Free Markets, Free People

GDP


Obama asks for another increase in the debt ceiling

If you wonder why there is this focus on the left on taxing the ‘rich’, part of it can be found here:

President Barack Obama asked Congress for another $1.2 trillion in government borrowing authority, the third and final request under an August deal with lawmakers that averted a U.S. default.

The president’s notification to congressional leaders yesterday starts a 15-day countdown for lawmakers to consider and vote on a joint resolution disapproving of the increase.

An “August” deal and we’re already on the “third and final request”?  August for heaven sake.  5 months.  Does that at all demonstrate how absolutely unconcerned this administration is with out-of-control spending?  Does it help explain the class-warfare, anti-Wall Street, shift-the-blame campaign in which the President has been engaged?

We’ve already exceeded the national yearly GDP with our debt under Obama and now he’s going for more.

Well, except at DoD.  There’s he’s slashing muscle and bone on the one hand while proposing a pay-hike for other federal employees on the other.

The debt ceiling increase is to meet commitments already made by the government. The Treasury Department has been relying on accounting maneuvers, similar to the ones employed during the year’s earlier dispute, to ensure that the previous $15.194 trillion limit wasn’t breached.

Since the budget law was approved, the debt limit has been raised twice, by a total of $900 billion. In the latest request, the limit would rise to $16.394 trillion, which the Treasury Department estimates will fund the government until late 2012.

We are so ill served by our current crop of politicians that it almost defies description.  We’re past the generational theft of our grandchildren’s money and are working on that of our great-grandchildren.

This is simply inexcusable, yet like an alcoholic or drug addict it seems our politicians can’t help but do whatever is necessary to obtain their next fix of borrowed money.  Meanwhile the credit rating for the country has been downgraded and is at risk for further downgrade.  And the economic drag on the economy in general this sort of a debt load carries continues to increase.

You want a national tragedy … here it is.  You want a national nightmare … its playing out right in front of you and there doesn’t seem like anyone is able to stop it.

But most rational people understand that at some point it has to stop … it has to come to an end.  And when it does, this recession will look like child’s play, all thanks to the selfish short-sightedness of our political class.  Oh, and yes,  the gutless votes who keep rewarding this sort of behavior because it benefits them.

At the risk of sounding like some sort of extremist fanatic, the end is near.   And it isn’t going to be a pretty end either.

~McQ

Twitter: @McQandO


“Kicking the can” in a cul de sac

Or maybe a better analogy is Nero and Rome.  Politicians and hard decisions just don’t seem to mix very well do they?  It is much better to be Santa Clause than the Grinch.  Especially if you want politics to be your career.

Maybe that’s the problem.  If you remember correctly, at least in the US, politics was supposed to be a part-time job.  But here as in Europe, it has developed into a full-time job that requires excessive pandering to special interest groups using taxpayer money and borrowing as the means.

And here we are.

In Europe, it has, as predicted for decades, finally reached a tipping point.  And the political elite?   They really have no idea how to handle the problem (and the same sort of problem is becoming evident here).  So they resort to the usual reaction of politicians caught in an uncomfortable situation.  Defer a decision:

Under pressure to deliver shock treatment to the ailing euro, European finance ministers failed to come up with a plan for European countries to spend within their means. Such a plan is needed before Europe’s central bank and the International Monetary Fund consider stepping in to stem an escalating threat to the global economy.

The ministers delayed action on major financial issues – such as the concept of a closer fiscal union that would guarantee more budgetary discipline – until their bosses meet next week in Brussels.

If their finance ministers can’t put together a plan of action, what in the world are the ministers going to do next week?  Megan McArdle notices the can kicking as well and also recognizes that they’re doing that in a cul de sac:

Keeping the euro together requires much more than fiscal integration–all fiscal integration does is turn the peripheral countries into something like those Algerian ghettos ringing Paris.  Actually correcting these imbalances is going to require a lot of people in the periphery to get up and move.  That’s a really tall order.  Despite the fabled European multi-lingualism, in my experience, the majority of workers speak English about like I spoke high-school French and college Spanish; well enough to go on vacation, but not well enough to enjoy living in another country.  I’m told that this is about standard.  And that’s just one of the many barriers to movement between countries.

It’s not just the Germans who have to ask themselves whether the PIIGS won’t eventually say "Enough!" and renege.  The bond buyers have to ask the same thing.  At this point, it’s not entirely clear to me that any solution is credible enough to kick the can more than a very short distance down the road.

McArdle’s question in the title of the piece is “How can Europe possibly save itself?” You could read the question two ways.  The first is wondering out loud what Europe could do to fix the problem and solve the dilemma they’re in.  The second is rhetorical and reflecting a belief that it can’t.

Given this latest deferral, I’m beginning to see the question as rhetorical and the result as catastrophic.  If you want to see a real “Domino Effect”, let Europe collapse.

Oh, and by the way, they just downgraded the third quarter GDP estimate from 3.1% to 2.3%

And that sound you hear?   The can clinking along as politicians the world over do what they do best.

MICHAEL ADDS: You could actually read the question a third way: Who will step in to save Europe from itself? Why, none other than good ole Uncle Sam (aka we the taxpayers):

The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points. In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary. Further details on the revised arrangements will be available shortly.

U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.

This is essentially a back-door bailout of the Euro. The Fed fixes the interest rate for these loans (the currency swaps) at today’s rate, sends a bunch of US dollars to European central banks (and elsewhere), which then loan out those dollars to European banks facing a “liquidity crisis” — i.e. running out of money and holding diminishing assets (one of which may have almost crashed last night). Nominally, the European central banks are on the hook for any losses suffered, but we all know how that works.

You can read more about how these swaps work here.

~McQ

Twitter: @McQandO


GDP numbers up this quarter but is that permanent and significant?

Yeah, I know, boring economics again, but its important stuff.  This is where the crisis is and it is important to understand these stories as they come out.

The Washington Post trumpeted today that the Gross Domestic Product grew by 2.5% this past quarter.   Yes, that is a decent number.  But a) is it a number that will be revised upward or downward (because they’re always revised) and b) are there any clinkers out there we should be aware of, and finally c) is this the beginning of a trend or just a blip?

In answer to “a”, the “b” says down.  So let’s get to “b”:

Real disposable personal income fell 1.7%, the biggest drop since the third quarter of 2009, economist Nigel Gault of IHS of Global Insight notes. Even so, consumer spending jumped 2.4%, a big factor in the overall GDP growth. That means consumers boosted their spending by saving less. The savings rate fell a percentage point to 4.1%, Commerce Department data show.

That trend can’t last indefinitely, economists warn. Consumers eventually will tap out their savings or put the brakes on spending. “Consumer spending only accelerated because the saving rate dropped by a full percentage point,” Mr. Gault wrote. “That’s not a solid foundation for growth.”

Economists are already wondering whether a plunge in consumer confidence will eventually translate into lower consumer spending. October data from the Conference Board this week showed that Americans’ confidence in the economy is lower than at any point since the depths of the recession.

So the good news is that consumer spending most likely drove the GDP numbers up this past quarter.  However, it also appears, given the report, that it is unlikely that’s going to continue.  That is a huge drop in real disposable income and tapping savings isn’t something one would expect to be a long-term trend.  What we may have seen this quarter is consumer spending driven by the fact that a good percentage of consumers could hold out no longer on making some purchases.  Additionally, those out of work and tapping savings can’t do that forever.  

Which brings us to “c”.  Trend or blip?  Well, first my guess is the GDP will be revised downward.  And, seeing how that’s been the case with all previous quarters, I think that’s unfortunately a pretty safe bet.   And “c”?

Blip.

~McQ

Twitter: @McQandO


Congrats on the debt deal–for the first time US debt is greater than GDP

Yes, we’ve finally done it – and almost immediately after the Spender-in-Chief signed the new law:

US debt shot up $238 billion to reach 100 percent of gross domestic project after the government’s debt ceiling was lifted, Treasury figures showed Wednesday.

Treasury borrowing jumped Tuesday, the data showed, immediately after President Barack Obama signed into law an increase in the debt ceiling as the country’s spending commitments reached a breaking point and it threatened to default on its debt.

The new borrowing took total public debt to $14.58 trillion, over end-2010 GDP of $14.53 trillion, and putting it in a league with highly indebted countries like Italy and Belgium.

Public debt subject to the official debt limit — a slightly tighter definition — was $14.53 trillion as of the end of Tuesday, rising from the previous official cap of $14.29 trillion a day earlier.

Treasury had used extraordinary measures to hold under the $14.29 trillion cap since reaching it on May 16, while politicians battled over it and over addressing the country’s bloating deficit.

The official limit was hiked $400 billion on Tuesday and will be increased in stages over the next 18 months.

No linger time there, huh?  We now owe more than we produce in a year.  And let’s be honest, we didn’t get here just during the last 3 years – although we did switch from a horse-drawn sled to a rocket sled – this has been a long process aided and abetted by both parties.  Yes, one has been worse than the others at times, but it pays to remember that George W. Bush gave us Medicare part D and No Child Left Behind … both horribly expensive programs. 

But it’s not slowing down is it?  And that’s a problem for economic recovery as Dale reminded us:

…a body of peer-reviewed work has been developed (PDF) that shows that an excess of government debt serves as a drag on the economy, shaving at least a full percentage point off of annual GDP growth. And we’ve learned that this negative economic effect has a non-linear effect on economic growth as debt increases.

There seems to be little real recognition of how drastic and the enduring government cuts in spending must be to change this so the debt isn’t a drag on the economy.  Granted they must be intelligent so as not to compromise our national security or disrupt what we deem as basic essential services government provides, but that leaves one heck of a lot of the pie to cut.   And that would include massive cuts in entitlements.  You’re not entitled to something someone else can’t afford.  And that’s where we are.   I wish we’d quit calling those programs which are pure welfare “entitlements”.  There is a difference between paying into something for years and a program in which recipients are getting something for nothing.   It is the “getting something for nothing” programs that deserve a first hard look.  Unfortunately the programs in which taxpayers were forced to contribute and were subsequently looted by spendthrift politicians need to be reviewed and cut as well. 

We can pretend this isn’t a real problem, like most of the politicians in Washington DC, or we can face the reality (and pain) of the situation and start to work doing what is necessary to bring fiscal sanity to our nation’s finances.

A good start would be cleaning the lot of them out  DC and starting over.  You’re likely to find at least as competent a group as are up there now by randomly picking 535 names from a phone book.  Yes, I know that’s not going to happen, but we’ve got to come up with some way to scare those people straight.  Suggestions are welcome.

~McQ

Twitter: @McQandO


Taxes won’t help

A commenter to my previous post writes: “Tax increases on the wealthiest would keep rates below Reagan era rates, and add some revenue.”

No, they won’t.  Not even close. Here’s why:

Tax Revenues as a Percentage of GDP by Year, 1933-2010

Now, this chart counts all tax revenues. Income taxes, corporate taxes, excises, tariffs, etc.  All of them. It includes the low income taxes of the 1930s, the 90% top tax brackets of the 40s and 50s, the Kennedy and Reagan rate cuts of the 60s and 80s…it’s all there.

And what do we notice about this model? Well, a couple of things. First, the highest tax receipts as a percentage of GDP was 20.9%.  That was in 1944. In 1945, the percentage was just north of 20%.  I think I have a pretty solid–and obvious–explanation of why tax receipts jumped so high in those two years. Sadly, the Nazis are gone and the Japanese seem rather less interested in the Greater Southeast Asia Co-Prosperity Sphere project than they did back then, so a global conventional war seems out of the picture at the moment. Darn our luck!

But the other thing we notice when we look at this chart is that despite top marginal tax rates varying between 28% and 90% since 1945, tax revenues as a percentage of GDP seem to be locked in at about 18%.  There is, in fact, only one explanation for the variations–minor as they are–in the revenue percentage since 1945, and that is economic expansion.  Irrespective of the statutory tax rates, the single, overriding factor in increases or decreases in the revenue percentage has been economic growth.  The percentage rises when the economy expands, and dips when it contracts.

As a practical matter, this chart shows us a very obvious, but little-understood phenomenon, namely, that 18% or thereabouts is the rate at which the electorate consents to be taxed. Think about that for a minute. Dwight D. Eisenhower presided over a system of steeply graduated tax rates with a top marginal tax rate of 90%.  He got 18% of GDP in revenue.  Ronald Reagan slashed tax rates, simplified the structure into three brackets, indexed for inflation, with a top marginal tax rate of 28%…and got 18% of GDP in revenue.

In the past couple of weeks, three different progrssive policy think tanks have released deficit reduction plans, all of which contained substantial tax increases, and which projected revenues as a percentage of GDP rising to over 23%.

Not. Gonna. Happen.

We know it won’t happen, because the American people have told us repeatedly, over the past 60 years, exactly how much revenue they’re willing to pay in taxes. You can jack around with tax rates all you want and you’ll get 18%.  Unless you grow the economy.  When the jobs are plentiful and the money is rolling in, the American people get a bit more generous. They’ll give you 19%.  Maybe, if things are really going swell, 20%.  But if the economy isn’t rolling hard, you’re gonna get your 18%–or less. Assuming you can lift 23% of GDP in tax revenues is just a fantasy.

Because here’s the thing: You can’t force people to make money. If they can make the same take-home pay working 35 hours per week under the new tax regime as they made in 40 hours per week under the old one, they’ll just work 35 hours per week. The more you penalize income, the less desirable additional income becomes.  It’s almost as if people respond to incentives!

Bonus question 1: If the government collects about 18% in GDP irrespective of the statutory tax rates, what is the electorate telling you the desired statutory tax rate is?

Bonus question 2: If the main factor in increasing tax revenues is economic growth, would economic growth likely be greater or smaller under a regime of lower taxes?

Discuss among yourselves.

~

Dale Franks
Twitter: @DaleFranks


What a difference a percentage point makes

Especially when you’re talking about GDP growth:

The "new normal" is a term coined by the brain trust at the giant bond fund PIMCO. Anthony Crescenzi, a PIMCO vice president, strategist and portfolio manager, is part of that brain trust.

"The difference between 2 percent growth and 3 percent growth is of major importance and has major implications for the entire economy, for financial markets, for the budget," he says. And the heart of the problem is job creation.

Crescenzi and his colleagues argue that the U.S. economy could actually grow 2 percent a year without adding any new jobs. That’s because the productivity of current workers is rising at about 2 percent a year. "In other words a company can produce 2 percent more goods and/or services a year even if it doesn’t increase the number of people it employs," he says.

Smaller Incomes Mark Zandi, chief economist at Moody’s Analytics, thinks some new jobs would be added in an economy growing 2 percent a year, but far fewer than one growing 3 percent. "In a 3 percent world we’d create roughly 1.6 million jobs a year," he says. But he says that in a 2 percent world, job creation would be less than half — around 700,000 jobs.

Meanwhile, in China, growth hit 9.5%.  So what is China doing, policy wise, that the US isn’t?  Well, for one thing it is encouraging businesses and has established a positive business climate.  Additionally, it isn’t borrowing money to pump into some black hole it calls “stimulus” at a rate faster than we’ve seen in recent history. Etc.

It’s pretty bad when you have to look to China to point out what the US should be doing.   As Henry Kissinger recently said, the Chinese used to think we had the financial side of things pretty much figured out.   Then this mess and resultant stupidity in reaction to it.   The one thing we should have had the inside track on, we didn’t, because we chose to recreate the failed policies of the Hoover/FDR era without a world war to finally pull us out of the mess (or at least I hope that’s the case).

Is this the “new normal” as Crescenzi claims?   PIMCO, btw, is the world’s largest bond fund (almost 2 trillion).  PIMCO also recently announced that it would no longer be buying US debt.

Why?  Because no one is confident the Federal Reserve knows what it is doing:

Some Fed officials at the June meeting also said additional monetary stimulus would be appropriate “if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated,” according to the minutes.

Really? 

So they are considering a “QE3”?  Note the change from “last August” to now. 

Last August, when Bernanke signaled in a speech in Jackson Hole, Wyoming, that the Fed would embark on a second round of Treasury bond purchases, employers were cutting jobs, pushing up the unemployment rate to 9.6 percent. The weakness in the economy prompted Bernanke to focus on the possibility of deflation, or a broad-based drop in prices and asset values including homes and stocks.

The economy is in better shape now than in August, though hiring remains “frustratingly slow,” Bernanke said at a June 22 news conference. Employers added 18,000 jobs to their payrolls last month, the fewest in nine months, the government reported last week.

The Fed’s $600 billion Treasury bond-buying program, completed in June, was designed to spur economic growth, employment and consumer spending by lifting stock prices and reducing borrowing costs.

Is the economy in “better shape now than in August”?  I say ‘no’. And so do most of the economic indicators.  Dr. Robert Barro, Paul M Warburg Professor of Economics at Harvard University makes it clear where the current policy is leading:

Turning to quantitative easing, he warned that the US and UK are storing up inflation and that the Bank of England may be too complacent. Although there is no threat to inflation now, he said: "You have to have an exit strategy. Ben Bernanke [chairman of the US Federal Reserve] and [Bank Governor] Mervyn King are aware of this, but I think they are a little over confident about how they can accomplish it. Because you want to have this exit strategy without having a lot of inflation.

"That’s when the inflation would occur. If there’s a recovery and there’s all this liquidity and somehow the central bank has to reverse it."

That’s precisely where this is all headed – somehow at, at some point, the Fed has to wring out all this money it pumped into the economy.  And that stored up inflation is likely to explode during that process – a real economy killer.  Barro is saying he has little confidence in the Fed, deeming them “over confident” in their ability to do that while avoiding letting the inflation dragon out of the cage.

Meanwhile, in Europe …

Yeah, it’s a mess.  And given the propensity of our policy makers to recreate the policies of the Great Depression, I don’t see it getting better any time soon.  So yes, for at least the foreseeable future, the “new normal” may be 9.2% unemployment.  Because there is still no reason or incentive for US businesses to take the chance of expanding and hiring in such an uncertain economic atmosphere.

Until they are much more confident in the policies of this administration and the Federal Reserve, few if any are going to change the status quo.

~McQ

Twitter: @McQandO


Charts of the day – do we really need more teachers?

Apparently the president’s job initiative centers around hiring 10,000 more union teachers.

The reason given is we need to beef up our math and science achievement.  And, as usual, the way to do that is to throw either more money or more teachers at the job.

What everyone ignores, however, is we’ve been doing both for years with no change.  What’s the definition of insanity again?

 

image

 

So for an approximate 10% rise in enrollment, we’ve added 10 more public school employees for every student.  And we’ve also seen the spending go through the proverbial roof as a result.  The normal, everyday, tax paying citizen would most likely expect spectacular results if he or she invested the amount they were taxed in something of their choice.  Instead, they end up screwed again:

 

image

Looking at those two charts, does anyone think the problem is related only to the money spent or the number of teachers?

Japan spends about 5% of its GDP on education, pays its teachers the equivalent of $25,000 US, has average class sizes of 33 and graduates 93% of its students from their equivalent of high school.  South Korea actually spends more of its GDP than does the US (7.35%), pays its teachers a little over $27,000 US, has huge average class sizes (almost 36) and has a graduation rate of 91.23%.  The US’s stats are 7.38% GDP, average teacher’s salary of almost $36,000, average class size of 19 and a graduation rate at a dismal 77.53%.

To most that would signal that something is wrong other than the number of teachers or what we’re spending.  Somehow, however, that message seems never to get through to our political leaders who continually work under the premise that more money and more bodies is bound, at some point, to make it all better.

That thinking, In this case, given the word pictures the two charts paint, it is obviously wrong.  When and how we can get that message across to both sides of the political spectrum remains to be seen.  But if the left wants to invoke the “for the children” canard in an attempt to shame the right into capitulating for the usual remedies, maybe they can put these two charts in their pockets and make one up of the comparative spending and graduation rates and change not only the discussion, but the solution.  My guess the new solution would take less people and less money.  Wouldn’t the taxpayers love that?

~McQ


Stimulus spin

This is being pointed to as a validation of the “stimulus” plan:

The oft-criticized stimulus plan boosted the economy in the second quarter by as much as 4.5%, the Congressional Budget Office said on Tuesday.

In a report published the same day as Minority Leader John Boehner’s criticism of President Obama’s economic policy, the CBO said the stimulus law boosted the economy by between 1.7% and 4.5%, lowered the unemployment rate by between 0.7 percentage points and 1.8 percentage points and increased the number of people employed by between 1.4 million and 3.3 million.

Of course it boosted the GDP by a sizeable amount.  When you pour almost a trillion dollars out of the government bucket and that is part of the calculation of GDP, then naturally the GDP is going to be “boosted”.

The question is, what good did it do.  Claims of “increasing the number of people employed” is, as is obvious, a guess cranked out by an economic model. 

But look around you.  When what the bucket has dumped out drains away, what do we have?

9.5% unemployment – at least at an official level – 1.5% higher than what was promised if the “stimulus” wasn’t passed.

A stagnant economy. 

Businesses neither expanding nor hiring.

Car sales – down.

Housing sales – way down.

Consumer confidence – in the tank.

Expanded regulation, increased taxation and a war on business.

Policies that have been described as an “economic Katrina.”

So let the left and the media try their best to make this more than it is – the effect on GDP calculation that absurd levels of governmental deficit spending will have.

Take that out and there isn’t much to shout about, is there?

In practice, that means the stimulus plan is the main reason the U.S. economy grew during the second quarter. The Commerce Department estimates the economy grew 2.4% in the second quarter, a figure most economists expect to be sharply revised lower in a report due Friday.

Uh, no, there isn’t.

One last little point:

The CBO also upwardly raised the cost of the stimulus plan to $814 billion from $787 billion.

Nice.

~McQ

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Surprised again – Weekly job loss numbers “unexpectedly” rise

I think I need a special category for this.  The “unexpected surprise of the week”.  Of course, it would mostly be filled with posts about unemployment numbers – although there’d also be plenty about “disappointment” concerning other economic numbers as well.

Apparently the “Recovery Summer” sunshine show is showing it’s tattered edges fairly obviously.

New U.S. claims for unemployment benefits unexpectedly climbed to a nine-month high last week, yet another setback to the frail economic recovery.

Initial claims for state unemployment benefits increased 12,000 to a seasonally adjusted 500,000 in the week ended August 14, the highest since mid-November, the Labor Department said on Thursday.

And last week’s loss was revised upwards another 4,000 lost jobs.

The economy grew at a 2.4 percent annualized rate in the second quarter, much slower than the 3.7 percent pace in the first three months of the year.

Which, politically, means:

The economy’s poor health has handed President Barack Obama a tough challenge and put at risk the Democratic Party’s majorities in the U.S. House of Representatives and Senate in November’s mid-term elections.

Obama’s approval ratings have tumbled to the mid- to lower 40 percent range and Congress’ ratings are hovering at about 20 percent.

Hey, when you’re the loudmouths who stand on the side and blame the other guy for the problem and claim you are the only ones who can “fix” it  – elect me – then you by God better fix it when it is handed to you (even if you haven’t a clue of how to do it).

Irony can be a bitch, can’t she?

~McQ

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Observations: The Qando Podcast for 02 May 10

In this podcast, Bruce, Michael, and Dale discuss the economy, Charlie Crist, and the Times Square bombing attempt. Billy Hollis checks in, too.

The direct link to the podcast can be found here.

Observations

The intro and outro music is Vena Cava by 50 Foot Wave, and is available for free download here.

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2009, they can be accessed through the RSS Archive Feed.

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