The Shape of Economic Decline

Federal debt is less the cause than the measure of troubles in our private-sector economy

I didn't see it coming, but pardoning the January 6th insurrectionists makes perfect sense, as Trump won the insurrection of November 5th.  

I only hope the US economy survives.

Three Eisenhower Recessions, and one other thing

My Google Search: "the eisenhower years" "three recessions" in quotes like that. The search results led me to this bit of text, exactly what I was looking for, from Wikipedia's "Presidency of Dwight D. Eisenhower":

There were three recessions during Eisenhower's administration—July 1953 through May 1954, August 1957 through April 1958, and April 1960 through February 1961, caused by the Federal Reserve clamping down too tight on the money supply in an effort to wring out lingering wartime inflation.[169][175]

Note 169: Frum, David (2000). How We Got Here: The '70s. New York, New York: Basic Books. p. 296. ISBN 978-0-465-04195-4.

Note 175: Barone, Michael (2004). Hard America, Soft America: Competition Vs. Coddling and the Battle for the Nation's Future. New York: Three Rivers Press. p. 72. ISBN 978-1-4000-5324-7.

I didn't need the recession dates. I needed someone to say the recessions were caused by the Federal Reserve. I needed confirmation. Furthermore, to be clear, I didn't need them to say the Federal Reserve caused the recessions on purpose. I needed it said that the Fed's purpose was to fight inflation; and I need it understood that recession is a likely outcome when the Fed is fighting inflation.

Checking the reference: On page 296 of the Frum book we read: "President Eisenhower ... accepted three recessions over his presidency to wring out the last of the wartime inflation." 

I got what I needed.

A second search-result caught my eye:

The 1960s and President Kennedy's Successful, Supply ...
American Enterprise Institute
https://www.aei.org › carpe-diem
Aug 17, 2013 — And during the Eisenhower years, the economy grew at a subpar 2.4% yearly rate, including three recessions. But then came the 1960s, the ...

The link is "Let’s Not Forget the Decade the Liberals Love to Hate: The 1960s and President Kennedy’s Successful, Supply-side Tax Cuts" at AEI. When I saw the long version of the title, it didn't look so interesting anymore. Then I saw the article was written by Mark J Perry, and I got even less interested.

Perry quotes Larry Kudlow:

From 1944 to 1960, with a top tax rate of 91 percent, the U.S. economy expanded at an anemic 2.1% annual pace. And during the Eisenhower years, the economy grew at a subpar 2.4% yearly rate, including three recessions.

I am distracted, losing sight of "three recessions" because Kudlow makes an argument by implication. He suggests that US economic growth was "anemic" and "subpar" because the top tax rate was so high. Kudlow does not use the word "because" in that excerpt, but he doesn't have to. By putting the idea of high taxes and the idea of subpar growth together, he suggests to the reader that the high tax rate caused the slow growth.

Kudlow does not force this conclusion on his readers; he allows readers to reach their own conclusion. But his technique makes the conclusion more personal and quite possibly stronger, despite the absence of evidence. 

If growth was slow in the Eisenhower years, it is because three recessions dragged the average down.

In the AEI article, Mark J Perry hints at a series of tax-rate reductions beginning in the 1960s:

In ... 1962 ... the highest marginal individual income tax rate was 91% and ... by 1964 the top personal tax rate was 77%, dropping further to 70% in 1965.

Confirming Perry's hint, FRED has a dataset that shows a 30-year trend of tax-rate reduction:

Graph #1: Hover over the Graph at FRED to See the Tax Rates
https://fred.stlouisfed.org/series/IITTRHB

 
Now, about that one other thing. Perry and Kudlow want us to think that the Kennedy tax cut made the economy great in the 1960s. But as Graph #1 shows, tax rates are far lower now than they were in the 1960s. Yet our economy is not booming now.

I know: It doesn't feel like tax rates are low. But that's because our economy is so bad. A decent wage is hard to find. Something is wrong with the economy. When people like Perry and Kudlow say that tax rates are high, many people say yeah, that must be it.

That's not it. (The problem is the cost of excessive finance; the cause is economic policy; the reason is either (a) politicians still think that credit is good for growth and debt is not a problem, or (b) politicians are rich and make a lot of money by lending. I'm not sure which.)

Economic growth is definitely slow now. Here's a graph showing "peak growth" of Real GDP. It shows long-term decline with very few interruptions:

Annual US Real GDP Growth Rate and the Trend of Peaks  1948-2023

On this graph,

• The lows don't go low in the 1960s, possibly because of the Kennedy tax cut.
• The lows don't go low in the 1980s, possibly because of the Reagan tax cuts.
• The lows don't go low in the 1990s, despite the Clinton tax increase. And
• The overall trend of economic performance is downhill, as the red line shows.

Yeah, growth was good in the 1960s. Perry is right about that. But growth was also good in the 1950s, except when recessions slowed things down. By my count, 27 of Eisenhower's 96 months in office were recession months.

By contrast, under JFK and LBJ combined there was just one month of recession: February 1961, the last month of the third Eisenhower recession. 

It wasn't high tax rates that slowed growth in the 1950s. Fighting inflation slowed growth.

I miss my Mish

Some memories --

• May 2013
• February 2015
• December 11, 2023

And now a word from President Eisenhower

Should any party attempt to abolish social security and eliminate labor laws and farm programs, you would not hear of that party again in our political history. There is a tiny splinter group of course, that believes you can do these things [...] Their number is negligible and they are stupid.

 

The quote is footnoted to

Mayer, Michael S. (2009). The Eisenhower Years. Facts On File. p. xii. ISBN 978-0-8160-5387-2.

Source: "Presidency of Dwight D. Eisenhower" at Wikipedia

Google Scholar search-by-date

When I restrict the dates for a Google search, sometimes Google finds the wrong date in search items. For example in Google Scholar just now I searched the phrase political economy in disarray for the years 1750-1775. The search turned up 4 results. The first of them opened to "Chapter Four: The Early National Period: 1775-1815" by Peter P. Hill, from the book A Companion to American Foreign Relations, published in 2008. The chapter title was probably the source for the date Google Scholar used in response to my request.

Second of the four results was "A Language for the Nation: A Transatlantic Problematic", a chapter from the book Revolutionary Histories presented by Springer Nature. The page presents an Abstract which begins with the words "Early in the 1750s, Scotsmen Adam Smith and John Stevenson were lecturing on rhetoric..." That sentence was probably the source for the date.

Third was "The Policy of Rome towards the English-Speaking Catholics in British North America (1750-1830)" by Luca Codignola. This appears to be chapter 5 from the book Creed and Culture, on offer by De Gruyter. The only date I saw for that item was in the title.

And fourth of four, a PDF titled "The Materiality of Death". On the title page, below the title this one says "BAR International Series 1768" and below that, the date 2008. 

All four were results reported for the period 1750-1775. Hey, I'm not complaining. This is my hobby, my idea of fun and relaxation. But I want to advise caution, for you and me both, against blind faith in date-related search results from Google Scholar -- and from Google Ngrams, and perhaps other Google services.

It's not a total waste. I'm looking for things that strike me as interesting. And by the time I got to the years 1800-1825 my search turned up the Google Book General introduction to Statistical Accounts of Upper Canada, published in 1822. Yeah, not interesting, but at least the date is good.

The 1900-1925 search turned up the Google Book Absentee Ownership and Business Enterprise in Recent Times by Thorstein Veblen, copyright 1923. It contains one use of the word "disarray" which doesn't serve my purpose, but now at least I can say I've read a little Veblen.

Another from that search is another Google Book: The Theory of the High Cost of Living, by Michail Osipovič Kefeli, translated from the Russian, published in 1923. The blurb for the search result said:

… None of the classical works on political economy pay any serious attention to the question … Only such gigantic blunders can explain the unprecedented economic disarray, which we …

Jackpot. I'm interested. The first fragment of that blurb led to this, from page 9:

Laws against speculation are a complete novelty. The law codes beginning with the Roman one contain no mention of speculation. On the contrary the laws of all the States recognize the right of the owner to dispose of his goods at his own price.

None of the classical works on political economy pay any serious attention to the question of speculation; on the contrary economics as a science teach us that the prices and profits cannot be raised in accordance with the merchants' wishes, but are regulated exclusively by the relation between demand and production.

Evidently speculation is either a new scientific discovery of our days or it is a phenomenon, which has just only made its appearance.

I like it. So next I read the opening:

The high cost of living, which has spread throughout the world, has turned in Russia into an overwhelming famine and in Sovdepia (the land of bolshevism) into a nightmare with all the horrors of cannibalism and desperate mortality, exceeding all ever existant wars and epidemics. This frightful calamity took humanity by surprise, as a storm overtakes a thoughtless traveller ...

and then the conclusion:

But all this does not demolish the high cost of living and the endless miseries of the population. The idea that it is necessary to introduce some improvements however insignificant, into capitalistic regime, for example limiting the consumption to certain normal standards and opposing the speculation, are so deeply rooted in the minds of men of all sorts, that it is doubtful, whether the State will have the courage to revert to the old economic policy existing up to now throughout the world; all the more as this idea is continually strengthened by half rations, mad rise of prices, the authoritative statements of deceptive science and the general mystery which enshrouds the present situation.

Therefore we can but surmise, that that one, who will be called to lead the country from this enchanted circle, will not be a man of high ideals, but a such one, who will be ready to sacrifice the fantistic theoretical welfare of his subjects for the sake of the actual strengthening of his power.

 

Anyway, here's what I wanted to see:

Graph #1: Search Results by 25-year Period (except 2000-2024)

Graph #2: Ditto, on a Log Scale

Google always reports "about" so-and-so many results. Sometimes those numbers are way off, I know. The graphs show the counts reported.

Yadda yadda yadda, economic performance declines

Following up on my previous post. Here is the graph, again:

Graph #1: Financial Crises and Economic Growth

The Trump Musk DOGE plan to cut two trillion dollars of federal spending is a plan that will almost certainly create a financial crisis unless it is offset by a two-trillion-dollar increase in private-sector investment -- two trillion dollars in addition to the investment already planned for the year of federal budget cuts. That increase is not likely to happen.

Graph #2: The Red Line Shows a Two-Trillion-Dollar Increase in One Year

All of the investment shown on this graph since the first quarter of 2017, in total, adds up to less than two trillion dollars.

And again, as Milton Friedman said,

There is strong evidence that a monetary crisis involving a substantial decline in the quantity of money is a necessary and sufficient condition for a major depression.

You know how many times Google finds this Friedman quote on the internet? 8 times. Almost no one is focused on the problem of an insufficient quantity of money. But as Yoda says: You will be. You will be.

After each financial crisis, economic performance declines

The bleeding obvious, really.

Graph #1: Financial Crises and Economic Growth

Horse's Mouth v. Horse's Ass

Keynes, in chapter 23 of The General Theory of Employment, Interest and Money (1936):

When a country is growing in wealth somewhat rapidly, the further progress of this happy state of affairs is liable to be interrupted, in conditions of laissez-faire, by the insufficiency of the inducements to new investment. Given the social and political environment and the national characteristics which determine the propensity to consume, the well-being of a progressive state essentially depends, for the reasons we have already explained, on the sufficiency of such inducements.

 

Joint Economic Committee Republicans, in "Taxes and Long-Term Economic Growth" (1997):

Writing in the midst of the Great Depression, Keynes saw the major problem of economics as excessive supply. The thesis of his work is that the capitalist system would periodically suffer depressions because businesses and farms would produce more goods than consumers wanted. However, Keynes offered a solution to these periodic crises. When businesses were excessive in their production, the government could provide the extra demand to handle the surpluses by increasing spending through higher budget deficits.

Perfect wording

At Reddit (10 months ago): The Economy Is Thriving. Why Are Americans Feeling So Sour About It?  (They're still asking that question on Morning Joe.)

Mastershoelacer's awesome answer: Home economics trumps macro economics.

Black Friday

From Britannica's "Why Is It Called Black Friday?":

Historically, Black Friday has yet another connotation, one unrelated to shopping. In 1869 Wall Street financiers Jay Gould and Jim Fisk attempted to corner the nation’s gold market at the New York Gold Exchange by buying as much of the precious metal as they could, with the intent of sending prices skyrocketing. On Friday, September 24, intervention by President Ulysses S. Grant caused their plan to fall apart. The stock market instantly plummeted, sending thousands of Americans into bankruptcy.

Was the title of today's post driven by coincidence?  I looked up the worst recessions of all time and Britannica included the above link as a second article on the page, following "5 of the World’s Most Devastating Financial Crises". They also include a link to their "Black Friday" article, subtitled "securities market panic, United States [1869]".

Reading their Why Is It Called Black Friday, I was struck by how commercially-oriented our culture is. So I went to the Ngram Viewer to see usage of the term "black friday". Yes, we have become highly commercialized, and yes, the Viewer shows it.

Happy Thanksgiving anyway.

I say again: The evidence is overwhelming

Milton Friedman didn't like too much money. But he also didn't like not enough money. In chapter 2 of Money Mischief he wrote:

There is strong evidence that a monetary crisis involving a substantial decline in the quantity of money is a necessary and sufficient condition for a major depression.

An insufficient quantity of money can cause a depression, Friedman says. If the "monetary base" grows too slowly it can cause a major downturn. In fact, that happened twice in the past hundred years:

Graph #1: Growth Rate of the Monetary Base
The downtrend before the Great Recession runs from 2001 to 2008
This graph is from 2014, when each series at FRED could have its own start- and end-date.
This graph replaces mine from 10 Feb 2021.

 

At Investor's Business Daily (27 Nov 2024) we read:

When Tesla (TSLA) CEO Elon Musk bounded onto the stage as President-elect Donald Trump's sidekick in the campaign's final stretch, the MAGA movement's anti-Washington mission suddenly broadened from taking down the "deep state" to slaying big government.

Putting up a target of at least $2 trillion in annual government spending cuts — one-third of federal outlays, excluding interest on the debt — Musk said living within our means would require that everyone "take a haircut." Accepting "temporary hardship," he said, would ensure long-term prosperity.

The carrot and the stick. Prosperity is the carrot, and a tasty one for voters whose primary concern is the economy. But a focus on federal debt will not solve the problem.

In the past month I have seen news articles wondering whether Musk meant a two trillion dollar cut in one year or ten. The consensus, among those articles, seems to be that two trillion over ten years is quite easily doable, and two trillion in one year is not doable. Now IBD is saying "at least $2 trillion in annual government spending cuts". That sounds like two trillion in one year to me. Apparently that's the plan, but I'm still not sure what Musk has in mind.

The Hill of 3 November 2024 reported:

“How much do you think we can rip out of this wasted, $6.5 trillion Harris-Biden budget?” Howard Lutnick, a Wall Street CEO and Trump’s transition team co-chair, asked Musk at the former president’s recent rally held at Madison Square Garden in New York City.

Without offering specifics, Musk said in response that he thinks “at least $2 trillion” in a brief moment that has since gained widespread attention online and drawn mixed reactions from budget world.

I got the impression from that, and from other reading, that Musk might not have been expecting the question and that the "$2 trillion" number was off the top of his head. 

I think Musk painted himself into a corner with that number. Since March of 2024, President Biden has been selling a plan to cut the budget by $3 trillion over 10 years. If Musk says it will take 10 years to cut the $2 trillion that he's talking about, then his plan is a 98-pound weakling compared to Biden's. Musk can't go with $2 trillion over 10 years. He has to say he can do it in one year. Musk painted himself into a corner.

It's a dangerous thing, the slipshod planning of trillion-dollar budget cuts. Does Musk's ego prevent him from admitting that his $2 trillion estimate was premature? Sure, there was a lot of excitement at that Madison Square Garden rally. But I have to ask: Would it be better for Musk to go ahead and cut $2 Trillion in just one year because that's what he said amid all the excitement? Or would a cautious and carefully worked plan that avoids disastrous unintended consequences be the better choice? 

I ask, because there is strong evidence that a monetary crisis involving a substantial decline in the quantity of money is a necessary and sufficient condition for a major depression. And because cutting $2 trillion from the federal budget in one year might just create the monetary crisis that brings a major depression upon us.

Given the supermassive federal debt that we have already, using Keynesian deficit-spending tactics to extricate ourselves from that next great depression will be neither quick nor tidy.

 

Rolling Stone, 13 December 2023 has said:

During his third trip to Iowa this month, Donald Trump warned that if he was not elected president in 2024, the U.S. would see its economy plunge into a “1929”-era depression. His words arrived as the Dow Jones Industrial Average hit a record high Wednesday.

CNN, 9 January 2024 reported Trump saying "I don’t want to be Herbert Hoover. The one president – I just don’t want to be Herbert Hoover". CNN followed that up by reminding the reader of the history that had Trump so worried:

"The US stock market crashed during former President Herbert Hoover’s first year in office in 1929, which signaled the beginning of the Great Depression." 

Hey, I took Trump's concerns as electioneering when I first read them. But maybe Donald Trump is as concerned about the fragility of the US economy as I am, and more explicit about it. And I refuse to be the guy who, by dismissing Trump's economic concerns as political showmanship, brings on that next great depression.

But I do love irony. Rolling Stone dismissed Trump's worries about another Great Depression by noting that the Dow Jones Industrial Average recently hit a record high. That remark remind me of an exceptionally good economist named Irving Fisher, whose misfortune it was to say the stock market had reached "what looks like a permanently high plateau" and to say it "just nine days before the Wall Street Crash of 1929".

Do not put a lick of faith in Rolling Stone's dismissal of Trump's concern. 

I should say at this point that the first thing I learned about Irving Fisher was his "permanently high plateau" remark, and that I spent most of my life not reading Fisher's work because of it. I don't want to do that to you. I recommend that you read the first three parag (or more) of Wikipedia's "Irving Fisher" article, and the first two parag -- plus Footnote 1 -- at Federal Reserve History's "Stock Market Crash of 1929".

One more brief but necessary tangent must be considered at this point. Musk wants to cut the federal budget. He says it will bring prosperity. That's not the way the economy works.

During the prosperity of the "Roaring Twenties," private sector debt grew faster than the federal debt. The prosperity lasted until excessive private sector debt choked it off. During the Great Depression and the Second World War, the federal debt grew faster than private-sector debt until private-sector debt reached a relative low that was low enough for prosperity to resume.

During the prosperity of the "Golden Age of Capitalism," private sector debt grew faster than the federal debt. And the prosperity lasted until excessive private sector debt choked it off. During the low productivity years of 1974-1994, the federal debt grew faster than private-sector debt until private-sector debt reached a relative low that was low enough for prosperity to resume.

During the prosperity of the "new economy" -- the latter half of the 1990s -- private sector debt grew faster than the federal debt. The prosperity lasted until excessive private sector debt choked off the housing boom. In the years since the financial crisis and the 2009 recession, federal debt has grown faster than private-sector debt, and will continue to do so until private-sector debt reaches a relative low that is low enough for prosperity to resume.

Given that this is how the economy works, to again achieve prosperity it is private-sector debt that must be reduced. If instead we focus on reducing the federal debt, we push prosperity further out into the future. If that troubles you, I'm sorry.

On February 18, 1981, newly elected President Ronald Reagan said

It is our basic belief that only by reducing the growth of government can we increase the growth of the economy

Since that time we have tried and failed to reduce the growth of government enough to bring economic growth up to a satisfactory level. We have tried and failed because we think, as Reagan thought, that excessive federal debt is the problem that hinders growth. In fact, it is excessive private-sector debt that hinders growth.

On the graph below, the blue line shows our accumulating federal debt since 1970. The red line is an exponential, constant-growth-rate trend line based on the blue-line data for the years 2001 to 2023:

Graph #2: Federal Debt 1970-2023 and the 2001-2023 Exponential Trend
From mine of 7 March 2024
The "below trend" data before the Great Recession runs from 2004 (or before) to 2008-09.

Federal debt in the 1970s ran close to the trend line even though the trend line is based on data for the year 2001 and later. This suggests that the trend line is a good one, not far from the actual trend.

In the 1980s and early 1990s, federal debt rose above the trend. In the latter 1990s it returned to the trend line and in the early 2000s went slightly below trend.

Around 2005, the federal debt began to go increasingly below the trend line, until mid-2008. The increase after that date shows the federal spending response to the financial crisis and the great recession. 

Again: Between 2000 and 2010, federal spending cuts helped bring the federal debt down to trend, then below trend, and then further below trend; and then we had a financial crisis. I cannot yet prove to my own satisfaction that the federal debt, going below trend, was the cause of the financial crisis and great recession. But I am certain that it was at least a contributing cause of those troubles.

Graph #1 shows "too little money" and the monetary base as the problem. Graph #2 shows "too little money" and federal deficit spending as the problem. Neither graph shows private-sector debt.

If we continue to choose not to reduce private sector debt, then to achieve prosperity we will have to have federal debt increase more rapidly than private-sector debt. The more rapidly federal debt gains on private-sector debt, the less time it will take to achieve prosperity. 

But such prosperity will come with a very high level of private-sector debt. That prosperity will not last for many years: The increases in private-sector debt that accompany economic growth will create financial costs that drain first the vigor and then the life from prosperity.

The better solution is to focus our attention on private-sector debt and put all our efforts into reducing it. To achieve prosperity we must reduce private debt relative to federal debt. To do this we can reduce private debt, or increase federal debt, or both. But debt is costly, and the best option is always to reduce cost by reducing debt.

Our best option, therefore, is to reduce private-sector debt as rapidly as we can. That is what you need to know. When private-sector debt falls enough, prosperity will resume. Economic growth will be vigorous, as in the latter 1990s; or better and longer-lasting, if private debt starts from a lower level.

As private-sector debt falls and economic growth improves, there will be less need for federal programs that help people cope with a troubled economy. This means that a natural reduction in federal spending, rather than a forced reduction, is in the cards.

The graph below shows transaction money -- the money we spend -- relative to nominal GDP. Once again, the graph shows "too little money" in the years leading up to the financial crisis and great recession:

Graph #3: The Quantity of Transaction money per Dollar's Worth of Output
The low before the Great Recession runs from 2004 to 2009.

Fiscal and monetary policy cooperated, creating a substantial decline in the quantity of transaction money, from the record low of 2000-01 to an even lower level at which our economy could no longer function.

 "... substantial decline in the quantity of money is a necessary and sufficient condition for a major depression."

The evidence is overwhelming. 

Please do tell President-Elect Trump and Elon Musk, and anyone who will listen, the things I have shown you today.

Cost determines the Lower Limit for Price, I think

A Google Scholar search for "cost-push inflation in ancient Rome" (without quotes) turned up something I wasn't looking for: Flaws and Ceilings: Price Controls and the Damage They Cause. It's a Google book with a 48-page preview, and as it happened, the 48 pages included a page I could use. Here's part of page 37:

They say the cost-push idea is "based on a simple mistake." And, unbelievably, they suggest that "increases in wages" do not cause corresponding increases in prices. They argue that the increase in wages puts no upward pressure on the price level.

They say:

Costs do not determine the prices of consumption goods; rather it is the value attributed to a consumption good that determines its price.

Yes and no, I think. If the consumer values a product at a value higher than cost-plus-profit, then yes, the price will soon rise to the higher value. But if the consumer values the product at a value lower than cost-plus-profit, soon the product will not be sold at all.

To get rid of that first batch of low-valued goods, the store will mark down the prices repeatedly until the whole batch is sold. But you'll never see that product in that store again. No one who is in it for the money buys products to sell them at a loss.

There are exceptions, no doubt. The store might run a special and sell selected items at a loss for a week, to bring new customers in. But that is a special situation.

Of course the store will sell their stuff for the most they can get, with some big-picture exceptions like running a special. But no store can long exist if its standard practice is to sell everything at a loss. Costs may not "determine the prices of consumption goods." But costs surely do establish minimum prices. The argument made in Flaws and Ceilings is nonsense.

Therefore, I reject their view that there is no such thing as cost-push inflation. I reject their view that because cost is not the sole determinant of price, cost-push inflation is impossible. Prices, perhaps, seldom come down when costs come down. But surely, prices almost always go up when costs go up.

This view that they hold, I have seen it before, and I simply cannot accept it. Is my thinking flawed? 

Note: I am only disputing the argument put forth in the paragraph from Flaws and Ceilings. I am not disputing the inflation-is-always-a-monetary-phenomenon argument.

Words spoken 3½ years before the Great Depression:

"As things are now, we have nothing to look forward to except a continuance of Conservative Governments, not merely until they have made mistakes in the tolerable degree which would have caused a swing of the pendulum in former days, but until their mistakes have mounted up to the height of a disaster." (1926)

You'd think the Heritage guy would know

At The Hill, "Musk draws skepticism with call for $2 trillion in spending cuts" (3 November 2024) by Aris Folley:

Trump campaign national press secretary Karoline Leavitt said the former president’s “pro-growth” tax policies would help “quickly rebuild the greatest economy in history while eliminating taxes on tips, overtime, and Social Security for [hard-working] Americans,”

Richard Stern, head of the Grover M. Hermann Center for the Federal Budget at the Heritage Foundation, the conservative think tank behind the Project 2025 plan, also defended Trump’s 2017 tax law, while arguing that its policies “likely brought in more revenue than a loss.”

Maybe Richard Stern meant "more revenue than less". "Loss" is not quite the opposite of "more" revenue. And he stuck an extra word in there. Sometimes I think people mis-speak like that on purpose, mixing up what they are saying just a little so they have an excuse if somebody challenges them on what they seem to be saying.

I don't really know what idea Stern wanted me to get from what he said. But I think he wanted me to get the idea that Trump's 2017 tax cuts boosted the economy enough to boost tax revenue enough to more than make up for the lower tax rate -- exactly the idea that lies behind the Laffer Curve.

So what the hell, I went to FRED and looked up Federal Receipts. I set the units to "Percent Change from Year Ago" so I could see how much the federal revenue grew each year. Here's what I found:

This Graph at FRED: https://fred.stlouisfed.org/graph/?g=1z1Ao

In the area marked "LOW" the plotted line drops almost to zero (no increase from previous year) in 2016... rises just a little, for a 1.5 percent increase in 2017... back down to zero (no increase) in 2018... a 4 percent increase in 2019... and then a little below zero in 2020, the Covid year.

That's not all Trump's doing, not 2015, not 2016, maybe not 2017, and definitely not 2020. But in 2018 and 2019 federal receipts show very little growth. And there is no recession in that time frame to have caused the low. Hey, voters say the economy was good in 2018-2019,  and the media agreed. Politico (March 21, 2019) for example, said of Trump:

[I]f the election were held today, he’d likely ride to a second term in a huge landslide, according to multiple economic models with strong track records of picking presidential winners and losses.

and

“The economy is just so damn strong right now and by all historic precedent the incumbent should run away with it,” said Donald Luskin, chief investment officer of TrendMacrolytics, a research firm whose model correctly predicted Trump’s 2016 win when most opinion polls did not.

And if the economy was "so damn strong", federal receipts should have been higher than the graph shows. I think it was Trump's tax cut that (a) gave the economy a boost up from the 2016-2017 low, and (b) reduced tax revenues to the lows shown in 2018-2019.

So that's really all I had to say on this, except that Richard Stern must have been making things up. He probably wanted to make Trump look good. But Stern wasn't guessing about federal receipts. He had to know they were low. That's why he said likely brought in more revenue, to cover his ass.

As the FRED graph shows, the Laffer Curve did not bring in more revenue under Trump.

Oh -- and I want to point out that the Heritage Foundation, for tax purposes, is a charity. Somehow, that just doesn't seem right.

Inflation Explanation

https://fred.stlouisfed.org/graph/?g=1Au0q

Okay, Google's AI is smarter than I am

I was going back and forth, changing my post title from "Growth is the solution" to "The solution is growth" and back again. So I figured I'd look it up:

Good answer! It's nuanced, even. Way better than what I expected after it fumbled "public" versus "public sector" the other day.

From: "The Perils of Inflation" at TFTC

Will Durant: "From barbarism to civilization requires a century; from civilization to barbarism needs but a day."

https://www.tftc.io/monetary-inflation-history-rome-modern-lessons/

The Biden Inflation in Two Graphs

1. A Brief Timeline:

Key dates behind the Biden inflation

Friday, March 13, 2020:	313 days before the Biden inauguration
Wednesday, January 20, 2021:	The day of the Biden inauguration
Thursday, March 4, 2021:	43 days after the Biden inauguration
Thursday, March 17, 2022:	421 days after the Biden inauguration

For Jerome Powell's inflation warning of March 4 2021 see the Wall Street Journal Jobs Summit video.

2. Following Milton Friedman:

The Quantity of Money Relative to Output (MRTO) and the CPI

For relevant quotes from Milton Friedman on the Quantity of Money and the Lag see mine of October 12, 2024.

How unusual was the Federal Reserve response to the post-Covid inflation?

This graph at FRED: https://fred.stlouisfed.org/graph/?g=1x6Ir

It was most extremely unusual.

The graph shows the FedFunds rate, the interest rate set by the Fed to manage inflation and economic growth. Usually I just look at the raw data: it is down near zero bla bla bla, it is up near 5 percent yadda yadda yah. This time I'm looking at the "percent change from year ago" in the data -- the same measure people most often use when they talk about the rate of inflation.

The graph goes back to the start-of-data. At no other time was the interest-rate increase anywhere near the extreme reached during the post-Covid inflation -- during, you know, the so-called "Biden inflation". 

The bizarre FedFunds interest rate activity of the post-Covid period was due to 

• the long delay before the Fed began raising the interest rate; and
• the urgency that arose because of that year-long delay.

A less bizarre response would have begun after less delay and could therefore have been more gradual. The less bizarre response would have slowed the increase in prices sooner, and would have caused inflation to top out at a much lower level.

There is only one question that remains, far as I can see: Who was responsible for the delay?

On a good day, only half the profit goes to pay interest

Adam Smith in The Wealth of Nations:

The stock which is lent at interest is always considered as a capital by the lender.

Dirk Bezemer and Michael Hudson in "Finance is Not the Economy" quote J.S. Mill restating Smith and using Smith's view as an example of an all-too-common error:

All funds from which the possessor derives an income … are to him equivalent to capital. But to transfer hastily and inconsiderately to the general point of view, propositions which are true of the individual, has been a source of innumerable errors in political economy.

To transfer to the macroeconomic view, propositions which are true of the micro-economic, has been a source of innumerable errors in economic thought. Say's law comes to mind.

Adam Smith again:

Double interest is in Great Britain reckoned, what the merchants call, a good, moderate, reasonable profit; terms which I apprehend mean no more than a common and usual profit. In a country where the ordinary rate of clear profit is eight or ten per cent., it may be reasonable that one half of it should go to interest, wherever business is carried on with borrowed money.

Bezemer and Hudson:

Adam Smith assumed that the rate of profit would be twice the rate of interest, so that returns could be shared equally between the “silent backer” and entrepreneur. But as bonds and bank loans replace equity, interest expands as a proportion of cash flow. Nothing like this was anticipated during the high tide of industrial capitalism.

Profit and the Cost of Interest since 1947:

Profit (blue) and Interest Cost (red) for Corporate Business

This graph overstates profit and understates the cost of interest. Since the year 2000, half the assets of Nonfinancial Corporate Business are financial assets. So I have to figure that half of what they call profit is really interest income. The blue line should be much lower than what the graph shows.

Google's AI does not know the difference between "the public" and "the public sector"

The public is the people; the public sector is the government. Hey, I didn't make it up.

//

I was reading something where the guy used the phrase "outside financial wealth" without defining it. I think it means public sector debt held by someone in the private sector. But I dunno. 

So I googled what is "outside financial wealth". The AI Overview responded:

Outside financial wealth is a term used in modern money theory to describe government IOUs that are held by the public sector. The private sector holds government currency and bonds as net financial assets. The qualifier "outside" refers to the fact that the wealth comes from outside the private sector.

I believe the AI's first sentence should end with the words "government IOUs that are held by the private sector." Or just "held by the public". But I don't know for sure. That's why I looked it up. If I am right, then this is the second time in a week that the AI has found and paraphrased an error -- or created an error of its own -- and offered it to me as fact.

That's dangerous. I expect to be able to trust the AI more than I trust a human response, because the AI is a computer. But I cannot trust the AI Overview. The AI should have to verify every fact that it gathers for paraphrasing.

In a follow-up search, I said:

Verify: "Outside financial wealth is a term used in modern money theory to describe government IOUs that are held by the public sector."

Google Search responded promptly: 

No results found for Verify: "Outside financial wealth is a term used in modern money theory to describe government IOUs that are held by the public sector."

The AI didn't even participate in the response this time. That thing is irresponsible!

//

A separate search for MMT: "outside financial wealth" definition turned up a very good, fully italicized paragraph from L. Randall Wray.

I had it right.

It's not all bad news

Another look at US economic decline. I started with annual FRED data on Real GDP growth, inspected it, and added two trend lines -- one before the economic disaster of 2008-09 and one after:

The black line shows Real GDP, annual rate of growth. I omit the years before 1950, eliminating data from the Depression and World War Two.

The red trend line is based on the data for 1950-2000 and is displayed for the years 1950-2009.

The blue trend line is based on the data for 2010-2019 and is displayed for 2008-2023.

The 1950-2007 trend is visually indistinguishable from the 1950-2000 trend so I have excluded the years 2001-2007 from the trend calculation.

The 2010-2023 trend, excluding 2020 and 2021, is to my eye indistinguishable from the 2010-2019 trend as far back as the mid-1990s, so I have omitted the years after 2019 from the calculation.

The transition from down-trend to up-trend seems to occur during the Financial Crisis and Great Recession years, 2008-09.

The source data values are annual percentage rates. The trend lines are based on annual percentages. I read the trend values as percentage values.

The red trend runs from 4.326772247 (4.3%) in 1950 to 2.801315234 (2.8%) in 2009. The difference, spread over 59 increments, comes to a 0.026 percentage point trend loss per year or 0.26 per decade.

The blue trend runs from 2.02969697 (2.0%) in 2008 to 2.884242424 (2.9%) in 2023. The difference, spread over 15 increments, comes to a 0.057 percentage point trend gain per year or 0.57 per decade. The uptrend, so far, is rising twice as fast as the downtrend was falling. If it hadn't started from such a low level -- and if we didn't have the covid interruption -- the improvement would be obvious.

Assuming that the transition occurred in 2008-09, we can say that during the one year transition, trend growth fell by 0.7405 (0.74%) or, for comparison, just over 7.4% at the per-decade rate. That one-year trend-transition shock is equal to approximately 28.5 years of the 1950-2000 trend decline.

That's an interesting statistic, I think.

This is the first time I looked at the decline of GDP growth and noticed a trend of increase in the years since the financial crisis. So the news is not all bad. But in case you have forgotten how bad our economy was in 2008-09 and how long it took to show improvement, let me refresh your memory.

On August 6, 2016 Neil Irwin wrote: "The underlying reality of low growth will haunt whoever wins the White House in November..."

It was not until a couple of years later that the blue up-trend economy had at last improved enough that people were noticing:

• March 2018 at FiveThirtyEight: The Economy Is Keeping ‘Reluctant’ Trump Voters With Him.
• September 2018 at CNBC: Trump has set economic growth on fire. Here is how he did it.
• March 2019 at Politico: How Trump is on track for a 2020 landslide.

Those old headlines make it sound like Trump performed an economic miracle. He did not, as the blue trend line on the graph clearly shows. Economic growth was definitely coming back by 2013: compare the low that year to the low of 2011. But the financial crisis was so severe that it took a decade for the economy to get back to halfway decent. And now we have Mister Trump taking credit for that improvement. It's not the lies that bother me so much. It's his flawed understanding of the economy.

If he understood the economy, he wouldn't have to lie.

CNBC tried to explain why the economy improved, but they had no clue. Financial costs were down, that was really why we started to see vigor. But when the economy grows, debt grows faster, financial costs rise, and vigor fades. 

If policymakers were wise, they would stop creating policy to encourage the use of credit -- policy that drives debt upward at a rapid pace -- and start creating policy to accelerate the repayment of private-sector debt.

Here's why the economy was so good in the latter 1990s. Until covid interrupted the progress, the same was happening in the years after the 2008-09 financial crisis and recession, but more slowly because debt was so much higher.

In 2015-2016 I predicted the return of economic vigor. Here's a page of notes and quotes.

Friedman's warning

We have been forgetting the basic truth that the greatest threat to human freedom is the concentration of power, whether in the hands of government or anyone else. We have persuaded ourselves that it is safe to grant power, provided it is for good purposes.

  Milton Friedman in Free to Choose

The irony in this is that each side in the upcoming election sees the other as the problem identified by Friedman.

I can only repeat what I said before: This little piggy has bad policy, That little piggy has none.

PS: In The Road to Freedom, Hayek said "it is not the source but the limitation of power which prevents it from being arbitrary." 

Presidential immunity is NOT a limitation of power. Just the opposite.

River Birch

River birch trees are notable, not for their fall color, but for their perpetually peeling bark.

It seems river birch leaves fall as soon as they start turning yellow. What strikes me about them is the vein system, visible even in the green leaves. This one caught my eye while I was out with the dogs.

Milton Friedman and the Biden Inflation

Blue:  The Quantity of Money Relative to Output
Red:  The Consumer Price Index
This Graph at FRED:  https://fred.stlouisfed.org/graph/?g=1vFil

From Tim Doescher at Heritage:

Milton Friedman famously said: “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

From W. Lee Hoskins at Cato:

Friedman (1960) provided the well-known argument that attempting to stabilize the price level directly might in practice destabilize the economy because of the long and variable lag with which monetary policy acts on prices.

So I'm not quite sure how it got to be the Biden inflation.

From trumpwhitehouse.archives.gov

The opening sentence at this link:

"Before the Coronavirus spread from China across the globe, President Trump helped America build its strongest economy in history."

Not even close.

The Ptize Lecture

https://www.nobelprize.org/uploads/2018/06/lucas-lecture.pdf

Covid and Profit

This graph shows corporate profits in red, and in blue the same blue data we saw yesterday, the interest rate that the Fed uses to fight inflation. Last time the graph started in 2019. This time it starts in 2012:

This Graph at FRED: https://fred.stlouisfed.org/graph/?g=1uOsu

Corporate profits ran pretty flat between 2012 and Covid -- the right-side scale shows profit running between 2000 and 2500 billion. Immediately after the Covid recession, profits jumped to almost 3000 billion. But not quite as immediately as the graph makes it seem. 

The Covid recession (gray bar) lasted through February and March 2020. It was over by April Fools' day. The red line -- corporate profit -- reaches a low at that point, which appears to be the first of April. But the data at that low point is for the second quarter of 2020, which includes April, May, and June. The total profit over those three months was low, and no doubt they knew it would be low, but they did not have that number until the end of June. 

The data is plotted at the start of April. There is a three-month lag that we do not see. (By the way, you can check dates and values by hovering over the graph at FRED.)

After that second-quarter low, corporate profit shot up to almost 3000 billion in the third quarter of 2020. It dropped just a little in the last three months of the year. And then it shot up again for six months, reaching almost 3500 billion dollars in the second quarter of 2021.

Now, back up. Come halfway down that last increase, to the dot on the high side of 3000 billion. This dot represents the data for the first quarter of 2021. The first quarter of 2021 ended with March. That March was the month when Jerome Powell warned us that inflation was on the way. At that point, near the end of the first quarter of 2021, we had not yet been hit by that inflation. This means that the profit increase from April 1, 2020 to mid-March, 2021 -- an increase of almost 1000 billion dollars -- was not caused by the inflation, surprising as that may be.

Apparently, it was mostly caused by the Covid shock putting people out of work. Compensation of employees fell by over 700 billion dollars in the second quarter of 2020 alone.

When I first noticed that profits increased in the Covid years, I figured it was because of the inflation. But profits shot up before inflation took off. When Covid lockdowns put people out of work, labor costs fell, so profit went up. Today, of course, the employment level is as high as it was before Covid, and more or less back to normal. A lot of people are working again -- and presumably getting paid -- but corporate profit did not go back down. How can that be?

The inflation, maybe? Inflation did not cause the sharp increase in profit in the first Covid year. But inflation did sustain high profits and boost them in the later Covid years. The data appears to support this view.

Thus the argument can be made that "corporate greed" was in part responsible for the inflation. Yes, the Q-of-M increased like crazy, and by keeping interest rates at zero the Fed put up no resistance to inflation. But the money had to go somewhere. Before Powell's inflation warning, the money went to profits instead of to employee compensation. When people started going back to work, the money to sustain high profits started coming from price increases. From the inflation.

This Graph at FRED: https://fred.stlouisfed.org/graph/?g=1v73y

The red line is faint on this graph, but it still shows corporate profit (using the same data as the first graph). The blue line again shows the interest rate the Federal Reserve uses to fight inflation. The black line on this graph is new. It shows inflation as measured by the Consumer Price Index (CPI).

The gray circle on the black line, the faint blue circle below it (on the blue line), and the faint gray vertical line through those two circles all identify the location of March 2021 on the graph. As the gray circle shows, until March 2021 inflation was still low, still close to the Fed's 2 percent inflation target. But, as you can see, corporate profit was shooting up like crazy.

After March 2021, inflation and rising prices sustained high profit and drove it higher. Unemployment was nearing 6 percent and more or less back to normal. Labor costs were up because more people were working. It was no longer the labor-cost savings that boosted corporate profits. It was inflation. That sounds like corporate greed to me. Corporate decency would have been better.

Hm, I wonder if the high cost of interest (at 4 percent and above, say) induced corporations to keep raising their prices. Now that the blue line is starting to come down, maybe we will see profit level off. And maybe the rate of inflation will drop back down, closer to that 2 percent target. Something to keep an eye on.

Always waiting too long

Interest rate data in the graph below. Red and green are 5-year rates. Blue is the Federal Reserve policy rate:

This Graph at FRED: https://fred.stlouisfed.org/graph/?g=1uaVr

Everything fell in March 2020, because of Covid.

The five-year rates were increasing by October 2020. The Federal Funds rate didn't begin to increase until March 2022.

The increase of the five-year rates started decelerating by May of 2022. The Federal Funds rate did not begin to decelerate until December of that year.

The five-year rates started falling after October 2022, and after October 2023, and after April of 2024. The Federal Funds rate did not fall, at all, between March 2020 and September 2024.

The five-year rates were constantly exploring their options: going up a little, testing the water, going down a little, and down a little more, changing their mind and rising, always testing the water. The Federal Funds rate fell to zero and sat there for two years. When it started rising, it rose continuously for a year and a half. And when it peaked, it stayed at the peak rate for a full year.

Sure, the Fed has a different objective than private investors. But when you refuse to change your interest rate decisions for long periods of time, you paint yourself into a corner. And when you finally do decide to change the rate, you suddenly discover you are behind the curve and you need to make oversized changes rather than small, cautious, gentle ones.

It's not like the Fed is new at this. It's like somebody convinced them to create some crazy 9 percent inflation, and follow up with a recession. That's what it's like.

Unemployment before and after Covid

Yesterday we looked at the trend of unemployment based on the Obama years (but after the Great Recession), and based on the Trump years (but before the Covid shock). I wanted to show a third graph, with the trend based on the Biden years after the Covid shock, when unemployment appears to have returned to its normal behavior. But that graph didn't show anything useful. I don't know why.

Maybe there was not enough data between July 2022 and August 2024 to make a trend line that looked reasonable in the pre-Covid years. Or maybe the Fed's high interest rate started pushing unemployment up in early 2023 (as I said before) and put a "kink" in the trend line. And maybe the kink shows up as a massive mismatch between trend and data in those pre-Covid years. I dunno. But I couldn't use that graph.

So I went back to FRED's unemployment data. In red, I underlined two years of data before the Covid shock, and two years after it. I want to compare the two underlined periods:

This Graph at FRED: https://fred.stlouisfed.org/graph/?g=1uyts

By eye -- my eye, at least -- the post-Covid increase seems to be accelerating upward noticeably faster than the pre-Covid decrease was slowing. As I said a couple of weeks ago:

To my eye, unemployment started going up around January 2023 - more than a year and a half ago, now -- and started accelerating around January 2024. They waited too long before bringing rates down.

It still looks like that, to me. But I don't trust my eye more than I trust arithmetic. So in Excel, I sorted the March-2018-to-Feb-2020 data in reverse-date order, turning the decrease into an increase. Then I showed the two periods starting together on a graph. Here is the result:

Comparison of Pre-Covid data (reversed) and Post-Covid data

There's not much difference between the two lines. They start at 3.5 percent unemployment, both of them, and after two years they end up only 0.2 percent apart. On this graph, I don't see the recent accelerating increase of unemployment that I thought I saw on the underlined FRED graph.

But after sleeping on it, I notice that the left half of the graph shows the blue line mostly at-or-below the orange line. And the last seven or eight months show the blue line mostly at-or-above the orange. So the difference between the two lines may be more than the 0.2 percent difference we see between the August 2024 and March 2018 data.

I could take the blue line and move it up by 0.1, more or less centering the blue line on the orange in that first year. This might even be a reasonable manipulation of the data, given that I want to see the differences that arise in the second year.

Here's how the graph looks with the blue line values increased by 0.1:

By eye, at least, the blue line is roughly centered on the orange through 2022 and 2023. In December 2023 and January 2024, the two lines are identical at 3.8 percent unemployment. For the rest of 2024, blue gains on orange: The post-Covid increase in unemployment outpaces the (chronologically reversed) pre-Covid decline. This is the acceleration I was looking for! The arithmetic confirms the eye.

 

Is it reasonable to take a two-year decline in unemployment, put it in reverse chronological order, and compare it to a two-year increase? I dunno. It seemed reasonable, at the time.

Are we gonna have a recession? I dunno. I expect one, yeah, but I don't predict.

Does it matter if we get a recession when we could have avoided one?  Yes, definitely.

Does this post show that the Fed should have started lowering the interest rate during or before January 2024? Yes, definitely.