Wednesday, April 23, 2014

Advantages of Democracy in the United States

From Democracy in America, Tocqueville:

Democratic laws generally tend to promote the welfare of the greatest possible number; for they emanate from the majority of the citizens, who are subject to error, but who cannot have an interest opposed to their own advantage. The laws of an aristocracy tend, on the contrary, to concentrate wealth and power in the hands of the minority; because an aristocracy, by its very nature, constitutes a minority...

Aristocracies are infinitely more expert in the science of legislation than democracies can ever be. They are possessed of a self-control which protects them from the errors of temporary excitement; and they form far-reaching designs, which they know how to mature till a favorable opportunity arrives. Aristocratic government proceeds with the dexterity of art; it understands how to make the collective force of all its laws converge at the same time to a given point. Such is not the case with democracies, whose laws are almost always ineffective or inopportune.

Tuesday, April 22, 2014

Take a walk on the wild side

Following up on Gene's link...

From: Interpreting Deviations from Okun’s Law by Mary C. Daly, John Fernald, √íscar Jord√†, and Fernanda Nechio at the Federal Reserve Bank of San Francisco:

Whether we analyze Okun’s law with real-time or revised data, countercyclical loops tracing the relationship over time are a common feature. These loops reveal an underlying characteristic of the U.S. business cycle. Changes in employment—and likewise unemployment—lag behind changes in GDP. For example, faced with a shortage of demand, it takes time for firms to adjust staffing levels.

The article explains those loops in a way that makes good sense to me. (I didn't quote that part. You should read it.) The bit I quoted is just detail information about the loops. But I want to stop and smell the detail:

These loops reveal an underlying characteristic of the U.S. business cycle. Changes in employment—and likewise unemployment—lag behind changes in GDP.

Got it? The loops tell us something about the business cycle. What they tell us is that changes in the supply side lag behind changes in the demand side.

The supply side follows the demand side. That's what those loops tell us.

Supply follows demand.

Monday, April 21, 2014

Trends and tendencies

I typed employment in the FRED search box, went down the list that came up, and picked three different measures:

Graph #1: Three Measures of Employment
One's a little higher than the next, and the gap between lines varies a little. But the biggest difference I see, apart from the colors of the lines, is that one of them starts ten years or so after the others.

They all have humps in the same places. They all have dips in the same places. They accelerate and decelerate and respond to crisis in unison. So does it really matter which one you use to evaluate our economic past?

It might, if you are looking at some particular detail. It might. But if you're doing macro, it might not matter very much. And if you're just sticking a toe in the water, it would make very little difference.

You probably would want to check all of those lines, eventually, to see if your observations and conclusions apply in all cases. Of course. I'm not saying it is okay to be closed-minded about such things. But if you want to choose a data-set by throwing darts, I don't see anything wrong with that.

I usually pick the one that shows the most years.

When I change the graph to show not "Thousands of Persons" but instead "Percent Change from Year Ago", the three lines still move as one:

Graph #2: Growth Rates of the Three Measures of Employment
The green line wanders a bit from the other two, but the red and blue are so close that the one is almost always hidden by the other. And while the green one shows differences, it still shows very much the same pattern as the others.

That pattern reminds me of something: inflation-adjusted GDP. Here in black:

Graph #3: Growth Rates of the Three Measures of Employment and Real GDP
Again, pretty much the same pattern.

Shouldn't be surprising, really, the similarity between employment and output. It's Okun's law.

Sunday, April 20, 2014


Had a little trouble with my computer at work the other day.

I don't know what the problem was. I mean, I didn't go in and reverse-engineer the code and figure it all out. But I do know what was different.

The only thing that was different is that XP is no longer "supported".

What happened is, I left my computer on when I left work on Tuesday, so that the "Microsoft Security Essentials" could do its weekly virus scan Tuesday night. That wasn't different -- I do it every week. But when I got to work on Wednesday morning and turned on the screens, there was an error message:

MsMpEng.Exe -- Application Error

The instruction at "0x5a4d684d" referenced memory at "0x00000000". The memory could not be "read".

Click on OK to Terminate the program.
Click on CANCEL to debug the program.

And there was another message hiding under that one, that I found when I clicked OK to the first message:

AntiMalware Service Executable has encountered a problem and needs to close.

That all doesn't mean a whole lot to me. But the part that said it tried to "reference memory at 0x00000000" -- that means something. The ox (the first two characters of the number, zero and the X) means it is a hexadecimal number (base 16) but the big piece of info in that number is that everything after the ox is zeros. The instruction at some memory location tried to reference the memory location zero. I've seen that error before. Something wasn't properly initialized. That's why the value is zero.

And the thing was slow as hell. Took 8 or 10 minutes for Windows XP to boot up, and as long again for AutoCAD to load up and open a small drawing. I dicked around with it till my supervisor came in. Do anything without being authorized first, and you're liable to be accused of causing the problem you're trying to fix.

When my supervisor came in I laid out the problem for him. He said: try the System Restore -- a good idea; I had not thought of that -- and then uninstall the Microsoft Security Essentials. I liked that plan, and (to make a long story short) it worked. And I'm more convinced than ever that the problem was created by XP support shutting down. They left a dangling end there, and when I tried to use the scan, the problem showed up.

But that's what I think. My supervisor thought it was probably the hard drive going bad. He's told me lots of stories over the years, where a failing hard drive was always the problem. But he didn't read the error messages I got.

What I'm thinking is that, when you have a complex system like a computer, it is sometimes difficult to pin down the cause of a problem. And if you are quick to turn to the internet for an answer, you may find the most popular answer rather than the most accurate one.

What I'm thinking is, when you have a complex system like the economy, it is sometimes difficult to pin down the cause of a problem. And if you are quick to turn to an authority for an answer, you may find the most popular answer rather than the most accurate one.

Saturday, April 19, 2014

Do imports account for the decline of US production?

One of the components of GDP is "net exports". As you know, net exports went seriously negative since about 1980:

Graph #1: Balance on Current Account
See also this comparison at FRED
Stable until 1970, at least at this scale, and no evidence of negativity until after 1980. Interesting, though: the first big downtrend, in the 1980s, slows suddenly in 1986 and turns upward by 1988. That was also when the US saw a big slowdown in the growth of private debt. Two good things at the same time, and probably no coincidence.

But how big is that trade imbalance, anyway? What if we could zero it out? What would GDP look like if we don't reduce it for net exports? I mean, we can add the value of those imports to GDP, as if we produced the stuff here. It will bring the GDP number up -- but how much? What would Real GDP growth look like, then? Would it still be trending down? In other words, do imports really account for the decline of US production?

Here's how the Balance on Current Account looks in comparison to GDP:

Graph #2:Balance on Current Account (blue) and GDP (red)
At this scale the Balance on Current Account looks stable to the latter 1990s. And even where it's big, it is small in comparison to GDP. But it was a fair percentage, before the crisis there.

If we subtract our growing trade deficit from GDP we get a number that's larger than GDP by the amount of the trade deficit. Graph #3:

Graph #3: GDP (red) and GDP with the Trade Deficit Subtracted (blue)
The red line is GDP. The blue line is higher, as if we produced the imports here.

It's higher, yes, but not a lot higher.

These things always surprise me.

So now, if we look at the growth rates of those two lines...

Graph #4:Growth Rate Comparison
... there is hardly any difference at all between them. If domestic production is lagging, it's not because of the balance of trade. Oh, we import a lot, yeah. Too much. But our trade imbalance is another of those things that's a result of the problem -- a contributing consequence, maybe, but not the cause.

And if I show Graph #3 after taking the natural log of the values, the two lines follow a similar path. Both show a slowdown in the early 1980s:

Graph #5:Log Scale Comparison
Nothing if not similar.

Two more graphs to look at, and we're done. I want to strip out the inflation, and compare the two versions of "real" GDP:

Graph #6: "Real" Values, Log Scale Comparison
No. The trade deficit doesn't make a big dent in GDP.

Graph #7: "Real" Values, Growth Rate Comparison
Nope. Can't say GDP declined because of the trade deficit. I'd say this instead: The thing that's causing the decline of GDP is also responsible for the trade deficit.

Friday, April 18, 2014

A Desperate Expedient

I never saw this one before. Openness:

Graph #1

At FRED the notes on it say:

Exports plus Imports divided by GDP is the total trade as a percentage of GDP. More information is available at

Exports plus imports. Openness. Here's the same data on a log scale:

Graph #2
Skidelsky quotes Keynes:

'If nations can learn to provide themselves with full employment by their domestic policy....there would be no longer a pressing motive why one country need force its wares on another or repulse the offering of its as to develop a balance of trade in its own favour. International trade would cease to be what it is, namely a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases which, if successful, will merely shift the problem of unemployment to the neighbour which is worsted in the struggle'.

Thursday, April 17, 2014

One of my favorite lines from Keynes:

It is astonishing what foolish things one can temporarily believe if one thinks too long alone...

What Maynard is telling us here is that if you want to understand the economy, you are going to have to do a lot of independent thinking.

He is telling us what he did.

Wednesday, April 16, 2014

"laying the groundwork for the first rate hike"

Tim Duy:

Overall, the Fed appears committed to a long period of low interest rates and I continue to think this should be the baseline view. But actually policy seems to remain hawkish relative to the Fed's rhetoric. By its own admission, the Fed is missing badly on both its mandates. Why then the push to reduce accommodation by ending asset purchases and laying the groundwork for the first rate hike?

Here's the argument Tim Duy is taking a turn at: It's time to start fighting inflation. No, it's not. Yes, it is. No it's not.

Here's the policy version of that argument: It's time to start raising interest rates. No it's not. Yes, it is. No, it's not.

Here's the problem: We need to stop using interest rates to fight inflation.

Does what I'm saying seem irrelevant? Actually, my argument is the relevant one. It's using interest rate hikes to fight inflation that's irrelevant -- and plain wrong -- because we use credit for growth. The policies contradict. Our policy of raising interest rates contradicts our policy of getting good growth. We have to fight inflation a different way.

We should fight inflation by paying down private debt faster. It's time to create policies that encourage and reward the accelerated repayment of debt.

Tuesday, April 15, 2014

Siding with Sumner

Scott Sumner:

Before we consider whether we are likely to repeat the mistakes of the 1960s era Fed, let’s review precisely what those mistakes actually were. Here’s the data as of November 1966:

Unemployment rate = 3.6%, and falling.

Inflation = 3.6% over previous 12 months. That’s a big increase from the 1.7% of the 12 months before that, and the 1.3% inflation rate two years previous. The “Great Inflation” began here.


Keep this data in mind when some fool tells you that the Great Inflation was caused by oil shocks or the Vietnam War or budget deficits or unions, or some other nonsense.

So let me add a little something to that. Sumner says it's not the Vietnam war that caused the inflation, and not Federal deficits. (He also says it's not the oil shocks of the 1970s that got inflation going in the 1960s. That can stand on its own, I think.) Here's a picture of the Federal deficits from 1950 to 1970. Bigger is higher on the graph:

Graph #1
The high point on the graph occurs in 1968, as the label indicates. Follow the blue line down to the left and you come to a low point just above the "5" in the "1965" on the horizontal axis. That low point is the Federal deficit in (you guessed it) 1965. A quarter-inch to the right of that you can see a kink in the blue line; that's 1966. Another quarter-inch to the right there is another kink, just below the horizontal line at the 10 level. That kink is 1967.

Now you can certainly say that the 1968 deficit was a big one, for the 20-year period we're looking at here. And you might say the 1967 deficit was a big one. But the deficits were small in 1965 and 1966; you can see that for yourself. Yet as Sumner points out, the rate of inflation was already climbing vigorously by 1966.

The Federal deficits did not cause the Great Inflation.

You know what I think: The rising cost of finance was the cost that started driving prices up, by the mid-1960s.