Wednesday, September 30, 2015

The Emergence of the State

I thought this was fascinating.

Via Reddit, at Vox

Cereals, appropriability, and hierarchy

Joram Mayshar, Omer Moav, Zvika Neeman, Luigi Pascali 11 September 2015

Conventional theory suggests that hierarchy and state institutions emerged due to increased productivity following the Neolithic transition to farming. This column argues that these social developments were a result of an increase in the ability of both robbers and the emergent elite to appropriate crops. Hierarchy and state institutions developed, therefore, only in regions where appropriable cereal crops had sufficient productivity advantage over non-appropriable roots and tubers.

To understand why surplus is neither necessary nor sufficient for the emergence of hierarchy, consider a hypothetical community of farmers who cultivate cassava (a major source of calories in sub-Saharan Africa, and the main crop cultivated in Nigeria), and assume that the annual output is well above subsistence. Cassava is a perennial root that is highly perishable upon harvest. Since this crop rots shortly after harvest, it isn't stored and it is thus difficult to steal or confiscate. As a result, the assumed available surplus would not facilitate the emergence of a non-food producing elite, and may be expected to lead to a population increase.

Consider now another hypothetical farming community that grows a cereal grain – such as wheat, rice or maize – yet with an annual produce that just meets each family's subsistence needs, without any surplus. Since the grain has to be harvested within a short period and then stored until the next harvest, a visiting robber or tax collector could readily confiscate part of the stored produce. Such ongoing confiscation may be expected to lead to a downward adjustment in population density, but it will nevertheless facilitate the emergence of non-producing elite, even though there was no surplus.

This simple scenario shows that surplus isn't a precondition for taxation. It also illustrates our alternative theory that the transition to agriculture enabled hierarchy to emerge only where the cultivated crops were vulnerable to appropriation.

  •  In particular, we contend that the Neolithic emergence of fiscal capacity and hierarchy was conditioned on the cultivation of appropriable cereals as the staple crops, in contrast to less appropriable staples such as roots and tubers.

According to this theory, complex hierarchy did not emerge among hunter-gatherers because hunter-gatherers essentially live from hand-to-mouth, with little that can be expropriated from them to feed a would-be elite.

  •  Thus, rather than surplus facilitating the emergence of the elite, we argue that the elite only emerged when and where it was possible to expropriate crops.

Due to increasing returns to scale in the provision of protection from theft, early farmers had to aggregate and to cooperate to defend their stored grains. Food storage and the demand for protection thus led to population agglomeration in villages and to the creation of a non-food producing elite that oversaw the provision of protection. Once a group became larger than a few dozen immediate kin, it is unlikely that those who sought protection services were as forthcoming in financing the security they desired. This public-good nature of protection was resolved by the ability of those in charge of protecting the stored food to appropriate the necessary means.

  •  That is, we argue that it was this transformation of the appropriation technology, due to the transition to cereals, which created both the demand for protection and the means for its provision.

This is how we explain the emergence of complex and hereditary social hierarchy, and eventually the state.

Tuesday, September 29, 2015

Not setting the interest rate

From the FRED Blog:
The traditional policy tool of the Fed is to target the federal funds rate. Note the term target. Indeed, the Fed does not set this interest rate; rather, it sets the target and then conducts open market operations so that the overnight interest rate on funds deposited by banks at the Fed reaches that target.

The Fed does not set the interest rate. It sets the target and conducts open market operations so that the interest rate reaches this target.

Monday, September 28, 2015

The lower the number, the faster debt accumulates.

Not sure I have this graph right. I'm taking "Household Debt Service Payments as a Percent of Disposable Personal Income", dividing by 100 to eliminate "percent" and multiplying by "Disposable Personal Income" (FRED's DPI) to get Household Debt Service Payments in Billions. But the DPI numbers are quarterly at an annual rate and the debt service numbers are just "quarterly". My numbers might be mismatched.

Don't let that stop me.

After I get Household Debt Service Payments in Billions, I multiply by 100 to get percent and divide by Household Debt (FRED's CMDEBT) to see Household Debt Service Payments as a Percent of Household Debt:

Graph #1: Household Debt Service Payments as a Percent of Household Debt
I'm going ahead with this graph despite my doubts, because the results are reasonable. At max, debt service amounted to between 16 and 17 percent of debt. At present. debt service amounts to between nine and ten percent. Those numbers feel right. Were I to multiply (or divide) them by 4 to correct for a "quarterly" discrepancy, the revised numbers would be too high (or too low). So I'm happy with this graph.

Not happy with the downward trend. The lower the number, the faster debt accumulates.


FRED doesn't offer Household Debt Service Payments data for the years before 1980. So I don't know what the graph of those years would look like. But I expect it would be pretty much a mirror image, increasing irregularly from the 1950s to the 1985 peak.

Sunday, September 27, 2015

New Borrowing minus Payback = Change in Debt

We were looking, a few days back, at cost-of-debt graphs. Geerussell linked to How much income is used for debt payments? A new database for debt service ratios by Mathias Drehmann, Anamaria Illes, Mikael Juselius and Marjorie Santos.

I re-read that article this morning and made sense of it this time. Some things it says should be obvious:
Debt service ratios (DSRs) provide important information about the interactions between debt and the real economy, as they measure the amount of income used for interest payments and amortisations...

These debt-related flows are a direct result of previous borrowing decisions and often move slowly as they depend on the duration and other terms of credit contracts. They have a direct impact on borrowers' budget constraints and thus affect spending.

Since the DSR captures the link between debt-related payments and spending, it is a crucial variable for understanding the interactions between debt and the real economy.

(By "amortisations" they mean repayment of principal. So they are looking at more than just the cost of interest. Interest and principal, both. Debt service.)

Some of what they wrote was plain interesting:
... during financial booms, increases in asset prices boost the value of collateral, making borrowing easier. But more debt means higher debt service ratios, especially if interest rates rise. This constrains spending, which offsets the boost from new lending, and the boom runs out of steam at some point. After a financial bust, it takes time for debt service ratios, and thus spending, to normalise even if interest rates fall, as principal still needs to be paid down.

After a financial bust, it takes time for debt service ratios, and thus spending, to normalise even if interest rates fall, as principal still needs to be paid down.

But Jim has pointed out that "The amount of debt for households hasn't changed much in the last 8 years." He's right:

Graph #1: Household Debt. The circled point on the graph is Third Quarter 2007, eight years back
Principal still needs to be paid down.

The change in household debt was that it stopped going up so fast. That seems to agree with Dr. Econ's graph showing a sudden, screeching halt in Household Net Borrowing:

Graph #2: Household Net Borrowing is "the difference between borrowing and saving during a period"
When new borrowing drops to nothing, debt stops increasing.

But look at Household Debt in comparison to "Debt Service Payments as a Percent of Income":

Graph #3: Household Debt Continued to Grow Faster Than Debt Service Payments
You wouldn't know by Graph #3 that there had ever been a financial crisis. There's barely a wiggle on the graph. And debt continues to increase faster than we can manage to pay it off.


  •  Debt will always increase unless we pay it off faster than we take it on.
  •  If debt always increases, you must eventually have a crisis.
  •  The longer debt reduction is postponed, the bigger the crisis.

Saturday, September 26, 2015

"a handful of sand"

From Chapter 7, Zen and the Art of Motorcycle Maintenance by Robert M. Pirsig:
All the time we are aware of millions of things around us -- these changing shapes, these burning hills, the sound of the engine, the feel of the throttle, each rock and weed and fence post and piece of debris beside the road -- aware of these things but not really conscious of them unless there is something unusual or unless they reflect something we are predisposed to see. We could not possibly be conscious of these things and remember all of them because our mind would be so full of useless details we would be unable to think. From all this awareness we must select, and what we select and call consciousness is never the same as the awareness because the process of selection mutates it. We take a handful of sand from the endless landscape of awareness around us and call that handful of sand the world.

Thursday, September 24, 2015

Simplistic Complexity

We're often warned that the economy is extremely complex. The meaning of the warning seems to be that we should shut up and let the experts do their thing.

But that's some kind of joke, I think. Because whenever it comes down to promoting growth versus preventing inflation, we unfailingly get boilerplate, like this from Bloomberg Business, waved in our faces:

... not to mention the Federal Reserve's first interest rate increase since 2006 coming as soon as next week. Some economists worry that it's too early to start tightening policy, which carries the risk of crimping growth.

Yes: They always raise interest rates to fight inflation, and raising interest rates always "carries the risk of crimping growth". No duh. But that analysis is painfully, painfully simplistic.

Wednesday, September 23, 2015

Fools and Wise Men in Context

I don't read these things, so maybe I have it wrong. Looks to me like Nassim Taleb said "A good political system is one that allows the country to have an idiot, or a team of idiots at the top, without suffering from it." And Noah Smith replied "Yes, and a good coffee maker is one that doesn't break even when you hit it with a hammer."

Smart-ass kid.

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

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

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

In that environment, you could put idiots in charge and the economy would still be good. But it has nothing to do with the political system being good, and everything to do with the economic environment being conducive to growth.

So, let me go back to Noah Smith and Nassim Taleb.

Taleb makes a statement worth thinking about. Noah Smith smashes it with a hammer. Noah Smith is an idiot.

Taleb says if the system is good, it can withstand idiots. I agree, but with caveats.

1. Politics is yap. Economics is money. It is the economic system that must be good, if it is to withstand idiots.

2. By encouraging the growth of private sector debt, the idiots of the 1960s eroded the conducive nature of the economic environment. They did harm to the economic system by increasing costs, financial costs. When the problem appeared, it appeared as inflation. Inflation was the economy's solution to the problem of increasing costs. (General inflation was the economy's solution to the problem of increasing financial costs.)

3. The idiots of the 1980s suppressed inflation by suppressing the thing that was good about the economy: economic growth. Sure, yes, inflation fell on their watch. But not because they reversed the increase of financial costs. Inflation fell because vigorous economic growth disappeared and never returned.

4. And like the idiots of the 1960s, the idiots of the 1980s encouraged the growth of private sector debt. This made the cost problem worse, which reduced growth more. Then these idiots tried to counteract the decline of growth with solutions to help the supply-side grow. But the part of the supply side that was willing and able to grow was the financial sector, so the cost problem continued to grow worse, right up to the moment of crisis.

Conclusions: Yes, the economic system can withstand idiots, but not forever. And the economic environment is the context that can make fools look like wise men, if the fools are lucky enough to get out before things go bad.

Tuesday, September 22, 2015

Sometimes the ideas that underlie the numbers are so simple you just have to laugh

A little silliness here yesterday: I praised the accuracy of the potential output data series, real and nominal, based on similarity to the inflation series. That's silly, because they have to be similar. After CBO has "real potential GDP" figured, to get the nominals they can just factor-in the inflation numbers. Those numbers are known. So when I come along later and subtract the real rate from the nominal, I'm left with inflation numbers that differ from the originals only by rounding errors.

Then, for the ten-year futurecast, they just draw a nice, flat line about as close to the "target" rate as you could get if you drew it by hand.

So while I was having some fun with poutput and inflation, Paul Krugman was having some fun with unemployment:
Estimates of how low U can go seem always to be a bit below the current level of unemployment.

What’s driving this ever-falling estimate of the NAIRU? The failure of inflation to materialize. And look, it’s better to see the FOMC update in the light of evidence than not. But the truth is that we really don’t know how low unemployment can go ...

Well, Krugman squeezed all the fun out of it by the end, there. But he's right: If there is no inflation, then the NAIRU must be less than the unemployment. So then, they guess a lower NAIRU number.

Point of interest (maybe): FRED identifies the U.S. Congressional Budget Office as the source for the NAIRU numbers. Not the FOMC.

Monday, September 21, 2015

Maybe they'll know I'm joking around

Listlessly rummaging thru FRED data, I noticed they offer both "real" and "nominal" measures of potential output. The difference between them, I noted, is a measure of inflation.

Hmmm, I said to myself, if I subtract the one rate from the other, I can compare the result to inflation and see how accurate these things are. The fact that both series run from 1949 to 2025 -- ten years into the future -- made these datasets all the more interesting.

Graph #1: Inflation Embedded in Potential Output (blue) and Inflation (red)
Pretty darned accurate, I said to myself. Pretty darned accurate.

Close as the red and blue lines are, amazing as that is, it's nothing compared to the forecast for the 2015-2025 period. Let's get a close-up:

Graph #2: A Look at the Years Ahead
The faint vertical just after the end of the red line, that faint vertical shows where we are now, in the third quarter of 2015. Inflation is running at just under 1% annual, well below the Fed's 2% target rate.

Not to worry. Within six months, inflation will be up over 1.5% annual. And by the end of 2017 we'll be right on target, or just a hair over.

Most amazing of all, if you ask me, by 2018 inflation is in the zone and from there on out it is smooth sailing, with inflation solidly at the two percent level, consistently at two percent, and unwavering at two percent.

Sunday, September 20, 2015

Looking under the wrong rock

From this page

on 12 September 2015, this link

to a 24-page PDF: What Drives Consumer Debt Dynamics?

Twenty-four pages. Here's the opening paragraph:
Monetary policy influences household spending through various channels. For example, low interest rates support higher asset prices, increasing households’ wealth and producing more spending through the wealth effect. In addition, to the extent that previously acquired debts have floating interest rates or can be re-financed, low interest rates can reduce the burden of servicing those debts and free up cash flow for other spending. Low interest rates also tend to make new borrowing more attractive, which in turn can boost household spending.

You can challenge me on this, but I really don't have to read further. The authors of that paragraph think monetary policy drives consumer debt dynamics, end of story.

The old tax deduction for all consumer interest costs plays no role in their understanding. The present tax deduction for mortgage interest costs plays no role in their understanding. The present business and corporate income tax deduction for all business interest costs plays no role in their understanding. The entire business income tax structure -- which allows 100% tax deduction for all legitimate business expenses, but takes a cut of the income the business doesn't spend -- plays no role in their understanding. None of these incentives to borrow and to spend play any role in their understanding. Only the intermittent low interest rates bequeathed upon the economy by monetary policy play a role in their analysis.

I didn't read beyond that first paragraph, so I could be wrong. Want to show me I'm wrong about this? I'd be thrilled. But include a quote from the PDF and tell me what page you found it on.

Saturday, September 19, 2015

Bar code

Friday, September 18, 2015

Debt vs Credit Use

It sometimes confuses people when I distinguish between debt and the use of credit. I say things like: Using credit is good for the economy, and debt is bad for the economy.

I think the confusion arises because people don't distinguish between debt and credit use as I do. Okay. So try this on for size:

It is not because we owe money that the economy becomes vigorous. It is because we spend more money than our incomes allow.

Now you'll probably say in the not too distant past we spent way more than our incomes allowed, and the economy was awful.

Yes. Because there was already a massive accumulation of existing debt, the stuff that's bad for the economy. There was so much of it that we couldn't spend enough more than our incomes to make the economy good again. The bad outweighed the good.

And if you notice, it's the good thing -- the borrowing and spending beyond our income -- that adds to existing debt and makes the bad thing a bigger problem.

Thursday, September 17, 2015

Oh, what a relief it is

I was very much relieved to discover, when I finally went and looked at it, that Excel's linear trendline for that scatterplot we've been looking at is not upsloping left to right:

Rather, it runs in the same general direction as the lines that connect the dots.

Wednesday, September 16, 2015

The Blob

Source: Wikipedia, of course

On mine of 13 September Jim said "I agree that the cost of debt to households (and to business?) appears to be correlated with economic expansion/contraction (but not to the quantity of debt). And it is worth exploring why that correlation exists."

Jazzbumpa quoted Jim, and replied:
Well, here is the correlation.

It looks like a correlation, but I think that is a mirage. Eliminate the 5 extreme points at the top left and the 8 at bottom right - that's 13 out of 141 - and you're left with an amorphous blob in the middle.
An amorphous blob? At first glance, perhaps.

I replied:
Jazz, connect the dots by turning on the line that connects them. Your amorphous blob begins to take on definition. I see mostly downsloping (left-to-right) lines, suggesting that higher cost-of-debt is associated with lower GDP growth, and lower cost-of-debt with higher growth.

These downsloping lines appear to be flatter when the cost of debt is lower, and more sloping when the cost of debt is higher.

Some of the lines are upsloping (left-to-right). I suggest that these show phase changes, times when people are learning to deal with a permanently higher level of debt cost, for example. We saw something comparable in Noah Smith's Phillips Curve graph a few years back.

Jim replied to Jazzbumpa as well:
If you were following the discussion: It started with the ratio of private debt to all debt. That ratio drops on every single recession since 1950 for a few years and then slowly climbs upward till it hits the next recession and then repeats. The debt service graph has similar characteristics - particularly since 1990.

Jim sees a clear relation between the debt ratio and economic performance, and a similar relation between debt service and economic performance. Jazzbumpa shows an amorphous blob, and sees an amorphous blob. Maybe he is challenging us to make a better argument.

I'll take that challenge.


I downloaded the FRED data for Jazz's graph, along with quarterly recession indicators in case I need that. Loaded up the data into Excel and made a scatterplot comparable to the one Jazz did at FRED:

Graph #2: "mostly downsloping (left-to-right) lines"
I connected the dots, of course.

I suppose you could find a high-density region of blue dots around 5% NGDP growth, like this:

Graph #3
Or perhaps like this:

Graph #4
Okay. But if you don't add lines to the graph, if you just look at the lines that are on the graph, you don't see a lot of lines showing a steep slope up and to the right:

Graph #5
The lines that connect the dots show the year-by-year pattern. Most of those lines seem to run either flat or high on the left and low on the right. Yes, there are a large number of dots clustered around the 5% annual growth number. But that just means the most common NGDP growth rate is in the neighborhood of five percent annual.

The thin red lines on Graph #5 do not show a lot of activity in the steep upward direction indicated by the thick red line on Graph #4. That tells me that even though most of the annual numbers end up somewhere near 5%, we cannot say that the trend is upward and to the right.

The apparent clustering of dots in the neighborhood of 5% annual GDP growth allows us to imagine a trend that is upward and to the right. But that clustering is unrelated to household debt service payments as a percent of disposable personal income. There are other factors -- factors, real or expectational, but not shown on the chart -- that favor NGDP growth in the neighborhood of 5%. These factors are the source of the clustering. The clustering and the fat red lines on Graphs #3 and #4 are not relevant to the analysis of Graph #5.


These thoughts may have implications for the time-shifting Phillips Curve.

Sunday, September 13, 2015

2½ Times Longer and 2½ Times Deeper

On Thursday I said

The blatantly obvious problem with excessive credit use is the cost of it.

Jim responded:
This graph suggests the cost of debt is not a problem much less THE only problem.

The burden of debt on households is currently the lowest it has been in 40 years (or more).

I responded:
Jim, the other day you said:
"What I see in [the other day's graph] is that whenever the ratio of private debt to all debt is going up it corresponds to a period of what is generally regarded as good economic times. And when the ratio is going down those are periods generally regarded as bad economic times."

I bring this up because I think one can see the same correspondences in your graph: increase (and good times) in the mid-1980s and in the mid-1990s; decline (and bad times) in the early 1990s and since the crisis.

Note that the decline since the crisis is about twice as deep as the early 1990s decline, and lasts about twice as long. Also, we appear to be at the same point on the curve now as in late 1993 -- almost ready to have an uptrend and good economic times for a while.

Your observation that "The burden of debt on households is currently the lowest it has been in 40 years (or more)" seems to be a reference in particular to the sharp decline during the past 8 years, the decline that followed from the crisis. That decline corresponds to bad economic times, as you so correctly point out.

And now that the decline seems to be bottoming out, I am willing to say we might be ready to begin a period of good times of approximately the same duration as the decline. But you seem to say that if I was right about the cost of debt being a factor related to economic performance, then the economy would be in the midst of good times right now because the cost of debt is already low.

Not at all. For the cost of debt has only just become low. So now, conditions will be able to improve.

The increase in debt (or, really, the use of credit (which is recorded as an increase in debt)) adds to good economic times. But existing debt is a cost that subtracts from good economic times. When existing debt is low it does little to hurt the good economy, and when existing debt is high it does much to hurt the good economy.

Therefore, an uptrend in credit use that begins when existing debt is at a low level is likely to be vigorous, and may continue (though with decreasing vigor as the level of existing debt rises) until the damage done by existing debt equals or exceeds the benefit derived from new credit use.

I'm not good enough with photoshop to superimpose the graphs

Okay... I'm looking at this part of what I said:

Note that the decline since the crisis is about twice as deep as the early 1990s decline, and lasts about twice as long. Also, we appear to be at the same point on the curve now as in late 1993 -- almost ready to have an uptrend and good economic times for a while.

Suppose we take Jim's graph and stretch it out a few years into the future. FRED lets me do that, but when I capture and display the link, it reverts back to 2015. Anyway...

Here's a screen shot:

Image #1

Next I change the blue line to dashed red, turn off the recession bars, stretch the graph out to the year 2030 again, and take another screen shot of it.

Then I load it into Paint.NET, use the "magic wand" (at 20% tolerance) to erase the white background, and save the file as a GIF:

Image #2

Then I crop it so it shows just the 1990s, and put a black border on it. Actual size:

Image #3

Then I open up Image #1 so I have two files to work with in Paint.NET. I create a new layer for Image #1.

I switch back to the cropped GIF file, make it twice as big, no, 2½ times as big, and copy it.

Then I switch back to Image #1, paste the cropped GIF into place, save and "flatten" the file, and show you what I got:

Image #4
See how the blue line, after the 2007 peak, follows very much the same path as the first few years of the dotted red overlay? This doesn't guarantee that anything will happen tomorrow, of course, but the striking similarity of the two downtrends makes me think that the uptrends might also turn out similar.

So we could soon get a few years when the economy seems pretty good again while debt races upward even faster than it did before the crisis, if we have the stomach for it. When those good years come, you know whatever political party is in power will claim all the credit.

Right now, though, nobody expects a few good years.

I don't either.

Thursday, September 10, 2015

It's cost, Joe

At Economist's View, Stiglitz: Towards a General Theory of Deep Downturns. Excerpts from a recent paper.

Here, excerpts from the excerpts:
This paper, an extension of the Presidential Address to the International Economic Association, evaluates alternative strands of macro-economics in terms of the three basic questions posed by deep downturns: What is the source of large perturbations? How can we explain the magnitude of volatility? How do we explain persistence?

Why so deep? Why so long? And, where do they come from?

The paper argues that while real business cycles and New Keynesian theories with nominal rigidities may help explain certain historical episodes, alternative strands of New Keynesian economics focusing on financial market imperfections, credit, and real rigidities provides a more convincing interpretation of deep downturns, such as the Great Depression and the Great Recession, giving a more plausible explanation of the origins of downturns, their depth and duration.

Finance, credit, and real rigidities. In that order.

Or, not quite in that order I guess:
Since excessive credit expansions have preceded many deep downturns, particularly important is an understanding of finance, the credit creation process and banking, which in a modern economy are markedly different from the way envisioned in more traditional models.

A lot of people will like that one: Since credit expansion is a problem, it is important to understand the credit creation process and banking.


Is excessive credit use a problem, or is it not? Simple question.

The blatantly obvious problem with excessive credit use is the cost of it. Or it should be blatantly obvious, but every time I say "the cost of it" people think I mean the rate of interest. Duh. How about the interest rate times the number of dollars of debt outstanding, to get a total cost of all the credit that is presently in use. How about that?

Wednesday, September 9, 2015

Following up

On Monday I showed this graph:

Graph #1
and tried to describe one particular decade of it:
Consider, for example, what the graph shows between the years 1980 and 1990. It shows the Federal debt (green) running at around 5% increase, and relatively stable at that level. It also shows everybody else's debt (red) climbing from near 10% annual increase to near 30%, then falling back to below 10% during the decade.

So, I'm thinking if I look at the red line relative to the green line -- "other" debt relative to Federal -- I'd see during that decade "other" debt starts at about two times Federal, rises to about six times Federal, then falls back to around two times Federal or something less. And that's just the 1980s.

I want to follow up now by comparing two different graphs of that particular decade: one, the ratio of change from year ago values; the other, the ratio of Hodrick-Prescotts of those values.

Looking at it a little more closely now, what I described as the 1980s appears to be more like the 1982-1992 period. I hope you'll forgive that sloppiness.

Anyway, I took Graph #1 and reduced it to run from 1980-01-01 to 1992-01-01:

Graph #2
As you may remember, the blue line is "total credit market debt" relative to GDP. The red and green are two portions of that: Green is the Federal government's portion of that debt, and red is everybody else's; both, again, relative to GDP.

I ignore the blue line, and look at the red relative to the green:

Graph #3
This is a reduced-date-range version of Monday's Graph #2, which showed two grand spikes, a few squiggles, and nothing in the 1980s.

My description of what I expected to see in the 1980s --

during that decade "other" debt starts at about two times Federal, rises to about six times Federal, then falls back to around two times Federal or something less

is not too far off (if you go from 1983 to 1992). But my intent here is not to compare the graph to my guesstimate and conclude that I'm a good guesser. My intent is to compare Graph #3 to Graph #4:

Graph #4
Now it gets subjective: I think #4 is a good representation of #3.

Just to clarify what's in my mind... I've been wanting for quite some time to work with Hodrick-Prescott values, smoothed-out versions of raw data. Using smoothed data in ordinary economic calculations (rather than using the raw data) just seems like it might give more easily interpretable results.

The two posts, Monday's and this follow-up, are my first opportunity to try it.

Tuesday, September 8, 2015

First Wooly Bear of the season

Head at left, tail at right.

Long brown, short black, mild winter.

Really short black at the tail end. Maybe an early Spring?

We will see.

Monday, September 7, 2015


We ended up last time looking at debt relative to debt. Maybe you don't like that so much, because in this world things are always shown "relative to GDP".

Hmm. Debt was growing a lot faster than GDP for more than half a century. So debt numbers are way bigger than GDP numbers. So, what you use for context might depend on what you want to see.

If you want to make the Federal debt look small, you could compare it to a big number like total debt. If you want to make it look big, you compare it to a small number like GDP.

Of course, you might just want to find out about the Federal debt (or whatever data you're looking at) without trying to make it look small or anything like that. I suppose you could compare it to GDP and also to total debt, as I did in the previous post.

And, all data aside, you should want to think about the context variable. You should want to think about whether GDP is always and everywhere the right variable to use when you're looking at things "relative to" things.

Of course GDP is not always and everywhere the right variable to use.


Irony of ironies: Turns out I'm going back to "relative to GDP" for this post. Truth be told, I got motivated to write the previous post because I happened upon my old Change in Debt post, which shows changes in debt relative to GDP.

The old post has an "old" style FRED graph. Here's the updated version:

Graph #1
The green line shows the Federal debt, relative to GDP. We looked at that last time, except last time it was accumulated Federal debt relative to GDP. This time it is change from year ago values, relative to GDP. So the numbers are not as high this time. But maybe it's easier to see changes.

The red and blue also show "change in debt" relative to GDP. Blue shows changes in total credit market debt (or credit market "instruments" as they are now called). Red shows changes in "other" credit market debt -- by which I mean all of it except what the Federal government owes.

Looking at Graph #1, I find a couple interesting things. One is that, in the years before 1970, the Federal debt was tangled up with the zero line, meaning almost no growth of Federal debt ("relative to GDP"). But "other" debt was running close to the 10% line -- meaning that debt other than the Federal debt was growing nearly 10% every year.

That's a big difference. If you start with $1 in (say) 1952 and it grows zero percent every year until 1970, in 1970 you still have just $1. But if you start with $1 in 1952 and it grows ten percent every year until 1970, then in 1970 you have $5.56.

So, in the years before 1970 on Graph #1, we can guess that the Federal debt grew about 5½ times slower than everybody else's debt. Or turn it the other way and say everybody else's debt grew about 5½ times faster than the Federal debt.


After 1970 or so, the growth rates on Graph #1 pick up the pace. Federal debt growth moves up to around 5%. "Other" debt varies, but reaches as high as 30%. In my view, the 20 years or so when the Federal debt was not growing, and everybody else's debt was growing around 10%, those 20 years of disparate debt growth created imbalances in the economy. The imbalances reduced economic growth, which led to a higher rate of Federal debt growth. That's why we see the Federal debt running higher between 1970 and 2000 than in the years before 1970.

But that's just what I think. It's not what this post is about.

This post is about the two different debt growth rates -- the rate for Federal debt and the rate for everybody else's debt. Consider, for example, what the graph shows between the years 1980 and 1990. It shows the Federal debt (green) running at around 5% increase, and relatively stable at that level. It also shows everybody else's debt (red) climbing from near 10% annual increase to near 30%, then falling back to below 10% during the decade.

So, I'm thinking if I look at the red line relative to the green line -- "other" debt relative to Federal -- I'd see during that decade "other" debt starts at about two times Federal, rises to about six times Federal, then falls back to around two times Federal or something less. And that's just the 1980s.

Instead of describing what all six and a half decades might look like, it is much easier just to show the graph. Unfortunately, these are "change from year ago" values. We're looking at changes. And sometimes the changes are large and sudden. So when I take "other" debt from Graph #1 (red) and look at it relative to Federal debt from the same graph, it comes out like this:

Graph #2
Two of the values are so large, and most of the other values are  so close to zero, that no discernible pattern appears on the graph.

I think I know what the decade of the 1980s should look like on Graph #2, but there is nothing there to see.

I could change the start- and end-dates on the graph and probably get something useful. But then I'd be missing five and one-half decades of the pattern I want to see. So I need a different strategy.


Oh, by the way: I'm taking "100 times Other Debt divided by GDP" and dividing it by "100 times Federal Debt divided by GDP". When I do that I have 100 on the top and 100 on the bottom, so they cancel out. And I have GDP on the bottom and GDP on the top, so they cancel out, too. So I'm left with Other Debt divided by Federal Debt.

No GDP for context!


I downloaded the excel file from FRED for the data in Graph #1 ... deleted the blue line for total (Federal plus Other) debt ... and made a graph in Excel to show Federal and Other (separately). The two are a good match to the green and red lines on Graph #1. (I check my work.)

Then I figured Hodrick-Prescott values for the two debt series, to smooth out the lines. I'm thinking when I recreate Graph #2 using the smoothed-out numbers, I won't get those crazy spikes. So I'll be able to see the pattern of Other relative to Federal for the whole period of the graph. Hopefully.

Just a reminder: If I'm successful we'll be looking at "change from year ago" of "other" debt as a multiple of "change from year ago" of the Federal debt. And we should be looking at better results than we have on Graph #2.


The FRED data I started with is quarterly. The recommended "lambda" value for the Hodrick-Prescott calc is 1600 for quarterly data. But that smooths the numbers out much more than I want. So I switched right away to a lambda of 100 -- the recommended value for annual data. Messed with it a bit and reduced the lambda values to 10. Now the H-P lines hug the FRED data pretty closely:

Graph #3
Now the next step is to do the "Other divided by Federal" again, this time using the Hodrick-Prescott data values.

Oh, by the way, I did my Hodrick-Prescott twiddle using Kurt Annen's HP-Filter Excel Add-In.

So I made the graph, and it wasn't much different than #2 above. Changed my lambda numbers back to 50, messed with it, and stuck with 50.

I don't know what to make of the result:

Graph #4


The Excel file with graphs, data, calcs, and Kurt Annen's H-P code is available for download at Google Drive.

// Monday Morning Update

I looked at Graph #4 this morning and decided to just graph the section between the really high spikes.

Graph #5
Well that's better! Looks like the spikes die as recessions arise. We might have expected that. What's more interesting, I think, is that the height achieved  by the spikes drops consistently, over a range of five spikes and for a 30-year period (1963-1993). We can say that a dollar increase in the Federal debt produced less and less of a private-sector response throughout that 30-year period. That's interesting, I think.

// The revised Excel file.

Sunday, September 6, 2015

"I wish there could have been less [controversy]"

Let's start with the number that has us by the balls -- the Federal debt:

Graph #1: The Federal Debt
Please don't tell me it doesn't have us by the balls, or I'll have to tell you you're an idiot.

Here, let me point out that I didn't say it rightly has us by the balls. Of course, I didn't say it wrongly has us, either... Oh, but you know? I did say that. Probably a hundred times on this blog, if not in so many words. And you know it, too.

It was always my intent to skip this drivel, and just show you some graphs, and tell you what I see. But it turns out that people don't read carefully. And they already have their own conclusions. Well, not their own, but somebody else's conclusions that they parrot as their own. And those people cannot really see what I'm showing them, because they are unwilling to take it one step at a time.

They prefer to reject every step along the way. You know, like idiots.

Anyway, if you look at Graph #1, the Federal debt seems to run essentially flat until, oh, the 1974 recession. Or at least until 1970.

But guess what... It doesn't even run flat in the years before 1970:

Graph #2: The Federal Debt To 1970
Even though it looks flat on Graph #1, the Federal debt increased regularly and consistently from 1957 to 1970. No biggie, no biggie, don't be an idiot. We're just looking at pictures here.

The Federal debt increased about 35% in the dozen years or so between 1957 and 1970. (Compare that to the 100% increase -- from 2000 billion to 4000 billion -- in a dozen or so years from the latter 1980s to the latter 1990s on Graph #1. And that's not the fastest increase. It is just easy to see.) So the Federal debt was on the increase in those early years, if at a slow pace.

Oh, by the way, the above graphs show the Federal government's portion of "credit market debt", essentially the same as the portion "held by the public".

Graph #3: Measures of the Federal Debt
On Graph #3 the bright blue line is the Federal government's part of "credit market" debt, same as shown on the first two graphs. The red line is the Federal debt "held by the public". The red line is annual data and the blue is quarterly; this accounts for at least some of the difference between the two. But there isn't much difference.

The green line is the "gross" Federal debt. It includes the part held by the public and also the part held by various Federal agencies -- Social Security, and like that.

FYI, for the rest of the graphs in this post we're looking at "credit market" debt, not "gross" debt.

Attention Idiots: Please notice that I still have not said anything about whether or not the Federal debt is a problem. We're just looking at it. Gathering a little information. Confirming things we know, and maybe learning a thing or two. (My memory's not the best, so I can learn things today that I might have learned before.)

Okay. On Graph #1 we looked at the Federal debt. But it was just dollars of debt. Or... you know, billions of dollars of debt. But there's no "context". We can see the debt is higher at the end than at the start. But we don't really know how that fits to the economy.

Yeah, I know: We do know. Or probably you do know. But we have not looked at it yet in this post. You know what that means? It means you're not allowed to discuss how it fits to the economy. Not yet. You still have to be patient and wait and pretend that you're interested. Because I still didn't get to the point.

If we go back and get the data from Graph #1, Federal debt for 1950-2015, we can give it a context by showing it "relative to GDP":

Graph #4
Now, in Graph #4, we're looking at what Noah was looking at in his Why did rich-world deficits start exploding around 1980? post.

We're looking at the US data that Reinhart and Rogoff were looking at in Growth in a Time of Debt (PDF, 6 pages).

And we're looking at the US data in A contribution to the Reinhart and Rogoff debate: not 90 percent but maybe 30 percent (via Reddit).

Now, idiots, I'm getting to the point.

When you look at the Federal debt relative to GDP there are lots of things you're not looking at. The usual practice among economists, I guess, is to say ceteris paribus, "with other things the same".

Well... one of the things left out, when you look at the Federal debt relative to GDP, is the debt of everybody other than the Federal government. That's a lot to leave out, all by itself. And the debt of everybody else was not "the same", unchanged and unchanging, while the Federal debt was growing.

Let's look at that.

Graph #4, above, shows the Federal government's part of credit market debt, relative to GDP. It's in blue on Graph #4. The same data is shown again, in blue, on Graph #5:

Graph #5
Graph #5 also shows the rest of credit market debt, relative to GDP, in red. That's all of credit market debt except the Federal government's part. And the Federal government's part is now low on the graph, because everybody else's debt is such a big, big number. Too big to hide under the doormat of ceteris paribus.

The red line, by itself, peaks at 320% of GDP. Add the blue and red together, and you're up around 350% of GDP at the peak. That's 3½ times the value of all the goods and services produced that year, 2009 or whatever year it was.

That's a lot of debt.

And that makes me think: Maybe we're using the wrong "context" variable. Rather than looking at debt "relative to GDP", why not look at debt relative to debt? Why not look at the Federal part of credit market debt as a percent of credit market debt? And why not look at the rest of credit market debt, other than Federal, as a percent of credit market debt? Why not?

Graph #6: Federal and Other Shares of Total Credit Market Debt
The line that runs low, the blue line, that's the Federal government's share. The red line that runs high, that's everybody else's.

If excessive debt is the problem, it's not the Federal part that's giving us trouble. It's our part. And I think we know that. We all want out of debt.

And that's a damn good idea.

Saturday, September 5, 2015

Guessing games

In a post called Historical Fiction, John Cochrane writes:
Steve Williamson has a very nice post ... rebutting the claim ... that the late 1970s Keynesian macroeconomics with adaptive expectations was vindicated in describing the Reagan-Volker era disinflation.

The claims were startling, to say the least, as they sharply contradict received wisdom in just about every macro textbook: The Keynesian IS-LM model, whatever its other virtues or faults, failed to predict how quickly inflation would take off in the 1970, as the expectations-adjusted Phillips curve shifted up. It then failed to predict just how quickly inflation would be beaten in the 1980s.

In other words: The Keynesians failed to predict the fast pace of rising inflation, and then failed to predict the fast pace of disinflation.

So, the predictions were wrong. Ahh, but economics is best when it does not toy with prediction. Economics is best when it uses the past to understand the present and to make decisions about the future -- and not to play guessing games.


Cochrane and Williamson evaluate the predictions of Keynesians. Let us evaluate the predictions of people with money to lend.

I showed this graph on 20 August:

Five Interest Rates (red) and Four Measures of Inflation (blue)
See the fairly consistent gap between the red and blue lines around 1960-1965? As you should expect to see, interest rates fairly consistently ran two or three percentage points above inflation in those years. But then after 1965 inflation (blue) started climbing faster, and pretty soon closed the gap.

In other words, the people who set those interest rates did not expect inflation to rise as rapidly as it did in the 1965-1981 period. Those people were fooled by the fast pace of rising inflation, just as Cochrane's Keynesians were.

And then, around 1981, inflation (blue) started coming down. It came down faster than interest rates (red) so that a gap opened up again between red and blue. This gap stretches from the early 1980s to the year 2000. The gap is twice as wide as the gap of the 1960-1965 period -- because inflation fell quickly and interest rates fell slowly.

In other words, the people who set those interest rates did not expect inflation to fall as rapidly as it did in the 1981-2000 period. Those people were fooled by the rapid pace of falling inflation, just as Cochrane's Keynesians were.

Who are those people who were fooled? Well, the Fed sets the short term rates. People with money to lend set all the other rates.

Cochrane says the Keynesians did a terrible job predicting inflation. Okay. But guess what? The Fed and the people with money to lend did just as bad as Cochrane's Keynesians. Their inflation predictions were just as bad.

And you know what? The Keynesians were only making predictions. The people with money to lend were making predictions and betting on them.

Friday, September 4, 2015

Our task

Here's how it works: A man lives for a while, and then dies. A nation lives for a while, and then dies. A civilization lives for a while, and then dies.

If you want your civilization to live, not die on your watch, then economics must be nothing more or less than the effort to get the right answer.

The right answer does not depend on what you or I want. It depends on what the economy wants and how the economy works. Our task is to understand these.

Wednesday, September 2, 2015

Things Keynes did not say

Bill Mitchell:
In Chapter 24 of The General Theory of Employment, Interest and Money, Concluding Notes on the Social Philosophy towards which the General Theory might Lead, John Maynard Keynes confronted the issue of the “arbitrary and inequitable distribution of wealth and incomes” in capitalist economies. The argument he advances in that Chapter of his 1936 book contains guidelines for the progressive left that some just cannot seem to grasp. In short, governments (as our agents) do not need the savings of the rich to ensure that society prospers.

Wow. I never quite got that from Chapter 24.

I stopped reading Bill Mitchell's post at that point, and went back to Keynes. I re-read the whole of Chapter 24, with Mitchell's statement in mind. I found something relevant to Mitchell's opening. Turns out, it is the same that Bill Mitchell quoted. I shorten it and split it in two, here:
Since the end of the nineteenth century significant progress towards the removal of very great disparities of wealth and income has been achieved through the instrument of direct taxation .... Many people would wish to see this process carried much further, but they are deterred ... partly by the fear of making skilful evasions too much worth while and also of diminishing unduly the motive towards risk-taking, but mainly, I think, by the belief that the growth of capital depends upon the strength of the motive towards individual saving and that for a large proportion of this growth we are dependent on the savings of the rich out of their superfluity.

In other words, we have sometimes used taxation to reduce the inequality of income. But not often and not much, because we thought the economy needed the saving of the rich in order to grow.

We thought wrong, Keynes says.
... But ... we have seen that, up to the point where full employment prevails, the growth of capital depends not at all on a low propensity to consume but is, on the contrary, held back by it... Moreover, experience suggests that in existing conditions saving by institutions and through sinking funds is more than adequate, and that measures for the redistribution of incomes in a way likely to raise the propensity to consume may prove positively favourable to the growth of capital.

In other words, Keynes says he has shown that the economy does not need the saving of the rich in order to grow. (Except in conditions of full employment, of course.)

Okay. So I think, when Bill Mitchell says "Governments do not need the savings of the rich" (in the title of his post) I think he means the economy does not need the savings of the rich. That makes sense to me.

From the full title of Bill Mitchell's post

Governments do not need the savings of the rich, nor their taxes!

I originally thought he meant that governments can just print the money they need; they don't have to get it by borrowing or by taxation. My impression of Mitchell is that he is liable to say that. Keynes, of course, most definitely did not say that.


Mitchell follows his Keynes quote with these remarks:

In other words, the high saving of the rich actually undermine the capacity of the economy to achieve full employment and if they spent more then the government would not have to spend as much to achieve that aim.

Yeah, exactly.

And these remarks:

But the idea that these savings were essential to fund government spending and could be accessed by taxing the rich was clearly understood by Keynes to be flawed reasoning.

Oh. Mitchell *is* thinking in terms of taxing the saving of the rich "to fund government spending", and how this is not necessary. And he is putting those words into the mouth of Keynes -- things Keynes did not say.