Tuesday, June 30, 2015

Crotty: Keynes and Commons


We're up to pages 5 and 6 in James Crotty's paper on the stages of development of capitalism.
Keynes clearly distinguished two historical stages of capitalist development: pre-World War I or "nineteenth-century" capitalism (which I label Stage One), and post-World War I or modern or twentieth-century capitalism (which I label Stage Two). He argued that these stages had qualitatively different economic outcomes because they had qualitatively distinct institutions and agent practices.

In a number of writings, Keynes asserted that while freedom of trade and of capital flows brought peace and prosperity in the nineteenth century, the same international system produced imperialism, war, and depression in the twentieth century (a point to which I return). In a similar vein, Keynes often observed that Britain's domestic nineteenth-century capitalism was characterized by reasonably steady growth, price stability, adequate employment and rising living standards, all produced by a strong and relatively steady pace of capital accumulation. In The General Theory Keynes made the point as follows. "During the nineteenth century," there existed:

a schedule of the marginal efficiency of capital which allowed a reasonably satisfactory average level of employment to be compatible with a rate of interest high enough to be psychologically acceptable to wealth-owners. There is evidence that for a period of almost one hundred and fifty years ...rates of interest were modest enough to encourage a rate of investment consistent with a rate of employment which was not intolerably low [Keynes 1964, pp. 307-8].

Later in the book he commented on "the exuberance of the greatest age of the inducement to invest" in nineteenth-century England [Keynes 1964, p. 353]. And in the Economic Consequences of the Peace he argued that before World War I, "Europe was so organized socially and economically as to secure the maximum of capital accumulation [with] some continuous improvement in the daily conditions of life of the mass of the population" [Keynes 1920, p. 18].

Second, note Keynes's belief in the need for a theory that could explain the evolution of qualitatively distinct stages of economic development. He aligned himself with Commons's view that economic theory had to reflect the existence of "three epochs, three economic orders, upon the third of which we are entering." The first, according to Keynes, was a precapitalist "Era of Scarcity with a maximum of communistic, feudalistic or governmental coercion," which was dominant through the sixteenth century and survived to some degree into the eighteenth century. Then came the "Era of Abundance" with "the maximization of individual liberty, the minimum of coercive control through government, and individual bargaining. ...[In] the nineteenth century this epoch culminated gloriously in the victories of laissez-faire and historic liberalism" [Keynes 1963, p. 334].

But, Keynes continued, we are now passing through a period of turbulence into a new stage of capitalism, an "Era of Stabilization" in which societal or governmental controls will replace laissez-faire. The coming era will require a "transition from economic anarchy to a regime which deliberately aims at controlling and directing economic forces in the interests of social justice and social stability" [Keynes 1963, p. 335].

The Era of Scarcity, the Era of Abundance, and the Era of Stabilization: Three stages of capitalist development, proposed by Professor John Commons and (as Crotty says) developed by John Maynard Keynes.

Jim Crotty already made the point. We quoted it yesterday:

I argue that Keynes provided the outlines of a theory of the evolution of two distinct stages of capitalist development (and anticipated the transition toward a third) in which each stage is assumed to possess unique institutions and agent practices that differentiate its processes and outcomes from the other.


As for myself, I think it's optimistic to say "we are now passing through a period of turbulence into a new stage of capitalism, an 'Era of Stabilization'".

Why would the economy stabilize? Isn't "stable" the same as "in equilibrium"? It is convenient to think about the economy in equilibrium or approaching equilibrium, sure. But that doesn't mean we ever get there.

So if we have a time of "abundance" or let's say a time of generally improving conditions, and then the improvement tapers off... and if we don't achieve an era of stabilization, what happens?

It's easy. If the trend doesn't continue to climb, and it refuses to run flat, then the only direction left to go is down. So we would have rise to a peak: rise and decline. It would look like part of a business cycle.

It would look like only part of a business cycle because we're not looking at the whole picture. We're only looking at a few hundred years. A few hundred years near the peak. Keynes described the peak. He called it "the greatest age of the inducement to investment" and he said it lasted 150 years.

If the peak lasted 150 years, you're not going to see the whole cycle if you consider only 400 years or so. Don't think in terms of nations. Think in terms of civilizations and cycles of civilization. Thousands of years.

It's just a business cycle, really nothing out of the ordinary.

Out of the ordinary would be to achieve stabilization, an age of stabilization. That would be special. Something to shoot for, but not part of the natural course of events. We'll have to earn it.

Monday, June 29, 2015

Crotty challenges Samuelson's Keynes


When I type marxists into the URL box in my browser, I get links to the first few chapters of The General Theory, and to the last couple. Not so much to the middle chapters, where one finds the "highly abstract argument" and the "much controversy" that Keynes promised in his Preface.

I don't often go to the middle chapters. I always figured that was because I'm not an economist, and the middle-chapter stuff has a hard time getting thru my thick skull. I still figure that's true. But now I have another reason for preferring the first and last parts of Keynes's book: I found James Crotty's PDF on "the Stages of Development of the Capitalist Economy".

Crotty writes:
The generally accepted interpretation of The General Theory, pioneered and popularized by Paul Samuelson, suggests that the consumption, marginal efficiency of capital, liquidity preference, and labor supply functions constitute the scientific core of the book; the comments, observations and asides that surround this core, it is assumed, have little scientific value.

My favorite parts of the book have "little scientific value". Ouch. But they're still the best parts.

Jim Crotty doesn't accept the generally accepted interpretation. If that interpretation is correct, he says, then
The General Theory must be a model of capitalism-in-general, equally applicable in all times and in all places where the capitalist system dominates economic activity. I argue to the contrary that such a characterization of Keynes's theory is profoundly mistaken.

Furthermore, he says
In The General Theory and elsewhere Keynes made evident his belief that no all-purpose, institutionally abstract macromodel can adequately capture the processes and outcomes of distinct phases or stages of capitalist development ...

Now we're getting to the good stuff: the stages of capitalist development. And indeed, the title of Crotty's PDF should have given me a clue. The thick skull strikes again.

If Keynes's macrotheory is indeed historically contingent, then he should have developed different versions of his theory to describe and analyze institutionally distinct historical stages of capitalism. I argue that Keynes provided the outlines of a theory of the evolution of two distinct stages of capitalist development (and anticipated the transition toward a third) in which each stage is assumed to possess unique institutions and agent practices that differentiate its processes and outcomes from the other.

In other words, if Crotty is right about this, then we would expect to find in Keynes's work a partitioning of capitalism into stages. And, Crotty says, we *do* find this partitioning into stages.

To me, this is exciting stuff. I have always been fascinated by the many brief moments in the General Theory where the evolution of capitalism is brought to light. Both the General Theory and Essays in Persuasion. I wrote of it last year, and five years back.

Crotty continues:
Specifically, Keynes argues that nineteenth-century capitalism differed in institutional and class structure as well as in agent behavior patterns from post World War I capitalism. Because of these institutional differences, nineteenth-century capitalism exhibited impressive economic growth and stability, whereas twentieth-century capitalism was prone to stagnation-depression as well as to bouts of extreme instability.

It becomes important. We're talking about a time when capitalism was good, and a time now when capitalism is not so good. And in this time, when capitalism is not so good, there is a sort of nostalgia for the better times. We see many politicians and economists call for a return to the policies of the nineteenth century in hopes of restoring good to capitalism. Foolhardy, I think. I sympathize with their goal, but not their methods. Not sure yet where Crotty stands on that.

But let me quote him one more time, to wrap up what he has been saying:
Clearly, these sets of profoundly different outcomes cannot be comfortably generated by a single Keynesian theory of something called competitive-capitalism-in-the-abstract. This being the case, the question naturally arises as to precisely what The General Theory is a theory of, and in what sense it is general.

That leaves us at the top of page two in J.R. Crotty's 16-page PDF.

Sunday, June 28, 2015

Small world


Recently I found a Reddit link on "How Sovereign Debt Accelerated the First Industrial Revolution". Oh, I said. I know about that. Retrieving what I know brought me back to Tales of Debt Mountain (31 August 2010). And that brought me back to that thing Keynes said:

For nothing short of the exuberance of the greatest age of the inducement to investment could have made it possible to lose sight of the theoretical possibility of its insufficiency.

So I googled the phrase "the greatest age of the inducement to invest". Only a few results turned up -- mostly my own here on the blog and in comments on other blogs. But there was one solid hit that wasn't mine: John Maynard Keynes, Critical Assessment: Second series by John Cunningham Wood, in the Google Books.

In Wood's book is the article Keynes on the Stages of Development of the Capitalist Economy: The Institutional Foundation of Keynes's Methodology by J.R. Crotty, from the Journal of Economic Issues, September 1990, vol. 24, no. 3.

In Crotty's article Google found two hits for the "the greatest age" phrase. I was reading the article for a while, finding much that I like and only a little to raise an eyebrow at. (Unusual, I know.) Suddenly, I got feedback from my brain: J.R. Crotty... I think I've seen that name before! So I did a google search for it on the blog.


Yup, I referenced him before. Small world.

Seeming agreement, remarkable alignment, and all that. Pretty cool.As I read more of Crotty's article, I kept finding quotable stuff. So, welcome to Crotty Week.

Saturday, June 27, 2015

Off the mark


Via Reddit, from the IMF, the working paper What Really Drives Public Debt: A Holistic Approach (PDF, 25 pages). From the intro:
Recent years have witnessed a rapid increase in public debt—in 2007, gross general government debt in advanced economies stood at around 70 percent of GDP; by 2013, this had risen to over 105 percent (IMF, 2014). Concerns over sovereign debt sustainability have led to significant financial and economic disruption; and the optimal policy response to these elevated debt levels is a topic of controversy amongst policymakers and academics.

The proximate causes of this rapid increase in debt are well know. Deep recessions reduced nominal GDP and caused primary balances to deteriorate; banking sector recapitalisation forced step changes in the debt level; and in some cases, sovereign bond yields spiked, increasing the cost of debt. But what is less clear is how these various drivers of debt interacted with each other, to propagate or mitigate the eventual impact on the debt level.

Yeah, ain't that cute? A look at public debt. The world begins in 2007.

These people can't be that stupid. They have to know that for the 60 years before 2007, private debt increased, and private debt increased, and private debt increased some more. They recognize that "banking sector recapitalisation" was occurring, for example. And yet, their focus is "sovereign debt sustainability".


An overview of their conclusion:
This paper explores how the various drivers of sovereign debt – the primary balance, the interest rate, growth and inflation—interact with each other...

Sovereign credit markets do not seem to systematically respond to shocks to growth or the primary balance, but are sensitive to the debt level...

This paper, therefore, provides some empirical evidence to support the often cited opinion that monetary policy matters for sovereign debt sustainability...

They're doing what they call "debt sustainability analysis".

Why? Apparently they think high levels of public debt are a problem. Okay, let's not focus on whether they are right or wrong about that. It's their view, and that's what we have to deal with.

If you think high levels of public debt are a problem, what is the proper response? Do you want to find the best way to "manage" those high levels of debt, so that we can succeed in "sustaining" them?

Wouldn't it be more productive to figure out the reasons public debt grow to problematic levels? That way, there is a chance we can avoid those high levels of public debt in the future.

The authors skip the "cause" part, and go straight to analysis of results. The whole thing, all their effort, is a waste of time.

Friday, June 26, 2015

John Cochrane sees the private debt problem


A little, tiny bit from Taxes at The Grumpy Economist:

OK, mortgages taken out under the current tax law should get to keep the interest deductibility. We don't change rules in the middle of the game. But why should new mortgages get an interest deduction?

... And after a huge financial crisis, what in the world is the US government doing subsidizing debt anyway?

Sunday, June 21, 2015

"models are maps of an abstract territory"


From Keynes "hadn't got round to it" at Ecological Headstand:

More remarkable is the complete lack of connection between growth theory and growth as a policy slogan. No, this is not the difference between map and territory. The theoretical models are maps of an abstract territory in which some kinds of features have the same names as the kinds of features on the actual territory -- "labor", "income", "output," "capacity utilization" -- but those labels remain undefined in any way that would correspond to the real features with the same name.

Saturday, June 20, 2015

Same Data. Same Conclusion


Steve Keen:
If we’re honest, when we say “why can’t you just be normal?” to someone or about something, what we really mean is “why can’t you be the way I’d like you to be?” So by “normal times”, the Chancellor really means “when things are really good”.

There is something of the sour grapes in saying that by "normal times" we mean "really good" times. It's like saying the really good times were just a fluke, and we ought not expect good times to return. It is a willingness to settle for less than really good times. Sour grapes, and giving up.

Keen identifies the "really good" times:
In that sense, the ultimate “normal times” for the Western world were the years from the end of the Korean War until just before the OPEC Oil crisis—from 1954 until 1973. These were the socially tumultuous years from Happy Days and The Fonz, to the Beatles, the Vietnam War and the death of Jim Morison. But they were also the years when the economy boomed, with the real rate of growth in America averaging 4% a year ... So 1954 until 1973 is the yardstick for “normal times” in the modern, post-World-War era.

And in those normal times, the annual change in US government debt was normally plus 1.72% of GDP.

For the rest of the article, Keen refers to the really good times as "Happy Days".

Yes, that’s right, the “normal thing” for the government during those Happy Days was to run a deficit of just under 2% of GDP.

Okay, don't lose focus. We're not here to talk about Happy Days. Jokes and funnies and reader-coddling aside, Steve Keen notes the important detail that U.S. debt was growing during those good years. Growing at about half the rate of GDP.

For the past few days I have been trying to make the point that the growth of government debt didn't start with Reagan. Back in the 1950s and '60s, the federal government was, on average, running deficits. Small ones? Sure. That's the point. That's what I've been saying for the last three days: The deficits were small in the '50s, a little bigger in the '60s, bigger yet in the '70s, and Reaganesque in the '80s.

You can cry and moan about Reagan, and blame him for massive deficits, I don't care. But you can't ignore the fact that Federal deficits were growing for three decades before Reagan. And you cannot refuse to consider the possibility that anyone in Reagan's position -- at Reagan's time, I mean -- might have done the same.

Friday, June 19, 2015

Can't be done.


Yesterday I showed the difference between the overall and primary budget balances for the federal government. The overall number is described on the graph as the "unified" number:

Graph #1: Overall Budget Balance less Primary Budget Balance

Today I want to play with that thing. I inverted the graph, so that when deficits are bigger the line goes up. It's just more intuitive. And you don't have to explain, like JW Mason does, that "The balances are shown ... with surpluses as positive values and deficits as negative." I don't want you to have to pay attention to trivia detail like that.

So I inverted the graph and split it into three sections (three different colors) based on three different trend paths you might see in the data.

Graph #2: Broken into Three Time Periods
Then I put exponential trend lines on the blue and orange parts:

Graph #3: Exponential Curves added for Two of the Three Periods
The early years are a good match to a gradually-increasing exponential trend (blue). The middle period is a good match to a rapidly-increasing exponential trend (orange). There is a significant difference between the two periods.

The change-over happens around 1973. I know, the familiar story is that the "federal government ran small budget deficits through the 1960s and 1970s" and then "during the 1980s the deficits ballooned". But by 1980 the "overall less primary" line is way off from the 1950-1973 (blue) trend. The graph just doesn't fit that familiar story. Faster increase, represented by the orange exponential curve, takes over around 1973. In other words, we don't have to wait for the Reagan years to see that faster increase.

I know Jazz won't care. He wants to blame Reagan and he's gonna blame Reagan come hell or high water. To each his own, I guess.

//

I went back then to the first graph and looked at it a different way this time. Jazz says "I like to look at this kind of stuf as YoY % change". Me, too. So that's what I did:

Graph #4: The orange line shows Year-on-Year Percent Change for the blue line
The numbers on the right-hand scale show the Percent Change values for the orange line. The high point -- something over 30% -- comes in 1981. It looks to me like there was a general upward trend from 1951 to 1981, and a general downward trend after 1981.

I added exponential trends lines for the periods through 1981 and since 1981:

Graph #5: Percent Change, with Exponential Trends
The exponentials cross directly under that 1981 peak. This graph tells us that the difference between overall and primary was accelerating until 1981, and since 1981 has been decelerating.

Graph #3 shows faster exponential growth taking over around 1973. This does not contradict Graph #5. It tells us you should find on Graph #5 a faster increase from 1973 to 1981 than in the years before 1973.

Taken together, these graphs show increase from 1950 to 1973, faster increase from 1973 to 1981, and decline after 1981.

Jazzbumpa wants to use these data to argue that Reagan "blew up the primary budget" after 1981.

Sorry, Jazz. Can't be done.


Thursday, June 18, 2015

"I argue that the increase started well before the 1980s."


Yesterday I looked at a graph from J.W. Mason's The Myth of Reagan's Debt. The graph shows "the overall and primary budget balances for the federal government since 1960," Mason says.

"The balances are shown in percent of GDP," he adds.

That troubles my friend Jazzbumpa. Jazz asks Mason

How do your graphs look as straight values, not as ratios to GDP? I'm always suspicious of the denominator effect.

Following up on his own blog, Jazzbumpa says

J.W.M. is looking at surplus or deficit as a % of GDP. Conclusions based on ratios always make me want to take a different look.

And then Jazz did take a different look. He found a source for overall and primary budget balance numbers. He made a graph comparable to Mason's, but showing budget balance in billions of dollars rather than in percent of GDP.

I grabbed Jazzbumpa's source data, stuffed it into a spreadsheet, and duplicated his graph:

Graph #1: Overall (orange) and Primary (blue) Federal Budget Balance
Comparing the "straight values" graph to Mason's "percent of GDP" graph, Jazzbumpa observed:

There may not be much distortion from a denominator effect in this specific case ...

and again:

For the period in question, this [straight values graph] does not look substantially different from JWM's graph, with data as percentage of GDP.

Okay. That's why we do graphs, you know? To see how they turn out.

I had a sudden urge then to subtract the primary balance from the overall balance, so that I might see the shape of the space between the two. The subtraction would show me the portion of the deficit caused by the payment of interest, so to speak.

It was simple enough to perform the subtraction, seeing as how Jazz had already done all the legwork.

Graph #2: Take Graph #1 and Subtract the Blue Line from the Orange Line
Well, now that is one heck of a lot smoother than what we see on Graph #1.

Allow me to remind you that Jazzbumpa created his Graph 1 as a version of JW Mason's graph that is not expressed as a ratio. Jazz omits GDP from the calculation because he is concerned that the changes in GDP will give rise to changes in the ratio, and that we (the viewers of graphs) will mistakenly attribute those changes to the numerator -- to the Federal budget deficits -- when they might in fact arise from the changes in GDP.

An excellent precaution.

However, looking at Graph #2 here, at Graph #1, and then Graph #2 again, I want to say that in Graph #1, Jazz did not manage to eliminate the denominator effect. Oh, he eliminated the denominator, for sure. But the jogs and jags on his graph are intimately related to GDP, the denominator that he eliminated.

Jazz eliminated GDP from his calculation. But that did not eliminate the effects of GDP from the Federal deficit numbers. The Federal government always runs big deficits at times of recession.

Graph #3, from November 2010

Removing GDP from the debt-to-GDP calculation does not eliminate the tendency for Federal deficits to rise during times of recession. Removing GDP from the calculation does not remove the effects of changes in GDP from the Federal budget balance.

Subtracting the primary deficit from the total deficit eliminated most of those effects. That's what the smoothness of Graph #2 tells me.


Oh, and by the way: Graph #2 shows a big increase in deficits in the 1980s, an increase that began, I'm tempted to say, in the 1950s.

Wednesday, June 17, 2015

Gentlemen, start your deficits!


In the recent post, JW Mason writes
Here, first, are the overall and primary budget balances for the federal government since 1960. The primary budget balance is simply the balance excluding interest payments -- that is, current revenue minus . non-interest expenditure. The balances are shown in percent of GDP, with surpluses as positive values and deficits as negative. The vertical black lines are drawn at calendar years 1981 and 1990, marking the last pre-Reagan and first post-Reagan budgets.
The black line shows the familiar story. The federal government ran small budget deficits through the 1960s and 1970s, averaging a bit more than 0.5 percent of GDP. Then during the 1980s the deficits ballooned, to close to 5 percent of GDP during Reagan's eight years ...

Mason doesn't focus on Reagan. I stopped the quote there and it sounds like he does, but he doesn't.

Also, he doesn't buy "the familiar story." But you probably know that.

Here's what I see in Mason's graph... using a technique I got from Jazzbumpa, drawing "trend channel" lines. If there's a proper technique for doing it, I don't know. I'm just connecting low points for one channel line, and connecting high points for the other:

Graph #2
The familiar story describes the deficit trend as a flat, stable trend at "0.5 percent of GDP" in the 1960s and 1970s. I don't see that. I see a well-defined downtrend -- an expansion of deficits -- that begins in the 1960s.

Mason does not seem to dispute the familiar story. He only says a different story is more important. His story is about the red line rather than the black -- the primary balance rather than the overall balance. I won't look at that today.

Today I'm just looking at the black line, the overall balance, and trying to figure out how anyone can claim to see "small budget deficits through the 1960s and 1970s, averaging a bit more than 0.5 percent of GDP." Let me add two more lines to the graph to represent that viewpoint:

Graph #3
This is a much smaller channel. It starts earlier, but it is forced to end sooner -- in the early 1970s -- and it is already pierced in the 1960s by an expanding deficit.

Mason argues that "the increase in federal borrowing during the 1980s was mostly due to higher interest rate, not tax and spending decisions."

I argue that the increase started well before the 1980s.

Tuesday, June 16, 2015

"Inflation was still high"


From Idiosyncratic Whisk:
And, look at what happened when the Reagan era supply side policies replaced the demand side policies of the 1970s.  I think most people would be surprised to learn that nonfinancial corporate profits didn't top the 1979 level until 1992, after 12 years of the Reagan and Bush presidencies, during a decade when Democrats sponsored tax cuts and the New York Times was against the minimum wage.  And, these are nominal figures while inflation was still high during this period.

Inflation was still high during the 1979-1992 period. That's not the point of Kevin Erdman's post. It's more like deep background. But I focus on those words because this is the second time I've seen that thought expressed in less than a week. JW Mason writes

(inflation was still quite high in the early '80s)

Quite high is not a quantitative statement. (Or maybe it is, but you cannot divide something by "quite high".) So it's tough to argue with Mason. It's a little easier to argue with Erdman, who says inflation was "still high". To me, inflation was still high before the 1982 recession, but not after:

Graph #1: Three Measures of Inflation. The Big Drop is Obvious
Maybe Erdman is thinking over three percent is high inflation and under three percent is not? Then I guess maybe he could argue inflation was "high" until 1992... I guess.

Inflation was way lower after 1983 than before 1983. Using annual numbers, figuring price-level changes for 20-year periods for all three series and averaging the three, prices rose 204% during the 1963-1983 period, compared to 71% during the 1983-2003 period.

(71% is too much, yeah, but it is way less than 204%.)

Figuring 10-year periods, prices rose 112% during the 1973-1983 period, versus 40% during the 1983-1993 period. Again, way less after 1983.

Prices rose less after 1983 than before. A lot less. If you want to say inflation was "still high" (or even "quite high") after 1983, fine, whatever, but inflation was way less after 1983 than before.

Oh, and inflation came down a lot quicker than the Federal Funds rate:

Graph #2: Three Measures of Inflation (again) and the Federal Funds Rate (black)

//

Well, I thought I was done revising this post, but then I found a bonus quote. JW Mason commented on The Myth of Reagan's Debt at his old blog:

If we are comparing the 1980s to the 1960s and 1970s, the denominator does not make much difference -- nominal GDP growth was roughly equal in all these decades. For more recent periods, the denominator has a bigger effect.

That's phrased in a way that I can check the numbers. That's what I like.

Nominal GDP. Annual. Percent change from ten years earlier:

YearPercent Change
196081%
197098%
1980166%
1990109%
200072%
201046%

Well, NGDP growth in the 1980s (109%) was more than it was in the 1960s (98%). "Roughly equal" is a crude approximation, but I take Mason's point. Okay. And yes, growth drops off in recent years. So I have to accept this quote from JW Mason. But I don't have to like it.

The breakdown of data by decade is convenient, but it smothers key facts. For example, it combines the low inflation of the early 1960s with the high inflation of the late 1960s. It combines the falling-from-peak inflation of the early 1980s with the already-having-fallen inflation of the mid and later 1980s. These facts are key, because high inflation is at times a huge part of nominal GDP growth, and Mason is evaluating the growth of nominal GDP. Talking about data in terms of decades rather than in terms of trend paths lets generalizations arise that are more tidy than precise.

All of this matters to me because I have focused on inflation, and I think I have a good feel for how inflation affects the debt-to-growth ratio. But I have not considered the level of interest rates. Mason considers both, and finds the level of interest rates the more significant factor.

It's interesting to me because if Mason is right, then maybe I'm wrong. That's always an interesting thing to find out.

Monday, June 15, 2015

Technology


From Technology in the Medieval Age: Agricultural Tools:
... the way the crops were grown changed in Medieval Europe when farmers changed from a two-field crop rotation to a three-field crop rotation beginning in the 8th century. According to White (1962), Charlemagne himself thought of this agricultural innovation...

Under a two-field rotation, half the land was planted in a year while the other half lay fallow. Then, in the next year, the two fields were reversed. Under three-field rotation, the land was divided into three parts. One section was planted in the Fall with winter wheat or rye. The next Spring, the second field was planted with other crops such as peas, lentils, or beans and the third field was left fallow. The three fields were rotated in this manner so that every three years, a field would rest and be unplanted.

Under the two field system, if one has a total of 600 fertile acres of land, one would only plant 300 acres. Under the new three-field rotation system, one would plant (and thereby harvest) 400 acres. But, the additional crops had a more significant effect than mere productivity. Since the Spring crops were mostly legumes, they increased the overall nutrition of the people of Northern Europe.

This, too:
The plow is considered to be one of the most important (and oldest) technologies developed. In fact, the history of the plow stretches back to the Neolithic (New Stone) Age that began about 8000 BC in Mesopotamia. In the Middle Ages, however, the plow was radically improved and was used with multiple-oxen teams. This innovation facilitated the clearing of the forests of fertile northwest Europe (Gies & Gies, 1994). Before this time because of the nature of the soil, it was difficult to plow these fields. And, obviously, this inability to cultivate these fields reduced the population of northwest Europe. After the redesign of the plow, allowing the plow to plow the heavier and wetter soil of northwest Europe, there was a dramatic increase in agricultural productivity, and subsequently, the population of these areas.

Finally, from Medieval Technology Pages - Horse Harness:
The horse collar seems first to have been used in Europe around the 8th or 9th century [White, p. 61]. This may have been a northern European development or, as both White [White 1962. p 61] and Usher [Usher 1954. p 183] suggest, imported from the east. The horse collar rests on both the shoulders and the breast of the horse. The traces and thus the traction points, are over the horse's shoulders, not high on the horse's back. This allows the horse to develop much more power without putting any pressure on its neck.

Use of the horse collar seems to have spread rapidly though not uniformly through European agriculture and heavy freight hauling -- though in neither case did the use of oxen ever totally vanish. [Langdon 1986. pp 19-20] Oxen were cheaper than horses, but horses are 50% faster than oxen and can work more hours during the day. But they were no stronger than oxen in total pulling force, were more difficult to care for, and required specialized (and more expensive) food. Nevertheless, by the late Middle Ages the use of the horse in agriculture became very common. [Gimpel 1976. p 35]

Three-field rotation, an improved plow, and the horse collar. I love this stuff.


CREDITS:

The Technology in the Medieval Age page is under the supervision of Dr. Patricia Backer, the chair of the Department of Technology and the Department of Aviation at San Jose State University in San Jose, CA.

(That page links to the Horse Harness page.)

The Medieval Technology Pages - Horse Harness page is maintained by Paul J. Gans. Copyright (©) Paul J. Gans, 1997-2002.

Sunday, June 14, 2015

Recap


"That stimulus money?" the guy says. "Shovel-ready jobs? Two trillion dollars," he says. "That money went all around the world. They didn't spend any of it here."

I'm not sure exactly what the guy's complaint is.



As of 13 June 2015



Two trillion dollars?

Zero point seven eight seven trillion, more like. $787 billion.

Two trillion would have been a good number, if they spent the whole thing in about 365 days. But they didn't plan to start spending it for a year or so. No understanding of the word "urgent". No understanding of the word "stimulus".

Anyway, I don't know where the guy got his numbers from. I do know he listens to Rush Limbaugh.

Oh, and if you want to find out where they spent it, it's easy enough to find out.

Saturday, June 13, 2015

"Clearly," Marko says


At JW Mason's new blog, in comments on The Myth of Reagan’s Debt, Marko writes

The counterfactual I’d like to see is what would have happened if debt/gdp ratios ( both public and private ) had been held constant at their 1980 levels. That would at least define a sustainable system.

He adds this thought:

Clearly this would mean new debt growth would have slowed and/or interest payback would have been increased , both of which would have subtracted from aggregate demand.

Clearly -- but only if we hold everything else constant. I don't want to do that. I want to reduce debt growth and do one other thing. I want to increase the quantity of spending-money.

I want to reduce debt and increase the quantity of spending-money. I've showed you the ratio a thousand times:

Graph #1: Dollars of Total (Public and Private) Debt, for Each Dollar of Spending-Money
Obviously it can be done. FDR did it. Plus, it's not on the graph but it has been happening again since 2009 -- mostly by accident, I think. It also happened in the early 1990s, without causing a depression.

Trouble is, we can't increase spending money because it gets parlayed into a ton more debt, because we have the financial infrastructure to do that. So we need to regulate that infrastructure, and/or discourage financial innovation, and/or reduce the demand for new loans, and/or just start paying off old loans faster.

If we design policy so people pay off old loans faster, debt will increase more slowly. Debt might even decrease. But as Marko says, that subtracts from aggregate demand.

That's okay. Think of the subtraction from aggregate demand as a way to fight inflation. An alternative to jacking up interest rates again, like the Fed is getting ready to do. I don't like jacking up interest rates: Jacking up rates is a way to reduce growth and create recession. People have been talking for six years now about how interest rates should be at negative five percent or something like. We can't get there, but we damn sure can't resume the policy of jacking rates up until we get recession. We need a better way to fight inflation.

We have a better way. We have the paydown of debt.

We just need policy to encourage and support the idea instead of working against it. If we can stabilize the debt-per-dollar ratio, we have the policy tool we need for a golden millennium. We want to seek the best level of debt-per-dollar -- the level that best promotes growth -- and we want to keep it there.

It's not difficult.

Friday, June 12, 2015

I really don't know what this is


Bank's Net Interest Margin for World:

It was almost zero. Then, suddenly, four percent.
Looks like it was zero until 1996, but it was a little above zero. There is data there.

After 1996 it jumps way up, all of a sudden. I don't like big mysterious changes.

See the first word of the series title? Bank's. One bank. Belonging to one bank.

One global bank? That can't be right. In the future, maybe, but not yet. So I don't know what this graph shows.

I did a quick google. Found A Quick Comparison Of Interest Margins For The Largest U.S. Banks from Forbes. Dated 11 September 2014, just a few months back. Here is the opening sentence:
Net interest margin figures for all banks in the U.S. have been on a steady decline over the last three years as a direct result of the low interest rates being maintained by the Federal Reserve since the economic downturn of 2008.

Forbes is worried about a decline that doesn't stand out on the graph. I think they are making an argument without really having one. Their evaluation seems one-sided.

What I want to know is what law was changed, to let that thing jump up so suddenly after 1996?

Thursday, June 11, 2015

Not paying Paul


I was looking for data on a whole series of years. This first graph, for the year 2010 only, is better than nothing. From the Tax Policy Center:


Oh, now wait...What is that OMB Budget Historicals thing at the bottom of the graph?

Oh yeah, Historical Tables, a page of links to Excel files. Oh yeah.

I took Table 2.2—Percentage Composition of Receipts by Source: 1934–2020, from whitehouse dot gov. Your tax dollars at work.

Thank you very much. I threw a graph together:

Graph #2: Stacked Graph Comparing Federal Revenue by Source

The purple fringe across the top is "other". The green, low-hanging fringe is "excise" taxes, something they just cut out of you, evidently. Taken together, the green and purple provided a pretty substantial portion of Federal revenue in the mid-1930s. You've probably heard that story as "protectionism" during the Great Depression.

But it makes me wonder how "excise and other" looked for a hundred years or so before the mid-1930s.

The fringe on the bottom, that bluegrass, that's revenue from corporate income taxes. We looked at that yesterday.

Everything else is taxes on labor. Well, on whatever you get your income from. Labor or profit or rent or interest, whatever. Mostly on labor, I'll venture. The orange is individual income taxes. The yellow is Social Security and stuff. It all comes out of your paycheck.

I did a little digging, to check that. Found a link to a spreadsheet that gives a breakdown of "Social Insurance and Retirement Receipts". That's the same title used in Table 2.2 for what I showed as yellow on Graph #2.


Actually you can get Table 2.4 from the same "Historicals" page where I got Table 2.2. I guess it's easier to search with Google than it is to read two more lines on a list of table names. Oh, well.

Anyway, Table 2.4 shows things like unemployment insurance, disability insurance, and old age and survivors insurance. Stuff that comes out of your paycheck when they take your taxes out, and stuff that your employer pays because you are employed. Stuff that, from the employer's point of view, is a cost associated with hiring. A labor cost.

To my mind these costs, these taxes, ought to be lumped in with our income taxes. Not always and forever. But just so we can take a gander at it.

Gander away:

Graph #3

Wednesday, June 10, 2015

Not robbing Peter


Taxes on Corporate Income relative to Corporate Profits After Tax
The government take has fallen from $1.20 (1943) to about 27 cents (2013) per dollar of corporate after-tax profit.

Tuesday, June 9, 2015

Curse that Ronald Reagan, he raised corporate taxes


Taxes (red) and After-Tax Profits (blue) as a Percent of Corporate Pre-Tax Profits

Monday, June 8, 2015

Urgency No More


At this writing I have two posts tagged "Urgency" -- one from February, one from September, both from 2009.

And there is this Reddit headline, from June of this year: Americans are savers now. It's a problem for the economy

Yeah, well, six years gone by. No urgency now. People are getting used to things this way. The lower-level, slower-growth-of-income, slower-growth-of-output economy is indeed becoming the new normal.

That was why there was urgency. The need was to restore the economy to a higher level of employment and a lower level of unemployment before people started getting used to the idea of spending less. Before people got used to the reality of living with lower living standards. But it's too late for that now.

Oh -- and it's not a problem for the economy. It's a problem for people. It's a problem for the people who lost out. You know, the 99%. Maybe even the 100%.

The economy doesn't care if people lose out. But it's a problem for people.

That's why there was urgency.

Sunday, June 7, 2015

Archdruid: The Era of Breakdown


I always love his openings. I always lose it soon after. His details don't do much for me, but his big-picture does.

From The Era of Breakdown:
The era of breakdown is the point along the curve of collapse at which business as usual finally comes to an end. That’s where the confusion comes in. It’s one of the central articles of faith in pretty much every human society that business as usual functions as a bulwark against chaos, a defense against whatever problems the society might face. That’s exactly where the difficulty slips in, because in pretty much every human society, what counts as business as usual—the established institutions and familiar activities on which everyone relies day by day—is the most important cause of the problems the society faces, and the primary cause of collapse is thus quite simply that societies inevitably attempt to solve their problems by doing all the things that make their problems worse.

The primary cause of collapse is that societies inevitably attempt to solve their problems by doing all the things that make their problems worse.

Yes. Because in the early years, those solutions worked. And decision-makers learned to do those things to solve problems. But then, you know, the economy changed. The world changed. The standard solutions became less effective.

Decision-makers noticed that the solutions were less effective. But they didn't think about why. They didn't realize it was time for new solutions. They only thought about how to make the old solutions stronger and more effective. But since the old solutions were the cause of the new problems, the more effective solutions only made things worse, faster.

Laffer Limit: The point at which continuing to do the same thing begins to have the opposite effect.

Saturday, June 6, 2015

one dna


People are always pointing out that the debt-to-GDP ratio ran flat until around 1980, and then began its relentless upward climb.

I always point out that inflation pushed GDP upward a lot more than debt in the 1960s and '70s. Inflation aside, debt was growing faster. But inflation pushed GDP up and kept the ratio flat until the end of the Great Inflation in the early 1980s. Then, when the inflation rate fell, the debt-to-GDP ratio became a more honest measure. Suddenly the rapid growth of debt was easy to see.

Nobody seems interested in this story, maybe because it interferes with the political stories they like to tell.

This graph compares "total financial assets" (TFA) of financial business to TFA of households. No flat spot in the 1960s and '70s here.

FRED Graph 1dna
Financial business assets were half that of households in the early 1950s, but the ratio tripled by the time of the 2009 recession.

Household assets increased a lot, of course. But assets of financial business increased a lot more, and a lot faster.

Now you're gonna tell me finance is a good thing; we need finance. Sure. But we don't need so much of it. Look to the time in our economic history when the economy was good -- the 1950s and '60s. And look at where the ratio was, then.

Friday, June 5, 2015

Measurements of Finance


I started by gathering FRED data for Total Financial Assets:

Graph #1: Total Financial Assets for Seven Sectors
Oddly, when they've capitalized the words "total financial assets" in a series title, the units are billions; when those words are not capitalized, the units are millions. It could be useful to know that, if you make graphs.

I combined the two nonfinancial business sectors into one line, and the two government sectors into one line. That reduced the confusion to five lines. I kept the same colors, as much as possible. Where I deleted a line, I deleted the yellow line, as on Graph #1 they are difficult to distinguish.

http://research.stlouisfed.org/fred2/graph/?g=1cXG

Then I divided them all by GDP to "normalize" them, as the IMF PDF describes.

Graph #2: Total Financial Assets Relative to GDP (for Five Sectors)
Uh-oh! The blue line starts out well below the red line, and ends up well above it! TFA of financial business starts out well below TFA of households, and ends up well above it.

Looks to me like finance is the sector that has grown excessively.

//

Other indicators of financial size and depth that could be usefully examined include ratios of broad money to GDP (M2 to GDP), private sector credit to GDP (DCP to GDP), and ratio of bank deposits to GDP (deposits/GDP).

M2 to GDP is easy:

Graph #3

But I'm not sure how good a measure this is of the size of finance. M2 money divided by GDP is the inverse of M2 Velocity, FRED's M2V. In the notes on that series at FRED, we read:

The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.

The FRED notes also say

Comparing the velocities of M1 and M2 provides some insight into how quickly the economy is spending and how quickly it is saving.

"How quickly it is saving" might be a measure of the growth of finance. Doesn't seem very straightforward, to me. Here, this graph shows M2 Velocity relative to M1 Velocity:

Graph #4
But if we don't just call it a ratio of velocities, we may notice that it is really


which, when we invert and multiply, looks like this


and when we cancel out things that cancel, we get


So the graph shows M1 declining relative to M2 until the crisis -- except for that early 1990s increase in M1 that I notice all the time.

I guess you could say that if M1 declines relative to M2, it's because of an increase in savings. And that increase might be a way to measure the size of finance. But you'd have to say, then, that finance had been growing consistently until the crisis -- except perhaps during that early 1990s blip.

//

Private sector credit to GDP, using "Total Credit to Private Non-Financial Sector" (copyright BIS) relative to GDP:

Graph #5

That one goes up also. Plus, it excludes credit to the private financial sector, which, as we might assume after seeing Graph #2, increased even more rapidly than credit to the private non-financial sector.

So, yeah, again, finance grew faster than GDP, consistently, for a long time.

//

Finally, the ratio of bank deposits to GDP. I don't know which deposits they mean. Here are a few:

Graph #6

I didn't bother to show them relative to GDP. Interesting that they all run pretty flat except the purple line. That's savings deposits, the purple one. That's money that's stuck in finance.

Thursday, June 4, 2015

Return of the Laffer Limit


The excessive financialization of the U.S. economy reduces GDP growth by 2% every year, according to a new study by International Monetary Fund. That’s a massive drag on the economy–some $320 billion per year.

"Properly scaled," Steve Denning writes in Forbes, "the financial sector is a good thing. The financial sector plays a healthy role in translating products and services into exchangeable financial instruments to facilitate trade in the real economy." But
Problems occur when the financial sector gets too big.

Throughout history, periods of excessive financialization have coincided with periods of national economic setbacks, such as Spain in the 14th century, The Netherlands in the late 18th century and Britain in the late 19th and early 20th centuries. The focus by elites on “making money out of money” rather than making real goods and services has led to wealth for the few, and overall national economic decline.

How big is too big? An IMF study in 2012 showed that “once the [financial] sector becomes too large—when private-sector credit reaches 80% to 100% of GDP— it actually inhibits growth and increases volatility. In the United States in 2012, private-sector credit was 184% of GDP.” So the U.S. financial sector is already way too big.

And what’s the cost? The new IMF study quantifies the direct cost to U.S. economic growth of an oversized financial sector: 2% of GDP per year. In other words, if the financial sector were the proper size, the U.S. economy would be enjoying a normal economic recovery of 3% to 4% per year instead of the dismal 1% to 2% of the last few years.

The Forbes article also provides this graph:

Graph #1; From the Forbes Article
Hm. That reminds me of something:

Graph #2, from HowStuffWorks

See it? Same shape.

Some time back, I described how these curves work:
The Laffer Curve was all about taxes. But the Laffer Limit is a practical maximum. In one of those Google hits, J.H. Cochrane refers to "the 'Laffer limit' of taxation." That suggests there can be Laffer limits on things other than taxes.

If you are a government trying to raise revenue, increasing the tax rate brings in more revenue up to a point; beyond the Laffer Limit it brings in less revenue.

If you are a gardener fertilizing your flowers, adding more fertilizer improves the garden up to a point; beyond the Laffer Limit it starts ruining the garden.

If you watch an economy using credit for growth, using more credit increases growth up to a point; beyond the Laffer Limit it starts ruining the economy.

The Laffer Limit refers to the notion of a practical maximum.


Laffer Limit: The point at which continuing to do the same thing begins to have the opposite effect.

Wednesday, June 3, 2015

Expectation and Reality


I was outside mowing the lawn, thinking about the way JMK laid out supply and demand. I summarized it the other day:
Effective demand occurs at the intersection of supply and demand, where supply is

the expectation of proceeds which will just make it worth the while of the entrepreneurs to give that employment

and demand is

the proceeds entrepreneurs expect to receive from the employment of N men

I also remembered what he said about expectations:
It would be foolish, in forming our expectations, to attach great weight to matters which are very uncertain. It is reasonable, therefore, to be guided to a considerable degree by the facts about which we feel somewhat confident, even though they may be less decisively relevant to the issue than other facts about which our knowledge is vague and scanty. For this reason the facts of the existing situation enter, in a sense disproportionately, into the formation of our long-term expectations; our usual practice being to take the existing situation and to project it into the future, modified only to the extent that we have more or less definite reasons for expecting a change.

In practice we have tacitly agreed, as a rule, to fall back on what is, in truth, a convention. The essence of this convention — though it does not, of course, work out quite so simply — lies in assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change.

I hopped off the mower, ran into the garage, grabbed a pad and pen, and wrote:

Expectations are the reason things don't go bad until they go bad suddenly, and, when that finally happens, expectations are the reason things get far worse than the situation merits.

Expectations only look like the reason it is so difficult to recover from a financial crisis. The true reason is that we don't reduce private debt quickly and sufficiently -- we don't solve the problem -- so there is no real improvement. With no real improvement, discouraged expectations are altogether appropriate. But they are a result, not the cause, of the lethargy.


Expectations are the source of lag; they explain why lags are "long and variable". But expectations arise from realities. Realities drive expectations. You cannot fix the economy by changing expectations, but only by changing realities.

You can only fix the economy by actually fixing the economy.

Tuesday, June 2, 2015

The 43%


Wikipedia:

A debt income ratio (often abbreviated DTI) is the percentage of a consumer's monthly gross income that goes toward paying debts.

Consumer Financial Protection Bureau:

The 43 percent debt-to-income ratio is important because, in most cases, that is the highest ratio a borrower can have and still get a Qualified Mortgage.


I was gonna end it right there, but no. I want to gripe about the number. I want to gripe about the whole process.

The 43% number comes from the consumer protection bureau. They imposed that number on us... to protect us?

How does that work?

I think they're trying to protect the economy, not the consumers. Hey, I'm all in favor of making sure the economy keeps functioning, and that it starts functioning better than it has, sure. And that's good for consumers; it's good for me. But don't be a hypocrite about it. If you're protecting the economy, admit you're protecting the economy. Don't make it sound like you're protecting consumers by forbidding us to borrow one more dollar. That's hypocrisy, and it's bullshit.

Forty-three percent?

Oh, I resoundingly agree that the best way to protect the economy is to prevent the excessive accumulation of debt. But, uh, 42.5% is somehow okay? It's the extra half a percent that creates all the problems? I don't think so.

Anyway, they are impinging on our freedom to get ourselves in trouble with debt. No matter how good the motive, no matter how good the objective, no matter how good the implementation, they are impinging on our economic freedom. I'm not a political guy. You don't often see me use the word "freedom". But you know there are many many people who will holler that word till they are blue in the face.

Those people will object to the policy. And that's a problem, because it reinforces the polarization of our views. It impedes resolution of the problem.

Here's what's wrong, here's what's economically wrong with the 43% policy:

It fails to consider the reason debt ratios are so high. It does nothing to change the economic forces that push debt ratios higher, nor to discover what those forces are. It only imposes a limit. And because it does not deal with the underlying forces, the policy that imposes the limit is bound to fail. You can expect the limit-value to creep upward, just as debt ratios have. And then, when there's another crisis, everyone will be surprised. Again.

We have to deal with the underlying cause of the problem. Excessive debt accumulation is the problem, and we have to deal with that. But excessive debt accumulation is the water on the kitchen floor. We have to turn off the tap and unclog the drain. We have to discover the underlying forces pushing debt upward, and we have to point those forces in the other direction.

The problem is the excessive accumulation of debt -- public and private debt. Mostly private debt. I used a McKinsey graph the other day, found the link in this old post of mine, really liked a quote I took from McKinsey then. I repeat it now:

history shows that, under the right conditions, private-sector deleveraging leads to renewed economic growth and then public-sector debt reduction.

That's how it works.

All these years of failure to reduce the Federal debt and deficits. People say the government doesn't want to reduce that debt. I'm telling you, that's wrong. It's not that "they" don't want to reduce the Federal debt. It's that the plan we've been using can not work. The only plan that will work is the plan to reduce private sector debt, and then take advantage of the opportunities created by that plan to reduce the public debt (if that still seems necessary).

That is an indirect approach, and maybe it requires more thought than some people can muster. But it's the only plan that will work -- unless you wish to bring life as we know it to an end, and replace it with a dark age.


So we need to reduce private debt. The question that must be asked, then, is: What are the economic forces that drive private debt upward? The question that must be asked, and answered.

The answer is policy, of course. More accurately, the answer is the mindset that lies behind policy. Our economic policies almost unfailingly encourage the use of credit. Our policies encourage growth, which means they encourage spending. But we don't want inflation, so policy provides a quantity of money that is inadequate for the growth our policies hope to achieve. Because the quantity of money is inadequate, the growth is always disappointing. And because of the inadequate quantity of money, people borrow more in order to increase their spending.

The combination of policies is a problem. The one policy encourages spending, and the other fails to provide an adequate money supply. So borrowing increases. And accumulated private-sector debt increases as a result of the borrowing.

But you know what? This explanation does not matter. Perhaps I have it all wrong, as Jim always says. No matter. The simple fact is that there is a massive accumulation of private sector debt.

The simple solution is to design policies that accelerate the repayment of debt.

Monday, June 1, 2015

how to measure the size of finance


From Chapter 2: Indicators of Financial Structure, Development, and Soundness, a PDF at the IMF:

Financial structure is defined in terms of the aggregate size of the financial sector, its sectoral composition, and a range of attributes of individual sectors ...

The aggregate size of the financial sector. Yeah, that's what I'm looking for. ("How to measure the size of finance" was the Google search that turned up the IMF PDF.)

Oh, but I left off the ending of that sentence:

... a range of attributes of individual sectors that determine their effectiveness in meeting users’ requirements.

Ah, yes. Customer satisfaction. That's some bullshit, I think, and that's why I left the ending off. I'm not interested in the financial sector's assessment of their customers' satisfaction. Just the size of finance.

Next page of the PDF:

The overall size of the system could be ascertained by the value of financial assets, both in absolute dollar terms and as a ratio of gross domestic product (GDP). Although identifying the absolute dollar amount of financial assets is informative, normalizing financial assets on GDP facilitates benchmarking of the state of financial development and allows comparison across countries at different stages of development. Other indicators of financial size and depth that could be usefully examined include ratios of broad money to GDP (M2 to GDP), private sector credit to GDP (DCP to GDP), and ratio of bank deposits to GDP (deposits/GDP).

That's exactly what I'm looking for. How to measure the size of finance.

Oh, but I left off the ending of that paragraph:

However, one should be careful in interpreting observed ratios because they are substantially influenced by the state of financial and general economic development in individual countries.

Fair enough. But then, this:

Cross-country comparisons of economies at similar stages of development are, therefore, useful in obtaining reliable benchmarks for “low” or “high” ratios.

What they're saying is that we can best determine whether the ratios are high or low -- whether finance is a large or small part of our economy -- by a comparison of nations.

Source: McKinsey Global Institute, January 2012
In other words, total U.S. public and private debt at 300% of GDP should be considered low, if only we can manage to dig up a few countries with even higher debt. This is serious bullshit. If the ratios for many countries are high, then surely finance is large in all of them.

That's how the U.S. housing sector got in trouble, according to something I read a while back. Instead of using a fixed debt-to-income ratio to determine mortgage affordability, lenders let the ratio creep higher. This was justified by observation that economic fundamentals were still sound. That justification was used, apparently, right up to the moment of crisis.