Fed Chair Janet Yellen: "there remains considerable slack in the economy"

See Yellen: Economy Still Needs Extraordinary Support. The  Fed thinks that we are still below the full-employment GDP (Q_F in the graph below). They basically think that we are still at a point like AD1 and need to have policies that will move us to AD2 (AD stands for aggregate demand and SRAS stands for short-run aggregate supply). If we move from AD1 to AD2, we will still have very small price increases while having a big increase in GDP which will help lower the unemployment rate. The Fed discussed similar issues in 2009. See Fed Officials Disagree On Threat Of Inflation.

Now excerpts from this latest article:

"Low interest rates, she said, make buying a home more affordable and make it easier for businesses to expand and hire.

“We are trying to lower the costs of buying a car that can carry a worker to a new job and kids to school, and our policies are also spurring the revival of the auto industry. We are trying to help families afford things they need so that greater spending can drive job creation and even more spending, thereby strengthening the recovery,” Yellen said.

Yellen said she and “most” of her Fed colleagues believe the unemployment rate must fall to between 5.2% and 5.6% before fulfilling the Fed’s mandate of maximum sustainable unemployment. At that point, inflation becomes more of a risk because wages rise as demand for workers sharpens.

Yellen noted inflation is still not a concern because the inflation rate is about half the Fed’s target rate of 2%.

However, simply by mentioning the 5.2%-5.6% range for maximum sustainable employment, it's certain market analysts will speculate interest rates, which have hovered at near-zero for more than five years, will start to move higher when the unemployment rate falls into that range. It currently stands at 6.7%.

“The Federal Reserve takes its inflation goal very seriously,” Yellen said. “One reason why I believe it is appropriate for the Federal Reserve to continue to provide substantial help to the labor market, without adding to the risks of inflation, is because of the evidence I see that there remains considerable slack in the economy and the labor market.”

Slack, she explained, is when there are significantly more people looking for work than there are jobs available.

Yellen suggested the primary issues holding back the job market are ‘cyclical,’ in other words there are simply not enough jobs to employ all those who are looking for work. Accommodative monetary policy – low interest rates, for example – can help create conditions conducive to creating jobs, Yellen explained."

U.S. pump prices seen extending gains

See U.S. pump prices seen extending gains by Barbara Powell and Mario Parker of Bloomberg. It appeared in the print version of the San Antonio Express-News on April 2. So why are gas prices going up? Exerpts:

"... because of declining supplies and rising costs for the ethanol added to the fuel"

"Gas, averaging $3.56 a gallon at the pump nationwide, already costs the most since September, according to AAA. Prices for ethanol, the fuel additive mandated by the government, are the highest in more than seven years after freezing weather and a shortage of rail cars slowed distribution and reduced inventories."

"“We expect that the peak for gasoline prices will be in April, with the most likely outcome about $3.65,” said Michael Green, a spokesman for AAA in Washington. “

Ethanol climbed a record 81 percent in the quarter, surpassing a 65 percent gain during the third quarter of 2005..."

"...as distillers take plants offline for routine spring maintenance..."

"Ethanol's premium to May gasoline reached 64.7 cents Tuesday. The additive has averaged a 17.39-cent discount to gas since 2005."

"Congestion on the nation's rail lines delayed shipments from the Midwest, where 89 percent of ethanol plants are located, to terminals in the Northeast where it's blended with gas..."

"Replenishing that supply is going to be difficult as companies wrestle with when to perform seasonal maintenance and a lack of availability of rail cars, said Julie Ward, an assistant vice president at R.J. O'Brien & Associates, a brokerage in Des Moines, Iowa."

Is There Economic And Political Meaning In "The Wizard of Oz?"

I will start on international trade in my micro class tomorrow and the text book has something about this in that chapter.

To get a handle on this, you can read Money and Politics in the Land of Oz By Quentin P. Taylor. Also, for my students, there is an article in chapter 15 of the micro book by Tucker and in chapter 18 in the macro book.Below is an excerpt from the Taylor paper:

"Dorothy, the protagonist of the story, represents an individualized ideal of the American people. She is each of us at our best-kind but self-respecting, guileless but levelheaded, wholesome but plucky. She is akin to Everyman, or, in modern parlance, “the girl next door.” Dorothy lives in Kansas, where virtually everything-the treeless prairie, the sun-beaten grass, the paint-stripped house, even Aunt Em and Uncle Henry-is a dull, drab, lifeless gray. This grim depiction reflects the forlorn condition of Kansas in the late 1880s and early 1890s, when a combination of scorching droughts, severe winters, and an invasion of grasshoppers reduced the prairie to an uninhabitable wasteland. The result for farmers and all who depended on agriculture for their livelihood was devastating. Many ascribed their misfortune to the natural elements, called it quits, and moved on. Others blamed the hard times on bankers, the railroads, and various middlemen who seemed to profit at the farmers’ expense. Angry victims of the Kansas calamity also took aim at the politicians, who often appeared indifferent to their plight. Around these economic and political grievances, the Populist movement coalesced.

In the late 1880s and early 1890s, Populism spread rapidly throughout the Midwest and into the South, but Kansas was always the site of its most popular and radical elements. In 1890, Populist candidates began winning seats in state legislatures and Congress, and two years later Populists in Kansas gained control of the lower house of the state assembly, elected a Populist governor, and sent a Populist to the U.S. Senate. The twister that carries Dorothy to Oz symbolizes the Populist cyclone that swept across Kansas in the early 1890s. Baum was not the first to use the metaphor. Mary E. Lease, a fire-breathing Populist orator, was often referred to as the “Kansas Cyclone,” and the free-silver movement was often likened to a political whirlwind that had taken the nation by storm. Although Dorothy does not stand for Lease, Baum did give her (in the stage version) the last name “Gale”-a further pun on the cyclone metaphor.

The name of Dorothy’s canine companion, Toto, is also a pun, a play on teetotaler. Prohibitionists were among the Populists’ most faithful allies, and the Populist hope William Jennings Bryan was himself a “dry.” As Dorothy embarks on the Yellow Brick Road, Toto trots “soberly” behind her, just as the Prohibitionists soberly followed the Populists.

When Dorothy’s twister-tossed house comes to rest in Oz, it lands squarely on the wicked Witch of the East, killing her instantly. The startled girl emerges from the abode to find herself in a strange land of remarkable beauty, whose inhabitants, the diminutive Munchkins, rejoice at the death of the Witch. The Witch represents eastern financial-industrial interests and their gold-standard political allies, the main targets of Populist venom. Midwestern farmers often blamed their woes on the nefarious practices of Wall Street bankers and the captains of industry, whom they believed were engaged in a conspiracy to “enslave” the “little people,” just as the Witch of the East had enslaved the Munchkins. Populists viewed establishment politicians, including presidents, as helpless pawns or willing accomplices. Had not President Cleveland bowed to eastern bankers by repealing the Silver Purchase Act in 1893, thus further restricting much-needed credit? Had not McKinley (prompted by the wealthy industrialist Mark Hanna) made the gold standard the centerpiece of his campaign against Bryan and free silver?"

Now an excerpt from Tucker:

"Gold is always a fascinating story: The Wonderful Wizard of Oz was first published in 1900 and this children's tale has been interpreted as an allegory for political and economic events of the 1890s. For example, the Yellow Brick Road represents the gold standard, Oz in the title is an abbreviation for ounce, Dorothy is the naive public, Emerald City symbolizes Washington, D.C., the Tin Woodman represents the industrial worker, the Scarecrow is the farmer, and the Cyclone is a metaphor for a political revolution. In the end, Dorothy discovers magical powers in her silver shoes (changed to ruby in the 1939 film) to find her way home and not the fallacy of the Yellow Brick Road. Although the author of the story, L. Frank Baum, never stated it was his intention, it can be argued that the issue of the story concerns the election of 1896. Democratic presidential nominee William Jennings Bryan (the Cowardly Lion) supported fixing the value of the dollar to both gold and silver (bimetallism), but Republican William McKinley (the Wicked Witch) advocated using only the gold standard. Since McKinley won, the United States remained on the Yellow Brick Road."

But not everyone agrees with this. Economist Bradley Hansen wrote an article titled The Fable of the Allegory: The Wizard of Oz in Economics in the Journal of Economic Education in 2002. Here is his conclusion:

"Rockoff noted that the empirical evidence that Baum wrote The Wonderful Wizard of Oz as an allegory was slim, but he compared an allegorical interpretation to a model and suggested that “economists should not have any difficulty accepting, at least provisionally, an elegant but controversial model” (Rockoff 1990, 757). He was right—we did not have any difficulty accepting it. Despite Rockoff’s warning, we appear to have accepted the story wholeheartedly rather than provisionally, simply because of its elegance. It is as difficult to prove that The Wonderful Wizard of Oz was not a monetary allegory as it is to prove that it was. In the end, we will never know for certain what Baum was thinking when he wrote the book. I suggest that the vast majority of the evidence weighs heavily against the allegorical interpretation. It should be remembered that no record exists that Baum ever acknowledged any political meanings in the story and that no one even suggested such an interpretation until the 1960s. There certainly does not seem to be sufficient evidence to overwhelm Baum’s explicit statement in the introduction of The Wonderful Wizard of Oz that his sole purpose was to entertain children and not to impress upon them some moral. The Wonderful Wizard of Oz is a great story. Telling students that the Populist movement was like The Wonderful Wizard of Oz does seem to catch their attention. It may be a useful pedagogical tool to illuminate the debate on bimetallism, but we should stop telling our students that it was written for that purpose."

I found a review of the book in the NY Times from 1900 and it does not mention anything about OZ having political or economic meaning. The book was also made into a musical a few years later and none of the reviews of the musical mention any political or economic meaning.

Do Movies About Women Make A Higher Rate Of Return?

See The Dollar-And-Cents Case Against Hollywood’s Exclusion of Women by Walt Hickey of fivethirtyeight.com. Excerpts:

 "One of the most enduring tools to measure Hollywood’s gender bias is a test originally promoted by cartoonist Alison Bechdel in a 1985 strip from her “Dykes To Watch Out For” series. Bechdel said that if a movie can satisfy three criteria — there are at least two named women in the picture, they have a conversation with each other at some point, and that conversation isn’t about a male character — then it passes “The Rule,” whereby female characters are allocated a bare minimum of depth. You can see a copy of that strip here."

"The median budget of a film that failed the test was $48.4 million. The median budget of a film that passed was $31.7 million, or 35 percent less."

"The total median gross return on investment for a film that passed the Bechdel test was $2.68 for each dollar spent. The total median gross return on investment for films that failed was only $2.45 for each dollar spent."

 Using the numbers from above, this implies that "male" movies grossed about $118 million on average (2.45*48.4). If we subtract that $48.4 cost from the $118 million, we get about a $70 million profit.

Using the numbers from above, this implies that "female" movies grossed about $85 million on average (2.68*31.7). If we subtract that $31.7 cost from the $85 million, we get about a $53 million profit.

How long does it take to shoot a movie, six months? If you are the head of a studio, would you rather make $70 million over those six months or $53 million?

Now if it takes less time to make "female" movies then things might be different. For example, if takes 75.7% as long to make a "female" movie as it takes to make a "male" movie, then the returns are the same because 53/70 =.757. And maybe it does take less time since the "female" movies cost less to make (the less time everyone works, the less they get paid).

But if they take the same length of time to make, "male" movies make 32% more money (70/53 =1.32).

There is also a marginal/average issue. The Hobbit: The Desolation of Smaug grossed $950 million and cost $250 million to make. So it got $3.8 in revenue for every $1 of cost. If they had spent another $100, would that have generated $380 million in revenue? Probably not. If so, they left alot of money on the table.

Only so many people can see a movie. At some point, the rate of return has to fall off. With "female" movies, maybe the next $1 million spent on making it might only return, say $2.67 million in revenue. Then the next $1 million, only $2.66 million. A similar drop off would occur for "male" movies.

But if alot more money is spent on any given "female" movie, then the average rate of return would be alot lower than 2.68. We just don't know how much it would fall. And making more "female" movies has the same problem. People will be less excited with each new movie of any genre and revenue will tail off.

It is a little like a grocery store that only makes a 1% profit on, say, cans of soup. But soup might have a high turnover rate. So they sell lots of them each day for a given space on the shelves. So they make a big profit.

They might make a 100% profit in caviar but sell very little each day. So it occupies very little shelf space. We don't tell the store to carry more caviar and less soup. The store already knows the right balance of each one to maximize profits. Maybe the studios know something similar about "male" and "female" movies.

Firms want to maximize profits. So they produce a quantity (Q) that makes marginal revenue (MR) = marginal cost (MC). "Male" and "female" movies could have different MR & MC lines, like in the graph below (blue for male, red for female). In this example, more "male" movies get made, they have a higher total profit and a higher profit per movie, yet "female" movies have a higher return on investment or rate of return. And since MR = MC for both types of movies, studios have no reason to produce more "female" movies or fewer "male" movies.

The first thing to notice is that the MC is 9 for "male" movies and 6 for "female" movies. That is about the cost ratio mentioned in the 538 piece.

Male movies: Q = 11, total revenue (TR, the area under the MR curve up to a Q of 11) is 159.5. Total cost is 11*9 = 99. Profit = 159.5 - 99 = 60.5. Profit per movie is 60.5/11 = 5.5. Return on investment is 159.5/99 = 1.61 (that is TR/TC). So $1 spent making a "male" movie, leads to $1.61 in revenue.

Female movies: Q = 8, total revenue (TR, the area under the MR curve up to a Q of 8) is 80. Total cost is 8*6 = 48. Profit = 80 - 48 = 32. Profit per movie is 32/8 = 4. Return on investment is 80/48 = 1.67 (that is TR/TC). So $1 spent making a "female" movie, leads to $1.67 in revenue.