James Hamilton does a post mortem of the debt deal:
Let me begin by suggesting that the debt debate lumped together three issues that I regard as separate problems. There was first the immediate challenge of how the U.S. government was going to pay its bills for the rest of August. Second is the near-term need to bring unemployment down– we need to see more robust economic growth in order to get Americans back to work as quickly as possible. And third is the daunting challenge of putting U.S. fiscal policy on a sustainable long-run course– debt cannot continue to grow as a multiple of GDP, and something needed to change to ensure that it did not.
On these three issues I am relieved, uncertain, and deeply concerned, respectively.
I am relieved that the debt ceiling has been raised. I believed that it would be raised all along but the closer the deadline came the more nervous I became. IMO the exercise in brinksmanship was damaging of itself. Prudent policies aren’t constructed during heated debates, particularly heated debates that feature hyperbolic name-calling. What is more likely is that, not only will the can be kicked down the road, it will be shot down the road with a howitzer and to my eye that’s largely what has happened this time around.
I’m uncertain what is to be done about the unemployment situation. I think that the senior senator from Illinois, Dick Durbin, was correct in his assessment that the debt deal was the death knell for Keynesian economics if by “Keynesian economics” is means massive, amorphous stimulus packages. Characterizing the ARRA as “Keynesian economics” is an insult to Lord Keynes. If I remember the General Theory correctly, in it he was arguing less for the government as the consumer of last resort than as the employer of last resort. Work rules, regulations, laws, trade agreements, globalization, and technology have made that much more difficult than it was 75 years ago. Is opposition to the idea based on ignorance or experience?
I don’t believe that an aggregate demand story can be the whole explanation for what we’re seeing. Personal consumption expenditures are higher now than they were before the start of the recession, indeed, except for a brief dip they’ve remained high. Besides, the present dominant role of personal consumption in the economy isn’t a law of nature. 35 years ago personal consumption was 50% of the economy; now it’s 75%. What was the remainder? A lot of it was business consumption. I think that the higher proportion of business consumption then despite the lack of consumer demand goes against the view that the cause of reduced business consumption is low consumer demand. In my view the decline in entrepeneurialism, new business formation, over the period is a more compelling explanation.
Spurred by a comment to the Econbrowser post linked above, I’ve been toying with the idea that phlegmatic employment growth can be explained by flat or declining U. S. energy production. I’ll look into that idea more thoroughly in a later post. It’s certainly something to think about.
Finally, I’m deeply concerned by the fundamentally frivolous quality of the debate on the deficit on the debt. Consider the chart above of the cuts to total spending approved in the debt deal relative to the CBO baseline (hat tip: Russ Roberts). Remember that the CBO baseline assumes the expiration of the “Bush tax cuts” in 2012. That’s a long way from stabilizing our fiscal situation. Previous experience suggests that the expiration is far from a done deal and even with the increased revenue we’d need some combination of additional revenue and cuts twice as large as what’s been agreed upon just to stabilize our fiscal condition let alone improve it. Our innumerate leaders adamantly refuse to take the situation seriously.
Meanwhile primary default comes nearer and nearer.
As to your point of deep concern, I’ll share what my (Republican) Congressman said earlier this year. He came out against the bill to defund NPR, arguing that it was unnecessarily divisive and not even a drop in the bucket of our fiscal problems. He apparently was lobbied by fellow Republicans and ultimately voted to defund NPR. Why the change? The Republicans apparently believe that the only way to get public support to reform entitlements is to demonstrate that they’ve cut the excesses in the discretionary budget first.
Inspired trust-building measures or death by a thousand cuts?
@PD- It is just cutting what the GOP does not like
If they cut programs they like, or the vote buying Medicare Part D, we will know they are serious.
Steve
I suppose steve, but I’m guessing the Republicans are trying to convince their constituents they are serious before they try to cut or reform something their constituents like. It wouldn’t serve much use to try to convince liberals that Republicans are serious if they fundamentally don’t agree that cutting the size of government is a goal to be serious about.
I read his piece earlier. Interesting.
“Prudent policies aren’t constructed during heated debates, particularly heated debates that feature hyperbolic name-calling.”
Fair enough, but when the calibre of debate is poisoning the water and killing grandma vs corporate jet owners just what low level of heat will produce sensible debate and prudent policies?
“What is more likely is that, not only will the can be kicked down the road, it will be shot down the road with a howitzer and to my eye that’s largely what has happened this time around.”
Like for 40 years. Carry on; let the tax and spend continue.
“Personal consumption expenditures are higher now than they were before the start of the recession….”
A point I made a day or two ago over at OTB in a thread on how “its all lack demand…”
“…….In my view the decline in entrepeneurialism, new business formation, over the period is a more compelling explanation.”
And why would that be? Ease of “making it” in govt subsidized industries like finance or health care or education? Said another way, the rise of the professions. The threat that if you bet it all and lose – tough. If you bet it all and win the govt wants it……and your filthy corporate jet? Increasing impediments to business, including regulatory costs and costs of employment?
Me: I’m not releived. But I sure am uncertain, and deeply concerned. Calling this whole recent debate “frivolous” was charitable in my view.
“Spurred by a comment to the Econbrowser post linked above, I’ve been toying with the idea that phlegmatic employment growth can be explained by flat or declining U. S. energy production. I’ll look into that idea more thoroughly in a later post. It’s certainly something to think about.”
Saw that one. As someone who has invested in the inherently energy intensive manufacturing sector for 15 years now I’d say a problem – a big problem – although certainly not THE employment problem. The employment problem is the lack of new manufacturing and warehousing footprint, which comes with jobs. .
Energy costs of course hit you in two ways: production and transportation. Process engineers spend alot of time trying to reduce energy content of product and do a pretty good job. It comes down to value engineering and yield. Logistics has been the big field the past 10 years, and the strides have been huge. However, fuel costs are fuel costs. I often chuckle at sage advice, usually from the left, about needing fuel taxes, gas taxes etc and the like……..and then crying about manufacturing jobs. All for a hoax theory. Talk about man’s inhumanity to man.
And for those in the electric car etc crowd, that’s fine, but I don’t know if anyone has noticed….you can’t haul around large volumes of heavy engine parts or concrete bridge structures in a Smart Car.
I think you might want to use this graph of real PCE. Still your point remains, but what has me worried is that downward trend at the end of the series there.
Thanks, Steve. Yes, that’s useful. Inflation has been low enough for the last couple of years that PCE and PCEC96 are pretty close. To repeat my point: this is pretty thin gruel for an aggregate demand story. I guess an aggregate demand story would point to the difference between the present value of PCEC96 and the hypothetical value that would it would have achieved if the curve had continued along the previous path. I have a problem with that reasoning which I guess makes me either an Austrian or a monetarist.
Steve V (and Dave) –
I posted the recent Q2 year over year S&P 500 sales figures in a separate thread. To your point, Steve, they are nominal. I don’t want to regurgitate sector by sector (I am sure you can find the report with one Google search) but overall the sales were up in the aggregate something like 9-10%. You tell me what inflator to use. The point is that we have had an unemployment problem 3 years running and a) GDP (despite all the recent revisions) has roughly recovered to pre-recession levels and b) the S&P report for the last 12 months indicate that the “there is no demand” argument has no merit whatsoever.
Here’s the issue and where I’m going, and would like your view (and Dave). It seems to be petering out. It seems to me that the no demand argument actually might be taking hold now. I’ve noted that people began borrowing again to support spending some two years ago; they may approach being tapped again. “Snap back spending may have run its course. Any wealth effects from housing are nowhere to be seen (and won’t be), and similarly the public equity markets have basically stalled. Finally, as we all know, being a small businessman, and speaking with a wide swath of businessmen, I know they are making investment decisions based upon the climate and fears of what Obama and those of his policy ilk might implement. I’m tired of arguing it. We may all be crazy, but this is reality.
With that lengthy preamble…………if demand is actually petering out, and with unemployment where its at, it sounds like Katy bar the door for the next 18 months.
At the risk of sounding off topic, or completely lacking in the level of economics knowledge that your readers demonstrate, I thought I’d share an interesting tidbit, and ask you and your readers what you make of it… Our library systems partners with a variety of public and non-private employment services, who provide instruction and support for would-be small business entrepreneurs. I have heard from them that the majority of people developing business plans for a small business concept are new immigrants, and that the majority of new business start ups in Minneapolis are new immigrants. What do you make of that? That they pool family resources, and work as a family to get a business off the ground? Are the American born used to being consumers, and not providers of products and services? Maybe The future of America lies in the success of hard workers and innovators. Kudos to new immigrant entrepreneurs.
That and that new immigrants are hungrier, more ambitious, and haven’t yet learned that the way to get ahead is by rent-seeking rather than hard work and investment.
Steve V –
Heh. Hadn’t been to OTB today. I think I have your view.
I think you summarized it well: it will take a while to unwind decades of bad policy.
In my view our present downturn has a number of causes, mostly long term. In no particular order:
1. Bank malfeasance, misfeasance, and nonfeasance.
2. Tolerance of Chinese mercantilism.
3. Demographics–the retirement of the Baby Boomers.
4. Crony capitalism.
5. Overgrown healthcare, financial, education, and defense sectors.
6. A generally enormous amount of deadweight loss.
7. The collapse of the housing bubble and the serial policy errors that followed the collapse.
We’ve done blessed little to address any of them and the longer we wait the harder it gets. I am desperately worried about the cashflow problems that I see just on the horizon.
Well, that’s one way of looking at things. I’m interested in personal income sans transfer payments. Take out government payments and real personal income is still down substantially. Given that most income gains have come to those at the top, this shows that most people are still getting crushed, income-wise, despite the recovery in this category at the trough. Expenditures are where they are because they HAVE to be. Gotta eat, gotta have a place to sleep, gotta have clothes, gotta gotta gotta.
Question (because I’m too tired to look it up): Do the expenditures take inflation into account for the purchased items? One might be spending the same amount but getting less for it. More importantly (from an employment standpoint), the suppliers of whatever goods or services may be making the same amount in dollars, but selling less. If they’re selling less, they most likely won’t need the same number of employees.
And yes, I should have turned off my machine after reading the first post tonight.
Sorry, my link didn’t work. Hopefully this will work.
http://research.stlouisfed.org/fredgraph.png?g=1oR
Juxtaposed (I hope) with the PCE96 series.
http://research.stlouisfed.org/fredgraph.png?g=1oS
Or simply a realist Dave. My objection to the line of reasoning you object to is that the previous path was, in part, determined by the fact that we were in a bubble economy–i.e. an unsustainable path of growth. Using that as a benchmark is nothing short of…well…to be kind, retarded.
Drew,
I agree with your view. The recent declines in real PCE indicate that while the “lack of demand” argument may not have held much water say this time last year, it very well might get some traction now. I’ll be curious to see the advanced estimate for PCE in a few days. If it continues the decline that will not be good news at all.
Regarding this,
You know, I see this argument…I’ve made this argument and the dismissive response of Krugmanites is simply mind boggling. Krugman is undoubtedly a Keynesian. What is one thing Keynes talked about? Animal spirits. A careful reading of Keynes indicates he understood that there is at least some element of regime uncertainty to animal spirits,
That is from this post by Robert Higgs.
So when people like John Persona and even Krugman himself dismiss this idea I have to stop and think, WTF? Do these nattering boneheads even read the guy they are supposedly deriving their view from?
Icepick,
One thing to keep in mind is you are comparing expenditures to income. Income is more volatile than expenditures. That is people will prefer to smooth out expenditures while they may have greater difficulty doing so with income.
In looking at your graph it looks like at the very end of the series PCE and income have come back together (maybe shortening up the time frame a bit to make it easier to see?). But, maybe it is as Drew has suggested, people have tapped various credit sources to smooth out consumption/expenditures hoping to weather the storm…problem is maybe the storm is lasting longer than their credit. I don’t know, just speculating here.
My first reaction when Obama became president is that he should have postponed health care, global warming, etc. and focused on the economy. Working hard to restore the confidence of the businessman to invest and expand. He didn’t. Somewhat understandably, he used the crisis to get key parts of his agenda pushed through (which probably would have had a much harder time absent the crisis) but which didn’t help the crisis and may have added to the uncertainty, thus either deepening or lengthening the crisis, or even both.
Steve V, regarding your penultimate paragraph, I largely agree. Also, transfer payments from government have undoubtedly helped for a good many people. What worries me, though, is that the transfer payments represent a problem in and of themselves. And I do believe that if one could look at the private income one would see that almost all of the growth since the trough has been at the highest end on the income ladder. BLS data supports that view as well. (No doubt the high-end earners in aggregate also lost income during the crisis, but their situations are much less grim, and are improving for many of them. Not so for us peons.)
Taken together it means that most people are getting squeezed tighter and tighter. Even more so when factoring in inflation, and especially food and energy inflation. There’s a limit to how far people can pare back those expenses. So I don’t think there is any question that people are going to have trouble weathering the storm going forward, as you put it, ’cause it ain’t abating any time soon.
As for Obama’s agenda. It was clear in the fall of 2008 that neither Obama nor McCain had the mental suppleness to adjust to new circumstances – neither changed their campaign messages in any meaningful way, and Obama’s post-election response was mostly to just fund a bunch of Democratic wish-list proposals anyway. Well, that and destroy several hundred years worth of contract law, as Drew pointed out.
(The GM bailout may well be the worst single thing this President has done. Talk about adding uncertainty to the business environment – contracts are no longer valid unless the President gets more campaign contributions from the party seeking enforcement of the contract than from other parties involved. THAT ought to count as a high crime and misdemeanor.)
“My first reaction when Obama became president is that he should have postponed health care, global warming, etc. and focused on the economy. Working hard to restore the confidence of the businessman to invest and expand. He didn’t. Somewhat understandably, he used the crisis to get key parts of his agenda pushed through (which probably would have had a much harder time absent the crisis) but which didn’t help the crisis and may have added to the uncertainty, thus either deepening or lengthening the crisis, or even both.”
Exactly. And those of us who take this view are invariably called cruel and heartless, if not racist. But with unemployment supposedly as low as 9.2% now, and lord knows where its going, who is really cruel and heartless? Those taking advantage for advancement of leftist ideology, or us? ………and as I always say, when the left has ideology or the little guy to consider, the little guy be damned.
“My first reaction when Obama became president is that he should have postponed health care, global warming, etc. and focused on the economy. Working hard to restore the confidence of the businessman to invest and expand. ”
How? Be concrete. Please keep in mind that things were worse than most thought.
http://www.americanfuture.net/?p=1261
Steve