Saturday, June 16, 2018

Freight trains and economies of scale

See Why Railroads Are Making Freight Trains Longer and Longer by Daniel Machalaba of The WSJ. Economies of scale happen when average total cost falls as a firm increases the scale of its operation (more capital). Total cost rises, but output or quantity rises by an even greater proportion. Excerpts:
"The freight train is now on track to stretch up to 3 miles long, with 200 cars or more. And it’s being powered, in part, by an unusual energy source: the activist investor.

Companies have plenty of reasons to keep adding train cars. Long trains save on fuel and crews, reducing the cost of rail transportation.

Longer trains also decrease the volume of trains through communities and improve productivity, said Raquel Espinoza, spokeswoman for Union Pacific Corp. And fewer trains on the network frees up track space for other traffic.

“Railroads thrive on economies of scale,” said Christopher Barkan, professor and director of the railroad engineering program at the University of Illinois in Urbana-Champaign, Ill. “Longer trains are the most important advance in achieving economies of scale in the past quarter century.”

A confluence of pressures—from the long-term decline of coal deliveries to competition from trucking to activist investors—are forcing railroads to improve efficiency and cut costs.

In a nod to activist investors, who have pressed for improved operations and the return of capital to shareholders, major railroads now report average train length with quarterly earnings. CSX Corp. , for instance, in April said its average train length rose 5% in the first quarter from a year earlier, a signal to investors and analysts that the railroad is gaining efficiency.

Operating trains that are double the length of standard size trains involves mastering the distribution of weight and pulling force. The longest, heaviest trains may have four locomotives in front, two in the middle and two at the end.

Some critics say the railroads are moving in the wrong direction, given the demand for faster, more frequent deliveries of smaller batches of raw materials and goods. Long trains take longer to assemble and disassemble in freight yards and can lead to delays on main lines."

"Long trains can block multiple crossings, delaying emergency vehicles and other motorists, as they take 5 minutes or more to go from front to back through a crossing."

"95% of trains are shorter than 10,000 feet."

"Some railroads are adding remotely controlled diesel locomotives at the end or in the middle of superlong trains so that locomotives are both pulling and shoving at the same time. Distributing the locomotive power reduces the heavy loads on the couplers that can break a train in two, improves train handling by reducing slack action and makes brake applications quicker and smoother."

Friday, June 15, 2018

Is the gig economy growing or not?

See Was the Gig Economy Overblown? U.S. labor market largely unchanged since 2005, new data show by Eric Morath of The WSJ. Excerpts:
"the fraction of workers employed as independent contractors was 6.9% in May 2017, down from 7.4% in February 2005, the last time the survey was taken. The broadest measure of the share of workers who are contingent—meaning they don’t expect their jobs to last more than an additional year—was 3.8% last year, down from 4.1% in 2005."

"Labor data showed a large increase in such contractors working in transportation—think Lyft drivers—and professional and business services, which would capture many on platforms like Thumbtack. Use of independent contractors fell sharply in construction, retail and finance."

"It only asked about a worker’s “main job,” meaning someone moonlighting on TaskRabbit wouldn’t show up. And workers needed to do the work in the past week to count.

A separate study by the JPMorgan Chase Institute found that in 2015, only 33% of those participating in online platforms, such as Uber and Airbnb, earned the majority of their income through such apps and sites. The institute also found it was common for workers to cycle on and off platforms, often working more gigs when other sources of income slowed."

"temps, vendors and contractors, but most of those workers are employees of a contracting firm—not going it alone, and thus not independent."

"independent contract workers are happy, with 79% saying they preferred their current arraignment to traditional work. That could be because independent contractors, on average, earn more than traditional workers.

However, 55% of workers who expected their employment to end in less than a year said they would prefer traditional jobs."
But also see Don’t Be So Sure the Gig Is Up Contract work has fallen as a share of employment, a BLS study finds: But there are reasons to doubt it by Liya Palagashvili, an economics professor at State University of New York-Purchase . Excerpts: 
"But there are reasons to doubt the BLS survey, which was last conducted in 2005. The new survey found that as a percentage of all workers, those in alternative employment arrangements—including contract, freelance and on-call work—was lower in 2017 (10.1%) than in 2005 (10.7%).

Does this mean that the gig economy is shrinking? Not necessarily—for three reasons. First, the BLS survey measures only workers whose primary job is a contractor or freelancer. Thus, for example, 69% of Uber drivers are not considered in the BLS study because they also have payroll jobs. Studies by Upwork, McKinsey Global Institute and MBO Partners all account for secondary work and report a significantly higher proportion of freelancers and contractors.

Second, the BLS statistic is a ratio of workers in alternative employment arrangements to the total number of people employed. That can be misleading. As the workforce grows, the denominator increases so that the ratio goes down. In fact, total employment grew more than 10% between 2005-17. Alternative employment, as measured by the BLS, grew only slightly less quickly.

Third, the BLS data may have a sampling bias, because the survey is conducted as an in-person or live telephone interview. Unadjusted differences in traits of contractors and gig workers, such as working longer hours, affects whether they are likely to be absent or missed during the survey, and can lead to undercoverage of that type of worker.

A notable study by economists Lawrence Katz and Alan Krueger used the same questions as the BLS survey, but worked with a different sample population (the RAND American Life Panel) and used an internet survey. It found that alternative employment arrangements as a worker’s primary form of employment grew more than 50% between 2005 to 2015, when they collected their data."

Thursday, June 14, 2018

Do FAA drone regulations illustrate the tradeoff between Type I and Type II errors?

I use the book The Economics of Public Issues in my micro classes. Chapter 1 is called "Death by Bureaucrat." It discusses how the Food and Drug Administration can make either a Type I error or a Type II error.

Type I error: The FDA approves a drug before enough testing is done and when people take it, there are harmful side effects.

Type II error: The FDA tests a drug longer than necessary to stay on the safe side. But people might suffer because the drug is not yet available. 80,000 people died waiting for Septra to be approved.

The FDA would rather make a Type II error because the public can blame the FDA if a Type I error occurs.

Something similar might be going on withe the FAA. See Science panel says the FAA is too tough on drones by David Koenig of the Associated Press. Excerpts:
"Science advisers to the federal government say safety regulators are hindering the spread of commercial drones by being too cautious about the risks posed by the flying machines.

The National Academies of Science, Engineering and Medicine said in a report Monday that federal safety regulators need to balance the overall benefits of drones instead of treating them the same way that they oversee airliners.

Academy experts said in a strongly worded report that the Federal Aviation Administration tilts against proposals for commercial uses of unmanned aircraft without considering their potential to reduce other risks and save lives.

For example, they said, when drones are used to inspect cell-phone towers, it reduces the risk of making workers climb up the towers.

The study on the FAA’s work on integrating drones into the nation’s airspace was requested by Congress last year."

"The high-level science board said that the FAA was making “overly conservative risk assessments” about drones by applying the same near-zero tolerance for risk that it uses with other aircraft.

“In many cases, the focus has been on ‘What might go wrong?’ instead of a holistic risk picture” that considers overall risk and benefit, the advisers wrote."

"“The committee concluded that ‘fear of making a mistake’ drives a risk culture at the FAA that is too often overly conservative, particularly with regard to (drone) technologies, which do not pose a direct threat to human life in the same way as technologies used in manned aircraft,” the board experts wrote.

They said that FAA staffers may believe they could endanger their careers by allowing any new risk."

Wednesday, June 13, 2018

Book Recommendation: Economics for the Common Good by Jean Tirole

Amazon link. If you have already taken one economics class, and especially if you are interested in majoring in economics, this book gives a great overview of how economists do their work and the issues they face. Also a great introduction into how government policy affects the economy. Here is the Amazon description:
"From Nobel Prize–winning economist Jean Tirole, a bold new agenda for the role of economics in society

When Jean Tirole won the 2014 Nobel Prize in Economics, he suddenly found himself being stopped in the street by complete strangers and asked to comment on issues of the day, no matter how distant from his own areas of research. His transformation from academic economist to public intellectual prompted him to reflect further on the role economists and their discipline play in society. The result is Economics for the Common Good, a passionate manifesto for a world in which economics, far from being a "dismal science," is a positive force for the common good.

Economists are rewarded for writing technical papers in scholarly journals, not joining in public debates. But Tirole says we urgently need economists to engage with the many challenges facing society, helping to identify our key objectives and the tools needed to meet them.

To show how economics can help us realize the common good, Tirole shares his insights on a broad array of questions affecting our everyday lives and the future of our society, including global warming, unemployment, the post-2008 global financial order, the euro crisis, the digital revolution, innovation, and the proper balance between the free market and regulation.

Providing a rich account of how economics can benefit everyone, Economics for the Common Good sets a new agenda for the role of economics in society."

Tuesday, June 12, 2018

Fed officials disagree on how much inflation the current low unemployment rate might cause

The Fed will announce tomorrow (Wed.) if they are going to raise interest rates. If demand increases too much, inflation gets too high. Higher interest rates might prevent such demand increases (see graphs at some of the links I have below). It may be a question of where aggregate or total demand is. If it is still in the relatively flat part of supply, then we don't need to raise rates. But if it is already close to where supply gets steep, any more increases in demand will cause large price increases.

First, see U.S. Inflation Accelerates to Six-Year High, Eroding Wages by Katia Dmitrieva of Bloomberg.

Then see The Fed’s Biggest Dilemma: Is the Booming Job Market a Problem? Jerome Powell, the chairman of the Federal Reserve, has to figure out whether inflation is around the corner. The wrong choice could cripple the economy by Nick Timiraos of The WSJ. Excerpts:
"Only twice in the past half-century has unemployment fallen to its current rate of 3.8%—for a few years in the late 1960s and for one month in 2000.

The ’60s episode spurred years of soaring inflation that would take a decade for policy makers to corral. The latter coincided with a technology bubble that, when it burst, caused the 2001 recession.

The Fed is likely to announce Wednesday it is raising its benchmark short-term interest rate to a range between 1.75% and 2%, the latest in a series of increases aimed at avoiding such outcomes by keeping the economy on an even keel."

"He [Fed chair Powell] and other Fed officials have been studying the low unemployment episode of the 1960s for clues, poring over simulations to understand what might happen if unemployment keeps falling and debating whether traditional models for joblessness and inflation still work. The Fed has long operated under the framework that if joblessness falls too low, rising labor costs dominate and lead to higher inflation."

"Officials seek 2% annual inflation because they view that as consistent with an economy with healthy demand for goods and services.

The employment debate is taking on more urgency because joblessness is expected to keep falling due to a burst of economic stimulus from recent tax cuts and government spending increases.

If hiring and workforce participation trends since January continue, unemployment would reach as low as 3.3% by December, way below Fed officials’ estimates of the level that is sustainable over the long run.

Among the questions preoccupying Mr. Powell: Could a tighter labor market bring in people not already in the job market and raise workforce participation rates? If that happens, the economy will be in a position to draw on those unused resources and keep growing without overheating. That would allow the Fed to raise rates more slowly than it otherwise would.

If there aren’t people outside of the labor market ready to enter, the Fed could raise rates more aggressively. Higher inflation requires tighter credit to keep price pressures in check."

[former chair] "Janet Yellen . . . was convinced that low unemployment rates eventually will lead to higher inflation"

"Key to the Fed’s considerations is an economic concept developed in the late 1960s by Milton Friedman known as the natural rate of unemployment. Some economists believe this level balances the supply and demand for labor, and that below it, inflation accelerates"

"Their estimate tumbled from 5.1% three years ago to 4.7% last year to 4.5% in March."

"Officials now seem less sure that low interest rates will keep boosting workforce participation"

 "Mr. Powell has said the natural rate of unemployment could be anywhere from 3.5% to 5%."

"the Phillips curve has been flat for the past 20 years, meaning big swings in unemployment haven’t significantly affected U.S. inflation."

"A few Fed officials have grown skeptical of the central bank’s devotion to the Phillips curve"

"They hesitate to rely on a model that would have called for more aggressive interest-rate rises in 2015 and 2016, because the jobless rate implied inflation would soon heat up. In fact, millions of Americans found jobs and inflation remained low."

"A second group of officials rejects this thinking. They say unemployment is well below a sustainable level. They worry it is just a matter of time before imbalances emerge—either excess inflation or financial bubbles—and if they wait until then, they will have to raise rates aggressively, causing a recession."

"Looking at city-level data, economists found inflation picked up more quickly once the jobless rate fell below 3.75%. One of the researchers, UBS’s Mr. Detmeister, said the paper argues for maintaining the Fed’s current approach of raising interest rates with the goal of anticipating where the economy will be 12-to-24 months ahead."

"Many Fed officials . . . say globalization, technology and demographic changes mean a low-unemployment economy may not face the same price pressures as it did in the 1960s."

"Today’s economy has more college-educated workers than in the past, which depresses the natural rate of unemployment because they have lower unemployment rates than others."

"In the 1960s and 1970s, if inflation went up one year, consumers expected it to rise by at least as much the following year. Officials believe such expectations can be self-fulfilling as workers demand pay increases and businesses raise prices in anticipation.

But in the early 1980s, the Fed ratcheted interest rates up into the double-digits, slowing inflation dramatically by pushing the economy into a severe recession. It demonstrated the central bank’s commitment to keep prices in check, and the approach has held since then.

Fed research published in 2016 used the 1960s experience to measure the point where inflation pressures begin to harm the economy, including by leading expectations of higher prices to become self-reinforcing as they did in the 1970s. The research, which was presented to Mr. Powell, concluded this happens when inflation rises by 3% on a sustained basis, using the Fed’s preferred gauge and excluding volatile food and energy categories. Using this gauge, inflation is currently rising 1.8%.
Given the anchoring of inflation expectations, Mr. Kashkari said it is no surprise that inflation is unresponsive to low unemployment today. “The more credibility we have with the market and with employees and employers, the less responsive they are going to be to minor changes in the economy,” he said."
Related posts:

Is There A Neutral Interest Rate? If So, How Much Is it?

Is The Phillips Curve Dead In Japan? Maybe not

Is The Phillips Curve Not Holding Up Well Because The Service And Goods Sectors Are Behaving Differently?

Has the Fed Flattened the Phillips Curve?

Nobody knows what the natural rate of unemployment is today

More on the natural rate of unemployment

How Central Banks Differ In Their Methods Of Calculating Inflation.

Fed Officials Disagree On Threat Of Inflation (from 2009)

Fed Chair Janet Yellen: "there remains considerable slack in the economy" (from 2014)  

Professor Mark Thoma of the University of Oregon had a post at his blog on the disagreement over what the optimal inflation rate is called Do We Need to Rethink Macroeconomic Policy? Some economists think maybe 4% would be okay. But this article gives you a good idea of the issues and controversies surrounding the unemployment-inflation tradeoff.  Excerpt:
"Just to be clear, the relative price of good A to good B is PA/PB. If there is inflation and one of the two prices is stickier than the other, then the two prices will change at different rates in response to inflation. This pushes relative prices away from their fundamental values, and this in turn distorts resource flows (which leads to losses and unemployment as resources are subsequently reallocated). The higher the inflation rate, the faster these prices become distorted and the higher the subsequent costs. This is not the only cost of inflation, but on this basis alone it's likely that at some point the costs of inflation will exceed the benefits. The hard question is where the breakpoint is (partly because we don't have good estimates of either the costs or the benefits, so it's possible to support most any position by picking and choosing among the empirical studies). I'd be very uncomfortable with a rate over 4%, 4% itself seems a bit high, but 3% isn't so hard to accept."

Monday, June 11, 2018

It seems like airlines are not passing along all of the increased fuel costs to consumers

See Airlines Raise Ticket Prices as Fuel Costs Surge: Oil is again the largest expense for most airlines prompting higher domestic fares, surcharges on international flights by Doug Cameron and Alison Sider of The WSJ.

An increase in costs is like a new tax. It shifts the supply curve up. But the price goes up by less than the amount of the tax or the increase in costs. There is a link below to a post from a few years ago that explains this with supply and demand curves.

Excerpts from the article:
"Jet-fuel prices have surged more than 50% over the past year, pushing carriers to raise fares and Delta Air Lines to cut its profit expectations.

Delta, the nation’s No. 2 carrier, said Wednesday it could take six to 12 months to recoup the extra fuel costs via pricier tickets."

"“We feel good about our ability to pass through the increase in fuel price,” United Continental Holdings Inc. President Scott Kirby said at an investor event last month. He said strong summer demand is bolstering industry pricing power—with carriers pushing through a succession of small increases of between $2 and $5 per flight on domestic routes—and that will help United recoup about 75% of the higher fuel prices."
Notice he mentions "strong demand." If demand increases, then price will go up. But we have to assume demand is not changing to understand the effect. And also notice he says they will recoup only 75% of the higher fuel prices, not 100%. So they have not been able to pass all of the increase along.

See If You Lower The Excise Tax On A Good By $1.00, Does A Firm Save $1.00 On Each Unit Sold?

Sunday, June 10, 2018

When Economists Turn Hedonistic

More sensitive viewers might want to look away. Sometimes economists get kinky, too (when they talk about oligopoly, but that's another story).

The Canard About Falling Incomes: Don’t believe the government’s consumer-price index, which is obsolete by Andy Kessler of The WSJ. Excerpts:
"As consumer items got more feature-rich and complex, the BLS simply couldn’t note the absolute price of, say, a microwave oven. So the bureau came up with the indulgently named hedonic quality adjustment, defined as “decomposing an item into its constituent characteristics, obtaining estimates of the value of the utility derived from each characteristic, and using those value estimates to adjust prices when the quality of a good changes.”

It’s a better measurement but still inaccurate. Here’s a thought experiment: Think about your car’s automatic emergency braking, sometimes known as precrash or collision avoidance. It has been an increasingly popular option in recent years. By 2022, it will be standard on most cars. Some silicon sensors and a few pieces of code—today it costs maybe $50 to produce. But what’s it worth?

Let’s do a little hedonic decomposing of our own. Before these sensors, you would have had to hire a person to ride shotgun and constantly watch for potential collisions and slam on the brakes for you. In 2016 the AAA Foundation for Traffic Safety estimated the average driver spends almost 300 hours a year in the car, logging more than 10,000 miles. Paying someone even $10 an hour to stare into traffic means that over five years, collision avoidance is worth nearly $15,000. Double if you want someone to look out the back window, too.

Does this show up anywhere in the consumer-price index? Of course not. One of the most lifesaving features has dropped in cost by three orders of magnitude in less than a decade. To the BLS, it’s practically nonexistent."

"By the time the BLS puts something new in the CPI basket, it’s already cheap, so it misses the massive human-replacement price decline."

"But the CPI absolutely doesn’t take today’s technology-infused lifestyle and work backward to show how much more expensive it would have been in 1973."
In related news "it took the average worker 10 minutes to earn enough money to afford a Happy Meal in 1979. Today it takes that worker just 6 minutes of work to afford one." See Happy Meals Are Now Even Happier by By Alexander C. R. Hammond and Gale Pooley of HumanProgress.

Saturday, June 09, 2018

Use of opioid drugs ‘appears to be connected’ to labor market conditions

See Why U.S. Prime-Age Workforce Participation Is Lagging Behind Other Nations by Sarah Chaney of The WSJ.

This is related to yesterday's post ("American Job Openings Now Outnumber the Jobless") which mentioned "the share of Americans who are working or seeking work has generally declined for almost two decades."

Chaney's article suggests that opioid use has played a part. Excerpts:
"The share of U.S. prime-age workers holding or seeking jobs has picked up in recent years but remains well below the rates of other developed economies, a phenomenon suspected to be linked to the opioid crisis.

The so-called labor-force participation rate of such workers, ages 25 to 54, fell sharply after the financial crisis to a recent low of 80.7% in the third quarter of 2015, according to a report by the Organization for Economic Cooperation and Development released Wednesday.

The figure has increased since then to 81.7% in the fourth quarter of last year.

The OECD’s 35 countries—which include the U.S., most of the European Union members, Canada and FranceJapan—had a combined rate of 85.5% in the last three months of 2017."

"The use of opioid drugs “appears to be connected” to labor market conditions, the report said.
Opioid prescription rates are generally higher where overall labor-force participation rates are lower, it notes.

These areas also tend to be places where disability rates are high, it says, pointing to a possible connection between drug use and disability.

The prescription of opioids per capita is “significantly higher” in the U.S. than in other OECD nations, the report notes."

"“In addition, when addiction leads to criminality, the consequences of a felony record can drastically reduce employment possibilities.”"

"Princeton University economist Alan Krueger found that a national increase in opioid painkiller prescriptions between 1999 and 2015 may have accounted for about 20% of the decline in workforce participation among men ages 25 to 54, and roughly 25% of the drop in prime-age female workforce participation."

Friday, June 08, 2018

American Job Openings Now Outnumber the Jobless

U.S. job openings rose to 6.7 million at the end of April, compared with the 6.3 million Americans who were unemployed

By Eric Morath of The WSJ. Excerpts:
"For the first time since such record-keeping began in 2000, the number of available positions exceeded the number of job seekers"

"U.S. job openings rose to a seasonally adjusted 6.7 million at the end of April, a record high, and more than the 6.3 million Americans who were unemployed"

"Meanwhile, the share of Americans who are working or seeking work has generally declined for almost two decades. That gives employers fewer potential workers to draw from, but also suggests there remain hundreds of thousands of Americans who could be drawn back into the labor force.

And they may be waiting for better wages. Hourly pay for nonsupervisors rose 2.8% in May from a year earlier, the best annual gain since mid-2009. But the last time unemployment was as low, wages for those workers rose 3.9% from a year earlier.
The largest number of April openings, 1.3 million, were in the broad business-services sector, which includes everything from accountants and software developers to temporary staffers and clerical workers.
There were also ample job openings in some of the lowest-paying fields. There were 844,000 accommodation and food-service jobs open in April and 735,000 unfilled retail positions."

"[an expert]  is asking clients if they are being realistic in their demands for workers with clean criminal histories and higher levels of education."

"a tighter labor market presents several challenges to businesses. If they can’t find workers to meet the demand for their products, they can’t help the economy grow."

"Firms may need to pay more to attract workers, and some already are. That raises costs and would cut profit margins if higher prices can’t be passed on to customers."

"There are, however, still an elevated number of Americans who are stuck in part-time jobs and would prefer full-time work. And others are employed but not in the jobs they want."
Justin Lahart, also of the WSJ, had an article the same day on this topic. See
One Surprising Reason Why Companies Struggle to Fill Jobs: The churn rate in the jobs market is less than you’d think with unemployment at multi-decade lows, and one reason is an aging workforce. Excerpts:
"people aren’t changing jobs as much as you’d expect."

"One measure of churn—the sum of hires and separations as a share of overall employment—stood at 7.4% in April, around where it has been for the past year. That is far better than the 5.9% it plumbed in 2009, but still below the 8% it reached in 2006 when the unemployment rate was 4.6%."

"The U.S. workforce is aging, and older workers are less likely to job hop. Housing costs are high, particularly in some of the urban areas where job openings are most plentiful. And  many workers may still have lingering fears"

"the quits rate, or quits as a share of total employment is at its highest level since 2001. But fewer people are leaving their jobs for other reasons, pushing the churn rate lower. For companies, the low churn rate has been both good and bad. The good part is that it makes it easier to retain the employees"

"The bad part, which mostly affects companies looking to expand their workforce, is that it can be hard to hire people without offering them strong incentives to do so."

Wednesday, June 06, 2018

Some Bad News for Good News — Optimistic Forecasts Create Recessions

Positive forecasts lead the public and private sector to ‘celebrate’ by borrowing more, says IMF paper

By Georgi Kantchev of The WSJ. Excerpts:
"over-optimistic economic growth forecasts—including the IMF’s own—could help cause recessions and fiscal problems. The IMF argues that positive forecasts lead the public and private sector to “celebrate” by borrowing more, which encourages the sort of debt accumulation that builds frailties in the economic system, harming growth.

“Over-optimism brings economic damage in later years,” the authors write. “An overestimation of the future rate of economic growth could provide a short-run boost to the economy, but it also increases the subsequent probability of a recession and other economic difficulties,” they say."

"forecasts for next year’s gross domestic product growth have been 0.58 percentage points higher than the actual number. Research shows that such an upward bias is also present in forecasts made by private sector economists"

"The IMF has also missed most recessions in its forecasts, predicting only 24% of recessions one year ahead of the event."

Tuesday, June 05, 2018

What's the Difference Between Bills, Notes and Bonds?

By Nickolas Lioudis of Investopedia.
"Treasury bills (T-Bills), notes and bonds are marketable securities that the U.S. government sells in order to pay off maturing debt and to raise the cash needed to run the federal government. When you buy one of these securities, you are lending your money to the government of the U.S.

Understanding T-bills

T-bills are short-term obligations issued with a term of one year or less, and because they are sold at a discount from face value, they do not pay interest before maturity. The interest is the difference between the purchase price and the price paid either at maturity (face value) or the price of the bill if sold prior to maturity.

For example, an investor who purchases a T-bill at a discount price of $97 will receive the $100 face value at maturity. The $3 difference represents the interest return on the security.

Treasury Notes and Bonds

Treasury notes and bonds, on the other hand, are securities that have stated interest rates that are paid semi-annually until maturity. What makes notes and bonds different are the terms to maturity. Notes are issued in one-, three-, five-, seven- and 10-year terms. Conversely, bonds are long-term investments with terms of more than 10 years.

To learn more about T-bills and other money market instruments, read An Introduction to Treasury Securities, The Basics of the T-Bill, and our Money Market Tutorial. For further reading on bonds, see our Bonds Basics Tutorial.

Monday, June 04, 2018

Vanilla Is In The News Again

See Vanilla is worth more than silver by Tyler Cowen. I had a post on this last year (link below). 
The price of vanilla has hit a record high of $600 (£445) per kilogram for the second time since 2017 when a cyclone damaged many of the plantations in Madagascar, where three quarters of the world’s vanilla is grown. Silver by comparison currently costs $538/kg.
Demand for vanilla has kept the prices high, leading some ice cream manufacturers to cut back and even halt production of the flavour, sparking fears of shortages over the summer.
Here is the full story, and note this:
Replacement printer ink cartridges can cost between $8 and $27, depending on the type of printer you have. A single black ink jet cartridge from one major manufacturer can cost $23 for just 4ml of ink – enough to print around 200 pages.
Manufacturers argue they need to charge this to cover the loss they are selling the printer hardware at, together with the research and development they do on ink technology. But cut open an ink cartridge and you will see that most of the space inside is taken up with sponge, designed to help preserve and deliver the ink.
And when you are paying what works out to be around $1,733/kg of ink, you might be better off printing with pure silver instead."
See also Vanilla is so valuable now that it needs to be guarded. There are actually "Vanilla bandits."

Sunday, June 03, 2018

Is There A Neutral Interest Rate? If So, How Much Is it?

See Fed Minutes Signal Rate Increase in June: May meeting minutes say ‘it would likely soon be appropriate’ for another rate rise by Nick Timiraos of The WSJ. Excerpts:
"The Fed held its benchmark federal-funds rate steady at the May meeting in a range between 1.5% and 1.75%, but it looked ahead to future increases that might leave policy at a neutral level that neither spurs nor slows growth."

"The Fed’s postmeeting statement at the May meeting caught some attention because officials added a second reference to their “symmetric” 2% inflation target, meaning they won’t necessarily accelerate interest rate increases once inflation runs at or slightly above 2%."

Some officials at the May meeting said a temporary period in which inflation rises modestly above 2% “would be consistent with the committee’s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective.”

At the time of the May meeting, the unemployment rate had held steady since October at 4.1%. A report released after the meeting showed the rate fell to 3.9% in April.

Most officials still believe in a framework that sees an inverse relationship between unemployment and inflation (the is is the Phillips Curve). If the unemployment rate drops faster, officials likely will be more attuned to the potential for acceleration in inflation.

The minutes show officials are still unsure over the degree to which lower unemployment will fuel faster wage increases or firmer price pressures"

"San Francisco Fed President John Williams said last week he still estimates the current neutral fed-funds rate to be 2.5%. Officials’ March projections show a median expectation that the fed-funds rate would settle over the long-run at around 2.9%—an approximation of neutral.

Estimates of the neutral rate matter because a consensus appears to be forming among Fed officials that they should stay on their current “gradual” path of raising rates by a quarter percentage point at roughly every other meeting until they reach neutral. The bigger debate is likely to be over what to do after they get there."

AD and SRAS help explain what is going on. As AD increases or shifts to the right, prices rise. But the increases get bigger. Q or GDP increases, which lowers unemployment, but less each time. That tells the same story as the Phillips curve. But, what if supply shifts to the right? (which I don't show). If SRAS shifts more to the right than AD, then the rise in prices might be slight (and inflation could be less than what it was in the past) while the increases in Q can be large and the unemployment rate falls. That is the opposite of the Phillips Curve. So the Phillips Curve has to assume a fixed SRAS. Maybe a neutral interest rate keeps AD right at QF, the level of GDP that gives us the lowest rate of unemployment with inflation no higher than a set target. This is full-employment.




Related posts:

Is The Phillips Curve Dead In Japan? Maybe not

Is The Phillips Curve Not Holding Up Well Beacuse The Service And Goods Sectors Are Behaving Differently?

Has the Fed Flattened the Phillips Curve?

Nobody knows what the natural rate of unemployment is today

More on the natural rate of unemployment

How Central Banks Differ In Their Methods Of Calculating Inflation.

Fed Officials Disagree On Threat Of Inflation (from 2009)

Fed Chair Janet Yellen: "there remains considerable slack in the economy" (from 2014) 

Friday, June 01, 2018

The percentage of 25-54 year-olds employed was unchanged in May

One weakness of the unemployment rate is that if people drop out of the labor force they cannot be counted as an unemployed person and the unemployment rate goes down. They are no longer actively seeking work and it might be because they are discouraged workers. The lower unemployment rate can be misleading in this case. People dropping out of the labor force might indicate a weak labor market.

We could look at the employment to population ratio instead, since that includes those not in the labor force. But that includes everyone over 16 and that means that senior citizens are in the group but many of them have retired. The more that retire, the lower this ratio would be and that might be misleading. It would not necessarily mean the labor market is weak.

But we have this ratio for people age 25-54 (which also eliminates college age people who might not be looking for work)

The percentage of 25-54 year olds employed is 79.2% for May. It was 79.2% in April. It is still below the 79.7% in December 2007 when the recession started (it was 80.3% in January 2007).  Click here to see the BLS data. The unemployment rate was 3.8% in May . Click here to go to that data. The % of those 16 and older employed went from 60.318% in April to 60.389% in May.

Here is a good graph from the St. Louis Fed. It shows that there are 126,295,000 people in the 25-54 year old group. So since we are 0.5 percentage points below the 79.7% of December 2007, that is still 631,475 fewer jobs (Hat tip: Vance Ginn of the Texas Public Policy Foundation).

Here is the timeline graph of the percentage of 25-54 year olds employed since 2007.


Here it is going all the way back to 1948


The annual numbers are important, too. It rose to 78.63% for all of 2017 from 77.925% in 2016. We have had 4 or more straight years of a 0.5 or more gain. The last time that happened was 1984-89. But we are still below the 79.9% for all of 2007 (the recession started in Dec. 2007).

Again, there were about 125 million people in the 25-54 year old group in 2017. So since we were 1.26 percentage points below the 79.9% of 2007, that is still 1.58 million fewer jobs. 

Thursday, May 31, 2018

India sets a price floor for sugar and gets a surplus

See India, Buried in Sugar, Tries to Dig Out: Government price controls have created an unsustainable glut, with 13 million tons stockpiled by Vibhuti Agarwal of The WSJ.

This is what we teach in ECON 101. If the government says the price has to be above where supply and demand intersect. then the quantity supplied rises and the quantity demanded falls and you have a surplus.

Excerpt from the article:
"The Indian government’s price controls have created an unsustainable sugar glut, and now New Delhi wants to dump it on the already struggling world market for the commodity.

India is the world’s second-largest producer and biggest consumer of sugar. Thanks to strict controls of imports, exports and prices, the country generally produces all it needs.

In a holdout from an era of central planning, New Delhi sets the minimum price for cane, and to keep sugar-cane farmers sweet with the government, it keeps raising that price. But end-user sugar prices are free to fluctuate and currently are so low that refiners say they lose money on every teaspoon they sell.

“Stocks get added every year, but there are not as many takers,” said refiner Amit Agarwal, who runs sales operations in a sugar mill in the northern state of Uttar Pradesh. Pointing to a warehouse packed with 77,500 metric tons of sugar he can’t sell, Mr. Agarwal said his mill is under pressure to pay farmers on time. “But where is the money to pay them?” he said.

Refiners are required to buy everything the cane farmers bring them at a government-set price. But because they only have to pay the farmers after they sell it, they are hoarding the sugar and waiting for a better price—or better incentives."

The result: piles and piles of sugar, in warehouses all over India. Mr. Agarwal’s five warehouses all have sugar bags piled 34 feet high. At last count, in late May, Indian refiners had a stockpile of 13 million tons of sugar—more than all the sugar consumed in the U.S. last year."

Tuesday, May 29, 2018

Higher U.S. interest rates recently helped fuel a surprise rally in the dollar

See U.S. Government Bonds Pay More Than Debt From Other Developed Nations: Higher yields reflect investors’ struggle to reconcile expectations for faster U.S. growth with concerns about impact of deficits and inflation by Daniel Kruger of The WSJ.

This is one of the factors that affects the value of the dollar that I talk about when I cover exchange rates. If the interest rate on U.S. government bonds rise relative to those in other countries, the demand for the dollar will increase because investors need dollars to buy more U.S. bonds. So then the value of the dollar also rises. That is, it will take more of other currencies to buy one U.S. dollar.

See Trade Weighted U.S. Dollar Index: Major Currencies (DTWEXM) from the St. Louis Federal Reserve Bank (a timeline chart of this is at the end of the post.

Now an excerpt from The WSJ article:
"U.S. government bonds are paying more than debt from other developed countries for the first time in almost two decades, a new sign of investors’ struggle to reconcile expectations for faster U.S. growth with concerns about the impact of deficits and inflation.

The yield on the benchmark 10-year Treasury note, a key barometer for borrowing costs for consumers and companies, last week topped 3.1%, its highest close in almost seven years. It’s a climb that’s rippling through markets, buffeting stocks and helping fuel a surprise rally in the dollar as higher rates attract yield-seeking investors to the currency.

Analysts said the rise in yields in part reflects optimism about the U.S. economy and expectations for a pickup in inflation, which threatens the value of government bonds by eroding the purchasing power of their fixed payments.  A market-based measure of expectations for annual inflation over the next 10 years, known as the break-even rate, recently reached its highest levels since 2014.

“The U.S. has the highest rates of everyone in the G-10 and it looks like the rate differential will continue to widen,” said Chris Gaffney, president of EverBank World Markets. “The U.S. seems to be going it alone in this rising interest-rate path.”

The 10-year yield’s surge this year has pushed it above yields on bonds from seven major developed countries for the first time since June 2000, according to an analysis by Bianco Research. It recently exceeded the yield on 10-year debt from a record number of countries, according to Deutsche Bank Research, and surpassed the 10-year German bund yield by the most in almost three decades."
Related posts:

Why Is The Dollar Down 5.6% This Year?

Why Did The Value Of The Dollar Rise More Than 20% From July 2014 To March 2015?

The weakening dollar is having rippling effects around the world.


Monday, May 28, 2018

Comparative Advantage

Yesterday I posted a link to the new PBS series "First Civilizations" which had an interesting episode on trade. Last year was the 200th anniversary of David Ricardo's important idea called "comparative advantage." It explains how two nations can benefit from trade even if one country seems to be better at making all products than the other.

The Washington Post even had an article about it last year. It's the 200th anniversary of the most counterintuitive idea in the social sciences by Daniel W. Drezner, a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.

Trade can benefit both sides. Otherwise, why make the trade? For example, if you have bread and no water and I have water and no bread, if I trade some water to you for some of your bread, we both gain or are better off.

It might seem like if one country is "better" at producing all goods than another, they have no room for trade. But even then, the seemingly more advanced country will still gain from trade.

Here is an example that comes from  David Ricardo himself. Comparative advantage is when you can produce a good at a lower opportunity cost than others face (in a two good example, it is impossible to have the comparative advantage in both goods).

Suppose it takes 40 labor hours to make a barrel of wine in England and 2 hours to make a yard of cloth. In Portugal, those numbers are 10 and 1, respectively. So it looks like Portugal is "better" at producing both goods since it takes them less time to make wine and less time to make cloth.

The labor hours numbers means that if England wants a barrel of wine, it would have to give up 20 yards of cloth (since 40/2 = 20-if you don't produce a barrel of wine, you save 40 hours of labor and you can make 20 yards of cloth in that time).

In Portugal, if you want to trade a barrel of wine, you can get 10 yards of cloth. Not spending 10 hours making wine allows them to make 10 yards of cloth.

So Portugal has the comparative advantage in wine since less cloth is given up there (10 yards) than in England (20 yards) for every one barrel of wine produced. That is a lower opportunity cost.

England would only give 1/20 a barrel of wine to make cloth while Portugal gives up 1/10 a barrel. England has the  comparative advantage in cloth.

How can the two countries gain from trade? What if England trades 15 yards of cloth to Portugal for 1 barrel of wine?

Both countries gain. England is better off since they only give up 15 yards of cloth to get that barrel of wine when normally they have to give up 20.

Portugal gets more cloth (15 yards instead of 10) for that 1 barrel of wine they trade. They are better off, too (even though it takes them less time to make each product than in England).

Sunday, May 27, 2018

New PBS Series "First Civilizations" Has Interesting Episode On Trade

Here is a summary of the episode.
"Examine an ancient civilization unlike any other, that of the Indus Valley. Rather than imposing order through war or religion, it relied on the free flow of trade. The exchange of goods promoted wealth, co-operation and trust."
Click here to go to the list of episodes. There should be a link that will allow you to watch it. Highly recommended.

Saturday, May 26, 2018

Is The Phillips Curve Dead In Japan? Maybe not

See In Booming Japan, the Phillips Curve Is Dead: Unemployment is down but inflation isn’t budging. Why companies resist raising prices by Greg Ip of The WSJ. Excerpt:
"By several measures, the economy is overheating. Total activity is now 1.5% above normal capacity, the Bank of Japan estimates. Unemployment, at 2.5%, and businesses’ spare capacity are both the lowest since 1993, when the 1980s property and stock bubbles were still deflating. There is more than one job opening for every active job seeker in all 47 prefectures. “This clearly means there is much more demand than supply,” says Masatsugu Asakawa, vice-minister of finance. “Almost every indicator has been great. The only mystery is the weak performance of prices.”

In defiance of the Phillips curve, these intensifying bottlenecks have had only limited impact on wages, and none on prices. Inflation in the year through April was just 0.4% when fresh food and energy are excluded. That’s better than the outright deflation that generally prevailed from 1998 to 2012, but not by much, and it’s a far cry from the Bank of Japan’s 2% target. This is a problem, because if inflation gets stuck at or below zero, interest rates also get stuck at zero, robbing the central bank of its ability to stimulate the economy by cutting rates."

But that is only recently. Below is one of the graphs from the article and since the late 1990s, there have been periods in Japan when the unemployment rate fell while the inflation rate rose.



Look at the two green lines. It looks like from 1998-2002, unemployment and inflation go in the opposite direction (the unemployment rate rose while the inflation rate became lower). That is what the Phillips curve predicts.

Then it looks like they moved in the opposite direction for the next 2-3 years (the yellow lines), although unemployment fell while inflation rose.

Then starting in 2009, they moved in the opposite direction again for a couple of years. Red lines.

And from 2010-2015, they moved in the opposite direction. Black lines.

So maybe for 13-14 of the last 19 years, things have gone the way the Phillips curve would have predicted. And certainly since 2009 except for the last 2 years.

AD and SRAS help explain what is going on. As AD increases or shifts to the right, prices rise. But the increases get bigger. Q or GDP increases, which lowers unemployment, but less each time. That tells the same story as the Phillips curve. But, what if supply shifts to the right? (which I don't show). If SRAS shifts more to the right than AD, then the rise in prices might be slight (and inflation could be less than what it was in the past) while the increases in Q can be large and the unemployment rate falls. That is the opposite of the Phillips Curve. So the Phillips Curve has to assume a fixed SRAS.