Archive for the ‘Business Cycles’ Category


The Bureau of Economic Analysis ( is the federal government agency that manages the NIPA (National Income and Product Accounts) for the U.S. Just recently we saw the release of first quarter 2018 real GDP growth but these estimates arrive with a considerable delay after the end of a calendar quarter. Often it is useful for individuals to have some advanced predictions about future real GDP. The Atlanta Federal Reserve Bank has a project which generates such predictions, a project called GDPNow. I provide this link here for those interested in a prediction of future real GDP.

It may also be of interest to readers to know that the current forecast for second quarter real GDP growth from this source is now 4.1 percent which, if accurate, suggests that the recent tax reform has indeed had a very substantial impact upon U.S. real economic activity. This should not come as a big surprise since there are other sources of information (such as statements by the Federal Reserve) consistent with the view that the economy is now in a boom.


Financing Government Deficits with Money

May 10, 2018 6 comments

In an earlier post, I described the budget constraint faced by the federal government. Here I want to point out how a deficit can lead to inflation. I will also indicate how the European Union (EU) and Greece are related to this discussion since there is an interesting difference between the U.S. and Greece regarding deficits and inflation.

Financing Deficits by the Central Bank

Suppose that the government has a deficit meaning that its spending for all purposes exceeds its tax revenue and that the government is unwilling to raise tax rates and/or cut spending. Now imagine that lenders will not lend to the government by buying the bonds that the government has tried to sell. In this situation, one financing option (bond sales to the public) for deficits is unavailable.  If nothing else is done to deal with the deficit, the government simply runs out of money and must shut down its operations until new tax money arises. But there is another option in the U.S. and many other countries; the central bank (the Federal Reserve in the U.S.) can buy the bonds sold by the government.

To see how this works, consider what the Fed can do. The government sells the bonds sold by the government and creates bank reserves as a result. Bank reserves would just be deposits at the Fed owned by banks. Those bank reserves will expand the money stock and so we have the Fed “printing” money to finance the government’s deficit. But to paraphrase the late Milton Friedman, inflation is a monetary phenomenon. Thus the government’s deficit can be accompanied by inflation. This appears to be happening now in the socialist paradise of Venezuela. But for Greece the situation is different because of its membership in the European Union (EU). Read more…

The Government Budget Constraint

May 3, 2018 1 comment

My last post reported on the latest Congressional Budget Office (CBO) analysis of the federal government budget showing unprecedented increases in the ratio of government debt to GDP. That ratio emerges from the government’s budget constraint which is the topic addressed here.

The Government Budget Constraint

The government’s sources and uses of funds are collected together into one expression, known as the Government Budget Constraint, which states that the sources of funds must equal the uses of funds by the government. The table below lists these items.

Uses of Funds Sources of Funds
Spending on Goods and Services Tax Revenue
Interest Payments Government Bond Issue
Net Transfer Payments

The uses of funds include spending on goods and services, interest payments, and net transfer payments to the public. This latter category includes, among other things, the Social Security and Medicare programs. So Net Transfer Payments rise as the entitlements crisis unfolds. If interest rates on government debt rise, interest payments by the government must rise as well.

On the sources side of the ledger, the government gets tax revenue which it uses to pay for its spending and/or it may issue government bonds to pay for spending if its spending exceeds its tax revenue. So the CBO report said that the government will be running deficits increasing in size into the future and thus will have to issue increasing amounts of government debt to finance its spending.

But this table does not include the role of the Federal Reserve which is included in a related concept which we discuss now. Read more…

Investment and Tax Reform

March 23, 2018 Leave a comment

The tax reform recently enacted should have an impact upon investment spending by firms. In a previous post, I argued that the ability to expense (deduct from revenue in the computation of taxable income) all of the investment done by firms in a year should cause investment to rise in the U.S. This is crucial because our living standards depend in part on the stock of capital goods in our economy which in turn affects labor productivity.  More capital should enhance or increase the productivity of labor and thus real wages.

For future reference, it is a good idea to get a look at some data so that, in a future post when more data is available, we can see if investment has responded to tax reform. For this reason, consider the following table.

2017:01 19057.705 2383.409 12.51
2017:02 19250.009 2433.551 12.64
2017:03 19500.602 2468.374 12.66
2017:04 19736.491 2511.182 12.72

In the table for the year 2017, quarterly GDP is given (so we have GDP in the range of $19 Trillion), NRFI is Nonresidential Fixed Investment, a sensible measure of investment spending by firms, and the ratio of NFRI to GDP.  So we see that about 12.5 percent of GDP has been devoted to building additional nonresidential plant and equipment.

An increase in this ratio would be a reasonable measure showing that tax reform is actually raising investment in the U.S. We will see if this is the case when new data for 2018 is available.

Incentives Matter

January 20, 2018 1 comment

I have stated on this blog that if the social science of economics is about anything, it is about the powerful economic effects of incentives. The recent media reports about Apple and other firms building new plants in the U.S., raising money wage rates, and increasing employment, are extraordinary examples of how powerful incentives can be in changing economic behavior. All of these stories stem from the tax reform recently passed.

  1. Real Wages. I stated that reducing the corporate tax rate would increase the demand for labor and cause real wages to rise. We have already had announcements about higher money, and thus real, wages paid by firms.
  2. New Plant and Equipment. Apple announed that it will build new plant in the U.S. as other firms have stated as a result of the tax reform.
  3. Tax Revenue. Much has been written about the fact that firms refused to bring money back to the U.S. to avoid double taxation of their income. Apple will pay $38 Billion in taxes once it returns funds to the U.S. so the federal government gets a one-time windfall of revenue due to the tax reform from Apple.
  4. Employment. Apple and other firms are planning to increase employment, with Apple stating that it will hire 20,000 people.

There are other examples (yes they are anecdotes) that I can give but those above make the point. What is most entertaining is to watch Democratic politicians pretend that these effects are nonexistent when, in fact, they should set off a growth boom of the sort that we have not seen in many years. First quarter GDP numbers should be most interesting when they are released. Stay tuned.

But another lesson from these events is how easy it is for government to reduce economic activity or economic growth when it imposes its policies.

All of this provides a wonderful set of examples of economics in action. This is why I got interested in economics when I was a student because it has so much to offer for understanding the world around us.

The Obama Growth Record

January 4, 2018 Leave a comment

The final aspect of the new tax bill is that it may increase economic growth and so I thought I would post a final bit of data to be used down the road in assessing the impact of the new tax reform. And that data is the growth rate of real output in the economy during the two terms of Barack Obama and the record for President Trump.

The Obama Record

After the eight years that President Obama was in office, we can provide the annualized quarterly growth rates that occurred during those two terms. Using data from the Bureau of Economic Analysis (, the average over 2009-2016 is 1.8 percent (some quarterly data was provided in this post). As I pointed out previously, this is below the long-run growth rate of three percent that the U.S. generated over the century ending at the onset of the last recession. It is a bit unfair to use the first quarter or two of a presidency since the new president can hardly be blamed for what he/she inherited but we need a consistent measure so this seems as good as any.

The Trump Record

We have only a few data points regarding the President Trump growth record but here is what is available: 2017Q1 1.2 percent, 2017Q2 3.1 percent, 2017Q3 3.2 percent. This is an average of 2.5 percent which is a substantial improvement over the Obama record. The existing numbers don’t mean all that much since there are so few of them but we will see if this persists. If it does, this will provide some evidence that the tax reform has had the impact anticipated by its designers.

The U.S. Tax-Income Ratio

August 17, 2017 1 comment

I recently saw a news report about federal government tax receipts and I began to wonder what trends, if any, have been present in the public’s support of government as measured by its tax payments. Most media reports that I have seen focus on the dollar amounts of federal government tax revenue but it is more informative to include state and local governments as well so that we can get a more accurate measure of public tax payments to the government.

But rather than looking at tax payments in dollars, it is more useful to look at tax shares of our incomes. The economy grows over time and so it is more informative to see what fraction of our incomes are paid to the government so that we can adjust for the size of the economy as it changes through time. For this post, I will use Gross Domestic Product (GDP) as a measure of our incomes and I will use Federal plus State and Local receipts to capture the revenues of all sorts that flow to the government. All of the data was drawn from the St. Louis Federal Reserve Bank FRED database which is freely available to the public. The data is annual and it covers 1929 through 2016. Read more…

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A blog by John B. Taylor

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