Friday's news that U.S. gross domestic product grew by only 2.5 percent came as a disappointment. After all, that performance not only fell short of the consensus expectation of three percent GDP growth, but was aided by a one-time bump for inventory expansion deferred from the last quarter of 2012. And while the strengthening housing market was a bright spot, those gains were offset by the contraction of government spending that on average has slashed half a point off GDP each quarter since early 2010. As it turns out, after years of austerity by state and local governments, Uncle Sam, too, is holding back U.S. economic growth.
As Floyd Norris explained in the New York Times, the U.S. hasn't seen this kind of contraction since the post-Korean War demobilization of the mid-1950's:
The G.D.P. report released Friday states the total government part of G.D.P. - federal, state and local - came to $3.0306 trillion in the first quarter of this year. That is 0.01 percent below the $3.0309 trillion recorded four years earlier.
Those are nominal figures, not adjusted for inflation...On a real basis, the decline was 6.5 percent.
And that kind of drag, Jared Bernstein warned, is offsetting the double-digit expansion the housing sector has enjoyed for three straight quarters:
Housing continues to be a bright spot as residential investment was up almost 13% on an annual basis. Housing has now been a positive contributor to growth for two-years running, adding 0.3% to the 2.5% growth rate for the first quarter.
But the government sector more than offset housing's contribution, shaving 0.8% off of the growth rate, with across the board declines in defense, non-defense, and state and local public spending. Since 2010q1, the public sector has, on average, taken half-a-percent from real GDP growth per quarter.
Despite slashing the national debt by an additional $1.8 trillion over the next decade, President Obama's proposed fiscal year 2014 budget was received with two predictable talking points by Republican leaders. House Majority Eric Cantor, who previously complained about being called a "hostage taker," protested that "we ought to do so without holding [entitlement cuts] hostage for more tax hikes." His fellow debt-ceiling hostage-taker John Boehner echoed that sound bite, proclaiming "I would hope that he would not hold hostage these modest reforms for his demand for bigger tax hikes." But Boehner didn't end there:
"The president got his tax hikes in January; we don't need to be raising taxes on the American people."
Speaker Boehner couldn't be more wrong. As it turns out, Uncle Sam has a well-documented need for more tax revenue in the years ahead. And a big reason why is that between them, Presidents Bush and Obama cut taxes by more than the five times the amount of the combined new revenue hikes Obama got in January and is asking for now.
The chart above tells the tale. Leaving aside the new funding contained in the Affordable Care Act, President Obama is seeking $1.2 trillion in new tax revenue over the next decade. With the fiscal cliff deal in January, Obama got about $620 billion, or about half that amount. Individuals making over $400,000 a year (and households earning over $450,000) will see their income tax rate return to its Clinton-era level of 39.6 percent. The capital gains rate similarly will be reset at 20 (from 15) percent. In his FY 2014 budget proposal, the President has asked for another $580 billion by 2023, primarily by capping deductions for the wealthy at 28 percent, instituting the so-called "Buffett Rule," and ending tax breaks for the booming energy sector.
But Obama's $1.2 trillion in current and requested tax increases pales in comparison to the roughly $6.4 trillion he and George W. Bush will have drained from the U.S. Treasury between 2001 and 2023.
I saw it fly past in yesterday's Twitter stream: 'Hurricane Sandy is a Keynesian'. And I thought, "Hmm."
Now, don't get me wrong. There's no way in hell I'm happy about this storm (in fact, I'd like to send an invoice to oil lobbyists and tell them to split the bill) and after it's done, there will be people who died (sixteen on the East Coast, 69 in the Caribbean as of this writing), and countless others left homeless, but there is a small silver lining in all those clouds.
Because the construction industry has been moribund for a while. Now it will explode, and a lot of people who didn't have jobs will have them.
And those people who have those new jobs will spend money, and that will create more jobs. How many? That depends on how much money the feds put into the recovery. (Don't forget, Wall Street brokers live in these affected areas, too.)
This story appeared after Hurricane Irene, but it still applies:
When it comes to the larger economy, Irene could provide a hefty stimulus. Analysts are already predicting a big jump in construction and home-furnishings spending as beleaguered homeowners rush to repair and replace property that was destroyed in the storm. Economist Peter Morici estimates that this short-term consumer spending boost will total roughly $20 billion, and suggests that it may have some long-term positive effects. To begin with, he predicts a multiplier effect of about $16 billion as post-disaster spending works its way through the economy. What's more, as business owners replace destroyed property, Morici estimates that there may be a long-term economic improvement of more than $10 billion.
Other analysts agree; David Kotok, chairman of money management firm Cumberland Advisors, notes that his company is now predicting that fourth-quarter GDP growth may go as high as 3%, fueled by "Billions [that] will be spent on rebuilding and recovery."
Unfortunately, much of this growth will be dependent upon the political climate. Cumberland assumes that, among other things, "Washington may set aside the usual destructive and divisive partisan political wrangling and act in the interest of the nation." If this is the case, Kotok emphasizes, federal financial assistance will rush to troubled areas, quickly stimulating rebuilding efforts.
However, if the recent debt ceiling debate demonstrated anything, it's that "neither snow nor rain" nor the best interests of the country can slow down Washington's partisan wrangling. When it comes to post-Irene rebuilding, the battle lines have already been drawn: House Majority Leader Eric Cantor (R-Va.) is demanding other federal budget cuts to offset disaster assistance spending, and FEMA is in the middle of a funding crisis that -- barring quick action -- will undoubtedly delay some rebuilding efforts.
Meanwhile, GOP presidential candidate and U.S. Rep. Ron Paul (R-Texas)reiterated his argument for killing FEMA altogether.
I just don't see it now. I just don't see the Republicans lying down on the railroad tracks and letting the train of popular opinion run over them. They've done it before, of course, but this time it's just too many voters. It's D.C. (where they live), it's Philadelphia, New Jersey, New York, New England, the Virginias, North Carolina. The rural areas (which always take a lot longer to get repair crews to) are their voters! The sensible thing would be for them to call an emergency session of Congress and pass a massive funding bill for the reconstruction.
Or will they throw public opinion to the wind and instead double down on the Cantor Doctrine? Stay tuned.
It's a depressing way to finally get an adequate stimulus, but I'll take what we can get.
So Mitt Romney has decided to end his presidential campaign the same way he started it. That is, by lying. During what his aides touted as a "major address" in Iowa Friday, Governor Romney charged that while President Obama "inherited a troubled economy," he "made the problem worse." That's the same long-debunked myth Romney used in his June 2, 2011 speech formally announcing his candidacy when he declared Obama "When he took office, the economy was in recession, and he made it worse, and he made it last longer."
But while Romney was pummeled by fact checkers last year as soon as the words first left his lips (prompting Mitt to hilariously claim for 24 hours "I didn't say things are worse; what I said was the economy hasn't turned around"), the "Obama made it worse" fraud has remained the centerpiece of his campaign. Unfortunately for Romney, the facts and the overwhelming consensus of economists - including the nonpartisan Congressional Budget Office and John McCain's 2008 brain trust - flatly contradict Mitt's closing argument. Instead, the numbers show and the experts confirm that President Obama saved the American free-enterprise system from the abyss and averted Great Depression 2.0.
Sadly for Romney and his Republican allies, history did not begin on January 20, 2009. And the data show that President Obama didn't inherit a "troubled economy," but one literally on the brink of collapse. Obama entered office in 2009 as the Bush recession was in full swing. GDP had plummeted by a shocking 8.9 percent the previous quarter. 820,000 jobs were lost in January 2009 alone; all told 2.2 million evaporated in the three months before Obama's stimulus was passed that February. (That might explain why more than three years after he left office, Americans still blame George W. Bush for the economic calamity he bequeathed to Barack Obama.) Now, even with the difficult recovery, the U.S. has produced over 30 consecutive months of private sector job gains and a return to economic growth. And despite Romney's charge that President Obama's are "the most anti-investment, anti-business, anti-jobs series of polices in modern American history," the Dow Jones has jumped by 68 percent since January 20, 2009. Corporate profits are at record highs even as firms' tax burden continues to drop.
Nevertheless, Governor Romney charged in June that the President "slowed the recovery and harmed our economy," a result he called "a moral failure of tragic proportions." Sadly for his campaign's mythmaking, just 24 hours earlier, the director of the nonpartisan Congressional Budget Office blew Romney's bogus claim out of the water.
"Politics," Republican Senator Arthur Vandenberg declared during Harry Truman's presidency decades ago, "stops at the water's edge." Not, it turns out, for Mitt Romney. Three years ago, Romney blasted Obama's "apology tour" even as the President was visiting Cairo, Ankara and other capitals. (For that slander, the Washington Post fact-checker gave Romney a "Four Pinocchio" rating.) Now, the Republican nominee has dispatched his chief economic adviser, Glenn Hubbard, to pen an op-ed in a German paper to undermine the Obama administration's position on the economic crisis in Europe.
For months, the White House has been pressuring Euro zone leaders and German chancellor Angela Merkel to take action to stabilize Spain and Greece while backing away from the draconian austerity programs that are dragging down European economies and threatening the U.S. recovery. Even as Treasury Secretary Timothy Geithner pushed for the rescue of Spanish banks, President Obama used his press conference Friday to issue a warning:
Over the longer term, even as European countries with large debt burdens carry out necessary fiscal reforms, they've also got to promote economic growth and job creation. As some countries have discovered, it's a lot harder to rein in deficits and debt if your economy isn't growing. So it's a positive thing that the conversation has moved in that direction, and leaders like Angela Merkel and Francois Hollande are working to put in place a growth agenda alongside responsible fiscal plans.
But even as the Obama administration was sending Merkel one message, former Mitt Romney's chief economic adviser, Glenn Hubbard, was taking to the pages of the business journal Handelsblatt to argue the reverse in his screed, "Don't Learn from America." As The New York Times reported:
"Unfortunately, the advice of the U.S. government regarding solutions to the crisis is misleading. For Europe and especially for Germany," Mr. Hubbard wrote, according to a translation of his article from the Handelsblatt Web site.
He opposed what he described as the Obama administration's efforts "to persuade Germany to stand up financially weak governments and banks in the euro zone so that the Greek crisis would not spread to other states."
"These recommendations are not only unwise," he added, "they also reveal ignorance of the causes of the crisis and of a growth trend in the future."
Mr. Hubbard proposed a classic conservative pro-austerity, anti-Keynesian approach, arguing that cutting government spending will restore public confidence, encourage growth and avert future tax increases.
"Long-term confidence in solid government financing shores up growth and enables the same scope for short-term transitional assistance," he said. "Mitt Romney, Obama's Republican opponent, understands this very well and advises a gradual fiscal consolidation for the U.S.: structural reform to stimulate growth."
This week, Rex Nutting of the MarketWatch caused a stir with his analysis correctly showing that federal spending has hardly budged under President Obama, rising at the slowest pace since the Dwight Eisenhower was in the White House. Predictably, James Pethokoukis of the conservative American Enterprise Institute cited the jump in Washington's spending as a percentage of the U.S. economy to comically "prove" that "actually, the Obama spending binge really did happen." Comically, that is, because Pethokoukis conveniently ignores the staggering economic contraction resulting from the Bush recession, with GDP only last year having returned to 2008 levels. Even less surprising, the perpetual tax-cutters of the right neglected to mention that thanks to the steep recession and the Treasury-draining Bush tax cuts, total federal tax revenues as a percentage of GDP hit their lowest level since 1950.
On January 7, 2009, Reuters reported that President Bush was bequeathing a $1.2 trillion budget deficit to his successor. That record gap was fueled by Bush's $700 billion TARP program and plummeting tax revenue due to the shrinking American economy. As Reuters noted, President-Elect Obama "said he expects deficits around $1 trillion for years, forcing tough budget choices."
Which is exactly what came to pass. But even with the 2009 stimulus program and the necessarily growing outlays for Medicaid, unemployment insurance, food stamps and other safety net programs, those trillion deficits had less to do with Barack Obama boosting spending than the dramatic loss of tax revenue. As former Reagan administration official Bruce Bartlett explained in October 2009:
According to the Congressional Budget Office's January 2009 estimate for fiscal year 2009, outlays were projected to be $3,543 billion and revenues were projected to be $2,357 billion, leaving a deficit of $1,186 billion. Keep in mind that these estimates were made before Obama took office, based on existing law and policy, and did not take into account any actions that Obama might implement...
Now let's fast forward to the end of fiscal year 2009, which ended on September 30. According to CBO, it ended with spending at $3,515 billion and revenues of $2,106 billion for a deficit of $1,409 billion.
To recap, the deficit came in $223 billion higher than projected [in January], but spending was $28 billion and revenues were $251 billion less than expected. Thus we can conclude that more than 100 percent of the increase in the deficit since January is accounted for by lower revenues. Not one penny is due to higher spending.
Obama's own tax cuts, the ones contained in the February 2009 stimulus bill, "reduced revenues in FY2009 by $98 billion over what would otherwise have been the case."
That's the word from Tuesday's Wall Street Journal, where Justin Lahart explained that the "unemployment rate without government cuts: 7.1%." While the Labor Department's establishment survey shows 586,000 government jobs at all levels have been lost since December 2008, the more volatile household survey of unemployment suggests the total might be much, much worse:
In the three months ended April, it shows that there were an average 20.3 million people engaged in government work, 1.2 million fewer than the average for the three months ended December 2008. That is more than double the job losses registered by the establishment survey.
The unemployment rate would be far lower if it hadn't been for those cuts: If there were as many people working in government as there were in December 2008, the unemployment rate in April would have been 7.1%, not 8.1%.
Back in March, Paul Krugman expressed the same point, but with some inconvenient historical context for the Party of Reagan. "In fact, if it weren't for this destructive fiscal austerity," Krugman explained, "Our unemployment rate would almost certainly be lower now than it was at a comparable stage of the 'Morning in America' recovery during the Reagan era."
We're talking big numbers here. If government employment under Mr. Obama had grown at Reagan-era rates, 1.3 million more Americans would be working as schoolteachers, firefighters, police officers, etc., than are currently employed in such jobs.
And once you take the effects of public spending on private employment into account, a rough estimate is that the unemployment rate would be 1.5 percentage points lower than it is, or below 7 percent -- significantly better than the Reagan economy at this stage.
A month ago, the Economic Policy Institute (EPI) showed how much better with the chart above. Noting that the private sector had gained 2.8 million jobs while federal, state and local governments shed 584,000 just since June 2009, EPI concluded that the public sector job losses constituted "an unprecedented drag on the recovery":
"The current recovery is the only one that has seen public-sector losses over its first 31 months."
Now we know: The jobs situation is bleak, and it will continue to be bleak until we face up to the fact that we need more stimulus spending - lots more - and we have to relieve millions of homeowners from their indentured servitude to Wall Street so that they can help restore the economy too.
In other words spend, spend, spend - and provide some principal reduction for underwater homeowners.
We won't recap all the employment figures in today's jobs report, since they're available elsewhere. We'll stick to the highlights:
A key figure is essentially unchanged: There are 12.7 million unemployed people in this country.
Also unchanged, or only slightly changed: Unemployment rate for adult men is 7.6 percent, for when it's 7.4 percent, for teenagers it's 25 percent, for white people it's 7.3 percent, and for Asian it's 6.2 percent. Hispanics are still suffering with 10.3 percent unemployment, and for African Americans the rate remains a stunningly high 14 percent.
But then, all of these figures are stunningly high.
The crisis in long-term unemployment persists, with 5.3 million people among the long-term jobless. There was a drop in the number of people who want full-time work but can't get it, but it remains extremely high at 8.1 million.
Wait. It Gets Worse
And unemployment isn't our only national burden. Income gains have been very weak, and that segment of the workforce that actually is working is increasingly finding itself in low-paying jobs. And analysts are expect low earnings reports for corporate America, starting next week, as the sluggish economy takes its toll on publicly-traded companies.
Meanwhile banks, high off the settlement deal that protects them from criminal prosecution for illegal foreclosures, are expected to begin another wave of foreclosures that will send housing prices plummeting even further and costing local communities even more in lost revenue.
Compare and contrast: While Beltway insiders insist there is nothing more we could have done to heal the economy, the Shrill One (who, I seem to remember, is supposed to know something about economics) is pointing out the effect of providing only inadequate aid to the states.
Now, it's certainly true that the Republicans continue to obstruct any of the president's efforts. (Hell, you just know when Gov. Kasich turns down federal aid for his tornado-devastated state that more Republican posturing on the debt is imminent.) When Congress balks at raising the debt ceiling, the administration has some real problems.
But Obama doesn't have to encourage them. He doesn't have to lead cheers for the budget hawks. He doesn't have to keep talking about how the U.S. needs to cut, cut, cut to live within its means, just like Americans do when they budget at their kitchen table.
Because here's the thing: Americans don't usually pay cash for their houses, their new cars or their kids' college educations. We frequently go into debt for our long-term good, and he's just undermining the public perception of a nation hopelessly in debt when he talks like that. (Bug, or feature?)
I have this habit of getting off the highway when there's a traffic jam. I just can't stand sitting in traffic, so I get off at the nearest exit and find my way via alternate routes. But here's the thing: Usually it's faster to sit in traffic and wait it out, but I'm too impatient.
I wonder if President Obama is doing the same thing. Maybe he's so eager to present the appearance of progress that he'll settle for any damn thing at all - much to our detriment:
Under President Obama, however, the dire fiscal condition of state and local governments — the result of a sustained slump, which in turn was caused largely by that private debt explosion before 2008 — has led to forced spending cuts. The fiscal straits of lower-level governments could and should have been alleviated by aid from Washington, which remains able to borrow at incredibly low interest rates. But this aid was never provided on a remotely adequate scale.
This policy malpractice is doing double damage to America. On one side, it’s helping lose the future — because that’s what happens when you neglect education and public investment. At the same time, it’s hurting us right now, by helping keep growth low and unemployment high.
We’re talking big numbers here. If government employment under Mr. Obama had grown at Reagan-era rates, 1.3 million more Americans would be working as schoolteachers, firefighters, police officers, etc., than are currently employed in such jobs.
And once you take the effects of public spending on private employment into account, a rough estimate is that the unemployment rate would be 1.5 percentage points lower than it is, or below 7 percent — significantly better than the Reagan economy at this stage.
One implication of this comparison is that conservatives who love to compare Reagan’s record with Mr. Obama’s should think twice. Aside from the fact that recoveries from financial crises are almost always slower than ordinary recoveries, in reality Reagan was much more Keynesian than Mr. Obama, faced with an obstructionist G.O.P., has ever managed to be.
More important, however, there is now an easy answer to anyone asking how we can accelerate our economic recovery. By all means, let’s talk about visionary ideas; but we can take a big step toward full employment just by using the federal government’s low borrowing costs to help state and local governments rehire the schoolteachers and police officers they laid off, while restarting the road repair and improvement projects they canceled or put on hold.
Among the predictable Republican reactions to the President's proposed 2013 budget is the refrain that "Obama has failed to keep a 2009 promise to cut the deficit in half by the end of his first term." Just days after Senate Minority Leader Mitch McConnell told a CPAC audience that President Obama "said he'd cut the deficit in half by the end of his first term," ABC's Jake Tapper dutifully announced "Obama's broken deficit promise." And today, the RNC debuted a new ad in which a supposedly betrayed voter warns, "President Obama, you broke your promise. I'll never forget that."
First, Bush's pompous prediction used as its baseline a wildly inflated White House deficit forecast of $521 billion, well above the CBO's estimate and the actual figure of $413 billion. More importantly, President Bush conveniently chose 2009 as his finish line, the year before his tax cuts were set to expire. Making them permanent (which he and all of the GOP presidential candidates endorse) would blow another $2.2 trillion hole in the federal budget by 2014.
(It's also worth noting, as the Obama administration has this week, that Bush's budget plans always understated the real deficit, because they routinely failed "to account for the costs of the wars in Afghanistan, the cost of preventing cuts to Medicare doctors, and the price of staving off an expansion of the alternative minimum tax.")