Saturday, April 25, 2020

"Current" Federal Yadda (thru February 2020)

This post is practice for data "thru March" which should show some effects of the pandemic. Data thru March should be available within a few days.

1. Available Data

Figure 3 from the Monthly Treasury Statement (MTS) thru March 2020:

The Vertical Gray Bars DON'T Indicate Recessions!

Feb and March of this year look very much like Feb and March of last year. No visible effect, yet.

Friday, April 24, 2020

"COVID-19 Lights a Fuse"

From the April 2020 Global Debt Monitor: COVID-19 Lights a Fuse at the Institute of International Finance:
  • With the COVID-19 fiscal response in full swing, the global debt burden is set to rise dramatically in 2020; gross government debt issuance soared to a record high of over $2.1 trillion last month, more than double the 2017-19 average of $0.9 trillion.
  • As social distancing becomes the norm across most mature economies, global recession looms: a recession which would begin with $87 trillion more in global debt than at the onset of the 2008 financial crisis.
  • Using a simple top-down estimation, if net government borrowing doubles from 2019 levels—and there is a 3% contraction in global economic activity (nominal terms)—the world’s debt pile would surge from 322% of GDP to over 342% this year.
That's Global numbers, remember, and not just for the US.

I like the way they say it: They make sure we understand that debt is rising and that GDP is liable to decline, and that both of these changes contribute to the growth of debt-to-GDP.

One could argue

Found this on my old blog. Shortened it, tweaked a few words, and here ya go.

Opening with conclusions, in Fiscal Consolidation Strategy: An Update for the Budget Reform Proposal of March 2013, John F. Cogan, John B. Taylor, Volker Wieland, and Maik Wolters write:
As a consequence of the global financial crisis and great recession government deficits have risen substantially, thus creating the need for a fiscal consolidation strategy to reduce deficits and stabilize government debt. Looking forward, sustained spending increases are particularly worrisome, because they ultimately require raising tax rates beyond pre-crisis levels, even after the economic recovery. The distortions resulting from higher tax rates would then constrain the economy’s trend growth for a long time.

One could argue that Figure 1 consists largely of prediction, and that without prediction Figure 1 is largely empty:
Graph #2: Similar to Figure 1 but without Prediction

One could argue that the starting point for Figure 1 was "cherry picked" to give the greatest effect:
Graph #3: Similar to Figure 1 but with a Different Cherry Picked Start Date

One could look at all the years in the St. Louis Fed's FRED dataset, with an elliptical trend line painted on:
Graph #4: Maybe This Is What the Trend Looks Like
On Graph #4 you can see the big off-trend spike concurrent with the Second World War. A bit after that, you can see a small off-trend spike, peaking at 20, concurrent with the Korean War. And you can see a general pattern that follows the red trend line.

One could argue that the budget balancing of the 1990s and the feeble spending of the 2000s left the Federal component low for near two decades, and that this insufficiency was the cause of the global financial crisis and great recession. I'm not prepared to make that argument, but one could argue.

Tuesday, April 21, 2020

An unexpected recovery?

Robert W. Fogel, in NBER Working Paper No. 11125:
At the close of World War II, there were wide-ranging debates about the future of economic developments. Historical experience has since shown that these forecasts were uniformly too pessimistic. Expectations for the American economy focused on the likelihood of secular stagnation; this topic continued to be debated throughout the post-World War II expansion.
You never know. Our economy came back much better than expected after the second World War. What are the chances of a comparable recovery after the pandemic?

You never know. But some things are obvious.
  • If Congress bickers to death over Covid stimulus money, it will be the death of our economy. They call it a "war", this fight against the pandemic. So let them spend the money to fight it like a war.
  • Everyone's itching to get out of the house. Nobody says they want to go out and spend money, but spending money is part of the process. When the time comes, and "sheltering in place" is behind us, consumers may just provide enough demand, and business enough supply, to drive the economy to exciting new heights. You never know.
  • The world will be different; there is no doubt. One wonders how we will manage. But here, there is an easy answer: Human ingenuity will pave the way. The world is already different; many protections are already in place: At the grocery story, the auto parts place, and almost everywhere, the changes we have already seen are remarkable and inspiring.

Don't be surprised if the economy turns out better than we expect. Just saying.

Friday, April 17, 2020

Rules of thumb

FRED gives the unemployment level -- the number of people unemployed -- in thousands of people. I divide that number by 1000 to get the number of millions unemployed.

Then, because it might be interesting, I divide the unemployment rate by the number of millions unemployed:

Graph #1: Unemployment Rate per Million Out of Work
Starts around 1.6% unemployment for each million people out of work. Ends around 0.6%. Population is bigger now, that explains it. Also, the percent of the population that's in the labor force. And how they count unemployment, too: Probably not a big effect (on this graph), but that's just a guess.

Here's something odd: Take the first graph, put a second line on it, and have the second line show the inverse: Turn the ratio upside down.

Graph #2: Rate-to-Level (blue) and Level-to-Rate
The one line starts at 1.6 and ends at 0.6; the other starts at 0.6 and ends at 1.6. Pure coincidence.

Anyway, these days, throw a million people out of work and it adds about 0.6 to the unemployment rate.

These days, for each 1% the unemployment rate goes up, figure it means an additional 1.6 million people are out of work. So when the unemployment rate increased by 0.9, from 3.5% to 4.4%,  it meant that 0.9 times 1.6 million people -- about 1.44 million people -- had lost their jobs.

Thursday, April 16, 2020

Timothy Taylor on Joshua Gans and the pandemic/economy tradeoff

A COVID-19 Two-Pronged Choice: Production Possiblity Frontiers, at Conversable Economist.

Definitely worth a read. Plus, Taylor links to Gans's book, which "is freely available on-line..."
In the future, when people are looking back to see what was known and argued when the pandemic was hitting, this book will be a natural starting point.
For the rest of us, this framework helps to explain issues like why the social distancing rules were put in place so abruptly, why trying to take a half-way approach to social distancing would have probably imposed lots of economic costs with few health gains, and why choosing to prioritize health helps to avoid the "drift" that would otherwise occur as the pandemic evolved.

Wednesday, April 15, 2020

To your health

It was news the other day that the curve was flattening:
New York and other US states plan for reopening as Covid-19 cases 'plateau'

New York, by far the hardest hit state, will work closely with nearby New Jersey, Connecticut, Delaware, Pennsylvania and Rhode Island to devise strategies for jointly easing stay-at-home orders imposed last month to curb coronavirus transmission...
To judge by media reaction, people took this as good news. And it is good news. But that doesn't mean it's time to close the distance.

It means it's not getting any worse. But it also means that right now, at the plateau, risk of infection is the worst it has ever been.

Go the distance.

Thursday, April 9, 2020

The Century Foundation

Old news now I guess, but TCF on 31 March said what's been on my mind:
We anticipate [in April] the largest one-month spike in the unemployment rate in history, which underscores the critical importance of extending support to working families and those who have recently lost their jobs. The CARES Act passed by Congress last week, which broadened UI eligibility and increased weekly unemployment benefits by $600, along with providing direct cash payments to Americans, was a good and needed first step. But given the scale and scope of the current crisis, much more is needed to give relief to struggling families.
To struggling families, yeah. And to the economy. If they throw enough money at people, they can keep economic forces from compounding the sharp decline created by our response to Covid-19.

If they don't, we're in a world of shit.

Tuesday, April 7, 2020

Quarterly Changes in the Unrate

"Quarterly Changes in the Unrate"
The increase in unemployment associated with recession typically takes time to build up. This is most easily seen in the 1949, the 1974, and the 2009 recessions, but pretty much all the recessions show the same pattern of gradual (or at least non-instantaneous) increase.

But here we are in the first Covid recession, hopefully the only Covid recession, with an instantaneous spike in unemployment that is as big as the biggest increase of the 1975 recession -- and that was definitely a bad one.

Does this mean the recession that we are falling into just now will be a big, bad one? Jamie Dimon thinks so.

But as the graph shows, unemployment has not been building up. It took a massive leap because everybody all at once reacted to the Covid-19 during the last half of March. Okay, maybe not everybody. Maybe during the first half of April the massive Covid layoffs will continue. But that should be it, as far as the response to Covid-19 is concerned.

After that, we have to go back to the economic consequences of the March and April layoffs: the typical "buildup" effects. It is easy to picture a buildup like we saw in the 1949 or 1974 or 2009 recessions, only on a massive scale because the first small step, this time, was so very large. Easy to picture, but not necessarily correct.

From the October 1973 low of 4.6%, it took until July 1974 for the unemployment rate to climb 0.9 percentage points. Between February and March of 2020 -- one month -- unemployment climbed 0.9 percentage points. One month instead of eight months.

From the May 2007 low of 4.4%, it took until April 2008 to reach the 5.0 level -- an increase of 0.6 percentage points -- and another month to reach 5.4%. Eleven or 12 months that time, one month this time.

If it normally takes 8 months to a year for the unemployment rate to rise as much as it did between February and March of this year, then we simply don't have enough people employed to allow the sort of unemployment buildup that we normally get, on the massive scale suggested by the March increase. It's not going to happen.

It should be obvious that the March increase was so big, not because a recession was developing, but because we are shutting down the economy in order to fight the pandemic.

Granted, shutting down the economy has consequences...

Monday, April 6, 2020

The social-distancing recession

As you know, in the past two weeks ten million people signed up for unemployment. The typical number, before two weeks ago, was was less than a quarter-million per week. So, 10 million versus half a million. Wow... Egad! What's going to happen to the economy? How bad will the recession be?

I expect you've heard of Okun's law. Okun's law says you can tell what effect a change in unemployment will have on economic growth. So if unemployment increases by ten million people (or by 20 million, or however high it goes in the next few weeks) we can estimate how much GDP growth will slow down and how bad the recession will be. We'll look into that today.

I'll be using the "growth rate version" of Okun's law, from an old (2006) PDF from Miles Brian Cahill, at Researchgate. In the paper, Cahill looks at three time periods and figures Real GDP trend growth estimates for each:
  • From 1949 to 1972: 4.09% growth
  • From 1973 to 1996: 3.01% growth
  • From 1997 to 2004: 3.40% growth
I will figure growth from 2010 to the last data before the big jumps in unemployment, and compare that to growth after the increase of ten million having gone unemployed.


I started by figuring the same time periods as Cahill. My results are close to his:
  • From 1949 to 1972: 4.16% growth
  • From 1973 to 1996: 3.05% growth
  • From 1997 to 2004: 3.45% growth
My results differ some from his. There have been revisions to the data since Cahill wrote his paper, and I think this explains the differences. My results are close enough to Cahill's that I am satisfied I got the arithmetic right. Here are my three graphs:

Graph #1

Graph #2

Graph #3
I kept the X- and Y-axis limits the same on these graphs so that the "window" is always the same size. What we see in that window changes from one graph to the next. On the third graph the cluster is much smaller than on the others. In part this is because there are only one-third as many dots on Graph #3. In part, the reduced variation is probably an effect of the "great moderation".

In the trend line equation on each graph, the number before the "x" is the "Okun's Law parameter", Cahill says. That number relates unemployment to GDP growth, and we can use it to estimate how bad our social-distancing recession might be. If the number is close to 2, it means that when the unemployment rate rises by one percentage point, GDP falls about two percentage points.

So far, all these "parameter" values are close to 2. Cahill's values are 2.2, 1.83, and 1.95. Mine are 2.15, 1.83, and 1.99. (Remember, though, that all these values are for the year 2004 or before. I'm checking my work before we compare the 2010-2019 economy to the Covid-19 economy.)

Something I didn't know: According to Cahill, the number after the "+" sign in the trend line equation gives the trend growth rate of GDP. That surprised me. But here again, the results I got are a good match to Cahill's. Because these and the parameter values all turned out close to Cahill's, I figure I got the math right.


Another explanation of Okun's law, this from Investopedia:
Okun's law ... states that when unemployment falls by 1%, GNP rises by 3%.
When unemployment falls a certain amount, GDP rises a certain amount. That's cut and dry. They say 3%, not 2%; I'll get to that in a moment. Investopedia continues:
However, the law only holds true for the U.S. economy and only applies when the unemployment rate is between 3% and 7.5%.
That's an interesting constraint. We're looking at the US economy, and our unemployment rate has been between 3% and 7.5% since mid-2013. So I'll say the constraint is not a problem.

On the 2% versus 3% difference in the impact on GDP, Investopedia says:
In the United States, the Okun coefficient estimates that when unemployment falls by 1%, GNP will rise by 3% and GDP will rise by 2%. When unemployment rises by 1%, then GNP is expected to fall by 3% and GDP is expected to fall by 2%.
The 3% number applies to GNP, Gross National Product. Economists talked GNP back in the 1960s, when Okun came up with his law. Today, economists talk GDP, Gross Domestic Product. The change occurred in the 1990s. Cahill uses GDP in his paper. I'm using GDP in this post. The 2% number applies.

So we have an answer already. The unemployment rate in February was 3.5%. In March it went to 4.4%. The difference is almost one percent. Call it a 1% rise in unemployment. So we can expect GDP to fall by 2%. That's based on Cahill's parameter value of 2, which I duplicated, and which Investopedia confirms.

Let me put the 2% decline in context:

Graph #4: Real GDP Growth, and the HP Trend since 2002
 The red line shows a "smoothed" trend of the growth rates shown in blue. The trend line starts in 2002 just a little above the 2.0 level. It gradually falls closer to 2.0 by mid-graph. (It reaches 2.006 in 2011-2012.) And it increases ever so slightly, but visibly, in 2018 and 2019.

Call it a trend growth rate of 2%.

If we have a rise in unemployment of 1% from February to March, and if the parameter value 2 is accurate, we can expect the GDP growth rate to fall by two percentage points.

If we have an RGDP trend growth rate of 2%, as Graph #4 shows, and the growth rate slows by 2%, we end up with a growth rate of zero. By the way, this is the effect of only one month's change in unemployment. If unemployment continues to fall, we can expect RGDP growth to go below zero.

How long might it last? Not long, I think. As I said the other day, this recession is not the result of something wrong with the economy. It is the result of our response to the pandemic. A necessary response, I think. But when the pandemic eases and our response can relent, employment will rise again -- probably rapidly -- and GDP growth will rise also.

But I don't want to make guesses about what will happen with the unemployment rate. I want to look at the numbers we have on the unemployment rate, and see if I can estimate the effect of those numbers on economic growth. But first I want to check that last graph.

This next graph shows the same RGDP growth data as on #4. But this time, to figure the trend I only look at the years since 2010. The trend line here shows more increase than we saw on Graph #4:

Graph #5: Real GDP Growth, and the HP Trend since 2010
One of the funky things about the Hodrick-Prescott (HP) calculation is that adding a new value to the end of the series can cause the trend to change as much as 10 or 15 years back. I didn't change or add anything in the RGDP growth numbers shown by the blue line. The blue line is exactly the same on Graph #5 as it is on #4. But when I figured the red line on #5, I omitted the blue values from before 2010. And the red line changed as a result.

The start- and end-values for the HP line on Graph #5 are 2.04 (for 2010 Q1) and 2.51 (for 2019 Q4). Say 2.0% and 2.5%. The trend shows a gradual increase in the RGDP growth rate. So we should figure a trend rate of 2.5% for the early months of 2020 when our response to the pandemic started pushing the unemployment rate up and pulling economic growth down.

We had a 1% rise in unemployment between February and March of this year. If the Okun's law parameter is close to 2, then that one month's change in unemployment is enough that we can expect Real GDP growth to fall by two percentage points.

If recent trend growth is 2.5%, as on Graph #5, and the growth rate falls by two percentage points, we can expect economic growth to slow to around 0.5% as a result of March unemployment. Or, I should say it this way: We can expect economic growth to vary around the 0.5% level, rather than around the 2.5% level, as a result of the March unemployment.

But that is only true if the Okun's law parameter still has a value close to 2. I don't think it does. I think the parameter value is much lower now: Over the past several years unemployment fell several percentage points, but sluggish GDP growth suggests that the parameter value is low.

I'll be following up in a day or so with an estimate of what the parameter value may now be and how it may impact economic growth.


Excel file for Graphs 1, 2, 3
Excel file for Graphs 4, 5
Note: These files contain VBA macros

Sunday, April 5, 2020

The “Accounting View” of money

Money As Equity: For An "Accounting View" Of Money by Biagio Bossone and Massimo Costa, at Economonitor. Feb 12, 2018.  Strikes me as a significant statement.

In fact, even though the law says that money is “debt”, a correct application of the general principles of accounting does raise deep doubts about such a conception of money. Debt typically involves an obligation between lender and borrower as contracting parties. We wonder which obligation may fall upon the state from the rights entertained by the holders of coins, or which obligation may fall upon the central bank from the rights entertained by the holders of banknotes or by the banks holding reserves.

We specifically refer to these three “species” of money because they are all “legal tender”, that is, in force of a legal power, they absolve their issuers of any responsibility to convert them into other forms of value.

And from the conclusion:
The foregoing discussion offers a broad outline of a new approach that we refer to as the “Accounting View” of legal tender money. The proposed new approach calls for understanding money by correctly applying to it the principles of general accounting. We think it will be important to further deepen the study of the implications of the new approach.

Thursday, April 2, 2020

How might that affect the unemployment rate?

The graph from Monitoring Real Activity in Real Time: The Weekly Economic Index:

The sudden drop at the recent end of the graph is mostly the result of new initial unemployment claims in response to the pandemic. From the article at Liberty Street Economics:
The effects of the pandemic become visible in the week ending March 21. This week saw an unprecedented 3.28 million UI claims, a sharp decline in consumer confidence and fuel sales, and a more modest decline in steel production, but also a countervailing surge in retail sales, as consumers took to stores to stock up. In spite of this positive signal from retail sales, and the relatively mild declines in some other series, the UI release drove the WEI to a level not seen since the 2008 financial crisis.
Their graph goes back just far enough in time to show that the decline of 2008-09 was a relatively slow one, as compared to the drop of the week ending March 21st. Even one week before 21 March, the graph shows no indication that such a drop was coming. Yes, we might have known. But even in closeup, the Initial Claims data offer only the slightest hint:

Initial Claims for the week ending 21 March
What struck me about this is that there is not something wrong with the economy. Back in '08, when there was clearly something wrong with the economy, it took time for the crisis to develop. I've seen a few graphs that show the peak as far back as 2005 or 2004. Here, initial unemployment claims were decreasing thru the seventh of March; they show what would ordinarily be a substantial (but still ordinary) increase on the 14th; and then the increase of over three million the following week.

There was something wrong with the economy 15 years back, which led to the financial crisis of 2008. But, given the "new normal" where 2% growth is called "good", there was nothing wrong with our economy in mid-March.

I think that's good. I think it means we should be able to have a rapid recovery, once the pandemic is behind us, because there's nothing wrong with the economy. Economic declines are always more rapid than recoveries, of course, because recoveries require rebuilding. Declines don't: All we have to do is stop.

Our economy could not possibly recover in a week. But it should be able to recover (back to that new normal) much more quickly than it did after the financial crisis, if all goes well.

What could go wrong? We could default on our debts, enough to start a chain reaction which creates another financial crisis. (I'm sure there are other things that could go wrong, but my mind always goes back to debt.) If our debt was low -- not the Federal debt, our debt -- the chance of a chain reaction would be less. The Federal debt back at the end of World War Two was more than GDP, but debt for the rest of us was only about half the size of GDP. Our debt today is more than twice the size of Federal -- and two and a half times the size of GDP:

Federal Debt (blue) and Everyone Else's Debt (red) as Percent of GDP

If our debt went from half of GDP to two and a half of GDP, the risk of a chain-reaction debt implosion became what, five times worse?

The "Initial Claims" for 21 March indicates that 3,283,000 people filed for unemployment benefits that week. How might that affect the unemployment rate?

Sometime back I figured out how the unemployment rate relates to the number of people unemployed: Multiply the Unemployment Rate by the size of the Civilian Labor Force, and divide by 100 (to get rid of the "percent" thing) to get the number of people who are Unemployed.

You could go the other way and divide the number Unemployed by the Civilian Labor Force, then multiply by 100 to get the Unemployment Rate.

To preserve my sanity I will assume no change in the size of the Civilian Labor Force. I will also assume no one was hired, so that the Initial Claims number is the net change in the number of people who are working. That's not perfect, but I think it must be ballpark.

The count of people who were unemployed in February was 5787 thousand, or 5,787,000.

The Civilian Labor Force in February was 164,546 thousand, or 164,546,000.

5787 divided by 164,546 equals 0.035, so 3.5%. This matches the Unemployment Rate given in the FRED data.


Now take the count of people who were unemployed as of February, and add the 3,283,000 who lost their jobs during the week ending 21 March:

5,787,000 + 3,283,000 = 9,070,000

Divide 9070 by 164,546 to get the new estimated unemployment rate: 0.055, or 5.5%. Based on that one week's data alone, the unemployment rate could rise from 3.5% to 5.5%.

That's an increase of two percentage points. Divide 2.0 by the Initial Claims number of 21 March, and multiply by a million to see how much the unemployment rate changes for every additional million people unemployed: a 0.6 percentage point increase in the unemployment rate, for every million people.

To preserve my sanity I assumed some things that won't turn out to be true. To make up for that, take the 0.6%-per-million and call it half a percent. For every million people added to the unemployment rolls, unemployment will go up an additional half a percent. Maybe more.

Three million additional unemployed adds 1.5% (or more) to the February rate of 3.5%.

Due to some quirk in the timing of data collection and reporting, or so I hear, the 3,283,000 who lost their jobs will not be reflected in the Unemployment Rate number for March. I dunno. But 3.5% unemployment plus 1.5% more unemployment comes to 5% unemployment. And that's a change that happened in one week. The last time we had a 5% unemployment rate was September 2016.

Economic declines are always more rapid than recoveries.

Well it's no longer March. After I got this thing written, I checked FRED's Initial Claims data and (sure enough) the number is out for 28 March: 6,648,000. That's on top of the three million who lost their jobs last week. Six or seven million people at a half-percent higher unemployment rate per million comes to an increase of 3% or 3.5% -- and that's on top of the 5% rate after the week of 21 March. So, say an unemployment rate of 8 or 9 percent, after the week of 28 March. How high it goes after that, I can't say.

Initial Claims for the week ending 28 March
(Note the slight increase in the number for Week Ending 21 March)
Usually I prefer line graphs. But here, a line graph made it look like we had a three-million increase in unemployment last week, and another three million this week. That's not it.

Three million last week, and another six million this week. Closer to seven.

These increases occurred when they did, not directly because of the pandemic, but directly because of the response to the pandemic, the closing of businesses and all. Unemployment will not keep rising the way the number of Covid-19 cases keeps rising.

I can't guess when unemployment will stop the insane increase, but that will come first, and then the pandemic will show signs of retreat. Let's call it "soon".

The Weekly Economic Index

Food for the data-hungry:
Daniel Lewis, Karel Mertens, and Jim Stock, “Monitoring Real Activity in Real Time: The Weekly Economic Index,” Federal Reserve Bank of New York Liberty Street Economics, March 30, 2020,