Tuesday, March 31, 2020

You'll never find the problem if you look on the wrong graph

Eric Boehm at Reason:
During Trump's first three years in office, he's signed off on spending plans that added at least $4.7 trillion to the national debt. The debt totals more than $23 trillion, a record high. When measured against the size of the economy, it is approaching the all-time record set during World War II.

Graph #1: Gross Federal Debt as a percent of GDP

But there is a difference between the Federal debt now and back at the end of World War II. And the difference doesn't show up on the debt-to-GDP graph.

Here is the difference:

Graph #2: Gross Federal Debt as a percent of Debt Other Than Federal Debt
The Federal debt today is low in comparison to everyone else's debt. That was not true at the end of the Second World War.

Even during and after the financial crisis of 2008, Federal debt growth amounts to no more than a wiggle on this graph. That shows the truly massive size of debt other than Federal.

And it shows that the big increase in Federal debt since 1980 (which you can see on the first graph) has done nothing to reduce debt other than Federal.

It even shows why the big increase in Federal debt has done nothing to solve the problem: We have done nothing to reduce debt other than Federal.

But none of this shows up on the debt-to-GDP graph.

Sunday, March 29, 2020

Arthurian Profit Study 3.0: Getting the F out

“One indication of financialization is the extent to which non-financial firms derive revenues from financial investments as opposed to productive activities.”
- Greta Krippner, quoted by Bezemer and Hudson

Today we're looking at corporate business (CB) profits. Corporate business profits before tax. At FRED, corporate business profits are reported for two main categories: the total, and the NCB (nonfinancial corporate business) component. Subtracting NCB from the total gives us a third main category, the FCB (financial corporate business) component:

Graph #1: Financial (red) and Nonfinancial (blue) components of CB Profits  (billions)
NCB profit (blue) is the larger of the two components, currently around 1100 billion. FCB profit (red) comes in around 400 billion. Taken together, FCB and NCB profits add up to about 1500 billion dollars, the CB profits total.


The next graph shows the FCB and NCB shares of total CB profits. The graph shows a trend of gradual increase in the financial share, and gradual decrease in the nonfinancial:

Graph #2: Gradual Change in the FCB and NCB shares of CB Profits  (percent of total)
At FRED: https://fred.stlouisfed.org/graph/?g=qvrw
70 years of wiggles and waggles notwithstanding, the NCB share of CB profit has gone from about 90% to around 75%, while the FCB share has gone from 10 percent to 25. For now, though, I want to set Financial Corporate Business profits aside. We will come back to it later. But first we look at the components of NCB profits: the Financial and Nonfinancial components of Nonfinancial Corporate Business profits.

Yes, that's right: Some of the profits of nonfinancial businesses are financial profits. In this post we will estimate the size of this financial component.

The data FRED provides on profit is broken down by business type: For any business that they call "nonfinancial", the profits are identified as profits of nonfinancial business. I prefer to summarize corporate business (CB) profits by profit type. For this, we have to rework the data.

It turns out that some of the assets of Nonfinancial Corporate Business are nonfinancial, and some are financial. What's more, the financial share of NCB assets for a long time gained on the nonfinancial share:

Graph #3: Gradual Change in the F and N shares of NCB Assets
At FRED: https://fred.stlouisfed.org/graph/?g=qvrR
Financial assets start around 20% of total NCB assets, and nonfinancial around 80%. By the end of the millennium, they damn near meet at 50-50. Since then it has been about a 55-45 split. Almost half the assets of nonfinancial corporations are not nonfinancial assets.

Almost half the profits of nonfinancial corporations are not nonfinancial profits? Not to rain on anyone's parade, but "the fundamentals" of our economy are not sound.


How do you suppose it works out, the rate of return on NCB N assets versus the rate of return on NCB F assets? Well obviously the financial assets have been growing faster than the nonfinancial. This suggests to me that people prefer the F to the N. And that suggests to me that F offers the better return on investment.

But this might not be the case. It may be that N provides the better return. And yet N assets show decline while F assets show growth -- or at least they did for the whole second half of the 20th century. During all that time, F assets were preferred over N. If it is not true that F provided the better return, it must nevertheless be true that F provided greater "utility" than N. People valued F more than N, either because the return was better, or despite the fact that it wasn't.

Not being an economist, I am free to put value on utility: That which provides the greater utility is more highly valued. Ergo, F offers a better return than N.

But for the sake of argument, let's say F and N offer equal returns. Also, for the sake of the arithmetic I have to do. Okay? So if financial assets make up 20% of total NCB assets, then the profit attributable to those assets will be 20% of total NCB profits. If financial assets make up 45% of the assets, then the profit attributable to them is 45% of NCB profits. The arithmetic is simple now.


On Graph #1 we noted that NCB profits are presently around 1100 billion, FCB around 400 billion, and the total of the two around 1500 billion.

Now we can take the 1100 billion of NCB profit and split it up to match the assets of nonfinancial corporate business: Today, that's near 55% for nonfinancial assets, and 45% for financial assets. This makes the most recent numbers roughly 600 billion in nonfinancial profits and 500 billion in financial profits. The two numbers still add up to 1100 billion, so the graph looks right to me:

Graph #4: Breakdown of NCB Profits by Asset Share
At FRED: https://fred.stlouisfed.org/graph/?g=qw4s
But remember: This is only the profits of nonfinancial corporate businesses. We set aside the 400 billion profits of FCB.

The NCB profit number, which ends around 1100 on Graph #1, is broken up here into an N that ends at 600 billion and an F that ends at 500. The N line shows the nonfinancial profits of nonfinancial corporate business. We'll keep that number.

But the 500 is financial profit of nonfinancial business. It is financial profit. It ought to be counted as financial profit, along with the financial profit of financial business. So we have to take the 500 away from the 1100 of NCB, and add it to the 400 of FCB. We end up with values of around 900 for the financial profits of corporate business, and around 600 for the nonfinancial profits:

Graph #5: NCB Profit less F Asset Share (blue), FCB Profit plus NCB F Asset Share (red)
At FRED: https://fred.stlouisfed.org/graph/?g=qvsD
Financial profits -- red -- run above nonfinancial since the late 1980s, except for a moment during the financial crisis. Nonfinancial profits are not 1100 billion, but only about half that figure. And at 900 billion, financial profits end up about 50% higher than the profits from the production of output.

To get a better feel for the relation between the two measures, consider the F-to-N ratio:

Graph #6: Financial Profit per Dollar of Profit from Production
At FRED: https://fred.stlouisfed.org/graph/?g=qvuH
In 1951 finance was half as profitable as the production of output. Today, it is half again as profitable.

When you tally corporate business profits by type of business, nonfinancial business profits always run higher than financial business profits:

Graph #7: Profits of N and F Corporate Business as Percent of GDP

But when you tally corporate business profits by type of profit, financial profits run above nonfinancial since the late 1980s:

Graph #8: N and F Profits of Corporate Business as Percent of GDP
At FRED: https://fred.stlouisfed.org/graph/?g=qw5j
Swallow hard and acknowledge the reality: Profits are not high; financial profits are.

If you take the profit numbers as FRED presents them, profit is high in recent years and N profit is the better part of it. I have had trouble with that evaluation for many years, because Keynes said
The engine which drives Enterprise is not Thrift but Profit.
If profit drives enterprise, and profits are so good, then why is the economy so bad? The answer, it turns out, is that profits are not so good. Well, I take that back. Financial profits are good, except in the crisis. Financial profits are good, and financial business has been our growth industry. But, like the economy itself, nonfinancial profits, correctly measured, are not so good.

Now the story fits the Keynesian logic. Now it makes sense.


The key point in today's post is that FRED's data has profit categorized by type of business, not by type of profit. At FRED, if a Nonfinancial business earns a Financial profit, that profit is counted as part of the Nonfinancial business profit. That's what it is -- based on who earned it. But I don't look at things that way. I look at the N profit of N business, because this is the profit that arises from the production of output. And I total up all the F profit, no matter who earned it, because F profit does not arise from the production of output.

If I'm breaking up NCB profits into N and F, should I do the same for FCB profits? I thought so at first, but now I say no. The bank building is an asset that at first glance might seem to be a nonfinancial asset. But unless they sell pizza there, or hats or something, the profit they make is financial profit. For financial business it doesn't matter what type the assets are; the profits are still financial.

One-page Printouts:   Preview   PDF    PNG

Data Used

CB and NCB Profits:

NCB and NCB-F assets:

Context variable:

I show my work in an Excel file: Here's the link.

The Current Numbers: an Overview

1500 billion = Corporate Business Profits
  • 1100 billion = Nonfinancial Corporate Business Profits
  • 400 billion = Financial Corporate Business Profits

1100 billion = Nonfinancial Corporate Business Profits
  • 600 billion = Return on NCB Nonfinancial Assets
  • 500 billion = Return on NCB Financial Assets

400 billion = Financial Corporate Business Profits
500 billion = Return on NCB Financial Assets
  • 900 billion = Total Financial Profits

600 billion = Return on NCB Nonfinancial Assets
900 billion = Total Financial Profits
  • 1500 billion = Corporate Business Profits

The problem is not excessive profits. The problem is excessive finance.

Wednesday, March 25, 2020

Stanley Greenberg, political analyst

From Americans’ Revulsion for Trump Is Underappreciated at The Atlantic:
Trump’s reelection campaign is premised on voters embracing an “America first” vision on trade and immigration, a defense of the traditional family with a male breadwinner, and a battle for the forgotten working class. But the percentage of Americans who believe that free trade between the United States and other countries is mostly a good thing has jumped from 43 to 56 percent in three years—reaching 67 percent among Democrats. The percentage who believe that foreign trade is an opportunity for economic growth rather than a “threat to the economy” has jumped from about 60 to 80 percent since Trump took office.

From Greenberg's remarks, it sounds as if people are becoming more committed to "free trade" and "foreign trade" in reaction to President Trump. Indeed, Greenberg's paragraph concludes with the thought that Trump's "tariffs and trade war have united much of the country against him."

Our views on trade are being shaped by political hatred rather than economic evaluation.

What's worse, Greenberg's analysis makes it clear that in his view, if more people think free and foreign trade are good things, then free and foreign trade will be good things.

Myself, my views on trade are not firmly established, other than to say that trade distracts us from domestic policy as the main driver of economic conditions. However, I am certain that trade has consequences both good and bad.

I am certain also that those consequences depend upon many things. But they do not depend upon our opinions about whether trade is a "good thing".

Saturday, March 21, 2020

Lessons in exponential growth

Why we’re not overreacting to the coronavirus..., at Vox:
In a press conference on March 16, the National Institutes of Health’s Dr. Anthony Fauci, who has played a major role in leading the US response, explained to Americans why the strong measures the government was taking were not an overreaction.

“Some will look and say, well, maybe we’ve gone a little bit too far,” he said. “The thing that I want to reemphasize, and I’ll say it over and over again, when you’re dealing with an emerging infectious diseases outbreak, you are always behind where you think you are if you think that today reflects where you really are.”
On the same topics, and worth a watch if you have not seen it:


Financial relative to Nonfinancial Corporate Business Profits

Friday, March 20, 2020

Corporate Profits of Financial and Nonfinancial Business

Financial Profit relative to Nonfinancial

High points for financial business are lows for nonfinancial.

Thursday, March 19, 2020

Arthurian Profit Study 2.0: The Mysteries of Science

Graph #1: Financial Business Share of Corporate Business Profits
When the value of a ratio wanders up and down, as in the graph above, all you know is that one component of the ratio is changing relative to the other. You don't know if one is increasing and the other is stable, or one is decreasing and the other is stable, or which one it might be. Maybe one is going up and the other is going down; you don't know. It's even possible that they're both going up -- or both going down.

From the ratio, you can't tell. So I want to look at the components of the ratio. For the above graph, that would be the profits of Corporate Business (CB), Nonfinancial Corporate Business (NCB), and the one minus the other, Financial Corporate Business (FCB).

For the record, FRED uses the abbreviation NCB for "Nonfinancial Corporate Business" in the series names, sometimes at the beginning of the name. For example:
And sometimes at the end of the name:
But sometimes they drop a stitch, as with these two:
And sometimes, they don't even try:
FRED uses NCB quite often as a memory-jogger for Nonfinancial Corporate Business. But I don't think they ever use FCB for Financial Corporate Business, and I don't remember ever seeing them use CB for Corporate Business -- except embedded in "NCB", of course.

But anyway, we wanted to look at the profits of CB, NCB, and FCB. Here ya go:

Graph #2: CB (blue), NCB (red), and FCB (green)
Bottom to top, we have the Financial business (green) portion, the Nonfinancial business (red) portion, and the total of the two: Corporate Business profits (blue). Just by eye, all three measures appear to have been increasing slowly until around 1970, then moderately fast until around 2000, and then extremely fast, though with significant declines as well.

Actually, it is hard to tell how fast they increased, because when the line goes up and off the chart, the whole plotted line has to shrink down to fit on the graph. When the plotted line shrinks, the low numbers get closer to zero and differences between the low numbers take fewer pixels of space. And the numbers that were in the middle move lower on the graph, so the next time the plotted line has to shrink, those numbers will get lower and closer to zero, with less pixels for differences. The higher numbers -- typically, recent ones -- always make older, lower numbers look small. This is what Graph #2 shows.

It shows the increase in profits. But it doesn't show the growth of profits. To see the growth we can take the "log" of the values. Doing that gives us this graph:

Graph #3
Graph #3 shows the same data as #2. But #3 shows it a different way. Shows it in a way that gives us a better look at the growth of profit.

Here: Increase versus Growth: "Increase" means to add more. As children, we learn to count, and we learn the word "more". As adults, when we  think more we think increase by one or more. When we put it into numbers, it looks like this:
1, 2, 3, 4, 5, 6...
It looks like counting.

But suppose you're counting your money. You start with one, and then you get one more, so you have two, and you say: "Wow, I doubled my money!"

But then you start with two, and you get one more, so you have three, and you say, "Wow, I only got half as much this time," and there is some disappointment in the "wow" this time.

And then you start with three, and you only get one more. You drop the "wow" and say "Things are getting bad!" And you start looking for for ways to increase your money faster.

You're thinking in terms of growth. If you start with a dollar and you double it, you want to double it again, and again, and double it every time. When we put that into numbers, it looks like this:
1, 2, 4, 8, 16, 32...
"1, 2, 3, 4..." is constant increase. "1, 2, 4, 8..." is constant growth.

On Graph #2 we could see that the increase of profits was slow early on, and a lot more rapid later, as with "1, 2, 4, 8". That pattern emerges because people try to grow their profits, not just increase them. But Graph #2 is designed to show increase rather than growth. So the growing profits appear to be increasing at an alarming rate.

Graph #3 is designed to show growth rather than increase. On #3, you could draw a straight line down the middle of one of the plotted lines, and it would fit quite nicely. On the graph of "logged" values, your straight line would show constant growth, or a constant growth rate, lets say. The plotted line would vary some from your straight line, but not very much.

What this means is that the growth rate of profits, though it did vary, was close to constant from the late 1940s to the most recent data.

You can see as you move from left to right on the graph, from the 1940s to 2000 or later, the green line was going up faster than the red and blue. The green line -- Financial corporate business profit -- was growing faster than the other measures of profit, reliably, for all that time.


I used the FRED data from Graph #2 to make an Excel graph, and made the vertical scale a Log Scale to make a graph similar to Graph #3. Then I put exponential trend lines on each series. By some miracle of science, when you show an exponential curve on a Log Scale graph, the exponential curve comes out perfectly straight.

The graph below shows just one profit measure, Corporate Business (CB) profits (that is, Financial plus Nonfinancial business profits. The total of the two). The blue line from Graph #3 is repeated here on Graph #4, along with an exponential trend line in black. Note than on a Log Scale graph, exponential trend lines appear as straight lines:

Graph #4
I included the trend line equation so you know that this trend line is an exponential line calculated by Excel, not just a line that I added to the graph by eye. Just below the trend line equation, Excel gives an R-Squared value that, at 0.9786 is pretty darn close to a perfect match. (1.0 is perfect.) The 0.9786 is evidence of the "nice fit" I mentioned above.

As I said above, the blue line on Graph #4 is the same as the blue "CB" (Corporate Business) line you can see on Graph #3. And here's something interesting: For Graph #4, I used the original data values that I got from FRED, and made the vertical scale a Log Scale. But that method didn't work for Graph #3, the FRED graph. (The plotted green line uses calculated values; FRED's Log Scale option never works when I try to use it for calculated values). For #3 I used a different method: I plotted the Logs of the data values instead of the values themselves. Then, because the values were logged, #3 didn't need the vertical scale to be a Log Scale.

The plotted line comes out the same either way: The blue line on Graph #4 is identical to the blue line on #3. Far as I can tell, anyway.

But compare the numbers on the vertical scales for Graphs #3 and #4. On #3 (with Logged values) the vertical scale only goes from zero to 8. All of the plotted values are less than 8. By contrast, on Graph #4 (with the original data values) the lowest number is around 30 -- and the highest is in the neighborhood of 2000, the same as on Graph #2.

Graphs #2 and #4 use the same values, but the plotted lines are different. Graphs #3 and #4 use different values, but the plotted lines are the same. Ah, the mysteries of science.

Hey, if you make enough graphs, it all starts to make sense.


So you've seen what Corporate Profit on a Log Scale looks like, paired with its exponential trend. I know, it is hard to believe that that straight line is an exponential curve. But you can prove it to yourself, if you want: Open up Excel, enter the numbers
in adjacent cells -- just the numbers, not the commas -- then select those cells, and insert a line graph. Then click your plotted line, click the Chart Tools "Layout" option on the menu, click "Trendline", and click "Exponential Trendline". You get a thin, black, curved line that runs so close to the plotted line that it's hard to see. A curved line. Now click the graph to select it, and from the Chart Tools "Layout" menu, under "Axes" click "Primary Vertical Axis" and click "Show Axis with Log Scale". Watch the graph as you make that last click: Both your plotted line and the curved, exponential trend line will change to straight lines because you're using a Log Scale! Seeing is believing.

Under "Primary Vertical Axis" you can click "Show Default Axis" to go back to the curved lines, and then "Show Axis with Log Scale" again and watch it change to the straight lines again.

This next graph shows all three profit data lines -- blue, red, and green -- as on Graph #3. It also shows exponential trend lines for each of the three, similar to the one on Graph #4. All told, six lines.

Graphs look messy to me when they show more than two lines. Oh, well:

Graph #5
The plotted lines are narrow ("thin") this time and the trend lines wide ("heavy"), to emphasize the trends. The uppermost pair, blue, is the same as shown on Graph #4, FRED's Corporate Business profits.

The three plotted lines (not the trend lines) are the same as shown on Graph #3: Blue is CB, red is NCB, and green is FCB profits. The heavy lines, the trend lines, are all Excel's exponential trend calculations, as on Graph #4. Here the trend lines are color-coded to match the plotted lines. The colors don't signify anything in particular, far as I know. By default, Excel makes the first line you put on a graph blue, the second one red, and the third one green.

(FRED uses the same sequence of colors: blue first, then red, and then green. Also, I never used it but I'm pretty sure that when you make a graph in "R" you get the same color sequence. I wonder who came up with that sequence -- and who decided to stick with it.)

Anyway, the trends. By eye, the plotted lines run pretty close to the trend lines. (Observing the high R-Squared value, we already confirmed that for the blue line. Here, for each of the three pairs, the plotted line never runs far from its exponential trend. The one exception is at the end of 2008 where the green line momentarily drops down and off the chart. Yeah, that one looks like the page view count in my blog stats when I write a long, involved post like this one...

Oh, by the way, that exception, the green line that drops way low, it bottoms out at the value 0.01. I made up that number. Just that one number. I made it up because the actual value was negative -- it was -67.947, actually. Excel wouldn't give me the trend line because, I dunno, exponential calculations don't work with negative numbers or something. It's that science thing again. Weird science.

I suppose my green trend line slopes up a little more than it would if the negative number worked. But not much higher.

My reason for showing you Graph #5 is so you can see that the green line slopes uphill quite a bit more than the red or blue. Because the vertical scale is a Log Scale, the slope of the line represents the growth rate. (Remember I said some graphs show increase and some show growth? I switched to the log scale to see the growth of profits rather than the increase. And now you know why: The slope of the line represents the growth rate.)

The green line goes uphill faster than the red or blue. So we know that Financial Corporate Business profits grew faster than Nonfinancial Corporate Business profits (red) as a rule, since the late 1940s. And we know that those Financial profits grew faster than total Corporate Business profits (blue). Financial profits grew the fastest. And remember: The financial (F) profit arising from the financial (F) assets of nonfinancial (N) corporate business is counted as part of the profits of nonfinancial (N) corporate business!

The financial (F) profit of  Nonfinancial (N) Corporate Business is counted as N profit, not F profit. It makes F profit look lower than it really is, and it makes N profit look higher than it really is.

It is true that some part of the fast growth the green trend line shows is due to the fact that I changed one value from -67 to 0.01 so that the Log thing would work. But that part of the fast growth of F is nothing compared to the accounting of F profit as N profit simply because it accrues to N. Look: The more economic policy favors F over N, the more F will grow and the less N will grow. And the more that happens, the more people will think that F is the better investment, so F will grow even more and N will grow even less as a result.

F is Financial and N is nonfinancial, but N is productive, and F is nonproductive!

And remember: Financial profits have grown faster than Nonfinancial for the last 70 years or more.

Now, I think, we are ready to begin.

Monday, March 16, 2020

Arthurian Profit Study 1.0

Corporate Business Profit is not the same as Corporate Profit. It's not; I doublechecked. I don't know what the differences might be. But on both these linked graphs (quarterly since 1947 and annual since 1929) corporate profits by the end are a little over 2000, and corporate business profits are a little under 1600: Less than 80% of corporate profits are corporate business profits. And that's the way it is, as Cronkite used to say.

While I'm checking things... I have been using "corporate business profits" minus "nonfinancial corporate business profits" as a measure of "financial corporate business profits". But while I was making the graphs linked above, a FRED search turned up Domestic financial sectors; corporate profits before tax excluding IVA and CCAdj, Flow, which should be just what I need: profits of financial corporate business.

The word "flow" on the end of the series name troubled me; but Wikipedia points out that
Some accounting entries are normally always represented as a flow (e.g. profit or income)...
So if I compare my calculated measure of financial profit to this new series I found, it's a flow-to-flow comparison. Good! (If it was stock-to-flow the numbers would certainly differ.) Here's the comparison graph. I'm happy to say the numbers match:

Graph #1: My Calculation (blue) and the FRED Series (red)
My calculated values are displayed as a wide blue line. The FRED series is a narrow, bright red line. The red line is neatly centered on the blue, so the values are identical, or very nearly. To see a bigger version, click the graph. Or click the "Graph #1" text to see it "live" at FRED.

This comparison gives me confidence in my calculation, confidence that FRED's "domestic financial sectors" series would have been the right one to use, and confidence that I'm correctly interpreting the difference between "corporate profits" and "corporate business profits".

I'm so full of confidence now that I'm not even going to use FRED's financial profit series. I'll stick with my calculation instead. Convenient, because I have another half dozen graphs ready to go. First is the financial share of corporate business profits: financial as a percent of total corporate business profits.

Graph #2: Financial Business Share of Corporate Business Profits
There's no straight-line path here, but there is a general upward trend. The financial share runs from less than 10% in the late 1940s to about 25 percent in recent years. This tells me that the nonfinancial share was more than 90% in the late 1940s, and that it has since worked its way down to about 75%.

Be aware, however, that the share of profits going to Nonfinancial Corporate Business (NCB) arises in part from nonfinancial activity and in part from financial assets. Some of the 75 percentage points of profit accruing to NCB are, to my way of thinking, financial (F) profits. As opposed to profits arising from productive activity and the generation of output.

I don't know what the numbers are, but let me give an example. Let's say 50 of the 75 percentage points of NCB profit arose from productive business activity. That means the other 25 points of profit arose from the financial (nonproductive) business activity of those nonfinancial business corporations.

To my way of thinking, these 25 points of profit should be counted with the "about 25 percent" that accrues to financial corporations, for about 50% in total. This would mean that corporate business profits arise half from the productive activity of NCB corporations, and half from the financial activity of corporate business in general. Half and half. Of course, the 25 points we're looking at is not the actual number. It's not even an estimate. It is only an example.

As we saw on Graph #2, financial is gaining on nonfinancial when it comes to shares of Corporate Business (CB) profits. But financial is also gaining on nonfinancial when it comes to the assets of nonfinancial corporate business. What's good for the goose is good for the gander, so I have to assume that for nonfinancial corporate business, their profit from financial operations is gaining on their profit from nonfinancial operations.

If I'm right about this, we can be certain that profits from financial operations are rising faster than we saw on Graph #2. We can be certain that corporate business profits arising from financial operations are increasing faster than those arising from productive business activity.

The partitioning of corporate business into "nonfinancial" and "financial" may be accurate as far as the standardized nomenclature of "business types" is concerned. But that type of partitioning is not an accurate way to measure profits arising from financial vs nonfinancial business activity.

Does it matter? Yes, certainly. If financial profits are gaining on nonfinancial, financial business is the better business to be in. Capital moves out of productive business and into financial business. Finance continues to grow, while productive business continues to tread water and productivity continues to disappoint.

For my next graph, I duplicated Graph #2 in Excel and added a Hodrick-Prescott trend line. The H-P may be out of favor these days, but I was last in line to start using it, and I'll probably be last in line to stop. Anyway, I used it:

Graph #3: Same as Graph #2 but with Hodrivk-Prescott Trend (red) (and in Excel)
I have in mind to figure an average level for regions between the high points of the H-P, and look at those average levels relative to economic performance. But it's all just a foggy notion right now. I did take the H-P trend line and put it on its own graph:

Graph #4: The H-P Trend line from Graph #3
Okay, so that's the "trend" of the financial profits data we were looking at. And next -- no one ever showed me how to do this so I might have it wrong, but I don't think so -- next I took the original data (the blue line on Graph #3) and subtracted the trend line values from it. If I'm doing it right, this gives me the "detrended" data.

Where the blue line is above the red on Graph #3, the blue is above zero on Graph #5. Where blue is below red on #3, it is below zero on #5. All the differences visible on #3 are visible on #5. But instead of being different from the wavy line on Graph #4, they are different from the zero level:

Graph #5: The Trend (graph #4) Subtracted from the data (graph #1)

Graph #6

Graph #7

What these interesting patterns might possibly mean, I have no idea. Interesting patterns often mean nothing. And hey, I haven't spent a lot of time looking at the financial business share of profits. Besides, this is the first time I've looked at a detrended anything. So I have no clue if these patterns mean something. I just thought they were interesting. That's allowed, right?

I have one more variant of the detrended financial business share graph, one more that we need to look at -- a copy of Graph #5 with recession bars:

Graph #8
The blue line has a peak at every recession.

"But," you will point out, "the blue line also has peaks in several places where there is no recession."

Indeed. If we were using this graph to predict recessions, it would be no more reliable than a yield curve chart! But we're not using our graph to predict anything. I had in mind to use it to see what happens to profits over the course of the business cycle. But I'm disappointed: It doesn't look useful for what I have in mind.

I expect to see the Financial share of profits rise before recessions and fall after, while the Nonfinancial share falls before recessions and rises after. Back in January I looked at corporate business profits and said
Early in the expansions that follow recessions, profit of non-financial corporations typically rises (as a share of corporate business profits). Later in the typical expansion, when concern about inflation arises and interest rates go up, rising financial costs drive non-financial profit down while financial profit rises.
But I'm not seeing that pattern in the detrended graph. I think detrending removes the information I need.


I changed the H-P smoothing factor from 1600 (for this quarterly data) to 100. The H-P trend changed, so the detrended graph changed:

Graph #9: Like Graph #5,  but with H-P Smoothing Factor=100
The "interesting" features have disappeared: The expanding cone of Graph #6 doesn't seem to be there; and the "bunchiness" of Graph #7 is different now. Those interesting features apparently arose not from the profit data but from the amount of smoothing applied by the H-P calculation.

On the other hand, the peaks of the blue line on #9 are more closely tied to recessions. To my eye, only the 1987 peak now stands out as unmatched to a recession.

Meanwhile, the reduced smoothing produced a possibly more useful H-P trend line:

Graph #10
In the present post I am looking for a way to test and evaluate the behavior I noticed in January, with financial profits falling (and nonfinancial profits rising) during recovery from recession, and with financial profits rising (and nonfinancial profits falling) on approach to the next recession. That pattern is somewhat visible in the blue line on Graph #10. I was thinking that using the red line could provide a less subjective indication of the change from decline to increase and of the timing of that change.

The lows following the 1949 and 1954 recessions are clear, but the red line shows no low between the 1958 and 1961 recessions. And then the low after the 1961 recession is clear, but the low after the 1970 recession doesn't occur until after the 1974 recession!

I still need a better indication of the timing of changes from decline to increase. Maybe I can tweak the smoothing factor more and come up with that better indication. For now, though, ten graphs in, that's about all I can take for one day!


See also: A rising cost that can turn expansion into recession

Thursday, March 12, 2020

On income inequality

I'm thinking that maybe the income at the top didn't increase extraordinarily fast in recent decades.

Now you're mad at me. But maybe you could reserve judgement till you're more than one sentence in to what I have to say? I always try to "think" about graphs and data. I don't like to see a graph, say That's outrageous, and later find out that what's outrageous really is that the graph is wrong or that I misinterpreted it in some way. So bear with me; I'm just thinking. And I did say "maybe" in that opening sentence.

I'm thinking maybe the income at the top only continued to grow at the same rate as in earlier decades... and that the slowing of income growth for the rest of us makes it look as if the top earners had extra-fast growth.

That's obvious? Okay, but then you can't be mad about my opening sentence.

In A Guide to Statistics on Historical Trends in Income Inequality at CBPP, they say this:
The broad facts of income inequality over the past seven decades are easily summarized:
  • The years from the end of World War II into the 1970s were ones of substantial economic growth and broadly shared prosperity.
    • Incomes grew rapidly and at roughly the same rate up and down the income ladder, roughly doubling in inflation-adjusted terms between the late 1940s and early 1970s.
    • The gap between those high up the income ladder and those on the middle and lower rungs — while substantial — did not change much during this period.
  • Beginning in the 1970s, economic growth slowed and the income gap widened.
    • Income growth for households in the middle and lower parts of the distribution slowed sharply, while incomes at the top continued to grow strongly.
    • The concentration of income at the very top of the distribution rose to levels last seen nearly a century ago, during the “Roaring Twenties.”
There it is. Right there. Here's what they say:
  1. Before the slowdown of the 1970s, incomes grew "at roughly the same rate" for everyone.
  2. Since the slowdown, "Income growth for households in the middle and lower parts of the distribution slowed sharply, while incomes at the top continued to grow strongly."
They don't say income growth at the top increased. They say income growth continued at the top, and slowed for the rest of us.

That supports my opening thought.

So does their graph. Here, I added a dashed red line to their graph, to suggest a linear trend for income at the top. My dashed line is a pretty good fit to their top income data. Straight-line trend, no acceleration of income growth at the 95th percentile. For the rest of us, income growth slowed:

Graph Source: A Guide to Statistics on Historical Trends in Income Inequality at CBPP
Art added the dashed red trend line (by eye)

But who the hell is CBPP? So I looked up what the Economic Policy institute -- EPI -- has to say. This is from their America’s slow-motion wage crisis: Four decades of slow and unequal growth, from September 2018:
From the end of World War II through the late 1970s, the U.S. economy generated rapid wage growth that was widely shared. Since 1979, however, average wage growth has decelerated sharply, with the biggest declines in wage growth at the bottom and the middle.
EPI makes the same income comparison as CBPP and says the slowdown begins in the same decade, the 1970s, though EPI and CBPP pick different slowdown-start dates in the 1970s.

EPI also says "the biggest declines in wage growth [have occurred] at the bottom and the middle", suggesting that even at the top, wage growth declined. They don't make this explicit. But if the biggest declines were at the bottom and middle of the income scale, then there must have been a smallest decline and it must have occurred at the top.

Decline at the top. Not a big decline, but decline. The growth of income at the top did not accelerate. According to EPI, it declined.

Income growth lost ground even at the top of the income scale, or at least it did not gain ground. That doesn't make things better for those of us below the top of the income scale. But it seems to be an accurate description of what happened. And if we want to fix the economy, we need to know what did happen and what didn't. You can't fix what went wrong if you don't know what went wrong.

If my opening thought is true, as it now appears to be, then the solution is to boost economic growth enough to restore the growth of income for the lower 99%, rather than reducing the growth of income at the top.

We need growth, to boost income for the rest of us. Maybe we need some constraints on income at the top, too; it would seem so. But reducing income at the top is not the solution. Increasing income where income is low, this is the solution. Increasing income is the solution.

And that means economic growth is the solution.

From an old post:
Of course it would be better if we reduce inequality. Better for some of us, at least. But you have to remember that the people who are doing well want their fair share just like the rest of us. And the blue line [20-year Trend Growth of RGDP per Capita] has been going downhill. So when they get theirs, things are normal for them and bad for the rest of us...

Eliminating inequality cannot work as long as the blue line is going down, because when the blue line is going down, eliminating inequality makes everybody poor. The highest priority is not to eliminate inequality, but to improve economic growth.

Tuesday, March 10, 2020

A FREDGraph Technique

I created this graph from scratch, modeled after one I did back in January:

It's a comparison of financial business (red) and nonfinancial business (blue) shares of Corporate Profits, from 1929 to 2018. But what it's a graph of is not the point just now.

I wanted to get rid of the jiggy lines on the left there, from 1929 to 1933:

Okay. Those jiggy lines at the left are gone.

Then, to test something I noticed FRED doing, I clicked "Max" to restore the graph to its default 1929 start date, and eliminated the years before 1933 by a different method:

Notice the difference in the plot window! All the whitespace above the 100 level is gone. All the whitespace below the zero level is gone. And the two plotted lines have expanded to use the available space. So it's easier to read the wiggles in the lines. Now I'm happy.

A useful technique thing to know.

Monday, March 9, 2020

Ian Hall on Toynbee's 'Time of Troubles'

‘Time of Troubles’: Arnold J. Toynbee's twentieth century by Ian Hall, at ResearchGate; and from there, downloadable as a 15-page PDF.

I'm fascinated by what Toynbee wrote. Now, having read Ian Hall's paper, I'm fascinated by Toynbee the man as well. Here's a paragraph from Hall's paper:
While Toynbee worked away at narrating events on the world stage, he was also at work on what he called his ‘Nonsense Book’, A study of history. A hugely ambitious, sprawling book, the Study tried to put contemporary politics and international relations into context and to provide nothing less than a complete reinterpretation of the history of the modern West. Toynbee took aim at almost all the accepted verities of nineteenth- and early twentieth-century historiography: that modern history was a story of unrelenting and unstoppable progress; that the nation-state was the highest political form to which humanity could aspire; that the West had ‘won’ and that its values, ideas and institutions—especially democracy and industrialism—were thus superior to others. He even attacked the way in which his fellow historians worked—that ‘industrialisation of historical thought’ which valued learned articles on ever more narrow and obscure topics more than bold, broad and book-length interpretations of the past.
If that doesn't fascinate you, maybe you need to read some Toynbee. Hall's last sentence (above) is footnoted; the reference is to page 5 in volume I of Toynbee's "nonsense book". A perfect place to start: the beginning.

Volume one (of 12), unabridged, is available online at archive.org. Start at page one. I'm betting that by the time you get to page five, you won't want to stop.

Friday, March 6, 2020

The fall of Rome

The psychohistorian Hari Seldon on the fall of Trantor:
The feeling will pervade the Galaxy that only what a man can grasp for himself at that moment will be of any account. Ambitious men will not wait and unscrupulous men will not hang back.
From Foundation by Isaac Asimov.

The historian M. I. Rostovtzeff on the fall of Rome:
What happened was a slow and gradual change, a shifting of values in the consciousness of men. What seemed to be all-important to a Greek of the classical or Hellenistic period, or to an educated Roman of the time of the Republic and of the Early Empire, was no longer regarded as vital by the majority of men who lived in the late Roman Empire and the Early Middle Ages. They had their own notion of what was important, and most of what was essential in the classical period among the constituent parts of ancient civilization was discarded by them as futile and often detrimental.
From "The Decay of the Ancient World and Its Economic Explanations" by M. I. Rostovtzeff. In The Fall of Rome: Can It Be Explained? edited by Mortimer Chambers.

Thursday, March 5, 2020

The fall of Trantor

"The fall of Trantor," said Seldon, "cannot be stopped by any conceivable effort. It can be hastened easily, however. The tale of my interrupted trial will spread through the Galaxy. Frustration of my plans to lighten the disaster will convince people that the future holds no promise to them. Already they recall the lives of their grandfathers with envy. They will see that political revolutions and trade stagnations will increase. The feeling will pervade the Galaxy that only what a man can grasp for himself at that moment will be of any account. Ambitious men will not wait and unscrupulous men will not hang back. By their every action they will hasten the decay of the worlds. Have me killed and Trantor will fall not within three centuries but within fifty years and you, yourself, within a single year."
- From the first book of Asimov's Foundation trilogy
(30 June 2021) ... or try this link.

Wednesday, March 4, 2020

History's not done yet

William Manchester, The Glory and the Dream

While looking for the Keynes quote, I came upon an article by William Ecenbarger in the Baltimore Sun, from 1991: DEPRESSING TIMES RECESSION RECALLS THE BAD OLD DAYS OF THE 1930s.

This paragraph floored me:
Men really did sell apples on the street. People did actually starve to death. There were entire towns where not a single person had a job. Good health was a luxury -- indeed, there were so many deaths in Logan, W.Va., that coffin-making was established as a work-relief project. Some two decades ago, historian Arthur M. Schlesinger Jr. lamented: "I don't know what is to be done to persuade people that the Great Depression took place. So far as I can tell, more and more Americans are coming to believe that it never occurred. . . . The whole thought of widespread economic collapse a generation ago in a nation as spectacularly opulent as ours is now, has for many -- perhaps for most of us -- no more reality any longer than a bad dream. Worse, the actualities of the Depression -- bread lines, soup kitchens, Hoovervilles, etc. -- have become cliches rejected by the sophisticated as corny and by the unsophisticated as communistic."

You find that depressing? Okay. But at least the focus is on the problem, on the economy. I'm more put off by thoughts like those in a "Wednesday Editorial" from 2018, from the Florida Times-Union: History shows Amercia overcomes its challenges.

I'm pretty sure they meant "America" but they wrote "Amercia".

I'm troubled by their apparent belief in history as a problem-solver. In ancient Rome they doubtless thought the same thing: History shows we can overcome any challenge. But as Toynbee showed, it's not just a matter of "challenge". It's a matter of "challenge and response". If we respond successfully, we overcome the challenge. If we don't, we don't.

When the Florida Times-Union tells me "history shows" that America overcomes its challenges, my response is: History's not done yet.

I'm gonna quote the whole Wednesday Editorial:
By Times-Union Editorial Board
Posted Jul 4, 2018 at 2:01 AM

Americans have survived periods of intense division when the nation took a step back but eventually recovered its bearings.

Author Jon Meacham reminds us of this in his new book “The Soul of America: The Battle for Our Better Angels.”

As he notes: “History shows us that we are frequently vulnerable to fear, bitterness and strife. The good news is that we have come through such darkness before.”

Klansmen held office

During the 1920s, members of the Ku Klux Klan held 11 governorships, 16 U.S. Senate seats and seats in the House. The KKK had about 2 million members in 1925, and 30,000 Klansmen took part in a march in Washington, D.C.

Overcome by fear of immigrants, The National Origins Act of 1924 set immigration quotas reducing the number of immigrants from 805,000 in 1921 to 164,000 by 1929.

Darkness of the Great Depression

Asked whether history had ever seen something like the Great Depression, economist John Maynard Keynes said, “Yes. It was called the Dark Ages, and it lasted 400 years.”

McCarthyism fueled intolerance

Journalist William Shirer, who covered Nazi Germany, said about America during the McCarthy era of the 1950s: “There was an atmosphere throughout the land of suspicion, intolerance and fear that puzzled me.”

Leadership has been key

One reason why America has been able to move beyond the virulent racism of the 1920s, the crushing economic weight of the Great Depression, the Red-baiting 1950s and much more is because at critical points, America’s leaders showed true leadership.

So it’s worth reflecting on some insightful observations made by our past leaders.
• President Lyndon Johnson: “I recognized that the moral force of the presidency is often stronger than the political force. I knew that a president can appeal to the best in our people or the worst; he can call for action or live with inaction.”
• Johnson in a speech to Congress after the assassination of President John F. Kennedy: “America must move forward. Let us turn away from the fanatics of the far left and far right, from the apostles of bitterness and bigotry, from those defiant of law and those who pour venom into our nation’s bloodstream.”
• President Dwight Eisenhower: “I’ll tell you what leadership is. It’s persuasion and conciliation and education and patience. It’s long, slow, tough work. That’s the only kind of leadership I know ... ”
• President Theodore Roosevelt: “Americanism is a question of spirit, conviction and purpose, not of creed or birthplace.”
• President Harry Truman: “You can never tell what’s going to happen to a man until he gets to a place of responsibility.”

Let us resolve

In his book, Meacham aptly sums up the challenge both our leaders and citizens face today:

“We cannot guarantee equal outcomes, but we must do all we can to ensure equal opportunity. Hence a love of fair play, of generosity of spirit, of reaping the reward of hard work and of faith in the future,” Meacham writes.

“In our finest hours, the soul of the country manifests itself in an inclination to open our arms rather than to clench our fists.”

So on this July Fourth, let us resolve to listen to each other.

Let us resolve to look for the best in each other.

Let us resolve to work with each other.

Let us resolve to take to heart the stirring words of another great American, Robert F. Kennedy, whose name might have been among the list of presidents quoted above were it not for an assassin’s bullet 50 years ago.

In April 1968, less than two months before he was killed during his surging campaign for the presidency, Robert F. Kennedy said this to an audience in Cleveland:

“We must recognize that this short life can neither be ennobled or enriched by hatred or revenge. Our lives on this planet are too short and the work to be done too great to let this spirit flourish any longer in our land.”

You probably like it. It's hopeful. I feel it too. But there's nothing there except "faith in the future". There's no hint of a solution, other than that we should "resolve" to be better people. And what does that mean -- that we should complain less? That's not gonna solve the problem. That's not gonna fix the economy.

That whole big section in the middle there on leadership -- there's really not much there. "Moral force". "Persuasion and conciliation and education and patience". "Spirit, conviction and purpose". And for Truman, character. But what are we going to DO? How are we going to SOLVE THE PROBLEM? We don't know, but we'll do it with our heads held high.

Challenge and response, man. Challenge and response.

The best of those leadership quotes is the second one from President Johnson:
“America must move forward. Let us turn away from the fanatics of the far left and far right, from the apostles of bitterness and bigotry, from those defiant of law and those who pour venom into our nation’s bloodstream.”
Trouble is, we have become those "fanatics of the far left and far right".

People have given up. We no longer believe the economy can be fixed. This is why we're so divided politically: because of the desperation arising from our underlying belief that The End Is Near.

What was that thing from the Sermon on the Mount?  Look at the birds of the air. Their Father takes care of them... Today we might say that nature takes care of them. Or, for people, we could say that the economy works.

But it doesn't work all the time, the economy. It didn't work for that 400 years Keynes was talking about. And it's not working for us. And it's not gonna work for us if we focus on claptrap like leadership and morality. We have to focus on the economy.

We have to understand what needs to be done to fix the economy. Why? Because our "leaders" take their cues from their "followers". From us. If we know what needs to be done, they will do it.

If we think we know what needs to be done, they'll do that -- even if we are wrong. Then, when it doesn't work, we'll blame them, call them corrupt, and say the system is "broken".

What we need is to stop insisting that we know what needs to be done to fix the economy. We need to rethink this. Since the 1980s, the 1970s, maybe even the 1960s, we have been unable to fix the economy. If we don't stop and realize that our plan to fix the economy is part of the problem, pretty soon it will be too late.

The failure for the last 50+ years to fix the problem is not evidence that our politicians are the problem. It is evidence that our plan to fix the economy is the problem.