Tuesday, January 31, 2017

Things change

Interest expenses of domestic financial corporations:

It used to be that interest paid on deposits was 3½ times the size of interest paid on other liabilities of domestic financial corporations.

Today, interest paid on other liabilities is 12½ times the size of interest paid on deposits.

Monday, January 30, 2017

"The drastic Republican border-tax package"

The title of the article is Jack Mintz: Why the drastic Republican border-tax package probably won’t happen. At the Financial Post.

Jack Mintz strikes me as just like all the other guys saying President Trump's economic policies won't work. I'll take advantage of this opportunity to say the people criticising Trump-o-nomics are probably the same people who didn't see the crisis coming, and who have not much changed their thinking in the years since. Just a guess, but that is how it strikes me.

So I'm not going to quote any part of Mintz's article except this:
The proposal has three major elements. First, the federal corporate tax rate would be reduced from 35 to 20 per cent. Second, comes the cash-flow tax, which would allow companies to expense investments, but they could no longer deduct the interest they pay on debt. Third comes the border-adjustment tax, where companies would pay no corporate income tax on all export revenues, but would also no longer be allowed to deduct the cost of imported inputs from their taxable profits.

There are things in there that I don't care for, and things in there that I don't care about. And there is this:

They could no longer deduct the interest they pay on debt.

Of all the things that must be done, this is right up at the top.

// Update:

For more on the tax proposal see Border Adjustments, Tariffs, VAT, and the Corporate Income Tax the Conversable Economist.

Sunday, January 29, 2017

You don't just show a graph and assume that the trend it shows will continue forever

Menzie Chinn takes a look at President Trump's goal:

Boost growth to 3.5 percent per year on average, with the potential to reach a 4 percent growth rate.
(From the Trump-Pence website)

Professor Chinn shows a graph of Potential GDP which suggests that Trump's target is out of reach. This FRED graph shows the problem: Basically, Potential GDP would have to reach twice the level projected by the CBO. That ain't nothin.

As you may remember, though, I have been predicting economic vigor since last March. So you know where I'm coming from. Before any Trump anything, I was expecting vigor in GDP growth. And now we have Trump.

The vigor that I expect, arising from changes in monetary balances, will add to whatever vigor President Trump can get from his policies, so that economic growth might exceed the President's growth target. And wouldn't that be something.

But this is not a post about economic vigor or Donald Trump. This post is about Menzie Chinn's evaluation of a growth target.

Professor Chinn's Figure 1 strongly suggests that Trump's target is out of reach. His Figure 2 shows RGDP from the late 1940s to the present, with Trump's growth targets appended, to "place into historical context what a 3.5% or 4% growth rate looks like":

Econbrowser Figure 2: RGDP and Trump Targets
Chinn follows the graph with this observation:

... it seems unlikely to have acceleration of growth to the indicated rates...

The post was later updated. But the above observation was Menzie Chinn's conclusion at the time that I offered this reply:

The purpose of Figure 2 seems to be to show that the 4% claim is ridiculous. The RGDP growth rate for 1996-2000 was over 4% if my eyeball is working right. It wasn’t ridiculous then.

Another commenter, Bruce Hall, had a reaction similar to mine:

With the exception of the last decade and the “oil shock”, Trump’s target doesn’t seem quite so absurd.

Let me try again to express my reaction: You can't just show a graph of the economy not doing well for most of the last fifty years and use it as evidence that the economy will continue to do poorly. The graph shows evidence of what happened, not of what's going to happen.

I look at graphs all the time. I always want to know what happened, and why, and what was going on with monetary balances in the meanwhile. Then I try to read the tea leaves the economic forces and see what those forces might imply about the future.

You don't just show a graph and assume that the trend it shows will continue forever.

Am I reading too much into Chinn's post? I don't think so. I think he is using innuendo to make his point; innuendo demands that the reader put words in the writer's mouth. Bruce Hall and I put similar words in Professor Chinn's mouth.

But let me check my work. Figure 1 in the post shows the "contributions to annual Potential GDP growth" -- contributions from "labor force" and "labor productivity". I think this approach is called "growth accounting". I found it fascinating.

Following Figure 1, Menzie Chinn notes the large growth gap that must be made up if Trump is to hit his targets. Then he says:

For more on the growth accounting approach, see Dan Sichel’s EconoFact memo on this subject.
So I followed Menzie's link to Sichel's EconoFact memo. In the first paragraph, this:

Some of Trump's policy proposals, such as tax cuts and infrastructure spending, indeed could boost growth over the next couple of years. Such a boost would lift living standards and be a welcome change for all Americans. But ongoing growth, not just a short spurt, is required to continue raising living standards. The arithmetic of growth, and the experience of the past half-century, suggest it unlikely that sustained growth of this magnitude is possible.

The experience of the past half-century suggests it unlikely that sustained growth of this magnitude is possible.

You don't just show a graph and assume that the trend it shows will continue forever.

Saturday, January 28, 2017

It's "Productivity and Cost", not "Productivity and Labor Cost"

Last week I suggested that we can improve productivity by reducing costs: in particular, by reducing the cost of finance.

Usually I try to avoid making claims like that, because I don't see cost in the calculation of productivity. Productivity is output per hour of labor. The units for "hours of labor" are time. The units for "output" are ... output, I guess. Things. Stuff. There is no cost number in the "things produced per hour" calculation. So until now I have tried to avoid talking about the connection between productivity and cost.

Of course, I have pointed out the increase in productivity that arose in the 1990s, just after Household Debt Service (a financial cost) went low:

Graph #1: Debt Service (blue) and Labor Productivity (red), and Forecast
(The graph also shows that I expect productivity to rise again soon.)

And I have pointed out that productivity always goes high as we're coming out of recession:

Graph #2: Productivity (Percent Change from Year Ago)
Recessions are times when costs are reduced. High productivity follows, every time.

And I have pointed out that productivity reliably goes high after financial costs go low: for two decades after the Second World War, and again for most of a decade after 1995. When productivity goes high again, over the next few years, it will confirm my hypothesis (though Donald Trump may get all the credit).

Even though the relation between productivity and financial cost is right there on the graphs, I have always avoided talking about the connection between productivity and cost because there is no cost number in the "things produced per hour" calculation.

That's about to change. I noticed that FRED lists productivity and costs together. And BLS puts productivity and costs together. And I thought about it.

Labor is not the only cost of doing business. It is generally the biggest, but not the only cost. If nothing else changes, a change in business financial costs will certainly affect business costs. Likewise, a change in household financial costs will affect consumer spending, and the resulting change in demand will affect business activity, output produced, labor hours consumed, and productivity.

Cost influences productivity, even though cost is not in the productivity calculation.

Friday, January 27, 2017

A "tacit understanding" is an assumption

Rated L for Language

Scott Sumner:

In 1981, 364 British economists signed a petition warning that Thatcher's polices would fail. But, by the 1990s, there was a sort of tacit understanding among policy-oriented economists that when countries get into trouble, market reforms are the only real option.

... there was a sort of tacit understanding among policy-oriented economists ...

"Tacit" means unstated. A "tacit understanding" is not the same as a well-developed theory. It is more like a well-developed assumption.

Note that a well-developed assumption is not necessarily correct.

According to Sumner, the idea that market reforms solve all problems is based not on economic theory but on a tacit understanding: This is what we did and it seemed to work. And by the 1990s, those rudderless economists were sitting around the "market reforms" campfire, building on each other's stories. But there was from the start a lack of clearness and of generality in the premisses.

The tacit understanding, the assumption of which Sumner writes, is nothing but an observation of outcome: Things turned out well. Set aside objectionables like the "great" recession, peak inequality, and the massive Federal debt, and things turned out well. "My view here is obviously somewhat subjective," Sumner says... Things turned out well.

There's no fuckin theory. It's all bullshit. They don't have a clue. They complicate their stories with numbers (364 economists on the head of a pin in 1981). They make shit up.

"The neoliberal policy revolution ... began in the late 1970s," Sumner says, and it "might be the most important recent event in world history." Singing songs 'round the campfire, and patting selves on back.

Where is the analysis of the problem? This whole neoliberal neoplasm that Sumner tirelessly, tiresomely celebrates is nothing but an observation of outcome: GDP continued to grow, so we must have done something right. But they are changing everything. And nothing they do solves the problem.

They deny it, of course. But they've been fixing things for forty years now. And they're still fixing things, because they still have not fixed the right thing. They still have not solved the problem of excessive private debt.

They say only that private debt doesn't matter. What they mean is, they're not even going to think about it. And then you get people like Sumner telling you forget about debt:

Forget about debt and focus on NGDP. It’s NGDP instability that creates problems, not debt surges.

Economics by proclamation: Forget about debt. It’s NGDP instability that creates problems, says Sumner, not debt.

Well, maybe. But it's debt that creates NGDP instability:

Excessive Private Debt --> NGDP Instability --> Problems


Thursday, January 26, 2017

What is debt?

Debt is the money on which we pay interest.

Wednesday, January 25, 2017

Seeing is Believing

Petroleum imports in billions of dollars. Red is annual data, not seasonally adjusted. Blue is quarterly data, seasonally adjusted.

Graph #1: Petroleum Imports
Two measures of petroleum imports because I was checking my work.

I'll add one more line, for comparison. The green line is monetary interest paid.

Graph #2: Petroleum Imports (red, blue) versus Interest costs (green)
So you know.

Tuesday, January 24, 2017

Sequence of Events

Prices in general (red) were going up faster than the price of crude oil (blue) from 1959 to 1974. In 1974, oil jumped way up.

Graph #1: Crude Oil (blue) and Consumer Prices (red)
The crude oil price data only starts in 1959, so that's where I started the graph. [Apparently that's not correct. The graph starts in 1959 because it does. Edit 22 Feb 2017 ArtS]

I indexed both datasets to make them equal at the start. Whatever line is higher, that's the one that went up more. The CPI went up more than the price of crude until 1974.

Before 1974, the price of crude was lagging behind. It makes you wonder: Why the sudden change in '74? Why such a big change?

I added the price of gold to the graph (in green). The data for gold starts in April, 1968. So I eliminated everything before that date, and indexed all three to make them equal at the start:

Graph #2: Crude (blue), Consumer Prices (red) and the Price of Gold (green)
In early 1972 (not long after Nixon closed the gold window) the price of gold started going up a lot faster than prices in general.

The increase of crude oil prices in 1974 was just about enough to keep crude prices on a par with the price of gold.

You know... This confirms something I heard on the news once -- only once -- many years back: OPEC (or whoever) said they were raising prices to keep up with gold. Because of the falling value of the dollar.

Monday, January 23, 2017

Hope and bullshit

In The inequality gap — five sickening facts Lars P. Syll presents an excerpt from Oxfam. Consider the first of those five facts:
Just eight men own the same wealth as the 3.6 billion people who make up the poorest half of humanity. Although some of them have earned their fortune through talent or hard work, over half the world’s billionaires either inherited their wealth or accumulated it through industries prone to corruption and cronyism.

I saw a headline doubting the "eight men" number, but that's not the point. There is certainly some number of richest people who own the same wealth as the 3.6 billion poorest people. I'm sure it's a small number, and getting smaller.

The exact number is not really the issue. I didn't quote the "eight men" thing for the fact it presents, but for the way Oxfam understands that fact:

Although some of them have earned their fortune through talent or hard work, over half the world’s billionaires either inherited their wealth or accumulated it through industries prone to corruption and cronyism.

So, some of the nameless eight would be like Bill Gates and Jeff Bezos, earning their fortune through talent and hard work. It's the other ones that Oxfam find disturbing, like the ones who will inherit the wealth of Gates and Bezos and the ones who chose to work in industries that are "prone to corruption and cronyism".

Oh. My. God. Is that what they really think? They're relying on the waste, fraud, and corruption argument? People have been applying that one to government for several decades now, and it hasn't solved a single problem.

What I see when I look at Oxfam's story is that Oxfam doesn't have a clue. They know that things are not going the way we need things to go. But they have not the slightest idea why.

If you want less corruption, you have to make it possible for people to succeed by other means. You have to improve the economic environment. You have to provide an alternative to crime and corruption. Just like with kids in school. If you want them to do better in school, you have to make it so things will be better when they get out of school. Opportunities really have to be there. You can't do it with hope and bullshit.

In other words, you have to fix the economy.

Oh -- and the inheritance thing? That's the way the world works, bud. If you're born into the right family you can inherit England. You're not going to solve the inheritance problem by banning inheritances. You can only solve it by making sure inheritances are less massive. That means you have to make sure that the "good" rich guys (the "talent and hard work" crew) are not so damn successful.

By design, the business income tax favors bigness. The biggest businesses get the biggest tax deductions. Talent and hard work? Sure. Talent, hard work, and a tax structure that favors the big and the lucky.

Saturday, January 21, 2017

If you can't find a way to boost productivity, maybe you're not looking in the right place

From the article Every US president promises to boost economic growth. The catch: no one knows how at VOX:

... others argued that greater government spending would ramp up demand for goods and services, increasing productivity by allowing business to operate near full capacity.

I don't know why they do that, combine two thoughts into one. It only creates confusion. Take that little excerpt there from VOX, separate out the part about "greater government spending", and throw it away. I don't want to talk about greater government spending, because so many people react so negatively to it. I want to talk about a way to increase productivity:

... ramp up demand for goods and services, increasing productivity by allowing business to operate near full capacity.

Capacity utilization has been drifting downhill for decades:

Graph #1: The Long-Term Decline of Capacity Utilization
The red line shows the trend. There was one bright spot there in the 1990s: two peaks quite above trend. Two peaks in the 1990s, reaching the 85% level briefly achieved in the 1980s. And between the two peaks, utilization persisted at trend level rather than falling below, as so often happens on this graph.

So we have an example of a time of high utilization, which is also a time of high productivity:

Graph #2: Productivity, high in the 1990s
Productivity was higher in the 1990s than in the 1970s or '80s. And utilization was up. (Productivity was also high in the 2000-2007 period. But that was recession effects.)

Was the higher productivity of the 1990s due to "greater government spending"? No: Those were the years the Federal budget was coming into balance. Moreover, the trend of capacity utilization and the trend of Federal debt growth run in opposite directions.

If Federal debt growth was generally accelerating (except in the 1990s) and capacity utilization was generally declining (except in the 1990s) are we led to conclude that Federal debt growth harms capacity utilization? No. That leap is based on too few facts. The broader picture contradicts that story.

It is not likely that GDP growth was good because the Federal budget approached balance in the 1990s. It is more likely that the Federal budget approached balance in the 1990s because GDP growth was good. So the question remains: What pushed productivity and GDP growth up to those memorable levels?

I suggest that a reduction in cost was responsible for the good years. A reduction in cost would keep prices on the low side and profit on the high side. Good for business, and good for consumers. Growth picks up, and capacity utilization picks up, and productivity picks up:

... ramp up demand for goods and services, increasing productivity by allowing business to operate near full capacity.
So a reduction in cost could be responsible for a rise in productivity, or could anyway have contributed to it. The question then is: What reduction in cost can benefit both producers and consumers? If business costs are down, it's probably because wages are down. On the other hand, if wages are gaining on the cost of living, it probably means wage costs are rising in the business sector. Where is the category of costs that can be reduced, that can bring about this magical improvement of growth and productivity?

Finance. Reducing the size and cost of finance allows wages and profits to rise.

... bank credit creation affords an opportunity for rentier interests to install financial “tollbooths” to charge access fees in the form of interest charges and currency-transfer agio fees...

The FIRE sector’s real estate, financial system, monopolies, and other rent-extracting “tollbooth” privileges are not valued in terms of their contribution to production or living standards, but by how much they can extract from the economy. By classical definition, these rentier payments are not technologically necessary for production, distribution, and consumption. They are not investments in the economy’s productive capacity, but extraction from the surplus it produces.
- Dirk Bezemer and Michael Hudson in Finance Is Not the Economy

Finance. In the 1990s, a reduction in financial costs left more money available for wages and profits. As a result, the economy was almost as good in the 1990s as it was in the 1960s when financial costs were low because finance was still small.

Bezemer and Hudson refer to "tollbooths" and "FIRE". I just call it finance. But in all the years between $3.50 and $35.00 on the graph below, there was just one time that the "debt per dollar" ratio obviously fell, reducing financial cost per dollar. That one time was the early 1990s, immediately before the good years of productivity and utilization and RGDP growth:

Graph #1: Dollars of Total (Public and Private) Debt, per Dollar of Spending Money
After a decline of financial cost, the economy becomes vigorous. Then productivity rises because labor productivity is endogenous.

Friday, January 20, 2017

Snowball Effect

I'm not saying anything about the 1970s here.

We have Steve Roth saying

Democrats’ remaining progressivism under Johnson — civil-rights legislation, Medicare and Medicaid, and the wholesale movement of liberated women into the workforce — eventually pushed a hot middle-out economy into the demand-driven inflation of the 70s. That torrid growth brought government debt down from 120% of GDP in 1947, to 35% in 1980.

The demand-driven inflation of the 70s? I think most people would say cost-driven inflation. Cost-of-oil driven.

And then we have the snowball effect that follows:

The obvious solution to the 70s inflation was to raise taxes, reducing government deficit spending, to drain off excess demand from a too-hot economy.

"A too-hot economy" in the 1970s? Roth's analysis is too quick and too careless.

Here's the full blizzard:

Democrats have been kicking the economic ball into their own net ever since. The obvious solution to the 70s inflation was to raise taxes, reducing government deficit spending, to drain off excess demand from a too-hot economy. Instead they acceded to the banker-industrial complex and the diktats of childish monetarism, again conceding the win to an economic belief system that is egregiously self-serving for the rich, and anathema to Democratic progressive economic populism.

See what happens when you jump too soon? Roth's "obvious solution" depends on his being right that the inflation was demand-pull and being right that the economy was too hot. Those things are at best uncertain. But Roth has already embedded his solution in a political and cultural argument.

People like that kind of argument. But it's not how economic problems get solved.

Thursday, January 19, 2017

The "causal loops" of system dynamics

Excerpts from Introduction to Computer Simulation: A System Dynamics Modeling Approach by Nancy Roberts, David Anderson, Ralph Deal, Michael Garet, and William Shaffer. Addison-Wesley Publishing Company. Copyright (c) 1983 Lesley College.

Page 16, on causal loops:
One way to clarify the representation of a system is to focus on circular chains or causal loops. Within a causal loop, an initial cause ripples through the entire chain of causes and effects until the initial cause eventually becomes an indirect effect of itself. This process whereby an initial cause ripples through a chain of causation ultimately to reaffect itself is called feedback.

Pages 23-24, on positive and negative feedback loops:
Another approach to better understanding the implications of a closed-loop diagram is "walking through" the links. Take, for example, the "Tired-Sleep" loop shown here.

It can be read: "The more tired I am, the more I sleep. The more I sleep, the less tired I am. The less tired I am, the less I sleep," and so forth around the loop.

If this loop were walked through as it is talked through, stepping in the same direction each time saying the same word (more or less), or reversing direction as the words changed, a distinct two-directional pattern would develop. The tired-sleep loop would produce the pattern of footprints shown below.

The up-and-down pattern is symptomatic of compensating causal loops...

The "Cry-Depressed" loop provides another and different type of example for "walking through."

The footsteps produce the distinct one-directional pattern shown below,

The one-directional pattern is symptomatic of reinforcing causal loops...

So there are compensating loops, and reinforcing loops. Compensating loops undermine the tendency to move away from some equilibrium level. Reinforcing loops reinforce the tendency to move away from equilibrium.

Compensating loops are called negative feedback loops. Reinforcing loops are called positive feedback loops.

Page 43, on positive feedback loops:
The general pattern is that if some quantity within a positive feedback loop begins to increase, then a "snowball" effect takes over, and that quantity continues to increase...

The "snowball" effect of a positive loop can also work in reverse. If a quantity in a positive loop begins to decline, that can lead to a continuing decline...

Occasionally, the equilibrium point is not difficult to determine. In the bank balance problem in figure 3.1, for example, it is easy to see that the equilibrium point is zero. If any amount of money above zero is deposited in a bank account earning 10 percent interest compounded annually, it will grow without bound. But if exactly zero dollars are placed in the account, the balance will remain constant at zero.

Page 44, on negative feedback loops:
Previous examples have indicated that negative feedback loops tend to produce behavior over time that is "stable" and "goal-seeking." For example, a heating system in a house always tends to maintain the house at the same temperature under wide variations in the temperature outside...

The behavior of a negative feedback loop cam be described more easily by referring to the system's equilibrium point. Recall that if a quantity in a positive loop ... is above the equilibrium point, it generally will grow at an accelerating rate; and if it is below the equilibrium point, it will decline at an accelerating rate. Thus the equilibrium point in a positive loop is unstable.

In a negative loop, the situation is just the reverse.
// Related post: Negative Feedback

Wednesday, January 18, 2017

So no recession yet.

Graph #1: The Declining Productivity of Capital
First impression: Looks like we are at the high point of this business cycle. But the curve has to actually turn downward and go downhill before we get a recession. So, no recession yet.

First time I ever saw this graph. Maybe it doesn't work that way. But that's how it looks, based on the data since the mid-80s.

FRED says "Capital services are the services derived from the stock of physical assets and intellectual property assets."

Tuesday, January 17, 2017

A remarkably consistent increase in debt trend growth

Here. Take another look at yesterday's graph:

Graph #1: Exponential Growth of Real Debt Across Four Periods, 1948-1993
A lot of people seem to think debt exploded in the 1980s. It didn't. As I said yesterday, real debt did not run flat until the 1980s and then suddenly explode. It was always increasing. Today we look at the increase.

The black lines on #1 are exponential trend lines drawn by Excel for four different time periods. I used simple rules for selecting dates to figure the trend lines: Each period should be ten years or more in length, and aim for the maximum R-squared value.

After the thing posted on Monday morning I watched the graph for a while and started wondering what the growth rates are, the growth rates of the four exponential trend lines.

So in the Excel file I formatted the trendline label to make the numbers show 12 decimal places. Then I copied the exponents from the four different trendlines and pasted them together on a new sheet, along with the start- and end-dates Excel used to figure the trendlines.

Then I did my usual thing: I made a graph. I made a graph of the trend line growth rates.

The graph showed a straight line. I thought I messed something up. So I made it show a dot for each of the four data points. The dots all showed up on the straight line. So I know I didn't mess up.

It's a straight line. The increase in real debt growth is a straight-line increase, regular and consistent.

I recreated the graph as a vertical bar graph. It seemed right, as there are only four data points. And then I put the same data on the graph again as a line, like I had it the first time. With dots and all. I made the line black so it looks like a trend line. But it's not a trend line. It's a plot of growth rate data. And it's a straight line increase, regular and consistent:

Graph #2: Exponential Growth Rates of Real Federal Debt
I am amazed by this outcome.

// The Excel file

Monday, January 16, 2017

The evolution of Real Debt growth, 1948-1993

Real Debt did not run flat until the 1980s and then suddenly explode. It was always rising.
The graph shows Federal debt because I had that graph handy. But the acceleration of debt growth is similar for private debt and for total (public plus private) debt.

The animated GIF was easy to create from individual GIF images at gifcreator.me.

Sunday, January 15, 2017

Current expenditures? What's that?

This one was dated 29 June 2914 on my Test & Development blog. Apparently I didn't post it here, then.

Answer available at BEA. Here's a bit of it:
BEA's national accounts measure government spending in three ways:

Government consumption expenditures and gross investment:  This is a measure of government spending on goods and services that are included in GDP...
Government current expenditures: Total spending by government is much larger than the spending included in GDP.  Current expenditures measures all spending by government on current-period activities...
Total government expenditures:  In addition to the transactions that are included in current expenditures, this measure includes gross investment (as defined earlier), and other capital-type expenditures...

For more detailed information on government expenditures, please see "A Primer on BEA's Government Accounts."

- See more at: http://www.bea.gov/faq/index.cfm?faq_id=552#sthash.zpykIqWy.dpuf

U.S. Bureau of Economic Analysis, FAQ: “BEA seems to have several different measures of government spending. What are they for and what do they measure?” (May-28-2010), http://www.bea.gov/faq/index.cfm?faq_id=552.

Saturday, January 14, 2017

Philip George on involuntary unemployment

Why is there involuntary unemployment?

I think the article is brilliant. Recommended reading!

Friday, January 13, 2017

Agreeing to agree

Rummaging the internet for something I could use in my recent Adjusting Debt for Inflation series, I found an old (2011) post by John T. Harvey: What Actually Causes Inflation (and who gains from it) at Forbes.

I was so impressed by his opening:

I made a post two weeks ago in which I explained that the popular view of inflation (wherein it is caused by money growth) depends critically on assumptions that do not hold in the real world. Money comes into existence when someone adds it to her portfolio of assets. This occurs either when she borrows money (which creates new cash from reserves) or sells securities to the Federal Reserve (which injects new cash into the system). Neither of these scenarios allows the central bank to increase the supply of money beyond demand, the story told by those in the money growth ==> inflation camp.

I don't know what a "portfolio" is, and I don't want to know. But I know that money comes into existence when someone borrows money or sells securities to the Federal Reserve, as Professor Harvey says.

What I never thought of, on my own, was that "Neither of these scenarios allows the central bank to increase the supply of money beyond demand, the story told by those in the money growth ==> inflation camp." It's nothing, really. It's "supply and demand" as opposed to just "supply". But it is how the economy works -- I don't even have to stop and think about that. And it's important because, as Harvey says, "money growth ==> inflation" is a story without demand.

At least, in the dumbed-down "printing money causes inflation" version, it is a story without demand. And I never noticed.

So, first impression, I was pretty well impressed by John T. Harvey.

That opening paragraph continues:

... Neither of these scenarios allows the central bank to increase the supply of money beyond demand, the story told by those in the money growth ==> inflation camp. Instead, inflation happens first. This then means that agents need more cash for transactions, leading them to borrow more or sell government securities to the Fed. Thus, the money growth accompanies inflation, but does not cause it.

I'm a little uncomfortable with "inflation happens first". But I'm okay with "there is a need for more money". Either way, the key is "accommodation". If the Fed doesn't accommodate the increased demand for money, then there isn't enough money to let prices increase. At least, that was Paul Volcker's plan. (Hey, I'm big on cost-push. If costs are driving prices up, then the failure to accommodate means there isn't enough money to let the economy function normally, and all sorts of problems arise. I don't think Volcker's plan was a good one. However, I do still think the lack of money pretty well prevents prices from rising.)

I'm okay with "the money growth accompanies inflation, but does not cause it." I think it often works that way. One thing I particularly like about John Harvey's wording is that it leaves the cause of inflation unspecified. It leaves open the door to inflation being cost-push. I need that door open.

But I don't think it always works as John Harvey describes. Note that his analysis omits fiscal actions. Money comes into existence, he says, because "she" borrows it. She is the private sector, as I read his paragraph. When the Great Depression enveloped us, it was Federal spending that went high. And Federal borrowing. Nobody was depending on private-sector demand to lift prices while the Fed sat there pushing on string.

And again, during World War Two, it was Federal spending and Federal borrowing that went high. It's not the same as private borrowing and spending. The aftermaths differ. Professor Harvey omits this different era from his analysis.

Graph #1: Real GDP Growth (blue) and the Rate of Inflation (red), 1930-1955
Demand -- largely government spending -- along with manipulation of gold and other FDR policy created Depression-era highs (centered on 1935) in economic growth and inflation. Then wartime spending (see 1940-1945 on the graph) created a higher high in economic growth. The increased demand created a higher high in inflation as well.

After the war (1945) economic growth fell and inflation went low. After a low point in 1946, economic growth and demand came back, weakly. The blue line couldn't reach the 5% level. Inflation, however, spiked to 20%. And again after the 1949 recession growth and demand returned, stronger this time, but again inflation climbed higher than economic growth.

These peaks, in the late 1940s and early 1950s, these peaks show demand coming back enough to permit inflation to occur. But they do not show demand coming back enough to cause the inflation. Five percent growth doesn't cause 20% inflation. What was the cause of the inflation when price controls ended? Too much money chasing too few goods.

Federal spending and economic policy during the Great Depression and the Second World War raised the quantity of money to a high level relative to GDP and whatever. After the war, when the economy was getting back to normal, even a relatively low level of demand was enough to create a high rate of inflation because the quantity of money was extraordinarily high. This was demand-pull inflation.

Sometimes the "popular view of inflation" does happen in the real world.

I happen to think that John Harvey's description of the cause of inflation is mostly right most of the time. I also happen to think that Milton Friedman was born at just the right moment to see what was happening with money and demand and prices during the Great Depression and the second great war. And I think Friedman's description is exactly right for those periods of our economic history.

There is plenty more I'd like to say about Mr. Harvey's article. Another time, perhaps. Just now I have to say there is a lot of disagreement between different schools of economic thought. But a lot of it doesn't need to be disagreement. A lot of those different views need to be put on a timeline, that's all.

It's not that the other guy's assumptions "do not hold in the real world". It's that they don't hold at the present time. Or they only hold in special circumstances. From a timeline we might discover interesting stuff, like the "zero bound" problem occurs only rarely, and if "printing money" is applied as a solution then we should expect that the inflation which follows, when it comes, will be "too much money chasing too few goods" inflation.

The timeline would help us see that it's not always a matter of right and wrong. It is sometimes a matter of right now or right at some other point in time. Fleshing out the timeline might help economists get along better. And it would help them, and all of us, understand the bigger picture.

Thursday, January 12, 2017


This graph shows the Gross Federal debt, nominal and real:

Adjusting the Federal Debt for Inflation
Graph #1: Federal Debt (blue) and Its Inflation Adjustments, Right (red) and Wrong (green)
Nominal (blue) is useful for figuring the payback of debt. Real (red) is useful for figuring the boost that credit use gives the economy. The third calculation (green) is wrong and should not be used. These rules apply not only to government debt, but to all debt.

Wednesday, January 11, 2017

Would it matter?

Some people use an incorrect inflation adjustment of debt and produce a line like the green one on this graph:

Graph #1: Federal Debt (blue) and Its Inflation Adjustments, Right (red) and Wrong (green)
See how nice and flat the green line is, from the 1940s to the early 1980s? People see that and say those times were good because the debt stayed low. Then debt "exploded" in the 1980s, they say.

It's the wrong calculation. The green line is wrong. The red line correctly shows inflation-adjusted debt. Debt started going up in the 1950s, not the 1980s.

Look, I don't want to argue the point. I just want you to think about it. If you were making decisions and setting economic policy, would it matter if you thought debt started going up in the 1980s but it really started going up in the 1950s?

Would it matter? Answer that question first. If you think maybe it would matter, then maybe you should look into whether the green line really is wrong, as I say.

Tuesday, January 10, 2017

As a graph-maker ...

After I wrote yesterday's post and showed the "national debt (adjusted for inflation) since George Washington" graph, bluemexico's graph, I went and made my own graph right away.

Adjusting the Federal Debt for Inflation
Graph #1: Federal Debt (blue) and Its Inflation Adjustments, Right (red) and Wrong (green)
I didn't work out the numbers for each President, and I only went back to 1940. So my graph is only roughly comparable to bluemexico's, and only to the last part of it. This part:

Graph #2: The Last Part of Yesterday's Graph
The graphs differ some. Mine shows the data once for each year. Bluemexico's shows the data once for each President. The graphs show the same general path but are not identical.

But the two are close enough I can tell that bluemexico adjusted the debt for inflation using a calculation like the one that is used to adjust GDP for inflation. His graph shows the same pattern as my green line: It shows a peak in 1945. Then it falls a bit. Then it runs flat for the rest of the '50s, the '60s, and into the '70s. On mine, into the '80s.

Compare the green line to the red in the years before the mid-1980s, or the green to the blue, and it is easy to see that the green is the flattest of the three. That flatness is the result of the way inflation is taken out of the debt numbers.

What's wrong with the green line? Debt accumulates over many years. The effect of inflation on debt depends on what year the money was borrowed. But the calculation for the green line pretends that the whole accumulation was borrowed in a single year: in 1970 for all the debt accumulated up to 1970, in 1980 for all the debt accumulated up to 1980, and like that.

I know, I know. I hope I don't still have debt left over from 1970 or 1980. Still, the graph does show the debt of those years. And if the graph shows it wrong, people get wrong ideas about debt and the economy. That leads to flawed analysis and bad policy.

Here is a post on how to adjust debt for inflation.

Monday, January 9, 2017

You don't even know the size of inflation-adjusted debt until you get the calculation right

I keep going back to this graph:

Graph #1: Federal Debt by President, from Washington to Obama
You can click the graph to see it bigger and more readable. You probably don't need to, as the plotted line is easy enough to see. Also you may not want to, if your closed mind has already dismissed my topic as meaningless and unimportant. Me, I'm still trying to figure out what my topic is.

I keep going back to that graph because it shows debt adjusted for inflation. I wonder why they bother. They're not looking at debt relative to anything but the price level. All they are showing is that debt went up more than prices went up. It's an odd focus, don't you think?

Oh, I forgot to say: The graph is from Reddit, from the The_Donald subreddit, from a page titled A look at our national debt (adjusted for inflation) since George Washington became President in 1789. Obama will have added almost $9 trillion to our national debt by the time Trump takes office. It has 4082 thumbs up and 442 comments.

I searched that page for the phrase adjusted for inflation and found two occurrences: one in the post title, and one in a critical comment by imfineny:

I think it would be more informative to plot it against GDP adjusted for inflation

Mm. I wonder what sort of information the guy expects to find in the graph he imagines. (I briefly wonder why he doesn't just create the graph that he wants to see. I guess he doesn't want it that much.)

If the adjustment of debt for inflation is done using the same calculation used to adjust GDP for inflation -- as it almost always is -- then the debt-to-GDP ratio comes out the same whether the values are adjusted for inflation or not. It is incorrect to use the same calculation for debt as for GDP, of course. But I doubt those guys at Reddit are aware of that problem.

If they were, I expect they would focus more on getting the calculation right than on the size of the debt. Because you don't even know the size of the debt until you get the calculation right.

And now we have discovered my topic.

Sunday, January 8, 2017

The Federal debt and deficits

"A budget deficit or budget surplus is measured annually. Total government debt or national debt is the sum of budget deficits and budget surpluses over time."

Yeah, that's what I thought: add up the deficits to get the debt.

So how come when I add up the deficits they don't equal the debt?

If you try it, let me know how it works out.

Saturday, January 7, 2017

My recession indicator says "not yet"

Employment Growth