December 2004 Archives

I've been refraining from commenting on this until now. It's one of those stories that seems too outrageous to be true--unless, of course, you fly regularly. In that case, you will believe anything outrageous about air travel. It started with the alleged "sick-out" at U.S. Airways on the Christmas weekend. Lots of missing baggage handlers then resulted in a sea of luggage in Philly that has to this day not been dealt with. Next time I fly and the agent asks if I'll be checking my bags, my response will be, "You've got to be kidding." Oh wait, that's what I've always been thinking even if I haven't said it.

The alleged "sick-out" in itself would be a story, but there's more...

The company took the unusual step Tuesday of asking employees around the country whether they would be willing to travel to Philadelphia International Airport between now and Jan. 3 to work as unpaid volunteers supplementing the airport's regular staff.

The company stressed that employees already scheduled to work this weekend would be paid their regular rate, but said it hoped to find volunteers willing to donate time greeting passengers, answering questions, serving coffee, directing foot traffic through the terminals and lending a hand in baggage claim. [article here]

Ever seen the U.S. Airways check-in line at Philly? The only questions they'll get will be "How many hours before I get to the front?" But I digress.

The whole idea is wishful thinking. U.S. Airways has about 2 weeks left before someone starts painting "for sale" signs on their airplanes. (Got a few million dollars in spare change?) These employees are about to be ex-employees. And yet, management wants them to volunteer their New Year's holiday helping travelers. Since a lot of travelers are in a disagreeable mood at the airport to begin with, and since anyone with U.S. Airways on their ticket is going to be a little edgy right now anyway, this isn't something I'd volunteer for. (Besides, Iowa is playing football.) If management is that optimistic as to hope that any workers are going to volunteer for this duty, they might even believe that their planes will be flying on January 16th. (Only if they can work out a last minute deal.)

Basically, what you have here is a finite repeated game being played between workers and the company. The game will terminate when U.S. Airways flies off into the sunset. As that date approaches and becomes more certain, the employees would be expected to expend less effort, not more. Hence, the "sick-out." As an economist, I'm not really surprised by the fact that it happened. To those who say the workers shot themselves in the foot, I say only if you believe U.S. Airways was going to come out of bankrupcy. (That doesn't make it right--just understandable.)

Bottom line: I think you'll have to get your own coffee if you're flying in and out of Philly this weekend.

At the time of this post, they were just short of $7 million.

Alan at Ozblog on keeping up with the Joneses.

Looking forward to part 2.

From Cafe Hayek:

This time, it is none other than the New York Times displaying ignorance. Alas, the article is no longer freely available. Don Boudreaux does the honor of correcting the record.

It bears repeating again and again: a current-account deficit is not synonymous with debt. Nor are all dollars that foreigners do not spend on U.S. goods and services loaned to Americans. Many of these dollars are

- held as cash reserves

- used to purchase American real estate

- used to purchase shares in American corporations

- used to create, maintain, and expand foreign-owned firms located in the U.S.

Gotta love it. Faithful readers will recall that goofy reporting on the value of the dollar is one of my pet peeves. Goofy reporting on the trade deficit is right up there on my list, and usually related to the former.

Boudreaux does a really nice job of smashing the myth with his post.

It didn't take long for the broken window fallacy to surface in relation to the tsunami tragedy.

In part:

The regions hurt most by the tsunami did not have much in the way of heavy industry, and many people there lived off the land as farmers and fishermen.

Still, while the cleanup from the devastation will be a daunting task, the resulting economic activity might actually be a boon for the region, said Kathy Bostjancic, a senior economist at Merrill Lynch. With the expected outpouring of economic aid for rebuilding, the economies of the affected countries could actually rise. From the Daily Breeze.

Dingel states that Bostjancic might really mean that it is the injection of foreign aid that is the benefit. That is really giving the benefit of the doubt. We've seen these comments too many times before. I would add that if Bostjancic meant it is the foreign aid that is the "boon," then she should at least say so.

Still...

The injection of foreign aid will not bring about any long term growth to the poverty stricken regions affected by the tsunami. At best it will provide a short term demand stimulus, no supply stimulus whatsoever. Any positive effect on the national economies from the aid will likely be offset by the devastating loss in tourism dollars.

Expect more of this in the days to come. It's sad because some people who read things like that will actually believe it.

Amazon.com has a system to let you donate easily to the Red Cross to help the victims of the tsunami. Click here. As of this afternoon, they have already collected over $2 million.

This is great! Via Newmark's Door comes word that the Statistical Abstract is online.

I graduated from college in 1994, just over 10 years ago. The single best thing that has happened for academic economists since then is, in my humble opinion, the proliferation of free data online. I can get material for my classes in half an hour that would have taken an afternoon at the library, and perhaps an interlibrary loan request when I was in college. That's quantifiable progress.

It's been a few days. It took some doing to get the new site name to work, but we're now up and running. Time to pick up where we left off.

The FAA is thinking about allowing cell phone usage on airplanes.

Here's my take on the matter. The only people who would bother me by talking on their cell phone on an airplane are the people seated right next to me. You can't hear a conversation more than a couple rows away because of the noise of the jet engines. It's not going to be that much noisier with people talking on cell phones. One possible glitch with that, however, is that I've never actually heard people talking on cell phones while the engines are running. (Currently they can only be used on the ground when the engines are much quieter if they are running at all.) People trying to talk over the engine noise might have to shout. (Not good.) Someone should do an investigation of this before it goes any further.

For me, it's that total stranger sitting 6 inches from me who would be the trouble. (Think: 3 hours or more sitting in very close quarters with someone complaining about life/love/work/whatever on their cell phone.)

So here's my solution: When ordering your tickets, you should have the opportunity to make a pledge to not use your cell phone. Those making that pledge will only be seated next to others who make a similar pledge, to the extent possible (and if it's not possible, you should be informed before being charged for the ticket). We already have on-line seat selection. This should not be that hard to implement in that system. Those not willing to make the "cell-free" pledge would have no right to complain if they are disturbed. (Note that I don't think a "no-cell section" of the plane would really be necessary. Just try to keep cell users and pledged non-users from sitting next to each other.

And let's see if the market can figure it out. Maybe one smart company will implement my plan (thinking it will get more non-cell phone customers). Others might follow. I hope the government doesn't try to micromanage this.

Any thoughts on my idea? Any other unintended consequences?

I'm not opposed to cell phones on airplanes, but personally, I would like to be seated next to people who (like me) will promise not to use them in flight. Shouldn't be hard to figure out.

On a related matter, the FAA is looking at providing Internet access in the air. It's about time!

Heard on the radio news tonight in a story talking about the price of the 12 days of Christmas (what it would cost to buy all those gifts):

The price of 3 French hens has gone from $15 to $45.

As the announcer said, maybe we should look into using American hens.

The consensus is that the trade deficit will widen by a couple billion dollars. Too much more than that would send the dollar reeling, but I'm not really expecting any surprises--good or bad.

Update: More than a couple billion, it was up by about $4 billion. The bond market was not pleased. Of course, all was forgiven the next day.

Some investors said the market's gains were due in part to continued relief that the Federal Reserve had sustained its pledge to be measured in raising interest rates and reiterated its sanguine view on inflation.

Or they might have been picking up bargains after Tuesday's fall. Who knows? Writing stories on the bond market is sort of like writing stories on which way the wind is blowing.

Anyone want to disagree with the conventional wisdom that the Fed will raise interest rates again tomorrow?

Anyone?

(*insert sound of crickets chirping*)

I thought not.

The question is whether the word "measured" will be in the press release. I say it will.

Update: They did, and it was.

This blog is still really in the experimental stage. I have a few readers, but it's far from the readership of some of the big blogs. At least for now.

Anyway, in the last day or so, I have been doing a lot of thinking about Alan's most recent post, and thinking about the future of this blog. That's hard to do. You never know where the future will lead. But thinking about it is good exercise for the mind.

I've been thinking about what the "permanent" title of this blog will be. Academic Scribbler has been a perfect name to get things started, but I'm not sure it will fit with what I see as the long run mission of this blog. For one, it's not just about policy, economics, or academics. When Final 4 time comes around, I will blog more about basketball. I blog about math once in a while (and should do more). I blog about things that just strike me as funny, and on and on. Remember, I've only been doing this for a couple months. Most blogs I read are at least 2 or 3 years old. I'm a relative latecomer, but as we all know, blogs are springing up like dandelions on my lawn in April. I would like to stake my ground before all the good spots are taken.

Among economics blogs, some have clever economic related names: ArgMax, Marginal Revolution, Truck and Barter, and Voluntary Xchange. These are just some of the better known ones. Then there are the econ blogs with non-economic related, but clever, names: Knowledge Problem, Cold Spring Shops, and AtlanticBlog, just to name a few. Then there are those who put their name on their blog: Newmark's Door, Daniel Drezner, and Brad DeLong make my short list.

Some of the clever names are run by more than one person (Marginal Revolution and Truck and Barter, for example). They tend to be very focused. Those who take a multi-pronged approach often use their names or come up with something clever but non economic.

I find myself wanting to morph this blog just a little. I think about how it relates to what I do for a living. Everything else I write has my name on it first and foremost. I want that to be the case here too.

When I made my first few posts, I wondered if it would last. I don't know if any statistics are kept on this sort of thing, but I wonder how many blogs start out for a few weeks and then quit. When I started, I thought I might be one of those. I never figured I would enjoy it as much as I do or find it as useful as I do. But it is useful, and there is a relationship between blogging and scholarship (see here for an excellent summary). For me it helps me clarify my thoughts on certain things. I've gotten a couple ideas from blogging that may make their way into a paper someday. Plus, when you blog, you have to READ what others are writing about. That keeps you connected. There are liberal blogs and conservative blogs and middle of the roaders too. Quite frankly, the give and take in the blogosphere is better than it is on the cable news talk shows. Most of it is at a higher level too.

Finally, I am also toying with the idea of running more than one blog. I'm still giving full attention to this at first, but stay tuned.

The experiment continues, it takes new steps, it grows, and it comes of age. As a reflection of who I am and what I want this blog to be, a change is coming. To be continued...

My friend Alan considers what to do next.

I think our readership overlaps a little bit. Alan plugged my blog when it was just getting started. But for those of you who don't know of Ozblog, I invite you to check it out while it lasts.

I, for one, would like to see Alan keep blogging independently.

Here's an interesting take from Stumbling and Mumbling. In part:

Did I learn nothing at all at university? I’m prompted to ask by the increasing tendency – of which the BBC is part – to blame the falling dollar on the US’s budget deficit.

This view not only flatly contradicts efficient market theory – we’ve known about the federal government’s red ink for ages – it also contradicts the standard exchange rate models we learnt in the 1980s. These are the Mundell-Fleming-Dornbusch models. In these, a fiscal expansion strengthens the currency, because it boosts economic activity and raises the demand for money.

And later...

More respectably, some people are using the weak dollar to draw attention to the fact that Americans will have to increase their savings sometime.

And herein lies the problem. If or when Americans do start to save more, the resulting slowdown in demand could weaken the dollar still further, and cause even more trouble for people exporting to the US.

Read the whole thing. The part about savings is something that I haven't heard anyone else say out loud. I wrote about personal savings a few days ago, but from the perspective of explaining why it is so low. The author of the quote above is saying that it would get worse if people saved more. I say people save less because it's a rational equilibrium response (consumption smoothing, etc.) that keeps the situation from getting worse. We're on the same page, really. (It goes without saying that I think the author has little to worry about on that score--at least for the forseeable future.)

The real question here is whether or not it is the US budget deficit that is driving the dollar down. I too, would have to say "no," although in the grand scheme of things it is far from irrelevant. Here's another quote from the same post (listing potential problems with the standard models and the relationship between dollar and deficits):

2) Deteriorating creditworthiness. If foreign investors take fright at rising government debt, they’ll sell bonds and trigger a fall in the currency. Again, though, this hasn’t happened, at least not yet. These figures show that foreign private investors (never mind central banks) bought $167.3bn of US government debt in the 12 months to September.

One word. China. And that may change, but it's really unclear if and when. So are speculators overestimating the chances of this? I'd say it's a distinct possibility. (Reference here, particularly my quoting of DeLong's advice to the Secretary of the Treasury.) If so, is there a correction coming? Yes, but not until interest rates come back up in the U.S. That's the real reason. Speculators might be rationally expecting all that monetary stimulus (as well as the fiscal stimulus of deficit spending) that has been in place for 3 years now might finally start to result in inflation. If for some reason the economy stalls at that point, the result could be low real rates and high nominal rates which would essentially confirm the speculators' worst fears. That hasn't happened yet.

And that's why I think the death of the dollar is being exaggerated.

Oh, and by the way, the dollar isn't that much lower (according to the major currency index) than it was in the early 90's. See for yourself. The late '90s were the abberation, methinks. (I know, I know, try telling that to students wanting to spend January in London.)

Hat tip to Newmark's Door.

Read here. Reuters reports that the "Old Lady" is expected to keep interest rates unchanged. The announcement will come in the early morning hours for those of us on this side of the Atlantic.

Twenty economists in the Reuters poll said the BoE is now done with tightening and the next move in rates will be down, if not for some time. But 23 others said there is at least one more hike to come.

The pound is very strong right now (much to the chagrin of my students planning a January interim in London). If the economists predicting rates to go down in the UK are right, and if the Fed continues to tighten, this will help arrest the dollar's decline.

Not that this news really changes anything. I'm still holding to my prediction of about another year of slow decline in the dollar, mainly because it will take that long for the Fed to get rates up to a neutral position. And I hope it does take a while for that to happen. Brad DeLong and Tyler Cowen indirectly touch on this at the Wall St. Journal today. Mainly, it is one of DeLong's goals for the Treasury Secretary.

Convince foreign-currency speculators that large leveraged bets that the dollar will decline rapidly are risky, and so try to make the forthcoming decline in the dollar gradual and orderly rather than rapid and accompanied by spikes in long-term interest rates.

Precisely.

Meanwhile, in other news, the ECB, which really does not want to lower interest rates any further, is worrying about inflation. Again. Soon, this will cease to be news.

It's a difficult situation for everyone. In the long run, the US needs to get interest rates up about a point or so, but until GDP growth (and job growth) is firmly on track it seems dangerous to be pushing for higher rates too quickly. Europe doesn't want us exporting inflation to them. Exchange rates are the pressure release valve.

America spending money and racking up deficits fighting an unpopular war, Europe worried about our inflation spilling over the Atlantic...sound familiar? It's similar to the situation that led to the demise of Bretton Woods. The dollar devalued suddenly because there was no pressure release valve. As bad as The Economist is making it seem, it's not as bad as the '70s. Not by a long shot. Let the dollar continue its gradual slide until interest rates get back (closer, at least) to equilibrium. That is much better than the sudden devaluation when we broke from Bretton Woods and better than the devaluations in Latin America and Asia in recent years.

I think that we can avoid that outcome if the John Snow follows DeLong's advice. I hope Snow is listening.

Update: Rates did remain unchanged in the UK.

Tomato prices are going up, and in some places they are in limited availability. The reason: those hurricanes in Florida earlier this fall which destroyed half the nation's tomato crop. The higher prices are expected to persist for a few more weeks until the next crop is harvested.

Supply and demand. The supply decreased, and as a result the price rises while the quantity traded in the market falls.

The higher price induces some people to temporarily give up eating tomatoes if they are not willing to pay the higher price. This frees up the more limited quantity of tomatoes for those who value them more highly.

I really hope this is rectified quickly because I so enjoy large amounts of ketchup on my hamburgers. I don't want the local Steak n Shake to start charging for the extra ketchup packets at the drive-through. But, I would rather have them charge me a nickel than have them run out. The latter has happened to me a couple times this fall. It's very disappointing to hear that they have run out of ketchup.

Supply and demand. It's everywhere.

One of the competitors on The Amazing Race was seen wearing a hat with the numbers 1.618 on it. 1.618 is "Phi" or the Golden Ratio (to three decimal places), which many regard as the most beautiful proportion. That's great! I think it's pretty cool that a contestant on a reality show would wear a mathematical constant on her hat. (I wonder if anyone else mathematically inclined noticed.)

So, if you were going to wear a mathematical or physical constant on your hat, what would it be?

I'd pick "e" (the base of the natural logarithm). Economists like the natural log function. This book is a very nice history of e. This one is a decent book on the Golden Ratio. I must admit that I like books on mathematical constants and famous equations.

I wonder where I can get one of those "1.618" ballcaps.

The blogosphere just got a credibility boost of Nobel proportions. The Becker-Posner Blog is up and running. Gary Becker is a Nobel prize winning economist from the U of Chicago and Richard Posner is a federal judge and Chicago Law School senior lecturer whose scholarly writings have focused extensively on the law/economics nexus.

All I can say is: Thank you, Gentlemen.

I heartily encourage my readers to join me in becoming regular readers of the Becker-Posner blog.

This isn't good.

A related story is here.

Is this related to what I've been writing on the euro lately? You bet. Look here for a story on EU expansion. Look especially where it says that Hungary needs to do more to fight inflation. (And look at the size of their deficit.) This latest news won't help.

This is as blatant as FDR packing the Supreme Court. It really hurts Hungary's chances of joining the EU.

There's a larger story about the EU and expansion that is brewing, and it will continue to get bigger. This blog will keep you posted.

Tyler Cowen quotes The Economist. Yeah, The Economist is banging the gong on the dollar again. I sense a theme developing.

Anyway, here's Prof. Cowen's take:

My (cautious) take: The Euro area is rich in accumulated bank accounts but running a massive long-run deficit, most of all on human capital. Plus what will happen when countries start rejecting the EU constitution in their referenda? And don't currency markets have some tendency to long-run mean reversion, suggesting the dollar will make a comeback someday? So I say no, the Euro will not become the world's reserve currency. That being said, every prediction I have made about the Euro has been wrong to date. I said it wouldn't happen, it can't last long, and it won't rise in value. That is 0-3, must I now step away from the plate?

Right on. As for his predictions, I suddenly feel a little better about being off on today's job market numbers. But seriously, I understand his skepticism of the euro. I have felt for a long time that Europe is not an optimal currency area, at least not now. Just look at the disparity between the former East and West Germany. Read this if you have any doubts. Add a few more former communist countries into the mix and you've got a recipe for trouble.

And yet, the euro is rising like a hot air balloon. That said, I think the dollar probably will drop further before going up, maybe sometime mid to late 2005. A year of growth in the US together with uncertainty about Europe's economic future will bring about the mean reversion to which Prof. Cowen refers.

In the meantime, brace yourself for more articles like the one in this week's issue of The Economist. I hope I'm right about this one and that Tyler improves his record to 1 out of 4.

From the Wall St. Journal today (subscription required):

"IBM is really focused on high-growth enterprise business opportunities," said Mark Stahlman, an analyst at Caris & Co. IBM manages "around return on investment capital. I would suspect the PC business does not come out very well in enterprise growth and return on capital calculations," he said.

Steven Milunovich, analyst at Merrill Lynch, said in a report that the divestiture of the PC business should be "a moderate positive for IBM" boosting its return on capital and profit margins.

Without a PC business, there is some risk that IBM could lose control over corporate accounts to the benefit of H-P and Dell, he added, but IBM might try to mitigate any expected revenue decline by continuing to distribute IBM-branded PCs made by Lenovo.

"If IBM is exiting PCs, management is likely making a long-term call that PCs are commodities," Mr. Milunovich said.

PCs are commodities. That's for sure. IBM has the resources to continue to innovate, and that's what they intend to do. They can be a lot more profitable by selling their business services where they can (as economists would say) charge a higher markup over marginal cost.

The service industry gets a bad rap too often. The Chinese can make computers for a very low cost. Let them. We get cheap computers; they get decent jobs. People in India can write decent software. Let them. Meanwhile, our bright young kids should be designing business solutions. We should be designing systems that allow hospitals to use technology to streamline patient care and systems that do a million other services to society.

Tell me, where are the latest and best improvements to our quality of life coming from? Assembly lines or talented, skilled, and smart service providers?

Only 112,000 new jobs last month. I was expecting at least 250,000. I can take a little comfort in the fact that this took everyone by surprise, but still, what happened?

Here's one theory. The BLS adjusts for seasonal variation. If the hiring in mid-November in advance of the Christmas season was lower than normal, that would, because of the seasonal adjustment, cause the payroll employment gain to be slightly understated. I'm pretty sure that could explain away part of it, but not all of it. The auto industry is hurting and businesses everywhere are trying to do more with less.

Maybe we need to temper our expectations given the magnitude of structural change in the economy? See this article for some important insight.

According to CNN, analysts are expecting around 200,000 new jobs for November. They also say we need about 150,000 per month to keep up with population growth. This article goes into even more detail with a consensus around 222,500. This article featuring quotes from Janet Yellen is even better.

Given the way that the economy is picking up some traction, I'm inclined to look to the high side of the consensus. We're still below where we should be on the jobs front, and I don't think we should forget that. As we return to potential GDP, I think the job market still "owes us" a couple of stellar (300,000+) months. For my prediction I'll say 250,000 to 280,000 as a likely range, but with higher probability on being above that range than below it.

Less than 225,000 would be a little disappointing, but I don't forsee any reasonable outcome that would keep the Fed from raising rates at their December meeting.

Of course now that the election is over, it might not get quite as much attention as before, but this blog will keep an eye on things.

You might remember I poked fun at the Peoria Mutineers a few days ago. Well, they are looking for a new name. Now's your chance to name a football team. Go for it!

Heard on the radio news today in a discussion of a bill before Congress to improve the locks on the Mississippi (among other things): "...the ominous bill will..."

Uh, that's "omnibus bill". The news reader said it not once, but twice!

I laughed at first. Then I thought, some bills might be both omnibus and "ominous"!

I'm cynical sometimes. (Aren't we all?) I rather like pointing out silliness in the world around us. (Who doesn't?)

That's why every now and then I just have to put my cynicism on hold for a minute. Sometimes, those calling the shots get it right.

At last, we have plans for a Caterpillar "showcase center" which promises to be even better than the museum wing that had been talked about earlier.

Read the article. I hope the city council signs off on it. While I'm biting my tounge to keep from saying, "What took so long?" I am really thrilled about the idea. The expansion of our local museum should be tremendous and Caterpillar would complement the facility well.

If you read the article carefully, you'll see that there's still a little silliness in the process. But I don't want to focus on that today. I also don't want to focus on local minutia since most of my readers are outside Peoria. However, everyone can learn from this. Imagine if the prime downtown address in your city went vacant for a decade. Imagine that literally acres of real estate in the center of your city is a crumbling, empty old Sears store (from the bygone days when Sears had stores downtown--a long time ago).

Imagine that for years nothing got built there because no one could agree on what kind of development was "appropriate" for the area.

Now imagine a Smithsonian affiliate museum and a "showcase center" for your area's largest employer (a company with a worldwide reputation) will be built there. Are you imagining that? Smiling yet?

That's how I feel today.

Also, just to add a special touch to the occasion, yesterday was the 75th anniversary of Caterpillar's listing on the NYSE.

The regular readers of this blog (yes, there are some!) will notice the new look at the top of the page. It used to say, "William Polley's foray into the world of blogging." Since I've been at it a couple months now and have a pretty good set of entries to keep you reading, it's no longer a "foray." I'm here to stay.

The quote above was my inspiration for the title of my blog. It's one of my favorite Keynes quotes, and probably one of his best known. (Another well known quote of his is that "In the long run, we're all dead." But that doesn't make for a catchy blog title!)

The whole context of the quote is this.

But apart from this contemporary mood, the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

Those words were written by a revolutionary. In his writing, I sense a lament over the present "madmen in authority" whose policies were guided by academic scribblers of years past. But the General Theory ends on a slightly more hopeful note.

Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

Indeed. And so the General Theory did eventually get picked up by policy makers. Remember when Nixon said, "We are all Keynesians now."? (Well, I don't remember it, I was pretty young at the time.) Today, many would call Keynes himself a "defunct economist." Modern policymakers get their inspiration from academic scribblers like Lucas, Prescott, Krugman, and Mankiw just to name a few. Tomorrow's policymakers will get their inspiration from a new generation of academic scribblers. Some of them, no doubt, will be bloggers.

This blog will continue to comment on the current happenings of economics as well as the spectrum of policy from silly and frustrating to wise and profound. With your help, gentle reader, we can supply the voices in the air for tomorrow's madmen in authority.

Along the way, I promise to have a little fun. :)

If you're a regular reader, thanks. If you're new to the blog, welcome aboard!

A Term at the Fed by Laurence Meyer

This book was fantastic for a Fed enthusiast. Meyer was a Governor at the Fed from 1996 until 2002. He tells some entertaining tales of discussions at FOMC meetings during those years. The accounts of his dealings with the media are particularly interesting. I remember when he first came onto the Fed and made some rather provocative statements that were reported in the Wall St. Journal. He wasn't your ordinary Governor, and that's gives the book some character. Meyer has a way of humanizing Alan Greenspan that is critical yet respectful. His upfront approach comes through in the book. Economists are by their nature storytellers, and Meyer can spin a yarn.

Be aware that it's not a long book. If you're looking for deep theoretical analysis, don't bother. If you're looking for a quick, pleasant read about a time when policy was made by the seat of your pants when the old rules stopped working and no one knew why, then this is the book for you. He tries to recount these policy discussions in a way that reflects what was known at the time rather than using too much hindsight. If you studied the economy in the 1990s, it will be a walk down memory lane.

It's about as close to a "page-turner" as an economics book can get. It passed the "student test" here as well. Our econ majors loved it.

Households saved about 0.2% of their income in October, the 2nd lowest level on record. Wall St. Journal article here (sorry, subscription only).

But don't despair. The Beige Book says that the economy is humming along. Well, they don't use the word "humming." That would be very un-Fed-like. Nonetheless, the overall picture is good, but not perfect. Auto sales are flat to down in most places--which explains the continued 0% financing on which I commented earlier.

But really, friends, what is there to say about the low savings rate that hasn't been said already? It could be interpreted as good news. Low savings could mean that people are less worried about the future and expect incomes to be higher and not lower. Of course, for obvious reasons, a low savings rate is bemoaned by many as contributing to our rather uncomfortable balance of payments position. Par for the course, these opposing views separate the bulls from the bears.

Today, the bulls won.

The laws of algebra, however, will not be repealed. In open economy macro, we have a little saying: I+G+X=S+T+M which is often expressed as (X-M)=S+(T-G)-I. Ok, it looses something in the translation. (I'd promise no equations in my blog, but I would be bound to break such a promise sometime!) It means that the trade deficit equals the shortfall of national savings relative to investment. This is not negotiable. It's a fact. Let's review more facts:

1. We're running a budget deficit (fact...we'll not debate the pros and cons of it here).
2. Despite the falling dollar, Chinese goods (and those of other countries) are still pretty cheap--and we like cheap. Oh, and the dollar is expected to fall further (possibly leading to somewhat higher inflation).
3. The economy seems to be finally hitting its stride as many of us have been predicting it would. Investment should (at long last) start to recover. Indeed the last few quarters have been good (though the most recent quarter was a little cooler).
4. Interest rates remain low--still a couple points below what would be neutral for growth by my reckoning. Not that there's anything wrong with that for now.

Macroeconomics final exam question (multiple choice since I'm so nice): Predict personal savings based on 1-4 above.
a) above average
b) average
c) below average

I just love how a little bit of economics makes the news less mysterious. Savings will stay low until interest rates return to "neutral" and the dollar bottoms out. Believe me, you don't want that correction to come too suddenly.