Evidence vs evidence

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

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

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

In response to Vivian, Scott Sumner replied:

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

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

Figure 1: Debt and GDP 1920–1940

and he says

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

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

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

and of this (missing) figure Keen says

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

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

The Point of this Post

Keen offers Figure 7 as evidence that

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

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

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

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

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

I like that word, 'perky'

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

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

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

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

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

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

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

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

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

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

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

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

Ancient Roman Tax Code

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

• Roman Taxes | UNRV.com
  

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

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

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

• Ancient Taxes from Around the World | Community Tax
  

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

• Taxes in Ancient Rome - Early Church History
  

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

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

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

"That is enough for today!"

A Wealth Tax

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

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

Graph #1: "wealth tax" (blue)

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

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

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

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

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


Jerry's thoughts on a wealth tax:

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

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

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

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

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

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

Publishers never had a fair shot...

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

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

Beginning immediately, antitrust enforcers should:

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

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

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

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

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


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

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

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

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

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

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

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


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

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

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

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

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

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

The Washington Post

At Economist's View:

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

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

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

Primarily? Both.

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

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

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

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

On the sustainability of low unemployment

JW Mason:

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

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

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

Graph #1

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

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

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

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

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


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

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


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

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

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

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

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

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

Graph #2

Again, all the sustainability seems to occur before 1970.

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

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

We tried that already

JW Mason:

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

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

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

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

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

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

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