Saturday, March 21, 2015

They didn't

Why did rich-world deficits start exploding around 1980? asks Noah Smith.

You already know my answer: They didn't. Now I can read his post, and reply.

Noah writes:

The U.S. federal deficit, which had been decreasing since the end of WW2, began to trend upward beginning around 1980

Then he shows a picture of the U.S. Federal debt (not the deficit) ...

Graph #1: Noah's Measure of the Federal Deficit
... the U.S. Federal debt relative to GDP.

Silly Noah.

He immediately explains (in a very short paragraph) that "the proximate cause was big tax cuts". But he wants to talk about the political-economic cause. "I have a theory" he says.

Yeah, Noah, I bet you do.

But I didn't get any farther than that, reading his post. I had to stop reading and start responding. So I don't yet know what his theory might be. Before we look at Noah's theory...

Before we look at Noah's explanation of something that didn't really happen -- his explanation of why it happened, I mean -- let's pause long enough to see whether it really happened, or not.

1. Stock and Flow

Debt is a stock. Deficits are a flow. A deficit is the addition to debt during a well-defined short period of time. A debt is the sum total of deficits accumulated over a continuous series of those time periods. So obviously, since "debt" takes a whole bunch of "deficits" and adds them all together, a "debt" is going to be a lot bigger than a "deficit". Look at it on a graph and, if you're a little naive, you might even think the debt is "exploding".

Here is the FRED graph Noah used. It goes all the way back to 1966. Whoop dee doo.

For the next graph, I took Noah's graph and added a line for the U.S. Federal deficits, the flow number. Mine (red) is shown as a percent of GDP, just like Noah's (blue).

Graph #2: U.S. Federal Debt (blue) and Deficit (red). The blue line is the same as on Graph #1
(Click the graph to see the FRED source page.)
See any explosions in the red line? The red line is deficits.

When numbers "explode" on a graph, you expect to see a line going up, fast. That's what I expect. That's what Noah was showing us with his Federal debt graph: After the early 1980s, the line goes up sharply. Too bad his graph doesn't show deficits.

A deficit is a shortage, of course. If a deficit is a hole in the ground, then a bigger deficit is a bigger hole. As deficits get bigger, the line on a graph goes down. I don't know why FRED shows it that way, but they do. That's why the red line is almost all below zero on Graph #2.

It's not intuitive. But that's okay. If deficits were "exploding" we'd see the red line go down a lot. Myself, I don't see that on Graph #2.

I know what would help. We can get rid of the blue line and just look at the red line. We can give all the space to the red line and let it expand to use the available space. (FRED will expand it automatically when I remove the blue line.) Then maybe the little wiggles will look like explosions.

But if I'm gonna do that, I'm also gonna put a minus sign in front of the data series, to invert the line. That way, bigger deficits will go up on the graph, instead of down. It'll just make more sense.

2. Go with the Flow.

Here are the deficits that Noah didn't show us:

Graph #3: U.S Federal Deficits as Percent of GDP (inverted, so higher is bigger)
That's better isn't it? The line is so jiggy! It looks like explosions all over the place. But wait just a moment. The biggest number on the vertical axis is 10.0. The biggest number on the vertical axis of Graph #2 is 120. So basically we took the red line from Graph #2 and magnified it by a factor of 12.

Yes, it's satisfying to see some action in the line on the graph. But you have to remember it's the same red line on graph #3 and on Graph #2. We're just taking a closer look.

So do we see "explosions" on Graph #3? Remember, Noah says deficits started exploding around 1980. Do you see that in the U.S. data? I don't.

I see the growth of deficits peaking around 1980 -- in 1983 actually -- and going downhill after that until the year 2000. And then maybe, an explosion after the year 2000. Here, I eyeballed in some trend lines:

Graph #4: U.S Federal Deficits as Percent of GDP (with some trend lines just by eye)
Yes, deficits were increasing from around 1970 to that 1983 peak. But if you want to call that an explosion, you have to say it started around 1970. So when Noah asks why deficits started exploding around 1980, we have to say they didn't. Not in the U.S. at least.

Hey if you look at the bottom part of Graph #4, above, just below the dates there's a squeezed-down version of the graph that shows how much of the data we're looking at. We're only looking at half, a little more than half of it. That's because Noah was looking at a data series that starts in 1966, and I didn't change the dates yet. I'll do that now. But first, look at that squeezed down version again. Look at the left-hand part, the years before 1966. You can see a big hump there. Probably everybody knows that hump is from World War Two. Yeah, let's look at that.

Graph #5: U.S Federal Deficits as Percent of GDP, all years. Inverted so big is up.
Now there's an explosion of deficits! World War Two makes everything else look like ... muffins. There is certainly no explosion of deficits between 1980 and 2000.

Okay, deficits were increasing since the 1970s -- or since the 1950s, really -- and deficits remained relatively high for an extended period, from the mid-1970s to the mid-1990s. And a bunch of high deficits one after the other should make the debt graph show an explosion. Sure.

And yes, Noah's graph shows a sudden, sharp, and persistent increase in debt from the early 1980s to the mid 1990s. But that is not an explosion of deficits. If you insist on calling it an explosion, it is an explosion of debt. Deficits tended to get smaller after the early 1980s, as a percent of GDP (and that's Noah's yardstick).

3. A Discrepancy

Well, Noah says the explosion started "around 1980". And you can see it in his graph. Checking his graph at FRED, it appears that the increase in debt started after 1981 Q3. The increase in debt as a percent of GDP.

Graph #6: Noah's graph of the U.S. Federal Debt, again
And that's strange, because deficits were trending up since the 1950s. Deficits were trending up quickly since 1970. If deficits were growing quickly since 1970, why does Noah's debt graph not show increase until ten years later?

Why, from 1976 to 1981, does Noah's graph trend downhill? Why doesn't it show increase since 1970? Hey, I wouldn't be asking the question if I didn't think I knew the answer: Inflation skews the numbers.

To be continued...


The Arthurian said...

If you look at Graph #2 for a moment, you can see a significant uphill trend in the blue line, beginning at the start of the 1982 recession. The blue line is above zero, so an uphill trend means the debt was getting bigger.

If you look at the red line you can see a definite uphill trend beginning just after the 1982 recession. The red line is below zero, so an uphill trend means the line was approaching zero, and deficits were getting smaller. Deficits were tending to get smaller for something like 20 years, beginning around 1983.

Noah's claim that Federal deficits exploded after 1980 is incorrect. But that's not the real problem. The real problem is that people accept flawed stories like Noah's, and develop views about government and about the economy based on the flawed stories. And people make political choices based on those views that are based on false information. That's the real problem.

Noah, you are part of the problem.

Jazzbumpa said...

Yeah -

There's a denominator problem.

I like to look at this kind of stuf as YoY % change, or on a log scale. Here's % change. Makes your point even more emphatically, I think. I gotta run for now.