A reasonable summary? How about, ‘”let’s put aside partisan bickering because I need a political boost and spend half of what was spent on the stimulus to do exactly the same thing that hasn’t yet worked.”
As most predicted two things were evident in the speech. A president out of ideas and trying once again to shift blame to Congress. And the fact that he still doesn’t understand that the spending spree is over.
Instead of suggesting a regulatory roll back, or cutting government red tape, or even, horror of horrors, a corporate tax cut, we’re essentially get much of the failed stimulus plan repackaged. The entire purpose of addressing a joint session of Congress (instead of doing the speech from the Oval Office) was to again attempt to establish the House GOP as the bad guys in all of this.
The proposal is simply a redo of the stimulus plan, something Obama has been trying to get Congress to do since the first one failed. Obama proposed a payroll tax cut extension, an extension of unemployment benefits, the creation of an infrastructure bank, a new job training initiative, and providing aid to state and local governments, which have been hard hit by job losses.
The infrastructure bank is somewhat new, but aimed at the same sort of programs at which we previously threw over $800 billion in stimulus money. How did that work out? The payroll tax and unemployment benefit extensions haven’t produced more jobs yet, have they? In fact some argue the continuing extension of unemployment benefits works to the opposite effect. We’ve had job training programs since time immemorial and they too have very little positive effect. The one key point that those who propose such initiatives always seem to miss is there have to be jobs available for such a program to be successful. And finally, pumping money into state and local governments is a very temporary fix. It allows them to keep employed workers who they otherwise couldn’t, at least for a while. But, as they learned with the stimulus funds, once the money ends, so do the jobs. Hardly what one would consider a “jobs program”.
Obama also tried to waive off criticism of cost by claiming his plan was all paid for. AP disputes that:
OBAMA: "Everything in this bill will be paid for. Everything."
THE FACTS: Obama did not spell out exactly how he would pay for the measures contained in his nearly $450 billion American Jobs Act but said he would send his proposed specifics in a week to the new congressional supercommittee charged with finding budget savings. White House aides suggested that new deficit spending in the near term to try to promote job creation would be paid for in the future – the "out years," in legislative jargon – but they did not specify what would be cut or what revenues they would use.
Essentially, the jobs plan is an IOU from a president and lawmakers who may not even be in office down the road when the bills come due. Today’s Congress cannot bind a later one for future spending. A future Congress could simply reverse it.
Currently, roughly all federal taxes and other revenues are consumed in spending on various federal benefit programs, including Social Security, Medicare, Medicaid, veterans’ benefits, food stamps, farm subsidies and other social-assistance programs and payments on the national debt. Pretty much everything else is done on credit with borrowed money.
So there is no guarantee that programs that clearly will increase annual deficits in the near term will be paid for in the long term.
To actually pay for this, the revenue must be diverted from this years budget, not some future year(s) budget. Again smoke and mirrors to sell more spending. Eric Cantor caught all sorts of grief for claiming disaster relief needed to be paid for elsewhere in the budget. That is how you cut and control spending. What Obama has again done is use the old DC jargon that claims something is paid for if they say they plan for it in the future.
That’s simply not acceptable.
Obama challenged the Republicans with a falsehood:
OBAMA: "Everything in here is the kind of proposal that’s been supported by both Democrats and Republicans, including many who sit here tonight."
THE FACTS: Obama’s proposed cut in the Social Security payroll tax does seem likely to garner significant GOP support. But Obama proposes paying for the plan in part with tax increases that have already generated stiff Republican opposition.
For instance, Obama makes a pitch anew to end Bush-era tax cuts for the wealthiest Americans, which he has defined as couples earning over $250,000 a year or individuals over $200,000 a year. Republicans have adamantly blocked what they view as new taxes. As recently as last month, House Republicans refused to go along with any deal to raise the government’s borrowing authority that included new revenues, or taxes.
So, as AP points out, the claim is fraudulent. In fact, there are many things in the proposal that the GOP has been against.
And perhaps the biggest falsehood of the night?
OBAMA: "It will not add to the deficit."
THE FACTS: It’s hard to see how the program would not raise the deficit over the next year or two because most of the envisioned spending cuts and tax increases are designed to come later rather than now, when they could jeopardize the fragile recovery. Deficits are calculated for individual years. The accumulation of years of deficit spending has produced a national debt headed toward $15 trillion. Perhaps Obama meant to say that, in the long run, his hoped-for programs would not further increase the national debt, not annual deficits.
Perhaps. But then if that was so, he should have said it, shouldn’t he? Instead he played politics.
Probably most interesting was the man who has been driving the lead clown car in the political parade admonishing Congress to “stop the political circus and do something”. It has taken the circus ringmaster 3 years to figure out this is what he should have been focused on from the beginning. And for 2 of those years, he had an all Democratic Congress.
They guy who called for an end to politics has done nothing but played politics throughout this whole ordeal. And now, with his popularity at an all time low, his political future dimming and with him finally turning from his political agenda to that to which he should have been paying full attention from day one, he falls back on one of his favorite political tricks – blame shifting.
What he doesn’t seem to understand is this is all his now. And while the GOP should consider the proposal, it should also be unremitting in pointing out that the proposal isn’t paid for, will add to the deficit and is simply another attempt at a second stimulus throwing money at old programs and ideas which have yet to prove their worth in either improving the economy or increasing jobs.
(UPDATE) If you really want to know how bad the plan is, Krugman liked it:
First things first: I was favorably surprised by the new Obama jobs plan, which is significantly bolder and better than I expected. It’s not nearly as bold as the plan I’d want in an ideal world. But if it actually became law, it would probably make a significant dent in unemployment.
Yeah, just like the last one did, huh Paul?
Today’s economic statistics releases:
Exports increased and imports decreased, resulting in a smaller than expected trade deficit of $44.8 billion. The trade gap in all three components—petroleum, non-petroleum, and services—declined.
Initial Jobless claims continue held steady in the last week, up 2,000 to 414,000. The four-week moving average rose 3,750 to 414,750 which is nearly 9,000 higher than last month.
U.S. consumer confidence last week fell to -49.3, the second-lowest reading this year.
UPDATE: Speaking of joblessness and jobs, as we await the president’s big jobs speech tonight, Darryl Issa’s House Oversight Committee reports on the depth of the employment problem. It doesn’t look good. The key takeaways:
Two and a half years after its implementation, at a cost of $825 billion, the economy has lost 2.3 million jobs
In the months following the stimulus, unemployment rose well above the ceiling of 8 percent promised by President Obama and Administration officials to over 10.1 percent
Less than 55 percent of Americans have full time jobs—the lowest percentage in modern times. Some 25 million people are unemployed or unable to find full time jobs
A study by Ohio State University in May found that instead of creating jobs, the stimulus "destroyed/forestalled one million private sector jobs" but did create 450,000 jobs in the government sector
8.1 million workers are employed part time because they are unable to find full-time jobs or their hours have been cut
An additional 1.1 million discouraged workers have stopped looking for jobs because they do not believe there were any available—taken together, true unemployment tops 16 percent
So, when you hear the president talk about jobs "saved or created" by the stimulus tonight, remember that the true phrase should be "destroyed or forestalled". Because the president seems to be wanting a Stimulus II, to add to the awesome economic power of Stimulus I. And TARP. And Quantitative Easing I. And Quantitative Easing II.
There seems to be more and more evidence and economic consensus that a double dip recession may be about to occur, something we’ve been warning about for some time.
The outlook for economic growth in developed countries has got much worse in the last three months, the OECD said on Thursday and urged central banks to keep rates low and be ready to pursue other forms of easing.
The latest estimates marked a sharp slowdown from the Paris-based organization’s last forecasts in May but used different methodology so were hard to compare precisely.
The Organization for Economic Cooperation and Development forecast growth across the G7 group of major industrialized economies would average 1.6 percent on an annualized basis in the third quarter before slowing to just 0.2 percent in the final three months of the year.
"With respect to three months back the growth scenario looks much worse, one would say that growth is stagnating," said OECD chief economist Pier Carlo Padoan.
"We are witnessing a growth slowdown across OECD countries."
Not good. To put it in graphic form, check out this projection from OECD:
Those are not good numbers for growth. Now check out this particular graphic. One of the obvious keys to economic growth is consumers since they make up about 70% of the GDP numbers. What you’ll see is not something which inspires feelings of well being:
The title is an understatement. Consumer confidence, especially in the US, has tanked. In fact, if you look closely, it is slightly less than at the depth of the recession in 2009.
Again, not good.
Economies have a strong self-reinforcing nature. When people are optimistic, they spend, which begets hiring and then more spending. When people are anxious, they pull back, which leads to a cycle of hiring freezes and further anxiety that often lasts for months.
And history tells us:
The United States appears to have entered some version of the vicious cycle. Most ominously, job growth has slowed to a pace that typically signals the start of a recession .
Over the last 50 years, every time that job growth has been as meager as it has been over the last four months,the economy has been headed toward recession, in a recession or in the immediate aftermath of one. From early 2010 through this spring, by contrast, employment was growing fast enough to make the economy look as if it were in a recovery, albeit a modest one.
That’s not the case now.
More immediately, the main significance of the recent slowdown is that the economy may not merely be going through a weak phase that will soon pass, as many policy makers hope. Instead, history seems to suggest that the situation will probably get worse before it gets better.
In a recent research paper, Jeremy J. Nalewaik, a Federal Reserve economist, described this concept as “stall speed”: once the economy slows markedly, it often continues to do so. (He did not make a forecast.) In the other two severe downturns of the last 80 years—in the 1930s and the early 1980s—the economy suffered just such a stall and fell into a second recession not long after the first.
So the consensus opinion forming is we’re in big trouble economically:
“For the U.S, we now expect GDP growth in the second half of 2011 to average just 1.3 percent at an annual rate, down from 2.8 percent,” said HSBC Chief US Economist Kevin Logan in a research note.
“Don’t be fooled by an autos recovery in the third quarter,” said Logan Jonathan Loynes, the chief European economist at Capital Economics, feels similarly about Europe.
“The latest activity indicators suggest that the euro-zone economy might soon slip back into recession.
In the second quarter, the economy expanded by just 0.2 percent, compared to 0.8 percent in the first quarter of 2011,” said Loynes.
“Growth this weak means the economy will likely remain on recession watch throughout the remainder of this year,” Logan said of the U.S. He believes the key risk is stagnating consumer spending.
On the economic side of things, this is not something anyone wants to see, but the metrics are lining up to indicate that a double dip is what we’re going to see. On the political side of things, if that’s the case, it spells big trouble for the incumbent president.
There’s your economic setting for the big Presidential jobs speech tonight.
It’s not a big day for economic releases today, so we get a bit of a breather from major releases.
The Mortgage Bankers Association reports that their composite index fell once again, as mortgage applications dropped –4.9%, despite low interest rate. Purchase applications actually increased by 0.2%, but re-fi apps fell –6.3%.
In retail sales for the week, ICSC-Goldman reports same-store sales fell steeply by 0.7% last week to pull down the year-on-year rate to 2.7%. Conversely, Redbook reports same-store year-on-year rose sharply by 0.9% last week, for a 4.9% rate.
UPDATE: The afternoon release of the Fed’s "Beige Book", prepared for the September 20-21 FOMC meeting, shows that the economy continues to expand at a "modest pace." Some Districts noted mixed or weakening activity, however the Fed believes that a double-dip recession is not in the offing. Overall, the report indicates that a sluggish recovery continues.
Gary Becker is an economist who has also been awarded a Nobel Prize in his field, but unlike the one which hangs out on the pages of the New York Times, hasn’t yet succumb to being a water carrier for a particular administration. He also doesn’t seem to have any particular political agenda.
Consequently, when he speaks I tend to listen and in today’s Wall Street Journal, he speaks. It is well worth the read. Some nuggets:
The origins of the financial crisis and the Great Recession are widely attributed to "market failure." This refers primarily to the bad loans and excessive risks taken on by banks in the quest to expand their profits. The "Chicago School of Economics" came under sustained attacks from the media and the academy for its analysis of the efficacy of competitive markets. Capitalism itself as a way to organize an economy was widely criticized and said to be in need of radical alteration.
Although many banks did perform poorly, government behavior also contributed to and prolonged the crisis. The Federal Reserve kept interest rates artificially low in the years leading up to the crisis. Fannie Mae and Freddie Mac, two quasi-government institutions, used strong backing from influential members of Congress to encourage irresponsible mortgages that required little down payment, as well as low interest rates for households with poor credit and low and erratic incomes. Regulators who could have reined in banks instead became cheerleaders for the banks.
This recession might well have been a deep one even with good government policies, but "government failure" added greatly to its length and severity, including its continuation to the present. In the U.S., these government actions include an almost $1 trillion in federal spending that was supposed to stimulate the economy. Leading government economists, backed up by essentially no evidence, argued that this spending would stimulate the economy by enough to reduce unemployment rates to under 8%.
Of course, while not a “leading government economist”, the NYT’s resident economist was right in the middle of cheerleading that spending as well.
More importantly, Becker addresses what opponents of capitalism always like to blame for any market downturn. “Market failure”. It is a bit like the climate alarmist crowd. They prefer to ignore the sun’s effect on climate in order to put the blame on people. In this case, the opponents of capitalism prefer to ignore the effect of government on markets in order to blame markets and thus insert more government.
And that increase in government intrusion is also talked about by Becker:
The misdiagnosis of widespread market failure led congressional leaders, after the 2008 election, to propose radical changes in financial institutions and, more generally, much wider regulation and government control of companies and consumer behavior. They proposed higher taxes on upper-income families and businesses, and extensive controls over executive pay, as they bashed "billionaire" businessmen with private planes and expensive lifestyles. These political leaders wanted to reformulate antitrust policies away from efficiency, slow the movement by the U.S. toward freer trade, add many additional regulations in the medical-care sector, levy big taxes on energy emissions, and cut opportunities to drill for oil and other fossil fuels.
Congress did manage to pass badly designed laws concerning financial markets, consumer protection and medical care. Although regulatory discretion failed leading up to the crisis, Congress nevertheless added to the number and diversity of federal regulations as well as to the discretion of regulators. These laws and the continuing calls for additional regulations and taxes have broadened the uncertainty about the economic environment facing businesses and consumers. This uncertainty decreased the incentives to invest in long-lived producer and consumer goods. Particularly discouraged was the creation of small businesses, which are a major source of new hires.
Of course, that’s precisely the problem we’ve been pointing out for a couple of years now. The unsettled business climate has provided a disincentive to expand and hire. The acceptance of the premise that it was the markets that failed have justified and driven the increases in regulation and government control. Bottom line: businesses are scared to commit and thus continue to sit on the sidelines as they attempt to figure out the new rules of the game, even while more and more rules are being piled on top of the new rules. Who in their right mind is going to risk their future and their money in a fixed game with rules slanted heavily against their success?
Answer? Very few.
Becker then addresses what we all know is the 800 pound gorilla in the room that politicians still manage to ignore in favor other much less effective but more politically palatable actions:
The expansion of government resulting from the stimulus and other government programs contributed to rising deficits and growing public debt just when the U.S. faced the prospect of big increases in future debt due to built-in commitments to raise government spending on entitlements. Social Security, Medicaid and Medicare already account for about 40% of total federal government spending, and this share will grow rapidly during the next couple of decades unless major reforms are adopted.
A reasonably well-functioning government would try to sharply curtail the expected growth in entitlements, but such reform is not part of the budget deal between Congress and President Obama that led to a higher debt ceiling. Nor, given the looming 2012 elections, is such reform likely to be addressed seriously by the congressional panel set up to produce further reductions in federal spending.
It is a commentary on the extent of government failure that despite the improvements during the past few decades in the mental and physical health of older men and women, no political agreement seems possible on delaying access to Medicare beyond age 65. No means testing (as in Rep. Paul Ryan’s budget roadmap) will be introduced to determine eligibility for full Medicare benefits, and most Social Security benefits will continue to start for individuals at age 65 or younger.
In a nutshell, there is little political will to reduce spending on entitlements by limiting them mainly to persons in need.
I love the line “A reasonably well-functioning government” because it cuts to the core of the problem. Our problem isn’t markets. Our government isn’t now nor has it been for a while “reasonably well-functioning”. It is broken. It doesn’t run or function well at all. The proof is the “debate” that is now going on concerning spending, debt and deficit. It is focused in the wrong area deliberately because politicians avoid hard and unpopular decisions which may cost them their power and prestige. Human nature 101. So they nip around the edges while ignoring the core problem. And the result is $14 trillion of debt and no end to massive increases in that debt in sight. It is a result of the total mismanagement of government by successive generations of politicians more concerned about politics than fiscal sanity and what is best for the nation.
And it isn’t just at the federal level his problem persists:
State and local governments also greatly increased their spending as tax revenues rolled in during the good economic times that preceded the collapse in 2008. This spending included extensive commitments to deferred benefits that could not be easily reduced after the recession hit, especially pensions and health-care benefits to retired government workers.
Unless states like California and Illinois, and cities like Chicago, take drastic steps to reduce their deferred spending, their problems will multiply as this spending grows over time. A few newly elected governors, such as Scott Walker in Wisconsin, have pushed through reforms to curtail the power of unionized state employees. But most other governors have been afraid to take on the unions and their political supporters.
The perfect example of why more of what is necessary isn’t being done can be found in Wisconsin where politicians actually stood up and have done what is necessary. Result? Childish tantrums from unions, recall elections and daily vilifications by opponents. Who would willingly subject themselves to that as a routine part of their job? Very few. And thus, as Becker points out “most other governors have been afraid” to even suggest doing what is necessary, much less do it.
Becker concludes with something we’ve been trying to get across for years. It is exceptionally well stated and, as far as I can determine, quite true:
The traditional case for private competitive markets goes back to Adam Smith (and even earlier writers). It is mainly based on abundant evidence that most of the time competitive markets work quite well, usually much better than government alternatives. The main reason is not that individuals in the private sector are intrinsically better than government bureaucrats and politicians, but rather that competitive pressures discipline market behavior much more effectively than government actions.
The lesson is that it is crucial to consider whether government regulations and laws are likely to improve rather than worsen the performance of private markets. In an article "Competition and Democracy" published more than 50 years ago, I said "monopoly and other imperfections are at least as important, and perhaps substantially more so, in the political sector as in the marketplace. . . . Does the existence of market imperfections justify government intervention? The answer would be no, if the imperfections in government behavior were greater than those in the market."
The widespread demand after the financial crisis for radical modifications to capitalism typically paid little attention to whether in fact proposed government substitutes would do better, rather than worse, than markets.
Government regulations and laws are obviously essential to any well-functioning economy. Still, when the performance of markets is compared systematically to government alternatives, markets usually come out looking pretty darn good.
Exactly. And as Becker states, this is “based on abundant evidence”, not something some government economist pulled out of thin air (like the example in which government economists claimed spending the stimulus would keep unemployment under 8%).
Markets certainly have their hiccups and the like, but most of that is because we deal in a world of imperfect information. But markets adjust and compensate and it is competition that is the driver of those market changes. Government intervention only interferes in that mechanism and magnifies the imperfections Becker notes. At some point, the intrusion is so great that the market can’t recover. That’s usually when we hear the term “market failure” used with the proposed remedy being even more government intrusion.
And we end up right here. The question, of course, is whether or not this is the place we want to be? If not, one would hope the remedy is fairly obvious. Painful, perhaps, but obvious. Our debt doesn’t exist because of the markets. Our debt exists because of government. What is it going to take to get it properly acted upon and fixed?
The Unemployment situation is the big report today, but it’s not the only one.
The Monster Employment Index rose slightly from 144 to 147 as the number of job want ads increased a bit.
Big deal. The headline number today is, of course, the Bureau of Labor Statistics’ report on the national employment situation, and it’s not good. The headline unemployment rate remains unchanged at 9.1%, and no net new payroll jobs were created last month. Last month’s increase in jobs was revised downward to 85,000.
To the extent there is any positive news to this report, it is in the underlying data. The labor force participation rate rose very slightly, from 63.9% to 64%. The U-4 unemployment rate (Total unemployed plus discouraged workers, as a percent of the civilian labor force) fell from 10% to 9.6%. The U-6 rate (Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force) also fell from 16.3% to 16.1%. The number of employed persons also rose from 139,296,000 to 139,627,000.
The bad headline number, though, pushed the Dow down more than 200 points as of 6:40 this morning.
Today’s economic stats releases show weakness in the economy remains, as the numbers are lackluster, overall.
Retail sales are reported by chain stores today, and they’re looking a bit weak. Some stores blamed Hurricane Irene for lower sales results than in July, though others point to a generally tough economic environment for shoppers.
Initial claims for unemployment fell to 409,000, but the the four-week average is worse at 410,250 which is up for the second week in a row and compares to 408,250 at the end of July. The Verizon strike caused a bit of a bump over the last two weeks, which is now smoothing out, so we’ll get a better idea of the trend in the next few weeks. Overall, though, the trend looks fairly flat, which is disappointing.
The revision to Productivity and Labor Costs indicate that productivity fell by -0.7% while unit labor costs rose 3.3% in the second quarter. The revisions show that the economy is still weak, and hiring is probably not an attractive option for firms.
The Bloomberg Consumer Comfort Index for the August 27 week slipped to -49.1 from the last report of -47.
The ISM Manufacturing Index declined very slightly to 50.6 from last month’s 50.9. A reading above 50 generally indicates an economic expansion, but a reading of less than 51 isn’t much of an expansion.
Construction Spending in July fell -1.3%, and is down -4.7% from last August. Last month’s spending, however, was revised sharply upwards from an increase of 0.2% to 1.6%. The overall trend is upwards, too, compared to monthly losses of –17% in 2009.
The President gets low marks for his handling of the economy, sure to be the primary issue during the 2012 presidential election. The latest CNN Poll delivers the bad news:
But only 34 percent approve of how the president is handling economic issues, with 65 percent saying they disapprove of how he’s handling the economy. Thirty-three percent give him a thumbs up on the budget deficit and 37 percent approving of how he’s dealing with unemployment.
"Two-thirds of Democrats continue to approve of Obama’s economic record, but seven out of ten independents disapprove. Not surprisingly, more than nine out of ten Republicans also disapprove of how Obama is handling the economy,” adds Holland.
The important part of those numbers is found in the second paragraph where “seven out of ten independents disapprove”. As we all know, independents are where elections are won or lost. When you’re down 70% with that group on an issue as important and personal as the economy, you’re in trouble. Also note that only 66% of Democrats are happy with his record on the economy.
While Obama gets higher marks in other areas such as foreign affairs, few think such areas are going to be major factors in how people vote in the upcoming election. When it comes to his record for handling economic issues, the vast majority of the country finds his performance to be subpar.
So the week before a “major jobs speech”, the numbers are in and they’re not good. As I’ve mentioned any number of times, Obama has a problem for the first time in his elected life – he has to run on his record. And to this point his record has a number of "records" in it – record deficits, record debt, record unemployment and now, record discontent.
Turning this around will be no easy feat. Especially before November of next year. So as he pivots yet again to focus on jobs (something he’s supposedly been focused on since the beginning of his presidency), he has some implacable opponents he can’t spin, namely numbers, facts and statistics. And those numbers, facts and statistics translate into the poll numbers like those above.
Finally, despite all his efforts to do so, it appears that his days of being able to blame shift his “inherited” problems to Bush are over. These poll numbers say that the majority of Americans have rejected that and are not pleased with his performance, not Bush’s.
Must be tough to actually finally have to take responsibility for something when you’ve spent your entire life attempting to slip responsibility for anything that was negative.
I generally tweet the day’s economic statistics, and compile them on Google+. It occurs to me that I can just do that here. Don’t know why I haven’t thought of this before…
Anyway, here’s the day’s economic statistics.
MBA Purchase Applications fell -12.2% in the latest week, led by drops in refinancing applications. The plus to this report is that purchase applications rose
Challenger reports that layoff announcements fell to 51,114 from 66,414 last month. These numbers are not seasonally adjusted, so the monthly comparison is a bit difficult. The trend is down from a year ago, however. Most layoffs were centered in government, especially the military.
ADP is calling for a 91,000 rise in private payrolls for August, down from last month’s 109,000. This implies a weaker Employment Situation than last month’s when we get that report from BLS on Friday.
The Chicago PMI was 56.5, indicating that business slowed slightly in the Chicago area this month. This is generally seen as a predictor of the national index, which will be released tomorrow.
July was a very strong month for the manufacturing sector with factory orders up 2.4%.