Tag Archives: political economy

Another Impact of Obamacare

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The Labor Department released its April jobs data last Friday.  First, the good news: the labor force participation rate didn’t change from March—good news because it actually means more folks, in absolute terms, are participating, since the US’ population increased from March, and because while participation still is down from last January and remains near 30-year lows, it’s not dropping further.  Also, 165,000 new non-farm jobs were added in April—no great shakes compared with what’s needed for actual economic growth, but it’s better than even the upwardly revised number for March.  These combined to lower the unemployment rate a tick from March, to 7.5%.

Buried in the numbers, though, are some worrisome data [emphasis added].

[A] broader rate, known as the “U-6” for its data classification by the Labor Department, increased to 13.9% from 13.8% a month earlier.
…
In April, the rate ticked up as the number of workers who are part-time but want full-time work increased.  That came even as the numbers of hours worked also dropped this month for all workers.

The primary reason the hours are dropping is illustrated by this.

…the decision by some employers to keep fewer full-time workers on the payroll or reduce the hours of near full-time workers to avoid having to provide health insurance.

It’s not limited to private enterprise:

Consider the city of Long Beach.  It is limiting most of its 1,600 part-time employees to fewer than 27 hours a week, on average.  City officials say that without cutting payroll hours, new health benefits would cost up to $2 million more next year, and that extra expense would trigger layoffs and cutbacks in city services.

And

Overall, an estimated 2.3 million workers nationwide, including 240,000 in California, are at risk of losing hours as employers adjust to the new math of workplace benefits, according to research by UC Berkeley.  All this comes at a time when part-timers are being hired in greater numbers as US employers look to keep payrolls lean.

As the WSJ put it,

This raises the question about the kinds of jobs being created, and whether they can support a faster recovery.

The Party of Stupid, Again

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Mark Peters and Neil King, writing in The Wall Street Journal, described the party’s latest escapades, this time in state governments, late last week.

Republican lawmakers in several states are blunting plans by GOP governors to reduce or eliminate income taxes, putting the legislators at odds with figures many in the party see as leading voices on reshaping government.

Friction over tax policy within the GOP has flared in states such as Louisiana, Nebraska, Kansas and Ohio, as Republican lawmakers raise concerns over projected revenue losses from income-tax cuts.  Three of those states shelved big income-tax cuts that would be paid for by broadening the sales tax, and in Kansas, legislators will return next week to a continuing debate over the size and speed of proposed cuts.

And

What is playing out is a collision of long-held Republican Party ideals as lawmakers want to cut taxes to spur economic growth without running up deep budget deficits.  Most of the governors promoting cuts are first-termers who say the income tax damps consumer spending and business creation.  The boldest plans, however, can’t be done without expanding the sales tax and eliminating certain exemptions, a shift many legislators aren’t willing to embrace.

As I’ve pointed out many times, these beefs flow from the false premise that the (state) governments need the revenues.  No.  Cut spending to fit within the (lower) taxes—which actual revenues will increase, anyway, from the resulting stronger and growing state economies.  Reduce overdone services; eliminate the frivolous and/or duplicative ones (New Jersey has six separate services related to agriculture as well as an Arts Council and an Arts and Recreation service that are better done locally and/or in the private sector; Arizona’s descriptions of its state-run services run to 500 pages of…regulations); let the private sector do more with its own money; let private charity, church, community play more of their proper role.

Indiana House Speaker Brian Bosma (R, Indianapolis) said of a tax reduction plan generated by Governor Mike Pence (R)

You can’t just have a reaction and say, “Yep, we’re going to cut a tax.”  You have to look in the long haul—over a decade—to be sure it’s sustainable.

Yes, you can.  It’s sustainable from cutting spending commensurately.

Peters and King note

[t]he tax debate in Republican-dominated capitols comes as national party leaders see the states as a source of policy innovations and fresh faces following Republican election defeats on the federal level last November.  The Republican National Committee recently heralded its 30 GOP governors as “America’s reformers in chief.”

It’s hard to make this case, though, with the evident hypocrisy the Republican state legislators are showing.

Figure it out, guys.  Either you’re for low taxes, little spending, and limited government, or you’re not.  Do we need to generate a new party that takes shrinking government seriously?

Federal Debt and GDP Growth

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In a speech by Federal Reserve Chairman Ben Bernanke to the Japan Society of Monetary Economics, a few short years ago, he said

In economics textbooks, the idea that people will save rather than spend tax cuts because of the implied increase in future tax obligations is known as the principle of Ricardian equivalence.  In general, the evidence for Ricardian equivalence in real economies is mixed, but it seems most likely to apply in a situation like that prevailing today in Japan, in which people have been made highly aware of the potential burden of the national debt.

The principle of Ricardian equivalence does not apply exactly to increases in government purchases (for example, road building) but it may apply there approximately.  If, for example, people think that government spending projects are generally wasteful and add little to national wealth or productivity, then taxpayers may view increased government spending as simply increasing the burden of the government debt that they must bear.  If, as a result, they react to increases in government spending by reducing their own expenditure, the net stimulative effect of fiscal actions will be reduced.

A part of what Bernanke intimates is that government debt and government spending are closely intertwined: debt is a function of that spending.  It’s also a function of taxes, since debt results from the accumulating excess of spending over tax collection, but the primary driver of debt is that spending and not the taxes or their collection.  After all, government has immediate and proximate control over its spending, but it has only indirect control over its tax collections—through tax rates which it sets and through the strength of the underlying economy, which is impacted by that spending.

But what is the impact on the US’ economy, for instance, from Federal spending and the associated national debt?  I have some graphs below which show that, but first I want to talk a little about our GDP.

Our Gross Domestic Product, the total value of the US’ economic output—our goods and services—is estimated by a simple, third grade arithmetic formula: GDP=C+I+G+(Ex-Im), or the sum of total consumer spending, business investment, and our net exports in our international trade.  Consumer spending and business investment together comprise the bulk of our private economy, the economy in which we and our businesses conduct our affairs.

Using this formula, many economists will insist that increases in government spending, perforce, increases GDP, and based on this formula they’re right.  However, the formula, far from being merely simple, is actually simplistic: it ignores the interactions between government spending and private economy activity—those interactions of which Bernanke spoke.

One further point: this formulation measures GDP in terms of the value of the goods and services, not the volume of production of these, which would be another measure of national economic activity.  By measuring GDP in terms of pricing, the measure is made susceptible to distortion through inflation.  By inflating prices, the value of GDP can be made to seem to increase, even if actual production is not rising as quickly, is stagnating, or even is contracting.

The first of these isn’t necessarily bad; a healthy economy will see production rise, after a lag, in response to (slowly) rising prices, and this can lead to more business investment and more jobs, and more consumer spending.  But the other two are plainly the result of a shrinking or even failing economy, disguised by that overall measure.

Now let’s return to Bernanke’s remarks and look at the effect of government spending and national debt on our private economy, the total of our spending and our business’ investment.  The graphs below were developed from data collected here, here, and here, and they cover US economic history from 1900 through 2012.

The first graph below shows the per cent change, year on year, in government spending and private sector activity.

It’s easy to see that while small changes in government spending from one year to the next have little impact on the private economy, large changes—the sharp increases during the two World Wars of the last century, for instance, and the avowedly stimulative spending of 2009 and since—actually have been counterproductive in terms of facilitating economic activity in the private sector.

Those sharp increases are associated with depressed private economic activity, while large drops in government spending are associated with increases in that private activity.  In Bernanke’s terms, taxpayers simply view government spending as wasteful (the present period) and/or as future debt to be borne by them (the two war periods), and reduced their own activity—were crowded out of the overall economy—by that spending.

A careful observer might notice the Depression period and wonder at the sharp increase in government spending there, followed by an increase in private sector activity.  This, though, is an example of price rises (here, smaller decreases than expected)—inflation*—increasing the price value of GDP while actual economic activity—the volume of production—remained depressed.  Unemployment, for instance, remained at historically high levels throughout the Depression, and prices were, by Federal policy, inflated (or not allowed to decrease IAW market forces) via FDR’s wage and (farm) price controls.

The next graph shows the relationship between year to year changes in government debt and private sector economic activity.

There’s not much difference between this debt graph and the spending graph above.  That’s to be expected, though, since government borrowing is a function of government spending.  The argument for the depressive effects of large changes in government debt on the private economy apply here, also.

This last graph shows the prolonged effects of large changes in government borrowing on private sector economic activity; it compares the year to year change in government debt with the two-year change in private sector activity, thereby illustrating a more prolonged effect from government borrowing.

Now the effect is even more pronounced.  The depressive effects of government (spending and) borrowing during the Depression become clearer, for instance.  Clearer, also, is the effect of large reductions in government borrowing: private sector activity picks up sharply after a reduction has lasted long enough for crowding out effects of the underlying government spending to have time to work out of the economy and as the players in the private economy—individuals and our businesses—start to believe that the borrowing and spending actually is reducing.

Finally, there’s this view of Larry Summers, President Barack Obama’s National Economic Council at the start of Obama’s first term and one of the architects of the destructive 2009 Stimulus package of spending moves:

Mr Summers says governments should borrow more now at near-zero interest rates to invest in future growth.

Summers is ignoring the fact that these low rates are artificially low due to Fed interference in the market for the purpose of keeping interest rates low.  These artificially low interest rates harm the economy, however: they’re future inflation, they’re future taxes—even these “low cost” borrowings have to be repaid—and they inhibit capital investment, house (and other big ticket item) buying, etc by making lenders less willing to lend—they can get better returns on their money elsewhere.

These artificially low rates are a future threat to our economy, also.  By encouraging profligate borrowing of the sort Summers favors, lenders—including sovereign lenders (e.g., The People’s Republic of China, Japan, the EU, and so on)—will lose faith in our ability to repay.  They’ll stop lending until the interest rates we’re willing to pay rise to fit that risk.  In addition to this, and separate from it, they’ll take their lending renmimbi, yen, euros, etc somewhere else where they can invest them at better rates of return.

 

*It was a depressionary period, certainly, but the government’s moves to artificially prop up prices during that time, rather than allowing the market to clear, was (relatively) inflationary: a smaller than to be expected drop in prices is as inflationary as is a larger than to be expected rise in prices.

Some Misconceptions about Debt

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AP has some.

A number of misconceptions are shown in their article carried by Fox News.  They begin with this:

China is responsible for just a shade over 7% of [US’] total debt.  And while it remains the single largest foreign lender (just ahead of Japan), China’s been slowly trimming its holdings, down from nearly 10% a few years ago.  Overall, all foreign investors—including national central banks—account for roughly one third of the total outstanding federal government debt.

Never mind that there’s a reason the SEC requires those who acquire 5% of the shares of a company to file public documents identifying that acquisition.  That’s enough to start exerting significant influence over the company’s behavior.

Then the AP writes this misconception:

The national debt will soon be front-and-center again…with an expected new Obama administration request to increase the government’s borrowing authority, the legislatively set debt ceiling.  The higher limit would not authorize borrowing for new spending but just enables the government to pay all the bills already racked up.

This is, at best, a naïve reading of the present administration’s demand to continue borrowing.  It’s the House of Representatives that is so loathe to raise the borrowing limit without an offsetting reduction in actual spending.  President Barack Obama repeatedly disparages that body for insisting on reducing spending: he wants to borrow more so he can spend more, not so he can simply “pay all the bills already racked up.”  Those already racked up bills are the result of his past five years’ spendthrifting.  And of similar overspending by prior administrations.

And this:

US politicians see the mountain of debt, but investors globally view US Treasury securities as among the world’s safest financial havens, reflected in part by their current super-low yields.

There are two misconceptions in this single sentence: 1) for how much longer, as our debt continues to grow out of control, will those global investors view our Treasury securities as safe?  How safe do those global investors see Greek debt as being?  Cypriot debt?  Spanish debt?  Etc?  2) Those “super-low yields” aren’t market rates, they’re artificially suppressed rates capped by Fed intervention in the market.  For how long will those global investors be satisfied with such poor returns on their investments?

And this quote from Nicholas Lardy, a Senior Fellow at the Peterson Institute for International Economics:

There’s a huge misconception here.  The guy on the street thinks that we’re up to our ears in indebtedness to China.  And it is a large absolute amount.  But the public holds a lot more….

We are up to our ears in indebtedness to China.  That we’re even more irresponsibly in debt to ourselves doesn’t at all mitigate that simple fact.

Finally,

Social Security holds $2.7 trillion of the debt in its trust fund, in the form of special unmarketable Treasury bonds.  The Federal Reserve holds a $1.7 trillion portfolio of Treasury notes and bonds, much of it accumulated over the past four years with its heavy purchase of US securities to stimulate the economy and hold down interest rates.

This is simply a description of one contributory factor in Social Security’s impending failure: that’s a debt that cannot be repaid—at any price, marketable or not—given our present, much less our growing, unsustainable overall debt.  Notice, also that market manipulation of interest rates—the avowed purpose of the purchases.

The Growth Deficit Redux

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There’s this from last fall:

Let’s look at this another way.  It’s been widely reported that this “recovery” is the weakest, most anemic post-recession recovery in our nation’s history.  Those reports aren’t far wrong.  A normal recovery coming out of a downturn as deep and steep as was the Panic of 2009 typically sees growth rates of 5%-6% per year, or more.  This Obama recovery has been 6.7% over the entirety of his term in office—nearly four years [as of October 2012.  It’s not any better today].  Had we seen a normal recovery (and using a pessimistic 5%/year growth rate), we would have reached today’s unemployment rate after a shade over one year—in 2010—and we would have been back to full employment (in the range of 4.8%-5.5%) in just under 2 years—by last year.

Next, there’s this from last weekend:

We are now in year five of what has been one of the great experiments in Keynesian economic policy.  We were told that if Congress would spend $830 billion more temporarily, and the Federal Reserve would unleash monetary policy, a recovery would begin and rapid growth would resume.  Larry Summers, Alan Krueger, Jared Bernstein and their allies on Wall Street got their policy wishes.  Their economy has delivered mediocre growth and declining middle-class incomes—though we will concede that the wealthy have done well as the stock market has recovered.

So now the same Keynesians say the spending blowout wasn’t large or long enough, taxes still aren’t high enough, and monetary policy hasn’t been easy enough.  What this economy really needs is a statute of limitations on intellectual denial.

Finally, there’s this from Henry Morgenthau in the depths of that earlier great experiment in Keynesian economic policy:

We have tried spending money.  We are spending more than we have ever spent before and it does not work.  I want to see this country prosper.  I want to see people get a job.  I want to see people get enough to eat.  We have never made good on our promises.  I say after eight years of this administration, we have just as much unemployment as when we started.  And enormous debt to boot.

Hmm….