Politics Today and Marginal Analysis in Economics

Those of you who took a course in economics remember the idea that to establish any optimal decision, it usually took the intersection of marginal this or marginal that. 

Probably the most famous of these marginal analyses relates marginal cost to marginal revenue. When MR=MC, we know the firm is producing the output that yields the maximal amount of profits. If MR>MC, then you know you can make greater profits by producing more. If MR<MC, then producing another unit would raise cost more than revenue so you would not produce more.

We have marginal equalities that guide just about all important economic questions –among them are how much to produce, how many workers to hire, how much to pay workers, and where to set your price.

So when we hear so much commotion these days about government spending and taxation, it might be good to remember that most of what we know in economics is all about marginals. The word marginal means “at the edge of something”. Or in terms of most economic applications, it means a small change from a given starting value. 

When we talk about marginal cost we ask, how much will costs change if we produce one more unit of output? We don’t say, how much will costs change if we go from producing 1 car to producing 10,000 cars….or a million cars? Or if we are producing 16 million cars today then we might ask, how much will total costs change if we produce 17 million cars?

Marginals are about small changes for good reasons. It is much easier to think of a small change in output as having known and quantifiable cost changes associated with it. A small change in output probably means more or less the same factory space, with the same utility costs, with same property taxes, and so on. Yes, a small output change might require more worker hours but the relationship between a small change in output and the change in employment ought to be well known.  Contrast that to someone who says, let’s increase output from 1 million cars to 100 million cars. Wow. Estimating the costs of a large change like that could be a lot more complicated and uncertain.

The above is why I am getting nervous about the coming election. Many of the viable candidates on the Democratic side are making a case for non-marginal change. They want big changes. And who can blame them? We have big and enduring problems, and these might require major policy changes. I am not saying that it is wrong to want to make large changes. What worries me, instead, is the confidence that these politicians seem to have about how these large changes will benefit us and how much they will cost. I don’t care if one takes the side of the Ds or the Rs in this context of billions and trillions of dollars. The trouble is believing any of them when they start throwing around trillions of dollars like Jack Daniels mini-bottles on an Alaska Air flight.

One source of these estimates is a group called the Committee for a Responsible Federal Budget http://www.crfb.org/blogs/would-medicare-all-require-middle-class-tax-hike .

With respect to Medicare for All, they estimate a bill of about $27 to $35 trillion dollars. That’s a lot of JD. That amount for one program is equal to 100% of GDP and is larger than the national debt. I don’t know how we can be sure of that amount as we switch millions of people out of their own insurance policies and into the government program. In fact, since private premiums would go down, it is unclear how much more we will pay. Of course, I don’t know how anyone could estimate how much more healthcare we will consume when the price for so many people will go down.

The candidates, of course, have very different opinions about who should pay for this program. One candidate thinks the rich will pay the full amount. Do the rich really have an extra $30 trillion just hanging around? Other candidates think the middle class will have to pay a bit of the price tag. They have not told us how much they would pay. 

Maybe they don’t really know!!!! Private estimates are all over the place. One source saying that tax burdens will double for millions of us. Another says the vast majority of workers will pay less for healthcare. Your politics might have you leaning one way or another. But be honest – these folks are pulling this out of their butts. I’d suggest a colonoscopy.

I won’t belabor the point by adding to this discussion all the other programs being debated on the campaign trail including free education ($2.4 trillion), a write-off of past educational loans ($1.6 trillion), the Green New Deal ($93 trillion) … and free JD. While there is much debate about who exactly would pay for this (rich, middle class, military budget reductions), the truth is that if any of these numbers for spending are even close, it is going to be a very major hit on the country.

The point remains. With extremes running the political process how can we believe any of this? Large changes have got to be tough to swallow regardless of these estimates. Why can’t we go back to marginal changes? Is the risk of causing incredible havoc really something we want to face? Why can’t we just go back to the smaller changes of a marginal analysis? Maybe that is too boring? 

The Fed Again -- Are you Kidding?

If you bother to read some of the articles about Federal Reserve policy lately, the facts and terminology are stunning. So stunning that I have no idea what they are talking about.

Apparently a couple of weeks ago something happened in the financial markets and the Fed had to buy a bunch of bonds -- and once again the Fed flooded the markets with money. I have read a bunch of articles about this event and even more recent ones that acknowledge the Fed is still pumping money in. If this was a fire department pouring water on a fire, surely by now the planet would be totally submerged.

All this has to do with something called bank reserves. While learning the money supply process takes a semester course, the truth is that it is pretty simple. First, the Fed decides the economy needs more money. Second, the Fed buys assets from banks -- mostly outstanding government bonds held by banks. Third, the Fed pays for these bonds with money. This is a special kind of money that banks can hold as reserves. Fourth, banks then lend it out and the world is awash with money.

Reserves is a technical word but by law, banks are not allowed to loan out all the money they receive. That would be risky. Banks want to loan the money out because that's how banks screw the public -- um, I mean that's how banks earn revenues and profits. The Fed regulates how much they have to hold back in reserves.

Point: the Fed injects money into banks. Banks loan some of it out. Banks hold some back as reserves. Now wasn't that easy? Send your tuition payments to me at my usual address.

Now that you are experts on bank reserves, you can understand what the Fed did recently. When market rates jumped like cockroaches in a frying pan slathered with olive oil, the Fed concluded that banks didn't have enough reserves. Simple, the reason rates were rising so much is that banks didn't have enough money sitting in vaults ready to lend to each other. Translation, reserves were insufficient for market activity. So voila, the Fed pumped a bunch of money into the markets.

Here's my question about all this. Look at the graph below. It shows bank reserve balances since 1950. The chart looks weird, and you can hardly see the amounts before 2009. Essentially the amounts were chump change. Bank reserves then jumped to $2.8 trillion.What????? From basically zero, they jumped to almost $3 trillion dollars.

Why? Because the Fed was correctly playing its role as a lender of last resort. The great recession of 2008-09 needed a boost from the Fed and we got it to the tune of $2.8 trillion. According to the lender of last resort theory, once the economy is growing and safely past a recession, they can pull that money out. As the chart below shows, they did begin pulling some money out in 2015 -- some six years after the end of the recession.

The chart also shows that the amount remains at a little lower than $1.6 trillion. Given that zero was a normal amount of reserves before 2008, why all of a sudden is $1.6 trillion in reserves not enough to accommodate most hiccups in the economy? Why did short term interest rates jump to the sky when we have $1.6 trillion of reserves sitting in banks?

This is a new world and one I don't understand. And despite all the articles that have been written in the last weeks, I have seen not one word to explain why $1.6 trillion in bank reserves is insufficient. Accordingly, I would ask those geniuses at the Fed why they now think they need to pump even more reserves into the banking system. Apparently now, $1.6 trillion isn't enough.

Sadly, I know why. Over-regulation of banks and the usual liberal/progressive monetary policy ideology are responsible. The Fed wants to be the big dog in town. The Fed wants to save the day. The Fed wants to jump into the economy every time they sense even the smallest hiccup. Sad but true. We deserve better policy. Dear Fed: Figure out why $1.6 trillion in reserves isn't enough in 2019. Then fix that problem. Quit flooding us with money! We are drowning.

Candidate Warren and Skin in the Game

Do you have skin in the game? Do you have a frog in the race? Do you have a cabinet full of JD? We know what these phrases mean. They are asking if you have something to lose.

Why ask these questions? Usually it has something to do with the earnestness of someone commenting on an issue. If you have no real connection to the issue, then maybe your opinion is not as important as those of others more directly involved. 

“Let’s raise lip stick prices by 100% tomorrow”, said Peter.  Diane, who actually wears lipstick disagreed. If Peter has no lipstick and no real connection to lipstick, we might want to put more stock into Diane’s opinion on this matter. Of course if the topic changes to jockey shorts, then the situation might be reversed. Peter is a known jockey shorts wearer.

Presidential candidate Elizabeth Warren recently introduced the Accountable Capitalism Act. If passed it would affect all companies with more than a $1 billion in annual sales. All those companies would have to obtain a new Federal Charter. CEOs and directors would have to serve stockholders and the workforce, its customers, the local and global environment, and community and societal factors.

This is newsworthy for several reasons. First, it makes explicit that companies can no longer be solely focused on stockholders. Second, it makes explicit who all the stakeholders are. Third, it expands the scope of government as it relates to regulating business by creating a very complicated and unspecified (ie risky) responsibility for CEOs and company directors.

Let’s take the explicit part first. Please tell me how a billion dollar company can ignore any one or more of these mentioned stakeholder groups. I cannot imagine a director’s meeting where the agenda did not include issues relating to the employees, the local community, social responsibility, and so on. The issue is not so much whether companies do this sort of thing – because they do.

The issue here is to shift the responsibility for running the business from the CEOs and directors and into the hands of workers, union leaders, community representatives, and perhaps members of the Greenpeace Fund. Yes, when it comes to pricing milk in March and deciding on where to buy other productive inputs, Elizabeth Warren believes we need a conglomeration of these people to vote and make the decisions. It is not enough that federal and local government entities regulate many aspects of business (health, safety, hiring, firing, etc), we now need, according to a broad committee, to make sure directors do the best thing for everyone.

And what is the best thing for everyone? And who is everyone? Should local City Council members be on each board? Should United Way officials help companies vote on safety policies? Maybe the local Boys and Girls Club should be represented as well. What expertise do these and other stakeholders have when it comes to objectively judge the impacts of the myriad business decisions made by CEOs and boards?

These questions are not meant to be my usual silliness – but rather to focus on the main issue here. The main issue has to do with how you choose or regulate who is on the board and who is off. When it was only stockholders interests, making decisions was easy. Stockholders are the reason the corporation exists. Think about the origins of corporations. A simple view is that someone decided they had a great idea that would sell. Today all sorts of people are sitting behind their computers trying to develop the next best Internet Application. At some point they need money to keep their efforts going. Just because they have brains and energy does not mean they also have enough money to fund their development process.

These entrepreneurs raise the money from people who want to invest in projects that will give them great returns. Most of us don’t want to take that kind of risk. Even when companies make it and are more mature, many of us worry that buying company stock is too risky for us. We put the money instead into government bonds that offer less risk. Luckily for those entrepreneurs there are people willing to take that risk.

I am not trying to romanticize capital, but I am trying to point out that companies come into existence and stay that way because there are people who don’t mind having skin in the game. Without those people, you can have the greatest ideas and the best employees – but you don’t make it.

Point – stockholders have skin in the game and thus are important contributors to the existence and life of a corporation. Compare that contribution to that made by any of the other stakeholders mentioned by Warren. Clearly the City Council loses but loses a lot less than the stockholders when the company has a bad year. What about the workforce? I think the answer there is more complicated. Employees are clearly critical.  While employees are not always stockholders, they stand to lose a lot if the company has a very bad year. They might get laid off or fired. They might not get a raise. These are not insignificant amounts of employee skin.

In the worst case of a company going out of business, the employees differ in one fundamental way from stockholders. First, an employee’s loss might be looked at in terms of a month or more of unemployment. Some of that loss might be cushioned by unemployment insurance. Most employees will find new jobs. But when the value of the stock plummets and stays low – the stockholder loses the sum. The stock value does not return by buying into another company. The loss of investment is permanent.

This in no way minimizes the losses employees suffer -- but it does point out a difference between temporary and permanent losses.

I am not sure of all the specifics related to Warren’s proposed policy. Clearly companies make mistakes. Clearly companies impact workers, schools, children, the environment, and many other things. But running a company is not for everyone. Running a company is not for political ideology. Running a company means being successful and not going out of business. Typically, when a company is run well it must treat its employees well and it must attend to the very many modern regulations and social responsibilities. If it ignores these stakeholders it does it at its own peril. 

I am not convinced that getting government into the game of day to day management is the best way to help all these stakeholders. Hopefully Candidate Warren will convince us of why these new broad corporate committees will be better for any of us.

US Government Budgeting: The Elephant in the Room

Apparently, the government cannot see the elephant in the room.

There has been little discussion of US budgeting challenges lately. It used to be a lot of fun to have the two parties rant about how the other party was spending the country into ruin. But no longer. They’d rather scream about other things. Or maybe they have decided to put things off. Most recently, they decided to postpone discussions of the budget for 2020 for three weeks. Can you believe that? They postponed for three weeks. Do you really think they will be more prepared to work on the budget in three weeks? That’s rich.

So that gives us an opportunity to get back to basics about the budget. I created the table below to show you where the budget sat in 2018. These numbers are history in the first column. The 2020 column shows where they plan to go. These numbers are already legislated. They could change, of course, if they enact changes to the 2020 budget in the coming weeks.

Keep in mind that some people would look at the 2018 numbers and worry. In 2018, the federal government spent $823 billion dollars more than it collected in taxes. We call that a budget deficit and that number is large by historical standards. That’s a big discrepancy. Usually, a government will excuse a large budget deficit if the country is in a recession. But we were not in a recession recently, nor are we in one now. The unemployment rate is at historic lows.

Each year a government has a budget deficit, it must issue debt to pay the deficiency. Since we have had mostly deficits every year since the Tuna was a little fish, the national debt gets larger and larger. The table shows that the debt will grow by more than a trillion dollars each year over the two years. It will reach $23.7 trillion in 2020. Note—we must pay that debt. Since there are no plans to reduce the annual government deficit, this debt will just increase for the foreseeable future.

The rest of the table shows us how we spend our federal tax dollars. The total spending includes everything, but the individual amounts in the table do not include every category of government spending. The main ones are all there, though.

Notice first that over these two years, spending is planned to increase by $409 billion and that amounts to a 10.7% increase. I hope you get to spend that much more on your household over those years. Note that inflation is coming in lately at about 2% per year so the 10.4% increase is pretty generous. It does not look like the government is worried about spending too much and how that impacts deficits and debt.

Second, look down the 2018 column to see the biggest spending numbers. What do we spend our money on? If you add together Social Security and Medicare, you get a total of about $1.7 trillion. Those two programs gobbled up 45% of the entire government spending in 2018. Of the projected change through 2020, the increase in those two programs is expected to be $192 billion and that amounts to 47% of the total spending increase.

Even though the large defense spending figure leaves out some of the total amount of military spending, one can see that defense spending is a major part of the overall budget and at 11.6%, it is one of the fastest growing spending categories through 2020.

While the expected $390 billion of net interest (on the national debt) is not among the largest numbers, it shows that our continuing debt has consequences. We spend more on net interest than on income security, on Veterans, and it is coming close to equaling how much we spend on Medicare. A smaller debt would imply less interest paid. But no one in our government seems very concerned about that. 

Table. US Federal Deficits, Debt and Spending

Table. US Federal Deficits, Debt and Spending
Actual and Projected
	2018	2020*	Change	% Change
Deficit	(823)	(1,008)	(185)	22
Debt	21,462	23,688	2,226	10
Total Spending	3,829	4,238	409	11
Defense	627	700	73	12
Non-Defense **	579	622	43	7
Social Security	992	1,097	105	11
Medicare	728	815	87	12
Medicaid	369	418	49	13
Income Security	290	302	12	4
Veterans	93	104	11	12
Net Interest	325	390	65	20
In billions of dollars.
* 2020 figures are estimates based on current law
Source: https://www.cbo.gov/about/products/budget-economic-data
**Non-Defense Discretionary Spending includes many
different government programs not listed individually.

Is the Saving Rate Too High?

Last Friday in the Wall Street Journal, it was announced that consumer spending slowed to a crawl in August. Consumer spending rose by only 0.1% in August after a 0.5% increase in July. The worry expressed in the article is that this portends a poor third quarter 2019 for the broader measure of US economic health -- real Gross Domestic Product. Maybe it means a national recession is coming?

As usual, the folks at such publications have nothing to do but try to write exciting stories when very boring economic information trickles out. Imagine the top execs at the WSJ sitting in their expensive chairs drinking lattes in the afternoon after the government announced the data. Nolan, the head guy, says, "Hey dudes, nothing happened to consumer spending last month."

Charlie nearly spills his extra hot mocha and agrees and says,"Noley, we all know that monthly data jump around more than a tuna in a shark tank. In fact, the increase of 0.5% in July when annualized was more than 6%. That's hot stuff for consumer spending in real terms."

Peter wakes from his nap and congratulates both his colleagues on their drink choices and adds that "if you average the increases in July and August, you get a very reasonable number of about 0.3% which when annualized would be around 4% per year. Real growth of consumer spending of 4% for two months ain't bad."

Much ado over nothing. I thought I would dig deeper to see if there might be something going on and I decided to follow up on some words in the article about saving. There is a national statistic known as the personal saving rate. Let's call it the PSR. The PSR tells us what percent of a household after-tax personal income is not spent -- that is, it tells you the percent of income that is saved. I asked my buddy FRED at the Saint Louis Fed to graph the PSR for the US from 1959 to the present. See the table below.

Many things will influence the PSR, and you can see from the below graph that it has had some interesting cycles. During those times when the PSR was generally rising, it meant that consumer spending was probably weak; when the PSR was falling consumers were having a little more fun on Amazon.com.

We are told we should save. Saving is good! Why? Because it helps you prepare for spending in the future. It also supports economic growth by allowing more spending on capital projects. Capital projects and various innovations often need funding. If banks are full of saving funds, then it facilitates the flow of funds from those who don't need the money right now to those who do. So you might say that ample savings is good for the future growth and expansion of business and the economy.

But the other side of the coin (must there always be the other side of the coin?!) is that spending today gets pinched the more we save today. Interesting that a rise in saving is a signal of less spending today and more spending tomorrow. Retirees and future retirees know that very well.

Thus we see why some analysts might wring their hands over the recent rise of the PSR. In the table, you can see that the recent rise is part of a longer term trend that started back in 2005. That rising trend, however, appears to be more a return to long-term normalcy than a record-breaking threat to consumer spending. The most recent rates were in the neighborhood of about 7%. But the average rate over the entire period was closer to 9%. A closer look at the chart shows many quarterly PSRs of well above 10% (in 1973 the peak rate was 14.5%).

As usual, the real story is a lot more complicated than the daily press has time or interest to tell you about. Woowee -- the PSR went up in August. Sort of like you getting on the scale and your weight went up two pounds after a Grand Slam breakfast a Denny's. A return to normalcy in the saving rate might pinch spending now but it clearly is an important thing for the country's long-term gains in productivity and output.

Guest post by John Manzella*, U.S.-China trade war damage could last decades

When it comes to international trade, China hasn’t always played by the rules. So the question begs: How do you change that behavior? Engaging in a trade war by imposing tariffs isn’t ideal. To save face, Chinese President Xi Jinping must appear strong and that means responding to U.S. tariff increases with Chinese tariff increases. This tit for tat strategy, which escalated again on September 1, is increasing volatility and uncertainty, while hurting economic growth. But it gets worse.

As America’s exports to China get shut out, our allies and trading partners are filling the gap. For example, as U.S. soybean exports to China have dropped due to retaliatory tariffs, Brazilian soybean exports there have surged. Canada, Mexico, Australia, Japan and others also have benefited. These new trading relationships are unlikely to be temporary.

Reported in Xinhua, China’s official news agency, Han Jun, China’s vice-minister of agriculture and rural affairs, recently said: “Many countries have the will and ability to replace the U.S. presence in the Chinese agricultural market. If other countries become reliable suppliers to China, it will be difficult for the United States to regain the position.”

President Trump’s unpredictable actions may be textbook negotiating tactics. But they have Chinese customers questioning whether they can rely on American suppliers, which they increasingly view as unreliable partners due to the volatility in the commercial relationship, says the US-China Business Council (USCBC), an organization of approximately 200 American companies doing business in China. And the damage is mounting.

While 49% of respondents of a recent USCBC survey said they lost sales in China due to retaliatory tariffs, 37% said they lost sales due to their Chinese partners’ concerns about doing business with American companies, a seven-fold increase over 2018. Even if the trade war ended tomorrow, Chinese concerns moving forward likely will call for strategies to play it safe by reducing dependence on U.S. companies.

Trump’s go-it-alone tariff approach is proving very worrisome at best. And his statement, “trade wars are good, and easy to win,” couldn’t be further from the truth.

When faced with Trump’s tariffs, virtually all America’s allies and trading partners have responded in kind, often targeting U.S. agricultural exports. Peter Navarro, Trump’s trade advisor, grossly miscalculated what would follow when in 2018 he said, “I don’t believe there’s any country in the world that will retaliate for the simple reason that we are the biggest and most lucrative market in the world.”

What is a better strategy to deal with the Chinese? Working closely with our European, Asian, and other friends around the world to establish a united front against China would likely prove more effective. And for the most part, we have similar interests with regard to curtailing Chinese bad behavior.

But establishing a united front at this point would be difficult since Trump has either threatened many of our friends with protectionist measures or weakened the relationships. Nevertheless, this option may still be the best way forward.

The administration’s desire to persuade China to stop subsidizing its state-owned enterprises, enforce intellectual property protection, eliminate trade restrictions on U.S. firms, and stop demanding U.S. companies hand over technology in exchange for Chinese market access are important goals. But implementing the wrong strategy is severely hurting those it is intended to help.

American farmers and exporters have spent decades developing the Chinese market. Losing those markets is costly and difficult to bear. But trying to win them back may be extremely challenging, if not impossible at least in the foreseeable future. It’s time for the administration to take a different approach.

*John Manzella, founder of the ManzellaReport.com, is a speaker, author and nationally syndicated columnist on global business and economic trends. Contact him at JohnManzella.com.

Economics is Dismal But Is It a Science?

On September 3^rd, Joseph Epstein’s article was published in the Wall Street Journal – Economics is Dismal, But Is It a science?*

Epstein’s worry about economics is common but misplaced because most of us do not know what a science is. Epstein is worried that an economist makes an analysis or a forecast based on something that might not always be right. He underscores the idea that because politicians abuse economics, then it must be the fault of the economics. It is more true that economics is fine. It is the politicians and the journalists who are the problem.

I am glad that Epstein didn’t write about shovels. Shovels are perfectly good tools to move dirt from point A to point B. But if Donald Trump and Nancy Pelosi were in one room and each held a shovel – he might worry that those dang shovels are just way too political. Hmmm.

This opening allows me to pontificate about economics and science. When I was in graduate school at Chapel Hill I was fortunate to take a course in what was called economic methodology. It would have been better named economic philosophy or the philosophy of science. You didn’t learn much micro or macro economics in that course but rather we learned what it means to seek and find truth. That sounds hoity toity but it is a way to describe what we do as people every day.

In the USA we drive on the right side of the road. If you drive on the left you soon learn a lesson about safe driving.  You might say we learn by doing. We find similar truths in many ways every day. Sometimes we find truth by merely thinking about things. You do not need to throw a dart in the air above your head to find out it might come down and hit you on the head. Instead, you could sit in a nice chair and think about the law of gravity. You learn that what goes up must come down. So, you might not throw a dart or a bowling ball right above your head. The Theory of Gravity helped you learn that lesson. Of course, repeated trials could teach you the same lesson but that  might be painful. 

So what is a science? A science is basically a way to discover what seems to be true. It usually has two parts to it. The first part is the theory. We use all sorts of theories to make predictions. The theory of electricity tells you not to stick your screwdriver into the electrical socket. The theory of macroeconomics tells you that if governments have too much debt this might raise interest rates and/or inflation.

The second part of a science is to test to see if your theory holds in the real world. Have your worst friend stick a screwdriver into the socket 100 times to see if the theory holds. Or watch to see how large government debts affect interest rates and inflation in various countries at various times.

Epstein worries that economics is not a science. But surely all one has to do is theorize a bit and then put the theories up to testing in the real world and you have a science. Of course some people make distinctions between hard and soft sciences. Chemistry might be a hard science because physical laws are pretty old and tested. Economics is a soft science largely because it is the new kid on the block and has a ways to go before it gets the predictive accuracy of chemistry. It also deals with human behavior which can be less predictable that electrical currents. 

But please Mr Epstein do not confuse this hard/soft idea with politics and manipulation. All one needs to do is think a moment about how hard scientists disagree about such things as a hurricane’s path, the health effects of meatless meat or vaping, the timing of global warming, dangers of biofoods, the origins of black holes, and so on. No science has it all down pat. There are disagreements within all of them. This means we have not yet learned everything about a phenomenon and need to keep trying. But it also gives room whenever there is a policy issue stemming from these disagreements, for politicians and Epstein’s buddies in journalism to turn science into a heated and colorful debate.

In that sense, economics is no different from any other science – hard or soft. No matter what kind of science, when we try to extrapolate what we think we know into the future, we can never be sure we will be accurate. When we are not accurate then we should learn from the mistakes and improve the theory. But Epstein doesn’t care about that – he’d rather blame economics instead of the stupidity of politicians and the press.

* https://www.wsj.com/articles/economics-is-dismal-but-is-it-science-11567551425?mod=searchresults&page=1&pos=1

Nice Weather If You Are a Duck

No, I don't forecast weather. When it is raining we often say that it is nice weather -- but only if you are a duck. In other words -- if you are not a duck -- it is NOT nice weather!

I decided to take a break from moaning this week in order to look at some data. The data is meant to capture the growth of the world economy and its various parts. The International Monetary Fund loves to gather and present data. Normally, we all get to see the data when they present their World Economic Outlook reports in May and November. During the year, however, they often present updates. I found updates to world economic growth as of July 2019. These are presented in the table below.

You might say that the world economy is fine so long as you are not a duck. That doesn't make any sense so we might say the world economy is fine so long as you love being unemployed and/or don't like being hassled by things like customers. In fact, the world economy real stinks.

I took from the IMF dating measuring the real GDP growth of the world and various regions and countries. The first column in the table shows the actual growth rates in 2018. Since we are in the middle of 2019, I ignored that year. The second column shows the IMF projections for 2020 as of about a month ago, in July. As in all forecasts or projections, the future may turn out to differ from the projections today. But it is interesting to see what they are saying about the future today.

Notice that when you average all the countries of the world, the story is not too bad. The IMF expects world economic growth to stay about the same -- though technically we see a decline from 3.6% to 3.5% from 2018 to 2020. When compared to past years, this 3.5% is definitely below the usual outcomes. But on the positive side, while growth is slowing in most places, the IMF is not predicting a contraction in output in any of them. In other words, they are not forecasting a recession.

The US stands out in the table in going from 2.9% to 1.9%. That 1% decline in growth amounts to a 35% reduction in 2020 relative to growth in 2018.

Comparing future US economic growth to the other 17 places places listed in the table, only four countries/areas (Germany, India, Latin America & the Caribbean, and the Middle East, North Africa, etc.) are expected to grow faster in 2020 compared to 2018.

The remaining countries in the table are expected to decline (or stay the same) in terms of real GDP growth in 2020 compared to 2018. That's pretty special and deserves at least one JD toast.

While the 34.5% decline in the USA is impressive, Japan's growth is expected to shrink by about 50%. Economic growth in Russia, Spain, the Euro Area, Emerging Europe, France, and Italy are all expected to shrink by double-digit percentage changes. Smaller but still negative declines are expected for China, Mexico, and the Group of ASEAN countries.

Projections like these can be important to expectations, the least of which today result in low inflation and interest rates. As we go through the remaining months of 2019, it will be very interesting to see how this global picture changes.

	Actual	Projection	Diff	Diff %
	2018	2020		Change
World	3.6	3.5	-0.1	-2.8
US	2.9	1.9	-1.0	-34.5
Euro Area	1.9	1.6	-0.3	-15.8
Germany	1.4	1.7	0.3	21.4
France	1.7	1.4	-0.3	-17.6
Italy	0.9	0.8	-0.1	-11.1
Spain	2.6	1.9	-0.7	-26.9
Japan	0.8	0.4	-0.4	-50.0
UK	1.4	1.4	0.0	0.0
Canada	1.9	1.9	0.0	0.0
Russia	2.3	1.9	-0.4	-17.4
China	6.6	6.0	-0.6	-9.1
India	6.8	7.2	0.4	5.9
ASEAN	5.2	5.1	-0.1	-1.9
Emerging Europe	2.6	2.3	-0.3	-11.5
Latin Am & Caribb	1.0	2.3	1.3	130.0
Middle East, N. Africa, etc	1.6	3.0	1.4	87.5
Mexico	2.0	1.9	-0.1	-5.0
https://www.imf.org/ en/Publications/WEO/Issues/2019/07/18/WEOupdateJuly2019

Sticks and Stones Monetary Policy

I was having one of those weeks when it seemed like there wasn’t anything to say in the macrosphere. And then Fed Vice Chair William Dudley piped off enough to warrant an article about him in the WSJ (8/28/19) titled “The Federal Reserve Resistance.” Thanks Mr. Dudley. You made my day.

When I was a kid in the olden days our parents didn’t want us to get into fist fights. If someone said something nasty to us, we were told to say – “Sticks and stones will break my bones but words will never hurt me.” If anything, we should have learned this about Donald Trump. He says and tweets a lot of words. And often the words have no real meaning. He blurts and blurts. Most of us have learned to just ignore all that blather. Your grandma wears combat boots. Your Dad has a long nose. Your butt is bigger than Mt Everest. Most of us ignore stupidity.

That’s what is so surprising about Mr. Dudley. I am sure he has a PhD but I refuse to call him Dr. until he acts like one. He is acting like a school child and that’s okay for him – but he is ruining our understanding of the Fed’s role and in so doing proposing ridiculous policies.

The Fed is independent of the President and mostly from Congress. The President can nominate people to the Fed’s governing board when openings arise as in the Supreme Court. Congress can approve or disapprove of these nominees – and Congress always can write a new banking law that changes the operating rules at the Fed. But these options do not give the President or Congress the right to tell the Fed what to do insofar as ongoing monetary policy concerns.

As such, the Fed does what it wants to do. Trump or Pelosi or whoever can make speeches and write articles criticizing the Fed, but it doesn’t change a thing at the Fed. The Fed is usually smart enough to wear blinders or earplugs – but not Mr. Dudley. He makes up a fiction that the President is overstepping his duties. We all know Donald Trump. He runs his mouth a lot. Most of us ignore most of it. Why doesn’t Mr. Dudley do the same? 

Trump can talk all he wants but the Fed is independent. Trump can pressure the Fed to lower interest rates and previous Presidents have done similarly, but that doesn’t mean the Fed has to comply. I can remember many speeches by Arthur Burns wherein he basically turned the tables and told the President that if he did a better job at fiscal policy he wouldn’t need to pressure the Fed.

Instead Mr. Dudley wants to overthrow the President in the coming election. Really? Is that an independent Fed? Mr. Dudley even said the Fed could bring this about by not following Trump’s orders – and thereby pushing the economy into a recession. Mr. Dudley implied that recession might influence voters to get rid of President Trump. Wow. Crazy stuff. The Fed is just making things worse with this war of words.

If you read this blog you know I agree with the idea that the Fed should not lower interest rates. So it appears that I agree with Mr. Dudley about the direction of Fed policy. But when he gets too political and he says the Fed should induce a recession for political purposes -- he crosses the line. Instead Mr. Dudley could try to educate people about Fed independence and he could explain why a good Fed policy probably would NOT cause a recession...even if it means raising interest rates a tad.