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.