Macro is Asleep

Let’s suppose someone thought you were awake, and you were really sound asleep. They would talk to you and maybe they would ask you to do things and you would not move or speak. That would be surprising to your friend and maybe even upsetting. That’s why I am writing about macro being asleep. It is causing a lot of problems.

What is macro, and how could it be sleeping? I found this definition on Investopedia (https://www.investopedia.com/terms/m/macroeconomics.asp):

Macroeconomics is a branch of the economics field that studies how the aggregate economy behaves. In macroeconomics, a variety of economy-wide phenomena is thoroughly examined such as inflation, price levels, rate of growth, national income, gross domestic product, and changes in unemployment.

This definition reveals that macro is about the economy as a whole. It looks at GDP, for example. GDP is the sum of all goods and services produced. Macro does not emphasize toaster ovens or massages or the value of an airfare to Munich. It focuses on one number that represents EVERYTHING that is produced. It also doesn’t zero in on prices of jeans or a haircut – it emphasizes the average price of everything. Some people like to call it “the big picture.” As if we were looking down on the US economy from space and we couldn’t see all the detail.

In macro, we ask if national output is going to rise or fall. Will the inflation rate be 3% or 5%? With that in mind, economics or even what we might call national economics is much broader than macro. We might be interested in the parts of a national economy. How is the coal sector doing? What’s going on in Minnesota? How productive is the retail sector? What’s with Amazon.com?

So when I suggest that macro might be sleeping, I do not necessarily mean that we don’t have economic questions and challenges in the USA. Some of these issues can be national in scope but they are not MACRO.

You might react to above by saying who cares? If it is economic and if it affects the US, then why split a hair? Because it matters for both understanding and for policy. If you have a heart problem, you don’t go to a general practitioner. You go to a cardiologist. They are both doctors and both can treat you, but a GP and a cardiologist examine you differently and have very different options for your treatment.

As I see it today, we are confused about the US economy. We put on our macro hats to view our problems and policies but we don’t really have macro problems now. Macro is asleep.

What’s a macro problem? A recession with very high unemployment is a macro problem. Deflation is a macro problem. Hyperinflation or even high inflation can be a problem. A labor shortage could be a macro problem. And while we worry today that any of those problems could happen in the future, we mostly lumber along today with employment and output growing and inflation under control. 

Notice too that our typical macro policies are on hold. We had a massive government fiscal stimulus after the recession hit in 2008. We pumped money into the economy like a squadron of helicopters dousing a forest fire. But that was years ago and now we talk about normalization of these policies. We are not discussing an aggressive set of monetary or fiscal policies to either spur the economy on or to prevent rapidly rising inflation.

So whether it is macro indicators or macro policies, macro seems to be on hold, asleep. But don’t we have national economic problems? The answer is yes. They just aren’t macro and don’t require standard macro policies. But we are not used to thinking that way. It’s the economy, stupid. Get on with the macro! And that’s our problem. Macro policies don’t fit our current problems. We don’t really know what to do.

What are our national economic problems? What a question! We have plenty of them. But since we both have limited time and energy for this, let’s focus on four. The first is distribution of income. Economists have no consensus on what an ideal distribution of income is. But if it walks like a duck and quacks like a duck, then it might be a duck. What I am saying is that the distribution of income is probably out of whack. No macro stimulus policy is going to permanently change that. We need to seriously address this issue while muttering the oath that one should not throw out the baby with the bath water.

The second and related issue is poverty. President Johnson decided to have a war on poverty. Walk through the streets of any city and you will realize that we did not win that war. I know this is a crazy idea, but to win that war we probably need to focus on poverty. We don’t do that now. We have housing programs. We have food programs. We have shelter programs. We have substance abuse programs.  We have job retraining programs. How many separate programs do we have? That’s dumb. We should have one program. The goal of that program is to treat each person until they are no longer poor. Okay – some problems cannot be solved. But I would bet that a program focused on poverty would have a much better record than one with a thousand parts that is not focused on poverty.

A third solution for national economic problems would aim policy at industrial evolution. We are not a socialist country, and I am not recommending that government take over the economy, but I am suggesting that whether it is energy or artificial intelligence or small business, we could use government funds to both study and incentivize growth that would keep America competitive in an increasingly competitive world.

Finally, if I was Czar, I would work on racism in this country. You do not have to be a genius to know that the Golden Rule trumps just about everything else. We teach our children that starting a conversation with a nasty word is not the way to have a productive conversation. Racism festers in this country, and it holds us all back. We have a lot of laws that should lead to more equality but gaps remain in coverage and enforcement. Calling each other names is not going to do much to move the ball forward. Realizing that this is the most difficult of problems ought to engender open communication and respect since slogans do not accomplish the task. Talking with each other could go a long way as we hammer away at each and every vestige of hate. This one is worth the effort because this one impacts the other three I mentioned above. It is impossible to solve those and other problems in an environment of resentment and distrust.

Lesson 21 Macroeconomic Fuzziness

I had another one of those chats with a nice person who reads my blog. It always starts out with a nice compliment but then winds its way around to the fact that some people cannot understand one thing I say. They count the number of times I use the word JD and then go back to their usual productive lives.

This is both frustrating and understandable. I started learning macro from Professor Bill Shaffer at Georgia Tech in 1965. Since that first course, I have taken an embarrassing number of econ courses in college and graduate school, and I've taught an even larger number of econ courses since starting my career. While some of my econ colleagues were rocket scientists, I always loved the idea that you could help people understand the world better by studying econ.

Because some of my blog friends don’t have a lot of background in econ, I wish I could help them better understand what is happening “out there”. And there is a lot happening. The economy is or isn’t about to implode. The Fed might raise interest rates three or four times in 2018. The Federal government is planning to make its very large debt position even larger. Inflation is going to rise, the value of our stocks is going to fall, and we will all soon be panhandling on the sidewalk in front of Nick’s English Hut.

There is plenty “out there” to discuss. And that’s the problem, or should I say that’s the challenge. Economics has three parts. First, economics wants to provide answers about what is going to happen in the future. Second, to do that, economics must have some basic fundamentals that can be applied to the future. Third, economists are always checking the reliability of these fundamentals by looking backward. If they seemed to hold in the past, then maybe they can be used to think about the future.

Fundamentals? There are lots of them. For example, we believe that if you give a person an extra dollar that person will spend some of it. The marginal propensity to consume (MPC) tells us how much of an extra dollar received will be spent. (Some of the extra dollar goes to taxes and some goes into saving. The rest is spent.) This fundamental is used, among other things, to estimate how much extra spending will be done by people receiving tax breaks in 2018 and beyond.

The MPC is a potentially useful idea but we don’t want to apply this idea if it isn’t true. So we look backwards. Economists do studies to inquire how people really act. Give a dollar to Nolan. Let’s see what he does with it. Here’s a dollar for Ashley, let’s see what she does with it. We won’t all do the same thing with an extra dollar. But studies of the usefulness of the MPC in macroeconomics look to see if it is a reliable indicator of what all of us did when given an extra dollar. Thus, the past can be very useful. How have Americans behaved when given tax cuts in the past? When Americans were given a tax break of $1 billion, did they spend more on goods and services? If so, how much? Looking at more than one tax cut over time and over many families, did they have a reliable spending response?

Fundamentals can be argued about in terms of basic intuition. Focusing on income and spending might be too narrow. And history might find that tax cuts have had different impacts at different times. Thus, we might have a lot to argue about the past. If we can’t all agree about the nature of an economic fundamental and its reliability in the past, then clearly we will have a lot to argue about its application to the future.

Atoms don’t behave like humans. Apply heat to an atom and it behaves according to physical laws. Physical sciences, therefore, are more useful for predicting the future. Social sciences have fundamental laws of behavior but because they involve human behavior, they have less predictability.

We don’t give up trying to predict the future, though, just because Nathan doesn’t act like an atom. People are very curious about the future and are willing to tolerate a less than 100% accurate economic prediction. This underscores why macroeconomics always seems so iffy and controversial and why economic predictions are often off the mark. We spend a lot of time arguing about fundamentals and even more time disagreeing about whether a given fundamental was accepted or not accepted by a given past historical period.

To complicate matters further, we have ideologies mucking up our discussions. If macroeconomics sounds precarious based on past behaviors of fundamentals, this apparent unsoundness is compounded by the fact that we have extreme camps of economists who differ almost as radically as Catholics and Baptists. Conservative economists believe government is an evil that disturbs the natural and good order of things. Liberal economists have faith that the government is necessary to restore order and save us from the greed and stupidity of mere mortals.

This ideological split taints every fundamental and every economic prediction and ensures that each camp will totally disagree with the other ones about everything from peanut better to BB guns.  

This brings us full circle. It is fun and challenging to help some of you understand current macroeconomic issues. To do that takes blog posts that can never lack at least a few ifs, ands, and buts. A discussion of any topic worth writing about will be full of definitions and theories along with attempts to verify them with historic episodes. But history never proves anything perfectly, and ideology always provides ample grounds for near-theological disagreement. So I will ask for your patience and hope that this little post today helps you understand why things always have to sound so complicated.

Lesson 0. Why Study Macroeconomics

Recently a friend who reads this blog blurted, "I like the blog and all that, but what am I supposed to get out of all your words?" Apparently I have been putting the proverbial cart before the horse. So I am creating one more lesson-style post and numbering it zero to communicate the idea that this is supposed to be the beginning of one’s journey with macro. This is supposed to be the equivalent of those first paragraphs of a first book on macro. And, of course, it is the hardest one to write. But I do have a full glass in front of me. 

One place to start is with the phrase forest from the trees. Macro has a lot of parts, or trees, but macro is bigger than the sum of its trees. Wikipedia defines macro as “the part of economics concerned with large-scale or general economic factors, such as interest rates and national productivity.” I read that and almost fainted. It breaks every rule of definitions. About the only words I understand in that definition are large and scale – and even those words are misleading. There are lots of large things (e.g. the Goodyear blimp and Refrigerator Perry) but not all of them are macro.

So let’s start over. First, macro is a science. Macro is a science because its main goal is to explain stuff and thus improve our lives. Physics is a helpful science because it tells you that after you throw a sharp dart up into the air, you should move or it might land on your head. Astronomy helps us to understand why the sun “comes up” each morning. Biology explains why eating too many extra-large Big Macs might not be a good idea. Science is our friend.

Macro is our friend too. It takes the economy of the country as its focus. While biology might focus on the whole body, macro asks questions like: How is the German economy doing? What’s up with Greece’s economy? While the concept of a body is very specific, the idea of the economic system of a whole country is less tangible. And thus macro is already in trouble. The doctor can touch your arm but the economist cannot touch the national economy. It is a figment of our imaginations. It exists only in our minds. And some of us have some pretty whacked-out minds. 

That sounds pretty bad. But the truth is that we use such counterfactuals for much good. You read fictional stories to your children hoping they will learn important lessons about life. Scientists stick millions of thingies on semiconductors that are so small that you can’t see them, and yet we are able to do amazing things with cellular phones and their apps. In biology class we experiment on fetal pigs, and despite the fact that they are not human beings, we learn a lot about human biological systems.

With macro, we can learn how the economy impacts our lives. The economy is like a train with many cars. Each car might be very different but when the train goes forward all the cars go forward. We might not be able to touch the national economy but we can try to improve its outcomes. At the heart of macro is something called GDP. GDP is not a tangible thing. It is an idea. It is defined as the nation’s output of goods and services. Think of a huge pile of goods and services and that is what GDP measures for given quarter or year. 

Every nation produces tangible goods like autos and JD. Every nation produces services that disappear the second you consume them, like when the Uber pulls away or the bartender moves on to serve another customer. Your drive in an Uber's Prius is over the second you step out. Okay, you might have a nice memory. In the bartender case you do have a lovely Old Fashioned but that drink is a good. The act of the bartender delivering it was the service.

In 2016 the US produced about $18.6 trillion dollars of goods and services. That's quite a pile! Can you touch that $18.6 trillion? No! You personally bought parts of that amount but the “whole enchilada” is the macro concept. GDP is like a basketball team. We cheer for it. Go GDP! Sure we have favorite players, but it is the team that we focus on year after year. In that sense, a basketball team is definitely not a tangible you can touch. It is a concept (and to many people, a very important one).

When GDP falls in a year, we call that a recession. We frown during a recession because we get less goods and services – and we dislike the fact that many people lose jobs as part of the contraction in output. We smile when GDP rises, and we clap when it rises faster than normal. Just as a basketball coach is expected to produce good results for the team, we expect our government leaders to create the right policies for growth of GDP. And like basketball coaches, even the best leaders win some and lose some. No one is a winner all the time.

  

I am just about down to the ice cubes. But I think I am almost finished. Macro is a science and as such is supposed to help us improve our lives. Macro uses concepts that are not always tangible but which are developed to help us think more productively about how to improve the nation’s economy. Macro devises policies and sometimes they succeed and sometimes they don’t. But like the meteorologist who missed the exact speed and location of a hurricane that came on land near Sanibel Island, the macroeconomist is constantly evaluating our macroeconomic science and policies with an eye toward learning from one’s mistakes.

Finally – since macro is about a whole nation – it is not about you or me specifically. Macro is not about Hoosiers versus Coloradans. Macro is not about workers versus owners. Macro is not about girls versus boys. Macro is not about JD or corn or oak barrels. Macro is not really about the rich versus the poor. The field of economics has categories to investigate each of those things, but macro tries to focus on the whole economy of a nation. When macro policy starts trying to be everything to everyone, it always fails at doing the one thing it is intended for – helping the economy to grow more so we all have jobs and more goods and services to play with!

LGBTQs and Macro

Last week was very disappointing for me. I wrote a blog about a non-macro topic and it got more hits in one week than any of the 300 pieces I have written in the last five years. You would think I would be happy about that – but it tells me two things. First, nobody likes macro. Second, despite my hard work over five years many of you admitted to me that most of what I write you don’t understand at all. So you are outed – you don’t like macro and you think I stink at macro.

As my mother would say, Larry, eat your peas. She would also say make lemonade out of lemons. So I made some lemonade and that didn’t seem to help at all. Then I decided I would write a blog focusing only on things I know little or nothing about. That gives me a lot of leeway. But then I couldn’t think of anything to write about. Then I decided I would write a blog only on LGBTQ topics. But I wrote everything I know about that last time. Finally I decided to sip a little JD and then I hit upon a great idea. I will continue to write about macro topics and I will try to make them understandable to anyone over the age of six having a non-negative heartbeat.

I did that once. When Jason was a toddler in red sweatpants I wrote a series of lectures on macroeconomics for him. He went on to a degree in economics in college and excels at disagreeing with almost everything I write in this space. So that proves that I am capable of writing great things if only I try. It also shows that if I write about Ashley in one blog I have to say something about Jason in the next one. 

As a child and then as an adult I always loved Kraft Macaroni and Cheese. ChiliMac is pretty awesome too. My favorite song was Mac the Knife. So it was only natural that I would want to study mac-roeconomics. I was dismayed when I found out that macroeconomics was not food study and that it involved math, graphs, and something called variables. But I persevered. It took three universities and four degrees to figure out supply and demand. With that knowledge safely tucked under my beard Indiana University decided that hiring me was cheap and easy and letting me loose on students might not destroy more than a hundred years of academic tradition.

With all the above filler as an introduction I now turn to my true love, nude beer making. No, just kidding. I now turn to macroeconomics. Since many of you never completed a macroeconomics course and since most of you have forgotten whatever you might have learned in that course, I am now going to make things so crystal clear to you that when you read future blogs you will understand them perfectly and you will be able to explain those blogs to your friends and pets.

The place to start for you rookies is with anatomy vavava voom. Suppose you are going down the street and your friend says – Hi, how are you? You say, fine. That explains macroeconomics. In macroeconomics your friend is Canada and you are the USA.  Macroeconomics is all about the economic health of a country. Your friend then says – you don’t look so fine. You look like crap. Your GDP is sagging, your unemployment rate is flabby, and your inflation is barely beating.

You go to your doctor to get another opinion. He takes your blood pressure, temperature, and asks you to turn your head and cough. He looks at a bunch of indicators and uses them to explain why you look like crap. You feel better knowing that there are a bunch of things wrong with you. He then makes some outrageous guesses about what is causing your indicators to be so negative and gives you a prescription for drugs including Viagra. Or he might suggest that you go to a specialist. He then charges you enough money to pay for his next vacation on Jeju Island.  Yes, she will fly first class.  

Hopefully you are still awake and are getting the point. You look like crap. No just kidding. You look just like your Mother. Kidding again. The point is that macro is about the health of a country. Macroeconomists make huge sums of money despite taking the summers off by making up indicators that measure the macroeconomic health of places like the USA, Greece, and Oz. And like everything else on this planet we sort of know what is going on but we have lots of disagreements. What does it mean when your doctor says you are healthy? What does it mean to be healthy? There could be lots of opinions here. So we have a lot of indicators that must be evaluated.

The same is true of macro. There is no one single thing that determines the economic health of a country. So we mostly agree to analyze a bunch of economic indicators. One that gets a lot of attention is GDP or Gross Domestic Product. In class I usually refer to GDP as stuff we produce where stuff is a highly technical term meaning all that crap that passes for a good or a service. Then there is the unemployment rate which hardly needs explanation despite the fact that the US Department of Labor publishes a million different versions of it. The list of macroeconomic indicators grows from there including such spicy items as inflation, interest rates, exchange rates, earnings, debt, the length of Donald Trump’s hair, and more.

Okay – so for you literature and philosophy majors I will stop there. This is our introduction to macro. Macro is all about the health of a country’s economy. It includes numerous indicators when taken together can help you decide just how healthy the economy is. The implicit assumption is that once you make this judgment, you then try to decide WHY the economy is not at its peak health and then figure out WHAT we can do to improve it. That cause and effect approach will be covered more completely in lessons 2-768.  Or you could just go backing to listening to your favorite Jimi Hendrix song, Purple Macro. Okay admit it – Macro is very easy and cool.