February 2008 Archives

William F. Buckley Jr. has passed away at the age of 82. I certainly wouldn't say that I agreed with him on everything. But I did enjoy Firing Line. (Some episodes are available online at the Hoover Institution.) Wherever you stood on the issues, those shows did a lot more to advance the public debate than the fluff you see on cable news shows today.

I think the most fitting thing to post today would be to recall my post on the death of Buckley's intellectual sparring partner and friend, John Kenneth Galbraith. Here's the last paragraph of my comments from that post, with only the name changed. It sounds just as true.

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 Buckley, but I suspect that there will never be another quite like him.

Links: NY Times Obituary, WSJ Commentary by Buckley on how he and others neutralized the influence of the John Birch Society, some previously published material in Slate, a remembrance from Robert Lawson of the Division of Labour blog, comments from Tyler Cowen at Marginal Revolution--including a link to some YouTube videos. I know I'll be watching a few of them.

The news isn't good. The PPI is on the rise. (MSNBC)

WASHINGTON - Battered by bad economic news, consumer confidence plunged while wholesale food, energy and medicine costs soared, pushing inflation up at the fastest pace in a quarter century.

The Labor Department said Tuesday that wholesale inflation jumped by 1 percent in January, more than double the increase that analysts had been expecting.

The next paragraph isn't about inflation, but isn't great either...

Meanwhile, the New York-based Conference Board reported that its confidence index fell to 75.0 in February, down from a revised January reading of 87.3. The drop was far below the 83 reading that analysts had forecast and put the index at its lowest level since February 2003, a period that reflected anxiety in the lead up to the Iraq war.

And on another note, I was revising my homework solutions for my principles of macro course this semester. I always ask students to find the most recent rate of inflation by the CPI (12 month % change). Last semester, the answer was 2.0% at the time I asked the question. The answer now? 4.4%. (4.3% not seasonally adjusted)

Uh oh.

College newspapers usually report the same old fluff. But every now and then, they report some interesting news. This from my very own campus...:

Back in August, 30 RAs replaced nearly 5,100 incandescent bulbs in the building with an energy-saving alternative. The move began a pilot study to determine how compact fluorescent light bulbs can lower electric output in a residence hall.

Months later, Interim Director of Residential Facilities Matt Bierman said the study has found an average savings of $2,000 per month in electric bills compared to last year.

"I think it's been pretty successful," he said. "As more people bring electronics, that's going to cause kilowatts to go up - cell phone chargers, iPod docks, iPods … all that stuff gets plugged in. For the first time in awhile, the kilowatts have dropped."

$2000 per month for one residence hall. Way to go!

Ruminating on this post by Gabriel Mihalache reminded me of this. It's Preston McAfee's introductory econ text. Since I'm teaching MBA microeconomics this summer, I need to make a note to put this on the list of suggested supplements.

Gabriel has noted some other free books and notes out there as well. The variety of what's out there for economics is truly amazing. McAfee's text is fine for a principles course at Cal Tech but probably too advanced for principles courses at most places. However, one could put it on the reading list as an optional supplement for more advanced courses, as I intend to do.

Q: What do you get when you mix a plastic bag full of Hong Kong coins, a clunky old change counting machine, polite-to-a-fault customer service, and one U.S. penny?

A: A delightful essay chronicling one man's odyssey to deal with his spare change.

But Martin Feldstein does say this in Wednesday's Wall St. Journal:

The dysfunctional character of the credit markets means that a Fed policy of reducing interest rates cannot be as effective in stimulating the economy as it has been in the past. Monetary policy may simply lack traction in the current credit environment.

As they say, read the whole thing.

Students occasionally ask what economics book they should read for pleasure. If you're an econ professor, you know what I mean. Greg Mankiw tells us of a recent conversation he had...

Student: Professor Mankiw, if you could recommend just one book, what book would it be?

[Mankiw]: Am I allowed to recommend my favorite textbook?

Student: No. Textbooks are disallowed.

[Mankiw]: In that case, I'll suggest Milton Friedman's Capitalism and Freedom.

Student: That's funny. That's the same answer I got when I asked this question of Professor Summers.

Capitalism and Freedom is a book that I have recommended as well. As I described previously on this blog, that book was and still is a favorite of mine.

By the time I read Capitalism and Freedom, I had already made up my mind to go to grad school and be an academic economist. So it was not a life changing event in that sense. However, by the time I put the book down I knew that I had made the right choice for me. I remember that one of my thoughts after reading it for the first time* was, "Wow, that's how to make an economic argument." Maybe that's why economists across the spectrum from Mankiw to Summers and undoubtedly many more in-between recommend the book to students.

*It is indeed a shame that I will never again read it for the first time and capture that exact feeling again. I am reminded of an episode of "Classic Albums" on VH1Classic in which one of the members of Pink Floyd (probably David Gilmour, but I don't recall for sure) waxed philosophical about what it must have been like for someone to bring home Dark Side of the Moon, turn out the lights, put on the headphones, and listen to it for the first time--and that since he was so involved with brining it into being he never had that experience for himself. I can't help but wonder if Milton Friedman had a similar experience with Capitalism and Freedom.

This is interesting.

NEW YORK (Reuters) - Banks in the United States have been quietly borrowing "massive amounts" from the U.S. Federal Reserve in recent weeks, using a new measure the Fed introduced two months ago to help ease the credit crunch, according to a report on the web site of The Financial Times.

The newspaper said the use of the Fed's Term Auction Facility (TAF), which allows banks to borrow at relatively attractive rates against a wide range of their assets, saw borrowing of nearly $50 billion of one-month funds from the Fed by mid-February.

The Financial Times said the move has sparked unease among some analysts about the stress developing in opaque corners of the U.S. banking system and the banks' growing reliance on indirect forms of government support.

Here's a link to the Financial Times. In early fall we were hearing that banks were too scared of the stigma of borrowing at the discount window and that something had to be done to get them to step up. Remember this? So it seems a little odd to get worked up about this now--except for the fact that the collateral requirements are less stringent than for open market operations. So yes, on the margin, this is less secure. However, it is important to remember that the TAF is meant for banks that are in generally good condition and are eligible for the primary credit discount window. I wouldn't look for them to close the facility any time soon. It is doing exactly what they want it to do, and they are gathering important data about how to improve the working of the ordinary discount window.

Yes, you read it right. CNN sends me a breaking news e-mail.

(CNN) -- Fidel Castro announced his resignation as president of Cuba and commander-in-chief of Cuba's military on Tuesday, according to a letter published in the state-run newspaper, Granma.

A historic day indeed.

This blog will proudly wear the colors of Northern Illinois University until Monday evening. Western Illinois University is also paying tribute on their web site with NIU colors. A vigil will be held at 3pm on Monday in the University Union.

Ouch.

Feb. 15 (Bloomberg) -- Confidence among U.S. consumers fell more than expected this month, reaching a 16-year low, as the labor market cooled and expectations about inflation rose.

The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 69.6, the lowest since February 1992, from 78.4 in January.

UPDATE: FRED has not updated their series to reflect today's data, so I have drawn in where the new data point will be. The series has been noisy in the current (I'm still using present tense) expansion. The reader is left to draw his or her own conclusions.

Another shooting on a college campus--this one closer to home. Northern Illinois University is just three hours up the road. There are probably more than a few students from the Macomb area studying up there, and many students studying at WIU have friends at NIU. It is a somber night down here as I'm sure some of my own students are waiting for word from their friends in DeKalb. However, we are comforted to hear that a fellow economist blogger, Stephen Karlson (Cold Spring Shops), is ok.

The Northern Star has wall-to-wall coverage.

UPDATE: The Chicago Tribune has much more.

I mentioned these once before. Now, I'm starting to contribute to the library of demonstrations. My first contribution is a simple Keynesian IS-LM model. I chose this for my first attempt as it was easy to code and could be widely used in classroom presentations. Granted, I don't make the IS-LM the centerpiece of my class, but it does have some value and students should know what it is.

If you teach macroeconomics, you might want to try it out. It requires the Mathematica version 6 player (free download). Here's a link to the demonstration. Here's a link to all the economics demonstrations. And this is what the interface of my IS-LM demonstration looks like...

Please let me know if you find it useful. I hope to do some more of these in the near future.

Believe it or not, this sort of dovetails with my previous post. Here's Robert Reich in the NY Times:

We're sliding into recession, or worse, and Washington is turning to the normal remedies for economic downturns. But the normal remedies are not likely to work this time, because this isn’t a normal downturn.

...

The only lasting remedy, other than for Americans to accept a lower standard of living and for businesses to adjust to a smaller economy, is to give middle- and lower-income Americans more buying power — and not just temporarily.

...

The only way to keep the economy going over the long run is to increase the wages of the bottom two-thirds of Americans. The answer is not to protect jobs through trade protection. That would only drive up the prices of everything purchased from abroad. Most routine jobs are being automated anyway.

A larger earned-income tax credit, financed by a higher marginal income tax on top earners, is required. The tax credit functions like a reverse income tax. Enlarging it would mean giving workers at the bottom a bigger wage supplement, as well as phasing it out at a higher wage. The current supplement for a worker with two children who earns up to $16,000 a year is about $5,000. That amount declines as earnings increase and is eliminated at about $38,000. It should be increased to, say, $8,000 at the low end and phased out at an income of $46,000.

Median household income is about $48,000. What would be the ramifications of making almost half of all households receive the earned income tax credit? The EITC is a great program, and probably could be expanded in the sense of giving a larger amount to the lower income earners. It's the closest thing we have to Milton Friedman's negative income tax. It is a potentially powerful anti-poverty program.

But I'm less sanguine about making the EITC a middle class entitlement, which is exactly what would happen if we were to follow Reich's advice. I'm not sure a middle class entitlement is what Friedman had in mind.

Reich is right about one thing though.

Over the longer term, inequality can be reversed only through better schools for children in lower- and moderate-income communities. This will require, at the least, good preschools, fewer students per classroom and better pay for teachers in such schools, in order to attract the teaching talent these students need.

Except that he forgets to mention that it also requires a change in the way we fund schools at the state and local level. The federal government is impotent to do anything about that, and that's probably a good thing. Though it is tempting to think that the federal government could swoop in with a grand fix, I fear that they would make things worse. Our recent record on federal government intervention in K-12 education is not exactly stellar.

Yesterday, I pointed to comments by William Poole. There were also similar remarks from Janet Yellen and Charles Plosser. Both remain concerned about inflation, with Plosser appearing to be more skeptical of the anticipated moderation of inflation coming this year. (Hat tip to Greg Mankiw for the links.)

In contrast, the Philly Fed is concerned. So are many economists on Wall St.

But then we have this interesting piece from King Banaian (SCSU Scholars). He quotes from this article in his local paper. The article raises the following question in my mind: Are American households really worried about a traditional recession or are they concerned about changing relative prices causing them to adjust their expenditures? Before you dismiss the question, take a look... this could be any newspaper in any city.

Cindy Haupert's life has changed since the economy took a dive.

Haupert, 36, once lived comfortably with her husband and two children in St. Cloud. She was a stay-at-home mom, working every other weekend. Her husband is an attorney. They made ends meet.

But gas prices would rise. Costs for homemade dinners and lunches would increase. And in September, when it was time for her son to go to kindergarten, she wanted him to go all-day, every day, so he could be ready for first grade. But that meant a $184 hit to the family checkbook each month. That doesn't even count lunch money.

"Now it's like we're living paycheck to paycheck. I can definitely see a change," she said.

Prices rising faster than wages Lifestyle changes. There's nothing so far about a real recession in the classical sense. As King points out, she didn't have to pay for all-day kindergarten. The writers says this all happened since the economy "took a dive"? Did their income fall? That question is not addressed.

But the writer understands that cost of living increases is just inflation by another name...

The consumer price index for Midwestern states, including Minnesota, increased 3.8 percent from December 2006 to December 2007. That reflects the increased cost of living.

So what's a person to do?

Haupert feels it. She now works an additional four days a week at Office Depot as a cashier while her fifth-grader and kindergartner are in school.

Wait... what? She's increasing her hours worked? Isn't that contrary to what happens in a traditional recession? Sure, we shouldn't generalize from one person's experience. But this is what the newspaper is giving us, and I don't think this is the only story of its kind in the media. Is the new face of "recession" someone who has to work harder to maintain their standard of living with higher gas prices, etc.?

She tries to make up for extra costs. She clips coupons and budgets meticulously. She's allowed herself and her husband $90 per week for gas and $125 per week for groceries.

She takes advantage of mail-in rebates and uses gas coupons. She rides the bus when she can and doesn't take frivolous drives.

When she and her husband bought a new TV to accommodate the high-definition requirement for 2009, they shopped around. They checked prices to see where they could get the best deal.

When they settled on one with a better warranty, they got an extra 10 percent off for comparing prices.

Again I ask, is shopping around to get an extra 10% off an HDTV a sign of a weak economy or a smart consumer facing different relative prices?

(By the way, if they have cable or satellite, they don't need a new TV in 2009, at least not right away.)

I don't mean to diminish the cases where people have lost their jobs due to slack demand in construction or manufacturing, etc. There are certainly people who are feeling the effects of the slowing economy. And while those people may be larger in number today than, say, a year ago, they still represent a fairly small slice of the population.

Yet, so many people surveyed by the major media have a profoundly dismal view of the economy--even if they are not unemployed or particularly at great risk of becoming unemployed. And I am seeing more and more anecdotal stories like this one where what people are really concerned about boils down to the increasing cost of living (inflation) and the choices that one has to make to cope with the increased cost. Gas prices are higher. Real incomes have not increased as rapidly. Thus, one will need to cut back on gas or cut back on something else. If that means shopping around for the best deal on an HDTV or getting one that is a couple inches smaller, then that's just the way it is.

We are now experiencing somewhat slower and more uneven growth of real income than at other times in our history. The current inflation we are experiencing is also uneven in the sense that some prices are rising faster than others. Some prices (like HDTVs) are even falling. And that does create some distortions. But there's little that the Fed can do to reverse the long trend of slower wage growth. That is largely a structural problem that transcends the current recession or non-recession. There's little that the Fed or congress can do to address changes in relative prices which are the real source of dissatisfaction with the economy for so many people.

So at the end of the day, I'm not sure what to make of this. Is this just a bad article and a bad interview subject for the point the writer was trying to make? Or is this indicative of the reasons behind the dissatisfaction with the economy for a significant number of people? If the former, then this post is a cautionary tale for journalists and we can perhaps leave it at that. But if the latter, then we really need to have a talk about the difference between a real recession and other economic events that can also cause households some distress such as changing relative prices that are not necessarily recessionary.

Outgoing St. Louis Fed president William Poole gave a speech to the St. Louis NABE today. I linked to the Reuters story in the previous post. Now, I would like to post some excerpts from the speech that didn't make the wires. Most of the speech has to do with central bank communications.

My general approach has been to speak primarily about the policy process rather than the specific situation facing the FOMC at its next meeting. I try to think of myself as speaking to portfolio managers who have a medium-term horizon rather than to traders who have a horizon measured in hours or a few days. I do not disparage traders—they perform an important function. Obviously, I have had internal information that would be of interest to traders but it would be entirely inappropriate—indeed illegal—to disclose confidential FOMC information.

Traders, portfolio managers and many others always want to know my forecast of what will happen at the upcoming FOMC meeting. My standard answer is that I do not forecast monetary policy decisions—my job is to participate in making those decisions. I confess that, initially, this response was something of a dodge, because I usually had a pretty good idea weeks in advance of what my own position at a meeting would be. However, over the years I have become impressed by how often my own position would change even in the days just before a meeting as a consequence of the arrival of new information, including staff analysis and sound arguments by my FOMC colleagues. It is not that my views are pushed this way and that by arrival of the latest economic data reports. What happens is that, from time to time, compelling new information does arrive. I hope that my policy outlook was stable even as my view on the appropriate policy action might change in the light of incoming data.

Thinking through the matter led me to a bit of research. Working with Bob Rasche, the St. Louis Fed research director, I had already studied the accuracy of market expectations about FOMC decisions using data from the federal funds futures market the day before each FOMC meeting. Given that those futures market forecasts have proven to be quite accurate, an obvious question was forecast accuracy longer in advance. Bob and I studied futures market predictions of the fed funds rate three and six months in advance and found that the accuracy was pretty low. The reason these forecasts have not been very good is that new information arrives that calls for a changed expectation on the monetary policy setting, both for the markets and for the FOMC. I not only became more aware of the need for me to keep my mind open but also thought it important to explain to my audiences how the policy process worked to be responsive to new information.

...

I also became troubled by the following argument. If current economic conditions were such to suggest a high probability that future economic conditions would justify a future increase in the funds rate target, why not just raise the rate at the current meeting? Given lags in the effects of policy actions, the current policy had to be based on the future outlook. On the other hand, if the probability were low, would it serve the cause of good communication to state a bias? Wouldn’t it be more helpful to work harder to articulate the conditions under which the committee might change the target—to explain in more detail the nature of the policy rule or response function?

Another problem with forward policy guidance was that a slow accumulation of information sometimes made the prior balance-of-risks language out of date, but it was not easy to take it out of the statement without sending a message, or seeming to, that a future policy adjustment in the other direction was contemplated. This problem arose in 2006. In August 2006, the committee kept the funds rate target unchanged, after increasing it by 25 basis points at each of its previous 17 meetings. However, the statement indicated a bias toward a further increase by saying this: “Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.” Just ahead of the August meeting, the market had assigned a probability of about 0.8 on an FOMC target fed funds rate of 5.25 percent and a probability of about 0.2 on a target rate of 5.5 percent.

Just after the August 2006 FOMC meeting, the market assigned these probabilities to the FOMC decision at its forthcoming September meeting: a target of 5.25 percent had a probability of about 0.78, a target of 5.5 percent had a probability of about 0.2 percent, and a target of 5.75 percent had a probability of about 0.02 percent. Although the FOMC retained the language that “firming may be needed” at subsequent meetings, over time the market lowered its probability that the FOMC would in fact raise the target rate. Ahead of the FOMC meeting of Jan. 30-31, 2007 the market placed essentially zero probability on any target rate above the prevailing rate of 5.25 percent.

At its meeting of March 20-21, 2007, the committee dropped the language referring to possible firming. Doing so made little difference given that the market had discounted the possibility of firming for some time.

Here's the key paragraph of the whole thing...

I have recounted several of these episodes in some detail to illustrate the general issue. As a consequence of observing this process for 10 years, I have concluded that an FOMC attempt to provide forward guidance in the policy statement causes more communications difficulties than it solves. A key reason is that the economy is subject to more shocks and reversals than one might think. These shocks sometimes require more frequent policy actions than I would have thought likely when I came to St. Louis. At a minimum, changing economic conditions change the likelihood that the FOMC will want to adjust the fed funds target in the direction previously thought. Directional language tends to remain in the FOMC policy statement beyond the time it applies and removing the language creates the possibility of miscommunication. Every change in the policy statement leads naturally to market questions as to what the change means and whether the change is meant to provide a hint about the future direction of policy. To my mind, every time new language is inserted into the policy statement, there needs to be as much thought given as to how to exit from the language as to the rationale for inserting it. (Emphasis mine)

Oh, how true. I blogged about this over two years ago. At the time, I was hopeful that this was a solvable problem. The intervening two years have made me less optimistic--apparently, I'm not alone.

Now, some might be surprised or taken aback by his talk of "hunches" in the next paragraph, but I think most veteran Fed watchers know what he means. I know I do.

I know that market participants are hungry for insight into the FOMC’s thinking and into the likelihood of future adjustments in the target federal funds rate. My judgment is that, most of the time, the committee cannot provide what the market wants because the committee itself is not clairvoyant. No one knows how the economy is going to evolve and how events will change the appropriate setting of the federal funds target rate. Most of the time over the past 10 years I had hunches about the policy direction I would be advocating at the next FOMC meeting, but “hunches” really is the right word. I had hunches and not settled convictions. Furthermore, the more I reflected and the more experience I accumulated, the more I realized how frequently surprise changes in conditions required that I change my hunches. I should not be misinterpreted as saying that I necessarily changed my view on the appropriate setting of the fed funds rate target. But when the information on which my prior hunch was based changed significantly, I had to start over, in a sense, to figure out whether the new information required a change in the policy stance.

This one's going on the reading list.

Via Reuters:

ST. LOUIS (Reuters) - The U.S. appears likely to avoid an economic slowdown but the chances of a recession have risen, St. Louis Federal Reserve Bank President William Poole said on Monday.

"I think the best bet is that we will not have a recession," he said in response to questions after a speech to the St. Louis chapter of the National Association for Business Economics.

However, Poole later told reporters, "There is no question that the odds (of recession) are higher than they used to be."

...

"So far we're standing with very sticky shoes on that slippery slope," he said. "We do watch it very closely; there's no question that there's a risk."

Poole said the housing market continues to be a problem, but based on his readings of retail and auto sales data, consumer spending is flat but is not crashing.

One glimmer of hope is that while recessions are typically characterized by large business inventory overhangs, stocks are currently lean.

But Reuters may have buried the lede.

In his prepared speech, Poole said efforts to provide guidance on the likely direction of interest-rate policy often can sow more confusion than clarity.

"I have concluded that an ... attempt to provide forward guidance in the policy statement causes more communications difficulties than it solves," Poole said. "A key reason is that the economy is subject to more shocks and reversals than one might think."

Those shocks require the central bank to change interest rates more frequently that he would have thought likely before he arrived at the regional Fed bank 10 years ago, he said.

Here's a link to the speech.

Lawrence White explains why the gold standard may not be such a bad idea. It's a Cato podcast... with a briefing paper to go along with it.

Tim Duy gets frustrated with people comparing our current problems with Japan in the 1990s. Me too. He also gives his take on Plosser's speech and more.

Jeff Frankel is blogging. Go. Read. Now.

Andrew Samwick is disappointed with congress over the stimulus package.

The college had a bulletin board contest for the various student organizations. The Economic Student Association took 3rd place (the cash prize will help pay for our trip to St. Louis we're planning). The Finance Club took 1st, but I really shouldn't complain since one of the items on their bulletin board was a sign advertising my talk to their club earlier this week.

Also this week, I heard from a former WIU student now studying for her Ph.D. in economics that she has passed both her comprehensive exams...with a "high pass" in macro. Since I taught both her macro classes in our M.A. program, I am delighted to hear that news. She did both her B.A. and M.A. at WIU.

Another former student of mine recently returned from a semester at Oxford. Still another student is in the running for a very prestigious award. Hopefully he'll find out about that soon.

Not to mention that I have some really bright students this semester as well. Could be one of my best groups yet (compared to any place I've been). We've got some really good econ majors, and some good finance majors getting a minor in econ (a very good and increasingly popular combination here).

Today is the 50th birthday of the integrated circuit (at least if you're going by the date that the patent was filed).

Michael Mandel thinks so.

Here’s a thought…maybe part of the reason the credit markets are in such bad shape because the Fed raised rates too fast and too high. Think about it—they started raising rates in June, 2004. It was a quarter point increase, from 1 to 1.25. Two years later, the Fed funds rate was up to 5.25. That’s four percentage points in only two years.

...

Basically the Fed took a sledgehammer to the subprime sector in order to slow the economy…they should not be surprised that it broke.

In retrospect it would have been better for the Fed to have stopped at 4% and waited for a while to see what happened. If we assume that it takes 12-18 months for the effect of rate changes to propagate through the economy, they basically showed too much impatience.

I'm not so sure. My main beef during the long, slow rate increase was that they got boxed into a corner with their "measured pace" language. They might have been better off raising the funds rate a little faster at first rather than dragging it out for two years. The measured pace gave the bubbling real estate market more time to ferment into a potent brew. "Sledgehammer" isn't the word I'd use for Greenspan's handling of the situation.

Besides, the teaser rates would have reset anyway, and that's the real problem. Felix Salmon is also skeptical of Mandel's argument.

That's not to say that rates maybe are a little on the high side even now (though the 1.25% shaving last month gets us closer to the sweet spot). In fact, I raised this point tonight at this event with our students. I showed a graph of the Taylor rule and how rates were below what the rule implied in 2003 and recently went a bit above what the rule implied as the economy slows. I'm still a hawk, but even a hawk knows to back down once the tide has turned. Richmond Fed president Lacker would be another case in point. From Reuters:

Lacker said on Tuesday more rate cuts may be necessary to hold off a downturn.

"The prominence of downside risks means that further easing ultimately may be warranted," Lacker said.

However, he added that if economic indicators are not weaker than expected over the next several months, "it's not clear further rate cuts would be warranted."

and...

A well-known inflation hawk, Lacker said persistently high levels of inflation continue to trouble him and limit the Fed's choices in thwarting recession.

"It implies that one doesn't ease as aggressively as one otherwise would," he said.

Well said.

Brendan Koerner tells us why in Slate.

But what about the mercury? The toxic heavy metal is integral to the design of current CFL bulbs: Electricity agitates the mercury molecules, causing them to emit ultraviolet light. That light then spurs a bulb's phosphor coating to give off visible light. But the amount contained in each bulb is barely enough to cover the tip of a ballpoint pen, and won't cause any bodily harm as long as simple precautions are taken. The National Electrical Manufacturers Association has voluntarily imposed a limit of 5 milligrams per bulb on all CFLs sold in the United States—about 1 percent of the mercury contained in an old home thermometer. Since manufacturers are well aware that health fears are preventing the widespread adoption of CFLs, most have committed to making bulbs with even less mercury than NEMA's standard. The average CFL bulb now contains around 4 milligrams of mercury, and that figure should drop closer to 2 milligrams in the very near future. Much of the credit for these reductions goes to Wal-Mart, which has pressured GE, Royal Phillips, and Osram Sylvania to cut down on the quicksilver.

I'm glad they're working on the mercury problem. Now about the quality of the light from CFLs, it is my opinion that it varies not only across the brands, but also across bulbs of the same type and style from the same brand. I've been gradually replacing most of our incandescents as they burn out. For the most part, they're ok. I do like the fact that you get more lumens per watt. In the right kind of fixture, like a sconce where the lighting is indirect, I don't notice any real light quality issue. For direct lighting, they do take some getting used to.

Anyway, I'll use them until they figure out how to make LED lights that aren't blue. I keep hearing how LED lights are the next great thing and that they will solve all of the problems people have with CFLs. LEDs will last virtually forever. They are dimmable. They can be made to change color.

They just can't change them to a color that approximates light from incandescent light bulbs. I have a couple of LED flashlights. They are a very annoying shade of blue. Solve that problem, and our lighting issues are history.

I'm waiting.

Flyers like this one have been seen on campus.

It shouldn't be hard to come up with 45 minutes worth of things to talk about.

This was one of those things that you knew was going to happen sooner or later. The trend in the growth of nonfarm payroll employment has been heading down for the last couple years. Now we get the first actual decline since 2003. (Read the press release from the BLS.)

More worrying perhaps is that the annual revision knocked off a whopping 191,000 jobs from the original month-to-month changes accumulated during 2007.

Of course this will solidify the case that we are in a recession already or just about to slide into one. Economists are terrible at picking out these turning points in real time. The NBER always waits until a clear picture has been established before making the call, and they have not made that call yet. I wouldn't make the call yet that the recession has begun on the basis of the data we have available now. But the continuing downward trend in job creation is becoming harder to ignore, and the potential for a significant slowdown is very real.

The employment picture is most bleak for teenagers. Unemployement among 16 to 19 year olds has increased from 15% to 18% in the last year.

Among all workers, average and median duration of unemployment are both up. The seasonally adjusted mean duration rose from 16.5 to 17.5 weeks in 2007 and the seasonally adjusted median duration rose from 8.2 to 8.8 weeks.

All in all, not a good way to start the weekend.