fin 30220: macroeconomic analysis
DESCRIPTION
FIN 30220: Macroeconomic Analysis. Using Economic Data. “There are three kinds of lies; Lies, Damn Lies, and Statistics” - Mark Twain. Principle #1: What are you trying to measure? How is your statistic defined ? Is your statistic consistent with what you are trying to measure?. - PowerPoint PPT PresentationTRANSCRIPT
![Page 1: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/1.jpg)
FIN 30220: Macroeconomic Analysis
Using Economic Data
![Page 2: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/2.jpg)
“There are three kinds of lies; Lies, Damn Lies, and Statistics”
- Mark Twain
![Page 3: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/3.jpg)
Principle #1: What are you trying to measure? How is your statistic defined ? Is your statistic consistent with what you are trying to measure?
Example: Poverty in the US
![Page 4: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/4.jpg)
Source: CIA Factbook
Lets see how we compare to other parts of the world…
But, How would you define poverty?
![Page 5: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/5.jpg)
Poverty was defined by Mollie Orshansky of the SSA in 1964 as 3 times the cost of the Dept. of Agriculture’s “Low cost food plan”
That number has been indexed by inflation every year (The Johnson Administration later substituted the “economy” food plan)
Family Size Threshold
One $11,670
Two $15,730
Three $19,790
Four $23,850
Five $27,910
Six $31,970
Seven $36,030
Eight $40,090
Nine $44,150
2014 POVERTY GUIDELINES
![Page 6: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/6.jpg)
USDA Food Plans: 1964
50$1014 1.05 $11,627
1014$3338$5250.6$ (Poverty Line in 1964)
(Approximate Poverty Line Today)
![Page 7: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/7.jpg)
Food Budget as a percentage of household income: 1964
0 20 40 60
Under $3,000
$4,000 - $4,999
$6,000 - $6,999
$8,000 - $9,999
$12,000 - $14,999
$20,000 - $24,999
Average
Lower Income Households spent around 33% on Food in 1964
![Page 8: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/8.jpg)
![Page 9: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/9.jpg)
Food Budget as a percentage of household income: 2003
In Fact, No Family Spends Anything Near 33% on Food Today!!!
16.5%
![Page 10: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/10.jpg)
Suppose we use current food prices and the current budget share
416,13$6236,2$236,2$5243$ (Poverty Line in 2014?)
Assuming Food is 16.5% of ones budget
![Page 11: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/11.jpg)
1014$3338$5250.6$
Actual Calculation
Redefined Household Budget (Current food prices)
416,13$6236,2$236,2$5243$
So, which is it and why should we care?
50$1014 1.05 $11,627
15% Difference
![Page 12: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/12.jpg)
A more important question: Is it “absolute” income that we really care about?
The Simpsons have a household income of $35,000. Median income is Springfield is $50,000
The Griffins have a household income of $45,000. Median income is Quahog is $85,000
Which of these two families do you think is happier?
![Page 13: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/13.jpg)
Relative poverty measures define poverty as a certain percentage of median household income
Poverty Line for 3.5 Person Household= $20,000 (40% of Median)
Median Household Income = $50,000
![Page 14: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/14.jpg)
Country
Absolute poverty rate(threshold set at 40% of U.S. median household income)
Relative poverty rate (40% of Median Income)
Pre-transfer
Post-transfer Pre-transfer Post-transfer
Sweden 23.7 5.8 14.8 4.8
Norway 9.2 1.7 12.4 4.0
Netherlands 22.1 7.3 18.5 11.5
Finland 11.9 3.7 12.4 3.1
Denmark 26.4 5.9 17.4 4.8
Germany 15.2 4.3 9.7 5.1
Switzerland 12.5 3.8 10.9 9.1
Canada 22.5 6.5 17.1 11.9
France 36.1 9.8 21.8 6.1
Belgium 26.8 6.0 19.5 4.1
Australia 23.3 11.9 16.2 9.2
United Kingdom
16.8 8.7 16.4 8.2
United States 21.0 11.7 21.0 11.7
Italy 30.7 14.3 19.7 9.1
Altering the definition of poverty can make a big difference when comparing across countries!!
It also makes a big difference when looking across time periods!
![Page 15: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/15.jpg)
The common international poverty line has in the past been roughly $1 a day. In 2008, the World Bank came out with a revised figure of $1.25.
Percentage of Population Living on Less that $1.25/day
*Source: United Nations
![Page 16: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/16.jpg)
1991 Recession 2001 Recession
Principle #2: How is your variable measured?
Example: U.S. Unemployment
2007 Recession
![Page 17: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/17.jpg)
Each month, the Department of Labor surveys 60,000 households. Each household is asked a series of questions:
1) “Are you currently working?” (Note: no mention of part time or full time)
YES You are employed (147 Million)
No
2) “Have you looked for a job in the past 30 days?”
YESYou are unemployed (9 Million)
No
You are not in the labor force (93 Million)
Unemployment Rate (UR)
= UnemployedLabor Force
=9
147+ 9= .057 (5.7%)
![Page 18: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/18.jpg)
Over the same month, the Department of Labor surveys 400,000 businesses and asks one question.
1) “How many employees are currently on your payroll?”
Total Non-Farm Payrolls(140 Million)
1) “Are you currently working?” (Note: no mention of part time or full time)
YESYou are employed (147 Million)
Wait a minute, that’s not what the household survey reported??? Which is it ???
![Page 19: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/19.jpg)
The two surveys track each other reasonably well, but there are noticeable differences.
![Page 20: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/20.jpg)
-1,500
-1,000
-500
0
500
1,000
1,500
1990 1992 1994 1996 1998 2000 2002 2004
Revisions to Total Payroll EmploymentPreliminary minus Current Estimate, thousands
J obs overestimated
J obs underestimated
Source: Bureau of Labor Statistics
However, the establishment survey is subject to fairly large revisions
![Page 21: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/21.jpg)
Pay Period Pay Period
Job at Company A
count = 1 payroll job count = 2 payroll jobs
Job at Company B
The Establishment Survey Will often times “Double Count” Jobs
Suppose you quit your job at company A and find a new job at company B – if this is done in the same payroll period (most payrolls are bi-weekly) you will be counted twice!!
In months with high job turnover, the establishment survey will overstate employment.
No Turnover Turnover
![Page 22: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/22.jpg)
7.71M jobs arelost per quarter
8.11M jobs are gained per quarter
Average US Labor Market Turnover
FYI: Worst-case estimates predict outsourcing costs us 55,000 jobs per quarter.
![Page 23: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/23.jpg)
Household Survey vs. Establishment Survey
The household survey includes agricultural workers, self employed workers and private household workers. The establishment survey does not.
The household survey counts people on unpaid leave as employed – the establishment survey does not.
The household survey only counts people over the age of 16 – the establishment survey is not limited by age.
![Page 24: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/24.jpg)
Main problems with measuring the unemployment rate The unemployment rate doesn’t count
underemployment (those that would like to work full time, but only work part time)
The “discouraged worker effect”: Those that have given up trying to find a job are counted as not in the labor force rather than unemployed
Selection bias: those that are unemployed are more likely to answer the survey.
Moral hazard: due to unemployment insurance, it is difficult to tell how hard individuals are trying to find work
![Page 25: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/25.jpg)
Example: The Top 10 All Time Grossing Films (in Millions – US)
1) Avatar (2009): $760
2) Titanic(1997): $658
3) Marvel’s the Avengers (2012): $588
4) The Dark Knight (2008): $533
5) Star Wars I: The Phantom Menace (1999) $474
6) Star Wars IV: A New Hope (1977): $460
7) The Dark Knight Rises (2012) $449
8) Shrek 2 (2011): $441
9) E.T. The Extra-Terrestrial (1982): $435
10) The Hunger Games: Catching Fire (2013): $424
Principle #3: Is your variable in terms of current prices or fixed prices (Real vs. Nominal)
![Page 26: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/26.jpg)
Real vs. Nominal Variables
Nominal Variables are in terms of a current dollars. For example, you’re starting salary after college might be $50,000 per year.
Real variables are in terms of some fixed commodity. Real variables measure purchasing power. If a gallon of gas costs $2.00, then we can calculate your “real” income.
Real Income = Nominal Income
Price = $50,000$2.00
= 25,000
![Page 27: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/27.jpg)
In 2009, a gallon of gas cost $3.50
Real Gross = Nominal Gross
Price = $749M$3.50 = 214M
Real Income = Nominal Gross
Price = $460M
$.62= 742M
In 1977, a gallon of gas cost $.62
(Gallons of Gas)
(Gallons of Gas)
![Page 28: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/28.jpg)
Usually, the “commodity” used for real variables is a particular year’s dollars. Suppose we want both grosses to reflect 1997 gas prices. (Gas was $1.26 in 1997)
Real X = Target year PriceCurrent Year Price
Nominal X
Real Gross
= $270M
$1.26$3.50$749M=
Real Gross
= $935M
$1.26$.62$460M=
( 1997 Dollars) ( 1997 Dollars)
Current Year
Target Year
These two dollar figures are comparable because they represent the same year’s dollars!
![Page 29: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/29.jpg)
The Top 10 All Time Grossing Films– Inflation Adjusted (Millions of 2000 Dollars)
1) Gone With the Wind (1939): $1,689
2) Star Wars Episode IV(1977): $960
3) The Sound of Music(1965): $768
4) ET: The Extraterrestrial(1982): $764
5) The Ten Commandments (1956): $706
6) Titanic (1997): $691
7) Jaws (1975): $690
8) Dr. Zhivago (1965): $669
9) The Exorcist (1973): $596
10) Snow White (1937): $587
Notes: Avatar falls to #14 ($516), a movie ticket in 1939 was $0.23
![Page 30: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/30.jpg)
Suppose that you buy a $1,000, 90 Day Treasury Bill for $994
90 Days from now, you receive $1,000 from the government
$1,000 - $994$994
X 100 = .6%
Alternatively, you could buy a $1,000, 5 year bond for $902
5 years from now, you receive $1,000 from the government
$1,000 - $902$902
X 100 =10.86%
Which of these two assets is paying a higher return?
Principle #4: Annualizing
Example: Treasury Yields
![Page 31: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/31.jpg)
$1 $1.006 $1.012 $1.018 $1.024
$1(1.006) $1(1.006) $1(1.006) $1(1.006)
Suppose that you could earn .6% interest every quarter (90 days). How much would you have in a year?
2 3 4
You earned 2.4% (Annualized)
$1 $?? $?? $?? $??
$1(1+i) $1(1+i) $1(1+i) $1(1+i)
For the 5 year bond, we do the same process in reverse (how much would you have to earn per year to get a 10.86% return after 5 years)?
2 3 4
$1.1086
$1(1+i)5
You earned 2.0% (Annualized) 02.11086.111086.11 5
15 ii
![Page 32: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/32.jpg)
GDP
Time
Principle #5: Economic data can be can be broken into 3 components:
Trend (many years)Business Cycle (1-5 years)Seasonal (Months)
Trend
Seasonal Cycle
Business Cycle
Recessions are periods of below trend growth
Expansions are periods of above trend growth
![Page 33: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/33.jpg)
Example: Tax Cuts, Tax Revenues and “VooDoo Economics”
Bracket Old Rate New Rate
$0 - $6,000 15% 10%
$6,000 - $27,250 15% 15%
$27,251 - $67,550 28% 25%
$67,551 - $141,600 31% 28%
$141,601 - $307,300 36% 33%
$307,301 + 39.6% 35%
The Bush Tax Cuts of 2001 & 2003 lowered marginal tax rates across the board, lowered the capital gains tax, eliminated the estate tax, and lowered the “marriage penalty
The tax cut was advertised as “the largest tax cut in history”
![Page 34: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/34.jpg)
Suppose that the Griffin family has a household income of $50,000. Currently, the income tax rate is 20% of all income earned
Under the current tax code, the Griffins pay $10,000 per year in Taxes.
If the government cuts the tax rate to 10%, then the Griffin’s tax bill falls to $5,000
The cost of the tax cut is the $5,000 in lost revenues
What do we mean by the “cost” of a tax cut, anyways?
By this measure, the Bush Tax cuts have a price tag of around $130 Billion per year!!
![Page 35: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/35.jpg)
Source: Congressional Budget Office
Let’s take a look at previous marginal tax rate changes to put the Bush tax cut in a historical context.
Wilson1917
Coolidge1925
FDR1933
Kennedy1964
Reagan1981
Bush2001/2003
![Page 36: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/36.jpg)
Tax Bill Cost in Dollars (Billions)
Kennedy Tax Cut (1964) $11.5
Reagan Tax Cut (1981) $38.3
Bush Tax Cut (2001) $73.8
Bush Tax Cut (2003) $60.8
Given an income distribution in 1964, 1981, and 2001/2003, we can estimate the per year “cost” of the three major tax cuts
What’s the problem with comparing these numbers?
![Page 37: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/37.jpg)
Kennedy1964
Reagan1981
Bush2001/2003
Cost (in 1964 dollars): $11.5BCPI: 30.9Real GDP: $2998.6B
Cost (in 1981 dollars): $38.3BCPI: 87.0Real GDP: $5,291.7B
Cost (in 2003 dollars): $134.6BCPI: 175.1Real GDP: $10,301B
175.130.9$11.5B
175.187.0$38.3B
175.1175.1$134.6B
= $67.6B
= $79.9B
=$134.65B
(2.25% of GDP)
(1.5% of GDP)
(1.3% of GDP)
When expressed in real terms as a percentage of GDP, the Bush tax cuts aren’t so big after all!
![Page 38: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/38.jpg)
Let’s return to the Griffin family. The Griffin family has a household income of $50,000. Currently, the income tax rate is 20%.
Under the current tax code, the Johnsons pay $10,000 per year in Taxes.
The drop in the tax rate caused revenues to increase rather than decrease!
Suppose that a drop in the marginal rate encourages Lois Griffin to go back to work. With the two income earners, the Griffin family income rises to $120,000. At the 10% rate, their tax rises to $12,000
Could this happen?
![Page 39: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/39.jpg)
Tax Rate
Tax Revenues
0% 100%Revenue Maximizing Rate
Tax Revenues = (Tax Rate) (Tax Base)
The basic logic behind the Laffer Curve is that the tax base should be negatively related to the tax rate.
Is there evidence of a Laffer curve in practice?
![Page 40: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/40.jpg)
Annual Federal Receipts (Billions)
Year 0 Year 1 Year 2 Year 3 Year 4
Kennedy (1964) $116.8 $130.8 $148.8 $153.0 $186.9
Reagan (1981) $617.7 $600.5 $666.5 $734.0 $769.2
Bush (2001) $1,853.4 $1,782.5 $1,880.2 $2,153.8 $2,402.7
Tax Rate
Tax Revenues
0% 100%Revenue Maximizing Rate
History suggests that taxes are two high, but be careful…
Source: Congressional Budget Office
![Page 41: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/41.jpg)
Date Revenues (Billions of Dollars)
% Change CPI Real Revenues (Billions of 2003 Dollars)
%Change
1964 116.8 --- 30.9 720.8 ---
1965 130.8 11.3 31.2 799.4 10.3
1966 148.8 24.2 31.8 892.3 21.3
1967 153 27.0 32.9 886.8 20.7
1968 186.9 47.0 34.1 1045.2 37.2
1981 617.7 --- 87.0 1353.9 ---
1982 600.5 -2.82 94.3 1214.3 -10.9
1983 666.5 7.6 97.8 1299.6 -4.10
1984 734 17.25 101.9 1373.6 1.4
1985 769.2 21.9 105.5 1390.4 2.6
2001 1853.4 --- 175.1 2018.5 ---
2002 1782.5 -3.90 177.1 1919.4 -5.0
2003 1880.2 1.44 181.7 1973.3 -2.3
2004 2153.8 15.0 185.2 2217.7 9.4
2005 2402.7 25.9 190.7 2402.7 17.4
Once we account for price changes, the Laffer curve effect starts to disappear
![Page 42: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/42.jpg)
After correcting for price changes, it appears that empirical evidence suggests the presence of a Laffer curve. However, we need to be careful.
![Page 43: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/43.jpg)
*Source: Congressional Budget Office
Kennedy1964
Reagan1981
Bush2001/2003
Recession
Expansion
Each of these tax cuts was passed during a recession!
![Page 44: FIN 30220: Macroeconomic Analysis](https://reader035.vdocument.in/reader035/viewer/2022062222/56815d1e550346895dcb1a41/html5/thumbnails/44.jpg)
The Laffer effect of a tax cut should affect the trend, but not the cycle…
GDP
Time
Old Tax Code
New Tax Code
This is what we have measured
This is what we should be measuring
In other words, we have overstated the Laffer effect in the previous slides