Posts filed under “Research”
I could not help but be struck by the different positions — both articulated on Friday – on federal spending taken by two economists for whom I have the utmost respect — Paul Krugman and David Rosenberg. In his daily missive Friday, Rosie went off on federal spending:
Government spending, in the United States, is simply out of control.
Over the past decade, federal expenditures rose at an average annual rate of 6% while the growth rate in the number of households has risen at a 0.8% annual rate. At around 25% of GDP, spending is higher now than at any other time since 1946. That is an outlier. Admittedly, revenues at 15% of GDP are abnormally low as well, and while a partial by-product of the recession and sluggish recovery, loopholes galore and endless tax gimmicks are also at play — in the 1991 economic downturn that ratio was around 18% and in the severe economic decline in the early 1980s, it was 19%. Revenues have to go up and there’s a cool trillion sittin’ right there in loopholes — oh, sorry, deductions and “tax expenditures,” we don’t want to offend anybody — that could be eliminated without sacrificing growth while reducing the ridiculous complexity of the tax code. [...]
But to think that the U.S. government cannot manage to deliver effective and essential services with a $2.5 trillion revenue base is absurd. [...] Isn’t 21 grand per household of government benefits enough?
You get the gist.
Krugman sees it otherwise:
Whenever someone like me or Bruce Bartlett points out how little Obama resembles the right’s portrait of a raging leftist, someone is sure to come back with the assertion that Obama has presided over a vast expansion of federal spending. Even people who really should know better, like John Taylor, do it.
So what’s the truth? I’ve written about this before, but here’s another take.
The fact is that federal spending rose from 19.6% of GDP in fiscal 2007 to 23.8% of GDP in fiscal 2010. So isn’t that a huge spending spree? Well, no.
First of all, the size of a ratio depends on the denominator as well as the numerator. GDP has fallen sharply relative to the economy’s potential; here’s the ratio of real GDP to the CBO’s estimate of potential GDP:
A 6 percent fall in GDP relative to trend, all by itself, would have raised the ratio of spending to GDP from 19.6 to 20.8, or about 30 percent of the actual rise.
That still leaves a rise in spending; but most of that is safety-net programs, which spend more in hard times because more people are in distress. The CBO breaks out “income security” (Table E-10 in Historical Budget Tables), which is unemployment insurance, food stamps, etc., and also gives us numbers on Medicaid; here’s what they look like as percentages of GDP:
That’s another 2 points of GDP, or about half the rise.
So we’re still left with a bit, around 1 point of GDP. That’s the stimulus, more or less. And there are two things you need to know about it. First, it’s temporary, and already fading out fast. Second, a large part of the stimulus “spending” was actually aid to state and local governments, intended not to expand spending but to avert a fall — that is, it was about maintaining government, not expanding it.
Now, pointing out the Obama spending binge is a myth generally produces rage: people know that it happened, because Rush Limbaugh and the Wall Street Journal say so. But that doesn’t make it true.
What I find most fascinating is that back in the period leading up to the recession, both Krugman and Rosenberg were spot-on in their assessments of what was unfolding. Far from calling it in real time, they were way ahead of the curve and their peers (see here for Rosie’s prescient piece on the housing market; it’s just one of dozens). They both brilliantly foretold of the coming crisis and the effects it would have on the economy, jobs, joblessness, liquidity, monetary policy, interest rates, etc. Where they are diametrically opposed is on how to solve a problem they both so astutely saw coming. That two people could so precisely diagnose a problem, yet differ so totally on the solution, intrigues me greatly. Would love to see the two of them side-by-side on a panel discussion.
Mokito Rich, NY Times, The Role of Government Spending, July 29, 2011
The Chicago Fed’s National Activity Index (CFNAI) printed this week. The CFNAI is among my favorite indicators that no one seems to follow (though it is covered monthly by Calculated Risk and usually David Rosenberg). It is an amalgam of 85 distinct economic indicators that gives a very accurate read on the economy. The folks…Read More
A Bank of America Merrill Lynch research note on the abysmal nonfarm payrolls number for June contained this graph: A February 2010 Big Picture post on slack in the labor market contained this graph: My comment at the time, which holds true today: I’d postulate that only when this gap starts to close meaningfully will…Read More
A mention by David Rosenberg in a recent note sent me scurrying to find this report from the San Francisco Fed in August of last year. The report — remember, it was almost one year ago — used the Leading Economic Indicators to assess the probability of another recession within the next 24 months (from that date,…Read More
Tons of talk and pixels being spilled over the imminent inflation threat. It bears an eerie resemblance to what we heard from the likes of Jerry Bowyer and Art Laffer two years ago. I’d fade it now, exactly as I suggested back then (here and here, the latter piece co-authored with Bonddad): Exhibit A —…Read More
Invictus here. I’m halfway through Greg Farrell’s Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America. Perhaps I’ll post a thorough review when I’m done with it. So far, so good, though I’ll confess it’s a bit like watching one’s own funeral — very morbid; sad…Read More
Duly noted in a research piece by Merrill Lynch, the wealth gap continues to widen, poverty grows: The following article caught our attention on the Wall Street Journal Online, “Millionaire Population Soars – Again.” The Wall Street Journal is reporting on a survey performed by Phoenix Marketing International’s Affluent Market Practice. According to the survey,…Read More
It is a very hot August and the heat seems to be getting to people on Wall Street. In Washington the greater heat stems from fears about the impact of the economy and housing on the mid-term elections. As a result, Wall Street is expecting a big “surprise” in the form of a massive GSE…Read More
Warning: The following post is offered in the spirit of shameless self-promotion. Those who prowl the web and consume all manner of economic research probably saw some things late last week that looked eerily familiar. Maybe you could place them, maybe you couldn’t. Perhaps you wondered, “Where have I seen that before?” Well, in at…Read More
The National Federation of Independent Business (NFIB) released its monthly Small Business Economic Trends (SBET) survey, and the outlook for small businesses is still not good. The NFIB counts its membership at about 350,000 small businesses. The overall Optimism Index declined in the month of March to 86.8, roughly the same level it was at…Read More