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Archive for the ‘Business Cycles’ Category

The U.S. Tax-Income Ratio

August 17, 2017 Leave a 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…

The Government Deficit and the Fed

April 13, 2017 1 comment

The Federal Reserve recently announced an increase in the interest rate which it sets. This has implications for the government deficit which may not be well understood by the average person so I thought that it might make sense to discuss the connection between the Federal Reserve and the government deficit. What this discussion reveals is that the Fed has been helping to finance the government deficit in the U.S.

The Consolidated Government Budget Constraint

There is a relationship between the government and the Fed known as the Consolidated Government Budget Constraint that is written below.

Spending + Interest Payments + Net Transfer Payments =

Tax Receipts + Change in the Stock of Debt + Change in the Monetary Base

The items on the left side of the equal sign are the uses of the government’s funds. Spending refers to the fact that the government buys goods and services, it makes interest payments to the holders of government debt, and it makes transfer payments to individuals in the economy. The right side of the equation is the list of sources for the government’s spending. It receives tax payments, it issues or retires bonds, and the last item reflects bond purchases or sales by the Federal Reserve. It is these last two items that reflect the connection between the Fed and the government deficit. Read more…

The Business Cycle and the 2016 Election

November 9, 2016 Leave a comment

The 2016 election is now over, thankfully, and so it might be a good time to provide some perspective on the electoral outcome. It seems safe to say that voter dissatisfaction motivated much of what happened yesterday and the state of the economy is one part of this voter discontent. In this post, I thought I would provide some data on the business cycle history of the U.S. which I believe was clearly part of the explanation for the election. Along the way, I will give a primer if you will on business cycle measurement. Read more…

Dismal Economic Growth Continues

The political primaries seem to reflect the dissatisfaction that many voters feel about the state of the U.S. Some of this discontent is likely to be related to the condition of the economy. As I have stated in earlier posts (read them here and here), economic growth is low by long-run U.S. standards and should be the top economic issue considered by the voters in making their voting decisions in the next presidential election.

The last recession ended in June 2009 (go to the web site for the National Bureau of Economic Research for business cycle dates).  Below is a table listing annual growth rates for real output (GDP) since the last recession ended.

Quarter Growth Rate
2009:3 1.3
2009:4 3.9
2010:1 1.7
2010:2 3.9
2010:3 2.7
2010:4 2.5
2011:1 -1.5
2011:2 2.9
2011:3 0.8
2011:4 4.6
2012:1 2.7
2012:2 1.9
2012:3 0.5
2012:4 0.1
2013:1 1.9
2013:2 1.1
2013:3 3.0
2013:4 3.8
2014:1 -0.9
2014:2 4.6
2014:3 4.3
2014:4 2.1
2015:1 0.6
2015:2 3.9
2015:3 2.0
2015:4 1.4
2016:1 0.5

The data in the table is drawn directly from the Bureau of Economic Analysis, the federal agency responsible for producing the National Income and Product Accounts.

The average growth rate in this table is 2.1 percent. Over the century ending at the beginning of the last recession, real output grew at 3 percent per year. The difference between 2.1 and 3 percent is enormous over long periods of time. Thus there will be enormous losses of real income in store for U.S. residents if the dismal growth rate in the table continues.

Unfortunately, I have not heard a great deal in the press about this unfolding disaster (because a disaster is exactly what it is). But no economic issue is even close in importance to the question of how we can reverse this decline in economic growth.

The 2008 Financial Crisis Revisited

January 8, 2016 1 comment

A movie (The Big Short) has recently appeared that attempts to portray the events leading to the financial crisis of 2008. While I have not seen the movie but plan to do so, I have seen statements that the movie does not describe the role of the federal government in this fiasco. Whether or not that is true, there is some information easily available which provides an account of the government’s role in this crisis.

Peter Wallison is on the staff of the American Enterprise Institute.  He has written extensively on the financial crisis and he has a recent blog post giving his views on risk-taking by financial firms that was induced by the federal government.

I have also written previously on the crisis (read those posts here and here).  All of the information referred to in this post points to the affordable housing goals adopted by the federal government as providing incentives for financial firms to take on riskier mortgages. This does not mean that the federal government was the only cause of the crisis but it was a big part of the forces causing this latest U.S. recession.

Greece

February 20, 2015 Leave a comment

Greece has a newly-elected government which campaigned on the promise that, if elected, it would renegotiate the bailout terms that previously were imposed upon the Greek economy by a previous government and its financial bailout partners. The reason for the desire to renegotiate terms is that Greece has been in recession with high unemployment and declining output for some time and the terms of the bailout require higher taxes and reduced spending, among other things, as a requirement for loans to keep the government from defaulting on its debt.  This drama seems to me to offer a number of lessons for the U.S. and other countries running persistent government deficits.

The Fallacy of Composition

Economists know that what is true for an individual in an economy is not necessarily true in the aggregate economy.  This fact is known as the Fallacy of Composition.  So if Greek politicians promise transfer payments to some Greek citizens, this does not imply that those politicians can promise such payments to all citizens.  Once you add up all the promises, one needs to ask how this will be financed and in many countries, such as the U.S., the answer is borrowing to keep these promises. Each individual wants what he or she has been promised but, if a government is unable to borrow, then what is true at the individual level cannot be true in the aggregate. Greece cannot keep all of the promises that it has made because it will not be able to continuously borrow to do so.

Greece and the EU

Greece is a member of the EU and so it cannot print money to cover its deficits if it is unable to borrow.  The reason is that Greece does not control the EU Central Bank.  If it did control its own money stock, it would undoubtedly be in the throes of a hyperinflation because it would be printing money to finance its deficits. Since it cannot print money, it sought loans to keep the party going but reduced spending and higher taxes were the price it paid for its bailout. The recession resulting from these terms are what has prompted the desire to renege on its previous agreement.

Ultimately, structural reforms are needed to promote economic growth, much like those discussed previously in this blog in connection with Italy which has problems similar to Greece (see Why Italy Declines). These reforms are so-called supply-side policies that remove regulatory and other impediments that reduce economic growth. These reforms appear not to be part of the bailout requirements but these reforms are the only way that the Greeks can achieve real economic progress.

Gasp!!!: An Example of Good Economic Policy by the House

July 30, 2014 3 comments

I know – you are wondering if there is a misprint in the title. While I have been a frequent critic of economic policy by the government, I am here to write about an example of good behavior by the House of Representatives. Specifically, a bill has been introduced (read BILLS-113-hr5018-10-pages) which would require a policy rule to be used by the Fed as it conducts monetary policy.

Economists have devoted a great deal of research to the study of rules-based policymaking by the monetary authorities. Here is an example of a rule that might be used.

i = π + .5·(Y – YP)/YP + .5·(π – 2) + 2

In the above equation, i is the interest rate controlled by the Fed (such as the Federal Funds rate), π is the inflation rate, and YP is the level of real output at full employment. There are a number of advantages to using this rule. Read more…

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