
econcrit
"The commonwealth was not yet lost in Tiberius's days, but it was already doomed and Rome knew it. The fundamental trouble could not be cured. In Italy, labor could not support life..." - Vladimir Simkhovitch, "Rome's Fall Reconsidered"
Tuesday, March 25, 2025
Sunday, March 23, 2025
An exercise
I just want to see a number. I want to see where the federal debt would be, if we make allowance for federal responses to the Savings and Loan Crisis, the Great Recession, and the pandemic.
The Savings and Loan Crisis (2.2% of 1989 GDP)
Wikipedia says
The savings and loan crisis ... was the failure of approximately a third of the savings and loan associations (S&Ls or thrifts) in the United States between 1986 and 1995... The total cost [to] taxpayers by the end of 1999 was $123.8 billion...
And the FDIC Banking Review Vol 13, No. 2 says
It has been more than a decade since enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), which began the taxpayers’ involvement in the cleanup of the savings and loan industry.
The Great Recession (5.7% of 2009 GDP)
Forbes of 17 Feb 2020 says
Exactly 11 years ago today, February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 or the Recovery Act into law. The $831 billion in spending kicked off the longest period of economic growth and job creation in American history.
Heritage Foundation of 24 March 2020 says
In the wake of the housing meltdown and financial crisis, Congress passed the largest stimulus-spending package in American history... Vice President Joe Biden barnstormed around the country in 2010 promising a “Summer of Recovery” that never came.
He "barnstormed around"??
And of course Heritage, a nonpartisan, nonprofit charity, says
Keynesian stimulus almost always fails, and often makes the downturn worse and the eventual recovery weaker.without any recognition of the financial roots of the 2009 recession or that "financial recessions are particularly problematic" -- as Google's AI Overview says:
Yes, financial recessions, stemming from issues in the financial markets, tend to be more severe and costly than those caused by other factors, often leading to significant economic downturns and lasting damage.
The Forbes article calls it the longest recovery. Heritage calls it the slowest. I love the irony.
The COVID-19 Pandemic (21.8% of 2020 GDP)
Investopedia says
According to official U.S. government tallies as of July 31, 2024, the U.S. had spent a total of $4.65 trillion on a variety of programs related to COVID-19 relief.
Adjusting the Federal Debt
I start with the FRED's FYGFD, an annual measure of the federal debt. To adjust for the Savings and Loan crisis I subtract $123.8 billion from the FYGFD number for 1989. This makes the federal debt falsely low for most of a decade. But it self-corrects by the end of 1999 because all that money was borrowed and spent by then. From 1999 to 2009, adjusted debt runs on the low side of the FRED data.
From the federal debt for 2009 I subtract the $831 Billion of the 2009 response to the Great Recession. Again, I let the passing years correct my lazy assumption that the whole 831 was spend in one year. After a decade, I figure, that money was all spent, and my number is a good estimate again.
And from the federal debt for 2020 I subtract the $4.65 Trillion COVID response. As that money was all spent by mid-2024, I figure my estimate is right by that date.
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Without those three responses to economic crises, the federal debt would now be about equal to GDP, some 20 percent of GDP less than it actually is. For what that's worth. |
Yeah, I know: The graph ends in 2023. I know. But this is only an estimate, and now I have seen it.
I guess the government didn't "have to" rescue the economy those three times in the past 36 years. But if we did nothing, we might still today be in the middle of a Depression caused by the Savings and Loan mess.
That's okay. Trump is hard at work creating the next one.
Saturday, March 22, 2025
He was right
"The authoritarian state systems of today seem to solve the problem of unemployment at the expense of efficiency and of freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated and in my opinion, inevitably associated with present-day capitalistic individualism."
Thursday, March 20, 2025
A Certain Uncertainty
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FRED Source Graph: https://fred.stlouisfed.org/graph/?g=1ERg3 |
Uncertainty fell rapidly in the first four months of the Biden presidency. Uncertainty rose sharply in the month of Trump's election, then paused for two months, and rose sharply again in February of this year. Between the rapid Biden decline and the sharp Trump increase in policy uncertainty, we see Biden's four years.
During those four years, uncertainty ran low from April to October 2021. Then it rose until October 2022. Then it dropped off until August 2023. Then it ran lower, until the election.
The second graph shows the Biden years:
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FRED Source Graph: https://fred.stlouisfed.org/graph/?g=1EW8a |
The blue line shows policy uncertainty during the Biden years. The red line shows "the Biden inflation". The paths of the two lines show interesting similarity, don't you think?
Tuesday, March 18, 2025
Sunday, March 16, 2025
To repeat something that should be obvious...
I watched John Oliver the other day, an old one, S11E15, June 16 2024, "Trump's Second Term". He ran a clip from a promotional video for Project 2025, a conservative manifesto I suppose you'd call it. The line in the video that caught my ear was this:
"... to end Washington's bureaucracy and restore American prosperity..."
As if ending the bureaucracy will restore prosperity. These people are totally out of ideas.
It was the word "prosperity" that got my attention. If you're talking prosperity, you're talking about economic performance. You're talking about the economy.
These Project 25 guys, they think they know how
to fix the economy. But it sounds like they are still thinking what
Reagan thought:
After 44 years, these people have learned nothing. Reagan was wrong about why economic growth is slow. Growth is slow because we have too much debt in the private sector.
Growth is slow because we have too much debt in the private sector.
Hey, we don't want to grow the government, right? We want the private sector to grow. That's where the money is, and the jobs and all. So the Project 25 guys want to "end Washington's bureaucracy" and "reduce the growth of government". Other people say government should spend more, to help the private sector grow. The two sides couldn't be more at odds.
As those other people often point out, Reagan grew the federal debt. But if you look at the debt of all US sectors, or of domestic non-financial sectors, or of the private non-financial sector, or of households alone, you'll notice that debt growth slowed in the mid-1980s (because of the Savings & Loan Crisis) and slowed again around 2008 (due to the financial crisis).
And if you look closely at household debt,
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Graph #1: US Household Debt, 1946-1980 |
- you will see it slowing from 1946 to 1955 (the line curves downward),
- running at a constant rate from 1955 to 1965 (the line runs straight), and
- slowing down from 1965 to 1970 (the line curves down relative to 1955-65).
So there was also a slowdown of debt growth in the latter 1960s, at least for household debt.
It is all this slowing of debt growth that has slowed our economy. Slower growth of debt in the private sector means a slower increase in borrowing and spending -- and a slower increase in spending is closely tied to slower growth of the economy.
Also, the lines on the FRED graphs only go up, which means our debt is always increasing. Maybe increasing faster sometimes and slower at other times, but always increasing. So debt service is also always increasing, at least in the big picture. Increases in debt service take money away from current spending, and therefore contribute to making our economy grow more slowly.
I attribute the slow growth of our economy entirely to our accumulated debt. Most people ignore that line of thought. We can compromise, if you like, and say accumulated debt and your concerns have combined to slow our economy. I don't object to trying your solutions. I object to not reducing debt in the private sector.
In the latter 1960s debt growth slowed, and in the mid-80s, and again after 2008. Three warnings, the economy has given us. Three warning we have ignored. We're not too bright, are we.
Speaking of which, the Project 25 guys seem to think that cutting back on government bureaucracy (and on government spending and government debt, I presume) will lead us to "prosperity". Their word: prosperity.
It's funny, you know: There actually is a connection between government debt and prosperity. But that connection does not require us to reduce government debt. Nor does it require us to increase government debt. It only requires that private debt be low enough (relative to government debt) that private debt can grow fast enough that the economy grows at the rate we want.
It requires that private debt be low enough, relative to government debt, that private debt can grow fast enough to make us prosperous.
When I Google times of US prosperity, three periods come up: the "Roaring '20s", the 1947-1973 "golden age", and the "new economy" of the mid-to-latter 1990s. All three of those periods of prosperity were times when private debt was increasing relative to public debt. As you can see:
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The Tides of Prosperity |
The other times, when private debt gets too high, and when it falls relative to public debt, are not times of prosperity. This is something people will never see as long as they focus only on federal debt.
It's not that we have to increase the federal debt or reduce it. It's not that we have to increase or reduce private debt. What we have to do is coordinate the two measures of debt.
When private debt gets too high, relative to public debt, prosperity cannot continue. The problem is that excessive financial cost hinders growth. I don't know how economists missed that detail, but it seems that they have.
When private debt gets low enough, prosperity
is able to resume. After it resumes, prosperity appears to become self-supporting.
But private debt always tends to grow faster than the economy. And federal debt tends to grow less in times of prosperity. So, in prosperous times, the private-to-public debt ratio
rises, and rises until prosperity can no longer be sustained.
When private-sector financial cost becomes excessive, prosperity fades. Remember 2008?
One thing that does not show up on the Prosperity graph is the increase in debt: Debt only increases. The private-to-public debt ratio sometimes rises and sometimes falls, but debt only increases -- except in times of crisis, of course. But then, times of crisis are not times of prosperity.
Suppose that we want prosperity, but we also want the federal debt to be less than it is. Okay then, we will have to do something to reduce private-sector debt. Also, private-sector debt has to decrease faster than federal debt, to bring the ratio down until prosperity resumes. That is the trick.
We have to bring private-sector debt down. And that is difficult to do. But it is easier to reduce private-sector debt than it is to reduce the federal debt. In the 44 years since Reagan -- and for 20 years before that -- we have been unable to bring the federal debt down. Yes, Clinton almost did it in the latter 1990s. But those were years of prosperity and, unfortunately, the prosperity didn't last.
To reduce the federal debt, we must be prosperous. And to be prosperous we must reduce debt in the private sector. That is difficult to do because economic policy promotes the use of credit. Because of policy, the private-sector use of credit grows fast, unnaturally fast. And the use of credit creates debt, so our debt also grows unnaturally fast. Thus, we have to come up with policies that encourage and accelerate the repayment of private-sector debt.
We have policies that encourage credit use and the growth of debt. To offset the effect of those policies, we need policies that encourage repayment of debt. Such policies will lead to prosperity and, if we do it right, to long-term prosperity.
As a bonus, accelerated repayment of debt would also help to fight inflation.
You heard it here first.
Thursday, March 13, 2025
And now a few words from Milton Friedman
The Trump agenda, cut-cut-cutting the federal government, it's like we are married to it: for richer or for poorer, in sickness and in health, for better or for worse.
Milton Friedman wanted to say a few words:
Just as higher government spending can contribute to excessive monetary growth, so lower government spending can contribute to reduced monetary growth.
And also this:
There is strong evidence that a monetary crisis involving a substantial decline in the quantity of money is a necessary and sufficient condition for a major depression.
In recent posts we have seen the quantity of money running low, problematically low relative to GDP-at-actual-prices, and problematically low relative to accumulated non-federal debt. And not long ago we saw graphs showing
- the low quantity of "base" money as a recurring problem;
- federal debt running below-trend, contributing to the financial crisis and 2009 recession;
- and the effects of changes in the M1-to-GDP ratio.
Milton Friedman wants you to be cautious and careful, Donald. So do I.
Ah, and something I didn't notice until just now:
- When non-federal debt went below-trend in the 1990s, the economy improved.
- When the federal debt went below-trend, 2004-2008, the economy tanked.
Coincidence? Sure, Donald. Keep thinking that, Mister I-don't-want-to-be-Herbert-Hoover.
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I'm not a fan of "diagrams" in economics, but sometimes... This is a screen capture of slide 36 from a SlideShare presentatio...
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Mark Thoma links to the Kansas City Fed's Nominal Wage Rigidities and the Future Path of Wage Growth by José Mustre-del-Río and Emily ...
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JW Mason : "... in retrospect it is clear that we should have been talking about big new public spending programs to boost demand....
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It is surely true that the price level cannot rise without a corresponding increase in the quantity of money or velocity or use of credit. ...
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Went to Harbor Freight the other day. When I left, there was so much traffic I had to fight my way out of the parking lot -- at one p.m. on ...