Here's the second graph from 4AM yesterday, Troy's graph tweaked:

Graph #1: Percent Change from Year Ago, Employment (blue) and Consumer Debt (red) |

That's what makes it so interesting.

Yeah, two lines close together. Except they're on two different axles. Two different axes. The lines are pretty close together, but the numbers themselves are not. Where the blue line is zero, the red line is seven. Where the blue line is 10, the red line would be 23. The numbers are not usefully close. But the patterns are teasingly similar -- and yet intriguingly different during the 1960s and 1990s, the two decades of above-average economic performance. Intriguing.

Then I remembered a technique I learned from Lars Christensen. It goes something like this:

Subtract from Series A the average value of Series A, and then divide by the standard deviation for Series A, and then multiply by the standard deviation for Series B, and then add the average value of Series B. At that point no further adjustment should be needed for comparing A and B.

That set of calculations I call "Christensen-fitting" the data. I don't know if it's a standard technique (and if so, what the name of that technique is) or if Lars Christensen invented it. But I like it.

So I downloaded the data from FRED and set to work.

I went right back to FRED then, changed the monthly PAYEMS series to quarterly so it matched the debt series, and downloaded the data again.

The CMDEBT data was intermittent before 1952Q4, so I deleted the data for both series before that date. Then all I had to do was find a spreadsheet with the calcs Christensen used, and duplicate the calcs. He used the STDEVPA() and AVERAGE() functions, so I did the same. Here are the numbers I came up with:

Next, I went back to FRED and plugged in the numbers for the Christensen-fit. Here is the result:

Graph #2: The Christensen-Fitted Version of Graph #1 |

(Hm. FRED must use a calculation very much like this to scale and shift the right-axis numbers, when two axes are used on a graph.)

Okay. Now that I have the employment numbers fitted to the debt numbers, I can subtract the one set from the other and see the difference:

Graph #3: "Fitted" Employment Growth Date Less Debt Growth Rate |

*before*the crisis. Now that's interesting.

I subtracted the debt growth rate from the employment growth rate. So where the line is below zero, debt growth is the bigger number. Again, where the line is below zero, the debt growth rate was faster than the employment growth rate... Well, I have to be careful here. The debt growth rate is

*always*faster than the employment growth rate. If I go back to the first graph and put everything on the left axis, it looks like this:

Graph #4: Not Fitted, and On the Same Axis, Debt Growth (red) Is Way Faster |

Well, yeah. That's why I fitted the one series to the other. So we could compare them. But I have to be careful how I talk about it. So let me try again:

On Graph #3, I subtracted the debt growth rate from the "fitted" employment growth rate. So where the line is below zero, debt growth is the bigger number. That is, where the line is below zero, the debt growth rate was faster than the "fitted" employment growth rate.

Where Graph #3 is below zero, the debt growth rate is relatively faster than the employment growth rate. Where Graph #3 is above zero, the employment growth rate is relatively faster than the debt growth rate.

Where Graph #3 shows a trend of increase (before 1967), the trend favors employment. Where it shows a trend of decrease (1967-1980) the trend favors debt growth.

I downloaded the "fitted" data from FRED, put it into Excel, and added a Hodrick-Prescott trend line to it:

Graph #5: Same as Graph #3 (blue) with a Hodrick-Prescott Trend (red) |

The trend favors employment till about 1967, then debt till 1980, employment till the mid-1990s, then debt again

The trend favors employment till about 1967. That's interesting, I think. I have it in my notes that Scott Sumner identifies the years 1952-1964 as

*a big debt surge*. But despite surging debt, employment grew more. Can that be right?

Graph #6 |

But look at it this way: From 1952 to the mid-1960s, employment was winning in a race of go-karts. At the same time debt was losing in a race among dragsters. Then from the mid-1960s to 1980 employment was losing among go-karts and debt was winning among dragsters. That's what Graph #3 and Graph #5 show, the Sumner debt surge of 1952-1964 notwithstanding.

Now look at it this way: The employment growth of 1952-1966 was faster, compared to employment growth of the whole 1952-2013 period, than the debt growth of 1952-1966 compared to debt growth of the whole period.

Debt growth in the early years was only moderate, as debt growth goes, while employment growth in those same years was very good, for employment growth.

Yeah, that's it.

## 4 comments:

Debt and employment number seem too apple and orange to me. I doesn't take wages into account.

BTW, I took a hard look at Sumner's idea back at that time. He's wrong.

http://jazzbumpa.blogspot.com/2012/08/debt-recession-and-that-ol-devil.html

I think this is also relevant.

http://angrybearblog.com/2012/04/another-look-at-wealth-and-consumption.html

Cheers!

JzB

Art

Since you like Keen I think you should review this paper. It is explaining (I think) what your are trying to flesh out.

http://www.debtdeflation.com/blogs/wp-content/uploads/2010/09/DeleveragingWithTwist.pdf

Oilfield Trash,

Thanks for the Keen link. This paragraph, from the bottom of the first page, is just right:

The aggregate level of private debt now towers over the economy, putting into sharp relief the obsession that politicians of all persuasions have had with the public debt. Rather like Nero fiddling as Rome burnt, politicians have focused on the lesser problem while the major one grew out of control. Now they are obsessing about a rise in the public debt, when in a very large measure that is occurring in response to the private sector's deleveraging.

Also, Keen's next sentence:

If they had paid attention to the level of private debt in the first place, then we wouldn't be facing exploding public debt today.Exactly. I've been watching the ratio of total debt to circulating money since the late 1970s. I figured, if I knew about it, policymakers knew about it and they'd stop the increase of debt before the increase of debt stopped us.

I was wrong.

OT, I'm about four comments behind in getting back to you. I liked what you said the other day about rising income inequality. My thoughts are not orderly on the topic, but I hope to respond by the weekend.

Jazz,

By Okun's law there is a pretty strong connection between the output gap and the unemployment gap.

Here's Keen on the relation between debt and employment:

Though the correlation between changes in real GDP and changes in employment are higher than those for the acceleration in debt and changes in employment, the “credit impulse” leads changes in employment while GDP slightly lags changes in employment: credit, which is ignored by conventional “neoclassical” economics, is in the driving seat.(from Oilfield's link)

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