Tuesday, August 15, 2017

Fed Policy and a Rubber Seesaw

You know what a seesaw is, right? It’s a lot of fun. It’s a long board with a fulcrum at the center. Tuna sits at one end and Peter sits at the other. When Tuna move downward, Peter moves upward. You can do that all day. Or until the board breaks.

Lots of things in economics are like seesaws. The price of JD goes down and demand for JD goes up. The value of the dollar goes down and the Scots buy more JD. The Fed reduces the interest rate and the economy expands. Lots of seesaws out there.

In the past, the Fed believed in a seesaw called the Phillips Curve. This Phillips Curve said that if the unemployment rate went down then inflation would go up. Since inflation and unemployment were so rigidly related, either one could be used to indicate a need for monetary policy. A reduction in the unemployment rate meant inflation was rising and the Fed could back off. That is, the Fed would give less stimulus to the economy.

But that was in the past. Now the Phillips Curve is no longer rigid. It’s like the Phillips Curve has a bend in the middle, and both ends are going down. Think of the Gateway Arch in St Louis. Imagine a seesaw with both ends on the ground. Weird. Tuna and Charlie would sit there and nothing would happen. How sad.

Dr. Yellen is very confused about all this. Inflation and unemployment are both down. The thing that is curious about her reaction to all this is that she ignores the unemployment rate being down as she favors the information she is gleaning from the inflation rate. The unemployment rate is so low many folks are being tempted to return to the labor force. That should be a sign that Fed stimulus is no longer needed. But Dr. Yellen doesn’t want to be guided by this. She would rather focus on the inflation rate’s downward status. If the inflation rate is down then, by gosh, she is going to keep stimulating the economy.

It seems crazy and backward to me. Unemployment is very personal. People are getting jobs. We should like that. But we also know that pushing unemployment too low can bring very undesirable results. Just like a racer who runs the first lap much too fast, she may not have enough gas left to finish well. Inflation is also very personal. Most of us prefer a lower water bill to a higher one. Ask your neighbor. Is she complaining about prices being too low?  I don't think so. So why would the Fed want to continue with a policy of making things more expensive for us? 

Answering that question requires a fresh paragraph. Why does the Fed want to make things more expensive? The answer is that the Fed associates a low or falling inflation rate with dismal expectations and a lack of buying power. So even if everyone had a job, the Fed would still worry that something is amiss in the economy. And Dr. Yellen would keep stimulating.

What could be wrong with that? There are a couple of problems. One I mentioned above. We often associate over-stimulus with bad future events such as recessions. The second reason is that lower inflation rates might be the result of things the Fed simply does not and should not control. Maybe that thing is global competition. Or maybe the low inflation rate is the result of innovation that lowers prices. Clearly the Fed has no business or tools to interfere with either of those things.

Dr. Yellen has her teeth clenched like a dog with a bone. And she is not going to stop clenching until she gets us back to the good old days when inflation was soaring. She might coax output and income growth above 3% for a while. But if we learned anything from the past, an economy that grows too fast too long gives us a recession and higher unemployment. It is quite possible and highly desirable for her to implement a less stimulating policy. She should get to that task immediately and quit using low inflation as an excuse. Demand too low out there? Ask Amazon.com. I don’t think our problem is insufficient demand. 

Tuesday, August 8, 2017

Net Neutrality: David Versus Goliath?

I was thinking about words and names and it occurred to me how misleading they can be. Social Security is a good one. Who feels secure about their retirement years because of the Social Security checks they may or may not receive? It should have been called Pin Money or maybe Chump Change. It is a damn shame that so many people will retire with little in the bank and must rely on so-called Social Security.

And then there is Net Neutrality. At first I thought NN had something to do with not touching the badminton net. Then I realized it had something to do with the Internet, and it made total sense – the Internet should be neutral. The Internet should not be for or against Tom Brady. But then I read on and realized NN is all about a war between ISPs (Internet service providers like Comcast and AT&T) and all those content providers (like Amazon, Google, Facebook, and thousands of others).

The issue took on significance when President Obama’s FCC initiated a rule that concluded that Internet service is a basic need. It’s like weed – we all need a little from time to time. No, that’s not true. It is like the pavement between your house and your job. We all need to get to work. Your sexy neighbor with the big smile and hot red car should not have better access to that concrete than you. Be proud of that Lada and drive it right down the middle of the road!

The FCC enacted the Open Internet Order in 2015 to treat Internet service more like a road or a public utility. And thus the issue got hot. President Trump’s FCC reopened the case and is wondering what to do about it, so it is approaching a boiling point. I like the article I just found by Nelson Granados https://www.forbes.com/forbes/welcome/?toURL=https://www.forbes.com/sites/nelsongranados/2017/05/31/the-net-neutrality-debate-why-there-is-no-simple-solution/&refURL=&referrer= ) 

The article is pretty unbiased as indicated by the title – The Net Neutrality Debate: Why There is No Simple Solution. Granados concludes that NN is much like any government regulation – the basic premise might be correct but the unintended side-effects need to be considered. On the one hand, the right amount of NN means more fairness to content providers. Too much NN means a lack of progress, investment, and innovation on the part of ISPs.

When Granados says there is no easy solution, he basically means it is not easy to find the exact point of net benefit to society with NN. As in many cases, the answer lies not in the perception of government versus the company but rather impacts on one set of companies (and consumers) versus another set of companies. As you can imagine, both sets of companies are lobbying the government when it comes to NN. The ISPs (e.g. Comcast, Verizon, AT&T) want lighter regulation. The content providers (Amazon, Facebook, Google, Netflix, and many more) want tougher regulations.

In this blog post today I don’t pretend to know enough about which side is right. Perhaps you will educate me. But what I do think is curious is how many people are phrasing this as a David (content providers) versus Goliath (ISPs) confrontation. And of course, we are supposed to favor tiny sweet David over huge ugly Goliath. So today’s post is a look at the relative size and wealth of some of these companies.

I got the data from the Internet and mostly from Forbes.com. Most of it is for year 2016. So here goes…CP means content provider and ISP means Internet Service Provider.

The largest companies in terms of market value are CPs – Alphabet, Amazon, and Facebook. The largest ISP (AT&T) is valued at $255 billion with Verizon at $199 billion. The main point here is that there is no David and no Goliath if the biggest CPs are duking it out with the largest ISPs.

I will admit that this data may be misleading. For example, saying that AT&T is a CP might be misleading because it operates in numerous business activities. The same goes for Alphabet which owns Google. But the data are relevant in the sense that these companies lobby, and the entire wealth/sales of the company is an indicator of what they are capable of spending on government support. The column presenting each company's sales data is not more helpful in the David/Goliath breakdown. ISPs AT&T and Verizon have huge sales but so does CP Amazon.

I had a limited purpose today. NN is not a David/Goliath story. It is more a government regulation story. We consumers don't really care who wins but we want two things. We want continued investment and innovation from the Internet. We also want fairness in the sense that some content providers are not elbowed out of competition simply because they are friends with the right people. We want our Internet cake and we want to eat it too. Hopefully a public discussion will move the regulatory needle so we at least get a nice brownie with some ice cream on top of it. 

                                             Sales      Market
                                             $Bil        $Bil
CP          Alphabet                90         583
CP          Amazon               136         423
CP          Facebook               28         411
ISP         AT&T                  164         255
ISP         Verizon                126         199
ISP         Comcast                 80         178
ISP         Charter                   29         101
CP          Priceline                 11          88
CP          Netflix                      9          64
CP          Salesforce                8           58

Tuesday, August 1, 2017

1969 Was a Good Year

I wanted to compare some data and found a nice series for government spending going back to 1969. Not sure why they started the data in 1969, but they did. So I started thinking about what things were like about 50 years ago.

I started with my favorite subject, me. I finished my BS in Industrial Management at Georgia Tech in June of 1968 and to escape the draft, I started an MS program there. Strangely enough, the draft was not impressed by my love of Industrial Management, so they sent me a draft notice in late 1968. They let me finish two quarters of my new program and asked me to report for basic training in March of 1969. So in 1969 I was about 23 years old and was spending time training in Texas and Colorado. I finally settled into an Air Force base in Tucson, Arizona. I was an Airman First Class. I had one stripe. I think I made less than $100 per month.

On that salary I was lucky that a stamp cost 6 cents and a gallon of gas was about 35 cents, which made it economical to drive down to Nogales, Mexico to buy rum. A dozen eggs was 62 cents. For real people who could think about such things because they had a median income of about $8,300, a car cost about $2,000 and a decent house ran $30,000.

I was fully employed in the USAF in 1969. The national unemployment rate was 3.5%. A recession started in December 1969 so the unemployment rate started rising in 1970. The inflation rate was 4.5% in 1969. I could remind you of more – but that’s probably enough for the purposes today.

My main purpose is to look at how we spend the government’s money today compared to 1969. The table below shows 1969 spending in billions of dollars and as a percent of total government spending. 
                                          BIL$      %ofTotal
       Total Government      183.6          100
       Total Mandatory          53.6            29
       Social Security            26.7            15
       Medicare                       6.3              3
       Medicaid                       2.3              1

Our beginning situation finds government spending of about $184 billion in 1969. What we refer to as Mandatory Spending comprised a little more than a quarter of that total spending. Social Security spending was responsible for most of that – and amounted to 15% of total government spending. Medicare and Medicaid were toddlers in monetary terms – accounting for about 4% of all government spending in 1969.

A lot of water has passed under the bridge since then. For example, my forehead has grown several thousand percent since I was 23, and my time in a 10K race might have tripled. In basic training we had to run a mile in less than 6 minutes with combat boots on. I am not kidding. Anyway, let’s look at our government in 2016.

                                          BIL$     %ofTotal
      Total Government       3,853          100
      Total Mandatory         2,428            63
      Social Security              910            24
      Medicare                       693            18
      Medicaid                       368            10

As you might expect, if all the things we buy went up in price then government spending would do the same, and it did. Government spending went from $184 billion to $3,853 billion. That’s an increase of 21 times. Notice that if median income had gone up 21 times, it would now be about $174,000. So let’s give a big cheer for government growth. Way to go, government.

The above table shows that total Mandatory Spending went from being 29% of total government spending to 63% in 2016. That means – tada – that Mandatory Spending went up a lot faster than overall government. Mandatory Spending went up 45 times in 47 years! If median income had gone up that much, the median person today would be making $374,000 per year. You guys all make that amount, right?

You smarty-pants are starting to get my drift. Now let’s look at Social Security, Medicare, and Medicaid. To cut to the chase, Social Security went up 34 times; Medicare by 110 times; Medicaid by 160 times. These three programs have gone from being 19% of all government spending to 52% of it. Or put another way, all the other things the government spends on went from being 81% of the budget to 48%.

I know I harp on this point a lot. But the baby boom generation is just getting started. We were born from 1946 to 1964. Those born in 1964 are mere babies in their fifties. If we don’t focus more on how we spend money on the old folks, then the rest of you are going to have to live on a lot less. Maybe you should think about it a little more. In case you are interested, if median income had gone up by the same number of times as Medicaid (160 times) we'd each be making about $1.3 million a year. Sweet. 

Tuesday, July 25, 2017

Single Payer Health Insurance and Federalism

 A frequent comparison brought forth by those who favor single-payer health insurance is to make note of nice places around the world where single-payer works well. If it is good for them, then it must be good for us. I’ll drink to that!

No I won’t. This kind of comparison is like saying if a shirt fits perfectly on a dwarf, then it should be great for portly me. Suppose single-payer is great in Sweden. Does that really mean it is great for the USA? Why don’t we see a single-payer system for all of Europe? Or for the EU countries? Or for the G20? The answer is simple. They don’t want it. These places I mention are not only big but they are also dissimilar. People in northern Holland don’t have much in common with those silly Limburgers. Can you imagine the Hungarians and the Germans wanting the same single-payer system? I can’t.

But the US is one country, you retort. States are not the same thing as countries. But pshaw, I say. I know a few New Englanders who can’t even say Mississippi with a straight face. The south is where those “deplorables” live. Without getting so silly, I cannot see folks in South Dakota or Idaho wanting to have the same single-payer system as the groovy people of California. And then there is the idea of a frugal state like Indiana pairing up with scofflaws in Illinois. The USA might be one country but that does not mean that we all live or think alike.

The proof is in the pudding – or shall we say our governing documents. We purposely created a federalist country composed of strong states. Today we continue to honor the federalist state in many ways. We find comfort in the idea that some king living on the east coast can’t tell us how to run our lives. Sure, we have a big national government that does a lot of things. But think about all the areas that are left up to states or cities or counties. Police, fire, education, zoning, roads, parking, and so on. This is not trivial stuff. State and local area government budgets and regulations impact us in major ways every day.

Why don’t we turn over the police departments to the national government? Why doesn’t the US Congress run our fire departments? I am sure that it is possible to make strong statements about the great efficiency or perhaps some sense of fairness that derives from national control. But the answer is simple. It doesn’t make sense. Locals better understand the local problems. Locals know how to create local solutions. And what might be fair in W. Lafayette might not seem so fair in Bloomington.

Some of our politicians and ideologues want us to believe that single-payer is a slam dunk for the USA. Since it is a fait accompli, then it follows that anyone against it must have ulterior motives. But the truth is that the case has not been made. Bernie Sanders can rant all he wants but that doesn’t make people in southern Georgia have the same health issues and problems as those who live in Brooklyn. It does not mean that because a small European nation finds single-payer ducky that a huge economic space populated by 330 million Hoosiers, Tarheels, and Buckeyes is going to love it.

Republicans are trying to make the case for healthcare reform. It is an uphill fight for many reasons. But one of the reasons is the apparent superiority of single-payer. Why isn’t single-payer being held to the same kinds of debate and logical standards? Why do we noddingly approve of single-payer as the words are spoken? 

Tuesday, July 18, 2017

Sustainable Medicaid spending

Since the government is working on several different versions of a healthcare bill for the USA, it is not easy to know what will be legislated and how those changes will affect us. What we can know is that some folks will claim the sky will fall, and maybe it will. But since the sky has never fallen in my lifetime, I thought I would look backward in this post. This continues my wail about government addiction to debt. Lost in the preoccupation with the future is what happened to government spending and debt in the recent past. We don't really hate poor people. But we do have to think harder about how we accumulate debt. So here goes.

I got a little wild and crazy with the data. It makes me want to gulp JD and sing Blue Suede Shoes (Carl Perkins version). At the bottom of this post is one huge table with three parts.
     Part 1: Amounts for various categories of government budgeting in billions of dollars for the years 2006, 2011, 2016, 2021, and 2026. The data for 2021 and 2026 were given to me by Putin. Just kidding. They are estimates of the future based on past legislation. That is, if we do not change any legislation, that is what the Congressional Budget Office thinks will happen to spending in the future.
     Part 2: The changes, in billions of dollars, between those five-year time periods.
     Part 3: The percent changes between those time periods. The last two lines 06-16 and 16-26 summarize a comparison of 10 years past to 10 years in the future.

Let's start with the last column which shows federal government revenues. The government collected around $2.4 trillion in 2006. By 2016, it was raking in $3.3 trillion, an increase of about 36%. That seems reasonable. With no legislative changes, this would increase to almost $5 trillion in 2026 or 51% higher than in 2016.

I started with revenues because they are a benchmark for how much spending could grow without increasing the government debt. A 51% increase in the next 10 years seems reasonable. But then, if you are paying that 51% increase, you might want to argue about that. One thing we learn is that the rate of growth of federal taxes will be much higher (the rise from 36% to 51% is a 42% increase) in the future compared to the past. Don't say a word to me about austerity!

With that benchmark, we can now look at spending. Let's start with Medicaid.  Medicaid was a mere $181 billion in 2006, rising to $369 billion in 2016. So in the past 10 years, Medicaid spending rose by 104%. Review: Taxes rose by 36%; Medicaid by 104%. Medicaid will rise another 78% from 2016 to 2026. So whether we look backward or forward, Medicaid is one of the stars of government spending -- rising much faster than overall revenues.

If we want to be concerned about deficient government spending, look at the Income Security (Part of Mandatory Spending) and Discretionary changes. These components contain a lot of government programs*. After rising by 52% in the past 10 years, Income Security is projected to grow by only 21% in the next 10. Discretionary spending rose by 17% in the past and could rise by 24% in the future. Laggards!

Not to be prejudiced against Social Security and Medicare, you can see that those programs are doing their respective parts to bankrupt our country. After growing by 67%, SS will grow another 84%; Medicare will leap by 101% after growing by 84% previously.

The sad conclusion is this: As a centrist I support using the government to help people. But as a centrist, I also believe the best way to help people in a sustainable way is to not go bankrupt. These numbers help us see that we are on our way to trouble. These numbers do not incorporate any proposed increases in spending on military and infrastructure and do not incorporate any budgetary changes attendant to reforming healthcare or taxes.

These numbers suggest that Medicaid is among several key spending areas that must be addressed. It is not our national purpose to harm or kill the old and sick. But it is in our national interest to find ways to correct a problem in such a way that we can sustain programs that help the elderly, the sick and others. If ideologues scream murderer every time a program's growth is slowed -- then we will have to deal with a world in which none of the government works.

*Discretionary Spending includes spending on such items as education, scientific research, infrastructure, parks, environmental protection, some low-income assistance, public health and more.  


Social  Income  Discre- Rev-
Billions  Security Medicare Medicaid Security tionary enues
2006 544 377 181 2001017 2407
2011 725 560 275 404 1347 2303
2016 910 692 368 304 1185 3268
2021 1184 904 479 320 1306 4011
2026 1674 1390 655 369 1464 4948
Social  Income  Discre- Rev-
Change Security Medicare Medicaid Security tionary enues
6 to 11 181 183 94 204 330 -104
11 to 16 185 133 93 -100 -162 965
16 to 21 274 212 111 16 121 743
21 to 26 490 486 176 49 158 937
Percent Social  Income  Discre- Rev-
Change Security Medicare Medicaid Security tionary enues
6 to 11 33 49 52 102 32 -4
11 to 16 26 24 34 -25 -12 42
16 to 21 30 31 30 5 10 23
21 to 26 41 54 37 15 12 23
 6 to 16 67 84 104 52 17 36
16 to 26 84 101 78 21 24 51

Tuesday, July 11, 2017

US Leading in Government Deficits

Two weeks ago, I wrote a post about US national debt and deficits and concluded that past governments have put our country in a very tough place with few good options that could restore economic growth. Some friends wondered whether the US is alone is this distinction. So I found some IMF data to compare the US against other key countries.

The first line in the table below gives you US information. After averaging annual government deficits of 3.5% of GDP from 1999 to 2008, the deficit is now 4% in 2017. Thus the deficit is now worse. We had deficits in all 7 years since 2011 with the highest deficit in 2011 of 9.6%.

In all these categories, the US was worse than the EU and the other comparison countries. While all these countries are habitual debtors, Canada was slightly better since it had a surplus in one of those seven years. Germany had only two deficits in those seven years. Wunderbar!

When it comes to 2017, the US and Japan were tied with deficits of about 4% of GDP. Germany posted a surplus in that year of 0.6% of GDP. The UK, Canada, Italy, and the EU had deficits that were smaller (better) than 3% of GDP. The difference between 3% and 4% might seem small but remember we are taking these numbers as a percentage of GDP, which is $15 trillion in the USA. Also keep in mind that four is 33% higher (worse) than three. I next looked at a table with similar data for emerging markets and found that even this comparison is not good for the US. China, Russia, Mexico, Turkey and Romania among many others all had smaller (better) deficits than the US in 2017. Of course the US beat Brazil and Venezuela, Pakistan, and India. Way to go team!

The US stood out from the pack in having recorded the highest one-year budget deficit between 2011 and 2017. Japan came close with 9.1% and the UK's was 7.7%. The rest were virtually half or less than half of the US budget deficit.

Conclusion: the US tends to have larger deficits than other comparable world leaders -- both before the recession and after. We not only have larger persistent deficits but we also juice them higher when faced with a major recession. Apparently government deficits are our drug of choice.

I then found another table that compared the US to 39 other advanced nations. In 2017, there was not one single country with a budget deficit larger than the US deficit of 4% of GDP. There were 10 countries in 2017 that had surpluses: the Netherlands, Luxembourg, Latvia, South Korea, Macao, Iceland, Singapore, Hong Kong, Norway, and New Zealand. These countries typically have budget surpluses.

The US has a deficit problem whether we compare the numbers in dollars, in percent of GDP, in one year or over many. It is clear from looking at 40 major industrial countries that such behavior is neither typical nor desirable. We are hooked on the government spending drug. I think we need an AA meeting.

Budget Data for Selected Countries and Regions
Source: International Monetary Fund, World Economic Outlook, April 2017, Table A8.
2017: Budget position in 2017. Minus indicates deficit.
Fiscal Year 2017 ends September 30, 2017
99 to 08: the average budget position from 1999 to 2008
Change: Change from that average to 2017
# Defs 11 to17: How many deficits from 2011 to 2017
Highest 11 to 17: Highest annual deficit from 2011 to 2017
2017 99 to 08 Change # Defs Highest
11 to 17 11 to 17
US -4.0 -3.5 Worse 7 -9.6
EU -1.5 -2.0 Better 7 -4.2
Germany  0.6 -2.1 Better 2 -1.0
France -3.2 -2.6 Worse 7 -5.1
Italy -2.4 -2.9 Better 7 -3.7
Japan -4.0 -5.5 Better 7 -9.1
UK -2.8   -1.9 Worse 7 -7.7
Canada -2.4  1.1 Worse 6 -3.3

Tuesday, July 4, 2017

Happy July 4, 2017

When I was a kid my father used to lament that he could no longer get a Chinese meal for 25 cents. Born in 1915, he lived through the Great Depression and served in World War II. It was not easy for me to understand him because so much had changed in the 50 or so years between when he had been born and when I was a teenager. Now I am the old dude, and it dawned on me how much time has passed and how much "distance" there is between my world and that of my grandkids.

I think of that on the 4th of July 2017. Today I think of that distance as most of us seem to agree that our national problems couldn’t be worse. Most of us can’t even mention politics among family and friends for fear of starting a fight. But then it dawned on me that just like it shaped my father, time and experience have given me a perspective. I forget it most of the time but on the 4th of July, it is worth thinking about.

In elementary school, we practiced air raids by hiding under our desks in case the Soviets decided to attack us. At Ponce de Leon Junior High School in Miami, we held our collective breath as a Soviet ship carried missiles toward Cuba. Jackie Robinson had to stay in a different hotel from his white Dodgers team mates. Cassius Clay changed his name to Muhammad Ali and later spent time in prison for saying what he believed. Elvis changed from serious musician to Vegas entertainer, and Bob Dylan gave up his acoustic guitar for an electric one. I played little vinyl records on a phonograph at 45 speed, and our landline was a party-line with a human operator at one end whose name was not Alexa. I used to give my punch-card computer programs in a cardboard box to a guy called the computer operator who laughingly told me that the turn-around time would be 24 hours. Ya'll, come back tomorrow. 

The point? A lot of water has gone under the bridge. How can my grandchildren understand anything I say when I used to watch my mother hang clothes on something called a clothesline after scrubbing them on a washboard? But the truth is that on 7/4/17, much has not really changed. Today we have very challenging economic and social problems. We still find ourselves in a very scary world where our leaders cannot trust the bad guys to not make trouble. Technology both thrills and worries us. Driverless cars? Robots? Artificial intelligence? These and other innovations both fascinate and threaten. I recall one colleague telling me right after the Soviet Union fell that the future of the world would henceforth be peaceful. What was he smoking? Change is the only constant we will ever know, and any generation that thinks tranquility or the end of the world is right around the corner is fooling themselves.

The point? Lean back and take a big drag. This is as good as it gets. Appreciate the now for what it really is. Our current President doesn’t look or act like John F. Kennedy. But Kennedy almost got us all blown away playing chicken with Nikita Khrushchev, and he showed he wasn’t very adept when he messed up the Bay of Pigs invasion. Iran, North Korea, and China are threatening but we have lived through plenty of menacing situations, not to mention the the Vietnam War, Cuban Revolution, Korean War, WWII, WWI, and so on.

The economy is nothing to write home about today. But the ups and downs of the 1970s were no fun either. As we exited WWII, most people were pretty sure we would fall back into the Great Depression once the government spending stimulus for the war was retracted. While we are not now setting records for economic growth, we haven’t had a recession in almost nine years. I think we had two  recessions in every decade since the 1950s.

We worry about low inflation and interest rates. True, they have their negatives. But many of us remember rising inflation and mortgaging our first homes at double-digit interest rates. We didn’t have to take a finance course to understand the power of compound interest.

What’s the point today? The point is that we should give our family and friends a big high-five as we enjoy the birthday of America. Our land is not perfect and it is far from being safe and strong. But it has been worse before and it will probably be worse again in the future. There has never been a time when all was well and we didn’t have important things to threaten us. Our land is what it always has been – a work in progress in a dangerous world. And thus, we will always have to be aware, mindful, and ready to act to preserve what we have.

Combine that truth with the larger truth of our freedoms. We have freedom to express and share our views. We have freedom to fashion solutions for tomorrow. We have freedom to argue and to be right sometimes and wrong other times. Today let’s worry less about our troubles and disagreements and kiss the ground that gives us so much. Tomorrow let's get back to the work of making things better. 

Raise your cups of JD to the 4th!

Sunday, June 25, 2017

Mr. Tuna Goes to Washington

With healthcare and tax reform in reverse and the debt ceiling sagging, I thought it might be fun to create some perspective. This will seem silly compared to all the serious things politicians say to us but sometimes it may be helpful to step back and see the essence of the situation – the proverbial bull in the china shop.

Imagine the Tuna sitting in his ill-fitting Walmart suit at the Sixth National Bank of North Avenue. He is more nervous than usual waiting for the Vice President of Horrible Loans to arrive. Tuna has a large roll of toilet paper next to him on which he has written down all his past debts, current income, and expenses. He also has a good luck charm from his glory days of tackling swift runners like the Kilt.

Luckily, the VP is in a good mood and offers the Tuna a bowl of Starbuck’s finest blend and then the fun begins. How much debt do you have, Mr. Tuna? Please call me Charlie the Tuna. Okay, Mr. Charlie the Tuna, how much debt do you owe? A ton, sir. In US dollars, I owe about a million give or take a grouper or two. Wow – that’s a lot of debt. I see you are retired, how much do you earn, including Social Security benefits each year? Together the missus and I earn about $60,000 per year. Hmm, says the VP. How much do you spend each year? Well sir, we are quite frugal in our household. We try to not spend more than $100,000 per year, if you count Mrs. Tuna’s weekly mani-pedi.

Why are you here today, Mr Charlie the Tuna? Well, we need to buy some of that long-term healthcare stuff, and we also want to buy an Airstream travel trailer. So we are going to need another $300,000. Tuna is quite confident that he has answered all the VP’s question and is beaming with pride.

So let me summarize, says the VP. You owe a million now. You spend $40,000 more each year than you earn, and you now want to borrow another $300,000. Yup, that’s about it. Tuna is very optimistic that the both of them understand the situation perfectly.

Then the VP asks another series of questions. Is it possible that you could spend a little less money each year? For example, could you cut back on large rib-eye steaks? Or maybe end your subscription to Hustler Magazine, or maybe even not subscribe to HBO? Or maybe you could get a paper route to earn more money? Tuna is confused. All those things sound crazy. Cut back on large rib-eyes? Reduce his porn intake? Work more? Geez, the next thing the VP might ask him to do is run a mile in short pants.The Tuna stands up and tells that VP a thing or two. Surely there are other banks that would treat him more fairly.

Okay, I had an extra JD with my bagel this morning. But I swear to you that this silly little tuna tale is exactly what is going on (in sophisticated language) in Washington, DC. The Congressional Budget Office projects government spending, revenues, and debt from 2017 through 2027. These numbers are based on past legislation. National debt held by the public will rise from $15 trillion to $25 trillion – or from 78% of GDP to 89% in 2027. The 78% today is the largest since World War II. So debt is basically huge today and promises to get much bigger even before we factor in proposed changes in infrastructure spending, tax reform, military spending, and so on. 

Government spending is also expected to grow – from about $4 trillion this year to $6.5 trillion in 2026. Taxes will also be rising but not fast enough. The federal government deficit will be about $600 billion in 2017 and without any new legislation will grow until it reaches $1.4 trillion in 2027. That means for every year between 2017 and 2027, yearly deficits will be somewhere between $600 billion and $1.4 trillion. That adds up!

These numbers are no better than the Tuna’s mythical situation above. This country is an economic train wreck. No wonder the economy is stuck in low gear. Our politicians put us in a no-win situation. If they raise taxes or reduce spending, we know that will have negative impacts that are nearly impossible to tolerate in this political climate. If they allow the debt numbers to rise even more, we could be the next Puerto Rico, and I don’t mean anything about rum.

That’s just the macro situation – it gets even uglier when we drill down to specifics. Senator A wants to spend more – not less – on defense. Senator B wants German Shepherds to have free health care. He won’t take a nickel away from any social program. Senator C says he loves old people and won’t threaten their ability to afford Mediterranean cruises nor will he touch spending on Medicare or Social Security. Senator D wants to reduce tax rates, and Senator E has a crush on Nancy Pelosi.

What’s the point of my rant? The harm has already been done, and our government officials do not recognize what is clear to many workers and business managers. Potential workers are staying out of the economic system. Firms are not investing in capital. The economy lags. Politicians give us technical crapola to divert our eyes and ears from what is real. What is real is that we are between a rock and a hard place, and the only salvation comes in ways that demand a first step backward. Someone is going to have to give up something. Few politicians will admit the truth because they fear they will lose their jobs. I don’t see any leaders out there. It will get worse before it gets better.

Merry Christmas from the Grinch. 

BTW. Charlie the Tuna didn't get the loan and decided to un-retire and run for the US Congress and swim with the big spenders.

Tuesday, June 20, 2017

Inflation and Rocky: Down But Not Out

The table below explains why people are saying, what’s up with inflation? In the decade including 2007 to 2016, the US inflation rate averaged 1.9% per year. If we compare that to any of the full decades from 1950 to 2010, that 1.9% is lower than any of the 10-year averages. The lowest annual inflation rate for a decade was the 2.3% of the 1950s. The 1.9% is also lower than the average annual rate of about 4.7% per year from 1950 to 2010.

What happened to inflation? Why is it so low? Are we in a new zone wherein low inflation is guaranteed for the foreseeable future? Or is it like Rocky and will bounce off the canvas once he clears his head?

Since only the Tuna knows the future for sure, I can’t really answer those questions. But a good place to start is with an understanding of tires and pumps. No just kidding. A good place to start is with some basic macro. And basic macro says Rocky might be wobbling right now but don’t count him down and out.

Inflation is the percentage change in prices for a nation. We use words like “basket of goods and services” to evoke the idea that inflation is not about the price of pickles or goat cheese. "Basket of goods and services" makes one think of all the goods and services the people of a country might typically buy. Inflation refers to how the cost of that basket of goods and services changes over time. If it cost $100 dollars one year and then rose to $105 the next year, we would call that a national inflation rate of 5%. If that same basket of goods and services fell to $104 in the next year, we would call that a deflation rate of about -1%.

You can see why people might worry about inflation. If your wages did not rise but the inflation rate was 5%, then you would feel poorer because your income would buy fewer goods and services. Ouch. The same goes for all your saving. If you have $1000 in the bank, it too will buy less because the cost of things went up. Double ouch.

That brings me to my first point. How could inflation rise by more than your wages? It doesn’t make much sense that it could go on very long. Sure, greedy businesses might want to raise their prices but if wages don’t rise and people can’t buy as much, then surely the price increases won’t stick for very long.

But look at the table. Inflation has kicked up many times and for as long as a decade or more. How is that possible? The first answer is government. The second is expectations.

Consider how government figures into this. Suppose firms raise prices but not wages. Consumers can't buy as much as before. The economy begins to slow. Governments don’t like recessions, so as the economy slows, the government decides to stimulate spending. Government stimulation thereby replaces the reduction in private spending with an increase. With spending restored, inflation sticks.

So firms raise prices again. What fun! Inflation is on a roll. Meanwhile workers are saying, what’s up? Dudes, you keep raising prices but not wages and we keep getting poorer. Cagey firms might then give in to wage demands. Notice that higher wages mean that workers can buy more and this keeps the inflation party going. But the trick for firms is to NOT raise wages enough to seriously damage their profits.  

For a while (much of the 1960s and part of the 1970s), workers got wage increases but they never quite caught up. And then viola!, workers figured it out and demanded a proper wage increase. In 1979, coal miners asked for a 39% wage increase for their coming three-year contract. Other workers followed. That was like taking a 2x4 to company profits and caused a couple of recessions in the beginning of the 1980s. Once workers expected higher inflation they wanted higher wages. This is the second impetus to higher inflation as firms pass along those new costs into even higher prices for goods and services. 

Those recessions created the incentive for the government to jump in again. Except by 1980 the government had accumulated an ugly national debt and wasn’t prepared to bail out the firms. No bailout? Without the bailout and with a weak economy, firms were much less apt to try to raise prices. The table shows the inflation rate moving in a better direction after 1980. With government stimulus and inflationary expectations falling, it made sense that actual inflation would decrease.

One more point that may seem to fly in the face of all the above. Milton Friedman coined the phrase "money, that's what I want". No wait, that was the Beatles. Forget that.  Friedman said, “inflation is always and everywhere a monetary phenomenon.” Milton Friedman was not simplifying when he said the above. So we have to add a bit to our story to bring in money.

According to Friedman and other monetarists, a government is limited in how much it can stimulate spending. In the above storytelling, I glibly spoke the company line that a government deficit could be used to stimulate spending. But that idea exaggerates their powers. Government deficit spending is less powerful if people believe that a deficit will be temporary. The more people think that the government will soon either retract spending or raise taxes, the more they adjust their spending (downward) to that expected reality.

So it is not the government deficit itself that permits spending and inflation to increase. It is the act of the Central Bank monetizing the government debt that seals the deal. Government deficits cause interest rates to rise. The Central Bank reacts to those rising rates by flooding the economy with money. And that money is the magic grease to keep the spending and inflation going. The money is not the cherry on the top – the money is the ice cream, the cherry, the bowl, and the JD.

That brings us to today. Workers are too worried about a weak economy to push for higher wages. The government has no more bullets and can’t increase spending. Thus, inflation is at bay. But that’s not the whole story. The rest of the story is the money that is sitting in bank excess reserve accounts. So long as the money sits in those accounts, we are at risk of them turning into real loans and real spending power. It won’t take a huge change to get all that green moving. The Fed is scared to death to drain those reserves from the system. They are ready to be spent. The unemployment rate is down and labor markets are tightening worldwide. Thus workers will soon feel their oats and will be ready to jump on higher wages.

It won’t take a forest fire to get things started. Little bits of information flow that make us more optimistic about the future. That growing optimism combined with a forest full of money can suddenly spark a spending spree. And that could ignite inflation expectations and lead to workers demanding higher wages. None of that could happen without all that money sitting around. With government stimulus stuck in neutral, a stronger economy can't cause a sustainable rise in inflation. With government stimulus unchanged, inflationary expectations can't unleash a wave of higher wages. It's the money that is the risk today. With trillions of dollars in excess reserves, spending can expand elastically, wages can grow without limit, and inflation will rear its ugly head. To Janet Yellen: Get rid of that money before it comes back to bite us all. Let's keep Rocky on the mat. 

Inflation Rate of the
Consumer Price Index
By Decade (In Annual % Change)

1950s                           2.3
1960s                           3.1
1970s                         11.2
1980s                           5.9
1990s                           3.2
2000s                           2.7

2007 to 2016               1.9

Tuesday, June 13, 2017

CO2 Emissions by Country: What's Up?

As the Paris Accord consumes more of our attention, I thought it might be fun to look at some numbers. We know that countries will invest resources in policies designed to curb CO2 emissions. But we don’t know all the determinants of a country’s capacity to create CO2. My little data analysis comes up short with respect to a smoking gun. There is some interesting dirt, however.

I started out with a simple model that says that the amount of CO2 a country emits ought to have something to do with fundamentals like size of the economy, the population, and, of course, its number of cows. I look at these relationships and find some corroboration. But it is very clear from the data that there are other factors that are important. As the world moves forward with CO2 policies, it behooves us to be more clear about what actually causes CO2 to be high/low for a country. Clearly one-size-fits-all policies make no sense. 

The US was the world’s second largest CO2 emitter in 2015, behind only China. The next biggest emitters were India, Russia, Japan, Germany, Iran, South Korea, Canada and Saudi Arabia. (Table in million of metric tons, https://en.wikipedia.org/wiki/List_of_countries_by_carbon_dioxide_emissions)

                     CO2s   Rank










Saudi Arabia

Guide to below tables. The order of each table's rows is in terms of CO2 emissions above. The rank found in the rank column in each table below refers to rank of the item being displayed. In this way we can quickly see how each of these factors correlates to a country's emissions. 

The size of the economy should have something to do with CO2 emission. And it seems to hold true since the US and China are very large emitters and have large economies. (World Bank, mostly 2015 data, nominal GDP in billions)
    Billions        Rank
China  11,158  2
US  18,037  1
India  2,116  5
Russia  1,326  8
Japan  4,383  3
Germany  3,364  4
Iran  425  10
Korea  1,378  7
Canada  1,553  6
Saudi Arabia  653  9

But this simple relationship between emissions and size of economy breaks down because Russia is the 8th largest economy but the 4th largest emitter. Iran, the 7th largest emitter, has the 10th largest economy. Its economy is tiny compared to the others.

Next, I calculated a statistic for each country that is found by dividing the amount of CO2 emitted by the size of the economy. If the economy size was the key explanation for how much a country emits, then the size of this stat should be similar for each country. 
C02 per
Economy       Rank
China 0.95 4
US 0.29 8
India 1.16 3
Russia 1.33 2
Japan 0.29 9
Germany 0.23 10
Iran 1.49 1
Korea 0.45 6
Canada 0.36 7
Saudi Arabia 0.77 5
Median 0.60

The US is the largest economy and the 8th
 largest emitter in terms of CO2 per nominal GDP, with a value of 0.29. Notice that value for the US is half the median country (0.6) value and about one-sixth the value of Iran’s value of 1.5. India’s CO2 output per unit of GDP is four times the US value. The US, Japan, and Germany are under-polluting (higher ranks) based on CO2 per GDP. Iran, Russia, India and China over-pollute relative to GDP.
This statistic varies a lot by country. Iran’s score is about four times that of the US. Russia’s is close to three times the US value. Germany has the lowest statistic of any of the 10 countries at 0.23. These numbers suggest that there is something other than the size of the economy that determines how high a country ranks on emission.

So naturally I turned to cows. Luckily there is data on cows by country and I calculated the emission of CO2s per cow in each of these countries.

                     Co2 per
      Cow        Rank
China 93 4
US 58 8
India 13 10
Russia 88 5
Japan 313 2
Germany 60 7
Iran 70 6
Korea 206 3
Canada 46 9
Saudi Arabia 1012 1

Again, the range was wide from a score of 1012 Co2s per cow for Saudi Arabia to a low of 13 for India. Perhaps the flatulence of Saudi cows is higher than those of Indian cows. But the message is clear. We cannot explain the ranking of emitters by number of cows. There must be something else.

The ranking of countries by population is almost identical to the ranking of emitters.










Saudi Arabia

(Population is in billions)

But higher population does not mean proportionally more emissions. When I calculate emissions per person for each country (table below), there is still a lot of variability from a value 16,073 for the US to only 1,872 for India. Emissions of countries with large populations like China and India are not proportional to population. Whew. Less populated countries like Saudi Arabia and Canada tend to have higher CO2 scores per person. More interesting are the US and Russia who have large populations and CO2 per person.

CO2 per
Person      Rank
China  7,734  9
US  16,073  1
India  1,872  10
Russia  12,275  5
Japan  9,900  6
Germany  9,641  7
Iran  7,504  8
Korea  12,267  4
Canada  15,441  3
Saudi Arabia  16,049  2

The last table below brings all this together. Here we see how each country did with respect to ranking on CO2 per GDP, per person, and per cow. Remember, a low rank (e.g. 1 or 2)  means more CO2 emission. So a low number is a high score on pollution -- a low number below is "bad". Thus a high number is "good".

The countries with the lowest scores and the worst CO2 rankings are S. Arabia, Russia, S. Korea, and Iran. For Russia and Iran the lowest rankings relate to higher CO2 per GDP.  Saudi Arabia gets poor scores because of high CO2 per person and per cow.

The countries with the highest (best) numbers did best on pollution emission. Germany was good across the board while India did well on account of not polluting in proportion to their large populations of people and cows.

The remaining countries were mostly in the middle. The USA, however, scored very poorly on CO2 per person though the USA did well when comparing CO2 to GDP. Japan doesn't seem to have enough cows.

Yes, some of this is facetious. But I reported it all for several reasons. First, I was well into my JD. Second, there might be some interpretations when you break down the numbers. It is obvious why a country with a huge population might have a small CO2 output per person or cow. But less obvious why China's CO2 per GDP is pretty strong despite having a very large GDP. Finally, this analysis suggests that any one-size-fits-all remedies may not succeed. CO2 emission might be strongly related to size of population, GDP, number of cows, policy or other things. What each country can or should do to improve CO2 should be the subject of much more analysis and discussion than I am hearing these days. We all nod when someone says that money and technology will solve the problem. I'm not sure it is that simple.

Summary of Ranks 
CO2 per
             GDP   Person   Cow   Sum
China      4            9           4        17
USA        8            1           9       17
India        3          10         10       23
Russia      2            5           5      12
Japan       9            6           2       17
Germany 10          7           7       24
Iran            1          8           6       15
S Korea     6          4            3       13
Canada      7           3           9       19
S. Arabia    5          2           1         8