by Dave Schuler on July 29, 2010
Over at Naked Capitalism there’s a post on the various sources of drag we can expect on the economy in upcoming months:
The manufacturing sector has pancaked in June and July after giving roughly a 1% boost to GDP over the last 4 quarters. Moody’s says we can expect to subtract that 1% mfg boost to the economy in 2011. “It’s becoming increasingly clear that the biggest lift from the inventory cycle is over. The inventory swing added nearly a percentage point to real GDP growth over the past year and is unlikely to add anything during the coming year. This will weigh on manufacturing output over the next several months.”
David Rosenberg adds that there will be a 1.5% fiscal drag in 2011, and reminds us of a third potential drag on the economy in 2011, the expiration of the Bush tax cuts.
This highlights a point I’ve been trying to make none too articulately around here for some time. A slowdown in manufacturing is dragging GDP down. Fiscal problems are dragging the economy down. If there’s a tax increase, that’ll be a drag, too.
Those aren’t the only sources of drag. We have enormous over-investment in the financial sector, the construction sector, the retail sector, and the healthcare sector, all consequences of government bungling over a long period of time. That has an attendant deadweight loss, another major drag on the economy. Then there’s the general deadweight loss of government.
How much drag can the economy stand before it has all the buoyancy of a lead balloon.
I think one thing is for certain: we’ll never solve our problems by adding additional drag.
by Dave Schuler on July 29, 2010
The scandal surrounding the salaries of city officials in Bell, California continues to make ripples:
The scandal over high salaries paid to Bell officials has city leaders throughout the state scrambling to limit the political damage.
City halls have seen an uptick in residents calling to find out what their local officials make ever since the story broke two weeks ago and prompted widespread public outrage.
On Thursday, city managers from across the state will gather in Sacramento to discuss damage control. Among the ideas on the table: launching an independent examination of city officials’ salaries and compiling a database of salaries for municipal executives.
The Legislature also is mulling several Bell-inspired proposals, including a requirement that cities make salaries easily accessible on websites. Another suggestion would cap pensions of highly paid city officials, an issue that arose after The Times reported that former Bell City Manager Robert Rizzo, who earned nearly $800,000 a year, would receive roughly $600,000 a year in pension benefits once he retired.
It wasn’t just the city manager. The chief of police was earning a half million dollars a year, the chairman of the city council way into six figures, and each city councilman was earning a hundred thousand a year for a part-time job.
It might be helpful for me to explain just what was going on here. It wasn’t merely that city officials had been able to secure ridiculously high salaries for themselves away from the prying eyes of taxpayers although that would have been bad enough. Bell participates in the California state retirement system. Under that system the participants in the system all share in the underwriting of the system.
Pensions paid to public employees are paid based on a certain percentage of their wages from their last several years of service. The Bell officials were not only boosting their salaries to get the money now. They were boosting them in anticipation of big payouts from the pension system for the rest of their lives, looting not merely the taxpayers of Bell but those of the entire state.
This is just the tip of the iceberg. The problem of public pensions and their abuse is one that reaches from the president of the United States to the lowliest town dog-catcher, from the federal government down to villages of 50 people.
If I were king I’d do the following:
- No elected official at any level would be eligible for any pension whatever as a consequence of being elected to office.
- Being elected to office would automatically disqualify individuals from pensions previously vested as a consequence of working for government at any level.
- The pension plans of all civil servants at all levels of government would be converted to defined contribution plans rather than defined benefit plans.
- Public pension checks should only be mailed to addresses within the jurisdictions in which the pensions were vested. Having pension checks mailed to addresses other than a primary residence should be considered fraud.
The present situation is a scandal and an outrage. I have no confidence that short of action by the federal government analogous to Eisenhower’s sending of the 101st Airborne to Little Rock Central High School a great deal will be done about it. Even if the state governments manage to curtail the very worst abuses in outlandish wages for public officials we’ll still have ridiculous pension commitments, the fruit of years of fraud and abuse, and state elected officials will be afraid of rakebacks affecting their own pensions.
by Dave Schuler on July 29, 2010
Apparently, the White House wants to stimulate the economy by building affordable housing:
In conjunction with this event, Treasury released a new report (pdf) yesterday showing that, through June 30, states have awarded more than $4.1 billion in Recovery Act funds to provide affordable housing, and that this funding has saved or created more than 80,000 jobs building or rehabilitating those housing units. Mayor Fenty noted that, with support from Treasury and the Recovery Act, the District of Columbia has created 7,510 new units of affordable housing and preserved over 4,600 units since 2007.
The Treasury report released yesterday also shows that state housing authorities have leveraged these sub-awards with financing from private investors and other federal programs to fund the construction or rehabilitation of more than 57,000 housing units – more than 53,000 of which are for low-income residents.
This Recovery Act program is helping to not only create new jobs, but improve the long-term strength of our communities. These are exactly the type of investments we need to make in order to continue the momentum of this recovery and lay the groundwork for future prosperity.
Perhaps I’m missing something. Don’t we already have an enormous inventory of unsold housing? I recognize that what’s on the market probably doesn’t fit into the affordable category but does building more housing sound like a good use of stimulus funds to you?
I could add that I drove down to Midway Airport last week and on the way saw hundreds of units of subsidized housing that had been boarded up, vacant except, possibly, for squatters. Demolishing those eyesores and contributors to urban blight and making the space available for other uses would be a better use of funds than building more housing.
Indeed, if you want a good snapshot of the history and conundrum of the American economy you could do worse than driving down Cicero Ave. from, say, the northern border of Chicago to Midway Airport. On the way you’ll pass mile after mile of empty factories, empty lots where factories and warehouses used to be, and shopping malls with no shoppers that have been built where factories and warehouses used to be.
by Dave Schuler on July 29, 2010
The Blinder-Zandi paper I mentioned here is now online. I think it’s an excellent paper if only for the way it brings together all of the measures taken by the Federal Reserve, the U. S. Treasury, and the U. S. Congress in response to the financial crisis and subsequent economic downturn in a convenient, single place.
In my view it, too, has the problems that are apparently commonplace is economics—measuring inputs rather than outputs and making post hoc arguments. For example, I think their demonstration that consumer spending rose as a consequence of measures in the ARRA is particularly weak. That spending can be deferred does not imply that it can be deferred indefinitely. I see no way to determine whether the increased spending would have just taken place anyway. In addition the scale of the graph they used is inadequate to determine the effects of timeshifting from potential future spending.
I would sum up the takeaways from the paper like this. According to the authors
- The steps taken (mostly by the Fed) have been effective in averting a complete meltdown of the financial system.
- The ARRA (fiscal stimulus) has been less important in producing an economic recovery but not negligible, either.
- State budgets would have been in even worse shape than they are without the ARRA.
- The tax cuts that were part of the ARRA were effective in boosting consumer spending.
- The Keynesian multipliers were highest on the additions to spending for food stamps, lowest for certain tax cuts.
Update
Arnold Kling’s reaction to the paper is “Let’s do the time warp again!”:
If macroeconometrics were a viable paradigm, we would have seen major efforts to try to bring this sort of model up to date from its 1975 time warp. However, for reasons I have documented, the profession has decided that this macroeconometric project was a blind alley. Nobody bothered to bring these models up to date, because that would be like trying to bring astrology up to date.
There are more detailed criticisms at the link.
He also says here that the reason that their study wasn’t published in a peer-reviewed publication is that its statistical and theoretical approaches would not have passed muster.
Update 2
Tyler Durden is even more critical:
Yesterday’s “paper” (more in the napkin sense than as a synonym for “intellectual effort”) by Mark Zandi and Alan Blinder, which was nothing more than a glorified cover letter for selected perma-Keynesian posts in the administration’s Treserve complex, was so outright bad we did not feel compelled to even remotely comment on its (lack of any) substance.
For substantive criticism he directs us to Stanford economist John Taylor’s Economics One:
I have now had a chance to read the paper and have more to say. First, I do not think the paper tells us anything about the impact of these policies. It simply runs the policies through a model (Zandi’s model) and reports what the model says would happen. It does not look at what actually happened, and it does not look at other models, only Zandi’s own model. I have explained the defects with this type of exercise many times, most recently in testimony at a July 1, 2010 House Budget Committee hearing where Zandi also appeared. I showed that the results are entirely dependent on the model: old Keynesian models (such as Zandi’s model) show large effects and new Keynesian models show small effects. So there is nothing new in the fiscal stimulus part of this paper.
Second, I looked at how they assessed the impact of the financial market interventions. Again they do not directly assess the interventions. They just simulate the model with and without the interventions. They say that they have equations in the model which include the financial interventions as variables, but they do not report the size or significance of the coefficients or how they obtained them.
Third, the working paper makes no mention of previously published papers in the literature which get different results. It is rather standard in research to provide a literature review and to explain why the results are different from previous published papers. For the record there are different results in papers by John Cogan, Volcker Wieland, Tobias Cwik and me in the Journal of Economic Dynamics and Control, by John Williams and me in the American Economic Journal; Macroeconomics, or by me published by the Bank of Canada or the St. Louis Fed.
He also notes that the appendix of the paper points out that policy actually performed worse than the model said it should. That reminds me of a wisecrack from an old professor of mine, Bergen Evans: “I never pay much attention to any student’s paper until the first ‘however’.”
by Dave Schuler on July 28, 2010
We can’t simply inflate our way out of any coming debt crisis in the United States because we have so much in the way of future liabilities which will become worse with inflation.
by Dave Schuler on July 28, 2010
I generally disagree with Harold Meyerson but in his column this morning he gives voice to some things that have concerned me for some time:
The GM model typifies that of post-crash American business: massive layoffs, productivity increases, wage reductions (due in part to the weakness of unions), and reduced sales at home; increased hiring and booming sales abroad. Another part of that model is cash retention. A Federal Reserve report last month estimated that American corporations are sitting on a record $1.8 trillion in cash reserves. As a share of corporate assets, that’s the highest level since 1964.
Why invest in new plants, offices and workers, particularly here at home? Spooked by the 2008 crash, corporations want to keep more money under the mattress. More important, they’re sitting pretty as profits rise.
Is this model sustainable? It’s hard to say — a double-dip recession could plunge their profits yet again. But from the American worker’s perspective, the model, no less than a new downturn, is an unqualified disaster. It portends the kind of long-term, structural unemployment that we haven’t seen since the 1930s. It locks into place a generation of reduced incomes.
This dystopian America already stares us in the face. Fully 46 percent of the unemployed have been without work for six months or more — the highest level since the Bureau of Labor Statistics began measuring such things in 1947. Two years ago, just 18 percent of the unemployed were jobless for more than six months. America’s private-sector job machine — the marvel of the world since 1940 — has clanged to a halt, and there’s no place for it in corporations’ new business model.
The restoration of American prosperity, then, isn’t likely to be driven by our corporate sector. Across-the-board business tax cuts make no sense when business is already sitting on oceans of cash. Targeted tax cuts and credits for strategic investment and hiring within the United States, on the other hand, make excellent sense. The Obama administration has proposed expanding the tax credit for the manufacture of green technology here at home, and congressional Democrats will soon unveil legislation creating further incentives for domestic manufacturing.
What if this is the recovery? What if unemployment hovers around 10% for the foreseeable future or, at least, until the next economic downturn when it goes higher? It’s not merely that people aren’t willing to take the jobs that are there, it’s that there aren’t enough jobs to take. Should we be willing to support 10% of the populace forever? Will we be?
Just as I don’t believe that any company has ever cost-reduced its way to greatness, I don’t think that the federal government can cut its budget to national prosperity. Other things have got to happen, too.
I think I’ve made my views pretty clear. I’d like to see means-testing of entitlements, a radical reformation of the healthcare system, major cuts in the defense budget, and substantial reforms in employee compensation of government employees at all levels. I don’t think that those things alone are going to get us on the right track again, however.
What if this is as good as it gets?
Update
Mish:
Given that housing leads recoveries (more specifically housing starts followed by new home sales), this is another nail in the coffin that suggests there has been no recovery except in financial assets. Moreover, that financial recovery is only a result of unsustainable stimulus that is now quickly fading into the sunset.
by Dave Schuler on July 28, 2010
Attorneys made their closing arguments in the corruption case against former Illinois Governor Rod Blagojevich and the case is expected to go to the jury today:
Jurors are expected to begin their deliberations Wednesday after they are instructed on the law by U.S. District Judge James Zagel, who has presided over the trial, the second of a former Illinois governor in four years. Blagojevich’s brother, Robert, who ran the Friends of Blagojevich campaign fund in the waning months of 2008, is also on trial.
In the second day of closing arguments, the two lawyers described Blagojevich in terms both starkly different and opposite from normal expectations. It was Adam who often seemed to diss his own client, while Schar found himself praising the former governor’s skills.
Adam found Blagojevich “insecure,” “silly” and “not the sharpest knife in the drawer.” Schar said Blagojevich was a “practiced communicator,” good enough to be twice elected governor of the nation’s fifth-largest state and skilled at the art of pitching his desires without being overtly blatant.
If felony—half-wit were a capital crime, there’s little doubt in my mind that Blagojevich would swing. Will he be convicted? Who knows? Juries are funny and I haven’t heard all of the testimony as they have.
I sincerely believe that Rod Blagojevich is corrupt; I have always thought so, since before he was elected to a governor’s mansion he never lived in. Whether the prosecution has proved the case beyond reasonable doubt is another question. The defense appears to be using the Gyp Watson defense (from Destry Rides Again): he ain’t got the brains to be bad.
by Dave Schuler on July 28, 2010
Economists Alan Blinder and Mark Zandi have drawn the conclusion that the various bailouts and stimulus programs of the last 2+ years have prevented the economic downturn from being much, much worse even that it has been:
“While the effectiveness of any individual element certainly can be debated, there is little doubt that in total, the policy response was highly effective,” they write.
Mr. Blinder and Mr. Zandi emphasize the sheer size of the fallout from the financial crisis. They estimate the total direct cost of the recession at $1.6 trillion, and the total budgetary cost, after adding in nearly $750 billion in lost revenue from the weaker economy, at $2.35 trillion, or about 16 percent of G.D.P.
By comparison, the savings and loan crisis cost about $350 billion in today’s dollars: $275 billion in direct cost and an additional $75 billion from the recession of 1990-91 — or about 6 percent of G.D.P. at the time.
But the new analysis might not be of immediate solace to officials in the Obama administration, who have been trying to promote the “summer of recovery” at events across the nation in the face of polls indicating persistent doubts about the impact of the $787 billion stimulus program.
For one thing, Mr. Blinder and Mr. Zandi find that the financial stabilization measures — the Troubled Asset Relief Program, as the bailout is known, along with the bank stress tests and the Fed’s actions — have had a relatively greater impact than the stimulus program.
If the fiscal stimulus alone had been enacted, and not the financial measures, they concluded, real G.D.P. would have fallen 5 percent last year, with 12 million jobs lost. But if only the financial measures had been enacted, and not the stimulus, real G.D.P. would have fallen nearly 4 percent, with 10 million jobs lost.
There’s something for everybody in that statement. It doesn’t provide a lot of support for those who argue that the stimulus worked. It does support the effectiveness of the Troubled Asset Relief Program.
There’s an old rabbinic saying: if a woman comes from a far country and tells you she’s divorced, believe her (give greater weight to testimony against interest). I think that due consideration should be given to Blinder’s and Zandi’s findings but I’d have a lot more confidence in them if Eugene Fama or Robert Barro were telling me that TARP and the stimuli have averted a second Great Depression.
I’ll post the link to the actual study when it becomes available.
