I recently discovered that someone had put my speech on, “Why Bastiat Is My Hero,” on You Tube. If interested, you may find it here.

Given the strong hints of a December beginning of interest-rate normalization in her Washington Economics Club Speech on Wednesday and her Congressional testimony yesterday, Chairman Yellen can hardly back out after today’s good jobs report. Data dependent means data dependent.

I’m all for it even though the data probably isn’t as good now as it was a few months ago in terms of momentum. Sure, we now have two months of 5% unemployment under our belts, but momentum was probably stronger earlier. The recent further increases in the dollar exchange rate, the slowing of global trade, the dicey situation many of our trading partners find themselves in, weakening exports, and, yes, signs of slowing manufacturing don’t provide the ideal backdrop for what the market apparently sees as a major tightening. My attitude: Better late than never.

I don’t get the markets lately. Whatever happened to news being priced in so that it causes hardly a ripple when expectations pan out? That pattern still makes sense to me. Yet, it seems like each new hint of the same thing has triggered further selling. Take yesterday for example. The hints yesterday in Congressional testimony were similar to the hints the day before in the speech. Yet the stock market took a big hit. Maybe yesterday belonged to Draghi rather than Yellen as he apparently disappointed. But, when the Euro soared against the dollar, which was good news on this side of the pond. We needed some dollar relief.

My take on the aftermath of the FOMC’s move on December 16 is that it will soon be seen as no big deal. After possible initial craziness, people will soon wonder what all the fuss was about. Subsequent hikes will be few and far between with the FOMC feeling the rocks to cross the river. How do I know? Janet has told us so, over and over. Plus, the real economy really is weak. There is still plenty of slack. Rising inflation remains a hunch and a hope. Academic studies which the Chairman follows closely are predicting a very low “natural rate of interest,” much lower that rates in the years preceding the financial crisis.

Of course, I could be wrong.

Given the strong hints of a December beginning of interest-rate normalization in her Washington Economics Club Speech on Wednesday and her Congressional testimony yesterday, Chairman Yellen can hardly back out after today’s good jobs report. Data dependent means data dependent.

I’m all for it even though the data probably isn’t as good now as it was a few months ago in terms of momentum. Sure, we now have two months of 5% unemployment under our belts, but momentum was probably stronger earlier. The recent further increases in the dollar exchange rate, the slowing of global trade, the dicey situation many of our trading partners find themselves in, weakening exports, and, yes, signs of slowing manufacturing don’t provide the ideal backdrop for what the market apparently sees as a major tightening. My attitude: Better late than never.

I don’t get the markets lately. Whatever happened to news being priced in so that it causes hardly a ripple when expectations pan out? That pattern still makes sense to me. Yet, it seems like each new hint of the same thing has triggered further selling. Take yesterday for example. The hints yesterday in Congressional testimony were similar to the hints the day before in the speech. Yet the stock market took a big hit. Maybe yesterday belonged to Draghi rather than Yellen as he apparently disappointed. But, when the Euro soared against the dollar, which was good news on this side of the pond. We needed some dollar relief.

My take on the aftermath of the FOMC’s move on December 16 is that it will soon be seen as no big deal. After possible initial craziness, people will soon wonder what all the fuss was about. Subsequent hikes will be few and far between with the FOMC feeling the rocks to cross the river. How do I know? Janet has told us so, over and over. Plus, the real economy really is weak. There is still plenty of slack. Rising inflation remains a hunch and a hope. Academic studies which the Chairman follows closely are predicting a very low “natural rate of interest,” much lower that rates in the years preceding the financial crisis.

Of course, I could be wrong.

As for Fed and member banks financing transportation, that makes no sense, except that the money is there. Users of the roads and bridges should pay for them through tolls or a gasoline tax dedicated to that purpose.
Furthermore, transportation should be a matter for state and local governments, which would incidentally give people greater choice in where they live and how much tax they pay.

Federal Reserve Banks earn income by providing priced services to bank customers, and more so by their pro rata share of income earned on government securities. After covering operating expenses, paying their contractual dividends to bank owners of Fed stock and adjusting their surplus account to predetermined norms, they turn their excess earnings over to the Treasury’s general fund. All taxpayers get the benefit and that benefit has grown with the size of the Fed’s portfolio during these last few years.
The first raid on the Fed came when Congress in Dodd-Frank decided to give the Consumer Financial Protection Bureau access to Fed earnings rather than go through the normal processes of Congressional appropriations. That was the proverbial foot under the tent. Here is round two. The House move was a bad move, but better than the Senate alternative.

My brush with one GAO audit in the early 1990s was maddening. The GAO was auditing the Dallas Fed’s new building program. Their big bombshell was that we had built the lobby of the new building much larger than the plans had called for. This was an easily correctable error on their part, but they had no interest in correcting it.

The GAO had added to the square foot calculation of our actual lobby the square feet on another floor that had the word lobby in its designation. Anybody walking into our lobby would realize it was a fraction of the size the GAO reported to Congress. Yet, I had to watch two U.S. senators—Senator Reid and Senator Harkin—go on national TV and lambast us for over building our lobby. The GAO made no attempt to correct the record.

This is why I cringe when politicians try to make cheap points by arguing the Fed should be audited by the GAO when it already is. The bill they are talking about would extend the GAO’s audit powers to the Fed’s monetary policy. They want individual members of Congress to be able to request a GAO audit when they don’t agree with a decision of the FOMC. Fed independence has already taken a hit in recent years. This audit bill would be its death knell.

I repeat: the Fed is already audited by the GAO.

On a later visit in 2006, in a meeting with a hedge fund group, the guy doing most of the talking leaned back in his chair and said, “You do realize, don’t you, that everybody you see here under 30-years old is an only child?” Well, we did know that to be substantially true, but hearing it so starkly took air right out of the room.

The news these past couple of days has been full of speculation (mostly doubts) about how dropping the one-child policy would affect the Chinese economy and over what time period. But that really misses the more important point that a big dose of freedom has been granted. If the Chinese leaders are worried about social unrest, this probably serves them better than good times on the Shanghai stock exchange.

But, wait. They didn’t just drop the one-child policy. The small print says they changed it to a two-child policy. Rulers gotta rule, I guess. Don’t they know that it takes 2.1 to just hold the population steady? I guess in another decade or two they can add the last one tenth of one baby. It’s called fine tuning.

I wasn’t sure I would buy the book, but I looked in the index at the bookstore. Sure enough, there were two references to me. Sold!

I’m mentioned briefly on pages 62 and 73.

Mr. Bernanke’s first FOMC meeting was on August 13, 2002, as a newly appointed Governor in the Greenspan Fed. We were in the midst of a tepid recovery (sound familiar?) from a March to November 2001 recession. During 2001, the FOMC had cut the federal funds rate from 6.5% to 1.75%, an aggressive reaction. The recovery, such as it was, was a jobless recovery. Nevertheless, Chairman Greenspan recommended no change at the August meeting, which was agreed to by the FOMC unanimously.

The economy had shown few signs of life by the time Mr. Bernanke’s second FOMC meeting rolled around in September 2002. But the federal funds rate was already at a low 1.75% and the committee discussed the potential problems of a zero bound situation if the federal funds rate approached zero. Chairman Greenspan again recommended no change, although he hedged by saying we might have to act before the next scheduled meeting.
Mr. Bernanke said on page 62 of his book, “I went along even though I had been leaning toward a rate cut.” When the vote came Governor Ned Gramlich and I dissented, arguing that we should move then. In recounting this, Mr. Bernanke said “The other dissenter was Bob McTeer of the Federal Reserve Bank of Dallas, who had earlier earned the nickname ‘The Lonesome Dove.’” More about the Lonesome Dove moniker at another time.

By the next meeting, the full FOMC adopted the Gramlich/McTeer position and cut rates. For the record, I had no idea that Governor Gramlich planned to dissent. Dissents are rarer for Fed Governors than for Fed Presidents; so, I was honored that he asked me to write the single paragraph for the minutes explaining our position.

The jobless recovery remained jobless into 2003 just ahead of the March 2003 FOMC meeting, the Labor Department reported a decline of 308,000 jobs in February alone. “‘With recoveries like this, who needs recessions!’ said Dallas Fed president Bob McTeer.” That was my page 73 reference. Two sentences in a 610 page book!

While I read the early portions of the Bernanke book for nostalgia, most people will focus on his recounting of what he and others did during the financial crisis and its aftermath and what they were thinking at the time. It is worth your time.

Even smaller annual deficits still add to the accumulated national debt, however. Gross federal debt has risen to about 103% of GDP. About 75% of that debt is held by the public or non-governmental agencies while the remainder is held by the Social Security Administration and other government agencies. The debt held by the public is the traditional way of measuring the burden of sovereign debt. The 75% estimate is up from the 60’s prior to the financial crisis and great recession.

Debt held by the public includes debt held by foreign entities, including governments. Much has been made in the past of the large quantity of treasuries held by China, and much is now being made of recent reductions in these holdings. However, rather than reflecting a loss of confidence in U.S. Treasuries, a more benign and likely explanation is that foreign dollar reserves are being used to support weakening foreign currencies, including China’s.

Budget deficits affect the economy and are affected by the economy. As economic activity weakens, certain government spending programs increase automatically and tax revenue intake slows down. The growing deficit automatically adds stimulus to the economy. In a strengthening economy the opposite tends to happen, with tax revenues growing faster and certain spending programs slowing down. Thus, to some extent, the budget balance acts as an automatic stabilizer of the economy.

However, most economic textbooks suggest not relying only on the deficit as an automatic stabilizer. Instead, they recommend deliberately increasing the deficit with tax and/or spending measures to combat a slowing economy and deliberately reducing the deficit as economic growth is restored. Ideally, deficits should be run in weak times offset by surpluses in strong time.

Fiscal policy has traditionally focused on the deficit rather than the level of debt. However, in recent years, the level of the debt has received increased attention, with higher and higher levels of debt being thought to inhibit economic activity. Certainly, as debt grows, interest payments on the debt take a larger portion of tax revenues and crowd out other government expenditures. Recently, however, the Federal Reserve’s monetary policy, by lowering interest rates over a prolonged period, have reduced the cost of servicing the growing debt. In addition to that, the Fed’s larger balance sheet caused by more Treasury security holdings, have directly reduced the burden of federal debt since Fed earnings on its holdings are repatriated to the Treasury. Some worry that those benefits will reverse when interest rates are normalized and if and when the Fed sells of its portfolio of Treasury securities.

Whatever the burden of the federal debt, it grew rapidly during the 2009-2012 period when annual deficits exceeded a trillion dollars per year. In more recent years, even though the debt has continued to rise, it has risen more slowly relative to the size of the economy, and its burden has increased little or none. It would take annual budget surpluses to reduce the debt, which are hard to come by. A more doable approach would be to take measures to stimulate economic growth and tax receipts.

To close our borders to imports, that is. And to those who think exports are okay but imports are not, and that countries who have a surplus in trade with us are “killing us,” Henry also pointed out that . . .

“To have all the ships that left each country sunk before they could reach any other country would, upon protectionist principles, be the quickest means of enriching the whole world, since all countries could then enjoy the maximum of exports with the minimum of imports.”

The Trans-Pacific Partnership trade pact is about to test the economic literacy of the American public and politicians. I’m not optimistic that it will pass because we all understand and appreciate the benefits of freer foreign trade. Henry George would probably be disappointed. It may pass, however, because the balance of lobbying power could tilt in its favor. In other word, business interests desiring better access to foreign markets may beat the protectionists. I’ll take it that way too, if necessary.

The TTP is a trade pact among 12 Pacific Rim countries: the United States, Canada, Mexico, Peru, Chile, Australia, New Zealand, Brunei, Japan, Malaysia, Singapore, and Vietnam. These countries reportedly account for about 40% of global trade. The TTP is supposed to represent the administration’s tilt toward Asia.

I haven’t read the agreement and don’t know the details. I’m pretty sure I would regard the safeguards included for labor and environmental standards as watering it down. I’d rather have my trade pacts neat, but in this day and age I understand that won’t happen.

My limited purpose here is to arm the good guys who favor freer trade with some ammunition against specious arguments we’ll be hearing against it.

The main argument proponents use against freer trade is that it will cost jobs. Will it? Yes, of course some jobs will be lost as imports substitute for domestic production. But just as many jobs will likely be gained as exports expand. There will be job losses, but not necessarily net job losses.

This offsetting of job losses with job gains doesn’t just depend on luck. Automatic economic mechanisms will produce that outcome. When we import more, the exporting countries earn more dollars with which to purchase imports from us. If they don’t, on a multilateral basis, the dollar will depreciate against foreign currencies and make our imports more costly in dollars and our exports cheaper in foreign currencies. Flexible exchange rates tend to promote balance between our job creating exports and job killing imports. You can’t import without exporting an equivalent value over time. You can’t export without importing an equivalent value over time.

The problem is that job losses from imports or movement of production abroad are visible and easily identifiable. The job gains from exports or import substitution are less so. It’s the old seen versus the unseen problem.

So far I’ve concentrated on the jobs question. On production. We should not forget that exports are the cost of trade while imports are the benefits of trade. We are all consumers and we all benefit when output expands because of increased trade, just as we benefit when new technology increases production. All the focus in political debates is on the producer and jobs. Some of us make a living by producing something that is exported. All of us benefit from more plentiful imports.

Speaking of debates, ‘they are killing us’ usually refers to countries that have a trade surplus with us. I guess for us to kill them we have to have the surplus. This is silly.

I have a deficit with just about everybody I deal with. I buy food at the grocery store, gasoline at my local service station, get hair cuts from my barber. I have a deficit in trade with all of them because I don’t sell them anything. I have a surplus with a couple of firms I sell my services to, witch, so far, covers my deficits. My balance of trade is multilateral, not bilateral.

It’s the same with countries. We don’t have to match our purchases from each country with sales to the same country. Our surplus with some covers our deficits with others. The fact that we’ve had a trade deficit for several years covered by a surplus in capital flows does not change the principles. In the first place, its a fairly stable deficit. But, more importantly, The various balancing mechanisms, including exchange rates discussed earlier, work on the capital accounts as well. A deficit or a surplus tend to bring about their own cures over time.

Consider trade between the citizens of Texas and the citizens of California, or any other state. Since we don’t keep the records, we don’t know which has a deficit and which has a surplus. But we can be confident that corrective forces are at work, automatically, without policy intervention.

The two quotes from Henry George are devastating to the protectionist argument. However, the most famous argument against protectionism came from my hero, Frederick Bastiat, who fought the free-trade battles in France in the mid-1800s. He used wit and sarcasm to make his case. He wrote a fictitious letter to the French Parliament on behalf of the French candlemakers arguing forcefully for the shutting out of the sunlight from houses to sustain the prosperity of the candlemakers. The sunlight was, after all, unfair competition. All they wanted was a level playing field.

The unemployment rate held steady at 5.1% in September, but by now everyone understands that this low number is enabled by a low and still falling labor force participation rate. 350,000 labor force drop-outs in September dropped the civilian labor force participation rate to 62.4%, the lowest since 1977, from 62.6% the previous 2 months. The employment to population ratio fell to 59.2%. All the numbers in this post are from the official report of The Bureau of Labor Statistics.

Another sign of weakness in September was a small drop in the average workweek and flat earnings. The average for all employees on private nonfarm payrolls declined by 0.1 hour to 34.5 hours while the manufacturing workweek declined by 0.2 hour to 40.6 hours. Overtime declined by 0.2 hour to 3.1 hours. Average hourly earnings for all employees on private nonfarm payrolls declined by a penny to $25.09 after rising 9 cents in August. Hourly earnings have increase by 2.2% over the past 12 months, which hasn’t changed much lately and which Chairman Yellen considers inadequate.

Before the September employment report, I thought there was a good chance that the FOMC would lift off at its next meeting on October 27-28. With no new employment report due before then and with a weak advance GDP report for the 3rd quarter expected on October 29, that seems impossible now. Furthermore, December 15-16 also seems much less likely since there will be only one new employment report due before then. Some have argued that this weak report vindicates the FOMC’s non action in September. Maybe so, but one could also argue that they missed an opportunity they should have taken even if these numbers were pending. As they say in Texas, you can argue it round and you can argue it square.