Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

Copyright Notice

Everything that appears on this blog is the copyrighted property of somebody. Often, but not always, that somebody is me. For things that are not mine, I either have obtained permission, or claim fair use. Feel free to quote me, but attribute, please. My photos and poetry are dear to my heart, and may not be used without permission. Ditto, my other intellectual property, such as charts and graphs. I'm probably willing to share. Let's talk. Violators will be damned for all eternity to the circle of hell populated by Rosanne Barr, Mrs Miller [look her up], and trombonists who are unable play in tune. You cannot possibly imagine the agony. If you have a question, email me: jazzbumpa@gmail.com. I'll answer when I feel like it. Cheers!

Wednesday, January 29, 2014

Republican State of Disunion: Taxes Edition

The Republican response to the President's State of the Union message was delivered by Washington State Rep. Cathy McMorris Rodgers.  It was personal, platitude-ridden, overtly religious, twee, and devoid of policy content or anything else of relevant substance - other than a naked assertion that BHO's policies are making life harder in myriad unspecified ways. In other words, it was the most you could expect from an intellectually bankrupt party whose only agenda item is to make the President fail.

To be fair, she did offer one concrete recommendation: to lower taxes.  The concept that lowering taxes would be beneficial at this point is one of those zombie ideas that not only won't die, but continues to eat peoples' brains.  For example, in a recent AB comment stream, this idea was put forth: "Substantial tax cuts worked under Kennedy, Reagan, and Bush. Given the much higher level of household debt, a bold tax cut was needed more than ever."

As I've demonstrated before, and shortly will again with actual facts and data, there is no reason to believe that lowering taxes improves the economy.    But first, let's remember two important details.  First, over 45% of Americans don't pay any federal income tax.  The Wall Street Journal calls them "Lucky Duckies."  Imagine the great good fortune of making so little money that you don't qualify to be taxed on your earnings.  Second, as Bruce Bartlett pointed out 4 years ago, "tax filers with adjusted gross incomes between $40,000 and $50,000 have an average federal income tax burden of just 1.7%. Those with adjusted gross incomes between $50,000 and $75,000 have an average burden of 4.2%."

So the opportunity to have tax cuts do much to promote real economic growth is somewhere between slim and nonexistent.

Let's look at the actual information we have on tax rates and Real GDP growth.*  Graph 1 shows the top marginal rate in blue and the capital gains rate in green from 1950 through 2011.  Also included in brown [right scale] is the YoY percent change in RGDP [annual data] and a linear RGDP growth trend line.  The major trend in each of these phenomena slants down over time.

Graph 1 - Tax Rates and GDP Growth since 1950

Graph 2 is a scatterplot of RGDP growth vs top marginal tax rate, same annual data as in graph 1.

 Graph 2 - Scatterplot of RGDP Growth vs. Top Marginal Tax Rate

The points are color-coded Red for Republican administrations, and blue for Democratic administrations.  Again, a trend line is included, showing a positive slope.  I find it interesting that the space below the trend line is dominated by red dots.  You might not.  The data arranges itself  in columns because the tax rates tend to remain constant for several years at a time.  There is a great deal of scatter since many things besides the tax rate influence the economy.  The simultaneous general abandonment of a Keynesian approach over the period is notable in this regard.

It might be a bit simplistic to think that a current tax rate influences GDP growth in the immediate year, so I took some long averages and redid the scatterplot.   Graph 3 is a plot of the 8-year averages of both top marginal tax rate and RGDP growth.  This has the additional advantage knocking down the data columns.

Graph 3 - Scatterplot of RGDP Growth vs. Top Rate, 8-Yr Avgs.

The 8th year of each administration that lasted that long is indicated with a red dot for Republican and a bright blue dot for Democrat.  Make of it what you will.  The general trend over time is from the top right to the lower left of the graph, and the highlighted dots appear in strict right to left chronological order, from Ike at the right though Kennedy-Johnson, Nixon-Ford, Reagan and Clinton to G. W. Bush at the left. A similar graph of 13-year averages tells the same story, but with all of the the dots landing closer to the trend line.

It does appear from graph 3 that lowering the top rate from 91% to 70% might have been associated with higher RGDP growth.  But, note from graph 2 that the spread of RGDP values at 91% is far greater, and that the highest individual RGDP values are at the higher tax rates.  The 50's, when most of the 91% values occurred, were characterized by a series of economic shocks and recessions as the U.S. returned to peace time conditions and absorbed several million WW II veterans into the work force.

Graph 4 is a close-up view of the 8-Yr average graph starting with the Reagan administration.

Graph 4 -  RGDP Growth vs. Top Rate, 8-Yr Avgs.from Reagan on

The eight years of the Reagan administration are indicated with red dots, GHW Bush in orange, Clinton in bright blue, and GW Bush in purple.  The later is most notable for making the 8 year average of RGDP growth dive off a cliff.  And before you get too excited about the transient RGDP increase in the late Reagan years, remember he also ran deficits that dwarfed anything seen up to that time.

The record of the Clinton years not withstanding, I'm not going to get into a post-hoc discussion of higher taxes causing higher growth - though the data up to at least the 70% level is consistent with that assertion.  Correlation is not causation.  On the other hand, the absence of correlation absolutely refutes causation. What one may say with absolute certainty is that in the post WW II United States, tax cuts have never led to a sustainable increase in RGDP growth.  The lone possible exception is the cut in the 60's from 91% to 70%.  It's plausible that cutting from an extremely high tax rate might be beneficial, but, due to the extreme volatility of the early post WW II period, the effect in that case is not at all clear.

So if anyone tries to tell you that cutting taxes in the current set of conditions will stimulate growth, feel free to show them this post.


* Top marginal tax rates from Citizens for Tax Justice.
Capital Gains Tax rates from the Tax Policy Center.
RGDP data from FRED

Saturday, January 25, 2014

Oh, Look The Lying Liars -

at the Heritage Foundation have a new Chief Liar Economist.

I've seen Steven Moore on television many times.

To be polite, the man is a buffoon.

He has now left the WSJ to become Chief Economist at the Heritage foundation, well known bastion of shameless liars.

Though it's possible that Moore actually believes the anti-arithmetical nonsense he spouts - which would make him less of a liar, and Moore of an idiot.

Quote of the Day

"the thing that most fascinates me about this type of person is that he is entirely oblivious to the fact that in the world of adam smith – the world in which this clown believes he is living – you can’t get that wealthy.

free markets do not produce wealth: oligopoly produces wealth.

which is to say, cheating produces wealth (or, alternatively, behind every great fortune lies a crime).

i suspect that perkins has given this reality approximately 3 nanoseconds of thought in his life – and then dismissed it as irrelevant. he’s a maker, after all!"

-- Commenter Howard at LGM, on SF Bay area venture capitalist Tom Perkins.

Friday, January 24, 2014

What the Hell?!? Friday - Bifocal Hell Edition

Good Lord - I misread this as KENYAN economics.

Paul Krugman is wrong; Obama DOES need to discuss Keynesian economics in his State of the Union address. Here’s why.
---Beverly Mann

Read all about it, and a whole lot more at Angry Bear.

BTW, unless Beverly has a different Krugman source, I think she's misrepresenting what he said

“What do you want to hear in the State of the Union?” Hayes asked Paul Krugman, the New York Times economic columnist and Nobel prize winner.

“What I’d like to hear, I’m not going to hear. I’d like to hear a full-throated endorsement of more stimulus.”

He explained instead what he did not want to hear: “This whole business with the sequester, all of this is, this is not the time for any of this, and the less he says about the deficit, the better. I mean I was really gratified by the second inaugural, because he said almost nothing about the deficit. He finally broke out of that beltway obsession with the deficit. So if he talks about other things, the middle class, inequality, climate, and not about what we need to balance the budget, that’s what I’m mostly hoping for.”

 A full-throated endorsement of stimulus sounds pretty Keynesian to me, irrespective of deficits.

A Look at the Housing Bubble

The Case-Schiller House Price Index shows the magnitude and severity of last decade's housing bubble.

Graphs to follow, but first, let's have a look at what a bubble is, from Markus Brunnermaier, quoted in this post by Gavyn Davies at FT Blogs. [No pay wall, but you'll have to register to read it.]

Bubbles are typically associated with dramatic asset price increases followed by a collapse. Bubbles arise if the price exceeds the asset’s fundamental value. This can occur if investors hold the asset because they believe that they can sell it at a higher price to some other investor even though the asset’s price exceeds its fundamental value.

This is pretty good, but there's something missing.  How do you assess fundamental value?  With housing, you can make some comparison to cash flow from comparable rentals, but that's an approximation, and comparables never quite are.  Plus there's the location-location-location aspect that always tells you your house is worth more than the one a quarter mile away.

But, via Mish, Graph 1 displays how a home prices index diverged from a rental index.

Graph 1 Home Price Index vs Rents

Instead of tracking together, prices ballooned to about 3 times the rental equivalent before crashing.  Besides this divergence per se, the other visual feature of a bubble is the price chart going parabolic.  It's a thrill ride, for sure, until the stomach-wrenching drop. 

So, back to the C-S Index. Values are inflation adjusted, and given in constant 2013 dollars.  I graphed the data from 1900 forward.  It's presented as Graph 2.

 Graph 2 Case-Shiller Index, 1900 on

A few things stand out.

1 - The long average, 126.0 [yellow] is nearly identical to the 1953 -2000 average, 124.0 [purple.]

2 - From 1917 through the Great Depression, housing price stayed low and mostly flat.

3 - The first big rise in home values was from 1942 to 1947, roughly the span of WW II.

4 - From 1953 to 2000, the Index stayed within a fairly narrow range.

5 - The bubble inflated from 2000 until it burst in 2005.

Graph 3 presents a close up view of  the 1953-on period.

Graph 3 Case-Shiller Index, 1950 on

I've added a blue band +/- 2 Standard Deviations [St Dev  = 6.2] around the 1953 to 2000 average.  Except for a brief and quickly corrected span in 1988-9, the Index stayed within the +/- 2 St Dev envelope until 2000.  From there the rise is nearly vertical to 221.41 in Q4 '05.  The decline is just as dramatic, hitting right on the long average of 126 in Q1 '12.

The rise to the peak tops out at 15.6 standard deviations from the 47 year mean.

I've also added a trend channel in red and green, with a width of 19.04 index units, based on the series of increasing bottoms starting in Q3 '74.  The channel top is parallel to the bottom, and projected from the Q1 '79 top.  The bubble peak is 5.12 channel widths above the channel bottom.

Graph 2 indicates 3 long realms of relatively stable housing prices, separated by transition periods of only a few years each.  One can always quibble about start and end dates, but I parse it out this way.

The question is - where is this going now?   Relative to rents, home prices look about right.  Relative to either the pre-bubble period or the post '74 trend channel, prices are currently on the high side.  If this assessment is correct, then prices should top in the next year or so, then slide during the following 3 to 4 years to near 126, the trend channel bottom, or possibly lower.  The other possibility is that post-bubble, we're entered a another different realm, where housing prices will be higher than in the pre-bubble period.

That would be very strange post-bubble behavior.

Update [1/25]

Plus, we now learn that that the pace of sales fell off sharply in December, and that low end [read affordable] properties are being scooped up by hedge funds and other investors paying cash.  This, combined with stagnating wages and continuing debt overhang, especially from student loans, is driving first time buyers out of the market.

I don't see this coming to a good end.

Sunday, January 12, 2014

Question of the Day

Is it over the top to consider bridgegate an act of domestic terrorism?

Friday, January 10, 2014

More on Christie

There is almost no doubt at this time that the Bridge closure was politically motivated pay-back to screw with the lives of Democrats.  But the whole Mayor of Fort Lee theory involves levels of stupidity that strain credence.

Rachel Maddow has another theory that almost seems compelling.  Here it is in a 17 minute video from last night's broadcast.

What the Frozen Hell?!? Friday

All those things that were going to happen when  .  .  .

Well - they can happen now.

Thursday, January 9, 2014

Shallow Stupid - The Bully is a Dupe

He makes excuses, says he didn't know
About that bridge thing when no one could go.
"I worked the cones." See - it's all just for show.
That's why the Bully is a Dupe.

It wasn't Christie, no - it was his staff
Now they've resigned both the riff and the raff
They jammed up Fort Lee, and just for a laugh.
That's why the Bully is a Dupe.

He loves to spew a lot of hot air
He doesn''t care
Traffic is broke
He says it's OK

He hates Fort Lee; and he don't give a whoop.
That's why the Bully is a Dupe.

To the tune of -