It's Still The Economy, Stupid

Friday, May 30, 2003  

$300 Tax Cut Jujitsu

One of the interesting consequences of the battle over the 2001 tax debate was that Democrats were able to jam a $300 immediate rebate to working families into the final massively regressive and irresponsible bill, injecting a note of immediate stimulus and progressivism into what was ultimately a very bad tax change. While the Republicans resisted tooth and nail, ultimately, the Democrats prevailed on the small, and Americans got their $300. And then the Republicans, especially Bush, took credit, and used the unwanted rebate as a way to sell the tax bill like it had been a good idea. Like the Homeland Security Department, originally a Democratic idea opposed consistently by the administration for a year before its cooption, the immediate rebate made people like Bush and his tax policies (polls show that Americans don't trust Bush on the economy, but they do on taxes). Had the Democrats not pushed this sugar pill, I believe that Americans would have rejected the current tax bill because they wouldn't have seen any relief from the 2001 act.

Clinton would not have made this mistake. He would have turned the Republican's desire to do stupid mean things into a liability, rather than forcing them at gunpoint (or more accurately, votepoint) to do something really small and nice and then letting them take credit for it. That was the genius of triangulation: Let the Republicans do their thing, be that shutting the government down or otherwise acting petty and threatening, and then submit a positive smart alternative eschewing conventional liberal methods that actually achieves liberal ends (vintage DLC, I guess, but I won't go there).

I am afraid that this situation will repeat itself with the new debt increase bill. While it includes no provision for immediate cash back to everyone, it does provide a small amount of money for the states and localities, and I already heard Virginia's governor touting what he's going to do with the extra money: raise teacher salaries. That's so nice.

Watch this bill's rationale change. It will no longer be post-sold as economic palliative; it won't even be post-sold as a tax cut (which it really isn't).

This bill will, in typically egregiously cynical fashion, be sold as aid to localities and states.

Democrats: Don't let him get away with it! Do a preemptive rhetorical strike NOW!

(x-posted at To the point.)

posted by Matthew | 12:55 PM |

What he Said

Former president Bill Clinton, speaking at the John F. Kennedy Library, said he "can't find anybody with a straight face" to defend the tax package, whose advocates "compromise the future of our country." Of the Republicans, Clinton said: "When ideological people find themselves in a hole, they ask for a bigger shovel."


posted by Angry Bear | 11:47 AM |

Thursday, May 29, 2003  

A bit more on housing

From Trader Mike Norman at

"Highly overlooked in the recent home sale data was the fact that inventories of unsold homes rose to 2.47 million units, the highest level since September 1991."

So much for the 'don't worry about oversupply' thesis...

UPDATE: What I'm hearing about the NYC real estate market is that while prices aren't yet that soft, transaction flow has dried up. People are staying put rather than dropping their asking price, a typical precursor to lower home values. I'm interested in some anecdotal evidence here, spurred by Hugh in the comments area. If you're trying to sell your home, drop a comment and include where you live.

posted by Matthew | 8:50 PM |

Wondering Why Deficits Matter?

Go read CalPundit.


posted by Angry Bear | 2:38 PM |

If it walks like a duck, and talks like a duck...

Or more appropriately, if it looks like a recession, and feels like a recession...

If you've been listening to the Bush Administration for nigh on the past year, you might have been led to believe that, while growth is slugging and the job market still contracting, we are "officially" out of the 2001 Recession. According to an article (sub req) today by Jon Hilsenrath on page 1 of the Wall Street Journal, the powers that be when it comes to saying "when" to the start and end of recessions, namely the National Bureau of Economic Research, has yet to officially offer up that closing "when".

In May of last year, Mr. Hall and his colleagues believed the latest recession might be over. Consumers were spending more and economic output was rising. All that the committee members needed to see was a few months of uninterrupted job growth to announce the end of the recession. "It seemed like the timing was imminent," he says.

But Mr. Hall is still waiting. Instead of expanding employment, companies are continuing to shed jobs at a furious pace -- 525,000 nonfarm payroll positions in the past three months alone. Since March 2001, when the recession began, the U.S. economy has lost 2.1 million jobs. The total number of people unemployed -- including discouraged workers who would prefer to work but have stopped looking -- is about 9.2 million. And the number of people who are working part time because they can't find full-time work is 4.8 million, up 46% since 2001, according to the Bureau of Labor Statistics.

In short, the U.S. is experiencing the most protracted job-market downturn since the Great Depression. It has left behind a remarkably broad swath of workers -- from young to old, and from high-school dropouts to the highly educated -- even as the economy has started growing again.

And don't expect things to turn around any time soon. While in past recessions, most employers expected that layoffs would be "temporary" and workers called back when the economy picked back up again, this recession has been markedly different. Manufacturing jobs are continuing their migration to cheaper labor markets, but this time have been followed by high tech jobs as well; Eli Lilly has recently joined this trend and has contracted its IT department to an Indian (as in South Asia) firm. Airlines are permanently downsizing, as are electronics and communications firms. Add to these trends higher worker productivity, and what many economists fear, a jobless recovery, seems more and more likely.

Unfortunately for the Administration, this has been an "equal opportunity" recession, hitting middle and upper income workers as well as the more typically-affected working poor. What should worry Bush&Co. is that this demographic while not only more inclined to complain, is more inclined to vote their now-empty pocketbooks and wallets as well.

But it is a recovery, right? So why haven't the big dogs at the NBER cried "uncle" yet?

At the National Bureau for Economic Research, the enduring job-market weakness has sparked a debate about some very basic economic questions. Like this one: How do you know when a recession ends? Some members, including Robert Gordon, a Northwestern University professor and an expert on productivity trends, believe the recession actually ended a long time ago, because overall output, as measured by indicators such as gross domestic product and national income, have been rising since late 2001. "There clearly was a trough," says Mr. Gordon.

But Mr. Hall, a Stanford University professor, isn't so sure. "I don't want to say that a recession is over if more and more people are unemployed and job growth is negative," he says. For now, he says, he prefers to wait a little longer.

In 1991, the NBER jumped the gun a bit, declaring the 1990-91 recession over just prior to the fall "double-dip", where they were then forced to backpedal. Unfortunately for Bush I, the economy, while growing sluggishly, was in fact expanding, but relatively "jobless". An electorate irritated over having their hopes for an improving economy dashed once, proved skeptical even once the economy in fact began to turn around. Bush Jr. might be wise to refrain from calling for the closing bell on the 1991 Recession until all those ducks are truly in line. Fortunately for the Democratic contenders, Bush has never shown a great deal of impulse control.

(x-posted at Wampum)

posted by MB | 11:54 AM |

Short cuts...

Dwight at PLA dissects the new Republican "Ivory Tower Dreamers" and how much they may cost.

Atrios has been following the Leave Poor Kids Behind (literally) tax cut deficit increase fiasco. More here as well.

Turns out Kevin Drum at CalPundit was on the case too last night, and credits our own AngryBear for pointing out the political tit-for-tat game Congressional Republicans are playing.

Over at Wampum's new home, I take a look at the latest run of weekly jobless claims.

Brad at A Taxing Blog has the scoop on continuing problems with Proposition 13 in California, tax incentives that Kansas offered Boeing to sweeten a relo deal, and the possible unconstitutionality of the Ohio House Democrats plan to increase the state's minimum net corporate income tax.

posted by MB | 7:18 AM |

Moderately Positive Outlook?

CNN has a story, "Mañana economics: Economists keep saying the sun will come out tomorrow ... and tomorrow ... and tomorrow." Here's the outlook:

GDP actually grew just 2.4 percent in 2002. When surveyed at the start of 2002, forecasters predicted 3.5 percent growth in 2003. Lately, they've cut their forecast for the year to 2.2 percent. Now, they're expecting 3.6 percent GDP growth in 2004.

The improved projections are attributed to the tax cuts (which are in fact somewhat stimulative, though that stimulus may come at the expense of long run investment, as government borrowing to finance deficits pushes interest rates up and crowds out private investment), low interest rates (which have done a lot to keep consumer spending up--mortgages and cars--but haven't similarly stimulated business investment), the falling dollar (good for exporters; bad for domestic firms that buy a lot of inputs from abroad), rising consumer confidence, and a rising stock market.

2.2% growth is basically ok, closer to recession than to boom, but basically neither. It would take growth rates somewhat above 3% to reverse the unemployment increases that we've seen over the last two years.

But not all the news is rosy: using the administration's own numbers (from the CEA), the tax plan is projected to destroy jobs from 2005-2007. Why? Well it's billed as creating 700,000 new jobs in total, while creating 1.4 million in 2003-2004 alone. So to total up to 700,000, that many jobs have to vanish after 2004! That's rather convenient, given the election cycle.

And some of the news is outrageous:

A last-minute revision by House and Senate leaders in the tax bill that President Bush signed today will prevent millions of minimum-wage families from receiving the increased child credit that is in the measure, say Congressional officials and outside groups.

The $400 checks that these families will not get were a big part selling this plan, a way to avoid the "sellout to the wealthy" label. The group that does not benefit includes those making $10,500 to $26,625, meaning that many of these families, likely the majority, do in fact earn enough to pay income taxes, and therefore would benefit from the child credit even if it is not fully refundable (it isn't).

I'm sure we'll hear that this was an inadvertent slip (right now, the House is blaming the Senate's $350b "limit"), but inadvertent slips tell a lot about the priorities of those making the slips.


UPDATE: The numbers about job growth and loss before and after 2003-2004 in the CNN story are based on a mistake Max Sawicky made, where that mistake basically amounts to believing the president's Council of Economic Advisors February 2003 report. You see, crazy Max thought that by a "creating a job", the CEA meant "one person working for one year who would not be working under the baseline scenario for that year", when it turns out that the CEA meant something different. Max explains the details here. I suppose the WSJ editorial page can just blame it on Clinton for confusing us all about what "is" means. I should emphasize that even under the CEA's interpretations, it remains very front-loaded, meaning the majority of job gains--such as they are--accrue bye the end of 2004.

X-posted at Angry Bear.

posted by Angry Bear | 6:53 AM |

Wednesday, May 28, 2003  

An Email From the United States Treasury

The United States Treasury thinks I should know about all the economists speaking out in favor of President Bush's jobs and growth bill.

Note that the "economists who speak out" include only two of the eighteen living Republican former members of the President's Council of Economic Advisers. (I'm not surprised to see Beryl Sprinkel in this company. I am surprised to see Mike Boskin in this company: he used to be a guy who used to say that the reason to vote for George W. Bush was that he would solve the long-run problem of financing America's programs (Social Security and Medicare), and has no business applauding a bill that blows another hole in the long-run fiscal stability of the American government.)

Two of eighteen is a remarkably low score. Take that as a good summary index of what economists predisposed to like Republican economic policy initiatives think of what is now going on.

Sent: Wednesday, May 28, 2003 3:24 PM

Here is what economists are saying about the Jobs & Growth Tax Relief Reconciliation Act of 2003: [Eight omitted...]

"Cutting taxes is not only an important economic stimulus, it is an equally important stimulant for personal liberty." -- Paul J. Zak, Claremont Graduate University

"Many of President Bush's tax cuts, such as marginal rate reduction and dividend relief, have been in the direction of fundamental reform of the tax system that will generate sustained long-term growth." -- Chris Edwards, Director of Fiscal Policy, Cato Institute

"This tax relief package will provide a solid boost to small business, the economy and job creation. Critical pro-growth measures -- such as reducing income tax rates, cutting the capital gains tax and expanding expensing levels for small business -- will enhance incentives for investing and entrepreneurship. That's exactly what the economy needs right now." -- Raymond J. Keating, Chief Economist, Small Business Survival Committee

"The President's tax cut makes two important contributions. First, although the economy already shows significant improvement, the tax cuts clearly speed the recovery. Second, it increases individuals' economic freedom by allowing them to keep a larger fraction of their earnings." -- John Rapp, Professor of Economics, University of Dayton

"President Bush's balanced tax relief plan will help individuals, families and business owners better spend, save, or invest more of their own earnings in a way that will unlock capital, enhance economic activity, and foster job creation." -- Paul G. Merski, Chief Economist & Director of Federal Tax Policy, Independent Community Bankers of America

"I strongly support the Jobs and Growth Tax Relief Reconciliation Act of 2003. The Act will increase the after-tax income and cash flow of both consumers and investors, leading to greater job growth through increased consumer spending and capital accumulation." -- Craig A. Stephenson, Ph.D., Babson College

"The passage of the Jobs and Growth Tax Relief Reconciliation Act of 2003 represents significant tax reform by sharply reducing the double taxation of dividends. In addition, by accelerating previously enacted income tax cuts, the act should provide significant stimulus to economic growth over the next two years. When combined with the original tax cut passed in 2001, the act provides the most significant rollback in tax rates since the Reagan tax cuts." -- John Ryding, Bear Stearns

"The Bush Administration tax cut increases household disposable income, raises the after-tax returns on equity and provides incentives for business investment. Whether you rely on a demand-driven model of the economy or one that is supply-driven, the economic impact of this package is clear: it will boost growth and create jobs." -- Mickey D. Levy, Chief Economist, Bank of America

"Cuts in dividend and capital gains taxes will stimulate investment and grow the economy. The nation should be grateful that President Bush has persevered on this issue." -- John Semmens, Phoenix College

"The combination of the income tax cut and the stimulants for capital investment bode well for economic growth in our country. As people spend and businesses invest, demand for goods and services will increase, ultimately creating jobs for Americans." -- Dr. Rebecca A. Thacker, Ohio University

"In the short-term, this act will stimulate the economy by providing immediate tax relief for millions of Americans. Over the long-term, it enhances economic growth by encouraging business investment and improves economic efficiency by reducing the taxation of dividends and capital gains." -- William Walstad, Professor of Economics, University of Nebraska-Lincoln Lincoln

"Timely medicine to strengthen a struggling economy with tax relief for overburdened taxpayers and investment incentives to spur growth and create jobs. And a good step toward long-run tax reform, to boot." -- Dr. Michael J. Boskin, T.M. Friedman Professor of Economics and Hoover Institution Senior Fellow, Stanford University, former Chairman of the President's Council of Economic Advisers

"The Jobs and Growth Tax Relief Reconciliation Act of 2003 is another positive step forward for taxpayers. Much more work remains to be done, but this legislation marks provides both qualitative and quantitative improvements in our federal tax system." -- John Berthoud, Ph.D., President, National Taxpayers Union, Adjunct Lecturer, George Washington University

"I believe the new Jobs and Growth Tax Relief law and continued easy money will do just that; create more jobs and growth, beginning in the last half of this year and through 2004. President Bush and the Congress are to be congratulated on their achievement." -- Dr. Beryl Wayne Sprinkel, President, B.W. Sprinkel Economics.

[seven more omitted...]

posted by James Bradford | 2:51 PM |

Treasury Bonds and Housing

(X-posted at To The Point)

Treasuries are dropping in price.

"I attribute it to a natural correction of a very spectacular move in the market," said Marcello Frustaci, a bond trader at Mizuho Securities in Hoboken, New Jersey. "We've had an unprecedented move down in yields over the last few weeks."

One of the interesting parallel bubbles tracking housing is the bubble in Treasury bonds. The incredible rise in the bond is suggestive of a 'blow-off top', a term traders use to describe the final (and usually most spectacular) phase of a bull market.

Both Treasury bonds and the housing market draw from the same source of capital, of course: investors looking for relatively risk-free investments. Fannie Mae and Freddie Mac, implicitly guaranteed by the Federal government, ensure that this is so.

When the blow-off top ends is anyone's guess, and that these bonds are dropping today doesn't mean that they won't resume an aggressive upward trajectory. In fact, I suspect they will. But this is worth keeping an eye on.

posted by Matthew | 11:10 AM |

Tuesday, May 27, 2003  

Calpundit is worried about housing. So am I.

(X-posted at To The Point)

CalPundit talks about the housing bubble.

Falling mortgage rates have indeed helped keep the housing market frothy, but they don't have much farther to fall. Eventually, unless the economy picks up pretty smartly this year, the bubble is going to burst. And in an economy that's fragile and already suffering from all the problems I mentioned above, another bubble burst is the last thing we need.

My response is as follows:

The fall in the dollar, the credit crunch among small businesses, the current prospects for a liquidity trap, and Bush's fiscal mismanagement tie into your unrosy scenario quite nicely.

For the past thirty years, foreigners have been lending a lot of money to America. It's gotten to the point that they are now lending us $2.2 billion a day to cover our yawning trade gap. This is structurally problematic, but hey, it's America, global investors, where ya gonna go, huh?

At this point, though, foreigners have decided that they won't lend so much to us anymore and are already overweight in US assets. Hence they are selling dollar denominated assets and the dollar as a matter of course starts to drop, thereby beginning the long-overdue rebalancing of the global economy away from the American consumer.

But then, why is the Treasurer bond still going up? Why are rates falling to record lows? Wouldn't the absence of capital mean that rates should go higher? Normally, yes. However, right now the normal credit market is stunted away from an enormous source of credit demand, small and medium size businesses, who just cannot get a loan to save their lives. This is part and parcel of the infamous 'fair weather banker' syndrome where bankers will only lend in good times when risk is hidden while refusing to lend in bad times when risk is overstated. The liquidity trap is essentially suggestive of this syndrome writ large into a systematic problem crushing all private borrowers. Right now, though, only small and medium businesses are feeling the heat. Consumers can still go right ahead and borrow to the hilt on a mortgage or get another credit card, and the Federal government can also ring the register (well that's fair, it does have 200 years of credit history going for it) on the capital market.

So basically, the inability of small businesses to get credit is directly tied to the lower interest rate for T-bills, and to consumers getting an artifically low interest rate for home mortgages. That the economy isn't doing well and people are losing their jobs is the reason that the housing market is rocking. The market is not being driven by supply and demand, but by odd distortions caused by a credit crunch that is inefficiently shunting capital towards an overproduction of housing.

Now, if there's a liquidity trap, as Krugman suspects there will be, a deflationary spiral would just devastate the homeowner, because debt burdens would get heavier. Indeed, because, unlike Japan, American savings are low, we might be faced with a deflationary spiral AND real high interest rates, which would not only kill the housing market but bankrupt a substantial portion of Americans and wreck the financial system.

If there is an economic recovery, it will inevitably sputter for precisely this reason. Once the credit crunch among businesses abates, capital will flow away from the housing sector, and many Americans will have negative equity only partially disguised by low monthly payments. You won't default on your mortgage necessarily if you have a fixed rate mortgage, but you sure won't be able to move any time soon because you'll owe more than your house is worth. Here's where fiscal mismanagement comes in. If Bush pursued prudent policies and promoted national savings via deficit avoidance, the interest rate would rise, but not by that much. However, that he's doing the opposite - depriving this country of its savings by spending that on tax burden redistribution away from the rich - means that the cost of capital, or the interest rate, will go up much more than it need appreciate.

Because of this, consumer spending, normally the leader of an economic recovery, will become a drag. Unless we can somehow manage an export-led recover, it doesn't seem likely rosy scenarios that Bush is banking on will come to pass, nor is it clear that we can avert a full-fledged meltdown.

Short answer, no I wouldn't buy a house now.

UPDATE: Commenter Teddy Salad points me to this paper.

posted by Matthew | 1:44 PM |


Is Teddy, in the post immediately before this one, being serious? I hope not. As far as the Greens go, I'll go with what Dave Talbot said (click here for a free and lengthy excerpt). I pretty much lay a good chunk of the blame for everything that's happened since 2000 at Nader's doorstep. As TBogg said, "It's gotta be the hemp. I blame it on the hemp.....". And does anyone still remotely believe there's no real difference between Republicans and Democrats? And for the "it's gotta get worse before it gets better" crowd, how much worse do you want it to get? Is the state of affairs today creating a goundswell of Green support, or the possibility of Republican control of all three branches of government for as far as the eye can see? I think the latter.


posted by Angry Bear | 12:46 PM |

Say It Ain't So, Ralph

A faction of the Greens is lobbying the party to not run a candidate in 2004 and instead back a Democratic candidate, provided it is not Lieberman or Gephardt (or Kerry or Dean or Edwards or Graham or Clark...)

My reason #24 for being Green - what he said.

posted by Teddy | 9:58 AM |