By Philip Pilkington
I’m currently reading Robert Solow’s paper A Contribution to the Theory of Economic Growth in which he lays out his famous Solow growth model. I don’t want to get into the actual model laid out here but instead ask what exactly this paper is trying to address. As readers of this blog will probably know I find so-called ‘long-run’ models to be about as useful for understanding the economy as toy train sets are for understanding the operations of an actual train. But in many instances the reasoning they are based on is poisonous and somewhat dangerous.

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Solow starts out the paper by criticising the Harrod-Domar growth model (for an excellent overview of the Harrod-Domar model which is one of the most suggestive in macroeconomics see the following three

By John Mauldin, Thoughts from the Frontline

“China’s economy has entered a state of new normal.”– Premier Li Keqiang, 2015
“Success breeds a disregard of the possibility of failure.”– Hyman Minsky

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Hollywood thrives on tropes. Most things that are possible to portray on film have been portrayed at some point in the last century. Today’s producers mostly just rearrange those tropes – and that’s OK.
Much of what we think is new and different is actually one variation or another on ancient themes. My favorite book genre, science fiction, has many archetypal tropes that can be traced back to Greek mythology, which itself must have grown out of tales that must have been told for

By John Mauldin, Thoughts from the Frontline

“Forget the past. The future will give you plenty to worry about.”– George Allen, Sr.
“I try not to worry about the future, so I take each day just one anxiety attack at a time.”– Tom Wilson

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The middle ground can be uncomfortable. As someone now widely known as the “muddle-through guy,” I have learned this the hard way. My bullish friends call me a worrywart, and the bearish ones think I am Pollyanna incarnate.
The irony here is that I’ve never claimed to be a great trader or a short-term forecaster. I think I have a pretty good record of calling major turning points. Next week or next month is another matter. Anything can happen, and

By Elliott Morss, Morss Global Finance
Introduction
In earlier writings, I have pointed to the primary shortcoming of democracy as a form of government. Special interest groups get what they want via lobbying and campaign contributions while the general question of what is good for the country is put on the back burner.

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An excellent example of this is what Eisenhower warned about – the military-industrial complex. The complex is not happy unless the US is at war. And for the last 60 years, it has gotten what it wants: since Vietnam, the US has almost always been at war, wars of questionable merit. The military-industrial complex has been helped along by an electorate that is

By Timothy Taylor, Conversable Economist
Given the tumultuous changes in the US economy in recent years, I would have guessed that average "job tenure"–that is, the average time that someone with a job has held that job–was declining. My guess would have been wrong. Henry R. Hyatt and James R. Spletzer present the evidence that job tenure has been mostly on the increase since about 2000 in "Shifting Job Tenure Distribution" (U.S. Census Bureau, Center for Economic Studies, May 2016, CES 16-12R).

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For example, they write:
"According to published statistics from the Current Population Survey (CPS), the proportion of workers with five or more years of tenure on their main job has

By Philip Pilkington
Article of the Week from Fixing the Economists
Recently I ran a post that briefly delved into the connection between Keynes and the money cranks of the 1920s and 1930s. There I showed that Keynes’ ideas cannot be said to have been influenced in any substantial way by the money cranks. Rather they were an outgrowth of a modifying of his earlier views, put forward in his Treatise on Money and taken from the Swedish economist Knut Wicksell.

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In what follows I will draw upon an article by Robert Dimand entitled Cranks, Heretics and Macroeconomics in the 1930s. Dimand’s narrative is centered on a periodical that was started in the US in 1932 entitled Economic Forum.

By John Mauldin, Thoughts from the Frontline

“I often joke that 100 years from now I hope people are saying, ‘Dang, she looks good for her age!’”– Dolly Parton
“Just because you live 20 years or 100 years doesn’t make it less meaningful. They’re both short amounts of time. So all we can do is just live in that time, whatever time we’re given.”– Ansel Elgort
“If I had more time, I would have written a shorter letter.”– Blaise Pascal, 1657 (and a few score other later attributions)

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Author’s note:  Welcome to the new, improved, faster-to-read, better yet still-free Thoughts from the Frontline. My team and I have been doing a lot of research on what my readers want. The reality is

By Philip Pilkington
Article of the Week from Fixing the Economists
One of the nicest stylised facts in applied economics is that if the Fed inverts the yield curve it will cause a recession. Inverting the yield curve basically means that the Fed hikes the short-term interest rate goes higher than the long-term interest rate. In theory this should lead to long-term lending drying up, investment falling significantly (usually in housing and inventories) and, ultimately, a recession.

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The track record of this as an indicator of recessions in the US is too impressive to dismiss. Take a look at the chart below. The shaded areas are recessions. As you can see, every time the short-term

By John Mauldin, Thoughts from the Frontline

“Premature optimization is the root of all evil…”– Donald Knuth, from his 1974 Turing Award lecture

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This is the second of twoarticles that I think will be among the most important I’ve ever written. These letters set out my philosophy about how we have to invest in the coming days and years. They are the result of my years spent working with clients and money managers and thinking about the economic and particularly the macroeconomic world. Because of some of the developments I will be discussing, I think the future is likely to be extremely challenging for traditional portfolio allocation models. In these letters I also discuss some

By Philip Pilkington
Article of the Week from Fixing the Economists
A conversation that I was having some time back reminded me of a rather funny point in economic theory. When we consider the value of a financial asset we take into two components: that is, it’s price and it’s income stream. It’s price is a sort of stock variable while it’s income stream is a flow variable.

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Now that’s all rather simple and elementary. But once we subject these two variables to some degree of uncertainty it becomes impossible to truly calculate the value of the asset moving into the future in any meaningful way.
Let’s take a concrete example: that of a government bond. Let’s say that the bond is

By Elliott Morss, Morss Global Finance
Introduction
The papers are full of speculations of possible collusion between Trump associates and the Russians. And there is even now talk of Trump leaning on US intelligence leaders to drop the investigations. However, throughout all of this, his core supporters have stuck with him. But there is an area that will cause him to lose a large segment of his supporters – his policies. Below, supporters and the policies that will cause them to reject him are examined.

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Trump’s Supporters
Recently, some survey pundits have claimed Trump’s support did not come to low income Americans. This claim is misleading. Many high income Republicans voted for

By John Mauldin, Thoughts from the Frontline

“A speculator is one who runs risks of which he is aware, and an investor is one who runs risks of which he is unaware.”– John Maynard Keynes
“The biggest mistake investors make is to believe that what happened in the recent past is likely to persist. They assume that something that was a good investment in the recent past is still a good investment. Typically, high past returns simply imply that an asset has become more expensive and is a poorer, not better, investment.”– Ray Dalio, founder, Bridgewater Associates, LP

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This letter and next week’s will be two of the most important I’ve ever written. They will set out my philosophy about

By Rick Davis, Consumer Metrics Institute
26 May 2017 – BEA Revises 1st Quarter 2017 GDP Growth Upward To 1.16%
In their second estimate of the US GDP for the first quarter of 2017, the Bureau of Economic Analysis (BEA) revised the growth of the US economy upward to a +1.16% annual rate, up +0.47% from their previous estimate for the first quarter but still down nearly a percent (-0.92%) from the +2.08% reported for the fourth quarter of 2016.

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Weak consumer spending grew at a meager +0.44% annualized rate during the quarter, up +0.21 from the previous estimate but still down a significant -1.96% from the prior quarter. The previously reported inventory contraction worsened

By Philip Pilkington
I’ve been asking myself that question rather a lot in the past two weeks. This is because I have had two separate commissions for pieces of writing that require me jump down the rabbit hole into the land of the money cranks. One piece is for a magazine and is about gold bugs and their ilk. The other is for an encyclopedia and deals with the Real Bills Doctrine.

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To be frank, the Real Bills stuff is actually in some ways worse than the gold bug stuff. Whereas the gold bug stuff is pretty straight-forward and basically in line with the quantity theory, the Real Bills stuff is all over the place. The basic “insight” is simple — that is, money-loans backed by assets

By Philip Pilkington
Fixing the Economists Article of the Week
Kevin Hoover, although not generally well-known in Post-Keynesian circles, is easily one of the most interesting economists writing on epistemology and ontology today. He was originally an applied macroeconomist but, like anyone who is remotely philosophically literate, he quickly began to see an awful lot of problems with both the econometric approach and with the models that were generally being used — most particularly, microfounded macroeconomic models.

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In his article Microfoundations and the Ontology of Macroeconomics he makes any number of interesting points. One that Lars Syll recently picked up on and which I highlighted in a book review last year is that the Rational Agent in microfounded models is an

By John Mauldin, Thoughts from the Frontline
Basic economics tells us all resources are scarce, but our demand for them is not. Hence we need methods to allocate the limited supply of each resource. A significant part of economics is the study of those methods.

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One exception to the rule, though, has developed in the last few years: The amount of information available to us is practically unlimited. Open your internet browser, and most of that information is just a few clicks way. But if media industry profits (or lack of them) are any indication, demand for that information is anything but infinite.
One problem with information is that much of it is biased. I know, for instance,

By John Mauldin, Thoughts from the Frontline

“There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt.”– John Adams, 1826
“The problem with fiat money is that it rewards the minority that can handle money, but fools the generation that has worked and saved money.”– Adam Smith

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“Being young and having no job remains stubbornly common. Wages for young people fortunate enough to get a job have gone down. Inflation-adjusted wages for young high school graduates were 11 percent higher in 2000 than they were more than a decade later, and inflation-adjusted wages of young college graduates (four years only) have fallen by more than 5 percent.

By Philip Pilkington
Something rather strange happened in Britain around the time of the financial crisis. The sterling tanked, import prices rose substantially and yet the inflation rate didn’t respond as much as we might assume.

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Other weird stuff happened too. For example, export prices rose rather than fell and the trade deficit worsened. Although these two aspects seem to totally contradict macroeconomic theory I’m not as concerned about them. In our newly globalised world exports, outside of small open economies, don’t increase as much as economists might assume. I’ve known this since I started examining the data — and Nicholas Kaldor was well aware of this by the late-1970s

by Raj Chetty, David Grusky, Maximilian Hell, Nathaniel Hendren, Robert Manduca and Jimmy Narang, Voxeu.org
Posted originally at Voxeu.org 05 May 2017
One of the defining features of the ‘American Dream’ is the ideal that children have a higher standard of living than their parents. This column examines rates of ‘absolute income mobility’ – the fraction of children who earn more than their parents – to assess whether the US is living up to this ideal. Rates of absolute mobility have fallen from approximately 90% for children born in 1940 to 50% for children born in the 1980s. Most of this decline is driven by the more unequal distribution of economic growth rather than the slowdown in aggregate growth rates.

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By Philip Pilkington
Article of the Week from Fixing the Economists
Note:  This article was written in April 2014.
I’ve been waiting for this for some time but now Jamie Galbraith has come out and provided an extensive discussion of Thomas Piketty’s new book Capital in the Twentieth Century. While I haven’t yet read Piketty’s book its difficult not to have heard about it given how much of a response it is getting among economics types.

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The moment the hype started I thought that something was amiss. In 2012 Galbraith and his team published an extensive empirical investigation of income distribution using new datasets that they constructed. Beyond the interview I did with Galbraith and a few other articles and the like the release of the study didn’t get much play among economist types. The reason should be obvious: whereas Galbraith arrived at heterodox conclusions, Piketty’s are mostly orthodox.
As Galbraith notes in his review Piketty seems to put some weight in the idea that the problems with income inequality that we face today are mainly to do with technology and education. Galbraith and his team, on the other hand, point to something that should be intuitively obvious to anyone following political and economic events in the past decade; namely, finance.

By Voxeu.org
— this post authored by Oscar Jorda, Bjorn Richter, Moritz Schularick, and Alan Taylor
Higher capital ratios are unlikely to prevent a financial crisis. This is empirically true both for the entire history of advanced economies from 1870 to 2013 and for the post-WW2 period, and holds both within and between countries. The authors of this column reach this conclusion using newly collected data on the liability side of banks’ balance sheets in 17 countries. However, higher capital buffers have social benefits in terms of macro-stability: recoveries from financial crisis recessions are much quicker with higher bank capital.

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A well-run bank needs no capital. No amount of capital will rescue a badly run bank.—Walter Bagehot

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The institutional response to the Global Crisis has centred on higher capital buffers and regulation of bank leverage. Bagehot’s quip, however, reminds us that the trouble might start when a bank decides how much to lend, and to whom: no amount of capital provisioning can make up for poor business acumen.
In theory, larger capital buffers should reduce both the probability and cost of financial crises, just as higher levees better protect against floods.

By John Mauldin, Thoughts from the Frontline

“We of the sinking middle class may sink without further struggles into the working class where we belong, and probably when we get there it will not be so dreadful as we feared; for, after all, we have nothing to lose.”– George Orwell
“A strong, educated middle class is what made America the greatest country in the world.”– Lincoln Chafee

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As we continue our tour of the widespread angst afflicting investors large and small today, I want to ask a more fundamental question: Is the angst all in our heads?
The quick answer: No, it’s not. The economic challenges we face are real. Fear, or angst, is often a perfectly reasonable response. I’ve said that, with one exception, we can muddle through the coming crises. But “we” doesn’t mean every single one of us. The nation will survive the next recession, but some of its citizens may not, at least not with the same financial security that they currently enjoy and expect. The coming pension crisis will put quite a dent in expectations. Economic strain can lead directly to sickness, disability, and sometimes suicide or fatal illness. It happens. I don’t want to minimize that risk.
It’s precisely the risk that we will find ourselves among those who can’t muddle through that creates so much angst. Worse, we know the risks aren’t randomly distributed.

April 28, 2017 – BEA Estimates 1st Quarter 2017 GDP Growth At 0.69%:
by Rick Davis, Consumer Metrics Institute
In their first (preliminary) estimate of the US GDP for the first quarter of 2017, the Bureau of Economic Analysis (BEA) reported that the US economy was growing at a +0.69% annual rate, down roughly two thirds (-1.39%) from the +2.08% reported for the prior quarter.

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Total consumer spending grew at a meager +0.23% annualized rate during the quarter, down a significant -2.17% from the prior quarter. Inventory contraction removed another -0.93% from the headline number, a swing of -1.94% from the prior quarter. Government spending contracted during the quarter, removing -0.30% from the headline. The good news was that commercial fixed investment added +1.62 to the headline, the strongest contribution since 1Q-2012 — five years ago. And foreign trade also improved markedly to an essentially neutral contribution (+0.07%), up some +1.89% from the prior quarter. The BEA’s "bottom line" (their "Real Final Sales of Domestic Product", which excludes the growing inventories) was nearly a full percent better than the headline at +1.62%, up +0.55% from the 1.07% rate recorded 4Q-2016.

By John Mauldin, Thoughts from the Frontline

“The ship of democracy, which has weathered all storms, may sink through the mutiny of those on board.”– Grover Cleveland, the 22nd and 24th president of the United States
“It is your concern when your neighbor’s wall is on fire.”– Horace

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“The biggest mistake investors make is to believe that what happened in the recent past is likely to persist. They assume that something that was a good investment in the recent past is still a good investment. Typically, high past returns simply imply that an asset has become more expensive and is a poorer, not better, investment.”– Ray Dalio, Founder, Bridgewater Associates

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When you spend a couple of decades writing weekly letters to hundreds of thousands of people you think of as friends, your readers naturally come to associate you with a few key ideas. I have certainly become known for at least one. My longtime regular readers think of me as the “Muddle Through” guy. That’s not an image I have tried to cultivate, but I have it anyway.
I have to confess that it’s usually accurate. In a typical letter I will describe some sort of potentially scary problem, explain what might happen, then conclude that we’ll probably avoid the worst and muddle through.

By Philip Pilkington
Well, it looks like The New York Times has opened a bit of a can of worms by asking Was Marx Right?. I generally find that this question to be a bit annoying. Was Marx right about what, specifically? That labour is the True and Only source of value? No, he was wrong on that. That communism was an inevitable outgrowth of capitalism? He’s been wrong on that — so far, at least. That capitalism was prone to financial crises? Yes, he was quite right about that.

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I suppose I’ve made my point. Marx said a lot of things. It would be rather unusual if he were right about everything he wrote and it would be equally surprising if he was wrong about everything he wrote. Marx was right about some things and wrong about some things. Although the man had a marked tendency to play the prophet in truth he was really just a man, no matter how much some of his contemporary acolytes may insist to the contrary. He was right sometimes and wrong sometimes.
Anyway, the series gives me an opportunity to clear up a few Marxian myths. The first is propounded by Brad Delong in his piece Marx Was Blind to the System’s Ingenuity and Ability to Reinvent.

By Elliott Morss, Morss Global Finance
Introduction
In all likelihood, Brexit is coming. What will its effects be and what countries will be injured the most? It clearly “depends.” While it is apparent that the UK would like trade linkages to remain the same, numerous Economic Union (EU) members have been piqued by Brexit and want to strip away some of the UK’s trade benefits. At least they do as a starting point for negotiations. Below, the benefits and costs of a breakup are examined.

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So Far
Initially, the sense was that Brexit would weaken Britain. This resulted in a weaker Pound: down nine percent against the Euro and twelve percent against the Dollar. And as a result, the UK’s exporters have been doing quite well since the vote.
What Will the Trade Effects Be?
The outcome of the Brexit negotiations remains uncertain. However, it is reasonable to assume that trade between the UK and the EU will be restricted in various ways. Who will this hurt the most? This will be reflected in lower exports and/or higher import prices.
a. EU Members
If Brexit occurs, it is likely that the completely free trade access that the UK now enjoys will be lessened. Table 1 provides EU members’ exports and imports to and from the UK.

By Philip Pilkington
Nothing gets heterodox economists quite so fussed as the long-run theory of the rate of profit. Yet, Keynes did without one altogether and when examined closely there is no way that such a theory can say anything tangible about the real world. In order to lay this out I am going to take my leave from Joan Robinson’s excellent book Economic Heresies: Some Old-Fashioned Questions in Economic Theory.

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When Robinson discusses Keynes she says that he had no real interest in a long-run theory of profits and accumulation. In the long-run, Keynes famously said, we are all dead. All that matter is short-term analysis. Crucially Keynes thought that profits and accumulation could not be discussed without reference to expectations — that is, to his ‘animal spirits’ — and thus any discussion about profits and accumulation in the long-run is only building so many castles in the sky.
In her book Robinson takes Keynes to task for discussing financial markets rather than the actual sphere of production. The Marxian and Ricardian influences on Robinson are clear when she writes, for example,

Keynes rather lost his grip on the distinction between the rentier and the entrepreneur.

By John Mauldin, Thoughts from the Frontline

“Companies are doing everything they can to get rid of pension plans, and they will succeed.”– Ben Stein
“Lady Madonna, children at your feet Wonder how you manage to make ends meet Who finds the money when you pay the rent? Did you think that money was heaven sent?” -– “Lady Madonna,” The Beatles

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There was once a time when many American workers had a simple formula for retirement: You stayed with a large business for many years, possibly your whole career. Then at a predetermined age you gratefully accepted a gold watch and a monthly check for the rest of your life. Off you went into the sunset.
That happy outcome was probably never as available as we think. Maybe it was relatively common for the first few decades after World War II. Many of my Baby Boomer peers think a secure retirement should be normal because it’s what we saw in our formative years. In the early 1980s, about 60% of companies had defined-benefit plans. Today it’s about 4% (source: money.CNN). But today defined-benefit plans have ceased to be normal in the larger scheme of things. We witnessed an aberration, a historical anomaly that grew out of particularly favorable circumstances.
Circumstances change.

By Philip Pilkington
Editor’s note:  This was written in March 2014.
Some people often ask why I complain about Krugman. “Hey Phil, Krugman is a good guy. He likes government spending. You like government spending. Therefore you must like Krugman,” says our budding young Socrates. Well, I’ll tell you why: because Krugman is a pretty awful economist who pushes completely outdated views and tricks people into thinking that they’re cutting edge. Anything that is of interest he poaches from elsewhere, typically engages in dubious accreditation and ultimately gets it wrong.

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The reason for this? Because Krugman loves models and hates books. He loves little simplifications of the world and hates complexity. That is why he has been wrong on most substantive issues over most of his career. What are the roots of this hatred? From his public writings it appears to have something to do with the influence of JK Galbraith and American institutional economics (which, in Krugman’s mind, is tied up with all heterodox economics).
In the mid-1990s Krugman used to write awful reviews of Galbraith’s books.

By Timothy Taylor, Conversable Economist

"America’s commerce with the rest of the world must be and always is balanced when taking into account investment flows as well as the exchange of goods and services. … [O]ne key insight for public policy is that the total outflow of dollars each year from the United States to the rest of the world is matched by an equal inflow of dollars from the rest of the world to the United States. There is no need to worry about a `leakage’ of dollars siphoning off demand from the domestic economy. Dollars spent on imported goods and services return to the United States, if not to buy US goods and services, then to buy US assets in the form of an inward flow of investment. … When we account for all the dollars flowing into the United States, with an adjustment for the statistical discrepancy, it totals the exact same amount. The difference between dollars flowing out and dollars flowing in each year is zero."

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Thus writes Daniel Griswold in "Plumbing America’s Balance of Trade," a paper published for the Mercatus Center at George Mason University. For noneconomist readers, Griswold’s statements may seem ideological or controversial.