Relevant and even prescient commentary on news, politics and the economy.

Fiscal Dishonesty from CNBC and Our Treasury Secretary

Fiscal Dishonesty from CNBC and Our Treasury Secretary

Is Jacob Pramuk on the White House payroll?

US budget deficit expands to $779 billion in fiscal 2018 as spending surges. The federal budget deficit rose 17 percent in fiscal 2018, according to the Trump administration. Spending jumped, and revenue only increased slightly following the GOP tax cuts. The Trump administration has pushed for dramatic budget cuts at several agencies and supported massive increases in military spending.

And that was just his headlines!

The deficit increased by $70 billion less than anticipated in a report published in July, according to the two officials. Federal revenue rose only slightly, by $14 billion after Republicans chopped tax rates for corporations and most individuals. Outlays climbed by $127 billion, or 3.2 percent.

He is getting his numbers from this report:

Government receipts totaled $3,329 billion in FY 2018. This was $14 billion higher than in FY 2017, an increase of 0.4 percent…Outlays were $4,108 billion, $127 billion above those in FY 2017, a 3.2 percent increase.

I have skipped the chest thumbing about the economy from Mnuchin and Mulvaney to focus on the stupidity ala CNBC. Real government spending barely kept pace with inflation, which is why outlays relative to GDP fell from 20.7% to 20.3%. Real tax revenues clearly fell in absolute terms and as a percent of GDP went from 17.2% to 16.5%. I guess this is what one gets when one lets Lawrence Kudlow become a chief economic adviser. But this kind of dishonesty is well known ever since Kudlow and his ilk tried to pull this intellectual garbage in the 1980’s. Does anyone at CNBC not realize the Trump White House is playing the same games with numbers? Never mind that the Treasury Department has decided to lead the way on some good old fashion rightwing nonsense.

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Subdued September inflation means real hourly and aggregate wages grow

Subdued September inflation means real hourly and aggregate wages grow

Courtesy of subdued gas price increases this year vs. one year ago, overall consumer prices rose only 0.1% in September vs. 0.5% one year ago (and 0.3% over the last two months vs. 0.9% one year ago). As a result, YoY CPI growth is down to 2.3% vs. 2.9% several months ago, and that means that “real” wages increased, despite no movement in growth nominally YoY.

With that background, let’s update real average and aggregate wages.

Since nominal wages for non-managerial workers are up 2.7% through September, this means that real wages, which had been flat, have grown in the last few months by +0.4% YoY:

In the last 2 1/2 years, real wages had been essentially flat. The last couple of months moves the needle a little bit:


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The Political Economy of the Working Class

The Political Economy of the Working Class

The political economy of the working class is pluralist.

The political economy of the working class is pragmatic.

The political economy of the working class is critical.

Karl Marx chronicled and contributed to the political economy of the working class. He did not invent, conclude or supersede it. In  his Inaugural Address to the International Working Men’s Association, Marx celebrated the first victory of the political economy of the working class, the passage, in 1847, of the Ten Hours’ Bill:

This struggle about the legal restriction of the hours of labor raged the more fiercely since, apart from frightened avarice, it told indeed upon the great contest between the blind rule of the supply and demand laws which form the political economy of the middle class, and social production controlled by social foresight, which forms the political economy of the working class. Hence the Ten Hours’ Bill was not only a great practical success; it was the victory of a principle; it was the first time that in broad daylight the political economy of the middle class succumbed to the political economy of the working class.

This passage tells us what we most need to know about the political economy of the working class. It is founded upon “social production controlled by social foresight” in opposition to “the blind rule of supply and demand laws.” The “most notorious organs of science” had predicted and “proved” that “any legal restriction of the hours of labor must sound the death knell of British industry” and, of course, they were subsequently proved absolutely wrong. Not ‘merely’ wrong, but the exact opposite of apposite.

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Housing’s most difficult comparisons in years begin next Wednesday

Housing’s most difficult comparisons in years begin next Wednesday

After a real quiet week for news, next week we get retail sales, industrial production, the JOLTS report, existing home sales … and housing permits and starts. The week after, real residential fixed investment will be reported as part of Q3 GDP.  Permits and residential fixed investments will have some of the most challenging comparisons in a long time.

Here’s why. First, here’s a graph of 30 year mortgage rates:

These have broken out to highs not seen since early 2011.


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Tracking Trump’s trade wars: inventories and intermodal traffic

Tracking Trump’s trade wars: inventories and intermodal traffic

Here’s something I thought I would start to track: looking for evidence of the effects of Trump’s trade wars on manufacturing and distribution.

Producers and distributors aren’t simply going to sit back and wait to absorb new tariff expenses: we should expect them to engage in as much “front-running” as possible, importing the goods and commodities likely to be affected by the tariffs early, and building up inventories that can be sold at the lower, pre-tariff prices. Once the tariffs kick in, the front-running would end, leading to a reversal of the pattern.

Two places we would expect that front-running to show up are in manufacturers and wholesalers inventories, and in the intermodal units that are typically used for cross-ocean shipping.  Let’s take them in order.

First, as a general rule sales lead inventories. Sales peak first going into recessions, and bottom first coming out.  It is likely the very fact that sales turn that is the signal for producers to add or subtract from inventories. Here’s that relationship for wholesalers over the past 25+ years:


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U.S. Saudi Trade

U.S. Saudi Trade

Donald Trump appears to be reluctant to investigate the murder of Jamal Khashoggibecause of an alleged trade deal?

Donald Trump has said US investigators are looking into how Jamal Khashoggi vanished at the Saudi consulate in Istanbul, but made clear that whatever the outcome, the US would not forgo lucrative arms deals with Riyadh. The president’s announcement raised concerns of a cover-up of evidence implicating Saudi Arabia’s powerful crown prince, Mohammed bin Salman, in plans to silence the dissident journalist…Any sense that the administration might seek to impose serious consequences on Saudi Arabia was dispelled by the president. Asked at an impromptu press conference in the Oval Office whether the US would cut arms sales if the Saudi government was found to be responsible for Khashoggi’s disappearance, the president demurred, saying the US could lose its share of the huge Saudi arms market to Russia or China. In the Oval Office Trump pointed out that the disappearance took place in Turkey and that Khashoggi was not a US citizen.

He may not be a citizen but he did hold a green card and worked for the Washington Post. Credit to the Republicans in Congress for pressing on the appropriate investigation of this matter. My only comment today will be to challenge Trump’s argument that our trade with Saudi Arabia is more important than sanctioning the Saudi government for this murder likely ordered by Mohammed bin Salman. The Census Bureau reports on both our imports from Saudi Arabia and our exports to them. Over the last decade, imports have varied from less than $17 billion per year to over $55 billion. These imports are predominantly been oil of course. Exports have never reached $20 billion per year so we have run persistent and sometimes large deficits with the Saudis. In Trumpian “logic” – aren’t we losing to them? To be fair, we choose to import Saudi oil but then again, the kingdom is not the only supplier of this commodity. But Trump is telling us that we may have yuuuge exports of military goods:

I know they’re [Senators] talking about different kinds of sanctions, but they’re [Saudi Arabia] spending $110 billion on military equipment and on things that create jobs, like jobs and others for this country. I don’t like the concept of stopping an investment of $110 billion into the United States.

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Kevin Drum discusses single parent households

(Dan here…lifted from Robert’s Stochastic Thoughts)

Kevin Drum discusses single parent households

Disqus won’t let me comment, so I post my comment on this post hereI am honestly impressed that you didn’t mention lead. So I will. The single parent household peak came later than the murder peak — as one would expect. Single parent households last (until another marriage & good luck with that Ms single mom). You graph a stock (OK 3 stocks) each correspond to flows — births to single moms and separations of couples. Teenage births peak when the girls (and 18 and 19 year old women) in queston had maximum lead exposure as babies and toddlers. The boys (and men) aren’t always even identified on birth certificates, but ages of mothers and fathers are usually similar. Hasty marriages (including of couples who are racing to be spouses before they are parents) are less likely to last.

i am surprized to be more piombophobic than you, but I think it was lead. Certainly the evidence on lead and teenage pregnancy looks similar to the evidence on lead and crime.

In any case, to understand causes, it is almost always better to look at flows than stocks

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Is the taboo against raising wages beginning to break?

Is the taboo against raising wages beginning to break?

It’s a *really* slow news week for economic data — just producer and consumer prices tomorrow and Thursday. Even JOLTS doesn’t come out until next week.

But there was one little nugget of good news this morning: the NFIB, which represents small businesses, came out with their September report, and there was some good news about wages: more small businesses — 37% — said they *actually* raised wages in the last 3 months, than during any other 3 month period over the last 30 years:

If the taboo against raising wages is finally breaking, that is good news. Now we have to see if it is confirmed by actual data on wages.

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How To Succeed in Business Without Really Trying

This is a somewhat late 10th anniversary of the Lehman failure post. I am not going to write much that is new, but will restate an argument I have been making for years (following John Quiggin and Miles Kimball). It is trivially easy for the US Treasury (and other treasuries) to make huge profits on the carry trade. These huge profits are, I claim, actual wealth created by the operation.

In general, the argument is that, over all recorded long time intervals, returns to a diversified pool of risky assets (such as the market portfolio of stocks) are greater than returns to Treasury bills. The average difference in returns is huge (on the order of 5% per year). This suggests that long term public debt problems could be relieved (or eliminated) if Treasuries issued more low return bonds and purchased a diversified portfolio of risky assets.

The common response seems to be that it can’t be so easy and there must be some catch. I claim it is easy to beat the market, so why am I not rich. The response to that is that the huge gains are available to an agent with deep pockets and a long planning horizon — that is states which can borrow at low rates in their own currency.

I think the 2008 financial crisis was an accidental experiment proving providing very strong evidence for these claims. The US Federal Government purchases trillions in risky assets at prices higher than private agents were willing to pay. This was done to save the economy and it was assumed that it would cost the Federal Government hundreds of billions. In the event, the Tr easury and the Federal reserve system made the highest profits ever recorded.

The reason for the huge forecast error (largest forecast error ever) is that Congress banned consideration of the expected gains from bearing risk. Normally, the CBO scores policies based on the change in the expected value of the federal debt 10 years later. This means that the scores are risk neutral. In the case of the Treasury’s rescue efforts (TARP and the earlier rescue of Fannie Mae and Freddie Mac) they were ordered to mark assets to market — to assume that risky assets had the same value for the deep pocketed infinite horizon Treasury as for private investors (which include wealth managers investing other people’s money who are fired if they have a few quarters of sub-market returns). It was possible to calculate the expected value of corrections to the estimates as uncertainty was resolved. It was in the hundreds of billions of dollars. Almost everyone was surprised by the result that things turned out as (mathematically not subjectively) expected. Barney Frank was the only policy maker who noted this before uncertainty was resolved. He was pilloried for having been soft on Fannie Mae before 2008, and had a strong personal interest in arguing that the bailout would not be a disaster for the Treasury. Also he turned out to be right.

Just google Fannie Mae profits and get to the latest report

Looking at 2017 as a whole, I am very pleased with our progress. We paid $12.0 billion in dividends to Treasury in 2017, bringing our total dividends to taxpayers to $166.4 billion. This compares to the $119.8 billion in draws that we have received or expect to receive shortly. Our pre-tax income was $18.4 billion, very much in line with pretax income of $18.3 billion 2016.

Now the $119.8 billion does not include interest paid on the Treasury securities sold to get the money to loan to Fannie Mae. These interest rates were near zero (Tand could have been even lower if the Treasury issued only Treasury bills and didn’t pay investors to bear term risk). The money sent by Fannie Mae to the Tresury does not sum up the gains to the Treasury which currently owns preferred shares, 80% of the common stock (if it were higher they would have to consolidate accounts and violated the debt ceiling) and the rights (just take but with the approval of judges) to all future dividends.

The huge profits were a side product of the effort. The main point of the rescue is that it was necessary to prevent a total collapse of the housing industry. In the crisis years, Fannie Mae and Freddie Mac were bearing the vast bulk (80% IIRC) of default risk on newly issued mortgages.

Of course Congress’s conclusion is that something has to be done to eliminate the terrible problem that a Federal Government agency is too successful in a market. That has to be inefficient because it is socialism and look at Venezuela. There are proposals to do something about this problem of a hugely profitable government agency. They never go anywhere fortunately. The arguments are
1) Fannie and Freddie are subsidizing residential investment
This is true. No one is forced to do business with them. Mortgage initiators do because unloading risk on Fannie and Freddie makes it possible for them too to get high profits. But the cost of this subsidy was negative 12 billion last year. So why is it a problem ?
2) Fannie and Freddie are sucking money out of the economy. Their profits are like a tax.
Not so true. Their profits are the result of private sector agents choosing to trade with them.
3) If there is another great recession, they will have huge losses automatically implying a larger budget deficit exactly when the economy is depressed.
True. They also serve as an automatic stabilizer. This is a good thing. It is better for the Treasury to lose money during recessions than for private agents to lose the money. Since the Treasury belongs to citizens, rational people would cut spending if it lost money (this is called Ricardian equivalence). But you make policy for the people you have not the people Fresh water economists want. In the real world Treasuries hide profits and losses from people who don’t act as fully rational agents (this is what Ricardo actually wrote).
4) It can’t be that easy. Why doesn’t everyone do that ?
Not everyone can borrow trillions at low interest rates
5) It’s socialism
Yes. So ?

This was supposed to be a brief post. After the jump, I discuss TARP and the really big bailout — QE 1.

Before I want to complain. My assertion is that partial public ownership of the means of production would benefit the country. Yet I often find myself criticized by leftists who think I am soft on bankers. I don’t understand this. It is certainly true that the 2008-9 bailouts were good for bankers. That doesn’t mean they were bad for the rest of us.

It also doesn’t mean that similar operations now that the financial system isn’t in crisis would be good for bankers. The other complaint is that, since the Treasury can borrow at low interest rates, publicly owned financial services agencies (such as Fannie and Freddie) have an unfair advantage. They can easily drive private firms out of currently profitable markets because the immense debt capacity of the US Treasury makes risk bearing and maturity transformation cheap. This is unfair to the poor bankers who can make huge incomes doing something that modestly paid bureaucrats can do better. Cry me a river.

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Scenes from the September jobs report

Scenes from the September jobs report

Leaving aside wages, there was lots of sunshine in September’s jobs report, although there were a few gray if not dark clouds on the horizon.  Here’s a look at each:

1. Weekly jobless claims did lead the unemployment rate

Two weeks ago, I wrote that the new 40+ year lows in weekly initial jobless claims forecast new lows in the unemployment rate.  Here’s what I said:

[I]nitial jobless claims tend to lead the unemployment rate by a few months. Here’s the 50 year+ graph:

If jobless claims decline, then over the next 2-3 months it’s a good bet that the monthly unemployment rate will decline too.

And that it did. Here’s the updated graph of the last few years:


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