Month: April 2023

I had a bit of insomnia last night and produced this fine reenactment of old-school blogging:

This chart shows the change in federal spending during every postwar administration.¹ For example, Eisenhower's first budget clocked in at 18.14% of GDP while his final budget set spending at 17.38% of GDP. So over the course of his administration spending declined by 0.76 percentage points.

Add this up across the years and Republicans have increased spending levels by 5 percentage points. Democrats have reduced spending levels by 3 percentage points.

Since the mid-50s, federal spending has roughly increased from 16% of GDP to 20% of GDP. Over the next decade or two this will almost certainly have to increase to about 25% of GDP.

¹I didn't include Truman's enormous spending cuts because they were merely the result of the end of World War II. Likewise, I didn't include Trump's enormous increases because they were a bipartisan response to the COVID emergency.

In the New York Times Magazine this weekend David Wallace-Wells has an interview with Dr. Anthony Fauci. I knew David a little bit when I was at the Washington Monthly and I've followed him with admiration ever since, so I was surprised at how combative the interview was. In one sense, David was just asking tough questions and letting Fauci clear the air, but a few too many of the questions were premised on MAGA nonsense that really didn't deserve to see the light of day. Fauci got noticeably annoyed at several points, and I don't blame him.

That said, there are two big things I'd take away from the interview. The first is this:

Wallace-Wells: Did we do enough to communicate the age skew of the disease?...I still think, honestly to this day, that almost no one appreciates just how wide that age skew really is, given that the risk to someone in their 80s or 90s is perhaps hundreds of times as high as it is to someone in their 20s or 30s.

Fauci: You are hitting on some terrific points. Did we say that the elderly were much more vulnerable? Yes. Did we say it over and over and over again? Yes, yes, yes. But somehow or other, the general public didn’t get that feeling that the vulnerable are really, really heavily weighted toward the elderly. Like 85 percent of the hospitalizations are there. But if you ask the person in the street, they may say, “Oh, yeah, elderly are more vulnerable, but everybody’s really vulnerable” — which is true, but to a much lesser extent.

This is an example of something that doesn't get appreciated enough. There was an unending cacophony of voices during the first year of the pandemic. There was the CDC, but there was also WHO. There was the Donald Trump show. There were TV doctors. There were local mayors, governors, and health departments. There were charlatans. There was Twitter. Everybody had an opinion.

But we forget all that with the passage of time. Everything gets mushed together and then blamed on "the CDC." But if you go back and look you'll often find that the CDC didn't make the recommendations that we now think are so wrong. Rather, it was the hive voice.

This isn't to excuse every mistake. Some of the CDC's recommendations were wrong. This leads to my second takeaway. It comes from Don McNeil, former COVID reporter for the New York Times. His review of the Fauci interview is scathing—much too scathing, I'd say. But he makes this key point:

The truth is that many of the early guesses made by science proved wrong. When the data changed, good scientists changed their advice.

Read the Fauci interview for examples of this. The COVID virus surprised scientists at nearly every turn. It spread asymptomatically. It was airborne. It mutated wildly. It was more transmissible than anyone expected.

All of these things required scientists to change their advice. That's not a symptom of incompetence, it's a symptom of how the real world works. Fauci acknowledges that some things could have happened more quickly, but overall I think most people don't realize just how fast science worked during the pandemic. We complain about the fact that it took a few months to learn about asymptomatic transmission, for example, but this is something that normally might have taken years. As near as I can tell, scientists blew the doors off of previous speed records. Most of them should be getting medals, not Twitter mobs at their door.

My doctor was happy to see me today because apparently I'm one of his few CAR-T patients who's currently lucid. The others are staring blankly at the ceiling and trying to remember who the president is.

But I'm not out of the woods yet. If I start posting charts of, say, oatmeal consumption vs. AAA battery usage you'll know that I too have fallen prey to "neurological fuzziness," as they call it.

I almost wish I had. At least it's evidence that the T-cells are (over) working. Instead, I have to wait a month and then get a boring old M-protein test to see if anything happened.

Today I learned that archeologists recently dug up the bodies of some soldiers who died in the Battle of Camden in 1780:

The battleground remains have been determined to belong to 12 Continental soldiers, one British loyalist and one British regular. Thirteen were honored as heroes in ceremonies planned by countless volunteers, both civilian and military. The 14th individual was determined to have had at least some Native American ancestry and so will be buried with help from the Catawba Nation and the Lumbee Tribe.

Wait. Why are we burying a British soldier? It's not like I have any hard feelings at this point, but shouldn't this redcoat be honored as a hero by Britain, not us?

I'm not sure why this amuses me so much, but it does:

This is from a study comparing human doctors to GPT 3.5. The methodology was sort of fascinating: the authors collected 195 questions and responses from real doctors on Reddit and then fed the exact same questions into the chatbot. Then they jumbled up all the responses and had them evaluated by health care professionals.

As the chart shows, the pros concluded that the chatbot's answers were more accurate and more empathetic. So what was up with the doctors? Were they telling people to suck it up and just accept the pain? Or what? Here's an example:

(Sorry this is so small. As always, click to embiggen.)

In this case, I empathize with the human doctor. My response probably would be along the lines of "ffs, it's just a toothpick," so I think the doctor was heroically patient here.

Still, the chatbot answer is demonstrably better. One reason is that it's not time restricted. Most human doctors just don't have the patience or time to write long answers with lots of little verbal curlicues. The chatbot has no such problem. It used three times as many words as the doctor and could have used ten times more with no trouble. It simply doesn't require any effort for the chatbot to be empathetic and provide lots of information that might be of only minor importance.

On the downside, chatbots also have a habit of making stuff up. Then again, my experience is that human doctors are a little too prone to this as well.

In any case, chatbots aren't ready for unsupervised prime time yet, but they probably will be before long. And here we all thought that truck drivers were the first ones who would be out of jobs thanks to AI.

Exciting news today: the Fed has released its report on the failure of Silicon Valley Bank. You're already salivating, aren't you?

I've read through it, but I want to say up front that it presents me with a problem. I've taken a very public stance that SVB didn't really do anything seriously wrong, and this means I need to be doubly careful about how I interpret the Fed's report. I don't want to cherry pick just the bits that support my view, but neither do I want to bend over backward in the other direction out of a misguided sense of fairness. And the Fed report makes this balancing act especially hard because it says a lot of different things. If you have a point you want to make, you can find it somewhere.

So I'm going to do my best, but just beware that anybody with an axe to grind can find excerpts in this report to support their view, whatever it happens to be.

Let's start off with a chart:

This shows SVB's ratings from 2017 through late 2022. During this entire time both its capital and liquidity ratings were either excellent or good. In early 2021 supervisors wrote a warning about SVB's liquidity management and stress testing (though not about its actual liquidity position) but there was nothing after that. Here are the Fed's ratings of SVB's supervision programs:

In 2021, because of SVB's rapid growth, supervision switched from RBO (regional banks) to LFBO (large banks). However, the bank's supervision rating, even under the LFBO rules, improved in 2022 from Effective to Strong.¹

This is the basic finding of the report: all along, supervisors gave SVB good ratings in virtually every area, with some exceptions for governance. However, in retrospect the Fed now says a lot of things were missed. For example, "Based on the severity of the six findings from the 2021 liquidity examination . . . a more negative assessment (e.g., “Deficient-1” for Liquidity) would have been supportable."

This is typical of the report. Virtually every quantitative assessment of SVB is relatively positive, including both its capital and liquidity positions. But these are all followed by vague suggestions ("would have been supportable," "would have been reasonable," "likely not appropriate," etc.) that these assessments might have been too sunny. This makes the report extremely difficult to evaluate.

Here, for example, is one of the few quantitative assessments that's negative. It involves our old friend, the Liquidity Coverage Ratio:

An analysis of SVBFG’s December 2022 capital and liquidity levels against the pre-2019 requirements suggests that SVBFG would have had to hold more high-quality liquid assets (HQLA) under the prior set of requirements.  For example, under the pre-2019 regime, SVBFG would have been subject to the full LCR and would have had an approximately 9 percent shortfall of HQLA in December 2022, and estimates for February 2023 show an even larger shortfall (approximately 17 percent).

Under the old rules, SVB would have been 9% under the LCR requirement. This may show that the old rules shouldn't have been changed, but even a 9% shortfall in one liquidity sub-metric is hardly a mark of doom.

Generally speaking, what this report shows is that SVB was basically solvent and in fairly good shape. In late 2022 the Fed began to be concerned about SVB's deposit outflow and its Regulation YY liquidity position and intended to write a warning about it, but that was far too late to have made any difference. In the event, the warning wasn't issued before SVB's failure.

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Now I want to highlight the main reason I'm unhappy with this report. Here's an excerpt from Michael Barr's personal comments in the introduction:

We [] need to be attentive to the particular risks that firms with rapid growth, concentrated business models, or other special factors might pose regardless of asset size.

....We need to evaluate how we supervise and regulate a bank’s management of interest rate risk....In addition, we are also going to evaluate how we supervise and regulate liquidity risk, starting with the risks of uninsured deposits...and the treatment of held to maturity securities....We should require a broader set of firms to take into account unrealized gains or losses on available-for-sale securities.

In other words, the lesson of SVB is that we should address the very specific issues of SVB, rather than trying to figure out how—if at all—its problems were due to larger regulatory issues.

As best as I can tell, the Fed identified nothing in this report that actually led to SVB's demise. Its overall management was mediocre, but its capital and liquidity positions were generally fine with only minor shortcomings. It was arguably slow to react to its deposit outflows, but in the end it did the right thing. There was really nothing in its financials that predicted a sudden bank run.

And when the run happened, of course SVB's liquidity position became untenable. No stress test in the world can account for a sudden panic overtaking a bank's customers, and no improvements in SVB's financial position would have saved it once the run began. Quite the contrary. It was SVB's announcement of a plan to address its problems that caused the run in the first place. How do you plan for that?

¹Oddly, SVB's rating went down under the RBO rules. I don't understand this.

This is Charlie in our Australian willow tree, probably watching for the squirrels that zip up and down it all the time. As you can see from the look of the bark, it's an excellent climbing tree for any cat with even a hint of athleticism. Charlie has that. Hilbert doesn't.

Wages are up!

This time I have to concede that there is indeed upward movement in total compensation. Real comp is still negative over the past year, but it's been positive for two quarters in a row now.

Apparently this means the Fed is certain to raise rates yet again at its next meeting. Considering (a) how much inflation has fallen already, (b) how small the comp increase is, and (c) the fact that a rate increase won't affect anything until late 2024, I continue to find this inexplicable. But then, there is much that I find inexplicable these days.

Both core and headline PCE inflation were down in March:

Headline PCE was way down in March, and even on a trendline basis was only barely above 2%. Core inflation was more stubborn, coming down to only 3.4% and remaining around 4% on a trendline basis.

(On a year-over-year basis, headline inflation was 4.2% and core inflation was 4.6%.)

Overall, this is great news, and considerably different from my calculations yesterday. Why? Because I forgot that all the recent figures are revised each month. I was using the February indexes, which were revised in March and produced different results. So much for beating the BEA's release schedule.

The macroeconomic dynamic duo of Christina Romer and David Romer has a new paper out. It starts with a question:

This paper revisits one of the fundamental questions of macroeconomics: Does monetary policy matter?

I didn't even realize this was an open issue. Luckily, the answer is "yes," and R&R go on to estimate the size and latency of monetary policy on three economic variables. Note that their study is limited to contractionary episodes explicitly engineered to fight inflation:

• In response to a contractionary monetary policy shock, the unemployment rate rises gradually—starting about 5 months after the shock. The maximum impact is a rise of 1.6 percentage points after 27 months.
• Real GDP starts to fall noticeably starting about two quarters after a contractionary shock. After 9 quarters, it is 4.4 percent below what it otherwise would have been.
• Inflation begins to fall below the baseline path one year after the shock. Inflation continues to fall over the second and third years after the shock, and then levels off. A contractionary monetary policy shock leads to a permanent reduction in inflation of about 1.5 percentage points.
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These are averages across nine postwar monetary events. But what about our current one? Romer and Romer conclude that:

• We have indeed had a contractionary monetary policy shock.
• It started around July of 2022.
• The shock was a little larger than average.
• The shock will raise unemployment about two points between now and the middle of next year.
• Real GDP has already been affected. It will probably turn negative in autumn.
• Interest rate hikes haven't affected inflation yet. They won't have a significant effect until winter.

In other words, Romer and Romer are even pessimistic than me: I've been assuming that the Fed's interest rate hikes have had no impact on inflation yet, but will start to very soon. R&R think an effect is still several months away, though they acknowledge that inflation may be more sensitive to expectations than in the past, and also that there is "substantial uncertainty about the effects of monetary shocks on inflation."

If we get away with unemployment of 6% and GDP growth of -2% for a couple of quarters, we should consider ourselves lucky. As for inflation, it should easily drop to 2% or lower over the next year.

Of course, there's more to the economy than just Fed policy. It's always possible that other factors (oil, famine, plague, asset bubbles, political games, etc.) could make things either better or worse.