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The Scariest Graphic I Made All Week, or, Still More on Excess Reserves and "Money"

One of the nice things about the Kauffman Foundation’s Blogger Conference is the time to let the mind wander and look at data after having your brain scoured.

One of the worst things is realizing too late that you’ve got a Really Ugly Graphic, and most of the people who could help with it are gone.

Four hours ago at dinner, I was sitting between Brad DeLong and Tim Duy (who pointed out some good contemporary performers of Real Country Music), but I didn’t have this graphic with me. Now Tim is on a plane and Brad is teaching students, and my best option is to ask the AB commentariat if the following graphic scares them as much as it does me.

Even given my hobby-horse attitude toward Excess Reserve (i.e., the Sheer Unmitigated Contempt with which I treat the idea that reserves in general—let alone Excess Reserves—should “earn” interest), the dropping-off-a-cliff impression (and the overall downward trend, even keeping in mind that we do not Seasonally Adjust Excess Reserves, and therefore Seasonal Effects are clear) almost seems to explain why the 32nd month of the “recovery” feels as if it’s just possibly starting something.

To be fair—and a hearty “thank you” to Jeff Miller of A Dash of Insight for reminding me that most people believe the Fed concentrates on M2, not M1—the broader index shows an upward trend (again, discounting the recent decline as a Seasonal Effect):

Otoh, an overall ca. 5% increase in “Net M2,” as it were, over a year in which the dollar has increasingly appeared to be the only reasonable “Safe Haven” doesn’t seem all that large either.

I’ve yet to play with the data beyond this, so I leave it to the AB comentariat:

  1. Do you believe there is something here?
  2. If so, any guesses what it is? Or anything you want to know about it?
  3. If not, what else should we be looking at where Excess Reserves may/should/will (depending upon your degree of certainty) affect the value of the data and/or Real Economic Growth?

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Can Your State Mandate That You Buy Broccoli or Join a Gym? (And why the excoriation of Donald Verrilli is misplaced)

The answer to the title’s question—Can your state mandate that you buy broccoli or join a gym?—depends upon which of the two possible grounds the 5-4 Supreme Court majority overturns the ACA’s individual-mandate provision.  And which grounds the majority selects also will determine whether under the Court’s new “liberty” jurisprudence, Social Security and Medicare also are unconstitutional. 

That’s because if, for all their posturing about the imposition on individual liberty of having to buy healthcare insurance that the individual may not want, they ultimately base their ruling not on that imposition on individual liberty to choose whether or not to buy a health insurance policy, but instead upon—and only upon—a narrow reading of the Congress’s powers under the Commerce Clause, states will retain the right to mandate the purchase of health insurance (e.g., “Massachusetts’s “Romneycare”), and of auto insurance, and of broccoli, and of gym memberships.

If, on the other hand, the Commerce Clause ground is simply the fig leaf used to segue into an individual-liberty-to-choose-not-to-buy-health-insurance ground, then the ruling also will imperil the legal underpinnings of Social Security and Medicare, because while those programs were enacted not under Congress’s Commerce Clause power but instead under its taxing power, both programs require payment for insurance—one, a retirement annuity, the other, eventual health insurance—that the individual may not want and may never use. Not everyone lives to age 65, after all.

The Commerce Clause issue deals only with the breadth of Congress’s power to regulate interstate commerce and the things that impact it.  Or, in Commerce Clause jurisprudence lingo, the power to regulate “markets” that impact interstate commerce.  The Obama administration, and the Congress that enacted the ACA, have claimed that there are two separate “markets” that the ACA regulates: the market for health insurance and the market for healthcare itself.  The Commerce Clause issue does not address what statescan regulate, and what states are prohibited by concepts of “liberty” from regulating. For that, you have to look at the Fourteenth Amendment’s due process clause and the constitutional doctrine known as “substantive due process,” which concerns the limits of state governments’ powers to intrude into personal autonomy, personal decisions.  As I explained in a post earlier this week, it is the doctrine under which the Supreme Court has stricken state laws prohibiting the sale and use of contraception and state laws prohibiting sodomy, and those categorically prohibiting abortion (Roe v. Wade).

The Fourteenth Amendment applies only to the states, but its due process clause is virtually identical the Fifth Amendment’s due process clause.  The Fifth Amendment applies to the federal government, and the “substantive due process” doctrine applies to that Amendment’s due process clause in the same manner in which it applies to the Fourteenth Amendment’s.

For the last two years, the rightwing has conveniently conflated the Commerce Clause ground and the due process “liberty” ground, seamlessly seguing between the two but always calling the “liberty” ground the “Commerce Power” ground.  And, with two exceptions that until Tuesday’s argument seemed important, they’ve gotten away with it  The two exceptions were the two lower appellate court opinions, both of them written by conservative Republican appointees, upholding the constitutionality of the individual-mandate provision and, in doing so, noting both that the mandate provision concerns not only the market for healthcare insurance but also the market for healthcare itself, because a 1986 federal law requires hospitals that receive federal funds to treat people having medical emergencies, irrespective of whether or not the patient has healthcare insurance. 

What surprised me most about Tuesday’s argument is that Anthony Kennedy appears to have not readthe government’s brief on the individual-mandate provision.  He seemed utterly unaware of the nature of the government’s Commerce Clause claims and unaware of the 1986 law.  “Can you create commerce in order to regulate it?” Kennedy asked Solicitor General Donald Verrilli early on.  Well, no, but if, as the government claims, one of the relevant markets under Commerce Clause jurisprudence is the market for—payment for—healthcare, then unless the ACA rather than the 1986 statute creates the obligation of hospitals to treat people who come there with medical emergencies and to admit them to the hospital if necessary rather than just treat them in the emergency room, then the ACA doesn’t create the market for healthcare of the uninsured.  Kennedy suggested that we don’t require hospitals to provide medical treatment to the uninsured, just as we don’t require someone in a position to stop a blind person about to step in front of a moving car, to do so.  And Scalia said we shouldn’t “obligate” ourselves to that.  We already have, which is one reason why the mandate provision comes within Congress’s Commerce powers.

Verrilli is being excoriated for answering ostensibly Commerce Clause questions with actual Commerce clause answers.  Especially for answering Kennedy’s and Roberts’s requests for a “limiting” Commerce Clause principle with a Commerce Clause answer.  Paul Clement, lead attorney for the challengers, is, by contrast, being praised for his brilliance in presenting his arguments, although his task was similar to that of a candy store owner offering children all the free candy they’d like.  Clement may be a brilliant appellate advocate.  But a monkey could have argued this one for the challengers, with the same effect.

Much is being made of Verrilli’s final few sentences on Tuesday—and Clement’s response to them.  And appropriately so.  Verrilli, ultimately realizing that the earlier questions were not really Commerce Clause questions at all, nor even Fifth Amendment substantive due process “liberty” questions, but instead public-policy questions, made an emotional plea that the Court respect the public-policy choice of Congress and the Obama administration in choosing to recognize a profound connection” between health care and liberty. “There will be millions of people with chronic conditions like diabetes and heart disease, and as a result of the health care that they will get, they will be unshackled from the disabilities that those diseases put on them and have the opportunity to enjoy the blessings of liberty,” he said.

To which Clement responded, “I would respectfully suggest that it’s a very funny conception of liberty that forces somebody to purchase an insurance policy whether they want it or not.”  Perhaps.  But that’s a Fifth Amendment due process argument, not a Commerce Clause one.  And if it is upon that basis that the Court strikes down the individual-mandate provision in the ACA, those of us who think that the Social Security and Medicare statutes are constitutional under both the taxing power of Congress and generic “liberty” jurisprudence shouldn’t find the Court’s ruling in this case funny at all.

[Cross-posted at, front page.]

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Lending, Velocity, and Aggregate Demand

JKH likes this line in Keen’s response to Krugman:

The endogenous increase in the stock of money caused by the banking sector creating new money is a far larger determinant of changes in aggregate demand than changes in the velocity of an unchanging stock of money.

It struck me as an empirical question: how do those changes compare in magnitude? I didn’t know offhand.

Let’s start with MZM (money of zero maturity, the broadest definition of money), and GDP:

There’s about $10 trillion in MZM right now, and GDP (annual spending) is at about $14 trillion.* The money stock turns over about 1.4 times per year.

If money supply was unchanged — no new net lending/borrowing — but the musical chairs/logrolling game sped up so money turnover increased by 5%, because people were more optimistic — ready to take chances, consume now while worrying less about later, invest in new housing and productive capacity, etc. (“animal spirits”) — that would add $.7 trillion to aggregate demand. (5% is quite a GDP jump given no new net lending…)

Now lets look at annual net borrowing/lending — annual change in debt outstanding for households and nonfinancial firms:

Plus $1.6 trillion, to minus $.4 trillion. We’re looking at magnitudes far beyond what we could reasonably expect from pure animal-spirit-driven velocity changes.

Now it’s true that much of that lending/retiring might not translate directly into purchases/production/consumption of real goods. Much of it might (does) leak into changes in financial asset prices. (Keen is keenly aware of this. It’s pure Fisher/Minsky.) Yes, that portion could affect real-good transaction volumes via a second-order wealth effect, but the magnitude of that effect is unclear.

But it seems from the magnitudes that Keen’s statement is probably correct: changes in borrowing and de-borrowing have a lot more potential effect on aggregate demand, at least, than changes in velocity.

* Note that this does not include spending on intermediate goods — those that are turned into final goods within the accounting period — or used stuff. Adding these into total spending when calculating velocity might yield interesting insights. See Nick Rowe, Macroeconomics and the Celestial Emporium of Benevolent Knowledge.

Cross-posted at Asymptosis.

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Another Look at Wealth and Consumption – Pt 1

 Part 1 – Spending as a fraction of Net Worth

Tim Duy weighed in on the output gap debate – not my topic, but he presented this chart of net worth as a percentage of GDP.

Graph 1 Net worth as a Percentage of GDP 

That got me thinking again about the issue of whether consumption spending is determined by income or wealth. Specifically, if consumption is determined by wealth, there should be peaks in consumption corresponding to the dot-com and housing bubbles shown on Graph 1.  However, as Graph 2 shows, there were no such peaks.

Graph 2 Personal Consumption Expenditures

I’ve argued already that, contrary to standard economic thought, consumption is directly determined by income.  (Posted at RB and at AB.) One observation was that consumption, as a fraction of income, didn’t vary much over time, averaging 90.1% with a standard deviation of 2.1%. 

I took a similar look at consumption and net worth, data from Fred.  The next three graphs show personal consumption expenditures (PCE) as a decimal fraction of net worth (blue, left scale) along with net worth (NW) (red, right scale) over different time spans.

Graph 3A  Expenditures/Net Worth and Net worth, 1959-79,

Graph 3A spans from 1959 – the beginning of the data set – to 1979.  Net worth rises exponentially as the population grows.  Adjusting for population growth does not change the shape of the net worth curve, so, in the aggregate, we were becoming richer during those years.  Note that PCE/NW follows a generally similar, though far bumpier trajectory.  As I pointed out in the prior post, the personal savings rate also increased during this period, so the average worker was able to both save and spend more.

Graph 3B  Expenditures/Net Worth and Net worth, 1975-90

Graph 3B spans from 1975 to 1990.  Net worth continues on its exponential track.  But, after about 1979, PCE/NW drops, reversing the prior trend.  By 1990, PCE/NW is no greater than it was in the early 1960’s.  Meanwhile, the personal savings rate also dropped – to a range below that of the early 60’s.

Graph 3C  Expenditures/Net Worth and Net worth, 1989-2011

Graph 3C spans from 1989 through October, 2011.  The exponential growth of net worth falters before and during the two most recent recessions.  After about 1994, PCE/NW is a roller coaster ride.  Of particular interest is the exactly contrary motion at a detail level between NW and PCE/NW, after about 1998.  During the housing bubble of mid-last decade, PCE/NW hit an all time low.

What narrative makes sense of these three graphs?  Here’s my attempt.

Through the 60’s and 70’s, the standard of living was increasing, as incomes and net worth rose together.  This allowed more discretionary spending, and therefore, the fraction of NW that was spent increased.

In the 80’s, aggregate net worth continued to rise, but consumption spending, quite dramatically, failed to keep pace.  Lane Kenworthy has repeatedly pointed out that middle class income growth has decoupled from general economic growth as the upper income percentiles have captured an increasing slice of total income.  As the wealthy grew wealthier and the middle class fell behind, the fraction of NW that was spent declined – exactly the opposite of what should happen if increasing wealth determined spending.  But exactly what should happen if increased wealth is diverted to the already wealthy who have less of a propensity to consume.

During the 90’s, growth in median family income and GDP per capita were close to parallel (see graph at the Kenworthy link)  so there was a lull in the decoupling.  For most of that decade, PCE/NW was close to constant at 0.18-.19.  But while spending was kept level, the personal savings rate continued to fall. 

During the current century, median family income has flat-lined, while GDP/Capita has continued to increase. The decoupling has resumed and the wealth disparity has widened.   During the two wealth bubbles, PCE/NW declined dramatically.  When the bubbles burst and net worth declined, PCE/NW increased  back into the 0.18-.19 range.  Most strikingly, from about 1998 on, the two lines in graph 3C exhibit exactly contrary motion at a detail level.


There was a tight relationship between Net Worth and consumption through the 60’s and the 70’s, when earnings growth kept up with GDP and wealth disparity was slight by current standards.

This relationship broke down during the 80’s – though one could argue as early as the mid 70’s – as aggregate wealth and working class income decoupled.

Most recently, the relationship between NW and PCE/NW is inverse.  The big swings in NW that the bubbles provided also demonstrated that consumption spending does not depend on net worth.

As I indicated in the earlier post linked above, consumption spending does depend on disposable income, throughout the entire post war period.  A simple look at readily available data casts grave doubts on the idea that wealth, and not income, determines consumption spending.

For the longer perspective, here is the data of Graphs 3 A-C on a single graph.

 Graph 4  Expenditures/Net Worth and Net worth, 1959-2011

In part 2, we’ll look at how spending and Net Worth correlate.

Cross-posted at Retirement Blues.

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Consumer Spending on Energy

Today’s release of personal income and expenditure data was about as expected and the January-February data suggest that first quarter real personal expenditures component of the real GDP account will show about 2% real growth.

But the energy expenditures within the data has been little noticed. Normally rising energy prices dampen the economy. But this time around the warm winter, falling natural gas prices and conservation appear to be offsetting the negative impact of higher oil prices. Nominal expenditures on energy peaked at $676.8 billion in September, 2011 and fell to $610.5 billion in January,2012 before rebounding to some $636.4 billion in February, 2012. The drop from September to January was about 10% and even after the February rebound nominal consumer spending on energy was still some 6% below it’s September peak. So, contrary to the standard assumption it does not appear that rising oil prices is doing that much damage to economic growth.

As the chart shows, energy as a share of consumer spending was 5.78% in February as compared to the recent September peak of 6.24% and 7% at the July, 2008 peak.

Forgot to add: GO KENTUCKY

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If there was a Public Option in PPACA, what grounds would the Supreme Court use to overturn it?

The above is a more-than-semi-serious question.

I’ll be blogging/tweeting the Kauffman Foundation’s Bloggers’s Forum tomorrow from 9:30-3:30 EDT (8:30-2:30 here in Kansas City; 6:30-12:30 in DeLong/Thomaville; in Hawaii, they’re still watching Dave Garroway).

You can tell it has reached maturity because tomorrow’s presenters include J. Bradford DeLong, Scott Sumner, Tyler Cowen, and Karl Smith—and that’s just the first panel (“Recovery and Long-Term Growth”).

Mark Thoma, Arnold Kling, and the Former Dynamic Duo [Ezra Klein and Matt Yglesias] are all scheduled to follow.

As Brad noted, the event will be live-streamed at Growthology and (one assumes, as usual), the videos will be archived and available.

Neither your not-very-humble correspondent nor fellow AB (and now Roubini contributor) Rebecca Wilder will be presenting.

[links completed late; apologies to Ezra, Matt, and Rebecca for the delay.]

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Congressional Progressive Caucus’ Budget for All Deserves as Much Scrutiny as Paul Ryan’s Budget

Firedoglake author David Dayen notes that Congressional Progressive Caucus’ Budget for All Deserves as Much Scrutiny as Paul Ryan’s Budget

As long as the news media devotes massive amounts of space to a fantasy budget, why can’t they turn their attention for just a minute to a more legitimate one? Sure, the Congressional Progressive Caucus’ Budget for All isn’t likely to get much more than the 100 or so votes of its members, short of what would be needed to pass the House. But the Paul Ryan budget has about as much of a chance as the Budget for All from becoming law.

Economic Policy Institute analysis is here.

Update: Executive summary from the House …  hat tip PJR.

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Euro area credit: did the ECB wait too long?

by Rebecca Wilder

Euro area credit: did the ECB wait too long?

The ECB released its February report on monetary developments in the Euro area. This is an important report, since it will highlight whether or not the ECB’s LTRO is ‘working’, rather if the new liquidity is passing through to the real economy via new lending. On balance, it’s probably too early to tell, since there are long lags in monetary policy – however, early signs are not good for the real economy.

Ostensibly, the ECB LTRO did its job, as interbank credit has re-emerged in aggregate. Repo credit increased 4.2% over the year in February – this followed an 11.5% annual surge in January. Furthermore, short-term debt holdings jumped at a 21.3% annual pace. Banks and sovereigns have seen relief in the short-term credit markets, a product of long-term funding from the ECB.

But credit availability to the broader economy is more challenged. The chart below illustrates the working-day and seasonally adjusted lending by Monetary Financial Institutions (MFIs) to the household and non-financial corporate sectors. I use the 3-month/3-month average growth rate to illustrate the credit impetus over the LTRO period. In the three months ending in February, household lending fell 0.18% compared to the average spanning September through November 2011. The drop in quarterly lending did slow, but remains in decline. Loans to non-financial corporations fell a larger 0.82% in the three months ending in February. For non-financial corporations, the pace of decline quickened since the three months ending in January.

Across the Euro area, the charts below illustrate the contribution to annual growth in Euro area credit across the 17 EMU economies by sector: household (and nonprofit) and non-financial corporate. The usual suspects are seeing large declines in household and non-financial corporate lending, including Spain, Portugal, Greece, and Ireland. France is the bright spot across both sectors, contributing a large share (multiples of its GDP share) to household and non-financial corporate lending.
Chart Note: the Charts below illustrate the country-level contributions to the annual growth rate of Euro area Household and non-financial corporate loans in February 2012.

Household lending The contribution to annual EA credit growth from Irish households (consumer plus mortgages) has been negative for 40 consecutive months, or 13 consecutive months in Spain. Portuguese household loans dragged annual EA loan growth consecutively since September. The credit impetus is very negative in consumer and mortgage lending for these economies. A positive point is that German consumers are borrowing for credit consumption and home buying. German household lending contributed 0.32% to annual EA loan growth in February – this compares favorably to the 0.17% average contribution spanning 2004-2006.

Non-financial corporate lending By this metric the Spanish business sector is effectively imploding, as Spanish non-financial corporate lending dragged the pace of annual EA lending by 1.1% in February. The contribution from Spanish corporate lending has been negative for 32 months, and the pace of contraction has picked up some speed since September 2011 on an annual contribution basis.

The credit impetus remains reasonably strong in the core countries, at least on a Y/Y basis (with stark exception of the Dutch household sector). And to some extent, the drop-off in credit to the periphery was to be expected. However, with the domestic drag in periphery credit markets already underway, and limited upside potential to global demand for exports, one questions whether or not the the ECB waited too long (given the long lags in monetary policy).

Megan Greene highlights the risks to the Euro area. With these risks in mind, restrictive fiscal policy amid deteriorating labor markets makes the Euro area extremely vulnerable to external shocks.
Statistical reference: the Euro area aggregate statistical data links can be found here. The country level data can be found in the statistical warehouse tree here.

originally published at

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