Tuesday, March 30, 2010

Should the Rich pay more taxes?

I suggested in an earlier blog that the recent healthcare reform is part of a bigger agenda to redistribute income and wealth in the USA. I just saw a television interview with Howard Dean, a Democrat and a former presidential candidate who confirmed the idea. The widely held belief is that under President George W. Bush (or perhaps longer) the distribution of income changed in such a way as to move income from the poor to the rich. Therefore, the argument goes, it is okay to tax the rich more so as to provide healthcare benefits to those in lower income brackets.
Data from the IRS do not confirm the widely held belief that the rich have somehow escaped an increasing tax burden. If anything, the tax burden on the rich has grown while the tax burden of the poor and those with middle incomes declined. Of course, there might still be an argument that these relative burdens should have changed even more.

Read on for the details of my analysis of the IRS data.
The above link will take you to a report summary and details presented in 10 tables. The tables contain relevant income and tax data for each year between 1980 and 2007. Given the limited room we have here, I decided to focus on comparisons over a 10-year time period from 1997 to 2007. Of course, results could differ depending on which years are compared and the reader is invited to use the data to further the discussion. Briefly, both 2007 and 1997 were years of strong economic growth. While 2007 was the end of a long expansion period, 1997 was not the terminal period of a similar long expansion.
All the data discussed here comes from income tax returns. Thus, it does not include any direct data on wealth. Since adjusted growth income (AGI) does include income from assets as well as labor, it is a fairly broad measure of income. The data reported includes tax return filed that reported a positive AGI – whether or not they paid anything in taxes. Some paid zero (meaning they received back anything that was withheld) in taxes. AGI does not include government transfer payments and other non-taxable income sources.
To facilitate the discussion, I compare three groups – those in the upper 10% of the incomes (Rich), those in the lower 50% (Poor), and everyone else (Middle). I recognize there are many ways to define the rich, poor and middle. To be in the upper 10% in 2007, you had to make more than $113,080. To be in the bottom 50% you could make no more than $32,879.
The details are below, but here are the three main points of the decade comparison -- 1997 to 2007:
1. While the Rich had large income increases, their share of income taxes rose proportionately more to where they accounted for 71% of all incomes taxes paid in 2007. Thus, 10% of the filers paid 71% of the income taxes. They accounted for 43% of AGI reported.
2. The Poor’s income rose during the decade, but the lower 50% of filers fell further behind the rest of the population. This 50% of the population accounted for only 12% of income reported in 2007. They contributed only about 3% of all taxes, however, down from more than 4% in 2007.
3. I constructed a measure of taxes paid relative to income reported and found that the share of taxes the Rich paid was 48% more than their equal share of taxes (if their tax share was equal to their income share). That was roughly constant over the decade. In contrast, the Poor paid about 25% less than their equal share of taxes (if their tax share was equal to their income share). This was down from about 31% in 1997. That is, in 2007 the Poor earned 12% of the income but only paid 2.9% of the taxes.
In 1997, the following was recorded:
· 121.5 million tax returns were filed, with AGI of about $5 trillion and paid income taxes of about $730 billion.
· The Rich (according to my definition) accounted for 10% of the filers, 43% of the income, and 63% of the income taxes.
· The Poor accounted for 50% of the filers, 14% of the income, and 4.3% of the taxes paid.
· Middle accounted for 40% of the filers, 43% of the income, and about 37% of the taxes.
Some metrics – The Poor compared to the Rich had 5 times the number of returns, one-third the income, about 7% of the taxes paid. Summary of metrics – there were many more returns filed by the poor, they accounted for a very small share of the income, and an even smaller share of taxes. If 100 signifies an equal share of taxes to income – then the score of the Poor was 30.7. The score for the Rich was 147. This is one way of measuring the progressivity of the income tax.
Next, let’s see how these metrics changed between 1997 and 2007
· The number of tax returns increased to 141.1 million – an increase of about 16%. The overall USA population increased by about 13% over those years. AGI rose by $3.8 trillion or by about 76%. Income taxes increased $390 billion or by about 53%. The average income tax rate for the USA went from about 14.6% in 1997 to about 12.7% in 2007.
· Rich (as defined by the upper 10%) received 48% of the income and paid 71% of the taxes. Comparing to 1997, the share of income going to the Rich increased by 5 points (from 43% to 48%) and their share of income taxes increased by 8 points (from 63% to 71%).
· Poor (as defined by the lower 50% of the filers) reported 12% of the income and paid 2.9% of the income taxes. The share of income of the Poor fell from 14% to 12% while their share of the taxes declined from 4.3% to 2.9%. Their share accounted for 2 points less of the income and 1.4 points less of the taxes paid.
· Middle’s share of income fell by 3 points from 43% to 40% while their share of taxes declined 6.6 points from 32.7% to 26.1%.
Over these 10 years the income share of the rich rose by 5% -- with the share of the Poor and Middle declined together by 5%. The tax share of the rich increased by 8% while the other 90% of the population saw their share of all taxes declining by a total of about 8%. If we compare income to taxes, the Rich’s score rose slightly to 148; the Poor’s score decreased to 24.2; Middle’s score fell from 76 to 65.

Monday, March 29, 2010

Leaving a comment

Some of you have tried to leave a comment on my blog and have had problems. I apologize for the inconvenience. I think I now understand the issue.

To leave a comment you must have an account/password at google (the easiest), yahoo, or twitter. Follow these steps to post a comment:

1.Type in your comment (highlight and save it just in case something goes wrong)
2. There is a box that says "Comment as" -- either select Google or select OpenID
3. If you select OpenID it will ask you for its url -- simply put yahoo.com or twitter.com
4. Then sign in using your google/yahoo/twitter account and password
Then you should be able to post your comment

It sounds difficult but it really is pretty easy. Thanks for putting up with this. The alternative is to make the site totally open and I am afraid none of us would like the security issues involved with that option.

Sunday, March 28, 2010

The new four-letter word – Socialism.

Okay, so Socialism isn’t a four-letter word – but maybe I got your attention. I hate to be the first one to pass along this information to some of you – but we live in a socialist country here in the good old USA. Now I really have your attention.
As in my other postings – the bottom line of this one is to ask why name-calling and concept-hurling replace real discussion and analysis. I discuss four issues that could be dealt with in a straightforward way and should comprise the elements of a real discussion.

Most people on this planet, including those of us in the USA, live in a mixed economic system. The mix involves varying degrees of capitalism and socialism – generally meaning that economic decisions involving production, distribution of income, and allocation are partly based on interactions among private actors in markets (capitalism) and partly by government (socialism). China might have a Communist political system with one party, but for 20 or more years it has been slowly privatizing and liberalizing in many ways so as to move decisions from the government to private persons and companies. Much of industry remains in China’s government control and its economic system is more socialized than the USA, but it is a mixed system. The USA is mostly a capitalist system but it has very evident and significant government control.

So what is going on with the four-letter word thing? – you are socialist – nah nah nah nah. No I am not – nah nah nah nah.

The issue is that recent political events suggest a movement towards a more socialized economic system in the USA. Thus the balance of market/government is changing in the USA. So it is much easier to call each other names than it is to use logic and facts to support/defend a movement in the mix in one direction or the other.

Clearly it is more interesting than it sounds on the surface. There always has been and always will be a desire to make sure that the less fortunate are not left behind in the wake of free market outcomes. The extension is that there is no theoretical formula which spells out what less fortunate means. Even poverty has no empirical and universally agreed upon numerical threshold. Thus, there will always be those who believe that economic outcomes of the marketplace could be improved by reallocating some of the benefits to those who did less well. Since this does not happen automatically under capitalism, there is a role for the political process and government. And notice that what passes as politically acceptable changes over time. Three hundred years ago, government did very little for people. Upshot – the demand for redistribution should be expected to change over time.

That sounds good. Most moral philosophies would support helping one’s neighbor. So the question is mostly – when is enough enough? And that is where the fun starts. I like the phrase – don’t throw the baby out with the dirty bath water. This colorfully gives rise to the idea of intentionally doing a good thing (getting rid of the dirty bath water) without negative unintended consequences (also throwing out the baby). So how do we minimize the unintended consequences? The first issue has to do with making sure the government interventions are effective – that is, they not only redistribute the income but they try to remediate problems that might prevent people from doing better on their own. In this regard we often hear the dictum, “Don’t give a man a fish – teach him how to fish.” The second issue concerns disincentive effects of the policies on those who earn and produce the most. Clearly if the policies induce the most productive elements of society to produce less, income might be more equal but the average income of society will be lower. Finally, the third issue revolves around the use of debt to attain income distribution goals. Clearly someone has to pay. How much of today’s income redistribution should be paid for by our children?

I fear I may have angered one particular group and I want to say one more thing to them. There are people alive today who witnessed personally or heard/read about their family members and/or friends being harmed by socialist political regimes – past or present. My mother was a refuge from Hungary. There is a point at which my economic discussion and the three issues above lose relevance – when economic socialism turns into dictatorial political socialism. So I should add a fourth issue to the above paragraph that asks whether or not increasing economic socialism could lead to ruthless dictatorial regimes. If the answer to that is YES, then that would trump the first three.

I am sure I left something critical out – and that’s why we have room for comments.

Wednesday, March 24, 2010

Is Stiglitz part of the solution or the problem

I try to be a pragmatist and that compels me to wonder why my most famous and awarded economist colleagues want to line up on the extremes of thought with respect to our most pressing economic problems. Today I saw a piece by Joseph Stiglitz, Dangers of Debt Reduction (http://www.bepress.com/ev/vol7/iss1/art6/?sending=10949 ) and for the life of me I just can't figure out why he wants to spread such nonsense. Few serious economists are advocating a quick resumption of balanced budgets. This blog exists to explore if there is a sensible centrist way to approach our current problems. This post singles out Stiglitz' article as a good example of a non-centrist and ignorable piece of work. Pardon me if I try to list some of his revelations and conclusions.
  • Even with the recent government deficits, the main risk to the US economy is high unemployment and weak growth
  • Thus we should not quickly reduce government deficits.
  • Government investments in education, infrastructure, and technology should lead to smaller deficits in the future. What counts are national assets versus liabilities.
  • Unlike when government spends more on wars and give-aways to financial firms, government investments build national assets.
  • When the economy does perk up, we should reduce deficits largely through taxes on bad things like pollution, taxes on bad guys like the financial industry, and taxes on speculative activity.
  • Reducing government spending is not a risk worth taking
Okay my friends, this sounds pretty logical -- or does it? We have very large national government deficits and debt today. We have the baby boom ready to fall off a very steep cliff requiring a lot of government support. Economists can give you estimates of how much debt will be accumulated under various scenarios.

And Stiglitz is suggesting that we can solve these challenges largely by having government spend more on social investment while eventually raising more revenues by taxing bad things, bad guys, and bad behavior. While giving us not a clue as to how much tax revenues would come in from the fiscal dividend of higher growth and assets or from his sin taxes -- he seems extremely confident that our problems will be solved. I would love to see at least a faint attempt to estimate when and by how much his policy recommendations will lead to economic and financial stability in the US over the next 10-20 years.

Of course, that would be good for starters. What about answering some questions...

What is the risk that government will wait too late -- start reversing deficits once the economy regains its strength? He says this risk is smaller than the risk of reducing the deficit too soon. How does he come to that conclusion? What do the 1970s say about government's ability to easily reverse course after years of strong spending on military and social programs? If deficits and debt are not reversed quickly enough, how might that impact US interest rates, stock prices, exchange rates, inflation... Are there any historical examples of countries that have had such problems? Is it not worth expending a few words on the real expected benefits of spending more today on education or infrastructure? Of course, we all hope government will spend that money wisely but is there no evidence to suggest that this too is a risky endeavor -- that sometimes governments waste money? Aside from advice given to transforming nations, how many economists advise rich industrial countries to use government investment on education and infrastructure as the main way to generate economic growth and reduce government deficits?What is the cost in terms of jobs and economic growth when you focus your attention on penalizing business with higher taxes? Is there any ceiling on how high you would go with respect to tax rates on the rich and business?

Stiglitz won't answer any of these questions because he has attained a status that let's him print this kind of dribble without any real support or analysis. He spoon feeds us gruel because he thinks we are too dumb to think for ourselves. Of course, he writes this kind of stuff because he likes being the darling of the left and he knows that people in power will love having their shoulders rubbed.

What really needs to be done today is a lot more complicated than Stiglitz makes out. Stiglitz' one-sided account does not do justice to a more seasoned and complete answer for today's enormous fiscal challenges. Dangers of debt reduction indeed!

Monday, March 22, 2010

Robn Hood Rides again

In the spirit of not overly irritating one party or ideology over the other -- let's agree that Robn (Reid, Obama, Biden, Nancy) succeeded to do what some have wanted to do for years -- legislate a bill that attempts to change the distribution of income in the USA -- or as the President frequently says, "Spread the Wealth Around."

Forget that what was passed in the House yesterday is called Healthcare -- just notice what the bill did in terms of redistributing income from the rich to the poor. If you want an analysis with some of the specifics and some numbers, go to Bloomberg (http://www.bloomberg.com/apps/news?pid=20601010&sid=apU2CQDSEG9g ).

While almost every aspect of the bill has implications for redistributing income away from richer people and corporations -- here are a few of the key ones --
$103 billion Medicare Payroll Tax increase for families with incomes above $250,000
$88+ billion excise tax on insurance companies and brand name Pharmaceutical companies
2.3% tax on medical device companies (no dollar amount estimates) -- notice this is on all revenues -- not levied against profits.
$70 billion on premiums for expensive healthcare insurance
$466 billion in subsidies for health insurance for poor families

Isn't this amazing that they were able to make such large and permanent changes in income distribution (after taxes and subsidies)? So if you believe that income redistribution is important -- then you are very proud of ROBN. They accomplished what few other governments have been able to do. Of course, if you are on the other side of the issue then you are going to have a different set of feelings.

One more point before I let my friends nibble me to death. We all know there is a difference between tax changes and tax incidence. The REAL question, whether it relates to income redistribution or health care, is how this bill will IMPACT us in the coming decade. I won't extend this single post with the hundreds of impact issues because I know the next year will be filled with lots of good articles. I will throw out one tidbit -- to what extent has the CBO estimated the number of the 4 million households who might have earned $250,000 or more who will suddenly report income of $249,000 when the taxes are due. And how will this tax avoidance impact the macroeconomic system in the USA?

Wednesday, March 17, 2010

St. Patty and the Chinese Dragon, Yuan

Betty is in the kitchen pouring two very nice bottles of Guinness Stout over a perfectly innocent corned beef roast. While most of us in the USA have no idea why we drink Guinness, wear Green, and try to speak with an Irish accent every March 17, we gladly partake in the annual festival of St. Patty. Even if we are Jewish. Anyway, I digress. St. Patty had nothing to do with China or a dragon and I just said that to get your attention so I could spout off a little bit about the Yuan.

No the yuan is not a Chinese Dragon or an Irish Whiskey. Rather it is the official name of the Chinese Currency. We have a a dollar -- they have a yuan (also referred to as a renminbi, reminbi, or mean and ugly culprit leading to the demise of all red-blooded Americans.) The markets say that 1 yuan will get you about 14 cents. Or put the other way -- $1 will get you about 6.83 yuan.

For the last year and a half China returned to the practice of pegging the value of the yuan at 6.83 to the dollar. Previous to that, China was, more or less, letting the yuan/dollar exchange rate float. Market forces pushed the value of the yuan up -- meaning one could get more dollars with a yuan. The US government thought that was really cool since it meant that US goods and services would be cheaper to buy in China and all our problems would disappear, including teenage acne. But those fun days are gone and the Chinese have gone back to "pegging" at a value of 6.83.

That makes some of our people livid (imagine responsible government officials foaming at the mouth). So lately we see lots of stupid statements from both US and Chinese officials. "You guys are protecting your economy illegally." Other side retorts "No we are not. Na na na na na." "We are going to beat you up if you don't let your currency float." Retort -- "My mother's bigger than your mother."

This gets us back to my theme about spouting. Where is the cause and effect? Where is the rational approach to policy and international relations? Will letting the currency float again really make a big difference? Are we really getting anywhere?

Let me finish this rant with some questions....

If China lets its currency float, will its value rise against the dollar? Enough to make a major difference?

If it rises against the dollar, how big an effect will that have on US exports to China?

Speaking of exports to China, what does China usually buy from the US? Do they need/want more?

If China is not buying enough goods and services from the US, do we know why?

The last time China let the yuan float, what happened to US exports to China? To the trade deficit between US and China?

What do we buy from China? Why do we buy so much?

If the yuan rises against the dollar -- will US importers be filled with joy? How will that impact US households? How will that affect US business decisions with respect to prices they charge at home?

If the Chinese government stops buying dollar assets as their way to let the yuan appreciate, what will that do to US bond markets? US interest rates? Other US financial markets?

How do these changes in financial markets help/hurt our avowed US monetary policy to keep interest rates near zero for the foreseeable future so as to stimulate domestic spending?

China seems to be a fast growing but risky place -- if they bet the farm on trade surpluses then how will smaller trade surpluses help their national stability?

Is an unstable China a good thing for the USA?

As a developing country -- can China easily replace the foreign demand for goods and services with local consumer spending?

Who put the bop in the bopshebop who put the ram in the ramaramadingdong?

Looks like I ran out of questions and the smell of corned beef is wafting down into my basement office. This spout is all about approaching policies sensibly and without extremism. Is the exchange rate issue with China really as simple as some of our talking heads make out? I think not! Let's tell them to shut up until they have something useful and constructive to say.

Tuesday, March 16, 2010

More about Working together

In the previous post I forecast that extremist policy views would soon be seen as selfish, inappropriate, and counter-productive -- and will be edged out by saner ideas based on cause and effect logic. I know that sounds crazy but the evidence is piling up. I know -- it doesn't seem to be apparent in the health care reform debate but it is showing up in other places. I quote from yesterday's article in the Financial Times (page 11, March 15) "A frugal budgetary policy is the better solution" by George Osborne and Jeffrey Sachs...
"Our macroeconomic view, in short, can be stated as follows. We must escape from economic management by quarterly indicators and the demands of the political business cycle....Our priority should be a medium-term fiscal framework, with the first steps starting this year. That must be matched by improvements in the delivery of health, education, skills, and technology; social protection for those in need; and a decent regard for the long-term investments needed to rebuild an economy crushed by the bubbles of wishful thinking."

Sachs and Osborne point out what most of us know -- we will never return to good economic growth with unsustainably high government budget deficits -- so they advocate real policies to quickly address and reduce the size of government deficits. Well intended short-term stimulus at this point, according to these authors, would be counter-productive. But they do not discount a role for government since they forcefully advocate a public role in "... regulation, high quality education, pre-commercial innovation, and a world-class science and technology base.

Sachs is director of the Earth Institute at Columbia University . More information about him and a link to the FT article can be found at:http://www.earth.columbia.edu/articles/view/1804

It is a question of priorities. It doesn't matter if it was Bush or Obama who caused a larger national debt. It doesn't even matter the goodness or the motivations of the government spending. What matters most today is that most people -- at home and abroad -- wonder and worry if the US will find a way to reverse the very large deficits of the last couple of years. We see what those kinds of worries did to Greece and the Euro. Greece now must experience a macro shock treatment if it is to convince the world that it is credit-worthy. The US situation is not as dire now -- but the lesson is instructive.

First things first. If we remove the shackles of debt incredibility then we set the stage for a return to economic growth. It is this economic growth that will restore the job engine and the income growth that will allow some wiggle room to work on social inequity. Reversing the order of things right now makes no sense and helps no one.

Sunday, March 14, 2010

Report Card -- Not spouting off enough

I have received a few comments from friends that I am not spouting off enough. Since it is nearly spring and I set my clocks ahead today I will try to sprout a little more. Ha ha. You meant spout and not sprout.

I thought I was spouting off -- I made a big point about useless and misleading data reports. I also tried to make a point about politicians being too short-term oriented and not focusing on the real issues. But you want more -- so here goes.

I think some of you people are living in the old world -- a world where left and right ideology are important. Like many good things that outlive their usefulness, this dichotomy is not only less productive than it used to be but it is downright damaging. You don't have to meditate and say Ohhhmmm three times a day to see how today's difficult challenges reflect our inter-connectedness. It is our overlaps that matter more than our differences. I listened to a labor leader pontificate the other day -- his mantra is unchanged from the 1960s and focuses on the separate and paramount goals of workers. Firms and their leaders, according to him, are selfish and gain only by stepping on the backs of the workers. I hear plenty of talking heads on television ridiculing people who ask Congress to do more to help those whose situations have eroded over the last decade. There is plenty of finger-pointing and derision. A few minutes watching any news program easily and vividly supports the notion that ugly and mean spirited accusations dominate the news. Listen carefully -- there is VERY little said about the real causes of our problems. There is very little time devoted to honestly debating the impacts of various solutions.

Don't kid yourself -- this is not business as usual. And one side is not going to win. There are three things that are missing today. First, there is no real discussion of cause and effect. There is no serious debate about the most important issues. Even some scientists lie and exaggerate. And we let them do it. We have chosen our teams and whenever the "good-guys" say anything we jump to their side and their defense. We don't even listen to the "bad-guys". Second, once we get into cause-effect analysis we will clearly see that the solutions to problems require shared burdens and shared misery. We don't think that way now. We are not going to do better as a nation or as a world until we realistically evaluate the ways in which we can share the burdens of the solutions. Once we start REALLY CARING about the plight of others, the more they will care about ours. Funny thing -- this sounds a lot like the moral philosophical statement -- Do unto others as you would have them do unto you. You don't have to be in any particular religion to believe in that idea -- most religions and many variants of atheism see Do unto others as a pretty logical way to live. Third, we lack leadership. Some of you think I am out of my gourd, but those of you who don't think all this is too crazy should be looking for leaders who are reaching across the famous aisles or looking for ways to create coalitions that transcend obsolete idealogical silos.

Whether the present healthcare policy passes into law or not; Whether we get an energy or new stimulus or a financial reform bill -- it doesn't really matter. The losing side will find a way to regroup and challenge again in the coming year or years. It is good to have this kind of competition in government. BUT THE PROBLEM is that this competition is wrong-headed and motivated by sad, pitiful, close-minded extremism. Extremism is a form of sadistic pleasure- seeking that gains only at the expense of others. Real analysis is, on the contrary, pretty hard and dreary work. After working all day, who wants to come home and listen to talking heads discuss and debate the details of our many issues?

As the tsunami comes closer to our sadly weak and short seawalls, we will become clearer about our common and interdependent fates. Real debate and solutions will sound a little sexier. As the baby boom hits the shores of retirement in bigger numbers over the next decades, we will see the end of extreme ideology and the rise of seriousness about evaluating and solving our biggest challenges. Let's hope we don't wait too long.

Was that enough spout?

Thursday, March 11, 2010

The Whack-A-Mole Recovery or Good News is Bad News Until the Good News Really is Good News

Sorry about that title. My marketing friends will cringe but I just couldn't find the right title despite trying for almost 11 minutes. Anyway, there seems to be a big discussion among the pundits about the short-term future of the US economy -- will it be L- V- or W-shaped? While I like shapes as much as anyone -- I don't think these choices are helpful or correct. In words that Dr. House might use -- they are plain wrong.

So let's get on with it. Whack-A-Mole brings up the idea of a mole's head popping out of a board and before you can really hit it with your hammer, it disappears back in the hole. Like a roller coaster, it goes up and before it can reach the sky it goes back down again. I like this picture because I think this describes the course of the US economy for at least a couple of years...if not more. Thanks to colleague Mike B. for the idea of the children's roller coaster -- it goes a lot slower than an adult one. That's the second point -- not only are we stuck in roller coaster purgatory, but the average speed of the roller coast is pretty slow.

So I have two points -- a slower-than-average recovery typified by spurts and fizzles. This is very different from a typical V- shaped recovery -- which would have stronger-than average growth for a year of more following the recession. It also differs from the W-shape which imagines two recoveries sandwiched between two recessions. What's the deal? The deal is that we have the buds and shoots of a sustainable recovery around us now but it is complicated by at least three factors. First, the sources of the real estate and financial crisis that started all this have not been fully digested or addressed with policy. Second, we have a huge monetary overhang that must be withdrawn. Third, we have a lot of government debt to sell in the next few years.

So what? The problem is that good economic news -- news of growth in short-run economic activity will be met with rising interest rates and inflationary expectations. The rising rates will panic a lot of people. They will keep the average firm and consumer in a state of perpetual uncertainty. Even without the panic, a time of good growth will mean increases in credit demand from the private sector -- putting it on a collision course with the government for sparse domestic saving. Thus good news is bad news since strong growth will create the seeds of its own partial destruction. How long will we be in growth limbo? That's simple. We will be limbo as long as we have not full resolved housing and bad debt; as long as we have a significant money overhang; and as long as we have a government deficit/debt problem. We won't return to a second recession in this scenario because we have made progress -- housing and stock prices are higher and firms are making positive earnings...but our three longer term factors make it difficult to break out into a gallop or growth.

Of course, we don't have to completely solve these three challenges -- the more it appears that we are on the road to real solutions for them, the higher will be the growth rate of the recovery. But with today's partisan approach to politics it is hard to see that outcome arising. Some might say I am being overly pessimistic but I don't think so. It makes no sense to stick your pinky in a small whole in the dike was a tsunami approaches.

Monday, March 8, 2010

Favorite Macro Graphs and Data

This Post will grow and change. These are some of my favorite macro graphs and data sources. Just click the data item below and you will be whisked to a wonderful site...I use these graphs and data to help my students gain perspective on macro change. It is one thing to memorize a bunch of concepts -- it is another to have a "feel" for how they change over time. It takes a while to add links so give me a while to get most of them done. In the meantime, post a comment if you want me to add something for you.

Here are some nice Macro graphs for the USA
Percentage Change in Real GDP USA
GDP Quarterly Press Release with data tables

These graphs relate to Monetary Policy in the USA

These graphs relate to Fiscal Policy in the USA

These graphs and data relate to the Phillips Curve for the USA
Phillips Curve file has spreadsheet of unemployment rate and change in the CPI inflation rate for each year from 1960 to 2009. Scroll down in the file to see a few connect the dots exercises. You can clearly see the downward slope at times, shifts at other times, and wackiness at still other times. If you believe in the expectations adjusted Phillips Curve you can have fun with this. If you enjoy throwing darts please be careful when children are present.

International Comparison Data -- the following links take you to sources of macro/policy about various countries.

The next site is a data appendix from a recent OECD Economic Outlook (86). It contains 60-something tables of data. Key categories of tables include: Demand & Output, Wages, Costs, Unemployment, Inflation, Key Supply-side data, Saving, Fiscal Balances and Public Indebtedness, Interest Rates and Exchange Rates, External Trade and Payments, Other background data. Click the FULL TEXT Button to open the files.

The IMF has a similar publication -- IMF World Economic Outlook (Jan 2010). It has a similar data appendix which allows comparison for an even larger group of countries.

Sunday, March 7, 2010

Look at the data -- Employment and Unemployment

The Saint Louis Fed is a great place to find data and graphs. Since we have been writing about employment and unemployment lately, it doesn't hurt to see what the graphs show. These graphs begin in 1985 and give you some perspective. Notice the grey bars indicate time periods of past recessions. These graphs come from a publication called National Economic Trends. Can you see why people say that the unemployment rate is a lagging indicator? Notice that the unemployment rate does not begin to fall for several years after the end of a recession....

Saturday, March 6, 2010

Unemployment can be fattening

Since none of you responded to my first post, let me try another one. It is an analogy. Suppose you gained 40 unwanted unsightly pounds. You decided to reverse course and lost 10 pounds over the last several weeks. Today you get on the scale and you gained back 2. What do you know? What should you do? The 2 pounds could signal that you are on course to start gaining weight again. It could be the signal of a bad trend starting.It could also be the result of weighing at a different time of day. It might have been caused by the extra water you drank after a vigorous exercise session. Your spouse might have sneaked behind you and stuck her cute little toe on the scale without you knowing. Truth is, just from the single reading you don't know much and you shouldn't get all wacky about it. You probably shouldn't change your behavior.

So what? This seems quite relevant to the way we think about monthly employment and unemployment announcements. Everyone knows the economy is performing a little better than it was a year ago. Everyone knows that firms who were burned by sales and profit declines and who have responded with major cuts and restructuring are NOT about to start hiring at the first signs of recovery. Everyone knows there is still a lot of uncertainty and lack of confidence. So what real relevance is one month's employment number in the middle of all this? When it comes to what really matters -- the real future course of employment and the economy -- what happened in February never was going to be much of a factor. Suppose they say they made a mistake and the true number was really much worse than reported? Would that really warrant a lot of consternation? I think not. It is just like the 2 pounds. We need to watch for at least a few more months before we make a judgment.

Friday, March 5, 2010

Larry Davidson Spouts Off

Okay -- I am in my 60s and while I think I moaned a lot when I was younger -- the truth is that I seem to spend a lot of time complaining to my friends about macro issues and especially the way the press and various talking heads abuse what ought to be a humble and simple science. One problem for me is that I end up sharing my complaints in various outlets -- emails to friends, cocktail parties, lines at the grocery store, Facebook comments, notes to students, and so on. It seems more efficient to have one place to write these gaseous essays. So let's get started.

If I have one really big beef, it is the way that people use macro for their ideological and other personal ends (e.g. to show that you are much smarter than your Dad and you know who you are Jason, Ashley, Beth, Laura). While ideology can be fun in the right place, many people are seeking some sort of answer about the past, present, or future economy. There is an answer. Macro is a science. Since any country's economy is complex, there could be many answers to any specific question. There is plenty of room for difference of opinion, especially if we are dealing with the future. But geez guys, let's get real -- labels, name calling, and bringing up religious figures (e.g. Galbraith, Krugman, etc) isn't always very productive. For example, we are in the middle of many productive debates about the best monetary and fiscal policies for our times -- but somehow the good stuff gets edged out by debates about rocket scientists (finance guys) and the downfall of capitalism. There is plenty of room for the latter but I fear that the average bloke sometimes doesn't know the difference.

A second gripe has to do with the abuse and misuse of reported figures. There is hardly a reported macro indicator that isn't complicated. It always amazes me, however, how writers can tell stories based on one month's information. Today's announcement of the unemployment rate was a good example. One writer pointed out that despite the good news in today's announcement, the job market still faces stress. Please -- is that news? Analysis? Why do we even try to come to conclusions about the goodness of a one month report? Surely most of us who read this stuff understand that most of these figures have enough randomness in them to preclude making judgments without at least 3-6 months of data. I know it might be boring if we didn't have all this nonsensical reporting -- but then again, if it wasn't there it might give us all a little more time to pet the wife or kiss the dog.

I think blogs are supposed to be short. I think I have done enough damage for one day. Cheers,