Continuing on from where my last post left off, let’s consider the big domestic stories.
The U. S. economy is flat
At the present rate of growth of the U. S. economy There is no growth in the U. S. economy. Real growth is, essentially, zero. The Case-Shiller index fell again, ending the first quarter of 2012 at the lowest level since the housing crisis began in 2006. Why don’t we hear a coherent plan to remedy the present situation from somebody, anybody?
Please do not tell me that higher education is the key to a bright economic future. More than half of recent college grads are unemployed or underemployed. Canada has the highest percentage of people with college educations—roughly 50%. That seems to be about the limit for higher education for a population. What about the other 50%? We’ve had three consecutive administrations for which higher education for all has been the keystone of their economic policy. What that has produced is mountains of student debt.
If you believe that cutting taxes will produce a vibrant economy, please explain why the multiple tax cuts of the last decade haven’t had that outcome? And why this time will be different?
This is not just a Big Story. This is The Big Story. The entire world’s corporate economic plan seems to be for the U. S. consumer to recover.
State and local governments are broke
State and local governments are being bankrupted by increasing healthcare and pension costs. Healthcare and pension costs are rising fast enough and incomes, real estate values, and retail sales are rising slowly enough (or even falling) that just increasing taxes is no solution. We need national healthcare reform that lowers healthcare costs. This is a Big Story.
Energy self-sufficiency
As I’ve written any number of times before energy independence is a will o’ the wisp—there’s a world market and unless we close our doors and pull the rug in behind us we’ll be subject to the effects of a world market. However and somewhat ironically, energy self-sufficiency may be within our grasp. This is an absolutely enormous story. Our imports of oil are a big component of our trade deficit and our trade deficit is a component of our economic slowdown. My suggestion on energy policy: lead, follow, or get the hell out of the way. Mostly the latter.
ZIRP
If anybody has a good explanation of how most people can save for their futures as long as the Federal Reserve maintains a zero interest rate policy, I’d like to see it. It’s also killing the insurance industry but that’s a topic for another time.
Reverse migration
Mexican immigration seems to have stopped and may even be going back the other way. I honestly don’t think that enough people appreciate how big a story this is. I think the assumption is that, if the American economy picks up, Mexican immigration into this country will resume. The demographics and economic development of Latin America and the Caribbean do not support that conclusion.
If you have other candidates for really big domestic stories, please submit them in comments. I’ll add the ones I agree are Big Stories in an update to this post.
But but but…Obama Care?
You know I once wrote a post at OTB pointing this problem out. That the growth rates are not sustainable. The responses were…dismal.
Most people are innumerate fools. Oh and amusing one of the respondents was Bernard Finel. Most humorous line, “I think we can fix health care.”
But it is always popular with politicians and their supports eat it up with a spoon.
Like I said, most people (like…mmm…85% or more) are innumerate fools.
The politicians know this and take advantage of it and laugh all the way to the bank (so to speak).
How about buy something, anything, other than government debt so a ZIRP is no longer required?
You seem to be saying that if savers buy more government debt then that it is going to help savers and I don’t see how. Correct me if I’m wrong, but all Bernanke can do is make government debt less attractive to savers.
^ Correct me if I’m wrong, but all Bernanke can do is make government debt, and the dollar less attractive to savers.
The thing these stories have in common is that there’s not much we can do about any of them. We don’t know what to do, and if we did we wouldn’t be able to do it in our political system.
You’ve got a literary novel here, Dave, lots of malaise and futility and no action. People like action, heros and emotion. Your story’s got none of those, so people are going to focus on the cannibal who ate the guy’s face, and the horse race, and whatever blond girl is missing this week.
Now, if I were editing this, I’d suggest that if you want to write all this dismal stuff you need to wrap it into a larger narrative. People will come to grips with interest rates if it’s part of the hero’s journey, or an element in some much larger story. From that perspective the problem is not that people aren’t paying too little attention, but rather that they’ve nothing really compelling to focus on. You need a story — a World War 2 or a Cold War or maybe aliens.
Look at it this way: in Act 1 the government makes promises. In Act 2 the crisis develops and the government has a hard time fulfilling those promises. In Act 3 we reform the system so that in the future your health insurance levels off or rises at a slower rate, and you get fewer services. It’s not exactly The Avengers.
I think it’s more that they’re inured to reality. Once upon a time people found wolves pretty frightening. And wolves actually exist. But wolves became rarer and farther away so it took super-wolves to frighten them. Then super-vampiric wolves. Then super-vampiric wolves from outer space. Then super-vampiric zombie wolves from outer space.
All of this is highly entertaining but the reality is that the metaphorical wolves are real, they’re still there, and they’re actually pretty frightening.
The American people by and large couldn’t figure out that Hitler was a problem until he started bombing London, and even then most weren’t sure. You think people are going to come together and loudly and coherently demand action on health reform? Or interest rates? Or the Euro?
The wolves are no doubt real, but what’s a plumber in Kansas going to do about it? What can he do about it? The more he assiduously studies the issue the more confused he’ll get. So he won’t have a coherent set of demands like, “Kill Bin Laden,” or “Buy food for those poor kids I saw on TV,” or even, “Jail more perverts.”
What our plumber will have is, “Someone ought to do something about medical.” That vague notion then gets translated to Washington where the lobbyists for doctors, hospitals, big pharma, health food quacks, old people, rich people, poor people, unions, plus the entire 20 theater multiplex of public intellectuals, will all know exactly how to interpret the message.
BTW, literary novels with lots of malaise and futility and no action hold no terror for me. I’ve read Oblomov. In Oblomov it takes 150 pages for the protagonist to get out of bed.
People are people. We generally don’t collectively react until there’s some kind of brutal wake-up call. I think all the issues Dave mentions are going to get worse before they get better. It’s at that point the hero narrative can take hold and possibly accomplish something. The downside is that something will be very painful and the hero could turn out to be a villain.
Just a quick note on ZIRP. I set up youth savings accounts for my two oldest kids this week. Mostly this is a learning exercise to teach them about money, banking, responsibility, math, etc. We ran the numbers for the APY, which is a whopping 0.11%. They caught on right away how crappy that is.
If you believe that cutting taxes will produce a vibrant economy, please explain why the multiple tax cuts of the last decade haven’t had that outcome? And why this time will be different?
The original Bush tax cuts did have a positive impact on the economy. UE remained low, in contrast to today’s number, while the work force continued to grow. Despite 911 and all the financial repercussions of that event, our economy did not tank. However, while Bush wanted to make these new tax margins permanent, he wasn’t able to push them through without a sunset clause. And, I think wherever you have cut-offs to tax cuts, hovering in the future, you also have more timidity in robust investment. This has certainly been the case for the Obama extensions of these tax cuts, which, while circumventing the crashing of markets or the economy, they did not lend much confidence for people to risk further investment in this country. It’s all been more of a wait-and-see kind of mood, IMO, for years.
As for state and local economies suffering, most of these problems go hand-in-hand with defined pension plans coming into reality that were strong-armed by unions. Healthcare costs are certainly out of control. But some solutions, encouraging competition between HC companies and their rates, are strait-jacked by rules and regulations disallowing coverage from other states. Then there is the issue of tort reform, which directly impacts insurance rates and HC costs. If Obamacare is not overturned we will see even more local and fiscal difficulties, as people scramble to meet the mandates and objectives of this ill-conceived policy that has yet to see disasters of it’s implementation.
Our energy problems are basically at loggerheads with the demands of an over-zealous environmental screed. Between stubborn divisiveness over alternative energy and fossil fuels, the warmists and skeptics carbon feuds, the Keystone pipeline fiasco, fracking controversies, private versus government land oil exploration inequities, and the like, we are making no headway fast in reaching viable, long range solutions to our problems. Furthermore, the over-reaching EPA, creating new and harsher guidelines by the minute, under the Obama administration, has only burdened economic growth more, especially dealing with manufacturing, coal and mining industries.
Like Andy implied, interest rates are so low they really don’t encourage either saving or banking money. One might as well bury your savings in the ground or under the mattress — the old-fashioned way.
Immigration may be reversing itself, but our population is aging, as well as getting lax in it’s work ethic. Already there are states, with crops dying on the vine, because there aren’t enough people willing to work in the fields. We need to over-haul our practices here, including allowing some kind of temporary worker program. But, ideology and fear of losing American jobs to others continues to cloud any creative vision in reaching baselines or guidelines for reasonable immigration reform.
I do think there are ways and means for most of our problems, in this country. They are not out of our control if only people could compromise and come together on more of a joint solution to each and every segment of our problems. Instead, though, most are captivated by their own ideology, their special blend of group-think, and any other idea, injected into the equation, becomes unthinkable.
Maybe, like Andy also said, it can only be realistically addressed when times become so bad, creating a wake up call, jolting the people out of their intransigence into some kind of positive action.
That’s pretty different from what both Brookings and the CBO found, jan. They both found that any small stimulus effect that the tax cut might have provided had ended by 2003. The tax cuts of 2008 and 2009 rather clearly have not kick-started the economy out of its malaise. Why will this time be different?
@sam
“How about buy something, anything, other than government debt so a ZIRP is no longer required?
You seem to be saying that if savers buy more government debt then that it is going to help savers and I don’t see how. Correct me if I’m wrong, but all Bernanke can do is make government debt less attractive to savers.”
This confuses two separate rates. ZIRP is solely related to the price of reserves which banks loan to each other. Yield on government bonds is low because of this policy but it is not the goal of that policy.
Treasurys only serve two functions: to drain reserves so the Fed hits its target overnight rate, and as a risk-free vehicle for the private sector to save. So long as our economy hovers near a renewed recession, demand for bonds will continue to be very high. The Fed could charge a premium for bonds and they’d still sell because everyone has become risk averse.
@Dave Schuler
” The entire world’s corporate economic plan seems to be for the
U. S. consumer to recover.”
Even as so many talk about the fading economic power of the U.S., the attitude is clearly that Americans should buy a lot more and save everyone. Not going to happen this decade.
I think we’re in the social calm before the storm. If the vast majority continue to feel as though they’re going nowhere while a tiny minority continue to get ahead, I think pressure is going to slowly build until people turn to violence, or until we get real populist leaders. I don’t believe there’s any way to avoid big political changes in the next decade.
“The original Bush tax cuts did have a positive impact on the economy. ”
The Bush tax cuts are still in effect. They had a short effective period, as Dave has noted. On energy, we are producing natural gas at record levels and oil has been heading up. I keep hoping that we will see more natural gas used for transportation, but I think we have infrastructure issues. We are waiting for private industry to address this. Has not been happening.
“Why don’t we hear a coherent plan to remedy the present situation from somebody, anybody?”
Not sure we can really have one. Tax cuts? Tried that. Fiscal stimulus? We started out with too much public debt this time. I think we just need to repair balance sheets, and let the shadow real estate inventory work its way through the system.
For the long term, we should be working on health care. We can keep the ACA and start the second round of health care concentrating on costs. Or, we can repeal it and try something different. My bet is it doesnt happen until the bond market says it must. If I am wrong, and the GOP decides to institute a PCA type plan, I expcet Romney to give the independent panels in the PCA (much like the ones in the ACA) a lot of oomph. They already allow for fines (and jail sentences IIRC), which were not in the ACA.
Steve
Wow, Steve Verdon is still a liar. Amazing.
What I actually said at the time was the health care costs were unsustainable. That they were indeed THE only spending problem we had. And that precisely because they were unsustainable, they would be fixed somehow. I was thinking something pretty dramatic — lifetime caps, hard choices about procedures, and so on. I didn’t actually specify it, though, because I don’t know what will happen. I just know that health care costs won’t continue to rise at the rate they’ve risen, because they CAN’T without eating up everything.
Now, I did say that Social Security had easy fixes… and it does.
Steve Verdon, making up shit to cover his ideological bias since 2008….
Light bulb!
We have too much real estate inventory, right? And we have nuclear weapons. Come on, am I the only one seeing this?
Sounds like a good idea for a book Michael.
Michael
One thing I can say about you is that your ideas really careen around the corners of an out of the box brain.
@Michael Reynolds
You want to sell unoccupied homes to the nuclear weapons? No, wait! You’re saying we should build nuclear weapons on the unused lots and increase their value. Preeetttty clever Mr. Grant.
I just remembered Michael, the 1978 Superman movie beat you to the punch.
I just remembered Michael, the 1978 Superman movie beat you to the punch.
Not exactly. In that movie the bombs were supposed to destroy perfectly expensive real estate so that the crap behind it would become valuable sea front property. This would be the opposite: Blow up the shitty property so that it stops dragging the rest of the market down with it. I’ve been hearing this plan for four years now, sans nukes. The nukes really make this one, because all red-blooded Americans love explosions, and the bigger the better. And megatons are as big as we currently make them!
Mostly, I just love a big glowing mushroom cloud, so I’m on board with this plan.
” Already there are states, with crops dying on the vine, because there aren’t enough people willing to work in the fields. ”
Which states? Link to at least one crop that is not being sold in US stores anymore. If you can’t name a single crop your argument is bogus.
Went to a networking event tonight. Met lots of people I already know, unfortunately. Some of us caught up on things as we hadn’t actually bumped into each other in over a year. Everyone is still unemployed, everyone is still looking for a job, everyone still can’t even get on at Walmart or McDonald’s – they’re not hiring.
The fun new thing was talking to someone who just lost his job six months back. It was interesting to hear the old-timers talk to the newbie and give him advice on how to scrape by. The bad news for him is that because the economy is improving (according to the assholes running the country) he isn’t going to get anywhere near the UE benefits that us old 99ers got. Gonna be tough-tough-tough-tough got him when the state money runs out. The poor bastard doesn’t know that his working career is OVER. He’s only 33, but he’s as fucked as the 55 or 65 year-olds.
And this is now three years into the Glorious Obama Recovery. I wonder what will happen when the economy tanks again?
PS Dave, did you see the PMI numbers out of Europe the other day? I told you northern Europe wasn’t going to escape recession this year. I think the latest prints have confirmed that. I also saw a chart last week, I believe on MISH’s site, showing that a bank run has already been going on in both Italy and Spain. It’s more of a bank power walk, though, as it is taking place over months instead of hours. But the money is flowing out regardless. Plus the British are looking at emergency plans to close their borders (good luck with that during the frickin’ Olympic Games) and the Swiss are talking about currency controls. Things look like they’re sliding downhill FAST over there now…..
We’ve had three consecutive administrations for which higher education for all has been the keystone of their economic policy. What is has produced is mountains of student debt.
Why are you assuming that mountains of student debt weren’t the plan?
“Wow, Steve Verdon is still a liar. Amazing”
That’s diplomatic.
“Steve Verdon, making up shit to cover his ideological bias since 2008..”
Oh, the irony.
I’ve found Steve Vernon — with whom I often clash — to be a pretty straight-up guy. I don’t know that misquoting or mischaracterizing amounts to lying. Lying would be intentionally doing those things, and that doesn’t jibe with my experience with Steve.
Bernard,
Where is the lie? You said “we can fix health care….” How is that a lie? At this point I don’t think we can “fix health care” that is why I find it amusing now. I don’t think we can fix it because any solution is going to be politically impossible.
In fact, here is the entire first paragraph,
The post is here.
So, this fix that will not only stop the growth rate, but reduce it is….?
And why don’t you update your graphs here Bernard. I bet they’ll tell a very different story now. For example, using FRED data looks like your graph of public debt to GDP ratio went from just under 40% in 2007 to around 97% in 2011. Whoops.
The only one that may not change is the last one, the net interest on the debt…but that is only because the Fed is keeping interest rates so low, ZIRP as Dave calls it. Will that continue? Probably not indefinitely. Then look to that last graph of yours to change dramatically for the worse.
Like I said, politically impossible. Recall Palin going on about Death Panels? The Bush cartoon of him pushing a little old lady in a wheel chair over a cliff? As soon as one side starts to put forward these ideas they become a huge and obvious target for the other side who only care about winning.
And look at the Medicare prices. Dave has noted that for the last decade Congress always passes legislation putting off the price cuts for doctors. I’m sure Dave can link to some of his posts on it.
There is no spine to make the changes you are talking about.
I agree, but I think that they will stop rising because things will go completely off the rails in regards to this issue. Basically it will fix itself which will be the least optimal approach.
Really Bernard, it is amusing how vitriolic you are on this when there is actually considerable agreement. Our main point of disagreement is that you have an optimistic view while mine is pessimistic in regards to controlling costs.
So if that makes me a liar…okay. Whatever.
Oh and the most recent “doc fix” went just like it has for the past 10 years or so.
linky
“The agreement is also important because it prevents doctors who treat Medicare patients from taking a nearly 30 percent pay cut.”
Never mind that that is one of the big reasons there are “savings” in under ObamaCare. Whooops.
“I’ve found Steve Vernon — with whom I often clash — to be a pretty straight-up guy. I don’t know that misquoting or mischaracterizing amounts to lying. Lying would be intentionally doing those things, and that doesn’t jibe with my experience with Steve.”
Indeed. And although I like to think of myself as the King of faux invective and hyperbole, all intended really just to get a rise and draw people out, I find this comment would apply to almost all commenters here…….at OTB, well, not so much. But Bernard is an interesting cat.
I wouldn’t want to tangle with him on foreign policy, it wouldn’t be a fair fight, with me the loser. But on business, investment and economics I find him pretty much to be a piñata. And he doesn’t even know it. Such is the left leaning mindset…..
I might add that I continue to think that Medicare Part B functions as a price support. Said another way, one of the reasons that healthcare spending keeps going up is due to the “doc fixes”.
I know that steve (not Steve V., the emergency medicine doc) objects to this strongly but I also think that there’s a sort of Gresham’s Law governing inpatient vs. outpatient procedures. Let’s say that there’s a procedure that can be performed either on an inpatient or outpatient basis (that’s true of all of them). You cap the reimbursement rate for inpatient procedures and don’t cap the reimbursement rate for outpatient procedures. It stands to reason that outpatient procedures will be increasingly preferred. Outpatient is frequently given as one of the reasons for the increasing cost of healthcare.
Just so you know, insurers pay less when it is done at an outpatient facility, not always but often. However, the money is divided up a bit differently. More of what is paid often goes to the physician. There is significant incentive to do procedures at outpatient facilities.
At any rate, on the physician fee side of the equation, the fees for the procedure are usually about 20% higher when paid by a private insurer. Just from an academic econ POV, that doesnt make much sense if you are looking at it as a price support. Private insurers should just be paying 1% more to make sure patients are being seen. If physicians are not seeing patients because they think Medicare reimbursements are too low, which is the case for some docs, that suggests that private insurance is the cost driver. Medicare needs to raise fees to make sure there are enough docs to see their patients.
(I am an anesthesiologist. Secondary to teaching and admin responsibilities I have often spent extra time in the ER and in the military I had to do ER work, so if I referred to time in the ER, I suppose that is how that came up.)
Steve
Thanks Michael, I appreciate that. I always figured is we ever got together over a glass of scotch we’d probably have a fair bit of fun.
But then we run right into the sustainability problem.
As I pointed out upstream…I see this problem now as intractable. That is why I found re-reading Bernard’s comment amusing. That we can fix health care and that we will and that things will end up going 180 degrees they’ve been going for decades. I suppose it could happen, but I hope I’m not considered a liar for thinking it is an extremely low probability event.
Steve,
If medicare doesn’t act as a floor, then why would we want to chase ever-increasing private sector prices by raising medicare rates to make them more competitive with private insurance?
Leveraged dividend funds? They will tank when short term rates rise unfortunately, but if you believe that ZIRP will be around for a long time it might be a good bet.
Andy,
I was just thinking the same thing…why not, by government fiat, set all health care prices equal to the Medicare prices. Thus making doctors indifferent to which type of patient to treat and lower health care costs?
Okay, that actually makes things a price ceiling and that be bad as that prevents the market from clearing and results in excess demand (i.e. a shortage).
This very evening I attended a small gathering of clients of the firm that manages the majority of my money, and the featured presenter was the CIO. He is a serious person of national stature. It’s late, so I only want to address two points in Dave’s essay.
The first is energy independence. To observe that energy is a global market tells me nothing. Of course it is. That doesn’t mean that a player with the enormous resources of the US shouldn’t be at the task of altering the supply side of the equation. All we have to do is look at what the unleashing of private production of natural gas has done to price. This is a major advantage in the “re-shoring” of US manufacturing, which should produce GDP and employment. Along with relative advantageous changes in US currency, US wages and various logistics and intellectual property issues.
Unfortunately, noted business management guru Barack Obama has decided to “kill the coal industry.” (his words, not mine) You may not know this, but energy distributors bid for output about two years in advance. Because of the regulatory posture of the Obama administration coal fired energy assets are being forced out. Shuttered. New energy producing assets and output are being priced at – no kidding – 8 to 15 times what it is today. Stop and think about that. These are real live contractual bids, not projections.
Businesses will no doubt install their own captive on site gas production units as best they can. But what about the Average Consumer Joe? Fucked. It’s like 6 dollar gas at the pump. Thanks Barry.
It needn’t be so. Yes, energy is a global market, but this country should be flexing it’s resource muscle instead of maturbating over wind mills and solar cells. This is just shy of criminal, and surely incompetence. The country deserves so much better.
As for ZIRP
Ive never heard of leveraged dividend funds. But one can only imagine it just means purchase of cash flowing assets using financial leverage. In my business we call it a leveraged buyout.
As for Dave’s lament, I feel his pain. However, the answer is as simple as pie, although uncomfortable. You have to walk up the risk ladder. So instead of near term treasuries you buy corporates, dividend yielding public equities (watch noted economic guru Barack Obama destroy the little old ladies clipping coupons with a significant dividend tax rate increase………I guess that’s caring). You buy MLPs in various activities. Perhaps some REITs. And so forth. Basically, as a matter of public policy, we are forcing people who’s “portfolio beta” should be low, to take on higher beta to cover for the politicians horrific and self interested programs. Government at its very worst.
Because of the regulatory posture of the Obama administration coal fired energy assets are being forced out. Shuttered. New energy producing assets and output are being priced at – no kidding – 8 to 15 times what it is today. Stop and think about that. These are real live contractual bids, not projections.
I linked to that several days ago in the comments here. Apparently no one wants to discuss how much this sucks ass. Note that the big increases will come AFTER the election. Obama wants to drive energy prices through the roof, but he doesn’t want to have to stand before the voters and defend those policies. The politics of next summer are predictable.
@Icepick
I had read the link, but I am days behind.
The results of these hikes are not going to be pretty. It will affect any electricity users – individuals and businesses. The contracts are made about three years in advance, and the President does not control this. I doubt his administration understands how the market actually works, and therefore, this was probably not planned. In addition, the spot market price should be much higher.
As Bobby McFerrin sang, “Don’t Worry, Be Happy”. The President will make everything right.
“For the Snark was a Boojum, you see.”
Correct: they are closed end funds that buy dividend paying stocks, a certain percentage of which is with short term borrowing where the spread is payed out to fund owners. The problem is they are at risk of not being able to roll over the debts as short term rates rise and being forced to sell assets. They are right in their sweet spot now though – flat to modestly rising expected dividend payments coupled with short term rates expected to be low for a while.
Ice pick
I find that to be a standard tactic of this administration. Candy today, medicine tomorrow.
Sam
Thanks. And that is a variant of what is called tenor risk, or alternatively, duration mismatch, and you are correct to worry about that. A cynic (not me of course) would describe such an invest ment strategy as “musical chairs.”