July 2005 Archives

I subscribe to NASA press releases, and this just hit my inbox.

A media teleconference will be held today to announce major findings regarding the detection of a new planet in our solar system.

Dr. Michael Brown, associate professor of planetary astronomy, California Institute of Technology, Pasadena, Calif., will present his discovery of the most distant object ever detected orbiting the Sun. He and his colleagues made the observations as part of a NASA-funded research project.

It is just a few minutes before 7pm EDT, the scheduled start of the teleconference, and this e-mail just now arrived. And why announce this on a Friday night when it will get little media play?

My 3 year old knows the names of all the planets (thanks to a song on "Blue's Clues"). Is he going to have to learn one more?

Stay tuned.

UPDATE: Here are more details.

A planet larger than Pluto has been discovered in the outlying regions of the solar system.

The planet was discovered using the Samuel Oschin Telescope at Palomar Observatory near San Diego, Calif. The discovery was announced today by planetary scientist Dr. Mike Brown of the California Institute of Technology in Pasadena, Calif., whose research is partly funded by NASA.

The planet is a typical member of the Kuiper belt, but its sheer size in relation to the nine known planets means that it can only be classified as a planet, Brown said. Currently about 97 times further from the sun than the Earth, the planet is the farthest-known object in the solar system, and the third brightest of the Kuiper belt objects.

"It will be visible with a telescope over the next six months and is currently almost directly overhead in the early-morning eastern sky, in the constellation Cetus," said Brown, who made the discovery with colleagues Chad Trujillo, of the Gemini Observatory in Mauna Kea, Hawaii, and David Rabinowitz, of Yale University, New Haven, Conn., on January 8.

Brown, Trujillo and Rabinowitz first photographed the new planet with the 48-inch Samuel Oschin Telescope on October 31, 2003. However, the object was so far away that its motion was not detected until they reanalyzed the data in January of this year. In the last seven months, the scientists have been studying the planet to better estimate its size and its motions.

"It's definitely bigger than Pluto," said Brown, who is a professor of planetary astronomy.

...

A name for the new planet has been proposed by the discoverers to the International Astronomical Union, and they are awaiting the decision of this body before announcing the name.

For more information on the discovery and to view images, visit: http://www.nasa.gov/vision/universe/solarsystem/newplanet-072905-images.html

UPDATE: NASA has pictures on their website. NASA images are generally not copyrighted and may be reproduced for educational purposes. Here is the picture:

These time-lapse images of a newfound planet in our solar system, called 2003UB313, were taken on Oct. 21, 2003, using the Samuel Oschin Telescope at the Palomar Observatory near San Diego, Calif. The planet, circled in white, is seen moving across a field of stars. The three images were taken about 90 minutes apart.

Scientists did not discover that the object in these pictures was a planet until Jan. 8, 2005. Image credit: Samuel Oschin Telescope, Palomar Observatory

This is what an artists conception of the planet looks like with the sun in the distance. Obviously, it will be a long time before we actually get that close!

UPDATE (yet again): They want to call the new planet "Xena" after the TV show starring Lucy Lawless. Why "Xena"? Well...

'We have always wanted to name something Xena,' said Michael Brown, a member of the team that made the discovery using telescopes at the Palomar Observatory, outside San Diego, California.

Uh huh... Anyway, you can read the story of the brewing controversy here. No, the controversy isn't over the name, it's whether this should be a considered a planet at all. Some would even want to demote Pluto to "minor planet" status, a point that Phil Miller had already seized upon with this post.

The numbers are in. Real GDP was up 3.4% in the 2nd quarter. This is on the heels of 3.8% growth in the first quarter.

That's not stellar, but it's not bad either. It is well within the sustainable range and shouldn't fuel inflation fears all that much. But King at SCSU Scholars finds the news that others might miss.

The markets are soft today after the GDP report came in with 3.4% growth. But buried in the report itself is good news.

The real change in private inventories subtracted 2.32 percentage points from the second-quarter change in real GDP after adding 0.29 percentage point to the first-quarter change. Private businesses reduced inventories $6.4 billion in the second quarter, following increases of $58.2 billion in the first quarter and $50.1 billion in the fourth.

Real final sales of domestic product -- GDP less change in private inventories -- increased 5.8 percent in the second quarter, compared with an increase of 3.5 percent in the first.

As my dad would say, "in English, please?" It means that in real terms, businesses who had stockpiled lots of inventory over the previous six months sold it all off in the previous quarter. It seems unlikely that they would continue to disgorge inventories (already at the 1.3 benchmark as a ratio to sales), so production should pick up again in the next quarter. A 5.8% growth of final sales is the best since the second quarter of 2003.

This report also showed a turnaround in net exports, with imports decreasing 2% in the quarter. This and the Chinese repeg of the yuan might mark the end of that drain on GDP growth going forward.

Yep. The market may have yawned, but it really was pretty good news when you dig beyond the headline. PGL of Angry Bear saw it too... and he seems a little less bearish today.

As one that has been hoping for a reversal of the bad news that we saw for export and investment demand, however, I see some good news in these numbers. Export demand growth was reported at 12.6% per year and imports fell. Fixed investment growth was reported at 9.3% with both business fixed investment and residential investment reporting strong growth rates.

Final sales of domestic product grew at a 5.8% annualized rate with the difference between growth in sales and the growth in production coming from a “negative contribution from private inventory investment”. Could this news be a harbinger of an export and investment led recovery, which would might increase the employment to population ratio to 63% by year end? One can only hope!

It is, of course, too early to say if this is a "soft landing." That's a call that I think we might be able to make about a year from now with some air of certainty. But today's news is consistent with a soft landing scenario. Next week we'll get some more labor market numbers and we'll see if we're making any more progress on that e/p ratio.

Finally, I'll throw in this from CNN:

Manufacturing in the Midwest region continued to expand in July, according to the release of the Chicago PMI, shortly after the start of trading. The index rose to 63.5 from 53.6 in June, topping forecasts for a rise to 55.5.

UPDATE: Tim Duy and James Hamilton weigh in as well. Note also that this is the 9th straight quarter of greater than 3% real GDP growth. I was in 7th grade the last time that happened.

Out of town and blogging sporadically, I should have known something like this would happen.

By now you've heard that China dedicded to revalue the yuan by about 2 percent. That is enough to get the market's attention, to be sure; but it's not as much as what some politicians wanted. Nor is it sufficient to really affect our economy right away. It won't fix the trade deficit.

In case you, like me, have been away from the news for the last 24 hours, you can catch up here and here, for starters. You can also check out the blogosphere-- macroblog, Economist's View, Max Speak, Dan Drezner, Brad Setser, and a Wall St. Journal Econoblog featuring Dave Altig and Nouriel Roubini just to name a few.

Kash at Angry Bear rightly realizes that this small move could actually prompt more speculation (Setser and Roubini note it as well). Remember various devaluations in history that prompted capital flight because the initial devaluation wasn't big enough? Well, this is the same prinicple working in reverse. One thing that can prevent it is for the Chinese central bank to do a good job of managing expectations. Keep a very close eye on this over the next few months.

King at SCSU Scholars as well as the Altig and Roubini Econoblog mention this post of mine. So let me tell you what was going through my mind when I wrote that.

I did mention the principle of macro/monetary theory that says that you can't have free trade in assets, fixed exchange rates, and independent monetary policy (you can have at most two of the three). I honestly did think about connecting the dots, but decided in the end to leave it to the reader (I have excellent readers who did notice the connection). I really didn't expect it to happen before the end of the week. (Who did?) But like many of the econobloggers out there, I figured something was definitely building. In that respect, the announcement on the lifting of capital controls earlier this week did seem to be almost a necessary step in a sequence of events--as a signal if nothing else. So while I didn't think it would be this week, I can't say I fell out of my chair with surprise. The combination of the relaxaton of capital controls (assuming it's more than just a token gesture) and today's announcement on the exchange rate are important steps in China's macroeconomic development. But it is just one more step--neither the first, nor the last.

Here's what I thought about the timetable to revaluation back in April.

A few years ago, it might have been 2002, I was asked when I thought China would begin to relax their exchange controls in a meaningful way and begin to float. At that time, I answered somewhere between 2008 and 2012, and that it would be gradual, perhaps taking that entire range of years to complete. Funny thing is that today I'm less sure. I don't think I have the confidence to give a range like that now. If pressed, my answer would probably be about the same, but with less confidence. There would be something to be said for beginning before the Olympics, but that's really going out on a limb.

How things change. More recently, I would have probably expected something by the end of the year, or more conservatively in 2006. I was still off by a bit.

I also said this at a moment when the game theory implications made me throw up my hands. So did China choose summer to make the move when Wall St. traders are vacationing in the Hamptons? Just a thought. I think the intention all along was to create an atmosphere where some movement would be expected, but no one would know the day. I'd say it worked.

The bond market took it as well as could be expected. The 10 year lost almost a point, but that's not bad all things considered. The yield curve looks a little more respectable, though I wouldn't take any extra undue joy from that. Besides, there is likely to be some further adjustment over the next few days as the market gets used to the new normal. Let's watch it for a few days. Certainly by the next FOMC meeting we might have some interesting things to say about it.

I agree with the consensus that this will not have a huge effect in and of itself. It is significant that China is no longer exclusively pegging to the dollar. But again, this isn't going to cure our trade deficit or lead to any other massive implications in the short term.

I do believe, however, that this is just one step in a long road. The pace may quicken or it may remain (dare I say) measured. I have said in the past that China will not make any moves until they feel it is time for them. I think that still applies to the endgame. You won't see complete convertibility or a true floating exchange rate for a long time. China has a lot of work to do before then. They also have to continue to build their monetary reputation. If they are able to maintain control over the rate within the band they have set out, it will go a long way towards building that reputation and moving the day of full convertibility closer. If today's move only turns up the speculative heat, then they may have moved too soon.

But for now, I'm optimistic that this very gradual change will be interpreted correctly. China is earning a reputation, and I don't think they will squander it. After one day, I'd say they should be very happy. Now comes day two...

What does this mean for the Fed and policymaking in general? Let's leave that for another day. So far, not much. 2% isn't going to throw a huge crimp in Greenspan's style. As time goes on, if there is further movement, you can be sure that I will have more to say.

And that's where we are. Everyone wants to say something, but what do you say that hasn't been said already? And there are some aspects on which comment is rightly reserved until we see how the market adjusts. We've been expecting it for a long time, but with little or no idea of when it would happen. Now realizing that the immediate impact will be little more than a ripple, we are left to ponder when and how the next move will take place and whether this will quell the speculation or encourage it. Despite the flurry of activity today, this story will play out over weeks and months.

But it sure is exciting, isn't it?

Men first walked on the moon 36 years ago today. Here's the story as it was reported July 21, 1969 in the NY Times.

From CNN:

LOS ANGELES, California (AP) -- James Doohan, the burly chief engineer of the Starship Enterprise in the original "Star Trek" TV series and motion pictures who responded to the apocryphal command "Beam me up, Scotty," died early Wednesday. He was 85.

Doohan died at 5:30 a.m. (1330 GMT) at his Redmond, Washington, home with his wife of 28 years, Wende, at his side, Los Angeles agent and longtime friend Steve Stevens said. The cause of death was pneumonia and Alzheimer's disease, he said.

The Canadian-born Doohan fought in World War II and was wounded during the D-Day invasion, according to the StarTrek.com Web site.

The episode where he makes a guest appearance on Star Trek: The Next Generation would have to be one of my favorites.

Here's to ya, lad.

She'll be coming for your state next. First this (which I reported on earlier), now this (NY Times):

I would rather not spend the next Election Day the way I spent the last one: wondering just how much to hate Ohio. My vote was written off because I live in the perpetually sewn-up state of New York. But because the citizens of that battleground state could not make up their gosh darn minds, their votes actually counted. They chose the current president of the United States.

Or rather, to be accurate, last Nov. 2 they chose the rich guys and party hangers-on known as the electors of the Electoral College, and on Dec. 13, those folks elected the president.

But here's the depressing what-if. If neither John Kerry nor George Bush had received the necessary 270 electoral votes to win - which was a real possibility - the House of Representatives would have chosen the president. What's wrong with that? Nothing much - if each state's representatives all voted. But in such a contingency, each state in the union is allotted a single vote for president. Let me repeat that: a single vote. So the half-million residents of Wyoming would have had the same amount of say in electing the president as the 34 million citizens of California.

What is the most pressing social issue in 92-percent-white Wyoming? Whether people should be able to ride snowmobiles in Yellowstone.

(I will go on the record as being against snowmobiles in Yellowstone - not because I'm an environmentalist but because I am not "fun.")

Am I the only New Yorker (or Californian or Texan) who, nearly nine months after Election Day, can still name the specifics of Ohio's concerns to a "Behind the Music" level of detail? That its jobs have gone to China and its schools have gone to hell? That Cleveland is the poorest big city in America?

...

But I cannot live with that equation of Wyoming = California, that one-state-one-vote House contingency. I know it is merely one small procedural rule. It is not as dramatic or as significant as Supreme Court confirmations. It is not as pressing a morass as the war that looks as if it will go on for the rest of all our lives. That is actually why it is a pleasant problem to ponder in the middle of July, years away from the next election. It is solvable.

Let me make one important point of fact before subjecting you to my opinion.

It's not a foregone conclusion that Ohio will decide the presidency in 2008. I can envision scenarios where it is Michigan or Iowa. I think there's even a wild permutation that could make make Colorado or New Mexico come to the forefront. In 2000 it was Florida. In 2004 it was Ohio. In 2008 it could be one of those or something else.

The center of electoral power moves as the voting demographics change. That could be seen as a strength of the system, not a flaw.

Now for my opinion. Electing a president through the popular vote would be impractical and subject to a lot of... well... you know, without a VERY good system of preventing voter fraud. The cost/benefit calculation for those who would mess with the system would shift in favor of evildoing. It's a virtual certainty (by my way of thinking anyway) that both parties would behave in dishonest ways to a greater extent than they do today.

Furthermore, can you imagine a bipartisan commission to explore changes in the way that we vote for a president? If you're imagining it now, please stop. You'll give yourself a headache. Any change would end up being a compromise between what each party sees as being in its short run interest. That can't be good for the long run.

We have a strong history of Federalism in this country. We are, after all, the United States.

The mechanism by which we elect a president reflects the basic principles by which we govern ourselves. To change the former would betray the latter.

China's economic situation is truly fascinating. Seems like it would be a pretty easy task to collect a series of news articles to supplement an international macro text... just on China.

Case in point, from China Daily:

China plans to further loosen its strict capital controls to boost the competitiveness of its firms overseas, a move which would also relieve building speculative pressure on the yuan.

The State Administration of Foreign Exchange (SAFE) will deepen reforms by improving its management and creating a more supportive foreign exchange framework, Li Dongrong, deputy chief of SAFE, was quoted as saying by Financial News.

"Advancing and deepening the management of foreign exchange and structural reform is required ... so that domestic companies can go overseas and take part in international process of competition," said Li.

The reforms would grant domestic and multinationals in China greater strategic freedom by allowing them to buy more foreign currency as well as lend the money to overseas subsidiaries.

Chinese banks would also be allowed to lend foreign currency to Chinese companies operating in foreign countries directly, Li said.

...

Earlier this month China's central bank governor Zhou Xiaochuan was quoted as saying by local media that supporting Chinese companies to move into international markets was becoming a key strategy of the country's economic development.

The banking chief also said that China should lift certain foreign exchange controls in the near-term to create conditions for the full convertibility of the local currency, but did not say which ones.

China keeps its currency effectively pegged at 8.28 yuan to the dollar, a level that many trade partners say is artificially low and gives the country an unfair boost in trade.

Doing away with curbs on outbound capital flows would also relieve pressure on the yuan and help the bank combat the billions of dollars in speculative money flowing into the country.

Fixed exchange rates, independent monetary policy, and free asset trade--an economy can have at most two of these, not all three. China has been pursuing the first two while capital controls have prevented truly free asset trade. The steps outlined in the article do not totally free up trade in capital, but they represent a step in the right direction if they follow through with it. Of course, the speculation on the possible revaluation of the yuan has stepped up lately. This announcement could be aimed at quelling some of that speculation. Time will tell.

PGL (Angry Bear) and I brought it to you earlier. (UPDATE: I should have also mentioned James Hamilton, General Glut, and Brad DeLong. I've probably missed others.) Now, Paul Krugman chimes in.

Many seemingly authoritative figures, not all of them partisan shills, say that the American economy has fully recovered from the recession that began in 2001. They point to the unemployment rate, which has fallen from a peak of 6.3 percent in 2003 to 5 percent last month. That's not quite as low as the 4.2 percent unemployment rate in February 2001, when the recession began, but it's fairly low by historical standards.

For some reason, however, the public isn't feeling prosperous. Gallup tells us that only 3 percent of Americans describe the economy as "excellent," and only 33 percent describe it as "good."

Maybe people are just ungrateful. Maybe they've been misled by negative media reports. Maybe they're grumpy about their paychecks: adjusted for inflation, average weekly earnings have been flat for the past five years.

Or maybe the figures on unemployment are giving a false signal.

Economists who argue that there's something wrong with the unemployment numbers are buzzing about a new study by Katharine Bradbury, an economist at the Federal Reserve Bank of Boston, which suggests that millions of Americans who should be in the labor force aren't. "The addition of these hypothetical participants," she writes, "would raise the unemployment rate by one to three-plus percentage points."

Allow me to point you to Bradbury's paper. There's a little more worth reading than just what Krugman quotes. Go on... read it! Interesting charts as well.

Some observations after reading it.

1. Women's LFPR has been climbing steadily for many years but appears to have topped out. That makes comparisons with the past difficult and comparisons with men's LFPR more relevant. These comparisons are in the study as well, but not in the charts. The charts for the women could be misleading in light of this.

2. Both men and women 55+ have seen large gains in LFPR lately. They were effectively unscathed in the recent recession. Part of this is, as the study points out, due to a "pig in the python" effect of baby boomers hitting 55 and lowering the average age of the 55+ cohort, but I suspect there's more.

3. Men's LFPR appears to be in a long term decline. If that continues and if women's LFPR levels off, what are the implications?

4. The declines in LFPR across the board seemed to begin before the recession started. According to Bradbury's chart, the women's LFPR looks like it topped out in the late 1990s.

The study raises some interesting questions in addition to the ones that have already been asked. Though I'm less worried than PGL about this, I do agree that it bears watching.

...and don't expect him to say that the rate hikes are over.

Via Bloomberg:

Greenspan will likely use his semi-annual monetary policy report to end any lingering notions the central bank is almost finished lifting its interest-rate target after nine increases since June 2004, investors said. Yields, which move inversely to debt prices, have been little changed the past two months as bondholders sought clues as to how much rates will rise.

This "could be the spark that causes 10-year yields to rise out of their range," said Colin Lundgren, who helps manage $100 billion as head of institutional fixed-income at American Express Asset Management in Minneapolis. Greenspan testifies in Washington on July 20.

We'll see. I hope C-Span carries it. So far, they don't show it on their schedule. Stay tuned.

From the NY Times:

But for other homeowners, the calculus of the 1990's that might have led them to trade up quickly no longer applies. "When the market was strong, somebody would move up to a nicer home in two years because they had so much equity," said Karen Snyder, an owner of Metro Brokers Right Realty in Centennial, a suburb southeast of Denver. Now, she said, "they're just staying put."

That really encapsulates what seems to have driven the housing market in the frothy areas. Buy a $100,000 house with 10% down. In a couple years it's worth $110,000. Sell and use the profit to put 10% down on a $200,000 house. Repeat. That can't go on forever. It also can't even get started everywhere. These are regional bubbles driven by a number of factors. Low interest rates were only part of the puzzle.

Of course, by the latter part of the boom, 10% down seems such a quaint idea, doesn't it?

If you've been following this blog for the last few months, you know that Mark Thoma and I have engaged in a running discussion on Social Security. (PGL of Angry Bear commented on many of those posts, and others commented occasionally.)

And so, I bring you this recent dispatch from Thoma which I quote in part: (It's quite long, and I'm skipping over the part on insurance against poverty, a topic we have both covered-- Thoma here and me here).

A common solution to the moral hazard problem is deductibles and co-payments that cause individual to share in the cost of a negative outcome. Two proposed solutions to market failure in retirement savings markets have this deductible feature. The first is well-known, opt-out, add-on accounts. These tend to work better when the default outcome is very unattractive, and the difference between the outcome with active participation and the outcome with passive participation can be viewed as the deductible the individual pays for behaving in a manner leading to sub-optimal outcomes. The other is a money match program where the government matches, say dollar for dollar but the exact ratio could vary, money put into retirement savings accounts. In designing a system, I would implement a combination such as an opt-out add-on accounts with the amount matched in some ratio by the government (and capped) unless one of my really smart economic advisers convinced me some other program would work better.

The opt-out solution has the problem that short-run considerations may interfere with following the optimal long-run plan, and there is an argument for forced individual saving because of this. A family responding to the pressures of the moment may make decisions that, in retrospect, were not the best in the long-run, and forced saving overcomes the short-run temptations (IRAs have this feature). Forced retirement saving is not my preferred solution, but it needs to be mentioned, and, if the opt-out system appeared to allow sub-optimal behavior to emerge even with the incentives described above in place, I would consider dropping add-on accounts and adding forced retirement saving to the forced poverty insurance payment. That would result in a system resembling the current system in many ways. (emphasis mine)

All in all, it's a good post. In the part I'm not quoting, he has a little to say about how to design the poverty insurance aspect of Social Security. Of course, there are issues that are too much for one blog post, so there are no final answers here. But if you have forgotten the earlier discussion, this will refresh your memory.

In the part quoted above, Mark admits that add-on accounts may not be the optimal solution either. It doesn't totally overcome the incentive problem. He doesn't give forced savings a ringing endoresement, but says "Forced retirement saving is not my preferred solution, but it needs to be mentioned, and, if the opt-out system appeared to allow sub-optimal behavior to emerge even with the incentives described above in place, I would consider dropping add-on accounts and adding forced retirement saving to the forced poverty insurance payment."

First of all, forced retirement saving would (or at least could) look a lot like a system of private accounts much like the privatizers have been talking about. In fact, I should probably say "partial privatizers" since most of us who have advocated private accounts at one time or another have really been arguing for partial privatization. Partial privatization would effectively separate the poverty insurance from the retirement savings. The former could quite likely remain solvent in pay-as-you-go form while the latter becomes a system of "forced retirement savings."

Of course, I am assuming that the forced retirement savings go into an personal account. That would not look much like what we have now, so I have to differ with Mark a little bit, at least on the specifics of how I would implement the "forced savings." (Since he doesn't mention private accounts, I have to admit the possibility that he wants forced saving without private accounts--Mark, if you're reading this, please clarify.) Here's why. If we accept Mark's implication that the forced savings looks much like what we have now (without private accounts), then what is the point? One more way to divide up the FICA tax? Would a certain percentage go to a poverty insurance fund and a certain percentage go to a retirement fund? What sort of rate of return would it yield? If it resembled the rate of return the average person receives on their OASI contribution, there would be open revolt! You'd have people begging for private accounts so fast it would make your head spin.

Perhaps Mark would advocate funding the program by letting the government invest in other assets (i.e. stocks) rather than just government bonds--in effect, fully funding the retirement savings but not giving individuals private accounts (and control over the risk/expected return trade-off). He mentions this elsewhere in his post. But this has been suggested before and it went nowhere.

Honestly, I don't see how you sell a forced savings program without private accounts. My return from a forced savings program without private accounts is going to be determined by politics rather than the market.

On the other hand, partial privatization is really just forced savings with private accounts (and choice over your risk/expected return trade-off). At the risk of sounding like a broken record, I think that could be done quite effectively if it were phased in with younger workers first.

That said, Mark's post is a step in the right direction. He and I definitely agree that it would be better to separate the insurance from the retirement savings. The details are still left to be debated. I prefer the "forced saving" with private accounts over the add-on opt-out accounts. Whether I could reluctantly support the latter is something I'm currently pondering. Government matching money for retirement savings is worth exploring (Mark mentions this in his post as well).

The debate continues. The real question is whether any progress will be made in Washington this year. If the second half of the year is like the first, I doubt it.

UPDATE: Has Daniel Altman been reading our blogs?

Well, we've been very busy lately with moving in, settling in, and all. After a long day yesterday, my wife and I sat down to watch some TV. It had been a long time since I'd watched The Jetsons. It happened to be the episode "Jetson's Millions," one of the last episodes from the revived version of the series which aired in 1985.

Synopsis: George Jetson wins the Venutian lottery (10 million venutis) which at the current exchange rate (75 cents per venuti) means he wins 7.5 million dollars. At the end, the Venutian economy collapses and the planet Venus has to devalue their currency to 0.01 cents per venuti, which devalues his prize to 1000 dollars (he had not received the money before the economic collapse).

Cartoons often have social commentary (from WWII era Warner Brothers all the way through The Simpsons), but economic commentary is not always tied to the main plot. As cartoon humor goes, this was pretty sophisticated.

The timing was interesting too. The episode originally aired May 4, 1985. That corresponds almost exactly with the peak of the dollar just a couple of months earlier but before the large drop in the value of the dollar. Of course, cartoons take a while to develop and animate, so the episode was probably conceived in 1984 or even 1983. That is only a year or two after the Mexican peso devaluation of 1982. Perhaps that provided the inspiration for the writers.

Whatever provided the inspiration, it made this economist laugh 20 year after the episode first aired.

Microeconomics is probably easier to spot in TV shows in general and cartoons in particular. I've never done a careful count, but it just seems to me to be the case. If you can remember any vintage cartoons that have some sort of macroeconomic reference, I'd be interested to hear about it.

Sarah Vowell (NY Times) writes:

...last year, [the Department of Homeland Security] distributed $38.31 per resident of Wyoming, but only $5.50 for each person living in the state of New York.

When Senator Hillary Clinton started using the adjective "threat-based" in talking about how to divvy up the homeland security funds, I thought my head might explode. Not because she was wrong. But because - simpleton that I am - I kind of assumed that the "threat-based" thing went without saying.

I was clueless enough to think that the very idea or, let's face it, ideal, of effective counterterrorism involved, at the very least, an educated guess about our national vulnerabilities - and I even thought that the money and equipment and personnel would be distributed accordingly. Which probably sounds simply adorable to those of you who have ever heard of the United States Senate.

I love Wyoming. I grew up right next to it in Montana. But from where I now sit in an apartment in the Flatiron neighborhood, staring at the Empire State Building, an apartment that, admittedly, isn't the Brookings Institution or anything, but does have high-speed Internet access and all the cable channels, it seems to me that New York has more ports and borders and financial centers and people and, yes, subways, so Wyoming could stand to throw a buck or two more our way per person.

I really don't understand the part about high-speed Internet access and all the cable channels. Is she trying to say they don't have those things in Wyoming? Maybe not in every nook and cranny of the state, but the cities and towns are not exactly primitive. That seemed a bit gratuitous.

Anyway, the mental arithmetic here is pretty easy, so let's talk about it. It so happens that the population of Wyoming is just about 1/2 million. New York is just about 19 million. New York has about 38 times the population of Wyoming. Hence, by the numbers Vowell cites, you could wipe out all the Homeland Security spending on Wyoming and it would only add another dollar per person for New York. Putting New York and Wyoming on equal footing in terms of per capita spending would require eliminating nearly all of the spending now going to Wyoming.

I'll leave it to the reader to contemplate whether eliminating Homeland Security spending for Wyoming (or Montana, North Dakota, etc.) would be appropriate. Your response will probably depend, at least to a degree, on whether you live in more rural areas or not. I live in a college town in a rural part of one of the most populated states in the country, so I can see this one from both sides.

The fact of the matter is that the quantity of Homeland Security services provided in rural areas is less than that in urban areas. Yet, there is a certain fixed cost associated with providing certain types of security. For example, providing security at an airport in Cheyenne requires a significant investment in equipment, not to mention a commitment to an ongoing cost in staffing--just like it does in New York. Now, of course, a small airport may have only one security portal and a large airport has several, but even then, there are certain economies of scale. Now, think about how many more people pass through JFK than pass through Cheyenne Regional Airport. Remember too, that the security chain is only as strong as its weakest link and you realize that there simply must be some disparity in the per capita spending on things like airport security. It's simply a matter of economies of scale caused by the high fixed costs. A simple extension of this concept explains why protecting trains and subways is orders of magnitude more difficult and costly. There are 428 subway stations in New York City. That compared to 579 airports in the entire US that are certificated for Part 139 passenger service.

I don't have a magic solution to this problem. Providing any sort of minimal air travel opportunities outside coastal population centers will necessitate some disproportionate spending on rural areas. Protecting New York's subways (not to mention the rest of the nation's railways to the same standards would require an incredible amount of spending. But then, if you don't protect the Amtrak train coming into the city from the rural areas, you're back to the same problem.

It's not a pleasant set of circumstances. And I'll admit that the current allocation is probably not optimal, so additional discussion on this topic is warranted. As situations change, so too our Homeland Security spending priorities must adapt. However, I would refrain from simplistic comparisons of per capita spending without a nod to the economies of scale that come with protecting population centers.

I suppose that in the '30s there were some city folks who objected to spending all that money on rural electrification. But the REA and TVA were meant to address similar economies of scale problems. Cities had electricity because there were lots of customers per mile of wire (and cost depends largely on distance). Rural areas had fewer customers per mile. Now, the good folks in rural areas have electricity, cable, and high-speed Internet--just like Ms. Vowell in her Flatiron apartment. (And that's great because it means you can read my blog whether you are in Cheyenne or Manhattan.)

Today's problems and priorities are different, but there are some principles that one would do well to keep in mind when thinking about these things.

I was out of town yesterday, unable to blog, and only able to catch news reports here and there. But every time I did catch a news update the toll was higher. Our prayers are with the British people in the days to come.

The speech isn't that long. As they say, read the whole thing. This part seems particularly relevent to some issues the blogosphere has been buzzing about this year.

Starting with the policy statement following its meeting on August 12, 2003, the FOMC began to provide firm guidance as to the future direction of policy. The statement said that the Committee “…believes that policy accommodation can be maintained for a considerable period.” This language was repeated until the statement released on January 28, 2004, when the Committee said that it “… believes that it can be patient in removing its policy accommodation.” That language was continued until May 4, 2004 when the Committee said that it “believes that policy accommodation can be removed at a pace that is likely to be measured.” At its meeting of June 29-30, 2004 the Committee raised the target federal funds rate by 25 basis points and issued a statement repeating the “measured pace” language. That language came to be interpreted in the market as creating an expectation of an increase in the target fed funds rate of 25 basis points at the next FOMC meeting and, depending on circumstances, at the next several meetings. At every subsequent meeting following the June 2004 meeting, through its most recent on June 29-30, 2005, the Committee raised the target funds rate by 25 basis points and repeated the “measured pace” language.

Providing guidance on likely future policy actions is a significant departure for the Federal Reserve. Historically, the Fed and other central banks have been reluctant to provide forward guidance out of a concern that doing so would limit freedom of action in the event of new information indicating that changed circumstances called for a change in policy direction. If the markets have a thorough understanding of policy, including an understanding that forward guidance is conditional on the information available to the central bank at the time the guidance is issued, then markets should not have difficulty in understanding how new information might require policy action that differs from the guidance.

Experience to date with forward guidance has been successful but in my opinion it is too early to tell whether this departure will be successful in the long run. The matter will be tested when changed circumstances require policy action that differs from forward guidance.

I believe that improved predictability of policy has had much to do with improved effectiveness of policy. Poole and Rasche (2000) argue that changes in policy practice have moved the economy toward a rational expectations macroeconomic equilibrium in which the Fed and the markets react in similar fashion to the arrival of new information. Synchronized responses between the markets and the Fed enhance the economy’s adjustment to changed circumstances, thereby increasing economic stability and efficiency. In the years ahead, maintaining and extending improved predictability of policy will be a major challenge for Federal Reserve chairmen.

Can't say I disagree.

King at SCSU Scholars has more on the panel at the WEAI meetings (where this speech was delivered).

Mark Thoma links to a Reuters story about the event.

From USA Today

A two-bedroom, two-bathroom mobile home perched on a lot in Malibu is selling for $1.4 million. This isn't a greedy seller asking a ridiculous amount no one will pay. (Photo gallery: Mobile home boasts of spectacular views)

Two others sold in the area recently for $1.3 million and $1.1 million. Another, at $1.8 million, is in escrow. Nearby, another lists for $2.7 million.

"Those are the hottest (prices) I've ever heard," says Bruce Savage, spokesman for the Manufactured Housing Institute. He says prices in another hot spot, Key West, Fla., top $500,000. As if the price isn't tough enough to swallow, trailer buyers:

•Don't own the land. As with most mobile homes sold in Malibu, the land is owned by the proprietor of the trailer park, in this case, Point Dume Club.

•Still pay rent. Not owning the land means paying what's called "space rent" that is as high as or higher than many mortgages in other parts of the USA. On the $1.4 million trailer, space rent is $2,700 a month.

•Can't get mortgages. Since the buyers don't own the land, most of the mobile homes are paid for in cash or with a personal property loan that usually amounts to $100,000 or less, says Clay Dickens, mortgage loan agent at Community West Bank.

...

Developers are partially driving the rise. Janet Levine at Maliblue Holdings has bought several old homes and is installing high-end "mobile villas" to put up for sale. Levine and others bristle at the term "trailer." To be permitted in the park, the home must be perched on piers (a high-end version of up on blocks).

A high-end version of "up on blocks"?!

Words fail me.

Hat tip: Calculated Risk

I only planned to do one post tonight, but this was too good to pass up. Via macroblog comes word that the market might be thinking twice about whether the Fed is done or nearly done raising interest rates.

For better or worse, "measured pace" lives. Check it out. The implied probability of another 50 basis points by October is almost at 60%. This after being in the 30-40% range since late April.

The rather sudden turn in the implied probabilities is not all that puzzling. Clearly last week provided the market with new information. After mulling it over the long weekend, traders are putting that new information into practice.

So is the economy really doing better than market participants were expecting? Maybe. I mean, the bond market is not infallible. For my money, they have been too pessimistic so far this year. But even some Fed watchers are a little surprised. I admit to being less surprised.

In the final analysis, I think what we're seeing here is the market adjusting to information. The Fed has been cryptic about when the rate hikes would stop. That heightened speculation that they would stop soon. The Fed essentially said, "Think again." This isn't a sign that things are going wrong. While it's not a perfectly transparent process, information gets transmitted and the market reacts. What we are seeing is what we teach in our classes.

In a comment over at Mark Thoma's blog, I had one of my better predictions concerning what I thought the committee might say in the statement after the meeting. I missed one thing though, and I think it is important. The Fed (and I think the market too) believes that the increase in energy prices is not likely to translate into long term inflation problems. From the statement:

Although energy prices have risen further, the expansion remains firm and labor market conditions continue to improve gradually. Pressures on inflation have stayed elevated, but longer-term inflation expectations remain well contained.

And in turn, long term expectations are keeping the 10 year yield well contained. Inflation expectations matter, and I haven't seen any indication that the news that the market is responding to has much to do with long term inflation expectations. There hasn't been as much talk about this, but it's a very important point.

I actually see the movement in the fed funds futures and the 10 year in the last few days as an understandable, if not totally expected, move. Just a real-time adjustment in short-term (3-12 month) expectations--not a lot more. I'll just say that for now anyway, any attempt to make this into a lot more is probably much ado about nothing.

I do, however, think that the minutes to the meeting just ended will be worth reading indeed. And I'll report on them here.

This week has been filled with moving as well as finishing a paper that I had to revise and resubmit. Blogging can now resume.

How about this from the Wall St. Journal?

What's your major? Around the world, college undergraduates' time-honored question is increasingly drawing the same answer: economics.

U.S. colleges and universities awarded 16,141 degrees to economics majors in the 2003-2004 academic year, up nearly 40% from five years earlier, according to John J. Siegfried, an economics professor at Vanderbilt University in Nashville, Tenn., who tracks 272 colleges and universities around the country for the Journal of Economic Education.

And the best part...

And as its focus broadens, there are even some signs that economics is becoming cool.

There you have it. Economics is becoming cool. Well, I thought it has been all along. The rest of the world is just catching up. But in all seriousness, there are some interesting things in the article about job prospects for all these economics majors (hint: they are good).

(hat tip: Marginal Revolution)

Time to catch up on some other things. Blogging will be somewhat light for a few days, but I am here and if interesting stuff comes along, I'll toss in my 2 cents.