Tuesday, April 30, 2019

Wikipedia: US Population

Source: Immigration to the United States 17 April 2019
Note: 10-year intervals except 2010-2015
It reached a low in 1970, and has been increasing since 1980. Is this a coincidence, or is it part of neolithic policy? Uh, neoliberal, I mean.

Monday, April 29, 2019

Abuse of language

3:10 AM at this writing, and already the day's not a total waste. Good omen!

I searched FRED the other day for UK real gdp and sorted the results by "Obs Start" to see the ones that go way back in time. That's how I found the "Hodrick-Prescott (HP) Filtered Log of Real Gross Domestic Product at Factor Cost in the United Kingdom" graph we were looking at yesterday, the one with alternating periods of moderation and hyperactivity. That's the graph that made me say "I don't know what the hell this graph is."

That was the first item in the sorted search results. (The "Obs Start" is 1270.) The next two items  (Obs Start 1700) were these:

What the hell... I thought I knew what Real GDP is. But what's this "factor cost" and "market prices" stuff? And when you figure "real" GDP, don't you start with GDP "at market prices" and then take out the inflation? ???

I've run across those two items before, and they stopped me dead in my tracks. This time I made the bold move and Googled define real gdp at factor cost. The blurb-in-the-box that came up said
Definition of 'Real Gdp At Factor Cost' Definition: Real GDP is the nominal GDP after adjusting for any price changes attributable to either inflation or deflation. ... This measure is called the Real GDP or the GDP at constant price. It does not factor taxes and subsidies.
That, from The Economic Times. Doesn't seem right, though. Their last sentence throws me. At the site, they give a definition:
Real GDP is the nominal GDP after adjusting for any price changes attributable to either inflation or deflation.
Yeah, I know about that. But I never heard that Real GDP "does not factor taxes and subsidies."

Following the definition, they give a description:
Nominal GDP or the GDP at current price can present a distorted picture of the actual growth in GDP owing to price changes. However, if we consider the price of base year as constant and compute the GDP growth rate of the current year using that constant price, the value so arrived at will give a true picture of the actual growth rate in GDP. This measure is called the Real GDP or the GDP at constant price. It does not factor taxes and subsidies.
Again, I know about that. I know that whole paragraph, right up to the last sentence. But then suddenly they tack on that last sentence: "It does not factor taxes and subsidies." First I thought they meant "It does not exclude taxes and subsidies." Now I wonder if they mean "It does not include taxes and subsidies." But either way, I never heard this qualification before, modifying the simple conversion of nominal to real values. It just doesn't seem right.

Under "People also ask" in the Google search results, the first question was "How do you calculate GDP at factor cost?" That might clarify things, I thought.

Yup. The link is Measuring Output Using GDP. First thing they say:
Gross domestic product is the market value of all final goods and services produced within the national borders of a country for a given period of time.
Yeah. So "GDP" is the "market value" measure, as I said. Second thing:
Expenditure Approach

The expenditure approach attempts to calculate GDP by evaluating the sum of all final goods and services purchased in an economy. The components of U.S. GDP identified as “Y” in equation form, include Consumption (C), Investment (I), Government Spending (G) and Net Exports (X – M).

Y = C + I + G + (X − M) is the standard equational (expenditure) representation of GDP.
Yup. And because it measures purchases, the phrase "market prices" is relevant. Third thing:
Income Approach

The income approach looks at the final income in the country, these include the following categories taken from the U.S. “National Income and Expenditure Accounts”: wages, salaries, and supplementary labor income; corporate profits interest and miscellaneous investment income; farmers’ income; and income from non-farm unincorporated businesses. Two non-income adjustments are made to the sum of these categories to arrive at GDP:
  • Indirect taxes minus subsidies are added to get from factor cost to market prices.
  • Depreciation (or Capital Consumption Allowance) is added to get from net domestic product to gross domestic product.
Now we're talkin! Now it makes sense. You add up the factor costs, Adam Smith's land, labor, and capital costs. The factor costs, seen from the recipient's point of view, are income. But apparently "indirect taxes" add something to the factor cost of output, and "subsidies" reduce that cost. Making those adjustments to the "factor cost" number will get you closer to the "market prices" number.

Then just add depreciation to get from "net" to "gross". This all makes sense. But the income and expenditure approaches are both based on transactions, so inflation is built into the numbers. To get to "real" values, the inflation has to come out. But remember, the two approaches are called "factor cost" and "market prices". So, after they are converted to real values, we have "Real GDP at Factor Cost" and "Real GDP at Market Prices".

And that is how you come to have "real" GDP "at market prices". But here we abuse some language, as Christian Zimmermann might say, as we really mean it's the market price version of Real GDP. And the other one is the factor cost version of Real GDP.

And now I can go back to sleep.

Sunday, April 28, 2019

The Greatest Age of the Inducement to Investment ?

FRED has some data from the Bank of England, from their "Three Centuries of Macroeconomic Data" project. I happened to look at one graph and, well, first things first:
Bank of England, Hodrick-Prescott (HP) Filtered Log of Real Gross Domestic Product at Factor Cost in the United Kingdom [HPGDPUKA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HPGDPUKA, April 27, 2019.

Graph #1
What's that, the "Great Moderation" to the right of the mid-graph hyperactivity? Can't be.

There are alternating periods of high and low amplitude. I see three quiet periods:
  • A mid-length one around 1500
  • A very long one after 1700, and
  • A very brief one after 1950.
To see a version of the graph big enough to read the dates, click the graph.

The brief quiet period, after 1950, that's actually the 1960s. Ain't that odd?

I should say, I don't know what the hell this graph is. I know, it's "Percentage Difference from Trend". So the black line, the zero line, is the "trend" after the trend has been subtracted from the data. And the trend was probably figured using the Hodrick-Prescott calculation (which they call a "filter"). And they probably started with "logged" values for Real GDP.

Doesn't matter what the graph is. I'm just looking at it. And I was wondering, what can that long quiet period be, if not the Great Moderation? Here's my guess: It's the 150 years of "the greatest age of the inducement to investment" as described by John Maynard Keynes:

Graph #2
Click the damn graph.

Saturday, April 27, 2019

per Capita growth

The deeper I got in the writing of "The Expectation of Growth (part two)", the more I got stuck in the muck. I wanted to talk about changes in the trend rate of RGDP growth in the post-WWII period, first from 4% to 3, then from 3% to 2. I wanted to come back around to this graph:

Graph #1
But to be comfortable with what I wanted to say, I had to look at growth in the years before the second World War. And when I did? Muck. I went looking for "nothing but improvement" in the rate of RGDP growth per capita. I didn't find it. I should have known. After all, Mark Perry said we can count on 2% real growth in the long-run. That's stability, not improvement. I have to learn everything the hard way.

Thinkin about it now, maybe if I'd been looking at RGDP rather than its growth rate, I'd have seen improvement. Another time, maybe I'll do that. Meanwhile, here's what I got on the growth rate of RGDP per capita:

Graph #2
Two percent growth would be a straight, flat, horizontal line a little above 0%. Both the red and blue lines are in the neighborhood of that (though obviously they're not straight). The red is a Hodrick-Prescott of the blue. The blue is a 9-year moving average, centered, based on the gray. The gray is annual growth rates, based on MeasuringWorth data for Real GDP per capita.

Looking at the graph now (now that the pressure's off) I see a high spot around 1940: World War Two. And I see a low spot in the mid-1860s: Civil War? Those two spots nicely divide the red line into three parts. The first part shows an upward trend. The second and third show a downward trend.

I could have it wrong: Maybe not the low of the mid-1860s, but the high around 1880 is a break point. Even so, the trend from 1800 to 1880 is upward. And the trend from 1880 to 1930 is downward, as is the trend since 1960.

Were I to apply these observations to my "cycle of civilization" I could put the peak of the cycle around 1880: GDP growth rises to that point, then falls, then falls again. Maybe there is more here than I thought.

Friday, April 26, 2019

Let the griping resume

Well, I was going to follow "The Expectation of Growth (part one)" with "part two" but that's not gonna happen.

Something I came across just now at BeBusinessed.com in The History of Recessions:
Prior to 2009, the IMF defined a global recession as a global annual real GDP growth of 3.0% or less. After 2009, they changed their definition to a more complicated formula involving a decline in annual per-capita real world GDP (PPP-weighted) backed up by other macroeconomic indicators.
Sometimes it's hard to tell the difference between what Keynes said (changing your mind when the facts change) and just supercharging the bullshit.

Tuesday, April 23, 2019

The Expectation of Growth (part one)

Despite the vagaries of the business cycle, unexpected periods of recessions, a civil war, two world wars, a Great Depression, etc., there's one thing we can always count on in the long-run: 2% real growth in per-capita GDP

The wife and I were bingeing season seven of Game of Thrones again, before the release of season eight. "I'd very much like to believe that Jon Snow is wrong," Tyrion says. "But a wise man once said that you should never believe a thing simply because you want to believe it."

Yup. And I very much want to believe that Mark J Perry is right. But wanting to believe is not a reason to believe. It is a reason to doubt.

Trust your judgement, not your dreams.

Earlier this year, Timothy Taylor brought up Keynes, back in 1930, writing of the standard of living we might achieve by 2030. ("Between four and eight times as high as it is to-day", Keynes wrote. This "assumes only an average annual growth rate of 1.5-2.0% per year", Taylor said.)

Then Taylor mentioned Thomas Macaulay, writing in 1830 about the prosperity we might achieve by 1930:
Perhaps the best-known passage from the essay is Macaulay's comment: "We know of no country which, at the end of fifty years of peace and tolerably good government, has been less prosperous than at the beginning of that period."
No country grows less prosperous, Macauley says. But Macauley lived in a time that Keynes called "the greatest age of the inducement to investment". Ours, by contrast, is not the greatest age; we can and do grow less prosperous. From The Sounding Line:

In Brief: US Wages Finally Get back to Where They Were in 1973

Submitted by Taps Coogan on the 19th of April 2019 to The Sounding Line.

According to the U.S. Bureau of Labor Statistics, inflation adjusted average wages for production and non-supervisory workers for March came in at $23.24 per hour. That is down ever so slightly from February (-0.2%), which was an all-time high.

Unfortunately however, $23.24 per hour is exactly how much the average worker would have made in February 1973 (in inflation adjusted terms). In other words, only in the last few months have US hourly production wages returned to the levels they set 46 years ago.
Fifty years, give or take.

Taylor continues:
But the passage of most interest to me here is when Macauley looks back more than a century to 1720, and also ahead 100 years from 1830 to 1930--when Keynes was writing. Macauley wrote:
"Hence it is that, though in every age everybody knows that up to his own time progressive improvement has been taking place, nobody seems to reckon on any improvement during the next generation. We cannot absolutely prove that those are in error who tell us that society has reached a turning point, that we have seen our best days. But so said all who came before us, and with just as much apparent reason. ... On what principle is it that, when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"
I've raised this theme often enough in discussions. Yes, maybe economic progress is about to stop and reverse itself. Maybe we will be immiserated by new technology. Maybe the future is one of mass starvation from overpopulation. But looking back at the historical experience of the last several hundred years, what can be the basis for having any confidence in such pessimistic claims?
I use the cycle of civilization as a tool for understanding the world. I'd say those who express "such pessimistic claims" may be looking back at the rise of civilization, and forward at its decline. Civilizations do decline, you know.

That doesn't mean our civilization is declining, of course. It just means it could be. So rather than asking "What principle is it" or "What basis can there be", the question I'd ask is: Are we at a "turning point"? If we are, Taylor and Macauley's questions are answered.

"A cycle," Ray Dalio says, "is nothing more than a logical sequence of events leading to a repetitious pattern." The rise and decline of civilizations meets this criteria.

Timothy Taylor says okay, maybe our best days are behind us, but all the evidence shows nothing but improvement. And you know, maybe Taylor is right. Maybe "nothing but improvement" will continue into our future. On the other hand, "nothing but improvement" is pretty much how it would look all through the "rising" side of the cycle of civilization and right up to the turning point at the peak. After the peak, it's a different story.

Don't get me wrong. I'm not marching around carrying a sign that says "The End Is Near". I'm just saying that if you want to think about life or human progress, you may find the cycle of civilization a useful tool for explaining facts and organizing thoughts.

I also have to point out that if your evidence is "there is nothing but improvement behind us", then your evidence may be evidence of a cycle of civilization.

As John Maynard Keynes pointed out, people often rely on the assumption that "the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change." So it is not surprising that people expect economic growth in the future to continue much as it has in the past. (Also, people want to believe growth will continue. But you heard Tyrion.)

When you figure growth at a constant rate, you get a curve that goes uphill faster and faster all the time. Like the dashed line on this graph:

Graph #1 from Mark J. Perry at Carpe Diem, 2009
"Exponential growth", it is called. Many people would tell you that exponential growth cannot continue because of resource constraints. If we take such claims as true -- and it's hard not to -- then we are saying future growth (now or at some point in the future) must slow down.

Or, at some point in the past. Actually, economic growth has been slowing for some time already. But I do not mean to assume that this is (or isn't) because of resource constraints. If we assume that growth must slow down, then no further explanation is needed to account for the slowdown of economic growth. I don't want to do that. I don't want to assume an answer to the question of slowing growth.

I want to think about the questions posed by Timothy Taylor and Thomas Macaulay:
  • "Yes, maybe economic progress is about to stop and reverse itself. Maybe we will be immiserated by new technology. Maybe the future is one of mass starvation from overpopulation. But looking back at the historical experience of the last several hundred years, what can be the basis for having any confidence in such pessimistic claims?"
  • "On what principle is it that, when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"
I want to think about my answer to those questions.

If you take a graph like #1 above, but make the vertical scale a "log scale" (or if you take the log of the values) the exponential trend (on Graph #1, the dashed line) becomes a straight line:

Graph #2 from Mark J. Perry at Seeking Alpha, 2010
Maybe this is where the idea to show straight-line trends comes from: A constant rate of growth, logged, appears on a graph as a straight line. And in this case the straight line tells Mark J Perry that "there's one thing we can always count on in the long-run: 2% real growth in per-capita GDP".

The straight line on Graph #2, the red line, shows a constant rate of growth: 2.0% per year, Perry says. If economic growth continues at the same trend rate after 2009, the straight red line will continue up and to the right with exactly the same slope as in the 1809-2009 period.

If trend growth slows, there will be a change in the red line where the slowdown occurs. After the change, the red line may again be straight, but the slope of the line will be less steep. (If trend growth is faster, the slope will be more steep.)

The above graphs were created in the early years after the Global Financial Crisis and the Great Recession, back when economists still thought growth always "returns to trend" after recessions. Likewise this graph, from Mark Thoma:

Graph #3 from Mark Thoma at Economist's View, 2011
You will notice that on this graph the red trend line is straight, but not perfectly straight. Not sure what the calculation for that line is; maybe it's a Hodrick-Prescott with a high smoothing factor. It's not exponential.

On Graph #2 the trend line is perfectly straight: Perry assumed growth was exponential, and logged the values, so his trend line is perfectly straight. But even without making the assumption of exponential growth, Thoma got a trend line straight enough to suggest that growth will continue in the future along the same general path. It gave him the confidence to say "I am confident that we'll return to trend this time as well".

Noah Smith commented on Mark Thoma's thoughts:
The idea is that because this graph sort of looks like a straight line (although if you look closely, you'll see that it's not!), that it will continue to look sort of like a straight line into the future.

But off the top of my head, I can think of no good reason to think that this is true. The kinda-sorta stability of the long-term U.S. GDP growth rate is not a law of the Universe, like conservation of momentum, which is (we hope) fixed and immutable. It is a past statistical regularity whose underlying processes we don't fully understand. There may be solid, long-term factors that will keep our growth at this "trend," or there may not.
Maybe, Noah says, but maybe not.

In 2010 Mark J Perry was saying "we can always count on" 2% real growth in per-capita GDP. In 2011 Mark Thoma was saying: "I am confident that we'll return to trend". In those years, people expected the economy to return to trend.

Yet already in 2011, Noah Smith was saying:
Even if the U.S. returns to its "trend" growth rate of 2 or 3 percent, there seems to me to be no good reason to believe that it will return to its trend level.
In 2012, James Bullard was broaching the idea that the economy's performance showed that it was not going to return to trend. The trend has changed, Bullard said:
"A better interpretation of the behavior of U.S. real GDP over the last five years may be that the economy was disrupted by a permanent, one-time shock to wealth."
Also in 2012, Marcus Nunes noticed a change: "It´s more or less recognized that US RGDP is trend stationary (maybe that´s changed now!)", he wrote. Now, seven years later, I'm willing to say that economists' thinking has definitely changed. What was it Keynes supposedly said? "When the facts change I change my mind. What do you do?"

In September 2016, an article at VOX pinpointed the reason for the change in thinking:
The typical post-WWII recession has a distinct trough, followed by a sharp rebound toward a stable trend line. Following the Great Recession, however, this rebound is missing.
(Marcus Nunes turned up that link.)

As Marcus described it back in 2012, the US Real GDP trend growth rate was "about 3.3% from the early 50s to 2007". These days, the people who predict growth prefer to predict low growth. In the last five years you don't find anybody making predictions of growth above 2.3%. The trend of growth, or at least the expectation of growth, has definitely changed.

Here's the thing: Marcus was thinking in terms of one single trend growth rate for the whole 55 years ending in 2007, and said the consensus among economists was that the economy is "trend stationary". What's weird about all this is that none of those economists seems to remember the previous slowdown, the one after 1973. Let me jog your memory:
  • 23 May 2010, Scott Sumner: America’s amazing success since 1980
    I am not denying that growth in US living standards slowed after 1973, rather I am arguing that it would have slowed more had we not reformed our economy.
    Sumner provided two important bits of data: the date the slowdown started, and an evaluation ("it would have slowed more...").

  • 26 October 2014, Gavyn Davies: Is economic growth permanently lower?
    Three of my colleagues at Fulcrum have been examining the behaviour of long run GDP growth in the advanced economies, using developments of dynamic factor models to produce real time estimates of long run GDP growth rates. See the summary paper here by Juan Antolin-Diaz, Thomas Drechsel and Ivan Petrella, and the more academic version here [1].

    The results (Graph 1) show an extremely persistent slowdown in long run growth rates since the 1970s, not a sudden decline after 2008. This looks more persistent for the G7 as a whole than it does for individual countries, where there is more variation in the pattern through time.

    Averaged across the G7, the slowdown can be traced to trend declines in both population growth and (especially) labour productivity growth, which together have resulted in a halving in long run GDP growth from over 4 per cent in 1970 to 2 per cent now.
    (Unfortunately, the links don't work, and there is no graph to see.)

  • 1992 Presidential campaign, Ross Perot in his book United We Stand, this graph:

    Again, the slowdown in growth occurred around 1973.

If the 1952-2007 growth average is 3.3%, and there was a slowdown around 1973, then trend growth must have been more than 3.3% before 1973, and less than 3.3% after. No one acknowledges this. Economists talk about low volatility and low productivity, but don't mention slow GDP growth.

Everyone is now so certain the 2007-2008 slowdown was "permanent" that instead of 3% growth they now predict 2%. But none of em seem to remember the slowdown from 4% to 3% that occurred around 1973.

Monday, April 22, 2019

Here, here!

I wrote the following post in 2014, back when you didn't have to subscribe to read the Financial Times. Found it again just now, and I'm posting the first half of it. The topic is relevant to the one I've been writing that isn't finished yet. Here you go:

I went back to that Gavyn Davies article to see if his two "here" links were working. Nope. And the link in the footnote worked, but required more commitment than I was willing to make. So there was nothing for me to do but read his article again.

Gavyn Davies on economic growth:
The long run growth rate, as identified in the Fulcrum study, is defined as the trend component of the growth rate. Economic cycles will fluctuate around this rate. But the trend component can also change through time.

That's well said. The business cycle is variations from a trend line: a little above, then a little below, then a little above again. (See? Gavyn Davies said it better.) But the trend line is not a "given". The trend line is just what you get if you take all the little variations and smooth them out. What's left then is the trend. And of course the trend can change.

Heck, that's the most interesting part: to see the changes in the trend.

You can take a jiggy line and figure a moving average and use that to smooth out all the jiggies and show the general trend. (That's the kind of thing I do for fun; you know.) But what that means is, the trend line emerges from the jiggy line. Making a trend line is just an attempt to get a better look at where the jiggies are taking us.

So it's a little silly to take that thought, turn it backwards, and say the trend line is a given and the jiggies will forever follow the path indicated by the trend. In my experience, economic data comes from the past. A look at a graph of that data is a look at the past. You look for trends in the past, and you look for changes in trends, and that's what it's all about. So where does "forever" come from?

Maybe it comes from people who are not very good at math.

Gavyn Davies:
The regression to the mean that Summers/Pritchett have identified is a reversion to the global average growth rate. But that growth rate may also change. The assumption that the mean growth rate is one of the great economic constants in advanced economies is simply wrong.

It's wrong to assume that the trend growth rate is a constant that does not change.

Saturday, April 20, 2019

How it looks from the "rise" side of the cycle of civilization, at or near the peak

We may therefore acquiesce in the pleasing conclusion, that every age of the world has increased, and still increases, the real wealth, the happiness, the knowledge, and perhaps the virtue, of the human race.

Friday, April 19, 2019

How it looks from the "rise" side of the debt supercycle, at or near the peak

In Washington the men who formulate the nation's economic policies have used Keynesian principles not only to avoid the violent cycles of prewar days but to produce a phenomenal economic growth and to achieve remarkably stable prices. In 1965 they skillfully applied Keynes's ideas—together with a number of their own invention—to lift the nation through the fifth, and best, consecutive year of the most sizable, prolonged and widely distributed prosperity in history.

Wednesday, April 17, 2019

I like it, Nick

  • It's the money that's important, Nick says.
  • Yeah but nobody notices until the money gets out of order, Mill says.
  • I describe "out of order".

Nick Rowe:
The lesson I want you to draw from this post is that thinking of central banks setting a rate of interest and that rate of interest affecting desired investment and desired saving is a very inadequate way of thinking about monetary policy. A better way to think about monetary policy is to think of central banks setting a rate of interest in order to influence money growth... The rate of interest set by the central bank matters because, and only because: it affects money growth; ...
(My bolding.) Nick's statement brings to mind Milton Friedman quoting J.S. Mill:
There cannot, in short, be intrinsically a more insignificant thing, in the economy of society, than money;... it only exerts a distinct and independent influence of its own when it gets out of order.
Let me add that when money is "out of order" these days, it generally means there is too much bank money per dollar of government money.

Tuesday, April 16, 2019

Pitirim Sorokin

From Wikipedia:
Sorokin's work addressed three major theories: social differentiation, social stratification and social conflict...

Social stratification refers to the fact that all societies are hierarchically divided, with upper and lower strata and unequal distribution of wealth, power, and influence across strata. There is always some mobility between these strata. People or groups may move up or down the hierarchy, acquiring or losing their power and influence.
Sounds right to me. Well said: the kind of thing I might want to quote or link to, later on.

(Now I know where to find it.)

Sunday, April 14, 2019

Citizenship & unintended consequences

From Mortimer Chambers's Introduction to The Fall of Rome: Can It Be Explained?
From a different point of view, E. T. Salmon suggests that the action of the Emperor Caracalla, who bestowed Roman citizenship on nearly all free men living within the Empire in 212, actually had an unforeseen and dangerous result. Men who joined the army with the aim of winning Roman citizenship through service were no longer incited to enlist by this presumably strong motivation. Roman citizenship was worth serving for, since it conferred on a man the right to go to court and to make a legal will, not to speak of its social and other advantages. If it could be acquired automatically, this possibility could have discouraged enlistment by noncitizens.

Saturday, April 13, 2019

The Trump phenomenon, explained

The historian M. I. Rostovtzeff (1870-1952) on the fall of Rome:
What happened was a slow and gradual change, a shifting of values in the consciousness of men. What seemed to be all-important to a Greek of the classical or Hellenistic period, or to an educated Roman of the time of the Republic and of the Early Empire, was no longer regarded as vital by the majority of men who lived in the late Roman Empire and the Early Middle Ages. They had their own notion of what was important, and most of what was essential in the classical period among the constituent parts of ancient civilization was discarded by them as futile and often detrimental. Since our point of view is more or less that of the classical peoples, we regard such an attitude of mind as a relapse into "barbarism," which in fact it is not....
From "The Decay of the Ancient World and Its Economic Explanations" by M. I. Rostovtzeff. In The Fall of Rome: Can It Be Explained? edited by Mortimer Chambers.

And again:
Another aspect of the same phenomenon is the development of a new mentality among the masses of the population. It was the mentality of the lower classes, based exclusively on religion and not only indifferent but hostile to the intellectual achievements of the higher classes. This new attitude of mind gradually dominated the upper classes, or at least the larger part of them.
From "The Oriental Despotism" by M. I. Rostovtzeff. In The Fall of Rome: Can It Be Explained? edited by Mortimer Chambers. From the concluding passage of The Social and Economic History of the Roman Empire.

In his prefacing remarks to the latter essay, Mortimer Chambers writes:
... he [Rostovtzeff] attributes the breakdown of the Empire to an unfortunate transformation of its social structure. A common criticism of this theory is that it was probably suggested to him by his own tragic experience at having to leave Russia at the time of the Revolution.

Okay. So, worst case, the "shifting of values" and the "new mentality" tell the story not of the fall of civilization, but rather of the rise of Revolution with a capital "R". The kind of revolution that actually comes about, with guns and all.

Friday, April 12, 2019

"Public" and "private" terminology

At Fleximize: The Difference Between Public and Private Debt:
Private debt is the debt accumulated by individuals or private businesses.
Yeah. Private debt is the debt accumulated by the non-government sector.

At Prestige Funds: Private Debt:
Private debt covers the lending of money to companies and individuals by entities other than banks.
Nope, that's lending, not debt. Private lending. Except banks are typically private (non-government) entities also, like companies and individuals. So really, "private lending" isn't correct either.

Again, on their definition:
A private debt fund specialises in lending activity and raises money from investors and lends that money to companies. It represents an alternative to bank lending...
They describe lending activity. Their words. Lending, not debt. Lending, by entities other than banks. That's not the same as "private debt".

At YourDictionary: Public Debt:
public debt
  1. Public debt is defined as any money owed by a government agency.
public debt
  1. the total debt of all governmental units, including those of state and local governments
  2. national debt
At FocusEconomics: Public Debt:
Public debt, sometimes also referred to as government debt, represents the total outstanding debt (bonds and other securities) of a country’s central government.
Yeah. Public debt is government debt: sometimes Federal, state, and local government; sometimes only the Federal or central government debt. Either way, "public" debt differs from "private" debt in that public debt is owed by government, and private debt is owed by non-government debtors.

At AARP: What is the public debt?:
The Debt Held by the Public, or public debt, is all federal debt held by individuals, corporations, state or local governments, foreign governments and other entities outside the U.S. Government, less Federal Financing Bank securities.
No! They equate "public debt" with "debt held by the public". That's just wrong. Debt held by the public is one part of the Federal debt. Debt held by the Federal government, or by its agencies, is the other part.

And no again: AARP equates "debt" with "debt held". Debt is a liability; debt held is an asset. They couldn't be more different.

In conclusion:
  1. We must distinguish between owing debt and holding debt, between "debt owed" and "debt held". Debt owed, or debt (without a qualifier)  is a liability. Debt held is an asset.
  2. We must distinguish between "public" and "private". If "public" means government, then "private" must mean non-government.
  3. We didn't even get to the difference between debt and deficits.
If you are concerned about debt, you need to know these things.

If you are not concerned about debt, you should be.

Thursday, April 11, 2019

Not too far apart, these two

Edward Gibbon:
... the decline of Rome was the natural and inevitable effect of immoderate greatness. Prosperity ripened the principle of decay; the causes of destruction multiplied with the extent of conquest; and as soon as time or accident had removed the artificial supports, the stupendous fabric yielded to the pressure of its own weight.

Hyman Minsky:
The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.

The difference? Gibbon left out the internal dynamics of financial relations.

Wednesday, April 10, 2019

Three words that can bring civilization down

"Property is sacred"

The sacredness of property is not more rational than the divine right of kings.

The cycle of civilization is a massive business cycle driven by the concentration and dispersion of wealth. If property is sacred, there is no stopping the concentration of wealth. If you don't mind a dark age every so often, then you may be okay with "property is sacred". Otherwise, it's a no-go.

Me, I always liked Issac Asimov's picture of a civilization lasting twelve thousand years or more. But as Toynbee pointed out, in 6000 years of human civilizations, ours is the third generation. On average, a civilization lasts only about 2000 years.

By one commonly used count, this is year 2019.

My guess is that most people like the idea that property is sacred. They don't like the idea that "property is sacred" could be a driving force behind the concentration of wealth and the fall of civilization. If I'm right about that, it would explain why civilizations always collapse: We refuse to accept the idea that sacredness of property can be harmful, and we don't limit ownership.

So if a civilization is lucky enough that nothing else causes it to collapse, the concentration of wealth engendered by the principle that "property is sacred" will eventually bring that civilization to an end. One might say that sacred property is the method behind the madness in the phrase "civilizations die from suicide".

When the growth of wealth outpaces the concentration of wealth, civilization grows. When the concentration outpaces the growth of wealth, civilization declines.

Tuesday, April 9, 2019

I'm with Sumner on this. I don't like the "guns and butter" story, either

Myself, I attribute the Great Inflation to self-perpetuation. For example, I heard on the news once -- years back, and only once -- that the rising price of oil just compensated for prior inflation. (David Glasner points out that "the Arab oil embargo did not take place until late in 1973 when inflation, wage-and-price controls notwithstanding, had already surged well beyond acceptable limits".)

But self-perpetuation does not explain how the inflation got started. Wages were often blamed, wrongly I think. And yes, sometimes, "guns and butter" gets the blame. But I say it was the rising cost of finance that got inflation going. I don't think anyone ever agrees with me on this, but that doesn't make me wrong.

Monday, April 8, 2019

Summers & Greenspan, Q&A

Larry Summers:
Such economic success as the industrial world has enjoyed in recent decades has reflected a combination of very low real rates, big budget deficits, private leveraging up and asset bubbles.

No one from whom I have heard doubts the key conclusion that a combination of meaningfully positive real interest rates and balanced budgets would likely be a prescription for sustained recession if not depression in the industrial world.
(Summers didn't really ask why, but he should have.)

Alan Greenspan:
[Among the] reasons to expect demands to moderate and economic activity to settle back... [is that] many households have built up sizable debt burdens in recent years, and coping with debt repayments could hold down their spending.

Debt goes up, Greenspan says, and the repayment takes a bite out of aggregate demand. He's right.

Maybe the problem is the word "repayment". Maybe it makes you think that debt goes away after a while so it isn't a problem. Yeah but it doesn't work like that. We borrow faster than we repay. So as a rule, debt is always increasing.

Greenspan said "households have built up sizable debt burdens in recent years". He said it in 1996. But household debt kept growing. All the debt kept growing, till 2008. It wasn't only household debt. And then we had really sizeable debt burdens.

These days, debt is growing again. But not as fast as before, so growth remains weak.

Sunday, April 7, 2019

So did Kuznets say it, or not?

Shekhar Aiyar and Christian Ebeke at VOX:
Despite the firm consensus that income inequality is intrinsically undesirable, its impact on economic growth is much disputed. Simon Kuznets famously argued that inequality is beneficial for economic growth at an early stage of development, since a moneyed capitalist class can undertake more investment, but is harmful at a later stage. Others have pointed to inequality as a necessary, even desirable outcome of rewards to innovation and risk-taking...
Granted, it's their opening paragraph. They're setting the stage for what they really want to say. But to me it is objectionable to speak, even in passing, to speak about inequality being "beneficial" or "harmful" or "necessary" or "desirable" without at least acknowledging that numbers or percentages or relative levels matter. There will always be income inequality, but surely there are differences between a little, a lot, and a lotta lot.

What's interesting in their quote is Kuznets's different evaluations of inequality in "early stage" and "later stage" economies. This has Cycle of Civilization implications.

Simon Kuznets famously argued that inequality is beneficial for economic growth at an early stage of development ... but is harmful at a later stage.
I had to go looking. Where does Kuznets say this? He's not listed among the VOX article references. What I've found so far is not promising:
  1. The Political Economy of the Kuznets Curve by Daron Acemoglu and James A. Robinson:
    One of the major stylized facts about long-run processes of economic development is the Kuznets curve—the inverse-U shaped pattern of inequality. In a seminal paper, Kuznets (1955) argued that as countries developed, income inequality first increased, peaked, and then decreased, and documented this using both cross-country and time-series data.
    According to this source, Kuznets said inequality changes. I don't find him saying the benefit/harm from inequality changes.

  2. How does income inequality affect our lives? from the OECD iLibrary:
    It’s also possible to look at the relationship between inequality and growth from the opposite direction: Does inequality affect growth and, if so, how? The Harvard economist Richard B. Freeman is one of those who believe it does. He argues that inequality is good for growth – up to a point. But after that point, rising inequality means falling growth...
    So okay, somebody said it. But I find Richard Freeman saying it, not Simon Kuznets.

  3. I went to Aiyar and Ebeke's own paper, the one listed among their VOX article references: "Inequality of Opportunity, Inequality of Income and Economic Growth", IMF Working Paper WP/19/34. 23 pages. I searched for Kuznets. No matches were found. WTF.

I'd like to add the Kuznets and the variable benefit of inequality argument to my arsenal of evidence on the Cycle of Civilization. Unfortunately, I can't do that.

If you have a link to Kuznets making the argument, I'm interested.

Why the Economy Is Slow: A Never-Ending Story

Why do we not grow?

1. We think printing money causes inflation.

2. We think we need credit for growth.

3. Our policies restrict the growth of money and encourage the use of credit.

4. As a result, we have come to use credit for money.

5. Policy does not fight inflation by getting people to reduce their debt, so debt accumulates.

6. The increasing reliance on credit drives up embedded interest costs.

7. The cost of using money comes to compete with wages and profit.

8. Low wages and low profit lead to inadequate growth.

9. We think more access to more credit will solve the growth problem.

10. Greater reliance on credit increases the cost of using money and puts further downward pressure on wages and profit.

11. Go to step 8.

Saturday, April 6, 2019

Why the economy is slow

Testimony of Chairman Alan Greenspan
The Federal Reserve's semiannual monetary policy report
Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate
July 18, 1996

... Looking forward, there are a number of reasons to expect demands to moderate and economic activity to settle back toward a more sustainable pace in the months ahead.

First, the bond markets ...

Second, the value of the dollar ...

Third, the support to economic growth provided by expenditures on durable goods, both for household consumption and business fixed investment, is likely to wane in coming quarters. Consumer spending in the past few years has been boosted as households have made up for the purchases of big-ticket items that they had deferred during the recession and the early, weaker phase of the recovery. Five years after the business-cycle trough, however, we should expect that this pent-up demand has been largely exhausted. Moreover, many households have built up sizable debt burdens in recent years, and coping with debt repayments could hold down their spending.
That last part -- repayment of debt holds down spending -- that's what I talk about all the time. I'm just thrilled to see Greenspan admit it could happen.

Greenspan also said
While these are all good reasons to anticipate that economic growth will moderate some, the timing and extent of that downshift are uncertain.

It didn't happen in 1996. It happened in 2008, and it was hard to miss.

Friday, April 5, 2019

Look at Capacity Utilization

What I said yesterday: "Look at Capacity Utilization."

Here is Total Capacity Utilization (TCU) from FRED, with a "best performance" trend line eyeballed in:

Graph #1: Total Capacity Utilization with my estimate of a Best Case Trend Line
The best, or highest, capacity utilization that we can get shows a consistent decline since the 1960s. Where we were once near 90% utilization, we are now below 80% at best. The peaks in the data are reliably close to trend except for two brief periods which I have circled, and possibly at the near end (see arrow) where we can't say what will happen next.

The circled low peaks occur after the 1980 and 1982 recessions. Note that the circled peak following the 1982 recession is well below trend despite the uncharacteristically high growth of Real GDP at the same time. In my view the utilization peaks run low somehow because of the disturbance created by the Federal Reserve in the process of ending the so-called Great Inflation.

The circled high peaks occur in the mid and late 1990s, during the good years of the "new economy" identified by Alan Greenspan. They occur in the early years of the high productivity period which notably followed 20 years of low productivity. In my view the utilization peaks run atypically high because financial costs were atypically low. With less money going to pay for the money we use to buy things, there was more money available to buy things. That gave a boost to aggregate demand.

You could argue the point, but it looks to me that the final peak (at the arrow) is above trend. That's unusual. It leads me to wonder if perhaps the future will bring a second, equally high peak, as happened in the 1990s. It wouldn't surprise me. Because, you know, financial costs are atypically low again at present.

Thursday, April 4, 2019

"It’s one of the major challenges of our time, really, to have inflation, you know, downward pressure on inflation let’s say."

The title of this post is part of a statement from Fed Chairman Powell, from a press conference, recently quoted by Tim Duy. And of course quoted by me the other day, because it was funny.

I want to say #1 that if it was me at a press conference, the quotes would be so bad they wouldn't even be funny. So I sympathize with Mr. Powell, and he has my respect.

Be surprised, I don't care. Let's consider what he said. He said downward pressure on inflation is one of the major challenges of our time.

It is. And by focusing on it, Powell was perhaps trying to bring this challenge, this downward pressure on inflation, bring it front and center.

A major challenge to explain it, I think he means. Hold that thought.

On my old econ blog, one of the first posts that I wrote was The Big T: How to prevent inflation when the Fed prints a trillion dollars. March, 2009.

In that post I had a good laugh when the Fed said they would "employ all available tools ... to preserve price stability." And I wrote
The phrase "preserve price stability" seems to mean the Fed will fight inflation. But it really means the Fed will fight deflation.
I quoted Glenn D. Rudebusch of the San Francisco Fed on "unconventional strategies":
"A transparent commitment to a positive inflation objective may help prevent inflationary expectations from falling too low, which could help forestall any excessive decline in inflation directly."
By "a positive inflation objective" Rudebusch meant keeping inflation up, not down.

That was in 2009, when Ben Bernanke was Chairman of the Fed. Ten years have gone by. What started as a "commitment to a positive inflation objective" has grown into a focus on "one of the major challenges of our time". And the attention level has moved up from Rudebusch (presently Executive Vice President and Senior Policy Advisor at the San Francisco Fed) to Jerome Powell, Chairman of the Federal Reserve.

So basically, we still have the same problem we had ten years ago: downward pressure on inflation. And as I understand Chairman Powell, we still need to explain this downward pressure.

The simplest explanation is best, right? Recall this, from Alan Blinder:
At any given moment, there is a core inflation rate toward which the actual inflation rate tends to gravitate. This rate is determined by fundamental economic forces, basically as the difference between the growth rates of aggregate demand and aggregate supply.
If Blinder is correct, then we can explain the downward pressure on inflation as a case of low aggregate demand. It is the sort of thing that might arise from a permanent policy fixation on the supply side.

How to explain the downward pressure on inflation? Maybe the economy is just slow. Slow, not since 2008, not even since 2001, but slowing persistently since the mid-1970s. Scott Sumner, for example, says: "I am not denying that growth in US living standards slowed after 1973, rather I am arguing that it would have slowed more had we not reformed our economy [in the 1980s]". And Tyler Cowen, in Stubborn Attachments, mentions "the great stagnation, a slowdown in growth which overtook the Western world starting in about 1973."

Look at Capacity Utilization: trending down since the start of the 1974 recession; but flat or possibly up-trending before that recession. What better measure can there be, of the difference between the growth rates of aggregate demand and aggregate supply?

The economy slowed after 1973, and would have slowed more in the 1980s if not for Reaganomics. It slowed more after the 2001 recession, and slowed more again after the 2008 recession. Oh, and there was one brief burst of vigor in the latter 1990s.

The economy is just slow. Think about it: With all this great new technology we have, and with the people who don't like it mostly retiring out of the workforce, shouldn't "the new economy" be giving us more of the high productivity and low inflation that Alan Greenspan observed in the 1990s? With all that technology, shouldn't we reliably be getting 4% annual growth, or better? Well, we're not. The economy is slow, and has been slowing for something like 45 years.

Our economy is just slow. Aggregate demand is down. That's the reason we have not been getting the inflation economists expect. That's the reason there is "downward pressure on inflation". That's the simple explanation.

Tuesday, April 2, 2019

Dueling "recession probability" indicators

In chronological order...

  •  1 March 2019: James Hamilton, The long expansion continues
The Bureau of Economic Analysis announced yesterday that U.S. real GDP grew at a 2.6% annual rate in the fourth quarter of 2018. That’s below the 3.1% average for the U.S. economy over the last 70 years, but better than the 2.2% average rate since the recovery from the Great Recession began in 2009:Q3...

The solid growth numbers kept the Econbrowser Recession Indicator Index at 1.5%, among the lowest levels we ever see. That means the U.S. economic expansion has now been under way for 9-1/2 years, 2 quarters shy of the longest expansion on record (1991:Q2-2001:Q1).
GDP-based recession indicator index.
The plotted value for each date is based solely on information as it would have been publicly available and reported as of one quarter after the indicated date, with 2018:Q3 the last date shown on the graph. Shaded regions represent the NBER’s dates for recessions, which dates were not used in any way in constructing the index, and which were sometimes not reported until two years after the date.

  •  24 March 2019: Tim Duy's Fed Watch, Fed Needs to Get With The Program
Everyone has their pet recession indicator; many are probability models based on some combination of yield spreads and other leading indicators. Most will be raising red flags like this estimate of the probability of recession in six months based on the 10s2s and 10s3mo spreads and initial unemployment claims:

... The risk of recession has risen to levels that demand attention from the Federal Reserve. In the two cases of similar spikes in the 1990s, a recession was avoided by the rapid response of the Fed in the form of rate cuts. The times that response was lacking, a recession followed.

So now I switch from analyst to commentator: The above leads me to the conclusion that the Fed needs to get with the program and cut rates sooner than later if they want to extend this expansion.

Once again I took Duy's graph, erased the background, and used it as an overlay. This time I didn't erase the recession bars on his graph. I used his recession bars to resize and position his graph over Hamilton's.

This is probably not the must useful graph I ever made, but I wanted to see it:

Graph #3: Hamilton's (black) and Duy's (blue) Recession Probabilities
Duy's three light gray recession bars hide Hamilton's recession indicator during the recessions. But you can see it on the first graph. And anyway, I'm more interested in recession probabilities when we're not already in recession.

The interesting piece of the graph is the right end, where Duy indicates recession and Hamilton does not. Hamilton's data ends before Duy's; as Hamilton notes, "The GDP data were a month late being released due to the government shutdown." Another month or two, or three, we'll see what happens on Hamilton's graph.

My first thought was that when the data's available, Hamilton's graph will show an increasing recession probability because of the interest rate spread, as Duy's does. But Hamilton's index isn't based on the interest rate spread. As described in The Econbrowser Recession Indicator Index, it is based on GDP growth rates and the probability (based on experience through 2005) that a given GDP growth rate occurs during a recession or during an expansion.

It's a different and, as Hamilton says, an objective approach. And it has nothing do do with interest rate spreads. So there is a chance Hamilton's graph will not spike upward as Duy's does. Ooh, this just got interesting.