Tuesday, November 29, 2016

Peas, Stuffed Cabbage Balls, and the No-Camp Camp of Economic Policy

As a recent member of the Septuagenarian Club I am working hard on balance. Old people fall down a lot even when they have not partaken of JD tasting rituals. So working on balance is important if one values his hips, shoulders, and other decaying body parts. Getting depressed yet? Getting old ain’t no picnic you know.

But this piece is not about aging or falling down. It is about restoring balance in economic policy in this country. While it sounds obvious that balance might be an appropriate goal, this conclusion is not shared by everyone and the move towards balance is not easily attained. Stand on one leg and close your eyes and you will see what I mean.

American is very unbalanced. We have our camps. The blue camp likes more government intervention. The blue camp prefers to increase spending and worry later about the debts. The blue camp wants to regulate banks, shadow banks, and various companies. The red camp says they worry about government deficits but often favor tax cuts that create them anyway. The Red camp favors deregulation and generally a smaller intervention by government. And now there is forming a Trump camp. The Trump camp is not so much a camp as it is family of camps with no identifying color.

I kind of like the no-camp camp. The no-camp camp is a little closer to what I might call balance. The no-camp camp can favor more government spending and at the same time propose tax cuts. It believes that somehow lower tax rates and higher spending will not cause the deficit to increase. It also says it wants to reduce many recently imposed government regulations.

How could I like this no-camp camp? If balance enrages extremes then it immediately has strong minuses. Notice that balance means that the blues will scream about a proposed diminishing role of government while the reds yell that the government is still too big. This no-camp camp will quickly enlist enemies from all the traditional camps. This will not be easy to overcome.

Overcoming the negatives shouted by the traditional camps means focusing on the positives gained by each camp from the no-camp camp. More spending on infrastructure is widely viewed to be beneficial on many fronts since it generates income to the working class while it improves productivity. Red and blue will like that one. Tax cuts for the middle class can restore losses in earning power to that group. Blues will like that. Tax cuts for the wealthy should be good for national investment spending and declines in corporate income taxes and should boost the competitiveness of US companies and American cities. Can you hear the reds cheering?

More contentious is how government deregulation can promote jobs and growth in energy and healthcare. But the clear point is that a slowdown of regulation in these areas could produce jobs and income growth. One does not have to be a climate skeptic or a hater of the poor to believe that a temporary hiatus of regulation in those areas might produce important beneficial growth effects. Get the economy humming again and then return to more vigorous ways to remedy global warming and coverage of health care.

What I am suggesting here is that a no-camp camp set of policies provides balance as it contains features that both annoy and amuse everyone. It’s like my mom used to say to me – Larry, eat your peas and then you can have another stuffed cabbage ball. In the distant past the two political parties would compromise on economic policies. Give a little get a little was the slogan. More recently with strong influence by ideological extremes we quit doing that. You can eat the peas or the stuffed cabbage balls. Not both. And the nation has suffered from this standoff.

Many of us don’t like Trump for one reason or another. What I am suggesting is that since Trump has no real connection to either party or ideology, he might be the perfect person to get us back to some much needed balance in policy. I guess we will see in the near future. He has to come through with policies that make some sense. As voters, we need to be ready to eat our peas. Hopefully the meatballs will make it worth our while. 

Tuesday, November 22, 2016

Trickle-Up Economics and Labor Infrastructure

When both parties agree then you know something is wrong. Infrastructure spending (IS) has gained a lot of bipartisan support lately. There is a lot of pressure on Trump and Congress to put together a really big package on infrastructure. What does that mean and is that the best we can do with our money?

The usual support for more IS focuses on simple theories. Paramount is that IS is part of the production and delivery process of goods and services. An improvement in infrastructure will accordingly increase our lagging national productivity. When workers are more productive the nation becomes more competitive.  A second logic is that building more infrastructure takes workers and therefore employment will increase. Third, when those workers have more income they will buy more goods and services thus providing more business and employment for other firms and workers. Can you hear the horns blowing? Who could be against more IS?

The reason people can be against more IS is that the above is simple theory. Put all this into the context of 2017. For any of the above magic to transpire we have to have viable projects and we have to have them pretty fast. Unlike a tax cut which immediately gives a tax payer more money to spend, an infrastructure project has to be planned, approved, contracted, environmental regulations checked, and so on. Shovel ready projects are a joke. This spending could drag on long after my ashes are spread in Biscayne Bay.

And then there is the issue of where this infrastructure might be built. Since Harry Reid is a has-been it probably won’t be done in Nevada. Politicians will be in seventh heaven fighting for the next bridge, road, or waterway. What a glorious boondoggle!

And then even if some projects get started, what about the spending multiplier theory? The employment-spending-more employment-more spending theory assumes everything else is the same. In 2017 our nation is deep in debt. Our firms are not expanding. Perhaps construction workers will pocket some money, pay off some bills, and the story ends there.

And finally – tada – what about cause and effect? Is our slow growth these days really caused by potholes? I don’t think so. But one major thing many of us agree is that growth is very much impacted by slow labor supply growth, a mismatch of skills, and generally a poorly-functioning labor market. So why not focus on that? If that is the real problem then more IS is really what liberals usually call trickle down. Why wait years if not decades for an uncertain trickle? No prostate jokes please!

Instead we can use some or all of that IS money to improve our work situation. We could seriously fund training, retraining, and relocation. Rather than spiffy highways we could create the world’s employment champion. Wouldn't it be cool if global companies starting moving to America because we have the world's most outstanding employees for the 21st century?

We know that transition is a constant. If we know that renewables will take a larger share of national and world production, why not have the world’s best labor for that? If we know that the GIG economy is employing more and more millennials, then why not shout to the world that the best labor for that is right here in the USA? If Internet security is going to be a global challenge for the foreseeable future why don’t we have the best minds trained here? Healthcare? Entertainment? Whisky? (You didn't think I was going to leave out JD did you?)

If labor is the problem in this country then it ought to be solution. We need to stop wringing our hands and most of all – we need to stop thinking that the best we can do is use company subsidies to improve the labor market. Companies may or may not decide to spend a subsidy on labor.

And of course notice what there is no trickle down if we focus directly on the labor market. Helping people do better in the labor market has immediate impacts on their employability. It makes them more productive, competitive, and valuable. Perhaps we could call this trickle up economics since the benefits start with the workers and then radiate outward to more successful and competitive companies.

Finally when I say labor I don’t mean labor unions. A sincere focus on training, retraining, and relocation means we are strengthening workers for what they want – better pay, improved mobility, and more sustainable jobs and careers. Labor unions can get on board but this idea is not about enriching union bosses. Remember when we decided as a nation to put a man on the moon. We had a clear focus and we made it happen. America can be the training ground for a revolutionary new center of employment readiness. I'd rather see us spend a lot of money in that way than on infrastructure boondoggles. 

Tuesday, November 15, 2016

Elections, Friends, and Families

I am bleary-eyed from reading so many articles about the aftermath of last week’s elections. My quick takeaway is that many sturdy trees have given up their lives. And yet, as is always true about the future, everything we say today is speculation. 

Uncertainty always exists but in this case today uncertainty is on steroids. I am supposed to give a speech about the economy on Thursday. What could I possibly say that wouldn’t be completely wrong in two weeks? Bartender, one JD on the rocks for my friend Lauren please. 

Then I got a text from a very good friend who I won’t name to protect his reputation. This dear friend noted to me how so many of his friends were having fights with their colleagues and families. It reminded me of when I was a young guy during the Vietnam War days. Families were splitting apart. The nation was coming apart. Then my dear friend said that he was so happy that despite our political differences we could continue to be civil and friendly to each other.

Of course, that was like a love arrow piercing my heart. How nice that someone who disagrees with much of what I write could extend a kindness at a time when many of his other friends and colleagues were no less than Vlad the Impaler driving stakes through the hearts of their friends!

So it made me think. How many political conversations held before election day went nowhere because one or both of the participants began with an insult. I am not accusing the left or the right because the same behavior was observed for both. The tenor of the situation was an accusation that the person at the other end of the conversation was either evil or stupid for saying even one good thing about a particular politician. How can two people have a conversation if at least one of those persons starts off by saying the other one is either stupid, immoral, or a bootlicker? How?

Is the hair standing up on the back of your neck? Of course – Trump is the devil. He hates blacks, Hispanics, foreigners, gays, and so on. Of course – Hillary is corrupt and a liar to boot. How could a human being from plant Earth say even one good thing about either of these people?

Good question Larry! But the truth is that if you think that way you have been duped by politicians. There is more than one side to these two politicians. I know they are lousy – both of them. But you people who bought into these extreme caricatures of Trump and Clinton got duped. Nothing is that simple.

Am I saying you have to do back flips for Trump? Not at all. You can fight him tooth and nail on every policy he advocates. What I am saying is that it is not worth demeaning your friends and your friendships over politics. Think about the proportionality. Every morning you wake up and you kiss the dog and pet your wife. You go to work and interact closely with colleagues. You have beers with your buddies. That's your real life. Then you turn on your favorite channel and watch the so-called news. Or you read the newspaper or check your favorite website. And then your blood pressure rises and you start cursing like a sailor.

It is true that a new President will impact the lives of many people – maybe even you. But it is also true that the impact on society is a lot less on you than what happens when you ruin your relationship with your mother or your best friend or your boss. And for what?

“For what?” is the real question. Recall Mr Obama passing Obamacare without a single Republican vote. Recall him making numerous regulatory changes without help from Congress. I was opposed to many of those things. But I didn’t jeopardize my friendships by calling friends and family idiots. After all, they have been in my family or been friends for a long time. We have disagreed many times. But I never dismissed them with the easy phrase like “you must be an idiot to support Obama.”

Now the shoe is on the other foot. Actually I am not sure what foot the shoe is on because Trump does not fit into any easy category. But surely as soon as he gets rolling you are going to hate some of the changes he pushes. Maybe you will be surprised and like some of it. Maybe you won't. When you don’t agree you can oppose them with vigor but at least have the decency to respect those who don’t agree with you. The world is a complicated place. Your friends and family have a right to their own opinions. Try to change their minds if you want. But don’t dismiss them simply because they disagree with you. You can always replace your old friends with new ones who will always agree with you. But that sounds pretty boring and sad to me. 


Tuesday, November 8, 2016

The Gravity of Globalization

Much is being written lately about globalization. Free traders love to see more cross border activity. Non-Free traders wish international trade would be less prevalent. Belgian Walloons tried to stop a free trade agreement between Europe and Canada. I was once in Seoul when a monk set himself on fire and died to protest the coming FTA between S. Korea and the USA. Free trade and globalization have become a central focus in the current US presidential campaign.

Much of the debate has to do with politics and ideological warfare applied to trade. But it helps to know that there are basic economic forces to explain both the rise and the fall of globalization. These basic economic forces have been described by using something called a gravity model. Gravity is the force that attracts a body toward the center of the earth or toward any other physical body having mass. As Charlie would say – gravity is the thing that keeps us from falling off the earth. It is also the thing that causes bird poop to come down on unsuspecting heads. The pull of gravity between two bodies is proportional to the masses of the bodies and inversely proportional to the distance between them. Two large bodies close by have a lot of gravitational pull. Two distant small bodies would have little pull.

Economists have applied gravity models to economic issues. St. Paul and Minneapolis are two cities in Minnesota. Bloomington Indiana and Palo Alto California are also two cities. A gravity model predicts that there would be more trade between the larger close cities St. Paul and Minneapolis than between the smaller distant cities Bloomington and Palo Alto. To apply this basic theory to globalization we need to better define the terms mass and distance as they relate to trade.

Mass refers to economic size but it should be the relevant economic size. For example, if two distant small cities were very specialized art centers – then you might expect a lot of trade in art objects between those two cities. Or if two large close cities had a mountain in between them, then that object might impede trade between the two. Dig a tunnel or build a road through the mountains and the situation changes. Much more trade would be expected.

These ideas are easily applied to globalization. While the physical distance between countries and cities did not change in the 1990s, the distance measured in economic terms did. For one thing technology great reduced the costs of communication and transportation in the last 25 years. For another, the fall of the Soviet Union and the demise of many dictatorships in Latin America allowed people in dozens of countries the legal right to trade. Technology and political change were tantamount to pulling nations much "closer" together or removing a mountain. As they came closer they discovered the benefits of trade.

Harvesting low hanging fruit is easy. But once the easy to reach apples are gone, you need a ladder to get the higher ones. The picking process gets more challenging and more costly the farther up you go. The same happened with globalization. It was easy to get rid of thousands of tariffs. Those tariffs hindered growth in most countries so the politics of tariff removal were easier. When world economic growth picked up and countries dropped many trade restrictions, it seemed like most people in most countries benefited. Today it is harder to see how technology or politics would change again so dramatically so as to make international trade even more seductive. It was hard to see the things that might change in the future that would make serious dents in the costs of distance.

And then it got harder to agree on liberalization. The tariffs that were left (on the higher branches) were the ones that offered protection to a country’s farmers or steel makers. But tariff protection was not enough to satisfy some free traders. If barriers to goods could be beneficial, then why not remove obstacles to trade in services (like airlines, banking, healthcare, and so on)? If restrictions on cross-border investing and mergers and acquisitions seemed unfair, why not remove those barriers too?  If laws did not protect ones ownership of intellectual or other property then why not make it harder for foreigners to easily pirate your patents and copyrights?

Once the low hanging fruit was gone, the remaining trade barriers were much harder to remove. With no earth-shaking transportation/communications inventions expected it is harder to convince voters of the needs for freer trade. This is why the so-called Doha Round of the World Trade Organization remains unsigned though negotiations started in November 2001. The average person says something like – yes, we want the benefits of trade but we do not want to be exactly like other countries. We don’t want a one world government. We don't want our our national champions weakened. 

Inasmuch the advancement of free trade and free trade agreements has become even more political and ideological. As we move to closer economic integration, the benefits of the potential trade are fuzzier and the costs of trade in terms of reduced national independence and stability seem scarier.

Further global trade integration is not impossible. It is just tougher. It is made even more difficult in an epoch of slow world growth. In a slow growth world economic mass is not increasing and it is harder to believe that trade will raise all boats. But it is easy to see the risks to any nation that lowers its barriers. In a world where growth is strong, there is less to lose. Growth means people are doing better, worry less, and are more willing to try something that makes them even better. Without much stronger economic growth I find it very hard to envision a world in which globalization advances. 

Tuesday, November 1, 2016

Alan Blinder and Those Hateful Republicans

Every week I wonder where and when the inspiration will hit for my next spout. I had finished my morning bowl of Rice Krispies and JD and was well into my favorite newspaper, the WSJ, when the inspiration came. As often happens I can’t stop myself from reading columns written by Alan Blinder, economics professor at Princeton. I especially love the pictures but this time he supplied the words that make writing this blog so much fun. The title of the article (WSJ, page A15, October 25, 2016) is “It’s Not the Economy Stupid. It’s the Political Gridlock.”

The main point of the article is that if voters and other people are not happy in the USA it is because of politics. The economy is just spiffy. It is the politicians that make us feel unhappy about our lives. And guess which ones are persona non grata? You got it. Those pesky Republicans did it.  I felt at first relieved that if I wanted to accuse someone for my irritable bowel I now know exactly who to blame. But then after thinking about it for about 10 seconds I realized that Professor Blinder was either kidding us or he was just plain wrong. Or maybe he was hoping that his column would sway voters to the Democrat party. You will have to ask him which explanation is correct for wasting our time on his article on October 25th.

Blinder begins by quoting some well-known polls that show that people think the US is on the wrong track. Then he launched into the most one-sided discussion since Paul Winchell spoke to Jerry Mahoney about birth control. Blinder quoted all the economic indicators we are already familiar with. For example, who doesn’t already know that the unemployment rate is around 5%? Or that the stock market is much higher than its trough  in 2009? Of course, anything that might puncture his carefully constructed happy balloon was somehow ignored. Are people unhappy with zero interest rates? I think so. How do the recent stock market highs compare to highs before 2009? Not so great. The absolutely worse business capital spending and productivity increases that one can remember are not cause for indigestion? Export sales make us itchy. Even those at his former employer, the Fed, are lamenting the plight of souls who are still struggling despite a 5% unemployment rate. Most people just shrug when an economist explains that the economy has not grown so slowly for so long since the Great Depression. And even Fuzzy was not alive in the Great Depression.

To discount the economy as a major source of the country’s poor mental attitude is just plain wrong. But like most liberals these days Blinder doesn’t much care about the truth because he is all about politics and about making sure that liberal candidates get elected. Which gets me to the second part of his story. Blinder believes that our dissatisfaction with the USA today is not due to the economy but rather is due to “The fact that Republicans have blocked almost everything and proposed very little.” That’s it in a nutshell. Case closed. 

Lucky for George Bush, Alan Blinder is not blaming everything on him. Now it is all Republicans who make our people so unhappy. Spread the blame baby. Blinder cites Obamacare as evidence of Republican resistance. But Obama, with a huge majority rammed the largest change in social policy in decades down our collective pie-holes without one Republican to support it. Wow – who is the cause of political dysfunction there?  And please note the headlines reporting huge increases in Obamacare premiums. The Democrats created this monster – and now our negativity is the fault of Republicans?

And how can Blinder talk about blocking by Republicans? If the Republicans had a NFL team they’d be penalized for missing too many blocks – not too few. Listen to Obama make speeches today about all he has accomplished during his eight years. Listening to him you would think he was Abe Lincoln, Teddy Roosevelt, and General George Patton combined. He got Dodd-Frank. He got energy regulation. He stopped a pipeline. He stopped a recession. He contained ISIS. And there were examples of bipartisan support for a Doc Fix, a Highway Bill, a budget deal and so on.

No, Obama and the Democrats did not get everything they wanted. Yes, they met a determined opposition at every turn. But come on folks. Every President without a clear Congressional majority has had to fight tooth and nail. And that is as it should be since the absence of a majority government says that the country lacks agreement on key issues.

In summary, Blinder is very wrong to de-emphasize the role of a slow economy and to exaggerate the negative consequences of Republican resistance to a Democratic president. An honest appraisal would admit two things – it is the economy and it is a dysfunctional Federal Government that make us unhappy. Unfortunately extremes in both parties make the rest of us pay for their harmful antics. 

Tuesday, October 25, 2016

Fed Gone Wacky?

Bloomberg.com had an article last week with a photo of a smiling Janet Yellen which said that the Fed was elated that the inflation rate was rising in the US. On the same day was an article “The Fed Embraces a More Diverse Future” that had several quotes from Fed officials decrying disparate effects of unemployment on minorities. Minneapolis Fed President Neel Kashkari promised to “spend a day in the life of a struggling black family in order to better understand that experience.” The article concluded  

“While the Fed may have no direct ability to do anything about this relationship, it may be less willing to call an overall unemployment rate of 4.5 to 5 percent full employment if it coincides with a black unemployment rate of 8.5 to 9 percent.

I wanted to know more about the explicit goals of the Fed. I found the below words at a Federal Reserve website https://www.federalreserve.gov/faqs/money_12848.htm
The Congress established the statutory objectives for monetary policy--maximum employment, stable prices, and moderate long-term interest rates--in the Federal Reserve Act. In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.

Wow. Double Wow. The Fed’s explicit job is to control inflation and employment. Yet today’s Fed officials are happy to see more inflation and are not content when they reach their goal of full employment.

Interesting is how cavalier the Fed is departing from its statutory mission. I can see it now. Hey coach I think I would be more popular if I played guard on our football team. But son, you are a quarterback. Come on coach, the linemen are cool guys and I always wanted to hang with the cool guys.

The Fed has no mission and has no ability to affect the composition of unemployment. If they drive the unemployment rate below the usual definition of full employment – they can provide some jobs for those at the lower end of the labor pool. But history shows that such jobs do not last very long. Driving unemployment so low will cause the economy to run fast enough to absorb more workers. But like any engine that runs faster than normal for a while – it will generate frictions that eventually bring it back to normal – if not requiring a new engine! History suggests also that the aftermath of such reckless driving is often the dreaded scourge stagflation wherein both inflation and unemployment rise together. At some point the Fed then has to tighten and cause a recession and even more unemployment. Thus gains are not only temporary but they end up worsening the entire economy.

As for the seemingly perverse joy over a September rise in the inflation rate, this just underscores my point. Yellen has recently been quoted as saying it would be okay for the economy to run hot for a while. I like my coffee hot but she is delusional if she thinks a hot economy is a good thing. Higher inflation and a hot economy won't accomplish anything except to raise and then dash the expectations and lives of those least able to deal with such changes. 

Unfortunately our current Fed has fallen for the liberal line that one should focus on the short-run. Despite relying on nothing more than dreams and drugs, our Fed wants to make people feel happy that it is doing something. But like many do-gooders, the Fed has neither the tools nor the mission. Just because Congress is broken it does not mean the Fed can pull a rabbit out of a hat. Unequal incomes may be a problem but like the QB who wants to be an offensive lineman, the Fed is neither qualified nor licensed to solve this problem. Mrs Yellen -- please just stick to your job description.  

Tuesday, October 18, 2016

Lesson 16: International Investment

Those of you with post-kindergarten training may or may not know that governments keep international trade statistics. Even some of our current presidential candidates know that.  These statistics are found in something called the Balance of Payments Accounts and are found at bea.gov . 

While there are two equally groovy parts to the BOP figures most politicians only know about one part of it, the Current Account. The Current Account is on the top and we wouldn’t expect those people to actually read all the way down to the bottom, right? They are busy people. Also the history of the world and the solar system has emphasized the Current Account so it would be unfair to criticize our politicians for only knowing about the Current Account.

This Current Account is where we publish statistics that have to do with exports and imports of goods and services. We sell Chevys to China and they sell rice and replicas of the Great Wall to us. It’s a cool deal. Some of our political leaders have noticed that our dear country almost always has a deficit in our Current Account. And that burns them. After all – the word “deficit” is not a nice word. If your teacher said you had deficits in your behavior, you would feel injured and probably never get a PhD in science or classical studies. This deficit in Current Account means that we are buying more stuff from other countries than they are buying from us. This is especially true of China and since we have a very long list of other issues with China, our politicians complain and sometimes cry that this deficit with China is worse than Dengue Fever and needs to be stopped.

I have written thousands of posts (I exaggerate all the time) which explain why Current Account deficits are not necessarily bad things and I don’t won’t to repeat all that minutia here. I see the Tuna is already starting to nod off.

This post is about the other part of the BOP Accounts – the part at the bottom that most people ignore. It is the part that our politicians don’t have a clue about. So you should feel very special that I am doing this for you today and send either money or JD to thank me.

The second part of the BOP account is called the Financial and Capital Account (F&C Account). What a name! Can you imagine being in the first grade and having a name like that? No wonder no one looks at this account. But this account is the coolest kid on the block and has a lot to tell us.

The F&C Account records all the financial trades between countries. We don’t usually call these import and exports – instead we talk about outflows and inflows. If China invests in America we call that an investment inflow. We like it when foreigners open up US bank accounts and when they buy our bonds, stocks, and companies. All of those financial inflows are recorded in our F&C Account. At the same time, we also like it when US citizens invest abroad. We usually call that diversification. You don’t want all your eggs in one basket and you don’t want all your investments in US bonds, stocks, etc.

When foreigners invest in America we call that an inflow. When US citizens invest abroad we call that a financial outflow. Globalization means that citizens around the world have become increasingly interested in investments both at home and abroad. 

So as a public service and hopefully for money and booze I will acquaint you with some of the financial flow numbers. Below I will refer to some numbers from a close cousin of the F&C Account called the International Investment Account or IIA (the F&C Account focuses on the one period flows between countries while the IIA reports the resulting total ownership positions). 

As it turns out, there are some looming risks associated with the IIA account that we should be worrying about. Unfortunately our leaders are playing with their bellybuttons and/or are unaware of these trends.

I went to the bea.gov web site and downloaded a spreadsheet of IIA information from 2000 to 2015. Here is some of the information from that download:


                                         2000   2007   2015
US Ownership of F. Assets   7.6    20.7    23.3   
F. Ownership of US Assets   9.2    22.0    30.6
Data is trillions of US dollars
F. stands for Foreign

This little table tells you the following:

·       Globalization of financial markets was very evident in the new century with foreign ownership more than tripling from 2000 to 2015.

·       Most of that increase came between 2000 and 2007.

·       Then the activity slowed – especially with respect to US ownership of foreign assets. After growing by $13.1 trillion in the first period, it grew by $2.6 trillion between 2007 and 2015.

·       Foreign ownership of US assets slowed as well but it still increased by almost $9 trillion between 2007 and 2015.

·       If we focus on the 2007 to 2015 time period we see a much wider gulf – foreigners owned $7.3 trillion more of us than we owned of them. Nearly all of that gap can be explained by what is called portfolio investment (in bonds and stocks). That gap was $1.6 trillion in 2000; $1.3 trillion in 2007; and then $7.3 trillion in 2015.

What’s going on? Why are foreigners so interested in our financial markets?

First, since the financial crisis, the US has done better economically than other countries. A relatively stronger economic profile means more confidence in our financial products. Think Greece, China, and Venezuela.  

Second, think US government deficits and debt that have supplied a lot of investment opportunities to both residents and foreigners. Foreigners gobbled up our huge pile of new government bonds!

Third, while foreign companies did increase their acquiring and merging with in US companies, most of the gap mentioned above came from investments in private bonds, government bonds, and equities.

Fourth, notice that despite the gap, US citizens have shown a strong and growing appetite for foreign bonds and stocks. Despite a financial crisis foreigners continued to buy US assets and Americans continued to buy foreign assets.

What do we make of all this? When the gap is favoring US assets, this implies two important things. First, people need dollars to buy US assets so this has strengthened the dollar. Second, when foreigners buy our assets this pushes our asset prices up and interest rates down. With the huge increases in national debt and the needs of firms to finance their investment projects, this asset demand from foreigners prevented our interest rates from rising/stocks falling and thus helped to keep the US economy growing.  

And this is what concerns me. What happens when things turnaround? What happens when other major countries strengthen and their assets look more desirable to global investors? What happens when our government increases its debt even more as foreigners desert US financial markets? Financial globalization made the US wealthier when the rest of the world was weak and uncertain. Financial globalization will have the opposite impact if the US grows weaker relative to Europe, Japan, China, and other countries. Our politicians have complained loudly about the Current Account Deficit. Just wait to see what happens when buckets of money leave the US to be invested elsewhere. Then we will be clamoring about deficits -- deficits in the F&C Account!  

Tuesday, October 11, 2016

Debt? What Debt?

After the Presidential debates one would have wondered if national debt is in the vocabulary of our two candidates. Surely Donald Trump’s business deals in the 1970s and Hillary’s personal appearance are more important than the national debt. At least those two issues were discussed. But nary a word was uttered about the national debt. 

Each try to outdo each other with policies that would increase the debt but none seemed worried that a larger debt might be a problem. Surely making college free is more important that a nation’s debt. Surely giving families more time off from work is more important than a nation being able to pay off its debts.

So here I go again about debt. Debt is both easy and complicated. It is both beneficial and dangerous. It is seductive like a night with a hooker and debilitating like the rash that follows. And like the drug addict, he or she is the last one to ever admit that he or she is hooked. What a topic!

Debt is easy to understand. Consider three stories.

Story 1. You get to the end of the month and you spent all your cash. Luckily you have a plastic card that lets you buy a few more essentials. Or maybe you buy a few more Miller Lites or a lottery ticket. Next month you conserve a bit and are able to buy all you need and payoff your credit card. In that case, the debt lasts only a month. That story is both simple and nice. Debt was an instrument to accomplish an objective.

Story 2. You want to buy a house or a horse. Or a hose. These items all start with H and all three of them are durable goods. If you take care of them they last a while. It makes sense to pay for them over a time period that is similar to the life of the durable good. So you use credit to buy a durable good and you pay it off over time. That is another simple and acceptable role for debt. If you are a humble employee in the workforce you don’t buy a $4 million dollar house. It is too expensive. It would create too much debt to pay back. Instead you buy a house whose payments are comfortable for your monthly income.

Story 3. You buy that $4 million dollar house. Or maybe you really like JD but you decide to instead buy a new $400 bottle of Pappy. You like the Pappy so much that you buy a bottle a day and a few extra bottles for your friends. Clearly you cannot afford $12,000 per month for bourbon. But it REALLY tastes good. Your mortgage lender or your credit card company likes you to take on more debt. At least until the day comes when you quit paying them.

Story 3 is a silly story, right? But we know that people and countries do this kind of behavior. People go into debt for all sorts of reasons – houses, cars, education, jewelry, gambling, drugs, and more.  Countries get hooked on defense spending, pension programs, healthcare, and more. When I say hooked I am not implying anything negative about spending on any of these items. The problem comes when you spend more than you can afford and you find it difficult to stop.

But what can you afford? That’s an interesting part of all this. Except for the dishonest and corrupt, most of us think we can afford our debt. Like me, many of you bought your first house, looked at the size of the mortgage, and started to shiver and shake. Can I really pay back that amount? I was young then and did not know what would happen to me. But a good financial system has criteria and rules and they are willing to bet on people who have track records and/or whose current situations warrant trust.

This brings to mind two challenges. First, we make mistakes and accidentally take on debt that is too high. Second, unexpected things unfold that change the equations. Worst among these is that you lose your job and/or your future income turns out to be much lower than you expected. Also terrible is that unexpected expenses crop up and eat up your income – healthcare, a family member needs help, your kid gets accepted to Harvard, and so on. Whatever the case, stuff happens and then you can no longer pay the debt.

When you can no longer pay the debt is when things get tough. There is no easy way out. You are between the proverbial rock and hard place. Even if you find a way to not fully repay your creditors, you are back to square one. You have lost the durable good that you can no longer afford. And now, you will find it much more difficult to get new credit – so you will have to live on what you earn. The choices at that point are very unattractive.

Notice that all of this would have been avoided if you had not taken on the debt. Or that you had taken on the debt in a more sustainable way. That leads to unpleasant but rational realities like borrowing much less than the bank will allow. That might mean buying a cheaper house or car or going to IU instead of Harvard but it also means that contingencies are easier to deal with. Another option is to wait. While you wait you save money and later make a good down payment on the durable good. No alternative is foolproof in an uncertain world. But some options reduce the probability of a catastrophe.

Debt is inevitable. Debt can have unforeseen negative and debilitating consequences. So it is good to handle it carefully.

All the above applies to countries too but it gets more complicated. For one thing, having its own currency means that most countries can print money to pay debts. At least for a while. Excessive currency creation we know might work for a while but then it causes inflation and other instabilities that transmit a message to creditors – this ship is taking on water and may sink.  

Think about what happens when a country gets a debt problem. Below I am summarizing some of the things we have learned from debt crises over the years in many different places. The first signs come when the debt gets big enough for people to notice. At that point investors shy away from the debt and that reduces bond prices and raises interest rates in that country. If the debt is not attended to debt rating agencies downgrade the debt causing rates to rise even more. A reduction in purchases of debt by foreigners may cause the currency to depreciate. A rapidly depreciating currency is worrisome and will sometimes cause a country to try to stabilize the downswing. It does this by buying its own currency using foreign reserves – and then the level of those reserves fall. That sends another worrisome signal to the world.

Then the world waits to see if the government gets the point. Everyone knows they have gone into too much debt and need to do something about it. The more the country hesitates to reduce its debt in conventional ways – the more confidence falls, the more interest rates rise, money flows out, the currency depreciates, and foreign reserves plummet.

I am getting depressed. Where is that JD?

What about the US today? Where are we? Actually we are okay. Yes the debt went from roughly 30% of national income to more than twice that in the past decade – and is scheduled to rise even more based on current laws. Some estimates have US debt closing in on about 100% of GDP soon. But that is BEFORE we factor in any of the current proposals by the candidates for more spending and/or less taxes. So maybe we are talking well over 100% by the time the new President gets rolling.

But that’s not the whole story. What happens if we have a crisis? We are due for a recession in the next few years. Given alarming trends in China, Russia, Iran, and Syria might we decide to spend a lot more on defense and security?  Will we need to bail out business and/or student debt? Such scenarios could send our national debt soaring to well above 100% of GDP. Then what will happen? Nothing good! Now is the time to worry about that. Not after the fit hits the shan. 

Tuesday, October 4, 2016

Lesson 15 Money and Monetary Policy

Janet Yellen is the head of the Fed. She and her colleagues at the Fed determine the nation’s money supply. Much has been said about her management of money and lately she is being labelled a lackey of the President and Mrs. Clinton. I doubt she is lackey but I would say that she is guilty of drinking the same Kool-Aid as her liberal progressive buddies in government.

We grew up with Kool-Aid and I don’t mean to disparage that lovely and colorful drink with enough sugar in it to start a diabetic colony.  What I mean is that Yellen, Obama, Clinton and many others share a similar philosophy in general and in particular with respect to the magical qualities of money.

And that’s what makes this post today so much fun. Money itself is about as exciting as your Uncle Ed who rocks himself to sleep at 1 pm in the living room while you watch his cigar ash fall on his partly open bathrobe. Money is paper. Or money is electronic entries that get transferred from one account to another. 

This is not exciting stuff. You buy something – whip out a bill or a debit card – and the deed is done. Nothing to write home about there. It’s like your best friend Peter. You wear plaids and so does he. You wear stripes and so does he.
Although money itself lacks any real excitement, governments can turn it into Charlie Sheen on crack. There was a day when the world did not have money. We called that barter. A farmer would trade three carriage loads of corn for two dresses. That worked okay but corn farmers could not always find dressmakers and so pretty soon money evolved. If everyone carried money it made transactions much simpler.

Money went through a number of stages. Money needed to be around. At first it was commodities – stuff that most people already had and knew the value of – like corn or wheat. Then they were replaced by commodities that seemed to be more durable and held value better – like silver and gold. Silver and gold are pretty but those commodities are heavy or bulky and not easy to safeguard or carry to Sam’s Club. The next stage created paper money  wherein the paper money had to be backed by gold. Paper was essentially valueless but it represented an amount of gold.

Are you history-lovers still awake? Finally came the stage where money could be pulled out of a hat. Not really a hat but essentially the same thing. Central banks create money at will. They need nothing but a magic wand and an Internet connection. Money is “backed” by faith that the central bank will always create the right amount. Not too much and not too little. Like Goldilocks, we like just the right amount of money. The Fed pretends to give us what we want.

And here is where ideology comes in. The conservative school of thought sees the world as being very complicated and uncertain. The right amount of money is no easy thing to attain. Jim suddenly needs money to fix his roof. Dan swears money off when he decides to live in the forest. Imagine figuring out the right amount of money for a whole country day by day. Humbly, conservatives prefer a passive approach. Transactions usually grow by about 5% per year. So let the money supply grow by 5%. End of story. Go fishing.

But liberals always think they know more and apparently they are nervous people who don’t like fishing. They erect giant data collecting machines and try to measure the demand for money on a minute by minute basis. They take great delight and credit by measuring and the ups and downs of money and then trying to match those demand changes with more or less money. Think Whac-a-Mole. Liberals admit that sometimes they get it wrong. They admit that sometimes they even cause recessions when they get it wrong. But alas they are progressives and they are pretty sure that sometime in the future their models will be more correct and the world will be saved. Think Don Quixote.

If the above is not enough to make you reach for the JD pitcher there is more. Even though the infamous JM Keynes said that controlling money was like pushing on a string other modern liberal economists decided to give monetary policy a bigger role in society. Matching money supplied to transactions needs was way too boring for these moderns. So they decided they would match money to employment, prices, exchange rates, and hooker sales. If employment was too low then pump a bunch of money. If prices are too high take it back out. If exchange rates rise then blame China. If hooker sales go up or down call Charlie Sheen.

Talk about a way to guarantee that your name will get into the Bloomington Herald Times on a regular basis. The Fed now has so many balls in the air that it would take a multi-headed hydra to try to catch them all. But undaunted they collect data every day and they have serious discussions and then they go home to their mansions and foreign sports cars.

Yellen and her buddies at the Fed and in the government are not necessarily colluding. They simply have this faith that they know how to manage a 21st century global economy. That they have been doing it badly never concerns them. They never question this faith that more active policy is better. They are modern and smart. They will learn from their mistakes and finally get it right. They will save us.

Their disease is incurable because failure begets more activism and then more failure. Nowhere in their playbook is taking a deep breath. Nowhere in their training is the idea that too much variance and activism creates uncertainty. Nowhere in their discussions is that it takes time to disentangle short-term noise from long-term trends. Nowhere in their arsenal is the knowledge that some problems are non-monetary in nature and require non-monetary solutions. 

Lackey? I don't think so. Misguided and dangerous? I think so. 

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.