Passing of Li Keqiang

 China is not doing too well economically. 

This is not a message you often hear from politicians, the legacy media, or uninformed commentary on the internet.

This is not entirely unexpected to macroeconomists: high growth rates of developing countries typically are not sustainable, and China is well-known for publishing macroeconomically questionable data.

The first signs of all this started about 10 years ago.

***

Anyway, Li Keqiang died suddenly this past week.

China's political structure for the last 40 years has been one with 2 guys at the top, serving for 2 five-year terms, with mandatory retirement for top officials when a term ends and they are over 65. 

This is analogous to a firm being managed by a Chief Executive Officer (CEO, who has the final say on decisions), and a Chief Operating Officer (COO, who makes the day-to-day decisions). This metaphor is useful because China has been run like a business since around 1980, with a good deal of promotion by merit, leading to something like an executive suite culture, with a strong board, silos of power, and a clear path to the top.

The top two installed in 2012 were Xi Jinping and Li Keqiang. 

The CPC (Chinese Communist Party) does not allow competition from other political parties, but it does have factions that are analogous to political parties in other countries. Xi and Li were from different factions. Li was seen as the continuation of the successful way of doing things, and Xi was seen as the guy from the rich and well-connected family who was getting his turn at the top.

The big story in China over the last 10 years has been that Xi has outmaneuvered or muscled out the leadership competition to make China more dictatorial than it has been since the mid-70s. 

And Xi seems more interested in power than economic success. So lots of observers infer that China's macroeconomic problems start with his dictates, inattention, and lack of expertise. Li was the one who was supposed to bring the last two. Xi kept him around for most of two terms, but he was pretty much policy-neutered by 2014 or so.

Americans get Xi's interest in power. What they are not getting is that China's economy is rounding out almost a full decade of looking sickly and problematic.

There are lots of obituaries out there (look for one), but the best one is in The New York Times. Look for a free version, but this may be gated (not expecting students to pay for it). What's interesting about these is the outpouring of comments from within censored China about their loss of economic dynamism.

“He may not have been a strong and forceful politician, nor a proficient public speaker,” Mr. Shen wrote in a post on WeChat. “But in my impression, almost all his public expressions were closely related to keywords such as democracy, rule of law, market economy and government streamlining.”

Li did not believe the internal hype about China's economy:

In 2007, when he was the leader of Liaoning Province, in the northeast, Mr. Li privately acknowledged to the American ambassador to China that Beijing’s official economic statistics were “man-made” and unreliable, according to a confidential diplomatic cable ...

Anyway, he's gone, and Xi is not.

Half of a Story About China

The Chinese are getting richer. You can see that in this chart from The Economist:

The Chinese getting richer is a good thing that we should all be happy about. But this is not the same thing as China getting bigger or (economically) stronger.

Charts like this are very common. But an economics student ought to recognize a problem immediately: for a firm, that orange line is a cost. The firm only benefits if productivity has gone up just as fast. 

The source provided no information on this. The message for a student then is to stop, stall, and look for other information. Do not "jump at the bait" of looking at only one side of the issue.

BTW: Yeah, I spent many seconds looking for that information myself. The article in The Economist didn't have it (so they were doing the same dumb thing I just warned you about). And I could not find it at Haver Analytics either; but that doesn't mean that much since they are a consulting service academics and student can't afford to pay for, and they keep most stuff under lock and key.

GDP Revision for 2022 IV

Revisions to GDP numbers are normal. Today's just happens to coincide well with what we're doing in lecture.

The rough draft of these numbers came out a month ago, and this is the revision. Here's the press release.

You have to scroll down a bit, but nominal GDP growth was revised upwards from 6.5%/yr to 6.7%/yr annualized. There you'll also see that the "price index for gross domestic purchases" rose from 3.2%/yr instead of 3.6%/yr. This is all from the BEA, so the price index is annualized too, unlike the CPI.

Now, going back to the top, real GDP growth was revised downwards from 2.9%/yr to 2.7%/yr annualized.

But if you look closely, the numbers don't match up. Working through this is a good exercise. 

The way that you combine the price and real GDP information to get the nominal GDP information has to check. The arithmetic is that you take the product of the gross rates and subtract one, as in: 

(1+.032)(1+.029) - 1 = .062 (for the advance estimates)

(1+.036)(1+.027) - 1 = .064 (for the second estimates)

Neither of those check.

What's going on here is a combination of two things. First off, the data from the announcement is not the right one to use. Go figure. Secondly, annualization makes a difference.

To get the right data, you need to dig a bit. Go from the BEA.gov home page, click "Data", then "By Topic", then Gross Domestic Product. Click "Tables Only" towards the bottom of the page (an Excel file will download). Nominal GDP is in the top middle of Table 3. Real GDP is towards the top right.

Nominal GDP (in billions of dollars per year) went from 25,723.7 to 26,145.0. Divide the latter by the former to get the gross rate of NDGP growth: 1.01637%/qtr. To annualize, raise that to the 4th power and get 1.0671. Subtract 1 to get the net rate, and express as the rate 6.71%/yr. Check.

You can do the same thing for real GDP (in billions of 2012 dollars). It went from 20,054.7 to 20,187.5. The gross rate is 1.00662, the annualized gross rate is 2.68%/yr. Check.

But where does the 3.9%/yr inflation rate come from that balances those two? Above, I noted there are 2 issues, but let's do the annualization first. Generally, the gross rates of real GDP growth and price growth have to be multiplied (sort of like compounding). BUT,  you need to do this with the original quarterly data, and then annualize that, rather than do it from the already annualized rates. So, the 1.00662%/qtr for real GDP has to be multiplied by an unknown (1+x)%/qtr, to get 1.01637%/qtr. Just divide those two to get 1.00968. Compound that to get 1.0393%/yr. Subtract 1 to get 3.9%/yr. Check.

Now back to the first question: where's the index that actually went up by 3.9%/yr? This requires more digging. It's called the implicit price deflator, Put that into the search bar at the top of the BEA home page. Look for a link titled "What Is an Implicit Price Deflator and Where Can I Find the GDP IPD?" In there you'll find a link to Table 1.1.9, with the data you want at the top right.

The index went up from 128.269 to 129.511 (you could think of that as the dollar prices now of stuff that cost $100 in 2012). That's a gross rate of 1.00968%/qtr. Compound that to get 1.0393%/yr, and from that the net rate of 3.9%/yr. Check. 

Don't ask me why they don't put that one in the news release. A cynical person would say it's because they had something that sounded similar (the price index for gross domestic purchases) with a smaller/better number.

A casual way of thinking about this is that while your paycheck may have gone up last quarter, over half of that was needed to cover price increases.

***

In all of this, note that I don't have the advance estimate of the implicit price deflator. Couldn't find it. It is possible to find historical advance estimates, but it's not easy, and it wasn't worth more than a minute or two of trying.

But I can figure it out. Going back to the gross rates from the advance estimate — 1.065%/yr for NGDP and 1.029%/yr for real GDP, I can divide the former by the latter to get 1.035%/yr. 

So the revision said the NGDP growth rate went up by 0.2%/yr, and the RGDP growth rate went down by 0.2%/yr, and the difference (subject to rounding and compounding) is the 0.4%/yr increase in the implicit price deflator. In short, they initially underestimated inflation, and that made real GDP growth look higher than it really was.

French Social Security Trivia

Other countries face the same problems with their pay-as-you-go, cash-in-cash-out, social security systems that the U.S. does. 

In France that has led to riots of up to a million people. Keep in mind that the population of France is less than a fifth that of the U.S., so that dwarfs anything that's happened here. Ever.

The motivation was the proposed policy to raise the retirement age from 62 to 64. 

I learned a few things about this over the last few weeks. 

First, that's a mandatory retirement age for most jobs. Mandatory retirement was largely eliminated in the U.S. during the 1980s. No source for this that I can recall; something on NPR I think.

Second, I may have mentioned that other countries had these systems before the U.S. had them (at the Federal level). In France, the system dates to 1910, when the life expectancy was 51. Now it's 82.

 

Environmental Disaster in Ohio (Not Required)

Natural and environmental disasters have macroeconomic consequences. It's important to keep abreast of the news on them.

Americans have been distracted by balloon shoot downs the last 10 days or so.

Which has kept most people from knowing much about the ongoing environmental disaster in Ohio. This is looking like it may be the worst on in several years for the U.S.

The short version is that a train derailed carrying chemicals that were both hazardous to health and explosive. Due to fear of explosion, authorities started burning the stuff. Evacuations were ordered. Obstinate people wouldn't leave. Animals left out in the open have been dying. It's a mess.

***

This is not required because in the long-run, maybe this turns out to be nothing to worry about. But, there's a broader point that we worry about a lot of things that aren't that important, and then use those as cover to avoid thinking about the more serious stuff.

Turkey Earthquake Update 2

It's arguable that I was premature in noting that Turkey would fare better in their recent earthquake than poorer countries might.

To some extent, given the continuing rise in the death count, my two earlier posts may seem callous.

Having said that, it's well established in economics that death tolls drop as real GDP per capita rises. The seminal paper in this literature is Kahn's 2005 paper in the Review of Economics and Statistics (if interested, an ungated working paper can be downloaded here).

Kahn looked at 57 countries over a 13 year span, totally over 4K disasters and over 800K deaths. His Figure 1 and Table 8 summarize the results that deaths are inversely related to GDP per capita, and that disasters are not more likely in poor areas. They're just not dealt with as well.

(Interestingly, his summary in Table 3 shows that Turkey is one of the worst countries for casualties from earthquakes).

Turkey Earthquake Update

The earthquake in Turkey now seems considerably worse than it did on Monday. I have heard reports that some are calling it the worst quake in the region in 2,000 years.

The pattern I outlined the other day continues to hold. Excepting the 2004 earthquake caused tsunami, all the countries above Turkey on the list of deadliest quakes are poorer than Turkey. And right behind in the casualty list is richer Japan which suffered from a bigger quake.

***

There are also very sketchy reports of high casualties over the border in Syria.

The problem with this is that we may never get a solid death toll from Syria. Syria on a map is not the same thing as what is controlled by the Syrian government, since rebel groups hold large parts of the country.Neither one is likely to have the organizational ability to accurately count deaths.

Turkey Earthquake

Forgive the morbidity of all of this. My point is that economic growth saves lives.

We discussed in class the morning's news of a large earthquake in Turkey. As of 8 pm, deaths are up to 4,300 from a quake that was a 7.8 on the Richter scale.†

I pointed out that this is a better performance than other, poorer, countries in similar situations.

On NPR on the way home, they pointed out that Turkey had suffered a 7.6 in 1999 that resulted in 17K deaths, and then I found a 7.8 in Turkey in 1939 that resulted in 32K.

† The Richter scale is logarithmic with base 10. So an increase in 1 point on the scale is 10 times stronger. To compare two quakes with decimals, raise 10 to the higher Richter value, and divide by 10 raised to the lower Richter value (use Excel or a calculator, unless you want to do the binomial expansion by hand). For example, today's 7.8 quake is about 60% more powerful than the 1999 quake which was a 7.6. That doesn't necessarily imply 60% more damage, but it does suggest they're not as comparable as they look.

N.B. Keeping in mind that valid comparisons require really close Richter values, there's a similar pattern that in other countries (like India, Iran, Italy, and Haiti) that the passage of time and  economic growth, lead to fewer casualties. Also note that countries with governments generally viewed by developed nations as suspect (China from 1950 to 1980, Iran since 1980) generally have higher casualties too.

Bias In CBO Estimates

The Congressional Budget Office (CBO) produces economic reports used by Congress to justify its positions. It has mostly permanent staff, and is supposed to be non-partisan. But, it is a creature of D.C. and Congress, so I think it leans left most of the time, more left when the Democrats control both houses.

Hanno Lustig, a macroeconomist at Stanford posted a Twitter thread this week showing that it's projections about the financing of fiscal policy have been too optimistic for the last 25 years or so. This takes the form of forecasts that are always on one side of the truth: in this case on the side of "oh no government spending isn't as out of control as everyone says".

This first one shows the debt/GDP ratio (not my favorite statistic, but the choice is theirs not mine) in black. Every year they make forecasts going several years into the future. Before 2000 they were forecasting it to get bigger and it didn't. Since then they've forecast it to get bigger, and its's outpaced their forecasts.

The story is the same for deficit/GDP ratio (a more useful statistic). Here surpluses are above 0 and deficits are below it. They had a good mix of forecasts before 2000. But since then, they've mostly forecast deficits to be smaller than they actually were.

In defense of the CBO, they are tasked with analyzing bills as written. Members of Congress have gotten very good at writing into law social policies with expiration dates ... that everyone knows will be renewed rather than allowed to go away. But because they do expire formally, the CBO isn't allowed to take into account what everyone knows is going to happen. That happens with tax cuts sometimes too: reductions in FICO taxes late in the Bush II administration persisted for longer than intended because Obama didn't find it politically feasible to have them cancelled.

 

***

One other thing to note about the colored forecasts. They all have a lot more variation towards their left than towards their right. This is mentioned further down in the thread, and is evidence that the forecasts are mean-reverting. This means they kind of behave like a guitar string being plucked (in one direction), and then vibrating back and forth a bit, before settling down to where it was before.

 

Mean reversion is a property of many time series whose behavior is tied to some fundamental value like its mean. Note that the black lines, showing actual political outcomes appear unhinged rather than tied to some fundamental.

What is the "Deep State"?

Trump and others have mentioned something called the deep state. What is that?

I happened across this interview the other day that I thought was both informative and helpful. It's with Dominic Cummings ... who was on track to be the next Prime Minister in the UK ... before his political career collapsed around personal travel early in the pandemic that pretty badly violated lockdown rules. So, disgraced, but if you get played by Bendedict Cumberbatch in a movie, you're probably worth listening to.

The interview is on a podcast called Manfold that seems to be free on Spotify. It's 2 hours long. Listen only if interested. FWIW: you can also get AI programs to create transcripts of things like this.

Admittedly he is talking about the UK, but the ideas carry over to the U.S.

***

The name and concept of the "deep state" come to us from Turkey. It described elements of the military and intelligence services that didn't really run the country from day to day, but which did keep it on what they saw as a desirable path. They did this by limiting the ability of elected officials to have their more substantive decisions put into effect.

Basically, an unelected bureaucracy that couldn't be displaced through democratic means.

The power of the deep state in Turkey was eventually diminished by the election of the pro-Islamist Erdogan, and his accumulation of dictatorial powers over the last 15 years. 

FWIW: the deep state in Turkey tended towards policies that aligned the country more closely with the U.S., western European powers, and Israel.

***

From Turkey, the notion of the deep state spread to other countries.

In the U.S, Trump and others also called it "The Swamp", after the steamy climate in Washington D.C.

No one has ever made a serious claim that the deep state was ever as strong here as it was in Turkey.

***

From the interview, as excerpted in The Epoch Times (all the emphasis is theirs).

Asked “who really runs the UK,” Cummings said he was surprised that donors have “remarkably little influence” and it was the officials that made decisions.

“COVID’s a classic example of this.”

...

Cummings said while the media reported disagreements among ministers over COVID-19 policies, “in fact, almost always … these ministers had absolutely nothing to do with anything important, and the decisions were taken almost entirely by officials with almost no ministerial input at all.”

He said officials, particularly private secretaries, make 99 percent of the decisions, while the prime minister and chancellor of the exchequer made few but “big” decisions.

Asked whether it’s fair to call the officials a “deep state,” Cummings said he believed it is fair in the sense that “they are a kind of deeply entrenched institutions, which actually practically controls huge amounts of what happens with zero to very little democratic insight or even knowledge and understanding.”

“That is unarguably the case,”  he said, adding that it doesn’t mean there are conspiracies going on.

Cummings believes on the one hand it’s “for the good” that “brilliant 30-year-old women who no one’s heard of and no one elected [are] actually running things” because “the quality of the elected people is so desperately bad now across Western governments.”

On the other hand, it means the institutions become “incredibly stale and self reinforcing” to the point “almost nothing can change in any way, including by the deep state itself,” he said.

N.B. In the parliamentary system in the UK, ministers are members of Parliament (a legislature) elevated to positions comparable to our executive branch. The secretaries referred to are not executive assistants (as the word is used in the US) but more like top-level permanent staff of various government departments. 

***

Personally, I don't care for Trump, have little interest in Cummings or The Epoch Times, and I've never heard of the podcast or interviewer. 

Professionally though, I do get that something like the "deep state" or "the swamp" exists, and that it has both benefits, but the costs are quite clearly stated in the last quoted paragraph. This is in important point for understanding why so much macroeconomic policy is lousy.

 

 

Social Security Sustainability Data and Links

This is from Mises Institute. Fair warning: that's a libertarian think tank. So their view of government programs is not neutral.

Even so, as I did, they riff off the riots in France about raising the retirement age. I recommend reading the whole thing, but here's some excerpts (BTW: I'd say their numbers are probably better/newer than mine are).

When it was being sold to the public in 1935, those promoting Social Security took advantage of sentiments that people over age 65 were essentially too old to work, and thus would soon fall into poverty. This certainly would have seemed plausible at the time. Most jobs in 1935 involved significant amounts of physical labor whether we're talking about cleaning laundry, waiting tables, farming, mining coal, or building houses. Work was also more dangerous—as historical work injury data makes clear—and workers were more likely to sustain injuries that would render one unable to work. For example, a 65-year-old simply could not safely perform much of the work required at a steel mill. (As shown in this 1944 video on the steel industry.)

Especially important to efforts at presenting Social Security as fiscally prudent was the fact that with a minimum age of 65, the number of Social Security beneficiaries would also be limited by the realities of life expectancy. In 1940, for example—the first year that pensioners could receive benefits—life expectancy at birth was only 61 for men and 65 for women. Indeed, even if we eliminate the toll of childhood diseases on life expectancy, the numbers do not change dramatically. In 1940, total life expectancy for persons over 15 years of age was 68. Moreover, in 1940 the percentage of the population surviving from age 21 to 65 was only 54 percent for males and 61 percent for females. But what about those who actually made it to age 65? In 1940, a male at age 65 would, on average live another 13 years. A female would live another 15 years. So, when looking at the work force in 1940, we can eliminate nearly half of the men and about 40 percent of the women as likely future Social Security recipients. About half of those who actually made it to 65 would then collect benefits for no more than 15 years.

Now let's contrast that with life expectancy realities in our own time.

Life expectancy at birth today is 78 years, and for those who reach age 15, it is 80. for both men and women, more than 75 percent of the population reaching 21 will survive to age 65. That's an increase of 50 percent for men, and around 30 percent for women. For those reaching age 65 in 2022, males will live another 18 years on average, while females will live another 20 years.

None of this is really about politics, but rather about designing a system that's sustainable. That wasn't done, and it's not being fixed.

And don't forget: Medicare is worse, but it won't hit until later.

Debt Ceiling Trivia

The U.S. has raised its debt ceiling 80 times since 1960, including in 2011, 2013, 2017,  2018, 2019, and twice in 2021. 

Note that those are almost all odd years, indicating the year after an election when a new session of Congress opens.

Social Security vs. Pensions

After the discussion in class the other day about the political problems with entitlements for senior citizens. KT asked whether social security would be better if it was privitized like a pension.

This is an area where folk macroeconomics isn't bad, but it can be misleading.

The argument usually made is that pension funds can generate a bigger nest egg for retirees to live off of, that isn't matched by the checks sent out by the Social Security Administration. 

What I would say to that is ... that's true, but they're not the same thing, so why would you compare them at all? This makes that a form of straw man argument.

***

So what is a social security program (and Medicare too). These are pay-as-you-go or cash-in-cash-out systems. Collections are made from some part of the population (like workers) today, and immediately divided up and given to some other part of the population (like retirees). 

There is nothing inherently wrong with this sort of system, and it mimics how families have taken financial care of elders for much of history.

Interestingly, since there is no investment in a social security system, other than having babies that grow up to be new payers, the (gross) rate of return is roughly the rate of population growth. Since people are real rather than nominal, that's a real rate of return. 

The problem I described in class, of the relatives size of the two groups changing through electoral methods, alters that rate of return. It typically  lowers it , since most people want to get out of the paying group (reducing its rate of growth). An additional problem is that as people get richer, they tend to have fewer children, reducing the growth rate.

Some pros of this sort of system is that it can always work, and it's relatively efficient. The cons are changing demographics, and unethical voting.

***

On the other hand, a pension fund is one in which workers pay into an account today, that invests the money, and then pays out the proceeds many years later. That investment may have a degree of control for the investor, although that is sometimes illusory.

The "rate" of return on this sort of investment can be quite high. There are two caveats to that. One is that some people invest timidly producing lower returns to fund their retirements. The second is that most of think of these a nominal rates of return. So we need to subtract out expected inflation from the if we're going to compare to social security.

The pros of this sort of system are the higher returns, and thus higher income when old. The cons are that investments aren't always good, and returns can be stolen or mismanaged.

***

The takeaway from all this is that social security and pension fund systems are separate things. Why not have both? In fact, that is the case for a majority of people in developed countries. 

The common argument always seems to be to turn social security into a pension, rather than the other way round. This is usually based on rates of return. But that's just one aspect. A forgotten one is that if social security invested like a pension, the Social Security Administration would become the largest investor in the world. How do you feel about its ability to do a good job? How do you feel about it being the dominant investor in most firms, probably with a seat on the Board of Directors of every large corporation?

GDP Announcement for 2022 IV

This came out last Thursday.

These releases are scheduled in advance, but generally at 6:30 Mountain time on the 4th Thursday of the month.

GDP is collected by the Bureau of Economic Analysis (BEA.gov). Here's the news release.

GDP is measured as a flow, so it's never available until after the time period ends (so the flow is finished), and then after a delay (shorter delays suggest less accuracy.

The U.S. measures their GDP on a quarterly and an annual basis. Most developed countries have shifted to doing it monthly.

In the U.S., this is done like how you're supposed to write an English paper: draft, revision, and final version. What we got last week was the draft (called the Advance Estimate). The others will come out in 1 month and 2 months.

It showed a real GDP growth rate of 2.9%/year, annualized. 

It was expected to be in the high 2's, and this was a little better than expected.

Current dollar GDP for the U.S. is now $26.13 T/year, or $26,130,000,000,000/year.

Different price indices are collected and released by a number of different agencies in the U.S. The one that goes with GDP, and is used to convert (nominal) GDP into real GDP is called the PCE index. 

In the fourth quarter, (nominal) GDP increased by 6.5%/yr., the PCE increased by 3.2%/yr. The 2.9%/yr. for real GDP is derived from those.

GDP and real GDP are typically announced as annualized measures over a quarter. Price indices are often released on year over year basis, but you can find both.

The Trillion Dollar Coin Idea Floating Around

There's been suggestions that the U.S. could temporarily solve its debt ceiling problem by having the Treasury mint a coin worth a trillion dollars, and then depositing that coin at the Federal Reserve.

If it sounds stupid ... it probably is.

***

Review: the debt ceiling is an issue because Congressional decisions about spending are not connected to decisions about revenue, the difference is financed by net borrowing (the deficit), the accumulation of which is the debt (or national debt), and there's a ceiling on that that isn't connected to the other two decisions. 

A more subtle issue is that Congress doesn't usually allocate exact amounts to things its spending on (particularly entitlements). Instead, it passes laws with stipulations to do some thing and worry about how much later on. It's worse with taxes, where Congress sets rates, but you and I (and the IRS) determine the amount (called the tax base) that the rate is applied to. So on spending side its mostly guesstimates and on the revenue side its all guesstimates. 

***

No one is worried about the debt ceiling who is also willing to just cut spending (or raise taxes). Of course, it would be helpful not to have the guesstimates to make this all easier, but it's a doable thing.

A problem with that is that much spending is on "autopilot". Entitlements are like that: they go up whether we want them to or not. Revenue is also on autopilot (most of us agree in advance on how much to have them withhold from our paychecks). But then the problem goes back to the previous section: autopilot is convenient but it doesn't fix the fact that they aren't tied together. 

***

The long-term issue with the debt ceiling is that Congress is undisciplined with its spending and revenue decisions. The debt ceiling is the outlet for this.

The short-term issue is that if we hit the debt ceiling, the Executive branch can only use tax revenue to fund spending that's already been promised. The practical solution is then to just make the payments that are required (interest on the debt and entitlements) and put everything else on hold. There's enough leeway that this will actually work. But it's not desirable.

And this might actually make the Executive branch look like it's the problem. It's not, but that doesn't mean they won't scheme to avoid that.

***

Enter the trillion dollar coin. This is an idea put forth by Jack Balkin in 2011. More on Balkin later. That suggestion (related to a debt ceiling issue then) never gained traction. 

Representative Rashida Tlaib revived the idea in 2020, and formally introduced a bill into the House to do this. More on Tlaib later.

Our currency is not backed by anything. It has its value because 1) the government prints it on there, and 2) people like you and I believe that and act upon it.

Balkin's idea is that if you say the coin is worth $1,000,000,000,000 (fulfilling # 1), then # 2 will follow.

(Parenthetically, Balkin also made the claim that they couldn't print $1,000,000,000,000 in currency and do the same thing because there's a statutory limit on printing currency. I've been doing macroeconomics for 40 years and I've never heard of such a thing. It's possible what he means is that you can't print a bill that large. That's true, and the statute is in place to make money laundering more problematic for those interested in doing it. Even so, the only reason you couldn't print up a large number of smaller bills is that it would be inconvenient to move them around).

Anyway, to make # 2 work, Balkin would have the coin deposited at the Fed, and then would withdraw smaller amounts to make payments. 

(If that seems silly, because you could just print the currency ... you're not wrong).

Another interpretation of what Balkin meant is that while the Executive branch mints coins and currency, statutorily it can't put them directly into circulation. Instead, it does have to run them through the Federal Reserve, which then puts them in circulation.

Later the idea has been covered by the journalist Izabella Kaminska (ungated version here). And this year the big pushers of the idea are Rohan Gray and Nathan Tankus. More on Kaminska, Gray, and Tankus later.

***

There's a lot of detail there. Let's cut to the checks and balances. The distinction between the Legislative and Executive on this is that the former does the general stuff, and the latter does the specific stuff. So the Legislative branch can't micromanage, and the Executive branch can't dictate overall totals. 

But the Legislative branch has also put a check and balance on itself, by making the spending action subject to both ex ante and ex post approval. The trillion dollar coin is a scheme for the Executive branch to get around the ex post part.

***

At this point, we get to something most of you understand: economics is hard.

And I'm not really trying to be Chauvinist here; non-economists can do economics, but you'd really like the economists doing this stuff. Except ...

• Balkin is a law professor.
• Tlaib is a Representative, with a law degree, who never really practiced law.
• Gray is ... you guessed it ... a law professor.
• Tankus is a ... well ... I guess you'd call him an "internet authority". And college dropout.

As budding economists, you're going to have to get used to this. Let's just say, in an analogous situation in public accounting, these people would all be jailed.

Note that Kaminska is a journalist whose just reporting what she finds out. And some of her views are sound, others just offbeat (not getting the satire in the tweet from Zerohedge she linked to) or silly (the meme included, which is way too literal).

***

What's being proposed here is essentially ... quantitative easing ... a policy the Federal Reserve has already pursued for about 15 years.

In quantitative easing, the Fed buys illiquid assets (often Treasury bonds) and pays for them with liquid assets (usually reserves), which can then be readily converted into money.

Most of the time, they'd buy those bonds from whoever has them. But the Federal government owns trillions of dollars of bonds issued by its own Treasury. The trillion dollar coin is like making sure those bonds are first in line for purchase. (Of course, the Fed and the government could do this any old time: the Fed would make an offer for bonds low enough that no one would take it, and the government could volunteer to take the offer). 

This all makes the trillion dollar coin ... a prop ... for people who don't understand how things already work.

Why do they need a prop? Really they don't, but my guess is that it would obscure that this is equivalent to taking bad offers to sell on what you own on behalf of the American people.

But somehow the prop is really important. Gray has even suggested that the military could be used to force an uncooperative Fed to accept the trillion dollar coin. Yikes.

***

All of this misses a couple of subtle points about economics.

An easy one is that money is not the same thing as currency, coins, and reserves. In my principles classes, I like to modify money with "inside", and then group the other three as "outside money". Almost all money is inside money, because the financial system isn't just banks, or the Fed ... it's all of us. And inside money is a reflection of the interactions of all of us in this system. The people who like the idea of the trillion dollar coin are hung up on the importance of the much smaller outside money. If we've learned anything with the unconventional monetary policy of the last 15 years, it's that the financial system is very inelastic with regard to changes in outside money.

The harder point is that we really don't buy things with money. We buy stuff with stuff, and use money as a convenience to do that more readily. All of us sell stuff and get money in return. So money is a memory of that stuff. Then we take the money to go buy other stuff (from someone doing the opposite of what we're doing). The government is doing the same thing. The stuff it's selling is the promise of programs that attempt to fulfill some objectives. Our taxes and loans are what it gets in return. Then it uses those to make payments on those programs. The key point is that you buy stuff with stuff, and the government buys stuff with stuff, and we both use money as a convenience: stuff in, stuff out, money in the middle. The non sequitur committed by proponents of the trillion dollar coin is that if have more money, then you can get out more stuff than goes in.

Some mathematicians, when they see something that can't work, use a really cutting phrase to describe: "that's not even wrong".

Some History of Congressional Budgeting

The other day I briefly touched on how the budgeting process works in D.C. This op-ed from The Wall Street Journal entitled "Congress Once Constrained Government Debt" by John Cogan covers this in more details.

In short, some members of Congress anticipated the mess we're in, and advised not going down this path. Consider why it is that you don't hear that fact trumpeted by people in government or the media.

On a related note, there's this post from Calculated Risk entitled "Short Memories". He remarks that he wrote it 9 years ago and never published. Even so, he understood then the problems we have now. 

Not much explanation here today: both links are required reading.

N.B. Don't forget that SUU provides you with a free subscription to The Wall Street Journal. If you haven't set that up, this would be a good time to do so.

Voting Yourself Out of the Paying Checks Group and Into the Receiving Checks Group

In class on Wednesday, KT questioned what I meant by (some) social programs having sustainability problems because people vote themselves out of paying and into receiving.

The direct way to do that is to propose an increase in benefits to those receiving checks. It is a moral hazard for society that most people won't "take one for the team" and vote against their self-interest on this.

The indirect way is to do nothing when demographics shifts the relative numbers in the paying and receiving groups. This is a particular problem for programs that benefit senior citizens, who are living longer just about everywhere.

In class, as a partial answer to KT's question, I noted that Medicare Part D was added in 2005. It covers most prescription drugs for senior citizens. That's not a small group, and it's the most likely demographic group to vote and/or apply pressure to members of Congress. 

It's not that providing prescription benefits to seniors is a bad thing. The problem is that it is a gross benefit to those who receive, but a gross cost to those who pay into the system. The important question to society is what are the net benefits, and these are rarely addressed.

More generally, the issue with social security and Medicare is that due to increasing lifespans, the ratio of workers to receivers keeps dropping. When the Social Security Act was passed in 1935, it was about 15 to 1. Not it's less than 3 to 1. That change requires that taxes be 5 times higher to make up the difference.

For illustration, at the time social security checks started going out, the life expectancy of someone who had reached 65 was 2 more years. Not it's 15. To get back to receiving checks for 2 years on average, we'd have to raise the retirement age to 80 (for those of you who remember Professor Evans, that gives you some idea of the age).

***

So I wasn't going to riff of KT's question from class, and had more or less forgotten about it. But then a news item came up, and it rang a bell. KT was kind enough to remind me of the question.

The news item is the riots taking place in France over the last week. These are in response to a proposal to raise the retirement age from 62 to 64. But, of course, if their ages are lower, they have an even bigger sustainability problems than we do.

***

A few questions in the Quodlibet have asked about similar issues. This is a big problem around the world. Lucky countries (like the U.S.) "get rich before they get old" and have some chance of dealing with the issue. But other countries get old before they get rich (like China) and have more serious issues.

***

And one more thing: a way to address this demographic affordability problem is to ... encourage immigration. This is yet another case where the macroeconomically helpful thing is actually the politically unpopular one.

Yes I Am Being Conceited and (Proud)

I was not looking for this, and to be honest, had no reason to. But still, it felt good.

While browsing Tim Worstall's blog (fair warning: Tim's blog is often offensive, and even rarely NSFW) on Thursday evening, I was reading this post entitled "Ain't This a Bleedin' Change?"

Tim was invited to speak in Bangladesh about 5 years ago, and has been keeping an eye on its development every since. The level of well-being is not great there, but it has made amazing improvements since being declared the poorest spot on the planet about 50 years ago. 

The world’s getting better for hundreds of millions of people, great gobs and chunks at a time.

As David Tufte says:

If you care about people, the economic growth over the last generation is one of the most important stories in all 5,000 years of human civilization.

Yep.

But bugger me, it is working.

Not sure where the quote is from (maybe even this blog). But it's roughly something I say in most classes. 

I'd add that if you're not hearing about this once in a while in your preferred political and economic media sources, then they may be morally bankrupt and you just haven't noticed yet.

This Week's Debt Ceiling News

Some of you had me for principles. In that class, I sometimes sent you off to look at this blog so that my posts could do double-duty. In this case, I actually wrote this for principles and have copied it over here for you folks.

For some of you , the debt ceiling was a topic I covered in your 2020 class, and this might be a little repetitive. But still, required for everyone.  

I'm posting this pretty close to class, so we'll cover this one on Monday. And maybe another one too.

***

Once again, the debt ceiling is in the news. Go ahead, google "debt ceiling news". I got almost 2 million hits. The Wall Street Journal generally has the best coverage of macroeconomic issues, so here's one of their pieces on this entitled "U.S. Nears Debt Ceiling, Begins Extraordinary Measures to Avoid Default."

It's going to be this way your whole life. It is an issue that only goes away temporarily. So much so that you could estimate each time how much breathing room they've given themselves until it comes up again. 

My guess for this time is that they stretch it out all spring, and then do a quick fix that pushes it off until early 2025.

What is going on this week is the the (U.S. Department of the) Treasury is going to start using some "extraordinary measures" to avoid hitting the ceiling this week, but those will only last about 4-5 months. This doesn't mean much more than the standard things you do when you're short of cash: figure out which bills have to be paid first, pay them, and start stalling a little on the others.

First off, do not panic or overrate this, or listen to people who do. The government isn't broke, and it can pay its bills. 

Secondly, panic a little. In representative democracies, parties with slim majorities tend to get dominated by their stupidest/craziest members. It happened to the Democrats over the last 2 years (with a 216-213 majority 2 troublemakers can control things), and it's going to happen with Republicans over the next two (with a 222-212 majority, 5 troublemakers can control things). It's a common enough situation that both managerial economics and political science teach about "hostage negotiation" (which in this context means a vote or decision is being held hostage, not a person). So yeah, it's possible they may try and screw things up.

Third, part of that is going to be finding our sensitive spots, and manipulating them until one side gives in. For example, a few years ago, they "addressed" the lack of an agreement on the debt ceiling by closing all the national parks down until an agreement was reached. It worked. It always does. If it sounds like an unstable person engaging in self harm to get attention ... you're starting to get how this works.

The situation is that our government is set up with checks and balances. The legislative branch (Congress) decides on the amount of spending and taxes. But the executive branch (the Treasury) actually does bill paying. Just like you, if outflows of money exceed inflows, the difference must be borrowed. But the legislative branch sets the limit (a ceiling) on how much the executive can borrow, including all the past borrowing that hasn't been paid down (the national debt). What has happened this week is the Treasury has told Congress they need to raise the debt ceiling, or they'll have to cut spending or raise taxes. Legislators don't like to do any of those three.

Let's draw an analogy. Imagine an actor who's pretty good at doing things to make money flow in, but even worse at buying stupid stuff. (Ooh ooh, we don't have to imagine, it's a thing: we can just use Nicolas Cage as an example). Now suppose he has a manager that pays all his credit card bills by

check. Every once in a while the manager calls Cage and tells him if I send the check this time it will bounce. But maybe in the short-run I can pay the bill on one card with the other, and get away with that for a few months. And Cage's response in the longer-run is to find a card with a higher credit limit at the last minute.

More formally, this is how Jason Furman, an economist from the Obama administration explained it on NPR on Wednesday:

Congress has to give Treasury permission every time it goes out and borrows money, which it has to do quite a lot because we spend more than we collect in taxes. Starting about 100 years ago, they gave a blanket permission that you can borrow up to a certain amount, and you can't borrow past that even if you're borrowing money to pay bills that Congress itself passed a law saying you have to pay.

If it sounds ridiculous, it sort'of is. 

Back in the 1970's, Congress passed a law governing how it works that separated the spending amount from the tax revenue amount. And spending is usually bigger because raising spending gets you votes and raising taxes does not. So they don't have to match up, and they usually don't. Borrowing makes up the difference. 

But, here's another one of those bits of "folk macro" that most of you have. And most people have this completely backwards. The reality is that the U.S. government is the best and most reliable borrower the world has ever known. In short, everyone wants to loan it money. All. The. Time. The "folk macro" is that people think there's a limit on this. There isn't. All I can tell you is that the limit is so huge no one is even sure it exists. So much so that claiming there's a limit is a good sign the speaker really doesn't know what they're talking about. But like all folktales, try telling a true believer that Mike and Sulley are not in their closet, or Randy isn't under their bed.

I do think we're going to see a nasty political fight over the next 4 months. The Republicans, as a party, are convinced the government is too big. And stalling on the debt limit is one way to force others to vote for some spending reduction. 

And, we've had a big spending blowout over the last 3 years, so there's certainly an argument to be made that they can back off some things. 

In fact, you can probably view it as incompetence on the part of Democratic Congressional leadership that they didn't get the debt ceiling increased before the elections.

Lastly, another piece of "folk macroeconomics" that people get wrong is the idea that the Republicans hate spending and will cut it by much. I will admit that the Republicans prefer spending less than the Democrats. But not by much. The sentiments of the two parties are a lot closer to each other than they are to you and me.  And the job of member's of Congress is to spend other peoples' money: who'd want to do less of that?

Some Perspective on Poorer Countries Getting Richer

Economic growth occurs most places, some faster, some slower. 

China has grown a lot over the last 40 years, and it's growth experience has definitely been above average. But it tends to get overrated in the U.S. If you're paying attention, the reason for this is often no deeper than journalists shouting "CHINA!" until you pay attention. 

Do not construe what I just said as minimizing that. It is one of the great events in human history that most people living in China have moved from being poor to (what is called internationally) middle income. And it's notable that China as a whole has moved from about tenth in a ranking of economic size up to second or maybe first (the data from China is not great, so a better economics student should put wide latitude on the official numbers). China will probably even eventually be first before it ends up as second biggest for centuries to come. But a lot of that gets lost ... you know ... because ... "CHINA!!".

But if we want to look for the growth success story, it's next door in South Korea. This was the poorest place on the globe in 1950. And now South Korea is counted amongst developed/rich countries.

Digression: Korea was nominally independent, but dominated by China from the 17th to 19th centuries. Think smaller nation dominated by its neighboring empire as a subject minority (like Ukraine with the Soviet Union). Then in 1895 it got passed to Japan as spoils of war. And in 1945 the Soviets took the good parts (believe it or not) and that became North Korea. The poorer, more agrarian, south became the Republic of Korea (or RoK) ... which everyone calls South Korea. Or increasingly just Korea ... because they'd just assume ignore the presence of North Korea (or DPRK).

***

There's a couple of trains of thought about how countries go about the mechanics of growing.

One is that it is based on the investment in and development of domestic sectors that become successful international brands that can compete anywhere. Think Samsung or Hyundai. But there are failures at this too: Brazil has been trying to do this for a century.

The other is that it is based on foreign direct investment (FDI). With FDI, a big foreign investor buys some or all of some firm(s) in the target country and turns them into analogs of the original (this is what AT&T does). Or it might build from the bottom up in a foreign country (this is what Amazon does). Either way, this can work too: we all know that most iPhones and iPads come from a Chinese company named Foxconn, but that Apple is the main reason it's successful. On the other hand, this form a of FDI has encouraged a lot of revolutions and coups over the years.

It's an open debate about which one is better. But what does seem to be true is that the former is associated with more centralized/government planning, while the latter has more decentralized/corporate planning.

And the biggest cheerleaders for government involvement are ... government officials, politicians, bureaucrats and sometimes compliant media. Economists ... not so much ... mostly because corporate types can get fired if their investment plan goes south.

***

Both of those involve a lot of focus on exports. That's also something that's overrated, mostly because it's "EXPORTS!!"

Exports are not the secret. It's who you sell the exports to that is.

And if your country is poor, and foreigners are rich, then they may have a great willingness to buy what you've got to offer. (Certainly a lot more interest than the other poor people around you). 

So see, the trick really isn't exporting. Rather it's the old recipe for moving up in the world: if you're poor, find out what the richer people want or need, and start making it and selling it to them.

In this view, exports don't so much cause a country to grow, as they are a signal that the country has gotten that message. Honestly ... I don't think it's that notable if a country gets that message ... what's notable is if they don't (because it's sort of a denial of reality).

***

And that brings me to a notable tweet from this past week. Kevin Bryan (a strategic management professor at the University of Toronto noted that:

2.5x increase in GDP PPP per capita over 30 years is Bulgaria -> US, or Thailand/Bosnia -> Japan in one generation. An absolute miracle in standard of living. 33 non-resource countries did *at least* this since 1990. They are:

— Kevin Bryan (@Afinetheorem) January 11, 2023

Peru, Chile, Panama, DR
Ireland, Malta, Poland, Albania, Estonia, Latvia, Lithuania, Bosnia, Serbia
Rwanda, Uganda, Mozambique, CV, Ethiopia, Mauritius
Turkey, Armenia, Sri Lanka, Bangladesh, India, Bhutan, China, Burma, Laos, Singapore, Indonesia, Korea, Vietnam, Taiwan,Cambodia

— Kevin Bryan (@Afinetheorem) January 11, 2023

How many are export-led, high-govt-intervention-in-manufacturing, winner-picking countries? Like, China and Korea and...literally any others? So why so much discussion of Chang/Studwell? At least in part, it's a veneer to support govt. spending that's hard to justify otherwise

— Kevin Bryan (@Afinetheorem) January 11, 2023

So, it's tweets, so some clarification is necessary. 

In the first one, it's Bulgaria now to the level the U.S. has now in 30 years (or Thailand or Bosnia into Japan). Of course, the U.S. and Japan will have continued to moved ahead over those 30 years. The point is, if you like the U.S. in 2023, might you be perfectly happy living in Bulgaria in 2053? Maybe so.

In the second, DR is the Dominican Republic, and CV is Cape Verde. Both are island countries in the Atlantic Ocean.

In the third, Chang/Studwell is a paper whose authors have advocated for the government planning approach to growth. In doing so, Bryan is arguing that they're diminishing the stories of countries that have gone a different route.

And the growth noted in the first paragraph is not ridiculous. You can get that by sustaining a growth rate of 3.1%/yr in PPP real GDP per capita (because of the way growth rates work, any deviation around that rate would make the requirement go up a bit). This is not excessive: the U.S. has averaged about 2%/yr growth in real GDP per capita for many decades.

A deeper dive into how two countries have done this is entitled "The Poland/Malaysia Model". You can find it on Noahpinion on Substack (you can read the article without subscribing).