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

Debt and Growth

Art at The New Arthurian Economics and I are looking at the relationship between debt and economic growth.  Art started with an observation of two FRED series, total credit market debt owed (TCMDO) and Gross Domestic Product (GDP,  nominal or GDPC1, inflation adjusted – take your pick.)

Graph 1, from FRED, shows these data series.  I’ve chosen nominal GDP and, for reference, also included the total Federal Debt.

 Graph 1 TCMDO, GDP and Total Federal Debt

In 1950, TCMDO was about 1.3 times GDP, but growing a bit more quickly.  By 1980, the ratio was 1.6, and by 1987 it was greater than 2.  Now that ratio is approaching 4.  Note that TCMDO is also close to 4 times greater than total public debt.  This is why Art and I agree that private, not public debt is the problem that needs to be addressed, but is largely ignored.

Linked here are Art’s posts with graphs of YoY growth in both factors, pre 1980 and post-1980.  Pre 1980, their moves are similar in magnitude, and pretty well coordinated. Post 1980 there is still some occasional similarity of motion, but the coordination breaks down and debt growth is generally quite a bit higher than GDP growth.  The 80’s in particular stand out as being starkly different from the previous period.

Graph 2 shows the entire data set, since 1952.

Graph 2 YoY % Growth in TCMDO and GDP

These observations led Art to the reasonable hypothesis that, “Output growth slowed when debt became excessive.”  This, in fact, might explain the great stagnation.

I suggested, and Art accepted two corollaries to his hypothesis.

1) There is a non-excessive amount of debt. Let’s call it “just right.”
2) Below the “just right” amount, there might also be “not enough.”

Actually, there is a lower level hypothesis, to which Art’s is corollary: That there is a functional relationship between debt and growth, in which growth is the dependent variable.

This is what I will explore in this post.

Graph 3 is a scatter plot of GDP vs TCMDO YoY % change for each, FRED quarterly data from Q4, 1952 through Q2, 2012, with a best fit straight line included.

Graph 3 GDP vs TCMDO, YoY % Change

The relationship is quite clearly positive.  The R^2 value at .39 is rather low, but not terrible.  There is quite a bit of scatter in the data.  Note the circle of data points around the left end of the line.  More on that later.

Next, I divided the data by decades, frex, 1961-1970.  This admittedly simplistic data parsing reveals that the slope and R^2 values are strongly variable over time.  Graph 4 shows the scatter plot along with the slope and R^2 values for each decade.  These data values are arranged in the chart in chronological order and color matched with the corresponding data points.

 Graph 4 GDP vs TCMDO, YoY % Change by Decade

I’ve added a brown line connecting the dots for the first decade of this century.  The chronology proceeds from a cluster near the center of the graph into a clockwise circular spiral.

Graph 5 shows how the slope and R^2 vary over time.

 Graph 5 Slope and R^2 Over Time for GDP vs TCMDO

After the 60’s, the slope plummets, and by the 80’s R^2 is a laughable 0.035.  Though the slope has remained low, R^2 has since recovered to 0.38, which is near the whole data set value of 0.39, and only slightly less than the 0.40 to 0.44 of the first three decades.

The slope changes can be interpreted as generally less GDP bang for the TCMDO buck, as the TCMDO/GDP ratio increases.  This is totally consistent with Art’s hypothesis.

I have more to say about the GDP -TCMDO relationship, but this post is getting long, so I’ll save it for a follow-up.

For now, I’ll close with a few questions.

1) Do you think we’re on to something?
2) What do you think of the methodology?
3) “Excessive debt” is suggestive, but non-specific.  How should this concept be quantized?
4) How should I go at exploring corollaries 1 and 2 mentioned after Graph 2?
5) Any thoughts on what was there about the 80’s that blew up the prior debt – GDP relationship?
6) Is there such a thing as productive vs non-productive debt, and how would they be characterized?

I look forward to your constructive comments.

Predicting Recessions, The Great Stagnation, and Will There Be a Double Dip?

by Mike Kimel

Predicting Recessions, The Great Stagnation, and Will There Be a Double Dip?

There’s a lot of talk about a double dip recession these days. I don’t think there’s a precise definition of a double dip recession, but I think if there was it would be something like this: “a recession, followed by a recovery which doesn’t last very long, leading into another recession.” Given the official end of the recession occurred in June of 2009, if the current slow down is (or results in) a recession which gets labeled a double dip, that would imply a double dip recession is one that occurs no more than about two years after the previous recession ended.

By that standard, there’s only been one double recession in the last few decades – a recession began in July ’81, 12 months after the previous one ended. Before that, you have to go back to the supposedly “Roaring” 1920s, when you’ll find quite a few recessions coming back to back to back. You’ll also find multiple and large tax cuts, I might add. A cool graph of tax rates and recessions from 1920 to 1940 can be found here. Its really cool because the data just refuses to match up with what they’ve been teaching in econ classes for the past three decades.

Now, I was curious – how do you tell when you’re in a recession? (Long time readers may recall my frustration, having called both the start and end of the Great Recession in complete anonymity when I had a book to sell!. I guess the pay is better in being always wrong. The book, by the way, is still for sale and still provides a very different way of looking at the world that matches up with data very nicely.)

In this post, I want to stick to some of the traditional views. Basically, if you corner enough economists, you might get them to tell you recessions begin if there’s a big drop in private consumption, private investment, or gov’t spending. I hasten to add – that’s mostly investment in stuff, not in stocks and bonds. (Not all economists would agree with each of these items, I might add. So, let’s cut to the data and see what it shows. Data on real (inflation adjusted) private consumption and investment, and government spending is available from the BEA’s NIPA Table 1.16. Quarterly data goes back to 1947, and annual data goes back to 1929. (And please, please, please, don’t write to me about using some data set of suspect provenience developed decades after the fact. I don’t make up numbers, and I don’t use anyone else’s made up numbers either except when I’m pointing out problems with such data sets.) Recession dates come from the NBER.

Now, for every recession beginning with the one that started in October of ’48, I looked at the change over four quarters in real personal consumption, real private investment, and real gov’t spending through the quarter in which the recession began. For the recessions that began in May ’37 and February ’45, quarterly data wasn’t available, so I looked at the one year change in real personal consumption, real private investment, and real gov’t spending through the year when the recession began . The recession of 1929 was ignored because data began that year – hence, the one year change through 1929 is not available.

The table below indicates with an X if there was a drop in any of these three factors for any given recession.

Figure 1.

As the table shows, five of the eight recessions between 1937 and 1973 were preceded by a cut in real gov’t spending. None of the recessions after 1973 were preceded by a government spending cut. On the other hand, cuts in private investment also preceded two recessions that occurred before 1973, and all but one (four out of five) of the recessions that came after that date.

So… before 1973, cuts in gov’t may have been responsible for some recessions, and reduced investment may have been responsible for most recessions since the 1970s. (If that break sounds familiar, it is more less where Tyler Cowen puts the start of his Great Stagnation, though as I’ve pointed out, Cowen’s philosophy doesn’t allow him to understand what happened to cause that Great Stagnation. My guess is this can be added to that list.)

In recent decades, big drops in private investment have often been portents of recessions. And if you’re wondering… according to the May update of Table 1.1.6 (link above), private investment (in 2005 dollars) reached a post-recession high of 1.855 trillion in the third quarter of 2010. It fell to 1.761 trillion in the fourth quarter of 2010, and 1.813 trillion in the first quarter of 2011. We won’t know for a while what happened in the second quarter of 2011, but… things are a bit shaky. Ironically, at this point in time, one thing that might shellac private investment is a big reduction in gov’t spending. Right now I think there’s a good chance we’re just going to skate along on feeble growth rather than an outright second recession, but its going to be near miss at best. Public confidence is really poor, and its easy to see how private investment might fall even further if the gov’t takes its ball and goes home. (As regular readers know, I’m a big deficit hawk so it hurts to write that, though I’d hope to see the gov’t spending to be done more rationally than it has been since the whole mess started in 2008.) Of course, it also would help if proper incentives were provided.

Another Look at Keynesianism and the Great Stagnation

by Mike Kimel

Another Look at Keynesianism and the Great Stagnation

Cross-posted at the Presimetrics blog

Last week I had a post noting that the US government followed more or less naive Keynesian policies (whether on purpose or not I cannot say) from the early 1930s to the late 1960s. The post also notes that what Tyler Cowen calls The Great Stagnation, a period of relatively slow economic growth, began just about when the government moved from naive Keynesian policies to a regime that could mostly be described as “all deficits all the time.”

In this post, I’d like to present a couple of graphs that are pretty self-explanatory. The data in the graphs comes from the BEA’s NIPA Table 1.1.5 The black line runs from 1929 to 1967, and the gray line from 1968 to the present.

Figure 1

Figure 2

I’ll be coming back to this topic in future posts, but I’d like to make a few quick comments:

1. The Great Stagnation Tyler Cowen comments on seems to, at a minimum, coincide very strongly with the period where the government quit Keynesian policy, where the private sector’s share of the economy stopped shrinking and began growing, and where the government’s role in the economy stopped growing and started shrinking.

2.  Even if you assume the growth of the private sector or the shrinking of the government isn’t causing or contributing to the Great Stagnation, the data still leaves libertarian and conservative economic views at a loss.  After all – shouldn’t growth increase as the private sector becomes more important and the government shrinks in size? 

3.  Bear in mind that marginal tax rates – reduced in 1964 and then reduced again multiple times since then – were lower during the Great Stagnation period than they had been since the 1930s.  Needless to say, this is yet another fact that makes the data inconsistent with libertarian and conservative economic theory.

4.  As always, if you want my spreadsheet, drop me a line. I’m at my first name (mike) period my last name (one m only in my last name!!!) at gmail period com. And don’t forget which post your writing about.

A Critique of Tyler Cowen’s The Great Stagnation, by way of Alex Tabarrok’s Criticism of Keynesian Politics

by Mike Kimel

A Critique of Tyler Cowen’s The Great Stagnation, by way of Alex Tabarrok’s Criticism of Keynesian Politics

Cross posted at the Presimetrics blog

Alex Tabarrok and Tyler Cowen are libertarian professors from George Mason University who post at the very popular Marginal Revolution blog. I often don’t agree with what they write, but its usually well reasoned and grounded in reality.  (Unlike, say, what comes up in a number of other libertarian blogs.)

Cowen recently wrote an e-book called The Great Stagnation&lt I haven’t read it – I’m swamped these days.  However, there have been many reviews (and comments by Cowen himself, so I think I can provide a brief summary.  Essentially, Cowen notes that in the last few decades (since about the early ’70s), real economic growth in the US has slowed.  (That won’t be a surprise if you read Presimetrics.)  His thesis is that this has to do with technological development – we’ve eaten the low hanging fruit, and further technological progress (and hence real economic growth) will be slow until we get off the plateau we’re on. 

It might seem unrelated, at first, but Cowen’s partner at Marginal Revolution, Alex Tabarrok, recently had written a post that received some comment. Tabarrok argues that whether Keynesian economics can work or not (he does not believe it can – presumably he wouldn’t be a libertarian if he did), Keynesian politics has failed, in that it simply hasn’t been tried in this country, not during the two big economic disasters of the last 100 or so years:  the Great Depression and the Great Recession. 

Tabarrok is wrong – wrong that Keynesian economics hasn’t been tried, and wrong that it hasn’t worked.  And Cowen, it turns out, is wrong about exactly the same thing in his book.

The basic Keynesian idea is this:  economic downturns (and meltdowns) can occur and/or be prolonged and worsened when the private sector becomes worried and cuts back.  In those circumstances, the government should step in and buy things, lots and lots of things, replacing the shrunken private sector demand.  Once the economy picks up again, the government should cut back on its spending and start saving up money, first to pay for its recent spending bout and second to have cash in hand to cover its next necessary spending bout.

Put another way – a government thinking along Keynesian lines will tend to run a deficit when real private sector spending falls below some prior highwater mark.  It will run a surplus in years real spending exceeds prior real private sector spending.  There may, of course, be exceptions in any given year, but a Keynesian government will generally follow that sort of behavior.  A government that runs a deficit when real private sector spending is rising, or runs a surplus when real private sector spending is falling, and behaves this way in general is most definitely not operating under Keynesian principles. 

Which brings us to data.  Surplus and deficit information was computed using current federal gov’t receipts and expenditures from the BEA’s NIPA Table 3.2 Real private sector spending is made up of real “personal consumption expenditures” and real “gross private domestic investment” from BEA’s NIPA Table 1.1.5 Data goes back to 1929, the first year for which the BEA computed data.

The following graph may look a bit odd, since it has no curve on it.  But it shows something cool.  If I did this correctly, the gray bars show periods when:

1.  real private sector spending hit a new high and the government ran a surplus

2.  real private sector spending fell below a previous high and the government ran a deficit

Keynesian governments will generally behave in that way.  The turquoise bars show non-Keynesian behavior:

1.  real private sector spending hit a new high and the government ran a deficit

2.  real private sector spending fell below a previous high and the government ran a surplus

Here’s what it looks like:

Figure 1

Here’s what I get from this graph… from until some time around the late 60s or early 70s, US governments generally stuck to Keynesian policies and not incidentally, generally produced relatively rapid growth.  After that, the US government generally abandoned Keynesian policies and produced Tyler Cowen’s Great Stagnation.   I am not prepared on to comment on whether there has been technological stagnation though.

Perhaps the graph can be improved. Its important not to consider individual years Keynesian or not, but rather overall behavior over a number of years. For instance, the fact that the government ran a deficit during the recession in 1990 – 1991 doesn’t make it Keynesian behavior (though it does appear to have a gray graph) since it had been running a deficit already, even when times were good. Running a deficit when times are bad is only Keynesian if you’re paying down debt (i.e., running a surplus) when times are good. The fact that the government has been running a deficit more or less continuously since the late 1960s (except for a brief period in the 90s) indicates that it definitely wasn’t following Keynesian economic theory – else it would be running surpluses when real private spending was up.

Well, gotta run.  As always, if you want my spreadsheet, drop me a line.  I’m at my first name (mike) period my last name (one m only in my last name!!!) at gmail period com.  And don’t forget which post your writing about.  Toodle-oo, folks.