Thursday, May 30, 2019

The very definition of excessive finance

"Financial Sectors" as a percent of "All Sectors" (Debt Securities and Loans; Liability, Level) Logged Values:

Graph #1

I added trend lines by eye, in Excel. As I am not an economist it is perfectly okay to do that.

Were I to put dates on it, 'twould be as follows:
  • Trend 1:  Q4 1951 - Q4 1974
  • Trend 2:  Q4 1976 - Q4 2002
  • Trend 3:  Q4 2002 - Q2 2009
  • Trend 4:  Q2 2011 - Q4 2018
Q4 2018 is end-of-data.

Using Excel's "Size and Position" option to examine the trend lines -- as I said: I'm not an economist, so it's okay -- turns up the following:

The graph of those slope values shows downward progress:

Graph #2
but that was obvious from the start. Looking at the numbers, though, I can say that the Trend 2 growth rate is only about 72% of the Trend 1 growth rate. And it's all downhill from there. (I didn't check this but I'm pretty sure I'd get the same 72% number if I looked at the values in a more respectable manner.)

So what can we conclude from this? I'm thinkin: Excessive finance doesn't just drag down the economy. It even drags down finance.

There's a lesson in that, I think.

Tuesday, May 28, 2019

Financial Business Interest Received: Corporate and Non-Corporate

This is a stacked graph. The corporate number is shown in red; the non-corporate number (blue) adds a little on top of that. For example in the last year shown (2017) the corporate number is a little under 1,600 billion; the total (corporate plus noncorporate financial business interest received) is a little over 1,600 billion:

Graph #1
Just to get an idea of relative size.

Here's another look: Corporate as a Percent of Total (corporate + non-corporate):

Graph #2
Now that's interesting. The corporate share hung in there at 99% of the total from 1946 to 1994, then dropped rapidly to 91% of the total. What's really odd is that since the Great Recession the drop has stopped and the corporate share is now hanging in there at 91%.

I have no idea what caused the drop or the stop -- I'd guess tax law changes but I have no idea really -- but that's definitely an interesting graph.

Sunday, May 26, 2019

Bears repeating

I'm tedious-ing  my way through the 65 comments on Scott Sumner's 2012 post "Debt surges don’t cause recessions". Here's a good one.

Ryan quoted Sumner:
“Forget about debt and focus on NGDP. It’s NGDP instability that creates problems, not debt surges.”
and remarked:
This is the closest I have ever seen of an economist saying “It’s not the fall that kills you, it’s the sudden stop at the end.”
I laughed my ass off and visited Ryan's Stationary Waves blog. The blog is still active, seven years later. (At this writing, the most recent post is only two days old.) Not all econ, but some interesting stuff.

Sumnr responded to Ryan:
Rayn, I think you misread me. I am saying it’s the fall (in NGDP) that kills you. When you have a debt bubble but no fall in NGDP, you don’t get hurt. Or maybe I misread your comment . . .

Ryan responded in turn:
Prof. Sumner,

It’s like this: If rising debt causes a decrease in NGDP, then rising debt kills you. If NGDP falls for some other reason, then it is that other reason that kills you.
YES! Ryan continues:
Changes in outstanding debt may cause a change in NGDP. Changes in employment may cause a change in NGDP. Changes in the money supply may cause a change in NGDP.

But in all cases, a change in NGDP is the result of some other factor. NGDP does not simply rise and fall in a vacuum, for no discernable reason.
Yeah, I say the same: GDP is a result (of all the things we do to boost GDP). GDP is the consequence of other things. Ryan finishes his thought:
So basically, what I am suggesting is that when you invite us not to “reason from” anything other than NGDP, you are correctly pointing out that it is the sudden stop at the end (NGDP) that kills us. On the other hand, you are moving us away from any analysis of why on Earth we might be plummeting toward the ground. It’s like trying to prevent suicides by analysing splatter marks on the sidewalk.
It's an evaluation of Sumner's thinking that definitely bears repeating.

Sumner replied:
Ryan, You said;

“But in all cases, a change in NGDP is the result of some other factor. NGDP does not simply rise and fall in a vacuum, for no discernable reason.”

The Fed determines NGDP.

A comment by Vivian Darkbloom, not in the Ryan/SSumner thread but entirely relevant:
I sometimes think that you have so much invested in [NGDP targeting] (which by your own admission does not constitute *all* of macro) that you reject out of hand any other explanation for economic phenomena.

Friday, May 24, 2019

Palladino on corporate financialization

At the Roosevelt Institute: Corporate Financialization Hurts Jobs and Wages by Lenore Palladino. In the first paragraph Palladino sets the context of the argument. In the second, she defines corporate financialization: "the shift within public companies from making money off of selling goods and services to making a higher proportion of their profits off of financial activity..."

Exactly. Back in the 1990s, I remember being surprised to read that
Since 1990, Ford has made more money from financial services, principally automobile loans to consumers and dealers, than from car- and truck-making operations.

And less surprised, but still shocked to read that
Ford Motor Company has earned more as a banker than as a car builder in five of the last six years.

"[T]he ratio of financial profits out of overall corporate profits has increased dramatically in the last few decades," Palladino says, "and corporations have spent trillions purchasing back their own stock simply to increase their share price since such maneuvers became legal in 1982."

Though the literature is still nascent, several scholars have examined the direct negative impact of corporate financialization on income inequality. One study found that financialization, net of other factors, could account for more than half of the decline in labor’s share of income in the non-financial sector of the economy
Income is generated more within the financial sector these days, and less within the non-financial sector. And, Palladino says, this "financialization of America’s public corporations has contributed just as much to economic inequality as more commonly-cited factors."

As Adam Smith said: The cost of finance, if not paid out of profit, must come out of wages.

Wednesday, May 22, 2019

Compatible concepts

I came upon an old (2010) article by L. Randall Wray: Here's What Prophetic Economist Hyman Minsky Would Say About Today's Crisis, at Business Insider.

It's a good one. Some real zingers, like
Even if the early postwar "Keynesian" economics had little to do with J.M. Keynes at least it had some connection to the world in which we actually live.
The article also contains this observation:
According to Minsky, the economy emerged from WWII with a very robust financial system—hardly any private debt (it had been wiped out in the Great Depression) and lots of safe and liquid federal government debt...
Yeah, exactly. It reminded me of one of the major themes of my econ blogging. What follows is mine of 22 March 2016.

Scattered Thoughts on the Private-to-Public (P2P) Debt Ratio

If I take TCMDO debt -- All Sectors; Debt Securities and Loans; Liability, Level -- and subtract out the Federal portion of that debt, I'm left with something I call the Non-Federal debt. If I take the non-Federal debt and look at it relative to the Federal, I get the red line in this graph:

Graph #1: The Private-to-Public Debt Ratio (red) and the Growth Rate of RGDP (blue)
The red is the same data I looked at twice recently -- but only the FRED part this time, so it starts after World War Two instead of during World War One. Sigh... Also, the data frequency is semiannual instead of quarterly because -- spoiler alert -- I'm going to show a scatterplot, and it turns out that "Quarterly, End of Period" is not the same as "Quarterly". Sigh...

The blue line is inflation-adjusted GDP, the so-called "real" GDP. Percent change from year ago. Semiannual. And (in case you missed it) blue.

The scatterplot caught my eye:

Graph #2: The Scatterplot Version of the Previous Graph with
the Debt Ratio on the X-Axis and the RGDP Growth Rate on the Y-Axis
What caught my eye is this: On the left, the dots fit themselves pretty well to an up-and-down pattern. On the right, the dots fit themselves mostly to a left-and-right pattern. And in the middle, there's just a jumble of dots.

That jumble is mostly between 3¼ and 5¼ on the X-Axis. But if you look, most of the activity of the red line on Graph #1 is between 3.25 and 5.25 on the vertical axis:

Graph #3: Showing the "Activity Zone" of the Red Line
In other words, there is a big cluster of dots there on the one graph because that's mostly where the red line is, on the other.

For the record, the activity zone is too high. If the red line ran mostly below the 3.25 level instead of mostly above it, our economy would be in a lot better shape. But that's neither here nor there, I guess...

You can see that the red line is mostly between the two dotted red lines (in other words, between 3.25 and 5.25 on the X-Axis of Graph #2). Below the lower dotted line are the dots that fit themselves to an up-and-down pattern on the left on Graph #2. Above the upper dotted line are the dots that fit themselves to the mostly left-and-right pattern on the right on that graph.

I want to take Graph #2, the scatterplot, and separate the dots into those three regions: left, right, and middle. Then I want to look at the dots in those three regions and look at the Y-Axis values, the RGDP Growth Rate values. I want to get the average of the RGDP Growth Rates for each of those three regions. It looks to me like the left will show a high average rate of growth, the right will show a low average rate, and the middle will show in the middle. But we don't have to guess.


Out with the dogs, I was thinking about the scatterplot dot behavior. On the left, when the P2P debt ratio is low, we see RGDP growth following the expected, business-cycle-like behavior: up and down, up and down, up and down, and so forth. On the right, where the P2P ratio is high, we see RGDP growth behaving unexpectedly. And large changes in the debt ratio have relatively little effect on RGDP growth. Moreover, the highs and the lows of RGDP growth are lower on the right (when P2P is high) than on the left (when P2P is low).

I'm thinking these differing behaviors of RGDP growth may show up in the Phillips curve. When P2P is low, the curve behaves as Bill Phillips described. When P2P is high, it does not. Hey -- it's just a thought. I can't prove it yet. I haven't even looked into it yet. I'm just sayin, there is more to this P2P story than anyone realizes.


I downloaded the data from the scatterplot graph and eliminated rows before the second half of 1951, where some values were missing. I ended up with data from 1951 H2 ("H" for half, as opposed to "Q" for quarter; that's FRED notation) to 2015 H1. I got 128 rows of data.

Of the 128 items, 30 show P2P ratios less than 3.25. These have an average growth rate of 4.06 percent.

Of the 128 items, 19 show P2P ratios above 5.25. These have an average growth rate of 2.01 percent.

The balance, the 79 items with a P2P from 3.25 to 5.25 (inclusive) have an average growth rate of 3.05 percent.

So yes, as we might have expected, a low private-to-public debt ratio is associated with a high rate of RGDP growth. And a high P2P debt ratio is associated with a low rate of RGDP growth.

What else is new.

Friday, May 17, 2019

Capitalism and irony

Private debt has long been a problem. The textbook I used when I took Econ 101 (McConnell Economics, 1975) says
Although the size and growth of public debt are looked upon with awe and alarm, private debt has grown much faster. Private and public debt were of about equal size in 1947. But private debt has grown much faster and is now over three times as large -- about $1,350 billion, compared with $470 billion -- as the public debt.
And that's from the 1975 edition. McConnell adds:
If you insist upon worrying about debt, you will do well to concern yourself with private rather than public indebtedness.

In the January/February 1993 issue of the Federal Reserve Bank of St. Louis Review, Keith M. Carlson's article on debt, the opening sentence:
Early last year, a survey of the 50 Blue Chip forecasters indicated that the most important factor influencing the outlook for near-term economic growth in the United States was the debt burden carried by governments, households and businesses.
Okay, maybe not only private debt. But not only public debt, either. And Carlson's article is from the early 1990s.

During and immediately after the Global Financial Crisis and Great Recession, concern about private debt was sprouting like green shoots:
  • "The global economy cannot return to health until households have worked off at least part of their excess debt. So far they have made little progress." -- The Secret Economist, 8 May 2009
  • "Thirty years of surging growth in private sector leverage, in the balance sheets of the financial sector and in notional profitability of the financial sector in the US and other high-income countries has ended in calamity." -- Martin Wolf, 23 December 2009
  • "My operating assumption is that the main current problem with the US economy is Too Much Debt in the private sector, and that all will not be well until both the household and financial sectors have deleveraged back down at least to something like the levels of the 1990s (at a rough guess). On the pace so far, it appears likely that that will take at least a decade." -- Stuart Staniford, 3 July 2010
  • "I think it’s fair to say that a majority of economists believe that excessive private debt played a key role in getting us into this economic mess, and is playing a key role in preventing us from getting out." -- Paul Krugman, 25 September 2010

As recently as 2016, Richard Vague was saying
"Both private debt and government debt matter, and both will be discussed here, but of these two, it is private debt that has the larger and more direct impact on economic outcomes... When too high, private debt becomes a drag on economic growth."
But at long last, it seems capitalism has found a solution to the problem of private debt. At BNY Mellon for example we read that
The post-crisis era has seen private debt become an established asset class in its own right, matching the needs of yield-seeking institutional investors and companies looking for capital to grow.
"Private debt" is no longer a problem. They redefined it. Think I'm kidding? See for yourself:

So it goes.

Thursday, May 16, 2019

Debt overload by design

From the February 1992 testimony of Alan Greenspan to Congress:
To support these favorable outcomes for economic activity and inflation, the Committee reaffirmed the ranges for M2, M3, and debt that it had selected on a tentative basis last July--that is, 2-1/2 to 6-1/2 percent for M2, 1 to 5 percent for M3, and 4-1/2 to 8-1/2 percent for debt, measured on a fourth-quarter-to-fourth-quarter basis. These are the same as the ranges used for 1991.
Suppose they hit dead-center in the middle of each target range. Then M2 money would have grown 4.5%, M3 would have grown 3%, and debt would have grown 6.5%.

Debt grows faster than money by design. And, apparently, this has been the design since 1970 or before.

So if the question is "Why do we have all this debt?" the answer is "Policy".

Wednesday, May 15, 2019

On Cochrane's remarks

John Cochrane said something interesting the other day:
From the summaries I have read, some of the central propositions of MMT draw a false conclusion from two sensible premises. 1) Countries that print their own currencies do not have to default on excessive debts. They can always print money to pay off debts. True. 2) Inflation in the end can and must be controlled by raising taxes or cutting spending, sufficiently to soak up such printed (non-interest-bearing) money. True. The latter proposition is the heart of the fiscal theory of the price level, so I would have an especially tough time objecting.

It does not follow that the US need not worry about deficits...
My gut agrees with Cochrane's "It does not follow" statement and the paragraph it came from. And since I'm not yet talking about what I want to talk about, let me say I have finally figured out what my problem is with statements like "Countries that print their own currencies do not have to default on excessive debts." My problem with such statements is simple: ALL COUNTRIES SHOULD PRINT THEIR OWN CURRENCIES.

Statements about "countries that print their own currencies" treat (or seem to treat) such countries as a special case -- especially when the statement gets repeated as often as this one does. And that's a dangerous thing, because it may lead people to believe that countries NOT printing their own currencies is the normal condition and countries printing their own currencies is not the norm.

Anyway, what I wanted to talk about is the part where Cochrane says "... raising taxes or cutting spending, sufficiently to soak up such printed (non-interest-bearing) money." And the part of that that draws my attention is the part in parentheses: "non-interest-bearing" money.

As Cochrane sees it, raising taxes would be a way to take more non-interest-bearing money out of the economy. As I see it, that would raise the ratio of interest-bearing to non-interest-bearing money, which is exactly the wrong thing to do.

Policies which let us write off our interest expenses are policies that encourage people to be in debt. I would replace such policies with policies that reduce our taxes when we make extra payments on our debt. These would be policies that actually help people get out of debt. By this change we would change a world that maximizes debt into a world that minimizes it. We would slowly but permanently reduce the cost of finance in our economy. We would free up our money to be used for consumption and investment; to be used, in other words, to increase aggregate demand.

And "rentiers" would have to go get jobs.

Tuesday, May 14, 2019

I'll be using higher "debt service" numbers from now on

Alan Greenspan, in Testimony before Congress, February 19 1992 (PDF)
From page -10- (or 11 of 17)
In part because we have seen declines in long- as well as short-term rates and increases in equity prices, progress has been made in balance sheet restructuring, and hopefully more is in train. As a result of lower interest rates, household debt service as a percent of disposable personal income has fallen in the past year, from about 19-1/2 to about 18-1/2 percent.
Whoa! Debt service fell from 19.5% to 18.5% of DPI? The numbers I look at are around 10%, maybe 12%. Here are the four Household Debt Service and Financial Obligations Ratios series that FRED offers. I've always used the blue one, third from the bottom (the one in the neighborhood of 10 or 12 percent).

To the FRED graph I added a line running from 19.5% in January of 1991 to 18.5% in January of 1992, an approximation of the fall in debt service that Greenspan described:

The Four FRED Series, and Greenspan's Estimate
Even the "Household Financial Obligations" series is low, relative to Greenspan's numbers.

Monday, May 13, 2019

Simple and obvious

Back in the 1960s, in a car magazine I was reading, somebody distinguished between "quick" and "fast" in regard to drag racing. I remember, because I never thought about it before, and the guy opened my eyes.

As I recall, "quick" refers to the time it takes to travel the quarter mile, and "fast" to the top speed.

In Growth in the 1970s I said
Growth was as good in the '70s as it was in the '60s. There just wasn't as much of it.
The statement brings up a difference comparable to the difference between "quick" and "fast" in drag racing: A difference that is simple and obvious once you are aware of it. But if you're not aware of it, finding out can be an eye-opener.

Economic growth almost always varies from year to year; from day to day, even. But apart from releases of the latest information, growth is almost always reported as a long-term trend. Such reporting provides useful information, but it also hides useful information: Sometimes growth is vigorous; sometimes not. Sometimes it isn't growth at all, but recession -- and sometimes recessions occur a decade apart, but sometimes only a year apart.

Sometimes, these differences are naturally occurring. Sometimes they are created by policy. Sometimes, we don't know they were created by policy, or maybe we pretend not to know.

The long-term trend hides the differences between rapid growth punctuated by frequent recessions, and slower growth interrupted less often by recessions (or by less severe recessions). Even if the trend rate of growth is the same either way, economic conditions must certainly be different in those different scenarios. By ignoring the differences, we can deceive ourselves and each other.

This graph shows recessions in the U.S. since 1854:

Graph #1: Recessions since 1854
The gray bars indicate recessions. The white spaces between the gray bars show times of growth. There is much more gray on the left half of this graph than the right half. There is a lot more white space after the 1930s -- and then more yet after 1960, except for the cluster of recessions in the 1970s and early '80s, during a time called "the Great Inflation".

Consider just the 58 years since 1960:

Graph #2: Recessions since 1960
In the first half , the 29 years from 1960 to 1989 there are five recessions. In the latter half, the 29 years from 1989 to 2018, there are three.

A time of frequent recessions is likely to be a time of relatively low trend growth, simply because growth numbers are low (or even negative) in recessions. Low numbers and negatives drag the average down.

So you might look at the graph and say that the 1970s was a time of low growth. A general view might even develop, which says that growth in the 1970s was slow. It could happen.

But the economic conditions of the time were, in a word, inflationary. The main concern of policymakers and econ news articles, in the 1970s, was inflation. Not slow growth.

Inflation is often associated with a "hot" or "overheated" economy, one with too much aggregate demand. As Wikipedia puts it:
Overheating of an economy occurs when its productive capacity is unable to keep pace with growing aggregate demand.
The economy is not likely to be "hot" and "slow" at the same time. And we know there was inflation in the 1970s. This should lead us to question the view that growth in the 1970s was slow. Come to think of it, it should also lead us to seek alternatives to the view that overheating occurs when productive capacity cannot keep pace with growing aggregate demand. But that's a different story.

We lose information when we think in terms of trend growth. This is true even if we figure separate trends for separate decades, because the decade with more recessions is likely to have slower trend growth. Growth-phase growth may be as good (or better) in the slower decade, while recession-phase growth brings trend growth down.

What makes this difference significant is that it fails to consider that the recessions may have been created on purpose by policy as a way to fight inflation. It fails to consider the view that the economy was hot rather than slow, and that the problem might really have been inflation, not slow growth.

How can you solve an economic problem if you don't even know whether the problem is what you think it is, or the opposite of what you think?

Forgive me if I dwell on this.

If you want to say the US economy was slow in the 1970s, okay, fine, it was slow in the 1970s. But it was policy that slowed things down, because of the inflation problem in those years. So if you are talking about that slow economy, you are talking about a result of policy and you are treating the result of policy as the problem.

You cannot squarely address the problem of slow growth in the 1970s unless you treat it as a result of the policy response to inflation. I'm not recommending this, but in the case of the 1970s the problem of slow growth could have been solved by ignoring the inflation problem.

If this opened your eyes the first time I said it, but it's boring you now, then I have succeeded: The concept has become simple and obvious.

Consider now debt.

We take on debt by borrowing money. The cost of doing so is the interest we pay. So you might think that when interest rates are low, the cost of debt is low. But this ignores the size of the total accumulation of debt on which we pay interest. It is as if you are looking at the economy's trend growth rate, and forgetting about recession frequency -- or looking at the dragster's rate of speed and forgetting about elapsed time.

Saturday, May 11, 2019

Growth in the 1970s

Some people say economic growth slowed in the mid-1970s:
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.

Some people say otherwise:
In a recent post I pointed out that during the 1970s we had normal (3.2%) growth...

Couple years back, I quoted this from American Thinker:
Let us not forget that real GDP growth in 1984 was 7.3 percent; the next-highest value since was just 4.7 percent in 1999.
1984 really does stand out:

Graph #1: "Morning in America" (quarterly data)

To smooth the jiggy growth data (gray) on the graph below, I show a 9-year moving average in blue. It's a centered moving average: the last point shown for example, 2014, is the average for the years 2010 thru 2018. (And by the way, the two rightmost data points of the blue line show sharp uptrend because 2008 and 2009 drop out of the calculation.)

Graph #2: Based on Annual Values from FRED's GDPCA Series
Before 1970 or so, the blue line is roughly centered at the 4% level.

From the start of the 1970s to the early 2000s, the blue is centered between 2.00 and 4.00, so 3% or a little higher (but definitely below the 4% level).

The moving average for 2004 drops (because it includes the low growth of 2008); and by 2005 it drops below the 2% level.

Was growth in the 1970s slow as Scott Sumner says, or was it normal, as Scott Sumner says? Based on Graph #2, it appears that growth in the 1970s was slow compared to the 1960s and normal compared to the 1980s and '90s.

I want to make two points here. First: In 1983, James Hamilton opened his Oil and the Macroeconomy since World War II (PDF) with these thoughts:
The poor performance of the U.S. economy since 1973 is well documented:
  1. The rate of growth of real GNP has fallen from an average of 4.0 percent during 1960-72 to 2.4 percent for 1973-81.
  2. The 7.6 percent average inflation rate during 1973-81 was more than double the 3.1 percent realized for 1960-72.
  3. The average unemployment rate over 1973-81 of 6.7 percent was higher than in any year between 1948 and 1972 with the single exception of the recession of 1958.
Since the time Hamilton's paper was published, one may suppose, people have accepted the view that growth was slow in the 1970s.

Second: I remember Paul Krugman talking about recessions:
A lot of what we think we know about recession and recovery comes from the experience of the 70s and 80s. But the recessions of that era were very different from the recessions since. Each of the slumps — 1969-70, 1973-75, and the double-dip slump from 1979 to 1982 — were caused, basically, by high interest rates imposed by the Fed to control inflation...
The second point explains the first: Krugman's observation explains Hamilton's. As Krugman says, the Federal Reserve dealt with high inflation (Hamilton's item #2) by raising interest rates until they created recession. Low output growth (Hamilton's #1) and high unemployment (#3) were consequences of the Fed action. "Each of the slumps — 1969-70, 1973-75, and the double-dip slump from 1979 to 1982 — were caused, basically, by high interest rates imposed by the Fed to control inflation".

It's not that the economy was slow in the 1970s. It's that there was inflation, and to fight inflation the Fed slowed things down. Not that the economy was "slow", but that it was "inflationary". To say that the economy was slow creates a false impression unless you explicitly note that it had to be slowed by policy because of inflation.

I looked at this before, actually. For "the 1960s" James Hamilton looked at a 13-year period (1960-1972) during which there were two recessions. For "the 1970s" he considered a nine-year period (1973-1981) during which there were three recessions. No wonder "the 70s" were slower than "the 60s": There were more recessions to slow things down.

What we don't know is whether the economy would have been slow in the 1970s if the Federal Reserve hadn't been slowing it.

If you live three blocks from the store and you're on your way to get cigarettes when you see a cop, right away you check your speed. You check your miles per hour. It is still "miles per hour", even if you are only going three blocks. That makes sense, right? In the same way, it makes sense to talk about "recessions per year" even though no one ever speaks of it that way: Three recessions in 9 years is a lot more than two in 13 years.

If two recessions in 13 years is normal, say, then three in 9 years will make your economy slow. So even if nobody else ever says this, I have to say the economy was slow in the 1970s because the Fed increased the frequency of recession.

But again, we do not know know whether the economy would have been slow in the 1970s if the Fed didn't slow it down to fight inflation.

That blue line on Graph #2 shows the economy much slower in the 1970s than the 1960s. The numbers are what they are, and that's what they show. And yet it is not right to say the economy was "slow" in the 1970s: The fact is that the Fed had to slow it down.

I've been thinking about how to compensate for changes in "recessions per year".

I want to see what growth might have looked like if the Fed hadn't been slowing things down. Hey, they had to slow things down because of the inflation. I'm not saying otherwise. I just want to see what growth would have looked like if they didn't slow things down. I want to be able to answer the question "Fed-induced recessions aside, how does growth in the 1970s compare to growth in the 1960s?"

In other words: Was the economy actually slow in the 1970s, or was it slow because the Fed made it slow? I want to look at that. I don't want to cheat by changing growth rates. But I want to imagine the 1970s with more years of growth and fewer years of recession.

I want to look at growth in the 1970s, with the recession frequency reduced to what it was in the '60s. Let me take Hamilton's work as an example: three recessions in 9 years versus two recessions in 13 years.

Three divided by 9 gives a recession frequency number of 33% for James Hamilton's 1970s. Two divided by 13 gives a recession frequency of 15.4% for the 1960s. That's half or less than half the recession frequency of the 1970s.

What would growth have looked like in the 1970s if the recession frequency was the same as the 1960s? Maybe growth would still have been less than in the 1960s. If so, we could rightly say growth slowed in the 1970s. Otherwise, we have to say growth was not slow in the 1970s except that it was slowed by the Federal Reserve.

It turns out that to do the math, I don't need to know the recession frequencies. I need to know the growth frequencies. For Hamilton's 1970s, not 33% but 67%. For his 1960s, not 15.4% but 84.6%. In the 1960s 84.6% of the years were growth years, but in the 1970s only 67% of the years were growth years. No wonder Hamilton saw a growth rate drop!

If I take a growth rate number for the 1970s and divide it by 67%, then multiply it by 84.6%, I get an estimate of what growth would have been in the 1970s if the Fed didn't have to be fighting inflation. If this number is less than the growth rate number for the 1960s, then it is reasonable to say that growth was slow in the 1970s.

At what point do we start to worry about growth being inadequate? I picked a number: 2% growth. I'm thinking that growth of 2% or less is worrisome, and growth above 2% is not. It's arbitrary, but I had to have a number to work with.

I added a column to the spreadsheet for "Growth above 2%". For each year, if growth was more than 2% I put a "1" in the column; if growth was 2% or less, I put a "0" there.

The blue line on Graph #2 is a 9-year Centered Moving Average. I made another new column in the spreadsheet, this time for a 9-Year Centered Moving Count, where "Count" is the count of years of growth above 2% for each 9-year period. This is my "growth frequency" data. Each data point in the Centered Moving Count corresponds to a point in the Centered Moving Average.

Graph #3: Count of Years of Growth Above 2%, for Each 9-Year Period
The overall shape of the red line on Graph #3 is similar to the overall shape of the blue on Graph #2, because we are looking at the same data (but in a different way).

The red line starts at 7, meaning that 7 of 9 years had growth above the 2% rate. It rises to 8 and then 9 out of 9 in the 1960s before falling into the 1970s.

The general tendencies of the count values, as they appear to me, are as follows:
  • A count of 8 in the 1960s
  • A count of 6 in the 1970s
  • A count of 7 in the 1980s and '90s
  • A count of 4 when the effects of the financial crisis and Great Recession are felt.
These values are impressions, not calculations, so don't put too much weight on em.

Using these generalized count values (dividing by 9, and rounding), I get the following estimates of growth frequency:
  • 89% in the 1960s
  • 67% in the 1970s
  • 78% in the 1980s and 1990s
  • 44% since 2005
Now I can take a "moving average" growth number from the 1970s, divide it by 67% to remove the 1970s growth frequency, and multiply the result by 89% to apply the growth frequency of the 1960s. In the '60s, remember, growth was less hobbled by Federal Reserve policy. This calculation gives me an estimate of "less hobbled" growth for the 1970s.

I'll do the same for the more recent data also, even though the Fed wasn't fighting double-digit inflation in later years. We still get estimates of growth that are not influenced by changes in "recessions per year".

We are taking "moving average" data and modifying it, so I refer to the new values as "Modified M.A." These new values are shown in red on the next graph. For comparison, I also show the original moving average values in blue, same as they were on Graph #2.

Graph #4: Moving Averages showing Actual (blue) and 1960s (red) Recession Growth Frequency

Red and blue are the same before the 1970s. They separate in 1970, with blue based on a growth frequency of 67% and red on 89% (the frequency from the 1960s). The size of the gap changes in 1980, with blue based on 78% and red on 89%. The gap widens in 2004, when the blue growth frequency number drops to 44%.

The blue line shows that growth was slow in the 1970s. But inflation-fighting by the Fed helped to make growth slow. The red line shows what growth might have been in the 1970s if the Fed wasn't busy creating recessions. Red in the 1970s appears to be centered at the 4% level, just as for the years before 1970. In other words, when recession creation by the Fed is discounted we find the same growth rate in the 1970s as in the 1960s.

After the recession of 1982, there wasn't another recession until 1990. The Fed was no longer busy creating recessions. Nevertheless, there is a gap between red and blue, based on the count of years with more than 2% growth. Adjusted growth since the 1980s was below 4%, as opposed to centered on 4% as it was in the 1960s and '70s.

Finally, around 2004, the gap gets wide again, because the count of years with "above 2%" growth went low. Here, as in the 1980s and '90s, it is not that there were more years of recession, but that growth was in fact slower.

The narrow gap between red and blue in the 1980s and 90s is likely due to the "Great Moderation" which was evidently a moderation of growth. (I don't know why economists think of it as "great".)

The wide gap of recent years is due to a definite slowing of the economy -- the sort of slowing that is said to have happened also in the 1970s. Well, it happened in recent years, definitely. But it didn't happen in the 1970s. The gap between red and blue in the 1970s is due to the increased frequency of recessions resulting from the anti-inflation policy of the Federal Reserve.

So if anyone tells you "The economy slowed in the 1970s," tell them it didn't! Tell them it was slow in the 1970s because the Fed was busy creating recessions one after the other. Growth was as good in the '70s as it was in the '60s. There just wasn't as much of it.

Wednesday, May 8, 2019

And yet, economists say inflation is driven by expectations

It appears that households and businesses reduced their expectations of inflation and scaled back their expectation of rising asset values only after inflation was reduced.
From the January/February 1993 issue of the Federal Reserve Bank of St. Louis Review: On the Macroeconomics of Private Debt (PDF, 14 pages) by Keith M. Carlson.

Saturday, May 4, 2019

Dally Dally-Oh!

In bold lettering across the bottom of the screen: "MMT is inevitable". But Ray Dalio actually said something like "Something like MMT is inevitable". Not the same thing.

Dalio Says Something Like MMT Is Coming, Whether We Like It Or Not
By Ben Holland, at Bloomberg
May 1, 2019, 7:16 PM EDT Updated on May 2, 2019, 8:36 AM EDT

Central banking as we know it is on the way out, and it’s “inevitable” that something like modern monetary theory will replace it, billionaire investor Ray Dalio said.

The doctrine, known as MMT, says that governments should manage their economies through spending and taxes -- instead of relying on independent central banks to do it via interest rates. It also seeks to allay fears over budget deficits and national debts by arguing that countries like the U.S., which have their own currency, can’t go broke and have more room to spend than is usually supposed -- provided inflation is subdued, as it is now.
And when inflation is no longer subdued? What plan then?
Debate over MMT, which languished in obscurity for decades, has exploded in recent months. The idea has been criticized by a series of financial heavyweights, from Warren Buffett to Federal Reserve Chairman Jerome Powell. But Dalio, the founder of Bridgewater Associates, the world’s biggest hedge fund, said policy makers will have little choice but to embrace it.
Their challenge will be “to produce economic well-being for most people when monetary policy does not work,” Dalio said in his latest LinkedIn post. Over the past four decades, the era of central-bank dominance, income and wealth inequality has surged in most developed nations.
Bloomberg seems to be suggesting that "central-bank dominance" caused the surge in inequality, and that abandoning central-bank dominance will reverse the trend of inequality. That concept is too big to fit comfortably in a suggestion.
Read the full essay here.
Worth a click. Dalio is good.
Cutting interest rates, or buying securities in the process known as quantitative easing, have almost exhausted their ability to stimulate economies, he wrote. They’ll likely be replaced by a third-generation monetary policy, which Dalio labeled “MP3.’’ It will involve “fiscal and monetary policy coordination” along the broad lines suggested by MMT economists, he said, though not necessarily following their exact prescriptions.
Yeah, fiscal and monetary, the "two handmaidens":
"When economists write textbooks or teach introductory students or lecture to laymen, they happily extol the virtues of two lovely handmaidens of aggregate economic stabilization -- fiscal policy and monetary policy."
- Arthur Okun
But I would like to know what is the rebuttal to the argument that said When fiscal policy contradicts monetary, monetary policy is strengthened and fiscal is defeated. I never accepted that argument, but I could never shoot it down. And it has to be shot down, if we're going back to the two handmaidens.

I need to hear that rebuttal. And it had best be a good one.
The shift is well under way, Dalio said. With interest rates pinned near zero in Europe and Japan, and likely to head back there in the U.S. when the economy falters, the fiscal-policy takeover is “by and large what has been happening” already.

The U.S. ramped up budget deficits after the 2008 crisis, and has been doing so again under President Donald Trump. The bond-market response has supported MMT arguments: yields on government debt haven’t risen much, even though there’s much more of it around.
So the rebuttal is that the one-handmaiden approach didn't work when the shit hit the fan. But that's an observation, not an explanation. I need to understand what's wrong with the one-handmaiden approach. Otherwise, I have to think that it hasn't been shot down, and will eventually come back. I need a better argument. I always need a better argument.

Japan has been doing it for even longer -- yet after two decades of large deficits, it can still borrow money virtually for free.

Dalio gave examples of how such policies could evolve, without endorsing them. Central banks might print money directly to finance government programs -- bypassing the need to sell bonds. They could buy real estate “which would then ideally be used for socially beneficial ends.” They could also write off debts hanging over the economy, in a kind of “jubilee.” In downturns, they could deliver cash straight to the public, an idea widely known as “helicopter money.”
These are bizarre possibilities -- even the jubilee (which is the right solution) is bizarre. But it is creepy that people are willing to consider such presumably permanent possibilities as "bypassing the need to sell bonds", and that the central bank should get into real estate.

Changing the economy more is not the solution to the changes we've seen. We need to change it back, back to a low-debt, low-rent economic system, the kind of economic system that is sustainable.
There are risks, Dalio acknowledged. Such policies would put “the power to create and allocate money, credit, and spending” in the hands of politicians.
That's a long standing objection, putting the power to create money in the hands of politicians. Has to do with "central bank independence" and all. That objection won't go away easily.
“It’s difficult to imagine how the system will be built to achieve that,” he said. “At the same time it is inevitable that we are headed in this direction.”
I can only say what I say all the time: We need to understand the problem. We think we understand the problem but we don't, so the solutions we come up with are wrong. We have to go back to the beginning and think things through.

Friday, May 3, 2019

A Theory of Decline

The rise and decline of civilizations is an economic cycle, and concentration of wealth is the cause of decline:
When wealth grows faster than it concentrates, wealth spreads. You get the upswing of an economic cycle. But when wealth concentrates faster than it grows, you get the downswing.
The cause of the decline of civilizations is that "concentration" grows faster than "distribution" of wealth. Except, the word distribution is not quite right. It suggests a policy of redistribution. I mean something more on the order of natural distribution, where the act of creating wealth causes wealth to spread. I should use the word "dispersion" instead.

Distribution of wealth, dispersion, does not solve the problem if it does not arise spontaneously from the workings of the economy. You can't just tack redistribution onto the end of the process and hope to accomplish real change.

The policies that encourage wealth creation do so by creating incentives that reward wealth creators. These policies enhance the concentration of wealth, making the problem worse. Rewarding wealth creators skews the naturally-occurring distribution of wealth such that wealth concentrates at a faster rate. This puts the "dispersion of wealth" process at risk of being insufficient to sustain the long-term economic upswing. If downswing develops, you have the decline of civilization.

We can put this in terms Piketty uses. Dietrich Vollrath summarizes Piketty's view:
"Piketty says that if r>g, where r is the return to capital, and g is the growth rate of aggregate GDP, then wealth will become more and more concentrated."
Add to this the understanding that the cycle of civilization is an economic cycle driven by the dispersion and concentration of wealth, and it becomes immediately obvious that r>g puts civilization at risk.

Thursday, May 2, 2019

The golden goose, social classes, and the breakdown of civilization

Bosch season five air date: 18 April. Ten episodes. Four days later, six of the transcripts were already available. A few days later, the rest of em.

Anyway, the "golden goose" thing from episode two, about 10 minutes in:
EDGAR: Esquivel filed a complaint about Garcia for overprescribing oxy. They opened a file. It's an active investigation.
BOSCH: State medical board. Maybe what Junior and Pops were arguing about.
EDGAR: Old man killing the golden goose that lays the eggs.
BOSCH: Eggs are golden, not the goose.
EDGAR: I thought it was the goose.
BOSCH: I sometimes forget English isn't your first language.
EDGAR: W'ap enpoze'm manje, M'ap enpoze'w kaka.
BOSCH: "Kaka" what I think it is?
EDGAR: Ancient proverb. You stop me from eating, I stop you from shitting. Same thing.
BOSCH: As what?
EDGAR: As killing the goose.
BOSCH: I'll take your word for it.
"Killing the goose that lays the golden eggs" is the same as "You stop me from eating, I stop you from shitting"? Well I guess I have to take Jerry Edgar's word for it, too.

My interpretation of the goose story is simple. It's a definition: The goose is wealth. The eggs are income produced by that wealth. It's just a definition of wealth, and a bit of folk wisdom about protecting wealth. (The folk wisdom is just as true for a normal goose as it is for the one that lays the golden eggs.)

From The Class Structure in the U.S., at Lumen: Boundless Sociology:
A commonly used model for thinking about social classes in the U.S. attributes the following general characteristics to each tier: the upper class has vast accumulated wealth and significant control over corporations and political institutions, and their privilege is usually inherited; the corporate elite consists of high-salaried stockholders, such as corporate CEOs, who did not necessarily inherit privilege but have achieved high status through their careers; the upper-middle class consists of highly educated salaried professionals whose occupations are held in high esteem, such as lawyers, engineers, and professors; the middle class (the most vaguely defined and largest social class) is generally thought to include people in mid-level managerial positions or relatively low status professional positions, such as high school teachers and small business owners; the working class generally refers to those without college degrees who do low level service work, such as working as a sales clerk or housekeeper, and includes most people whose incomes fall below the poverty line. In the above outline of social class, status clearly depends not only on income, but also occupational prestige and educational attainment.
Class structure can be described in terms of "privilege" and "status" and "esteem" or, as the paragraph concludes: "status clearly depends not only on income, but also occupational prestige and educational attainment."

Sure. But things like occupational prestige and educational attainment also relate back to the measures of wealth and income, the goose and the eggs. And I have no trouble saying that as a rule the greater the disparity of wealth, and of income, the greater the distance between social classes.

On page 365 in the Study, from Chapter V: The Disintegrations of Civilizations:
... we have found already that the ultimate criterion and the fundamental cause of the breakdowns which precede disintegrations is an outbreak of internal discords ...

The social schisms in which this discord partially reveals itself rend the broken-down society in two different dimensions simultaneously. There are vertical schisms between geographically separated communities and horizontal schisms between geographically intermingled but socially segregated classes.

... [T]he horizontal schism ["between geographically intermingled but socially segregated classes"] of a society along lines of class is not only peculiar to civilizations [as opposed to primitive societies] but is also a phenomenon which appears at the moment of their breakdowns and which is a distinctive mark of the periods of breakdown and disintegration, by contrast with its absence during the phases of genesis and growth.
This is huge.

Toynbee is saying there is a natural limit to the concentration of wealth and income, a limit beyond which civilization can no longer continue to advance, but will begin to decline.

Seems to me that we should stop the concentration of wealth before it creates the breakdown of civilization. In our case, since we didn't stop it in time, policy needs to emphasize dispersion of wealth, enough to make things right.