Evidence vs evidence

In on the cost of private debt a few days back, I quoted from a 2012 comment by Vivian Darkbloom but had trouble with Darkbloom's link to a 2010 post by Steve Keen. Keen's graphs don't show up.

Contrary to what I said in that post, I think this may be the graph Vivian linked:

It shows debt and GDP separately, not as the ratio I imagined.

In response to Vivian, Scott Sumner replied:

Vivian, Thanks for that graph. Here’s my prediction: 99% of people will misread that graph. Most will think it shows a debt bubble before the Great Depression. In fact it shows there was no debt bubble before the Depression.

I think that might be the graph they were looking at, because the red line shows pretty dramatic increase from around 1922 to the Great Depression. Looks like a bubble to me. Also because Keen's caption for the graph is

Figure 1: Debt and GDP 1920–1940

and he says

Fig­ure 1 shows the scale of debt dur­ing the 1920s and 1930s, ver­sus the level of nom­i­nal GDP.

At Darkbloom's graphless link, for comparison, I find the caption

Fig­ure 7: US Pri­vate Debt and Nom­i­nal GDP, 1920–1940

and of this (missing) figure Keen says

Fig­ure 7 illus­trates both the ris­ing debt of the 1920s and the falling debt of the 1930s.

By Keen's descriptions, and Vivian's "a somewhat longer time-frame (back to 1920)" remark, the two figures could easily present the same graph.

The Point of this Post

Keen offers Figure 7 as evidence that

both the boom of the 1920s and the slump of the Great Depres­sion were caused by chang­ing lev­els of debt in an econ­omy that had become fun­da­men­tally spec­u­la­tive in nature. Ris­ing debt used to finance spec­u­la­tion dur­ing the 1920s made that decade “The Roar­ing Twen­ties”, while pri­vate sec­tor delever­ag­ing when the spec­u­la­tive bub­ble burst caused a col­lapse in aggre­gate demand that ush­ered in the Great Depres­sion in the 1930s.

The economy "had become fun­da­men­tally spec­u­la­tive in nature", Keen says, and "debt [was] used to finance spec­u­la­tion dur­ing the 1920s". He also says "the spec­u­la­tive bub­ble burst", leading to the Great Depression. Keen sees a bubble before the Great Depression.

Scott Sumner, on the other hand, says of the graph that

Most [people] will think it shows a debt bubble before the Great Depression. In fact it shows there was no debt bubble before the Depression.

Sumner's evidence is that he calls his opinion a fact.

I like that word, 'perky'

I was extremely happy with my recent post "We tried that already", except that in the middle of it I said

expansion of the Federal debt leads to expansion of private-sector debt

One of those things: I believe it's true. And nobody objected to it, so I figure nobody objected to it.

I'd say it is Keynesian. Or maybe fusion economics, Keynesian plus modern-era. From Keynes, the idea that big Federal deficits pull the economy up; and from us, the notion that using credit is good for growth.

I didn't doubt what I said. I just didn't like it dangling there, unsupported. So I was looking for a graph that shows the expansion of Federal debt leading to the expansion of private sector debt. It's one of those things: I needed it to be obvious on the graph. I didn't want to argue the point. It should just be obvious.

The dogs woke me up in the middle of the night to go out, and while waiting for them to return I turned the computer on and thought about the graph that should make it obvious. Funny thing, after a few days of nothing being obvious, I wake up at one o'clock in the morning and I know it should be obvious on this graph.

So I made the graph, and added arrows to show increases in Federal debt leading to increases in private-sector debt. Actually, increases in Federal debt leading to increases in everybody else's debt, the non-Federal debt:

Graph #1:  Federal (blue) and Non-Federal (red) Debt Growth Rates

The arrows show where it is obvious that the growth of Federal debt leads to the growth of non-Federal debt: Nothing really since the 1980s, and the one in the early '80s was not very perky.

Not what I expected to see. But come to think of it, maybe I should have expected it. The graph in the "We tried that already" post shows a change in Federal debt growth beginning around the mid-1970s. This one does, too.

"Expansion of the Federal debt leads to expansion of private-sector debt." Now, I doubt it.

Private-sector debt is already so big and costly that it undermines the effectiveness of the boost provided by the big new public spending: a problem that was making itself obvious in the mid to late 1970s.

Ancient Roman Tax Code

Now there's a title that'll drain whatever enthusiasm you may have had for this blog! I Googled it anyway.

• Roman Taxes | UNRV.com
  

  In the early days of the Roman Republic, public taxes consisted of modest assessments on owned wealth and property. The tax rate under normal circumstances was 1% and sometimes would climb as high as 3% in situations such as war. These modest taxes were levied against land, homes and other real estate, slaves, animals, personal items and monetary wealth.

  Then for a while there was tax farming. And then...
  

  In the late 1st century BC, and after considerably more Roman expansion, Augustus essentially put an end to tax farming. Complaints from provincials for excessive assessments and large, un-payable debts ushered in the final days of this lucrative business. The Publicani continued to exist as money lenders and entrepreneurs, but easy access to wealth through taxes was gone. Tax farming was replaced by direct taxation early in the Empire and each province was required to pay a wealth tax of about 1% and a flat poll tax on each adult. This new procedure, of course, required regular census taking to evaluate the taxable number of people and their income/wealth status. Taxation in this environment switched mainly from one of owned property and wealth to that of an income tax.

• Ancient Taxes from Around the World | Community Tax
  

  The Roman tax system changed many times over the years, and varied quite a bit from region to region... The most prominent tax in ancient Rome was the tributun, which was a tax on material wealth. Citizens of Rome did not need to pay this tax, aside from times of financial need, while all noncitizens living in the Roman territory were required to pay tributun on all their property.

• Taxes in Ancient Rome - Early Church History
  

  During the final death throes of the Empire, Emperor Galerius (reigned 305-308) imposed a higher capitation tax (from the Latin word “caput” meaning “head”) on each person in the Empire. Surveyors would arrive on a person’s property and measure every spot of land, number all the vines and fruit trees and make lists of all animals and their kinds in order to tax the assets of a landowner. Slaves were beaten to extract information on hidden assets of their masters. Wives were tortured to bear witness against their husbands and sons were strapped to the rack to force them to reveal their fathers’ assets. Imaginary assets, given under torture, were entered into the books and were taxed as real assets...

• Taxes Brought Down The Roman Empire, And They'll Do The Same ...
  

  In the terminal collapse of the Roman Empire, there was perhaps no greater burden to the average citizen than the extreme taxes they were forced to pay...
  
  By the 4th century, the Roman economy and tax structure were so dismal that many farmers abandoned their lands in order to receive public entitlements...
  
  In the 5th century, tax riots and all-out rebellion were commonplace in the countryside among the few farmers who remained. The Roman government routinely had to dispatch its legions to stamp out peasant tax revolts.
  
  But this did not stop their taxes from rising.
  
  Valentinian III, who remarked in 444 AD that new taxes on landowners and merchants would be catastrophic, still imposed an additional 4% sales tax… and further decreed that all transactions be conducted in the presence of a tax collector.
  
  Under such a debilitating regime, both rich and poor wished dearly that the barbarian hordes would deliver them from the burden of Roman taxation...
  
  Many Roman peasants even fought alongside their invaders, as was the case when Balkan miners defected to the Visigoths en masse in 378. Others simply vacated the Empire altogether.
  
  In his book Decadent Societies, historian Robert Adams wrote, "[B]y the fifth century, men were ready to abandon civilization itself in order to escape the fearful load of taxes."

"That is enough for today!"

A Wealth Tax

You can click either graph to see it in a readable size, or click the link below it to see the graph in the Ngram Viewer:

A long stretch with almost no discussion of the wealth tax:

Graph #1: "wealth tax" (blue)

And when there was discussion of the wealth tax, there wasn't very much:

Graph #2: "wealth tax" (blue), "income tax" (red)

In Domesday: A Search for the Roots of England, Michael Wood quoted from the Anglo-Saxon Chronicle on the idea for the Domesday book and on William the Conqueror's motivation for gathering the information:

Then he sent his men all over England, into every shire, and had them find out how many hundred hides there were in the shire, or what land or cattle the king himself had in the country, or what dues he ought to have each year from the shire.

William wanted to know what dues he ought to have each year -- what revenue he could expect to receive. In the 11th century, the King's business was to determine the wealth of the nation in order to predict his revenue from a tax on that wealth. It would be six centuries before anybody thought about taxing income.


Jerry's thoughts on a wealth tax:

I think of it more in terms of paying for the services that you use. e.g.: federal and state taxes go to pay for the military, police, fire department, highways, etc. Do the military and the police and the fire department only protect the assets that you bought with this year's income? No, they protect all of your assets. Every year, they protect all of your assets. That protection is fairly expensive, every year. We should pay for it in proportion to how much we have in terms of assets -- not income.

Similarly...everybody who gets their food from the grocery store benefits from the highway system. But the guy who owns a car benefits more. And the guy who owns a supermarket or a trucking company benefits even more. A wealth tax more accurately allocates this cost than an income tax does.

And even things like welfare or unemployment -- they have the effect of keeping society stable, preventing revolution, preserving the status quo. High net worth taxpayers benefit way more from that than the people receiving the welfare do...

At ProMarket: The Decline of American Journalism Is an Antitrust Problem by Sally Hubbard. Good article. Great opening:

As a former antitrust enforcer, I believe that the starving of journalism and the disinformation crisis are in good part monopoly problems. I’ve been writing about antitrust and tech platforms since the summer of 2016, when I noticed that the tech giants—Google, Amazon, Facebook, and Apple—were doing the same types of things Microsoft had been sued for nearly 20 years earlier. They were leveraging their market power to make fair competition impossible.

These tech giants are gatekeepers that also compete against companies that must get through their gates to reach users. News publishers must get through Facebook and Google’s gates due to the two platforms’ concentrated control over the flow of information. But Facebook and Google compete against news publishers for user attention, data and ad dollars. They are controlling the game and playing it too.

Publishers never had a fair shot...

Toward the end of the article, Hubbard summarizes, and suggests first steps toward a solution:

Weak antitrust enforcement set the stage for these platforms to extract the fruits of publishers’ labor, much as monopolies are extracting wealth across most sectors of our economy. Monopolies are putting the American Dream at risk, as people—including journalists—are not rewarded for their efforts.

Beginning immediately, antitrust enforcers should:

• Prevent Facebook and Google from acquiring competitive threats and companies that fortify their monopoly power
• Unwind anticompetitive deals and divest subsidiaries to open up competition
• Sue to stop exclusionary practices

Antitrust enforcement alone won’t solve all of the problems listed above, but we won’t be able to solve anything unless we weaken monopolies’ power. It is a necessary but not sufficient condition.

Necessary but not sufficient, Sally says. I'd like to suggest something else: The existing corporate income tax favors bigness. The corporate income tax is a tax on profit, on the income you take out rather than reinvesting in the company. The income you sink back into the company is all (or nearly all) deductible: you don't pay tax on it.

This arrangement drives business spending. The spending reduces the corporate income tax and encourages economic growth. But it also favors bigness, because the more you can afford to spend, the more of your income avoids the tax.

We need antitrust enforcement. One of the main reasons we need antitrust is that the corporate income tax favors bigness. And one of the main reasons antitrust is less effective than it should be is that the corporate income tax works against it.


At USA Today, from April of last year: Analysis: Trump is right. Amazon is a master of tax avoidance by Jeremy Bowman of The Motley Fool:

Throughout its history, Amazon has consistently reported minimal profits, meaning it has paid very little in taxes since taxes are assessed based on profits... Between 2008 and September 2017, for example, Walmart (NYSE: WMT) paid $64 billion in income tax, compared to just $1.4 billion for Amazon, even though Amazon has been the more valuable company for several years now.

Amazon uses the tax code as a tax avoidance strategy. And now that Amazon has shown American business how to take advantage of the tax code, we have really no option but to change the tax code.

In The Atlantic of 1 August 2018, in Jeff Bezos’s $150 Billion Fortune Is a Policy Failure  Annie Lowrey writes:

Amazon is a marvel that has changed everything from how we read, to how we shop, to how we structure our neighborhoods, to how our postal system works. But his fortune is also a policy failure, an indictment of a tax and transfer system and a business and regulatory environment designed to supercharging the earnings of and encouraging wealth accumulation among the few. Bezos did not just make his $150 billion. In some ways, we gave it to him...

Lowrey has it exactly right: We gave it to him. It's time to re-write the tax code.

But what to write? That is the question. Here's my answer: Broaden the tax base to include all of business income, and reduce the tax rate so the government's tax revenue is unaffected by the change. We could instead increase that revenue or reduce it, as you prefer. But the change that I see as necessary is the broadening of the tax base to include all business income. This will eliminate the tax advantage for bigness.


The main argument against this proposal would likely be that it turns the income tax into a wealth tax. From the businessman's point of view, he spends money to make a profit. But first he gets his money back, and then the profit is the extra money he makes on top of that.

The key concept here is that he gets his own money back. The businessman doesn't count that money as income. He considers it to be part of his wealth. By taxing it, in his view, the income tax becomes a wealth tax.

To the extent that the businessman's view is correct, it is a micro-economic perspective. When government makes economic policy, it must be from a macro-economic perspective. And from this broader perspective, the businessman's money stops being his money the moment he spends it. If he gets that money back later -- or more accurately, if he gets that much money back later -- it is two transactions later, or more. Probably more.

From the macro perspective, it isn't his money until he has it in hand. And when he receives that money, he receives it as income. For tax purposes, it is "gross income", but income nonetheless. And an income tax should tax it.

If Amazon and Walmart pay the same tax rate, and Amazon's gross income is bigger than Walmart's, then Amazon should pay more income tax than Walmart. It's that simple.

And the wealth tax? From a macroeconomic perspective: Yes, we need a wealth tax too.

The Washington Post

At Economist's View:

• We don’t usually put ‘moral’ and ‘economics’ in the same sentence. It’s time we started. - The Washington Post  Do you build the economy from the top down or the bottom up? And is the main purpose of the economy the production of things or the enhancement of life?

Mm, the Washington Post. They don't like me because I won't send them money. I don't like them because they insist that I do. Things on the internet were not always thus. But in any case, their question is idiotic: "Is the main purpose of the economy the production of things or the enhancement of life?"

The economy doesn't have a "purpose". People engaged in economic activity have their purposes, but that's not the same thing. I think what the Post means to ask is something like this: "Do we want the economy to be primarily for the production of things or the enhancement of life?" I'd say both.

Primarily? Both.

Where they say "the production of things", a literal reading would translate that into "the production of goods". But I'm pretty sure they mean goods and services, even if services are not "things". Maybe they should use the word "output": the production of output.

But then, income equals output. The production of output generates income, and income is used to measure output. So maybe they should say the production of income.

And now I have a problem, because what they seem to want to ask is this: Do we want the economy to be primarily for the production of income or the enhancement of life? But unless you live in the world of Star Trek, or at Walden Two, there's not much difference between the production of income and the enhancement of life. In those fictional worlds there is no income -- no keeping track of anyone's "share" of the output -- but only the enhancement of life. However, in those fictional worlds we are never told how to actually achieve that kind of existence.

I doubt the Washington Post has the answer. They're demanding money from me, remember, for access to their output.

On the sustainability of low unemployment

JW Mason:

But let’s suppose that today’s unemployment rate of 3.6 percent is sustainable—which it certainly seems to be, given that it is, in fact, being sustained.

Mark Thoma, July 2017 at The Fiscal Times:
“The inevitability of another recession is evident in a graph of the unemployment rate. Notice that, before 1970, it was common for the unemployment rate to reach a low point and then hover around that point for several years. For example, the unemployment rate was around 4 percent for an extended period in both the mid to late 1950s and 1960s. But since 1970 the unemployment rate has behaved differently. Instead of reaching a low point and then leveling off for a period of time, it has tended to “bounce” off the low point and almost immediately begin rising again.”

I put together a graph to show unemployment hovering around low points, or not:

Graph #1

The data begins at a low in the late 1940s. I put a red line thru it to suggest unemployment hovering around that level.

The next four lows each begin after a sharp decline in unemployment. I put the red line where the sharp decline stops. In each case unemployment does seem to hover near that level for at least several months, confirming Mark Thoma's observation.

Regarding the highest of these four red lines: Perhaps I should have stopped that line before the unemployment spike of the 1960 recession. Then at the end of that spike I'd need another flat red line where the blue seems to hover at a higher low, before falling to the last of those red lines. This correction, if I made it, would also support Thoma's view, unemployment hovering around the lows in the years before 1970.

After 1970 it is easy to find "bounce point" lows that separate the fall of unemployment from the rise. I marked them with black arrows (and in one case, a double arrow).

Thoma's right: After 1970, unemployment behaves differently. Looking at this graph, it is easy to doubt JW Mason's assertion that the current low in unemployment is "being sustained".


After 1970, unemployment behaves differently. The spikes on the graph in the early years show unemployment rising smoothly to a peak, and then falling smoothly. The fall is never less than half the size of the rise.

After 1970, the declines are more jiggy than smooth. After the 1975 recession, the smooth fall of the spike is only about one-quarter the size of the rise. The smooth rise and fall associated with the 1982 recession are about equal in size, but that's the last time that occurs. The fall after the 1991 recession appears to be smooth and about the size of the rise; but it isn't smooth: Click the graph to see it bigger, and you'll see what I mean.


Antonio Fatas, 12 March 2019 in The 2020 (US) Recession:
“This post is based on a research note I wrote asking whether low unemployment is sustainable. The answer is a clear no for the US. Low level of unemployment are good predictors of the tail risk event of a recession, a sharp increase in unemployment rates. These dynamics are related to the build up of financial and macroeconomic imbalances. If this pattern is to repeated, and given the current level of unemployment rate, a US recession must be around the corner. For details on the analysis, the research note including additional results is available on my web site: Fatas (2019).”

Antonio Fatas finds the same pattern in unemployment that Mark Thoma finds. I want to say Fatas seems more certain than Thoma that the pattern tells us recession is in the cards; but Thoma does say "the inevitability of another recession is evident" in the graph.

Having looked at the graph myself, I have to say that Fatas and Thoma together offer a perspective that challenges Mason's optimism and underscores the feebleness of his assertion that

"today’s unemployment rate of 3.6 percent ... certainly seems to be [sustainable], given that it is, in fact, being sustained."

But let me take another look. For Mason also says: “Every month that the US records an unemployment rate below 4 percent suggests that these low unemployment rates are indeed sustainable…”

It's not just the 3.6% level (sustained for two months now) to which Mason refers. It's anything less than four percent. This should give us a different graph. Let's see:

Graph #2

Again, all the sustainability seems to occur before 1970.

What stands out here, to my eye, is how seldom unemployment goes below four percent. That, and the scantiness of unemployment below 4% in the current period. I'd need my rose-color glasses to see unemployment "being sustained" at present.

Yeah, I thought there might be something there, but I don't see it.

We tried that already

JW Mason:

"... in retrospect it is clear that we should have been talking about big new public spending programs to boost demand."

This graph shows the exponential trend (red) of the Federal debt, based on the debt in the years 1945-1974, along with the actual path (blue) of the Federal debt out to 2015:

Figure 1: Showing the Growth of the Federal Debt above and beyond its pre-1975 Trend

If the 1945-1974 trend of Federal debt had continued unchanged to 2015, we would have ended up with a one-trillion-dollar debt. Instead, we got $18 trillion.

The difference, 17 trillion dollars, was the result of a four-decade attempt to boost the economy by means of big new public spending.

We tried it. It didn't work. It didn't work because expansion of the Federal debt leads to expansion of private-sector debt, and private-sector debt is already so big and costly that it undermines the effectiveness of the "boost" provided by the big new public spending.

This problem cannot be solved by additional government spending. It can only be solved by reducing private-sector debt.

JW Mason: Good News, Bad News, and the "Only" Alternative

JW Mason offers Good News on the Economy, Bad News on Economic Policy, a post "on new economic data". I take that to mean "on new releases of the data". Here's his opening:

On Friday, the the Bureau of Labor Statistics released the unemployment figures for May. As expected, the reported unemployment rate was very low—3.6 percent, the same as last month.

Getting into the evaluation of new data, Mason says this "suggests an exceptionally strong labor market by historical standards." Then, moving beyond evaluation of the data and into the politics of economics:

On one level this really is good news for the economy. But at the same time it is very bad news for economic policy: The fact that employment this low is possible, shows that we have fallen even farther short of full employment in earlier years than we thought.

I distinguish between economics that describe economic conditions (and economic forces) on the one hand, and economics that serves an agenda on the other. To say that the unemployment rate is very low describes an economic condition. To say that we have fallen even farther short of full employment in earlier years than we thought, to my ear, brings us into the realm of political agenda.

Mason goes back then to the data: "Virtually every other measure also suggests a labor market that is relatively favorable to workers, at least by the standards of the past 20 years," he says. Yes, the reference to "the standards of the past 20 years" is a twist of the political knife; but Mason does touch on the following data items:

• broader unemployment measures
• the labor force participation rate
• the quit rate ("higher than it ever got during the previous business cycle")
• job openings ("at their highest level on record")
• wage growth ("noticeably faster since 2016") and
• labor share in the nonfinancial sector

He interrupts himself then, to serve the agenda, saying

For progressives, it can be a challenge to talk about the strengthening labor market.

After calming and soothing his readers, Mason writes:

we need to call attention to the real gains to working people from a high-pressure economy—one where aggregate demand is running ahead of available labor.

Okay, maybe I'm wrong. Mason offers a strong statement about how the economy works, one that I strongly agree with. And yet, he is pushing the agenda. To me, if the argument is good you shouldn't have to push the agenda. He's not just dangling a toe, either. He jumps into his agenda with both feet:

Labor markets do seem to be doing well today. But that only shows that macroeconomic performance over the past decade was even worse than we thought.

He defends his statement by talking about macroeconomic policy and our inability to actually measure targets like potential output and full employment. He wants to be doing economics; he doesn't want to be doing agendas; that's easy to see. And hey, maybe he's coddling readers and working the liberal agenda into his article just to keep his readers' attention. God knows, I don't do that, and I don't have readers.

One can see, in the paragraph on macroeconomic targets, that Mason's argument fails:

Everyone agrees that the US fell short of full employment for much of the past decade, but we don’t know how far short. Every month that the US records an unemployment rate below 4 percent suggests that these low unemployment rates are indeed sustainable.

He uses what we don't know as evidence. Talk about weak links in a chain of logic! But Mason runs with it:

..these low unemployment rates are indeed sustainable. Which means that they should be the benchmark for full employment. Which also means that the economy fell that much further short of full employment in the years after the 2008-2009 recession—and, indeed, in the years before it.

He leaps from the suggestion that low unemployment is sustainable, to policies that should be put in place, without regard to the frailty of the suggestion.

I damn well agree with Mason that full employment is lower than policymakers think. I think we could have kept using the 4% number that was used back in the 1960s. When the number seemed to climb upward in the 1970s, we should have started looking for problems that had higher unemployment as a side effect -- problems like excessive private-sector debt. But apart from Minsky and Kindleberger, it seems no one did anything like that.

Now, late in the 20-teens, Mason at least is looking back to the 1960s as the benchmark for a good economy. There is yet hope.

Mason again:

But let’s suppose that today’s unemployment rate of 3.6 percent is sustainable—which it certainly seems to be, given that it is, in fact, being sustained. Then the unemployment rate in 2014 wasn’t 1.4 points too high but 2.6 points too high, which is nearly twice as big of a gap as policymakers thought at the time. Again, this implies that the failure of demand management after the Great Recession was even worse than we thought.

Yeah, but this is based on supposition, on fantasy. It may be enough to convince an audience of believers, but the argument is certainly insufficient to convince the people with most of the money.

When he switches back to agenda-mode the argument gets strong again:

For years now, we have been repeatedly told that the US is at or above full employment—claims that have been repeatedly proved wrong as the labor market continues to strengthen. Only three years ago, respectable opinion dismissed the idea that, with sufficient stimulus, the unemployment could fall below 4 percent as absurd.

Solid argument, well written. Yet Mason's next words quickly return us to the fallback position of all those who refuse to accept high unemployment as a policy objective, but see only one alternative:

As a result, we spent years talking about how to rein in demand and bring down the deficit, when in retrospect it is clear that we should have been talking about big new public spending programs to boost demand.

The people who accept high unemployment as policy have already rejected the "big new public spending" approach. Rejected it for decades. Embracing the solitary alternative, Mason restores an old stalemate.

I think we should have kept the 4% full-employment number that was used back in the 1960s. When the number seemed to wander upward in the 1970s, we should have started looking for problems that cause higher unemployment as a side effect -- problems like excessive private-sector debt. But we didn't do it then, and almost no one does it now, despite the obvious fact that the crisis which preceded the Great Recession was a FINANCIAL crisis.

For most of the past decade, interest rates were as low as they could be. You couldn't get them lower. You couldn't reduce the cost of finance any further by lowering rates more. If you wanted to further reduce the cost of finance, the only way to do it would have been to reduce the size of the debt on which interest is paid. Unfortunately, this was never a priority of policy.

Our economy has "recovered". But it is a listless recovery because we still have so much private-sector debt, and nobody wants to take on more debt. Then too, we use credit for growth, so if we're not using much credit we don't get much growth.

We use credit for growth because economists tell policymakers that the resulting accumulation of debt is harmless. It isn't. And debt accumulates, because we have lots of policies that encourage the use of credit, but none that encourage the repayment of debt.


One sentence more from Mason:

Again, the fact that today’s labor market outcomes are better than people thought possible a few years ago shows that the earlier outcomes were even worse than we thought.

I agree, the earlier outcomes were worse than most of us thought. However, Mason takes a premise

today’s labor market outcomes are better than people thought possible

and uses it to suggest policy for the future. What he does not do is take the premise -- the fact that things are better than we could have expected -- and figure out why things improved.

Things improved because financial costs peaked around 2008 and have fallen significantly since. When the payment to finance falls, more money is available for wages and for the profit of productive ("non-financial") business.

Many people have called the economy good of late. I would be embarrassed to say such a thing. But it has improved.

"Paying for the Welfare State Without Raising Taxes"

Mark Thoma offers Paying for the Welfare State Without Raising Taxes - Roger E.A. Farmer.

My initial thoughts:

1. If you get the economy running well, the need for a "welfare state" diminishes.
2. People think the Federal government runs in the red because it spends more than it brings in. That's perfectly true, as far as elementary school arithmetic is concerned; but if you really want to know the reasons, you have to get into the economics of it.

From the initial summary of Farmer's post:

Despite the old economic adage that there’s no such thing as a free lunch, there is a way for governments to finance social-welfare programs without imposing a higher burden on taxpayers. National treasuries should establish Social Care Funds that borrow money at low interest rates and invest the proceeds in the stock market.

The stock market is a casino. It isn't safe assets. Calling it "social care" doesn't change that.

Farmer asks: "What if there really is such a thing as a free lunch?" He's grasping at straws.

He dismisses the risk of loss on the grounds that a hundred-year average shows the stock market out-performing government bonds by almost seven percent (according to "one study"). But no one who suffers a loss in the market overlooks the loss.

Stock market performance depends on economic growth. When we can no longer get good growth, market performance comes to depend on rent-seeking, which undermines economic growth. To the degree that these statements are true, Farmer's plan to "borrow money at low interest rates and invest the proceeds in the stock market" is no more than institutionalized rent-seeking. It will prop up the market and provide capital gains for other investors as they cash out.

But are those statements true? Yes. As Farmer observes: "There is some evidence that the equity premium has been a little lower in recent years". But he interprets this evidence optimistically rather than realistically, saying "let’s conservatively assume that it will be approximately 4% over the next 50 years."

According to his evidence, the equity premium is "large" and

"provides a potential motivation for investing US Social Security funds in stocks rather than government bonds".

Farmer expands this thought by proposing that we borrow specifically for the purpose of investing in the stock market. But the picture of the equity premium as "large" is a still photo; what the movie shows is decline. Farmer is offering a prospectus that no one should consider.

Three quotes from AJ Toynbee

via StoreMyPic

Among the consequences of supply-side economics ...

Our first instinct is often to call attention to the ways in which workers’ position is still worse than it was a generation ago, and to all the ways that the labor market is still rigged in favor of employers. This instinct is not wrong ...

- JW Mason, 7 Jun 2019

The problem Keynes didn't fix

Hey. An excerpt from an old one of mine, comparing aftermaths, the Great Recession and the Great Depression:

What we did this time, that we failed to do last time, was prevent the collapse of the banks and private debt. Our debt lingers. But excessive accumulation of debt was the underlying cause of the crisis. So along with debt, unemployment lingers. Recovery remains impossible.

The Depression hit in 1929. Maynard's book came out seven years later.

By the time The General Theory was published, a lot of debt was already gone. Keynes didn't have to deal with that. He didn't have to say Get rid of the debt first. The debt spike was a thing of the past.

We don't have that luxury.

And an old graph from Steve Keen:

(My remarks are from January 2015, when unemployment remained high: 5.7 percent. Unemployment is lower now but the economy isn't right yet. Debt remains high today and is growing again. Not growing fast enough to give us economic vigor, but growing. And high.)

on the cost of private debt

I'm a little sensitive about the appropriation by lenders of the term "private debt" to refer to private sources of lending. If you think of debt as an asset you miss the bigger picture. First of all, debt can't even exist as an asset unless you first convince somebody to take on debt as a liability. Then too, debt as a "toxic asset" doesn't arise except as a result of debt becoming a problematic liability.

So when I googled on the cost of private debt I expected to find much on private debt as an investment opportunity, and not much on private debt as a source of macroeconomic problems. I was pleasantly surprised to find Bailing out the people: The public cost of excess private debt (12 January 2019) by Samba Mbaye, Marialuz Moreno Badia, and Kyungla Chae, at VOX. The prefacing paragraph:

Since the financial crisis researchers have extensively explored the dangers of excessive public debt, but excessive private debt has received less attention. This column documents a common form of indirect private sector bailout that goes largely unnoticed. Whenever households and firms are caught in a debt overhang and need to deleverage, governments come to the rescue through a countercyclical rise in public debt. This indirect substitution takes place even in the absence of a crisis.

Reminds me of my work on the private-to-public debt ratio.

Again, in the article:

The basic mechanism works as follows – whenever the private sector is caught in a debt overhang, the ensuing deleveraging process weighs on activity, thus prompting the government’s response through higher borrowing to support the economy. We show that this is a recurrent pattern through history, where excess private debt systematically leads to higher public debt.

One thing I have trouble with is a definition they provide:

We define a private deleveraging spell as the distance from a peak to the ensuing trough in the private debt-to-GDP ratio...

Debt-to-GDP? Really?? GDP is highly unstable, and probably affects the ratio more than debt does. I'm reminded of something Scott Sumner said. In comments on Debt surges don’t cause recessions, Vivian Darkbloom "ran across another [debt-to-GDP] chart", one that goes "back to 1920". Vivian provided a link to an old Steve Keen site but the link no longer works, so I can't show the graph.

But based on Scott Sumner's response, I'm pretty sure the outstanding feature of that graph was the massive spike associated with the Great Depression:

Vivian, Thanks for that graph. Here’s my prediction: 99% of people will misread that graph. Most will think it shows a debt bubble before the Great Depression. In fact it shows there was no debt bubble before the Depression. Rather the debt ratio rose DURING the Depression, but only because the denominator (NGDP) fell.

Agreed. But if you were around in 1910 or 1920, the Roaring 20s probably looked very much like a debt bubble. It's not that "there was no debt bubble before the Depression", but that in hindsight the bubble is insignificant when compared to the debt spike of 1929-1933.

I also found this graph (which leaves no doubt about when the debt spike started) from Global Finance:

The graph is great! The vertical line just before 1930 shows the start of the Great Depression, and the graph shows what now looks like a slight increase in debt before the Depression, and the big spike during it as GDP fell.

People didn't suddenly start borrowing a lot more after the Depression hit. No. But GDP fell like crazy, and that pushed the debt-to-GDP ratio up. This graph shows it well. Unfortunately the Global Finance link no longer shows this graph.

Fortunately, the Financial Times still shows it.

I wouldn't want to use debt-to-GDP to show changes in debt. Some time back I compared growth rates for GDP and debt and wrote

They're all GDP, the lows. GDP falls faster than debt. Debt does not fall as quickly as GDP. That's one thing that makes the debt/GDP ratio go up...

and I gave an example: "like during the Great Depression".

If GDP is falling faster than debt, the debt-to-GDP ratio can only go up. I don't know how they worked it out in the PDF. (I didn't read it yet.) But they did come up with results I can accept.


After defining a private deleveraging spell, they move on and say

To get a firmer grasp of private debt dynamics, we break down changes in the private debt-to-GDP ratio into the impact of the interest rate-growth differential – which we refer to as ‘macro-related changes’ – and the remaining component – which we call ‘leverage flows’.

The "interest rate-growth differential" sounds to me like Piketty's r>g. Remember Vollrath's summary:

"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."

Note that as the economy grows ever more financialized, the return to capital must be measured less in terms of profit and more in terms of interest.

So they look at debt both in terms of relative growth and in terms of leverage flows. They find that

while the debt ratio is rising at an increasingly faster pace before the deleveraging episode, leverage flows (blue bars) are growing at an increasingly slower pace...

If "leverage flows" means what I think it means (changes in debt levels) then it seems they are saying that a high debt level causes the economy to slow, increasing the debt-to-GDP ratio and creating the same sort of confusion among 99% of economists that Sumner predicted among 99% of people.

In a way, that's what the VOX article is all about.

The big lie

Available at a lower price from other sellers that don't offer free shipping, they say. So really, at Amazon the shipping isn't free. They just add it to the price.

But you'll never convince my wife.

The latest (and greatest!) in multi-language labeling

Lookin for some "soaker hoses" to help me water my landscape & garden plants. I found a good one at Northern Tool. Below the image of the hose they ask: "What do you think of our product images?" Kind of an odd question, no? So I looked at the blowup of the package:

I'm too old to think highly of the multi-language product labeling that is so common nowadays. But this Gilmour label is one I can live with.

Use over time for: finance

Plato on government

From The Lessons of History by Will and Ariel Durant:

Neel Burton M.D. in Plato on Democracy, Tyranny, and the Ideal State at Psychology Today:

Having experienced the limits of both tyranny and democracy, Plato sought to devise another and better system of government. In the Republic, which in my view is nothing more than a thought experiment, he conceived of an ideal state ruled by a small number of people selected, after close observation and rigorous testing, from a highly educated elite....

The ideal state is an aristocracy in which rule is exercised by one or more distinguished people. Unfortunately, owing to human nature, the ideal state is unstable and liable to degenerate into timocracy (government by property owners), oligarchy, democracy, and, finally, tyranny. States are not made of oak and rock, but of people, and so come to resemble the people of which they are made. Aristocracies are made of just and good people; timocracies of proud and honour-loving people; oligarchies of misers and money-makers; democracies of people who are overcome by unnecessary desires; and tyrannies of people who are overcome by harmful desires.

Plato provides a detailed account of the degeneration of the state from aristocracy to tyranny via timocracy, oligarchy, and democracy. Democracy in particular arises from the revolt of the disenfranchised in an oligarchy. The state is ‘full of freedom and frankness’ and every citizen is able to live as he pleases.

These and other kindred characteristics are proper to democracy, which is a charming form of government, full of variety and disorder, and dispensing a sort of equality to equals and unequals alike.

However, citizens are overcome by so many unnecessary desires that they are ever spending and never producing, and are ‘void of all accomplishments and fair pursuits and true words.’ As a result, the state comes to be ruled by people who are unfit to rule.

Recognizing the downhill slope

AJ Toynbee:

... since the vulgar estimates of human prosperity are reckoned in terms of power and wealth, it thus often happens that the opening chapters of a society’s tragic decline are popularly hailed as the culminating chapters of a magnificent growth.