A Look at Debt and Inflation

Here's a scatter of the YoY change in CPI inflation vs the YoY Change in the debt of households and nonprofits.  [FRED Custom Chart]  If debt drives inflation, we should see an upward slope in Graph 1.
 

Graph 1 - CPI Change vs Debt Growth

Clearly, there is no upward slope - at least not any simple or easily discernible way.   To try to make some sense of this, I color coded the points for different time periods.  That is shown in Graph 2.

Graph 2 - CPI Change vs Debt Growth, Color Coded

Once the light blue points are segregated, it's pretty easy to see that the remaining points reside mostly in a horizontal band.

Here is the arrangement.

1952 -60     Yellow - Eisenhower
1961 -68     Dark Purple  - Kennedy-Johnson
1969 -71     Green - Preamble to the Great Inflation
1972 - 82    Light Blue - The Great Inflation
1983- 92     Dark Blue - Beginning of the Great Stagnation
1993 - 00    Red - The Clinton Stability
2001-08      Dark Blue - Culmination of the Great Stagnation
2009 on       Pink - The Great Recession to now

As it turns out, the Red and Dark Purple points are hard to differentiate.  [if you right click on the graph and select "Open link in new window," you can blow up the graph by clicking "Control" and the "+" sign several times.]  The red points are more closely clustered and surrounded by the purple. There are the hearts of your two little moderations.

Originally I had the entire 1983 - 08 period in dark blue, then decided to highlight the Clinton years in red to see if anything stood out.  What we find is a short period of the greatest stability in the record, regarding both of these two variables.

So, the data tells that for the post 1952 period, there is no robust relationship between debt growth and inflation.  In fact, except for the Great Inflation period, the relationship might even be slightly negative.  The 1969-71 period, just prior to the Great Inflation, has the unique combination of lower debt growth and higher inflation than any other time in the data set.

Also, the Great Recession and it's aftermath are unlike anything else we've seen in recent decades.

Bottom line, though, is that a rate of CPI inflation of 3 +/- 1% is associated with the entire range of debt growth in the modern era.  And, if debt growth is a serious factor in health of the economy, inflation targeting is close to meaningless as a policy tool.
 

The Traffic Trap

Commenter OwenKL writes a bit of poetry most days to compliment the theme of the L.A. Times Crossword Puzzle.

Today's was a typically clever example. 

But I thought of a different Christie, and came up with this.

The Traffic Trap

Chris Christie writes cover-up scenes
Of denial re: that bridge west of Queens.
Why would it be
He put the screws to Fort Lee?
Just to vent his too partisan spleens!

Six Decades of U.S. Population Growth

2/08 Update - This is substantially revised, including more and better graphs.

The growth rate of the U.S. population has been in a generally downward trend since the post-war baby boom peaked in 1957.  Graph 1 shows the YoY percent change in the total population.

Graph 1 - U.S Population Growth since 1952

The precipitous growth rate drop through the sixties came to an abrupt halt in 1969, when early boomers like me started having our families.  My son, daughter and two step sons were all born in the blip spanning 1969 to '73.  There might be a similar reason for the mid to late 70's growth rate, but there also might be a bit more to it.

Graph 2 shows the birth rate per 100 population since 1950.  [1980 - 2010 data from CDC.]

Graph 2 - Birth Rate per 100 Pop

The drop in population growth rate through the 60's is explained by this data. You can also see the mini-peak from 1969 -73, the initial wave of boomer offspring.   Then there is another peak at 1990.  But that doesn't do much to explain the simultaneous big jump in population growth.  We'll see what does, shortly.  Also note the drop after the slight maximum in 2007.

To avoid any chance of getting a mistaken impression, let's also look at the annual birth numbers, shown in Graph 3.

  Graph 3 - Number of Live Births

Without the per population denominator, the post 1980 portion of the graph looks quite different.  Now the 1990 peak seems a lot more significant, with the greatest number of births since 1968.  And the barely discernible blip in 2007 on Graph 2 is revealed as the greatest number of births ever, just slightly edging out the 1957 post war baby boom peak.  But the drop from 2007 to 2012 is meaningful.  The 2012 birth rate of 1.27/100 pop is a record low.  It corresponds to a total fertility rate of 1.93 births per woman over her lifetime.  The replacement rate to keep native-born population from declining is 2.1.

The other source of population growth is immigration.  And, as Graph 4 shows [data from Table 1 at this link.] it accounts for a big chunk of the population growth in the early 90's.

Graph 4 - Immigration from 1950 on

The peak runs from 1989-93, with the maximum value in 1991.  I've imposed an exponential base line by putting an Excel generated best fit curve through the highlighted data points. The raw number of annual immigrants has generally increased over time, and has mostly run well above the base line since 1989. But now it has been basically flat since 2007.  The above-trend numbers of the late 70's contributed to the increased population growth at that time.

Graph 5 shows that, in raw numbers, for recent years births outnumber immigrants by not quite 4 to 1.

Graph 5 - Ratio of Immigrants to Births

The final component to population change is the death rate.  This data was not as easy to locate, is less detailed, and there are some discrepancies among various sources.  I took data before 2000 from info please, and from 2000 on from indexmundi.  I don't put a lot of faith in the 2nd decimal point.   Graph 6 shows the data.

Graph 6 - Death Rate per 100 Pop

The big drop in mortality during the 70's and 80's isn't hard to understand.   There were big medical advances leading to increased disease survival and longer life expectancy. At the same time, there were huge improvements in automotive safety that saved thousands of lives every year. On-the-job safety might also have been a factor, since OSHA was formed in 1971.  The slight increase in the late 90's and sharp drop after 2000 are more mysterious, but that might just reflect the quality of the data.

My first thought was that before about 1980, births dominated population growth, and after about 1990 immigration took over.  During the early 90's, at least, immigration dominated.  That may still be true.  As the number of births has dropped sharply, the birth rate has fallen to an all time low since 2007.  Population growth has stabilized at an historical low level, and hasn't declined further in the last 3 years.

One thing that is clear is that without immigration, the U.S. population would go into decline as my generation passes on. 

Ralph Kiner Ends His Gig On Earth

Ralph Kiner entered the major leagues the year I was born, and had a 10 year career. I recognize his name, but have no recollection of him as a player. He led the NL in HR's the first 7 of those years, and was one of the truly great players of all time.

He went on to a much longer career in broadcasting, and is probably better known and loved for that phase of his life

He passed yesterday at the age of 91.

RIP Ralph.

You were one of a kind.

Update

Kiner dated both Liz Taylor and Janet Leigh.  Here is the story of when he met Leigh's daughter Jamie Lee Curtis.

Quote of the day

I once remarked to another anatomist that the courses of many of the nerves in the human body don’t suggest “omniscient, omnipotent supernatural being of pure perfection” so much as they do “amateur electrician and the Three Stooges rewire a house”.

                              -- Commenter wjts, at LGM

Random Thought

I've decided I never want Chris Christie to be my bridge partner.

Real GDP per Capita

My last Angry Bear post generated such a wonderfully amusing comment stream that I couldn't resist posting a follow up.  One of the criticisms was that I didn't consider Real GDP per Capita.  At the risk of having anyone think I accept homework assignments from trolls, here is a look at that very thing.  I'm snowed in tonight, so what the hey.

I usually like more finely granulated data over a longer time span, but sadly discontinued FRED series USARGDPC gives us annual data from 1961 through 2011, and that's plenty good enough to make a point; the point being that the American economy is dying a slow and agonizing death.  This, alas, despite enormous tax cuts enduring over decades.  For the supply-siders among you, we'll take an extra special look at the Reagan years.

Graph 1, from FRED, shows YoY RDGP growth over the span of the data series.

Graph 1 - RGDP per Capita, YoY % Change

The single most prominent feature of this trace is the downward trend over time, characterized by both lower lows and lower highs.  This should be pretty obvious, even to the causal observer; but if you cannot see it, don't be disturbed, I'm going to help.

 Graph 2 shows the same data, along with some trend indicators.

Graph 2 - RGDP per Cap, % Change, with extra colored lines

Parallel trend channel boundaries are indicated in red and green, with the center line in yellow.  The Excel generated least squares trend line is in dark blue, and a moving 5 year average in purple.  Each of these additions is a visual aide, indicating that the trend over time has, indeed, been down.  Certainly, it has not been monotonic.  The real world seldom works that way.  But what you see here, with some exceptions, are mostly worsening recessions, and increasingly anemic recoveries.

Next, let's focus in on the 5 year average.  Graph 3 gives that to us, along with it's own set of trend lines.  The vertical axis is truncated relative to graph 2, and the downward slope is therefore emphasized.  This makes it easier to see that the 1990 peak is considerably lower than the double peak of '66 - '69.

Graph 3 - 5 Year Average of RGDP per Cap Change, with extra colored lines

The 5 year average is in purple.  The base data and least squares trend line are in grey, The red, green and yellow lines are again parallel channel boundaries and midline.  The last time the average line touched the top channel border was in 2000.  After that, despite the Bush tax cuts, things went into a bit of a decline, culminating in the worst financial disaster since the Great Depression.

I know what you're thinking.  The next to last peak in Graph 3 came in 1990, the culmination of the Reagan miracle, just before his buzzards came home to roost, costing Bush Sr. his chance at a second term.  But remember that that peak is considerably lower than those of the 60's, and scarcely above the mundane years of '70 to '73.

And back in graph 2, the highest single growth year ever was in 1984, the third year of phase-in for Reagan's 1981 tax cut.  Well, sure - but note that 1984 was a one-off, and also the recovery year from an exceptionally deep Fed-induced double-dip recession in the previous 3 years.  So, beside a lot of pent up demand, there were a few other things going on that might have given RGDP a boost.

Graph 3 shows the Effective Federal Funds Rate, which made an erratic drop from a high of just over 19% in mid '81 to 15% in early '82, then to under 9% by 1984. 

Graph 3 - Effective Fed Funds Rate, 1980 to '84

Graph 4 shows the explosion of credit that occurred coming out of 1982.  By 1984 it was close to an all time high.  It finally reached that peak in 1986, then collapsed.for the rest of the decade.

Graph 4 - Credit Expansion, 1978 to 1994

And let's not forget that Reagan was responsible for what was at that time, the most profligate explosion of federal spending ever seen, as shown in Graph 5.

 Graph 5 - Reagan's Deficit Spending

So let's recap.

Big picture: Decades of tax cuts have not led to increasing prosperity.  Quite the opposite.  The growth rate of RGDP per capita has declined substantially since the tax cuts of the 60's, and most severely since the 2001 tax cuts.  The ensuing change in RGDP/Cap growth is somewhat reminiscent of what happened from '69 to '75, but as yet without much recovery.

Focus on the Reagan years: After a long and deep recession, tax cuts plus the steepest decline in nominal  interest rates ever seen in the 20th century, plus a huge expansion in federal spending, plus an explosion in credit resulted in a single year of outstanding GDP growth, followed by four decent but less than stellar years, which incidentally also included the 1986 tax cut.  Then, alas, in 1991, there was another recession.

If you can look at this data and still have the opinion that tax cuts boost the economy, then knock yourself out.  Everyone is entitled to an opinion.  But you might want to ponder why your opinion has so little overlap with reality.

I welcome your comments, but please keep them more or less relevant to the topic, and if you are going to disagree, please bring more than assertions.  Facts and data have some gravitas. 

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

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.

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.