Misinformation and Monetary Policy

I wrote an article in the 1980s titled “Misinformation and Monetary Policy”. It was an academic-style paper published in the Review of the St. Louis Federal Reserve Bank. I would not suggest you read that unless you like having needles pushed into your eyeballs. The point of the article, however, is as true today as it was back then. The point is that inflation data can give you shingles. No, that’s not right. The point is that the actual behavior of inflation can sometimes be highly misleading.

The Fed is saying that inflation is not a problem. Fed officials know that too much money can cause too much inflation and the Fed stands ready to modify its current course of monetary ease once it sees the “whites of their eyes” – once they see inflation rising. This makes some sense. If the problem of money is too much inflation – you cannot say there is too much money if the inflation rate is low and stable. So the Fed has good reason to have a “watch and see” stance.

But here is the problem. There is a difference between inflation and the measure of inflation. For example, Casper the Friendly Ghost exists even if you can’t see him. Or maybe gravity is a better example. We are glued to the earth but no one can see gravity. Gravity is a force and it can be measured but only indirectly. It is known to be proportional to the mass of two objects and inversely proportional to the distance between them. Two small objects far from each other create little gravitational pull while two very large close objects would generate a lot of gravity. Okay so I am not an astro-physicist. Give me break.

The issue is that while gravity is never directly measured, we can use formulas to estimate its value. We do the same thing with inflation. Economists have models which tell us how much inflation is. Monetary models say inflation is high when money growth is high. But we don’t stop there. Governments spend a lot of money doing surveys and collecting data to try to measure inflation. But let’s be clear. These are two different things. We have inflation which cannot be measured – let’s call that Milton’s inflation. Then we have attempts to measure inflation – let’s call that Kardashian Inflation.

            Milton inflation usually does not equal Kardashian Inflation

This inequality is the source of policy disagreements since critics of Fed policy are looking at Milton Inflation while the Fed is focused on the Kardashian version.

To show why this all matters today, I use some traditional measurements. The first is theoretical Milton Inflation. We all know that the money supply increased a jillion percent and that means Milton inflation roughly equals a jillion percent. I exaggerate of course. But it is hardly worth care and precision since we know that the money supply has reached unprecedented proportions and if left at these values a return to some normalcy (especially in a thing called monetary velocity) the inflation rate could become very high. 

Now let’s turn to data on measured or Kardashian inflation. The place to begin is to note that we have a lot of measures of inflation. The one that is reported and circulated the most – the Consumer Price Index (CPI)– turns out not to be the preferred brand. It has some known defects like pimples and rashes in unmentioned places. A Similar index but with fewer distractions is something called the Price Index for Personal Consumption Expenditures (PPCE).  So I went to the Bureau of Economic Analysis (bea.gov ) and found that they had a ton of data going back to when I was in pig tails. I chose to examine measured inflation using the PPCE for the years from 2006 to 2014. The latest data point is the first quarter of 2014 or Q1 2014.  I look at annual percentage changes from the first quarter of each year to the first quarter the year before. There is much too much detail to put into a table so trust me when I report a few facts.

·        The PPCE increased by 1.1% from Q1 2013 to Q1 2014. PPCE was unchanged in 2009, bounced back to 2.1% in 2010 and averaged 2.1% per year from 2010 to 2013. So we can say that inflation is averaging around 2% per year but had a down year in 2013/104. Does that mean that inflation is low?

·        The PPCE has three major price components – prices of durable goods, nondurable goods, and consumer services. The reason that PPCE grew slowly in the past year is that the prices of durable goods fell by 2.2%. Within durable goods it was furnishings and durable household equipment that fell by 3.7%.  Because gasoline and other energy prices contracted by 2.8% in the past four quarters, we had flat nondurable goods prices. The prices of consumer services, in contrast, rose by 2% last year.

This is a lot of detail to throw at you. But one can come away with a story. Even Justin Bieber knows that housing has been slow to recover and that energy prices are high volatile. Looking at the last four quarters through Q1 2014, we see a lot of things that will probably not repeat in the coming year or years. The 3.7% decline in furnishings and household equipment was the worst performance of that category in the last 7 years. With a recovery, ever so gradual, in housing it is hard to believe that prices in this category will fall again. As for gasoline and energy – check out this stream of annual changes since 2008: +30.8%, -37.4%, +37.7%, +19.3%, +10.2%, -0.3%, and -2.8%. If this was your golf score you would be scheduling an appointment with your psychiatrist. Given the bouncing ball nature of energy prices it is hard to venture a guess for the coming year. But clearly, rising prices are not deniable after two years of declines.

The upshot is that consumer services have been growing steadily since the 1.5% rate of 2011. From this base a return to some normalcy in prices of consumer durables and nondurables would mean an inflation rate of above 2% and possibly well above 2%. And this is before we have much of a kick-in from well-anchored inflation expectations.

I am not ready to blame Casper the Friendly Ghost when I can’t find my car keys. The Fed doesn’t want to rely on Milton Inflation either. So we are stuck with interpreting measures like the PPCE.  Given the volatility of key PPCE components over time, interpreting these trends can be hazardous to one’s health and can lead to numerous interpretations. Since I am a card-carrying Miltonian I see inflation floating in my breakfast cereal. I also see it in the PPCE. Measured inflation in the last year was modest but may very well be misleading. The data suggests last year might be the eye of Hurricane Kardashian. 

Fed Policy: Chicken or Egg?

When it comes to chickens & eggs or climate change & Al Gore, we don’t know which came first. We take this to mean that we don’t know what is the ultimate cause of these things though I suspect Al Gore came from another planet. Regardless, the topic today is the Federal Reserve or as we lovingly call it – the Fed. The Fed says they will keep interest rates low. I doubt they can do it. 

There is a widely shared belief that the Fed controls interest rates. Thus we could say that the Fed causes interest rates and not vice versa. When Ms. Yellen proclaims that interest rates will remain low until Clint Eastwood stops making movies, that gives us the illusion that the Fed can and will keep rates low for a very long time. But this illusion, while technically correct, for most purposes can be highly misleading. This post suggests that interest rates will begin to rise soon, with or without the Fed’s permission.

To understand this point we have to go back and read several tons of text books or you can wake up and just read the next few paragraphs. Like there are many different kinds of Kentucky bourbons, there are many different interest rates. An interest rate tastes like chicken. No it doesn’t. An interest rate tells you how much you earn on a financial instrument. If you put money into a bank saving account your money would be earning about .02%. Invest your money in a government bond that matures in 30 years and you might get 3.5%. Corporate bonds might give you a little higher rate. These rates are market determined. That means that while a Fed policy might influence these rates, the Fed has no direct control over them. The buying and selling of these financial instruments by individuals and institutions change the prices and rates every day.

The one rate the Fed does have almost total control over is called the Federal Funds Rate (FFR). I say “almost” because even that rate is not dialed up or down in a mechanical fashion by the Fed. The FFR is mostly affected by banks borrowing money from each other. On a day when many banks want to borrow the rate goes up. When many banks don’t want to borrow from each other, the rate goes down. But unlike the other rates I mentioned above, the Fed considers the FFR as a target of monetary policy. When the Fed swears on a stack of Tim Geithner novels to keep interest rates at zero – we take this very seriously. We wait from Fed meeting to Fed meeting to learn of any real or imagined changes in the value of the Fed’s goal for the FFR.

It is easy for the Fed to control this rate. If bankers want to borrow a ton of money from each other on Tuesday then the FFR starts rising. The Fed watches and Yellen says – geez guys. I promised the FFR will stay at zero and today the rate is rising. So Janet knows what to do. She pumps money into the system so banks have plenty of money. They don’t need to borrow from other banks – the Fed intervenes and gives it to them. The FFR rate goes back down to zero. Like water on a fire, when the fire rares up just pour on more water.  The Fed apparently controls the FFR. 

But does it? Technically it does. It can do the actions of the last paragraph forever since the Fed has permission from the Koch brothers to increase money at will. No digging up gold is necessary. But the trick here is whether or not they can make their policy stick. You can pour water on a fire but if it a grease fire it might actually make the fire worse. In the case of the Fed policy, the focus is on the market factors responsible for driving up the FFR. Perhaps the FFR is just following other market-determined interest rates. Suppose the economy is stronger and inflation expectations are rising. These are factors that usually drive up market rates, including the FFR.

If markets are driving up interest rates then a one-time injection of money will take the FFR back down to zero. But will it stick? If the economy and its inflation rate are rising, then there will be continuous pressure on the FFR to rise. You might say that is no big deal because the Fed can just pump in more money. But here’s the challenge. If each time the Fed pumps in money this stimulates output, inflation, and credit demand, then there is EVEN MORE pressure on rates to rise…here is a very technical schematic:

      Rates rise – Fed pumps – rates fall – expectations rise – rates rise even more.

At this point the best way for the Fed to keep rates from rising is to stop pumping in more money. When people start to recognize that the Fed will stop stimulating the economy then they will reduce their expectations about economic strength and inflation. This reduced expectation brings rates back down.

So who controls interest rates in the economy? The answer is that it depends. If rates are being strongly driven by economic fundamentals it is not easy for the Fed to have much sway. They will have a very difficult time stopping rates from rising and attempts to do so may make matters even worse. Of course if the economy is not thrusting rates higher, this gives the Fed more room to maneuver. But if that is the case, it isn’t clear why the Fed would want to reduce rates. The market is already doing that trick. 

To modern progressives, this sounds strange and it should. Monetary activists think the Fed is all-powerful and should regularly employ countercyclical policy. But not everyone is a monetary activist. Milton Friedman and other monetarists have warned for decades about the unintended consequences of monetary activism. Today we have a very activist Fed under the guidance of Janet Yellen – a Fed that will promise lower future interest rates despite an inability to bring out that result. Bet on higher rates in the coming 6-12 months.

Income Distribution Policy: Dead End or Over the Cliff?

Writing about income distribution policy is a little like getting a lobotomy. You know the operation is necessary but you also know the end result is nothing one would wish for. But it is a rainy Saturday here in Bloomington and my self-imposed Tuesday deadline is looming.

I recently went to my 50^th high school reunion in Miami and it reminded me of a lot of things. Life was simpler in the 1950s but the world was very cruel for a lot of people. Segregation ruled in Miami and women dealt with more than glass ceilings. Many Cuban immigrants found Miami more hospitable than Fidel, yet conditions often “forced” them into ghetto life along the Tamiami Trail. Most gays stayed in the closet. Today much has been improved for these and other minorities but we all know that there remains much to do. There is no question that we can improve results.

What gets me spouting today, however, is the related but important issue of income distribution. It is no secret that the current US presidential administration is highly motivated by polices to improve income equality. This is a noble goal but his ways of going about this seem wrong to me – and worse than wrong is that they are counter-productive. You wouldn’t throw an anchor to a drowning man. But current thinking about income distribution policy seems like doing just that. Of course, this post is not so much about President Obama as it is about a total dis-function of our elected representatives when it comes to making any progress with poverty or income distribution. 

Thus my title – Income distribution policy might be a dead end. Actually it could be worse than a dead end. Most dead ends have a turnaround place. Once you know you cannot get through, you can turn around and try again. There is hope you can get to your destination. My worry is that we have gone beyond the turnaround place and don’t know it. As a result we should aptly describe our situation as over the cliff. You heard the joke about the guy who falls off the top of a very tall building. At about the fifth floor a guy leans out the window and asks the man how it is going. He replies, “Okay so far.” That’s the definition of an optimist.

Already some of you are ready to remove my JD. You have branded me a big bad meany and you are ready to stop my subscription to the Wall Street Journal.

Let’s be honest. This issue of income distribution has become a war cry for extremes on the left and right and many of us get sucked into unthinking knee-jerk reactions that in and of themselves prevent us from making headway. We can’t even have a civil discussion about how to improve income distribution. Wouldn’t it be nice to know that when I go to my 100^th high school reunion that we can say we made some progress? 

Or do we want to acknowledge in 2064 that we failed again to move the needle?

Wouldn’t it be nice if we could apply logic or common sense to this challenge? For example, we noticed a few days ago that no matter how low we set our AC’s thermostat, the temperature in our house was rising. That is what I call detection of a problem. So we called an expert who looked over the situation and found that a part had been installed incorrectly. We didn’t notice this in the winter but as soon as we had some hot days, it became obvious that a problem existed. The expert fixed it and now we are back to being cool.

To summarize – we detected a problem, we searched for the source of the problem, and then we applied a solution to fix that problem. We do that all the time. We do this at home, at work, and we sometimes do that in the public arena.

It is possible that two experts might have different opinions at each stage of the process. They might disagree that a problem exists, about the source of the problem, and then about the remedy. The sad thing is that politics is very different from home electronics. Two electricians might disagree but with a little more investigation, they can search for the correct approach. Politicians, on the other hand, will search out their base political support and continue saying things for years if not decades to keep getting elected.  

But surely we can do better than that. Economic and social success is not a partisan issue. Presidents Kennedy and Johnson are often given credit for starting the War on Poverty. They had the right idea. They wanted to eradicate if not minimize poverty. Their presumption was that people wanted to take care of themselves and not be permanently dependent on government assistance. Yet we find ourselves today after more than a half century of social programs far removed from that goal. Too often government programs lead to long-term dependency if not inter-generational reliance on fiscal support. Social programs have not wiped out poverty.  It is as much or more evident than it was in the early 1960s.

What is the problem?

            Racism has worsened?

            Reverse racism has worsened?

            Rich people are better able to take advantage of the poor?

            Rich people do not pay enough in taxes?

            Social programs are too skimpy with benefits?

            Social programs do not address the root causes of poverty?

            Social programs themselves engender dependence?

            The minimum wage is too low?

            The minimum wage is too high?

            Globalization reduces domestic wages and job opportunities?  

            Companies replace US workers with machines?

            Too many young people do not finish high school?

            Too many children are raised by single parents?

            Too many young people have children before they finish high school?

            Too many people are hooked on drugs?

Most of you might agree with some of the above possible causes but not all of them. But let’s face it – these and other issues deserve to be looked at objectively. After such a real inquiry then perhaps we can prioritize this list. Some items will go to the head of the list. Some will be dropped entirely.

But let’s face it – while the average guy might think this is a logical approach can you imagine some of the leaders of our two parties digging in examining these issues dispassionately? I can’t. If you agree then the problem is pretty obvious. Poverty can be addressed and reduced – but the people we pay in Washington to accomplish this are simply not up to the task. We should vote for people who are. 

At Last A Better Measure of Economic Growth

Pete recently got a new motorcycle – a real hum-dinger. He also got a new espresso machine. I asked him which one was better. He looked at me dumbfounded and told me I was an idiot. You can’t compare a motorcycle to an espresso machine.  Yet, the Wall Street Journal decided to publish an article on their Opinion Page (A15) on April 23 by Mark Skousen that essentially amounts to the same thing. Skousen compares apples and oranges and leaves us in a state of bewilderment wherein we now neither know what an apple or an orange is. Specially he says, “It (Global Output) is a better, more comprehensive measure of the nation’s economic activity than GDP, and a better indication of the economy’s growth prospects.” So my spout today is to explain why Skousen is both wrong and confusing.

The article is about an old economic concept that will now be published more regularly. The concept is called Gross Output (GO). There is nothing wrong with this concept. Just like an apple, it is a nice thing to have around. Actually, it is misnamed. It should be called Gross Sales. Why? Because it is a sales figure. GO is the sum of the sales of most companies in the country – those that produce raw materials, assemble units, manufacture goods, render services including those of retail and wholesale companies. GO is essentially the sum  of the sales of all those companies. It will now be published quarterly. I like that. 

Calling GO output, however is misleading.  Sales and output are not the same thing. This is easy to understand. Crotch Rocket Bicycles produced 100 bicycles this quarter. Unfortunately they forgot to hire a salesman and they sold no bicycles.  As a result, they produced 100, sold 0 and had inventory accumulation of 100. Or take the case of the whiskey producer Jim Daniels who had 1000 bottles in inventory. Jim Daniels then produced 700 bottles this quarter. Sales were 800.  So sales were 800, production was 700, and inventories declined by 100. Sales and Output are the not the same thing. If GO is sales then it should not go around calling itself output.

I know a guy who called himself Rocky for many years even though his name was Mike. No big deal. But in this case GO calling itself output is a problem because that word is reserved for GDP. GDP is output. GDP is not sales. So can I possibly be more obnoxious?

                          GO              GDP 

         Sales          Yes               No

        Output         NO              Yes

Why does any of this matter? It matters because apples are apples and they are not oranges. It helps to keep these things straight when you want to make apple juice or orange pie. GO is going to be published every quarter. It will tell us zip about output.

My above examples explain that the difference between sales and output has to do with changes in inventories:  (1) stuff produced this quarter that doesn’t get sold or (2) stuff produced in a previous quarter then sold this quarter.

GDP can rise in a given quarter only if we produce more. And by “we” I mean all the firms in the country whether they extract minerals, assemble cars, or sell insurance policies. Notice that GO, being a sales figure, can rise this quarter even if we didn’t produce more. GO rises because we sold more of current product or we sold more of past production.

Is GO better than GDP? Is sales better than output? The answer is no. Is a left brain better than a right brain? Is a car better than a blood transfusion? These things are mostly not comparable. GO and GDP are both products of measurement of a national economic system. They measure similar but different things. Having both of them published quarterly will be useful but clearly GO will not replace GDP. There is no sense comparing them.

Skousen says that GO is the better indication of a country’s growth prospects. He says it downplays the role of consumer spending in favor of business-to-business sales. Not true. Think of a value chain wherein

            Firm 1 digs up materials and sells them to Firm 2 for $50

            Firm 2 assembles the materials into a product and sells it to Firm 3 for $60

            Firm 3 paints the product and sells it to Firm 4 for $70

            Firm 4 sells the product to me for $80

Cool eh. Anyway, the value of the sales equals $50 +$60 + $70 + $80 = $260. This is the value of GO. What is the value of the total output? It is $80. You can calculate that as the value of the final product sold or you can sum the values of production added at each stage ($50 + $10 + $10 + $10). GDP is $80.

Even without any inventory complication, you can see that GO is much larger than GDP – it took $260 of sales to generate output of $80. You can see that they are both very different concepts or dimensions of a nation’s performance.

Why would GO be a better indicator than GDP? Because GO includes more lines of activity? I don’t think so. Think of bowling pins. The bowler aims at the front pin. If he hits it just right, he knocks over all 10 pins. The bowler doesn’t go to the bar and brag how each of the other 9 pins performed. He puffs up his chest and explains how he smacked that head pin just right!

The economy is the same. If you want to understand economic growth, you focus on cause and effect. All those intermediate sales are like those 9 pins – they just go along with something that started the chain reaction. The key to understanding the economy is not determined by how these intermediate sales react. The key to growth is how you get the chain reactions started. You don’t improve your game by finding ways to avoid the head pin and hit one of the others. 

Most macro policies aim at well-known driving variables. These usually focus on the end consumer or the firms that serve the end consumer. Macro policies rarely try to get Firm 2 to sell more to Firm 3 or to help Firm 3 to buy more paint. It makes no sense to focus on intermediate sales instead of sales to the final customer. Thus GDP and output are what we focus on if we want more growth, knowing full well that once we do the right thing a lot of things will be happening including a lot of intermediate sales.

So I say welcome to GO. Welcome to the quarterly macro indicators club. Having GO along side GDP may help us understand GDP even better. But let’s not waste our time wondering which one is better. GDP will remain the key gauge with or without GO. 

Earnings: Why Low Inflation Might Not be a Bad Thing

Earnings play a special role in many debates, including conclusions drawn about income distribution. Recent studies have been published yet lead to more than one conclusion about income growth. This is because there is more than one way to measure income. Some data include government workers. Others don’t. Some data include employee benefits while others don’t. Some data include social benefits and taxes while others do not include these. Most studies look at households at a point in time. Other longitudinal studies trace households over time. So it is pretty clear that depending on the income indicator you choose, you can come away with some very different conclusions about who earns what.

Today I want to focus on a popular indicator published regularly by the US Bureau of Labor Statistics (www.bls.gov  ) – Average Hourly and Weekly Earnings of all employees on private non-farm payrolls. These earnings include wages, salaries, and benefits of workers – workers in what we generally consider to be the business sector of the county. It does not include workers in government or on farms but it does encompass both manufacturing and services employees. How much do these workers earn in total? How much of those earnings are from company benefits like pensions and health insurance? How have these earnings changed over time? What implications can be drawn from past changes?

Two tables at the bottom show us changes in earnings during the 10 year period from 2003 to 2013. The first table shows the data in nominal terms. The second focuses on the buying power of these earnings by removing the impact of inflation on earnings. But before we get into all that – as of December 2013, earnings were:

            

            Wages and Salaries       $21.77 per hour

            Paid Leave                       2.21

            Supplemental pay              .77

            Insurance                        2.84

            Retirement & Savings      1.53

            Legally mandated

            (e.g Social security)         2.45

            Total Earnings           31.77 per hour

                       

My post looks at a decade of changes in these earnings per hour figures. The tables below divide the changes in three time periods with respect to the last recession -- before, during, and after. Earnings in the private sector show that the recession hasn’t ended. In real terms, total earnings have been stagnant during the recovery while wage and salary income per hour has declined. The leading component of earnings is health benefits. Is this stagnancy the result of the recession or other longer-term factors?

Surprising is that not much has changed in the buying power of earnings in the private sector. While it is true that in terms of nominal value earnings took a hit in the recession – so did prices and therefore the post 2007 time period does not look much different than the booming period that came before it. Real wages and salaries declined by about 1% per year during the strong growth years before the recession and continued that pace in the 6 years thereafter. So even when things seemed to be good for labor – they weren’t.

The only part of earnings that differs from this static pattern is health-related benefits. While total benefits were growing at 0.3% before the recession, real health-related benefits were growing by eight times that much or 2.4% per year. After the onset of the recession total benefits grew by a little less than 0.2% per year while health-related benefits were increasing by almost 2% per year. The recession did not slow the pace of health benefits.

The economy was blazing before the recession. On April 1, 2007 the unemployment rate bottomed at 4.5%. It previously peaked at 6.1% in 2003. The 4.5% shows that despite many adverse long-run trends, the US economy was capable of creating jobs. As recently as 2007, there was little national priority or serious concern about the employment effects of globalization, industrialization, and demographics. It was all about the economy stupid! From 2003 to 2007, the annual growth rate of the economy averaged more than 3 percent per year. Similarly from 1992 to 2000, the US economy grew rapidly and the unemployment rate fell to 3.8% in April of 2000.

The key takeaway is that we always have long- and medium-term headwinds – but the key driver of unemployment in the USA has for a long time been the strength of the economy – economic growth. And the same goes for earnings in the private sector. Since 1986, the growth of earnings has been essentially trendless with an average growth of about 3% per year for almost 30 years. Earnings growth picked up to almost 4% per year when the economy was growing rapidly –at the end of the 1980s, end of the 1990s, and around 2007. Earnings then slowed considerably during slow growth periods and recessions – falling below 3% growth in the early 1990s, early 2000s and then more recently.

As our data below shows, employment has been slow to resume growth and with that has come subpar improvements in earnings.  The reason is that this recovery has had strikingly anemic economic growth. The past data suggests that once economic growth returns to normal, so will employment and earnings. So while raising the minimum wage sounds hopeful the truth is that this will have little impact on earnings or economic growth. What we really need is a pro-growth economy hitting on all cylinders.

But even growth won’t solve all earnings problems when measured in buying power. Real wages have barely budged in the last 30 years. The problem in that regard is inflation. Since high employment and strong growth often bring higher inflation – a higher earning does not necessarily buy more.  Between 1980 and 2013 earnings grew by 194%. Prices as measured by the CPI grew by 183%. The Fed says they are not worried about inflation in the US now. But it seems to me that stronger growth coupled with low inflation might be the best thing they could do for the average private sector worker. Unfortunately policy is not headed in that direction. The Fed seems to be saying that inflation is too low right now. We'd be better off if Janet Yellen took her foot off the pedal and allowed earnings to rise relative to inflation. 

Tables. Earnings in Private Industry

Average Annual Rates of Change, 2003 to 2013

Before, During, and After the Recession

In current Prices

                             03-07    07-09      09-13

W&S                     3.3          1.9          1.8

Non-Health          3.8          1.0          2.4

Health                  5.8          3.8          3.5

Total                    3.7          1.9          2.0

In Constant Prices**

                            03-07    07-09      09-13

W&S                   -0.1        0.4          -0.2

Non-Health          0.4        -0.5          0.4

Health                  2.4          2.3          1.5

Total                    0.3          0.4          0.0

**CPI                  3.4          1.5          2.0

Climate Change: Where Did All the Cranky Scientists Go?

I wrote about wage gaps recently and now I want to write about climate change. Apparently I am going through the change. These are not macro issues per se. But they are as important as the Indiana Pacer’s playoff chances and therefore I am sticking my head out with full realization that my health is in jeopardy.

Before we get started let’s make something clear. I am not challenging climate change. I think it is real. I am not challenging all those climate change scientists. They know a lot more about climate change than I will ever know – and there are a lot of them.

But I am wondering out loud about their choice of information distribution. Their choices about how to communicate this information cast suspicions on the policy implications of their work. Recall that we used to think the earth was flat. I wonder if there were a few “scientists” around at that time who challenged the prevailing view? What did reporters at CNN say about those guys? I also remember when Hwang Woo-Suk reported that he had cloned a dog he named Snuppy.  A highly regarded professor at Seoul National University, his work was published in the best journals as state of the art stem cell research. It was not until one of his colleagues discovered some funny business that we found out the truth. He had really cloned Nancy Pelosi. Ha ha. Just kidding.  Remember all the buzz about cold fusion? It was going to save us all from electricity costs. Hmmm – maybe not, at least not for a couple hundred years.

Two points. 1. Science doesn’t always have it right even though a lot of highly regarded scientists agree. 2. Science is ongoing and it is skeptical. If you have been sentenced to any college courses about science they will always tell you that everything we know and learn derives from using the scientific method. No not the rhythm method Charlie – the scientific method. There is a lot of common sense in that statement. It basically says that you “don’t know nuttin” until you subject your ideas to the data. If your idea passes the empirical test – then scientists say – you failed to reject your hypothesis. Notice the wording – it DOES NOT say that you proved your point. It does say that you didn’t reject your idea this time and you get to pretend like it is true – at least until the next test of it comes around. That’s my dear friends is science.

Notice the conservative or skeptical approach to knowledge taken by scientists. The data confirms you this time fella – but we are not going to really trust this idea until we test it again. And again. And again. Even Einstein’s theories changed over time as scientists found that previous versions could not pass new tests. When I was a youthful maco-scientist and sent my path breaking articles to the academic journals, I knew that I would get an earful back. As other economists pored over my results they found weaknesses and they were quite clear and vocal about them.

Science is ALWAYS skeptical. And this gets me back to climate change. I spent the day finding and then pouring over the latest report: IPCC Intergovernmental Panel on Climate Change at http://www.climatechange2013.org/images/report/WG1AR5_SPM_FINAL.pdf

This shows you how boring my life is that I would take a perfectly good sunny afternoon and sit in my office and read this long and tedious report. Okay I did sip a little JD. The full report is not available and won’t be until later in the year. What I looked at was the Summary for Policymakers (33 pages of very small print). But give me a little credit for going through the report. I doubt that any of our policymakers or anyone in the press did that. And I am guessing even fewer people will actually read the full report when it comes out. Why? Because those scientists published a special version of the report in a press release that was two pages in length and had no real scientific terminology. It did have words like

A new report by the Intergovernmental Panel on Climate Change (IPCC) shows

that global emissions of greenhouse gases have risen to unprecedented levels despite a growing number of policies to reduce climate change. Emissions grew more quickly between 2000 and 2010 than in each of the three previous decades.

According to the Working Group III contribution to the IPCC’s Fifth Assessment Report, it would be possible, using a wide array of technological measures and changes in behaviour, to limit the increase in global mean temperature to two degrees Celsius above pre-industrial levels. However, only major institutional and technological change will give a better than even chance that global warming will not exceed this threshold.

These words are not science-skeptical and they give very little clue about disagreements of any kind in the analysis. They did explain that 31 teams from across the globe worked on the report. In fact, this press release is nothing but ringing an alarm bell and endorsing public policy. I am not sure what these scientists know about public policy but they didn’t explain that either. Clearly most of the press didn’t care. They were ready to spread the religion.

What is missing in the 2 page press release, sadly, is also missing in the longer report for policy makers. The longer report does have a lot of scientific jargon. But it doesn’t have a scientific attitude. It is skeptical about nothing. I would love to get some of the round-earth-ers together – people who thought some results of the flat-earth consensus were weaker than others. There must be some scientists inside this IPCC group who agreed with some general principles and conclusions but who saw some weaknesses in the models.

Some of these caveats come out but they are dispensed with as soon as they are mentioned. The recent 15 year hiatus in global warming is attributed to deep water or some such thing. I was a kid 15 years ago. That’s a lot of time to dismiss because it flies in the face of other facts. Real scientists love it when things fly in the face of their assumptions. Sherlock Holmes would find the smallest clue and that would take him to the killer. These were the same clues missed by other detectives. It is also interesting that many global climate change models work for the world – but somehow don’t explain specific regions.  If I had an economic model that explained Indiana’s spending but the model could not explain spending of Hooisers who live in Indianapolis, you might wonder about that model. Climate change scientists admit this but then move on as if it were an afterthought. They sweep it under the rug.  In economics we would call that an aggregation problem. It clearly bears further investigation. What would Sherlock do with that? 

And speaking about models, the real test of models is how they predict the future.  It is nice if a model can explain the past but the future is the real litmus test. This report admits that previous forecasts using similar models that were used to predict the last 15 years are totally off – we got cooling instead of warming. So we are supposed to believe the predictions of the newer models for the next 15 years. If I predicted stocks wrong for the last 15 years – few of you would let me invest your money today.

Of course, the easiest test of models is to see how they “predict” the past. These are trial runs. How did our model do? Scientists look at model errors to ascertain how much to trust its results or validity. Students who take statistics courses learn about model errors, and t tests and R squares,and such things which help us be very quantitative about the accuracy and validity of models. But in all 33 pages of this Summary for Policymakers there are no such statistics. Are policymakers devoid of statistical understanding? Instead these learned scientists use terms like “high, medium, or low confidence”  to give credence to their long string of individual results. Two footnotes on page 3 explain the meaning of these terms and I can tell you that the assigned meanings have more to do with camaraderie of scientists than statistics. To be a “likely” outcome of the model, the assessed probability of occurrence would be between 66-100%. 66% is likely? Is 66% enough to support major changes in the way we live?

I am not a climate change scientist. But I do know good scientific principles. The press release says that it will take “substantial investments” to mitigate the worst of climate change. They estimate a reduction of world output of about .06% -- a very small number. Then they conclude this “the underlying estimates do not take into account economic benefits of reduced climate change.” I wonder where they got those figures?And I wonder where the scientists are who take a more Sherlock Holmes approach to the finding of this august body.  

If policymakers are to know how to deal with climate change – they need more precision about the nature, degree, and timing of climate change. What they get in this report is only half the story. Where are the scientists who are brave enough to tell the full story and reveal the weaknesses in these models? Where are the caveats? Where are the probabilities that the model makes errors? Where is the real science? Perhaps they are right about urgency. A more scientific communication might sway some of us in that direction. Until then we will wonder what the full story is.  

Wages Gaps Vive la Difference

Whether it is income inequality or the gap between men’s and women’s wages, we have a President who single-handedly wants to kill that difference. And while it is impossible to argue on moral grounds that it is a good thing for people to be discriminated against, it seems the President is missing some real fundamentals in his quest.

Think of all the cases of differences we mostly accept. Some guys and gals get really tall and become successful basketball centers…and millionaires. Danny DeVito was a tiny man who became a successful actor. Napoleon was pretty tiny too. These guys never would have played center on any basketball team. We say men are from Mars and women from Venus. We celebrate these differences. On a lot of Saturday nights we dance, go to movies, have debates, and otherwise enjoy being with the opposite sex. Vive la difference.

Already some of you are fuming. Larry – it just isn’t fair for a man and woman to have the same job and be paid differently. But that just isn't the case. Before you explode, keep reading. 

What we all want is fair treatment when it comes to pay. But let’s face it – fair is not equal. I was a prof for 30 something years. I saw some pretty horrible profs who neither prepared for class nor did any research. It would have been unfair to pay those jerks the same as others. I also saw award winning profs who were incredible teachers. 

They got better pay raises than most of us and deserved them.

Think about every job you ever had. There were people who came in early, took short breaks, and went home late. Others were not so wedded to their jobs and couldn’t wait to bust out of the building so they could watch their kids play soccer or otherwise enjoy their non-business lives. While you don’t want to stop people from having balanced lives, it also does not seem fair or right to penalize those people who made disproportionate contributions to the organizations’ successes.

And then there is the path to the job. You and I might have the same job and work the same hours – but let’s suppose you grew up in a low income family and were very motivated to exit that status. You worked very hard at school and took the courses that would prepare you for a high income career. Me, on the other hand, born with a golden spoon in my mouth, spent more time playing cards than attending classes and majored in any field that provided a quick path to graduation. Uncle George helped me get my job and I demand to be paid the same as you. Yet I am not not the sharpest tool in the shed and don’t come close to your productivity. Somehow, it doesn’t seem fair to pay us equally.

I could go on and on but the point is made. What someone gets paid ought to have something to do with their contribution to the company or organization. It shouldn’t matter how tall they are, what race they are, their sex, or their parentage. We have laws in this country to prevent discrimination and they should be used and enforced.

What about the 77% stat (or other similar ones) that shows women make less than men for similar jobs? These figures are provocative but not rich enough to support the conclusions. Already there is a competition of stats that show the true number lies somewhere between 77% and 98%. But the truth is that all these numbers fail for pretty much the same reason – they do not bring in all the relevant facts to make comparisons. And they don’t even bring in the most relevant fact of all – how productive are these workers.

One does not have to be a crank to point out that really short people do not excel as basketball centers. Or that music majors often make poor astrophysicists. It is possible that these comparisons work against women for a lot of reasons that have nothing to do with misogyny or discrimination. Recall the women are from Venus thing? Women historically and still often play the larger role at home and/or with the children. Women have often been called the second income earner as a choice to promote family stability. Women often need flexible work schedules which sometimes put them at jobs that pay less or which work fewer hours. I haven’t kept up with the latest on women’s schooling or with women’s occupations. But surely women are different from men and these differences imply statistical gaps that have nothing to do with discrimination.

So why does all this really matter? It matters when it comes to every woman in the marketplace who earns a wage. Every woman who works for an organization should be paid according to her productivity. While productivity is no simple thing to measure, every co-worker, every supervisor, every VP, and everyone somewhere close to that woman’s work knows what her productivity is. I have never worked for any organization where productivity was a secret. I was an Airman in the Air Force and worked in an office with about 10 guys. We all knew who the slouches were – and we all knew the guys who made the difference. Let the companies make the decisions. And then let discrimination laws take care of any discrimination that results.

We don’t need the President of the USA sticking his nose into these matters. It doesn’t hurt to raise consciousness so that all people are treated fairly. But proposals requiring even more data from firms won't stop discrimination and have all the potential to harm what is already a very weak economy. The best thing we can do for women is what we do for men. Make them aware of the importance of productivity to one’s material well-being through advising about good choices with respect to education, training, career choices, family decisions, and so on. A woman has the right to choose and those that prefer to NOT maximize future income should have the right of lifestyles that meet their goals while paying them somewhat less along the way. To me that seems fair to those people who choose the opposite. 

The Fed -- One-Armed Juggler with Hand Grenades

As many of you know I am a retired professor. That means prunes for lunch followed by a well-deserved nap. Recently I was invited to a lecture at my local university and in a fit of insanity I decided to encounter traffic, parking, and students-walking-with-phones. I am happy to report that I made it to the lecture and back home without incident.

I won’t go into the details but it was a very prestigious group of speakers with prominent alumni in the audience and many of the grad students wearing their finest coveralls. Some of the speakers represented the past and present of the Fed.  

I am both glad and sorry that I attended. I am sorry because I am not used to sitting so long in regular (not sweat) pants with a belt. I am also not used to other speakers going on and on and on. It isn’t so bad when I excite my audience with thirty minute explanations about totally obvious points – but when I am at the receiving end it is quite another matter.  But I am not sorry I went because I learned a lot from these speakers. 

They spoke about the onset of the last recession, about policies aimed at the recession, and they ended by speaking about the future.  Much of what they said I agreed with. But some of what they said really alarmed me.

Agreement – in the face of the worst financial and global economic crisis since the Great Depression, the government and the Fed needed to provide some quick liquidity and some stimulus. I am not one of those economists who believe that in 2008 Adam Smith’s so-called Invisible Hand was the best approach. The Fed should have played the role of lender of last resort. The government should have applied some stimulus. But once we agree on that then we start to take different paths.

This is not the place to enumerate all the differences. Instead I want to focus on a couple of threads that really scared me. The first has to do with the assessment of the Fed’s use of quantitative easing or QE. One panel member said that when interest rates get to zero, then QE is necessary. So it was perfectly okay and successful for the Fed to begin actively buying mortgage-backed securities and long-term government bonds. The reason this was okay and successful was evidenced, according to this speaker, by stabilizing inflation expectations.

Note: These speakers said a lot of things and I have to admit that I was dozing now and then. So it is perfectly okay for the reader to interpret my remarks as targeting some unspecified speaker if I have not faithfully represented  views actually espoused that fine day.

One could say that since inflation is the key objective of the Fed, it goes without saying that a policy to address inflationary expectations was well in the purview of the Fed. Since demand and inflation were falling at the onset of the recession, it seems the Fed did the right thing with QE. But that would be too simple for several reasons. First, with its usual tools, the Fed’s mandate has always been macroeconomic. The Fed is not supposed to bailout a tornado-damaged community or help a beleaguered furniture industry. It had a dual mandate to approach national goals for inflation and unemployment. Buying short-term government bonds so as to influence the federal funds rate was compatible with stabilizing the economy. But buying mortgage bonds and long-term government bonds is a horse of a different color.

Second, buying mortgage bonds is basically what it is – helping out the mortgage market and the housing industry. You might argue that if the mortgage market was the source of national problems then it made sense to buy mortgages. But that’s a sticky wicket since QE started well after the beginning of the recession and continues today. Many would say that this practice of focusing on a particular industry is simply inappropriate because it is really fiscal policy. I would also say that it has already become ingrained in Fed policy and thinking. Somehow the Fed has gone from monetary policy to fiscal policy. Since the government is supposed to be the one doing fiscal policy is just doesn’t make sense. The Fed has neither the appropriate tools nor the jurisdiction to have permanently changed its modus operandi. Remember what the Fed does is determined by national law. As far as I know the law didn’t change.

Third, buying long-term government bonds is also another change and a ruse at that. It is no secret that government stimulus programs dramatically increased the need for the government to borrow. Having the Fed in these markets creating a huge demand has certainly made it much easier for the government to borrow – and keep borrowing long after the storm has passed. Was this QE done to stabilize inflation or to support government borrowing? If it was the latter then in just a few years this Fed has thrown away both its independence and credibility.

The second worry is that the Fed has no real plan to stop QE. Sure it has been slowing purchases for a few months but there is still no clear evidence it will stick to this path when Chair Yellen regurgitates Bernanke’s promise to keep interest rates at near zero until the economy is clearly strong enough. But is the road to Hell not paved with good intentions? Every time the economy reaches another milestone the Fed smiles and tapers, and then the markets react badly. Good news is bad news? Postponing the tapering then leads to market jubilation. Is Janet Yellen really going to remove the punch bowl? If markets bless less tapering – the Fed takes this as a sign of policy success. When the market hisses at more tapering, surely the Fed will cave to the markets drug addiction for Fed asset buying.

The Fed put itself and us between a rock and a hard place by promising low interest rates when every indicator is that rates will and should rise to more normal levels. If the Fed does the right thing and returns to a normal policy, rates will likely overshoot and create another recession. The government will accuse the Fed of terrible acts since it will have to borrow at higher rates. Housing market participants will cry even louder.  If the Fed does the wrong thing QE will feed bubbles in housing, government bonds, and stock markets, facilitate the spending and debt appetite of the government, raise inflation expectations, raise interest rates, and likely cause a quick growth spurt followed by a recession.

There are good reasons why the Fed had a simple mandate. A one-armed juggler can only keep so many balls in the air. This Fed has too many balls in the air and they will soon be landing on our heads. No more seminars for me!

Happy Fifth Anniversary by Guest Blogger Buck Klemkosky

It all began on March 9, 2009 – a time of skepticism, despair and pessimistic thinking. Some were even questioning the future of capitalism. It had been a turbulent decade in the stock market with the S&P 500 peaking at 1527 in March 2000 before falling 49 percent to 777 in October 2002. The market then rallied 101 percent to peak at 1565 in October 2007 before suffering a 57 percent decline to close at 677 on March 9, 2009. The U.S. was in its worst recession since the 1930s, the financial system had nearly collapsed and housing prices had also declined for the first time since the 1930s. In total U.S. households had lost more than $13 trillion of wealth from the stock market ($9 trillion) and housing ($4 trillion). Investors had plenty of reason to be pessimistic.

While difficult to do psychologically, investing during pessimistic times provides opportunity, and March 9, 2009 would have been one of the best stock buying opportunities in two decades. The S&P 500 has increased 177 percent from March 9, 2009 to March 7, 2014 and total returns, including dividends reinvested, have exceeded 200 percent. During the five-year period, $15 trillion of wealth was created in U.S. stocks. A good five years to be invested in the stock market for sure.

Unfortunately, many investors have not participated in the bull market. Using mutual fund flow data, individual investors were net sellers of equity mutual funds every year from 2008 to 2012, to the tune of $500 billion. Equity fund investors did turn optimistic in 2013 and purchased a net of $19 billion. The opportunity costs of keeping the money in cash would have been huge given the low Fed-induced interest rates. Net inflows into bond funds during this period were $1 trillion, much greater than the net outflows from equity funds. An indexed bond fund would have provided five-year annual returns of 4.42 percent, much less than equity returns of 24 percent, but better than cash.

The sectors of the market that did the best and outperformed the S&P 500 during this five-year bull market were the ones that did the worst during the bear market and recession, namely consumer discretionary, financials, industrials, technology and materials. The more stable sectors of the economy, health care, energy, consumer staples, telecom and utilities, underperformed the S&P 500, although all had positive five-year returns.

Five years on, the bull market celebration continues. How does this one compare with prior post-WWII bull markets? Bull and bear markets are arbitrarily defined as market moves of +20 or -20 percent respectively. By that definition, there have been seven bull markets in the post-WWII era and the present one is the sixth longest and still counting; two more months and it will move up to number four. The granddaddy of all bull markets was the one that lasted from October 1987 to March 2000, 4,494 days, compared with the present one of 1,824 days as of March 7, 2014. This bull market’s return of 202 percent would rank it second to the one in 1987-2000.

Corrections of 5 to 10 percent are normal for any bull market, and the present one is no exception. The S&P 500 experienced declines of 16 percent in 2010, 19.4 percent – almost a bear market – in 2011 and declines of 9.9 percent and 7.7 percent in 2012. Volatility wise, this has been a fairly normal bull market.

Is this bull market starting to look long in the tooth? It may be starting to show its age but certainly hasn’t reached an exhaustion stage yet. Most investors have been skeptical of this bull market, which is understandable given the two bear markets since March 2000. It has climbed a wall of worry and skepticism with little of the speculative euphoria seen in the 1990s and other bull markets. The market is fairly valued by most valuation metrics but these are not normal times with historically low interest rates, strong corporate balance sheets, a stronger financial system and less-indebted households. Still, expectations of a growing U.S. economy and higher corporate revenues and earnings will have to materialize in order for this bull market to continue past its fifth anniversary.

Crash Diets, Debt, and National Economic Growth

Last week I argued that the priority for economic growth had slipped and pointed out why this is a prescription for continued labor and economic problems. For a government that claims it wants to help the average guy, its opportunistic approach to labor market (and other) problems does nothing but slow the healing process. Today I want to take this discussion a little further and possibly irritate even more of my friends and relatives. I associate the government’s current shotgun approach with the popularity and (lack of) effectiveness of diet crazes.  

Some of you responded last week by admitting that economic growth is crucial for developing countries. When the average person in a country makes $1000 per year it seems pretty obvious that economic growth is the only sustainable way to lift people out of poverty and into lives that more closely approximate modern living. There is no serious debate about the negative side-effects of growth in such cases. The first priority is to improve the lives of very poor people. Of course there is always some debate. I have been lambasted more than once by questioners attending my speeches who pointed out how the serene and wonderful lives of people living in jungle huts were destroyed by the encroachment of economic development. I also remember the NAFTA debates that pointed out the deplorable conditions faced by inhabitants of northern Mexico as they traded rural lives for wealth aspirations associated with factory work in the Maquiladoras.

But while many growth critics will agree that economic growth is okay for poor countries, the party ends when we start talking about richer nations. Apparently it is okay for poor people to get richer but at some point self-appointed representatives of proper behavior draw a red line that means enough is enough. Earning one more dollar above that line is apparently not worth whatever side-effects might accompany the increase in income. This idea is not without economic foundation. Economists often cite “diminishing marginal utility of income (DMIU).” That fancy term means that as your income rises the satisfaction you get from each additional dollar gets smaller and smaller. So when a poor guy earns another $100, he is happy as a lark. But when a rich guy earns an extra $100 it means very little to him and he leaves it sitting on a park bench with his half-eaten croque-monsieur.

While DMUI sounds pretty intuitive a critical question asks when any of this actually kicks in enough to make a difference. Judging from park benches in the USA today, I see very few $100 bills sitting around. Does someone who makes $50,000 a year not value what another $100 will buy? Does someone who makes $250,000 not value the extra Benjamin? Where is the line? I will agree there is a line but I have never observed it in my family. If DMUI kicks in at a low income level then it follows that the negative side-effects of growth might dominate the good things generated by it. But if high income people value extra income sufficiently then it is not so clear that DMUI favors less emphasis on strong growth.

Another relevant economic concept comes from a psychologist named Abraham Maslow, “hierarchy of needs”. Wikipedia has a lengthy technical discussion (http://en.wikipedia.org/wiki/Maslow's_hierarchy_of_needs ) but the simple and popular version is that human beings (that means you too Charlie) first must meet their biological needs for food, water, etc. Once they have enough income to meet those needs, then they move up the ladder to such things as JD, security, friendship, self-esteem, and morality.  This is important for a couple of reasons. First, it gives a foundation for valuing all human wants and needs. Who is to say that the “higher order” needs are not important? Surely you must eat and drink to survive, but some people could barely “survive” if they missed the latest showing of Survival. Clearly people are willing to die to protect freedoms to associate, speak, protest, etc. If higher incomes allow a country to reap some of these higher order benefits, I am not sure where we are supposed to draw the line and stop the income parade.

But a more important aspect of Maslow is how it affects our political aspirations. Once a country gets richer and once basic needs are met for most of the people, then Maslow’s hierarchy might suggest a political recognition of higher needs.  More equal incomes, cleaner environment, and more humane immigration policies surely seem more important once you are easily meeting basic needs for survival. But again, the argument is not about the theory. The debate centers on the values of the tradeoffs. What if economic growth is negatively impacted by a stronger focus on equal incomes, a cleaner environment, and more humane treatment of immigrants? What if weaker economic growth then makes these higher order objectives less attainable? Or put another way, an "obvious or direct" approach doesn't always succeed. How many crash diets ultimately succeed?  Just because you think a diet will make you look like Popeye’s girlfriend Olive Oyl or Dan Marino, we have plenty of evidence from millions of people who try extreme stupid diets that do nothing but create more income for shady businesses.

When smiling politicians tell you that they have wonderful ways to redistribute incomes or improve the quality of the environment ask them how they are going to accomplish those goals when the policies of the last 50 years have done little to create lasting remedies. More important, however, is to ask them what happens if such policies create more debt and/or rob the country of its higher economic growth.  If such direct approaches to a myriad of higher order needs have dubious chances of succeeding and very strong chances of creating more debt and less income, then one has to wonder if there is a better approach.

That better approach is twofold. First you reduce debt. The more we sustain historically high levels of debt, the less wiggle room we have. Look at this latest issue with Russia. A country with no debt can easily devote more resources to an urgent military conflict. The same goes for natural disasters. But if you have a large debt, the only way for the government to spend more on the emergency without having even more debt is to spend less on other government priorities. We hate that. So we need to have less debt now to give us more room to spend tomorrow on our highest national priorities. But reducing debt isn’t enough.  What we spend is limited by our incomes. When a nation grows it generates more tax revenues that support government spending. If you want to afford expensive policies for anything – environment, income distribution, defense, security, etc – then having a higher income and more tax revenue is the surest way.

Crash diets don’t work. Healthful living does. Every diet that takes you away from a sustained healthful life plan simply makes you worse off. Shotgun approaches to numerous national problems that threaten economic growth and/or create more debt are doomed as well. 

National Growth, GDP, and the Geico Gecko

Aside from the articles I have been reading this week about China, it is remarkable how little focus there is about economic growth. Europeans acknowledge substandard growth but do little about it. Brazilians have their hands full dealing with protests relating to the coming World Cup. Governments in Turkey and Venezuela are two examples of demonstrations in the streets that have nothing to do with growth. Of course former Soviet States are now preoccupied with Russian aggression.  In the US we have a myriad of issues that policymakers have apparently placed above economic growth including climate change, immigration, the minimum wage, healthcare, and income redistribution.

One would think that after five years of disappointing employment and output gains, there would be more people in the street demanding stronger economic growth. One could imagine all manner of government committees hammering away at the best ways to restore economic growth. I understand that ideology has made it difficult to find a solution but that doesn’t fully explain why no one is even trying. We get steamed up when Russia exerts its will over defenseless people living on their borders – why is there no constituency comprised of the millions of small businesses and employees who are languishing in the shadows?

I have advanced some reasons for tepid approaches to growth in past posts but in this one I focus on the very meaning of macroeconomics. We take macro for granted since we have used its concepts and theories for at least half a century. GDP and inflation are macro concepts as widely known as spinach and atoms. We oooh when GDP rises and we cry when inflation accelerates. But the truth is that no one can buy a GDP and no one pays inflation. These and other concepts are made up by government statisticians and they are no more real to you and me than the Geico gecko.

GDP, inflation, and other macro concepts were designed for national cheerleaders. That is, we call the area within the boundaries of our nation the USA. Most of us are nationalist cheerleaders – we root for our Olympic teams and we revel in strong national economic growth.  In economic terms, this nation is made up of a lot of parts – bourbon is largely produced in Kentucky; skilled workers reside in California and Washington; a lot of autos are manufactured in the Midwest; Cruise ships depart in huge numbers every day from Miami and Fort Lauderdale; Las Vegas had a huge crisis in residential housing; and so on. Everything is local. The US scorecard is credited but the truth of more Recreational Vehicles produced is that most of the benefits go to Northern Indiana.

To repeat, everything is local yet we cheer for the national team. Why? One reason is that when residents of Elkhart, IN do better, the benefits often spread to a wider geographical area as Hoosiers spend their new found wealth in other places. But a stronger motivation for macro is that our elected federal policymakers in Washington have an obligation to improve the economic well-being of people across the country. Their job is to make GDP sizzle like your favorite steak.

That is what they have done for decades. Whether it is the Fed or Congress, we hear over and over about how their policies address national concerns with national remedies. We argue about the success of these policies but it is undeniable that macro has been a very important motivator and macro policies have been the result.

And this game has worked because of the inter-related and interdependent nature of the US economy. While each region and sector might have obvious and stark differences, these matter less if a national macro policy appears to have broad benefits spanning the country. We all know that some regions or some products or some industries or some workers are impacted more than others – but so long as the benefits and costs appear to be borne across the nation – we consider macro and macro policy a legitimate exercise.

So that gets us to where we are today. People bought this macro story in 2008 when we all felt threatened by a severe global downturn.  Helping the Saving & Loan in Fort Myers was not seen as a bailout for Florida or Real Estate. Rather it was viewed as part of what was necessary to bring the whole nation back to economic health. But that was then. Despite the fact that slow economic growth is very damaging, notice how many non-macro beliefs exist which stand against the advocacy of growth policies right now.

1.     Growth will not be shared among all workers

2.     Growth will not help the long-term unemployed

3.     Growth will not raise the wages of those with low skills

4.     Growth will not protect administrative workers from unfair business practices

5.     Growth will worsen pollution connected to energy production

6.     Growth will not solve problems of healthcare price inflation

7.     Growth will worsen illegal immigration

8.     Growth will not redistribute incomes from the rich to the poor

9.     Growth won’t solve problems associated with crime and poverty

10.                        ……….add your own here.

This is not just ideology and politics – these and other charges shake the very foundation of almost 80 years of macroeconomic analysis and policy. We can argue every one of the above points but the truth is that I cannot remember a time in my career when macro was so dubious. I checked the dictionary and one word used to describe dubious is suspect. Today macro is suspect. 

I point that out because I believe that while macro is a suspect – it is mostly not-guilty. I agree that income distribution has tilted towards the rich. I agree that the last 10 years have witnessed a time when many persons did not share equally in prosperity. But I will say that if there ever was a time when national economic growth could improve the lot of most Americans, it is now. And I will say even louder that if we spend all of our time debating the 10 points listed above, we will surely languish in substandard growth for the foreseeable future.

Let’s put it this way. There should be a time for everything. We don’t have the resources to do everything right now. Some of you would prefer to deal with a myriad of issues because you think they might goose the growth along. While some economists are making up theories that support income distribution before growth – I think there is much more evidence for the reverse. Let’s focus first and foremost on the national economic growth. Once we get a head of steam going, then we can work on the infinitely harder problems of distribution, immigration, climate change, etc.