Friday, May 31, 2013

Undertow



New uses of debt (whether public or private) give a boost to spending, a boost that increases employment.

The equal and opposite reaction would be to pay down debt. This reduces spending. It creates a drag on the economy, an undertow. It reduces employment.

But we don't normally repay debt -- not before we've borrowed more, anyway. So we keep getting new boosts from the use of credit, or from the increases in debt I mean. And the undertow created by payback is minimal.

But debt accumulates. And as debt accumulates, the undertow gets bigger: The cost of a growing debt makes the economy sluggish. Increases in debt do not boost a sluggish economy as they do an economy with little debt.

Each new increase in debt adds to the accumulation. In order to compensate for the growing undertow created by accumulating debt, new increases in debt must grow larger. Larger increases aggravate the problem, making the undertow worse, so that it takes a larger addition to debt to create the same little boost.

Thursday, May 30, 2013

Instruments of Liability


A thorn by any other name would prick no less.

Jim writes:

I noticed that TCMDO no longer means total credit market debt owed. It now means all credit market instruments.

Here are the total (blue) and Federal (red) instruments of liability on a log scale...

Graph #1

... showing a remarkable swelling of government debt between 1974 and 2001.

The blue line shows total credit market debt instruments of liability, which includes the Federal portion. So some of the up-going of the blue line can be attributed to Federal. Nonetheless, private and other non-Federal debt continued to increase during those years. That's the reason Federal debt growth in those years was not as successful as the Federal debt growth of the FDR years, in creating conditions for an economic boom to follow.

(You may have to read the two previous posts for this one to make sense.)

Wednesday, May 29, 2013

More cowbell


The first take of the session begins soon after. The recording seems to be going well but the band stops playing after a few moments because the cowbell part is rather loud and distracting. Dickinson, to the surprise of most of the band, asks for "a little more cowbell" ...

Government debt is like cowbell: loud and distracting.

Yesterday I said

If your plan is to fix the economy by expanding government spending, well, your plan has already been tried. It didn't work.

Yesterday's post reminded me of an old one I did. I'm repeating part of it here. To get the effect, be sure to move your mouse on and off the graph a few times.

We tried stimulus, big-time. We have been trying it since Reagan. Since before Reagan, even. All the while, we've been badmouthing government debt, sure. But all the while, we have been expanding government debt, too. To stimulate growth.

Graph #1

Graph #1 shows the gross Federal debt, in billions of dollars. After World War II, the trend-line is basically flat until, oh, 1970 or so. After that, the Federal debt just goes up and up. And up.

That big pink triangle cowbell there on the hover graph? All of it was stimulus.

Loud and distracting, not the problem, and not the solution.

Tuesday, May 28, 2013

FRED: Federal spending as a % of GDP (blue) and Federal deficits as a % of Federal spending (red)


Graph #1: Federal spending as a % of GDP (blue) and Federal deficits as a % of Federal spending (red)
Click Graph for FRED Source Page

In the green circle: Federal spending as a percent of GDP, and Federal deficits as a percent of Federal spending, both high for 15 years beginning with Reagan.

If your plan is to fix the economy by expanding government spending, well, your plan has already been tried. It didn't work.

Why didn't it work? To be blunt, it didn't work because we didn't have a Depression in those years. A Depression would have wiped out a lot of private debt while the government spending was pumping money into the economy. That didn't happen.

Instead, the private sector took every new dollar of government money and diced it up into many more dollars of private lending and debt. Instead of falling, private debt increased.

Of course, we don't have to have a Depression to minimize the growth of debt. It can be accomplished by policy. But it can not be accomplished by policy until policymakers decide this is the right thing to do.

And in order to convince the policymakers, I must first convince you.

Monday, May 27, 2013

The Cost-Push Problem


If you don’t define the problem correctly, you probably won’t figure out the right solution.

Sunday, May 26, 2013

"Mish"


Mish
We brought her home yesterday morning. 17 weeks old, 42 pounds. Likes slippers.

Good name for a dog, isn't it?

Illicit Krugman


The New Jerk Times stops in the middle of the 11th article to tell me I've "reached the limit of 10 free articles a month." But I'm reading Paul Krugman's The Mythical 70s and I want to read it all. So on the Firefox menu I hover over the Web Developer menu item until the submenu pops up, and then click on page source to see the HTML (or whatever you call it). I copy a good chunk and paste it into the blog editor. Presto, I've got the whole Krugman post.

And presto again, I've reduced it to focus your eyes on what I found in that post:
May 19, 2013, 8:46 am

The Mythical 70s

In elite mythology, the origins of the crisis of the 70s, like the supposed origins of our current crisis, lay in excess: too much debt, too much coddling of those slovenly proles via a strong welfare state. The suffering of 1979-82 was necessary payback.

None of that is remotely true.

What we did have was a wage-price spiral: workers demanding large wage increases (those were the days when workers actually could make demands) because they expected lots of inflation, firms raising prices because of rising costs, all exacerbated by big oil shocks. It was mainly a case of self-fulfilling expectations, and the problem was to break the cycle.

So why did we need a terrible recession? Not to pay for our past sins, but simply as a way to cool the action...

Was there a better way? Ideally, we should have been able to get all the relevant parties in a room and say, look, this inflation has to stop; you workers, reduce your wage demands, you businesses, cancel your price increases, and for our part, we agree to stop printing money so the whole thing is over. That way, you’d get price stability without the recession...

None of that is remotely true.

Well, some of it, maybe. Benefit of the doubt: Wages and prices were going up; you could call that a wage price spiral. And it was "exacerbated" by oil. And perhaps it became a case of self-fulfilling expectations.

And god knows, people suck the dick of expectations to this day because of it. But you see, it didn't start with expectations. It didn't start with the wage-price spiral. And it didn't start with oil. It started with rising financial costs.

Saturday, May 25, 2013

Clair Brown: "Periods of economic growth traditionally are characterized by greater equality of classes."


Every once in a while something just strikes you and, inexplicably, you like it. Clair Brown's American Standards of Living: 1918-1988 struck me that way.

After googling saving by quintile turned up the book (see yesterday's post) I went back and started reading from the beginning. Got all the way to page six before I had to stop and write this new post. Here's the part that did me in:

Periods of economic growth traditionally are characterized by greater equality of classes. Consequently, the growth in real expenditures across classes deviates from the growth in total output, as families in a lower class experience greater growth in consumption than families in a higher class...

Since government policies heavily influence total output and relative incomes, and because each class will try to maintain its relative position, shifts in income inequality tend to have a cyclical nature, as a class that loses out relatively in one period tries to improve its position in the next period. A period of increasing inequality usually follows a period of decreasing inequality.

Now if somebody had written that for Wikipedia, there would be a comment attached to it reading This article needs citations for verification. You know what? It's an important statement for me, so I need citations. I need references. I need verification. I need Emmanuel Saez's graph:

Graph #1: The Top Decile Income Share in the United States, 1917-2007
From Striking it Richer (PDF, 2009) by Emmanuel Saez

Greater equality, 1942-1978. Golden age of growth, 1947-1973. Periods of economic growth traditionally are characterized by greater equality of classes. Evidence? Well, it's a start.

I particularly like the idea that inequality might run in some sort of cyclical pattern. That idea fits right in with my world view. Shows up in the graph, too.

Actually, as Arnold Toynbee may already have said, if there are cyclical patterns on a civilizational scale to be found in our world then we ought to start with that, and always remember that the details probably fit the larger pattern. You don't always need to fit details to the larger pattern. But the pattern can help to resolve ambiguities. It can provide guidance. And it can call some things plain silly, like the idea that economic growth always clings to an invariant trend.


Economists like to think economic growth tends to trend. They say things like GDP is "trend stationary". They speak of an "output gap". The output gap is the gap between where GDP is now and where it would be if it had stayed on trend. People who speak of an output gap think in terms of a long-term trend of growth.

Let me see if I can get this right. "Stochastic" means "random" and is the opposite of "deterministic". At MathWorks they look at a graph of US GDP and identify it as a "nonstationary" (as opposed to stationary) stochastic process. Nonstationary, because "there is a very obvious upward trend" visible on the graph.

MathWorks calls this upward trend a "mean trend" and describes it as a "violation of stationarity". So, it is a nonstationary stochastic process. They identify two such trend types: where the mean trend is deterministic, and where the mean trend is stochastic. Note these two are opposites, per our introductory definitions just above.

So GDP is a nonstationary stochastic process, where the nonstationary part -- the trend part -- might be deterministic, or might be stochastic. If it is deterministic, we have a deterministic nonstationary stochastic process. If it is stochastic, we have a stochastic nonstationary stochastic process. Ain't this fun?

Anyway, the deterministic one is said to be "trend stationary". The other one (according to Eduardo Rossi's PDF, page 4) is said to have a "unit root". And this isn't just boring arithmetic. It's economics with a hard on.


Here's the thing. The path of GDP is something stochastic. The stochastic part means it's random in the sense, I think, that we cannot know whether the next report will be higher or lower than anybody's guess.

That's the "marginal" piece of it, the "next piece of data" part. The other part of it is the long-term piece. You know, the trend. Is it a trend? Or is it as random as the next piece of data? Is it deterministic, or stochastic? That is the question.

But that is their question. Not mine. For me, it's a Toynbee thing. Left to its own devices, the economy will follow a path of growth and decline that encompasses many centuries and many nation-states. Left to its own devices, the economy will conform to the demands of human nature and to the demands of wealth. Left to its own devices, we get what looks to us to be the rise and fall of civilizations.

It doesn't have to be that way, of course. We could understand that what's happening is the result of such forces, and we could choose a different path. But that's a difficult thing to achieve, because everyone clings to their political opinions, even when they damn well know the problems are economic.

It's a catch-22. If we leave our economy to the wiles of human nature, we end up with the decline and fall of civilization. And the only thing we have to prevent that sad end is human nature.

So... How to resolve the deterministic slash stochastic, trend-stationary slash unit-root dilemma? Think big picture. Sometimes it's one way; sometimes the other. When the economy's growing vigorously for twenty years or more, or when a nation is young and vigorous, you've got a deterministic trend.

When economic problems arise faster than we can invent solutions, and growth sucks ass, well, you get lots of people chanting "unit root, unit root, unit root". And you know what? At that moment, they're right.

Friday, May 24, 2013

Reasons for the fall of the saving rate


From The saving decline: Macro-facts, micro-behavior (PDF) by David Bunting in the Journal of Economic Behavior & Organization:

Between 1952 and 1984 the aggregate personal saving rate as calculated from National Income and Product Account (NIPA) data by the Bureau of Economic Analysis (BEA) averaged 9.0 percent... However, after 1984 the personal saving rate collapsed as the BEA rate fell nine percentage points ...

Reasons for this rise and fall remain controversial. While relatively steady saving rates facilitated development of “permanent” spending theories during the 1950s and 1960s (Modigliani and Brumberg, 1954; Friedman, 1957), these theories have been unable to explain shifts in saving behavior in the 1980s and the collapse in saving rates thereafter.

Thought it was interesting: Bunting opens a door to the rejection of Friedman 1957.

But before that, he writes: "Reasons for this rise and fall [of the saving rate] remain controversial." And that brings me to this resolution of that controversy:

From American Standards of Living: 1918-1988 (Google book) by Clair Brown, describing differences between 1973 and 1988:

As earnings failed to continue their rapid upward climb, families sought to augment income through more hours of employment, especially for wives... Because spending rates were lower [and saving rates were higher] in 1973 than in 1988, emulation of 1973 consumption patterns would have required families to reduce their consumption in many areas, including shelter, household operations, and food (per capita).

Instead, families increased their spending rate rather than reduce their consumption standards. Overall, expenditures rose faster than incomes... The difference was financed by reduced savings and a smaller family size along with employer-provided health insurance covering more health care expenses and energy-saving advances in fuel and utilities.

A google search turned up the two links and I happened to read them one after the other. They seem to fit together like question and answer.

Thursday, May 23, 2013

Tweakin' the bull


From the Congressional Research Service: The Fall and Rise of Household Saving, a PDF by Brian W. Cashell, Specialist in Macroeconomic Policy:


From Do the Rich Save More?, a PDF by Dynan, Skinner, and Zeldes:


From Rama Bijapurkar, a breakdown of income, saving, and spending in India:
Household income and savings distribution, from NDSSP (adjusted), 2003 -4, and expenditure distribution
from NSS
Deciles Income Distribution(%) Saving Distribution(%) Expenditure Distribution(%)
1 (lowest) 2.0 0.6 2.5
2 3.2 1.4 3.8
3 4.1 2.2 4.7
4 5.4 3.6 6.0
5 6.2 4.5 6.8
6 8.8 7.3 9.3
7 8.4 7.1 8.9
8 11.9 11.1 12.2
9 15.8 16.8 15.5
10 (highest) 34.1 45.3 30.4
Total 100 100 100
Top 20% 49.9 62.1 45.9
Top 5% 22.7 31.4 19.9
Top 1% 8.6 12.6 7.3

The higher the income per capita per household, the higher their savings as well. 34% of total income is earned by top 10% of the households. When we look at the saving pattern across economic status, it is found that as high as 45.3% of the savings comes from the richest 10% of the households.

The poorest 20% of the households contribute just 5% to India's total personal disposable income. In case of household saving also, only 2% of the savings come from these households

How I interpret the numbers: The first decile receives 2.0% of the income, does 0.6% of the saving, and does 2.5% of the spending. The second decile... etc.

Note that the lower 8 deciles all spend more and save less than their share of income. The top two deciles spend less and save more than their share.


But I guess no matter how much data you gather in support of the Marginal Propensity to Consume, none of it matters because as Paul Krugman says, "It’s true that at any given point in time the rich have much higher savings rates than the poor. Since Milton Friedman, however, we’ve know that this fact is to an important degree a sort of statistical illusion."

To an important degree.

To what degree. Half? Let's say half. So then half of the evidence supporting the MPC is a statistical illusion. It has no significance.

So the other half is *not* illusion. It is clear, it has significance, and it stands in support of the MPC.

It's all in how you tweak the bullshit, isn't it?

Wednesday, May 22, 2013

I know

From mine of 11 May 2013:

I know that any time you divide "nominal" something by "real" something, you are factoring inflation into the result.

I know that after you factor inflation into something, the thing looks more like inflation than it did before.

I know economists like to take these things with inflation factored in, compare them to inflation, and say Wow, look at the similarity.

And I know the similarity is a sham.

// Related posts:
The Greatest Scam of the 20th Century
Kaminska and Unit Labor Cost
Symmetry in Deception: Similarities between "Unit Labor Cost" and "Money Relative to Output"

Tuesday, May 21, 2013

How long do we wait before calling it a trend?


Going up for a year now:

Graph #1

Monday, May 20, 2013

CHUCK LORRE PRODUCTIONS, #397


A vanity card that didn't get aired.
I trimmed off Chuck Lorre's answers.
Come up with your own.

CHUCK LORRE PRODUCTIONS, #397

CENSORED BY ME

What does it say about us when we are simultaneously pro-life and pro AK-47's? What does it say about us when God's will would allow a rapist to ask for shared custody and child support payments? What does it say about us when a black guy's in charge and we say things like "it's time to take America back"? What does it say about us when we think the institution of marriage is threatened by gay people who love each other, but not by idiotic game shows like "The Bachelor"? What does it say about us when we export democracy with Hellfire missiles, then restrict the right to vote here? What does it say about us when we build nuclear submarines to defend against exploding vests? What does it say about us when we think a guy who doesn't drink, doesn't smoke, keeps his money offshore, stubs his toe and says "H-E-double hockey sticks" and wears magical underwear can feel our pain? What does it say about us when we demand less government and more FEMA? What does it say about us when we completely forgot the colossal shit storm we were in four years ago?

What's missing from this picture?


At Economist's View Mark Thoma relays a Krugman post celebrating that there's "not a hint" of "runaway deficits" in "the new CBO numbers".

Yeah. Krugman says "there are longer-term issues" to be dealt with, later. But basically he says he was right and the austerity people were wrong about Federal deficits being a problem.

Thoma supports Krugman:

It's a good scam if your goal is to reduce the size and influence of government: implement spending cuts that slow the economy, never mind the unemployed, then call loudly for tax cuts and deregulation to spur economic growth. Repeat as needed.

Note the politics in his remark.

But what does Thoma not say? He does not explain the decline of growth. The other guys do: They want to "reduce the size and influence of government" because big government is bad for growth. Or that's their argument, anyway. At least they have an argument. Thoma doesn't offer one. Liberals don't.

Because it is empty


In Page One Economics at the St. Louis Fed... the March 2013 issue... Scott A. Wolla writes:

If the low inflation rate of 2 percent is good, why not have an even lower rate of zero? When the inflation rate is less than 2 percent, the danger of deflation exists. Falling prices might sound appealing, but falling prices would likely lead to falling wages as well—and deflation is associated with very weak economic conditions (Board of Governors of the Federal Reserve System, 2013).

Makes it sound like prices might fall by accident and, once falling, continue to fall in some kind of bizarre death spiral.

Perhaps this is a reasonable evaluation of our economy since 2008 or so. But it is NOT a reasonable evaluation of our economy for the 60 years prior to 2008. It is not a reasonable evaluation of what we used to think of as a normal economy... of what we still think of as a normal economy.

The next paragraph in the same article refers to things Bernanke said:

An inflation rate greater than zero maintains an “inflation buffer,” which reduces the chances of deflation should the economy start to weaken (Bernanke, 2010). On the other side of the Fed’s dual mandate (maximum employment), it is generally agreed that economic growth and employment are enhanced when inflation is low and stable (Bernanke, 2006).

"An inflation rate greater than zero maintains an 'inflation buffer'".

You could be six years old and understand that notion, not because the idea is simple, but because it is empty.

An inflation buffer "reduces the chances of deflation should the economy start to weaken (Bernanke, 2010)."

Good golly. If we imagine the economy weakens only enough that inflation falls by 2% and no more, then we're imagining a weak economic weakness.

That's an awful weak imagination. And awful, awful economics.


You know, it used to be normal for prices to go up and down some. Before my time. Before the Fed's time. It was okay, you know? Of course, there wasn't as much debt then as we have today.

Yeah, prices (and incomes) going down in a debt-heavy economic environment make debt even more of a burden.

Is that the reason we dare not risk even a moment of falling prices? Get serious! The problem, obviously, is not risk of deflation. The problem is excessive debt.

Sunday, May 19, 2013

Gavin Kennedy: "On these issues I agree with Keynes"

Recommended reading.

From Keynes on Laissez-Faire at Adam Smith's Lost Legacy:

Keynes, rightly, points out that Adam Smith never used the words laissez-faire. And on the single occasion where he used the IH metaphor in Wealth Of Nations, it is a travesty to impute, let alone blatantly assert, that his words can be stretched to mean what Samuelson’s wild inference takes them to mean.

However, on this occasion I shall not develop that theme.

Funny, because Gavin Kennedy always develops that theme. Good post.

Why is there a discrepancy, and where did the money go?


Following McConnell mostly (though McConnell does not use inflation-adjusted values), Graph #1 shows Personal Consumption Expenditures versus Disposable Personal Income as a scatter plot. The blue dots represent Personal Consumption Expenditures. The block dots show where the blue dots would have been, if none of disposable personal income had been saved.


Graph #1
Here's the Google spreadsheet.

To me, this graph is not a good way to see whether the Marginal Propensity to Consume falls as income rises. It shows the average consumption of everybody, rich and poor alike. To see differences of income, it depends on the passage of time. But surely, conditions were much different in the 1960s than they were 40 years later!

To me, Graph #1 makes it difficult to see the relation between the two sets of numbers. If the black dots were not there, could you really tell that the blue dots are slightly below the 45-degree line? When I first did this graph I had the axes reversed, and no black dots. The blue dots were running above the 45-degree line, but I couldn't tell.

I prefer to look at the two sets of numbers as a ratio, like this:

Graph #2: Real Personal Consumption Expenditures relative to Real Disposable Personal Income
Click Graph for FRED Source Page
Here you can see an unusual down-loop created by World War Two spending in the 1940s. You can also see, pretty unusual too, personal consumption expenditures reaching 100% of disposable income just at the end of the Great Depression in the 1930s. (The end of the gray bar part of it, I should say.)

Other than that, there seems to be a pretty strong downtrend until the mid-1970s, and a pretty strong uptrend since the early 1980s. The downtrend of consumer spending (relative to income) implies an increase in saving in the early years. The uptrend of spending in the later years implies a decrease in saving. And sure enough:

Graph #3: Two Versions of the Saving Rate

The "saving rate" runs clearly up till the mid-1970s, and clearly down after the early 1980s. Until the crisis, anyway. Even the late-1970s hump on Graph #2 is matched by an inverted hump on Graph #3!

Does this have anything to do with the Marginal Propensity to Consume? Seems to me it has more to do with general economic conditions and economic policies.


Clearness of mind on this matter is best reached, perhaps, by thinking in terms of decisions to consume (or to refrain from consuming) rather than of decisions to save.

I thought this post was finished before the Keynes quote above. But during repeated proofreads, those last two graphs fascinated me repeatedly. See how the one line goes down gradually, then up fast? The other one goes up gradually and then down fast. Like mirror opposites. Intriguing.

True: When spending goes up as a share of income, saving must go down. And when spending goes down as a share, saving must go up. Nonetheless.

Consumption is a high percentage of income, up near 100%. And the saving rate is a low percentage of income, down near zero. Still, there is something about the changes that cries out to me.

I went back to FRED and put the line from Graph #2 and the red line from Graph #3 together on a new graph. Chopped off everything before 1947 to get rid of the World War Two woopsie there, and to have the two lines start and end pretty much together. And I used annual data for both, to eliminate a distraction.

So, I put 'em on a graph. At first glance, then, the consumption-relative-to-income line (from Graph #2) was up high on the new graph and the saving rate (from Graph #3) was down low, with a lot of air between the two. Plus, they went in opposite directions.

To make the saving rate go in the same direction as the consumption-to-income line, I decided to use the minus of the saving rate. And I wanted to add about 100 to this mirrored saving rate, to move it up and get it closer to the consumption/income line. So what I graphed for saving was: 100 minus the saving rate.

It came out close. But not close enough. I played with it a bit and subtracted some from the hundred I added. The two lines are now very close:

Graph #4: Comparison of Personal Consumption Expenditures relative to Disposable Personal Income (ratio in blue) and Personal Saving as a Percentage of Disposable Personal Income (red) with saving inverted and shifted up to get it close to the blue line.

Two observations, maybe three.

First: Yes, certainly we should expect to see this similarity. We are looking at what we spend and what we save, as percentages of the income that we choose either to spend or save. Of course. Still, actually seeing the similarity is way better than just expecting it to be there. (I'm not big on expectations.)

Second: Close as they are, the red line gains on the blue line for the whole period shown. Or for sixty years anyway, from 1947 to the crisis. The red line starts out below the blue line. It slowly closes the gap but remains below until about 1980. After 1980 the red line runs above the blue consistently, to the crisis. And the gap widens.

Yeah, the lines cross at 1980, but that's not because of anything Reagan. I could make the lines cross earlier or later by subtracting a little more or a little less than 3 (see the last term in the second formula line, in the blue border across the top of the graph).

Forget 1980. What this graph shows is that the red line gains on the blue line for the whole 60 years between the Second World War and the Global Financial Meltdown.

What does that mean? I dunno, but I'm thinkin about it. The red line is gaining on the blue: The saving rate is gaining on the consumption rate. Except that the saving rate here is inverted, because I minus'd it.

Odd, isn't it? Consumption and saving together add up to disposable income. Our only choices are to spend the income or not spend it, to consume or to refrain. You would think that if the one goes up by n% of income, then the other has to go down by the same n% of income.

If consumption goes up, saving should go down. If consumption goes down, saving should go up. Invert saving, and the two should move together. And, yes, they do move together. But the red line is gaining on the blue.

Fascinating.

Here: Before 1980, consumption (blue line) decreased. The red line went down more slowly, so the gap between red and blue disappeared. But the red line is inverted saving. Before 1980 the red line went down slower than consumption; this means that saving went up slower than consumption went down.

Something similar happened after 1980. And all the while, the red line was gaining on the blue.

Okay, let's put numbers on it. From 1947 to 1981 the blue line fell from 92% of disposable personal income to 86%. That's a drop of 6% of income.

During those same years the red line fell from 90% of income to 86%, That's a drop of 4% of income and it means that saving increased by 4% of income.

Fine. But consumption (the blue line) fell by 6% of income while saving increased by only 4% of income. What happened to the other 2%?

More numbers: From 1981 to the 2001 recession the blue line went from 86% to 93%, an increase of 7% of income. During those same years the red line went from 86% to 94%. The red line went up one percent (of income) more than consumption went up. That means saving went down one percent (of income) more than consumption went up. We lost another one percent!

We lost two percent of disposable personal income in the years before 1981 and another 1% in the years after 1981. That's three percent of income, total, that's missing.

Pretty weird.

One thing that should be obvious in all this: There was no great change around 1980. Income disappeared in the years before 1980, and income continued to disappear in the years after 1980.


Okay. What Graph #4 shows is that the red line gains on the blue line for the whole 60 years. The red line is saving, inverted. It's an indicator of income not saved.

The blue line is income spent.

If the red line gains on the blue line for 60 years, it means that "income not saved" gained on "income spent" for 60 years.

Why is there a discrepancy, and where did the money go?


Wait a minute. One more graph. I took the saving rate and added it to consumption as a percent of income. The money we spend plus the money we don't spend, together. It should equal 100% of the income we started with. But it doesn't:

Graph #5: Personal Consumption Expenditures as a Percent of Disposable Personal Income, plus the Saving Rate, together add up to less than 100% of Disposable Personal Income, and fall from 99% to 96% between 1947 and 2007.
Click Graph for FRED Source Page
Why is this line less than 100%. And why is it falling?

Saturday, May 18, 2013

Is Wikipedia pulling my leg?


Scott Sumner says "give up on that MPC stuff, it was discredited decades ago".

Paul Krugman says

It’s true that at any given point in time the rich have much higher savings rates than the poor. Since Milton Friedman, however, we’ve know that this fact is to an important degree a sort of statistical illusion. Consumer spending tends to reflect expected income over an extended period.

So that gets us to Milton Friedman.

From the Handbook of consumer finance research, edited by Jing Jian Xiao, this note:


So that gets us to the permanent income hypothesis.

The Friedman reference is to: A theory of the consumption function. Princeton, NJ: Princeton University Press.


Note that the excerpt from the Handbook of consumer finance research is based on "perceived future income"... On expectations. I'm not big on expectations.

Anyway, this is some of what Wikipedia has to say on the Permanent Income Hypothesis:

The permanent income hypothesis (PIH) is a theory of consumption that was developed by the American economist Milton Friedman...

Friedman concluded that the individual will consume a constant proportion of his/her permanent income; and that low income earners have a higher propensity to consume; and high income earners have a higher transitory element to their income and a lower than average propensity to consume.

1. "low income earners have a higher propensity to consume"
2. "high income earners have ... a lower than average propensity to consume"

Sounds to me like it supports the idea of the Marginal Propensity to Consume.

Is Wikipedia pulling my leg?

Friday, May 17, 2013

Interest Income by Quintile


Didn't have to pull too many teeth to find this PDF from the BLS. (Data for 2009.)

Under "sources of income" the PDF includes "Interest, dividends, rental income, other property income" for "All consumer units" and by quintile.

Under "Consumer unit characteristics" the PDF provides the total income before taxes for each quintile.

I took a look at the ratios of those numbers:


Graph #1
Here's the spreadsheet.

Considering interest, dividends, rental income, and other property income as returns to various forms of saving, I am calling the total "interest income" and using it as a proxy to estimate various forms of savings by income quintile. For what it's worth.

Thursday, May 16, 2013

McConnell discredited?


Two excerpts from Malcolm R. McConnell's 1975 textbook, and a contradiction I let slide in yesterday's post:

First, from the text above McConnell's Figure 11•2:

Many economists now feel that the MPC and MPS for the economy as a whole are relatively constant. Statistical data such as those of Figure 11•2 are consistent with this position.

In other words, statistical data supports the view that the MPC does NOT change.

Second, from the text below Mcconnell's Figure 11•2:

[The figure] suggests that households spend a larger portion of a small income than they do of a large income.

In other words, statistical data supports the view that the MPC *DOES* change.

Wow. Talk about seeing both sides of an issue!

Wednesday, May 15, 2013

Gattopardo economics


Via Reddit...

Gattopardo economics: The crisis and the mainstream response of change that keeps things the same

by Thomas I. Palley.

PDF. 30 pages, give or take.

I'm four or five pages in, and I have thoughts for a critique already, but this paper is very good.

MPC discredited?


Steve Roth ponders the Marginal Propensity to Consume (MPC) here:

...since those workers have a high propensity to spend their income, all things being equal that distributional shift should mean there’s ... a virtuous cycle.

and again here:

Sumner, Drum, and Krugman all seem to think that the distribution/MPC/velocity argument has no legs. They’re quite categorical about this.

It is a big deal, because a lot of things fall into place if the MPC idea holds good. If it doesn't hold good, people should be a little more explicit about how it fails than Paul Krugman is:

...that the rich spend too little of their income. This hypothesis has a long history — but it also has well-known theoretical and empirical problems.

If it doesn't hold good, people should be a little more explicit about how it fails than Scott Sumner is (at the first link):

you really need to give up on that MPC stuff, it was discredited decades ago.

The quest for a better explanation of what's wrong with the MPC idea is Roth's focus in comments at the first link (in response to Sumner)...

I’ve poked around a lot looking for a straightforward, cogent refutation (that doesn’t make assumptions that I consider to be questionable). Any leads for me?

... and at the second link, in its entirety. Roth writes:

Can folks (especially those who don’t believe this argument) point me to what might be considered definitive takedowns? I have notions about what they might say, but want to see the best argument(s) out there.

I want to see too, Steve. But I suspect they're a lot like the arguments for free trade:
1. "It's obvious"
2. "We'll get to that later" (and later, they only say "It's obvious"), or
3. something incomprehensible, just to shut us up.


Roth is looking for "the slam-dunk argument that has Krugman and especially Drum convinced that the MPC argument doesn’t hold water".

You know what I like? I like it that even though the MPC explains a lot in a most satisfactory way, Roth is willing to accept that the idea is garbage -- *IF* someone can make the convincing argument. That's the right way to do economics: "always approaching" the best answer.

Anyway, I decided to look through some textbooks for views on the Marginal Propensity to Consume. Maybe that would be the easy way to find the concept discredited, I thought. I went first to McConnell's 1975 edition of Economics:
The proportion, or fraction, of any change in income which is consumed is called the marginal propensity to consume (MPC). Or, alternatively stated, the MPC is the ratio of a change in consumption to the change in income which brought the consumption change about; that is:


This is a bit different from Steve Roth's (admittedly brief) "poorer people spend a larger share of their income/wealth than richer people." And maybe that opens up a door. Because even of the marginal propensity to consume *is* junk, Roth's non-marginal observation may still be true.

In his 1975 textbook McConnell wrote:
Economists are not in complete agreement as to the exact behavior of the MPC and MPS as income increases. For many years it was presumed it was presumed that the MPC declined and the MPS increased. That is, it was felt that a smaller and smaller fraction of increases in income would be consumed and a larger and larger fraction of these increases would be saved. Many economists now feel that the MPC and MPS for the economy as a whole are relatively constant. Statistical data such as those of Figure 11•2 are consistent with this position.

These "feelings" that McConnell describes -- is that all there is?

McConnell's Figure 11•2:

Source: Economics by Campbell R. McConnell (Sixth Edition) Page 229

Reiterating the notes below the figure, a dot would be on the 45-degree line (the black line) if every dollar of disposable income were spent. Where a dot falls below the black line it indicates that some part of disposable income has been saved. The farther the dot falls from the black line, the greater the amount that was saved.

McConnell says the brown line "suggests that households spend a larger portion of a small income than they do of a large income." I agree: The brown line is not a trend-line for the dots. The brown line is a "constant percentage of income" line. For the years since 1946 through 1966 the dots are generally above the brown line. For the years after 1966 the dots are generally below the brown line. At the higher incomes, saving was generally greater than at the lower incomes.

But somehow, that doesn't feel like a slam-dunk argument.

Tuesday, May 14, 2013

Because too often one reads that the problem of scarcity has been solved


From The mother of invention at Interfluidity:

Actual scarcity has not, in fact, been overcome. We have not achieved overcapacity in aggregate. In a depression, businessmen perceive overcapacity all over the place. But that is a distributional phenomenon. There is an abundance of goods and services relative to the needs and desires of people with purchasing power to consume. There is no such abundance in an absolute sense.

Monday, May 13, 2013

An inverse relation


Via Random Eyes:


Pretty interesting: The interest rate and the Federal debt (relative to GDP) move in opposite directions. For a good long period, too: half a century.

It would be a mistake, however, to assume there is a causal relation between these two factors. That would leave out too much. Why do interest rates (blue) continue to rise in the 1970s when the Federal debt (red) is essentially flat? Why do interest rates fall through the 1990s while the Federal debt makes an S turn? There is more to the story than we can see on this graph.

Sunday, May 12, 2013

The Reason for Desiring Economic Growth


Checking my blog stats the other day, I noticed that one of the "traffic sources" was a google search for the reason for desiring economic growth is to...

Now, one of the things that's clear in my mind is why we might desire economic growth. So I thought I'd be explicit about it.

Lots of people complain that GDP is not a good number for various reasons. That may be. But it's the number we have. Making the number better is off-topic at the moment.

So what is GDP anyway? It's a measure of what we produce in a year. It's a way to measure the "size" of the economy. And we want it bigger because...

Nope. Not yet.

GDP = Gross Domestic Product
"Gross" = all of it. ("Gross" in this context does NOT mean "yucky".)
"Domestic" = within our country.
"Product" = the stuff we produce.
GDP is a measure of all of the stuff we produce within our country. In a year.

Now I can tell you why it's important. It's important because the total value of what we produce in a year is equal to the total value of our income in a year. GDP = GDI, where the "P" is "Product" and the "I" is "Income".

So, why do we want more economic growth? Because we want more income.

You do want more income, don't you?

Saturday, May 11, 2013

BCG81 said...


This is crude. I'm just throwing together a few pictures at FRED, in response to a comment from BCG81 on my old Kaminska and Unit Labor Cost post.

BCG81 said...

I agree it does not make sense to talk about a "correlation" between ULCs and inflation, because they're the same thing. But as I understand it, the reason *nominal* compensation is compared to *real* productivity is to measure the extent to which compensation can rise (as a result of compensation or inflation rising) without putting pressure on prices. You can't see that without holding output prices constant. Also, when using ULCs as a measure of international competitiveness, you want to see both cost (i.e., nominal i.e., labor share) competitiveness and price competitiveness (i.e., relative rates of inflation).

I don't know how to respond in words. The ideas are too big and too nebulous. It goes in interesting but turns to mush in my head. So I went to FRED.

This is crude because I'm just comparing labor cost to corporate profit.


Here's the "Unit Labor Cost" graph I showed in the old post:

Graph 1: Unit Labor Cost

Now if you wanted to compare that to something, you might compare it to Corporate Profit as a share of GDP:

Graph #2: Corporate Profit After Tax as a Percent of GDP

But that's not really a good comparison, for a couple reasons. First of all, the corporate profit measure is "after taxes". Why, I don't know. That's the popular measure though, at FRED. Type corporate profits in their search box and hit enter, and the first thing that comes up is Corporate profits after tax on a list that's sorted by popularity.

Whatever. The second reason...

Well, wait a minute. Let's look at the graphs.The first graph shows unit labor cost going up on a pretty straight path since 1980. That's labor cost, meaning wages and salaries (and benefits) before tax, as opposed to after tax. In addition, the taxes businesses pay on labor are added to that, if I remember right.

The second graph shows corporate profits after tax drifting possibly down until the mid-1980s, then rising from a low of 3% to a current high of over 11%.

From 1980 to the recent data, unit labor cost rose from about 60 index-units to less than 120. I don't know what the index-units are, but I can see that unit labor cost did not quite double since 1980. By contrast, corporate profits increased from 3% to over 11%. That's almost a fourfold increase, in less time than it took for the unit labor cost to double. Now... where was I?

The second reason these two graphs are not a good comparison is that Graph #2 shows profit as a percent of actual-price GDP. To make it comparable to Graph #1, we'd have to show it as a percent of inflation-adjusted GDP, like this:

Graph #3: Corporate Profits After Tax as a Percent of Real GDP

Now that sucker's going up.


I downloaded the data from Graph #3 and figured the average of the four (quarterly) values from 2005. That value is 9.72447382422837. (You should be laughing because I'm using all the digits.)

I used the average to create a version of Graph #3 that shows the data as an index with 2005 = 100, just like the Unit Labor Cost in Graph #1.

Here's the corporate profit data in blue, and the Unit Labor Cost data in red:

Graph #4: Unit Labor Cost (red) and Unit Corporate Cost (blue)
Here's the same data, just since 1980:

Graph #5: Unit Labor Cost (red) and Unit Corporate Cost (blue) since 1980

So, what's going up faster? What's driving prices up? Labor cost, they say. Not the blue one, they say. Well, maybe that was true in the Reagan years...


But, you know, maybe that's not so clear. Both lines are going up since the latter '80s. Let me do what I did in the old post, and show the data relative to "nominal" GDP -- GDP measured in the prices we actually paid to buy the stuff we bought:

Labor Cost (red) and Corporate Profit (blue) Indexes Relative to Actual GDP
Yeah, that red one? The one that's going down since 1960? That's the one they say makes prices go up.

It can't be true.


And now I can respond to BCG81:

I don't know about the things you said. But I know that any time you divide "nominal" something by "real" something, you are factoring inflation into the result.

And I know that after you factor inflation into something, the thing looks more like inflation than it did before.

And I know economists like to take these things with inflation factored in, and compare them to inflation, and say Wow, look at the similarity.

And I know that the similarity is created by the arithmetic. Not by the economy.

Friday, May 10, 2013

Notes on Debasement


In Milton Friedman's Money Mischief, in a chapter titled "The Cause and Cure of Inflation" we read:

So long as money consisted of specie (whether gold, silver, copper, iron, or tin) inflation was produced either by new discoveries or technological innovations that reduced the cost of extraction or by debasement of the currency -- the substitution of "base" metals for "precious" metals.

As long as money "consisted of specie" there were only two ways to create inflation, Friedman says. And debasement was one of the ways to create inflation.


From Price Fixing in Ancient Rome ( Mises Daily: Thursday, June 18, 2009 by Robert L. Scheuttinger and Eamonn F. Butler):

In order to attempt to deal with their increasing economic problems, the emperors gradually began to devalue the currency. Nero (A.D. 54–68) began with small devaluations and matters became worse under Marcus Aurelius (A.D. 161–180) when the weights of coins were reduced. "These manipulations were the probable cause of a rise in prices," according to Levy.

And again:

It would seem clear that the major single cause of the inflation [from Nero to Diocletian] was the drastic increase in the money supply owing to the devaluation or debasement of the coinage.

As with Friedman, here also the manipulation of the metal in money is offered as the cause of inflation, not the result. It's probably both, as everything in the economy has two sides. But what I'm saying is that manipulation of the metal, debasement, is a response to changing conditions in the economy. Note the prefacing phrase in the first excerpt from Scheuttinger and Butler: "In order to attempt to deal with their increasing economic problems..."

The problem doesn't necessarily start with government debasing the currency. You have to look farther back, before the debasement, to find the source of the problem.

It's a cost problem.

// Update 28 May 2013: Here's another one from Milton Friedman:

Since time immemorial, sovereigns -- whether kings, emperors, or parliaments -- have been tempted to resort to increasing the quantity of money as a means of acquiring resources to wage wars, to construct monuments, or for other purposes. They have often succumbed to the temptation. Whenever they have, inflation has followed close behind.
(From Money Mischief, Chapter 8: The Cause and Cure of Inflation)

Thursday, May 9, 2013

Inside and Outside


From Mark Dow and Michael Sedacca at Behavioral Macro:

The Fed does not control the money supply; they control base money (or outside money), which is a small fraction of the broader money supply. In our fractional reserve system, the banks (loosely defined) control the other 90% or so of the money supply (a.k.a. inside money). And the banks have not been lending...

Pretty clear, about inside and outside money, and who controls what.

Wednesday, May 8, 2013

"Medium of Exchange" and "Medium of Account"


Two items from The Coinage of Ancient Rome:

During which emperor's reign was nearly all silver removed from Roman coins?
    Gallienus. When Gallienus (253 - 268 a.d.) became Emperor, the coinage was already very debased. During his disastrous reign almost all silver was removed. He tried to disguise this fact by issuing copper coins which were silver-plated.

The standard gold coin of the early empire was the "aureus." How much gold did it contain?
    About 1/5 oz. Unlike the silver coinage, Roman gold coins continued to be minted from good metal through the history of the Empire, undergoing only minor debasement. The weight of the aureus did tend to fluctuate a bit, but it was usually minted at 60 aureii to the Roman pound, which works out to about 1/5 oz of precious metal.

When wealth is excessively concentrated, little or nothing remains to serve as value in the everyday money of everyday folk. But the gold coins, that's a different matter.

Tuesday, May 7, 2013

Trade Agreements, Trans-national Corporations and the Sovereignty of Nations


Today's post has been rescheduled for tomorrow, to free up your time to read the above-titled post at Another Amateur Economist.

Monday, May 6, 2013

When you hear complaints of weak leadership, remember this:


In the half century before Diocletian, there had been a succession of short-reigned, incompetent rulers elevated by the military; this era of weak government resulted in civil wars, riots, general uncertainty and, of course, economic instability...

To this intellectual and moral morass came the Emperor Diocletian and he set about the task of reorganization with great vigor...

Since money was completely worthless, he devised a system of taxes based on payments in kind. This system had the effect, via the ascripti glebae, of totally destroying the freedom of the lower classes — they became serfs and were bound to the soil to ensure that the taxes would be forthcoming.

Excerpts from Price Fixing in Ancient Rome (Mises Daily: Thursday, June 18, 2009) by Robert L. Scheuttinger and Eamonn F. Butler. (I added the link to Wikipedia.)

Sunday, May 5, 2013

The double-sided excuse


At Mike Norman Economics, Tom Hickey links to Erroneous Use Of The Sectoral Balances Identity [Updated] by Ramanan.

Ramanan reviews Andrew Lilico's Can public sector austerity coincide with private sector austerity?

Ramanan's post is impressive. Andrew Lilico's is not.


Lilico writes:

When we talk about "private sector deleveraging" what do we mean? We mean things like households paying off loans to the bank, or corporates paying off bonds or other loans. The vast, vast majority of such loans are loans private sector agents make to each other. So for every dollar reduction in borrowing made by one household or company, there is one dollar fall in savings by other households and companies.

(Forgive me my Americanisms. Andrew Lilico thinks in British pounds, but I think in dollars. Two places I had to change his word "pound" to "dollar" to help me think.)

Ramanan astutely observes:

Lilico confuses the terms borrowing and saving

He certainly does: For every dollar reduction in borrowing made by one household or company, there is one dollar fall in savings by other households and companies.

If only. If the reduction in demand (caused by the reduction in borrowing by some) was counterbalanced by an increase in demand caused by the reduced saving of others, there need be no recession, no output gap, no increase of unemployment.

Andrew Lilico's error is comparable to Eugene Fama and John Cochrane's as described by Paul Krugman:

Fama and Cochrane are asserting that desired savings are automatically converted into investment spending, and that any government borrowing must come at the expense of investment — period.

But in Lilico's case, the error is created by his use of the word "savings" when the correct word would have been "lending": For every dollar reduction in borrowing made by one household or company, there is one dollar fall in lending by other households and companies.

That much is true. But a reduction in lending is not the same as a fall in savings. A fall in savings implies money moving out of savings and into circulation without an act of lending. It implies a dollar-for-dollar substitution of demand by savers in the place of demand lost when spenders borrow less.

Lilico's simple word-substitution error explicitly describes this dollar-for-dollar shift in demand. Since it is dollar-for-dollar (or pound-for-pound) as Lilico describes it, GDP does not fall as a result of the reduction in borrowing. Output does not fall.

Ramanan writes:

The most fundamental error of Lilico of course is that he holds output constant in his entire argument. When discussing a scenario with sectoral balances, it is also important to keep in mind the behaviour of output.

Amen to that.



Ramanan also points out that

Lilico’s argument seems to think of the budget deficit as exogenous – i.e., under the control of the government but a careful study reveals that this ain’t so.

Yeah... But this depends on one's point of view. The people who call for austerity in government spending obviously think government spending can be cut and cut again. And obviously it can be done: It is being done. So I think Ramanan's argument here is weak. Remember, the object is always to convince people who disagree. Never only to preach to the choir.


My criticism of Andrew Lilico's article is unlike Ramanan's.

Lilico describes the sectoral balances identity:

...whatever the government doesn't borrow from the private sector in its own country it must be borrowing from foreigners.

He calls this "trivial". Then he allows a simplification: "we assume the position relative to foreigners doesn't change." Now the trivial has been reduced to pristine simplicity:

That implies that any reduction in government borrowing must precisely be matched by a rise in household borrowing. Conversely, any fall in household borrowing must be precisely matched by a rise in government borrowing.

Couldn't get much clearer than that. Even I understand it: A given economy, with its particular monetary balances, requires a particular level of borrowing for markets to clear. Notice in the above excerpt only borrowing is considered; not lending.

But Lilico says "the entire argument is utterly confused" from the start. From the off, he says.

Lilico says that private-sector borrowers essentially borrow only from the private sector. Not from the government, he implies out of the blue. Allowing the same simplification Lilico allowed above, let us say *all* private sector borrowing originates in the private sector. So when we speak of private sector deleveraging, he says,

The net change in the indebtedness of the private sector as a whole, relative to ... the government ... is zero.

Now he brings in lending, thoroughly confusing the issue:

Within the private sector, households could pay off all of their debts to each other, and that would (in an accounting sense) make no difference whatever to the net lending of the private sector as a whole to the government.


The goal of the sectoral balances approach is not simply to separate debt by sector. The goal is to see and understand what happens in the economy. In order to see and understand what happens, it is helpful to keep the sectors separate. Adam Smith did something similar when he identified the categories we call land, labor, and capital.

Andrew Lilico's logic is painfully out of focus. Reaching for a conclusion, he writes:

That clever-sounding national accounting identity at the start, once we ignore the external sector, says nothing more than that what the government borrows from the private sector is equal to what the private sector lends to the government

In Smith's day, Lilico would have been calling it foolish to separate labor from capital because what capitalists pay to labor is equal to what labor receives in payment.

Saturday, May 4, 2013

Reading the new issue of Discover


In the recent Discover magazine I turn the page and find this:
Improve Medical Research, Scrap Funding Model

For nearly seven decades, federal agencies and many private funders have financed medical research through competitive grants to individual scientists who submit proposals for particular projects. This system is intended to match available funds with the best researchers and ideas.

But today's competition for limited grant money encourages overly safe research, aimed more at producing positive results to bolster future proposals than at breaking new ground. The current system discourages high-risk, high-payoff science...

I don't need to read any more. I already have a response.

The first paragraph sets the stage by describing the how and why of funding for science. The second paragraph describes problems with that system. Between the two is a transition phrase: "But today's competition for limited grant money..."

That's the problem, right there. The money. Problems with money create other problems. And then people write articles proposing to fix those other problems by changing the way things have been done for seventy years or more.

It may be a way to cope, but it does not solve the real problem.

Friday, May 3, 2013

Opportunity cost


If I spend enough time mowing the lawn and doing yard work, then I don't have enough time to write a post every day for the blog. I hope to catch up this weekend.

Thursday, May 2, 2013

Reverse debasement

Just some loose ends, not a complete idea. But I need a post this morning, so I'll call this a post.

I found a U.S. Silver Coin Melt Value Calculator. They provide a list of silver coins, with face value, weight, percent silver and other data. I typed in a quantity of one for each of the coins on the list.

Total face value: $7.85

Total value of silver: $239.27 (based on the current price of silver just a few days ago).

The value of the silver in those seventeen coins is more than 30 times the face value of the coins.


A Jefferson nickel, containing only 30% silver, contains $1.31 in silver. In a nickel.

But you know what really gets me? The Kennedy half dollar issued in 1964 contains $8.42 worth of silver at recent prices. But the Kennedy half issued in 1965 contains only $3.44 silver. Because after 1964 the silver content dropped from 90% to 40%.

The issue of dimes and quarters containing 90% silver, if I read the list right, also stopped at 1964. I vaguely remember. (I was in high school.) Wikipedia confirms.

Clearly, before 1965 the people in charge of issuing our coins knew they could not continue to issue coins containing 90% silver, or people would melt them down to make money on the silver in the coins. It's Gresham's law: Bad money drives good money out of circulation.

It's also a kind of reverse debasement: The government had to take silver out of the coins, because the coins were getting to be worth less than the silver was worth.

Usually, when I think of debasement, I think of the money becoming worth less because the government reduces the silver content. That's not what happened here.

Wednesday, May 1, 2013

A Krugman meme?


In Government Debt and Economic Growth (Economic Policy Institute, July 26, 2010) Josh Bivens and John Irons write:

The GITD threshold rests on a simple correlation of high debt levels with slower growth, but no evidence on causality is given. This is important given that contemporaneous causality is actually more likely to run in the opposite direction that what is claimed in the report. That is, causality is more likely to run from slow growth to high debt levels, and this alternative explanation is even supported in the GITD data.

In Not to Pile On, But…Correcting Reinhart and Rogoff (On the Economy, Apr 16, 2013) Jared Bernstein writes:

As I’ve written many times, riffing off of Bivens and Irons for one, if you mush everything together they way they do, you’re likely to get the causality backwards. You’ll convince yourself that higher debt leads to slower growth when it’s more often the opposite.

In Debt and Transfiguration (The Conscience of a Liberal, March 12, 2010) Paul Krugman wrote:

I’ve been going through this chartbook somewhat in tandem with rereading the recent Reinhart-Rogoff paper on debt and growth (subs. req.) — the one that’s being widely cited as evidence that bad things happen when debt goes above 90 percent of GDP...

What I think I’m seeing, although I haven’t tested this carefully, is that the causal relationship largely runs from growth to debt rather than the other way around. That is, it’s not so much that bad things happen to growth when debt is high, it’s that bad things happen to debt when growth is low.

This is definitely the case for the United States...

So, as I wrote before,

Paul Krugman argued against the view that a high level of debt causes problems in the economy. Inadequate growth, he said, makes debt appear excessive. He thinks the people who worry about the debt have cause and consequence reversed.

We see now that Josh Bivens and John Irons have the same idea, as does Jared Bernstein, and Arindrajit Dube, and probably many, many others.

I don't care. If you are evaluating the work of Reinhart and Rogoff, evaluating their analysis of Federal debt and its impact on growth, how are you going to deal with the fact that other debt has grown to be a far bigger number than Federal debt, and carries far greater cost?

Do you just assume it away with an implicit ceteris paribus?

The only way to deal with "other" debt is to consider it, in your studies of debt. If other debt is not constant -- and you know it is not -- then by ignoring it you invalidate your own study of central government debt.

In my simple view, the Reinhart and Rogoff study is completely invalid because it ignores debt other than central government debt. In everybody else's view, it seems the R&R study is great, except they got the causality wrong.

So, who has the better argument?