Government and Growth 2019 to 2021

The bottom line of the table shows that real GDP fell in 2020 meaning that 2020 was a recession year. The recession lasted only a single year (if we ignore quarters) and real GDP was only somewhat larger in 2022 than in 2020. 

The table shows that we experienced a tripling of the government deficit from 2019 to 2020. It is not uncommon for the government to spend more and/or tax less during a recession. Both outlays and revenues recovered in 2021 but we were left with a large government deficit in 2021. 

The national debt grew in both years -- by $4.2 trillion in 2020 and then by another $1.3 trillion in 2021. The total increase over two years amounted to a 33% over the level in 2019. That's a whopping increase in debt in just two years. Recent news shows the national debt now at $32 trillion. 

So what? We have come to expect that governments will react this way after a recession. Governments feel the responsibility to juice up the economy and they do it by increasing national debt. It seems reasonable, right? If you lose your job and you go into a personal recession, you might borrow to carry you through the lean times. 

Debt seems natural and it is. But we always have to remember that when we go deeper into debt, we take a risk. On the personal level, if you don't get another job quickly, then you might not be able to pay back the debt. There is that same risk with the government. If the economy does not recover quickly, then we may not be able to repay the debt. Creditors don't like it when they are not repaid in a timely manner and there are consequences for failure to replay.

With governments it gets more complicated. Government has the power to tax and therefore we believe that the government should and can repay. Just because the government has the power to tax and repay, however, it doesn't mean it will. With government there is the additional element of policy. If government decides not to pay down the debt, it is possible that it will incur even more debt. Government, or should I say politicians, excel at finding ways to spend the people's money. If they fail to reduce government deficits and debt, what happens next? 

The recent behavior of national inflation and interest rates might give you a clue. The picture is not so rosy. 

The table shows a large increase in debt following a recession. But will it end there? Will politicians find excuses to not reduce spending or to not raise taxes? If national debt continues to rise in the future, we will surely get higher inflation and interest rates. Is that what we want? Is that what we elect leaders to do? I think not!

Government Budget and Real GDP (in trillions)

                        2019     2020     2021

Revenues          3.5        3.4        4.0

Outlays             4.5        6.6        6.8

Deficit             -1.0       -3.1      -2.7    

Debt               16.8       21.0      22.3

Real GDP       19.0       18.4     19.4

The Fed and the Indy 500

Honey, I think Junior found a box of matches. No worry. He doesn't know how to use matches. 

Honey, I think Junior took out a match from the box of matches.  No worry. He doesn't know how to use matches. 

Honey, I think Junior is striking a match.  No worry. He doesn't know how to use matches. 

Honey. I think the match is lit. No worry. He doesn't know how to use matches. 

Honey, Junior's room is on fire. Oops. 

Reminds me of the current discussion over monetary policy. Monetary policy aimed at expanding the economy remains a discussion item despite the fact the we have expanding economic growth and rapidly rising interest rates and inflation. It is time to blow out the match. 

The title of an article in the Wall Street Journal is Fed’s Inflation Fight Has Some Economists Fearing an Unnecessarily Deep Downturn. Interesting choice of words -- Fight, Unnecessarily, Deep, Downturn. To me those are fighting words. 

It's not enough that the Fed's errant policy might induce a slowdown in the economy -- folks are worrying that the downturn is deep and unnecessary. Why does the Fed risk something that is unnecessary? Why risk a deep downturn? What is wrong with those people? Aren't they satisfied with a good old slowdown? Won't that be enough to quell this inflation fire they started? 

I guess not. As in the inflammatory remarks above, you don't wait to call the fire department until the flames are all-consuming and there is little hope of saving the building. Instead, you might allow for a little friction but stop before you start a fire -- even a little fire. But not our Fed? 

They saw the fire starting but found every excuse under the sun to ignore all the signs. How high does the inflation rate have to rise before someone at the Fed slides down the fire pole?  Has the rise in the inflation rate not equaled or exceeded past increases in inflation? 

That's where we are. The Fed sat on its hands while the blaze started and now that it is roaring -- they sit on their hands again because they fear that they have backed themselves into an inflationary corner. 

As in the first lines of this piece above. Don't let Junior have the matches. Nope. Don't let him touch them. 

The Fed? Teach the Fed to act like a race car driver. When the car veers a little too far left, then make a correction rightward. Too far right, then correct to the left. Keep on top of the movements. Lots of little corrections keeps you on course. Waiting too long to correct puts you in the stands. 

What is wrong with our current crop of Fed officials that they can't understand these simple facts? Maybe the facts don't fit their ideology? Maybe to them rising inflation is more fun than falling?

Chemistry

I am reading a book called Lessons in Chemistry by Bonnie Garmus. It was recommended to me by a friend or else I would never have chosen it. I always heard that chemistry was a very hard course and I was very successful in avoiding that course in both high school and college. I was able to take biology instead so I don't know the first thing about chemistry. Just looking at the cover of that book scared me. 

As it turns out, it is a fabulous book and you don't need to know much about chemistry to read it. And despite the title, it is really a book about feminism. Speaking for myself, the book is stellar at what it tries to do and it probably turns most of us into feminists. That is, if feminism means understanding that the deck is stacked against equality and means that women usually have a hill to climb, then the book is about feminism. 

Elizabeth Zott has the misfortune to be a chemist -- a serious one. In the 1960s that meant she was a minority. Most chemists were men. But Zott had a strong personality and was not easy to be put down. Regardless of your own sex you will find Zott to be a role model. A person you would admire and trust. Turning the pages ought to remove you from your own hang ups and turn you  into a cheerleader for people. Yes people. All people. Literature is wonderful at making you think beyond the usual stereotypes. Zott is a great human being. Period. One review of the book says the following, "A story for the smart girls who refuse to dumb themselves down." In truth, it is a story for anyone who might dumb themselves down. 

What else? I love the way chemistry and cooking are tied in a knot in this book. Even me with limited understanding of chemistry can appreciate the intersections of chemistry and cooking. I think of chemists as people who mix things together and watch the outcomes. Cooks do the same things. Zott has a daughter and is thrown into cooking and then her own television cooking show when her daughter is fed a less than healthy lunch at school. So if you like cook books and cooking, you should love this book for that part of it. 

It makes me think about what it is that creates an Elizabeth Zott. I realize that she is a book character but I have been lucky to know a few Elizabeth Zotts -- both men and women who are successful because they have strong characters and they know how to solve problems. They set goals and work towards them. 

My Guitar

When I was at Ponce De Leon Junior High School I had a choice. I could either take shop, band, or chorus. The choice was easy since I had no skills with tools and I had never even held a musical instrument. But I did love to sing. That was back in the days of the Temptations and the Four Tops and those groups made me want to sing. Did I know how to sing? Could I carry a tune? Did I even know what a note was? No, No No. But taking Chorus with Mrs. Rayfield definitely beat band and shop.

Chorus class probably had at least 50 us in there. The girls in the soprano section could sing. Boys like me were assigned to the bass section and mostly we could sing loud. It was a good class. We were taught to read music -- read it enough to know whether to sing at a higher or lower pitch. We were not good at discerning pitches. We either went up or we went down. I loved chorus class. 

That's my musical history. Aside from listening to rocknroll on the radio and tapping my foot to the beat, I had no real training or ability. 

Eons later for no reason I can remember, I decided I wanted to play the guitar. Maybe I was influenced by my brother who seemed to be able to learn the guitar.  But a few years ago while I was living in Bloomington I bought a guitar and asked Charlie Jesseph if he would give me lessons. Charlie was a friend of my daughter and a gifted musician, and apparently he needed money. Let's be honest. I had zero skills. Charlie would play a note and then a higher note and ask me to describe the second note. I could not tell if it was a higher or a lower note. As I said, I had zero musical skills. 

I play an acoustic guitar. I am still taking lessons. Thankfully a teacher named Danny is willing to help me now. The nice thing is that I don't need to know how to read music. Most songs are found on sheets that simply display the chords. Play a G chord here. Then here play an E chord. I have learned some basic chords and I play songs that feature those chords. I stay away from songs that have chords I don't know.

Chords are, therefore, what its all about for me. Chords are not easy. Each chord asks you to put a finger on a particular place on the string. Of course, most chords have at least three notes so that requires you to have at least three fingers touching three strings in specific places. Wow. Talk about yoga for fingers. The fingers are one thing. The brain is the other. Each chord is different so when it says to play a D chord your fingers jump to specific places. Then you might jump to an E chord and you have to remember where your fingers go for the E. I get both hand and mind cramps. Ouch. 

Over these years I have learned to play maybe a dozen songs. Some of my favorites are Save the Last Dance for Me, Love is a Burning Thing, and Take the Load off Fanny. Harder is reading sheet music. I struggle with that. It is not really that hard but it requires memory and I seem to be short on that these days. I don't really need to know how to read sheet music since most guitar songs feature the chords. But it seems like perverse fun to give it a try. 

Age and Honesty

I was trying to find a topic to write about this week. The usual macro topics seemed overplayed by others. How much can you write about inflation? 

Then it occurred to me that there are topics that I think about all the time. They relate to my situation on this planet. Mostly that means that the topics are age/health related. I don't have to read piles of WSJs to write about health and aging. The facts are right there within me. 

For those of you who are under 50, I apologize for today's post. But it seems to me that most of you reading this blog are more my age. That means you are old. It also means you see yourself on the way out of here. Seems to me that we oldies have a lot in common and a lot to talk about that has nothing to do with inflation or GDP. 

Maybe I shouldn't write about health and aging. Maybe it is too personal. Maybe too depressing. Maybe. But it is also true that a lot of us are facing our toughest challenges ever and yet we don't have sufficient outlets to discuss or even vent. 

We all have some health concerns. And I won't try to discuss all of them. I am taking a purely personal approach today. But that doesn't mean that you can't widen the topic with the blog Q&A that follows my words. 

I don't have cancer. My heart seems to be ok as are most of my organs. I may be somewhat pre-diabetic. 

But my real challenge is short-term memory. Wow. My memory reminds me of the flight pattern of a drunk butterfly. I can forget a word or a thought in less than three seconds. Its right there one second and then wham, its outa here. 

Unlike a broken leg or even a serious heart problem -- a short-term memory issue is hard to hide but the embarrassment of it makes me want to try. You can tell your friend that you can't eat a giant fatty ribeye but it is another thing to tell that same friend that you can't remember the words they said to you just 10 seconds ago. So you just won't bring up that topic -- even though you'd like to keep talking about it -- whatever it was. 

I know several people who are my age and who suffer to some degree from memory issues. It is natural to have memory issues as you age. But there are memory issues and there are memory issues. And some old people don't suffer at all -- and they seem to flaunt their ability to remember just about everything that has ever happened to them, including what they ate for lunch. Damn!

Having short-term memory issues is one thing. No fun. But even worse are the solutions. To understand what is causing memory issues the doctor has to look inside your head. While Frankenstein used a hand drill for brain access, now they seem to use a modern thing called an MRI. To obtain the images inside your brain you have to go see a neurologist and he will ask you to lie down on a machine that will look inside your skull. 

That doesn't sound so bad until you realize that you have claustrophobia and you don't want to lie down with your hands tightly clapped to your sides inside an area that reminds you of the casing of submarine's missile. A small missile at that. 

Once you submit to the MRI you are in the hands of the medical community. Of course, that sounds good. It sounds good as soon as you realize that they might have a cure for your problem. But then, the possibility is that (1) they don't have a cure or (2) the cure is worse than the disease. 

Maybe you were wondering what is on my mind these days. Now you know. I hope I didn't totally spoil what otherwise might have been a fun day. My MRI is scheduled for September 26. Wish me luck. 

Green Lake

I have been in Seattle for a while and it looks like no other place on Earth is ready for me, so I might as well call this home. So it is worthy to write about in the blog.  

You probably already know I live in a neighborhood called Green Lake. It's called Green Lake because there is a lake here called Green Lake. Pretty clever naming scheme. 

Green Lake is a very attractive part of Seattle and attracts its share of sun worshippers. It's not big enough to attract speedboats and is more conducive to sailing and rowing. There is a small public beach as well. Green Lake mostly attracts people to the path that winds around the lake. On any given day  you might see hundreds of people walking the loop. I think it takes about an hour to walk around once. Runners are allowed too as are roller skaters. Bikes are not allowed access to the path but at times people who are poor readers sometimes zoom around to the chagrin of the rest of us. 

The neighborhood of Green Lake is perfect for me. It has just about everything within walking distance -- a grocery store, 7/11 Store, fitness center, at least two Mexican restaurants, other restaurants and various shops.  The lake is located in the middle of a very nice park. Within a short drive in the car is a Safeway, some nice restaurants, and more. Green Lake is north of downtown Seattle -- maybe takes about 10 minutes to drive downtown. Downtown is nice, especially because it is on the water with boats and docks and beautiful views.  

Driving to the west I can be on the Pacific -- lovely beach towns and beaches. Driving east of here takes me to some mountains and mountain towns. 

Green Lake Fitness Center is open to anyone who pays -- but seems to be populated by older folks like me. It doubles as a social club for some of us. It's a serious fitness center with instructors and classes and folks intent on getting a good workout. Sometimes it appears that the jaw is the main muscle being exercised. I took some classes there and decided that I would live long enough without trying to kill myself in very challenging classes. Now I go and workout without anyone yelling at me to do 10 more pushups. 

Even though Seattle is a big city, Green Lake feels like a small town. Whether it is the grocery store or the local tavern, the employees soon recognized me as a regular and often call me Larry. Tacos Guaymas is two blocks from my house and I feel like Victor and Abel are family. All the food is good there but my favorite is the carnitas. Machos Nachos ain't bad either. The family feel of TG generates a very loyal following of customers. It is hard to go there, sit at the bar, and not soon be talking to one of the regulars. When you are from elsewhere like I am, it is  really nice to have a place where you can go and meet nice people. 

I guess I could go on and on and on. I'd love to talk about macro topics but between Donald and Joe and the rest of those clowns in politics, its hard to find anything worth exploring. I cannot remember a time when this country was so poorly governed. 

Student Debt Forgiveness

Debt forgiveness is a strange animal. A person borrows money and then the government says -- don't worry about it. Someone else will pay it for you. Or maybe, they say, no one will pay it. Sorry banks -- you made a loan in good faith but now no one is going to pay you back. In either of those two cases the borrower skates while someone else ends up holding the bag. 

How our government can support that seems crazy to me. For one thing, it creates a moral hazard. Once this is allowed to happen, then who is going to lend you money? Hi Mr. Banker. I would like a bunch of money. Sorry Mr. Davidson, we don't lend money to people like you anymore. We just ran out of money yesterday because people don't pay us back anymore. Stick up a 7/11 if you need some cash. 

Hold on you say. The government exists to redistribute money from those who have a lot of money to those who need it. Higher income folks pay income taxes while lower income people get transfers to cover the cost of living.  We seem to think that is okay. Why is writing off loans so different? Give a poor person some income. Write off a loan. What's the big difference? It's all redistribution of income. 

For one reason it is different. It seems very different to me because this is a very specific financial transaction. We are not accustomed to using transactions to make incomes more equal. 

Back to basics. What is the value of education/training? There are two ways to estimate it. One estimate of the value of the education is the stream of income/benefits you get because of the education. Another way to estimate the value of education is what it costs to get it. Let's suppose the benefit stream is much larger than the cost of the education. In that case we say that education is a good deal. It has bang for the buck. We want to buy more education.  At the other extreme is that the income/benefits might be small relative to the costs or outlays for the education. In that case, education is not a good deal and we want less of it.  

Why go through all this obvious information? Because we seem to have lost track of the basics. We get all riled up about debt forgiveness. President Biden wants to let people borrow for education and then not have to pay back the loans. That doesn't make sense to me. Does the education have value? Can former students earn enough after graduation to pay off the loans? If so, what's the issue?

The issue could be that the educational benefit stream is too small. That means you can't earn enough after graduation to pay off the loans. The issue could be that the cost of the education is so high that it could never generate incomes that could pay down the debt. At the center of both of these possibilities are the schools and the lenders. 

Why would schools charge too much for the expected benefits? Why would lenders loan money to people who have zero chance of replaying the loans? The answer is found in our government. The market should work but the government waddles in without saying anything about the costs and benefits of an education. Someone has to point out when costs and benefits are so out of line that the government has to provide loans and then forgive them. Once we know the government is going to step in, then we have two problems. First, schools can raise prices knowing the government will make sure they get paid. Second, borrowers can fail to pay on their own with few consequences. 

As long as the government stands ready to bail out schools and borrowers -- these problems will never end. And taxpayers and paying students will end up footing the bill. 

Something's Happening Here

Buffalo Springfield sang that something's happening here...and what it is ain't exactly clear. 

Inflation fits that thought. Countless articles have been written lately to document the return of this rabid animal. We haven't had to worry about inflation for quite a while so its a new kind of paranoia. 

I decided to look at some of the numbers to get a better idea and it was a little shocking to see the stark changes. I won't predict the future but I have to say the story does not look as scary as some would have it. 

Much of the increase in inflation has come from admittedly temporary factors associated with Covid and Covid lockdowns. It would be nice to think that those changes are over now but it's probably too soon to put Covid to bed. 

I took numbers from the BLS -- for the monthly CPI. I compared the percentage change last year -- July 2021 to July 2022 to the average of the one-month percentage changes for the past three months -- May, June, and July of 2022. It is pretty startling. 

                                           1 Year  3 months

All  CPI Items                        8.5    0.8

Food                                     10.9    1.1

Energy                                  32.9    2.3

Fuel Oil                                75.6    1.6

Airline Fares                        27.7    1.3

Gas Utilities                         30.5    0.8

Food Away from Home         7.6    2.5

Gasoline                              44.0    2.5   

Clearly the last three months have been as unusual and unexpected as the last year. Looking at the average price of all the items in the CPI shows an increase of 8.5% from 2021 to 2022. That's a whopping increase. That performance has caused us to get a little crazy. Thinking the Fed is going to tighten money and raise interest rates to combat that supercharged inflation is doing a lot of economic damage. Just the worry that the Fed is going to tighten is causing people to be more cautious about spending. We are worried we might even get a recession. The simple expectation of tightened financial conditions is causing us to think a recession is around the corner. 

But then May 2022 arrived and the inflation data turned a corner. After rising at 8.5% for a whole year, we see the inflation rate in recent months falling to less than 1%. Less than 1% over three months! True, its only three months. I don't recall anyone predicting this. But clearly, if inflation surges can be caused by unusual things like Covid, then it is possible that those surges can reverse themselves. 

I don't think this reversal should be considered impossible. Look at some of those increases -- Fuel Oil 76%, Gasoline, 44%, Energy 33%. Those are huge increases and the fact that they had their day and are now returning to something more normal should not seem crazy. Somebody said, "what goes up must come down."

That saying has to do with gravity but is it intuitive that once a price rose by 76% in one year -- that it should keep rising at 76% forever? I don't think so unless you can tell me what permanent change should cause prices to keep rising at 76% for the foreseeable future. 

Stop. What's that sound? Everybody look what's going on. 

Poetry

I read the online version of Writer's Almanac every day. It's full of poetry. It makes me want to be a poet. Poetry isn't what it used to be. I thought to be a good poem the words had to rhyme. Apparently that's "old school" and thankfully so. Rhyming is hard. But eliminating rhyming doesn't make poetry easy. A poem has to say something. It has to say something important. And it has to say something in a beautiful or impactful way. 

The following words were written in the poem, Sea Fever in 1902. "I must go down to the sea again to the lonely sea and the sky. And all I ask is tall ship and a star to steer her by." Wow. How cool!

I am not sure how to differentiate a poem from the words of a song. "You've lost that loving feeling -- oh oh that loving feeling. You've lost that loving feeling and now its gone gone gone." The Righteous Brothers sang those words in 1965.

A few years ago I tried to write some poetry. The only poems that I finished were about aging. "Prostate Blues" and "I Found Myself in my Garage" were comical but they say a lot about getting old.  They are silly but real and heartfelt. Since writing those two poems/songs I have pretty much run dry. Which says to me that I am not cut out to be a poet or songwriter. Or maybe it says that I said whatever needed to be said and nothing else seems important enough for me to write about. Or it might say that I prefer writing prose over poetry. Whatever the motivation, here I sit at my laptop trying to write something that seems important to me. I like the idea that I might write a poem or a song, But nothing is coming today. 

I linger over the end of the last paragraph and wonder what I should write next. The white space is intimidating. When I finish one of my typical blog posts it is usually twice as long as the above. Is it possible that I have nothing more to say on this topic? Maybe this is enough. 

But maybe I need to give it a little more time. I should save this draft and come back to it later. Maybe there is more to say about why I prefer to write prose over poetry.  Maybe not. Let's see. 

Okay, let's finish this with a little about my location. My laptop sits on a desk in front of a sliding glass door in my apartment. I spend a lot of time looking out the window. Across the street is a fairly big apartment building so there is always movement over there. People come and go. Delivery people tap on phones to get them into the lobby so they can leave packages. Its a fairly busy street between me and the apartment building and I see a lot of cars and trucks go by. This street, 70th, more or less feeds into the street that goes around Green Lake. So it is busy most of the time. A young woman with her two daughters just stopped to pick up grandma. Looks like they might be going to the airport. 

That doesn't have much to do with poetry but I am sure a good poet could take the above paragraph and turn it into something. 

Otis Redding wrote something like --- sittin on the dock of the bay watching the tide roll away. I guess I could write something like -- sittin in front of a sliding glass door, watching the people roll away. Or maybe not. :-) 

Cheers.

Bobby Dodd

Most of you have no idea who Bobby Dodd was. I decided that the world would keep spinning if I took another week off from macroeconomics and had some fun sharing my past with you. 

My high school football team played for the state championship of Florida in 1963. It was a close game and we were behind the Tampa Robinson High School football team with only seconds left. Coach Kotys could have put in Larry Rentz at quarterback and tried a hail Mary but instead he looked at me and said, "son, get in there and kick a field goal." I had kicked a few field goals that year and it seemed logical enough until I realized that I might have pooped my pants before running on the field. Larry Rentz held the ball and I kicked it and the Gods shined on us as the ball somehow found that sweet spot between those goal posts.  

As an 18 year old virgin I was pretty sure that kick would get me laid, but it didn't turn out that way. But I was a home town hero for a little while and that was enough to get me a scholarship to play for the legendary college football coach at Georgia Tech, Bobby Dodd. Back then, Georgia Tech football must have been very rich because I was probably one of about 50 freshmen arriving at Tech that summer on full scholarship. Anyway, one of the highlights of my life was the honor of going to such a fine school. No, I didn't  play very much on the team but Coach Dodd let me sit on the bench until I graduated.  

And that seems to be the story of my life. I kinda luck into things. I was called a B+ student in high school -- more interested in sports and girls than studying. Football got me to a school well above my pay grade. Tech was hard. As Jim Kiltie, my Tech roommate and dear friend today is fond of saying -- I spent a lot of time in our room in Smith Dorm studying. I did not want to flunk out and as I said, I wasn't the brightest bulb in the package. Somehow God smiled on me and by the time I left Tech I was a pretty decent student. 

Then luck came along again. In this case, it was mostly bad luck that turned into good luck. The Vietnam War draft came along and my draft board was nice enough to let me finish college and start a MS degree at Tech before I had to enlist. Would I have gone to graduate school without the draft -- hell no. Anyway I got a taste of grad school before the Air Force and then with no other plans after I left the Air Force, I finished that MS at Tech and then went to the University of North Carolina for a PhD in economics. 

I was a pretty good student by then and it turns out that the Business Economics Department at Indiana University wanted to hire someone like me in 1976. They offered me a job but it was contingent on my finishing my doctoral dissertation in one year. Yikes. My topic was the Nixon Wage and Price Controls. I did finish it in a year and concluded that the controls were a failure. No, they didn't control wages or prices. The process colored my approach to research all these years -- taking a skeptical eye toward many government policies. No, I am not very impressed by President Joe's policies. 

So what? If anything, the words above remind me that life is a crap shoot. None of it could have been predictable. I feel so fortunate to be 76 years old, to have friends & family, and a lot of wonderful memories. It is very much the time to be thankful and compassionate. 

Thanks for listening. 

PS While the above might be long and boring it omits many people who helped me through life. I intend no ill will towards the friends, family, teachers, and colleagues who were a big part of my life. I hope to embarrass them in subsequent posts. 

Silver Linings: Lower Inflation and Greener Energy?

I get access to a free online version of the Economist Magazine. Unfortunately the free version is not complete. You can't read a whole article. One of the article summaries on 7/27 was titled "The Silver Linings of a Recession: Lower Inflation and Greener Energy are worth the price of a Short Recession."

So my comments here are based on the title without me reading the actual article. 

The title suggests it might be a good thing if policy was aimed at lowering inflation and reducing pollution from oil and gas. It implies that if such a policy were to cause a recession it would be worth it to attain lower inflation and greener energy. 

Interesting. We now have recessions that are not worth it and recessions that are worth it. I thought that recessions were bad but now we have a major policy periodical saying that some recessions are good. I wonder if they talked to the people who will be unemployed or otherwise adversely affected by the recession in coming to this conclusion. 

Who gets negatively affected by a recession? Laid off workers come to mind. What about all those bright and optimistic young people or other people who are new to the job market? Moving in with mom and dad after graduation might not be that great. Stockholders often see declines in their savings during a recession. Companies have to adjust to a recession. Some quit buying new plant and equipment. That hurts plant and equipment providers. Some find their own markets collapsing. They have to figure out how to adjust to that. What do they do with all those unsold goods? 

Recessions never have been and never will be fun. Even if they are short. Of course the article doesn't say how short short is. 

What about the silver lining -- apparently the article believes that a recession will have some really cool impacts. A short recession will reduce the inflation rate and it will somehow make energy greener. 

Will a short recession really do those two wonderful things? Where is the evidence? Maybe the authors have never heard of stagflation. It is quite possible that a recession will come with higher, not lower, inflation. Think about the theory. A recession means unemployed resources. Those unemployed resources quit buying as much. After enough time, the lack of demand finally sends a clear signal to producers that they better lower prices or nobody is going to buy their stuff. 

In today's economic and inflationary environment, how long do you think it will take before producers decide inflation's back has been broken and it's okay for them to start lowering their own prices? How deep or how long a recession will be required to get people to think the worse is over and they can go back to buying? 

My hands are cramping after discussing inflation. The green energy part of this story seems even more ludicrous than the inflation part. So I will leave it to you, my precious readers, to let me know how a quick recession is going to reduce inflation and move the green energy agenda ahead. 

Teaching Pigs How to Fly

The Editorial Board of the Wall Street Journal on 7/26/22 wrote about the "Economic Mess We Are In."

It is about time the WSJ awakened to the well known tradeoff between inflation and output. The economic mess is simple. The Fed and the Congress tried to stimulate the economy and now that they have a little growth going on they realize that they created a firestorm of inflation. Why this is a surprise to our learned friends at the WSJ is quite puzzling.  I am old as dirt and I remember teaching this simple truth in the 1970s. 

Anyway, what interests and amuses me is what the WSJ thinks we should be doing about the confluence of economic weakness and high and rising inflation.  They seem to have learned or relearned the simple lesson -- if you fight inflation, then you might get a recession. Since they don't want to cause a recession it is beyond funny to see what policymakers are now talking about -- please whisper this -- supply-side economics. 

No, they didn't actually say the four-letter word supply-side but they are basically proposing what amounts to what we used to call supply-side policy. They advocate using tight money to squeeze out the inflation. But to offset the impacts of the decline in aggregate demand, they recommend "economic growth" policies to stimulate supply. If that isn't resurrecting old fashioned supply-side economics, then I don't know what else they have in mind. 

When I was teaching I would use chalk on a blackboard. This kind of policy was popular in the 1970s and it was shown by a downward shift in aggregate demand coupled with an outward shift of aggregate supply. The diagrammatic result was a new equilibrium with higher output and lower inflation. Economic Nirvana! 

Sophisticated economists and journalists laughed at this kind of macroeconomics. I always thought it made sense but then I also thought Bevis and Butthead were funny. 

That's all history. Today the reality is that some people want to see tight money coupled with a fiscal policy inducing economic growth. The words are a little different but it all amounts to a leftward shift in Aggregate Demand and a rightward shift in Aggregate Supply. 

Will it work? Maybe. It depends on a couple of things. First, the Fed has to tighten money enough to reduce the growth of aggregate demand and inflation.  Second, Congress has to use taxation and spending in such a way as to promote more output directly without increasing aggregate demand. 

Maybe? I say maybe because neither the current Fed nor Congress has much experience with either of these policy actions. What are the odds that they know how to do this and are willing to try? Not very high. Kinda like teaching pigs how to fly. 

What's It all About Alfie?

That title is misleading but those words came to mind as I was thinking of a title. It was a good movie and a great song. 

Maybe a simpler title would be What's It All About? More specifically, I was born in 1946 and I was wondering what I should have learned during all those years between then and now. 

I will admit that one personal issue is memory. What I learned is not necessarily what I remember. But that's another issue that we can leave aside today. 

Being born in 1946 means that World War II had passed and is only a story that my parents told me. I read about it in school too. But WWII was not really my thing. It was before me. I am not trying to diminish WWII as I know it had big impacts on many of you who are still alive. It just wasn't my thing. My Dad came back from the war and life went on. 

Hopefully wars and similar one-time events do not define us nor tell us what it is all about. I went to Vietnam in an Air Force uniform but I lived and I don't think it defines me in any particular way. Luckily I spent most of my time there in an office and was not involved with with fighting. So I don't think Vietnam defined me. It did cause me to have an international experience and to meet and get to know some really special Vietnamese people. 

There is always religion. For many people accepting Christ or otherwise following spiritual paths is what its all about. In college I was mesmerized by a Christian evangelist but that didn't last very long.  I like to think I am a good person even though I am pretty much an agnostic. I doubt that tells me what its all about. 

It could be all about fame and riches. I doubt either one of those dimensions defines me. I am pretty much in the middle of the road on either of those scores. Some friends would acknowledge that I am famous but only in my own mind. :-)

Another value might relate to being a good family member. Maybe that's the toughest one of all. Divorces are on my permanent record and I doubt I have been the model father or grandfather. I'd like to think I have tried but some would say I didn't try hard enough. 

What it is all about might be finding a way to make use of the precious time we have to live life in a way that let's us sleep at night. Few of us will get it right the first time. But hopefully we converge on something good. 

As in baseball, we come to bat and strike out. We try to learn from out mistakes so next time we get a walk or a hit. Unless we do something really terrible most of us get a second or third chance. 

Seems to me -- that's what is is all about. We get a chance to bat and we try to learn from our mistakes and failures. So long as we keep trying, that seems to me to be the best we can do.  

Biden and Inflation Policy

President Biden recently gave a speech in which he outlined his plans to combat rising inflation. Below are the major elements in his plan.  

The interesting common denominator among these items is that Biden assumes absolutely no blame for inflation. He is going to ride in on his dragon and save the damsel in distress.

 

The other thing to note is his preference for an approach that makes no economic sense. There are remedies that make more sense.  

The first three items (below see Major Elements of Biden's Plan) focus on his government working with other governments to intercede into petroleum and gas markets. It’s as if the people who manage those commodities suddenly decided to gouge the world.

There is little understanding of the economics of those markets by Biden and he doesn’t explain to us what will happen when the government waddles into something it really doesn’t understand.  

In his speech he says nothing – nada – about what factors are part of the supply chains of the items he intends to control. Does he really know enough to not screw up those supply chains?Does he explain whose ox is going to get gored as the heavy hand of government intercedes in complicated markets?  

As for “giving the Fed more room to fight inflation,” that is the biggest piece of misinformation (malarky) in the speech.

The Fed gets more room to fight inflation when the government takes its foot off the pedal. When the government instead spends huge amounts – that puts pressure on the Fed to monetize that debt. Monetary policy is much affected by government fiscal policy. If the Fed puts on the monetary brakes while Biden’s friends slam down the spending accelerator – it is not going to be a pretty picture.  

That's about it. It might sound good to Biden to point his boney finger of blame at providers of oil, gas, healthcare and a few other sectors. But the country would do better if he would look in the mirror and ask himself why he is unable to put a lid on government spending.

 

Major Elements of Biden's Plan to Reduce Inflation

Release more oil from reserve 

Put cap on the price of Russian Oil 

Translate lower oil prices into lower gas prices 

Work with Congress to reduce everyday expenses for drugs, utilities, and health insurance 

Stop Republicans from reducing Social Security and Medicare – and from raising taxes generally. 

Give the Fed the room it needs to combat inflation. 

 

Da Market

Da Market is discussed a lot. I guess those two words can mean a lot of things. 

In the old days when there weren't giant super stores near our neighborhoods, we went to an outdoor market and bought things. That was before my time. Then grocery chains opened up large stores that constituted our idea of Da Market. Nowadays, groovy parts of our towns and cities have something more like the old fashioned outdoor markets. It's fun to hang out in those places and you can buy just about everything there. You can also buy fresh foods that a local farmer brought to the market that day.  Local musicians provide entertainment at some markets and you might even be entertained by a local magician. Call it community. How nice. 

When I hear the words Da Market it often brings to mind stock markets. Most of us don't physically go to a stock market. Most of us call our broker or we can make trades -- sales or purchases -- sitting on a chair in our living room typing on our Internet-connected computers. Some of us have very short-term goals. We try to buy low and then sell high. In that way we hope to make capital gains. Unfortunately, that's a tough call and might even be impossible for most of us. I seem to be very good at buying high and selling low. If only I could predict the future.

Most of us stay away from the lure of capital gains. Instead we SAVE. Saving means that we don't spend all the money we earn. What fun is that? Why not just spend it all right now? Maybe we need it for the proverbial "rainy day". Maybe we will need money after we retire. Saving helps us spend when our incomes are low. 

Saving can take on many forms. We can save money by leaving it in a bank account.  We can save by buying a bond or a stock. We could save by buying a durable good -- any good that lasts a while that we could later sell. So long as you can find a way to sell any of these items when you need some cash down the road, we can call that saving. 

That's a lot of boring background to get to the idea of Da Market. Most of us use those words to describe the stock market. Many of us are invested in the stock market and the main characteristic of the stock market is that it unpredictably goes up and down. Imagine being on a roller coaster with a blindfold on. Crazy. But another truth of the roller coaster is that if you just leave your mask on and if you wait long enough, the coaster will stop and you can get off.

The stock market is the same way. You can get bowled over by all its twists and turns or you can instead put your money in some nice stocks and go back to your knitting. Its called the "buy and hold". Put a little bit of money away each month, wait until retirement, and then take your money out. For most long periods of time, you would have been blessed by a nice gain. 

Which gets us to right now. I spent my life doing the buy and hold thing. When I retired I had a nice nest egg. But in the last couple of years I saw a lot of my money disappear. Wam bam thank you Larry. Gone. 

What to do now? Luckily I have enough income off what's left to keep me going. Luckily I understand that panicking is not good. Panic means I might look at declining values and sell my remaining stocks at ridiculously low prices. I don't want to do that! So I guess I will hold a while longer!

Investment

Today's topic is investment.

Investment is one of those words that means many things to many people. A popular meaning of investment relates to buying financial assets like bonds and stocks.  Today's regurgitation is not about buying financial assets. Instead, what I delve into is investment as it refers to the buying of productive assets by firms and new houses by households.. If you took a macro course you might remember the equation: 

Y = C+I+G+NX

That equation says that the output of a nation is composed of goods (and services) purchased for consumption (C), for investment (I), by the government (G), and purchased by the foreign sector (NX). 

That I is the I that I am writing about today. As the table below shows you, investment can be either residential or nonresidential. The later is what we think of as investment spending by firms as it includes their purchases of structures, equipment, and intellectual property. The former includes purchases of houses, apartment buildings, and other residences.

As I was thinking of choosing a topic for today's blog I wondered what was going on with respect to investment in the USA. As we all know we have been through some rough times in the economy of late. The news media is very focused on topics like consumer spending, overall output, and inflation. I wondered about what has been happening to investment. Investment must have bit someone on the hand lately because it gets very little attention. 

One reason for focusing on investment is that it is the key to the future. You buy a new plant today or add on to an existing one makes it possible to increase output in the future. The new plant might also be composed of the latest equipment, technology,  and productive methods thereby allowing for an increase in national productivity. Higher productivity not only allows for more output per employee but it also can lead to higher wages without higher inflation. 

Below is a table I created using data from the US Bureau of Economic Analysis https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey

What does the table say?

In 2021 investment was $3.6 trillion. The table also shows you that 10 years before, in 2011 it was $2.4 trillion. The fourth column calculates the percentage change over those 10 years to be 54%.  That's a pretty healthy increase. Consumer spending grew by 25% over those 10 years. Export sales by only 8%. Overall real GDP increased 22%. Investment's faster growth took it from 15% of real GDP to almost $20%. 

Equipment was the largest category in investment at $1.3 trillion in 2021. It rose by 47% over the decade. New housing or residential investment grew even faster at 85%.  

If you sum investment in structures, equipment, and intellectual property, you get a measure of the kinds of spending that increase business and national productivity. In 2021 those three parts of investment totaled $2.9 trillion, up from $1.9 trillion in 2011. That extra trillion dollars -- or 50% increase -- gave firms more and better capital to work with. 

There is a lot more that can be said about the table. But today's topic is investment. Investment in the USA is a good story. We need to figure out how to make the next decade as good or better! Clearly, business optimism helps. If only our government could figure out how not to damage that fragile forward thinking. 

Productivity Pay for Mr Powell and the Congress

I had a few blog posts ready to go. But my heart was not really into it until today. I was reading an article that was lamenting that for sure we are headed for a recession in the USA and mostly because we waited much too long to pay attention to rising inflation. By "we" I mean our national economic policymakers. Any remedies for inflation for today will surely hurt the economy and will have proportional impacts on the stock market. 

Simple translation -- we have idiots in charge of national economic policy and most of us will pay for it. That seems right on one hand -- we voted for those morons. We should pay.  But let's not take all the blame. It was hard to see in advance how stupid our leaders would be about national economic policy. They are obviously very good at wearing nice suits and making lofty speeches -- not so good at actually doing anything. 

As I said, in this state of mind I was reluctant to bore you with another negative post. How do we have fun instead? And then it occurred to me that even if we cannot make the below solution happen, it is at least fun to talk about it and who knows, maybe the idea will catch on.  

If you screw up at work, your boss might penalize you by making you work more hours. She might even reduce your pay. Same thing at home. If you forget to take out the trash on Friday night, your spouse might cancel that evening's frivolity. You drop that pass, coach takes you out of the game.  If you are a professional athlete you might not get your bonus. You are getting the picture. In life, failure has consequences -- sometimes severe consequences.

Failure in life often hurts your wallet. 

Why not apply this idea to the Fed and to Congress? Why not directly tie their income to their failures? Why does that sound so outlandish? If the Fed let's inflation rage on, how many people are hurt by that? We measure that hurt in billions of dollars. If the Fed or Congress react to rising inflation by causing a recession, do they not do incredible harm? How many people lose their jobs? How many people lose income? How many people cannot make their dollars stretch to buy the necessities of life?

So it seems fair to me -- if Mr. Powell or members of Congress cause us all economic pain, then they should share in the misery.  How much money does Powell need anyway? Powell only makes about $200k per year as head of the Fed but somehow this uncharismatic individual has accumulated more than $50 million in wealth over his lifetime. Before adding benefits, Congressmen make a salary of around $200,000 per year. Wink wink. 

These people aren't super rich from their salaries but we all know the perks are pretty good. They do wear nice suits, right?

Anyway, they certainly are not poor so why not let them share in the people's misery. For example, we could gear their incomes to changes in the unemployment rate. If the unemployment rate goes up this year, then let's have a formula -- or a people's committee -- or some mechanism  that will lower their pay. I can imagine an interesting formula that is something like the below:

Income = $200,000 

                - .5* the increase in the unemployment rate 

                -.5* the increase in the inflation rate 

                -.5* the increase in the real interest rate

                -.5* the increase in the national debt

                -.5 * whatever else you believe is a proper goal of the Fed and the government

There might be some lower bound to their pay. Maybe we say it is okay if they earn the minimum wage as a floor to their salaries. At about $15 per hour that's about $600 per week or about $30,000 per year (50 weeks). Hopefully if Senator X made $30,000 per year for a while, we would vote him out of office. Or maybe he would quit. 

The thought that these goofballs might get paid according to their productivity might get their attention. If you guys mess up our economy, then we mess you up too. No, it doesn't matter that you tried. If you failed -- you are treated just like any other member of the labor force.  Seems fair to me. 

Janet Yellen: Dishonest or Ignorant?

Janet Yellen is probably the most powerful policymaker in the US today. She leads the Joe Biden team policy efforts. And yet, she is either incredibly dishonest or just plain ignorant. 

She was quoted* recently as saying that inflation in the USA is getting worse and that it has nothing to do with the policies of the Biden administration. When she was asked point blank if the historically high government deficits and loose monetary policy were the causes of higher inflation, she said No. It could not be US policy generating these increases in US inflation.

Why not, asked the reporter? Secretary Yellen replied that it could not be US policies causing US inflation because this inflation phenomenon is worldwide. Wow. Despite the fact that loose money and huge government deficits are known to cause inflation in a country, if these twin monsters occur at the same time as similar policies in other countries, then we must look elsewhere for causes? 

The logic is horribly inverse. Let's suppose for a moment that the EU also has inflationary policies. Would it be proper to blame the EU for US inflation? Surely EU inflation might influence US inflation. Surely. But would you argue that the EU policies are more important for US inflation than are US policies? Or maybe you want to argue that the EU somehow caused the US policy? Really?

Reminds me of kids and parents. Charles, you just punched your sister. I did that Mommy. But Jimmy punched her too. Nice going Ms. Yellen. The US can skate by with its horrible policies because the EU has similar horrible policies. Really? Where do we find these "leaders"?

She didn't say it but maybe she REALLY meant to blame the inflation increases on Covid and other supply-chain issues. That line of thinking is wrong, but at least it is more popular. It is wrong because it totally avoids the difference between very short-term changes in the price level and an ongoing process of rising inflation. But surely the supply shock excuse does not work when monetary and fiscal policies are so inflationary.  I am old but I cannot remember a time in my life when monetary and fiscal policies were so expansionary. And yet, according to madam secretary, they have nothing to do with high US inflation. Wow. 

*https://www.wsj.com/video/watch-yellen-expects-inflation-to-remain-elevated/471F8909-AAE7-4248-A534-4D4752C8F02F.html

Alan Blinder -- Inflation Not Transitory and Not Permanent -- What?

Alan Blinder was cute with his words, but he wrote one of the best pieces I have seen about inflation. It is good writing because it is very clear about defining inflation and discussing its causes. My only rub with his June 1 Wall Street Journal article* is his conclusion.

His title is cutesy. He says inflation is not transitory but is is also not permanent. If not transitory and not permanent, then what is it? I guess it is is something in between. Inflation will hang around for a little while. Maybe that's what he is saying. He didn't say how long it will remain elevated but let's not get too picky.

Blinder does an excellent job of explaining why higher inflation isn't going to last a long time -- Covid and food and energy price impacts are expected to diminish.  And he argues that inflation isn't here forever because, if anything, monetary policy is now aimed at reducing inflation --- not increasing it. 

He is very clear about the analytics. He teaches us about the difference between temporary shocks to the price level that can be caused by many things -- and how monetary policy is the sole cause of longer term or sustainable changes in the rate of inflation. Blinder should get a "best teacher award" for his clarity about causes of inflation. I am not being sarcastic. This is a really good piece of writing and should be required in all macro courses. 

My issue with his article has to do with his policy conclusion. Let's be clear. Like most macro liberals, Blinder has a bias toward fixing output and unemployment. Inflation might catch his attention now and then but he is driven by fixing economic weaknesses. So I don't think he really means it when he concludes that inflation increases are not permanent. By this he implies that shocks will dissipate but even more importantly, monetary policy will not contribute to higher inflation.

And that last point is where I think he is being disingenuous. Should the Fed's anti-inflationary policy succeed, it will do so by causing economic growth to slow and by increasing the unemployment rate. If Blinder is true to his guns, he will not tolerate that. He will turn in an instant and fire his six shooters at the evils of recession and unemployment. Blinder wants to join the crowd and ask Mr Powell to stop inflation. But it really isn't in him. Once the unemployment rate starts to tick up he will get ticked off. 

*https://www.wsj.com/articles/inflation-isnt-transitory-but-it-isnt-permanent-either-federal-reserve-interest-rates-oil-energy-costs-prices-11654113873?cx_testId=3&cx_testVariant=cx_4&cx_artPos=1&mod=WTRN#cxrecs_s

Changing Course?

Is it possible that I might have nothing to say? 

Here's my dilemma. This blog is mostly about the economy -- the US economy. That's my thing. I studied macroeconomics and I taught macroeconomics. That's where my economic interests have been and that's what I love to write about. My mother's influence on me was to be optimistic. And that's my dilemma. Aside from the 1970s when we coined the term stagflation, I could always find a silver lining in the economy. 

But now, the macro-skies seem dark. It seems impossible to think about the usual macro topics without getting sad or angry. Inflation is roaring out of control. And while we are not in a technical recession yet, there is a realistic probability that a recession is around the corner. And those yahoos in the federal government are reacting to all this as if today was a Three Stooges episode. 

I just read an article that said that federal tax revenues are reaching a peak never seen before. And yet despite taking gobs of money from us for taxes, they promise to bring us historically high government spending, deficits, and debt. Why? Because they are not satisfied with spending the increased tax revenues. They want to spend much more than that. 

It doesn't much matter what they want to use the extra cash for. What matters is their total lack of courage when it comes to financial management. Hey mom, I just got a raise. Great honey. Mom, can I borrow a thousand dollars? But honey I thought you just got a big raise? I did, but I really want a new sailboat and a motorcycle. 

What makes matters worse is that no one seems to care. Maybe its that we still don't understand what a trillion means. We see the word so often now. Like mass shootings. Our reaction today is more like, well, how many  kids got killed this time? Mass shootings, like trillions of dollars of deficits, gets spoken so often that they don't really register anymore. That's the effect of frequency. But frequency does not mean unimportance. We can and should do something about politicians who whistle their way to the bank -- with our money and our economy at stake. 

The above is meant to be a last time. I am tired of writing bad news. There is so much going on around us that impacts us more than macroeconomics. Good health is a big one that we ignore until we lose it.  If you are my age, you have your share of health concerns. But if you are reading this, you are alive and so am I. My parents checked out at much younger ages. Wow. I just got another day. How sweet. 

And what about family and friends? How great is that! Okay, relationships are not always perfect. But would you rather have no relationships? I won't bore you with how lucky I am to have people in my life every day. 

Back to my main point. With little fun writing about macroeconomics these days, I need to find better topics to write about. Since that is new to me, I will need your help. Aside from health and friends, what should we be yacking about? 

Is it Happy Hour yet?