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Wednesday, October 06, 2010

The Definition of Discretionary, Revisited

I spent yesterday boiling water (for jello) and basically attending to the Chief. I will be very, very glad when this is over. Before I chauffeur the Chief off to the hospital, here's a few things.

1) ADP Employment report. I am a fan of this report. It is less volatile than the monthly employment report but the curves are generally the same. There are graphs in the report, and I think this month's commentary is worth a read as well. This report tracks only private employment:
A deceleration of employment occurred in all the major sectors shown in The ADP Report and for all sizes of payroll. The September decline in employment followed seven monthly increases from February through August. However, over those seven months, the average monthly gain in employment was 34,000. There simply is no momentum in employment.
September’s ADP Report estimates employment in the service-providing sector rose by 6,000 in September, the eighth consecutive monthly gain. This increase was not enough to offset an employment decline in the goods-producing sector of 45,000. Construction employment dropped by 28,000 during September and manufacturing employment declined 17,000, the third consecutive monthly decline.
Commercial paper seems to indicate that the ramp-up in industrial activity has walked through one peak but may be entering a new, smaller ramp:

I thought some of this was autos and trucks, and so far the recent weeks seem to confirm that.

Last, but not least, there is an excellent WSJ article to which I would like to direct you:
Meanwhile, the poorest Americans spent more as prices for necessities like food and rental housing climbed. Spending rose 5.6% from 2007 to 2009 for the poorest fifth of consumers, the most of any other income group, despite a 5.5% drop in after-tax income to an average $9,956 a household. In some cases, elderly people and others with low incomes dipped into savings or relied on credit to get by.
The lowest earners spent 15.4% more on food last year than in 2007, shelling out more for cereals, meat and processed vegetables.
Among the poor, rent expenditures increased 5.3%.
This is the face of reality, and it is the reason why cutting Social Security for the poorer third of the aged is a ridiculous proposition. Note the anecdote of the 69 year old who was laid off from her job at 67, who is now getting by on Social Security and a $133 unemployment check.

CPI is grossly understated for the poorest Americans, That means that real Social Security checks have plummeted. The unavoidable expenses (rent or property tax, utilities and fuel, food and medical) have risen far more than discretionary expenses. The drop in restaurant traffic over the last decade seems to be strongly related to older people with less discretionary income.

In part, this problem reaches back to the change in CPI calculations instituted under the Clinton administration. In part, it's just the result of a lousy economy. Price compression doesn't occur evenly - the prices for staples, especially the cheapest staples can and often will continue to rise even while the prices for discretionary items tend to drop.

However, given the price inputs for producers and servicers, we have reached the end of price compression in many markets. I expect wages to be depressed as a result of very scant profit margins and an oversupply of labor.

The reason so many more people over 65 are in the labor force is that they can't make ends meet. If you cut Social Security further for these folks, you will have to replace it with welfare. So you are not actually going to save much or anything for them. Further, to the extent they can get work, they generally will displace younger workers who are starting their working lives. So the result will be poverty for the young and the old.

I disagree acutely with some of the suggestions for reaching a fiscal balance, because they are wildly unlikely to succeed. Delaying full Social Security benefits until 70 is an idiotic idea. It's not clear that the 67 year age (current) is very workable, but 70 definitely won't wash.

What will be required to reach a fiscal balance will be to chop most government programs for the middle and upper class and to divert some funds to the people who really need it, who are mostly in the bottom 25% of the population sorted by income. And they are disproportionately aged. Pretty obviously we will have to deal with the immigrant problem. We are importing labor even while we are suffering an acute unemployment crisis. Not only does this not make sense, it is a recipe for the total collapse of the social safety net. Those pushing this are not humanitarians. They're either people who want to see the entire welfare state collapse, or they're idiots.

At this time I have become acutely hostile toward both the Democratic and Republican party leaderships, because on balance, not only are they refusing to deal with reality but I believe they haven't a clue about reality for the average American. There are some attempts at beginning to address the fundamentals, but the problem is that these attempts aren't really supported by the leadership of either party. It is nice to see WSJ publishing something like this which begins to approach the basic problem.

We are going to have to raise taxes, but the middle class is going to have to sustain a great deal of the increase in taxation. Otherwise, the rich will be taxed out of the country and unemployment will continue to rise.

I believe the rich can and will pay more taxes, but they won't sustain it until we have a workable plan to deal with our overall fiscal problem. Dealing with our fiscal crisis would reward the truly wealthy far more than they would lose with a moderate tax hike, but hiking taxes without really addressing the problem will just move more and more investment out of the country.

Tariffs on finished goods would raise revenue on
discretionary spending and help stop employers from shipping jobs overseas. We could abandon the weak
dollar policy which would help with fuel costs. I guess
the fed wants to sacrifice the middle class and poor on the alter of free trade.

People are reducing their aggregate demand because they can't afford to maintain it and the solution is to shake them down for more tax money.

Sounds like a vicious circle to me.
Among the poor, rent expenditures increased 5.3%

OK, I'm stumped. Why? Property values down, interest rates down, household formation down, why are rents up? Is there that much extra demand from foreclosures and simply forgoing home purchases?
Neil - okay, some of that is due to higher input rental costs in some areas - such as higher property taxes, higher water/utility bills, etc. But some is due to supply and demand. Generally rents will tend to move inversely to home sales, because when people buy homes they aren't renting. Thus higher rents eventually generate more home sales, all other things being equal.

This isn't true in every area. In overbuilt areas, both rents and home prices may fall.
Charles - well, if you want to get technical, the theory really is that fiscal policy relies on taxing those who are still able to save and spending the money, preferably on those who can't buy the necessities.

However all these things have their limitations. Obviously taxing the wealthy a LOT more will reduce aggregate demand. If you tax the rich somewhat more, cut real business taxes, and cut some of the spending on the middle class you can in theory reach a point at which the economy grows enough to return more than the lost taxes in the way of additional returns.

To do so, you have to be moderate in the tax increases. I'm dead tired right now, but I'll try to return to this topic later.
Investment will flee until the spending on entitlements is statutorily fixed into a rate of growth much lower the the natural rate of growth in GDP. All the programs - food stamps, welfare, Medicaid, etc. must be re-authorized with sub GDP growth rate locked in. And providing cash benefits is absolutely wrong- there are welfare recipients who live in darkened houses, because they gave their cash assistance away, or used it for things other than the power bill. Is this really right, when there are dependent children in the darkened houses? Obama has repealed all of the welfare reforms enacted during the nineties.

The tax increases you propose will do nothing to stop capital flight, because investors form rational expectations of the future based on past experience, and past experience shows, as you mentioned, that tax increases never reduce deficits, because Congress has always jacked up the expenditures in response to the free money.

The US Congress refuses to make the cuts that are plainly needed, because they seek re-election, and disregard the consequences of their spending.

The question is not if the US becomes Greece, but when in the near future it does so. The landing will not be a soft one.

Debates on public policy are so controlled by political correctness, and fear of villification, that policy will not change unless popular discontent brings down this Congress, and replaces it with a fiscally sane one. Academic economists certainly steer well clear of the truth, in discussions of what public policy regarding the economy ought to be in regulation, spending, etc.
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