Thursday, March 23, 2017

How could I say such a thing?

Couple weeks ago I showed this graph:

Graph #1
I said

"Growth definitely slowed when the interest rate went up. Growth slowed because the interest rate went up."

Commenting on the post, Jim quoted me and said

I can't understand how you can look at that graph and make such a statement. It seems pretty obvious to me that Fed interest rates are lagging behind GDP which suggests the correct conclusion is that the economy is driving Fed interest rates.


Graph #2, Recreated from Scratch to Match Graph #1, and marked up

Like that.

Blue accelerated out of the 1954 recession. Red noticed, and went up faster in early 1955.

Blue slowed slightly then, but not enough. Red went up faster again in the second half of 1955.

Blue slowed more, and ran parallel with red until 1957.

Growth definitely slowed when the interest rate went up. Growth slowed because the interest rate went up.

Wednesday, March 22, 2017

When did the Federal Reserve switch from CPI to PCE?

PCE and CPI Inflation: What’s the Difference? at the Federal Reserve Bank of Cleveland:

The Federal Reserve, however, states its goal for inflation in terms of the PCE.


Two Measures of Inflation and Fed Policy by Jill Mislinski:

The Fed is on record as using Core PCE data for its primary inflation gauge.


I say CPI, you say PCE by Phil Davies. At the Federal Reserve Bank of Minneapolis:

The Fed switched from the CPI to the PCE in 2000.


Now we know.

Saturday, March 18, 2017

Notes on the Measurement of Unemployment

The Persistence of Memory

i saw...
somebody said the calculation of unemployment has not changed.
they said it vaguely, so that it wasn't quite a lie.
but it is not true.
3:16 AM 3/16/2017
a couple days ago I saw it.

// Here it is:

The White House Takes Its Attacks On Jobs Data To A New (And Dangerous) Level
by Ben Casselman at five thirty eight
filed under Data Integrity

"(When pressed by Tapper, Mulvaney acknowledged that he didn’t think the Bureau of Labor Statistics had changed the way it collected jobs data since Trump took office.)"

"... there is no conspiracy here. Obama didn’t change the definition of unemployment, which has been essentially unchanged for decades."

The words "essentially unchanged for decades" link to

Ques12 is "Have there been any changes in the definition of unemployment?"

The answer is
"The concepts and definitions underlying the labor force data have been modified, but not substantially altered, even though they have been under almost continuous review by interagency governmental groups, congressional committees, and private groups since the inception of the Current Population Survey."

So yes, there have been changes. But the answer is not specific as to what those changes were.

If memory serves, under Clinton they added the condition that if you stop looking for work, you are no longer counted as unemployed. Clinton or Reagan, I forget. I think Reagan changed the inflation calculation and Clinton changed the unemployment calc.

Here you go:
"Yes, there have been modest shifts through the decades in how unemployment is defined, the last ones in 1994." -- Justin Fox at Bloomberg


What I can't figure out is why there is no discontinuity in the data at 1994. Can't see one on a graph. I've looked.


The Bloomberg article starts out very interesting, then drops off to asking
"Does this mean that the unemployment rate is some sort of “big lie” or “hoax...?”
(Can't you just deal with the economics? If you are addressing the question of the 'big lie' then you are NOT doing economics)
Then it gets interesting again.

The article challenges my memory:
"And when the U.S. government finally started measuring unemployment on a monthly basis in 1940 it was with a similar understanding that you didn’t count as unemployed unless you really wanted to work."

The "similar understanding" is a reference to "men who would have liked to work if they could have found a job that paid as much as they had been earning before."

But no, that's not really the same as no longer looking for work...

Recommended reading: What's Really Wrong With the Unemployment Rate by Justin Fox at Bloomberg. It gets specific about those changes in the unemployment calculation.

But I remember that NY Times article I read back in the '90s...

Friday, March 17, 2017

Suddenly it's the 1870s again

Justin Fox at Bloomberg on Carroll D. Wright in the 1870s:
As David Leonhardt explained in a great New York Times column in 2008, this all started in the U.S. with Carroll D. Wright, who as head of the Massachusetts Bureau of the Statistics of Labor during the economic hard times of the 1870s set out to measure joblessness while excluding people he considered malingerers:

The survey asked town assessors to estimate the number of local people out of work. Wright, however, added a crucial qualification. He wanted the assessors to count only adult men who “really want employment,” according to the historian Alexander Keyssar. By doing this, Wright said he understood that he was excluding a large number of men who would have liked to work if they could have found a job that paid as much as they had been earning before.
Wright went on to become the first commissioner of what is now the BLS.

...if they could have found a job that paid as much as they had been earning before.


Maynard Keynes in 1936:

If, indeed, it were true that the existing real wage is a minimum below which more labour than is now employed will not be forthcoming in any circumstances, involuntary unemployment, apart from frictional unemployment, would be non-existent. But to suppose that this is invariably the case would be absurd.

... if they could find a job that paid less, they would take it. They wouldn't prefer it, but if nothing else was available...

Scott Sumner in 2015:

I think they were unemployed because of sticky wages, and that if workers collectively accepted lower wages then we would have had full employment in 1936.

... they refused to work for less...

Thursday, March 16, 2017

Why the sudden change?

Central Bank Assets as a Percent of GDP:

Graph #1: Running Close to 5% Until the Big Surprise
(Annual data. Last date shown is 2014.)
The first question has to be Why? Why the sudden change?

My answer: The central bank suddenly felt the need to "catch up".

The line runs flat
Central bank assets ran flat from 1960 to 2008: a little higher at the end, a little lower in the middle. Central bank assets ran flat because the Fed was controlling things. The big surprise in 2008 was the discovery that they were not controlling the right things. And suddenly, there was a lot of catching-up to do.

You should be asking: Catching up to what?

Good question. The purpose of controlling central bank assets is to put a limit on the availability of money. And, from 1960 to 2008, they kept the limit around 5% of GDP. But that doesn't mean the money supply was 5% of GDP, because the money supply expands above the base provided by the central bank -- like dough rising to make bread.

The money supply increases when we borrow money. So you can imagine our borrowings must have some relation to the Central Bank Assets graph.

Note that our borrowings continue to exist until we pay back the borrowed money. The accumulation of borrowings is called "debt". So you may imagine that our debt must have some relation to the Central Bank Assets graph.


Graph #2: Central Bank Assets (blue) and Private Non-Financial Borrowings (red)
Our accumulated borrowings increased more or less continuously, all the while the central bank was "controlling" things. Then suddenly, something snapped. Borrowings started to fall. And the central bank had to make a quick adjustment to bring its assets back in line with borrowings.

The problem (in case you missed it) is that the central bank was keeping its assets in line with GDP but what we really needed was to have those assets more in line with our borrowings. Here is assets relative to borrowings:

Graph #3: Central Bank Assets relative to Private Non-Financial Borrowings
This one looks a lot like the first graph except, if you notice, the "flat from 1960 to 2008" is now a decline. In 1970, central bank assets were around 6% of our borrowings, the same level you see on graph #1 for assets relative to GDP. But by the time of the crisis, that asset level had fallen to not much more than 3% of accumulated borrowings. Half as much.

This graph starts near the 6% level. But if the data was available, I expect you'd see the ratio much higher in the 1950s. That would make the recent high look less daunting. And you would see that the central bank "backing" behind private bank assets was quite high early on, but fell over the years to a low in our moment of crisis. Then in 2008 the central bank suddenly seemed to discover something it should have known all along, and started pushing its assets up, relative to private borrowings.

This next graph uses different data to tell the same story. And it goes back to the 1950s, so you can see the ratio was much higher then:

Graph #4: Fed Holdings of Federal Debt relative to Private Borrowings
On this graph the debt measure is bigger because it includes financial as well as non-financial debt. And the central bank asset measure is smaller, as it includes only the central bank holdings of Federal debt. But the downtrend since 1970 is visible just the same. And the early years show an even bigger downtrend from an even higher level. The ratio was much higher in the 1950s than it is at present.

The Fed was "controlling" things all along. But it was looking at the wrong things. It was looking at assets relative to GDP. It should have been looking at assets relative to the private-sector money that was built upon those assets. It should have been looking at its assets relative to private sector debt.

To prevent the decline that ended in disaster, the Fed would have had to increase its assets faster than it did since the 1970s, or reduce the growth of private sector debt. Since the 1970s or earlier. But nobody likes either of those options. Increasing the assets is associated with inflation. Decreasing private borrowing is associated with economic stagnation.

What to do, what to do.

We need a judicious combination of the two options. A well-designed policy could have increased central bank assets and restrained private debt growth to keep the ratio as stable as the ratio we saw on graph #1. Policymakers do have the ability to keep such ratios stable. They just don't know which ratio to stabilize.

With less borrowing, we'd have less growth. But with more central bank assets we'd have more growth.

With more central bank assets, we'd have more inflation. But with less borrowing, we'd have less inflation.

Meanwhile, there would be less private debt in our economy. There would be less financial cost competing for dollars with wages and profits. Finance -- or "rent" as people call it -- would be reduced. So the cost of our output would include less financial cost. Our output would be a better bargain as a result: more value per dollar. This would allow wages and profits to rise. And it would make us more competitive in world markets.

See how it works? It's a "euthanasia of the rentier" thing. But you knew that.

Wednesday, March 15, 2017

From 40% of GDP to 140%

Stock market capitalization as a percent of GDP:

Graph #1: "Total value of all listed shares in a stock market as a percentage of GDP."
This series used to run close to 40% of GDP. These days, the swings are 40% of GDP.

Tuesday, March 14, 2017

A wish

The most that the natural-rate hypothesis can tell us is that if an economy is operating at its natural rate of unemployment, monetary expansion cannot permanently reduce the rate of unemployment below that natural rate. Eventually — once economic agents come to expect that the monetary expansion and the correspondingly higher rate of inflation will be maintained indefinitely — the unemployment rate must revert to the natural rate.

I wish economists would stop focusing on "monetary expansion" and start focusing on the ratio of accumulated debt to circulating money. Because changing that ratio changes the natural rate.

Or, to change the wording a bit and use Richard Werner's wording:

I wish economists would stop focusing on "monetary expansion" and start focusing on the ratio of accumulated debt to the quantity of credit creation. Because changing that ratio changes the natural rate.

Monday, March 13, 2017

Worth repeating

In Stuart Dreyfus on Richard Bellman, Dynamic Programming, Quants and Financial Engineering, David Glasner quotes Dreyfus, and considers the quote:
The place that [dynamic programming] is used the most upsets me greatly — and I don’t know how Dick would feel — but that’s in the so-called “quants” doing so-called “financial engineering” that designed derivatives that brought down the financial system. That’s all dynamic programming mathematics basically. I have a feeling Dick would have thought that’s immoral. The financial world doesn’t produce any useful thing. It’s just like poker; it’s just a game. You’re taking money away from other people and getting yourself things. And to encourage our graduate students to learn how to apply dynamic programming in that area, I think is a sin.

Allowing for some hyperbole on Dreyfus’s part, I think he is making an important point, a point I’ve made before in several posts about finance. A great deal of the income earned by the financial industry does not represent real output; it represents trading based on gaining information advantages over trading partners. So the more money the financial industry makes from financial engineering, the more money someone else is losing to the financial industry, because every trade has two sides.

1. Finance is non-productive.
2. To reduce financial cost, reduce the size of finance.

Glasner's view that it represents trading based on gaining information advantages is superfluous, diversionary, and irrelevant. I'm not repeating that part.

Actually, saying that financial income comes from unfair information advantages is the same as saying finance guys are cheaters. A lot of people probably like that thought. A lot of people complain that not enough finance guys were put in jail for creating the financial crisis. I think it's a waste of time to focus on people. We need to focus on what the problem really is, on why the problem arises, and how to stop it from arising.

Sunday, March 12, 2017

Another dim-witted criticism of Peter Navarro

"Thing is, the trade deficit is far from the most important part of GDP. According to the Bureau of Economic Analysis, the 2016 trade deficit was about $500 billion. That's a lot, but it's a fraction of the other main components of GDP, like the $3 trillion of private investment and the $12.8 trillion in consumption last year."

Well, yeah. But last year's trade deficit doesn't go away. It accumulates to a trade debt, just like the Federal deficit accumulates to the Federal debt. The trade debt could be measured in terms of not "keeping American assets in American hands." I don't think we measure it, though.

On the other hand last year's GDP doesn't accumulate to anything. It was consumed and/or depreciated. It's gone (or it will be, soon).

The article suggests that the trade deficit is not big. The analysis is extremely shallow.

"As for the importance of a trade deficit as a measure of how healthy your economy is, note that during the Great Depression, the US had a trade surplus."

If the US had a trade surplus, the rest of the world had a trade deficit. A trade surplus, like a trade deficit, is an imbalance. The imbalance is a problem. Or rather, the imbalance tells us there is a problem.

The article suggests that the trade deficit is not a problem because we had a trade surplus the last time our economy was this bad. The argument is ridiculous.

"Navarro's article opens with an incomplete premise, that US GDP growth comes from 'only four factors: consumption, government spending, business investment and net exports (the difference between exports and imports).'"


"Two main factors for GDP growth — the trade deficit not among them — are accepted by economists pretty much the world over: labor-force growth and labor-force productivity."

Yeah, I know. The two acceptable factors appear in the Solow growth model. The four unacceptable factors appear in the C+I+G+NX identity. And, yadda yadda, an identity is always true but it doesn't tell you how things happen. I know. I've heard it before.

You can't swing a dead cat these days without hitting somebody saying labor-force growth and labor-force productivity.

But it is one thing to speak of getting higher growth because immigrants added to our population. It is quite another to say we should increase immigration so that we can increase growth. The first of those two things is perfectly reasonable. The second isn't, because immigration is not an economic policy.

Anyway, if we do boost the size and/or the productivity of the U.S. labor force, and we do increase economic growth and GDP, then guess what? The unacceptable sum C+I+G+NX will also increase. So really, Navarro isn't necessarily wrong. Maybe he's just simplifying differently.


If you really like President Trump, every argument that supports him seems like a good argument. If you really don't like him, every argument that shoots him down seems like a good argument.

Most of those arguments are garbage.