GDP

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Seven Out Of Ten

Seven out of ten isn’t a bad score. It isn’t great either. It’s a majority, but isn’t totality.

What am I talking about?

I came across the reference to seven out of ten in Paul Krugman’s column this morning, and it’s worth pondering.

Let me set the scene:

One of the current most widely used criticisms of more stimulus for the economy – it could use the help – is that governments never get rid of the so-called ‘temporary’ measures once the emergency has passed. All that happens is that the programs designed to bolster the economy get baked into an ever growing pile of permanent government spending.This is not true. In fact it is way wide of the mark.

The best way to look at government spending is not in absolute dollars, but in the ratio of spending to GDP. With an ever growing population and an economy growing through time, the level of actual dollars spent is always going to rise. The crucial point is to see whether the portion of the economy designated as government spending is rising faster or slower than the whole.

And this is where seven in ten comes in.

Of the ten post World War II presidents before Obama seven have left office with government spending lower as a percentage of the economy than it was when they entered office. So we have only three fiscal laggards in the last seventy of so years. Three rotten apples who expanded government, and coincidentally, added to our national debt more than the others.

They were Ronald Reagan, and both the George Bush’s. Three rotten apples. Three Republicans. Three fiscal calamities.

This is not what you hear from right wingers of course.

Poor old Ronald Reagan, we are told, had to deal with those high interest rates. Remember those? Paul Volcker went after inflation by raising rates and plunging the economy into a severe recession in 1980/81. The downturn was  nasty. The recovery pretty good. And that explains Reagan’s pile of debt. Well not really. Reagan’s pile of debt came from his refusal to pay for his defense build up by raising taxes. Instead he borrowed the money. He thus earned his place in history as one of the few, very few, US presidents to expand the national debt during a period of non-emergency.

The key point to bear in mind about Reagan is that he might have been many things: he might have talked a good game, and he might well have been the originator of our current vogue of ‘blame the government’, but he was not, by any stretch of the imagination, a small government guy. No not at all. He expanded big government. Despite his rhetoric. And despite the efforts of his subsequent sycophants who toil endlessly to cover over the traces of his fiscal follies.

Then there was George I. No one seems to talk about him much any more. Probably for good reason. Go ahead: try to recall anything about him. Suffice to say he continued the Reagan trend, only with less brio.

And then we come to the true classic: George II. If ever anyone ought claim the title to fiscal recklessness George II is he.

Dear George II has left such a trail of wanton wreckage that we almost forget the horror that was his fiscal policy. He inherited a Federal budget under control and generating a small surplus, along with a government spending level on a downward track, and promptly blew it all up. The political headline was that if the Federal government budget is in surplus it must be taking in too much tax revenue. Therefore that surplus can be repaid to taxpayers without jeopardizing the government’s fiscal position. The political reality was different: the goal was not to balance the books by returning a modest amount. It was to undermine the government by returning so much that the books were thrown into imbalance and a false need to cut spending thus created. After all, if you want to get to a smaller government what better way is there other than to defund it?

The problem was that George II was not good at math and, besides, was not truly an advocate of small government. One or two of his pet projects, notably one to do with Medicare, piled on the government spending, but since he had cut taxes and thus revenue, debt  as a share of the economy rose, not fell, during George’s rein.

Naturally we are told by George II’s defenders – yes there are some – that his errors are really those he inherited from Clinton, and that the expansion of government during those long eight years was simply a function of Clintonian policies having a long incubation before they did their damage.

Sorry that won’t work. The Medicare Prescription Drug, Improvement, and Modernization Act of December 2003, which added about $530 billion to government spending, was not a Clinton era policy. It was the biggest revamp of Medicare since its inception, and included an infamous prohibition preventing the government from negotiating lower drug costs with the pharmaceutical industry.

So there you have it. The three rotten apples of fiscal imprudence all turn out to be Republicans. The clear message seems to be that if you want to expand government debt, elect Republicans. This is not exactly what you read about in the press is it?

Yes that’s right. The party currently venting its spleen over the need for tighter budgets and the dangers of debt is the very party that blazed the trail for increasing debt. It has, at least in terms of the post-war era, a long and hallowed tradition of inflating the debt, and fiscal recklessness.

Anyway, in case you think I am misleading you, here’s the chart:

 

 

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More Sideways Than Up

The economy just can’t get on a roll. We managed to get passed the slow down of late last year only to run full square into a self-inflicted slow down this year. Ugh. That’s a technical term for ‘I told you so’. The economy, as measured by Gross Domestic Product (GDP) grew at a 2.5% rate in the first quarter this year. The good news is that the economy gained speed – the last quarter of last year had seen anemic 0.4% growth. The bad news is that this acceleration is too slow to clear up all our excess capacity, especially our severe long term unemployment problem. It is also too slow to get us anywhere near back to our potential. Every day we slop about like this we leave wealth on the table unearned. And that matters to us all. Or at least it ought matter to us all. A lot.

Here’s the breakdown, as usual I show the contributions of each major part of the economy:

  • Personal Consumption grew at a 3.2% pace, contributing 2.24% to the total
  • Private Investment grew at a 12.3% pace, adding 1.56% to the total – of which 1.03% was in the form of inventory accumulation
  • Net exports reduced the total by 0.50% because the growth in exports was more than offset by growth in imports
  • Government spending continued to shrink and reduced the total by 0.80%

This is a really mixed bag.

As you can see, the biggest impetus to overall growth came from personal consumption, but no one expects this pace to carry forward much. Disposable incomes dropped 5.3% in the quarter due primarily to the rollback of the payroll tax holiday. Couple this with the continued decline in savings and it becomes very difficult to forecast strong personal consumption for the remainder of the year.

Then there’s the increasing negative effect of the decline in government spending. A large number of people, some in the media as well, seem not to realize that US government spending has been in decline for a while now. Right after the crisis hit, state and local governments around the country began to retrench in order to balance their books in the face of a collapse in revenues. The 2009 Federal stimulus meant that Federal level spending grew for a couple of years, but with that now fully worked through the system, and with the sequester cuts coming on line,  even Fed level spending is now declining. Add the two together and total governments spending is acting a strong brake on growth. Which is exactly not what we need to see. But Congress in its wisdom has decided to slash away at the economy. This is despite all the rapidly accumulating evidence that austerity doesn’t, can’t, and won’t work.

Let’s look at two charts:

Here’s GDP growth over the last few years …

Yes that dip was enormous.

Here’s how the total accumulation looks when we express it as a percentage the peak reached jut before the crisis …

As you can see we’ve managed to get back above the pre-crisis peak. But not by much. That’s because we are running well under a rate of growth enough to get us back to our potential. Here’s the gap between potential and actual …

 

And, last of all, here’s a look at the level of government spending as a percent of that potential GDP …

I think it correct to look at government spending in terms of potential, and not actual, GDP because the result gives us an idea of what that spending looks like were the economy in good shape and not impaired as it is now. Two points ought to leap out at you when you look at the last chart:

  1. Both the Reagan and Bush II years show sharper increases in government spending than the intervening Clinton years. Indeed if you look closely you can see that the Clinton era was one of good control over government spending.
  2. It is very clear that the leap in government spending associated with the crisis has not continued and that the Obama administration is overseeing the only non-recession caused contraction is such spending anywhere on the chart. In fact Obama is pursuing a tighter fiscal policy than any president of the past forty years.
  3. This Obama austerity movement is not something to applaud. Draining government spending from the economy before the private sector is back to full health makes matters worse, not better.

What does all this mean?

That the economy is not fully healed. That growth is more likely to slow than to accelerate. And that government fiscal policy is working in exactly the wrong direction.

This is not a good message. The first quarter’s 2.5% growth may well be the high water mark for the year. It’s most likely down hill from here.

Unless, of course, Congress decides not to be so stupid. That’s not happening though, is it?

 

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Deficit Realities: No Cuts Needed

It seems like the entire economic discussion is now about the Federal deficit and what we ought to do about it. You all know my position by now: nothing. The deficit is going to melt away, or at least back to manageable proportions. So there is no need to do anything. Really.

But, in the interests of science, and to give you some context, I ought to pass along to you some facts and figures. That way you can keep score for yourselves at home.

Since Obama arrived in the White House the accumulated deficits have been approximately $5,100 billion. That’s a lot by any standards. To put that in perspective: accumulated GDP has been $59,231 billion dollars. So the deficit has been about 9% of GDP throughout.

Deficits are always large during an economic downturn because tax revenues plunge as wages and profits take a hit. This was the mother of all recessions and so of the $5,100 a substantial part is due, not to policy – Obama being a closet socialist trying to take over the entire economy –  but to the downturn itself. This is the bit we can expect to go away through time as the economy recovers and tax revenues get back to normal. A rough estimate produces about $1,500 as this effect. This is about $375 a year or 30% of the deficit. So if we do nothing, we can expect the deficit to shrink by that much.

Then there’s all the short term and one time spending enacted to shore the economy up during the crisis. This includes the stimulus and things like the bank bail outs. These add up to about $1,600 over the last four years or about $400 billion a year. Obviously these are also going to go away, indeed the stimulus is already down to a trivial level.

Then there’s the Bush wars. Don’t forget about them. They weren’t paid for by extra taxes, they were paid for by borrowing and thus added to the deficit. Over the past four years their cost has been about $720 billion or $180 per year. One of these days those costs will go away, even though, for now, they still linger on.

And then there’s the impact of the Bush tax cuts. Even after the recent tax hike for high end wage earners there is still a huge drag on the budget from those cuts. To the tune of about $1,400 over the last four years. That’s $350 a year.

Now let’s add this all up.

The annual deficit since 2009 – the four years of Obama’s administration so far – has been approximately $1,275 billion. Makes your head spin, right?

Take away the effects of the crisis itself or $375 billon a year. Take away one time crisis related costs that will go away or another $400 billion a year. What do we get? A deficit of around $500 billion a year.

End those wars and that reduces us further. To around $320 a year.

Now.

In 2012 GDP, unadjusted for inflation, was about $15,700 billion. So this adjusted deficit of $320 billion is just about 2% of GDP. Compare that with the average of 4.23% during the Reagan administration. Yes, I know. Reagan had to deal with a recession too. So let’s be fair. Let’s add back to the Obama score that part of the deficit due to the downturn itself and to the stimulus. That means we have to add back about 3% of GDP making the average Obama deficit around 5% compared with Reagan’s 4.23%. Not a big difference. Especially when we take into account to the enormity of the recent recession.

So if we do nothing at all we can expect the deficit to shrink back to below the average we saw during the Reagan years when, as you no doubt recall, Dick Cheney famously said that deficits don’t matter. If that is so, the future Obama deficits will matter less.

Or ought to.

But the Republicans don’t seem to agree. While they loved those Reagan deficits, voted for them, and embraced them wholeheartedly. The Obama deficits, which are around the same totals and have the same impact, are, apparently a threat to the very soul of America.

Odd that.

Somewhere along the road to today Republicans had an epiphany. They saw the balanced budget light. And did a total U-turn. Whereas once deficits were the work of God, now they are the work of Satan. And like all born again folks their fanaticism for their new cause is extreme.

Well. Almost.

You see, I don’t think for one moment that the likes of Paul Ryan actually worry about deficits  as deficits. They just adore the war spending after all. No. They only ever object to deficits when their cause is social spending. Then all hell breaks loose and Republicans are beside themselves with angry fiscal rectitude. In the GOP’s eyes we cannot afford deficits when the spending is on the poor, only when it is on war. Social spending, bad. Military spending, good. Since both are government sending we can’t quite make out what Republicans think of that. Perhaps they’re just confused.

Anyway. The point of all this is to give you some context. Our deficits, labeled as a cause of crisis and imminent disaster by the media and right wingers, are under control. They need no action. The arithmetic says so. You saw it with your own eyes.

Oh. wait.

There’s that last bit. The Bush tax cuts. Let’s see. We had whittled the ongoing deficit down to around $320 billion a year by subtracting all the odds and ends associated with the recession and the Bush wars. The Bush tax cuts add about $350 billion a year to the deficit. Huh? $320 billion minus $350 billion  is … roll the drums … a surplus of $30 billion a year.

Yes. You see without the impact of the extraordinarily reckless George W Bush, our ongoing deficit wouldn’t be there at all. We’d have a surplus. Small, but definitely a surplus.

Eat your heart out Paul Ryan. We have a better budget plan than you do. All we have to do is eradicate the impact of Bush  and his Republican friends on history and we are all square.

Too bad we didn’t think of that at the time. Well some of us did. But I won’t brag about that.

 

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There He Goes Again

Paul Ryan is at it again.

He has unveiled his new plan to cut government spending. It looks a lot like his old plan. Fiction writers like Ryan try to cultivate a loyal following by sticking with popular characters and themes. In Ryan’s case the theme is to ensure that the poor get hammered and the rich get lots of goodies. His first and much ballyhooed budget was a classic of class warfare. This next piece of work takes that same theme and expands upon it. It will no doubt become an instant classic of the genre.

This version – let’s call it Ryan II – takes as its starting point the current annual federal deficit, Ryan uses the latest CBO figure of just under $1 trillion, and projects a balanced budget in ten years. He accomplishes this by cutting spending by $4.6 trillion and while leaving taxes untouched. The cuts are front loaded: the deficit in 2014 is projected at $528 million, and that in 2016 at $69 billion after which the deficit bounces around until it shifts into a tiny surplus in 2023.

The cuts are draconian. They fall mainly on health care. Medicaid is a favorite target of the right – it funds care for the poor so why not? – and so is slashed. Then there’s the somewhat bizarre proposal to eliminate Obamacare, presumably before people realize what a good deal it is for them, but still keep the bit that cuts Medicare costs. These are the bits, you may remember, that Ryan attacked during the election as defunding Medicare. So Ryan II attacks Obamacare while keeping one or two of its cost cutting components.

The good news for our elderly is that Ryan II postpones the elimination of Medicare for ten years. Presumably this is so as to avoid annoying voters between the ages of 55 and 65. After ten years, though, we will get the original Ryan I plan to make Medicare a voucher program. This ends Medicare as we know it and substitutes it with a program wherein the government sends seniors a voucher to help them buy insurance from a private insurance company. There is no guarantee of service, and if the cost of insurance is higher than the value of the voucher seniors will have to dig into their retirement income to pay for it. Under Ryan I it was a total certainty that the vouchers would not cover all costs. Ryan II simply confirms this. So  this budget saves government spending by shifting the cost of insurance back onto the backs of retirees. It doesn’t actually cut health care costs, it shifts the burden onto our elderly. Just not yet. I suppose the ten year abeyance is designed to allow everyone to save much more so they can afford health care in retirement. Good luck with that.

The objective of the budget proposal is to arrive at a balance with both spending and revenues roughly 19.1% of GDP. To put this in perspective: spending peaked at 25.2% of GDP in 2009 while revenues bottomed out that same year at 15.1%. Since then, as the recovery gained momentum, revenues have recovered slightly and were 15.8% of GDP in 2012. Meanwhile spending dropped to 24.1% of GDP. The forecast for 2013 shows a much more rapid improvement with revenues rising to 17.8% and spending falling to 23.3% of GDP respectively. Indeed, according to the CBO, revenues hit Ryan II’s target of 19.1% by 2016 under current policy. In historical terms that level of revenue is about 1.0% less than the levels we saw at the end of the Clinton administration.

So the onus is all on spending cuts. Not only that but rapid cuts. Ryan II slashes a full 5.0% in just two years. This is a major austerity program, and will have a very significant negative effect on the economy. To put the impact in context we are expecting GDP growth of about 2.5% this year and maybe 3.3% next. That’s before any downward adjustment from the sequester cuts now beginning to bite. Were Ryan II to be implemented there is a high probability that we would edge close to recession sometime in the next two years.

Ryan clearly is aware of this and so litters his press releases with dismissals of any notions of austerity. Cutting spending is good for the economy, we are told, because it engenders confidence, good will, and lots of private sector energy. Enough, anyway, to offset the loss of spending by the government.

This is, of course, rubbish.

For an example of how terrific austerity policies are I direct your attention across the Atlantic to Britain where a variant of Ryan II has been in place for a few years now. How well is all that confidence, good will, and private sector energy going? Well, not good at all. Britain holds the dubious record of being on the precipice of a triple dip recession. That takes some doing. Worse: the Conservative government denies culpability and still clings to the absurd, and surely debunked, notion that austerity is a good policy. All the evidence suggests it isn’t.

Then there’s Europe. The less said the better. European austerity programs have also been an unmitigated failure. Yet they plod on imposing squeeze after squeeze in a vain attempt to locate the magic of confidence, good will, and private sector energy.

The odd thing is that confidence, good will, and private sector energy all vaporize in the face of austere policies. Policy makers whose reputations depend on being serious deficit cutters and austerity advocates – Ollie Rehn in Europe, and George Osborne in the UK come to mind – have all been shown to be wrong. They have wreaked havoc on their economies and done great harm to tens of millions of innocent bystanders whose lives have been wrecked at the altar of confidence, good will, and private sector energy. But they haven’t changed their minds. They put ideology and personal ego ahead of social welfare.

So it is is with here.

Ryan II is not a plan designed to address the budget deficit. It is a plan to get rid of our social programs. It achieves its goal by making a vast number of poor or sick people poorer and sicker. It leaves rich people better off and it hands more profit to big businesses.

It is not a balanced budget. It is not even a budget at all. It is out and out class warfare.

As such it is a perfect manifestation of contemporary Republicanism.

Then again, it gives the media something to talk about. No doubt Ryan will once again receive plaudits for offering a ‘serious’ plan, and for being ‘bold’.

Oh. One last thing.

Ryan II cuts the top rate of personal tax to 25%, down from its current 39.5%, whilst claiming that tax revenues will remain unaffected. It does this by eliminating loopholes and other sundry tricks. Ryan, as before, doesn’t actually tell us which loopholes of which tricks. Perhaps this is because they include the elimination of popular deductions like those for the interest on mortgages, and for state, local, and property taxes. So while taxes would go down for the very rich, they would likely go up for people lower down the wage earning totem pole. It’s hard to tell though. Ryan II is silent on details. We are left guessing.

And waiting for the sequel. Maybe Ryan III will tell all. Maybe not.

 

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Sequester Day

Well here we are. And there we go. I doubt many of us really imagined that there would be a sudden out break of sanity in Washington. We haven’t ben disappointed. The war raging down there has produced another epic failure. It looks as if the sequester will go into effect.

So what happens now?

Well not much … and a lot.

Not much if you think that a drop of about 0.5% in GDP doesn’t matter. That’s the Congressional Budget Office’s estimate of the damage a sequester would cause. When you slash government spending, you slash demand. When you slash demand, you cripple the economy. Period. So, the CBO tried to give us all fair warning. That estimate was published back in November in those heady days when there was a glimmer, just a faint glimmer, that Congress could get off its duff and do something sensible. Oh well.

That drop in the economy will make unemployment leap. The CBO thinks we may crawl back up to an unemployment rate of 9.1% by year’s end.

Not that anyone cares.

And no one does care.

Voters don’t care that the economy will get clobbered. They are so tired of the mess in Washington that they’ve tuned it out. The endless brinkmanship and false crises of the past two years have made everyone so sick and tired of Congress that people seem to want to pretend nothing will happen. It all seems so remote after all.

Some of you don’t think government jobs are ‘real’ jobs. Really? So a shipyard worker working on the government’s dime is not doing a ‘real’ job, whereas a shipyard worker working on a private sector cruise ship is? If you believe that, you’re nuts. Truly nuts.

Some of you think we have been swamped by a surge in government spending under Obama. You imagine a kind of creeping socialism that is hobbling our good old private enterprise system. Really? Government spending has been declining. Read that again: government spending has been declining. As in going down under Obama. If you believe otherwise, you’re nuts. Truly nuts.

Then there’s some of you who dismiss the entire mess by arguing that both sides are guilty and that there is some equivalence in the stupidity down there. Really? So Obama’s plan which includes both spending cuts and a few tax increases – a balance more towards cuts – is the same as the Republicans no tax at any price and all cuts proposal that slashes social programs alone? One is balanced. The other is biased. They are not equivalent. If you think they are, you’re nuts. Truly nuts.

We live in a strange and unfamiliar world. I come across a lot of people who haven’t fully absorbed what’s going on. They prefer to see all our crises through politics as usual prism. Both sides are being silly these people say. So we have to punish both equally. And, if only the President would reach out and try to compromise.

He has reached out. He has bent over backwards. His compromise is enormous. He has given away a great deal. He has received nothing back. Not one thing. Except dishonesty and ridicule.

This is not politics as usual. There is an insurrection afoot. The Republican party is divided – about two-thirds to one thirds. That two-thirds is the extreme group. They have an extraordinarily radical agenda. They want to re-make America. But they are a minority. They get out-polled every time they make themselves clear. This means they cannot get what they want through the front door of majority rule. So they go through the backdoor of hostage taking and threats. They simply say no. They object. They create alternative facts. And they cry foul even when there’s no foul.

So determined is this group to slash government spending that they don’t mind at all if unemployment soars or the economy tanks. Their goal is to cripple the government and then to use its dysfunction as an excuse to defund it more. These are the people who want to eliminate Social Security and Medicare. These are the people who think unemployment assistance is a prop for laziness. These are the people who have no qualms in firing teachers, police and fire personnel so as not to pay taxes. These are the people who think our rotten infrastructure is just fine. They think government funding of research is unnecessary. They think government is just useless and can do nothing right.

And they’ve carried this fight to Washington.

They are not the heirs to Reagan. Even he was more pragmatic than this group. He modified his position when reality intruded on his idealism. This lot won’t compromise no matter how much reality bites. They have their own reality.

So, when someone says that the economy will suffer from the cuts. They say nonsense. They say if we get government out of the way the economy will soar. It is, in their mind, an economic truth. The less government, the more the private sector will do.

That there is no evidence anywhere to support this contention – nowhere – doesn’t matter. It is a badge of honor. It is a matter of faith. And like all faiths it brooks no discussion and tolerates no ‘fact’ based contradiction.

The impasse we have arrived at is simply a war of ideologies. It is ripping the country apart. It is corroding the economy. It is destabilizing our future.

The opening shot in this war was fired by the extreme right. It is not a war anyone else sought or even imagined possible.

And it is a war that will continue to undermine our society until people like you and me realize that we are the only people who can stop it.

We must pay attention. We must stop pretending it doesn’t matter. We must apportion blame. We must punish the perpetrators. That is what democracies do. We must take sides. We must make a stand.

And if you think this sequester stupidity will pass, I beg to differ. This is just the beginning. The real fight is in about a month when Congress has to pass legislation to fund the government. That budget fight is looming ahead. It will make this crisis look small.

This is no way to run a grown up country.

But it is the way we run ours.

Doesn’t that hurt?

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