Debt and Stimulus

From Bloomberg View:

Decade of Fiscal Stimulus Yields Nothing but Debt: Caroline Baum
By Caroline Baum Aug 4, 2011 8:00 PM ET

When George W. Bush took up residence in the White House in January 2001, total U.S. debt stood at $5.95 trillion. Last week it was $14.3 trillion, with $2.4 trillion freshly authorized by Congress Tuesday.

Ten years and $8.35 trillion later, what do we have to show for this decade of deficit spending? A glut of unoccupied homes, unemployment exceeding 9 percent, a stalled economy and a huge mountain of debt. Real gross domestic product growth averaged 1.6 percent from the first quarter of 2001 through the second quarter of 2011.

Facts. Not all the facts, but facts. What is it they say? The first step is admitting you have a problem.

My solution is different from everybody else's solution. Most especially, it is different from those solutions that propose cuts to government spending. But my solution does not depend on avoiding the facts.


From USNews:

Obama Taxes, Debt, and Stimulus Worked, Trumping GOP Blather
By John Aloysius Farrell
Posted: February 3, 2010

But, OK, the Obama tax cuts and stimulus package did exacerbate the debt problem that he inherited from the Tom DeLay generation of Republicans--which dropped the pay-as-you-go policies of the Clinton-Gingrich years to finance two wars and the biggest expansion of Medicare since LBJ with the government credit card.

And, due to the failure of the Democratic message machine (from smugness, or maybe just exhaustion), the need for the new red ink that the Bush-Obama rescue packages added to the national debt was poorly explained, went undefended, and became an invitation for Republican demagoguery.

But it is not that the GOP has offered any better ideas.

Partisan bickering. Sadly, the strongest argument here is blame. And the best excuse is that "the need" to add to the national debt was "poorly explained".

But the $8.35 trillion we added to the national debt in the last ten years did not leave us better off than we were before. So it would take one hell of a good talker to convince people of the need to add even more to the national debt.

My view is that our economy does not grow because private debt is excessive. And, that this problem is not resolved by raising or lowering the public debt.


From Vox:

Deflation, debt, and economic stimulus
Richard Wood
3 March 2011

Under Policy A the central bank creates new currency to purchase government bonds on the secondary market. The principal purpose is to finance a rise in bond prices and lower interest rates and, thereby, stimulate private investment.

Considerable risks and side-effects could arise from the continued application of this policy in the current environment of historically low interest rates.

If the consumption/investment preferences of bond holders are unchanged, then, under Policy A, bondholders may simply purchase new domestic bonds (or other close substitutes) with the newly created currency received from the central bank, or they may purchase higher yielding foreign bonds/assets offshore. On this basis, the additional money supply would not go directly, if at all, to domestic consumers, wage-earners, the unemployed, or to non-finance businesses – the areas where it is most needed to generate widespread domestic demand growth.

Quantitative easing -- Policy A -- does not ease the maladjustment of income that creates toxic assets by making liabilities toxic. The additional money supply does not go to domestic consumers, wage-earners, the unemployed, or to non-financial businesses – the areas where it is most needed.

And why is money "most needed" in these areas? Because that is where the toxic liabilities are. If we print money and use it to pay off debt for consumers, wage-earners, and the unemployed, we eliminate those liabilities. We eliminate that debt. We free up the economy so it can grow again.

And how does it grow? Because the money you have, your income, becomes discretionary again. You don't have to use so much of it for debt service. So you can use more of your income like you used to, to buy stuff. That is what stimulates the economy.


From The Hill:

Dems call for stimulus in debt deal as CBO offers warnings
By Erik Wasson - 06/22/11 08:19 PM ET

Senate Democrats on Wednesday said stimulus measures should be included in a debt-ceiling deal even as a new Congressional Budget Office (CBO) report shows public debt surging to nearly twice the economy’s size by 2035.

Sen. Charles Schumer (D-N.Y.) and other Democrats said the slowing economy demands a deficit-reduction package that includes provisions to create jobs.

The thing that bothers conservatives most about liberal policies, I think, is that liberal policies lead to what Rush Limbaugh has called "the aggrandizement" of government. Liberal policies make government bigger. That doesn't bother liberals, so they always miss the biggest objections that conservatives have to their views.

Quantitative easing creates new money and puts it in the hands of the wealthy; we tried this and it has not fixed the problem. Stimulus measures circulate new money into the hands of the poor, but do it in a way that conservatives object to.

If we print money and use it to pay off debt for poor people, the rich people get paid. So why should they object? And the poor people get debt relief, which is what we need to get the economy going again. And the government is not "aggrandized" in any way.


From Bloomberg Businessweek, January 14, 2010:

After the Stimulus Binge, a Debt Hangover
Trillions of dollars have been spent keeping the global economy afloat. But now fears about the Great Recession are giving way to worries about something else: The Great Reckoning
By William Pesek

Government policymakers from Washington to Tokyo are tallying the bill for last year's stimulus binge, and the results won't be pretty for investors or elected officials. Since the collapse of Lehman Brothers in September 2008, the Group of 20 largest industrialized economies have spent more than $2.2 trillion—much of it borrowed—trying to restore growth.

If the problem is excessive private debt, why would you even try to solve the problem by increasing public debt? But that's what we do.

If you print a dollar and use it to pay off debt, the debt and the dollar cancel each other out, and both of them disappear.

Or maybe, if fractional-reserve banking turns a dollar of money into $10 of debt, then we can print a dollar and use it to pay off $10 of debt. Or if each dollar supports $35 of debt, then maybe we can print a dollar and use it to pay off lots of debt. And if paying off debt destroys the dollar, then this plan is not even inflationary.

The Problem as the Cause of the Problem

From a "best answer" at Yahoo! Answers:

Q: What were the causes to stagflation in the 1970s?

A: This was because of high unemployment and high inflation at the same time.

Nothing I can add to that.

The Two Groups

If you were to divide economic opinion into two groups today, I think you'd have to distinguish between those whose primary concern is jobs, and those whose primary concern is inflation. This is rather sad.

The two groups we see today are the two that were defined by a problem that arose in the 1970s. And the absolute irreconcilability of the two groups is an outgrowth of our solution to that problem.

Back in the early 1970s the economy developed stagflation -- inflation in a stagnant economy. This was unusual because, before that time, when the economy was stagnant prices tended to fall. And times when prices were rising were times of growth, not stagnation.

It was the death of Keynesian economics, because Keynesian economics could not explain the stagflation.

Eventually, a new economics arose: supply side economics. It attempted to suppress inflation by monetary means, while encouraging growth by favoring producers.

In other words, the stagflation problem was solved by treating it as two separate problems: the inflation problem, and the growth problem. This solution was the mistake that created the two irreconcilable groups we have today.

The Natural Rate of Shostak per Hour

Looking at my recent Unspeakable Practices, Unnatural Rates...

Recalling my older post on Frank Shostak on Velocity. From that post:

"Velocity Does Not Have an Independent Existence," Shostak says:

...velocity does not have a "life of its own." It is not an independent entity--it is always [one number] divided into [another number]..."

I think I know what Shostak was complaining about.

You take two economic measurements -- GDP and the quantity of money, or inflation and unemployment -- divide one by the other, and then treat the result as though it has a life of its own. It really doesn't.

I must say, though, that if GDP increases and the quantity of money does not, then people must be spending faster. There's no other way those things could happen.

It's not the same with the unnatural rate, the natural rate of unemployment. If unemployment falls while inflation fails to rise, there must be reasons for this. You can't just look at the ratio and say, "Well, that explains it."

The velocity of money is something you can feel: slow when you're standing on the unemployment line, fast when you go to the Fair. Used to be anyway, fast at the Fair.

Unemployment? Yeah, you can feel unemployment. But you cannot feel the natural rate of unemployment. That is just a story somebody made up.

Thinking in red and green

Red means stop. Green means go.

Red is debt. Green is money.

All of it looks green, the money. But for every dollar you borrow, there is a red one, a dollar of debt lurking like a thug in the darkness, waiting for a chance to hurt you.

We're off the gold standard. That's okay. Being "on the gold standard" didn't mean we used gold for money. We still used paper in those days. We still used money created by creating debt. And that was always the problem: debt. Same as today.

We had problems even when we were on gold. The main problem was that there got to be too much debt -- too much money created by borrowing -- compared to the gold behind the paper. In those days, it created frequent crises.

In those days, it was easier to see when there was getting to be more paper and less gold. Today it is not so easy to see when there is a lot of debt, because all the money looks the same. So our crisis was delayed, and the problem got bigger.


The main problem is exactly the same today as it was when we were on gold. There is too much debt. Too much money created by borrowing, relative to the quantity of money issued by (in our case) the Federal Reserve.

The problem is *not* that we use the Federal Reserve now instead of gold. The problem is that there is too much debt compared to the "good" money. It is a very simple problem, really, and it happens over and over and over, all through history.

Roundabout

I want to compare the money we pay in taxes to the money we pay on our debt.

FRED has this on taxes:

Graph #1: Personal Current Taxes  (billions of dollars)

And this on debt service payments:

Graph #2: Household Debt Service Payments  (percentage)

But Graph #2 doesn't show dollars, or billions of dollars. It shows percent of Disposable Personal Income.

But FRED also has Disposable Personal Income:

Graph #3: Disposable Personal Income  (billions of dollars)

When I multiply Graph #2 by Graph #3, I get debt service payments in billions:

Graph #4: Household Debt Service Payments  (billions of dollars)

I had to divide by 100 to convert from FRED's percentage values.

Now I can bring in Personal Current Taxes from Graph #1. It shows up in red:

Graph #5: We pay about as much on our debt as we do to run the Federal government

Huh. Closer than I expected. The taxes are even somewhat higher, until about 2001.

So now I have to ask you a dangerous question: Which would you rather cut? Would you rather have no debt or no government? Be realistic in your assessment.

Would you rather cut the size of government in half, or cut your debt in half? If you had to pick one.

Would you rather not have sent astronauts to the moon and stuff, or avoided the economic policies that drove money out of circulation and encouraged the use of credit? Money in circulation, remember, is the money you receive as income and the money you spend. It was policy to reduce that, to fight inflation. And it was policy to encourage the use of credit, which caused inflation and left us full of debt besides.

I say cut the debt. But then, what would you expect me to say?

Let the Fed make your payments.

When people are deleveraging, more of our income goes to paying off debt. Less of our income remains for other things. Less remains for going out to dinner, and for buying toys, and for keeping the AC cranked up in the summer and the heat turned up in the Winter. Less money for other things. This is where the deflation comes from.

In order to prevent the deflation, it is necessary to continue with the normal spending that we were doing before we started deleveraging. And that is the problem. For if the money goes to normal spending, then it cannot go to deleverage. And if it goes into deleverage, then it cannot go to normal spending.


What are the solutions to this dilemma?

1. Improve confidence, reducing the urge to delever. This pathetic joke of a policy is the policymaker's main avenue of hope today. But it does nothing to reduce the target of deleverage: It does nothing to reduce debt. If there was no debt, there would be nothing to delever, and normal spending would resume.

If we wait long enough, however, delevered spending becomes the new normal. Reduced spending becomes the new normal. Depression becomes the new normal. We are moving toward this, more and more. This is why there was urgency at the start, and why there is less hope for quick improvement today.

2. Increase income by some magic. If we are going to maintain a level of normal spending and at the same time engage in deleveraging, then we need additional income. This is the reason that various groups call for various tax cuts -- for the middle class, or for the rich, or for the payroll.

Tax cuts, however, reduce revenue to government, making the problem of deficits worse. Then, cuts to government spending compound the downward spiral. Hopes come to rest on "confidence" and "certainty" at a time when we have neither. And none of this has the slightest bearing on the private sector's desire to reduce its own debt.

3. Let nature take its course. Deleverage drives down normal spending. This reduces growth, creates recession or depression, reduces the quantity of money in circulation, and leads to deflation and lowered incomes.

When lowered incomes confront existing debt, debt casts a longer shadow. It enhances incentives to deleverage. It reduces growth, creates recession and depression, reduces the quantity of money in circulation, and leads to deflation and lowered incomes.

When lowered incomes confront existing debt, debt casts a longer shadow...

4. Decrease debt by some magic. Forgiveness would work. Default would work. Both of these are disruptive to creditors, I think. Could be wrong about that. But if these methods were not disruptive to creditors, we would probably have done them already.

The Arthurian solution comes under category 4: Print money and use it to pay off debt for people. Those mortgages that became a problem, that created the subprime crisis that created the financial crisis that created the economic crisis... I say let's get rid of those mortgages.

The Fed bought up a lot of risky mortgages a while back. If they still own any, they should forgive that debt immediately. They should have forgiven that debt when they bought it. With that debt forgiven, under-water homeowners suddenly don't have a mortgage payment every month. Suddenly they have a healthy chunk of extra cash, every month. That cash will want to go for normal spending. Assuming it's not too late to preserve normal spending, this helps to eliminate the threat of deflation.

There is still plenty of debt in the economy that the Fed didn't buy up. We still need to reduce this debt. So, let the Fed print money and use it to pay it off. Let the Fed make your payments.


When they print money, that's bad because it causes inflation. Sure. But when you pay off debt, that causes deflation because it destroys money. So when we print money and use it to pay off debt, we create new money and destroy it immediately. Destroy it by reducing debt. Destroy that new money, instead of taking existing money out of circulation. Destroy the new money, destroy the threat of inflation, and destroy debt without reducing the normal spending that our economy needs and we need.

Take advantage of being off gold. Print money and use it to pay off debt.

Unspeakable Practices, Unnatural Rates

The post title is a perversion of Donald Barthelme's title "Unspeakable Practices, Unnatural Acts"

Looking at my recent post on the Natural Rate of Unemployment...

Reading the first quote from Bill Mitchell...

It was argued, erroneously, that full employment did not mean the state where there were enough jobs to satisfy the preferences of the available workforce. Instead full employment occurred when the unemployment rate was at the level where inflation was stable.

The estimated NAIRU (it is not observed)...

It is not observed. But I think it is calculated by working backwards from observations of unemployment and inflation (and maybe some other stuff). I want to look into that.

But I want to look at this graph first:

The blue is the interest rate. The red is the "natural" rate of unemployment, shifted down and scaled up.

The biggest mis-match (apart from the 1980 superhigh spike of interest rates) occurs in the late 1990s, during the "macroeconomic miracle" when the economy grew while inflation and interest rates held steady, and unemployment fell. That discrepancy somehow disproves the whole concept of the "natural" rate of unemployment.

Of course, they backed into the NROU number and they show it dropping. But why it dropped? Why the economy was good?? They'd probably say the economy was good because the unnatural rate dropped.

But that overlooks everything. It overlooks the brief correction of monetary balances that I identify in The Rise and Fall of the Non-Federal Relative. And it overlooks every other possible explanation.


Yup. Aaron Koenigsberg at EHow writes

Calculating the NAIRU requires data on both the yearly inflation rate and unemployment rate over a period of time and preferably some kind of statistical software.

He lays it out in five steps. I didn't get into it. But definitely, it is calculated by working backwards from observations of unemployment and inflation.

Iffy, Piffy (3): Clonal's chart and what???

Clonal's, from earlier today:

Graph #1: Clonal's Chart

And the Dow Jones Industrial Average, from StockMarketTiming:

Graph #2: StockMarketTiming Chart

Graph #2 is an older picture. It stops at 2001. It also goes back 50 years farther than Clonal's. So, just look at the parts that line up by date.

Look at the part of the trend-line just above the "http://StockMarketTiming.com" label, from the early 1940s to the turn of the century. The trend line rises (at an 8.2% rate). Then it is flat from about 1965 to just after 1980. Then it starts going up again, faster than before.

Just like Clonal's chart. I think this is remarkable.


Here ya go:

Graph #3: Combo

The blue line is Clonal's trend line. The red line is the Dow Jones.

The Dow goes haywire after 2000. So I stopped the trend lines there. I'm trying to show an interesting similarity, not a haywire.

Looks like the Dow increased more slowly than Clonal's inflation-adjusted debt number, in the years before the mid-1960s. But it looks like the two trends increased about the same after the early 1980s. Until, you know, the haywire.

First thing that comes to mind to possibly explain the difference in the early years: Before the mid-1960s, the real economy was dominant. Less of the debt increase was going into finance, and more was going into production. After the early 1980s, the financial economy was dominant. So the real economy had less effect on the trend lines. Just a first thought, like I said.

The dominance of the financial sector would explain the haywire too, of course.

And I do find that flat spot intriguing. The struggle for dominance, I think.

The Jazzbumpa Addendum

Thanks Jazz. I think.

Two versions of the graph that run to most-recent data:

Graph #4

Graph #4 is the one that prompted my "haywire" description. Because it is not shown in a log scale (right axis) the lesser values are somewhat compressed... pushed down below Clonal's blue trend line. But the recent Dow is in spasms that simply do not appear on Clonal's.

Graph #5

Graph #5 is more comparable to my Graph #3 above. I used the log scale, as in Graph #3. Now it is the higher numbers that appear compressed... failing to show a rise comparable to Clonal's.

What does Graph #5 show, in the later years?  Perhaps it shows that even the steepest of increases in consumer debt was incapable of satisfying the beast Finance.

Iffy, Piffy (2): Inflation-Adjusted Components of Total Debt

A look at components of TCMDO. All data divided by the GDP deflator.

Graph #1: The Federal Component of TCMDO (Adjusted)

This is the version of Federal debt that is now about $10 trillion. It is not the $14 trillion debt. That one is shown at the end of the previous post. This graph, like the previous one, shows that the Federal debt was stable, relative to the price level, until the early 1980s.

Graph #2: The Non-Federal Component of TCMDO (Adjusted)

The Non-Federal component of total debt increased gradually but persistently, until the early 1980s. So we can see that, until the 1980s, inflation-adjusted private debt was growing faster than prices, and inflation-adjusted Federal debt was not.

After 1982, the growth of Non-Federal debt increased.

Graph #3: TCMDO (Adjusted)

The graph of inflation-adjusted Total Credit Market Debt Owed looks very much like the Non-Federal component shown in Graph #2. The same trends are visible. This is because the Non-Federal debt is such a large part, and the Federal debt such a small part, of all debt.


Couple days back I said more stimulus is not the answer. The next graph shows why.

The growth of Federal debt since 1981 was all stimulus. It was an attempt to improve economic performance. Economic performance was feeble because of the excessive cost created by private-sector debt, which had been accumulating since the end of the Second World War. But once the Federal debt started expanding, private-sector debt growth accelerated. So the cost of accumulated private debt increased even faster.

The only thing stimulated by government debt is the growth of private-sector debt.

Graph #4: TCMDO and its Federal and Non-Federal Components (Adjusted)

Graph #4 is a summary that combines the first three graphs of this post. You can see that total debt (green) and the Non-Federal portion (red) run very close together, and increase consistently from the earliest data. The blue line (Federal debt) does not increase until the 1980s. And even when it does increase, that increase is nothing compared to the Non-Federal debt.

Once again, these graphs show inflation-adjusted debt numbers.

Iffy, Piffy

Clonal introduced me to the notion of inflation-adjusted debt in comments here:

If I look at "real" cpi adj. household debt per civilian worker, I get an interesting chart... At the peak, the average worker was in debt for about 18 months of pre tax earnings or 24 months of after tax earnings...

Clonal's chart:

Graph #1: Real Household Debt per Civilian Worker

This was something more than five weeks ago. At the time, I didn't see validity in the idea of dividing inflation out of debt numbers. But the idea comes back to me now.


It is certainly reasonable to strip the price changes out of GDP and look at the inflation-adjusted numbers. It is not reasonable to apply the word "real" to the result. And it is not reasonable to use that result as the denominator of a ratio that you then compare to the trend of prices, as Milton Friedman has done. But it is reasonable to look at the numbers for inflation-adjusted GDP, because that is a good way to see whether the economy is growing, and by how much.

Likewise, it is reasonable to look at the inflation-adjusted "consumer spending" component of GDP, or the inflation-adjusted investment component, or the inflation-adjusted government spending component. It is okay to look at any of these, to see the growth of that component.

If it is reasonable to look at the inflation-adjusted Federal spending component of GDP, then it must be okay to look at the entire lump of inflation-adjusted Federal spending, or any part of it.

So then it must be reasonable to look at the Federal deficits after inflation adjustment. This would be a good way to determine whether and by how much those deficits have grown, after allowance for inflation.


Now, what if I take those deficits and add them together? Is that okay? Adding up inflation-adjusted deficits would give me inflation-adjusted debt. That's why I ask.

I remember seeing notes (in the Statistical Abstract, perhaps) about "chained" GDP values, that it is not valid to add the values together. (I had the impression that a problem arose from the "chaining" method, but the reason was not given.) Is there some trouble that arises from adding inflation-adjusted values? I have no answer at this time.


I am going to assume the addition is okay, as long as the purpose is to observe growth. So now, I will take a short cut. Rather than inflation-adjusting all the deficits and adding them up, I will just take the Gross Federal Debt and adjust that:

Graph #1: Inflation-Adjusted Gross Federal Debt

This graph shows that before about 1981 the growth of the Federal debt kept pace with inflation, and since that time the growth of the Federal debt has far exceeded inflation. The change is surprisingly distinct.

If the Federal debt only keeps up with inflation, then the debt is not excessive. By this measure, until 1981 the Federal debt was certainly not excessive.


I have an answer now, regarding the validity of inflation-adjusted debt graphs. It is essentially the same thing I said about the Stan graphs: I'm not dividing inflation out of accumulating debt. I'm comparing debt to the price level.

That is a reasonable thing to do, certainly, if you're interested in such things. Is debt increasing as fast as prices? Faster? Or slower? These are very good questions.


I also have an answer regarding Milton Friedman's error.

If I divide something by a price deflator, I'm making a legitimate comparison. But if I take the resulting number and use it in another calculation, I am pretending to have divided inflation out of the original something. This pretense is Friedman's error.

An "iffy" graph, but I can't let it go

The other day I was writing yesterday's "The Elusive Growth" and thinking about how people look at economic policy. A lot of people say stimulus spending does not help the economy recover. I think say that because we tried stimulus already. But I'm not just talking about the Obama stimulus.

Think big picture. Long term.

I remember LBJ on TV (for a State of the Union speech, maybe?), apologizing to the American people for having a budget over a billion dollars or something. I don't remember the number: a billion dollars, or a hundred million, or a hundred billion or some big round number like that. And I don't remember the context: Was it a budget number, or the deficit, or the debt, I don't remember. But I remember LBJ on TV talking about it. Lots and lots of government spending. And it was all stimulus.

I remember Reagan campaigning on the idea that government was too big. And then I remember the massive budget deficits of the Reagan years: Lots more government spending. And it was all stimulus.

I remember Ross Perot running for President in 1992, worrying about the government debt. But that was all stimulus spending, even if we didn't call it by name.

And the deficits of George W. Bush and Barack Obama. All stimulus.

Big picture, long term, we have been using government spending as a way to stimulate the economy for decades.

All the while they were increasing spending, they were apologizing for it or claiming they were trying to cut spending or whatever, and after a while people sort of stopped believing what government officials were saying.

And with all of that, what happened in the economic analysis is that we had several decades of what is today considered "excessive" government spending.

It was all stimulus. It did not work.

Or, hey, maybe it did. Maybe we would have been in a Depression long ago if not for all this government spending. But either way, the economy is not in good shape today and the economy has not been in good shape for years. So either way, all that government spending didn't fix the problem.

Graph #1: Gross Federal Debt

Gross Federal Debt. Pretty much flat after World War II, until some time around 1970. Then, a turn upward, and more up in the 1980s and more up since then. Plenty of government debt. Plenty of government spending. Plenty of government stimulus. Again, look at where it was in 1980, and where it is now. Plenty of stimulus. If stimulus was what we needed, we should be fully engorged by now.


How does all that debt look, when you look at the growth rate percentages?

Graph #2: Percent Change in Gross Federal Debt

Low, near zero after World War II and in the 1950s, and not much higher in the 1960s. Then up, up and up through the 1970s and into the '80s, to a peak in about 1984. Then the growth of the Federal debt slowed (from a remarkable 20% increase) to just about a dead stop late in the Clinton years. Then again, an up-trend.

Why the trend-line does not dip below zero around 1999-2000 when the Federal budget was balanced, I can't say. Probably has to do with creative accounting.


Now, the iffy part.

Graph #2 above has a pretty good hump in it there after 1966. That's the same time we had a pretty severe bout of inflation. So I got wondering how the debt would look if I took the inflation out of it.

I took the Gross Federal Debt (from Graph #1) and divided it by the GDP Deflator to remove the inflation. I'm not sure that is valid economics. I think debt already shrinks on account of inflation. So maybe I'm double-counting. Something like that.

But I did the calculation anyway. And I was impressed with the result. (Thus, the title of this post.)

Graph #3

The trend line is almost totally flat until about 1981. And after that is when it goes up. After 1981 -- when inflation started dropping -- is when the debt really goes up.

If this graph is worth anything (and having written tomorrow's post, I can say I think the graph is valid for some uses) what it shows is that we have engaged in a massive economic stimulus program since 1981.

Isn't that graph interesting?

The Elusive Growth

From Bloomberg Businessweek:

Debt: The Forgiveness Fix

For overburdened countries and consumers alike, erasing unpayable debt is a necessary step toward renewed growth

By Peter Coy, August 10, 2011

Debt forgiveness is a "necessary step". Hm. Let's see...

There is still a presumption that blood can be squeezed from a stone. That’s true in the U.S. housing market, where banks continue to insist that they will be able to collect full repayment of wacky mortgage loans that they never should have made in the first place. And it’s true in Europe, where creditor nations and banks are dragging their heels on writing down the sovereign debt of Greece, Ireland, and Portugal.

Blood from a stone, yeah. The economy is in "deleverage" mode. We are not going to get economic growth until debt is reduced to some indeterminate level. So if we want growth, the quickest and most direct way to get there is to reduce debt until the economy starts to grow. By the way, it is not government debt that must be reduced. It is private-sector debt -- the debt that everyone is trying to reduce.

Policy must help us reduce our debt. The sooner, the better.

In the absence of strong economic growth, debt burdens around the developed world will remain onerous for years to come—and yet while countries are single-mindedly focused on paying down their debts, it will remain harder for them to implement pro-growth policies.

In the absence of growth, debt burdens will remain onerous.

Yes. Strong economic growth is the necessity: the elusive necessity. But... "countries"? Does Peter Coy mean the governments, or the people? The public debt, or the private? Private, I hope.

While countries are single-mindedly focused on paying down their debts, it will remain harder for them to implement pro-growth policies.

Maybe. I guess. But before we move on, let's think about this. I mean, let's think about the "pro-growth policies". What do we have in mind? Do we want everybody to use more credit? Using more credit creates more debt, you know.

And before we implement any more pro-growth policies, maybe we should think about growth. I'm saying yeah, we need growth. But I'm asking why we don't get growth. Our pro-growth policies would work better if we understood why we don't get growth, the elusive growth.

The Big Stim

Many people say the way to get growth is to expand government spending, expand government deficits, and expand government debt. Why? Because 75 years ago, Keynes said it would work. And it did work, 75 years ago. Will it work today? No.

It will not work. How do I know? Because we tried it already. Nope, not Obama's $787 billion stimulus that is now sometimes called too small, and not Bush's $600 checks from the Summer of '08. That's not what I'm talking about.

We tried stimulus, big-time. We have been trying it since Reagan. Since before Reagan, even. All the while, we've been badmouthing government debt, sure. But all the while, we have been expanding government debt, too. To stimulate growth.

Graph #1

Graph #1 shows the gross Federal debt, in billions of dollars. After World War II, the trend-line is basically flat until, oh, 1970 or so. After that, the Federal debt just goes up and up. And up.

That big triangle there under the rising debt trend-line? All of that was stimulus.

More stimulus is not the answer.


Anyway, Peter Coy the Forgiveness guy continues:

Collectively, U.S. consumers have reduced debt by more than $1 trillion since 2008, but for some, the burden remains intolerable. Start close to home, with American residential real estate.

Okay. Well now we know for sure that he's talking about private-sector debt.

Ultimately, the best argument for debt relief is that it helps to free the productive potential of the economy. Over-indebtedness stultifies growth today, just as surely as debtors’ prisons did centuries ago. It’s time to break the locks.

Yes, exactly: Debt relief helps to free the productive potential of the economy. Over-indebtedness stultifies growth.

Peter Coy says forgiveness. I say print money and use it to pay off debt. We achieve the same objective. But -- once you accept the premise that the economy will not grow until we reduce debt -- I think you'll find my way easier and quicker.

"...not as I do."

I got around to reading Krugman this morning, and his Fancy Theorists of the World Unite got me going. (What Krugman's good at.)

But before I expressed my outrage I thought I ought to read the "remarkable editorial by Stephen Moore in the WSJ" that PK was talking about. All the while I'm reading it, I'm thinkin I read this before... Where did I read this before?

Noahpinion.

So, Krugman's take is "the all-out embrace of anti-intellectualism" in the WSJ post.

Noah's take is, I guess, "macroeconomics IS based on common sense" (from his post title). Noah's post didn't make sense to me the first time I read it, but it didn't seem to deserve a second go. (Unusual for Noah, for me.)

The other guy (David Glasner)'s take seems to be that macro is NOT based on common sense. (I couldn't force myself to read the whole article, but he talks of "the law of comparative advantage" and how it doesn't make sense but it's true.)

So I'm thinking Glasner and Noah completely disagree. But I still don't want to re-read either post. The WSJ guy, on the other hand, was simple and straightforward. Full of irrelevant and mis-applied arguments, but nice and simplistic.

I want to look at just one thing the WSJ guy -- Stephen Moore -- said in the article. I think you'll like it:

Macroeconomics simply took basic laws of economics we know to be true for the firm or family—i.e., that demand curves are downward sloping; that when you tax something, you get less of it; that debts have to be repaid—and turned them on their head as national policy.

Petty economics, micro, says debts have to be repaid. According to Stephen Moore, Dr. Stephen Moore of the Wall Street Journal.

That's good, right? Now if we could only hold the petty economists to that view!

The debt of the Federal government did not increase first. It only began increasing after the private economy tanked in the 1970s. And why did the private economy tank? Because of the excessive accumulation of private-sector debt.

Federal (red) and Non-Federal (blue) debt relative to prices

So, Dr. Moore is right: If the private sector had repaid its debt, none of these economic problems would have ever happened.

How come?

Graph #1

Graph #1 shows the Consumer Price Index (blue) and the GDP Deflator (red). You'd think they would be the same. Or similar. That's what I thought. But looking at this graph, I wouldn't call them similar.

Note: The two trend-lines are indexed to different base years. For the CPI, the base year is... the average of values for the years 1982 through 1984. Something like that. For the Deflator, the base year is 2005.

(So if you find 2005 on the horizontal axis, look straight up to the red line, then look to the left to a point on the blue line, and then look straight down from there to the years, you should be looking at 1982 or 1983 or 1984, in there somewhere.)

But FRED lets me pick my own index point, and it re-figures the numbers. So I picked 1980-01-01 for both lines and regenerated the graph:

Graph #2

Now you can see that the two trend-lines run very close together until the mid-1980s maybe. After that they veer apart. The question is: Why?

I suspect that there was a change in the way the numbers are figured, some time in the mid-1980s.


Wikipedia says:

In practice, the difference between the deflator and a price index like the Consumer price index (CPI) is often relatively small.

You'd think. But that's not what the graphs show. But Wikipedia has more to say:

On the other hand, with governments in developed countries increasingly utilizing price indexes for everything from fiscal and monetary planning to payments to social program recipients, the even small differences between inflation measures can shift budget revenues and expenses by millions or billions of dollars.

Yeah. That's why I said there was likely a change in the way the numbers are figured.

But I'm not finding anything on revisions to the Deflator calculation. However, consumer and producer price indexes saw revisions in the late 1970s and again in the late 1980s. Still, the CPI is higher than the Deflator. You might expect that revisions would have reduced CPI growth, bringing it closer to the Deflator. I can't say.

Heh. Maybe it is a result of supply-side economics: making consumer prices higher than prices in general? Can't say.

I'll just leave this hanging, for now.

///////UPDATE

Good eyes, Jazz. It helps to have more than two eyes looking.

Held steady from the mid-1950s to that 1978 revision. Then there was for a while a steady separation. I still don't know what it means. But I like to look at stuff like this.

116 pages in

From Guard! Guard! by Terry Pratchett, HARPERTORCH, 1989.

The Supreme Grand Master smiled in the depths of his robe. It was amazing, this mystic business. You tell them a lie, and then when you don't need it anymore you tell them another lie and tell them they're progressing along the road to wisdom. Then instead of laughing they follow you even more, hoping that at the heart of all the lies they'll find the truth. And bit by bit they accept the unacceptable. Amazing.

Stigler 'n' me

Again, recently I said this:

Keynes said, "It is astonishing what foolish things one can temporarily believe if one thinks too long alone." It is true, to be sure. But it is equally true that one may think foolish things because one thinks too much in the company of others, and the meme spreads like measles, spreads like the plague.

At Freakonomics, The Beekeeper Dilemma links to Steven N.S. Cheung's “The Fable of the Bees: An Economic Investigation,” a 1973 paper (PDF). In that paper, Cheung quotes George Stigler:

What I said... But not in 1973.


In 1973, I was still political.

In 1973, the Vice President resigned on account of criminal activity. The President was appointing a new Vice President, who would before long pardon the President, after the President resigned in the face of almost certain impeachment and removal from office.

In 1973, I was getting ready to write stuff like this:

Look at that: I left an "e" off "committee". Never noticed it before!

In 1973, you would buy sheets of rub-on lettering, position a sheet over your unfinished, typewritten remarks, and rub a pencil back-and-forth fast over a letter to transfer it onto your paper.

Those were the days.


And look at what I wrote:

No one has any money, but there is just as much money in circulation as there ever was. Where has it all gone?

Who knew? Not me. In 1973 it was still three or four years before I would finally get interested in economics. When I did get interested, one of the first things I found out is that there is *not* "just as much money in circulation as there ever was." There is not.

How much money is there in circulation? Depends how you figure it. If you figure it like an economist, you look at the quantity of money compared to output valued at constant prices. 1973 prices, say. And looking at it that way, there is a lot more money in circulation than there used to be, compared to what we buy in a year.

But if you figure it my way, you look at the quantity of money compared to output valued at the prices we actually had to pay to buy it. Current prices. And looking at it my way, there is a lot less money in circulation than there used to be.

I was wrong in 1973. Everyone else is wrong today. Gee, I don't believe I have the nerve to say that.

And look at what I wrote:

Economic crisis should be political crisis.

Ha! Today, I always say you can't solve economic problems with political solutions. And you can't. All you can do is change the political structure. That is a dangerous thing to do. And it still doesn't solve the economic problems.


The Freakonomics honeybee post reports:

There are now indications that colony collapse, the current plague of the industry, may result from too-frequent moves of hives and the resulting greater exposure to more varieties of pathogens.

Evolution, I think.

The economy has evolved to the point that it demands move-the-hive beekeeping. But move-the-hive beekeeping is incompatible with bee survival. So, survival of the fittest, most of the bees-that-move will die off. Maybe all of them. That's evolution.

But maybe there are limits on how much we should let the economy change our lives.