Posts tagged ‘recovery’

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

Everything Looks Like a Nail When You Have A Hammer

Kevin Drum quotes Hugo Dixon on the Greek recovery:

Greece is undergoing an astonishing financial rebound. Two years ago, the country looked like it was set for a messy default and exit from the euro. Now it is on the verge of returning to the bond market with the issue of 2 billion euros of five-year paper.

There are still political risks, and the real economy is only now starting to turn. But the financial recovery is impressive. The 10-year bond yield, which hit 30 percent after the debt restructuring of two years ago, is now 6.2 percent....The changed mood in the markets is mainly down to external factors: the European Central Bank’s promise to “do whatever it takes” to save the euro two years ago; and the more recent end of investors’ love affair with emerging markets, meaning the liquidity sloshing around the global economy has been hunting for bargains in other places such as Greece.

That said, the centre-right government of Antonis Samaras has surprised observers at home and abroad by its ability to continue with the fiscal and structural reforms started by his predecessors. The most important successes have been reform of the labour market, which has restored Greece’s competiveness, and the achievement last year of a “primary” budgetary surplus before interest payments.

Color me suspicious.  Both the media and investors fall for this kind of thing all the time -- the dead cat bounce masquerading as a structural improvement.  I hope like hell Greece has gotten its act together, but I would not bet my own money on it.

Anyway, that is a bit beside the point.  I found Drum's conclusion from all this odd:

If this keeps up—and that's still a big if—it also might be a lesson in the virtue of kicking the can down the road. Back in 2012, lots of commenters, including me, believed that the eurozone had deep structural problems that couldn't be solved by running fire drills every six months or so and then hoping against hope that things would get better. But maybe they will! This probably still wasn't the best way of forging a recovery of the eurozone, but so far, it seems to have worked at least a little better than the pessimists imagined. Maybe sometimes kicking the can is a good idea after all.

For those that are not frequent readers of his, I need to tell you that one of the themes he has been pounding on of late is that the US should not be worried about either its debt levels or inflation -- attempting to rebut the most obvious critiques of his strong support for more deficit spending and monetary stimulus.

I would have thought the obvious moral of this story was that austerity and dismantling all sorts of progressive labor market claptrap led to a recovery far faster than expected**.  But since Drum opposes all those steps, his  conclusion seems to be simply a return to his frequent theme that debt is A-OK and we shouldn't be worried about addressing it any time soon.

** I don't believe for a moment that Greece has really changed the worst of its structural labor market, regulatory,  and taxation issues.  This story gets written all the time about countries like, say, Argentina.  Sustained incompetence is not really newsworthy, which is likely one reason we get so few African stories.  They would all be like "Nigeria still a mess."  A false recovery story gives the media two story cycles, one for the false recovery and one for the inevitable sinking back into the pit.

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.

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.

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.")

Chutzpah of the Day

It is interesting that the buck just never stops at this President's desk.  Apparently, the reason for the delay in approval of the Keystone Pipeline is the Republicans.

The approval process for the Keystone XL pipeline has been delayed by Republicans playing “political games,” Treasury Secretary Jack Lew says.

Lew said that the economy is “strong” and more resilient after 40 months of growth but the economic recovery is not fast enough, which led Chris Wallace on “Fox News Sunday” to ask whether approving the pipeline would help speed up job growth.

“If you’re so interested in creating more jobs, why not approve the Keystone pipeline, which will create tens of thousands of jobs?” Wallace asked of the pipeline under review.

“There were some political games that were played, that took it off the trail and path to completion, where Republicans put it out there as something that was put on a timetable that it could not be resolved. It caused a delay,” Lew said. “Playing political games with something like this was a mistake.”

 

When Environmentally Sustainable Actually Was Sustainable

Many of your know that my company operates public parks.  So I see a lot of different approaches to park design and construction.  Of late I have been observing a trend in "environmental sustainability" in park design that is actually the opposite.

The US Forest Service has built more campgrounds, by far, than any other entity in the world.  For decades, particularly in the western United States, the USFS had a very clear idea about what they wanted in a campground -- they wanted it to be well-integrated with nature, simple, and lightly developed.  They eschewed amenities like pools and playgrounds and shuffleboard.  They avoided building structures except bathroom and shower buildings.  The camp sites were simple, often unpaved with a table and fire ring and a place for a tent.  They used nature itself to make these sites beautiful, keeping the environment natural and creating buffers of trees and natural vegetation between sites.   I have never seen an irrigation system in a western USFS campground -- if it doesn't grow naturally there, it doesn't grow.

This has proven to be an eminently sustainable design.  With the exception of their underground water systems, which tend to suck, they are easy to maintain.  There is not much to go wrong.  The sites need new gravel every once in a while.  Every 5-10 years the tables and fire rings needs replacement, hardly a daunting task.  And every 20-30 years the bathrooms needs refurbishment or replacement.  The design brilliance was in the placement of the sites and their integration with the natural environment.

Over the last several months, I have been presented with plans from three different public parks agencies for parks they want to redevelop.   Each of these have been $10+ million capital projects and each one had a major goal of being "sustainable."   I have run away from all three.  Why -- because each and every one will be incredibly expensive and resource intensive to operate and of questionable popularity with the public.  Sustainability today seems to mean "over-developed with a lot of maintenance-intensive facilities".

What each of these projects has had in common are a myriad of aggressively architected buildings - not just bathrooms but community rooms and offices and interpretive centers.  These buildings have been beautiful and complex, made from expensive materials like stainless steel and fine stone.  They have also had a lot of fiddly bits, like rainwater collection and recycling systems and solar and windmills.  They have automatic plumbing valves that never seem to work right.  The grounds have all been heavily landscaped, with large lawns that require water and mowing, with non-native plants that need all kinds of care.  Rather than a traditional sand pad for tents they have elaborate wooden platforms.

The plans for these facilities are beautiful.  They win awards.  In fact, I am increasingly convinced that that is their whole point, to increase prestige of the designer and the agency that hired them through awards.  But they make no sense as a recreation facility.  In 10 years, they will look like hell.  Or sooner, since one agency that is in the process of spending a $22 million bond issue on 5 campgrounds seems to not have one dollar budgeted for operation and maintenance.

These things actually win awards for sustainability, which generally means they save money on one input at the expense of increasing many others.  One design  got attention for having grass on the roofs, which perhaps saved a few cents of electricity at the cost of having to irrigate and mow the roof (not to mention the extra roof bracing to carry the load).  I briefly operated a campground that had a rainwater recovery system on the bathrooms, which required about 5 hours of labor each week to keep clean and running to save about a dollar of water costs.

Tony Soprano Environmentalism

The Ecuadoran $18 billion court decision is turning out to be a monumental case of environmental fraud.  I am willing to believe that early critics of Texaco (now Chevron) had legitimate beefs about the company's stewardship in its drilling operations in the 1970's in the Amazon.  However, all semblance of principle has gone right out the window in a gigantic money grab.

A while back, it was reported that environmentalists (featured in the movie "Crude" were captured in the outtakes of the movie discussing how they lied about the science to the courts in order to score a big payday (bonus points for Obama appointing one of the fraudsters to the National Academy of Sciences).  See the link for the video evidence.

Past fraud revelations have cast doubt on the key scientific report submitted to the court as part of the proceedings, a report that is now known to have been ghost-written by the plaintiffs.  However, supporters of the judgement against Chevron have argued that the judge has always claimed that this study did not sway his decision in the case.  Now we know what did sway his decision:

Today new allegations of deceit and wrongdoing were leveled against the plaintiffs' lawyers bringing the already deeply troubled environmental suit against Chevron in Lago Agrio, Ecuador, which stems from Texaco's oil drilling in the Ecuadorian Amazon between 1964 and 1992. (Texaco was acquired by Chevron in 2001.)

In Manhattan federal district court this morning, Chevron filed the declaration of a former Ecuadorian judge, Alberto Guerra, who describes how he and a second former judge, Nicolás Zambrano, allegedly allowed the plaintiffs lawyers to ghostwrite their entire 188-page, $18.2 billion judgment against Chevron in exchange for a promise of $500,000 from the anticipated recovery.

Forgetting the Fed -- Why a Recovery May Actually Increase Public Debt

Note:  I am not an expert on the Fed or the operation of the money supply.  Let me know if I am missing something fundamental below

Kevin Drum dredges up this chart from somewhere to supposedly demonstrate that only a little bit of spending cuts are needed to achieve fiscal stability.

Likely the numbers in this chart are a total crock - spending cuts over 10 years are never as large as the government forecasts and tax increases, particularly on the rich, seldom yield as much revenue as expected.

But leave those concerns aside.  What about the Fed?  The debt as a percent of GDP shown for 2012 in this chart is around 72%.  Though it is not labelled as such, this means that this chart is showing public, rather than total, government debt.  The difference is the amount of debt held by federal agencies.  Of late, this amount has been increasing rapidly as the Fed buys Federal debt with printed money.  Currently the total debt as a percent of GDP is something like 101%.

The Left likes to use the public debt number, both because it is lower and because it has been rising more slowly than total debt (due to the unprecedented growth of the Fed's balance sheet the last several years).  But if one insists on making 10-year forecasts of public debt rather than total debt, then one must also forecast Fed actions as part of the mix.

Specifically, the Fed almost certainly will have to start selling some of the debt on its books to the public when the economy starts to recover.  That, at least, is the theory as I understand it: when interest rates can't be lowered further, the Fed can apply further stimulus via quantitative easing, the expansion of the money supply achieved by buying US debt with printed money.  But the flip side of that theory is that when the economy starts to heat up, that debt has to be sold again, sopping up the excess money supply to avoid inflation.  In effect, this will increase the public debt relative to the total debt.

It is pretty clear that the authors of this chart have not assumed any selling of debt from the Fed balance sheet.  The Fed holds about $2 trillion in assets more than it held before the financial crisis, so that selling these into a recovery would increase the public debt as a percent of GDP by 12 points.  In fact, I don't know how they get the red line dropping like it does unless they assume the current QE goes on forever, ie that the FED continues to sop up a half trillion dollars or so of debt every year and takes it out of public hands.

This is incredibly unrealistic.  While a recovery will likely be the one thing that tends to slow the rise of total debt, it may well force the Fed to dump a lot of its balance sheet (and certainly end QE), leading to a rise in public debt.

Here is my prediction:  This is the last year that the Left will insist that public debt is the right number to look at (as opposed to total debt).  With a reversal in QE, as well as the reversal in Social Security cash flow, public debt will soon be rising faster than total debt, and the Left will begin to assure us that total debt rather than public debt is the right number to look at.

So How Did It Go?

Since I blogged on the colonoscopy run-up, I supposed I am obligated to close the loop.  As Dave Barry warns, the prep is the bad part.  A day of eating lime jello combined with five or six hours of massive diarrhea.  Uncomfortable, mildly embarrassing, but quite manageable. The good part is that you know it is coming, you can prepare for it, and you know it is going to be over by the end of the day.

The procedure was a breeze.  The drugs are like a time machine.  One minute you are laying down, with the IV inserted and the next minute you are teleported 45 minutes into the future and in recovery with the whole thing done, feeling mellow.  No pain, before or afterwards.

Only two after-effects.  One, they apparently inflate your colon with air, like a bicycle tire tube, so they can see better.  Once I woke up, I passed gas in epic style, reminiscent of Peter Griffin in a Family Guy episode.  Second, I was freaking ravenous, since I hadn't eaten anything solid for 36 hours and anything at all for 12 hours.  That was solved by picking up the largest steak I could find at Whole Foods on the way home.

All is well medically, by the way.

Myth-Making By the Left on Europe Continues

The Left continues to push the myth that government "austerity"  (defined as still running a massive deficit but running a slightly smaller massive deficit) is somehow pushing Europe into a depression.  Well, this myth-making worked with Hoover, who is generally thought to have worsened the Depression through austerity despite the reality that he substantially increased government spending.

It is almost impossible to spot this mythical austerity beast in action in these European countries.  Sure, they talk about austerity, and deficit reduction, and spending increases, but if such talk were reality we would have a balanced budget in this country.  If one looks at actual government spending in European nations, its impossible to find a substantial decline.  Perhaps they are talking about tax increases, which I would oppose and have been occurring, but I doubt the Left is complaining about tax increases.

Seriously, I would post the chart showing the spending declines but I can't because I keep following links and have yet to find one.  I keep seeing quotes about "commitment" to austerity, but no actual evidence of such.

Let's take Britain.  Paul Krugman specifically lashed out at "austerity" programs there are undermining the British and European economy.  So, from this source, here is actual and budgeted British government spending by year, in billions of pounds:

2007: 544.0

2008: 575.7

2009: 621.5

2010:  660.6

2011:  683.4

2012:  703.4

2013: 722.2

Seriously, I will believe the so-called austerity when someone shows it to me.  And this is not even to mention the irresponsibility of demanding more deficit spending without even acknowledging the fact that whole countries already have so much debt they are teetering on the edge of bankruptcy.

Here is the European problem -- they are pouring hundreds of billions of Euro into bailing out failed banks and governments.  They are effectively taking massive amounts of available resources out of productive hands and pouring it into failed institutions.   Had they (or we) let these institutions crash four years ago, Europe would be seeing a recovery today.  The hundreds of billions of Euros used to keep banks on life support could have instead been used to mitigate the short term effects of bigger financial crash.

New Greek Bailout Announced

It is an open question how long this bailout will plug the dam.  I continue to maintain the position that Greece is going to have to be let out of the Euro. Pulling this Band-Aid off a millimeter at a time is delaying any possible recovery of the Greek economy, and really the European economy, indefinitely.  All to protect the solvency of a number of private banks (or perhaps more accurately, to protect the solvency of the counter-parties who wrote the CDO's on all that debt).

Anyway, the interesting part for me is that with this bailout, the total cumulative charity sent the Greek's way by other European countries now exceeds Greek GDP, by a lot.

Lesson We Keep Missing in the Financial Crisis: Bite the Bullet Now

Investors have a saying - your first loss is your best loss.  In other words, if you think an investment sucks, swallow your pride, take your lumps, and get out entirely now.

This is NOT how we have dealt with the financial crisis.  Through a series of bailouts, we have tried to keep failing financial institutions and countries on life support.   We have dragged out the reckoning on mortgages, so we still have not had a real clearing in the real estate market.  Worse, we have postponed, even entirely interrupted, financial accountability for those who made bad investments or took on too much debt.

Here is an interesting counter-example - Iceland, which basically went entirely bankrupt along with pretty much all their banks, is on the road to recovery.

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."

Weird Coincidences

I spent four days last week trying to get my online backup file restored for Quickbooks, our accounting software.

One morning, we woke up and found our entire QB file corrupted.  I would insert cautions to QB users about such occurrences, but I think everyone already knows the problem.  Such a warning would be like reminding a New York resident about street crime.  We QB users always feel like we are walking on eggshells with QB, ready at any moment for everything to go haywire.  We live with it, because the program is useful and ubiquitous.

So I perform a backup every day, but recently started using the QB online backup facility.  This automatically backs up the file every day.  I still make a local backup from time to time, but I have gotten lazy.  When things went south the other day, my online backup was 10 days old, an eternity in our business.  I sent QB our file to try to execute a repair, but in the mean time I went to the restore command to restore the most recent online backup before the corruption.

Fail.  Fail.  Fail.  Fail.  After four tries, each 3 hours each, I got the idea maybe it was not going to work.  So I called QB and got their Phillipines tech support desk.  They walked me through some steps.  Fail. Fail. Fail.

Through all this time, we were entirely shut down accounting-wise.  Finally, in exasperation, I asked them to just post my backup file on an FTP server somewhere.  After all, we could both see the file exists, and it was just the QB proprietary file transfer protocol that was failing to restore it.  Well, three countries and four departments later, no one could post the file on an FTP server.  Or to my Amazon S3 account.  Or to a password-protected web page.

For God sakes, this is a software company?  Finally, they agreed to have someone at the third party contractor who runs the servers try to put the file on a DVD and mail it to me, LOL.

It was almost exactly at this point that I opened this XKCD comic:

I tell you, sometimes that site is totally dialed into my brain.  (by the way, as I blog, a signed version of this comic on the wall behind my monitor).

PS- eventually the Quickbooks people rebuilt my corrupted file before I could ever get the backup in my hands.  Object lesson here - don't ever give up on the original file, the Intuit guys have twice in my life fixed a file that seemed corrupted beyond all hope of recovery.

Someone Must Have Been Reading My Blog

On July 8 I showed a series of job growth charts showing that the recovery in private employment virtually ceased almost on the exact same day Obamacare passed.

Via Q&O, Heritage has done a similar analysis, and come to a similar observation, though with much nicer and more professional graphics than I had.

Correlation is not causation, but in fact we have a lot of independent evidence (including my own experience) that many small and middle sized companies have changed their hiring plans based on costs and uncertainties of Obamacare.

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?

 

Obamacare and the Lost Recovery

Corporate profitability is back up, and output has returned to nearly pre-recession levels.  But employment still has not recovered.  Why?

Well, I am sure there are a lot of reasons, but one potential reason I have pointed out for a while are Federal efforts to increase the cost of employment.  If the true cost of an employee is higher, or even more uncertain, then investments are going to be funneled preferentially into capital rather than labor.  Certainly that is what our company has been doing for a while.  Thus productivity is way up, and employment is low.

I believe that Obamacare is a very important element in raising the cost and uncertainty of hiring new employees, particularly for small and middle-sized businesses that so often drive much of American employment growth.  Certainly in the NFIB, the small business group to which my company belongs, the entire character of our internal discussions has changed.  Three years ago we might have been discussing a mix of 10 or 12 issues we had.  Now all you hear is Obamacare discussion.  [Note - some on the Left like Kevin Drum argue that this concern is irrational.  I seldom take seriously the opinion of people who have never tried to make a payroll about what business people should and should not be concerned about, but it almost does not matter.  Whether it is irrational or not, the concern is a fact.]

Let me share a chart I just saw on Kevin Drum's blog (which he used to make an entirely different point).  Let's look at the recession up to March 2010:

Look at the orange line which is private sector employment growth (the blue bars include government and get squirrelly in 2010 due to temporary census workers).  This looks like a normal (though deep) recession with a nice recovery beginning.

Then, on March 18, 2010, Obamacare passed.  Now lets play the numbers forward.  Again, pay attention to the private job growth in orange - the blue spike in April in May is all temporary census workers

Correlation is not equal to causation, but Obamacare looks to me to be exactly like the National Industrial Recovery Act under FDR, a huge source of regime uncertainty and stab at free markets that killed an incipient recovery.

Labor and Capital Mobility, and the Recovery

I was thinking this weekend that one reason the US recovery may be slow is related to labor and capital mobility.

One substantial avenue to recovery in a recession has always been labor and capital mobility.  The fast labor and capital can be redeployed from losing industries to improving ones, the faster a recovery occurs.  One reasons Japan and certain European countries have had slower recoveries in the past than the US is that our mobility was higher and barriers to entrepreneurship lower.

But it strikes me that two things are going on in the US to endanger this advantage we have always enjoyed

  1. The government push for home ownership has turned out to be a trap.  Not only did it help create the bubble, whose bursting destroyed a lot of real and paper wealth, but it has greatly reduced labor mobility.  Home ownership makes labor mobility much harder even in a good housing market when one can sell his or her home easily.  In a bad market like today, very few feel they can pick up and move.  I might want to give up on the construction industry in Michigan and move to the oil patch of North Dakota, but how can I do that if I own a home that I can't sell?  A number of other actions, most notably the repeated extension of unemployment benefits, contributes to the lack of mobility.
  2. The government seems hell bent on doing everything it can to prevent, even reverse the tide, of capital mobility.  The government shifted tends of billions of capital into auto industry hands that had destroyed value for decades.  It continues to put the brakes on what should be an oil and gas exploration and production boom.  It kills health industries like light bulbs and shifts billions into useless politically powerful hands making ethanol.  The NLRB is preventing major American manufacturers from making factory investments in southern states.

In the late 1970's, the auto industry was in trouble but the oil patch was booming.  The Houston newspapers sold well in Michigan, popular for their help wanted ads.  From space, the Interstate highways between the Detroit and Texas probably looked orange from all the U-haul trailers.

The exact same dynamics could and should be occurring today.  Capital and labor should be shifting from, for example, the failing auto industry to the growing energy sector.  But the government today stands to block this reallocation. It is raising taxes on oil companies and placing barriers to their growth, while giving tax money to the auto industry and using every bit of power it can to sustain it.  Combine this type of barrier to capital flows (and auto/energy is but a couple of examples) with rising barriers to entrepreneurship, and it should be no surprise that growth is abysmal.

This is what happens in a corporate state.  Past winners retain huge amounts of power in the government long after their companies have become senescent in the marketplace.  Politicians argue for the power to pick winners and losers in the economy but generally use it only to protect current competitors and stand in the way of progress.

I Too Found This Puzzling

The other day I was reading an article on the crash of Air France flight 447, discussing recovery of the black box (two years after the crash).  It was suspected that the air speed measurement devices may have failed, thus impairing the automatic pilot, but it was not understood why the pilots were unable to fly the plane manually.  Was something else going wrong?  Did automatic systems, operating off bad data, override manual controls somehow?

The article said that the black box showed the plane went into a stall, and the pilots spent much of the fall pulling back on the yoke to regain altitude.  This made zero sense to me.  A stall occurs when the wing is angled to steeply.  The wing generates lift because the air on top of the wing must follow a longer curve than the air on the bottom of the wing, and thus must move at higher velocity.  This higher velocity results in lower pressures.  In effect, the plane is sucked up.  When the wing is too steeply angled, the air on the top of the wing breaks away from the surface, and lift is lost.

It is therefore absolutely fundamental in stall situations to drop the nose.  This does two things -- it decreases the wing angle out of stall territory, and it increases speed, which also increases lift.

Apparently, the experts are just as befuddled as I was reading the data.  Dropping the nose in a stall is on the first page of pilot 101.  This is not some arcane fact buried on page 876 of the textbook.  This is so basic I know it and I don't have a pilots license.  But apparently the pilots of 447 were yanking up on the nose through the whole long fall to Earth.

Regime Uncertainty

Kevin Drum doesn't buy the regime uncertainty argument as a partial explanation of the slow recovery.

Here's what's remarkable: Carter, a law professor at Yale, apparently never once bothered to ask this guy just what regulations he's talking about. Is he concerned with general stuff like the healthcare law? Or something highly specific to his industry? Or what?

Regardless, I've heard this kind of blowhard conversation too often to take it seriously. Sure, it's possible this guy manufactures canisters for nuclear waste or something, and there's a big regulatory change for nuclear waste storage that's been in the works for years and has been causing everyone in the industry heartburn for as long as they can remember. But the simple fact is that regulatory uncertainty is no greater today than it's ever been. Financialuncertainty is high, but the Obama adminstration just hasn't been overhauling regs that affect the cost of new workers any more than usual. The only substantial exception is the new healthcare law, and if you oppose it that's fine. But it was passed over a year ago and its effects are pretty easy to project.

First, the costs of the health care law are NOT easy to project, and are made even harder when your company might or might not get waivers from certain provisions.    Second, he seems to forget cap and trade, first by law and then by executive fiat; the NLRB's new veto power over corporate relocations it exercised with Boeing; the absurdly turbulent tax/regulatory/permitting regime in the energy field, and particularly oil and gas.  How about trillion dollar stimulus projects, that until very recently Obama was still talking about replicating (and Krugman begs for to this day).  I could go on and on.  This is spoke just like a person who never had to run a business.

Further, I wrote this in the comments section:

I think you are both right and wrong.  I am sure the discussion about this is to some extent overblown.  But you are thinking about business and hiring much too narrowly.

You seem to have a mental model of business showing up at the door, and someone turning that business down because they don't want to hire an employee to serve it (or out of sheer petulance because Fox News told them to sit on their hands, lol).  You find it unlikely anyone would refuse the business, and so do I.

But I run a small to medium size business, and a lot of hiring decisions don't work that way.    I do have some situations that fit your model - I have a campground that is really busy this year, so we hired more people to serve the volume.   No problem.

But most of my hiring decisions are effectively investments.  I am going to create a new position, pay money to train that person, and pay their wage for a while in advance of demand.  Or I am going to open a new site or department or location and make a lot of investment, and the return on investment may be very sensitive to small changes in labor or regulatory costs.

For our business, with labor costs over 50% of costs, the issue is definitely labor costs.  Our pre-tax margins are in the 6-7% range.  So if labor costs are 60% of revenues, then a 10% change in labor costs might wipe out the margin entirely, and a much smaller change in costs might flip the investment from making sense to not making sense.

We run a seasonal business with part-time workers who are older and on Medicare.  Regulations about exactly how much we will have to pay under Obamacare have not been written, so we have no idea how much our employment costs will go up in 2014, so we sit and wait.  I have cancelled two planned campground construction projects in the last 6 months because we have no freaking idea if they will make money.

If I am having trouble with just this one law figuring out whether to make investments, what are, say, oil companies doing in evaluating investments when they have absolutely no idea what their taxes will be, whether they will be permitted or not to drill, or whether they will be subject to cap and trade?

One other thought, it strikes me that there is a lot of good scholarship that suggests that the Great Depression was extended by just this kind of regime uncertainty.  Now, of course, the proposed structural changes to the economy being proposed at the time were more radical than anything on the table today.  The National Industrial Recovery Act was essentially an experiment in Mussolini-style economic corporatism, until most of it was struck down by the Supreme Court.   Nothing so radical is being proposed (unless you work in health care).

Look, I know the Left has convinced itself that only consumer demand matters in an economy, but business investment has simply got to matter in a recovery.   If the returns on future investments are harder to predict, and therefore riskier, businesses are going to apply a higher hurdle rate to new investments, meaning they don't stop entirely, but do invest less.

One interesting may to confirm this some day would be to look back and see if larger corporations with political access invested more than smaller ones or ones with less access.  Did GE, who clearly can get whatever it wants right now from the government, invest more than a small company or even than Exxon, which is on the political outs?  If so, this in my mind would confirm the regime uncertainty hypothesis, because it means that the companies doing most of the investing were the ones confident that they could shape the mandates coming out of the government in their favor.

Beyond regime uncertainty, if you want to talk about Obama and the recovery, you have to mention that a trillion dollars was diverted from private hands to public hands.  Does anyone believe that taking a trillion dollars out of whatever investments private actors would have used the money for and diverting most of it to help maintain government payrolls is really the way to increase the strength and productivity of the economy?

Believe it or Not, Steroids Have an Actual Medical Use

The other day I was listening to a national sports-talk radio show and they were discussing an prominent athelete's recent injury.  They were expressing concern that the doctor who was treating the athlete (succesfully, it seemed) had treated other non-ahtlete patients with HGH and steroids.

Well, duh.  This is what has driven me crazy about the whole steroid craze.  Steroids were not invented to as sports performance enhancing drugs.  They were invented because they had a variety of medical uses, including aiding recovery from certain injuries.   Is the sports world really better off if we deny, say, Tiger Woods the injury-recovery tools that any non-athlete would have access to?

I will add here, just to tick people off and highlight yet another area where I am grossly out of step from the rest of America, that I have no particular problem with PED's in sports.  It's fine if governing bodies for whatever reason want to ban them, but its not a straight forward case to me.  These drugs have dangers, but getting our panties in a knot about people's informed choices on these dangers seems hypocritical to me as we routinely attend sports that have been demonstrated to cause, for example, major brain damage in athletes (e.g. football, hockey, boxing).

I suppose I get the comparability issue (people like records from 1900 to be comparable to those today) but to some extent this is outright hypocrisy as well.  Don't modern training techniques, like altitude sleeping chambers, equally make a mockery of comparability?  Baseball cries the most about steroids messing up the record books, then it does stuff like lower the pitching mound to help hitters and add the DH.

On the plus side, isn't there value to seeing our athletes play longer?  Wouldn't it be nice (if you are not a Red Sox fan) to see Derek Jeter play a little longer?  To see Tiger Woods return quicker from injuries?

And don't even get me started on the government's campaign to throw steroid users like Barry Bonds in jail.  As I said earlier, I don't have a particular problem if private governing bodies choose, for competitive or marketing reasons, to ban PED's and enforce that ban within their community.  But throwing Barry Bonds in jail for choice he made with his own body?

The Left is Simply Unserious

This is the response from the Left to a proposed 1.6% cut in the Federal budget, that would reduce the annual deficit by a whopping 6%.  Greece here we come!

The Senate is expected to vote this week on alternative plans to approve spending for the rest of this year.  They will vote on whether to agree to the extreme cuts passed by the House (H.R. 1) - $65 billion less than last year's spending for domestic programs.  The House bill will deny vital services to millions of people, from young children to seniors. Please tell your Senators to VOTE NO on H.R. 1 and to vote FOR the Senate alternative. The proposed Senate bill cuts spending $6.5 billion below last year's levels, compared to more than $60 billion in cuts in H.R. 1.  Most of the extreme cuts in the House plan listed below are not made in the Senate bill.

Call NOW toll-free 888-245-0215 (the vote could be as early as Tuesday)
Please call both your Senators and tell them to VOTE NO on H.R. 1 and FOR the Senate full-year FY 2011 bill.  Tell them to vote NO on harsh and unprecedented cuts that will deny health care, education, food, housing, and jobs to millions of the poorest and most vulnerable Americans, while at the same time jeopardizing the economic recovery for all.