I guess I had to write something about the “compromise” aka cave-in yesterday in the US capital. You can only conclude that the US President wanted this agenda and needed a smokescreen (mad Republicans) to put it in place. There is a lot of evidence that Obama wanted to attack pension and medical entitlements. Now he can. Not for long though – he is a one-term president in the making. When you put all the elements together sometimes compromise is the worst thing.
This picture seems to have been used by various commentators and conservative advocates as representing the sentiment of the US people. They wanted their politicians to compromise and save America from bankruptcy. The problem is that such representations only reinforce the mis-information that is driving the entire “debt debate”.
My answers to the questions are: No, America is not Greece because it maintained sovereignty over its currency and thus can use fiscal policy at all times to advance public purpose. Second, compromise is usually a good strategy but that doesn’t hold in this case.
The US Bureau of Economic Analysis recently released (July 29, 2011) the Advance Estimate of the National Income and Product Accounts data for the second quarter 2011.
They found that:
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.3 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter)
That is not sufficient to reduce the unemployment levels and indicates that the US recovery is stalling.
Growth of global manufacturing sector moves closer to stagnation.
The analysis said that the “(g)rowth of production slowed to a near standstill, as levels of incoming new business declined slightly for the first time in over two years”.
This graph shows the recent evolution of the Global Manufacturing PMI. The way the PMI – which is a diffusion index – works is as follows. A survey asks respondents to indicate whether there is an improvement in a measure (P1 = percentage indicating that), no change (P2 is the percentage indicating that) and deterioration (P3 is the relevant percentage).
The PMI then is calculated as P1 + 0.5*P2
So if all the respondents said the measure had improved then the PMI would be 100 per cent and if all the respondents indicated a deterioration the index would be zero. A PMI of 50.0 means that the optimists exactly offset the pessimists and the measure is deemed to be unchanged.
More telling was the more detailed breakdown of the Global Manufacturing PMI which is captured in the following graphic. The key point is that both existing activity is slowing and marginal activity (New Orders) is contracting. When new orders decline and undesired inventories start to build up firms start to layoff workers and the downturn accelerates as the multiplier effects of the reduced income reverberate throughout the economy.
Also yesterday, the The Institute for Supply Management released their July Manufacturing ISM Report On Business which they have been doing since 1948. They survey “400 purchasing managers in the manufacturing sector on five different fields, namely, production level, new orders from customers, speed of supplier deliveries, inventories and employment level” and assemble a diffusion index for each field.
The Institute for Supply Management (ISM), is the largest supply management organisation in the world.
The ISM said that:
The PMI registered 50.9 percent, a decrease of 4.4 percentage points, indicating expansion in the manufacturing sector for the 24th consecutive month, although at a slower rate of growth than in June. Production and employment also showed continued growth in July, but at slower rates than in June. The New Orders Index registered 49.2 percent, indicating contraction for the first time since June of 2009, when it registered 48.9 percent. The rate of increase in prices slowed for the third consecutive month, dropping 9 percentage points in July to 59 percent. In the last three months combined, the Prices Index has declined by 26.5 percentage points, dropping from 85.5 percent in April to 59 percent in July.
So the picture is emerging – the expansion largely the result of fiscal stimulus support has ended and the manufacturing sector is slowing. More worrying is the fact that new orders are contracting and price deflation is emerging (a sure sign that demand is weakening).
The US respondents were reported as saying: “Europe weak, U.S. soft, Asia strong”. However, the JP Morgan global results (compiled from a number of different PMI sources) indicated that China has now started to slow. Therefore how long Asia will remain strong is uncertain.
And then I thought about the unemployment situation in the US. Some say I am obsessed with unemployment. I agree – I see it as the worst economic evil that capitalism delivers to the workers – the deprivation of even the chance to be exploited.
While we talk about the US national unemployment rate being 9.2 per cent that is an average and hides considerable regional disparities. The following map is produced by the US Bureau of Labor Statistics and shows unemployment rates by state as at June 2011.
To drill down into the “average” even further the next map shows the situation by county (averaged for June 2010 to May 2011) when the national unemployment rate was 9.3 per cent. You can see that many areas of California have rates of unemployment over 14 per cent and many areas in the East hover between 12 and 13.9 per cent (as do many counties in California).
The daily loss of output and income that this level of joblessness generates is enormous not to mention the social breakdown that accompanies long-term unemployment.
To put the maps into historical perspective, the following graph is taken from US Bureau of Labor Statistics data and shows the June 2011 state unemployment rates in relation to their historical lows (green) and historical highs (red). The history extends from when this particular data series began in January 1976.
In most cases, the local economies are performing around their worst despite a recovery that has been in progress for nearly 2 years.
Question: if you were in charge of this economy and you already had nearly 10 per cent unemployment and 44 per cent of the unemployed were long-term and you saw that a key sector was now in the process of contracting would you consider a “compromise” that will cut spending and reduce economic activity in the coming months to be a demonstration of responsible leadership?
Answer: Only a one-term President who lacked empathy for his people would sign such a “compromise” when clear alternatives were available that would render the conservative attack on fiscal policy futile.
What is it about macroeconomic fundamentals that the US President and the 279 House of Representative member who voted yes for debt ceiling “compromise” understand? Answer: very little it seems. Didn’t their advisors bring to their attention the latest PMI data or have large unemployment maps posted on the walls of the White House and the Capitol building?
And then you read this Sydney Morning Herald commentary (August 2, 2011) from its “international editor” – The magic credit card brings US to its knees. Why do international editors who mainly comment on politics think they can offer wisdom about macroeconomics and when they do so they wheel out Reinhart and Rogoff as credible testimony?
The writer’s overall perspective is that the years of “American exceptionalism – the idea that the normal rules of national conduct do not apply” are over “because exceptionalism tempted the country into grave misjudgments” and that “this is a good thing”.
Whatever we think of Americans it is not a good thing when their government turns on its own people by withholding essential fiscal support and pushing more into unemployment and poverty.
I agree with the writer that the military aggression of the US – its “manifest destiny” – has not only damaged other nations and killed millions of innocent people but it has also damaged the US in the eyes of the world and certainly hasn’t made us all safer.
The writer tries to link this aggression to unsustainable fiscal policy decisions. I don’t support the US government outlaying billions on its military to invade other nations but if they were not to spend the dollars equipping murderers (its army) then they would have to be spending it elsewhere – on schools, hospitals, jobs, public infrastructure, renewable energy etc.
A debate about the composition of US federal spending is not the same as a debate about the level of fiscal support the US government should provide its economy. At present, the latter is inadequate as evidenced by the persistently high unemployment (see above).
Hartcher (the writer) claims in relation to Iraq:
The war to date has cost American taxpayers at least $US800 billion ($727 billion) on a narrow definition, and $US3 trillion ($2.7 trillion) on the broad definition used by the Democrat economist Joseph Stiglitz. It has cost more than 4000 US soldiers their lives and the country a great deal of national credibility. Intended to demonstrate the scope of US power, it illuminated its limits.
It hasn’t “cost” the taxpayers a cent in the sense that taxpayers do not fund government spending. Please read my blog – Taxpayers do not fund anything – for more discussion on this point.
All the costs have to measured in real goods and services deployed (which includes the lives of its soldiers). I don’t mean to demean the actual people by using economics jargon like (real goods and services) to describe labour input. It has also cost the nations that the US invaded much more in real terms.
But while we might bemoan the waste of real resources none of this has any relevance to the financial capacity of the US federal government to prosecute such mis-adventures. In other words, there has been no financial crisis arising from the American folly in Iraq.
The real resources were purchased by a government which issues the currency as a monopolist. Such a government can always purchase available resources which are for sale the currency they issue. The crisis, in my view, was how they used those real resources. And that debate is not about fiscal policy. The fiscal reality is that the purchases added to aggregate demand and provided stimulus to growth.
Hartcher claims the:
The second great indulgence was the vast financial bubble that seemed to be the best of times. But it was, in fact, laying the basis for the global economic crisis of 2009.
I agree with this but this is not about public debt and certainly not about the need for “smaller” government. In fact, the conservative forces that are pushing for a reduction in government economic influence now were the same lobbyists who undermined the oversight of the government on the financial sector and allowed the Wall Street criminals to wreak havoc.
Further, with the external deficit that America enjoys, the only way the private sector will reduce its high debt levels is if the government sector runs deficits to support growth and income generation.
Hartcher then blames the Bush administration for not running bringing the deficit into check. He actually quotes – disapprovingly – the then Vice President who said that:
… deficits don’t matter.
Which was the only thing that Cheney probably ever said that was sensible. Deficits per se do not matter. You have to calibrate the size of public net spending with the other things that are going on in the economy. There is never any sense that can be made from saying that the deficit is high or low.
In relation to what? Is a deficit that is 10 per cent of GDP bad and one that is 1 per cent of GDP good? Is a surplus good and a deficit bad? You cannot make any statements like that. It depends on the state of the economy and the interplay of the sectoral balances which are the manifestations of the myriad of private spending and saving decisions that are made each day.
In some cases a deficit that is 10 per cent of GDP will be a demonstration of policy excellence and in other cases it will be outright madness.
Hartcher then provides some arithmetic:
Before Bush, Bill Clinton had managed to bring down two surplus budgets. When Bush and Cheney took power, the federal government had outstanding debts of $US5.6 trillion ($5.1 trillion). When they left eight years later, the debts were $US10 trillion.
Today, after a recession has eroded revenues and stimulus outlays have increased spending, the debt is $US14.3 trillion. That is about 99 per cent of GDP – above the tipping point, where the interest starts to snowball the debt into an ever-growing liability.
I love arithmetic. Note that he quotes a ratio then proceeds to make a conclusion about a level (interest payments). But at any rate, there is no snowballing of interest payments when the public debt ratio goes beyond 100 per cent of GDP.
For a given nominal GDP growth rate and a constant long-term bond yield rate there is no explosion in interest payments at higher public debt ratios. The flow is higher but they grow at a constant rate across all public debt ratios.
He then quotes the publisher of Grant’s Interest Rate Observer (they charge heaps for their articles):
We have the seeming gift of our ability to pay our bills in this currency that we alone can print … This gift is, in fact, a great detriment. It’s no help to us that we have this magic credit card.
Which just tells you that you would not want to subscribe to the Magazine.
All nations that issue their own currency have the “seeming gift of our ability to pay our bills in this currency that we alone can print”. Hartcher thinks this makes America special. The reality is that the US is no more special in this regard than the smallest nation on the planet that issues its own currency. For example, South Sudan – the newest nation is planning to issue its own currency.
Further, that gift can never be a detrimental factor as long as governments use it to pursue public purpose – full employment and price stability and equity.
What is of “no help” is when the US government puts the “gift” away and pretends that it lost it. Which is what happened overnight with the “compromise”.
The article peters out into claims that China is getting sick of funding the US government and various other commentators have declared the US dollar undesirable etc.
Compromise is usually a good thing – when the outcome advances the welfare of the negotiating parties and/or the welfare of those that are depending on the negotiators.
Compromise when the third parties are damaged by the wilful egos of the negotiators – which is the case of the US “deal” is not a good thing.
I agreed with Paul Krugman’s (pre-vote) assessment of the “deal” – The President Surrenders. He said:
A deal to raise the federal debt ceiling is in the works. If it goes through, many commentators will declare that disaster was avoided. But they will be wrong.
For the deal itself, given the available information, is a disaster, and not just for President Obama and his party. It will damage an already depressed economy; it will probably make America’s long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status.
When US politicians claim that America is great the whole world is now laughing at them.
That is enough for today!