Mitt Romney is surging. With a decisive, although completely expected, win in the Nevada caucuses, Romney has 2 in a row. Rick Santorum has clearly faded from serious contention, finishing a distant 4th in the race with a projected 11% of the vote (all votes were not in and counted as of this writing, so it could shift still.) Ron Paul, as he always does, continues to outperform in caucus states, taking 18% of the vote in Nevada, but there is no conceivable map to him securing the nomination, although he will continue to make noise and try to pick off delegates where he can to support his cause of libertarian freedom.
And then there is Newt. Defiant to the last, Newt held a press conference last night in lieu of a rally and continued to talk smack about Romney, essentially saying that there is no real choice in November if Romney is the nominee. He has pledged to stay in the race until the end, regardless of the outcome.
The rest of the calendar for the month is somewhat quiet until the end. We will see caucuses in Colorado and Minnesota on Tuesday, as well as a primary in Missouri which doesn't count (delegates are awarded in a March caucus - I'm not even sure all the candidates are on the ballot.) Then Maine next week, then over a two week break until the bigger paydays of Arizona and Michigan.
After a Washington Caucus March 3rd, then, the real big prize, Super Tuesday, takes place on March 6th, with Alaska, Georgia, Idaho, Massachusetts, North Dakota, Ohio, Oklahoma, Tennessee, Vermont and Virginia all holding events on the same day.
The conventional wisdom is that Newt Gingrich will try to survive until Super Tuesday, since he seems very unlikely, given the demographics, to win any of the races in between. But even on Super Tuesday, while he seems sure to take Georgia and will have a good shot in Oklahoma, Tennessee and Virginia, it seems extremely hard for him to construct a map that gives him a lead coming out of Super Tuesday.
But the nature of delegate awards works to Gingrich's advantage to stay around and make hay, even if he ultimately loses.
You see, it takes 1,144 delegates to win a majority of the 2,286 that will attend the Republican convention in Tampa including 168 party leaders and 2,118 that are awarded in the 50 primaries and caucuses over the winding primary season.
To date, because of a series of penalties to almost all of the early states except Iowa for violating party rules around the timing of their contests, only 140 have been awarded - and of those 140, Mitt Romney has only won 72 (this number will probably increase by a few when the final count is in from Nevada.)
Between now and Super Tuesday, the intervening contests will award another 202. Then, on Super Tuesday, an additional 437 will be awarded.
So, while the next few weeks will award more delegates than the first 5 contests to dates and Super Tuesday will award more delegates than all contests prior to it, at the end of the night on March 6th, there will still have only been 779 awarded, a mere 37% of the ones to be awarded in primaries and caucuses and far fewer than needed to lock up a nomination.
So Mitt Romney will have to solider on...and hopefully develop some better talking points than not being concerned about the poor.
If the Economy Soars, It's 1996 All Over Again
Since his first two years in office, the question on the table of political pundits has been which other Presidency the Presidency of Barack Obama will resemble at re-election: Jimmy Carter or Bill Clinton.
Both Carter and Clinton were swept into office as outsiders at a time when the economy was sputtering and people were looking for change. Both made significant policy changes versus their Republican predecessors. And both faced public backlash for changing too much too fast, losing many seats in the mid-term elections - in 1978 for Carter and in 1994 for Clinton.
Obviously, despite the parallels in their first two years, Carter and Clinton's arc diverged widely by re-election night. In 1980, Carter was destroyed, receiving less than 45% of the two-party vote and only 41% of the vote overall (Independent John Anderson explains the difference) and lost 44 states.
In 1996, Bill Clinton was resoundingly re-elected, with the least competitive Republican showing since Barry Goldwater, garnering almost 55% of the two-party vote (50% of the vote overall, due to Ross Perot's second independent run) and winning 379 electoral votes in 30 states.
The difference between Carter and Clinton was the arc of the economy headed into the election. The Carter era economy was still stagnant, with inflation still destroying savings and a high degree of national pessimism. The economy was booming under Clinton, with the effects of the 1990/91 recession, caused by the savings & loan busts, long gone, the budget on its way to balance and unemployment falling fast.
Obama will not be at either extreme. The economy will not be as bad as in 1980, nor as good as in 1996. But how the economy does between now and November will have a profound impact on the President's re-election chances.
And on that front there is good news. On Friday, the Bureau of Labor Statistics reported far better jobs news than expected, with official unemployment falling to 8.3%, it's lowest level in over 2 years and job creation was a net positive 243,000, the best result in 3 years and made even better by the fact that private sector job growth was actually 257,000, with a 14,000 reduction in government employment offsetting this to produce the total number.
It's one month, but it's a data point that confirms a trend - the economy is healing. Job growth has been positive for almost two years now and has been accelerating. Unemployment peaked at 10.0% in October of 2009 and has been falling since.
Lots of macroeconomic events could reverse the trend - the European debt crisis could torpedo the world economy. Political conflict in the Middle East could cause a big spike in oil and therefore other commodities. So an improved economy in November is not a lock, but now appears highly likely.
In addition to the economy always being the most important issue in a Presidential election, it is doubly true this time as the GOP really has precious little else to run against Obama on.
Foreign policy? Would you want to make this the issue against the guy who got Bin Laden, killed a dozen top Al Qaeda leaders, got Qaddafi, exited an unpopular war in Iraq with dignity and is drawing down from an unpopular war in Afghanistan? Good luck.
Social policy? Obama is to the right of the American people on many social issues. A narrow majority of Americans now favor legalizing gay marriage and legalizing marijuana (views to the left of the President) and a large majority continues to favor legal abortion. Social issues may play well in a Republican primary, but running to the right of a President is a loser in a general election.
Health care? If someone other than Mitt Romney were the nominee, this might play, as a majority still opposes Obamacare. But Romney doesn't have a leg to stand on in this debate as he continues to do the tap-dance that his plan in Massachusetts, which, despite the protestations from Ann Coulter, obviously is nearly identical to Obamacare (and the model for it in many ways), was great for Massachusetts, but horrible for the rest of the country, he is just engaged in a debate he can't win.
That leaves the economy. If it continues to improve, Obama is a lock for a second term. If it falters, it might give Mitt an opening.
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Showing posts with label Economic Recovery. Show all posts
Showing posts with label Economic Recovery. Show all posts
Sunday, February 5, 2012
Monday, January 17, 2011
A Real Discussion About the Economy, Obama the Comeback Kid?
Note: While much media attention has been paid to the aftermath of the shootings in Tucson over the past week, I do not intend to devote further digital ink to the topic unless issues of policy warrant further discussion. I do not consider the shootings or their aftermath a political issue and condemn unequivocally those on both sides of the aisle who have attempted to make it one. My thoughts are with the victims of the shooting and may Jared Loughner rot in hell.
Our Long Term Economic Future? Look to Our Infrastructure, Science and Education
In the sound-bite world of politics, serious economic discussion rarely takes place. Democrats speak of the need for government intervention to stabilize the economy and get Americans back to work. Republicans talk of the need to reduce government intrusion into private industry and let capitalism drive growth. Both sides largely miss the point most of the time.
Truth be told government intervention is neither inherently bad nor inherently good for an economy. It all depends on the nature of the investment.
Let's start by understanding what drives long-term economic growth. The size of an economy is determined by its Gross Domestic Product, the value of goods and service produced by that country. This is the all-important figure. It determines the value of goods and services that can be divided up amongst the citizens of the country. It is the measure of the wealth of a nation.
So what generates GDP? The simple way that I like to break down the equation is as follows:
GDP = Productivity * # of Workers * # of Hours Worked per Worker
Productivity is the value of what the average worker produces in one hour of work.
But GDP itself is not terribly instructive. The GDP of China exceeds the GDP of both Japan and Germany at this point. But no sane person that has visited all 3 places would call the average Chinese person more wealthy than the average person in Japan or Germany...it isn't even close. The reason China's GDP is so much larger is simply because it has so many more people, simply from the equation above, there are more workers even though the workers are less productive.
So to estimate how the average American is doing, or the average Chinese person or wherever, we usually use a term called Per Capita GDP, which is simply total GDP divided by the size of the population. This gives a good proxy for the average wealth of a citizen within each country. This changes our equation slightly:
Per Capita GDP = Productivity * Workforce Participation Rate * # of Hours Worked per Worker
So how wealthy the average person in country is can be described by three factors, how productive the workforce is, what proportion of the population works and how many hours each worker works.
So let's talk about how we "grow the pie" and increase Per Capita GDP.
In a typical recession, the last two terms of the equation shrink significantly...that is, you have a lot less people participating in the workforce and a lot less hours worked because you have a lot of unemployed and underemployed individuals. This can hurt. Workforce participation has dropped by over 5% in this recession and hours worked by at least 2%. This leaves a 7% hole in our wealth from where we started.
This is why, in times of recession, politicians spend a lot of time talking about getting people back to work. But the truth is, while this is an important short-term issue, simply employing more people will not spur long-term per capita GDP growth.
The reason is simple -- we hit the practical maximum pretty quickly. The unemployment rate in the US is presently 9.4%. Employing every single unemployed person (a feat that is not practical as unemployment rarely goes below 5% and never falls below 2%) would grow the economy only 10%.
Similarly, increasing hours hits a practical maximum pretty quickly. Hours could increase some now as people who have been forced into part-time work resume full-time work. But returning to pre-recession levels would only increase hours by 2%. Beyond that, who wants to start working 80 or 90 hour weeks routinely? That might spur economic growth, but we'd never be off work to enjoy our wealth. If anything, the social trend is in the opposite direction, with the generation presently coming of age preferring less work at lower pay rather than more work at higher pay.
So taking the last two terms of the Per Capita GDP equation to their practical maximum might yield 10% or even 12% growth if you really stretch it. That is about 2 to 3 years worth of growth in a healthy economy. Then what?
The answer lies in the first term of the equation - productivity. Unemployment and hours trend up and down with financial cycles, but productivity growth is the engine of long-term wealth generation.
So what influences productivity? A lot of things obviously influence how productive various workers in various industries are, but I believe that almost all of those factors can be distilled down to three basic categories:
Infrastructure, Education and Science
Think about what makes you productive in a job. If you are a truck driver, having efficient roads and bridges do. If you are an office worker, productivity tools such as the internet do. Your knowledge and skills, gained through education, most certainly do.
Also think about the game-changers of the past century in the economy and in society. The television. The internet. The microwave oven. Modern plastics. The GPS. You know what these things have in common? They were all technological game-changers that remade the economy and society. And they were all commercializations of basic scientific research carried out by the federal government.
Think about where the country would be without the Eisenhower Interstate System. How about without airports in major metropolitan centers? How about without a universal power grid? All infrastructure investments by the federal government (sometimes in cooperation with state governments.)
Now...think where our economy would be if there were no public schools. I imagine our workers wouldn't be the most productive in the world, as they are now.
Now, think about the major scientific, infrastructure and educational investments the government is making today and how they will spur the growth of tomorrow? NASA? Cut way back. Basic research investment? Its lowest level in decades. Infrastructure spending? Our power grid, air traffic control system and interstate were built in the 1950s. And China has better mass transit infrastructure than we do, to say nothing of Europe.
Education? Subsidies to public universities are falling across the country. Primary and secondary schools are getting squeezed as states and localities face budget shortfalls.
The real debate that we need to be having about the economy is how we can free up funds to invest in infrastructure, science and education. It isn't about the size of government, it's about WHAT it does. The federal government did a world of good in the 1940s and 1950s to set-up 6 decades of prosperity, despite facing down a massive debt following the end of World War 2. I would hope our politicians would look for ways to do the same.
Obama - On the Comeback Trail?
I will publish a full update next week, but President Obama's numbers have moved back to being solidly positive (that is, his approval minus disapproval is significantly greater than 0) for the first time in several months. The spin in the media is that this is due to the lame duck Congress and its productivity.
While I'd like to believe that the American public is rewarding bi-partisanship and is happy about the end of Don't Ask, Don't Tell and a nuclear arms treaty with Russia, as I said before, I find it hard to believe that they a. have been paying close attention and b. care much how many warheads Russia is going to reduce over the next decade.
A far more plausible scenario, in my mind, is that, as it usually is, this is all about the economy. Unemployment is finally starting to fall, the economy has been growing for some time, those who stuck with their investments through the crash are close to being back to even (those who sold at the bottom out of fear have no one to blame but themselves) and fear and panic have been replaced by some combination of hope and greed. In other words, the economy is in full recovery. An economic recoveries lead to popular Presidents.
The link below shows the study I've been promising to link to that demonstrates just how strongly economic conditions dictate results. The incumbent party does well when incomes are growing, poorly when they are not.
The Washington Post article highlighting this study is located here.
All told, if income growth in the election year is 1.5% or greater, the incumbent party generally wins, otherwise they generally lose. You can see that the predictive powers aren't perfect: an incredibly popular former General named Dwight Eisenhower caused the GOP to outperform in 1952 and seize the Presidency from Truman's Dems. The incredible unpopularity of the Vietnam War sank the Democrats in 1968, despite economic conditions at the time (it was so bad, LBJ didn't even bother running for re-election.) A charismatic Bill Clinton dramatically outperformed in 1996 against a lackluster Bob Dole. 2000, while technically correct (Gore indisputably won the popular vote), was a bit of an outlier in terms of the electoral outcome.
But most races are pretty tight to the line. Barry Goldwater's awful campaign in 1964? Turns out he finished right about where he should have, given the economic prosperity. The Reagan Democrat coalition in 1980 and 1984 that supposedly changed the political equation? Turns out he finished right about where he should have both years. John Kerry's 2004 disaster? Right on the line. Obama's Hope and Change in 2008? Right where it should be.
The point is that much as we like to think every election cycle is unique, the odds are that 2012 will play out somewhere close to the line as well. Which means that if incomes grow 1.5% or more in 2012, Barack Obama will likely win a second term. If they don't increase by that much, he will likely lose. If I'm the President, given the track of the recovery, I feel pretty good about that line.
If you like this site, tell your friends.
Our Long Term Economic Future? Look to Our Infrastructure, Science and Education
In the sound-bite world of politics, serious economic discussion rarely takes place. Democrats speak of the need for government intervention to stabilize the economy and get Americans back to work. Republicans talk of the need to reduce government intrusion into private industry and let capitalism drive growth. Both sides largely miss the point most of the time.
Truth be told government intervention is neither inherently bad nor inherently good for an economy. It all depends on the nature of the investment.
Let's start by understanding what drives long-term economic growth. The size of an economy is determined by its Gross Domestic Product, the value of goods and service produced by that country. This is the all-important figure. It determines the value of goods and services that can be divided up amongst the citizens of the country. It is the measure of the wealth of a nation.
So what generates GDP? The simple way that I like to break down the equation is as follows:
GDP = Productivity * # of Workers * # of Hours Worked per Worker
Productivity is the value of what the average worker produces in one hour of work.
But GDP itself is not terribly instructive. The GDP of China exceeds the GDP of both Japan and Germany at this point. But no sane person that has visited all 3 places would call the average Chinese person more wealthy than the average person in Japan or Germany...it isn't even close. The reason China's GDP is so much larger is simply because it has so many more people, simply from the equation above, there are more workers even though the workers are less productive.
So to estimate how the average American is doing, or the average Chinese person or wherever, we usually use a term called Per Capita GDP, which is simply total GDP divided by the size of the population. This gives a good proxy for the average wealth of a citizen within each country. This changes our equation slightly:
Per Capita GDP = Productivity * Workforce Participation Rate * # of Hours Worked per Worker
So how wealthy the average person in country is can be described by three factors, how productive the workforce is, what proportion of the population works and how many hours each worker works.
So let's talk about how we "grow the pie" and increase Per Capita GDP.
In a typical recession, the last two terms of the equation shrink significantly...that is, you have a lot less people participating in the workforce and a lot less hours worked because you have a lot of unemployed and underemployed individuals. This can hurt. Workforce participation has dropped by over 5% in this recession and hours worked by at least 2%. This leaves a 7% hole in our wealth from where we started.
This is why, in times of recession, politicians spend a lot of time talking about getting people back to work. But the truth is, while this is an important short-term issue, simply employing more people will not spur long-term per capita GDP growth.
The reason is simple -- we hit the practical maximum pretty quickly. The unemployment rate in the US is presently 9.4%. Employing every single unemployed person (a feat that is not practical as unemployment rarely goes below 5% and never falls below 2%) would grow the economy only 10%.
Similarly, increasing hours hits a practical maximum pretty quickly. Hours could increase some now as people who have been forced into part-time work resume full-time work. But returning to pre-recession levels would only increase hours by 2%. Beyond that, who wants to start working 80 or 90 hour weeks routinely? That might spur economic growth, but we'd never be off work to enjoy our wealth. If anything, the social trend is in the opposite direction, with the generation presently coming of age preferring less work at lower pay rather than more work at higher pay.
So taking the last two terms of the Per Capita GDP equation to their practical maximum might yield 10% or even 12% growth if you really stretch it. That is about 2 to 3 years worth of growth in a healthy economy. Then what?
The answer lies in the first term of the equation - productivity. Unemployment and hours trend up and down with financial cycles, but productivity growth is the engine of long-term wealth generation.
So what influences productivity? A lot of things obviously influence how productive various workers in various industries are, but I believe that almost all of those factors can be distilled down to three basic categories:
Infrastructure, Education and Science
Think about what makes you productive in a job. If you are a truck driver, having efficient roads and bridges do. If you are an office worker, productivity tools such as the internet do. Your knowledge and skills, gained through education, most certainly do.
Also think about the game-changers of the past century in the economy and in society. The television. The internet. The microwave oven. Modern plastics. The GPS. You know what these things have in common? They were all technological game-changers that remade the economy and society. And they were all commercializations of basic scientific research carried out by the federal government.
Think about where the country would be without the Eisenhower Interstate System. How about without airports in major metropolitan centers? How about without a universal power grid? All infrastructure investments by the federal government (sometimes in cooperation with state governments.)
Now...think where our economy would be if there were no public schools. I imagine our workers wouldn't be the most productive in the world, as they are now.
Now, think about the major scientific, infrastructure and educational investments the government is making today and how they will spur the growth of tomorrow? NASA? Cut way back. Basic research investment? Its lowest level in decades. Infrastructure spending? Our power grid, air traffic control system and interstate were built in the 1950s. And China has better mass transit infrastructure than we do, to say nothing of Europe.
Education? Subsidies to public universities are falling across the country. Primary and secondary schools are getting squeezed as states and localities face budget shortfalls.
The real debate that we need to be having about the economy is how we can free up funds to invest in infrastructure, science and education. It isn't about the size of government, it's about WHAT it does. The federal government did a world of good in the 1940s and 1950s to set-up 6 decades of prosperity, despite facing down a massive debt following the end of World War 2. I would hope our politicians would look for ways to do the same.
Obama - On the Comeback Trail?
I will publish a full update next week, but President Obama's numbers have moved back to being solidly positive (that is, his approval minus disapproval is significantly greater than 0) for the first time in several months. The spin in the media is that this is due to the lame duck Congress and its productivity.
While I'd like to believe that the American public is rewarding bi-partisanship and is happy about the end of Don't Ask, Don't Tell and a nuclear arms treaty with Russia, as I said before, I find it hard to believe that they a. have been paying close attention and b. care much how many warheads Russia is going to reduce over the next decade.
A far more plausible scenario, in my mind, is that, as it usually is, this is all about the economy. Unemployment is finally starting to fall, the economy has been growing for some time, those who stuck with their investments through the crash are close to being back to even (those who sold at the bottom out of fear have no one to blame but themselves) and fear and panic have been replaced by some combination of hope and greed. In other words, the economy is in full recovery. An economic recoveries lead to popular Presidents.
The link below shows the study I've been promising to link to that demonstrates just how strongly economic conditions dictate results. The incumbent party does well when incomes are growing, poorly when they are not.
The Washington Post article highlighting this study is located here.
All told, if income growth in the election year is 1.5% or greater, the incumbent party generally wins, otherwise they generally lose. You can see that the predictive powers aren't perfect: an incredibly popular former General named Dwight Eisenhower caused the GOP to outperform in 1952 and seize the Presidency from Truman's Dems. The incredible unpopularity of the Vietnam War sank the Democrats in 1968, despite economic conditions at the time (it was so bad, LBJ didn't even bother running for re-election.) A charismatic Bill Clinton dramatically outperformed in 1996 against a lackluster Bob Dole. 2000, while technically correct (Gore indisputably won the popular vote), was a bit of an outlier in terms of the electoral outcome.
But most races are pretty tight to the line. Barry Goldwater's awful campaign in 1964? Turns out he finished right about where he should have, given the economic prosperity. The Reagan Democrat coalition in 1980 and 1984 that supposedly changed the political equation? Turns out he finished right about where he should have both years. John Kerry's 2004 disaster? Right on the line. Obama's Hope and Change in 2008? Right where it should be.
The point is that much as we like to think every election cycle is unique, the odds are that 2012 will play out somewhere close to the line as well. Which means that if incomes grow 1.5% or more in 2012, Barack Obama will likely win a second term. If they don't increase by that much, he will likely lose. If I'm the President, given the track of the recovery, I feel pretty good about that line.
If you like this site, tell your friends.
Saturday, January 30, 2010
5.7% Economic Growth and What It Means, Time to Watch Wisconsin?
The Recovery Becomes Official, What's Next?
The Bureau of Economic Analysis on Friday released it's quarterly report on the performance of the United States Gross Domestic product, which included the preliminary estimate of economic growth in the 4th quarter of 2009. The US Economy grew at an annualized rate of 5.7% in the 4th quarter of 2009, the fastest rate in over 6 years. This, following the revised 2.2% growth rate for the third quarter of 2009, marks two consecutive quarters of positive economic growth. For all intents and purposes, we can declare that the "Great Recession" ended in the summer or fall of 2009, although an official pronouncement won't be made until long after the fact.
So what exactly does this mean and how does this jive with the current 10.0% unemployment rate and the even more scary "underemployment rate" which counts those who are unemployed, those who are no longer classified as unemployment because they have given up looking for work and those who are working part-time but are seeking full-time work, of 18.3%?
First, let's take a step back and remember what these numbers mean.
The Gross Domestic Product of the United States is the value of all goods and services produced in the United States within a year. This is a very important bottom-line economic number as the the value of all the goods and services produced directly correlates to the standard of living people have as all goods and services produced here are either consumed here or exported, with the value of the exports used to buy other goods. A very good metric for the overall standard of living in a country is its Per Capita GDP, that is the Gross Domestic Product divided by the population. This is how many goods and services the average person can expect to receive. This explanation is a little over-simplified, but generally true.
The US population is not static. It is growing at a rate of about 2% per year. Therefore, the GDP has to grow at a rate of 2% per year just to maintain the existing standard of living. When growth falls below 2%, even if it does not go negative, living standards decline. When it exceeds 2%, living standards increase.
The chart below shows the quarterly GDP growth rates since 2007. The green line is the actual GDP growth rate. The blue line is the "gap to 2%", that is the amount by which the standard of living in the United States is below where it was before the recession started.
There are two key lessons that I believe that you can glean from this graph.
(1) Economic performance under President Obama has been remarkable good
It's an odd thing to say with unemployment extremely high, but if you look at the growth curve, the economy was in utter free-fall in the 4th quarter of 2008 (before the President took office) and in the 1st quarter of 2009 (after the President took office, but before any reasonable impact from his economic policies could take effect.)
Of course, giving him full credit for the recovery would be silly. The actions to stabilize the financial system taken by the Bush administration in its last days, as lacking as they may have been in terms of proper accountability, was critical in preventing an even greater slide. The natural economic cycle obviously also plays into this -- economies go up and down to a certain extent irrespective of government policy. The Fed has also been critical, slashing interest rates to their lowest levels ever and providing large amounts of liquidity by taking on a large balance sheet.
Still, it's hard to deny the impact of President Obama's policies. Cash for Clunkers and the First Time Homebuyer credit spurred auto sales and arrested the free fall of home prices. Tax credits stabilized consumer spending. Infrastructure spending spurred construction employment, albeit not at a fast enough pace.
The bottom line is, in just three quarters, the rate of economic growth went from a pace of 6.4% contraction to a pace of 5.7% growth, over a 12% swing.
(2) How Far We Still Have to Go
If you look at the gap to 2% growth, the economy is still 5.8% smaller than it needs to be just to restore the standard of living prior to the recession. That may not sound like a lot relative to a 5.7% growth rate, but it is. Let me explain.
Keep in mind that going forward, the economy will continue to have to grow at 2% just to hold its ground, so a year of 5.8% growth wouldn't restore the standard, it would require a year of 7.8% growth, 5.8% to fill the hole and 2.0% to account for population growth. Nobody thinks 7.8% growth is going to happen.
So, based on more realistic scenarios, how long before we get back to where we were?
At 5% growth, it would take 2 years to get back to where we were at the start of the recession -- in other words we wouldn't be back to where we were until the end of 2011.
At 4% growth, it would take 3 years, or the end of 2012.
At 3% growth, it would take 5.75 years, or the fall of 2015.
And the 5.7% growth number includes a lot of inventory recovery - businesses restocking inventories following holding them at historic lows during the recession, growth that is not repeatable. 4% is probably a pretty rosy scenario. Which means that we are going to see elevated unemployment for some time to come.
So, in the end, the news is good, but we have a long way to go. The Fed will have to balance growth with controlling inflation and will ultimately need to increase interest rates to more normal levels if economic growth continues. There is still anxiety and depressed consumer spending thanks to high unemployment. But it's hard not to feel a lot better than we did a year or nine months ago.
Stimulus Spending and the Proposed "Jobs Bill"
The latest government report shows that stimulus money continues to slowly go out the door. The latest figures:
Tax Cuts: $92.8 billion spent out of $288 billion (32.2%)
Spending: $195.6 billion spent out of $499 billion (39.2%)
Total: $288.4 billion spent out of $787 billion (36.6%)
Given that 63.4% of the stimulus money remains unspent, why is President Obama saying that a "jobs bill", also known to those of us paying attention, as another stimulus bill, should be the top priority of congress this year?
Clearly part of it is political, the President is trying to pivot to an economic focus after the bloody fight over health care sapped his public approval. This is understandable. The Democrats want to be seen as doing something with people still hurting under the scourge of unemployment.
But authorizing more spending may not be the best course to chart. The best course is probably to focus on effectively deploying the almost half a trillion dollar already available under the stimulus package, working to close out TARP and collect remaining outstanding loans to the financial services industry, chart a course back to private enterprise for GM, which may well earn a profit this year and chart a plan to deficit reduction that will prevent future economic growth from being impaired by massive amounts of investment capital being absorbed through government bonds.
That work isn't as sexy, but is probably what is needed. Hopefully that will all happen in the background. But we are probably going to get at least a token jobs bill in the meantime.
Feingold at Risk?
A theoretical Rasmussen poll matching incumbent Senator Russ Feingold (D-WI) against popular former Republican Governor and former Secretary of Health and Human Services Tommy Thompson, shows Thompson leading Feingold by 3%. This is a theoretical poll as Thompson has not indicated that he is going to run. Still, it is a worrisome number for Feingold, as it shows that he IS vulnerable this November. It is enough to move Wisconsin from a Likely Democratic Hold to a Lean Democratic Hold.
Other polls released this week showed the GOP continuing to lead in North Carolina and the DEM's continuing to lead in California, but neither was significant enough to move the rating of the races, which were both already listed as leaning in those respective directions.
The GOP is slowly chipping into one Democratic seat after another. Is this just a low point for the DEM's and will the ultimately recover or hold on and win Wisconsin, Indiana, California, New York, Pennsylvania, etc.? Or is this the start of a GOP November rout, where the GOP finds an improbable way to secure 10 seats and control of the Senate.
No one can know at this point. We'll see what the polls do in the next few days in the aftermath of the State of the Union speech.
If you like this site, tell your friends.
The Bureau of Economic Analysis on Friday released it's quarterly report on the performance of the United States Gross Domestic product, which included the preliminary estimate of economic growth in the 4th quarter of 2009. The US Economy grew at an annualized rate of 5.7% in the 4th quarter of 2009, the fastest rate in over 6 years. This, following the revised 2.2% growth rate for the third quarter of 2009, marks two consecutive quarters of positive economic growth. For all intents and purposes, we can declare that the "Great Recession" ended in the summer or fall of 2009, although an official pronouncement won't be made until long after the fact.
So what exactly does this mean and how does this jive with the current 10.0% unemployment rate and the even more scary "underemployment rate" which counts those who are unemployed, those who are no longer classified as unemployment because they have given up looking for work and those who are working part-time but are seeking full-time work, of 18.3%?
First, let's take a step back and remember what these numbers mean.
The Gross Domestic Product of the United States is the value of all goods and services produced in the United States within a year. This is a very important bottom-line economic number as the the value of all the goods and services produced directly correlates to the standard of living people have as all goods and services produced here are either consumed here or exported, with the value of the exports used to buy other goods. A very good metric for the overall standard of living in a country is its Per Capita GDP, that is the Gross Domestic Product divided by the population. This is how many goods and services the average person can expect to receive. This explanation is a little over-simplified, but generally true.
The US population is not static. It is growing at a rate of about 2% per year. Therefore, the GDP has to grow at a rate of 2% per year just to maintain the existing standard of living. When growth falls below 2%, even if it does not go negative, living standards decline. When it exceeds 2%, living standards increase.
The chart below shows the quarterly GDP growth rates since 2007. The green line is the actual GDP growth rate. The blue line is the "gap to 2%", that is the amount by which the standard of living in the United States is below where it was before the recession started.
There are two key lessons that I believe that you can glean from this graph.
(1) Economic performance under President Obama has been remarkable good
It's an odd thing to say with unemployment extremely high, but if you look at the growth curve, the economy was in utter free-fall in the 4th quarter of 2008 (before the President took office) and in the 1st quarter of 2009 (after the President took office, but before any reasonable impact from his economic policies could take effect.)
Of course, giving him full credit for the recovery would be silly. The actions to stabilize the financial system taken by the Bush administration in its last days, as lacking as they may have been in terms of proper accountability, was critical in preventing an even greater slide. The natural economic cycle obviously also plays into this -- economies go up and down to a certain extent irrespective of government policy. The Fed has also been critical, slashing interest rates to their lowest levels ever and providing large amounts of liquidity by taking on a large balance sheet.
Still, it's hard to deny the impact of President Obama's policies. Cash for Clunkers and the First Time Homebuyer credit spurred auto sales and arrested the free fall of home prices. Tax credits stabilized consumer spending. Infrastructure spending spurred construction employment, albeit not at a fast enough pace.
The bottom line is, in just three quarters, the rate of economic growth went from a pace of 6.4% contraction to a pace of 5.7% growth, over a 12% swing.
(2) How Far We Still Have to Go
If you look at the gap to 2% growth, the economy is still 5.8% smaller than it needs to be just to restore the standard of living prior to the recession. That may not sound like a lot relative to a 5.7% growth rate, but it is. Let me explain.
Keep in mind that going forward, the economy will continue to have to grow at 2% just to hold its ground, so a year of 5.8% growth wouldn't restore the standard, it would require a year of 7.8% growth, 5.8% to fill the hole and 2.0% to account for population growth. Nobody thinks 7.8% growth is going to happen.
So, based on more realistic scenarios, how long before we get back to where we were?
At 5% growth, it would take 2 years to get back to where we were at the start of the recession -- in other words we wouldn't be back to where we were until the end of 2011.
At 4% growth, it would take 3 years, or the end of 2012.
At 3% growth, it would take 5.75 years, or the fall of 2015.
And the 5.7% growth number includes a lot of inventory recovery - businesses restocking inventories following holding them at historic lows during the recession, growth that is not repeatable. 4% is probably a pretty rosy scenario. Which means that we are going to see elevated unemployment for some time to come.
So, in the end, the news is good, but we have a long way to go. The Fed will have to balance growth with controlling inflation and will ultimately need to increase interest rates to more normal levels if economic growth continues. There is still anxiety and depressed consumer spending thanks to high unemployment. But it's hard not to feel a lot better than we did a year or nine months ago.
Stimulus Spending and the Proposed "Jobs Bill"
The latest government report shows that stimulus money continues to slowly go out the door. The latest figures:
Tax Cuts: $92.8 billion spent out of $288 billion (32.2%)
Spending: $195.6 billion spent out of $499 billion (39.2%)
Total: $288.4 billion spent out of $787 billion (36.6%)
Given that 63.4% of the stimulus money remains unspent, why is President Obama saying that a "jobs bill", also known to those of us paying attention, as another stimulus bill, should be the top priority of congress this year?
Clearly part of it is political, the President is trying to pivot to an economic focus after the bloody fight over health care sapped his public approval. This is understandable. The Democrats want to be seen as doing something with people still hurting under the scourge of unemployment.
But authorizing more spending may not be the best course to chart. The best course is probably to focus on effectively deploying the almost half a trillion dollar already available under the stimulus package, working to close out TARP and collect remaining outstanding loans to the financial services industry, chart a course back to private enterprise for GM, which may well earn a profit this year and chart a plan to deficit reduction that will prevent future economic growth from being impaired by massive amounts of investment capital being absorbed through government bonds.
That work isn't as sexy, but is probably what is needed. Hopefully that will all happen in the background. But we are probably going to get at least a token jobs bill in the meantime.
Feingold at Risk?
A theoretical Rasmussen poll matching incumbent Senator Russ Feingold (D-WI) against popular former Republican Governor and former Secretary of Health and Human Services Tommy Thompson, shows Thompson leading Feingold by 3%. This is a theoretical poll as Thompson has not indicated that he is going to run. Still, it is a worrisome number for Feingold, as it shows that he IS vulnerable this November. It is enough to move Wisconsin from a Likely Democratic Hold to a Lean Democratic Hold.
Other polls released this week showed the GOP continuing to lead in North Carolina and the DEM's continuing to lead in California, but neither was significant enough to move the rating of the races, which were both already listed as leaning in those respective directions.
The GOP is slowly chipping into one Democratic seat after another. Is this just a low point for the DEM's and will the ultimately recover or hold on and win Wisconsin, Indiana, California, New York, Pennsylvania, etc.? Or is this the start of a GOP November rout, where the GOP finds an improbable way to secure 10 seats and control of the Senate.
No one can know at this point. We'll see what the polls do in the next few days in the aftermath of the State of the Union speech.
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Saturday, January 9, 2010
Complete Latest Senate Rundown, The Jobs Deficit and John Edward's 2 Americas, Closing in on 1 Year
2010 -- Plenty of Reasons for the DEMs to Be Getting More Scared
The Pro-GOP or at the very least, anti-Democratic trend appears to continue to build. President Obama's numbers are stable, at least for now, around the +3% to +5% range...this is better than being negative, but puts him in a similar position to where President Clinton was leading into the year that saw Newt Gingrich's revolution that led to a GOP-controlled House and Senate. It isn't that bad yet, so let's take a look at where the races are tracking, with our new updates from this week:
Safe DEM Hold (6)
Maryland, New York (Schumer), Oregon, Vermont, Washington, Connecticut
Likely DEM Hold (5)
California, Indiana, Wisconsin, Hawaii, Massachusetts*
* Special Election January 19th
Lean Democratic Hold (2)
New York (Gillebrand), Illinois
Lean Democratic Pick-Up (1)
Missouri
Toss-up -- DEM Controlled (2)
Pennsylvania, Delaware
Lean GOP Pick-up (4)
Colorado, Nevada, North Dakota, Arkansas
Lean GOP Hold (5)
New Hampshire, Kentucky, Ohio, North Carolina, Arizona
Likely GOP Hold (5)
Georgia, Alaska, Kansas, Louisiana, Florida
Safe GOP Hold (7)
Iowa, South Dakota, Alabama, Idaho, Oklahoma, South Carolina, Utah
Total Projection: GOP Pick-up of 3 to 5 Seats
Best Case GOP (all leaners go to GOP): GOP +8 Seats
Best Case DEM (all leaners go to DEM): DEM +6 Seats
It certainly seems, given the national mood, that the Best Case GOP scenario is a heck of a lot more plausible than the Best Case DEM scenario at this point. This is because of all the states that fall in the "lean" category currently, the GOP is winning all but 3 of them. It does show, however, the vast impact a 5 point swing in the national mood can have on how races shape up.
The other things worth noting are that we do not have particularly recent polling in Missouri and Pennsylvania. One could surmise from the trend in other swing states that there is a reasonable probability that they will tip red when we do get such polling. This would push the GOP closer to their "best case" scenario.
Having said all this, I don't see a path to 51 for the GOP. In addition to picking up Missouri and Pennsylvania, they would have to win Illinois to get to +8, which is certainly possible, but probably no better than 50/50. On TOP of that, they would have to beat Gillebrand in New York (possible only if Pataki runs against her, and no sure thing even then), AND win at least 2 out of 5 in California (where they have a good candidate but are trailing), Indiana (where they don't even have a candidate yet against a well-liked moderate in Evan Bayh), Wisconsin (against Russ Feingold, seems like a no-hope race), Hawaii (when was the last time Hawaii sent a GOPer to the Senate?) and Massachusetts (closing fast at -9%, but still a long shot.)
So, the most realistic scenario to get there for the GOP would be to pull off the upset in Massachusetts, then win all the ones they are leading. Win the two toss-ups -- Delaware with Mike Castle and Pennsylvania with Pat Toomey. Win Missouri with Rep. Roy Blunt, New York's 2nd seat via convincing George Pataki to run. Finally, pull off the big upset with Carly Fiorna in California (hey -- they love tech celebrities there.) And you have 51 seats.
A long, long, shot, for sure. But for the first time I can actually construct a scenario where it could happen. First key, of course, is the Massachusetts special election a week from Tuesday, which I expect them to lose. But if they win that one, all bets are off.
In the House,
Democrats could be in huge trouble. Now, it's hard to tell, because we continue to be plagued by drastically different polls numbers (Rasmussen has it at GOP +9%, Gallup has it at DEM +3%), driven largely not by the fact that pollsters are asking the questions somehow differently, but more by the fact that they are making dramatically different modeling assumptions about who is actually going to vote in the mid-term. And the quagmire is real...after a massive turnout in 2008, clearly we all expect it to fall off for the mid-terms, but will it revert back to the normal for an off-year election? Will any of the newly registered voters in 2008 show up to vote for congress in 2010? We don't really know.
At any rate, my philosophy has always been that by building a larger sample poll, as well as looking at means and medians, we can mitigate the sample or weighting errors of any one given pollster. An our methodology produces a current projection of GOP +3.6%.
This leads to a House projection of: GOP +43 Seats
So, for the second projection in a row, I'm projecting a GOP takeover of the House. The margin is still slim, although it is 2 seats wider than it was last week. It could change obviously, with circumstances. But for now, the House Republicans are looking pretty darn strong. I doubt we'll see anything like Health Care reform moving through that chamber come 2011.
The Jobs Deficit -- John Edwards Was Right
I wrote about this some months ago, but I was struck recently by a personal experience. The company that I work for, which is a Fortune 500 company, was in the process of hiring entry-level engineers for a number of our factories, a process that I was involved in. We were recruiting principally for those who graduate this spring and conducted interviews over November and December, made offers in mid-December to 5 candidates and....were rejected 4 out of 5 times. Every single one of the 5 young engineers we were trying to recruit had multiple offers from multiple great companies. These are kids who are extremely intelligent, but let's face it, haven't actually DONE anything yet. And this punctuated my point -- the economy looks a lot different if you are a high school dropout who has been working at a factory in Michigan than it does if you are an Electrical Engineer from the University of Michigan.
The latest employment report, released yesterday, showed the unemployment rate remained flat at 10.0%, just a tick below the peak of 10.1% from two months ago. But the important numbers were even wore than that, with actually jobs declining by 85,000 and the unemployment rate only holding constant by virtue of people giving up on looking for work and dropping out of the work force, with this number rising to 929,000, it's largest level since 1985. So, with "normal" unemployment being in the 5% range, we have a gap of 7.6 million jobs, 8.5 million adding in the discouraged workers.
How does this relate to my story? Let's look at the unemployment rate by educational attainment one more time:
High School Dropout -- 15.3%
High School Graduate -- 10.5%
Some College or Trade School Graduate -- 9.0%
College Graduate with Bachelor's Degree or Higher -- 5.0%
The economy IS normal if you are a college graduate. Sure it isn't the heady days of the late 90s or the mid-00s when you could name your price, your location and your work hours. But you CAN find work if you have a degree and skills that are in demand. If you are a factory worker, however, your prospects are dim.
Which brings me to my point...we have focused so much on just creating jobs that we have neglected the other half of the equation...how do we raise the skill level of the unemployed to make them more productive and more attractive to potential employers? College tuitions continue to surge and achievement gaps between rich and poor school districts have sustained. How do we give the kid from Compton, rural Tennessee, Detroit or Mississippi a shot at being in the tier of people who are in demand? We have had zero political discussion in the past year about higher education and lifetime learning. And that's a crime.
In terms of what we have been discussing politically, we have the stimulus bill and we have the "jobs" bill creeping it's way through congress. The bill, which has been blasted by the GOP as "Son of Stimulus", would largely do more of the same that the American Recovery and Reinvestment Act did...that is the threefold approach of transfer payments to states to stabilize state governments (to "save" jobs), infrastructure projects (to "create" jobs) and temporary extensions / expansions of various social programs to provide money for the unemployed and needy (to generate consumer demand.)
The approach has its merits as a short-term buffer to an economy still dealing with the aftershocks of a massive financial crisis. My criticism is that the way the original stimulus was laid out, we haven't really had a chance to see how that program, which was designed as a 3-year reshaping of the economy, will really play out.
Here are the latest stats on the first stimulus bill:
Tax Cuts -- $92.8 billion out of $288 billion paid out (32.2%)
Spending -- $164.2 billion out of $499 billion paid out (32.9%)
Total -- $257.0 billion out of $787 billion paid out (32.7%)
With more than two thirds of the first stimulus bill left to spend, why craft another measure?
The answer simply is political reality. Congressional Democrats want people to see they are doing SOMETHING, even if the best course might be to simply let the tools that are already out there work. Liberal economist Paul Krugman, who never believed the first bill was nearly large enough, has been leading the charge for a second stimulus for some time. And it appears likely that SOME sort of jobs bills will pass in the new congress.
But the reality is that we will all have to wait and see whether what they did the first run around will actually work.
Almost 1 Year of Obama
The President of the United States will cross the 1 year in office threshold, 25% of his term, right as voters in Massachusetts are picking a Senator that will potentially represent the 60th vote in the Senate for final passage of health care legislation. It's almost time to break out the red pens and grade the President's year. Given the amazingly high bar he set for himself with his early speech to congress, I suspect when I sit down to write his review, he will have some significant short-comings. The President's inner-circle is fond of talking about him taking the "long view". But you do have to produce results at some point.
So, next up, our 1 year report card on President Obama. We'll look at my assessment of grades against his key initiatives. We'll look at his public opinion polls and the American people's grades of his performance. And we'll tap our old friends at Politifact to look at how well he is keeping his promises. Stay tuned.
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The Pro-GOP or at the very least, anti-Democratic trend appears to continue to build. President Obama's numbers are stable, at least for now, around the +3% to +5% range...this is better than being negative, but puts him in a similar position to where President Clinton was leading into the year that saw Newt Gingrich's revolution that led to a GOP-controlled House and Senate. It isn't that bad yet, so let's take a look at where the races are tracking, with our new updates from this week:
Safe DEM Hold (6)
Maryland, New York (Schumer), Oregon, Vermont, Washington, Connecticut
Likely DEM Hold (5)
California, Indiana, Wisconsin, Hawaii, Massachusetts*
* Special Election January 19th
Lean Democratic Hold (2)
New York (Gillebrand), Illinois
Lean Democratic Pick-Up (1)
Missouri
Toss-up -- DEM Controlled (2)
Pennsylvania, Delaware
Lean GOP Pick-up (4)
Colorado, Nevada, North Dakota, Arkansas
Lean GOP Hold (5)
New Hampshire, Kentucky, Ohio, North Carolina, Arizona
Likely GOP Hold (5)
Georgia, Alaska, Kansas, Louisiana, Florida
Safe GOP Hold (7)
Iowa, South Dakota, Alabama, Idaho, Oklahoma, South Carolina, Utah
Total Projection: GOP Pick-up of 3 to 5 Seats
Best Case GOP (all leaners go to GOP): GOP +8 Seats
Best Case DEM (all leaners go to DEM): DEM +6 Seats
It certainly seems, given the national mood, that the Best Case GOP scenario is a heck of a lot more plausible than the Best Case DEM scenario at this point. This is because of all the states that fall in the "lean" category currently, the GOP is winning all but 3 of them. It does show, however, the vast impact a 5 point swing in the national mood can have on how races shape up.
The other things worth noting are that we do not have particularly recent polling in Missouri and Pennsylvania. One could surmise from the trend in other swing states that there is a reasonable probability that they will tip red when we do get such polling. This would push the GOP closer to their "best case" scenario.
Having said all this, I don't see a path to 51 for the GOP. In addition to picking up Missouri and Pennsylvania, they would have to win Illinois to get to +8, which is certainly possible, but probably no better than 50/50. On TOP of that, they would have to beat Gillebrand in New York (possible only if Pataki runs against her, and no sure thing even then), AND win at least 2 out of 5 in California (where they have a good candidate but are trailing), Indiana (where they don't even have a candidate yet against a well-liked moderate in Evan Bayh), Wisconsin (against Russ Feingold, seems like a no-hope race), Hawaii (when was the last time Hawaii sent a GOPer to the Senate?) and Massachusetts (closing fast at -9%, but still a long shot.)
So, the most realistic scenario to get there for the GOP would be to pull off the upset in Massachusetts, then win all the ones they are leading. Win the two toss-ups -- Delaware with Mike Castle and Pennsylvania with Pat Toomey. Win Missouri with Rep. Roy Blunt, New York's 2nd seat via convincing George Pataki to run. Finally, pull off the big upset with Carly Fiorna in California (hey -- they love tech celebrities there.) And you have 51 seats.
A long, long, shot, for sure. But for the first time I can actually construct a scenario where it could happen. First key, of course, is the Massachusetts special election a week from Tuesday, which I expect them to lose. But if they win that one, all bets are off.
In the House,
Democrats could be in huge trouble. Now, it's hard to tell, because we continue to be plagued by drastically different polls numbers (Rasmussen has it at GOP +9%, Gallup has it at DEM +3%), driven largely not by the fact that pollsters are asking the questions somehow differently, but more by the fact that they are making dramatically different modeling assumptions about who is actually going to vote in the mid-term. And the quagmire is real...after a massive turnout in 2008, clearly we all expect it to fall off for the mid-terms, but will it revert back to the normal for an off-year election? Will any of the newly registered voters in 2008 show up to vote for congress in 2010? We don't really know.
At any rate, my philosophy has always been that by building a larger sample poll, as well as looking at means and medians, we can mitigate the sample or weighting errors of any one given pollster. An our methodology produces a current projection of GOP +3.6%.
This leads to a House projection of: GOP +43 Seats
So, for the second projection in a row, I'm projecting a GOP takeover of the House. The margin is still slim, although it is 2 seats wider than it was last week. It could change obviously, with circumstances. But for now, the House Republicans are looking pretty darn strong. I doubt we'll see anything like Health Care reform moving through that chamber come 2011.
The Jobs Deficit -- John Edwards Was Right
I wrote about this some months ago, but I was struck recently by a personal experience. The company that I work for, which is a Fortune 500 company, was in the process of hiring entry-level engineers for a number of our factories, a process that I was involved in. We were recruiting principally for those who graduate this spring and conducted interviews over November and December, made offers in mid-December to 5 candidates and....were rejected 4 out of 5 times. Every single one of the 5 young engineers we were trying to recruit had multiple offers from multiple great companies. These are kids who are extremely intelligent, but let's face it, haven't actually DONE anything yet. And this punctuated my point -- the economy looks a lot different if you are a high school dropout who has been working at a factory in Michigan than it does if you are an Electrical Engineer from the University of Michigan.
The latest employment report, released yesterday, showed the unemployment rate remained flat at 10.0%, just a tick below the peak of 10.1% from two months ago. But the important numbers were even wore than that, with actually jobs declining by 85,000 and the unemployment rate only holding constant by virtue of people giving up on looking for work and dropping out of the work force, with this number rising to 929,000, it's largest level since 1985. So, with "normal" unemployment being in the 5% range, we have a gap of 7.6 million jobs, 8.5 million adding in the discouraged workers.
How does this relate to my story? Let's look at the unemployment rate by educational attainment one more time:
High School Dropout -- 15.3%
High School Graduate -- 10.5%
Some College or Trade School Graduate -- 9.0%
College Graduate with Bachelor's Degree or Higher -- 5.0%
The economy IS normal if you are a college graduate. Sure it isn't the heady days of the late 90s or the mid-00s when you could name your price, your location and your work hours. But you CAN find work if you have a degree and skills that are in demand. If you are a factory worker, however, your prospects are dim.
Which brings me to my point...we have focused so much on just creating jobs that we have neglected the other half of the equation...how do we raise the skill level of the unemployed to make them more productive and more attractive to potential employers? College tuitions continue to surge and achievement gaps between rich and poor school districts have sustained. How do we give the kid from Compton, rural Tennessee, Detroit or Mississippi a shot at being in the tier of people who are in demand? We have had zero political discussion in the past year about higher education and lifetime learning. And that's a crime.
In terms of what we have been discussing politically, we have the stimulus bill and we have the "jobs" bill creeping it's way through congress. The bill, which has been blasted by the GOP as "Son of Stimulus", would largely do more of the same that the American Recovery and Reinvestment Act did...that is the threefold approach of transfer payments to states to stabilize state governments (to "save" jobs), infrastructure projects (to "create" jobs) and temporary extensions / expansions of various social programs to provide money for the unemployed and needy (to generate consumer demand.)
The approach has its merits as a short-term buffer to an economy still dealing with the aftershocks of a massive financial crisis. My criticism is that the way the original stimulus was laid out, we haven't really had a chance to see how that program, which was designed as a 3-year reshaping of the economy, will really play out.
Here are the latest stats on the first stimulus bill:
Tax Cuts -- $92.8 billion out of $288 billion paid out (32.2%)
Spending -- $164.2 billion out of $499 billion paid out (32.9%)
Total -- $257.0 billion out of $787 billion paid out (32.7%)
With more than two thirds of the first stimulus bill left to spend, why craft another measure?
The answer simply is political reality. Congressional Democrats want people to see they are doing SOMETHING, even if the best course might be to simply let the tools that are already out there work. Liberal economist Paul Krugman, who never believed the first bill was nearly large enough, has been leading the charge for a second stimulus for some time. And it appears likely that SOME sort of jobs bills will pass in the new congress.
But the reality is that we will all have to wait and see whether what they did the first run around will actually work.
Almost 1 Year of Obama
The President of the United States will cross the 1 year in office threshold, 25% of his term, right as voters in Massachusetts are picking a Senator that will potentially represent the 60th vote in the Senate for final passage of health care legislation. It's almost time to break out the red pens and grade the President's year. Given the amazingly high bar he set for himself with his early speech to congress, I suspect when I sit down to write his review, he will have some significant short-comings. The President's inner-circle is fond of talking about him taking the "long view". But you do have to produce results at some point.
So, next up, our 1 year report card on President Obama. We'll look at my assessment of grades against his key initiatives. We'll look at his public opinion polls and the American people's grades of his performance. And we'll tap our old friends at Politifact to look at how well he is keeping his promises. Stay tuned.
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Saturday, December 19, 2009
An 11th Hour Deal?, Plodding Along With the Recovery Act
Health Care Deal, Part 2?
Senator Charles Schumer (D-NY) has announced that a deal has been struck between Senator Ben Nelson (D-NE) and Majority Leader Harry Reid (D-NV) to secure Nelson's vote to invoke cloture on the health care bill. Now, it's understandable if we are all a little skeptical, given that this comes a week after the first "deal" between liberals and moderates was announced, and then promptly criticized by Sen. Joe Liebermand (I-CT) and Nelson as unacceptable.
I get the sense that this time things are different. First of all, Senator Nelson himself was the person with whom the negotiations took place. Secondly the deal appears to deal with the abortion issue, whereas the first "deal" dealt only with a compromise on the public option. I think this deal is the real deal.
Which is not to say that passage is assured. The Democrats could still lose another Senator from the center (Jim Webb being an unofficially undecided vote who apparently was not involved in these negotiations) or from the left (Roland Burris, for instance, has indicated that he might vote down a bill that doesn't have a strong enough public option, although he has moderated his tone in recent weeks.) And the Democrats still have a calendar problem -- it is razor thin to try to even get to a cloture vote by December 24th, and you have to believe that Republicans will continue to use every tactic available to them to slow things down. Today, the Senate is working through the Defense Appropriations Bill (the last regular appropriations bill of the year, at long last), hamstrung by the fact that the previous continuing resolution expired at midnight and non-essentially Defense operations are technically unfunded at the moment (which is okay on a Saturday, but pretty bad come Monday if a bill isn't signed.)
Finally, even assuming Senate passage of the bill, there is still the whole conference process....how much will liberals in the House be willing to give ground to keep Nelson on board?
But, despite the remaining obstacles, Democrats are far closer to passage than I expected them to get this year, assuming this deal is real.
What exactly the deal contains is not yet clear. The Reid "manager's amendment" that makes all these changes is posted online at the link below:
http://www.politico.com/static/PPM145_chris.html
It is almost 400 pages long, so I haven't had time to digest it yet, but I'l provide full analysis as soon as I can.
How Much Does H.R. 1 Matter?
It is the crowning political achievement for the still-young (although looking older) President Barack Obama -- the American Recovery and Reinvestment Act. The $787 billion stimulus bill, the heart of a brutal political fight last winter and spring and the largest economic stimulus ever passed in absolute dollar terms (although certainly FDR had a larger stimulus program relative to the size of the economy), this bill is certainly the most significant legislation signed into law of the 115 bills the President Obama has signed in the past 334 days.
But, does it matter? It was (unwisely) advertised as keeping unemployment below 8% (unemployment stands at 10.0% today, down slightly from last month's high of 10.2%). The number of jobs even its strongest advocates claim to "save" or create is dwarfed by the overall job losses in the economy. And in many ways, the actions under TARP and the massive expansion of the Fed's balance sheet, gobbling up everything from bonds to mortgage-backed securities to keep easy money flowing in the economy, contributed far more money to stabilizing the economy (TARP was $700 billion, the Fed's balance sheet has ballooned to over $2 trillion.)
Finally, the stimulus is now pretty unpopular. People don't tend to be particularly patient where unemployment is concerned (ask George Herbert-Walker Bush, who went from 91% to 38% approval in about a year, thanks to an unemployment rate nowhere near as bad as this one.)
Actions under the stimulus bill have been slow as well. The government will miss my benchmark of having 40% of the funds distributed in the 2009 calendar year. The latest government report, as of December 11th:
Tax Cuts: $92.8 billion paid out of $288 billion authorized (32.2% spent)
Spending: $152.6 billion paid out of $499 billion authorized (30.6% spent)
Total: $245.4 billion spent out of $787 billion authorized (31.2% spent)
A quarter of a trillion dollars is a lot of money to have spent this year, but is a small piece of the $3 trillion or so that all of the sources above add up to that has been pumped into the economy since the start of the financial crisis.
So was the stimulus even worth doing?
Absolutely. As amazed as you might be by this, I actually think the bill looks better in retrospect. The coordinated actions of the federal government, while imperfect, have had a huge impact in staving off a massive depression and spurring positive economic growth in the third quarter (and almost surely the fourth quarter as well.)
Consider:
(1) TARP for Banks
Without TARP (credit goes to President George W. Bush on this one for alienating the base of his party to do what needed to be done), it is very likely that Citigroup and Bank of America would have gone bankrupt, causing such a severe contraction of credit that we would likely be mired in depression for years. The banks are paying back the money with interest, meaning that on top of saving the economy, the bank-funding portion of TARP is actually turning out to be a good financial investment for the government.
Yes, the final plan looked nothing like what Hank Paulson described to congress when the bill was passed, whereby the government was supposed to buy the bad assets, not invest in the banks and certainly the original approach was better in many ways, but the government quickly determined it was not feasible in the timeline with which they needed to act.
(2) TARP for AIG
This was a bad deal. A big chunk of money was poured into insurance giant AIG ($180 billion in total) and short of a miracle, I see no path to recovering all that money. I have also been highly critical of this funding in the past -- you don't need to bail out the guy insuring the loan if you bail out the guy making the loan. There was a legitimate interest in protecting the stakeholders in other divisions of AIG (seniors who depending on a fixed annuity from AIG for retirement income, for instance), but this could have been accomplished by severing those portions of AIG and providing much smaller levels of funding to keep them afloat.
(3) TARP for the Auto Industry
Okay, so President Bush got this wrong initially, pumping more money into a losing business model. President Obama initially made the same mistake, before realizing that bankruptcy was the ONLY path to survival for GM and Chrysler. These bankruptcies should have come months earlier without the thrown-away federal money, but the structure of providing bridge capital to these companies in exchange for large equity stakes was ultimately the right way to go. Without these actions, two industrial giants would have collapsed entirely, sending manufacturing into a deadly tailspin (you think 20% unemployment in Detroit is bad, try 50%!)
(4) Ben Bernake's Management
Federal Funds rates of 0.25%, the lowest in history have spurred short-term borrowing rates as low as 4% for many consumers and even lower short-term borrowing rates for businesses. Money has been made historically extremely cheap. You think the credit crunch is bad now, try to the same environment with interest rates at 1.5x or 2x this level.
The Fed sopping up other securities to the tune of $2 trillion is another mechanism to inject liquidity into the monetary system. In essence, it amounts to the government printing money and using it to suck up debt. This would be a really bad move in an economy with even moderate inflation, but inflation risk has been extremely low to date.
(5) The Stimulus
While it doesn't look like a ton of money in the grand scheme of 1-4, the stimulus has done several very important things. First, it stabilized state governments, who can't deficit spend in a recession, avoiding massive layoffs of government workers. Second, it has started to provide infrastructure employment, which has a halo effect on economic growth beyond the immediate employment impact of those projects. Third, it has provided support for two key industries, the auto industry and the home-building industry through cleverly designed, highly effective tax subsidizes. Fourth, lest we forget, for the most part, the infrastructure spend is by and large things that NEED to be done anyway. In fact, I would argue that there wasn't ENOUGH investment in roads, bridges, rail and green energy in the bill.
The stimulus is structured to be a slow-burn: stabilizing state governments and providing the tax subsidizes immediately, but putting out the infrastructure spending on a much slower calendar. This is a politically-losing structure, at least in the short-term, but may be the right move in the long-term.
Working together, all these things have staved off disaster. I freely admit that looking out over the abyss, I did not see the magnitude of this crisis. Fortunately, Bernake, Paulson, Geithner and company did and the coordinated effort of the federal government is an example of government actually doing a massive program well.
There is a ton of mess to clean up:
(1) Unwinding all the TARP investments in banks. This has started, but getting all that money back is a slow process.
(2) Unwinding the AIG investment. This could take years as AIG is still in no position to pay.
(3) Unwinding the auto industry investment. GM owns a huge stake in GM (as the controlling owner) and a smaller stake in Chrysler. Unwinding this will take a stock offering that fetches a price enabler the government to recover its money.
(4) Unwinding the Fed balance sheet. This should start immediately, but in a measured way. The risk of inflation is starting to return as the economy sputters back to life. Acting too late on this could have terrible effects on our currency and the value of savings. The indications from the Fed so far is that it may take too long to act.
(5) Returning interest rates to normal levels. When the fourth quarter GDP figures come out, if they continue in the 2-3% growth range, I would argue that slowly bumping up rates should begin immediately. The currently low rates are great for borrowers, but are killing savers and people living off interest income, mostly seniors. They also risk allowing a surge in inflation, which would further destroy individual assets Historical norms put this rate around 3%. Bumping it to 0.5% in the spring wouldn't be so bad, would it? Alas, the Fed seems unlikely to touch rates until at least early 2011, at which point, the risk of inflation may be significant.
I was overcritical of men like Bernake and Geithner. Bernake deserves a second term at the Fed, having, on balance, made mostly the right moves. Geithner, for all his flaws, has done important work to stabilize the economy and deserves to stay on the job.
Here's to a better economy in 2010.
Senator Charles Schumer (D-NY) has announced that a deal has been struck between Senator Ben Nelson (D-NE) and Majority Leader Harry Reid (D-NV) to secure Nelson's vote to invoke cloture on the health care bill. Now, it's understandable if we are all a little skeptical, given that this comes a week after the first "deal" between liberals and moderates was announced, and then promptly criticized by Sen. Joe Liebermand (I-CT) and Nelson as unacceptable.
I get the sense that this time things are different. First of all, Senator Nelson himself was the person with whom the negotiations took place. Secondly the deal appears to deal with the abortion issue, whereas the first "deal" dealt only with a compromise on the public option. I think this deal is the real deal.
Which is not to say that passage is assured. The Democrats could still lose another Senator from the center (Jim Webb being an unofficially undecided vote who apparently was not involved in these negotiations) or from the left (Roland Burris, for instance, has indicated that he might vote down a bill that doesn't have a strong enough public option, although he has moderated his tone in recent weeks.) And the Democrats still have a calendar problem -- it is razor thin to try to even get to a cloture vote by December 24th, and you have to believe that Republicans will continue to use every tactic available to them to slow things down. Today, the Senate is working through the Defense Appropriations Bill (the last regular appropriations bill of the year, at long last), hamstrung by the fact that the previous continuing resolution expired at midnight and non-essentially Defense operations are technically unfunded at the moment (which is okay on a Saturday, but pretty bad come Monday if a bill isn't signed.)
Finally, even assuming Senate passage of the bill, there is still the whole conference process....how much will liberals in the House be willing to give ground to keep Nelson on board?
But, despite the remaining obstacles, Democrats are far closer to passage than I expected them to get this year, assuming this deal is real.
What exactly the deal contains is not yet clear. The Reid "manager's amendment" that makes all these changes is posted online at the link below:
http://www.politico.com/static/PPM145_chris.html
It is almost 400 pages long, so I haven't had time to digest it yet, but I'l provide full analysis as soon as I can.
How Much Does H.R. 1 Matter?
It is the crowning political achievement for the still-young (although looking older) President Barack Obama -- the American Recovery and Reinvestment Act. The $787 billion stimulus bill, the heart of a brutal political fight last winter and spring and the largest economic stimulus ever passed in absolute dollar terms (although certainly FDR had a larger stimulus program relative to the size of the economy), this bill is certainly the most significant legislation signed into law of the 115 bills the President Obama has signed in the past 334 days.
But, does it matter? It was (unwisely) advertised as keeping unemployment below 8% (unemployment stands at 10.0% today, down slightly from last month's high of 10.2%). The number of jobs even its strongest advocates claim to "save" or create is dwarfed by the overall job losses in the economy. And in many ways, the actions under TARP and the massive expansion of the Fed's balance sheet, gobbling up everything from bonds to mortgage-backed securities to keep easy money flowing in the economy, contributed far more money to stabilizing the economy (TARP was $700 billion, the Fed's balance sheet has ballooned to over $2 trillion.)
Finally, the stimulus is now pretty unpopular. People don't tend to be particularly patient where unemployment is concerned (ask George Herbert-Walker Bush, who went from 91% to 38% approval in about a year, thanks to an unemployment rate nowhere near as bad as this one.)
Actions under the stimulus bill have been slow as well. The government will miss my benchmark of having 40% of the funds distributed in the 2009 calendar year. The latest government report, as of December 11th:
Tax Cuts: $92.8 billion paid out of $288 billion authorized (32.2% spent)
Spending: $152.6 billion paid out of $499 billion authorized (30.6% spent)
Total: $245.4 billion spent out of $787 billion authorized (31.2% spent)
A quarter of a trillion dollars is a lot of money to have spent this year, but is a small piece of the $3 trillion or so that all of the sources above add up to that has been pumped into the economy since the start of the financial crisis.
So was the stimulus even worth doing?
Absolutely. As amazed as you might be by this, I actually think the bill looks better in retrospect. The coordinated actions of the federal government, while imperfect, have had a huge impact in staving off a massive depression and spurring positive economic growth in the third quarter (and almost surely the fourth quarter as well.)
Consider:
(1) TARP for Banks
Without TARP (credit goes to President George W. Bush on this one for alienating the base of his party to do what needed to be done), it is very likely that Citigroup and Bank of America would have gone bankrupt, causing such a severe contraction of credit that we would likely be mired in depression for years. The banks are paying back the money with interest, meaning that on top of saving the economy, the bank-funding portion of TARP is actually turning out to be a good financial investment for the government.
Yes, the final plan looked nothing like what Hank Paulson described to congress when the bill was passed, whereby the government was supposed to buy the bad assets, not invest in the banks and certainly the original approach was better in many ways, but the government quickly determined it was not feasible in the timeline with which they needed to act.
(2) TARP for AIG
This was a bad deal. A big chunk of money was poured into insurance giant AIG ($180 billion in total) and short of a miracle, I see no path to recovering all that money. I have also been highly critical of this funding in the past -- you don't need to bail out the guy insuring the loan if you bail out the guy making the loan. There was a legitimate interest in protecting the stakeholders in other divisions of AIG (seniors who depending on a fixed annuity from AIG for retirement income, for instance), but this could have been accomplished by severing those portions of AIG and providing much smaller levels of funding to keep them afloat.
(3) TARP for the Auto Industry
Okay, so President Bush got this wrong initially, pumping more money into a losing business model. President Obama initially made the same mistake, before realizing that bankruptcy was the ONLY path to survival for GM and Chrysler. These bankruptcies should have come months earlier without the thrown-away federal money, but the structure of providing bridge capital to these companies in exchange for large equity stakes was ultimately the right way to go. Without these actions, two industrial giants would have collapsed entirely, sending manufacturing into a deadly tailspin (you think 20% unemployment in Detroit is bad, try 50%!)
(4) Ben Bernake's Management
Federal Funds rates of 0.25%, the lowest in history have spurred short-term borrowing rates as low as 4% for many consumers and even lower short-term borrowing rates for businesses. Money has been made historically extremely cheap. You think the credit crunch is bad now, try to the same environment with interest rates at 1.5x or 2x this level.
The Fed sopping up other securities to the tune of $2 trillion is another mechanism to inject liquidity into the monetary system. In essence, it amounts to the government printing money and using it to suck up debt. This would be a really bad move in an economy with even moderate inflation, but inflation risk has been extremely low to date.
(5) The Stimulus
While it doesn't look like a ton of money in the grand scheme of 1-4, the stimulus has done several very important things. First, it stabilized state governments, who can't deficit spend in a recession, avoiding massive layoffs of government workers. Second, it has started to provide infrastructure employment, which has a halo effect on economic growth beyond the immediate employment impact of those projects. Third, it has provided support for two key industries, the auto industry and the home-building industry through cleverly designed, highly effective tax subsidizes. Fourth, lest we forget, for the most part, the infrastructure spend is by and large things that NEED to be done anyway. In fact, I would argue that there wasn't ENOUGH investment in roads, bridges, rail and green energy in the bill.
The stimulus is structured to be a slow-burn: stabilizing state governments and providing the tax subsidizes immediately, but putting out the infrastructure spending on a much slower calendar. This is a politically-losing structure, at least in the short-term, but may be the right move in the long-term.
Working together, all these things have staved off disaster. I freely admit that looking out over the abyss, I did not see the magnitude of this crisis. Fortunately, Bernake, Paulson, Geithner and company did and the coordinated effort of the federal government is an example of government actually doing a massive program well.
There is a ton of mess to clean up:
(1) Unwinding all the TARP investments in banks. This has started, but getting all that money back is a slow process.
(2) Unwinding the AIG investment. This could take years as AIG is still in no position to pay.
(3) Unwinding the auto industry investment. GM owns a huge stake in GM (as the controlling owner) and a smaller stake in Chrysler. Unwinding this will take a stock offering that fetches a price enabler the government to recover its money.
(4) Unwinding the Fed balance sheet. This should start immediately, but in a measured way. The risk of inflation is starting to return as the economy sputters back to life. Acting too late on this could have terrible effects on our currency and the value of savings. The indications from the Fed so far is that it may take too long to act.
(5) Returning interest rates to normal levels. When the fourth quarter GDP figures come out, if they continue in the 2-3% growth range, I would argue that slowly bumping up rates should begin immediately. The currently low rates are great for borrowers, but are killing savers and people living off interest income, mostly seniors. They also risk allowing a surge in inflation, which would further destroy individual assets Historical norms put this rate around 3%. Bumping it to 0.5% in the spring wouldn't be so bad, would it? Alas, the Fed seems unlikely to touch rates until at least early 2011, at which point, the risk of inflation may be significant.
I was overcritical of men like Bernake and Geithner. Bernake deserves a second term at the Fed, having, on balance, made mostly the right moves. Geithner, for all his flaws, has done important work to stabilize the economy and deserves to stay on the job.
Here's to a better economy in 2010.
Saturday, October 31, 2009
The Great Recession Ends with Great Damage, Headwinds and Tailwinds, Is the Stimulus Enough?
The Recession is Over, But What Has it Left Us With?
While the "official" declaration of the start and end of a recession comes months later after economic analysts have poured over reams of data on economic performance, the 3.5% growth in Real Gross Domestic Product in the 3rd quarter of this year is sufficient to declare with a very high probability that the so-called "great recession" has ended in the United States.
As a reminder, Gross Domestic Product is a measure of the value of all goods and services produced in the United States in a given time period. It is the most comprehensive measure of the health of the economy essentially because the value of everything produced equates to the value of goods and services that Americans will receive in that quarter -- in other words, we get something for the value that we generate. You can see the last 3 years of GDP growth in the chart below, with the negative quarters, where the economy was actually shrinking, in red.
With a total economic contraction of 3.8%, this ranks right up there with the worst recessions of the Post-World War II era, trailing only the Great Depression, but trailing it by a massive margin (we are talking greater than a 5:1 ratio.) There is a legitimate debate about whether this recession was worse than the double-dipper in 1981-1982 that saw unemployment surge above 10% and mass inflation to go with the economic stagnation (something that we fortunately do not see today, at least yet.)
So if the recession is over, when do things get back to normal? Depends what normal is and what happens going forward.
Keep in mind that the chart above talks about TOTAL GDP. The wealth-generation that people feel in their wallets relates to PER CAPITA GDP, or the total GDP divided by the number of people in this country.
Our population grows by about 1% per year. Therefore, just to keep the same standard of living, the total GDP has to grow by 1%. Any less and our standard of living is slipping. Any more and it is improving, as it historically has.
Think of it this way: if there were 2 people in the country and we made 2 cars in a year, that's 1 new car per person per year. If the population grows to 3 people, we now have to make 3 cars in a year for those 3 people to maintain the same standard of living that the 2 people previously had.
The recession, with all its quarters of negative growth have driven a significant gap in per capita GDP versus its high in the 4th quarter of 2007, when the recession began. The chart below shows the trend in Per Capita GDP.
If we were to maintain the 3.5% annual GDP growth rate that we had last quarter (which is a tall order in and of itself -- more on that later), it would take until the 3rd quarter of 2011 just for per capita GDP to get back to where it was before the recession.
That's a long time to suffer through high unemployment and declining wages. And there is no assurance that this growth rate will continue. The economy faces significant short-term headwinds, although also some long-term reasons to be optimistic.
Head and Tail Winds
There are many reasons to be concerned in the short-term:
The short-term is a little more dicey and harder to call. Will the economy sink back down as stimulus pulls out? Will consumer confidence drag on the economy for some time to come? Economists are split. I think we will continue to grow, but the question is how fast -- will it be enough to solve massive unemployment and consumer confidence or just enough to maintain our now-reduced standard of living?
More Stimulus? Too Much Stimulus?
The second quarter growth numbers have ended debate among serious economists about whether the stimulus had an impact on the US economy -- every credible financial news source cites stimulus funding as one of the major factors behind the return to growth in the second quarter. Clearly, programs like Cash for Clunkers and the Home Buyer Credit helped spur spending and growth.
Critics on the right argue that this a short-term bump up and that we will face negative longer-term consequences as government debt rises and the stimulus abates. They say that any benefit from the stimulus is not worth the long-term cost.
Critics on the left, on the other hand, argue that this simply proves that we didn't do enough stimulus, that the original bill should have been larger, that we probably need a second stimulus shot in the arm.
The White House won't dare to propose that we do something called a second "stimulus" bill, but as I noted a few weeks ago, has been quietly moving to make some small moves, such as extending unemployment benefits and the first-time home-buyer credit.
But there is still a lot of juice left in the first stimulus bill too. As of the latest reports:
Spending -- $123.5 billion of the $499 billion allocated has been paid out as of last week or 24.7%
Tax Cuts -- $83.8 billion of the $288 billion in tax cuts have been paid out or 29.1%
In total of the $787 billion stimulus package, about $207.3 billion has been paid out or 26.3% of the bill's total.
While I had argued that the money needed to go out faster to give the economy a quick shot in the arm, the good news in these numbers is that there are a lot of legs left in the existing stimulus package. If we spent about 26.3% of the bill's allocation and we managed to achieve 3.5% GDP growth for a quarter, it stands to reason that if that money is spent appropriately, we should be able to maintain that growth rate for several more quarters as the balance of the funds are paid out of the course of this year and next year.
The risk is that the most "stimulative" programs, such as Cash for Clunkers may have past and whether the bill continues to drive economic progress will depend on the effectiveness of the remaining programs.
All in all, not only would it be political suicide, it would seem to me to be fool-hardy to propose another stimulus when there is so much left to go on the existing bill.
The economy is a complex beast and if anyone understood all the twists and turns that it takes, that person would probably be able to get very wealthy and might not share that information with the rest of us.
However, the recent news is, on balance encouraging. We aren't on the verge of financial collapse anymore, the economy is growing and unemployment will eventually peak. But there will be more pain along the way.
Thanks for reading. If you like this site, tell your friends.
While the "official" declaration of the start and end of a recession comes months later after economic analysts have poured over reams of data on economic performance, the 3.5% growth in Real Gross Domestic Product in the 3rd quarter of this year is sufficient to declare with a very high probability that the so-called "great recession" has ended in the United States.
As a reminder, Gross Domestic Product is a measure of the value of all goods and services produced in the United States in a given time period. It is the most comprehensive measure of the health of the economy essentially because the value of everything produced equates to the value of goods and services that Americans will receive in that quarter -- in other words, we get something for the value that we generate. You can see the last 3 years of GDP growth in the chart below, with the negative quarters, where the economy was actually shrinking, in red.
With a total economic contraction of 3.8%, this ranks right up there with the worst recessions of the Post-World War II era, trailing only the Great Depression, but trailing it by a massive margin (we are talking greater than a 5:1 ratio.) There is a legitimate debate about whether this recession was worse than the double-dipper in 1981-1982 that saw unemployment surge above 10% and mass inflation to go with the economic stagnation (something that we fortunately do not see today, at least yet.)So if the recession is over, when do things get back to normal? Depends what normal is and what happens going forward.
Keep in mind that the chart above talks about TOTAL GDP. The wealth-generation that people feel in their wallets relates to PER CAPITA GDP, or the total GDP divided by the number of people in this country.
Our population grows by about 1% per year. Therefore, just to keep the same standard of living, the total GDP has to grow by 1%. Any less and our standard of living is slipping. Any more and it is improving, as it historically has.
Think of it this way: if there were 2 people in the country and we made 2 cars in a year, that's 1 new car per person per year. If the population grows to 3 people, we now have to make 3 cars in a year for those 3 people to maintain the same standard of living that the 2 people previously had.
The recession, with all its quarters of negative growth have driven a significant gap in per capita GDP versus its high in the 4th quarter of 2007, when the recession began. The chart below shows the trend in Per Capita GDP.
If we were to maintain the 3.5% annual GDP growth rate that we had last quarter (which is a tall order in and of itself -- more on that later), it would take until the 3rd quarter of 2011 just for per capita GDP to get back to where it was before the recession.That's a long time to suffer through high unemployment and declining wages. And there is no assurance that this growth rate will continue. The economy faces significant short-term headwinds, although also some long-term reasons to be optimistic.
Head and Tail Winds
There are many reasons to be concerned in the short-term:
- A large portion of the growth in the third quarter was created by government stimulus. Cash for clunkers is now gone, the first-time home buyer tax credit may or may not get extended and other stimulus spending and tax cuts will end eventually. Essentially we've grown through government leverage, but that can't last forever
- Unemployment is still very high, at 9.8% and predicted to rise further (although it feels like we are nearing the peak.) High unemployment squashes consumer spending, which in terms impacts growth in the near-term.
- Consumer confidence is still sagging. After recovering from downright scary levels in the winter, when it was 20% of the 1985 benchmark it is measured against, it rose throughout the spring, but still now stands at just 47.7% of its 1985 level, having declined each of the past two months. If consumers aren't confident, they aren't likely to spend.
- Productivity is surging -- worker productivity rose 6.6% in the 2nd quarter of 2009. Productivity is the single best indicator of long-term economic growth, because the more an individual outputs per hour of work, the more that there is to go around, once you get people working.
- Stimulus is not over -- we have a lot of stimulus money left to spend -- more on that later
- History is on our side -- double-dip recessions are actually very rare -- 1981/1982 was the exception not the rule. In the modern era, Americans have shown the capability to buckle down and grow the economy after a recession. Consider the boom that followed the 1990/1991 recession, where we saw some of the best economic growth in the countries history.
- Innovation could be the key -- just as the internet unlocked productivity and output in the past decade, new technology will be the key if we are going to launch into a new era of prosperity. We have still not fully leveraged the internet. Green energy could be a whole new economic boom segment. Upgrading and rebuilding the nation's infrastructure could be a growth industry.
The short-term is a little more dicey and harder to call. Will the economy sink back down as stimulus pulls out? Will consumer confidence drag on the economy for some time to come? Economists are split. I think we will continue to grow, but the question is how fast -- will it be enough to solve massive unemployment and consumer confidence or just enough to maintain our now-reduced standard of living?
More Stimulus? Too Much Stimulus?
The second quarter growth numbers have ended debate among serious economists about whether the stimulus had an impact on the US economy -- every credible financial news source cites stimulus funding as one of the major factors behind the return to growth in the second quarter. Clearly, programs like Cash for Clunkers and the Home Buyer Credit helped spur spending and growth.
Critics on the right argue that this a short-term bump up and that we will face negative longer-term consequences as government debt rises and the stimulus abates. They say that any benefit from the stimulus is not worth the long-term cost.
Critics on the left, on the other hand, argue that this simply proves that we didn't do enough stimulus, that the original bill should have been larger, that we probably need a second stimulus shot in the arm.
The White House won't dare to propose that we do something called a second "stimulus" bill, but as I noted a few weeks ago, has been quietly moving to make some small moves, such as extending unemployment benefits and the first-time home-buyer credit.
But there is still a lot of juice left in the first stimulus bill too. As of the latest reports:
Spending -- $123.5 billion of the $499 billion allocated has been paid out as of last week or 24.7%
Tax Cuts -- $83.8 billion of the $288 billion in tax cuts have been paid out or 29.1%
In total of the $787 billion stimulus package, about $207.3 billion has been paid out or 26.3% of the bill's total.
While I had argued that the money needed to go out faster to give the economy a quick shot in the arm, the good news in these numbers is that there are a lot of legs left in the existing stimulus package. If we spent about 26.3% of the bill's allocation and we managed to achieve 3.5% GDP growth for a quarter, it stands to reason that if that money is spent appropriately, we should be able to maintain that growth rate for several more quarters as the balance of the funds are paid out of the course of this year and next year.
The risk is that the most "stimulative" programs, such as Cash for Clunkers may have past and whether the bill continues to drive economic progress will depend on the effectiveness of the remaining programs.
All in all, not only would it be political suicide, it would seem to me to be fool-hardy to propose another stimulus when there is so much left to go on the existing bill.
The economy is a complex beast and if anyone understood all the twists and turns that it takes, that person would probably be able to get very wealthy and might not share that information with the rest of us.
However, the recent news is, on balance encouraging. We aren't on the verge of financial collapse anymore, the economy is growing and unemployment will eventually peak. But there will be more pain along the way.
Thanks for reading. If you like this site, tell your friends.
Friday, September 4, 2009
2009 Update, Is Obama at Turning the Corner?, Mixed Economic Signals
2009 -- Still Looking Good for the GOP, But Small Reasons to Hope for the DEMS
Will the GOP sweep the New Jersey and Virginia governor races in 2009? It still looks likely, but perhaps slightly less likely than it did a few weeks ago -- especially in New Jersey.
Let's begin in Virginia. McDonnell still leads Deeds by 8 to 15%, depending on which poll you believe. Deeds has scarcely led at all since his come-from-behind win over the much better known Terry McAullife, leading only one poll (an early June Rasmussen poll.) The Real Clear Politics average shows McDonnell at +9.8%, my own sample-weighted methodology puts it at +9.0%. Either way, this one still seems to be a likely GOP pick-up, as Virginia does not historically turn left at the last minute.
In New Jersey, unpopular Gov. Jon Corzine (D) still trails upstart conservative Republican Chris Christie by 5-10% depending on your poll. The RCP average shows Christie +6.5%, my own methodology has Christie doing even better at +7.9%. But this actually shows a significant tightening, as Christie led by double digits throughout all of July and the first half of August. I see a familiar pattern that has played out many times in New Jersey over the past 20 years -- tax-angry voters initially favor the Republican outsider, then, on closer reflection, swing back to their natural blue tendencies. I'll rate this as lean GOP pick-up for now, but I wouldn't be surprised at all if I were calling this a pick 'em by October and projecting a close Corzine win by November.
All-in-all, the GOP has nothing but upside (they are fighting for two seats currently held by Democrats) and still seem poised to take at least one and possibly both of them. But the possibility of massive routs that would have an impact on national policy seems to be waning.
Stabilizing Obama
After almost two months of solid free-fall that cut Obama's approve minus disapprove from +28.3% on June 27th to a low of +8.7% on August 30th, the President's scores have been spiking int he past few days and sit at +11.7% as of September 3rd, a full 3 point improvement in 4 days. This has largely been driven by significant improvements in the Gallup (+9% in 4 days) and Rasmussen (+7% in 4 days) tracking polls, which show wildly divergent overall results (Rasmussen has Obama at -1% today, Gallup at +17%), but a similar trend. Whether this is just a blip, a stabilization or the beginning of a recovery in Obama's numbers remains to be seen. But he still hasn't crossed the 7.2% margin of his November victory...yet.
In his monthly totals, you can see just how big a toll the summer took on Obama's numbers. In 2 months, his monthly averages (which flatten out the spikes and dips) dropped by 14%. September has started slightly lower than August, but for the first time in a long time, the President's daily numbers are ahead of his monthly numbers, which would typically project an increase in his monthly numbers, at least in the short term.
Can We Be Recovering with Unemployment Spiking?
The BLS today announced that the unemployment rate in July had surged by 0.3% to (another) 26-year high of 9.7%. Include underemployed and workers who have given up and you have 16.8%.
So how can I be saying we are in recovery?
As I've said before, unemployment languishes for long after a recession ends (and make no mistake, I believe this one ended this summer.) It is likely the unemployment rate will reach low double digits before it starts declining, towards the end of the year. And the decline may be slow. We "only" lost a little over two hundred thousand jobs in July, which would typically equate to a 0.1% bump in unemployment. The rate went up more, because more of those "given up" workers who don't count in the official tally, have no re-entered the work force. Expect more of the same. But note the stock market actually rallied today on the news, which was slightly better than expected.
Protracted unemployment still poses a huge political issue for the President. The explanation above is not something that President Obama can easily give in a way that is accepted by people. As long as people are out of work and hurting, they won't feel the recession is over.
So, let's get moving on this stimulus!
Latest numbers from recovery.gov:
Estimated Tax Cuts Paid Out: $62.5B (21.7%)
Spending Authorized: $217.0B (43.5%)
Spending Completed: $88.8B (17.8%)
$4.2 billion in stimulus spending happened last week, far above the average since the bill was passed. Still, at that pace, it would take 98 more weeks, almost two years at that pace, to complete spending. That won't be acceptable unless unemployment falls.
Inflation, Pfft
Among the dizzying theories about the end of the recession (is it V-shaped? Or W-shaped? or U-shaped? Or square-root shaped?), one that I don't buy at all is the theory that all this government spending and loose monetary policy will lead to massive inflation.
Inflation occurs when demand significantly outstrips supply of something. With unsold business inventories, house prices way off peak, oil at under $70/barrel and factories way under capacity, I can't see what that thing will be, at least for the next several years.
Sure, the Fed has to be careful to tap the brakes when the time comes...but that time is probably 18 months from now. Inflation risk is very small in the near-term.
Clearly the investing public things so too. The 10-year bond is yielding under 3.5% and the spread between 10-year and 30-year bonds is only 0.7%, implying very little investor fear about inflation, even over longer time horizons. TIPS, which pay a fixed rate over inflation, are yielding 1.8% plus CPI on a 10-year bond, meaning that the investing community has pegged 10-year inflation at a 1.7% rate (the spread between Treasuries and TIPS, which contain all the same risk-aspects, save for the inflation factor.) Hardly the late 70s and early 80s. Inflation may come out higher than that, but inflation under 5% is generally not an inhibitor of economic growth. And I'm not worried that the market is THAT wrong.
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Will the GOP sweep the New Jersey and Virginia governor races in 2009? It still looks likely, but perhaps slightly less likely than it did a few weeks ago -- especially in New Jersey.
Let's begin in Virginia. McDonnell still leads Deeds by 8 to 15%, depending on which poll you believe. Deeds has scarcely led at all since his come-from-behind win over the much better known Terry McAullife, leading only one poll (an early June Rasmussen poll.) The Real Clear Politics average shows McDonnell at +9.8%, my own sample-weighted methodology puts it at +9.0%. Either way, this one still seems to be a likely GOP pick-up, as Virginia does not historically turn left at the last minute.
In New Jersey, unpopular Gov. Jon Corzine (D) still trails upstart conservative Republican Chris Christie by 5-10% depending on your poll. The RCP average shows Christie +6.5%, my own methodology has Christie doing even better at +7.9%. But this actually shows a significant tightening, as Christie led by double digits throughout all of July and the first half of August. I see a familiar pattern that has played out many times in New Jersey over the past 20 years -- tax-angry voters initially favor the Republican outsider, then, on closer reflection, swing back to their natural blue tendencies. I'll rate this as lean GOP pick-up for now, but I wouldn't be surprised at all if I were calling this a pick 'em by October and projecting a close Corzine win by November.
All-in-all, the GOP has nothing but upside (they are fighting for two seats currently held by Democrats) and still seem poised to take at least one and possibly both of them. But the possibility of massive routs that would have an impact on national policy seems to be waning.
Stabilizing Obama
After almost two months of solid free-fall that cut Obama's approve minus disapprove from +28.3% on June 27th to a low of +8.7% on August 30th, the President's scores have been spiking int he past few days and sit at +11.7% as of September 3rd, a full 3 point improvement in 4 days. This has largely been driven by significant improvements in the Gallup (+9% in 4 days) and Rasmussen (+7% in 4 days) tracking polls, which show wildly divergent overall results (Rasmussen has Obama at -1% today, Gallup at +17%), but a similar trend. Whether this is just a blip, a stabilization or the beginning of a recovery in Obama's numbers remains to be seen. But he still hasn't crossed the 7.2% margin of his November victory...yet.
In his monthly totals, you can see just how big a toll the summer took on Obama's numbers. In 2 months, his monthly averages (which flatten out the spikes and dips) dropped by 14%. September has started slightly lower than August, but for the first time in a long time, the President's daily numbers are ahead of his monthly numbers, which would typically project an increase in his monthly numbers, at least in the short term.
Can We Be Recovering with Unemployment Spiking?The BLS today announced that the unemployment rate in July had surged by 0.3% to (another) 26-year high of 9.7%. Include underemployed and workers who have given up and you have 16.8%.
So how can I be saying we are in recovery?
As I've said before, unemployment languishes for long after a recession ends (and make no mistake, I believe this one ended this summer.) It is likely the unemployment rate will reach low double digits before it starts declining, towards the end of the year. And the decline may be slow. We "only" lost a little over two hundred thousand jobs in July, which would typically equate to a 0.1% bump in unemployment. The rate went up more, because more of those "given up" workers who don't count in the official tally, have no re-entered the work force. Expect more of the same. But note the stock market actually rallied today on the news, which was slightly better than expected.
Protracted unemployment still poses a huge political issue for the President. The explanation above is not something that President Obama can easily give in a way that is accepted by people. As long as people are out of work and hurting, they won't feel the recession is over.
So, let's get moving on this stimulus!
Latest numbers from recovery.gov:
Estimated Tax Cuts Paid Out: $62.5B (21.7%)
Spending Authorized: $217.0B (43.5%)
Spending Completed: $88.8B (17.8%)
$4.2 billion in stimulus spending happened last week, far above the average since the bill was passed. Still, at that pace, it would take 98 more weeks, almost two years at that pace, to complete spending. That won't be acceptable unless unemployment falls.
Inflation, Pfft
Among the dizzying theories about the end of the recession (is it V-shaped? Or W-shaped? or U-shaped? Or square-root shaped?), one that I don't buy at all is the theory that all this government spending and loose monetary policy will lead to massive inflation.
Inflation occurs when demand significantly outstrips supply of something. With unsold business inventories, house prices way off peak, oil at under $70/barrel and factories way under capacity, I can't see what that thing will be, at least for the next several years.
Sure, the Fed has to be careful to tap the brakes when the time comes...but that time is probably 18 months from now. Inflation risk is very small in the near-term.
Clearly the investing public things so too. The 10-year bond is yielding under 3.5% and the spread between 10-year and 30-year bonds is only 0.7%, implying very little investor fear about inflation, even over longer time horizons. TIPS, which pay a fixed rate over inflation, are yielding 1.8% plus CPI on a 10-year bond, meaning that the investing community has pegged 10-year inflation at a 1.7% rate (the spread between Treasuries and TIPS, which contain all the same risk-aspects, save for the inflation factor.) Hardly the late 70s and early 80s. Inflation may come out higher than that, but inflation under 5% is generally not an inhibitor of economic growth. And I'm not worried that the market is THAT wrong.
If you like this site, tell your friends.
Friday, August 21, 2009
Hypocrites Abound, Rewind to November, The Coming Economic Boom That Will Change Everything
All for People's Rights...As Long As They Are Our People
When liberal activists began protesting the Iraq war, conservatives condemned the protests as un-American and sought to demonize the protesters. The Bush-backers stated that protesting the President in a time of war was wrong. They condemned comparisons of Bush to Nazi leader Adolf Hitler.
Liberals mouth-pieces, on the other hand, glorified the protests as the most true form of patriotism, a passionate expression of free speech and the very basis of Democracy. They even half-way supported the Hitler analogy -- not explicitly, mind you, but made it clear that they understood with Bush's politics how people could feel that way.
My, how times have changed.
Conservative protesters shouting down their Representatives and Senators are hailed from the right as champions of democracy and true Americans and condemned by the left as un-American and conspiratorial. This time, it is the right that is half-way supporting the Hitler analogy and the left that is calling it across the line.
Do these people just have really short memories or do they think we do?
Protests are a proud demonstration of American democracy. No one should try to stifle the airing of anyone's opinion, right or left. The right to protest should be protected, bar none.
That doesn't make protesters right. I support the right of the Klan to have a march, but I think their views are heinous. The right to speak doesn't imply the right to have me listen.
The debate would be so much more reasoned if we could agree to the principle that everybody should be allowed to protest...that it is both their right and their duty when they feel their country has gone awry. Let's instead discuss the MERITS of their protests. And in both cases, the comparison to Hitler was ridiculous and overblown.
On the merits, comparison of either George W. Bush or Barack H. Obama to Adolf Hitler is not particularly useful, because to any half-way informed person, clearly neither man is Hitler. If you believe that either one's grand ambition is to kill Jews, Catholics and gypsies to bring the Aryan Nation to its full potential and to take over Europe, please stop reading this blog right now and go back to first grade.
In the case of the right-wing protesters, please at least get your extreme analogies right. Hitler was about as far from a socialist as you can get. If you want to pick an extreme figure to compare Obama too, at least be intellectually consistent enough to pick a communist instead of a facist.
So, let's let the right protest...it's one of the few tools that the party out of power has to make their voices heard. And then let's resolve to do what we believe is the right policy.
On a realated note, I was entertained to see Rep. Barney Frank (D-MA) take on protesters at his town hall. Far from the timid response that many deer-in-the-headlights Democrats have shown, Rep. Frank fought back. Some say he was talking down to his constituents. I think when somebody asks you why you support Nazi policies, you are well within the principles of decorum to ask them what planet they spend most of their time on.
It's Just Like Election Day...
The protests we are seeing are symptomatic of the great partisan divide in this country. The red states and blue states (or more accurately, red regions and blue regions) that we have been talking about this whole decade. On election day, Barack Obama won a "huge" victory by modern standards...by 7.2% of the vote. That means almost 47% of voters did not vote for him. And those percentages were a hell of a lot larger in places like South Carolina, Utah, Oklahoma and Kentucky.
For a brief period after his election, as is often typical with new Presidents, the country unified. Hopeful of the President's promise of post-partisanship, his decrying of the red state-blue state phenomenon, they looked for a new era of cooperation and solution.
Then reality set in. Democrats are Democrats because they support Democratic policies. Republicans are Republians because they support Republican policies. If we have had complete bi-partisanship, we wouldn't need two parties. The two we do have clearly disgaree on a number of major issues facing our country.
So after a little post-election euphoria, the poll numbers for President Barack Obama look awful close to how they did on election day...still favorable, but hardly a unification of the whole country:
In his monthly averages, we see a continuation of the same slide.
The real question is: will the President hold steady at near the totals he had on election night or will he continue to decline into unpopularity?
The fate of health care reform and the economy will likely determine that. And on at least one of those fronts, things are looking up.
The Coming Boom
It is completely unmistakable now...the global recession has ended. Germany, France and Japan all are growing economies again. We won't know how the U.S. economy fares in the third quarter, but I would be willing to be a substantial sum of money that it is already growing again as well. Productivity, the engine of long-term economic growth, has been shooting up over the last two years.
Yes, we face problems. Unemployment is still WAY too high, the budget deficit is WAY too large (more on that in my next blog) and consumers are still wary of spending money. But rest assured, things are going to look much better a year from now than they do today. Don't be too surprised when the economy turns if the protests get a little quieter too.
If you like this site, tell your friends. And, as always, I welcome your comments.
Next Up: A look at the deficit and debt, my thoughts on Tom Ridge's allegations and our regular update on the stimulus bill.
When liberal activists began protesting the Iraq war, conservatives condemned the protests as un-American and sought to demonize the protesters. The Bush-backers stated that protesting the President in a time of war was wrong. They condemned comparisons of Bush to Nazi leader Adolf Hitler.
Liberals mouth-pieces, on the other hand, glorified the protests as the most true form of patriotism, a passionate expression of free speech and the very basis of Democracy. They even half-way supported the Hitler analogy -- not explicitly, mind you, but made it clear that they understood with Bush's politics how people could feel that way.
My, how times have changed.
Conservative protesters shouting down their Representatives and Senators are hailed from the right as champions of democracy and true Americans and condemned by the left as un-American and conspiratorial. This time, it is the right that is half-way supporting the Hitler analogy and the left that is calling it across the line.
Do these people just have really short memories or do they think we do?
Protests are a proud demonstration of American democracy. No one should try to stifle the airing of anyone's opinion, right or left. The right to protest should be protected, bar none.
That doesn't make protesters right. I support the right of the Klan to have a march, but I think their views are heinous. The right to speak doesn't imply the right to have me listen.
The debate would be so much more reasoned if we could agree to the principle that everybody should be allowed to protest...that it is both their right and their duty when they feel their country has gone awry. Let's instead discuss the MERITS of their protests. And in both cases, the comparison to Hitler was ridiculous and overblown.
On the merits, comparison of either George W. Bush or Barack H. Obama to Adolf Hitler is not particularly useful, because to any half-way informed person, clearly neither man is Hitler. If you believe that either one's grand ambition is to kill Jews, Catholics and gypsies to bring the Aryan Nation to its full potential and to take over Europe, please stop reading this blog right now and go back to first grade.
In the case of the right-wing protesters, please at least get your extreme analogies right. Hitler was about as far from a socialist as you can get. If you want to pick an extreme figure to compare Obama too, at least be intellectually consistent enough to pick a communist instead of a facist.
So, let's let the right protest...it's one of the few tools that the party out of power has to make their voices heard. And then let's resolve to do what we believe is the right policy.
On a realated note, I was entertained to see Rep. Barney Frank (D-MA) take on protesters at his town hall. Far from the timid response that many deer-in-the-headlights Democrats have shown, Rep. Frank fought back. Some say he was talking down to his constituents. I think when somebody asks you why you support Nazi policies, you are well within the principles of decorum to ask them what planet they spend most of their time on.
It's Just Like Election Day...
The protests we are seeing are symptomatic of the great partisan divide in this country. The red states and blue states (or more accurately, red regions and blue regions) that we have been talking about this whole decade. On election day, Barack Obama won a "huge" victory by modern standards...by 7.2% of the vote. That means almost 47% of voters did not vote for him. And those percentages were a hell of a lot larger in places like South Carolina, Utah, Oklahoma and Kentucky.
For a brief period after his election, as is often typical with new Presidents, the country unified. Hopeful of the President's promise of post-partisanship, his decrying of the red state-blue state phenomenon, they looked for a new era of cooperation and solution.
Then reality set in. Democrats are Democrats because they support Democratic policies. Republicans are Republians because they support Republican policies. If we have had complete bi-partisanship, we wouldn't need two parties. The two we do have clearly disgaree on a number of major issues facing our country.
So after a little post-election euphoria, the poll numbers for President Barack Obama look awful close to how they did on election day...still favorable, but hardly a unification of the whole country:
In his monthly averages, we see a continuation of the same slide.
The real question is: will the President hold steady at near the totals he had on election night or will he continue to decline into unpopularity?The fate of health care reform and the economy will likely determine that. And on at least one of those fronts, things are looking up.
The Coming Boom
It is completely unmistakable now...the global recession has ended. Germany, France and Japan all are growing economies again. We won't know how the U.S. economy fares in the third quarter, but I would be willing to be a substantial sum of money that it is already growing again as well. Productivity, the engine of long-term economic growth, has been shooting up over the last two years.
Yes, we face problems. Unemployment is still WAY too high, the budget deficit is WAY too large (more on that in my next blog) and consumers are still wary of spending money. But rest assured, things are going to look much better a year from now than they do today. Don't be too surprised when the economy turns if the protests get a little quieter too.
If you like this site, tell your friends. And, as always, I welcome your comments.
Next Up: A look at the deficit and debt, my thoughts on Tom Ridge's allegations and our regular update on the stimulus bill.
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