GDP

/ / , , , , , , /

Hoenig The Terrible

Ugh. There are times that really try my patience. This is one. Kansas City Fed President, Thomas Hoenig, is urging the Fed to raise interest rates in order to head off inflation.

He’s an idiot.

Well, I suppose I shouldn’t throw around harsh words like that, but really. What inflation?

His analytical back-up? That he keeps being asked about inflation. Everywhere he goes, apparently, he is asked about the dangers of imminent inflation. He should get out and about a bit more often. As in get away from his hawkish friends. So, all we have to do to spook a Fed governor is talk about something an awful lot and he immediately rushes off and lobbies for a reaction.

How about this:

Unemployment. Unemployment. Unemployment. Oh my gosh! Unemployment.

Nothing. I hear nothing.

That’s the problem with tone deaf – or totally deaf, take your pick – hawks. They want inflation to be a problem. They just relish the idea of applying the big squeeze to the economy. They want to bask in that puritanical glow of having to be the harsh, stern, yet all too human paternalistic figure who put the state of the economy ahead of personal popularity or glory. Except, of course, that they secretly hope to go down in history as the person who was serious when all others were silly.

People like Hoenig have been crying wolf ever since it became clear that the private sector needed the public sector to bail it out. That hurt their sensibilities and disrupted their ever more smooth assumption that free market thinking had conquered the world. The years of quiescent inflation and steady growth were held up as witness to the success of their right wing views. The ugly mess of 2008, and the even uglier need for government intervention to stave off depression, mucked up that vision. Mucked it up so much that they all want to revert to the old ways as soon as possible in order to bury the evidence that their ideas failed.

To Hoenig and his ilk, any large scale run up in the money base will inevitably, absolutely and undeniably, cause rampant subsequent inflation. As night follows day, this is, in their minds, a regularity we cannot avoid. So QE2 and its antecedents are going to be a problem. It is just a matter of time.

So they wait. And hope. And look for any morsel that might give them hope that easy money is the world’s worst nightmare. And they wait. And wait.

Poor old Hoenig is so tired of waiting that he has simply given up looking for evidence. He just wants to get on with it. We should raise rates. Now. After all we know it’s a matter of time. Meanwhile he mutters on about debasing the currency, hyperinflation, and makes other derogatory comments to sow the seeds of discontent.

I wonder if he has ever paused to wonder whether it is his panicked tone that causes his listeners to worry about the imminence of inflation. After all he’s a Fed governor, and he ought to know. Right?

So his loose and baseless talk is contributing to the problem. He is causing the very problem he is seeking to cure. How very convenient.

What do the rest of us do?

Ignore Hoenig and those like him who see ghosts. Maybe the better analogy is that they hear voices. One things for sure, they don’t see hard evidence. There is nothing in the profile of the data that suggests we need to raise interest rates just yet. The economy is growing, but slowly. Too slowly to deal with high unemployment at anything other than a glacial pace. Global prices are rising on raw materials, food and oil. But those things do not drive long term inflation. Wages do. And, to put it politely, wages are sluggish. Turgid may be a better word to describe their progress. The long term trend in prices is up, but since non-wage prices play a relatively small role in the overall price level even a fairly rapid rise would not translate into rampant inflation.

It would take a sudden and radical shift in the labor market for inflation to explode on the scene and create the kind of long term problem worth reacting to. And that is not about to happen.

Why?

Because people like Hoenig have taken their eye off the other objective of Fed policy: maintaining full employment. In Hoenig’s muddled mind, whenever there is a trade-off between inflation and getting to full employment, the former wins hands down over the latter. Indeed, in true central banker mode, he ignores the full employment mandate anyway.

But enough of Hoenig. He’s a fool. Unfortunately he is a much quoted and influential fool. His effect is to cow Bernanke into backing away from keeping money easy until we have a recovery that is meaningful to everyday people. Up until now the benefits have gone to shareholders in the form of high profits. Everyone else is still digging out and paying the price for the binge the bankers indulged in.

Who benefits from austerity and higher interest rates? Lenders.

Who suffers the most? Workers, the poor, the elderly, and the young.

Enough said. We know where Hoenig’s priorities are.

/ / , , , , , , , , , , , , , , , , , , /

The Economy Slows Down

As we all thought, our economic growth slowed dramatically in the first quarter this year. The headline figure you will be reading about is 1.8% growth, down from the fourth quarter of last year when growth was 3.1%. What you will not be reading is the sneaky rounding up involved to get us to that 1.8%! To two decimal places growth was 1.75%. So being more accurate makes things appear a little worse. No big deal, but indicative of the efforts going in to make the headline look as good as possible.

Here’s the breakdown by major category:

  • Consumption 4Q 2010 .. +2.79%
  • Consumption 1Q 2011 .. +1.91%
  • Private Investment 4Q 2010 .. -2.61%
  • Private Investment 1Q 2011 .. +1.01%
  • Net Trade 4Q 2010 .. +3.27%
  • Net Trade 1Q 2011 .. -0.08%
  • Government Spending 4Q 2010 -0.34%
  • Government Spending 1Q 2011 -1.09%

These figures are what is called the “advanced” report and so will be subject to quite a bit of revision. Even so, it seems that the economy cooled off which could be cause for concern. Or perhaps not as long as the declines can be explained away as oddities unlikely to be repeated. The problem I have with these explanations based on “quirks” is that the economy is replete with such things. There are usually one or two odd numbers that appear to have “one-off” explanations. So there is always an element of forth masking the underlying trend. This is why forecasting the economy is more divination than science – despite all the high paid analysts in the media and at the investment banks.

With that in mind, let’s look at the data.

Obviously the key is personal consumption. It amounts to such a large percentage of the whole that any shift there can make the entire economy move. As you can see consumption faded strongly in the first quarter. One reason could be that bad weather kept people away from stores and that the decline will be offset this quarter as better weather sets in. Frankly there isn’t a great deal of more recent evidence to support that view. Retail sales have been decent, but not great at all. A different view is simply that households have pulled back a bit because unemployment has not improved significantly, home prices are still falling, wages are flat, and debts still need paying off. The accumulation of these factors outweighed the need to spend. hence the decline. I think we will experience this kind of stop-start activity for as long as consumer confidence is depressed. Even though April’s confidence figures showed a slight jump up, they are still not suggestive of strong spending.

The big shift from negative to positive in private investment could be interpreted as businesses preparing for expansion. That would be wrong. Recent durable goods numbers do suggest such a trend. But the first quarter investment turnaround was driven entirely by inventories. Other forms of investment hardly moved at all. As I have said before inventory accumulation is a highly ambiguous number. Sometimes a run up in stocks of goods is a sign that retailers expect high sales and thus are gearing up. Other times an accumulation represents a rise in unsold goods because consumption has fallen away and retailers are stuck with an excess. Which is it now? Looking at the hints I find it hard to tell. A rise in imports along with a rise in inventories is usually a sign that retailers are getting ready for higher sales. That’s a positive sign. I think we should take this first quarter accumulation in this light since it offsets the overly large run down in inventories at the end of last year.

Unfortunately the more telling aspect of the investment numbers are much the same as they have been for a while: weak business investment, and very weak residential investment. Businesses are showing some signs of adding to their capital stocks, but as long as the economy has as much excess capacity as it does, there is no real need to add rapidly. And, of course, we all know that real estate is in the doldrums and likely to stay there.

Trade, too, showed a big shift. The sudden drop in contribution to GDP from trade was driven entirely by an equally large change in imports. This was expected because the fourth quarter saw some very strange and large declines in imports that were not sustainable. All that occurred in the first quarter was that we resumed a more normal level of activity. The bad news was that exports faded a little also, so the resumption of a more normal pattern of imports was not offset by stronger exports.

Lastly, government spending is trending down. This may shock the “big government” hawks, but the numbers don’t lie. Federal spending dropped 0.68%, mostly on the back of a decline in defense spending. This is a notoriously volatile figure depending on bulk purchases. So I don’t think it is indicative of a trend. More importantly, both Federal and State spending on small ticket items and wages is falling steadily. This is the trend to watch. Especially as the deficit debate heats up. We have gone from a point where government spending was acting as a stimulus, to where it now acting as a drag. Presumably this is what the austerity hawks want. It is inevitable that, if government spending is cut, it will act to shrink the economy. We can use the UK as an example. There is an austerity program already in effect in the UK and its negative impact has slowed their economy to a crawl. They are perilously close to recession. Given the relative weakness of our private sector, any strong move to cut government spending runs the risk of doing the same here.

This is all tedious to recite.

What should we make of it all?

The economy is evidently not so strong that it can withstand a bout of bad weather. If that is the key explanation being offered to explain the first quarter decline, then we are not in great shape. This seems to be a very slow recovery, and one that is still very susceptible to downside risks. I suppose there is no news in this, but it should give us all pause to reconsider the current mania for deficit cutting and inflation fears.

Neither the deficit nor inflation should be of great concern right now. The focus should be on unemployment and the huge slack in the economy that such unemployment implies. We have too large a pool of idle workers. That means we are radically underperforming in terms of wealth generation. We are leaving money on the table month after month. This affects us all, not just the unemployed. It would be sensible for us all to be involved in getting those people back to work. That means more support, through both continued easy monetary policy and deficit spending fiscal policy.

This won’t happen, of course, because the powers that be have moved on to combat their imaginary demons of inflation and deficits.

This is looking more and more like the 1930’s.

That didn’t work out too well.

/ / , , /

Good Capital Goods

Just a quick note on a busy day to pass along the news that durable goods orders rose at a decent 2.5% clip in March which suggests that manufacturing is still on the rebound. February’s data was also revised to show a slight 0.7% increase – originally it had been a decline.

The key here is to focus on the non-defense and non-transportation number. Both those sectors include very chunky items that can distort the underlying trend. So we exclude them when we want to get an idea of how much manufacturers and businesses generally are spending as they gear up for higher production. That adjusted figure, known as core capital goods, showed a healthy 3.7% increase. It is this report that supports a slightly more upbeat view of manufacturing. It also contrasts with some of the data we were seeing in the last few weeks that suggested a breather in the rebound. Perhaps that breather was weather related. In any case today’s news should be cause for cautious optimism.

My expectation remains for modest growth throughout the year. Not good. Modest.

/ / , , , , , , , , , , /

Where Are We?

It’s tough to tell exactly how the recovery is going. Since this is a busy week for data reports it behooves us to step back and set the stage.

If you recall, at the end of last year the economy was growing at around 3.0% to 3.5% at annual rates. That was a marked improvement, but not earth shattering in the context of post-war recoveries. The general opinion was that we would pick up speed into the first quarter before settling down into a post-recovery ‘normal’ period of steady growth. I was always a slight dissenter to this view because I put more emphasis on our lingering unemployment problems, the risk still abundant in banking, and the downward weight resulting from the real estate collapse. Plus the fourth quarter had one or two oddities – trade and inventories – that pulled reported growth from its underlying trajectory. So my view was that growth would stick in that 3.0% range and then fall a little as we went through this year.

It looks as if we were all wrong.

The problem with the first quarter, we sill see the initial estimate this week, is that the string of oddities has continued. This time things like the very bad weather have taken their toll, and so we should all expect a much lower growth rate than originally thought. If we use the so-called Blue Chip consensus as our guide, the original commonly accepted growth rate was somewhere near 4.0%. This was based on the idea that the recovery was still accelerating, and had not yet peaked, and that consumer demand was bouncing nicely away from the depths plumbed in the recession.

Now that same consensus is looking for a first quarter of 1.7%, with the dramatic revision due to the weather and the fact that consumers have turned much more pessimistic again.

Apparently, one bad winter, and a sudden spike in oil and food prices, have done the recovery in.

So much for robust.

This, in a roundabout way, supports my view, although I make no claim for prescience. The issue is straightforward: as long as unemployment is high, and as long as home prices are weak, households will not shake off their sense of siege completely. It won’t take much to set them back into a savings mode. Likewise, banks may be reporting solid profits – or at least some of them are – but much of the improvement is coming from changes in loss rates, and trading rather form the basic banking that engages with the real economy. This is why I still think we are in a long haul and slow recovery, rather than in the middle stages of a typical post-war bounce back.

Add in the short term rise in consumer inflation caused by those food and oil price increases, and the mood has changed quickly.

This morning’s data on real estate is illustrative.

Sales of new homes in March climbed well: up 11% from February. On its face this is solid. But February was especially depresses because of that bad weather, so a large share of the rebound is simply the working off of a mild backlog. The average between the two months gives us a better longer term measure of sales, and that is essentially flat. Couple this with the news that builder expectations are still at incredibly low levels, and that the inventory of unsold new homes, at 183,000, is stuck somewhere around its 1967 levels – i.e. at near all time lows – and any image of recovery pales away to be replaced by one of decidedly abnormal and low activity. Certainly nothing in real estate suggests a return to good growth. Right now moderate growth would suffice.

The reason I am belaboring this is that when GDP for the first quarter is announced we will all be trying to divine its import for the rest of the year. I am arguing that it may not be much of a signpost at all. It may be too riddled with quirks. That implies we are better served looking at the more frequently announced numbers to get an idea of the general health of the economy.

And those numbers support a very modest outlook.

So what are the risks or problems that prevent us from moving along at a great clip?

  1. The absolute size of the hole we dug back in 2008/2009. This was one mother of a recession, and it has left immense slack throughout the economy. Until that slack is picked up there is little to no incentive for businesses to invest. This is despite interest rates being at ludicrously low levels. Some analysts argue that the Fed’s loose monetary policy has had no discernible effect on investment and thus is a failure. I disagree. It wasn’t a bust. It wasn’t a roaring success either. It just was. It is tough to critique the Fed when the entire system was so close to crumbling. Let’s all remember: the private sector vanished in very short order. Were it not for the government we would have vanished along with it. Business is rightly cagey when faced with skittish consumers and goods of spare capacity. So we can take robust investment off the table as a driver of near term growth.
  2. Austerity budgets will cause at least short term pain. They probably will cause long term pain as well, but that’s not our issue here. Luckily for us the debate will ramble of for a while, so the impact of less government spending will not be hugely significant this year. But it will be a real and noticeable drag when it does show up.
  3. Unemployment is still way too high. Yes, the trends have improved, but by any standard we are a very long way from a return to normal. The labor markets are very fragile. I expect them to stay this way for many more quarters.
  4. World imbalances will leak over into the US economy. Particularly in the form of a continued run up in some consumer prices. There is an argument to make that the world economy is headed into a period of generally higher prices due to the rapid growth of emerging economies and the stress that puts on supply of raw materials and food. But the recent spike in prices is not necessarily indicative of where that longer term price level will be. Short term supply constraints and like the turmoil in the Middle East, and rotten harvests, are masking the long term trend. I expect prices to settle back down, rather than to escalate wildly out of control. Nonetheless in the near term this spike has illustrated jut how vulnerable consumers are.
  5. That is the lesson we need to absorb. Confidence is fragile. To the extent that we rely on consumption and a return to healthy levels of sustainable demand, we are a long way from cured. This past few months have taught us, vividly, that consumers are acting as if on a knife edge. They are pessimistic one day, then optimistic, and then back in the doldrums. The battering they have taken has numbed them sufficiently that they will take a great deal of persuasion before they declare the recovery complete enough to spend the way they once did.
  6. Banking is not yet safe. Since we didn’t reform the banks to make them less dangerous, we have to assume that they are busily constructing their next disaster. Which we, inevitably, will be expected to pay for. Like all habitual blackmailers, the banks will not reform of their own accord. They need to be forced to behave. We will not achieve long term sustainable growth whilst banks are more interested in gambling than in underwriting loans that support the real economy. This shouldn’t be hard to understand, But apparently it is.
  7. Imbalances within the economy lower its potential trajectory. This is a longer term effect and perhaps out of place here, but I would be remiss for not mentioning that our enormously divided economy, between the haves and the have nots, is in itself acting as a brake on growth. It is my view that when the middle class is deprived of disposable income over long periods it cannot act as the economy’s primary consumption engine. It is no secret that the American economy is now so split with respect to the fruits of productivity, and thus income allocation, that its the middle class is now no longer capable of driving spending with sufficient force to justify investment. This sets in motion a steady spiral downwards. As investment is restricted, so future income growth is impaired. This encourages short term thinking in business in the form of cost cutting and wage freezes in order to maintain profit growth. The net result being a shift in income allocation away from wages towards profits and the steady throttling back of potential growth. If this view is correct, then the very clear bias in favor of profits as opposed to wage growth that has dominated American business for the past three decades will end up reducing long term profit. The greed of shareholders will ultimately be self-defeating as they stifle the middle class and thus the very source of their profit.

This is not an exhaustive list, but one point I want to make quite clear: I don’t think that the Federal deficit or the near term bulge in US debt is a particular problem. Our response maybe. Meanwhile we have left unaddressed many of the more obvious sources of risk, like the ones listed above. So as long as were are exposed to such a list we should expect a bumpy and not very fast growth pattern. There’s just too much out there lurking to derail us, and too little policy focus on a long term strategy to reduce inequality, for us to be upbeat.

So look for a lot of sideways motion.

/ / , , , , , , , /

A Left of Center Budget?

What would it look like?

All the talk so far has centered on the far right plan of the Republicans – a.k.a. the Ryan plan – and Obama’s counter offer, which is more right of center than the media imagines, because of its emphasis on cost cutting rather than revenue raising. This means that there isn’t much of a left of center option available or being discussed. That is except the plan developed by the Congressional Progressive Caucus which goes under the name of ‘The People’s Budget’. They place the emphasis on balance and fairness. So should we.

In that spirit, let me step back and articulate my plan:

First, we should not get swept away by debt panic. The US national debt is high, but not unmanageable. Indeed nowhere other than in the fevered minds of the austerity hawks is it an immediate problem. Obviously debt as a percentage of GDP has risen sharply in recent years. But, in case you’ve been napping, we’ve had a slight problem. The Great Recession knocked a huge hole in an already depleted government revenue stream. Federal government revenues as a percentage of GDP have plummeted from the 20% range to the 15% range. Since, at the same time, spending has risen as various safety net programs kicked in, the deficit has shot up.

Duh. Even a fool can see that much of the current imbalance is short term, or cyclical, and thus will automatically go away once the economy is back on track. Which is why, of course, we should put the highest priority on getting the economy moving at a solid rate. You’d think this would still be a high priority, but the talk has shifted away as if the problem is solved. But it isn’t. We need to work harder.

So any plan to correct the deficit should begin with a plan to maintain a boost to the economy.

Second, we need to address the long term creep in inequality. I have been beating this drum for a while and still believe it to be one of our highest strategic goals. We need to restore a better balance between wages and profits. This would send more cash into average household pockets where it is more likely to end up as consumption, and thus boost aggregate demand.

Third, we need to protect the entitlement programs from unnecessary attack. These programs are vital to the middle class way of life, and they protect the poor, sick, and elderly. Reducing them would impose a cost on those groups disproportionate to the benefits they have garnered from recent economic growth. It is one thing to argue people ought to suffer cuts. It is entirely another to argue that point after having initiated a long term squeeze on their lifestyles already. It may well be that entitlements need to be trimmed – although the urgency and extent is highly debatable. If so a spirit of fairness demands that those who benefitted most from the Reagan/Bush era bear the first and largest brunt of the burden.

Fourth, we need to clean up the more egregious, and deliberate, ways in which those with resources escape contributing to the common good. One example of this is the foreign based profits of business. Corporate profit is only taxed when it is brought back onshore in the US. So most large companies have fictitious subsidiaries abroad where they park profit. To accomplish this wheeze they maneuver costs into the US, and so reduce their taxable income here, and shove income offshore to ‘harbor’ it safely beyond the reach of the IRS. This tax dodge is so significant that has distorted corporate balance sheets. It is one reason why companies are sitting on piles of cash yet don’t invest it – they can’t invest it here. The Chamber of Commerce recently advocated a tax amnesty during which businesses could repatriate this cash without being subject to the full rate of corporate income tax. Their argument was that business isn’t investing because high marginal tax rates on profits “forces” companies to cheat in the way I just described. This is, of course, nonsense. I have a better idea: we should simply tax profit when it is made, and not only when it arrives back in the US. This removes the incentive to cheat – companies are getting taxed anyway. Besides: there is no evidence that it is tax policy undermining corporate investment. The real problem is that businesses have low expectation for demand. Thus they hold back on expansion plans.

Along with this adjustment to corporate taxes, we need to change the way in which capital gains are taxed. Capital gains are income. Since, in the immortal words of the British Law Lords, income tax is a tax on income, it makes no sense to tax income derived from capital at a different, and lower, rate than income derived from labor. Why should workers be subject to higher marginal tax rates? This change makes even more sense when we recall that hedge fund manager’s entire income is classified as a capital gain, and thus is not subject to income tax. So many of our highest paid workers are exploiting a loophole. It needs to be closed in the spirit of fairness.

Fifth, returning to government revenue, and in light of the above, any fair plan to reduce the budget has to include revenue increases. Taxes must go up. The US is a low tax state. By any comparison we pay less tax than our peers abroad. We have cut that already low level of taxation even more over the past few years. The result is that we defunded government. This was deliberate. It was unfair. It was dangerous. It remains a basic tenet of right wing plans. Even now, with government revenues in the tank, the Republicans are adamant that any deficit reduction cannot include tax increases. This places the entire burden for fixing the problem on the weakest members of society. If successful the Republican plan would alter our country’s social fabric and propel us even more into an unequal, bifurcated, and poverty stricken state than we already are. We on the left need to be equally adamant that fairness dictates tax increases on those who most can afford them. Besides: the era of greatest US economic growth coincided with an era of high marginal tax rates. There is no cause and effect there. But neither is there any evidence that high taxes diminish growth. They didn’t. They still won’t. Indeed, it could be argued that by sopping up some excess cash from higher wage earners we would reduce the flow of money going into coffers of the gamblers on Wall Street. Killing two birds with one stone is always a bonus.

Sixth, I think we need to engage in some industrial policy making. We should use the budget debate to allocate capital to industries and projects that pay off in the future. Free market advocates cringe at the very thought. They argue that government is incapable of making sound investment decisions. Or, at least, that the government is less well equipped for that task than private enterprise. This would be the same private enterprise that just produced the back-to-back epics of the dot-com and real estate bubbles. Neither exactly reinforces the image of the private sector as an efficient allocator of investment capital. Meanwhile the government’s early investment in the internet is a good counter example. We need to expand, not diminish, the role of government in industrial investment.

Seventh, let’s get rid of those agricultural subsidies. If we want to keep some for small farms, so be it. But large industrial farming doesn’t need our help.

Eighth, cut military spending. It would help, of course if we ended those Bush wars as well. The basic structure of the military needs to be changed to face forwards and not backwards. That implies less Navy and Air Force, and more Army and Marines. Plus we need to cut away at the unchecked pork flowing through the Pentagon into unneeded and often useless projects. We have to come to terms with the simple fact we cannot afford to spend what we do. And we need to realize that cuts don’t mean less security. Indeed, a more efficiently run, and forward focused military, would mean more security. It isn’t how much we spend. It is how we spend it. Pet projects for generals are not protecting us. Besides, as I have asked before: why does the US need to spend many times more on offense defense than the next ten largest military budgets combined? Are our generals that bad that they need to make up for it with cash?

Ninth, and last in this summary, we need to use the budget debate to attack the banks. OK, maybe ‘attack’ is not quite the right word. But we need to make finance less attractive, so we can move the nation’s store of capital back into industry where it is not subject to the volatility of banking, and where it would produce a greater number of middle class jobs. The main point here would be a tax on speculative activity to make it more costly to gamble. We could go further and impose a tax to recoup the costs imposed on society by the banks when they drove it over the cliff in 2008. But that might just be me indulging in an extra fantasy.

OK. Let me summarize:

  1. Raise taxes on the wealthy and corporations. Let the Bush tax hikes come into effect and close foreign tax and other high end loopholes.
  2. Protect entitlements and safety net features of the economy. Adjust them maybe. Cut them? Not at all.
  3. Cut, and re-orient, military spending. It’s time to end those wars as well.
  4. Deal with inequality and inject fairness back as guiding principle of policy.
  5. Get government back into industrial policy.
  6. Tax banks/banking transactions to reduce the size of the banking industry, and to encourage the flow of capital to less volatile industries.

That’s my first, rough, attempt at a plan. It leaves health care spending out, since I assume that the recent reforms will stay in place and thus diminish Medicare spending.

What’s your’ plan?

«< 14 15 16 17 18 >»