Tuesday, September 27, 2016

Ozzie and Harriet would be Mortified

A man and his wife were driving down a curvy mountainous road. The wife was driving.  They were arguing. All of a sudden the man yells out "Pig!" The wife looks at him in disdain and says "Jerk" and then immediately she ran into a large hog crossing the street. 

How many situations are like this? How many times do we go off half-cocked? How many times do we perpetuate arguments and differences of opinion because we fail to consider other viewpoints? Are we really always right and the other people are always wrong? Are there no truths somewhere in between? 

Consider all this in the context of the coming election. The majority of things we read and see today are not involved with anyone trying to convince us as to the best way to move forward in a very complicated world. Much of what we hear is personal attack – Hillary is a liar and a corrupt person. Trump is dumber than the Three Stooges and will immediately start World War III. When I discuss the election with my liberal friends most of them imply that if I vote for Trump I will have willingly sided with the devil. My conservative friends explain that voting for Hillary makes me no longer worthy of salvation. Either way I won't be invited to many parties. 

To me all this seems sad and worrisome. It is sad because it further divides us. We are not debating policy – rather we are making our differences more vivid and rigid. It is worrisome because it promises to continue to prevent us from seeing the world as it really is and trying to fashion remedies for our most challenging problems.

Before you start reminding me of all the evils that the other guys stand for and roasting me over a gumbaya-less campfire, let me explain a little more from where I come. While it is true that the people on the other side of the political aisle see the world differently and say some scary things, let’s try to image what we have in common.

·       We all, except for Charlie the Tuna, are part of the human race.
·       If we have families we want them to be happy and safe.We want our children to enjoy youthful experiences but also to learn responsibility
·       We want access to high quality healthcare that is affordable.
             If we have children we want them to grow up learning and to be prepared for life.
     We don’t want to wear gas masks to work and we want good jobs.  
·       We want to be a positive force in the global economy while recognizing that there always seem to be some countries or parts of countries that want to hurt us.
·       We believe that governments have proper roles in society but the positive outcomes of government are not automatic.
·       We know that governments, business firms, labor unions, and football teams are composed of mostly good people but to some extent they are populated by some really evil and corrupt individuals.  

Some of you are gagging so I will stop. I could go on. And on. And on. But its true. We have many common goals. I know – there is a conspiracy of progressives who want us all to become Communists. I know – there are many conservatives who want to preserve only the fittest and the rest be damned. I don’t disagree. There are some people like that. But what I also know is that most of us just want to get up in the morning, eat our Post Toasties, send our kids to school, go to work, and start planning weekend parties! 

We definitely disagree on the particulars of how to attain the above outcomes. We even disagree about the nature of the human spirit. But come on -- in a country of almost 330 million people, not everyone is going to see things the same way. My way or the highway is not going to work. 

But we can’t make any real headway because more and more of us get processed by the dividers who, by the way, get money and power by continuing to divide us.

We don’t have time to waste. As we hurl insults at each other, Rome burns. How do we deal effectively with ISIS? With other national enemies? National debt? Two-way racism? Economic growth? Crime? Security? and so on?  

Each of the parties will try to convince us that their way is the only way as they use every trick in the book to turn us against their evil competitors. But the evil competitors are mostly just like us. They want to see problems solved and get on with their lives. And worse, as each side slowly creates enemies lists we make it increasingly impossible to see our problems objectively and to find solutions that make any sense. We are on a path to Hell. 

Ozzie and Harriet would be very disappointed in us.

Tuesday, September 20, 2016

Joe Friday: Just the Facts M'am

As we come closer to Election Day in the USA we will hear and read a lot of things about the US economy. The blue team will brag about their victories over incomes, employment, and poverty. The red team will say the economy plods and weaves like a drunk on Kirkwood Avenue at 2 am. As you know I love data and so I decided to play around with some familiar information. It is impossible to summarize all economic data in a small space so I decided to focus on recent changes in real GDP and its components.

I stick to the facts today. I think the facts tell a clear story about slowing economic growth and one that deserves a policy discussion. But that discussion will have to wait. I already used up today's word count. 

GDP is a measure of the nation’s output of goods and services. Real GDP means that we are measuring output in constant prices –meaning that price change is not part of the change in real GDP. If real GDP increases it is totally because output or quantity produced changed. We like to analyze output because it usually has a strong association with things like employment, incomes, and sales of Jack Daniels.

GDP is output. It does not tell you about financial wealth. Of course if we are wealthier we often buy more goods and services but GDP does not directly measure wealth. It does not measure poverty and it does not measure distribution of income.

I wanted to examine near-term changes in real GDP so I did the following. For real GDP and each of its major components I looked at the annualized* percentage change over the past two quarters, past four quarters, and past eight quarters. By doing that I could get an idea as to whether things are improving, worsening, or staying the same.

For example, in the past two quarters real GDP grew by an annualized 1%. That was slower than the 1.2% it grew over the last four quarters and was less than half of the 2.1% annualized rate it grew in the last two years. These calculations suggest that things are clearly worsening. In 2016 the US economy is growing considerably slower than in the past year or two. And by the way – even the 2.1% rate two-year rate is not a strong growth rate for the USA.

Rather than speculate on a lot of causes of this slowdown, I decided to focus today on the components of real GDP. Recall that the Product Account approach to measuring real GDP focuses on the buyers of the output. The standard approach sees four buyers of US produced goods and services – domestic consumers, business firms, (federal, state, and local) governments, and foreign buyers. If real GDP is slowing it is because one or more of these buyers have slowed their purchases of US goods and services.

So I looked at consumers first. Households spent an annualized 4.5% more than two quarters ago on goods and services. Compared to the 1% overall GDP growth number for the past half-year, that’s a very strong rate. Way to go consumers! But even consumer spending has been slowing. Over the past two years it grew by an annualized 6.2%; it grew by 4.8% over the past year; and then 4.5% over the past half year.

Consumers desire for newly-built residences also flamed out. What we call Residential Construction declined by -0.2% in the past two quarters. Residential Construction grew by 5.7% in the past four quarters; by 8.5% over the past two years.

What about business spending? Business firms buy newly produced structures, equipment, and intellectual property. Here the news is ugly. Equipment spending was down by almost -7% in the last two quarters. That was a major decline from the -1.9% in the last year and the 0.7% annual rate of the past two years. Buying of new plant and other business structures shows a slightly different but dismal pattern of contraction. For example, spending on Structures was down by an annualized -4.3% in the past half year; -7.1% in four quarters; down -5.2% annualized in the past eight quarters.  The only positive story for business spending was for intellectual property purchases – growing at about 5% over the past two years.

If you like numbers instead of growth rates – business spending was up by about $30 billion dollars since the second quarter of 2014. During that same time period personal consumer spending was up $674 billion. Business spending on plant and equipment is the main way we expand both productivity and productive capacity. 

US exports are goods and services we sell to foreigners. The story there is not encouraging and falls in line with a slowdown theme -- declining by -0.2%/-1.3% in the last two/one years respectively. Exports leveled with 0.2% growth in the two past quarters.  

Let’s turn to some of the government buying numbers**. There is nothing particularly interesting coming out of federal versus state and local government spending. All government spending has slowed in the past year and past six months. More interesting is the breakdown of federal spending between defense and non-defense. In the past 6 months, defense spending slowed by -3.1% after contracting by -0.8% in the past year and by -1.5% in the past two years. Non-defense spending, in sharp contrast, grew by 2.3% over the past six months; 2.9% over the past year, and 3.3% annualized in the past two years.

I know there are a lot of things to discuss with respect to the economy and national policy. But the recent real GDP figures are very clear.

·       The economy is slowing.

·       The strongest growth sectors have been household spending on goods, services, and houses, – though even that strong growth is declining over the past two years.

·       Also contributing to positive economic growth was non-defense federal government spending on goods and services.

·       The weakest sectors showing significant contractions are business spending on plant and equipment and defense spending.

*All the figures in this post have been annualized. Whenever you compare different time periods you need to find a way to make them comparable. By annualizing, for example a half-year change, you are calculating how much real GDP would have grown in four quarters if it continued at the same pace as over the two quarters. When you annualize a two year change – you are showing how much it grew, on average, per year. 

** The government figures quoted here reflect only government purchases of goods and services. Much of what the government spends is for transfers and net interest. That information is found in the government budgeting figures but are not a direct part of the components of GDP. 

Tuesday, September 13, 2016

Happy Trails or Fearthquake 2?

This is dangerous. It is Saturday and the time I usually begin the drafting of Tuesday’s blog post. The financial markets will open and close on Monday before I post my usual dribble. Common sense would argue to let the experts stick their necks out and say stupid things that turn out to be wrong. I could instead write about Donald’s ties or Hillary’s latest pantsuit. But no, I decided to join the fray. Don’t ever say that economists don’t live life on the edge. Please note the dripping sarcasm.

Anyway if you have a television or a cell phone, you know that financial markets did a crazy dance on Friday. The main market indexes closed 2% down and US interest rates rose. I am guessing that in some places gravity pulled things up and sinners read Bibles. It was quite a day.

Those of us who were alive and over the age of seven in 2008 remember a similar decline in the markets. In that case one decline led to another and it wasn’t long before billionaires were removing zeroes from their wealth numbers. So if people are a little crazy this week it is because they have personally seen the fearthquake’s ability to turn everything upsidedown. See last week’s post if you don’t know the word fearthquake.

Many of us are beginning the football season unsure of what to bring to the tailgate. Should we bring expensive bourbon or PBR? Was Friday a false signal? Was Friday an exaggeration? Or was Friday the beginning of hell?

I am guessing that Friday was an exaggeration. Mom, that truck is going to hit us. No it isn’t. Yes it is. No it isn’t. Well, it isn’t really a truck. It’s a toy truck.

In my stupid example the truck is a metaphor for rising interest rates. On Friday we saw what happens when more and more people became surer that a truck is going to hit them. Fed officials said this. The ECB said that. Japan said so and so. All that information helped people become more sure that interest rates are going to rise and stocks plummeted.

I don’t question any of that. But what we collectively are not sure of right now is how big the truck is. A truck is coming but how devastating will be the resulting collision?
One view is held by the naïve mathematicians. Naïve means a strong belief in mean-reverting behavior. Suppose you averaged 180 pounds for most of your life and you get ill and lose 20 pounds. A mean-reverting forecast would have you gaining 20 pounds and going back to your normal weight. If an interest rate had an average of 5% and is now 2%, then a similar approach would believe the interest rate is headed back to 5%.

Mean reverting forecasts make a lot of sense. But notice they are based on an “everything else is the same” assumption. You dropped weight because of illness. When the illness departs you gain back the weight… if everything else is the same – your eating is the same, your exercise is the same, and you still have most of your teeth.

But mean-reverting behavior makes less sense if much has changed. With respect to interest rates, has anything changed? It depends on who you talk to or read. My Republican friends would tell me that Obama has destroyed the US economy. As such capital is worth less, the economy will grow slower, and the trust in bonds has diminished. Furthermore demand, like the final third of a cheap cigar, is harder to draw and is leading to permanently lower inflation. My Democrat friends would point to the negative impacts of income redistribution, globalization, and deplorable Republicans in harming economic growth, demand, and inflation.

If these lovely people are correct, then the usual pressures that would produce a return to a 5% interest rate (from the example above) are missing in action.  That means that the changed economic reality of today and tomorrow does not imply a return to any specific higher interest rate. Surely rates will rise but will they rise by 1%, 2%, 3% or more?

These are some of the questions discussed at our Saturday tailgates. Surely our favorite teams will win by many touchdowns and the deviled eggs will be delightful and make the JD go down ever so nicely. But don’t expect that these questions will be resolved on Monday (yesterday) or today. Get your seat belt on for another good ride. Or maybe they will be resolved and today will return to unicorns and methane-free cows. 

I am guessing that the bucking will go for a while but when the dust is settled we will be back on our slow-growth economy with nervous stock prices and interest rates. Interest rates will rise but ever-so-slowly. 

I’ll end this with the lovely words that Roy used to sing to Dale,

Some trails are happy ones,
Others are blue.
It's the way you ride the trail that counts,
Here's a happy one for you.
Happy trails to you,
Until we meet again.
Happy trails to you,
Keep smiling until then.
Who cares about the clouds when we're together?
Just sing a song, and bring the sunny weather.
Happy trails to you,
Until we meet again.

Tuesday, September 6, 2016

The Fed, Fitbit and Fearthquakes

Can you weigh yourself too often? Most of us are concerned about our weight. Being too heavy or fat is not what we strive for and in many cases we ought to be concerned for health reasons. As such, measuring one’s weight or girth is not a bad idea. The question then is how best to measure.

The measure I prefer is how my clothes feel. I cannot fool my Levis. When I gain weight they scream at me. Another approach is to buy a nice scale and stand on it now and then. I approximate that once a year when my blankety-blank doctor insists on knowing how much I weigh at my annual physical. To add insult to injury he makes me wear my shoes on the scale. Others think it sensible to detect trends and to weigh oneself at least once a month. My Fitbit friends are at the extreme. They measure every second.

And that’s where I part company. And that’s where I also get to today’s topic, the Fed. The Fed thinks it needs to read the pulse of the nation every minute. As if these frequent measurements will help them manage the US economy better. Think of your weight again. Body weight is partly mystery. You and I have both gone on radical diets that lasted at least 12 hours. And guess what? The stupid scale said we gained weight. And even if weight was a little more understandable and we did lose 0.5 pounds in 12 hours or 12 days – what then would that tell us? Way to go dude. Go eat a big buffalo burger.

Good monetary policy ought to be like a good diet. It works because you apply a new sensible regime over a long period of time. Or maybe it is more like a steamroller. If the road gets bumpy then flatten it out. Don’t take a hammer and flatten each and every bump as it arrives.  Ms. Yellen’s Fitbit contains an intermittent flow of hundreds of pieces of relevant but often conflicting information on a daily basis. It has her mesmerized. As recently as last week she was still not convinced that the US economy was growing fast enough. Let’s take in a little more data today. Maybe tomorrow she will be convinced. Or maybe not.

Meanwhile what is the problem? Why can’t we just lumber along? We aren’t growing very fast but we are growing faster than most other countries. Shouldn’t we be happy and proud about that? And inflation is not a problem. Give Ms Yellen a break. This line of argument shows how successful she, her buddies at the Fed, folks in government, and the press have been about hiding the elephant in the shop. It amazes me that except for an article here and there in some business tabloids, everyone is silent about something called imbalances.

Imbalances is not a great word. It doesn’t shout “save me” in the same way that recession or rich persons or automatic rifle does. Maybe I should make up a new word. Let’s call it a Fearthquake. F has nothing to do with methane this week. F means financial. Earthquake means well earthquake. They had an earthquake in Italy recently. We know earthquakes are terrifying events. A Fearthquake is just as bad. We had a Fearthquake in 2007. We are still suffering from the aftershocks.

That Fearthquake and the looming next one come from imbalances. In the case of 2007, the imbalances were in the housing and equity markets. Maybe that is why we are so reluctant to name this evil. Many of us were enjoying price appreciate in our homes and stocks. No one wanted to rain on that parade. But the Fed learned nothing from that episode. It is totally obvious that keeping interest rates low to negative for almost a decade is causing the economy to walk slowly and with a limp. Saving makes no sense in this economy. 

One wonders why productivity is so slow. Has there ever been an economy in the world that had strong perpetual growth in productivity and output with such little saving? And risk tolerance. I am not a finance expert but corner one if you get a chance. Because of low interest rates households are moving into bonds instead of money; into risky bonds instead of low risk bonds; into equities instead of bonds, and so on. And firms are doing the same things. Government believes they can borrow more and more – and a rising national debt will have no negative consequences. They back student loans as if these loans will ever be paid back. Please tell me Ms Yellen why you don't talk about any of these imbalances and the coming Fearthquake?

Call it imbalances or a Fearthquake. Ms Yellen needs to trash her economic Fitbit and put on her jeans. Maybe they will convince her that something bad is coming. It might not be too late for a return to sane monetary policy. 

Tuesday, August 30, 2016

Lesson 14: GDP Complaints and Super-Heroes

How are you doing? Excellent! Well, not exactly excellent. I feel great but my lower back is tight and my eyeballs are a little itchy. Okay my knee aches a little and my allergies have been flaring up.

Why don’t we have one single measure for how we are going? If we had such a single measure I could answer the above question with something like – my PSHM (personal single health measure) is up 15% this year. In August alone it rose by 15 points. Now that would be cool. But as you are questioning my sobriety right now – the point is well-taken when it comes to health. Health is highly multidimensional. We don’t really want a single measure of health. Nor do we want a single measure of how much fun you had last weekend. We clearly don’t want one indicator of how nice you are.

Then why in the world are people discussing the development of a new economic indicator to replace GDP? I see these articles all the time. The WSJ had such an article last week lamenting that GDP is too slim and there is so much going on around it. They mentioned how GDP tells you nothing about the distribution of income. It also is silent when it comes to investment versus consumer spending in China. It also says absolutely nothing about cow methane in Texas. (Betty says I can’t use four letter words starting with an F; thus methane).

I have heard similar statements since I started teaching macro in 1910. Critics lament that GDP is not a good measure of a nation’s overall welfare or happiness. They search for the Holy Grail of macro indicators. So with that as an introduction, let’s talk about GDP – what’s right with it and what could be improved.

Gross Domestic Product can be defined with one word – output. It is the output of a country where output is defined as the total amount of goods and services produced. The GDP for 2015 of about $18 trillion is the value of all goods and services produced in the 12 months of 2015. If a tall toilet got produced in 2015, it would be counted in GDP of 2015 – even if it didn’t get sold until yesterday. So be clear – GDP is not sales. GDP is output.

When we listen to complaints about GDP – keep in mind that it is pretty good at what it does – measuring national output. It is not supposed to be a measure of welfare or a measure of happiness. It’s output plain and simple.

A second issue has to do with laziness. While GDP is one number that gets publicized widely each quarter, the calculation of GDP involves at least two techniques and a large number of indicators. One approach (the Product Account) asks what happens after the stuff is produced. Some of it does not get sold and goes into inventories. The rest of it is sold to consumers, firms, governments, foreigners, etc. You can find and analyze all those details if you take the time and effort. 

A second approach (The Income Account) measures output in terms of what the factors earned/contributed in producing it.  So if you take a little extra time  you can learn how much of the output came from labor, ownership, and from barnyard animals. You could go blind reading all those details—there are so many of them published EVERY quarter. But you miss most of that detail because it is pretty boring to the press.

Is GDP perfect? Is Superwoman perfect? Of course not.  Superwoman often enlists the help of other super heroes to subdue evil. And even Superwoman has a bad hair day now and then. Even with all the details I mentioned above, GDP has two important limitations. 

First, it simply is not a good measure of welfare or happiness or distribution of income. Second, even as a measure of output, as the structure of the economy changes over time, so must GDP. Notice how over the years we have moved from producing mostly agriculture, to manufacturing, to services, to high tech, and even to pizza delivered by drones. To get the output number right, our methods of collection and estimation have to change. And that is why the Bureau of Economic Analysis has more economists than rats have fleas. 

So we continually try to improve GDP as a measure of output. And we also continue to develop measures of other important facets of economic health. If we are interested in distribution of income, the Census Department has a lot of data we can examine. If we are interested in welfare, then we know that economists have developed a number of measures exactly for that purpose. As for happiness, I know some monks you might refer to. 

The trouble with these broader measures is lack of consensus driven by varying definitions of somewhat hazy concepts like distribution of income, welfare, and happiness. We should keep trying to widen our scope of published super-statistics but keep in mind that all that activity has little to do with the usefulness and perfection of GDP, the nation's output of goods and services.

Tuesday, August 23, 2016

Free Trade and Burpees

I’m bothered that people don’t see trade the same way I do. Despite the fact that trade is highly multidimensional, people still focus on just one part – the trade deficit in goods. The trade deficit in goods is the telling figure to most people. We import more goods than we export. So there must be something wrong with us. Furthermore they equate years of decline in manufacturing employment with this surplus of imports. It sounds simple. We buy stuff from China instead of America and therefore we have a trade deficit and employment contracts in the USA.

But simple things are sometimes not so simple.

First, an analogy. Ashley tells Jason he should exercise more. It’s good for you, she says. So Jason starts a new exercise routine. Hey Ashley he says, my arms and legs hurt. They are killing me. Keep exercising she says, it will help your whole body. You will thank me later.

The pains of free trade are quick and obvious. To those displaced or diminished, their plights are not to be minimized or ignored. They must be assisted. But that is an issue separate from whether or not we should incur the pain. Some people say, no pain no gain. Maybe that is extreme. But ask any Olympic athlete and they can tell you how many hours and Ibuprofen it took to master their sport. Ask any musician how easy it was to learn how to make nice music.

With international trade we see the obvious hardships the nation must incur today. But the benefits are gradual in coming, diffused and much more difficult to see. Exercise does not make you jump 17 feet over a bar today – but it does help you be stronger and more flexible as you age.

Still, you might wonder whether the US benefits from trade. Consider this. Our population is 324 million people. The world’s population is 7.4 billion. There are lot of wants and needs residing outside of the US. And those  needs are growing. World per capital income (according to the World Bank) rose from $500 per person in 1960 to $10,000 in 2015. 

The average American made more than 5 times what the average world citizen made in 2015. World GDP rose by $72 trillion from 1960 to 2015. In comparison, US GDP rose by less than $18 trillion. POINT – the rest of the world has a lot of catching up to reach the US standard of living – and as they do their incomes will rise by huge amounts. They may not be there yet, but we definitely want to position ourselves to take advantage of rising world wealth. Being hostile to foreign business is not a great way to do that.

Finally let’s look at some trade data. Today I focus on the real values of goods exports and imports. This leaves out services because they are in surplus. These measures also eliminate prices and focus on the quantity of goods coming in and out of the country. I looked at the annual data since 1967. The numbers are percentage changes. Data can be found at bea.gov.

·       Of the 48 years between 1967 and 2015, in 22 of those years US exports grew faster than imports. In 26 years imports grew faster exports.

·       Goods imports annual percentage change exceeded goods exports sporadically (1968, 1969, 1971, 1972, 1976, 1977), from 1981 to 1986,  from 1992 to 1994, 1996, and 1998 to 2004, 2010, 2014, 2015.

·       In all the remaining years, exports of goods annual percentage change exceeded import change. More recently exports growth from the US exceeded import growth from 2005 to through 2013.

·       This is not the picture of a uniformly declining competitiveness of the USA because of globalization. In fact 12 of the 26 years when imports were rising faster than exports were before globalization picked up in the early 1990s.

·       In 2004 exports of goods trailed imports – with exports just over 50% of the value of all imports. By 2013 the ratio had increased to about 70%.

It is true that the US has a large goods trade deficit with the rest of world and especially with China. It is also true that this deficit has widened in value terms. But if we focus on real values we see a comeback with exports of goods growing faster than imports. This in no way proves that all is good and fair in international trade. But as the world regains its momentum and the rest of the world stabilizes and begins to catch up with US growth, we should expect them to want even more US goods. Shutting their goods out of US markets will do little to promote their desires to buy from the US.  One more point. 

We should expect that many countries would become stronger competitors to the US once they recovered from World War II damages. We should expect as well that many countries would compete against the US after the massive reforms that occurred worldwide after the collapse of the Soviet Union and dictatorships in South America. We can’t stop any of that and it would silly to try to do so. This tsunami of competition would have occurred with or without free trade agreements. We can argue about unfair trade but the truth is that America is being tested. We can complain about the competitors or we can get busy in figuring out the best way to remain strong in this new world. Withdrawing from the global stage seems counterproductive.

Tuesday, August 16, 2016

The Infrastructure Scam

More Infrastructure is the new hot phrase. Hillary wants it. Trump wants it. Your local asphalt company wants it.  I think maybe even the Pope wants it. All together now – three cheers for more infrastructure.

More infrastructure will cure our ills. More infrastructure will improve productivity, wages, employment, and economic growth. More infrastructure may even shrink your horribly swollen prostate. Sorry kids – this is an adult blog.

From the above words you are ready for the punchline. Surely there can’t be anything wrong with this new focus on more infrastructure. Or can there be?

Notice that more infrastructure spending mostly means spending more on our existing infrastructure. Most discussions mention dilapidated bridges, pot holes in highways, and leaky water systems. We can add sagging power lines and possibly an inefficient network of information technology equipment.  

When we refer to infrastructure we are legitimately singling out another dimension in the list of factors that produce output in a country. We know that how much output we get depends on how much input we use. Labor and capital are the two traditional labels for organizing our thinking about the inputs we use to alter the amount we produce. Now we are emphasizing a third factor – infrastructure.

Imagine a manufacturing company that produces those lovely little outfits worn by female beach volleyball players. That company has sewing machines (capital) and it has workers (labor). But notice that even the tiniest of these garments has to be shipped via truck or airplane. Orders might come in from the Internet. While having capable workers and great sewing machines is important to Tiny Garments, Inc, so is the quality of roads, airports, and computer networks.

The basic theory of infrastructure is not being questioned by me today. It is pretty clear why more and better infrastructure would be better for companies and therefore for their customers. I am not doubting the need for improvements in infrastructure. I am doubting the magnitude of the impacts of the current proposals. 

The questions I have are practical. For one thing, we are not talking about Tiny Garments Inc deciding on the best machines to create their very tiny garments. We are instead talking about society ordering improved roads for all the companies of America. Wow. Can you imagine the mess when the studly representatives of Wyoming get into a duel over whether they need the highway improvements more than brainy Connecticut. Or when kindergartners stage rallies demanding an equal share of the new fiber being laid for the purpose of America’s productivity.  There is only so much we can spend on infrastructure though listening to our main candidates suggests that the sky is the limit.

Which brings me to the next point – what is the optimal amount to spend on infrastructure if our goal is to increase America productivity, wages, and employment? Can you imagine Paul Krugman and Rush Limbaugh coming to some consensus about that. Surely we don’t want too much or too little? After all we have a pretty big national debt and infrastructure won't come cheaply, right?

Once we know how much we want, there is this question about whether or not more infrastructure today will really work to raise productivity, employment, and wages. Remember that this is 2016 and not 1956. In 1956 Eisenhower was President, manufacturing was dominant, and I had a full head of black hair with a pompadour. Putting in a new highway system was a lump sum investment and probably was worth every penny we spent on it after 1956. But in 2016 will another $300 billion or more have similar impacts? I know I have a few black hairs among the few hairs that populate my head and I know Eisenhower is no longer President.

I also know that trucks are already very efficient even on crappy roads and that drones are elbowing their way into delivery. Will $300 billion worth of better roads really make today's workers more valuable to companies? How much better will companies be able to compete because of the better roads? How much will they lower prices because of these efficiencies? How much will our spending and employment increase as a result of these price reductions?

And hold on – is it not possible that in today’s globally competitive high technology environment that some firms may react to improvements in infrastructure by using even less labor? Recall that some equipment is called labor-saving equipment. Some machines replace labor. Is it not possible that infrastructure improvements will mean a smaller demand for labor and lower wages? If infrastructure spending switches from roadways to super IT highways, might we need fewer workers?

I know we don’t expect our politicians to actually think about the things they say. But as I see it, this More Infrastructure thing is more complicated than they explain. It is clearly not a slam dunk no matter what they legislate. But that puts the cart before the donkey. What will they really legislate? Is this a serious attempt to improve economic growth or just another backdoor scam that appears to look like they are doing something? Or are we getting agreement from both parties because a new investment in infrastructure is rife with opportunities for rewarding friends and gaining from corruption? 

Tuesday, August 9, 2016

Alan Blinder's Priorities for Raising Wages in the USA

Alan Blinder, Professor of economics and public affairs at Princeton University, wrote a piece in the WSJ last Tuesday, Only One Candidate Can Make Wages Grow Again. As you might guess, this liberal economist is not writing in favor of Donald Trump or Alfred E. Neumann. Blinder apparently wishes he was as famous as Paul Krugman (or perhaps Karl Marx) and therefore has shed any pretense of objectivity or neutrality. He is a full bore Hillary supporter.

But don’t get distracted by my name calling. His piece is nonsense and I wanted to dissect it piece by piece.  The main problem is that Blinder ignores cause and effect. He starts with a liberal passion that says if a person’s wage is not high enough then we should simply raise it. It’s like if there is blood rushing out of a bullet wound then just push it back in. Pushing blood back into the hole totally ignores WHY it is gushing out.

I will get to some of Blinder’s points below. But first let’s discuss the data he quotes with respect to real wages. He prefers to use the buying power of what the workers earn as wages and salary – but he leaves out a very important part of earnings – the benefits. Benefits matter. The more benefits a worker gets, the richer he or she is. As our politicians are fond of reminding us – the more of our wage and salary that we don’t have to spend on healthcare – the more we can spend on other things. The Bureau of Labor Statistics has data on wage & salary, benefits, and the sum of the two, total compensation. They have nice tables showing quarterly data from 2004 to 2015. Here is what I found from the end of 2004 to the end of 2015:

            W&S rose by 28%
            Benefits rose by 43%
            Compensation rose by 33%
            Inflation rose by 24%.

In terms of buying power, real W&S rose by only 4% (28%-24%) over those 12 years. That’s yucky. But notice that benefits rose strikingly so that the buying power of compensation increased 9%. When Blinder uses real W&S he greatly understates the growth of the buying power of what a worker earns. He never even mentions compensation or benefits. I wonder why. No I don't. We know why. It spoils his progressive story. 

The other issue is history. Wages are characterized as a lagging indicator. That means labor is like your Grandpa. You have to call him three or four times before he finally comes to the dinner table. It often takes a few years after a recession before labor market tighten enough for wages to rise faster. Wages have repeated that pattern after our last recession albeit very slowly and so far wages continue to rise at a slow pace. Note that if labor supply begins to improve, this alone won’t help wage change. It will take a stronger bounce in labor demand. Firms, therefore will need to be more optimistic about the future and be convinced they need more capital and labor. But Blinder is silent about any policies that might make business feel more optimistic about the future. He prefers the following Clinton/Marx options.

            Increasing the minimum wage
            Profit-sharing (firms would receive a tax incentive if they profit-share with labor)
            Increased vocational training for non-college bound
            Provide pre-K education for all American children
            More generous Earned Income Tax Credit and expanding it to people without children

That’s his whole list. Thoughts…

While increasing the minimum wage increases the wage for some people, it will probably reduce the wage to zero for others. My friend Chuck T. says this is a full employment act for robots. But worse, what does this do to improve the optimism of the businesses that hire these workers?

What does forced profit-sharing do to improve the outlook of businesses?

We have a healthy industry of folks who provide alternatives to college education. What Blinder really means is FREE vocational training. But you get what you pay for. Right? I wrote about free education a couple of weeks ago.

Blinder implies that we don't work hard enough to move students away from college and into vocational training. I agree. The Germans seem to be very good at it. But why don't we do that? He should ask his liberal friends how we should target people who they might think are potential Einsteins into being plumbers. Who gets targeted? How is this done? Don't counselors already do that? 

Pre-K education might take 30 years. That’s a real winner. Please note sarcasm. What happens if we give more kids a great Pre-K experience without moving them out of a culture of poverty, drugs, and violence?

Giving the EITC to everyone seems like a big increase in spending. This is widely regarded as a good poverty program. So does Blinder advocate ending dead-end poverty programs and shifting the money to EITC? He doesn’t say. Piling more and more money onto already failing poverty programs does not make sense to me. I like EITC. But let's have it replace those programs that don't work. 

In fact he is totally silent about the implications of his suggestions for the national debt. Is there no end to how big our national debt can become without negative ramifications for business firms?

Business firms are the ones we want to hire people and then give them increases in wages and benefits. I would think that any balanced program to improve incomes in the USA might offer a few constructive ways to make firms optimistic about the future. Or is this just a backdoor way to increase the extent of government and reduce the scope of private enterprise in our economy? Mr Blinder, what is the truth here?

Tuesday, August 2, 2016

Lesson 13 Free Trade

I thought I knew the meaning of the words free trade. But listening to political dialogue these days I am more confused than Charlie Sheen at a lesbian AA meeting. I am mostly confused because some candidates say they are for free trade and then they explain why they oppose actual attempts to make trade freer. It is like you saying that you are for motherhood, but you think that women should not be allowed to fertilize their eggs. Wow – this is supposed to be a family blog and I used the word fertilize. I apologize.

You don’t have to have a PhD in meteorology to know that free trade is a desirable outcome. Can you imagine people protesting with big signs in favor of Not-Free Trade? It sounds pretty weird. We like things that start with Free. Like Free Love. What could be wrong with that? Then there is Free Enterprise. Free is the first four letters of the word freedom.

When I was a little economist with long pants and an Adam Smith tie I learned that free trade was a really good thing. Imagine free trade within your borders. Free trade means that Charlie can produce rose hip wine for Pete and Pete can sew doilies for Charlie. Both Pete and Charlie are made better off because Pete is lousy at making wine (he drinks more than he makes) and Charlie couldn’t sew his way out of a Goldman Sacks bag. Letting these two lovely fellows trade makes them both happier and richer.

The same basic idea can be applied to Paco and Juergen. Paco lives in Barcelona and Juergen lives in Germany when he is not globetrotting. Paco can make wonderful paella and Sangria and Juergen can produce machines and large spears of white asparagus (in the spring). They trade and both are made better off.

All that seems pretty clear. But economists can’t stand it when easy ideas don’t have complicated names and mathematical formulas – so they call this process comparative advantage. You could read a chapter in an economics book called comparative advantage and then want to kill yourself. But believe me, it is easy stuff. It explains why you don’t make your own t-shirts and why you’d prefer to buy one from the local t-shirt shop or maybe one made in China. The cool idea is that whether you buy the t-shirt (that says I sat by the window at the Mucky Duck) from Bloomington or China, you are not making the shirt yourself! Someone who knows how to make a really good shirt is making it for you. Apparently you are pretty good at making something else.

So what’s the problem? The problem is that in the real world there are three parties. Genevieve has been making t-shirts for three years. Along comes Nolan and he decides to make t-shirts too. Nolan's t-shirts glow in the dark. Brendan quits buying Jen's shirts and buys Nolan's shirts. Jen's business is threatened. Jen’s class erupts into chaos at their scheduled kickball time and begins chanting down with Nolan slogans.

The problem with free trade is that it advances mankind. You read that right. Free trade is all about free choice – freedom to replace one thing with another. We replaced the horse with the auto and the tractor. We quit eating fatty ribeye steaks and replaced them with corn on the cob and Brussel Sprouts. We threw away our wonderful phonographs and now use Spotify. Enough? Every one of those choices has a plus and a minus, but most of the choices make us all better. Proof? I don’t see many of you wanting to replace your new electric vehicle with a horse named Nathan.

Society does not like it when some people suffer. Society especially doesn’t like it when the person hurting seems to be suffering because we made a choice for a foreign-made product. There will always be a constituency that wants to help neighbors who lose jobs and income and careers because of either domestic or foreign competition. But don't forget. Helping these people means you restrain the benefits of trade and are hurting others. 

So that gets me to free trade agreements. FTAs are ways to promote free trade. That means removing or reducing tariffs or other obstacles that discourage trade across borders. FTAs encourage those positive results I wrote about above. My Google search says that the US has FTAs with 20 countries. Among the 20 are Australia, Canada, Israel, Korea, Mexico, and Singapore. We are contemplating more FTAs with Pacific countries and Atlantic countries. And while our candidates say they are proponents of free trade, they are also saying these new agreements are not good and Mr Trump says he might want to rip up some of those 20 we already have.

How do we get the benefits of free trade without FTAs? The answer is that that we don’t. Keep in mind that when countries negotiate a new FTA they require each country to do something to improve access to their markets. They might reduce a tariff or eliminate a quota. They might change a regulation that purportedly changes food safety or labels or names of products. There are many ways that countries protect themselves from the benefits of trade. Thus there are many ways to reduce those protections and encourage freer trade.

Our candidates are stepping back from these FTAs and are saying that we opened our economy more than our partners did. And thus our partners got more of the benefits of trade than we did. But keep in mind these points. First and foremost – all parties benefited from freer trade. Second, it is impossible given the diversity among the partners and the multitude of ways trade impacts a nation to insure that each country gets exactly the same benefits. Third, as in my examples above, all countries create losers in the process of opening up trade.

Free trade helps us. FTAs are the best way to keep expanding these benefits. Some politicians will point out the imperfections of these FTAs but any move away from free trade is going to hurt us. If I had my equations with me I could prove this with math. 

Tuesday, July 26, 2016

Can We Agree on a Way to Stimulate Economic Growth?

Last week I tried to make a simple point. Our government needs to prioritize and focus. My preference is to focus on economic growth and security. My assumption is that either candidate once elected with an earnest goal of promoting growth could find enough support to make progress. My second assumption is that a truly positive outcome would take a lot of focus wherein other issues would have to be put on a back burner. I got lots of responses and advice from you. So let me deal with some of that here.

First, even if I am wrong, I am not going to move to another planet. So forget it.

Second, some of you believe that neither party is capable of focusing on economic growth to the exclusion of other policies. And I agree with you. I can’t see them jumping on the growth wagon either. Whatever party wins and wins enough clout in Congress will begin by immediately jabbing its collective finger into the eye of the other party. If Democrats win the first thing they will do is to make abortion available to women who are not even pregnant. And Republicans in their first 24 hours in power will make it legal for kindergarten kids to carry loaded military weapons to class. Okay I jest, but you get the point. I doubt either party is capable of taking over without at least a few na na nas. This will not put anyone in the mood to join hands in even a few off-key gumbayas for economic growth.

But it is worth talking about. Why can’t one side just stick to making us all a little richer?

Third, even without the predictable eye jabbing, can both parties find a way to agree on an economic growth plan? Again, I am not sure they can do that. What is the best way to promote stronger economic growth that will lift most boats? Fuzzy seems to have a very large boat and I don’t even have a boat. So it sounds pretty challenging.

Okay forget boats for a moment. Here is a wild and crazy suggestion for thinking about a solution. Step 1. Recognize that no party in the discussion will get everything they want. It’s called compromise. If you are like Mr Cruz and won’t play unless you can use your own Tom Brady-signed under-inflated legal pad, then go home and don’t participate. Step 2. Write down all the credible policies that could conceivably improve economic growth in the US in the next few years. Yes, write them all down. Step 3. Prioritize all these possibilities in terms of a realistic appraisal of their impacts on economic growth. To do this step each side could pick a few economists who they believe are not wing-nuts and who could actually sit in a room for more than 7 minutes with economists on the other side of the aisle. Step 4. Put these economists in a locked room with only kimchi, soju, a photo of Margaret Thatcher, and only one week’s supply of Charmin. Step 5. Watch the magic happen and make sure that government legislates anything that a majority of these economists agree to. Step 6. If all that doesn't work go back to step 1. 

It sounds crazy but let’s face it, crazy is about all we have today. If any process was to lead to an even half-way intelligent set of economic policies, we would benefit. So as to totally not cop-out on some details of policies let me end by offering some suggestions.

·       Evaluate the full set of government regulations that negatively impact productivity and labor supply. Those that create the largest detriments should be eliminated for a period of three years.
·       Cut some fat out of every government program. Use that fat to fry some really nice pork chops. Or use it for infrastructure.
·       Do something about spending on Social Security and Medicare. Use those cuts to give some targeted tax cuts and/or subsidies that would directly enhance the replacement of worn out machines, software, and so on.
·       Create tax cuts or subsidies that would make it easier for poor people to work and safely provide for their children. More spending on training and retraining would fit here too. 
·       If any of the above leads to short-term increases in the government deficit or national debt, then permit deficits as high as 5% of GDP for two years. If the growth policies work, the deficit will automatically go back to tolerable levels.

I probably missed something so let me know. That list is provided to show that there are ways to get this done. It is not meant to be exhaustive. Notice that I have attempted to be flexible. If you have read some of my past musings you know that I harp consistently about deficits and debt. In the above I am acknowledging that a compromise might involve a temporary increase in the latter. Wow – I may need a visit to my JD bottle once that gets out. But compromise is compromise. I want to see people seriously ponder economic growth. If we stick to “my way or the highway” I can’t see us making any progress. What do you think? 

Tuesday, July 19, 2016

National Priorities: A New Candidate's Pledge

Mike Pence was quoted describing himself as "a Christian, a conservative, and a Republican, in that order.”

I think that is laudable. Many people say he is a fine man. Others might describe themselves differently. That’s what life is all about…different strokes for different folks. It is nice that we tolerate each other’s personal penchants.

But when it comes to national priorities, we realize that our own personal desires may have to take a back seat to the national interest. When young people are drafted into the military they often serve proudly because their national duty comes before their personal goals. Some of us are dragged kicking and screaming or at least complaining. Maybe we even threaten to move to Canada. I might hate to pay a higher tax rate on my income or have to pay more for my Medicare benefits because I am richer than someone else. But I also realize that being part of the USA I win some and I lose some. Sometimes national priorities do not exactly coincide with my own.

It is in that spirit that I offer a suggestion with respect to the coming election. I am asking Hillary, the Donald, and Alfred E. Neuman (if he decides to run) to consider taking on the following candidate's pledge. Hopefully the pledge would be accompanied by shots of JD but that's optional.

I promise that I will fix the US economy. Fixing the US economy will be my main passion for the country for four years. I realize that sensible economic policies could take all four years of my term and therefore I pledge and promise that in four years the US economy will be humming like never before. If not, then I will forego a second term.  I also promise to do whatever it takes to make Americans safe and secure from terrorism. So as to not take my eye off those two balls I promise to veto all and every legislation that is not directly involved with these two goals. Included in this list of important but secondary goals is anything relating to religious rights, gun rights, abortion, illegal immigration, and income equality. Yes, these and other unmentioned issues are important. And therefore once we have fixed the economy and our security I promise to spend my second term as President restoring the proper importance of these other issues. But for now, we have to provide more and better jobs for Americans and we have to keep our people safe.

Ok I admit that Ruth Bader Ginsberg and I may have been drinking out of the same JD decanter. But come on folks – is it not obvious that we have stuck the proverbial cart before the horse? Are we now dissipating our remaining political energy on things that are preventing us from making any real progress? I think the answer is clearly yes.

I know some people think we need to address income inequality BEFORE economic growth. They do not believe that all boats rise equally. I too doubt they rise equally. But surely you want boats to rise and so far there is little evidence that anything is better for the poor than a rapidly growing economy. As long as we argue about social programs our poor remain the same or they get worse.

If all our energy was producing some progress on the social program side then I would say fine. But all it really has done is create a hunker down mentality among the nation’s extremes on left and right. Apparently standing in the street, singing Bob Dylan songs and lobbing bombs and bullets at each other is more fun than actually talking with someone about real and effective policies. Of course those people who sit in their homes thinking there are no social problems do not help matters either. 

I love all the promises being made this week to heal differences among police and minorities. They swear it is time to talk to each other. You just watch. This will be yet another opportunity for extremists to hijack an important issue and use the occasion to scream at each other even louder repeating oft-heard mantras. If  that is talking to each other then I would rather take a pledge of silence.

Finally, what do we really give up if we put progress on these social policies on hold? What do you really expect to accomplish through more of the same? Despite all the attention given to it, how much did the needle move on abortion in the last four years? How much progress did we make in race relations or illegal immigration? 

So that’s my point. It sounds crazy to some of you to put some vital issues on the back burner for a while. But wouldn’t it be refreshing to have a timeout wherein we all worked together to get economic growth going again? And do that without the din of hatred playing in the background.  Accomplishing that maybe we could move on to learning how to work together on ways to eliminate the rest of our problems!

Tuesday, July 12, 2016

Free College Tuition

Let’s suppose for a minute that you are not a fiery participant in any wing. That is, you are not easily swayed by slogans and finger-pointing. You are from Missouri the so-called “show me” state. Let’s suppose that no matter what a candidate or a member of government proposes you would at least try to look at all sides of the proposal. Wow. This is already sounding crazy. Where is my JD?  Is there anyone left who thinks that way? Just in case the answer is yes, let’s move on.

Why does Hillary Clinton want to propose free college tuition? In fact, why free anything? Recall that economics teaches that us that stuff usually costs something to make. A My Pillow is the best pillow ever invented. If you watch TV ads you know why.  You don’t expect to get such a pillow for free. Why?  Because its inventor had to make it and all that activity costs money. It seems fair to give Mr. Pillow some money in exchange for his My Pillow. It seems fair too since your life will be totally changed by having a My Pillow (or two of them for the price of one). Imagine how sexy you will look and all the attention you will receive after sleeping on your My Pillow. Clearly it must be worth the asking price.

Why doesn’t Hillary Clinton want to make My Pillows free? I can’t answer that question but let’s now flip over to things the government loves to give away for free. Highways are usually free. You just jump on good old Interstate 5 and go anywhere from San Diego to Seattle. What a deal! No wagon ruts there. I won’t go into a long list of other free items because some of you might get inflamed. But the point is made. The government provides things to us free.

You are scowling. Highways are not free. It costs money to design, build and operate them. Tax payers send checks to local, state, and federal governments to pay for all so-called free stuff, whether it is for highways, schools, or for free drug needles to addicted persons.

Okay, since nothing is really free the main question here is whether you want to pay for stuff directly to a capitalist or to a government. Do you want business people to provide all these things through a market economy or do you want government making the decisions? And now all you Wingers are getting your guns loaded. You lefties don’t trust business people to give us a fair shake. You righties think government is equivalent to robbery. But since we are trying to be non-wingers for a little while today, let’s keep exploring this fascinating topic –more fascinating than a Matt Lauer and Al Roker wrestling match. 

Market economists believe that in some situations markets fail and it is possible that governments should intervene. Any microeconomics text book has a chapter called market failures. You don’t have to be Paul Krugman or Bernie Sanders to believe in market failure. All of us believe! I won’t rewrite the chapter here because a vivid example of market failures comes when two parties transact (you and the makers of Tide) and somehow you pollute other people (who live down the stream where your dirty water flows). Those other people are not represented when you buy Tide, wash your clothes, and dump the water into the stream. Thus those other people have to incur costs to undo the harm you did to them. Those costs escape the economic system unless the government intervenes and makes you and Tide pay for them.

Make sense? It does to me. A similar story relates to highways. Joe’s Highway Company comes to you and asks if you will pay $10 for a nice highway between Bloomington and Lake Lemon. You are a smart cookie and you say no. That’s because you know that Peter and Charles will say yes and then pay. And when they pay, you get to ride the highway for free. This is called the free-rider problem and it can result in not enough highways being built unless government decides that lots of people will benefit and taxes them. Thus more money is raised and more highways gets built.

Enough you say! Okay – government gets to do a few things. But what about free education? Free education satisfies the free rider issue. We all benefit from an educated population. We want our kids to be educated and we want people to pay for it through taxes. While most of us would agree that K-12 gives citizens the basic skills necessary to be good citizens, there is more debate about higher education advancing our kiddies beyond the the necessary levels of reading, writing, and arithmetic. States have subsidized advanced education for their citizens but the question remains as to how much more society benefits from courses and degrees after high school graduation.

College education might simply advance the skills of the person who encounters a degree—and not so much his or her neighbor’s welfare. In that case it makes sense for only the individual to pay for the education.

But what about people who can’t afford a college education? That’s a stickier wicket. We help people with low incomes in many ways. We reduce or eliminate their income taxes and we give them subsidies. We make them eligible for food and housing and heat and medicine and so on. But we don't buy diamond rings or even entry level Fords Fiestas for poor people. Free stuff to the poor has limits. Where exactly does a free college education fit in to that? Is it more like a diamond ring or a chicken in a pot?

Finally, a few more words about unintended effects. Prices are about value. When you say something is free – it is bound to reduce its value.  I worry that free college education will harm one of the strongest industries in the USA – higher education. Free higher education may attract some of the wrong people. Already higher education spends a lot of money and time on things unrelated to education. I fear that making it easier for people to attend will exacerbate those trends. We hear people complaining that college is more about having fun and socialization than about gaining knowledge and skills. Do we really want to spend the people’s money on fun and socialization?

Larry, you don’t give a fig about those young people who are dying to get a college education but can’t afford it. But that is exactly who I do care about. I want them all to attend college. They will be willing to put some skin into the game. Show me how Hillary’s proposal will differentiate between those who will be truly helped and those who will go along for a nice free ride.  Imagine how much more we could devote to those who really want/need the help if we make that distinction. Hillary's proposal includes any household with incomes below $125,000. I wouldn't call a family that makes $125,000 per year poor. Would you? Or is this just about doing something to get Bernie’s supporters to vote for her? Or maybe a backdoor means for government to control costs of higher education?