Tuesday, October 31, 2017

Post Wedding Blues

My daughter got married last weekend and I was sworn, along with other family members, to not discuss politics at wedding events. I managed to honor my promise Thursday through Saturday but then at the Sunday brunch, a wonderful relative found me and egged me on.

I am not writing about the specifics of that interchange. But our back-and-forth did make me think. It made me think about the impossible situation we find ourselves in today. This rock and hard place defines us. The rock is the fact that we have threatening problems in this country. We have a highly tilted distribution of income. We have a very expensive and failing health system. We have a drug epidemic. We have too many people making insufficient incomes. We have lackluster economic growth. That’s the rock. The hard place is that government spending is rising faster than tax revenue, creating larger yearly deficits and a bigger national debt. 

“Caught between a rock and a hard place” is a way to say that there are no easy choices left. Solving the problems I listed above will take a lot more money. But there is no money. And like anyone with a tendency to have larger and larger debts, the USA can and most likely will reach a point when people will stop lending to us. They will also stop investing in us. So on the one hand (do I sound like an economist now?), it is going to be very hard to spend more on these critical problems. On the other hand, if we try to reduce our debts, we will need to reduce the growth of spending relative to tax revenues. How can we reduce the growth of spending when we have so many needs?

If there is a robust (better than saying hateful) debate among the citizens, it is for a good reason. No matter which side of the rock and hard place you begin with, there is going to have to be a very negative impact. At Georgia Tech, I had the honor of taking a course from a professor named Phil Adler who introduced us pimply-faced Industrial Management majors to a concept called bubble management. If a well-inflated balloon has a bubble on one surface, any attempt to push it in will lead to a bubble on the opposing surface of the balloon. That is, if a management problem surfaces and you attack it, you should know you will ALWAYS create another problem. The trick to good management is having solutions that reduce the size of the problems (bubbles).

Unfortunately, most of today’s politicians did not have the opportunity to learn from Professor Adler. Unfortunately, what works in business management does not work in the political arena. So here we are with a really big and ugly bubble today, and no one has the guts to push it in. Why? Because we are afraid of the bubbles that will be created. Any politician who creates a bubble by trying to escape today’s problems fears he or she will be punished by the voters.

Is this problem new? No, but our current dilemma is really severe. Seems to me we had a similar situation in the late 1970s, and it required a Fed that raised the interest rate to 22%. That took guts. It smacked us into a recession. But someone knew that the only way forward was to take a step backward. And they had the guts to take on the wrath of a whole country. These extreme rock-and-hard-place situations are rare but they always require the same solution – wherein policymakers understand they must do something very unpopular to exit a very bad situation and make things eventually better.

That’s where we stand today. The public watches politicians on all sides abdicate their sworn duties as they lead cheers and rile up their constituents into thinking that rants against their opponents will somehow help us. They appear caring and intelligent as they enumerate all the bad things that will happen if their adversaries get their way. But as Professor Adler would say, there is always going to be another bubble. Let’s accept that and try to make the next bubble smaller than the current one.

The short-run impacts of any new policy cannot be absorbed by one group. And the impacts should be of manageable size and limited duration. This will take a bipartisan effort. There’s no other way. Otherwise, we are stuck between a very hard rock and a very hard hard place. 

What do we need to do? Generally, we need to reduce the budgetary risks that haunt us today. Specifically we can begin by controlling government spending. This won't be easy because we will have to prioritize. We will have to determine which programs will be slowed the most. Second, we have to permanently raise government revenues. The surest way to do this is to raise the long-term growth rate of the economy. Third, long-term growth can be raised by attending to factors that inhibit growth. We need to aim policy at increasing labor force participation and productivity. 

If we do all this, we will probably take a step backward. Some will be temporarily injured more than others. Howls will be heard from many sources. But this situation is no different than that facing a drug addict. Without a time of withdrawal from the drug, there is no miracle cure to end an addiction. Withdrawal hurts. But it is the only way to find a permanent cure. Putting it off just makes the eventual pain even worse. 

As far as the wedding goes -- it was an incredible weekend filled with happiness and love at the joining of two wonderful ladies. 

Tuesday, October 24, 2017

Impossible Mission -- Finding a New Fed Chair

I just wrote a piece about monetary policy and choosing the next Fed Chair. It was kinda cute and like all my posts, it was pretty brilliant in my own opinion. But alas, I ditched it. I deep-sixed it. I trashed it. I crumpled it up and threw it in the hopper. Actually, I just hit the delete button.

Monetary policy is the most misunderstood topic I ever write about. It’s not even that 
hard. The main confusion is that monetary policy is about every-day things that we think we know something about. So people blab on and on about it. But the truth is that most of us know almost nothing about it. It’s like climate change. I love climate change. Or is that season change? Anyway, I love it when the leaves turn color and fall off the trees and scream at me to rake them into piles.  I have a lot of opinions about climate change (and seasonal change which happens to be late this year) but I don’t know squat about molecules, CO2, H20 or the FBI.

So I can be very dangerous talking about climate change among real scientists since I don’t know a thing about chemistry or physics. But it is truly amazing how many people like me have very strong opinions. I know that because I see the veins on their neck pop out when they drink JD and talk about climate change. Why? Because they trust the scientists. Scientists are great.  My physicist friends – yes I have physics friends and an odd chemist or two – really understand what is going on with respect to weather, and climate, and how many angels can dance on the tip of a pin.

Scientists don’t have opinions. Okay maybe they have opinions about the things like the World Series and what color to paint the hall bathroom. But unlike most of us scientists have theory-based predictions. Scientists are famous for saying things like – based on my assumptions and my model (if you don’t like the word model replace it with theory) I predict that a chain reaction that started a jillion years ago in outer space will cause a blue light in a telescope in 2017. Now that is cool.

Scientists give us driverless cars, a nice lady named Alexa, and JD. But here is the thing about science. Science is not just about the past. It is about the future. And there is where the party and the gumbayas end. When we are dealing with new insights and the future we can use our models all day and all night – but not all models and not all approaches will be the same. Are all developmental driverless cars the same? As scientists develop batteries that will store solar energy, are they using the exact same technologies? Are all biologists and chemists using the exact same approaches to curing cancer and athlete’s foot?

When it comes to new things and to the future, we realize that scientists will use different approaches. We usually like that. This competition of ideas routinely produces better results than if Lee Corso was orchestrating research along one theory.

And thus we get to monetary theory. Money is simple. It’s stuff we use to make final payment. If you have a fist-full of money your bookie has to accept it. But that is where the simple part ends. How much money does the US economy need on October 24, 2017? Or more pertinent, how much money will the economy need between October 24 and December 31, 2017? The answer to that question depends on many things – things which will unfold between now and the end of the year.

Will the economy explode in a fit of growth or will it suddenly slow? Will events abroad cause a flood of foreign investment into New York and Seattle causing US interest rates to decline? Will productivity decline causing lower wages and inflation? How much money we need in the future depends on all those things and more.

Monetary scientists – people who have spent their lives memorizing monetary theories and egg foo young recipes – had similar training and know all the models. But because they could have different visions about the future, they might come away with very different prescriptions for monetary policy. Of course, much also depends on what I call their basic potty training. Some monetary scientists are perennial optimists who believe in Adam Smith’s invisible hand and conclude that we hardly ever predict the future accurately. They are conservative about monetary policy because they worry that they’d have to change it every two weeks as their view of the future changes. All that change causes uncertainty for buyers and sellers.

For every one of these conservative monetary scientists there is one of the opposite potty training. They do not have faith in the resiliency of the economy. They believe it takes an active hand of government to keep us from horrible consequences. They stand ready to alter monetary policy every time the economy twists or turns. They are like helicopter parents who believe they should room with their child in college or else they turn into monsters or professors.   

This has gone on long enough. I like this one better than the last one I wrote and deleted. I am truly a genius (in my own humble opinion). But what have I concluded? Basically nothing. Or maybe I made a prediction that despite the millions of words that will be said about this or that candidate to run the FED – all of it will sound very understandable but essentially will be a gobbly gook of opinions about which candidate has the proper potty training and which one can predict the future course of the economy better. Good luck with all that. Let's just pick one with some common sense and perhaps some real experience with money and financial markets.

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?