"Marty"

Source: mixfame.com

At Reddit a title grabs my attention: This is what a Harvard economics professor thinks should be top of the G7 agenda.

The Harvard professor is Martin Feldstein. He wrote the article. Everything he says is either irrelevant or wrong.

No, I cannot so easily dismiss the article. On the topic "the unsustainable increase in the major developed countries’ national debt", Feldstein writes:

Raising marginal tax rates is both politically unpopular and economically damaging. In the US, there is scope to raise revenue without increasing tax rates, by limiting so-called tax expenditures – the forms of spending that are built into the tax rules rather than appropriated annually by Congress.

For example, an American who buys an electric car receives a $7,000 tax reduction. Larger tax expenditures in the US include the deduction for mortgage interest and the exclusion from taxable income of employer-paid health-insurance premiums.

Although eliminating any of these major tax expenditures might be politically impossible, limiting the amount by which a taxpayer could reduce his or her tax liability by using these provisions could raise substantial revenue. So I do my best to persuade my Republican friends in Congress that reducing the revenue loss from tax expenditures is really a way to cut government spending even though the deficit reduction appears on the revenue side of the budget.

Wait a minute. Who is this guy? Wikerpedia says

Martin Stuart "Marty" Feldstein (born November 25, 1939) is an American economist. He is currently the George F. Baker Professor of Economics at Harvard University, and the president emeritus of the National Bureau of Economic Research (NBER). He served as President and Chief Executive Officer of the NBER from 1978 through 2008. From 1982 to 1984, Feldstein served as chairman of the Council of Economic Advisers and as chief economic advisor to President Ronald Reagan (where his deficit hawk views clashed with Reagan administration large military expenditure policies).

Deficit hawk and Reagan advisor. So when he says "my Republican friends" it is not sarcasm. But he wants to raise taxes and call it a spending cut. I love the irony.

Everything Feldstein says is either irrelevant, wrong, or humorous by irony.

//

According to the Wikipedia page, Martin Feldstein was so focused on the deficit in the Reagan years that he even opposed Reagan's spending on the military. That is serious tunnel vision. So, Feldstein can't see the big picture.

Now he wants to increase taxes to reduce the deficit. He wants it so bad he's willing to pretend a tax increase is a spending cut. That's really the only option left, given the corner that Feldstein's Republican friends have painted themselves into.

//

Most people have a opinion on the Federal debt. Many, like "Tunnel-Vision" Feldstein, say it's a huge problem -- it's the problem. Some say it's no problem at all. Then there are wafflers like Krugman, who says yeah it's a problem but we should fix it later.

Me, I have a different thought. I think private debt is the problem. I think private debt has us so bogged down and messed up that we can't see straight.

I say we cannot know whether the Federal debt is a problem. There is no way to evaluate it, because private debt has things in such a sorry state.

Everybody has an opinion except me. I say I don't know. So the people who say the Federal debt is a problem think I disagree with them, and the people who say it's not a problem think I disagree with them. But I have no opinion on the matter. I have reserved judgement. People tell me I'm wrong because I don't agree with them. I don't even know if I agree with them or not. I see the situation as murky. We have to clean up the private-debt mess first. Then we will see if public debt is a problem.

//

Let's go paragraph by paragraph. I'll summarize Feldstein. Check my work if you want.

Paragraph 1: The G7 should address the explosion of government borrowing.

2: "The problem is bad and getting worse almost everywhere."

3. It's even worse in Japan than the US.

4. It's also bad in the eurozone.

5. Feldstein suggests that the money the government borrows never goes back into the economy: the money is no longer "available to finance productivity-enhancing business investment", he says. Bullshit. If Daddy Warbucks wants to put his money into savings rather than business investment, that's what he is going to do. But if he lends his bucks to the Federal government, the government is sure to spend it back into the economy -- if it hasn't already.

6. A list of additional problems attributed to the Federal debt.

And most problematic of all:

7. "Reducing deficits is obviously a task for those responsible for tax revenue and public spending: governments and legislatures."

Stop it right there. "Obviously"?? Deficits are "obviously" the result of spending in excess of revenue? Oh! I know where that comes from: If A is less than B, then A minus B is less than zero... If revenue is less than spending, there is a deficit. People seem to think this rule proves that the problem is a spending problem -- or a revenue problem.

It proves nothing. Here are the rules:

1. If A is less than B, then A minus B is less than zero.

2. If A equals B, then A minus B equals zero.

3. If A is greater than B, then A minus B is greater than zero.

These three rules tell us something about arithmetic. They tell us nothing about the economy.

Why is A less than B? Because the Democrats increased spending, say some. Because the Republicans cut taxes, say others. Did anybody stop and look at anything other than taxes and spending?

A few. Edward Harrison is one:

I was on RT’s Capital Account last night talking to Lauren Lyster about the euro zone debt crisis. At the end of the show, we came up against the deficit problem and the question about how it should be solved. I get frustrated by this topic because the whole framing of the problem presented in the media is wrong because it gets cause and effect totally backwards. The question the media asks is "how can government cut the government deficit?" The real question is "why are deficits high to begin with and what should we do about it?"

The media gets cause and effect totally backwards Harrison says. Many people do. The question is not how to reduce the deficit -- not how to make A less than B. That's not the question. The question is: Why is A greater than B? Why is spending greater than revenue? That is the question.

If we don't know why it's happening, we'll never figure out how to stop it.

//

The short wrong answer is "the other guys spent too much". That's plausible. Or, the short wrong answer is "the other guys taxed too little" -- which is really not plausible.

What evidence is there of too much spending? The evidence is that taxes are too high. According to the plausible answer, then, the problem cannot be that taxes are too low.

If the answer is not that taxes are too low, then the answer must be that spending is too high. Because it's the only other answer.

That's the plausible view: short, plausible, circular, and wrong. The plausible view evidently satisfies a lot of people. It doesn't satisfy me.

The trouble is, we are given only two possibilities: the two that fit the "A is less than B" rule. We are asked to choose between two possibilities, as if no other possibilities exist. Edward Harrison thinks other possibilities exist. So do I.

Remember: the "A is less than B" rule tells us something about arithmetic, but nothing about the economy. As Ed Harrison said:

The real question is "why are deficits high to begin with and what should we do about it?"

"A is less than B" doesn't answer the question.

Another thread in the fabric of civilization

Three points in time, from A Brief History of Interest by Stephen Zarlenga:

*Charlemagne’s laws flatly forbade usury in 806 AD.
*The Magna Carta placed limits on usury in 1215 AD.
*Most States of the United States enforced usury limits until 1981.

It gets worse

Tejvan Pettinger:

How much does the EU cost the UK?

The ONS has produced a useful page... Working out an average for 2010-2014, this gives an annual net contribution of £7.1 billion according to European Commission figures.

How significant is EU spending?

The £7.1bn net contribution works out at 0.9% of public sector spending or £110 per person per year. It is 0.4% of GDP.

Other factors to consider in estimating cost of EU Membership

If the UK leaves the EU, how much would it have to pay for access to the Single Market? For example, Norway and Switzerland pay to have access to the Single Market.

 
What about "free markets"? All the rage, right?

Except, if you're not in the EU it's FU you gotta pay for access to markets.

Screw it, I'm going back to GNP

From an excruciatingly long article in The Atlantic from 1995:

Specifically, in 1991 the GNP was turned into the GDP—a quiet change that had very large implications.

Under the old measure, the gross national product, the earnings of a multinational firm were attributed to the country where the firm was owned—and where the profits would eventually return. Under the gross domestic product, however, the profits are attributed to the country where the factory or mine is located, even though they won't stay there. This accounting shift has turned many struggling nations into statistical boomtowns, while aiding the push for a global economy.

"... while aiding the push for a global economy."

Screw it, I'm going back to GNP. Or whatever, some more socially considerate measure, maybe.

Two moments in the broad sweep

First impressions are sometimes troublesome. A short history of GDP at Reddit caught my eye. I followed the link to Measuring an Economy: Where did GDP Come from? at Thirty is Infinity.

When I got to the site, there, at the top of the page, below the blog name Thirty is Infinity is the line A stat blog for the rest of us. My first impression was that they are dumbing things down really far "for the rest of us" -- from infinity, down to thirty. I like simplifying things, you know, but infinite is infinite.

When I read the article I was torn. They start in the 17th century with William Petty and Charles Davenant and the first attempts at income measurement. Next they move to the 1930s and Dr. Simon Kuznetsk. I've heard of Petty and Kuznets, but not of Davenant or Kuznetsk. That "k" on the end of Kuznets there only strengthens my first impression.

And something else bothers me about the article. Back when I first took an interest in economics, they talked about GNP. Not GDP. That was in the 1970s. In 1991 the government switched from the old GNP to the GDP. But in the Short History of GDP article they say

To see the earliest working of GDP, we need to go back to 17th century England

and, later

After Charles Davenent’s work on gross domestic product, this measurement would not be worked on or even be relevant for over 200 years.

I understand they're trying to simplify the story. But if you simplify too much, you're no longer telling the truth. Charles Davenant didn't work on GDP. He didn't even work on GNP. He tried to estimate the national income or some such thing. There probably wasn't even a name for it back then.

So I was a little hesitant to rely on the article. But I went to their "about" page. They have something on the site-name "Thirty is Infinity".

When working with normally distributed data but in small samples, you use what’s called the student t distribution. When your sample is over thirty, you can just use the normal distribution, which implies an infinite number of samples. So, thirty is infinity.

Suddenly, I like them. They're poking statistics people in the eye. So I guess I don't have to hold it against them, the simplification that says people were working on "GDP" in the 17th century. I can let it go, this time.

Good, because there is something I need from the article.


I need this:

Petty’s work was further developed by Charles Davenent, a Tory member of parliament and mercantilist economist. Continuing the trend of economic thought development from times of war, Davenent developed new methods for the sake of national income accounting. In the end, the government was able to use statistics (incredibly rudimentary statistics) to calculate output of the nation for the purpose of taxation calculation and budget planning in war efforts.

National income accounting was developed to facilitate taxation. Hm, that's probably why statistics are called "statistics". In early times, the meaning was restricted to information about states.

But anyway, in the 17th century the state was starting to think about taxing income. The idea developed further in the 18th century thanks to Adam Smith. Smith said the wealth of a nation was measured by what its people produced -- or by the income generated thereby:

... the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry ...

Smith's view provided an economic theory which supports taxation of income. Stop, stop, stop, I'm not arguing in favor of taxes. I'm describing two points in the cycle of civilization. Two moments in history.

I'm still describing the first of the two, in fact. So, how was Smith's view different from what came before? Good question! Before Smith was mercantilism. From FYO's Gallery, Adam Smith and Self Interest:

Mercantilists believed ... that the wealth of a nation was in the gold and silver (bullion) it possessed, and that trade surpluses were a primary means to accumulating bullion. Smith argued that the wealth of a nation was the real goods it produced, not the money it possessed.

Update 4 October 2018: You can find that quote now at justinleehanks.com. Also at Course Hero and at the Glencoe Online Learning Center

It is not clear to me whether the mercantilist focus was on gold and silver within the borders of the nation, or in the King's treasury specifically. EconLib indicates the latter:

During the mercantilist era it was often suggested, if not actually believed, that the principal benefit of foreign trade was the importation of gold and silver... Adam Smith refuted the idea that the wealth of a nation is measured by the size of the treasury in his famous treatise The Wealth of Nations ...

If that is correct, then before Smith, economics pretty much came down to restocking the King's coffers. If not, economics pretty much came down to restocking everybody's coffers -- or the coffers within the nation's borders, at least.

Either way, the mercantilists were focused on accumulating wealth, wealth in the form of gold and silver. Wealth as opposed to income. Adam Smith, by contrast, focused on income -- on income and the production that generates income.

A huge conceptual difference between the two. In the world of the dark ages, there was little spending. Agreements kept some people bound to the soil and others bound to their lords. But there was little spending. In a time of little spending, there was wealth but not income. There was much wealth, and little income.

In such a time, there would be little benefit in the taxation of income and much in the taxation of wealth. But in the time of William Petty and Charles Davenant and Adam Smith, the economy was waking up. Money was changing hands more often, and there were more hands willing and able to participate in monetary exchange. Income was growing. In such a time the revenue from the taxation of income would also grow. Thus the involvement of Petty and Davenant, and thus the thinking of Adam Smith.

This is the first of two points: By the 17th century income had grown to the point that taxing income produced enough revenue to make it worthwhile. Before the 17th century, it was more productive to get revenue by taxing wealth.

In our time it would again be productive to tax wealth. But this story is not about our time on the cycle of civilization. It is about Smith and Davenant and William Petty, and about a time before them.

Oh, by the way, by the 17th century income had grown to the point that taxing income produced enough revenue to make it worthwhile. How do you suppose that circumstance came about? Here's my guess: In the 13th century, Edward Longshanks -- remember him from the movie Braveheart? -- Longshanks started using money to pay the help.
[edit 12 Feb 2018: Looks like it was King Henry II, a hundred years before Longshanks, who started using money to pay the help. Or maybe Henry I, a tickle in my brain says. But it was some time during that period, that's the point.]

By the 13th century, then, the use of money had grown to the point that people were willing to accept it as payment, but not to the point that enough money was changing hands that taxing income was worth the trouble.

Let us now go a little further back in time to reach our second point. Let us go back to 1086, some years after the Norman Conquest. William the Conqueror, also known as William the Bastard, had the Domesday book assembled.

In Domesday: A Search for the Roots of England, Michael Wood quoted from the Anglo-Saxon Chronicle on the idea for the Domesday book and on William's motivation for assembling it:

Then he sent his men all over England, into every shire, and had them find out how many hundred hides there were in the shire, or what land or cattle the king himself had in the country, or what dues he ought to have each year from the shire.

William wanted to know what dues he ought to have each year -- what revenue he could expect to receive. The bastard!

The point, the second point actually, is that in the 11th century the King's business was to determine the wealth of the nation in order to predict his revenue from a tax on that wealth.

It would be six centuries before anybody thought about taxing income.

Less aimless: a closer look

In the previous post I showed household debt as a portion of total private non-financial debt. About half, but it varies, and it varied higher on the approach to crisis. Back in the normal range now, high, but high in the normal range and trending down.

I highlighted two peaks that look similar. They show similar rates of increase on the approach to peak. They show similar rates of decrease on the decline from peak -- and faster decline than increase for both.

In addition, they both peak near 0.54 on the vertical scale. And they both occur during times of superior economic performance. I'm not saying anything about cause or effect or significance; it's far too soon for that. I'm just pointing out similarities.

Graph #1: Household Debt relative to Total Private Non-Financial Debt
highlighting similarity between the 1960s and the 1990s

Looking at it a little more, the peak in 1980 shows the same pattern of rapid increase followed by more rapid decline. This peak is obviously lower than the other two, and people don't often describe the 1976-1982 period, say, as a time of superior economic performance. Still, the pattern is similar.

So I thought I'd take a look at all three peaks. I started out by bring the FRED data -- the "total credit to private non-financial sector" series is copyright BIS (but FRED is down again so I can't get their preferred copyright claim) -- bringing it into Excel and using Kurt Annen's Hodrick-Prescott code to smooth out the jiggies:

Graph #2: Ratio of Household Debt to Total Private Non-Financial
Debt (blue) and the Hodrick-Prescott Trend (red)
NOTE: This is Quarterly Data. The X-Axis Seems to Imply Monthly.

Next I changed the blue FRED data to gray so it doesn't stand out. I changed the red Hodrick-Prescott line to blue, to make it our starting point. And in red I added three subsets of the H-P data, one for each of the three peaks discussed above.

Those peaks occur at 1964Q2, 1979Q4, and 1996Q3. Each red subset shows the peak, 16 quarters before the peak, and 10 quarters after.

Graph #3: Household-to-TPNF Debt, and Three Similar Subsets

Then I pulled out the subsets to take a closer look. The blue and green lines on the next graph are the peaks in the 1960s (blue) and the 1990s (green). The two are remarkably close.

The red line is the 1979Q4 peak. It shows the same general shape as the blue and green. But the red is significantly lower, just as the October 1979 peak is lower on Graph #3.

Graph#4: The Subsets Highlighted on Graph #3
Blue=1964 peak, Red=1979 peak, Green=1996 peak
Again, this is Quarterly Data

On the X axis, Q is the peak quarter for each line. Q-16 is 16 quarters before peak. Q+10 is 10 quarters after peak.

I'll say it again: The blue and green lines, 30 years apart chronologically, are remarkably, remarkably close as a portion of total private non-financial debt. I'm not saying anything about cause or effect. But maybe there is something to be said for significance.

Aimlessly looking at economic data

Spend enough time aimlessly looking at economic data and eventually you'll find something interesting. I had total private non-financial debt on the screen, and suddenly wondered how it compares to consumer debt. Consumer debt is a subset of total private non-financial so it is worth a look.

Graph #1: Household Debt relative to Total Private Non-Financial Debt

First thing I notice: two big humps -- one in the 1990s and one in the 2000s.

Second thing: It is jiggy early, till around 1990, and smooth after that.

Third, it's about fifty-fifty. From 1950 to 2000, the curve is pretty well centered on the 0.50 line, and pretty well contained between 0.46 and 0.54. In other words, household debt runs between 45% and 55%  of private non-financial debt until just after the year 2000. Then household debt goes high, something I've heard other people say.

If the household portion of private non-financial debt is roughly half the total, that means the rest of private non-financial debt is also roughly half the total. Or again, was roughly half the total, until the year 2000. Something I didn't know.

Fourth, the peak in the mid-1960s and the peak in the mid-1990s both top out at about 54% (0.54 on the graph). That's quite a coincidence. In addition, the upslope in the 1960s is comparable to the upslope in the 1990s. The two downslopes are similar also:

Graph #2: Similarity in the 1960s and 1990s

What makes this interesting is that the 1960s and the 1990s are our two best decades of economic performance.


At the high point of the 1960s,

Apparently FRED is down.

Self-correcting? What do you mean by that?

Syll quotes Krugman

... we do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility

In response Syll offers "what Keynes himself wrote", here shortened:

On the one side were those who believed that the existing economic system is in the long run self-adjusting ...

Those on the other side of the gulf, however, rejected the idea that the existing economic system is, in any significant sense, self-adjusting.

The strength of the self-adjusting school ... has vast prestige and a more far-reaching influence than is obvious. For it lies behind the education and the habitual modes of thought, not only of economists but of bankers and business men and civil servants and politicians of all parties …

Thus, if the heretics on the other side of the gulf are to demolish the forces of nineteenth-century orthodoxy … they must attack them in their citadel … Now I range myself with the heretics.

 

Myself, I like to say that if we want to fix the economy we have to give it what it wants. People don't seem to like that for some reason. Personifying the economy maybe? Pffft.

The economy is a system. Push on it here, and it moves over there. Economics is the attempt to explain why that happens. I prefer to say: economics is the attempt to understand why it happens.


I say things like: Jobs? You think 'jobs' is the problem?? Okay. But it's our problem. A problem for people. It's not a problem for the economy. If you want jobs from the economy, you have to give the economy what it wants.

I say things like: The economy does not care about inflation or unemployment. Those are not problems for the economy. They are problems for people. For the economy, they are simply ways to correct imbalances.

I say things like: We should use policy to keep the ratio of private debt to public debt at a low level, a level where the economy constantly wants to grow vigorously.

So yes, I think the economy is self-correcting. But not in the way most people think. I think the economy self-corrects to rectify imbalances that the economy doesn't like. For example, if you put too much money in the economy, the economy doesn't like it. Prices go up until there isn't too much money any more, and then prices stop going up.


Some people say the economy is self-correcting. They mean unemployment will go down all by itself without government intervention.

Some people say the economy is not self-correcting. They mean unemployment won't go down by itself, and government intervention is needed.

Both sides use the phrase "self-correcting" to refer to things we want from the economy. To me, any discussion about whether the economy is self-correcting can only refer to problems that the economy recognizes as problems, and whether the economy can rectify those kinds of problems.

The answer is: The economy will attempt to rectify those problems. But it may be hindered by policies imposed by people who design policies to fix things that people see as problems, rather than fixing things that are problems for the economy.

An economist praying to the Natural Rate of Unemployment (?)

Happened to take a look at the so-called Natural Rate of Unemployment at FRED:

Graph #1

It's all steppy! I don't remember that. Found an old version at Wikia: