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Newsletter: Tame Inflation, Surging Coronavirus, German Stagnation

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This is the web version of the WSJ’s newsletter on the economy. You can sign up for daily delivery here.

The Price Is Right

U.S. inflation remains subdued. A key gauge of consumer prices—which excludes volatile food and energy components—climbed 2.3% from a year earlier in January, led by rising costs for housing and medical services. Will inflation remain tame? Ian Shepherdson, chief economist at Pantheon Macroeconomics, said housing and medical care would likely put upward pressure on core prices in the coming months: Those categories “have to be watched very closely. They are much more important than the prices of TVs and T-shirts.” Still, the larger inflation picture remained muted and officials at the Federal Reserve appear more concerned about soft than strong price gains, Amara Omeokwe reports.

Happy Valentine’s Day! Housing and medical aren’t the only sectors with some inflation pressure—and you might notice if you head out for a romantic dinner tonight. Restaurant prices climbed 3.1% in January from a year earlier, matching the fastest annual increase since 2009. That outpaced a 0.7% increase for dining at home and a 2.5% advance in overall prices for the same period. Food-industry analysts and restaurant executives cite the tight labor market as one key factor behind the run-up in restaurant prices. To attract scarce talent, restaurants are raising wages and then prices to compensate for it, Sarah Chaney and Heather Haddon report.

WHAT TO WATCH TODAY

U.S. retail sales for January are expected to rise by 0.3% from the prior month. (8:30 a.m. ET)

U.S. import prices for January are expected to fall 0.2% from the prior month. (8:30 a.m. ET)

U.S. industrial production for January is expected to fall 0.3% from the prior month. (9:15 a.m. ET)

U.S. business inventories for December are expected to rise 0.1% from the prior month. (10 a.m. ET)

The University of Michigan preliminary consumer sentiment index for February is expected to tick down to 99.5 from 99.8 at the end of January. (10 a.m. ET)

Cleveland Fed President Loretta Mester speaks in Sarasota, Fla., at 11:45 a.m. ET.

The Baker Hughes rig count is out at 1 p.m. ET.

TOP STORIES

Coronavirus Watch

New cases of the coronavirus rose sharply after Chinese authorities changed the criteria for diagnosing the illness, raising questions about how soon the outbreak will peak. Epidemiologists, government officials and investors might now need to recalibrate their projections for the trajectory of a virus that remains little understood, Wenxin Fan, Natasha Khan and Chao Deng report.

China has pumped billions of dollars into its financial system, raised expectations of an interest-rate cut and pledged to cut red tape in a bevy of emergency responses to the economic hit of its coronavirus outbreak. But there is nothing typical about China’s coronavirus challenge, which economists say defies traditional prescriptions for dealing with an economic shock. The problem, experts say, is that regardless of consumer and corporate demand, a shortage of supply renders traditional stimulus measures powerless to address the problems weighing on the $14 trillion economy, James T. Areddy reports.

Moody’s Analytics: “The coronavirus has prompted us to revise down our baseline forecast for China. We now look for China’s GDP to have fallen 0.2% at an annualized rate in the first quarter, the first drop since the late 1980s. We expect that growth will bounce back in subsequent quarters as some of the lost output is recouped. Still, we have cut the forecast for GDP growth for 2020 and now look for it to rise 5.4%, compared with the 6.1% in the January baseline. Risks are still weighted to the downside.”

Flirting with Recession

Germany’s economy isn’t looking so hot. The federal statistics agency Destatis said gross domestic product in the fourth quarter of 2019 was unchanged from the previous quarter, weighed down by a struggling manufacturing sector. “The economy began this year with even less momentum than most had expected. We think the economy will continue to flirt with recession in the first half of this year,” said Capital Economics economist Andrew Kenningham.

Germany’s sluggish performance is dragging down the eurozone. The currency bloc’s fourth-quarter GDP advanced a mere 0.1% from the prior quarter, according to revised figures out Friday. That left full-year eurozone growth the worst since 2013. “We expect the same pace of growth in Q1 as disruptions due to the coronavirus derail the nascent industrial recovery,” economists at Oxford Economics said.

Trade Truce?

Huawei Technologies and two of its U.S. subsidiaries were charged with racketeering conspiracy and conspiracy to steal trade secrets in a federal indictment unsealed Thursday, opening another front in the Trump administration’s battle against the Chinese telecommunications firm. The new charges amp up pressure on Huawei, where Trump administration officials are fighting to persuade allies to lock the telecommunications giant out of their next generation mobile networks because of national security concerns, Corinne Ramey and Kate O’Keeffe report.

More fodder for trade fights: A new study from the White House said foreign governments are taking unfair advantage of American drug company research and U.S. consumers by artificially suppressing drug prices abroad. The findings suggest drug pricing could become another source of friction between the U.S. and trading partners, similar to China’s appropriation of U.S. intellectual property and European “digital taxes” on big American technology companies, Greg Ip reports.

Nutty

Republican senators dealt a significant setback to one of President Trump’s nominees to the Federal Reserve Board when they raised concerns over her writings and public statements at a confirmation hearing Thursday. Lawmakers of both parties on the Senate Banking Committee said they were uncomfortable with at least some of Judy Shelton’s policy preferences. The former adviser to Mr. Trump’s presidential campaign has advocated for the Fed to reduce U.S. interest rates in response to rate cuts by other central banks and to prevent the U.S. dollar from strengthening, and has endorsed a return to the gold standard, Nick Timiraos and Sarah Chaney report.

“Nobody wants anybody on the Federal Reserve that has a fatal attraction to nutty ideas,” said Sen. John Kennedy (R., La.). “Now I’m not saying that’s the case here, but that was sort of the dialectic going on.”

TWEET OF THE DAY

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Economy

Book of the Week 7: To Engineer Is Human by Henry Petroski

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Henry Petroski is a fascinatingly eclectic writer – a nerd with the soul of a poet. I relied upon his book The Pencil: A History in writing the opening chapter of the forthcoming The Next Fifty Things That Made The Modern Economy (coming in May), and turned to Success Through Failure while writing Adapt.

I was delighted to receive To Engineer Is Human as a Christmas present – one of those rare surprise presents that actually works out… It’s a wide-ranging collection of essays and musings. Topics range from the experience of being a toddler in a world of adults, through the distinctive pattern of fatigue in a “Speak & Spell”, to the catastrophic collapse of walkways in the lobby of a Kansas City hotel in 1981.

One provocative idea in Petroski’s work is the idea that engineers learn through trial and error more than one might expect. Yes, there are the laws of physics and in principle one can calculate the load-bearing strength of any structure – but in practice, when we try to do something new we will sometimes run into the unexpected.

Not every essay hits the mark – I didn’t feel moved or improved by the analysis of the Oliver Wendell Holmes poem “The Deacon’s Masterpiece” – but like a collection of poems or short stories, if you don’t enjoy one you can skip to the next. Overall I felt I was learning things from Petroski that I wouldn’t learn from anybody else.

Some overlap with the more recent book Success Through Failure, but lots to intrigue.

US: Powell’s / Amazon   UK: Blackwells / Amazon

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Economy

Playing Scrooge in “The Best Economy Ever”

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@TBPInvictus here:

On Presidents Day, it is noteworthy that the current President feels compelled to cap the salaries of those employees who work for the government, who perform duties in the national interest, and  operate essential services for the benefit of the nation.

Salary increases limited to 1% annually. That ought to teach the Deep State!

Read Trump’s February 11 tweet below and try to reconcile it with the Feb 10 excerpt from a White House transmittal to Congress the day before.

Trump tells us — constantly and incessantly — that he has created the “best economy in history.” Let’s ignore the fact that he inherited  a robust GFC recovery from Obama, and then temporarily goosed it with an unfunded trillion dollar tax cut that never got us over 3% GDP on a sustainable basis, and which has since worn off, leaving us at a 2% or so GDP.

While we’re all enjoying the greatest economy ever, could he possibly – unilaterally, no less – cut the proposed pay increases (to 1.0%) for the nation’s Federal employees?

I don’t profess to have any other answer than that the man is a stone-cold hypocrite and liar. I’m open to other possibilities.

The previous day, February 10, 2020 (emphasis mine):

I am transmitting an alternative plan for pay adjustments for civilian Federal employees covered by the General Schedule and certain other pay systems in January 2021.

Title 5, United States Code, authorizes me to implement alternative plans for pay adjustments for civilian Federal employees covered by the General Schedule and certain other pay systems if, because of “national emergency or serious economic conditions affecting the general welfare,” I view the increases that would otherwise take effect as inappropriate.

[…]

We must maintain efforts to put our Nation on a fiscally sustainable course; Federal agency budgets cannot sustain such increases. Accordingly, I have determined that it is appropriate to exercise my authority to set alternative pay adjustments for 2021 pursuant to 5 U.S.C. 5303(b) and 5 U.S.C. 5304a.

Specifically, I have determined that for 2021 the across-the-board base pay increase will be limited to 1.0 percent and locality pay percentages will remain at their 2020 levels. This alternative pay plan decision will not materially affect our ability to attract and retain a well‑qualified Federal workforce.

This is rank hypocrisy. I don’t know who else is flagging this, but:

 

Greatest. Economy. Ever.

The post Playing Scrooge in “The Best Economy Ever” appeared first on The Big Picture.



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Arguments for Compulsory Vaccination

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The Connecticut legislature wants to abolish the last non-medical exception for the compulsory vaccination of children, following in the steps of five other state governments (“Connecticut Lawmakers Brace for Public Hearings on Vaccination Bills,” Wall Street Journal, February 15, 2010). Two serious economic arguments can be made in favor of this measure. (It wouldn’t protect against the coronavirus, for which there is yet no vaccine, but this epidemic is certainly a motivation or an excuse for strengthening compulsory vaccination.)

The first argument is a public good argument, which can be summarized as follows. Everybody potentially benefits from other individuals being vaccinated, the main beneficiary being those whose age or state of health precludes vaccination. Immunization through vaccination is thus a public good, to the production of which everybody must contribute. A large part of this contribution consists in having oneself vaccinated. In order to prevent potential free riders from skirting vaccination while benefiting from that of others—benefiting from the so-called “herd immunity”—compulsory vaccination is justified. Richard Epstein’s article “Let the Shoemaker Stick to His Last” (Perspectives in Biology and Medicine 46:3, 2003) can be interpreted this way.

The second argument for “compulsory” vaccination relates to the fact that, nowadays, it is, thus far, advocated only for children as a condition for admission in public schools (or perhaps private schools too). A child, the argument goes, is, by definition, too young to know where his own interest lies, especially in probabilistic choices such as between the risk and consequences of catching the disease on one side, and the inconvenience and risk of vaccination on the other side. The child’s parents must make the choice. However, as was famously said in a slightly different context:

A priori, parents would ideally always be willing and able to protect children from tobacco themselves. If this happened, there would be little need for governments to duplicate such efforts. Perfect parents, however, are rare.

This statement is due to Prabhat Jha et al., “The Economic Rationale for Intervention in the Tobacco Market,” in Prabhat Jha and Frank J. Chaloupka, Eds., Tobacco Control in Developing Countries (World Bank and Oxford University Press, 2000), p. 164. Note that the title of the book is a misnomer, for it is concerned as much with rich countries as developing ones.

The validity the two arguments for compulsory vaccination, even for children, is not obvious.

The first argument is analogous to the one that Thomas Hobbes, in his 1651 book Leviathan, made for the state in general. Since the security provided by the state is in everybody’s interest—since it is, in today’s terms, a public good—it is also in everybody’s interest not only that everybody contribute to financing the state, but also that the state be the only judge of everybody’s contribution. Otherwise, free riders will ride. Or so claimed Hobbes.

One problem with the Hobbesian argument, as well as with the public-health argument for compulsory vaccination, is that it justifies absolute power. Although Hobbes took the argument very seriously, some would dismiss the fear of tyranny as a slippery-slope argument. As if slippery slopes did not exist. Consider how, in the early 20th century, compulsory vaccination was used to legalize forced sterilization. The famous 1927 Supreme Court decision in Buck v. Bell (274 U.S. 200) said it clearly:

The principle that sustains compulsory vaccination is broad enough to cover cutting the Fallopian tubes.

It was not an abstract matter. The decision legalized previous and future forced sterilizations against individuals deemed to be “imbecile,” “feebleminded,” “defective,” or “socially inadequate.” It is estimated that more than 65,000 Americans were forcibly sterilized up to the 1980s. The last sterilization statute, in Mississippi, was only repealed in 2008. (On this topic, see Paul A. Lombardo, Three Generations, No Imbeciles: Eugenics, the Supreme Court, and Buck v. Bell [John Hopkins University Press,2008].)

Another problem with the public-good argument is that, technically, it only applies to goods or services unanimously desired. If basic security against aggression can be assumed to be a public good, the assumption becomes less valid as it is extended to other goods or services. Indeed, from what we can observe in the anti-vaxxer movements, many people do not want vaccination because they think that its cost is higher than its benefits for them or their children. From the point of view of a philosopher-king, this may be true or not, but it is not correct to think that there is no “objective” risk. For example, philosopher Mark Navin (who believes that compulsory vaccination is morally justified) cites the Centers for Disease Control and Prevention according to whom the DTaP vaccine (against diphtheria, tetanus, and whooping cough) causes long-term seizures or brain damage in “only” one out 1,000,000 children (Values and Vaccine Refusal: Hard Questions in Ethics [Routledge, 2016]).

Furthermore, there is a good economic argument against government pretending to determine the “optimal” vaccination coverage. University of Chicago economist Tomas Philipson brilliantly argued that the fewer the number of people who get vaccinated, the higher the risk factor for the unvaccinated, and the higher the latter’s incentives to get vaccinated (or to use other prevention measures). (See notably his “Economic Epidemiology and Infectious Diseases,” in A.J. Culyer and J.P. Newhouse, Eds., Handbook of Health Economics, Vol. 1 [Elsevier Science B.V., 2000].)

As for the argument that imperfect parents cannot be trusted to make decisions in the best interest of their children, the basic counterargument is quite simple: have you seen many perfect politicians and perfect bureaucrats? Despite a few extreme and troubling cases, parents have been genetically hard-wired to look out for their children’s interests. There is no such hard-wiring for the state.

To be clear—and to this extent that this may seem relevant—I am not arguing that the anti-vaxxers are right. In fact, I don’t agree with their evaluation of costs, but I don’t claim that their children belong to me either.

In this short post, I have only scratched the surface of the issue. It may get especially pressing if an epidemic scare grips the public. It will be interesting to see if populists affirm the primacy of individual choices or, at least, the presumption of individual liberty or, instead, just follow a frightened and irrational mob.

(48 COMMENTS)



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