The Pace of Growth

May 19, 2019

by Steve Stofka

We are living in an economy that is fundamentally different than the ones our parents and grandparents grew up in. Some of us want a return to those days. More goods were made in the U.S.A. Each family spent more on food, clothing, furniture and the other necessities of life but the money circulated in our economy, not among the workers of Asia. Union membership was stronger but there were crippling strikes that affected the daily lives of many families. In 2016, the current President promised a return to those days of stronger but more erratic growth. Almost half of voters bet on him to undo the changes of the past several decades. Let’s look at some data that forms the bedrock of consumer confidence.

GDP is the most frequently used measure of the nation’s economic activity. Another measure, Final Sales of Domestic Product excludes changes in business inventories. In the graph below is a chart of the annual change in Final Sales after adjusting for inflation (Note #1). Compare the right and left rectangles. The economy of post-WW2 America was more erratic than the economy of the past thirty-five years (Note #2).

The two paces of growth

In the first 35 years following WW2, growth averaged 3.6%. Since the Financial Crisis there have only been five quarters with growth above 3%. Let’s include the annual change in disposable personal income (Note #3). That’s our income after taxes. Much of the time, the two series move in lockstep and the volatility in each series is similar.

However, sometimes the change in personal income holds steady while the larger economy drops into recession. A moderate recession in 1970 is a good example of this pattern.

1982 was the worst recession since the 1930s Great Depression. Unemployment soared to more than 10% but personal incomes remained relatively steady during the downturn.

In the 1990, 2000 and 2008 recessions, personal incomes did not fall as much as the larger economy. Here’s the 2008 recession. While the economy declined almost 3%, personal income growth barely dipped below zero.

In the last 35 years, annual growth in Final Sales has averaged only 2.8%, far below the 3.6% average of the first 35-year period. After the recession, the growth of the larger economy stabilized but the change in personal incomes became very erratic. In the past eight years, income growth has been 2.5 times more volatile than economic growth (Note #4). Usually the two series have similar volatility. In the space of one year – 2013 – income growth fell from 5% to -2.5%, a spread of 7.5%. In the past sixty years, only the oil crisis and recession of 1974 had a greater swing in income growth during a year! (Note #5)

When income growth is erratic, people grow cautious about starting new businesses. Banks are reluctant to lend. Despite the rise in home prices in many cities, home equity loans – a popular source of start-up capital for small businesses – are about half of what they were at the end of the financial crisis (Note #6). The Census Bureau tracks several data series for new business applications. One of these tracks business start-ups which are planning to become job creators and pay wages. That number has been flat after falling during the Great Recession (Note #7).

Census Bureau – see Link in Notes

Businesses borrow to increase their capacity to meet expected demand. Since the beginning of 2016, banks have reported lackluster demand for loans from large and medium businesses as well as small firms (Note #8). For a few quarters in 2018, small firms showed stronger loan demand but that has turned negative this year. This indicates that business owners are not betting on growth. Here’s a survey of bank loan officers who report strong demand for loans from mid-size and larger firms. While few economists predicted the last two recessions, the lack of demand for business loans forecast the coming downturns.

There is an upside to slow growth – less chance of a recession. Periods of strong growth promote excess investment into one sector of the economy. In the early 2000s, the economy took several years to recover from the money poured into the internet sector. The Great Financial Crisis of 2008 and the recession of 2007-2009 was a reaction to over-investment and lax underwriting in the housing sector. On the other hand, weak growth can leave our economy vulnerable to a shock like the heightening of the trade war with China, or a military conflict with Iran.

Can a President, a party or the Federal Reserve undo several decades of slow to moderate growth? None of us want a return to the crippling inflation of the 1970s and early 1980s, but we may long for certain aspects of those yesteryears. An older gentleman from North Carolina called into C-Span’s Washington Journal and lamented the shuttering of the furniture and textile plants in that area many decades ago (Note #9). Many of those areas have still not recovered. Another caller commented that the Democratic Party long ago stopped caring about the jobs of rural folks in the south. Contrast those sentiments about the lack of opportunity in rural America with those who live in crowded urban corridors and struggle to keep up with the feverish pace and high costs of urban housing, insurance and other necessities.  Two different realities but a similar human struggle.



  1. Real Final Sales of Domestic Product FRED series A190RO1Q156NBEA
  2. Standard Deviation of first 35 years was 2.44. In the second 35-year period it was only 1.56.
  3. Real Disposable Personal Income FRED series DPIC96
  4. Since 2010, the standard deviation of economic growth has been .7 vs 1.75 for income growth.
  5. In the decade following WW2, people had similar large swings in income growth as the country and the Federal Reserve adjusted to an economy dominated by domestic consumption.
  6. Home Equity Loans FRED series RHEACBW027SBOG totaled $610 billion in the spring of 2009. It was $341 billion in the spring of 2019, ten years later
  7. Census Bureau data on new business start-ups
  8. Senior Loan Officer Surveys: Large and medium sized businesses FRED series DRSDCILM. Small businesses FRED series DRSDCIS.
  9. C-Span’s Washington Journal. C-Span also has a smartphone app.

Country Roads and the Election

May 12, 2019

by Steve Stofka

I spent the past week traveling with my sister to a family reunion near Dallas, Texas. In our travels, we passed through rural counties in southeast Colorado, western Oklahoma, and northwest and central Texas. In contrast to the signs of a brisk economy in the larger cities, some rural communities show signs of stress. Some roads leading off the main route need repair; some houses could use a fresh coat of paint; some stores have delayed maintenance. In some small towns most of the stores remain boarded up ten years after the financial crisis.

Candidates for the 2020 Presidential election must speak to the two Americas. The Americans who produce the food we eat and the power that lights our businesses and homes are not doing as well as those in the urban corridors. Young people in rural America leave for the larger cities to find a job or pursue an education. Older people with medical needs must move to larger cities with hospital facilities available in an emergency.

Let’s turn to a proposal on the list of issues for the 2020 election – an increase in the Federal minimum wage. A person making a minimum wage of $15 an hour in Los Angeles earns a bit more than half of L.A.’s median household income (MHI). She may work 2-1/2 weeks to pay the rent on a one-bedroom apartment (Note #1). The MHI in rural America is about 20% less than the national average. In Limon, Colorado (population less than 1500), the MHI is about half of the national average (Note #2). $15 an hour in Limon is the MHI.

In 2009 and 2010, the Democrats controlled the Presidency, the House and had a filibuster proof majority in the Senate. They could have enacted a federal minimum wage that was indexed to the living costs in each county or state. Why didn’t they fix the problem then? Because Democrats use the minimum wage as an issue to help win elections. If Congress passes a minimum wage of $15 an hour this year, they will have something new to run on in five years – a raise in the minimum wage to $17 an hour. Voters must begin asking their elected representatives for practical and flexible solutions, not political banners like a federal mandated one-size-fits-all $15 minimum wage.

For decades after World War 2, Democratic Party politicians who controlled the House refused to allow legislation that would index tax rates to inflation. This resulted in “bracket creep” where cost of living wage increases put working people in higher tax brackets automatically (Note #3). The problem became acute during the high inflation decade of the 1970s and the issue helped Ronald Reagan take the White House on a promise to fix the problem.

A week ago, I heard a Democratic Senator running for President say that they knew all along that Obamacare was just a start. The program was poorly drafted and poorly implemented and now we learn that Democrats knew all along that it was bad legislation? Will Medicare For All also be built on poor foundations and require a constant stream of legislative and agency fixes? This provides a lot of work for the folks in Washington who draft a lot of agency rules that require a lot of administrative cost to implement. Democrats are fond of federal solutions but show little expertise in managing the inevitable bloated bureaucracy that such solutions entail.

Some Democratic Party candidates are promising to fix the harsh sentencing guidelines that they themselves passed in the 1990s, which fixed sentencing guidelines enacted 25 years earlier by Democratic politicians in the 1960s and 1970s. This party’s platform consists of fixing its earlier mistakes.

According to a Washington Post analysis of election issues (Note #4), some candidates are concerned about corporate power. A Democratic president would have to work with the Senate’s Democratic Leader Chuck Schumer whose main support comes from large financial corporations based in his home state, New York. While a President Elizabeth Warren might propose regulatory curbs on corporate power, Mr. Schumer would be gathering campaign donations from the large banks who needed protection from those same regulations.

Large scale industrial power production has a significant effect on the climate. The few blue states that supported a Democratic candidate for President in the 2016 election also consume most of the final product of that power production. Have any candidates proposed solutions that lower the demand for power? Temperature control systems in commercial buildings could be set to a few degrees warmer in the summer and a few degrees cooler in the winter. That would have a significant impact on carbon production. Some candidates propose solutions that regulate the production and supply of power – not the demand for power. Most of that production occurs in states that supported a Republican candidate in the 2016 election. Proposals to install wind and wave generating stations in Democratic leaning coastal states in the northeast and northwest have been met with local resistance. Voters in the blue states want green solutions to be implemented in the red states, but not inconvenience residents of the blue states. Voters in the red states see through that hypocrisy.

A viable Democratic candidate must convince independent voters who are wary of political solutions from either party.  Donald Trump won the Presidency without visiting rural folks on their home turf. He landed his plane near a staged rally and the folks came from miles around to hear him. Compare that approach with former Republican candidate Rick Santorum who visited many small towns in Iowa in the months before the 2012 Iowa primary. In small restaurants and rural post offices, Santorum listened to the concerns of voters. Trump’s approach was successful. Santorum was not. Go figure.

Trump convinced rural folks that he was going to go to Washington and drain the swamp. This in turn would help the economy in small town America so that those folks could get themselves a new roof, or a new pickup truck, fix the fence or get a few potholes patched. From what I saw, those folks are still waiting. Some rural folks may run out of patience with Trump by next year. The success of any Democratic candidate depends on that.



  1. One week’s take home pay of $550 x 2.5 weeks = $1375. A 1 BR in L.A. averages $1350 L.A. Curbed
  2. Areavibes.Com assessment of Limon, Colorado.
  3. Tax indexing
  4. Washington Post article on various election issues

Making Stuff

May 5, 2019

by Steve Stofka

This week I’ll review several decades of trends in productivity. How much output do we get out of labor, land, and capital inputs? Capital can include new equipment, computers, buildings, etc. In the graph below, the blue line is real GDP (output) per person. The red line is disposable (after-tax) income per person. That’s the labor share of that output after taxes.

As you can see, labor is the majority input. In the following graph is the share of real GDP going to disposable income.  In the past two decades, labor has been getting a larger share.

That might look good but it’s not. Since 2000, the economy has shifted toward service industries where labor does not produce as much GDP per hour. The chart below shows the efficiency of labor, or how much GDP is being produced by labor.

If labor were being underpaid, the amount of GDP produced per dollar of disposable income would be higher, not lower. On average, service jobs do not have as much leverage as manufacturing jobs.

A century ago, agricultural jobs were inefficient in comparison to manufacturing jobs. The share of labor to total output was high. In the past seventy years, the agricultural industry has transformed. Today’s farms resemble large outdoor manufacturing plants without walls and productivity continues to grow. In the past five years, steep price declines in the prices of many agricultural products have put extraordinary pressures on today’s smaller farmers. The increased productivity of larger farms has allowed them to maintain real net farm income at the same level as twenty years ago (Note #1). Here’s a graph from the USDA.

Although agriculture related industries contribute more than 5% of the nation’s GDP, farm output is only 1% of the nation’s total output. The productivity gains in agriculture have not been shared by the rest of the economy. Labor productivity has plunged from 2.8% annual growth in the years 2000-2007 to 1.3% in the past eleven years (Note #2).  Here’s an earlier report from the Bureau of Labor Statistics with a chart that illustrates the trends (Note #3). The report notes “Sluggish productivity growth has implications for worker compensation. As stated earlier, real hourly compensation growth depends upon gains in labor productivity.”

Productivity growth in this past decade is comparable to the two years of deep recession, high unemployment and sky-high interest rates in the early 1980s. The report notes “although both hours and output grew at below-average rates during this cycle [2008 through 2016], the fact that output grew notably slower than its historical average is what yields the historically low labor productivity growth.” Today we have low unemployment and very low interest rates – the exact opposite of that earlier period. Why do the two periods have similar productivity gains? It’s a head scratcher.

Simple answers? No, but hats off to Donald Trump who has called attention to the need for a greater shift to manufacturing in the U.S. economy. He and then Wisconsin governor Scott Walker negotiated with FoxConn Chairman Terry Gou to get a huge factory built in Mount Pleasant, Wisconsin to manufacture LCD displays, but progress has slowed. An article this week in the Wall St. Journal exposed the tensions that erupt among residents of an area which has made a major commitment to economic growth (Note #4).

If we don’t shift toward more manufacturing, American economic growth will slow to match that of the Eurozone. Along with that will come negative interest rates from the central bank and little or no interest on CDs and savings accounts. We already had a taste of that for several years after the recession. No thanks. Low interest rates are a hidden tax on savers. They lower the amount of interest the government pays at the expense of individuals who are saving for education or retirement. Interest income not received is a reduction in disposable income and has the same effect as a tax. Low interest rates encourage an unhealthy growth in corporate debt and drive up both stock and housing prices.



  1. USDA summary of agricultural industry
  2. BLS report on multi-factor productivity
  3. BLS report on declining labor productivity
  4. FoxConn LCD factory (March article – no paywall). Also, a recent article from WSJ (paywall) – Foxconn Tore Up a Small Town to Build a Big Factory—Then Retreated

Marching Forward

April 28, 2019

by Steve Stofka

When former President Obama took the oath of office, the economy was in the worst shape since the Great Depression 75 years earlier. Tax receipts plunged and benefit claims soared. Millions of homes and thousands of businesses fell into the black hole created by the Financial Crisis. In sixteen years of the Bush and Obama presidencies, the country added $16 trillion to the public federal debt, more than tripling the sum at the time Clinton left office in early 2001.

Although growth has remained slow since the financial crisis (see my blog last week), the economy has not gone into recession. Despite the fears of some, a recession in the next year does not look likely. The chart below charts the annual percent change in real GDP (green) against a ratio called the M1 money multiplier, the red line (Note #1). Notice that when the change in GDP dips below the money multiplier for two quarters we have been in recession.

The money multiplier seems to act like a growth boundary. While some economy watchers have warned of an impending recession, GDP growth has been above 2.5% for more than a year and is rising. In 2018, real disposable personal income grew nearly 3%. This is not the weak economic growth of 2011 or the winter of 2015/16 when concerns of recession were well founded.

The number of people voluntarily quitting their job is near the 1999 and 2006 highs. Employees are either transferring to other jobs or they feel confident that they can quickly get another job. An even more important sign is that this metric has shown no decline since the low point in August 2009.

In 2013, the Social Security disability fund was in crisis and predicted to run out of money within a decade. As the economy has improved, disability claims have plunged to all-time lows and the Social Security administration recently extended the life of the fund until 2052 (Note #2).

Approximately 1 in 6 (62 million) Americans receive Social Security benefits and that number is expected to grow to 78 million in a decade. However, the ratio of workers to the entire population is near all time highs. The number of Millennials (1982-1996) has surpassed the number of Boomers. This year the population of iGen, those born after 1996, will surpass the Millennial generation (Note #3). Just as a lot of seniors are leaving the work force, a lot of younger workers are entering. The ratio of worker to non-worker may reach 1 to 1. 45 years ago, one worker supported two non-workers.

As the presidential cycle gets into gear, we will hear claims that there are not enough workers to pay promised benefits. Those claims are based on the Civilian Employment Participation Rate, which is the ratio of workers to adults. While the number of seniors is growing, the number of children has been declining. To grasp the total public burden on each worker, we want to look at the ratio of workers to the total population. As I noted before, that is at an all time high and that is a positive.

Raising a child is expensive. The average cost of public education per child is almost $12K (Note #4).  Public costs for housing, food and medical care can push average per child public cost to over $20K annually.

Let’s compare to public costs for seniors. The average person on Social Security receives $15,600 in benefits (Note #5). In 2018, the Medicare program cost an average of $10,000 per retiree (Note #6). The public cost for seniors is not a great deal more than those for children.

As a society, we can do this.



  1. The M1 money multiplier is the ratio of cash and checking accounts to the amount of reserves held at the Federal Reserve.
  2. SSDI solvency now extended to 2052. Here’s a highlight presentation of the trustee’s report.
  3. Generation Z will surpass the numbers of Millennials in 2019. Report
  4. Public education costs per pupil
  5. Social Security costs
  6. Medicare program cost $583 billion. There are approximately 60 million on the program. CMS

Slow Growth

April 21, 2019

by Steve Stofka

Happy Passover and Happy Easter. Now that tax day is past, let’s raise our heads and look at long-term growth trends of real, or inflation-adjusted, GDP. For the past seventy years real GDP has averaged about 3% annual growth. In the chart below, I’ve charted the annual percent change in a ten-year average of GDP (GDP10, I’ll call it). As you can see on the right side of the graph, growth has been below average for the past decade.

In 2008, growth in the GDP10 crossed below 3%. Was this due to the Financial Crisis (GFC) and the housing bust? No. The GFC barely figured into the computation of the ten-year average. The housing market had been running hot and heavy for four to five years, but this longer-term view now puts the housing boom in a new perspective: it was like lipstick on an ugly pig. Without the housing boom, the economy had been faltering at below average growth since the 1990s tech boom.

The stock market responds to trends – the past – of past output (GDP) and the estimation of future output. Let’s add a series of SP500 prices adjusted to 2012 dollars (Note #1).

For three decades, from the late 1950s to the mid-1980s, the real prices of the SP500 had no net change. The go-go years of the 1960s raised nominal, but not real, prices. Investors shied away from stocks, as high inflation in the 1970s hobbled the ability of companies to make real profit growth that rewarded an investor’s risk exposure. From the 2nd quarter of 1973 to the 2nd quarter of 1975, real private domestic investment lost 27% (Note #2). In less than a decade, investment fell again by a crushing 21% in the years 1979 through 1982.

In the mid-1980s, investors grew more confident that the Federal Reserve understood and could control inflation and interest rates. During the next decade, investors bid up real stock prices until they doubled. In 1996, then Fed chairman Alan Greenspan noted an “irrational exuberance” in stock prices (Note #3). The “land rush” of the dot-com boom was on and, within the next five years, prices would get a lot more exuberant.

The exuberance was well deserved. With the Fed’s steady hand on the tiller of money policy, the ten-year average of GDP growth rose steadily above its century-long average of 3%. A new age of prosperity had begun. In the 1920s, investment dollars flowed into the new radio and advertising industries. In the 1990s, money flowed into the internet industry. Construction workers quit their jobs to day trade stocks. Anything less than 25% revenue growth was the “old” economy. The fledgling Amazon was born in this age and has matured into the powerhouse of many an internet investor’s dream. Thousands of other companies flamed out. Billions of investment dollars were burned.

The peak of growth in the ten-year average of GDP output came in the 1st quarter of 2001. By that time, stock prices had already begun to ease. In the next two years, real stock prices fell almost 50%, but investment fell only 12% because it was shifting to another boom in residential housing. As new homes were built and house prices rose in the 2000s, long-term output growth began to climb again.

From the first quarter of 2006 to the 3rd quarter of 2009, investment fell by a third, the greatest loss of the post-war period. In the first quarter of 2008, growth in the GDP10 fell below 3%. In mid-2009, it fell below 2%. Ten years later, it is still below 2%.

The Federal Reserve has had difficulty hitting its target of 2% inflation with the limited tools of monetary policy. There simply isn’t enough long-term growth to put upward pressure on prices.  Despite the low growth, real stock prices are up 150% since the 2009 lows.  A prudent investor might ask – based on what?

The supply side believers in the Trump administration and Republican Party thought that tax cuts would spur growth. In the first term of the Obama administration, believers in Keynesian counter-cyclical stimulus thought government spending would kick growth into gear. Faced with continued slow growth, each side has doubled down on their position. We need more tax cuts and less regulation, say Republicans. No, we need more infrastructure spending, Democrats counter. Neither side will give up and, in a divided Congress, there is little likelihood of forging a compromise in the next two years. The stock market may be waiting for the cavalry to ride to the rescue but there is no sign of dust on the horizon.

Economists are just as dug in their ideological foxholes. The Phillips curve, the correlation between employment and inflation, has broken down. The correlation between the money supply and inflation has also broken down. High employment but slow output growth and low inflation. Larry Summers has called it secular stagnation, a nice label with only a vague understanding of the underlying mechanism. If an economist tells you they know what’s going on, shake their hand, congratulate them and move to the other side of the room. Economists are still arguing over the underlying causes of the stagflation of the 1970s.

A year ago, I suggested a cautious stance for older investors if they needed to tap their assets for income in the next five years. The Shiller CAPE ratio, a long-term evaluation of stock prices, is at the same level as 1929. At current prices in a low growth environment, stock returns may  struggle to average more than 5-6% annually over the next five years.



  1. Adjusted for inflation by the Federal Reserve’s preferred method, the Personal Consumption Expenditures Price Index (FRED series PCEPI). Prices do not include dividends
  2. Real Gross Private Domestic Investment – FRED Series GPDIC1.
  3. A video of the 1996 “irrational exuberance” speech


April 14, 2019

by Steve Stofka

In the current housing market, there are .4 new homes started for every 100 people, near century long lows. The Millennials (1981-1996) are now the largest generation in history but home builders are not responding to the population boom (Note #1). In the 1970s, home builders started triple that number of homes in response to the swelling number of Boomers coming of age.

Have you heard that there won’t be enough workers to support Social Security and Medicare payments for the retiring Boomer generation? Here’s the ratio of seniors to the core work force aged 25-54. Yes, it has gone up since the Financial Crisis.

Here’s the ratio of seniors to all workers. Each worker’s social security taxes are “funding” benefits for three seniors. The Social Security fund was never a separate fund, only an accounting gimmick that politicians enacted eighty years ago. As former Fed chairman Alan Greenspan explained, the federal government can continue to make payments to seniors (Note #2).

Have you heard that the interest on the debt is going to grow so large that it will crowd out all other spending? As a percentage of total expenses, it is at a low level.  Each year the federal government runs a deficit of about 2.4% (Note #3). Can it continue to do that indefinitely? Yes.

Each day we hear a lot of half-truths and outright lies. As the 2020 Presidential election gets nearer, half-baked versions of reality will grow like mold on bread. The Constitution was structured to encourage debate as an alternative to war among ourselves. The 1st Amendment guarantees everyone a right to spout half-truths and lies. Two dominant political parties compete for our belief in their version of the truth. This is the land of argument.


  1. Pew Research has redefined the Millennial generation as those born 1981-1996.
  2. YouTube video of Alan Greenspan explaining to Representative Paul Ryan that the Federal Gov’s checks are good
  3. The 80-year average of deficits is 2.4%. Not including debt for wars, it is 2.2%, per Steve Keen, author of Debunking Economics.

The Start of the Beginning

April 7, 2019

by Steve Stofka

In 1971 former President Nixon announced that the U.S. was abandoning the gold standard of fixed exchange that had existed for almost thirty years. Within a short time, other leading nations followed suit. Each nation’s currency simply traded against each other on a global currency, or FX, market.

Since oil was priced in dollars and the world ran on oil, the U.S. dollar became the world’s reserve currency. Each second of every day, millions of US dollars are traded on the international FX markets. The demand for US dollars is strong because we are a productive economy. The euro, yen and British pound are secondary currency benchmarks.

When the U.S. wants to borrow money from the rest of the world, the U.S. Treasury sells notes and bills collectively called “Treasuries” to large domestic and foreign banks who “park” them in their savings accounts at the Federal Reserve (Fed), the U.S. central bank (Note #1). The phrase “printing money” refers to a process where the Federal Reserve, an independent branch of the Federal Government, buys Treasury debt on the secondary market. It may surprise many to learn that the Fed owns the same percentage of U.S. debt as it did in 1980. The debt in real dollars has grown seven times, but the percentage held by the Fed is the same. That is a powerful testament to the global hunger for U.S. debt. Here’s the chart from the Fed’s FRED database.


In 1835, President Andrew Jackson paid off the Federal debt, the one and only time the debt has been erased. It left the country’s banking system in such a weak state that subsequent events caused a panic and recession that lasted for almost a decade (Note #2). Government debt is the private economy’s asset. Paying down that debt reduces those assets.

About a third of the debt of the U.S. is traded around the world like gold. It is better than gold because it pays interest and there are no storage costs. Foreign businesses who borrow in dollars must be careful, however. They suffer when their local currency depreciates against the dollar. They must earn even greater profits to convert their local currency to dollars to make payments on those dollar-denominated loans.

Each auction of Treasury debt is oversubscribed. There isn’t enough debt to meet demand. In a world of uncertainty, the U.S. government has a long history of respect for its monetary obligations. As the reserve currency of the world, the U.S. government can spend at will. Even if there were no longer a line of domestic and foreign buyers for Treasuries, the Federal Reserve could “purchase” the Treasuries, i.e. print money. Let’s look at the difference between borrowing from the private sector and printing money.

When the private sector buys Treasuries, it is effectively trading in old capital that cannot be put to more productive use. That old capital represents the exchange of real goods at some time in the past. In contrast, when the government spends by buying its own debt, i.e. printing money, it is using up the current production of the private sector. This puts upward pressure on prices. Let’s look at a recent example.

Quantitative Easing (QE) was a Fed euphemism for printing money. During the three phases of QE that began in 2009, the Fed bought Treasury debt. That was an inflationary policy that countered price deflation as a result of the Financial Crisis. In August 2009, inflation sank as low as -.8% (Note #3). It was even worse, but inflation measures do not include the dividend yield on money. To many households, inflation felt like -2% (Note #4). The Fed’s first round of QE did provide a jolt that helped drive prices up by 3% and out of the deflationary zone.

During the five years of QE programs, the Fed continued to fight itself. The QE programs pushed prices upwards. Near zero interest rates produced a deflationary counterbalance to the inflationary pressures of printing money. Because inflation measures do not include the yield on money, the Fed could not read the true change in the prices of real goods in the private sector. The economy continues to fall below the Fed’s goal of 2% inflation. There are still too many idle resources.

Leading proponents of Modern Monetary Theory (MMT) remind people that yes, the U.S. can spend at will, but that it must base its borrowing on policy rules to avoid inflation. A key component of MMT is a Job Guarantee (JG) program ensuring employment to anyone who wants a job. A JG program may remind some of the WPA work programs during the Great Depression. Visitors to popular tourist attractions, from Yellowstone Park in Wyoming to Carlsbad Caverns in New Mexico, use facilities built by WPA work crews. Today’s JG program would be quite different. It would be locally administered and targeted toward smaller public works so that the program was flexible.

The U.S. government has borrowed freely to go to war and has never paid that debt back. Proponents of MMT recommend that the U.S. do the same during those times when the private economy cannot support full employment. That policy goal was given to the Fed in the 1970s, but it has never been able to meet the task of full employment through crude monetary tools. With an active program of full employment, the Fed would be left with only one goal – guarding against inflation.

There are two approaches to inflation control: monetary and fiscal. Monetary policy is controlled by the Fed and includes the setting of interest rates. If the Fed’s mandate was reduced to fighting inflation, it could more readily adopt the Taylor rule to set interest rates (Note #4).

Fiscal policy is controlled by Congress. Because taxation drains spending power from the economy, it has a powerful control on inflation. However, changes in tax policy are difficult to implement because taxes arouse passions. We are familiar with the arguments because they are repeated so often. Everyone should pay their “fair share,” whatever that is. Some want a flat tax like a head tax that cities like Denver have enacted. Others want a flat tax rate like some states tax incomes. Others want even more progressive income taxes so that the rich pay more and the middle class pay less. Some claim that income taxes are a government invasion of private property rights.

Because tax changes are difficult to enact, Congress would be slow to respond to changes in inflation. The Fed’s control of interest rates is the more responsive instrument. The JG program would provide stability to the economy and reduce the need for corrective monetary action by the Fed. The program would help uplift those in marginal communities and provide much needed assistance to cities and towns which had to delay public works projects and infrastructure repair because of the Financial Crisis. As sidewalks and streets get fixed and graffiti cleaned, those who live in those areas will take more pride in their town, in their communities, in their families and themselves. This makes not just good economic sense but good spiritual sense. We can start small, but we must start.


1. Twenty to twenty-five times each month, the Treasury auctions U.S. government debt. Many refer to the various forms of bills and notes as “treasuries.” A page on the debt
2. The Panic of 1837
3. The Federal Reserve’s preferred measure of inflation is the Personal Consumption Expenditure Index, PCEPI series.
4. The annual change in the 10-Year Constant Maturity Treasury fell below -1% at the start of the recession in December 2007 and remained below -1% until July 2009. FRED series DGS10. John Maynard Keynes had recommended the inclusion of money’s yield in any index of consumer demand. In his seminal work Foundations of Economic Analysis (1947), economist Paul Samuelson discussed the issue but discarded it (p. 164-5). Later economists did the same.
5. The Taylor rule utility at the Atlanta Federal Reserve.


The Nature of Money

March 31, 2019

by Steve Stofka

Modern Monetary Theory (MMT) helps us understand the funding flows between a sovereign government and a nation’s economy. I’ve included some resources in the notes below (Note #1). This analysis focuses on the private sector to help readers put the federal debt in perspective. In short, some annual deficits are to be expected as the cost of running a nation.

What is money? It is a collection of  government IOUs that represent the exchange of real assets, either now or in the past. Wealth is either real assets or the accumulation of IOUs, i.e. the past exchanges of real assets. When a sovereign government – I’ll call it SovGov, the ‘o’ pronounced like the ‘o’ in love – borrows from the private sector, it entices the holders of IOUs to give up their wealth in exchange for an annuity, i.e. a portion of their wealth returned to them with a small amount of interest. A loan is the temporal transfer of real assets from the past to the present and future. This is one way that SovGovs reabsorb IOUs out of the private economy. In effect, they distribute the historical exchange of real assets into the present.

What is a government purchase? When a SovGov buys a widget from the ABC company, it also borrows wealth, a real asset that was produced in the past, even if that good was produced only yesterday. The SovGov never pays back the loan. It issues money, an IOU, to the ABC company who then uses that IOU to pay employees and buy other goods. A SovGov pays back its IOUs with more IOUs. That is an important point. In capitalist economies, a SovGov exchanges real goods for an IOU only when the government acts like a private party, i.e. an entrance fee to a national park. Real goods are produced by the private economy and loaned to the SovGov.

What is inflation? When an economy does not produce enough real goods to match the money it loans to the SovGov, inflation results. Imagine an economy that builds ten chairs, a representation of real goods. If a SovGov pays for ten people to sit in those ten chairs, the economy stays in equilibrium. When a SovGov pays for eleven people to sit in those ten chairs, and the economy does not have enough unemployed carpenters or wood to build an eleventh chair, then a game of musical chairs begins. In the competition for chairs, the IOUs that the private economy holds lose value. Inflation is a game of musical chairs, i.e. too much money competing for too few real resources.

A key component of MMT framework is a Job Guarantee program, ensuring that there are not eleven people competing for ten jobs (Note #2). Labor is a real resource. When the private economy cannot provide full employment, the SovGov offers a job to anyone wanting one. By fully utilizing labor capacity, the SovGov keeps inflation in check. The  idea that the government should fill any employment slack was developed and promoted by economist John Maynard Keynes in his 1936 book The General Theory of Employment, Money and Interest.

The first way a SovGov vacuums up past IOUs is by borrowing, i.e. issuing new IOUs. I discussed this earlier. A SovGov also reduces the number of IOUs outstanding through taxation, by which the private sector returns most of those IOUs to the SovGov.

Let’s compare these two methods of reducing IOUs. In Chapter 3 of The Wealth of Nations, Adam Smith wrote that government borrowing “destroys more old capital … and hinders less the accumulation or acquisition of new capital” (Note #3). Borrowing draws from the pool of past IOUs; taxation draws more from the current year’s stock of IOUs. Further, Smith noted that there is a social welfare component to government borrowing. By drawing from stocks of old capital it allows current producers to repair the inequalities and waste that allowed those holders of old capital to accumulate wealth. He wrote, “Under the system of funding [government borrowing], the frugality and industry of private people can more easily repair the breaches which the waste and extravagance of government may occasionally make in the general capital of the society.”

Borrowing draws IOUs from past production, while taxation vacuums up IOUs from current production. Since World War 2, the private sector has returned almost $96 in taxes for every $100 of federal IOUs. Since January 1947, the private sector has loaned the federal government $371 trillion dollars of real goods, the total of federal expenditures (Note #4). What does the federal government still owe out of that $371 trillion? $15.5 trillion, or 4.17% (Note #5). If the private sector were indeed a commercial bank, it would expect operating expenses of 3%, or $11.1 trillion (Note #6). What real assets does the private sector have for the difference of $4.4 trillion in the past 70 years? A national highway system and the best equipped military in the world are just two prominent assets.

The federal government spends about 17-20% of GDP, far lower than the average of OECD countries (Note #7). That is important because the accumulated Federal debt of $15.5 trillion is only .9% of the $1.7 quadrillion of GDP produced by the private sector since January 1947. Our grandchildren have not inherited a crushing debt, as some have called it. In the next forty years, the U.S. economy will produce about $2 quadrillion of GDP (Note #8). If tomorrow’s generations are as frugal as past generations, they will generate another $18 trillion of debt.

Adam Smith called a nation’s debt “unemployed capital,” a more apt term. The obligation of a productive nation is to put unemployed capital to work for the community. Under the current international system of national accounting, there is no way to account for the accumulated net value of real assets, or the communal operating expenses of the private economy. Without a proper accounting of those items, we engage in noisy arguments about the size of the debt.

In next week’s blog, I’ll examine the inflation pressures of government debt. I’ll review the Federal Reserve’s QE programs and why it has struggled to hit its target inflation rate of 2%. We’ll revisit a proposal by John Maynard Keynes that was discarded by later economists.


1. A video presentation of SovGov funding by Stephanie Kelton . For more in depth reading,  I suggest Modern Monetary Theory by L. Randall Wray, and Macroeconomics by William Mitchell, L. Randall Wray and Martin Watts.

2. L. Randall Wray wrote a short 7 page paper on the Job Guarantee program . A more comprehensive 56-page proposal can be found here 

3. Adam Smith’s The Wealth of Nations was published in 1776, the year that the U.S. declared independence from Britain. Smith invented the field of economics. The book runs 900 pages and is available on Kindle for $.99

4. Federal Expenditures FGEXPND series at FRED.

5. At the end of 1946, the Gross Federal Debt held by the public was $242 billion (FYGFDPUB series at FRED). Today, that debt total is $15,750 billion, or almost $16 trillion dollars. The difference is $15.5 trillion. The debt held by the public does not include debt that the Federal government owes itself for the Social Security and Medicare “funds.” Under these PayGo pension systems, those funds are nothing more than internal accounting entries.

6. In 2017, the Federal Reserve estimated interest and non-interest expenses for all commercial banks at 3% (Table 2, Column 3).

7. Germany’s government, the leading country in the European Union, spends 44% of its GDP Source

8. Assuming GDP growth averages 2.5% during the next forty years.

9. International Accounting Standards Board (IASB) sets standards for public sector accounting.


The Green Divide

March 24, 2019

by Steve Stofka

Half of the country’s voters live on 80% of the land, which the political analysts color red. Half of voters live on the remaining 20% of land, which is colored blue. The needs, values and outlooks of those in the red are not the same as those in the blue. As the country’s population continues to migrate from rural to metropolitan areas, the country becomes ever more divided. As economist Paul Krugman wrote this week, no one knows how to fix the continuing economic decline in rural areas (Note #1).

A person’s views on an issue may depend on the state they live in. In the past several decades, immigration has had much more impact on California and the southern states. In 1980, 15% of California’s population was foreign born, almost four times the national average of 4.3%. In 2015, that share had doubled for both California and the nation as a whole. However, the national average is only a third of California’s numbers (Note #2). How does the nation adopt a single policy toward immigration when there are such differences in circumstances?

Regardless of our different experiences and outlooks, we are dependent on each other. 20% of Americans are on the Social Security and Medicare programs (Note #3). 24% are on CHIP and Medicaid (Note #4). 40% of the two million farms in America receive subsidies (Note #5). The transfers of money between Americans has reached 14% of GDP.


In 1962, Ronald Reagan took a stridently conservative tone when he warned that the Medicare program being developed in the Democratic Congress would lead to socialism and the destruction of American democracy (Note #6). Having married into wealth, he could afford a dramatic interpretation of social policy. Few Americans hold such extreme views today (Note #7).

The reasonable arguments of today might look oppressive to future generations, and progressive ideas seem natural to our descendants. Our ancestors had different views toward slavery, racism, voting rights and social programs than we have today. What has not changed is our distrust of those we regard as “other,” and our desire to make our principles universal for our fellow Americans. We want everyone to play by our rules, or our interpretation of the rules.

In the debates on the ratification of the US Constitution, some asked what the terms “provide for the …general welfare” meant (Note #8). Was the new government to become a national charity? The Federalists argued for the inclusion of the term to give the government a degree of latitude in changing circumstances. The anti-Federalists argued that this new government would eventually become the home of beggars and lobbyists wanting to promote their own welfare as the “general welfare.” In the past century, the phrase has become a constitutional bedrock of Supreme Court precedent underlying social programs. A person could argue that the size of social welfare spending and the extraordinary power of lobbyists in Washington has proven the anti-Federalist’s case.

America is the land of debate because the Constitution was structured to promote debate. While Americans had a platform to argue with each other, it was hoped that there would be less bloodshed, rebellion, and dictatorship (Note #9). Some days we might be less sure of that premise. As the circumstances of urban and rural America diverge further, we will struggle ever more to reach consensus. Each side will feel the need to impose its will on the other.  As we debate these issues, we should be just as careful of our own instincts as we are about the instincts of those on the other side of the debate.



1. Krugman op-ed on lack of solutions for the economic decline in rural America
2. Four decades of immigration numbers – pdf page 6
3. 62 million Americans on Social Security and Medicare – numbers here
4. 74 million Americans on CHIP and Medicaid – numbers here
5. 39% of 2.1 million farms receive agricultural subsidies
6. Reagan warns against Medicare
7. During the debate before the passage of Obamacare, some Tea Party members advocated a return to the days when we just let old people die.
8. U.S. Constitution, Section 8.1 “provide for the common Defence [sic] and general Welfare of the United States”
9. Former colonies of Great Britain have struggled with free speech issues. South Africans has only had freedom of expression for twenty years . Canada still does not have complete freedom of speech


Green Debt

March 17, 2019

by Steve Stofka

Imagine a world where, each year, the U.S. government (USG) gave $1000 to each of it’s approximately 300 million citizens (Note #1). The annual cost of the program would be $300 billion, about $120 billion more than the 2017 tax cuts (Note #2). As it does every year, the USG would borrow the money and issue Treasury bills, which are traded around the world. Although there is more than $23 trillion of Treasury debt – a plentiful supply – there is not enough to meet world demand.

Let’s say that the American people spent 80% of that $300 billion each year and saved the rest (Note #3). Let’s also calculate a multiplier of 1.5 so that the extra $240 billion of spending generates $360 billion of GDP (Note #4), about 1.7% of last year’s GDP. The increase in GDP would return about $60 billion to the USG in tax revenues (Note #5). The net cost to the USG is $300 billion less $60 billion in additional tax revenue = $240 billion.

Will the slight increase in GDP each year generate higher inflation? Inflation occurs when too much money chases too few goods and resources. Efficiencies in world production of goods and services has caused a continuing deflation in developed economies. Against those headwinds, inflationary pressures will be modest.

At the end of ten years, this program would create an additional $3.5 trillion in U.S. debt, the same amount of debt that the Federal Reserve accumulated in 2008 to protect the jobs and bonuses of Wall St. bankers. The Fed still owns most of that debt (Note #6). Which is fairer? A program to distribute money equally to everyone or a program to distribute the same amount to a select few?

Implementation of such a program is unlikely but illustrates the lack of a moral rudder in our Congress. Self-branded fiscal conservatives in both parties promote the fiction that the Social Security and Medicare funds will “run out of money” at a certain date in the future. These funds are part of the Federal government and are nothing more than bookkeeping entries on the Federal government’s books. The Social Security Administration explains this: “[the funds] provide 1) an accounting mechanism for tracking all income to and disbursements from the trust funds, and (2) they hold the accumulated assets. These accumulated assets provide automatic spending authority to pay benefits” [my emphasis] (Note #7). The accumulated assets are paper IOUs from the government to itself so that Social Security benefits are beyond the reach of Congressional infighting and debate each year. When it was created, President Roosevelt called Social Security an insurance program because it was insured against Congressional tampering.

Republicans propose to privatize Social Security while Democrats propose additional taxes to “fully fund” Social Security. These schemes are built on accounting fictions and sold to the general public as prudent solutions. Will the trust funds run out of money? Congress can change this with a stroke of a pen. Just as they “borrowed” from the funds, they can “loan” to the funds (Note #8). Both parties are trying to convince voters that big changes must be made because Congress is too incompetent to make a small legislative change. Will voters buy this nonsense and let them keep their jobs?

Around the world, the value of US Treasury debt is more trusted than gold. It is more than a bond because it trades among commercial banks like currency. The U.S. enjoys a unique position. Its debt is a trusted part of the world’s savings. This country has worked hard and prudently to make the U.S. dollar the world’s money. Over the past century, the U.S. has managed its economy and debt better than other large developed countries. Let us take advantage of that position. Let’s stop the political ploys around Social Security and other federal entitlement programs. Let’s have a serious discussion about investing in building new schools and transportation solutions, as well as needed infrastructure repairs. Let’s stop posturing like buffoons and start behaving like the leader we are.


1. Census Quick Facts
2. Annual loss of tax revenue about $180 billion times 10 years = $1.8 trillion per CBO estimate 
3. Americans usually save about 5% of income.
4. More on fiscal multipliers. 1.5 is an average of various multipliers.
5. USG revenues average 17% of GDP.
6. Fed’s balance sheet over time. The Fed buys Treasury debt in the secondary market from large banks that buy the debt at Treasury auctions. The Fed continues to hold $1.6 trillion of mortgage-backed securities, the same kind of debt that led to the Financial Crisis. Current balance sheet.
7. Social Security Administration FAQ #1 on the nature of the funds . Also, see their page debunking SS myths promoted on the Internet
8. The Federal government pays below market interest rates for the money that it “borrowed” from the SSA funds. Decades ago, the interest rate was set at approx. the five-year average for funds “borrowed” for several decades. If 20 or 30 year rates had been used, the SS funds would be much larger. There would be no “crisis” to argue about.