Dollars and Jens
Friday, January 28, 2011
I had started to worry that too much of recent GDP gains were driven by inventory accumulation. In the fourth quarter, it appears there was basically no inventory accumulation, while imports fell and exports rose. Note that government expenditure is also a subtraction here; this is really the best 3.2% growth I've ever seen.
IV 07I 08II 08III 08IV 08I 09II 09III 09IV 09I 10II 10III 10IV 10
Gross domestic product2.9-.7.6-4.0-6.8-4.9-.
Nondurable goods.07-.50.31-.91-.78.06-.
Durable goods.20-.92-.23-.95-1.79.35-.211.35-.
Change in private inventories-.77-.49-.48-.12-2.31-1.09-
Fixed investment-.76-.98-.69-1.83-4.01-5.71-1.26.12-.12.392.06.18.50
Net exports of goods and services3.21.841.04-.631.502.881.47-1.371.90-.31-3.50-1.703.44
Government spending.24.44.651.04.31-.611.24.33-.28-.32.80.79-.11

Update: Now that I look at it, both inventory accumulation and net exports have been strongly pro-cyclical lately; if I back out half of each, the last five quarters have growth rates (in reverse chronological order) of 3.3, 2.6, 3.0, 2.5, and 2.6, a smoother series than the headline numbers. The inventory accumulation and net exports have also been negatively correlated. I wonder how much of the inventory fluctuations have been in tradeable goods sectors, and have been seeing inventories absorb the fluctuations in foreign trade. Of course, this can get into data-mining pretty quickly; it's not as though I have that many degrees of freedom to look at.


Wednesday, January 26, 2011
fed statement
The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in November December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment about a significant improvement in labor market conditions. Household spending is increasing at a moderate pace Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Longer-term Although commodity prices have risen, longer-term inflation expectations have remained stable, but and measures of underlying inflation have continued to trend been trending downward.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. The Committee will maintain In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings . In addition, the Committee and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Voting against the policy was Thomas M. Hoenig. In light of the improving economy, Mr. Hoenig was concerned that a continued high level of monetary accommodation would increase the risks of future economic and financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.

No dissents.


Wednesday, January 19, 2011
basic international monetary theory
Ronald McKinnon has an op-ed in the Wall Street Journal in which he states that
In 2010, consumer price indexes shot up more than 5% in major emerging markets such as China, Brazil and Indonesia, while the consumer price index in the U.S. itself rose only 1.2%.
China at least also is at a stronger growth point in its business cycle. It makes sense, then, that they should be running tighter monetary policy than the United States.

McKinnon's op-ed, though, has the curious title — which, if standard practice was followed, was not chosen by him, but by an editor — "The Latest American Export: Inflation". Which would make it a case of a country exporting something of which it is suffering from a shortage.

The first paragraph of the op-ed — which, if standard practice was followed, was chosen by him — seems of this spirit:
What do the years 1971, 2003 and 2010 have in common? In each year, low U.S. interest rates and the expectation of dollar depreciation led to massive "hot" money outflows from the U.S. and world-wide inflation. And in all three cases, foreign central banks intervened heavily to buy dollars to prevent their currencies from appreciating.

If "foreign central banks intervened heavily to buy dollars", thereby creating inflation, who's to blame? If the US economy is weak and shows no signs of inflation, and foreign countries have excessive inflation, in what universe is it appropriate policy for them to "prevent their currencies from appreciating" against the dollar? If someone's worried that the relative currency move will exacerbate China's trade deficit or the United States trade surplus, I imagine we could think of arguments to allay that concern as well.

Over the last few years, I haven't gone in as much for complaining about China's currency policy as seems to be popular in some circles; it does create international stability to some extent, but I don't feel it's bad enough to be worth much political capital — the primary victims, as with most of the Chinese government's policies, are the Chinese. At the same time, it's doubly ludicrous for anyone to complain about the US following appropriate monetary policy on the grounds that it creates problems for currency manipulation. If you insist on pegging your currency to ours, you are ipso facto imposing our monetary policy on your own currency. If your economic circumstances call for different policies, either impose our policy, or impose a different one — but if you impose ours, it's not our fault.

Monday, January 17, 2011
correlation, causation, and "gains" to education
Arnold Kling, on big structural shifts in the economy:
We are seeing fewer jobs where there is the external discipline of the time clock and the assembly line. The human robot that was once needed to lift and pound in a factory continues to be replaced by non-human robots.

Instead, we are seeing more jobs where internal discipline is required. I suspect that this explains some of the wage differential that shows up for college graduates. Graduating high school shows that you can submit to external discipline. Graduating college shows that you can operate under internal discipline.
There has been some theorizing — almost entirely by people with PhD's — that education, especially in college, doesn't produce more productive workers, but merely filters for them. Usually I've seen this presented in terms of "signaling"; employers prefer to hire the people who have been filtered, even though those same employees would be just as valuable if they hadn't gone to college. (If this is true, then you can think of college as a four-year job entrance exam.) What Kling suggests here is very closely related, but slightly different; he is referring not to the ability of these people to get hired by someone, but to the higher marginal productivity that employers are seeking in the first place.

More specifically, though, Kling is referring to a particular trait to which he argues the economic return has been increasing. This is new to me; the arguments I've seen before have tended not to address the growing spread in wages, while people arguing for a more fundamental benefit to education have tended to argue that those skills acquired in college are more valuable in an increasingly technological workplace. It seems just as reasonable — and perhaps more so — to suggest that the latent characteristics for which college filters might have that property as well.

Thursday, January 13, 2011
For a number of reasons, workers' best protection against employer abuses is the ability to threaten to leave. Perhaps this is part of the reason large employers and labor unions introduced defined-benefit retirement packages; it provides a large pecuniary barrier to employees' leaving, and thus empowers the unions and the employers at the workers' expense. The pension benefit that accrues to young workers is very, very small; if an employee leaves the employer, even after 15 years, he gets very little value from the retirement plan; on the other hand, the employee deciding between leaving after 24 years and leaving at 25 years may find that his benefits accrue quite rapidly in that extra year, and will want to stick around. Almost the only value to the 15 year employee is that, if he sticks around a few more years, he will be able to earn these large non-wage benefits as well.

Defined-benefit plans don't have to be that way; in practice, though, they almost always are (where "almost" is me being overly cautious, and not an indicator that I have any reason to believe that there is an exception). I just came across a nice graph for the teacher pension in Missouri. In this case, a teacher in his 23rd year (or thereabouts) gets $200,000 in pension value in one year.

As Joel Klein pointed out in an op-ed in the WSJ, this means a lot of money is being spent that is not going to new teachers, making it harder to recruit the best new teachers. This is on top of the teacher mobility issue, and there is evidence of substantial gains made from moving teachers from one place to another; while there appear to be good and bad schools, and good and bad teachers, it also appears that teachers will generally match up better with some schools than others, such that switching a teacher at one school with a teacher at another school can improve both teachers' results.

While much of the recent antagonism toward defined-benefit plans for state employees has been focussed on the uncertainty that this creates for state budgets or the ability it gives to politicians to hide implicit debts, it should also be noted that many problems are caused by the way in which benefits accrue, which, even if they might sometimes serve the narrow interests of the state-as-employer, are detrimental to the state's economy and polity.

Wednesday, January 12, 2011
Market Inefficiency
Even proponents of the efficient market hypothesis don't generally claim that all prices are perfectly right; they usually limit themselves to the assertion that wrong prices are expensive to predict. This story would seem to violate the stronger theory:
Who says you can't make money on Twitter? Rapper 50 Cent just raked in millions.

The rapper had plenty to say over the weekend about a penny stock named H&H Imports (HNHI), a tiny operation out of Florida. Why? Because 50 Cent invested $750,000 in shares and warrants in the company last fall. Some of those shares can be cashed in only as the stock rises to 15 cents, 25 cents and, yes, 50 cents.

What better way to pump up the stock than to promote it to your 3.8 million Twitter followers? That's what the rapper did -- and the stock rose 240% to close at 39 cents Monday.
Not the usual way of extracting money from one's fans.

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