Thursday, October 31, 2019

Samuelson and Solow (1960):

"But in the modern world, all or most wages are increasing." -- Page 362

... and then there's Google (2019):

Wednesday, October 30, 2019

Google starts like this now?

What the fuck?


How many questions you want, Goo?

Well, at least they don't say "Ask me a question".

Looks like vigor to me

Went to Harbor Freight the other day. When I left, there was so much traffic I had to fight my way out of the parking lot -- at one p.m. on a Friday in October.

Two days earlier, traveling with the wife: A lot of traffic, enough that she commented on it. Mid-morning on a Wednesday, a week before Halloween.

Not particularly busy times of the day. Not weekends or holidays or special days. Just ordinary days. But roads and parking lots were busy. It happens once, you don't think twice about it. It happens again, you have to stop and look. To me, it looks like economic vigor.

Then too, there are three or four new houses going up a mile down the road from me. I haven't seen that kind of activity since the '90s. Looks like vigor to me.


Ten years back, every time you turned around somebody was saying there's gonna be inflation, bad inflation. Because of Ben Bernanke and "Quantitative Easing". It got to the point, it seemed they wanted inflation, bad inflation. Whatever the reason, I don't know, but you heard the prediction so often it seemed like they wanted things to go bad.

Lately, last couple years maybe, it's been like that with predictions of recession: There's gonna be a recession in 2018. Then: There's gonna be a recession in 2019. Then: 2020. Now? 2020 or 2021. It's like they want it to happen.

Desire influences the predictions, no doubt. That's the trouble with politics.


Back in March of 2016 I predicted economic vigor: "This is going to be the full tilt, rapid output growth, rapid productivity growth, high performance boom."

In April 2016: "In two years everyone will be predicting it."

And in August: "The stage has already been set for the vigor that will be attributed to our next President."

Well it's been over three years now, and I've been hearing nothing but predictions of recession. Oh, there was a flurry of media reports a year or two back, about how "good" the economy was doing, two percent growth and all. Two percent is not good growth. Vigor means four percent, and hints of more. We're not there. The economy is not "good". Some people set the bar way too low.

I was wrong about vigor starting to be obvious by 2018. And the repeated refrain of recession has recently raised doubt in my mind that we'll ever see vigor again.

The numbers aren't there. Private debt is still painfully high, by any measure:

Graph #1

And "Debt Service" continues to drift downward:

Graph #2
It had started going up again, but that fizzled. So I've been thinking about writing a post to say my prediction of vigor was wrong. But now I don't know. Houses are being built, and parking lots are crowded. Things are busy, and busyness means business. This year we could have the best holiday shopping season we've seen in a decade or more. We will soon see.

Monday, October 28, 2019

Testing my DSR estimate

Last time, I put my "Estimated Debt Service Ratio (back to 1947)" data into an HTML table so it's accessible. Now I want to access it: copy it, paste it into a worksheet, and try to evaluate it. Are my results obviously ridiculous? Could be. I mean, suppose I subtract "household interest paid" from the debt service numbers. That leaves me with principal repayment. Maybe I can look at the principal repayment numbers in comparison to household income, or in comparison to household debt, and see if the numbers look reasonable or not.

If they look reasonable, that doesn't mean they're right. But if they don't look reasonable, it could mean they are wrong. So I want to do that kind of looking.


Graph #1
The red line in Graph #1 is the FRED data in the form FRED offers it: as a percent of Disposable Personal Income. The blue line is my approximation of the FRED data, based only on the ratio of household debt to DPI, and the effective interest rate on that debt, in an Excel regression. The main advantage of the blue data is that it goes back to 1947. The main disadvantage is we don't know if it is even close to right.

Graph #2
Graph #2: Same data as the first graph, but shown as billions of dollars. Here it appears that the differences between red and blue are small at first, for 15 or 20 years after 1980 (where the red line starts), and bigger in later years. So it appears. But by the end of the graph, Debt Service has climbed to 1600 billion; by the year 2000 it is only half as high. So a comparable difference would look only half as big before the year 2000.

And again, by the mid '80s is only around 400 billion, so again the same difference would look only half as big in 1985 as in 2000. And by 1980, only 200 billion, so the difference would look half as big in 1980 as in 1985 on this graph.

To get a better view of the differences between the red and blue, I looked at the difference between red and blue as a percent of the red data:

Graph #3
I was hoping this graph would look familiar. If I recognized something in it, like the growth rate of debt, I would want to add that data to the regression to see if it would make the discrepancies smaller.

No such luck. But what I do see in this graph is that before the year 2000, the discrepancies get bigger and bigger as you go back in time. None of the differences shown on the graph are more than six or eight percent, and I'd say that's not so much as to be objectionable. But if there's a discrepancy in every decade, and as you go back in time each earlier one is two or three percentage points bigger than the one before you're up around a 20% error in the 1940s. That's a lot.

The error seems to get worse as you go back in time. That makes sense to me. And even if a 6% difference is not a problem, it does seem to be a problem that the error grows with every decade.

But I'm looking at the big recent discrepancy on the graph, too, in the years after 2000. Maybe that discrepancy tilted the playing field, and the trend of discrepancies in the years before 2000 is not really a trend so much as the tilt introduced by the large late discrepancy. I'm thinking I might run the regression again some time, but stop the Y-values, FRED's Debt Service data, at the year 2000. Maybe the playing field will tilt back to normal and the discrepancies will all go away.

One can always hope.

Graph #4
Graph #4: I separate household debt service (in billions) into its two components: principal and interest. For the interest portion I use "Monetary Interest Paid: Households" from FRED. Nobody ever told me that this measure of interest is the interest that's included in household debt service. But what else could it be?

Famous last words, right?

Graph #5
Graph #5: Having split debt service into its principal and interest portions, here I convert them to "percent of DPI", same as FRED's Debt Service data.

You know what? Here again my red line looks almost like the smoothed trend for the green (FRED) data, at least in the 1980s and '90s. Except my data goes up when FRED's goes down, and down when theirs goes up. Hm.

Interesting in the early years where the principal (red) stays in the neighborhood of 4% while the interest (blue) drops to near 1% by the late 1940s. Makes sense, because interest rates were lower in the early years, and accumulated debt was smaller.

Graph #6
Graph #6: The components of Debt Service shown as "percent of Household Debt".

The blue line (interest) shows the same rise-to-early-80s-peak (and decline thereafter) that generally appear in US interest rates. My calculation of the "effective" interest rate ("monetary interest paid: households" as a percent of "household debt") seems to hold up okay.

Interesting that the blue line starts with much less of an increase here than on Graph #5, and that the red line starts with much more of a decrease here than on #5. Makes sense: When interest is the small component of Debt Service, principal must be the large component.

Nonetheless I am fascinated by the red line here, principal as a percent of debt. It starts extremely high, then falls very rapidly. But the fall tapers off by 1965 and the line runs flat for the first ten years of the Great Inflation. Red drops in the latter '70s -- an adjustment, I suppose -- then runs flat again to the end of the Great Inflation, at which time the original decline apparently resumes.

First impressions.

Saturday, October 26, 2019

Estimating Household Debt Service back to 1947

The other day I showed a graph of the components of household debt service, the interest and the principal:

Graph #1: Components of Household Debt Service: Principal (blue) and Interest (red) as % of DPI
The data on interest paid goes back to the 1940s. (Same for disposable income and household debt.) But the debt service data only goes back to 1980, so that's as far back as the blue line can go. I sure would like to see the behavior of that blue line in the earlier years.

I wonder if you could use interest cost and debt-to-income in a regression, to find an equation that simulates the debt service data since 1980, and then use that equation to estimate debt service back to the 1940s. I know: It's not as good as actually having the data would be. But it might be better than not having the data.

I must have been out the day they taught regression in school. The only thing I know about it is, it's way more complex and sophisticated than I am. So if you want to grab this idea and run with it, that would be great. Meanwhile, I do know how to find the "Data Analysis" window in Excel, click on "Regression", and plug numbers in. Let's see where that gets us.

At FRED I picked out some relevant data and saved it as my Early Years Debt Service Dataset #1.

When I think on TDSP, household debt service, I think it has to be related to the rate of interest and the level of debt. For the interest rate I'll figure the "effective" rate: household interest paid, as a percent of household debt. For the level of debt I'll go with household debt relative to disposable personal income, the same context used for TDSP.

From Jim Frost at Statistics by Jim:
Use regression analysis to describe the relationships between a set of independent variables and the dependent variable. Regression analysis produces a regression equation where the coefficients represent the relationship between each independent variable and the dependent variable. You can also use the equation to make predictions.
Sounds good. I'm thinkin I want to "predict" values for debt service:
  • first, to see if my "independent variables" give me good estimates since 1980;
  • then, to create estimates for the years before 1980.
Debt-to-income and the interest rate are my "independent" variables. They go in Excel's "X value" range as inputs for the regression. The FRED Debt Service data (which begins with 1980) goes in the "Y value" range. My "prediction" -- my calculated values based on the regression results -- should be a pretty good match to the Debt Service data. That's my plan so far.


Okay, I got results from Excel. The regression gave me coefficients I can multiply by the input values, giving me numbers I can compare to the original TDSP data. And since both the interest rate values and the debt-to-income values are available back to the 1940s, my estimate of debt service can be calculated back that far as well:

Graph #2: Regressing Household Debt and Interest to Approximate Debt Service
Not a bad match between red and blue. The biggest gap between red and blue is about a one percentage point difference near the value 12, so my numbers are off by less than one in 12, less than 10%. Excel's "Summary Output" gives me an R Squared of 0.844, if that's important for a regression. And my P-Values are suspiciously low (but I don't know what that means).

Let me be the first to say it: Past results are no guarantee of more remote past performance. But let me also say I'll use this estimate when I have a use for it, as a way to test whether it seems to make sense.

I did find an old article, "Recent Financial Behavior of Households" by Charles Luckett, from the Federal Reserve Bulletin of June 1980 (vol.66). Here's Luckett's Figure 6:

Graph #3: Luckett's 6th
His numbers are far higher than FRED's. The highest point in the FRED data is 13.22% of DPI in 2007. The low edge of Luckett's plot window is the 14% level!

I copied some of his gray background down (to duplicate his line spacing), down to the 6% level. Here (blue) is my result for 1973-1981, overlaid on Luckett' graph:

Graph #4: Comparison 1973-1980
The blue line going back to 1973  is from my calculation based on the regression. The short green line, down around the 10% level, shows FRED's Debt Service data for 1980 and '81. The black lines show Luckett's numbers. Mine are low. But so are FRED's.

Eh. I added 12 to all my numbers to bring them up near Luckett's. Adding 12 to the blue line gives me the double red line, which looks very much like a smoothed path for Luckett's numbers. Mine go a little low where his go low in 1974 and '75. Mine go a little high where his go high in 1978 and '79. The general trend of mine looks about right, assuming Luckett's numbers are right. That's at least a little bit interesting.

But why are my numbers so much lower than his?


Another old article: "Household debt burden: how heavy is it?" by Carl J Palash, from 1979. Here is Chart 1:

Graph #5: Carl Palash's First
I'll take the lower chart there, enlarge it, and overlay my numbers on it as before. But I can see already that these numbers also are far higher than mine. The overlay:

Graph #6: Comparison 1960-1979
Again, the blue line is my calculation. The red this time is twice the blue. Multiplication gives my red line more variation than the blue has, relative to Palash's, making the path of my data somewhat more similar in shape to the path of his black line: We both show flatness for a decade beginning in the mid-1960s; we both show increase before the flatness and after; and after 1975 our increases run parallel. But all of this is based on my calculated numbers being doubled.

Again I have to wonder why my numbers are so low. But so far, the only answer I have is that the numbers I was trying to duplicate are low, FRED's household debt service numbers.

Doesn't really answer the question.


Based on the two comparisons, I can say that my numbers show less variation than Luckett's or Palash's, and that mine and FRED's are a lot lower. I don't know why the old numbers are so high and the recent ones are so low. But in another article, "Recent Changes to a Measure of U.S. Household Debt Service" by Dynan, Johnson, and Pence, from 2003, I found this graph, showing the revised data lower than the older vintage:

Graph #7
The "Financial Obligations Ratio" they show here does go up above 18% of DPI, in the neighborhood of the older data. But the Financial Obligations Ratio includes other things in addition to Debt Service. And anyway in the FRED data today, the corresponding peak comes in at less than 18%. The numbers are still going down.

Factors presented in the article which would tend to lower the Debt Service Ratio include
  • the "time to maturity" of loans, because "longer-maturity loans have lower payments"
  • the failure to make payments: "According to the SCF, at any given time, payments are not being made on one-quarter to one-half of student loans. To account for the deferral of student loans, we adjusted the stock of loans to reflect only those loans on which payments are currently being made."
  • mis-estimating interest rates: "we replaced the previously used proxies with [the average interest rate offered by banks on 48-month new car loans], which is 3 to 4 percentage points lower than the proxies we had been using."
One factor that would seem to raise the Debt service Ratio is
  • broadening the measurement of debt: "Sallie Mae's student loans since 1977 were added to the Federal Reserve's G.19 consumer credit statistics beginning with the October 2003 release. Their inclusion did not materially change the growth rate of consumer credit, but it has raised the level an average of 2 1/2 percent since 1977."
"On net," they write, "changes to the source data led to a downward revision to the DSR of about 1½ percentage points from 1980 through 2002..." And "the lion's share of this revision [was due to] the lengthening of our assumptions about remaining maturity on these loans."

Even so, the Debt Service Ratio today is half or less than half what it was back when that data was still called the Debt Service Burden. That's a very large decrease, especially given the very large increase in outstanding debt which occurred during that same period.

Whatever. I got the result I got, and that's what I got. Do with it what you will.

by ArtS 

 EDSR47 dataset  

Regression Result 


TDSP (% of DPI)  

My Estimate  
























































































































































































Thursday, October 24, 2019

That old Sumner post again

Sumner's 2012 post at Money Illusion comes up again: Debt surges don’t cause recessions. This time, the comment by Woj:
The use of credit (debt) instead of money (income + savings) has an extra cost associated with the interest payments. As the aggregate amount of debt and interest rises, the percentage of income used to pay interest costs or pay down debt also rises, lowering the amount available for consumption/investment.
Sumner replied:
Woj, You said;

“As the aggregate amount of debt and interest rises, the percentage of income used to pay interest costs or pay down debt also rises, lowering the amount available for consumption/investment.”

This is simply factually wrong. Every debt payment is money received by someone else.
See what Sumner does here? He lets the "circular flow" run just long enough to make me think the money I pay against my debt is income to my creditor.[1] Note that he doesn't count anything else that happens during that moment of time, the other lending and spending and earning and repayment of debt. And he doesn't call the payment "income" to the creditor (because it isn't income to the creditor. He's not stupid). But he wants me to think it is income.[2][3]

That would be wrong. As PositiveMoney points out,
When you take out a loan, new money is created... When you pay down your debts, the money that leaves your bank account doesn’t go to anyone else – it just disappears. This is because loan repayments are just the opposite process to money creation...
Sumner says every debt payment is "money received by someone else." Well of course they receive it, but they can't spend it. They have to do their accounting.

They use the money to offset the money they created by lending it to you. The one cancels the other; the payment cancels the debt. Money created by fractional reserve lending is destroyed by repayment of debt. Not only do you not owe that money anymore; it doesn't exist anymore. Nobody gets to spend it. Nor is it income. Sumner is engaging in pure deceptive bullshit.

From Truthout: Government Debt and Deficits Are Not the Problem. Private Debt Is. By Michael Hudson, March 2013:
The problem is private debt... The problem is the carrying charges on this private debt, and the fact that debt service is eating into personal income – and also business income – to deflate the economy.
Michael Hudson says the same that Woj says, and PositiveMoney, and me. And so do Karen Dynan, Kathleen Johnson, and Karen Pence, of the Federal Reserve Board's Division of Research and Statistics, in "Recent Changes to a Measure of U.S. Household Debt Service" from 2003:
When a large share of household income is devoted to debt repayment, households have fewer funds available to purchase goods and services.
What was it Sumner said? "This is simply factually wrong."

I don't like to use the word liar but I think in Sumner's case it might be appropriate.

From The Private Debt Crisis by Richard Vague, at naked capitalism, September 2016:
When private debt is high, consumers and businesses have to divert an increased portion of their income to paying interest and principal on that debt—and they spend and invest less as a result. That’s a very real part of what’s weighing on economic growth. After private debt reaches these high levels, it suppresses demand.
Richard Vague says the same that Woj says, and Michael Hudson, and PositiveMoney, and Dynan and Johnson and Pence, and me.

If we're wrong, Sumner, convince me of it. Don't bullshit me. And hey, I don't jump to conclusions but you are slowing me down: I've been thinking about what you said for seven years, thinkin maybe you're right and I have things wrong. But you are the one who is wrong, Scott Sumner.

Stop wasting my time.

1. The time lag between making a payment and receiving it may be near zero today. This was not always so. During the historical period when the financial sector grew large enough to become a source of economic problems, computers were still only toys. See Float (money supply) at Wikipedia.

2. Sumner lets the "circular flow" run a little long, so that my most recent payment on my debt has time to be received by the lender and we can imagine it to be the lender's income. But Sumner doesn't count anything else that happens during that extra moment of time. If, for example, the overall trend is that debt grows faster than income (as from 1947 to 2008), then a preponderance of the annual data will show evidence of that trend. So will a preponderance of the quarterly data.
Now, you can take one of those quarters and extend it just long enough for your lender to receive your most recent payment on your debt, then immediately stop the clock; and this is just what Sumner has done. But what goes into the extended quarter must come out of the following quarter. So in the big picture, such manipulations change nothing.
If you take the whole history from 1947 to 2008 and break it down to a sequence of brief moments each just as long as Sumner's extension, in the preponderance of that data you will still find evidence of the same trend that is visible in the annual and quarterly data and in the data as a whole -- unless, like Sumner, you look at only one of those brief moments. Sumner's manipulation changes nothing.
This has been eating at my brain since 2012. I finally have an answer.

3. The interest portion of my payment is income to the lender; but the principal portion is not. However, the interest is income to the financial sector, not to the productive sector of the economy.

Tuesday, October 22, 2019

Mollifying America

I'm in the middle of something important here -- drinking coffee and making graphs -- but I have to interrupt myself because Old Mother Google is at it again. "It’s almost Drug Take Back Day":

They offer social insights like that, far too often. If they're gonna do that, they need a button on their search page so you can send them a message: WHAT ARE YOU, MY MOTHER? And if it's so damned important, why do we have to wait four days to take the stuff back? It's all nonsense and gibberish dressed up like little red riding hood.

They seem to want to play the Walter Cronkite role, mollifying America with their little one-liners.

I'm not mollified. I'm horrified. And I think it's creepy.

You'll probably focus on today's creepy message and say It's good they're concerned about drugs. Sure. Whatever. But shouldn't it be "It’s almost Drug Take-Back Day", with a hyphen in there? You know, a dash...?

I'm not complaining that they're concerned about drugs. I'm complaining that they are wearing it on their sleeve. Uh, excuse me a moment, I have to check something...

Yeah, that. "On the sleeve".

And yes, it was google I checked with, the one I'm complaining about, about the "on the sleeve" thing. That's part of the irony of what's going on here.

The other part of the irony is that the google search page DOES NOT HAVE beliefs, values, emotions, or sentiments. I'm just dealing with the search page, not with the people who work at google. Yes, I'm sure the people who work there have beliefs and values and emotions and all that shit. That's not the point.

I'm sure there is a whole department at google where it's their job to deal with Beliefs and Emotions and Values and Sentiments -- the BEVS department.  But what that means is, it's their job. The shit we see on our screen, those one-line BEVS, it's not from the heart. It's just their job.

Sure: Lots of those people care about lots of those issues. But not ALL of them care about ALL of those issues. So why do they expect ME to care about all of those issues? And why do you object so strongly when I happen to complain about one of their one-liners?

Me? I don't even use the word "issues". STOP PUTTING THAT SHIT ON MY SCREEN. Go to church and pray about it. Or donate money. Or volunteer your time. Do what the fuck you want, but stop putting that shit on my screen.


See? It wasn't about drugs, was it.

Establishing Parameters for Debt

Originally posted 18 November 2016 at NAE.

How much economic growth can we get by adding a dollar to Total Debt? Not much:

Graph #1: Change in GDP relative to Change in Debt, and the Hodrick-Prescott Trend Line
Not much, but it does vary. The high point was back in the 1960s and '70s. On average, we added 60 to 70 cents to GDP for every dollar we added to TCMDO debt. That's twice as good as we've done since the mid-80s, as the red line shows. (I'm only looking at the "old normal" economy, before the crisis.)

We can say the 1960s and '70s show the best performance, the highest level reached by the red line on Graph #1. But after about 1968, that line is already going downhill. Economic performance deteriorated in the 1970s. So let's just say the 1960s, then, and forget the 1970s.

But the "Great Inflation" started in 1965. So forget the second half of the 1960s. Let's say that the best performance on Graph #1 is from 1960 to 1964. In those years we gained 60 cents of GDP for every new dollar of debt. And the trend in those years is upward, not downward, and not turning downward.

Why does the ratio on Graph #1 vary? It varies because debt is a drag on growth. Having debt is a drag on growth. It's adding debt that boosts growth. But adding debt increases the debt we have. It's a conundrum.

We need to keep total accumulated debt at the level that gives the most GDP for each new dollar of debt.

Graph #2: Total (Public and Private) Debt as a Multiple of GDP
In the years of its best performance, 1960 to 1964, total debt was about one and a half times the size of GDP. In all of the 1960s and '70s, really, where the red line runs high on Graph #1, total debt was about one and a half times the size of GDP.

Together these graphs tell me that we had the best economic performance when total debt was about 1.5 times the size of GDP. Each new dollar of debt added the most to GDP in the years when total debt was half again the size of GDP.

That's not just the Federal debt, by the way. These graphs show the Federal debt and everyone else's debt added together.

There is something to be said about public versus private debt. But we can't see it on the above graphs. We have to separate public debt from private, and compare the one to the other. This next graph takes the debt we've been looking at (TCMDO at FRED) and separates the Federal debt from all the rest, from the debt other than Federal. Call this other debt "non-Federal". The graph shows non-Federal debt relative to Federal:

Graph #3: Non-Federal Debt as a Multiple of the Federal Debt
In the years 1960 to 1964, our years of best economic performance, non-Federal debt runs between two and three times the size of Federal debt. After 1964, there was never again so little non-Federal debt.

We get the most output from an increase in debt when we have about $1.50 of debt for every dollar of GDP. And the best distribution of that debt is to have non-Federal debt between two and three times the size of Federal debt. So, for one dollar of GDP we want 40 to 50 cents of Federal debt and $1.00 to $1.10 of debt other than Federal. These are ballpark targets for maximizing economic growth.

Graph #4: Targets for Federal and Non-Federal Debt-to-GDP Ratios

Sunday, October 20, 2019

Debt Service = Interest + Principal

Red: the interest portion of Household Debt Service
Blue: the repayment-of-principal portion of Household Debt Service (since 1980)

Graph #1: Components of Household Debt Service: Principal (blue) and Interest (red) as % of DPI


Friday, October 18, 2019

Just ask Fred

"The larger the debt, the larger the burden,
as households need to pay
more interest on a larger principal."
Too many people talk about interest rate increases. Too few talk about increases in the size of accumulated debt as a private-sector cost. Thanks, Fred.

Wednesday, October 16, 2019

To Jackie, Deanna, Will, Jan, Randall, Jon and Kevin

In Google, I asked why was the economy slow in the 1970s, to see what people think.

Other people asked...

Let me repeat that one
"The economy of the seventies was terrible. Dubbed with an oil embargo and a mix of other problems led the American nation to an almost depression state. The energy shortage was the start followed by high unemployment and inflation." - US History: Economics of the 1970's

1. I never saw the word "dubbed" used that way and I don't think it's right.
2. "a mix of other problems" -- That's not an explanation.
3. "an almost depression state" What?? I was there. Yes, New York City almost went bankrupt. And yes, farmers were ploughing their crop into the soil to reduce their costs. But the main problem that policy was addressing was inflation, and policymakers addressed it by creating recessions, to reduce inflation by slowing the economy.
4. "The energy shortage was the start". No, it wasn't the start.
5. "The energy shortage was the start followed by high unemployment and inflation." No. The rising price of oil was a response to inflation. The high unemployment was a result of the anti-inflation policy.

Looks like the bit I quoted was part of a high school history project. Maybe I was too hard on them. For example, item 2: "a mix of other problems". I've used non-explanations like that, myself. And sometimes you have to look at them a long time (in my case, years) before you can see how empty they are.

So, to Jackie, Deanna, Will, Jan, Randall, Jon and Kevin, I say I'm glad you're interested in economics. Keep at it. Your explanations will improve. Oh, and don't take anybody's word for anything. That'll come back to bite you, every time.

But to their teacher I have to say What the hell! Don't teach people that the problem started with oil. And don't teach people that the economy was slow when, recessions aside, growth in the 1970s was as good as it was in the '60s -- and the recessions were created on purpose by policy as a way to reduce inflation.

And to Google: To the question What were the key economic problems of the 1970s?, you respond with "an oil embargo and a mix of other problems"? -- Really?

The key economic problem then, as now, was our failure to understand the economy.

Monday, October 14, 2019

From a Woodford interview

I found an interview with Michael Woodford, by the editor of the Minneapolis Fed publication The Region. Here is the gist of the discussion at one point:

Region: ... What are the advantages of the latter, of a nominal GDP target policy?
Woodford: One advantage is it would be a single criterion; whereas, the thresholds that the Fed announced were two different criteria.
Region: Perhaps dueling criteria, at times.
Woodford: Right. There was a threshold for the unemployment rate, but there was also a threshold for inflation expectations. The question of whether those could be in conflict was being sidestepped.

The question of what to do if the inflation target and the unemployment target come into conflict was not addressed. Or not even. The question of whether the targets could come into conflict was not being addressed.

It's a good point in favor of NGDP. Or not really, but at least it's a good point against the current system. It doesn't mean NGDP targeting would be better; that's wide of the mark. But the idea of "what we need to happen with inflation" being in conflict with "what we need to happen with unemployment" is certainly a point worth pondering deeply.

If things get so bad that we have "dueling criteria" then I'm not confident even NGDP targeting can solve the problem. It leaves me confident only that somewhere along the way, our understanding of the economy went wrong. What we need is a massive re-think of all the things we are sure about.

In 1977 I wrote:
The solution to inflation is "less money." The solution to unemployment is "more money." This is a magnificent answer for an either/or problem. But when the problem is "both," the logical solution is to increase and decrease, at the same time, the country's money supply...

Our economy is facing a both problem. The solution to that problem is to do two contradicting things to the money supply.
Woodford and I both focus on the possibility that to solve the economy's problems we may need self-contradictory policy. But no: It was Woodford in 2014 who said we may run into that problem. Almost 40 years earlier I said we were already facing that problem. But at least we both recognize conflict within policy as a problem. (Apparently some people don't?)

Woodford's concern was that
"The question of whether those [policies] could be in conflict was being sidestepped."
I'm not sure sidestepping is the big issue here. Inflation and unemployment are our two main economic concerns, and getting them on target is the whole heart and soul of policy. If our economic policies are in conflict, this is no small thing.

Inflation was too high back in the 1970s. So was unemployment. Remember "stagflation"? It was a "both" problem, and the standard prescription called for self-contradictory policy. If that's the situation, doesn't it make you want to question our understanding of the economy? What -- We should wait for a financial crisis to raise such concerns?

Maybe there is something wrong with our understanding, and maybe our error is the source of our troubles. That's easy for me to say, of course, because I'm not an economist and I don't have the big investment in understanding the economy. It would be costly for economists to take the view that I take. So maybe we should expect their concern to be only "sidestepping". And maybe we should expect that their resolution to the conflict in policy would emerge from their conflicting conclusions, rather than from a rethink that begins at initial assumptions.

"Almost 40 years earlier I said we were already facing that problem."

The problem was that unemployment was too high, but also inflation was too high. It was a manufactured problem. We had created high unemployment by using recessions to fight inflation. And we had created high inflation, either by leaving old Keynesians in charge or by failing to address the cost-push issue that was being generated by a growing financial sector.

Well, we got rid of the old Keynesians. That didn't help...

Saturday, October 12, 2019

A hundred dollars?

Last time I said:
One of the biggest distortions life creates is that in the real world our reliance on credit grows over time. If we start out borrowing an average of a hundred dollars a year, as in 1956, we can end up fifty years later borrowing forty-four hundred dollars a year. But that's what happens when economists and policymakers think that a constantly rising debt goes "hand in hand with improvements in economic well-being".
That hundred dollars.

To be clear, I was looking at household debt when I said it. Take household debt, change the units to "Change from Year Ago, Billions of Dollars", and make the frequency "annual" so you get only one number for each year. Then divide it by U.S. Population (with units in thousands; VERIFY IT) and multiply the ratio by a million (to convert debt in billions to debt in thousands) to get a per capita number.

Here's what I got last time:

Graph #1

101.16508 in 1956 ... about a hundred dollars ... and 4398.80697 in 2006 ... about 44 times as much debt per capita. As I said. But come to think of it, we should probably correct for inflation.

We're looking at the change in debt. That's a flow variable. So we can use the same calculation you'd use to convert GDP from nominal to real: divide the change in prices out of the debt numbers, and multiply by 100. I'll be nice, and use the Personal Consumption Expenditures: Chain-type Price Index instead of the CPI. (The Fed uses a PCE index, not the CPI.) But I'm not going with the one that excludes food and energy prices. I'm not all that nice.

Here's what I got now:

Graph #2

668.19738 in 1956, and 4932.83577 in 2006 ... something above a seven-fold increase, less than seven and a half. Seven, seven and a half versus a 44-fold increase, the difference between them due entirely to inflation.

But anyway, per capita household borrowing in 1956: $668.20. That's in today's dollars (or year 2012 dollars, really). Does that sound a little more reasonable than $100?

So as I was saying:
One of the biggest distortions life creates is that in the real world our reliance on credit grows over time. If we start out borrowing an average of a $668.20 a year, as in 1956, inflation aside, we can end up fifty years later borrowing $4932.84 a year. But that's what happens when economists and policymakers think that a constantly rising debt goes "hand in hand with improvements in economic well-being".
There is no doubt in my mind that we are a cashless society today because of our pro-credit-use pro-growth policies. We should change those policies before it's too late, because the reliance on credit is killing us.

Friday, October 11, 2019

Debt Effects

Suppose we borrow an amount equal to 10% of our income every year. And suppose we pay off 10% of our debt every year. What does our economy look like?

Assume the interest rate is always 5%.
Assume we start with zero debt.
Assume our income is $10,000 per year, always.
Assume our standard of living is equal to our income plus what we borrow minus the debt service we pay.

Assume we start work at age 16 and drop dead at 80.

I put all that crap in a spreadsheet.

Graph #1
We start at age 16 with zero debt. We borrow a thousand every year, and pay back 10% of what we owe. Our debt accumulates. But when it gets to $10,000, we're paying back a thousand every year, same as we borrow. So our debt stabilizes at that level, the $10,000 level.

In the real world our borrowing varies from year to year. Prices and, hopefully, incomes go up. Interest rates change. And terms of repayment change. In the real world accumulated debt differs from what this graph shows. But the graph shows the kind of thing that would happen if prices and incomes and borrowing and interest rates and terms of repayment weren't all changing. What happens in the real world looks like what the graph shows, but twisted and distorted by the facts of life.

One of the biggest distortions life creates is that in the real world our reliance on credit grows over time. If we start out borrowing an average of a hundred dollars a year, as in 1956, we can end up fifty years later borrowing forty-four hundred dollars a year. But that's what happens when economists and policymakers think that a constantly rising debt goes "hand in hand with improvements in economic well-being".

I can't believe they had the nerve to say that "hand in hand" thing.

Graph #2
With income of $10,000 and $1000 borrowed, we can spend $11,000 the first year. We started with no debt, so debt service that first year is zero. In later years, debt service takes some of our money, and our standard of living falls.

After 10 years or so, the debt service payment goes above $1000 a year. That's more than the thousand we borrow each year. So our standard of living goes below our $10,000 income level.

Our Standard of Living continues to drop thereafter, but more slowly. As we saw above, our accumulated debt eventually levels off. As our debt stops rising, our debt service stops rising, so our standard of living stops falling. Why does it level off $500 below our income level? Looks like it's due to the cost of interest. In my spreadsheet for this simulation, the interest portion of the debt service payment gradually approaches the $500 level. The numbers fit.

On the Standard of Living graph, the blue line runs above our $10,000 income for a while, and below it thereafter. In the spreadsheet calculation, the difference from the $10,000 level is due only to our borrowing (which pushes the blue line up) and to debt service costs (which drag it down). For those first 10 years or so when the blue line is above 10,000, we're ahead of the game. But after those early years, the Standard of Living goes below our income level and our creditors are ahead of the game.

That's a bit of a simplification. Creditors can have bad days, too. But you get the idea: We're ahead of the game in the early years, and behind the game thereafter.

The Standard of Living graph indicates our standing for each year separately. It doesn't add last year's number to this year's. For each year it shows how that year's borrowing and that year's debt service payment tally with that year's income.

In life, we may take things a year at a time, or a day at a time, but if we're ahead every year for ten years or so, things seem pretty good. And if we're behind every year, without ever a good one, things can seem pretty bad. So I want to look at the cumulative effect of being ahead of the game or behind it due to the effects of borrowing and loan repayment on income.

Graph #3

On the earlier graph, the Standard of Living graph, we start at $11,000, a thousand dollars above our income level. Over the next ten years the blue line gradually falls and eventually gets down to our income level. That year, there is no gain.

On this graph, the Cumulative Gain or Loss graph, the blue line starts at the $1000 level because our standard of living was $1000 above our income level. Over the next ten years the blue line rises as we add in gains from later years, but it rises more and more slowly because each year's gain is less than the one the year before. After 10 years the cumulative gain reaches a maximum, just below the 5000 level on the graph. At the maximum, the line is just about flat, because the gain from borrowing has just about dissipated, and our Standard of Living is just about equal to our income.

In the years thereafter, our debt service is more than the $1000 we borrow each year. As a result, our Standard of Living runs below our $10,000 income level. We're behind the game, and each year is a loss. When you take those annual losses and add them to our Cumulative Gain or Loss graph, what you get is a shockingly large cumulative loss.

And yes, I checked that $100 number, $100 per year per capita borrowing in 1956.

Wednesday, October 9, 2019

Non Sequitur: High debt ⇒ Low demand ∴ the public sector should borrow to fill the spending gap

Cecchetti et al, again, 2011 (PDF; page 4):
In principle, as highly indebted borrowers stop spending, less indebted borrowers or lenders could take up the slack. For example, wealthy households could purchase goods at reduced prices and cash-rich firms could invest at improved expected return. But they need not. As Eggertson and Krugman (2011) point out, it is the asymmetry between those who are highly indebted and those who are not that leads to a decline in aggregate demand. Those authors suggest that, in order to avoid high unemployment and deflation, the public sector should borrow to fill the spending gap left by private sector borrowers as the latter repair their balance sheets.
Here's what I get from that paragraph:
  1. There is a lot of debt.
  2. Higher debt service (or a decision to cut back on borrowing) means people with lots of debt must spend less than they did before.
  3. People without a lot of debt could spend more and "take up the slack" but they do not.
  4. The "asymmetry" between items 2 and 3 "leads to a decline in aggregate demand." And
  5. "the public sector should borrow to fill the spending gap left by private sector borrowers"
But you can't really expect savers to turn around and bail out debtors just for the sake of improving the economy. People are not that altruistic. So it is nonsense to bring up "the asymmetry between those who are highly indebted and those who are not" and say that the asymmetry, rather than the cost of the debt, is what "leads to a decline in aggregate demand."

Don't fall for it. They're bullshitting you: Hey look over here! There's an asymmetry here that's making people spend less.

What? No! The problem is not that people who are heavily in debt cannot afford to "fill the spending gap" and people who are not don't want to. That's not the problem. The problem is there is so much debt it's choking off spending. The problem is the debt. Asymmetry is the distraction.

The problem is the high level of debt. Servicing it takes money that people would have spent on other things. So spending is listless. "Aggregate demand" is listless. And the economy is listless.

Since the private sector cannot solve the problem, Eggertson and Krugman say, "the public sector should borrow to fill the spending gap". Who else can fill the gap? The public sector, of course.

Again, no. When did we decide we should fill the spending gap? We didn't. The spending gap is not the problem. The high level of debt is the problem. The spending gap is a result of the debt problem. The spending gap is a result. Eggertson and Krugman want to fix a result. But what we need to do is fix the problem.

Eggertson and what's-his-name shift the focus away from the high level of debt. They shift the focus from the problem to the consequence -- "a decline in aggregate demand" -- and call this the problem. And then they propose a solution to this problem. But it isn't the problem. It is a consequence of the problem. Therefore, their proposed solution is a non sequitur. It doesn't follow from the given facts.