Tuesday, August 14, 2018

Mr. Knowitall

Correct me if I am wrong, but no one wants the label Mr. Knowitall. That’s how many of us felt about our parents who were always ramming their half-baked ideas down our throats. We swore we would never be like them. One problem with Mr. Knowitall is that we  know he is trying to impress us with his vast store of knowledge. But worse than that obnoxious trait is that he really thinks he knows it all. He has nothing left to learn. So he listens very little and pontificates often. Communication is a one-way street. Yes, shes can be knowitalls too! 

None of us likes to be wrong, especially when we are arguing with friends and relatives. But it is the essential nature of our world that we are usually wrong. Most of the valuable or interesting things are complicated if not uncertain. What is the best way to raise your child? What is the best diet for you? What is the best way to get from Bloomington, IN to Burnsville, NC? How do you eliminate poverty? How do you stop chipmunks from digging under the foundation of your house? What is the best way to stop terrorism?

The above questions are debatable. There are two or more sides to each question. While there might seem to be a best answer today to one of these questions, we know that there is no guarantee that provisional knowledge today is perfect or that what worked yesterday will work today or tomorrow. Things change and therefore so do the correct answers. Correct answers are never 100% correct and are qualified or transient depending on changing conditions.

One response is to think that there is never a correct answer and since we are always wrong, we might as well have no opinion. While that might be good for some people, another option is to accept what you think is the best answer today but keep an open mind about what might change your opinion tomorrow. We lope along over time searching for the best truths.

While that might sound overly philosophical, another way of saying all this is that most of us try to learn. We read, we talk to people, we watch television. And best of all, we argue. Argue? Are you kidding? One connotation of argument is two sweaty red-faced people with different opinions trying to win at any price. Call him names! Make fun of her parents? Associate him with a cult. Whatever you have to do, argue to win!

But argument doesn’t have to be like that. Argument can be the best thing you did that day. Argument can be the way you learn. To argue a point, you have to first become acquainted with the topic. You then put together your best argument for a specific result. You might say spanking is a good approach to child-rearing. Your adversary, if you listen to her, will explain why it isn’t the best approach. If you both really listen, you might learn some things that you overlooked. Or you might raise the importance of something you thought was unimportant. The point is that no one knows everything. 

Argument is a wonderful way for spirited people to learn more. There is nothing like a contest to make you work harder. The everyday contest of argument is what can make us stronger and more confident about what we think we know. But it can also make us more humble and willing to keep learning. 

What bothers me today is that I see very few examples of people learning from each other when it comes to the most important issues of our day. People seem quite adept at memorizing an ideological mantra. They shout it at an opponent. And when something comes out of the mouth of the opponent, they shout their mantra louder. The opponent then shouts louder still. This is one-way communication at its worst, and it leads to zero learning. 

I had the loveliest conversation with one of my children recently. And yes, JD was involved.  It was about immigration. I was so proud of both of us because we listened to each other. I think we are each better informed because we both spoke and listened. I am not sure that either one of us changed our minds considerably, but I do think the conversation opened some new doors for learning and making future decisions. I feel especially blessed to have a family composed of people who try to keep learning and do it by arguing with and listening to each other.

Tuesday, August 7, 2018

US Monthly Employment and Excessive Analysis

On Friday August 3, the US Labor Department announced the monthly employment number for July 2018. You would have thought it was the 4th of July. That's the way the press seems to handle every data announcement. Every data report is a special baby announcement: It's a boy, and what a whopper he is!

The below graph of seasonally adjusted monthly non-farm employment shows all the changes since the beginning of 2002. If you can see the vertical axis, you will see that one-month employment changes stayed between a high of almost 600,000 and a low of negative 800,000. But those extremes exaggerate what you see most of the time. If you take out the largest changes and look at the rest, you see that both before and after the recession (shaded area), employment changes averaged around 200,000 per month.

Another thing you see in the graph for the years before the recession and after the brief recovery is that employment changes bounced around more than a Nolan in a bounce house. You could get sick watching the employment change number go up and then down and then up again.

What's my point? My point is that, except for recessions, this is pretty boring stuff. It's like my weight. I weigh pretty much 200 pounds (okay, I weigh more than that but let's stick with 200 since the chart says 200). Betty bakes some cookies and I gain a few pounds. I go to the gym and I lose a few pounds. No one cares. I weigh 200 pounds...plus or minus.

Imagine the press in my front yard waiting to hear my weight right after my cookie-binge week. One reporter says to the other, I hear he ate three plates of cookies every night. He even piled on vanilla ice cream. I bet he weighs 210. Another one heard that I dreamed I did 10 burpees each day and that I probably only gained 8 pounds. Apple Pie stock slipped just below a zillion dollars on hearing all this.

I finally waddle through the front door and announce to the thousands of reporters -- the scale says I weigh 206. There is a deep hush as the public realizes they overestimated my weight. Kroger closed early that day, and Apple Pie stock fell below Amazon.

When the employment number got announced on August 3, the reactions to the announcements reactions were similarly silly. Many pointed out that the number was very strong. A good number. But sadly, it was a little lower than some had expected. Much was written and much was said. Hand-wringing was profound. But really, folks? Look at that graph. If the employment change goes under 200,000 one month, what are you supposed to think? Yup -- next month it will likely go above 200. End of story. If it goes under 200,000 for two or three months, what do we learn? Yup, it will return to 200,000 the next month. If it goes under 200,000 for six months, then we have something to talk about!

In the meantime the press will indulge our need to be excited each month. Experts will say many interesting things about trends and cycles. I just can't wait until September's report for August.

Tuesday, July 31, 2018

Forgotten Debt

The magician employs sleight of hand by having you fixate on something highly observable while he or she completes the trick with the other less visible hand. The audience oohs and aahs as they are sucked into thinking that something impossible has happened.

Today our government intrigues us with spies and improbable alliances with nasty dictators while they destroy our nation with behind-the-scenes budgetary policies that likely will bleed us ounce by ounce. The sleight of hand lets them spend more and more as they pretend to give us tax breaks and other goodies. Few speak out because frankly, the topic of budgets pretty much puts most of us to sleep or has us heading to the closest bottle of JD.

The data reveal a clear path to ruin but alas there are few in the press or anywhere who want to press the case. It seems to be a lot more fun to watch our key federal institutions lob daily bombs at each other. In fairness, there is a group that seems dedicated to warning about the national debt called the Committee for a Responsible Budget. You can find them on Google easily. Today, I share some data I found at cbo.gov – the Congressional Budget Office. I look at historical budget data and then their 10-year budget projections. It’s not a pretty picture but you would never know it if you read the daily Bloomington Herald Times or watch Fox Business News (or anything else).

Federal government spending came in at $3.98 trillion in fiscal year 2017. That amount was more than twice the number recorded for spending in 2001 ($1.86 trillion). While spending always rises during a recession (2008-9), the 2017 number is about a half trillion dollars higher than it was after the recession in 2010 ($3.46 trillion). Now for the future: the CBO projects that without any major changes in spending legislation, federal government spending will rise to $6.62 trillion in 2027. That’s an increase of about $2.6 trillion in 10 years.

Luckily, we got tax cuts so all is fine. Ha ha. Federal tax revenues rose from $2.16 trillion in 2010 to $3.32 trillion in 2017. CBO predicts revenues will rise to $5.30 trillion in 2027. Tax cut? I don’t think so. In the next 10 years, our taxes will increase by about $2 trillion.

You're on a budget, right? The budget is motivated by the difference between your spending and income. If you are like the federal government and you spend more than you earn, then you use the plastic. In government, the annual plastic usage is called the deficit. The total amount you owe is called your debt – the total amount the government owes is called the national debt. 

The government deficit in the year right before the recession was $248 billion. In 2017 it was $665 billion. The CBO says it will increase through 2027 when it will hit $1.3 trillion. Yup, in that one year the difference between government spending and revenue will be more than $1 trillion. Yup, in that one year we will spend $1.3 trillion more than we collect in tax revenues. Meanwhile, the national debt will rise from $9 trillion in 2010 to $14.7 trillion in 2017 and to $27.1 trillion in 2027. Can you imagine getting a statement form Visa saying you now owe $27.1 trillion dollars?

Another way to present this data is to compare these figures to GDP. That approach removes the impacts of inflation and shows the relative importance of these numbers to the size of the economy. The below table shows:

  • Tax revenues as a share of the economy declined right after the recession but will climb as a percent of the economy through 2027
  • Government spending increased during the recession and went back to something more normal, but recent legislation has spending rising as a share of the economy through 2027.
  • The deficit ballooned in the recession but was already falling by 2017. It will rise again through 2027.
  • The national debt increased in the recession and thereafter doubled as a share of the economy to 76.5% in 2017. Good times usually imply smaller deficits and lower debt. But in the case of the USA today, we see the national debt rising to almost 100% of the economy in 2027 – almost three times what it averaged right before the recession.

Is this a crisis? Not yet. But with our current tendencies in government today and the almost total lack of interest in approaching a 100% debt to GDP ratio, it is likely that these numbers will worsen.

Combining the government’s debt with student debt, credit card debt, auto debt, and a few others – the US could easily see itself in a debt crisis. The economy is strong today and that helps. But we have not seen a recession in a long time. When it comes the world’s investors may wonder if America is really a good place to stash their money.

We might want to think about ways to reduce that debt before the fit hits the Shan.

Government Budget Figures as a Percent of GDP (in percent)
                          2007    2010    2017   2027*
Tax Revenue      17.9     14.6     17.3    18.5
Spending            19.1     23.4     20.8    23.1
Deficit                 -1.1     -8.7      -3.5     -4.6
Debt**               35.2     60.9     76.5     94.5

* This is a projection assuming there are no changes made to the laws on government spending and taxing. Of course any new laws that change spending or reduce taxes would alter budgets in 2027.
**The debt quoted here is what’s called debt held by the public. This is what the government has borrowed and owes to private investors (domestic and foreign) and the Federal Reserve.

Tuesday, July 24, 2018

Catching Up Part 2

I got a hot new idea for a post this week that looks at how other countries are catching up to the US. The idea stemmed from the thought that the world has changed a lot, and many of the economic relationships between other countries and the US might need to be revisited given the shifts in relative economic success. For example, most of our free trade agreements are pretty old and likely reflect the relative poorness of some countries. So I downloaded a bunch of data and then got this sneaking feeling I had already done this topic before. And lo and behold, I did -- back on December 5, 2017.

Since I spent a good bit of time downloading this data I decided to plow ahead and call this one Catching Up Part 2. In Part 2, I focus on GDP per capita in dollar terms. This means I am focusing on what the average person makes or earns in each country. (Warning -- the next few sentences in this paragraph are basically footnote material. You can easily skip to the next paragraph if this kind of material bores you.)  If GDP per capital increases, that means GDP is growing faster than population and it means the average person is doing better economically. Putting each country's amount in dollars means that changes in the exchange rate are reflected in the resulting numbers. Presumably these exchange rate changes help to purge any impacts of relative price changes. That is, if GDP per capita is growing for a country only because of prices, then its exchange rate would depreciate and essentially nullify the impacts of the price changes. I use market exchange rates instead of so-called purchasing power parity rates. (Talk about boring!)

Part 2 also divides the changes in per capita GDP into two time periods -- from 1960 to 1979 and from 1980 to 2016. The World Bank data starts in 1960. I would have preferred to start earlier but the data isn't there. I chose 1980 because so much happened in the world after that date -- including the break up of the Soviet Union, China's emergence in world trade, and many political and economic changes in Latin America. You might think of these two time periods as Post-World War II and Globalization.

The main question posed here today is to what extent the rest of the world caught up to the US economically since WWII and since the onset of Globalization. I chose 17 countries to compare against the USA. The gorgeous table below has several columns. The first three columns contain the GDP per capita for each country in 1960, 1980, and 2016. The next three columns show the share of each country's GDP per capita relative to the US in each of those years. For example, in 1960 the number for Luxembourg is 0.75 meaning Luxembourg's GDP per capita was about 75% of the US GDP per capita in 1960. Notice that by 2016 it had risen to 1.75 or 175% of US GDP per capita. That's a huge increase. The US economy grew by 19 times over that time period. Luxembourg's economy grew 44 times! Note: Luxembourg is a tiny place and was included because of this spectacular result. It used to be a steel-making dynamo but is now a center for finance, knowledge, and space exploration. Enough about Luxembourg.
  • What about China? The table shows that in 2016 China's GDP per capita was barely above $8,000. Yes, China is a huge economy but it also has a huge population. Inasmuch, the average person in China makes a lot less than a German ($42,161) but considerably more than the typical Indian ($1,709). Notice that China's main growth came after 1979 -- the share of US went from 3% in 1960 to 2% in 1979 only to rise to 14% in the Age of Globalization. Clearly there is a huge catch-up of China to the USA between 1980 and 2016. 
  • Contrast China to Germany's share of the USA. Germany began in 1960 at 91% of the USA, rose a bit more in 1980 to 96% and then fell to 73% of the USA in 2016. Clearly German growth per capita was less than the USA in the Age of Globalization. Many countries were catching up to both Germany and the USA. 
  • Several countries gained against the USA in both time periods -- South Korea, Israel, and Chile. Of those, South Korea's advance was dramatic from 5% to 14% to 48%. 
  • Japan is interesting because that country had the highest catch-up for the whole time (up by 52%) but nearly all of that occurred in the 1960 to 1979 time period. Its economy slipped relative to the USA from 1980 to 2016. Several other countries had the same pattern -- first rising, then falling against US growth: United Kingdom, France, Mexico, Iran, Canada, and Germany. 
  • Argentina, Canada, and Germany were the only countries among this group to have a lower share of USA in 2016 than in 1960. Argentina's share fell by 17%, Germany's by 18%, Canada's by 3%.
  • Showing greater than a 10% catchup were Luxembourg, Japan, South Korea, United Kingdom, Israel, and China. 
  • Data for Russia and Japan are not available for 1960 and 1980. See the table notes. Vietnam has shown some catchup since 1985. 
The world is catching up to the USA in terms of GDP per capita. In some cases, the result is dramatic. Whether it is relations with China or the European Union, these differences can matter. The world has changed and our larger economic relationships should reflect these changes. Perhaps the US has spoiled some countries by letting them bend the rules. It won't be easy to change long-term habits. But it is worth a try.


Real GDP Per Capita in 1960,1980, and 2016
In Dollars and 
As a Percent of the USA
And Change from 1960 to 2016
Source: World Bank
1960 1980 2016 1960 1980 2016   60-16
US                3,007          12,598          57,638        1.00        1.00         1.00    
Lux        2,242          17,114        100,739        0.75        1.36         1.75            1.00
Japan            479          10,332          38,972        0.16        0.82         0.68            0.52
Korea            158             1,704          27,539        0.05        0.14         0.48            0.43
UK        1,380          10,032          40,412        0.46        0.80         0.70            0.24
Israel        1,229             6,229          37,180        0.41        0.49         0.65            0.24
France        1,338          12,713          36,857        0.44        1.01         0.64            0.19
China              90                195             8,123        0.03        0.02         0.14            0.11
Brazil            210             1,940             8,650        0.07        0.15         0.15            0.08
Chile            533             2,577          13,793        0.18        0.20         0.24            0.06
Mexico            342             2,802             8,209        0.11        0.22         0.14            0.03
Iran            192             2,440             5,219        0.06        0.19         0.09            0.03
India              81                264             1,709        0.03        0.02         0.03            0.00
Canada        2,295          11,135          42,348        0.76        0.88         0.73          (0.03)
Argentina        1,149             2,738          12,440        0.38        0.22         0.22          (0.17)
Germany        2,751          12,092          42,161        0.91        0.96         0.73          (0.18)
Russia  na              3,429             8,748  na         0.27         0.15  na 
Vietnam  na                 231             2,171  na         0.02         0.04  na 
Russia is 1989; Vietnam 1985

Tuesday, July 17, 2018

Is Inflation Back?

Is inflation coming back? Are hoola hoops returning? I don't really know since I still don't know how to predict the future. But people want to know answers to these kinds of questions so we devise ways to think about the future. One way is to hire a psychic or you could buy a Ouija Board.

In economics we resort to two well criticized methods -- we base forecasts on imperfect theories or take a walk through the data. While inflation theories can be quite complicated, many of us today throw them around like salmon at the Seattle Fish Market. The simpler the better. The economy is stronger than it used to be. Excess capacity is diminishing. Presto, firms can get higher prices for goods and services and inflation is higher. Job done. Way to go dudes.

Sometimes people or what we sometimes refer to as the "street" take these sophisticated theory-based forecasts seriously. Those very important people who comprise the Federal Reserve Open Market Committee (FOMC) take this information seriously and have announced that they have diverted their war against unemployment to a war against inflation. Or in more common layman's language they decided to raise interest rates four times this year.

When the Fed announces a plan to raise interest rates four times in a year that is big stuff. Some emerging markets suffered already as rich folks moved their money back to the USA in anticipation of jucier returns here. Some folks have decided to postpone their purchases of SUVs and garden condos because of higher interest rates. People who worry about inflation are now even more worried about inflation because the Fed would never lie. If the Fed is worried about future inflation then so should they.

While other parts of inflation theory would argue against a sustained rise in inflation, we ignore those irritating little details and sweep them under the rug. I have covered those points in recent posts and don't want to go over that today. Let's just say that most people seem to be clinging to a theory that predicts that strong US growth is going to raise inflation.

Today I want to play games with numbers. I chose to look at recent inflation rates. There are at least as many inflation rate indicators as there are SUVs. So one has to make a choice or write a 700 page dissertation. I chose the measure supposedly used by the FOMC -- the rate of change of the personal consumption expenditures (PCE) deflator. The PCE deflator is very much like its more well-know cousin, the Consumer Price Index (CPI), but it is a lot prettier and dresses better.

There is a version of the PCE deflator that ignores changes in food and energy prices. Food and energy prices are more erratic than a Trump behind a Twitter board. By ignoring F&E in an inflation measure, we focus on things that are less erratic and more sustained. Policy is supposed to ignore all those random fluctuations and focus on more sustained or persistent changes in prices.

I decided that since inflation of the PCE deflator less F&E has been rising for about 7 months -- I would focus on the 7 month annualized change in that index. Those numbers are found in the table below. I am comparing these 7 months changes over 7 month time periods since near the end of the last recession. Thus the table looks at inflation information from 2009 to 2017.

We begin the story by looking at the bottom numbers in the bottom of the table, 2.08 and .04. The 2.08 is the moving average of the inflation rate over the seven months from October of 2017 to May of 2018. Looking up that column you see its the highest number. Thus we see that inflation is higher now. The 0.4 says it was almost half of a percentage point higher than in the previous 7 month period. So that data shows inflation (PCE less F&E averaged over 7 months) is clearly higher.

Does the rest of the table tell us anything else about inflation that could be useful when thinking about the future? Notice that some of the rows of numbers are in red. In those rows the inflation rate in that 7 month period was lower than in the previous 7 month period. Inflation has not gone up linearly since 2009. It goes up and then it goes down. I chose 7 month moving averages because that time coincides with the latest increases in inflation -- and because it is a long enough period to be measuring sustained changes.

The point is that inflation has not sustained itself at higher levels since 2009. It bumps up and then it bumps down. Notice in 2016 there were back-to-back seven month periods when the inflation rose by .29 and then .44 points. Surely inflation was on a tear. But then those two periods were followed by  a seven month decline by .83 points. Hmm -- not so much a tear.

I'm not going to bore you with a discussion of all these numbers. But I do think that the two recent bouts of inflation from early 2017 to early 2018 do not prove that inflation is roaring back. Those two periods are not unlike what happened the year before and from what often happens in history after the inflation rate rises for a while.

There is no reason from either data or theory to be sure that inflation will come roaring back like a World Cup player after encountering what appeared to be a life-ending fall on the turf. I am happy the Fed seems to have ended its vendetta against unemployment but that doesn't mean they have to turn their guns on inflation. Just slowly return monetary policy to normalcy. That's all they need to do. Quit scaring the rest of us with your anti-inflation rhetoric. Extreme changes in policy from the frying pan into the fire can cause recessions. Here's a great idea -- let's have a monetary policy that goes from extreme to normal!

Personal Consumption Expenditures Deflator
Less Food and Energy 
Annualized Percent Change, 
Seven Month Moving Average

7 Mo
Avg Change
2009 Aug 1.46
2010 Mar 1.57 0.11
2010 Nov 0.89 -0.68
2011 May 1.8 0.91
2011 Dec 1.7 -0.1
2012 Jul 1.93 0.23
2013 Feb 1.59 -0.34
2013 Sep 1.25 -0.34
2014 Apr 1.78 0.53
2014 Nov 1.43 -0.35
2015 Jun 1.3 -0.13
2016 Jan 1.59 0.29
2016 Aug 2.03 0.44
2017 Mar 1.2 -0.83
2017 Oct 1.68 0.48
2018 May 2.08 0.4

Tuesday, July 10, 2018

The Age of Communication

My last two posts were more philosophy and less economics. How about a third one? Let’s call this one the irony of the age of communication.

Can one doubt that we are living in a new era based on communication? It sounds modern, doesn’t it? Think about it. We have Alexa in our living rooms. We spend a lot of time talking to her so that she will play music for us. She also turns on and off some lights while we are on vacation. I hear she listens in on our conversations but that is for another post. What matters is that I can communicate with a robot sitting on a table.

I also can communicate with people. Remember when making an international call was costly and difficult? Remember when making a long-distance domestic call was advanced? No more. And now you can even see the people at the other end if you use Skype or your iPhone. We can talk and talk and talk. Grandpa, did you gain a few pounds? Ha hah. Hey, Grandma is that a little mustache on your lip?

When I say "Hey Google" to my phone, I can communicate an information need. It’s more fun than typing into my Google search bar. Then Google tells me stuff that I forgot. Hey Google, when was Dolly Parton born? Hey Google, what year did Elvis die? When was Party Doll banned in Boston? I can even look up the seven signs of a coming heart attack. How cool is that? And I can do all this in my easy chair, in my car, and while walking on a crowded sidewalk.

This really is the age of communication and possibly the age of information and communication (I&C). Remember when we were kids and we had a huge bookcase in the living room that held our family encyclopedia? We had the kind you get when you accumulated enough Green Stamps. More financially successful families had the version by Britannica. But both did the same thing – they connected us to all sorts of facts. Now we don’t need a bookshelf or thousands of pages of paper and print. We now have computers, tablets, and phones. All that information and more is easily found in those tiny little boxes. It is more accessible and much cheaper.

All the above sounds pretty good. But here is what worries me after my fourth JD. Is there any connection between knowledge and the age of I&C? A na├»ve person would think there was not only a connection but a damn good positive one. That is, with more information and communication at our fingertips, surely we must know more and surely we must have more positive control over our environment. Surely more I&C makes us better off. 

Imagine taking a physics class where you learn all sorts of important things about the world. Things that make your life better. For example, Professor Bortell taught us about gravity and made us repeat several times that what goes up must come down. I can still remember that and so far I have not once hit myself on the head after throwing heavy objects into the air. Today’s physics students have to learn the same theories but I am guessing that job is made all the easier because of the ease of finding information about things that we could only find in our heavy, thick textbooks and encyclopedias.

But then I started thinking and wondering if there is a trade-off between knowledge and I&C. Is it possible that it allows people to squander their time rather than enhance it? We all know that learning a language, for example, takes a lot of time and repetition. It does not matter how much easy information you have accessible about Spanish pronouns or German sausage. Ha Ha. I meant German verbs. All that information availability is fine, but it cannot replace the 10,000 hours you need repeating Donde esta la biblioteka.

Think of all the things you learned in your life that needed time in the saddle. How did you learn multiplication of numbers up to 15? How did you learn the location of each state? All the classes of animals and plants? How did you learn algebra? Biology? How did you learn how to say how did you learn? Sorry about that one. But my point is that learning takes time and effort and then even more time and more effort. Maybe you were one of those people who found learning easy. Lucky you.

When I go anywhere these days I marvel at all the people who are connected – talking on the phone, writing texts, watching videos, listening to music, and so on. And then I worry that all these people are getting addicted. Can you go for more than 17 seconds without checking your email? Facebook? I go to a gym. Most people are there for less than an hour and some of them are on their phones the whole time. What kind of workout is that? You can't leave your phone in your locker for 60 minutes? 

This new drug of I&C gives us more and easier excuses. It’s not fun to do the hard work of learning, of acquiring knowledge. Many of us crave excuses to avoid this hard learning. If so, how are you finding the time to memorize your multiplication tables? That’s what I wonder about. Excuses have always been around. To avoid studying, my roomie and I used to walk across the bridge over Interstate 75/85 to have a chili dog and watch Laugh-In on TV at the Varsity Restaurant in Atlanta. On a nice day, one can always stare at the beauty of the surroundings. Excuses from work have always been there. But it seems to me that the Age of I&C has taken this one step further. Phones demand our constant attention. How do we find time to learn valuable things? Alexa, did the cashier give me the right change? Please!!!!!

We often hear people lament the fact that US students are falling behind those of other countries. How are we going to generate enough scientists and engineers if we are all sitting around staring at our phones? How are we going to create enough voters who are able to make good political decisions when it’s a lot easier and more fun to join a radical Facebook group? Knowledge is indispensable to a prosperous and happy society. I am not so sure that I&C is going to get us there. 

Tuesday, July 3, 2018

Uncivil Behavior

I hear more and more discussions about uncivilized behavior. It seems very uncivil for people to be uncivil. It’s not very civil. The synonyms polite and courteous come to mind when we think about civil behavior. The uproar over our President’s uncivil behavior is both warranted and, I think, a bit overbearing.

Warranted? Of course. We want our presidents to act presidential. A president should be calm and wise and strong and a model of behavior for nine-year old boys and girls. He or she should wear lovely appropriate clothing with nice ties and grey business suits. When President Trump tweets and sometimes when he speaks at pep rallies, he seems more like a football linebacker’s coach than a president. His critics call him crazy but many of them have never been around some of my relatives. If you want to see crazy, that’s crazy.

So the hullabaloo over President Trump’s behavior is warranted. Only Roseanne Barr can create more of a stir. But is it all a bit overbearing? Are the critics a bit disingenuous?

My first point is that while we live in a very educated and civilized society, most of us do not always act civilly. My son is very civil. But when he feels that a driver needs a little education, he is quite colorful in how he provides the necessary education. Admit it, even your favorite philosophy professor has flipped off a driver who cut her off. Civilized? When you careen down a narrow hallway reading the latest exciting tweet from your mother on your iPhone and make everyone else jump out of the way, that’s not exactly civilized. And what about that stream of four-letter words that escape your once pristine mouth cavity when your cable goes out in the middle of penalty kicks? 

My first point is simple. We are very civil people who act civilly most of the time but when we think it is warranted, we act more like the Sharks at a Jets reunion party. So now the question is not if President Trump acts uncivilly, but under what conditions it might be okay for any president to on occasion act like a maniac. It might be to educate someone who proves hard to educate. We sometimes say it takes a two-by-four to get someone’s attention. Or it might be that it is simply hard to convince someone that he must change an old practice. You can’t teach an old dog a new trick. Maybe you can – but you must speak louder or carry a bigger dog biscuit.

That gets me to President Trump. While many of you romanticize the civility and beauty of our foreign friends, the truth is that managing relationships with foreign leaders is not much easier than planning a wedding. A country is defined as foreign because the people in that country have chosen not to have English as their national language and they insist on singing their own national anthems at sporting contests. They also seem to prefer employment for their own citizens, and if you ever decided to bottle your latest batch of brandy under the name of Armagnac, you would find your French friends are no longer so friendly. America first? Hmm. How about France first? How about Germany first? Is it not clear that China is first?

Point? Even with our closest foreign friends, the relationships are contentious. Just like you and your best friend Howie when you got into that fight over who is best, the Beatles or the Stones. Being best friends brings out both the best and the worst in us. Inasmuch, having a tough stance and using rough words with Canada does not mean we like Russia better than Canada. It just means there might be a lot at stake between close neighbors who each care very much about their own citizens.

Back to the two-by-four. The world in 2018 is not the world of 1946. Europe has more than overcome post-World War II rebuilding. Many Asian countries including China are not the poorest backward nations of the world. The economic relationships between the US and these countries are also not the same as they were 50 or more years ago. But it is very possible that there are remainders or vestiges of economic policies that do not treat the US equally in 2018. The world has changed, and the policies must mirror those changes. 

Changing those policies is not easy. Many Americans are frustrated that a patient, civil approach doesn’t change things fast enough. Somehow we have to get the attention of our friends so they fully understand that the most current relationships do not reflect the shrinking economic gap between the rich US and its trading partners. I don’t mind a little uncivil language and tough bargaining if it means that we move economic relationships to more appropriately parallel true economic disparities. The risk of tough talk and actions is more of the same. That's not what we want. We do not want a trade war or any kind of war. But knowing that our partners have their own domestic situations to protect, it won't be easy to get their attention. Continuing the same civil approaches we used in the past might not be enough.

Tuesday, June 26, 2018

Can't Get No Satisfaction

No data this week. No macroeconomics this week. On to “Other Stuff.”

In their 1965 song Can’t Get No Satisfaction*, The Rolling Stones sang something like “When I’m drivin in my car, and a man comes on the radio. He’s tellin me more and more about some useless information. Supposed to fire my imagination…”

How prophetic! While this topic has bothered me for quite a while, it really came home to roost this last week with respect to the Kim/Trump Summit. I have never heard the same crapola repeated so often in the media within a week.

But let’s back up. I love the fact that we have freedom of the press. They should be free to decide what to report and how many times to report it. That’s their business decision, and they are free to do that. But that does not mean that their decisions are always good, and in the case of the last week I think their decisions were horrible.

What happened to the good old days of news with Walter Cronkite? We had Ralph Renick in Miami, but it was the same thing. They told us what was going on in the USA and to some extent in the world, too. When it was time to render an opinion, the lights flashed and horns blared (exaggeration), and we all understood this was not news. It was Ralph’s opinion about something. Lights would stop and then back to the news.

But even more important than the distinction between news and opinion was that Ralph was not a professor of a music or of a foreign language. In music and foreign languages, one learns and becomes accomplished through practice. And then more practice. It is normal in music and language learning that you would do the same thing over and over and over. You expected that. Donde esta la biblioteka? I must have said that 10,000 times in 10th grade Spanish class. I am currently learning to play the guitar. I learned how to do a G chord. Four years later, I am still struggling with mastering the G chord. And no Tuna – I don’t mean G string!

You think I am on my fourth JD but I am not. My point is that the press – whether on the left or right – have decided that it isn’t enough to give us their opinion. They have to hammer it in. And then cement it in. Apparently all the other stuff that is going on in the world isn’t worth their time and effort. They would rather spend their endless hours of news time hammering in simple opinion themes.

In the last couple of weeks, how many times have you heard that Trump was giving a world stage to dictator Kim? How many times did we hear that we will retain sanctions until Kim has totally dismantled all his nuclear weapons including his Lionel train set? How many times does it take?

Keep in mind that in all the lead-up to the meeting between Kim and Trump, there was actually very little news. Yes, there is a meeting. Yes, it is in Singapore. Yes, Trump said he will insist on a total end to Kim’s nuclear war capability. Yes, Kim wears a striped suit and has a cool haircut. But that was about it. After the meeting, there was a very short meeting summary that said almost nothing. How many times can a reporter tell you that a summary was short and said nothing? Apparently 10,000 times would be okay. Most of us can repeat the main left and right talking points about Kim/Trump in our sleep.

Is there nothing going on in the world that we are subjected to repeats of the exact same information and themes multiple times each day in multiple media? Why do we hear over and over the minutia of Hillary’s emails, Trump’s Russia conspiracy, Comey’s latest burp, and so on. Does the press really think that most of us could not get through a day without having them enflame us with these ongoing but sloth-like sagas? Why can’t we have a moratorium on all this and ask the appropriate bodies to decide if Trump should do an extra 10 push-ups while Hillary goes to Charm School? Shut out all the daily noise. Wait for a decision. Then report it. In the meantime, shut up. Please. 

Then maybe we could receive some in depth and thoughtful insights into why we can’t win a war on poverty or crime or can’t seem to balance the nation’s budget. Or maybe we could learn more about why some Italians might want to follow Britain in exiting the European Union. Give us the news and give us your opinion. But please, stop being the good language professor. It's getting really boring. La bioblioteka es enfrente de la iglesia.

*Otis Redding made a wonderful rendition of this song too. Not sure which one I like more. 

Tuesday, June 19, 2018

The Fed and the Next Recession

I had so much fun last week graphing wage changes that it spilled over to another graph this week. This time, the graph plots interest rates.

Why interest rates? Because interest rates are interest-ing? Ha ha. Of course they are interesting. But a better reason to focus on interest rates today is because the worry-warts are screaming that the Fed is going to send us straight to recession hell. While many of you hate the Fed and wish we were back in the good old days of the gold standard when there was no Fed or when the Fed was reduced to less importance than a milk delivery driver, the rest of us are less extreme. But we do worry that the Fed is prone to over-reacting, thereby becoming the winner of the contest for the most severe unintended consequences. We worry in 2018 that inflation will begin rising, the Fed will raise interest rates, and the economy will come crashing down around our ears.

So, we are all riveted on interest rates. And if we looked at interest rates in the summer of 2018 and compared those rates to those in mid-2016 or even mid-2017, we might get a wee bit scared. But the point of today is to create a longer historical perspective.

First, let’s define the interest rates plotted below. Both are market rates* on government securities. The top line is the rate on 30-year Treasury Constant Maturity Bonds. The bottom line is the rate on the 10-year Treasury Constant Maturity Bond. Neither of these is a policy variable directly controlled by the Fed. But both are very popular and are generally taken to be barometers of market interest rates. Many market rates are influenced or tied to the 10-year rate. The 30-year rate is a good proxy for longer-term bonds in general.

If the Fed implements a policy to raise interest rates, it usually conducts an open market operation whose intent is to change something called the Federal Funds Rate (FFR). A change in the FFR then raises the cost of funds and ought to impact many market interest rates. A successful Fed policy, therefore, will result in a wide swath of interest rates changing even though the Fed only directly controls the FFR. It is possible, however, that many of these market rates do not behave as the Fed desires.

The graph shows that market rates have risen in predictable fashion in 2017 and 2018 as the Fed raised the FFR. The FFR was set at virtually zero from around 2009 through most of 2015. Notice, however, the roller-coaster rides of both rates in the chart. The trend of both rates was clearly downward but there were very clear episodes of rising/falling cycles within that downward trend. With the FFR constant, there must be other things that affected interest rates. Notice the increases in rates around 2011 and then again in 2012 to 2014. Both of those periods saw rates rise and then fall by about as much as they rose. All this happened with a near zero FFR. 

If these other things could be important from 2009 to 2015, then presumably they might be important in 2018 and beyond. That is, if the Fed decides to raise the FFR rate in 2018, perhaps market rates will not follow. Perhaps other factors will keep rates from rising or even contribute to a fall. And this means knee-jerk forecasts that a Fed tightening cycle will lead to a recession could also be wrong.

What are these other factors that might prevent market interest rates from rising as the FED increases the FFR? First, consider real GDP growth in the US. Rapid growth often puts pressure on financial markets as the demand for loans exceeds the supply. But who is seriously forecasting strong economic growth in the US? While some forecasters imagine faster growth emanating from the recent tax cuts, few of them think growth will remain strong for very long. A barrage of studies worry that low productivity and labor supply growth imply weak US growth for the foreseeable future. Look at the diagram. The 30-year rate is barely rising compared to the 10-year bond.

Second, interest rates often reflect expectations of future inflation. Higher expected inflation means a lender gets paid back in dollars that are worth less. So they demand a higher interest rate today to compensate for the loss of buying power tomorrow. It is true that some forecasters believe that inflation is going to increase in the USA, but few see reasons for sustained higher inflation in the future.

Third, the value of the dollar is important for interest rates. If the dollar declines in value relative to other key currencies, this leads to more inflation in the USA. If one believes the dollar will fall in the future, this means investors will want to move out of US assets. The selling of these US assets raises interest rates. The dollar has not been depreciating lately. It has been rising in value. This reduces inflation and interest rates. Believing the dollar will continue to rise also lowers interest rates*.

Fourth is the risk scenario in other countries. As investors worry about economic problems in Europe (Italy, Britain ) and Asia (Korea, Japan), they increasingly want to invest in the USA. Even with warts in the USA, what matters is who has the bigger warts. The more negative news you read about Europe and Asia, the more the global appetite for US assets increases. This drives the price of US bonds upward and reduces interest rates. 

In summary: Modest US economic growth, stable inflationary expectations, a higher value of the dollar, and economic riskiness in Europe and Asia should all combine to put downward pressure on interest rates.

I cannot predict the future any better than you can. Some folks want you to believe that Fed policy will raise market interest rates and take the air out of the US economy. While Fed policy sometimes works that way, 2018 and 2019 are not typical years. It is altogether possible that the Fed will continue raising the FFR, and the result will be a continued slow growth economy with relatively stable inflation and interest rates. 

*Students often have trouble with idea that higher bond prices mean lower market interest rates. This is because we forget the these bonds have a fixed coupon yield or return. One bond might promise 5% to the holder. Thus a $100 bond gives whoever buys the bond $5 each year. If you buy such a bond in the open market on a bad day when the price is only $50 then you get $5 interest on your $50 investment. That's a 10% return! The lower market price for the bond means a higher market interest rate. If you buy the bond on a big day for the bond market, you might pay $200. You still get interest of $5 and therefore your market return is only 2.5%. So we get the general rule -- the higher the market price of the bond the lower the market return. The lower the market price of the bond the higher the market return. 

Tuesday, June 12, 2018

Wage Growth in a Tight Labor Market

Much has already been written about the employment report for May 2018 that was published on Friday, June 1. The unemployment rate, like your friendly mole, once again dug deeper and went to an 18-year low of 3.8%. This means that the labor market is growing tighter, which means that firms are finding it harder to find the right employees. There are many articles being written now about this business challenge as firms use innovative ways to try to attract new employees or to hold on to existing ones. Of course, a common approach to attracting and keeping workers is raising wages and benefits. 

Wages, therefore, become a critical economic variable these days. This week I decided to look at wage behavior in the USA to see if there are signs of firms using wages to ameliorate labor market tightness. The graph at the bottom looks at monthly percentage changes in average earnings for all employees. 

Reading graphs is definitely an art form. I ain't Picasso but let's give it a shot. Each dot on this graph records how much earnings grew in that month. If you go to the very last dot on the graph, it says that in May of 2018 earnings grew by 0.298 compared to the value in April of 2018. The one-month percentage change was 0.298%. For sake of our eyeballs, let's round up and call that a one-month increase of about 0.3% in May. If that one-month increase lasted for a full year, then wages would increase by about 3.6%. 

That's a big if and is only suggested so that we can put the one-month gain into an annual perspective. If Lebron scored 12 points in the first quarter of a game, he scored 12 points! But we could say something like -- dude, that's like scoring 48 points in a whole game. Wow. Groovy. He may or may not score 48 in that game but the 48 gives us another way of understanding the 12 he did score in Q1. 

Whew. I am thirsty. So if you read the above, you know that the 0.298 increase in May of 2018 is about a 3.5% annualized increase. That sounds pretty good. If the cost of living went up by 2% in May, then you might be happy that your wages grew faster than your expenses. 

The reason I placed the whole graph below is that we can evaluate the most current increase better by looking at past changes. This graph has monthly ups and downs from April of 2006 to May of 2018, so we can compare over a 13-year period. My task today is to evaluate the 0.298 of May 2018. 

Is it the highest point on the graph? 
     Absolutely not. Just in the last couple of years there were many months that had stronger growth in earnings. 

Is it the lowest point on the graph? 
     Absolutely not. There are even more months in which earnings grew much slower than 0.298. 

Is there any pattern to the monthly changes? 
     It looks like whack-a-mole to me. Most ups are followed swiftly by downs and vice versa.

Do you observe an upward or downward trend in the dots? 
     From about April 2006 through June 2010, there seems to be a downward trend. That is, on average, wage growth seemed to decline. Wages were growing but at a slower pace.  
     But from June 2010 to about October 2011, the wage growth picked up. From my eyeball, it appears that the average monthly percentage change during that time was about 0.2 or an annual rate of about 2.4%. 
     Then from 2012 to now, there appears to be no discernible trend change in earnings. For six years, we got ups and downs around a mean that suggests wage change at about 2.4% per year. If you removed the crazy negative data point in October of 2017, you might see some increase in trend starting around October of 2016. Of course, you might also see pink elephants.

Why go through all this madness? Because there is nothing like the data. You will see a lot of interesting and intelligent articles about wage change in the USA. Smart people will discuss the May data point and tell you that the 3.5% growth in May is higher than the 2.4% rate that prevailed over the last eight years. These folks may want to convince you that wages are spiraling higher -- and maybe they are. But looking at this graph from beginning to end does not make me very confident that we are on a new upward trend. I remain skeptical that the 3.5% means much of anything. I wonder what we will learn in July about June. 

Tuesday, June 5, 2018

Inflation: Viva la Difference?

Venezuela has been in the news a lot lately. While the news has covered a lot of different issues from food shortages to returned prisoners, I was very impressed with their inflation rate. According to the International Monetary Fund, the inflation rate of Venezuela in 2017 was 2,818.4 percent*. That got me wondering about the state of inflation around the globe. The US has experienced remarkably low inflation in the past decade; it came in at 2.1 percent in 2017. Are most countries like the US or more like Venezuela?

While my goal today is less about policy and more about simple comparisons, it won’t hurt starting out with a little background about inflation, its causes, and its consequences. Inflation is a straightforward concept. It is a macro concept that measures how much prices are changing in a nation. It is calculated by averaging together the prices of a bunch of things we usually buy. The Consumer Price Index is one of many measures of inflation. It looks at changes in the prices of the goods and services we most often purchase. Thus, we often speak of it as a measure of the nation’s cost of living.

When the cost of living is rising faster than our incomes, the buying power of our income falls. This raises caution because it means people find it harder to continue buying the same quantity/quality of goods and services. Some people think a little bit of inflation is good but when it reduces our ability to buy we get concerned. You could think of this in terms of inflation stages. Low inflation is okay and might be beneficial as most of us look forward to our wages rising, and firms often find life easier when their prices are increasing. When inflation gets higher, we begin to worry about purchasing power. When inflation accelerates even faster, we get even more concerned. At even higher rates, it creates additional concerns if it causes trading partners to shun our high-priced goods. It would cause alarm if it was a signal of deeper economic problems and foreigners decide to stop investing in our country.

With that brief background we wonder what was going on with respect to inflation in the world in 2017. The table below contains inflation information I took from the IMF. The information is divided by the six regions of the world. These regions account for 150 countries and sub-regions.

The first column contains the name of each region. Look below the table for the full region titles. In the ( ) is the number of countries and sub-regions reported in each region. The Advanced Countries include 40 countries/sub-regions.

The third column in the table labeled AVG gives the average inflation rate for all the countries in that region. The table is ordered by these inflation rates. In 2017, the Advanced Nations' inflation rate averaged 1.7%. The region with the highest inflation rate in 2017 was the Middle East. Those 23 countries averaged 7.2% inflation in 2017. 

Clearly, from the table, emerging markets experienced significantly higher inflation than that of the Advanced Nations.

The second (Low or L) and fourth columns (high or H) show you the range experienced by countries in each of the regions. One Advanced Nation experienced deflation in 2017 of 0.5%. The highest inflation rate experienced by any Advanced Nation in 2017 was 3.8%. Notice the range of inflation rates for Emerging Asia – from 2.2% deflation to 7.5% inflation.

The number that sticks out the most in the table is the 2,818.4% inflation rate experienced by Venezuela in Latin America. The 30% rate for the Middle East came from two countries: Egypt and Libya.  

The fifth column in the table is a measure of the inflation dispersion within each region. It tells you how many of the countries in that region had inflation rates of 3% or less. Of the 40 advanced countries, 93% had inflation rates of 3% or less in 2017. In contrast, only 15% of the CIS countries experienced 3% inflation or less. Despite the 12% inflation rate of Turkey, 92% of the countries in Emerging Europe had inflation of 3% or less.

These numbers raise more questions than we can possibly answer today. They communicate the idea that inflation in 2017 was experienced in highly varying degrees around the world. In some countries, prices fell while they were rising by almost 3,000% in others. Despite world trade and despite globalization, there is no such thing as a common inflation experience. While a casual viva la difference might sound like fun, the underlying point is that inflation has consequences, and both the causes and consequences of inflation are alive and well. We breathe easier in the USA with such low inflation. But the world in 2017 shows that when the right mistakes are made, damaging inflation could be closer than you think. 

           Inflation Rates, 2017
Regions             L      Avg     H          3%
Advan (40)     -0.5     1.7      3.8        93%
Em Asia (30)  -2.2     2.8     7.5         56%
LA & C (32)   -0.2    4.1** 2,818.4   53%
CIS (13)           2.5     4.7     13.7       15%
Em Eur (12)    0.7     6.8     11.9       92%
Mid East (23) -1.0     7.2     30.0       48%

*The data I used for this post came from the IMF’s World Economic Outlook for April 2018. More precisely, they come from Appendix Tables A6 and A7. The inflation measure quoted here is the annual percentage change in the Consumer Price Index. The complete names for the regions are:

Advanced Nations

Emerging and Developing Asia  - China, India Vietnam and others

Latin America and the Caribbean – Argentina, Brazil, and others

Commonwealth of Independent States  -- Russia and others

Emerging and Developing Europe – Turkey, Croatia, Hungary, and others

Middle East, North Africa, Afghanistan, Pakistan – Egypt, Saudi Arabia, and others

**The 4.1% average for Latin America excludes the very high inflation rates for Venezuela and Argentina