Thursday, March 26, 2015

Oh, my!

With Anonymous 2:09's correction, my graph looks totally different:

Federal Debt Prior to 1947 is not ignored in this graph
That's quick-and-dirty. I modified the Excel graph in Open Office.

I have to look at this, and think about it. Not tomorrow but probably Saturday the topic will return.

Necessity is the mother of invention

"Just as it is possible to construct a theory of the emergence of money based on principles of agent preference and action," writes James Caton in The Emergence of the State Monopoly over Money, "so too is it possible to build a theory of the state monopoly of money with such principles."

It's possible, I suppose. But it seems to me that if you are considering the emergence of the state monopoly over money, you would want to base your theory at least in part on the historical record. As opposed to just making shit up.

Wednesday, March 25, 2015

I didn't verify the numbers, but...

Michael Snyder at The Economic Collapse writes
I have shared these next numbers before, but they bear repeating.  In America today, most Americans do not make enough to support a middle class lifestyle on a single salary.  The following figures come directly from the Social Security Administration

-39 percent of American workers make less than $20,000 a year.

-52 percent of American workers make less than $30,000 a year.

-63 percent of American workers make less than $40,000 a year.

-72 percent of American workers make less than $50,000 a year.

We all know people that are working part-time jobs because that is all that they can find in this economy.  As the quality of our jobs continues to deteriorate, the numbers above are going to become even more dismal.

Tuesday, March 24, 2015

The Economy is the Model

Gavin Kennedy on Adam Smith:

Smith warned against arranging people as if they were wooden pieces on a chess board, moved at will by theorists (and fanatics), who forgot that every single person moved through life entirely under their own volition. Modern economists have substituted the arguments of their equations for the very essence of real societies peopled by real individuals.

Monday, March 23, 2015

A Quick Follow-Up on Models

JW Mason:
The test of a good model is not whether it corresponds to the true underlying structure of the world, but whether it usefully captures some of the regularities in the concrete phenomena we observe.

Okay... that's good, that's good. A model doesn't have to be right. It just has to explain the phenomena we observe. Sometimes, though, phenomenological explanations are a bit difficult to grasp. Perhaps an example will aid the understanding?

Theorists set the stage:
For years it has been believed that electric bulbs emitted light.

However recent information from Bell Labs has proven otherwise.

Electric bulbs don't emit light, they suck dark. Thus, they now call these bulbs dark-suckers. The dark theory, according to a Bell Labs spokesman, proves the existence of dark, that dark has mass heavier than that of light, and that dark is faster than light. The basis of the dark-sucker theory is that electric bulbs suck dark.

Empiricists capture some of the regularities:
There is less dark near the electric bulb than at a distance of 100 feet when it is operating; therefore, it is sucking dark and can be classified as a dark sucker. The larger the dark sucker, the greater the distance it can suck dark. The larger the dark sucker the greater its capacity of dark. The dark sucking capabilities are evident when the dark sucker has reached its capacity and will no longer suck dark. At that point you may notice the dark area on the inside portion of the dark sucker...

There is more dark 30 feet from a lit candle then there is at a distance of 3 feet. Proof of it's dark sucking capabilities is relatively simple. Examine a new unused candle, notice that the center core is not dark. Ignite the center core. Allow the center core to burn for about 5 minutes. Notice the lack of dark around the candle. Extinguish the candle flame. Notice that the center core of the candle is now dark... Ignite the center core and allow it to burn for a minimum of 2 minutes. Pass a clean pencil over the top of the flame, left to right, approximately 3 inches above the center core. Notice that there is no dark on the pencil. Pass the pencil over the center core now about 1/2 inch. Notice that the pencil now has a dark area. The pencil blocked the path of the dark being sucked to the core of the dark sucker...

Dark is heavier than light. Dark always settles to the bottom of a lake and/or river. Submerge just below the surface of a lake and you will notice an absence of dark. Lower yourself to 15 feet below the surface and you will notice a degree of darkness even on a sunny, bright day. Lower yourself to 50 feet (or more) below the surface and you are in total dark. Ergo, the dark has settled to the bottom; therefore, dark is heavier than light...

Dark is faster than light. If you would open a drawer very slowly, you will notice that the light goes into the drawer. (You can see this happen.) You cannot see the dark leave the drawer. Continue to open the drawer and light will continue to enter the drawer; however, you will not see any dark leave the drawer. Therefore, dark is faster than light. Go into a closet, close the door, and turn off the dark sucker. Have a friend open the door about 1 inch. Your friend will not see any dark leave the closet, nor will you. Have your friend open the door until half the closet is dark and half is light. Since 2 objects cannot occupy the same space at the same time, and you do not feel any change in pressure, by compressing the dark, it is logical to assume that dark is faster than light.

There ya go.

Sunday, March 22, 2015

Living in the Nominal World

Yesterday we were looking at this graph, the same that Noah showed:

Graph #1: Total Public Debt as a Percent of GDP

I want to use this graph instead:

Graph #2: Gross Federal Debt as a Percent of GDP
It goes way more back in time.

The two are quite similar, both of them ending near 100% of GDP. The second graph is less jiggy because it uses annual numbers rather than quarterly. Less jiggy? No biggie.

FRED's notes for our Graph #2 here tell me they used the FYGFD data series for the Federal debt. This series. But instead of looking at debt to GDP as they do, first I want to see debt in billions. And instead of looking at the whole Federal debt, I just want to look at the changes from one year to the next. I want to see each year's addition to the total. That will be like looking at Federal deficits. This graph shows the data I want to start with:

Graph #3: Annual Change in Gross Federal Debt, billions
Okay, this one makes me stop and think. The Federal deficits show a trend of increase from 1980 to the mid 1990s. I've been saying that deficits were falling since the early 1980s. Hm...

Oh, that's it: Yesterday we were looking at Federal deficits as a percent of GDP. Yeah. As a percent of GDP the deficits were trending down from around 1983 to the year 2000. But as raw numbers, debt in billions sans context, deficits were going up during that same period. Okay. Now I get it.

One other thing about Graph #3: Compare it to the data series that shows the Federal deficit, and the two are similar but not the same. They have the same pattern, and the two lines are very close until 1985. But for 1985 and after, a gap opens up and the numbers are not the same. Looks like they've been doing some creative accounting since that time.

I still want to use the change-in-debt numbers from Graph #3. But I thought you should know about this discrepancy.

Looking at Graph #3 now, each point on the line represents a year, the change in Federal debt for one year. But I was thinking, there was some pretty serious inflation in the 1960s and 1970s. All the numbers since then are higher than the earlier numbers because of the inflation. I can take the inflation out of the numbers and graph the result, and maybe we can see how inflation changed the Federal debt.

Yeah, let's do that. It's the same calculation you'd use to calculate "Real GDP" from "Nominal GDP". Here ya go:

Graph #4: Nominal (blue) and Inflation-Adjusted (red) Annual Changes in
Gross Federal Debt.
So the red line shows the inflation-adjusted, or "real", changes in Federal debt.

Now I can take and add them up, and that'll give me a number for the Federal debt with inflation removed. It'll be in 2009 dollars, because the GDP Deflator uses 2009 dollars.

I downloaded the data from Graph #4, and added up the inflation-adjusted changes in Federal debt.

It's funny though. I'm adding up the changes to the Federal debt since 1947. That means I'm not counting any of the World War Two debt or any Federal debt from before that time. We're starting with a low number, for sure.

I can't add up the numbers in a FRED graph, so I used Excel. I put my inflation-adjusted Federal debt numbers on the graph in red. And I put the blue line from Graph #2 on my Excel graph for comparison (but only since 1947. You don't see the wartime increase of the early 1940s). Here's what I got:

Graph #5: Nominal (blue) and Inflation Adjusted (red)  Gross Federal Debt as Percent of GDP
You can view or download the Excel file from Google Drive
The blue line should look familiar to you from the first two graphs, up top. It's the same, except for the start date. The red line is the inflation-adjusted version of the blue, except it starts out falsely low. The red line shows the Federal debt in 2009 dollars, as a percent of GDP in 2009 dollars. Everything is copacetic.

Noah asks Why did rich-world deficits start exploding around 1980?

They didn't, I reply.

It does look like deficits "exploded" around 1980. But when you strip away the effects of inflation, there is no sudden change from downhill to uphill in the early 1980s. So I guess you can say there was a sudden change in the early 1980s but only because the raging inflation came to an end.

Inflation aside, as the red line shows, the Federal debt was increasing as a percent of GDP since the end of the second World War. And I think we can see a more rapid increase starting around 1974. That's not 1980, that's 1974. These things are hidden when we look at the blue line -- which is how everybody looks at Federal debt, by the way -- because inflation and the falling value of the dollar allow us to understate the value of past debts.

Thankfully, we live in a nominal world. If not for the effects of inflation, we would not have seen the Federal debt falling for thirty-plus years after World War Two.

And if not for the effects of inflation, the significant increase in Federal debt growth would have occurred around 1974, not around 1982. And that is a biggie. It is important, because people key in on the date, look at the events of the time, and understand the economy based on what they see.

Noah, for example, says the U.S. Federal deficit had been decreasing since WW2, then suddenly began to trend upward around 1980. He then offers a theory to explain why that happened.

I'm not offering a theory. I'm showing you numbers, and I'm saying it only happened that way because of inflation. Oh, and it's not a theory. It's a fact.

If you don't start with facts, even your best theories are bullshit.

Saturday, March 21, 2015

They didn't

Why did rich-world deficits start exploding around 1980? asks Noah Smith.

You already know my answer: They didn't. Now I can read his post, and reply.

Noah writes:

The U.S. federal deficit, which had been decreasing since the end of WW2, began to trend upward beginning around 1980

Then he shows a picture of the U.S. Federal debt (not the deficit) ...

Graph #1: Noah's Measure of the Federal Deficit
... the U.S. Federal debt relative to GDP.

Silly Noah.

He immediately explains (in a very short paragraph) that "the proximate cause was big tax cuts". But he wants to talk about the political-economic cause. "I have a theory" he says.

Yeah, Noah, I bet you do.

But I didn't get any farther than that, reading his post. I had to stop reading and start responding. So I don't yet know what his theory might be. Before we look at Noah's theory...

Before we look at Noah's explanation of something that didn't really happen -- his explanation of why it happened, I mean -- let's pause long enough to see whether it really happened, or not.

1. Stock and Flow

Debt is a stock. Deficits are a flow. A deficit is the addition to debt during a well-defined short period of time. A debt is the sum total of deficits accumulated over a continuous series of those time periods. So obviously, since "debt" takes a whole bunch of "deficits" and adds them all together, a "debt" is going to be a lot bigger than a "deficit". Look at it on a graph and, if you're a little naive, you might even think the debt is "exploding".

Here is the FRED graph Noah used. It goes all the way back to 1966. Whoop dee doo.

For the next graph, I took Noah's graph and added a line for the U.S. Federal deficits, the flow number. Mine (red) is shown as a percent of GDP, just like Noah's (blue).

Graph #2: U.S. Federal Debt (blue) and Deficit (red). The blue line is the same as on Graph #1
(Click the graph to see the FRED source page.)
See any explosions in the red line? The red line is deficits.

When numbers "explode" on a graph, you expect to see a line going up, fast. That's what I expect. That's what Noah was showing us with his Federal debt graph: After the early 1980s, the line goes up sharply. Too bad his graph doesn't show deficits.

A deficit is a shortage, of course. If a deficit is a hole in the ground, then a bigger deficit is a bigger hole. As deficits get bigger, the line on a graph goes down. I don't know why FRED shows it that way, but they do. That's why the red line is almost all below zero on Graph #2.

It's not intuitive. But that's okay. If deficits were "exploding" we'd see the red line go down a lot. Myself, I don't see that on Graph #2.

I know what would help. We can get rid of the blue line and just look at the red line. We can give all the space to the red line and let it expand to use the available space. (FRED will expand it automatically when I remove the blue line.) Then maybe the little wiggles will look like explosions.

But if I'm gonna do that, I'm also gonna put a minus sign in front of the data series, to invert the line. That way, bigger deficits will go up on the graph, instead of down. It'll just make more sense.

2. Go with the Flow.

Here are the deficits that Noah didn't show us:

Graph #3: U.S Federal Deficits as Percent of GDP (inverted, so higher is bigger)
That's better isn't it? The line is so jiggy! It looks like explosions all over the place. But wait just a moment. The biggest number on the vertical axis is 10.0. The biggest number on the vertical axis of Graph #2 is 120. So basically we took the red line from Graph #2 and magnified it by a factor of 12.

Yes, it's satisfying to see some action in the line on the graph. But you have to remember it's the same red line on graph #3 and on Graph #2. We're just taking a closer look.

So do we see "explosions" on Graph #3? Remember, Noah says deficits started exploding around 1980. Do you see that in the U.S. data? I don't.

I see the growth of deficits peaking around 1980 -- in 1983 actually -- and going downhill after that until the year 2000. And then maybe, an explosion after the year 2000. Here, I eyeballed in some trend lines:

Graph #4: U.S Federal Deficits as Percent of GDP (with some trend lines just by eye)
Yes, deficits were increasing from around 1970 to that 1983 peak. But if you want to call that an explosion, you have to say it started around 1970. So when Noah asks why deficits started exploding around 1980, we have to say they didn't. Not in the U.S. at least.

Hey if you look at the bottom part of Graph #4, above, just below the dates there's a squeezed-down version of the graph that shows how much of the data we're looking at. We're only looking at half, a little more than half of it. That's because Noah was looking at a data series that starts in 1966, and I didn't change the dates yet. I'll do that now. But first, look at that squeezed down version again. Look at the left-hand part, the years before 1966. You can see a big hump there. Probably everybody knows that hump is from World War Two. Yeah, let's look at that.

Graph #5: U.S Federal Deficits as Percent of GDP, all years. Inverted so big is up.
Now there's an explosion of deficits! World War Two makes everything else look like ... muffins. There is certainly no explosion of deficits between 1980 and 2000.

Okay, deficits were increasing since the 1970s -- or since the 1950s, really -- and deficits remained relatively high for an extended period, from the mid-1970s to the mid-1990s. And a bunch of high deficits one after the other should make the debt graph show an explosion. Sure.

And yes, Noah's graph shows a sudden, sharp, and persistent increase in debt from the early 1980s to the mid 1990s. But that is not an explosion of deficits. If you insist on calling it an explosion, it is an explosion of debt. Deficits tended to get smaller after the early 1980s, as a percent of GDP (and that's Noah's yardstick).

3. A Discrepancy

Well, Noah says the explosion started "around 1980". And you can see it in his graph. Checking his graph at FRED, it appears that the increase in debt started after 1981 Q3. The increase in debt as a percent of GDP.

Graph #6: Noah's graph of the U.S. Federal Debt, again
And that's strange, because deficits were trending up since the 1950s. Deficits were trending up quickly since 1970. If deficits were growing quickly since 1970, why does Noah's debt graph not show increase until ten years later?

Why, from 1976 to 1981, does Noah's graph trend downhill? Why doesn't it show increase since 1970? Hey, I wouldn't be asking the question if I didn't think I knew the answer: Inflation skews the numbers.

To be continued...

Friday, March 20, 2015

"a keen ear for unwarranted analogies"

Gene Callahan quotes from computer scientist E. W. Dijkstra

It is probably more illuminating to go a little bit further back, to the Middle Ages. One of its characteristics was that 'reasoning by analogy' was rampant; another characteristic was almost total intellectual stagnation, and we now see why the two go together. A reason for mentioning this is to point out that, by developing a keen ear for unwarranted analogies, one can detect a lot of medieval thinking today.

I went to the source for more:

The usual way in which we plan today for tomorrow is in yesterday's vocabulary. We do so, because we try to get away with the concepts we are familiar with and that have acquired their meanings in our past experience. Of course, the words and the concepts don't quite fit because our future differs from our past, but then we stretch them a little bit. Linguists are quite familiar with the phenomenon that the meanings of words evolve over time, but also know that this is a slow and gradual process.

It is the most common way of trying to cope with novelty: by means of metaphors and analogies we try to link the new to the old, the novel to the familiar. Under sufficiently slow and gradual change, it works reasonably well; in the case of a sharp discontinuity, however, the method breaks down: though we may glorify it with the name "common sense", our past experience is no longer relevant, the analogies become too shallow, and the metaphors become more misleading than illuminating.

Thursday, March 19, 2015


History's details are excuses, not explanations.

Source: 4dtraveler
There are 11 labels on the graph above, each with an arrow pointing to a moment in history. Only one of those 11 is followed by a definite uptrend, only the crash of 1929. All the rest are followed by declines in the dollar's value. In other words, it hardly matters what happens; the dollar's value falls anyway.

A lot of people look at details like those eleven. I don't. If all the different details, ten out of eleven, all have the same apparent effect on the dollar, then really those details are of little consequence. There must be something else -- one abiding factor -- that is responsible for the dollar's decline.

Oh, and did you notice? The first of those arrows points to "Federal Reserve Established". But that first arrow points to a spot well down the slope from the high point of the dollar's value on that graph. So clearly, we have to say that the decline of the dollar was well under way before the Federal Reserve was created.

One abiding factor. Not the Federal Reserve.