Tuesday, April 20, 2021

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?




Tuesday, April 13, 2021

Corporate Income Taxes 1960 to 2020

Because we are about to embark on a discussion about corporate taxes in this country, I thought I would dig into some historical data. I easily found comparative government budget data for the US starting in 1962 -- this covers 10 presidents and 58 years. 

I am not looking at amounts paid by any particular firms -- instead the total of all of them. The IRS table I found gives a number for each year as to how much the Federal government collected in corporate income taxes as a percentage of Gross Domestic Product. 

Corporations pay more than just federal corporate income taxes -- they pay excise taxes and a pretty good chunk called payroll taxes. In 2020, for example, companies paid 1% of GDP in corporate income taxes. They paid another 0.4% of GDP in excise taxes and 6.2% of GDP in payroll taxes. 

I decided to report the corporate income tax results over time by President. But I didn't attribute corporate income taxes to exactly their terms because it takes a little while to get an administration going and impacts often linger after a term. So I decided to attribute to each president the taxes raised starting in the second year of the administration through the first year of the next president's term. 

For example, Clinton's term started in 1993 but I gave that year to Bush I. Clinton's term ended in 2001 but I gave taxes in 2002 to Clinton (not Bush II).  

The table below contains the corporate income taxes collected by each president -- the percentage in his second year, the highest/lowest percentage in the mid years, followed by the percentage in the first year of the following president. 

One note -- these are not legislated tax rates. We don't know from this data whether tax rates were raised or lowered. We don't know what changes were made to the tax code. We are getting the combined impact of all those things. Did taxes (as a percentage of real GDP) go up, down, or stay the same? 

The last column contains recession years of each president's term. We know that during recessions tax revenues decline so we should point out those years when looking at the tax revenue data. 

How do we read the table? 

LBJ is the first line. In his second year the tax to real GDP ratio was 3.6%. The rate peaked at 4.1% during his term but then ended up at 3.7%. Comparing LBJ to other presidents, his corporate taxes are high but they did not rise very much from beginning to end of term. 

Reagan finished with  higher taxes despite a large decrease during his term. Ford had a similar pattern.

Clinton and Bush II did the opposite with taxes rising and then falling. The recession at the end of both their terms might explain the decline in taxes. 

Obama's taxes showed a similar pattern -- rising then falling -- but there were no recessions in Obama's years. 

Trump's numbers are pretty interesting in that they don't change much. Taxes start low and stay low. His rates are definitely lower than Obama's but we see no pattern of falling tax revenues during his years. He and Reagan are reputed to be great tax cutters and maybe they made changes -- but the end result is that tax revenues as a percent of real GDP did not fall for either of them. 

The last line will be for Joe Biden. Given all this history, what's the possibility that after all the hooting and hollering, he is going to raise a ton of money for his spending plans? 

Clinton raised taxes above those of Bush I but a recession quashed his plan. Obama raised some revenue above Bush II but he benefited by the end of a recession raising tax revenues. 

Trump's very low numbers suggest that Biden might have some room to raise taxes but we will have to wait and see. History is not in his favor. We do not see taxes jumping from the end of one President to the next one (except for small ones for Clinton and Obama). 

                     Start High/ End   Recession years                

LBJ               3.6    4.1   3.7    None

Nixon            3.1    2.4   2.7    69/70

Ford              2.5    2.3   2.7     73/75  

Carter            2.6    2.3   2.0     80/81

Reagan          1.5    1.0   1.9     81/82

Bush I            1.6   1.6    1.7     90/91

Clinton           2.0   2.2    1.4    00

Bush II           1.4   2.6    1.0    07/08/09

Obama           1.3   1.9    1.5    None

Trump            1.0   1.1    1.0   20

Joe Biden        ?       ?       ?      ?

   



Tuesday, April 6, 2021

Raising Income Taxes

I recently wrote about income distribution. Today I turn to income taxes. As the Biden administration unfolds plans to greatly enlarge the scope of government spending, our minds turn to how we will pay for the extra trillions spent on infrastructure, childcare, green subsidies, and so on.

It might remind you of one of those finger-pointing exercises when everyone points at someone else who should bear the burden.  Who is going to pay for those extra trillions of dollars of government spending?

Point no further – of course, it is the rich folks who should pay. One storyline reads that Trump reduced the taxes of those folks and now it is time to collect.

So, I decided to look at some data. As usual, the data can be pretty illuminating. It doesn’t really provide any final answers to whether or not we should squeeze the rich. Some of you won’t be satisfied until everyone nets $15 per hour. But let’s play this game anyway.

The data comes the Internal Revenue Service and it relates to shares of taxes paid by income category.

The data I used starts in 2001 and goes through 2018. I wish I could have gotten more years but apparently there have been changes to the methodology and the pre-2001 data can’t be compared to years after 2001. Data for 2019 has not been published yet.  We are stuck with 18 years of data.

2001 was the beginning of George Bush. He served until 2009 when Obama took over. In 2001, the top 1% of all taxpayers paid 28% of all income taxes. Note that if we had an equal distribution, the top 1% would pay 1% of the taxes. So clearly, we have a progressive tax system. 

Let's move ahead to 2018. 1% of the tax returns was about 1.4 million tax returns. That means that of the 143 million tax returns filed in 2018, that 1.4 million of those returns accounted for 25% of taxes collected. The top 1%'s share of taxes was smaller in 2018 than in 2001, but 25% is still a full quarter of all income taxes paid. 

You might say, that’s cool. Maybe that 1% of taxpayers should have paid 30% of all income taxes. Or maybe you want them to pay even more. I can’t answer those questions. I can just point out that 1% of us paid 25% of the taxes.

Let’s go to the other side of the income scale. In 2018, the bottom 50% of all tax returns paid 3.4% of all taxes. Half of the all the returns paid 3.4% of the taxes. That isn’t zero but you could say that half the folks in the US basically paid almost none of the income taxes. Think of that. Of those 143 million returns, there were 71 million returns that paid almost nothing.

Put some of this above together. Of 143 million returns, 1.4 million of them paid 25% of all taxes and 71 million returns accounted for 3.4%. Subtracting, that means the remaining 70 million tax returns or 49% of all tax returns – people who were not super rich and people who were not among the bottom half, paid about 72% of all the taxes. Having average but not high income puts you in a group that is floating the US economy. Those 70 million taxpayers represented a little less than half of all taxpayers and paid approximately 72% of all income taxes paid.

Clearly, we already have a tax system wherein the bottom 50% of the population by income pay almost nothing in income taxes and receive a goodly share of the benefits of government. The remaining 50% of the population pay more than their share so that the bottom 50% get to pay little.

As I said above, you may believe that the above is not enough. I can’t influence that. I can wonder out loud when enough is enough. Higher income people are smart and mobile. At some point, if Biden gets too aggressive in raising taxes even more on higher income and mobile folks, he may find himself without people to pay. Then who is going to shoulder the main tax burden?

Tuesday, March 30, 2021

Monsters Under the Bed

The head of the Fed, Jerome Powell, was quoted as saying he didn't want to take his eye off the ball before we actually finish the job. I will let him mix metaphors but I won't let him get away with the main idea that is driving his policy. 

The eye in this case is monetary policy and interest rates. The ball is the strength of the economy. Powell believes the economy is not yet strong enough to raise interest rates above zero. Did you hear that....above zero? No interest rate increases for a good while. Nada. Zero.

To bolster this mixing of metaphors, he gets back to economics when he and his minions brilliantly conclude that there is a difference between actual data and forecasts of actual future data. No kidding? Unless they have a crystal ball -- we all know they do not know what is around the corner. We NEVER know what is around the corner. What they are really saying is what I used to tell my mother at bedtime. Mom, I am sure there are invisible monsters hiding under my bed. My mother always replied -- honey, there are no monsters. There are only good fairies. 

So there we have it. Our leaders at the Fed see monsters in our future. Despite their own forecasts and the forecasts of others, they prefer to believe there are monsters under our national economic bed. 

Why take such a strong position? They seem to be saying that good news is bad news. That is, if the good economic fairies actually produce stronger growth, then that stronger growth will be bad for future growth. What? I am not kidding. That is what they are saying. Apparently the current good economic growth is flimsy enough that as soon as prices and interest rates begin their eventual rise back to something more normal (ie not zero!), it will be like a punch in the stomach and the economy will fall to pieces. Poor Humpty Dumpty. All the king's horses...you know the sad story.

They argue that doing too little now just ain't enough. Keep going. Despite historically high government deficits and debt and despite a tidal wave of new money, they have to keep the pedal to the metal.

Nowhere in their explanation is any real mention of what could happen if you keep the pedal to the metal. I suppose the Andretti's could tell them some stories about the risks associated with taking too many turns too fast.  Or what happens when you want to cook an omelet and you forget to turn the heat down a bit after warming up the pan? Not enough heat won't cook the omelet -- for sure. But leaving the temperature on high will surely burn it. 

Our Fed has taken a stance. They are going to keep the monetary pedal to the metal as our government stimulates more and more. Once you vigorously defend that approach to policy -- when do you back off the pedal? How strong does the economy have to be before they raise interest rates a hair? I am not confident they know when to turn the dial the other way. Hope you enjoy your omelet. 


Tuesday, March 23, 2021

Income Distribution

The information to make the table below was taken from the US Census.

It reports the share of total income by income class. The bottom fifth refers to those at the bottom of the income scale. They earned at most $28k in 2019. Those in the top fifth earned more than $143,000 in 2019. While the chart reports five groups that each represented 20% of the population, the final row has a richer group -- those in the top 5%. 

The numbers in the table show how shares of income changed between 1967 and 2019. 

Before I get to the changes, it helps to know where we started. A lot has happened since 1967 when I was a junior at Georgia Tech. In 1967, the poorest 20% earned only 4% of the income. The poorest 60% only captured 32.1% of all earnings. In 1967, the top 5% of earners accounted for 17.2% of income earned.

Clearly, as far back as 1967, the distribution of income was not very equal.

What has changed since 1967?

The share of income going to the poorest group fell from 4.1% to 3.1%. The decline was spread evenly over the two time periods (1967 to 1993 and 1994 to 2019). 

The income share going to the top 20% of earners rose by 7.3% over the whole period but 5.3% of that came before 1994. 

Share changes for the remaining groups largely occurred in the first period relative to the second. 

What we can conclude from the data is that change was more pronounced before 1994 and has slowed since then. 

Comparing more recent data doesn't change anything. The same patterns emerge.

One point to make about this data. People moved in and out of these income classes every year. So the category is not the same people each year. But the lowest 20% is always comprised of the people at the bottom of the income scale. 

What else? To those people who believe something has fundamentally changed lately to change or worsen distribution income, I say that maybe they need to look further. A half-century of data supports the idea that not much has changed.

While the column of figures under 2019 is not very pretty, it does not very much differ from those numbers under 1967 or 1993. Should we want to make the numbers under column 2045 look a lot better, we might want to do some harder work to understand what is going on here.  

Between 1967 and today a lot of words and much money have been devoted to making the income distribution less unequal. Yet, things have not changed much. What is missing here? We put a man on the moon. Why can't we make incomes more equal?

1967      1993      2019      Change 

                                                                   Whole  First      Second

Bottom               4.0         3.6         3.1         -0.9       -0.4       -0.5

Second                10.8       9.0         8.3         -2.5       -1.8       -0.7

Third                   17.3       15.1       14.1       -3.2       -2.2       -1.0

Fourth                 24.2       23.5       22.7       -1.5       -0.7       -0.8

Fifth                     43.6       48.9       51.9       +8.3     +5.3      +3.0

Top 5%                17.2       21.0       23.0       +5.8     +3.8     +2.0

Tuesday, March 16, 2021

Which Scenario Do You Prefer?

Which is it?

Scenario 1. Inflation is rising. This pushes interest rates up. Rising interest rates raise the cost of borrowing and reduce spending. Lower spending decreases profits and causes firms to produce less and hire fewer workers. Lower profits reduce the value of the firm and cause the stock market to collapse. 

Scenario 2. Piles of accumulated savings, expansionary monetary and fiscal policies, and continued progress against the Covid virus cause people to expect a strengthening economy. This leads to expectations about higher future profits as firms not only produce more but also are emboldened to raise prices. Banks raise interest rates as this sanguine scenario causes firms to borrow money to finance economic expansion. 

In Scenario 1 we start with what we are observing in markets today -- rising inflation and interest rates. In Scenario 1 we are very worried that the rising inflation and interest rates are going to lead to negative outcomes in output, employment, and the stock market. Scenario 1, therefore, might be part of a case for why national policy should be more expansionary. 

Notice that Scenario 2 is driven by an optimistic expectation about the economy. The economy will be strong enough to produce more without further expansionary national policies. While it is true that inflation and interest rates rise in Scenario 2, these increases are not expected to slam the economy into reverse. Instead, they are seen as a part of a strong economic expansion. Surely rising interest rates and inflation might nip at spending increases, but these detractions are seen as minor compared to the spending increases generated in the expansion. Scenario 2 asks for no additional national expansionary policies. Past policies have generated enough growth and momentum. 

So which is it? Do you like Scenario 1 and prefer more government stimulus? Or is Scenario 2 more to your liking with its lack of need for additional national stimulus? 

You can't have both. Suppose you pick Scenario 1 and 2 is correct? What are the results for the economy?

Suppose you pick Scenario 2, and 1 is really correct? How does that combo impact the economy?

I am guessing that our current government believes in Scenario 1. They worry that the economy is going to fail. Rising inflation and interest rates are going to kill a weak recovery. They will pile on more stimulus. I worry that they are wrong and they will end up stimulating too much! Wait until you see inflation and interest rates soar!


Tuesday, March 9, 2021

Blog Post March 9, 2021 The Magnificent Seven

March 9 – The Magnificent Seven

Dear friends,

I am taking the week off. My friend Barbara and I are going to visit a place called Port Townsend.  I hope you have a great week.

Since your hunger for knowledge never ends, I decided I would give you some nice choices this week.

Below are the most popular articles from my blog since its inception.

Notice a couple things.

               I started the blog in 2010. The Tuna was a tiny Tunnini back then.

               I posted about 600 articles during those years.

               Below are seven that were by far the most popular.

               Notice that three of them were guest posts written by some good friends.

Want to be a guest blogger? Just let me know.

Here are the Top Seven.

The G20 Blame Game

https://larrydavidsonspoutsoff.blogspot.com/2013/09/the-g20-blame-game.html

Negative Real Interest Rates Cannot Exist. Or Can They?

https://larrydavidsonspoutsoff.blogspot.com/2012/06/negative-real-interest-rates-cannot.html

Bear Case by Guest Blogger John Succo

https://larrydavidsonspoutsoff.blogspot.com/2014/01/bear-case-by-guest-blogger-john-succo.html

Navarro in Neverland by Guest Blogger Chuck Trzcinka

https://larrydavidsonspoutsoff.blogspot.com/2017/03/navarro-in-neverland-by-guest-blogger.html

Peas, Stuffed Cabbage Balls, and the No-Camp Camp of Economic Policy

https://larrydavidsonspoutsoff.blogspot.com/2016/11/peas-stuffed-cabbage-balls-and-no-camp.html

Why We are Lousy Investors by Guest Blogger Robert Klemkosky

https://larrydavidsonspoutsoff.blogspot.com/2013/04/why-we-are-lousy-investors-by-guest.htm 

Ozzie and Harriet Would be Mortified 

https://larrydavidsonspoutsoff.blogspot.com/2016/09/ozzie-and-harriet-would-be-mortified.html

Enjoy!

See you next week.  

 

 

Tuesday, March 2, 2021

Interest Rates and Inflation

Last week the various stock market indices did some back flips, apparently because, like a vegan pizza, investors didn't much like the taste of interest rates. Of course the actual rate on that day went up so little that you couldn't find it among the spilled popcorn crumbs left over after my TV watching. 

So I decided to look at a little recent history. Below you will see a graph of the monthly inflation rate (annualized monthly changes of the consumer price index) and the monthly rate on 10 year Treasuries. Inflation is the crazy jagged line. The interest rate looks a bit calmer, perhaps on Prozac, in contrast. 

Getting away from the colorful TV messages and one-day fluctuations offers a nice calm way to think about what is going on out there. More specifically, do recent changes in inflation and/or interest rates offer some message, any message, about what might be around the corner? 

Looking way to the right on the diagram -- in the yellow inflation zone -- you see some crazy gyrations in the monthly inflation rate. Early in the recession you get a deep spike downward that reverses itself. The final points in the graph are more instructive. Notice how the latest inflation information falls between the two lines -- thus it is averaging around 2.5%. I am purposely not reporting the figures with all those decimal points to instead focus on general directions. 

If a monthly inflation rate has a lot of folks hot and bothered, start looking to the left on the chart. How does 2.5% compare to past time periods? Clearly, you can see a lot of data points that landed higher than 2.5% -- and many that were even a lot higher than the 5% line. So whatever might be going on now is nothing like we have seen many times in the last 20 years. If you think it is fun to count data points -- just go back a couple of years -- say 20 points -- how many of those were above 2.5%? 

The other line on the chart is a very popular version of interest rates. The 10 Year Treasury rate is the Tom Cruise of interest rates. It looks kind of sleepy but if you look closely you can see that it was pretty high on the left of the chart and then gradually came down until it hit a new low in the last recession. Notice, like a banana on its back, it seems to be trying to slope up. But come on, folks. There is not a lot there to convince us that we are headed to interest rate hell.

Yes, of course, inflation and interest rates ought to rise from the recent floor. But if the US economy could have long time intervals between recessions wherein the inflation rate often exceeded 2.5% why are we acting so crazy about a one-day interest rate peak of 1.5%? 





Tuesday, February 23, 2021

Inflation

More and more we are hearing experts worry about rising inflation. This worry is new for several reasons but the best one is the data. Since the recession ended in 2009, the inflation rate as measured by the percentage change in the consumer price index has averaged less than 2% per year. 

Some of you remember the extreme inflations of the 1970s but this recent bout of disinflation is extreme even in regards to recent decades. Inflation is clearly on a downward long term trend. And like a boxer on the canvas, we can't call inflation out until the count of 10. Economists for the first time in quite a while -- are wondering if inflation is ready to come back. 

And that's where the stories get interesting. Inflation is one of those household words that we interface with all the time. Fruit prices are up -- housing prices are up -- wages are climbing -- productivity is falling -- the money supply is increasing -- government is spending more -- the list goes on and on. The list of causal suspects is so large that it is overwhelming. What really explains or causes sustained or durable inflation? Is there no simple or more simple way to think about it? Why are some experts ready to see it rise and become worrisome again?

The main source of their concern comes from economic recovery. We have a simple theory that says that prices respond to imbalances between demand and supply. Too much supply and prices go down. Too much demand and prices go up. During a recession the inflation rate often falls because demand is insufficient to buy all the goods and services produced. Whether demand is low because people have meagre resources or is low because government limits what they can buy, the outcome is the same -- demand is low and so is inflation. 

It makes sense that if experts believe that Covid is going to improve and if experts believe that buyers will start buying more -- then they believe that an economic recovery could be in our near future. Firms seeing demand snapping back will be more optimistic and will have more confidence that higher prices will stick. Some experts point out that regulations that made it difficult to buy have caused households to save a lot -- and when the economy improves they will want to convert those savings into cars, clothing, and who knows what else. 

Makes sense to me. But there remains one big question. When I used to teach in a classroom, I would refer to the slope of the supply curve. When the demand curve shifts rightward along a given supply curve, what happens to output and prices depends on the slope of the supply curve. Or in more common language -- a flat supply curve translates higher demand into a lot more output and not much price change. But a very vertical supply curve translates more buying into price increases. 

Why would a supply curve be vertical? 

Vertical means that firms simply cannot or will not increase output when demand increases. Today, firms have plenty of workers and equipment laying around. So a deficiency of inputs is not the problem. The problem is expectations. Why hire a bunch of workers or light up your plant if you are not pretty sure that the increase in demand will keep up? Why go to all the trouble to meet an increase in demand if you don't think you will make profits doing so? It would be much easier to raise prices for a while to see how things pan out. 

Why would firms be worried about future demand and profits? Probably for many reasons. Perhaps they are skeptical about the longer term effects of very unique and  risky recent government policies. Huge government deficits and endless zero interest rates might be cause for concern. Politics of regulation might enter into the equation as well. Raising the minimum wage often affects the whole structure of wages as everyone gets a bump. Higher wages might sound good for spending but it raises costs and reduces profit incentives for suppliers. 

We don't need to repeat every policy the Biden administration is contemplating to reduce the supply of energy and bring on renewables.  And I think it goes without saying that whether it is healthcare or education -- the Biden administration's emphasis on equity is bound to lead to concerns about business costs and profitability. 

Is inflation going to worsen? Probably so. It seems to me that policy is tilting the nation's supply curve in a vertical direction. As policy incentivizes buying yet penalizes selling, the outcome is likely to be less in the way of increased output and employment and more along the lines of higher prices. 

We are living through quite an economic experiment. The ride should be interesting. 




Tuesday, February 16, 2021

Full Employment and Recessions

In the past week, we have heard over and over from several politicians that it is wasteful to not attack unemployment. Unemployment is not only bad for the usual and obvious reasons, but now we are learning that if we do not attack unemployment quickly, its negatives will ossify. Long term structural damage will be the result of moving too slowly. They argue that we must move quickly to full employment.

How can one argue with laxity when it comes to unemployment? You don't have to know someone enduring the hardships of unemployment to see how devastating that condition can be. Loss of income. Loss of pride. The list of negatives is too long to list here. 

One can argue how to best reduce unemployment. I have a friend recovering from surgery. I wish she could get rid of that cast and go dancing tonight. Even if we could remove the cast and go dancing in her kitchen (it is Covid you know), it wouldn't be a good idea. It is going to take time for her foot to heal. I am trying to learn to speak Spanish. I'd love to speak Spanish to others. But I am definitely not ready for that yet either. 

Things take time. And while our politicians might have good hearts when it comes to the unemployed, I wish they also had good brains too. Unemployment has always been referred to as a lagging indicator. Those words mean that the unemployment rate lags the economy. When the economy recovers, it takes a while before employment catches up. There are lots of reasons for that. But the primary one is uncertainty. 

Imagine going through a recession. Your firm had to cut back output and it had to lay off workers. Profits became losses. Not a good time for anyone. Then the economy starts to recover.  More people are buying your goods. Many firms react cautiously. Is the recession REALLY over? Let's wait and see before we start making big investments -- let's wait before we start hiring a lot of employees. If the recovery is a flash in the pan, you don't want to have to reverse all those decisions. For the time being we have plenty of inventories to satisfy the new demands. 

In a nutshell -- unemployment is a lagging indicator. 

In the 2008-9 recession, employment dropped from 137.7 million to 129.9. It took 5 years (2014) for employment to return to 137.7. 

Now let's look at the graph below. I won't discuss every recession (indicated by vertical bars)  but notice the lagging unemployment rate. You see the lag, but first notice the unemployment rate at the beginning of a recession. For example, before the 1975 recession the unemployment rate was around 5%. After rising considerably after that, it came down but never got back to 5% even by 1980. 

Before the 1990 recession the unemployment rate was around 5%. It took until well after 1995 to return to something near 5%. 

Again, before the 2007 recession the unemployment rate was around 5%. It was after 2015 before it got back to that range. 

Stand back and look at the map. Since 1972, how many times did the unemployment rate fall below 6%? 5%? Not many.

Is "full employment" a realistic target? 

Look at the chart another way. Look at those nice time periods in which we did get the unemployment rate down. How long did that phase last? And then what happened? 

Reminds me of dieting. It is one thing to have a sensible diet. It is another thing to try to fit into those jeans you wore in high school. So your diet works and you fit into them one more time and then what? Soon you are back to wearing that mumu.

In February 2020, employment was 152.4 million. It fell to 130.3 million. As of December, it rebounded to 142.6. It ain't back to 152.4 yet -- but it's only been one year!

Why and how do today's anxious politicians today think they are going to use a huge stimulus to move us quickly back to unemployment nirvana? Do they plan to continue raising the national debt and keeping interest rates at zero for years? If so, how many years? If they overdo the stimulus, then what? If my friend tries to walk too much on her healing foot, then what? I think we know the answer to both questions. 




Tuesday, February 9, 2021

NYT Silliness

The New York Times ran a lead article a couple weeks ago -- by David Leonard -- Why Has the US Economy fared so much better under Democratic presidents than Republicans?

https://mail.google.com/mail/u/0/?pli=1#inbox/FMfcgxwLsJzngqwGrpwmjTxfQWSXkmhV

What a piece of junk. I realize that the NYT has a job to support all liberal/progressive causes unflinchingly, but this article has to be the biggest pile of dogdo (no insult intended to dogs) that I have seen from a so-called respectable newspaper. 

I wish I had better skills to reproduce or copy the tables from the original source but alas I can't. So please stick with me. 

Background. Mr. Leonard wants to compare the economic records of Presidents. So he takes time periods with D presidents and compares them with those of R presidents. 

In his first table, he shows that during Democrat presidents, job growth averaged 2.8% per year but only 1% per year with R presidents. With respect to GDP growth, Rs could produce only 2.4% growth compared to D's 4.6%. Sounds pretty damning. 

Read on...

The second Leonard table is a bar chart showing average GDP growth by president -- starting with Roosevelt at the top (more than 8% per year) and going to Trump at the bottom (about 1%) The bars are arranged in order of GDP growth. 

The order of Presidents by size of GDP growth: Roosevelt, Kennedy, Johnson, Clinton, Reagan, Carter, Ford, Nixon, Eisenhower, Obama, GHW Bush, Truman, GW Bush, and Trump. 

14 presidents. First, point. Do we have enough observations to make a conclusion? I don't think so. So this is not good stats. 

Second point. We know that what a president can accomplish depends on the make-up of Congress. How did that factor into the results? 

We also know that what a president can accomplish depends on stuff going on at the time. Did he take over after a recession? Was he a president during a war? After a global pandemic? Apparently none of that matters to the NYT. According to the NYT the important thing that matters for unemployment and output is the party of the president. 

What else to say?

If Ds are so good then why are Truman and Obama in the bottom 5 of 14. 

If the Rs were so bad, then why were Reagan, Ford, Nixon, and Eisenhower in the top half? 

What else was going to on to color the economy? Maybe Carter had strong growth -- but do you recall stagflation? Would you characterize his years as president as a great economic success? I doubt many people think of him as a great president. 

When Reagan had to stomp out inflation fires after Carter, isn't it amazing that he managed such strong growth during his time in office?

Is there something weird about the fact that the highest economic growth rates came from Presidents who were in office more than half a century ago? Maybe it wasn't so much the party of the President -- but the times they were in office?

Deciding how presidential party affects the economy is not a simple thing. The NYT owes it to its readers to not print rubbish. Of course, I guess rubbish is okay so long as it supports their causes. 

I don't subscribe to the NYT so I was not privy to the full article. But I did find this juicy NYT quote which apparently explains it all - Ds are smart and caring and Rs are not. 

I quote, "Democrats have been more willing to heed economic and historical lessons about what policies actually strengthen the economy, while Republicans have often clung to theories that they want to believe — like the supposedly magical power of tax cuts and deregulation." Democrats, in short, have been more pragmatic."

So there we have it. I am so glad we have a D for president for the next four years -- life will be splendid. We will have mature people running our government. No clinging to stupid theories. We won't have any silly tax cuts or deregulation of industry. 

There is a mature and technical literature around this topic. One good example of a real approach to this difficult question can be found at https://www.princeton.edu/~mwatson/papers/Presidents_Blinder_Watson_Nov2013.pdf

My wonderful colleagues, Fratianni and von Hagen, and I wrote our piece on this topic a while back.  "Testing for Political Business Cycles," Journal of Policy Modeling,  (spring, 1990).  pp. 35-59. 

The NYT apparently doesn't bother researching real work on their topics. 



Tuesday, February 2, 2021

Staying the Course

In a recent Wall Street Journal piece*, Jason Furman strongly advised President Biden and his economic team to “Stay the Course.”

Staying the course usually means sticking to a policy. If you decided to start a diet with no barbecue ribs – staying the course means you don’t eat any barbecue ribs. I am not sure what it means for Biden to stay the course. He has only been in office for a short time. He has no course. Should he continue Trump’s policies? Should he continue Obama’s? Or should he continue FDR’s course?

Anyway, Furman doesn’t really mean stay the course. What he means is that Biden should not stay any particular course. When it rains, Biden should wear a rain suit. When it snows, he should don his best parka and winter boots. When the sun shines, he should wear cool aviator’s sunglasses.

This sounds logical and easy and cool. Especially the sunglasses part. But wait, we learned in econ the difference between ex ante and ex post. Ex post we know if it is raining, or snowing, or sunny. But ex ante is where it is all at. Suppose you don’t trust the weather lady and you have to decide what to wear before you actually know for sure what the weather will be?

Now, all of a sudden, this is no longer a trivial decision. What do you wear if you are not sure of the weather?

What’s this got to do with Furman? Furman says Biden should keep the stimulus accelerator down as long as the economy needs it. Then when the economy clearly does not need the stimulus, take his foot off the gas pedal. Sounds cool.

But wait. Our problem/challenge is not about the economy in the past. It is about the future. Today's policy can't change the past. Policy always takes time to have impacts. You put in a policy today to ward off the evils of tomorrow. Just like farmers who plant in the spring, you don’t harvest until later. 

If the future is easily knowable, this is all trivial and meaningless. But farmers don’t know how cold and rainy the coming spring will be. And Biden does not know how weak or strong the economy will be in the next six months. Maybe the last zillion dollars of stimulus will kick in. Maybe it won't. 

We don’t know the course of the future economy? No … we don’t! Would Jason Furman please show me the models he uses that predict the future of the US economy?

Will he also look into history and show me that similar stimulus programs did not backfire? I think he is old enough to have experienced or at least learned what happened to the US economy in 1969 and then again in 1979.

Larry. Silly boy. That was so long ago! This same thing has happened since but these two examples are too beautiful to forget. These two examples defined a new term – Stagflation. Stagflation was a terrible time period in which both unemployment and inflation soared.

You do not want to live through time periods when inflation makes goods too expensive to buy and unemployment prevents you from finding work and income. No government would ever purposely visit its people with stagflation!

So why did they do that? Not because they planned it. They did it because, just like Furman, they cannot forecast the future. They don’t know when the economy no longer needs stimulus and thus, they don’t know when to back off the accelerator. Waiting too long to remove the stimulus is like waiting too long to tend to a broken leg. You have to do it in a timely fashion or you create an even bigger problem.

Waiting too long to remove stimulus causes inflation and unemployment to rise. That is called a No-Win situation. Why? Because once you have twin problems in the economy, the traditional macro tools no longer work. If you attack high unemployment you make inflation worse. If you attack high inflation, you make unemployment worse. 

So Mr. Furman,  Ms Yellen, and Mr. Biden. Please do not try to fine-tune the economy like you would fine-tune your radio. Your dials might move you from one station to the next -- but there are no dials for the economy. Pretending that there are will get you nothing but static. I lived through the 1970s once. Please don't put us through that again. I especially didn't like the leisure suits and bell-bottom jeans. Great advice: Don't wear a bell bottom if you have one!

Tuesday, January 26, 2021

Real GDP 2020

Two weeks ago, we looked at changes in employment by sector in 2020. This week we continue looking at sectoral change, this time using GDP statistics. Real Gross Domestic Product measures output. GDP starts with sales figures and then the price change is statistically removed so that what is left is output.

The numbers found in the table below show dollars of output. For example, real GDP went from $19.1 trillion* in Q3 2019 to $18.6 trillion in Q3 2020. This $545 billion reduction is independent of whatever price changes might have occurred*. It reflects only the quantity of goods and services produced. In Q3 2020 we got a smaller pile of goods and services than we got in Q3 of 2019. We say output fell.   

It is traditional to present real GDP figures in terms of the destination of the goods -- the buyers. Most students taking macroeconomics courses learn the equation for real GDP:
            
            Real GDP = C + I + G+ NX 

Where C represents Personal consumption expenditures (PCE) -- the output of goods and services that mostly went to consumers; I is Gross Private Domestic Investment (GPDI) which mostly goes to business firms for capital goods and to people who buy new houses; G is government purchases of goods and services; and NX measures the difference between goods and services exports and imports to foreign countries. 

The top of the table shows these summary categories. The parts of the table below the top break each of the main categories into output changes for very specific segments of each of the main categories. Since these breakdowns differ from the sectors presented last week for employment, we learn a little more about recent sectoral impacts this week.  

Let's start with the broader categories to describe most of 2020. The top line reports that real GDP fell by 2.8% from Q3 2019 to Q3 2020. Of the major categories, only 1 showed an increase in output over that year -- the government bought 3.6% more goods and services during that year. You see a 7.2% increase for net exports but that plus sign is misleading. I will say more about that below. Outputs bought by consumers and firms, in contrast, declined. GPDI fell by 3.4% and PCE by 2.8%. A quick summary would be to say that private (not government) domestic purchases declined in 2020. 

The PCE story is interesting. Overall it fell by 2.8% but notice that consumers kept on buying goods (+$347.2 billion) while they quit buying services (-$622 billion). All but one of the categories of goods, from motor vehicles (+7.3%) to food and beverages (+6.4%), increased. Gasoline and Other energy goods was the only main category of goods spending to show a decline (-9.9%).  PCE fell because of a reduction in the purchases of services. Recreation services (-34.3%) and Transportation Services (-24.1%) led the sectors downward. 

Gross Private Domestic Investment has three key parts: Non-residential investment, residential investment and inventory change. Thus we explain the $116 billion reduction in GPDI by those three categories. Of those three, Non-residential investment was the main negative component -- falling by about $125 billion. That was driven by reduced business spending on structures, equipment, and transportation equipment. Businesses did buy more information processing equipment (+$65.3 billion). 

The main positive part of GPDI in 2020 was residential construction -- or the building of new houses. That rose by almost $44 billion or 7.2% in 2020. 

The negative almost $48 billion showed that inventories fell in 2020. That negative number, therefore, is a positive sign that sales were higher than input. But since those were goods produced in an earlier time period, those sales actually subtract from output in 2020.

That leaves us with net exports -- a measure of international trade. While the US exported $950 billion of goods and services to the world during 2020, we also imported a little more than $1 trillion from the world. Thus we say we had a trade deficit in goods and services. Notice that both exports and imports declined in 2020. So we say that trade was lower. But since exports fell more than imports -- the trade deficit got bigger -- the negative number became even more negative. 

Finally is government spending on goods and services. Here we see vividly the impact of the power to print money. We see that a recession prevents state and local governments from spending more while the Federal government finds it possible to spend without increased tax revenues. The latter is not constrained legally from having gaping budgetary holes. And they can fund those holes by creating money. In the past year we saw state and local government spending falling by $35 billion while Federal government spending increased by almost $47 billion. 

* We can value output in terms of dollars and cents by using the prices that existed before the output changes. Thus the dollars and cents number only reflects the changes in output and NOT changes in prices. 
 

Source: bea.gov

2019

2020

$

%

Table

Q3

Q3

CHG

CHG

Part 1. Summary

billions

billions

billions

Gross domestic product (GDP)

19,141.7

18,596.5

-545.2

-2.8

Personal consumption expen.

13,301.3

12,924.7

-376.6

-2.8

Gross private domestic investment

3,445.7

3,329.6

-116.1

-3.4

Federal government spending

1,288.5

1,335.1

46.6

3.6

State and local government spending

2,028.3

1,993.1

-35.2

-1.7

Net Exports

-950.2

-1,019.0

-68.8

7.2

Part 2. Details

Personal consumption expen.

13,301.3

12,924.7

-376.6

-2.8

Goods

4,805.2

5,152.4

347.2

7.2

Durable goods

1,797.8

2,028.2

230.4

12.8

Motor vehicles and parts

535.1

574.1

39.0

7.3

Furnishings and durable household equipment

414.4

460.9

46.5

11.2

Recreational goods and vehicles

605.9

748.5

142.6

23.5

Other durable goods

263.5

284.0

20.5

7.8

Nondurable goods

3,023.9

3,154.5

130.6

4.3

Food and beverages purchased for off-premises consumption

991.6

1,055.0

63.4

6.4

Clothing and footwear

412.2

412.5

0.3

0.1

Gasoline and other energy goods

444.8

400.7

-44.1

-9.9

Other nondurable goods

1,156.5

1,249.5

93.0

8.0

Services

8,541.5

7,919.6

-621.9

-7.3

Household consumption expenditures (for services)

8,188.4

7,525.1

-663.3

-8.1

Housing and utilities

2,199.5

2,224.5

25.0

1.1

Health care

2,234.0

2,095.2

-138.8

-6.2

Transportation services

447.4

339.8

-107.6

-24.1

Recreation services

502.6

330.3

-172.3

-34.3

Food services and accommodations

847.1

680.1

-167.0

-19.7

Financial services and insurance

858.2

871.8

13.6

1.6

Other services

1,118.2

967.4

-150.8

-13.5

Gross private domestic investment

3,445.7

3,329.6

-116.1

-3.4

Fixed investment

3,378.9

3,314.7

-64.2

-1.9

Nonresidential

2,783.9

2,659.0

-124.9

-4.5

Structures

552.6

464.7

-87.9

-15.9

Equipment

1,263.3

1,230.1

-33.2

-2.6

Information processing equipment

494.3

559.6

65.3

13.2

Industrial equipment

251.4

236.1

-15.3

-6.1

Transportation equipment

277.1

220.2

-56.9

-20.5

Other equipment

252.2

247.0

-5.2

-2.1

Intellectual property products

974.0

981.1

7.1

0.7

Software

452.9

476.4

23.5

5.2

Research and development

442.7

439.5

-3.2

-0.7

Entertainment, literary, and artistic originals

83.9

74.5

-9.4

-11.2

Residential

601.9

645.5

43.6

7.2

Change in private inventories

44.0

-3.7

-47.7

-108.4

Net exports of goods and services

-950.2

-1,019.0

-68.8

7.2

Exports

2,536.6

2,166.5

-370.1

-14.6

Goods

1,775.8

1,610.5

-165.3

-9.3

Services

764.4

581.3

-183.1

-24.0

Imports

3,486.8

3,185.5

-301.3

-8.6

Goods

2,944.4

2,827.3

-117.1

-4.0

Services

545.2

393.3

-151.9

-27.9

Government consumption expenditures and gross investment

3,317.7

3,327.2

9.5

0.3

Federal

1,288.5

1,335.1

46.6

3.6

State and local

2,028.3

1,993.1

-35.2

-1.7

*These quarterly numbers have bee annualized.