John B. Taylor shows an interesting graph.

I understand boosting federal spending during a downturn for the ordinary Keynesian reasons of filling in the gap between current demand and total production. We’ve been in recovery for nearly two years. If you don’t plan on reducing federal spending during a recovery, when will you lower it? And why doesn’t the failure of the economy to recover causing anybody to doubt the putative total production?

See Ryan Avent at The Economist, Arnold Kling, and Tim Duy at Fed Watch for a discussion rising from Robert Hall’s presentation at the AEA meeting on the actions of the Federal Reserve.

From Mr. Avent:

But Stanford economist Robert Hall really nailed the crux of the question, so far as I was concerned. At the AEA meetings a year ago in Denver, I listened to Mr Hall speak a few times on this issue and point out that with the market-clearing interest rate below zero the economy was stuck with high unemployment. At the time, I wondered why, if that were true, that the answer wasn’t simply a higher rate of inflation, which could combine with a zero nominal interest rate to move the real interest rate below zero.

This time around, Mr Hall addressed the point head on. He noted that in a liquidity trap, the real rate of interest was simply equal to the negative inflation rate. In other words, if the Fed’s nominal rate is at 0% and the inflation rate is 2%, then the real rate of interest is -2%. If a -3% real interest rate is necessary to clear the economy, then all that’s needed is a higher rate of inflation—3% rather than 2%. Mr Hall noted that this was an important point because potentially the Fed could have an enormously helpful impact on the economy simply by raising inflation just a little. And here’s where things got topsy-turvy. Mr Hall argued that:

A little more inflation would have a hugely beneficial impact on labour markets,
And a reasonable central bank would therefore generate more inflation,
And the Federal Reserve as currently constituted is, in his estimation, very reasonable; therefore
The Federal Reserve must not be able to influence the inflation rate.

Assume for a moment that the governors of the Federal Reserve aren’t motivated by ideology, desire for pecuniary gain, or even the imperative to satisfy the Fed’s (conflicting) statutory obligations but primarily to increase their own repute. That the governors have, in fact, maintained or increased their repute is the underpinning of Mr. Avent’s summary of Dr. Hall’s presentation.

Doesn’t pursuing their own and the Fed’s repute including a reputation for reasonableness, competency, or even omniscience completely explain the Fed’s actions of the last dozen years without recourse to other explanations?

Mission accomplished! Neither Hall, Avent, Kling, or Duy question those things. My experience in life is that if you want to figure out what people are trying to do don’t pay any attention to what they say they’re trying to do, what they should be doing, or what you’d like them to be doing. Focus on what they actually accomplish.

I was puzzled by Henry Blodget’s complaint about his Internet service:

Four years ago, when we were three people in a loading dock, we lived on the WiFi of another startup. For obvious reasons, our Internet often went down.

Then, three years ago, we raised money, which allowed us to buy “business class” Internet service from our cable company, Time Warner Cable. And that always went down.

Then, two years ago, we raised more money and got a 15MB connection from Verizon, keeping our “Business Class” cable modem as a back-up. Whether it was the modem or the network or the router or the weather, both services often went down.

Then, a year ago, after tearing our hair out over how slow the network was, we finally bit the bullet and ordered a 50MB direct fiber connection from Verizon, keeping the cable service as backup.

Getting our 50MB fiber connection took more than six months.

He then chronicles a tale of woe that’s familiar to any Internet user: “his Internet went out”, in his case for two hours in the middle of the morning news blitz.

My knowledge of backbone architecture isn’t what it was but the way I interpret his complaint is that he’s actually complaining about two distinct problems: a service problem and a support problem and the two functions are provided by different organizations. I also note that he never lists having a T-1 in his pilgrimage for good Internet connectivity which suggests to me he’s been sold a bill of goods at one point or another.

My experience has been that Verizon shares a characteristic with the other Baby Bells, presumably inherited from their mother: they don’t play nicely with others. That doesn’t mean that you can’t get good service and support but it does mean that you should try to limit the number of players. I wonder whether it is the case that in his (presumably New York) location fiber support is provided by a third party. Henry’s organization appear to be at that difficult stage: where its needs have exceeded a T-1 but aren’t enough (or his pockets aren’t deep enough) for a T-3.

It seems to me that he should be able to get several T-1s, all from Verizon, multiplex them together, get better performance than he saw from his DSL, and maintain single vendor responsibility.

Now to what puzzles me. Let’s assume his characterization of the problem (as he got it from his provider) was accurate. The Internet protocols were specifically designed to avoid that problem. They should have routed around the problem automatically unless it was a last kilometer problem in which case the explanation of the problem was bogus. Additionally, the problems that he’s describing appear to me to violate Verizon’s SLA (service level agreement). If his description is accurate he should be eligible for a significant refund from Verizon. Perhaps someone who’s more current than I would care to comment.

Larry M. Elkin, president of Palisades Hudson, a financial planning firm, shares what he’s learned about being a good manager:

Teaching management to the rest of our team became as important as teaching taxes or investment planning. Last year, we put all our managers through seven days of intensive in-house training, covering topics such as behavioral psychology and fostering creativity, as well as traditional areas such as marketing and human resources. I helped design and teach most of our courses, but that does not make me some sort of management guru. Far from it. Running a business and making the mistakes that go with that job have shown me how much I benefit from the counsel of competent people around me. But I think I have come far enough to share some thoughts here about what management really is, and how I learned to be better at it.

What makes a good manager?

He then lists ten practices a good manager follows including the obvious (setting goals and priorities) and the, sadly, frequently overlooked (earning trust). From my own 30 years of experience as a management and technology consultant I would add an eleventh observation:

11. Good managers are rare.

Managers are human beings and, consequently, are subject to the temptations all human beings are. Some of these include:

• Doing what they like doing rather than what needs doing.
• Selecting the wrong operational model, i.e. general or emperor rather than teacher or farmer.
• Being reluctant to take responsibility. One example of this is delegating policy-making to subordinates.
• Confusing personal goals with business objectives. Example: if you’re willing to hire a spouse or child, you’ve got to be willing to fire them, too.
• Letting go at the right time.

To some degree the first and the last of those are in conflict. The most successful business I’ve ever had as a client only really began to prosper when the founder and owner, who literally began the business on his kitchen table, turned the day to day management of the business over to others and devoted himself to what he really enjoyed (and was really good at): sales.

Illinois now has the distinction of having been awarded the lowest bond rating that Moody’s has bestowed on any state:

Jan. 6 (Bloomberg) — Illinois had its general-obligation bond rating reduced by Moody’s Investors Service to A2 from A1, making it the company’s lowest-graded U.S. state.

The downgrade to the sixth-highest level came after a legislative session that “took no steps to implement lasting solutions to its severe pension under-funding or to its chronic bill payment delays,” Moody’s said in a report. Illinois, it said, has “weak management practices.”

We’re one notch lower than California. No word on whether Moody’s considers all but two of the Illinois governors of the last fifty years having been convicted of corruption as “weak management”.

This follows the sharp tax increases the state of Illinois enacted a year ago on personal and corporate income. I wonder how many times the governor and members of the legislature believe they can go to that well?

Arnold Kling makes a point about the present composition of our policy making apparatus, i.e. Congress:

If you want policies to be implemented effectively, then policy needs to be made by people who understand something about implementation. Lawyers, economists, and policy wonks have no training or experience in managing large organizations. As a result, policies are enacted without any thought given to implementation issues.

which brought to mind this analysis from Alexander Hamilton in Federalist #36:

We have seen that the result of the observations, to which the foregoing number has been principally devoted, is, that from the natural operation of the different interests and views of the various classes of the community, whether the representation of the people be more or less numerous, it will consist almost entirely of proprietors of land, of merchants, and of members of the learned professions, who will truly represent all those different interests and views. If it should be objected that we have seen other descriptions of men in the local legislatures, I answer that it is admitted there are exceptions to the rule, but not in sufficient number to influence the general complexion or character of the government. There are strong minds in every walk of life that will rise superior to the disadvantages of situation, and will command the tribute due to their merit, not only from the classes to which they particularly belong, but from the society in general. The door ought to be equally open to all; and I trust, for the credit of human nature, that we shall see examples of such vigorous plants flourishing in the soil of federal as well as of State legislation; but occasional instances of this sort will not render the reasoning founded upon the general course of things, less conclusive.

Note the order: 1) proprietors of land; 2) merchants; and 3) members of the learned professions. In the 18th century land was the foundation of most wealth with commerce coming in second and practicing a profession a distant third. Such a composition of the legislature is dramatically different from what we see now in which the greatest number of those in Congress are lawyers by training and government bureaucrats and political apparatchiks by experience.

The original envisioned composition would have two advantages. First, the policy makers would pay attention to costs since in practice they and others like them would do most of the paying. Second, these were people who had the greatest experience in actually accomplishing things (other than getting elected to office, of course).

In Matt Yglesias’s post on the December employment situation report he remarks:

If instead of subtracting 12,000 government workers from the 212,000 private ones we’d added a few thousand to keep up with population growth, then the headline number would look a lot better.

The only industries in which you’d envision the norm as adding more employees as its market grew are those that are a) labor intensive and b) produce no returns to scale.

Is government inherently labor intensive without returns to scale? Inquiring minds want to know.

Today Employment Situation Report from the Bureau of Labor Statistics certainly appears to be good news:

Nonfarm payroll employment rose by 200,000 in December, and the unemployment rate, at 8.5 percent, continued to trend down, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in transportation and warehousing, retail trade, manufacturing, health care, and mining.

Felix Salmon characterizes the report as “unmitigated good news”:

File this one under “unmitigated good news”: America’s employment situation turns out to have been rosier, at the end of 2011, than anyone had dared hope. There were 200,000 more people in work last month than there were in November, and the unemployment rate — by far the single most politically-important macroeconomic statistic — fell to 8.5%, the lowest rate in three years. All data series are noisy, of course, and we’ll surely see volatility in this one over the course of 2012. But it really does seem that there’s a bit of fire in the American belly right now, and that things are going to continue to get better over the course of this year unless and until some new crisis comes along.

I think I’ll hold off on the champagne for a bit. As noted this is a particularly noisy statistic but even more notably November’s employment numbers were revised downwards by 20% while November’s unemployment rate was revised upwards. I’ll be more enthusiastic when I see the revised numbers that are issued next month.

The labor force participation rate remains at 64%, as Bruce Krasting notes, the level it was anticipated to reach in 2025. Still, that’s better than a further decline.

Remember, folks, we’re in a recovery and it won’t go on forever.

Update

Tyler Durden looks forward to the frabjous day when the U. S. will, officially at least, have zero unemployment, the feat to be accomplished by reducing the labor participation rate to 58.5%. See the charts in his post. The labor participation rate now is where it was 30 years ago. Somehow I don’t think that people are rejoicing at the additional leisure.

In a terse statement from GMU’s Mercatus Center economist Anthony Sanders asserts that the U. S. economy has become “numb” with respect to fiscal and monetary stimulus:

“This is the aftermath of a credit bubble. Basically, the government relaxes credit (or fails to supervise) and a bubble forms and bursts. As could have been predicted, Fannie Mae and Freddie Mac, the formerly private government-sponsored enterprises, have been effectively nationalized,” Sanders said.

I’m not as convinced about his next couple of sentences:

“Credit has contracted rather severely. This is one reason why the housing market, and the national economy as a whole, have taken so long to recover.”

When the Tulip Mania, ended tulip bulbs never returned to their previous high which in today’s dollar would be in the tens of thousands for a single bulb. What had been pushing the prices ever higher was the expectation that prices would continue to rise which is very much what pushed housing prices up just a few years ago.

Consequently, I would have said that the housing market and national economy as a whole have been seriously distorted by the housing (and credit) bubble, housing prices may not return to their previous highs for decades if ever, and it will take a very long time, indeed, to wring the distortions out of the economy as a whole. The more that we prop up the housing market the long it will take for the economy to recover.“Credit has contracted rather severely. This is one reason why the housing market, and the national economy as a whole, have taken so long to recover.”

Hat tip: Glenn Reynolds