Wrong Focus (3): Hot Buttons

Hot button issues? Here are a few phrases from Noah Smith (I use his last name because I'm scolding him here)'s recent Now Ron Paul wants to debase the currency?

1. Now Ron Paul wants to debase the currency?
2. Oh dear sweet Jehovah.
3. Republicans ... recommend a U.S. sovereign default
4. hyperinflation
5. a huge step toward hyperinflation.

And I'm only seven lines into the text of his post.

Yes, it makes the post interesting.

No, it doesn't make it intelligent and worth reading. It doesn't solve the economic problem. It doesn't analyze the economic problem. It doesn't do anything but get you all agitated, and muddify the meaning of the word "seigniorage".

So, I simplify things.

"Seigniorage" is the service charge a government expects to be paid for printing or coining money.

We don't have to use the word for everything. It is not the same as inflation. It is not the same as a tax. It is not the same as paying off debt. It is not the same as anything else, really.

I have a big fat dictionary from 1979, Webster's New Twentieth Century Dictionary, Unabridged. It has this:

I have an older one that I grew up with, same name (plus "of the English Language"), from 1950. It has this:

Wikipedia has this:

Seigniorage is the service charge a government expects to be paid for printing or coining money.

Noah writes:

Ron Paul wants to have the Fed destroy its holdings of U.S. Treasury bonds. This would be retroactive seigniorage; it would mean that the money that the Fed printed in the past to buy those Treasury bonds was actually printed to pay off the U.S.'s sovereign debt.

Printing money to pay off debt is not seigniorage.

Shredding financial assets is not seigniorage.

In the days of Charlemagne I suppose, and Alfred the Great, and Robin Hood, and during the California gold rush the mint would take a percentage of the gold or silver you brought in to be minted. That was seigniorage.

Today, the Federal Reserve spends maybe five percent of its income on operations. The rest of the Fed's income gets turned over to the Treasury.

That five percent is seigniorage.

In the U.S. economy today, that and nothing else is seigniorage. To say otherwise clouds issues that require all the clarity we can muster.

Wrong Focus (2)

If big government is bad for growth, why does China grow so fast?


Here I review Noah's review of Tyler Cowen's review of a new paper written by two guys who don't even get their names in my post. Noah quotes the paper's big news:

An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth rate. We discuss efforts to make sense of this correlation...

So the thing that here absorbs the focus of Noah, and Tyler, and the two nameless guys who wrote the paper, and me, and you, is the size of government.

It's not even economics, really.

Noah reiterates the part of that quote that I didn't reproduce here, and then offers three possible causal interpretations of the correlation the two guys say they found.

That ain't economics, either.

No, I take it back. It is how economists do economics: They like to see all sides of every petty little issue, and tie up discussions in suppositional knots.

No, I was right the first time. That ain't economics. Noah says

Which interpretation do you believe? I predict that it will depend on your politics.

See? Politics. Not economics. Noah discusses which of his three interpretations socialists would like, and which one librarians would like, or libertarians maybe, and which one Tyler Cowen likes, and other scholars, and which interpretation Noah himself likes.

Of course, as an economist, he does not even express his own view with confidence:

This would tend to fit with my own priors, and my own politics.

Would tend to fit?

Finally, Noah asks, "So why did Tyler Cowen post the link?"

But Tyler didn't leave a comment on Noah's blog to answer the question. So, who can say?


Well, this post is longer than I thought it was gonna be, and there's still no economics in it at all. But maybe I can squeeze some in.

The paper is by Andreas Bergh and Magnus Henrekson, who will no doubt sleep better tonight, knowing their names finally showed up in my post...

From the Abstract:

The literature on the relationship between the size of government and economic growth is full of seemingly contradictory findings. This conflict is largely explained by variations in definitions and the countries studied. An alternative approach - of limiting the focus to studies of the relationship in rich countries, measuring government size as total taxes or total expenditure relative to GDP...

So. These two guys are "measuring government size as total taxes or total expenditure relative to GDP."

Relative to GDP.

And they reach the conclusion that an increase in government size is associated with a lower GDP growth rate.

The denominator problem strikes again.

They measure the growth rate by measuring changes in GDP. And they take the size of government relative to GDP. They have things are all tangled up.

If there is some ignored or overlooked factor that happens to cause a slowdown in GDP growth, and the two guys compare the growth of government to a slowly-growing GDP, they are quite likely to discover that government appears to be increasing in size.

Meanwhile, the real problem (excessive private debt) remains overlooked and ignored.

Wrong Focus

Krugman:

Politically, stimulus turns out to be hard to do. But commentators who spread fatalism are part of the problem.

Yeah. Yeah, that's it. The problem is commentators. Not economists. That's it.

Krugman:

Changing the economy’s long-run growth rate is hard. We’ve had almost 25 years of “new growth theory” research, with every possible regression run, looking for the keys to faster growth; my sense is that we’ve basically come up dry.

It's okay when smart economists have nothing at all to offer? That's okay?? (If you are really looking for "the keys to faster growth," you might have a look at the previous post.)

Noah:

Regarding Krugman's argument…just because "New Growth Theory" hasn't found any definitive answers doesn't mean that there aren't any. After all, growth theory is working with terrible data. Countries are not selections from a random sample, and the time series of post-WW2 growth is not very long.

And this one. Cute kid. The first sentence there, okay. We've not found the answer, but that doesn't mean there isn't one. Solid, I like it.

But the next sentence after that had better tell me what you think the answer is. Or what you think the answer might be. Or why somebody else's proposed answer is right, or why their answer is wrong.

Does Noah do that?

No. Instead, Noah expounds on the topic of why there might be an answer even though we have not found it yet.

Really, Noah? It's no wonder you don't have the answer. You're not even looking.

Like this?

Non-Federal debt relative to Federal debt, again:

This time I subtract only the Federal debt that is included in the Total debt...
And then divide by the larger Federal debt number that the debt-clocks show.

No matter how I figure it, the pattern is always the same: Up-trends are associated with growth, and peaks are associated with recessions. High levels hinder growth, and low levels encourage growth. No matter how I figure it.

Wrong again!

Time goes by, and mistakes get buried. And sometimes, foundations get built on top of them, and that's no good.

Jim tells me I have an error. I brushed it off the first time. I'm no economist and I do not claim to have any of the skills that economists have, such as the ability to pick the most appropriate numbers to use for any particular graph. For my graphs I'm concerned most with trends and tendencies, not with particular values.

Still, if there is a chance to improve what I do, I ought to jump on it.


This is the graph that Jim objects to:

Graph #1: The Non-Federal Relative, 1949-2010

This is what he offers as the correct version:

Graph #2: Jim's Non-Federal Relative

The maximum Y-axis value on my graph is half the maximum on Jim's. Quite a difference.


Jim's graph uses "Debt Outstanding Domestic Nonfinancial Sectors - Federal Government Sector" (FGSDODNS) from FRED. Mine uses "Gross Federal Debt" (FYGFD).

On mine, the most recent value for Federal debt is 13528.8 for 2010, which is on-track with the $14.3 trillion that people talk about today.

On Jim's, the most recent value for Federal debt is 9569.59 as of the first quarter of 2011. Well below the 14.3 number.

The thing is, I fear Jim is right. I am using numbers from two incompatible compilations in order to use the $14.3 number. What I need, really, is a different version of total debt, one that is compatible with the $14.3T Federal debt number. Gee, I thought total debt meant "total" debt. Silly me.

But for now, this is my Non-Federal Relative and Jim's, on the same graph.

Graph #3: Jim's (blue) & mine (red)

The trends and tendencies are comparable. But Jim's is definitely higher, especially during (and after) the "macroeconomic miracle" years of the late 1990s.

This is all somehow eerily familiar.


For ha-ha's I took Graph #3 and put each line on a separate vertical axis. I thought it might help to "make the two series comparable," to use Milton Friedman's phrase.

Graph #4: Looking for Similarity

It did.


Oh look! I found a match:

Jim says, "As I understand, only the portion of the federal debt that is owed to the public is included in the FRED Total Credit Market Debt."

In other words, the portion of the Federal debt held "privately" by the Federal government itself, is not included in TCMDO.

Back in April, when Gene Hayward caught a discrepancy in my debt numbers, he wrote,"I teach my students that the total US Debt (14.3T) is comprised of a Public portion and a Private portion. In your chart am assuming you are only including the public portion with the private subtracted in creating the 'public debt' line."

So both Gene and Jim recognize that the big number ($14.3T) includes debt held by the public, plus debt held internally by the government. And that the smaller number ($9.6T or whatever) includes only the debt held by the public.

Okay. It's startin' to sink in.

September 15, 2008

Source: Wikipedia

Source: Yahoo! Finance

The week before Lehman filed for bankruptcy, the Volatility Index was still within the range it had been in for a year. Beginning the week of the filing, the VIX skyrocketed. It did not return to the previous level for a year. And we can still feel the repercussions.

That was one investment company. Wanna try it with the Federal government?

Look: In the economy, things collapse in an instant. But it takes a long time to rebuild. We don't want to take unnecessary risks. We don't want to risk damaging the thing we all rely on for a living.

Anyway, our economic problems are not caused by the Federal debt. Non-Federal debt is the cause. Excessive private-sector debt is the cause of our economic troubles.

You will never find me recommending "more government spending". I don't think we need more government spending. I think we need to fix the imbalance between money and debt, or between private-sector and public-sector debt (depending on how you phrase it).

Our economic problems are not caused by the Federal debt and deficits. Balancing the Federal budget will therefore not solve the problems. The solution lies elsewhere.

So the whole "debt ceiling" argument is a dangerous waste of time.

I don't know if I can be any more clear about it.

Suppose we cut enough to balance the Federal budget and the economy starts growing like crazy. Then what? What goes up must come down.

If we cut enough to balance the budget, the Federal debt stops getting bigger. It starts to get smaller.

And if the economy is growing, and we use credit for growth, then the Non-Federal debt grows fast.

So then we have private debt growing fast, and public debt shrinking. This is what everyone seems to want.

But with rapidly increasing private debt and a falling public debt, the Non-Federal Relative must rise again:

And then, it must fall again. Like the last time. Only, worse than last time.

You remember the last time, right?


Balancing the Federal budget does not solve the problem.

The Non-Federal Relative

Hey, Cuz!