Friday, September 18, 2020

A few charts and thoughts on the election

From time to time I update a chart or make a new one, and I realize it is worthy of highlighting. But then I delay posting it, looking for some broader theme to tie it too. I invariably regret doing that, so here is a short post with just 4 charts and some brief comments.

Chart #1

Chart #2

A few days ago the Census Bureau released its calculation of Median Household Income for 2019. As Chart #1 shows, this measure of prosperity increased at a historically significant rate. It rose a record-setting 8.7% from 2018 in nominal terms, and 7% in real terms, the latter being shown in Chart #2. Trump can claim credit for much of this, given his significant tax cuts and regulatory reform which began to take effect in 2018. 

It's arguable, of course, but I think Biden's agenda, which calls for significant tax hikes across the board, as well as an environmental agenda that would involve huge costs, economic turmoil (you don't easily get rid of an addiction to fossil fuels), and re-regulation (especially of the labor market), would be a drag on growth. Biden's agenda is anti-growth and anti-business, in the belief that addressing income inequality, social justice, and global warming are paramount.

UPDATE: Mark Perry's recent post on this same subject makes an important point I overlooked. Since the size of the median family has decreased steadily for the past several decades, if this data is adjusted for household size, by measuring income per member of the median household, the increase in median income growth has been much greater than my charts show: "the percent increase in median household income per household member since 1967 of 86.6% is almost exactly twice the percent increase in real median household income over the last half-century of 43.3%."

Chart #3

Chart #3 shows a huge, record-setting increase in homebuilder sentiment, which in turn foreshadows a significant pickup in housing starts. It's no secret that historically low mortgage rates have been a boon to the housing market and home construction, as well as to consumer sentiment. Who couldn't love sub-3% mortgage rates? 

Mortgage rates are low because the 10-yr Treasury yield, currently only 0.7%, is at levels once that though impossibly low, and the 10-yr is the primary driver of mortgage rates. And Treasury yields are low not because the Fed is promising to keep short-term rates near zero for the next 2-3 years, but because investors the world over are desperately demanding safety and security. The Fed is keeping rates low because it is forced to accommodate the world's huge demand for safe assets. On the bright side, the wave of risk aversion that has carried Treasury yields to unbelievably low levels is helping to generate a wave of new willingness to invest in homes as well as many other hard and financial assets. Remember, the new meme that the Fed is promoting is "Borrow and Buy," as I have noted in recent posts. When interest rates are super-low, it pays to borrow, and it pays to buy almost anything that will eventually benefit from renewed growth and—possibly—higher inflation.

Chart #4

On a less promising note, Chart #4 shows that passenger air traffic, which a few weeks ago was picking up (Labor Day holiday-related) has now resumed its flat trend. This detracts from the otherwise V-shaped recovery narrative that we have seen in housing, employment, industrial production, and retail sales. I think the economy will continue to improve at a relatively fast pace, but it's not yet gangbusters.

For all the promise of renewed growth, it remains the case that this year's gargantuan government spending and income redistribution will be a serious drag on growth for the foreseeable future. By borrowing many trillions, the government has commandeered a significant portion of the economy's resources and redirected those resources in ways which are very likely not as efficient as if those resources had been left in the hands of the private sector. Government can never spend other people's money as wisely and as efficiently as people can spend their own money, to paraphrase the great Milton Friedman.

From my supply-side perspective, the most important things to watch are confidence, employment, investment, and incentives to work and invest, all of which drive supply. Supply, as supply-siders believe, creates its own demand. Investment, production, and risk-taking are what deliver productivity, and productivity, coupled with more people and more work, is what delivers growth and prosperity. Spending follows production and growth; spending is not what drives the economy. 

Paying extra-generous unemployment benefits surely (and justly) helps those who were on the wrong side of government-mandated shutdowns, and it helps sustain consumption. But in the end it is harmful to the overall economy. There is no free lunch. It is increasingly clear that, as I predicted last April, government-ordered shutdowns were a catastrophic mistake, since nowhere in the world have they managed to derail the spread and devastation of the Covid virus, while in every case they have been hugely expensive and economically destructive to the lives and businesses of countless millions.

Supply-siders, as well as conservatives generally, believe that free markets and individual freedom are what create the fertile ground in which growth prospers. Modern-day liberals (as opposed to traditional liberals) believe that government actions (income redistribution, subsidies, price controls, regulations, industrial policies) are the main drivers of growth. Conservatives put their trust in individuals and businesses; liberals put their trust in government. You are free to choose, especially in the upcoming elections.

UPDATE (9/19/20): Mark Perry has a very interesting post on the demographics behind the household median income data. Excerpt:

It’s highly likely that most of today’s high-income, college-educated, married Americans who are now in their peak earning years were in a lower-income quintile in their prior younger years when they were single and before they acquired education and job experience. It’s also likely that individuals in today’s top income quintiles will move back down to a lower-income quintile in the future during their retirement years, which is just part of the natural dynamic lifetime cycle of moving up and down the income quintiles for a majority of Americans. So when [we hear] the incessant chatter from the mainstream media and progressive politicians about an “income inequality crisis” in America, we should keep in mind that basic household demographics go a long way towards explaining the differences in household income in the United States. And because the key income-determining demographic variables are largely under our control and change dynamically over our lifetimes, income mobility and the American dream are still “alive and well” in the US.


Ian said...

It's hard to know where to begin disentangling this dog's breakfast of economic illiteracy. Median income is up not due to deregulation but to the stimulus, enhanced unemployment benefits, and the rest of the economic rescue measures put in place to cushion the blow of the coronavirus recession. Far from being a drag on economic growth, this government spending has spurred growth: it's the reason that the world isn't in depression right now. The basic misconception at the heart of your analysis is that government spending is financed by the private sector, which has never been the case. The government finances itself, and in a world of slack, higher government spending stimulates economic growth.

Stephanie Kelton recently published The Deficit Myth, a wonderful account of the reality of macroeconomics. I hope that you and the readers of this blog will check it out.

Scott Grannis said...

Ian: I think you have failed to notice that this measure of median income includes only data through 2019. Which of course was way before Covid and way before enhanced unemployment benefits, etc.

And this: If government spending is not financed by the private sector, then where in the world does the government get the money it spends?

Ian said...

The government simply creates money. When it has to pay Lockheed Martin $80 billion for some aircraft, the Federal Reserve simply credits their account with $80 billion. This is one of the ways in which new money is created. We could easily pay off the national debt tomorrow. It would simply be a matter of creating the money.

In fact, the whole idea of debt doesn't apply to the finances of monetary sovereigns like the USA. If you could create all the money you wanted, why would you ever go into debt?

The only constraint on this process is inflation: if the Treasury injects too much currency into the economy, then it will lead to too much money chasing too few economic goods. However, inflation is low now, and capacity utilization is also low, so we can afford to spend liberally.

You're going to ask, "What are treasury bonds for then?" They're certainly not funding government spending. They're a means by which the government regulates interest rates. When the government wants to raise interest rates, it sells banks bonds with a high interest rate, which pushes overall interest rates higher. Treasury bonds aren't necessary, however. A national financial system would be possible without them.

Deficit hawks worry that the US government won't be able to pay off interest on its bonds. But this fear is ill-founded. As I said before, the US government can create as much money as it wants, so it can always pay off the interest.

I hadn't noticed that your income chart didn't cover 2020. That's strange, as the more recent data is relevant to your argument and does exist.

Scott Grannis said...

No, the government does NOT "simply create money." Neither does the Federal Reserve. I've explained this many times on this blog, but the myth of money creation persists.

Here is one example of many:

Benjamin Cole said...

Great blogging.

I think Trump is better for the economy than Biden.

We also get a lot of free entertainment from Trump.

Biden actually wants to get re-entangled in Syria. The globalist reverse Midas touch in action.

I might vote for Pat Paulsen.

Ian said...

That post of yours is about a different subject--the Fed's injection of reserves into the banking system in order to encourage lending and low interest rates. I'm talking about the process of how the government injects money into the non-banking economy, such as by issuing food stamps, building roads, launching rockets, or buying military equipment. The point is that there is no constraint on this spending except for inflation. The concept of debt doesn't apply to a monetary sovereign like the USA.

Scott Grannis said...

The government spends money, of course, and on many different things. But the money it spends must either be the result of taxation or of borrowing (i.e., by selling T-bills, note, and bonds). The private sector must buy these securities for the government to be able to spend beyond its means. It's really quite simple.

Argentina is one of the few places where this is not so. In Argentina the government can "borrow" money (real spendable money that is created out of thin air) from the central bank in exchange for an IOU which never comes due. Due to spending which massively exceeds tax revenues, the Argentine money supply is rising at a rate of 80-100% as a result of this money creation. As a result of massive money printing, the peso is continually falling vis a vis all currencies and inflation is north of 60-80% per year.

That the US does not suffer a collapsing dollar and inflation is quite low is proof positive that no entity is "printing money."

NCH said...

Can't Nutters be blocked?

Bob said...

Ian = MMT The Great Rationalization. "I can do what ever I want." When inflation comes, and it will, it will eat your theory like I eat my Sunday morning donut.

Ian said...


Your view of macroeconomics, while conventional, is obviously absurd. You say that taxation must precede government spending, but if that were the case, how would taxpayers have any money to pay their taxes? Ordinary citizens can't print money themselves, after all. It has to be the case that government spending precedes taxation because this spending is the only way that money can exist in the economy in the first place. And the same is obviously true of the purchase of government bonds.

It would seem that the USA's practice with regards to debt is the same as Argentina's--I guess the only difference is the Argentines are honest about what's going on! The USA government has been in deficit for the great majority of its history, so clearly this debt is an IOU that never comes due.

The reason for the relative stability of the US currency isn't our government spending policies but the size of our economy. American productive capacity is so enormous that there is always something for a dollar to buy. If we inject more dollars into the system through greater government spending, the economy will grow to accommodate them so there is little likelihood of dollars becoming worthless. Argentina on the other hand has a small economy so that you easily get a situation in which there are too many pesos chasing too few goods.

The stability of a currency has nothing with the size of its government "debt." Japan has a debt that is much larger than the USA's, but its currency is the ultimate safe haven.

If government debt were such a disaster, how has the US economy managed to survive so long? Surely the debt would have sunk us by now if it were ever going to.

NCH--I'm talking about Modern Monetary Theory, a major research paradigm in economics. Clearly the editors of economics journals don't consider the people who think this way "nutters," so why would you?

Bob--you lay your finger on the real issue: inflation. The goal is to run the economy at capacity without going overboard so that demand exceeds supply of goods. The economy is running far below capacity now, so there is little chance of high inflation for a while even if government spending gets ramped up. But eventually it might become a problem. However, there are obviously a lot of ways of crossing that bridge when we come to it: taxation, setting high interest rates, targeted interventions into inflationary domains of the economy, and so forth.:

A little bit of inflation would be preferable to what we have now: crumbling cities, healthcare that is too expensive for the majority, large parts of the country that are in endless depression, a dirty energy sector that is wreaking havoc on the planet. We need massive government spending to deal with all of these problems, and there's no reason why we shouldn't do it.

I obviously can't cover everything here. I hope you all will read The Deficit Myth by Stephanie Kelton and see if your questions and objections are answered there.

wkevinw said...

Kelton's writings are challenged by plenty of sound economic thinkers. They are far from gospel.

A lot of these gigantic government economic actions take many years, even decades to meet their final conclusion.

The USSR (and several other communist and socialist economies), actually took many decades for the lack of efficiency to show itself and finally destroy their economies. Social Security, as another example, started off at about 3% of wages, and now it's about 15%. Its cash flow/fund is headed for a deficit between ~2030-2040.

So, Social Security will have taken about 100 years to be "in trouble", and earlier trouble was only delayed by huge tax increases. This is the typical course of these things.

The other US govt deficits will likely have a similar time frame for "trouble". At some point the private markets will have less demand because the US will cause some kind of large inflation, or just create money for dividends, (monetize). At that point there's a big problem.

Smoking and government deficits have the same "human nature problem". They are both very bad for you but the impacts usually take decades to become apparent.

Grechster said...

Scott: You said "That the US does not suffer a collapsing dollar and inflation is quite low is proof positive that no entity is 'printing money'".

I don't think this is true. Rather, the Fed is printing money like mad BUT velocity has collapsed. The combination of the two has resulted in small-but-positive inflation and small-but-positive GDP growth (at least prior to Covid).


m is the money stock, V is velocity, p is the price level (inflation), and Y is real GDP growth.

Nobody seemed to think it was even possible - I surely didn't - but, since 2008, the money stock has soared fantastically. This is the money printing. But inflation hasn't resulted because velocity has collapsed (and even well before Covid reared its ugly head).

With the benefit of hindsight, this incredible combination was enabled by the fact that the US controls its currency, yes. But also because animal spirits have collapsed, which accounts for the ever-declining velocity. (Aside: Yellen didn't grasp this dynamic and probably still doesn't. Powell seems to.) Another thing, though, has been a major factor in preventing a collapsing dollar: every other major monetary geography is doing roughly the same thing. Europe, China, Britain, and Japan have even worse debt/GDP dynamics than does the US. So it makes sense that entities in charge of huge amounts of money wouldn't shun the dollar based on our extreme monetary policies (because they aren't relatively out of line).

So we ARE printing money, issuing debt, and boosting the Fed's balance sheet. It's just not resulting in the inflation that a 70's or 80's text book would have predicted. That velocity has collapsed extends the game. But the reasons behind the collapse in velocity is probably something we don't want to contemplate. It's a super-negative in the long run. The present game seems to be just pushing out the long run. Given the dynamics noted above, I think we can push it out for a very long time.

wkevinw said...

Dr. Hussman does a fine job explaining MMT, and its advocates' indoctrination of the economics world (note the statements about "arithmetic" without defense of the logical concepts and consequences by MMTers; typical indoctrination/cancellation of healthy inquiry):

"Keynesian economists are fond of arguing that government spending has a “multiplier” effect on output. This argument, like its cousin, the “money multiplier,” mainly relies on the arithmetic of infinite series, rather than any actual considerations of economics. In both cases, the quiet assumption is that there are no constraints on output, resources, productivity, or risk-taking, so that new output immediately appears in response to new demand, and demand immediately increases in response to new income. Turtles all the way down. Having abandoned any concept of scarce resources, this isn’t really economics at all, but the profession feeds it to the youth early enough that they grow up without questioning any of it."

Johnny Bee Dawg said...

"The basic misconception at the heart of your analysis is that government spending is financed by the private sector, which has never been the case"

LORD HAVE MERCY. And these people get to vote.

The Cliff Claven of Finance said...

"Dogs breakfast of economic illiteracy" is why I don't allow comments on my three blogs

Scott''s claim the partial shutdowns were a catastrophe is looking more and more true. At this point Covid is no worse than typical seasonal flu for healthy people under 60 years old. Doctors are much better able to prevent death now than in March and April. Forget those ventilators. Only 1 of 1000 die but 600 of 1000 do suffer. The economic damage has become far worse than the health damage. Whatever happened to flatten the curve? Mandatory mask wearing? Soon perhaps mandatory vaccinations? We tossed our personal freedom out from overhyped fear.

My daily parking lot survey of a nearby huge office building set a record with 37 parked cars on Friday. Never over 24 parked cars a day rom mid-March through August. There used to be hundreds of cars there.

Some schools are open in Michigan but others are not. Much more traffic on the roads after Labor Day. And I got thrown out of a nearly empty Dibellas sub sandwich shop for coming in without a mask. I felt like a rebel.

Scott Grannis said...

Grechster, re: " the Fed is printing money like mad BUT velocity has collapsed." Yes, velocity has collapsed (the flip side of soaring demand for money). BUT the Fed has only accommodated that by buying trillions of notes and bonds and replacing them with bank reserves, which banks use to back up their soaring deposits (the soaring demand for money). No money was created in the process. It was just a swap of bank reserves (T-bill substitutes) for notes and bonds. This is the argument I have been making for the past 7-8 years.

Roy said...

Interesting discussion.

Regarding inflation. The reason we have only seen the flow into specific asset bubbles, without causing a general inflation is because:
1. Strong deflationary pressure from external markets. This only started about 20-30 years ago? It's something new. So, if you studied economics 30 years ago, where they consider the USA as a closed market (plenty still do, awkwardly), you might have missed that.
2. Rise in inequality in the USA. This increases bifurcation of the market, limited flows to certain assets.

Regarding the debt, it's really about the cost of servicing the debt. If the cost of servicing the debt can be paid by increase in productivity, it's really a non-issue. Luckily, the USA has neglected this for so long it's easy to improve, such as massive infrastructure projects.

The Cliff Claven of Finance said...

The interest expense on the US debt is so low that interest expense this year is likely to be less than interest expense last year, in spite of more debt.

It is actually smart financially to borrow money when the interest rate is significantly below the inflation rate. Unfortunately, most politicans see low interest rates as a great reason to bortow and spend money recklessly. Borrow and spend they especially live when they don't have to raise taxes and get the taxpayers upset. Even better, borrow more, spend more, and cut taxes -- that was Trump's con game. Any boost to economic growth from the Trump tax cuts was small and temporary.

Roy said...
This comment has been removed by the author.
Roy said...

"So when [we hear] the incessant chatter from the mainstream media and progressive politicians..."

Without noting anything about the specifics he mentioned, when we read such comments, it's very doubtful that the conclusion was arrived at using scientific methods based on data.
Then why pretend at all? Just express outright your political opinion. It's fine. Everyone does it.

There are economists out there, that really try and avoid inserting their own agenda/politics into their economics thinking. My recommendation would be to seek out these economists, assuming you really want to figure out what's going on.

Roy said...

Here's an example:

"It rose a record-setting 8.7% from 2018 in nominal terms, and 7% in real terms, the latter being shown in Chart #2. Trump can claim credit for much of this, given his significant tax cuts and regulatory reform which began to take effect in 2018. "

How do you get to this conclusion from this data? Maybe it's true, I'm not saying it's not (I'm personally 100% for tax cuts), but how would someone seriously jump from these charts to this conclusion?

You know what else spiked from around that time, 2018-2019? You guessed it. The debt. And lots of other stuff.

Roy said...

" BUT the Fed has only accommodated that by buying trillions of notes and bonds and replacing them with bank reserves, which banks use to back up their soaring deposits (the soaring demand for money). No money was created in the process. It was just a swap of bank reserves (T-bill substitutes) for notes and bonds. This is the argument I have been making for the past 7-8 years."

This is technically true as long as it matches the demand for money. When the demand decreases, if the Fed does not shrink its balance sheet, in a timely manner, money supply increases. So, yeah, the Fed can cause an increase in the money supply.

"The government spends money, of course, and on many different things. But the money it spends must either be the result of taxation or of borrowing "

"must" or "should"? A certain department of the government can absolutely directly print money that the government can spend as it wishes. The only reason it does not do so unconstrained is because we have a certain structure, a framework, which has been around for a long time. At least up until recently, it seems to be dismantled brick by brick.

DJ said...

Hi Scott,
Stop responding to Ian. He is living in a Weimar/Zimbabwe/Venezuelan fantasy. There is no Magic Money Tree, and government spending and debt do matter. If we continue to try his experiment, there will be a collapse of the economy and all he and Stephanie will do is say they are sorry. Kelton is an advisor to Bernie Sanders - 'nuff said.

Johnny Bee Dawg said...


August 2020 Unemployment Rates

Nebraska R

Utah R

Idaho R

South Dakota R

Vermont R

North Dakota R

Alabama R

Georgia R

Montana D

Oklahoma R

Arizona R

Iowa R

Virginia D

Wisconsin D

South Carolina R

Indiana R

New Hampshire R

North Carolina D

Wyoming R

Colorado D

Texas R

Kansas D

Maine D

Maryland R

Missouri R

Alaska R

Arkansas R

Florida R

Minnesota D

Kentucky D

Louisiana D

Oregon D

Mississippi R

Connecticut D

District of Columbia D (Mayor)

Tennessee R

Washington D

Michigan D

Delaware D

Ohio R

West Virginia R

Pennsylvania D

New Jersey D

Illinois D

Massachusetts R

New Mexico D

California D

Hawaii D

New York D

Rhode Island D

Nevada D