Tuesday, December 29, 2015

Labor Income of Natives and Immigrants

Below, Corrections displays the labor income of natives (those born in the United States and its territories) and nonnatives (those born in other countries) over time (click to enlarge).  Unfortunately, the CPS only started asking a question about nativity whose answers can easily be compared in 1993.
Interestingly, the gap has fairly steadily closed in percentage terms, as depicted below (click to enlarge).
While historically, it's not too uncommon for immigrants to make more than native workers (there are strong selection patterns in immigration (there's a reason some people come to the U.S.), and immigrant workers have far less access to welfare programs than natives and lower take-up of the programs they do have access to, meaning they must rely on labor income more).  

Friday, November 27, 2015

Understanding Inequality and Taxes

Claims of how many households pay income taxes, or income and payroll taxes, or net tax (thanks to negative tax impacts of EITC) are common, but frequently erroneous.  Corrections looks to help put these to rest.
While it can be looked up, Corrections gives two graphs to give an idea of what households pay taxes.  Depending on our measurements (including Federal or state+federal, no deductions/deductions, etc.), 68.2% and 78.7% of households pay positive taxes.  This differs by about 17%-28% from Mitt Romney's "51%" that  "paid taxes."  About 10% of this comes from not being in the depths of the great recession, most of the rest comes from including FICA taxes (which are rarely included in these calculations), with some of the residual also coming from including state taxes.

 First, we display six different measures of the proportion of household heads or households that pay taxes.  We break things up by federal vs. federal+state taxes, and before and after tax deductions (primarily the EITC and additional child credit).  We also include two additional measurements by including SSI and TANF benefits as well as EITC (click to enlarge).  We give these graphs by age of household head.
We also display the distribution of the size of welfare payments (EITC, SSI, TANF, Additional Child Credit) conditional on being positive (click to enlarge).  

We can certainly reject claims like "60% of households don't pay taxes."  We can also note that claims with high proportions of households not paying taxes depend heavily on the use of households that are above the age of 60, or by including people in households that pay taxes but that themselves don't pay taxes, as when households file separately.  

As an aside, Corrections has heard the phrase "IQ's drop by 20 points when discussing politics."  Corrections has a mildly more amusing (tongue-in-cheek) formula with the same concept.  
  1. Let IQ_P be ones IQ when discussing politics.
  2. Let IQ be ones IQ under normal circumstances.
  3. Let R be ones ranking of Reagan (or FDR) on a scale from 0-1.
IQ_P = IQ-2*IQ*(R-0.5)^2

Is the U.S. a less competitive environment?

There exists an open question: "Is the U.S. a less competitive environment than it was in the past?"

There are many ways of trying to answer this question.  I start by running two tests, three examinations to examine whether or not the U.S. is a less competitive environment.  The first is what percent of the total market cap (AMEX, NASDAQ, NYSE) is held by the largest 10 and 20 firms (click to enlarge).  The second is what percent of the total market cap of the top 100 firms are held by the largest 10 and 20 firms (click to enlarge).  Both show fairly clearly that inequality, in the top 100 (and across the market barring market size effects)  has reduced: any "capital" advantages held by the largest firms are smaller than they were historically.
Next I look at the 10-year change in the top-10 and top-20 firms.  That is, the chart below (after 1935) gives data on the number of new firms in the top 10 or top 20 (by market capitalization) that weren't in the top 10 or top 20 10 years ago.  Unlike the cross-sectional data on firm size, this shows a lowering of competitiveness starting around Q2 2001 and continuing for the next 13-14 years (click to enlarge).

Saturday, October 17, 2015

Oil Futures

From NYMEX, Corrections displays light crude oil futures prices from 2015-2023 (click to enlarge). Note that we know that futures prices are not unbiased predictors of future spot prices (there are risk premia) but that they give an idea of the direction and magnitude of what future prices will be.

Friday, June 5, 2015

U.S. Hours per Working Age Person

Below, Corrections takes an estimate of the total hours worked by the non-institutional population and divides it by the U.S. population between 16 and 64 (click to enlarge).

Thursday, April 9, 2015

An Experiment in Kansas

In mid-2012, Kansas cut personal income taxes, from 6.45% to 4.9% for those making more than $60,000 when married or $30,000 when single, and from 6.25% to 4.9% for those making between $30,000 and $60,000.  Finally, it reduce tax rates on those making between $15,000 and $30,000 from 3.5% to 3%.  These tax rates have continued to reduce incrementally in 2013 and 2014.

Did this cause an employment increase? Or a break in trend?  It looks like the answer is no.  Below, Corrections depicts total employment in Kansas and the four contiguous states.  While Colorado took off, other states look fairly similar to Kansas (click to enlarge).
Alternatively, we could see if there was a break in trend by linearly regression pre-July 2012 data on time, and then taking the difference between the linear fit and the data.  This is depicted below (click to enlarge). 
This was a "supply-side" experiment that appears to have failed to stimulate employment.  This is an important finding, but should be seen in light of both the successes and other failures of tax cuts in increasing production and employment.  

Reactions to the experiment will be a far more definitive test about the intellectual honesty of proponents than this experiment was.

Thursday, March 26, 2015

Thinking about the Recession Recoveries

When thinking about the very slow (or extremely impressive, in the view of some) U.S. recovery from the Great Recession, self-serving theories fly fast and furious.  It is useful to discipline theory with data.  Below, Corrections depicts both the percentage change in real GDP per capita for a selection of advanced economies (click to enlarge) and the percentage change in the employment population ratio for the same countries (click to enlarge).  
The U.S. GDP recovery has been quite impressive: while it was the third largest drop from 2007 to 2009, it has had the second largest increase.  On average, it gained ground compared to these other economies.  Only Germany and Canada (for most of the recovery) had better post-recession growth.  
The U.S. labor recovery has been very unimpressive.  While a non-negligible proportion of the drop is due to demographic changes, well more than half is not.  U.S. employment to population ratio has recovered from its bottom slightly, but not by much.

When discussing the drop in labor markets, a joint explanation of all phenomena should be much more attractive than a single theory based on local politics.  For instance, many countries have had slow labor recoveries without sudden increases in socialistic policies.  And some countries have had robust GDP recoveries without sudden increases in socialistic policies.  Indeed, many seem to have had leadership that would be fairly indistinguishable from mildly conservative or mildly liberal leadership.

Friday, February 13, 2015

The Middle-Class Comeback Is Under Way

Wall Street Journal op-ed "The Middle-Class Comeback Is Under Way" (February 12th, 2015) makes a painful error while trying to pin the world's woes on the Fed.
The Fed’s easy-money policies were also slamming the middle class by encouraging speculation in—and thus pushing up the price of—commodities like oil and food, which are an incidental expense for the rich and a real burden for everyone else.
Normally of the left, this sort of talk belongs in the economic dark ages (60's, 70's).  Markets are driven by supply and demand.  Speculators essentially never take delivery of their product: they purchase a contract for future delivery with the intent to sell later.  They can, of course, sell to other speculators, but eventually speculators must sell to an agent that will actually take delivery of oil.

Assume first there is no storage market.  Agents who take delivery inelastically supply oil, and demand determines price.  This price determines what the delivery agent is willing to pay, which pins down the price they are willing to buy from speculators.  Whatever heights the oil may reach during speculation is pinned down by what it will actually be worth when it arrives.  Speculation can't impact prices at the pump in this world.  (One might say: "but maybe they can sell at a higher price to the agent and he will pass it on to consumers!"  The question this raises is "if he could sell at a higher price to consumers, why wasn't he before?  They don't care about his costs, only their value and the price.")

There is little difference with a storage market.  With a storage market, speculators can actually temporarily bring up prices, but only at a loss to themselves, if they brought it up incorrectly.  Say speculators anticipate (or act like they anticipate) a demand shock: oil will be pricier, they think.  They purchase many shares and drive the price up because they think it will be valuable in the future.  This causes less oil to go on the market today, and the price at the pump to rise today, and less oil is consumed.

After this, there will be a sharp plunge in oil prices, as storage capacity is sold but demand hasn't gone up.  (That is, speculators could potentially shift supply down and then up.  If there is no fundamental demand shift, this will cause a rise, then a fall in prices, easily mappable to storage).

Inventories did not change enough, and prices were not sharply changing enough, to allow speculation to have any role in the rise in oil prices.  Instead according to Knittel and Pindyck (2013), it seems that (as economic theory would predict) speculation lead to the smoothing of oil supply over demand shocks, actually reducing the price volatility (but not changing the level: changing the level over the long run is highly unrealistic, for the reason discussed earlier).

While theory and empirics line up to tell a clear story (viz., speculators are not to blame for price rises the way you ever read in newspapers), February 12th's Wall Street Journal's op-ed page doesn't just seem to abandon coherence of multiple signals, but even a sensible signal to begin with.  For shame.

Theory: the Federal Reserve is a liberal "long con."  The idea is to drive conservatives to heights of irrationality, causing the party to twist itself in knots to blame the Fed for each new and imagined ill, bringing them to the point of making up easily refuted historical and current "facts."

Tuesday, February 10, 2015

Beveridge Curve December 2000 - December 2014

Below, Corrections displays the Beveridge Curve from December 2000 to December 2014 (click to enlarge).

Thursday, February 5, 2015

Senator Rand Paul re-introduces 'Audit the Fed' bil

Reuters  article "Senator Rand Paul re-introduces 'Audit the Fed' bill" (January 28th, 2015) discusses a new bill introduced by Rand Paul, Ted Cruz, and 28 other Senators to "audit the Fed." This would expand the yearly audits taken by 1) Government Accountability Office, 2) the Office of the Inspector General, and 3) Private firms, to include monetary policy discussions, minutes of which are currently released with a three week lag.  Detailed accounts of their holdings are released each week.

The real intent of the bill seems to be to monitor Federal Reserve policy discussion in real time.  This will have two effects: first, to generate more comments for politicians like Rand to jawbone Fed officials about.  Second, it will chill discussion in times of crisis.

In the end, chipping away at the Fed's independence is a good way to get higher inflation.  From Alesina and Summers (1993), the relationship between Federal Reserve bank independence and inflation (click to enlarge).
Another aspect of the conservative echo chamber that has lead to insanity.  Sadly, Corrections sees little way to end it.

Edit:  Even a broken clock is right twice a day.  Senator Warren:
[...] but I oppose the current version of this bill because it promotes congressional meddling in the Fed's monetary policy decisions, which risks politicizing those decisions and may have dangerous implications for financial stability and the health of the global economy.
The worst thing for a party about giving up its sanity for poorly-thought-out crusades,is it cedes sanity to the opposition.

Wednesday, January 28, 2015

Federal vs. private employment over the last few years

Below, Corrections depicts the absolute deviation from Feb 2010 (the local minimum of total employment) of Federal employment (excluding Census hiring) and private employment (click to enlarge).  Private employment has rebounded by about eleven million workers, while government employment has fallen by about 484 thousand workers, or 2.16% of its February 2010 level. 
The figure below transforms the deviations into percent deviations (click to enlarge).

Thursday, October 30, 2014

Quantitative easing: giving cash to the public would have been more effective

The Guardian article "Quantitative easing: giving cash to the public would have been more effective" (10/29/2014) offers rhetorical flourishes rather than understanding when discussing Quantitative Easing.
Central banks have always been wary of “helicopter money” on the grounds that QE is temporary while giving cash to the public is permanent. But the temporary has become permanent. What was once unconventional has now become conventional.
As with most casual commentary about monetary policy, which trades understanding for catchphrases, sophistry, and silliness, this is phenomenally foolish.

QE is temporary in the sense that the Federal Reserve traded one asset for another asset (cash for Mortgage-Backed Securities and U.S. Treasuries).  The Federal Reserve "created money" and purchased these interest-bearing assets.  As these interest-bearing assets bear fruit, they can un-create the money they created (plus some more thanks to interest, if they so desired).  It is in this sense that QE is temporary.

Simply giving money away isn't trading money for an interest-bearing asset: it's giving money away.  Not only would it be illegal for the Federal Reserve to do this (this is fiscal policy, not monetary policy, the purview of Congress), but it would be permanent because the Federal Reserve has no way to "un-do" it, absent taxes which go unspent.

The distinction between "permanent" and "temporary" is not in the timeframe, it's the net change in assets.  The writer of the Guardian's article either misunderstands this meaning of temporary and permanent or ignores it: without this distinction, the article loses coherence.

Thursday, May 8, 2014

The Index of Economic Freedom suggests Economic Freedom is Unimportant for Growth -II

Below, Corrections depicts two uses of the Index of Economic Freedom.  In this version, we have added some countries that were previously missing due to heterogeneous naming of country names, and use yearly data, and we depict the data points associated with the U.S. separately from other countries. We combine the IEF with the Penn World Tables, the last of which is available in 2010, giving yearly data for most countries from 1995-2010.  The first figure (click to enlarge) looks at the GDP growth rate (rather than the level growth rate) by the change in economic freedom.  For those curious, the largest GDP/capita growth rate is that of Afghanistan between 2001 and 2002, for obvious reasons.  Iraq between 2003 and 2004 has a similar jump.
The second figure first regresses growth on size, and plots residual growth against the change in IEF (click to enlarge).

Saturday, March 29, 2014

Does the Federal Reserve Cause Growth? Apparently!

Hating on the Federal Reserve is a religion.  Among the falsities that will be claimed is that the United States grew faster when the Federal Reserve did not exist than when it has.

This is an unusual claim, as U.S. NIPA accounts only started in 1934 (retroactive to 1929), and the Federal Reserve came into being in late 1913/early 1914.  Indeed, the only widely used statistics Corrections is familiar with, Christine Romer's data extending back to the 1870's, still make a comparison difficult (and, we conjecture, will bear out the Federal Reserve).

In any case, we can use the late Angus Maddison's historical data to look at the geometric average of GDP/capita growth in constant Geary-Khamis dollars from 1800-1914, and from 1914 to 2010, the last (and first) year the data is contiguously available.

As one might rationally expect, the results don't bear out the Fed haters:  from 1800-1914, the geometric average growth rate is 1.15% per capita in real terms.  From 1914 to 2010, the geometric average growth rate is 1.95% per capita in real terms (the common "2%" number often claimed).

Note that Corrections is willing to bet that actual GDP growth (rather than GDP per capita growth) was faster in the 1800's than in the 1900's, ironically due to the massive waves of immigration, an actual cause of growth that conservatives want to kill off due to largely unstated, unsubstantiated, or untestable claims.

This shouldn't convince anyone, nor does Corrections expect it will.  It's a terrible comparison to make, with little to no information contained in the statistics.  That said, this allows for a double indictment of the argument.

The Index of Economic Freedom suggests Economic Freedom is Unimportant for Growth

The Index of Economic Freedom is correlated with GDP/capita.  Whatever our qualms about the Index's creation (it is fatally flawed), the manner in which it is almost always cited is wrong.  Not only is the instrument useless, but the traditional conclusions made with it are logically fallacious.

Corrections notes that in order for the Index of Economic Freedom to be useful in discussing growth, changes in the index should correlate with changes in GDP per capita growth.  Below, we take the difference in the rankings for the IEF and plot them against the difference in GDP per capita in Geary-Khamis dollars (PPP) (click to enlarge).  96 countries have data in both the Penn World Tables and IEF in 1995 and 2010.
The fit is so poor that a traditional OLS regression finds IEF on real per capita GDP change is worse than chance (it explains less of the variance than the average totally random sample would).  

Tuesday, March 18, 2014

Stock Ownership over Time

Below, Corrections displays a set of years with the proportion of the U.S. population holding stocks in their portfolio of assets:

  • 1952:  4%
  • 1970:  15%
  • 1990:  32%
  • 2000:  62%
  • 2011:  54%
The United States has seen a dramatic rise in the proportion of the population holding stocks.  The impact on equilibrium taxation of capital will be an interesting long-run story.

Monday, February 3, 2014

Employment/Working Age Pop

Below, Corrections depicts total employment/population aged 16-64 (click to enlarge).
We have unambiguously seen an improvement since the trough in 2009/2010.  

Tuesday, January 28, 2014


The biggest grip Corrections has with modern Conservatives and Libertarians is that they have abandoned intellectualism and new ideas in favor of bizarre non-sequitur ad hominems.  Replaced thoughtful economic policy with a love of a metallic numismatics.  Replaced an understanding of economic facts with stories that don't hold water, statistics that don't exist, and conspiracy theories.  Replaced critical self-inspection with pure hypocritical party politics.  Replaced Morning in America with apocalyptic cultism.  All this alienates Corrections from the movement, which we believe could be successful, if only it would think and be the party of ideas again.

An interesting litmus test for the party: myRA accounts.  While the concept isn't fully fleshed out, the idea is a government-backed Roth IRA type account, possibly with a new type of bond.  Here, we sample two possible responses:

  1. This is the government trying to take over retirement savings!   Soon they'll nationalize the whole kit & kaboodle!
  2. In the long run, this could be a means through which we can innocuously privatize Social Security.  Insofar as your payments into social security correspond to future payments out of Social Security, it wouldn't be absurd to simply force "purchases" of these savings bonds rather than having SSA keep the money.  This can over time be liberalized.
Of course, the first is hyperbolic and the second would need to be fleshed out (for instance, while payments in have corresponded positively with payments out, there are no guarantees.  Privatization would be a guarantee, which would impact the ease with which we can make Social Security solvent by defaulting on those implicit promises in the future).  But we believe how the party views the future (constructively and creatively, as it did in the past, or destructively and foolishly, as it has for some time now) will determine it's success.

 Corrections hopes that the constructive, second party wins out.

Saturday, January 25, 2014

Average Household Retirement Wealth: 2008

Below, Corrections displays a (corrected) table from Poterba, Venti and Wise (JEP 2013) displaying average household wealth at retirement age (65-69) in 2008 (click to enlarge).

Poterba, Venti and Wise calculate the expected net present value of many (often annuitized) promises that households held (such as Social Security and defined benefit pensions) that depend on the lifespan of the household.  Note that these are not liquid holdings!

Of course, while the average household had $871 thousand dollars in net present value , the median had $548 thousand ($187 in social security, $0 in defined benefit pensions, $227 in non-annuitized wealth, $15 in financial assets, $5 in personal retirement accounts, and $120 in housing).  

Sunday, December 22, 2013

Why are US firms holding so much cash?

A question for the last few years has been: why are U.S. firms holding so much cash?  Cash holdings as a percent of net assets has increased by 22% over the last few years (around a trillion dollars).  Note: this is a question about why firms are holding so much wealth in liquid form!  Most explanations hover around the impact of the financial crisis, the Great Recession, and policy uncertainty.  While never satisfied (anything that smacks too heartily of politics is wrong more often than not), Corrections lacked good micro evidence.

Of course, Compustat has a large sample of firms in its dataset with detailed information on financial holdings.  Examining it, we find  aggregate cash holdings of firms has been dramatically increasing since around 1996 (increasing to 500% of original value).  From the St. Louis Fed's Juan Sanchez and Emircan Yurdagul, aggregate cash and equivalents of U.S. Firms (from Compustat) (click to enlarge):
Aggregate Cash and Equivalents of U.S. Firms
Or, in percentage terms of net assets (the real question, as it is more reasonable to stay constant over time) (click to enlarge):
Ratio of Cash to Net Assets

Monday, November 4, 2013

An Actual Data "Manipulation"

As a rule, all accusations of government economic data manipulation made in a political setting are without basis.  Discussions of the CPI, or manipulated unemployment numbers, or Federal Reserve Bank data are politically motivated and have never panned out (and are never followed up on as time goes on).

In September 2013, the BLS will begin to incorporate a large non-economic code change and "artificially" increase employment.  Specifically, 469,000 people currently employed in private households (such as housekeepers and gardeners) will begin to be included as employees. This change will be "wedged" back into past estimates come the February 2014 report of January 2014 employment data.

This is an improvement in data, but it is an artificial inflation of job numbers compared to past history.  No doubt it will be used by some to hyperbolically account for the 7 million job increase over the last 3 and a half years, but this will be in error.

Wednesday, October 23, 2013

SNAP Benefit Reduction: Coming this November

Below, Corrections depicts the post-ARRA reductions in benefits coming this November.  The reductions to maximum benefits available by size to households of a given size vary by 5.5% and 6%, and are depicted in monthly dollar amounts below in red (click to enlarge).
The reductions will shave about $5 billion annually from SNAP payments to the approximately 48 million recipients.

Interestingly, the ARRA's plan was initially to allow inflation to whittle the benefits away: in August 2010, President Obama signed P.L. 111-226, which accelerated the sunset due to slow inflation (the bill was focused on reforming the Air Traffic Control system, and this was a rider).

Friday, October 18, 2013

The Corrections Shutdown has Ended!

Unfortunately, the BLS and other Federal agencies will roll out with a delay (click to enlarge).

Wednesday, October 2, 2013

Corrections is on Furlough!

Corrections is currently on furlough (click to enlarge [1] [2] [3] [4] [5]).
On the one hand, we consider the debt ceiling business embarrassing.  By definition, Borrowing=Revenues-Expenditures.  Congress chooses the two elements of righthand side, leaving the left side as a given.  But New Debt = Old Debt + Borrowing.  By setting a ceiling on New Debt (Old Debt is obviously predetermined), it sets a ceiling on Borrowing, and tries to (independently) choose or restrict all three elements.  Ludicrous.

However, as a political stunt or a politically focusing moment (taking a week or a month to talk about debt) is perhaps not unreasonable.  (What would be unreasonable would be to question whether or not the United States should pay its debts).  

Tuesday, October 1, 2013

Disability Insurance over Time

Below, Corrections depicts the number of people accruing disability benefits as well as the number of disabled over time (wives and children can also collect benefits) (click to enlarge) along with benefits (click to enlarge):
 We can normalize the count by looking at disability benefit counts divided by population (click to enlarge) and real benefit amounts (click to enlarge).
 Finally, we plot them all, normalized to January 2000 (click to enlarge).

Medicare Part D: Prescription Drug Benefits

In 2003, President Bush signed the Medicare Modernization Act, putting into place a prescription drug benefit program for Medicare, a program originally designed to provide medical insurance for those sixty-five years of age and older.

Medicaid Part D offers an unusual set of subsidies with a "hole" in coverage:  below, Corrections depicts the total cost of drugs along with the out-of-pocket costs (oopc) in 2009 as a function of total cost of drugs (click to enlarge).  If Medicaid had no value as a plan, the oopc line would be a 45 degree line passing through the origin.  Because of the deductible, it does for the first $295 in prescription costs.  After that, individuals don't pay the full amount.  However, from $2700 to $6154, individuals again pay the complete marginal cost of coverage:  this is the "Medicaid Part D Gap."
Below, Corrections depicts the average and marginal subsidies for drug coverage:  the "gap" becomes more apparent here (click to enlarge).  Notice that the average "chases" the marginal, at an ever-slowing rate.  Average subsidies quickly approach the 75% subsidy (25% co-insurance) but only slowly approach the 95% subsidy after $6154.

The Affordable Care act mildly mitigates this gap, giving a $250 check to those who enter the gap.  Its longer-term solution, to be achieved by 2020, is to close the gap through the use of generic brand coverage, and a 50% drug manufacturer discount, among other solutions.


Medicare has four parts:

  1. Medicare Part A, instituted in 1965, which contributes to nursing care, inpatient hospital care, home and hospice care.  
  2. Medicare Part B, instituted in 1965, which contributes to physician services, outpatient hospital care, and other medical services.
  3. Medicare Part C, or "Medicare Advantage" instituted in 1997/2003, substitutes the services of Part A and Part B, but are offered through a private entity (with a part of payments made by the government).
  4. Medicare Part D, or "Medicare Prescription Drug Benefit" instituted in 2003/2006 subsidizes prescription drugs supplied through a private entity.
In 2012, the U.S. spent $536 billion on Medicare expenditures, and Corrections breaks down that spending by type (click to enlarge).

AFDC/TANF Benefits over Time

Below, Corrections depicts the number of beneficiaries for Aid to Families with Dependent Children (AFDC) and its successor program, Temporary Assistance for Needy Families (TANF) (click to enlarge).  AFDC was synonymous with cash-benefit welfare before 1996, when the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA), part of the Contract with America, was signed into law by Bill Clinton. Around 1994 (denoted by the first red line) states began to request and were granted waivers to tighten welfare restrictiveness, in part due to the rapid rise of welfare beneficiaries in the early 1990's.
 By 1996, while rolls were falling due to new state actions, the PRWORA largely killed the welfare program by instituting five-year lifetime limits, and giving block grants to states, giving them incentives to find efficient uses for the money.  These grants have largely not increased over time, and are slowly being whittled away by inflation.

Friday, September 27, 2013

Working Full-Time, Part-Time, and Either in 2012

Below, Corrections depicts the proportion of the population working full-time, part-time, or either in 2012 according to the Current Population Survey (click to enlarge).

Thursday, September 26, 2013

Chaotic Systems

Corrections has yet to meet anyone who is good at forecasting much of anything.  Why might this be?  One reason is bad statistical models.  Another reason (that we are not overly sympathetic towards!) might be chaotic systems.  The present may perfectly and completely determine the future, but the near present may not have any power at predicting the future.

One simple example of this is the sequence x(t+1)=4x(t)*(1-x(t)).  The sequence will bounce around for a while between 0 and 1 (given we avoid a few bad starting states like {0, 0.25, 0.5, 0.75, 1}) and be completely deterministic.  Surely it wouldn't be hard to forecast, right?  

Wrong.  If your starting point (initial information used for forecasting) deviates the slightest amount, your sequence soon becomes completely different than if you had used the true starting point.  Below, Corrections depicts two such starting values:  X(0)=0.1 and X(0)=0.24, and plot the series for 100 periods (click to enlarge).
What if we were really, really, really close?  If we start out with a percent error of merely 0.0001%, then shouldn't our forecasts match up?  They do, for a while, but diverge rather quickly for having a one-part-in-ten-million difference (click to enlarge).
Does one series provide any forecast of the other, or have a recognizable pattern?  Below, Corrections depicts the two series against one another after the 20th period:  they no longer have a discernible relationship (click to enlarge).
This is one possible reason why the vast majority of sophisticated forecasts Corrections has heard (that don't suffer from selection) have been wrong.   We don't put much stock in it, however.

Monday, September 23, 2013

The Trends of Federal Receipts and Outlays

Below, Corrections depicts log Federal outlays and log Federal receipts under Reagan, Bush-I, Clinton, Bush-II, and Obama up until August 2013.  We also display the Reagan-Bush I-Clinton trend extrapolated out through Bush and Obama's terms.  We attribute the split January to the outgoing President, as he exits around the end of the third week of that month.

Log outlays tell a clear story:  outlays under Reagan, Bush I, Clinton, and Bush II continued on trend.  They saw a dramatic jump, and then a fairly stark arrest under most of Obama's term (click to enlarge).
Log receipts tell a different story:  while outlays have gone according to trend, receipts were halted under Bush, and again under Obama (click to enlarge).  For both, this was a result in part of tax cuts (or tax cut extensions) and bad economies.
Finally, we depict the two together (click to enlarge):  the short time the blue line was above the red line represents the Clinton surpluses, and the near-zero deficit of the Bush term before the financial crisis ended hopes of a balanced budget.

Friday, September 20, 2013

U.S. Federal Debt: Who Holds it, Who is Buying it?

Since 2007:Q4, over the last 21 quarters, U.S. Federal debt has gone up by about 7.5 trillion dollars.  Three of the most common misconceptions Corrections has heard have been:
  1. The Federal Reserve is buying all the debt!
  2. Foreigners are buying all the debt!
  3. Banks and the public are buying all the debt!
All three are incorrect.  U.S. debt purchases  have been fairly balanced.  Below, Corrections depicts the three owners of U.S. debt (click to enlarge):
It can be helpful to see the proportion of U.S. debt held by each of the entities (click to enlarge):
Neither of these is particularly helpful.  Instead, we depict how the three entities have changed their holdings since 2007:Q4 (click to enlarge).  Of the new debt, the public has purchased 41%, the federal reserve has purchased 14%, and foreign entities have purchased 45%.  
Any dramatic stories you hear about U.S. debt eschew the facts in favor of hyperbole: disbelieve them. Debt has risen sharply, but none of these three entities has purchased more than 50% of new U.S. bonds.

Note: Millions should read billions in the relevant graphs!  (E.g. U.S. debt has been in the 16 trillions range recently.