Tag: Macroeconomics

The Latest From the Keynesian Front

A couple of years ago, Japan’s Prime Minister Shinzo Abe instituted a program that made Keynesians everywhere wer their pants with joy. Abenomic consisted of fiscal stimulus (i.e., spending), quantitative easement (aka inflation) and structural reform. The result?

Japan is now in a recession. Oh, and their debt is up 230% of the GDP.

Now doubtless the Keynesians will have explanations for it. Keynesianism can never fail; it can only be failed. The Hoover years didn’t disprove anything. 1946 didn’t. The 1960’s didn’t. The 1970’s didn’t. 1993 didn’t. Like the Communists of old, Keynesians believe their pet theories are proven laws of nature and if the facts don’t fit the theory … well, ignore the facts. Their biggest excuse is that Japan raised sales taxes by 3%. I would submit that if that kind of modest tax hike derails what the Kenyesians themselves labelled as the best test yet of their theories, your theories are bullshit.

Oh, one economy that is starting to grow? Greece’s. This also shouldn’t be happening because of the austerity. Nor, as a matter of fact, should our economy be growing.

At one point does the mere thought begin to speculate about the merest possibility of crossing our minds that Keynesianism doesn’t work?

(All of the above comes with the caveat the most “Keynesians” these days are actually pseudo-Keynesians. They love the part where you spend during a recession. They’re not so keen on cutting spending during growth. Practically, Keynesianism is less an economic theory than an excuse to perpetually grow government.)

The Latest Triumph of Obamanomics

You remember the “Summer of Recovery”? That was back in 2010 when the combination of fiscal stimulus and Obama frisson was supposed to get the economy moving again. Since then, we’ve been waiting and waiting for a full recovery, bumbling along at 2% growth with job creation barely keeping up with population. But I’m sure an economic boom is just around …


The Commerce Department said on Thursday that the nation’s overall output shrank at an annual rate of 1 percent in the first three months of the year, revising downward its initial estimate from late April, which showed a very slight gain for the period. It is the first quarter in three years in which the nation’s output of goods and services has contracted.

The figures are bad news for the White House as well as for Democrats running for Congress in November’s midterm elections. Although there’s still time for growth to rebound before then — and recent data on hiring has been more encouraging — little room remains on the runway for an economic takeoff this year.

This is being blamed on the unusually cold winter. That’s not a ridiculous explanation but it’s not enough to explain everything. Gross Domestic Income fell a whopping 2.3% which could indicate that further revisions will be even worse.

Yeah, I know. Austerity! Republicans! Libertarians! Uh … no:

It has been six years since the financial crisis. Federal government spending is still around 21 percent of GDP, up from 19 percent in 2007, and the Federal Reserve still has a very expansive monetary policy. Under those circumstances, a quarter of negative growth is pretty unsettling.

Exactly. The “austerity” we’ve enjoyed has been a huge increase in FY2009 followed by flat spending. It has included a massive quantitative easement from the Fed. You simply can not look at all that and call it austerity, no matter how much Paul Krugman stamps his foot.

The Menace of a Double Dip

The initial numbers for 2012 Q4 show the economy shrank at 0.1%. Are we entering a double-dip recession? Ed Morrissey breaks the numbers down a bit:

In other words, much of this drop seems to be a lack of inventory expansion. Real final sales to end purchasers rose, even if it didn’t go up by much. That would indicate that inventory expansion in Q3 and prior periods was based on overly-optimistic views of the economy.

Government spending also fell dramatically by 15% in Q4, meaning that private spending was actually up. Of course, it was up in Q3, so if you average the two quarters out, we’ve got a slow economy, but not one in recession. Possibly.

A few reasons not to run for the hills just yet:

1) The numbers are preliminary and will be revised again and again over the next year and a half. Remember that the economy was actually in recovery when Bush was voted out in 1992 but it took a while for the numbers to become clear. By the same token, the economy was crashing badly in the final quarter of 2008 but that didn’t become clear until over a year later. The most dramatic revision is likely to occur at the end of February, but don’t be surprised if the numbers change a lot. That could mean the economy is better; but it could also mean it’s worse. It’s unlikely to be good.

2) A shrinking economy is at variance with a number of other economic indicators, notably falls in unemployment, jobless claims and job creation figures. Long-term unemployment is starting to fall for the first time in a while and housing is starting to recover. This may indicate the growth number is bad. Or may be a lagging indicator.

3) If the economy is slowing down, it means that the “Debt Truthers” like Paul Krugman and, alarming, Bruce Bartlett, are even more full of shit than they were a week ago. The idea that our budget is coming into balance is predicated on strong economic growth. If that isn’t happening, the debt is still a Big Fucking Deal.

4) Sniping about the media calling economic news “unexpected” is silly. Economic figures are very noisy and almost never come in at expectations. The news is always “unexpected”. That’s not media bias; that’s media ignorance of how economic figures work.

5) I suspect that the real reason Q4 was slow was because of the uncertainty created by the fiscal cliff combined with the impact of Hurricane Sandy. The last time we saw growth slow like this was … during the debt ceiling crisis. If Congress and the President would quit creating these self-induced economic crises, we might be in much better shape. And having a Katrina-level event — one that cause $60 billion in direct damage and God knows how much in lost productivity in the midst of this political mess was a huge blow. Sandy alone might have knocked a percentage point of our growth.

So we should be concerned, but I’m not ready to panic just yet. 2013 Q1 might also be a bit weak with the expiration of the payroll tax holiday and I do think this will get Congress to punt the debt ceiling and possibly the sequester just to keep the economy from any more shocks.

Update: More:

For one thing, most of the collapse was due to a stunning fall in military spending. That’s not good for GDP, but it doesn’t reflect the real underlying strength of the economy.

And it’s mostly due to war drawdown. That’s a good thing for everyone!

There was also a big decline due to a reversal of big inventory buildups.

What’s key is that the numbers that really reflect the strength of the economy were much better.

Personal consumption, fixed investment, and equipment/software all grew nicely. This is the real economy humming along.

I’m not quite that optimistic. We had a real problems last quarter with the fiscal cliff and Sandy — problems that have not magically gone away. I’m expecting Q1 to be mediocre if we’re lucky.

The Faux Economist

Just in case you were wondering if it was only the American sport media that never bothers to fact check:

As an ex-presidential consultant, a former adviser to the World Bank, a financial researcher for the United Nations and a professor in the US, Artur Baptista da Silva’s outspoken attacks on Portugal’s austerity cuts made the bespectacled 61-year-old one of the country’s leading media pundits last year.

The only problem was that Mr Baptista da Silva is none of the above. He turned out to be a convicted forger with fake credentials and, following his spectacular hoodwinking of Portuguese society, he could soon face fraud charges.

Blessed with such an impressive CV, Mr Baptista’s subsequent criticisms of the Lisbon government’s far-reaching austerity cuts, as well as dire warnings that the UN planned to take action against it, struck a deep chord with its financially beleaguered population.

According to the Spanish newspaper El País, his powerfully delivered comments at a debate at the International Club, a prestigious Lisbon cultural and social organisation last month, were greeted with thunderous applause and a part-standing ovation.

Then, in a double page interview in the weekly newspaper Expresso in mid-December, Mr Baptista da Silva continued to denounce the government’s policies. That was followed by an interview for the radio station TSF, appearances in high-profile television debates and well-publicised meetings with trade union leaders to advise them on economic policies.

Oh, you just knew he was going to be a damned Keynesian, didn’t you? Has anyone checked up on Paul Krugman lately? I mean really checked to make sure his blog isn’t being written by a perl script?

Frankly, it doesn’t surprise me that no one could tell he was a fake. A lot of economists seem to make stuff up as they go; a lot of attention is paid to those who reinforce popular but wrong-headed ideas; the media loves politicians who embrace big government and see it as the solution to all ….

Ok, seriously, has anyone checked on Paul Krugman?

Feelin’ Fine

OK. So yesterday, Obama said this in an economy speech. I’ll give the entire quote so you don’t think it’s out of context:

We’ve created 4.3 million jobs over the past 27 months. The private sector is doing fine. Where we’re seeing problems is with state and local government, often with cuts initiated by governors or mayors who are not getting the kind of help they’re accustomed to from the federal government.

(Aside before I get into this. That’s a pace of 159,000 jobs a month. That’s decent, but barely above population growth. We are still in the slowest recovery since the Depression, no matter how much you manipulate the stats.)

As you would expect, the Right Wing is jumping all over the statement that the private sector is doing fine while various left-wingers try to defend it. The problem is that it’s not the dumbest thing in that sentence. The second half — about the loss of government jobs — is the more disconcerting phrase. Ezra Klein, linked above, explains the numbers and thinking behind the statement:

Since Obama was elected, the public sector has lost about 600,000 jobs. If you put those jobs back, the unemployment rate would be 7.8 percent.

But what if we did more than that? At this point in George W. Bush’s administration, public-sector employment had grown by 3.7 percent. That would be equal to a bit over 800,000 jobs today. If you add those hypothetical jobs, the unemployment rate falls to 7.3 percent.

Both of those numbers, it should be said, are holding all else equal: If more workers had reentered the labor force, the unemployment rate could be higher. And if there were 1.4 million more Americans with jobs, they’d be spending money and creating jobs for other people. So private-sector employment could be higher, too.

Barack Obama continues to push “jobs” legislation that would, in effect, shovel money to the states to encourage them to hire. And according to people like Klein, this would bring the unemployment rate down at least a full point. But I find this thinking dangerous and misinformed for three reasons:

First, as I have sad many times, you should not be using George W. Bush as your standard. The point of the 2000’s was that government grew way too fast and became far too large and bloated. It was a bubble as much as housing was. The contraction in the public sector is necessary; it’s the result of a bubble popping. You do not respond to this by re-inflating the bubble. You do not “help” states that have just gotten their fiscal house in order by giving them money to hire new workers and create massive future obligations.

That’s the thing people forget about stimulus: it becomes part of the baseline. Today’s “shovel ready project” is tomorrow’s continuing support. Today’s hire is tomorrow’s retiree. With states already groaning under the burden of employee benefits, a wave of new hires is not what they need.

Second, the idea that hiring government workers will stimulate the economy and even, in the words of Pelosi, “pay for itself”, requires assumptions even a Keynesian would blush at. Presently, the government collects 15% of GDP. That means you would need an economic multiplier of six for these things to pay off. That’s twice what even the most optimistic Keynesian imagines and almost six times what many economists believe.

Finally — and most importantly — government is not a jobs program. When government creates jobs, it is a side effect of government doing the things that we, the people, have decided government should do. And our goal should be to have government do those things with the minimum number of jobs. If it is using too many people to accomplish its goals, that is simply wasting money and wasting human potential on busy work. It is paying people to, effectively, dig holes and fill them up again.

The purpose of a police department is to enforce the law, not to “create jobs” for cops. The purpose of a fire department is to fight fires, not to “create jobs” for firefighters. The purpose of our military is to fight wars, not to “create jobs” for soldiers. Hell, we could drive the unemployment rate to zero by starting a war and drafting everyone. Does anyone think that’s a good idea? Then why is it a good idea to do it on a smaller scale? It’s fine that people can find careers in government, but that’s incidental to government doing what government does.

We need to stop thinking of government as some kind of gigantic jobs program. Creating jobs is not the purpose of government nor is it something government is particularly good at. It stinks that 600,000 people have lost their jobs. But what stinks more is having hired them in the first place when there was no long-term ability to retain them. And it would be a stench beyond measure to engage in yet another unsustainable wave of hiring.

Paul vs. Paul

Ron Paul and Paul Krugman had a debate about economics (apologies for the link, which auto-plays). You can read Tyler Cowen’s commentary here. I agree with his final take:

There were too many times when RP simply piled polemic points on top of each other and stopped making a sequential argument. He overrates the costs of inflation, including in the long term, and for a believer in the market finds it remarkably non-robust in response to bad monetary policy. Still, given that Krugman is a Nobel Laureate in economics, and Paul a gynecologist, the score could have been more lopsided than in fact it was.

I have disagreements with Ron Paul on monetary policy and the Federal reserve. But I think Cowen understates Paul’s performance. There were several times where he got in points that Krugman had no response to (except to later whine with dubious factual accuracy on his blog). The fact is that the Keynesians really don’t have an explanation of how a 60% cut in federal spending after World War II produced an economic boom, other than to wave the “we owe the debt to ourselves” mantra. The fact is that they predicted Truman’s budget cuts would wreck the economy and they didn’t.

I think Krugman also, like most Keynesians, underestimates the potential danger of inflation. It is true that a moderate inflation can ease a financial crisis. But it’s very hard to manage a “moderate” inflation because the temptation to inflate away debts is strong and it is very easy to get into an inflation-interest rate spiral like we did in the 70’s. This is why the Federal Reserve has been keen to keep that beast in its cage for three decades.

Still, it tells you something about the intellectual weakness of the Left when they are preening/whining about, as Cowen said, a Nobel Laureate debating a 76-year-old Republican who is regarded as a crackpot by all “thinking people”. I suspect Krugman will next debate Milton Friedman. This may actually be an even match since Friedman is dead at the present time.

The Long Hard Slog

GDP went up at a 2.5% annual pace last quarter, which is pretty decent — wasn’t “austerity” supposed to kill us? We’re now back to GDP level we were at … almost four years ago. Yes, it’s time to party like it’s Q4 2007. An important point, jumped out at me, however:

real GDP is finally back to its pre-recession peak, and it’s taken us an historically very long time to get here. The figure (hat tip, BH) shows the number of quarters it has taken in the past for real GDP growth to regain its prior peak before the recession knocked it down (the top date on the x-axis is the quarter that GDP regained the peak; the bottom date is the prior peak). The average is 5.2 quarters…this go round, it took 15. That, my friends, is a long slog.

It was, is and is going to be. We are still too leveraged and our national finances have a biohazard sign on them. We are slowly unravelling the mess we were in — housing prices have fallen, as has debt. Maybe we can see some light. But we’re nowhere near the end; not with so many unemployed.