John Mauldin’s post at Business Insider explains nicely the reasons I’ve been complaining about the recovery:
If this were an average recovery, the economy would be growing at a 6% rate at this point, which pretty much says it all about our current 2.4% number. Further, 2.5 years after the beginning of a recession, we are typically already 8% higher than the prior high. This is a very tepid recovery, indeed.
Even more illuminating is the table he includes:
Click on it for a larger image.
As you can see consumer spending has been supported pretty well but once you exclude residential fixed investment the fixed investment category hasn’t contributed much to the economy at all. Note, too, that exports aren’t faring quite as well as I presume the administration hoped. Not only do our trading partners have problems of their own some of them have taken affirmative steps to insure that we don’t benefit from a cheaper dollar. That’s a continuing gripe of mine. The president’s economic advisors don’t seem to understand that in economics we’re dealing with purposeful actors rather than the force of gravity. Other nations will respond to our moves with moves of their own.
That’s why the term “aggregate demand” aggravates me. I think they should be saying “individuals and businesses aren’t spending”.
Another factor that should be considered in reflecting on GDP is imports, which reduces GDP. Oil prices have climbed during the downturn, yet another hint that we should be phasing in a carbon tax. Oil comprises a hefty proportion of our imports.
Here’s what he sees looking forward:
If the economy were to tip into a recession with inflation so very low (or even near zero at the end of the year), the results could be very toxic. As Paul’s colleague and my friend Mohamed El-Erian writes, we are driving our economic car without a spare tire. If we were to go into a deflationary recession, there is not much that government could do. Our deficits are already at dangerous levels, and a recession would mean that tax collections would fall further. The Fed has some policy room, but it is of a variety that has not been tried for a very long time. Frankly, we cannot be sure of the unintended consequences.
One of the guest hosts on Fox informed me that double-dip recessions are very rare things. And I agree. Absent a policy mistake it should not happen. But increasing taxes to the level that is now contemplated, along with spending cuts and tax increases at the state and local levels, is a very dangerous experiment with the economy being as soft as it is.
Further, Bloomberg’s survey of economists is suggesting that unemployment is starting to rise again rather than fall:
Unemployment probably climbed in July, raising the risk American households will keep a lid on spending for the rest of the year, economists said before a government report this week.
The jobless rate rose to 9.6 percent last month from 9.5 percent in June, according to the median estimate of 57 economists surveyed by Bloomberg News ahead of a Labor Department report Aug. 6. A drop in federal census workers as the population count wound down depressed payrolls by 60,000, the data may also show.
The consensus is that although the decline in employment may be shallow it is broad with both manufacturing and services shedding jobs.
Now I understand, I didn’t realize Mauldin posted at Business Insider routinely. For frequent commentors, I highly recommend the whole article.
As you know, Dave, he made a comment about final sales that is a bit of a stunner, supporting the view that what we have experienced is mostly inventory replenishment, and government incentive driven construction……..like we need that.
Also worthy of comment is his observation that we are in “L” mode, but only in the absence of a policy mistake: tax increases.
I think the Democratic Party’s painted itself into a rhetorical corner. How can you castigate a particular set of tax cuts as “tax cuts for the rich” (all cuts on income taxes will be tax cuts for the rich—they pay income taxes and cuts in FICA are condemned as attacking Social Security) and then turn around and proudly say that you’ll keep them anyway?
That’s why I suggested an out: phase them out based on benchmarks. They could claim they let them lapse and saved the economy at the same time!
I have maintained for quite some time (maybe 50 years) that we are navigating by the wrong stars. The importance we attribute to GDP is the prime example. Katrina increased GDP. Any destructive disaster does the same. The precipitous decrease in the the cost of computers and electronics has the same effect by static analysis. Yes, oil imports decrease GDP, but energy use makes for a huge net gain in the quality of life. To raise the cost of energy by taxation is shooting ourselves in the foot to tweak the gauges. Let the market reign, economists be damned.
Roy, the reason I’ve favored a carbon tax for so long is two-fold. First, geo-political reasons. The money we’re spending on oil in the Middle East is being given to imams who preach hatred of us, radical Islamists who plot to kill us, and is being used by Iran to develop nuclear weapons.
Second, economic. The price at the pump doesn’t reflect the real cost of gasoline. Favoring a Pigouvian tax on gas that causes it to reflect the true cost isn’t a rejection of the market, it’s enabling it to function properly.
Dave,
It strikes me that given the increasing demand for oil due to India and China and the inelasticity of our own markets the effect on the foreign producers of a domestic tax would be minimal. Perhaps another aircraft carrier would yield better results – and be considerably cheaper.
A Pigouvian tax is, by definition, an attempt to correct a perceived imperfection in a market. Its efficacy lies in the eyes of the beholder. I understand that these kind of taxes abound. There is the public justification – noble and illuminated by butterflies – and then there is the cui bono. I guess I’m just a wee bit cynical in my dotage.
Roy
“cui bono” LOL
I’ve had a love-hate relationship with Pijouvian taxes before I had even heard the term. As a younger lad I worked in a steel mill, and for some portion in a BOF steelmaking shop. All you had to do was go out back and see what was being dumped into Lake Michigan and you knew this wasn’t right. But then the intellectual question: how to compensate those harmed? EZ to say, hard to do.
So as for carbon tax its a nice construct, but I’m with “cui bono.” I don’t think there is a chance in hell those harmed by C consumption will receive an appropriate amount of the benefit of the taxes. Rather, just another honeypot for pols.
“I don’t think there is a chance in hell those harmed by C consumption will receive an appropriate amount of the benefit of the taxes. ”
Probably not, but the intent is to reduce that which you tax, not make reparations.
Steve
Steve –
I know, hence my love-hate comment. Wouldn’t it seem logical that those who bear the costs of the negative externatities actually receive benefits for their loss, rather than just having to take cold comfort in knowing that economic efficiency has been restored…………….and Robert Byrd has a piggy bank to build another building with his name on it?