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Monday, October 26, 2009

Well, You Live And Learn

I'm deep in tables, finances and NIPA tables. We get the first GDP estimate for Q3 this week, and I've been running through my stuff so I can plug it in quickly. I probably won't believe it though.

NIPA Tables (find 'em here!) Through Q2:
Click on this to get a larger image that's actually worth something.

This is from NIPA Table 1.1.6 showing GDP and several components in chained dollars. The top line is GDP. The line under it is PCE. GDP had rolled back to early 2006; PCE has only rolled back to late 2006.

The last three lines are government, Gross Private Domestic Investment and Exports.

Now click on this one and open it in another tab.
Same data, really, but this shows the components by share of GDP since 1970.

Here you can see the nasty fall in GPDI and exports in this recession. But what is of particular interest is that PCE (Personal Consumption Expenditures) has grown rather than dropped as a share of total GDP over the course of this recession.

Needless to say this has some rough public policy implications; raise taxes and you pull GDP down unless you are heavily stimulating GPDI in such a matter as to raise incomes and expenditures enough to compensate.

The only way to really pull off that hat trick quickly is to shove the money in infrastructure, and believe me, I do not mean light rail. If we were to cancel the more wacky portions of the stimulus we could throw another 100 billion or so into infrastructure. The timing is wrong, and it needs to get out there quickly, so you'd have to do something else to hit the northern half of the country. But that is just the short term - we need something in place by the end of the year, within three months at the latest.

Gross private domestic investment is at a series low at 11% of total GDP. It will pop up a little (or should) due to inventory clearing this summer, but I am not sure at all that the carrying trend isn't still slowing. Go back and look at the 74-84 sequence. Note that GPDI never dropped nearly this low as a share. It never even got close to 15% of GDP, whereas it is now 11%. That's not viable. You see it took three dips - one associated with the 75 debacle, which was really bad on the industry side. Then it took two associated with the 80-83 woe. You see the early 90s dip. But the low in 75 (only one quarter) was 13.5% of GDP. It was only in the 13s for two quarters, hit the low in Q2 75 and was back in the 16s in Q2 76. The low in the 80s sequence was Q4 82 and Q1 83, and by Q2 83 it was back to 15.6. Q4 83 it was in the 17s again.

There's no comparison to these previous recessions in this one. This one is more than twice as bad in its growth implications. The last three quarters of 2008 GPDI share was in the 14% range. In the first two quarters of 2009 it was 11.9% and 11% of GDP. The components of GPDI are nonresidential structures, residential structures, equipment, software and inventories. Here is a graph of these components in chained dollars so you can get a feel for their absolute levels: (Click on this for a larger version)

We should be through most of the inventory correction and we will get a bit of a boost from that, but it is not going to account for growth for long. Residential investment may or may not have bottomed, but in the near term it is shelfing nicely. Nonresidential (commercial and public) probably will fall through at least next year; commercial is way overbuilt, vacancies for most categories are very high. That leaves equipment and software, and the business readings are such that any growth in that category is probably going to be quite slow. Smaller businesses have not finished their decline yet (nor have many larger businesses), and they account for a big portion of employment, equipment and software. All of this implies that we won't get back over a 14% share for over a year, which is not strong enough to take us back to sustained growth with our debt drag as soon as the inventory correction is through. We might get back to the 12s for a bit, but that isn't going to get us anywhere.

For all intents and purposes, GPDI is the economy. If that doesn't pick up, the economy doesn't pick up. According to these metric, the correction was nowhere near over in June.

PCE and GPDI are linked. If you stimulate PCE, you should indirectly stimulate GPDI. However, we have that nasty little import problem, so of recent years feeding the PCE beast hasn't had as much effect on GPDI.

If you stimulate GPDI, you create jobs and that boosts wages, taxes and PCE quite quickly. GPDI is the major growth driver of the economy.

The other thing I would do is panic in a coldly rational fashion and cut corporate tax rates 5% across the board with the top rate being dropped to 25%. Permanently. Because it is now clear that we cannot afford to maintain PCE without GPDI, and you can only stimulate GPDI so much without raising taxes, which we cannot afford to do on most people, much less on corporations.

A VAT (value added tax) would probably result in a decade-long depression. I think not.

We cannot afford to raise health care taxes in January per the Baucus plan. No way. When the retirement bulge really hits, we will have to raise taxes on the higher earners. But we will only be able to do that once, so it is futile to do it now.

I feel truly sorry for this administration. Like the Bush administration, it finds itself caught in imponderable external inexorables that can only dictate backing away from many of Obama's campaign promises. The good news is that he is still very popular (given this economy, those poll numbers are great!). The bad news is that this administration may not be ready to suck it up and face reality yet.

The truth is that the only way they can get enough growth going to accomplish any of their domestic goals is to pull a Reagan-Palin. Cut corporate taxes sharply, drill, baby, drill (we can't afford green energy that's not cost effective, and only hydropower is en-masse), snuggle and cuddle up to the US Chamber of Commerce, and then proceed to slowly adopt some reform proposals along the lines they want.

But we don't have the room to go to single-payer now. We do have the room to adopt market reforms and raise Medicare reimbursements. We know we have to raise Medicare taxes anyway to about 3.90. Do it now, raise the reimbursements, go HSA for private, and he'll get a lot of support from businesses because health insurance costs will correct.

The Pelosi wing of the Democratic party is zombified by the economy. Obama's going to have to pull the plug on it.

Pelosi and Obama are in the same wing (far left).
Charles - Obama has so little in the way of real political achievement that he can't be slotted, and indeed he appears to have striven for that political attribute.

In any case, the most important affiliation for many politicians is that of "reelected", and the next year will force some changes.
To an IL resident, Mr. Obama can certainly be slotted on his history.
I have to agree with MoM here,Obama does not impress me at all,but pelosi...I suspect that Lovecraft's "old ones" would recognize her as a kindred soul.I wonder if Daddy would be proud or horrified?
Tom - I guess my point is that Obama ran as many things - in some ways, he was Rorschach blot candidate. But among his campaigning hats was that of a pragmatic get-it-done, moderate type of guy, and I guess he's just going to have to keep trying on those hats until he finds one that fits the circumstances.

Because we'll see, but the figures I outlined in this post look an awful lot like the guided missile of reality headed toward DC.

The ides of presidential September turned Bush into a president who had to reverse a lot of his agenda, and at this point it looks like Obama is in the same situation. He is the president. He can't dodge this one.

I don't think Pelosi is intelligent enough to see what's going on. She seems confused and lost.

"There's no comparison to these previous recessions in this one."

For what it is worth, I think that same EXACT thought every time I turn on the financial news and am told what we can expect to see going forward based on past recessions.
MOM - That's the question, isn't it?

When push comes to shove, does Obama go with ideology or with pragmatism? Will he be a Clinton, or a Carter? In his case, I'd say it's much worse, as the pragmatic approach here is utter anathema to his base of support. Much more so than it was for Bush, or for Clinton. And Clinton's skill at doing absolutely nothing and making it look good just won't work here.

One way or the other, we're going to find out soon. Foreign affairs are probably going to come to a head within 3 months, and if you are correct the economic situation will too.

So, Mr. President, it's all about you.
The President's agenda is anti-growth on almost every front: raise taxes on high taxable incomes (which hits small business since most small businesses pay taxes through the individual income tax), raise expenses for small business (health care reform), raise energy costs (cap and trade), raise labor costs (card check) ... the list is a long one.

Frankly, you're asking for a pragmatic response that just isn't in the cards. This administration is Carter II on steroids.

Unfortunately, there is no sign that the opposition is ready to smell the rich aroma of reality and prepare to govern well if they are swept back to power in 3 years. Their heads are still firmly buried where the sun doesn't shine.
I don't think the administration is thinking in terms of growth/anti growth. I don't even think they are thinking in terms of foreign policy. All they are thinking about is domestic legislation. Obama has already complained that not getting national health will "wreck his Presidency".

It just seems the administration wants some domestic policy feathers and is not looking any further out than that. Somehow, a little more Keynesian stimulus will fix the economy.

I think Rick is exactly right. The economists in the administration say they brief the policy people, and it just goes in one ear and out the other.

All that matters is getting the domestic agenda passed. Everyone can see that that domestic agenda will only make the problems we face worse; but I think they don't care.

They look at Roosevelt in 1936, when a bunch of deficit spending created a bunch of temporary jobs. FDR gets reelected, and the economy then collapsed. Unlike Roosevelt, they can't run again, so who cares what happens after 2012?
But Gordon, Obama comes up for election in 2012. I don't think it is any accident that these health care reform bills put the part where you actually get coverage at 2013, but people aren't buying that.

He really does have to face these problems, and Congress has to face them before that.

Why do you think the leadership doesn't want Congress Critters to be able to read these bills before they vote?
MOM, I think that Big O and the Policy Wonks think that the economists are exaggerating. No one in a senior position in the White House ever had to calculate the area under the curve. To them, it's all addition and subtraction; add enough interest groups together and they win again.

All of this "much worse than we were led to believe" talk is just preconditioning. If the economy shows any signs of recovery, in any sector, they'll trumpet it as proof that their wisdom is leading the way back to prosperity.

Why shouldn't they think they can win again? They managed to sell us a candidate with no experience and a dubious record last time, didn't they? They'll have plenty of money to throw around, and the bully pulpit too.
Gordon - in the US the BS stops when the jobs aren't there. People know when they are unemployed or employed but their real incomes are declining.

What I have outlined in this and the next post is a serious condition.
Please don't think I believe this isn't serious. I know it is.

I do believe, though, that Obama & Co. will try to bluff their way through it.
Oh, I can't argue with any of you who are saying that his administration has shown no perception of the seriousness of this. So far. But at some point I think it's going to become clear, and I suspect that clarity is dawning right now.

Even Herbert of the NY Times is beginning to get fractious about the situation.
Gordon - in the US the BS stops when the jobs aren't there. People know when they are unemployed or employed but their real incomes are declining.

And they STILL voted for FDR again. And again.

The BS never stops. (One of the reasons I loathed Reagan.)
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