Recommended reading

Why nation-states are good by Dani Rodrik at Aeon.

"A truly global economy, in which economic activity is unmoored from its national base, would necessitate transnational rule-making institutions that match the global scale and scope of markets."

A surprise ending that you should have seen coming

Timothy Taylor, Some Notes on Corporations and Social Values:

There is a long-standing debate over the goals of corporations. Should they focus mostly or exclusively on earning profits? Should they be willing to take on broader social missions? Should they be required to do so?...

At least among economists, the usual starting point for these discussions is an essay written by Milton Friedman in the New York Times on September 13, 1970, called "A Friedman doctrine -- The Social Responsibility of Business is to Raise its Profits." As with many things written by Friedman, it is a starting point both for those who agree and who disagree, because of the clarity and pungency with which his views are expressed...

A point Friedman does not state explicitly in this essay, but is implicit to many economists, is that the "social value" of a corporation lies partly in the way that it uses know-how and work to organize and combine various resources--workers, physical capital, and knowledge that can range from breakfast recipes to pharmaceutical formulas. By acting in this way, a corporation provides a service that customers believe is worth their money and jobs that workers believe are worth accepting, as well as buying inputs and supplies from other businesses and thus supporting them as well. If a company consistently makes losses and does not earn profits, these benefits will be lost. On the other side, a company that earns profits then has access to finance that could be used to expand in a way that satisfies more customer and hires more workers.

It seems to me that many discussions of the "social responsibility" of firms do not pay sufficient attention to these gains from pleasing customers and paying workers and suppliers. Such gains should not be taken for granted.

It seems to me that many, many discussions of "finance that could be used to expand in a way that satisfies more customer and hires more workers" do not pay any attention to the increase in financial costs that goes hand in hand with the rise of finance.

Such costs should not be taken for granted.

Setting the bar

2.2% is "pretty modest" GDP growth.

John Cassidy:

The fact is that economic growth was pretty modest during the first year of the Trump Administration: inflation-adjusted Gross Domestic Product, the broadest measure of the economy’s output, rose by 2.2 per cent.

So Jiggy, No Jiggy

Annualized Growth Rates, Real and Nominal GDP

Just checking

Spur of the moment, I'm wondering how far down the page I have to go at Economist's View to find the word "debt":

Economist's View

Thursday, September 20, 2018

Links (9/20/18)

• A Smorgasbord Recession? (Wonkish) - Paul Krugman
• Political Pressure on Central Banks - Carola Binder
• Three Sudden Stops and a Surge - Brad Setser
• Japan’s Successful Economic Model - Adair Turner
• The economic cost of repellent leadership - VoxEU
• Foreign expansion, competition, and bank risk - VoxEU
• Tax cuts have not led to bonuses, wage or compensation growth - EPI
• Reflections by Bernanke, Geithner and Paulson (Video) - Brookings
• Saving the Planet Doesn’t Mean Killing Economic Growth - Bloomberg
• Controlling My Heating Bill Using Bayesian Model Averaging - Dave Giles
• Communicating Academic Economics Ideas to the General Public - Mathew Kahn
• Growth, well-being: policy should not be based on GDP alone - Micro Insights
• How the sterling money markets dried up - Bank Underground
• Update on US Health Insurance Coverage - Tim Taylor
• The increasing faith in macroprudential policies - VoxEU
• Kavanaugh and the Politics of Bad Faith - Paul Krugman

Posted by Mark Thoma on Thursday, September 20, 2018 at 10:53 AM in Economics, Links | Permalink  Comments (259) 

---

Monday, September 17, 2018

Links (9/17/18)

• The Credit Crunch and the Great Recession (Wonkish) - Paul Krugman
• Comments on monetary policy at the effective lower bound - Janet Yellen
• Why central banks should not be inflation nutters - VoxEU
• Can Trade Agreements Be a Friend to Labor? - Dani Rodrik
• What Do We Actually Know About the Economy? (Wonkish) - Paul Krugman
• Central Banks Strike Back Against Political Interference - Bloomberg
• Economics Gets It Wrong Because Research Is Hard to Replicate - Bloomberg
• Ten Years Ago - Economic Principals
• Output Gaps and Robust Monetary Policy Rules - Roberto Billi
• Charting the Financial Crisis - Brookings
• Can codetermination help fix America’s wage problem? - Lane Kenworthy
• The Most Addictive Theorem in Applied Mathematics - Scientific American
• The Economist as Public Intellectual - Federal Reserve Bank of Richmond
• Interview with Chad Syverson - Federal Reserve Bank of Richmond
• Ten Year House Price Volatility - Richard Green
• Another lesson of the GFC unlearnt - mainly macro
• We’re Measuring the Economy All Wrong - The New York Times
• Crisis firefighters still uninterested in fire prevention - FT
• The Fed's Floor System: Sayonara? - Macro Musings
• Tax Cuts Are Costing the U.S. Treasury Money - Bloomberg
• Economic Security Programs Cut Poverty Nearly in Half Over Last 50 Years - CBPP
• What We Should Have Learned From the 2008 Financial Crisis - Reinhart and Reinhart
• Could A Coalition of the “Friends of Turkey” Ride to Turkey’s Financial Rescue? - Brad Setser

Posted by Mark Thoma on Monday, September 17, 2018 at 10:39 AM in Economics, Links | Permalink  Comments (374) 

---

Thursday, September 13, 2018

Links (9/13/18)

• Botching the Great Recession - Paul Krugman
• Fed Interest-Rate Debate Misses the Bigger Picture - Tim Duy
• The financial crisis and the foundations for macroeconomics - Larry Summers
• The Makings of a 2020 Recession and Financial Crisis - Roubini & Rosa
• An overdue look at the effects of monopoly distortion - Financial Times
• What Do We Mean by Neutral in Monetary Policy? - Lael Brainard
• How the brain decides what to do in the face of danger - EurekAlert
• Radical Markets: a review - Stumbling and Mumbling
• Rebelling Against the Clean Plate Club - Tim Taylor
• Financial panic and credit disruptions in the 2007-09 crisis - Ben Bernanke
• What’s Going On with the Economy? It’s the Stimulus, Stupid - John Cassidy
• Interview with Philip Jefferson - The Region
• SWF+UBD - interfluidity

Posted by Mark Thoma on Thursday, September 13, 2018 at 11:41 AM in Economics, Links | Permalink  Comments (302) 

---

Tuesday, September 11, 2018

Links (9/11/18)

• Trade, Inflation Targeting, and Central Bank Independence - PIIE
• The Stable-Coin Myth - Barry Eichengreen
• On the Debt Non-Spiral - Paul Krugman

Not in the first three posts. It is in the fourth one.

I grabbed the data on 23 September. I find the word "debt" in Mark Thoma's links posted in 11 September, a dozen days back. It would seem debt is no longer a hot topic, these days.

The word "debt" occurs in the 55th link from the top of the page. At least 54 things are more important than debt.


If debt was the cause of our problems ten years back, then it remains the cause of our problems today. No matter ten years have passed.

Predicting the 1990s

Robert Eisner in 1993:

The Office of Management and Budget, in its final document released by President [George H.W.] Bush, offered “baseline” deficit estimates grounded on the relatively pessimistic economic outlook of 51 private “blue chip” forecasters. They foresaw real GDP growth of only 3% in 1993, 2.9% in 1994, and then down to 2.5% from 1995 to 1998; unemployment was still projected at 5.7% for 1998.

Sounds like the same sort of unimaginative estimates we've seen over the last few years, estimates that cannot foresee real GDP growth above 2%. Meanwhile, we're seeing 4%.

//

See also mine of March 2016, predicting vigor due to low (but rising) financial cost.

"most articles are not actually meant to be read"

From What Should an Economics Research Article Look Like? by Timothy Taylor:

... is a research article actually meant to be read, word-for-word, beginning to end? It seems plausible that if articles have become three times as long, then students and researchers living in a world with just 24 hours in a day can read only about one-third as many articles. My guess is that most articles are not actually meant to be read, but only to be skimmed.

The problems of economics apparently go deeper than we realize.

Microfoundations

The insights into the financial meltdown that policymakers found most valuable came from scholars, such as Hyman Minsky and Charles Kindleberger, who thought in terms of broad aggregates and made no effort to establish micro foundations. The market participants, such as Ray Dalio, who were most prescient with respect to the crisis ignored microeconomics as they theorized in terms of debt and credit aggregates.

- Larry Summers

A difference of 37 cents apiece

I had to look to see how these parts differ from each other:

Source: PVC Distributors LLC at FlexPVC.com

"COO: China". Shoulda known.

"just use the deflator for the most recent year"

Suppose you want to look at average real GDP for the last ten years. You take real GDP, add up the last ten values, and divide by 10. Pretty simple.

Using Real GDP, the result is 16494.2

Suppose they don't give you real GDP. How do you do it then?

One way, the way that makes sense to me, is to use the deflator and figure the real values yourself. Then you add up the last ten values and divide by 10.

Converting Nominal GDP, the result is 16494.1
Okay, so there is a rounding error.

But maybe there is another way: Take the nominal values they give you, add up the last ten values and divide by ten, and then convert from nominal to real. To do the conversion you just use the deflator for the most recent year. That would work, right?

Using the Most Recent Deflator Value, the result is 15441.3

Nope. Do it this way and you get the wrong answer.

And yet, people figure real debt this way.

The big picture is wrong

A follow-up to my post of 31 August.

In mine of 11 August I compared Cecchetti Mohanty and Zampolli's average real debt growth of "slightly less than 4½%" to my 3.79%. But my number is for a different time period. CMZ's number is for 1980-2010. Mine is for the 1948-2017 period. This invalidates the comparison. I want a do-over.

It's been almost a month, so I downloaded a new dataset from FRED. Domestic Nonfinancial Sectors; Credit Market Instruments; Liability, Level (TCMDODNS) and Consumer Price Index for All Urban Consumers: All Items (CPIAUCSL). CMZ for some reason use consumer prices to deflate debt; I'll use this measure of CPI for that purpose.

As I'm using a new dataset here I want to check and see if I still get the same 3.79% growth figure for the 1948-2017 period. I do:

Graph #1: SN2R, 1948-2017

I'm taking the growth rate number from the trend line equation.

Okay, so now the 1980-2010 period:

Graph #2: SN2R, 1980-2010

That's a 4.05% growth rate. Higher than my original 3.79% but still less than CMZ's 4.5%. Why less? My number is for US debt. Theirs is the average for sixteen OECD nations. You'd expect the numbers to differ.

But I am troubled by my numbers for US data: higher for the period starting in 1980, lower for the period starting in 1948. Troubled, because my view is that debt growth was not slower before 1980. These numbers don't support my view.

Looks like we'll be doing a few more graphs today.

Oh, I should point out that I'm leaving the dates off the graphs so that my x-axis values start with 1, because adding x-axis dates changes the growth rate number. Starting with 1, Excel thinks I mean the first x value. Starting with 1980 or whatever, it seems to think that the first x value occurred back in the year 1 AD. Not sure why adding the dates changes the growth rate, but it does. Maybe because to show the date "1980" Excel needs a value like 29221. Excel date numbers are weird.

Okay, here's the period before CMZ's 1980-2010:

Graph #3: SN2R, 1948-1980

It shows a real debt growth rate of 3.81%. Low growth early. I'm not helping myself here.

And here is the period after CMZ's 1980-2010. This one we know is low:

Graph #4: SN2R, 2010-2017

It shows 2.33 percent growth for inflation-adjusted debt. That's low.

Here is the big picture:

Graph #5: Based on the Standard Nominal-to-Real (SN2R) Conversion

The black line shows CMZ's growth number for the OECD countries for 1980-2010. The three blue lines show my numbers for US debt growth before, during, and after the 1980-2010 period. The red line emphasizes the path of change.

My graph shows exactly what Cecchetti Mohanty and Zampolli said: Debt growth was rapid in the 1980-2010 period, slower before and after that time. So it looks like I was wrong, saying debt growth was not slower before 1980.

So it looks. However, we are looking at growth numbers for real debt, and the numbers are figured as if debt is a "flow" variable. Debt is not a flow variable. The calculation produces erroneous results. The big picture is wrong.


The debt growth rates above are based on inflation-adjusted debt. But the inflation adjustment is done incorrectly. It is based on SN2R, the standard nominal-to-real calculation. Let's see what happens to the growth numbers when we use AN2R, the calculation for "stock" variables that I went over last time.

First, look at the overall number. Using the same FRED data as above, this time I get a 4.74% growth rate for real debt. Last time I got 3.79%. Real debt growth is almost a full percentage point higher this time:

Graph #6

Okay, there is a discrepancy. In mine of 31 August when I figured my "yardstick" graph, I was satisfied with the result because the start-point and end-point were right. Here, the end-point is obviously wrong. My growth number must be too high, because the red line is too high at the end.

Probably should have been using a "compound annual growth rate" (CAGR) calculation. Well, we can do that some other time. Meanwhile, look at this graph with me.

• The two lines run close together until about Year 25. So from Year 1 to 25, the 4.74% number is good.
• From Year 25 to 43, real debt increases faster than the red curve. The 4.74% number is too low.
• From Year 43 to the end, debt growth is much slower than the red curve's estimate. Except that
• Between Years 55 and 61 the two lines run close together, so the 4.74% number is good.

Now look at the graph again, using Year 43 as a break point. Before Year 43 the CAGR must be greater than 4.74%. After Year 43 the CAGR must be less than 4.74%. In other words, real debt growth was faster in the early years and slower in the later years. This supports my view. So maybe I'm not wrong. Maybe Cecchetti and all are wrong about the growth of real debt.

Let's put dates on the graph and look at it again:

Graph #7

The two lines run close (and 4.74% is a good number) until 1972. Debt growth is faster than 4.74% from 1972 to 1988 about. Then after the late 1980s, real debt growth slows. If you make 1980 your break point, much of the rapid 1972-1988 growth gets counted in the 1980-2010 period. However, debt growth has been slowing since 1988. So I still want to say Cecchetti and all are probably wrong about 1980-2010 being the period of most rapid debt growth.

I left the trend line equation on the graph so you can see how it changes when dates are added to the x-axis. Obviously the growth rate doesn't really change just because you put dates on a graph. Ignore the trend line equation on Graph #7.

Let's break up the growth by period, as we did above. Before 1980:

Graph #8

 Before 1980, real debt figured my way shows 5.56% annual growth. That's more than a percentage point higher than CMZ's "almost 4.5%" claimed for the 1980-2010 period.

1980-2010:

Graph #9

For the 1980-2010 period, real debt figured my way shows a growth rate of 3.74 percent. This is three-quarters of a point lower than CMZ's 4.5% figure for the period, and nearly two percentage points less than debt growth for the 1948-1980 period shown on Graph #8.

2010-2017:

Graph #10

Two point one four percent real debt growth in the years after 2010.

And by the way, in these last three graphs the end-point discrepancy seems to have cleared up. The growth rate numbers are good.

To summarize these AN2R debt growth numbers:

Graph #11: Based on the Alternative Nominal-to-Real (AN2R) Conversion

There is a massive difference between this and Graph #5.

When real debt is properly calculated, its growth rate is seen to be slowing. Real debt growth is not fastest in the 1980-2010 period. It is fastest in the early period, and has been slowing since.

Now you have to rethink everything.