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.

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.

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."

Beveridge Curve December 2000 - December 2014

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

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.

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).

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.

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).

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).  

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.

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.  

myRAs

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.

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).  

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):

Or, in percentage terms of net assets (the real question, as it is more reasonable to stay constant over time) (click to enlarge):

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.

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).

The Corrections Shutdown has Ended!

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

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).  

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).