Saturday, March 31, 2018

Generations, defined

The Commissioner's Corner blog (at BLS) says:
A Pew Research Center report defines five generations for people born between these dates:
  • Millennial Generation: 1981 or later
  • Generation X: 1965 to 1980
  • Baby Boomers: 1946 to 1964
  • Silent Generation: 1928 to 1945
  • Greatest Generation: 1927 or earlier

Friday, March 30, 2018

"At night, all cats are black."

The Ruth Rendell mysteries have made themselves available on Amazon Prime Video. We started with the first one, the wife and I. Master of the Moor, in three parts, 50 minutes each. By the time we got to the end of part one, the wife said "Well I'll stick with it to see how it turns out, but I'm not watching any more of them." Me, too. We finished the three-parter and that was enough of that.

But somewhere in Part Three there was one good line: "At night, all cats are black." To me it meant: When you can't see what makes them different, they all look the same.

I thought that was a useful phrase. I often find myself thinking this is the same as that in economics. Then I read a little more, and it's like somebody turned on the light: Oh, I see, they are different!

But I wasn't really sure if that was how the phrase was used in the Ruth Rendell story. So I googled it. It came back the same phrase, but with gray in place of black. And apparently it was Ben Franklin's "endorsement of older women to a horny young man", according to the Huffington Post. Because older women don't look bad in the dark? So, that's not what I thought it meant.

I bit the bullet and sat down to watch Part Three again. Got it. It starts around 42:44 into the episode.

Cop#1 (comparing photos of three murder victims): There's something about this last one. It doesn't fit.

Cop #2: What?

Cop#1: I dunno. Can't put my finger on it. But something.

Cop#2: They're identical.

Cop#1 (turns to look at cop#2): At night, all cats are black.

What I said. When you can't see what makes them different, they all look the same.

Thursday, March 29, 2018


Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid-building as well as the search for the precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. The Middle Ages built cathedrals and sang dirges. Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York. Thus we are so sensible, have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the “financial” burdens of posterity by building them houses to live in, that we have no such easy escape from the sufferings of unemployment. We have to accept them as an inevitable result of applying to the conduct of the State the maxims which are best calculated to “enrich” an individual by enabling him to pile up claims to enjoyment which he does not intend to exercise at any definite time.
Everybody says the Keynesian thing is to increase government spending and government deficits when the economy needs a boost. I don't think that's it. I think Keynes was saying the slump is created by policies that encourage us to pile up claims to enjoyment which we do not intend to exercise at any definite time.

Perhaps you want to shoot me down by saying of course Keynes wanted to increase government spending and deficits.

Of course. But that's not the problem. Keynes was telling us, in very simple terms, what the problem is.

If Keynes really seemed to understand the economy -- if his solution was right -- it was because he understood the problem.

Wednesday, March 28, 2018


... there cannot be a buyer without a seller or a seller without a buyer. Though an individual whose transactions are small in relation to the market can safely neglect the fact that demand is not a one-sided transaction, it makes nonsense to neglect it when we come to aggregate demand. This is the vital difference between the theory of the economic behaviour of the aggregate and the theory of the behaviour of the individual unit, in which we assume that changes in the individual’s own demand do not affect his income.
Reminds me of Milton Friedman's strawberries.

Tuesday, March 27, 2018

"Interest on Federal Reserve Notes"

This graph comes from Ed Harrison, who attributes it to Mondovisione:

Graph #1: Remittances since 2008

Why, I wonder, do I never see a "Remittances" graph showing more than ten years of data? Is there no dataset that provides all the years going back to whenever? Do people always have to find the data one year at a time, buried in some news report?

Then I googled federal reserve remittances historical data, which turned up this note:
The Federal Reserve's Annual Report presents the cumulative payments to the Treasury as "Earnings remittances to the Treasury." Statistical table 10 in that report provides the remittances by Federal Reserve Bank, and table 11 presents historical data on the remittances. Mar 13, 2017

Fed's balance sheet - Board of Governors of the Federal Reserve ...
All you have to do is ask the right question :)

Among the tables of the Fed's 2016 Annual Report is Table 11, which copies easily into Excel. Remittances to Treasury are listed under "Interest on Federal Reserve Notes". (I don't remember how I know that.) The table goes back to "1914-15" but the remittances are "n/a" until 1947.

And just like that, I have "remittances" data going back to 1947.

This all comes up because I was wondering how much the interest rate is for the "Interest on Federal Reserve Notes".

As a measure of Federal Reserve Notes I'm using Currency in Circulation at annual frequency:

Graph #2: Interest Rate on Federal Reserve Notes compared to the Federal Funds Rate
I'm surprised to see that remittances pretty much follow the path of the policy rate. Looks like less volatility in remittances, more in the Fed Funds rate. Also, the two don't run together since the crisis.

I thought the zero remittances for 1997 might be an error. But there is a big number under "statutory transfers" for that year. I'm thinkin the whole pile of cash that would have been remitted to Treasury was instead redirected elsewhere as a statutory transfer.

Monday, March 26, 2018

Other ways to approximate Total PNF Debt

Total credit to the "Private Nonfinancial Sector" is shown in blue on the graph. It is mostly hidden by the red and black lines.

Graph #1: Total Private NonFinancial Debt (blue)
Domestic NonFinancial less Federal, State, and Local Government (red)
Household Debt plus NonFinancial Business Debt (black)
If I start with total credit to "Domestic Nonfinancial Sectors" and subtract the credit market debt of Federal, State, and Local governments, I get something very close to "Total Credit to Private Non-financial sector": the red line.

If instead I start with Household debt and add to it the debt of Nonfinancial Corporate and Nonfinancial Noncorporate Business, I end up again with something very close to "Total Credit to Private Non-financial sector": the black line.

Easy enough to see that the lines on the graph all move together. Harder to really see what lines are on the graph. You can click the graph to see it bigger. Better, click the "Graph #1" label to see the graph at FRED.

Sunday, March 25, 2018

Why I like to look back before 1947

GVA Finance since 1947, up and up, with only brief confusion at the crisis:

Graph #1: GVA Finance as a Percent of GDP since 1947 (Quarterly Data)

It gets more interesting if we go farther back in time:

Graph #2: GVA Finance as a Percent of GDP since 1929 (Annual Data)
Down and down from 1929 to 1944. Then up and up.

Saturday, March 24, 2018

Net interest

Net weight. Net income. Net worth. We think "net" makes things more accurate. Sometimes, it makes things less accurate.

I don't have a lot of money saved up. But I have a mortgage. And credit cards. So the interest I pay on my debt is more than the interest I earn on my savings. These days we call it "financial wealth". The interest I pay on my debt is more than the interest I earn on my financial wealth. It sounds pompous to me, calling it "wealth". I don't have enough to call it wealth.

Anyway, I pay more in interest than I earn. If I earn 10 and pay 100, my "net interest" is negative 90, a cost of 90.

But you know what? I don't take money out of savings to make my interest payments. Most people don't, I suspect. The money I do have in savings, I'm dedicated to keeping it. When I pay my bills and my debts and the interest I owe, the money comes out of my paycheck. Not out of my savings. So I'm not sure it makes sense to talk about my "net" interest.

Likewise, I think it is often incorrect to talk about net interest in the national statistics.

Friday, March 23, 2018

"the original source of value"

Wages, profit, and rent, are the three original sources of all revenue as well as of all exchangeable value. All other revenue is ultimately derived from some one or other of these.

Work. Someone pays you to make something. Work is the source of wealth, but not only because you get paid. Also, the creation of goods and services. The production of output. That's why Milton Friedman said in Money Mischief that
Nothing is more important for the long-run economic welfare of a country than to improve productivity.
Friedman also said it when he spoke of money relative to output.

The creation of output is the source of the wealth of nations. That was Adam Smith's main point, for crying out loud. Nobody missed it, right?

This is old now, but I'm afraid somebody might have missed it.

My notes are from October 2013. Never made it to my blog. In a long post, recent at the time, JW Mason wrote:
One other thing to clear up first: profit versus interest. Both refer to money tomorrow you receive by virtue of possessing money today. The difference is that in the case of profit, you must purchase and sell commodities in between.
Well, yeah, maybe. But Mason reduces Adam Smith's creation of exchangeable value -- his "wealth" of "nations" -- to the purchase and sale of "commodities". Mason places money high on the pedestal, and the creation of exchangeable value, low. Adam Smith must have been turning in the grave. I know I am.

No, Mason doesn't exactly miss Smith's point. But I think he misses the significance of it. He continues:
What is the relationship between these two forms of income? For someone like Cassel, interest has priority; profit is a derived form combining interest with income from managerial skill and/or a rent. For Marx on the other hand, and also for Smith, Ricardo, etc., profit is the primitive and interest is the derived form; interest is redistribution of profits already earned in production.
Mason captures the difference perfectly. And yet, he presents Cassel's contradiction of Smith as easily as Smith's own view. Mason misses the significance of Smith's view, a significance which tells me that Cassel cannot possibly be right.

Hey, I don't know from Cassel. But if he sees interest as the primary relation between a man and his money (and profit as sloppy seconds attributed to some lowly entrepreneurial shtick) then Cassel is not thinking of the wealth of nations. He is thinking of individuals, the wealth of individuals. And he is doing micro, not macro.

And Cassel may be right, as far as micro goes. But you must keep in mind that the success of individuals draws money from circulation, and often reintroduces it to circulation coupled with interest cost. Keep also in mind that this additional interest cost does not immediately undermine the wealth of nations; but the long term reapplication of additional interest costs is the serial killer of civilizations.

Bezemer and Hudson describe how it works:
To the extent that the FIRE sector accounts for the increase in GDP, this must be paid out of other GDP components.
Adam Smith laid it out for us: Profit is the income for producing real output; Interest is the income for not producing output. If you earn profit, you make output bigger. If you earn interest, you make output more expensive. Do not confuse the two.

Thursday, March 22, 2018

I called it two years ago

Debt service:

Graph #1: Debt Service Payments are Finally Going Up Again
The dot and the faint gray vertical near the right side of the graph identify the first quarter of 2016. If you look at the Debt Service plot, it seems to be going up after 2016 Q1.

It dropped like a rock, from above 13.0 before the Great Recession to just below 10.0 in 2012 Q4. It bounced back up a little, then continued down more gradually until 2014 Q4. Then it ran flat for all of 2015. And then after 2016 Q1, it started going back up.

Debt service on the rise, it costs us money. But it also means we're borrowing more. And if we're borrowing more, the economy is picking up. Starting to grow, at last.

I called it on March 3, 2016. That was the bottom, I said. Vigor is coming, I said.

Look for GDP growth to be better than 3% next year. Productivity will be going up, too. Maybe this year. And, frankly, Obama (or maybe Ben Bernanke) should get most of the credit. Not Trump. But let that be the least of your concerns.

Don't sit on your ass. We have to take advantage of the good years we'll soon see, to supplement interest rate policy with tax policy that encourages the repayment of debt as a way to prevent inflation. If we don't, we may never get another chance.

Tuesday, March 20, 2018

Wealth is like matter: It has mass and responds to the force of gravity

Wealth is like matter: It has mass, and it responds to the force of gravity.

Matter accumulates until black holes form and the known laws of physics no longer apply. Wealth accumulates until black holes form and the known laws of economics no longer apply.

The accumulation of matter does not begin with black holes, of course. It begins perhaps by chance. But once the accumulation begins, it begins to accelerate. For the force of gravity depends on mass: The greater the accumulation, the greater the mass, and the greater the force of gravity.

The greater the accumulation, the greater is the force drawing additional matter into the accumulation. Adam Smith described the process:
As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work...
Early on, the creation of value is a by-product of the process of accumulation. As long as the creation of value facilitates accumulation, the creation of value gives the appearance of being central to the process. It is not central to the process.

Late in the process of accumulation, little free matter remains in the universe. So the creation of value can do little to facilitate accumulation. Therefore, the process of accumulation evolves. The underlying force remains the same: The force of gravity attracts matter to matter, wealth to wealth. Late in the process, however, large accumulations attract large accumulations. Black holes consume black holes. Mergers and acquisitions serve the process of accumulation better than the creation of value ever could.

Maitland A. Edey and Donald C. Johanson, in Blueprints: Solving the Mystery of Evolution, compare Linnaeus to Buffon. Both men were born in the year 1707. Both rode the "surging wave of curiosity that was sweeping over Europe, an avid desire for explanation and description of the natural world."

Linnaeus devised the system of scientific classification now widely used in the biological sciences. Buffon also devised a classification system. Edey and Johanson write: "As one who sought to put the universe in order, Buffon, of necessity, had to become a classifier himself. He rejected Linnaeus's system". But Buffon's system, they say, "was preposterous."

Edey and Johanson tell us that Buffon "graded animals according to how useful they were to humans, and started with the horse, 'the noblest conquest man has ever made.'" They point out that Buffon's approach "does make clear what a strong hold the idea of the centrality of humans in the cosmos had on humans themselves--before Darwin."

Lacking a big picture, economists in the early days of the science observed the process of value creation, found it useful to humans, and assumed that value creation was central to the path of economic progress. It remains central to our understanding of economic forces today, because we have yet to learn better.

Economists today hold value creation -- economic growth -- central, because economists still place humans at the center of the economic cosmos. One day they will learn that economics is the study of the process of accumulation.

No. Let me say it better.

The force that drives economic accumulation arises from people who desire to accumulate. In a world where existing accumulations are small and atomistic, setting industrious people to work is evidently the best way to increase one's accumulation. But in a world where accumulations have become large and concentrated, there are better ways. Unfortunately, those "better ways" are better for the accumulators, but worse for the society of which they are part. Mergers and acquisitions, for example, reduce rather than increase employment.

The creation of value was never central to the process of accumulation. It was only, for a time, the best way to facilitate accumulation. Due to the long-term concentration of wealth, that is no longer true. But economists developed their basic understanding of the economy back in the day when setting industrious people to work seemed an integral part of the process. And economists still teach that job creation and accumulation of wealth go hand in hand. They still say that to create jobs we must encourage the accumulation of wealth.

That, however, was never true. Job creation was never more than a method which enabled accumulation to proceed. Moreover, having very few, very large accumulations was never a better plan that having many, smaller accumulations.

Our choices are to reverse the clock, using policies that favor small accumulations rather than accumulation in general, and thereby restore the Cycle of Civilization to its "capitalist" phase. Or, to continue on our present course and end up, most of us, as penniless serfs. Most of the present-day one percent, even: penniless serfs. For the process of accumulation does not stop until there are no more worlds to conquer.

Monday, March 19, 2018

Flies in their eyes: Wikipedia is confused about who is confused

I agree with Bezemer and Hudson, who said Finance Is Not the Economy:
Our aim is to distinguish this financialized “wealth” sector — the balance sheet of assets and debts — from the “real” economy’s flow of credit, income, and expenses for current production and consumption.
Me too. As I see it: Real assets produce profit for the owner, and output for all. Financial assets produce interest for the owner, and cost for all.

This idea comes to me from Adam Smith, who identified rent, wages, and profit as the payments to the three factors that he called land, labor and stock. Smith said
In every society the price of every commodity finally resolves itself into some one or other, or all of those three parts; and in every improved society, all the three enter more or less, as component parts, into the price of the far greater part of commodities.
Adam Smith also said
Wages, profit, and rent, are the three original sources of all revenue as well as of all exchangeable value. All other revenue is ultimately derived from some one or other of these.
And specifically,
The interest of money is always a derivative revenue
which makes it pretty damn clear that finance is not the economy.

Bezemer and Hudson want to eliminate confusion by distinguishing the "real" from the "financial" economy, profit from interest. Our world is littered with evidence of that confusion. At Wikipedia, for example, we are told that "the distinction between interest and profit is murky". As evidence, they quote Adam Smith. But Smith was not confused about the difference between profit and interest. At Wikipedia, what Smith said has been modified in an attempt to insert the modern confusion into Smith's thoughts.

The confusion is not Smith's. It is modern. Economics confuses interest with profit and teaches this confusion as gospel. Keynes cleared this up a long time back:
I was brought up to believe that the attitude of the Medieval Church to the rate of interest was inherently absurd, and that the subtle discussions aimed at distinguishing the return on money-loans from the return to active investment were merely Jesuitical attempts to find a practical escape from a foolish theory. But I now read these discussions as an honest intellectual effort to keep separate what the classical theory has inextricably confused together...
Keynes was brought up to agree with those "other" economists, but in the end came to agree with Adam Smith and with the Church and with Bezemer and Hudson and with Jacob Assa and with me: Interest is not the same as the return to active investment.

Let me do this again. Benefit of the doubt this time. The Wikipedia guy quotes Adam Smith from Book I Chapter 6:
Whoever derives his revenue from a fund which is his own, must draw it either from his labor, from his stock, or from his land. The revenue derived from labor is called wages. That derived from stock, by the person who manages or employs it, is called profit. That derived from it by the person who does not employ it himself, but lends it to another, is called the interest (f)or the use of money (or stock). It is the compensation which the borrower pays to the lender, for the profit which he has an opportunity of making by the use of the money (or stock). Part of that profit naturally belongs to the borrower, who runs the risk and takes the trouble of employing it; and part to the lender, who affords him the opportunity of making this profit. The interest of money is always a derivative revenue...
Wikipedia guy changes Smith's "or" to "(f)or", and twice changes Smith's "money" to "money (or stock)". I want to be clear whose changes these are: Not mine!

But having read that quote over until I no longer have energy enough to be outraged by the changes, I shall ignore the or-to-for change; and I even think I can live with the "money" to "money or stock" change. Here's Smith (unmodified) from EconLib:
Whoever derives his revenue from a fund which is his own, must draw it either from his labour, from his stock, or from his land. The revenue derived from labour is called wages. That derived from stock, by the person who manages or employs it, is called profit. That derived from it by the person who does not employ it himself, but lends it to another, is called the interest ...
The "it" that appears three times in the last of those sentences is "stock". Not stock-market stock. Accumulation-of-stuff stock. Stuff you can use to produce output. Stuff includes money, I suppose. So then we have "money or stock". I can live with it.

Compare the last two sentences in the unmodified Smith quote:
  • Revenue derived from stock by the person who employs it is called profit.
  • Revenue derived from stock by the person who lends it out is called interest.
The difference between the two sentences is that the one person is engaged in "active investment" and the other is not. The person who "manages or employs it" is engaged in active investment. The person who "lends it to another" is not.

The difference that concerned Smith is whether or not the person is engaged in active investment and the production of output. That much is clear. Wikipedia guy, however, says "Smith uses the word profit in two different ways here."

Wiki guy explains his problem:
Is the owner of the money/tractor in his capacity as owner realizing profit or interest? It is certain that the proprietor of the money/tractor is realizing profit as opposed to interest.
Smith's focus is whether or not the person is producing output. Wiki guy's focus is whether or not the person actually owns the stuff. See the difference? Smith is focused on generating product. Wiki guy is focused on the personal accumulation of wealth.

Smith wrote during the birth of capitalism. Wiki guy, during capitalism's death phase.

Wiki guy's question again is: "Is the owner of the money/tractor in his capacity as owner realizing profit or interest?" I bolded what I think must be the key part of that question. Let me rephrase the question two ways and see if I can get to Wikiguy's problem:

  • Is the owner of the money/tractor in his capacity as owner realizing profit or interest?
  • Is the owner of the money/tractor in his capacity as the person who manages or employs it realizing profit or interest?

We all (Smith, me, and Wiki guy) agree that the proprietor, the person who manages or employs the stock, realizes "profit". So the question, Wiki guy's question, is: Which word applies to the owner who lends it to another? The answer, far as I can see, has to be "interest". Unless you want to disagree with Smith, of course. That does seem to be Wiki guy's plan.

(Come to think of it, when the manager of the stock is not the owner but "some principal clerk", Smith says the manager receives wages for his labor. Not profit.)

If it happens to be the owner who is managing or employing the stock, it's just profit. Wiki guy wants to split the profit into profit and interest, and reward the owner for his ownership. This is death-phase thinking, preparation for the next phase of the Cycle of Civilization, the phase that comes after capitalism.

The problem I have with Wiki guy is his focus on the owner. That focus interferes with understanding what Smith said. Wiki guy, like Keynes, was "brought up to believe that the attitude of" Adam Smith "to the rate of interest was inherently absurd". Wiki guy needs to get past it, as Keynes did.

Wiki guy must learn to distinguish financialized “wealth” from the “real” economy, as Bezemer and Hudson recommend.

The key, the real difference as Smith saw it, was that if you use your stock to produce something other than money, your income is called "profit". If your only product is money, your income is interest. The key difference for Smith is not who owns the thing, but whether it is used to produce something other than money: Whether it is used to create the wealth of nations, or just the income of lenders.

That's what Wiki guy doesn't get, when he talks about the reward to the owner "in his capacity as owner". He wants to take the owner's profit and split it into two parts: profit for the "managing or employment" of it, and interest for owning it. For lending it to himself, as it were. But that's not what Smith said.

Smith said "The interest of money is always a derivative revenue". He means the money to pay the interest has to come out of profit, or come out of wages, or come out of rent, "the three original sources" of "all exchangeable value". That's what Smith said.

Profit is the reward to productive investment. Interest is the reward to non-productive investment. "Productive" means producing something other than just money. What Smith said is not hard to figure out.

Wiki guy's confusion is his own.

Friday, March 16, 2018

Yeah! (I was a math major)

As I understand it, Keynes was a mathematician and not widely read in economics.

Nothing wrong with that. Me, I look at graphs as much as possible. I want to know everything the economy can tell me. I don't so much care what the economists can tell me.

It's not quite that cut and dry. But close.

Thursday, March 15, 2018

"Capitalism" in context

The ‘Industrial Revolution’ long postdated Adam Smith, who died in 1790. ‘Capitalism’ was unknown while Smith was alive - the word itself was first used in 1833 in an obscure English newspaper and much later in Thackery’s novel, The Newcomes.

Wednesday, March 14, 2018

350%: Impenetrable barrier, or cozy cushion?

Back in 2009 or so, if you were looking at debt in the USA
(What happened to the "A" in USA? Nobody uses it anymore.)
you'd see that when it got to 350% of GDP is when we got into trouble:

ContraHour's Graph from 2009
You may have to click the graph and make it bigger to read the numbers, but the blue line goes up and up and up to 350% of GDP by the end.

These days, after some revisions to the data, it seems debt has settled down to 350% of GDP:

Comparable debt today: 350% looks like the new floor
Nothing cozy about it. Long way down to solid ground.

Tuesday, March 13, 2018

Even at Forbes, money is debt?

Every dollar in your wallet is a Federal Reserve Note, a sign that the Fed owes you. It is an interest-free loan from you to them that they can never pay back. And when the Fed gives the government their notes, these interest-free IOUs, they get an interest-bearing Treasury bond in return. It doesn't matter how much the interest is, the Fed is guaranteed to make money.

My dollar is an interest-free loan from me to the Fed? Dollars in my wallet being "notes" is a sign that the Fed owes me??

The Fed doesn't owe me shit. Someone with an agenda is making bad argument.

That's okay. Elsewhere in the article the guy says this:
The Fed has incurred much financial harm to our nation since its founding.
Incurred? The Fed "incurred" harm to our nation? It's the wrong word.

The guy's an ass.

A Federal Reserve Note is not "debt". Not to the holder, and not to the issuer. Anyone who ever spent a dollar knows it.

As Bossone and Costa write,
Convertibility of banknotes [was] suspended long ago, and the abandonment of the gold-exchange standard, about half a century ago, marked the definitive demise of “debt” banknotes even at the international level.
and further,
A correct application of the principles of general accounting recognizes that money accepted as legal tender is not a financial instrument as defined by the international accounting standards, and therefore cannot be debt.

In days of old when knights were bold and money was first invented, it was useful to have something of value be money. That way, people were likely to accept it. These days, some folks still like the idea. But we already accept money. We accept money as a thing of value.

The trick is to keep the value in the money. But I am convinced that going back on gold, for example, is not the solution. Because going off gold wasn't an arbitrary or spontaneous decision. Going off gold was forced on government by the growth of finance and the concentration of wealth.

Monday, March 12, 2018

People say oil is the problem

Graph #1: Petroleum Imports (blue) and Interest Paid by Households (red)

Graph #2: As Above, along with Interest Paid by All Sectors (green)

Oil is a problem. Finance is the problem.

Sunday, March 11, 2018

The GDP:Employment Comparison

Figure 2 from Jacob Assa, who uses the gap between employment and output as evidence that Real GDP overstates output by figuring finance as productive activity:

Figure 2: US GDP (constant prices) and total employment, 1977=100

Can I duplicate that?

Graph #1: Since 1977: GDPC1 and PAYEMS at FRED
Yeah. I can duplicate it. But when I look at all the years

Graph #2: GDPC1 and PAYEMS at FRED
it's more like a bow tie. The blue line goes up faster than the red not only after the "knot" in the middle, but also before the knot. It's almost like the knot is the odd thing, rather than the gap that opens up after.

Granted, RGDP appears to gain on employment much more rapidly after 1982 than before 1972. But that's fishy, because RGDP growth was faster before 1980 than after. Is the change in the graph due to a slowing of employment growth after 1980? Probably. But then, that is not evidence that the RGDP numbers have been falsely boosted by counting Finance as productive.

Well, that's disappointing.

Part 4 of 4

Saturday, March 10, 2018

"Final GDP"

I remember reading long ago that "Banks have doubled their share of GDP to 8% from 4%".

I read it again recently in a PDF by Robin Greenwood and David Scharfstein:
During the last 30 years, the financial services sector has grown enormously. This growth is apparent whether one measures the financial sector by its share of GDP, by the quantity of financial assets, by employment, or by average wages. At its peak in 2006, the financial services sector contributed 8.3 percent to US GDP, compared to 4.9 percent in 1980 and 2.8 percent in 1950.
I can also find increase to 8% at FRED:

Graph #1: GVA of Finance as a Percent of GDP
But 8% never seemed quite right, somehow. The number just isn't big enough. All by itself, Monetary Interest Paid has never been as low as 8%, not once since 1960. It was 8½% in 1960:

Graph #2: Monetary Interest Paid as a Percent of GDP
In recent years, with interest rates low as they can go, interest payments are between 13 and 14 percent of GDP. And that's just the interest. How could finance be only 8%?

I wasn't the only one thinking such thoughts. Here is Jacob Assa in an article at Developing Economics, from January of last year:
Recent research has suggested that the imputation of productive output for the FIRE sector in the national accounts has distorted GDP in several ways. First, the FIRE imputation drives a wedge between output (as measured by GDP and employment trends), as visible in the phenomenon of ‘jobless growth’ observed after the three most recent recessions in the US (see figure 2).

Figure 2: US GDP (constant prices) and total employment, 1977=100

Second, real per capita GDP has likewise diverged from a more realistic measure of standard of living, real median income...

These and other anomalies have been investigated by recent research, which has also proposed some corrected measures of output. Basu and Foley (2013), in their paper Dynamics of output and employment in the US economy, exclude the FIRE sector from their measure of output (called Non-financial Value Added or NFVA) and find a much improved correlation between NFVA and GDP. In my own research, I go a step further, first excluding and then deducting financial fees from GDP. This is symmetrical to the treatment of financial interest income (FISIM) in the SNA, and also echoes Nordhaus and Tobin’s treatment of some government services as ‘instrumental’, i.e. intermediate consumption. I call this adjusted measure Final GDP (FGDP), since it treats finance as an intermediate input to the rest of the (productive) economy, and deducts it as such (for a full discussion of this methodology and its implications for economic theory and policy, see my new book on the Financialization of GDP).
Figure 4 shows GDP against FGDP and NFGDP (the GDP equivalent of Basu and Foley’s NFVA). Both alternative measures match employment better than GDP, with FGDP being the closest. FGDP also fits median income far better than per capita GDP, and even performs better than GDP in forecasting employment trends (see this working paper).

Figure 4: Three measures of US output (constant prices) and employment, 1977=100
[end of excerpt]

On the last graph above, the blue line shows GDP, which considers finance as "output" and includes it in the total. The red line omits finance. The green line treats finance as an intermediate cost and subtracts it from the total. To me the subtraction makes good sense.

Part 3 of 4

Friday, March 9, 2018

Financial activity as a "net cost to the wider economy"

If you google FGDP you get results for the "Faculty of General Dental Practice".

If you google FGDP (economics) you get results for "GDP (economics)" and the option to "Search instead for FGDP (economics)".

If you click the option you get what you want (but Google still asks "Did you mean: GDP (economics)"). I got
along with a bunch of dentist stuff.

The third item is not the same PDF we saw yesterday. The second item is an online article with a couple graphs I'll show tomorrow. The first item is a book by Jacob Assa. Excerpts from the Foreword, below.

Via Google Books: The Financialization of GDP: Implications for Economic Theory and Policy by Jacob Assa.

From the Foreword by Brett Christophers:
The idea that contemporary capitalism represents a form of financialized capitalism is problematic, Assa maintains, because the statistical measure most commonly employed to demonstrate such financialization -- gross domestic product, of which finance is estimated to have accounted for an increasing proportional quantum -- has itself been financialized. Hence: "the financialization of GDP."

But what does Assa mean by this? What he means is that the way in which GDP is calculated has been changed in recent decades in such a way as to boost the relative contribution to GDP that the financial sector is seen to make, regardless of any actual transformation in the underlying economy...

His most distinctive contribution in this book ... is to at once recognize the problematic nature of the existing statistical framing and to suggest an alternative approach to GDP measurement.

While Assa does not couch it in these terms, his alternative harks back to the understanding of finance contained in the seminal texts of classical Western political economy -- those of Adam Smith, David Ricardo and Karl Marx -- wherein finance was conceptualized as non-value-adding.

Assa's preferred metric -- final GDP (FGDP) -- treats financial activities not as a positive economic output ... but instead as an intermediate input -- and thus as a net cost to the wider economy.

Assa suggests that this alternative treatment of the financial sector potentially helps to resolve some key statistical quandaries within contemporary macroeconomics. One is the much-discussed phenomenon of "jobless growth": the apparent curiosity of periods of economic growth coinciding with flat or declining levels of employment. For Assa, there is no curiosity: according to his FGDP measure ... the economy has not in fact been growing during the periods in question...
I quote too much. I can't help myself. He is answering questions I am only trying to ask.

Part 2 of 4

Thursday, March 8, 2018

How finance became "productive"

National accounts have been recast since the 1980s to present the financial and real estate sectors as “productive”.

Remember UNSNA?
UNSNA is UN SNA, the United Nations System of National Accounts. Like NIPA. Except "NIPA" is pleasing to the ear, and "UNSNA" sounds like something you'd wipe off with a kleenex.
In a recent post JW Mason happened to mention problems of measurement in the financial sector. So of course I clicked the link.

Brings up a download page at IDEAS for Financial Output as Economic Input: Resolving the Inconsistent Treatment of Financial Services in the National Accounts by Jacob Assa. 28-page PDF. I like.

Excerpts from page 4:
Financial intermediation has long been problematic to measure. Christophers (2011) describes the history of the so-called ‘banking problem’ - the fact that, without imputations, the value-added of the financial sector (that is, output minus intermediate consumption) would be negligible or even negative (since if its costs are deducted from fee-based revenues alone, the former would often exceed the latter). At a first stage in the history of this question (SNA 53 and before), all financial intermediation activities were excluded from calculations of national output based on the value-added approach, since they were considered to be mere transfers of funds (similar to social security payments) and hence unproductive.
An intermediate approach followed with the SNA 68, where the output of the financial sector was considered to be an input to a notional (i.e. imaginary) industry which has no output. In spite of the bizarre nature of this approach, “ascribing a negative income to an imaginary industry sector...has probably been the most used for financial intermediation services in the entire history of Western national accounting” (Christophers 130).
A useful example is the Gross Value Added (GVA) of the UK financial sector in 2003, which would be £39.8 billion under SNA 1968 (4.1% of total GVA). The imputed banking service charge (IBSC), however, was a negative £45.9 billion. Under SNA 1953 the financial sector would have thus shown a negative £6.1 billion value added. “Adopting SNA 1968 had, in effect, made UK finance productive” (Christophers 130, emphasis in original).
[He shows a table, which I have omitted.]
Finally, with the 1993 SNA, financial intermediation became an explicitly productive activity, for which value added is imputed based on the net interest received by financial institutions (the FISIM approach).
The latest revision, SNA 2008, extends the boundaries of SNA 1993 to include ever more exotic financial ‘products’.

The "Christophers" reference is
Christophers, B. (2011). Making finance productive, Economy and Society, Volume 40 Number 1, February: 112-140.

Part 1 of 4

Wednesday, March 7, 2018

El-Erian's article goes downhill from there

Paragraph 5:
But, at a certain point, confidence in the Washington Consensus turned into something like blind faith. The resulting complacency, among policymakers and economists alike, contributed to the world economy becoming more vulnerable to a series of small shocks that, in 2008, culminated in a crisis that pushed the world to the brink of a devastating multi-year economic depression.
Complacency and small shocks?


Here's some of what El-Erian sees as the problem:
The economics profession did not go far enough to develop a comprehensive understanding of the connection between a rapidly growing and increasingly deregulated financial sector and the real economy. The impact of major technological innovations was poorly understood. And insights from behavioral science were inadequately regarded – if not shunned altogether – in favor of analytically elegant microeconomic underpinnings that were model-friendly, but unrealistic and overly simplistic.
Okay. He's willing to sacrifice the "elegant microeconomic underpinnings" of economics, but that's it. There's nothing wrong with the "rapidly growing and increasingly deregulated financial sector" in his view. Just a failure to understand it.

He's got some nerve. He admits to not understanding the connection between finance and the real economy. He is nevertheless certain that the problem is not the growth of finance, but the failure to understand.

If he does not understand, then he cannot know that there was no problem with the growth of finance.

If he does not understand, he cannot know.

Here. Here's is the "series of small shocks that, in 2008, culminated in a crisis":

Graph #1: Each Vertical Bar is a "Small Shock"
Those vertical bars representing public and private debt: that's evidence of a rapidly growing financial sector. And, frankly, the size of the sector isn't the problem. It's the cost of the finance that's the problem.

Also, it didn't end in 2008.

At the international level, the established post-war order was increasingly challenged by a rising China...
Domestic policy.

Domestic policy.

To achieve full employment by domestic policy. Remember?

Don't use China as an excuse for your domestic policy failures.

Even the G20, which emerged when the G7 proved too narrow and exclusive to support effective economic-policy coordination, failed to change the game. A lack of operational continuity, together with disagreements among countries, quickly undermined the G20’s effectiveness, especially after the threat of a global depression had passed.
That's why, if you're going global, you have to have political unification. So that the "disagreements among countries" can be dismissed by a higher authority. As if that will eliminate the disagreement.

Building consensus around a revised unifying paradigm will not be easy.
There, see? For Mohamed El-Erian, the "Next Economic Paradigm" is not much different from the last one. It's still a unifying paradigm.

Ya can't trust the guy.

Moreover, feedback loops between the real economy and finance need to be examined in greater depth.
So read my blog, Mo.

His last paragraph:
Complacency was a central reason for the last economic paradigm’s loss of credibility. Let us not allow it to do any more damage than it already has.
See? There was nothing wrong with "the last economic paradigm", he says. The problem was "complacency".

Right, right. And "small shocks".

Part 3 of 3

Tuesday, March 6, 2018

An afterthought on globalization

The opening of the third paragraph:
Deepening the economic and financial linkages among countries was viewed as the best way to deliver durable gains, enhance efficiency and productivity, and mitigate the threat of financial instability.
Strengthening the "linkages among countries" is political activity. Political activities do not solve economic problems. Economic problems require economic solutions.

Following the typical technique used by globalizers, the "plan" part of their statement is vague and friendly. And the "results" part, as always, is a garden of economic delights:
  • to deliver durable gains
  • to enhance efficiency and productivity
  • to mitigate the threat of financial instability
Whatever the greatest economic concerns of the moment may be, those are unfailingly the issues that will be resolved by your acceptance of globalization.

They lie.

A friend offered a simple plan:
If nations can learn to provide themselves with full employment by their domestic policy (and, we must add, if they can also attain equilibrium in the trend of their population), there need be no important economic forces calculated to set the interest of one country against that of its neighbours.

To be able to achieve full employment by domestic policy. That's the key. An economic solution. But if nation-states cannot do it, no global state will be able to accomplish it.

Part 2 of 3

Monday, March 5, 2018

"countries would benefit"

Well I got as far as the first two paragraphs. I still expect the article to be interesting. But I have to stop and deal with what I just read.

In Working Toward the Next Economic Paradigm by Mohamed A. El-Erian, at Project Syndicate, the problematic opening:
For decades, the Western world put its faith in a well-defined and broadly accepted economic paradigm with applications at both the national and global levels...

The paradigm that, until recently, dominated much of economic thinking and policymaking is embodied in the so-called Washington Consensus – a set of ten broadly applicable policy prescriptions for individual countries – and, at the international level, in the pursuit of economic and financial globalization. The idea, simply put, was that countries would benefit from embracing market-based pricing and deregulation at home, while fostering free trade and relatively open cross-border capital flows.

The paradigm, apparently accepted with no acknowledgement of its internal contradictions, includes the goal of "economic and financial globalization".

Why? Because "countries would benefit".

Countries would benefit. Nations would benefit.

But the ultimate objective of globalization is the subjugation of nations to a global political authority: France becomes the new New Jersey.

Look, if you like globalization, fine. I won't try to change your mind. But be honest with yourself: Acknowledge the objective. Think about what you really want.

I'm sure you don't want to be tricked into giving up the nation-state.

And what makes you think global government will be able to solve the economic problems that nations cannot solve? The wrong solutions don't work, no matter who applies them.

Global government and "relatively open cross-border capital flows" will lead to greater concentration of wealth, not less. That's why globalization moves forward: The wealthy at the top of the heap are bumping into the ceiling created by the existence of nations.

They want to remove that obstacle.

Part 1 of 3

Sunday, March 4, 2018

I looked up "correlation"

One "L" in correlation. Two R's. Merriam-Webster says
a relation existing between phenomena or things or between mathematical or statistical variables which tend to vary, be associated, or occur together in a way not expected on the basis of chance alone.
Tend to vary together in a way not expected on the basis of chance alone.

Following up on Antonio Fatas's defense of debt: On the basis of chance alone, debt would not consistently increase more rapidly than GDP. So maybe the "very strong correlation" that Fatas describes is the simply that debt grows faster than GDP. You think?

Fatas describes a "correlation between GDP per capita and ... the ratio of debt to GDP." Between Real GDP per Capita, and the ratio of debt to nominal GDP. He doesn't specify a measure of debt. Following in the footsteps of Milton Friedman we can, first, assert the economic relation and, second, go looking for a measure of debt that gives a result that pretends to support our assertion.

No matter. Pretty much any measure of debt you pick will be one that grows faster than GDP. Economists generally prefer to use private non-financial (PNF) debt, perhaps because it seems at first blink the most relevant to the production of GDP, and thus the least likely to be questioned by people like me. Fine. PNF debt it is, then.

Fatas sees a relation between debt-to-GDP and real GDP per capita. There's GDP on both sides of that relation. If you take real GDP per capita and multiply by population and prices, you get GDP.

The GDP in debt-to-GDP grows faster than the other one because it includes the growth of population and the rise of prices.

The faster-growing measure of GDP is used in the debt-to-GDP ratio. But still the ratio goes up. That means debt is growing faster than the faster-growing measure of GDP. When you divide debt by the faster-growing measure, Fatas tells us, you get something that has "a very strong correlation" with the slower-growing GDP measure. This is very odd reasoning.

It sounds to me like Fatas, or somebody before Fatas really, was trying to show correlation. And they picked some data that sounded relevant and they did some division, and then brought in other data with different growth rates until they got the two lines to look similar on a graph. And Fatas was impressed, and he repeated it.

But what does the data actually show?

Graph #1: PNF Debt to GDP (red) and Real GDP per Capita (blue)
It shows that debt-to-GDP goes up. And real GDP per Capita goes up. But the red goes up somewhat more slowly than the blue.

Using PNF debt, the ratio runs higher than real GDP per capita from the mid-50s to the mid-70s. Then the two lines run together until the early 1990s.  Then the red runs below the blue until 2009. And after that, the red runs even farther below the blue. The red line not only increases more slowly than the blue, but also seems to do it in steps.

The steps are the most interesting thing about that graph.

Using a different measure of debt, the graph would be different. Graph #2 uses a broad measure of debt:

Graph #2: Like Graph #1 but using a Broad Measure of Debt
Here, the two lines run close together for a decade or so, early on. To me, that looks like a strong correlation. But around 1963 the two lines separate. After that, it almost looks like the red wants to run flat but the blue keeps dragging it upward.

I wouldn't call that correlation. I'd say things are going on, on this graph, that are overlooked when people make announcements about very strong correlations.

This graph is overlooked simply because it uses a broad measure of debt. Economists seem to prefer the PNF debt that gives them graphs that suit their arguments.

Here is another alternative to private non-financial debt -- financial debt:

Graph #3: Again like Graph #1, but this time using Financial Debt
No very strong correlation visible here. No wonder economists like to leave financial debt out of the picture.

Come to think of it, we might see better correlation with financial debt if we change the "real GDP per capita" (blue) to a different measure of GDP:

Graph #4: Like Graph #3, but replacing Real GDP per Capita with Nominal GDP
There ya go: The red and blue follow the same path from the start to the peak. Now that's correlation!

Hmm. Perhaps the growth of financial debt visible in the red line explains the increase of prices embedded in the blue.

Oh, but that line of thought doesn't fit the "defense of debt" argument made by Antonio Fatas. So forget it.

Part 3 of 3

Saturday, March 3, 2018

The other bad half of Antonio Fatas's "debt is not a problem" argument

Antonio Fatas says
Not all debt is bad. Two obvious points here. First, as much as we like to criticize financial markets for their excesses, we cannot forget that financial development is key to economic development.
"Financial development is key to economic development." That's his first point. Okay, so let's suppose Fatas is right. How do we explain this:

Graph #1: Private Non-Financial Debt as a Percent of GDP (Data copyright BIS)
The debt increased more than threefold from start-of-data to peak-of-data. And that's not just the debt. That's the debt as a percent of GDP.

Debt increased more than three times as much as GDP, all told. In other words, financial development led to one third as much economic development. Financial development is the muscleman, and economic development is the 98-pound weakling. That's how I explain it.

Here are his next two sentences:
There is a very strong correlation between GDP per capita and measures of financial development. And a common measure financial development is the ratio of debt to GDP.
The ratio of debt to GDP. We looked at that. Debt increased three times as much as GDP.

One more sentence from Fatas; again, his next sentence:
Higher debt means financial transaction that could not have occurred otherwise.
An increase in debt means financial transactions that could not have occurred otherwise. All the rest of the debt, other than the increase, supports the existing level of economic activity, which should really be supported by money that doesn't have the interest cost.

Part 2 of 3