government spending

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Growth, But Barely?

Today’s headline is that the economy grew, just, in the fourth quarter last year. GDP rose at an annual rate of 0.1%, down from 3.1% in the third quarter and at the slowest pace in almost two years.

But things aren’t that bad. On the contrary the report is quite encouraging. this is one of those occasions when we need to dig a little deeper into the numbers.

Here are  the basics, broken out by primary economic sector:

  • Personal consumption grew at a 2.1% rate; this contributed 1.47% to the total
  • Private investment slumped, declining at a -1.5% annual rate; this reduced the total by -0.2%
  • Exports and Imports both declined, at annual rates of -3.9% and -4.5% respectively; this added 0.24% to the total
  • Government spending declined sharply, at an annual rate of -6.9%; this subtracted 1.38% from the total

Now here’s the good news:

There are some major quirks inside those numbers.

Private investment looks rotten on the surface until we realize that the entire decline can be attributed to a major inventory adjustment. Without inventories investment actually grew at its fastest pace in over  year. That big shift in inventories is typical. Businesses periodically realize they have overstocked and try to compensate in the next period. There is nothing particularly abnormal about the swing in the fourth quarter, and it has little bearing on the sustainable rate of growth we have carried forward into 2013.

The other real oddity in the figures is in defense spending which dropped a remarkable -22.0% in the fourth quarter after having jumped up 12.9% in the third. Obviously the data needs to be smoothed out to accommodate such shifts, and even with a tighter budget there is no way that we will see a repeat of the fourth quarter any time soon. Setting aside defense, spending at the federal level rose 1.8% which was mostly offset by a continued decline – of -1.3% – at the state and local level. So without defense total government spending was a nearly neutral factor for the economy late last year.

In terms of looking forward into this year it is encouraging to see personal consumption continuing to contribute a healthy amount to activity. That 2.1% growth rate is vital as we seek to keep the recovery on track. Consumption has grown steadily, but not outrageously, in every quarter for three straight years, the last decline coming in the third quarter of 2009.

Without the quirks I noted above the economy would have grown at a healthy 3.0%, virtually identical to the 3.1% of the third quarter, so it safe to say that the recovery remains on a decent trajectory.

That, however, may end soon as the sequester eats into government spending. My original thought for 2013 growth was in the range of 2.0% to 2.5%. With the upcoming budget cuts that has to be reduced by at least 3/4%, so instead of a decent year in 2013 we will get minimal growth and thus will prolong the rotten employment outlook much further than we ought.

I find it strange that Congress actually is proposing a slower economy, one that might even totter on the edge of recession, but that’s exactly what the House seems to want. The dominant thought in the House is that cutting government spending will magically release a surge of confidence in the private sector and thus more than offset the negative effects of the cuts. It won’t. It never has. It never will. Private sector confidence is a function of a pragmatic assessment of the future. The outlook for demand is the largest single contributor to that assessment. Government tax policy and spending is a much lesser component. So even if businesses and households perk up at the thought of lower future tax bills – which is what right wing theory says happens – that extra optimism will be overwhelmed by the simultaneous realization that demand will ebb as government spending is cut. It is, after all, entirely rational to take into account all the effects of austerity and not just those the right wing prefers us to focus on.

If you disagree take a look at Europe. They tried the austerity-leads-to-growth idea. It has produced nothing but longer deeper recessions, and now is producing a populist backlash. It is an unequivocal failure. But we are about to follow.

That’s just stupid. It’s also where the House wants to go. I haven’t a clue as to why.

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Ho Hum, Another Crisis

Hey everyone: it’s sequester week! Aren’t you excited?

No?

I don’t blame you. And you’re not alone. According to Pew Research only 27% of Americans give a fig about the upcoming sequester. This despite it’s evident and widespread negative impact. This contrasts with the 50%+ who claimed to be intensely interested and concerned about the first of our recent ‘crises’ back in 2011.

What happened to us?

I think that repeat crises and endless brinkmanship wears out even the most ardent political junky. There’s just so much stupidity we can all take from our leadership before we turn away and sink into the sweet embrace of reality TV. Anything, it seems, is better for our mental health than the sorry sight of Congress as it muddles us along towards our demise. It is far better to imagine that it’s not happening and then act surprised and angry when we realize just how far our once great nation has fallen. At least we can feel like we aren’t to blame.

But we are: we elect these clowns. They are our clowns.

Well, not really. Most of them come from South and West of here. So strictly speaking they’re their clowns. Whoever they are.

Meanwhile we should take stock of the damage we are about to suffer. Helpfully, the White House has published a series of fact sheets to tell us. Some highlights:

  • The FBI will lose about 1,000 agents
  • Customs and Border patrol will lose man hours equivalent to about 5,000 fewer staff
  • The FAA will lose about $600 million which will require furloughing staff. This will increase airport wait times rapidly, with the big airports having 4 hour waits become normal
  • Airport security will have to furlough its 50,000 officers
  • FEMA will cut back its aid to local emergency responders
  • Nationally funded research will be cut back with as many as 1,000 research projects into things like the cure for cancer being axed
  • The FDA will be forced to slow its new drug approval process due to lack of staff
  • Small business aid will lose $900 billion in funding
  • Oil and gas prospecting will slow down due to loss of staff and longer approval times for licensing
  • Food safety will suffer as the FDA slows inspections
  • Up to 398 national parks will be forced to close
  • Funding for about 2,700 schools for disadvantaged children will be cut. This will affect about 1.2 million school children
  • Approximately 32,000 teachers will lose their jobs due to funding cuts of various sorts
  • A whole swathe of social services will either be eliminated or severely reduced. These include: meals on wheels; social security help and processing; child care; rental help for the poor; emergency unemployment assistance; homelessness programs; mental health programs; AIDS treatment; and Native American programs;
  • Then there’s the 9.4% cut in defense spending each and every year for the next decade which will cause unemployment right across the defense industry and its subcontractors

But we don’t care. Do we?

Well maybe a little.

The problem is simply that the emergence of a hard right faction within the Republican party has exposed the rickety nature of our political system. It was designed to prevent dominance of any majority over the minority and thus preserve individual liberty, but an unintended consequence is that a determined minority can disrupt everything and bend the nation to its will. The radical right is now running the show.

That’s why we have had an endless series of these artificial crises since the GOP took control of the House back in 2010. In fact the first such crisis emerged only three months after they took control. So radical and out of the mainstream is their agenda that their only method for advancing their cause is to create a crisis and hope to force the White House into an appeasement that extracts ransom sufficient to push the right’s agenda a little further along. The tactic worked well until Obama’s re-election. During his first term he caved far too often and gave away far too much.

Why?

It wasn’t that he was simply weak. Although, in my opinion, he was. The fact remains that he represents a line  of thinking within our elite that is dominant. That line of thinking is deeply flawed, but is both widely and deeply held. It is that our economy is too indebted; that our budgets need cutting; that fiscal policy – the use of the government budget as an active part of the economy – is not very effective; and that … drum roll please … austerity in some form or another is essential.

This all, to put it politely, is total balderdash.

Our debt is high but manageable. It has risen because we went through the mother of all recessions. Its rise was sharp but entirely explicable. It wasn’t due to some sudden surge in permanent government spending. It was subject to a massive swing due to the rotten economy and the consequent rise in emergency spending and the simultaneous loss of tax revenues.

That surge in spending has already abated. Government spending is falling back. Revenues are rising slowly too. There is no fiscal crisis. None.

So our federal budget doesn’t need cutting. At least not now. We have a few years to worry about health care spending which remains our largest challenge.

Which leaves fiscal policy.

Here I go again:

We need more, not less, spending.

Monetary policy – the Fed’s purview – has gone as far as it can. Interest rates have been forced as low as they can go. The economy is awash with cash much of which is sitting in corporate bank accounts and going underutilized. This means that the only policy lever we can pull is government spending and thus stimulus. Giving away more freebies to business won’t make them invest. They need customers with cash. That means we need to get the economy growing. And we do that by putting cash into the hands of people who will spend and not save it.

Yet here we are in sequester week talking about cuts to that spending. Going in exactly the wrong direction. We are headed into austerity.

And it isn’t as if we don’t know what that means. Just look at Europe. Do we really want to be that bad? Or that stupid?

Apparently.

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Simpson-Bowles: They’re Back!

Yes. Simpson and Bowles are back at it.

Erskine Bowles, former Clinton aide, and Alan Simpson former Republican Senator from Wyoming, are back in the headlines. Motivated by the onrushing sequester crisis – how we all love our crises nowadays – and infused with loads of cash from big business, our dynamic austerity duo snatched the headlines on more time today.

According to their website they have a new, modified, approach to deficit reduction. The urgency is greater, so is the pessimism. They say the need is greater because, well, umm, it is. And their pessimism is greater because, well, partisan bickering is getting in the way of deficit reduction.

If you’re like me and think that the deficit is just fine right now and needs attention only when we have a healthy economy so it can withstand the shock of cutting government spending, then there is no present urgency. Other, of course, to avoid any cuts. I suppose that puts me and the dynamic duo on the same side on that score. We both want to avoid the sequester cuts – they are just awful for the economy.

The problem is that any cuts in government spending will be awful for the economy. No matter when they occur. So I suggest that we go about that cutting, if at all, when we have growth robust enough to sustain a few hits.

Simpson-Bowles see things differently.

They say we need those cuts in order to get to robust growth. They don’t articulate why this is so. They have no theory to back up their thinking.

Well, that’s not true. they do. Let’s give them their due.

They subscribe to the view that we will get the economy going by reducing the deficit. This, their website tells us, will encourage private investment and mitigate the risk of a fiscal crisis. Here’s the relevant paragraph:

Promote, Don’t Disrupt, Economic Growth. The United States must pursue a growth agenda. As the economy recovers, one of the best ways to promote economic growth is to bring our debt under control, which will both encourage private investment and mitigate the risk of a fiscal crisis. However, sharp austerity could have the opposite effect by tempering the still fragile economic recovery. In order to protect the recovery, the sequester should be avoided and deficit reduction should be phased in gradually. At the same time, tax and spending reforms should be designed to strengthen current economic conditions, promote work, encourage innovation, improve productivity, and bolster investment in our future.

First let’s acknowledge that they admit ‘sharp austerity’ would not help matters at all. Good for them.

It’s their basic premiss that sucks.

How will less government spending encourage private investment? This, presumably, is a variant of the old idea that government borrowing sucks money out of the economy thereby less for business. There is no evidence to support this. There is, however, a lot of hot air. The credit markets seem quite capable of providing enough money to finance both government and the private sector. If that were not true we ought to be seeing some form of rate increase because limited supply favors creditors. This isn’t happening. Plus monetary policy has been lax to put it mildly driving down rates and making borrowing very cheap. The consequence has been that investment has been muddling along at a decent if not spectacular rate since the recovery began. Besides big business is sitting on an almost unprecedented hoard of cash. If it wanted to invest it could even without borrowing. And bank balance sheets are not so constrained that they cannot lend. Indeed the most frequent complaint I hear from the banks is that they have too few credit worthy opportunities.

Why is that?

Because business, and especially small business, has a very unsure revenue outlook. Yes, things a getting better, but not that much better.

We have too little demand. More demand means more revenues. More revenues means stringer balance sheets. Stronger balance sheets means better credit. And that means more lending.

All roads lead back to getting demand to rise.

I think Simpson-Bowles must agree: that’s why they argue, as I do, that austerity now is a bad thing. It would depress demand even more.

Their second point in support of austerity is the ‘fiscal crisis avoidance’ idea.

This is also nonsense. Again: where’s their evidence?

Were we on the brink of a fiscal crisis interest rates would be moving up as creditors become ever more wary of lending. This is just not happening. The claim of imminent rate increases has been a steady mantra of the austerity folks since 2009. You would think that after four straight years of being wrong they would re-think their ideas. But no. They simply repeat them more loudly. This is absurd. Not to learn form an error is the worst kind of mistake an analyst can make. It is to put ideology before thought. Simpson-Bowles have fallen into such a trap.

Then there’s the small matter of the fiscal crisis that caused the melt down. It wasn’t a government debt crisis. It was a private sector debt crisis. Over indebtedness on the part of business and households led to an over-reaction once asset values were exposed as fictitious. The subsequent furious saving has depleted demand so much that it has become self-fulfilling drag on growth. It is abating now, but has a long way to go before it is played out. And as long as the private sector is saving and reducing its indebtedness, the government needs to supply demand.

Once more I need to acknowledge that they are clear: any austerity now is a bad thing.

So why is ever a good thing?

Well. Umm. It just is.

At its heart the Simpson-Bowles argument is the usual supply side one. Bolster the supply side and good things will happen. How? It’s magic.

This is not an economic theory. It’s a political position. They are at pains to tell us that immediate and heavy handed austerity is a very bad thing, but then are very vague as to why it should ever be a good thing. Instead they resort to obscure and hopeful statements rather than solid analytical reasoning.

The only explanation I have for their continued argument is that they just like the idea of spending cuts. No reason. Just cuts for the sake of cuts. They wrap this all up in little homilies, big warnings, and subtle suggestions, but they give no reasons. They say they want to protect the disadvantaged and then urge entitlement cuts. They want to burn the village to save the village. They want to encourage productivity growth but are silent on how to divide the fruits of that gain. Is it all for capital as it has been in recent decades? In which case demand will flounder some more. Or do they advocate wage increases? Unlikely I would say since Simpson-Bolwes are funded by big business.

There is one thing we can agree on, though.

They are clear that health care costs need to be reined in before they crush the economy. I agree. America’s antiquated health are system is a disgrace. It needs through renovation.

Good luck with that.

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The Market Gets Queasy

As we approach yet another of our self-inflicted crises, the ‘sequester cliff’, I find it amusing that the markets are reacting with surprising unanimity. Cutting government spending, apparently, is a jolly bad thing to do.

Why else would the stock market be in the beginnings of a panic?

Why else would the financial media obsess over the potential loss of business?

And why on earth would the Wall Street Journal be concerned at all?

The paradox and contradictions are acute.

On one hand big business lashes into Washington for running up debt and spending too much. On the other it gets vexed when it realizes that those cuts mean less business revenues.

On the one hand big business really, truly, wants supply side economics to work – it gets all the hand outs in that case. On the other it knows that it loses big time if demand stays depressed.

The acid test for anyone trying to figure out which side of the argument – austerity or stimulus – is correct is simple: follow the money. Or, rather, follow the lead of those who want to make a profit.

Business is sitting on scads of dollars of unspent profits. Corporate cash hoards are at historically high levels. It isn’t getting spent or invested. Why not? There’s no point. There is no point in investing in an economy where demand is already too low to keep our existing factories and workforce humming. We have excess capacity. That’s why we have high unemployment. We have lots of idle people and lots of idle factories.

The austerity folks imagine that by cutting government spending we will magically conjure a burst of business activity. They argue that less government means more private stuff. It doesn’t. In an economy where the average person pays more in payroll tax than in income tax, cutting income tax means nothing. Absolutely nothing. Worse, cutting government spending means cutting wages and cash flows. Those cuts mean fewer customers for business. So, faced with fewer customers and therefore even less demand, business will have no choice but to reduce activity further. Austerity will make the economy worse. Take a look at Europe to see how much worse.

Business executives know this. It annoys them no end.

They tend to be a conservative bunch. They would love it were right wing politics and right wing economics to work in unison. But they don’t. The economics sucks. It is bad for business. That throws business into a quandary. It makes the markets queasy.

With profits already sucking out a larger percentage of our national annual wealth than ever before – I know small business people have a hard time thinking that’s true – the only way to increase future profits is to make sure we have a population with money to spend. We need higher wages. And we need government spending to stay where it is.

That may no agree with your politics. But it ought to agree with your pocket book.

In fact, I know it will.

No wonder the market gets queasy: it has its politics and its economics in a muddle.

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What’s Missing?

A couple of days ago I complained about the misrepresentation of Federal spending under Obama. It hasn’t risen anywhere near as much as some folks say it has. Indeed it has been under control since that first burst during the heat of crisis.

That drew the ire of one or two of you who complained that the real issue is not the budget, but the economy and its chronic under performance.

I agree.

I look at this chart and wonder why our fearless leaders don’t see what’s missing:

 

 

 

 

 

 

 

 

Because it’s pretty obvious to me.

The economy is blundering along well below its potential. Every moment that it continues that way we are leaving money on the table. That’s iPods we didn’t buy. Or schools we didn’t build. Or bridges, railways, and roads left in disrepair. Or jobs not created. Or wages not paid. It is even profits not made.

Whichever of these you focus on, and no matter what your political persuasion there has to be something on that list you wanted to see happen, the sad fact is that we have foregone a lot.

More to the point we won’t get it back. That gap between the bottom red line and the top blue line in the chart is the gap between what wealth we created – the red line – and what wealth we could have created – the blue line – had the economy tracked its historic path.

Look back in time on the chart. In each recession – they’re the grey patches – you can see the economy drop below its potential. Subsequently you see the gap close and we return to normal. Once or twice, especially in the latter Clinton years, the economy breaks above its potential and creates wealth at a pace that is not sustainable given our resources and productivity.

It is that yawning gap in recent years we need to look at. The loss is immense. The Congressional Budget Office calculates the loss to have been in the region of $7 trillion. Or at least it will be by the time we finally get back on track, which the CBO suggests is a few years off.

Now think of it this way: $7 trillion is a lot of cash. It would a great big pile were we ever to come across it. It would be unavoidable. We all can think of plenty of things we would like to do with it. So why aren’t we hell bent on finding and getting it back?

Because we can’t agree on how to go about the task.

In my opinion there’s only one sure way to get our money back. We need to stimulate demand. That would shift the red line upwards. But our private industry and households are busy digging out from the crisis. That’s why the red line collapsed. It was a private sector crisis. Businesses fired people. Households saved money instead of buying things. And that withdrawal of spending made business more worried, less profitable, and thus needing to cut more jobs. We fell into a vicious downward spiral where each step was sensible from a personal perspective, but destructive when we added it all up.

The result was that the economy dropped way below its potential. And it got stuck there because of the self-fulfilling nature of the cause.

The only way out was for the government to fill the gap temporarily by spending more. That’s what a stimulus does. It provides spending – and thus keeps that red line up – whilst the private sector gets its house in order.

There are a lot of people who disagree. They argue we need less government spending and more incentive for private businesses to invest and ‘create jobs’.

Think about that in terms of the chart.

Less government spending would move the red line lower. It would make the gap bigger. And more investment would add to potential. It would drive the blue line higher. That would also make the gap larger. Tinkering with the supply side is a fool’s game. It sounds great until you look at what effect it will have. None. In fact it will make matter worse.

No business worth its salt will invest heavily in the face of weak demand. Throwing all the incentives in the world won’t alter that. Think in terms of all the cash sitting on big business balance sheets right now. Profits and cash hoards at near all time highs. Business is wallowing in cash it doesn’t want to spend. Why? Because there’s no one willing to buy more. Wages are flat. Unemployment still lingers way too high. People are still worried about the immediate future.

Right now the only sector of our economy that has both the ability and the opportunity to help fill that gap is the Federal government. It needs to add to its deficit in order to succeed.

Which is why I keep arguing we don’t have a deficit or debt problem. To focus on those is to focus on symptoms not the disease. Our problem is a lack of demand. Crank that up and those symptoms subside of their own accord.

This is not magic. Nor is it a government take over of the economy. It is simply our only way of propping up activity until the private sector gets back on track. The sooner we can close that gap, the better off we will all be.

Or, of course, we can continue to shoot ourselves in the foot. The gap will only get bigger if we keep this up.

In which case that lost $7 trillion may seem like the good old days.

 

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