Saturday, October 21, 2017

A tale of two tales



... mathematical models must begin with precise assumptions about economic activity. In great measure, the conclusions and insights offered by the model are restricted or even determined by the initial assumptions.


At HBR: The Great Recession Drastically Changed the Skills Employers Want. Shown here on a light-blue background:

The employment shift from occupations that require mid-level skills toward those at the high and low ends is one of the most important trends in the U.S. labor market over the past 30 years.
"The past 30 years". That brings us back to 1987. Or, say, to the 1980s.

Since the 1980s, some people say, our anti-inflation policy has been to suppress wages. If that is true, then maybe that policy explains the trend the article describes. That, and globalization policy.
Previous research has suggested that a primary driver of this job polarization is something called routine-biased technological change (RBTC), an unfortunate mouthful whereby new technologies substitute for repetitive, middle-skill jobs and complement analytical, high-skill jobs. Think of word processors replacing typists or engineers using AutoCAD software.
Here's a peek at labor income since the Great Depression:

Graph #1
Flat in the 1970s. Trending downward since.

Maybe the Fed is responsible for the decline. Maybe not. Either way, with labor income trending down there is going to be more competition for that particular share of income. But the HBR article manages to tell its story without even noticing the decline of labor income.
Until recently, economists thought of this trend as a gradual phenomenon that didn’t depend much on the ups and downs of the economy.

However, studies dating back to Joseph Schumpeter’s coinage of the term “creative destruction” suggest that adjustments to technological change may be more episodic. In boom times, companies may face adjustment costs that deter them from adapting to technological change. Recessions, in contrast, can produce large enough shocks to overcome these frictions.
A recession is a disturbance in the Force. Recession provides an opportunity for the economy to reorganize itself in response to the pressures created by declining labor income and its consequences.
Whether adjustments to new technology are gradual or sudden is important for policy and for our understanding of economic recoveries.
Note that the article attributes the "employment shift" of the past 30 years to "new technology". Not to the decline of labor income.
The recoveries from the last three U.S. recessions (1991, 2001, 2007–09) have been jobless, meaning that employment was slow to rebound despite recovery in total economic output. If adjustment to new technology is sudden and concentrated in downturns, large numbers of displaced workers may be left with the wrong skills as the economy recovers.
Note that the article attributes the employment shift to new technology, observes that employment shift occurs "in downturns" and recoveries have been "jobless", then makes up a story to explain jobless recoveries, a story based on "new technology". Not on the decline of labor income.

There is more to the article, and they make a good case. And I would not deny that their story makes sense. But I wonder how things might have gone differently if labor income was not in decline for the last thirty-odd years, or if it had continued to increase. And I wonder how their story might have changed, if they had considered declining labor income in the article.

Friday, October 20, 2017

Rethinking the same damn thought


Noah Smith at Bloomberg, same post we looked at yesterday. Noah writes

... economists have known for decades that recessions might not be random, short-lived events, but the idea always remained on the fringes. One big reason was simple mathematical convenience -- models where recessions are like rainstorms, arriving and departing on their own, are mathematically a lot easier to work with.
"Recessions are like rainstorms". Nice alliteration. The phrase reminds me of something I read in The Roaring 80s:

... in the Great Depression, economists wrote about unemployment as if it were a bad hailstorm; then the Keynesian revolution gave some hope that nations could do something about the 'economic blizzards' that had previously been considered as random as the weather.

According to Noah, we're back to random as the weather.
... easier to work with. A second was data availability -- unlike in geology, where we can draw on Earth’s whole history, reliable macroeconomic data goes back less than a century. If economic fluctuations really do have long-lasting effects, it will be very hard to identify those patterns from just a few decades’ worth of history.

Skipping ahead a couple paragraphs:

If the only tools available were the ones that prevailed in 2007, it might be best for economists to simply throw up their hands and declare that the problem of spotting, preventing and fighting recessions is best left to our distant descendants.

But fortunately, this isn't the case. New tools are available that could help shed some light on the processes behind recessions. Now that almost all economic activity is electronically recorded, economists are able to observe much more about the behavior of businesses and consumers than they were even a decade ago.
Notice Noah's implicit assumption that recessions must be the result of people's behavior but general changes in people's behavior cannot be the result of changed aggregate quantities like private debt becoming excessive or financial cost reaching a problematic level.
Better microeconomic data will help researchers make better models of behavior. Those more realistic models -- sometimes called “microfoundations” -- will then be able to replace the old, simplistic assumptions that prevailed in previous generations of macroeconomic theories.

Now that almost all economic activity is electronically recorded, researchers can make better, more realistic models of behavior.

So now it's behavioral microfoundations.

The microfoundations will be better, Noah says, and so the macro will be better. Because everybody knows that what happens in the economy happens because of people's behavior.

What ever happened to the whole is greater than the sum of its parts ?


Remember Milton Friedman's best-remembered thought: Inflation is a monetary phenomenon. If prices are going up, it is because people are willing to pay higher prices for things. So there is behavior involved, to be sure. But if there was no behavior, there would be no transaction and no economy. If you are studying the economy, you are already studying behavior.

The results of behavior show up in the aggregates.

Friedman said that what matters is the quantity of money. That's macro. He did not say what matters is the behavior of the individual spenders. That would have been micro.

After 2007 the Federal Reserve increased the quantity of money several hundred percent. But ten years later, inflation still has not broken the 2% barrier. Was Friedman wrong? I'd say no. I'd say his statement was not general enough. It describes conditions in a "normal" economy, but not the economy of the last ten years.

You could say inflation is a spending phenomenon. You could say it is the spending that influences prices, not the money. I've said as much, myself. And then you could argue that spending is behavior and therefore the need is to focus on behavioral microfoundations. Here, my inclination is different. If spending behavior suddenly changes for the population as a whole, I expect to find the cause in the aggregates. Why? Because people respond to economic conditions, and the aggregate numbers describe economic conditions.

Aggregates are macro. Behavior is not. Behavior is the Brownian motion of gas molecules in a container. Macro is the behavior of a container of gas, measurable conditions like pressure and temperature that do not even apply to individual molecules. Boyle's law is macro.


We go shopping, or we don't. We spend money, or we don't. Only a fool would dispute that. But to insist on building up macro from scraps of human behavior is just so micro, so utterly small-minded. And to suggest that macro can be improved by including "all" the scraps of human behavior in the models, well that is plain ridiculous.

Nor is "all the scraps" a re-evaluation of what economists have been thinking for the past 40 years. It is, rather, a strengthening of commitment to the old "some scraps" idea. Using a more advanced technology to think the same old thought is not a way to rethink macroeconomic policy.

Thursday, October 19, 2017

"Rethinking" vs "shoehorning"


At Bloomberg, Noah Smith's Fixing Macroeconomics Will Be Really Hard jumps around so much on my screen that I'm tempted not to read it. Good subtitle, though: "The field is still reckoning with the failure to see the Great Recession coming."

Noah's article considers the same "Rethinking" symposium that Carola Binder went to and wrote about, which was grist for my mill yesterday. Noah writes:

A presentation by Blanchard and Summers provides a useful summary of how elite thinking has changed. They basically draw three lessons from the crisis: 1) the financial industry matters, 2) government should use a wider array of policies to fight recessions, and 3) recessions can last longer than expected.

Here's my response list:
1. financial cost matters
2. government would do better to focus on observing the causes of recessions, and
3. oh my god, are you kidding me?

Noah also comments on the items on his list. Here's what he says about finance:

In the past few years, macroeconomists have been scrambling to shoehorn the financial sector into their standard models. Of course, there’s always the danger that the Great Recession prompts macroeconomists to focus too much on finance, and ignore whatever leads to the next downturn -- fighting the last war, as it were.

Shoehorn as a verb.

I don't like it that Noah buries the "focusing too much on finance" idea between "fighting the last war" and "of course". The burial minimizes the significance of finance's contribution to the problem.

Beyond that, Noah Smith's thought that economists might "focus too much on finance" tells me Noah has no idea why it's important to focus on finance. Noah and other economists. They know it must be important, because that's what the chatter's been since the "financial" crisis. So they'll "shoehorn" finance in, and it'll look like they have everything under control.

And if they are "shoehorning" finance into their models, then I'd say they are thinking about their models, when really they should be thinking about the economy.

It just won't do.

Wednesday, October 18, 2017

Rethinking


In Rethinking Macroeconomic Policy at Quantitative Ease, Carola Binder asks the key question:

"How could we replace or transform the existing modes of analysis?"


Three policy challenges that Binder identifies in the article:

 • Low inflation and low nominal interest rates limit the scope of monetary policy in recessions
 • “Should policymakers care whether inequality is helpful or harmful for growth?”
 • Stabilization policy [is] disconnected from the ... discussion of inequality and growth

These are current issues: low inflation and low interest rates; inequality; economic growth; and stabilization (by which I assume they mean avoiding the next Great Recession). It looks to me like all these economists at all these conferences are caught up in the current problems of policy.

It seems right that economists should be concerned with current problems because we are concerned with those current problems. But maybe it isn't right. Maybe economists ought to be concerned instead with the historical processes that led to the current problems. Rather than trying to come up with ways to move beyond current problems, they should focus on understanding the original sources of those problems.

That would "transform the existing modes of analysis".

Sunday, October 15, 2017

Notes for David Graeber's Public Inquiry


At the New Statesman: We're racing towards another private debt crisis – so why did no one see it coming? by David Graeber.

Graeber's article is presented below on light blue background; my responses are on the parchment.


This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy.
Three sentences in, Graeber is already predicting disaster!
...to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous.
I won't be attending that impartial forum. But I have some thoughts you might bring up when you go. First: We need to know what the problem really is before we can really solve it. So the most important thing is to get the analysis right.
The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.
An inverse relation?

I agree with Graeber that private debt, not public debt, is the problem. I agree the crash happened "because of dangerously high levels of private debt" (though I would omit the word "dangerously" since the danger is obvious from the context). And I'm not sure he means to call public debt the "exact opposite" of private debt, but I agree these two types of debt affect the economy in different ways.

But an inverse relation? No. Recently I showed this graph:

Graph #1: Public (blue) and Private (red) Debt relative to GDP, 1834-2011
Source Data from Steve Keen's XLSX file from 2013
Public debt and private debt do sometimes move in opposite directions. There is sometimes inverse movement, we could say. But that is not a "relation". A relation is consistent.

And even if a thing is true, it may not be particularly significant. It's true that public and private debt sometimes move in opposite directions. That fact in itself is barely interesting, and not significant.

As I've said before, what's really significant about the movement of public and private debt (relative to GDP) is that when we have private debt rising while public debt is falling, we have an exceptionally good economy.

Bring that up at the Public Inquiry.
If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008.
Source: Wikipedia
That's not true. Graeber presents it like a General Principle but it's just not true. The public sector did not "reduce its debt" in the years leading up to 2008. In those years -- lets say since 2001, because before that the trend was different -- in those years, UK public debt increased from about 30 to about 38 percent of GDP.

Source: ukpublicspending.co.uk
Now ignore GDP. Look at the UK public debt in pounds, billions of pounds. There was a steady, gradual increase in public debt from 2001 to 2008.

Again, increase. The public sector did not reduce its debt in the years leading up to 2008. David Graeber is incorrect when he says it did.
As for the idea that private debt goes up when public debt goes down, well, private debt always goes up. Until you get a crisis like the Great Depression or the Great Recession, private debt always goes up. That's the problem. And it has nothing to do with public debt going up or going down.[1]  Private debt goes up because policymakers think the use of credit is good for growth, and they set policy accordingly.

Oh, and they say private debt isn't a problem. The use of credit creates debt, so the policies that encourage private use of credit also encourage growth of private debt. Policymakers don't see that as a problem. That's why private debt always goes up until you get a crisis.

Bring that up at the Public Inquiry.

Where this idea comes from that "overall private sector debt [only] goes up" when "the public sector reduces its debt," I don't know. But it is most assuredly wrong.
... That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.
David Graeber makes an incorrect generalization about the behavior of public and private debt, and treats it as a General Principle. His prediction of "another catastrophe" is based on the flawed generalization.

Don't bring that up at the Public Inquiry.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017.

This is what the OBR was projecting what would happen around now back in 2015:


This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:


Yeah, no. These graphs do not "show the relationship between public and private debt." They don't show debt at all; they show deficits. Deficits and surpluses. The graphs show quarterly changes, not the cumulative totals that comprise debt. That's why these graphs show the numbers getting smaller since around 2009.

I didn't know. I don't do sectoral balance stuff. I looked into it because if the numbers are getting smaller, it can't be debt.

Oh, and the graphs don't show the relationship between public and private debt. The graphs show four sectors, not two: public and household and corporate and foreign. And the graphs don't really show relationships. They show four separate sets of data. To see a relationship you would divide one of them by another, or like that.

Well, I take that back. I think these must be "stacked" graphs. For each quarter, the stuff that's greater than zero is piled up and compared to the stuff that's less than zero. And, for any quarter, the stuff that's greater than zero is equal to the stuff that's less than zero; that's the whole point of the graph. For each date, the bars below zero are the same height as the bars above zero. That's what creates the symmetry.

But symmetry is really all these graphs show.
First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”
"First," he says, "notice how both diagrams are symmetrical." Like that was the most important thing. It's not. The symmetry is of no great consequence. I mean, would you be shocked to discover that when you buy something, the amount you pay is equal to the amount the cashier receives from you?

All the money spent is equal to all the money received. All the money borrowed is equal to all the money lent. These things are not shocking. These are the simplest things. It's how transactions work. It would be shocking if the graphs didn't show it.[2]  Don't be duped by the symmetry visible on Graeber's graphs.


Next, Mr. Graeber provides examples to show that the amount of money involved in a transaction is the same amount for the one party as it is for the other. Two examples, which he puts on a pedestal called the ledger sheet:
As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram.

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).
Graeber expects you to be shocked and impressed by the symmetry in this. I expect you to know better.

Graeber is right when he says "in any ledger sheet, credits and debits have to match." Credits and debits have to match. That is the way accounting is done. And that is where the symmetry comes from.

Nifty. The symmetry is nifty. It may be shocking, if you didn't know. It may even be impressive. But it is not significant. Don't be misguided by nifty.

The amount you pay the cashier is equal to the amount the cashier receives from you. Actually, it's not even nifty. It's just ordinary.


Graeber next launches a generalization from the ledger-sheet pedestal, but it reaches an unsupportable conclusion:
So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.
Everyone else has to go into debt because government is in surplus? That's not true. You can have government and foreign in surplus, while household and corporate are in deficit. You can have government and household in surplus, while corporate and foreign are in deficit. You can have government and corporate in surplus, while foreign and household are in deficit. You can have government and household and corporate in surplus. Or government and corporate and foreign. Or you can have government and foreign and household in surplus -- and this you can actually see in the first two years shown on Graeber's graphs.

None of this stuff happens because of "accounting identities". It happens because of spending decisions people make. It shows up on the graphs because of the rules of accounting.

You cannot say "if the government goes into surplus, then everyone else has to go into debt." The statement is a caricature of thought. It is not true. Don't bring it up at the Public Inquiry.
We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)
There you go. That's a good paragraph, except for the silly stuff about the magic money tree. But yeah, I used to think of money as "already lying around". Back in 1976 I wrote "there is just as much money in circulation as ever there was." Like Graeber's poker chips. And I was dead wrong.

That is a good paragraph from David Graeber. Bring it up.
There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.
Oh, and things were going so well! Graeber is wrong when he says "the less the government is in debt, the more everyone else must be." That's "the real point" of the paragraph, he says. But it is wrong.

Graeber's in good company. Milton Friedman made a similar mistake. In Chapter 9 of Friedman's book Free to Choose we find a little story about building roads:

Financing government spending by increasing the quantity of money looks like magic, like getting something for nothing. To take a simple example, government builds a road, paying for the expenses incurred with newly printed Federal Reserve Notes. It looks as if everybody is better off. The workers who build the road get their pay and can buy food, clothing, and housing with it. Nobody has paid higher taxes. Yet there is now a road where there was none before. Who has paid for it?

The answer is that all holders of money have paid for the road. The extra money raises prices when it is used to induce the workers to build the road instead of engage in some other productive activity...

Milton Friedman is famous for his view that inflation is driven by "the quantity of money relative to output." But in order to make his road-building example work, Friedman assumes the size of the economy is a given. He ignores the normal expectation that output will grow. And he ignores the common sense that says the expansion of infrastructure encourages economic growth.

In order to make his road-building example work, Friedman has to assume zero growth of output. Why? Because according to his own famous phrase, if output grows then an increase in the quantity of money is justifiable and need not lead to inflation.

Friedman assumes zero growth of output. Graeber's mistake is similar. Graeber assumes zero change in total debt, so that government debt can only be reduced when some other sector increases its debt.

He overlooks the possibility that total debt could be reduced. To be sure, this is an understandable error because total debt never is reduced. But total debt is never reduced because policymakers think using credit is good for growth and private debt is never a problem. Debt could easily be reduced if policymakers were open to the idea of reducing it.

Bring that up.

Set aside those policymakers' principles, and reducing debt becomes possible. Reducing debt becomes a way that allows us to reduce government debt without an increase in household, corporate, or foreign debt. In other words, Graeber's "real point" is not necessarily true. There is a way around it.

Bring that up.

But because of the way the economy works, it would be better to give priority to reducing household and corporate and foreign debt. When those reductions bring true vigor back to the private economy, government debt will fall effortlessly.

Bring that up.
Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.
"In reality," he says, "debt is money."

In reality, debt and money are created at the same time (and in the same amount) when you take out a loan. The money gets put into your checking account or someplace where you can spend it, and it is soon gone. The debt sticks with you, and you pay it off gradually over time.

How can anybody in their right mind say debt is money? Debt is not money. Debt is the obligation you take on when you borrow money. Everybody knows that. So do me a favor and don't say debt is money. You're killing me with that stuff.
But of course debt has to be owed to someone. These charts show who owes what to whom.
"Of course" debt is owed to someone. And money isn't. That's the point. Debt and money are different. So, don't say debt is money. The thought is incomplete, and therefore incorrect.

Graeber says his charts show "who owes what to whom." They don't. The charts show who borrowed how much from whom in each period, net. The charts show surpluses and deficits. They do not show debt, so they don't show who owes what to whom.

Graeber is really not very good with graphs. Keep that in mind at the Inquiry.

Come to think of it, at the start of the article Graeber says "The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically)." And at the end of the article he says "And remember: it was a mortgage crisis that set off the 2008 crash". Graeber's focus is debt, dangerously high levels of debt.

He has the right focus. But his graphs show the symmetry of surplus and deficit. The symmetry and the declining levels of surplus and deficit. His graphs are unrelated to his focus. His graphs are irrelevant.

The symmetry may be striking, but the graphs are not relevant. Don't bring that up, but do keep it in mind.

Graeber's article includes two more sections and several more paragraphs. I have no remarks on that part of the article, except to quote this, which is very good:

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

Bring that up at the Public Inquiry, too.

//

Notes

1.
It is true that by increasing at a more rapid rate, public debt can solve some of the problems created by excessive private debt. But this does not mean insufficient growth of public debt is the cause of those problems. The cause is dangerously high levels of private debt, as Graeber correctly says.  Return


2.
Indeed, the second graph fails to show symmetry, suggesting an error. As Graeber describes it: "the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up."  Return

Thursday, October 12, 2017

"moved, steered, and in some cases manipulated"


At Mercatus, Nudge Theory in Action. It's a one-paragraph blurb for a new book on one aspect of behavioral econ, plus the Table of Contents, plus a link to the foreword by Tyler Cowen (PDF).

It's an advertisement. It's a nudge.

I went to the PDF.

"The issues surrounding 'Nudge' are some of the most important in all of economics" Cowen writes. "The simplest models of economics take preferences as given, but nudge ideas suggest that we can be moved, steered, and in some cases manipulated."

Oh that's new.

When I took macro in 1977, I was taught that there are two major types of economies: command economies, and those guided by economic incentives. "Incentives" was the good one and (not coincidentally) the one we have. The commies had command economies.

More recently I've seen people complain about the ineffectiveness of our approach. Oh, sure, command economies can be much better at getting you to do what they want you to do. If you like that kind of effectiveness. But I prefer incentives: Give me a tax break for doing what you want me to do. I'll get there eventually.

Incentives are compatible with the market economy, if that matters to you; command is not.

When it comes to policy, I prefer incentives. But when it comes to what brand I smoke and what I eat and what I wear and where I live, I prefer to be left alone.

But that's just me.

"The simplest models of economics take preferences as given," Cowen writes, "but nudge ideas suggest that we can be moved, steered, and in some cases manipulated."

Cowen:
Should we be more suspicious of private sector nudge or public sector nudge?

I am myself never quite sure how to answer the above question. On one hand, I fear the greater competency of private sector nudge. I know that a talented team of marketers is working overtime to try to get me to buy the product, take out a loan, or participate in a charitable cause ...

"A lot of this nudging is good for me," he adds. Fuck that.

Private sector nudge is highly problematic, and I would say it is often worst in those areas we tend to feel best about: health care, education, and charity. In those cases, our guard is most likely to be let down, even if we are highly educated. Or should I say because we are educated?

What about public sector nudge? Well, the good news is that a lot of what government does is simply send money around through transfer programs. In this regard, its potential for manipulating us is fairly limited.

That last part I don't buy at all. The potential for manipulating people is limited because they use transfer programs? If I'm a poor starving waif surviving on government handouts, I have no incentive to kiss government ass? I have more incentive, more likely.

Furthermore, government is extremely bureaucratic and usually it does not have top tier marketing talent. Most of the time I just don’t find my government very persuasive. Is there really anything the DMV can talk me into that I wouldn’t otherwise want to do?

But can I then relax? Can I stop worrying about public sector nudge? I am not so sure...

War, he says. Government nudges us into war.

Government also has nudged us into believing that more government regulation is the answer to many of our problems.

Cowen is not doing a neutral evaluation here. He's got preferences, and his evaluation is based on them. But I think Cowen's preferences show that he has more to fear of manipulation from anti-government forces than from government.

"Finally," Cowen writes,
I worry about how private sector and public sector nudge interact... The problem, in broadest terms, is that the public sector often piggybacks upon the marketing efforts of the private sector. The private sector marketing, taken alone, probably would be far less harmful, but it can be combined with the coercive powers of the public sector.

With anti-government attitudes so common these days, I suggest that private sector nudges are far more effective than public sector nudges.

And what is this crap about "the coercive powers of the public sector"? I thought we were talking about nudging. Incentives, remember? Not the command economy. Did you lose focus, Cowen?

Or are you trying to nudge me.

Wednesday, October 11, 2017

Recommended reading on UBI


When an idea like Universal Basic Income (UBI) comes along, offered as a bold and innovative solution to a whole set of economic problems, it tends to find strong and growing support.

This guy raises an interesting point: Universal Basic Income and the Threat of Tyranny by Shai Shapira, at Quillette.

Recommended reading.

Tuesday, October 10, 2017

"Your thoughts and concerns are very important to me"


I'm old enough to know better. But more and more, I'm hearing talk of scrapping the mortgage interest deduction. I had to say something. So I wrote my senator.

I wrote
Don't give up the tax deduction for mortgage interest without getting something in return. Trade it for a new system of tax credits designed to encourage the repayment of debt. To ease the transition, design the new system to keep the tax benefit about the same as the old system. The amount of tax benefit can be changed gradually, later.

The macroeconomic problem with the mortgage deduction is that "the largest effect of the mortgage deduction is on household financial decisions, inducing them to increase indebtedness" -- NBER Working Paper No. 23600
http://www.nber.org/papers/w23600

The new system will encourage people to decrease indebtedness.

Three minutes later, I received a response from my senator:
Thank you for contacting my office. Your thoughts and concerns are very important to me and you will receive a more detailed response shortly. I sincerely appreciate your patience in waiting for this response, as our mail volume is often significant.

If this is a request for assistance with a federal agency or an immigration case, please contact ...

That was on 29 September. I'm still waiting for the more detailed response.

Friday, October 6, 2017

SNAFU


Milton Friedman said "Inflation is always and everywhere a monetary phenomenon". He did not say inflation is only a monetary phenomenon. He did not say the increase of money is the only force at work.

People assume that the increase of money is the only force at work. But Friedman didn't say that. People assume that if there is inflation you can clamp down on the money and inflation will go away, and everything is better and nothing is worse by it. But what if there was some other force at work?

What if there was a situation which, to be resolved, requires increase in the quantity of money? By clamping down on the money we could make the inflation go away. But that would likely make the other situation worse, the one that requires monetary increase.


Paul Volcker, saying "the inflation process is ultimately related to excessive growth in money and credit", ignored any possible situation that might require increase in the quantity of money.

Paul Krugman, saying "Any attempt to tell a story about inflationary risks that does not explain where excess demand for goods comes in is, necessarily, monetary mumbo-jumbo", ignored any possible situation that might require increase in the quantity of money.

Bill Mitchell, writing of the government "taking a dollar" from people to "manage total spending" in order to avoid going "beyond the inflation barrier", ignores any possible situation that might require increase in the quantity of money.

Scott Sumner, who says "It's kind of scary when top Fed officials have forgotten that inflation is a monetary phenomenon", ignores any possible situation that might require increase in the quantity of money.


A large accumulation of debt requires a large debt service and drains a large quantity of money from circulation. To maintain a given volume of spending, an increase in the quantity of money is required. Inadequate increase leads to stagnation. As debt grows larger, this situation grows worse.

Thursday, October 5, 2017

Hurricanes on Ice


I want to take a few planeloads of dry ice and dump it into the Atlantic in the path of a hurricane that is just starting to form. Maybe lowering the temperature of the water in the region would kill off the storm before it gets going.

Wednesday, October 4, 2017

"The core of economics is that people respond to incentives ..."


Dietrich Vollrath considers why tax cuts don't boost growth, and reaches this conclusion:
... you could make the argument that if you want to raise GDP it would be ideal to raise taxes on financial transactions (a la the Tobin tax) to reduce the incentives to do those type 4 transactions, but lower taxes on type 1 transactions dealing with the provision of real inputs ...

Tuesday, October 3, 2017

Hicks, Friedman, and the "economic environment"


At Amazon: The Optimum Quantity of Money (Revised Edition) by Milton Friedman. Under Editorial Reviews for the book there are some quotes, including this one from J. R. Hicks:

Economists are much better at defining what should be done to maintain an equilibrium than at devising means of recovering it when it is lost. It is the former question, not the latter, on which Friedman’s historical researches may well throw some light.

It's almost like an insult: Yes, Friedman is pretty good at the thing most economists are pretty good at, but he's not so good at the important stuff.

So I had a good laugh at that. But look at that first sentence again:

Economists are much better at defining what should be done to maintain an equilibrium than at devising means of recovering it when it is lost.

What I want to ask is: What causes the equilibrium to be lost?

You'll find the answer in the same sentence: It's the "defining what should be done" during the equilibrium that causes the equilibrium to be lost.

It's the things economists do when they're not in trouble yet, that get them into trouble.

I've said as much before.


September 23, 2015, Identifying the economic environment:

Back after the end of World War Two, the government had a lot of debt and the private sector didn't. What with reduced output during the Depression and rationing during the war, after the war people were ready to spend some, even to go into debt.

And then, because people didn't already have a lot of debt, it wasn't a problem when they did accumulate a little debt. The economy wasn't dragged down by the cost of debt so much as it was buoyed by the spending of borrowed money.

The economic environment, in other words, was conducive to economic growth. And growth was good.

In that environment, you could put idiots in charge and the economy would still be good.


August 19, 2017: Agreeing with Christopher Snyder, who said "a bad economy can feed back to make beneficial policies look damaging." My thought:

Yeah, exactly, and that's very important. There is another version of the same idea: A good economy can make any policy (good or bad) look good.


Times like the "Great Moderation" and the "Golden Age" that followed World War Two are taken by economists of the time as evidence of their own ability to make great policy. In reality, such times are evidence of the economic environment and of its predominance over policy. It takes decades for policy to destroy equilibrium.

Monday, October 2, 2017

"It isn't bringing the public debt down that makes the economy grow. It is the vigorous economy that brings the public debt down"


In yesterday's discussion, red was private debt; blue was public debt.

Yesterday's conclusion:
Red line rising, blue line falling, growth is good. That's why some people say we must get the blue line down, get the Federal debt and deficits under control and bring them down. That's backwards, though. It isn't bringing the blue line down that makes the economy grow. It is the vigorous economy that brings the blue line down even though the public debt is actually increasing. The vigorous economy grows faster than government debt, and that's what brings the blue line down.

I don't like to make naked announcements like that. Facts are facts, but you never know. So I always like to look at the data, make sure I got it right, and show my work.

It is the vigorous economy that brings the blue line down even though the public debt is actually increasing. The vigorous economy grows faster than government debt, and that's what brings the blue line down.

1. On yesterday's graph 3, the blue line was going down from 1948 to 1978, dates approximate. That is the period examined here.

2. The public debt was actually increasing during the 1948-1978 period:

Graph #1: Gross Federal Debt in Billions (1948-1978 in Red Box)
Yup. Increasing.

3. The economy grew faster than the government debt:

Graph #2: GDP Growth Rate minus Federal Debt Growth Rate (1948-1978 in Red Box)
Yup. The blue line is above zero when GDP growth is faster than Federal debt growth. The blue is below zero when GDP growth is slower. And the blue line is at zero when  the two are equal.

The blue line is above zero for almost the whole 1948-1978 period. So we know that GDP growth was almost always faster than Federal debt growth during that period.

Yup. The economy grew faster than the government debt.

4. Yes, it is the vigorous economy that brings the blue line down even though the public debt was actually increasing in the 1948-1978 period.

So as I said yesterday: The vigorous economy grows faster than government debt, and that's what brings the blue line down. The people who act as though the fate of the world depends on cutting Federal spending, those people are wrong.

Maybe now we can move on to the actual problem?

Sunday, October 1, 2017

Look, it's early in the morning yet


It's early in the morning and I have not had my coffee yet but I found something interesting, so here we are. I need you to look at it with eyes that are not wide awake. I don't want you to notice, for example, that the one graph isn't even for the same country as the others. Just go for the interesting stuff. Spit the rest into your napkin, and don't show me.

I found a graph just now at Stumbling and Mumbling. A graph of productivity in the UK since 1800:

Graph #1: Moving 20-Year Average, UK Productivity since 1800
Source: Chris Dillow
There's a peak around 1870, and a peak around 1970.

Dillow's graph reminded me of something, and I went looking. Back in April I showed this graph from bawerk.net:

Graph #2, Source: BAWERK.NET

The GDP growth trend (red) reaches a high point around 1870, and another around 1970. Same dates as Chris Dillow's graph. Ain't that neat?

The blue line on this graph shows total (public plus private) debt relative to GDP. Since the red line serves as the denominator for calculating the blue, you would expect to see the general shape of the red line inverted in the resulting blue line. So we don't need to be impressed by the mirror-oppositeness of the red and blue on Graph #2. I'm okay with that. But GDP growth (red) does reach a high point around 1870 and another around 1970.

These high points mark ends of trends of good growth. On #1 they mark ends of trends of productivity improvement. Those things fit together. (Yes, the trends are very broad-brush. Spit that into your napkin.)

In my April post I also showed this graph, based on data from Steve Keen:

Graph #3: Public (blue) and Private (red) Debt relative to GDP, 1834-2011
Source Data from Steve Keen's XLSX file from 2013
Like the second graph, this one starts in 1834. Like the blue line on Graph #2, on #3 we look at debt relative to GDP. So we should expect to see some similarity of shape between the smoothed lines here and the smoothed line on #2. We do.

But here we take the total debt of Graph #2 and split into public and private components. We see the two halves move in different ways. The blue line (public debt to GDP) tends to crest at just about the same time the red line (private debt to GDP) reaches a trough or low point.

I should say, though, that it's not quite right to call these components "halves" of debt. That word implies they are equal in size. They are almost never equal in size. They are close to equal only when the red and blue lines are close to touching on Graph #3: around 1866, and again for a few years around 1946. After the Civil War, and again for a few years after the Second World War. Private debt is ordinarily somewhat larger or much larger than public debt. That is why the red line generally runs well above the blue.

Look at the more familiar of the two "near equal" periods, the more recent one, 1946. We had a very good economy from 1947 to 1973 or so, a "golden age". During that golden age, private debt (relative to GDP) climbed upward. Public debt (relative to GDP) fell consistently. Only as the golden age came to an end did the public debt decline slow, flatten, and turn to increase.

That increase has been thrown in our faces every day since, and held to be the cause of hard times.

Myself, I look higher on the graph, where the red line went up all during the decline of public debt, all during the flattening and the upward turn of public debt, and ever since. I say that if the increase in debt is a problem, then let us not forget about private debt. But that's just me.

Meanwhile, "red line rising while blue line falls" means the economy is good.


Earlier on the graph there is another example of "red line rising while blue line falls": a similar crest, decline, bottom, and increase in public (blue) debt. This begins with the crest of 1870. And all during those four stages of public debt, private (red) debt was on the increase.

The good economy of the 1947-1973 period appears on the graph as rising red and declining blue concurrently. In the earlier period I find rising red and declining blue concurrent roughly from 1874 to 1898. The last quarter of the 19th century.

Is the last quarter of the 19th century remembered for its good economy? If so, I think I'm onto something with this comparison of private to public debt and "red line rising while blue line falls".

The last quarter of the 19th is characterized as The Development of the Industrial United States, or The Rise of Industrial America. The first of those two sources reports "headlong economic growth":

... the United States underwent an economic transformation marked by the maturing of the industrial economy, the rapid expansion of big business, the development of large-scale agriculture, and the rise of national labor unions and industrial conflict.
An outburst of technological innovation in the late 19th century fueled this headlong economic growth.

(Other people say headlong growth fuels technological innovation.) (Maybe each fuels the other.)

The second source says

Over the period as a whole, American industry advanced rapidly. By 1900 the United States had one half the world’s manufacturing capacity. At the end of the century, it had overtaken Great Britain both in iron and steel production and in coal production.

Growth was good.

Red line rising, blue line falling, growth is good. That's why some people say we must get the blue line down, get the Federal debt and deficits under control and bring them down. That's backwards, though. It isn't bringing the blue line down that makes the economy grow. It is the vigorous economy that brings the blue line down even though the public debt is actually increasing. The vigorous economy grows faster than government debt, and that's what brings the blue line down. The people who act as though the fate of the world depends on cutting Federal spending, those people need to talk less and think more.

Saturday, September 30, 2017

So much for the study of cost-push inflation


Roger Farmer, September 21, 2017:
In the 1960s, the U.S. government borrowed to pay for the Vietnam war, and rather than raise politically unpopular taxes, it paid for new military expenditures by printing money. Milton Friedman pointed out correctly, that printing money would eventually lead to inflation.

Roger Farmer brings back memories. Evans and Novak's memories, not mine. In Atlantic Monthly, July 1971, Rowland Evans and Robert Novak remembered early 1968: Lyndon Johnson was President; Richard Nixon was on the campaign trail; and former President Eisenhower was considering the options open to his protege Nixon. Evans and Novak wrote:
For the old General there was no higher imperative for a new Republican President than to curb the torrent of inflation that had been loosed on the economy since full US intervention in the Vietnam war in 1965.

That is what happened: War-related spending increased, and inflation went up. And Milton Friedman is remembered as having predicted the inflation. "Cause and effect" was thus inviolably established. And every day since, one monetarist twit or another, his mind closed tight as his sphincter, has been predicting inflation. Generally, like the famous stopped clock, such predictions are only occasionally accurate.

Sure, I know: The value of the dollar continues to fall. I'm not saying there's no inflation. I'm saying the predictions are junk. Remember Janet Yellen saying we don't know the cause of inflation? If you don't know the cause, you can only make an accurate prediction by dumb luck. Dumb luck.

I even accept the bumper-sticker logic that says printing money causes inflation. What I cannot accept is that no additional logic applies. Even Friedman distinguished between "money supplied" and "money demanded", as Peter N. Ireland points out. It ain't just printing money that matters. The logic of demand matters, too.

Yes, it seems Friedman also said the demand for money is constant and it's only the supply that varies. And okay, I can see that in a normal economy the demand for money may be quite constant, probably more constant than the supply. So maybe in the normal economy the predictions of inflation are pretty good after all. Okay, fine. But why were people still making the same predictions after the economy went all abnormal? Echolalia?


Time magazine, December 31 1965:
The economic policies of 1966 will be determined most of all by one factor: the war in Viet Nam. Barring an unexpected truce, defense spending will soar so high—by at least an additional $7 billion—that it will impose a severe demand upon the nation's productive capacity and give body to the specter of inflation.

And there it is again. Inflation -- specifically, the Great Inflation -- was created by Lyndon Johnson's spending on the Vietnam war. They said it in 1965. They thought it in 1968 and wrote it in 1971. And apparently we still think it in 2017. But as Roger Farmer would say: Where's the beef?

Where's the analysis that shows the mid-1960s wartime spending was the cause, the sole cause, or even the primary cause, of the inflation that arose in that moment? Coincidence? You relying on coincidence as an argument? What about lags, then, the long and variable lags.

Your coincidence is not evidence if there are lags.


We thought and still think the Great Inflation was created in 1965 by the "guns and butter" spending of Lyndon Baines Johnson. This we have taken for true since the very first day of the Great Inflation.

It's odd, though. In 1960, Samuelson and Solow did a study in which they considered the source of the 1955-58 inflation in the US economy. They wrote:
... just by the time that cost-push was becoming discredited as a theory of inflation, we ran into the rather puzzling phenomenon of the 1955-58 upward creep of prices, which seemed to take place in the last part of the period despite growing overcapacity, slack labor markets, slow real growth, and no apparent great buoyancy in over-all demand.

It is no wonder then that economists have been debating the possible causations involved in inflation: demand-pull versus cost-push; wage-push versus more general Lerner "seller's inflation"; and the new Charles Schultze theory of "demand-shift" inflation.

Samuelson and Solow thought there was a good chance the inflation of the latter 1950s was cost-push in origin. That's interesting because, if it was, then there is also a good chance that when inflation returned in the mid-1960s, it was the return of cost-push inflation. Mixed, perhaps, with demand-pull brought on by Vietnam war spending.

Samuelson and Solow in 1960 were leaning toward "mixed":
We have concluded that it is not possible on the basis of a priori reasoning to reject either the demand-pull or cost-push hypothesis ...

What was needed, obviously, was additional work on the cost-push question. But things didn't go that way. Instead, their paper was read as a call for tradeoff: more inflation and less unemployment.

The inflation/unemployment tradeoff was a story Milton Friedman could shoot down, and Edmund Phelps, and they did.

Then Milton Friedman rejected cost-push, saying inflation is always and everywhere a monetary phenomenon. Right behind him, Paul Volcker rejected cost-push when he said the inflation process is ultimately related to excessive growth in money and credit.

By then, the concept of cost-push was in the throes of death. Today, I can't even find a link to the Samuelson and Solow paper. But I can find a sharp guy like Nick Rowe observing that Arthur Burns -- Chairman of the Fed through most of the 1970s and thus through most of the Great Inflation -- observing that Burns thought inflation was largely a cost-push phenomenon; then Rowe adds:

People forget (and maybe younger people never knew) just how common that view was in the 1970’s. It was common among economists as well as the general population. It was almost the orthodoxy of the time, IIRC. Tighter monetary policy would just raise interest rates, which would increase costs, and make inflation even worse.

Nick is much too nice a guy to put it into words, but to my ear what he's saying is that "cost-push" is a ridiculous idea, not worthy of economic analysis. That was in 2012.

And now, in 2017, you've got Roger Farmer (in the opening salvo of a post titled "Where's the Inflation? Where's the Beef?") dismissing the possibility of cost-push when he says "the U.S. government borrowed to pay for the Vietnam war, and ... paid for new military expenditures by printing money".

So much for the study of cost-push inflation.


To my mind, the growing cost of finance was the cost that initiated the cost-push inflation that became the Great Inflation of 1965-1984 -- and is chiefly responsible for the inflation since that time as well. Finance takes from non-financial business, directly increasing the costs of production. Finance takes from consumers, directly depressing demand. Finance returns its monies to the circular flow at interest, further increasing production costs and further depressing demand. And that is the story since Volcker. Since before Volcker.

Convince me I'm wrong, or stop assuming there is no cost-push inflation.


Related links:

Anna Schwartz on the buoyant economy (here)

The inflation/unemployment tradeoff (Kevin D. Hoover)

Williamson's history of the time (here)

An overview of confusion (Mainly Macro)

The Forder connection (Robert Waldmann at Economist's View)

Friday, September 29, 2017

A bit more from Heilbroner and Silk


Another excerpt from Leonard Silk's 1976 discussion of Robert L. Heilbroner's Business Civilization In Decline:
... in the end this mighty industrial machine spews forth so much output that it depletes the earth's resources and pollutes its environment, jeopardizing human life.

Economic growth must cease; but growth was the daemon of capitalism, and capitalism cannot survive in a nogrowth world. Without continuously increasing real income with which to buy off and pacify the lower classes, the struggle over distribution of income and wealth will intensify, nationally and internationally.
 
I've been doing economics since the 1970s. Untutored, yeah, but since the 1970s. And in all that time, this is the first explanation that I have seen for why growth is necessary in the capitalist system. I've heard it said a million times that growth is necessary in the capitalist system. Now I've seen it explained, once.

And I've never yet seen a careful and thorough analysis of the "growth is necessary" concept. It is always assumed to be true, whether or not you get the explanation, but there is never an analysis. Same as you get with the argument for free trade. Long as I've been interested in understanding the economy, I have never seen an analysis, no less a convincing one.

"Capitalism cannot survive in a nogrowth world." So says Silk -- expressing Heilbroner's view, I suppose.

Why can it not survive? Because capitalism needs "to buy off and pacify the lower classes", the story goes. That's not economic analysis. It's rabble-rousing.


Why can capitalism not survive in a no-growth world? Because that's how we set it up. If we set it up differently, it would work differently. If we designed economic policy for a no-growth world, we could live in a no-growth world. You see it in economic models all the time.

We're almost there now, actually. We live in an almost-no-growth world, right? And yes, things are not very good. And even I have been calling for (or predicting, actually) better growth. However, things are not very good in our no-growth world because all our policies are designed for a world of "full speed ahead" growth. Just for the record, then, the fact that economic conditions have satisfied almost no one for the past decade is not evidence that we cannot live in a no-growth world.

I can't lay it out for you today. I'm not particularly a fan of the no-growth world. I don't see it as necessary. But that's just me.

But I can lay out a parallel situation. I can lay out a no-debt-growth world:

• 1. Use credit for growth as we did, say, in the 1950s and '60s.
• 2. Use new tax incentives to accelerate repayment of the debt generated by Step 1.
• 3. Step 2 is deflationary, so the Fed should buy up some government debt.

Step 1 grows the economy; step 2 repays the debt; step 3 expands the money supply. Together these steps allow us to keep both the money-to-GDP and the debt-to-GDP ratios stable as GDP expands.

It's not magic. But it recognizes that existing policy encourages the use of credit, so that debt accumulates at an unnaturally rapid rate and reaches an unnaturally large size. It offsets that effect of policy by encouraging an unnaturally rapid repayment of debt.

Economic growth under this system is supported by credit use. Say we grow three percent. We need credit enough for that three percent. We don't need credit enough for the whole economy. We don't need to use credit for everything. We do use credit for everything, and that's the problem; but we don't have to. Let the Fed issue that money. If the economy grows 3%, let the Fed issue 3% more money by expanding its holdings of government debt. The system is essentially unchanged under the plan I describe, except the normal growth of Federal Debt held by Federal Reserve Banks is faster than before, and anti-inflation policy gets some help from the tax code.

Remember, I'm talking about encouraging the private sector to pay down debt at an accelerated rate. This doesn't have to be a punitive plan. Shouldn't be, until we can average 4% RGDP growth for a decade. Oh, and this suppression of wages to fight inflation, that has to go.

A plan similar to this, more or less, could change policy enough to make a no-growth world a pretty decent place to live.

Any question about the definitions of money and credit, see here.

Thursday, September 28, 2017

Excerpts from a book review


I remembered the phrase "business civilization" and looked it up.

First hit, The New York Times:
Business Civilization In Decline

Is capitalism dying? Robert L. Heilbroner is sure it is. He expects it to be gone within a century. Yet, although Heilbroner is himself a socialist, the impending demise of capitalism leaves him joyless; for he is full of apprehension about the conditions that are causing capitalism to rot and bringing statist regimes into being. And he fears that personal freedoms and parliamentary political institutions, which he reveres, may die with capitalism.

By Robert L. Heilbroner. 127 pp. New York: W. W. Norton & Co. Cloth, $6.95. Paper. $2.95.
 
Those prices seem right to you?

The article is from 1976. Yeah, the prices are about right.


Heilbroner writes: “Much as we now Inspect Chichdn Itzi, the Great Wall, the pyramids, Machu Picchu, so we may some day visit and marvel at the ruins of the great steel works at Sparrows Point, the atomic complex at Hanford, the computer centers at Houston.”
 
Turns out we didn't have to wait a century to "marvel at the ruins of the great steel works at Sparrows Point":
Source: This drone video shows the disheveled remains of Sparrows Point steel mill (2015)
"But the worst of all," the article continues,
But the worst of all, in the future we may long for the time when liberties were accorded to “artistic statements, social or sexual habits, political utterances.”
 
We didn't have to wait a century for that, either.


The article, by Leonard Silk, also includes this statement which I include here because it will be useful later:
Why should a society—which Daniel Bell calls a post‐industrial society—that is shifting from the production of goods to services become a more centralized system, rather than the reverse? Admittedly, the provision of some services, such as telephone communications, may have large economies of scale, but others, including education, medicine, the arts and sciences, do not. Even in massive existing corporations, the degree of vertical and horizontal monopoly in the United States today is less obviously a result of economies of scale than of market power, often reinforced by government, which carries its own political dangers.
 
Monopoly power in the United States today is less a result of economies of scale than of market power reinforced by government


See also: The power to change the world

Wednesday, September 27, 2017

Taking a knee today



Tuesday, September 26, 2017

"... a burst of renewed growth" -- Steven Kopits


The great unwind begins by James_Hamilton at EconBrowser, 20 Sept 2017:

The Federal Reserve announced today that it will begin reducing the size of its balance sheet next month in very modest and deliberate steps.

Hamilton takes a graph of the Fed's balance sheet since 2002, and uses details from the Fed's announcements to calculate what the balance sheet might look like over the next few years.

First he shows the asset side. Then he shows the liabilities side. The latter graph helps explain some of the assumptions Hamilton uses in his asset-side prediction.

Fascinating stuff. Recommended reading.


And something else. The comments on Hamilton's post include one from Steven Kopits. Following is the body of that comment:
Depressions show markedly different economic and social dynamics than ordinary recessions. For example, we see persistent low interest rates, low population growth, low productivity growth, and sluggish GDP recovery, for example.

On the social front, we see a rejection of the established political system, eg, Brexit, Trump and Macron, an exaggerated ideological polarization (fascists v communists fighting in the street), and active steps to deport illegals (also occurred in the 1930s).

One has to speculate as to what could cause such a prolonged malaise. Gavin Davies takes a crack at the issue:

“The graphs above show a simple version of the Taylor Rule, comparing the appropriate rate (red line) with the actual policy rate set by the central banks (black line). The graphs contain a simple but clear message: because of the constraint imposed by the zero lower bound, policy [rates] were much higher than the appropriate rate for the ECB from 2009-16, and for the Federal Reserve from 2009-14. Now, the rise in the appropriate rates has taken policy into slightly expansionary territory in both the ECB and the Fed, despite the rate rises introduced in the US.”

This interpretation suggests that real interests were too high in the aftermath of the Great Recession, and therefore investment, and perhaps productivity growth, were too low. With Taylor Rule interest rates now above target, the economy may begin to operate well again, with productivity growth rebounding and GDP growing nearer (or above) its historical range. Oil consumption growth — above 2 mbpd / year for the last two quarters — and strength in oil prices suggest this might be true.

We know from the Great Depression (for which I have not seen Taylor Rule analysis) that the US struggled through the 1930s, but doubled its GDP from 1941 to 1947, and did not fall back materially with the end of WWII (although there was a stiff post-war recession). We are now at a similar turning point, which would seem to either end in war or in a burst of renewed growth.

I would welcome your thoughts in a post.

https://www.ft.com/content/0c6cfd54-b4c4-345b-a530-ae2b25967746

I like the opening paragraphs. They describe the world as I see it. The state of the economy affects "social dynamics". Most people look at the world, complain about politics and the decline of society, and toss in a few complaints about the economy as an afterthought.

The economy is not the afterthought. The economy is the driver of the system. And now I lost almost everybody. 99% of six readers gone, anybody still here? No matter: I don't have to be right about this, but you have to think about it. Because if I'm right and you don't think about it, our problem will never be solved. Or you could say it this way: The problem will be solved by a dark age.

Or this way: "Civilization dies by suicide."

Anyhow, look at the Gavin Davies quote and Steven Kopits's evaluation of it. Good stuff. Based on the Taylor rule, the policy rate was too high until recently, they say. But recently the Taylor rate has gone up, so that the policy rate is relatively low and is therefore expansionary.

They say With Taylor Rule interest rates now above target, the economy may begin to operate well again, with productivity growth rebounding and GDP growing nearer (or above) its historical range. In other words, growth and productivity will be improving. Gavin Davies and Steven Kopits are predicting vigor.

Vigor. Sound familiar? See mine of March 3, 2016, April 7, 2016, August 7, 2016, and August 22, 2016.

Monday, September 25, 2017

Life's little ironies


Yglesias at VOX: The economy really is broken — but we know how to fix it

No, we don't know how to fix it. And thinking that we do is part of the problem.

Yglesias:
Census data released last week revealed that 2016 was a second straight strong year for median household income growth. Consequently, inflation-adjusted median household income is now at an all-time high, finally surpassing the previous record set in 1999...

Anyone who predicted in 1999 that median income would be lower in 2015 would have been regarded as ridiculously pessimistic, and nobody would have thought that quibbling over exactly how we calculate the inflation rate was the difference maker.

Something really is badly wrong.

The good news in the census report is that what’s wrong is fairly straightforward, easy to understand, and conceptually simple to fix. It requires a sense of political urgency that’s been lacking.

No. Ever since Martin L. Gross's 1993 book A Call for Revolution I hear that what's missing is the political urgency. Wrong. It's flat out wrong.

The argument is: We know how to fix the problem, but we lack the political will to do it. Bullshit. If they knew how to fix the problem, they'd fix the problem. Do you really think the Dems wanted to lose control to the Republicans? I don't think so. I think that if the Democrats knew how to fix the problem they'd have fixed it. That way they'd have been king of the hill for decades, like what happened after FDR.

Do you really think the Republicans wanted to lose control to Trump? I don't think so. If the Republicans knew how to fix the problem they'd have fixed it, instead of having to redistrict and restrict voter rights to gain king-of-the-hill status.

And if voters thought either of the parties knew how to fix the problem, they wouldn't have elected Trump. So no, it is not true that we know how to fix the problem and only lack the political will to do it. It's not true. And the evidence is: We elected Trump.

Yglesias:
In short, the country has gotten a lot richer on average, and yet the typical household hasn’t gotten richer at all...

What we need to do is tax the rich, spend the money on the poor, and prioritize fighting recessions as a core economic policy mission that’s more important than low inflation or high bank profits.

But what's "more important" depends on one's point of view, doesn't it. Meanwhile, the economy has degenerated into an "us versus them" struggle because we've failed to fix the problem. The wrong answer makes the problem worse as economic decline puts employer and employee at odds, making it seem that the solution must be to pick a side in the battle, and fight harder.

It won't work. The economy is not "us versus them". We're all in it together.

Yglesias:
Median household income has been essentially flat since 1999...

Reflecting this reality, the poverty rate is higher today than it was in 1999.

The solution to both facets of this problem is simple: taxes. Higher taxes on very high wages and higher taxes on investment income.

This is an "us" solution. "Them" won't go for it. And "them" have the money and power and influence.

I'm not saying Yglesias is wrong about raising taxes. But he is not presenting a fix for the economy. He is presenting a fix for one side only. He builds his argument on us-versus-them:
The rich, as it turns out, have a very different set of concerns than does the rest of the population. In particular, they don’t necessarily suffer during times of high unemployment...

Lucky them. But the rest of the country needs a government that’s fanatically committed to fighting recessions.

Fanatically committed?

You know about the Fed, right? The dual mandate? "The monetary policy goals of the Federal Reserve are to foster economic conditions that achieve both stable prices and maximum sustainable employment."

"Maximum sustainable employment" doesn't sound fanatical. But it does sound reasonable -- at least until you look at economic conditions, I know. I know. But I would argue that the reasonableness of the dual mandate is not the problem. I would say we don't know how to fix the economic problem. And thinking that we do, well, that's part of the problem.

One of life's little ironies: The Fed's "dual mandate" instructs the Fed to do the two things that are part of the trade-off known as the Phillips curve. Whichever one the Fed chooses to do will undermine the other.

These days, economists say "the Phillips curve is broken." You know why it's "broken"? The dual mandate.


This part is good. Yglesias says:
One problem is that the top 5 percent includes all the members of Congress and all of the donors and lobbyists and business leaders whom members of Congress speak to. It also includes all the Federal Reserve governors and regional bank presidents and all the business leaders whom they speak to. It includes the top editors of all the major media outlets and most of the star talent. For that matter, it also includes most of the leading economic experts at top universities.

All else being equal, of course, political elites prefer lower unemployment to higher. But it simply isn’t instinctively urgent in elite circles the way a financial market panic is.

We still do have the right to vote, but it doesn't seem to help. I think there's a reason for that.

The reason is that we don't know how to fix the economic problem. I think that if we fixed the economic problem most of the other problems would go away, and the rest would be easier to fix.

Since we don't know the right fix for the problem, we can't agree with each other on a solution. But the issues are immensely important, so we become "partisan". And it only gets worse from there.

Since all the people who disagree with each other think they know how to fix the problem, they can only conclude that the other guys are wrong.

Yglesias thinks Yellen is wrong:
Janet Yellen’s Federal Reserve is raising interest rates to slow job creation in order to head off the possibility of future inflation even though actual inflation remains below target.

Yglesias himself takes the other position:
For the economy to work for normal people, the federal government needs to be obsessed with avoiding recessions and making them as short as possible. If that means short bursts of inflation during supply-side shocks, or reduced bank profits due to restrictions on lending, or high deficits to stimulate the economy, we need to be willing to make those trade-offs.

I'm not saying Yglesias is wrong. For the economy to work for "normal people" we need work for normal people. But Yellen has work to do, too, and it's a job that has to be done. Don't make it us-and-them. Think of it more as a dual mandate for the nation. Not just for the Fed, but for the nation.

It is funny, though, when the guy arguing for more inflation takes the view that inflation will only come in "short bursts". That's not the kind of inflation that bothers the other side. But Yglesias isn't writing for those guys.


Just to tie up a loose end, recall Matt Yglesias saying

... the top 5 percent includes ... the top editors of all the major media outlets and most of the star talent.

I asked google is matt yglesias in the top 5% of income earners? and this turned up: Matt Yglesias' $1.2 Million House Stokes Class Envy in Conservatives.

Yglesias isn't writing for the top five percent. But he's part of it.