Tuesday, February 28, 2017

Incidental notes on the early years of the Great Inflation

The so-called "Great Inflation" was just getting started in 1965. The economy was running "too hot", some would say. There was a policy-induced near-recession in 1966-67. By 1970 the inflation was bad enough and the monetary policy reaction strong enough that we did get recession:

Having choked off the money supply as an anti-inflation device in 1966 so tightly that it produced a serious slump in housing and construction (called by some a mini-recession), the central bank started pouring out money too quickly and generously in 1967 and thereby spoon-fed a new inflation.

... in the closing months of 1969 ... Milton Friedman ... in Newsweek, in discussions with key figures in the Administration, and even in one telephone conversation with William McChesney Martin, Friedman argued that the Federal Reserve had now kept the money supply choked off for so long that further restrictions threatened a severe recession.
- Excerpts from "Nixonomics: How the Game Plan Went Wrong" by Rowland Evans Jr. and Robert D. Novak, Atlantic Monthly, July 1971.

Monday, February 27, 2017

Krugman on Two Kinds of Recession

Paul Krugman in Postmodern Business Cycles:

... there’s a definite change in the character of recessions after the mid-1980s. Before then, recessions were basically brought on by the Fed, which raised interest rates sharply to curb inflation ...

Since then, however, inflation has been well under control, and booms have died of old age — or more precisely, they have died because of overbuilding and an excessive level of debt.

Krugman in Postmodern recessions:

A lot of what we think we know about recession and recovery comes from the experience of the 70s and 80s. But the recessions of that era were very different from the recessions since. Each of the slumps — 1969-70, 1973-75, and the double-dip slump from 1979 to 1982 — were caused, basically, by high interest rates imposed by the Fed to control inflation...

Since the mid 1980s, however, we’ve had the “Great Moderation,” with inflation quiescent. Post-moderation recessions haven’t been deliberately engineered by the Fed, they just happen when credit bubbles or other things get out of hand.

Sunday, February 26, 2017

Drawing conclusions from a conceptual framework

"Conceptual framework" by Alan Blinder:

At any given moment, there is a core inflation rate toward which the actual inflation rate tends to gravitate. This rate is determined by fundamental economic forces, basically as the difference between the growth rates of aggregate demand and aggregate supply.

Conclusions by Scott Sumner:

I hope that we can both agree that slow growth in AS did not cause the high inflation of the 1970s. Yes ... inflation was completely demand-side.

Friday, February 24, 2017

So, why do people think growth was slow in the 1970s?

Last week we looked at Scott Sumner insisting that growth was good in the 1970s. We pretty much all agreed he was right, me and the people I quoted on that. So why does Sumner make such a big deal of it? More to the point, where did the idea come from, that growth was not good in the 1970s?

I dunno. But in 1983, in Oil and the Macroeconomy since World War II, a young James Hamilton opened with these thoughts:
The poor performance of the U.S. economy since 1973 is well documented:

    1. The rate of growth of real GNP has fallen from an average of 4.0 percent during 1960-72 to 2.4 percent for 1973-81.
    2. The 7.6 percent average inflation rate during 1973-81 was more than double the 3.1 percent realized for 1960-72.
    3. The average unemployment rate over 1973-81 of 6.7 percent was higher than in any year between 1948 and 1972 with the single exception of the recession of 1958.

This decade of stagnating economic performance coincided with ...

And his paper has been cited almost 2700 times.

Thursday, February 23, 2017

Oil shocks?

Yesterday I said the oil shocks of 1973 and 1979 could explain the stagflation of the mid and late 1970s but they do not explain the stagflation of the early 1970s which, I said, was "plain as day" on this graph:

Graph #1: Quarterly Data Suggesting Times of Stagflation. Early 1970s rung up.

Then I came across Oil and the Macroeconomy since World War II by James D. Hamilton.

Hamilton says

All but one of the U.S. recessions since World War II have been preceded, typically with a lag of around three-fourths of a year, by a dramatic increase in the price of crude petroleum.

My knee-jerk was No, that's not right. I was there in the 1970s. That doesn't help, though, because Hamilton is talking mostly about before the 1970s.

My problem is that maybe there was an oil shock that created the stagflation of the early 1970s. If so, maybe what I said yesterday is wrong. Maybe the oil shock of (say) 1968 could explain the plain-as-day stagflation of the early 1970s.

You shoulda seen me scurry! I went right to FRED to look at oil prices. I grabbed the first two datasets I found that go back to the 1940s, where neither one hides the other. Why two? Because sometimes you can look at two different measures of the same thing and they are nothing alike. For me, that means I've got something wrong. If I get two datasets that show a similar pattern, I gain confidence that I've picked good data.

Here's what I got:

Graph #2:The Price of Oil, 1946-2017
Similar pattern. Oh, one of 'em is an index. Eh, that's all right I guess.

Hard to see any "dramatic increase in the price of crude" before 1973-74. But then, Hamilton's paper is from 1983. Benefit of the doubt: Maybe the big increases after '83 make the increases of the early years relatively small and hard to see.

Here's a look at the same data up to January 1983:

Graph #3: The Price of Oil, 1946-1983
Yeah I dunno, I still don't see much price activity before the 1974 recession.

Maybe it's me. Well, we can look at percent change from year ago. Maybe that'll help:

Graph #4: Percent Change from Year Ago in Oil Prices, 1946-1983
Not really. Not much activity there, from the 1950s to the 1974 recession. There are maybe four times when the red line jogs up a little bit, holds steady for a while, and then falls. The biggest one of those four is the one at the 1954 recession. It shows an increase of less than ten percent -- and that's the biggest one. If the price of gas was 30 cents a gallon before that increase, it was less than 33 cents a gallon after. That's not an oil shock.

The price of a barrel of "West Texas Intermediate" went from $2.57 in May of 1953 to $2.82 in June of 1953. The price stayed at $2.82 until February of 1957. The dates do seem to be related to recession dates. But I don't see any "dramatic increase".

On Graph #4 the red line stays high for a year after the increase because we're looking at "change from year ago" values. It's not like the price increased every month for a year. The price increased once in 1953, and did not increase again until 1957. And those were pretty small increases, in my book.

But we were talking about the stagflation of the early 1970s, and any possible "oil shock" that might have caused it.

I don't think so. Here. This graph compares the price of oil (blue) to the general price level (red):

Graph #5: Crude Oil (blue) and Consumer Prices (red)
The two lines start out the same, in January 1959. Both lines go up from there. But the red line goes up faster, until 1974. The price of oil (blue) lags behind.

You can see the increase in oil prices just before the 1970 recession, and the one just after. (Those two increases are also visible on Graph #4.) Those increases don't seem to have any major impact on the path of the general price level. I'm more inclined to say the increases in oil prices came in response to increases in the general price level.

Hamilton considered that possibility. In the PDF he calls it "an inflationary 'catch-up' effect". He says the evidence is not strong but the "catch-up phenomenon was surely operative".

James Hamilton also says his findings suggest that "oil shocks were a contributing factor in at least some of the U.S. recessions prior to 1972." Okay, but everything contributes to everything. Hamilton's dinky little oil shocks do not by themselves account for the stagflation of the early 1970s, far as I can see.

Oh, and I don't find the word "stagflation" anywhere in Hamilton's PDF.

Wednesday, February 22, 2017

It was the changing behavior of inflation that created stagflation

It's pretty simple, really. Stagflation is "not just inflation on the one side or stagnation on the other, but both of them together." That's according to Iain Macleod, who created the word and the concept of stagflation.

According to Wikipedia, the word stagflation is "a portmanteau of stagnation and inflation". Macleod took two separate and distinct words and jammed them together to make a new word to describe what he saw happening in the economy. In the economy, stagnation and inflation had been somehow jammed together so both were occurring at the same time.

I went to MeasuringWorth for real and nominal GDP from 2015 back to 1800. Annual data, unfortunately, but let's take a look. This graph shows years when prices were rising and GDP was not:

Graph #1: Annual Data Suggesting Times of Stagflation
Stagflation is not common, by this graph, though it was not altogether new in 1965 when Macleod gave it a name.

The graph shows annual data going back to 1800. A lot of people will tell you the data from back then is old, unreliable, and not worth bothering with. That's okay. They probably say the same about me.

I find it interesting that stagflation does not appear at all before the 1890s but does occur before World War Two. Knowing this, I want to take a look at the quarterly data. Quarterly data provides more detail than annual, like a camera with more megapixels. But the quarterly values begin in 1947, and provide no detail about earlier years.

This next graph shows the times since 1947 when RGDP growth was below half a percent and inflation was above 1%, for "change from previous quarter" values:

Graph #2: Quarterly Data Suggesting Times of Stagflation
My inflation measure is high, given that 1% quarter-to-quarter is used. I used "strongly rising" inflation, to borrow Macleod's phrase. The graph shows an interesting result. We see stagflation mostly in the 1970s: the beginning, middle, and end of the 1970s. Plus a couple years just before the 1970s and three years after. Call those 15 years an "era" of stagflation.

If I raise the "more than 1%" inflation filter to "more than 1.25%", the narrow, scattered bars disappear, leaving only the first blue bar on the left and the big cluster at the 1970s. That *is* when most of the inflation occurred, the 1970s. But that's not exactly the point. The point is that inflation was high in the '70s, and the economy was stagnant. The occurrence of both stagnation and inflation defines stagflation.

But then, most of the stagnation in and about the 1970s occurred as the result of inflation-fighting by the Federal Reserve. There were four rapid-fire recessions in that era, and no other recessions between March of 1961 and June of 1990.

The recessions "were basically brought on by the Fed, which raised interest rates sharply to curb inflation", according to Paul Krugman. That means the stagflation we see in that era was the result anti-inflation policy applied in a time of high inflation.

Inflation was running high in those years, and the policy response to inflation created stagnation. The policy response did reduce inflation, but not enough to make prices fall. This meant we had both inflation and stagnation, which by definition is stagflation.

The key point is that inflation was rising strongly. Anti-inflation policy was the natural response. The response created stagnation. Unless prices actually fell, the result was stagflation.

I like this explanation. But I think most people, if you asked them about stagflation, would say it happened because of the oil shocks. The dramatic increases in the price of oil. Well, okay. The oil shocks of 1973 and 1979 might explain the stagflation in the middle '70s and the stagflation at the end of the '70s. But what about the stagflation at the beginning of the '70s? That was before any oil shock, yet there it is on Graph #2, plain as day. So the "oil shock" story does not fully explain stagflation.

The next graph shows the monthly change in prices, as measured by the CPI. The blue line does seem to move downward at or near times of recession. So the rate of inflation goes down. But in the stagflation era, prices didn't go down. On this graph, the blue line going below zero indicates prices going down:

Graph #3: Percent Change in the CPI (monthly data)
Over time, between the 1940s and the 1960s, the blue line goes below zero less and less. In the latter 60s the blue line stops going below zero altogether, till after the 1982 recession. In those years, prices did not go down. So from the latter 1960s to 1982, any time the economy was stagnant we had "stagflation".

The "percent change" in CPI did vary, of course. And the economy continued to have recessions. But stagnation no longer coincided with price decline, because prices no longer went down. In the stagflation era, prices went up a little more or went up a little less, but did not go down. This seems to me to be the simplest explanation of stagflation.

If this explanation is correct, it was the changing behavior of inflation that made stagflation a reality. Instead of going up or down, prices went up more or up less. You can see it on the graph. To explain this different behavior, we should look at inflation before and during the stagflation era. Since the problem was that inflation didn't go below zero -- it didn't go low enough, in other words -- we should look at the lows of inflation, not the highs.

The trend of low values of Graph #3 is persistently upward from the mid-1950s (or earlier) to 1980, as shown here:

Graph #4: Same as Graph 3 up to 1988 (blue), the Lows of the Blue line (red),
and Overlapping Three-Year Averages of the Red Line (black)
The problem that became stagflation began as gradually increasing inflation. It was developing already the first time inflationary lows bottomed out at a higher level than they had before. When was that first time? The lows of the 1970s were higher than the low of the 1960s. But the low of the 1960s was higher than the low of the mid-50s. And I'll be damned if the low of the mid-50s wasn't higher than the low of the late '40s.

Stagflation emerged late in the pattern of long-term increase visible in the inflationary lows. This is not a problem that began in 1974. It is not a problem that reduces to slow growth in AS. And it is not a problem that can be written off as inflation expectations. It may, however, be attributed to a gradual, long-term, cost-push problem such as the one arising from the persistent growth of finance.

The stagflation era is a benchmark in economic history. It is fully explained by the long-term increase in inflationary lows that goes back 30 years or more before 1980. That long-term increase is not fully explained by the price of oil.

In his 1957 lectures on Prosperity Without Inflation, Arthur Burns eloquently explained that economic policies since the enactment of the Employment Act of 1946 had introduced an inflationary bias in the U.S. economy ...

The Excel files

USGDP_1800-2016.xls for Graph #1

Stagflation Quarterly.xls for Graph #2

Lows in Percent Change of CPI.xls for Graph #4

Tuesday, February 21, 2017

The gory details

Google house of commons official report

77 million results. The one I want is first on the list.

Click House of Commons Hansard archives - UK Parliament

At the House of Commons Hansard archives page you want Historic Hansard: 1803-2005.

Using their nifty century-and-decade-selector, select the 20th century, and then select the 1960s.

Then select the year (1965) and month (November) and day (the 17th).

From there I used Ctrl-F to search the page for econ and found ECONOMIC AFFAIRS.

I clicked that and got a discussion in which Iain Macleod was involved. From there, a CTRL-F search for stagf brings you to the pertinent quote.


Now the quote from 1970.

Go to the Historic Hansard: 1803-2005 page.
Click the 20th century.
Click the 1970s.
Click 1970.
Click July.
Click the 7th.

Ctrl-F search for econ.
Click the one result.
Ctrl-F search for stagf.
Three hits.
First hit: Chancellor of the Exchequer Mr. Iain Macleod speaking:
The economy today shows two outstanding features. On the one hand, demand and activity are rather sluggish and unemployment is high compared with the post-war average. On the other hand, there is the strongly rising trend in wages and prices. This is a combination of stagnant production and cost inflation. As Shadow Chancellor, I christened it "stagflation". I cannot believe that even hon. Gentlemen opposite, however they wish to paint this picture, can be complacent about such a situation.

Later that same day,

he was rushed to hospital with appendicitis. He was discharged 11 days later; yet at 10.30 pm on 20 July, while in 11 Downing Street, he suffered a massive heart attack and died at 11.35 pm.

So it goes.

Monday, February 20, 2017

Documenting the origin of the term 'stagflation'

If you really, really, really want to know, this will be interesting.

I got a little nervous when both Glasner and Krugman said the origin of the word "stagflation" was the mid-1970s -- after I said the mid-1960s and my only backup was Wikipedia.

Seems like I should be able to find a document that offers proof of some kind -- a newspaper clipping or magazine article from 1965 quoting Iain Macleod, or something like that.


Looking for evidence, as opposed to cut-and-pastings of the sentence "The coinage of the word stagflation is attributed to him."

Here is something: from Project Gutenberg, the World Heritage Encyclopedia article on Iain Norman Macleod. Interestingly, the article includes the quote of his first use of the word "stagflation", from 1965:

We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of 'stagflation' situation. And history, in modern terms, is indeed being made.

and the quote is footnoted.

Oddly, the footnote link is broken.


At the Mises Wiki, an article on Stagflation. The first line is a good definition of stagflation:

Stagflation is an inflationary period accompanied by rising unemployment and lack of growth in consumer demand and business activity.

The second line attributes the term "stagflation" to Iain Macleod:

The term stagflation is attributed to British politician Iain Macleod, who coined the phrase in his speech to Parliament in 1965.

Both lines are footnoted.

The attribution footnote reads:

Edward Nelson and Kalin Nikolov. "Monetary policy and stagflation in the UK", Bank of England Working Paper #155, 2002; Introduction, page 9. (Note: Nelson and Nikolov also point out that the term 'stagflation' has sometimes been erroneously attributed to Paul Samuelson.) Referenced 2011-04-25.

The "Monetary policy and stagflation in the UK" link takes you to "Page Not Found" at the Bank of England.

The Bank of England link takes you to the Bank of England page at the Mises Wiki.

You should be laughing by now.

I went fishing for a PDF named "Monetary policy and stagflation in the UK" and did not come up empty.

Found a couple different PDFs containing one-page blurbs for the article at the Bank of England. No thanks.

Found the PDF at CiteSeerX. But that was yesterday, in a Google search for the quoted title. Captured the link. Tried it today, and CiteSeerX doesn't know anything.

But I went to Google again and searched for "Monetary policy and stagflation in the UK" in quotes, and the CiteSeerX link came up first on the list. And the link works.


I don't know if it'll work for you.

The PDF is 43 pages long. Written by Edward Nelson and Kalin Nikolov. The paper is © Bank of England 2002, and ISSN 1368-5562.

I thought is was "ISBN" but "ISSN" appears legit.

The Mises Wiki footnote refers to page 9. In the PDF, that's the Introduction. The Intro opens with this statement:

On 17 November 1965, Iain Macleod, the spokesman on economic issues for the United Kingdom’s Conservative Party, spoke in the House of Commons on the state of the UK economy

That opening is followed by the same "worst of both worlds" quote I showed above.

Interestingly, following that quote in the PDF there is a reference:

(17 November 1965, page 1,165).

The reference is footnoted. Oddly, the link works. The footnote says

Many of the statements quoted in this paper are those by UK policy-makers in Parliament, as given in the House of Commons’ Official Report (also known as Hansard). These quotations are indicated by the date of the speech and the page from the Hansard volume from which the quotation is taken.

So there is hope. Maybe I can find the Hansard volume that documents the quote.

Good grief.

After the Macleod quote, the text says

With these words, Macleod coined the term ‘stagflation’.

That sentence is footnoted. The footnote says

Macleod used the term again in a speech to Parliament on 7 July 1970 and confirmed that he had invented the word. From then on, the term was common parlance in UK economic policy debate, being used, for example, in an article in The Economist of 15 August 1970. Some sources (eg Hall and Taylor (1997)) attribute the term to Paul Samuelson (1975). But the earliest occasion on which we have found Samuelson used the word was in a Newsweek column of 19 March 1973, entitled ‘What’s Wrong?’, reprinted in Samuelson (1973, pages 178–80).

Now I'm happy. It's not only that the word is attributed to Iain Macleod; he also says he invented it.

Well that was easy, huh?


I made a one-page PDF of the page (page 9) from the "Monetary policy and stagflation in the UK" PDF. Download it and have a look if you want.


Oh wow, I found it! Actual documentation:


Now I'm happy.

Sunday, February 19, 2017

In the context of yesterday's post, you might find this funny

Via Paul Krugman, Paul Krugman declares — as a simple fact — that

Stagflation was a term coined by Paul Samuelson to describe the combination of high inflation and high unemployment. The era of stagflation in America began in 1974 and ended in the early 80s.

Saturday, February 18, 2017

How an economist thinks

I usually like reading David Glasner for snippets of economic history. But I was a little disappointed when I read his old post on 1970s Stagflation. Here is Glasner's opening:

Karl Smith, Scott Sumner, and Yichuan Wang have been discussing whether the experience of the 1970s qualifies as “stagflation.” The term stagflation seems to have been coined in the 1973-74 recession, which was characterized by a rising inflation rate and a rising unemployment rate, a paradoxical conjunction of events for which economic theory did not seem to have a ready explanation.

The term was not coined during the 1973-74 recession. Wikipedia:

On 17 November 1965, Iain Macleod, the spokesman on economic issues for the United Kingdom's Conservative Party, warned of the gravity of the UK economic situation in the House of Commons: "We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of "stagflation" situation. And history, in modern terms, is indeed being made."[3][5] He used the term again on 7 July 1970, and the media began also to use it, for example in The Economist on 15 August 1970, and Newsweek on 19 March 1973.

Stagflation is not an incidental or inconsequential part of econ. I find it distressing that Glasner has so little concern about stagflation that he doesn't know the origin of the term, is willing to guess the origin, and is satisfied to make a bad guess. (If my view seems extreme, let it reflect the importance of stagflation in my economic thinking.)

Glasner does offer a good description of stagflation as "a paradoxical conjunction" of rising inflation in a stagnant economy. And he is right about the reason stagflation was significant: Economic theory could not explain it.

Glasner links to Karl Smith, who says

The 1970s were definitely an era of stagflation

and to Scott Sumner, who quotes that line and disputes it. As Glasner has it:

Scott observed that inasmuch as average real GDP growth over the decade was a quite respectable 3.2%, applying the term “stagflation” to the decade seems to be misplaced.

What is the argument here? Given that we did have rising inflation in a stagnant economy at times in the 1970s, the argument seems to be whether it is okay to call the decade an "era" of stagflation. Sumner says it is not okay, because growth on average was "normal" in the 1970s.

But Karl Smith does not say growth was slow in the 1970s:

Scott is correct that we remember the 70s as an era of slow growth but indeed GDP growth was rapid.

Smith agrees with Sumner that growth was good in the 1970s. Where is the problem?

They agree that growth was good. But Smith points out that there was stagflation. And Sumner says No, growth was good. Quite the non sequitur.

Hey... It is important to get the facts right. If growth was good in the 1970s, we need to know it. But Karl Smith does not dispute that growth was good in the 1970s. So what's the problem?

Maybe the problem is semantics: For Scott Sumner the word "era" implies "the whole decade". And then he mistakenly equates "stagflation" with "stagnation". Thus, Smith says there was stagflation in the 1970s, and Sumner apparently takes him to mean there was stagnation for the whole ten years of the 1970s. Sumner responds, saying real growth was normal and averaged a 3.2% annual rate in the 1970s.

The kindest interpretation of their dispute that I can offer is that Sumner knows that many people say growth was slow in the 1970s. And he knows that growth was not slow in the 1970s. And the discrepancy is a sore point for him. I sympathize.

Scott Sumner says it is incorrect to think that growth in the 1970s was slow. But so does Karl Smith. Come to think of it, Paul Krugman said it too. And David Glasner:

... if one looks at the periods of rapid increases in aggregate demand in which oil price shocks were absent, we observe very high rates of real GDP growth.

So Scott Sumner and Karl Smith and Paul Krugman and David Glasner and I agree that growth was good in the 1970s. And look at this graph from Marcus Nunes:

Graph #1 Source: Marcus Nunes. See also here and here.
Marcus shows inflation-adjusted GDP on a log scale, so that a constant growth rate appears as a straight line. In red, he shows a constant-rate trend line. And he marks up the graph to identify different periods. Look at the period labeled "G.I." for "Great Inflation" -- the inflationary years from 1965 to 1980.

Marcus's graph shows real GDP (blue) at or above trend for the entire inflationary period. By contrast, before 1965, and again after 1980, the blue line is at or below trend. The inflationary period shows particularly good economic performance.

So that's Scott Sumner and Karl Smith and Paul Krugman and David Glasner and Marcus Nunes and me. And the third economist named in Glasner's post, Yichuan Wang, says real growth should get a boost from inflation like we had in the 1970s (though he doesn't see it himself, according to Glasner).

So yes, there's good reason to be careful when talking about stagflation in the 1970s, inflation and stagnation in the 1970s. Good reason. And yet, Karl Smith *is* careful. He explicitly says growth was good in the 1970s. And he says it immediately after he calls the 1970s "an era of stagflation". Why, then, does Sumner choose to disagree with Smith when Smith is trying to agree with Sumner?

Why? Because Sumner has an agenda:

Rather than arguing over semantics, I’d rather focus on the important issue; what does the 1970s tell us about NGDP targeting?

You might have guessed. Sumner wants to talk about NGDP targeting. He doesn't want to argue over semantics. The whole "semantics" argument is a straw man that Sumner set up so he could say he doesn't want to argue over semantics. Sumner is out to get attention for his hobby horse, his NGDP targeting hobby horse. He says so himself.

And Sumner will stop at nothing to get that attention. He even re-defines "stagflation" to suit his purpose. Here's Glasner:

The term stagflation [means the combination of] a rising inflation rate and a rising unemployment rate ...

Yes. Stagflation is the increase in the two rates that, when added together, give the "Misery Index". But Sumner criticizes Karl Smith for using the same definition Glasner uses. Here's Sumner:

Karl seems to think [stagflation] means high inflation plus other bad things, like high unemployment.

Scott Sumner sticks a parenthetical finger in the definition of stagflation:

I had thought the word ‘stagflation’ meant high inflation plus slow output growth (due to slow growth in AS.)

By Okun's law, "slow output growth" is equivalent to "high unemployment". That change of wording is only a distraction. But Sumner modifies the concept when he adds the words "due to slow growth in AS". He puts those words in parentheses, as though they don't really change the definition. But those words change everything! By adding the causal factor to the definition of stagflation, Sumner changes everything.

Sumner's "AS" means "aggregate supply". Sumner's extra words make stagflation explicitly and exclusively a result of supply-side factors, by definition.

Sumner himself points out that he is changing the definition:

I think if the term ‘stagflation’ is going to mean anything useful, it has to refer to a periods where, for any given rise in AD, slower than normal AS growth leads to higher inflation. The 1970s do not meet that definition.

Sumner re-defines stagflation to suit his agenda, and suddenly the world is different. You have been bullshitted.

Glasner describes stagflation as

a paradoxical conjunction of events for which economic theory did not seem to have a ready explanation.

Glasner is right. The lack of explanation is the reason stagflation was such a big deal: Stagflation didn't fit with what economists knew about the world. The whole point of raising interest rates to reduce inflation is that it works by slowing the economy. Anti-inflation policy creates stagnation. It still does. But in the 1970s, inflation and stagnation were thought to be mutually exclusive. It was "inflation on the one side or stagnation on the other", as Iain Macleod said. Except, during the inflationary 1970s, we got inflation and stagnation at the same time. It meant there was something wrong with economic theory. It was a big deal.

It opened the door to Milton Friedman and Monetarism and Paul Volcker and all that came after. That's why stagflation is important. That's why it matters. To show that Milton Friedman and everything since Friedman is wrong, if that is what you might want to do, it is necessary to go back to stagflation and review what happened then, and think it all through. Instead of blindly accepting the notion that the whole decade of the 1970s was a time of stagnation. And instead of blindly accepting Scott Sumner's agenda-driven alternative.

Friday, February 17, 2017

Having it both ways

Scott Sumner:
Another example is that “decade of stagflation;” the 1970s.  The only problem with this commonly held view is that the 1970s were not a decade of stagflation; rather we saw an extraordinary surge in aggregate demand:

NGDP growth averaged:  10.4%
RGDP growth averaged:   3.2%

Growth was normal, and inflation was very high.
Scott Sumner:
... the neoliberal reforms after 1980 helped growth...

... growth was slowing almost everywhere in the 1970s and 1980s...

I am not denying that growth in US living standards slowed after 1973...

Thursday, February 16, 2017

To say that money is not a factor of production is to accept the view that money is a veil

At Social Democracy for the 21st Century, an oldie: Stagflation in the 1970s: A Post Keynesian Analysis.

There's a lot I like in it. But I don't stop reading when I get to something I like. I stop reading when there's a problem.

There's a problem. LK writes:
The price of commodities produced in an economy depends on the costs of factors of production, in particular the wage bill, and then the mark-up over the costs of factor inputs (Musella and Pressman 1999: 1100).

The factors of production are
(1) primary commodities or natural resources, including land, raw materials, water, and energy;
(2) labour, and
(3) capital goods.

Thus inflationary pressures can result from
(1) surges in the prices of primary commodities or energy, especially when the prices of these factor inputs are set on world markets or are influenced by supply shocks;

(2) workers pushing for wage rises, and

(3) business firms increasing their pricing mark-ups.


Well, yes and no. Everything he's got there is right. It is something left out that I have trouble with.

Where's finance?

LK lists the factors of production, straight out of Adam Smith: land, labor, and capital. But LK says it better: He says capital goods. That excludes money.

That's good, because I count money as factor number four.

I like what LK says, that "The price of commodities produced in an economy depends on the costs of factors of production".

I like it that Adam Smith's discussion of land, labor, and capital has the title Of the Component Parts of the Price of Commodities.

I like the idea that the cost of a product is, at minimum, equal to the total of the costs that went into making the product.

And if, as LK says, the price of commodities produced in an economy depends on the costs of factors of production, then I like to turn that around and say that the factors of production are cost categories. The factors categorize the costs involved in the production of output. And if that is the case, then certainly money is a factor of production.

If you can't accept that, then say money is a factor of facilitation. And when you say "factors" think of both the factors of production and the factor of facilitation. That's fine with me. What's important is to make sure we include all of the categories of cost that add to the cost of output. Certainly, money is one of those categories. Money, or finance, or rent, or call it what you will.

As Bezemer and Hudson say

... it is necessary to divide the economy into a “productive” portion that creates income and surplus, and an “extractive” rentier portion siphoning off this surplus as rents ...

It surely is important to be aware of the "rentier portion" of the economy. It surely is important to consider the cost imposed by that sector on the rest of the economy. So when I see LK limit himself to three factors, and exclude the "rentier portion" from his list of factors, I have to stop reading, and write.

Tuesday, February 14, 2017

The Boring '90s

Antonio Fatas looks at the change in stock market valuations since the November election and does some economist-math that I can almost follow. He also provides a link to a useful page at CBO. They have budget projections, spending projections, economic projections, and more. They have their most recently-issued projections and older vintages in separate downloadable Excel files. A useful site.

I got looking at their "Potential GDP and Underlying Inputs", then went to FRED by reflex for a gander:

Graph #1: Potential GDP Growth Rate
The graph includes a 10-year projection out to 2027. The projections always make me laugh because they are so obviously different from the historical record. The smooth curve shown at the right end of this graph anticipates lousy growth, but no recession.

Probably smart, not pinpointing the date of our next recession.

The other thing that gets me about Potential GDP is the anomalous high of the latter 1990s. Here -- I downloaded the data and put a trend line on it in Excel:

Graph #2: Growth of Potential GDP and Linear Trend thru 2016
The blue line shows 1950 thru 2027, same as Graph #1. I used the same data for the red line, but stopped the data at the end of 2016. Then I put a linear trend line on the red one.

The 2017-2027 projection (blue) doesn't look so funny now. But that anomalous high of the late 1990s, that one still bothers me.

I put a green line on the graph, connecting the high point of the early 1950s, the high of the latter '60s, and the high of the mid-80s. Then I put a linear trend line (dashed line) on that. Now it's easy to see how high Potential GDP was in the latter 1990s.

Graph #3: Trend of Peaks in Potential GDP Growth
Also, maybe the 2017-2027 projection is overly optimistic.

Now I want to deflate the late-1990s high, to bring it down to the dashed trend line like the earlier highs. Then we can see what happens to the other trend line on the graph.

I removed the dates from the x-axis and went with the default sequential numbering instead. I displayed the trendline formula and formatted it to show a dozen decimal places. I used the trendline formula to calculate values that lie on the trend. Then, checking my work, I displayed the values (purple line) to make sure they do indeed lie on the dashed trend line.

Graph #4: Using Excel's Trendline Formula to Calculate Trendline Data Points
Now I could find when the high point of the latter 1990s occurs (first quarter 1999), what that high point value is (4.18646 percent) and what is the first quarter 1999 value of the purple line (3.02275 percent).

I want to take that whole red peak above the purple line (plus some of the points below it) and scale that all down so the red peak just touches the purple line in first quarter 1999. Get rid of the anomalous high and see how things look then.

(Who would be interested in such things? No wonder nobody reads me.)

It took some fiddling but I finally got the calculation right. The high point of the latter 1990s has been lowered and now falls directly on the dashed trend line.

Graph #5: Removing the Anomalous Peak
The red is the adjusted data. The blue shows the given data. Blue in the 1990s is substantially higher than the trend of peaks.

You may notice that the solid black trendline is lower here than on the previous graph. Excel relocated it automatically when I made that anomalous red peak "nomalous".

I cleaned up the graph, got rid of the green line and the dashed line, and put dates back on the x-axis.

Graph #6: Growth of Potential GDP Without the Boom of the 1990s (red)
Come to think of it, the 2017-2027 projection now runs about as much above trend as the other highs of the red line.

And the anomalous high of the 1990s really stands out.

Wouldn't it be nice to know what happened to make potential GDP go unusually high in the 1990s? I guess everybody has a story about that. The trouble is, the story has to explain not only the big increase in potential GDP, but also the big decrease that soon followed. And it has to explain similar changes in productivity.

A lot of people will tell you the IT revolution accounts for the increase -- and that it suddenly petered out. Well yeah, I can see that the petering out happened in productivity and all. But that doesn't mean IT was the cause.

Here's my story, and it has nothing to do with IT. It has to do with money.

1. There was a significant decrease in the growth of debt from 1986 thru 1991, and the growth of total debt remained low (below 7.5%) for most of the 1990s:

Graph #7: A Sudden slowdown of Total Debt Growth, 1986-1991

2. There was a significant increase in the growth of the "funds that are readily accessible for spending" from 1989 thru 1992, and money growth remained high for some years after 1992:

Graph #8: A Sustained Increase in the Growth of Circulating Money

3. Slow growth of total debt combined with rapid growth of circulating money to create slack in the demand for credit in the early 1990s:

Graph #9: Monetary Slack led to High Potential GDP and High Productivity in the 1990s

4. Since people had more funds readily accessible for spending, the growth of total debt could remain low thru most of the 1990s:

Graph #10: The Slow Increase of the Debt-to-GDP Ratio in the 1990s

5. Combined with lower interest rates, the slow growth of debt meant that interest costs in the 1990s were lower than in the 1980s -- lower by four or five percent of GDP:

Graph #11: Reduced Financial Costs Opened a Door to Greater Production and Consumption

6. The reduced financial costs of the 1990s meant lower debt service payments:

Graph #12: Household Debt Service was Low in the 1990s

7. The reduced cost of finance left more money available for production and consumption. All else aside, the reduced cost of finance can account for the temporary but significant increases in productivity and Potential GDP that occurred in the latter 1990s. Moreover, we can do it again.

Is IT responsible for the good years of the latter 1990s? Maybe. But it could not have happened without the reduction of financial cost.

// The Excel file

Monday, February 13, 2017

Real and Nominal Debt-to-GDP Ratios

A question from the econ section of Stack Exchange:
Are debt/GDP ratios calculated with real or nominal GDP as the denominator?

As the title suggests, I would like to know whether the numbers are generally calculated with real or nominal GDP. Besides that I would also like to know whether it matters and how significant of a difference this could make.

There is an existing response that includes these remarks:
If you use real gdp as denominator and nominal debt as numerator, you end up with a number which is less clear to interpret. It is more relevant to have either both variables in nominal terms or both in real terms.

I agree. You don't want to mix nominal and real. You want either a ratio of reals or a ratio of nominals. My response:
In my experience the ratio of nominals is far more common than the ratio of reals. Nominals are useful when the topic is current spending. Reals are useful when the topic is growth apart from changes in the value of money.

GDP is the sum of one year's final spending. Given annual data for GDP and prices, there is only one year's price level embedded in any one year's GDP number.

Debt is the accumulation of borrowing (less repayment) over many years. So the price levels of many years come into play even when only one year's nominal debt is converted to a real (inflation-adjusted) number.

Because many years' price levels are embedded in one year's debt, the calculation of real debt is not the same as the calculation of real GDP. Because the calculations differ, the ratio of reals is not identical to the ratio of nominals.

People often assume that the calculation used for real GDP can also be used for real debt. Using the same calculation gives a ratio of reals that is identical to the ratio of nominals. When the topic is current value ("how much is it now") no harm is done by this mistake. But when the topic is growth ("how much bigger is it now") the wrong calculation gives incorrect information ("The public debt remained fairly constant from the late 1940s through 1981") and may lead to serious or fatal errors in policy.

Sunday, February 12, 2017

Where no Arthurian has gone before

I was looking at FGTCMDODNS for the millionth time, looking for something with more recent data actually, looking in the "related content" at the bottom of the page.

Under Sources it says More Releases from Board of Governors of the Federal Reserve System (US). I said okay and it brought me to a page listing 33 categories of the kind of stuff that always seems to interest me, including
Banking and Monetary Statistics, 1914-1941 (1,993)
H.6 Historical Data (6)
G.20 Finance Companies (183)
Mortgage Debt Outstanding (89).

I was like a kid on Christmas. I got a ton of things to open and look at and toss aside.

H.6 Historical Data turns out to be a few discontinued series on M3 and components.

Then there is G.20 Finance Companies, which offers Domestic Finance Companies, Total Assets, Outstanding -- shown here as a percent of GDP:

Total Assets of U.S. Finance Companies
Runs flat from the mid-1950s to the 1980 recession. These are not the "flat" dates I usually find. Then a severe uptrend, with a peak at the end of 2004. That's the earliest crisis-related peak I've seen. That's interesting.

And then in the Mortgage Debt Outstanding category there is Mortgage Debt Outstanding, All holders. Here it is, shown as a percent of GDP:

Mortgage Debt Outstanding as a Percent of GDP
It shows a persistent increase in mortgage debt except in the latter 1960s and -- surprisingly -- in the 1990s. And it shows a "world's tallest volcano" type of peak, the one that erupted in crisis a few years back. It's that peak, I think, that leads people like Dirk Bezemer and Michael Hudson to focus on mortgages as "the center of the bubble economy". The root of the problem, as it were, in their view.

Here is the same Mortgage Debt Outstanding in a less evocative form:

Mortgage Debt Outstanding as a Percent of Total Credit Market Debt Owed
Looking at it as part of Total Debt, mortgage debt was lower at the pre-crisis peak than it was in 1961. Mortgage debt was lower at the pre-crisis peak than it was from 1961 to the mid-1980s.

The crisis was not caused by mortgage debt being too high. The crisis was caused by debt in general being too high. Total debt was too high. Mortgage debt was only part of the problem.

Apparently I have been here before.

Saturday, February 11, 2017

Athens didn't let member states quit the Delian League ...

Athens didn't let member states quit the Delian League. Abe Lincoln didn't let member states quit the United States. You could have known the European Commission would be unwilling to let Great Britain leave the EU.

The Economist has an article today -- From Brussels with love ... The multi-billion-euro exit charge that could sink Brexit talks ... A bitter argument over money looms:

... officials in Brussels are drawing up a bill for departure that could mean Britain’s contributions remain close to its membership dues for several years after it leaves...
Michel Barnier, who will lead negotiations on behalf of the commission, is said to consider that the bill stands between €40bn and €60bn.


Article 50 says
1. Any Member State may decide to withdraw from the Union ...
2. A Member State which decides to withdraw shall notify the European Council ...
3. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2 ...

I didn't make it up. You decide to withdraw, you tell 'em, and in two years (or less) you're out. There's nothing in there about 60-billion-euro exit fees.

Worst case? Wait 'em out.

Robert Shiller fleshes out Expectations with Narrative Economics. Meanwhile ...

Robert Shiller:
My goal in this paper is to describe what we know about narratives and the penchant of the human mind to be engaged by them, to consider reasons to expect that narratives might well be thought of as important, largely exogenous shocks to the aggregate economy.
But are narratives more important than this?

The Debt-per-Dollar Ratio, 1916-1970
And this?

The Debt-per-Dollar Ratio since 1970
And this?

Household Debt Service
And this?

Private-to-Public Debt Ratio
Click here for the Excel file
I think not.

Friday, February 10, 2017

Private Debt relative to Public Debt

The ratio of private debt to public debt is useful because it is closely related to good times and hard times. With that in mind, I want to show this search result again.

I didn't get what I was looking for:

Thursday, February 9, 2017

Covering the same ground

Nick Rowe says:

if you don't start with money, monetary exchange, and AD and AS, you are doing macro wrong.

I think Nick is right. I often say:

The economy is transaction.

To my mind we're covering exactly the same ground.


As an afterthought I'll repeat what Nick said

if you don't start with money, monetary exchange, and AD and AS, you are doing macro wrong.

and I'll say: Yeah, that's why this is not even wrong not even economics.

Wednesday, February 8, 2017

Getting a look at the result -- that's the prize

Sometimes one thought crashes into another and makes a little spark in my brain. Those are always intriguing. They always make me want to write. You never know at the start how the writing will turn out. Maybe there's nothing there. Maybe it was a hiccup, not a spark.

For the millionth time I was proof-reading my Fact-checking thingie the other day, and looking at that graph again:

The Long-Term Decline of Real GDP Growth
I suddenly thought I can subtract the trend-line from the data-line and see how it looks then. And that was all it took to get me going.

The graph is old. It only goes to the start of 2013. So I got new data from FRED and sat down to make a new graph, similar to the old one. That's when I noticed all the revisions. Revisions make me uncomfortable. I'm all for getting the numbers right, but they're still changing numbers from 69 years ago. There's a point where it just becomes ridiculous. There's a point where you start to stop trusting the revisers.

In general, we might expect estimates of nominal GDP to change for a few years after the initial estimate, as new data become available, and to then stay fixed.

Oh, well. If I didn't do graphs, what would I do?

I made a new graph, similar to the old one but using the current data:

Graph #2: RGDP Growth and Trend

Then I modified it: Showed more decimal places in the Trendline Label, because I'll need the numbers; Removed the dates from the X axis and went with numbers in sequence, because I need that for the calculation too; Added a column to the spreadsheet where I use the Trendline Formula and the X Axis values to calculate values to fit the Linear Trendline; Showed those numbers as a Green Line on the graph, to make sure my calculated trend line matches Excel's trend line; And showed you the result:

Graph #3
Now I have numbers that represent the trend line. Now I can subtract those numbers from the original data and look at the result.

If I take the linear trend line, subtract it from itself, and graph the result, I get a perfectly flat line at the zero level. Obvious.

If I take the red line and subtract the linear line from it, I get a version of the red line that is centered on the zero line and runs flat, not downhill. That's what I want to see.

Graph #4
That's what I wanted to see: The high in the 1990s is lower than the high of the 1960s. And the low after 2008 is lower than the low of the 1950s. Things are lower now than they were before. That's what I was wondering about.

Now the only thing I don't know is if "things are lower now" is true, or if it's just that the linear trend was a bad choice.

Not a spark. Just a hiccup.

Tuesday, February 7, 2017

"He who controls the past controls the future"

I want to update an old graph of RGDP. So I got new data from FRED. Then I opened up the old file, and compared the two. The numbers differ all the way back to 1948.

On the left is the file from 2013. On the right is the file from 2017:

Saturday, February 4, 2017

There's only so much I can do

If someone says

the Federal Reserve is the one area where experts have been most wrong, and have caused the most harm

I can point out that Congress,

Congress has created an economic environment that promotes credit use but does not also promote accelerated repayment of debt. This tilt toward credit use (and debt accumulation) makes most economic problems impossible to solve

and that the Fed takes the blame for this.

If the guy gets back to me, saying

I have no problem with credit. It's how economies grow. Debt accumulation is not a problem in and of itself

I shouldn't have to point out that credit use creates debt. It should be obvious. I shouldn't have to point out that debt is a way to keep track of the cost associated with using credit. It should be obvious. I shouldn't have to point out that debt is the cost that offsets the benefit derived from credit use. It should be obvious. I shouldn't have to point out that, interest and inflation aside, the use of credit and the addition to debt are "equal and opposite": benefit and burden in equal dollar amounts. It should be obvious.

So when somebody says

I have no problem with credit. It's how economies grow. Debt accumulation is not a problem in and of itself

and I reply

So you are saying there is a definite benefit from the use of credit, and no corresponding cost from the debt created by credit use. I cannot agree.

my meaning should be perfectly clear.

If someone shows a graph of Federal debt relative to GDP, and points out

1970-1982, the years of Nixon, Ford and Carter, where debt remained level at approximately 25%

I can point out that

debt-to-GDP runs level in the 1970-1982 period because of inflation. The rising price level inflated GDP and inflated the increases in debt, but did not inflate existing debt

and that

During the 1970-1982 period the average increase in debt was about 10% of the existing debt, so the bulk of the debt was not inflated in any given year

and that

inflation caused the GDP number to increase much faster than the Debt number. This lowered the debt-to-GDP ratio, creating the impression that debt was growing slowly in those years. But debt was not growing slowly. From 1970 to 1982 debt remained level at approximately 25% of GDP, as a result of inflation.

But I really shouldn't have to drag it out beyond that. I mean, I already pointed out the 10% growth rate. I already pointed out that only about 10% of the debt accumulation is subject to inflation. I already pointed out that inflation causes GDP to increase faster than debt. All the information is there. All you have to do is think about it.

So, when the guy replies

Both sets of data are nominal, ie before inflation is calculated in.

All I can do is laugh, point out the error

Both sets of data are nominal, ie before inflation is calculated out.

and hope for the best.

If someone points out the

rather widespread consensus of public debt being acceptable as long as it doesn’t increase too much and too fast

and says that

the focus... is solely on the upper limit of indebtedness

and then says

maybe there is also a problem if public debt becomes too low

I can point out that the public debt is definitely not too low. It is obvious, except to a mind that will not open.

If the "too low" argument shows up again I can point out that the focus remains

on public debt

and that

important questions will remain without answers until our focus shifts to private debt relative to public debt.

I can say these things. I can give you things to think about. But I can't make you think about them. In particular, I cannot prevent you from rejecting these thoughts before you think about them. That's on you.

If someone says

I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas

I can only hope.