Tuesday, October 17, 2017

IMF says Global Economic Upswing Creates a Window of Opportunity

The International Monetary Fund publishes a world economic outlook every six months. The latest one was just published this month (https://blogs.imf.org/2017/10/10/global-economic-upswing-creates-a-window-of-opportunity/ ) and is entitled "Global Economic Upswing Creates a Window of Opportunity".

This report is not for the faint-of-heart as it is long and treacherous and filled with words and phrases like "raising potential output" and "strengthening international cooperation". Far be it for me to summarize the most current document but I thought I would copy a key table (see the bottom of this post) and then go on and on a bit about some of that.

First, notice that the title of the table says the global recovery is continuing at a faster pace. Yet, the top of the table says that after growing at 3.6% in 2017 (technically this is a forecast since we have not yet shopped for Halloween much less Thanksgiving or Christmas in 2017) we will grow at 3.7% in 2018. For those of you who know a little about statistics, I doubt that 3.7 is statistically different from 3.6.  For those of you who were never punished by a Stats class and don't know a standard deviation from your local neighborhood deviant, this means that the entire publication is suspect. While the thousands of words in the report support this view of faster growth, we all know that the main table of the report says the world will not grow faster next year. It might grow faster. It might grow slower. And Humpty Dumpty had a great fall.

Read down farther and you will learn the following world areas/countries will grow slower in 2018 than in 2017:

Advanced Nations
Euro Area         
Emerging Europe 

Given the title of the report and table say that world  growth will be faster, there must be some places that will grow faster in 2018.   The table says these places will grow faster -- the US by a smidge, France, CIS less Russia, India, Brazil, Saudi Arabia, Nigeria, South Africa, and Low Income Developing Countries.

How you can average the growth rates of the slower list with the faster list and come up with faster world growth is a mystery to me. If I was writing this report based on this table I would say that the world seems to be on its last JD of the night. Or maybe -- "While growth in our bigger world markets is stuck in first gear, we see some hopeful spots for growth in some developing countries."
Second is the part of the title that claims that 2018 is a window of opportunity. I recall being in high school and thinking that my bedroom window provided a great opportunity to escape in the wee hours of Sunday morning. But when was my bedroom window not a window of opportunity? And so it goes for the IMF -- why is 2018 going to be a window of opportunity that wasn't there in 2017? And the answer is that  the IMF thinks we have kicked the policy can down the road long enough because growth was too weak in too many countries. But now that so many countries are doing so much better, they will button down, quit kicking cans, and attend to important things like economic growth.

Wow --- what is the IMF smoking because I would like some of it. No, the world is not growing any faster according to their own numbers and mostly is growing faster in places like Kokomo (fictional one of the song and not the one in Indiana), Gotham, and Atlantis. And in what places will politicians in 2018 resoundingly decide that long-term economic growth is their number one priority? Watch France. Their child Prime Minister is trying such things and every union in France is suggesting that statues of Emmanuel Macron be broken into tiny little pieces.

If that isn't enough, the IMF has the audacity to imagine that this is a great opportunity for countries to get together in a pro-growth fit and further reduce trade barriers and expand international economic cooperation. Really? Have they looked around? What part of the world is not cracking up? Have they read about Spain or Brexit?  What free trade agreement is universally loved?

From the above you would think that I am either into my third JD of the morning or that I am pessimistic about 2018. I won't comment on the former since children might be reading this but I am not pessimistic. My reading of the world economy is that modest growth is good since it doesn't create huge imbalances and threaten high inflation. Momentum is our friend as more and more countries attach to a slightly stronger world economy. The biggest risks arise from the absence of what the IMF predicts -- that we will continue to kick the growth policy can down the road and countries will outdo themselves with counterproductive protectionist policies. That is -- the economy is fine -- it is the politicians that we have to worry about. Let's hope they take an extended vacation.

Tuesday, October 10, 2017

Economic Growth Anemia

Many of my friends cannot remember which one was Laurel and which one was Hardy. I do remember which one was Sonny and which one was Cher. And so it goes with economic growth and business cycles. In truth, growth and cycles are as different as Simon and Garfunkel but you would never know it.

Economic growth has become the Cinderella of macro. Pushed into the back room and assigned to the lowliest cleaning duties, economic growth is hardly heard of in favor of business cycles. The Fed has never been more neurotic. Are we at full employment today? Are we too strong? Is inflation too low? Should I drink JD or Scotch?

Whew. I feel a lot better now. Let’s start at the beginning. Macro has two main areas – growth and cycles. Growth is a long-run concept. It is all about how the capacity to produce changes over time. Imagine the economy as one big factory. What makes the factory able to produce more (or less) as a long-term or permanent outcome? You can imagine the kinds of things that affect the capacity to produce – better equipment, new structures, a more efficient layout, better training of the workforce, are just some of them.

The second part of macro – cycle theory – is very short-run-oriented and poses questions about why the nation’s output deviates from the capacity to produce. That is where things like recessions come into play. Most recessions are over in a matter of months. Their impacts can go on for a while, but the large and sometimes sharp turns in output are usually limited to half a year, plus or minus. Policies designed to reduce these cyclical changes are very different from those that augment long-run capacity changes. Typically the causes of such short-term cyclical events have something to do with the ever-fickle desire to buy – or what we refer to as demand changes. Suffice it to say, the things that cause short-term changes in demand are very different from the things that impact long-run capacity – and so too are the policies different.

With all that behind us, let’s think more about Cinderella -- i.e., long-term or capacity growth. While capacity growth sounds like engineering, the reason we emphasize it is that capacity growth is the key to improving both the standard and the cost of living. The evidence is around us. Whether it is a rich country like the USA or a dramatically growing country like China or Vietnam, the evidence is that producing a larger pile of goods brings permanently higher incomes and lower poverty incidence to the citizens of those countries. With those higher incomes come safer and more environmentally friendly production. While there are some who would argue against growth, most of those people are on the fringe.

We usually use sustained real GDP growth to measure capacity changes. Not focusing on short-term changes, I present some figures for the time period from 1955 to 2016 – 61 years.

Average Annual Growth in U.S. Real GDP
1955 to 1970           4.8%
1970 to 1985           4.1%
1985 to 2000           4.4%
2000 to 2016           2.0%

The US economy expanded at an annual rate of over 4% for about 45 years from 1955 to 2000. After that we saw a pronounced slowing to 2% per year. It is true that we had a major recession in 2008 and part of 2009, but it is also true there were many recessions between 1955 and 2000. If we look at shorter time periods after 2000, we see 2.7% annual growth from 2000 to 2005, slower growth of 0.7% per year in 2005 to 2010, and then 1.9% per year in the six expansion years from 2010 to 2016.

While anything is arguable, the data seem clear that something changed to permanently alter the growth rate of the US economy after the turn of the century. Left to its own course, this slowdown threatens our ability to increase our standard of living and reduce poverty.

What causes economic growth to slow? To answer that question, economists use growth models. These models ignore many things that cause short-term deviations in demand and output to instead focus on capacity-altering events. Growth models boil down to two sets of factors – those that impact the supply of labor and those that impact the productivity of labor. A retiring baby boom, global competition, government regulation, tax rates and other policies towards business are often discussed in the context of waning capacity.

The surprising thing is that most legislators ignore the bull in the china shop. Maybe it is too complicated for them. Instead they would rather spend their precious few working hours heatedly debating social policy. Policies relating to regulation and tax reform are a case in point. Such policies have the potential to raise the growth of output yet few of the public discussions focus on output, instead pointing fingers about how they might harm social goals and income distribution.

Social goals are critical to a nation. But so is growth. If we continue to relegate serious growth discussion to the background, we will suffer the consequences as we become a stagnant economy with few resources for much of anything including solving difficult social problems.

Tuesday, October 3, 2017

The National Football League

I had to do it. I had to get sucked into this mess. I am a card-carrying global macroeconomist and here I am writing about the NFL. Does the NFL cause inflation or recessions? No, I think not. Does the NFL cause productivity or wages to rise? I doubt it. But here I am writing about it.

As one of my friends wrote me recently, why would anyone be interested in macro when there is all this other stuff to talk about? He told me that only the elites care about the usual macro policy issues. So, on to the NFL.

So what do I say? I thought long and hard and here is what I could come up with: The NFL is the canary in the mine shaft. The NFL is the beginning of a road that leads directly to chaos and eventually bloody revolution.

That’s a big statement, right? I just watched part of the Vietnam film on PBS, and it reminded me that we are not immune to violence and revolution in the USA. People my age participated in mistakes in Vietnam and were glad when the Cold War seemed to end. We also experienced the Civil Rights protests and were glad to see that situation improved. But it has been a while since all that transpired and it is not unbelievable that we have come full circle. It is quite possible that what we are seeing in the NFL is just the beginning of some very tough times ahead.

The end of the Cold War and the Civil Rights Revolution brought positive change. In the 1970s, one would have expected a great period of healing to follow – and maybe it did. It is one thing for whites and blacks and capitalists and communists to be ignorant of each other. It might follow that as we joined closer together, as in any marriage, many problems would be solved. But what we did not expect is that when we got to know each other a little better we would sometimes get on each other’s nerves. As we all became more equal, some got equal faster than others and some got less equal.

A half a century later we find that the world might be fairer than it was in 1960. But we also find as we become more familiar and equal, we have new and larger problems between capitalists and communists, blacks and whites, gays and heteros, JD and Scotch drinkers. (I had to get JD in somewhere!)

Conservatives can defend their records and describe how much minorities have gained in the last half-century. Liberals can point out the vast inequalities that remain. This is not an argument that can be resolved easily. Major progress on income distribution, job discrimination, crime, policing, immigration, national security and defense will not come easily. These are tough nuts to crack. Solutions won't reduce to ”my way or the highway.”

Reasoned approaches to our most difficult challenges are not to be had. And the NFL is the beautiful example of why. Our President said horrible things about our players and our players responded in kind. Is this stupid or what? We have proper forums to work through sensitive national issues. Why are those fleet of feet and marbled by muscle feeling the need to make their political desires known at NFL games? Why do actors do the same at award ceremonies? Why do college students wear masks and beat each other with sticks on campus?

I think this is because the answers to the questions are tougher than we are. We either want or don't want dramatic change. We want to be on the right side. We want to curse at those who disagree with us. But the truth is that the more we act in these ways, the less headway we make and the more entrenched our adversaries become.

That all this has come to the NFL shows how far we have come down a very bad road. Does it seem far-fetched that these behaviors will come to baseball? To college athletics? To Macy’s holiday parade? To a local music concert? To your next family gathering? It does not seem impossible that, in light of the lack of any real leadership in this country, we will keep playing out our demand for a better world outside of regular political/government frameworks. It also does not seem impossible that those who are the most frustrated will bring their impatience and hatred to situations that will give them notoriety. With all the sides hardening, it is not difficult to imagine even more violence in even more places.

Where is the national leader who will tell us that these behaviors are counter-productive and convince us of the following: First, our situation today in the USA is enviable compared to most places around the world. Second, we made a start to become the shining light on the hill. Third, some of the hardest challenges are ahead of us. And finally, we are good enough to meet those challenges.  Can you think of one politician today who could pass this muster?

Tuesday, September 26, 2017

Happy Birthday to the National Debt

Let’s call her Natty. Natty just reached 20 -- $20 trillion that is. Okay, it’s not a birthday but it is a milestone and one that bears a little time and attention.

There are so many things to say that I don’t know where to begin.

Let’s think first about the words “national debt.” Natty is most definitely not a measure of all the debt of the nation. Households have many kinds of debt and none of them are included in the $20 trillion national debt. Borrowing money for houses, cars, JD, and college are not part of Natty. All that credit created by slipping your credit card into a little machine is not included in Natty. That loan to Uncle Chuck isn’t part of it either. And when companies large and small borrow from banks or sell bonds or find other means to finance their acquisitions of plant, equipment, and software – none of that is included either.

So what is included in Natty? Natty is simply the debt owed by the federal government. Notice that Natty does not include any borrowings of your state and local governments. Natty’s $20 trillion pile of debt includes only that which the US federal government borrowed.

Why does the government owe any money? Doesn’t the government have the power to tax us? Surely there are plenty of federal taxes. The truth is that the government owes money because, like the Tuna, it loves to spend money and hates to ask us taxpayers to pay the whole deal. Take 2016 for example. The government collected $3.3 trillion in tax revenue. On Social Security, Medicare, defense, and many other programs, it spent approximately $3.9 trillion. Thus the government had to borrow $585 billion to meet the difference.

Why did the government have to borrow that money? Doesn’t the government have the power to print money without limit? In most countries, including the USA, a central bank exists and it is allowed to print money. But budget deficits must be funded by government borrowing through bonds. Clever governments ask central banks to buy their debt and that eases the process. But as we will see below, most of the debt is held by private investors.

In 2016 the government borrowed $585 billion. That’s a long way from $20 trillion. How did the debt get so large? The answer is that the US government is addicted to debt. In the 49 years between 1967 and 2016, the US had a surplus only five times. Thus we had deficits and we added to the debt in 44 of those 49 years. That’s how the debt got so large. We piled up almost $8 trillion of the $20 trillion in the nine years since the great recession started in 2008. While the additions to the debt have been somewhat less lately, we had at least three years in which the annual deficits were well over $1 trillion per year.

Who holds the national debt? I heard China has a lot of it. Let’s start with the 2016 national debt of $19.6 trillion. Of that amount, $5.4 trillion was money that some parts of government owed to other parts of government. So we call the public debt the remaining $14.2 trillion. Of that amount, the Federal Reserve owned $2.8 trillion. That left $11.7 trillion for private investors. Of that amount, Chinese and other foreigners owned $6.2 trillion. 

Is that $6.2 trillion enough for foreigners to push the US around? I doubt it. But in the event that foreigners decided to quickly sell all their US bonds, that could throw us for a loop. But keep this in mind, if any investors in US bonds decided they are a risky bet – it doesn’t matter whether the sales come from foreigners or US citizens – the results could be terrible.

This leads us to the big question: Does the $20 trillion debt put the US in a risky position? The government is a pretty big cat; is $20 trillion a lot of money? Here is where an example might be helpful. Suppose you have debt of $100,000. Is that risky? It depends on your ability to pay it off. Maybe you have a savings account of $3 million. Not so bad. Maybe you have an annual income of $300,000. Not so bad. But if instead you have no money in the bank and you have a very low income, then your bank is going to worry about your ability to repay the $100,000.

Similar ideas apply to countries. How do you measure the ability of a country to repay its debt? We might look at foreign reserves they accumulated to pay foreigners. We might also look at tax revenues. Those tax revenues are driven by the strength of the economy and the soundness of the financial system. If a country is about to implode, it worries a lot of people – including people who hold that government’s bonds.

Is $20 trillion too much debt for the USA? Probably not at the moment. But psychology moves quickly. If we seem unable to restrain our future debts because we spend too much and tax too little that will not make bondholders happy. If our economy grows too slowly or if a recession threatens even worse economic outcomes, that realization will make things scarey. At that point the $20 trillion will seem like a very risky burden.

Ask other countries about how quickly a difficult situation can turn into a crisis. One day you are the darling of the world. The next day people are selling your assets and your currency and you are the basket-case of the world.

We manage debt to be prudent. A modest debt load is normal. A larger amount of debt won’t necessarily undo you but it does raise the risk of some very bad things happening. It is time our US government acted as if they knew this valuable truth.

Tuesday, September 19, 2017

Lesson 19 Tax Reform and Simultaneous Organization

Who is up next? I am. My name is Tax Reform. My friend healthcare already struck out. Budget, debt limit, and immigration will be up in future innings or maybe in future games. I don’t know.

No, government policy is not a baseball game. But it sure seems like one as policy deliberations and decisions flow sequentially from one month (inning) to the next. 

What other choice is there? While it seems almost crazy to mention, a better choice is to do it all at once – simultaneous instead of sequential.

We seem to be focused now on tax reform. But we are already hearing that you can’t do tax reform until you settle healthcare. Or you can’t get much accomplished with tax reform until you settle the budget or change the debt ceiling. It’s all related. Who came first, the chicken or the egg?

There must be a prize in government that is awarded to the people who make simple things impossible. People make budgets all the time. So do companies and churches and drug dealers. We plan and make budgets because this activity produces better results. Instead we could wake each morning and make a new decision. It’s Tuesday so maybe I will buy a TV. It is Wednesday so I might sell some shares of stock. It is Thursday, and I will get a job and earn some money.

Sound stupid? It should. But this is the way government works each year. The main reason that sequential budgeting does not work in government is that each policy affects many aspects of our lives. A given policy helps Nolan while is hurts Jenny. Of course, Jenny and her friends scream bloody murder. The next policy helps Jenny but not Nolan. Nolan organizes his kindergarten buddies, and they throw rotten eggs at guilty politicians. The upshot is that sequential decision making gets nowhere because EACH decision has a natural resistance.

Better would be a more simultaneous approach. Let’s take five different areas of policy and find the best solutions. Policy 1 helps one group. Policy 2 helps another group. Policy 3 might help both groups. If you decide and then announce all five policies at once, it is harder for resistance to form. For one thing, figuring out the net effects on people might not be easy when summing up all the pluses and minuses of all the policies. For another, it might be the truth that most of us benefit from the whole package, warts and all.

The above is too abstract. Think next how this might play out in the real world. Good planners begin with a statement of problems. Once the problems are known they can then think about the remedies. What are our national problems?

Low labor participation
Low capital spending 
Slow economic growth
Unequal distribution of income
High government debt
Inefficient tax system
Too little/too much government spending
Too much/too little government regulation of business
Pimples, JD, and other

We can argue about these problems and their order of importance but it seems possible that a fruitful beginning step by national policymakers would be to list these problems according to some definition of priority or importance. Ties are permissible. Just rank them, damn it.

Then they would produce a list of policies that might address one or more of those problems. Such policies would include tax reform, tax cuts, government spending changes, reforms to healthcare, immigration policies, and so on.

Assign every policy a positive or negative number as to how that policy might impact each and every problem listed. Note that a tax reform policy might help the rich more than the poor in dollar terms. A government spending policy might do the opposite. Do not try to make every policy help every problem and every person. Each policy should have an intended benefit though with side effects.

Summarize the positive and negative impacts of each policy on each problem area. The first round of this simultaneous approach will find some policymakers do not approve of the results. Go back at it and adjust each policy so that the net result of all the policies is acceptable. No set of policies will make everyone happy. This approach has a chance of finding a solution that recognizes that not every policy will make everyone happy but that the sum of all the policies generally improves things.

Every major organization works this way. The board approves a comprehensive plan whose purpose is to best meet the goals of the organization – be they marketing, finance, or human resources. They do not go from day-to-day making decisions willy-nilly. Call me a dreamer for believing that government can be thoughtful and goal focused. But that just shows how we have come to accept idiotic and failed approaches to our very important problems and goals. Or maybe, like watching a good fist fight, we revel in the blood and guts. Government policy is pure entertainment. In that case, we deserve what we get. 

Tuesday, September 12, 2017

Happiness in 2017

It is nearly impossible to be among people and JD (or other forms of alcohol) and not get into a fierce debate about politics. People are energized by the current political scene in ways I have not seen since I first went to Disney World and Lego Land. Otherwise gentle and thoughtful folks look as if their heads are going to blow off standing next to the appetizer table. Red-faced and sweating, they speak in loud voices and won’t put up with hearing things that defy their own opinions. We don’t mind telling our dear friends that if they hold a particular view, they are lower than the slime on the belly of reptile.

So in the spirit of making things horribly worse, I decided to do a little research. If this is the way people want to spend their evenings, I wanted to try to understand how this behavior fits into well-recognized theories about happiness. Let’s be clear: I am not trying to change you, and I am not taking sides. But I do wonder why we want to spend our precious time on this planet screaming and yelling at our friends, relatives, and pets.

What’s important? What makes us happy? I admit that the quotes and summaries I display below leave out some critical aspects of happiness. But this topic ain’t macro and it ain’t football -- in other words, I did the best I could. Maybe you can see in the philosophies below why so many of us seem to be happy being ugly. Or not.  

Abraham Maslow, in his 1943 paper “A Theory of Human Motivation”, set out what people now call Maslow’s hierarchy. The hierarchy of wants is often shown as a triangle in which the base represents the most basic human needs to stay alive. Once one level of the triangle is satisfied, the human moves upward to satisfy higher needs with the highest level called self-actualization. My interpretation of this is that things like eating, breathing, feeling safe, having loving family and friends, are among the key things that make us happy each day.

Confucius (according to a blog I found (https://www.linkedin.com/pulse/confucius-happiness-suzana-aleksic )
Confucius believed that anyone could change themselves regardless of social status and financial situation. In other words, happiness was not reserved for aristocrats. For Confucius, happiness had nothing to do with financial situation of a person; it depended on a person's level of self-development and virtue attainment. In addition to this, Confucius emphasized action over thoughts. He stated that to reach happiness, it was not enough to think well; one had to act on these thoughts. Similarly, doing good deeds without good intentions did not count for Confucius. To advance on the "happiness path", one had to think good and then act on those thoughts. This great philosopher stated that the "reciprocity" is what should lead people through their lives, as "what you do not want done to yourself, do not do to others."

According to Aristotle, happiness consists in achieving, through the course of a whole lifetime, all the goods — health, wealth, knowledge, friends, etc. — that lead to the perfection of human nature and to the enrichment of human life. This requires us to make choices, some of which may be very difficult. Often the lesser good promises immediate pleasure and is more tempting, while the greater good is painful and requires some sort of sacrifice. For example, it may be easier and more enjoyable to spend the night watching television, but you know that you will be better off if you spend it researching for your term paper. Developing a good character requires a strong effort of will to do the right thing, even in difficult situations.

A quote from Ayn Rand (from For the New Intellectual): Happiness is not to be achieved at the command of emotional whims. Happiness is not the satisfaction of whatever irrational wishes you might blindly attempt to indulge. Happiness is a state of non-contradictory joy—a joy without penalty or guilt, a joy that does not clash with any of your values and does not work for your own destruction, not the joy of escaping from your mind, but of using your mind’s fullest power, not the joy of faking reality, but of achieving values that are real, not the joy of a drunkard, but of a producer. Happiness is possible only to a rational man, the man who desires nothing but rational goals, seeks nothing but rational values and finds his joy in nothing but rational actions.

10 Commandments (It is debatable among Christians if following all the commandments is the key to happiness and salvation but they do express a view of what the Bible says God wants from his followers.
1.  You shall have no other gods before Me.
2.  You shall not make idols.
3.  You shall not take the name of the LORD your God in vain.
4.  Remember the Sabbath day, to keep it holy.
5.  Honor your father and your mother.
6.  You shall not murder.
7.  You shall not commit adultery.
8.  You shall not steal.
9.  You shall not bear false witness against your neighbor.
10.You shall not covet.

The Four Noble Truths:
1.  All things and experiences are marked by suffering/ disharmony/ frustration (dukkha).
2.  The arising of suffering/ disharmony/ frustration comes from desire/ craving/ clinging.
3.  To achieve the cessation or end of suffering/ disharmony/ frustration, let go of desire/ craving/ clinging.
4.  The way to achieve that cessation of suffering/ disharmony/ frustration is walking the Eightfold Path.

The eightfold path to the cessation of suffering:
1.  Right Understanding of truth suffering impermanence and separate self as an illusion.
2.  Right Determination to give up what is wrong and evil;
3.  Right Speech: Abstain from telling lies and harsh speech or language
4.  Right Action: Moral, peaceful, honorable conduct
5.  Right Livelihood: Abstain from making your living from an occupation that brings harm and suffering to humans or animals, or diminish their well being.
6.  Right Effort: Foster good and prevent evil; work on yourself—be engaged in appropriate self-improvement.
7.  Right Mindfulness or wakefulness: Foster right attention.
8.  Right Concentration: Developed by practicing meditation and/or mental focusing.

Here are some interesting quotes from Martin Luther King:
  • Darkness cannot drive out darkness; only light can do that. Hate cannot drive out hate; only love can do that. 
  • The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy. 
  • In the End, we will remember not the words of our enemies but the silence of our friends. 

It is tempting to summarize at this point but infinitely more enjoyable to have you tell me if and how any of this makes heated argument a good thing! 😊

Tuesday, September 5, 2017

Lesson 18 Inflation

The posts in my blog space named “lessons” are meant to provide some background on concepts I throw around like fish at a Seattle fish market. Some of my readers are not economists, and they often send me emails requesting that I try to better explain macro concepts. I sometimes direct them to my online resource called MacroNotes (http://macronotesmba.com/ ) but that’s a little like sending someone who wants to taste a little pho to Hanoi when our local Vietnamese restaurant, Rush Hour Station, has perfectly good pho. So instead of going to MacroNotes for more information about inflation ( http://macronotesmba.com/lessons/inflation-and-unemployment/ ), I will post today on that topic.

Inflation isn’t an easy topic and therefore deserves some attention. And inflation is a very important topic these days for several reasons. First, it is growing slower in the USA and that makes us wonder about it. Second, it seems to be associated with economic growth forecasts that are less than rosy. Something is going on out there that makes lower inflation a sign and maybe even a cause of slower economic growth. And third, our policymakers see the lower inflation rates as a reason to keep pouring fuel on the economy.

Inflation will never be as exciting as a Confederate War Memorial or an Indiana University football game, but inflation is pretty interesting these days. So what is inflation?

Let’s begin with this definition: inflation is the rate of change of prices. For you math buffs, this definition is basically an equation. I can talk about the inflation rate of weed prices in Colorado. Suppose a sack of weed went from $2.00 to $2.20 in the last month. Applying the formula, we can say that the inflation rate of weed during that time period was 10%. Anything that has a price has an inflation rate associated with it.

Applying this concept of a rate of change means that inflation of something could be positive, negative, or zero. If it is negative then we call that deflation as it means prices are falling. If the calculation is positive then we simply call that inflation. If the calculation is zero we have no name for that. We would say inflation is zero. Once a teacher called me "zero" but that had nothing to do with inflation. 

We also have terms to describe how the inflation rate is changing over time. If the inflation rate goes from 2% to 1% we say inflation in decreasing or we say we call this disinflation. A rising inflation rate is called reflation.

The inflation rate we are discussing today is the inflation rate of a nation. In the USA each day, we not only buy weed but we buy silly things like cars and doctor visits and Uber rides. Our Labor Department defines someone called the typical Urban Consumer. Let’s call her Jaden. Jaden buys stuff each month at Target, Kroger, and of course Amazon. Since she is the typical Urban Consumer, the Labor Department tracks what she pays for all the goods and services she buys. She hides this information from Chuck but that is another story. 

The idea is that the Labor Department can get a number that represents what she paid for all the stuff she bought in any month, say for example, December of 2016. We would call that number the CPI for December 2016 for the USA. Let’s say that number is 200. We collect that same price information in January of 2017. Suppose the number for January turns out to be 210. We would use our formula and conclude that the inflation rate in January was 5%. If that rate kept up for every month in 2017, then we would say the annualized rate of inflation in January was 60%. But the inflation probably won’t keep up at that rate and the 60% is just a way to express what happened in one month.

Suppose you don’t spend exactly like Jaden. Perhaps you really like Cuban black beans and you eat that with rice a disproportionate number of times per day. Aside from certain gastrointestinal issues that we won’t cover here, your own personal inflation rate might be different from the national rate. But us macro people do not care about you – we are more interested in how much the average of all of us is paying for goods and services. So when you read something about the CPI in the USA you need not feel concerned about your own cost of living, as it tells you only about the cost of living of the average person.

The CPI is not the only measure of prices in the USA. So sometimes you will hear about inflation as measured by the Personal Consumption Deflator or the GDP Deflator. Maybe you will read about Producer Prices. The truth is that there are many indicators of inflation but here is the main takeaway. For most of us, the CPI is just fine. And second, while the others are different in various ways they usually tell a similar story about inflation.

One more fun fact. Food and energy prices are notably erratic. They bounce around like a 4-year-old in a bounce house. To get a better reading of all prices, the Labor Department publishes the CPI without food and energy prices. If you are trying to understand the general trend of all prices over time, this CPI Less Food and Energy is your baby. Finally, stocks and bonds and other financial assets are not goods or services -- and therefore the prices of these assets are not included in the usual measures of inflation. 

So why is inflation of so much interest? For one thing it might have relevance to your own situation. For another it might tell you something about the national economy. It might influence your optimism or pessimism about future inflation, jobs, and income.

Here is where it gets a little complicated and even controversial. When inflation is high, the immediate message is that prices are rising at a faster pace. Most of us frown when that happens. But prices do not rise in isolation. Prices are part of a bigger macroeconomic scene. It depends very much on some of those other things as to how a rise in inflation impacts you and me and the nation.

Suppose we are living through a time of great optimism and growth. Jobs are plentiful and wages are rising. In that environment, a rise in the inflation rate doesn’t seem ominous. Okay the price of eggs went up, but I have a great job and my earnings are growing faster than prices. In that case, inflation is just part of a very positive economic situation.

Instead, suppose we are living through a time in which inflation is rising but people are losing jobs and/or wage growth is stagnant. That is the kind of time when inflation really hurts. Such times are not frequent but do happen and are usually the result of business productivity rising at a slower pace than business costs. Some of us geezers remember the 1970s when the price of energy was rising so fast that business costs were crippling many companies. Stagflation is a term coined to describe this kind of inflation.

Inflation can be part of a successful economy or the result of a very negative scenario. Since the national economy is not simple, different experts can look at the economy and come away with different opinions. Today the inflation rate is very low and some policymakers see this as a very negative sign. They want to use policy to bring the rate up. Others believe the macro economy is not so bad and attempts to engineer a higher inflation rate will come back to haunt us. So stay tuned.  

Friday, August 25, 2017

Tax Loopholes and Tax Reform

Not sure they will get around to tax reform this year, but I am told that tax reform is high on the legislative agenda. Tax reform usually involves significant changes in income and/or business tax rates. For example, we hear talk that US corporations pay tax rates that are very high. A tax reform might, therefore, reduce the rate to something lower. Tax reform might instead lower tax rates for the middle class or for rich people. There are many ways to do tax reform.

As a result of the lower tax rates of a tax reform, tax revenues would likely fall. So an important part of any tax reform that lowers tax rates but does not want to create larger government deficits is the accompanying ways to raise tax revenue. One approach would create a totally new tax. Some thought was given to the USA adopting a value added tax or perhaps an import tax. More likely, however, is the closing of existing tax loopholes. That approach sounds much better to most of us. But as I will show below, it is not so easy and the attempt to close loopholes may actually doom tax reform.

First, our friend Wikipedia says a loophole is an ambiguity or inadequacy of a system, such as a law or security, which can be used to circumvent or otherwise avoid the purpose, implied or explicitly stated, of the system. That makes a loophole sound pretty bad. It should be easy to eliminate tax avoidance. But a further look at tax loopholes suggests that many of the biggest ones are there for specific reasons.

We sometimes use the word tax expenditure for myriad reasons that allow people to avoid paying tax. Tax expenditures are defined as special provisions of the tax law such as exclusions, deductions, deferrals, credits, and tax rates that benefit specific activities or groups of taxpayers. Tax expenditure? Tax loophole? Pretty much the same thing. But the wording is kinder. Why? Because it implies that it isn’t an error or a deficiency in the system. Rather, it is an intent to promote an end. Getting rid of a loophole sounds easy. But a tax expenditure has a purpose. Do we really want to end it? If so, who gets hurt?

Below I list only some of the major tax expenditures and the amounts (in billions of dollars) estimated by the Tax Policy Center for 2018 (http://www.taxpolicycenter.org/briefing-book/what-are-largest-tax-expenditures)
Exclusion of employer contribution for medical care premiums
  and medical care $235.8
Exclusion of net imputed rental income $112.7
Deferral of income from controlled foreign corporations $112.6
Capital gains $108.6
Defined benefit and defined contribution employer health plans $140.4
Mortgage interest expense on owner-occupied homes $68.1
Earned income tax credit $63.6
Deductibility of state taxes $63.3
Child credit $54.3
Charitable giving $51.2

There are plenty more but this list adds up to just short of a trillion dollars. Thus we learn two points. First, that’s a healthy amount of money if we are looking for loopholes to close. Second, who is going to resist closing each one of these? People who want cheaper healthcare? People who receive rental income and capital gains? State and local governments? Poor people and those who represent poor people? Parents? Homeowners?

Other federal government tax loopholes?
            American Opportunity Tax Credit to reduce the cost of education
            Savers Tax Credit helps low income people save for retirement
            Lifetime Learning Credit to reduce cost of education
            Retirement Saving Accounts
            Carried Interest Loophole for mostly high income taxpayers
  529 College Saving Plan for parents saving for child’s education
Finally comes the fun part. There are so many loopholes in our tax system that you would have difficulty listing them all. Investopedia (http://www.investopedia.com/financial-edge/0512/americas-most-outrageous-tax-loopholes.aspx) found some interesting ones that relate to state and local taxes:
            The Florida Rent-A-Cow Credit
            Washington DIY Cigarette Discount
            The Arkansas Credit for Naturally Destroyed Autos
            The Accelerated Depreciation of NASCAR Tracks
            Larry’s JD exemption (just kidding)

Even with these last few loopholes, there were reasons for instituting them. Closing tax loopholes is not a slam dunk. Tax reform and reducing our tax rates is valuable for many reasons. But if tax reform is not going to blow a hole in our national deficit and debt, then some of these tax loopholes have to go. Which ones will you vote for? 

Tuesday, August 22, 2017

Medical Care Costs

(I apologize for the formatting this time. This one looks pretty bad. This blogspot is not user friendly when it comes to formatting and formatting is not my thing.)
On July 18 and 25 I wrote blogs that  focused on government spending on healthcare. I got some questions and decided to look a little further into medical costs. 

Below are words I lifted from the Bureau of Labor Statistics which define the two medical price components found in the US Consumer Price Index. Medical Care relates mostly to Commodities like pharmaceuticals and medical devices. The larger of the two components measures the prices of Medical Care Services from regular doctor's office visits to hospital services to buying a pair of glasses.

Medical care in the CPI is broken down into medical care commodities (mostly prescription and non-prescription drugs) and medical care services.
Medical care services is the larger of the two components, representing over three-fourths of the medical care weight and about 6 percent of the entire CPI market basket.
Exactly what does the CPI price in medical care services? The largest components are hospital services and physicians’ services. Also included are dental services, services by other medical professionals, eyeglasses and eye care, and nursing homes.
In other words, the medical care services index in the CPI reflects the cost to consumers not only of trips to the doctor’s office or to the hospital, but also of trips to the dentist, psychologist or chiropractor, or even buying a new pair of glasses or staying in a nursing home.
The goal today is to compare the long-term behavior of these two medical price series to the performance of the overall Consumer Price Index which includes everything purchased by typical US urban consumers. 

The first table below presents the inflation rates for five decades beginning in 1966 and ending in 2016.  You can see, for example, that the CPI rose 8% per year from 1966 to 1976. In the next decade it rose by 9% per year. Since then inflation has been falling to where it grew by a mere 2% per year from 2006 to 2016. In each of those decades the price of medical care rose faster than the CPI. For example, in the decade from 1976 to 1986 Medical Care Commodities was increasing by 13% per year while the CPI rose by 9% per year. Medical Care Services rose even faster than Medical Care Commodities in three of the five decades. It rose, for example, by 14% per year from 1976 to 1986. 

The second table lets you see more directly how Medical Care Commodities and Medical Care Services were changing relative to the overall CPI. For example, from 1966 to 1976 Medical Care Services rose by 12% per year relative to the CPI at 8% per year. That implies that Medical Care Services were rising 50% faster than the CPI. Did that relative performance change? As you read down the last column of the second table you see the numbers 50, 56, 125, 67, and 100. The general trend has been upward for 50 years. Medical Care Services from 2006 to 2016 rose twice as fast as all goods and services. 

For the last 50 years Medical Care Commodities and Medical Care Services have grown much faster than overall prices of consumer goods and services. There is reason to believe from these numbers that the gap has increased over time and while the gap has been larger (1986 to 1996) it was very high from 2006 to 2016. 

The obvious next question is to ask is why. But answering that is no easy task. The provision of healthcare has changed much since 1966 and again since 2006. Medicaid and Medicare made for major changes and more recently Obamacare added new layers of delivery and payment. Today we nail down one point -- the medical sector has been and continues to be highly inflationary when we compare it to the other things we buy. 

The CPI attempts to make adjustments so that we compare apples with apples over time. Therefore, a rise in price should not indicate an increase in quality -- it should be a rise in price for a like or similar good or service. But we know that technology in medicine has been very important and while the Bureau of Labor Statistics may try to adjust for quality, I am guessing these adjustments are not perfect. Healthcare is both better and more expensive. I fear much of what the numbers show is that we are paying more to stay healthy and alive. 

One upshot of today's data. If government is spending more for healthcare today it is not just because of Obamacare. Healthcare prices have overshot just about everything for half a century. If we want to control how much we pay either through or without government, we need to better understand pricing of healthcare goods and services. 

Annual Inflation Rate Per Decade
1966 to 2016, in Percent
CPI All items, Medical Care Commodities, 
and Medical Care Services
66 to 76
76 to 86
86 to 96
96 to 06
06 to 16

Relative Annual Inflation Rate Per Decade
1966 to 2016, in Percent
CPI All items, Medical Care Commodities, 
and Medical Care Services

66 to 76

76 to 86


86 to 96

96 to 06
06 to 16