Posts Tagged Gross domestic product
There is an English idiom, “don’t judge a book by its cover” that is a metaphorical phrase which means “you shouldn’t prejudge the worth or value of something by its outward appearance alone.” There has been good news about America’s economy over the past couple of months, and to the third and final estimate of third quarter GDP by the Bureau of Economic Analysis (BEA), it appears the economy is finally starting to find solid footing to make some serious progress. However, Americans should not celebrate just yet because although the third quarter numbers are certainly encouraging, there is plenty of reason to skeptical, and concerned, that the apparent good news on the economy may be an aberration; at least for the majority of Americans.
According to the BEA, third quarter Gross Domestic Product (GDP) grew at an of 4.1% in the third quarter that is significantly better than the 3.6% growth economists predicted in the second estimate published earlier this month. The promising numbers are the fastest growth pace in two years, and some economists believe that it is a sign the recovery is starting to build going into the new year. One of the drivers of the good report was consumer spending that grew at a higher rate (2%) than previously estimated (1.4%) this summer. The data seemed to suggest that Americans were shopping and buying despite Washington’s budget dysfunction, but the increased spending was partially fueled by higher-income Americans spending more on recreational pursuits. The bulk of the increase in consumer spending was for health care before the Affordable Care Act went into effect in October and gasoline; necessities that deprive middle income households of discretionary income to spend on other goods and services. In states that embraced the ACA, healthcare costs declined significantly and that will certainly give them more disposable income during the 4th quarter, but that is not the case in Republican states. The high gas prices are solely attributable to the oil industry selling America’s glut of fuel on the export market that contributed to higher GDP and profits for the oil industry while high fuel prices prevented consumers from spending on durable goods and services.
The lion’s share of positive growth was from companies spending to build up third-quarter inventories which accounted for about 40% of overall third-quarter growth. Companies stockpiled $115.7 billion worth of goods on warehouse shelves, but economists warned GDP will likely fall sharply in the final months of 2013 if companies are unable to sell all the goods they stockpiled. MaketWatch surveyed economists who forecast GDP will drop to 2.1% in the fourth quarter that is directly in line with predictions based on food stamp cuts, the Republican shutdown, and the sequester cuts. Real damage will hit the economy in 2014 because Congress left for their winter break without funding food stamps or extending unemployment benefits that will drive 1.3 million Americans into poverty and restrict their spending ability.
What economists are wondering is whether or not the economy is genuinely taking off, or is the momentum bound to evaporate as it has repeatedly throughout the recovery. The chief economist at Regions Financial Corp, Richard Moody, said “every time we have thought we were finally starting to take off, we get dragged back down,” but he hopes this time might be different. However, most economists say any future gains in consumer spending will hinge on whether Americans’ incomes rise more quickly and, like a panel of three dozen economic experts last week, complained that income growth has been stagnant or declining throughout the recovery. The Sterne Agee Chief Economist, Lindsey Piegza said, “We are just not seeing the momentum behind incomes and that’s really what we need to see driving the consumer sector. We are not seeing quality, high-wage jobs being created.”
It is likely economists, and the American people, are not going to see many high-wage jobs being created, or minimum wage workers getting a raise anytime soon; if ever. Republicans left Washington without extending unemployment benefits for 1.3 million Americans who will struggle to buy food or pay rent let alone have income to buy durable goods, and the encouraging economic news will be the impetus for Republicans to reject calls to extend benefits in the new year; particularly since they convinced Democrats to pass a budget without addressing the issue when they had the opportunity. President Obama called for raising the minimum wage a year ago during the State of the Union, and despite an overwhelming majority of Americans supporting hiking the wage $3 per hour, Republicans have rejected the idea as unnecessary on earlier promising economic news.
The question economists have not asked, and are unlikely to answer, is who profited from the good economic news. It certainly has not been the majority of the population who were not in the income class the report cited were able to afford increased spending on recreation. At the beginning of the year, 47.7 million Americans were living below the poverty line and the latest estimates are that it ballooned to 50 million. More Americans require food, healthcare, and housing assistance, and although there has been a steady monthly increase in the number of jobs created, the majority have been minimum wage jobs that prevent a family from affording adequate housing or sufficient food. The sequester is predicted to kill an estimated one million jobs over the course of 2014, and yet it will stay in place for nine more years with only 4 tenths of one-percent reduction for two years as negotiated in the Ryan-Murray budget agreement.
One hopes the third quarter economic is a sign that the economy is on a solid trajectory for sustained growth to benefit all Americans, but there is little reason to think that is the case. Republicans have no inclination, or incentive, to create jobs, raise the minimum wage, extend benefits for the unemployed, or fund infrastructure improvements that are crucial to a sustained recovery. The only thing Americans can be certain of is that Republicans will use the good economic report as a reason to reject the Presidents’ calls to address the ever-widening income gap and obstruct Democrats’ attempts to do anything that might help struggling Americans or prevent the total and complete demise of the middle class. If Americans have learned only one thing about the economic recovery, it is that Republicans will make sure the only beneficiaries of good economic reports are Wall Street and corporations and this time will be no different.
- Republicans Are Making Sure That the Economic Recovery Only Benefits the Rich (politicususa.com)
- Beyond GDP: get ready for a new way to measure the economy (cobdencentre.org)
- 22 Must-See Charts That Show The Truth About The American Economic Recovery (businessinsider.com)
- UK trade deficit takes biggest share of GDP in over 20 years – ONS (theguardian.com)
- Consumers Drive U.K. Growth Again in Third Quarter (nytimes.com)
- GDP Surprises Again, Up by 4.1 Percent in Third Quarter (usnews.com)
- TD Economics: Economic Recovery to Gain Speed as Fiscal Drag Dissipates (sys-con.com)
- U.K. Disposable Income Increases as Consumers Drive Recovery – Bloomberg (bloomberg.com)
- Nasty, brutish and (possibly) short(-lived): Putting the UK recovery in context (blogs.lse.ac.uk)
- U.S. GDP Sees 4.1 Percent Growth in 3rd-Quarter (hispanicallyspeakingnews.com)
September 24, 2013
The Depressed Economy Is All About Austerity
Right now the official unemployment rate is 7.3 percent. That’s bad, and many people — myself included — think it understates the true badness of the situation. On the other hand, there are some reasonable people (like Bob Gordon) arguing that at this point, possibly thanks to long-run damage from the Great Recession, “full employment” is now a number north of 6 percent. So there’s considerable uncertainty about just how depressed we are relative to potential.
But we’re clearly still well below potential. And we’ve also had exactly the wrong fiscal policy given that reality plus the zero lower bound on interest rates, with unprecedented austerity. So, how much of our depressed economy can be explained by the bad fiscal policy?
To a first approximation, all of it. By that I mean that to have something that would arguably look like full employment, at this point we wouldn’t need a continuation of actual stimulus; all we’d need is for government spending to have grown normally, instead of shrinking.
Here’s a comparison of two series. One is actual government purchases of goods and services since the Great Recession began (this is at all levels; most of the fall has been state and local, but the Federal government could have prevented that with revenue sharing). The other is what would have happened if those purchases had grown as fast as they did starting in the first quarter of 2001, i.e., in the Bush years.
As you can see, the gap is large and has been growing rapidly; it’s currently at about 400 billion 2009 dollars, or more than 2 1/2 percent of GDP. Given reasonable multipliers, this suggests that real GDP is somewhere between 3 and 3.75 percent lower than it would have been without the austerity. And given the usual Okun’s Law rule of half a point of unemployment per point of GDP, this in turn says that without the austerity we’d have an unemployment rate well under 6 percent, maybe even under 5.5 percent.
I don’t want to pretend to spurious precision here. Instead, I just want to make the point that given what we know and have learned about macro these past five years — and given the modest recovery that has taken place — we’re now at a point where, to repeat, to a first approximation the depressed state of the economy is entirely due to destructive fiscal policy.
The austerians have a lot to answer for.
- U.S. Default Is Impossible Unless Politicians Ignore Monetary Realities (kampconsultingblog.com)
- What’s It All About Then?: The Real Reason for the Fight over the Debt Limit (economistsview.typepad.com)
- Krugman Makes It Easy (cafehayek.com)
- It’s the Austerity, Stupid: How We Were Sold an Economy-Killing Lie (motherjones.com)
- Another Bad Story Bites The Dust – NYTimes.com (mbcalyn.com)
- Yes, It Looks as Though Expansionary Fiscal Policy Is Effective at Moderating Recessions (delong.typepad.com)
- Deeply Irresponsible Fiscal Policy (economistsview.typepad.com)
- The Jobless Trap – NYTimes.com – Paul Krugman (dralfoldman.com)
- Using Austerity To Cure Economies Is Like Using Leeches To Cure Disease (thinkprogress.org)
- How Austerity Kills – NYTimes.com (dralfoldman.com)
The Deadly Secret About the Fiscal Cliff Charade
Let’s stop repeating failures of austerity and move toward solutions that can restore our Federal budget – and us – to health.
January 4, 2013
Photo Credit: Shutterstock.com
Imagine a nation with a terrible problem – one its leaders refuse to discuss. The problem will needlessly drain trillions of dollars from its economy in the next ten years.
Now imagine that this problem also robs that nation’s citizens of life itself, draining years from their lifespans while depriving them of large sums of money. Imagine that it sickens and disables countless others, drives many people into bankrupcty, and kills more than two newborn infants out of every thousand born.
Imagine that fixing this problem would make result in a dramatic decline in publicly-held debt. It wouldn’t just “help” the debt problem, mind you – it would cause that debt to plunge.
And now imagine a national “deficit debate” which completely ignores this problem.
Imagine a news media which pretends the problem doesn’t exist. Imagine a corporate-funded “Fix the Debt” movement that refuses to mention it, and yet is treated as an objective source of information. Imagine a political consensus in which the debate isn’t around how to fix this problem, but how to cut service programs that help people cope with it.
Welcome to the United States of America, January 2012. It’s a land where the population is broke, sick, gypped, and mistreated. But the problem’s fixable – if we can find the political will.
The problem, of course, is our health care system – although “system” seems like a flattering word for this greed-driven, anarchic three-ring circus. Our health care system – guess we’ll need to call it that for lack of an alternativer – is the worst in the developed world. It costs far more, provides much less, and has worse outcomes than any system that’s even remotely comparable.
How bad is it?
Our health care spending is 17.6 percent of GDP , compared with an average of 9.6 percent for all developed countries. (All figures are from the compendium ofhealth and economic statistics published by the Organization for Economic Cooperation and Development ( OECD ), unless otherwise indicated.)
Total health spending (from all sources, not just insurance-related) averages $7,960 per person in the United States, versus an average of $3,233 for all developed countries.
If we spent the same on health as the average developed country (as a percentage of GDP ) that would inject more than a trillion dollars per year into other parts of the economy. ( 1.14 trillion, by my rough calculation.)
What are we getting for our money?
- Life expectancy at birth in the United States is 78.2 years, compared with an OECD average of 79.5 years and Japan’s life expectancy of 83 years.Our expected lifespan is the shortest of any among the countries we normally think of as “developed.” The ones that trail us are newer entrants into the “developed” category — like Mexico, Turkey, Brazil, Indonesia, and the Eastern European countries.
- Our infant mortality rate is 6.5 deaths per 1,000 live births, as opposed to the OECD average of 4.4 deaths. As with life expectancy, we lag behind all the other long-term “developed” nations.
- We score even more poorly on another metric, “Premature Mortality,” which measures the number of years someone loses “before their time” (essentially by calculating how many years it would have taken on average to reach the age of 70).
Our high rates of premature mortality are affected by our high rates of accidents and suicide, too, and from a homicide rate for males that’s five times the average. (That’s a figure worth citing in the gun control debate.)
The question becomes, Why? Why do we pay so much and get so little for our money?
Part of the answer lies in the fact that, despite the high cost of private-insurance premiums, our health plans don’t provide enough coverage. According to survey data, Americans were unable to meet their medical needs because of cost more often than citizens of ten comparable countries ( OECD , Table 6.1.3).
That statistic applied to lower-income Americans, as might be expected. But interestingly, it was also true for higher-income Americans – those that are most likely to have private health insurance. 39 percent of Americans with higher-than-average income had an unmet medical need due to cost in 2010. For the runner-up, Germany, that figure was 27 percent. (It was 12 percent in Switzlerland and 4 percent in Great Britain.)
Higher-income Americans also led the pack in reporting out-of-pocket expenditures of $1,000 or more per year, along with their lower-income peers, with 45 percent in the higher-earner category spending that much or more per year. The figure was 37 percent for runner-up Switzerland. It was 2 percent in Sweden. And in much-reviled “socialist” Great Britain the figure was effectively zero.
These results reinforce the findings of studies on medical bankruptcies by Prof. Elizabeth Warren, which showed that medical costs were a dominant reason for bankruptcy even for people with health insurance. (She was officially sworn in as Senator Warren today – congratulations!)
Where does all the money go? Much of it goes to profit margins for private insurance companies, of course. (They’re experts at understanding their margins, which are much higher than most observers believe.) There are also profit margins for a number of health providers, including for-profit hospitals, medical imaging companies, and physician practice management groups.
Underlying much of our explosive cost growth is the phenomenon we described in “Sick Money“: Investors like Bain Capital buy up health care companies, load them up with debt, and demand highly aggressive profit margins. Many of them respond to the problem the way the Bain companies did in our piece: through fraud.
But many other providers overtreat, subjecting the population to a barrage of needless (and sometimes invasive) procedures while other basic health needs go unmet.
Here are two more OECD statistics that illustrate the point:
The United States is second only to technology-crazed Japan in the prevalence of high-cost (and high profit) MRI and CT devices for medical imaging, both in hospitals and in free-standing facilities. Many American facilities were financed by physicians who send their patients there, which poses a significant conflict of interest and which both public and private insurers have been attempting to limit. Many others are owned by sales-driven chains. Unsurprisingly, studies suggest there is significant overuse of this equipment in the United States.
And let’s not forget drugs. When it comes to per-person pharmaceutical costs the United States is off the charts, spending $947 per person on average. That’s nearly twice the OECD average of $487.
And remember: Congress won’t even let Medicare negotiate with the drug companies.
Pharmaceutical corporations, for-profit hospital companies, private insurers — our system is sick. The diagnosis: Corporate greed.
Our “sick secret” can be fixed. In our next piece we’ll discuss how to attack it — and what it will take to shift the debate away from a “consensus” plan to adopt the miserly failures of austerity and toward real solutions that can restore our Federal budget – and us – to health.
- The Deadly Secret About the Fiscal Cliff Charade (alternet.org)
- The Deadly Secret About the Fiscal Cliff Charade | Alternet (seculardiscourse.wordpress.com)
- America’s White Male Problem | Alternet (mbcalyn.com)
- 6 Reasons the Fiscal Cliff is a Scam | Alternet (mbcalyn.com)
- Tea Party Republicans Flaunted Their Nihilist Extremism During Fiscal Cliff Negotiations | Alternet (mbcalyn.com)
- America’s White Male Problem | Alternet (goodolewoody.wordpress.com)
- The Real Meaning of the Fiscal Cliff: “We Were All Lying in 2011.” (teapartyeconomist.com)
- The Real Meaning of the Fiscal Cliff: “We Were All Lying in 2011.” (flyoverpress.wordpress.com)
- Fiscal Cliff charade over – next charade will be debt ceiling and sequestration charades…… meanwhile the Fed will be buying 45 billion a month in treasuries starting January 3rd….. (fredw-catharsisours.blogspot.com)
- Even Mainstream Pundits Are Now Saying, Republicans ‘No Longer a Normal Governing Party,’ ‘Unfit for Government’ | Alternet (mbcalyn.com)
We end 2012 besieged by all kinds of huge economic problems – a fiscal cliff, a jobless recovery, a long-term debt crisis, a list that sometimes seems endless. Yet I look forward to 2013 genuinely optimistic about the economic future of the United States.
Perhaps our biggest and most important immediate challenge is to find jobs for millions of unemployed or underemployed Americans. We start the year with an unemployment rate of 7.7 percent, but we all know the rate would be higher if it included people who simply have given up looking for work. I don’t think we will bring that rate down to an acceptable rate in the next year, but I do believe we will see real progress.
Pat Bagley / Salt Lake Tribune
Corporate profits hit record numbers in the last few months, and U.S. corporations ended the third quarter with $1.74 trillion in cash and liquid assets. Standard & Poor’s said that the accumulation of cash and the lack of corporate investing is “unsustainable and if left unchecked, underinvestment could lead to loss of competitiveness and in turn, lower profitability, potentially hampering issuers’ access to credit markets in time of need.” I predict that in 2013 corporate America finally will begin investing in their growth again and start generating new jobs.
After past recessions, the housing industry was the leading engine of recovery. We created such a gigantic housing bubble before 2008 that this has not been the case this time. When I talk to those in the industry, they tell me that a major cause of a stalled housing market has been the reluctance of banks to lend money until they see positive signs of recovery. Well, in November, housing sales were up 14.5 percent nationally. There were nearly 900,000 housing permits, the highest level in four years. Prices in all three counties in Delaware were up, reflecting a trend in many other parts of the country. It looks like housing is finally coming back, creating new jobs and boosting the economy.
Beyond these positive signs, I see real reasons for optimism when I look at the future position of the United States in the world economy. Clearly we need to do much more to ensure competitiveness in the areas of job training, education and a major emphasis on all the things that drive innovation. If we do these things reasonably well, I think we will have the best environment in the world for business growth.
Much of that outlook has to do with the decline in the environments of our major competitors. The 17-nation Euro zone is now in recession. Countries like Greece and Spain are falling down a slippery slope in which budget cuts to meet Euro zone (read German) demands for balanced budgets lead to falling GDPs, lower tax revenues, and even larger budget deficits. Germany and the European Central Bank keep saying they will do whatever it takes to keep the Euro zone intact, but if Greek and Spanish slides continue I think the internal political climate in Germany may make that impossible. Yes, it is an unfortunate mess, but for the foreseeable future the U.S. will be a much more attractive place to build plants and businesses.
Our other major competitor, China, has a different but also intractable set of problems. Just as one would expect, the last few years of double-digit annual growth in China’s GDP has led to rapidly increasing costs of labor and real estate. American and European corporations that set up major operations in the country are becoming increasingly disillusioned. Endemic corruption, blatant disregard for intellectual property rights, and an uneven and undependable application of the rule of law are all adding to the real costs of foreign corporations doing business in China.
I think the situation is best summed up by a statement in a recent report from the Boston Consulting Group: “We estimate that the relocation of manufacturing from China, combined with increased exports due to improved U.S. competitiveness compared with Western Europe and other major developed markets, will directly and indirectly create 2 million to 3 million jobs in the U.S., reduce unemployment by 1.5 to 2 percentage points, and lower the non-oil-related merchandise deficit by 25 [percent] to 35 percent. In fact, given the many changes sweeping the global economy, we believe our estimates are conservative.”
A lot of possible pitfalls lie in the way, but right now I would not trade places with any other economy in the world.
Happy New Year.
- Why the Fiscal Cliff is a Threat to the Euro-Zone (live.wsj.com)
- China manufacturing on track for growth revival (thehimalayantimes.com)
- Why the euro zone is the greatest threat to global economic recovery (qz.com)
- Greek deal puts euro zone in slow recovery room (thehimalayantimes.com)
- Picking David Rosenberg’s brain for what to expect in 2013 (theglobeandmail.com)
- You: Yen-negative factors to drive Tokyo stocks in ’13 (japantimes.co.jp)
- Euro Zone Interest Rate Remains Unchanged (nytimes.com)
- Analysis: Greek deal puts euro zone in slow recovery room (news.yahoo.com)
- The euro zone isn’t working (economist.com)
- What’s Wrong with the Economy? (counterpunch.org)
Dec 10, 2012 6:31pm
U.S. Intelligence: China Economy to Surpass U.S. by 2030
A report on global trends prepared by the U.S. intelligence community notes that by 2030 China is likely to have surpassed the United States as the world’s largest economy. The report suggests the United States would likely serve as “the first among equals” in a multi-polar world.
“China alone will probably have the largest economy, surpassing that of the United States a few years before 2030,” The report “Alternative Worlds” prepared by the National Intelligence Council notes in their findings released Monday at the National Press Club.
“In terms of the indices of overall power in gross domestic product, population size, military spending and technological investment, Asia will surpass North America and Europe combined,” said Christopher Kojm, Chairman of the National Intelligence Council at the press conference.
But a lot could happen in the next seventeen years. And there is uncertainty about how China will evolve.
“China is…the wild card. I mean, its actions itself can be its worst enemy, particularly if it becomes, as we’ve seen in a couple — starting a couple of years back, a lot more aggressive in the neighborhood, then actually is sowing a lot more support for continued U.S. — a continued U.S. role in the region.” Said Dr. Matthew Burrows, counselor to the National Intelligence Council at a press conference Monday morning.
Despite the findings about China’s economy, the report notes that the United States will remain a dominant power militarily with a strong economy as the boom in domestic natural gas production possibly helps lower costs for manufacturing and reduces unemployment.
“When you broaden your definition of power beyond just the basic ones of GDP [Gross Domestic Product], military spending, R&D [Research and Development] and GDP, and you look broader at what a lot of the other — what a lot of people would call more softer powers, the U.S. still in 2030 stands head and shoulders above China, India and actually all other powers in the world.” Burrows said.
“The U.S. most likely will remain ‘first among equals’ among the other great powers in 2030 because of its preeminence across a range of power dimensions and legacies of its leadership role. More important than just its economic weight, the United States’ dominant role in international politics has derived from its preponderance across the board in both hard and soft power. Nevertheless, with the rapid rise of other countries, the ‘unipolar moment’ is over and Pax Americana—the era of American ascendancy in international politics that began in 1945—is fast winding down,” The assessment noted.
Noting the abundant shale gas reserves in the United States the NIC report notes, “With shale gas, the US will have sufficient natural gas to meet domestic needs and generate potential global exports for decades to come. Increased oil production from difficult-to-access oil deposits would result in a substantial reduction in the US net trade balance and faster economic expansion.”
Among the reports other major trends and concerns noted are the growing demand for food and water with climate change exacerbating the need for these resources as the world’s population is expected to approach 8.3 billion people in 2030. The report also notes that the Middle East and South Asia could face increased instability as 2030 approaches.
“The Middle East’s trajectory will depend on its political landscape. On the one hand, if the Islamic Republic maintains power in Iran and is able to develop nuclear weapons, the Middle East will face a highly unstable future. On the other hand, the emergence of moderate, democratic governments or a breakthrough agreement to resolve the Israeli-Palestinian conflict could have enormously positive consequences.” The report noted.
While terrorism has been the main national security concern for the United States for over a decade the NIC report notes that Islamist terrorism is likely to decline but not completely disappear.
“The current Islamist phase of terrorism might end by 2030, but terrorism is unlikely to die completely. Many states might continue to use terrorist group out of a strong sense of insecurity, although the costs to a regime of directly supporting terrorists looks set to become even greater as international cooperation increases. With more widespread access to lethal and disruptive technologies, individuals who are experts in such niche areas as cyber systems might sell their services to the highest bidder, including terrorists who would focus less on causing mass casualties and more on creating widespread economic and financial disruptions.”
The report also notes that technology will help shape global-security, social and economic developments with increased productivity, automated technologies, precision agriculture and advancements in health care.
Noting the potential for major crisis the report notes the possibility of a severe pandemic as well as weapons of mass destruction and cyber attacks being carried out by non-state actors.
“Our work is invaluable to the administrations past and present. It helps to inform the Pentagon’s Quadrennial Defense Review. It has helped to inform the State Department’s Quadrennial Diplomacy and Development Review. And the policy planning staffs across the national security agencies are keenly interested in our work, and we know that senior policymakers are as well,” NIC Chairman Kojm said at the press conference.
- U.S. won’t be alone at the top by 2030, says new report (tv.msnbc.com)
- Report: U.S. Will Lose Superpower Status By 2030 (personalliberty.com)
- Intelligence community: U.S. out as sole superpower by 2030 (politico.com)
- China Economy to Surpass US by 2030 (abcnews.go.com)
- New Study: Africa, Asia to Overshadow USA, Europe by 2030 (atlantablackstar.com)
- U.S. Intelligence Agencies See a Different World in 2030 (whitenewsnow.com)
- Asia ‘set to eclipse’ US by 2030 (bbc.co.uk)
- US National Intelligence Council says China’s global power more than EU and USA combined by 2030 (chinadailymail.com)
- U.S. Intel Report: China to Overtake U.S. Economy by 2030 (foxbusiness.com)
- China’s economy likely to surpass U.S. before 2030, analysts predict (denverpost.com)
Domestic Cuts Can’t Close the Gap
AUGUST 29, 2012
There is widespread agreement our nation is on an unsustainable fiscal path. The Bipartisan Policy Center has found that if we maintain the status quo of current spending and historically low tax rates, by 2027 our nation’s debt will breach 100 percent of gross domestic product. The nonpartisan Congressional Budget Office predicts that if we do nothing before the end of 2012 and drive off the “fiscal cliff” — allowing the sequester’s across-the-board cuts to take effect and tax cuts to expire — our nation will fall back into recession.
Between these extremes, there lies a solution. Several bipartisan groups of experts (like the Simpson-Bowles commission and the Domenici-Rivlin task force) have recommended that we reduce the deficit by $4 trillion over the next decade through a “balanced approach” that addresses both sides of the deficit equation: increasing revenue through tax reform and cutting what we spend on discretionary and mandatory programs, including entitlements.
The deficit proposals to date have focused on discretionary cuts alone, which are not the underlying drivers of the debt. Tax and entitlement reform must be on the table.
Yet all deficit reduction efforts to date have focused on discretionary cuts alone, which are not the underlying drivers of the debt. The bipartisan Budget Control Act, signed by President Obama last summer, created spending caps that would cut these programs — defense, education, medical and scientific research, public health, public safety and security, roads and bridges, weather monitoring, etc. — by $1 trillion over 10 years. If sequestration takes effect as scheduled next January, these programs will face additional cuts of more than $800 billion.
Whether they realize it or not, every American will feel these cuts. They may be left waiting longer for help after a natural disaster like Hurricane Isaac. They may be more susceptible to deadly infectious diseases, like the West Nile outbreak in Texas. They may experience longer wait times for health care professionals in their community. They may wait longer for cures to debilitating diseases like cancer and Alzheimer’s. And this is just the impact on public health. With fewer air traffic controllers, flights may be curtailed. Classroom size may increase as teachers are laid off. National parks will have fewer visitor hours. Roads and bridges might not be repaired as quickly. Gang violence and other illicit activity may increase with fewer police officers on the streets.
Discretionary cuts alone cannot balance the budget. Members of Congress know what they need to do. They just haven’t yet mustered the political will to make the tough decisions. Congress and the president must work together to achieve a balanced approach to deficit reduction where everything, including tax and entitlement reform, is on the table. Only through balance can we avoid sequestration, sustain economic recovery and put our nation on a sustainable fiscal path.
- Paul Ryan’s Speech, Factually and Intellectually Dishonest – NYTimes.com (mbcalyn.com)
- The Romney-Ryan Plan for America – NYTimes.com (mbcalyn.com)
- Partisan Finger-Pointing Misses Real Deficit Story: BGOV Insight – Bloomberg (bloomberg.com)
- Blink! US Debt Just Grew by $11 Trillion – Bloomberg (bloomberg.com)
- Fact Checking Paul Ryan’s Convention Speech – NYTimes.com (lynchatlarge.wordpress.com)
- Doctor Shortage May Swell to 130000 With U.S. Cap – Bloomberg (bloomberg.com)
- The Real National Debt Is $222 Trillion (theburningplatform.com)
- Business Fears the Fiscal Cliff – NYTimes.com (mbcalyn.com)
- A Full Fact-Check of Niall Ferguson’s Very Bad Argument Against Obama (theatlantic.com)
- How Congress Helped Cause the Doctor Shortage (reason.com)
Paul Ryan’s ‘Path to Prosperity’ Is Really a Bad Trip on the Road to Economic Ruin
Your guide to Ryan’s irresponsible budget fantasies and the lessons of economic history he missed.
August 22, 2012
Photo Credit: AFP
Vice-presidential hopeful Paul Ryan has a giant liability for someone hailed for his economic vision: He knows next to nothing about the facts of economic history.
Ryan is celebrated by Republicans as a “super-wonk” who “masterfully and forcefully presents his free market, fiscal-policy beliefs” and brings “serious economic firepower” to the Republican ticket. Yet in truth, his vision of America’s economic future has already been proven wrong. Ryan’s claim that he has outlined what he calls a “path to prosperity” is ridiculous. What he has concocted is a bad trip on the road to ruin.
Ryan’s “Concurrent Resolution On The Budget, Fiscal Year 2013” was submitted to the House of Representatives on March 23, 2012. In this resolution, Ryan argued that unless Congress reins in government spending and thereby reduces the federal debt-to-GDP ratio, the country is doomed. Accordingly, his budget resolution calls for an 8 percent reduction in on-budget federal spending in 2013 and a 13 percent reduction in 2014 (both figures relative to appropriate federal budget these expenditures for 2012). This Ryan claims will shrink the federal deficit from approximately 7.8 percent of GDP to 4 percent in 2014 and simultaneously shrink the size of the federal government from 23 percent of GDP to a projected 20 percent by the beginning of 2015.
Since military spending is not reduced, these cuts must be made in other federal spending programs such as transportation, funding for scientific research and development, education, environmental protection and Interior Department diligence regarding offshore drilling in the Gulf of Mexico (remember the BP spill!), and so on. Ryan expects his proposed cuts to equal $700 billion over the next decade.
A sage has noted that “Those who cannot remember the past are doomed to repeat its errors.” So it is with Paul Ryan and his misguided slashing proposals. Ryan should have remembered how 1) the USA slid back into the great Depression in 1937-’38, after four years of slow but significant progress in reviving the American economy from the greatest depth of the Great Depression in 1931-1932; and 2) how the Reagan administration cut the unemployment rate almost in half.
The Great Depression Lesson
During his first term (1932-1936), President Franklin Roosevelt ran large annual deficits of between 2 and 5 percent of GDP. In 1932, the federal debt-to-GDP ratio was approximately 20 percent. By 1936, the national debt had increased or approximately 40 percent of GDP, while the real GDP (adjusted for price level changes) was once again approaching the peak level it had reached in 1929. Unemployment declined from approximately 25 percent in 1932 to 16 percent officially in 1936. (Keep in mind that at the time, workers employed on public works projects financed by the federal government were listed officially as ”unemployed” thereby swelling the official unemployment rate. If these employed public work laborers are removed from the unemployment list, it is estimated that only 10 percent were unemployed in 1936.)
Despite the improvement in the economy, many, including people in Roosevelt’s administration, wrongly feared that if the government debt-to-GDP ratio increased much further, the federal government would have to declare bankruptcy. (Shades of Greece today.) Accordingly, in 1937 Roosevelt yielded to pressure to reduce the size of the deficit as well as the debt-to-GDP ratio. Roosevelt sent a budget to Congress that slashed spending in 1937 by over 13 percent and another 11 percent in 1938. The result was a catastrophe. From the fall of 1937 to the summer of 1938, the economy collapsed, with industrial production declining by 33 percent, GDP falling by 13 percent and unemployment rising by approximately 5 percentage points.
Roosevelt then abandoned his deficit reduction program and the economy again began to grow. With the advent of the World War II, all fears of the deficit and debt-to-GDP ratio were forgotten. As a result, federal debt-to-GDP rose to over 100 percent of GDP to pay for mobilization and fighting the war. Despite the large debt-to-GDP ratio, the postwar period was one of great prosperity for at least another quarter of a century.
Fast-forward to the present day. Ryan’s proposed budget would have the U.S. reduce spending significantly in the next two years and therefore repeat the error of the Roosevelt administration in 1937 and 1938 that plunged us back into the Great Depression. How’s that for economic folly?
The Reagan Deficit Lesson
Ryan would also do well to remember what occurred under the Reagan administration from 1980 to 1988. In December 1979, the unemployment rate was 6 percent. By June 1980, it had spiked to 7.6 pecent. By September 1982, the unemployment rate had climbed past the 10 percent mark. The rate remained over 10 percent for a full 10 months, topping out at 10.8 percent in both November and December 1982.
In 1983, the Reagan administration increased government spending by almost 30 percent more than it had been when Reagan took office in 1981. Government expenditures continued to rise throughout the rest of the Reagan administration until it was approximately double what it was in 1980. The debt-to-GDP ratio was 26 percent when Reagan took office. It rose to 41 percent by the end of 1988.
The effect of this big government deficit spending starting in 1983 was that by the summer of 1983, the unemployment rate was below 10 percent, and by June 1984 it was at 7.2 percent. By the time Reagan left office at the beginning of 1989 the unemployment rate was 5.2 percent.
Obviously, Paul Ryan has learned nothing from the economic past history of the U.S. under either Democratic or Republican presidents. These economic facts should have taught Ryan that the worst thing one can do is cut government spending when the American economy is struggling to reduce unemployment and increase economic growth to achieve some measure of economic prosperity.
Ryan’s Clouded Crystal Ball
Unsurprisingly for someone so ignorant of economic history, Paul Ryan doesn’t do well when he tries to predict conditions in the future. On February 14, 2009 in an op-ed article in the New York Times, Ryan argued that the Obama $787 billion stimulus plan will bring forth high inflation. Ryan wrote that inflation would occur as the Federal Reserve prints money for the government to spend on economic recovery. This expansion of the money supply must be inflationary, Ryan declared, because ”it is a situation in which too few goods are being chased by too much money.”
On February 22, 2009, the New York Times printed my response to Ryan’s forecast of inflation:
“Paul D. Ryan repeats the tired idea that when the Federal Reserve prints money for the government to spend on economic recovery, the result will be inflation as ‘too few goods are being chased by too much money.’ This is based on a false assumption that the output of the country will not increase when government lets contracts to businesses to produce more goods and services that will improve the productivity and health of our country. If there is significant unemployment and idle capacity in the private sector (and who can deny that there is?), then this deficit spending will not cause inflation. Rather, the ‘printed’ money spent on a recovery plan creates profit opportunities that induce private enterprise to hire and produce more goods. Then there will be many more goods available for this money to chase and no inflation need occur.”
It is now more than three and a half years since Ryan predicted inflation. The Federal Reserve not only “printed money” to finance the Obama stimulus plan, but since Ryan’s op-ed piece, the Fed also pursued its policy of “quantitative easing” which pumped even more money into our economy while we are suffering high unemployment.
We may ask Mr. Ryan, where is the high inflation that he saw coming? Obviously, Ryan is using a false economic theory to make predictions that have nothing to do with the world of experience in which we live.
Military Spending v. Health Care
In his budget proposal, Ryan seeks an increase in defense expenditures. He obviously believes that it is the responsibility of the federal government to spend whatever is necessary, without any constraints, to protect all American citizens, rich and poor, from an attack by an enemy which can cause death and disabilities.
Yet, Ryan’s budget indicates that the federal government has little or no responsibility to protect all American citizens from death or disability due to an attack from cancer or any other disease, or even an accident. If we were to protect citizens from foreign enemies the way that Ryan would have the government protect seniors from disease via a voucher program for health insurance, then the government should give each American household a voucher they could use to buy some small level of protection from a market choice of private armies of mercenaries. These mercenaries would provide competition for the U.S. armed forces and would, under the Ryan philosophy, force the Army, Navy and Marines to be more efficient.
Moreover, if any American citizen felt he was not getting enough military protection for his family from the value of his voucher, he would be free to spend his own money to hire more mercenaries to protect his family. Wouldn’t that be the efficient “free market,” “free choice” process for the American people to buy the best military defense possible, instead of increasing the government spending on the military?
A Budget for the 1 Percent
Taken as a whole, Ryan’s proposals are simply a smoke-and-mirrors way to benefit the 1 percent at the expense of poor and middle-class Americans. Hardly a “super-wonk,” Paul Ryan is simply a poser whose ignorance of economic history and extremism make him poison to any vision of true prosperity.
- Paul Ryan’s ‘Path to Prosperity’ Is Really a Bad Trip on the Road to Economic Ruin (alternet.org)
- 10 Ways Paul Ryan’s ‘Path To Prosperity’ Budget Would Hurt Americans (huffingtonpost.com)
- What Paul Ryan’s Budget Plan Would Mean for an Average Family (dailyfinance.com)
- Paul Ryan’s Path to Prosperity (mschuettblahblahblah.com)
- Ex-Reagan Budget Director: Paul Ryan’s Budget ‘Is Devoid Of Credible Math Or Hard Policy Choices’ (huffingtonpost.com)
- A look at Paul Ryan’s ‘Path to Prosperity’ plan (jsonline.com)
- Paul Ryan Wants Your Children to Fix His Problems (businessweek.com)
- Paul Ryan’s Budget Likely to See Increased Scrutiny (newsy.com)
- Congressman Paul Ryan For Vice-President: Good or Bad Choice? (nichellemitchem.typepad.com)
- Video: Breaking down Rep. Ryan’s “Path to Prosperity” (cbsnews.com)
China Economic Trouble Looms as PMI Falls
Posted: June 21, 2012 at 4:20 am
The HSBC measure of China’s PMI for June showed that the nation’s manufacturing sector slowed again, and may be in for a period of deep trouble.
The drop in the index created a string of eight consecutive months of dips as the measurement moved to 48.1 on a scale that marks 50 and above as expansion.
The drop raises the issue of what constitutes a recession in China. The traditional measure around the
world is a contraction of gross domestic product for two consecutive months. China’s economy has been white hot for a decade, with GDP increase of 10% or better most years. Based on that level of expansion, both China’s factories and its middle class consumers may have entered a time that they perceive as economic trouble if GDP drops to an expansion level of 6% or 7%.
China’s factory economy was built with infrastructure and a labor force size, with a foundation of a massive and growing export market. With many of the nations in Europe in traditional recessions and the U.S. economy cooling, the demand for China’s exports has already faltered. The trend in the West will only worsen in coming months.
China’s consumer population has moved from one of saving to one of use of earnings for the purchase of goods and services. Much of China’s GDP is based on this internal consumer activity. The double blow of a slowdown in purchasing activity among the nation’s middle class and a slackening of external demand could be devastating. And China’s consumers will balk at parting with money if they believe that their jobs, or at least a continuing increases wages, are in jeopardy.
It has been unthinkable until recently that the expansion of China’s GDP could drop much below 8%, particularly given the fire power the central government can muster for stimulus. But no injection of capital into the economy can completely overcome a sharp contraction of global consumption among individuals and business enterprises.
Douglas A. McIntyre
- China Economic Trouble Looms as PMI Falls (247wallst.com)
- China PMI Slides as World Economy Cools – 24/7 Wall St. (mbcalyn.com)
- World Bank Downgrades China Growth – 24/7 Wall St. (mbcalyn.com)
- Chinese Sick Of Pollution – 24/7 Wall St. (mbcalyn.com)
- China Flash PMI Falls Further To 48.1, Hitting A 7-Month Low (businessinsider.com)
- China’s Manufacturing Activity Falls In June: HSBC PMI (ibtimes.com)
- Another Reason People Hate Lobbyists: The Alliance for American Manufacturing – 24/7 Wall St. (mbcalyn.com)
- China factories in eighth month of contraction: PMI (news.yahoo.com)
- Europe’s Contagion Spreads Into China (businessinsider.com)
- China’s Flash PMI hits 7-month low (wantchinatimes.com)