Urban Economic Legends

I really like the “MythbustersThis is a third party link. Please review the third party content guidelines by clicking here for more details.  TV show, perhaps because the 13-year-old still lurking inside me loves seeing watermelons explode in the interest of science. Anyway, here are several of my favorite urban economic legends, some of which contain a grain of truth.

ANY CHARACTER HERE

The Social Security Annual COLA Excludes Food and Energy

Completely false! The annual COLA (cost-of-living adjustment) increases Social Security and other benefits checks by the amount of the rise in the All Items Consumer Price Index (CPI) since the last COLA. The latest adjustment was 3.6 percent starting with the January 2012 checks.

The folks at Social Security compute the percentage rise in the CPI since the last COLA was paid. There were no increases in 2009 and 2010 because the CPI did not rise!

How big will the next COLA be? The monthly Wall Street Journal Survey of prominent forecasters (including yours truly) sees the CPI rising 2.3 percent during the second half of this year. If correct, the next COLA will be about the same amount.

 

If You Exhaust Your Unemployment Benefits, You Are No Longer Counted as Unemployed

This was mentioned recently in connection with the unemployment rate decline in April that occurred against a backdrop of a shrinking labor force. For this to be true, someone has to stop looking. So, it isn’t automatically true.

The monthly survey of households that generates the familiar unemployment rate (8.1 percent in April) does not ask whether an individual is or was collecting unem­ployment compensation. As discussed in our last issue, it only inquires whether someone worked or looked for work.

However, the survey is likely affected by exhaustion of benefits. In order to keep collecting, a worker has to continue to regularly vouch that he or she is looking for work. It is a serious crime to lie. If included in the household survey sample, they would be counted as unemployed. After using up all their benefits, people may simply stop looking and not be counted as unemployed and, as a consequence, not in the work force.

However, if they continue looking, they’ll be counted as unemployed until they find a job or stop looking. Problem is that we have no way of measuring how big an impact the exhaustion of benefits has on the overall jobless rate.

 

Stealth Inflation: The Shrinking Sausage Saga

When the manufacturer reduces the weight of your favorite box of cookies or can of coffee, this is truly inflation. But most people think this is not captured by the Consumer Price Index (CPI). They are wrong!

I got really annoyed recently when stealth inflation hit close to home. While shopping, I chose what appeared to be a pound package of the store brand of Italian sau­sage. When I got home and started preparing my sausage and peppers grinder, I noticed that the label said it only contained 14 ounces. This really annoyed me because I felt it was outright deception. The sausage was nestled there among name brands that did indeed contain a true pound – for now, at least. And it had the same number of pieces as the pound packages except, of course, they were smaller.

However, when gathering data for the CPI, the Bureau of Labor Statistics calculates the cost-per-ounce or other appropriate unit of measurement. They use the example of the shrinking candy bar whose weight had gone from 1.5 ounces to a mere 1.0 ounce, but the price remained the same at 75 cents. Of course, our Washington watch­dogs would log this in as a 50 percent price hike! So rest assured, those sneaky supermarkets and food manufac­turers aren’t deceiving the vigilant statistical sleuths in Washington.

 

The Federal Reserve is Owned by the Private Banks

This is a difficult one, because private banks that are members of the Federal Reserve actually own stock in the Fed and they can influence the choice of directors and presidents for the 12 regional Federal Reserve Banks. (Before proceeding any further I should disclose that I was an economist at the Fed for several years.)

Most economists firmly believe that the member banks exert little or no influence over monetary policy, i.e., the setting of interest rates and related actions. The reason for this is that this decision-making power is highly concentrated in Washington at the Board of Governors. And the stock that the member banks hold has no voting rights. It cannot be sold or traded and by law pays a dividend of 6 percent.

Moreover, all Governors, including the Chairman, are appointed by the President subject to approval by the Senate. All Regional Fed Bank presidents must be approved by the Board of Governors, and 3 of the 9 mem­bers of the 12 regional boards of directors are appointed directly by the Board, including the chair and vice chair.

However, the question of bank regulation and oversight has been more problematic. Would bank examiners from, say, the Federal Reserve Bank of Lake Wobegon be as tough as they should be if the CEO of a private bank under scrutiny serves on the board? Hopefully, sensitivity to the concerns that arose during the 2008 financial crisis as well as new regulations will alleviate this possibility.