Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

Copyright Notice

Everything that appears on this blog is the copyrighted property of somebody. Often, but not always, that somebody is me. For things that are not mine, I either have obtained permission, or claim fair use. Feel free to quote me, but attribute, please. My photos and poetry are dear to my heart, and may not be used without permission. Ditto, my other intellectual property, such as charts and graphs. I'm probably willing to share. Let's talk. Violators will be damned for all eternity to the circle of hell populated by Rosanne Barr, Lady Gaga, and trombonists who are unable play in tune. You cannot possibly imagine the agony. If you have a question, email me: jazzbumpa@gmail.com. I'll answer when I feel like it. Cheers!

Tuesday, April 1, 2014

Tigers' Opener

I'll be blogging about the Tigers again this year.  There will be end-of-month wrap-ups and other posts whenever something interesting happens or I just get the urge.  Yesterday's game qualifies on both counts.

Starters: Verlander, Shields
W: Nathan, L: Davis

The Tigers did not play a great game, but there was great drama.  Victor Martinez opened the scoring with a solo HR in the second.   Torii Hunter made an inexplicable error in the top of the 2nd, dropping a routine fly ball, but no harm came of it.  New SS Alex Gonzales was the goat for a while in the 4th inning when Lorenzo Cain's ground ball slipped by him, then two batters later with two outs, he fumbled Nori Aoki's grounder to load the bases.  Verlander then walked in a run to make it 3-1 K.C.   This was a big scary moment with the bases still loaded and Eric Hosmer, who hit a first inning double, coming to the plate.  Fortunately, JV got him to pop up a 98 MPH fast ball and end the inning.

But the real drama came later.  It was still 3-1 after 6.  Evan Reed replaced Verlander on the mound and had a 1-2-3 inning.  In the Tigers' 7th Austin Jackson hit a 1 out triple.  After Avila walked, starter James Shields was lifted for Aaron Crow.  AJ scored on a wild pitch, while Avila took 2nd.  Gonzales then began to redeem himself by smacking an RBI double and aggressively extending it into a triple.  Rajai Davis grounded out to end the inning.  Tie ball game.

The eighth inning was uneventful, with new pitchers Albuquerque and Davis each getting through on four batters.

Joe Nathan came on for the Tigers in the 9th, and had a 1-2-3 inning.  In the bottom of the 9th, with Davis still on the mound, Jackson grounded out, then Avila walked.  Tyler Collins came on to pinch run.  Nick Castellanos, who had been thrown out at 2nd trying to extend a single in the 5th, singled, with Collins taking third.  K.C. then brought in their all star closer Greg Holland.  Last year, RH batters were only 18 for 107 (.168 ba) against him with 48 K's.  Gonzales finished the day with a single to left, scoring Collins for the win.

This game was marred by two errors, a bad route by AJ on a hit that could have been caught, Castellanos failing to get to a foul fly near the stands, and also getting thrown out trying to extend a single.  With a walked in run, that makes 6 pretty glaring mistakes.  JV got a quality start in a solid, but less than stellar outing.  It was nice to see major contributions from the new comers.  Collins must have been thrilled crossing the plate to seal the victory.

This game was remarkable for being so unlike Tigers games last year.

- The bull pen closed down the other team.
- The Tigers came from behind to win AFTER the 6th inning.
- The Tigers showed some aggressive and productive base running.
- The Tigers overcame some pretty bad play to get the win.

I'm not going to be offering detailed game description like this very often, but this game was worth it.

One down, 161 to go.

Update:  According to this analysis, teams have averaged about 7 walk off wins per year between 1995 and 2012.  That's 8.6% of the time.  So you have about a 1 in 12 chance of seeing a walk off when you go to a random game.  By my count [I can't find anyone else's] the Tigers had 7 in 2013, 5 in regulation and 2 in extra innings.

Box Score

Recap

Play by Play

Impressions

Tuesday, March 11, 2014

Equity Extraction and Personal Consumption Expenditures

In comments to my previous post I made this statement of historical fact: "home price bubble equity was an ATM that grew consistently as a fraction of PCE after 1996, and accounted for over 2% in 2005 – and I got this from Greenspan and Kennedy, Table 2." In my estimation, this implies that the collapse of the housing bubble eliminated the possibility of equity extractions, and was therefore a major contributor to the decline in personal consumption expenditures [PCE] that led into the Great Recession.

Here is the explanation.

Bill McBride at Calculated Risk has been following the equity extraction data. Here is the March, 2014 update. Dr. James Kennedy, mentioned above, wrote that for technical reasons, the data set that he and Greenspan were using was no longer valid after 2008, and presented an alternate calculation method [link at the linked CR post.] McBride uses this alternate measure, calculated from the Fed's Flow of Funds data and the BEA supplement data on single family structure investment. Also linked at the CR article is a spread sheet with the two data sets. Graph 1, from CR, shows how the two data set compare.

Graph 1 - Equity Extractions - G-K Data vs CR Calculation.

I'm looking at the correlation between equity extractions and personal consumption expenditures during the housing bubble and collapse to support my claim. The method is to compare McBride's calculated data, which extends past the end of '08, and FRED Series PCE. Graph 2 shows Equity Extractions [blue, left scale] and the YoY dollar change in PCE [green, right scale] from 1991 through Q1, 2010, both in billions, quarterly data.

Graph 2 - Equity Extractions and PCE Change

The traces start rising together after the 1991 recession. There's a disconnect during the 2001 recession, when PCE takes a dive, but extractions continue to increase. From 2003 until the crash, they are close to being in lock-step; but from the peak, extractions fall farther and faster leading into the recession. One objection to my claim is that extractions decline a year earlier than PCE. We'll get to that.

Graph 3 shows a scatter plot of Year-over-year PCE dollar change vs equity extractions from Q1 2001 through Q3 2008

Graph 3 - PCE Dollar Change vs Equity Extractions - '01 to '08

The period from Q1, '01 through Q2, '03 is highlighted in red. During this time, PCE falls and levels off without a correlation to extractions. After mid '03, extractions and PCE rise together into the peak values highlighted in yellow, then fall together into the crash. R^2 for Q3 '03 through Q3 '08 is .75. This includes the blue and yellow points.

Graph 4 is a scatter plot of the Q1 '91 through Q1 '10 period. I've color coded data subsets representing different coherent realms.

Graph 4 - PCE Dollar Change vs Equity Extractions - '91 to '10

Starting from the 1991 recession in red, PCE increased into the cluster of purple dots representing Q1 '92 to Q1 '98. From Q2 '98 until Q1 '01 is another [less tight] cluster representing a greater change in PCE but only slightly higher equity extractions. This is the peak of the dot com bubble. Q2 '01 to Q2 '03 is again in red, the slide into and climb out of that recession. The blue dots, as in Graph 3, represent the period from Q3 '03 to Q3 '08 - the housing bubble peak and decline into the crash. The green dots are from Q3 '08 through Q1 '10, when everything collapsed and the correlation fell apart. The R^2 for all the data points except the green is .49. Eliminate the red dots as well, and it rises to .70. Take out the top 4 yellow dots, Q4 '99 to Q3 '00, and it rises further to .81.

This suggests that outside of recessions and the peak of the dot com bubble, which can be considered as distortions to a underlying trend, from 1992 on, changes in consumption expenditures were strongly correlated to mortgage equity extractions.

I used an ATM analogy for equity extraction, but there's a big difference. You can go to the ATM as often as you like, but extracting equity is an event that is unlikely to be repeated very often. So it's not out of the question to expect that the flow of equity dollars into consumption expenditures would be spread over several months - possibly a year or more.

I also looked at the correlation between extractions and the PCE dollar change 4 quarters later. This is shown in Graph 5.

Graph 5 - PCE Dollar Change vs Equity Extractions - '91 to '10

Color coordination, based on the PCE values, is the same as in Graph 4. The blue dots now make a more spiky array, but there is almost no loss in the coherence of the data sub sets. Only the green dots, now extended though Q1 '11, look substantially different.  R^2 for the blue dots slips from .75 to .56, but for the entire data set [except the green dots] it increases slightly from .49 to .55.

Extraction data is seasonal, with local peaks in Q's 2 or 3, and valleys in Q's 4 or 1.  This accounts for some of the data scatter.  PCE dollar change data is smoother, with no consistent seasonal pattern.  Graph 6 shows a scatter of 4Q averages of each variable, same color coding as graphs 4 and 5.  Not including the recession-related red and green dots, R^2 is .75.  Include the red dots and R^2 drops to .588.

Graph 6 - PCE Dollar Change vs Equity Extractions - '91 to '10 - 4 Q Avgs

It's now very easy to see the two variables rise and fall together from the time after the 2001 recession into the Great Recession.

I know correlation is not causation, but I have a coherent narrative that is completely consistent with the data. The behavior of the [blue dot] data from 2003 until deep into the collapse is striking, either with or without a 4 Q lag. Non-conforming data [other color dots] are explainable variances. I think the counter assertion that equity extractions had not a darned thing to do with the collapse into the great recession is not supported by real world data.


Sunday, March 2, 2014

Did the Fed Cause the Great Recession?

With the release of the Fed's Open Market Committee Meeting minutes from 2008, it has been confirmed that the Fed was too concerned about inflation, and, to quote Marcus Nunes, "worse, the headline kind" leading into the 2008 crash.  The Market Monatarists cite this as evidence that the Fed was responsible for turning a potentially pedestrian downturn into the Great Recession.  See David Beckworth here

I'm not here to defend the Fed, but there are two issues. The first issue is their behavior - and if they mistook 2008 for 1978, that is inexcusable.

 And, as Marcus points out, it looks like they did. [Emphasis his]

Two speeches by voting Regional Fed presidents certainly helped perceptions along:

Plosner (July 22): Keeping policy too accommodative for too long worsens our inflation problem. Inflation is already too high and inconsistent with our goal of — and responsibility to ensure — price stability. We will need to reverse course — the exact timing depends on how the economy evolves, but I anticipate the reversal will need to be started sooner rather than later. And I believe it will likely need to begin before either the labor market or the financial markets have completely turned around.
Hoenig (July 16): “While the comparison to the ´70s can be useful(!), the present economic situation is also different…
However, like the 1970s, monetary policy is currently accommodative(!)…In this environment there is a significant risk that inflation and inflation expectations could move higher in coming months.
Thus, it will be important for the Federal Reserve to monitor inflation developments and inflation expectations closely, and to move to a less accommodative stance in a timely fashion”.

By their words shall you know them.  But only if you're paying attention.

Let's look more closely at that first issue - Fed behavior.  What was happening with inflation, and how did the Fed react?  Graph 1 shows headline inflation in blue and core inflation in red.



In mid 2008, core inflation was running at 2.3 to 2.5%, not far off its decade-long average of 2.2%, and had been pretty stable year to date.  Headline inflation, however, had taken a big jump.  As Graph 2 shows, headline inflation, now in red, was following the producer price index, in blue, which had taken an even bigger jump.


As these graphs show, core inflation - which is what, if anything, policy makers ought to be reacting to - is much less volatile, and did not look at all like cause for concern.  But, as Steve Roth pointed out a while back, fighting inflation is the only part of its alleged dual mandate that the Fed takes seriously.  The scorpion has to follow its nature.

 Meanwhile, what was the economy doing back in 2008?

As Graph 3 shows, the growth in personal consumption expenditures had been in steady decline from the local high of just over 7% in 2005, was more or less stable through the first half of 2008 at about 4%, but then fell off to 1% in October.   It was deeply negative by the end of the year.



Not surprisingly, NGDP growth followed a similar path.  See Graph 4


Meanwhile, Real Median Household Income, which had risen modestly from 2005-7, was slumping, probably due to income lost in the housing construction bust.  See Graph 5.


So, I think it's right and proper to criticize the Fed for their focus on inflation.  With 20/20 hindsight, it looks spectacularly wrong-headed.

The second issue is cause and effect between Fed action and the condition of the economy. Did the Fed really spawn the Great Recession in 2008?  David Beckworth says yes, and I believe the Market Monitarist community is unanimous on this point.  But let's look at what the Fed actually did.  Graph 6 shows the Effective Federal Funds Rate in blue.  Also included for reference is the Prime Lending Rate, in red, which follows in lock-step.



The Fed Funds rate was shaved a bit from about 5.25% in the 3rd quarter of 2007, then cut dramatically to 2% by the end of the first quarter of '08.  In statements from the Open Market Meetings of August 5 and September 16, the FF target rate was kept at 2%.  Clearly, that decision did not hold, as the rate was hovering near 0% by the end of the year.

I hope I'm not misstating the Market Monetarists' stance when I say that they believe the Fed has essentially unlimited power to achieve whatever targets it chooses, and that in managing expectations, Fed words speak louder than actions. In a comment at Beckworth's post, linked above, I asked the following:

Regardless of what the Fed did or didn't say; during the first quarter of 2008, The Fed funds rate was cut in half from 4% to 2%, and between August and December dropped to almost zero.

Why do words [or the absence of words] trump what is actually happening in the real world? What percentage of the population has even the slightest awareness of the FOMC? Why would their announcements influence behaviors in the general population?

On October 8, they announced a 50 basis point cut to 1.5%, then to 1.25% on 10/29, on 12/16 the target was reduced to 0 to 1/4%.

When you consider that until the Fall of '07, the Fed Funds rate was over 5%, they did rather a lot taking it to essentially 0 in about 14 months.

What am I missing?

Part of his answer [read it all here, reposted as a follow-up here] was -

As I noted in the post, the key is to change the expected path of monetary policy. That means more than changing the federal funds rate. It means committing to keeping it low for considerable time like the Fed did in 2003 and signalling it clearly and loudly. With this policy, the Fed would have provided a check against the market pessimism that developed during this time. Instead, the Fed did the opposite: it signaled it was worried about inflation and that the expected policy path could tighten. So, yes, the correct response is far more than just cutting the federal funds rate, it is about setting expectations about the future path of policy and the future economic outlook.

I have a hard time accepting this ignore what I do, pay attention to what I say [or don't say] argument.  It has to assume that people are deciding their actions by thinking months or years into the future based on what they think the Fed might do then, instead of reacting to what is happening today.  Maybe I'm just disoriented by the time travel, but in a world where the major focus is on the current quarter's returns, I don't think very many actual people behave that way.  Nor do I believe that the hoi polloi have even the vaguest awareness of Fed activities, let alone their words.

The Market Monetarist response, from Marcus is, "Interest rates are a terrible (even misleading) indicator of the stance of monetary policy."  At his article linked in the first paragraph of this post, Marcus indicates that the true stance of monetary policy is the resulting growth in NGDP - which I believe, as post-hoc as it may be, is the axiom on which Market Monitarism rests. 

But there are other reasons to disagree.  Krugman provides two.  First, "We were in the midst of an epic housing bust, which was in turn causing a collapse in the value of mortgage-backed securities, which in turn was causing a collapse of confidence in financial firms."  This strikes me as being a market failure, aided and abetted [if not actually caused] by weak lending standards and lax regulation, and thus totally outside the realm of anything that can be effected by either setting or talking about interest rates, especially after the fact.

Second, "what we actually know is that the panic was in fact fairly short-lived, ending in the spring of 2009.  .  .  .  Yet the economy didn’t come roaring back, and in fact still hasn’t. Why? Because the housing bust and the overhang of household debt are huge drags on demand, even if there isn’t a panic in the financial market."  Again, it doesn't seem likely that Fed action or words would have any effect on this outcome.

Further, as Stephen Williamson puts it, "So, it's like there was a fire at City Hall, and five years later a reporter for the local rag is complaining that the floor wasn't swept while the fire was in progress."  A bit on the snarky side, but he also points out that the Fed had lost control of the Fed Funds rate at this time, anyway, due in part to risk perceptions.  This is shown in Graph 7.   What does this tell us about expectations at a time of panic?


He also indicated that the Fed loaned substantial amounts to financial institutions, starting early in '08, and increasing dramatically in September and October.  This is shown in Graph 8.


There was a lot of overt Fed action in 2008.  Maybe it was a bit sluggish, but if so, it was only lagging real world events by a few weeks.  They might have acted a bit quicker, but I don't see any more they could have done, other than talking differently.

Can those words really have been the cause of the greatest financial disaster in 80 years?

Afterthought:  It's entirely possible that the Fed, and most particularly bubble denier Alan Greenspan, were complicit in the many-years-long prelude that set the stage for the crash.  But that was much earlier and really is a separate set of issues.

Sunday, February 23, 2014

A Look at Debt and Inflation

Here's a scatter of the YoY change in CPI inflation vs the YoY Change in the debt of households and nonprofits.  [FRED Custom Chart]  If debt drives inflation, we should see an upward slope in Graph 1.
 

Graph 1 - CPI Change vs Debt Growth


Clearly, there is no upward slope - at least not any simple or easily discernible way.   To try to make some sense of this, I color coded the points for different time periods.  That is shown in Graph 2.

Graph 2 - CPI Change vs Debt Growth, Color Coded


Once the light blue points are segregated, it's pretty easy to see that the remaining points reside mostly in a horizontal band.

Here is the arrangement.

1952 -60     Yellow - Eisenhower
1961 -68     Dark Purple  - Kennedy-Johnson
1969 -71     Green - Preamble to the Great Inflation
1972 - 82    Light Blue - The Great Inflation
1983- 92     Dark Blue - Beginning of the Great Stagnation
1993 - 00    Red - The Clinton Stability
2001-08      Dark Blue - Culmination of the Great Stagnation
2009 on       Pink - The Great Recession to now

As it turns out, the Red and Dark Purple points are hard to differentiate.  [if you right click on the graph and select "Open link in new window," you can blow up the graph by clicking "Control" and the "+" sign several times.]  The red points are more closely clustered and surrounded by the purple. There are the hearts of your two little moderations.

Originally I had the entire 1983 - 08 period in dark blue, then decided to highlight the Clinton years in red to see if anything stood out.  What we find is a short period of the greatest stability in the record, regarding both of these two variables.

So, the data tells that for the post 1952 period, there is no robust relationship between debt growth and inflation.  In fact, except for the Great Inflation period, the relationship might even be slightly negative.  The 1969-71 period, just prior to the Great Inflation, has the unique combination of lower debt growth and higher inflation than any other time in the data set.

Also, the Great Recession and it's aftermath are unlike anything else we've seen in recent decades.

Bottom line, though, is that a rate of CPI inflation of 3 +/- 1% is associated with the entire range of debt growth in the modern era.  And, if debt growth is a serious factor in health of the economy, inflation targeting is close to meaningless as a policy tool.
 

Thursday, February 13, 2014

The Traffic Trap

Commenter OwenKL writes a bit of poetry most days to compliment the theme of the L.A. Times Crossword Puzzle.

Today's was a typically clever example

But I thought of a different Christie, and came up with this.

The Traffic Trap

Chris Christie writes cover-up scenes
Of denial re: that bridge west of Queens.
Why would it be
He put the screws to Fort Lee?
Just to vent his too partisan spleens!




Friday, February 7, 2014

Six Decades of U.S. Population Growth

2/08 Update - This is substantially revised, including more and better graphs.

The growth rate of the U.S. population has been in a generally downward trend since the post-war baby boom peaked in 1957.  Graph 1 shows the YoY percent change in the total population.

Graph 1 - U.S Population Growth since 1952

The precipitous growth rate drop through the sixties came to an abrupt halt in 1969, when early boomers like me started having our families.  My son, daughter and two step sons were all born in the blip spanning 1969 to '73.  There might be a similar reason for the mid to late 70's growth rate, but there also might be a bit more to it.

Graph 2 shows the birth rate per 100 population since 1950.  [1980 - 2010 data from CDC.]


Graph 2 - Birth Rate per 100 Pop

The drop in population growth rate through the 60's is explained by this data. You can also see the mini-peak from 1969 -73, the initial wave of boomer offspring.   Then there is another peak at 1990.  But that doesn't do much to explain the simultaneous big jump in population growth.  We'll see what does, shortly.  Also note the drop after the slight maximum in 2007.

To avoid any chance of getting a mistaken impression, let's also look at the annual birth numbers, shown in Graph 3.

  Graph 3 - Number of Live Births

Without the per population denominator, the post 1980 portion of the graph looks quite different.  Now the 1990 peak seems a lot more significant, with the greatest number of births since 1968.  And the barely discernible blip in 2007 on Graph 2 is revealed as the greatest number of births ever, just slightly edging out the 1957 post war baby boom peak.  But the drop from 2007 to 2012 is meaningful.  The 2012 birth rate of 1.27/100 pop is a record low.  It corresponds to a total fertility rate of 1.93 births per woman over her lifetime.  The replacement rate to keep native-born population from declining is 2.1.

The other source of population growth is immigration.  And, as Graph 4 shows [data from Table 1 at this link.] it accounts for a big chunk of the population growth in the early 90's.

Graph 4 - Immigration from 1950 on

The peak runs from 1989-93, with the maximum value in 1991.  I've imposed an exponential base line by putting an Excel generated best fit curve through the highlighted data points. The raw number of annual immigrants has generally increased over time, and has mostly run well above the base line since 1989. But now it has been basically flat since 2007.  The above-trend numbers of the late 70's contributed to the increased population growth at that time.

Graph 5 shows that, in raw numbers, for recent years births outnumber immigrants by not quite 4 to 1.



Graph 5 - Ratio of Immigrants to Births

The final component to population change is the death rate.  This data was not as easy to locate, is less detailed, and there are some discrepancies among various sources.  I took data before 2000 from info please, and from 2000 on from indexmundi.  I don't put a lot of faith in the 2nd decimal point.   Graph 6 shows the data.

Graph 6 - Death Rate per 100 Pop

The big drop in mortality during the 70's and 80's isn't hard to understand.   There were big medical advances leading to increased disease survival and longer life expectancy. At the same time, there were huge improvements in automotive safety that saved thousands of lives every year. On-the-job safety might also have been a factor, since OSHA was formed in 1971.  The slight increase in the late 90's and sharp drop after 2000 are more mysterious, but that might just reflect the quality of the data.

My first thought was that before about 1980, births dominated population growth, and after about 1990 immigration took over.  During the early 90's, at least, immigration dominated.  That may still be true.  As the number of births has dropped sharply, the birth rate has fallen to an all time low since 2007.  Population growth has stabilized at an historical low level, and hasn't declined further in the last 3 years.

One thing that is clear is that without immigration, the U.S. population would go into decline as my generation passes on. 

Ralph Kiner Ends His Gig On Earth

Ralph Kiner entered the major leagues the year I was born, and had a 10 year career. I recognize his name, but have no recollection of him as a player. He led the NL in HR's the first 7 of those years, and was one of the truly great players of all time.

He went on to a much longer career in broadcasting, and is probably better known and loved for that phase of his life

He passed yesterday at the age of 91.

RIP Ralph.

You were one of a kind.

Update

Kiner dated both Liz Taylor and Janet Leigh.  Here is the story of when he met Leigh's daughter Jamie Lee Curtis.


Wednesday, February 5, 2014

Quote of the day

I once remarked to another anatomist that the courses of many of the nerves in the human body don’t suggest “omniscient, omnipotent supernatural being of pure perfection” so much as they do “amateur electrician and the Three Stooges rewire a house”.
                              -- Commenter wjts, at LGM

Saturday, February 1, 2014

Random Thought

I've decided I never want Chris Christie to be my bridge partner.

Real GDP per Capita

My last Angry Bear post generated such a wonderfully amusing comment stream that I couldn't resist posting a follow up.  One of the criticisms was that I didn't consider Real GDP per Capita.  At the risk of having anyone think I accept homework assignments from trolls, here is a look at that very thing.  I'm snowed in tonight, so what the hey.

I usually like more finely granulated data over a longer time span, but sadly discontinued FRED series USARGDPC gives us annual data from 1961 through 2011, and that's plenty good enough to make a point; the point being that the American economy is dying a slow and agonizing death.  This, alas, despite enormous tax cuts enduring over decades.  For the supply-siders among you, we'll take an extra special look at the Reagan years.

Graph 1, from FRED, shows YoY RDGP growth over the span of the data series.

Graph 1 - RGDP per Capita, YoY % Change

The single most prominent feature of this trace is the downward trend over time, characterized by both lower lows and lower highs.  This should be pretty obvious, even to the causal observer; but if you cannot see it, don't be disturbed, I'm going to help.

 Graph 2 shows the same data, along with some trend indicators.

Graph 2 - RGDP per Cap, % Change, with extra colored lines

Parallel trend channel boundaries are indicated in red and green, with the center line in yellow.  The Excel generated least squares trend line is in dark blue, and a moving 5 year average in purple.  Each of these additions is a visual aide, indicating that the trend over time has, indeed, been down.  Certainly, it has not been monotonic.  The real world seldom works that way.  But what you see here, with some exceptions, are mostly worsening recessions, and increasingly anemic recoveries.

Next, let's focus in on the 5 year average.  Graph 3 gives that to us, along with it's own set of trend lines.  The vertical axis is truncated relative to graph 2, and the downward slope is therefore emphasized.  This makes it easier to see that the 1990 peak is considerably lower than the double peak of '66 - '69.


Graph 3 - 5 Year Average of RGDP per Cap Change, with extra colored lines

The 5 year average is in purple.  The base data and least squares trend line are in grey, The red, green and yellow lines are again parallel channel boundaries and midline.  The last time the average line touched the top channel border was in 2000.  After that, despite the Bush tax cuts, things went into a bit of a decline, culminating in the worst financial disaster since the Great Depression.

I know what you're thinking.  The next to last peak in Graph 3 came in 1990, the culmination of the Reagan miracle, just before his buzzards came home to roost, costing Bush Sr. his chance at a second term.  But remember that that peak is considerably lower than those of the 60's, and scarcely above the mundane years of '70 to '73.

And back in graph 2, the highest single growth year ever was in 1984, the third year of phase-in for Reagan's 1981 tax cut.  Well, sure - but note that 1984 was a one-off, and also the recovery year from an exceptionally deep Fed-induced double-dip recession in the previous 3 years.  So, beside a lot of pent up demand, there were a few other things going on that might have given RGDP a boost.

Graph 3 shows the Effective Federal Funds Rate, which made an erratic drop from a high of just over 19% in mid '81 to 15% in early '82, then to under 9% by 1984. 

Graph 3 - Effective Fed Funds Rate, 1980 to '84

Graph 4 shows the explosion of credit that occurred coming out of 1982.  By 1984 it was close to an all time high.  It finally reached that peak in 1986, then collapsed.for the rest of the decade.

Graph 4 - Credit Expansion, 1978 to 1994

And let's not forget that Reagan was responsible for what was at that time, the most profligate explosion of federal spending ever seen, as shown in Graph 5.

 Graph 5 - Reagan's Deficit Spending

So let's recap.

Big picture: Decades of tax cuts have not led to increasing prosperity.  Quite the opposite.  The growth rate of RGDP per capita has declined substantially since the tax cuts of the 60's, and most severely since the 2001 tax cuts.  The ensuing change in RGDP/Cap growth is somewhat reminiscent of what happened from '69 to '75, but as yet without much recovery.

Focus on the Reagan years: After a long and deep recession, tax cuts plus the steepest decline in nominal  interest rates ever seen in the 20th century, plus a huge expansion in federal spending, plus an explosion in credit resulted in a single year of outstanding GDP growth, followed by four decent but less than stellar years, which incidentally also included the 1986 tax cut.  Then, alas, in 1991, there was another recession.

If you can look at this data and still have the opinion that tax cuts boost the economy, then knock yourself out.  Everyone is entitled to an opinion.  But you might want to ponder why your opinion has so little overlap with reality.

I welcome your comments, but please keep them more or less relevant to the topic, and if you are going to disagree, please bring more than assertions.  Facts and data have some gravitas. 





Wednesday, January 29, 2014

Republican State of Disunion: Taxes Edition

The Republican response to the President's State of the Union message was delivered by Washington State Rep. Cathy McMorris Rodgers.  It was personal, platitude-ridden, overtly religious, twee, and devoid of policy content or anything else of relevant substance - other than a naked assertion that BHO's policies are making life harder in myriad unspecified ways. In other words, it was the most you could expect from an intellectually bankrupt party whose only agenda item is to make the President fail.

To be fair, she did offer one concrete recommendation: to lower taxes.  The concept that lowering taxes would be beneficial at this point is one of those zombie ideas that not only won't die, but continues to eat peoples' brains.  For example, in a recent AB comment stream, this idea was put forth: "Substantial tax cuts worked under Kennedy, Reagan, and Bush. Given the much higher level of household debt, a bold tax cut was needed more than ever."

As I've demonstrated before, and shortly will again with actual facts and data, there is no reason to believe that lowering taxes improves the economy.    But first, let's remember two important details.  First, over 45% of Americans don't pay any federal income tax.  The Wall Street Journal calls them "Lucky Duckies."  Imagine the great good fortune of making so little money that you don't qualify to be taxed on your earnings.  Second, as Bruce Bartlett pointed out 4 years ago, "tax filers with adjusted gross incomes between $40,000 and $50,000 have an average federal income tax burden of just 1.7%. Those with adjusted gross incomes between $50,000 and $75,000 have an average burden of 4.2%."

So the opportunity to have tax cuts do much to promote real economic growth is somewhere between slim and nonexistent.

Let's look at the actual information we have on tax rates and Real GDP growth.*  Graph 1 shows the top marginal rate in blue and the capital gains rate in green from 1950 through 2011.  Also included in brown [right scale] is the YoY percent change in RGDP [annual data] and a linear RGDP growth trend line.  The major trend in each of these phenomena slants down over time.

Graph 1 - Tax Rates and GDP Growth since 1950

Graph 2 is a scatterplot of RGDP growth vs top marginal tax rate, same annual data as in graph 1.

 Graph 2 - Scatterplot of RGDP Growth vs. Top Marginal Tax Rate

The points are color-coded Red for Republican administrations, and blue for Democratic administrations.  Again, a trend line is included, showing a positive slope.  I find it interesting that the space below the trend line is dominated by red dots.  You might not.  The data arranges itself  in columns because the tax rates tend to remain constant for several years at a time.  There is a great deal of scatter since many things besides the tax rate influence the economy.  The simultaneous general abandonment of a Keynesian approach over the period is notable in this regard.

It might be a bit simplistic to think that a current tax rate influences GDP growth in the immediate year, so I took some long averages and redid the scatterplot.   Graph 3 is a plot of the 8-year averages of both top marginal tax rate and RGDP growth.  This has the additional advantage knocking down the data columns.


Graph 3 - Scatterplot of RGDP Growth vs. Top Rate, 8-Yr Avgs.

The 8th year of each administration that lasted that long is indicated with a red dot for Republican and a bright blue dot for Democrat.  Make of it what you will.  The general trend over time is from the top right to the lower left of the graph, and the highlighted dots appear in strict right to left chronological order, from Ike at the right though Kennedy-Johnson, Nixon-Ford, Reagan and Clinton to G. W. Bush at the left. A similar graph of 13-year averages tells the same story, but with all of the the dots landing closer to the trend line.

It does appear from graph 3 that lowering the top rate from 91% to 70% might have been associated with higher RGDP growth.  But, note from graph 2 that the spread of RGDP values at 91% is far greater, and that the highest individual RGDP values are at the higher tax rates.  The 50's, when most of the 91% values occurred, were characterized by a series of economic shocks and recessions as the U.S. returned to peace time conditions and absorbed several million WW II veterans into the work force.

Graph 4 is a close-up view of the 8-Yr average graph starting with the Reagan administration.

Graph 4 -  RGDP Growth vs. Top Rate, 8-Yr Avgs.from Reagan on

The eight years of the Reagan administration are indicated with red dots, GHW Bush in orange, Clinton in bright blue, and GW Bush in purple.  The later is most notable for making the 8 year average of RGDP growth dive off a cliff.  And before you get too excited about the transient RGDP increase in the late Reagan years, remember he also ran deficits that dwarfed anything seen up to that time.

The record of the Clinton years not withstanding, I'm not going to get into a post-hoc discussion of higher taxes causing higher growth - though the data up to at least the 70% level is consistent with that assertion.  Correlation is not causation.  On the other hand, the absence of correlation absolutely refutes causation. What one may say with absolute certainty is that in the post WW II United States, tax cuts have never led to a sustainable increase in RGDP growth.  The lone possible exception is the cut in the 60's from 91% to 70%.  It's plausible that cutting from an extremely high tax rate might be beneficial, but, due to the extreme volatility of the early post WW II period, the effect in that case is not at all clear.

So if anyone tries to tell you that cutting taxes in the current set of conditions will stimulate growth, feel free to show them this post.

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* Top marginal tax rates from Citizens for Tax Justice.
Capital Gains Tax rates from the Tax Policy Center.
RGDP data from FRED



Saturday, January 25, 2014

Oh, Look The Lying Liars -

at the Heritage Foundation have a new Chief Liar Economist.

I've seen Steven Moore on television many times.

To be polite, the man is a buffoon.

He has now left the WSJ to become Chief Economist at the Heritage foundation, well known bastion of shameless liars.

Though it's possible that Moore actually believes the anti-arithmetical nonsense he spouts - which would make him less of a liar, and Moore of an idiot.