Posts tagged ‘recession’

Kevin Drum Inadvertently Undermines His Own Keynesianism

This is a follow-up from a post this morning here.  Kevin Drum is a Keynesian who thinks that the government is committing economic suicide if it does not increase its spending substantially during and after a recession.  Kevin Drum is also a fierce partisan who wants to defend President Obama against his detractors.  Unfortunately, trying to do the two simultaneously has led to what I think may be an embarrassing result for him.

In the chart below, I combine two graphs of his.  The one on the left is a chart from last year in a Mother Jones cover story blasting "austerity" and lamenting how dumb it was to decrease spending in the years after a recession.  The chart on the right is from the other day, when Drum is agreeing with Paul Krugman that the recession recovery under Obama has been much stronger than the one under Bush II.  The result is a juxtaposition that seems to undermine his Keynesian assumptions - specifically, the recession where we had the "austerity" was the one with the better recovery.  The only thing I have done to his charts is removed lines in the left chart for other past recessions and changed the line colors on the two charts to match.   You can click to enlarge:

click to enlarge

The blue line is the Bush II recession, the red line is the Obama recession.  I believe the start dates are consistent in both charts.  All the numbers and choice of start dates and measurement scales are Drum's.  Don't yell at me for something in the chart construction being unfair -- they are his choices.

The conclusion?  Higher government spending seems to inhibit recovery.  Thanks Kevin!

Kevin Drum Undermines His Own Cover Story and Refutes His Own Keynesian Assumptions

Update:  I have posted an update with a side by side chart comparison here.

Last year, Kevin Drum wrote what I believe was the cover story of the September / October issue of Mother Jones (I read the online edition so exactly how the print version is laid out is opaque to me).  That article, entitled "It's the Austerity, Stupid: How We Were Sold an Economy-Killing Lie" features this analysis:

Click to enlarge

 

He described the chart as follows:

 In the end, for reasons both political and ideological, Obama decided that he needed to demonstrate that he took the deficit seriously, and in his 2010 State of the Union address he did just that. "Families across the country are tightening their belts," he said, and the federal government should do the same. To that end, he announced a three-year spending freeze and the formation of a bipartisan committee to address the long-term deficit.

The Beltway establishment may have applauded Obama's pivot to the deficit, but much of the economic community saw it as nothing short of a debacle. Sure, there were still a few economists who believed that even in a deep recession government spending merely crowded out private spending and thus did no good, but they were a distinct minority. Most economists acknowledged that deficit spending was appropriate at a time like this. Paul Krugman fumed that Obama was cravenly trying to score political points by doing a "deficit peacock-strut" that would be destructive in the wake of the financial crisis. Mark Zandi, a centrist economist who has advised leaders of both parties, used more judicious language, but likewise warned that spending cuts might "cost the economy significantly in the longer run."...

Taken as a whole, these measures have cut the deficit by $3.9 trillion over the next 10 years. And that doesn't even count the expiration of desperately needed stimulus measures like the payroll tax holiday and extended unemployment benefits.

This was unprecedented, as the chart above shows. After every other recent recession, government spending has continued rising steadily throughout the recovery, providing a backstop that prevented the economy from sliding backward. It happened under Ronald Reagan after the recession of 1981, under George H.W. Bush after the recession of 1990, and under George W. Bush after the recession of 2001. But this time, even though the 2008 recession was deeper than any of those previous ones, it didn't.

 

I thought the choice of baseline dates for his charts was deceptive, but never-the-less for the moment lets accept this at face value.  Make sure to take a note of the red line, which is the current recession, and the brown line, which was the recovery from the recession in the late Clinton / early Bush years.  By Mr. Drum's earlier analysis, the earlier 1990 recession was better handled than the current one (against his Keynesian assumptions) by the government continuing to increase spending after the recession to keep the recovery going.   The point of Drum's earlier article was to say that Republicans in Congress were sinking the current economy by not increasing spending as was done after these earlier recessions.

So this is what Drum published the other day, I think based on a Paul Krugman article.

But I think Krugman undersells his case. He shows that the current recovery has created more private sector jobs than the 2001-2007 recovery, and that's true. But in fairness to the Bush years, the labor force was smaller back then and Bush was working from a smaller base. So of course fewer jobs were created. What you really want to look at is jobs as a percent of the total labor force. And here's what you get:

blog_private_employment_2001_vs_2010

The Obama recovery isn't just a little bit better than the Bush recovery. It's miles better. But here's the interesting thing. This chart looks only at private sector employment. If you want to make Bush look better, you can look at total employment instead. It's still not a great picture, but it's a little better:

Awesome, Kevin!  So I guess that austerity you were complaining about was the right thing to do, yes?

Seriously, in his article a year ago Drum argued that the Republicans in Congress were sinking the economy vis a vis the 1990 recession by not continuing to boost spending in the years after the recession.  Now, he admits  (though since he does not refer back to the original article I guess it is not an admission per se) that this "austerity" led to a stronger recovery than the spending-fueled 1990 version.  All hail smaller government, the solution to growing employment!

PS-  I wonder how much of this change in private employment since the last recession came in the oil and gas industry, whose expansion the Left generally opposes?  Well, they'll bash on oil tomorrow but today, they will take credit for the jobs added.

Update:  Here are the two charts combined, with other recessions removed and the colors on the data series set to match (click to enlarge)

click to enlarge

Phoenix Light Rail Update: We Spent $1.4billion+ to Reduce Transit Ridership

Check this graph out from the Phoenix Metro web site.  It shows bus ridership in years past, and more recently both bus and light rail ridership.

click to enlarge

 

You can see a few things.  First, note that almost all the rail ridership came at the expense of bus ridership.  It  was almost a pure 1:1 substitution.  The bus ridership, even with a half year of light rail being open, was 65.7 million in 2009.  Total ridership was only 67.6 million in 2010 and 2011.  Yes there is a recession here, but of the 12 million or so in light rail ridership, at least 10-11 million of that came out of buses.  Essentially, we paid $1.4 billion in capital costs to move 10 million riders to a mode of transit that is at least an order of magnitude more expense.  Nice work.

Second, note that after over 12 years of growth, with the onset of light rail transit ridership has stagnated for 6 years.  Some of this, at least initially, is likely due to the recession but in fact recessions are supposed to spur transit ridership, not reduce it, as people look for lower cost alternatives.  There is a good explanation for this.  Because light rail is so much more expensive, the cost per rider for the entire transit system has skyrocketed.  With budgets unable to be increased this fast (and with fares covering only a tiny percentage of rail costs), the system must cut back somewhere.  Since rail can't really be cut back, bus routes are cut.

If we had seen the same growth rate from 2009 to 2014 as we had seen in the twelve years prior, we should have over 86 million trips in 2014 (note these are fiscal years, and fiscal year 2014 is already closed, so this is not partial year data).

We paid, and continue to pay (since rail must be subsidized heavily) billions of dollars to reduce transit ridership.

I am Pretty Sure Bastiat Figured This Out 150 Years Ago: Cash For Clunkers Even Worse Than First Thought

From the WSJ

In a National Bureau of Economic Research working paper this month, economists at Texas A&M return to Cash for Clunkers, the 2009 stimulus fillip that dispensed vouchers worth as much as $4,500 if people turned in their old cars for destruction and bought a new set of wheels. Mark Hoekstra, Steven Puller and Jeremy West report their "striking" finding that the $3 billion program's two-month run subtracted between $2.6 billion and $4 billion from the auto industry.

The irony is that the goals were to help Detroit through the recession by subsidizing sales and to please the green lobby by putting more fuel-efficient cars on the road. By pulling forward purchases that consumers would make later anyway, the Obama Administration also hoped to add to GDP. Christina Romer, then chair of the Council of Economic Advisers, called Cash for Clunkers "very nearly the best possible countercyclical fiscal policy in an economy suffering from temporarily low aggregate demand."

The A&M economists had the elegant idea of comparing the buying behavior of Texas drivers who owned cars that barely qualified for cash (those that got 18 miles per gallon of gas or less) and those that barely did not (19 mph). Using state DMV sales records, this counterfactual allowed them to isolate the effects of the Cash for Clunkers incentives and show what would have happened without the program.

The two groups were equally likely to purchase a new vehicle over the nine month period that started with Cash for Clunkers, so the subsidy did not create any extra auto business. But in order to meet the fuel efficiency mandate, consumers who got the subsidy were induced to purchase smaller vehicle models with less horsepower that cost on average $2,500 to $3,000 less than those bought by their ineligible peers. The clunkers bought more Corollas, and everybody else more Chevys.

Extrapolated nationally, auto revenues may have plunged by more than what the government spent. And any environmental benefits cannot be justified under the federal social cost of carbon estimate of $33 a ton. Prior research from 2009 and 2013 has shown that the program cost between $237 and $288 a carbon ton.

Obamacare and Jobs in One Chart

This is a pretty amazing chart from Jed Graham and IBD which I have annotated a bit

click to enlarge

 

Note first that the diversion between high and low-wage** industries did not occur during the recession, and in fact through the recession the two groups tracked each other pretty closely until early 2010.  Then, in early 2010, something made the two lines start to diverge and in 2012-2013 they really went in opposite directions.

Well, my suggestion for the "something" is Obamacare.  In March 2010, the PPACA was passed.  Looking at the jobs data, one can date the stall in the economic recovery almost precisely from the date the PPACA was passed (e.g. here).

The more important date, though, is January 1, 2013.  This is a date that every business owner was paying attention to at the time but which seems entirely lost on the media.   All the media was focused on the start-date of the employer mandate on January 1, 2014.  Why was the earlier date important?  Let's go back in time.

At that time, the employer mandate had yet to be delayed.  The PPACA and IRS rules in place at the time called for a look-back period in 2013 where actual hours worked for each employee would be tracked to determine whether the employee would classified as full or part-time on the Jan 1, 2014 start date.  So, if a company wanted to classify an employee as part-time at the start of the employer mandate (and thus avoid penalties for that employee), that employee needed to be converted to part-time as early as possible, preferably before 2013 even started and at worst by mid-year 2013 [sorry, I typo-ed these dates originally].

Unlike the government, which apparently waits until after the start-up date to begin building large pieces of major computer systems, businesses often tackle problems head on and well in advance.   Faced with the need to have employees be working 29 hours or less a week in the 2013 look-back period, many likely started making changes back in 2012.  Our company, for example, shifted everyone we could to part time in the fourth quarter of 2012.  I know from talking to the owners of several restaurant chains that they were making their changes even earlier in 2012.  One employee of mine went to Hawaii in October of 2012 and said that all the talk among the resort employees was how they were getting cut to part-time over Obamacare.

Yes, the employer mandate was eventually delayed, but by the time the delay was announced, every reasonably forward-looking company that was going to make changes had already done so.   Having made the changes, there is no way they were going to switch back, and then back yet again when the Administration finally stumbles onto an actual implementation date.

If this chart gets any traction over the next few days, expect to see a lot of ignorance as PPACA defenders claim that the fall in low-wage work hours can't possibly have anything to do with the PPACA because the employer mandate has not even started.  Now you know why this argument is wrong.  The PPACA, and associated IRS implementation rules, drove companies to convert full-time to part-time jobs as early as 2012.

Usual warning:  Correlation is not causation.  However, I will submit that I was predicting exactly this sort of result years before it occurred.  This is not a spurious correlation that is ex post facto blamed on whatever particular bete noir I might have.  I and many other predicted that Obamacare would drive down work hours per week in lower-wage industries, and now having seen exactly that correlated with key Obamacare dates, it is not going to far to hypothesize a connection.

** Why could low-wage industries be impacted more than high-wage?  Two reasons.  One, low-wage industries are far less likely to offer a full Obamacare-compatible health plan to employees than high wage industries.  Second, the fixed penalties ($2000 and $3000 per employee) for lack of insurance plans are obviously a far higher percentage of the total pay in low-wage vs. high-wage industries.   A penalty that is 15% of annual pay is much more likely to cause employers to shift or reduce work than a 3% penalty.

Windows 8 Even Worse Than I Thought

Up to this point, after some initial bad impressions trying Windows 8 briefly, I have avoided it like the plague.  However, my son needed a new laptop and the only ones that really met our requirements only came in Windows 8 flavors, so we bought one.

What an awful mess.  The system boots up into a tiled mess that looks like some cheesy website covered in moving gifs and viagra ads.  To make matters worse, nothing on this tablet-based interface is organized at all logically.  The interface is like the room of an ADD child that dropped all of his toys and books in random spots.  I am sure these tiles have some sort of navigation paradigm, but it is completely different from any used in past windows versions.  I could not, for example, figure out how to easily exit the store except to alt-tab out (there is no exit or quit option and right-click context menus which are one of the great advantages of windows over mac don't seem to work a lot of the time).  Again, I am sure there is some way to do it, but I have no idea what it is and no desire to learn new navigation commands.  Perhaps Microsoft intends that one use a gamepad instead of a mouse -- I would not be surprised at this point.

Unlike older versions of windows, windows update did not run automatically at first bootup.  I knew from past experience there were likely dozens of security patches I needed to install right away.  I hunted for quite a while just to find the windows control panel (so I could run windows update).  It was buried in a sub-menu of a toolbar on the right side of the screen that only pops up if you find a tiny (unmarked) spot in the corner of the screen with your mouse.   It amazes me that anyone thought replacing the start button with an unmarked spot on the screen was a good idea.

Of course, the control panel is called something entirely different now, but I did eventually find windows update and there were, as expected, over 70 security patches that needed to be installed.  But for some reason they would not download immediately, but kept giving me a message that they would be downloaded at some future indeterminate date.  I finally found a way to force them to download.

My next step was to get rid of the stupid application tile interface and get the computer to boot directly to desktop and get the old start button back.  This requires a free upgrade to windows 8.1, but there is no obvious way to do this, even through windows update.  I finally had to search the internet to find the link.  This sent me into the windows 8 app store.  What a total mess that is!  If anything, it is more poorly organized than the Apple app store.  Like the Apple store, it seems aimed at people who want to browse applications virtually at random rather than find something specific.  Incredibly, there is no search function.  Yes, I know, I have to be wrong about that, but I scrolled all over that damn storefront and cannot find a search box.

So I cannot actually find the Windows 8.1 upgrade.  The web site tells me that I should be presented with a prominent option to download it in the store, but I am not.  It is nowhere to be found.  I found an FAQ somewhere that suggested that I would not be offered the 8.1 upgrade if my 8.0 installation is missing certain patches, so I am going back to windows update to see if there is something I am still missing.

I was wrong about windows 8 -- I once wrote it was bad but perhaps not as bad as Vista or ME.  But it is.  This is the worst thing I have ever seen come out of Microsoft.  It is inexplicable that this company with such a strong market share in the business world could saddle its flagship OS with an interface more appropriate to an XBOX.

In the past, I have said that I would not want a desktop with a tablet interface.  But at the end of the day, I would not want a tablet with this interface.  Perhaps with hours of work, I will make this computer usable.  Who would have ever thought I would have longed for the day when I had to spend an hour with a new computer removing bloatware.  Now I have to spend a day trying to emulate the windows 7 experience on windows 8.

People have developed many hypotheses for the lingering recession.  Some say it was too small a stimulus.  Some blame the sequester.  I blame the Windows 8 launch, which I think has a lot to do with suppressing PC sales and thus much of the electronics and retailing sector.

Irony

It turns out that the US is one of the few industrialized nations to meet the terms of the Kyoto protocols (reduce CO2 emissions to 1997 levels) despite the fact we never signed it or did anything to try to meet the goals.

Thank the recession and probably more importantly the natural gas and fracking revolution.  Fracking will do more to reduce CO2 than the entire sum of government and renewable energy projects (since a BTU from natural gas produces about half the CO2 as a BTU form coal).  Of course, environmentalists oppose fracking.  They would rather carpet the desert with taxpayer-funded solar panels and windmills than allow the private sector to solve the problem using 50-year-old technology.

Trading $1 in Debt for 85 cents of Economic Activity

UPDATE:  Mea culpa.  One point in the original post was dead wrong.  It is possible, contrary to what I wrote below, to get something like a 0.7%  difference in annual growth rates with the assumptions he has in the chart below (Drum still exaggerated when he called it 1%).  I don't know if the model is valid (I have little faith in any macro models) but I was wrong on this claim.  Using the 0.7% and working more carefully by quarter we get a cumulative GDP addition a bit lower than the cumulative debt addition.  There is still obviously a reasonable question even at a multiplier near 1 whether $1 of economic activity today is worth $1 of debt repayment plus interest in the future.  

I am not a believer, obviously, in cyclical tweaking of the economy by the Feds.  To my thinking, the last recession was caused by a massive government-driven mis-allocation of capital so further heavy-handed government allocation of capital seems like a poor solution.  But what really drives me crazy is that most folks on the Left will seductively argue that now is not the time to reduce debt levels, implying sometime in the future when the economy is better will be the appropriate time.  But when, in any expansion, have you heard anyone on the Left say, "hey, its time to reduce spending and cut debt because we need the fiscal flexibility next time the economy goes wrong."

I will leave the stuff in error below in the post because I don't think it is right to disappear mistakes.  For transparency, my spreadsheet reconstruction both confirming the 0.7% and with the updated numbers below is here:   reconstruction.xls.

 

Kevin Drum is flogging the austerity horse again

I see that Macroecomic Advisors has produced a comprehensive estimate of the total effect of bad fiscal policies. Their conclusion: austerity policies since the start of 2011 have cut GDP growth by about 1 percentage point per year.

Something seemed odd to me -- when I opened up the linked study, it said the "lost" government discretionary spending is about 2% of GDP.  Is Drum really arguing that we should be spending 2% of GDP to increase GDP by 1%?

Of course, the math does not work quite this way given compounding and such, but it did cause me to check things out.  The first thing I learned is that Drum partook of some creative rounding.  The study actually said reductions in discretionary spending as a percent of GDP reduced GDP growth rates since the beginning of 2011 by 0.7% a year, not 1% (the study does mention a 1% number but this includes other effects as well).

But it is weirder than that, because here is the chart in the study that is supposed to support the 0.7% number:

click to enlarge

Note that in the quarterly data, only 2 quarters appear to show a 0.7% difference and all the others are less.  I understand that compounding can do weird things, but how can the string of numbers represented by the green bars net to 0.7%?  What it looks like they did is just read off the last bar, which would be appropriate if they were doing some sort of cumulative model, but that is not how the chart is built.  If we interpolate actual values and are relatively careful about getting the compounding right, the difference is actually about 0.45%.  So now we are down to less than half the number Drum quoted see update above (I sent an email to the study author for clarification but have not heard back.  Update:  he was nice enough to send me a quick email).

So let's accept this 0.45% 0.7% number for a moment.  If GDP started somewhere around 16 trillion in 2010, if we apply a 0.45% the quarterly growth numbers from his chart, we get an incremental economic activity from 2011 through 2013:Q2 of about $333 billion.

So now look at the spending side.  The source says that discretionary spending fell by about 2% of GDP over this period.  From the graph above, it seems to bite pretty early, but we will assume it fell 1/12 of this 2% figure each quarter, so that by the end of 2013 or beginning of 2014 we get a fall in spending by 2% of GDP.  Cumulatively, this would be a reduction in spending over the 2.5 years vs. some "non-austere" benchmark of $388 billion.

Thus, in exchange for running up $677 billion $388 billion in additional debt, we would have had $445 billion $333 billion in incremental economic activity.  A couple of reactions:

  1. Having the government borrow money and spend it definitely increases near-term GDP.  No one disputes that.  It is not even in question.  Those of us who favor reigning in government spending acknowledge this.  The question is, at what cost in terms of future obligations.  In fact, this very study Drum is quoting says

    Economists agree that failure to shrink prospective deficits and debt will bestow significant economic consequences and risks on future generations. Federal deficits drive up interest rates, “crowding out” private investment. If government borrowing supports consumption (e.g., through Social Security and major health programs) rather than public investment, the nation’s overall capital stock declines, undermining our standard of living. The process is slow but the eventual impact is large.2 In addition, accumulating debt raises the risk of a fiscal crisis. No one can say when this might occur but, unlike crowding out, a debt crisis could develop unexpectedly once debt reached high levels.

    High deficits and debt also undermine the efficacy of macroeconomic policies and reduce policymakers’ flexibility to respond to unexpected events. For example, in a recession, it would be harder to provide fiscal stimulus if deficits and debt already were high. Furthermore, fiscal stimulus might be less effective then. Additional deficit spending could be seen as pushing the nation closer to crisis, thereby forcing up interest rates and undercutting the effects of the stimulus. With fiscal policy hamstrung, the burden of counter-cyclical policy is thrust on the Federal Open Market Committee (FOMC) but, particularly in a low interest-rate environment, the FOMC may be unable (or unwilling) to provide additional monetary
    stimulus.

  2. I guess we have pretty much given up on the >1 multiplier, huh?  Beggaring our children for incremental economic growth today is a risky enough strategy, but particularly so with the implied .66 .85 multiplier here.

This is not the first time Drum has taken, uh, creative data approaches to cry "austerity" during a mad spending spree. 

Eeek! Austerity! Oh, Never Mind.

Yesterday I challenged a graph by Kevin Drum in Mother Jones as being a disingenuous attempt to paint US government spending as some sort of crazed austerity program which is making the recovery worse.  He uses this graph to "prove" that our fiscal response to this recession is weak vis a vis past recessions.  The graph is a bit counter-intuitive -- note that it begins at the end of each recession.  His point is that Keynesian spending needs to continue long after (five years ?!) after the recession is over to guarantee a good recovery, and that we have not done that.

Click to enlarge

For anyone not steeped in the special reality of the reality-based community, it is a bit counter intuitive for those of us who have actually lived through the last 5 years to call government spending austere.

The key is in the dates he selects.  He leaves out the actual recession years.  So by his chart, responses that are late and occur after the recession look better than responses that are fast and large but happen during the recession.  This seems odd, but it is the conclusion one has to draw.

I took roughly the same data and started each line two years earlier, so that my first year is two years ahead of his graph and the zero year in my graph is the same as the zero point in Drum's chart.  His data is better in the sense that he has quarterly data and I only have annual.  Mine is better in that it looks at changes in spending as a percentage of GDP, which I would guess would be the more relevant Keynesian metric (it also helps us correct for the chicken and egg problem of increased government spending being due to, rather than causing, economic expansion).

Here are the results (I tried to use roughly the same colors for the same data series, but who in the world with the choice of the entire color pallet uses two almost identical blues?)

recession-redux2

You can see that Drum makes spending look lower in the current recession by carefully dating the data series to the peak of the spending, rather than comparing it to pre-recession levels.  The right hand scale is the difference in government spending as a percentage of GDP from the -2 year.  So, for example, in the current recession government spending was 34.2% in 2007 and 41.4% in 2009 for a reading of 7.2% in year 0.

Even with the flat spending over the last three or four years in the current recession (flat nominal spending leads do a declining percent of GDP) the spending increase from pre-recession levels is still about twice as high as in other recent recessions.

Does this look like austerity to anyone?

Deceptive Chart of the Day from Kevin Drum and Mother Jones to Desperately Sell the "Austerity" Hypothesis

Update:  OK, I pulled together the data and did what Drum should have done, is take the graph back to pre-recession levels.  Shouldn't it be even better if the increase in spending came during the recession rather than after?  See update here.

Kevin Drum complains about US government austerity (I know, I know, only some cocooned progressive could describe recent history as austerity, but let's deal with his argument).  He uses this chart to "prove" that we have been austere vs. other recessions, and thus austerity helps explain why recovery from this recession has been particularly slow.  Here is his chart

Austerity_2_WM_630

This is absurdly disingenuous.  Why?  Simple -- it is impossible to evaluate post recession spending without looking at what spending did during the recession.   All these numbers begin after the recession is over.  But what if, in the current recession, we increased spending much more than in other recessions.  We would still be at a higher level vs. pre-recession spending now, despite a lack of further increases after the recession.

In the time before this chart even starts, total state, local, Federal spending increased from 2007 to 2008 by 10.2%.  It increased another 11.1 % from 2008 to 2009.  So he starts the chart at the peak, only AFTER spending had increased in response to the recession by 22.5%.  Had he started the chart at the correct date and not at a self-serving one, my guess is that it would have shown that in this recession we increased spending more than any other recent recession, not less.  So went digging for some data.

I actually have a day job, so I don't have time to create a chart of total government spending since 1981, so I will look at just Federal spending, but it makes my point.  I scavenged this chart from Factcheck.org.  The purple bars are the year that each of Drum's data series begin plus the year prior (which is excluded from Drum's chart).  Essentially the growth in spending between the two purple lines is the growth left out just ahead of when Drum started each data series in his chart.  The chart did not go back to 1981 so I could not do that year.

click to enlarge

Hopefully, you can see why I say that Drum is disingenuous for not going back to pre-recession numbers.  In this case, you can see the current recession has an unprecedented pop in spending in the year before Drum starts his data series, so it is not surprising that post recession spending might be flatter (remember, the pairs of purple lines are essentially the change in spending the year before each of Drum's data series).  In fact, it is very clear that relative to the pre-recession year of 2008 (really 2007, but I will give him a small break), even after 5 years of "austerity" our federal spending as a percent of GDP will be far higher than in any other recession he considers.  In no previous recession in this era did post recession spending end up more than 2 points higher (as a percent of GDP) than pre-recession levels.    In this recession, we are likely to end up 4-5 points higher.

By the way, isn't it possible that he has cause and effect reversed?  He argues that post-recession recovery was faster in other recessions because government spending kept increasing over five years after the recession is over.  But isn't it just possible that the truth is the reverse -- that government spending increased more rapidly after other recessions because recovery was faster, thus increasing tax revenues. Congress then promptly spent the new revenues on new toys.

Let's look at the same chart, highlighted in a different way.  I will circle the 4-5 years included in each of Drum's data series:

spending-2

You can see that despite the fact that government spending in these prior recessions was increasing in real terms, it was falling in two our of three of them as a percentage of GDP (the third increased due to war spending in Afghanistan and Iraq, spending which I, and I suspect Drum, would hesitate to call stimulative, particular since he and others at the time called it a jobless recovery).

How can it be that spending was increasing but falling as a percent of GDP?  Because the GDP was growing really fast, faster than government spending.  This does not prove my point, but is a good indicator that recovery is likely leading spending increases, rather than the other way around.

We Are In the Best of Hands: Janet Yellen Edition

The Arizona Republic today reviews a speech given by Yellen in January, 2007 in Phoenix:

It was January 2007 when Yellen, then head of the Federal Reserve Bank of San Francisco, spoke here about financial literacy before transitioning into comments about the economy — comments that now look remarkably unperceptive.

Back then, months before the real-estate and banking crisis took down the economy, Yellen expressed concern that inflation was uncomfortably high while job gains were coming too swiftly.

“If labor markets are as tight as the unemployment rate suggests, then there may be reason for concern about building inflationary pressures,” she said according to my Jan. 18, 2007, article.

Subsequent events showed that inflation was the last thing we had to worry about, while the lack of jobs has emerged as a central drag on the economy. Back then, U.S. unemployment was around 4.5 percent. But after the recession took hold, it more than doubled, peaking at 10 percent in late 2009. At 7.3 percent currently, it remains well above where it should be this far into an economic recovery.

In contrast, core consumer inflation (which excludes food and energy costs) of 1.8 percent today has hardly budged from the 2.2 percent rate that had Yellen all worked up back then.

In another comment during her Phoenix talk that now looks wildly off-base, Yellen, who later was named vice chair of the Fed’s board of governors, said recession risks had receded despite lingering weakness in housing. She cited the Valley as a place where home-price appreciation had come down from unsustainably high rates of increase.

The Great Recession, as we all now know in hindsight, began later that year, triggered by a home-price slide of epic proportions.

I don't want to beat her up too bad for missing the bubble burst, since most everyone did.  They also all missed the last bubble burst, and the one before that, etc.

This is what makes me crazy:  not that these folks were wrong, even consistently brutally wrong, but that they display absolutely no modesty in their actions given that they were so wrong.  They propose policy steps, such as seemingly eternal QE, that are astoundingly risky unless one assumes that they have a very, very good grasp on exactly where the economy is going.  Which they clearly never have had in the past.  If they acted like they had been wrong most of the time, then I would have little to criticize.  But to be consistently wrong and then make huge risky bets as if you have reliable predictive powers is hubris of the worst sort.

Most Unsurprising Headline of the Year

Via the AZ Republic:

The pay gap between the richest 1 percent and the rest of America widened to a record last year.

...

Last year, the incomes of the top 1 percent rose 19.6 percent compared with a 1 percent increase for the remaining 99 percent.

...

But since the recession officially ended in June 2009, the top 1 percent have enjoyed the benefits of rising corporate profits and stock prices: 95 percent of the income gains reported since 2009 have gone to the top 1 percent.

That compares with a 45 percent share for the top 1 percent in the economic expansion of the 1990s and a 65 percent share from the expansion that followed the 2001 recession.

The Federal Reserve is pumping over a half trillion dollars of printed money into inflating a bubble in financial assets (stocks, bonds, real estate, etc).  It should be zero surprise that the rich, who disproportionately get their income and wealth from such financial assets, should benefit the most.   QE is the greatest bit of cronyism the government has yet to invent.

(yes, I understand that there are many reasons for this one-year result, including tax changes that encouraged income to be moved forward into last year and the fact it was a recovery off of a low base.  Never-the-less, despite decades of Progressive derision for "trickle down" economics, this Administration has pursue the theory that creating an asset bubble that makes the rich much richer will in the long term help the economy via the "wealth effect.")

Phoenix Spent $1.4 Billion To Cannibalize Buses

I have written many times about my problems with Phoenix light rail -- examples are here and here.  We paid $1.4 billion in initial capital costs, plus tens of millions a year in operating losses that must be subsidized by taxpayers, for a line that carries a tiny tiny percentage of Phoenix commuters.  Capital costs equate to something like $75,000 per daily round trip rider  -- If we had simply bought every daily rider a Prius, we would have save a billion dollars.

But, as with most things the government does, it is worse than I thought.  Over the last several years, I have been treating these daily light rail riders as if they are incremental users of the area's transit system.  In fact, they are not, by Valley Metro's (our regional transit authority) own numbers.  Here is the key chart, from their web site.

ridership report chart graphic

Compare 2009 to 2012.  Between those years, light rail ridership increased by just a hair under 8 million.  In the same time period, bus ridership fell by just a hair over 8 million.  So all new light rail ridership is just cannibalizing buses.  We have spent $1.4 billion dollars to shift people to a far more expensive transit platform, which does not offer any faster service along its route (the light rail has to fight through traffic lights on the surface streets same as buses).

This is a pattern seen in most cities that adopt light rail.  Over time, total ridership is flat or falls despite rising rail ridership, because rail is so expensive that it's operation forces transit authorities to cut back on bus service to balance their budgets.  Since the cost per rider is so much higher for light rail than buses, a dollar shifted from buses to light rail results in a net reduction in ridership.

Postscript:  Looking at the chart, light rail has achieved something that Valley Metro has not seen in decades -- a three year period with a decline in total ridership.  Sure, I know there was a recession, but going into the recession the Valley Metro folks were arguing that a poor economy and rising gas prices should boost their ridership.

 

 

Trapped Into Civic Participation, and A Note on Labor Mobility

Up until now, I had never know that there was actually a theory, propounded by people with a straight face, that trapping people in neighborhoods and institutions (like public schools) is a positive because it promotes civic virtue.  

If you own your home, then a lot of your wealth is tied in with the quality of your neighborhood. In theory, this should motivate you to vote more carefully in local elections. On the other hand, if you are a renter, and the neighborhood goes downhill, you will simply leave.

Collectivists prefer to trap households within specific government service areas. Their thinking is that with the “exit” option foreclosed, households will be forced to exercise their “voice” option, to everyone’s benefit. This is an argument against private schools. It goes back at least as far as A.O. Hirschman’s classic book, Exit, Voice, and Loyalty.

I would argue just the opposite, that this creates state monopolies ripe for abuse, and besides, is disastrous for labor mobility and thus the healthy functioning of labor markets.  People keep arguing that this recession is long because recessions after financial bubbles are always long.  I am not sure that is proven out by history.

I would argue a big reason this recession is long is that the nature of this bubble, being in housing markets, short-circuited one of the ways we get out of recessions, which is labor mobility.   Trapped in homes the government encouraged them to buy but now they cannot sell, people can't move to find new regional opportunities.  Where are the mass migrations to the North Dakota oil fields?

Government Spending Ratchet

In 2010, Arizona v0ters passed proposition 100, a 1% "temporary" sales tax increase that was meant to help fill in the budget hole created by the recession.  The tax was only to last 3 years.

It is pretty clear that by the end of 2013, when the tax expires, the rationale for the temporary tax cut will have passed.  Already the state's finances are improving and all signs are that by 2014 the economy and real estate market should be greatly recovered.

But, having got taxpayers used to paying the higher tax, supporters of big government and public employees unions have put a proposition on the ballot this year (204)  to make the 2010 tax increase permanent.  The tax extension will go to a mish-mash of new programs.

This is how the government spending ratchet works.  A "temporary" tax increase is justified in a fiscal emergency to fill in a recession-created hole.  Government insiders decide they like having more money, and make the tax permanent.  The new money is used to create brand new programs.  Then, in the next recession, when all these brand new programs are now "essential" and "beyond the reach of even the worst austerity", a new, even higher "temporary" tax increase is necessary.

Obama Bravely Fighting Against Deleveraging

I found this chart interesting, but am not entirely sure what conclusion to draw (via Zero Hedge)

In 2009, I think most everyone understood that the economy would have to reduce debt and that this process would be painful in terms of creating years of slow growth.  The good news from this chart is that the financial and consumer deleveraging has indeed been occurring, so at least our pain is not for naught.  The debate that will likely go on for years after this recession is whether the rapidly increasing Federal debt helped or hurt:  did it help offset the cost of the private deleveraging, or did it drag out the recession by keeping total debt levels from dropping?  Is it private debt that matters, or total debt?  Of course this makes the analysis more complicated.

 

Workers Comp. and Unemployment

Breaking news from California:

The Workers' Compensation Insurance Rating Bureau (WCIRB) made it official and submitted a mid-year filing for a 9.1% increase in the pure premium advisory rate that Insurance Commissioner Dave Jones approved less than six months ago. The proposed July 1 increase follows the 37% increase that Jones approved for January 1 that was hidden by the change in benchmarks for pure premium rates that was made at his request....

The Bureau insists that an increase of this magnitude is necessary to combat the continued deterioration in the claims experience, as well as an uptick in claim frequency in the 2010 accident year. Much of the increase will also go to pay for the higher loss adjustment expenses carriers are incurring fighting liens and litigating permanent disability claims. Projected ALAE costs are up to $11,403 per indemnity claim for the 2011 accident year compared to $10,698 the year before.

A 9.1% increase a half year after a 37% increase is just crazy.  This tends to confirm three issues I have written about before:

  1. People are filing workers comp claims as a substitute for or a supplement to unemployment.  Our company has seen a significant increase in people "coincidentally" suffering an injury on one of the last few days, and particularly the very last day, before they are to be laid off.  Only such fraud explains an increase in claims when economic activity is way down, particularly when more dangerous professions like construction employment fell much more than office employment in the recession.  We have also seen, by the way, an increase in frivolous labor lawsuits in CA coincident with the economic decline.  A year ago I had an employee in CA tell me that she had attended a brainstorming session the night before among several of my ex-employees trying to generate ideas for ways to sue our company.  I can't wait for an improvement in the economy when the returns of working are higher than the returns of brainstorming ways to extract money from our company via the legal system.
  2. California in general does a bad job of policing workers comp. fraud.  Woe to the employer that actually attempts to question an outrageously suspicious claim.  Last time I tried to do so in CA I got slapped with a lawsuit.
  3. All states do a terrible job policing permanent disability claims.  I hire a lot of older workers.  I can't tell you how many people show up at my door trying to be paid under the table because they don't want to endanger their permanent disability by having a record of getting paid for doing very physical outdoor work for us.  They assure me they are 100% capable to do heavy physical labor.  Since I don't pay anyone off the books, they end up finding work elsewhere.   Many of you may not believe such people exist, but I have met a number of folks who consider getting a permanent disability, or at least something a doctor will testify is a permanent disability, the equivalent of hitting the lotto.  I have even been sued by a woman for submitting testimony to the social security administration that might have harmed her chances of getting a permanent disability ruling.  The lawsuit stated that if she was denied the disability payment after I testified that I had seen no evidence of any limitations in what she could do on the job,  that I should be liable for paying her the lifetime amount she would have gotten.  So I wimped out and withdrew my testimony and let the taxpayers pay her rather than farting around with a lawsuit.

OMG, We Have Really Hit Bottom - Young People Forced to Work to Support Themselves

Back when he was blogging, TJIC had a nice little animated gif with people running around yelling "Oh Noz."

 [update:  sent to me by by the folks at finem respice]

I wish I had it for this chart and the accompanying text  (via Kevin Drum)

Many young adults have felt the impact of the recession and sluggish recovery in tangible ways. Fully half (49%) of those ages 18 to 34 say that because of economic conditions over the past few years, they have taken a job they didn’t really want just to pay the bills. More than a third (35%) say they have gone back to school because of the bad economy. And one-in-four (24%) say they have taken an unpaid job to gain work experience.

First, this study is great evidence of my "what is normal" fail.  There is no baseline.  OK, 24% moved back in with their parents.  How many did this in good times?  How much worse is this?

But the real eye-catcher to me is that somehow I am supposed to be shocked that people have to find a job to pay the bills.  Even a job that, gasp, they really didn't want.  I have a clue for you.  A lot of jobs 22-year-olds have to take are not that compelling.  Mine were not.  Despite what colleges seem to be telling them, the world does not offer up a lot of really cool jobs to inexperienced young adults.  Long before you are closing deals with CEO's, you are probably writing sales literature in some cubicle.

And by the way, I am struck by how wealthy our society is when I look at this chart.  Look at answers two and three.   In both cases, people are saying that in tough times, they chose to forego income and build their skills, even perhaps paying for the privilege.  What other time in history would people have this luxury?  How many countries today would have so many people with this luxury in hard times?  Even in the Great Depression in this country I don't think we saw the same phenomenon.  Obviously the economy sucks and it would be great for everyone for it to improve, but in most other times and even in many other countries in the world today, a significant bar in bad times would have been "I starved to death."

For Some, There Can Never Be Enough Government Spending

In his New York Times column, Paul Krugman blames the coming British recession on the government's "austerity."  In the Left's parlance, "austerity" means the government is not spending and in particular deficit spending enough.

But it turns out that

a. Of 44 major economies in the world, the British have been running the highest budget deficits of any country except two - Greece and Egypt are higher.

b. British real government spending has risen every year through the financial crisis

Presuming Krugman has access to these basic facts, is his argument that Britain should be deficit spending even more (and if so, wtf is enough?) or is this just political hackery to help Obama dispel concerns about his deficits?

State of the Union: Apparently, Hugh Hefner is Responsible for Abstinence

My column for this week is up at Forbes, and inevitably, deals with the State of the Union address last night.

But the portion that really floored me was Obama’s taking credit for the increase in US oil and gas production over the last several years.  It is certainly true that, against all predictions of peak oil, new technologies have helped drive a surge in US hydrocarbon production.  Combined with a recession-driven drop in demand, America’s oil imports as a percentage of its total use has dropped to 45.6%, the lowest level in over 15 years.

This surge in energy production is a fabulous reminder of how markets work.  For years I have written that the peak oil folks were missing something fundamental by performing an overly static analysis.  They looked at current “proven” reserves of oil and gas and projected forward how many years it would take for these to run out.  But oil and gas reserve numbers only make sense in the context of a particular set of technologies and pricing levels.  As hydrocarbons run short, rising prices tend to spur both innovation and new, more expensive exploration activity.  Oil and gas companies are once again proving Julian Simon’s addage that the only true scarcity is human brain power, and they should be given a lot of credit for the recent production boom.

The one person who deserves no credit for this boom is Barack Obama....

Read it all.

Crony Capitalism

Perhaps I do not give Sarah Palin enough credit, because this is a really good passage, from one of her recent speeches (emphasis added by Mickey Kaus)

We sent a new class of leaders to D.C., but immediately the permanent political class tried to co-opt them – because the reality is we are governed by a permanent political class, until we change that. They talk endlessly about cutting government spending, and yet they keep spending more. They talk about massive unsustainable debt, and yet they keep incurring more. They spend, they print, they borrow, they spend more, and then they stick us with the bill. Then they pat their own backs, and they claim that they faced and “solved” the debt crisis that they got us in, but when we were humiliated in front of the world with our country’s first credit downgrade, they promptly went on vacation.

No, they don’t feel the same urgency that we do. But why should they? For them business is good; business is very good.  Seven of the ten wealthiest counties are suburbs of Washington, D.C. Polls there actually – and usually I say polls, eh, they’re for strippers and cross country skiers – but polls in those parts show that some people there believe that the economy has actually improved. See, there may not be a recession in Georgetown, but there is in the rest of America.

Yeah, the permanent political class – they’re doing just fine. Ever notice how so many of them arrive in Washington, D.C. of modest means and then miraculously throughout the years they end up becoming very, very wealthy? Well, it’s because they derive power and their wealth from their access to our money – to taxpayer dollars.  They use it to bail out their friends on Wall Street and their corporate cronies, and to reward campaign contributors, and to buy votes via earmarks. There is so much waste. And there is a name for this: It’s called corporate crony capitalism. This is not the capitalism of free men and free markets, of innovation and hard work and ethics, of sacrifice and of risk. No, this is the capitalism of connections and government bailouts and handouts, of waste and influence peddling and corporate welfare. This is the crony capitalism that destroyed Europe’s economies. It’s the collusion of big government and big business and big finance to the detriment of all the rest – to the little guys. It’s a slap in the face to our small business owners – the true entrepreneurs, the job creators accounting for 70% of the jobs in America, it’s you who own these small businesses, you’re the economic engine, but you don’t grease the wheels of government power.

So, do you want to know why the permanent political class doesn’t really want to cut any spending? Do you want to know why nothing ever really gets done? It’s because there’s nothing in it for them. They’ve got a lot of mouths to feed – a lot of corporate lobbyists and a lot of special interests that are counting on them to keep the good times and the money rolling along.

WOW. Our Countries Leaders Sure Have Come A Long Way

From ABC News via Q&O

At a million-dollar San Francisco fundraiser today, President Obama warned his recession-battered supporters that if he loses the 2012 election it could herald a new, painful era of self-reliance in America.

“The one thing that we absolutely know for sure is that if we don’t work even harder than we did in 2008, then we’re going to have a government that tells the American people, ‘you are on your own,’” Obama told a crowd of 200 donors over lunch at the W Hotel.

At least he is making the choice clear.

Ka-chunk Ka-chunk

That is the sound of the printing presses running 24/7.  Because that appears to be how we are funding all of Obama's spending right now (source)

When folks say they are not worried about the deficit, because folks still seem eager to buy our debt (as evidenced by the low interest rates) note that the general public has been a net seller of US debt the first 2 quarters of 2011.  In fact, the only buyer has been Uncle Sam himself, buying up the debt with newly minted cash (or electrons, really).

One other interesting issue, the Fed seems to have been soaking up the money supply in the early days of the recession, before the high-profile business and financial failures really got things moving downward.

Minimum Wage: Demand Curves Really Do Slope Down

Via Carpe Diem, from William Even and David Macpherson:

"Each 10% increase in the minimum wage [since 2007] was accompanied by a decrease in employment of 1.2% for Hispanic males, 2.5% for white males and 6.5% for black males. When looking at hours worked, we saw a similar effect: Each 10% increase in the minimum wage reduced hours worked by 1.7% for Hispanic males, 3% for white males and 6.6% for black males.

The data clearly show a disproportionate loss of hours and employment for black young adults. Let's put these lost opportunities into context. Between 2007 and 2010, employment for 16- to 24-year-old black males fell by approximately 34,300 as a result of the recession; over the same time period, approximately 26,400 lost their jobs as a result of increases in the minimum wage across the 50 states and at the federal level.

Stossel on Keynsianism

This is right on the mark

His description of what Keynesians believe is correct. It's why Keynesians, including the President, thought that government spending would stimulate the economy. As Klein points out, "Obama didn't just have a team of Keynesians. He had the Keynesian all-star team."

Right, but then Klein gets it wrong: "The idea [behind Keynesian economics], in other words, is not about whether the government spends money better than individuals."

Yes it is! Obama and Klein think that during a recession, "the financial system scares business and consumers so badly that they hoard money, which worsens the damage to the system." Therefore, the government must take money away from individuals, and spend it elsewhere. Eric Cantor correctly pointed out that the theory is: "government can be counted on to spend more wisely than the people."

Part of the problem here is in nomenclature.  People don't think of saving as spending.  So I will shift a word a bit.  The idea of Keynesian economics is that the government can deploy your money better than individuals can.

The cause of the asset bubble for this argument is almost irrelevant.  Households, finding themselves over-leveraged, want to deleverage by buying fewer things and saving more money.  The Keynesians explicitly wanted to prevent this by taking the money that would have been saved and spending it.  This destroys value in two ways.  As Stossel points out, it shifts money from being deployed with an eye on productivity to being deployed with an eye on politics.  From a value-creation standpoint, this has to destroy value.  In addition, by slowing the process of deleveraging, it slows the recovery, unless individuals in the mean time can be convinced that they really don't need to deleverage.  And is that really the post-bubble message we should be sending out?