One Hundred Years Ago -- 1920

Since 2020 is ending in a few days, I thought we might compare 2020 to 100 years before. What happened in 1920?

Imagine what 2120 will be like. 

Most of the information found below is from Wikipedia*. In 1920,

My mother and father were each 5 years old.

Ford’s Model T captured 47% of the US car market.

The Treaty of Versailles took effect ending World War I.

The ACLU was founded.

The League of Women Voters was founded in Chicago.

The Spanish Flu ended with 17 to 50 million dead.

Life expectancy was about 54 years (today it is 78 years).

Galveston, TX grappled with the bubonic plague.

The Summer Olympics were held in Antwerp, Belgium.

The first game of the Negro National Baseball League was played in Indianapolis.

The first commercial radio station in the US started in Detroit.

NFL was established and play started with 5 teams.

Adolph Hitler made his first public address in Austria.

Warren Harding became the 29^th President of the US.

KDKA AM of Pittsburg started broadcasting radio signals.

Ireland partitioned.

Real GDP was about $670 billion (today it is almost $19 trillion).

Stan Musial was born.

Best songs were "Swanee" by Al Jolsen and "Makin' Whoopee" by Bing Crosby.

There were 48 states and a population of about 107 million.

Cleveland Indians beat the Brooklyn Dodgers in the World Series.

California, Harvard, and Princeton were the top college football teams and each was undefeated. Cal beat Ohio State 28-0 in the Rose Bowl. 

The US Army Air Service began (the independent US Air Force would not come until 1947).

Lots of change in the last century. In 1920, who would have thought that we would be sending humans in rocket ships into the solar system. Who would have thought the Hooisers would have been in the top 10 -- in Football! Who would have thought that our main wardrobe accessory would be a mask? 

So what's up for 2120? Any guesses? 

https://en.wikipedia.org/wiki/1920

Scrooged: Xmas 2020

It is December 22, 2020 and while I have written Xmas posts many times, I have to admit I am pretty stumped this year.

I must have started this thing a dozen times. One problem is timing – it is not Christmas yet and New Year’s seems a ways off in the distance.

I wanted to display my usual lack of respect for institutions in a humorous way, but somehow humor doesn’t flow in me today. Clearly, you are better off watching Bill Murray and Chevy Chase if what you want is humor.

There is the saga of Trump on his horse, Frigger, saying Hi Ho Silver away as he rides into the sunset while Joe and his gang wreak havoc in their expensive Brooks Brothers suits and confident swaggers. The only sure thing about this transfer of power is that we will get dizzy from the swing moving too far in one direction and then going too far in the other one.

Of course, you are totally sick of reading and learning about Covid. Even the so-called good news about vaccines isn’t very reassuring as pundits question every aspect of it and tell us to wait patiently for it to have its full effects in the future. They somehow forget that many of us are old enough to be resting in pine boxes when that normality returns.

The Saint Louis Fed published a piece recently about income and wealth distribution and guess what they found? Yep, the distributions are getting a little less unequal but not enough to make a difference. While their piece has enough data to choke an actuary, there is nary a word about what we should do about it. They did say that if the poor earned more income and saved more, their wealth would improve. Wow. How much do they pay those economists to improve our lives with sage advice like that?

So, there you have it. I know you are busy getting Covid at your local stores, and you still have many gifts to buy so I won’t keep you from all that. I do hope you find a minute or two to send cash to me at my Seattle address. The alcohol taxes here in Seattle are criminal, and I could use a little assistance at this time of year.

I will end appropriately with a hearty CHEERS and a hope that we all survive and thrive in 2021. Have a nice holiday too. 

  

Alan Blinder Can’t Wait Until January*

I was wondering when the Krugman/Blinder forces would get back into the act. Maybe I read the wrong publications, but this duo has been pretty silent lately. But wait no more, the day after Thanksgiving, Alan Blinder weighed into the Wall Street Journal for more. More what? Of course, another drumstick or piece of pumpkin pie. Or another couple trillion of stimulus for the US economy.

The Blinder issue is not how many trillions to spend. The issue is speed. Of course, Blinder won’t take ownership of the speed idea as he quotes Jason Furman saying “the economy can’t wait until the Biden Administration takes office” to create the requisite trillions. Blinder is saddened that the Fed is out of bullets and cannot help. Strange that he can admit that zero interest rates for an extended period of time won’t help enough – yet he believes so fervently that a few trillion here and there of fiscal urination is all that is needed…and right now. I guess he never taught that part of the macro course called crowding out. Surely a few trillion will save the economy. Not!

I am writing this on November 27 and so Blinder believes with all his pea-picking heart that if we have to wait until January, the US economy will collapse and he and his rich friends will have to sell their stocks at a very low value. Geez, did you know that the economy is perched on a knife’s edge and will plummet into an abyss in two months?

Nowhere in his article does he explain why the next 60 plus or minus days are so critical. Geez Alan, what’s up? Is the US economy such a basket case that it can’t wait for 60 days for Biden and his debt-loving buddies to start spewing money here and there?

It is interesting and curious how he pinpoints all sorts of hot spots that need help. State and local governments, small businesses, and such, but his punchline is that the ones who need it the most are the “under dogs” of society. His words, not mine. He must be assuming that all the previous provisions in the tax and spending code have vanished and therefore we need to spend a lot more to help those people. He doesn’t exactly explain how he will turn them into “over dogs” but let's not be hypercritical.

This is the kind of gooblygook that politicians love. A guy with a lot of degrees and a nice home at Princeton writes a scholarly sounding article and they can’t wait to make passionate speeches and legislate. If Blinder says a couple trillion – then they will up the bid a few trillion. And the sad thing is that after all the politicking, those underdogs will still be underdogs and the usual politicians will have endeared themselves to the usual voters.

 *https://www.wsj.com/articles/a-speedy-recovery-depends-on-more-aid-will-trump-deliver-11606420721?mod=opinion_lead_pos11

 

Macro is Sleeping

Covid is frustrating for policy makers now and their inability to understand one thing is leading to ineffective policy at best and some very dire consequences at worst.

Let’s suppose you have a headache and you take a couple of Bufferins. That’s what you usually do. But this time the headache doesn’t disappear and you take two more.  Still, the headache persists. At some point you have to realize that something has changed. A different remedy is needed. Maybe you need to shut your window to keep the dust out?

Today the Fed has poured massive amounts of money on the US economy and set interest rates near zero. Congress has enacted stimulus in the trillions of dollars. Yet with all this activity, we still worry about a short-term recession and possibly slower economic growth for a decade.  

Monetary and fiscal policies are traditional tools. John Maynard Keynes was among others aptly named “Keynesians”, who invented a story that we call macroeconomics. Monetary and fiscal policies are macroeconomic tools designed to mend a macroeconomic problem.

Macro problems are real. And they require macro remedies. But just as a headache might not be fixed by a pain pill, economic problems might not be fixed by a macro policy.

A recession is usually thought of as a macroeconomic problem. Recently I wrote about the slack sisters – how unemployment and a real GDP gap are evidence of an economic problem. Today I want to emphasize that these sisters of slack are not always caused by macro sources or events and therefore the typical macro tools might not be useful.

What is a macro source? Macro is a convenient and useful “lie” or theory that lets us think of the economy as if it were one factory pumping out schmoos. If people decide to save more and quit buying schmoos, then the macro doctor rushes in with more money or lower taxes to induce us to spend more. Macro problem solved!

But what if this macro lie does not fit the problem? What if in fact, the economy cannot be portrayed as a single or integrated entity but instead is more like two or three different ones.

What if the current problem does not find all sectors of the economy moving as if hinged together? What if instead, one sector is vibrant while the other one(s) is (are) in real trouble? In that case, it might be less useful to take one macro pill. Instead of putting on our macro hat, we should be wondering why that one sector is dormant.

Today the story finds companies most negatively affected by Covid shutdowns in one sad tent – with a bunch of high tech or digital companies glowing in a nice condo nearby. I can’t or don’t want to go to my favorite local retail store, but I sure can sit in my apartment and order stuff online until my credit card decays.

Neither monetary not fiscal policy is designed to fix these two tents. They add unnecessary stimulus to sectors that are growing and won’t solve the problem of stores shut down by bureaucrats. But that does not stop the politicians from trying to add more and more gasoline to a fire that won’t light.

The one positive thing that one might say is that some of the expansionary fiscal policies do help some people manage during the crisis. It gives people income who have suffered great losses. But as Keynes said in the thirties – even this won’t solve the problems of deep recession. He likened policy to “pushing on a string.” Clearly, in times of lockdowns and pessimism, people are less likely to take a government payment and spend it all.

So what do we do? First, realize that macro policies have limited value in today’s crisis. Second, rethink how we help people get through this mess. Third, make distinctions between growing and shrinking sectors. Finally, don’t waste the people’s money. Think harder about what sounds good to the media as opposed to what is really needed in 2021. We are going to come out of this with a huge debt that will have to be paid. Try to do what we can to make it less huge.

Misleading Economic Reporting

In today’s Wall Street Journal I found one of the worst examples of economic reporting I have seen in a long time – bad enough that I just had to get this out on a Saturday night.

The topic was the Labor Department’s announcement for employment in November. The actual one-month change in total employment was about 245,000 workers. One would think that in the middle of one of the worst economies we can remember, that the press would stand up and applaud 245,000 more jobs in one month.

The article wrote about “fitful” efforts to pass another aid passage were now even more necessary. The article correctly pointed out that the 245,000 in November was smaller than half of the 610,000 added in October. The article quoted unnamed pols who cried that the 245,000 number is “further impetus for quick action." Apparently some at the WSJ know how to calculate halvesies.

Unfortunately, those people don’t know a thing about the real world. For example, follow some of the numbers over the last few years.

2018 and 2019 were fairly normal years. In 2018 employment increased by about 2.3 million persons. In 2019 it increased by another 2.1 million workers. Divide those numbers by 12 months and you get a monthly average of around 180,000 more jobs each month. So, in pretty typical years we could think of 180,000 jobs increase as pretty good or at least average. Compared to 180,000 November’s 245,000 doesn’t seem too shabby . It doesn’t seem like that number presages cataclysm.

But wait, the article crowed that 245,000 was a lot less than Octobers’ 610,000 increase. But what they don’t either understand or don’t want to say is that neither the 610 nor the 245 should be compared to previous averages or to each other.

In March and April, US employment fell by a total of 22 million jobs. A decline of 22 million jobs in two months is nothing short of crazy. The Covid-associated shutdown helped to create an impossible number to plot on any graph. Of course – of course my dear WSJ friends – after a loss of 22million jobs in two months, you might expect something equally weird to follow that.

And it did. Between May and December of 2020, employment bounced back by 12.3 million jobs. That did not make up the whole decline and that makes sense because we do not think we are clear of Covid. The 610,000 in November was simply part of an expected partial bounce back. The months directly before November showed ever larger increases. For example, in June of 2019, employment increased in that one month by almost 5 million jobs.

What’s the point? The point is that November’s number of 245,000 increased jobs tells us almost nothing. It is not a bad number as monthly averages go. It is not enough of a number to help us to get back to were we were before Covid. It is also not a terrible number that should make us to want more and more stimulus from Washington. It is not alarming in any sense. What's wrong is that we have Covid plaguing us. November was not anything to cry over. If anything, it was reason for some optimism. 

Why do journalists have to misinterpret reality? Is it that hard to sell advertising dollars that they have to turn respectable vehicles of news into purveyors of economic porn? I can see the New York Times publishing rubbish like this as part of its ideological thrust. But I thought the WSJ was above this kind of tomfoolery.

Slack Sisters

If someone calls you a slacker, it is not meant to be a compliment. A slacker is one who doesn't do work or does it poorly.

We use this terminology to describe the economy. Today, our US economy is a real slacker. I know that because I went to the Saint Louis Fed and created the below graph. The graph displays two common measures of slack in the US economy since 1948, from around the time the Tuna was learning how to swim. 

The red line is the quarterly unemployment rate; the blue line is the difference between real GDP and potential real GDP. 

Economic slack is highest when resources are sitting around unused when they should be working. In the graph, more slack is evidenced when:

    1. the unemployment rate gets higher, and/or

    2. output real GDP is low compared to how much we could be producing if more people were employed (potential real GDP).

The rightmost part of the graph shows you that the slack sisters are telling you the same thing -- slack was incredibly high in the third quarter of 2020. Slack improved compared to the second quarter, but it remained very high. 

Notice that slack worsens predictably in recessions. The graph's shaded vertical areas show you US recessions since 1948 and what you generally see is unemployment rising and output falling relative to potential output.  

During the periods of slack, we often see policymakers reacting by applying stimulus to the economy -- whether from the Fed, the Treasury, or some combination of the two. 

Notice that that while Q3 of 2020 stands out on the graph, it is not the worst we have seen. The early 1980s and early 20-teens saw very high slack. Following each of those time periods, we saw improvement, albeit gradual improvement, with declining slack for about a decade. 

This raises the question of policies. Recent Fed chairs have advocated very strong stimulus. The Fed wants zero interest rates for three years. Janet Yellen may be confirmed as the next Secretary of the Treasury, and it is pretty certain she will want very strong stimulus from Congress. 

That means we have to wonder about the future behavior of slack. We don't like slack because it means we are not operating the economy efficiently. But the trick is to do the stimulus in the right way because too little slack can also be a problem. Too little slack creates its own problems -- for example, firms having increased difficulty in finding enough qualified workers and rapidly rising costs and prices, rising so rapidly that they often to lead to the next recession. 

How do we eliminate harmful slack in a way that does not come back to bite us? Two things to watch: 

    1. Don't push policies until slack is dangerously low.

    2. Don't reduce slack so quickly that it creates imbalances and inefficiencies.

Do you want to go on a diet after Christmas? Sure, most of us will. But don't do two things. Don't try to lose all that weight in one month. Second, don't try to get into your 1980 wedding outfit. Be kind to yourself. Toss out the pecan pies and get down to a reasonable weight in a reasonable time.

Do you think Janet Yellen and our leaders will figure out how to do that with national slack? I guess we will have to wait and see. 

Thanksgiving 2020

Happy Thanksgiving!

At first it sounds like classic irony. I had to look up the word “irony” to make sure I was using the word right. It basically means using words in a way that is counter to what they usually mean implying humor, sarcasm, or emphasis.

Thanksgiving is a time when we usually give thanks. It matters not to which religion you subscribe. It is time in the USA when we take the day off and spend time with friends and family. We usually acknowledge how lucky we are and thank the Lord or someone else who might be listening.

How ironical to say those words in 2020 when there seems to be almost nothing to be thankful for – a time when we are not even supposed to be with other people. Clearly, you will not be in the stands cheering with thousands of people holding a very expensive ticket and watching the Lions and the Cowboys. Of course, if you want to go to New York and watch the 94^th annual Macy’s Thanksgiving Day parade, you will watch it in your hotel room on television. Don’t wander into the streets to catch a glimpse of your favorite float or the Covid police will get you.

But worse than that, depending on which state or city you live in, you will have to read a Bible of regulations on whom and how many people you can be with on Thanksgiving 2020. And even though you might be allowed to be with four close relatives, two bums, and three jack rabbits, you will still have to wear masks and make sure you are never closer than 182.88 centimeters from any of them.

For sure, there will be no hugging allowed and don’t even think about sharing spit in any way, shape, or form. You should not even shout or laugh in a hardy manner, and it might be safe to wear two masks instead of one. Maybe a lovely face shield to top it off. What a look! Some resourceful entrepreneur will hopefully invent a way to eat turkey and mashed potatoes without removing one’s mask or masks.

Some of you will feel safe disregarding most of the above because two days before Thanksgiving you will stand in a line longer than the ones to get into your favorite grocery store on restricted hours, so you can have someone jab a swab up your nose until you see stars. When the news comes back that you and your 300 friends tested negative, you will spend Thanksgiving dancing to fifties rock, drinking Andre champagne, and finally showing your thanks by hugging and kissing everyone right before you drive home drunk from the dinner party.

Okay, some of the above is partly true. But let’s end on a positive note. Since my year in a distant city has been very small since Covid started, I have had to do what so many of you have done. I had to choose priorities. I could sit around and feel sorry for myself or I could learn to live with a new situation – a situation whose terminal day is impossible to know.

I am strumming my guitar unmercifully, but thanks to teacher Dan, I am coming along at a pace that most snails might admire. I have spent more time in the gym and a lot of time walking around Green Lake cursing at people who don’t wear masks. I have gotten back into reading more and, of course, I keep badgering you with blog posts. Luckily, I met a really nice lady named Barbara, and we are able to safely eat a lot of soup and salads together.

So maybe it is not ironical to say Happy Thanksgiving. I hope you are surviving if not thriving in this special week.

Roller Coaster Economy

While the election and covid19’s resolutions are going to take a while, I thought I might take a week to get back into some macro.

Below is a table I hijacked and made some modifications of some data from the US Bureau of Economic Analysis (www.bea.gov).

The table shows us almost two years of data relating to Real Gross Domestic Product for the US.

The numbers are all percentage changes. The first column shows you how much real GDP rose from 2018 to 2019,  2.2%. The next three columns have the same information for each of the three quarters of 2020. The quarterly percentage changes have been seasonally adjusted and annualized so we can compare each quarter to the first column.

The first thing to notice is that after rising by a modest but fairly normal rate of 2.2% in 2019, RGDP fell for two quarters and then snapped back in the third quarter of 2020. The -31.4% followed by +33.1% is just crazy. It is hard to find such huge swings in US history. That, in a nutshell, is the source of a lot of uncertainty right now. How does one think about the future when the economy looks more like kamikaze pilot than an Alaska Air flight to Minneapolis?

We all know that most of that variability came from Covid 19 and its lockdowns – but that doesn’t help us much in making choices about working and spending in the future. How many waves of Covid are coming? How much of the economy will be locked down?

The rest of the table shows us similar information for the parts or components of RGDP. The largest sector of RGDP is spending by households on goods and services. While the goods line shows some ups and downs – the services spending fell by 42% only to recover by 38%. Farther down in the table you see spending on residential housing. Those swings are even larger – a decline of 36% followed by an increase of 59%. That 59% increase in Q3 of 2020 was impressive but not the biggest in the table.

Business spending on equipment recovered by 70% in Q3. In contrast, business spending on structures fell in all three quarters of 2020 after declining somewhat in 2019.

International trade was wackier yet. Exports of US goods and services to the world increased by 60% in the third quarter; our imports of goods more than doubled (108%).

That leaves us with the final part of the table labelled Government Spending. That’s a bit of a misnomer since it only includes purchases of goods  and services by the government (tanks, paper clips etc) and does not include payments to individuals like welfare, Medicare, and Social Security.  So much of what has transpired this year as government payments to individuals and companies does not show up in this table.

The table shows that Federal government spending for non-defense items rose by almost 38% in the second quarter. Defense spending by the Feds and state and local spending show no major changes.

What is the upshot? Trump brags about the third quarter rebound without noting that we are not back to where we ended in 2019. Of course, a Q3 rebound is better than no rebound. Moreover, all that volatility creates a muddy crystal ball. If the table was affected by a virus and we can't be sure about the future of the virus -- then surely we know almost nothing of value to help us know the future economy. 

Anti-Racism

Macroeconomics is easy to write about. Racism is not.

Luckily, I have some good friends who have introduced me to the concept of anti-racism. I read a book by Judy Picoult called small great things. I recently read pieces by Jonathan Kanter and Ben Danielson.

No, it doesn’t make me an expert. But it’s enough to get me thinking. You are my friends and I like to share my thinking with you. Even if it is not macro.

Anti-racism is a new term to me. It simply means that you no longer are willing to put up with racism. I don’t consider myself a racist but then most of us don’t. Anti-racism makes you a little more action-oriented. It means when you come across a racist action you don’t sit quietly – it means you confront it.

Confronting it does not mean you have to punch someone or embarrass a person in front of others. Being anti-racist means you do it in your own way. I will probably never walk in a parade, carry a sign, or shout slogans, but I can find ways to speak with people or to write about what I see and hear. That’s my way. You might prefer to take part in public activities or maybe you want to fight with those advancing racism. Each should find their way – but anti-racism implies you find some way that is compatible with your personality and knowledge.

Why take on anti-racism? Why not let other people do it? My answer to that is that there is still much to do so that black* people feel as natural and comfortable as white people in going about their business. Talk to a black friend about that. His experience is not the same as yours.

Sure, much has changed since I was a boy growing up in Miami. Or much has changed since I graduated from Georgia Tech in Atlanta. I recall that Lester Maddox, before he became Governor of Georgia, owned a restaurant in Atlanta. He became famous for giving axe handles to his white patrons to use against any black people who tried to eat in his barbq restaurant. Much has changed since blacks sat in the back of buses.

Even more has changed at workplaces where we find more black persons working side by side with white colleagues. But it doesn’t take much effort to find vast differences in the ways whites and blacks live. A residual blanket of racism lies almost everywhere we care to look. Even if it is simply the numbers. When you go into a restaurant, a bar or Wendys, most of the people are just like you, white. That’s not prejudice but it does speak to the different ways we experience life.

I used to think to myself that if I did it and Russell Wilson did it, then why can’t more blacks do it? I grew up Jewish in a time when Jews were not loved much more than blacks. I got myself educated and I played by all the rules and everything turned out fine. 

But this is self-deception. I had two parents who were perfect parents. No they weren’t high income, but they came from traditions and families that passed down success traits. They did not come from dangerous neighborhoods and they did not teach us to shy away from white people. They did not teach us to be afraid that because of our skin color we might be suspected or accused of things we didn’t do.

Some like to use the term white privilege and I used to recoil at that. I used to hate the term institutional racism. But those reactions come from one who has always benefited from being white. Of course, I didn’t want to admit that I was advantaged. And sure, I had to work hard to get into and get out of Georgia Tech. But that’s not the point. It is not so much that I gained an advantage. It is more that so many other people were left out of that. In comparison to what many blacks were facing, my achievements were a walk in the park. Call it institutional racism or call it white privilege or call it black prejudice, what matters is that there exists a tilted field.

Maybe it isn’t tilted as much as before but it is still tilted. And that’s why we can’t sit on our hands. When an artist roughs in a landscape, she draws the big picture. After that takes form, she can work on the details of the ducks and the geese on the pond. We have drawn the landscape of a more equal society; now we need to address all the remaining details.

It will be hard for a government to do that and that is what I find so compelling about anti-racism. It says that each of us can play a part. Like in the famous whack-a-mole game – when we see something pop up, we whack it to the ground. A few years of racial whack-a-mole, we might make some headway.

A personal note to end on. Sometimes my friends note or joke that my move to Seattle has changed me. In economics terms, I always considered myself a moderate or a conservative. But never was I conservative when it came to race. Marge and Sonny Davidson, my parents, wouldn’t have it. I tried to raise my children that way too. But I am tired of telling people I am not a racist because it doesn’t mean anything. Today I see the point. Not being a racist isn't enough. Being anti-racist means that I will do what I can to work against racism around me. I hope you will too.

*I use the term black people here and I realize that term might not be the best way to describe the issue. Surely there are other people of color not to mention others who face racism. No harm is intended and my use of that term came from things I am reading that were written by black people. 

Covid Debt: Baby Steps

Last week I brought up the idea that it might be necessary to think of Covid 19 as equivalent to war financing. That is, with a war on Covid,  we might have to spend a lot of money and go into considerable debt to win the war. I worried primarily about the aftermath of the war using data from 1940 to 1955 to illustrate the difficulties of reversing engines – of bringing debts back to pre-war levels.

I offered no solutions for how we could reverse engines but I have had some nice discussions with several of you about that topic. So here we go again. At one extreme is one friend who basically said that we shouldn’t worry about the government debt. He is in no hurry to return to pre-war debt levels. Technology is roaring and will restore economic growth even in the face of historic debt.

Should we worry about the national debt in 2020 and 2021? It’s a good question. With household and business debt at high levels and government debt historically high, I wonder where all the saving comes from to buy all that debt. With the world in a recession, surely the amount of saving is low. Yes, it might be high as a percent of income when stores are closed, but the gross amount can’t be much.

And where do global investors want to invest? Much depends on how they see the US as the leader when these investors view the strength of the US government and economy. Will they see us as handling our issues better than Japan or Germany? Or will we look like global village idiots? If it is the latter, then the world will not want to fund our debts and we will be indistinguishable from Venezuela. If the former, then we can move forward with historical debts for the time being.

So maybe we have some time. What do we do with it? The first thing to note is that we don’t have to clean up historically high debt over the weekend. We could send a decent signal to the rest of the world that we have started on the right path.  Perhaps your doctor puts you on a diet because you have been gaining 10 pounds each year. A good sign might be to only gain 5 pounds next year. It might seem better to start losing weight – but in a tough situation you might see halving your weight gain as the beginning of a  win.

My point is that we don’t have to balance the budget tomorrow. But we could begin by making a bold statement that we will start by improving budgetary dynamics and then will turn to smaller deficits and debt. You gotta start somewhere.

But even that seems tough right now. How do you start? Where do you start?

Logically you start by remembering that the debt is the result of annual budget deficits and annual budget deficits are the net result of decisions about government spending and taxing. With respect to spending – you are already in a fight. What gets cut? What gets cut the most? What spending items are sacred?

If this is not your usual budget year and you face challenges of historic proportions, you don’t get wild and crazy. You just had the flu and you haven’t eaten well in days – so you don’t go out and run your fastest mile. With respect to the US government budget recently – it might not be that hard to find a little fat in the spending. What I am saying is that you let government spending grow but you let it grow a little slower than before. Seriously, are you telling me that a bipartisan group of adults could not pare back a little of the future growth of government spending? Stop it.

The story about tax revenues is the same – find a way to have revenues grow a bit faster. Don’t gouge business or the middle class or even rich people. I am sure you can find a loop hole or two. The point here is to start a turnaround. Make a statement. You cut back some of the growth of spending. You also will increase the growth of tax revenues. The deficit will get smaller.

The result is a beginning wherein you reduce the 2021 or 2022 budget deficit by a few billion. Hey mom, we turned things around. The deficit is smaller this year.

I am running out of space (and your patience) so let me say that once you get started, take five to 10 years rolling in the same direction. So long as you move in the right direction and you do things that seem reasonable and not cutthroat – you don’t scare away world investors. 

There was a major, historic  shock to the US economy in 2020. It will take a while to reverse it. As we get into the process, the decisions about spending and tax revenues will get harder. But with some years of working together on the budget, and seeing progress in the economy result, then maybe our politicians will catch the hint. 

But if you don’t take the first step, I am not sure what you do next. Let's get off the dime.

Covid War

It was recently announced that the US government deficit for fiscal year 2020 was $3.1 trillion, or 16.1% of the nation’s output for that year. In the previous year, it was a more normal, but still large, 3.1% of GDP. It averaged about 4% of GDP over the past 10 years. That’s quite a hop to 16.1% in 2020. The government deficit is defined as government spending minus government revenues. The main reason the deficit went up so much in FY 2020 was the 47% increase in government spending. You heard that right. The Federal government decided to spend almost 50% more in 2020 than in 2019.

Each annual deficit must be funded – so this means we added $3.1 trillion to our national debt. Our national debt is now more than 100% of the size of the whole economy. The figure for FY 2020 is 102%. We have not had such a large debt in the last 75 years. Around 60% might be considered normal.

One could say that Covid 19 is as serious as a world war. If we could have large deficits and debts in the 1940s, then it should be okay to have large deficits and debts in 2020. While I have argued in this blog that we might have spent less to save us from Covid 19, I won’t belabor that point here. My point today is about what happens next. Our political parties are arguing now about whether or not to add either another trillion (or so) or another three trillion (or so) to the debt.

Once our government saves us from Covid and recession, what will happen next? I decided to go back 75 years and ask what it was like in the US when the world war was over and how we addressed our huge debt of that time period. Maybe we can learn from history?

Below is a table I put together using data from several US government sources (Congressional Budget Office and the Bureau of Economic Analysis). The data start in September 1940 and go through 1955. World War II went from September of 1939 through September 1945. The Korean War kicks up then and goes to around 1953, but that war is not the topic for today.

The data in the table going from left to right are: Federal government expenditures as a percent of GDP, Federal defense spending as a percent of GDP, Federal government revenues as a percent of GDP, Federal government deficits as a percent of GDP, National debt as a percent of GDP, and the annual percentage change in real GDP.

What do we see?

            Defense spending went up dramatically in two years – in 1941 it was 418% of GDP and in 1942 it was 256%. We definitely went to war!

            Total government expenditures also increased rapidly and were growing at 40% per year by 1943, 1944, and 1945.

            While tax revenues also went up in those years – they did not go up as much, so we see huge increases in government deficits from 1943 to 1945 and similar increases in national debt in those years. The debt as a percent of GDP rose from 52% in 1940 to 119% in 1946.

            The table shows that it took until 1955 for debt as a share of GDP to return to 67% of GDP. It took at least 10 years to go back to pre-war levels. Focusing on the deficits column you see there were mostly annual surpluses after 1956, some near-balances, and only two years of small deficits.

            Upshot: To get back to something like “normal” debt, it took a decade of surpluses or budget balances.

            We also see in the chart how real GDP reacts when governments increase debt – during the war we had high double-digit increases in national output. That economic strength did not last, however, as you see pretty much 5 years of negative or near negative growth starting in 1945.

That’s lots of information to process, but what I see is that it takes time to reverse extreme cases of government deficits and debts. I also see that reversing them causes recessions. I also see that it took a long period of austerity in budgets to bring us back to normalcy.

My question to you: Will the aftermath of the war on Covid 19 be like the aftermath of WWII? Will our politicians, after fighting the war fiscally, move to several years of annual government surpluses? Will they do the hard things necessary to restore the economy? If they don’t, what will our economic growth be after, say, 2022?

The Stock Market

The stock market is getting a bad rap these days. As I wrote last week, the recent relative success of the stock market is used as evidence of a growing rift between the fortunes of rich people and poor people. This rift gives people more confidence that they should do something with stocks to rectify the problem. Some politicians want to take stocks or the income from stocks away from the rich and distribute them to the poor. Or better said, they want to tax them to death and redistribute the proceeds through government.

Last week I pointed out that stocks are not owned just by rich people. Many of us less than rich persons own stocks and thus a lot of stockholders would be impacted by whatever is done to make stocks less valuable. I won’t repeat that information.

There is more to say about stocks. Stocks are created by companies. They are pieces of paper. They are pieces of paper that take on value because they promise the owner of that piece of paper a dividend. What does it take to get a dividend from a stock? Unlike an interest payment that is legally promised on a bond, a stock dividend is as gotcha. The promise is that if the company has a good year – it will pay dividends. If it does not have a good year, then it might pay a small dividend or maybe even nothing at all.  

Thus, buying and holding a stock is a risky thing. We hope that the company will do well so that we get a nice juicy dividend. Another aspect of a stock is that it has a price. The price is set each day for stocks through the interaction of supply and demand. If word gets out that a firm is doing poorly, then the market price of its stock might fall.

Ugh. If the firm is doing poorly you might not get a dividend AND if you want to sell the stock, you might have to accept a lower market price and thus take a loss on it. Clearly, stocks are risky businesses. Why do so many people and retirement funds want to buy stocks if they are so risky? Answer – they are optimistic that firms will do well – stock prices and dividends will rise and the owners of the stocks will get richer. No matter your income from work, if the stock market rises, you get richer. It’s a gamble – because you don’t know if firms will do better or worse in the coming weeks and months.

But still, stocks are risky. Right, and that’s why a lot of people are very careful in how they use their saving. Aha – the world “saving” just snuck in. Most of us save.

Okay, not all of us save. I have some friends with high incomes and they manage to always spend more than they earn. They have negative saving – or what we refer to as borrowing and debt. And then there are a lot of people who cannot save because they don’t earn enough to even provide for a meager standard of living.

But national saving is a big number. Some of it just ends up in our checking accounts at the end of the month – or maybe our saving accounts. Or maybe we buy a certificate of deposit. Or maybe we buy a government bond … or a corporate bond. Or maybe we buy paintings. There are lots of ways to save. Stocks are just one of the ways.

It makes sense that people, rich or not, want to save and use some of that money for stocks. But why do firms want to sell them? Mostly because they need the money. The main idea is that a company might not generate enough revenue to pay more than wages, rent, intermediate goods, and so on. If they are going to be more successful in the future, they may want new equipment, a larger office building, better cars for the salesforce, etc. They can get that investment capital from a bank, they can borrow it by selling bonds, or they can ask you to be an owner of their stock. Whichever they do, the end result is that firms look ahead and try to be more productive.

So what? We want to save as a nation, and we want to buy stocks. Firms need money, so they sell stocks.

Simple. There is a reason for the stock market, and there is a reason we want it to be healthy with lots of transactions and with rising prices and values. People want good options for their savings and firms want to find lots of money to use for growth. 

The stock market is not the reason there are poor people. Killing the stock market will not stop or reduce poverty. Having a viable stock market means we funnel good savings into companies who can use it to grow, be stronger, and hire more people along the way. That might not end poverty but surely it won’t help if attacks on the stock market hinder firms attempts to grow and thrive. There are other and better ways to reduce poverty.  But those ways are neither quick nor easy -- maybe that's why some politicians would rather speak loudly and unkindly about the stock market. 

 

K

A topic of conversation these days is the impact of Covid 19 on distribution of income. Numerous articles point out that the stock market is healthy and benefiting rich people, while lower income people’s jobs and wages are bearing the economic brunt of Covid.

We now have a letter to illustrate these impacts, the K. It suggests that the upper part of the K has fortunes rising for rich people; the lower part shows incomes falling for everyone else.

As in many things that have to do with poverty and distribution of income, I cannot take exception with the facts. Surely those at the lower end of the income distribution are subject to disproportionately negative impacts when the economy tanks. Last-in-first-out is an inventory term but applies well to employment and jobs. Often those most recently hired in an expansion phase are the first to go when things turn down. Those hired near the ends of expansions are generally people who were not the first choices of companies.

Even though we agree largely on the facts, the issue is always what to do about them. Here is where it gets really messy. What do we do in this country to reduce the impact of economic downturns on our population? Surely people will be injured by recessions. How do we share those burdens better?

Answering that question is messy because it involves both politics and economics.

We have a progressive tax system that was supposed to be part of the answer. If you make more money this year, you might be bumped up to a higher tax bracket. The richer you get, the more money the country takes in to distribute.

That seems straightforward except for the fact that the tax code is wacky. As we have read lately, rich people in America sometimes seem to pay no taxes at all. If we like a progressive tax system, then why let them get off the hook? Write-offs like those that let you deduct charitable donations are designed to satisfy other goals. Let’s not list all those write-offs here. Argue about this one or that one – but let’s be clear that a lot of them exist and they often do a lot of good. A rich person who chooses to take advantage of these write-offs can reduce how much she owes in taxes. 

To have more money for lower income families, perhaps we should get rid of these write-offs. That becomes a very economic and political decision. What if preventing a write-off lowers how much money people contribute to not-for-profit institutions? Who gets hurt? That’s economics. But there is also the political dimension. How do we pass legislation to get rid of write-offs? Which ones do we end?

Write-offs are one of many challenges. What about the stock market? Those writing about inequalities point out that rich people have done well lately as evidenced by the stock market. Surely the stock market has bounced back, but like many other economic dimensions of the economy since last January, it has also taken a hit.

But what about the stock market? Is it really owned by Richie Rich and no one else? I don’t think so. One economic reality is that you are not going to own stocks if (1) you don’t save and (2) you don’t work for an institution that puts money into stocks for you. More than half of the population in the USA own stocks. Many of them are very rich. But many have great pensions earned by working for the government and private companies. Still it's only about 50% of the population.

It is not surprising that poor people – who don’t work for companies with good pensions and who often earn so little that they have very little to save – don’t own many stocks or other financial and real assets.

That is a main source of inequality – the stock market’s performance favors those who own stocks. What do you do about it? To answer that question, we are back to economics and politics again. How do we help those at the lower end of the income distribution have permanently higher incomes? How do we help them to earn more and save more without throwing the baby out with the bathwater? Or in political terms, how do we get government to agree on effective ways to accomplish this?

To those who point a boney finger of blame at one party or at rich people, I challenge you to do less pointing and more hard thinking about how we effectively help those with lower incomes earn and save more. Wouldn't it be nice if our programs attacked the real causes of poverty and moved people permanently to higher levels of income and wealth? Or is it sufficient to transfer money to them so that they can continue to live on the edge of poverty. While some people may never be able to live through their own efforts, I am guessing that the situation of most poor people can be improved by helping them overcome obstacles. That sounds better to me than helping them stay poor forever. 

Bizzaro World

Bizzaro World was a fictitious planet found in comic books which featured situations that were unexpected or opposite to what would be expected. It seems to me as I try to write this blog that I am having an increasingly difficult time fitting into our current Bizzaro World.

Maybe this is what always happens. People live and they get old. They find that the world around them has changed. They no longer understand how the world works. They are ready to spend the rest of their lives grazing on the lower 40.

I’ve never had trouble finding a good topic to write about. I have written over 500 posts for this blog in the last 10 years. But I have to say that I am wondering how I fit into this bizarre world we now live in.

Last week I wrote about the Fed. How bizarre is that? After a century of trying to keep inflation low, the Fed now says they want to make inflation high. Zero interest rates for three or more years? What does that even mean?

I often write about economic growth. But no one seems to care much about that topic. Economic growth depends on the growth of productive inputs like the growth of the labor force and its productivity. Have either candidate for president said a word about those topics?

And then there are the usual ups and downs of the business cycle. Macro looks at the key components of spending to discuss these cycles and how to end recessions and start expansions. But apparently, the sizes of the recent changes in spending from one quarter to the next are so huge that they almost lose meaning. What does it mean when consumer spending falls by 30% one quarter and then rises by 50% in the next one? Bizarre.

And isn’t it crazy that we don’t seem to care how large the money supply and the national debt are? We even have a new theory called MMT which says debt is irrelevant. Seriously? When is the last time your friendly banker told you not to worry about your debt?

And what about letting markets work? Isn’t it interesting that in what appears to be one of the biggest recessions in decades, firms raise prices in the face of declining markets?

And what about supply and demand? Supply left through the back door. Better said, everything now seems to depend on the resurrection of demand for goods and services. And we need a little Viagra to get demand up and going again. The government wants to give people more money so they can spend more. Presumably, that will cause firms to hire more workers and produce more goods and services. But how can we spend more when stores aren’t really fully open or they can accommodate only a small group of buyers. Many of those stores will never open again.

Our government says our challenge is raising demand and they are spending trillions to get us to buy more. But the real constraint is Covid and that restricts output. The government is pissing away our money, putting a cast on your right arm when your left arm is broken. Bizarre.

I’m sure that a lot of this has to do with special problems associated with Covid but I am guessing that there is more to it. Maybe it’s getting to be time for me to head out to pasture. I could start writing about duck cloacas but then my editors might wonder about that choice. Of course our government does function a bit like a cloaca so you better get your dictionary out. 

Jim Dandy to the Rescue

 In 1969 a music group named Black Oak Arkansas played the song, Jim Dandy to the Rescue. 

One verse went like this:

One day, I met a girl named Sue.
She was feeling kind of blue.
I'm Dandy, the kind of guy
Who can't stand to see a little girl cry.
Jim Dandy to the rescue!
Go, Jim Dandy! Go, Jim Dandy!

Apparently Jerome Powell and his buddies at the Fed took that song to heart. Powell said recently  in a Wall Street Journal article, more than two million Americans have permanently lost their jobs and 11 million fewer Americans were employed last month than in February. Mr. Powell said it would be important for Congress to spend more money to support these households, along with hard-hit businesses and state and local governments, to limit additional damage to the economy.https://www.wsj.com/articles/fed-signals-interest-rates-to-stay-near-zero-through-2023-11600279214

Powell previously had stated that the Fed would keep interest rates near zero for at least three years. But that’s not enough. He says he wants Congress to do even more.

While I love the song Jim Dandy, it made me realize how far we have come with respect to macroeconomic policy since I was in school.

Let's start with microeconomics. Draw a supply and demand curve for anything – let’s say masks. Note the intersection of the curves tells you the equilibrium value of output and prices of masks. Cool.

Now let's suppose people listen to Donald Trump or their barber and they decide to stop buying masks. The demand curve for masks shifts downward. What does the model say happens next? When I was teaching that sort of thing, I broke it down.

1.     With prices unchanged, supply would now be greater than demand.

2.     We call that situation a glut or an excess supply.

3.     Masks are sitting around gathering dust in storerooms.

4. Firms will cut back on mask production and employment.

5.    Firms would rather sell those masks than have them sit in a warehouse.

6.     Firms, faced with this new situation, lower the price of masks.

6.     Lower prices for masks raises demand for masks and they sell more masks at the new lower price.

Cool, eh. This is what people call market economics because competition in markets means there is a more or less automatic mechanism in a market economy. If demand and output decline, you don’t need Jim Dandy to come to the rescue. If demand and output decline, prices fall and as they do, this restores some of the lost demand. Presto. Problem resolved.

Some of you might be skeptical but this is what we believed for a long time. Somehow now, we never even speak of markets working. If there is a problem in a market – we need to bring Jerome Powell or Nancy Pelosi together to save the day.

You scoff. Larry, you are into the JD again.

So I went to the Bureau of Labor Statistics to look at price data. They have a lot of price data and I won’t bore you with all that. I will tell you that in the very extreme and dire situation in the US after 1929, we had a really big economic contraction called the Great Depression. Guess what happened to prices? Prices, as measured by the annual percentage change in the Consumer Price Index, fell during four straight years

            1930  -2.3%, 1931 -9.0%, 1932 -9.9%, 1933 -5.1%.

Did that solve the problem of the Great Depression? No. Did fiscal policy solve it back then? No.  

But a trip to the Bureau of Economic Analysis  (https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey ) shows real GDP growing at very high rates from 1934 to 1944 (except for 1938 when it declined by 3.3%). In those 11 years the annual increases in real GDP ranged from 18.9% in 1942 to 5.1% in 1937.

So maybe prices did fall to clear the markets?

This is not a sophisticated historical or statistical exercise. But I can tell you that after a major collapse in the economy, prices did fall, and that was followed by a vigorous economic expansion.

A subsequent shift in policy advocacy towards Jim Dandyism means that markets don’t clear anymore. Why would a firm accept a lower price if it knows the government is going to come to the rescue? When Powell tells all of us, powerfully, that he wants inflation to be higher, it seems to me markets will never function properly. 

Look at the data again. Between 1949 and 2019 there were only three years in which the price level fell. Those three years were quite interspersed – 1949, 1955, and 2009. In every other year between 1949 and 2019, prices rose. Since 2017, the price index has increased by about 2% per year. Prices did not generally fall in recessions. 

If Powell would quit singing Jim Dandy and stop cheerleading for higher prices, and instead lecture firms about their social and economic responsibility during a recession, maybe then we might get a recovery -- a recovery that does not involve huge mountains of money sitting in banks and an enormous increase in national debt. Maybe worth trying?

Life in 2020

Last week I messed around with the glass half-full versus half-empty. It’s a decent message. Yes, things are bad but if you look around, things could always get worse. Admittedly, that philosophy can only go so far. When things get bad, you feel pretty crappy.

Today what’s affecting me is the idea of living with change. Life has changed a bunch since January. Most of us are not crazy about change. We like to know that the grocery store will have plenty of our favorite items in stock. How could they possibly be out of raisin bran?

I’m sitting in my apartment in Seattle and looking out the window. Today (I wrote the first draft of this piece on September 16) I can see the sun – at least a little. It is 11 am but the haze from the smoke from all the fires is so thick that the sun is barely visible behind a very grey cloud. Smoke hangs on everything. So what? Apparently gulping down smoke is even worse than gulping down too much Jack. Who ever would have thought of that?

That means that since I am old and frail and my respiratory system looks like a 1920s railroad yard, I am not supposed to go outside. It is okay for young people to suck in soot but us older gentlemen (and ladies) are supposed to stay inside. That makes it kinda hard for me to go on my daily walk with friend Barbara around Green Lake.

Wear a mask. Well maybe. “They” say masks don’t work against smoke. Who the hell are “they”? That’s the other thing. Whether it is smoke or Covid, there are a lot of experts out there who seem to want to shout their opinions everywhere they go. A walk down the street is a national debate.

One can’t smell a rose or down an Old Fashioned without having to listen to someone spout off about any one of dozens of topics. We are in debate mode. And these are not friendly debates. For most people, "its my way or the highway". That’s different and takes some getting used to. 

I go to the gym now. I can’t go on walks, so I am left with indoor activity. I know that sounds risky but my gym seems very safe. Gym used to be partly a social event. I met ladies and gentlemen there. Now we all wear masks and we try to stay 10 feet from each other. We actually have to work out at the gym! It's very tiring to work out for a whole hour without stopping to discuss recipes and restaurants. 

Can you imagine doing exercise with a mask on? Now that’s a change worth wondering about. We all look like we are about to hold up a 7-11. We blow spit into our masks as we try to do a few curls and a push-up or two. Before the smoke storms, we could walk outside without a mask. Now you wear your mask everywhere. Inside. Outside. I wear mine to bed. Just kidding about that one. 

Tell that to someone last January and they would have taken your driving privileges away. And how do you know how pretty a lady is while she does bench presses if she has a mask covering her face?

Working out now involves not only a mask but a cloth and a bottle of some stuff you spray on the machines to kill all those covids. Everyone is watching everyone else. Did Joe wipe down his machine sufficiently?  Did he wipe it down at all? Is he wearing his mask properly? Does it cover his nose and mouth?  Is he a Trump supporter? I am a highly active wiper-downer. I feel a little sorry for the machines. Surely they won’t last very long with all this spraying and wiping. My mask is firmly in place. I check it every seven seconds. 

Changes, yes. But where does all this end? We have smoke and covid and race relations. What’s next? Murder Hornets?

The Fed's New Approach to Monetary Policy

The press went wild and crazy recently when the Fed announced a new and radical policy change. Sometimes I just don’t understand these people. The story has two parts. 

First,  the Fed is now very concerned that inflation is not high enough. They most definitely want it to reach 2%. Second, they say they are going to tolerate inflation going above 2%.

It makes me think of a powerful and omniscient Fed that can wield its many policy tools so as to manage this lazy inflation kid.

So I digitally went to my friend, Fred, the data analysis tool at the St. Louis Fed. There I was able to download enough inflation data to gag a goose at Green Lake. https://fred.stlouisfed.org/series/CPIAUCSL#

I graphed (not here) what is called the Consumer Price Index (CPI) from before the Tuna was born to now.

This was data for every month from February 1947 to July of 2020.

I was able to get a transformation – the annualized percentage change from one month to the next. That’s good for comparison purposes.

I looked at the graph and it made my stomach sick. So many ups and downs!

So I downloaded the data into an Excel file and looked at the numbers.

What did I find? I found a pattern in the inflation rates that resembled Peter Wachtel after his usual two-bottle liquid dinner in Marietta.

Main conclusion? If the Fed was trying to predict or control Peter, then they are going to have their hands full.

For example, in the 12 months between August 2019 and July 2020:

            The CPI rose in 9 months, but declined in 3 months.

            The biggest one-month decline was April 2020 when it fell by 9%.

            The biggest one-month increase was the 7.3% increase in August of 2020.

            The average monthly rate over those 12 months was 1.1%

I’m not sure what the Fed would say about all that monthly variability, but it might say, “See Larry, inflation averaged only 1.1%.” We must mount our hefty steed and push it faster. Clearly if the goal is 2% and it increased by only 1.1%, then Mr Powell would be in a dither. Imagine that you were hoping to make $2 at a craps table and you only got $1.10. What a gigantic humiliation.

But that’s not the whole story. This little table shows you some of the other years.

            2020  1.1%

            2019  1.8%

            2018  2.9%

            2017  1.8%

            2016  0.9%

Are they keeping 2018 a secret? Were they excited and happy in 2018 when they got inflation (2.9%) well above their 2% goal?

What if you averaged the last three years and found that for the last three years inflation averaged about 1.9% per year? 

1.9% seems pretty close to 2% to me. I guess that’s irrelevant. Maybe they think they have such precise controls over the economy that they can spin the money dial and get 2% instead of 1.9%?

Despite inflation of 1.9% over the last three years the Fed had to make a major announcement that inflation is tool low and that they needed to make a major historical change in their targeting.

And the press lapped it up like a huge chocolate milk shake in September.

Please tell me what is wrong with these people?

Okay, I will take a shot at that question.

What is wrong is that they aren’t honest with us. They think we are stupid and they think we will believe the Fed and the press and we will give them kudos and honorary awards for wonderfully controlling our economy. No kid goes away without a medal to pin on his or her chest. 

The truth is that the Fed doesn’t care a wit about inflation. Inflation is a way to take our eye off the ball. The ball is the goal to always be pressing on the accelerator pedal. The Fed’s goal is to always be trying to get demand in the economy to grow faster. Their goal is for that increased demand to reduce the unemployment rate.

Why can’t they just admit that? Why can’t they say they have only one policy target? Since I have been so brilliant today, I will let you reply and tell me why you think the Fed would rather distract us with meaningless inflation data than just tell us what they are really trying to do when they keep interest rates at roughly zero for infinity.