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

Eric Boehm at Reason:

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

Yeh:

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

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

Here is the difference:

Graph #2: Gross Federal Debt as a percent of Debt Other Than Federal Debt

The Federal debt today is low in comparison to everyone else's debt. That was not true at the end of the Second World War.

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

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

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

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

Arthurian Profit Study 3.0: Getting the F out

“One indication of financialization is the extent to which non-financial firms derive revenues from financial investments as opposed to productive activities.”

- Greta Krippner, quoted by Bezemer and Hudson

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

Graph #1: Financial (red) and Nonfinancial (blue) components of CB Profits  (billions)

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

//

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

Graph #2: Gradual Change in the FCB and NCB shares of CB Profits  (percent of total)
At FRED: https://fred.stlouisfed.org/graph/?g=qvrw

70 years of wiggles and waggles notwithstanding, the NCB share of CB profit has gone from about 90% to around 75%, while the FCB share has gone from 10 percent to 25. For now, though, I want to set Financial Corporate Business profits aside. We will come back to it later. But first we look at the components of NCB profits: the Financial and Nonfinancial components of Nonfinancial Corporate Business profits.

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


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

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

Graph #3: Gradual Change in the F and N shares of NCB Assets
At FRED: https://fred.stlouisfed.org/graph/?g=qvrR

Financial assets start around 20% of total NCB assets, and nonfinancial around 80%. By the end of the millennium, they damn near meet at 50-50. Since then it has been about a 55-45 split. Almost half the assets of nonfinancial corporations are not nonfinancial assets.

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

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

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

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

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

//

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

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

Graph #4: Breakdown of NCB Profits by Asset Share
At FRED: https://fred.stlouisfed.org/graph/?g=qw4s

But remember: This is only the profits of nonfinancial corporate businesses. We set aside the 400 billion profits of FCB.

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

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

Graph #5: NCB Profit less F Asset Share (blue), FCB Profit plus NCB F Asset Share (red)
At FRED: https://fred.stlouisfed.org/graph/?g=qvsD

Financial profits -- red -- run above nonfinancial since the late 1980s, except for a moment during the financial crisis. Nonfinancial profits are not 1100 billion, but only about half that figure. And at 900 billion, financial profits end up about 50% higher than the profits from the production of output.

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

Graph #6: Financial Profit per Dollar of Profit from Production
At FRED: https://fred.stlouisfed.org/graph/?g=qvuH

In 1951 finance was half as profitable as the production of output. Today, it is half again as profitable.


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

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

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

Graph #8: N and F Profits of Corporate Business as Percent of GDP
At FRED: https://fred.stlouisfed.org/graph/?g=qw5j

Swallow hard and acknowledge the reality: Profits are not high; financial profits are.

If you take the profit numbers as FRED presents them, profit is high in recent years and N profit is the better part of it. I have had trouble with that evaluation for many years, because Keynes said

The engine which drives Enterprise is not Thrift but Profit.

If profit drives enterprise, and profits are so good, then why is the economy so bad? The answer, it turns out, is that profits are not so good. Well, I take that back. Financial profits are good, except in the crisis. Financial profits are good, and financial business has been our growth industry. But, like the economy itself, nonfinancial profits, correctly measured, are not so good.

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

Afterthoughts

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

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

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Data Used

CB and NCB Profits:
https://fred.stlouisfed.org/graph/?id=A446RC1Q027SBEA,A464RC1Q027SBEA,

NCB and NCB-F assets:
https://fred.stlouisfed.org/graph/?id=TABSNNCB,TFAABSNNCB,

Context variable:
https://fred.stlouisfed.org/series/GDP

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

The Current Numbers: an Overview

1500 billion = Corporate Business Profits

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

1100 billion = Nonfinancial Corporate Business Profits

• 600 billion = Return on NCB Nonfinancial Assets
• 500 billion = Return on NCB Financial Assets

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

• 900 billion = Total Financial Profits

600 billion = Return on NCB Nonfinancial Assets
900 billion = Total Financial Profits

• 1500 billion = Corporate Business Profits

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

Stanley Greenberg, political analyst

From Americans’ Revulsion for Trump Is Underappreciated at The Atlantic:

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

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

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

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

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

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

Lessons in exponential growth

Why we’re not overreacting to the coronavirus..., at Vox:

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

“Some will look and say, well, maybe we’ve gone a little bit too far,” he said. “The thing that I want to reemphasize, and I’ll say it over and over again, when you’re dealing with an emerging infectious diseases outbreak, you are always behind where you think you are if you think that today reflects where you really are.”

On the same topics, and worth a watch if you have not seen it:
https://www.youtube.com/watch?v=Kas0tIxDvrg&app=desktop

Reagan

Financial relative to Nonfinancial Corporate Business Profits

Corporate Profits of Financial and Nonfinancial Business

Financial Profit relative to Nonfinancial

High points for financial business are lows for nonfinancial.

Arthurian Profit Study 2.0: The Mysteries of Science

Graph #1: Financial Business Share of Corporate Business Profits

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

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

For the record, FRED uses the abbreviation NCB for "Nonfinancial Corporate Business" in the series names, sometimes at the beginning of the name. For example:

• NCBLL for Nonfinancial corporate business; loans; liability, Level
• NCBDBIQ027S for Nonfinancial corporate business; debt securities; liability, Level

And sometimes at the end of the name:

• TABSNNCB for Nonfinancial corporate business; total assets, Level
• TNWMVBSNNCB for Nonfinancial corporate business; net worth, Level

But sometimes they drop a stitch, as with these two:

• NFCPATAX for Nonfinancial Corporate Business: Profits After Tax (without IVA and CCAdj)
• BCNSDODNS for Nonfinancial corporate business; debt securities and loans; liability, Level

And sometimes, they don't even try:

• A455RC1Q027SBEA for Gross value added of nonfinancial corporate business
• A466RC1A027NBEA for Nonfinancial corporate business: Profits after tax (without IVA and CCAdj)

FRED uses NCB quite often as a memory-jogger for Nonfinancial Corporate Business. But I don't think they ever use FCB for Financial Corporate Business, and I don't remember ever seeing them use CB for Corporate Business -- except embedded in "NCB", of course.

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

Graph #2: CB (blue), NCB (red), and FCB (green)

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

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

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

Graph #3

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

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

1, 2, 3, 4, 5, 6...

It looks like counting.

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

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

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

You're thinking in terms of growth. If you start with a dollar and you double it, you want to double it again, and again, and double it every time. When we put that into numbers, it looks like this:

1, 2, 4, 8, 16, 32...

"1, 2, 3, 4..." is constant increase. "1, 2, 4, 8..." is constant growth.

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

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

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

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

//

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

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

Graph #4

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

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

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

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

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

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

//

So you've seen what Corporate Profit on a Log Scale looks like, paired with its exponential trend. I know, it is hard to believe that that straight line is an exponential curve. But you can prove it to yourself, if you want: Open up Excel, enter the numbers

1,2,4,8,16,32

in adjacent cells -- just the numbers, not the commas -- then select those cells, and insert a line graph. Then click your plotted line, click the Chart Tools "Layout" option on the menu, click "Trendline", and click "Exponential Trendline". You get a thin, black, curved line that runs so close to the plotted line that it's hard to see. A curved line. Now click the graph to select it, and from the Chart Tools "Layout" menu, under "Axes" click "Primary Vertical Axis" and click "Show Axis with Log Scale". Watch the graph as you make that last click: Both your plotted line and the curved, exponential trend line will change to straight lines because you're using a Log Scale! Seeing is believing.

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

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

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

Graph #5

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

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

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

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

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

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

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

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

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

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

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

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

Now, I think, we are ready to begin.