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

Is an Increased Federal Deficit good or bad ?

As the Senate decides whether to send an additional $1400 to US residents, there are two macroeconomic policy issues. One is whether aggregate demand stimulus would be useful. The other is whether we should be concerned about the budget deficit.

I think that the case for fiscal stimulus is medium strong and the case for higher Federal Debt is very strong. Thus I agree with Donald Trump and Bernie Sanders and disagree with Larry Summers.

The case for stimulus is only medium strong. Unemployment is fairly high, but part of this is an efficient response to the risk of Covid Transmission. There are two ways to argue that demand is undesirably slack. One is below peak employment in sectors which are not especially directly affected by Covid 19 such as construction. The other is that core inflation is below target and falling. Both are enough to convince me that general stimulus is OK.

But mostly the amazing fact is that the 30 year TIPS real interest rate is negative. This means that investors are willing to pay the US Federal Government to store their wealth safely. Given this, I think there is a very strong case for selling more long term bills and giving the money to residents. The interest rates assert that the US Federal Government intertemporal budget constraint is slack. This can’t be Pareto efficient.

I anticipate the concern that interest rates might rise. That is why I graphed the 30 year rate, which is locked in now. If interest rates rise, investors will lose money, but it won’t create a new problem for the Treasury. Also these are real rates (paid in multiples of the consumer price index) so deflation wouldn’t be a problem for the Treasury (although it would be a catastrophe for the economy).

Given the market interest rate, the ration of the debt to GDP should fall roughly in half over the life of the bonds. If the rates lasted, rolling over the debt would be a source of income indefinitely. The argument is absurdly simple. It is also valid.

The only concern is that public debt might crowd out private investment. This could cause higher returns on capital and lower wages with undesirable distributive effects. This problem can be managed by shifting taxation from labor to capital.

I am convinced that raising the subsidy to $2000 is an improvement.

The Four big coincident indicators as of the end of 2020

The Four big coincident indicators as of the end of 2020

All of the important economic data for 2020 has already been released. In this final week only November house prices and one last week of jobless claims remain.

So this is a good time to take a look at the current state of the economy as it has unfolded in this pandemic year.

The 4 most important components in the NBER’s toolkit for calling recessions and expansions are real sales, real income, production, and employment. With the exception of manufacturers’ and wholesalers’ sales, all of the above components, including retail sales, have already been released through November. Let’s take a look:

Figure one

The onset of the pandemic in March is really obvious, and the outsized distortions, first to the downside, and then to the upside, continued through July. In the last 3 months, the gains have slowed dramatically, and in November two of the four components went negative.

Reichtum ist verfügbare Zeit und nichts weiter

Reichtum ist verfügbare Zeit und nichts weiter

How it started (Charles Wentworth Dilke, 1821):

THE PROGRESS OF THIS INCREASING CAPITAL WOULD, in established societies, BE MARKED BY THE DECREASING INTEREST OF MONEY, or, which is the same thing, the decreasing quantity of the labour of others that would be given for its use; but so long as capital could command interest at all, it would seem to follow, that the society cannot have arrived at that maximum of wealth, or of productive power, when its produce must be allowed to perish.

When, however, it shall have arrived at this maximum, it would be ridiculous to suppose, that society would still continue to exert its utmost productive power. The next consequence therefore would be, that where men heretofore laboured twelve hours they would now labour six, and this is national wealth, this is national prosperity. After all their idle sophistry, there is, thank God! no means of adding to the wealth of a nation but by adding to the facilities of living: so that wealth is liberty––liberty to seek recreation––liberty to enjoy life––liberty to improve the mind: it is disposable time, and nothing more. Whenever a society shall have arrived at this point, whether the individuals that compose it, shall, for these six hours, bask in the sun, or sleep in the shade, or idle, or play, or invest their labour in things with which it perishes, which last is a necessary consequence if they will labour at all, ought to be in the election of every man individually.

Who Has Been Warring Against Christmas?

Who Has Been Warring Against Christmas?

 Where I am the Third Day of Christmas is just finishing with the news that Grinch Trump has ended his own brief War on Christmas and is signing the Covid-19 relief bill, thereby reinstating unemployment benefits for 14 million people although they’ll miss a week of payments, as well as preventing millions more from being evicted from their rental housing units, along with the Omnibus spending bill so the government will not shut down after tomorrow.  There has been less noise this year about the War on Christmas by the usual gang of right wing media types who like to whine about merchants and others saying “Happy Holidays!” rather than “Merry Christmas!” during the runup to Christmas, probably because so many of them have been caught up in whining about Biden supposedly stealing the election from Trump.  But this somehow draws my attention to another group entirely who have been at warring on Christmas for a long time.

So according to most of the major Christian denominations such as the Roman Catholic Church, and the Episcopalians, and Lutherans, and others of that ilk, the official proper Christmas season actually is the Twelve Days of Christmas, the first of which was Christmas Day itself, with the twelfth day of Christmas being Jan. 6, the Epiphany, the day supposed the Magi (Wise Men) visited the Baby Jesus. But for many they are not even willing to wait until New Year’s day, the official seventh day, to bring it to an end.  There I was on Facebook yesterday, the second day, also known as Boxing Day in UK and some other places, and an FB friend posted about being “glad it is over,” with a commenter on that thread getting even more worked up and declaring to have “taken down out tree and put away all the decorations, I could hardly wait for it to end!”  Yikes! Along these lines for some years now around here there is a rock/pop radio station that begins playing cheesy commercial “Christmas” music like “Frosty the Snowman” all the time starting almost immediately after Halloween, but reverts immediately to its usual fare starting December 26, the Second Day of Christmas. Sheesh!

Weekly Indicators for December 21 – 25 at Seeking Alpha

 by New Deal democrat

Weekly Indicators for December 21 – 25 at Seeking Alpha

My Weekly Indicators post is up at Seeking Alpha.

While there have been some signs of softening in a few of the high profile metrics, overall the economy continues to remain surprisingly resilient.

As usual, clicking over and reading should bring you up to the moment, and put a little coin jingle in my pocket.

Jobless claims continue to show a sideways to an upward trend

Jobless claims continue to show a sideways to an upward trend

New jobless claims declined this week, but are still significantly above their recent pandemic lows, while continuing claims, seasonally adjusted, made a new pandemic low. The downward trend in claims has clearly ended for now, although whether the current trend is sideways or upward remains unclear. In particular, there is a sizable but by no means certain likelihood that December’s jobs number will be negative.

On an unadjusted basis, new jobless claims declined by 71,512 to 869,398. Seasonally adjusted claims also declined by 89,000 to 803,000. The 4-week moving average rose by 4,000 to 818,250. All of these are above their recent lows. 

Here is the close up since the end of July (for comparison, remember that these numbers were in the range of 5 to 7 million at their worst in early April): 

Figure 1

Because of the huge distortions caused by the pandemic in seasonally adjusted numbers, and because we are at a time of year when seasonality causes the most distortions, in any event, let’s also take a look at the YoY changes in all of the above metrics:

Trump As The Grinch Who Stole Christmas

Trump As The Grinch Who Stole Christmas

 So the Congress struggled for months after the House passed a $3.3 trillion followup Covid relief bill, which Senate Majority Leader McConnell blocked and kept blocking.  House Speaker Pelosi and Treasury Secretary Mnuchin kept negotiating and coming up with this or that proposal, only to mostly have McConnell shoot it down, or sometimes Pres. Trump himself doing so.  Finally after the election, and with the threat of losing control of the Senate, McConnell suddenly decided a deal needed to be made, so sure enough, with Mnuchin supposedly representing Trump, a deal got cut.  It must be recognized that the push for having another round of direct payments was pushed by Trump, who threw out several numbers, and McConnell got it that this was popular. So he went along with Mnuchin’s suggested $600 per person, half of what was sent out in the CARES round last spring.

The whole thing has also been linked to the Omnibus general budget spending package, which needs to get passed or the government will get shut down, with ongoing week by week Continuing Resolutions holding that off, the current one expiring on Monday.  It contains mostly things approved in the budget sent officially from Trump’s OMB to Congress, although it is pretty clear he does not know what is in there.

Status quo bias and vaccine supplies

Here is a simple thought experiment on the use of scarce vaccine supplies.

Suppose that we had tested the Pfizer/Moderna vaccines with one dose per person and discovered that they were 85% effective at preventing covid-19. However, due to an administrative error, we gave some people two doses, and when we analyzed the data it turned out that a two-dose regimen was 95% effective at preventing covid-19.

Only 200 million doses of vaccine will be available over the next six months.

Under these circumstances, the idea that we should switch from our initial vaccination plan of one dose per person to two doses would be regarded as insane. It is clearly better to give 200 million people 85% protection than it is to give 100 million people 95% protection.

Yet today, many people believe that we should vaccinate half as many people using two doses per person, simply because this was our initial plan. This certainly seems like an irrational framing effect, or a status quo bias of some kind, or hidebound, bureaucratic thinking, and it seems likely to lead to thousands of unnecessary deaths and prolong our social and economic misery by months.

Come on people! Let’s think outside the box.

Millions of India’s farmers fight for their economic lives

As a bit of a comparison, the 2018 Distribution of Federal Payroll and Income Taxes shows 761,000 household taxpayers making up 4 tenths of 1% of all taxpayers having the highest income in the US. I am not sure if we can get it as finite as what India shows in wealth. With a population of ~1.3 billion, the wealth of 831 individuals amounts to 25% of the nation’s GDP. The 831 are calling the shots for farmers in India and the nation.

Millions of India’s farmers are in a fight for their economic lives,” New Europe, Sonali Kolhatkar , December 21, 2020

Dale Coberly, Angry Bear Blog

India’s farmers are revolting against Prime Minister Narendra Modi’s government in a mass movement that has drawn international attention. The world’s largest democracy is witnessing a collective groundswell of protest as hundreds of thousands of farmers, largely from the states of Punjab and Haryana, have laid siege to the outskirts of the capital of New Delhi, determined to occupy the edges of the city until Modi reverses unpopular new laws that they say are anti-farmer.

About half of India’s workers depend on the agricultural industry, and the government has long had in place regulations to protect farmworkers, acting as a middleman between farmers and buyers of their produce. Now those protections have been upended. In September 2020, Modi and his Bharatiya Janata Party (BJP) pushed three deregulatory bills through Parliament amid chaos and even some opposition from within his own party.

Three laws now threaten the likelihood of farmers and subsequently the population’s food supply.