Free Markets, Free People

Economics

Debt accumulation for the past 2 years higher than GDP

I’d like to say this is astonishing, and it would be if a Republican was in the White House because our press would make it so.  But with Obama? Meh:

“President Obama said that increasing the debt limit does not increase the debt,” the minority side of the Senate Budget Committee says in a statement. “But when the Treasury department started using so-called extraordinary measures to avoid a breach of the debt ceiling in May, 2011, the debt limit stood at $14,294 billion.

“Today it stands at $16,699 billion, which was reached when Treasury started using extraordinary measures in May of this year.  That’s a $2,405 billion increase in 2 years.

“Meanwhile, the economy, as measured by GDP only increased by $1,199 billion between the second quarter of 2011 and the second quarter of this year.

“So the debt increased twice as much as the economy over the last two years, the very definition of unsustainable.  The growth of a nation’s debt cannot for long exceed the growth of its economy – which is precisely what is happening now.”

Ya think?!

If you need a picture, try this:

And, of course, they’re asking for more.  So here’s the question: If we give them more, what will they want next?   Answer: Why more, of course.

So at some point, you have to say “no” don’t you?

Well common sense says you do, but apparently for this crowd, that sense isn’t at all that common.

So we do the circus thing, year after year after year and we build charts like this?

Hell, that’s the chart of a 3rd world country.

And the word that should be plaster across the top of it is “unsustainable”.

Meanwhile, in DC, they continue to wrangle over more debt.

~McQ

Economic Statistics for 27 Aug 13

The following US economic statistics were announced today:

ICSC-Goldman Store Sales still look weak, with a 0.2% increase for the week, and 1.9% annual increase.  Redbook, on the hand, reports a stronger 3.8% year-on-year same-store sales increase.

The S&P/Case-Shiller home price index rose 0.9% in June, a 12.1% increase from last year.

The Conference Board’s consumer confidence index rose 1.2 points to 81.5 in August.

The Richmond Fed Manufacturing Index rose sharply from -11 to 14 in August as business activity picked up in the mid-Atlantic district.

Confidence among institutional investors remains high, though it declined a bit from 107.6 to 105.1 in August.

~
Dale Franks
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Stagnant wages, among other things, a result of the economic doldrums

That’s certainly one of the factors keeping GDP growth low.

Four years into the economic recovery, U.S. workers’ pay still isn’t even keeping up with inflation. The average hourly pay for a nongovernment, non-supervisory worker, adjusted for price increases, declined to $8.77 last month from $8.85 at the end of the recession in June 2009, Labor Department data show.

Stagnant wages erode the spending power of consumers. That means it is harder for them to make purchases ranging from refrigerators to restaurant meals that account for most of the nation’s economic growth.

Not only that, but unemployment remains historically high years after the “recovery”. The question, however, is why wages are remaining stagnant. The WSJ cites three factors:

Economic growth remains sluggish, advancing at a seasonally adjusted annual pace of less than 2% for three straight quarters—below the prerecession average of 3.5%. That effectively has put a lid on inflation, which has been near or below the 2% level the Federal Reserve considers healthy for the economy. With demand for labor low, prices not rising fast and 11.5 million unemployed searching for work, employers aren’t under pressure to raise wages to retain or attract workers.

Emphasis mine. The Fed is happy with the inflation rate. And the administration, despite numerous claims to be focused like a laser beam on “j-0-b-s” has done little if anything to address unemployment or economic growth. Finally, given the uncertainty that regulation and new laws (such as ObamaCare) bring to the table, employers are even less likely to hire until the regulatory and legal dust settles and they have a much better idea of how both effect their business and industry.  It’s not about “pressure”.  It’s about a lack of incentive.

Secondly:

Businesses are changing how they manage payrolls. Economists at the Federal Reserve Bank of San Francisco in a recent paper said that, in the past, companies cut wages when the economy struggled and raised them amid expansions. But in the past three recessions since 1986—and especially the 2007-2009 downturn—companies minimized wage cuts and instead let workers go to keep remaining workers happy. As a result, to compensate for the wage cuts that never were made, businesses now may be capping wage growth. “As the economy recovers, pent-up wage cuts will probably continue to slow wage growth long after the unemployment rate has returned to more normal levels,” the researchers said.

Another point to make, again considering the unemployment rate, is that those working are glad to still have a job. And with the economy still struggling it is unlikely that many feel the time right to push for higher wages. In fact, it is a “buyers market” right now when it comes to labor. And it will remain one until we get into much higher growth percentages and the demand for labor begins to outstrip the supply. We’re not even close to that at this point.

Finally:

Globalization continues to pressure wages. Thanks to new technologies, Americans are increasingly competing with workers world-wide. “We are on a long-term adjustment, as China, in particular, but all developing countries, get their wages closer to ours,” said Richard Freeman, an economist at Harvard University. According to Boston Consulting Group, there will be only a roughly 10% cost difference between the U.S. and China in making products such as machinery, furniture and plastics by 2015.

Technology is also replacing workers in many industries. Automation is especially tough on low skilled workers. But again, given laws like ObamaCare, the incentive at work is to have fewer employees, not more. Businesses will automate where it makes sense and helps make a profit. It is also a means of closing that wage gap mentioned above, so it isn’t a trend that is likely to end anytime soon.

All of those factors and what I’ve mentioned in addition to them combine to make unemployment and wage growth both remain static. There simply aren’t any incentives at the moment to hire more people. Certainly not in GDP growth. Certainly not with the plethora of new regulations and laws.

In fact, as is mentioned in the article, at the moment there are only two paths to higher wages:

The only path to wage gains is through a stronger economy or an increase in demand for specialized skills.

The economy is moribund and has been for quite some time with GDP growth under 2% for the last three quarters.

That narrows the path to wage gains to a single one – developing specialized skills. It isn’t a path open to everyone, unfortunately, for a number of reasons.

So how could government help change all of that? Quite simply by getting out of the way – something it seems completely unable to comprehend or do.

And because of that, it continues to contribute negatively to the economic situation we endure.

~McQ

Detroit: The dead canary in the debt mine

Zero Hedge has a very pointed article about Detroit’s decline.  In it are listed 25 reasons it’s bankrupt (that, as ZH claims, will leave you shaking your head when you finish).  Here are the first 12:

1) At this point, the city of Detroit owes money to more than 100,000 creditors.

2) Detroit is facing $20 billion in debt and unfunded liabilities.  That breaks down to more than $25,000 per resident.

3) Back in 1960, the city of Detroit actually had the highest per-capita income in the entire nation.

4) In 1950, there were about 296,000 manufacturing jobs in Detroit.  Today, there are less than 27,000.

5) Between December 2000 and December 2010, 48 percent of the manufacturing jobs in the state of Michigan were lost.

6) There are lots of houses available for sale in Detroit right now for $500 or less.

7) At this point, there are approximately 78,000 abandoned homes in the city.

8 ) About one-third of Detroit’s 140 square miles is either vacant or derelict.

I know, you look at that and say, "these have me shaking my head already … there’s more"? Oh, yeah. Read ’em all. But here’s the important part. It’s not just Detroit:

9) An astounding 47 percent of the residents of the city of Detroit are functionally illiterate.

10) Less than half of the residents of Detroit over the age of 16 are working at this point.

11) If you can believe it, 60 percent of all children in the city of Detroit are living in poverty.

12) Detroit was once the fourth-largest city in the United States, but over the past 60 years the population of Detroit has fallen by 63 percent.

“Oh my”, you’re saying, “I’m already shaking my head.  There’s more”?  Oh, yeah, much more.

But here’s the important part – a part we’ve been talking about for quite some time”

A while back, Meredith Whitney was highly criticized for predicting that there would be a huge wave of municipal defaults in this country.  When it didn’t happen, the critics let her have it mercilessly.

But Meredith Whitney was not wrong.

She was just early.

Detroit is only just the beginning.  When the next major financial crisis strikes, we are going to see a wave of municipal bankruptcies unlike anything we have ever seen before.

And of course the biggest debt problem of all in this country is the U.S. government.  We are going to pay a great price for piling up nearly 17 trillion dollars of debt and over 200 trillion dollars of unfunded liabilities.

All over the nation, our economic infrastructure is being gutted, debt levels are exploding and poverty is spreading.  We are consuming far more wealth than we are producing, and our share of global GDP has been declining dramatically.

We have been living way above our means for so long that we think it is "normal", but an extremely painful "adjustment" is coming and most Americans are not going to know how to handle it.

I agree completely.  As I said in my first post about Detroit it is just the dead canary in the debt mine.  It was simply the worst off of the bunch.  But, remember, we were told this sort of stuff couldn’t happen and to quit worrying about.   That debt wasn’t really that important.  Well, in a microcosm, Detroit is the end state we can expect for any number of governmental units in this country (and others).  It is where everyone is headed, it’s just a matter of the speed in which they get there.

You cannot live as we’ve been living and expect there to be no consequences.  Let me modify that.  You can “expect” whatever you wish, what’s delivered will be delivered by reality, not your expectations.

~McQ

Why is Detroit bankrupt?

Well there are a lot of contributing reasons, but Brad Plumer hits on the major one:

Detroit is sagging under decades of bad governance. “The city’s operations have become dysfunctional and wasteful after years of budgetary restrictions, mismanagement, crippling operational practices and, in some cases, indifference or corruption,” Orr wrote in May. “Outdated policies, work practices, procedures and systems must be improved consistent with best practices of 21st-century government.” (Detroit has been a one-party city run by Democrats since 1962.)

Now I didn’t write that or suggest that.  In fact, it comes from Ezra Klein’s “Wonk Blog” in the WaPo.  Some things just can’t be denied or spun.  Detroit is and has been the exemplar of the blue model city for decades.  And this is the result.

Of course, Detroit isn’t the only blue city in dire straits.  It’s simply the one in the worst shape of all.  It has literally imploded.  It’s population dropped as people fled the exploding crime and high taxes.  78,000 buildings have been abandoned or have become blighted. Unemployment is rampant.  And, uncooperative unions and huge pension debt doomed any recovery.

Over the past few months, Orr has tried to convince the city’s various creditors, including the city’s unions and pension boards, to take far less than they were owed in order to restructure the city’s finances (in some cases, pennies on the dollar). But he was unsuccessful, so now the city is filing for bankruptcy protection.

So now they’re all at the mercy of the bankruptcy court, assuming the Obama Administration’s misnamed “Department of Justice” doesn’t try to take a hand in the restructuring as it did in the auto bankruptcy proceedings.

Looking back at the first cite,  Kevyn Orr, the city’s temporary emergency manager makes an interesting point – he claims it is time to move government into the 21st century.  Doing so would also include much less power for unions and much less generous payouts for pensions, if a city is to have a chance at fiscal solvency.  Not that Detroit is going to get there easily:

“But city retirees, facing the prospect of sharply reduced benefits whether in bankruptcy or under Detroit’s restructuring proposal, think they stand squarely on the moral high ground because despite the poverty of many current and retired members, they have already offered big concessions.”

You can stand on the highest “moral ground” you can find, but reality says if there’s no money, it really doesn’t matter, does it?

That is, of course, unless the fed tries to involve itself in the mess and subsidize pensions and unions – something not at all far fetched. 

Detroit is the canary in the coal mine of blue model governance.  How many other cities will fold before it is finally kicked to the curb?

~McQ

Prepare for the next government push to scam their way into your wallet

The Wall Street Journal reports:

When President Barack Obama lays out plans to tackle climate change in a speech Tuesday, including the first effort to curb greenhouse-gas emissions from existing power plants, he will unleash a years long battle that has little assurance of being resolved during his time in office.

The president has called climate change a “legacy issue,” and his speech may head off a backlash from environmentalists should his administration approve the proposed Keystone XL oil pipeline from Canada. But the address is unlikely to blunt criticism of Mr. Obama’s approach from the left or the right.

He is set to propose a host of measures to help lower emissions of gases that climate scientists say contribute to climate change. These include ways to boost energy efficiency, promote cleaner energy and rein in emissions from the existing fleet of power plants, according to people briefed on the speech.

Of course, as we’ve seen, the science and reality doesn’t support their contentions – and that’s all they are – at all.  It is another scam designed to literally create a tax out of thin air.  And they will try all the emotional arguments too.

We’ll be told that F3+ tornadoes are up because of climate change :

We’ll be told that hurricanes are up  because of climate change:

We’ll be told we’re suffering more drought/wetness because of climate change:

And that temperatures are higher than ever:

Reality is a bitch.

All you have to remember is what they said would happen based on their predictions hasn’t.  In fact, it’s not even close, is it?

HT: Powerline

~McQ

Economic Statistics

Here are today’s statistics on the state of the economy. And yesterday’s too, since a family emergency kept me from posting them.

1st Quarter GDP was revised downwards to a 2.4% annualized growth rate. The GDP Price index also dropped to a 1.1% annual rate.

Initial jobless claims rose 10,000 to 354,000. The 4-week average rose 6,750 to 347,250. Continuing claims rose 63,000 to 2.986 million.

Corporate profits in the first quarter fell -4.0% to $1.738 trillion annualized.

The Bloomberg Consumer Comfort Index held at a near 5-year high at -29.7.

The Pending Home Sales Index rose a worse-than-expected 0.3% to 106.0 due to supply constraints.

The Fed reports the weekly M@ money supply fell -11.9 billion.

Personal income was unchanged in April, while spending fell -0.2%. The PCE price index fell -0.3% while the core rate was unchanged. On a year-over-year basis, income and spending were up 2.8%, while the PCE price index rose 0.7% at the headline level, and 1.1% at the core.

The Chicago Purchasing managers index rose sharply to 58.7 in May.

The Reuters/University of Michigan’s consumer sentiment index improved to 84.5 in May.

~
Dale Franks
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Liberals Don’t Understand How Agricultural Subsidies Work

To be fair, they don’t understand how most things work, especially when there’s math involved, but this particular quirk is quite annoying.

I remember the first time I came across this general ignorance (see the comments), in a West Wing episode:

Actual dialog from a recent West Wing rerun:

Josh: What do I say to people who ask why we subsidize farmers when we don’t subsidize plumbers?
Farmer’s daughter 1: Tell ’em they can pay seven dollars for a potato.

Yes, I know it’s a TV show, but do people actually think like this? I always assumed that the reason we couldn’t get rid of farm subsidies was rent seeking by the farmers, but if people actually believe this, that could be part of the problem.

Yes, people actually do believe this. Indeed, here is David Sirota spouting the same ignorance:

GOP meat eaters aren’t free market – they want everyone to subsidize their eating via taxes that fund meat subsidies.

Among best ways to reduce meat consumption is to end ag subsidies so that the cost of meat is a true free market price – think: $9 burgers

David also makes the correct point that some GOP congressmen vote to keep these subsidies in place (particularly those in states with farms that benefit the most from them), but that doesn’t alleviate the complete misunderstanding of what these subsidies do.

In short: agricultural subsidies don’t reduce consumer prices, but instead raise them.

In fact, the entire point of these subsidies is to set minimum price levels (often called “price supports”) or trade barriers that create an artificial monopoly. The entire milk industry, as an example, is propped up with such subsidies. Why else do you think it costs about as much for a gallon of milk as does for a gallon of gas?

Although there had been several different forms of subsidies in the U.S. prior to the 1930’s, most were simple tariffs. When the Great Depression began, the Roosevelt Administration sought to prop up the nation’s farmers by raising their incomes. How did they propose to do that? Mainly by setting minimum prices and production quotas (remember Wickard v. Filburn?):

When Franklin D. Roosevelt was inaugurated president in 1933, he called Congress into special session to introduce a record number of legislative proposals under what he dubbed the New Deal. One of the first to be introduced and enacted was the Agricultural Adjustment Act. The intent of the AAA was to restore the purchasing power of American farmers to pre-World War I levels. The money to pay the farmers for cutting back production by about 30 percent was raised by a tax on companies that bought farm products and processed them into food and clothing.

The AAA evened the balance of supply and demand for farm commodities so that prices would support a decent purchasing power for farmers. This concept was known as “parity.”

AAA controlled the supply of seven “basic crops” — corn, wheat, cotton, rice, peanuts, tobacco, and milk — by offering payments to farmers in return for farmers not planting those crops.

The AAA also became involved in assisting farmers ruined by the advent of the Dust Bowl in 1934.

In 1936 the Supreme Court, ruling in United States v. Butler, declared the AAA unconstitutional. Writing for the majority, Justice Owen Roberts stated that by regulating agriculture, the federal government was invading areas of jurisdiction reserved by the constitution to the states, and thus violated the Tenth Amendment. Judge Harlan Stone responded for the minority that, “Courts are not the only agency of government that must be assumed to have capacity to govern.”

Further legislation by Congress restored some of the act`s provisions, encouraging conservation, maintaining balanced prices, and establishing food reserves for periods of shortages.

Congress also adopted the Soil Conservation and Domestic Allotment Act, which encouraged conservation by paying benefits for planting soil-building crops instead of staple crops. The rewritten statutes were declared constitutional by the Supreme Court in Mulford v. Smith (1939) and Wickard v. Filburn (1942).

During World War II, the AAA turned its attention to increasing food production to meet war needs. The AAA did not end the Great Depression and drought, but the legislation remained the basis for all farm programs in the following 70 years.

The entire point of these subsidies is to increase the incomes of farmers. It has never had anything to do with making the price of a potato or a hamburger cheaper for consumers. By design, these programs intend to raise the price for agricultural products, as well as to transfer dollars from taxpayers to farmers.

How liberals like David Sirota and Aaron Sorkin came to think the exact opposite is puzzling. As Ronald Reagan said: “It isn’t so much that liberals are ignorant. It’s just that they know so many things that aren’t so.”

Don’t like the GDP numbers? Change the rules …

Seems easy enough.  That way you can claim to be improving it even while nothing is actually improving in reality:

The Bureau of Economic Analysis announced last week it would be changing the guidelines with which it calculates Gross Domestic Product, more familiarly known as the GDP, the standard by which the size and growth of the economy is measured.

The change comes after more than five years of economic stagnation that, despite frequent claims of a strengthening recovery, have seen high unemployment and extremely slight growth in the size of the economy.

GDP is calculated by adding up the total amount of private consumption, investment, government spending, and net exports. The new changes, which will include definitional changes to expand what is counted in GDP, are expected to add 3 percent to the GDP report, while not changing the actual output of the economy.

The agency claims the changes in calculation “more accurately portray the evolving U.S. economy and to provide for consistent comparisons with data for the economies of other nations.”

Note the emphasized text.  Realize that the addition of 3% to future GDP reports will be made without any explanation that a) there have been changes in the way it was calculate and b) in reality, the actual output of the economy has not changed at all.

But the administration will claim victory and the low information voters will buy it while the “no” information voters (those on the left who refuse to challenge anything put out by this administration) will crow about the “improvements” that the administration has brought to the economy.

Meanwhile the unemployment picture will remain the same (about 7.5%) until they can find a new way to calculate that and take about 3% off .  Then we’ll be officially “fixed”.

Amazing.

~McQ

Jobless numbers “unexpectedly” rise to 4 month high

Because, you know, we’re in a (perpetual) recovery and stuff like this isn’t supposed to happen:

The number of Americans filing new claims for unemployment benefits hit a four-month high last week, the latest suggestion the labor market recovery lost some momentum in March.

Initial claims for state unemployment benefits increased 28,000 to a seasonally adjusted 385,000, the highest level since November, the Labor Department said on Thursday.

Economists, who had expected claims to drop to 350,000, said while part of the rise reflected difficulties adjusting the data during the Easter and spring breaks, there was no doubt the pace of job growth had eased.

“What we do know is that the growth momentum has slowed, employment has slowed. The question is how much?” said Millan Mulraine, a senior economist at TD Securities in New York.

How much?  Well let’s consider something shall we?  What has recently and finally gone into full effect to the point that employers can now finally make some plans with reference to it as to how many they plan to employ (or continue to employ)?

Oh, yeah, ObamaCare.  The taxes and penalties kick in this year and – not saying this is the only reason – companies and corporations are finally put in the position of executing their plan to avoid the prohibitive costs and penalties imposed.

That’s right – “avoid”. Again, as is usually the case, the left has ignored Human Nature 101 as they usually do. You have to remember, the purpose of their utopia is to change human nature once and for all from a self-interested and independent being to a hive worker enslaved to the state, er, an enlightened being who thinks of others first … yeah, that’s the ticket.

And when their utopian plans meet human nature, well they call the result “unintended consequences”. We who study human nature call them “entirely predictable outcomes”. They seem surprised by these “unexpected” developments. We simply shake our head at their studied stupidity.

The problem, of course, is they presently have the power of the state in their hands. What that means is they will continue to try to drive the square peg of their utopia into the round hole of human nature and use the power of government to do so.

What that means is at some point, when they’re finally out of power, we’re going to have to pick up their pieces of what they’ve destroyed and try to piece it together in some form or fashion, if that’s possible.

And all the while that’s being attempted, we’ll have to listen to them whining and complaining that what is being done isn’t “fair” or “equitable”.

Well, what you’re suffering now is a result of “fair and equitable” nonsense that ignored Human Nature 101. Maybe it’s time to figure that out if you’re on the left.

~McQ