Alan Krueger, Assistant Secretary of the Treasury for Economic Affairs, suggested in a speech in October a useful metaphor to distinguish different kinds of economic indicators. Some indicators are like the gauges on the dashboard of the car — industrial production, unemployment, inflation and so on. They give the latest bits of information on the business cycle outlook, for businesspeople , government policy-makers, economic forecasters, and anyone else who wishes to follow such developments at high frequency. Many of these numbers are typically collected on a monthly basis. Other statistics are like the results of 10,000 mile checkups – the poverty rate, infant mortality, life expectancy, carbon emissions, natural resource depletion, the crime rate, traffic congestion, leisure surveys, and other measures of inequality, health, the environment and the quality of life. They are needed to supplement market-measured output in order to get a comprehensive feel for welfare and the longer term sustainability of the economy. This second category of statistics is more often collected on an annual basis.

GDP is the single indicator that gets the most attention. Lately much of that attention has been very critical. In late September, the most recent in a long line of critics weighed in. This group was weighty indeed: the Commission on the Measurement of Economic Performance and Social Progress was created by President Sarkozy, chaired by Joseph Stiglitz, chair-advised by Amartya Sen, and coordinated by Jean-Paul Fitoussi, with Nobel-Prize winners abound. The Commission apparently believes that we have been focusing too much on market-measures output “By their reckoning, much of the contemporary economic disaster owes to the misbegotten assumption that policy makers simply had to focus on nurturing growth, trusting that this would maximize prosperity for all. “What you measure affects what you do,” Mr. Stiglitz said…”If you don’t measure the right thing you don’t do the right thing.” (New York Times, Sept. 23, 2009.)

Numbers newly reported from the IMF’s COFER data base show that in the most recent quarter, the spring of 2009, the share of central banks’ foreign exchange reserve holdings that they allocate to dollars resumed its downward trend. The dollar share has been gradually sliding since the beginning of the decade – perhaps because of the birth of a possible rival, the euro, in 1999, or perhaps because of the long-term path of tremendous fiscal and monetary expansion on which the United States embarked in 2001.

During the four quarters preceding the most recent one, the share of the aggregate portfolio that the world’s central banks allocated to dollars had temporarily reversed direction. Arithmetically, the main source of this increase in the dollar’s share was its appreciation against other currencies. But another source was the action of central banks in industrialized countries, acquiring dollars more rapidly than other currencies. The movement of the raw quantity shares can be seen in the first graph below, and the movement in the shares properly valued at current exchange rates in the second graph. (I am grateful to Ted Truman and Dan Xie, both of the Petersen Institute for International Economics, for these graphs.)

National leaders are meeting at the United Nations in New York to discuss climate change negotiations. Talks will continue at the G-20 meeting in Pittsburgh later in the week. But hopes look very bleak for progress sufficient to produce at Copenhagen in December a successor treaty to the Kyoto Protocol. The biggest roadblock is the familiar game of “After you, Alphonse.” The United States will not accept quantitative emission targets unless China, India and other developing countries do the same, at the same time. But the developing countries will not cut their emissions below the Business as Usual path (BAU) unless the rich countries go first.

In the past I have developed my own proposal for how to break the deadlock, a politically realistic plan to assign emission targets in ways that leaves no country feeling it is being asked to incur an economic cost that is unfair or too large. The targets are derived from a family of formulas The specific detailed example of the plan that I have given in the past attained an environmental target by the year 2100 of CO₂ concentrations equal to 500 ppm. It did so without violating the political constraints, which included that no country is asked to accept an ex ante target that costs it more than 1% of income in present value, or more than 5% of income in any single budget period.

The field of International Monetary Economics is not without its own cycles and fads.

In a speech at the European Central Bank over the summer, “On Global Currencies,” I identified eight concepts that I saw as having recently “peaked” and eight more that I saw as now rising in relevance. Those that I viewed as losing traction were: the G-7, global savings glut, corners hypothesis, proliferating currency unions, inflation targeting (narrowly defined), exorbitant privilege, Bretton Woods II, and currency manipulation. Those that I saw as receiving increased emphasis now and in the future were: the G-20, the IMF, SDR, credit cycle, reserves, intermediate exchange rate regimes, commodity currencies, and multiple international currency system.

A year ago, it occurred to me that if the popular blood lust against the financial sector was to be given vent, one could do worse than adopt a small (but global) tax on financial transactions. The Financial Times reports Thursday, August 27, that Adair Turner, head of the UK Financial Services Authority, has come out in support of just such an idea.

It is worth recalling that the original goals of the bailout packages of a year ago have been attained better than many commentators expected. The goal of preventing a depression in the general economy has been accomplished. You don’t punish someone who has been smoking in bed by allowing the resultant fire to burn down the block. The Administration and the Fed always said that helping some undeserving financiers would be an undesirable but necessary side effect of the rescue plan (even though the Treasury would recoup a share of the budget costs, when banks repaid loans).

In the July employment report released by the BLS this morning, the labor market shows its first encouraging signs. Most commentators will focus on the jobs numbers, which show a decline of only half the rate that the economy experienced in the “freefall period” of late 2008 and early 2009.

Employment tends to lag behind production. For this reason, as readers of this blog will know, my preferred indicator is total hours worked. The latest numbers show that the length of the workweek has begun to rebound from its record low of two months ago. As a result, the BLS reports that total hours worked in the economy did not decline at all in July, for the first time since the financial meltdown of last September.

Friday marks 200 days in office for President Obama. “How has he done?” asks Fortune.

The first thing to say is that Barack Obama took over the presidency at an extremely difficult time. A variety of analogies suggest themselves: He is Harry Houdini who has been thrown in the river, in a straitjacket, with chains wrapped around him. Or he has taken over as the captain of a ship with a rotting hull, while the ship is under attack in a hurricane. To capture the state of the economy, perhaps the best metaphor is that Obama took over as pilot of an airplane in the middle of a steep dive. For a president precedent, he is Lincoln, who takes office as the South secedes. Or he is Roosevelt, who takes office at the depth of the Great Depression.

Personal saving rose again in the second quarter. “Does this mean the stimulus tax cut has failed, as the 2008 tax cut stimulus did?”, asks The National Journal.

My answer:

On July 31, the Department of Commerce’s BEA (Bureau of Economic Analysis) released an important set of numbers regarding GDP. Of most immediate interest, the advance estimate of GDP growth for the second quarter, April-June, 2009, was a very moderate -1 per cent per annum. The small magnitude of this negative number confirms an inflection point in the second quarter. As most of us had already thought, the economy is no longer in the free-fall of October 2008 to March 2009 — when the rate of output contraction was approximately 6% per annum – but, rather, is beginning to level out.

Furthermore, the figures reveal large depletion of inventories in the second quarter, which offers good grounds for hope that firms will begin to produce more in the second half of the year. In other words, the economy is probably bottoming out even as we speak.

The National Journal asks “Is the recent Return to Saving temporary or permanent?”

The famous Paradox of Thrift holds now more than ever: what is good for the individual, and for the economy in the long run — high saving — is bad for the economy in the short run. During the current worst-post-30s recession we need a boost to demand. In the longer run we need more saving.

The quip “There are three kinds of lies: lies, damn lies, and statistics” is variously attributed to Benjamin Disraeli or Mark Twain. What should the public make of government statistics, such as the monthly employment report released today, Thursday, July 2, by the U.S. Bureau of Labor Statistics (BLS)?

There is no lying in US government statistics. But there are always commentators who will use the numbers to make whatever point they want. One should learn enough to be able to interpret the numbers for oneself. That is the only way to prevent being misled.

The rate of decline in employment moderated substantially in May, according to the BLS figures released June 5, to about half the monthly rate of job loss recorded over the preceding six months (345,000 vs. 642,000). The news was received in a variety of ways.

First, the cynics. They tend to wax sarcastic at the idea of “things are not getting worse quite as fast as they were” as a good-news proposition. But a wide variety of recent data indicate that the economy is no longer in the state of free-fall that it entered last September, and this is indeed good news. To begin to level off is the first step toward the start of the recovery.

The current visit of Secretary Tim Geithner to Beijing once again shines the spotlight on the Renminbi (RMB) and on demands by US politicians that the People’s Bank of China (the country’s central bank) abandon the peg to the dollar.

Throughout the period 2003-2008, I, as some others, have thought that demands from American politicians of both parties that China loosen the dollar link have been misguided in a number of particulars. They were misguided in thinking that an appreciation of the RMB would, alone, do much to boost US output or employment. The demands were especially misguided in putting such high priority on the entire exchange rate issue, given that we need China’s help on more important things, such as preventing a nuclear-armed North Korea. But my arguments during this period might reasonably have been viewed by non-wonks as quibbles. After all, I did agree, along with a majority of other economists, that an increase in the flexibility of China’s exchange rate would be a good thing.

The Commerce Department this morning announced its advance estimate of last quarter’s real GDP. As expected, the estimate shows that GDP fell in the first quarter of 2009 — by a hefty 6.1 per cent at an annual rate. An implication is that the current recession has just tied the post-war record for longevity.

The previous record-holders were the recessions of 1973-75 and 1981-82, each of them four quarters in length according to the official NBER chronology. In the current downturn, the NBER’s Business Cycle Data Committee determined that the economy peaked in the 4th quarter of 2007. Although the Committee won’t declare the trough of the recession until well after the fact, and the trough could well be a ways off, a negative 1st quarter of 2009 almost certainly means that the four-quarter benchmark has now been attained. (The Commerce Department often revises its GDP figures substantially between the advance estimate and the final number, and we are due for major backward-looking revisions in July. Indeed that is one reason why the NBER always waits so long to issue its findings. In the past, the size of the average revision has been just over 1 percentage point, whether up or down. It is highly unlikely that future revisions will change this morning’s negative number into a positive one.)

Most international summit meetings are long on photo-opportunities and short on substance. Last Thursday’s G-20 meeting in London did have genuine substance.

Nobody reads the communiques, or listens to the press conferences of leaders or finance ministers. But here it is:

In July 2005, the Chinese government announced that it was changing its official exchange rate regime. As American politicians had been demanding, the renminbi or yuan would no longer be pegged to the dollar. Rather the authorities would:

1. Set its value with reference to a basket of foreign currencies (with numerical weights unannounced), and
   
2. Allow a margin of fluctuation in the exchange rate that, though small in any given day, could cumulate substantially over time.

The standard techniques show that, in practice, the RMB initially continued to maintain a tight peg to the dollar after July 2005. Gradually, in 2006, the relationship loosened. Statistical analysis suggests that the People’s Bank of China did indeed begin to assign a little weight within the anchor basket to a few non-dollar currencies, beginning with the Korean won during a period centered on January-March 2007. However most of the weight remained on the dollar. [Frankel & Wei, in Economic Policy.]

The use of a new, more sophisticated, statistical equation reveals that during the course of 2007 the anchoring basket began for the first time to assign substantial weight to the euro. For a period that ran up to approximately May 2008, the anchor was a true basket that put virtually as much weight on the euro as on the dollar. There was also some limited flexibility around that anchor. When high or low international flows were working to push the currency away from the basket, the authorities would intervene, or “lean against the wind,” to push the currency back. [Frankel, 2009, forthcoming in Pacific Economic Review.])

During the course of 2008, however, weight began to return to the dollar. My newly updated estimations show that during the most recent period, September 2008-February 2009, all the weight has once again fallen on the US currency. The regime has come full circle, virtually back to what it was in late 2005.

At first glance, this sounds like news to get the juices of US Congressmen flowing. It sounds as though it might confirm recent complaints that the RMB has stopped its earlier slow-but-steady, appreciation against the dollar. Is it time to dust off the Schumer-Graham bill, which threatened tariffs against China’s exports if it did not stop “unfair manipulation” of its currency?

In fact, these results imply something quite different, almost the opposite. American politicians don’t really care whether the RMB is fixed or floating. What they want, of course, is for it to be stronger against the dollar rather than weaker, so that American firms have an easier time competing against Chinese exports. In 2007, when the RMB was loosely tied to a basket that put heavy weight on the euro, it appreciated against the dollar because the euro was appreciating against the dollar. Indeed from mid-2006 to the end of 2007, the overall value of the RMB did not in any month fluctuate outside a band of plus-or-minus 1%, if one defines the value in terms of a yardstick that assigns half-weight to the euro and half-weight to the dollar.

One can see in the graph below: (i) the steadiness during this period of the average (the green line in the middle), and (ii) the observed and approved appreciation of the yuan against the dollar (the magenta line on top). The appreciation was apparently due to the presence of the euro in the basket, and not in fact to appreciation against the basket as usually implied in the press.

The recent link to the dollar is visible in the flattening of the magenta line at the end. What has been the implication of the movement back toward a dollar peg over the last year? It has been to strengthen the RMB above what it would be if Beijing had stuck with the regime of 2007. Why? Because over the last year, the dollar has appreciated strongly against the euro. If the RMB had stuck with the basket peg in 2008 and 2009, it would have depreciated against the dollar (because the euro depreciated) by an estimated 14%. This would have been the opposite of what congressmen really want!

It is ironic that the dollar has strengthened rather than weakened over the last year.

• The sub-prime mortgage crisis originated in the United States;
• The crisis has severely undermined the credibility of American financial institutions – both in the narrower sense that leading investment banks have now disappeared and in the broader sense that American modes of corporate governance have lost value as role models (rating agencies, accounting systems, executive compensation, and so on);
• The response in Washington has included further acceleration in the already-rising national debt plus an expansion of the US money supply and reduction in policy interest rates that, though appropriate, are unprecedented.

Under normal conditions, any country on the receiving end of three such bullet-points would see its currency go down in flames. Yet the dollar has appreciated.

Now I am a believer.

Few readers of my blog will be surprised to hear that I supported Barack Obama in the election. But I was always skeptical that he would be able to achieve fully his promises to bring candor, responsibility, and bipartisanship to Washington. Experience had convinced me it wasn’t possible. OK, I am still dubious whether it is possible to achieve bipartisanship – even for Obama. The evidence was his failure a week ago to get a single Republican vote for his fiscal stimulus in the House (and only three votes in the Senate) despite his substantial election mandate, the severity of the current recession, and the concessions he made to the other side.

We often hear the question “isn’t this economic crisis becoming as bad as the Great Depression?” Economists can offer a variety of reassurances, but each of them is quite circumscribed:

1. First reassurance: So far, the downturn is at worst competing with 1981-82 for the title of worst post-war recession. True, it is too late for the large monetary and fiscal stimulus applied from Washington to prevent a major recession. In April the current episode is all but certain to surpass the 1981-82 recession in length. It is still quite possible, however, that with the help of the stimulus package the current recession could fall short of the 1981-82 in depth. Unemployment peaked at 11.4% in January 1983, whereas so far we are “only” up to 8.5% (in January 2008).