CMP Associates Regulation Blog: Collateral Effects of Unwinding Unconventional Monetary Policy, Recovery without Hiring in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Ten Million Fewer Full-Time Jobs, Youth and Middle-Age Unemployment, United States International Trade, Rules, Discretionary Authorities and Slow Productivity Growth, Collapse of United States Dynamism of Income Growth and Employment Creation, World Cyclical Slow Growth and Global Recession Risk: Part II

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Collateral Effects of Unwinding Unconventional Monetary Policy, Recovery without Hiring in the Lost Economic Cycle of the Global Recession with Economic Growth Underperforming Below Trend Worldwide, Ten Million Fewer Full-Time Jobs, Youth and Middle-Age Unemployment, United States International Trade, Rules, Discretionary Authorities and Slow Productivity Growth, Collapse of United States Dynamism of Income Growth and Employment Creation, World Cyclical Slow Growth and Global Recession Risk

I Recovery without Hiring

IA1 Hiring Collapse

IA2 Labor Underutilization

ICA3 Ten Million Fewer Full-time Jobs

IA4 Theory and Reality of Cyclical Slow Growth Not Secular Stagnation: Youth and Middle-Age Unemployment

IIB United States International Trade

IIC Rules, Discretionary Authorities and Slow Productivity Growth

II IB Collapse of United States Dynamism of Income Growth and Employment Creation

III World Financial Turbulence

IIIA Financial Risks

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendixes

Appendix I The Great Inflation

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

IIID Appendix on European Central Bank Large Scale Lender of Last Resort

IIIG Appendix on Deficit Financing of Growth and the Debt Crisis

IIA United States International Trade. Table IIA-1 provides the trade balance of the US and monthly growth of exports and imports seasonally adjusted with the latest release and revisions (https://www.census.gov/foreign-trade/index.html). Because of heavy dependence on imported oil, fluctuations in the US trade account originate largely in fluctuations of commodity futures prices caused by carry trades from zero interest rates into commodity futures exposures in a process similar to world inflation waves (https://cmpassocregulationblog.blogspot.com/2018/01/dollar-devaluation-and-increasing.html). The Census Bureau revised data for 2017, 2016, 2015, 2014 and 2013. Exports increased 1.8 percent in Dec 2017 while imports increased 2.5 percent. The trade deficit increased from $50,435 million in Nov 2017 to $53,118 million in Dec 2017. The trade deficit deteriorated to $45,290 million in Feb 2016, improving to $37,380 million in Mar 2016. The trade deficit deteriorated to $38,422 million in Apr 2016, deteriorating to $41,520 million in May 2016 and $43,385 million in Jun 2016. The trade deficit improved to $41,294 million in Jul 2016, moving to $41,130 million in Aug 2016. The trade deficit improved to $38,466 million in Sep 2016, deteriorating to $43,069 million in Oct 2016. The trade deficit deteriorated to $46,373 million in Nov 2016, improving to $44,607 million in Dec 2016. The trade deficit deteriorated to $48,715 million in Jan 2017, improving to $44,447 million in Feb 2017. The trade deficit deteriorated to $44,751 million in Mar 2017 and $48,087 million in Apr 2017, improving to $47,822 million in May 2017. The trade deficit improved to $45,626 million in Jun 2017 and to $45,102 million in Jul 2017. The trade deficit improved to $44,245 million in Aug 2017, deteriorating to $44,830 million in Sep 2017. The trade deficit deteriorated to $48,553 million in Oct 2017, deteriorating to $50,435 million in Nov 2017. The trade deficit deteriorated to 53,118 million in Dec 2017.

Table IIA-1, US, Trade Balance of Goods and Services Seasonally Adjusted Millions of Dollars and ∆%

	Trade Balance	Exports	Month ∆%	Imports	Month ∆%
Dec	-53,118	203,351	1.8	256,469	2.5
Nov	-50,435	199,806	2.3	250,241	2.5
Oct	-48,553	195,290	-0.1	244,144	1.6
Sep	-44,830	195,436	1.1	240,265	1.2
Aug	-44,245	193,257	0.5	237,502	-0.2
Jul	-45,102	192,924	-0.1	238,026	-0.3
Jun	-45,626	193,074	1.2	238,699	0.0
May	-47,822	190,865	0.2	238,687	0.0
Apr	-48,087	190,558	-0.6	238,645	0.9
Mar	-44,751	191,726	0.0	236,477	0.1
Feb	-44,447	191,819	0.3	236,266	-1.5
Jan	-48,715	191,206	0.9	239,921	2.5
Jan-Dec 2017	-566,031	2,329,311	5.5	2,895,342	6.7
Dec 2016	-44,607	189,507	2.5	234,114	1.3
Nov	-46,373	184,848	-0.4	231,221	1.1
Oct	-43,069	185,599	-1.3	228,668	0.9
Sep	-38,466	188,123	0.4	226,588	-0.8
Aug	-41,130	187,385	1.1	228,514	0.8
Jul	-41,294	185,330	0.8	226,624	-0.4
Jun	-43,385	183,770	0.9	227,605	1.8
May	-41,520	182,166	0.1	223,686	1.5
Apr	-38,422	181,895	1.1	220,317	1.4
Mar	-37,380	179,887	-0.6	217,277	-3.9
Feb	-45,290	180,892	1.2	226,182	1.9
Jan	-43,409	178,660	-2.3	222,070	-0.9
Dec 2015	-41,125	182,919	-0.5	224,044	-0.3
Jan-Dec 2016	-504,793	2,208,072	-2.5	2,712,866	-1.9

Note: Trade Balance of Goods = Exports of Goods less Imports of Goods. Trade balance may not add exactly because of errors of rounding and seasonality. Source: US Census Bureau, Foreign Trade Division

http://www.census.gov/foreign-trade/

Table IIA-1B provides US exports, imports and the trade balance of goods. The US has not shown a trade surplus in trade of goods since 1976. The deficit of trade in goods deteriorated sharply during the boom years from 2000 to 2007. The deficit improved during the contraction in 2009 but deteriorated in the expansion after 2009. The deficit could deteriorate sharply with growth at full employment.

Table IIA-1B, US, International Trade Balance of Goods, Exports and Imports of Goods, Millions of Dollars, Census Basis

	Balance	∆%	Exports	∆%	Imports	∆%
1960	4,608	(X)	19,626	(X)	15,018	(X)
1961	5,476	18.8	20,190	2.9	14,714	-2.0
1962	4,583	-16.3	20,973	3.9	16,390	11.4
1963	5,289	15.4	22,427	6.9	17,138	4.6
1964	7,006	32.5	25,690	14.5	18,684	9.0
1965	5,333	-23.9	26,699	3.9	21,366	14.4
1966	3,837	-28.1	29,379	10.0	25,542	19.5
1967	4,122	7.4	30,934	5.3	26,812	5.0
1968	837	-79.7	34,063	10.1	33,226	23.9
1969	1,289	54.0	37,332	9.6	36,043	8.5
1970	3,224	150.1	43,176	15.7	39,952	10.8
1971	-1,476	-145.8	44,087	2.1	45,563	14.0
1972	-5,729	288.1	49,854	13.1	55,583	22.0
1973	2,389	-141.7	71,865	44.2	69,476	25.0
1974	-3,884	-262.6	99,437	38.4	103,321	48.7
1975	9,551	-345.9	108,856	9.5	99,305	-3.9
1976	-7,820	-181.9	116,794	7.3	124,614	25.5
1977	-28,352	262.6	123,182	5.5	151,534	21.6
1978	-30,205	6.5	145,847	18.4	176,052	16.2
1979	-23,922	-20.8	186,363	27.8	210,285	19.4
1980	-19,696	-17.7	225,566	21.0	245,262	16.6
1981	-22,267	13.1	238,715	5.8	260,982	6.4
1982	-27,510	23.5	216,442	-9.3	243,952	-6.5
1983	-52,409	90.5	205,639	-5.0	258,048	5.8
1984	-106,702	103.6	223,976	8.9	330,678	28.1
1985	-117,711	10.3	218,815	-2.3	336,526	1.8
1986	-138,279	17.5	227,159	3.8	365,438	8.6
1987	-152,119	10.0	254,122	11.9	406,241	11.2
1988	-118,526	-22.1	322,426	26.9	440,952	8.5
1989	-109,399	-7.7	363,812	12.8	473,211	7.3
1990	-101,719	-7.0	393,592	8.2	495,311	4.7
1991	-66,723	-34.4	421,730	7.1	488,453	-1.4
1992	-84,501	26.6	448,164	6.3	532,665	9.1
1993	-115,568	36.8	465,091	3.8	580,659	9.0
1994	-150,630	30.3	512,626	10.2	663,256	14.2
1995	-158,801	5.4	584,742	14.1	743,543	12.1
1996	-170,214	7.2	625,075	6.9	795,289	7.0
1997	-180,522	6.1	689,182	10.3	869,704	9.4
1998	-229,758	27.3	682,138	-1.0	911,896	4.9
1999	-328,821	43.1	695,797	2.0	1,024,618	12.4
2000	-436,104	32.6	781,918	12.4	1,218,022	18.9
2001	-411,899	-5.6	729,100	-6.8	1,140,999	-6.3
2002	-468,262	13.7	693,104	-4.9	1,161,366	1.8
2003	-532,350	13.7	724,771	4.6	1,257,121	8.2
2004	-654,829	23.0	814,875	12.4	1,469,703	16.9
2005	-772,374	18.0	901,082	10.6	1,673,456	13.9
2006	-827,970	7.2	1,025,969	13.9	1,853,939	10.8
2007	-808,765	-2.3	1,148,197	11.9	1,956,962	5.6
2008	-816,200	0.9	1,287,441	12.1	2,103,641	7.5
2009	-503,583	-38.3	1,056,042	-18.0	1,559,625	-25.9
2010	-635,365	26.2	1,278,493	21.1	1,913,858	22.7
2011	-725,447	14.2	1,482,507	16.0	2,207,954	15.4
2012	-730,446	0.7	1,545,821	4.3	2,276,267	3.1
2013	-689,470	-5.6	1,578,517	2.1	2,267,987	-0.4
2014	-734,482	6.5	1,621,874	2.7	2,356,356	3.9
2015	-745,082	1.4	1,503,101	-7.3	2,248,183	-4.6
2016	-736,794	-1.1	1,451,011	-3.5	2,187,805	-2.7
2017	-796,150	8.1	1,546,762	6.6	2,342,911	7.1

Source: US Census Bureau

http://www.census.gov/foreign-trade/

Chart IIA-1 of the US Census Bureau of the Department of Commerce shows that the trade deficit (gap between exports and imports) fell during the economic contraction after 2007 but has grown again during the expansion. The low average rate of growth of GDP of 2.2 percent during the expansion beginning since IIIQ2009 does not deteriorate further the trade balance. Higher rates of growth may cause sharper deterioration.

Chart IIA-1, US, International Trade Balance, Exports and Imports of Goods and Services USD Billions

Source: US Census Bureau

https://www.census.gov/foreign-trade/data/ustrade.jpg

Table IIA-2B provides the US international trade balance, exports and imports of goods and services on an annual basis from 1992 to 2017. The trade balance deteriorated sharply over the long term. The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit of the US not seasonally adjusted decreased from $126.0 billion in IIIQ2016 to $112.8 billion in IIIQ2017 (https://www.bea.gov/international/index.htm). The current account deficit seasonally adjusted at annual rate increased from 2.4 percent of GDP in IIIQ2016 to 2.6 percent of GDP in IIQ2017, decreasing to 2.1 percent of GDP in IIIQ2017. The ratio of the current account deficit to GDP has stabilized below 3 percent of GDP compared with much higher percentages before the recession but is combined now with much higher imbalance in the Treasury budget (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71). There is still a major challenge in the combined deficits in current account and in federal budgets. The final rows of Table IIA-2B show marginal improvement of the trade deficit from $548,626 million in 2011 to lower $536,773 million in 2012 with exports growing 4.3 percent and imports 3.0 percent. The trade balance improved further to deficit of $461,876 million in 2013 with growth of exports of 3.4 percent while imports virtually stagnated. The trade deficit deteriorated in 2014 to $490,336 million with growth of exports of 3.6 percent and of imports of 4.0 percent. The trade deficit deteriorated in 2015 to $500,445 million with decrease of exports of 4.7 percent and decrease of imports of 3.6 percent. The trade deficit deteriorated in 2016 to $504,793 million with decrease of exports of 2.5 percent and decrease of imports of 1.9 percent. The trade deficit deteriorated in 2017 to %566,031 million with growth of exports of 5.5 percent and of imports of 6.7 percent. Growth and commodity shocks under alternating inflation waves (https://cmpassocregulationblog.blogspot.com/2018/01/dollar-devaluation-and-increasing.html) have deteriorated the trade deficit from the low of $383,774 million in 2009.

Table IIA-2B, US, International Trade Balance of Goods and Services, Exports and Imports of Goods and Services, SA, Millions of Dollars, Balance of Payments Basis

	Balance	Exports	∆%	Imports	∆%
1960	3,508	25,940	NA	22,432	NA
1961	4,195	26,403	1.8	22,208	-1.0
1962	3,370	27,722	5.0	24,352	9.7
1963	4,210	29,620	6.8	25,410	4.3
1964	6,022	33,341	12.6	27,319	7.5
1965	4,664	35,285	5.8	30,621	12.1
1966	2,939	38,926	10.3	35,987	17.5
1967	2,604	41,333	6.2	38,729	7.6
1968	250	45,543	10.2	45,293	16.9
1969	91	49,220	8.1	49,129	8.5
1970	2,254	56,640	15.1	54,386	10.7
1971	-1,302	59,677	5.4	60,979	12.1
1972	-5,443	67,222	12.6	72,665	19.2
1973	1,900	91,242	35.7	89,342	23.0
1974	-4,293	120,897	32.5	125,190	40.1
1975	12,404	132,585	9.7	120,181	-4.0
1976	-6,082	142,716	7.6	148,798	23.8
1977	-27,246	152,301	6.7	179,547	20.7
1978	-29,763	178,428	17.2	208,191	16.0
1979	-24,565	224,131	25.6	248,696	19.5
1980	-19,407	271,834	21.3	291,241	17.1
1981	-16,172	294,398	8.3	310,570	6.6
1982	-24,156	275,236	-6.5	299,391	-3.6
1983	-57,767	266,106	-3.3	323,874	8.2
1984	-109,072	291,094	9.4	400,166	23.6
1985	-121,880	289,070	-0.7	410,950	2.7
1986	-138,538	310,033	7.3	448,572	9.2
1987	-151,684	348,869	12.5	500,552	11.6
1988	-114,566	431,149	23.6	545,715	9.0
1989	-93,141	487,003	13.0	580,144	6.3
1990	-80,864	535,233	9.9	616,097	6.2
1991	-31,135	578,344	8.1	609,479	-1.1
1992	-39,212	616,882	6.7	656,094	7.6
1993	-70,311	642,863	4.2	713,174	8.7
1994	-98,493	703,254	9.4	801,747	12.4
1995	-96,384	794,387	13.0	890,771	11.1
1996	-104,065	851,602	7.2	955,667	7.3
1997	-108,273	934,453	9.7	1,042,726	9.1
1998	-166,140	933,174	-0.1	1,099,314	5.4
1999	-258,617	969,867	3.9	1,228,485	11.8
2000	-372,517	1,075,321	10.9	1,447,837	17.9
2001	-361,509	1,005,653	-6.5	1,367,162	-5.6
2002	-418,955	978,705	-2.7	1,397,659	2.2
2003	-493,890	1,020,419	4.3	1,514,309	8.3
2004	-609,885	1,161,549	13.8	1,771,434	17.0
2005	-714,247	1,286,023	10.7	2,000,270	12.9
2006	-761,714	1,457,644	13.3	2,219,358	11.0
2007	-705,376	1,653,547	13.4	2,358,922	6.3
2008	-708,727	1,841,611	11.4	2,550,339	8.1
2009	-383,776	1,583,051	-14.0	1,966,827	-22.9
2010	-494,661	1,853,603	17.1	2,348,265	19.4
2011	-548,626	2,127,020	14.8	2,675,646	13.9
2012	-536,773	2,218,989	4.3	2,755,762	3.0
2013	-461,876	2,293,457	3.4	2,755,334	0.0
2014	-490,336	2,375,905	3.6	2,866,241	4.0
2015	-500,445	2,263,907	-4.7	2,764,352	-3.6
2016	-504,793	2,208,072	-2.5	2,712,866	-1.9
2017	-566,031	2,329,311	5.5	2,895,342	6.7

Source: US Census Bureau

http://www.census.gov/foreign-trade/

Chart IIA-2 of the US Census Bureau provides the US trade account in goods and services SA from Jan 1992 to Dec 2017. There is long-term trend of deterioration of the US trade deficit shown vividly by Chart IIA-2. The global recession from IVQ2007 to IIQ2009 reversed the trend of deterioration. Deterioration resumed together with incomplete recovery and was influenced significantly by the carry trade from zero interest rates to commodity futures exposures (these arguments are elaborated in Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4 http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html). Earlier research focused on the long-term external imbalance of the US in the form of trade and current account deficits (Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State Vol. II (2008b) 183-94, Government Intervention in Globalization (2008c), 167-71). US external imbalances have not been fully resolved and tend to widen together with improving world economic activity and commodity price shocks. There are additional effects for revaluation of the dollar with the Fed orienting interest rate increases while the European Central Bank and the Bank of Japan determine negative nominal interest rates.

Chart IIA-2, US, Balance of Trade SA, Monthly, Millions of Dollars, Jan 1992-Dec 2017

Source: US Census Bureau

http://www.census.gov/foreign-trade/

Chart IIA-3 of the US Census Bureau provides US exports SA from Jan 1992 to Dec 2017. There was sharp acceleration from 2003 to 2007 during worldwide economic boom and increasing inflation. Exports fell sharply during the financial crisis and global recession from IVQ2007 to IIQ2009. Growth picked up again together with world trade and inflation but stalled in the final segment with less rapid global growth and inflation.

Chart IIA-3, US, Exports SA, Monthly, Millions of Dollars Jan 1992-Dec 2017

Source: US Census Bureau

http://www.census.gov/foreign-trade/

Chart IIA-4 of the US Census Bureau provides US imports SA from Jan 1992 to Dec 2017. Growth was stronger between 2003 and 2007 with worldwide economic boom and inflation. There was sharp drop during the financial crisis and global recession. There is stalling import levels in the final segment resulting from weaker world economic growth and diminishing inflation because of risk aversion and portfolio reallocations from commodity exposures to equities.

Chart IIA-4, US, Imports SA, Monthly, Millions of Dollars Jan 1992-Dec 2017

Source: US Census Bureau

http://www.census.gov/foreign-trade/

There is deterioration of the US trade balance in goods in Table IIA-3 from deficit of $64,829 million in Dec 2016 to deficit of $73,348 million in Dec 2017. The nonpetroleum deficit increased $11,150 million while the petroleum deficit decreased $2230 million. Total exports of goods increased 8.8 percent in Dec 2017 relative to a year earlier while total imports increased 10.3 percent. Nonpetroleum exports increased 5.6 percent from Dec 2016 to Dec 2017 while nonpetroleum imports increased 10.1 percent. Petroleum imports increased 14.2 percent.

Table IIA-3, US, International Trade in Goods Balance, Exports and Imports $ Millions and ∆% SA

	Dec 2017	Dec 2016	∆%
Total Balance	-73,348	-64,829
Petroleum	-3,382	-5,612
Non-Petroleum	-68,976	-57,826
Total Exports	137,470	126,326	8.8
Petroleum	12,489	8,205	52.2
Non-Petroleum	124,515	117,865	5.6
Total Imports	210,818	191,155	10.3
Petroleum	15,772	13,816	14.2
Non-Petroleum	193,491	175,692	10.1

Details may not add because of rounding and seasonal adjustment

Source: US Census Bureau

http://www.census.gov/foreign-trade/

US exports and imports of goods not seasonally adjusted in Jan-Dec 2017 and Jan-Dec 2016 are in Table IIA-4. The rate of growth of exports was 6.6 percent and 7.1 percent for imports. The US has partial hedge of commodity price increases in exports of agricultural commodities that increased 2.7 percent and of mineral fuels that increased 47.2 percent both because prices of raw materials and commodities increase and fall recurrently because of shocks of risk aversion and portfolio reallocations. The US exports a growing amount of crude oil, increasing 39.1 percent in cumulative Jan-Dec 2017 relative to a year earlier. US exports and imports consist mostly of manufactured products, with less rapidly increasing prices. US manufactured exports increased 4.3 percent while manufactured imports increased 5.7 percent. Significant part of the US trade imbalance originates in imports of mineral fuels increasing 26.7 percent and petroleum increasing 26.9 percent with wide oscillations in oil prices. The limited hedge in exports of agricultural commodities and mineral fuels compared with substantial imports of mineral fuels and crude oil results in waves of deterioration of the terms of trade of the US, or export prices relative to import prices, originating in commodity price increases caused by carry trades from zero interest rates. These waves are similar to those in worldwide inflation.

Table IIA-4, US, Exports and Imports of Goods, Not Seasonally Adjusted Millions of Dollars and %, Census Basis

	Jan-Dec 2017 $ Millions	Jan-Dec 2016 $ Millions	∆%
Exports	1,546,762	1,451,011	6.6
Manufactured	1,094,730	1,049,243	4.3
Agricultural Commodities	138,358	134,723	2.7
Mineral Fuels	136,358	92,623	47.2
Petroleum	103,801	74,636	39.1
Imports	2,342,911	2,187,805	7.1
Manufactured	2,022,213	1,912,316	5.7
Agricultural Commodities	121,035	114,443	5.8
Mineral Fuels	194,945	153,822	26.7
Petroleum	181,320	142,933	26.9

Source: US Census Bureau

http://www.census.gov/foreign-trade/

The current account of the US balance of payments is in Table VI-3A for IIIQ2016 and IIIQ2017. The Bureau of Economic Analysis analyzes as follows (https://www.bea.gov/newsreleases/international/transactions/2017/pdf/trans317.pdf):

“The U.S. current-account deficit decreased to $100.6 billion (preliminary) in the third quarter of 2017 from $124.4 billion (revised) in the second quarter of 2017, according to statistics released by the Bureau of Economic Analysis (BEA). The deficit decreased to 2.1 percent of current-dollar gross domestic product (GDP) from 2.6 percent in the second quarter. The $23.8 billion decrease in the current-account deficit reflected decreases in the deficits on secondary income and goods and increases in the surpluses on primary income and services.”

The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit of the US not seasonally adjusted decreased from $126.0 billion in IIIQ2016 to $112.8 billion in IIIQ2017. The current account deficit seasonally adjusted at annual rate increased from 2.4 percent of GDP in IIIQ2016 to 2.6 percent of GDP in IIQ2017, decreasing to 2.1 percent of GDP in IIIQ2017. The ratio of the current account deficit to GDP has stabilized below 3 percent of GDP compared with much higher percentages before the recession but is combined now with much higher imbalance in the Treasury budget (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71). There is still a major challenge in the combined deficits in current account and in federal budgets.

Table VI-3A, US, Balance of Payments, Millions of Dollars NSA

	IIIQ2016	IIIQ2017	Difference
Goods Balance	-203,022	-211,273	-8,251
X Goods	364,117	382,172	5.0 ∆%
M Goods	-567,139	-593,444	4.6 ∆%
Services Balance	66,707	64,279	-2,428
X Services	197,136	200,710	1.8 ∆%
M Services	-130,429	-136,431	4.6 ∆%
Balance Goods and Services	-136,315	-146,994	-10,679
Exports of Goods and Services and Income Receipts	802,389	861,331
Imports of Goods and Services and Income Payments	-928,421	-974,147
Current Account Balance	-126,032	-112,816	-13,216
% GDP	IIIQ2016	IIIQ2017	IIQ2017
	2.4	2.1	2.6

X: exports; M: imports

Balance on Current Account = Exports of Goods and Services – Imports of Goods and Services and Income Payments

Source: Bureau of Economic Analysis

http://www.bea.gov/international/index.htm#bop

In their classic work on “unpleasant monetarist arithmetic,” Sargent and Wallace (1981, 2) consider a regime of domination of monetary policy by fiscal policy (emphasis added):

“Imagine that fiscal policy dominates monetary policy. The fiscal authority independently sets its budgets, announcing all current and future deficits and surpluses and thus determining the amount of revenue that must be raised through bond sales and seignorage. Under this second coordination scheme, the monetary authority faces the constraints imposed by the demand for government bonds, for it must try to finance with seignorage any discrepancy between the revenue demanded by the fiscal authority and the amount of bonds that can be sold to the public. Suppose that the demand for government bonds implies an interest rate on bonds greater than the economy’s rate of growth. Then if the fiscal authority runs deficits, the monetary authority is unable to control either the growth rate of the monetary base or inflation forever. If the principal and interest due on these additional bonds are raised by selling still more bonds, so as to continue to hold down the growth of base money, then, because the interest rate on bonds is greater than the economy’s growth rate, the real stock of bonds will growth faster than the size of the economy. This cannot go on forever, since the demand for bonds places an upper limit on the stock of bonds relative to the size of the economy. Once that limit is reached, the principal and interest due on the bonds already sold to fight inflation must be financed, at least in part, by seignorage, requiring the creation of additional base money.”

The alternative fiscal scenario of the CBO (2012NovCDR, 2013Sep17) resembles an economic world in which eventually the placement of debt reaches a limit of what is proportionately desired of US debt in investment portfolios. This unpleasant environment is occurring in various European countries.

The current real value of government debt plus monetary liabilities depends on the expected discounted values of future primary surpluses or difference between tax revenue and government expenditure excluding interest payments (Cochrane 2011Jan, 27, equation (16)). There is a point when adverse expectations about the capacity of the government to generate primary surpluses to honor its obligations can result in increases in interest rates on government debt.

First, Unpleasant Monetarist Arithmetic. Fiscal policy is described by Sargent and Wallace (1981, 3, equation 1) as a time sequence of D(t), t = 1, 2,…t, …, where D is real government expenditures, excluding interest on government debt, less real tax receipts. D(t) is the real deficit excluding real interest payments measured in real time t goods. Monetary policy is described by a time sequence of H(t), t=1,2,…t, …, with H(t) being the stock of base money at time t. In order to simplify analysis, all government debt is considered as being only for one time period, in the form of a one-period bond B(t), issued at time t-1 and maturing at time t. Denote by R(t-1) the real rate of interest on the one-period bond B(t) between t-1 and t. The measurement of B(t-1) is in terms of t-1 goods and [1+R(t-1)] “is measured in time t goods per unit of time t-1 goods” (Sargent and Wallace 1981, 3). Thus, B(t-1)[1+R(t-1)] brings B(t-1) to maturing time t. B(t) represents borrowing by the government from the private sector from t to t+1 in terms of time t goods. The price level at t is denoted by p(t). The budget constraint of Sargent and Wallace (1981, 3, equation 1) is:

D(t) = {[H(t) – H(t-1)]/p(t)} + {B(t) – B(t-1)[1 + R(t-1)]} (1)

Equation (1) states that the government finances its real deficits into two portions. The first portion, {[H(t) – H(t-1)]/p(t)}, is seigniorage, or “printing money.” The second part,

{B(t) – B(t-1)[1 + R(t-1)]}, is borrowing from the public by issue of interest-bearing securities. Denote population at time t by N(t) and growing by assumption at the constant rate of n, such that:

N(t+1) = (1+n)N(t), n>-1 (2)

The per capita form of the budget constraint is obtained by dividing (1) by N(t) and rearranging:

B(t)/N(t) = {[1+R(t-1)]/(1+n)}x[B(t-1)/N(t-1)]+[D(t)/N(t)] – {[H(t)-H(t-1)]/[N(t)p(t)]} (3)

On the basis of the assumptions of equal constant rate of growth of population and real income, n, constant real rate of return on government securities exceeding growth of economic activity and quantity theory equation of demand for base money, Sargent and Wallace (1981) find that “tighter current monetary policy implies higher future inflation” under fiscal policy dominance of monetary policy. That is, the monetary authority does not permanently influence inflation, lowering inflation now with tighter policy but experiencing higher inflation in the future.

Second, Unpleasant Fiscal Arithmetic. The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:

(M_t + B_t)/P_t = E_t∫(1/R_t_{, t+τ})s_t_+τdτ (4)

Equation (4) expresses the monetary, M_t, and debt, B_t, liabilities of the government, divided by the price level, P_t, in terms of the expected value discounted by the ex-post rate on government debt, R_t_{, t+τ}, of the future primary surpluses s_t_+τ, which are equal to T_t_+τ – G_t_+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post R_t_{, t+τ}. The second equation of Cochrane (2011Jan, 5) is:

M_tV(i_t, ·) = P_tY_t (5)

Conventional analysis of monetary policy contends that fiscal authorities simply adjust primary surpluses, s, to sanction the price level determined by the monetary authority through equation (5), which deprives the debt valuation equation (4) of any role in price level determination. The simple explanation is (Cochrane 2011Jan, 5):

“We are here to think about what happens when [4] exerts more force on the price level. This change may happen by force, when debt, deficits and distorting taxes become large so the Treasury is unable or refuses to follow. Then [4] determines the price level; monetary policy must follow the fiscal lead and ‘passively’ adjust M to satisfy [5]. This change may also happen by choice; monetary policies may be deliberately passive, in which case there is nothing for the Treasury to follow and [4] determines the price level.”

An intuitive interpretation by Cochrane (2011Jan 4) is that when the current real value of government debt exceeds expected future surpluses, economic agents unload government debt to purchase private assets and goods, resulting in inflation. If the risk premium on government debt declines, government debt becomes more valuable, causing a deflationary effect. If the risk premium on government debt increases, government debt becomes less valuable, causing an inflationary effect.

There are multiple conclusions by Cochrane (2011Jan) on the debt/dollar crisis and Global recession, among which the following three:

(1) The flight to quality that magnified the recession was not from goods into money but from private-sector securities into government debt because of the risk premium on private-sector securities; monetary policy consisted of providing liquidity in private-sector markets suffering stress

(2) Increases in liquidity by open-market operations with short-term securities have no impact; quantitative easing can affect the timing but not the rate of inflation; and purchase of private debt can reverse part of the flight to quality

(3) The debt valuation equation has a similar role as the expectation shifting the Phillips curve such that a fiscal inflation can generate stagflation effects similar to those occurring from a loss of anchoring expectations.

This analysis suggests that there may be a point of saturation of demand for United States financial liabilities without an increase in interest rates on Treasury securities. A risk premium may develop on US debt. Such premium is not apparent currently because of distressed conditions in the world economy and international financial system. Risk premiums are observed in the spread of bonds of highly indebted countries in Europe relative to bonds of the government of Germany.

The issue of global imbalances centered on the possibility of a disorderly correction (Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State Vol. II (2008b) 183-94, Government Intervention in Globalization (2008c), 167-71). Such a correction has not occurred historically but there is no argument proving that it could not occur. The need for a correction would originate in unsustainable large and growing United States current account deficits (CAD) and net international investment position (NIIP) or excess of financial liabilities of the US held by foreigners net relative to financial liabilities of foreigners held by US residents. The IMF estimated that the US could maintain a CAD of two to three percent of GDP without major problems (Rajan 2004). The threat of disorderly correction is summarized by Pelaez and Pelaez, The Global Recession Risk (2007), 15):

“It is possible that foreigners may be unwilling to increase their positions in US financial assets at prevailing interest rates. An exit out of the dollar could cause major devaluation of the dollar. The depreciation of the dollar would cause inflation in the US, leading to increases in American interest rates. There would be an increase in mortgage rates followed by deterioration of real estate values. The IMF has simulated that such an adjustment would cause a decline in the rate of growth of US GDP to 0.5 percent over several years. The decline of demand in the US by four percentage points over several years would result in a world recession because the weakness in Europe and Japan could not compensate for the collapse of American demand. The probability of occurrence of an abrupt adjustment is unknown. However, the adverse effects are quite high, at least hypothetically, to warrant concern.”

The United States could be moving toward a situation typical of heavily indebted countries, requiring fiscal adjustment and increases in productivity to become more competitive internationally. The CAD and NIIP of the United States are not observed in full deterioration because the economy is well below trend. There are two complications in the current environment relative to the concern with disorderly correction in the first half of the past decade. In the release of Jun 14, 2013, the Bureau of Economic Analysis (http://www.bea.gov/newsreleases/international/transactions/2013/pdf/trans113.pdf) informs of revisions of US data on US international transactions since 1999:

“The statistics of the U.S. international transactions accounts released today have been revised for the first quarter of 1999 to the fourth quarter of 2012 to incorporate newly available and revised source data, updated seasonal adjustments, changes in definitions and classifications, and improved estimating methodologies.”

The BEA introduced new concepts and methods (http://www.bea.gov/international/concepts_methods.htm) in comprehensive restructuring on Jun 18, 2014 (http://www.bea.gov/international/modern.htm):

“BEA introduced a new presentation of the International Transactions Accounts on June 18, 2014 and will introduce a new presentation of the International Investment Position on June 30, 2014. These new presentations reflect a comprehensive restructuring of the international accounts that enhances the quality and usefulness of the accounts for customers and bring the accounts into closer alignment with international guidelines.”

Table VI-3B provides data on the US fiscal and balance of payments imbalances incorporating all revisions and methods. In 2007, the federal deficit of the US was $161 billion corresponding to 1.1 percent of GDP while the Congressional Budget Office estimates the federal deficit in 2012 at $1087 billion or 6.8 percent of GDP. The estimate of the deficit for 2013 is $680 billion or 4.1 percent of GDP. The combined record federal deficits of the US from 2009 to 2012 are $5094 billion or 31.6 percent of the estimate of GDP for fiscal year 2012 implicit in the CBO (CBO 2013Sep11) estimate of debt/GDP. The deficits from 2009 to 2012 exceed one trillion dollars per year, adding to $5.094 trillion in four years, using the fiscal year deficit of $1087 billion for fiscal year 2012, which is the worst fiscal performance since World War II. Federal debt in 2007 was $5035 billion, slightly less than the combined deficits from 2009 to 2012 of $5094 billion. Federal debt in 2012 was 70.4 percent of GDP (CBO 2015Jan26) and 72.6 percent of GDP in 2013 (http://www.cbo.gov/). This situation may worsen in the future (CBO 2013Sep17):

“Between 2009 and 2012, the federal government recorded the largest budget deficits relative to the size of the economy since 1946, causing federal debt to soar. Federal debt held by the public is now about 73 percent of the economy’s annual output, or gross domestic product (GDP). That percentage is higher than at any point in U.S. history except a brief period around World War II, and it is twice the percentage at the end of 2007. If current laws generally remained in place, federal debt held by the public would decline slightly relative to GDP over the next several years, CBO projects. After that, however, growing deficits would ultimately push debt back above its current high level. CBO projects that federal debt held by the public would reach 100 percent of GDP in 2038, 25 years from now, even without accounting for the harmful effects that growing debt would have on the economy. Moreover, debt would be on an upward path relative to the size of the economy, a trend that could not be sustained indefinitely.

The gap between federal spending and revenues would widen steadily after 2015 under the assumptions of the extended baseline, CBO projects. By 2038, the deficit would be 6½ percent of GDP, larger than in any year between 1947 and 2008, and federal debt held by the public would reach 100 percent of GDP, more than in any year except 1945 and 1946. With such large deficits, federal debt would be growing faster than GDP, a path that would ultimately be unsustainable.

Incorporating the economic effects of the federal policies that underlie the extended baseline worsens the long-term budget outlook. The increase in debt relative to the size of the economy, combined with an increase in marginal tax rates (the rates that would apply to an additional dollar of income), would reduce output and raise interest rates relative to the benchmark economic projections that CBO used in producing the extended baseline. Those economic differences would lead to lower federal revenues and higher interest payments. With those effects included, debt under the extended baseline would rise to 108 percent of GDP in 2038.”

Table VI-3B, US, Current Account, NIIP, Fiscal Balance, Nominal GDP, Federal Debt and Direct Investment, Dollar Billions and %

	2007	2008	2009	2010	2011
Goods & Services	-705	-709	-384	-495	-549
Primary Income	85	130	115	168	211
Secondary Income	-91	-102	-104	-104	-107
Current Account	-711	-681	-373	-431	-445
NGDP	14478	14719	14419	14964	15518
Current Account % GDP	-4.9	-4.6	-2.6	-2.9	-2.9
NIIP	-1279	-3995	-2628	-2512	-4455
US Owned Assets Abroad	20705	19423	19426	21767	22209
Foreign Owned Assets in US	21984	23418	22054	24279	26664
NIIP % GDP	-8.8	-27.1	-18.2	-16.8	-28.7
Exports Goods, Services and Income	2559	2742	2283	2625	2983
NIIP % Exports Goods, Services and Income	-50	-145	-115	-95	-149
DIA MV	5858	3707	4945	5486	5215
DIUS MV	4134	3091	3619	4099	4199
Fiscal Balance	-161	-459	-1413	-1294	-1300
Fiscal Balance % GDP	-1.1	-3.1	-9.8	-8.7	-8.5
Federal Debt	5035	5803	7545	9019	10128
Federal Debt % GDP	35.2	39.3	52.3	60.9	65.9
Federal Outlays	2729	2983	3518	3457	3603
∆%	2.8	9.3	17.9	-1.7	4.2
% GDP	19.1	20.2	24.4	23.4	23.4
Federal Revenue	2568	2524	2105	2163	2303
∆%	6.7	-1.7	-16.6	2.7	6.5
% GDP	17.9	17.1	14.6	14.6	15.0

	2012	2013	2014	2015	2016
Goods & Services	-537	-462	-490	-500	-505
Primary Income	207	206	210	181	173
Secondary Income	-97	-94	-94	-115	-120
Current Account	-426	-350	-374	-434	-452
NGDP	16155	16692	17428	18121	18625
Current Account % GDP	-2.6	-2.1	-2.1	-2.4	-2.4
NIIP	-4518	-5373	-6980	-7493	-8318
US Owned Assets Abroad	22562	24145	24832	23352	23849
Foreign Owned Assets in US	27080	29517	31813	30846	32168
NIIP % GDP	-28.0	-32.2	-40.1	-41.3	-44.7
Exports Goods, Services and Income	3096	3212	3333	3173	3157
NIIP % Exports Goods, Services and Income	-146	-167	-209	-236	-263
DIA MV	5969	7121	7189	6999	7375
DIUS MV	4662	5815	6370	6701	7569
Fiscal Balance	-1087	-680	-485	-439	-585
Fiscal Balance % GDP	-6.8	-4.1	-2.8	-2.4	-3.2
Federal Debt	11281	11983	12780	13117	14168
Federal Debt % GDP	70.4	72.6	74.2	73.3	77.0
Federal Outlays	3537	3455	3506	3688	3853
∆%	-1.8	-2.3	1.5	5.2	4.5
% GDP	22.1	20.9	20.4	20.6	20.9
Federal Revenue	2450	2775	3022	3250	3268
∆%	6.4	13.3	8.9	7.6	0.5
% GDP	15.3	16.8	17.5	18.2	17.8

Sources:

Notes: NGDP: nominal GDP or in current dollars; NIIP: Net International Investment Position; DIA MV: US Direct Investment Abroad at Market Value; DIUS MV: Direct Investment in the US at Market Value. There are minor discrepancies in the decimal point of percentages of GDP between the balance of payments data and federal debt, outlays, revenue and deficits in which the original number of the CBO source is maintained. See Bureau of Economic Analysis, US International Economic Accounts: Concepts and Methods. 2014. Washington, DC: BEA, Department of Commerce, Jun 2014 http://www.bea.gov/international/concepts_methods.htm These discrepancies do not alter conclusions. Budget http://www.cbo.gov/

https://www.cbo.gov/about/products/budget-economic-data#6

https://www.cbo.gov/about/products/budget_economic_data#3

https://www.cbo.gov/about/products/budget-economic-data#2

https://www.cbo.gov/about/products/budget_economic_data#2 Balance of Payments and NIIP http://www.bea.gov/international/index.htm#bop Gross Domestic Product, Bureau of Economic Analysis (BEA) http://www.bea.gov/iTable/index_nipa.cfm

The most recent CBO long-term budget on Mar 27, 2017, projects US federal debt at 150.0 percent of GDP in 2047 (Congressional Budget Office, The 2017 Long-term Budget Outlook. Washington, DC, Mar 30, 2017 https://www.cbo.gov/publication/52480).

Table VI-3C provides quarterly estimates NSA of the external imbalance of the United States. The current account deficit seasonally adjusted at 2.4 percent in IIIQ2016 stabilizes to 2.4 percent of GDP in IVQ2016. The deficit does not change to 2.4 percent in IQ2017 and increases to 2.6 percent in IIQ2017. The current account deficits decreased to 2.1 percent in IIIQ2017. The absolute value of the net international investment position increases from minus $8.0 trillion in IIIQ2016 to minus $8.3 trillion in IVQ2016. The absolute value of the net international investment position decreases to minus $8.1 trillion in IQ2017 and decreases to minus $8.0 trillion in IIQ2017. The absolute value of the net international investment position decreased to $7.8 trillion in IIIQ2017. The BEA explains as follows (https://www.bea.gov/newsreleases/international/intinv/2017/pdf/intinv217.pdf):

“The U.S. net international investment position increased to -$7,768.7 billion (preliminary) at the end of the third quarter of 2017 from -$8,004.1 billion (revised) at the end of the second quarter, according to statistics released today by the Bureau of Economic Analysis (BEA). The $235.4 billion increase reflected a $1,001.2 billion increase in U.S. assets and a $765.8 billion increase in U.S. liabilities (table 1).”

The BEA explains further (https://www.bea.gov/newsreleases/international/intinv/2017/pdf/intinv317.pdf): “

“The $235.4 billion increase in the net investment position reflected net financial transactions of –$87.4 billion and net other changes in position, such as price and exchange-rate changes, of $322.8 billion (table A).

The net investment position increased 2.9 percent in the third quarter, compared with an increase of 1.1 percent in the second quarter, and an average quarterly decrease of 5.3 percent from the first quarter of 2011 through the first quarter of 2017.

U.S. assets increased $1,001.2 billion to $26,854.9 billion at the end of the third quarter, mostly reflecting increases in portfolio investment and direct investment assets that were partly offset by a decrease in financial derivatives.

· Assets excluding financial derivatives increased $1,227.5 billion to $25,149.7 billion. The increase resulted from other changes in position of $869.2 billion and financial transactions of $358.2 billion. Other changes in position mostly reflected foreign equity price increases that raised the equity value of portfolio investment and direct investment assets, and the appreciation of major foreign currencies against the U.S. dollar that raised the value of foreign-currency-denominated assets in dollar terms. Financial transactions mostly reflected net acquisition of portfolio investment assets.

· Financial derivatives decreased $226.2 billion to $1,705.1 billion, mostly in single-currency interest rate contracts.”

U.S. liabilities increased $765.8 billion to $34,623.6 billion at the end of the third quarter, mostly reflecting increases in portfolio investment and direct investment liabilities that were partly offset by a decrease in financial derivatives.

· Liabilities excluding financial derivatives increased $988.8 billion to $32,952.3 billion. The increase resulted from other changes in position of $524.6 billion and financial transactions of $464.2 billion (table A). Other changes in position mostly reflected U.S. equity price increases that raised the equity value of portfolio investment and direct investment liabilities. Financial transactions mostly reflected net incurrence of portfolio investment liabilities.

· Financial derivatives decreased $223.0 billion to $1,671.3 billion, mostly in single-currency interest rate contracts.”

Table VI-3C, US, Current Account, NIIP, Fiscal Balance, Nominal GDP, Federal Debt and Direct Investment, Dollar Billions and % NSA

	IIIQ2016	IVQ2016	IQ2017	IIQ2017	IIIQ2017
Goods & Services	-136	-132	-113	-155	-147
Primary Income	43	51	49	51	58
Secondary Income	-32	-31	-26	-31	-24
Current Account	-126	-112	-90	-134	-113
Current Account % GDP	-2.4	-2.4	-2.4	-2.6	-2.1
NIIP	-8036	-8318	-8092	-8004	-7769
US Owned Assets Abroad	24839	23849	24933	25853	26855
Foreign Owned Assets in US	-32875	-32168	-33025	-33857	-34623
DIA MV	7392	7375	7895	8125	8581
DIA MV Equity	6147	6172	6609	6909	7355
DIUS MV	7424	7569	7952	8135	8453
DIUS MV Equity	5607	5784	6153	6341	6630

Notes: NIIP: Net International Investment Position; DIA MV: US Direct Investment Abroad at Market Value; DIUS MV: Direct Investment in the US at Market Value. See Bureau of Economic Analysis, US International Economic Accounts: Concepts and Methods. 2014. Washington, DC: BEA, Department of Commerce, Jun 2014 http://www.bea.gov/international/concepts_methods.htm

Chart VI-3C of the US Bureau of Economic Analysis provides the quarterly and annual US net international investment position (NIIP) NSA in billion dollars. The NIIP deteriorated in 2008, improving in 2009-2011 followed by deterioration after 2012. There is improvement in 2017.

Chart VI-3C, US Net International Investment Position, NSA, Billion US Dollars

Source: Bureau of Economic Analysis

http://www.bea.gov/newsreleases/international/intinv/intinvnewsrelease.htm

Chart VI-10 of the Board of Governors of the Federal Reserve System provides the overnight Fed funds rate on business days from Jul 1, 1954 at 1.13 percent through Jan 10, 1979, at 9.91 percent per year, to Feb 8, 2018, at 1.42 percent per year. US recessions are in shaded areas according to the reference dates of the NBER (http://www.nber.org/cycles.html). In the Fed effort to control the “Great Inflation” of the 1970s (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB and http://cmpassocregulationblog.blogspot.com/2017/01/rules-versus-discretionary-authorities.html http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html), the fed funds rate increased from 8.34 percent on Jan 3, 1979 to a high in Chart VI-10 of 22.36 percent per year on Jul 22, 1981 with collateral adverse effects in the form of impaired savings and loans associations in the United States, emerging market debt and money-center banks (see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 72-7; Pelaez 1986, 1987). Another episode in Chart VI-10 is the increase in the fed funds rate from 3.15 percent on Jan 3, 1994, to 6.56 percent on Dec 21, 1994, which also had collateral effects in impairing emerging market debt in Mexico and Argentina and bank balance sheets in a world bust of fixed income markets during pursuit by central banks of non-existing inflation (Pelaez and Pelaez, International Financial Architecture (2005), 113-5). Another interesting policy impulse is the reduction of the fed funds rate from 7.03 percent on Jul 3, 2000, to 1.00 percent on Jun 22, 2004, in pursuit of equally non-existing deflation (Pelaez and Pelaez, International Financial Architecture (2005), 18-28, The Global Recession Risk (2007), 83-85), followed by increments of 25 basis points from Jun 2004 to Jun 2006, raising the fed funds rate to 5.25 percent on Jul 3, 2006 in Chart VI-10. Central bank commitment to maintain the fed funds rate at 1.00 percent induced adjustable-rate mortgages (ARMS) linked to the fed funds rate. Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but the exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at interest rates close to zero, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV).

The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper with the objective of purchasing default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever-increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4). A final episode in Chart VI-10 is the reduction of the fed funds rate from 5.41 percent on Aug 9, 2007, to 2.97 percent on October 7, 2008, to 0.12 percent on Dec 5, 2008 and close to zero throughout a long period with the final point at 1.42 percent on Feb 8, 2018. Evidently, this behavior of policy would not have occurred had there been theory, measurements and forecasts to avoid these violent oscillations that are clearly detrimental to economic growth and prosperity without inflation. The Chair of the Board of Governors of the Federal Reserve System, Janet L. Yellen, stated on Jul 10, 2015 that (http://www.federalreserve.gov/newsevents/speech/yellen20150710a.htm):

“Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy. But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step. I currently anticipate that the appropriate pace of normalization will be gradual, and that monetary policy will need to be highly supportive of economic activity for quite some time. The projections of most of my FOMC colleagues indicate that they have similar expectations for the likely path of the federal funds rate. But, again, both the course of the economy and inflation are uncertain. If progress toward our employment and inflation goals is more rapid than expected, it may be appropriate to remove monetary policy accommodation more quickly. However, if progress toward our goals is slower than anticipated, then the Committee may move more slowly in normalizing policy.”

There is essentially the same view in the Testimony of Chair Yellen in delivering the Semiannual Monetary Policy Report to the Congress on Jul 15, 2015 (http://www.federalreserve.gov/newsevents/testimony/yellen20150715a.htm). The FOMC (Federal Open Market Committee) raised the fed funds rate to ¼ to ½ percent at its meeting on Dec 16, 2015 (http://www.federalreserve.gov/newsevents/press/monetary/20151216a.htm).

It is a forecast mandate because of the lags in effect of monetary policy impulses on income and prices (Romer and Romer 2004). The intention is to reduce unemployment close to the “natural rate” (Friedman 1968, Phelps 1968) of around 5 percent and inflation at or below 2.0 percent. If forecasts were reasonably accurate, there would not be policy errors. A commonly analyzed risk of zero interest rates is the occurrence of unintended inflation that could precipitate an increase in interest rates similar to the Himalayan rise of the fed funds rate from 9.91 percent on Jan 10, 1979, at the beginning in Chart VI-10, to 22.36 percent on Jul 22, 1981. There is a less commonly analyzed risk of the development of a risk premium on Treasury securities because of the unsustainable Treasury deficit/debt of the United States (Section II and earlier http://cmpassocregulationblog.blogspot.com/2017/01/twenty-four-million-unemployed-or.html and earlier http://cmpassocregulationblog.blogspot.com/2016/07/unresolved-us-balance-of-payments.html and earlier (http://cmpassocregulationblog.blogspot.com/2016/04/proceeding-cautiously-in-reducing.html and earlier http://cmpassocregulationblog.blogspot.com/2016/01/weakening-equities-and-dollar.html and earlier http://cmpassocregulationblog.blogspot.com/2015/09/monetary-policy-designed-on-measurable.html and earlier http://cmpassocregulationblog.blogspot.com/2015/06/fluctuating-financial-asset-valuations.html and earlier (http://cmpassocregulationblog.blogspot.com/2015/03/irrational-exuberance-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/12/patience-on-interest-rate-increases.html

and earlier http://cmpassocregulationblog.blogspot.com/2014/09/world-inflation-waves-squeeze-of.html and earlier (http://cmpassocregulationblog.blogspot.com/2014/02/theory-and-reality-of-cyclical-slow.html and earlier (http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html). There is not a fiscal cliff or debt limit issue ahead but rather free fall into a fiscal abyss. The combination of the fiscal abyss with zero interest rates could trigger the risk premium on Treasury debt or Himalayan hike in interest rates.

Chart VI-10, US, Fed Funds Rate, Business Days, Jul 1, 1954 to Feb 8, 2018, Percent per Year

Source: Board of Governors of the Federal Reserve System

https://www.federalreserve.gov/datadownload/Choose.aspx?rel=H15

There is a false impression of the existence of a monetary policy “science,” measurements and forecasting with which to steer the economy into “prosperity without inflation.” Market participants are remembering the Great Bond Crash of 1994 shown in Table VI-7G when monetary policy pursued nonexistent inflation, causing trillions of dollars of losses in fixed income worldwide while increasing the fed funds rate from 3 percent in Jan 1994 to 6 percent in Dec. The exercise in Table VI-7G shows a drop of the price of the 30-year bond by 18.1 percent and of the 10-year bond by 14.1 percent. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). The pursuit of nonexistent deflation during the past ten years has resulted in the largest monetary policy accommodation in history that created the 2007 financial market crash and global recession and is currently preventing smoother recovery while creating another financial crash in the future. The issue is not whether there should be a central bank and monetary policy but rather whether policy accommodation in doses from zero interest rates to trillions of dollars in the fed balance sheet endangers economic stability.

Table VI-7G, Fed Funds Rates, Thirty and Ten Year Treasury Yields and Prices, 30-Year Mortgage Rates and 12-month CPI Inflation 1994

1994	FF	30Y	30P	10Y	10P	MOR	CPI
Jan	3.00	6.29	100	5.75	100	7.06	2.52
Feb	3.25	6.49	97.37	5.97	98.36	7.15	2.51
Mar	3.50	6.91	92.19	6.48	94.69	7.68	2.51
Apr	3.75	7.27	88.10	6.97	91.32	8.32	2.36
May	4.25	7.41	86.59	7.18	88.93	8.60	2.29
Jun	4.25	7.40	86.69	7.10	90.45	8.40	2.49
Jul	4.25	7.58	84.81	7.30	89.14	8.61	2.77
Aug	4.75	7.49	85.74	7.24	89.53	8.51	2.69
Sep	4.75	7.71	83.49	7.46	88.10	8.64	2.96
Oct	4.75	7.94	81.23	7.74	86.33	8.93	2.61
Nov	5.50	8.08	79.90	7.96	84.96	9.17	2.67
Dec	6.00	7.87	81.91	7.81	85.89	9.20	2.67

Notes: FF: fed funds rate; 30Y: yield of 30-year Treasury; 30P: price of 30-year Treasury assuming coupon equal to 6.29 percent and maturity in exactly 30 years; 10Y: yield of 10-year Treasury; 10P: price of 10-year Treasury assuming coupon equal to 5.75 percent and maturity in exactly 10 years; MOR: 30-year mortgage; CPI: percent change of CPI in 12 months

Sources: yields and mortgage rates http://www.federalreserve.gov/releases/h15/data.htm CPI ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.t

Chart VI-14 provides the overnight fed funds rate, the yield of the 10-year Treasury constant maturity bond, the yield of the 30-year constant maturity bond and the conventional mortgage rate from Jan 1991 to Dec 1996. In Jan 1991, the fed funds rate was 6.91 percent, the 10-year Treasury yield 8.09 percent, the 30-year Treasury yield 8.27 percent and the conventional mortgage rate 9.64 percent. Before monetary policy tightening in Oct 1993, the rates and yields were 2.99 percent for the fed funds, 5.33 percent for the 10-year Treasury, 5.94 for the 30-year Treasury and 6.83 percent for the conventional mortgage rate. After tightening in Nov 1994, the rates and yields were 5.29 percent for the fed funds rate, 7.96 percent for the 10-year Treasury, 8.08 percent for the 30-year Treasury and 9.17 percent for the conventional mortgage rate.

Chart VI-14, US, Overnight Fed Funds Rate, 10-Year Treasury Constant Maturity, 30-Year Treasury Constant Maturity and Conventional Mortgage Rate, Monthly, Jan 1991 to Dec 1996

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h15/update/

Chart VI-15 of the Bureau of Labor Statistics provides the all items consumer price index from Jan 1991 to Dec 1996. There does not appear acceleration of consumer prices requiring aggressive tightening.

Chart VI-15, US, Consumer Price Index All Items, Jan 1991 to Dec 1996

Source: Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

Chart IV-16 of the Bureau of Labor Statistics provides 12-month percentage changes of the all items consumer price index from Jan 1991 to Dec 1996. Inflation collapsed during the recession from Jul 1990 (III) and Mar 1991 (I) and the end of the Kuwait War on Feb 25, 1991 that stabilized world oil markets. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). Policy tightening had adverse collateral effects in the form of emerging market crises in Mexico and Argentina and fixed income markets worldwide.

Chart VI-16, US, Consumer Price Index All Items, Twelve-Month Percentage Change, Jan 1991 to Dec 1996

Source: Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

The Congressional Budget Office (CBO 2017Jun29, CBO 2017Jan24) estimates potential GDP, potential labor force and potential labor productivity provided in Table IB-3. The CBO estimates average rate of growth of potential GDP from 1950 to 2016 at 3.2 percent per year. The projected path is significantly lower at 1.8 percent per year from 2017 to 2027. The legacy of the economic cycle expansion from IIIQ2009 to IVQ2017 at 2.2 percent on average is in contrast with 3.8 percent on average in the expansion from IQ1983 to IIQ1991 (https://cmpassocregulationblog.blogspot.com/2018/01/continuing-dollar-devaluation-mediocre.html and earlier (https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states_23.html). Subpar economic growth may perpetuate unemployment and underemployment estimated at 24.3 million or 13.3 percent of the effective labor force in Jan 2018 (https://cmpassocregulationblog.blogspot.com/2018/02/twenty-four-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2018/01/twenty-three-million-unemployed-or.html) with much lower hiring than in the period before the current cycle (Section I and earlier https://cmpassocregulationblog.blogspot.com/2018/01/dollar-devaluation-and-rising.html).

Table IB-3, US, Congressional Budget Office History and Projections of Potential GDP of US Overall Economy, ∆%

	Potential GDP	Potential Labor Force	Potential Labor Productivity*
Average Annual ∆%
1950-1973	4.0	1.6	2.4
1974-1981	3.2	2.5	0.6
1982-1990	3.4	1.7	1.7
1991-2001	3.3	1.2	2.0
2002-2007	2.4	1.0	1.4
2008-2016	1.4	0.5	0.9
Total 1950-2016	3.2	1.4	1.7
Projected Average Annual ∆%
2017-2020	1.7	0.5	1.2
2021-2027	1.9	0.5	1.4
2017-2027	1.8	0.5	1.3

*Ratio of potential GDP to potential labor force

Source: CBO, The budget and economic outlook: 2017-2027. Washington, DC, Jan 24, 2017 https://www.cbo.gov/publication/52370 CBO (2014BEOFeb4), CBO, Key assumptions in projecting potential GDP—February 2014 baseline. Washington, DC, Congressional Budget Office, Feb 4, 2014. CBO, The budget and economic outlook: 2015 to 2025. Washington, DC, Congressional Budget Office, Jan 26, 2015. Aug 2016

https://www.cbo.gov/about/products/budget-economic-data#6

Chart IB1-A1 of the Congressional Budget Office provides historical and projected annual growth of United States potential GDP. There is sharp decline of growth of United States potential GDP.

Chart IB-1A1, Congressional Budget Office, Projections of Annual Growth of United States Potential GDP

Source: CBO, The budget and economic outlook: 2017-2027. Washington, DC, Jan 24, 2017 https://www.cbo.gov/publication/52370

https://www.cbo.gov/about/products/budget-economic-data#6

Chart IB-1A of the Congressional Budget Office provides historical and projected potential and actual US GDP. The gap between actual and potential output closes by 2017. Potential output expands at a lower rate than historically. Growth is even weaker relative to trend.

Chart IB-1A, Congressional Budget Office, Estimate of Potential GDP and Gap

Source: Congressional Budget Office

https://www.cbo.gov/publication/49890

Chart IB-1 of the Congressional Budget Office (CBO 2013BEOFeb5) provides actual and potential GDP of the United States from 2000 to 2011 and projected to 2024. Lucas (2011May) estimates trend of United States real GDP of 3.0 percent from 1870 to 2010 and 2.2 percent for per capita GDP. The United States successfully returned to trend growth of GDP by higher rates of growth during cyclical expansion as analyzed by Bordo (2012Sep27, 2012Oct21) and Bordo and Haubrich (2012DR). Growth in expansions following deeper contractions and financial crises was much higher in agreement with the plucking model of Friedman (1964, 1988). The unusual weakness of growth at 2.2 percent on average from IIIQ2009 to IVQ2017 during the current economic expansion in contrast with 3.8 percent on average in the cyclical expansion from IQ1983 to IIQ1991 (https://cmpassocregulationblog.blogspot.com/2018/01/continuing-dollar-devaluation-mediocre.html and earlier (https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states_23.html) cannot be explained by the contraction of 4.2 percent of GDP from IVQ2007 to IIQ2009 and the financial crisis. Weakness of growth in the expansion is perpetuating unemployment and underemployment of 24.3 million or 13.3 percent of the labor force as estimated for Jan 2018 (https://cmpassocregulationblog.blogspot.com/2018/02/twenty-four-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2018/01/twenty-three-million-unemployed-or.html). There is no exit from unemployment/underemployment and stagnating real wages because of the collapse of hiring (Section I and earlier https://cmpassocregulationblog.blogspot.com/2018/01/dollar-devaluation-and-rising.html). The US economy and labor markets collapsed without recovery. Abrupt collapse of economic conditions can be explained only with cyclic factors (Lazear and Spletzer 2012Jul22) and not by secular stagnation (Hansen 1938, 1939, 1941 with early dissent by Simons 1942).

Chart IB-1, US, Congressional Budget Office, ctual and Projections of Potential GDP, 2000-2024, Trillions of Dollars

Source: Congressional Budget Office, CBO (2013BEOFeb5). The last year in common in both projections is 2017. The revision lowers potential output in 2017 by 7.3 percent relative to the projection in 2007.

Chart IB-2 provides differences in the projections of potential output by the CBO in 2007 and more recently on Feb 4, 2014, which the CBO explains in CBO (2014Feb28).

Chart IB-2, Congressional Budget Office, Revisions of Potential GDP

Source: Congressional Budget Office, 2014Feb 28. Revisions to CBO’s Projection of Potential Output since 2007. Washington, DC, CBO, Feb 28, 2014.

Chart IB-3 provides actual and projected potential GDP from 2000 to 2024. The gap between actual and potential GDP disappears at the end of 2017 (CBO2014Feb4). GDP increases in the projection at 2.5 percent per year.

Chart IB-3, Congressional Budget Office, GDP and Potential GDP

Source: CBO (2013BEOFeb5), CBO, Key assumptions in projecting potential GDP—February 2014 baseline. Washington, DC, Congressional Budget Office, Feb 4, 2014.

Chart IIA2-3 of the Bureau of Economic Analysis of the Department of Commerce shows on the lower negative panel the sharp increase in the deficit in goods and the deficits in goods and services from 1960 to 2012. The upper panel shows the increase in the surplus in services that was insufficient to contain the increase of the deficit in goods and services. The adjustment during the global recession has been in the form of contraction of economic activity that reduced demand for goods.

Chart IIA2-3, US, Balance of Goods, Balance on Services and Balance on Goods and Services, 1960-2013, Millions of Dollars

Source: Bureau of Economic Analysis http://www.bea.gov/iTable/index_ita.cfm

Chart IIA2-4 of the Bureau of Economic Analysis shows exports and imports of goods and services from 1960 to 2012. Exports of goods and services in the upper positive panel have been quite dynamic but have not compensated for the sharp increase in imports of goods. The US economy apparently has become less competitive in goods than in services.

Chart IIA2-4, US, Exports and Imports of Goods and Services, 1960-2013, Millions of Dollars

Source: Bureau of Economic Analysis http://www.bea.gov/iTable/index_ita.cfm

Chart IIA2-5 of the Bureau of Economic Analysis shows the US balance on current account from 1960 to 2012. The sharp devaluation of the dollar resulting from unconventional monetary policy of zero interest rates and elimination of auctions of 30-year Treasury bonds did not adjust the US balance of payments. Adjustment only occurred after the contraction of economic activity during the global recession.

Chart IIA2-5, US, Balance on Current Account, 1960-2013, Millions of Dollars

Source: Bureau of Economic Analysis http://www.bea.gov/iTable/index_ita.cfm

Chart IIA2-6 of the Bureau of Economic Analysis provides real GDP in the US from 1960 to 2016. The contraction of economic activity during the global recession was a major factor in the reduction of the current account deficit as percent of GDP.

Chart IIA2-6, US, Real GDP, 1960-2017, Billions of Chained 2009 Dollars

Source: Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IIA2-6, US, Real GDP, 1960-2016, Billions of Chained 2009 Dollars

Source: Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart IIA-7 provides the US current account deficit on a quarterly basis from 1980 to IQ1983. The deficit is at a lower level because of growth below potential not only in the US but worldwide. The combination of high government debt and deficit with external imbalance restricts potential prosperity in the US.

Chart IIA-7, US, Balance on Current Account, Quarterly, 1980-2013

Source: Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Risk aversion channels funds toward US long-term and short-term securities that finance the US balance of payments and fiscal deficits benefitting from risk flight to US dollar denominated assets. There are now temporary interruptions because of fear of rising interest rates that erode prices of US government securities because of mixed signals on monetary policy and exit from the Fed balance sheet of four trillion dollars of securities held outright. Net foreign purchases of US long-term securities (row C in Table VA-4) strengthened from $10.9 billion in Oct 2017 to $41.4 billion in Nov

2017. Foreign residents’ purchases minus sales of US long-term securities (row A in Table VA-4) in Oct 2017 of $10.5 billion strengthened to $34.8 billion in Nov 2017. Net US (residents) purchases of long-term foreign securities (row B in Table VA-4) strengthened from $15.7 billion in Oct 2017 to $22.7 billion in Nov 2017. Other transactions (row C2 in Table VA-4) changed from minus $15.4 billion in Oct 2017 to minus $16.1 billion in Nov 2017. In Nov 2017,

C = A + B + C2 = $34.8 billion + $22.7 billion - $16.1 billion = $41.4 billion

There are minor rounding errors. There is strengthening demand in Table VA-4 in Nov 2017 in A1 private purchases by residents overseas of US long-term securities of $33.8 billion of which weakening in A11 Treasury securities of minus $12.1 billion, weakening in A12 of $5.1 billion in agency securities, strengthening of

$28.8 billion of corporate bonds and weakening of $12.0 billion in equities. Worldwide risk aversion causes flight into US Treasury obligations with significant oscillations. Official purchases of securities in row A2 increased $1.0 billion with decrease of Treasury securities of $6.7 billion in Nov 2017. Official purchases of agency securities increased $7.1 billion in Nov 2017. Row D shows increase in Nov 2017 of $4.6 billion in purchases of short-term dollar denominated obligations. Foreign holdings of US Treasury bills increased $1.4 billion (row D11) with foreign official holdings increasing $7.4 billion while the category “other” increased $3.2 billion. Foreign private holdings of US Treasury bills decreased $6.1 billion in what could be arbitrage of duration exposures and international risks. Risk aversion of default losses in foreign securities dominates decisions to accept zero interest rates in Treasury securities with no perception of principal losses. In the case of long-term securities, investors prefer to sacrifice inflation and possible duration risk to avoid principal losses with significant oscillations

in risk perceptions.

Table VA-4, Net Cross-Borders Flows of US Long-Term Securities, Billion Dollars, NSA

	Nov 2016 12 Months	Nov 2017 12 Months	Oct 2017	Nov 2017
A Foreign Purchases less Sales of US LT Securities	27.7	365.6	10.5	34.8
A1 Private	387.1	445.5	28.5	33.8
A11 Treasury	58.2	139.0	-2.1	-12.1
A12 Agency	214.4	92.4	6.5	5.1
A13 Corporate Bonds	128.9	135.8	10.7	28.8
A14 Equities	-14.3	78.3	13.4	12.0
A2 Official	-359.4	-79.8	-18.1	1.0
A21 Treasury	-397.4	-125.5	-20.2	-6.7
A22 Agency	40.7	38.9	3.4	7.1
A23 Corporate Bonds	-4.2	1.5	-0.2	-0.1
A24 Equities	1.6	5.3	-1.1	0.7
B Net US Purchases of LT Foreign Securities	213.4	139.3	15.7	22.7
B1 Foreign Bonds	258.5	251.2	27.8	21.3
B2 Foreign Equities	-45.2	-111.8	-12.0	1.4
C1 Net Transactions	241.1	504.9	26.2	57.5
C2 Other	-268.2	-219.0	-15.4	-16.1
C Net Foreign Purchases of US LT Securities	-27.0	285.9	10.9	41.4
D Increase in Foreign Holdings of Dollar Denominated Short-term
US Securities & Other Liab	65.1	111.0	47.6	4.6
D1 US Treasury Bills	-8.0	74.9	33.0	1.4
D11 Private	22.9	30.9	26.0	-6.1
D12 Official	-30.9	44.0	7.0	7.4
D2 Other	73.0	36.1	14.6	3.2

C1 = A + B; C = C1+C2

A = A1 + A2

A1 = A11 + A12 + A13 + A14

A2 = A21 + A22 + A23 + A24

B = B1 + B2

D = D1 + D2

Sources: United States Treasury

https://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticpress.aspx

http://www.treasury.gov/press-center/press-releases/Pages/jl2609.aspx

Table VA-5 provides major foreign holders of US Treasury securities. China is the largest holder with $1176.6 billion in Nov 2017, decreasing 1.1 percent from $1189.2 billion in Oct 2017 while increasing $127.3 billion from Nov 2016 or 12.1 percent. The United States Treasury estimates US government debt held by private investors at $11,643 billion in Sep 2017 (Fiscal Year 2017). China’s holding of US Treasury securities represents 10.1 percent of US government marketable interest-bearing debt held by private investors (http://www.fms.treas.gov/bulletin/index.html). Min Zeng, writing on “China plays a big role as US Treasury yields fall,” on Jul 16, 2014, published in the Wall Street Journal (http://online.wsj.com/articles/china-plays-a-big-role-as-u-s-treasury-yields-fall-1405545034?tesla=y&mg=reno64-wsj), finds that acceleration in purchases of US Treasury securities by China has been an important factor in the decline of Treasury yields in 2014. Japan decreased its holdings from $1108.6 billion in Nov 2016 to $1084.1 billion in Nov 2017 or 2.2 percent. The combined holdings of China and Japan in Nov 2017 add to $2260.7 billion, which is equivalent to 19.4 percent of US government marketable interest-bearing securities held by investors of $11,643 billion in Sep 2017 (Fiscal Year 2017) (http://www.fms.treas.gov/bulletin/index.html). Total foreign holdings of Treasury securities increased from $5953.0 billion in Nov 2016 to $6343.1 billion in Nov 2017, or 6.6 percent. The US continues to finance its fiscal and balance of payments deficits with foreign savings (see Pelaez and Pelaez, The Global Recession Risk (2007)). A point of saturation of holdings of US Treasury debt may be reached as foreign holders evaluate the threat of reduction of principal by dollar devaluation and reduction of prices by increases in yield, including possibly risk premium. Shultz et al (2012) find that the Fed financed three-quarters of the US deficit in fiscal year 2011, with foreign governments financing significant part of the remainder of the US deficit while the Fed owns one in six dollars of US national debt. Concentrations of debt in few holders are perilous because of sudden exodus in fear of devaluation and yield increases and the limit of refinancing old debt and placing new debt. In their classic work on “unpleasant monetarist arithmetic,” Sargent and Wallace (1981, 2) consider a regime of domination of monetary policy by fiscal policy (emphasis added):

Table VA-5, US, Major Foreign Holders of Treasury Securities $ Billions at End of Period

	Nov 2017	Oct 2017	Nov 2016
Total	6343.1	6349.5	5953.0
China	1176.6	1189.2	1049.3
Japan	1084.1	1094.0	1108.6
Ireland	328.7	312.4	275.2
Cayman Islands	269.4	269.9	260.8
Brazil	265.3	270.0	258.3
Switzerland	250.9	254.0	230.3
United Kingdom	237.9	225.9	215.8
Luxembourg	218.3	217.9	222.4
Hong Kong	194.9	192.3	185.5
Taiwan	179.9	181.7	183,1
Sudi Arabia	149.0	145.2	100.1
India	140.8	141.4	118.7
Singapore	124.2	130.4	96.9
Foreign Official Holdings	4056.1	4079.1	3768.2
A. Treasury Bills	339.6	332.2	295.6
B. Treasury Bonds and Notes	3716.5	3746.9	3472.7

Source: United States Treasury

http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticpress.aspx

http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/index.aspx

http://ticdata.treasury.gov/Publish/mfh.txt

II Rules, Discretionary Authorities and Slow Productivity Growth. The Bureau of Labor Statistics (BLS) of the Department of Labor provides the quarterly report on productivity and costs. The operational definition of productivity used by the BLS is (https://www.bls.gov/news.release/pdf/prod2.pdf 1): “Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers.” The BLS has revised the estimates for productivity and unit costs. Table II-1 provides the first estimate for IVQ2017 and revision of the estimates for IIIQ2017 and IIQ2017 together with data for nonfarm business sector productivity and unit labor costs in seasonally adjusted annual equivalent (SAAE) rate and the percentage change from the same quarter a year earlier. Reflecting increase in output at 3.2 percent and increase at 3.3 percent in hours worked, nonfarm business sector labor productivity decreased at the SAAE rate of 0.1 percent in IVQ2017, as shown in column 2 “IVQ2017 SAEE.” The increase of labor productivity from IVQ2016 to IVQ2017 was 1.1 percent, reflecting increases in output of 3.2 percent and of hours worked of 2.1 percent, as shown in column 3 “IVQ2017 YoY.” Hours worked decreased from 2.4 percent in IIQ2017 at SAAE to 1.2 percent in IIIQ2017 and increased to 3.3 percent in IVQ2017 while output growth increased from 3.9 percent in IIQ2017 at SAAE to 4.0 percent in IIIQ2017, decreasing to 3.2 percent in IVQ2017. The BLS defines unit labor costs as (https://www.bls.gov/news.release/pdf/prod2.pdf 1): “BLS calculates unit labor costs as the ratio of hourly compensation to labor productivity. Increases in hourly compensation tend to increase unit labor costs and increases in output per hour tend to reduce them.” Unit labor costs increased at the SAAE rate of 2.0 percent in IVQ2017 and increased 1.3 percent in IVQ2017 relative to IVQ2016. Hourly compensation increased at the SAAE rate of 1.8 percent in IVQ2017, which deflating by the estimated consumer price increase SAAE rate in IVQ2017 results in decrease of real hourly compensation at 1.8 percent. Real hourly compensation increased 0.3 percent in IVQ2017 relative to IVQ2016.

Table II-1, US, Nonfarm Business Sector Productivity and Costs %

	IVQ2017 SAAE	IVQ2017 YOY	IIIQ2017 SAAE	IIIQ 2017 YOY	II 2017 SAAE	II 2017 YOY
Productivity	-0.1	1.1	2.7	1.4	1.5	1.3
Output	3.2	3.2	4.0	3.0	3.9	2.8
Hours	3.3	2.1	1.2	1.5	2.4	1.4
Hourly Comp.	1.8	2.4	2.7	0.8	0.3	0.8
Real Hourly Comp.	-1.8	0.3	0.6	-1.2	0.6	-1.1
Unit Labor Costs	2.0	1.3	-0.1	-0.6	-1.2	-0.6
Unit Nonlabor Payments	3.0	1.7	4.8	4.3	3.0	3.8
Implicit Price Deflator	2.4	1.5	2.0	1.5	0.6	1.3

Notes: SAAE: seasonally adjusted annual equivalent; Comp.: compensation; YoY: Quarter on Same Quarter Year Earlier

http://www.bls.gov/lpc/

The analysis by Kydland (http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2004/kydland-bio.html) and Prescott (http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2004/prescott-bio.html) (1977, 447-80, equation 5) uses the “expectation augmented” Phillips curve with the natural rate of unemployment of Friedman (1968) and Phelps (1968), which in the notation of Barro and Gordon (1983, 592, equation 1) is:

U_t = Uⁿ_t – α(π_t – π^e) α > 0 (1)

Where U_t is the rate of unemployment at current time t, Uⁿ_t is the natural rate of unemployment, π_t is the current rate of inflation and π^e is the expected rate of inflation by economic agents based on current information. Equation (1) expresses unemployment net of the natural rate of unemployment as a decreasing function of the gap between actual and expected rates of inflation. The system is completed by a social objective function, W, depending on inflation, π, and unemployment, U:

W = W(π_t, U_t) (2)

The policymaker maximizes the preferences of the public, (2), subject to the constraint of the tradeoff of inflation and unemployment, (1). The total differential of W set equal to zero provides an indifference map in the Cartesian plane with ordered pairs (π_t, U_t- Uⁿ) such that the consistent equilibrium is found at the tangency of an indifference curve and the Phillips curve in (1). The indifference curves are concave to the origin. The consistent policy is not optimal. Policymakers without discretionary powers following a rule of price stability would attain equilibrium with unemployment not higher than with the consistent policy. The optimal outcome is obtained by the rule of price stability, or zero inflation, and no more unemployment than under the consistent policy with nonzero inflation and the same unemployment. Taylor (1998LB) attributes the sustained boom of the US economy after the stagflation of the 1970s to following a monetary policy rule instead of discretion (see Taylor 1993, 1999). Professor John B. Taylor (2014Jul15, 2014Jun26) building on advanced research (Taylor 2007, 2008Nov, 2009, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB, 2015, 2012 Oct 25; 2013Oct28, 2014 Jan01, 2014Jan3, 2014Jun26, 2014Jul15, 2015, 2016Dec7, 2016Dec20 http://www.johnbtaylor.com/) finds that a monetary policy rule would function best in promoting an environment of low inflation and strong economic growth with stability of financial markets. There is strong case for using rules instead of discretionary authorities in monetary policy (http://cmpassocregulationblog.blogspot.com/2017/01/rules-versus-discretionary-authorities.html and earlier http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). It is not uncommon for effects of regulation differing from those intended by policy. Professors Edward C. Prescott and Lee E. Ohanian (2014Feb), writing on “US productivity growth has taken a dive,” on Feb 3, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303942404579362462611843696?KEYWORDS=Prescott), argue that impressive productivity growth over the long-term constructed US prosperity and wellbeing. Prescott and Ohanian (2014Feb) measure US productivity growth at 2.5 percent per year since 1948. Average US productivity growth has been only 1.1 percent since 2011. Prescott and Ohanian (2014Feb) argue that living standards in the US increased at 28 percent in a decade but with current slow growth of productivity will only increase 12 percent by 2024. There may be collateral effects on productivity growth from policy design similar to those in Kydland and Prescott (1977). Professor Edward P. Lazear (2017Feb27), writing in the Wall Street Journal, on Feb 27, 2017 (https://www.wsj.com/articles/how-trump-can-hit-3-growthmaybe-1488239746), finds that productivity growth was 7 percent between 2009 and 2016 at annual equivalent 1 percent. Lazear measures productivity growth at 2.3 percent per year from 2001 to 2008. Herkenhoff, Ohanian and Prescott (2017) and Ohanian and Prescott (2017Dec) analyze how restriction of land use by states in the United States have been depressing economic activity. The Bureau of Labor Statistics important report on productivity and costs released on Feb 1, 2018 (http://www.bls.gov/lpc/) supports the argument of decline of productivity growth in the US analyzed by Prescott and Ohanian (2014Feb) and Lazear (2017Feb27). Table II-2 provides the annual percentage changes of productivity, real hourly compensation and unit labor costs for the entire economic cycle from 2007 to 2017. The estimates incorporate the yearly revision of the US national accounts (https://www.bea.gov/scb/pdf/2017/08-August/0817-2017-annual-nipa-update.pdf). The data confirm the argument of Prescott and Ohanian (2014Feb) and Lazear (2017Feb27): productivity increased cumulatively 4.8 percent from 2011 to 2017 at the average annual rate of 0.7 percent. The situation is direr by excluding growth of 0.9 percent in 2012, which leaves an average of 0.6 percent for 2011-2017. Average productivity growth for the entire economic cycle from 2007 to 2017 is only 1.2 percent. The argument by Prescott and Ohanian (2014Feb) is proper in choosing the tail of the business cycle because the increase in productivity in 2009 of 3.1 percent and 3.3 percent in 2010 consisted of reducing labor hours.

Table II-2, US, Revised Nonfarm Business Sector Productivity and Costs Annual Average, ∆% Annual Average

	2016 ∆%
Productivity	1.2
Real Hourly Compensation	-0.7
Unit Labor Costs	0.2
	2016 ∆%	2015 ∆%	2014 ∆%	2013 ∆%	2012 ∆%	2011 ∆%
Productivity	-0.1	1.3	1.0	0.3	0.9	0.1
Real Hourly Compensation	-0.2	3.0	1.3	-0.3	0.6	-1.0
Unit Labor Costs	1.1	1.8	1.9	0.9	1.7	2.1

	2010 ∆%	2009 ∆%	2008 ∆%	2007∆%
Productivity	3.3	3.1	0.8	1.6
Real Hourly Compensation	0.3	1.4	-1.0	1.4
Unit Labor Costs	-1.3	-2.0	2.0	2.7

Source: US Bureau of Labor Statistics

http://www.bls.gov/lpc/

Productivity jumped in the recovery after the recession from Mar IQ2001 to Nov IVQ2001 (http://www.nber.org/cycles.html) Table II-3 provides quarter on quarter and annual percentage changes in nonfarm business output per hour, or productivity, from 1999 to 2017. The annual average jumped from 2.7 percent in 2001 to 4.4 percent in 2002. Nonfarm business productivity increased at the SAAE rate of 9.3 percent in the first quarter after the recession in IQ2002. Productivity increases decline later in the expansion period. Productivity increases were mediocre during the recession from Dec IVQ2007 to Jun IIIQ2009 (http://www.nber.org/cycles.html) and increased during the first phase of expansion from IIQ2009 to IQ2010, trended lower and collapsed in 2011 and 2012 with sporadic jumps and declines. Productivity increased at 4.4 percent in IVQ2013 and contracted at 3.4 percent in IQ2014. Productivity increased at 2.4 percent in IIQ2014 and at 4.4 percent in IIIQ2014. Productivity contracted at 1.8 percent in IVQ2014 and increased at 2.7 percent in IQ2015. Productivity grew at 1.3 percent in IIQ2015 and increased at 1.3 percent in IIIQ2015. Productivity contracted at 2.6 percent in IVQ2015 and contracted at 1.2 percent in IQ2016. Productivity increased at 0.8 percent in IIQ2016 and expanded at 2.5 percent in IIIQ2016. Productivity grew at 1.3 percent in IVQ2016 and increased at 0.1 percent in IQ2017. Productivity increased at 1.5 percent in IIQ2017 and increased at 2.7 percent in IIIQ2017. Productivity contracted at 0.1 percent in IVQ2017.

Table II-3, US, Nonfarm Business Output per Hour, Percent Change from Prior Quarter at Annual Rate, 1999-2017

Year	Qtr1	Qtr2	Qtr3	Qtr4	Annual
1999	4.5	1.2	3.6	6.6	3.7
2000	-1.9	8.2	-0.2	4.1	3.0
2001	-1.6	7.0	2.1	5.2	2.7
2002	9.3	0.3	3.1	-0.7	4.4
2003	4.2	5.5	9.0	3.9	3.7
2004	-0.1	3.8	1.4	1.3	3.1
2005	4.5	-0.4	3.0	0.1	2.1
2006	2.4	-0.3	-1.8	3.0	0.9
2007	0.4	2.5	4.9	1.7	1.6
2008	-3.8	4.0	1.0	-2.5	0.8
2009	3.1	7.9	5.9	4.9	3.1
2010	2.1	1.4	2.0	1.6	3.3
2011	-3.3	1.3	-0.7	2.8	0.1
2012	0.6	2.3	-0.7	-1.8	0.9
2013	0.9	-0.7	1.6	4.4	0.3
2014	-3.4	2.4	4.4	-1.8	1.0
2015	2.7	1.3	1.3	-2.6	1.3
2016	-1.2	0.8	2.5	1.3	-0.1
2017	0.1	1.5	2.7	-0.1	1.2

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/

Chart II-1 of the Bureau of Labor Statistics (BLS) provides SAAE rates of nonfarm business productivity from 1999 to 2017. There is a clear pattern in both episodes of economic cycles in 2001 and 2007 of rapid expansion of productivity in the transition from contraction to expansion followed by more subdued productivity expansion. Part of the explanation is the reduction in labor utilization resulting from adjustment of business to the sudden shock of collapse of revenue. Productivity rose briefly in the expansion after 2009 but then collapsed and moved to negative change with some positive changes recently at lower rates. Contractions in the cycle from 2007 to 2016 have been more frequent and sharper.

Chart II-1, US, Nonfarm Business Output per Hour, Percent Change from Prior Quarter at Annual Rate, 1999-2017

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/

Percentage changes from prior quarter at SAAE rates and annual average percentage changes of nonfarm business unit labor costs are provided in Table II-4. Unit labor costs fell during the contractions with continuing negative percentage changes in the early phases of the recovery. Weak labor markets partly explain the decline in unit labor costs. As the economy moves toward full employment, labor markets tighten with increase in unit labor costs. The expansion beginning in IIIQ2009 has been characterized by high unemployment and underemployment. Table II-4 shows continuing subdued increases in unit labor costs in 2011 but with increase at 8.9 percent in IQ2012 followed by decrease at 0.1 percent in IIQ2012, increase at 1.1 percent in IIIQ2012 and increase at 13.2 percent in IVQ2012. Unit labor costs decreased at 9.7 percent in IQ2013 and increased at 6.5 percent in IIQ2013. Unit labor costs decreased at 0.5 percent in IIIQ2013 and decreased at 1.9 percent in IVQ2013. Unit labor costs increased at 10.5 percent in IQ2014 and at minus 4.7 percent in IIQ2014. Unit labor costs decreased at 1.2 percent in IIIQ2014 and increased at 7.1 percent in IVQ2014. Unit labor costs increased at 0.6 percent in IQ2015 and increased at 2.3 percent in IIQ2015. Unit labor costs decreased at 0.2 percent in IIIQ2015 and increased at 7.2 percent in IVQ2015. Unit labor costs decreased at 2.7 percent in IQ2016 and increased at 3.9 percent in IIQ2016. Unit labor costs increased at 0.1 percent in IIIQ2016 and decreased at 5.7 percent in IVQ2016. Unit labor costs increased at 4.8 percent in IQ2017 and decreased at 1.2 percent in IIQ2017. United labor costs decreased at 0.1 percent in IIIQ2017 and increased at 2.0 percent in IVQ2017

Table II-4, US, Nonfarm Business Unit Labor Costs, Percent Change from Prior Quarter at Annual Rate 1999-2017

Year	Qtr1	Qtr2	Qtr3	Qtr4	Annual
1999	2.9	0.3	0.0	1.6	0.9
2000	17.4	-6.8	8.2	-1.7	4.0
2001	11.4	-5.4	-1.7	-1.4	1.6
2002	-6.6	3.3	-1.1	1.7	-2.0
2003	-1.5	1.6	-2.6	1.5	0.1
2004	-0.5	3.9	5.6	0.5	1.4
2005	-1.3	2.6	2.0	2.3	1.6
2006	6.1	0.5	2.3	4.0	3.0
2007	9.8	-2.7	-3.2	2.6	2.7
2008	8.3	-3.6	2.4	7.1	2.0
2009	-12.3	2.1	-3.0	-2.3	-2.0
2010	-4.8	3.2	-0.2	0.2	-1.3
2011	11.0	-3.5	3.3	-7.7	2.1
2012	8.9	-0.1	1.1	13.2	1.7
2013	-9.7	6.5	-0.5	-1.9	0.9
2014	10.5	-4.7	-1.2	7.1	1.9
2015	0.6	2.3	-0.2	7.2	1.8
2016	-2.7	3.9	0.1	-5.7	1.1
2017	4.8	-1.2	-0.1	2.0	0.2

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/

Chart II-2 provides change of unit labor costs at SAAE from 1999 to 2017. There are multiple oscillations recently with negative changes alternating with positive changes.

Chart II-2, US, Nonfarm Business Unit Labor Costs, Percent Change from Prior Quarter at Annual Rate 1999-2017

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/

Table II-5 provides percentage change from prior quarter at annual rates for nonfarm business real hourly worker compensation. The expansion after the contraction of 2001 was followed by strong recovery of real hourly compensation. Real hourly compensation increased at the rate of 2.9 percent in IQ2011 but fell at annual rates of 6.5 percent in IIQ2011 and 6.8 percent in IVQ2011. Real hourly compensation increased at 7.1 percent in IQ2012, increasing at 1.4 percent in IIQ2012, declining at 1.4 percent in IIIQ2012 and increasing at 8.3 percent in IVQ2012. Real hourly compensation fell at 1.0 percent in 2011 and increased at 0.6 percent in 2012. Real hourly compensation fell at 10.4 percent in IQ2013 and increased at 6.3 percent in IIQ2013, falling at 1.1 percent in IIIQ2013. Real hourly compensation increased at 0.9 percent in IVQ2013 and at 4.1 percent in IQ2014. Real hourly compensation decreased at 4.2 percent in IIQ2014. Real hourly compensation increased at 2.1 percent in IIIQ2014. The annual rate of increase of real hourly compensation for 2013 is minus 0.3 percent. Real hourly compensation increased at 5.8 percent in IVQ2014. The annual rate of increase of real hourly compensation in 2014 is 1.3 percent. Real hourly compensation increased at 6.0 percent in IQ2015 and increased at 1.2 percent in IIQ2015. Real hourly compensation decreased at 0.4 percent in IIIQ2015 and increased at 4.1 percent in IVQ2015. Real hourly compensation increased at 3.0 percent in 2015. Real hourly compensation decreased at 3.9 percent in IQ2016 and increased at 2.4 percent in IIQ2016. Real hourly compensation increased at 0.7 percent in IIIQ2016 and decreased at 7.3 percent in IVQ2016. Real hourly compensation decreased 0.2 percent in 2016. Real hourly compensation increased at 1.7 percent in IQ2017 and increased at 0.6 percent in IIQ2017. Real hourly compensation increased at 0.6 percent in IIIQ2017. Real hourly compensation decreased at 1.8 percent in IVQ2017. Real hourly compensation fell 0.7 percent in 2017.

Table II-5, Nonfarm Business Real Hourly Compensation, Percent Change from Prior Quarter at Annual Rate 1999-2017

Year	Qtr1	Qtr2	Qtr3	Qtr4	Annual
1999	6.0	-1.5	0.5	5.1	2.5
2000	10.6	-2.2	4.1	-0.5	3.5
2001	5.4	-1.7	-0.7	4.1	1.4
2002	0.7	0.3	-0.2	-1.3	0.7
2003	-1.5	7.8	3.0	3.9	1.5
2004	-3.8	4.5	4.5	-2.5	1.8
2005	1.1	-0.6	-1.0	-1.3	0.3
2006	6.4	-3.5	-3.1	8.8	0.6
2007	6.0	-4.7	-1.0	-0.5	1.4
2008	-0.3	-4.7	-2.6	14.6	-1.0
2009	-7.1	7.8	-0.7	-0.6	1.4
2010	-3.4	4.8	0.6	-1.4	0.3
2011	2.9	-6.5	-0.1	-6.8	-1.0
2012	7.1	1.4	-1.4	8.3	0.6
2013	-10.4	6.3	-1.1	0.9	-0.3
2014	4.1	-4.2	2.1	5.8	1.3
2015	6.0	1.2	-0.4	4.1	3.0
2016	-3.9	2.4	0.7	-7.3	-0.2
2017	1.7	0.6	0.6	-1.8	-0.7

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/

Chart II-3 provides percentage change from prior quarter at annual rate of nonfarm business real hourly compensation. There have been multiple negative percentage quarterly changes in the current cycle since IVQ2007.

Chart II-3, US, Nonfarm Business Real Hourly Compensation, Percent Change from Prior Quarter at Annual Rate 1999-2017

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/

Chart II-4 provides percentage change of nonfarm business output per hour in a quarter relative to the same quarter a year earlier. As in most series of real output, productivity increased sharply in 2010 but the momentum was lost after 2011 as with the rest of the real economy.

Chart II-4, US, Nonfarm Business Output per Hour, Percent Change from Same Quarter a Year Earlier 1999-2017

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/

Chart II-5 provides percentage changes of nonfarm business unit labor costs relative to the same quarter a year earlier. Softening of labor markets caused relatively high yearly percentage changes in the recession of 2001 repeated in the recession in 2009. Recovery was strong in 2010 but then weakened.

Chart II-5, US, Nonfarm Business Unit Labor Costs, Percent Change from Same Quarter a Year Earlier 1999-2017

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/

Chart II-6 provides percentage changes in a quarter relative to the same quarter a year earlier for nonfarm business real hourly compensation. Labor compensation eroded sharply during the recession with brief recovery in 2010 and another fall until recently.

Chart II-6, US, Nonfarm Business Real Hourly Compensation, Percent Change from Same Quarter a Year Earlier 1999-2017

2005=100

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/

In the analysis of Hansen (1939, 3) of secular stagnation, economic progress consists of growth of real income per person driven by growth of productivity. The “constituent elements” of economic progress are “(a) inventions, (b) the discovery and development of new territory and new resources, and (c) the growth of population” (Hansen 1939, 3). Secular stagnation originates in decline of population growth and discouragement of inventions. According to Hansen (1939, 2), US population grew by 16 million in the 1920s but grew by one half or about 8 million in the 1930s with forecasts at the time of Hansen’s writing in 1938 of growth of around 5.3 million in the 1940s. Hansen (1939, 2) characterized demography in the US as “a drastic decline in the rate of population growth.” Hansen’s plea was to adapt economic policy to stagnation of population in ensuring full employment. In the analysis of Hansen (1939, 8), population caused half of the growth of US GDP per year. Growth of output per person in the US and Europe was caused by “changes in techniques and to the exploitation of new natural resources.” In this analysis, population caused 60 percent of the growth of capital formation in the US. Declining population growth would reduce growth of capital formation. Residential construction provided an important share of growth of capital formation. Hansen (1939, 12) argues that market power of imperfect competition discourages innovation with prolonged use of obsolete capital equipment. Trade unions would oppose labor-savings innovations. The combination of stagnating and aging population with reduced innovation caused secular stagnation. Hansen (1939, 12) concludes that there is role for public investments to compensate for lack of dynamism of private investment but with tough tax/debt issues.

The current application of Hansen’s (1938, 1939, 1941) proposition argues that secular stagnation occurs because full employment equilibrium can be attained only with negative real interest rates between minus 2 and minus 3 percent. Professor Lawrence H. Summers (2013Nov8) finds that “a set of older ideas that went under the phrase secular stagnation are not profoundly important in understanding Japan’s experience in the 1990s and may not be without relevance to America’s experience today” (emphasis added). Summers (2013Nov8) argues there could be an explanation in “that the short-term real interest rate that was consistent with full employment had fallen to -2% or -3% sometime in the middle of the last decade. Then, even with artificial stimulus to demand coming from all this financial imprudence, you wouldn’t see any excess demand. And even with a relative resumption of normal credit conditions, you’d have a lot of difficulty getting back to full employment.” The US economy could be in a situation where negative real rates of interest with fed funds rates close to zero as determined by the Federal Open Market Committee (FOMC) do not move the economy to full employment or full utilization of productive resources. Summers (2013Oct8) finds need of new thinking on “how we manage an economy in which the zero nominal interest rates is a chronic and systemic inhibitor of economy activity holding our economies back to their potential.”

Former US Treasury Secretary Robert Rubin (2014Jan8) finds three major risks in prolonged unconventional monetary policy of zero interest rates and quantitative easing: (1) incentive of delaying action by political leaders; (2) “financial moral hazard” in inducing excessive exposures pursuing higher yields of risker credit classes; and (3) major risks in exiting unconventional policy. Rubin (2014Jan8) proposes reduction of deficits by structural reforms that could promote recovery by improving confidence of business attained with sound fiscal discipline.

Professor John B. Taylor (2014Jan01, 2014Jan3) provides clear thought on the lack of relevance of Hansen’s contention of secular stagnation to current economic conditions. The application of secular stagnation argues that the economy of the US has attained full-employment equilibrium since around 2000 only with negative real rates of interest of minus 2 to minus 3 percent. At low levels of inflation, the so-called full-employment equilibrium of negative interest rates of minus 2 to minus 3 percent cannot be attained and the economy stagnates. Taylor (2014Jan01) analyzes multiple contradictions with current reality in this application of the theory of secular stagnation:

Secular stagnation would predict idle capacity, in particular in residential investment when fed fund rates were fixed at 1 percent from Jun 2003 to Jun 2004. Taylor (2014Jan01) finds unemployment at 4.4 percent with house prices jumping 7 percent from 2002 to 2003 and 14 percent from 2004 to 2005 before dropping from 2006 to 2007. GDP prices doubled from 1.7 percent to 3.4 percent when interest rates were low from 2003 to 2005.
Taylor (2014Jan01, 2014Jan3) finds another contradiction in the application of secular stagnation based on low interest rates because of savings glut and lack of investment opportunities. Taylor (2009) shows that there was no savings glut. The savings rate of the US in the past decade is significantly lower than in the 1980s.
Taylor (2014Jan01, 2014Jan3) finds another contradiction in the low ratio of investment to GDP currently and reduced investment and hiring by US business firms.
Taylor (2014Jan01, 2014Jan3) argues that the financial crisis and global recession were caused by weak implementation of existing regulation and departure from rules-based policies.
Taylor (2014Jan01, 2014Jan3) argues that the recovery from the global recession was constrained by a change in the regime of regulation and fiscal/monetary policies.

U_t = Uⁿ_t – α(π_t – π^e) α > 0 (1)

W = W(π_t, U_t) (2)

The policymaker maximizes the preferences of the public, (2), subject to the constraint of the tradeoff of inflation and unemployment, (1). The total differential of W set equal to zero provides an indifference map in the Cartesian plane with ordered pairs (π_t, U_t- Uⁿ) such that the consistent equilibrium is found at the tangency of an indifference curve and the Phillips curve in (1). The indifference curves are concave to the origin. The consistent policy is not optimal. Policymakers without discretionary powers following a rule of price stability would attain equilibrium with unemployment not higher than with the consistent policy. The optimal outcome is obtained by the rule of price stability, or zero inflation, and no more unemployment than under the consistent policy with nonzero inflation and the same unemployment. Taylor (1998LB) attributes the sustained boom of the US economy after the stagflation of the 1970s to following a monetary policy rule instead of discretion (see Taylor 1993, 1999). Professor John B. Taylor (2014Jul15, 2014Jun26) building on advanced research (Taylor 2007, 2008Nov, 2009, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB, 2015, 2012 Oct 25; 2013Oct28, 2014 Jan01, 2014Jan3, 2014Jun26, 2014Jul15, 2015, 2016Dec7, 2016Dec20 http://www.johnbtaylor.com/) finds that a monetary policy rule would function best in promoting an environment of low inflation and strong economic growth with stability of financial markets. There is strong case for using rules instead of discretionary authorities in monetary policy (http://cmpassocregulationblog.blogspot.com/2017/01/rules-versus-discretionary-authorities.html and earlier http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). It is not uncommon for effects of regulation differing from those intended by policy. Professors Edward C. Prescott and Lee E. Ohanian (2014Feb), writing on “US productivity growth has taken a dive,” on Feb 3, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303942404579362462611843696?KEYWORDS=Prescott), argue that impressive productivity growth over the long-term constructed US prosperity and wellbeing. Prescott and Ohanian (2014Feb) measure US productivity growth at 2.5 percent per year since 1948. Average US productivity growth has been only 1.1 percent since 2011. Prescott and Ohanian (2014Feb) argue that living standards in the US increased at 28 percent in a decade but with current slow growth of productivity will only increase 12 percent by 2024. There may be collateral effects on productivity growth from policy design similar to those in Kydland and Prescott (1977). Professor Edward P. Lazear (2017Feb27), writing in the Wall Street Journal, on Feb 27, 2017 (https://www.wsj.com/articles/how-trump-can-hit-3-growthmaybe-1488239746), finds that productivity growth was 7 percent between 2009 and 20016 at annual equivalent 1 percent. Lazear measures productivity growth at 2.3 percent per year from 2001 to 2008. Herkenhoff, Ohanian and Prescott (2017) and Ohanian and Prescott (2017Dec) analyze how restriction of land use by states in the United States have been depressing economic activity. The Bureau of Labor Statistics important report on productivity and costs released on Mar 8, 2017 (http://www.bls.gov/lpc/) supports the argument of decline of productivity growth in the US analyzed by Prescott and Ohanian (2014Feb) and Lazear (2017Feb27). Table II-2 provides the annual percentage changes of productivity, real hourly compensation and unit labor costs for the entire economic cycle from 2007 to 2017. The estimates incorporate the yearly revision of the US national accounts (https://www.bea.gov/national/an1.htm#2017annualupdate). The data confirm the argument of Prescott and Ohanian (2014Feb) and Lazear (2017Feb27): productivity increased cumulatively 4.8 percent from 2011 to 2017 at the average annual rate of 0.7 percent. The situation is direr by excluding growth of 0.9 percent in 2012, which leaves an average of 0.6 percent for 2011-2017. Average productivity growth for the entire economic cycle from 2007 to 2017 is only 1.2 percent. The argument by Prescott and Ohanian (2014Feb) is proper in choosing the tail of the business cycle because the increase in productivity in 2009 of 3.1 percent and 3.3 percent in 2010 consisted of reducing labor hours.

In revealing research, Edward P. Lazear and James R. Spletzer (2012JHJul22) use the wealth of data in the valuable database and resources of the Bureau of Labor Statistics (http://www.bls.gov/data/) in providing clear thought on the nature of the current labor market of the United States. The critical issue of analysis and policy currently is whether unemployment is structural or cyclical. Structural unemployment could occur because of (1) industrial and demographic shifts and (2) mismatches of skills and job vacancies in industries and locations. Consider the aggregate unemployment rate, Y, expressed in terms of share s_i of a demographic group in an industry i and unemployment rate y_i of that demographic group (Lazear and Spletzer 2012JHJul22, 5-6):

Y = ∑_is_iy_i (1)

This equation can be decomposed for analysis as (Lazear and Spletzer 2012JHJul22, 6):

∆Y = ∑_i∆s_iy*_i+ ∑_i∆y_is*_i (2)

The first term in (2) captures changes in the demographic and industrial composition of the economy ∆s_i multiplied by the average rate of unemployment y*_i, or structural factors. The second term in (2) captures changes in the unemployment rate specific to a group, or ∆y_i, multiplied by the average share of the group s*_i,or cyclical factors. There are also mismatches in skills and locations relative to available job vacancies. A simple observation by Lazear and Spletzer (2012JHJul22) casts intuitive doubt on structural factors: the rate of unemployment jumped from 4.4 percent in the spring of 2007 to 10 percent in October 2009. By nature, structural factors should be permanent or occur over relative long periods. The revealing result of the exhaustive research of Lazear and Spletzer (2012JHJul22) is:

“The analysis in this paper and in others that we review do not provide any compelling evidence that there have been changes in the structure of the labor market that are capable of explaining the pattern of persistently high unemployment rates. The evidence points to primarily cyclic factors.”

The theory of secular stagnation cannot explain sudden collapse of the US economy and labor markets. The theory of secular stagnation departs from an aggregate production function in which output grows with the use of labor, capital and technology (see Pelaez and Pelaez, Globalization and the State, Vol. I (2008a), 11-6). Simon Kuznets (1971) analyzes modern economic growth in his Lecture in Memory of Alfred Nobel:

“The major breakthroughs in the advance of human knowledge, those that constituted dominant sources of sustained growth over long periods and spread to a substantial part of the world, may be termed epochal innovations. And the changing course of economic history can perhaps be subdivided into economic epochs, each identified by the epochal innovation with the distinctive characteristics of growth that it generated.Without considering the feasibility of identifying and dating such economic epochs, we may proceed on the working assumption that modern economic growth represents such a distinct epoch - growth dating back to the late eighteenth century and limited (except in significant partial effects) to economically developed countries. These countries, so classified because they have managed to take adequate advantage of the potential of modern technology, include most of Europe, the overseas offshoots of Western Europe, and Japan—barely one quarter of world population.”

Chart II-7 provides nonfarm-business labor productivity, measured by output per hour, from 1947 to 2017. The rate of productivity increase continued in the early part of the 2000s but then softened and fell during the global recession. The interruption of productivity increases occurred exclusively in the current business cycle. Lazear and Spletzer (2012JHJul22) find “primarily cyclic” factors in explaining the frustration of currently depressed labor markets in the United States. Stagnation of productivity is another cyclic event and not secular trend. The theory and application of secular stagnation to current US economic conditions is void of reality.

Chart II-7, US, Nonfarm Business Labor Productivity, Output per Hour, 1947-2017, Index 2009=100

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/

Table II-6 expands Table II-2 providing more complete measurements of the Productivity and Cost research of the Bureau of Labor Statistics. The proper emphasis of Prescott and Ohanian (2014Feb) is on the low productivity increases from 2011 to 2017. Labor productivity increased 3.3 percent in 2010 and 3.1 percent in 2009. There is much stronger yet not sustained performance in 2010 with productivity growing 3.3 percent because of growth of output of 3.2 percent with decline of hours worked of 0.1 percent. Productivity growth of 3.1 percent in 2009 consists of decline of output by 4.3 percent while hours worked collapsed 7.2 percent, which is not a desirable route to progress. The expansion phase of the economic cycle concentrated in one year, 2010, with underperformance in the remainder of the expansion from 2011 to 2017 of productivity growth at average 0.6 percent per year.

Table II-6, US, Productivity and Costs, Annual Percentage Changes 2007-2016

	2017
Productivity	1.2
Output	2.9
Hours Worked	1.6
Employment	1.5
Average Weekly Hours Worked	0.1
Unit Labor Costs	0.2
Hourly Compensation	1.5
Consumer Price Inflation	2.1
Real Hourly Compensation	-0.7
Non-labor Payments	6.2
Output per Job	1.3
	2016	2015	2014	2013	2012
Productivity	-0.1	1.3	1.0	0.3	0.9
Output	1.5	3.4	3.3	2.0	3.1
Hours Worked	1.6	2.1	2.2	1.7	2.2
Employment	1.8	2.2	2.0	1.8	2.0
Average Weekly Hours Worked	-0.3	-0.1	0.2	-0.1	0.2
Unit Labor Costs	1.1	1.8	1.9	0.9	1.7
Hourly Compensation	1.0	3.1	2.9	1.2	2.6
Consumer Price Inflation	1.3	0.1	3.6	1.5	2.1
Real Hourly Compensation	-0.2	3.0	1.3	-0.3	0.6
Non-labor Payments	2.9	3.1	4.9	4.4	5.3
Output per Job	-0.4	1.2	1.2	0.2	1.1

	2011	2010	2009	2008	2007
Productivity	0.1	3.3	3.1	0.8	1.6
Output	2.2	3.2	-4.3	-1.3	2.3
Hours Worked	2.1	-0.1	-7.2	-2.1	0.7
Employment	1.6	-1.2	-5.7	-1.5	0.9
Average Weekly Hours Worked	0.5	1.1	-1.6	-0.6	-0.2
Unit Labor Costs	2.1	-1.3	-2.0	2.0	2.7
Hourly Compensation	2.2	1.9	1.0	2.8	4.3
Consumer Price Inflation	3.2	1.6	-0.4	3.8	2.8
Real Hourly Compensation	-1.0	0.3	1.4	-1.0	1.4
Non-labor Payments	3.7	7.5	0.0	-0.4	3.4
Output per Job	0.6	4.4	1.5	0.2	1.4

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/

Productivity growth can bring about prosperity while productivity regression can jeopardize progress. Cobet and Wilson (2002) provide estimates of output per hour and unit labor costs in national currency and US dollars for the US, Japan and Germany from 1950 to 2000 (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). The average yearly rate of productivity change from 1950 to 2000 was 2.9 percent in the US, 6.3 percent for Japan and 4.7 percent for Germany while unit labor costs in USD increased at 2.6 percent in the US, 4.7 percent in Japan and 4.3 percent in Germany. From 1995 to 2000, output per hour increased at the average yearly rate of 4.6 percent in the US, 3.9 percent in Japan and 2.6 percent in Germany while unit labor costs in USD fell at minus 0.7 percent in the US, 4.3 percent in Japan and 7.5 percent in Germany. There was increase in productivity growth in Japan and France within the G7 in the second half of the 1990s but significantly lower than the acceleration of 1.3 percentage points per year in the US. Table II-7 provides average growth rates of indicators in the research of productivity and growth of the US Bureau of Labor Statistics. There is dramatic decline of productivity growth from 2.1 percent per year on average from 1947 to 2017 to 1.2 percent per year on average in the whole cycle from 2007 to 2017. Productivity increased at the average rate of 2.3 percent from 1947 to 2007. There is profound drop in the average rate of output growth from 3.4 percent on average from 1947 to 2017 to 1.6 percent from 2007 to 2017. Output grew at 3.7 percent per year on average from 1947 to 2007. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 34 quarters from IIIQ2009 to IVQ2017. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) and the first estimate of GDP for IVQ2017 (https://www.bea.gov/newsreleases/national/gdp/2018/pdf/gdp4q17_adv.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by dividing GDP of $14,745.9 billion in IIQ2010 by GDP of $14,355.6 billion in IIQ2009 {[($14,745.9/$14,355.6) -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (https://cmpassocregulationblog.blogspot.com/2018/01/continuing-dollar-devaluation-mediocre.html and earlier (https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states_23.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.9 percent, 5.4 percent from IQ1983 to IIIQ1986, 5.2 percent from IQ1983 to IVQ1986, 5.0 percent from IQ1983 to IQ1987, 5.0 percent from IQ1983 to IIQ1987, 4.9 percent from IQ1983 to IIIQ1987, 5.0 percent from IQ1983 to IVQ1987, 4.9 percent from IQ1983 to IIQ1988, 4.8 percent from IQ1983 to IIIQ1988, 4.8 percent from IQ1983 to IVQ1988, 4.8 percent from IQ1983 to IQ1989, 4.7 percent from IQ1983 to IIQ1989, 4.7 percent from IQ1983 to IIIQ1989, 4.5 percent from IQ1983 to IVQ1989. 4.5 percent from IQ1983 to IQ1990, 4.4 percent from IQ1983 to IIQ1990, 4.3 percent from IQ1983 to IIIQ1990, 4.0 percent from IQ1983 to IVQ1990, 3.8 percent from IQ1983 to IQ1991, 3.8 percent from IQ1983 to IIQ1991 and at 7.8 percent from IQ1983 to IVQ1983 (https://cmpassocregulationblog.blogspot.com/2018/01/continuing-dollar-devaluation-mediocre.html and earlier (https://cmpassocregulationblog.blogspot.com/2017/12/mediocre-cyclical-united-states_23.html). The National Bureau of Economic Research (NBER) dates a contraction of the US from IQ1990 (Jul) to IQ1991 (Mar) (http://www.nber.org/cycles.html). The expansion lasted until another contraction beginning in IQ2001 (Mar). US GDP contracted 1.3 percent from the pre-recession peak of $8983.9 billion of chained 2009 dollars in IIIQ1990 to the trough of $8865.6 billion in IQ1991 (http://www.bea.gov/iTable/index_nipa.cfm). The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IVQ2017 would have accumulated to 34.4 percent. GDP in IVQ2017 would be $20,149.0 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2876.5 billion than actual $17,272.5 billion. There are about two trillion dollars of GDP less than at trend, explaining the 24.3 million unemployed or underemployed equivalent to actual unemployment/underemployment of 14.3 percent of the effective labor force (https://cmpassocregulationblog.blogspot.com/2018/02/twenty-four-million-unemployed-or.html and earlier https://cmpassocregulationblog.blogspot.com/2018/01/twenty-three-million-unemployed-or.html). US GDP in IVQ2017 is 14.3 percent lower than at trend. US GDP grew from $14,991.8 billion in IVQ2007 in constant dollars to $17,272.5 billion in IVQ2017 or 15.2 percent at the average annual equivalent rate of 1.4 percent. Professor John H. Cochrane (2014Jul2) estimates US GDP at more than 10 percent below trend. Cochrane (2016May02) measures GDP growth in the US at average 3.5 percent per year from 1950 to 2000 and only at 1.76 percent per year from 2000 to 2015 with only at 2.0 percent annual equivalent in the current expansion. Cochrane (2016May02) proposes drastic changes in regulation and legal obstacles to private economic activity. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. There is similar behavior in manufacturing. There is classic research on analyzing deviations of output from trend (see for example Schumpeter 1939, Hicks 1950, Lucas 1975, Sargent and Sims 1977). The long-term trend is growth of manufacturing at average 3.1 percent per year from Dec 1919 to Dec 2017. Growth at 3.1 percent per year would raise the NSA index of manufacturing output from 108.2393 in Dec 2007 to 146.8830 in Dec 2017. The actual index NSA in Dec 2017 is 103.381, which is 29.6 percent below trend. Manufacturing output grew at average 2.0 percent between Dec 1986 and Dec 2017. Using trend growth of 2.0 percent per year, the index would increase to 131.9431 in Dec 2017. The output of manufacturing at 103.381 in Dec 2017 is 21.6 percent below trend under this alternative calculation.

Table II-7, US, Productivity and Costs, Average Annual Percentage Changes 2007-2017, 1947-2007 and 1947-2017

	Average Annual Percentage Rate 2007-2017	Average Annual Percentage Rate 1947-2007	Average Annual Percentage Rate 1947-2017
Productivity	1.2	2.3	2.1
Output	1.6	3.7	3.4
Hours	0.4	1.4	1.2
Employment	0.4	1.6	1.5
Average Weekly Hours	-0.6*	-14.4*	-15.0*
Hourly Compensation	2.0	5.4	4.9
Consumer Price Inflation	1.7	3.8	3.5
Real Hourly Compensation	0.3	1.7	1.5
Unit Labor Costs	0.8	3.0	2.7
Unit Non-Labor Payments	2.1	3.5	3.3
Output per Job	1.1	2.0	1.9

* Percentage Change

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/

Unit labor costs increased sharply during the Great Inflation from the late 1960s to 1981 as shown by sharper slope in Chart II-8. Unit labor costs continued to increase but at a lower rate because of cyclic factors and not because of imaginary secular stagnation.

Chart II-8, US, Nonfarm Business, Unit Labor Costs, 1947-2017, Index 2009=100

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/

Real hourly compensation increased at relatively high rates after 1947 to the early 1970s but reached a plateau that lasted until the early 1990s, as shown in Chart II-9. There were rapid increases until the global recession. Cyclic factors and not alleged secular stagnation explain the interruption of increases in real hourly compensation.

Chart II-9, US, Nonfarm Business, Real Hourly Compensation, 1947-2017, Index 2009=100

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/

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