March 2005 Archives

Final estimates of 4th quarter 2004 real GDP growth came in at 3.8%. That is the same as the preliminary estimate released last month.

The growth rate of the price index for gross domestic purchases (a measure of inflation) was revised up to 2.9% from 2.8%. As you can see from the chart, the growth of the gross domestic purchases deflator spent all of 2004 above 2%. Excluding food and energy, the picture was somewhat better, but still averaged over 2% for 2004 and considerably higher than in the last couple years.

Click the chart to enlarge.

Also see the NY Times.

Probably not nationwide, but things like this worry me: (NY Times)

Premonitions of a bubble on the verge of popping do not ruffle those who are bullish on real estate. In Miami, Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors, predicted that a limited supply of land coupled with demand from baby boomers and foreigners would prolong the boom indefinitely.

"South Florida," he said, "is working off of a totally new economic model than any of us have ever experienced in the past."

Oh dear.

And on the radio news (the news, mind you) was a one line quote from some broker or banker (I forget which) who said that with interest rates rising it might be time to look into an adjustable rate mortgage.

Penny wise and pound foolish. What are these people thinking?

From the NY Times:

TOKYO, Mar. 29 - Japan's unemployment rate rose unexpectedly in February and consumer spending declined, indicating that the economy has not yet fully emerged from a slowdown that began last year, data released on Tuesday shows.

The unemployment rate rose to 4.7 percent in February from a six-year low of 4.5 percent the month before, according to a report from the government statistics bureau. Economists had expected the rate to remain unchanged.

Spending by households headed by wage earners fell 4.1 percent in February from January, slightly worse than economists had projected.

Continuing today's theme of current debates between economists, we have the lastest WSJ Econoblog installment. It's free, so read it!

David's opening line summarizes my thoughts exactly.

I truly do enjoy reading and listening to Nouriel discuss these issues -- much like I enjoy a good horror movie. It's a frightening ride while you are experiencing it, and I can't say that I don't sometimes get the willies in the dark of the night. But the whole thing just doesn't seem so scary to me in the light of day.

I'm not going to detail all the components of Roubini's disaster scenario. You can read them at his blog or at today's Econoblog. Imagine all of the bad things that you have heard about our current fiscal/financial position and multiply them by 2 or 3. Of course, as Roubini points out, many top economists join the chorus of voices repeating one or more aspects of the scenario in varying degrees. It can't just be dismissed out of hand.

While I would side with Altig on the big picture, I worry about just how bumpy the ride will be. Topping my list of things to worry about is inflation, and not just in the near term. If the fiscal imbalances in Social Security and Medicare are not fixed (not to mention the general fund imbalance), there will be considerable inflationary pressure (or downward pressure on the dollar--in an increasingly global economy the results will be similar and just as bad).

But I always am struck by the fact that the U.S. economy is probably in the best long term condition of the big three (which consists of the U.S., Japan, and Europe as a whole). The pension system in Europe makes ours look easy to solve, and Japan is aging very rapidly. (See The Coming Generational Storm by Kotlikoff and Burns--I plan an extended commentary on this book in a future post.) This is why Altig writes:

So that naturally leads to this question: If they flee from the dollar, to where are they going to run? Your "hot potato" metaphor is not apt, I think. In a game of hot potato you throw the offending spud to your neighbor, and your hands are empty. Not so in dumping dollars -- you have to end up with something else, and hope it's not a flaming carrot. Right now, perhaps investors are thinking that bet looks less than obvious.

Admittedly, being a hot potato in a world of flaming carrots is nothing to be proud of. I do think, though, that it might stave off the disaster scenario. But there is a lot to worry about in a world in which the major three economies face generational fiscal imbalances. It might be bumpy, but I'm a little more confident than Roubini.

On this same theme, the NY Times chimes in.

There is indeed a volatile blend of risks surrounding the dollar. President Bush's new budget proposal would substantially expand the government's debt burden in the next decade, potentially raising doubts about the desirability of its i.o.u.'s. Some Asian central banks have declared that they will diversify their reserves away from dollar-denominated assets. If China decouples the yuan from the dollar, it will not need as many dollar-denominated assets to keep its currency from gaining value, nor will its competitors for export markets. In recent times, long-term interest rates have stayed stubbornly low, making it difficult for American companies to attract new investment from abroad.

These ingredients may just be waiting for the right catalyst. If enough people start thinking like those at Bridgewater Associates, the dollar will lose value rapidly. There's no point trading dollars today, after all, if everyone thinks that they will be worth less in the near future. Fundamental economic factors need not worsen any further; in currency crises, perception very quickly becomes reality.

Bridgewater says it believes that the dollar is already beyond the point of no return. To keep the currency at its current value, private investors will have to buy more American securities as central banks desert them, said Robert P. Prince, the firm's co-chief investment officer. Before private investors will act, they need to see a higher return from American assets, relative to assets carrying similar risks abroad.

Mr. Prince said that those higher returns had begun to arrive through lower prices for assets. If an asset comes with a fixed interest payment, say 4 percent, buying it at a lower price will offer a relatively higher return. But these higher returns could cause problems for the economy. Borrowers in the competitive market for credit will have to offer higher returns, too, and interest rates may rise. "The Fed doesn't want that, because too much of a rise in interest rates will choke off the economy," Mr. Prince said.

The alternative is for the assets' prices to remain the same while the dollar loses value. That way, foreigners will be able to buy assets at a discount, yielding a higher return, but without putting too much upward pressure on American interest rates. (The implicit assumption here is that the assets' future returns will not be harmed too much by today's lower dollar.)

So, instead of allowing the economy to adjust purely through higher interest rates, perhaps causing another recession, Alan Greenspan and his colleagues at the Federal Reserve will have the luxury of allowing the dollar to do some of the heavy lifting. The numbers? Bridgewater predicts a further decline in the dollar of 30 percent, especially against Asian currencies, and a rise in American long-term rates of one-half to one full percentage point.

Not everyone thinks that events will play out this way. "It's really too extreme to be talking about potential crises in the dollar," said Martin D. D. Evans, a professor of economics at Georgetown University in Washington. "Yes, we have seen a large movement in the dollar versus the euro in particular, but to say we're sort of on the edge of a precipice isn't really merited by the facts. The premise here, thinking that it's impossible for the dollar to come back, I also don't buy."

Professor Evans said the Fed's hand would be forced by the rising tide of inflation. "The Federal Reserve cares about inflation," he said, "and they're going to be very reluctant if they start seeing the inflationary effects of the decline in the dollar to just sit by and say, 'But we need low interest rates to support exports.' " He predicted that the Fed would put the clamps on credit, leading to interest rates high enough to attract foreign capital: "We are going to see quite a sharp tightening in the United States, perhaps tighter than people are expecting."

Needless to say, I think Evans is right on the mark.

Unfortunately, the Times finished with this.

Though action by the Fed and a clampdown on federal spending could spare the dollar's blushes, they would both be bad news for the economy. A cutback in federal spending will, at least in the short term, create slack in labor and product markets. And one of the surest forecasters of recession is a tightening of short-term credit by the Fed.

Not so in 1994. But more on that later.

UPDATE: Andrew Samwick has more.

Photos of Economists, 1969-2005 by Robert J. Gordon.

Via Truck and Barter.

Yesterday's Washington Post included a letter from Jeffrey Sachs responding to William Easterly's review of his book The End of Poverty. Tyler Cowen of Marginal Revolution was somewhat critical of Sachs' recommendations in the first place. Co-blogger Alex Tabarrok is unhappy with Sachs' response to the review.

My 2 cents: I saw Sachs on C-Span2 this weekend. (For those who don't know, C-Span2 has what they call "Book TV" on the weekends and it's a great thing to have on in the background when you are blogging or, as I was doing, fixing your father-in-law's computer.) Sachs was speaking at an event sponsored by the World Bank. It was quite a compelling speech. He is a first-rate economist and I have enjoyed his writing in the popular press for some time. And while the speech was compelling, it was laced with raw emotion and was at times short on specifics. I definitely got the idea that he would like the World Bank to do a better job of getting the wealthy nations to pony up the dough. Exactly how the dough is going to be spent was a little bit of a mystery. If his book (which I have not read, but is on my list) runs similar to the speech, I can see where Easterly is coming from.

But I do buy into the overall themes Sachs brought out. In many developing countries, roads are not being built because that is not the sort of investment that the private wealthy country donors want to make. He is outraged that we are insisting on selling mosquito nets (to prevent malaria) to countries that cannot afford them. In fact, outrage at bureaucrats who seem to have given up on ever achieving the Millenium Development Goals was definitely the tone of the speech. I'd be outraged too if I had seen the things he has seen. However, I would tread carefully when it comes to how the money is spent. We don't want to give the dictatorial regimes a blank check. It will require a more hands-on approach (involving the Peace Corps, Doctors Without Borders, and the World Bank perhaps). Because of the difficulties involved in many of these countries in making sure the money gets to the right place, I'm a little skeptical that it can be achieved at the price tag Sachs suggests. However, done right, it might be worth the higher price tag.

For his part, Easterly raises some important questions in his review--questions that deserve discussion. Easterly also wrote a book on development, The Elusive Quest for Growth. If there were ever two distinguished economists equipped for this kind of discussion, it would probably be these two. I hope that is still possible given the exchange in the Post. We sure could use it.

Next week, watch this space for a comparison of the 1994 fed funds tightening cycle to the present one.

From Reuters (and cited at macroblog):

In a somewhat disappointing signal on the factory sector, the Commerce Department said on Thursday orders for durable goods -- pricey items meant to last three years or more -- edged up 0.3 percent in February. This was well below the 1 percent gain expected on Wall Street.

But in the Wall St. Journal:

"If you take the last three months compared to the same period a year ago, new orders are up 10% for durable goods, so we're still seeing relatively strong activity," said Daniel Meckstroth, chief economist of the Manufacturers Alliance/MAPI, a policy-research group in Arlington, Va. This included price increases that somewhat distorted the comparison, he added, but prices of machinery were up only about 2% from a year earlier.

Maybe this is the real story (same article):

David Greenlaw, an economist for Morgan Stanley, said the main disappointment in the numbers was the pullback in shipments. Shipments of manufactured durable goods dropped $3.4 billion, or 1.6%, to $53.6 billion in February, following four consecutive monthly increases. "In this environment of stronger orders," he said, "you wouldn't expect so much of a pullback in shipments."

Meanwhile, new home sales (mentioned in both articles) continue to fuel talk of a housing bubble.

King Banaian at SCSU Scholars posts a graph from Chart of the Day that you really should see.

Elsewhere in the roundup, Brad Setser asks the 1.3 billion dollar question, and The Eclectic Econoclast mirrors my optimism.

None. That is, as I write, there is almost no movement in the 10 year since yesterday's close. Indeed, at the moment, it has gained back a little bit of what it lost. Those who were expecting more bloodletting in the event of inflationary news might have been surprised. I was not expecting a huge sell-off, even with the 0.4% increase in the CPI. Yesterday's activity seemed like enough movement to price in the increased inflation expectations. I still think it a little strange that the jump in the 10 year yield waited until after the FOMC statement when there really wasn't a lot of new information in the statement. Then today when the CPI comes out higher than expected (I read that the expectation was for 0.3%), there is almost no movement.

Now, normally, when inflation begins to peek through the data it makes a splash in the bond market. That there was no additional reaction today would seem to suggest that even today's somewhat higher than predicted inflation was already priced in to some extent.

For some time, it seemed like the 10 year yield was "too low" and that was a puzzle. As David Altig at macroblog points out (citing Steve Leisman), maybe that's because the Fed was getting too predictable. For his part, however, Altig does not really put much stock in that problem, as he writes,

I'm not sure if this new language combined by with the old language solves the Leisman problem or not, because I didn't really understand the problem in the first place.

Nor did I. That is, I didn't feel that this is a problem for my own interpretation. But I clearly do think that the bond market was, at least to a point, thinking in those terms. My comments leading up to and immediately after the FOMC statement sort of give that away. Even if Altig and I don't happen to worry about such distinctions, bond traders might and so we ignore those distinctions at our peril.

And so I do think that the language of the statement does solve (or at least address) the Leisman problem, if you want to cast it in those terms. If, as has been suggested, bond traders were finding the Fed too predictable and were "undoing" Fed policy by undertaking leveraged carry trades, that bubble popped yesterday. I predict that there will be a slight premium on the bond yields as that uncertainty over when the more aggresive stance will translate to policy action heightens the market's sensitivity to inflation in weeks to come.

In light of this, it seems that what really was eating at the bond market yesterday was not so much a perceived lack of aggressiveness against inflation as much as a frustration with the increased uncertainty over how and when that commitment will translate to actual policy changes. As someone who favors greater central bank transparency, I'm not so sure I like that. I really hope it doesn't signal any weakening of the commitment to fight inflation. I don't think it will, but the proof is in the pudding.

Meanwhile the dollar continues to gain, which reassures me that the market isn't discounting the Fed's credibility.

Fed funds futures charts at macroblog. Right now the market looks to be saying the probability of a 50 b.p. increase in July is becoming increasingly likely. Unfortunately, I think this might rekindle some of the frenzy over the word "measured" leading into the May meeting. Time will tell.

Update: More on inflation (charts) at Angry Bear

Update: John Berry at Bloomberg has this to say:

First, it was responsive to a growing concern in financial markets that inflation pressures have worsened. Thus, even if officials aren't as concerned as some private economists -- and many aren't -- as a group they have said, "We are on the case."

My point yesterday was to ask whether that is enough. I hope it is, but it's a legitimate question.

Second, if incoming data confirm that inflation indeed is getting worse, the market has been warned that rates may be headed higher more quickly.

Yes.

Third, the door is open to removing the "measured pace" language which some officials have objected to from the beginning on the grounds that it is too predictive of where policy is headed. Whether that phrase actually will disappear in May is uncertain.

Proof that in spite of the incredible strides that Greenspan and Co. have made towards increasing transparency, it's not a perfect science.

The exchange market, for one, is not.

The changes in the statement raised the prospect of the Fed accelerating its current steady rate rises.

"It really raises the possibility of a 50 basis point hike down the road or higher rates than was previously thought," said Marshall Gittler, senior market strategist at Deutsche Securities in Tokyo.

It's looking like "measured" refers to the expectation, but the risk is higher. If things go sour, "measured" goes out the window--fast! I'm willing to go with that interpretation if the markets are. I think it's a better interpretation than the market had 24 hours ago. I'll sleep easier now.

The dollar was up, but...

High-yielding currencies that investors have favored in carry trades also took a bruising.

Ah... that would explain some of what's going on.

For more on carry trades, see this excellent post at macroblog.

Finally, we have this,

While the threat of faster inflation is usually bad for a currency, the Fed's promise to stamp out price pressures with higher rates helps lure foreign investors to short-term dollar deposits. Treasury bond yields at eight-month highs may also entice investors.

Right, and the market was more sanguine about this than I thought they would be. That's a good thing. Nice to be pleasantly surprised.

If you haven't guessed by now, the thing that still puzzles me the most about Tuesday's events is why the bond market reacted so suddenly, so negatively to news that was not really news. What motivated traders to hold on to the 10-year until 2:15pm EST yesterday? If "measured" isn't that significant, and if the Fed is committed to keeping inflation at bay, and if we all knew that price pressures are building based on previous information, why did they wait for the statement to move?

Maybe all those leveraged carry trades started to unwind all of a sudden. Maybe the exchange market was more forward looking today than the bond market.

Maybe.

One thing I know for certain... it was a fascinating day in the financial markets. This is what I live for as an economist. What will the morning bring?

Still licking my wounds after Iowa's loss in the "Big Dance" imagine my reaction to this:

A number of national media outlets have slated Ferentz's Hawkeyes to be among the top 10 teams in the country - some even predict Iowa to play in the 2006 Rose Bowl for the BCS national championship.

Most recently, a CBS analyst ranked Iowa second on the website's pre-spring top 25, facing Southern California in the national-title game.

Oh, I would love it. You know I would. Of course...

Ferentz isn't convinced - or at least he says he's not.

Nor am I. But I look forward to the season. Number 2 or not, I think they'll be pretty good.

In a nutshell here's what's been bugging me about the wording of the press release today and the media and market response to it.

People are treating this as if the Fed's stance in this press release is aggressive towards inflation and as if that aggressiveness and the warning of inflation is the reason for the bond market taking a dive.

I see in that press release the word "contained" twice as it relates to inflation. I see only one mention of inflation pressure picking up. I see the word "measured," which suggests to me that the rate increases will be 25 b.p. at a time. I see them say, "the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal."

There's not much in there for inflation hawks, despite what everyone is saying. I think that is what the bond market is worried about. If the word "measured" had gone, then perhaps the hawkish ones would take comfort in the fact that a 50 b.p. increase is coming. (Note: I am not advocating a 50 b.p. increase at this time, I'm just trying to understand market sentiment. And clearly there are a significant number of market participants who expect and/or want 50 b.p. sometime before the end of summer.)

I don't see a 50 b.p. increase in the cards for the next meeting. Up to very recently, some did. That's what I think has the bond market reeling. Some in the bond market are perhaps a bit disappointed that we will have to continue hearing the word "measured" for another six weeks and a more aggressive rate hike is pushed further in the future.

Otherwise, is there really any information in that press release that we didn't already know? Why should this have caused such a sudden spike in the 10 year yield? Anyone who read the last meeting's minutes knows that firms are more able to pass on price increases to the customer. That's all the press release said.

No, I think the bond market fears that the Fed is risking falling behind the curve and that they are waiting until inflation appears rather than being proactive. Being "measured" is not being proactive. I think this was a failure to meet expectations.

We might know more in the morning when the CPI is released.

Let's start here. The headline is "Stocks, Bonds Fall, Dollar Firms."

How often does that happen? The article reads...

NEW YORK (Reuters) - U.S. stocks and bonds fell and the dollar firmed on Tuesday after the Federal Reserve said inflation picked up recently, indicating to traders that the pace of interest-rate hikes could quicken in the months ahead.

As expected, the Fed raised rates by a quarter-point for the seventh straight time and maintained its "measured pace" language regarding future increases.

But what got investors' attention in the Fed's accompanying statement was that pricing power was increasing in the world's biggest economy.

Stocks reversed course and went negative.

The Dow Jones industrial average was down 45 points, or 0.43 percent, at 10,520. The Standard & Poor's 500 Index was down 5 points, or 0.46 percent, at 1,178. The Nasdaq Composite Index was down 10 points, or 0.50 percent, at 1,998.

"The Federal Reserve said it was going to continue raising rates at a measured pace while acknowledging that inflation is starting to edge higher," said Michael Sheldon, chief market strategist at New York brokerage Spencer Clarke.

"The reason the stock market gave up its gains following the Fed meeting is because some investors are seeing through the Fed's gentle phrasing and are realizing that the Fed is starting to become more serious about fighting inflation."

Tell that to the bond market...

The yield on the benchmark U.S. Treasury 10-year note rose to its highest level in eight months.

"Instead of dropping 'measured,' they chose language that acknowledges the modest pickup in inflation pressures," said William Fitzgerald, head of fixed-income portfolio investment at Nuveen. "This may be a step toward getting rid of 'measured,' of being more aggressive without indicating a change in the plan."

Remember what I said yesterday about the word "measured" taking on a life of its own? Apparently now we need to take gradual steps to remove that word. And "being more aggressive without indicating a change in the plan"? That's the kind of answer you give when you've just been blindsided.

The yields on the 10-year Treasury note shot up as high as 4.62 percent from 4.48 percent just before the Fed release and 4.52 percent late on Monday. The yield on the two-year note rose to 3.75 percent from 3.72 percent.

So you're trying to tell me that stocks fell because the Fed is going to get tough on inflaton, and bonds fell because the Fed is not being tough enough on inflation. The choice of words managed to give everyone something to complain about. Leaving in the word "measured" while acknowledging inflation was not what people wanted to hear.

So how about some good news?

The euro initially slipped half a cent to session lows around $1.3146, according to Reuters data, from around $1.3200 shortly before the Fed announcement, and down about 0.2 percent from levels late on Monday in New York.

Against the yen, the dollar rose to 105.23 yen, up from around 105.07 yen shortly before the announcement.

What gives? CNN thinks it knows...

Higher rates makes U.S. securities more attractive to foreign investors, who must purchase the notes in U.S. currency.

The dollar has gained more than 2 percent against the euro and yen since the start of the year as investors bet that rising interest rates and higher yields on dollar assets might help offset worries about structural problems in the U.S. economy, including the nation's massive deficits.

I dunno... it didn't look like foreign investors were scrambling for dollars so they could rush out and buy stocks and bonds this afternoon. It would seem more likely to me that the exchange market is just reserving judgement and waiting until tomorrow's CPI data comes out. The CPI data will either be a reassurance to the bond market or the other shoe dropping on bonds and the dollar. I guess we'll have to wait until morning.

Greg Ip reminds us that the decision of how to word this press release was frought with difficulty. (WSJ subscription required)

Some officials feel that inflation risks have risen, so the Fed should give itself more flexibility in how it responds to incoming economic data, with a half point move if necessary. But other officials believe communicating their limits disruptive volatility in the markets, and they should continue to say rate increases will be measured as long as Fed officials really expect that.

The last sentence looks like a typo, but I think you and I know what he's saying.

Fed chairman Alan Greenspan fueled speculation that "measured" would be dropped when he declined to use the word in his testimony in mid-February to Congress. But he did question why long-term interest rates in the bond market are so low, calling them a "conundrum."

And Mr. Ip knows who to go to for a quote. Clarida is a fine economist who seems to come closest to explaining what happened.

Richard Clarida, economic strategist at Clinton Group, a New York hedge fund, says when the Fed tightens credit conditions, it relies on the bond market to do some of its work by boosting long-term borrowing costs. The fact that, up to this point, it had not left Mr. Greenspan two options: drop "measured" and raise short-term rates faster, or use the "bully pulpit" of his congressional testimony to push long-term bond rates higher. Since bond yields rose sharply after Mr. Greenspan's testimony, Mr. Clarida says the Fed concluded it can stick with "measured" rate changes for now.

But still I'm not sure. If the CPI doesn't take too big of a jump and the bond market calms down, then maybe it's ok to leave the word "measured" in. But if the CPI is higher than expected tomorrow, then long term rates go even higher--in part because the word "measured" is still in.

Of course, if Clarida is right, then that's just what the Maestro ordered.

One last thing from Ip's article.

The Fed also raised the rate on the less important discount rate, charged on short-term Fed loans to commercial banks, to 3.75% from 3.5%. Just 10 of the Fed's 12 reserve banks requested the increase in the discount rate. It was unclear why the Kansas City and Dallas banks did not.

I'm sure that K.C. and Dallas will make their request tomorrow. That occasionally happens.

Wow. I can't wait until the minutes to this meeting are released.

Read it here. I was wrong (though I was certainly not alone) in thinking that the word "measured" would be missing.

It's still there.

Can't wait for the minutes.

Can't wait to see what this does to fed funds futures (not to mention other markets).

Will the dollar fall in late trading? I suppose so.

Right now I need to teach a class on this stuff. Back in a couple hours.

UPDATE: I didn't catch this before I had to run to class, but Kash at Angry Bear did. The wording of the press release does contain a nugget for the inflation hawks.

Output evidently continues to grow at a solid pace despite the rise in energy prices, and labor market conditions continue to improve gradually. Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices.

They are careful to say that "longer-term inflation expectations" or "underlying inflation" are expected to be contained. They also do say that

The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal.

How will the markets take these words. Will they interpret this action favorably? Kash at Angry Bear has a chart that shows that the bond market took a dive. They apparently don't like the word measured. The whole tone of the thing seems weaker than what the market was expecting.

More to come...

At the end of tomorrow's FOMC meeting, we will receive the usual press release telling us whether the fed funds target will change and by how much. But for the last few meetings, there has also been a specific word in that press release that seems to have taken on a life of its own. That word is "measured," as in "the Committee believes that policy accommodation can be removed at a pace that is likely to be measured."

If that word is missing from tomorrow's press release, perhaps simply by omitting that key sentence, it will spur a flurry of conversation in the MSM as well as on the economically oriented blogs (like this one). Reuters has this to say going into the meeting.

NEW YORK (Reuters) - The dollar rose to two-week highs against the euro and the Swiss franc on Monday on speculation the U.S. Federal Reserve may signal a more aggressive pace of interest rate rises at its meeting Tuesday.

The Federal Open Market Committee is widely expected to raise official U.S. interest rates on Tuesday for the seventh consecutive time by a quarter-percentage point to 2.75 percent, further widening the interest rate differential over the euro zone where the ECB's minimum bid rate is 2 percent.

Some expect the Fed could signal a more aggressive stance by removing from the statement accompanying its decision on monetary policy its oft-repeated pledge to raise rates at a "measured" pace.

"The removal of the word 'measured' ... would be positive for the dollar as it suggests the Fed is giving itself room to raise rates at a faster pace later this year," Bank of New York currency strategist Michael Woolfolk told clients in a note.

Late afternoon in New York, the euro had its sharpest one-day fall since the first week of the year, down 1.1 percent from late Friday to $1.3165.

It's a situation that I would not have forseen nine months ago. I wouldn't have expected a single word to linger in the press releases for this long and have such significance attached to it. It's almost as if the removal of the word will, in the minds of some, signal that a 50 basis point increase at the next meeting is a foregone conclusion. I certainly wouldn't go that far, but you and I both know that some people will.

Is the removal of "measured" a prerequisite for more agressive moves going forward? Probably. But that's a situation that the FOMC seems to have backed into by virtue of leaving the word in there for so long. When asked about this last summer (pre-blogging days, so I don't have a link), my response was that "measured" probably meant that rates would be raised 25 b.p. at a time with an occasional break where there is no change. Ah, but that is ancient history, before the term "measured" acquired a policy definition--or so it would seem.

For review: check out these fed funds futures charts from a couple weeks ago at macroblog.

All in all, I think the FOMC is probably going to opt for the 25 b.p. increase tomorrow and remove "measured" from the press release. The wording change will be mostly to give them a degree of freedom over whether and when the policy stance can shift into a more aggressive posture. We can then take a couple weeks to contemplate it before getting the minutes to tomorrow's meeting. If the word "measured" is removed tomorrow, then the date of the release of the minutes will be eagerly anticipated by us spectators out in the markets, academia, and the blogosphere.

And what news article on the dollar would be complete without this?

Under pressure from Asian currencies too, the euro slipped to a two-week low against the yen, at 138.31 yen , because of a news report purporting China may be getting closer to increasing the flexibility of its pegged currency regime.

The yen was helped by a report in the Beijing Daily saying China may expand its yuan currency trading band.

The yuan has been pegged since the mid-1990s at a rate of about 8.28 per dollar. If it is allowed to move more freely, it is widely expected to appreciate against the dollar.

"The People's Bank of China will gradually exit from daily forex transactions. The band within which the renminbi exchange rate floats may be expanded to 0.6 percent or 1 percent from the current 0.3 percent," the newspaper said. It did not mention a timeframe for any changes to the currency regime.

"Is it jawboning on the part of Chinese officials? We're not 100 percent sure," said a trader with GAIN Capital in Warren, New Jersey. "If it is true, then that should lead to dollar weakness."

And so it goes.

I meant to respond to this earlier, but am just catching up. Macroblog reported on the increase in capacity utilization. In a comment over there, PGL speculates on the rate that is consistent with full employment. Here are some quick stats on capacity utilization. Since 1967, the mean has been 81.4% and the median 81.9%. Since 1988 (chosen somewhat arbitrarily to include the peak before the 90-91 recession), the mean has been 81.0% and the median 82.1%. The peak in the latter period was 85.1%. As the chart below shows, the speed of the recovery of capacity utilization has been about on pace with the last recovery, but the level at its nadir was lower this time (i.e. we have more ground to make up).

Looking at the 3 month moving average of the changes in the capacity utilization rate shows that the recovery has been, in fact, quite steady, with fewer fits and starts than after the last recession. But again, we did (and still do) have more ground to make up.

From MSNBC

WASHINGTON - An index designed to forecast future economic activity rose a middling 0.1 percent in February after a decline of 0.3 percent in January, the Conference Board reported on Thursday.

Still, the February increase was the third in the last four months, and Conference Board economist Kenneth Goldstein said the trend was "pointing to (economic) growth this spring."

The business-financed research group said its Composite Index of Leading Economic Indicators advanced to 115.6 in February from 115.5 the previous month. The index had risen 0.3 percent in both November and December.

Goldstein said the statistics were "reflecting an economy that is continuing to improve."

The index is designed to predict economic activity over the next three to six months.

In Washington, meanwhile, the Labor Department reported that the number of new people signing up for unemployment benefits last week declined for the first time in a month — an encouraging sign that the jobs market may be gaining traction.

The department said new applications for unemployment insurance dropped a seasonally adjusted 10,000 to 318,000 for the week ending March 12. The level of 318,000 was the lowest since late February.

The last time new filings for jobless benefits fell was in the week ending Feb. 12, when they dipped by 1,000.

But...

NEW YORK - U.S. consumers became less upbeat in early March as rising gasoline costs made Americans more uneasy about the economy, a report said on Friday.

The University of Michigan said its measure of confidence had slipped to 92.9 so far this month from 94.1 in February, according to market sources who saw the subscription-only report.

"It sounds like there's a bit of a negative reaction to higher oil prices but the level of confidence is still more than high enough to keep consumer spending growing solidly," said Jim O'Sullivan, senior economist at UBS in Stamford, Conn.

The decline took analysts by surprise, since a recent burst of hiring had prompted many to forecast a slight gain to around 95.0.

The survey's expectations component eased to 83.6 from 84.4, while sentiment on current conditions dipped to 107.3 from 109.2.

Kash at Angry Bear has more on rising oil prices.

The title of this NY Times article is, "When It Comes to Managing Retirement, Many People Simply Can't."

I'll admit it, the headline made me read the article. Score one for the Times. But there's a lot more in that article than just that one-liner. A more accurate title would be, "Some People Enter Retirement With Too Little In Their Private Accounts; Reasons Vary." You now see why I'm an economics professor and not a headline writer.

One very important reason mentioned in the article was that some people start saving too late in their working years. 401(k)s and IRAs are a relatively new invention. Two people mentioned in the article saved for only 17 years. A 22 year old college grad could save for more than 40 years if they start right after they get their first job. This is a pretty good argument for making private accounts a part of Social Security (whether they are a carve out or an add on is less relevant to my point here than just getting 22 year olds to do it automatically and steadily--let's save the carve out/add on argument for another day). Saving for retirement must begin early. Rome wasn't built in a day. I would expect that as time goes on and later generations of workers (who have had 401(k)s for a longer period of time) retire, the results will improve.

Consider this:

Ms. [Annika] Sunden [of Stockholm University and Boston College's retirement studies center] and Alicia Munnell, director of the Boston College retirement studies center, estimated that a worker making the minimum ideal contribution of 6 percent of wages to a 401(k) plan, with a company match of a further 3 percent, could do better than with a traditional pension.

If the account achieved a 4.6 percent annual return on top of inflation, the assumption adopted by President Bush based on historical returns, a worker retiring at 62 after 30 years of savings and a final salary of $52,650 would amass more than $350,000. This could provide annuity income for the rest of the person's life of roughly $31,000 a year, higher than the $26,500 such a worker would get from a typical defined-contribution pension.

Disciplined saving is a good thing. But...

In 2001, the most recent year for which comprehensive figures are available, the Federal Reserve's survey of consumer finances found that the median savings in a 55-to-64-year-old American's 401(k) or individual retirement account added up to $42,000, less than one-eighth the amount needed at 62 to achieve the retirement income estimated by Ms. Munnell and Ms. Sunden.

$42,000 is not much of a retirement nest egg. Obviously people are starting late and not saving enough. I think we've pretty much established that now. Towards the end, the article says,

Fewer than 10 percent of eligible workers contribute the maximum amount to their 401(k), and about a quarter contribute nothing at all. Many younger workers empty their 401(k) accounts when they change jobs - postponing saving for retirement.

Low savings are not the only problem. After they retire, workers must manage their savings, a task often complicated by unexpected expenses.

It's hard to imagine something worse than cashing out your 401(k) when switching jobs. If you have to use it as a cushion to tide you over to the next job (if you really must), then at least put back what you don't spend when you take a new job. The article ends with an account of how difficult retirement planning can be:

When Robert Stacy took an early retirement package from U S West more than six years ago, at 53, he had a traditional pension. But he took only half as an annuity, worth $900 a month, and the other half as a lump sum. His total savings at the time, including his 401(k) and the proceeds from the sale of his house, added up to almost $600,000.

The Stacys expected this money would be enough to roam through the country carefree in their new R.V. But six years later, the stash is down to $400,000. And the couple is facing higher health expenses since Qwest, which took over U S West in 2000, started charging hefty premiums on its retirees' health plans. So the Stacys, too, decided to take up jobs in retirement. "If I had to choose again," Mr. Stacy said, "I would have taken it all as an annuity."

Maybe so. But nothing here suggests that Mr. Stacy didn't understand his options. This seemed like a strange way to end the article.

Anyway, if the intent of the piece is to scare people away from private accounts for Social Security, it doesn't deliver the goods. The whole idea of private accounts should be to get younger workers used to saving and taking ownership of their retirement funds. Judging individual retirement accounts by the fact that most people haven't been contributing to them for very long strengthens my contention that starting young is the most important thing. An ownership society will take generations to build, but every day we wait just puts it off further.

The private accounts being discussed for Social Security would not (to my knowledge) allow workers to cash them out when changing jobs like a 401(k). That's one more problem eliminated.

Furthermore, the Hagel bill (S. 540) specifies that the private accounts be converted to an annuity on retirement. You won't have the same regret about your Social Security private accounts that Mr. Stacy did about his pension. Still another problem solved.

(Another nice thing about S. 540 compared to H.R. 530 is that the eligibility age is lower--45. I'd argue for even lower, but at least this is moving in the right direction.)

The Times article could certainly be interpreted as an attempt to show the perils of relying on private accounts for retirement (especially if you only read the headline). On the contrary, it makes an effective argument that disciplined saving over one's working life is very important. It also makes the point that once retirement hits, those savings should not be left to chance. Neither of these points is controversial.

Advocates of private accounts need to start making these very uncontroversial points.

I'm catching up on a stack of journals and papers during spring break. This is from the Minneapolis Fed Quarterly Review. Given this blog's occasional updates on the inflation targeting debate, I thought it was appropriate. Stern and Miller argue in favor of inflation targeting.

The last two sentences:

The important practical step in adopting an inflation targeting strategy is to find a small set of observable variables that bear a stable long-term relationship with inflation. We believe this is an important issue for research.

Money growth (assuming constant velocity) and....?

They reject constant money growth rules in the paper as giving "too little weight to output stabilization to satisfy many government officials or the public." They also make an exception to an inflation targeting rule in the case of coordination failures, which begs the question of how to recognize a coordination failure when you're in one. I don't think that's a trivial question.

But it is a thought provoking short paper.

I am not in any basketball pools. These are for entertainment purposes only. My picks are as follows:

Chicago region--UW-Milwaukee (12) over Alabama (5), no other upsets

Albuquerque region--Creighton (10) over WVU (7), Gonzaga (3) over Wake Forest (2) in semifinal, no other upsets

Syracuse region--NC State (10) over Charlotte (7), Kansas (3) wins the region, no other upsets

Austin region--Iowa (10) over Cincinnati (7), no other upsets

Do I have a thing for #10 seeds? Yes, I do. I always pick at least one. Upsets will be hard to come by, however. For example, I like UNI (11), but I don't see them having much of a chance against Wisconsin. I always pick a (12), UW-Mil. has the best chance of the four. The other 5/12 games should be good, with the (5) winning.

I would pick Winthrop (a 14 seed with the longest active winning streak in the NCAA) in the first round except for one thing--I never go against Gonzaga in the first round. Never.

I can see a lot of these games going down to the wire, and that's all that really matters to me.

In the finals, I'll take Illinois over Duke.

But remember, your picks are as good as mine until noon tomorrow! We now return to your regularly scheduled econoblogging.

In case you hadn't heard, read it all here. Main story:

The U.S. current-account deficit--the combined balances on trade in goods and services, income, and net unilateral current transfers--increased to $665.9 billion in 2004 from $530.7 billion in 2003. An increase in the deficit on goods to $665.5 billion from $547.6 billion accounted for most of the increase. Other contributors to the increase in the deficit were a decrease in the surplus on income to $24.1 billion from $33.3 billion, an increase in net outflows on unilateral current transfers to $72.9 billion from $67.4 billion, and a decrease in the surplus on services to $48.4 billion from $51.0 billion. As a share of U.S. GDP, the deficit rose from 4.8 percent in 2003 to 5.7 percent in 2004.

This was not a surprise, of course. Still, it shouldn't go unnoticed.

On today's show: "From the CIA World Factbook"

Note to student readers: In the event that you have not used the CIA World Factbook to do basic background research for your international business, international studies, political science, economics, and other term papers, please check it out to see what you've been missing.

Not only will your term papers be filled with up-to-date facts, but you might do better if you ever go on Jeopardy!

In case you missed the PBS special The Elegant Universe on TV (or if you want to see parts of it again), you can watch the whole thing online. Actually, you can watch a number of NOVA programs online.

The news about net capital inflows is good, but I wouldn't get too excited yet.

The troubling news was that 41 percent of the buying came from Caribbean countries, with much of that from hedge funds based there. The funds could easily reverse their positions and sharply lower the flow of money into the United States in the months ahead.

Read the rest of the Times article.

UPDATE: The Economist's Buttonwood voices concern.

Read this:

BEIJING (Reuters) - China could spring a surprise on financial markets in deciding when and how it reforms the yuan, Premier Wen Jiabao said on Monday in comments seen as warning speculators trying to guess what the country might do.

"Our goal has been to let market supply and demand determine the exchange rate," Wen told a news briefing at the close of the annual session of parliament.

"We are carrying out such work now, and as for the timing and what measures will be adopted, this could be unexpected."

I like this part the best:

"The attitude by Beijing is they don't want to reward speculators," Claudio Piron, an Asian forex strategist with JP Morgan in Singapore, said of Wen's remarks.

"The only thing is, this statement itself is kind of going to bring speculators back into the market, so they've kind of contradicted themselves," Piron said.

The market moved a little...

Following Wen's remarks, the offshore non-deliverable yuan forwards market, used by speculators to bet on any change in the currency's value in the future, priced in a 4.8 percent appreciation in the yuan in one year, increasing from 4.6 percent priced in on Friday.

...but Andy Xie remains unimpressed.

Andy Xie, an economist with Morgan Stanley in Hong Kong, said China would not spring reforms any time soon, and that Wen's comments were no departure from Beijing's go-slow approach to currency changes.

"China's not in a position to move on the currency because the economy is not stable," Xie said. "The currency is the only anchor for the economy right now."

That would be my gut reaction too. (But maybe that's what they want us to think!)

Also, see this Bloomberg article, courtesy of Calculated Risk (a blog that I just came across recently but deserves your attention).

Are these stories connected? Stay tuned to find out!

Thanks to a comment from Calculated Risk (by way of Movie Guy), I looked at some publications on the other trust funds. This is an interesting one that came up in the search.

I didn't find any long term projections but did find some history and some clarifications on how they are handled. There really are a lot of them, fortunately most are extremely small in the grand scheme of the budget. Even the larger pension plans are small compared to Social Security (and let's not even talk about Medicare). Plus, I suspect the demographics are different. Military pensions, for example, would have income/outgo profiles that respond to the demographics of the military rather than the demographics of the work force in general (which is the problem for Social Security).

One other thing I noticed while reading the publication is that the 1999 balance of the Civil Service Retirement and Disability Fund was around 6 times its 1999 revenue. Compared to Social Security where the 1999 trust fund balance was not even twice its 1999 revenue. I have my theory on why this is the case.

All in all interesting, but still nothing that worries me greatly.

Michael Moskow, for one, is not.

From a Reuters article:

Unlike several of his FOMC colleagues, the Chicago Fed chief said he was "cautious" about inflation targeting, terming it a concept more useful in countries that have had inflation crises.

"Inflation targeting is not something you can move into right away," he told reporters after the speech. Studies have shown "no evidence" that inflation targeting is helpful, Moskow added.

Fed Chairman Alan Greenspan does not favor inflation targeting, but some Fed officials have said that it would make the Fed's thinking more transparent and contribute to price stability.

The Fed's policy-making group discussed targeting as a special topic at its last meeting in early February.

The "no evidence" line probably refers to NBER working paper number 9577 by Ball and Sheridan (2003).

Calculated Risk makes a good point. There are other trust funds, like the Civil Service Retirement System, will face demographic problems similar to that faced by Social Security. Acutally, I haven't seen long term demographic projections for these funds, though I assume such projections exist. These other funds are "on-budget," which means that you should be able to find the short term projectons in the budget (something to do this weekend).

Granted, the magnitude of the problem will be much smaller, so I am confident that this can be handled. Also, I would be interested in hearing the details of how these trust funds work. Civil service pensions would seem to more closely resemble employer managed pensions than a general Social Security system. I would think that the administrative details would be a little different.

So, while this doesn't particularly trouble me, it is a good point. Most of all, it highlights the problem of lumping every thing into one "unified" budget. I like the idea of generational accounting for Social Security and separating it (and perhaps the other trust funds) from the general fund.

Click here for the Fed's Beige Book.

Lately, when the Beige Book comes out, I've been skipping right down to the section on prices.

Retail prices were generally flat or up modestly; however, businesses continued to face rising input costs, and a number of Districts indicated greater ease in passing along price increases. Prices for finished goods were reported to be increasing modestly in Richmond and Minneapolis, but almost all of the other Districts characterized retail prices as flat. Cleveland and Chicago reported that motor vehicle prices were being reduced by increased incentives and discounts. A number of Districts also noted ongoing declines in apparel prices.

Despite the stability in consumer goods prices, manufacturers in a number of Districts--including Boston, Cleveland, Kansas City, and Dallas--indicated that they have been finding it increasingly easy to pass along price increases; Philadelphia producers anticipated greater ability to boost prices in the near future. Also, truckers in the Cleveland and Atlanta Districts indicated that they have been offsetting rising fuel costs with surcharges.

A number of Districts reported persistent pressures on input costs, though some noted that these have eased since the last report. Firms in Boston, Richmond, Atlanta, Minneapolis, Dallas, and San Francisco reported sizable increases in prices of various raw materials. The most commonly mentioned were construction materials (especially steel) and fuel. Quite a few Districts also mentioned continued rapid escalation in health insurance costs, though San Francisco indicated that these have decelerated. More generally, New York, Cleveland and Chicago indicated that input cost pressures have abated somewhat since the last report.

I don't think this will drastically alter market expectations.

From the Peoria JournalStar:

PEORIA - When Scott Stanard ordered his usual sausage, egg and cheese biscuit combo Monday morning, he got two policemen on the side.

Stanard said the staff at McDonald's, 3600 N. University St., called police after he handed over a $10 bill that they said was a fake.

"I kept wondering why they weren't giving me any change," said Stanard, who sat in the drive-thru lane in his work van for several minutes before deciding to pull up and park.

"I knew I didn't do anything wrong - I got it from Family Video," he said, more upset from the embarrassment, and the fact that he didn't get his food.

Two officers arrived, talked to him and went in the restaurant to get the alleged funny money.

"(The police) said it was old - a 1950s series $10 bill - and the markers they use don't work on old money," Stanard said.

And the conclusion of the article:

In many instances, police will send suspected counterfeit money to the Secret Service for close scrutiny.

In Stanard's case, [Secret Service agent] Pingolt suspected the officers were able to tell the $10 bill was old and wouldn't stand up to the marker test. Hence, Stanard was not arrested, Pingolt said.

Stanard said police took the $10 bill, telling him he could pick it up later if it was real. If the bill turned out to be fake, it would be destroyed.

Despite still being peeved at the McDonald's management, Stanard was pleased Tuesday. He got his money back.

If the bill was in good condition and from the 1950s it might have had some collectable value. Of course now it probably has a big marker stain on it from those counterfeit detecting markers, making it worth...$10.

At least the police exercised some common sense and didn't haul the guy off in handcuffs as sometimes happens.

Dead Parrot vs. Angry Bear. Quite a mental image, isn't it? Anyway, lots of stuff to address, and I can't figure out where to break it into two posts. So here goes...

If you haven't been following it, today's participants in the Social Security free-for-all have been PGL of Angry Bear and Victor of Dead Parrot Society. They cover a lot of ground, and I'm not going to trace through it all. Today, I will cover just one aspect of their posts. This is a long post, but I have a couple of tidbits for you that I think are worth reading.

One observation I have is that the debate on the econoblogs is moving towards more general issues of government financing. Not that I have a problem with that. Might be a good thing.

PGL and Victor are arguing over whether increases or decreases in specific taxes affect the overall trend in spending. This is sometimes called the "starve the beast" theory. Cut taxes and spending will fall. Obviously it's not that simple in reality. It certainly hasn't been the case this time around. But the discussion then turns to the experiences of the 1980s and 1990s.

So, was the Social Security surplus that big of a deal during the Reagan administration? Nope. Not at all. You can say that Reagan raided the lockbox if you want, but at the time, the lockbox was the government equivalent of petty cash. Year to year fluctuations in the on-budget deficit were larger than the Social Security surplus. No evidence of "raiding the lockbox" yet, not in any meaningful sense. (Ah, but read on!)

The Bush (41) years were different. The size of the off-budget surplus (mostly Social Security) stayed relatively constant. Meanwhile the deficit took off. Looking at the numbers, you can't make a convincing case that Bush (41) was looking to the trust fund as a contemporaneous source of revenue. I suppose he could have been forward looking, but I'll leave that for you to decide.

The tax increases of the early '90s were perfectly timed (for everyone except Bush 41). The recovery was well underway by the time they really started to bite. Revenue growth outpaced spending growth. The on budget deficit fell for 8 years (becoming a surplus for 2 of those years). Meanwhile, the off budget surplus took off for demographic reasons that have very little to do with what was taking place "on budget." So, did Clinton raid the lockbox? No more (or less) in substance than Reagan or Bush (41). There was, however, a more subtle raid taking place--one that continued into Bush (43) as the following question makes clear.

What was the peak surplus at the end of the last cycle? 236 billion or 86 billion? If you say 236 billion, you're guilty of raiding the trust fund. (The off budget surplus was 150 billion in 2000.) The trust fund was getting huge just in time to make our already pretty good deficit fighting effort look even better. But the two have very little to do with each other. So who can blame the Democrats for touting hundreds of billions of dollars of surpluses? I certainly don't! (And don't say they didn't make those claims and rhetorically raid the trust fund--the proof is here. Furthermore, Gore wouldn't have made the lockbox such a big deal in his campaign if they hadn't already noticed that their hands were in it.) The current administration has simply continued on this path. In fact, the off budget surplus hasn't grown much since Bush (43) took office. The on budget deficit has. Like father, like son.

The punch line is that there really isn't much connection between the growth of the trust fund and the changes in trends in taxes or spending, at least not contemporaneously. That explains my reasoning for being skeptical of the "starve the beast" theory as well as my skepticism over any cause and effect connection between the tax increases in the early '90s and the fact that the economy boomed and government's share of GDP fell during the Clinton administration. There you have it--I'm an equal opportunity skeptic.

So, I don't mind making this debate at least partly about government financing in general. The general fund deficit is a big problem worth talking about independently of Social Security. I happen to think that if Social Security reform is done correctly, it won't make the general fund problem much better or worse. So let's do Social Security reform correctly and tackle the general fund problem separately.

PGL often claims that the payroll tax increases were to prefund the baby boomers' retirements (and thus he contends that claiming that we are still essentially pay-as-you-go is equivalent to saying Reagan lied in 1983). The first part is true, at least rhetorically. The trust fund is a meaningful promise to pay--fully funded politically and morally (but not in a strict accounting sense). Because of this, your mileage may vary on the conclusion he draws. However, it's interesting that the first time this issue came up was in 1985, just as Social Security was being taken off budget. Reagan wanted a one year freeze on cost of living adjustments to Social Security. This would save $6 billion in FY1986. Imagine! He wanted to raid it for $6 billion and make the $200 billion dollar deficit look $6 billion smaller! I don't know what Reagan was thinking, but I think it's plausible to think that he either thought that in 20 years we would solve this problem or that we wouldn't be talking about such huge amounts being at stake. Again, you are free to make up your own mind. (By the way, this information is from the May 14, 1985 New York Times. If you have Lexis-Nexis, do a search for the headline "Two kinds of deficits" from that day's paper. It's an article worth printing and saving if you have access. I'd excerpt from it if this wasn't so long already. Maybe another day. To boil it down to whether the Times writer thought that Reagan was lying--his answer would have been a firm yes... and no.)

All historical data in this post are from the 2005 Economic Report of the President, Table B78.

Ok, that's enough for today. As always, your comments are welcome.

UPDATE: PGL responds. Also, take note of a comment by CalculatedRisk.

First, look at this from Cafe Hayek:

The Ohio state government will soon require all auctioneers operating in that great state to be licensed. This licensing requirement goes into effect on May 2. Here’s the whole story; just below is a relevant excerpt from it:

Besides costing $200 and posting a $50,000 bond, the license requires a one-year apprenticeship to a licensed auctioneer, acting as a bid-caller in 12 auctions, attending an approved auction school, passing a written and oral exam. Failure to get a license could result in the seller being fined up to $1,000 and jailed for a maximum of 90 days.

This licensing requirement is stirring up controversy because, as written, it will prevent ordinary Ohioans from using eBay. Supporters of the regulation deny that its intended reach is so vast.

And there's this from the state where I reside.

Actually auctioneer licensing is not uncommon. In the midwest, there is a lot of crossover between auctioneering, appraisal, and real estate. All of which typically require some form of licensure. It's the eBay connection that has people up in arms.

This reminded me of something I heard on the radio a couple days ago that takes occupational regulation to a new extreme. So I did a quick search and found one newspaper reporting on it. It's from the Minneapolis Star-Tribune, and I think you can read the this article if you register on their site (free registration).

BATON ROUGE, La. -— In Louisiana, not just anyone can sell a bunch of pretty flowers. You have to have a license.

U.S. District Judge Frank Polozola ruled Wednesday that the state can keep its unique law requiring florists to pass a test and get a license to work on their own. Would-be florists had argued that the law unconstitutionally bars them from entering the occupation of their choice.

About half of all applicants fail the test, which includes a written exam and one in which they must create four floral arrangements in as many hours. Unlicensed "floral clerks" can only work in a shop which also has a licensed florist.

"There are few occupational licensing laws as crazy as this one in this country," said Clark Neily with the Institute for Justice, a libertarian nonprofit law firm in Washington, D.C. Neily said he will ask the 5th U.S. Circuit Court of Appeals to overturn the ruling.

Neily has argued that the question of who has floral talent should be left to the market: people whose arrangements are ugly would soon find themselves without customers.

Priceless.

My neck of the woods is going to be prominently featured on The Weather Channel this week during their "Tornado Week" on Storm Stories.

Tonight at 8:30 EST (7:30 CST) will feature the Utica, IL tornado from last April. Wednesday at 8:00 EST (7:00 CST) will feature the Roanoke, IL tornado from last July. The Roanoke tornado was an F4 that ripped apart a manufacturing facility just a few miles down the road from us.

Last year was a very bad year for tornadoes in Illinois. The day that the Roanoke tornado struck, the skies were mostly clear in Peoria (where my office is). I heard about the warning and called home to make sure things were ok. My wife reported no unusual weather there either. But the tornado was ripping through Roanoke at about that very moment.

I nearly saw a tornado last year during one particularly bad complex of storms. We have a very good 180 degree view of the countryside from a vantage point about 50 yards from our house. I like to go there to watch the skies during storms. So do the local storm spotters. So as the storm was approaching, I went up there to watch and talk to the spotter. I also had my video camera in hand. When the rain started coming down in buckets, I made the 50 yard dash back to the house to preserve my camera (and get out of the lightening and the wind).

I no sooner got back to the house when the scanner (tuned to the storm spotter frequency) crackled to life with a report of a tornado. It was the spotter I had been talking to 30 seconds before! I just missed my tornado; but on the bright side, my camera survived the rain, I was not struck by lightening, etc.

I literally do not remember how many times we took cover in the basement last year. My standard for taking cover is when the spotters in our city have spotted a funnel cloud within 5 miles. That happened a lot. Tazewell County is right in the heart of "Tornado Alley."

I know a few economists who have something of a hobby interest in weather. Must be something about trying to forecast dynamic systems. Anyway, if you have an interest, watch The Weather Channel this week.

Macroblog has another update on the fed funds futures. Check it out.

Let's start with a quote from macroblog.

I won't even bother to link to previous posts, but if there was ever a policy-driven transaction without consequences for national saving, it would have to be issuing explicit debt for already promised benefit payments. (OK, I lied -- here's the link.)

In the same spirit, here are links to a couple of my previous posts. I think Altig's comment above makes excellent sense as a first approximation. In other words, in a perfect world or a simplified model it should hold. The extent to which it doesn't hold exactly would, in my estimation, have to do with market imperfections and other "real world" problems. So when Brad DeLong says,

My position is that we really don't know what the impact of having the Treasury sell $4.5 trillion more of government bonds and then having individuals invest that $4.5 trillion in their private Social Security accounts will be. I would bet that there's at least a 50-50 chance that it will be a wash as far as national savings is concerned. I would also bet that there's at least a 20% chance that it will shrink national savings significantly--that people will regard their private accounts as relatively close substitutes for their 401(k)s and other assets, and so reduce the amounts they commit to funding their other retirement savings.

I have to give him credit for honesty. DeLong also says,

What I object to are assertions that people know that the effect on national saving will be a wash. They don't know this. What I object to are assertions that worriers--like me and Alan Greenspan--should "stop railing about the budget impact [of the Bush Social Security plan]. The... increase in the budget deficit won't place a new burden on future generations." There's reason to hope that this is the case, and I think it is better than a 50-50 bet. But as Uncle Alan said, it's important to go slowly: if it is a big mistake, we need to find that out in time to stop it.

I also said this more than a month ago.

Back to the issue of what happens to national saving, here's why I think there might be some ambiguity. Let's go back to macroblog again.

I have already conceded that the trust fund should be treated as a meaningful promise to pay future benefits.

Me too. Of course, there are various ways to shave the amount that we have to pay (like raising the retirement age or changing the indexing formula, to give two examples). One possible problem for Ricardian Equivalence is financial market uncertainty about whether and how much we'll shave that amount. If privatization changes those expectations, RE will not hold exactly.

Another possible problem would be if privatization had a very different generational effect compared to waiting until 2042 and the generations react in systematically different ways. This is a serious research question, not something you can answer off the top of your head.

I'm not sure how much either of these would impact national saving, but it's worth talking about.

Once again, the more gradual the transition, the better the chance for success. The sooner we start, the more gradual we can afford to be.

H.R. 530 is not gradual. If this ends up being the plan for consideration, I'll be as worried as Greenspan and DeLong.

From Reuters:

BEIJING (Reuters) - China will keep its currency in a relatively small range even when it implements a gradually more flexible exchange rate system, a state newspaper on Saturday quoted the top foreign exchange official as saying. The country had already made preparations to reform the exchange rate system, which currently keeps the yuan in a tiny range between 8.276 and 8.28 per dollar, the China Securities Journal quoted Guo Shuqing, head of the State Administration of Foreign Exchange, as saying.

"We will continue to maintain a managed floating system based on market supply and demand and will gradually increase exchange rate flexibility," Guo was quoted as saying.

"In fact, we have been constantly reforming the foreign exchange system and the exchange rate formation mechanism and have made a lot of preparations, including developing the forex market."

"As China is a developing country, the floaing range for the yuan exchange rate will definitely be relatively small," Guo said.

Sounds a little like opening a door just a little bit at a time when people are pounding on it trying to get in. It might just cause folks to pound harder. Good timing and effective management of expectations will be critical for success.

Via Cafe Hayek comes this NY Times story:

Oil drilling has long been a more common sight on the arid plains of West Texas, but oil prices topping $50 a barrel are now luring wildcatters to urban areas written off until recently as uneconomical by the energy industry. In fact, crude oil rose $1.37 on Wednesday, or nearly 3 percent, to $53.05 a barrel, the highest closing price since Oct. 26. Traders are concerned that producers and refiners are not keeping up with demand.

I remember trips out to western North Dakota where there are some oil wells. Some years they were pumping; some years they weren't. Hence, I've used that as example in classes before. I should point out that there are some oil wells in Illinois, south of Springfield on I-55. I have never seen those pumping, but I'll let you know next week if they have started. The story in the Times takes it up a notch with drilling right in people's backyards. This could, however, be a boon to the neighborhood when the residents get their royalty payments as the article explains.

I also found this interesting:

Still, a rig operating in the middle of a residential area is raising eyebrows even in Houston, a city known for abhorring zoning restrictions of nearly every stripe. Some geologists suggest that the location of the drilling rig has as much to do with the gap between rich and poor in Houston as with geology.

"You try this in River Oaks and they'd have your hide," Theron Sage, an associate professor of geology and environmental science at the University of Houston, said of the exclusive district of Tudor-style mansions where this city's wealthiest residents live. (River Oaks is about a 20-minute drive from Northmore.)

"This is one of the oddities of $50 oil," Ms. Sage said. "This type of thing doesn't happen with $20 oil."

Law of supply an "oddity"? That comment aside, Ms. Sage brings up a good point. It would take even more expensive oil to get the wealthy neighborhoods to start drilling because they would ask to be compensated more for the inconvenience.

The economy added 262,000 jobs in February. I've been hoping for 200,000 but I didn't want to get my hopes up too much. We've had a couple months of under 150,000 and another would not look good.

So, how does this affect the chart I showed a few days ago?

Click the graph to enlarge.

As you can see from this version (which begins in 1989 so you can see the recent activity a little more clearly), February's numbers did bump us up just a bit. There was a net change of 1.8% from Feb. 04 to Feb. 05 compared to 1.7% for Jan. 04 to Jan. 05.

Slowly....inching....up.

Oddly, the unemployment rate increased to 5.4% from 5.2%. Since the unemployment rate comes from the household survey, this might be a result of the small sample size. This could very well reverse itself next month. Don't base any conclusions on a one month change in the unemployment rate--in either direction.

See also: Angry Bear. They have two posts. In the latter, PGL remarks that some reporters don't know how to interpret these numbers. Based on my read of the BLS news release, I'd say he's right.

UPDATE: PGL points me to MaxSpeak who also interprets the change in the numbers correctly. Max also adds this,

Stepping back, the post 2001 recovery still compares badly with previous ones. This one had the dubious benefit of tax cuts; the previous one had tax increases. This is not a strong testament to the power of marginal tax rates, Alan.

Many of the tax cuts were aimed more at capital formation than job creation. Depending on your point of view, that makes Max's criticism more or less biting. Personally, I'd like to see more research along the lines of Groshen and Potter (2003) to try to figure out the reason for the "jobless recovery," which according to my chart is mostly evidenced by the odd little hiccup in the curve in 2003. Something happened in there that had a much larger impact than the particular tax cuts Bush enacted. Structural change? Uncertainty over Iraq? Both? Other?

Anyway, the employment data is better today than yesterday. However, I'm holding off on declaring victory until my chart crosses the 2% line and stays there for 3 months.

UPDATE: Re: The exchange between PGL and Max in the comments of MaxSpeak

The civilian labor force numbers for the last 3 months: Dec. 148,203, Jan. 147,979, Feb. 148,132. So since December, there is been little change in the actual numbers or the rate. The gain in the labor force in February is in the number of unemployed workers. That could mean we undercounted them in January or some people who had dropped out of the labor force are returning. Take your pick. We can't tell from one month.

In the last day or so I graded one set of midterms and wrote another which I gave today. (You know what I'm doing this weekend.) That leaves less time for blogging. Thus, we have these quick hits from the past day's news and blogs. I'll post more on some of this later.

Stumbling and Mumbling asks what the blogosphere is really all about and decides:

I think we should regard it as a new form of 17th century coffee-house, a venue where men met on equal terms to exchange news and ideas.

Perhaps so. And the real beauty of it is that it knows no geographical boundaries. The author of Stumbling and Mumbling is British. I came to small town Illinois from small town Minnesota. You could be sitting anywhere right now reading this. Yet here we are.

Next up, Brad DeLong points us to a Financial Times article on productivity. Angry Bear has more, and a chart. You could also check out macroblog. I'll have more on this later.

On the budget front, this headline lays it out there, "Greenspan Says Federal Budget Deficits Are 'Unsustainable'." Here's a taste of what you'll read in the article,

"When you begin to do the arithmetic of what the rising debt level implied by the deficits tells you, and you add interest costs to that ever-rising debt, at ever-higher interest rates, the system becomes fiscally destabilizing," he told lawmakers. "Unless we do something to ameliorate it in a very significant manner," he added, "we will be in a state of stagnation."

White House officials played down Mr. Greenspan's remarks, noting that he had placed top priority on reduced government spending and that Mr. Bush had vowed to reduce the budget deficit by half by 2009.

"The president does have a substantial deficit-reduction package," said Trent Duffy, a White House spokesman. "His budget is a continuation of that policy, and he looks forward to working with Congress in cutting that spending down. Likewise, the president agrees that the long-term budget is the issue, which is why he's trying to lead a national discussion and reform movement to save and strengthen Social Security."

But then,

WASHINGTON (Reuters) - President Bush said on Thursday he would focus for now on the financial problems facing Social Security, signaling a shift in tactics amid a slide in support for his private account plan.

There was so much more happening Thursday, like a thought provoking WSJ article by Greg Ip.

Job figures come out today. Lately, 150,000 has been the number to beat. That has to rise. 200,000 would be so much better. I think it will be close, but these things are hard to predict.

PGL at Angry Bear made this post on Social Security, but my response will have to wait.

So much for the roundup. Extended analysis on Friday.

FYI from Reuters:

RICHMOND, Va. (Reuters) - A long-simmering debate over whether the Federal Reserve should adopt a formal goal for U.S. inflation moved to front burner on Tuesday when two policy-makers backed the idea in separate speeches.

At the Fed's rate-setting meeting in February, the policy committee opened discussions about inflation targeting -- an idea Chairman Alan Greenspan opposes -- but further talks were put off amid divergent views.

Richmond Fed Bank President Jeffrey Lacker said in a speech at the University of Richmond an inflation target would help keep concerns about rising prices in check and boost transparency at the central bank.

"Ambiguity about the Fed's long-run inflation intentions has outlived its usefulness," he said. "I believe that the adoption and announcement of an explicit, numerical, long-run inflation target by the Fed would enhance the effectiveness of monetary policy."

and...

Philadelphia Fed Bank President Anthony Santomero also backed an inflation goal in a speech in Berlin, calling it a "reasonable next step in the evolution of U.S. monetary policy."

Read the full article here.

Refer also to one of my previous posts on the release of the minutes from the last FOMC meeting.

Via the New York Times:

FRANKFURT, March 1 - Unemployment in Germany, which crossed above the politically charged five million mark in January, rose again in February, to a rate of 12.6 percent with 5.2 million people out of work, the Federal Labor Agency said on Tuesday.

The unemployment rate, the highest since World War II, rose from 12.1 percent in January. Germany's economy has slumped recently, contracting 0.2 percent in the fourth quarter.

A bitterly cold winter put an unusually large number of construction employees out of work, but another reason for the high numbers was a statistical change to now count able-bodied recipients of social welfare payments as unemployed.

"As expected, the number of registered unemployed again rose markedly in February," Frank-Jürgen Wiese, the head of the Federal Labor Agency, said in a statement.

Chancellor Gerhard Schröder battled last year to pass the most thorough overhaul of unemployment benefits in decades, and the changes took effect on Jan. 1. Joblessness has risen since, and Mr. Schröder's Social Democrats face a crucial state election in May.

Click here to read the rest.

Fed Governor Mark Olson gave this speech yesterday. Check out the charts at the end; they are quite amazing. Bottom line, asset quality did not deteriorate nearly as much in the most recent (2001) recession as they did in the 1990-91 recession.

Risk management has certainly improved, but banks should not become complacent. As Olson puts it:

The more favorable experience in the more recent period speaks well for the credit-risk management at smaller institutions, even in the context of a mild recession. That said, it also means that it has been a decade and a half since many lenders have seen a serious overall downturn in asset quality. We know from surveys of senior lenders that lending standards have eased overall. Some easing is normal for this phase of the business cycle, but this easing is always of concern to regulators. Some lenders have recently expanded their offerings of interest-only mortgages and mortgage loans with maturities beyond thirty years. In this context, prudent lenders should weigh their alternatives carefully before compromising established underwriting standards or pricing in the face of competitive pressures.

That's probably good advice.

I'm giving exams this week. At times like this one needs a little humor to retain one's sanity.

Thank you, Division of Labour, for this one. If you've got kids in grade school, clip this and teach them.