NPR reported recently that a “large scale Canada-U.S. cheese smuggling operation” has been busted. More than $200,000 worth of cheese and other products were purchased in the U.S. and distributed in Canada. Profits from the scheme were estimated at $165,000. The smuggling ring was composed of one current and one former police officer, along with one “civilian”.
So what gives? What makes cheese a profitably-smugglable commodity across the world’s longest non-militarized border?
Not surprisingly, it all comes down to economics. Canada has quotas – essentially price supports – for dairy products. The U.S. doesn’t.
When the Canadian dollar was low relative to the U.S. dollar, Canada used to ship truckloads of chees to the U.S. Now that the Canadian dollar is worth more than the U.S. dollar, there’s money to be made smuggling in cheese from the U.S.
The dairy price supports in Canada are designed to protect farmers there from fluctuating market conditions, much as corn, wheat, and other agricultural price supports in the U.S. are designed to help farmers here.
Dairy price in the U.S. also are reportedly lower because U.S. farmers get subsidies, and U.S. farms are large and thus benefit from economies of scale.
While better for Canadian farmers, Canadian consumers have to pay higher prices for cheese, milk, and pizza.
Economists love to hate price supports of any kind in otherwise efficient markets, because of the unintended consequences and market distortions they cause. You can add cheese smuggling to that list of unintended consequences.
Two internet headlines from yesterday:
“U.S. consumer spending jumps in August” (Wall Street Journal MarketWatch)
“Consumer Spending in U.S. Stagnates” (Bloomberg)
So what gives? Different data?
No. Same data. Both were based on the same report from the Bureau of Economic Analysis.
It took me a little time with the data to figure out the disparity. MarketWatch reports that “Spending rose by 0.5% in August — the fastest rate since February”. Meanwhile Bloomberg states that “Purchases rose 0.1 percent after adjusting for inflation”.
The key phrase here is “after adjusting for inflation”.
The MarketWatch report was talking about nominal spending. Without adjusting for price changes, consumer spending did increase 0.5% in August.
However, average prices increased 0.4%. So, after adjusting for inflation, real consumer spending increased by only 0.1%.
Which is right? MarketWatch or Bloomberg?
Well, technically both. But which is more relevant? I’d have to say the Bloomberg report. Real changes are (almost) always the most important and relevant factors for determining human behavior, unless it’s a situation where consumers aren’t aware of price differences.
Why MarketWatch chose to focus on the nominal, un-adjusted numbers is a mystery.
So bottom line, consumer spending barely budged in August. Not great news for the economy.
As previously posted, the Labor Department reported yesterday that the U.S. economy created 386,000 more jobs from April 2011 through March 2012 than previously reported. The revision was the result of the annual re-calibration of the department employment estimates.
Looking at the Bureau of Labor Statistics’ technical notes, this revision wasn’t all the large compared to other years. Here are the department’s annual adjustments since 2002.
When people complain about how much government has grown, their harshest criticism usually is reserved for the federal government. In reality, the number of federal government employees hasn’t grown quickly at all, compared with state and local.
Based on data from the Bureau of Labor Statistics, the number of federal government employees has grown at an average annual rate of only 0.4 percent since 1955, from 2.3 million employees to 2.8 million.
Local government, on the other hand, has grown at a rate of 2.4 percent per year, from 3.5 million employees in 1955 to 14.1 million in August 2012. State government growth averaged 2.6 percent per year, from 1.1 million to 5 million.
Of course, number of government employees isn’t the only way to measure government, and using other measures might yield different conclusions. But numbers of employees hardly suggests out-of-control growth of federal government.
The Department of Labor said today that it had understated total employment by about 386,000 jobs from April 2011 to March 2012. In other words, the economy created an average of 194,000 new jobs each month during this period rather than 162,000, an increase of 32,000 new jobs per month. The revisions were the result of the annual re-calibration that the government performs each year.
These jobs numbers are closely watched and form the basis of many business plans and forecasts. They can have a significant effect on business and consumer confidence, and thus can influence economic growth.
In the Labor Department’s defense, calculating and estimating these sorts of numbers is very complex and difficult. Even so, inaccuracy can lead to costly policy mistakes or even influence elections.
When George H. W. Bush (the elder) was up for re-election in 1992, the U.S. was in the midst of a recession. In June 1992, the Labor Department announced that it had undercounted the job losses by 600,000, or about 33 percent. Thus, the original numbers had made the 1990-1992 recession appear to be much less severe than it actually was. While the department denied that the undercounting was politically motivated, Democrats seized on the new figures, and the economy and severity of the recession was one of the factors that led Bill Clinton to win the Presidency that year.
There is no reason to believe that either the initial undercounting or the actual revisions were politically-motivated in this instance. Let’s just hope that this indication that the economy has been doing better than we thought will lead to more confidence – and thus more growth – in the future.
Consumer Confidence was up 9 points in September, increasing from 61.3 in August to 70.3, according to the Conference Board. This is a positive sign for the economy, indicating that consumers are feeling more optimistic about their current employment and financial situations, suggesting that they will be more likely to spend money in the future.
Consumers also were more optimistic about the near-term future, with more than 18 percent expecting things to improve over the next six months. Less than 14 percent expect business conditions to worsen during that period.
Here’s a graph of the Conference Board’s Consumer Confidence index from 2000 through September 2012. The index fell substantially from a peak of 111.9 in July 2007, down to 25.3 in February 2009. Since then it has gradually trended upward, except for a downward spike in 2011.
As reported in the Wall Street Journal’s blog, most of the economics surveyed believe that the government should maintain or increase spending in 2013. Nearly half of them believe that the government should spend even more. Only 33 percent of the 236 economists advocated less fiscal stimulus.
This is because the economists believe that the economy remains sluggish, unemployment remains high, and stimulus is needed to promote economic growth, despite the already-high government debt levels.
What’s particularly interesting is reading the comments. Readers of the Wall Street Journal, of course, are mostly business people. And business people, for the most part, do not want to hear that fiscal stimulus is still needed to help revive the economy. They take issue with various aspects of the economists surveyed, all but personally attacking them unseen. Never mind that the economists surveyed are experts in their fields, spending all their time poring over economic models and data. If the experts say something that readers don’t want to hear, the experts obviously must be wrong.