April 2006 Archives

Videocasts from economists? Yes.

Brad DeLong muses over his morning coffee at Google Video.

James Reese expands the successful Radio Economics concept into the world of moving pictures at Video Economics. You can subscribe to Video Economics by entering this address into iTunes or other video podcast software. (http://www.acidplanet.com/podcasts/rss.asp?id=137)

They take different appraoches to the medium. DeLong does the talking head routine. Reese's site is, at least for the first episode, a slide show with audio. For a lot of things, the latter would be better. Both sites are worth your time to check out.

He was a liberal and not ashamed of the word.

The Wall Street Journal brings news of the passing of one of the true giants of that nexus between academic economics and the policy world. Galbraith was 97 years old. The WSJ tells us of this quote:

"There is no hope for liberals if they seek only to imitate conservatives, and no function either," Mr. Galbraith wrote in a 1992 article in Modern Maturity, a publication of the American Association of Retired Persons.

"In the end, it is the liberals who save the conservatives," he wrote, insisting that capitalism couldn't survive without social programs such as public housing, unemployment benefits and welfare for the helpless poor.

Galbraith lived through the Great Depression, and clearly the experience influenced his view of the world. Although I don't agree with much of his policy stance, I have always admired the man, the scholar, the writer. I think we would all do well to remember that in the late 19th century and early 20th century capitalism was under fire even more than it is today. As we gradually lose those economists who lived and worked during the Depression, we lose more of the connection to that time. That thought saddens me immensely.

The NY Times writes:

Mr. Galbraith became an American citizen, and taught economics at Princeton in 1939. But after the fall of France in 1940, Mr. Galbraith joined the Roosevelt administration to help manage an economy being prepared for war. He rose to become the administrator of wage and price controls in the Office of Price Administration. Prices remained stable, but he grew controversial, drawing the constant fire of industry complaints. "I reached the point that all price fixers reach," he said, "My enemies outnumbered my friends."

...

He summarized the lessons of his days at the Office of Price Administration in "A Theory of Price Control," later calling it the best book he ever wrote. He said: "The only difficulty is that five people read it. Maybe 10. I made up my mind that I would never again place myself at the mercy of the technical economists who had the enormous power to ignore what I had written. I set out to involve a larger community."

...He continued to pour out magazine articles, book reviews, op-ed essays, letters to editors; he lectured everywhere, sometimes debating William F. Buckley Jr., his friend and Gstaad skiing partner....

I find the part about the OPA kind of amusing, but the line about William F. Buckley Jr. says it all. How I would have loved to sit in on a conversation between the two of them. Sadly, such a thing will never happen again.

Many economists of my generation probably have not even read Galbraith's works (or Keynes's or Friedman's or Hayek's). That is extremely unfortunate. Whether you agree with these authors or not, there are many things to learn from each of them. I have always felt that the experience of reading works like these is like intellectual weightlifting. You are stronger for having taken the time to grapple with the ideas.

Tonight, I cannot help but reflect on what it means to be liberal or conservative in the major policy debates of today and how our debates and the circumstances of our time will influence the intellectuals of the next generation. I hope that our time can produce a few liberals and conservatives with the passion and conviction of Galbraith, but I suspect that there will never be another quite like him.

UPDATE: Bloggers react (WSJ). Also, you really must read Brad DeLong's post. Cafe Hayek links to this nice piece by the Boston Globe. Mark Thoma reprints a lengthy commentary on Galbraith's work.

I've been thinking about getting a tablet PC. I think I'll wait until Windows Vista ships. This sounds really nice. (NY Times)

With Microsoft's new Windows Vista software, to be available in January, virtually any newspaper, magazine or book can be formatted into an electronic version and read online or off. The software would allow The Times to replicate its look — fonts, typeface and layout — more closely than its Web site now does.

...

The Times said it would charge advertisers to appear on the new version of the newspaper, called Times Reader, but it had not decided whether to charge readers for the service. Microsoft would include the offering in the next version of its operating system.

The value added here is in the formatting and the organization. The content would be essentially the same. I'd say they should bundle it with Times Select. (End of free advice)

For today's demonstration, The Times was downloaded onto small tablet computers, about the size of a hardcover book, which are already commercially available for $1,000 to $3,000. But this printlike version of the newspaper could also be downloaded onto a home computer or a laptop. The electronic paper is displayed in columns and it formats itself to fit any size screen.

Mr. Gates said he had long wanted to make easier what he called "on-screen reading" and he had reached out to The Times to help develop that ability.

Mr. Sulzberger said the software combined the portability of the print paper with the immediacy of the Internet. Readers can in effect turn the page electronically. There is also a gauge that tells them how much of the paper they have read and how much more is left.

Tom Bodkin, an assistant managing editor of The Times and its design director, demonstrated Times Reader to the audience. "You can page through the entire paper in a natural and intuitive way," Mr. Bodkin said. Mr. Gates said that starting in January, new computers would come equipped with the software that would allow access to such newly formatted newspapers. He said he expected that by then, other publications would have developed electronic versions closer to their own styles and typefaces.

I'm not sure I need a gauge to tell me how much I've read and how much is left. Give me a book on a tablet PC that displays a "double page spread" the way that an open book in your hand does. Allow me to turn the pages by touching the screen. Make the pages turn as fast electronically as I can turn them physically in my hand. Give me tabs for chapters and an intuitive way to bookmark pages and keep my place. Oh, and a hypertext index would be nice too.

Give me all those things and I'll try it. An E-book (or magazine or newspaper) needs to replicate the physical presence of a book in a way that Adobe Acrobat Reader does not. But this sounds like the closest thing yet. I would like to see it demonstrated. Even if this product doesn't go all the way, I'm sure someone is working on satisfying all of my criteria.

Real GDP was up 4.8% in the first quarter according to advance figures. (Full Press Release)

It appears that a couple of items that dragged down 4th quarter GDP were an aberration. I figured that the weak government purchase figures were nothing to worry about. However, I was a genuinely concerned about durables three months ago. Today's figures on durables make up what was lost in the 4th quarter, but taken together the last 6 months have been pretty bad for durables. If that continues through the rest of the year, it will be a drag on GDP.

Taken in context, today's report looks good mostly because the last one looked so bad. The average growth over the last 6 months is still in the 3 percent range. That's acceptable but not breaking any records. I think that Bernanke and the rest of the crew at the Fed are correct to expect GDP to slow just a little bit in coming quarters--maybe around 3% or the high 2's. I think it would have taken a number like 5.5 or 6% today to get me to argue that the rate increases should go on unabated. Bernanke wants to pause. I think we could use a pause in either June or August--data dependent of course.

Let us not forget about the GDP deflator and the PCE deflator which are included in today's report. Inflation as measured by the GDP deflator came in at 3.3%. The PCE deflator registered only a 2.0% increase--the lowest in over a year. So was the March CPI a one-off event? I'm still waiting on the April data before committing to an answer.

But putting it all together, I am comfortable now with a policy regime in which rates are expected to rise every 12 weeks instead of every 6 weeks. I do not want them to give any impression that a pause is a stop. Inflation is still at the top end of my comfort zone. But we also need to remember that we've got 2 or 3 rate increases in the pipeline that were not anticipated by the market when this process began. As the last few hikes start to take effect, we can probably afford to ease up a little.

Or as I like to say, take a little pressure of the brake pedal, but don't take your foot off of it.

UPDATE: See also Angry Bear, Brad DeLong, and Andrew Samwick.

China discovers that as they integrate into the global capital market, their interest rates will tend to follow those in the rest of the world. But read a little deeper and find that it's not exactly the standard textbook situation. (NY Times)

HONG KONG, April 27 — China's central bank raised lending rates on Thursday for the first time in a year and a half, in a move by Chinese leaders to rein in the world's fastest-growing economy.

The action aims to slow a spectacular surge in investment and it may potentially brake China's voracious appetite on world markets for oil and other commodities.

With interest rates already climbing in the United States and the European Union, and with monetary officials starting to tighten policy in Japan, China seems to be joining the world's central bankers in trying to gain control of speculation that has driven up prices of assets like gold and real estate.

...

"It is easy to borrow money," said Jack Lee, a manager at the Guangchan Conveyor Idlers Company in east central China, which had an 80 percent jump last year in its sales of conveyor belt rollers and is now buying more equipment to open a second production line next year.

China's boom in lending and investment, which has contributed to the country's rapidly rising exports, pushed growth in China's economy to 10.2 percent in the first quarter. That was high even by China's extraordinary standards, and so strong that President Hu Jintao himself warned on April 16 that the country needed efficient, high-quality development and not "excessively rapid economic growth."

...

The effectiveness of somewhat higher interest rates in slowing growth, however, remains to be seen. The People's Bank of China, the central bank, said that it was raising the benchmark lending rates on one-year loans by 27-hundredths of a percentage point, to 5.85 percent. It was the same size increase as on Oct. 28, 2004, the last time China raised rates. That increase was the first in nine years.

...

But the central bank did not change bank deposit rates. By raising lending rates while leaving deposit rates untouched, the government will allow banks to widen their profit margins to cover losses on loan defaults.

Moreover, by isolating deposit rates, China's move is unlikely to address calls by industrialized countries, including the Group of 7 last weekend, for China's currency to gain in value. One-year bank deposits earn just 2.25 percent in China, and leaving that rate unchanged makes it slightly less attractive for foreign investors to pump money into China and therefore bid up the value of the yuan, the Chinese currency.

Let us not forget that the capital markets in China are not yet totally free of controls.

Also covering the story, Reuters gets some choice quotes:

"It's another example of the Chinese using market instruments to deal with market conditions in their economy," Treasury spokesman Tony Fratto told reporters.

"From that perspective, it's positive, though it's clear that China's ability to use market instruments like the interest rate are somewhat limited because of a lack of flexibility in the currency," he added.

Federal Reserve Chairman Ben Bernanke said later that allowing the yuan to move more freely would give Beijing even more independence in setting monetary policy.

"It's a very large country, they need to have an independent monetary policy. They can't really run independent monetary policy without a flexible exchange rate," he said.

Lorenzo Bini Smaghi, the European Central Bank board member responsible for international relations, called the Chinese move a step in the right direction. Asked in Florence, Italy if more hikes were needed, he replied: "Yes, and they'll do it."

Bernanke's statement becomes more true every time another part of the wall of capital controls is dismantled. As the Chinese move closer to full convertibility, they will need to get those rate in line with the rest of the world. That would imply that more rate hikes are a pretty safe bet. It probably won't be another 18 months before the next one.

UPDATE: The Wall Street Journal has more:

"The underlying problem is the currency," said Hong Liang, chief China economist for Goldman Sachs, who added that the small size of the interest-rate increase made it more likely Beijing would pick up the pace of currency appreciation. China's exchange rate, of course, has been a hot political issue in the U.S. for years, with fierce criticism from manufacturers, unions and others that the yuan is too weak and gives Chinese companies an unfair advantage.

Even if the interest-rate move has little effect on the yuan's strength, according to U.S. economists it signaled that Beijing is increasingly willing to rely on market forces to adjust its economy. Regulators could simply have slowed lending by telling banks they had to keep more money in reserve; instead, they sought to use interest-rate policy much as U.S. or European central bankers would have done.

Indeed. The effect will be small, probably almost undetectable, but it is a sign of things to come.

Mr. Bernanke speaks:

The FOMC will continue to monitor the incoming data closely to assess the prospects for both growth and inflation. In particular, even if in the Committee's judgment the risks to its objectives are not entirely balanced, at some point in the future the Committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook. Of course, a decision to take no action at a particular meeting does not preclude actions at subsequent meetings, and the Committee will not hesitate to act when it determines that doing so is needed to foster the achievement of the Federal Reserve's mandated objectives.

The only thing that would be more clear would be if he had a timeline for "some point in the future." June or August are, of course, the obvious possibilities.

From the blog archives, after the March 28 (last FOMC meeting) I said,

Nothing in the press release surprises me (or changes my outlook), but I look forward to the next round of "Fedspeak" to see which way some committee members will be heading as they go forward. Another increase in May appears very likely. After that it's hard to say. "Some further policy firming" allows some flexibility. Just remember, a pause doesn't mean that it's over. As we near the top, there is something to be said for putting twelve weeks between rate increases rather than six. (Sort of like letting up the pressure on the brake pedal of a car as you come to a stop.) But for the moment, the timing of the inevitable pause is still unknown. Stay tuned for the next round of speeches by FOMC members.

I still like my brake pedal analogy.

And from a Wall Street Journal Econoblog with Tim Duy last November, Tim said:

...Although there may be pressure to establish his [Mr. Bernanke's] inflation-fighting credentials, he will have to weigh this against the actual and projected state of the economy. Regardless of the pressures he faces, over-tightening in the face of deteriorating economic data could be as damaging to his credibility and that of the institution as a whole, as failing to tighten sufficiently as inflationary forces mount. So no, I don't believe that Mr. Bernanke is destined act in deference to his critics.

Still, even if Mr. Bernanke is immune from his critics' pressure, there remains a risk of policy error. As the federal-funds rate is pushed further into the 4% range, we will be closing in on the neutral point for monetary policy. A considerable amount of accommodation has been removed, and recent and expected rate hikes have yet to work their way into the economy. With the Fed seemingly locked on a higher rate trajectory, there will be a risk that past rate hikes will be slowing economic activity even as more tightening is implemented.

The Fed is cognizant of this risk and, I believe, will likely require a higher bar for rate hikes at some point early next year. The real trick for Mr. Bernanke might be the need to communicate the transition to a new policy direction at the same time the Fed is transitioning to new leadership.

and I replied...

If incoming data forces us to redefine "neutral" as something higher, then (all other things being equal) I am slightly less worried than I was this summer about policy error. What concerns me more is, as you suggest, the need to communicate the transition to a new policy, especially if the economy begins to slow and the Fed is forced into some tough choices. If GDP growth slows at the same time that the recent increases in energy prices finally feed through and increase core inflation, the Fed must decide which objective is the most critical. If you advocate inflation targeting (or price-level targeting -- Angry Bear and macroblog have a couple of good posts discussing the difference), your choice is clear. I sense that some of the more vocal opposition to Mr. Bernanke is coming from ardent proponents of price-level targeting who fear that he may not be tough enough.

Still true. Incoming data has pushed the definition of "neutral" higher than it was in November when we wrote this. Sustained increases in energy prices are beginning to show evidence of feeding core inflation. In the morning, perhaps by the time you read this, we'll know how the GDP numbers change this landscape.

Barry Ritholtz is worried that the Fed could get behind the inflation curve. Though I acknowledge the risk, I'm a bit less concerned. Remember, there are two months, and therefore two inflation data points, before the June meeting. I'll be the first to say that if those two points yield unhappy news, I'd call for (and expect) more increases in June and August. Ditto if the morning news reports robust GDP growth. But that's what "data dependent" means. And I reiterate what I said in March. I would not want a pause to mean a stop. I'm definitely not advocating (or expecting) "one-and-done". I'm still of the mind that talk of rate increases will be on everyone's lips well into the fall, even if rates are not raised at every single meeting between now and then. Bernanke's comments today were, I think, a necessary step to pave the way for a pause, but not sufficient to guarantee that it will come in any definite time frame.

I must say though, Bernanke's comments notwithstanding, I can't envision a pause in June if inflation numbers for April and May are what they were for March. But I am on the edge of my seat waiting for the GDP numbers in the morning--more than I have been in some time. Such is life in a "data dependent" environment. Though you'll probably first read this after the morning news, I figured I'd set this out now to give you a clear "before and after."

See you in the morning.

Brad DeLong reads John Tamny. Fortunately it wasn't during his morning coffee, or he would have probably had to clean the monitor.

Tamny:

To begin, just as Chinese authorities fix the yuan's value, so too do U.S. authorities fix the dollar's value. As the Journal's George Melloan noted in a recent editorial, "no currency actually 'floats.'" As opposed to commodities set by market forces, currencies today are merely paper concepts controlled by central banks through the creation of and extinguishment of that paper.

That the above is true calls into question Lindsey's assertion that the "Chinese clearly undervalue their exchange rate."

DeLong:

The above is not true. If it were true, it would not "call into question" Lindsey's assertion. This year it looks like China will spend $250 billion trying to keep the value of the renminibi low: that's the reason for Lindsey's assertion.

Actually, it gets worse. Tamny continues...

Regarding the exchange of goods between the two countries, Lindsey argues that the supposedly undervalued yuan creates “losers,” specifically the “American producers of goods that are now made in China.” Implicit here is the flawed assumption that changes in currency values impact the real price of anything.

In truth, as 18th century philosopher David Hume wrote, “the greater or less plenty of money is of no consequence” in trade since the price of commodities always adjusts to any changes in a currency’s value. Nixon Treasury Secretary John Connally articulated the same in pointing out that money itself “cannot produce, increase efficiency, or open markets abroad.”

If China adheres to Lindsey’s compromise and revalues the yuan upward, the imported commodity inputs used to create the goods they sell us would simply become cheaper in nominal terms. Conversely, U.S. producers would hardly gain from a devaluation of the dollar given the same market forces that apply to the Chinese in what is a world economy.

Correcting the errors here is an undergraduate exercise and is left to the reader. The upshot of his claim is that the value of the yuan is of no real consequence. Keep that in mind as he continues...

Lindsey also argued that in “resisting revaluation, [Chinese president Hu Jintao] is making China poorer.” More realistically, Mr. Hu is intimately aware of what happened to Japan the last time the U.S. political elite engaged in one of its periodic protectionist episodes. The “revaluation” we forced on Japan through the 1985 Plaza Accord caused it to sink into a 15-year deflation from which it is only now in recovery.

Can't have it both ways, Mr. Tamny. Either currency values have real effects or they don't. One of the things that Tamny is forgetting is that capital controls throw a wrench into Hume's price-specie flow mechanism. So, while China has been slowly removing the capital controls, Hume's mechanism is unlikely to work perfectly. He's also glossing over a lot of monetary economics here.

Tamny concludes...

Rather than engage in wealth-reducing currency revaluations, the U.S. and China should seek a tight link between the two in order to ensure the kind of stability that will cause our trading relationship to continue to grow.

The yuan is undervalued. The undervaluation of the yuan has had and continues to have real effects. I'm not sure why Tamny wants to deny this. I'm not sure why he wants to "seek a tight relationship" between the dollar and the yuan when market forces are pushing in the other direction. That seems like a losing battle, and one that relies on inconsistent logic. I continue to assert that while the yuan is destined to become less undervalued, the risks associated with moving too quickly outweigh the risks of moving too slowly. Protectionism isn't the answer, but the status quo is unacceptable as well. That China held its exchange rate fixed against the dollar for so long was, I believe, an important factor in their rapid growth. But they are entering a new stage of development--one in which a hard peg is not necessarily the best option. A gradual adjustment to that next stage is in both our interests. Denying that to score political points is no better than proposing a tariff to achieve the same ends. A mature trade relationship with China will have a flexible exchange rate. Hopefully we will avoid repeating some past mistakes on the way there.

UPDATE: PGL at Angry Bear has more.

John Palmer sees the Palestinian Authority running out of money and ponders what might lie ahead.

My guess is that unless other [Arab?] nations cover the shortages left by canceled EU and Western aid, then within a year (and possibly just a few months), the PA will declare its independence from the New Israeli Sheqel and the Jordanian Dinar and start printing money to pay its debts. The effect will, of course, be to create massive and rapid inflationary pressures. These will be followed by ruthlessly enforced price controls and foreign exchange controls.

Whether it will play out this way depends on Middle Eastern politics and diplomacy. By comparison, predicting the Fed's June decision looks like a piece of cake. This bears careful watching. One hyperinflation in the world right now is one too many.

The minutes of the March meeting are out.

Reuters has the story.

Barry Ritholtz says, "We remain as data dependent as ever..." Can't say I disagree with that.

Dave Altig checks out the probability charts and sees a slight, but discernable, shift in the air.

Mark Thoma quotes from Janet Yellen's speech.

It did seem to me that the minutes went into a lot of detail on the discussions of how to word the statement and the fact that the FOMC members realize just how much the market makes out of these statements. For example, take a look at this passage:

Changes in the sentence on the balance of risks to the Committee's objectives were discussed. Several members were concerned that market participants might not fully appreciate the extent to which future policy action will depend on incoming economic data, especially when an end to the tightening process seems likely to be near. Some members expressed concern that retention of the phrase "some further policy firming may be needed to keep the risks...roughly in balance" could be misconstrued as suggesting that the Committee thought that several further tightening steps were likely to be necessary. Nonetheless, all concurred that the current risk assessment could be retained at this meeting.

Given that the intermeeting release of the minutes is now part of the information cycle, it is not out of line to think that this could be warming us up for a change in the language--possibly, but not certainly, at the May meeting. But it does seem clear that a pause in the rate hikes is coming soon--they just aren't quite ready to telegraph to the markets exactly when. To do so would inhibit their flexibility in either direction.

Barry is right. We are as data dependent as ever. Even more so.

From Reuters:

SHANGHAI (Reuters) - China relaxed its capital controls on Friday to make it much easier for individuals and companies to buy foreign currencies and invest abroad.

The move will permit President Hu Jintao to tell President Bush when they meet next Thursday that China has made another notable move toward a market-driven exchange rate.

"The deregulation is a concrete step fulfilling the central bank's commitment to gradually ease China's capital controls," said Li Yang, an economics professor who is a former member of the central bank's monetary policy committee.

Under rules announced by the central bank and the foreign exchange regulator, Chinese banks will be allowed to pool yuan deposits and convert them into foreign currencies for investment in overseas bonds.

...

It follows a series of other moves to build a two-way market for foreign exchange. These include the introduction of a system of market-makers, who constantly stand ready to buy or sell the yuan, and the development of derivatives so banks and firms can hedge new-found currency risk.

"Just as central bank officials have been saying, what really counts is reform of the foreign exchange formation mechanism rather than the level of the exchange rate. This move is a vital part of that reform," said economist Yi.

Underscoring the reform drive, China said on Friday it would launch interbank trading in currency swaps on April 24.

Depending on the pace of liberalization, the easier foreign exchange rules provide a juicy business opportunity for Chinese banks and money managers.

"You're giving banks a huge opportunity. They already have a huge depositor base, so marketing is going to be very easy," said economist Stephen Green with Standard Chartered Bank in Shanghai.

Green rated the significance of Friday's announcement at five on a scale of one to 10. "It's giving them the tools they need to start allowing liquidity to move offshore. They've driven a wedge through the capital account," he said.

Faithful readers will note that this is just the latest in a series of events that began last summer even before the actual revaluation. This one also comes with a date (April 24) for the next step. Each step is necessary for this reform to work in the long run, and each step represents real progress. Of course people will want to make the connection between these events and the upcoming state visit, but it seems to me that the visit is not the most important driver here. The precise timing of an announcement like this (any announcement of any substance would suffice) today is no coincidence. However, this is a process that the Chinese know is going to take months and years to see to completion, and it is in their interest to start down that path and move very deliberately. I have long held that the Olympics in 2008 are going to be an important reason for China to promote openness that goes in both directions. Money will need to flow in and out and not remain trapped behind capital controls. Yet they know that this needs to be managed very carefully to avoid too much volatility. For Americans, this is election year politics. For the Chinese, the stakes are higher. Stories like this will continue to trickle out every few weeks for some time to come.

For a summary of what has happened so far, check out all of my China posts.

Liran Einav and Leeat Yariv have an interesting paper in the Journal of Economic Perspectives (Winter 2006). The title is, "What's in a Surname? The Effects of Surname Initials on Academic Success." Here's a tease...

We suspect the "alphabetical discrimination" reported in this paper is linked to the norm in the economics profession prescribing alphabetical ordering of credits on co-authored publications. As a test, we replicate our analysis for faculty in the top 35 U.S. psychology departments, for which co-authorships are not normatively ordered alphabetically. We find no relationship between alphabetical placement and tenure status in psychology.

Personally, I always go alphabetically. If it truly is a team effort (and I only co-author when it truly is a team effort), then order should make no difference. It makes no difference to me, at least. Apparently, this is not a universal opinion. I haven't had time to thoroughly critique it, but at first glance, it is an interesting paper.

It's the 50th birthday of the shipping container this month. Marc Levinson has a new book for the occasion. In it he argues that the shipping container permanently changed the economic landscape and was instrumental in turning emerging Asian economies into trading powers.

Michael Mandel isn't convinced. He wants data to back up the claim--data that is lacking in Levinson's book. I put my 2 cents in on the comments over there. I just finished posting a 2nd comment that is awaiting approval in which I answer Mandel's skepticism that the container was a disruptive innovation. (He thinks it was an "incremental process improvement.") I think it would suffice to say that there wouldn't need to be a World Trade Center in cities like Denver, Kansas City, and St. Louis, if it were not for some form of standardized intermodal shipping.

I have not read the book, but have read comments and reviews about it. I plan to put it at the top of my list of things to read. Virginia Postrel blogged about it a while back. She also mentions the regulatory system, which was also crucial to the expansion of intermodal transport. How quickly we forget.

Approximately 211,000 net new jobs (seasonally adjusted) were created last month. That makes over 2 million in the last year. If you exclude the months of September and October where were distorted by the effect of the hurricanes, that gives an average of over 200,000 jobs per month for the last year. Even if you include those two months of slower than average growth, the average for the last 12 months is still almost 175,000 per month. That's not bad. It's even enough to bring some cheer to an Angry Bear (PGL). He's happy because the employment to population ratio hit 63%. That's up 0.6% since last March. The trend is definitely good--which is important since that ratio comes from the Household Survey, which has a small sample size (meaning month-to-month changes can be noisy).

I've been taken to task by some for being too optimistic and by others for being too pessimistic (though the count is probably in favor of those who call me too optimistic). For the past several months (since late spring/early summer of last year), I've been of the opinion that the labor market is better than a lot of people are giving it credit for, but not destined to break any records of the late '90s. In those months, we've seen some ups and downs, but all in all it seems very consistent with a "soft landing" scenario.

So is it too early to call a "soft landing"? Probably. We should at least get the 1st quarter GDP and another month of job growth before making the call. Some (the ones who call me too optimistic) would say that we should wait even longer. How long? What will be the characteristics of the data that signal a soft landing? A year of 200,000/month job growth? (Excluding the hurricanes, we got it.) A return to 3-4% real GDP growth after a quarter of below average growth? Declining inflation pressure and a pause in interest rate hikes by the Fed? I'd go with all of the above, and it does sound like it is possible in the next few months. (Though some think the Fed might put off that pause a little too long for their tastes.)

That said, let's look a little deeper into the labor report and see where the action is.

Labor force participation:
Men--up
Women--down
Teenagers (both men and women)--up
Black men and women 20 and over--up
Black teenagers--down (with an increase in their unemployment rate from 30.8% to 33.1%)
No high school degree--down
High School (no college)--up
Some college--up
Bachelor's degree-down

In most cases, the employment to population ratio behaves similarly. In short, the overall picture looks good, but different demographics will see things differently. If you've been following along, this is nothing new to you. Obviously Black teenage unemployment is a concern. I have mentioned in the past that labor force participation for women in general may have peaked, or nearly so, in the late '90s. Overall their rate for women continues to fall while for Black women (who participate in the labor force at a greater rate than white women) the rate continues to rise.

Finally, let's look at the change in the distribution of unemployment duration. Since March of 2005, how has the percentage of people unemployed for various lengths of time changed?

Less than 5 weeks--increased from 32.8% to 38.1%
5 to 14 weeks--decreased from 30.5% to 28.6%
15 to 26 weeks--decreased from 15.2% to 14.9%
27 or more weeks--decreased from 21.5% to 18.4%

That, my esteemed readers, is an improvement indeed!

...increases the premium people will pay to someone who can get the job done. CNN reports:

DOLORES HIDALGO, Mexico (AP) -- Barely 18, Jose belongs to Mexico's new generation of migrant smugglers -- young, savvy and happy to see Uncle Sam further tighten border security.

Why? It's good for business, he says.

Jose figures more migrants will seek his help if the U.S. Senate approves legislation to double the Border Patrol and put up a virtual wall of unmanned vehicles, cameras and sensors to monitor the 2,000-mile border with Mexico.

If you want to know what would happen next, just look to the drug trade. The article continues...

"The new generation of migrant smugglers are youths who see their clients as merchandise," [Mexican border expert Victor] Clark said. "Many of them abandon the migrants in the desert or give them drugs, or tell migrants they know the way when they don't, and they end up dying along with the migrants. Others have turned to violence to steal clients from other smugglers."

The Law of Unintended Consequences rears its ugly head yet again.

Dallas Fed President Richard Fisher thinks so:

Until recently, the econometric calculations of the various capacity constraints and gaps of the U.S. economy were based on assumptions of a world that exists no more. [Former Fed Governor Laurence] Meyer’s book is a real eye-opener because it describes in great detail the learning process of the FOMC members as the U.S. economy entered a new economic environment in the second half of the 1990s. At the time, economic growth was strong and accelerating. The unemployment rate was low, approaching levels unseen since the 1960s. In these circumstances, inflation was supposed to rise—if you believed in the Phillips curve and the prevailing views of potential output growth, capacity constraints and the NAIRU. That is what the models used by the Federal Reserve staff were saying, as was Meyer himself, joined by nearly all the other Fed governors and presidents gathered around the FOMC table. Under the circumstances, they concluded that monetary policy needed to be tightened to head off the inevitable. They were frustrated by Chairman Greenspan’s insistence they postpone the rate hikes.

We now recognize with 20/20 hindsight that Greenspan was the first to grasp changes in the traditional relationships among economic variables. The former chairman understood the data and the Fed staff’s modeling techniques, but he was also constantly talking—and listening—to business leaders. And they were telling him they were simply doing their job of seeking any and all means of earning a return for shareholders. At the time, they were being enabled by new technologies that enhanced productivity. The Information Age had begun rewriting their operations manuals. Earnings were being leveraged by technological advances. Productivity was surging. Inflation wasn’t rising. Indeed, it just kept on falling.

If the advice of Meyer and the others had prevailed, the Fed would have caused the economy to seriously underperform. According to some back-of-the-envelope calculations by economists I respect, real GDP would have been lower by several hundred billion dollars. Employment gains would have been reduced by perhaps a million jobs. The costs of not being right on the critical calibrations of monetary policy would have been huge.

We live in a globalizing era. Just consider what the fall of the Soviet Union, the implementation of Deng Xiaoping’s “capitalist road” in China and India’s embrace of market reforms mean to business operators. Consider labor alone. In the early ’90s, the former Soviet Union released millions of hungry workers into the system. China joined the World Trade Organization at the turn of the century and injected 750 million workers into play. And now India, with over 100 million English-speaking workers among its 1 billion people, has joined the game. Just two weeks ago, a CEO told me his company posted ads for people to apply for 9,000 jobs in a new facility in India. Do you know how many applications they received?—1,400,000.

How does this affect the American manager—paid to enhance returns to shareholders by growing revenues at the lowest possible costs? Because labor accounts for, on average, about two-thirds of the cost of producing most goods and services, the managers will go where labor is plentiful and cheapest. They will have a widget made in China or Vietnam, or a software program written in Russia or Estonia, or a center for processing calls or managing a back office set up in India.

...

You could sense something was wrong with the econometric equations if you listened to the troops on the ground, fighting in the trenches of the marketplace. This is what I did at the U.S. Trade Representative’s office in negotiating market-opening trade rounds with China, Vietnam, Mexico, Brazil and others. It is what my colleagues and I at Kissinger McLarty did while advising dozens of U.S. companies seeking entry into China and the former Soviet satellites and India and Latin America. It is what my colleagues and I on the FOMC do by making dozens upon dozens of calls to CEOs, COOs and CFOs of businesses, large and small, every month to prepare for FOMC meetings.

We are simply observing managers at work expanding the capacity of our economy, expanding the gap between what their previously limited resources would allow them to produce and what their newly expanded globalized, technologically enhanced reach now allows them to produce.

From this, I personally conclude that we need to redraw the Phillips curve and rejig the equations that inform our understanding of the maximum sustainable levels of U.S. production and growth. How can economists quantify what the U.S. can produce with existing labor and capital when we don’t know the full extent of the global labor pool we can access? Or the totality of the financial and intellectual capital that can be drawn on to produce what we produce?

Jeffrey Lacker of the Richmond Fed also gave a speech today. See Mark Thoma's recap. Lacker sounds confident that inflation is under control, and he's upbeat on the overall economic growth picture. Fisher's speech quoted above suggests that globalization is keeping inflation down. Note how he also references the debates within the Fed from the '90s that put Governor Meyer and Chairman Greenspan at odds over interest rates. It's not hard to tell whose camp he's in.

How's the media interpreting this? Here's a check of Reuters:

"The combination of a decline in oil prices, however slight, and some fairly upbeat comments (by Fed officials), may have led Fed watchers to conclude the Fed may raise interest rates at its meeting in May, and then stop," said Hugh Johnson, chief investment officer of Johnson Illington Advisors.

"Conclude" might be a bit strong at this point. Personally, I would probably advocate pausing in June, even if only just for one meeting. However, I'm not prepared to call it anything but an even bet at this point. The markets, at least as of Monday, would seem to concur (hat tip to macroblog). David's comment about the employment numbers coming out on Friday seems on the mark. Also between now and June we'll get two news releases on 1st quarter GDP. I'm not going to "conclude" anything for a while.

But Lacker and Fisher have staked their ground. Let's see how the others position themselves.