Tuesday, September 18, 2018

The Goods Trade Deficit Part 2

Last week I discussed the persistent US international trade deficit in goods. I concluded with two points. First, if the goods deficit really is a bad thing, a new approach might be necessary now after 47 years of trying has only made it worse. Second, I suggested that the goods deficit might not really be such a bad thing and that we might focus our policy efforts elsewhere. To make this second point I briefly made some points about trade in services and various assets.

This week I’d like to follow up with the idea that the trade deficit might not be such a bad thing.

To start with, discussions of US International Trade are supported by figures collected by the US Bureau of Economic Analysis and found in what is called the Balance of Payments (BOP). That’s a very misleading term and ought to be replaced by something like Stuff People Don’t Know about International Transactions (SPDKIT).

Even if this is likely to put the Tuna to sleep and cause Nathan to hyperventilate, I am going to educate you goonies about the BOP. I will do this with the below table which reports results for 2017. Once everyone is totally asleep I will then come back to the reason why all this supports my idea that the goods deficit is not such a horrible thing.  

First, the goods deficit of  ($808) billion is shown at the top of the table.

Second, just below the goods numbers are the services numbers. While some people like to say services can be aptly defined by what people at McDonalds do, services is a much broader category with some very sophisticated outputs and very high wage inputs. Services include at least the following industries – travel, transportation, finance, banking, education, retail and wholesale trade. Services account for about 70% of the US national output of about $21 trillion dollars. Notice that we had a trade surplus in services of $255 billion in 2017.

Third, the US is actively engaged in buying and selling financial assets. For example, Germans buy US government bonds and US citizens buy stocks of British companies. The table lists three types of cross-country investments which show purchases of Financial Portfolios, Bank Loans and Deposits, and Direct Investments. Financial Portfolios relate mostly to when we buy each other’s stocks and bonds. Direct Investments are when we buy each other’s companies. Loans and Deposits are self-explanatory.

Adding together the balances of these three financial accounts gives you a total surplus of $353 billion. Adding together the surpluses of these three plus services gives you a total surplus of $608 billion.

Tired of adding and subtracting?

One point of this exercise is that there is much more to international trade than goods imports and exports. Clearly a goods deficit of more than $800 billion has negative impacts. It does directly impact employment and it does manage to send US dollars out of the US. But a surplus in services does just the opposite. It increases jobs in the USA and it brings dollars back into the USA.

The story is similar for trade in assets. The financial surpluses show that foreigners love adding US bonds and stocks to their portfolios and they love buying ownership positions in US companies. The benefits should be obvious. When they buy ownership in companies they make it easier for these companies to raise money for investment purposes.

When foreigners buy US bonds and stocks they strengthen these markets too. As they drive stock prices up they lower the cost of capital to firms. As they buy government and private bonds they lower US interest rates and reduce the US cost of capital.

This latter point is more important than one might think. In the US we don’t love to save. We love to spend. As a result, capital is scarce and the cost of capital is higher than it should be. As foreigners bring their savings to the US they augment or pool capital and make it easier and less costly for us top borrow and invest.

This is getting a bit long so let’s wrap up. There is more to trade and to US health than goods. If we worry too much about goods we might threaten these other valuable activities. If bad policy on goods trade makes foreigners move their savings away from the US, then a lot of Americans will suffer as the stock market swoons and the cost of capital rises. Finally, global competition for US goods is not going to end with China. So long as developing countries want to compete with us and so long as their workers make only fractions of what our workers make, we will have a difficult time competing with them. Rather than bring all this activity home we should decide what we do best and what will sustain our workforce in the decades to come. 

Table (In billions of dollars)

Exports of Goods                              1,553
Imports of Goods                              2,361
     Goods Balance                                    (808)

Exports of Services                              798
Imports of Services                              543
     Services Balance                                  255

US Portfolio Investments Abroad       587
Foreign Portfolio Investments in US  799             
     Portfolio Investment Balance            212

US Loans/Deposits from Abroad       219
Loans/Deposits to Foreigners in US  384 
     Loans/Deposits Balance                     165

US Direct Investments Abroad          379
Foreign Direct Investments in US     355
    Net Foreign Direct Investments        (24)

NOTE: This presentations leaves out several smaller items that compose the US BOP Accounts so that we can concentrate on the main items. This presentation also does not mention that some of these items are part of the Current Account while others are part of the Financial and Capital Account.  

Tuesday, September 11, 2018

The Goods Trade Deficit

President Trump has made the US goods trade deficit the center of his economic agenda. He believes that the US is being treated unfairly when it comes to trade in goods. He concludes that this is bad for US workers.

Since international trade is like a giant sausage or at least a meter-long bratwurst, let's try to ignore for a moment most of the aspects of international trade and just focus on the US goods trade deficit. As its name implies, we now focus on only goods. That means for the moment we are ignoring trading of services and various kinds of assets. As Joe Friday used to say, "just the facts on goods ma'am." Okay, he didn't really say that but I had fun saying it anyway. Goods are tangible things that tend to stick with you. So we can begin with sticky buns. Trade in goods includes other tangibles such as agricultural products, autos, trucks, computers, phones, and much more.

The international trade balance in goods equals goods exports minus goods imports. In 2017, the US exported almost $1.6 trillion in goods to other countries. That sounds pretty impressive. But keep in mind two things. First, in 2017 the total amount produced of all goods and services (Gross National Product) in the USA was close to $20 trillion. So in terms of the whole amount of production, goods exports was about 8% in 2017. I would call that peanuts except it might be taken as an insult to peanuts.

Second, we sold $1.6 trillion of goods to people in other countries -- but here's the kicker -- we bought about $2.4 trillion from them. My friend Chuckie T. says that is really cool. We got a lot of stuff, and we didn't have to make it ourselves. But that isn't how President Trump thinks. He would prefer for all that stuff to be made here by US workers. That deficit of about $807 billion is a black eye. It represents to him what the US is losing.

So for a moment, let's stick with the black-eye interpretation. As anyone who has ever suffered a black eye knows, it is not a thing to cherish  It hurts. One must remedy it, but before we start throwing around remedies, let's turn to a bigger picture.

The goods balance has been negative since 1971. I found that information at the US Bureau of Economic Analysis (https://apps.bea.gov/iTable/iTable.cfm?isuri=1&reqid=62&step=2&0=1). I counted on my fingers and concluded that the US has had a goods trade deficit for 47 years. Wow. Turning around something that has been in deficit for 47 years could be quite an undertaking. The plot sickens -- I know it is supposed to be thickens but it really does get worse.

I used a graph from the St. Louis Fed (below) to show the goods trade balance since 1992. Notice some interesting things about that graph. First, the US goods trade deficit gets worse from 1992 to 2017. Second, the only thing that seems to improve the goods deficit is when we have recessions (vertical shaded areas in the graph) in the US that make us poorer and less likely to buy goods (both domestic made and imports). A cynic might conclude that recessions are great ways to reduce goods deficits, but one can plainly see that the remedial impacts of recessions are temporary. And that would be a very painful way to reduce deficits.

Let's suppose you lost undesirable weight gradually over a period of 25 years. We might conclude that extreme diets did not bring about that result. The continued desired loss of weight probably came because you made permanent and important changes in your life. And so it goes with goods trade deficits that have been around for 47 years and clearly worsening for 25 of those years -- there is something fundamental going on. And that something fundamental is not going to be easy to change.

We have had a lot of presidents and congresses in those 47 years, and it is probably true that not one of them organized a party to celebrate larger goods deficits. Yet, despite a lot of talk and some actions here and there, we are here in 2017 with goods deficits that seem to be getting bigger and bigger.

Let's suppose goods deficits are really bad for us. Then perhaps Trump's different approach to goods deficits is worth trying. Apparently his predecessors just made things worse. Their methods might have been sweeter and more humane but let's face it: if this is a problem, then sweetness may not be the best approach. If we want to reverse all those goods deficits, then it may take a fresh approach. You've heard of good cop/bad cop. Maybe it deserves a try.

Let's suppose, instead, that goods deficits are not so bad for us.  Seventy percent of our national output is services. We are very good at making and competing with services. Our services trade balance in 2017 was a surplus of $255 billion. As buyers we want goods and services. As producers we want to make services. So clearly -- we WANT a trade deficit in goods.

We also "export" a  lot of financial and real capital to the world. Maybe we should be focusing more on what we can do (services and assets) rather than what we can't (goods).

Tuesday, September 4, 2018

Wages, Employment and the Plow Horse Economy

Today's blog is about employment. For most of us, employment is a love/hate thing. No matter how exciting and challenging a job might be, there are days when you would prefer to pull the covers over your head and just chill as the alarm clock ticks on and on. But we know that if we do that every day, we might tire of watching Kelly Rippa and various other morning talk shows.

Work not only gets us out of the house, it gives us a paycheck. And that's the point of this exercise today. Last week I pondered why wages had been growing so slowing in the last decades especially when labor productivity was growing much faster. I was stumped. But then after a generous glass of JD, I got into a conversation with a neighbor and may have discovered at least one reason for the sad behavior of wages in the USA.

If productivity is rising, firms have more than one way to react to that happy outcome. They can enjoy the profits associated with the stronger productivity. Second, they can split the proceeds with their workers. Third, they can do neither and take the opportunity to exploit their new efficiencies by hiring more workers and beating the crap out of their competitors.

There are many factors that might cause firms to choose among those and other alternatives. Stockholders usually enjoy a nice dividend check, especially in January when they have to pay for the holidays. Workers just love a bonus or a pay increase. Honey, now we can afford the monthly payments on that new Lada SUV we always wanted.

What about the third choice? Why make existing workers and owners unhappy by hiring even more workers? One answer -- that came after the above mentioned JD (or two?) -- is that the choice may be affected by the firm's expectations about future economic growth.

We know that ever since the global recession of 2008-9, many people lost faith in the resiliency of the US economy. Some thought that the recession proved that capitalism had peaked. The rush to government control and regulation reinforced the idea that capitalism was breaking down. Even without such extreme beliefs, many simply saw reasons why economic growth might never return to those heydays when the economy could muster 3% or more growth each year.

Even in 2018, there are many dour forecasts that after a tax-induced sugar high, the economy will fall back into 2% growth. Imagine a mindset since 2001 that simply wasn't very sure that even moderate economic growth would return. Brian Westbury of First Trust named this situation the new Plow Horse Economy, with no intended insult to plow horses.

With such a dismal forecast, it might make sense for companies to do things that are reversible. They wanted to take advantage of the short-term strength of the economy, and they could do that by hiring more workers. When stagnation returned, they could reduce employment levels as necessary. They would not be stuck with higher permanent wages.

The behavior of wages and employment seem compatible with the above hypothesis. Last week I showed how average annual real earnings of the business sector barely rose in the years between 2001 and 2018. The graph below shows no similar phenomenon in hiring. The chart plots annual changes in employment (all employees of non-farm businesses) since 1939. The number 4,000 on the chart is in thousands so that represents a one-year increase of employment of 4 million workers. While that change didn't happen very often, we can use that as a benchmark for the largest one-year changes in employment.

We can also see that employment is banged around by recessions -- the vertical shaded areas. Ten times in the graph, employment declined from one year to the next. (An employment decline is a negative value on the chart.) Notice that employment dipped by 6 million workers in the latest recession.

The 2 million mark is interesting. Until 1965, the US economy did not have many years when employment increased by more than 2 million jobs. Between 1965 and 1998, it was common for the US economy to create more than 2 million jobs. The graph looks pretty messy right before and after the recession, but notice that in all 6 years (2012 to 2017) after the recession, the economy again produced more than 2 million jobs. 2018 will continue that record. The average change of those 7 years (2012 to 2018) will likely be around 2.54 million jobs per year.

It's interesting that the average increase in employment (leaving out the decreases in recessions) was about 2 million jobs from 1965 to 2001.

The point? A simple explanation for wage sluggishness might be companies preferring to weather the current economic environment by hiring workers rather than paying them more. But this could change. Wages have been responding to tighter labor markets in the last few years. But much depends on expectations about the future. Are we on a sugar high? Or will we return to historical economic growth? If and when expectations turn more positive, we should see those wages returning.

Tuesday, August 28, 2018

Wage Stagnation and Globalization

William Gladstone wrote in the Wall Street Journal on August 14 that "wage stagnation is everyone's problem." I agree, but I strongly disagree with his analysis of cause and effect. Wage stagnation is a problem for the economy's growth and very much a problem for the people who find their wages stagnating. The challenge is doing something about it. Something that will work.

After looking at many possible causes of wage stagnation, Gladstone quotes a single Federal Reserve Bank of San Francisco publication that attributes 85% of the decline in labor's share to globalization. Since I know that there have been hundreds, if not thousands, of articles written about the many impacts of globalization, it made me wonder why he chose only one single article to support a very extreme claim. I promise I will read that article and get back to you. But today I decided to look at some relevant data and see what it says.

I didn't look at wage data because I know that wages are not the exclusive source of income for most workers. Most of us get benefits at work. Some grocery workers lift a banana now and then, and many of us have retirement and health benefits. When you combine wages and benefits, you get something called earnings. If a worker accepts a better health plan in lieu of a wage increase, one should count that benefit. So earnings is a superior measure of what the employee gains.

I also chose constant dollar earnings because that deflates the earnings figure for changes in the cost of living. The Labor Department deflates earnings with the consumer price index. With constant dollar earnings, we get a pretty good measure of how much the spending power of employees changes over time.

I chose the time period from 2001 to 2018 because Gladstone argued that most of the labor wage problems stemmed from that time period. The data found in the table below come from the US Bureau of Labor Statistics.

BLS loves to collect this kind of data. Among the many economic times series they publish, I found information about constant dollar earnings for a number of occupations and industries. I was hoping by looking at this information I could see if there is a strong case for a large impact of globalization on the earnings of US workers. It is well known and often cited that foreign countries have stolen jobs from America, especially manufacturing jobs.

The table presents data for various US occupations and industries. The numbers for June of 2001 and June of 2018 are called index numbers and represent the levels of constant dollar earnings in those years. The last column presents the cumulative change over those 17 years. At the top is the average for all civilian workers. The table shows that the buying power of wages plus benefits rose by 10.2% over those 17 years. The typical employee in 2018 could buy about 10% more than he could in 2001.

The next part of the table gives similar data for various occupations. The strongest real earnings growth was the 14% increase for the occupation called Office and Administration. The lowest increase was earned by the category called Management, Business, Finance. Other weak growth occupations included Production and Management Professional. While this occupation information has no direct bearing on which industries were impacted the most, it does show that a broad spectrum of employees had less than average earnings growth. Production workers were among that group with less than average buying power increases. But so were many office workers.

The bottom of the table shows changes by industry. Workers at Hospitals and those in Administrative industries did the best while those that produced Goods and Manufacturing did the worst. Aha, you say. See, globalization hurt production workers! But by how much? The average worker saw her buying power increase by 10.2%. Goods producing workers earnings expanded by 9.2%. That is a cumulative difference over 17 years. That means that the buying power of the average worker beat that of the goods producer by 0.06% per year. If the average worker had an increase of $100 in a given year, then the production worker had an increase of $99.40.

Workers in Public Administration firms saw their buying power rise by 16.8% over those 17 years. That is 7.6% more than workers at Production firms. That sounds like a lot but when you look at the average yearly amount the major difference disappears. The gap suggests an improvement of 0.45% per year. If a worker at a Public Administration firm had an increase of $100, then the worker at a Production company would have gained purchasing power of about $99.54.

I redid these calculations several times, and they are correct. The reason why we might disbelieve them is that an increase in the buying power of wages of around 10% over one year is great -- but over 17 years it is tiny. Thus the differences among industries and occupations are even tinier. Maybe globalization did impact production workers -- but the Labor Department tables suggest that average employees of none of these occupations and industries got rich.

I'm not sure globalization had much to do with all that but it is worth pondering the real causes. The US is a very large economy and trade is a relatively minor part. If employee earnings have grown too slowly, we might want to look a little harder at what is causing that. Check out this blog next week. I will offer one explanation then.

Constant Dollar Employment Cost Index
As of June in each year
2001 2018           Change
All Civilian Workers 94.5 104.1 10.2
Management, Professional 94.6 103.8 9.7
Management, Business, Finance 96.1 104.7 8.9
Sales and Office 94.2 104.3 10.7
Office, Administration 93.6 106.7 14.0
Natl Resource, Constrn, Maint. 93.8 104.4 11.3
Construc, Extraction, Farming, etc 94 104.3 11.0
Installation, Maintenance, Repair 93.6 104.5 11.6
Production 94.1 102.6 9.0
Transportation 95.5 106.6 11.6
Services 95.2 105.4 10.7
Goods 93.6 102.2 9.2
Manufacturing 93.3 102.1 9.4
Services 94.7 104.5 10.3
Education 93.5 103.9 11.1
Healthcare and Social Assistance 93.5 103.6 10.8
Hospitals 90.9 104 14.4
Public Administration 91.4 106.8 16.8

Tuesday, August 21, 2018

Lesson 23 The Hidden Bond Market

The market approach was very popular when I learned macroeconomics. A macro model was composed of several markets – for goods and services, labor, money, and financial markets (bonds and stocks). By studying those markets we would learn about changes in things such as output, unemployment, wages, prices, and interest rates.

While each market could be studied separately in isolation, the trick of macro was to study them as an interconnected system of markets. What fun. We learned that something that first disturbed one of the markets, for example, the goods & services market, could subsequently affect outcomes in the other markets. Not everything was obvious by looking at one market. You had to study the whole system. 

Think of the US economy as being composed of a bunch of lily pads. A frog lands on one of those pads and impacts that one pad. But then the change in that one pad may affect the whole pond and all the other pads. The impact of those pads then reverberates around until that dang frog leaves the pond. That’s the way we think about macro. Something might disturb the labor market but before all is done, all the markets will have been impacted and therefore that one initial change might affect output, employment, wages, price, interest rates and more.

Isn’t macro fun? Lily pads! Frogs!

An economist named Leon Walras (pronounced vall rah) was diddling around with macro systems of markets and decided that one could focus on all the markets except one. You would always know the results for the “dropped” market because it was totally determined by looking at all the other markets. It became traditional to “drop” the bond market via Walras’ Law. That does NOT mean there is no bond market. It does not mean that the bond market is unimportant. It means only that one can learn all one needs to learn about all the markets without directly addressing the bond market.

The bond market is, therefore, hidden in macro models. It is lurking in the background but generally not in direct view. (Many of us learned something called the IS-LM model in macro. The IS curve represented goods & services and the LM curve was the money market. The bond market was "dropped" and we just looked at goods, services, and money.)

Aside from silly macro modeling, why would a normal human care about any of this? The answer is that sometimes the hidden bond market is forgotten, yet sometimes the bond market is very important. Today, this is especially important given all the focus on the Fed and its impacts on interest rates. 

People mistakenly think the interest rate is determined in the money market and is very much impacted by the Fed’s policy decisions. That belief oversimplifies the truth. The interest rate is the rate of return on a bond or other similar credit instruments. Changes in the supply and demand for bonds, therefore, have fundamental impacts on interest rates. To forget the bond market is to leave out critical factors impacting interest rates.

Today, we are concerned that Fed policy is going to raise interest rates. Our eyes are peeled for Fed policy meetings and the resulting impacts of their decisions on interest rates. But wait, there is much more to it. The Fed might influence interest rates, but much depends on the other factors in asset markets. For example, because the government is going to have large deficits in coming years, the Treasury is going to sell a bunch of government bonds to finance those deficits. Call that a large increase in the supply of bonds. Without a corresponding increase in the demand for bonds, that launch of new bond sales puts upward pressure on interest rates. One could argue that the Fed need do very little to raise interest rates since the Treasury is going to do a nice job of lifting them anyway.

Think about other borrowing in the economy. Firms will need to borrow more to permanently raise the amount they spend on plant, equipment, and innovation. Students will likely borrow more, too. There seems to be no end to how much we want to borrow for new cars. In a strong economy, all of that borrowing combined with the Treasury’s borrowing could be putting strong pressure on rates to rise. What if the Fed pushes rates even higher?

What I am suggesting is that ignoring the “dropped” bond market could result in interest rates rising too much too soon. If rates rise too much, this could trigger the next recession. Interest rates are returning to more normal higher levels due to the usual impacts of a growing economy that is reliant on debt. The Fed seems overly worried about inflation these days and is very willing to push rates upward. But they should also be worried about the bond market’s impact on interest rates and instead be focused on not letting interest rates rise too much.

The Fed is always somewhere between a rock and a hard place. The Fed finally decided that interest rates were too low. Sadly, it might be true that the real worry is that rates may be already rising too much. Why is the Fed always a day late and a dollar short?

Tuesday, August 14, 2018

Mr. Knowitall

Correct me if I am wrong, but no one wants the label Mr. Knowitall. That’s how many of us felt about our parents who were always ramming their half-baked ideas down our throats. We swore we would never be like them. One problem with Mr. Knowitall is that we  know he is trying to impress us with his vast store of knowledge. But worse than that obnoxious trait is that he really thinks he knows it all. He has nothing left to learn. So he listens very little and pontificates often. Communication is a one-way street. Yes, shes can be knowitalls too! 

None of us likes to be wrong, especially when we are arguing with friends and relatives. But it is the essential nature of our world that we are usually wrong. Most of the valuable or interesting things are complicated if not uncertain. What is the best way to raise your child? What is the best diet for you? What is the best way to get from Bloomington, IN to Burnsville, NC? How do you eliminate poverty? How do you stop chipmunks from digging under the foundation of your house? What is the best way to stop terrorism?

The above questions are debatable. There are two or more sides to each question. While there might seem to be a best answer today to one of these questions, we know that there is no guarantee that provisional knowledge today is perfect or that what worked yesterday will work today or tomorrow. Things change and therefore so do the correct answers. Correct answers are never 100% correct and are qualified or transient depending on changing conditions.

One response is to think that there is never a correct answer and since we are always wrong, we might as well have no opinion. While that might be good for some people, another option is to accept what you think is the best answer today but keep an open mind about what might change your opinion tomorrow. We lope along over time searching for the best truths.

While that might sound overly philosophical, another way of saying all this is that most of us try to learn. We read, we talk to people, we watch television. And best of all, we argue. Argue? Are you kidding? One connotation of argument is two sweaty red-faced people with different opinions trying to win at any price. Call him names! Make fun of her parents? Associate him with a cult. Whatever you have to do, argue to win!

But argument doesn’t have to be like that. Argument can be the best thing you did that day. Argument can be the way you learn. To argue a point, you have to first become acquainted with the topic. You then put together your best argument for a specific result. You might say spanking is a good approach to child-rearing. Your adversary, if you listen to her, will explain why it isn’t the best approach. If you both really listen, you might learn some things that you overlooked. Or you might raise the importance of something you thought was unimportant. The point is that no one knows everything. 

Argument is a wonderful way for spirited people to learn more. There is nothing like a contest to make you work harder. The everyday contest of argument is what can make us stronger and more confident about what we think we know. But it can also make us more humble and willing to keep learning. 

What bothers me today is that I see very few examples of people learning from each other when it comes to the most important issues of our day. People seem quite adept at memorizing an ideological mantra. They shout it at an opponent. And when something comes out of the mouth of the opponent, they shout their mantra louder. The opponent then shouts louder still. This is one-way communication at its worst, and it leads to zero learning. 

I had the loveliest conversation with one of my children recently. And yes, JD was involved.  It was about immigration. I was so proud of both of us because we listened to each other. I think we are each better informed because we both spoke and listened. I am not sure that either one of us changed our minds considerably, but I do think the conversation opened some new doors for learning and making future decisions. I feel especially blessed to have a family composed of people who try to keep learning and do it by arguing with and listening to each other.

Tuesday, August 7, 2018

US Monthly Employment and Excessive Analysis

On Friday August 3, the US Labor Department announced the monthly employment number for July 2018. You would have thought it was the 4th of July. That's the way the press seems to handle every data announcement. Every data report is a special baby announcement: It's a boy, and what a whopper he is!

The below graph of seasonally adjusted monthly non-farm employment shows all the changes since the beginning of 2002. If you can see the vertical axis, you will see that one-month employment changes stayed between a high of almost 600,000 and a low of negative 800,000. But those extremes exaggerate what you see most of the time. If you take out the largest changes and look at the rest, you see that both before and after the recession (shaded area), employment changes averaged around 200,000 per month.

Another thing you see in the graph for the years before the recession and after the brief recovery is that employment changes bounced around more than a Nolan in a bounce house. You could get sick watching the employment change number go up and then down and then up again.

What's my point? My point is that, except for recessions, this is pretty boring stuff. It's like my weight. I weigh pretty much 200 pounds (okay, I weigh more than that but let's stick with 200 since the chart says 200). Betty bakes some cookies and I gain a few pounds. I go to the gym and I lose a few pounds. No one cares. I weigh 200 pounds...plus or minus.

Imagine the press in my front yard waiting to hear my weight right after my cookie-binge week. One reporter says to the other, I hear he ate three plates of cookies every night. He even piled on vanilla ice cream. I bet he weighs 210. Another one heard that I dreamed I did 10 burpees each day and that I probably only gained 8 pounds. Apple Pie stock slipped just below a zillion dollars on hearing all this.

I finally waddle through the front door and announce to the thousands of reporters -- the scale says I weigh 206. There is a deep hush as the public realizes they overestimated my weight. Kroger closed early that day, and Apple Pie stock fell below Amazon.

When the employment number got announced on August 3, the reactions to the announcements reactions were similarly silly. Many pointed out that the number was very strong. A good number. But sadly, it was a little lower than some had expected. Much was written and much was said. Hand-wringing was profound. But really, folks? Look at that graph. If the employment change goes under 200,000 one month, what are you supposed to think? Yup -- next month it will likely go above 200. End of story. If it goes under 200,000 for two or three months, what do we learn? Yup, it will return to 200,000 the next month. If it goes under 200,000 for six months, then we have something to talk about!

In the meantime the press will indulge our need to be excited each month. Experts will say many interesting things about trends and cycles. I just can't wait until September's report for August.

Tuesday, July 31, 2018

Forgotten Debt

The magician employs sleight of hand by having you fixate on something highly observable while he or she completes the trick with the other less visible hand. The audience oohs and aahs as they are sucked into thinking that something impossible has happened.

Today our government intrigues us with spies and improbable alliances with nasty dictators while they destroy our nation with behind-the-scenes budgetary policies that likely will bleed us ounce by ounce. The sleight of hand lets them spend more and more as they pretend to give us tax breaks and other goodies. Few speak out because frankly, the topic of budgets pretty much puts most of us to sleep or has us heading to the closest bottle of JD.

The data reveal a clear path to ruin but alas there are few in the press or anywhere who want to press the case. It seems to be a lot more fun to watch our key federal institutions lob daily bombs at each other. In fairness, there is a group that seems dedicated to warning about the national debt called the Committee for a Responsible Budget. You can find them on Google easily. Today, I share some data I found at cbo.gov – the Congressional Budget Office. I look at historical budget data and then their 10-year budget projections. It’s not a pretty picture but you would never know it if you read the daily Bloomington Herald Times or watch Fox Business News (or anything else).

Federal government spending came in at $3.98 trillion in fiscal year 2017. That amount was more than twice the number recorded for spending in 2001 ($1.86 trillion). While spending always rises during a recession (2008-9), the 2017 number is about a half trillion dollars higher than it was after the recession in 2010 ($3.46 trillion). Now for the future: the CBO projects that without any major changes in spending legislation, federal government spending will rise to $6.62 trillion in 2027. That’s an increase of about $2.6 trillion in 10 years.

Luckily, we got tax cuts so all is fine. Ha ha. Federal tax revenues rose from $2.16 trillion in 2010 to $3.32 trillion in 2017. CBO predicts revenues will rise to $5.30 trillion in 2027. Tax cut? I don’t think so. In the next 10 years, our taxes will increase by about $2 trillion.

You're on a budget, right? The budget is motivated by the difference between your spending and income. If you are like the federal government and you spend more than you earn, then you use the plastic. In government, the annual plastic usage is called the deficit. The total amount you owe is called your debt – the total amount the government owes is called the national debt. 

The government deficit in the year right before the recession was $248 billion. In 2017 it was $665 billion. The CBO says it will increase through 2027 when it will hit $1.3 trillion. Yup, in that one year the difference between government spending and revenue will be more than $1 trillion. Yup, in that one year we will spend $1.3 trillion more than we collect in tax revenues. Meanwhile, the national debt will rise from $9 trillion in 2010 to $14.7 trillion in 2017 and to $27.1 trillion in 2027. Can you imagine getting a statement form Visa saying you now owe $27.1 trillion dollars?

Another way to present this data is to compare these figures to GDP. That approach removes the impacts of inflation and shows the relative importance of these numbers to the size of the economy. The below table shows:

  • Tax revenues as a share of the economy declined right after the recession but will climb as a percent of the economy through 2027
  • Government spending increased during the recession and went back to something more normal, but recent legislation has spending rising as a share of the economy through 2027.
  • The deficit ballooned in the recession but was already falling by 2017. It will rise again through 2027.
  • The national debt increased in the recession and thereafter doubled as a share of the economy to 76.5% in 2017. Good times usually imply smaller deficits and lower debt. But in the case of the USA today, we see the national debt rising to almost 100% of the economy in 2027 – almost three times what it averaged right before the recession.

Is this a crisis? Not yet. But with our current tendencies in government today and the almost total lack of interest in approaching a 100% debt to GDP ratio, it is likely that these numbers will worsen.

Combining the government’s debt with student debt, credit card debt, auto debt, and a few others – the US could easily see itself in a debt crisis. The economy is strong today and that helps. But we have not seen a recession in a long time. When it comes the world’s investors may wonder if America is really a good place to stash their money.

We might want to think about ways to reduce that debt before the fit hits the Shan.

Government Budget Figures as a Percent of GDP (in percent)
                          2007    2010    2017   2027*
Tax Revenue      17.9     14.6     17.3    18.5
Spending            19.1     23.4     20.8    23.1
Deficit                 -1.1     -8.7      -3.5     -4.6
Debt**               35.2     60.9     76.5     94.5

* This is a projection assuming there are no changes made to the laws on government spending and taxing. Of course any new laws that change spending or reduce taxes would alter budgets in 2027.
**The debt quoted here is what’s called debt held by the public. This is what the government has borrowed and owes to private investors (domestic and foreign) and the Federal Reserve.

Tuesday, July 24, 2018

Catching Up Part 2

I got a hot new idea for a post this week that looks at how other countries are catching up to the US. The idea stemmed from the thought that the world has changed a lot, and many of the economic relationships between other countries and the US might need to be revisited given the shifts in relative economic success. For example, most of our free trade agreements are pretty old and likely reflect the relative poorness of some countries. So I downloaded a bunch of data and then got this sneaking feeling I had already done this topic before. And lo and behold, I did -- back on December 5, 2017.

Since I spent a good bit of time downloading this data I decided to plow ahead and call this one Catching Up Part 2. In Part 2, I focus on GDP per capita in dollar terms. This means I am focusing on what the average person makes or earns in each country. (Warning -- the next few sentences in this paragraph are basically footnote material. You can easily skip to the next paragraph if this kind of material bores you.)  If GDP per capital increases, that means GDP is growing faster than population and it means the average person is doing better economically. Putting each country's amount in dollars means that changes in the exchange rate are reflected in the resulting numbers. Presumably these exchange rate changes help to purge any impacts of relative price changes. That is, if GDP per capita is growing for a country only because of prices, then its exchange rate would depreciate and essentially nullify the impacts of the price changes. I use market exchange rates instead of so-called purchasing power parity rates. (Talk about boring!)

Part 2 also divides the changes in per capita GDP into two time periods -- from 1960 to 1979 and from 1980 to 2016. The World Bank data starts in 1960. I would have preferred to start earlier but the data isn't there. I chose 1980 because so much happened in the world after that date -- including the break up of the Soviet Union, China's emergence in world trade, and many political and economic changes in Latin America. You might think of these two time periods as Post-World War II and Globalization.

The main question posed here today is to what extent the rest of the world caught up to the US economically since WWII and since the onset of Globalization. I chose 17 countries to compare against the USA. The gorgeous table below has several columns. The first three columns contain the GDP per capita for each country in 1960, 1980, and 2016. The next three columns show the share of each country's GDP per capita relative to the US in each of those years. For example, in 1960 the number for Luxembourg is 0.75 meaning Luxembourg's GDP per capita was about 75% of the US GDP per capita in 1960. Notice that by 2016 it had risen to 1.75 or 175% of US GDP per capita. That's a huge increase. The US economy grew by 19 times over that time period. Luxembourg's economy grew 44 times! Note: Luxembourg is a tiny place and was included because of this spectacular result. It used to be a steel-making dynamo but is now a center for finance, knowledge, and space exploration. Enough about Luxembourg.
  • What about China? The table shows that in 2016 China's GDP per capita was barely above $8,000. Yes, China is a huge economy but it also has a huge population. Inasmuch, the average person in China makes a lot less than a German ($42,161) but considerably more than the typical Indian ($1,709). Notice that China's main growth came after 1979 -- the share of US went from 3% in 1960 to 2% in 1979 only to rise to 14% in the Age of Globalization. Clearly there is a huge catch-up of China to the USA between 1980 and 2016. 
  • Contrast China to Germany's share of the USA. Germany began in 1960 at 91% of the USA, rose a bit more in 1980 to 96% and then fell to 73% of the USA in 2016. Clearly German growth per capita was less than the USA in the Age of Globalization. Many countries were catching up to both Germany and the USA. 
  • Several countries gained against the USA in both time periods -- South Korea, Israel, and Chile. Of those, South Korea's advance was dramatic from 5% to 14% to 48%. 
  • Japan is interesting because that country had the highest catch-up for the whole time (up by 52%) but nearly all of that occurred in the 1960 to 1979 time period. Its economy slipped relative to the USA from 1980 to 2016. Several other countries had the same pattern -- first rising, then falling against US growth: United Kingdom, France, Mexico, Iran, Canada, and Germany. 
  • Argentina, Canada, and Germany were the only countries among this group to have a lower share of USA in 2016 than in 1960. Argentina's share fell by 17%, Germany's by 18%, Canada's by 3%.
  • Showing greater than a 10% catchup were Luxembourg, Japan, South Korea, United Kingdom, Israel, and China. 
  • Data for Russia and Japan are not available for 1960 and 1980. See the table notes. Vietnam has shown some catchup since 1985. 
The world is catching up to the USA in terms of GDP per capita. In some cases, the result is dramatic. Whether it is relations with China or the European Union, these differences can matter. The world has changed and our larger economic relationships should reflect these changes. Perhaps the US has spoiled some countries by letting them bend the rules. It won't be easy to change long-term habits. But it is worth a try.


Real GDP Per Capita in 1960,1980, and 2016
In Dollars and 
As a Percent of the USA
And Change from 1960 to 2016
Source: World Bank
1960 1980 2016 1960 1980 2016   60-16
US                3,007          12,598          57,638        1.00        1.00         1.00    
Lux        2,242          17,114        100,739        0.75        1.36         1.75            1.00
Japan            479          10,332          38,972        0.16        0.82         0.68            0.52
Korea            158             1,704          27,539        0.05        0.14         0.48            0.43
UK        1,380          10,032          40,412        0.46        0.80         0.70            0.24
Israel        1,229             6,229          37,180        0.41        0.49         0.65            0.24
France        1,338          12,713          36,857        0.44        1.01         0.64            0.19
China              90                195             8,123        0.03        0.02         0.14            0.11
Brazil            210             1,940             8,650        0.07        0.15         0.15            0.08
Chile            533             2,577          13,793        0.18        0.20         0.24            0.06
Mexico            342             2,802             8,209        0.11        0.22         0.14            0.03
Iran            192             2,440             5,219        0.06        0.19         0.09            0.03
India              81                264             1,709        0.03        0.02         0.03            0.00
Canada        2,295          11,135          42,348        0.76        0.88         0.73          (0.03)
Argentina        1,149             2,738          12,440        0.38        0.22         0.22          (0.17)
Germany        2,751          12,092          42,161        0.91        0.96         0.73          (0.18)
Russia  na              3,429             8,748  na         0.27         0.15  na 
Vietnam  na                 231             2,171  na         0.02         0.04  na 
Russia is 1989; Vietnam 1985

Tuesday, July 17, 2018

Is Inflation Back?

Is inflation coming back? Are hoola hoops returning? I don't really know since I still don't know how to predict the future. But people want to know answers to these kinds of questions so we devise ways to think about the future. One way is to hire a psychic or you could buy a Ouija Board.

In economics we resort to two well criticized methods -- we base forecasts on imperfect theories or take a walk through the data. While inflation theories can be quite complicated, many of us today throw them around like salmon at the Seattle Fish Market. The simpler the better. The economy is stronger than it used to be. Excess capacity is diminishing. Presto, firms can get higher prices for goods and services and inflation is higher. Job done. Way to go dudes.

Sometimes people or what we sometimes refer to as the "street" take these sophisticated theory-based forecasts seriously. Those very important people who comprise the Federal Reserve Open Market Committee (FOMC) take this information seriously and have announced that they have diverted their war against unemployment to a war against inflation. Or in more common layman's language they decided to raise interest rates four times this year.

When the Fed announces a plan to raise interest rates four times in a year that is big stuff. Some emerging markets suffered already as rich folks moved their money back to the USA in anticipation of jucier returns here. Some folks have decided to postpone their purchases of SUVs and garden condos because of higher interest rates. People who worry about inflation are now even more worried about inflation because the Fed would never lie. If the Fed is worried about future inflation then so should they.

While other parts of inflation theory would argue against a sustained rise in inflation, we ignore those irritating little details and sweep them under the rug. I have covered those points in recent posts and don't want to go over that today. Let's just say that most people seem to be clinging to a theory that predicts that strong US growth is going to raise inflation.

Today I want to play games with numbers. I chose to look at recent inflation rates. There are at least as many inflation rate indicators as there are SUVs. So one has to make a choice or write a 700 page dissertation. I chose the measure supposedly used by the FOMC -- the rate of change of the personal consumption expenditures (PCE) deflator. The PCE deflator is very much like its more well-know cousin, the Consumer Price Index (CPI), but it is a lot prettier and dresses better.

There is a version of the PCE deflator that ignores changes in food and energy prices. Food and energy prices are more erratic than a Trump behind a Twitter board. By ignoring F&E in an inflation measure, we focus on things that are less erratic and more sustained. Policy is supposed to ignore all those random fluctuations and focus on more sustained or persistent changes in prices.

I decided that since inflation of the PCE deflator less F&E has been rising for about 7 months -- I would focus on the 7 month annualized change in that index. Those numbers are found in the table below. I am comparing these 7 months changes over 7 month time periods since near the end of the last recession. Thus the table looks at inflation information from 2009 to 2017.

We begin the story by looking at the bottom numbers in the bottom of the table, 2.08 and .04. The 2.08 is the moving average of the inflation rate over the seven months from October of 2017 to May of 2018. Looking up that column you see its the highest number. Thus we see that inflation is higher now. The 0.4 says it was almost half of a percentage point higher than in the previous 7 month period. So that data shows inflation (PCE less F&E averaged over 7 months) is clearly higher.

Does the rest of the table tell us anything else about inflation that could be useful when thinking about the future? Notice that some of the rows of numbers are in red. In those rows the inflation rate in that 7 month period was lower than in the previous 7 month period. Inflation has not gone up linearly since 2009. It goes up and then it goes down. I chose 7 month moving averages because that time coincides with the latest increases in inflation -- and because it is a long enough period to be measuring sustained changes.

The point is that inflation has not sustained itself at higher levels since 2009. It bumps up and then it bumps down. Notice in 2016 there were back-to-back seven month periods when the inflation rose by .29 and then .44 points. Surely inflation was on a tear. But then those two periods were followed by  a seven month decline by .83 points. Hmm -- not so much a tear.

I'm not going to bore you with a discussion of all these numbers. But I do think that the two recent bouts of inflation from early 2017 to early 2018 do not prove that inflation is roaring back. Those two periods are not unlike what happened the year before and from what often happens in history after the inflation rate rises for a while.

There is no reason from either data or theory to be sure that inflation will come roaring back like a World Cup player after encountering what appeared to be a life-ending fall on the turf. I am happy the Fed seems to have ended its vendetta against unemployment but that doesn't mean they have to turn their guns on inflation. Just slowly return monetary policy to normalcy. That's all they need to do. Quit scaring the rest of us with your anti-inflation rhetoric. Extreme changes in policy from the frying pan into the fire can cause recessions. Here's a great idea -- let's have a monetary policy that goes from extreme to normal!

Personal Consumption Expenditures Deflator
Less Food and Energy 
Annualized Percent Change, 
Seven Month Moving Average

7 Mo
Avg Change
2009 Aug 1.46
2010 Mar 1.57 0.11
2010 Nov 0.89 -0.68
2011 May 1.8 0.91
2011 Dec 1.7 -0.1
2012 Jul 1.93 0.23
2013 Feb 1.59 -0.34
2013 Sep 1.25 -0.34
2014 Apr 1.78 0.53
2014 Nov 1.43 -0.35
2015 Jun 1.3 -0.13
2016 Jan 1.59 0.29
2016 Aug 2.03 0.44
2017 Mar 1.2 -0.83
2017 Oct 1.68 0.48
2018 May 2.08 0.4

Tuesday, July 10, 2018

The Age of Communication

My last two posts were more philosophy and less economics. How about a third one? Let’s call this one the irony of the age of communication.

Can one doubt that we are living in a new era based on communication? It sounds modern, doesn’t it? Think about it. We have Alexa in our living rooms. We spend a lot of time talking to her so that she will play music for us. She also turns on and off some lights while we are on vacation. I hear she listens in on our conversations but that is for another post. What matters is that I can communicate with a robot sitting on a table.

I also can communicate with people. Remember when making an international call was costly and difficult? Remember when making a long-distance domestic call was advanced? No more. And now you can even see the people at the other end if you use Skype or your iPhone. We can talk and talk and talk. Grandpa, did you gain a few pounds? Ha hah. Hey, Grandma is that a little mustache on your lip?

When I say "Hey Google" to my phone, I can communicate an information need. It’s more fun than typing into my Google search bar. Then Google tells me stuff that I forgot. Hey Google, when was Dolly Parton born? Hey Google, what year did Elvis die? When was Party Doll banned in Boston? I can even look up the seven signs of a coming heart attack. How cool is that? And I can do all this in my easy chair, in my car, and while walking on a crowded sidewalk.

This really is the age of communication and possibly the age of information and communication (I&C). Remember when we were kids and we had a huge bookcase in the living room that held our family encyclopedia? We had the kind you get when you accumulated enough Green Stamps. More financially successful families had the version by Britannica. But both did the same thing – they connected us to all sorts of facts. Now we don’t need a bookshelf or thousands of pages of paper and print. We now have computers, tablets, and phones. All that information and more is easily found in those tiny little boxes. It is more accessible and much cheaper.

All the above sounds pretty good. But here is what worries me after my fourth JD. Is there any connection between knowledge and the age of I&C? A na├»ve person would think there was not only a connection but a damn good positive one. That is, with more information and communication at our fingertips, surely we must know more and surely we must have more positive control over our environment. Surely more I&C makes us better off. 

Imagine taking a physics class where you learn all sorts of important things about the world. Things that make your life better. For example, Professor Bortell taught us about gravity and made us repeat several times that what goes up must come down. I can still remember that and so far I have not once hit myself on the head after throwing heavy objects into the air. Today’s physics students have to learn the same theories but I am guessing that job is made all the easier because of the ease of finding information about things that we could only find in our heavy, thick textbooks and encyclopedias.

But then I started thinking and wondering if there is a trade-off between knowledge and I&C. Is it possible that it allows people to squander their time rather than enhance it? We all know that learning a language, for example, takes a lot of time and repetition. It does not matter how much easy information you have accessible about Spanish pronouns or German sausage. Ha Ha. I meant German verbs. All that information availability is fine, but it cannot replace the 10,000 hours you need repeating Donde esta la biblioteka.

Think of all the things you learned in your life that needed time in the saddle. How did you learn multiplication of numbers up to 15? How did you learn the location of each state? All the classes of animals and plants? How did you learn algebra? Biology? How did you learn how to say how did you learn? Sorry about that one. But my point is that learning takes time and effort and then even more time and more effort. Maybe you were one of those people who found learning easy. Lucky you.

When I go anywhere these days I marvel at all the people who are connected – talking on the phone, writing texts, watching videos, listening to music, and so on. And then I worry that all these people are getting addicted. Can you go for more than 17 seconds without checking your email? Facebook? I go to a gym. Most people are there for less than an hour and some of them are on their phones the whole time. What kind of workout is that? You can't leave your phone in your locker for 60 minutes? 

This new drug of I&C gives us more and easier excuses. It’s not fun to do the hard work of learning, of acquiring knowledge. Many of us crave excuses to avoid this hard learning. If so, how are you finding the time to memorize your multiplication tables? That’s what I wonder about. Excuses have always been around. To avoid studying, my roomie and I used to walk across the bridge over Interstate 75/85 to have a chili dog and watch Laugh-In on TV at the Varsity Restaurant in Atlanta. On a nice day, one can always stare at the beauty of the surroundings. Excuses from work have always been there. But it seems to me that the Age of I&C has taken this one step further. Phones demand our constant attention. How do we find time to learn valuable things? Alexa, did the cashier give me the right change? Please!!!!!

We often hear people lament the fact that US students are falling behind those of other countries. How are we going to generate enough scientists and engineers if we are all sitting around staring at our phones? How are we going to create enough voters who are able to make good political decisions when it’s a lot easier and more fun to join a radical Facebook group? Knowledge is indispensable to a prosperous and happy society. I am not so sure that I&C is going to get us there.