|It's Still The Economy, Stupid
Friday, May 30, 2003
$300 Tax Cut Jujitsu
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."
ABposted by Angry Bear | 11:47 AM |
Thursday, May 29, 2003
A bit more on housing
Wondering Why Deficits Matter?
Go read CalPundit.
ABposted by Angry Bear | 2:38 PM |
If it walks like a duck, and talks like a duck...
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.
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.
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.
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.
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
Sent: Wednesday, May 28, 2003 3:24 PMposted by James Bradford | 2:51 PM |
"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
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.
ABposted by Angry Bear | 12:46 PM |
Say It Ain't So, Ralph