August 2005 Archives

23 ticks up in price. The yield stands at 4%. (CNN)

Write your own story. You know the drill.

Econbrowser (James Hamilton) with the latest:

But then I look at the size of the challenges we face today. The price of the September gasoline futures contract went as high as $2.92 a gallon today before closing at $2.61. That $2.92 high would be $1 more than the price of the same contract last Friday. Contemplate the consequences if the retail price were to move $1 per gallon in a few days, and you grasp the magnitude of the situation we're in.

Bloomberg found at least one person who has contemplated it:

"We're going to be over $4 a gallon retail by the end of next week," said William Shireman, executive vice president of Gas City Ltd., a 50-station chain based in Frankfort, Illinois. Shireman said major oil companies have stopped selling unbranded gasoline to independent retailers in Illinois and have cut back on contract allotments. He declined to say which companies were halting unbranded sales. The wholesale price he pays for gasoline has "gone up about 80 cents a gallon in two days," he said.

Are you ready for that, America?

Indeed.

The ZIP code is 56572. The blog is 56572. It's the town where I grew up. And gas costs $3.10. (Click to go to the picture).

Kash returns from his hiatus and tries to discern the "animal spirits." He's worried.

Even temporary problems can get magnified if they contribute to a broader change in psychology. And I think that the current situation contains the seeds for such a shift in sentiment. My personal odds for a recession in 2006 have just gone up, thanks to Katrina.

James Hamilton tries not to be too pessimistic, but finds it hard.

Could this be enough to tip the whole economic cart over? I'm not certain that it will. But it would seem foolish to deny the very real possibility that it could.

Macroblog presents a special mid-week edition of the fed funds probabilities and reports that sentiment for a November rate hike is weakening.

David Tufte thinks the damage total will be much higher than the media is reporting, and he's pretty familiar with the area.

The only estimates that have come out so far are insured losses. There are three problems with this. First, New Orleans is not a heavily insured city. Second, initial insurance estimates have been notoriously low for several disasters the last few years. Third, we've never had a disaster like this before.

Estimates of national wealth from the World Bank are $400K per capita in the U.S. Currently, with the failure to close the 17th Street levee break in New Orleans, the entire east bank of Orleans and Jefferson parish is at risk. Something like 800K live in that area. This places the total wealth of that are at $320 billion.

and...

On top of this, the GDP of the east bank is roughly $2.5 billion per month. They are talking a bare minimum of 2 months before people can even come back everywhere across the city, much less get back to a reasonable facsimile of earlier production.

Calculated Risk gives the rundown on the refineries.

MaxSpeak thinks it might be too late...

Oil refining capacity is on a very tight string. Any damage in the Gulf seems likely to wreak non-trivial damage on the economy. That sounds like an emergency.

But it may be too late to prevent a recession, given the heights to which oil prices have already risen. Is a recession an emergency? How much would releasing the reserve do to forestall gas price increases and recession?

Like I said last night, I am reluctant to speculate too much too soon about a recession. It's just too early. But all in all, the economics corner of the blogosphere has been (as evidenced by the links here) very reasoned in its assessment of the situation. My take is closest to Hamilton's. It would indeed be foolish to underestimate the possibility that this could be the straw that breaks the camel's back. For some time, I have been comparing the present situation to the mid-1990s, which was a time of monetary tightening, the early stages of a recovery, much anxiety over deficits of both the budget and the trade variety, and a general notion among economists and analysts that the economy was at a crossroads. Will the landing be soft or hard? That was the question then, and it is the question today. I have been of the opinion that if we are able to stay the course, we would be on a trajectory for a soft landing, perhaps even softer than in 94-95. My airplane analogy even got a notice from Brad DeLong. Well, to continue the analogy, this hurricane was indeed the sort of ill wind that would cause a pilot to make a last minute correction or things will get bumpy. I think it is reasonable to believe such a correction could take the form of a pause in rate hikes near the end of the year. I've been arguing that even before the hurricane, and I believe it even more strongly now. I know we'll be watching those fed funds probabilities very closely, eh, David?

Of course, that doesn't mean a recession is inevitable. After all, we had the Mexican peso crisis in late 1994 which some thought might derail our nascent recovery. It did not. Will Katrina be different? As of August 31, we simply cannot say. I think it is safe to say, however, that this is a very critical moment for the economy. It could swing either way. If we pass this hurdle, I think it bodes well for the future of the recovery.

In the immediate term, my thoughts and prayers are still with the people affected by Katrina.

UPDATE: David Altig posts an update on the fed funds probabilities, and all I can say is, "Wow." Altig writes,

In his email alerts, Stan Jonas -- who probably knows more about the federal funds rate derivatives than anyone -- says "Fed Done By December... Certain..."

Countless organizations will be collecting donations for the victims of Hurricane Katrina. If you have a favorite charity that helps out in situations like this, I invite you to support them. The standard line is that they need money more than actual physical goods. And the Red Cross has certainly distinguished itself in many tragedies for being on the scene so quickly and providing basic needs.

Click here for the Red Cross donation site.

Habitat for Humanity is gearing up to rebuild homes in the stricken areas. That effort will take some time, but they could use your help too.

Click here for Habitat for Humanity.

On one of the news networks (can't remember which one, sorry) an official was being interviewed about the looting in New Orleans. He responded that they would be going after the looters and price gougers to the fullest extent of the law.

As I heard the question, it was not about price gouging but about looting. The interview subject (presumably someone in state government--wish I caught the name) was the one to put them in the same sentence.

Discuss.

UPDATE: I may not have caught the name of the official who made such a statement the other night. But a certain higher ranking official is making headlines. (CNN)

I think there ought to be zero tolerance of people breaking the law during an emergency such as this, whether it be looting, or price-gouging at the gasoline pump or taking advantage of charitable giving, or insurance fraud," Bush said in an interview on ABC's "Good Morning America.

With apologies to Sesame Street... One of these things is not like the others!

In a previous post today, I panned some analysts for indicating that Katrina might end up spurring GDP growth and that the impact of lost wages would be balanced by increased spending on construction. Mark Thoma writes in with a comment. We are in total agreement that GDP counts "bads" as well as goods. But I'd go further in saying that it is dubious that a disaster like this even raises GDP at all. The BEA takes no stand on whether such an event has a positive effect on GDP.

GDP is a measure of the Nation’s current production of goods and services; as such, it is not directly affected by the loss of property (structures and equipment) produced in previous periods. GDP may be affected indirectly by the actions that consumers, businesses, and governments take in response to disruptions in production or to the loss of property, but these responses are not amenable to precise quantification; moreover, the responses may be spread out over a long period of time. For example:

Rebuilding activity, which may occur over many months following a disaster, will typically be reflected in the regular source data used to estimate residential and nonresidential investment. There is no way to disentangle the disaster-related rebuilding from other construction activity.

Tourism and other types of consumer spending may be canceled or postponed in the face of a disaster; whether canceled or merely postponed, the effects will be embedded in the source data that are used to estimate personal consumption expenditures. Again, there is no way to disentangle disaster-related spending from other consumer spending.

The BEA does, however, calculate is how much economic damage is done by disasters. Here is the BEA's calculation for the storms of the 2004 hurricane season. They estimate about a 4 billion dollar hit to personal income from the time of the storms through the 2nd quarter of this year. While that is pocket change in a 12 trillion dollar economy, it's sizeable to those in the affected region.

In simplest terms, I guess you could say that a natural disaster and the rebuilding that follows converts a stock to a flow. Capital is destroyed and new investment is required to replace it. The replacement temporarily generates income and jobs, but it is not clear that there is a gain. I just can't see that an involuntary conversion of stocks to flows is a good thing. If it was, we would do it voluntarily.

Mark also says:

But from the Fed's perspective, in an inflation targetng environment, the important factor is what happens to pressure on prices. ... But looking forward it does seem to me as though this has the potential to increase the demand for inputs in key sectors such as housing putting upward pressure on prices. It is true that we only have what we started with, but to get back there requires the use of additional resources.

So the question is what kind of impact Katrina will have on prices. Certainly there could be some impact on building materials and the like. But remember, we're talking about a fraction of a percent of GDP even if Katrina shatters all records.

And so I have to take issue with part of Tim Duy's commentary on the FOMC minutes today as he relates it to Katrina:

The impact [of Katrina], in my mind, is a classic supply side shock; we can’t really argue that this latest surge in energy prices is driven by strong demand, placing the Fed in the famous conundrum – fight weak output, or fight inflation? But wait, maybe output, nationally, will not be a problem after all. The Gulf States will need extensive rebuilding as Katrina was likely the costliest storm in US history. Consider the billions and billions of dollars of construction materials that will be streaming into the region over the next few years.

At least part of that money would have been spent on something else. It is not all a net gain to GDP. The amount of gain is questionable, and the (unseen) loss is great. Furthermore, it's an almost imperceptable effect on the scale of the national economy (aside from the oil impact). But Duy concludes that the Fed will be primed for more rate hikes, in part because of Katrina, and (if I read him right) the positive demand shock which will result.

Right conclusion; but too much emphasis on the demand shock from Katrina. I think there was evidence in the minutes that the Fed will continue with the rate hikes even if the inflation pressure is coming from the supply shocks (i.e. oil). We can debate the wisdom of this, but I think it may be a moot point. I just don't see the evidence that the aggregate economic impact of whatever demand shock of Katrina's aftermath is enough to factor into the Fed's equation at all. They certainly aren't going to quicken the pace of rate hikes to cool the increased demand due to Katrina.

In related news, the 10 year bond shot up 20 ticks today. An overreaction perhaps (we'll see if it gives any back tomorrow), but it's not exactly a sign that the bond market thinks Katrina will light the inflation fuse.

The Economist says it's possible. (h/t: The Eclectic Econoclast)

Chief among the worries is the oil industry. The Gulf of Mexico provides about a tenth of all the crude oil consumed in America; and almost half of the petrol produced in the country comes from refineries in the states along the gulf's shores. Oil companies are busy assessing how much damage was done to drilling rigs, refineries and port facilities; but even if the infrastructure is largely intact, shipping delays threaten to idle refinery production. This is bad news considering that refineries have been running flat out in recent months to keep up with high demand. The White House says it is considering opening up the strategic petroleum reserve to supply refiners caught short by the hurricane.

The oil situation is really the only aspect of this story that has recessionary undertones. Even at the high end of the damage estimates (admittedly it's early to think about estimating the amount of damage) we're talking maybe a quarter of a percent of GDP. And that's only if the total comes in smashing the record sent by Hurricane Andrew in 1992. There will be lost jobs at hotels and casinos that have been destroyed. There will be disruptions in a myriad of ways large and small. It will result in a slowing of GDP growth in that area, probably for the rest of the year. But viewed in the national statistics, the direct effect will be a small ripple. The big story is Katrina's effect on refining capacity.

I've been hearing reports on various news networks that a little less than 10% (one said 8%... I have no hard evidence on the accuracy of this number) of the nation's refining capacity has been impacted. In an environment where we're already running the refineries full-tilt to keep up with demand, that is a significant hit. Wholesale gas prices are already being affected, and this is only the first 48 hours after the hurricane. Of course it will take a few days before we really know where we stand.

As I mentioned earlier, this is a bigger story than the effect on the crude oil market itself, and no less important to the national picture of our economy. All of a sudden, we're dealing with a bottleneck in the production of gasoline, natural gas, heating oil, and other petroleum products with no clear indication yet of how long this shock could last.

I've been reluctant to join in the chorus of voices predicting recession, and I sincerely hope that this event will not lead me to revise my probabilities too terribly much. Like everyone else, I'm just waiting to see what the news coming out of the refineries is going to be. Calculated Risk has had a couple of posts on this topic, including this one and a pointer to this article from Marketwatch.com. We're in a wait-and-see mode, which is frustrating, but I'm going to resist the urge to speculate any further at this early stage about how long lasting the disruption might be.

$70 oil is tough on the economy, and so is $3 gasoline. Even if oil prices recede a bit because Katrina's impact on the global market is small, the higher gas prices (and heating oil, natural gas, etc) will be a major concern. This is definitely something to watch.

The word "measured" is in the minutes in a couple of important paragraphs:

The Committee's decision at its June meeting to raise the intended level of the federal funds rate 25 basis points, to maintain an assessment that risks to the goals of price stability and sustained growth were balanced assuming appropriate monetary policy action, and to retain the "measured pace" language was widely expected in financial markets. Over the intermeeting period, however, investors appreciably marked up their expectations for the path of policy, primarily in response to incoming economic data suggesting more strength in spending and output than had been anticipated.

and...

In their discussion of current conditions and the economic outlook, meeting participants noted that aggregate spending appeared to have picked up in recent months by more than anticipated and that current estimates of slack were narrower than those reviewed at the June meeting. In addition, high and rising energy prices were adding to pressures on overall inflation, and energy price increases probably would feed through, at least temporarily, to core measures of inflation. Nonetheless, core inflation recently had been relatively low and inflation expectations remained well contained. Moreover, participants thought that some slowing in final sales was likely later this year as net exports resumed their decline and purchases of automobiles fell back with the expiration of special discount programs. In these circumstances, it appeared that, for now, continued removal of policy accommodation at a measured pace still would likely be sufficient to keep inflation contained, but participants also recognized that the pace and cumulative extent of policy adjustment going forward would depend importantly on economic developments.

But there's more... These are some of the most interesting minutes in quite a while.

Participants viewed the increases in market interest rates over the intermeeting period as an appropriate response to the stronger economic outlook. A few participants voiced concerns that still-low interest rates and insufficient recognition by investors of the dependency of the Committee's policy expectations on economic data were continuing to foster an inappropriate degree of risk-taking in financial markets. Another participant mentioned, however, that recent sluggish growth of the monetary aggregates suggested that the stance of policy was not overly accommodative. Moreover, with a higher proportion of mortgages now tied to short-term rates, it was noted that increases in short-term rates could have a somewhat larger-than-usual effect on spending. On balance, current financial conditions, which embedded expectations of future policy tightening, were generally seen as likely to be consistent with sustained moderate economic growth and containment of pressures on inflation in coming quarters. (emphasis mine)

Ah, there appears to be debate of the sort we've been chronicling. Note how the at this point the minutes are sounding a trumpet call to the market that future policy is going to be dependent on the data. I think that should be crystal clear now. You've been warned.

Participants discussed at length the factors affecting costs and prices. Although uncertainties about the underlying pace of productivity increases, trends in labor force participation, and the level of potential output complicated the inflation outlook, higher energy prices and reduced resource slack were seen as pointing to elevated inflation pressures. While recent monthly readings indicated that core inflation had been subdued, a number of participants noted that underlying core inflation appeared to be running at a pace around the upper end of the range they viewed as consistent with price stability-an assessment that was reinforced by the recent upward revisions to historical data on core PCE inflation. Participants commented that an increase in inflation from recent rates could have especially adverse effects on longer-run economic performance.

Ah, to have been a fly on the wall for that discussion, eh, PGL?

While most participants viewed the risks to inflation as having ticked up over the intermeeting period, many also cited factors that, in concert with the likely continued removal of policy accommodation, would tend to hold inflation pressures in check. For example, few indications had emerged recently that businesses had enjoyed any significant increase in pricing power, and the continuing expansion of global trade was seen as an important factor limiting firms' ability to pass through cost increases. In these circumstances and with markups at relatively high levels, a substantial proportion of any increases in business costs might well be reflected in narrower profit margins. Moreover, the recent relatively low monthly readings on core inflation and modest wage pressures, at least by some measures, suggested that some slack remained in resource utilization. Despite the rise in oil prices and quickening pace of economic activity, both market- and survey-based measures of inflation expectations seemed to remain quite well anchored.

Seems like most of the discussion was about inflation, which is the appropriate thing for a central bank to talk about since it's where they have the biggest effect in the long run. The inflation picture is not unambiguously benign. However, it appears to be held in check, perhaps more than they would have expected given strong GDP data and higher oil prices.

In the Committee's discussion of monetary policy for the intermeeting period, all of the members favored raising the target federal funds rate by 25 basis points to 3½ percent at this meeting. Even with this action, the federal funds rate would remain below the level that members anticipated would prove necessary to contain inflation pressures and keep output near potential, and thus in all likelihood further policy action would be required. However, the pace of future policy moves, although likely to be measured, as well as the extent of those moves, would depend on incoming data.

It's not over, folks. But then, you knew that already, right?

In discussing the statement to be released after the meeting, members agreed that it was appropriate to highlight the apparent strengthening in aggregate spending. Policymakers exchanged views on the characterization of labor market conditions in light of recent employment reports and other indicators, but members ultimately concurred that the description of labor markets as "improving gradually" remained appropriate. Members agreed that it was appropriate to acknowledge the recent relatively low monthly rates of core inflation, but also to emphasize that inflation pressures remained elevated. As in past meetings, there was some discussion about the desirability of including forward-looking language in the statement, but members agreed to retain the forward-looking language for now.

All in all, there are a few tidbits in here that haven't come out in previous minutes. I think these minutes paint quite a picture of how the Fed is concerned that the market needs to take note of the fact that upcoming policy moves are going to be dependent on incoming data. As I said above, you've been warned. Energy prices continue to be a point of interest, and probably will be for some time. Don't look for the Fed to ease (or let up on the increases as the case may be) just to give the economy a break from high oil prices, at least not at this point.

So we know a little more today than we did yesterday. The rate hikes are clearly not over. And some additional increase is probably appropriate given the big picture painted by the data. I still would advocate for a pause in the action in December even if they resume in 2006, just to give the economy a chance for the last couple hikes (which were not anticipated until a few months ago as opposed to a year ago) a chance to sink in.

The situation in New Orleans and throughout LA, MS, and AL is indeed grim. As of last report, the water is still rising in New Orleans due to the breaks in the levee. It was disconcerting last night to see so few pictures from New Orleans. That can only mean that it is still nearly impossible to get in there. The pictures starting to trickle out today are not pretty.

But in the face of this disaster, the media does what it always does and adds insult to injury with bad reporting on basic economics. It's like clockwork. See here for a tsunami example. I seriously considered writing a post before Katrina hit, just to get my thoughts out there in front. I decided the only purpose that would serve would be to be a "see, I told you so." I don't think it would have caused stories like this to have been written any differently.

"There will be a lot of rebuilding that is going to need to occur. These things do spur GDP growth," said Ken Mayland, president of ClearView Economics in Pepper Pike, Ohio.

Hat tip: Cafe Hayek.

Oh, and the article goes on...

Diane Swonk, chief economist at Mesirow Financial in Chicago, said wages lost by workers and revenues missed at shops and other businesses would be generally short-lived and replaced by stepped-up demand for construction and other workers and higher sales at home-supplies outlets.

This kind of thing really bugs me. Part of me wants to weep at how misguided such thinking is on the part of these people who really should know better. Part of me wants to be mad at the media for accepting such statements uncritically and perpetuating the myth.

This is the "Broken Windows" fallacy. It's the idea that destruction (as in breaking a window) is somehow positive because it provides economic activity for the person replacing the window. Of course, the person whose window was broken and has it fixed will spend money that he could have spent on something else (and would have spent on something else). And what does he have to show for it? A window... just like he had before.

Russell Roberts of Cafe Hayek tries to give the benefit of the doubt.

Maybe the last two economists quoted were quoted out of context. Or maybe they meant something more nuanced, holding things constant that they didn't explicitly mention.

But I've heard too many interviews like this in context to give them the benefit of the doubt.

This is not to say that some people will not benefit. Bastiat's original story of the broken window makes it clear that the glazier does indeed benefit. Carpenters, restoration companies, and many other types of service providers will see more business. That is true, but it is far from clear that the work that they will be doing adds any net new social value. Mostly, they will be replacing what was lost and that will prevent them from creating anything truly new. If supplies are tight, they will raise their prices (if they are allowed to) which is an efficient response, even if it is hard for the citizens of the affected areas to stomach.

We have a clear need for better reporting and writing about economic issues. I am going to coin a phrase that I hope will catch on. I used it here first. Principles level is all I ask!

The Eclectic Econoclast finds another example.

The television journalists I have been watching do not understand.

Oil is traded in a world market. Katrina had little effect there, as can be seen here which lists oil futures prices. There was a minimal impact on oil futures for January '06.

Gasoline is traded regionally in the U.S., and gasoline futures for January '06 rose by nearly 20%.

The major energy effect of Katrina will be on U.S. (and probably Canadian) gasoline prices because of the impact on refining capacity, not because of the minor impact of world pumping capacity or reserves.

The Eclectic Econoclast then points us to the always excellent James Hamilton, who lays it all out in one of the best post-Katrina blog posts of all.

Finally, to wrap up the blog-roundup on Katrina (at least for now), I note that Phil Miller did make a post ahead of time warning of the kind of foolishness that might follow. I don't have any confirmed reports that the government is cracking down on "price gouging" yet, but I'm sure it will come. Such things are as clockwork. I suspect that some politicians know better but it's just so easy to cater to what people want to hear. No one wants to be for higher gas prices; everyone want to be against them. The willing media just makes their job easier.

Principles level is all I ask!

(Note to my principles students: If you master the content of a good course in principles of economics, just look at how much better you will understand what is going on compared to so many people out there! Just understanding things at the principles level is good enough for many policy discussions. Indeed, there are many instances [often chronicled by econo-bloggers] where the world would be better served if the discussion were elevated to that level.)

UPDATE: I go into more detail in response to a comment below.

I've been following the progress of Hurricane Katrina throughout the day like everyone else. The media coverage of the approach of the storm can at times be frustrating to watch. Generally speaking, I only watch The Weather Channel for analysis of hurricanes since it's the one place where the reporters actually know what they are talking about. For the latest from the National Weather Service, look at weather.gov.

At one point today, the pressure inside Katrina was the 4th lowest on record in the Atlantic Basin. It is a category 5 storm... nothing to mess around with. It's going to be a rough morning for the gulf coast. My prayers are with those in the affected areas.

Alas, this photo is from a 2002 visit. I hope Mr. Greenspan and all the other participants at the Jackson Hole conference are able to get out and enjoy. The view from the main lounge in the lodge is spectacular. Get out in the morning to see elk and moose.

Larry Kudlow writes the following at the NRO

On the oil-price shock, I say at least two cheers for higher prices. Why? Because I believe in markets. When the price of energy goes up, demand falls off and supply increases. This is the case today and it represents nothing short of a tectonic shift.

PGL is not pleased.

OK, Kudlow does seem to understand that the supply curve has not shifted inward but what does “demand falls off” mean? Larry – try this: an outward shift of the demand schedule, which has led to the dramatic increase in the price of oil. Kudlow also suggests a higher elastic supply schedule for energy:

The part to which PGL refers is this:

As Dan Yergin, president of Cambridge Energy Research Associates, recently wrote in the Washington Post, rising energy prices today will cause energy supplies to explode tomorrow.

Allow me to make a helpful clarification.

Kudlow's statement, "When the price of energy goes up, demand falls off and supply increases." is the kind of thing I see a lot of as a person who teaches principles of economics. It is a horrible way to say it. Usually, the person saying something like this knows what they are trying to say, but they are easily misunderstood. And in my principles class, I'd tell him to re-write it.

He's obviously talking about long run supply and demand, both of which are more elastic than short run supply and demand. But not every reader will catch that, so at best it sounds awkward. At worst, it sound contradictory since a few sentences later Kudlow says,

The spread of global capitalism to places like China, India, and Eastern Europe is the main cause of the spike in energy prices. It’s a market signal that the new and prospering world economy needs more power. Consequently, this is not a recessionary supply crunch like we had in the 1970s. It’s a growth-oriented demand increase.

Are you dizzy yet? "Demand falls off," and "It's a growth-oriented demand increase." Which is it? Well, it's both... but with a short run vs. long run distinction.

Examples of this sort of imprecise language in public discource are too numerous to mention... and it knows no party lines.

Now, the question of how elastic long run supply might be is another question entirely, one which PGL properly raises. But it would be a lot easier to have that discussion (and Kudlow's readers would be better served) if the good economic terminology (principles level is all I ask) were used.

Mark Thoma piles on about the monetary policy aspect of Kudlow's column.

I've been telling my students for years that this was going to happen and that when it does it will be significant.

Sounds like it's starting. (NY Times)

Read it here (NY Times). Much has been made lately of the apparent bubble in housing in certain areas of the country. As a measure of that bubble, we can look at the price-rent ratio. Calculated Risk, for one, has been keeping track of it. The Times article indicates that the tide might be turning, at least in some areas.

Throughout the South, in cities like Atlanta and Charlotte, N.C., fewer apartments are empty, building managers say. Nationwide, the vacancy rate for rentals fell to 9.8 percent in the second quarter after having climbed early in 2004 to 10.4 percent, the highest level since the Census Bureau began keeping statistics in 1956.

That might reverse the trend that I noted here.

Hal Varian's Economics Scene column in the NY Times discusses the rise of the micro-multinational.

But offshore work means something quite different to the micro-multinationals. These companies simply would not exist without access to foreign labor. If they succeed, they will certainly hire more American workers as they grow.

The internationalization of small and medium-size enterprises has got to be a big plus for the American economy. It allows the small players to have access to labor markets that only the big boys could afford a few years ago.

It's already happening, and it's becoming more important, even (or should I say especially) in smaller cities where high tech job growth is bound to be on a micro scale.

That way, they could commiserate with the folks down there about how much resentment a successful company faces.

Ok, I jest, but before you laugh it off, read this (NY Times).

SAN FRANCISCO, Aug. 23 - For years, Silicon Valley hungered for a company mighty enough to best Microsoft. Now it has one such contender: the phenomenally successful Google.

But instead of embracing Google as one of their own, many in Silicon Valley are skittish about its size and power. They fret that the very strengths that made Google a search-engine phenomenon are distancing it from the entrepreneurial culture that produced it - and even transforming it into a threat.

...

"I've definitely been picking up on the resentment," said Max Levchin, a founder of PayPal, the online payment service now owned by eBay. "They're a big company now, doing things people didn't expect them to do."

Like make a lot of cool stuff and give it away.

For the moment, at least, Google is aiming for that most coveted position in technology: a platform that, like Microsoft's operating system, is so popular that outside software developers write programs, and Web developers build new Google-related services, that render the Google home page indispensable to the personal computer ecosystem.

I don't want to repeat the whole article, and there is much more than I have excerpted here, so do read it all. For my part, Google seems to be doing a lot of things right. Fears of them taking over the computer world are probably blown out of proportion. Other good ideas will spring from the fertile ground of Silicon Valley. After all, it wasn't long ago when folks might have laughed at Google for thinking they could be a threat to Microsoft. Which brings me to one more good quote from the article.

"When I meet with venture capitalists, or if I'm engaged in a conversation about going into partnership with someone, inevitably the question is, 'Why couldn't Google do what you're doing?' " said Craig Donato, the founder and chief executive of Oodle, a site for searching online classified listings more quickly.

"The answer is, 'They could, and they're probably thinking about it, but they can't do everything and do it well,' " Mr. Donato said. "Or at least I'm hoping they can't."

Go get 'em, Mr. Donato.

Capitalism. Ain't it grand?

Read it here. Some of it is silly. Some of it will bring back memories. My favorite is this one:

Money put in their savings account the year they were born earned almost 7% interest.

"They" refers to today's college freshmen, born in 1987.

Here's the setup from the Sunday NY Times. The writer is speaking of an interview with Matthew Simmons, author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.

Simmons has a lot riding on his campaign -- not only his name but also his business, which would not be rewarded if he is proved to be a fool. What, I asked, if the data show that the Saudis will be able to sustain production of not only 12.5 million barrels a day -- their target for 2009 -- but 15 million barrels, which global demand is expected to require of them in the not-too-distant future? ''The odds of them sustaining 12 million barrels a day is very low,'' Simmons replied. ''The odds of them getting to 15 million for 50 years -- there's a better chance of me having Bill Gates's net worth, and I wouldn't bet a dime on that forecast.''

The gathering of executives took place in a restaurant at Chelsea Piers; about 35 men sat around a set of tables as the host introduced Simmons. He rambled a bit but hit his talking points, and the executives listened raptly; at one point, the man on my right broke into a soft whistle, of the sort that means ''Holy cow.''

Simmons didn't let up. ''We're going to look back at history and say $55 a barrel was cheap,'' he said, recalling a TV interview in which he predicted that a barrel might hit triple digits.

He said that the anchor scoffed, in disbelief, ''A hundred dollars?''

Simmons replied, ''I wasn't talking about low triple digits.''

Enter John Tierney, who takes a page out of the late Julian Simon's playbook and asks Simmons to make a bet on his claim.

Read it here. (NY Times)

I proposed to him a bet using what Julian considered the best measure of a resource's value: how it compares with the average worker's wage. I offered to bet that the price of oil would not rise faster than the average wage, meaning that future workers would be able to afford oil more easily than they could today.

Mr. Simmons said he favored a simpler wager, based on his expectation that the price of oil, now about $65 per barrel, would more than triple during the next five years. He said he'd bet that the price in 2010, when adjusted for inflation so it's stated in 2005 dollars, would be at least $200 per barrel.

Remembering a tip from Julian, I suggested that we use the average price for the whole year of 2010 instead of the price on any particular date - that way, neither of us would be vulnerable to a sudden short-term swing as the market reacted to some unexpected news. Mr. Simmons agreed, and we sealed the deal by e-mail.

Tierney told Julian Simon's widow, Rita Simon, who (as Tierney tells it) "wanted a piece of the action herself." They split the bet.

So, is $200/barrel in 2005 dollars on average for the calendar year 2010 realistic? I don't think so.

I'm sure someone has already told them that they should get their bet on the record for all to see at longbets.org. If not, I just did.

UPDATE: King at SCSU Scholars makes a nice chart to go along with this story.

UPDATE #2: When writing this post, I was tempted to write, "I wonder what James Hamilton will say." Well, wonder no more. He rightly takes to task those who say that Simmons is putting his money where his mouth is. As Hamilton (and Calculated Risk-see comments below) point out, even if Simmons wins he loses because if he really wanted to make some money he would buy a bunch of futures contracts. Tierney, on the other hand, is simply picking up free money. Of course, Simmons is probably going to provoke just the response that he wants. $5000 is a small price for publicity, I guess.

Performed some technical work on the blog last night and this morning. As it happened, my host was upgrading the server right before I started to do what I was trying to do. The end result was that my host's server upgrade took the blog offline for a while (at least half an hour that I know about--perhaps a little longer that I wasn't aware of). Then I did some work of my own and things might have acted funny for a while. All should be normal now.

In fact, I hope things like trackbacks and comments will work a little faster. We shall see.

James Hamilton (Econbrowser) explains the difference between "light sweet" and "heavy sour" crude oil, and in so doing reveals some interesting economic implications with a simple explanation.

The story of the Tuskegee Airmen is one of those stories that not enough people know about. Alas, a time is coming when the story will only be able to be told second-hand. From the Chicago Tribune:

ORLANDO -- Moments after retired Maj. William Watkins set aside his walker and sat down in the hotel lobby, a woman carrying a poster of him and other Tuskegee Airmen rushed up to get his autograph.

A number of African-American Air Force officers also gathered around the 92-year-old, eager to hear tales about World War II from one of the storied blacks who defied expectations in a segregated military.

Watkins, of Columbus, Ohio, is one of 80 airmen at the annual convention this week of Tuskegee Airmen Inc. It is estimated that only 200 of the original 13,000 airmen are still alive.

The stark reality of those numbers led to the decision that the 34th convention will be the last of its kind. Next year, Tuskegee Airmen Inc. will join the International Black Aerospace Council at its convention.

"Our seniors are more frail," said Cora Tess Spooner, president of the Tuskegee group. Some came to this final gathering in wheelchairs, others dragged around oxygen tanks, a few were accompanied by nurse's aides. "Some of them don't come because of economic issues--they are on fixed incomes.

...

Tuskegee Airmen is the nickname given to the men who trained in Tuskegee, Ala., one of the only places in the 1940s that blacks interested in military aviation could train. About 1,000 became pilots. Some were trained as airplane mechanics and radio control workers and for other support jobs, but all were considered Tuskegee Airmen.

Today, there are fewer than 300 African-American pilots in the U.S. Air Force, said Spooner, whose father-in-law was an airman.

When the airmen started, the War Department said black men couldn't be trained to pilot aircraft.

"The first thing one has to appreciate is the context in which these men occurred," said Alvin Thornton, a political science professor at Howard University. "One, there was a perception about the intellectual inadequacy of African-Americans. Secondly, there was a perception that African-Americans did not have the same will to defend and fight for democracy and freedom."

With the first class graduating in 1942, the airmen became role models, Thornton said.

"The Tuskegee Airmen allowed black people to hold their heads up," he said. "You heard examples where these young, professional fighter pilots were so impressive."

After World War II, many of the men went their separate ways and lost touch with each other. But nearly all dedicated themselves to mentoring black children and encouraging them to seek careers in aviation.

Learn more about the Tuskegee Airmen here.

From the Peoria Journal-Star

[Colin] Harley, 65, arrives today in South Dakota for the world-famous Sturgis Motorcycle Rally. But he won't arrive by bike but by air. When his plane touches down, his Harley will be there waiting for him.

Harley is part of a burgeoning breed of bikers who, because of time constraints, have their motorcycles shipped to Sturgis and other rallies. And a great many of those shipments are handled by the Federal Warehouse Co. in East Peoria.

"You have a lot of people who like to ride their bikes out there (to Sturgis)," says Jennifer Gibbs, assistant manager at Federal Warehouse. "But not everyone has the luxury of time."

Bike shipments are a touchy subject amid certain motorcycle enthusiasts. Some feel that the lore of Sturgis and other big rallies demands that true bikers make the trek to and from a gathering.

...

The one-way cost averages about $600, though coast-to-coast can run $750. Besides rallies, Federal sends a lot of bikes to museums and bike shows, plus handles many eBay sales.

...

Cross-country travel can put a lot of wear and tear on an expensive bike. More and more owners are opting to protect their investment by reducing on-road time.

Maybe that chips away at the legend of the scruffy, road-weary biker. But it only helps business at Federal Warehouse.

Applications of opportunity cost are, indeed, all around us. What a great example for class discussion as it includes both the time and the wear-and-tear aspects of the journey.

The San Francisco Fed has had some pretty good Economic Letters lately, including this on foreign central bank reserve diversification. They also look at unemployment in this letter and bubbles in this one.

Good weekend reading.

Check this out (CNN)

TOKYO, Japan (Reuters) -- Imagine watching a football match on a TV that not only shows the players in three dimensions but also lets you experience the smells of the stadium and maybe even pat a goalscorer on the back.

Japan plans to make this futuristic television a commercial reality by 2020 as part of a broad national project that will bring together researchers from the government, technology companies and academia.

Sounds like fun. It would be great if it works, but I have some doubts. Can you imagine the bandwidth and processor speed that would be required to convert live action to three dimensional virtual reality? Will Moore's Law get us there by 2020? Look at the improvement that HDTV is over analog TV. It took about as long to get us that incremental improvement that is nothing like what will be needed to get virtual reality TV (VRTV?)

But the end of the story had me wondering if they were serious.

The ministry plans to request a budget of more than 1 billion yen ($9 million) to help fund the project in the next fiscal year starting in April 2006.

Hands up all who think that kind of funding, even multiplied 15 times over, is going to do it. I thought so.

Google is amazing. I typed in "money spent on HDTV research" and found this from the Research Laboratory of Electronics at MIT. It was published in 1990. The words are those of MIT researcher William F. Schreiber.

People have tried to estimate how much the Japanese have spent on HDTV--some say $500 million, others say $1 billion. That may seem like a lot of money, but General Motors spent $3 billion to introduce the Saturn automobile. Any new model car from Detroit costs $1 billion to introduce. A Boeing 747 costs $150 million. Each TV network is a $4 billion operation, and all the networks together are smaller than NYNEX. So, in those terms, a billion dollars isn't much money.

A billion yen is even less.

It's a law of nature. Move in day on college campuses must be at least 90 degrees (it was 91 today to be precise). The dewpoint peaked at 79 degrees, which, for those who don't know, is very high humidity. As I recall, it was about like that on my very first move in day as a freshman back in 1990.

Today's freshmen were as old then as my son is now.

Anyway, the rain held off until the evening. Tomorrow is the opening convocation. Time for the professors to get all dressed up and show off our colors and explain to curious freshmen and their parents how to tell what a person's degree was in and where they got it by the colors of their gown and hood. Hopefully the rain will stay away until after the event.

Welcome back, WIU students. And best wishes to any of my readers who are graduate or undergraduate students getting ready to get back to work.

Read here for Jared Bernstein's take on the labor market, posted by Max Sawicky. Bernstein shows three charts that illustrate the slack in the labor market even when controlling for changing trends in men's and women's labor force participation rates. The model takes data through 2001QI and forecasts through 2005QII. In his words,

These are not large gaps, but they’re not trivial either. In tandem with other evidence—the absence of wage acceleration (in fact, the most recent data show decelerating nominal wages and compensation)—they support a slack story more than a full employment one.

Based on the charts in that post, the above conclusion is quite reasonable.

Dave Altig is skeptical, as am I. Altig says,

But even excepting the legitimacy of identifying the cyclical part of a time-series representation with slack, there is the inevitable ambiguity in exactly how that representation ought to be constructed. I'm not sure exactly how STAMP works, but let me try another cycle/trend decomposition, based on a statistical tool known as the "Hodrick-Prescott filter".

I'm also more familiar with the H-P filter, but I'm not sure it does a whole lot better here. Filtering the monthly LFPR data with lambda=14,400 makes any deviations at business cycle frequencies pretty hard to see. The data is pretty noisy. Month to month variations are pretty small (a couple of tenths of a percent). In other words, I don't take too much solace from the fact that we're currently above trend by this measure. By Altig's chart, it looks like the same could be said of about half the months since the last recession. Indeed, you have to look very hard to see the recession in the deviations from trend.

Now, I don't think that Altig is actually arguing to look at the data this way. It does, however, illustrate what seems to be his real point that it matters how you construct the trend and extrapolate from it. Yep. 'Tis true.

Then he really humbles us (rightfully so)...

We have a way to go on that agenda. I am a macroeconomist by trade, and operate in the realm of the usual macro models that are, in the end, not much different than they type you would find in a typical intermediate-level macro-theory textbook.... The fundamental shortcoming of these models is that they treat the labor market as if it is, more or less, a spot market. They make no allowance for the long-run nature of employment relationships, the zero/one nature of labor force participation, and the like. Furthermore, these are models in which the key variable is hours -- there is no distinction to be made between changes in hours that result from the number of hours an average employee works and the number of people working (the latter being with what labor force participation and unemployment rates are solely concerned).

All of this may be OK if what we are focused on is forecasting GDP growth or inflation. It is obviously a disaster if we are trying to forecast unemployment or some measure of slack that depends on labor force participation rates. To put it another way, I think macroeconomists know even less about labor-market slack than we do about most of the other things that we nonetheless pontificate about at great length. And that is saying something.

True. But lest you abandon all hope, there is a bright side. This is how the state of knowledge advances. With all the attention that is being focused on this issue (more than, say, in 1995 as I recall) we are asking good questions. We are experimenting with different ways of looking at the data and subjecting our analysis to immediate comment and criticism. There's little doubt in my mind that this labor market recovery will be studied in great detail and much will be learned.

I'm going to bookmark this one. It's called Instant History. The author plans to post a cover of a historic issue of Time or Newsweek and comment on how the news magazines covered the events in that issue--history's first draft.

I really like the idea. I suppose it's because I have a couple of boxes full of old newspapers that I felt were worth saving. I have a New York Times from the day after Deng Xiaopeng died. I think I also have the very first color front page of the Times. I've got a clipping from the Wall Street Journal after Greenspan's "irrational exuberance" quote. Of course, my collection also includes a number of issues of the local paper in the days after 9/11. These are indeed history's first draft. It's why I like "On This Day." Instant History is going up on the blogroll in that category as well.

I admit that on more than one occasion after doing some research in the library I wandered over to the Time and Newsweek magazines and paged through some random issues from decades past. It would be interesting to do a more systematic search to see how these outlets reported on the economy--especially given the way I concluded Tuesday's post. I think I'll do that when I get a chance.

Hat tip: Betsy's Page

Definitely worth your time. This Econoblog installment is titled "Debating Job-Market Slack" and features Dave Altig of macroblog taking on Max Sawicky and Tom Walker of MaxSpeak, You Listen! First a quote from Sawicky and Walker:

Finally, rather than dwelling on discrepancies in labor force participation rates, it may indeed make sense, as David suggests, to consider the choices of workers and nonworkers. It doesn't follow, however, that those choices have been made enthusiastically.

Good point. While pgl of Angry Bear has been claiming that labor force participation and employment/population ratios have been lagging, I have admitted to being less concerned. I have been very intrigued by the whole situation, however, and posted some questions that have been raised in my mind and taken a preliminary shot or two at trying to figure out what is going on. If it appears that I've been dwelling on those rates, it's mainly because I've been trying to drill down into the demographic issues. In the end, I am most sympathetic to James Hamilton's approach and position. Undoubtedly the LFPR is a function of people's choices, but whether those choices are being made "enthusiastically" or not is a sticky wicket. Altig responds:

But at this point we may want to introduce another paradigm-shifting idea, the real business cycle concept that (in part) won the 2004 Nobel Prize for Finn Kydland and Ed Prescott. (A second mention for Arizona Sate University!) My simple-minded version of Kydland and Prescott's story goes like this: Sometimes the sun shines, sometimes it rains. We may like it better when the sun shines, but the rain, too, is part of the natural order of things. And there is nothing policy makers can or should do about it.

Whether you like the theory or not, that's a pretty nice statement of the theory. And then...

So, yes, a voluntary decision about seeking work or not seeking work is not the same thing as a happy decision. But it does not follow that all unfortunate circumstances are the appropriate objects of economic policy.

To which Sawicky and Walker respond:

Some unfortunate circumstances are the result of economic policy and others can be ameliorated in a way that actually contributes to efficiency. It would be irresponsible to do nothing in response to the former and unwise to do nothing in the latter circumstance.

Ah, but telling the difference is the tricky part. Back to Altig:

Perhaps it is because I am a child of the 1970s -- the decade in which I became familiar with the larger world around me -- that my instinct is to respond to this type of uncertainty with a certain reluctance to espouse activist policies unless the evidence pretty clearly speaks to the need. To my eye, that evidence is lacking for the moment.

On balance, I'd have to agree. Changing demographics and educational choices by young people account for some (though probably not all) of the lagging LFPR. Also, I'm not sure we totally understand the dynamics of very shallow recessions. The last two recessions have been more shallow than many previous ones and the job market has taken longer to recover. So let me leave no doubt as to where I stand. There are questions to be answered, to be sure. But changing demographics and other factors probably make the LFPR of the late 1990s something that will not be seen for some time.

Now Max and Tom might argue that, in the spirit of these comments, the conservative approach would be, for example, to ease up on the funds rate increases for now. They would find a lot of support for this among bloggers that I respect a lot -- Angry Bear, James Hamilton, and William Polley, to name just a few. Mark Thoma, on the other hand, emphasizes a different take on the cost-benefit analysis that works to the opposite conclusion. And so it goes.

Thanks for the mention. While I would welcome a pause in the rate hikes, the labor market is not my primary concern. However, it is on my radar screen. Given that the last recession was pretty shallow and payroll employment has been slower to recover than in previous expansions, I admit to being a little concerned about how far to push rates before letting the economy catch up. The macroeconomy deals with policy lags more slowly than the financial markets, after all.

But let me wholeheartedly agree with Max and Tom's plea to "look at the long-term trends." In not too many years the particulars of this business cycle will be a distant memory. The exact level at which the federal-funds rate "pauses" will be of little matter. I really suspect the same will be true of the federal deficit. What will matter is the set of policies that are put in place to maximize human capital development and unleash the seemingly boundless potential of the American people. With that in mind, your next stop should be this interview with James Heckman, who discusses the really big potatoes in thinking about how workers fare.

Yes. Read the Heckman article. Definitely.

It is true that the particulars of this cycle will be forgotten in a few years. What words to people use to describe the 1990s economically? Boom. Longest post-war expansion in history. Yes, even "bubble" comes to mind. But how soon we forget that in the fall of 1995, there was a bit of discontent in the air. GDP was still growing at a decent pace, but people were saying on the news how those statistics don't measure the way people really live. (As I was looking through some things today in preparing for classes next week, I found a page of notes that I took while watching Nightline back then.) Stories of mass layoffs still dominated the news.

And yet, Bill Clinton was re-elected one year later in a landslide. The economy of the 1990s was a sucess story and whether you think he had a little or a lot to do with it, Clinton got a lot of the credit. But my point is that in the fall of 1995, it wasn't a sure thing. As I have said repeatedly, that's about where we are now. It's not a sure thing. Layoffs still make headlines. GDP growth is stable and positive, but does the person on the street care? The parallels are there.

And to those who say that the media is spinning the economy to hurt the President because of a liberal bias, I respectfully disagree. As I said, I have notes on broadcasts and newspaper clippings to show that the media didn't give Clinton a free ride either. The media likes a story, and for the economy that means accentuate the negative--no matter who is in the White House. In 1995, I told my classes not to believe everything they heard. And now?

But I still hope the Fed pauses in December.

UPDATE: MaxSpeak blogs a postscript to the debate from Jared Bernstein.

Brad DeLong links to this interesting little site. Ok, so Fermilab might not be a factory in a typical sense, but I'm sure it would be an interesting tour. Everyone should visit a factory sometime, especially economists. I've seen a number of factories/industrial sites, including some individual personal tours, and I'm always fascinated by what goes on. Manufacturing is not dead. It is changing, and in some pretty exciting ways.

This one was one of the most interesting factory tours I have seen.

Depending on your time zone in the world, V-J Day is usually celebrated on the 14th or 15th, but August 15th has seen a lot of other action.

India and Pakistan became independent (1947)
Macbeth was killed (1057)
Napoleon was born (1769)
Will Rogers and Wiley Post killed in plane crash (1935)
The movie "The Wizard of Oz" premiered (1939)
Woodstock got underway on Max Yasgur's farm in upstate New York (1969)
Nixon announces a 90 day freeze on wages, prices, and rents (1971)

Other birthdays include Justice Steven Breyer, Ethel Barrymore, T. E. Lawrence, and Princess Anne.

These bits of trivia are courtesy of On This Day, a feature of the New York Times.

Check out macroblog:

Randy Moore from Aspen Publishers brought my attention to a special question on just this topic that was addressed in the latest edition of Blue Chip Economic Indicators. With his permission, I share the results with you:

Q: In the FOMC’s policy statement, will the phrase “measured pace” be dropped before, at the same time, or after the phrase “monetary policy is accommodative” is dropped from the statement?

Response: Before: 8.9%; At the same time: 82.2%; After: 8.9%.

Q: Will the FOMC drop the phrase “measured pace” and/or “monetary policy is accommodative” from its policy statement before, at the same time, or after it pauses in its tightening cycle?

Response: Before: 35.6%; At the same time: 57.8%; After: 6.7%.

Very interesting. I'd answer "at the same time" to the first question. The second question is a bit more difficult to answer. A few months ago, "before" would have have my clear choice, but I've been revising my priors on that after each of the last three meetings.

And if you've been a regular reader you know that it's been on my mind. Here's macroblog's take.

The answers to the second question are interesting, as they suggest that most forecasters think the measured pace language does not much constrain the Committee meeting-to-meeting. Here's something I'd like to know: Do the Blue Chip responses to this question reflect the opinion that the FOMC will find plenty of alternative ways to signal a pause if the time is drawing near -- as William Polley suggests? Or does it suggest that the press-statement language has become largely meaningless?

Well, I sure hope it's the former. The latter would be one step forward and two steps back.

UPDATE: Dave Altig (macroblog) also links to the WSJ online today.

By a narrow margin, economists surveyed in the latest Wall Street Journal Online forecasting survey say they think there's a greater risk the Fed will go too far in its campaign of rate increases than it will stop short of what's needed. About 54% said they see a greater risk of the Fed moving too aggressively in the next year, while 46% say the bigger concern is rates will be kept too low...

Ethan Harris of Lehman Brothers Inc. worries that the Fed will overshoot, but he says that the problem is the central bank won't know if it has gone too far until it sees subsequent economic data. "There's a danger that the Fed will keep pushing the brakes until they finally work," Mr. Harris says.

If you read my blog earlier this week, you'll understand me when I say, "no comment necessary."

A million sounds like a lot. A million here, a million there,... you know the rest. I'm pretty sure that talk about millions of whatever just sounds to most people like "a lot." But economists know that you need to understand the significance of a million (or a billion, or whatever) in context--are we talking gross or net?

We begin with Paul Krugman's latest op-ed: (NY Times)

I used to live next door to a Russian émigré. One day he asked me to explain something that puzzled him about his new country. "This place seems very rich," he said, "but I never see anyone making anything. How does the country earn its money?"

The answer, these days, is that we make a living by selling each other houses. Since December 2000 employment in U.S. manufacturing has fallen 17 percent, but membership in the National Association of Realtors has risen 58 percent.

58 percent is a lot--that is true. In that same period, the BLS figures for the real estate sector show an increase of 150,000 jobs, or about 10 percent of the total jobs in the sector. Obviously, not every job in the real estate sector is accounted for by Realtors. However, the overall increase in the sector is not out of line with the growth in the 5 years preceeding that period. It is blatantly obvious that employment in rental and leasing is practically flat (actually down just a bit) since December 2000. It's probably reasonable to hypothesize that some people who worked in the rental business are now real estate agents. If the housing bubble deflates, I think we could expect that trend to reverse.

Given the interest many of my readers have in the housing picture, I thought you might like these charts. The BLS sure has a great web site.

Krugman continues:

The housing boom has created jobs in two ways. Many jobs have been created, directly and indirectly, by a surge in housing construction. And rising home values have fueled a simultaneous surge in consumer spending.

Let's start with home building. Between 1980 and 2000, which was before the housing boom, spending on the construction of new homes averaged 4.25 percent of G.D.P. In the most recent quarter, however, the figure was 5.98 percent. That difference is equivalent to about $200 billion a year in additional spending, generating roughly two million extra jobs.

He's correct about the $200 billion a year in additional spending. But two million extra jobs? Since he's talking about an increase in the fraction of GDP spent on housing construction, isn't he really talking about two million more jobs in the economy being supported by spending on construction as opposed to being supported by other spending? Fewer jobs are being created from increases in other types of spending. It's gross job creation vs. net job creation, and it includes both direct and indirect effects.

Then there's the jump in house prices. Over the past five years housing prices have grown much faster than the overall cost of living, adding about $5 trillion to the public's wealth. Typical estimates say that each additional dollar of housing wealth adds about 3 cents to annual consumer spending, as families reduce their savings and borrow against their newly valuable homes. So we're talking about an additional $150 billion in spending, and roughly 1.5 million more jobs.

Same story; same multiplier. We're talking about new wealth in the last 5 years contributing to additional consumption spending. Consumption spending kept right on rising during the recession and recovery of the last 5 years while investment and net exports fell. Again, Krugman is really talking about jobs that are now being supported by consumption spending (housing induced) as opposed to being supported by investment or exports. They may be new jobs, they may not be. We are, after all, talking about one sector growing while others are shrinking. Of course, to the extent that during the recession and shortly afterwards total jobs fell, it is probably the case the additional spending was taking up the slack and keeping net job destruction from looking worse. The same is true of construction. Whether these jobs are taking up the slack in the labor market now is less obvious. Again, it's gross vs. net.

I can tell a (really simplified) story that illustrates the point. Imagine a small town--we'll call it Keynesville. Suppose aggregate home values rise by $10,000 in Keynesville and people take out all that equity. They spend it all on consumption goods in town which, after a multiplier process, raises total income by $50,000 (assuming a simple Keynesian multiplier of 5). The increased demand causes a local firm to hire an additional worker for $50,000. A job is created. Of course, if net exports exogenously fell at the same time, a job might be destroyed. Gross job creation (the story Krugman is telling) from the increase in home values only tells half the story.

Does anything else in the U.S. economy rival housing as a source of job creation? Well, there's also the military buildup. The Economic Policy Institute estimates that increased military spending over the past four years has created 1.3 million private-sector jobs.

I looked up the EPI brief whence cometh the 1.3 million estimate. The author cites the administration (OMB), but doesn't give a link and I couldn't find it. If anyone has a link, let me know.

Here's what the EPI says:

Federal, state, and local government spending has created 2.1 million jobs in the last four years (see footnote). According to the administration's budget report, defense spending is generating 1.33 million more jobs in the private sector this fiscal year (for a total of 3.85 million jobs) than it did four years ago (2.52 million). At the same time, government jobs have increased by 760,000. In a fully employed economy, the additional 1.2 million jobs generated by government spending would have caused a reduction in jobs in other parts of the economy. But because the current labor market is so weak, the spending by people holding these 2.1 million new jobs has actually resulted in what is known as a "multiplier effect," leading to the creation of even more jobs in the labor market.

Footnote:

This estimate does not include private-sector jobs resulting from more spending for homeland security, health, education, and other purposes.

The report goes on:

Defense spending gave its largest single-year boost to private-sector jobs in the fiscal year that ended in September 2004. In that year alone, defense spending directly generated almost half a million jobs (495,000). The multiplier effect from that spending no doubt contributed to the other 434,000 jobs added in the private sector that year. By contrast, in this fiscal year, additional defense spending is supporting only 70,000 more jobs, a small fraction of the 2 million private-sector jobs being added this year.

Where do I begin? Estimiting the size of the multiplier here is pretty dicey business. But if you try to assume something reasonable for 2004, you end up concluding that the effect is pretty small this year. Pretty small indeed. This was a temporary effect.

I also question the extent to which the private sector defense jobs created many additional jobs that would not have been created without defense spending. This multiplier is greater than one perhaps, but I'd like to see evidence.

And what of the 706,000 jobs created by the government in the last 4 years? That's about right, in fact. But when you dissect that number, it's not that impressive. Here is the BLS chart:

If my memory serves me correctly, the spike in May 2000 would be temporary census workers. Notice that growth of government jobs has slowed recently. Federal government employment is actually falling.

At the end of all of this, we've used the word "million" a number of times but haven't really pinned very much down. Krugman is talking about housing supporting a few million more jobs out of 134 million, some new, some not. Couple this with the EPI attributing defense spending for 1.3 million private sector jobs, again some new and some not. Some taking up the slack in the labor market, some displacing growth that could come in other sectors. What do we make of all this?

Krugman is using these millions of (gross) jobs created because of changes in the composition of spending (with multipliers flying around everywhere you look) to make a statement about how the labor market is on shaky ground because of these shifts. The real story beneath the story here is that he's saying that the economy is more dependent on housing than before--and that much is true. All those millions of (gross) jobs created directly and indirectly by housing must mean millions of (gross) jobs directly and indirectly lost elsewhere, right?

But the indirect effects, that is, the (gross) jobs created through these multiplier effects (as elusive to track down as they may be) would have been created anyway in all likelihood. I find it a little troubling to talk about multiplier effects resulting from people moving from jobs in the rental sector to the real estate sector. Ditto for an increase in construction's share of GDP.

And where are the jobs that have been indirectly destroyed by the sectors of the economy that are shrinking? There must be millions of them. But you might never know which jobs they are. The restaurant worker whose job was created indirectly by factory expansions 30 years ago might now be earning a living serving real estate agents instead of factory workers. Aside from any social implications beyond the scope of this discussion, he probably doesn't care.

If you believe in any sort of resiliency in the labor market, I think you would want to put less emphasis on the jobs created through the indirect effects. When the pendulum swings in the other direction, some jobs will be directly created, some will be directly destroyed, and a lot of others will notice changes, but they'll see it through.

I have trouble seeing the purpose in using multiplier effects to think about gross jobs created by shifts in spending patterns unless you believe in a lot of labor market rigidity. If the housing boom ends and all those new real estate agents and mortgage brokers are out of work with no other prospects, then we could have problems. But I think the labor market is more resilient than that. It did, after all, survive the pendulum swinging in one direction. I'm confident the pendulum could swing back without breaking.

Mark Thoma points us to The Economist (subscription required)

Let me just add back a sentence that Mark left out when clipping pieces of the article.

The IS-LM model helps us to understand these two opposing theories. Originally devised for a single closed economy, it can today be more realistically applied to the global economy.

That's the part that is potentially intriguing, even though I'm not a fan of IS-LM and I don't totally buy into the explanation put forth by the author of the article. Part of the reason for the frustration with the IS-LM is that it is a closed economy model. (Tacking on a balance of payments function helps a little, but it's not the final answer.) The global economy is closed, and so a "paradox of thrift" is possible if there were enough of a global "savings glut". But are low labor costs in China and India enough to keep inflation down enough that a fixed-price model becomes a good approximation?

Almost makes you want to go read Hicks (1937 Econometrica) again. Click here if you are at an institution with a JSTOR subscription.

Like Mark, I'm not ready to jump on the IS-LM bandwagon, but author of the article in The Economist does understand the shortcomings of the model. It makes a nice introduction for students at the intermediate level.

I don't need to tell you that there's been a little dust-up recently concerning the health of the labor market. See Mark Thoma's latest post, for example. Economist (and non-economist) blogs are resounding with shouts of optimism and wails of pessimism.

I've been called a "bad news bear" and been accused of jumping up and down (as if with glee, I suppose). In truth, I tend towards being optimistic when it comes to the macroeconomy, but my tendency for optimism is always tempered by the data. In macroeconomics, data is paramount. But the data does not always speak with a clear voice. Macro data also has the disadvantage of being at a lower frequency than, say, financial data. So you get a bad payroll report and it wears on you for a month. Comes with the territory.

But if you get enough recent data to allow you to compare it to other time periods, things are a little better. Much of the recent debate has centered on economic growth, labor market recovery, and inflation compared to the recovery after the 1990-91 recession. I've tossed in my two cents. Today, I will let the data speak.

To begin with, I took HP filtered (log) real GDP and found the quarter of maximum deviation below trend. For the 1990-91 recession, that was the 4th quarter of 1991 (two quarters after the NBER recession end date). For the most recent recssion, it was the 1st quarter of 2003 (more than a year after the NBER recession date). I would attribute the difference to the fact that the transition both into and out of the most recent recession was more gradual than in 1990-91. Why? That is an open question.

Next, I plotted payroll job growth and core CPI inflation starting from that point of maximum deviation from trend real GDP (October 1991 and January 2003). Here's payroll employment growth:

To make things a little clearer, I took a 3 month moving average centered on the observation.

Oddly, there is a spike in payroll growth about a year and a half after the maximum negative deviation of real GDP from trend. It is pretty clear, however, that the current recovery has been consistently lagging the previous one. And unless things really pick up in a hurry, the cries of those who are more pessimistic are going to get louder. If the job market hums along at 200,000 new jobs per month, that will seem paltry compared to the job growth in 1994.

Please note, however, that the Fed waited longer after that maximum negative deviation of trend real GDP to pull the trigger on interest rates. Indeed, rates were still falling in 1992. All my students should know that this should have led to a faster recovery in 1991 and beyond. (Of course, the Fed's job in the last recession was complicated by the fact that interest rates got so low that we were worried that they might run out of ammunition.)

The fact that rates were still falling in 1992 and didn't start to rise until 1994 should have also meant that inflation would have started to bubble up a bit sooner. The next chart bears this out.

The data is the CPI excluding food and energy taken from FRED and last updated 7-14-2005. For clarity, I only show the 3 month moving average as you can see the trends more easily. After taking the moving average, I converted it to an annual rate for ease in interpretation.

This too, pretty much speaks for itself. Core inflation was very low at the start of 2003, but by the time the Fed started raising interst rates it had climbed. But we are still in a better position than in 1994-95. All in all, not too bad a job of sticking to the mandate of price stability.

On the dual mandates of price stability and full employment, the picture is mixed. Some would say the Fed should have a single mandate of price stability, but that's not the way their mandate reads at present. The real test will be to see if the steady growth we have seen (note: I use the word steady, not booming) will be sustained. If the timing of a soft patch is similar to the timing of the last one, it could still be in the future. I do believe that it can be avoided. It would appear to this observer that the Fed has made a real effort to avoid the mini-boom and mini-bust nature of the last recovery. Does no mini-boom mean no mini-bust? Time will tell.

But the pictures do help put it into perspective.

UPDATE: A misprint in the CPI graph was corrected. The first series starts in October 1991.

One more thing. Most comparisons of the labor market recovery to that after past recessions use the NBER recession end dates. The reason I chose not to use those dates (and use the date of maximum negative devation of real GDP from trend) was to try to allow for the fact that the last recession was more shallow and the below trend growth lasted longer. I was trying to see if the job recovery was delayed by a similar length of time. Not quite, but it might be useful to think about the reasons for the recession being shallow and the deviation from trend lasting longer as at least partially driving the "weak" labor market recovery.

Another link from Newmark's Door. (ABC News)

The reason for asking that question is the announcement this week by blog tracker Technorati (a great site, by the way, for continuously following the state of the Zeitgeist), in its annual State of the Blogosphere report that the number of blogs in the world has jumped from 7.5 million in March to 14.2 million today.

In other words, in appears the blogosphere is doubling in size every five months. Or even more staggering -- a new blog is being created out there somewhere every second.

In the time it took just to read that excerpt 10 blogs were created. Now go read the whole thing while a couple hundred get started.

That is amazing, of course. But the fact is that many blogs fizzle out after a few months, weeks, or days. Only a relative handful of that 14 million are updated daily or even semi-daily (as in the title of Brad DeLong's blog). Also a relative few are worth reading. The interesection of those two sets is nonempty, but certainly less than their union.

Among economics blogs, the Wall Street Journal has a good rundown of the best. Our friend Mark Thoma even gets quoted:

"On a professional level, I've been making contacts that I would have never made before," says Mark Thoma, associate professor of economics at the University of Oregon, Eugene. Mr. Thoma is also a self-described left-of-center Democrat and author of economistsview.typepad.com.

Indeed. I can say the same.

Apparently a lot. NY Times

Names have gained increasing importance in the competitive world of higher education. As colleges jockey for market share, they are looking for names that project the image they want or reflect the changes they hope to make. Trenton State College, for example, became the College of New Jersey nine years ago when it began raising admissions standards and appealing to students from throughout the state.

And then there's this...

Many college officials said changing a name and image could produce substantial results. At Arcadia, in addition to the rise in applications, the average student's SAT score has increased by 60 points, Juli Roebeck, an Arcadia spokeswoman, said.

Newmark's Door links to this article from Slate on why power lines are so dangerous. Don't they have insulation?

No, they don't—at least the ones that run aboveground. Most of the hundreds of thousands of miles of high-voltage transmission lines in this country are made solely of metal—either aluminum or aluminum wrapped around a steel core. Adding a layer of insulation to every line would be pricey and has been deemed unnecessary given how high the lines are off the ground. (Underground lines are insulated, both for the safety of the walkers above and to protect the lines from shovels and the like.)

Simple economics of reducing risk to an acceptable level. As long as you and the lines keep your distance, there's no need for insulation.

When I was in college, I worked for a power utility one summer. My job had nothing to do with power lines. I was collecting data on customers who used electric heat. My head was filled with facts that I have long forgotten (like the average annual kilowatt hours of power used by a geothermal heat pump). I also learned to identify types of transmission lines and learned the answer to questions such as why direct current (DC) is used on some long distance lines. Click here for an explanation of that and other facts about power lines.

Read it here. I reproduce the key paragraphs below.

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Aggregate spending, despite high energy prices, appears to have strengthened since late winter, and labor market conditions continue to improve gradually. Core inflation has been relatively low in recent months and longer-term inflation expectations remain well contained, but pressures on inflation have stayed elevated.

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. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

Analysis to follow.

UPDATE: The risk assessment is identical to the last press release. ("Measured pace" lives!) The outlook is almost identical. I print it again below with the previous release's words in parentheses and italics where they differ. New language is in bold.

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Aggregate spending, despite high energy prices, appears to have strengthened since late winter, (Although energy prices have risen further, the expansion remains firm) and labor market conditions continue to improve gradually. Core inflation has been relatively low in recent months and longer-term inflation expectations remain well contained, but pressures on inflation have stayed elevated. (Pressures on inflation have stayed elevated, but longer-term inflation expectations remain well contained.)

What is the message? Economic performance has been good despite high energy prices, and the high energy prices haven't spilled over into the rest of the economy (core inflation remains low). Other than that, it's pretty much what we've seen before. So far, the market is yawning. I guess that's an appropriate reaction. Stay tuned to see if there is any change once the words sink in.

UPDATE #2 (1:50pm): The 10 year bond is actually up a few ticks. Considering that this morning, the Forbes piece that I quoted earlier seemed to be of the opinion that the bond market is looking for a hawkish statement one might consider the current reaction to be a little strange. I didn't see anything all that "hawkish". The only difference between this statement and the previous one on inflation is the statement today that core inflation has been low in recent months. Of course, there is nothing in the statement to suggest that the rate hikes are over either. And maybe that's what the market really wanted to see. I'm not jumping up and down over that. Though I don't think another one or two quarter point moves will throw us into a tailspin, I worry that the FOMC has painted themselves into a corner linguistically. How are they going to break it to the market that the rate hikes are about to pause? Granted, that may be irrelevant at the moment if the fed funds futures market is correct, but it's something they'll have to deal with eventually. The end result of this statement is to tell the bond market "don't worry; be happy" and the yield curve flattens out again. This can't go on forever.

But it looks like it will go on for a few more weeks. Right now, I am anticipating a scenario where we get two more rate hikes to get the funds rate to 4% and then a pause at the December meeting. By December, the housing market might be softening and inflation will hopefully still be contained. The holiday spending season would be a good time for a break in such a long (by that time almost 18 month) string of rate hikes. Many people regard 4% as pretty close to neutral, and that would be a good time for Greenspan to hand over the reins to his successor.

Of course, we don't have a successor yet, but that's a topic for another day.

But that scenario presupposes that the Fed can give the market a hint that the rate hikes to which the bond market seems to have become addicted are about to end. My guess is that those hints will be dropped in speeches by Fed governors and presidents. So far I haven't heard much. It will indeed be an interesting autumn for monetary policy. I just hope it doesn't give way to the winter of our discontent.

UPDATE (yet again): For more, check out Mark Thoma, and PGL at Angry Bear. The Capital Spectator is even more worried than I am.

UPDATE: Still more econ bloggers checking in. See also macroblog, New Economist, and Brad DeLong.

So here we are again on the day of an open market committee meeting. Not much to talk about in the way of what they will do, but plenty to talk about in the way of what they should do. Is the current round of tightening too much or not enough?

First, the news... (CNN)

Before the Fed meeting, the Labor Department announced Tuesday morning that unit labor costs, an important measure of inflation in the job market, climbed 1.3 percent in the second quarter. Economists expected a 2.75 percent result.

Productivity also climbed 2.2 percent during the second quarter, ahead of economists' expectations of 2 percent.

Macroblog has more, including links to other news articles from this morning. All in all, I'd say the morning news has my day off to a good start.

But as Jerry Garcia famously sang, "Every silver lining's got a touch of grey." You just can't get away from the long standing notion that a strong economy leads to inflation. Dave Altig's (macroblog) post points to a Bloomberg article that makes both of us cringe a little.

Reports in recent weeks have shown that even after nine rate increases since June 2004, with a 10th expected tomorrow, the Fed hasn't been able to slow the economy. The 10-year note yields less now than it did when the central bank began raising interest rates. The government reported that house prices in June jumped by the most on record and inflation is running at the high end of the central bank's estimates.

...

"The Fed is going to have to raise rates however high as necessary to get an effect on the housing market," said Jan Hatzius, a senior economist at Goldman Sachs Group Inc. in New York. Goldman forecast a year-end 10-year yield of 4.90 percent.

Count me in the camp that believes that pricking the housing bubble is not the Fed's objective here.

And here's an interesting observation (Forbes)

The market's attention will focus firmly on the FOMC's accompanying statement, with many expecting a slightly more hawkish tone in light of recent strong US economic data.

"People are thinking that the Fed may adopt a slightly more hawkish tone, and that is giving the dollar a bit of a boost at the moment," said Gary Noone, currency analyst at Informa Global Markets.

It doesn't get much more exciting than this, folks. In the overall scheme of things, not a lot has changed in the last 5 months. The labor market has improved (albeit more slowly than some would prefer) and GDP growth has been pretty strong (but not "overheating"). Inflation has, despite a number of anxious moments, largely remained in check. And here we are again with the bond market anxious--expecting hawkish words from the Fed to reassure them.

Here's a Reuters piece:

Treasuries have taken quite a whipping over the past two months, with benchmark yields spiking 40 basis points higher as expectations of an economic soft patch gave way to hopes for stronger growth in the second half of 2005.

A barrage of positive economic data has convinced investors that the economy is on a strong enough footing to allow the Federal Reserve to continue raising interest rates for a considerable time to come.

Coupled with upward revisions to inflation, the numbers are shifting the focus of the interest rate debate from a discussion about when the Fed could pause to a debate about just how far it might go, analysts said.

"The minutes of the upcoming meeting may show that a search for neutrality is being replaced by an inquiry into whether FOMC policy will need to turn restrictive in the coming quarters," argues Bruce Kasman, global head of economic research at JP Morgan.

Fed forecasters have adjusted their expectations for further monetary tightening accordingly to reflect a chance the central bank might actively nudge rates higher well into 2006.

What strikes me as odd, and a bit worrisome, is the idea that the economy has to hit a "soft patch" (for lack of a better word) to give the Fed the signal to stop raising rates. If Calculated Risk and Paul Krugman are correct that the housing market is starting to lose steam, then we might want to tread carefully.

I think that market forces (from yuan revaluation right on up the list) are going to push the 10 year yield up a bit regardless of what the Fed does. A pause in rate hikes might be just what we need in the 4th quarter. We've got a lot of rate increases in the pipeline. Although most of the increases were "priced in" some time ago, we need to remember that most of us weren't expecting to be where we are now when rates started rising a year ago. I'm not saying that it's time to stop--just time to pause. It's time to give the yield curve a little time to catch up. If market forces are gearing up to push long rates up anyway and the Fed is overzealous, that's just going to cause more problems.

Time to get away from the notion that a soft landing has to include a soft patch. As James Hamilton notes,

So where does that leave us right now? The Fed's expected rate hike next week will narrow the spread further. My nervousness about that is allayed somewhat by last week's favorable economic data. I'll be more nervous if the Fed raises rates again at the following FOMC meeting, and even more nervous if they raise rates again in November.

I get nervous when people talk about "slowing" the economy when real GDP growth has been remarkably stable in the (roughly) 3-4% range for a year and a half and some measures of the labor market have been slow to recover. Slowing right now would not be good, and it's exactly what would happen if you put one or two extra rate increases into the pipeline before we understand the effects of a year's worth of rate hikes.

I started the day feeling pretty cheery, and now I feel nervous. Well, check back in an hour and see if the FOMC press release has me in good spirits again. More importantly, check back to see what kind of spirits the market is in after the release.

Most of today's BLS news release was pretty lukewarm. The unemployment rate was unchanged. Payroll employment up just over 200,000--which is on the short side of being just enough to hold our own with population growth. The employment/population ratio was up 0.1% to 62.8% (which PGL notes as being a sign that things are slowly improving).

I noticed one thing that might have slipped by. Check out page 13 of the pdf version of the news release. (N.B. It's not archived yet, so this link will be current for only a month. I'll try to remember to update the link when it is archived.) Notice the breakdown of unemployment as a percent of the labor force. "Job losers and persons who completed temporary jobs" went down from 2.5% to 2.4%. "Reentrants" went up from 1.5% to 1.6%. "New entrants" and "job leavers" are unchanged. This is positive news. The unemployment rate was unchanged for the month but the makeup of the unemployed pool of workers changed. A larger number of the unemployed are reentrants to the work force and a smaller number are the job lowers and persons who completed temporary jobs. In fact, when you look at the seasonally adjusted numbers right above this on the page, you will see that this represents the smallest number of people who are unemployed but not on temporary layoff since September 2001 and has been consistently falling for about two years. The number of reentrants has been a little more stable, but is at the highest it has been since February 2005.

Also, the mean duration of unemployment is down 2 weeks since April (from 19.6 to 17.6 weeks). The median duration is down from 9.3 weeks to 9.0 weeks since March.

These facts do not come out in the headline numbers, but they are indications that things are still moving in the right direction, slowly but surely.

See also: Economist's View and Big Picture. I'm sure the list of those commenting on the numbers will grow.

Remember this?

Via Reuters:

The Treasury said it was considering semiannual auctions of a 30-year nominal security beginning February 2006. It announced suspension of the 30-year bond in October 2001, with the last auction having taken place in August that year.

Not that surprising, really. Everyone who has refinanced their house in the last few years knows that locking in a low interest rate for 30 years is a good thing.

They'll make an announcement August 3. I think it will be affirmative. They wouldn't admit they were considering it unless it was actually going to happen.

And so they are. David Andelman of Forbes writes about it, concluding thus:

Indeed, for the bond fund manager, the arrival of the shiny new 30-year Treasury only complicates matters. The duration of these bonds inevitably introduces more uncertainty, and uncertainty breeds volatility. "The 30-year Treasury, at least right now, isn't offering fund managers dramatically more yield than the 10-year Treasury," says Scott Berry, bond fund analyst at Morningstar. "But they could be getting considerably more volatility."

That said, it's unlikely then that many fund managers or even savvy individual investors will be waiting in line at midnight for the Treasury to open the 30-year window. So will anyone be there?

Absolutely. Pension fund managers, for instance, are in love with the long-duration bonds. So much so that there are even 100-year municipal bonds issued by some far-sighted U.S. locales, while 50-year euro bonds are also in big demand. Pension managers love these long-maturity bonds because only rarely do they have to trade them. If they're on the hook for a pension booked today for a 25-year-old fireman who won't be collecting until he turns 65, well then a 30- or 50-year bond looks very nice indeed. The fund manager knows just how much his investment will be paying at every step along the way.

Might I also refer you to what Brad Setser said back in May.