US Taxes

At the 1988 Republican National Convention, presidential candidate George H. W. Bush  famously said "Read my lips: no new taxes." In fact, taxes went down in the first part of the Bush I Administration (see the graphic above, click to enlarge), but started going up again and reached the lower 98% prediction interval right before the Clinton administration. And, taxes continued to go up until hitting the upper 98% prediction interval right before the Bush II Administration. In fact, taxes appear to go up during Democratic administrations and go down during Republican administrations, while bouncing around a cyclical attractor path (dashed red line above). What's going on here and what might we predict for the new Right-Wing Republican Administration scheduled to take office in early 2025?

First, I can easily predict that tax revenue is going to be lowered. I can also predict that tax revenue will return to the attractor path and increase sometime during or after the Trump administration. History clearly makes the prediction. But what is driving the cyclical attractor path and the prediction of future increases in tax revenue after 2030?

Aggregate tax revenue is being driven by growth in the US SocioEconomic system. When the economy does well, the government increases its revenue. This should be no surprise. But that's not all that is going on because actual tax revenue itself cycles around the attractor path.

What is driving the actual taxation cycle (and this should also be no surprise) are political shocks (see the graphic above, click to enlarge). Republican administrations, starting with Bush II and continuing with Trump I, pass massive tax cuts that eventually have to be rolled back (even during the same administration e.g., the expensive War on Terror starting after Sep 11, 2001 during the Bush II administration).

The assumption is that these cyclical tax cuts help the wealthy and fuel the deficit. I will look at the effects of tax cuts in a future post, but for the present I want to emphasize that tax cuts are both a political football and a countercyclical approach to balancing the economy. Tax cuts could probably be a more effective automatic stabilizer if politics was more rational.

 

Alternate Futures for the US

 

The graphic above (click to enlarge) shows four alternative futures for US1, an index of overall growth in the US SocioEconomic System (see the measurement matrix below). It is based on computer simulations of alternative estimated state space models. I would argue that the graphic says a lot about why US voters decided the way they did in the 2024 Presidential Election and what we can expect from the new, Right-Wing Republican Administration after 2025.

First, why did the MAGA movement embrace an extension of the American First isolationist movement? The Foreign Policy of the Obama Administration (2009-2017) was directed toward the World System and was not Isolationist. The World System input model (W) in the graphic above put the US on a slower overall growth path (dotted green line). I would argue that voters were well aware that growth of the US Economy and the US standard of living was slowing (see Economist Kathryn Ann Edward's comments here). The realization led to a Right-Wing backlash (the same thing that happened in Germany during the Inter-War (WWI-WWII) Years, see Arno Mayer's The Persistence of the Old Regime).

Second, the President-elect's policy pronouncements and transition plans suggest abandoning the World System and doing everything possible to stimulate unlimited endogenous economic growth in the US: eliminating regulation, ignoring white-collar crime, closing borders to immigrants, abandoning environmental regulation (allowing businesses to exploit free environmental resources), eliminating labor regulation (a restraint on profits), dismantling the Welfare State, slashing business taxes (another restraint on profits), eliminating funding for and control over education (a stimulus to wage growth and a limit on profits), etc.

The red and the blue dashed lines in the graphic above show possible time paths for the US Economy unleashed.  The models predict uncontrolled, unending exponential growth for the US System. They are, I would argue, a business man's fantasy. Nothing can grow forever and eventually limits will be reached (my models suggest sometime after 2050). Most of us living at the present moment, me included, will be dead by then. It will be someone else's problem.

There is another possible time path for the US SocioEconomic System: the Random Walk (RW, the solid line in the graphic above). No one can know the future. Attempts to dismantle failing US Institutions may or may not happen as imagined. The new Administration's cabinet picks, so far, are not reassuring. Essentially, in a Random Walk, today is like yesterday except for random error, actions by people who are making it up as they go along. 

I am always surprised that commentators can seem so confident about what happened in the 2024 Presidential election and what will happen as a result of it. I'm not. My advice for the future is to take defensive positions and not follow Economic Bubbles that might develop in response to crippling of US regulatory institutions. 

We know our current systems are failing and need to be rebuilt. In future posts I will look more carefully at all of these systems.

US Measurement Matrix

The graphic at the beginning of this post applies the weights from row [1,] of the state space measurement matrix to 36 indicators of US development from 1950-2010. After 2010, the results are simulated from four state space models: RW (Random Walk), W (World System input), US (components from rows [2,] and [3,] in the measurement matrix), and BAU (a Business as Usual model with no inputs).

Measurement Matrix 

     L.US.E. L.US.U. GDP.US.  GDP.C.  GDP.I.  GDP.X.

[1,]  0.1955   0.138  0.1978  0.1972  0.1961 -0.1402

[2,]  0.0669   0.200 -0.0462 -0.0554 -0.0355  0.0751

[3,] -0.0312   0.239  0.0284  0.0314 -0.0272  0.2229

      GDP.G. P.US.TBILL. P.CPAPER. P.FED.FUNDS.  P.CPI.

[1,]  0.1976     0.00429  -0.01554       0.0127 0.19773

[2,] -0.0377     0.40583   0.40460       0.3998 0.00996

[3,]  0.0541     0.07630  -0.00165       0.0986 0.02128

     P.GDP. P.SP500. V.NYSE. P.S.P.DPR. P.S.P.EPR.

[1,] 0.1967   0.1868   0.166     -0.146     -0.112

[2,] 0.0337  -0.1076  -0.131      0.144      0.128

[3,] 0.0240  -0.0277   0.165      0.321      0.384

     Q.H.Starts.   K.US.      M1      M2 P.WPI.    Q.A.

[1,]     -0.0202  0.1974  0.1953  0.1979 0.1932  0.1918

[2,]      0.0392 -0.0418 -0.0145 -0.0325 0.0612  0.0766

[3,]     -0.4666  0.0446 -0.0318  0.0472 0.1051 -0.0973

        Q.I.   O.B. P.FUELS. P.W.AG. P.W.MFG. Q.OIL.

[1,]  0.1967 -0.173   0.1834  0.1983   0.1990 -0.113

[2,]  0.0374  0.186   0.0269  0.0131   0.0125  0.312

[3,] -0.0683  0.110   0.2538  0.0489   0.0232 -0.145

       N.US. IMM.US.   U.US.   CAPU     EF Globalization

[1,]  0.1951  0.1440  0.1967 -0.141 0.1867        0.0818

[2,]  0.0746  0.0546  0.0477 -0.153 0.1096       -0.2964

[3,] -0.0642 -0.1371 -0.0589 -0.164 0.0303        0.3905

        CO2 Q.FOSSIL.

[1,]  0.180     0.129

[2,]  0.155     0.283

[3,] -0.110    -0.157

 Fraction of Variance 

 [1] 0.698 0.854 0.900

Atlanta Fed Economy Now

My approach to forecasting is similar to the EconomyNow model used by the Atlanta Federal Reserve. Since the new Republican Administration is signaling that they would like to eliminate the Federal Reserve, the app might well not be available in the future.

Hurricane Forecasting

My vision for SocioEconomic system forecasting is to follow the US National Oceanic and Atmospheric Administration's (NOAA) approach to hurricane (Economic Crisis?) forecasting using Spaghetti Models (see below).

Currently, Economic forecasting does not use Multimodel Inference but it is getting there! The best state space model for the US SocioEconomic System in the graphic at the beginning of this post is the World System (W) model based on the AIC Criterion.

Climate Change

Another comparison for what I have presented above are the IPCC Admission Scenarios. These scenarios are for the World System. Needless to say, the new Right-Wing Republican administration plans on withdrawing the US from all attempts to study or ameliorate Climate Change.

Is the US Presidential Election a Random Walk?

 

Today is (finally) the US Presidential Election. Can the results be predicted ahead of time? The Economist Magazine has a prediction model (here)  but most experts seem to be saying that the race is too close to call. I'll make a prediction because I have a little different approach than other forecasters. My results won't be very comforting.

First, I've created an Index of Political Support (see the graphic above, click to enlarge, the solid red line is the toss-up election line). A positive standard score indicates support for the GOP; a negative value indicates support for the Democratic party (this isn't a value judgment, just a way to present data).  Elections happened every four years in the US, but the support index is continuous and nonlinearly interpolated between elections. Support has cycled back and forth between parties over time with the mid-1970s to mid-1990s being GOP high points (except for the Carter years).

Then, I tested four models: (1) A Random Walk (RW), (2) A BAU (Business-As-Usual), (3) a US Economy Index model and (4) A World System Index model. The Index models are similar to the Atlanta Fed GDPNow Model except that the Political Support Index is substituted for GDP. If we accept the results of opinion polling (here), the US Economy should be the major determinant of Political Support with Foreign Policy (the World System Index) being the fourth most important. The BAU model would essentially mean that people cast their votes traditionally, possibly based on family upbringing. But, what would the RW model mean?

A Random Walk model, Support(t) = Support(t-1) + E(t-1), indicates that Political Support today is a function of yesterday's Political Support plus Random Error, E. It is sometimes called the Drunkard's Walk which assumes that randomness rules our lives, "...history being one damned thing after another." It would mean that Political Support is essentially unpredictable.

It turns out the the RW and BAU are the best models using the AIC Criterion. The RW or BAU result feel pretty appropriate for the current Presidential Election in the US. The voters seem to be very conflicted and acting randomly. The GOP nominee, a former single-term president, has an unsavory political and criminal record. The Democratic nominee, the current Vice President, is fighting deep-seated racial and misogynistic undercurrents in American history. The US has had only one Black president and has never had a female president.

What does this mean for our political system? David Easton's model of the Political System (here) might need to be modified. Support might be a poor method of controlling the System if it is simply a Random Walk. We have to wait for some Shock such as the Vietnam War or the 1973 Oil Crisis or the Great Inflation the Dot-Com Bubble or the Subprime Mortgage Crisis or the COVID-19 Pandemic (did I miss anything) to force the country out of random voting. Even then, it seems that the voters have poor memories (the botched handling of the COVID-19 Pandemic was during the Trump Administration and the Inflation Reduction Act did not cause the COVID-19 supply-chain inflation).

There is plenty of blame to go around. Can the Two-Party System be expected to field reasonably competent candidates who will run the country effectively? Can the Legal System hold political elites accountable for criminal activity? Can Congress impeach presidents who are incompetent? Can our Educational Systems produce citizens who can process economic and political information and make decisions?

Maybe my most depressing question is whether Democracy is compatible with Capitalism? Every day we go to work in organizations that are Authoritarian. They are not democracies. Our only experience with Representative Democracy is periodic elections which seem unable to sort out competent from incompetent candidates. Competent candidates seem to want nothing to do with political offices.

One positive trend is the Ballot Initiative (there should be more of these and some States do not allow them). Some of the big questions of the day (here) should be put to the voters. The political parties should make recommendations for each initiative and give their reasons. Only minor issues should be put to incompetent political representatives.

Data and Sources

Are Migrants Stealing Your Jobs?

The US Presidential Election is tomorrow. In a prior post (here) I presented poll results from the Pew Research Center showing that the Economy, Health Care,Violent Crime and Immigration were the major issues, of concern to more the 60% of all voters. What the polling doesn't tell me is whether these issues are interrelated. I expect they are but in no straight forward way (that's why they are political issues).

There is a mountain of research results on each issue; none of it is very easy for the average voter to wade through. Here's what the Artificial Intelligence (AI) System ChatGPT produces after surveying the results:

In summary, while there can be local variations, the data does not support a general link between higher immigration and increases in either unemployment or crime.

Interestingly, AI does not agree with Political Intelligence here. For example, the Heritage Foundation, a Right-Wing Think Tank,  argues that "...2/3 of Federal Arrests involve non-citizens". Of course, both ChatGPT and the Heritage Foundation have biases because they base their conclusions on very limited data and biased mental models. So, the assertions and arguments don't satisfy me.

In the causal diagram above (click to enlarge), I try to make some links that are missing from the literature which concentrates almost entirely on presenting numbers for Net Migration, Employment, Unemployment, Crime and Healthcare. My working hypothesis is that all these variables are being driven by Shocks and internal dynamics within the US Economy and the World-System. Causal links with "?" indicate that the direction of causation is unclear, at least to me.

First, let me summarize my results before getting into details. The models I will use are similar to the Atlanta Federal Reserve's Economy Now model but I've expanded the variables of interest to include Crime, Net Migration and Healthcare (the EconomyNow app, which you can download on your cell phone, covers GDP, Wages, Employment and Consumer Prices). It's the same model I have used in prior post (here and here). To summarize my findings:

• Crime Crime rates have been declining since 1974 with 1981 being the peak for violent crime rates. In the short run, crime rates are a random walk or driven by US Economic performance. In the long run, crime rates are driven by the World-System, particularly events in Latin America (this result should appeal to the Right-Wing). But, it is not driven by immigration.
• Government Healthcare Expenditure In the short-run, healthcare expenditure is also a random walk and driven by events in the World-System. It also is not driven by immigration.
• Unemployment In the short run, and the long run, unemployment is driven by events in the US Economy and not by immigration.
• Net Migration For net migration (more people entering than leaving the country), I don't get a very clear picture (this is probably why it is a perfect issue for wild political distortions). The best model is a Business-As-Usual (BAU) model, likely the result of US immigration restrictions. However, it does not support the assertion that the US has Open Borders.

If you are still interested, here are the details.

Crime

The graphic above (click to enlarge) shows violent crime over time across administrations (left panel) and violent crime after a NETM shock. Crime rates have been declining since a high in the late 1970s, bottomed out during the Obama Administration, began to climb again during the Trump administration and leveled off during the Biden Administration. A shock to NETM (right panel) decreased crime rates but not by a lot (the y-axis of both graphs is measured in standard score units).

The shocks to CRIME from World-System events are displayed in the graphic above. The two major shocks were the September 11 Attacks in 2001 during the Bush Administration and the COVID-19 shock during the Trump administration.

Government Healthcare Expenditure

The graphic above (click to enlarge) shows Federal Government Healthcare expenditures across administrations (left panel) and shocks to Health Care expenditure from NETM in the right panel. You can clearly see that Obama Care (the Affordable Health Care Act of 2010) "bent the curve" on US Healthcare expenditures. It is interesting that the time path of GHEALHX is best described as being driven by World-System events, specifically the state of the economy in Latin America. To my knowledge, this link has never been demonstrated before and should be considered controversial. However, shocks from NETM, although increasing GHEALHX, only have minor effects. And, the COVID-19 shock during the Trump Administration can be clearly seen. It would be fair to conclude from the graph above that abolishing Obama Care (a plank of the Trump Administration and Project 2025) would "unbend" the GHEALTHX curve.

Unemployment

The graphic above shows Unemployment (LU) by administration (in the left pane, driven by the US Economy) and shocks to LU from NETM in the right pane. You can clearly see the LU shocks at the beginning of the Reagan Administration, the beginning of the Clinton Administration, the beginning of the Obama Administration and the COVID-19 LU shock during the Trump Administration. Shocks to NETM (right pane) actually decrease unemployment but the effects are not very large.

Net Migration

The graphic above (click to enlarge) shows Net Migration (NETM) being driven by the World-System (left pane) and a shock to NETM from LU. NETM was particularly high in the Bush I and Clinton administrations as a result of World-System events. Shocks to LU decreased NETM, meaning that when Unemployment was high in the US, NETM was reduced (no jobs for migrants).

Summary

I have already summarized the results above, but I hope that the displays of Crime rates, Government Healthcare Expenditure, Unemployment, and Migration (GDP and Inflation here and here,  respectively) might help an interested voter make decisions about the upcoming Presidential Election.

One point that I hope is also made by the graphics is that "cherry-picking" isolated numbers and percentages (as seems to be the case in political rhetoric and Media presentations) mean very little without historical analysis. All the data presented above (and a lot more) are available from the World Bank Development indicators (here) and is freely available to you if you have other topics of interest.

If you would like to see some other series presented as an Economy Now model, please contact me. I am happy to post about other topics (otherwise, I'll just keep pursing my interests).

US Inflation by Administration

 

We are now within a week of the 2024 Presidential Election. There seems to be a lot of confusion in the American electorate about the state of the Economy and the role (if any) that has been played by prior administrations. In a earlier post (here), I looked at GDP across eight Administrations starting in 1974 (I also explain how to read the graphic above). In this post, I will look at Inflation, specifically the Consumer Price Index (CPI).

There were two major episodes of Inflation since 1974:  (1) The Great Inflation of the late-1970s and early 1980s and (2) the COVID-19 Pandemic Inflation of 2020. Both these historical periods provide fascinating Economic History and provide clues about how the Economic System really works (particularly the Nixon Price Controls and the current debate). Commentators with an axe to grind will argue that inflation is caused by Government Expenditure. For example, the Inflation Reduction Act of 2022 is erroneously argued to have caused the Inflation of 2020, but causation doesn't run backwards in time. 

Without becoming sidetracked in the causes of Inflation (I'll address that elsewhere), the major causes of Inflation in the Modern period are economic Shocks (the first row of the figure above):  

Since 1975, we've had (1) the Vietnam War, (2) the Great Society Programs, (3) the Arab Oil Embargo, and (4) the COVID-19 Pandemic. Everyone reading this lived through the COVID-19 Pandemic and experienced  supply chain disruptions (remember hoarding toilet paper). Any supply shocks will increase prices--that's simple ECON 101. Aggregate Demand shocks can also increase inflation, but the effects pale by comparison. 

It's inevitable that the current administration (Carter in the late-1970s and Trump in 2020) gets blamed for everything that happens on their watch. Except for botched or nonexistent attempt at Price Controls (they were used effectively during WWII), the shocks that hit the Economic System and resulted in Inflation had external causes. It is really the Political System's response or poor memory of cause-and-effect that has led to a bad taste in Voter's mouths.

In any event, the COVID-19 Pandemic Inflation is over, the  Inflation Reduction Act of 2022 has not created permanent increases in the CPI and the Atlanta Fed Economy Now App (you can get it on your cell phone and the forecasting approach is similar to the one I use) also predicts declining Inflation.

My take on the current Inflation episode is that the Political System missed an opportunity to implement a reasonable, possibly temporary, regime of Price Controls. For example, the Kroger-Albertson's Supermarket Merger  which was blocked by the Federal Trade Commission (FTC) could have been used to exert some control over Food Prices. As a condition of the merger, the new company would have been required to accept Price Gouging laws. Food Price Inflation has been major complaint of consumers. Capping price increases at Kroger-Albertson's would have been a major stimulus to their business. Blindly following Neoliberal Free-Market principles has prevented the US from responding to Inflation. Voters should be concerned about failures in the Political System.

US Economic Performance by Administration

 

We are about a week away from the US 2024 Presidential Election. Polling seems to show that likely voters are very concerned about the economy and hold each succeeding administration responsible for economic performance (see below). 

The graphic above shows Gross Domestic Product (GDP) performance since 1975 by the various presidential administration. The black line is actual GDP, the dashed red line is the GDP Attractor Path and the dotted and dashed blue and green lines are the lower- and upper-98% prediction intervals, respectively. The model used for prediction is my version of the Atlanta Fed GDP Now model.

The model shows that for most of the period (except briefly in the Reagan administration) the economy performed better than might have been expected from the Attractor Path. The Clinton and Bush II administrations even briefly reached the upper-98% prediction interval. The Trump administration inherited a solid economy from the Obama administration but was clearly affected by the COVID Pandemic. The Biden administration, so far, has almost returned to the upper-98% prediction interval, meaning the economy has performed extraordinarily well.

The best prediction for the future is that the economy will return to the GDP Attractor Path which means that whichever party wins the White House, the administration will face downward pressures on economy growth.

Polling on Economic Performance

A recent CBS poll (here) shows that respondents rated the prior Trump Administration (Jan 2017 to Jan 2021) as better than the current Biden Administration on economic performance. The polling does not seem to reflect the actual data (see above) but the COVID Pandemic hit during the Trump administration and respondents seem to discount the resulting economic shocks.

Update

Current BEA estimates (here) show GDP increasing within the upper-98% prediction interval. The economy continues to perform quite well inspite of pessimistic polling data.

Was It a Mistake for Britain to Enter the EU?

I have written an earlier post (here) showing the effect on Gross Domestic Product (GDP) of Britain leaving the EU and pursuing a Go-It-Alone Scenario. The effect, based on the UK20 model run with no inputs, was that GDP would peak in 2020. The pro-BRitain EXIT (Brexit) model makes the argument that Britain should have never joined the EU. I will investigate that counterfactual in the following post.

The way to construct a BrNoEU (Britain No EU) counterfactual would be to estimated a statistical model using only data prior to the assumed entry point. Then the model prediction for some variable, such as GDP, would be forecast into the future and compared with what actually happened. If entering the EU was good for GDP, the fictitious future should have shown slower growth than actually happened.

The history of Britain's entry into the European Union (EU) is somewhat complex (here), but let's for the sake of simplicity use the signing of the Maastricht Treaty on Nov 1, 1993 as the starting point. For a number of reasons to be discussed next, I decided to start the model in the year 2000 and do an attractor-path simulation with the UK2000 model model starting in 1960. The best UK2000 model has no inputs meaning that the best way to think about Britain in the late 20th century was as a Go-It-Alone nation.

To understand the counterfactual, look at the time plot above. The dark solid line is the actual path of GDP displayed here from 1980 to 2012. The dashed red line is the attractor path constructed by simulating the UK2000 model from 1960 to 2040. The dashed green and blues lines are the 98% upper and lower prediction intervals. The prediction intervals are relatively narrow for the period where we have data and start to get wider apart in the future as our confidence in the prediction decreases.

Looking at the actual path for GDP (dark solid line), prior to the Maastricht Treaty, Britain was having some trouble staying on the attractor path. The economic bubble that started in the mid-1980s had popped by the point the Maastricht treaty was signed. At the time, it must have looked as if Britain needed some help maintaining economic growth and joining the EU offered that hope. Indeed, from the 1990s till the Financial Crisis of 2007-2008, it looked as if joining the EU had been a success. The hope that Britain would keep growing (red arrow) above the attractor path, however, was an unrealistic expectation. Currently, the British economy is on the attractor path looking as if there was not much benefit from entering the EU.

How do we understand this counterfactual? If the pro-Brexit position is that the British economy would return to the growth rates of the 1993-2007 period by leaving the EU, the model shows that joining the EU would most likely lead to the departure from the attractor path and the 2007-2008 Financial Crisis put an end to the boom. The pro-Brexit position confuses membership in the EU with the effects of the 2007-2008 Financial Crisis. Leaving the EU will not increase GDP growth and will likely take the British economy back to the boom-and-bust period of the 1980s.

If you look back at my earlier post (here), you will also see that whatever Britain does, attractor path growth for the economy is slowing. The economy is maturing and Brexit will not change that and will probably only make matters worse. This, of course, would not be an easy argument to sell to the British public.