Thursday, June 22, 2017

A game for two players

SpaceX's Mars colony plan: How Elon Musk plans to build a million-person city

Elon Musk wants Mars? Sure, because everything on Earth will be owned by Jeff Bezos:

Amazon is buying Whole Foods Market in a $13.7 billion deal

Wednesday, June 21, 2017

The business cycle, bigger

Patterns of Growth and Decline in Western Civilization
Source: Greg Stevens                (Click Graph to Enlarge)

Recommended reading: Western civilization will completely collapse in the next 200 years.

Take that "200 years" as conceptual. Stevens does not say May 4, 2217 is the critical date. He says "I have no equation to give you that will spit out a number!" But determining the exact moment of our demise is not really the point. The point is that the cyclic pattern is a useful tool for thinking about the world.

Tuesday, June 20, 2017

Doublespeak at Bloomberg

Bloomberg: "While the expansion has been normal, 'output has been held back by woeful productivity growth and an unusual decline in labor-force participation'..."

You can't have it both ways. Either the expansion has been normal, or it has not. If output has been held back, then expansion has not been normal.

See Skipping a stone across recent years

Sunday, June 18, 2017

It's like that

As a follow-up to my two previous posts, I want to clarify one point: There is an imbalance between private and public debt, an excess of private relative to public, and economic growth will not improve until the imbalance is corrected.

My theory doesn't need 2% inflation to prop up the economy. And it certainly doesn't need three or four percent inflation to get better growth. I have no need of that hypothesis.

From Unveiling the Edge of Time by John Gribbin:
Newton himself had been baffled by one feature of the behavior of the planets. One planet on its own, orbiting the Sun, would indeed move in a perfect ellipse in obedience to Kepler's laws, under the influence of the inverse-square law of gravity. But with two or more planets, the extra gravitational forces of the planets acting on each other would tug them out of their Keplerian orbits. Newton feared that these effects might lead to instability, eventually tumbling the planets out of their orbits, and sending them either crashing into the Sun or drifting away into space. He had no scientific answer to the problem but suggested that the hand of God might be required, from time to time, to put the planets back in their proper orbits before such perturbations became too large.

In the mid-1780s, however, Laplace proved that these perturbations are actually self-correcting. Using the example of Jupiter and Saturn, the two largest planets in the Solar System, with the strongest gravitational pulls, he found that although one orbit might contract gradually for many years, in due course it would expand again, producing an oscillation around the pure Keplerian orbit with a period of 929 years. This was one of the foundations of what is possibly the most famous remark ever made by Laplace. When this work on celestial mechanics was published in book form, Napoleon commented to Laplace that he had noticed that there was no mention of God in the book. Laplace replied: "I have no need of that hypothesis."

Saturday, June 17, 2017

That tangent again

There is an excess of private sector debt. This creates problems, in response to which public debt has increased. Almost everyone sees and objects to the increase in public debt. Few see and object to the high level of private debt that created the problems and caused the public debt to grow. Those who do see private debt as the problem seem universally to point to faster increase in public debt as the solution. But this solution is not quite right.

Those who call for faster increase in public debt are right in the sense that increasing the public debt reduces the imbalance between public and private debt. But the analysis must not stop there. For in our economy, increases in the public debt lead to greater increases in private debt, making the imbalance worse. So the solution, as I see it, is not to focus on increasing the public debt, but rather to focus on limiting the increase of private debt.

Friday, June 16, 2017

The 2% solution

Neil Irwin is often good. But this post of his from 2014 disturbs me: Of Kiwis and Currencies: How a 2% Inflation Target Became Global Economic Gospel

How did the 2% inflation target become global economic gospel? Irwin answers that question in the first paragraph, using an interesting twist of language:

Sometimes, decisions that shape the world’s economic future are made with great pomp and gain widespread attention. Other times, they are made through a quick, unanimous vote by members of the New Zealand Parliament who were eager to get home for Christmas.

He completes his answer in the second paragraph:

The practice was so successful in making the high inflation of the 1970s and ’80s a thing of the past that all of the world’s most advanced nations have emulated it in one form or another.

So the 2% policy was created by accident, by politicians less interested in governing than in getting home for the holidays. And 2% policy became the standard by dumb luck: It seemed to work, and everyone got on board.

This is not really good analysis on Irwin's part. He dumps on government, and everybody likes that, so he has an "in" at the start. No doubt there is another side to the story, a more respectable, more respectful side, which Irwin does not cover. Not that there's an audience for that side of the story.

Having created the picture of a shoddy foundation for 2% policy, Irwin proceeds to poke and prod us toward thinking that 2% is no good:

Yet even as the idea of a 2 percent target has become the orthodoxy, a worrying possibility is becoming clear: What if it’s wrong? What if it is one of the reasons that the global economy has been locked in five years of slow growth?

Note that his attack on 2% policy is based solely on "what if".

And again:

All of this has quite a few smart economists wondering whether the central bankers got the target number wrong. If they had set it a bit higher, perhaps at 3 or 4 percent, they might have been better able to combat the Great Recession...

What if they had set a higher target.

And again:

“Probably in the abstract had they settled on a somewhat bigger number, that would have been a better choice,” Mr. Blinder said.

That's "what if" in economist-speak.

By now I've criticized Neil Irwin's attack on 2% policy as baseless, and criticized his presentation of the higher-target argument as empty. So maybe you are thinking that I support the 2% policy. I don't. I'm not defending 2%. I'm criticizing Irwin's analysis.

For the record, I don't support 2% inflation. I support zero inflation. But not now, and not as a solution to anything.

Inflation is the economy's way of telling us that it has a problem: Inflation is the economy's way of fixing the problem. When we figure out what the problem is, and fix it, inflation goes away. That's why I favor zero inflation. Because it will be a sign that we fixed the problem.

Now you're mouthing the words "printing money causes inflation" and you think that I think that printing less money will get us to zero inflation. That's not it. Not even close. I did say "When we figure out what the problem is", remember?

To tie off this tangent, let me say what I think the problem is. We use money for money. And we use credit for money. But sometimes we use more money and less credit, and sometimes we use less money and more credit. And by "sometimes" I don't mean Tuesday versus Saturday. I mean, for example, the 1950s and '60s versus the 1990s and 2000s and since. The problem that our economy has is that we use too much credit for money, and not enough money for money. There is an imbalance between money and credit, an excess of credit use, an excess of debt.

There is an excess of private sector debt. This creates problems, in response to which public debt has increased. Almost everyone sees and objects to the increase in public debt. Few see and object to the high level of private debt that created the problems and caused the public debt to grow. Those who do point to private debt as the problem seem universally to point to faster increase in public debt as the solution. But that solution is not quite right.

There is an imbalance between money and credit. There is much credit, relative to money. If we say private debt is a measure of credit, and public debt is a measure of money, then there is too much private debt relative to public debt. This is the imbalance, the monetary imbalance that creates our economic troubles.

Those who call for greater increase in public debt are right in the sense that increasing the public debt reduces the monetary imbalance. But the analysis must not stop there. For in our economy, increases in the public debt lead to greater increases in private debt. This makes the imbalance worse. So the solution, as I see it, is not to focus on increasing the public debt, but to focus on limiting the increase of private debt.

That's not really as bad as it sounds, for we can limit the increase of private debt easily, by encouraging faster repayment of that debt. Policy-makers think credit is good for growth, and they make lots of policies that encourage the use of credit. As a result, our use of credit has increased. But policy-makers have not also created policies that encourage the repayment of debt. So our accelerated use of credit makes private debt grow at an accelerated rate, and no policy does anything to reduce the growth of private debt. This is where policy must be corrected.

So you can see that the optimum rate of inflation is not my main focus. Maybe you can also see that in my view, the 2% inflation target is most definitely not "one of the reasons that the global economy has been locked in five years of slow growth". And that a higher inflation target will not solve the problem.

I'm criticizing Irwin's analysis.

The argument about whether we should double the target inflation rate from 2% to 4% is an argument between two factions unaware that the problem lies elsewhere. Neil Irwin refers to the doubling as setting the target rate "a bit higher", and he quotes Alan Blinder calling 4 "somewhat bigger" than 2. But these misrepresentations do not disprove that 4 is twice as much as 2.

Irwin quotes Laurence Ball saying “Any adverse effects on the economy of having 4 percent rather than 2 percent inflation are trivial compared to the effects of having a horrible recession like we’ve been experiencing.”

Trivial? To whom? To the 99%, yes. To the 1%, no. To the 1%, seeing the value of their money halved in a generation must be no trivial matter. It's hard to sympathize with the 1%, I know. Still, they have the money, and the power that goes with it. So if you want to fix the economy, you'll have to do it in a way they can live with. Doubling the rate of inflation is not it.

Thursday, June 15, 2017

Forder & Friedman v Irwin, RE: 3 to 4% inflation is hardly memorable

Neil Irwin:

...inflation also hovered in the range of 3 to 4 percent through the mid-1980s, hardly remembered as an economic nightmare.

James Forder:

The question [Samuelson and Solow] were addressing was that of the explanation of the inflation of the 1950s – particularly the period 1955-57 – and the implications it had for macroeconomics. Mild though that was later to seem, this 'creeping inflation' as it was called was, at the time, a source of much anxiety.

Milton Friedman:

it took a century for the inflation in Rome, which contributed to the decline and fall of the empire, to raise the price level "from a base of 100 in 200AD to 5000... -- in other words a rate of between 3 and 4 percent per annum compound."

Wednesday, June 14, 2017

A Moving Target

According to Neil Irwin, Paul Volcker (Fed chairman from 1979 to 1987) liked the idea of zero inflation:

One view was that zero inflation should be the goal — that a dollar today should have the same buying power as a dollar in a decade, or two or three. That was the view embraced by, among others, Paul A. Volcker, the former Fed chairman.

Irwin says New Zealand in 1989 was "the first country to set a formal target for how much prices should rise each year — zero to 2 percent in its initial action." By the end of that paragraph, though, Irwin drops the zero:

A 2 percent inflation target is now the norm across much of the world, having become virtually an economic religion.

Then, after noting more recent events, Irwin writes:

All of this has quite a few smart economists wondering whether the central bankers got the target number wrong. If they had set it a bit higher, perhaps at 3 or 4 percent, they might have been better able to combat the Great Recession...

So zero, and then zero-to-2%, and then 2%, and now 3-to-4%.

Monday, June 12, 2017

Maybe more links will solve the problem

I thought it was a mistake: three links to stuff about the insufficiency of 2% inflation:

Not a mistake. Apparently, Thoma likes what DeLong and Kocherlakota have to say.

The first link -- Rethink 2% -- is a copy of a letter to the Fed, signed by Kocherlakota and DeLong and Mark Thoma and a bunch of other economists with lots of name recognition. The letter opens with an uninspiring account of our economic troubles:

The end of this year will mark ten years since the beginning of the Great Recession. This recession and the slow recovery that followed was extraordinarily damaging to the livelihoods and financial security of tens of millions of American households. Accordingly, it should provoke a serious reappraisal of the key parameters governing macroeconomic policy.

One of these key parameters is the rate of inflation targeted by the Federal Reserve...

They open with the ten-year complaint? Why would anyone read on, unless to criticize it in a blog post? (Note, for example, that "This recession and the slow recovery" are two things, not one thing; so maybe the letter should say This recession and the slow recovery were damaging rather than "was" damaging. Where is Paul Romer when you need him?) The second paragraph continues:

In years past, a 2 percent inflation target seemed to give ample leverage with which the Fed could lower real interest rates. But given the evidence that the equilibrium interest rate had fallen substantially even prior to the financial crisis, and that the Fed’s short-term policy rate remained at zero for seven years without sparking any large acceleration of aggregate demand growth, a reassessment of this target seems warranted...

So their concern is that two percent no longer provides enough room for rates to fall, should the need arise. And that the "equilibrium" rate has fallen, and that two percent inflation has not solved the problem.

The second paragraph concludes with a call for "moderately higher" inflation.

My problem with the views expressed in the letter is that inflation is not a solution to economic problems. Higher inflation may change the shape of the problem, from one acceptable to the 1% to one acceptable to the 99%, but it does not solve the problem.

You might say that a problem 99% of the people can live with is better than a problem 1% of the people can live with. Okay, but it's still a problem: It's not a solution. Anyway, the 1% of the people have 99% of the money, so they can put things back in their favor easily. We'll get higher inflation for a while, and then we won't, and the problem will remain.

Note that the letter considers it a "given" that the equilibrium rate has fallen. This is unacceptable. According to the letter, the fall in the equilibrium rate appears to be an integral part of the problem. If that's the case, you don't accept it as a "given" and turn to moderately higher inflation as a coping mechanism. No. You investigate the fall in the equilibrium rate. You look at its causes rather than its consequences. And then you explore solutions that might reverse the causes of the fall of that rate.

And that's just for starters. You have to trace the problem to its origin. It is not enough to find the proximate cause of the problem. It is never enough to find the proximate cause.

Mark Thoma's second link is The Fed Needs a Better Inflation Target by former Fed bank president Narayana Kocherlakota.

Kocherlakota opens with a reference to the "Rethink 2%" letter:

Today, a group of economists published a letter urging the U.S. Federal Reserve to consider a monumental change in policy: raising its target for inflation above the current 2 percent.

I signed the letter. Here's why...
His explanation sounds very much like the opening of the letter itself, with its concern about having room for interest rates to fall:

The inflation target helps define how much stimulus the Fed can deliver when it lowers interest rates to zero...

Same page. But Kocherlakota spends the rest of the paragraph explaining his thinking, which is the worst thing a writer can do. He does get in a couple of decent hyphenated terms, but explanations are always dreary. And then Kocherlakota ends the paragraph by explaining that three percent is "a full percentage point" more than two percent. Reminds me of the "six is greater than one" TV commercial.

Kocherlakota writes:

The issue is all the more important because periods of zero nominal rates are likely to be more frequent.

More frequent than in the past.

Why? Because of "a lowering of the 'natural' interest rate consistent with full employment and stable inflation". You know:

the equilibrium interest rate had fallen substantially even prior to the financial crisis
The "given". Again.

So, the same story from two sources. But prob'ly not two sources. Prob'ly one source with two outlets, to make it seem like many people had the same thought independently.

Anyway, Kocherlakota says that the fall of the equilibrium rate

might require the Fed to be at the zero lower bound about 30 percent to 40 percent of the time.

So don't you think we might want to figure out what caused the equilibrium rate to fall, and reverse the causation, and get that rate back up again? But no: Like the letter, Kocherlakota says we should cope with the problem by raising the inflation target.

Kocherlakota again:

Of course, there's also a case against raising the inflation target. That’s why the more important part of the letter is its call for “a diverse and representative commission” to re-examine the monetary policy framework -- a much more open and transparent approach than the Fed usually takes. When the policy-making Federal Open Market Committee (of which I was a member) chose the 2 percent inflation target in January 2012, its deliberations were completely hidden from the public. As a result, the target has little buy-in from the public and Congress.

Bullshit. The 2% target has "little buy-in" because it didn't work.

Mark Thoma's third link is Why the Fed Should Rethink Its 2%/Year No-Lookback Inflation Target by Brad DeLong.

Oh! I thought it was going to be "same pile, different foot" again; but maybe not. DeLong says his contribution to the discussion was "to set out what the arguments on the other side are—and why we do not find them convincing".

Well, good. I'm not "on the other side", but I don't favor raising the interest rate target as a solution to anything, because it isn't a solution to anything. So, maybe DeLong will address my concerns and educate me. We'll see.

DeLong says he sees four "other side" arguments, all of which are wrong. I'll just look at the first one:

"Even at the zero lower bound," the Fed has other tools, and does not need to raise the inflation target. That argument is wrong, DeLong says, because the other tools have not worked. His evidence is the low employment and low production of the past decade.

Okay, but that doesn't mean that raising the inflation target will solve the problem. I'm willing to admit that a sufficiently high inflation rate would probably boost spending and employment and production. But I'm not willing to admit that the low levels of those things are the problem. Oh, sure, they are a problem for people. But you don't fix the economy by fixing people's problems. You fix the economy by fixing the economy's problems. When the economy is working right, people's problems get fixed more or less automatically.

Since the time of Carter and Volcker and Reagan, many things have been done to the economy to "fix" things. Bringing the inflation rate down was only one of those things. Where is DeLong's call for a reversal of all the other things? Why does he only want to reverse the lowering of the inflation rate?

The impediment then was the same as it is today: Economists and policy-makers look at outcomes and try to improve them. What they need to do is look at outcomes and correctly determine the causes of those outcomes. Then maybe they'll have to look upon those causes as if they were outcomes, and chase down their causes. And when they discover the causes, maybe they'll have to do it again. They have to track the problem to its source.

They don't do that. They didn't do it in the Carter/Volcker/Reagan era, and they're not doing it now. As I said, a higher rate of inflation could boost employment and production without solving the problem that made employment and production go low.

No one is saying the problem is that prices are too low. A higher rate of inflation would fix that problem -- but that isn't the problem.

Sunday, June 11, 2017

The cost of debt and the cost of credit are two different things

The title grabbed me immediately: Capital Controls and the Cost of Debt.

Not capital controls. It's the cost of debt that caught my eye. I still don't know what "capital controls" are. I still don't even know what "capital" is. But the cost of debt, yeah, that one I know. So I clicked the link (it's the loader page for a PDF) and read the first sentence of the abstract:

Using a panel data set for international corporate bonds and capital account restrictions in advanced and emerging economies, we show that restrictions on capital inflows produce a substantial and economically meaningful increase in corporate bond spreads.

I see now how difficult that sentence is to read. Too long. On the first read, the last three words stuck in my head: "corporate bond spreads."

Interest rates. Spreads are interest rates, differences in interest rates. That's not the cost of debt.

Interest rates are the cost of credit, the cost of borrowing. The cost of debt is something entirely different. The cost of debt is the cost of the whole accumulation of borrowings. And the size of that cost depends primarily on the size of the accumulation. Not on interest rates.

Interest rates affect the cost of the next dollar borrowed. That's entirely different.

For example:

These days, the cost of debt is high and the cost of credit is low. That much, I know.

Thursday, June 8, 2017

I can do simplistic, too

At the New York Times N.Gregory Mankiw offers A Tax Cut Might Be Nice. But Remember the Deficit.

Anyone who reduces the problem to taxes and deficits is a complete ass. Yeah, that means most everybody. But maybe it's not Mankiw; maybe it's his editor. Can't say. So I started reading the article to see what I can say.

Mankiw's first sentence includes this question: "Should we have a tax cut that increases the budget deficit?" And his last sentence is "In this era of alternative facts, it would be far too easy to pass irresponsible tax cuts and hand the bill to future generations." So yes, Mankiw reduces the problem to taxes and deficits. Therefore, Mankiw is an ass.

Wednesday, May 31, 2017


Two posts back I said Marcus Nunes was concerned that people would accept the new, lower trend of economic growth and forget the higher trend of the eighties and nineties and naughts. "Forget" was my word. Maybe it wasn't quite right.

But Marcus does say "there´s a wide acceptance of the new trend." People are giving up on trying to get back to that old, high trend. Maybe the word "forget" is not so far off, after all.

In that post I used Marcus's graph, which goes back to the late 1980s and shows the high trend and the low trend, both. My post also quoted Menzie Chinn talking about a trend based on the 1984-2007 period and saying this trend now seems implausibly high. Chinn wants us to forget about the high trend.

I find it interesting that Marcus and Menzie both show the old trend existing since the 1980s. Interesting, because for a long time it was widely recognized that there was an economic slowdown in the mid-1970s, from which we never fully recovered. The older trend, from before the mid-1970s, was even higher than the old trend that Marcus and Menzie show.

Evidently, the older trend is even more completely forgotten. "Abandoned" might be the better word. Let's have a look.

FRED provides the Real GDP data series GDPC1. Menzie Chinn provides the range of dates used to establish the trend. Excel provides an exponential trend line and the trendline equation:

Graph #1: Real GDP (blue) and the Exponential Trend (red) for 1984 to 2007
Showing an exponent of approximately 0.0313, the equation indicates average annual growth of about 3.13% for the 1984-2007 period.

I used the trendline equation to calculate values for the 1984-2007 trend, to extend the trend from 1947 to 2016. Then I showed those values as a red line on a new graph, along with Real GDP. By this method we can see how well the 1984-2007 trend fits the RGDP data for the full 1947-2016 period:

Graph #2: Real GDP (blue) and the 1984-2007 Trend (red) in the 1947-2016 Period
It appears to be a good fit, right up to the problems of 2008. Then Real GDP falls away from the trend and establishes the new, lower trend, as discussed by Marcus Nunes, Menzie Chinn, and others. Even before the 1980s the fit looks good, in the 1970s, and in the late 1960s.

Before about 1965, Real GDP (blue) does run persistently below the 1984-2007 trend (red). It doesn't appear to be off by much. One good way to tell how much it is off is to show a trend line based on those early years on the graph.

According to what Scott Sumner said ("growth in US living standards slowed after 1973"), Ross Perot's graph in yesterday's post, and the observations of others, 1973 seemed to be a good end-date for the early years' trend.

Then, for the start-date, I remembered Marcus telling me he likes to omit the years before 1952 "to avoid the post war adjustment which distorts the data." I like to imitate what I see economists doing, so I went with the 1952 start-date.

This next graph shows the same Real GDP (blue) and the same trend line based on the years 1984-2007 (red) as the graph above. But to gauge the difference visible in the years before 1965, this graph adds an exponential trend line (black) based on the years 1952 to 1973:

Graph #3: RGDP (blue), the 1984-2007 Trend (red), and the 1952-1973 Trend (black)
In the early years, there is not much difference between the trends. But there is a huge difference by the end. Menzie Chinn's 1984-2007 trend brings Real GDP to 20 trillion dollars by 2016. The 1952-1973 trend brings Real GDP to 30 trillion. And Menzie thought the lower of those numbers was an "implausible" outcome!

But what if these are not implausible outcomes?

// The Excel file

Tuesday, May 30, 2017

The previous slowdown in economic growth

Arguing with Paul Krugman, Scott Summner wrote: "I am not denying that growth in US living standards slowed after 1973, rather I am arguing that it would have slowed more had we not reformed our economy."

Sumner accepts the view that the growth in US living standards slowed after 1973.

The classic graph that shows that slowdown is this one from Ross Perot:

Graph #1 Source: Ross Perot, United We Stand
(from when Perot was running for President in 1992)
Before 1973, living standards would double in less than two generations. After 1973 it would take 12 generations for living standards to double.

If a generation is 25 years: Before 1973 it took less than 50 years for living standards to double. After 1973, according to the graph, 300 years.

Scott Sumner says things would have been even worse if not for the Reagan-era reforms.

Perot lost the 1992 election to Bill Clinton, and during the Clinton years the economy improved. (I'm talking chronology here, not causality.)  The "generations required" number came back down, but only for about ten years. Then it went up again. And after that we had the financial crisis and recession, and the "generations required" went up even more.

Sunday, May 28, 2017

Skipping a stone across recent years

Early 2008, not long before the 2009 recession: Real GDP (blue) is right on track, and the track itself (Potential GDP, gray) is predicted to continue rising, undisturbed, for a decade:

Splash #1

Early 2010: In the past two years there was a recession (vertical gray bar). Real GDP (blue) dropped significantly, then turned upward again. In addition, Real GDP has been revised and now uses "2005 Dollars" rather than "2000 Dollars". 2005 Dollars are worth somewhat less than 2000 Dollars. It takes more of them to buy a given amount of Real GDP. That makes the blue line higher:

Splash #2a
For purposes of comparison, the above graph shows the "track" (Potential GDP, gray) as it was in early 2008. In point of fact, Potential GDP was also revised to use 2005 Dollars and, like Real GDP, is higher than it was before the revision:

Splash #2b
With blue and gray both revised, blue still appears to follow gray about as closely as it did before the revision, except since the 2009 recession. Also, for the future, gray appears to fall slightly below the path predicted in the previous graph, then return to it.

Late 2010: Ezra Klein examines the gap created by the 2009 recession. He looks at ways to to bring output back up to trend: Real GDP could accelerate quickly, or slowly, or not at all.

Splash #3

Early 2012: Pursuing Ezra Klein's third option, Real GDP (blue) continues on its new, lower path. Meanwhile, expectations have been somewhat reduced: The old 2010 trend (gray) has been lowered for 2012 (red):

Splash #4
In February John Taylor shows two graphs of recession and aftermath. One graph considers the 1982 recession, after which the recovery was like Ezra Klein's "rapid acceleration" model. The other considers the 2009 recession, after which the recovery is like the "no acceleration" model. But Taylor's graphs are not models. They are actuals.

That same month, James Bullard (PDF, 6 pages) offers a story to explain why we have a "no acceleration" recovery. In the years before 2008 our economy was in a bubble, he says. And the path predicted for our economy (gray, on Graph #1 here) was based on the bubble.

Imagine our economy without that bubble, Bullard says: predict a future path based on that lesser economic performance, and you will have a better prediction. In other words: Forget the Ezra Klein graph. We're not going to bring Real GDP up to trend. We're going to bring the trend down to meet Real GDP.

As I write this today (2017) Bullard's story seems reasonable, even to me. Bullard's is now the accepted story. How did we get here?

Late 2012: Scott Sumner says if the new (lower) trend continues he will "throw in the towel" and accept it:

In 2009 I advocated going all the way back to the old trend line. I currently favor going about 1/3 of the way back. If we keep on the same track for a few more years I’ll through in the towel and advocate starting a new 5% trend line from where we are.

Sumner, struggling to accept the lower trend.

2014: Marcus Nunes shows a graph of Real GDP since the 1980s, including the 2009 recession and the slower growth since that time. The graph also shows the old and new trends of Real GDP growth:

Splash #5
"For RGDP the trend growth rate is 3.3%," Nunes says. But "There´s no doubt that the economy was 'shifted down' during what has become known as the 'Great Recession', and it looks as if this shift is 'permanent'."

Yes, when the economy falls below trend, it is reasonable to assume that it will rebound back to it. The only thing is that the trend it will rebound to is the new much lower one. And that´s something that makes me think that there´s a wide acceptance of the new trend.

What this implies is that over time the “old trend” will, for all sorts of economic reasons, “cease to exist”, in fact coming down all the way to become one with the new trend level, in which the real economy grows at 2.2%...

Nunes worries that people will, like Sumner, forget about the old trend and accept the new one. There is wisdom in his words.

2016: “Is current output really 18% below potential output?” Menzie Chinn puts the question in quotes, suggesting he does not accept the 18% number. He explains:

One thing that should be remembered is that the trend line extrapolated from 1984-2007 implies that the output gap as of 2015Q4 is … -18%.

In other words, he says the 1984-2007 trend must be wrong. This graph, he says, "highlights the implausibility of the -18% output gap":

Splash #6
Menzie Chinn has turned a corner from Marcus Nunes. The old trend is unreasonable, Chinn says; therefore the new trend must be right.

His evidence? The long duration of the new, lower trend. Chinn enhances that duration by showing the new, lower prediction of Potential GDP, which conveniently aligns with the reported data. In fact, though, the new measure of Potential GDP is not better or more accurate than old measures of Potential GDP. Not better, only different. Lower.

And the duration of slower reported growth is not evidence that the old high trend was wrong. It may only be evidence that economists have not yet found the problem, and policy has not yet fixed it.

Marcus Nunes was right: The old trend has ceased to exist. People like Scott Sumner and Menzie Chinn no longer expect good growth to return. With their minds at last made up, economists can now go back to explaining the world making up their stories.

Saturday, May 27, 2017

Time for another update already

Thursday, May 25, 2017

Just to be sure

This graph (from yesterday's post) shows average growth rates for periods beginning in 1930. But the graph is a close-up. It only shows the years since 1952:

Graph #1
So the first point on the red line represents average growth for the 1930-1952 period. This seems misleading, as the years before 1952 are not shown. I want to re-do the calc, figuring average growth rates for the period beginning in 1952.

I'll keep the green line from the first graph, the "average annual growth" calculation from BEA. I'll toss the running average line, and make a new red line using the BEA calc on data from 1952 and after:

Graph #2

The new red line shows a lot of variation in the early years. That's to be expected, as there isn't much to average against. The green line has a backlog, 20 years of data from before 1952, acting like an anchor to prevent the green line from moving when the blue line moves.

In the early years the red line has no such backlog, so big changes in the blue line create big changes in the red. After a dozen years or so, the red has a backlog of its own. Then it is not so much influenced by changes in the blue. And then we see the red and green run side-by-side.

By the time the red and green run side-by-side, both are more influenced by their past than by each new change in the blue line. So if somebody says average RGDP growth in the 1947-2017 period is 3.21%, it tells us more about the past than it does about today.

On the other hand, if the side-by-side years show a general downward trend, it means there are so many below-average years that they are dragging the anchor down. I conclude, then, that the important information in these long-term averages is not that the average value is 3.21% or 3.3% or whatever.  The important information is that growth has been going downhill since the 1960s.

I go back to the first graph and this time keep the red line, the running average since 1930. I get rid of the green line and create a new one showing the running average since 1952. This time we compare running averages for two different start-dates.

Graph #3
This time the red line has an anchor, two decades of data from before 1952. The green line doesn't. So the green line responds more to changes in the blue than the red line does. But again, after a dozen years or so, the "since 1952" line has its own backlog, and we see red and green show the side-by-side behavior.

We get the same behavior for running averages as we got for the BEA calculation. It turns out that the "backlog" is more significant than the calculation that makes use of it. To me this says the long-run average isn't worth much, except it shows that new growth keeps dragging the average down.

To finish up, I'm replacing both lines on the first graph with the "since 1952" data.

Graph #4
Red and green follow the same path: decline since the 1960s.

// The Excel file

Wednesday, May 24, 2017

Decline of the long-run average

Today we look at long-run economic growth, and along the way compare the results of a running average calculation to a more complicated (but no doubt more accurate) calculation that the BEA uses to figure average annual growth.

The other day I read that the

GDP Growth Rate in the United States averaged 3.21 percent from 1947 until 2017

That reminded me of Marcus Nunes telling me

It´s more or less recognized that US RGDP is trend stationary (maybe that´s changed now!), with real growth averaging about 3.3% from the early 50s to 2007.

I'm not comfortable using averages that way. Compared to the economic growth of the last ten years, 3.21% average growth (1947-2017) seems quite high. And yet 3.21% is noticeably lower than Marcus's 3.3% for the period ending in 2007. It seems the more recent the end-date, the lower the average growth. I want to look at the numbers.

(Yes I know, the two long-term averages have different start-dates too. That's another reason I have to make my own graph!)

The first graph today shows Real GDP (annual data, faint gray, right-hand scale) along with annual growth rates (blue), an average of the growth rate values (red), and an average I got by using the BEA's "variant of the compound interest formula" (green):

Graph #1: On the right is where we have been recently. On the left is where we were before.
Both averages are figured for the full period to date. (The average for 1931 is based on the years 1930 and 1931; the average for 1975 is based on the years 1930 thru 1975; and the average for 2016 is based on the 1930-2016 period.) All the years since 1930 are included in each year's average.

I was happy to see there is not much difference between the red and green lines. No doubt the BEA's method is more accurate than a simple running average, but the running average looks like a good rough estimate. And the two lines seem to follow a similar path.

The blue line is up near 10% growth for a few years in the mid-1930s, and approaches 20% in the early 1940s. There are extreme lows before and after these extreme peaks. Then the next high after that has two dots a little below 10%. Those two dots represent 1950 and 1951. The second graph begins in 1952, and shows the same values as the first graph:

Graph #2: On the left is where we were before. On the right is where we have been recently.
Red and green run close together and show the same variations. Toward the right end, the green line is hidden behind the red, but both lines continue all the way to 2016.

Also, it is a little more obvious on this graph that average RGDP growth is in decline; red and green both show it. The averages ran at or above the 4% growth rate until 1980, then fell noticeably below the 4% rate.

Blue dots above the average pull the average up. Blue dots below the average pull the average down. The last blue dot above the average occurred in 2004.


The red and green lines never go as low as 3%. So for any year you pick, it wouldn't be wrong to say "The GDP growth rate in the United States averaged above 3.0 percent from 1952 until [year]". Sounds pretty good, right? Especially compared to the slow economy of recent years.

It is even true. But it is nonsense. Economic growth has been slowing. And the trend of growth has been slowing. The trend shows where the economy is going in the longer term.

You don't get a feel for where the economy is going when somebody says the average growth rate since 1947 is 3.21%. There were a lot of good years since 1947, that helped to bring the average up. That doesn't do us any good when we've been below the average for years. It's like you got an F on a test and your parents find out, and you tell them "Yeah, but the class average was a B!" That's not gonna help you.

And it doesn't give you a feel for where the economy is going when an economist says GDP is "trend stationary" at 3.3%. It doesn't even sound like things are going downhill. But they are.

// The Excel file

Tuesday, May 23, 2017

Comparing conclusions

From Time magazine, December 31, 1965
If the nation has economic problems, they are the problems of high employment, high growth and high hopes. As the U.S. enters what shapes up as the sixth straight year of expansion, its economic strategists confess rather cheerily that they have just about reached the outer limits of economic knowledge. They have proved that they can prod, goad and inspire a rich and free nation to climb to nearly full employment and unprecedented prosperity. The job of maintaining expansion without inflation will require not only their present skills but new ones as well. Perhaps the U.S. needs another, more modern Keynes to grapple with the growing pains, a specialist in keeping economies at a healthy high. But even if he comes along, he will have to build on what he learned from John Maynard Keynes.
From the Federal Reserve Bank of St. Louis Review, November/December 1998:
I am sure rigorous economic research of the kind Homer Jones advocated, directed, promoted, and carried out will be essential to developing and adopting policies to raise productivity growth and achieve such a goal. We need a new Homer Jones to help us find policies for economic growth just as we were lucky to have had the original Homer Jones to help us find policies for economic stability.

Monday, May 22, 2017

"More saving means more investment..."

John B. Taylor:
Simply running a budget surplus would help achieve the productivity growth goal. Why? Because by running a budget surplus, the federal government can add saving to the economy rather than subtract saving from the economy. More saving means more investment...
John M. Keynes:
Those who think in this way are ... are fallaciously supposing that there is a nexus which unites decisions to abstain from present consumption with decisions to provide for future consumption; whereas the motives which determine the latter are not linked in any simple way with the motives which determine the former.

Sunday, May 21, 2017

Maybe I've been going about this all wrong

John Taylor explains a graph:

The trend line in Figure 1 shows where the economy is going in the longer term...
On the right is where we have been recently. On the left is where we were before.

It's like the commercial on TV that says "6 is greater than 1". Do people really need to be told such things?

Friday, May 19, 2017


A list of economic cycles:

Source: Wikipedia


Off the top of my head, four cycles that didn't make the list:

   •  Short financial cycle (Borio) 16-20 years
   •  Long financial cycle (Greenspan) once-in-a-century
   •  Price waves (D.H. Fisher) 150-300 years, give or take
   •  Cycle of Civilization (Arthurian) 2000 years, give or take


Wikipedia's list indicates a "technological basis" for the Kondratieff wave.  Note, however, that Kondratieff found his cycle in prices [and interest rates]. Also, the Juglar cycle is referenced to "fixed investment". But as Yoshihisa points out in the IWATA PDF, "Conventionally, “Juglar Cycle” is attributed to the investment cycle. But his logic is mainly credit and speculation." So at least two of the four cycles listed have a monetary or financial basis. Plus all four of the ones I added to the list.


Eight cycles listed, total off the top of my head. Six of the eight are observed in or driven by or closely related to money or credit or finance. And that's just off the top of my head.

Thursday, May 18, 2017

The road not taken

"Professor Commons, who has been one of the first to recognise the nature of the economic transition amidst the early stages of which we are now living, distinguishes three epochs," Keynes wrote in 1925, "three economic orders, upon the third of which we are entering."

The three epochs identified by Professor Commons are the Era of Scarcity, the Era of Abundance, and the Era of Stabilization. The change from the second epoch to the third, according to Keynes, is the source of some troubles.

Robert Skidelsky writes:

The classical economists of the nineteenth century looked forward to what they called a “stationary state,” when, in the words of John Stuart Mill, the life of “struggling to get on…trampling, crushing, elbowing, and treading on each other’s heels” would no longer be needed.

According to Skidelsky, the classical economists of the nineteenth century thought with Professor Commons that the world would move from abundance to stabilization. Skidelsky brings this up to make the point that secular stagnation (as described by Larry Summers) *IS* the stabilization, and we should get used to it: "one should view secular stagnation as an opportunity rather than a threat", Skidelsky says.

I say one should have doubts about any era of stabilization. The economy moves in waves and cycles. Growth follows recession follows growth. Why would this suddenly stop? Why would the economy suddenly "stabilize"? One day general equilibrium is unachievable, and the next day it is thrust upon us -- stable general equilibrium, no less. Hogwash.

It is unrealistic to think the world will stabilize. It is beyond ridiculous to think it will stabilize at an acceptable level of output. It is laughable to think it's all under control.

Can we make it happen? Possibly. But that is a different road than the one we have taken.

Asked whether there had ever been anything like the Great Depression before, John Maynard Keynes replied, "Yes, it was called the Dark Ages, and it lasted 400 years."

The fall of Rome was a Great Depression on a grand scale. Professor Commons' "Era of Scarcity" was the long, slow recovery from that economic collapse. The "Era of Abundance" was the grand-scale boom. These are parts of a cycle, a business cycle on a grand scale: the cycle of civilization.

In place of the Era of Stabilization we can reasonably expect another grand-scale Depression, another "Fall of Rome", only this time it won't be Rome.

Can we avoid it? Possibly. But that is a different road than the one we have taken.

Now, as the final day of his campaign drew to a close, Scipio Africanus stood on a hillside watching Carthage burn. His face, streaked with the sweat and dirt of battle, glowed with the fire of the setting sun and the flames of the city, but no smile of triumph crossed his lips. No gleam of victory shone from his eyes.

Instead, as the Greek historian Polybius would later record, the Roman general "burst into tears, and stood long reflecting on the inevitable change which awaits cities, nations, and dynasties, one and all, as it does every one of us men."

In the fading light of that dying city, Scipio saw the end of Rome itself.
- Charles Colson in Against the Night

Arnold J. Toynbee identified at least 23 civilizations. Most of them are dead and gone. Toynbee, though, said the death of civilization was avoidable. Stefan Zenker lays it out:

In contrast to Oswald Spengler, who thought that the rise and fall of civilizations was as inevitable as the march of the seasons, Toynbee maintained that the fate of civilizations is determined by their response to the challenges facing them... The unifying theme of his book is challenge and response.

Challenge and response. If our response meets the challenge successfully, civilization advances. If not, civilization declines. It's that simple.

But we must choose the road less traveled. And that means that most of us have made the wrong choice.

Wednesday, May 17, 2017


Civilization may be seen in the rise and fall of cities, but it is measured in the rise and fall of the standard of value.

A standard of value is not (as Investopedia describes it) a value. It is a standard -- a standard, like the dollar. Not "a" dollar, but "the" dollar. The dollar is not a value; it is a standard of value, as the inch is a standard of measurement.

Beyond that, the phrase "standard of value" encompasses the idea that it is possible to set such a standard. In this sense, then, when Charlemagne put us on silver, and 1200 years later when Nixon took us off gold, both relied on an economic environment that to varying degrees supported the concept of the standard of value.

For several hundred years before Charlemagne, the environment did not support a standard of value. And unless we are most judicious, we will before long discover that for several hundred years after Nixon the economic environment again does not support a standard of value. I know this because civilization is an economic cycle.

Tuesday, May 16, 2017

The usefulness of the cyclic view

Thinking in terms of the cycle helps to organize one's thoughts.

The idea, for example, that we should reduce government to something we can drown in a bathtub is part of the decline. So is the mindless alternative, that to solve the economy's problems we must make government bigger.

I have a few notes on the upswing of the cycle here and a detail on the downswing here.

Monday, May 15, 2017

If not the origins of money, then what?

If the important fact is not whether money first arose to replace barter, then what are the important facts?

   •  A cycle of civilization exists;
   •  it is an economic cycle, as is the business cycle;
   •  it can be observed in the rise and fall of money; and
   •  it is driven by the dispersion and accumulation of wealth.

Sunday, May 14, 2017

The origins of money?

I think it’s a mistake to think you’ll find the workings of modern money by going back to the origins of money.” -- Michael Beggs, quoted in The Myth of the Barter Economy

I agree with Beggs. But the article in which he is quoted, dwells on the origin of money not being barter. That's the least important thing.

Thursday, May 11, 2017

"New rule #1: a 3 percent inflation target"

That's Thomas Palley's rule, a higher inflation target. Palley says

First and foremost, the Fed should raise its inflation target to 3 percent, or even as high as 5 percent. The current 2 percent target is a cap that inevitably keeps the economy in Wall Street’s bliss zone, and prevents the party from reaching Main Street.

I like Palley's "bliss zone" graph. But I don't see inflation as a solution to economic problems. When I took Econ 101 in the 1970s, the goal of policy was economic growth with price stability. If price stability is a goal, you don't get there by increasing the inflation target. And if the 2% target does not allow decent economic growth, then the proper response is not simply to raise the target. The proper response is to figure out why decent growth now requires higher inflation. In other words, the proper response is to figure out what the problem really is. Raising the target does nothing to discover that problem, and nothing to solve it.

Palley says raise the target. I want to look at that to see what the effect might be. And I want to look at inflation in relation to debt and GDP, for a few reasons:

1. Inflation changes GDP, but doesn't change debt.
2. Debt (private debt) is too high and must be reduced.
3. I want to see how Palley's plan affects debt and GDP.

I'll look at credit market debt relative to GDP (annual data) with inflation based on the GDP Deflator.

Palley says the inflation target should be 3% or maybe 5% instead of 2%. So, 1% higher than the target, or 3% higher than the target. But instead of imagining the future, I want to reimagine the past. I want to figure 1% higher (and 3% higher) inflation than we actually had in past years. I'll show higher inflation beginning in 1987, the year Alan Greenspan became Chairman of the Federal Reserve. I'll figure actual inflation, actual+1%, and actual+3%, and show all three together on a graph.

For debt I'm using FRED's TCMDO, which ends with 2015. So I'll be showing actual versus Palley-plan inflation for a period of almost 30 years. Maybe I should say: Palley proposes a higher inflation target for the future, not for the past. I'm just looking at the past because the data is available, to get a feel for how the Palley-plan future would turn out.

First off, GDP.  The blue line shows actual GDP (which is often called "nominal" GDP). The red line shows that same GDP and, since 1987, 1% per year more inflation than we actually had. That's the Palley 3% plan, where 3% equals target plus 1%. The green line shows GDP with 3% more inflation since 1987, the Palley 5% plan.

Graph #1
 The orange line shows GDP with all inflation removed. (This is often called "real" GDP.)  Usually, this line crosses the blue line in 2009, at around the 15000 level. I scaled it down to make it cross the blue in 1947. That makes 1947 the "base year".  You can see that very little of the economic growth we've had has been real growth, and that most of it has just been prices going up. Inflation.

You can also see that, compared to the actual (blue) numbers, Palley's 5% inflation target (green) more than doubles GDP, from less than $20,000 billion to more than $40,000 billion by the end of the 1987-2015 period.

Next, debt. I started with the year-to-year change in debt, because I'm figuring higher inflation for each year. I have to inflate each year's increase in debt separately. Maybe you plan to buy $10 of stuff on credit, but because of inflation it costs $10.50. I have to make an adjustment like that for every year from 1987 to 2015, to create my Palley-plan numbers.

Graph #2
Same colors as before: Blue is actual. Red shows 1% more than actual inflation each year from 1987 to 2015. And green shows an extra 3% inflation on top of actual. The orange line shows no inflation at all, as on Graph #1.

Next, debt again. Now that I have Palley-plan numbers for each year's change in debt, I can take those numbers and add them up to get total debt with the extra inflation already in it.

Graph #3
Now we have GDP and total debt, both adjusted for Thomas Palley's higher inflation targets. All that's left to do is match them up by color and divide debt by GDP. I come up with three different debt-to-GDP curves:

Graph #4
Blue is actual. It is the same as you would get using FRED data. Red shows the ratio when both debt and GDP are figured at an inflation rate one percentage point higher than actual. This is comparable to Palley's 3% inflation target -- one point higher than the existing 2% target -- except I am using actual data from the past rather than a target for the future.

Green shows the ratio when debt and GDP are figured at an inflation rate three points higher than actual. The green is the lowest of the three. One can generalize and say that some inflation brings the ratio down some, and more inflation brings it down more. Of course, this assumes that inflation affects wages and prices equally, and that nobody decides to use any additional credit. But you can see that inflation does have some effect on the debt-to-GDP ratio.

What I see is that the actual ratio peaked with debt at something over 3.5 times the size of GDP, that with 1% higher inflation for the 1987-2015 period, the ratio peaks at something under 3.5 times GDP, and that with 3% higher inflation for the same period, the ratio peaks at something under 3 times the size of GDP.

Is it worth it? Today, instead of having a little over 60 trillion dollars in debt, we would have a little over 70 trillion with the one Palley plan, and almost 100 trillion with the other. That's a lot of debt.

And GDP, instead of being about 18 trillion dollars in 2015, with the higher Palley plan would have been about 42 trillion. But since it is inflation that changed, not real output, it means that under the Palley plan the dollar today would be worth something less than half its present value.

I don't see inflation as a solution to economic problems.

The Excel file. Feel free to check my work.