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Saturday, November 20, 2010

Should Republicans Consider Hedging Their Bets on Paul ‘Speedy’ Ryan? Fail Files, Vol. II

Disinformation’s readers come through yet again.  Responses to my last blogpost were extremely varied and thought provoking, with some well-reasoned and others less so.  The persistence of themes played out in the latter so impressed me that it well pleases me to once again examine the big ol’ “Fail” written all over Paul Ryan’s (R-WI) endorsement of the Laffer Curve, especially its implications for ‘The Velocity of Money’.



Remember ‘The Velocity of Money’That’s the basic economic concept introduced in our post about the hypothetical castration of Goldman Sachs.  It’s a thumbnail measure of how efficiently an economy employs its capital—the more often a single dollar is spent during a given year, the higher the rate of employment.  Any number of other theoretical implications can be drawn from that;  the higher the rate of employment, the greater economic, social and political equality, the higher the rate of technological innovation, etc., etc. 

Paul Ryan’s bizarre fixation with tax cut giveaways for his bankster buddies*** and slashing Social Security benefits relates to ‘The Velocity of Money’ in this way:  He is trying to sell you on the notion that corporate spending has a faster velocity than federal spending.  Is this true?  Let’s take a look at the evidence ourselves.

Data and Analysis
Before we begin, you should know that there are many standard ways of comparing the relative productivity of government vs. corporate spending.  But they are typically too narrow (e.g., don’t even consider the usefulness of non-profit driven infrastructures like courts, roads, bridges, water and electricity lines, etc.) or require use of numerous complicated and opaque actuarial assumptions (e.g., the relative propensity to spend for pensioners vs. new college graduates just entering the work force, etc.).

But we can go another route.  We can use that very simple concept, ‘The Velocity of Money’.  Remember, that’s a quick thumbnail stat that shows how often a dollar gets spent in a given year, and the higher the better.  It has a high, positive correlation (i.e., >75%) to employment.  So the higher the velocity the better.

The math is simple, too.  It may not even require an inflation-indexing of the data, because what we’re trying to measure is how many times a dollar cycles through the economy during a single year, not a static comparison of income levels between different years.  All we have to do then is divide each sector’s contribution to Gross Domestic Product (“GDP”) by its money supply, per the standard formula we learned about here.

The non-partisan career professionals at the Bureau of Economic Analysis regularly publish breakdowns of GDP by sector here.  One minor new term for you to learn is Gross Value Added (“GVA”).  Basically this just means the contribution by a given sector; the sum of GVA’s for all non-government sectors plus that of the government sector equals the total GDP.  See the reconciliation of this sector detail to the total in rows 19 through 21 of the workbook ‘Velocity of Money by Sector.xls’ here.

Probably the only novel component of this calculation is allocating a portion of the money supply to individual sectors; after all money is the ultimate in fungible assets, and a key concept underlying ‘The Velocity of Money’ is the relational dynamic of the various sectors interacting with one another to maximize GDP.  But that may not be as challenging as you’d think: the Federal Reserve Bank regularly publishes reports summarizing the total flows and balances of money and other financial instruments throughout the U.S. economy.  This is called the ‘Release Z.1’, and we can use it to calculate the average money held by each sector during a given year.  We’ll focus especially on the levels tables L.204, L.205, L.206, L.207 and L.208.  They tell us the total aggregate balances of currency and cash, time and savings deposits, money market funds, federal funds repurchase agreements and open market paper components of the money supply.

Unfortunately, after February 2006, the Fed stopped tracking M3 components separately, meaning that we’ll have to both estimate M3-only components subsequent to that date, and come up with some reasonable way to allocate it to the various sectors.  However, we’re not totally out of luck.  We already estimated subsequent M3 based on its strong correlation to the Dow Jones here.  And it turns out that two M3-only components are broken out separately in workbooks L.207 and L.208—and that gives us a rationale to allocate the rest of the estimated M3 balance.  Unsurprisingly, on average over 60% of M3-only components are held by the corporate financial sector.

So far so good.  Pretty simple: divide gross value added by the average money supply for the sector during the year.  But I would give you three reminders when you look at this data:

  1.  The Fed has only made complete data for the years 2001 through 2009 available in Excel format.  While I could spend the next five decades manually transcribing the PDF file information for other years, I’m not sure that’s so value added for our purposes.  Especially since the remaining data doesn’t go back much farther than 2000.
  2. Data for 2008 and 2009 was very skewed by certain measures taken to address the liquidity crisis that started in Q3 2008.  The Fed initiated two programs under Section 13[c] of the Federal Reserve Act that were funded by sales of government securities, bumping up federal cash quite a bit--$259.3 billion for the Commerical Paper Financing Facility ("CPFF") and $49.8 billion for the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility ("AMFL") in 2008 alone.  Of course, since Paul Ryan not only begged for passage of the TARP  the House floor, but was also a big beneficiary of some of the rescued firms (i.e., AIG and JP Morgan Chase)***, I think he will agree that these extra-ordinary funding events should be removed from the analysis in order to preserve comparability.  See further details about these transactions at note BJ in cell AA100 on the ‘Velocity of Money by Sector’ tab within the workbook here.
  3. Be aware of some important sector classifications.  I’ve followed the Fed’s own classification system for the most part. (Well, I have to, don’t I?  I don’t have access to the full underlying dataset.)  That puts the Fed and Fannie Mae and Freddie Mac as well as all federal and state pension plans within the ‘Financial Sector’.  Being in a generous mood, and wishing to head off potential controversy regarding the role of those institutions in the home mortgage debacle that most say lead to the whole fiasco in Q3 2008, I've cut the corporate finance guys a little slack:  while I give them full credit for the GDP of the entire financial sector (including the Fed, Fannie and Freddie), I've taken the Fed's cash OUT of the equation. I have them listed in the workbook as 'Monetary Authority'.  So the private financial sector gets a little boost by not having to cary the Fed's cash in this calc.
Okay!  Got all that.  Feel free to take your time and read it over again if need be.  Here’s a short glossary of terms if you need help.  And here’s a link to the analysis workbook:  Velocity of Money by Sector.xls’.  Continue on to the conclusion whenever you feel you get the gist of what we’ve done here.

But I myself can hardly wait.  Paul Ryan’s laid big money (via TARP bailouts and tax cuts for the uber-rich  ) on the financial corps(e) coming out wayyyy ahead of slow-poke federal government.  Let’s see how well that works for him.

Conclusion



Huh.  Who’d have funk it?  Turns out, compared to Ryan's corporate bankster buddies, dat' damn gubmint' is a job creatin' machine!  The federal government has a jobs-producing median velocity of 9.4, versus ZERO-POINT-TWO (0.2) for financial corporations!  That suggests that, at least as it's currently structured, the Big Banks are actually a drain on the national economy rather than a boon.  Wonder if that ever comes up during Ryan's fundraising dinners with JP Morgan Chase and AIG execs?***

Non financial corporations fare somewhat better at 5.5, but that’s just baaaaarely over half the rate that federal spending increases GDP.  Look here in the workbook 'Velocity of Money by Sector.xls' for details.

Or was it a mistake??  Maybe Paul actually knew that his plan would likely ruin the economy and cost thousands their homes and destroy the United States; maybe he just didn’t give a flying fuck.  Maybe he thought we weren’t gonna catch onto him.  Though I don’t know how; his hypocritical ragging on the 2010 financial regulation law after he’d begged for the TARP handouts is legendary.  He’d have to know we’re on to him by now.

Recommendations
Call and your representatives and senators immediately and often telling them that you know what a horrible idea Paul Ryan's "Roadmap to America's Ruin" is.  And let them know that you know what you’re talking about.  Send them a copy of this chart.  Send them a link to the workbookVelocity of Money by Sector.xls’so they can see for themselves.  Send them a link to this blog post.  Send them a link to the Senate testimony of Mark Zandi, Chief Economist at Moody's, to the effect that tax increases for the rich are tantamount to robbery of the middle class and that continued support of government programs like Social Security and Medicare is vital.  Send them a link to the Congressional Budget Office's report that renewal of the Bush era tax cuts would add bring the national debt up to 100% of GDP by 2020.  Email this stuff to your friends, family and acquaintances.  Whatever you do, don't keep this information to yourself.


Footnotes
*Excludes effects of about $309.1 billion and $37.9 billion in 2008 and 2009, respectively,  to fund a bailout of Ryan’s buddies at AIG, JP Morgan Chase and Goldman Sachs.  See further discussion in point #2 in the Data and Analysis section.
**Includes, in accordance with the Fed’s own classification system, GDP activity of the Fed itself as well as Fannie Mae and Freddie Mac.  However, as further explained at point #3 in the Data and Analysis section above, I felt generous and gave the corporate financial sector a break by splitting out the Fed's cash balance separately.  Don't say I never gave them a hand!
*** During this last election cycle, Paulie boy was a big favorite of the banksters.  His clients included not only Goldman, but CITI, Bank of America, JP Morgan and a host of other F.I.R.E.  (i.e., "Finance, Insurance and Real Estate sector) companies and trade groups.  In fact, he got about $246,000 or 25% of his total PAC money from these guys.  See details here.  Who knows how much else he got INdirectly through Orwellian-ly named PACs or individual contributions?

[Editorial Note December 2, 2010:  See note regarding the revision of M3 calculation at item #1 here.]

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