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

Why There’s Little Inflation, In One Easy Graphic

Ex-food and energy, inflation is at 0.9% for the past twelvemonth. Even if you include those in the longer measure, annual inflation has been 1.7%. (Recall that we paid an average of more than $3.00/gallon for most of the Spring of 2010, for instance.)

There is a simple reason “everyone” expected higher numbers: they were looking at money supply, not circulation.

As Jim Hamilton notes, money is only supply when its being circulated.

The “intermediaries” aren’t intermediates; they’re SPOFs. Hamilton’s graphic tells all:

All that “extra” money is being kept in mattresses. Financial-Institution-shaped mattresses, but mattresses nonetheless. The velocity of monetary reserves is 0. So the weighted-average velocity of money is much less than the standard formula would imply.

There is inflation out there. For instance, China, whose “stimulus” was an impossible 17% of its GDP (h/t Susan of Texas, of course), is seeing inflation.

The U.S. needs to deal with financial institution mattress stuffing before it can have such problems.

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Following the Taylor Rule would have led to President Kerry

The Reserve Bank of New Zealand released a paper by Nicolas Groshenny last month—I’m behind on planning for Chanukkah; that I got to a paper from New Zealand about U.S. monetary policy this soon is, er, probably one of the reasons why—in which he evaluates the counterfactual of following the “Taylor Rule” from 2002 to 2006.

Groshenny finds (link is PDF):

[T]his paper estimates a New Keynesian model with unemployment and performs a counterfactual experiment where monetary policy strictly follows a Taylor rule over the period 2002:Q1 – 2006:Q4. The paper finds that such a policy would have generated a sizeable increase in unemployment and resulted in an undesirably low rate of inflation. Around mid-2004, when the counterfactual deviates the most from the actual series, the model indicates that the probability of an unemployment rate greater than 8 percent would have been as high as 80 percent, while the probability of an inflation rate above 1 percent would have been close to zero.

Several obvious questions:

  1. The period in question includes Alan Greenspan’s last hurrah as Chair of the FRB. If he had followed the Taylor Rule then, would his legacy be so fondly remembered by his champions?
  2. If the Taylor Rule would have done that much damage then, why is it getting such vehement advocacy now (with only Scott Sumner—whose model has the virtue of being consistent—throwing out cautionary notes from the conservative side)?*
  3. Is the NAIRU for post-2001 U.S. U-3 closer to 8% than anyone in their right mind currently believes?
  4. Most of the period covered by the paper is when we had a, uh, relatively inexperienced crony capitalist running the U.S. Treasury Department. How much cover should that give to the FRB?

I’m certain there are other, better questions. Feel free to mention them below. And, while we’re at it, let’s see if we can answer the question of why 8% unemployment with less than a 1% inflation rate was unaccepted to the Bush-Cheney Administration but is perfectly fine with the Summers/Geithner “Rubinites“-with-Obama crowd.

*I’m still trying to figure out if Andy Harless is on Sumner’s side or playing both sides against a middle that may not exist, but I suspect he should be included in Sumner’s camp.

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Transmission Channels for the Fed’s QE2

What are the channels for QE2? In a recent post, David Beckworth outlines his frustration:

It has been frustrating to watch Fed officials explain QE2. The standard Fed story centers around the QE2 driving down long-term interest rates and stimulating more borrowing.

On the tip of my tongue, I can think of three direct channels: (1) the interest rate channel, which is the source of his frustration, (2) the wealth effect channel, and (3) the weak-dollar channel.

  1. The interest rate channel: the Fed lowers current and expected real borrowing costs to firms and households, thereby stimulating domestic demand via increased consumption and investment. Clearly, this is the most clogged channel, as it requires increased bank lending and leverage build.
  2. The wealth effect channel: the Fed drives up the price of riskless assets (bonds), forcing substitution toward risky assets (equities, corporate bonds, etc.), which raises household wealth (via asset price appreciation) and current consumption demand. This channel was highlighted publicly in October by Brian Sack at the 2010 CFA Fixed Income Management Conference:”Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be.” In my view (see chart below), this has been the strongest channel through which Fed policy has worked.
  3. The weak-dollar channel: the Fed prints money, thereby debasing the currency relative to global trading partners. The technicalities of a weak dollar policy prevent the Fed’s actions as directly being a weak-dollar policy; however, the short-term effect on the dollar was quite strong. In the end, though, we see that the Fed’s policy has had no accumulated impact on the dollar to date (see chart below). This policy still has some time to work through, since the Fed only recently initiated its quantitative easing program again. Furthermore, it’s unclear to me how the dollar will play out in 2011 (perhaps another post), since it’s really a relative game: Fed QE versus the European debt crisis, EM inflation expectations rising, or the like.

The chart below proxies the three channels using the 5y-5yr forward TIPS rate (1), the S&P 500 equity index (2), and the dollar spot index (3). The value of each channel is indexed to the September FOMC meeting for comparability.

The interest rate channel has been negative, as expected real yields increased 35% since the FOMC meeting, driving up expected borrowing costs. The wealth channel has been strong and positive. The S&P 500 gained 9% since the September FOMC meeting date, but the gains really started earlier, as speculators front-ran the Fed decision. Finally, the dollar channel fizzled out, as the dollar index (against major trading partners) is pretty much flat over the period.

I’d like to hear your input regarding other potential channels for Fed policy. But the data has, objectively, been surprising to the upside. Thus the growth outlook has improved. The chart below illustrates the Citigroup economic news surprise index (compared to Bloomberg consensus), which turned to the positive at the outset of November.

Many moving parts.

Rebecca Wilder

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Comparing the Fed, the ECB, and the BoE before policies diverge

The coming week is G4 central bank week. The Federal Reserve Bank (Fed) announces its policy decision on November 3; the European Central Bank (ECB) and the Bank of England (BoE) will make policy announcements on November 4; and the Bank of Japan pushed forward its November 15-16 meeting to be held now on November 4-5.

At this juncture, G4 ex Japan monetary policy is likely to diverge sharply: the Fed is expected to announce an extension of its asset purchase program, while the ECB and BoE are not expected to increase theirs. In fact, the policy wedge between the three central banks is already wide. Despite the ECB’s enacting its covered bond purchase program, the amount is small, roughly 1.4% of Eurozone GDP (see chart below), and the central bank is sterilizing the flow – sterilizing the operation means that the ECB performs equal and opposite monetary operations to reduce bank reserves by the amount of the bond purchase program.

The chart above illustrates the size of the bond purchase programs (assets sitting on the central bank balance sheet) as a share of 2010 GDP (IMF forecast). Ostensibly, and from a bank-lending point of view, Eurozone financial conditions appear to be “healthier” than those in the UK or US.

The chart above illustrates total bank lending in the Eurozone, UK, and the US; but this may change as austerity measures in some European countries infect the stronger economies via a tightly integrated trade relationship.

Policy is already much tighter in the ECB compared to its US and UK counterparts. This discrepancy is expected to diverge, as the Fed moves into QE2 mode this week.

Rebecca Wilder

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The Fed didn’t announce QE2

Fortune published an op-ed piece by Keith R. McCullough at Hedgeye (h/t to my Mom). He argues (not very well, I might add) that QE2 is the doomsday scenario for “markets”.

I’d like to point out the following (mostly because this is a common mistake): what the Fed announced is NOT QE2. Furthermore, the Fed’s been considering investing options for months now, why the shock and awe treatment from markets?

Here are the FOMC’s announced investment intentions:

…the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.

The Fed announcement is NOT a second version of quantitative easing (QE2). Quantitative easing is a “super” policy response, where the Fed grows its balance through reserve creation and the purchase of (usually) government assets.

The Fed is reinvesting the principal of maturing securities into longer-dated Treasuries from reserves already created. Therefore, the Fed is simply shifting the asset side of the balance sheet toward a Treasury-only portfolio. Reinvesting maturing Treasuries is regular practice for the Fed. No new quantitative easing.

The announcement should not have been a surprise; it wasn’t to me. According to the FOMC minutes, the Fed has been considering investment options regarding the principal of the maturing securities for months now. From the June 22-23 FOMC minutes:

First, the Committee could consider halting all reinvestment of the proceeds of maturing securities. Such a strategy would shrink the size of the Federal Reserve’s balance sheet and reduce the quantity of reserve balances in the banking system gradually over time. Second, the Committee could reinvest the proceeds of maturing securities only in new issues of Treasury securities with relatively short maturities–bills only, or bills as well as coupon issues with terms of three years or less. This strategy would maintain the size of the Federal Reserve’s balance sheet but would reduce somewhat the average maturity of the portfolio and increase its liquidity.

The Committee decided to go with the second strategy, but in an altered form: reinvest the proceeds of maturing securities to maintain both the size of the balance sheet and the average maturity of the portfolio. And a few members favored the Fed’s August announcement:

A few participants suggested selling MBS and using the proceeds to purchase Treasury securities of comparable duration, arguing that doing so would hasten the move toward a Treasury-securities-only portfolio without tightening financial conditions.

So you see, the FOMC announcement to buy longer-dated Treasuries is not QE2; is not a surprise; and for reasons that I did not describe here, doesn’t portend economic collapse (see this policy brief, or the working paper, by Randy Wray and Yeva Nersisyan, where they refute the application of the Reinhart and Rogoff findings).

Rebecca Wilder

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Dropping $100 Bills on the Sidewalk, or Even More on Excess Reserves

The sarcasm of the title of my recent post notwithstanding, there are some things economists understand to be true that are. Among those:

  • People respond to incentives

As with the Supreme Court, economists extend this principle to organizations, on the (generally correct) idea that organizations are made up of people who act in their own best interest.  (It isn’t, pace the old joke, that they wouldn’t pick up a $100 bill lying on the sidewalk; it’s that they would never believe someone would drop one there in the first place.)  This is how you get to teach courses in “Organizational Behavior” and the like—it’s not the madness of crowds if they all act “rationally” on an individual basis. (More Skinner than Ballard, but I sidebar.)

In economic models, as I obliquely ,mentioned last post, there is no risk-free arbitrage: if there were, “the market” would eliminate it, because it would mean someone was dropping $100 bills on the sidewalk, and the “the market” would make certain that person (or organization) was bankrupted, or at least suffered enough of a loss to change its behavior.

If you need proof of that:


Note that there were a nominal amount of excess reserves being held by some institutions even before interest was paid. We can treat them basically as rounding errors and systemic inefficiencies; given the skewness of the risk-reward, it has always been safer to put an extra $20,000 or so “in reserve” for late transactions, counterparty failures to deliver, or just plain calculation errors. Think of it as the equivalent of taking $60 out of the ATM when you only expect to need $40; the ability to pay taxes you forgot to calculate, upgrade a shirt from poly to cotton, or buy a bottle of water “on impulse” is more valuable (utile) than the day’s interest on that $20 (currently, just over 1/100,000th of a cent from one of my TBTF financial institutions; half that from the other). And so it goes for reserves.

But in September of 2008, the Fed decides to pay interest on reserves—including Excess Reserves. The banks can now make 25 times what they pay in interest, risk-free, just by holding onto money.  The Fed is, essentially, leaving $100 bills on the sidewalk.

Hasty disclaimer: it’s doing so for all the right reasons: the banks need to rebuild strengthen their balance sheets, and nationalization is off the table.  Every little bit helps. Conceptually, economic theory indicates that one should pay “interest,” in some form, for the right to use another’s capital. (That this breaks down in the details is subject for a discussion over tonics.)

I’m using monthly, blended data—nothing so clear as the BarCap analyst examined in the last post—but it’s fairly easy to see what happens even on that trend. Excess Reserves in October are two orders of magnitude higher than they were a few months. They more than double for November, and then stay in a fairly narrow band until around the time the “recovery” began. From August of 2009 until the end of the year, they rise again, just missing the magic $1 Trillion mark in October, breaking it in November and not dropping below again.

It’s free money; why wouldn’t the people who run the banks take it?

And they do.  So the number of $100 bills being dropped on the sidewalk would be expected to decline—save that the Fed has no liquidity constraint, even if we’re ignoring a right of seignorage. And the participants come by each night, picking up more.

The externalities of such a situation are obvious.  The most direct solutions are two: either (1) stop dropping the bills or (2) show the banks that there are better investment opportunities on a risk-adjusted basis.

Joe Gagnon (h/t Brad DeLong) advocates the former.  It is unclear (to me) whether Gagnon is advocating the full cessation of paying 0.25% on reserves or just a temporary cessation until market rates rise, but in either case he recognizes the perils of risk-free arbitrage. (Bruce Bartlett is shriller—and possibly more extreme—than I am on the matter.)

The other option is rather more problematic, not so much because the pump hasn’t been primed as that the water used was rather dirty, with a significant underestimation of the amount of rust that needed to be addressed only compounding the issue.

The result is approximately what one might have reasonably predicted in the goods and non-financial services economy: the Federal G(f) barely compensated for the State –G(s), and only the multiplier effect of that spending actually happening “expanded” anything. (Or, more accurately, some businesses did not fail so rapidly and the cost of some services did not rise so quickly as they would have ex-“stimulus.”)  The good news is that there was a barrel of water between the diving board and the ground; the bad news is that the barrel wasn’t full, so the dives had to be better than excellent, with minor injury virtually a best-case scenario.

The non-financial private-sector, in short, has not been able to recover, while the financial sector—propped up by those $100 bills—shows evermore “strength” on the back of dicey assets being held by the Fed, higher fees and lower interest rates for their “customers,” and—of course, $2.5 Billion a year in from the taxpayer.

Sooner or later, we’ll be talking about real money. For now, though, we’re just talking about the real economy.  What we have here isn’t (quite) a dead shark—as I said earlier, the private sector has performed amazingly well in the face of opposition to it from the Fed and the banks—but it has a diving tank in its mouth and Tim Geithner et al. taking shots at it will a high-powered rifle. We can only hope that former NYC “financial cop” Geithner isn’t as good a shot as another former NYC cop transplanted to a land he doesn’t like or understand.

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When S != I

As Brad DeLong has noted, Tim Geithner believes it is time for “the economy has now recovered sufficiently for government to begin to make way for private business investment.”  In short, he expects “the private sector” to do the heavy lifting in these joyous times of economic recovery.

Cynics among us—why, yes, that might well include me—would note that the private sector has had to do much of the heavy lifting for the past several quarters, in the face of what is varyingly described as “a precipitous decline in Aggregate Demand” or “a rise in unemployment.” (You say overextended credit, I say bankrupt.)  And that its performance has been, not to put too fine a point on it, exemplary in the face of the constraints presented.

Yes, I’m praising the efforts of the private sector.  Not just because small businesses especially are trying to sustain current levels of production and services in the face of tightened credit and the aforementioned AD decline, but also because they, as LBJ once observed in another context, have been put into the position of trying to run a race when the shackles are just being removed from their ankles.

I blame the banks.

Now you know it’s me.  The problem is, the evidence is on my side.  Recall that the alleged reason we needed to “save” the banks is that they are Financial Intermediaries, taking a slice out of the matching between Investors (Savers, in most economics models) and Capitalists, who borrow to recombine Capital (K) and Labor (L) into a new product that presents a better return than the old one.

Call it “creative destruction.” Call it “capitalism.” Call it “economic growth.”

Let us ignore—though it Abides, like Earth or a steaming pile of elephant dung—that the “intermediaries” were making somewhere between 30 and 40% of the total profits in the U.S. for the past decade. We can (1) pretend that those were all payday lenders, (2) be a “first-best economist” and claim that is the way things should be, or (3) realize it’s a problem and leave addressing it for another time.*

But let us not ignore that capital supply is essential to growth possibilities. With labor abundantly available, the limitation on creating new product is essentially The Big K, and it’s “Main Street” proxy, money.

As noted above, in most models of economic growth, we treat Savings as being equal to Investment.  This makes sense: even when the Financial Intermediaries were making $3 or $4 of every $10, they were reinvesting in better systems, better technology, better analysis, and better methods.  Low Latency leads to High-Frequency Trading (HFT) which leads to…well, let’s be nice and just say “greater firm profits.”  Even if only 50% of those profits are being directly reinvested, they are being reinvested, while the rest produces at worst greater paper investments and at best a higher velocity of money and/or a multiplier (“trickle-down”) effect from increased spending.**

Put your money in a Mutual Fund, it’s Invested. Buy a stock, it’s invested.  Put it in a Demand Deposit Account (what used to be a “Savings” or “Checking” account), and it’s invested (“swept”) by the Financial Intermediary, who gives you a share of the profits in the form of interest.

Not to sound like a broken record, but Excess Reserves put a spanner in that last one.  Don’t believe me, ask economists Bruce Bartlett or Joe Gagnon.  Or just look at a graphic of M2 and what I’m calling “Intermediary Private Investment” (M2 minus the Excess Reserves maintained by Financial Intermediaries).



As Excess Reserves are not Seasonally Adjusted, I used the NSA version of M2.  As noted in my previous post, up until September of 2008,  the Fed did not pay interest on Excess Reserves (or Reserves, for that matter), so that excess reserves were essentially a rounding error—funds kept because of the asymmetric risk-reward of a miscalculation, or “precautionary savings.”  They tended to total about $1-2 Billion on average, rather minor in the context of $7-8 Trillion.***

But once you hit September of 2008, the growth in M2 is more than negated by the growth in Excess Reserves. Indeed, the horizontal line on the graphic above is the level of Intermediary Private Investment in August of 2008—nine months into the “Great Recession.”—isn’t exactly reaching for the skies.  But it’s also significantly higher than the current I, as opposed to S.

(Note that the NSA trend is also downward since the alleged beginning-of-recovery months of June-July, 2009. That the performance has been as good as it has been in such a context is amazing.)

When Savings=Investment, there is potential for growth. When savings go into mattresses—for good reason, especially in the pre-FDIC days—intermediaries cannot do their job so efficiently as the models presume.

What are we to call it when Intermediary Private Investment is significantly less than Savings—when not the people, but the intermediaries themselves, are stuffing money into their own, interest-bearing mattress?

I would suggest “bad economics,” but that term seems too applicable to more general conceits.

*I would rather lose what is left of my eyesight and hearing than take the second position; others, from Scott Sumner explicitly to Brad DeLong implicitly, have significantly variant mileages, which is why there’s a horserace for describing economic policies in the past decade or so. They are winning, while I received several decent paychecks over the time.

**It is left as an exercise whether the “trickle-down” effect is positive or significant.

***Another sign of improved technology is that the growth in reserves decelerates—funds are used more efficiently by the intermediaries—after ca. 1990/1991; the trend moves slightly upward in the Oughts, though that is both relatively minor and possibly due to complications related to the expansion of products offered.


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Yield curves in Japan and the US: similar but not the same

Andy Harless presents the case for a double dip (second recession) – I would re-order #1 and #2 on that list – and that for a sustained recovery. #6 of Andy’s case for a sustained recovery (he calls it Case Against a Second Dip) caught my attention, pointing me to an earlier Paul Krugman article about positively-sloped yield curves in a zero-bound policy environment.

In a related article, Krugman argues that a current policy of near-zero short-term rates precludes the lowering further of future short-term rates. Therefore, the steep yield curve reiterates that rates have nowhere to go but up rather than that the economy is expected to improve.

Reasonable; but it was Krugman’s comparison to policy during Japan’s lost decade that got the mental wheels rolling:

Indeed, if we look at Japan we find that the yield curve was positively sloped all the way through the lost decade. In 1999-2000, with the zero interest rate policy in effect, long rates averaged about 1.75 percent, not too far below current rates in the United States.

In my view, current Fed policy is generally more credible than policy undertaken by the Bank of Japan in the early 2000’s. The fed funds target has been near-zero since December 2008; and the new reserve base (liquidity) peaked quickly since the onset of QE and has since remained in the banking system.

Therefore, it would stand to reason that as long as policy remains consistent and big (the latter on the fiscal side is the problem right now), the US yield curve can, in my view, be interpreted as an auspicious sign – all else equal, as they say – as compared to the positively-sloped one in Japan.

Monetary policy in Japan: 1998 – 2006

The Bank of Japan has a solid history of rescinding their own policy efforts. They did it earlier this year; but more importantly their policy announcements spanning the years 1999 to 2006 have on occasion been rather deceiving. Notice that the 2-10 yield curve never became inverted.

The shortened version of the timeline (illustrated in the chart above):

  • From Bernanke, Reinhart, and Sack (2004): “In April 1999, describing the stance of monetary policy as “super super expansionary,” then-Governor Hayami announced that the BOJ would keep the policy rate at zero “until deflationary concerns are dispelled,” with the latter phrase clearly indicating that the policy commitment was conditional.”
  • In August 2000, The BoJ raises the overnight call rate to 0.25%, up from near-zero.
  • In February 2001 the BoJ lowers the overnight call rate to 0.15%.
  • In March 2001, the BoJ announces its quantitative easing strategy, initially targeting current account balances (essentially reserves) at 5 trillion yen and lowered the overnight call rate target to near-zero.
  • Until 2004, the BoJ raises the current account reserve target several times until it peaks at 30-35 trillion yen.
  • In March 2006, the BoJ exits QE.

I concur with Paul Krugman, that the deflation threat is very very real. I do not think that it is completely fair to compare the current US yield curve to that to early 2000’s Japan.

To be sure, the likelihood of rates rising is the only possibility built into the US yield curve right now (no possibility of lower rates); but since the Fed is relatively more credible and consistent, the probability of rates rising is much higher compared to that in early 2000’s Japan.

And the current US curve is steep! The chart below compares the dynamics of the 2-10 yield curve in Japan from its low in 1998 through 2006 to that in the US from its low in 2007 through June 24, 2010.

Rebecca Wilder

Reference for paper in final chart: Luc Laeven and Fabian Valencia (2008), Systemic Banking Crises: A New Database, IMF Working Paper WP/08/224.

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The 1920s Depression: Glenn Beck, Thomas Woods, and "Benefits" of Cutting Taxes to Combat a Recession, Part 2

by cactus

Last week I wrote a post about some nonsense Glen Beck was peddling, with said nonsense originating with Thomas Woods.  Woods claimed a smorgasbord of things, the dollar meal version being:

1.  lefties talk up how the New Deal (big gubmint, tax hikes) saved the economy from the Great Depression but it didn’t

2.  there is a conspiracy of silence about the recovery from the 1920s Depression because it shows that if the government does nothing (with the possible exception of cutting taxes), the economy will roar, as it did throughout the 1920s

Last week I put up a graph showing the marginal tax rates and the recessions from 1920 to 1940.  The graph of the data doesn’t quite mesh with the words that Woods chooses to use.  What we see is that while Republican administrations were happily cutting marginal tax rates in the 1920s, the economy kept going into recession after recession culminating with Great Depression.  In fact, between the end of the 1920s Depression and the start of the Great Depression (not including either one), the economy was in recession 30% of the time.  Conversely, once the New Deal started and the Big One ended in ’33, there was only a single recession before WW2 started.

Today we’re gonna do something different.  We’re going to look at economic growth and see how well that meshes with Woods’ storyline.  Now, the problem is… where do we find data?  After all, the Naitonal Income and Product Accounts tables were not being calculated back in the ’20s.  But…  Woods quotes a number or two on GNP, which he gets from Smiley on GNP.  Smiley, in turn, pulls his GNP data from the Historical Statistics of the United States.  I’m always leery of using pre-1929 national accounts data from the HSUS since its made up of interpolations, but I guess its as good a source for that data as one is likely to find.  Either way, they’re clearly good enough for Woods, so I cannot imagine he would object to us poking around.

Anyway, I had to enter the data by hand, and I’m using a mini-mini laptop right now, so hopefully I didn’t screw up anything, but here’s what real GNP per capita in 1958 dollars (I’m not changing the HSUS data at all…. I want to make sure Woods would approve) looks like:

Figure 1 - Woods & Beck Part 2

Sorry about the step figure look, but I wanted to get the recessions (the gray bars) as accurate as possible… and while that data is monthly, real GNP per capita from the HSUS is yearly.  Now, Woods’ focus is on the recoveries…  but the the graph doesn’t exactly scream at you that the Mucho Tax Cuts and Deregulation Roaring ’20s massacred the Drab Socialist New Deal period.  As a result, he adds a lot of verbage which I do encourage you to read.  I prefer to take a different approach, though.   I created the graph below, which I think is pretty self-explanatory.

Figure 2 - Woods & Beck Part 2

So there it is.  All of Woods’ verbiage boils down to this…  relative to the New Deal policy he excoriates, his example of success is a time of slower growth, more time spent in recession, and it all culminates in what may be the worst economic situation this country has ever faced. 

Now, you may be thinking…  Woods doesn’t realize that the policy he is promoting produced worse results than the one he is attacking.  But I disagree.  I believe he knows what the data shows.  I provided a few examples last week where Woods seemed to me, at least, to be very misleading.  One technique for doing that which I pointed out last week was to cite someone else when passing off incorrect data, but not to point out that the data was wrong.  That allows Woods not to outright lie, but it does lead readers to believe something which is not true.  Here’s another example…   Woods states:

Instead of “fiscal stimulus,” Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third. The Federal Reserve’s activity, moreover, was hardly noticeable. As one economic historian puts it, “Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.”

Now, Woods is very carefully not stating himself that the Fed did nothing. He himself states that the Fed’s actions were hardly noticeable.  That may be…  I have no way to measure that with the poor data that is available to us now.  But Woods goes farther.  He tells us that an economic historian has stated that “the Fed did not move to use its powers to turn the money supply around and fight the contraction.”  Which is stronger than hardly noticeable.  Does Woods agree with this statement?  Well, he doesn’t quite say so.  But what he never writes is this – “well, this dude says the Fed did nothing, but he is wrong.”  And by not doing that, by telling us what some historian said but not indicating we should not believe that historian, Woods is, in effect, endorsing that economic historian’s statement.  And by now, after two posts, you should realize that I’m only bringing this up because the Fed actually did something. 

As we can see on page 440 of this document from the FRASER collection at the Federal Reserve of St Louis, back in that era, there could be different rates at different Federal Reserve Banks.  And just about all the big ones had rate cuts in 1921 before the end of the recession.  Take the New York branch, the most important one.  The rate was 7% at the start of the year, was cut to 6.5% in May, cut again to 6% in June, and cut again to 5.5% in July, the month the recession ended.  One can argue that the Fed moved a little late – which would make “hardly noticeable” potentially true, but it certainly makes “the Fed did not move” BS.  This is just one of several examples where, in my opinion, Woods is careful not to lie by commission.  But readers will read it and conclude something that is untrue. 

So there it is.  After two posts, I conclude:

1,  the Roaring 20s prior to the start of the Great Depression were a period of deregulation, many tax cuts, and many recessions with very short lived recoveries.  The culmination of the Roaring 20s was a great economic disaster, perhaps the worst in American history.   None of this applies to the New Deal Era prior to the start of World War 2. 

2.  Over the length of the Roaring 20s “recovery” and the New Deal recovery, growth was quite a bit faster during the New Deal years. 

3.  Woods writes carefully and precisely enough that it is hard to conclude that he does not realize 1 and 2.

4.  Knowing what Woods appears to know, and knowing that economic policy has tremendous consequences on people’s lives, Woods is nevertheless willing to promote policies that did much more poorly than he implies and to attack policies that did much better than those he promotes

5.  Glen Beck is either in on the con or he’s being had.

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