster. 

The continuing relatively high participation rates is one hopeful sign in an otherwise gloomy landscape. The forthcoming QNHS for the first quarter of 2009 will probably show further rises in unemployment and falls in participation, but perhaps later this year there will be signs of stabilisation.

Two depressions revisited

Barry Eichengreen and I have posted an update to our column comparing the current global economic crisis with the Great Depression. The data are through the end of March (apart from the discount rate data, which are through the end of April). Further updates will be posted as the industrial output and trade data are processed by the international organisations which we are using as our source.

At the global level, March saw green shoots in the stock market, but not in the real economy — although world trade stabilised, and there was a clear deceleration in the rate of decline of world industrial output.

We are also, for the first time, posting data on individual countries. These emphasise the gravity of the current crisis. They also show green shoots in some countries, particularly in Eastern Europe and Japan. Hopefully subsequent numbers will confirm these encouraging signs.

Is this the end of the beginning, or a lull between storms? Hopefully the former, but how can one be certain, especially given the various unexploded landmines littering the economic landscape, and the steady increase in unemployment around the world with its potential to create new holes in the financial sector? The Great Depression also saw increases in output which turned out to be temporary, largely due to the policy mistakes of central bankers and politicians trapped by a gold standard mentality. As my column with Barry pointed out, the policy response has been much better this time around, and may be bearing fruit. Once the recovery is clearly under way, governments will need to start balancing the books. But a premature tightening of fiscal policy would be disastrous, which is why Europe needs to avoid artificial fiscal straitjackets.

SMART or Smart Regulation?

The ‘smart regulation’ dimension of the ‘smart economy’ has not been much discussed. Conceived of properly and implemented well smart regulation offers a way for governments to better understand and harness the different ways of mixing instruments and actors to get regulatory tasks done. It invites all stakeholders to think outside the usual boxes and then frequently re-visit institutional choices to fine tune regimes where outcomes are inappropriate.

In the Government’s White Paper Building Ireland’s Smart Economy  ‘smart regulation’ was linked to broader public sector reform. The smart regulation measures were described in the following way:
‘Reduce the administrative burdens for citizens  and improve the quality of regulation  through tools such as e-government,  regulatory impact analysis and by enhancing the accessibility of the statute book.’

In essence this usage is consistent with that of the Canadian Government’s 2004 Smart Regulation programme which adopted a business usage of the acronym SMART – Specific, Measurable, Attainable, Realistic, Timely. The best examples of SMART regulation, in this sense, involve reviewing proposed and existing regulatory rules to ensure they are proportionate to the aims sought and targeting enforcement more effectively at higher risk areas of activity. These measures are the primacy focus of Better Regulation programmes adopted in Ireland and in most OECD member states.

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