The G20, gruel, and low-hanging fruit

The G20 is meeting in Seoul to deliberate and the buzz is that they are going to focus on exchange rates and trade, among other things. Expectations are high among some people that this body will help resolve current trade issues. There were similar high expectations when the members of the World Trade Organization started the Doha Round. And there was good reason for optimism.  Globalization has shrunk the world. We are all more highly related in terms of business and economic policy. The global recession called for a coordinated approach to the slowdown and the financial problems that caused the worst economic collapse since the Great Depression.  Yet little has come of the Doha Round, coordinated financial reform, solutions to trade imbalances or currency competition. While it is true that protectionism has not raised its ugly face as much as it could have, there seems to be more than the usual amount of finger-pointing and populist face saving.  Deficit countries complain about surplus countries and vice versa. Germany wags its boney finger at the US for its inability to let go of its warm blanket – stimulus. Others worry that Germany, Great Britain and Canada maybe over-doing austerity.

Wazzup? Nothing more than common sense. While most of us love the benefits we get from clubs and teams we are not ready to give up who we are just for the sake of camaraderie. You love golf and are willing to shell out the monthly dues for the country club, but you aren’t about to throw out your favorite golf shirt just because other members are offended by it. Or you love the friends you met in your new bicycle club but you draw the line at 50 mile rides at 7 am on Sunday morning. And what is this – say again – I have to drive across town to meet with my Chocolate Martini Club because some of the members don’t have cars and prefer a location closer to their apartments? In short, we like the benefits from integration but there are limits to how much we really want.

The same can be said for international integration. While 16 countries of Europe decided to tie their sails to the euro, that doesn’t mean that the French will give up their snails or the Germans will welcome you in the morning with a bon jour. Politicians in each country are elected by their citizens. If globalization brings benefits to Spaniards, then they will applaud further integration. But when they believe that a particular new attempt at further integration will bring negatives to Italy, then Italians will throw their pastas in the face of any Italian politician who dares to sign the new free trade agreement.

In a paper I wrote some years ago, I talked about low-hanging fruit. Starting in the 1980s it seemed that globalization brought easy benefits to most countries. As tariffs came down in leaps and bounds, countries found that freer trade was like a tide that raised most boats. But as we approach 2011 and countries seem to have more equal strength and say-so than ever, the new  agreements seem more like zero-sum games. So each side fights tooth and nail. Each politician would rather say NO and go home and be honored, than make an  agreement that has some potential to harm his or her citizens.

The low-hanging fruit is gone. The WTO and other formats require consensus. How do you get such consensus with 20 diverse countries much less 160 of them? What you should expect – in the real world – is discussion and more discussion.  Clearly as the value of the dollar continues to fall, export-oriented countries whose well-beings are tied to strong exports will want to push harder to stop the dollar’s trajectory. Already we read more and more about weaknesses showing up in Germany, Korea, and several other countries. And many countries are not happy with the US for flooding their economies with dollars. But it is not in the immediate interest of US policymakers to have a stronger dollar or a more responsible monetary policy. Wam bam – there is no warm hug there.  With respect to trade problems in general – we cannot expect much fun in the sun either. Even with a declining dollar the US trade deficit is not going to disappear until US savings increases or our foreign friends reduce their savings.  But national savings in any country do not easily change since they are tied to culture, institutions, and very long habits.

So what we can conclude about this G20 meeting in Korea is that there will be no home runs and no singing in the sauna. The leaders are smart enough to know that nothing will be gained by sharp rhetoric and mean disagreements. Instead we will receive flowery speeches and unintelligible communiqués.  Milk toast will be abundant.  We have two things going on. We have a very difficult world economy  with no easy solutions. But we also have leaders who want to appear like they are doing something for their people. Since they know the real solutions are just about impossible and may mean some real sacrifice, we will get gruel. No low hanging fruit means we eat gruel! Bon apetit

Currency War – My Mom’s tougher than your mom

The current discussion about a Currency War gives me pause to think about how far we have come during my life. I am at the leading edge of the baby boom because my father had one thing on his mind when he jumped ship at the end of World War II. So while I didn’t really live during WWII I feel that I can claim a connection. That was a hot war and there was no question about the meaning of war and that we don’t want to do anything like that again. While I missed the Korean War by being too young, I was just perfect to join the US Air Force and was able to participate in Vietnam.  I swore to the medical officer during my draft physical that I had flat and very smelly feet, but that didn’t seem to deter them from inviting me to join. Those wars were nothing to replay again. I spent most of my enlistment in an air conditioned office but we all know the horrible outcomes that all sides suffered from in Korea and Vietnam.

Most of my life, however, was impacted by a cold war which pitted my home country against the Soviet Union. I recall being a teenage boy and looking south in the Miami sky on the day that Kennedy called Krushchev’s bluff – a little game of missile chicken near Cuba.  I was wishing that I was from a richer family that could afford to dig a fallout shelter in South Florida. That was no fun either and we were all relieved if not elated when the Soviet Union imploded. I remember a jubilant colleague telling me that we would now be in an era of peace. No more war! What a great feeling.

Of course, what neither he nor I really foresaw was how the cold war between two key giants froze the outward manifestations of hundreds of years of animosity in many places of the world. As the cold war disappeared from memory banks, we have seen increased levels of conflict in former Soviet Republics, the former Yugoslavia, the Middle East, and more. We couldn’t be farther from a world of peace! In some ways we are even worse off than we were during the Cold War.

In this present context we read about currency wars. My first reaction is that this currency stuff has no connection whatsoever with a war. I don’t know why the press describes it in those terms. Maybe it sells more soap? In fact, I am not even sure that I understand who the enemy is and how we would fight them. In international trade as in all forms of trade there is competition among the players and they each try to gain their shares of the pie. In a time of great economic uncertainty when the world economy is growing slowly it makes sense that every firm and every government will want to compete harder to keep from losing business.  While war does involve a form of competition, competition frequently exists without any hint of war – from Dictionary.com here is one definition of war –“a conflict carried on by force of arms, as between nations or between parties within a nation; warfare, as by land, sea, or air.”

It is self-defeating to call trade competition a war even if there are elements of unfair competition and protectionism. It confuses people and you know how easy it is to confuse the people in our government!

In my last post I documented a trend in financial trading that when combined with our goods trade deficits makes it pretty clear why the value of the dollar has been falling. Add the Fed’s alleged policy of a new vigorous round of quantitative easing and you have even more pressure on the dollar to fall. In today’s world of global competition where many countries are VERY reliant on their exports – no self-respecting populist official can sit around drinking expensive imported beer and let their currency appreciate against the dollar. 

Holy cow –imagine the leaders in Brazil or Singapore or Japan drinking their Budweisers in their new hot Chevrolet Cobalts telling the folks at home that it would be great for world order if the dollar depreciated another 20%. And it’s not just the dollar. Recall that our friends in China like to peg their currency to the dollar. So when the dollar depreciates against most world currencies, the yuan is also depreciating again the yen and the won and the real and the Singapore dollar. Hmm – not only is the US seemingly getting a trade advantage, so is China. Now that gets my jets in an uproar and it makes me want to depreciate and I don’t even have a currency.

Okay – so back to war. Who are we going to fight here? Answer – no one. Put your Rocky dolls back in their holders and cool your jets. What we have here is a bout of international trade instability. And it is a unique bout. In past currency crises it was possible for enough nations to come together and decide it was a good time to work together to either appreciate or depreciate the dollar. But as I described above – that would not really fit the current situation because just about EVERYONE wants to depreciate. You can pine away all you want for a return to the gold standard or gold exchange standard – a time when exchange rates were largely fixed – but that ain’t gonna happen here either!

So what is the solution? First, quit calling this a war. Second, use common sense. There are fundamentals that are causing exchange rate problems. Fundamentals often take time to manifest and therefore it takes time to solve the problem. So don’t be in too much of a hurry. Third the US has to save more at home and spend less abroad. That will help reduce the downward pressure on the dollar. Fourth, the Chinese need to save less and spend more at home and that will reduce their need to rely on exports. That will make it easier for them to tolerate a yuan appreciation. As the dollar rises this will take some pressure off the need to have the Yuan fall and the other countries will be able to let their currencies float without harm.

You can call it a war and you can scream that you want the government to fight for your country’s exports, but none of that is going to do a thing in the face of real and fundamental international trends and cycles. A string of competitive devaluations or other forms of export protection will do nothing but exacerbate the problems. “My mom is meaner than your mom” just gets flung back in your face squared. Once people begin to see China, the US, Germany, Korea, and other countries addressing the real causes of trade imbalances then you will see this exchange rate issue diminish. Until then, let’s hope Obama doesn’t jump in the ring with a sumo wrestler or a Chinese bear.

The dollar is down for the 10-count

Recently the dollar’s value has depreciated and there are quite a few stories being written. As in most interesting topics in economics, the answers are not simple. There are many things that impact the value of the dollar but in this post I want to focus on a three year trend of global financial flows. The main conclusion of this post is that recent changes in the value of the dollar have very little to do with all the fuss over China. Many of us have worried about what would happen when foreigners decided to sell their US assets. Well– the future is here now and the trends do not look like they are going to reverse. It will not be easy to restore foreign faith in US assets especially when the substitutes are looking increasing better.


But before we oooohhh and aaaahhhh over pictures of hot data in skimpy pink pants, let’s just discuss the basic or fundamental forces that impact exchange values. These have to do with the fact that many cross border trades require a domestic citizen of one country to first purchase the currency of the other country. If a US citizen wants to buy goods or services in South Korea or China – she often will sell dollars and buy Korean won or Chinese yuan. We already know well that the US buys more goods from other countries than they buy from us. The implication is that this deficit in goods trades means that we are selling more dollars than foreigners really want or need to buy our goods. Thus, there is a glut of dollars on world markets because of goods trade. This glut pushes the value of the dollar down. But this is old news – let’s move on to groovier stuff.

It is also true that when US citizens buy foreign bonds, stocks, and other financial assets they generally need foreign currency to make the purchases. In the chart from the link below you see the net of US purchases of foreign assets (BOPO) in each quarter since 2000. You can see that between 2000 and early 2007 the US was building up its foreign assets (it is conventional to assign a negative sign when US citizens take money out of the US to add to foreign asset postions). So the BOPO line is going downward as US citizens buy more assets abroad. But afterward, the building slowed and by the end of 2008 we were net sellers of foreign bonds, stocks, bank deposits, etc (line is rising). As a result we were first net sellers of dollars and then became net buyers. That speaks well for a rising dollar since 2007. But read on -- that's only part of the story.
BOPI shows foreign interest in US financial assets. It is conventional to use a positive sign when foriegners Notice a similar pattern with foreigners wanting more US assets until the end of 2006 followed by a diminished appetite for increasing their net purchases of US assets. While there has been some recovery of their interest in US assets through the first quarter of 2010, the overall result is at first an increased demand for dollars and then a reduced need for dollars.

http://research.stlouisfed.org/fred2/graph/?printgraph&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=BOPI,BOPO&transformation=lin,lin&scale=Left,Left&range=Custom,Custom&cosd=2000-01-01,2000-01-01&coed=2010-04-01,2010-04-01&line_color=%230000FF,%23FF0000&link_values=,&mark_type=NONE,NONE&mw=4,4&line_style=Solid,Solid&lw=1,1&vintage_date=2010-10-14,2010-10-14&revision_date=2010-10-14,2010-10-14&mma=0,0&nd=,&ost=,&oet=,&fml=a,a

The net effect on the demand for US dollars from cross border asset flows can be seen by subtracting the US Net Purchases of Foreign Assets from the Foreign Net Purchases of US assets. This net amount is shown in the table below. The peak value of the net amount in early 2006 of $780 billion shows that foreigners needs for dollars to buy US assets exceeded by $780 billion dollars the sales of dollars by US purchases of foreign assets. Until 2006, therefore, we clearly see an increasing demand for dollars that should have been pushing the value of the dollar upward. Since 2006, we see less and less upward pressure on the dollar. The net amount fell to $165 billion in 2009 and looks headed even lower than that in 2010. Recent news suggest this is tue.

Year     NET Dollar Demand in billions of dollars based on BOPI and BOPO
2000     478
2001     400
2002     501
2003     533
2004     532
2005     701
2006     780
2007     631
2008     611
2009     165
2010*     55
* based on two quarters

Whereas speculators and governments can influence the value of the dollar – it is pretty clear that if we combine the long-term impact of goods trade deficits with a movement towards a finance deficit – we can see why there is plenty of fundamental pressure pushing the dollar down. Recent press stories are focusing on the relative strengths of emerging markets and the flow of investments moving to China, South Korea, Brazil, and many other countries. If this is the wave of the future, then it is difficult to imagine the dollar rising unless there is a change in the desire of foreigners for US goods, service, or financial assets. A rising dollar cannot come until the US clearly signals a return to competitiveness and strength.

These international asset transactions have several components – so I wanted to look further into the causes of these changes. What was accounting for financial transactions and money changing directions? What asset categories accounted for US citizens holding fewer assets abroad and foreigners wanting fewer US assets? To answer these questions I compared two time periods of equal length (12 quarters) – 2004 Q1 to 2007 Q1 versus 2007 Q2 to 2010 Q2.

Consider the US citizens holdings first. US net holdings of foreign assets fell by a total $1.9 trillion when you compare the changes in the second period to those in the first. That amounted to a decline of 58%. Foreign bank account holdings fell by about $840 billion and US citizens held about $587 billion less in foreign securities. But the largest reduction in US asset holdings abroad came in the category called “U.S. claims on unaffiliated foreigners reported by U.S. nonbanking concerns.” US financial intermediaries reduced their holdings of assets of their foreign counterparts by approximately $1 trillion. It is worth pointing out that virtually none of these swings were attributable to official or government flows in gold, currency, or reserves.

Foreigners held $2.9 trillion less of US assets in the time period from mid-2007 to mid-2010 when compared to the time period from early 2004 to early 2007. This withdrawal of foreign holdings from US markets was almost fully explained by a reduction in bank accounts of $1.6 trillion and a reduction in securities (not bonds) by $1.4 trillion. Again, almost none of the changes across these time periods had anything to do with recorded changes in official government activities regarding gold, currencies, or reserves.

Taking both US and foreign asset swings into account shows a net increase of a trillion dollars ($2.9 trillion minus $1.9 trillion) in sales of internationally trade dollars. We don’t yet have figures for 2010 Q3 but the current business and economic news suggest that these trends have picked up. Low US interest rates coupled with movement of funds into higher yielding assets in emerging markets suggest this trend could go for some time. When it looked like the US was emerging from its recession funds hung around for a while and the dollar played its role as a safe haven. But now that there is increasing worry about the US expansion while other nations promise stronger growth, the effect of these international transaction flows are having a more profound impact on the value of the dollar – moving it in a southerly direction.

While southern fried chicken is delicious, a currency crisis is not what this country needs. Quantitative easing and more stimulus will not help since QE will simply move more dollars off shore exacerbating the trends mentioned above. More stimulus will create bigger worries about US financial credibility and further movements away from US assets. It is time to move away from populism to solid thinking about the US economy. The future is here and there is no easy way out.

A Circular Flow of Ideas and Backward Thinking: Should we attack unemployment first?

This week the news is buzzing about the next jobs announcement. Once the jobs number comes out on Friday morning planets will fall from the sky and well-behaved dogs will bite. I am sure of it because I saw it on CNN. While the House of Representatives will want to enact new laws to protect us from falling planets and viscous dogs, I am more worried that they will do something about the economy. Since they have the story backwards one can only expect more bad ideas in the next sack of legislation.

As I am writing I don’t know what number they will announce for jobs this week – and I don’t pretend to know its value. I can hardly forecast how many times I will get up to pee at night – so how would I know the future value of the unemployment rate?

What I am spouting about has more to do with the idea that if the number comes in as expected (or worse) people will increasingly worry that the lack of strong job growth will further restrain consumer spending and we will be stuck in macro purgatory. So if I can use a little professorial pedantry – I would write on a white board (what was wrong with black or green?) the following to describe the theory behind all this:

Employment → Consumer spending

I apologize for this little fit of mathematical elegance but this is the macro-theory all the talking heads are brandishing. The arrow indicates the direction of causality. This might seem pretty cool but the simple truth is that it is wrong and its policy implications are wrong too. This theory suggests that if policymakers could just find a way to increase employment then more workers would have more income and they would go out and buy lots of diamond earrings, steering wheels, and full body massages. And that’s just the firecrackers. When the first round of fireworks ends – then all those manufacturers (of earrings, steering wheels, and massages) will hire more workers who will buy even more stuff (stuff is a very technical term used by sophisticated economists). Before you know it, the unemployment rate will equal 5.5% and government can declare a holiday and take private jets to exotic islands with their stenographers. Note the essence of the theory – we start with a policy aimed directly at employment and that will generate more spending – and even more employment.

What could be wrong with this theory? To answer that question we have to take another sip of JD and review one of the first simple models first taught in dank caves in prehistoric times called the circular flow of income. In its simplest format, it can be expressed without calculus or a neutron microscope as follows:

Employment → Consumer spending

Consumer spending→ Employment

Here is the crux of the issue – this is called circular flow because there is no beginning and there is no end. We just go around and around and around and around. That’s fun for a while but at some point you wonder if there is some way to stop the merry-go-round because you are late for dinner and your honey doesn’t know that you are at the Office Lounge drinking beers with your students. That’s a no-win situation.

So you look at the model and try to decide where to interrupt it. Here is where such things as common sense or cause & effect come into play. If the circular flow is moving too slow – then the first question you ask is WHY. What is CAUSING consumers to spend and firms to hire workers at a slow rate?

Maybe I am way off track, but it seems to me that the answer has something to do with the recent history of the US economy. Consumers and firms took on too much borrowing/debt/ leverage and got themselves into financial trouble. Of course it is much more complicated than that – but the issue here is which of these two alternatives do you think was the main CAUSE of the slowdown today? Did all this get started because firms decided to lay off workers? Or did we get into this mess because of a financial collapse that led to consumers and firms being unable to continue spending and borrowing as they had in the past. I think the latter is the true cause -- we had a Wall Street Problem that spilled over to Main Street and employment. It was NOT the reverse.

If that is true, then it makes no sense to direct our immediate attention to employment. It reminds me of the physician who comes upon a person who is bleeding profusely from a bullet wound. He is screaming at the blood – “get back into that hole”. Surely, the patient would be helped if he had his blood back. But the doctor would have been more helpful if he attended to addressing the cause of the blood flow – a bullet they opened a wound. It would be better to remove the bullet and close the hole.

If the CAUSAL variable was really the finances and spending, then we should start there. And this is the real challenge right now– how do you make consumers and firms want to spend more? First, notice that since too much spending was a CAUSE of this mess – it hardly seems rational that simply encouraging consumers to spend more could be a solution. So the first part of logic is to accept the fact that households are going to take some time paying off debt and restoring saving before they run out and buy three Lexi (plural of Lexus) and a vacation in French Lick. The data show that households are doing just that and while they are not spending a lot, there is some further recent evidence that there is solidification and gradual growth. In short, if you want households to be more optimistic and you want them to spend more – work on the remaining issues with respect to the housing and financial problems and have some patience.

The second way to improve household psychology is to stop confusing people. I realize we have an election coming up and there are important reasons for the two political parties to clarify their separate and highly superior ideologies but there is just too much uncertainty arising from all this political clatter for households to believe that all is really getting better. Isn’t that sad that things really are getting better but our government is making it almost impossible to believe. And this gets me back to all the talk about the coming employment release. If the number is considered to be a bad one – it will be a lightning rod for even more activism by the President, the Congress, and the Fed. Unfortunately, the popular and wrong thing for these policymakers to do is to try to intervene in labor markets and/or induce households to spend at a rapid rate. This will create even more uncertainty and push them farther away from what we really need.

The employment market did not break down and cause our ills. It makes no sense to begin there. Households are waiting for their own financial situations to improve and for some certainty that the economy is improving. Policies that patiently and realistically address the true causes of a slow circular flow of income are the only ones that have a chance of succeeding now. More fireworks may burn down the barn!

A Wish Come True – Democrats and Republicans join together -- and create stupidity squared

As the Ds and Rs duked it out this year on health care, macroeconomic stimulus, and financial reform we all heaved a collective sign and muttered – why can’t they just work together? Wouldn’t we get better policy if they compromised and attacked our problems rationally?

This question reminds me of the guy with the broken leg who prayed that both his legs would be equally strong – only to find that now both his legs are broken! He wished for something and he didn’t get exactly what he had hoped.But he did get what he wished for.

The headline yesterday was that the Ds and Rs came together in the US (Nut) House and decided to pass legislation allowing US companies to bring unfair trade allegations stemming from China’s exchange rate policy. If this is an example of getting what we wished for – I plan to stop wishing altogether. There is absolutely nothing in this legislation that makes any sense – except that the two parties have decided to outbid each other on the populism score. Is this what we should expect next year when these former antagonists get together on tax and spending? With a presidential election coming up in two years – will they climb over each other to give us tax breaks and new entitlements? If so, I long for the days of mean and vindictive shouting matches. Luckily the Senate will not take up this nonsense until after November and we are saved from Two-Party Senatorial Yuan-idity for a while.

To keep this short I won’t review all the reasons I have already written about in my postings to explain why I think that this kind of policy won’t work. Luckily the business press is full of good analysis explaining why it is not a good idea. But I would like to focus on two points here.

First – companies will be able to apply for countervailing duties against Chinese goods that have injured them by estimating the unfair undervaluation of the offending country’s currencies. Now we might all agree that I am overweight – but not by exactly how much. My mother always said I was gorgeous – so she might have a small estimate. My football coach said I looked like a pregnant elephant and ran like a giant tortoise in mud. He might argue I needed to lose a lot of pounds. Exchange values are no different. There is no perfectly acceptable and objective measure of currency undervaluation. It is bad enough that economists scientifically disagree -- I can’t wait to see all the clever and innovative ways companies and government will use to estimate currency undervaluation. This will be more entertaining than Lady Gaga and Larry King doing the fox trot.

Second, if you are keeping up with global events you will notice that numerous countries whose growth rates are closely tied to their export performances, are increasingly introducing policies to depreciate their home currencies. While China is a standout in this regard – Japan has recently joined the fray with vigorous yen-selling. If Japan is going to depreciate, then do you really think that other Asian countries are going to just sit around and let their currencies appreciate? With a slow growth global economic environment competition for export sales is keener than ever.

The upshot is that while the US House is pointing its boney finger at China – there are probably 10-20 countries whose apparent survival hinges on a beggar-thy-neighbor exchange rate policy. How can the members of the House think that they can single-out China and ignore the scores of other countries that are unfairly protecting their domestic exporters? Brazil has already complained of diminished competitiveness due to such actions by other countries. If it keeps up, Brazil will join the growing team of depreciators. Are we really ready to apply this protectionist totally unenforceable and possibly illegal mumbo jumbo against scores of countries?

Now imagine this – after this legislation is passed – virtually any US export company registering their complaints against China, Korea, Vietnam, Brazil etc for their exchange rate policies. And in a slow growth economy – how difficult will it be for these companies to show with great statistical acumen how their exports were injured? We will have so many companies filling out applications that they won’t actually have time to produce and export! The US House dream will have come true – they want to make our export success equal to those of our competitors – and we will end up all having lower exports! Viola

Cleaning Larry's Blog House

Since I started this blog in the spring, I managed to pontificate 51 times on quite a few exhilirating macro topics. So I realized it was time to do a little house clearing. I created 20 topics for the 51 posts. In this way, if you are totally insane and bored and if you want to see what I have written about unemployment -- you will find all my posts neatly gathered together under a topic called Employment and Unemployment. If you want to revisit my blather about the Fed and other central banks -- you can find the topic Monetary Policy. If you want to learn more about the sex practices of gophers then I suggest you try Wikopedia since I have no posts on that topic. But if I do learn something and want to write about it, I will happily create as many new topics as necessary.

To find the list of topics and associated posts -- go to the main page of the blog and then scroll down and down and down and look in the lower right hand corner...to a box labelled Labels. There is an indicator next to each topic which tells you how many posts can be found under that topic. If you cannot find it, mix up your best margarita, drink it, and then try again in 15 minutes. If that doesn't work after several tries then at least you will have an entertaining evening. I epsecially like Carnitas at LaTorre -- they go very well with margaritas.

Do we love debt or do we love spending? It makes a policy difference

In my Myopic Squirrel post I focused on over-spending and I concluded with the following, “Clearly all this spending reduces the nation’s saving and its ability – like the squirrel – to do what’s best for the future.” While spending and saving are two sides of the same coin, it helps to put spending/saving changes into perspective by focusing now on the saving side. To continue the squirrel analogy (is this driving you up a tree?) I find in this post that it might NOT be so much that squirrels want to over-eat in the Fall  – it is more like nuts have become too easy to find and chew.  Does the American consumer want to buy more or do they buy more because credit is so much easier to obtain than it used to be? 

Household saving will be my focus in this post but it is good to remind you that it is just one part of a nation’s saving – which includes saving by households, businesses, and federal, state, and local governments.  Right now the government is a massive dis-saver so solving the household saving problem won’t guarantee a return to normalcy. But you have to start somewhere to build the full story.

While squirrels are fun to watch and talk about (no offense intended to woodchucks and next-door-neighbors) they illustrate the general notion that if a nation doesn’t save enough today it may starve itself tomorrow. In Macro courses we emphasize two problems caused by insufficient saving. First, a low level of saving means that a business firm will find it more difficult and more costly to gain credit to purchase new capital and equipment.  If this goes on for years, then firms will reduce how much they spend on productivity enhancement and this will slow output growth, raise prices, and harm competitiveness.  Second, if lower national saving is insufficient for investment spending, foreign money will flow into the country to augment it. This process tends to raise the value of the dollar and increase the country’s trade deficit.  Whether you focus on the first or second point – the result is a general reduction in domestic and international competitiveness and a slower growing economy. In a nutshell, domestic saving adequacy is very important!

I start by reviewing what most of us know – the saving rate in the USA has fallen dramatically over the years.  To make valid comparisons over time, we look at the ratio of saving to disposable income (income less taxes). In 1952 the personal saving rate was 8.4%. That is, of the amount of after-tax income that we can choose to spend or save, households saved 8.4%. If you take the time period from 1952 to approximately 1988, the saving rate varied quite a bit but stayed in a band of between about 6.9% and 10.7%. It averaged about 9%. After about 1988 the saving rate started on a downward trend. Starting at 10.9% in 1982 it generally fell until bottoming at 1.4% in 2005. The rate recovered and was 5.9% in 2009. The rate has gone in the right direction since 2005 but it appears that temporary factors are at work.  For example, we will show below how important debt is to our calculation of saving rates. As households walked away from mortgages and other debts and as other families paid down their debts, this led to the increase in recent saving rates. But those debt pay-downs can only last so long.  In sum, the following table describes the average annual saving rate since 1952. If 8% is considered a normal rate for the US, then the pattern since 1998 is to be well below that rate.

                1952 to 1970       8.2%

                1970 to 1982       9.8%

                1982 to 1998       6.7%

                1998 to 2007       2.8%

                2007 to 2009       5.0%

There are many sociological and economic explanations for this distinct trend change in saving behavior. We can, perhaps, pursue some of those in a coming post. Here, I want to focus on what we can learn by looking deeper into the components of saving.  Luckily the government calculates saving in two ways. The first and most popular way is what I explained above – saving equals income minus taxes minus spending.  This is often called the NIPA definition of saving where NIPA stands for National Income and Product Accounts. 

The second definition of saving focuses on the uses or forms of saving. It is called the FFA or Flow of Funds Accounts definition of saving and it is published by the Federal  Reserve.  Data for both NIPA and FFA can be found at http://www.bea.gov/national/nipaweb/Nipa-Frb.asp   . These two measures of saving can sometimes differ. For example, in 2000, the NIPA Personal Saving Rate was  2.9% while the FFA version was -2.4%. That’s a big difference. But I don’t want to emphasize the differences. Graphing both series from 1952 to 2009 shows the same general patterns – saving rates rising through 1988 and then falling thereafter.  Both rates show higher saving rates in 2008 and 2009.

The value here in using the FFA Saving series is in what its components tell us. Quoting from A Guide to the NIPAs, “personal saving may be viewed as the net acquisition of financial assets (such as cash and deposits, securities, and the change in life insurance and pension reserves), plus the net investment in produced assets (such as residential housing, less depreciation) less the increase in financial liabilities (such as mortgage debt, consumer credit, and security credit), less net capital transfers received.

That is a mouthful so let’s boil it down to something simple. The FFA Saving figure is a net figure since it looks at how much is being added to or subtracted from what we might call their net worth or net wealth. We say a household has positive net worth if the value of its assets (stocks, bonds, house value, etc) is larger than the value of its liabilities (consumer loans, mortgage loans, etc).  We say there is an increase in Saving in a given year when changes in assets and liabilities imply that the value of its net worth would increase. This could happen if asset contributions increased, liabilities decreased, or if assets increased more than liabilities increased. Accordingly, a nation’s saving falls if the value of assets fall, liabilities rise, or if the assets rise more slowly than liabilities.

The main FFA Personal Saving categories are shown below in the table. Consider the main causes of the high average saving rate between 1952 and 1970 – the net acquisition of assets was almost $80 billion per year while net increase in liabilities (including mortgages) averaged only about$28 billion. The increases in assets was almost 3 times the increase in liabilities. Thus, saving rose. In the next period, the saving rate rose again. Notice that net acquisition of financial and real assets averaged about $348 billion from 1970 to 1982 – greater than a four-fold increase compared to the almost $80 billion in the previous time period. Although liabilities increased by 5.5 times – the value of liabilities was small enough that the effect on saving was swamped by the much larger increase in assets.

You might think that the saving rate would have continued increasing after 1982 by virtue of the very large increases in net acquisitions of financial and real assets—at least doubling in 1982 to 1998 and then again in 1998 to 2007. But it didn’t because the value of liabilities was catching up with the assets. The net increase in liabilities averaged over a trillion dollars during 1998 to 2007 – a huge increase compared to 1982 to 1998. A large part of that swing was attributable to increasing mortgage debt – but at least 40% of that increase in household debt beyond the financing of homes.

Here is one way to summarize and gain perspective on what happened to saving over the last 55 years, much of this since 1982. While personal incomes grew about 42 times and assets held increased about 40 times – liabilities grew by 97 times (mortgage liabilities 104 times).

So we see two things going on in the US.  Consumer spending is growing very fast relative to disposable income and we see households taking on much more in the way of mortgage and other debt.  My father, a product of the Great Depression, bought our home in Miami in 1950 with cash.  But the baby boom generation started a trend of buying houses and other things with credit. Did the desire for housing create a love for credit – or was it something in the acceptance and love of credit that created a spending and housing boom? The way you answer these questions underpins how you approach the problem. For example, in my Squirrels post I suggested that households would need to cut $840 billion annually from future spending. Do we constrain spending by using policy to reward saving? Or do we restrain spending by making credit harder to obtain? Or do we do both?

				52 to 70	70 to 82	82 to 98	98 to 07	07 to 09
Saving Rate NIPA				8.2	9.8	6.7	2.8	5.0
Net acquisition of financial assets				43.9	236.8	525.0	940.3	261.1
Plus: Net investment in tangible assets				35.9	107.3	277.9	671.2	296.0
Less: Net increase in liabilities				27.9	151.5	370.3	1263.7	-161.2
Mortgage debt on nonfarm homes				12.7	64.5	198.5	761.5	-146.5

How do you define a humane stimulus package?

I had planned another post for today but I just can’t ignore the news. As I write, the DJ Average is down more than 200 points. But this post isn’t really about the stock market. What I am writing about is three news items today. First, in a special session that prevented our nation’s leaders from their August recess (doesn’t the word recess remind you of what first graders do at 10 in the morning?) added another $26 billion to government spending. Second, the Fed formally announced its decision to downgrade their forecasts of coming US economic growth. They agreed to a small amount of further monetary stimulus (called QE or quantitative easing) and implied that more might be needed. Third, Laurence Kotlikoff wrote that the US is financially bankrupt. He puts up some scary numbers about what it would take to close the federal government fiscal gap. Clearly he is arguing against further fiscal stimulus. http://noir.bloomberg.com/apps/news?pid=20601010&sid=aiFjnanrDWVk

Take the first two items. They are evidence that the dominant policy opinion is the seemingly humane one – more stimulus. Public Enemy #1 is slow growth that is too weak to provide significantly higher employment. It appears we are in a vicious cycle – low employment means low spending which means low employment. Monetary or fiscal stimulus aims to increase spending. But is this really humane? On the surface of it – it looks as if it is. Putting school teachers back to work not only improves the education process but it means one more family will be adding spending to the economy.

But is this really humane? What if most workers see the stimulus for what it really is – a drastic and panicky attempt to revive an economy with multiple fundamental problems, none of which is too little government spending or money growth. What if school teachers or whoever gets assisted by the latest package – and everyone else – see these actions as a sure sign that things are going to get worse before they get better? My guess is that most of them will save as much as they can of their newfound incomes – many will pay off their horrible credit card debts – many will abandon house payments. Hmmm – this does not sound so humane to me. It INSURES THAT THE DOWNSPIN will continue. We know this exactly because most experts agree that the lack of spending right now is a result of negative expectations and uncertainty. These last ditch fire hoses do nothing but enflame the uncertainty. Shame on you Fed. Shame on you Congress! Humane indeed!

My Keynesian friend says there is plenty of evidence of past stimulus policies working. And I would agree that there have been times and places when some stimulus was necessary and did work. A couple of years ago some stimulus was useful – but even then I argued that too much stimulus would send the wrong message – it sent a message of severe alarm. The Sky is Falling is what I heard. And that’s the problem today. Piling up even more stimulus sends the wrong message today. It is scaring the crap out of everyone. Furthermore, if Kotlikoff is right, it sends a Grecian message as well. If more people believe that solving the US financial gap will take Herculean increases in taxes and reductions in spending – they will translate this into even more pessimism. Are we giving a teacher a job today only to take it back tomorrow?

Clearly I don’t know the answer. But it seems to me rather than play the populist game of more stimulus, it is possible to spend more time on a plan to attack the real structural problems. We don’t have to actually start the policies today – but we could agree on and enact a proper set of real changes with an agreed schedule that make sense and would give people a little confidence in the future. Why wait until after the fall elections?

It is frustrating to me that the solution is right in front of our faces, yet we dodge it only to flail around with policies that only worsen the situation. The right policies will show that we are smart enough to recognize the true source of our economic problems and tough enough to enact the right policies. Being smart and tough is what we need to install the confidence and optimism necessary to get firms to want to produce more and to hire more workers to do so.

The Fed comes out of the closet and slips on a banana peel

The Fed met and made it pretty clear that its monetary policy no longer is aimed at a severe recession, a double dip, or declining economic conditions. Now it says it will step in and buy even more government assets and try to push interest rates lower to support the economic recovery. Hmmm -- now that is news. That muddies the water precisely enough so that the Fed has now lost and remaining credibility.

Since "to support the economic recovery" has never been defined it leaves open a much more active and aggressive policy for the Fed -- and the chances of overdoing it. I know -- there were words in the latest statement about stabilizing inflation and inflation is subdued right now. But notice how the Fed has changed its language about policy -- starting with a near-depression moving to declining growth and now to economic recovery. Is the Fed addicted to expansionary policy? Will the next stage include rationalizing expansionary monetary policy so long as the economy has not reached its previous peak level? Or maybe they will keep pushing in money until economic growth averages the rate it takes to gain full employment? Where does it end?

Why would I care? For two reasons -- the current policy is going to make things worse now and will lead to higher inflation in the future. It will make things worse now because it creates more uncertainty for investors without any remedial value. The patient is getting better but the doctor wants to give him even more drugs because he isn't healing fast enough. Interest rates are very low -- does the the Fed really think that pushing them a little lower is going to cause us to go out and buy a new car? Will firms suddenly run to the bank to borrow money so they can build more plants? I don't think so. This new policy message would make me wonder if the economy is ever going to recover. I'd continue to save, pay off debts, and drink cheap whiskey. It will create more inflation down the road for obvious reasons. There is no way that the Fed is going to pull out money quick enough given the huge volume outstanding.

Why did the Fed make this statement this week? What good might it have accomplished? I simply don't get it. Do you?

Finger in the Dike - Geithner and the Big Three team up for Nothing

I had planned a follow up to my Myopic Squirrel post next, but I just can't sit around and eat Kimche today. So let me break with tradition and write a short piece so I can get on with my day. Most of the headlines right now focus on China as a currency manipulator and are encouraging our enlightened government to finally do something about China. But guess what -- all this protectionist mumbo jumbo is exactly like the stimulus policy, the government bailouts and the toothless financial reform -- they amount to a finger in a dike. Worse than that -- they amount to a finger in the famous Dutch dike as a tsunami races to Den Haag.

Yes, yes, yes -- CHINA IS A CURRENCY MANIPULATOR. Geez, how long have we known this? Did we just discover it? Do we have a chance in Hades of really changing their policy? Is China not the giant in the neighborhood who is going to get stronger and stronger? Is there something strange about the timing of all this? As the government grabs at every possible last minute last ditch effort to invigorate a recovering economy, is this not just one more example of something stupid that appeals only to populist and hateful and envious Americans?

And you know what the bad thing is about all this misdirected energy? The bad thing is that it confuses people about the best ways to deal with the impacts of globalization. The tsunami  involves more than China -- if you are paying attention you know that China is only one of many countries who threaten top compete more vigorously with US firms. What was announced by EU today? They have consummated the EU/Korea Free Trade Agreement. We talked about working hard at FTAs but the truth is that our government would rather reach for the protectionist/populist card than do the hard work of negotiating and implementing a FTA.

It is easy to make eloquent speeches pointing to China as a currency manipulator. But you know what? Even if China let its currency appreciate -- it would not be a very good thing for anyone. We have a trade deficit in the USA because we spend so much and save so little. We have a trade deficit because other countries save a lot and spend a little. To think that fiery rhetoric and currency changes are going to do anything but create small, annoying, and temporary impacts is to be putting your finger in a small hole in a large dike that is bracing  for a 200 foot wall of churning water. Now I can go eat my kimche.

The Myopic Squirrel and $7 trillion worth of Missing Nuts

It is well-known that a major part of our difficulties today is that like the myopic squirrel, we ate all the nuts in the Fall and didn’t put enough away for the Winter. In other words, residents of the US spent like there was no tomorrow. The spending and the leverage that accompanied it contributed to problems in real estate which spread to the financial sector and then to Main Street. Did we really spend thatmuch? What will it take to restore some balance?

I deal with those questions in this blog. It is sobering to see what Karma has wrought. Can we trim the US consumer’s appetite by $840 billion per year in the coming decade? It won’t be easy but that’s what I think it will take to return to something normal. My calculation is that the US household would have to trim its annual consumption by approximately 42 billion bottles of Jack Daniels. While that seems tough, another calculation finds that if there are approximately 300 million people in the US, then per capita consumer spending would have to fall by about $2,700 per year.

To draw these conclusions I found data on the website of the Bureau of Economic Analysis – http://www.bea.gov/ . I chose to use real (chain-weighted) GDP and Personal Consumption Expenditures (RGDP, RPCE). Using real figures means that the Commerce Department has removed price change from these figures. To examine how consumer spending changed over time, I look at both the value of the amount of RPCE as well as its share of GDP (Share=(RPCE/RGDP)*100). For the year 2009, RGDP was $12.9 trillion. RPCE in the same year was 71% of that amount, or $9.2 trillion. RPCE includes the spending in the US on consumer durable goods (like cars, and furniture), nondurable consumer goods (like food and clothing), and consumer services (like financial transactions and transportation). RPCE does not count goods or services that businesses buy (like plant construction business computers) nor does it count goods and services purchased by foreigners or the government. It also does not include housing construction. Because of the latter, it does not include any of the spending of households on new houses or condominiums. Clearly, if I added the latter, the numbers would get bigger.

So what about this 71% figure for 2009? The table below shows the average of Share over selected periods of time. Notice that for the 18 year time period stretching from after World War II until 1963, Share was a little less than 63%. In the next 16 years – call this from President LBJ to Carter – the ratio increased to about 64%. Share in the 1980s rose to 66%, in the 1990s to 67% and then the last decade it averaged about 70%. At the end of that period it hung in at 71%. Very clearly, household spending has not only increased in absolute terms but it has become an ever larger part of the nation’s output and income – that is, RPCE has been growing much faster than RGDP.

Share of Real PCE to Real GDP for selected time periods from 1946 to 2009

46-63	64-79	80-89	90-99	00-09
62.53	63.91	65.90	66.63	69.63

Okay – so Share is rising, but what else can we say? Let’s make a big assumption about normality. Let’s take the 44 year period from 1946 to 1989 as a norm. Share averaged about 64% during that time. Let’s calculate how much RPCE would have been IF SHARE HAD REMAINED AT 64% IN THE FINAL 20 YEARS. Applying the normal Share of 64% to the years between 1990 and 2009 gives us a normal RPCE estimate of about $8.2 trillion in 2009. The actual RPCE in that year was $9.2 trillion. Subtracting the normal estimate from the actual value, we find that above-normal RPCE was about $910 billion dollars in 2009. Notice that in terms of 2009 figures, RPCE was about 10% higher than if SHARE has been normal. That is, if we want RPCE to return to a more normal share of the national economy, consumers should have spent about 10% less than they did in 2009.

That’s just one year. What if we look at the whole decade from 2000 to 2009? The total RGDP produced over the period was $123.2 trillion. RPCE totaled $85.8 trillion. If RPCE Share was 64% during the whole 10 years, RPCE would have summed to $78.8 trillion – or about $7 trillion less than what was actually spent. In other words – households spent $7 trillion more than normal for a decade. Now that’s starting to look like money! US consumers overspent more than half of a full year’s RGDP in the last 10 years.

What about the future? I estimate that at current trends we will overspend approximately $8.4 trillion in the next 10 years from 2010 to 2019. In other words, we need to trim spending by roughly $840 billion per year for the next 10 years to restore the PCE Ratio to 64% of Real GDP. During that time period RGDP will average $14.7 trillion per year (if it grows at the same rate as the past decade – a lowly 2% per year). If Share remains at 71% then Real PCE will average $10.3 trillion per year. With a normal Share of 64%, Real PCE would average $9.4 trillion. Thus over-consumption would average approximately $840 billion per year from 2010 to 2019.

Let’s add an important perspective. Cutting out this $840 billion each year from 2010 to 2019 does not mean that RPCE has to decline. What it says is that as a nation if we want to return the share of consumer spending back to something normal, then we will have to increase our spending at a lower rate. Notice that should RPCE grow at a more normal rate it will average about $9.4 trillion per year; it will GROW! But it must grow by somewhat less than the $10.3 trillion average if Share is to return to some sense of normalcy.

You can’t have your Jack Daniels and drink it too. We have a clear choice. We can continue to spend like a drunken hooligan or we can try to put our house back in order. Chopping $840 billion per year out of consumer spending will not be easy – noting that if we apply this same analysis to residential construction we will have to tighten the future belt even more – and the result will be slower growth of both output and employment. But not tightening has its price too. Clearly all this spending reduces the nation’s saving and its ability – like the squirrel – to do what’s best for the future. There is no way to return to normal economic health without a return to normal spending. Let’s get on with it.  To set an example, I had breakfast this morning without my usual JD.

Stuck in Macroeconomic Purgatory

I got a lot of nice comments about my Lilliputians post. The comments made me think more about why the two parties just can’t seem to face up to current economic issues in the way many of us would like to see. Unlike some of my other posts, this one takes me out of my comfort zone and into what I would call pure conjecture. This is the kind of stuff one talks about in the bar after having one too many JDs.

In my last post I conjectured that it might be better now to view our economic issues as an interrelated set of challenges that would be better handled as a single set rather than in piecemeal fashion. I argued that both parties could get plenty of credit by taking a more holistic approach and that the resulting policies would be an improvement of what we have been seeing lately. While liberals might be partially pleased with recent progress in some policies (In particular healthcare, stimulus, and financial reform) much of what was legislated was done without conservative support and the path forward with respect to those and other policies now seems even harder to travel. While much might be decided by the coming November elections, there is no guarantee that this will produce anything beyond a stalemate.

So not much is going to change and we seem stuck with politicians who seem more concerned with pleasing the extreme wings of their parties than with solving our pressing economic problems. This seems crazy and wrong since no party is going to have the muscle or support to make the compromises that will produce the right kinds of policies—those that address the cause and effect of the issues.

The question then is why we are stuck in Macroeconomic Purgatory. Here is where I take a big gulp of JD and move ahead unsteadily. My conjecture is that none of these politicians took Econ 101 from Art Benavie at the University of North Carolina in Chapel Hill. I was very lucky to have been accepted into the PhD program in Economics at UNC in 1973. I was a teaching assistant for Prof. Benavie and learned a lot from listening to his lectures to freshmen. I learned a lot from him (as well as from Dick Froyen, Roger Waud, and the many other folks involved with the Macro Seminar) but one thing that stood out was the point that policies for income redistribution should be handled separately from those of macroeconomic efficiency and growth. I believe this is a point that Milton Friedman also articulated and espoused. Regardless of where it originated, Prof. Benavie made it come alive in the classroom in Chapel Hill. It all seemed so clear. There was one axiom – you cannot have an economic issue or policy without the problem or the policy having an implication for income redistribution. Benavie’s conclusion was that income distribution should to be treated separately from other issues.

Let me try to give an example that relates to macroeconomics. Macro is the study of the economy of a nation or region. It does not seek to model or explain the behaviors of individual persons or sectors – rather it sees the economy as a whole. So let’s suppose the nation has high unemployment or slow growth. The NATION, therefore, is operating inefficiently. The MACRO ISSUE is that the system is not working as it should or could. The MACRO ISSUE is that workers and the goods and services they make are less than the amounts that ought to be hired and produced. But notice – the story doesn’t end there. The recession also has uneven impacts on persons and sectors. Perhaps the white goods market is more negatively impacted than others. Maybe the Northeast is hurting more than the South. Low income persons may be impacted more than those with higher incomes.

The main point here is that Macro problems always come with unequal and negative impacts on various persons, sectors, regions, etc. BUT MACRO POLICIES ARE ALWAYS DESIGNED TO ADDRESS THE MACRO PROBLEMS. MACRO POLICIES are not designed to deal with the numerous and myriad individual impacts of recessions.

Hearing this you might retort – that’s exactly what’s wrong with macro. How can you not care about all these uneven impacts on people and companies and sectors and so on? But I would snort this retort – a chain saw is a great tool to bring down a dead tree. A chain saw kicks butt when it comes to bringing down a tree. But if you use your chain saw to provide the missing shade or to replace the beauty of the tree, you might be barking up the wrong tree. Sorry – I just couldn’t help myself. But you see the point. To replace the shade provided by the tree – you might be better off with a shovel to dig a hole for another tree. To replace the beauty of the tree you might want to paint the new lovely lawn flamingos you purchased at the limestone store.

You can care a lot about the missing shade and the loss of beauty but if the tree is dead, then you need a tool designed to deal with that problem. You can use other tools for the shade/beauty issue. Similarly in macro, you need macro tools for the recessionary conditions – and other policies and tools for the micro issues. And the traditional MACRO TOOLS are notoriously not designed for the many micro problems – while they are, like the shovel, focused on one problem -- remediating MACRO PROBLEMS.

When I speak of the traditional MACRO TOOLS I specifically refer to monetary and fiscal policy. Since Keynes’ ideas were first cast into a modern macro model by Sir John Hicks and others – the profession has articulated (and debated) using monetary and fiscal policy to target real GDP and employment. These tools can’t do everything. Monetary and fiscal policy do not guarantee any level of effectiveness at moving real GDP or employment – just as a particular chain saw might not always take down the tree. But at least you know it is the right kind of tool for the problem. Most economists would agree, however, that monetary and fiscal policy are NOT designed or appropriate for solving the energy crisis, making American an export dynamo, reducing poverty, or saving education. We view other tools as being superior for those problems.

Congress apparently never got the message – because we hold macro policy hostage to other issues – especially income distribution. Prof Benavie would say – use a Macro Policy for the recession. Then check and see how that might impact income distribution. If income distribution is worsened by the Macro Policy, then design a specific policy to solve that issue. Don’t let the income distribution ramifications cause you to alter the Macro Policy. If you want to do something about incomes of the poor or the middle class – don’t use a chain saw or Macro Policy – use a policy specifically designed to help people move up in the income distribution..

But notice what we argue about tirelessly. Should the Bush-era tax cuts for the rich be extended? Should the Fed expand its program to buy mortgage securities so rates on mortgages will be driven lower and funds be made more available to people who otherwise could not buy houses? Should unemployment benefits be extended for months to provide income for a group measuring probably less than 5% of the US population? Should we direct extra stimulus spending to poor people on Medicaid? The list goes on and on.

Notice that I am not denigrating the need to have policies designed to improve the distribution of income. What I am saying is that Macro Policy cannot and should not solve income distribution problems. If we want to raise GDP or employment let’s debate Macro Policy on its Macro Merits. If we want to improve the income distribution, let’s have debates and legislation designed for that. Failing to understand this simple point means that it is going to be next to impossible to get good policy. It is much too easy for any populist politician (is that redundant?) to use income distribution as the excuse to not stand behind good macro policy. There will always be compromises in policy but watering down a macro policy to achieve income distribution goals is not a positive compromise since it means less than desirable policies for economic growth and income distribution. Preferable would be simultaneous passage of separate and specific policies designed for macro and income distribution. As I suggested above, this would imply a holistic approach to policy – not a sequential and piecemeal approach. As a result, instead of getting a nice burger and fries, we will be presented with mush.