December 2007 Archives

A very merry Christmas to one and all. Thank you to my loyal readers and commenters for keeping me going.

Greg Mankiw writes in the New York Times today:

The question on the minds of many in Congress and in the White House is this: What they should be doing now to keep the economy on track? The right answer: absolutely nothing.

This advice isn’t easy for politicians to follow. Because economic downturns mean fewer jobs and falling incomes, they are painful for many families. Voters can confuse inaction with nonchalance and send incumbents packing. But just as patients should avoid doctors who recommend radical surgery for every ailment, voters should be wary of politicians eager to treat every economic ill. Sometimes, bed rest and wait-and-see are the best we can do.

Indeed it is true that the incumbent party does poorly, as Mankiw shows on his blog today (via Statistical Modeling).

Thus, Mankiw has a point, and later on in the article when he puts more faith in the Fed's ability to cope with the business cycle than Congress and the White House, I would also agree to a great extent. Whether the Fed is able to stave off a recession remains to be seen. If indeed a recession is to begin this quarter or the next (I wouldn't bet an awful lot of money on it, but it is a non-trivial probability), then what the Fed did in December or what they do in January will matter little. Likewise, if the economy rebounds in 2008 it probably wasn't the extra quarter point this month that saved us. Iacta alea est.

PGL directs us to Kevin Drum. They are both hot under the collar about this from the Washington Post.

New data from the Department of Commerce showed that consumer spending increased 1.1 percent in November compared with the month before on a seasonally adjusted basis -- more than analysts expected and a sign that consumers had not yet been discouraged by rising energy prices and a slumping real estate market.

Incomes also rose in November, by 0.4 percent, double the rate of increase in October, although that was more than offset by increased prices, the department reported. Discounting for inflation, disposable personal income -- the money left to spend after taxes -- fell 0.3 percent.

PGL suggests a shorter version.

Real consumer spending rose by 0.5 percent in November despite a 0.3 percent decline in disposable personal income. With consumption increasing despite the drop in income, personal savings declined.

Yep. Much better.

Drum comments:

What possible excuse can there be for leaving the initial impression that incomes rose in November? Real income is the only income that matters, and real income was down. That's the number that should get the attention.

Indeed. Mark my words. If inflation makes a resurgence in 2008, we are going to have to really be on the lookout for this sort of thing. Inflation makes it all too easy to point to rising nominal spending and miss the fact that real spending (or income) is barely moving.

UPDATE: It's not just the Washington Post. This article on MSNBC (which comes from the Associated Press) does the same thing. It's not any one writer. It's just the fact that these stories follow a formula the reflects the government press release.

That's the problem.

I didn't see anyone else reporting this. (Via Reuters)

BEIJING (Reuters) - China raised its benchmark interest rates on Thursday for the sixth time this year, in the latest in a series of tightening steps to contain inflation and prevent the world's fourth-largest economy from overheating.

...

China is battling inflation of 6.9 percent, an 11-year high, which until now has been driven by soaring food prices but has shown worrying signs of spilling over to the broader economy.

A few days ago, it was the required reserve ratio, as the Wall St. Journal reported on December 10:

BEIJING -- In its first move since officially shifting to a tight monetary policy last week, China's central bank said it would raise the share of deposits that banks must keep on reserve for the 10th time this year to help cool the economy.

The increase in the required reserve ratio, which will rise by a full percentage point, could signal an acceleration in Beijing's efforts to bring the country's high inflation rate, and the threat of economic overheating, under control following a key meeting. The Central Economic Work meeting, which laid out economic policy priorities for 2008, ended Wednesday.

Rising inflation in China may be one of the most underreported stories out there right now. It's very simple. The Chinese government is finding out that when you open up capital markets, you make it harder to sterilize the currency interventions necessary to maintain control over their exchange rate. And it is this simple fact that has for years led me to believe that China can only wait so long before they approach something that resembles a floating exchange rate.

Early in this decade, shortly after it was announced that the Olympics would be in Beijing, I told people that 2008 might be the year.

So then there was this from Bloomberg yesterday:

Dec. 20 (Bloomberg) -- The yuan rose for a third day against the dollar as the U.S. Treasury refrained from naming China a currency manipulator in its semi-annual review of exchange rates.

Treasury Secretary Henry Paulson reiterated yesterday that China should let the yuan appreciate at a quicker pace and said gains since the currency's link to the dollar was scrapped in 2005 are ``not fast enough.'' Paulson was in China last week as part of talks to urge the nation to increase flexibility in the yuan to offset lopsided trade and help slow China's economy.

"It's good China wasn't labeled a manipulator,'' said Liang Futao, an analyst at Shenyin Wanguo Research and Consulting Co. in Shanghai. "The government may keep allowing the yuan to rise next year to help reduce import prices and ease inflation.''

The yuan advanced 0.1 percent to 7.3694 per dollar as of the 5:30 p.m. close in Shanghai, from 7.3768 yesterday, according to the China Foreign Exchange Trade System. The yuan has gained 6 percent this year, adding to the 3.4 percent pace in 2006.

So how much do YOU think the yuan will appreciate in 2008? More than 6 percent?

I think it is very telling that the U.S. did not label China a "manipulator" and that the rhetoric has cooled, albeit slightly. Sometimes the best clue is from the dog that didn't bark. If I were negotiating with China, knowing the importance of saving face in the Chinese culture, I would definitely back off if I thought that there was a chance that they were about to do give a little of their own accord.

It has always been my prediction that the yuan would appreciate when it is in China's best interest to do so, and that the Olympics in 2008 might signal a particularly good time for a significant change. With inflation building due to the opening of credit markets, it looks like things are happening right on schedule.

Just a little DNS hiccup. Most of you probably didn't notice it, but the site may have been unavailable briefly.

Nothing to worry about.

I'm working on some changes for the blog in 2008. Stay tuned.

Today's howler is from CNN/Money:

Gasoline is one of those items that some economists consider "inelastic," that is, people will buy it no matter what the cost. But the recent drop in demand puts that into question, and suggest people will cut out unnecessary trips if they are too expensive.

As I try to tell my students, a good or service is not elastic or inelastic--the demand for or the supply of it is. Second, inelastic demand doesn't mean that people will buy it no matter what the cost--budget constraints ensure that eventually the curve slopes back to the left as you go up higher in price. Third, if you want to get really pedantic, it's not a drop in demand, but a drop in the quantity demanded as this is a change induced by higher prices (caused by increased input costs which reduced the supply). Fourth, one should consider short-run vs. long run demand for gasoline since it takes a while for habits to change.

When I read that I had flashbacks to grading exams.

No wait, I did not grade any exams this term that packed this many errors into two sentences. My students are better than that.

I was in the St. Louis area this weekend as several inches of snow fell. A story on the local news (sorry, couldn't find a link) interviewed a young man who was going up and down the streets in a neighborhood shoveling sidewalks and driveways for cash. As I recall, the going rate he charged was $10. It looked like a middle class neighborhood. The people could certainly afford the $10. The young man probably made couple hundred dollars for his day's work. Not an insignificant sum. It really was a significant snowfall for St. Louis, maybe 6-8 inches in some places. (Contain your laughter, King!) So there were a lot of people who don't like to shovel that much snow and were willing to pay to have it done. While it's not a disaster on the scale of a flood or a hurricane, there still is a sense of disruption. A lot of man-hours need to be expended in a short time in order to restore a sense of normalcy.

It was just a man with a shovel--not a professional snow removal firm. I'm not even sure if it was his neighborhood. For all I know, he might have come from across town. (I don't recall if the news story went into that much detail.) Good capitalism? I think so. Self-interested? Absolutely. Is it ethical to engage in this sort of "profiteering" (if we wish to call it that)? Comments are open.

Now, right after the news crew interviewed that young man, they showed a group of citizens going around a neighborhood digging people out for nothing. They were doing it purely out of kindness. I believe that that particular neighborhood had more elderly residents who were the beneficiaries of the volunteers' labor.

So what are we to make of their selfless act? Could they have profited but chose not to? Probably. Are they bad capitalists? Good neighbors? Both?

Does the fact that this is a trade in services rather than goods have any bearing on how we perceive the actions of these individuals? Though the entrepreneur may be charging a little more than what the market for snow shovelers might bear in other times, is it ok since he is providing a labor service? (After all, it's not like he loaded up a pickup truck with shovels and sold them for $20 a piece, right?)

But then, hurricane regions often have guys in trucks swooping in offering their labor services for an exaggerated fee as well. Sometimes they get excoriated for price gouging. What's the difference?

Would it be wrong or unethical to go around charging $10 for shoveling in a neighborhood of poor elderly residents?

This is precisely what I meant in Saturday's post when I said that our attitudes (as well as the law) affect our supply response. So I can be perfectly comfortable saying that I applaud the entrepreneur as well as the volunteers. There are social customs, sometimes at a very local level, that may dictate when it is ok to raise prices in a case like this. Someone charging high fees to the poor and elderly might be met with disapproval from the neighbors (and maybe politely told to take a hike). Yet, people of means are perfectly willing to pay to avoid this unpleasant task that nature has thrust upon them. Few people would have a problem with that.

Honestly, I cannot imagine trying to think through this sort of economic problem without considering these kinds of issues. As Milton Friedman put it this when he wrote his oft-cited article, "The Social Responsibility of Business is to Increase its Profits"

That responsi­bility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while con­forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. (emphasis mine)

and...

That is why, in my book Capitalism and Freedom, I have called it a "fundamentally subversive doctrine" in a free society, and have said that in such a society, "there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

We've had a rather spirited discussion of price gouging on this and other blogs. My position is, as it always has been, that the profit motive induces people to bring goods and services to the areas where they are needed most, and that prices should rise to compensate people for the opportunity cost they incur. How much the price will rise, the exact locations where it will rise, and the length of time it will remain elevated will necessarily depend on the particulars of the situation. Modern supply chains are likely to make the price increases smaller, more localized, and shorter. But it still will happen, often in ways that are hard to predict until that particular disaster occurs. But it will happen.

However, that does not give anyone license for deception or for violating the basic social norms. The question is how best to make sure that the goods and services go where they are most valued while discouraging people from violating those social norms. I do not think that vague and selectively enforced price gouging laws are the answer to that question. Information is the greatest weapon against price gougers. Information helps the process of price discovery happen more efficiently. There are private and public means of providing information that are not always used to their fullest extent. That would be a start.

If you look at anyone who looks to recover their opportunity cost as a criminal, then it will discourage the sort of people you want from coming into the affected area--unless they are large enough to be able to eat the cost. But then what of the people in areas out of Wal-Mart's reach? Will their only choice be the suppliers who are willing to risk the condemnation of society--those with less to lose and less of a conscience when it comes to those social norms?

Those are questions worth thinking about.

The Real Time Economics Blog conducts a Q&A with the president of the Philadelphia Fed. Among other things, Plosser says,

It’s a mistake to rely on the slowdown for much disinflationary effect.

However, he was in agreement with the recent 25 basis point cut, given the changes in the economy since October. Read the whole thing. A short article is also in the Journal.

Apropos of recent discussions here, at Cafe Hayek, and at Angry Bear, I offer this example of how higher prices really do induce people to move goods from one area to another. Supply curves really do slope upward. Transportation costs are important. Read this from the Columbia Missourian from last February. Here's a sample:

A two-year drought and this year’s harsh winter weather are contributing to a national hay shortage that’s hurting many Missouri farmers. Back-to-back years of low hay production are forcing them to decide between selling their livestock or paying two to three times more than last year for hay.

...

The hay shortage has spread across the Midwest and southern Plains states such as Texas and Oklahoma. Tony Hancock, market news reporter for the Missouri Department of Agriculture, said farmers are hard-pressed to find any hay in Missouri. Most are looking to Northern states such as Iowa and Wisconsin that have seen more rainfall.

...

Going north for hay forces farmers to dig deeper into their wallets, especially those in the southern regions. Jeff O’Laughlin, owner of Missouri Hay and Straw in Ashland, said high fuel prices have forced the price of small square bales up $2 to $3. He’s charging $5 to $9 for a small square bale now.

...

The Missouri Department of Agriculture is trying to help the situation by running the “hay hot line,” which connects hay producers with those in need of the product.

If our recent discussions have intrigued you, then you definitely should read the whole article. There are so many things about this article that make is wonderful for an economics course. It is a good illustration of the application of the supply and demand model in the way that it is often applied in discussions of price gouging. And yet, the word "gouging" is not in the article at all, nor is there any sense of moral indignation. It's very matter of fact. There was a drought in Missouri. Hay became scarce. The price rose. Supplies came in from several states away. End of story.

And while I raise this point to defend the economist's usual way of approaching the issue (upward sloping supply curves and all), I am not at all trying to deny spencer's point about how Wal-Mart et al. operate in disaster regions. There are similarities in terms of the overall issue. But there are important differences that are too obvious to even warrant mentioning to the informed readers of this blog, but that I would probably take 5 minutes in a class to discuss (ideally through a Socratic dialogue).

But perhaps the most important difference does warrant a mention, and that is that the time over which this plays out is longer. There is perhaps less of a sense of urgency and catastrophe. Thus there is more time for a reasoned response by both parties in the transaction.

There is an important similarity as well. That is that there is always an additional cost to moving the goods, and that's going to show up on someone's bottom line. Wal-Mart may find that it's costs are small because of its distribution network--small enough that they can absorb it. Great. But that's not always going to be the case. Even for Wal-Mart, if their stores are damaged, the cost of the "last mile" increases substantially.

Finally, there's the government's part in the situation. Rather than punishing price gougers, in the Missouri hay shortage, the government established a hot line for the dissemination of information. Thereby improving the process of price discovery. In a disaster situation, the process of price discovery, so important for markets to work, is severely hampered. The presence of large retailers in competition with each other leads to lower prices because they are able to aggregate a lot of that information. If you have only a few of what spencer so beautifully refers to as "guys in pick-up trucks", the burden of aggregating that information falls on the consumer and that is costly. Having more guys in pick-up trucks (and box trucks, flat beds, and independent semi-truck drivers) would help. Perhaps Wal-Mart can do better, but Wal-Mart is not all powerful. There will be some places they will not reach. There will be some places too costly for them to go the last mile, at least temporarily. Why not encourage local independent sellers to move good into the area, and why doesn't the government assist with the process of price discovery like they do in Missouri. Then, while prices might rise, it would be a smaller and more temporary rise that would be more likely to do some good.

I say this with all due respect to Wal-Mart et al. and spencer's excellent defense of them because any newsreel of disaster footage will tell you that for all the big box retailers do for those areas, they do not completely solve the problem. If they did, you wouldn't have people trying to invent machines that can extract drinking water from the air. Why waste time on that if Wal-Mart can do it all at no additional cost? Because they can't. They can't do it all, and if they tried, their costs would at some point go up. Supply curves do slope up, at least when you're talking about transportation costs in the very short run in a disaster area.

Spencer always comes back to one point. Why should we celebrate the guys in pick-up trucks? Why should we hold them up as examples of how market capitalism works? Well, I'm not sure we should--at least not in the way that he is implying that free market economists do. I think what we should celebrate is the process of price discovery and whatever mechanism helps speed that process along--whether it comes in a pick-up truck, a flatbed, or a blue and white semi-truck from Bentonville. Because in different times and in different situations, each may have more or less role to play. And if government can do something to speed that process along during a time of crisis, then that is an appropriate role for government to play as well.

This post is already getting lengthy and there is, I'm sure, a lot more could be said. But rest assured, spencer, that in a 75 minute class period, there is a lot of time to discuss those other issues that don't always make it into the textbooks. It's not about celebrating the guys in trucks. It's thinking about how our attitudes and how the law affects supply responses and whether that does more harm than good. It's about how there may be good reasons for price gouging laws, but our present ones are too vague to work well. It's about whether there are things the government can do besides passing price gouging laws that might make things work better. That's what it's about--the guys in trucks are bit players in my story.

Yes, I've been quiet the last few days. It has been final exam week, and on Wednesday it almost required a shovel to get down to the desktop. Things are better now, and I hope to be rejuvenated after the weekend. In the morning, I will be at the Commencement ceremony. As I often do, I will be leading the graduate students (MA Econ) across the stage and handing each of them their diploma cover as we smile for the camera (the actual diploma will be in the mail after grades are in).

Then, after the ceremony, we're going to St. Louis to see Wicked (for the 2nd time).

Have a good weekend!

And so it is 25 basis points and not 50. Link to statement

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent.

Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.

Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; and Kevin M. Warsh. Voting against was Eric S. Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points at this meeting.

I am giving three final exams today (and am finishing up one of them now), so this has to be brief. Wall Street was clearly not impressed by this statement. The reasons are pretty straightforward. They were hoping for 50 basis points. (In your dreams, Wall Street.) So there was some obligatory pouting about that. But also the statement acknowledges the weakness but promises nothing more. The last paragraph (before the vote) is telling. The Fed is pointing to increased uncertainty. This is a classic instance of the committee wanting to buy a little flexibility. (We have discussed this before though I don't have time right now to find a link to the discussion.) In other words, they do not want this series of cuts to turn into anything resembling a "measured pace." They want to be able to say, "We just don't know right now."

I have to go start exam number three, so I will leave you with the best quote I have seen about the action so far. From CNN/Money.

"The Fed is not going to bail out the market. Time will heal these wounds. People don't want to hear that but it's the real world," said Rich Berg, chief executive officer of Performance Trust Capital Partners, a Chicago-based bond trading firm.

Indeed.

This does not look good. From the National Weather Service:

A major ice storm will move through the region tonight through Tuesday night spreading a large swath of freezing rain across the mid-Mississippi valley. Ice accumulations of one half inch to around one inch are expected along and south of Highway 34 including the Memphis MO, Fairfield, Mount Pleasant, Keokuk, Burlington and Macomb areas. Between Highway 34 and a line through Williamsburg, Iowa City, Clinton and Sterling ice accumulations around one half inch could occur. Areas to the north will see a mix of freezing rain, sleet and snow with ice accumulations around a quarter of an inch and snowfall amounts up to 3 inches.

Ice accumulations from this storm system couild result in significant damage to trees and power lines. Power outages should be anticipated especially in the south were heavier ice accumulations are expected. The ice will also cause difficult if not impossible travel conditions.

The adverse weather with this storm system will affect a large area of the midwest. Ice Storm and Winter Storm Warnings are in effect from the southern plains through the mid-Mississippi valley.

Good thing I just bought 100 pounds of ice melting chemicals for the driveway and sidewalks. All of my final exams are tomorrow. At least that's the plan. Students are to watch the WIU web page for any announcements.

Spencer at Angry Bear points us to a Division of Labour post. This is from The Oregonian.

In cases of extreme weather and natural disasters, some of the nation's largest retailers now behave like municipalities -- sometimes better.

[R]etailers have created specialized divisions -- or hired outside firms -- to gird for emergencies. The goal: to speed recovery for customers, employees and ultimately sales.

No one is clear how many retailers operate internal emergency units, but the practice is now standard among the biggest players, including Target Corp. and Lowe's Cos. Inc.

This past week, Wal-Mart donated a 40-foot tanker of potable water to Vernonia, [Oregon,] while up north Home Depot opened its still-waterlogged Chehalis store for the town's Chamber of Commerce to pick up face masks and cleaning supplies free of charge.

Such coordination became clear during Hurricane Katrina in 2005, when local governments praised initial responses from retailers as more expedient than those of the Federal Emergency Management Agency.

Spencer adds a jab at libertarians.

Because they [libertarians] seem to be believe the only way to get supplies to natural disaster victims is some guy in the back of a pick-up truck gouging them with high prices.

Well, I don't know if I'm the right guy to defend libertarians. I sympathize with them often, but don't really fully consider myself one. But anyway, I'll bite. After all, spencer has raised the issue here before. I suppose we could dig into the archives and see what I wrote then...

So no, I don't have evidence that guys in pick-up trucks would do a better job. That's the wrong question. I do have a very strong reason to believe that large companies could do a much better job if they knew they wouldn't be excoriated by politicians and the media for making a modest amount of money from it. While I praise them for their generosity, I think you'd get more than five truckloads [of bottled water] from Culligan if they could charge a modest amount for their trouble. The fact that there are still guys in pick-up trucks means the established, reputable companies are not doing enough.

In the present story as well as back then, most of the supplies from the big box stores were donated. A cynical person might say that the big boxes are making that donation hoping that when things get back to normal people will remember their generosity and buy their rebuilding supplies from them. Think of it as a tax deductible advertising expense.

Even so, I don't have any problem with them doing this. I think it's great. Look, there are many reasons that a big box company might have for making these donations. But the bottom line is that they can get supplies into these areas at a low cost, so they aren't losing much. Furthermore, they can afford to take a bit of a hit in the short term in the name of goodwill, community relations, advertising, or what have you.

Let me put it even more bluntly. I hope that Wal-Mart puts all the small time mom-and-pop price gougers in pickup trucks out of business. The world would be a better place.

Maybe it is starting to happen. I think you see fewer stories these days about "guys in pickup trucks" these days. (Though they did at one time exist, and I think they still do. My above-mentioned post has some links in the comments where I point to media discussions of them, though they are getting a bit dated.) But even so, I think the big boxes are still going to fall short of the optimal outcome, meaning the "price gougers" will still exist in the hardest-to-get-to areas.

Here's where the rubber meets the road. There are two reasons that prices can go up. It's either a supply issue or a demand issue. (It can, of course, be both.) In the immediate aftermath of a disaster, the supply of certain items decreases and demand for those items increases. But if a number of large (competing) firms with nearly constant marginal costs and with vast distribution networks can move the supply from one area to another at a low cost, then prices will not rise very much... even if demand increases.

However, I'm not at all convinced that the big boxes are going to donate enough to satisfy all of the demand. Why would they? At some point they would be donating to people who would be willing and able to pay the retail price that prevailed before the storm. Are they able to donate close to the "right" amount that would get the goods to the people who need them most and then sell at the previous price to those willing to buy? Admittedly, I do not know the answer to that question. Though I suspect the answer is no. Do we suffer some loss of efficiency because the big boxes are careful not to give even the appearance of profiteering? Admittedly, I do not know the answer to that question. Though I suspect the answer is yes.

So in the end, what the big box stores are doing is definitely a good thing. The fact that they are doing something (and doing it well and at low cost) is beneficial. They seem to do better than government at times. In fact, maybe the government should pay Wal-Mart and Home Depot to step it up a notch! One way or another, price incentives still are important. Donations won't completely solve the problem.

Ask anyone reading these stories if they think that the big box stores could do more. You'll probably get a lot of "yes" answers. So then the next logical question is, "why don't they?"

UPDATE: More in the comments. And King has more at SCSU Scholars.

It's always nice to get a little spike in traffic. I see that we have a number of new readers finding their way over here from About.com where Mike Moffatt gave this blog (and 9 others) some kind words. Thanks for the link, Mike. And welcome to the new readers. Take a look around. Hope to see you back soon.

And while I'm on the subject of welcoming new readers, it is that time of year again. My visitor log is filled with lots of search terms that sound like term paper topics. Welcome, students...and here's a bit of friendly advice. If you find something here that is noteworthy, take the time to follow the link to the original source. Your papers will be better for it.

Yes... the twice-a-year "term paper search" traffic spike is noticeable. Very.

Nonfarm payrolls increased by 93,000 last month. The average for the last 5 months is approximately 99,000. We would certainly like it a little better if these numbers were a little higher. If we need somewhere around 125,000 jobs per month to keep up with population growth, then we are falling behind--albeit slowly, but falling behind nonetheless. What is interesting is that the gains have been reasonably consistent. In the last 5 months, three data points were in the 90,000s, just two outliers--one at 170,000 and one at 44,000. So it's as if the economy is trying to keep growing, but just isn't getting the traction it was getting in 2005 and 2006. We're stuck in neutral, unable to get back into the higher gear.

But at the same time, the labor force participation rate climbed a bit last month, back up to 66.1%--where it was in July. The employment to population ratio is at 63%--also the same as its July level. These numbers had dipped a bit in recent months, so this could be a good sign that there still is some strength remaining under the surface.

Of course employment is a lagging indicator. I wouldn't recommend trying to forecast when a recession will begin by looking at the last month's job growth. But given the preponderance of the evidence this number is not going to be enough to cause the Fed to stop cutting interest rates yet. Not until there's a clearer sign that we've finally let out the clutch and are safely in high gear again.

From the NY Times:

FRANKFURT, Dec. 6 — The European Central Bank, caught between fears of rising inflation and subsiding economic growth, walked a middle ground today, leaving interest rates unchanged.

But across the channel, the Bank of England opted to take action, cutting its key rate for the first time in two years, by a quarter-point, to 5.5 percent. The bank said the credit squeeze in the United States had curtailed loans for households and businesses, denting Britain’s growth prospects.

Apparently the ECB was not of one mind on their decision....

In a rare departure from his usual discretion about the bank’s deliberations, Mr. Trichet disclosed that some bankers on the 19-member governing council had argued for raising rates.

Meanwhile, the probability of a 50 basis point ease increased from 31% to 35% (reaching a high of 37%) as measured by the binary options contracts on the Chicago Board of Trade.

Productivity is up. (BLS press release)

The Bureau of Labor Statistics of the U.S. Department of Labor today reported revised productivity data—as measured by output per hour of all persons—for the third quarter of 2007. The seasonally adjusted annual rates of productivity growth in the third quarter were:

6.7 percent in the business sector and

6.3 percent in the nonfarm business sector.

In both sectors, changes in productivity are higher than the preliminary estimates published November 7, and represent the largest productivity gains since the third quarter of 2003. The upward revisions to productivity resulted from upward revisions to output—which grew 5.7 percent in both sectors—and small downward revisions to hours, which fell 1.0 percent in the business sector and 0.6 percent in the nonfarm business sector in the third quarter.

Also see the Wall St. Journal.

Does this change anything going into the FOMC meeting? In my estimation, no.

Also in the Wall Street Journal today is a piece by Martin Feldstein. Here are some excerpts.

Further interest-rate cuts can reduce the risk of recession and increase output and employment in 2008 and 2009. The current 4.5% fed-funds rate is essentially neutral -- not low enough to stimulate growth and not high enough to reduce inflation. Although there are risks that the rise in oil prices and the falling dollar will raise the inflation rate, the greater potential damage of an economic downturn calls for a more stimulative policy. The Fed should reduce the fed-funds rate at its December meeting and continue cutting toward 3% in 2008, unless there is a clear sign of an economic improvement.

Because of current credit market conditions, there is a risk that interest rate cuts will not be as effective in stimulating the economy as they were in the past. The current credit crunch reflects not only a lack of liquidity, but also a lack of confidence in the creditworthiness of counterparties and in the accuracy of asset prices. This problem is now being compounded by the banks' loss of capital as they recognize past losses, and by their need to use large amounts of the remaining capital to support existing off-balance-sheet credits that have to be shifted to their balance sheets. All of this implies that lower interest rates may not raise lending and economic activity to the same extent that they did in the past.

The latter paragraph is a good follow up to Greg Ip's piece. In old fashioned Keynesian terms, what we've got here by this reckoning, is the basis for a liquidity trap. Later in the article, Feldstein adds the second part of his strategy.

What's really needed is a fiscal stimulus, enacted now and triggered to take effect if the economy deteriorates substantially in 2008. There are many possible forms of stimulus, including a uniform tax rebate per taxpayer or a percentage reduction in each taxpayer's liability. There are also a variety of possible triggering events. The most suitable of these would be a three-month cumulative decline in payroll employment. The fiscal stimulus would automatically end when employment began to rise or when it reached its pre-downturn level.

Enacting such a conditional stimulus would have two desirable effects. First, it would immediately boost the confidence of households and businesses since they would know that a significant slowdown would be met immediately by a substantial fiscal stimulus. Second, if there is a decline of employment (and therefore of output and incomes), a fiscal stimulus would begin without the usual delays of the legislative process.

You're probably familiar with the term "automatic stabilizers". Well this takes the concept to the next level. A tax cut conditional on economic data--that's an interesting suggestion. Unfortunately, the temporary nature of the cuts would tend to reduce their impact. Anyway, read on.

Even if the Fed decides that it should not cut rates further at the present time, it would not raise rates to offset the stimulus effect of the fiscal change. From the Fed's point of view, the tax cuts can provide a desirable short-run stimulus without the inflationary impact that would result from a lower interest rate and an increase in the stock of money.

Dust off your trusty old IS-LM model and let the fun begin.

Some reliance now on a fiscal stimulus rather than easier money would also take pressure off the exchange-rate adjustment. While further declines of the dollar are necessary to shrink the massive U.S. trade deficit, continued rapid declines might lead to counterproductive retaliatory actions by some of our trading partners.

Add a dash of Mundell-Fleming.

The excessive asset-price increases caused by some past monetary expansions -- especially the induced rise in the prices of real estate -- provide a further reason to use fiscal as well as monetary policy. By cutting the fed-funds rate to just 1% in 2003 and promising that it would be raised only slowly, the Fed contributed to the sharp rise in house prices and the market's current weakness. A mixed strategy that included a prospective fiscal stimulus would have reduced the Fed's perceived need for a sustained negative real fed-funds rate, and would therefore have produced a more balanced expansion of demand.

But didn't we cut taxes in 2001 and 2003? Yes, however those cuts were aimed in large measure at increasing long run growth--the success of which is a fair topic of debate. That's not to say that the short-run stimulative effect was nil. But the question is: would a temporary tax cut with a similar order of magnitude to the 2001 and 2003 cuts have any more stimulative effect? Or would people just save it?

Mark Thoma also mentions the permanent income hypothesis, but doesn't mention the 2001 and 2003 tax cuts. Interestingly, a lot of prominent economists opposed the 2003 tax cut because they thought it should be temporary (contrary to Thoma) in order to provide stimulus without threatening the long term budget outlook and that it should include a spending component (in agreement with Thoma).

I think temporary tax cuts won't work very well (in agreement with Thoma) and I have my doubts about temporary spending increases (more bridges to nowhere?), contrary to Thoma. So where does that leave us?

With a lower funds rate in 2008, that's where.

Greg Ip has a knack for giving you tomorrow's news today when it comes to the Fed. Here's what he's got for us today. (Wall St. Journal)

Futures markets expect at least a quarter-percentage-point rate cut and see a two-thirds probability of a half-point cut. Fed officials will likely consider the larger cut, but some might find it hard to justify when just a few weeks ago they thought they were finished cutting rates.

Some analysts say the Fed is more likely to deliver a quarter-point rate cut and drop from its statement last month's characterization of risks of weaker growth and higher inflation as equally balanced. That would implicitly leave the door open to additional easing, without leading investors to presume further cuts were coming.

Analysts also believe the Fed could improve the functioning of financial markets with either an additional cut in the discount rate -- at which the Fed lends directly to banks -- or by lengthening the terms of such loans.

And later in the article, this key insight which, although it has been expressed, probably hasn't been talked about as much as it should yet:

Fed officials' main concern isn't the current economy, though recent data have been on "the soft side," as Chairman Ben Bernanke said last week. Rather, it's that banks and other lenders, having already tightened mortgage-lending terms, will do the same with loans to small and medium-size businesses as well as credit cards and other consumer credit. Fed officials don't believe banks' reluctance to lend will go away after Dec. 31. And Mr. Bernanke warned that could "impose additional restraint on activity in housing markets and in other credit-sensitive sectors."

Subprime gets all the attention. Mortgage lending is the big story. A general recession is a real concern. But the economy can certainly ride out the subprime mess. The housing market will recover even if it takes many months. The real threat that could potentially cause a serious recession is if other credit markets besides the mortgage market start to seize up because of a generalized lack of liquidity. The Fed is simply taking out some insurance that this won't happen. But there's even so, there are no guarantees... which brings us to our next installment (see next post).

With apologies to Art Linkletter, kids say the darndest things. Today's smile is from the Quad City Times:

DES MOINES — Forget politics, the concern of Chris Dodd's 6-year-old daughter is that Santa Claus won't find her in Iowa.

The Democratic presidential candidate recently moved his family, wife Jackie and daughters Grace and 2-year-old Christina, from Washington to Iowa in advance of the Jan. 3 caucuses. Jackie Dodd said Monday that the girls are adjusting well to their extended stay in Des Moines, where the family has rented a house until the caucuses. The Dodds also enrolled Grace in kindergarten at a nearby public school.

But Jackie Dodd said Grace is concerned that Santa won't get word of their move.

"Right now, her biggest worry is that Santa may not find her here,'' she said.

And then there's the fireplace.

"There's a fireplace in this new home, but it doesn't really work and she thinks it's too small for Santa,'' Jackie Dodd said. "She's a little concerned that reindeer can't land anywhere.''

Go click on over to the article. The photo is priceless.

Hat tip to Washington Wire, which also reports that Dodd wants to buy his toys from Iowa--a state with 10 small toymakers employing 113 people according to Ed Gresser of the Progressive Policy Institute. He suggests sports equipment instead as Iowa has 31 businesses in that industry.

The Bank of Canada sees inflation risks declining. Consequently, they lowered their key interest rate from 4 1/2 to 4 1/4 percent.

Consistent with the outlook in the MPR [Monetary Policy Report], the global economic expansion has remained robust and commodity prices have continued to be strong. The Canadian economy has been growing broadly in line with the Bank's expectations, reflecting in large part underlying strength in domestic demand. However, both total CPI inflation and core inflation in October, at 2.4 per cent and 1.8 per cent respectively, were below the Bank's expectations, reflecting increased competitive pressures related to the level of the Canadian dollar. The Bank now expects inflation over the next several months to be lower than was projected in the MPR. In the context of exceptional volatility in global financial markets, the Canadian dollar spiked well above parity with the U.S. dollar in November, but it has recently traded closer to the 98-cent-U.S. level assumed in the October MPR.

Here's the speech.

Here are some excerpts:

To sum up the story on the outlook for real GDP growth, my own view is that, under appropriate monetary policy, the economy is still likely to achieve a relatively smooth adjustment path, with real GDP growth gradually returning to its roughly 2½ percent trend over the next year or so, and the unemployment rate rising only very gradually to just above its 4¾ percent sustainable level. However, for the next few quarters, there are signs that growth may come in somewhat lower than I had previously thought likely. For example, some of the risks that I worried about in my earlier forecast have materialized—the turmoil in financial markets has not subsided as much as I had hoped, and some data on personal consumption have come in weaker than expected. I continue to see the growth risks as skewed to the downside in part because increased perceptions of downside economic risk may induce greater caution by lenders, households, and firms.

...

It seems most likely that core PCE price inflation will edge down to around 1¾ percent over the next few years under appropriate policy and the gap between total and core PCE inflation will diminish substantially. Such an outcome is broadly consistent with my interpretation of the Fed’s price stability mandate. This view is predicated on continued well-anchored inflation expectations. It also assumes the emergence of a slight amount of slack in the labor market, as well as the ebbing of the upward effects of movements in energy and commodity prices. However, we do still face some inflation risks, mainly due to faster increases in unit labor costs, the depreciation of the dollar, and the continuing upside surprises in energy prices. Moreover, labor markets have continued to surprise on the strong side. All of these factors will need to be watched carefully going forward.

...

In line with the forecast-based policy I’ve described, the Committee’s decisions reflected a forward-looking and preemptive approach. In particular, I supported putting a substantial easing in place so as not to fall “behind the curve.” Given the long lags between policy actions and their impact on the economy, and the possibility that economic downturns can be difficult to reverse once they take hold, an approach that was more gradual and reactive than this would have created unnecessary economic risks.

Since the October FOMC meeting, financial conditions have deteriorated, and we have seen some unexpected softening in the economic data. These developments necessitate some rethinking of my growth forecast, and have highlighted the downside skew in the risks to that forecast. On the inflation front, I continue to expect core consumer prices to rise at a pace that is broadly consistent with price stability, although there are some notable upside risks that bear careful watching and consideration. Additional data bearing on the outlook will become available before the FOMC’s meeting next week, and this information must also be factored into an assessment of the economy’s prospects.

I'm with Tim Duy. Ignore the hawks. FYI, the Chicago Board of Trade binary options shows the probability of a cut at 93%.

The headline from the Wall Street Journal reads: "Five-Year-Old Chimp Beats College Kids In Computer Game"

Japanese researchers pitted young chimps against human adults in two tests of short-term memory, and overall, the chimps won.

...

Ayumu, the chimp that did the best, was included with nine college students in a second test. This time, five numbers flashed on the screen only briefly before they were replaced by white squares. The challenge, again, was to touch these squares in the proper sequence.

When the numbers were displayed for about seven-tenths of a second, Ayumu and the college students were both able to do this correctly about 80% of the time. But when the numbers were displayed for just four-tenths or two-tenths of a second, the chimp was the champ. The briefer of those times is too short to allow a look around the screen, and in those tests Ayumu still scored about 80%, while humans plunged to 40%. That indicates Ayumu was better at taking in the whole pattern of numbers at a glance, the researchers wrote.

Yes, the headline grabbed my attention and I had to read it. And yes, I chuckled when I read that it was a short-term memory test involving college students. But seriously, this sounds like an interesting experiment to do on people with different occupations. I would hope that people in careers where the powers of observation, quick reaction times, and short-term memory matter (police officers, air traffic controllers, and derivatives traders come to mind) might do better on this test than the average adult.

Age seems to make a difference too.

The other factor is the youth of Ayumu and his peers. The memory for images that's needed for the tests resembles a skill found in children, but which dissipates with age. In fact, the young chimps performed better than older chimps in the new study.

I received a book today. (The pile grows.) The full title is The Euro and the Dollar in a Globalized Economy. However, the space on the mailing label was limited. It proclaimed "The Euro and the Dollar in a Glob".

I have long believed that all students should have some experience with the Latin language. Sadly, it was not offered in my high school by the time I was old enough. It had been offered years ago. But I did manage to take a year's worth of Latin in college. Truly, a knowledge of Latin helps to make you a better writer and speaker--or at least I can see the effect of my own study of the language on my own speaking and writing. This is likely due to the fact that knowing Latin causes you to be keenly aware of grammar.

So I was delighted to see this in the NY Times:

AT first glance, it doesn’t seem tragic that our leaders don’t study Latin anymore. But it is no coincidence that the professionalization of politics — which encourages budding politicians to think of education as mere career preparation — has occurred during an age of weak rhetoric, shifting moral values, clumsy grammar and a terror of historical references and eternal values that the Romans could teach us a thing or two about. As they themselves might have said, “Roma urbs aeterna; Latina lingua aeterna.”

...

Following in his father’s footsteps, George W. Bush studied Latin at Phillips Academy (the school’s mottoes: “Non Sibi” or not for self, and “Finis Origine Pendet,” the end depends on the beginning).

But then President Bush was lucky enough to catch the tail end of the American classical tradition. Soon after he left Andover in 1964, the study of Latin in America collapsed. In 1905, 56 percent of American high school students studied Latin. By 1977, a mere 6,000 students took the National Latin Exam.

Recently there have been signs of a revival. The number taking the National Latin Exam in 2005, for instance, shot up to 134,873.

Why is this a good thing? Not all Romans were models of virtue — Caligula’s Latin was pretty good. And not all 134,873 of those Latin students are going to turn into Jeffersons.

But what they gain is a glimpse into the past that provides a fuller, richer view of the present. Know Latin and you discern the Roman layer that lies beneath the skin of the Western world. And you open up 500 years of Western literature (plus an additional thousand years of Latin prose and poetry).

Read the whole thing.