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increase in federal debt growth occurs some eight years earlier than we thought the difference is not due to any changes i made to the blue line i made no such changes i only changed the red line from a wiggly worm to a constant average growth rate value so that the red line does not obstruct our view of the blue line almost done we ve been looking off and on lately at a picture of the federal debt relative to gdp this fred graph from noah graph 4 the federal debt relative to gdp it shows the federal debt relative to a wiggly worm according to our graph 1 above the wiggly worm ran low in the years before 1977 and then high till the year 2000 running low before 1977 it makes the federal debt look falsely high low as it is in those years on graph 4 it is falsely high running high between 1977 and 2000 it makes the federal debt look falsely low i m saying that the growth of federal debt was less than we think in the years before 1977 and more than we think in the years after we are deceived why are we deceived because we think of the federal debt in comparison to the wiggly path of actual gdp but now we can fix that we can use the constant growth rate approximation of gdp in place of actual gdp this will give us a version of federal debt relative to gdp that is similar to graph 4 without the distortions arising from variations in gdp growth graph 5 below shows in red the same relative to actual gdp data that we see on graph 4 in particular the red line shows the increase beginning around 1982 the increase noah calls the explosion in u s government debt the blue line on 5 which shows the same federal debt but shows it relative to the constant growth rate approximation of gdp shows that increase beginning around 1975 that is the same difference we noticed above comparing graphs 2 and 3 the federal debt relative to actual gdp red and relative to a constant growth approximation of gdp blue graph 5 the two lines are very similar that says the two measures of gdp are very similar and we would want that to be true so we can have confidence in the approximation but the two lines also differ in the years before 1977 the blue line is lower in the years between 1977 and 2000 the blue line is higher but look also at the transition from downtrend in the 1960s to uptrend in the 1980s the red line using actual gdp hits bottom around 1974 and runs flat until 1982 and then suddenly starts on its upward journey we know that of course noah pointed it out the transition from downtrend to uptrend is different for the blue line it is earlier instead of going suddenly flat in 1974 like the red line the blue line begins its uptrend there that uptrend is definitely stronger after 1982 so if you were wanting to blame reagan for the big increase in federal debt i guess you can still do that but 1982 is not where the uptrend starts not for the blue line not for the federal debt and the only difference between the red and blue lines is that the red line is shaped by vagaries in both debt growth and gdp growth the blue line is not the blue line is the better measure of federal debt growth and the postwar increase in federal debt growth started before 1982 the excel file at google drive posted by the arthurian at 4 00 am 1 comments sunday august 23 2015 and you thought milton friedman wasn t funny milton friedman the price system is the mechanism that performs this task without central direction without requiring people to speak to one another or to like one another free to choose chapter one posted by the arthurian at 6 51 am 0 comments saturday august 22 2015 oh no this again if you look at noah s graph of debt relative to gdp it certainly looks like the big increase started around 1982 graph 1 noah s graph noah s graph shows the federal debt as a percent of gdp i called up gdp red and the federal debt blue as two separate series and looked at the growth rates for those two series sure enough the blue line is way up high in the 1980s graph 2 click graph for fred source page but that s not the only thing i see the blue line is way up high in the 1980s and it is way down low in the 1950s and into the mid 1960s it was low before the mid 1960s and high after the early 1980s from the mid 1960s to the early 1980s the blue line debt growth changes from very low to very high between the mid 60s and the early 80s the growth of debt went from low to high so it doesn t make sense to me that noah says a deficit explosion began after the early 1980s the explosion started in the mid 1960s and ended in the early 1980s noah has it wrong and if you look at the blue line on graph 2 yes debt growth reaches a high point in the early 1980s but the trend was downhill from that moment to the year 2000 why does noah s graph show increase beginning arount 1982 why does it show the debt essentially flat all through the 1970s while graph 2 shows increasing debt since the mid 1960s well because noah s graph does not show debt it shows debt divided by gdp that s not the same thing graph 2 shows the growth rates separately so that we can better evaluate what we see on noah s graph on 2 the blue line runs below the red for almost all the years before 1982 then the blue line runs above the red for almost all the years since 1982 so the federal debt was growing more slowly than gdp before 1982 and faster than gdp after 1982 this transition this change that happened around 1982 affects the appearance of graph 1 it pushes the debt to gdp ratio lower before 1982 and higher afterwards this is one of the reasons noah thinks he sees an explosion of deficits beginning in the early 1980s there was a decrease in the growth of gdp noah has it wrong posted by the arthurian at 9 05 am 3 comments friday august 21 2015 def inflation i was going to find milton friedman s definition of inflation i thought that would be a good place to go next but before i even got started i got email from greg if you leave a comment on the blog i get it as email so i don t miss it and greg left a comment on the blog actually art inflation is most commonly defined as a sustained rise in the general price level over time so there ya go that s pretty much word for word what i was attributing to friedman i m still looking for that one but meanwhile i found this from investopedia inflation is defined as a sustained increase in the general level of prices for goods and services it is measured as an annual percentage increase as inflation rises every dollar you own buys a smaller percentage of a good or service the value of a dollar does not stay constant when there is inflation the value of a dollar is observed in terms of purchasing power when inflation goes up there is a decline in the purchasing power of money for example if the inflation rate is 2 annually then theoretically a 1 pack of gum will cost 1 02 in a year okay except a pack of gum is still a nickel right the company did not raise the original five cent price of a five stick package of wrigley s spearmint juicy fruit and doublemint gums until 1971 management reluctantly did so by creating a seven stick package and charging a dime for it oh never mind come to think of it i probably haven t bought gum since the 1960s posted by the arthurian at 4 00 am 9 comments labels def inflation thursday august 20 2015 four measures of inflation and five interest rates the inflation measures are blue the interest rates are red the one causes the other they move together they don t what do you see i ll tell you what i see i m not nit pickin it just a quick look on the way up in the 1960s and 1970s rising inflation snuck up on inflation expectations and closed the gap with interest rates we didn t expect the inflation we were getting on the way down in the 1980s and 1990s falling inflation again surprised inflation expectations and the gap with interest rates grew we didn t expect the disinflation we were getting doesn t say much about the relation between interest and inflation does it says a lot about expectations though posted by the arthurian at 4 00 am 1 comments wednesday august 19 2015 three make that four there it is mid june of this year i thought it was recent but not that recent three measures of inflation graph 1 three measures of inflation cpi the gdp deflator and the pce index i knew about the consumer price index and the gdp deflator for a long time i still have photocopies of statistical abstract tables from the early 1980s they cost 25 cents apiece at the library but i never heard of the pce price index till just a few years ago now the other day i read brian romanchuk s response to nathan tankus romanchuk writes yes economists who argue that inflation reduces the burden of debt are using consumer price inflation as a proxy for generalised inflation which i describe below this is technically incorrect but as the chart below shows there s a fairly strong correlation between cpi inflation and wage inflation for very good reasons what follows is most interesting a divergence between the two has implications for the wage and profit shares of national income he writes i won t quote any more of that if you missed it you should definitely go there and read it so anyway brian romanchuk s chart compares consumer price inflation to u s wage inflation for wage inflation he uses average hourly earnings something i never thought of to be sure but i like it so i picked two series out of the 267 000 fred offers and managed to satisfy myself that i had duplicated romanchuk s graph graph 2 after romanchuk earnings fred ahetpi and cpi fred cpilfesl he didn t identify his data but i got a good match by using ahetpi and cpilfesl now i have four price series to look at graph 3 four price series i don t usually use price series that exclude food and energy prices to me it doesn t make sense but that s what romanchuk used so i went with it for this graph by the way on that last graph the green line runs with the low group in the 1980s then accelerates up to the higher line and even goes above it after 2010 that line shows the fastest increase of any in the last 25 years that line is average hourly earnings the one i got from romanchuk if you happen to be a nathan tankus fan i am not you might want to follow up on this with brian romanchuk wages are going up faster than prices is that with or without benefits either way how can it be why doesn t romanchuk point it out and was there no more realistic series he could have used to shoot holes in nathan tankus s post posted by the arthurian at 4 00 am 2 comments tuesday august 18 2015 less simple but there is no reason to complicate it following up on yesterday s post source lancasterpollard com my annotations posted by the arthurian at 4 00 am 0 comments monday august 17 2015 i m going for simple here source lancasterpollard com my annotations posted by the arthurian at 4 00 am 8 comments sunday august 16 2015 how changes in gdp inflation and debt influence the erosion of debt i showed this graph on saturday saturday s graph erosion of the federal debt due to inflation i said i had a hard time imagining how changes in the data would be related to the changes visible on the graph i m back now to look at it i made up a spreadsheet with some made up numbers for debt gdp and a price index in columns on the left i made up 30 years of data test 1 the yellow cells are numbers i might want to change the other cells are calculated from the yellow cells or from calculations that depend on them the graph is generated by the numbers in the rightmost column the nn rr column as the third row of yellow cells shows i started with a price index value of 100 an initial gdp of 100 and an initial debt of 50 half the size of gdp the latter two numbers are somewhat arbitrary i had to pick numbers to get started the initial price index value of 100 is not arbitrary by convention or on principle or for reasons unknown the base year of a price index is always given the value 100 it s probably to simplify matters whatever since i m using 100 as my first year s price index value you should be able to guess that i am using the first year as the base year for my calculations didn t have to be but it is economists tend not to do that but i m not an economist and i m free to put the base year any where i want besides it just makes sense when i think about the economy i like to set things up start the action and see what happens it s just natural that where i start is the beginning so the graph test 1 above figures 2 inflation each year 4 annual gdp growth that s nominal gdp by the way and an 8 annual increase of outstanding debt how that works for inflation i take each year s value and multiply it by 1 02 to get the next year s value the new value turns out to be 2 bigger than the value i started with for gdp multiplying by 1 04 makes each new value 4 bigger than the one before for debt multiplying by 1 08 makes each new number 8 bigger the numbers i use to set my growth rates 1 02 1 04 and 1 08 appear in the yellow cells on the first two lines of the test 1 spreadsheet image i use the numbers on the top row in the calcs for the first 15 years for the left half of the blue line on the graph i use the numbers from the second row for the next 15 years the right half of the blue line in test 1 the blue line is a nice smooth curve because the numbers on row one and the numbers on row two are the same now i can change one of the growth rates on the second row and maybe we ll see a kink show up right in the middle of the blue line test 2 nope the line looks just the same i kept the value 1 04 an annual growth rate of four percent for the first 15 years but changed the number to 1 40 for years 16 to 30 that s forty percent annual gdp growth that s way more than china was getting it s a ridiculous number ridiculously big still there is no change in the blue line no kink there in the middle making a huge change in the growth rate of gdp and leaving the inflation rate and the debt growth rate unchanged made absolutely no difference in this graph i thought that was pretty weird and hey maybe i have something wrong it wouldn t be the first time but i can t find it if there is so anyway i figured let me get even more extreme with the change in gdp growth rates so i used 0 01 for the first 15 years and then 100 0 for the next fifteen still no change in the blue line test 3 in test 3 some of the numbers below the graph are now so big that i got nothing but cross hatches hash marks i guess they re called now or hash tags whatever but the blue line for test 3 looks just the same as it did for test 1 and 2 even the numbers in the vertical axis are the same they run from 75 to 105 and that s it what this is telling me is the growth rate of gdp has no bearing on the rate of erosion of debt i still think that s odd and like i said i could have mistakes in the spreadsheet but that s what it s telling me so i set the gdp growth numbers back to 1 04 so the second period matches th...
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