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Graph of the Day

Winter 2018 will use the (new) 5th ed of Krugman & Wells.

Nov 29, 2017

Here are the target upper limit for Federal funds,
and the realized interest rate, both on a daily basis. Rock steady. As you can see, other short-term rates track this closely. Of course most businesses need finance longer than a month or even three; no individual building a home cares [or should care – stay away from variable rate mortgages!] about anything other than a 20- or 30-year interest rate.

Compare this with the "monetarist" period during Paul Volcker's chairmanship of the Fed. Interest rates of course were high, but they were also volatile. See for yourself:

Nov 15, 2017

When the Fed was set up, the US was still heavily agrarian – in 1900 close to half the US population lived on the farm or in small rural communities. As a result the supply and demand for funds moved in a predictable seasonal pattern, with borrowing peaking just prior to harvest, followed by a period when farmers would be flush with cash. The resulted in strong seasonal movements in interest rates, and in different interest rates in different parts of the country. But by 1913 the economy was much more urban with an orientation towards manufacturing and services, and this seasonal shift in interest rates did not match those needs. So one purpose of the Fed was to lessen this seasonality. To do that they could accumulate more assets – create more Federal Funds – to hold their target rate and offset loan demand. They still do that today, though to a much more modest extent, as per the graph below from the Credit Easing data page of the Federal Reserve Bank of Cleveland.

“...most people do not buy a home but rather commit to a long-term payment scheme...”

Izabella Kaminska, FTAlphaville, November 7, 2017
And the good phrasing doesn't stop there: her line refers to a Convexity Maven (Harley Bassman) note "House of Cards."

Nov 9, 2017

So here is the composition of money in our economy, going from the most liquid at the bottom, to the least liquid at the top. During the past 60 years institutional changes such as the removal of "Regulation Q" ceilings on the interest rates banks could pay on deposits have shifted. At one time moving money out of a savings account required a trip to the bank, passbook in hand, and they might hassle you a bit. Now you can have one tied to your checking account and set it up to shift funds automatically to checking if your balance gets low. Likewise it's easier today to withdraw funds from an MMMF (Money Market Mutual Fund). Those were invented in the early 1970s, and rose in visibility along with inflation, because their yields were tied to the nominal yields on short-term US government bonds, which by late 1978 paid 9% while savings account interest rates were capped at 5% until 1980. More on that later.

Ten days since the last graph ... so time to add a few. Here are the largest transfer programs in the US as a "stacked graph." [Technical note: in FRED you first edit the graph, adding all the series. You then format using graph type of "area" and stacking = "normal" to see growth over time. If you choose stacking = "percent" then you get the shares of the total, as in the graph below.] [Details: BEA responded quickly to my email. Details of Government Current Transfers are in NIPA Table 3.12 Government Social Benefits.]

First, you can see the magnitude of government transfer programs. (There are private transfers, too, particularly employer-funded pensions. Those aren't large, or more precisely are no longer large.) In our $20 trillion economy, they come to $2,700 billion or about 14% of GDP. (Remember, transfers don't show up directly in GDP, they only enter when someone spends the money.) However, the graph is not particularly helpful, because this is nominal GDP, which reflects not just "real" growth but also inflation. To better convey the magnitude, you should divide each of these series by nominal GDP. OK, rather than ask you to do that, here's the graph for the total rather than for each component. You can see that there was a big increase with the Great Recession, but that the amount is slowly decreasing. I expect that is muted because of the retirement of the Baby Boomers, but have not dug in deeper. Anyway, it's about 14% of GDP.

We can also look at the composition. In the early 1950s there were few retirees as a share of the population, and many of those retired did not qualify for social security. That changed as more and more workers were "vested" in the program (which was enacted only in 1937). As a share unemployment was much higher, but that's as part of a very small total. The catch-all other category looms large as a share of transfers, but small as a share of GDP. Neither Medicare nor Medicaid existed until 1966. Today retirement programs predominate: social security and medicare together are $1.6 trillion.

All of this provides an anchor to the multiplier: these flows continue independent of the state of the economy. So even in a recession, there's a large numerator to our multiplier framework. In addition, unemployment benefits are generally trivial, and they are also time-limited (6 months). So during a recession they act as another component of our "automatic stabilizer," allowing people to cut consumption less and thereby partially offsetting (through the multiplier) the drop in GDP and employment that would otherwise occur.

October 20, 2017

Krugman won his Nobel Prize for work in international trade, but his "open economy" chapter remains at the end of the book. That textbook structure dates back to the first true "principles" text by Paul Samuelson (another Nobel laureate) in 1947. Since then all successful new texts chose to market themselves as potential replacements, which is realistic only if they are close to what econ profs were already using. We do not see product differentiation! But that's a topic for Econ 243...

In 1947 trade was insignificant –Western Europe and Japan were still in ashes, China was descending into civil war while the Cold War was closing off Eastern Europe. As Levinson helps make clear, the structural shift came only with the first oil crisis, which put money into the hands of OPEC, who soon became significant importers. It is also the era when the GATT process was starting to have an impact (the Kennedy Round was signed in 1967, the Tokyo Round in 1979) while containerization was making it easier to move goods. And at the micro level it marked the point where Europe and Japan were high enough in income to matter as markets, and had caught up in an array of technologies (particularly in differentiated products such as motor vehicles) that let them also become exporters. For example, US imports were at the 5% level into the 1970s, first hit 10% in 1979, and 15% in 2004 – and were still at 15% in Q2 of 2017.

Later this term we'll analyze trade balances, returning to our (S - I) + (T - G) ≡ (X - M) framework. That will help us understand why a macroeconomically significant trade deficit only opened up in the mid 1980s, why it shrank going into the 1990s, and why it then again expanded and has remained that way. Ours will be a macroeconomic story, one in which "competitiveness" is not the issue.

October 16, 2017

The default graph on FRED – today was the latest data release – is the total number of houses under construction. (Of course there are many series, including permits issues, completions, and regional breakdowns.) However, since 1960 the US population has risen 80%, from 180 million to 325 million (the estimate for 2017). Everything else being equal – and it's not, we know that the baby boomers are retiring and downsizing – we would expect the desired amount of total housing to reflect the level of population. Divided by population, the current level of housing starts remains lower than at any time prior to the Great Recession.

One factor is that we clearly built a lot of housing in the years leading up to 2007, when prices suggested demand was insatiable. Housing lasts a long while. Absent a policy to bulldose unoccupied "bubble" housing, which no one seriously suggested, these structures will still be around in 2050. Adding to the challenge is that what's going up are multifamily dwellings. That will keep the squeeze on the construction of single family, which casual observation suggest tend to be larger and also cost more to build, that is, create more jobs. We'll see what happens, but my sense is that it is not a good time to be an architect, and will remain that way for years to come. If housing is your passion, then go for renovations. "This Old House" is popular for a reason!


October 16, 2017

The personal savings rate in this graph does not behave as our life cycle model would have us expect. What else could be going on? One possibility is that we have more complex motives for saving that operate over different time horizons. In other words, the life cycle model is incomplete. Another is that this reflects an aggregation issue, even though individual households do try to smooth consumption. A combination of the two is to note that some people are cash flow constrained. That is, they have no assets and little or no access to credit. If their income falls and they want to keep their house or especially their car, they have to cut consumption a lot to make loan payments. That is, payments (savings!) remain high (the numerator), while income falls (the denominator), so the ratio, the savings rate, rises.

Can you think of additional savings motives? Do you save and then dissave money each month? Do you keep a positive balance in your checking account? Are your grandparents saving money?

Now what is true of households is not necessarily the case for other actors in our economy. State and local government turned into big dis-savers in 2010. What's going on here? Why the rebound – or is it merely a return to normal, and not offsetting behavior?

October 11, 2017

Among the "headline" inflation numbers, experienced observers look not at the overall monthly, seasonally-adjusted CPI but at the CPI less food and energy. You all know what's happened to energy, but you also know that it's temporary, until the effects of Harvey wear off. Food has such effects when a droughts or floods will hit a major crop area one year but not the next. So look at the graphs – not a formal statistical test, but a start! – and look for co-movements of these three indices. Don't see any? Maybe that's why the focus on "core" inflation.

October 11, 2017

This graph shows (i) the nominal interest rate, here on 3-month Treasury bills (which are bonds), (ii) the corresponding 3-month rate of inflation for the economy as a whole, in the form of the quarterly GDP deflator [which is thus much broader than the CPI measure of inflation, as befits an economy-wide interest rate], and (iii) the difference of the two, the "real" interest rate. Note that you can drag the bar at the bottom to narrow the time frame. What has happened these past 10 years?

This is the WordPress site for Prof Smitka's two sections of Econ 102, Macroeconomic Principles. The tabs give you the syllabus, schedule, and blogs for each of the two sections. I will continue to tweak the site to make sure posts and discussion are front and center.

If you've not looked at this site before, blogs are divided for the two section tabs – see the CGL Blog or Huntley Blog – for posts. Ones I write appear in both places, student posts appear only in the tab specific to their class.

Remember that you need to comment on the title of a post to make a comment. It works better if you're logged in, but I periodically check the site and can approve comments made while you're not logged in. Any classmate logged in should also be able to do that. However, your comment won't appear until a classmate or I does that.

The Professor's Blog, Autos & Economics
The Professor's Posts:

  • Monetary Policy (11/30/2017)

    Nov 29, 2017

    Here are the target upper limit for Federal funds,
    and the realized interest rate, both on a daily basis. Rock steady. As you can see, other short-term rates track this closely. Of course most businesses need finance longer than a month or even three; no individual building a home cares [or should care – stay away from variable rate mortgages!] about anything other than a 20- or 30-year interest rate.

    Compare this with the "monetarist" period during Paul Volcker's chairmanship of the Fed. Interest rates of course were high, but they were also volatile. See for yourself:

  • Structural Budget Deficits (10/30/2017)

    Fiscal Year The (Unadjusted) Deficit Cyclical Component Structural Deficit Change
    1992 290 60 230 n/a
    1993 255 47 208 -22
    1994 203 15 188 -20
    1995 193 -3 196 8
    1996 94 -8 102 -94
    1997 22 15 37 -65
    1998 -69 47 -22 -59
    1999 -126 86 -39 -17
    2000 -236 137 -102 -63
    2001 -128 39 -89 13
    2002 158 85 73 162
    2003 378 106 271 198
    2004 413 61 351 80
    2005 318 15 304 -47
    2006 248 -24 272 -32
    2007 161 -107 268 -4
    2008 459 -41 500 232
    2009 1413 283 1129 629
    2010 1293 404 889 -240
    2011 1300 399 900 11
    2012 1087 363 724 -176
    2013 680 344 335 -389
    2014 483 308 176 -159
    2015 438 241 342 166
    2016 616 156 318 -24
    2017 504 74 389 71
    2018 454 24 455 74
    2019 549 -6 523 68
    2020 534 -10 564 41
    2021 552 3 598 34
    2022 660 -1 627 29
    2023 677 0 634 7
    2024 650 0 639 5
    2025 741 0 687 48
    2026 793 0 793 106

    Note: The Fiscal Year begins October 1st. Thus FY1995 ends Sept 30, 1995. Data from Congressional Budget Office. Analytical Perspectives: Budget of the United States Government. Various years, 1995-2017.

  • U.S. Trade Deficit (10/25/2017)

    Since 1992 to the autumn of 2008 right before the economic recession, the U.S. has "suffered" from an increasingly growing trade deficit where the U.S. is a net importer. The recession temporarily cut this trade deficit, but since the end of the recession in mid-2009 the deficit has once again grown. Part of President Trump's trade policy was a promise to "renegotiate" trade deals to the "benefit" of America, presumably implying that the U.S. should export more and import less.

    With the recent depreciation of the dollar over the summer, it does seem as if U.S. exports will increase while imports (especially from Europe where the Euro has gone up) will decrease. However, it is also important to note that the U.S. trade deficit is not as bad as it looks in the first graph when the fact that the U.S. is a net exporter and the rise in GDP are taken into account. This is reflective of Levinson's point of the U.S. becoming a service-oriented economy rather than a labor-intensive manufacturing one. In this sense, it does not necessarily seem bad if the U.S. has a trade deficit, because importing things such as clothes allows us to specialize in what we do best (i.e. capital intensive work). Why did the trade deficit drop during the recession of 2008? Why are we a net exporter of services and can you think of some examples?

    See: FRED 3 view of trade deficit and NYT Charts

    Ayub Herman & Jack Johnson

  • Cobalt prices (8/27/2017)

    WordPress added various functions over the summer, and I'm testing the ability to embed graphs here. Why cobalt prices? Cobalt is a critical part of electric vehicle batteries, as cathodes rely upon nickel-chrome oxide crystals of various compositions (eg, along with manganese). It is a potential game-stopper, because enough is used that chrome content affects the overall price of a car. There are other chemistries ... in the lab. However, the path from lab to cost-effective volume production is at a minimum 20 years, and then adding capacity to meet the potential size of the market can (in the automotive case) take an additional two decades.

    Now this isn't macroeconomics, but it is certainly a good exemplar of the challenges of turning exciting technologies into commercial realities. That IS of macroeconomic significance. Indeed, in the US context productivity is potentially the single most important contributor to economic growth over the 40-plus years your working life.

    This however is a statement that needs both a theoretical foundation – what underlies growth? – and am empirical foundation – what are the numbers in the US context, and can we usefully project them for the next 4 decades? Making predictions is challenging, the moreso if they are about the distant future. Be skeptical about claims that pin that down to a precise number; be thoughtful about whether we can put likely bounds on what will happen, e.g., can we achieve 3% growth?


    If I understand correctly, both these graphs should update automatically – come back in a month to see whether they still reflects Aug 26th data, which for cobalt happened to be the then historic peak of $60,750 per (metric) ton.

  • Textbook options (8/10/2017)

    I just sat through a webinar by Macmillan, here is a list of textbook options. The bookstore already has used copies at $150+ without any of the online add-ons. Look around, but buying one or another ebook and/or printable looseleaf version looks to be the least costly route. If so, there's no need to rush to buy the text in advance of the start of classes.

    Macmillan Krugman & Wells Macro takes you to the textbook page and HERE jumps you to the Macmillan student bookstore page. They try to upsell, with various packages as per below. These packages do however appear to add value, unlike the add-ons I examined a few years back.

    • just the Looseleaf which gives you an eBook version that you can print, at 5¢ a page that's cheaper than buying the physical book, esp as the first few chapters are a review of Micro
    • the LaunchPad option includes an eBook. LaunchPad looks quite useful, consider adding it
    • the slightly more expensive FlipIt + Launchpad + Looseleaf Sheets adds videos and other pre-class material that is well done. not a costly upgrade
    • Sapling is a fairly sophisticated homework/quiz function. I think you can purchase after-the-fact, again, I'll update once I've checked with the bookstore as I don't want to mandate something after you've bought other components.

    Amazon appears to be more expensive than any of the above options, and what they sell in general will not include access codes to LaunchPad / FlipIt / Sapling. However you may be able to find a used 3rd edition. I've not been able to find a Table of Contents online to confirm, but typically changes are modest (updated graphs, examples but no wholesale changes to content and order or presentation). If you find a ToC, email it to me and I'll confirm whether the old edition is adequate.

  • Econ Snapshot (7/30/2017)

    Econ Snapshot provides exactly that.