November 2006 Archives

The mint is taking another run at making a dollar coin people will use. In reality, it sounds like a dollar coin that people will want to collect. (NY Times)

The United States Mint is unveiling four designs for one-dollar coins today, featuring likenesses of the first four presidents. They begin a series that is to last a decade and portray every deceased president.

The United States Mint is planning a series of one-dollar coins to feature every deceased president, with the date stamped into the edge.

The first coin, displaying George Washington on one side and the Statue of Liberty on the other, will go into circulation in mid-February, in time for Presidents’ Day. After that, coins with John Adams, Thomas Jefferson and James Madison will be issued at three-month intervals.

...

The size, color and metal content of the $1 coins will be identical to those of the current Sacagawea dollars, but their luster should last longer because of a new anti-tarnishing compound that will be applied to blank coins between the time they are annealed, or softened by heating, and struck with the design.

The date and some inscriptions will be stamped into the edge, airing out the designs.

The director of the Mint, Edmund C. Moy, said the number of each presidential dollar coin issued would depend on circulation demands forecast by the Federal Reserve, regardless of how well known a president was. “This could be a renaissance for some of our lesser-known presidents,” Mr. Moy said in an interview.

...

Hopes are that the new dollars will be as popular as the state quarters, many of which have been taken out of circulation by collectors. The government has earned $4 billion to $5 billion on the state-quarter series since 1999.

I like dollar coins. We really should emulate Canada with both $1 and $2 coins. Count me in as collecting this series. I also love the quote from the director of the Mint. The number issued will be determined by circulation demand, not the popularity of the president. Be prepared to observe Gresham's Law in action. Andrew Johnson coins might circulate at face value while collectors hoard all the Jeffersons.

Here's the announcement from the U.S. Mint. Note that Grover Cleveland gets two coins for his non-consecutive terms.

I am not one-dimensional. Economics is not the only thing that gets me fired up. I'm also a science enthusiast. Yes, I'm a big fan of Mr. Wizard, Bill Nye, etc. Are Jamie Hyneman and Adam Savage in their league? The NY Times recently ran a piece on one of my guilty pleasures, Mythbusters on the Discovery Channel

Mr. Hyneman, however, insists that he and the “Mythbusters” team “don’t have any pretense of teaching science.” His wife, he noted, is a science teacher, and he knows how difficult that profession is. “If we tried to teach science,” he said, “the shows probably wouldn’t be successful.”

“If people take away science from it,” Mr. Hyneman said, “it’s not our fault.” But if the antics inspire people to dig deeper into learning, he said, “that’s great.”

Science teachers know a good thing when they see one, however: Mr. Hyneman and Mr. Savage were invited to speak at the annual convention of the National Science Teachers Association in March, and the California Science Teachers Association named Mr. Savage and Mr. Hyneman honorary lifetime members in October.

I really enjoy the show, but it is not a science lesson. Over the years there have been a number of times where I was howling at the TV convinced that they had made a fundamental scientific error. But most of the time they prove themselves to be very, very clever. If you like seeing people get creative with everyday items and use the scientific method, then there's a good chance that you will find it to be entertaining television.

I will also note that there was one episode where they could have discussed statistical inference but didn't (the helium football episode). Ultimately their reasoning was essentially correct, and I'll give them the benefit of the doubt that they could have done it but decided (correctly, I think) that it wouldn't be good for television.

My guess is that they have a pretty diverse audience and it is next to impossible for them to fine tune the show to please everyone. I'd like more science, but too much science would cause them to lose some viewers. After all, if I get inspired to think about the science behind the show, there are plenty of ways to dig deeper. I enjoy the show for what it is, and I wonder if any other economist-types do as well?

Have a wonderful holiday, everyone!

Paul at Truck and Barter has done heroic work in putting so many links together.

OpinionJournal has a sampling of Friedman's many pieces written for the Wall Street Journal. Thomas Sowell has a tribute piece as well.

Lawrence Summers shows his class in his NY Times op-ed.

UPDATE: Robert Frank suggests a way to expand the earned income tax credit to be more like what Friedman envisioned while also getting the incentives right. Not an easy assignment, but worth discussing.

This isn't good. (NY Times)

The latest housing statistics, released yesterday by the Commerce Department, suggested that the months ahead would be equally bleak. The number of building permits issued in October fell for the ninth straight month, dipping to the lowest rate since 1997.

The report deepened concerns that the slowdown in the housing market could brake economic growth more than analysts have anticipated.

The number of new homes that builders started in October was down 14.6 percent from September, at seasonally adjusted annual rates, to 1.49 million. The number of building permits issued fell 6.3 percent, to 1.54 million.

James Hamilton has more. I don't think this is over. All eyes will be on next month's data to see if this rate of decline holds up. By itself, this does not necessarily mean a recession, but it does shift the balance of risks. Combined with yesterday's CPI news which were lower than what most were hoping, but not outside the range I had in my head, this is enough to get me to raise my probability of a Fed rate cut in early 2007 by a little bit. Earlier this week, I would have said that a rate cut in the first 3 months of 2007 had about a 1 in 4 probability. Today I'd go up to 1 in 3.

The charts at the Cleveland Fed show a small rise in the probability of a cut in January as well as a perceptible rise in the probability that the rate in March will be 4.75%. Chew on that over the weekend.

Source: Cleveland Fed

Relatively few of us live to age 94. Fewer are still professionally active at that age. Even among academics, who are noted for their ability to continue the intellectual enterprise under the title "emeritus", 94 years is an extraordinary age for a public intellectual.

Milton Friedman certainly was extraordinary in more than just this respect.

His scholarly accomplishments are being lauded widely today, and there is a lot to praise. But it was more than just the papers that he authored that made him so influential. It was that his ideas were infused into the very heart of the discipline. Ideas that he, his students, and his followers advanced have become the standard currency of the realm. Pick up a journal containing macroeconomic research today. You will be looking at his legacy. And what a legacy it is.

I never met the man, but I'm sure many of you would agree that after watching so many hours of his television interviews and specials over the years it was hard not to feel like you knew him. I so enjoyed and admired the way that he conducted himself in the public eye. In those interviews he had a twinkle in his eye that only comes from true passion for the ideas he advanced. He made no apologies for his position. He was staunch and steadfast but at the same time a consummate gentleman.

Whether you agreed with him or not, he forced you to think. As Bill Conerly wrote on his blog (Businomics) today, he did not tolerate sloppy economics. He didn't tolerate sloppy arguments of any kind. He made short work of many a question by an interviewer, sometimes in a way that made you feel for the person who just got put in their place. But there was no malice. He wanted to win people over not by browbeating them, but by convincing them with the strength of his argument. However his quickness could catch even a great interviewer off guard. He came up with the perfect answer right away whereas us ordinary folks would have taken some time to ponder the theory or plumb our memory for an example. It was as if he was one step ahead all the time.

But then he was extraordinary.

What gives me the greatest sorrow today is that there will never be another of those interviews for us to enjoy. No longer will we be able to hear his insight on the momentous economic events of our time. Even at age 94, he had so much more to give, as this op-ed in the Wall Street Journal (dated Friday) illustrates. He was as sharp as ever, right up to the end.

Over the upcoming Thanksgiving break, I plan to re-read parts of Two Lucky People and Capitalism and Freedom. The latter was an inspiration for me as I began my study of economics (by no means was my experience unique). Though I do not fully endorse every single idea in the book, I find it to be so engaging and thought provoking that it inspires new ideas in me no matter how many times I read it. Reading the words of Friedman, like reading the other true giants of the discipline regardless of their position on the political spectrum, sharpens your mind and refines your arguments.

His and Rose's memoir, Two Lucky People is special to me because it came out in paperback right about the time that I proposed to the woman who would become my wife. I told her about Milton and Rose, what a beautiful marriage they had, and what an inspiration he was to me professionally. The more I read about Milton and Rose, the more they became an inspiration to me personally. My future wife agreed and gave me the book as a gift. We celebrate our sixth anniversary on Saturday. That's not even one-tenth as long as Milton and Rose spent together. My wife and I hope and pray that we can enjoy that kind of longevity as a couple. The word "extraordinary" falls short of fully describing it.

In the coming days and weeks, I will offer some additional thoughts on Friedman's contributions and what we can still learn from his ideas, even those that have met with less success than others. Tonight, however, my thoughts tonight are for his family.

NY Times Obituary
WSJ Obituary

UPDATE: Paul at Truck and Barter has an extensive listing of links, including a link to David Friedman's blog.

The October minutes are on the Fed's web site. Here's the first thing that caught my eye.

The Chairman noted that the President had recently signed the Financial Services Regulatory Relief Act of 2006, which among its provisions gave the Federal Reserve discretion, beginning October 2011, both to pay interest on reserve balances and to reduce further or eliminate reserve requirements. The Act potentially has important implications for many aspects of the Federal Reserve's operations and the Chairman asked Vincent Reinhart, Director of the Division of Monetary Affairs, to form a committee of Federal Reserve System staff to consider these issues.

They could learn from Canada, the UK, and New Zealand, as this publication by Sellon and Weiner from the Kansas City Fed explains. Let me know if you have other papers in this area to suggest.

On to the current outlook,

In their discussion of the economic situation and outlook, meeting participants noted that incoming data over the relatively brief intermeeting period had come in broadly as anticipated. The most recent indicators suggested that economic growth had probably slowed more sharply in the third quarter than had been expected at the time of the September meeting, but that appeared to largely reflect the impact of temporary influences. Participants continued to expect the economy to expand at a rate close to or a little below the economy's long-run sustainable pace over coming quarters. The ongoing adjustment in the housing market was likely to depress real activity in the near term, but this effect was expected to wane gradually; private final domestic purchases had held up well in recent months and looked set to expand at a reasonably good pace. Although recent monthly inflation readings indicated some slowing of core inflation from the very rapid rates of spring and early summer, many participants noted that current rates of core inflation remained undesirably high. Most participants expected core inflation to moderate gradually, but they were quite uncertain as to the likely pace and extent of that moderation.

There was some concern about consumer spending, especially if the housing market continues to falter.

To date, weakness in the housing market and the associated downshift in house price appreciation did not seem to be spilling over into consumer spending, which appeared to have grown at a steady pace in recent months. Retail activity in most Districts had been relatively robust and contacts in the retail sector were generally upbeat about the outlook. Several participants noted, however, that contacts within the transportation sector had reported that activity in anticipation of the holiday shopping season appeared to be softer than in previous years. Meeting participants judged that consumer expenditures going forward were likely to expand at a steady pace a little below the growth in disposable income, supported by favorable financial conditions, continued increases in employment and income, and the recent decline in energy prices. Nonetheless, many participants expressed concern that ongoing developments in the housing market could have a more pronounced impact on consumer and other spending, especially if house prices declined significantly.

Inflation, however, appeared to be more of a concern, even in light of lower energy prices recently. The main concern is that if core inflation is too high for too long it will cause expectations shift.

All meeting participants expressed concern about the outlook for inflation. Most participants expected core inflation to edge lower, in part as the effects of the run-up in energy prices in recent years waned. And shelter costs were not expected to add materially to inflation going forward. Moreover, moderate growth in aggregate demand and the associated modest easing of pressures on resource utilization should also contribute slightly to the slowing in core inflation. Recent changes in core prices had declined slightly from earlier in the year. Nonetheless, nearly all participants viewed the current rates of core inflation as uncomfortably high and stressed the importance of further moderation. The available measures suggested that medium- and long-term inflation expectations remained around the levels seen for the past several years, although in the view of some participants these expectations were probably higher than would be consistent with their assessment of long-run price stability. Participants were concerned that inflation expectations could begin to drift upwards if core inflation remained elevated for a protracted period. Any such rise in inflation expectations and associated upward pressure on inflation itself would likely prove costly to reverse. Although some participants noted that the recent slowing in core inflation had helped to allay their fears of a further sustained increase in inflation, all participants emphasized that the risks around the desired downward path to inflation remained to the upside.

In summary,

...Although substantial uncertainty continued to attend that outlook, most members judged that the downside risks to economic activity had diminished a little, and likewise, some members felt that the upside risks to inflation had declined, albeit only slightly. All members agreed that the risks to achieving the anticipated reduction in inflation remained of greatest concern. Members noted that a significant amount of data would be published before the next Committee meeting in December, giving the Committee ample scope to refine its assessment of the economic outlook before judging whether any additional firming was needed to address those risks.

Overall, the data coming in over the last few days has given me no reason to expect any additional firming is coming in December. Many have been speculating that the Fed may ease rather than tighten in early 2007. I'm not on that bandwagon yet, but I'm less dismissive of it than I would have been two months ago. It seems that staying the course is the best bet, probably for another meeting or two before we see where things are heading. I have been somewhat sympathetic with Mr. Lacker for worrying that core inflation has been too high for too long and thus additional firming will be necessary sooner or later. Depending on tomorrow's CPI, I maybe more or less so. I'm leaning toward the "less". If the core CPI (and then later the more important core PCE) are moderating, then it seems a good bet to hold things where they are. We shall see.

On communication, they had this to say...

The Committee then continued its discussion of communication issues and considered the advantages and disadvantages of quantifying an inflation objective. Participants stressed that any such step had to be consistent with the statutory objectives for monetary policy. In that regard, it was noted that over time price stability is a prerequisite for maximum employment and moderate long-term interest rates. However, the possible specification of a numerical price objective raised a number of complex and interrelated issues that required considerable further discussion. The Committee reached no decisions on these issues at this meeting, and participants agreed to continue the Committee's review of communication issues at its meeting in January 2007.

This month's fedgazette from the Minneapolis Fed features poverty as its theme. There are a number of interesting articles that are worth your attention. In this post, I call your attention to one in particular on income mobility--the ability of individuals and households to move through the income distribution over time.

Income mobility is one of those things that we like to talk about and make claims about. We like to hear stories of "rags to riches", but how often does it really happen? It turns out that we understand relatively little about mobility from a statistical standpoint. Ronald Wirtz writes in the fedgazette article,

Bhashkar Mazumder, an economist at the Federal Reserve Bank of Chicago, has authored several mobility studies in recent years. He said, also via e-mail, that prevailing mobility research throws water on the common notion that U.S. income is highly mobile and more mobile than other countries. More recent studies, like his own, have used much richer longitudinal data that track income over longer periods of time, giving a more accurate reading of lifetime incomes in the United States. Research over the past decade and a half shows that “mobility is relatively low in the U.S. and lower than we thought,” said Mazumder.

...

Nathan Grawe has also done research on income mobility as an economics professor at Carleton College in Minnesota. In his estimation, the four best studies done to date on intergenerational mobility have both positive and negative findings, and most results were not statistically significant; in other words, the findings aren't particularly trustworthy. “All told,” Grawe said via e-mail, “I'd say we have no evidence of change.”

Part of the problem is that studies done before about 1990—which generally concluded that the United States had high mobility—are widely discredited today as faulty, mostly because they relied on very small windows of income data, often just a few years or less. In 1992, Solon published one of the first papers suggesting that U.S. mobility was not as high as everyone thought.

Mazumder's research comes to the same conclusion. But his most recent effort with Daniel Aaronson (also of the Chicago Fed) might have something of a silver lining. They found that current mobility might simply be returning to its historical trend line after experiencing an uptick in the 1970s. In other words, mobility might be worse compared to the 1970s, but it might well be in line with the country's historical average.

Obviously, a lack of longitudinal data going way back will remain a problem. Maybe in fifty years we'll be able to put the current period in historical perspective. Too long for some. You know what Keynes said about the long run. While the evidence here is conflicting and the conclusions not quite conclusive, the situation is better than that concerning the question of how much mobility is optimal.

The notion of perfect mobility—an equal chance for any outcome, regardless of where you start—has a hint of social and economic chaos, by virtue of the fact that it implies a lack of predictability in outcomes regardless of the very things that families and societies tend to value: effort, ability, education and other human capital investment, and parenting.

Economists believe incentives motivate behavior. Grawe, from Carleton College, noted that mobility research was often written “in ways which suggest more mobility is better.” But a society with no obvious determinants for income “would clearly have all sorts of incentive problems.”

For example, parents' attempts to offer certain advantages to their kids—reading to them, sending them to better schools, saving for college, transmitting certain values—might be for naught in a world where these things have no lasting economic effect. In a 2002 working paper on the notion of perfect mobility, sociologist Adam Swift of the University of Oxford wrote, “Even those that regard current mobility patterns as evidence of morally unacceptable unfairness should acknowledge that some mechanisms by which parents transmit advantage—or disadvantage—to their children are unobjectionable and would exist even in an altogether just society.”

In other words, there is no clear guidance at all on how much mobility is optimal or even what we mean by optimal mobility. One cannot escape the fact that mobility requires an appeal to long run incentives, but people do not always behave in accordance with those long run incentives. Hence, a divergence between opportunity and outcomes is assured. This is the world in which we live. And this is why the solution to the problem of income inequality is more difficult than many people realize.

Thirty-one years ago this evening, the Edmund Fitzgerald and her crew of 29 was lost to the depths of Lake Superior. The Great Lakes Shipwreck Museum will have a memorial service, but unlike last year, there is no sign that it will be broadcast on the web. See my posts from the last two years.

Tomorrow, we observe Veterans Day. Originally called Armistice Day, the holiday was to commemorate the signing of the armistice at the 11th hour of the 11th day of the 11th month. Today, we honor all who have served.

Today, the clouds are rolling fast overhead as a strong north wind makes the rain seem all the more miserable. Ugly as it is, it is nothing compared to what Lake Superior would have felt like on this night in 1975. In that cold wind and rain this afternoon, a university flag across the street flies at half-staff in honor of another Illinois son.

And so it goes, in the present we see reflections of the past. And we remember.

But then that's the kind of sense of humor that I have. Here were two headlines from the CNN website this morning. It was all the more humorous that they were grouped together in the list.

Viking ship to ply North Sea; no invasion planned

Vandals behead George Washington statue

There was no report of any troop movements by the Visigoths or any other medieval trouble-makers, thankfully.

Cumulate Draw is a web based drawing application that looks very promising. One drawback appears to be that you can't insert text just anywhere in your drawing. You have to create a box for it and set the borders and transparency. No big deal once you get used to it. Anyway, I think it could come in quite handy for those "quickie" graphs to put on exams and such.

Hat tip to Newmark's Door

Check 21 is the name given to the law that allows banks to treat the image of a check as the real thing. Transmission of the images saves time and money, and it allows checks to clear even in the event of another 9/11 type of crisis that cripples the nation's transportation system (most checks travel in the bellies of airplanes).

Large banks started clearing checks electronically almost immediately after the law was passed. Now, as the NY Times reports, small businesses are able to take advantage of the efficiency improvement. The necessary hardware is available for about the price of a personal computer ($500-$1200).

Now banks are issuing miniature versions of those scanners to their small-business customers. The Stone Age, a 10-person company that sells stones, bricks, statues and tools to landscapers, started scanning its checks for deposit a few months ago. One of its owners, Jack Longo, estimates that it saves him five hours a week that used to be spent driving to and from the PNC branch about 10 miles away from his office in Totowa, N.J.

Mr. Longo had to go to the bank only twice in August: once because he had a check, for $50,000, that exceeded the dollar limit for remote deposit, and another time because he needed to initiate wire transfers that could be handled only at the branch.

Adding to the benefits, the device — a single-feed scanner made by the RDM Corporation — is connected to the company’s QuickBooks accounting software. After both sides of a check are scanned, the device’s software reads the routing number and dollar value and creates an electronic deposit slip. It also updates the company’s account balances and its accounts-receivable log.

“The computer automatically debits and credits the proper things, and all the bookkeeping is done at that time,” Mr. Longo said. That saves him money on the outside bookkeeper he pays by the hour. The scanner almost never reads the numbers wrong, he added, whereas “manually, you are prone to transposition or entering the wrong amount.”

Instructors who teach principles of macroeconomics are often discussing money and banking at about this time of the semester. This would be an interesting article for your classes and could be used as a starting point for a discussion of check clearing, the banking system, and the Fed.

I'm almost as much of a college soccer fan as I am a college football fan. So it pleases me to say that the Western Illinois soccer team is going to the NCAA tournament for the 3rd straight year. They will play the University of Illinois-Chicago on Friday. WIU is 15-7-0 and is 2nd in the nation in goals scored at 50 (Winthrop has 51). UIC is 12-2-5 and has the 2nd best goals against average in the country. The strength of the UIC defense is going to be tough to beat, but maybe they can pull it off. The winner advances to meet #12 seed Notre Dame next week. Go Leathernecks!

Excuse the lack of posting. Last week, I took a group of students to compete in the "Fed Challenge" in Chicago. The Fed Challenge is a competition in which student teams present a summary of economic conditions, a short-term forecast, and a monetary policy recommendation to a panel of judges. Most teams structure their presentation as a mock FOMC meeting. I would tell you how we did, but I have not received the official results yet--all anyone knows is who made the final round and who won. I can tell you that we did not win--Northwestern University took that honor and will represent the 7th Federal Reserve District in Washington, D.C. at the national competition. However, our students learned a lot from the competition. This was also the first time that WIU has entered a team, and I picked up some valuable ideas for next year.

Last minute preparations and missing a day last week left me in "catch-up" mode, and due to some other obligations this weekend, I still have a day or so before I'm caught up. I have to grade some exams and write some exams--not the fun part of the job, but one of the obligations nonetheless. Normal blogging will resume shortly.

In the meantime, there's an election tomorrow. Here is a Slate piece by Steven Landsburg from 2004 and Tyler Cowen's response. I'm with Cowen on this one. People do not (often for good reasons) treat every decision as a rational optimizer. Sure, there's no payoff from voting, nor is there payoff from many of the things we do that seem to contradict utility maximizing theory. For example, I tip generously even when I know that I'll never be back at that restaurant. I call the highway patrol to report road hazards even when a rational person would figure that someone has already called it in. The latter is probably a pretty close analogy to voting. I'm doing something at a (very small) cost to me when I have every expectation that it doesn't matter for the outcome. I feel good about it, but that's not a satisfactory explanation. Putting warm fuzzy feelings in the utility function allows you to explain anything. I think it is more accurate to think of voting and other similar actions as a commitment to a social contract. Some people are more committed to the contract (willing to pay a higher cost to uphold it) than others. Those less committed free ride on those who are more committed. Years of observation suggests to me that the same is true on the public roadways.

So tomorrow, vote or don't. But if you don't, please do not pester me with this business of how it is irrational to vote. As for me, I plan to incur an extremely small cost to display my allegiance to the social contract.