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. 

Tuesday, July 3, 2018

Uncivil Behavior

I hear more and more discussions about uncivilized behavior. It seems very uncivil for people to be uncivil. It’s not very civil. The synonyms polite and courteous come to mind when we think about civil behavior. The uproar over our President’s uncivil behavior is both warranted and, I think, a bit overbearing.

Warranted? Of course. We want our presidents to act presidential. A president should be calm and wise and strong and a model of behavior for nine-year old boys and girls. He or she should wear lovely appropriate clothing with nice ties and grey business suits. When President Trump tweets and sometimes when he speaks at pep rallies, he seems more like a football linebacker’s coach than a president. His critics call him crazy but many of them have never been around some of my relatives. If you want to see crazy, that’s crazy.

So the hullabaloo over President Trump’s behavior is warranted. Only Roseanne Barr can create more of a stir. But is it all a bit overbearing? Are the critics a bit disingenuous?

My first point is that while we live in a very educated and civilized society, most of us do not always act civilly. My son is very civil. But when he feels that a driver needs a little education, he is quite colorful in how he provides the necessary education. Admit it, even your favorite philosophy professor has flipped off a driver who cut her off. Civilized? When you careen down a narrow hallway reading the latest exciting tweet from your mother on your iPhone and make everyone else jump out of the way, that’s not exactly civilized. And what about that stream of four-letter words that escape your once pristine mouth cavity when your cable goes out in the middle of penalty kicks? 

My first point is simple. We are very civil people who act civilly most of the time but when we think it is warranted, we act more like the Sharks at a Jets reunion party. So now the question is not if President Trump acts uncivilly, but under what conditions it might be okay for any president to on occasion act like a maniac. It might be to educate someone who proves hard to educate. We sometimes say it takes a two-by-four to get someone’s attention. Or it might be that it is simply hard to convince someone that he must change an old practice. You can’t teach an old dog a new trick. Maybe you can – but you must speak louder or carry a bigger dog biscuit.

That gets me to President Trump. While many of you romanticize the civility and beauty of our foreign friends, the truth is that managing relationships with foreign leaders is not much easier than planning a wedding. A country is defined as foreign because the people in that country have chosen not to have English as their national language and they insist on singing their own national anthems at sporting contests. They also seem to prefer employment for their own citizens, and if you ever decided to bottle your latest batch of brandy under the name of Armagnac, you would find your French friends are no longer so friendly. America first? Hmm. How about France first? How about Germany first? Is it not clear that China is first?

Point? Even with our closest foreign friends, the relationships are contentious. Just like you and your best friend Howie when you got into that fight over who is best, the Beatles or the Stones. Being best friends brings out both the best and the worst in us. Inasmuch, having a tough stance and using rough words with Canada does not mean we like Russia better than Canada. It just means there might be a lot at stake between close neighbors who each care very much about their own citizens.

Back to the two-by-four. The world in 2018 is not the world of 1946. Europe has more than overcome post-World War II rebuilding. Many Asian countries including China are not the poorest backward nations of the world. The economic relationships between the US and these countries are also not the same as they were 50 or more years ago. But it is very possible that there are remainders or vestiges of economic policies that do not treat the US equally in 2018. The world has changed, and the policies must mirror those changes. 

Changing those policies is not easy. Many Americans are frustrated that a patient, civil approach doesn’t change things fast enough. Somehow we have to get the attention of our friends so they fully understand that the most current relationships do not reflect the shrinking economic gap between the rich US and its trading partners. I don’t mind a little uncivil language and tough bargaining if it means that we move economic relationships to more appropriately parallel true economic disparities. The risk of tough talk and actions is more of the same. That's not what we want. We do not want a trade war or any kind of war. But knowing that our partners have their own domestic situations to protect, it won't be easy to get their attention. Continuing the same civil approaches we used in the past might not be enough.