Joe Biden, Trust Buster

The WSJ was full of articles about Joe Biden becoming the latest trust buster. I watched a clip of one of his recent speeches. As usual he is full of passion for the average Joe and he is ready to make corporations and rich people pay for a wonderful and glorious, fair and equal world for everyone. 

Wow. We used to call these people snake oil salesmen.  There used to be people who prayed on other people by promising that if they bought and swallowed the snake oil, they would be miraculously cured. Hmmm. 

Don't get me wrong. There is lots that could be done to help poor people and make the world more fair. It is also true that large corporations take advantage of their largeness. But holy jumping junipers, do we really trust Joe Biden and his buddies to know what to do and how to do it? 

We have already seen their lack of respect for the dollar and finance. In the name of the same kinds of goals, they have dug us deeper into a debt hole that we will probably never escape. Luckily our kids are smart and successful and they will happily figure out how to pay it back. Please note the sarcasm. 

But that was yesterday's headlines. Today Joe is smiling on TV as he goes after companies. Same promises. The world is going to be a better place if he puts Amazon and Microsoft and Apple and Facebook into their proper places. 

Clearly, AMAF are monsters. And Joe, Nancy and their buddies are our saviors. They know a lot about business, right? I don't think Joe even had a paper route. Has he ever held a job? Made a payroll? Aside from passionate political speeches that play to people's weaknesses, does his government job require him to accomplish anything? Sure he was supposed to show up and vote now and then. Is that the kind of person who is prepared to even understand the first thing about a company?

Think about it. He seems to know everything about how companies hurt us. He told us that big companies cause national economic growth to be slower. They also cause inflation to be higher and wages to be lower. These companies also exacerbate inequality of incomes and cause global climate change. They make us less globally competitive. Really. In a very short speech he said all that. 

Wow. Why is he regulating these companies? If all that were true, why not just hang the heads of these companies. That's some really bad stuff that they do. Give them life sentences. 

And why is everything so one-sided? In Joe's zest to regulate, as he is enumerating all the sins of business, could he not mention one or two good things? Why do we need to believe that these companies are blood-sucking monsters? How many people do they employ? How many people in these organizations make really good money? How much tax revenues pad the government budget? Have tech companies not put enormous resources and communications at our fingertips for virtually nothing? What about the impact these companies have on not-for-profits. How much do they give to charity? How many of their employees serve on boards and committees and run wonderful projects in their local communities? He didn't utter a word about the positives. Nope, they are monsters who perpetuate evil. 

Joe, how much money have these companies given to you and your buddies so that you can finance your travel and political expenses? 

Tell the whole story Joe. No one believes an extremist who only sees one (ugly) side of the picture. If you want to regulate these companies -- don't turn them into national criminals. Get serious and do the hard work of convincing the people that regulations you propose will make some things better. As one of my management professors told me at Georgia Tech, attend to a problem but consider the full consequences -- Don't throw the baby out with the dirty bathwater. Joe, please don't throw the baby out with the dirty bathwater. 

National Output since Covid

A GDP numbers game is in full swing in the press. Is the US economy growing? Slower? Faster? The fellow who gets sick and loses 50 pounds regains that weight when he heals. The gained 50 pounds is simply a return to normal. But when it comes to GDP and the press and politicians, only God knows what is happening behind the curtain. 

The best way to understand what is happening is to go behind the curtain. In this case, I went to the Bureau of Economic Analysis, the BEA, for the raw GDP numbers by quarter.  https://apps.bea.gov/iTable/iTable.cfmreqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey

The numbers presented below are for chained or real GDP. These numbers represent how much of GDP's growth is from higher quantities produced of goods and/or services. It "removes" any price changes from the data. When Real GDP grows you know the pile of goods and services produced is getting larger. 

Pre-pandemic, in the fourth quarter of 2019, real GDP stood at $19.3 trillion. By the middle of 2020 it had declined to $17.3 trillion. That's a decline of $2 trillion dollars in half a year. Since Q2 2020, real GDP has been rising. But by Q1 of 2021 it had not returned to its former high. Q1 came in at $19.1 trillion. That's close but no cigar. We expect that by Q2 2021 real GDP will be back to where it was before the pandemic hit. 

That means it will have returned to its former self in about 6 quarters. Of course, that's nothing to celebrate since that means that over the past 1.5 years the growth of real GDP will have been about zero. 

But wait, What about the press? The above story would put even Nolan asleep. What the press is harping on is the re-gained 50 pounds from above. But that's stupid, if not misleading. The story is really that we likely will have had zero economic growth for about 1.5 years.

You beg to differ. As we move back to a normal real GDP number, you say, that's a lot of pressure on an economic system, especially one with supply constraints. But surely that is a temporary issue that will heal itself. As it becomes more clear that a recovery is underway, surely supplies will line up. Maybe inflation will burst a bit for a moment, but the underlying truth is still there. We are headed back to whence we came. We are basically headed back to 2019.

If you are boring enough to be a regular reader of this blog you will see that I have pontificated about the danger of rising inflation. So let's be clear. Now is a great opportunity for Joe and his buddies to start removing stimulus. If he doesn't, then what seems like returning to normal will be met with a storm of increased spending. Normal output will be met with a growing tidal wave of demand and will surely lead to more sustained inflation. 

Some times it helps to dig a little deeper and it often improves your sleep. Real GDP has a lot of components. Let's take a quick look at some of them to see what's growing and not.

The numbers below show how much each category of real GDP changed from pre-Covid to Q1 2021. 

Households are leading the return with spending on consumer goods and houses. 

Businesses, in contrast, have reduced spending on business structures and are getting less attention from the rest of the world 

    Consumer goods +24%

    Residential Structures +14%

    Business Equipment   +4%

    *Government defense spending   +3%

    *Government non-defense goods and services +2%*

    Imports  -1%

    Consumer Services -6%

    Exports   -11%

    Business Structures  -16%

*Note that these categories are not the whole amount of government spending. It only includes government spending on goods and services. Government spending on transfers -- where they essential transfer money to households (e.g. entitlements) -- is not included here. I suspect that would be a very large positive number but it doesn't belong in the GDP statistics. 

The Federal Reserve is Irrelevant

The US federal Reserve met on July 7 and much was decided after a sumptuous lunch of baloney. With straight faces and expensive suits, they looked the camera in the eye and said that they had decided not to forecast the weather and that they were not perfectly sure about the future of interest rates and monetary policy. But they were quite certain that they would meet again and bring up the fact maybe possibly they might change policy. Exciting stuff. 

Apparently the private sector financial players have turned into a bunch of meanies. They lurk in dark places just waiting for the next taper tantrum. That is, they apparently sit around all day and wait for a Fed official to say something about tapering Federal Reserve purchases of government bonds. Such a taper would reduce the demand and prices of government bonds in the markets and thus cause interest rates to rise. Just the smell of such a possibility has private sector vultures ready to swoop first. If they move before the Fed moves, then they are able to "sell high and buy low" -- the dream of all financial players.  Of course, this has the market effect of forcing up interest rates even before the Fed does anything. 

So it behooves the Fed to say confusing and meaningless things so that the private sector meanies don't mess up the economy. 

While the above is a lot of fun and almost makes some sense, there is a more somber picture hiding out there. None of the above mentions the real culprit in all this monetary policy hooey -- our friends in government. By government I mean President Joe and his colleagues and the people who run Congress. The Fed and monetary policy are not exactly immune or walled off from what that government does. 

I am not talking about DC hot dog weenie roasts or the late night parties. I am referring to the thing we dearly called the government deficit. While there is quite an IQ deficit in government, the deficit we can measure is called the Federal Government Budget Deficit. If you haven't looked lately, it now amounts to about $3 trillion per year. That $3 trillion dwarfs anything that went before it. 

So what? A bunch of DC accountants come up with a big negative number. Who cares? Well, you do and so does the Fed. That $3 trillion government deficit means that the government cannot pay for all its goodies. It is $3 trillion short this year (and last year). Where do they get that $3 trillion so they can spend it? They don't get a personal loan from Donald Trump or Bill Gates, that's for sure.

They borrow it from you! Well maybe not you but they borrow it from the general public. They sell government bonds and we buy them. Money that we might have used to buy Amazon stock or a new roll of toilet paper, we instead send to Joe and he sends us a piece of paper called a government bond. And you thought the government just printed a bunch of $100 dollar bills. No way, it is just as easy to sell bonds. They will give us our money back later. No big deal. In the meantime Joe gets $3 tril.

So what? Here's where the Fed comes in. During a time when the government is flooding the market with bonds, financial markets go crazy. A modest amount of bond sales would be fine. But $3 trillion? Wow. Now that's a story.  The $3 trillion of bonds for sale greatly exceeds the demand for bonds so the price of bonds falls...and interest rates rise. 

Aha. It is Joe and his buddies -- not the Fed -- who are the real causes of higher interest rates. And that harm has already been done. Bam. Government deficits cause interest rates to rise. Period. 

All that mumbo jumbo about inflation and how the Fed will react to it is supposed to divert your attention. It makes for great newspaper sales and for colorful evening news. And even though Joe and his buddies are the real culprits, we focus our misguided attention on the Fed. And the Fed, not having the courage to tell the truth, does the government's bidding. The Fed jumps in the market and buys all (or some of) those bonds that are sitting around unsold. What a tag team! Joe and his buddies sell a bunch of bonds and the Fed buys them like they were tacos at Taco Bell. And yes, the rumor is true. The Fed can create money and buy as much they want. 

The net effect is to forestall the downward price of the bonds and viola -- and puts a ceiling on the interest rates. Well, maybe. Maybe for a second.  If the Fed pumps in too much money and keeps rates too low, then inflation, which is always lurking in the shadows, will come back to haunt us -- eventually raising interest rates and causing all sorts of havoc. 

So we come back to the Fed. Will they or won't they? It really doesn't matter because the real problem is Joe and his buddies. They show no signs of conducting an honorable fiscal policy. So long as they choose to spend like drunken sailors, things will not be well in the metropolis. Doesn't matter much what the Fed says or does.  Taper tantrum or not. Those evil financial firms understand all this and they are ready to pounce at a moment's notice. 

Slow Wage Growth

It seems almost axiomatic these days that policymakers decry slowly rising wages. The slowly rising wages mantra is one part of the overall story about income inequality. But today's post is not about income inequality. It's more about labor income which includes what we earn through our labors and not what we gain from investments. 

To investigate wage change I chose to use time series from the Bureau of Economic Analysis of the US Department of Commerce. I had lots of choices but after noodling around I decided I would use the BEA data. For those of you who like to noodle such things you might have also used statistics from the US Bureau of Labor Statistics. 

I chose the BEA data because it comes with an integrated comprehensive set of data that show how much workers in the private sector received in (1) wage and salaries, (2) employee supplements (pension and insurance funds), as well as how much was paid to workers for government social benefits (Social Security, Medicaid, Medicare, Unemployment insurance, and Veterans Benefits).

In total, this data set covers most of the income workers receive as part of what is often referred to as personal income. The date is available from 1970 to 2020 and I chose to examine changes in decade increments.*

I then made two adjustments. We know that we use income to buy things -- and we know the power of our income depends very much on how much prices are changing. One adjustment, then, is to subtract from the income changes the changes in the price level. We thus convert the data from current values to real values. 

The second adjustment is to subtract the employment changes from these real values. In that way we get data that refers to the average employee -- or what we call per employee real income changes. 

Making these two adjustments, we get a better picture of changes in the buying power of the average worker. One example helps. From 1970 to 1980, wages and salaries increased in nominal aggregate terms by 149 percent. Once we adjust for inflation and employment changes, the resulting increase was 24 percent. That 24 percent represents how the spending power of the average worker changed during that decade. The 149 percent is simply the change in total amount paid to the sum all private sector workers to keep up with inflation. Between 1970 and 1980 the inflation rate was 97 percent and employment increased by 28 percent. 

Reading the table -- each number below is a percentage change over ten years. The number for 2020, for example, is the percent change from 2010 to 2020. Divide by 10 if you want the annual change  of that 10 year period. The number 21.4, for example, means that item grew by about 2% per year. 

The data in the Table below show a great degree of stability. Except for the time period from 2000 to 2010, the real percentage changes per worker are stable -- wages and salaries oscillating by decade from a low of 11 percent (2010 to 2020) to a high of 31.3 percent (1990s). The 11 percent change between 2000 to 2010 was mostly the result of two recessions. For example, that was the only decade when employment fell during the decade. 

If you instead examine total income -- personal income also includes company benefits and government social payments -- you get a similar picture of stability. The 1970s found income growth of 47 percent and that was high compared to the 27.1 percent of recession bound 2000 to 2010 but we also see a partial return in the following decade to 28.5 percent. It helps that the government benefits increased by 60.1 percent from 2010 to 2020, making up for a drop in company supplements. 

I know this is a lot of data to swallow. But sometimes the truth is not so easy to discover. Wages and incomes are never helped by major recessions or slow growth time periods. But this look at a half-century of data suggests that there are no clear trends that mitigate against the average worker. When we put together a comprehensive set of income data, my recommendation would be to find ways to promote long term economic growth and employment without inflation. That's the best way to make sure our wages and income stay strong. 

        Table.  Elements of Person Income*

        Decade Percentage Changes, 1970 through 2020

        Real Percentage Change Per Worker

                                            1980  1990  2000  2010   2020

Private Wages & Salaries         23.6   26.0   31.3   11.0    21.4

Company Supplements          120.7   67.0   25.8   31.0    11.4

Government Social Benefits  152.7   37.8   36.9   97.3    60.1

Total                                    47.0    33.1  31.3   27.1    28.5

Nonfarm Employment            28.4    20.1   21.5   -1.4       8.9 

PCE Deflator                           96.7   53.5   23.3   22.4    16.1                         

*Personal Income in 2020 was $19.7 trillion. The three components above totaled $15.7 trillion. The remainder of PI not discussed in this post were proprietor's income, rental income, interest, and dividend income.