27/5/19: Which part of the Federal spending poses a greater fiscal threat?

An interesting chart via Cato on the number of Federal state aid programs in the U.S.

The grand total of these programs in terms of annual spending is roughly US$697 billion. The issue here is that these programs are continuing to increase in scale and scope despite the so-called 'strongest economy, ever' (excluding the recent changes under the Trump Administration that propose significant cuts to some of these programs on the social welfare, public health and education sides for Budget 2020) .

Here is the summary of the main program headlines and outlays:

Source for both charts: https://object.cato.org/sites/cato.org/files/pubs/pdf/pa868.pdf

Nonetheless, whether or not the state supports and welfare entitlement programs can be afforded into the future (yes, demographics of ageing are driving up the demand for many of these programs, while also making them more politically feasible with older voters, yet reducing the capacity of the economy to carry these increases), the major issue that is left un-addressed by the American analysts is the overall composition of the U.S. Federal spending.

As discussed in this article: https://bit.ly/2VU39Hj, current 2020 budgetary outlook envisions a massive increases in military spending, offset by the reductions in assistance to the low income families, education and public health. Here is the summary slide on this from my new course slides on the subject of the Twin Secular Stagnations:

The key quote from the above: "In fact, the proposed FY2020 military and war budget makes up $989 billion of the Federal Government’s $1,426 billion Discretionary Budget. This represents a staggering 69 percent of the total Federal Discretionary Budget for FY2020!"

No matter how concerned we might be with the sustainability of the Federal fiscal policies, transfers to the States from Washington are, de facto, a form of local monetization of the Fed monetary policies, some of which is being cycled into state-level investments in public infrastructure and education, as well as public health. Pentagon's spending, in contrast, carries virtually no investment-like benefit for the rest of the society, and much of the 'securing our nation' argument in favor of spending almost a trillion dollars on weaponry and military personnel is bogus as well (unless you still, for some unfathomable reason, believe that demolishing Libya or Syria are of some benefit to the actual American society or that the likes of Iraq and Iran pose a truly existential threat to America).

23/5/19: Winning the Trade War: Easily and Bigly

NY Fed just published some interesting numbers on President Trump's Trade War with China. Available here: https://libertystreeteconomics.newyorkfed.org/2019/05/new-china-tariffs-increase-costs-to-us-households.html, the Fed note states that per recent study "the 2018 tariffs imposed an annual cost of $419 for the typical household. This cost comprises two components: the first, an added tax burden faced by consumers, and the second, a deadweight or efficiency loss... the tariffs that the United States imposed in 2018 have had complete passthrough into domestic prices of imports, which means that Chinese exporters did not reduce their prices. Hence, U.S. domestic prices at the border have risen one‑for-one with the tariffs levied in that year. Our study also found that a 10 percent tariff reduced import demand by 43 percent."

Thus, in simple terms, China is not paying the tariffs, American consumers are paying the tariffs. Just as Mexico is not paying for the Wall, and just as Mr. Trump is probably not paying his taxes in full (legally or not - a different matter). Same as the Trump Organization is not employing the greatest bestest American workers, preferring to employ cheaper legal and illegal migrants. And same as the Trump Organization is not paying their employees 'tremendous' salaries. And... well, you get the drift.

The Fed note states that, of course, the net loss to the U.S. economy is mitigated by the fact that the tariffs revenue is collected by the Federal Government and "could , in principle, be rebated". Alas, this is of little help to ordinary American households, because the U.S. Federal Government is not particularly know to be efficient spender of the money it collects. One can't really argue that taking $419 from an average household and pumping the cash into, say, new missiles and bombs to be dropped in Yemen is an equivalent economic activity. Or, for that matter, spending the same $419 on fighting in Afghanistan, or subsidizing loss-making perpetually insolvent boatbuilding docks in the U.S. that are already reliant on the atavistic Jones Act to sustain any pretence at building something. And so on... you get the drift.

The Fed researchers go on: "Some firms may also reorganize their supply chains in order to purchase their products from other, cheaper sources. For example, the 10 percent tariffs on Chinese imports might cause some firms to switch their sourcing of products from a Chinese firm offering goods for $100 a unit to a less efficient Vietnamese firm offering the product for $109. In this case, the cost to the importer has risen by nine dollars, but there is no offsetting tariff revenue being paid to the government. This tariff-induced shift in supply chains is therefore called a deadweight or efficiency loss." And the deadweight loss is fully, even in theory - forget practice - carried by the households.

Worse, "economic theory tells us that deadweight losses tend to rise more than proportionally as tariffs rise because importers are induced to shift to ever more expensive sources of supply as the tariffs rise."

How does that work? Marvellously, of course.

"... Compare the estimates of the costs of the 2018 tariffs with those of the recently announced higher tariffs on $200 billion of Chinese products. ...in November 2018, purchasers of imports were paying $3 billion per month in added tax costs and experiencing another $1.4 billion in deadweight losses. Thus, the total bill for U.S. importers was $4.4 billion per month. If we annualize these numbers, they amount to a cost of $52.8 billion, or $414 per household. Of this cost, $282 per household per year was flowing into government coffers as a tax increase and could theoretically be rebated. ... However, deadweight losses accounted for an additional $132 to households per annum and represent a net loss to the U.S. economy that is in excess of any tariff revenue collected by the government."

And the Fed analysis shows the effect of the rising deadweight loss on the U.S. households under the latest bout of tariffs hikes: under 2018 tariffs, deadweight loss was $132 per household per annum, and the total loss to the household was $414 per annum. Under 2019 tariffs, the deadweight loss is estimated to rise to $620 per annum per household and the loss to household budget of $831 per annum.

Now, the Fed study does not take into the account that higher prices charged on consumers as the result of tariffs are also subject to sales taxes imposed at the State level. Which means that for a 7% sales tax state, actual out of pocket losses for 2018-2019 tariffs war for an average household will be in the region of $889 per annum.

Based on the most recent data from the Tax Policy Center, "the middle one-fifth of income earners [in the U.S.] got an average tax cut of $1,090 — about $20 per biweekly paycheck" as a result of 2017 2017 Tax and Jobs Act (TCJA or Trump tax cuts). Transfers from corporate tax cuts to average salaried employee amounted to additional $233 per annum pre-tax. So an average household with two working parents gained somewhere in the neighborhood of $1,330 per annum from the 'massive tax cuts'.

You get $1,330, we take $889 back, and we call it 'America winning the trade war. Easily. And bigly!'

21/5/19: 'Popping up everywhere' or not? Entrepreneurship and start ups

Much has been written, taught and said about the New Age of Entrepreneurship and the new generations of entrepreneurs, allegedly springing up across the modern economies. The problem is, for all the marketing hype and academic programs enthusiasm, entrepreneurship (new business formation) is actually running pretty low.

Here is the U.S. data on new business formation:

While other data, e.g. Kauffman Foundation, shows relatively stable and even higher rates of entrepreneurship over recent years, much of this data aggregates both incorporated and non-incorporated businesses, including sole traders and self-employed. This is reflected in the fact that entrepreneurship rates in recent years have been sustained solely by a massive increase in entrepreneurship uptake by individuals with less than high school education and of older age cohorts:

Source: https://indicators.kauffman.org/wp-content/uploads/sites/2/2019/02/2017-National-Report-on-Early-Stage-Entrepreneurship-February-20191.pdf

Over the same time, cohorts with higher education have seen a decrease in their entrepreneurship rates, driven in part by their rising share of population, their rising numbers, and, well, yes, lower incentives to undertake entrepreneurial risks.

Now, as to the age of entrepreneurs we have.

Source: https://indicators.kauffman.org/wp-content/uploads/sites/2/2019/02/2017-National-Report-on-Early-Stage-Entrepreneurship-February-20191.pdf 

In  summary, the above table shows that the rates of entrepreneurship amongst the Millennials have declined, the rates for GenX-ers (35-44 cohort) have risen, but are quite volatile, with significant increases (2009-2010) associated with greater involuntary entrepreneurship (high unemployment), while overall increases in entrepreneurship have ben sustained by entrepreneurs of ages 45 and older.

So, to that often repeated popular and academist 'truism' of the New Age of Entrepreneurship and the great entrepreneurial spirit of the younger generations... errr, not quite.

Note: caveats notwithstanding, good data on the subject is available here: https://www.kauffman.org/currents/2019/02/indicators-provides-early-stage-entrepreneurship-data.

19/519: FocusEconomics 75 Top Economics Influencers List

Delighted to make @FocusEconomics top 75 Economics Influencers to Follow list:

Honoured to be in the company of some really inspiring people talking about economics, economic policy and research!

See the full list here: https://www.focus-economics.com/blog/top-economics-influencers-to-follow.

16/5/19: Identifying Debt Bubble 4.0

Having just posted on the debt supercycle-related comments from Gundlach (https://trueeconomics.blogspot.com/2019/05/16519-gundlach-on-us-economy-and-debt.html), here is a chart identifying these super-cycles in the U.S. economy:

The periods of significant leverage in the U.S. economy have been identified as follows:

• First, I took nominal GDP growth rates (q/q) snd nominal total non-financial debt growth rates (also q/q) for the entire period of data coverage for which all data points are available (since 1Q 1966). 
• Second, I adjusted nominal non-financial debt growth rates to reflect the evolving ratio of debt to U.S. GDP.
• Third, I subtracted adjusted debt growth rates from nominal GDP growth rates to arrive at change in leverage risk direction. This is the difference figure shown in the chart below. Positive numbers reflect quarters when GDP growth rate exceeded growth in GDP-ratio-adjusted debt and are periods of deleveraging in the economy, and negative periods correspond to the situation where GDP growth rate was exceeded by GDP-ratio-adjusted growth rate in debt.
• Fourth, I calculated 99% confidence interval for historical average difference (shown in the chart below).
• Fifth, I identified three regimes of debt evolution: Regime 1 = "Deleveraging" corresponds to the Difference variable being non-negative (periods where the gap between growth rate in GDP and growth rate in debt is non-negative); Regime 2 = "Non-significant leveraging up" corresponds to periods where the gap (difference) between GDP growth rate and debt growth rate is between zero and the lower bound of the confidence interval for historical average difference; and Regime 3 = "Significant Leveraging up" corresponds to the periods where statistically-speaking, the negative gap between growth in GDP and growth in debt is statistically significantly below the historical average.

I highlighted in the above chart four periods of significant, persistent leveraging up, identified as Debt Bubbles 1-4. There is absolutely zero (statistical) doubt that the current period of economic recovery is yet another manifestation of a Debt Bubble. And, given the composition of the debt increases since the end of the Global Financial Crisis, this latest Bubble is evident across all three components of non-financial debt: the households, corporates and the U.S. Federal Government. 

16/5/19: Gundlach on the U.S. Economy and Debt Super-cycle

U.S. growth over the past five years is based “exclusively” on government, corporate and household debt, according to Jeffrey Gundlach, chief executive of DoubleLine Capital, as reported by Reuters (link below). This is hardly surprising. In my forthcoming article for Manning Financial (in print since last week), I am covering the shaky statistical nature of the U.S. GDP growth figures, and the readers of this blog would know my view on the role of leverage (debt) in the real economy as a drug of choice for boosting superficial medium term growth prospects in the U.S., Europe and elsewhere around the world. What is interesting in Gundlach's musings is that we now see mainstream WallStreet admitting the same.

Per Gundlach, the U.S. economy would have contracted in nominal GDP terms (excluding inflation effects) three out five last years if the United States had not added trillions in new government debt. Just government debt alone. “One thing everybody seems to miss when they look at these GDP numbers ... they seem to not understand that the growth in the GDP it looks pretty good on the screen is really based exclusively on debt - government debt, also corporate debt and even now some growth in mortgage debt.”

And if private sector debt did not expand, U.S. "GDP would have been very negative.” Per Reuters report, nominal GDP rose by 4.3%, but total public debt rose by 4.7% over the past five years, Gundlach noted. "Against this debt backdrop and financial markets “addicted to Federal Reserve stimulus,” these are “very, very dangerous times” for the next U.S. recession, Gundlach ...said."

Per CMBC report on the same speech, Gundlach said that “Any thoughtful person would be concerned... It’s sounding like a pretty bad cocktail of economic risk, and risk to the long end of the bond market.”

As reported by Reuters: https://www.reuters.com/article/us-funds-doubleline-gundlach/u-s-growth-would-have-contracted-without-trillions-in-government-consumer-debt-gundlach-idUSKCN1SK2KW and by CNBC https://www.cnbc.com/2019/05/14/doublelines-gundlach-warns-of-recession-cocktail-of-economic-risk.html

As the charts below show, Gundlach is correct: we are in a continued leverage risk super-cycle. While nominal debt to nominal GDP ratio remains below pre-GFC peak, nominal levels of debt are worrying and debt dynamics are showing sharpest or second sharpest speed of leveraging during the current recovery phase. Worse, since the start of the 1990s, all three non-financial debt sources, households, corporates and the Government, are drawing increasing leverage. 

14/5/19: Agent Trumpovich Fails to Deliver... Again...

In the months following China's retaliatory introduction of tariffs on U.S. soybean exports, both traditional and social media were abuzz with the screeching sound of 'analysts' claiming that Trump Administration trade war with China is a boon to Vladimir Putin's Russian economy.

Behold this from the

• Venerable CFR (albeit intellectually vulnerable): https://www.cfr.org/blog/trumps-trade-war-china-makes-russia-great-again and 
• WSJ: https://www.wsj.com/articles/russia-exploits-u-s-china-trade-tensions-to-sell-more-soybeans-11550745001 and 
• Bloomberg: https://www.bloomberg.com/news/articles/2018-05-17/china-buys-record-amount-of-russian-soy-as-it-shuns-u-s-growers and more Bloomberg https://www.bloomberg.com/news/articles/2018-11-07/china-turns-to-russia-in-search-to-replace-u-s-soybeans and 
• And a good collection of sources across the media here: https://www.dailykos.com/stories/2019/1/7/1824363/-Is-Russia-profiting-from-Trump-tariffs-on-China and
• The Hill: https://thehill.com/blogs/blog-briefing-room/388178-china-buys-record-amount-of-russian-soybeans-amid-halt-on-us-imports and
• A more somber and sober analysis from Carnegie Moscow Center: https://carnegie.ru/commentary/77443 and so on

 Alas, given that Russia supplies less than 1% of Chinese imports of soybeans, it might take a major Congressional investigation and a few PoliSci 'Russia experts' to get serious imaginary beef on the Trump Administration's alleged Russia-benefiting policies. Here is the data from ... well... Bloomberg, via Global macro Monitor (https://global-macro-monitor.com/2019/05/14/who-pays-the-tariffs/) showing that Russia is hardly a major winner from Trump's Trade Wars when it comes to soybeans:

Let's put the thin blue line of 'Russia winning, thanks to Trump' through some analysis:

1. There is no dramatic massive rise in Russian exports of soybeans to China in 2018, and some dip in 2019.
2. 2018 increase - moderate - came in after 2017 moderate decrease.
3. Russian exports of soybeans to China have been rising-falling-rising very gently since 2013.

Friendly Canada quietly dramatically increased its sales of soybeans to China in the wake of the Trade War, although its exports were rising since 2015. Argentina also acted as a substitute supplier to China during the Trade War period so far, but that increase came on foot of massive collapse in exports to China since the start of this decade. In fact, while the U.S. share of Chinese imports of soybeans fell 30 percentage points, Brazil's share rose 35 percentage points. Trump's Administration-triggered Trade War with China has helped Brazil first, followed by Canada and Argentina. Russia hardly featured in this dastardly plot to serve Vladimir Putin's interests by Agent Trumpovsky.

Sorry, my dear friends in American mass media. You've faked another factoid.

14/5/19: TrueEconomics makes Top 100 Blogs by the Intelligent Economist

Delighted to see TrueEconomics making it (for the fourth year running) into https://www.intelligenteconomist.com/economics-blogs/ Intelligent Economist's Top 100 Economics Blogs of 2019.

14/5/19: Monetary Policy at the edge of QE

My new column for the Cayman Financial Review on the current twists in global Monetary Policies is now available on line: https://www.caymanfinancialreview.com/2019/05/07/monetary-policy-at-the-edge-of-qe/.

14/5/19: Trump's Trade Wars and Global Growth Slowdown Put Pressure on Corporate Earnings

The combined impacts of rising dollar strength, reduced growth momentum in the global economy and President Trump's trade wars are driving down earnings growth across S&P500 companies with double-digit drop in earnings of companies with more global (>50% of sales outside the U.S.) as opposed to domestic (<50 exposures.="" of="" p="" sales="" the="" u.s.="" within="">
Per Factset data, released May 13, "The blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings decline for the S&P 500 for Q1 2019 is -0.5%. For companies that generate more than 50% of sales inside the U.S., the blended earnings growth rate is 6.2%. For companies that generate less than 50% of sales inside the U.S., the blended earnings decline is -12.8%."

5/5/19: House Prices and Household Incomes

A recent note from Brookings on the nature of the ongoing housing crisis in America has opened up with a bombastic statement:

"Over the past five years, median housing prices have risen faster than median incomes (Figure 1). While that’s generally good news for homeowners, it puts additional pressure on renters. Because renters generally earn lower incomes than homeowners, rising housing costs have regressive wealth implications." 

(Source: https://www.brookings.edu/blog/up-front/2019/05/02/your-city-has-a-housing-crisis-the-answer-is-more-less-building-money-regulation/)

It sounds plausible. And it sounds easy enough to understand for politicos of all hues to take up the claim and run with it. There is is even a handy chart to illustrate the argument:

Except the claim is not exactly consistent with the evidence presented in that chart.

For starters, Case-Shiller Index covers 20 largest metropolitan areas of the U.S., which is a sizeable chunk of population, but by far not the entire country. And rents, as the Brookings article correctly says, are rising across whole states (the article, for example referencing California, which is way larger than the largest urban areas of the state alone). Second point, the article is completely incorrectly uses nominal house prices inflation against real (inflation-adjusted) income growth figures. If the converse of the article claim held, and real incomes exceeded housing price inflation, it would mean rising purchasing power for American households shopping for houses. However, that is not what the housing markets are historically, longer-term about. They are more about hedging inflation. The third, and more important point is that the article refers to the last 5 years. Why? No reason provided. But even a glimpse at the chart supplied in Brookings paper is enough to say that the same problem persisted prior to the Great Recession, was reversed in the Great Recession, and then returned post-Great Recession.

What's really happening here?

Ok, let's take four time series:

• House prices 1: Median Sales Price of Houses Sold for the United States, Dollars, Annual, Not Seasonally Adjusted;
• House prices 2: S&P/Case-Shiller 20-City Composite Home Price Index, Index Jan 2000=100, Annual, Seasonally Adjusted (same as in Brookings article);
• Income 1: Real Median Household Income in the United States, 2017 CPI-U-RS Adjusted Dollars, Annual, Not Seasonally Adjusted (same as in Brookings article); and 
• Income 2: Nominal Median Household Income in the United States, Current Dollars, Annual, Not Seasonally Adjusted

Observe that we have data only through 2017 for the last two measures due to data reporting lags.

Now, compute annual rates of growth in all four and plot them:

Blue line is the reference point here. Notice that the grey line (real household income growth) is really underperforming house price growth over virtually all periods, except for one: the Great Recession. Yellow line, however, is less so. Nominal incomes have more benign relationship to nominal prices than real incomes do to nominal house prices. Why would that be surprising at all? I am not sure. It did surprise folks at the Brookings, though.

Let's compute some average rates of growth for all four series and calculate the difference between:

1. Real Median Household Income growth rate and the growth rate in the Median Sales Price of Houses, percentage points; and
2. Nominal Median Household Income growth rate and the growth rate in the Median Sales Price of Houses, percentage points.

Instead of using an arbitrary 5 years horizon, consider instead the business cycle and longer term averages. Here they are:

Historical averages are, respectively, -3.71 percent and -1.31 percent. Across the last Quantitative Easing cycle, -2.94 percent and -1.60%, ex-QE cycle, -4.05% and -1.19%. 

So what does the above tell us? Things are not as dramatic, using nationwide house prices, than the Brookings claim makes it sound, and, more importantly, there is no evidence of a significant departure in the current QE cycle from the past experiences. When it comes to property prices, hoses inflation seems to be much less divorced from real and nominal income growth rates in the last four years (the recovery period post-Great Recession) than in the periods prior to the GFC.

3/5/19: The Rich Get Richer when Central Banks Print Money

The Netherlands Central Bank has just published a fascinating new paper, titled "Monetary policy and the top one percent: Evidence from a century of modern economic history". Authored by Mehdi El Herradi and Aurélien Leroy, (Working Paper No. 632, De Nederlandsche Bank NV: https://www.dnb.nl/en/binaries/Working%20paper%20No.%20632_tcm47-383633.pdf), the paper "examines the distributional implications of monetary policy from a long-run perspective with data spanning a century of modern economic history in 12 advanced economies between 1920 and 2015, ...estimating the dynamic responses of the top 1% income share to a monetary policy shock." The authors "exploit the implications of the macroeconomic policy trilemma to identify exogenous variations in monetary conditions." Note: the macroeconomic policy trilemma "states that a country cannot simultaneously achieve free capital mobility, a fixed exchange rate and independent monetary policy".

Per authors, "The central idea that guided this paper’s argument is that the existing literature considers the distributional effects of monetary policy using data on inequality over a short period of time. However, inequalities tend to vary more in the medium-to-long run. We address this shortcoming by studying how changes in monetary policy stance over a century impacted the income distribution while controlling for the determinants of inequality."

They find that "loose monetary conditions strongly increase the top one percent’s income and vice versa. In fact, following an expansionary monetary policy shock, the share of national income held by the richest 1 percent increases by approximately 1 to 6 percentage points, according to estimates from the Panel VAR and Local Projections (LP). This effect is statistically significant in the medium run and economically considerable. We also demonstrate that the increase in top 1 percent’s share is arguably the result of higher asset prices. The baseline results hold under a battery of robustness checks, which (i) consider an alternative inequality measure, (ii) exclude the U.S. economy from the sample, (iii) specifically focus on the post-WWII period, (iv) remove control variables and (v) test different lag numbers. Furthermore, the regime-switching version of our model indicates that our conclusions are robust, regardless of the state of the economy."

In other words, accommodative monetary policies accommodate primarily those with significant starting wealth, and they do so via asset price inflation. Behold the summary of the last 10 years.