We tasted 25 different root beers, not from frosty mugs but in our usual wine glasses. This was a clinical environment, after all, a time for analysis and debate. Frosty mugs? We don’t need no stinkin’ frosty mugs!

Wine glasses? That shouldn't be legal. Anyway, they give 2 stars to Fitz's and 3 stars to IBC. Personally, I would argue the reverse. Stephen Karlson will be happy to know that Sprecher's garnered 3 stars.

The article also links to this rating site for root beer. (Ah, this Internet. We do indeed live in wonderful times.)

But the best root beer I've ever tasted would have to be 1919 root beer. It might be a little tough for you to find, however, as it is a draft root beer--no bottles or cans for this precious drink. The last time I had it was about a year ago at the Whiskey River Emporium in St. Peter, Minn. Southern Minnesota is about the only place I know of where restaurants serve it. It's a must when I pass through the area.

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.

Michael Mandel thinks that the Fed should have cut. I haven't seen too many others jump on that bandwagon. Barry Ritholtz thinks that statement is "too cheery on growth, not concerned enough about inflation -- and is totally irrelevant". Mark Thoma does the side-by-side with the last statement and writes that "There aren't many clues about the future in the statement..."

I don't know about that. I happen to think that this statement paves the way for standing pat for the rest of 2008. They seem to be extending the time horizon for when to expect inflation pressures to moderate ("later this year and next year") and they took out the part about it being necessary to "monitor inflation developments carefully".

So Mandel thinks a cut is in order. One can speculate about what a Greenspan Fed might have done in this situation. I certainly know what Wall Street would like. In the face of that, it seems that Mr. Bernanke might be following the right course. He's waiting for real rates to come up on their own as the economy recovers. I think that's the way to interpret it, and I think this course is less bad than some of the other options.

From the dissenters at the last couple of meetings, it looks like Fisher is trying to stay one step more hawkish than the chairman--now dissenting by voting for a rate hike in the face of the majority holding steady (previously he voted to hold steady when the majority wanted a cut). Plosser's votes (dissenting by voting to hold steady rather than cut in April but voting with the majority to hold steady now) are probably more fundamentally in line with Bernanke's thinking about where they want to be down the road (assuming the inflation forecasts are right), but he looks to have wanted a little bit more of a start at getting the real rate up where it should be.

If inflation shows any progress downward, I think they'll stay here as long as they can. If not, then rates probably go up in 2009. But this statement gives me the impression that they are prepared to give inflation some more time before they pull the trigger.

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2007

Here's my post from last October upon Hurwicz, Maskin, and Myerson receiving the prize.

We are approximately 40 miles from the Mississippi at Keokuk and about 45 miles from both Fort Madison and Burlington, Iowa. For a brief time, I believe all three bridge crossings were closed (and Quincy was down from 4 lanes to 2). At last report, the bridge at Burlington is still closed, Fort Madison is open, and Keokuk is advised for local traffic only. Fortunately, we have not needed to cross the river lately.

All this flooding is due to rains in northern and central Iowa a couple of weeks ago. Hence, the tributary rivers on the Illinois side are fine. (UPDATE: Let me restate that... tributaries on the Illinois side are not at record levels, and some are not even at flood stage. Some are, however, above flood stage, but nothing like those in Iowa.) This also means that while Iowa suffered from incredible floods, worse than the big flood of '93, as the water moves down the Mississippi, the effects will diminish. In '93, the Missouri and other rivers were swollen as well. This pushed the water higher at St. Louis. This time around, the major tributaries just above St. Louis (the Missouri and the Illinois) are fine. The Mississippi has a lot of room to spread out there, and so everything from St. Louis and below should stay well below the '93 levels... as long as we don't get a lot of rain.

I moved to Iowa City/Coralville in 1994 to start grad school. There were still reminders of the '93 flood around town, and lots of stories from grad students who had been through it (mostly having to do with the effects of lack of showering and confined office spaces). There were some pictures, though those were pre-digital photo and pre-Internet days. What I am seeing on Flickr and on the Press-Citizen websites are a lot worse than the pictures I saw back then. So many of my old haunts were completely underwater--over a person's head. Just incredible.

In most places, the water is receding or will be shortly. Then the cleanup begins.

KCRG TV 9

Cedar Rapids Gazette

The levees broke, and the river crest will shatter the mark from the flood of '93 as well as the record high set in 1929.

In the pictures, and perhaps on the news broadcasts tonight you will see the city hall building on an island in the river. I was at that very spot a few months ago. I parked on the bridge, which normally is far above the surface of the water.

Now that bridge is underwater all the way up to the railings. A terrible sight.

The people there will bounce back, but it's going to be a tough summer.

Hat tip to ArgMax (John Irons) who also points to Scott Page's book which I have not had a chance to read yet, but plan to this summer. (Page was a professor of mine at Iowa back in the day.)

In other news...

I have been working on a project with a deadline of this week, hence the lapse in blogging. That will improve soon enough, but still for a while I won't have much time to do much more than offer up some links. One thing that I do need to do is catch up on some old stuff (like this) that I bookmarked with the idea of blogging it later. Time to clear out the ol' RSS reader. The time for spring cleaning is soon over, but one can always do some "summer cleaning".

Already it has been a rather busy summer, and looks to continue that way. I'm teaching an MBA class (managerial econ) and having a blast with it. Trying to revise and create some new course materials when I have a spare moment. Of course there's always the family stuff going on too.

I ran a 5K a couple weeks ago and turned in a rather mediocre 27 minutes and change. I let myself get out of shape when I got out of grad school and am trying to turn it around. I'm doing another race in a couple weeks. Hopefully I'll do better...perhaps I'll even post a picture or two.

Conditions look more conducive for blogging next week. Until then, maybe a few more links out of the files of ancient history.

Download the free player software to run the demonstration.

See also Donald Kohn's speech from yesterday.

"The 1970s were a horrible period. If there's one thing that has to be very high priority, we don't want to go back to a period that is anything like that," she said, critiquing presentations on the economy at a symposium for college students in Tacoma, Washington.

She is, of course, talking about inflation (not bell-bottoms or disco).

"During the 1970s the Fed failed to keep inflation low in the face of supply shocks (which) became incorporated into inflation expectations," Yellen said.

She acknowledges, as I think most of us do, that this is not a simple problem with a simple answer. She's worried about the prospects of lower growth as well. But the fact that she, as one of the more dove-ish members of the committee, is talking about inflation risks is a sign that the tide may have turned.

Kaku was on C-Span2's Book TV recently, and the talk associated with this book was fascinating. Who knows if any of what he describes will come to pass, but if a fraction of it does it would be amazing. Stuff like that is just fun to think about.

WASHINGTON (Reuters) - The Federal Reserve's Board of Governors will hold a closed meeting on Wednesday [Apr. 30] to discuss paying interest on bank reserves, one of a number of options officials have been mulling to address liquidity problems in financial markets in case measures taken to date fail to gain traction.

This is not a sudden development, as the article goes on to point out...

Congress in 2006 granted the Fed authority beginning in 2011 to pay interest on bank reserves. At the time, the central bank assigned staff to study the implications such a move could have on its operations.

The staff report is now ready and will be presented to the Fed during the regularly scheduled meeting of its interest-rate setting panel, a Fed official added, declining to comment further on whether the presentation is pegged to any imminent steps to boost liquidity.

This was scheduled to go into effect in 2011, but they are looking for approval to start doing it now. I think that's a good idea. It is certainly not without precedent. Other central banks do it, including our neighbor to the north.

Now, the fact that this was passed back in 2006 went largely unnoticed, but not here. In fact, I even gave you a scholarly reference...

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.

And here's a technical paper on how the Bank of Canada does it.

I'll go on the record that this is a good idea. It will help to smooth out the recent fluctuations in the funds rate that garnered so much consternation at this blog among other places. It would prevent interest rate policy from getting in the way of policies for directly injecting liquidity into the financial markets by effectively keeping a floor on the funds rate even during a big injection of liquidity.

Fed Governor Donald Kohn spoke about it back in 2004 as well.

Hat tip to Barry Ritholtz and the WSJ.

UPDATE: Mark Thoma thought of it too.

One type of post that gets people talking is when I discuss the teaching of economics. So a few posts back, I pointed out that the NY Times confused "demand" and "quantity demanded". The Times wrote:

An open letter signed recently by more than 100 economists said the proposed tax holiday would do little to reduce gas prices. In part, that is because a fall in prices would lead to more demand, which would cause prices to return to their earlier level. The result would be that overseas oil-producing governments would get money now flowing to the United States government in gas taxes.

And I said:

The whole sentence about demand is the sort of circular statement that we caution our students not to make but that newspapers print all the time. Not only is it a terrible misstatement of demand vs quantity demanded, it's not even consistent with the claim (advanced by Krugman among many) that supply is fixed.

John Whitehead pointed out something similar in another story. After taking a little heat in the comments, he links back to me approvingly.

Why the heat? Well, I have to admit that when an economics professor starts to pontificate on demand vs quantity demanded, it tends to border on the pedantic. I know it does. I can't stand it, but I do it anyway. Why? Because the misunderstanding often leads to circular reasoning as it did here. You argue that prices fall, which causes demand to rise, which causes prices to rise and you're back to where you started.

Every principles of economics textbook seems to have a homework question devoted to identifying and critiquing that sort of circular reasoning--often from a real-life example like this.

So we've got a a real problem with the terminology here. It's made worse by the fact that the principles textbook terminology has absolutely zero chance of catching on in the wider world. Face it, journalists are not going to use demand and quantity demanded correctly in an Econ 101 sense. Not going to happen. But we need to figure out how to educate them to avoid making hideous errors even if they don't use Econ 101 terms.

I have addressed this before.... Digging into the archives for Polley's greatest hits of November 2005:

Stephen Karlson (Cold Spring Shops) links to Phil Miller's (Market Power) post and mine on a common media mistake. Karlson adds this,

...the source of the confusion in many observers' minds might be in the terminology of introductory economics (and nowhere else in economics) itself.

Much of the discipline refers to the act of drawing a new demand or supply curve as a "change in demand (or supply)," sometimes calling that an "increase" or "decrease" in demand or supply. A new choice along the same demand or supply curve goes by the cumbersome locution "change in quantity demanded (or supplied.)" Bleah. I recommend the use of the term "shift" to describe the drawing of a new curve, and I'm continually reinforcing "left shift" and "right shift" as "increase" and "decrease" have the potential for mischief on the supply curve. A new choice along the same curve is a "movement along."

I agree. Bleah. He is absolutely right that this terminology is only an issue at the introductory level. Why, you ask? Long story. At more advanced levels, the mathematics forces you to keep track of what is going on without resorting to these labels. That's part of it. We (those of us who teach this) also just tend to obsess over making sure students shift the right curve. These labels, properly used, do force you to be clear about what you're doing. But I agree with Karlson that there has got to be a better way.

Unfortunately, "shift" is not likely to catch on with journalists either. That only makes sense if you're thinking of the curve, and most of their readers aren't thinking that way. So I'm still puzzling over this one. Your suggestions, and any discussion on the topic, are very welcome.

Anyway, back to the article at hand, it is true that the writer confuses demand and quantity demanded. But the greater sin is that the passage was not even consistent with the main critique of the tax holiday. And I don't think that these errors are unrelated. Sloppiness begets sloppiness. Once you introduce that circular logic, the next step is more likely to go off-track. If anything, that's why professors need to continue to instill some professional discipline in the use of language to describe supply and demand.

We just need to come up with something that resonates better with journalists.

1. The benefit to the consumer would probably not be literally zero. (This is the part everyone has been seizing on as the most charitable thing being said about the proposal. Ok, so be it. If you call that charitable, you go ahead and run with it. See where it gets you.)

My reason for saying it would not be literally zero is that there is evidence that inventories are higher than usual and that capacity utilization is lower than a couple years ago. The system is probably capable of squeezing out a few more barrels, but not terribly many.

I would also add that the open letter signed by over 100 economists says, "...research shows that waiving the gas tax would generate major profits for oil companies rather than significantly lowering prices for consumers." I have already said that I agree with that letter, and I think they were correct (but subtle) in saying that it would not significantly lower prices, leaving open the very sensible possibility that there might be a very small benefit. I fully agree with their wording.

2. While not literally zero, the consumer benefit is likely to be very small. I'd say a third or less of the total (half of what these authors found concerning the Illinois tax holiday in 2000). And I would probably bet the "under" if it came to that.

3. Good public policy should be well outside of the neighborhood of "pointless". (That is, the effects should be economically as well as statistically significant.) This proposal fails, even under my most charitable assumptions.

4. A tax holiday at the federal level will have less impact than the state tax holiday Illinois had in 2000. Then, gasoline could be diverted to Illinois from other states. That's harder to do at the national scale.

5. The average consumer will absolutely NOT notice the difference. Differences in price between locations and over time in the last couple weeks have far exceeded my most charitable estimate of the gain. Econometric studies would be done after the fact. There would be t-statistics, p-values, arguments over assumptions, and in the end some very small, but probably positive, estimates.

In short, I stand by my statement that consumers would likely see a couple (maybe even a few) pennies worth of benefit. But most importantly, the point I was trying to make was that this: This proposal does not have to be literally pointless for it to be a really bad idea. I think that is a worthwhile point to make.

But again, the relevant question is how much the price would have to fall to get consumers to buy up whatever increase in production would optimally be obtained if the tax were temporarily gone. That is, I think, the clearest statement of the question--and the answer is not much.

UPDATE: I have sent a message adding my name to the open letter.

But I liked this somewhat tangential remark:

The fear of tempting fate showed up in further experiments with Cornell students. When told about an applicant to graduate school at Stanford who had been given a Stanford T-shirt by his mother, people assumed he would hurt his chances for admission if he had the hubris to wear it. And they believed that a professor was more likely to call on them in class if they didn’t do the assigned reading.

The latter might actually be true. We can read faces, you know.

The real question is this: How much would gas prices need to fall in order to induce consumers to buy up whatever additional production would be optimally squeezed out of the refineries if the gas tax temporarily went away?

When you think about it that way for a little bit, it becomes easier to see that the answer is probably greater than zero, but not much.