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How is the Economy Really Doing?
Tweet Share on Facebook February 6, 2009 Comment (1)Jim Paulsen of Wells Capital Management sends me this chart that shows despite a big drop in employment, worker incomes have held up pretty well: "None of this diminishes the severity of the collapse currently unfolding in the job market. However, it is a bit of a silver lining that this record-setting job collapse is being at least somewhat buffered by a relatively modest decline in real incomes."
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Ronald Reagan on the Economy
Tweet Share on Facebook February 6, 2009 Comment (9)President Ronald Reagan was born on Feb. 6, 1911. Lots of folks are saying Reaganomics is no longer applicable to the modern world. Decide for yourself. Here are excerpts from his farewell address on January 11, 1989:
The way I see it, there were two great triumphs, two things that I'm proudest of. One is the economic recovery, in which the people of America created--and filled--19 million new jobs. The other is the recovery of our morale. America is respected again in the world and looked to for leadership. ...
Common sense told us that when you put a big tax on something, the people will produce less of it. So, we cut the people's tax rates, and the people produced more than ever before. The economy bloomed like a plant that had been cut back and could now grow quicker and stronger. Our economic program brought about the longest peacetime expansion in our history: real family income up, the poverty rate down, entrepreneurship booming, and an explosion in research and new technology. We're exporting more than ever because American industry became more competitive and at the same time, we summoned the national will to knock down protectionist walls abroad instead of erecting them at home. ...
Ours was the first revolution in the history of mankind that truly reversed the course of government, and with three little words: "We the people." "We the people" tell the government what to do, it doesn't tell us. "We the people" are the driver, the government is the car. And we decide where it should go, and by what route, and how fast. Almost all the world's constitutions are documents in which governments tell the people what their privileges are. Our Constitution is a document in which "We the people" tell the government what it is allowed to do. "We the people" are free. This belief has been the underlying basis for everything I've tried to do these past eight years.
But back in the 1960s, when I began, it seemed to me that we'd begun reversing the order of things--that through more and more rules and regulations and confiscatory taxes, the government was taking more of our money, more of our options, and more of our freedom. I went into politics in part to put up my hand and say, "Stop." I was a citizen politician, and it seemed the right thing for a citizen to do. I think we have stopped a lot of what needed stopping. And I hope we have once again reminded people that man is not free unless government is limited. There's a clear cause and effect here that is as neat and predictable as a law of physics: As government expands, liberty contracts.
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What Obama Doesn't Understand About Tax Cuts
Tweet Share on Facebook February 6, 2009 Comment (5)Here is a great interview with economist Robert Barro on how tax cuts really work to boost an economy, as well as his thoughts on the Obama stimulus package. (He hates it.) But this hunk is really great:
I don't think it is really confusing at all, because when you cut taxes there are two different effects. One is that you cut tax rates, and therefore give people incentives to do things like work and produce more and pay more -- maybe, depending on what kind of taxes. And then you also maybe give people more income. This income effect is the one that's related to this Keynesian multiplier argument, where it's usually argued that government spending should have a bigger effect. So that's the income effect. But the tax-rate effect, inducing people to do things like work and produce more and invest more, is a whole separate effect, and that could easily be much bigger than the multiplier thing, than the income thing.
Me: And that, my friends, is the economic argument of the past 25 years in a nutshell. If Democrats bought into that, there would be no debate on how to best boost an economy. By the way, President Obama does not buy into Barro's approach. I think this quote from his book The Audacity of Hope is most illustrative: "The high marginal tax rates that existed when Reagan took office may not have curbed incentives to work or invest, but they did distort investment decisions—and did lead to the wasteful industry of setting up tax shelters." That is as far as he will go, apparently.
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Unemployment Rate Climbs to 7.6 Percent
Tweet Share on Facebook February 6, 2009 Comment (1)From the Labor Department:
Nonfarm payroll employment fell sharply in January (-598,000) and the unemployment rate rose from 7.2 to 7.6 percent. Payroll employment has declined by 3.6 million since December 2007; about one-half of this decline occurred in the past 3 months.
Me: The unemploymen rate for those with a college education is 3.8 percent, the highest number since the government began tracking for educational attainment in 1992. The lowpoint since then was 1.5 percent in December 2000. It was also as low as 1.9 percent in May 2007. The unemployment rate for those without even a high school diploma was 12.0 percent, the highest since the start of 1992. One more reason why it makes sense to cut payroll taxes. They are taxes on work, like putting a higher price on work. Time for a discount!
And get used to this factoid, via Wachovia: "Only the government sector is adding jobs at this point with most of the jobs being added by the federal sector."
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Greg Mankiw's Stimulus Package
Tweet Share on Facebook February 6, 2009 Comment (8)Economist Greg Mankiw offers up his preferred stimulus package:
I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax. I would make the two tax changes equal in present value, so while the package results in a short-run budget deficit, there is no long-term budget impact. Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift.
I recognize that some state governments are now struggling in light of the macroeconomic crisis. For the next two years, I would let each state governor have the authority to divert a portion of the payroll tax cut in his or her state and take the funds instead as state aid. This provision would essentially be giving governors the temporary authority to impose a payroll tax on his or her citizens, collected via the federal tax system. Those governors who think they have valuable infrastructure projects ready to go would take the money. When designing a fiscal stimulus, there is no compelling reason for one size fits all. Let each governor make a choice and answer to his or her state voters. It is called federalism.
Any further federal spending projects should be evaluated on the basis of cost-benefit analysis. That analysis would take time, but it would ensure that the projects are not a waste of taxpayer dollars.Me: I hear a lot of about these payroll tax-carbon tax swaps. But liberals want to use any funds from a carbon tax -- or a cap-and-trade system -- for further government spending on "green energy" or other projects. In fact, that was even part of Obama's campaign agenda. He was going to finance his energy projects with $100 billion a year in revenue from selling cap-and-trader permits to business.
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Obama Economic Advisory Board: Few Dissenting Voices
Tweet Share on Facebook February 6, 2009 Comment (74)So President Obama is going to announce his economic advisory board today. It will be chaired by Paul Volcker, while Austan Goolsbee will be its executive director. The board itself can be found here.
Me: Names I would liked to have seen on there: Stanford economist John Taylor, FedEx CEO Fred Smith, Mitt Romney, Cypress Semiconductor CEO T.J. Rodgers, Lawrence Kudlow, Cisco Systems CEO John Chambers, economist Arthur Laffer, economist Glenn Hubbard, among others. I just wonder about the diversity of advice this board will provide.
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Fixing the Banks
Tweet Share on Facebook February 5, 2009 Comment (1)CNBC reports that the White House may choose to suspend mark-to-market accounting rules as part of its "all of the above" bank bailout plan: "The Obama administration is now working on ideas to address that, which might entail a temporary suspension of certain accounting rules." ... Also, David Goldman of the Inner Workings blog doesn't understand the drama: "A bit of capital here, some asset guarantees there, a tad of FDIC-backed new debt, and some fiddling with accounting rules — and the banks aren’t solvent, but the next best thing. There just shouldn’t be so much drama about it."
Me: Suspension of mark-to-market would be an incredibly huge plus. We'll see ...
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Mustard Seeds: Productivity
Tweet Share on Facebook February 5, 2009 CommentThe continued rise in productivity may be the most important indicator of the deep strength of the U.S. econonomy. It rose at a 3.2 percent annual rate in the fourth quarter, topping the consensus expected gain of 1.6%. Overall, productivity is up 2.7 percent versus last year.
As Wesbury and Stein at First Trust Advisers put it:
As much as the economy is hurting right now, the continued rise in productivity (output per hour) bodes well for our long-term prospects. Despite the recession, productivity was up 2.7% in 2008, slightly better than the average pace of productivity gains over the past ten years (2.6%). Businesses have achieved recent productivity gains by cutting hours worked (-3.6%) faster than the decline in production (-1%). Tomorrow’s employment report will likely show a significant loss in payrolls, roughly 525,000. However, higher productivity will eventually make it appealing for companies to re-hire workers and bid up real wages/benefits.
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Obama Pushes $900 Billion Stimulus Package
Tweet Share on Facebook February 5, 2009 Comment (14)The president just got finished giving a speech promoting passage of his stimulus package. I found it kind of weird. I mean, as usual, Obama served as his own best spokesman. But he seemed a little peeved. If the bill is in trouble, he has no one to blame but himself. The White House chose to pretty much take a hands-off approach to the package other than setting some broad parameters. Pelosi & Co. wrote it and stuffed it full off stuff that had nothing to do with stimulating the economy nor contributing to long-run economic growth.
Yes, the Republicans are pushing tax cuts, but so are many liberal economists who think, for instance, that cutting the payroll tax would provide a huge boost to the economy. Liberals have also assailed the package for being to wimpy on things like infrastructure spending and moving toward a "green" economy. I am pretty sure if Larry Summers, Austan Goolsbee, Christina Romer and Jared Bernstein said in a room and came up with a package, it would be a vast improvement on the mishmash that congressional Dems have devised.
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CBO: Obama Stimulus Plan Lowers Long-Run Growth
Tweet Share on Facebook February 4, 2009 Comment (6)According to the Congressional Budget Office -- in a letter sent to Sen. Judd Greg and Sen. Charles Grassley -- the big deficits generated by the Obama stimulus plan would lower economic growth over the long run.
In contrast to its positive near-term macroeconomic effects, the Senate legislation would reduce output slightly in the long run, CBO estimates, as would other similar proposals. The principal channel for this effect is that the legislation would result in an increase in government debt. To the extent that people hold their wealth in the form of government bonds rather than in a form that can be used to finance private investment, the increased government debt would tend to “crowd out” private investment—thus reducing the stock of private capital and the long-term potential output of the economy.
The negative effect of crowding out could be offset somewhat by a positive long-term effect on the economy of some provsions—such as funding for infrastructure spending, education programs, and investment incentives, which might increase economic output in the long run. CBO estimated that such provisions account for roughly one-quarter of the legislation’s budgetary cost. Including the effects of both crowding out of private investment (which would reduce output in the long run) and possibly productive government investment (which could increase output), CBO estimates that by 2019 the Senate legislation would reduce GDP by 0.1 percent to 0.3 percent on net.
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