Thursday, July 24, 2014


...thanks be to God, I did not find myself in a condition which obliged me to make a merchandise of science for the improvement of my fortune.
From Descartes: Selections edited by Ralph M. Eaton. The Modern Student's Library, Philosophy Series. Charles Scribner's Sons, New York, 1927. Page 8."

Wednesday, July 23, 2014


Smith was not the first nor the only 18th-century, political economist. He wrote just before what we call the ‘Industrial Revolution’. His focus was on history, not the future (he did not make predictions for the future; he tried to understand the past as a guide to the present).
- Gavin Kennedy on Adam Smith

What's wrong with economic theory today?

One of the first of the considerations that occurred to me was that there is very often less perfection in works composed of several portions, and carried out by the hands of various masters, than in those on which one individual alone has worked.
- Descartes

Tuesday, July 22, 2014

"But they haven't learned how to theorize."

Frances Woolley at WCI:

They can follow the most complicated plans, and build any model they are asked to build. But they struggle to come with an idea of their own; to decide what they want to build. Nothing in their training has encouraged them to fill their minds with ideas, nor taught them to distinguish the awesome from the not-so-awesome.

Sunday, July 20, 2014

New and Different

I want to make it clear that I am talking about a new and different policy.

We have a new and different chairman at the Federal Reserve: Janet Yellen. But having a new and different chairman does not necessarily mean new and different policy.

From Brookings: Fed Unveils a New Job-Market Index by David Wessel:

In her testimony to Congress this week, Ms. Yellen said that “significant slack remains in the labor markets” and noted that wages are rising very slowly, all of which points to an economy which has not yet fully recovered from the Great Recession and still needs the sustenance of low interest rates.

Most people might evaluate Yellen's remark by focusing on whether or not "significant slack remains". Everyone is wagging the same tongue: The economy is recovering -- or it is not. It is time to raise interest rates -- or it is not. Inflation is just around the corner -- or it is not. Endless prattle, tiresome and nonproductive.

Open your mind.

This is not the thing: We have one policy that lowers interest rates to boost economic growth, and another policy that raises interest rates to fight inflation. That's not it.

This is it: We have a policy that raises or lowers interest rates, depending on whether we are more concerned about inflation or growth. It is one policy: We change interest rates. It is only one policy, with two phases you might say.

So if we toss aside one Fed Chairman and install another, hoping to see (or not to see) a change in the path of interest rates, this is not a change.

It would be a change if we were to abandon our policy of raising-and-lowering interest rates, and adopt some other policy or combination of policies in its place. That would be a change.

That would be new and different.

Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.

David Wessel says Janet Yellen says that the economy "still needs the sustenance of low interest rates."

No, not "still needs". The economy always needs the sustenance of low interest rates. But this means we cannot raise interest rates as a policy tool to fight inflation. And that means we need a different policy tool to fight inflation.

See? This is what I mean by new and different. It isn't new and different if we push interest rates up instead of down. It isn't new and different if we hold interest rates down instead of letting them up.

It's not different if we exhale instead of inhale. It would be different if we suddenly got gills, or if we started absorbing oxygen through the skin and didn't need lungs anymore. That would be different.

We have to keep interest rates on the low side, always, so that the economy can grow. If you do not reject this idea immediately, you can think about it and you must say: But if interest rates remain low, there will be too much borrowing-and-spending, and we will get inflation.

You are right. So let us examine the problem that arises if we keep interest rates low: We get too much borrowing. The increased borrowing leads to increased spending. And the increased spending leads to inflation. Okay! That wasn't nearly as painful as I thought. Now...

If we keep interest rates low and remain permanently in a quasi-boom, we get increased borrowing and increased spending. We get increasing debt and increasing prices. This is undeniable. It happened in the 1960s and '70s.

And yet, did you notice in the years after 2008, there was a great deleveraging: debt stopped increasing and the money supply stopped growing. The Fed responded with bizarre emergency measures, boosting the quantity of money to avoid deflation.

People focused on paying down debt, and the threat of inflation disappeared. Did you notice? Paying down debt is a way to fight inflation.

Suppose we keep interest rates low, and as a result we see an increase in borrowing and the growth of debt. We see an increase in spending, and rising prices. But if we can only find a way to encourage a more rapid paydown of debt, we can have the increase in borrowing without seeing the growth of debt. We can get the economic vigor that comes from new borrowing without having to face the "significant slack" that arises from an excessive burden of debt.

And, if we find a way to encourage more rapid paydown of debt, the paydown of debt will drain money from the spending stream, limit the increase of spending, and limit inflation. If we can only find a way to encourage a more rapid paydown of debt.

Child's play. All we have to do is start weeding out the policies that encourage use of credit and accumulation of debt, and replace them with policies designed to accelerate the repayment of debt.

This is what I mean by new and different policy: Not interest rates that run high and low like the tides. Rather, a commitment to low rates and strong growth, permanently, and commitment to a tax policy that fights inflation by accelerating the repayment of debt and by preventing the excessive accumulation of private debt. Permanently.

This is what I mean by new and different.


More: An Arthurian Future ... Geanakoplos and the Can of Worms ... Sumner engages the crystal ball ...

Saturday, July 19, 2014

Penn World Tables

The "Notes" tab of FRED's Total Factor Productivity page has a "For more information" link to the research tab at Penn World Table (PWT).

The PWT page offers several tables, including a "Data" table. That table lists several measures of real GDP, but also DA and GA -- Development Accounting and Growth Accounting.

DA provides "the sources of differences in living standards at a point in time". That sounds interesting. The words "living standards" capture one's attention.

GA, Growth Accounting, provides "the sources of economic growth over time". Not too long ago I looked a bit at the Solow Growth Model. It's something I want to look at again. I clicked this one. Here's a piece of what I got:

Data goes back to 1950, that's decent. Several countries, okay. Capital stock values, yeah that's related to the Solow Growth Model, okay.

If they're so blunt as to present that particular set of nations (instead of maybe the G7 nations) they have to be bold enough to make it easy to change what shows up on the list. Yup: See that red dot in the upper left, just above the table? "Adjust criteria". You got it. There's a lot of countries to pick from, and more, and it's pretty intuitive. And the "adjust criteria" page has a red dot in the upper right, pointing right, that gets you back to the data table. Very nice.

Something I never saw on line before: In the table, in the header area, at the left, it says "Toggle display". I didn't try that one yet. But to the right of it there are four little arrows. Hover over the down-arrow and a tag says "Change order". Hover over the diagonal arrow and the tag says "Move to Y-axis". That, I never saw on line before.

I didn't play with the buttons. I adjusted the criteria to show only U.S. data. Because I'm focused. Or myopic, whatever. The previous table shows "Capital stock at constant 2005 national prices" for half a dozen countries. The following table shows "Capital stock" and four other "growth accounting"-related data categories:

If you need to see it bigger click the image, or just go to Penn World Tables.

I like the place already.

Friday, July 18, 2014

"They're five cents lower per pound on welding wire"

You know you have to compare prices to get the best deal.

You also know that the big companies can give you lower prices than the little companies. It's buying in bulk, or economies of scale, or some such thing.

But let me ask you this: Do you think it's right that the government should help the big companies more than it helps little ones? Help Walmart drive Mom-n-Pop out of business? Is that right? Certainly not.

And yet we have a business income tax system that lets you write off all your expenses. Gives you a tax break for all your expenses. So if you're Mom-n-Pop, with business expenses of a hundred thousand a year, you avoid paying taxes on $100,000. If you're one of the big guys, with business expenses of several billion dollars a year, you avoid taxes on several billion dollars, because of our tax system.

Our tax system favors bigness. And then we moan about "too big to fail".

BTW: The total amount of business income tax deductions is approximately twice the size of GDP.

Thursday, July 17, 2014

Scatterplotting Debt

At the FRED Blog, Debt- and deficit-to-GDP dynamics. Three scatter plots of government debt versus government deficit since 2001. Graphs for the U.S., Japan, and the Euro Area. I will only look at U.S. data.

The opening sentence of the FRED Blog post:

Several historical examples show that financial crises generate large increases in private and public debt that take many years and sometimes drastic measures to resolve.

Sadly... ironically... typically, they speak of "private and public debt" but they only look at public debt. That's okay. I'll fill in the blank.

Here's the first graph from the FRED Blog post:

Graph #1: Federal Debt (vertical scale) versus Federal Deficit (horizontal scale) 2001-2013
The uppermost red dot represents 2013. If you count years backwards from that dot, following the red line, you see that the leftmost dot represents 2009, and that the dot before that, 2008, is far removed from the 2009 dot and clustered with the dots from before 2008.

(If you know that the Federal debt for 2013 was the highest since World War Two, you can tell that the highest dot on the graph is the 2013 dot. And if you know that 2009 had the big increase in Federal deficits, and that the deficits have been getting smaller since, you can tell that the leftmost point is the 2009 dot. I didn't remember those things, so I had to look around some.)

I followed the blog's "customize" link to the FRED source page and pushed the start-date back to 1970. So we can see all the dots on the first graph, and more:

Graph #2: Federal Debt (vertical scale) versus Federal Deficit (horizontal scale) 1970-2013

Easier to see now: The 2008 dot is the last in a cluster. For some reason the color setting changed when I changed the start-year. I couldn't duplicate their setting.

What this graph shows is that, before 2009, the Federal deficits ranged between zero and six percent of GDP. It also shows the budget surplus of the Clinton years. Looks like four years in surplus, with a maximum surplus of just over 2% of GDP.

During that time, 1970 to 2008, the Federal debt ranged from 30 to about 65% of GDP: never over 70%, but tending to increase rather than decrease. The big, massive jump from 2008 to the leftmost dot, 2009, pushed debt up over 80% of GDP. A slowing economy (I mean, slowing GDP growth) also helped push the dots higher.

Since the FRED Blog failed to do it, I thought I'd look at Federal debt versus non-Federal debt:

Graph #3: Federal Debt (horizontal) versus Non-Federal Debt (vertical) 1949-2013
The last dot on the right represents 2013. Counting backwards, you can see the line runs flat back to 2008: no up-and-down movement -- no change in non-Federal debt -- and large rightward steps  showing big increase in the Federal debt.

Before 2008 there is a general upward trend. The dots climb with regularity from the start. Then there is a sweep around to the right and back to the left. Suddenly, then, it turns a "corner" and climbs with regularity again toward 2008.

Counting backwards from the rightmost dot again, 2013, it turns out that the dot at the "corner" represents 2001. The leftward sweep for the few years before 2001, just below it on the graph, show the latter Clinton years when the Federal budget was coming briefly into balance.

On Graph #3 the horizontal scale (which shows the size of Federal debt) runs from zero to something over 10000. The vertical scale (which shows the size of non-Federal debt) runs much higher, up to 50,000. But here's the thing. On the vertical scale the distance from zero to 10,000 is about half an inch, maybe less. On the horizontal scale the distance from zero to 10,000 is about 3 inches, maybe more. The two scales are quite different.

I re-sized the graph to make 10,000 vertical about the same size as 10,000 horizontal. This should give you a better feel for the relative sizes of Federal and non-Federal debt. Horizontal distances measure Federal debt. Verticals measure everyone else's debt:

Graph #4: Federal (horizontal) v NonFederal (vertical) Debt, Similar Scaling
You don't even believe it, do ya.

Wednesday, July 16, 2014

GDS vs GDP: Crude, but you get the idea

The snowplow hit our mailbox last winter. Broke the post. I went out and got a 2x4 and made a new mailbox post. The work was easier than I expected.

The other day I was looking for something in the garage. I found a 3-foot length of 2x4 left over from the mailbox repair. I kept it because... because you never know.

It occurs to me that the 2x4 I bought is a model of Gross Domestic Spending. The part of the 2x4 I used to make the post, well, that's the output, that's GDP, final spending. And the 3-foot difference, that's sort of like non-final spending.

If I had a customer that paid me for the mailbox job, my little metaphor would be more accurate. But as it is, I was the final customer. Mine was the final spending. My work was for my own satisfaction (according to the IRS) so I got no tax deductions for my spending. And my 3-foot leftover piece is just post-consumption detritus. Guess I could pay somebody to haul it to the dump, and that would add a little more to GDP.

What seems to bother most people about GDP is that it doesn't measure happiness. I think that's weird. What bothers me about GDP is that it ignores trillions of dollars of spending just because we get to subtract those trillions from our taxable income. So I invented Gross Domestic Spending (GDS).