Put on the Feed Bag

Mr. Sow-L (rhymes with Powell) is Chairman of the FEED (Feed Everyone Every Day). All the remarks below were taken from a recent barnyard speech he made in Washington D.C. 

Mr. Sow-L wanted to reaffirm that the FEED will not back away from its plan to require us to eat less each week. He overfed us for quite a while and he admitted it was time to remove the feed bag. While SOW-L indicated that we would definitely start us on a new and healthy diet, he was reluctant to begin it right now preferring to pin down the actual start date as sometime before Hell freezes over. 

Until then, he promised to keep force-feeding us another $120 billion ears of corn per month because he noted that many of us show acute signs of hunger, especially while watching reruns of the Little Rascals  on late night TV. 

He admitted that sticking with the $120 billion per month figure has been causing dramatic weight gain among the sow and pig population, but he believes that the weight gain has been the result of global warming and the Georgia Tech football team's record. It makes no sense to Sow-L to begin to reduce the number of corn ears in such an uncertain environment, especially since the Delta Delta Delta fraternity at Georgia Tech is going into Pledge Week.

His plan, therefore, is to hold numerous meetings over numerous months with his FEED Board over sumptuous salads and Twinkies to ascertain whether or not it is prudent to reduce the figure of $120 billion of ears to something more reasonable like $119 billion additional ears of corn. 

He admitted that adding so many ears of corn to the hog and pig population might cause even fatter results, but then reiterated that if the Tri-Delt thing kept up, it could spread to the GDI population. And then we would all be in real trouble. 

Nancy Pigosy and President Ride-M supported Mr. Sow-L's points and each promised to do what they could do separately to help the situation by using their debt powers to support infinite dollar outlays for feed, not only for pigs, hogs, and sows, but also for horses, cattle, sheep, and small dinosaurs. 

The FEED's next meeting is September 21-22 where they plan to assess the animal feed/weight issue again. Should the herds be growing in waist size, they will ponder the possibility of slowing growth to an extra $119 billion but they warned that such an extreme change could be unsettling to the gilt population.

One reporter pointed out that even a reduction to $119 billion was still a gigantic increase in corn and he wondered out loud when the FEED would begin to actually remove some of those gigantic piles of maize. Sadly he was stripped and whipped and relieved of his FEED badge.  Everyone knows that an actual reduction in corn piles could lead to mass starvation and possibly herpes. 

Inflation Madness

There are lots of people writing about inflation now. I guess it is cool now that inflation is higher. 

I don't mean to be a macro snob but I think inflation is one of the hardest things to understand and to write about. 

It seems simple on the surface. You go to the store one day and an apple costs a dollar. You go the next day and it costs two dollars. You didn't get a raise in your salary so if you buy the inflated apple, you now have a dollar less to spend on JD and artichoke hearts. 

Simple. Now extend the apple example to a basket of goods and services people usually buy each month and you can do the same kind of comparison. If it costs more to buy that bundle of goods and services this month, then we say there was inflation. If the cost of those goods was to fall this month we could call that deflation. 

What else? While we know inflation means we can buy less for a given income, what happens if your income is changing too?  That's were it starts to get more interesting. That's where we start saying more about the impact of inflation. Suppose inflation is 5% this year and you got a 6% raise? Hmmm. That means you can buy more goods and services -- not less. 

So what do we have to consider to know the impact of inflation? We need to know all the sources of income --- wages, salaries, benefits, dividend income, interest income, gambling profits, housing appreciation....please stop me. Clearly this means several things.

First, it means that inflation will likely have different impacts on different people. Kiltie might be doing great because he is a great investor while Gibson is suffering because of the decline in his rentals of surf boards. 

Second, if we can somehow add together all the various income sources of all the people, then we can talk about the macro impact of inflation. If price change is greater than income change, then we can say we have a national impact of higher inflation. 

Third, it is important to think about temporary versus more permanent changes in the impact of inflation. Economic data jumps around each month. There is a lot of noise in most economic time series. Like your weight. It goes up some one day; down some another day. What matters most to your belt is the trend. Is it getting looser or getting tighter?

That may be the hardest thing when it comes to understanding the impact of inflation. Let's suppose prices in June go up a bunch. It might be a one month thing. Maybe it is caused by weather in June. So you see that the inflation rate in June was high -- maybe 10%. A reasonable thing is to ask how much inflation has gone up over the last year, ending in June. Despite taking a longer term perspective in June, that big increase might calculate to a large increase in inflation over the past year. Was it a one-month thing or was it a 12 months thing?

That's what happened this year. Inflation went up by 5.4% in June compared to the previous June. A one year increase of 5.4%. That was worrisome. But really, it was mostly all happening in a few months. So we have to wait and see.

I looked at CPI data since 2011. Yes, inflation from July 2020 to July 2021 was 5.4%. In the previous three years (2018 to 2020) inflation averaged about 1.8% over each year.  How do you get from 1.8% per year to 5.4%?

Mostly because you had Covid and that caused negative inflation from February 2020 to to June of 2020. Almost half a year where the CPI never got above its value in February of that year. It was not until February of 2021 that the CPI began rising again. It rose a bunch between February and July of 2021. 

What's the point? The point is that the rise of inflation to 5.4% is almost meaningless. It is covid induced and reflects prices falling and then rising. 

It is difficult to make any forecast of the future from this information. Its like steering your boat in a storm. You cannot make rational forecasts during a storm. Inflation has been tossed around in a storm. When the storm is clearly gone, then maybe we will have something to say.

When the storm clears, maybe the impacts of excessive money creation or government deficits will be more recognizable. Maybe all the experts should wait and give a chance for the clouds to clear. 

Bernie Sanders Wants Bold Action

Below I cut and pasted words from an article published in the Wall Street Journal by Bernie Sanders. I promise that while I didn't want to take all his words, I did not misrepresent his meaning. I took enough words so you could see what this guy wants to do to our country. 

Looking at each individual item, you might say he sounds reasonable. There is a lot in the USA that should be fixed. 

But pay attention to his last line where he concludes by saying "it is time for bold action."

Make no mistake, he wants to do it all at once within the scope of a $3.5 trillion Reconciliation Package. 

I don't need to say much else. I just ask you to read his words and then wonder if we can handle bold action. He is not the least bit shy here. And he shows absolutely no worry that we can make significant progress on so many fronts. You might say that if you don't wish big you won't ever reach your dreams. I could also say that if you wish too big then maybe you are in the wrong profession. Is he a politician or a preacher? 

It reminds me of you or me declaring that we are going to get really smart. It is time to act and so we are going to become really smart with respect to biology, economics, physics, astronomy, leg pain, cooking, habits of crows, and a few other things. 

It sounds good, right? But really, how do you quickly become an expert in all those areas? Bernie has no worry about doing a lot of things boldly at once. His actual words are below my summary of his list. What do you think? 

My summary: Make rich people pay their fair share of taxes, reduce the greed of pharmaceutical companies, reduce child poverty by extending tax credits, reduce our dysfunctional child care system by capping childcare expenses, expand higher education and job training by making community colleges free, guarantee paid family and medical leave to all, expand Medicare for seniors by making hearing aids and glasses free, provide healthcare to all uninsured people, provide enough doctors, dentists, and nurses in underserved areas, help seniors and others with disabilities to get care without leaving their homes, make unprecedented investments in affordable housing, provide pathways for citizenship for undocumented persons, move our transportation, electrical generation, buildings and agriculture towards clean energy,  and hire hundreds of thousands of young people to protect our natural resources and guard against global warming. 

That's all he wants to do. All we need is bold action. Below is much of the article he wrote. 

Bernie Sanders: Why We Need the $3.5 Trillion Reconciliation Package

• August 3, 2021

By: Bernie Sanders; Wall Street Journal

THE AMERICAN RESCUE PLAN BOOSTED THE ECONOMY DURING THE PANDEMIC. BUT IT DIDN’T GO FAR ENOUGH.

The bad news is that the American Rescue Plan didn’t address the long-neglected structural crises that many U.S. families face.

 We need structural reforms to improve the lives of U.S. families. If Democrats can’t get Republican support for these reforms, then we have to do it alone through the reconciliation process.

But we will use it (the reconciliation process) to support the middle class and struggling families and, in the process, create millions of good-paying jobs.

Here is some of what is in the $3.5 trillion reconciliation package that the Senate Budget Committee agreed to:

We are going to end the days of billionaires not paying their fair share of taxes by closing loopholes, while also raising the individual tax rate on the wealthiest Americans and the corporate tax rate for the most profitable companies in our country.

We will take on the greed of the pharmaceutical industry, which charges U.S. residents the highest prices in the world by far for prescription drugs. Under our proposal, Medicare will finally be allowed to negotiate prescription drug prices with the industry.

We will end the absurdity of the U.S. having the highest levels of childhood poverty of almost any major nation by extending the Child Tax Credit so families continue to receive monthly direct payments of up to $300 a child.

We will radically improve our dysfunctional child-care system so that no working family pays more than 7% of its pretax income on child care, and we will provide universal pre-K to every 3- and 4-year-old.

We will expand higher education and job-training opportunities for students by making community college tuition-free for all Americans.

We will end the international disgrace of the U.S. being the only industrialized country not to guarantee paid family and medical leave. Women shouldn’t have to return to work a week after giving birth because they have no paid leave and can’t afford to stop working.

We will expand Medicare for seniors to cover dental needs as well as hearing aids and glasses. We will also make sure that we have enough doctors, nurses and dentists in underserved areas, while expanding Medicaid to provide healthcare to the uninsured.

We will give hundreds of thousands of seniors and people with disabilities the ability to get the care they need in their own homes instead of in expensive nursing facilities.

We will also address homelessness and the national housing crisis by making an unprecedented investment in affordable housing.

Further, we will provide undocumented people living in the U.S. with a pathway to citizenship, including Dreamers and the essential workers who courageously kept our economy running in the middle of a deadly pandemic.

Perhaps most important, we will begin the process of shifting our energy system away from fossil fuels and toward sustainable energy to combat the existential threat of climate change. This effort will include a nationwide clean-energy standard that moves our transportation system, electrical generation, buildings and agriculture toward clean energy. We will also create a Civilian Climate Corps, which will hire hundreds of thousands of young people to protect our natural resources and fight against climate change.

Now is the time for bold action.

Vietnam and Unfair Competition

Our leaders in Washington have been complaining about Vietnam and how they manipulate their currency so as to generate unfair competition for the USA. Their currency is known as the dong and that's another story but the rub comes because it is alleged that they purposely create and sell a lot of dong in international currency markets so as to cause the dong to depreciate against the dollar and other currencies. 

President Biden has backed away from naming Vietnam an unfair competitor, a label created by President Trump. But there remain negotiations between our nations and Vietnam has promised not to engage in predatory exchange rate practices. The light still shines on them. 

One of my points is that this currency depreciation is an old story and doesn't exist if data is true. But even if it were true, complaining about Vietnam brings about my second point. That is we must have gotten really desperate to complain about a country that is both poor and tiny. 

Vietnam has 98 million people who earn on the average $3,600 per year. Yes you read that right. The average US citizen makes $63,000 per year. 

While their GDP per year is $355 billion, ours is  $22 trillion. Yep, they produce one third of a trillion and we produce about 66 times that. 

Here is a good one to think about. We export to the world each year $2.6 trillion of goods and services. We import $3.2 trillion. Vietnam exports $290 billion. While Vietnam punches above its weight in trade, their total exports to the entire world only amount to about 9% of what we buy from the world. Or put another way, even if we stopped all imports of Vietnamese goods and services, US imports would still be $2.9 trillion and our trade deficit would still be about $300 billion.

We are worried about unfair competition from Vietnam?

Back to the Vietnamese currency issue. Between 2003 and 2012 the dong depreciated against the dollar by 35%. Between 2012 and 2021 the depreciation was a total of 14%. Between 2019 and 2021 it was zero. Zilch. Nada. 

Hmm. We all know that Vietnam is a developing country. It is a poor developing country. A novice boxer needs to attend to a lot of skills and practice before entering the ring. Vietnam is in a very competitive ring. We have bigger eggs to fry than to complain about unfair competition from Vietnam. 

                                    Vietnam   USA

Population  (millions)         98          333

Percapita GDP ($)          3,600     63,000

Nom. GDP (Billions $)      355     22,000

Exports (Billion $)             290       2,600

Imports  (Billion $)             NA       3,200

Holiday

 Hi all,

I'm on holiday this week. Enjoy your week off. 

Best,

Larry

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. 

             

Federal Government Spending 2000 through 2020

Given that my life is already very boring, I decided to bore myself to tears with a digital trip to the Office of Management Budget where I found federal government budget numbers. Talk about a nap-inducing exercise. 

I could have chosen budget numbers back as far as when Tuna's grandtuna was a mere minnow.  Instead I decided to be modern and look at recent numbers -- looking at the columns for 2000, 2010, and 2020. I could have gone out to projections through 2026 but I decided that I was interested in history and not fiction. 

Where do I start? I printed some of the numbers and they lay in front of me like an army of wannabees.  I have to be choosy over what I report here as I know you might need a little nap too. So let's hit the high points. 

Total government expenditures rose from $1.8 trillion in 2000 to $3.5 trillion in 2010, and then landed on $6.6 trillion in 2020. That's a lot of change, but keep in mind that these numbers reflect decades of change and that government is an unstoppable runaway train. I won't do the calculations, but the changes between decades are pretty similar. Government spending roughly doubled in each of the two decades. These government numbers are not adjusted for inflation -- they have not been purged of inflation like a lot of GDP numbers. So they are going to look pretty large because of this.  Just fyi -- the CPI rose by 28% in the first decade. It rose by 16% between 2010 and 2019. It rose by 19% between 2010 and 2020. 

What else? How about national defense spending? After rising by nearly $400 billion in the first decade -- it rose by $31 billion in the second one. Luckily the world because a safer place and so we didn't need to waste all that money on national safety and security. Please note the sarcasm as indicated by italics. 

And then, that's when it hit me that my results were too much affected by Covid by using 2020 as my terminal point for the second decade. So I used instead changes between 2010 and 2019. My results changed markedly. Instead of total government spending rising by $3.1 trillion in the second decade, they rose by only $990 billion. 

Wow. What's the point? Covid meant that the government was going to come to the rescue with spending. In just one year (2020), the change for the "decade" went from less than a trillion before Covid to $3.1 trillion after government had a little time to react (in 2020). 

What else? Defense spending was goosed some by Covid -- rising in the second decade through 2020 by $31 billion. That was a lot more than the planned decrease through 2019. Before Covid hit, defense spending was going to shrink from $693 billion in 2010 to $686 billion in 2019. That's a Covid-induced increase of $39 billion for defense. 

Similarly, income security spending was set to decline from 2010 to 2019 by $107 billion. By 2020, the change from 2010 was  an increase of $642 billion or a swing of almost $750 billion. Clearly Covid made a huge difference for federal spending for income security.

Similarly, the Feds were going to spend an additional $57 billion between 2010 and 2019 for Commerce and Housing Credit. And then Covid caused that number to swell to $651 billion between 2010 and 2020. That's a swing of almost $600 billion. 

Most of the key categories of federal government spending show the same increases because of Covid. Education, Health, Medicare, Social Security, and many others show increases beyond what was planned in 2019. 

Note that the numbers I quoted above are past outcomes. They do not count any of the spending increases planned for the future. When the emergency is over, will we have the discipline to move these spending numbers back to something more normal? It's hard to imagine it. The budget requires legislators to either reduce spending or raise taxes. They don't seem to excel at either. If they don't, then the only other option is a much large national debt. 

Inflation 2015 to 2021

The Fed met last week and after a good lunch of weenies and baked beans they spilled the beans and said that they no longer believed that inflation would require them to leave interest rates at zero until 2024. They pushed up the date when they might maybe perhaps would possibly raise interest rates above zero to 2023. The markets swooned and left-wing commentators drooled. 

Geez guys. Have you looked at a calendar lately? Some folks are worried about inflation NOW...and the Fed is going to quell inflation by raising interest rates a smidge in 2023. The last time I looked, 2023 is two years from now. This is like me telling you all that since I gained thirty pounds recently, I am going to cut out bacon on my baked cheese-soaked potatoes in 2023. Recall that money is supposed to hit inflation with a lag. So if they start putting the brake on in 2023 then inflation will begin to come down in 2024? 

How dumb do they think we are? Never mind. 

My last post was pretty long and pedagogical. The summary mainly suggested we wait and see as to how long inflation stays high. 

I wasn't happy with that result so I looked at some CPI  numbers -- focusing on each May from 2015 to 2021. Doing that suggests to me that the recent bout of inflation is more than temporary. 

Below are the May CPI figures from 2015 to 2021. The last column is the change from May of one year to the next year. 

Year   CPI*   Change

2015   237

2016   240   3

2017   244   4

2018   251   7

2019   255   4

2020   256   1

2021   269   13

*The numbers below are CPI index numbers. You calculate inflation by taking percentage changes in the index numbers. 

Wow. The 13 point change from May of 2020 to May of 2021 is huge compared to the changes before. It is true that 2020 showed a very small increase. But the change of 13 in 2021 more than makes up for that one year. 

The average change from 2015 to 2019 was 4.5 points. Even if you bring in the two extreme points, the average from 2015 to 2021 is 5.3. Either way, the 13 point increase in 2121 looks very large. 

Prices generally rise year after year. They rose by very little in 2020 mostly because the Covid change was minus 3 from February 2020 to May of 2020. But guess what? By July of 2020, prices had already returned to the number attained in February 2020. 

So the huge 13 point swing in 2021 is not just a temporary bounce back from a Covid induced drop in prices. There is a lot more going on there. 

Could that 13 have something to do with the Fed and the government stimulus? Might these impacts be lasting if the FED and government don't remove that stimulus?

Inflation 2021

Now that inflation is back in town I have been reading all the articles and thinking more about what it all means. 

It made me want to start at the beginning and that's where it gets really strange. Inflation is a very unique word. It has way too many meanings to be easy to discuss. For example, inflation can be a very general word meaning to increase in size or function. You inflate your tires and some people inflate their egos. Those meanings have very little to do with economic inflation though they share the idea that something is changing in size. Inflate means to become larger. Deflate means to get smaller.

While that first step is logical, it doesn't help us much to understand today's news.  Ok, economic inflation  is getting bigger. What exactly is inflating? How do you measure that? Once we get through all that, we ask is inflation good or bad? If it is usually bad -- then how is it ever good?

What is inflating? While my waistline is often inflating, what we mean by inflation usually has something to do with the consumer price index -- the CPI. Each month the labor department surveys a lot of stores and asks about the price being charged for the goods and services they have defined as part of the consumer's typical purchases. They average the prices of the typical consumer's "basket" of goods and services. If the average this month is higher than the average last month, they say there is inflation. If lower, they say we experienced deflation. 

Typically they also report the percentage change from one month to the next. So they might say that the inflation rate was 4% in May. If the inflation rate was 1.8% in the previous month they we would say the inflation rate increased. 

Think of all the prices out there. There are prices for new things: nondurable consumer goods (food), durable consumer goods (autos), consumer services (electricity) -- when we measure changes in those things we are mostly looking at consumer inflation. The Bureau of Economic Analysis produces a similar consumer oriented price index called the personal consumption expenditures deflator. It is very similar to the CPI but differs in several ways. They sometimes come up with different results for consumer inflation, 

There is a similar long list of non-consumer items -- that business firms buy. Like households, businesses buy food and clothing (uniforms) and energy, but they also buy tools and other equipment their workers use as well as the structures they erect, like new office buildings and plants. They also buy partially finished goods from other firms. And they may buy a host of business services like accounting and consulting. These items are often measured in wholesale price indices or in business cost indices. It might be possible that consumer prices are rising one month even though business prices are falling. Both measures are important in their own right and tell us different things about inflation. 

If households or businesses import goods or services from other countries these are factored into inflation too. Exchange rates complicate the valuations of import prices since we know that a lower (higher) dollar makes foreign items cost more (less) for any given sticker prices. 

Main point so far. Inflation comes in a lot of flavors.

A second point is that much depends on the time period you are measuring. Like your weight, inflation can fluctuate a lot on a given day. Most of the time we measure price change in months or quarters or years. The longer the interval, the more we can conclude there is a trend and that is another way of saying that it has gone on long enough to really impact us. Sometimes we ignore a big in change in inflation in one month -- preferring to wait and see what happens over the next months 

Lots of flavors. Lots of time periods. Lots to think about. 

Is a sustained increase in inflation something to worry about? Most of us think from the perspective of buyers and we usually don't like consumer price inflation. But if you sell apples and the inflation rate of apples rises, then you are probably happy. Your customers might not be so happy but at least they are getting apples. Maybe with less inflation sellers would be less willing to bring apples to the market? You see, now it is getting complicated. Is inflation good or not? 

Generally we think that inflation is like grease -- a little grease applied in the right place at the right time makes the machine work well. But too much grease can clog up the works. Inflation is similar. We don't mind a little inflation. As a firm, it's nice to think that your prices are rising. As a worker, rising goods prices often bring higher wages and incomes. But when inflation starts jumping around and rises in leaps and bounds, then it drives us crazy. When the average increase in each month goes up for several months, then we start to get concerned. 

So that's a little ditty about inflation. At the moment, we have seen some large one-month changes. While that gets our attention it does not mean the large changes will continue in the future and it does not mean that higher inflation is sustainable. It does mean that we need to look into it more and make sure that policy is not making it worse. 

May Flowers Disappoint

The article cited below ( A Good Worker is Hard to Find) is one of many that shows once again why we should not read or listen to the press. I used to think the Wall Street Journal was different but that was then and this is now. 

https://www.wsj.com/articles/a-good-worker-is-hard-to-find-11622845855?mod=hp_opin_pos_1

My spleen is over-running today because of all the fuss over the employment number for May 2021. The main theme is this. The BLS reported an increase of 559,000 private sector jobs for May of 2021. You would think  that the press would have been ecstatic with Andre pseudo corks popping everywhere. But no. Not our press. Harrumph. 

Why ecstatic? For one thing, employment rose by only 278,000 in April. Or maybe the fact that employment in 2020 fell by 9.4 million jobs. Wouldn't you be happy if after your weight rose by 94 pounds, you soon lost about 15 pounds? Should you have lost all 94 pounds? How many pounds should you have lost?

Apparently unnamed economists had met these journalists in a smoky bar on a unnamed street and told them that May was going to be the big month. Place your bets on employment to show in May. I guess they all expected at least 660,000 more jobs. 

All that got me thinking about jobs numbers. So I went to bls.com and downloaded monthly private sector employment statistics for each month from January 2010 to May 2021. 

My first thought was that jobs numbers ought to be stable -- not like stock prices careening all over the place. And that is true. In every year since 2010, employment was higher in December of each year, except for December 2020 and Covid. It was higher each December by about 2.4 million jobs. Those one-year employment increases ranged from 2 million in 2019 to 3 million in 2014. Pretty stable stuff.

But then all that came to a screeching halt in 2020. Covid made employment in 2020 look like a wet firecracker contest. In April of 2020 alone, employment fell by almost 21 million jobs. That cliff fall was followed by several months of gains and then the year ended with a jobs decline of 306 thousand jobs in December 2020. In 2020, there were 3 months of jobs declines and 9 months of increases. 

So far with five months of data for 2021 we see some numbers more like the past. We have had five months of employment grains averaging about 500,000 jobs per month. Compared to the past average of about 200,000 jobs gains per month, those 500,000 jobs per month were pretty high but one would expect such large gains as we return to post-Covid normalcy.

Okay, so why haven't we made up for those huge job losses of 2020? Maybe the press and the unnamed economists should show some patience. A number of 559,000 in May sounds pretty darn good to me. 

We should keep in mind one thing. If you face a catastrophic challenge and get through it, then maybe you won't go back to living the same way you lived before the incident. What is normal in our future may be quite different from what used to be normal. Covid has taught us that there are a lot of ways to live and a lot of ways to make money that we might have never considered before 2020.

Ask all those arm-chair economists what models they are using to convince us that we should be disappointed in May's near 600,000 job increase. What do they know about the future that we don't?

A New Favorite Cocktail

Those of you who know me know that I prefer bourbon. Sure, I drink beer and wine and an occasional frozen Margarita, but I really like the bourbon. 

Bourbon is very flexible. You can drink it straight from the bottle. If there are people around to watch you, you might rather drink it straight up -- meaning that rather than sucking it out of the bottle, you find a nice glass and drink it from there. The good thing about straight up is that it is not easy to drink it fast -- and therefore you don't get drunk in 15 minutes as you might if you added a bunch of coke. A close cousin to straight up is bourbon on the rocks. Pouring bourbon over some ice cubes is a compromise between straight up and adding some sweet tasty liquid to the bourbon. In this case it might only take you an hour to walk a crooked line. The water makes it easier to gulp but not like adding coke would. 

I spent many years drinking bourbon on the rocks. That was my go-to-drink. When I walked into a bar or a friend's house, they knew immediately that I was that kind of guy. At least that was true until I learned about a drink called an Old Fashioned. Since I was older, it made sense to most people who know me that Old Fashioned was a perfect description of me. So why not have that be my signature drink? It was a lot like a bourbon on the rocks, except for a tiny bit of red vermouth added into an altogether almost perfect bourbon on the rocks. 

That sounded good but it turned out that I don't really like red vermouth. With vodka or gin martinis, if you don't want a lot of white vermouth, you can tell the bartender to make it "dry". Dry is a code word that means mostly vodka or gin and very little vermouth. If you say VERY dry, the bartender knows you want only a small eye dropper full of vermouth added to your otherwise perfect vodka or gin. 

Sadly, when it comes to Old Fashioneds, there is no standard terminology akin to "dry". If you told a bartender to give you a dry Old Fashioned, she would call in the white coats. So that leaves you with the English language. If you want an Old Fashioned that has very little red vermouth in it, then you have to spell it out. I found over many years of data collecting on this important issue that there is no standard language to tell said bartender how much red vermouth you want in your Old Fashioned. This is not a good state of affairs and it has led to much personal anguish if not stress. 

You are on the edge of your barstool wondering what comes next. Simple, I never really liked the red vermouth anyway. But the other part of the Old Fashioned that I loved, was, tada, the cherries! Problem solved -- "Bartender, I would like a bourbon on the rocks with two cherries and a half-teaspoon full of cherry juice." Solved, Done. Nirvana. 

Well, maybe. I purposely did not say much about gin above. But I also love gin and therefore I love dry martinis and gin & tonics. I won't go into a lot of detail because the Tuna is already sleeping loudly. I will lay on you the main point. I wanted some gin the other night and I was out of white vermouth and I was out of tonic. What to do? Easy, try something that no one would even think of. Pour some gin over some rocks and then....and then....add two cherries and a half teaspoon of cherry juice. 

You serious gin drinkers will say pasha and look down your pimply noses at me. But the truth is that a gin and cherries is freaking amazing. In case any of you are still awake I will issue a challenge to you. This new drink must have a name. I thought of Ginerry and Chegin. But those names are lame. I'm not exactly a marketing type. 

What would you call this incredible new drink? If you win the naming contest you will be eligible to win a free seaplane ride over Green Lake. 

Note: There are some gin/cherry drinks but to my knowledge most of them add soda, lime or something disgusting like that. My drink is gin, ice, two cherries, and a half teaspoon of cherry juice. 

The Fed and the Punchbowl

The table below shows the changes in unemployment rates during six expansionary time periods in the US – generally growth periods following recessions between 1975 and 2021.  

I present this information to help us think about the prospects of a rise in inflation in coming months and years. I do this mostly because the Federal Reserve seems to think that inflation is not a worry now. Their main task, it seems, is to keep the economy humming through near-zero interest rates. Many Fed officials are on record as to the fact that even if we observe some recent changes in the inflation rate, they are probably temporary.

My table refers to the idea that a rapidly growing economy that generates reductions in the unemployment rate often results in higher inflation. Once the Fed observes a significant and durable rise in inflation, then they are compelled to remove the punchbowl from the party.

It is important, therefore, to wonder what the unemployment rate is saying about prospects of durable inflation. To that effect I created the below table which shows unemployment rates in six expansionary periods from 1975 to 2021.

In each of those expansionary periods the unemployment rate declined. The declines varied. For example, in 2003, the unemployment rate peaked at 6.3% and subsequently fell to 4.4%. The change in the unemployment rate was 1.9 points. In 1982, the unemployment rate had peaked at 10.8% and then fell to 5.2%. The change in the unemployment rate was -5.6 points. The common factor in all these episodes of economic expansion was a significant, though variable, reduction in the unemployment rate. In all but one of those episodes inflation increased.

Next, consider the last row of the table. It shows that the unemployment rate had risen to almost 15% in 2020. By early 2021 it had fallen by 8.8 points to 6%.

Some remarks. In the 2020 case, unemployment peaked at a very high rate – higher than any of the previous time periods. But it is also true that the unemployment rate quickly fell by 8.8 points – the largest reduction in the table. While the 6.0% rate in 2021 is not the lowest in the table it is considerably lower than the high rates in the table. That lower rate is already capable of generating inflation.

Summarizing. If the Fed thinks current increases in inflation are temporary, or if they think the unemployment rate has not yet gone low enough to start inflation – then they are not looking at the numbers.

They need to quit mumbling around and waiting for a clear sign from above. It is past time to think about anchoring inflation and expectations of future inflation. It is time to take the punchbowl away from the party. 

 

Table. Unemployment Rate During US Expansions

1975  8.8    1979  5.7   Dif -3.1 

Note: Inflation rose

  

1982 10.8    1990 5.2   Dif -5.6

Note: Inflation rose

 

1992 7.8     2000  3.8  Dif -4.0 

Note:  Inflation did not rise

 

2003 6.3     2007  4.4  Dif -1.9

Note: Inflation rose

 

2009 9.9     2020  3.5   Dif -6.4

Note: Inflation rose

 

2020  14.8   2021  6.0   Dif -8.8

Inflation?

  

A Little Ditty about April Inflation

If you have paid attention lately, April’s CPI number came out and everyone is atwitter. Apparently, inflation is back and is wounding the stock market and like a Bono reunion, it is causing quite a stir.

Us older folks remember the 1970s when inflation kept rising and eventual turned into something called stagflation. We surely don’t want that to happen again. And it snuck up on us after almost no inflation during most of the 1960s, it seemed to surge out of nowhere via excessive money emission and government deficits. Food and energy crises definitely helped.

Given all the crazy things happening lately it is no wonder inflation is catching our attention and concern. But let’s be honest – the news media sector doesn’t much care if they are correct as they benefit from colorful story-telling.

I decided to get away from all the theorizing this week and focus more on the common sense of numbers. The main point here is that what goes up often comes down. That has something to do with gravity. But what about when something goes down? Does it have to come back up? There is no rule of gravity to help us there.

If something typically grows by 3% per year and then it grows by only 2% this year – we expect it to mean reverberate. We expect it to go back to 3%. That means it might hit 4% this year as the 2% and the 4% average to 3%. No, it isn’t always that simple – but if a phenomenon really does average 3% then it is reasonable to think it will go back to that after it has temporarily diverged.

The consumer price index is a commonly used measure of the prices of things the average consumer buys. It is published each month. In April of this year it sprung to a value of 266.8. In April of 2020, it had been 256.2 so the one-year increase was about 4.1%. That’s a big number for inflation these days. Markets went crazy.

But one thing the market seems to be missing is that The CPI went from 255.3 to 256.2 between April of 2019 to April of 2020. That was a small increase. In percentage terms it was 0.35%. That’s hardly different from zero! That shows you that 2020 was a really unusually crazy year. Zero inflation! Many commentators admit that most of the things happening that year (Covid, a recession, and Tuna’s colonoscopy) may have caused temporary changes in inflation. Clearly a Zero percent inflation is unusual and not expected to last.

So what might you expect in the next year? In 2021? Perhaps a movement back to normalcy? And that’s what happened.

The CPI in April 2017 was 244.3 rising to 255.3 in April 2019 – for a two-year inflation rate of about 4.5%. The two-year inflation rate from April of 2019 of 255.3 to this April of 266.8 was again 4.5%.

Hmmm. The two year inflation rate from 2019 to 2021 was exactly the same as the average of the previous two years – 2017 to 2019. And people were not jumping off buildings because of inflation.

Yes, we had a serious rise in inflation in the past year. Does that mean trouble? Maybe. But it might also mean we are headed back to some sort of normalcy. But, of course, normalcy doesn’t sell airtime.

Last point. Once the temporary factors recede, we are left with a chance to bring our monetary and fiscal situation back to something less crazy. If we don’t, I am afraid that stronger growth coupled with excessive policy stimulation will be enough to bring us back to Jaws, One Flew Over the Cuckoos’ Nest, and the 1970s. Still got those cool bell bottoms? 

A Fictional Dialogue with Robert Kaplan of the Dallas Fed

Note: I wrote this post at least a week ago. More recently Janet Yellen -- a former Federal Reserve boss --  started to back away from low interest rates -- but then changed her mind. So as I write today, the Fed and the Treasury seem united in thinking inflation is not a threat and preferring to stick with near-zero interest rates. 

Below I pulled some key words from a WSJ article* about Robert Kaplan's Policy views. My comments below are in italics after .............. 

Federal Reserve Bank of Dallas President Robert Kaplan said it isn’t time for the central bank to pull back on its support of the economy, but paring stimulus when it becomes clear the coronavirus pandemic is abating and the economy is meeting the Fed’s goals will be important to keep the recovery on track..........when will it become clear? Might they wait too late?

When we’re in the middle of a crisis, we should be aggressively using our tools, so I agree with what we’re doing now in terms of asset purchases and stance of policy generally, .............are we really in the middle of a crisis?

Mr. Kaplan declined to give a timeline for when those conditions might be met. The official remains upbeat about the economy and forecast 6.5% growth this year, with the jobless rate dropping to 4% this year....the jobless rate is dropping to 4% and he says we are in a crisis? When will he know when the economy is strong enough so they can begin to pull back all that stimulus?

There’s reason to be optimistic about the future,” the official said, adding, Having said that, I would also emphasize it is my view that we’re not out of the woods yet............I repeat, when will he know we are out of the woods? When will he want to take his foot off the accelerator?

Determining when the pandemic has largely passed is a conversation that will take place in conjunction with health policy experts. But once clarity on that question emerges, the Fed should trim its support to keep it commensurate with what the economy needs........Is Dr Fauci going to run the Fed? When will Covid's future be clear?

I reserve the right to change my mind, and update my views depending on how the economy performs, Mr. Kaplan said Tuesday........wow -- now that's a commitment to a clear policy we can bank on. 

Market excesses and imbalances can seem benign while it’s going on, but if it goes too far, if you have somewhat of a shock or an adjustment or you’re getting back to normal and people need to some extent de-risk, it can create a severe tightening in financial conditions which can slow the economy,” Mr. Kaplan said.......okay now he is honest but that honesty does not go with his policy view. Yes, it will hurt if you hit yourself in the head with a hammer -- but go ahead and keep hammering. You will know when to stop hitting yourself in the head.

That is why at some point it will be important for the Fed to trim back support, the official said.....how do we know when we are at that point? How will he know? Seems to me we are there already. 

All things being equal, I am going to be much more willing to be accommodative or highly accommodative in the months and years ahead in order to achieve our goals,” Mr. Kaplan said, ....aha. Months and years. Years? Really? Sounds to me like he is never going to judge the economy to be healthy. And as he said -- then the fit will hit the shan. 

*https://www.wsj.com/articles/feds-kaplan-says-the-economy-still-needs-central-bank-support-11617787800?mod=hp_lista_pos2

President Biden and Cause & Effect

I watched President Biden's speech and I came away thinking about cause and effect. Before I get more into that idea, let me say that he really knows how to deliver a speech. I have heard of bully pulpits before, but he really mastered the art. He was incredibly strong and persuasive. 

Having said that, I want to make a distinction between cause and effect. When your big toe hurts, you do not bring in your nearest evangelist and have him or her give your toe a talking to. You don't hire the Dallas cheerleaders to cheer on your big toe.  Most of us go to a doctor who knows something about toes. He or she uses her training and experience to decide what can be done to fix your toe. When she tells you to apply a remedy, you might be persuaded and you are on to feeling better. While it might be nicer and more fun to have the Dallas Cheerleaders cheer on your toe -- you'd rather deal with a doctor.

This point can be exaggerated. Sometimes the problem is really emotionally based and a good cheering on can be the remedy. And sometimes a doctor might get it all wrong. So let's be clear -- cause and effect allows for both science and emotion. 

But more frequently, we stick to cause and effect in the sense of science.  If we want a rocket to head toward the moon, we might pray for a safe journey but before that we need to build a good rocket using science. If we want our lawn to look nicer we don't cheer on the grass, we put gas in our mower. 

I know I am aggravating some of you.

But to me this is all relevant when I think about Joe Biden's speech the other night. While he is an expert at enumerating and describing many of our modern ills, and while he is passionate and persuasive about us wanting and needing solutions -- I never heard him say a peep about what causes these things. Apparently what causes all our ills is that the government is too small and rich people get to have all the fun. 

Take poverty or inequality of income as an example. Why are people poor? Why are incomes unequal? Did he ever say why? He ranted about rich people. But are you sure that rich people exist to make other people poor? Is there no other explanation for why people are poor? Do those other reasons not deserve a minute or two in his speech? 

And he is so sure that if the government spends more money, then poverty will be greatly improved? Trust in the government. But really? How long have we had poverty programs? If they are so good, then why do we continue to have poverty? Because Trump put in a reduction in tax rates? Do you really believe that's the beginning and the end of the story?

Is poverty really so simple that we can wave a magic wand and it will disappear? Is the government so powerful and smart that it will use all that money they get from the rich to make large and lasting reductions in poverty? Do we have sophisticated models of the causes of poverty and do the programs being put forward really have substantial and durable effects?

I think all these questions can be answered. But Joe Biden is more interested in whipping up emotion than in being serious about how we solve our nation's problems. He has been in government a long time and yet he points the finger of blame at the other party. Maybe he and his advisors should spend less time whipping up emotions and more time in the library figuring out what is really wrong and what can usefully be done about it. 

Janet Yellen and Pinocchio*

Janet Yellen defended the proposed increase in corporate taxes. Her main rationale seems to be that Uncle Sam needs the money for infrastructure. She claims that taxes are at an all-time low and so she wants to raise the corporate income tax.

I wrote about the incidence of the corporate income tax last week and while some of you weren’t convinced by my lucid argument, my main point was simply that it won’t just be rich folks who are impacted by the higher tax rates on corporations.

But that was last week, and this week is, well – this week. The point this week is that the problem is not that taxes are low. It’s like your kid arguing for a higher allowance because she gets less than all her friends. How can she survive if she can’t go to Paris with her friends next week?

Loving the data points so much, I put together a little table* using data from the Congressional Budget Office. I chose five years for the data – every five  years from 2000 to 2020.

The Rev column shows federal tax revenues in each of those years as a percent of Gross Domestic Product. The Exp column is federal government spending as a percent of GDP.

The item that stands out the most is that Yellen needs tax increases, but not because taxes are so low today. Sure, the 16.3% in 2020 looks low – though it is a good bit higher than the 14.6% in 2010. Obviously, recessions are not kind to taxes. The average tax rate across the five years is 17.1%.

Notice the expenditures column. In 2020, the eye-popper is the federal government spending that is 31.2% of GDP. Now that’s a whopper of a year for spending. Could all that really be for infrastructure? I don’t think so. Before 2020, the average spending of those prior four years is 20.2% of real GDP.

Point? If you want to tax corporations more, then go ahead and do it and live with the consequences. But to say that you are doing that because taxes are too low is ridiculous. Taxes are insufficient because you are spending huge amounts of money – and not much of it is really for infrastructure.

Janet Yellen – you need to go back and read the story of Pinocchio.

Year   Rev     Exp

2000   20.0    17.7

2005   16.8    19.3 (recession 2001)

2010   14.6    23.3 (recession 2008/09)

2015   17.9    20.4

2020   16.3    31.2 (recession 2020)

https://www.wsj.com/articles/a-better-corporate-tax-for-america-11617813355?mod=opinion-sf_theme_opinionmain-ribbon

Taxes Part 3 -- Who Pays the Corporate Income Tax?

Last week I wrote about corporate income taxes and focused mostly on changes over time and presidential terms. 

One astute reader of the blog commented to me that another perspective looks at who actually pays the corporate income tax. 

For example, your mother gets mad at you and then you slug your brother. The impact of your mother's scowl is on your little brother...or your sister. I don't want to be sexist here.  

It is the same thing with taxes and corporations. Let's say that your company produces canned tuna. The government decides that the owners of Charlie's Tuna Factory are rich and they should pay more taxes to the government. Clearly, the government reasons, they can do much better things with the cash than Charlie. 

So bam Charlie gets hit with a bigger tax bill. 

Charlie and his lamb-like accountant Jack put their heads together and decide how to deal with the tax increase.

Charlie feels guilty because he recently installed a plastic pool in his backyard and he is the rave of his neighborhood. Life is good for his family. He tells Jack to pay him a smaller dividend so the government can do better things with his money. 

Jack laughs so hard that he worsens his double hernia. 

"Charlie, don't be a fool. You deserve all that money you make. There are lots of other ways to find the cash to pay the extra taxes." Tuna is all ears. 

Here is what Jack said.

    Don't give your workers a raise this year. That will give you more money for taxes.

    Reduce the benefits you pay those workers.

    Fire some of your workers -- you can get by without a lot of them. Make the rest work harder and longer. 

    Give a lot less to the United Way and other charities this year. 

    There are lots of tax write-offs besides charity we can use to offset the increased taxes.  Take a trip to Paris to search for better tin cans and enjoy good wine and coffee. 

    Support politicians who will help you reduce taxes down the road.

    Get tough on your suppliers. You don't need to pay so much for oil or for tin. 

    Your sales staff do not need those luxurious Chevy Vegas. Bicycles would provide better health benefits than that silly expensive healthcare plan. 

I could go on but you get the picture. The corporation writes the check to the IRS each year but the real issue is who REALLY "pays" the tax. As you can see, it is not just the stockholders who will pay the extra taxes.me 

I tried to bring in some data on this topic. Personal dividend income surged from 2010 to 2020. It rose 239% compared to the decade before. Most of that increase came before 2015. During those two decades, personal income rose by only 79%. It is hard to see any real bump from Trump's lower corporate tax rates on dividend income. Trump becomes President in January of 2017 and his tax bill is signed in December of 2017. Dividends do rise in 2018 compared to 2017 but that increase appears to be the continuation of a trend of increases that started as early as 2012.

Are we sure that the extra trillions in taxes proposed by Joe Biden are going to be used by government in ways that are better for the country than the alternative uses?