Paul Krugman on longterm 3% growth

The Trump Administration and the Congressional Republicans have been promising that their magic tax cut will produce 3% growth over an extended period. That was part of the official assumption to minimize the projected deficit the tax cut produces.

Krugman explains why that is unlikely, to put it mildly (What the Economic Data Don’t Tell Us New York Times 01/28/2018). It involves an economics theory known as Okun's Law:

Potential output – the economy’s productive capacity – grows fairly smoothly. But recessions leave some of that capacity idle, and the economy can temporarily grow fast as that capacity is put back to use. The unemployment rate is an imperfect measure of idle capacity; still, there’s a strong relationship – Okun’s Law – between changes in the unemployment rate – capacity going into or out of use – and short-run economic growth

The unemployment rate is currently at a low point. Looking at the variable rates of quarterly growth and how 2017 fits into the Okun's Law trend, he concludes that a longterm 1.5% rate is far more realistic:

Why is potential growth so low? Unfavorable demographics are one big culprit: the baby-boomers are getting old (you kids get off my lawn), so the working-age population is barely growing. Oh, and cracking down on immigration is, you know, not likely to help on that front.

Productivity growth is also lackluster, despite all the hype about robots and all that. [my emphasis]

There is a lot more to say about unemployment and the constraints on labor participation rates, of course. But Krugman is giving a brief explanation about why the longterm 3% growth rate the Republicans are projecting/fantasizing is not a realistic expectation.

Hillary Clinton and the risks of incrementalism

Scott Eric Kaufmann reads Paul Krugman's latest New York Times column as not only a warning against cautious incrementalism as a strategy for a Hillary Clinton Administration, but also as drawing a lesson from the failure of the first Clinton Administration's effort at comprehensive health insurance reform. (Krugman: Kaufmann: Wisdom, Courage and the Economy The time for liberal pundits to push Clinton’s economic policy to the left is now Salon 08/15/2016)

Krugman writes:

Is the modesty of the Clinton economic agenda too much of a good thing? Should accelerating U.S. economic growth be a bigger priority?

For while the U.S. has done reasonably well at recovering from the 2007-2009 financial crisis, longer-term economic growth is looking very disappointing. Some of this is just demography, as baby boomers retire and growth in the working-age population slows down. But there has also been a somewhat mysterious decline in labor force participation among prime-age adults and a sharp drop in productivity growth.

... I’d argue, in particular, for substantially more infrastructure spending than Mrs. Clinton is currently proposing, and more borrowing to pay for it.

Kaufmann notes:

Though Krugman never openly states it, the clear comparison is her failed attempt establish HillaryCare in the ’90s and President Obama’s successfully pushing ObamaCare into law through any and all means necessary.

Of course, Clinton has acquired quite a bit more political savvy during the intervening decades, so perhaps Krugman’s point is simply not to forget the lessons learned, but to remember what is known and knowable and what, at this point, simply isn’t ...

Another way to think about the political risks is that Republicans will continue their radical obstructionism on domestic policy when Clinton becomes President. The economy could weaken and go into another recession, which the Republicans and their media networks will cheerfully blame on Clinton and the Democrats. Clinton is also talking about setting up a protected zone in Syria, which would be a qualitative jump into a guaranteed disaster. Throw in a spectacular terrorist attack or two in the United States by Muslim extremists, and the next Trump could be in a strong position in 2020. And then there's the 2018 midterms, which will go to the Republicans by default if the Democratic National Committee doesn't make a drastic change in the practice of neglecting Congressional elections, we could be looking at four more years of domestic policy paralysis capped by a Republican resurgence in the 2020 Presidential election.

Slow growth prospects in the world

Joe Stiglitz has some sobering things to say about the current state of the world economy.

In Joseph Stiglitz explains why the Fed shouldn't raise interest rates Los Angeles Times 08/27/2015, he writes:

Six years into a lackluster U.S. expansion, price growth for personal consumption expenditures — excluding food and energy — has averaged less than 1.5% annually in the recovery, well below the Fed's unofficial 2% inflation target. It slowed to 1.3% so far in 2015.

Global economic forces are poised to drive inflation still lower. Last week, oil prices fell to $42, a low not seen since February 2009. Europe's growth remains anemic and is likely to remain so: The IMF forecast for 2015 is just 1.5%. And while it is difficult to piece together a precise picture of what is happening in China, most experts see growth slowing markedly, with effects in other emerging markets.

With a weaker euro and yuan, our exports will decrease and our imports increase. Together, this will put pressure on domestic businesses and the job market, which is hardly robust.

In an interview with Jason Kirby (Joseph Stiglitz on why this stock market upheaval is so dangerous MacLean's 08/26/2015), he says of the US:

... I’d say it’s not a strong recovery. The crisis was 2008, we’re now in 2015—eight years later after the recession and the gap between where we would have been and where we are is huge and not closing. That in some ways was expected, in that the defective response to the crisis lowered potential U.S. economic growth by leaving all these people unemployed. The implied unemployment rate is still very high. Labour force participation is very low, at something like a quarter century low. Not so much because of the aging population, but because of discouraged workers. And the increase in the wages in the second quarter was the lowest performance in 25 years. So overall, before this last turmoil, the U.S. economy was in better shape that Europe or Canada, but not strong. This turmoil will almost surely make things worse.

The median family income in the U.S. is lower than it was a quarter century ago, and if people don’t have income, they can’t [consume], and you can’t have a strong economy. We had assumed it was the emerging markets that would keep the global economy going. With Europe weak, with our household income weak, it would be China and emerging markets. And what’s clear is that’s not true. There’s significant risk—actually it’s, no longer risk—a significant likelihood of a marked slowdown not only China, but also in a lot of other countries—Brazil, which is in recession, all of the other countries that depend on commodities, including Canada, are facing difficulties. So it’s hard to see a story of a strong U.S. economy.

In the LA Times piece, Stiglitz also comments on the role that quantitative easing can play in inflating bubbles:

After the 2008 crisis, the Fed tried to stimulate the economy by buying bank debt, mortgage-backed securities and Treasury assets directly from the market — so-called quantitative easing — which disproportionately benefited the rich. Data on wealth ownership show clearly that the portfolios of the rich are weighed more toward equity, and one of the main channels through which quantitative easing helped the economy was to increase equity prices.

So quantitative easing was yet another instance of failed trickle-down economics — by giving more to the rich, the Fed hoped that everyone would benefit. But so far, these policies have enriched the few without returning the economy to full employment or broadly shared income growth.

Debt, growth and endless justifications for austericide policies

A paper by three IMF economists (not to be confused with an IMF official position paper) has generated some interesting headlines in the press and economics blogosphere:

David Wessel, IMF Economists’ Surprising Advice on Federal Debt: Don’t Worry About It Wall Street Juornal 06/02/2015

Katie Allen, A more radical approach to debt: do nothing The Guardian 06/02/2015

Anna Yukhanonov, IMF economists say some countries can 'just live with' high debt Reuters 06/02/2015

The paper itself is When Should Public Debt Be Reduced? by Jonathan D. Ostry, Atish R. Ghosh, and Raphael Espinoza IMF Staff Discussion Note June 2015.

Ostry et al note, "What constitutes a safe level of debt (or ample fiscal space ...) is, needless to say, very difficult to pin down precisely in practice, and can never be established through some mechanical rule or threshold."

This is a major caution around discussion of the right or proper debt level. The infamous notion that 90% of GDP is some special percentage beyond which national debt should never go should have been thoroughly discredited by now. (Dean Baker, Excel Spreadsheet Error: Lessons from the Reinhart-Rogoff Controversy Truthout 05/27/2013; Peter Coy, FAQ: Reinhart, Rogoff, and the Excel Error That Changed History Bloomberg Business 04/18/2013)

As Dean Baker put it in 2013:

The Reinhart-Rogoff 90 percent cliff was widely accepted policy wisdom for more than three years, which suggests the internal policing in the economics profession is pretty damn weak.

Of course the more fundamental point that came up in the wake of Excelgate is that Reinhart-Rogoff show nothing about causation. Efforts to examine the direction of causation show that it goes almost entirely from slow growth to high debt (here and here) not from debt to slow growth as is generally implied in the policy debate.

And, those who ever learned accounting would recall that debt is only half of a balance sheet. We would have to consider assets also if we really wanted to tell a story about how debt could impact growth.

These points were made to a large swath of the public not because of the internal policing of the economics profession, but because of an Excel spreadsheet error. For this reason, those who care about honest academic and policy debates should be celebrating the spreadsheet error. If this embarrasses important people in the economics profession, that’s because it is a profession that deserves to be embarrassed.

Ostry et al draw a vague distinction among three categories:

Stress testing public-sector balance sheets is essential to form judgments at the country level of what constitutes a safe public debt level. It may be helpful to think of debt levels as falling into three zones: a green zone, in which fiscal space is ample; a yellow zone, in which space is positive but sovereign risks are salient; and a red zone, in which fiscal space has run out.

Paul Krugman had seen through the faults of the 90%-of-GDP notion that Carmen Reinhart and Kenneth Rogoff had posited even before the infamous spreadsheet error was discovered. In The Excel Depression New York Times 04/18/2013, he wrote:

At the beginning of 2010, two Harvard economists, Carmen Reinhart and Kenneth Rogoff, circulated a paper, “Growth in a Time of Debt,” that purported to identify a critical “threshold,” a tipping point, for government indebtedness. Once debt exceeds 90 percent of gross domestic product, they claimed, economic growth drops off sharply.

Ms. Reinhart and Mr. Rogoff had credibility thanks to a widely admired earlier book on the history of financial crises, and their timing was impeccable. The paper came out just after Greece went into crisis and played right into the desire of many officials to “pivot” from stimulus to austerity. As a result, the paper instantly became famous; it was, and is, surely the most influential economic analysis of recent years. [my emphasis]

He explains the objections to accepting their conclusions even before the spreadsheet error was discovered:

As soon as the paper was released, many economists pointed out that a negative correlation between debt and economic performance need not mean that high debt causes low growth. It could just as easily be the other way around, with poor economic performance leading to high debt. Indeed, that’s obviously the case for Japan, which went deep into debt only after its growth collapsed in the early 1990s.

Over time, another problem emerged: Other researchers, using seemingly comparable data on debt and growth, couldn’t replicate the Reinhart-Rogoff results. They typically found some correlation between high debt and slow growth — but nothing that looked like a tipping point at 90 percent or, indeed, any particular level of debt.

See also Krugman's Reinhart And Rogoff Are Not Happy 05/26/2013.

And Berkeley's Brad DeLong also weighed in on Accurate and Inaccurate Ways of Portraying the Debt-and-Growth Association 05/26/2015: "We are supposed to be scared of a government-spending program of between 2% and 6% of a year's GDP because we see a causal mechanism at work that would also lower GDP in a decade by 0.01% of GDP? That does not seem to me to compute."

The most urgent sovereign debt problem in the world right now is that of Greece, because of the possibly far-reaching implications of a Greek default. Greece can't repay its current level of debt, which has soared to around 170% of GDP. But Greece doesn't borrow in its own currency, it borrows in euros. So the limitations of a currency zone, and the structural faults of that particularly currency zone, come into play. A similar problem was present in the Argentine financial crisis of 2001-2, because Argentina's currency had been pegged to the US dollar.

Japan, on the other hand, borrows in its own currency and has run debt levels of twice its GDP for years without borrower fears of a possible default driving up its interest rates to any kind of problematic levels. The US borrows in its own currency, which is also the world reserve currency. Under those conditions, a US default is effectively impossible.

Ostry et al make a different sort of argument about advanced economies like the US, which is one of their "green zone" countries. They describe the logic of using public funds to pay down public debts ahead of schedule:

Why do we think that high public debt should be reduced? The main rationale is essentially one of risk management, the desire for additional margins to cope with unanticipated or contingent risks. The option value of lower debt is particularly high if there are risks of catastrophic events (an example would be a financial crisis in which a public backstop is essential), in which the government would need to ramp up borrowing massively (the more so given the political and economic limits to raising taxes sharply in a pinch). If debt is high when such a shock occurs, a heavy penalty may be exacted as sovereign risk premiums rise and, in extreme cases, a shutout from markets would ensue. In other words, debt needs to be reduced today to lower the potential risk of a sovereign crisis tomorrow.

A second rationale for why high public debt needs to be brought down is the belief that high public debt weighs on economic growth. While causality runs both ways, an important causal channel is taxation: high public debt implies the need to distort economic activity (labor, capital) to service the debt (either through taxation or cuts in productive spending), which dampens economic growth. A reasonable idea is that laying the foundation for sustainable growth requires paying the upfront cost of reducing the debt today. [my emphasis]

They argue a more than plausible point, that in developed countries not facing a fiscal crisis, advance paydown of debt doesn't make good economic sense. Using the public funds that go to debt paydowns to instead stimulate growth would be expected to grow the economy and in doing so reduce the percentage of GDP represented by the outstanding debt.

The Herbert Hoover/Heinrich Brüning/neoliberal austerity policies so beloved of oligarchs near and far simply denies the logic behind all this in favor of wishful thinking and blind assertions of what is necessary without little or no basis at all in macroeconomics.

But Ostry et al want to hold open the door for application of austerity policies in their "yellow" and "red" zone countries with the debt burden as justification: "For countries with significant risk of fiscal distress, it is unlikely that they could afford to take the chance of going on a borrowing spree, no matter how large the public investment deficiencies."

It's important to note that Ostry et al base their analysis by explicitly excluding "Keynesian demand management and risk of fiscal crisis." While it doesn't mean the analysis is invalid, it does mean that to be useful in formulating macroeconomic policies, both essential macroeconomic fundamentals (including "Keynesian demand management") and concrete debt crisis situations (including the special conditions and structrual faults of the eurozone) have to be taken into account.

A lot of potential austericide mischief can hide behind formulations like this:

Higher debt, as just mentioned, requires higher distortive taxation for servicing. Such taxation is likely to reduce the productivity of labor and capital (factors that are complementary to public capital), meaning that both output and public capital should be lower than in a situation in which there is less public debt. Thus, there are implications of public debt for warranted public investment and, in turn, for the growth path of the economy.

And leaving out "Keynesian demand management" considerations allows them to make statements like this, which have no real-world relevance outside of the realities of "Keynesian demand management":

Inherited public debt represents a deadweight burden on the economy, reducing both investment potential and growth prospects. Although the debt may have been incurred for good reasons, for a given stock of public capital, the higher the inherited debt, the poorer the economy (by the present value of the distortionary costs of the taxation needed to service the debt). Efficiency dictates that the larger the inherited debt, and thus the higher the level of taxation, the lower will be both public and private investment, and the lower will be output growth. Higher-debt economies will rationally invest less in public infrastructure than less-indebted economies. [emphasis in original]

In fact, despite their seemingly pragmatic and realistic view of debt paydown in developed countries, Ostry et al seem to be advocate something very similar to the flawed and discredited Reinhart-Rogoff "It is a feature of the framework adopted here that higher public debt leads to lower investment, slower transitional growth, and a lower long-run level of output: debt is bad for growth." As the entire discussion over Reinhart-Rogoff and their phony 90% benchmark showed, at the very best the notion that "higher public debt leads to lower investment, slower transitional growth, and a lower long-run level of output" is only a partial truth. But Ostry et al continue in the very next sentence to call it a "clear causality."

This, however, is an important factual observation for both the US and Europe:

The global financial crisis has resulted in sharp increases in advanced-economy public debt
ratios, on a scale unprecedented in peace time. ...the deterioration in primary balances [i.e., increased deficits] corresponded mainly to the loss of revenues and the operation of automatic stabilizers during the Great Recession; very little represented discretionary stimulus, and of that, only a small fraction was investment in public infrastructure. Thus, while the accumulation of public debt was generally for good reasons (averting an economic or banking system collapse), the fact remains that most advanced economies have built up large stocks of debt but have little or no more public infrastructure to show for it. [my emphasis]

In their conclusion, they formally disavow any direct policy implications of their paper:

Advanced economies are facing some of the highest ratios of public debt since World War II. For those countries that are not at imminent risk of losing market access, current policy debates center on the appropriate pace at which to pay down public debt. Those who believe that debt is bad for growth favor a rapid reduction in indebtedness, whereas those who stress Keynesian demand management considerations argue for a measured pace of consolidation, perhaps with a ramping up of public investment while interest rates remain at historic lows. Somewhat lost in this debate is the possibility of simply living with (relatively) high debt, and allowing debt ratios to decline organically through output growth. The purpose of this paper is not to provide direct policy advice, but rather to elicit a debate on whether governments should actively seek to pay down public debt or simply live with high debt.

It's notable how they frame the choice: "actively seek to pay down public debt" and "simply live with high debt". That disreputable "Keynesian" notion that wild and crazy characters like Krugman advocate of "a ramping up of public investment while interest rates remain at historic lows" isn't really of interest to them here. But then, their analysis explicitly sets aside those dreary "Keynesian demand management" stuff, aka, basic macroeconomics.

Stan Collander puts emphasis on the good part of the Ostry et al paper (You're Wrong If You Want To Reduce The National Debt Forbes 06/03/2015):

This should be a huge blow to all those (and you know who you are) who perpetually insist that the national debt is a tool of the devil and the federal budget must always reduce or eliminate it. The IMF is saying that those individuals, deficit scold groups and candidates that insist on fixing the debt are just wrong because there’s nothing to be fixed. To the contrary, the spending and taxing policies needed to pay down the debt in most circumstances will do far more damage to the U.S. economy than reducing the borrowing.

The IMF report should be thought of as a public rebuke of those who continually say the federal government must do what families do by balancing their budgets. The IMF is actually saying the federal government should do what homeowners do when their mortgage becomes less of a financial burden because their income increases, not because they have stopped making improvements on the house or paying college tuition to pay off the mortgage faster. As [David] Wessel notes, the IMF says the U.S. and several other countries would be better off if the do what many families do by borrowing “at today’s exceptionally low interest rates and live with their debt but allow the ratio of debt to GDP to decline over time.”

Galbraith on the threat to the US middle class

Jamie Galbraith, always worth listening to. From Muddling Towards the Next Crisis: James Kenneth Galbraith in conversation with The Straddler Winter 2013:

The story that is often told about what’s happened to factory jobs, and what’s happened to wage rates, is not a good way of getting at the threat to that existence. The typical story is that median wages peaked in 1972 and have been stagnant and falling since then. As a result, it must be the case that people who are working now are much worse off than they were ten, fifteen, twenty years ago. That’s not an accurate story - at least not up until the crisis in 2008—because over that period the labor force became younger, more female, more minority, and more immigrant. All of these groups start at relatively low wages, and they all then tend to have upward trajectories. So there’s no reason to believe that life was getting worse for members of the workforce in general. On the contrary, for most members of the workforce it was still getting better. Plus they had the benefit of technical change and improvement in the other conditions of life.

The real threat to the middle class is not there, it’s in the erosion of the programs I just mentioned. That is to say, it’s in the attack on the public schools, it’s in the squeeze on higher education, it’s in the threat to Social Security. When you look at housing, you have a very large unambiguous loss. Millions of people have been displaced, but many, many more have lost the capital value of their homes. They won’t be able to sell and retire on the proceeds.

So I think there is a threat to the middle class, but if I were talking about it in political terms, I wouldn’t be giving an abstract statistical picture of wages. This doesn’t connect to people’s experiences. If I were designing the boilerplate rhetoric of a popular movement, I would take a blue pencil to these statistical formulations. I don’t like the stagnant median wage argument—I think it obscures what actually happened. And I don’t particularly care for the “one percent” argument. I understand it has a certain power, but one can be much more precise about what it is you want to attack, and what it is you want to preserve and to build. I would cut to the chase: we need to tear down the financial sector and rebuild it from scratch in a very different way.

The American oligarchy and the 2008 crisis

This jeremiad from Simon Johnson in 2009 is still relevant and impressive, The Quiet Coup The Atlantic May 2009.

Describing financial crises in emerging market nations, he writes:

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions — now hemorrhaging cash — and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large. [my emphasis in bold]

And he has some intriguing things to say about the US oligarchy in the 2008 crisis: "Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy."

He discusses the ways that the US oligarchy achieved such cultural hegemony (as the literary critics like to say) before the 2008 crisis:

Wall Street is a very seductive place, imbued with an air of power. Its executives truly believe that they control the levers that make the world go round. A civil servant from Washington invited into their conference rooms, even if just for a meeting, could be forgiven for falling under their sway. Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U.S. government officials, and the interweaving of the two career tracks. I vividly remember a meeting in early 2008—attended by top policy makers from a handful of rich countries—at which the chair casually proclaimed, to the room’s general approval, that the best preparation for becoming a central-bank governor was to work first as an investment banker.

A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true. Alan Greenspan’s pronouncements in favor of unregulated financial markets are well known. Yet Greenspan was hardly alone. This is what Ben Bernanke, the man who succeeded him, said in 2006: “The management of market risk and credit risk has become increasingly sophisticated. … Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.”

Of course, this was mostly an illusion. Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t. AIG’s Financial Products division, for instance, made $2.5 billion in pretax profits in 2005, largely by selling underpriced insurance on complex, poorly understood securities. Often described as “picking up nickels in front of a steamroller,” this strategy is profitable in ordinary years, and catastrophic in bad ones. As of last fall, AIG had outstanding insurance on more than $400 billion in securities. To date, the U.S. government, in an effort to rescue the company, has committed about $180 billion in investments and loans to cover losses that AIG’s sophisticated risk modeling had said were virtually impossible. [my emphasis]

Krugman on taxing the One Percent

Paul Krugman argues that during the Obama Administration, effective taxes on the upper 1% of earners have increased by a signficant amount. Or at least a non-trivial one. (Why the One Percent Hates Obama 11/13/2014)

According to CBO, the effective tax rate on the one percent — reflecting the end of the Bush tax cuts at the top end, plus additional taxes associated with Obamacare — is now back to pre-Reagan levels. You could argue that we should have raised taxes at the top much more, to lean against the widening of market inequality, and I would agree. But it’s still a much bigger change than I think anyone on the left seems to realize.

Krugman interview on Obama's Presidency

Alyona Minkovski interviewed Paul Krugman recently in this Huffpost Live segment that aired on 10/22/2014:

He's talking about themes he used in his recent Rolling Stone article, In Defense of Obama 10/08/2014.

I read his comments in the article and in the interview as a plea to voters and maybe especially to his fellow members of the punditocracy to be realistic about Obama's actual accomplishments.

He's not making an "Obamabot" argument. His evaluation of Obama's economic policy overall comes down to: at least he's not as bad as Angela Merkel.

That's almost the definition of damning with faint praise!

Leslie Gelb's Obama’s Last Chance to Save His Presidency The National Interest 10/22/2014 probably counts as an example of the kind of commentary Krugman is addressing.

Yellen and inflation

Janet Yellen as head of the Federal Reserve has refused to give in to the inflation Chicken Littles and is declining to raise interest rates the way they would like.

One of the zombie ideas of conservative economics is the "natural rate of unemployment," which is normally taken to be a percentage point or so below the actual rate of unemployment at a given time. Not that anything besides the raw materials in the economy is actually "natural."

But this allows conservatives who think high unemployment is either good or, at worst, a minor inconvenience too insignificant to have national policies aimed at lowering it, to argue that we're almost at the level of employment that will set off INFLAA-AATION!! Germany! Hyper-inflation! Hitler! It will hurt the old people! Aiii-eeee!!!

Peter Coy and Matthew Philips in How Much Surplus Labor Do We Have? Bloomberg Businessweek 08/21/2014 articulate a sensible view of Yellen's decision:

To Yellen’s credit, an inflationary spike in wages is nowhere in sight. Given current inflation and productivity growth, workers should see wage gains above 3 percent, says Ethan Harris, co-head of global economics research at Bank of America Merrill Lynch (BAC). Wage growth has been closer to 2 percent, no higher than overall inflation. It’s possible, as the hawks worry, that wage pressure is building up unnoticed. But Yellen has said that a little bit of above-target wage growth is OK as long as the public continues to believe that inflation will remain low over the long term. For now, the slackers at the Fed are running the show.

Not that Businessweek is immune from spouting the conventional wisdom in the face of realities that fairly obviously contradict it on other occasions.

Tags: janet yellen, us economy

Financial reform and the too-big-to-fail problem

Paul Krugman discusses the benefits of Dodd-Frank, which he rates as a major accomplishment of the Obama Administration (Good News on Financial Reform 08/01/2014):

The two big achievements of the Obama administration are health reform and financial reform. (Maybe carbon regulation will be added to the list; stay tuned.) For the most part, however, neither has gotten much respect. I think this may finally be changing on health reform, as the evidence piles up for a dramatic improvement in coverage in states that didn't obstruct the law. But financial reform is still unloved, attacked by the right as anti-business and by the left as too weak to work.

He focuses in particular on one complaint against financial reform made by the Republicans. Dodd-Frank give clear authority to the federal government to put too-big-to-fail banks in receivership in situations like the 2008 crisis. One criticism is that it left large financial institutions in a position to gain financing at favorable rates because of their presumed too-big-to-fail status. Krugman observes that it doesn't seem to be working that way:

And if financial reform was a giveaway to the banks, why did Wall Street, which used to look relatively favorably on Democrats, turn overwhelmingly Republican after reform passed?

Still, you’d like some evidence. And GAO has the goods. There was indeed a large-bank funding advantage during and for some time after the crisis, but it has now been diminished or gone away — maybe even slightly reversed. That is, financial markets are now acting as if they believe that future bailouts won't be as favorable to fat cats as the bailouts of 2008.

This news is part of broader evidence that Dodd-Frank has actually done considerable good, on fronts from consumer protection to bank capitalization. Of course it should have been stronger ...

Tags: financial reform, us economy

The national deficit and deficit discourse in the US

Joseph Firestone, who writes under the nom de blog letsgetitdone, has some useful comments following up on Paul Krugman's post, The Deficit on the Milk Carton 02/12/2014, in which Krugman notes with wonderment and relief that the deficit seems to have suddenly disappeared for the moment as a topic of political debate:

You could say that this reflects the dwindling of the deficit — but that’s old news; anyone doing the math saw this coming quite a while ago. Or you could mention the failure of the often-predicted financial crisis to arrive — but after so many years of being wrong, why should a few months more have caused the deficit scolds to disappear in a puff of smoke?

Anyway, it's quite remarkable. And it's a good thing — although the price for years of warped discourse and completely wrong priorities has been immense.

Firestone comments in Dear Dr. Krugman: Please Let Me Explain FDL 02/13/2014:

Why indeed are they so quiet? Could it be because the deficit hawks have succeeded in getting the short-term result they want, which is a likely deficit too small to sustain the private savings and import desires of most Americans, and also because the political climate is such right now that they cannot make progress on their longer term entitlement-cutting program until after the coming elections have resolved the issue of whether there will be strong resistance to such a campaign if they renew it? Let’s look at the budget outlook first.

Here’s CBO projecting deficits of 3.0% of GDP this fiscal year, followed by 2.6%, 2.8%, and 2.9% for fiscals 2015, 2016, and 2017. Those deficits are mostly smaller than Warren Buffett’s and the Eurozone’s favorite deficit target of 3.0%. They are the same too small deficit targets that have prevented the Eurozone’s PIIGS [Portugal, Ireland, Italy, Greece, Spain] from responding effectively to the crash of 2008, and the prolonged depression and astronomical unemployment rates which have engulfed them since. When one considers that CBO’s projections are usually too conservative when it comes to projected deficits, so that the reality of these is likely to be smaller, as it has been regularly, for the past few years, then it’s even more apparent that Peter G. Peterson and his other austerian friends have gotten where they want to go for the time being.

But it's also because of a turn toward an economic narrative in the Democratic Party that is at least marginally more progressive than Obama's Grand Bargain deficit fetish, which Krugman has rightly criticized during Obama's Presidency.

In his January 28 State of the Union address, Obama mentioned the deficit four times. But he did focus his economic message on austerity.

It's important to remember the level of austerity the current budgets are imposing on the US, as Firestone mentions and about which Krugman also expresses concern.

Yet good news is good news. The less we hear the Democrats talking about The Deficit for now and the immediate future, the better. Because as Krugman says, "the price for years of warped discourse" focusing on the falsely imagined dangers of The Deficits "and completely wrong priorities has been immense."

Tags: austerity economics, us economy

NSA spying and the national security priesthood

Digby makes an important point in The political perils of the security state Hullabaloo 11/20/2013 about NSA spying, one so obvious that of course the Beltway Village normally cheerfully ignores it. She's refers to legendary FBI Director and cross-dresser J. Edgar Hoover's using information he had obtained to blackmail lawmakers, and notes:

The reason I bring this up is not to talk about politicians getting blow jobs, although that's always fun. It's because this story about the foibles of powerful people in Washington points up the fact that all this information "collection" can serve a very useful purpose for people inside the secret government if they choose to use it such ways. It's been done before and it can be done again. I don't care about the inner lives of politicians or their sexual proclivities. But no humans can live like humans under a microscope and I think it's quite clear that politicians are human. The ability to spy on people in powerful positions and use that information to manipulate the government has always been a problem. This "metadata collection" puts that danger on steroids.

The big question I have is why the politicians who so vociferously support these programs do so. It might be that they do it on principle. It might not be. [my emphasis]

If anyone thinks that a Liz Cheney wouldn't use NSA domestic spying information for reasons that have nothing at all to do with national security or preventing terrorism probably needs to spend some time searching the Internet on the name "Cheney."

Foreign policy über-Realist Stephen Walt raises another skeptical question about the current Bid Data version of massive spying - Big Spying? - in NSA Spying: Where's the Beef? Foreign Policy 11/04/2013:

As a realist, I'm neither surprised nor horrified to learn that governments spy on each other, or that a wealthy, powerful, self-important, and slightly paranoid country like the United States might ... ahem ... do a bit more of it than others. But this unthinking, unstrategic Hoovering of data, megadata, and actual conversations is obviously out of control, and the diplomatic and other costs could easily outstrip any putative benefits.

In particular, given our capacity and willingness to spy on virtually everyone, you'd think that American diplomats would be entering foreign policy contests and diplomatic negotiations with an enormous advantage over their counterparts. If we're as good at extracting private information from other countries' networks, cell phones, emails, and the like, you'd think U.S. officials would usually have a good idea of our antagonists' bottom line and would be really skilled at manipulating them to our advantage. We now know that the Allies in World War II got big strategic benefits from cracking German and Japanese codes; I want to know if we're getting similar benefits today.

It is hard to believe we are, given that America's foreign policy record since the end of the Cold War is mostly one of failure. And that leads me to suspect that one of two things is true. Either 1) the NSA is good at collecting gazilla-bytes of stuff but not very good at deciding what to collect or figuring out what it means, or 2) the rest of our foreign policy establishment is not very good at taking advantage of the information the NSA has worked so hard to acquire. In other words, either the NSA is not worth the money we're paying for it, or the rest of our foreign policy establishment is less competent than we thought. To be frank, I'm not sure which possibility I prefer.

But why don't we see more of our media establishment, even the liberal ones at MSNBC, actively questioning the lawlessness and the usefulness of the mass information dragnets the federal government is conducting?

One big reason is quasi-religious. Or maybe idolatrous in the Christian theological sense. Fred Kaplan did an excellent book years ago called The Wizards of Armageddon (1991), which told the story of the top nuclear strategists. Andrew Bacevich relying on Kaplan's book in The New American Militarism (2005), when he describes the historically important connection between the first-strike nuclear war advocates and the neocons of the 2000s who advocated preventive war against countries like Iraq and Iran. "Wizards" is an apt label because they conjured abstract ideas about nuclear war strategy as part of a select group of initiates with occult knowledge (occult=hidden).

Yanis Varoufakis in Being Greek and an Economist While Greece Burns: An intimate account – MGSA Keynote 2013 (blog link 11/16/2013) gets in touch with his inner Veblen and explains how this works in the case of economists:

Allow me to enlist Evans-Pritchard, the renowned British anthropologist, to explain more graphically how it is that economists lose not a smidgeon of their discursive power despite their pathetic incapacity to predict economic crises or, indeed, to say anything useful about really existing capitalism. In his study of the social dominance of the Azande priesthood, Evans-Pritchard asked a fascinating question: How did the priests and oracles retain their hold over the tribe’s imagination given that they consistently failed to predict or avert disasters? His explanation of the Azande's unshakeable belief in their oracles goes like this:

"Azande see as well as we that the failure of their oracle to prophesy truly calls for explanation, but so entangled are they in mystical notions that they must make use of them to account for failure. The contradiction between experience and one mystical notion is explained by reference to other mystical notions." [Evans-Pritchard, Witchcraft, Oracles and Magic among the Azande, 1937]

Possessing the occult knowledge of their profession with its arcane mathematical models, they get to be the ones who give the expert opinion on their own failures resulting from their own lack of understanding and, far too frequently, their lack of integrity:

Economics is not much different. Lacking a macroeconomics laboratory, when economists fail to predict some pivotal economic moment, which is always, for instance the Crash of 2008, that failure is accounted for by appealing to the same mystical economic notions which failed in the first place. Occasionally new notions are created in order to account for the failure of the earlier ones. And so predictive failure leads to more, not less, social power for the economists who are entrusted by society to offer scientific explanations of their ... failures.

A similar priesthood presides over national security matters, with a much greater claim to secret knowledge - bugging and recording a huge portion of the communications in the world - with all the aura of patriotism and their claims to protect us from The Terrorists and all other threats.

The fact that the national security priesthood fails repeatedly to detect threats typically has only limited effect on the prestige they enjoy, especially among the Very Serious People but also among the general public. But ordinary people are not quite so willing to accept endless wars and government lying as those who are well-compensated for doing so.

But there is a ceremonial and magical aspect to the rituals associated with the conventional economists and the theologians of national security that gives them credibility and authority far beyond rational evaluations of their actual accomplishments.

Tags: national security state, nsa spying, us economy

Robert Reich keeps plugging for sensible approaches

Whether President Obama will ever come around on this issue is by now far more than dubious. But Bob Reich keeps at it. In The Triumph of the Right 10/22/2013, he warns:

The real triumph of the right has come in shaping the national conversation around the size of government and the budget deficit – thereby diverting attention from what’s really going on: the increasing concentration of the nation’s income and wealth at the very top, while most Americans fall further and further behind.

Continuing cuts in the budget deficit – through the sequester or a deficit agreement — will only worsen this by reducing total demand for goods and services and by eliminating programs that hard-pressed Americans depend on.

The President and Democrats should re-frame the national conversation around widening inequality. They could start by demanding an increase in the minimum wage and a larger Earned Income Tax Credit. (The President doesn’t’ even have to wait for Congress to act. He can raise the minimum wage for government contractors through an executive order.)

But the commitment to deficit-reduction, even in a depression and a week recovery, seems to be heavily ingrained in today's Democrats. It needs to change.

I'm ready for the end of "Obamaism," i.e., conservative economics married with an obsessive pursuit of "bipartisanship" with the Republicans as though it were an end in itself.

Tags: austerity economics, us economy

Executive ideas for Obama to act like a Democrat

Bob Kuttner in Obama, the Economy and the Movement Huffington Post 08/04/2013 names some of the Executive powers President Obama could legitimately use to support liberal/progressive goals.

... the president has a great deal of executive power that he hasn't used. One example is the power to set the terms of government contracts.

During World War II, President Roosevelt denied war production contracts to any employer who tried to bust unions. In the 1960s, before there were the votes to pass civil rights legislation, Presidents Kennedy and Johnson issued executive orders requiring government contractors to end racial discrimination in hiring and promotion.

President Obama could issue orders requiring government contractors to pay decent wages and not to interfere with workers' legal right to unionize. And now that the Senate has finally confirmed his appointees to the National Labor Relations Board, the NLRB could take a much tougher stance against illegal union busting.

The president could stop proposing trade deals that make it easier for industry to outsource and to evade labor and environmental regulations by moving offshore. Social standards should be part of all trade deals.

As we've seen in the massive surveillance program, the new extremes in Executive Branch secrecy he's adopted and the drone wars, Obama is willing to embrace very expansive views of Presidential power.

If he isn't doing things like this that he could, it's because they don't fit into his basically conservative ideas of economic policy. He can't blame the Republicans in Congress for his inaction in areas like this where he can use Executive authority without Congressional approval.

Kuttner is right about the following:

What's needed is not just presidential rhetoric but a mass social movement to press for decent wages. The Occupy movement was a start, but it was a protest without a program. The movement for a $15 minimum wage is a protest connected to a politics. As it grows, this movement can create a tailwind for presidential leadership and isolate the Republicans as the party of privilege.

For three decades, this society has been dividing into haves and have-nots. Yet the struggles of ordinary people have been weirdly disconnected from our politics. Democrats express an economic populism when their backs are to the wall, but our Democratic presidents tend to get captured by economic elites.

But I see no possibility of Obama embracing this idea:

Obama, who tends to dislike partisanship, needs to become a better partisan in order to be a more effective president. He should make it even clearer what stands between us and a strong recovery -- Republican obstruction on the budget. He should send up legislation for much more substantial public investment, and then lead the attack on the obstructionist Republican House, Harry Truman style.

He can't seem to give even the most partisan of his speeches without stepping on his own messages with pious bromides about bipartisanship or lowering the deficit.

Tags: obama administration, us economy

Bob Kuttner says progressives should want Janet Yellen as Fed Chair - but shouldn't demand Obama appoint her?

Bob Kuttner has an informative column about why Janet Yellin would be a far more progressive and constructive Chair for the Fed that Larry Summers or some other loyal lackey of Wall Street: The Bungled Coronation of Larry Summers Huffington Post 07/28/2013.

But then he bizarrely turns around at the end and says that if progressives demand Yellin, that Obama might get mad and not appoint her and it would all be the fault of her supporters!

But these reversals do not necessarily mean that Yellen is the front-runner again. If Rubin, Summers and their allies run true to form, they will be frantically looking for a plausible woman candidate who is closer to Wall Street than Yellen. Obama may also react negatively to a public campaign to force him to make the Yellen appointment. His anti-Yellen advisers will be warning him that capitulating to this pressure will make him look weak.

One parallel that comes to mind was the campaign by liberals to press Obama to name Elizabeth Warren chair of the Consumer Financial Protection Bureau. In the end, the job went to someone as progressive as Warren, Richard Cordray, but not to Warren (who is better off and more influential in the senate). But, in general, campaigns to force a president to make a particular appointment face rough going.

What other possible women? There are really none as qualified and talented as Yellen, an economist who has served both as Vice Chair of the Fed Board of Governors and, before that, as president of the Federal Reserve Bank of San Francisco. One possible name is Laura Tyson, a widely respected economist who formerly headed the National Economic Council under Clinton, and who is close to both the Rubinites and to the liberals. However, Tyson since leaving government has joined several corporate boards including Morgan Stanley, and as a friend and supporter of Janet Yellen, she would be unlikely to stab Tyson in the back.

But as this drama continues to unfold, watch for leaks of other possible women candidates who are closer to Wall Street than Yellen. The issue here is not just that Yellen is female; it's that she is immensely talented, public-minded, and independent of Wall Street. It would be a shame if progressives succeeded in blocking Summers only to lose Yellen. [my emphasis]

Honestly, this just doesn't make jack for sense to me. Since left to his general conservative inclinations on matters economic, Obama would appoint a Wall Street stalwalt, and since Kuttner himself is saying that the campaign for Warren resulted in a better CFPB appointee that we would otherwise have expected, how can it be a bad thing from a progressive point of view for Democratic progressives to demand the Democratic President appoint a decent Fed Chair? Especially since the position has such high visibility in the business world?

That just sounds goofy to me. "It would be a shame if progressives succeeded in blocking Summers only to lose Yellen." It would be an even bigger shame if progressives assume that Obama will appoint a good Fed Chair without pressure from the base. Good grief!

Tags: federal reserve, obama administration, us economy

Stagflation as it really was

Good post by Paul Krugman on The Mythical 70s 05/19/2013. He gives a standard Keynesian definition of the "stagflation" phenomenon of the 1970s:

There was no deficit problem: government debt was low and stable or falling as a share of GDP during the 70s. Rising welfare rolls may have been a big political problem, but a runaway welfare state more broadly just wasn’t an issue — hey, these days right-wingers complaining about a nation of takers tend to use the low-dependency 70s as a baseline.

What we did have was a wage-price spiral: workers demanding large wage increases (those were the days when workers actually could make demands) because they expected lots of inflation, firms raising prices because of rising costs, all exacerbated by big oil shocks. It was mainly a case of self-fulfilling expectations, and the problem was to break the cycle.

So why did we need a terrible recession? Not to pay for our past sins, but simply as a way to cool the action. Someone — I’m pretty sure it was Martin Baily — described the inflation problem as being like what happens when everyone at a football game stands up to see the action better, and the result is that everyone is uncomfortable but nobody actually gets a better view. And the recession was, in effect, stopping the game until everyone was seated again.

He points out that the solution actually adopted - high interest rates imposed by Fed Chairman Paul Volcker which began under President Carter, who appointed him, and the deregulation and (domestic) austerity - didn't have completely admirable results, to put it mildly. "It worked on the inflation front, although some of the other myths about all that are just as false as the myths about the 1970s. No, America didn’t return to vigorous productivity growth — that didn’t happen until the mid-1990s."

Even Krugman is conventional enough to sidestep the Galbraithian option of wage and price controls as a tool to deal with the inflation of that time. Instead, he winds up giving a rather fatalistic picture of the options of the time:

Was there a better way? Ideally, we should have been able to get all the relevant parties in a room and say, look, this inflation has to stop; you workers, reduce your wage demands, you businesses, cancel your price increases, and for our part, we agree to stop printing money so the whole thing is over. That way, you’d get price stability without the recession. And in some small, cohesive countries that is more or less what happened. (Check out the Israeli stabilization of 1985).

But America wasn't like that, and the decision was made to do it the hard, brutal way. This was not a policy triumph! It was, in a way, a confession of despair.

People eagerly interpret the past in light of the present and often do so superficially. But it is important to try to remember what really happened.

Tags: paul krugman, stagflation, us economy

Businessweek's controversial cover and the real estate article it overhypes

Erik Loomis thinks the cover of the Bloomberg Businessweek print edition for 02/26 to 03-03/2013 looks like a racist caricature (The Past and the Future LGM 02/28/2013). I agree:

Matthew Yglesias also notes it in Businessweek Warns That Minorities May Be Buying Houses Again Slate 02/28/2013 and quotes a response from the magazine, which he characterizes as "a pretty categorical non-apology" apology, i.e., one in the form of, I apoogize if any of you silly people were offended. Yglesias follows up with a commentary on a further clarification from BW (The Context for Businessweek's Housing Cover Slate 02/28/2013), one which sounds like a stretch to me.

See also: Jason Linkins, Bloomberg Businessweek Goes Racist-Chic For Housing Bubble Cover Huffington Post 02/28/2013

It seems to me that Businessweek has been looking hard for a housing rebound for a while.

The online version of the article with the unpleasant cover is A Phoenix Housing Boom Forms, in Hint of U.S. Recovery by Susan Berfield 02/21/2013. The article doesn't quite match the hype of the cover blurb, "Flips. No-look bids. 300 percent returns. What could possibly go wrong?"

The report itself focuses on the housing recovery beginning in the Phoenix area after a severe downturn. For instance, Berfield reports on the homebuilding company PulteGroup, which is active in Phoenix:

Pulte is the largest homebuilder in the U.S. by market value and, like most builders, had a very good year. Its revenue was $4.8 billion in 2012, with a profit of $206 million. That’s well below the $1.4 billion it earned in 2005 but far above its $2.3 billion loss in 2007. Last year, Pulte was the best-performing stock in the Standard & Poor’s 500-stock index, nearly tripling in value. ...

Richard Dugas, the chief executive officer of Pulte, sees opportunities in "the Southwest, the Northeast, parts of California, Florida, Las Vegas. We’re optimistic." Nowhere is that optimism about a recovery more palpable than in Phoenix, which has always been as much a bellwether of national fortunes as a place to live. Tempered by painful memories of the bust, the area’s buyers, sellers, builders, and investors are coming back into the market warily—but they’re coming back.

Housing developers always see opportunities, so that's not exactly news. For PulteGroup, what the report describes is a slow comeback from a severe slump:

Pulte is much smaller than it was in 2005. During the downturn, the company laid off 80 percent of its workforce and built 66 percent fewer homes. Even among homebuilders, Pulte was known for its aggressive land purchases. "People would have said we were obsessed," says Dugas. Since 2005, Pulte has reduced the number of lots it controls from 380,000 to 120,000.

Berfield also reports that real estate sales people are optimistic about the Pheonix market. Wow, optimistic real estate agents, what a surprising phenomenon!

There are some signs of a modest housing recovery showing up in the national economic data. Jeanna Smialek reports in Krugman Says Fed Low Rates Key to Housing Rebound: Tom Keene Bloomberg News 02/15/2013. From Bloomberg Surveillance 02/15/2013:

But the new runaway housing bubble that the Businessweek cover picture and blurb would lead the unwary reader into believing was starting up isn't really in evidence in the article itself.

Tags: us economy, white racism

The SOTU and the economy

Paul Krugman was on UP With Chris Hayes on Sunday morning (yesterday), and he said that his highest hope for President Obama's State of the Union (aks, SOTU) message Tuesday, the highest he thought was realistic anyway, was that he doesn't mention The Deficit very much. The more we hear about the deficit in the SOTU, the bigger indication that is that Obama intends to press forward with austerity economics in the middle of a depression, austerity that is very likely to scuttle the weak, high-unemployment recovery currently under way.

In his column of 02/07/2013, Kick That Can New York Times, he emphasizes what a bad idea austerity economics is for the American economy right now:

Slashing government spending destroys jobs and causes the economy to shrink.

This really isn’t a debatable proposition at this point. The contractionary effects of fiscal austerity have been demonstrated by study after study and overwhelmingly confirmed by recent experience — for example, by the severe and continuing slump in Ireland, which was for a while touted as a shining example of responsible policy, or by the way the Cameron government’s turn to austerity derailed recovery in Britain.

Even Republicans admit, albeit selectively, that spending cuts hurt employment. Thus John McCain warned earlier this week that the defense cuts scheduled to happen under the budget sequester would cause the loss of a million jobs. It’s true that Republicans often seem to believe in "weaponized Keynesianism," a doctrine under which military spending, and only military spending, creates jobs. But that is, of course, nonsense. By talking about job losses from defense cuts, the G.O.P. has already conceded the principle of the thing.

Krugman in that piece talks about the salutary effects of monetary policy in earlier decades, a reminder that he has more faith in the usefulness of monetary policy than the more heterodox Keynesians tend to have.

But that's not an immediate concern in the current situation, with rates still up against the zero lower bound and therefore monetary policy having little it can even theoretically do right now.

Meanwhile, Beltway conventional wisdom, and even some academic economists, are still operating on bonehead economic assumptions that were discredited decades ago, as Mr. K explains in Still Say’s Law After All These Years 02/10/2013. Say's Law as Krugman defines it is "the proposition that income must be spent and hence that there can never be an overall deficiency of demand." Supply-side economics, the crackpot economic theory that was the theoretical justification for St. Reagan's huge tax cuts for the wealthy, was a variation on Say's Law. Krugman writes:

What's depressing about all this is that Say’s Law is a primitive fallacy – so primitive that Keynes has been accused of attacking a straw man. Yet this primitive fallacy, decisively refuted three quarters of a century ago, continues to play a central role in distorting economic discussion and crippling our policy response to depression.

Bad ideas can have real effects, especially when wealthy interests find them convenient in reinforcing their power.

Tags: austerity economics, us economy

US economic growth weak: austerity to the rescue?

Awesome. Faced with continuing weakness in the economy, President and Obama are debating on how much to try to reduce the federal deficit. The deficit that will continue in any case so long as we have a trade deficit and private investment is lower than private income.

Bloomberg Businessweek reports the GDP news in an upbeat tone: Despite a Lousy GDP Report, U.S. Economy is Primed to Expand by Matthew Philips 01/30/2013. The official release from the Commerce Department's Bureau of Economic Analysis (National Income and Product Accounts: Gross Domestic Product, 4th quarter and annual 2012 (advance estimate)) says:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent.

The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency... The "second" estimate for the fourth quarter, based on more complete data, will be released on February 28, 2013.

The decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased. [my emphasis]

Philips reports:

The biggest shocker is the 22 percent decline in defense spending. According to Neil Dutta, head U.S. economist at Renaissance Macro Research, there have been only seven quarters since 1947 in which defense spending fell that far. That makes it a 3-in-100 event, he wrote in a note on Wednesday. Again, just like business inventories, this is an example of spending being pulled forward—probably for fear over federal budget sequestration—and thereby stealing from future growth. During the third quarter, defense spending jumped by 13 percent. Back in October, BNP Paribas chief economist Julia Coronado likened that surge to a “use it or lose” mentality within the Pentagon. Looks like they just used it before October: After surging from $807 billion to $834 billion in the third quarter, the annual rate of defense spending crashed to $787 billion in the fourth quarter.

Now the good news. While businesses were cutting back on inventory spending, total business investment surged by 12.5 percent as companies spent on capital goods such as computers and trucks and machinery. That’s very good news, especially for a recently beleaguered manufacturing sector.

Federal spending goes down - defense spending in this case - and it's a drag on the economy. Just like in Britain, Greece, Ireland, Italy, Portugal and Spain, with Germany and France undertaking the same sort of approach. Who would have guessed?

Philips writes of the last several months, "it’s not surprising that growth and spending have been so choppy. Also, this is the kind of growth [i.e., apparently flatlining at the moment] that happens when you shrink government. Total spending by the federal government fell by 15 percent. Given such a dramatic decline, it can be considered heartening that the private sector was able to pick up so much of the slack." (my emphasis)

Dean Baker's reflection on the Clinton deficit-fighting era and the Austerian myth that has grown up around it among Democrats is timely, Deficit Delusions: Putting to Rest the Clinton Legacy FDL 01/29/2013. He notes of the post-Clinton years:

Note that the budget would have shifted from surpluses to deficits in 2002 even if there had been no tax cuts and no increase in military spending associated with the wars in Afghanistan or Iraq. While neither of these may have been good uses of public money, they did not cause the deficit. The downturn following the collapse of the stock bubble led to the deficits in 2002-2005.

The additional deficits caused by wars and tax cuts were actually a positive for the economy in these years. From an economic standpoint there would have been much better uses of this money, but this spending did help to boost the economy at a point where it desperately needed a lift. While the Fed was not quite at the zero bound in terms of its monetary policy, it had lowered the federal funds rate to 1.0 percent by the summer of 2002. [my emphasis]

The Democrats really, really need to get over their deficit fixation. Even though that will give David "Bobo" Brooks a big sad.

Tags: us economy

A good, accessible piece on the trade deficit and budget deficits

Dean Baker in Has Anyone Heard of the Trade Deficit? Beat the Press 01/12/2013 gives a good, brief explanation of the relationship of the trade deficit to domestic deficits and savings:

Fans of arithmetic (a tiny minority among DC policy types) like to point out that a large trade deficit implies negative national savings. In other words, if we have a trade deficit then by definition the United States as a whole has a negative saving rate.

This means that we either must have budget deficits (negative public savings) or negative private savings, or both. There is no way around this fact. There is now a holy jihad in progress against the budget deficit in Washington, which means that all right thinking people don't want to our negative national savings to mean negative public saving.

The implication would then be that we want negative private saving. This could come through an investment boom, but only believers in Santa Claus think that investment is likely to expand much as a share of GDP. It is not easy to produce large increases in investment and we never have in the whole post-war period. So even though Serious People in Washington might talk about some huge uptick in investment, serious people don't believe it.

This is an accounting identity that reflects what happens in the real world. For a country, the trade surplus/deficit equals the sum of private and public surpluses/deficits. In a post from 2011, National Income Accounting for the Washington Post and Robert Samuelson 08/25/2011 he gives a wonkier explanation.

This is a major factor that is missing from most of the political discussion on the federal deficit. Because a lot of the Very Serious People appear clueless about it.

Tags: trade deficit, us economy