Practice Good Theory

Some government bonds (called TIPS) compensate the lender for changes in the CPI. For instance, if you lend $100 to the government, and the CPI goes up by 3% when it is time to repay, you will be paid $103 (a falling CPI has the reverse effects, within certain ranges). If a TIPS bond has a yield of 2% and inflation is expected to be 1% a year, we would expect people to want at least 3% (2% + 1%) yield on a regular (non-TIPS) government bond. In other words, the difference between the yield on TIPS and the yield on regular government bonds is the "implied" rate of inflation (i.e., the rate assumed by a decision-maker who considers both types of bonds and is open to buying either). Of course, market actors are simply making their best guesses; in retrospect, the assumption may prove to be wrong. This chart shows the yields for (5-year constant maturity) TIPS (red ) and Treasuries (blue) . The next chart shows the spread between the two, which is the "implicit" annua...

This post is a bit of "extrapolation fun". What is the unemployment rate going to look like when the U.S. faces the next Presidential election in 2012? First, we have to answer another question. is this (largest and deepest post-war) recession qualitatively similar to other post 1940 recessions?... or, does this recession (and the Great Depression) have certain special characteristics that make them different? Ordinary recession, but huge scale: If it is just a question of scale, "dumb" extrapolation should give us a pretty good guess. Here's a chart I posted earlier , taken from from the excellent Calculated Risk blog , with my scribbles added. The blue rectangles to the right are the future. The red line shows the current recession. The time it took to (apparently) bottom has only been matched by the recent "dot.com"recession (the dark brown line ). It has taken about two years for unemployment to climb (downward in the chart) by 6%: i.e., from...

( Click here for the Slide-show version ) Here are two sample headlines: " Half a million more people employed " " Half a million more people unemployed " Can both are true? Yes, they can. Read on to understand how. To compute an unemployment rate, we ask: how many people want to work (how big is the "labor force"?) how many of them cannot find work (how many, of the labor force, are unemployed) This graph shows the total population of the US, broken down into four groups: first (between the top-most blue line and the red line), we have children (under 16 years) and people in the military or in prison, etc. next (between the red and green lines), we have civilian adults (16+) who do not want to work today. They could be going to school full-time, or retired, or stay at home parents, etc. finally, we're down to the "civilian workforce" (the green line) or civilians (16+) who want a job and are either employed or unemployed. Of these ,...

The NBER says the current recession ended over a year ago, in June 2009. This might seem odd: the economy does not appear that great, and voters say the economy is issue # 1, unemployment is high, house equity and sales are low, wages are stagnant, retail sales are flat, and credit is down. How can they say the recession ended? A current poll shows that people disagree with the economists: 70% of people polled say the recession has not ended. I've heard some angry commentary from people, accusing the NBER of being out-of-touch. However, the NBER's approach is fairly algorithmic. The apparent dichotomy flows from this: the typical economist's concept of a recession is different from the concept of many lay-people. Economists usually consider the rate of change and turning points to mark a recession, while non-economists tend to think in terms of the level at which the economy is running. Therein lies the mismatch. Consider this graph, showing a downturn. To an economi...

Many are rightly wary of "effortless-success" schemes, but it's also important to be wary of "high-effort success" schemes. Through experience, we often develop a heuristic that puts an extra sheen of value around high-effort schemes, even while we might reject them for their "cost". Now and then, remind yourself of the person who tries earnestly and hard, while another whizzes past. It ain't the effort alone but the process to which it is applied: a press of a finger can grind something that took my granny 5 minutes of hard labor with the mortar. Of course we know this intellectually; but I think we need to remind ourselves of it every now and then. Every now and then, one ought to ask: "is this not working because I'm not putting in the required effort, don't have the patience, cheat with some 'indulgence', etc. Or, am I just doing the wrong thing?" Alternatively: "How can I do this in a way that is a little more e...