I am travelling over the next few days and have limited time to write my blog. Today though I am writing about the latest US National Accounts data which I had the chance to examine carefully over the last couple of days. Clearly the news that real GDP growth has falling sharply in the first three months of 2011 is evidence that the current policy mix with an emphasis on public spending cuts is not working. At the same time the political debate is about to consider the public debt limit which expires in a few weeks. The conservatives are once again threatening not to extend this limit. One notable commentator said the failure of the US Congress to extend the limit would be the “most asinine act’ ever by them. I think that was an understatement. When you put the debate in the context of what is happening in the real economy (real growth down, jobless claims up) you have to conclude that the current behaviour of the US political leadership is worse than asinine.
The US Congress is about to debate whether they raise the legal limit on government borrowing. The limit expires on May 16, 2011.
The political sentiment at present is that more net spending cuts will be demanded by the majority in the government in order to approve any new limits. A stalemate is likely for some period while the conservatives (in both parties) posture in the media about how tough they are. The reality is that the whole debate is pathetically ill-informed.
I think it is always better to focus the mind of what is important when entering these debates.
The US Bureau of Labor Statistics started compiling their “>Alternative measures of labour underutilization in January 1994. They publish 6 measures (U-1 to U-6) on a monthly basis as part of their Labour Force data releases. U-3 is the official unemployment rate (total unemployed as a percent of the civilian labor force) whereas U-6 is their broadest measure and is defined as:
… total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.
The following graph compares the official unemployment rate (U-3) with the broader measure (U-6) since January 1994. The impact of the two recent recessions (2001 and 2008-09) is apparent. The unemployment rate rises and then stalls before growth slowly reduces it. The length of the current recession is very striking. The unemployment rate has barely moved since it started to increase sharply in early 2009.
I wondered about that level of inertia – which is a common characteristic of the way labour markets tend to operate elsewhere.
The following graph extends that observation. It shows the national US unemployment rate (U3 measure) from 1950 to 2011. There have clearly been periods when the unemployment rate has soared. But while persistence is a characteristic of advanced nation labour markets the US labour market has typically recovered more quickly. Se how quickly the peak unemployment rate turns.
However, it is clear that in the two recent recessions (the apex of the neo-liberal era) that has not been the case. Much of that, in my view, has been due to the increasing constraint that the political process is putting on the capacity of fiscal policy to respond and the excessive reliance on monetary policy as the primary counter-stabilisation tool.
You only have to think back to the Press conference last week held by the Chairman of the US Federal Reserve where he expressed his concern over the size of the fiscal deficit and the hope that “loose” monetary policy would provide enough jobs to bring down the unemployment rate to realise how skewed the policy debate is in the current ear. Please read my blog – US Federal Reserve chairman loses his independence – for more discussion on this point.
I was interested to read this story – Warren Buffett: Failure to Raise Debt Limit Would Be ‘Most Asinine Act’ Ever By Congress – (Saturday, April 30, 2011).
The report quotes Buffett as saying that he:
… doesn’t want the nation to keep increasing its debt relative to GDP … [but that] … there shouldn’t be a legislated debt limit to begin with, because circumstances change.
Yes, the business cycle is uncertain. Locking the government into artificial rules that continually restrict its capacity to respond to the vagaries of the business cycle is poor policy.
Buffett said that the US will not:
… have a debt crisis of any kind as long as we keep issuing our notes in our own currency.
100 per cent agree. If the government surrenders it currency-issuing monopoly and thus becomes non-sovereign in the US dollar then default risk would be something to worry about.
The Washington Post used to be a paper worth reading (even getting the hard copy delivered to Australia before the Internet came along). Think back to the 1970s and its work in exposing the corrupt Nixon regime. But those days are long gone.
Now it seems to be a place for ill-informed journalists who rehearse the usual myths about the impending financial demise of the US government on an almost daily basis.
On May Day when the people of the world should be marching in the streets – this article appeared in the Post – Running in the red: How the U.S., on the road to surplus, detoured to massive debt.
The title tells you most of what you could then write. Who needs a journalist these days – I could program a computer to write the daily financial news – all we would need is to seed the code with one or two keywords and the story would be produced in milli-seconds.
But this story was actually written by a human which makes it more sad.
We read that “(t)he nation’s unnerving descent into debt began a decade ago with a choice, not a crisis” and:
In January 2001, with the budget balanced and clear sailing ahead, the Congressional Budget Office forecast ever-larger annual surpluses indefinitely. The outlook was so rosy, the CBO said, that Washington would have enough money by the end of the decade to pay off everything it owed.
Which just goes to show how poorly informed the CBO was. It was clear to the people I speak to regularly (MMT types) that the US was going to hit the wall in 2001. We talked about that as we saw the Clinton surpluses expand and private debt increase. It was only a matter of time. When the 2001 recession hit it was just a case of how bad it would be.
As it turned out it was a relatively small recession and the unemployment rate went from 3.8 in April 2000 to 6.3 in June 2003. That was bad enough but of-course, worse was to come.
The fiscal response of the then government (Bush) was to cut taxes and increase spending. There is a legitimate debate to be had about the targetting of both (and I clearly think too much of the bounty went to the top-end-of-town at the same time that the deregulation was also moving real income to them).
But the fiscal injection clearly helped bring the 2001 recession to a more rapid end than otherwise.
The Washington Post article seems to think that the Clinton surpluses could have been maintained forever. In relation to the fiscal reaction to the 2001 recession the article says:
Now, instead of tending a nest egg of more than $2 trillion, the federal government expects to owe more than $10 trillion to outside investors by the end of this year. The national debt is larger, as a percentage of the economy, than at any time in U.S. history except for the period shortly after World War II.
Yes, and the collapse in private spending is also rarely seen in the history of the US.
But what exactly is this “national debt”? It is wealth and income owned and received by the non-government sector. In part, by foreigners (for example, bond holders in China and Japan) who have sent more real goods and services to the US than they have received in return. In doing so, they have enhanced the real standard of living of the US residents – through totally voluntary exchanges.
The domestic bond holders enjoy a safe haven for their wealth and receive a guaranteed annuity (income flow) each year. I fail to see anything bad about that.
The US government is “us” (being the “non-government sector”). It does not have any “resources” of and by itself. It has a power – to issue the currency that non of “us” enjoy. It can use that power to enhance the incomes of private citizens and allow them to increase and store wealth.
The national debt is just an accounting expression of the cumulative budget deficits. Even when a deficit is rising as private economic activity is collapsing – the net public spending is helping us boost our material standards of living. It would be better for deficits to contribute to growth when private spending was strong – because then it would be delivering and maintaining full employment, while providing demand support for output to allow the private sector overall to save and allowing the nation to enjoy an eternal deficit.
The notion that a budget surplus represents a “nest egg” is totally false. When the government runs a surplus it destroys net financial assets held in the non-government sector (manifest as reduced purchasing power). The “money” accounted for by the surplus goes no-where. It is purchasing power which is destroyed.
The surplus does not provide the government with any “extra” capacity to spend next period. It has infinite (minus 1 cent) capacity to spend in a financial sense. Running a surplus just undermines private sector wealth and future income potential.
The idea that a budget surplus represents national saving is thus spurious and until that myth is broken people will struggle to realise that surpluses are typically destructive (with recessions following soon after typically) and deficits are virtuous. That is not always the case but it is standard.
The Washington Post article rehearses all the flawed ideas that pertain to surpluses. In discussing the Clinton years it says:
In the typical American household, a surplus comes as welcome news. But the White House is not a typical household. When Treasury Secretary Robert Rubin saw the budget shift into the black in 1998, he immediately warned President Bill Clinton that, politically, it was a mixed blessing. Rubin wanted to use the surplus to start repaying the debt, which was then just more than $3 trillion.
Instead of writing – “the White House is not a typical household” – the author should have been categorical – “The US government is nothing like household”. The household uses the currency the government issues. The former is thus financially constrained in that currency, the latter, as Warren Buffet notes above – is never financially constrained.
But this erroneous association (between household and government) leads to further nonsense.
The debate in the US at the time was about paying back debt or “saving Social Security first”. Another erroneous idea – that somehow the ageing population would bankrupt the pension system. How can it? The US might not be able to feed all its ageing citizens at some point (doubtful) but the government will clearly be able to sign the cheques that will allow the pensioners to buy what food is available.
Yes, there might be declining real standards of living if their is inflation. But that is a different story.
I note that a lot of conservatives (and some commentators on my blog) are claiming that – it is true the government can “print” its way out of insolvency but the inflation represents the way it defaults.
Once you get down to this level of argument you realise how ridiculous the claims are. There is constant inflation – low but constant. It varies year to year. All debtors benefit from that in real terms for all their nominal debt contracts. That is not exclusive to government debt.
What you have to run is an argument that government deliberately inflates to reduce its real debt obligation. Why would it do that if their is no “burden” anyway? What is the evidence that governments deliberately do that? None!
The Washington Post constructs the response to the 2001 recession as:
… the abandonment of fiscal discipline in the wake of the surpluses …
Which begs the question? What do they think would have happened?
They admit that the in relation to the Bush tax cuts and spending increases the “(g)ood times masked the impact, as surging tax revenues reduced the size of year-to-year deficits during the first three years of his second term”. But then they say:
… after the economy collapsed during Bush’s final year in office, deficits — and therefore the debt — began to explode as Obama sought to revive economic activity with more tax cuts and federal spending.
As if the fiscal expansion in response to the 2001 meltdown caused the latter collapse. There were many policies of the Bush government that caused the financial crisis in 2008. But the response (in aggregate terms) to the 2001 recession was correct although the deficit increase was not large enough at the time. Reflect back on the unemployment graph above.
Further, the issue now is not the deficit but the real hangover from the private spending collapse.
There was no mention in this Washington Post article of unemployment. The public debt build-up is just a “canary” telling us that unemployment has risen dramatically. The latter is what we should be worried about not the former.
Not lifting the debt limit would be worse than asinine. It would be a cruel and irresponsible decision to make and would represent the abandonment of leadership in the United States.
GDP trends in the US
Which brings me to the US National Accounts results released by the US Bureau of Economic Analysis last week.
The data shows that the US economy is slowing rapidly in the March 2011 quarter with consumer spending falling and government action destroying growth.
The annualised real growth rate has fallen to 1.8 per cent (down from the fiscal-driven 3.1 per cent in the December 2010 quarter).
Last Thursday (April 28, 2011) the US Department of Labor published their latest Unemployment Insurance Weekly Claims Report. The Report says that:
In the week ending April 23, the advance figure for seasonally adjusted initial claims was 429,000, an increase of 25,000 from the previous week’s revised figure of 404,000. The 4-week moving average was 408,500, an increase of 9,250 from the previous week’s revised average of 399,250.
Why didn’t the Washington Post mention this in its commentary on the current state of fiscal policy in the US?
To see the reason that real GDP growth has slowed you can consult the following graph (from BEA data). It shows the contributions to real GDP growth since the March quarter 2006 split into the major National Accounts components – C = Personal consumption expenditures, I = Gross private domestic investment, NX is Net exports of goods and services and G is Government consumption expenditures and gross investment.
The negative contributions of the government in December 2009 and March 2010 was due to the states. The federal government continued to make a positive contribution in these quarters.
But in the December 2010 and March 2011 quarters, the overall contribution of government has been negative and this has been driven by the negative federal government contribution.
You can also see that private consumption (C) has tapered off in the March 2011 quarter as have net exports. Obama was hoping for an export-led boom and notwithstanding the falling US dollar there is no hint that the external sector will replace the declining (now negative) contribution of the government.
The point is obvious. The public spending cuts that are being debated in the US Congress at present will severely curtail economic growth in the US. The contribution of the US government (federal and states individually) to real GDP growth in the first three months of this year is already negative.
I have to catch a plane now. But the message is clear. As an economists dealing with data and theories it is easy to divorce the material under study from the context – human well-being. I thus always try to keep a focus on what really matters – things that affect human welfare.
I know from my work and experience that unemployment is the worst economic affliction there is. It feeds a number of highly destructive pathologies. It is the exemplar of waste and inefficiency. It is the principle cause of poverty. It beggars belief that the US Congress would be even considering not extending unemployment benefits or raising the debt limits right now.
It is even more ridiculous that the debate is so heavily skewed to further cutting the contribution of the government to real GDP growth when that growth rate is falling and unemployment claims are rising.
The behaviour of the US political leadership is worse than asinine. What goes on inside these characters’ heads?
That is enough for today.