Recession

When I took economics in college, the definition of a recession was two consecutive quarters of negative growth/declining Gross Domestic Product (GDP).  Yesterday, the US posted a 0.9% shrinkage in the GDP for the second quarter (April through June) of 2022.  The first quarter (January through March) saw a 1.6% shrinkage in the GDP.  Ipso facto: recession.  Of course, this is a terrible time for a recession.  The midterms are just around the corner and the growth numbers for the third quarter (July through September) won't be released until shortly before the election on November 8th.  Even if the economy rebounds, the voters are thinking about recession as they ponder their upcoming vote; that is never good for the incumbents.

In 1992, George Bush was running for re-election and the economy looked weak.  His opponent, Bill Clinton, proclaimed it the worst economy since Herbert Hoover and rode the slogan "It's the economy, stupid" to the White House.  In fact, the economy was in recovery throughout 1992, the recession having taken place in 1991:

Economic downturns have a deleterious effect on incumbent politicians.  Jimmy Carter suffered through a bad economy and catastrophic inflation in 1980 and was ousted by Reagan.  Donald Trump had a terrible economic year in 2020 and suffered the same fate as Carter and Bush: one-term presidency.

With this history, no one wants to have a recession with the election so near.  Therefore, the plan has rolled out to redefine recession.  President Biden has stated that "Both [Federal Reserve] Chairman Powell and many of the significant banking personnel and economist say we're not in recession."  Rather than the traditional definition of recession, the administration has shifted to the Sahm Rule.

Sahm Recession Indicator signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its low during the previous 12 months.

By this metric, the US is not in recession.  Ergo, the administration has decided this is the correct method for determining if we are in a recession.

Cold War, Part 2?

With the ejection of diplomats/spies in the United States and Russia, there is talk that we are entering a new Cold War.  Unlikely.  Sure, we may not have the best of relations but the US is the world's number 1 economy and Russia ranks about 12th at a paltry 7% of the US economy.  California alone has an economy twice the size of Russia.  Economically, Russia is to the US what Slovakia is to Russia.  South Korea has a bigger economy than Russia!  Embarrassing.  Coal and Petroleum are the big exports for Russia and US fracking has depressed prices.  When ANWR starts producing, the oil market is going to be even more competitive.  We can economically hamstring Russia just by drilling for oil here.  Win-win!  As far as population, Russia is suffering a decline in population and has only 45% as many people as the US.  What about allies?  The US could count on the majority of the EU, Japan, South Korea, India, and probably most of the former Soviet Republics.  Russia can look forward to support from Syria and Iran.  China might adopt Russia as the new North Korea but wouldn't commit itself.  The breakup of the Soviet Union left Russia as a far less formidable country.

 

Putin benefits from memories of the Soviet days and makes great use of the memories of the former super power.

Whose Economy Is It?

Trump taking credit for Obama's economy is like someone inheriting millions from his dad and bragging about what a smart businessman he is.

Oliver Griswold, Twitter

 

As seen on Facebook, this is pretty funny. Throughout the Obama years, the anemic economy was blamed on the mismanagement of the Bush Administration. I recall posing the question that, if Romney won, would he be inheriting the Bush or Obama economy? Indeed, Obama's first term saw an average growth rate of less than 1%. His second term was quite a bit better at 2.1% but still anemic by historic standards. Let's explore the numbers, shall we.

 

 

Obama had inherited the worst economy of any president shown and it got worse. He is the first president since Hoover who never saw a year break 3% growth. His best year – 2010 - is worse than Bill Clinton’s worst year -1995. George W Bush does not compare well to Clinton either. The direction of the economy since Clinton left office has not been promising.

 

 

Both Bush and Obama had good excuses for a weak start. Bush had to contend with the Tech Bubble bursting and then 9/11. Obama started his presidency with the economy plunging into the deepest recession since the Depression. On the other hand, both Bush and Obama entered the presidency with plans to expand government. Bush had No Child Left Behind and the Medicare Part D Drug Benefit already in the queue when 9/11 prompted the creation of the Department of Homeland Security. Likewise, Obama entered with the promise of a health care overhaul, an $800 billion stimulus, and what eventually became the Dodd-Frank Act to further regulate the financial sector. Therefore, both entered in difficult economic times with plans to expand the scope and expense of government.

 

President Clinton’s first term had a very respectable average growth rate of 3.3%, despite his raising taxes and trying to nationalize the healthcare system. In 1996, he declared the era of big government to be over. His second term saw a phenomenal average growth rate of 4.4%. Moreover, the federal debt shrank during this period and the government was running surpluses.

 

Expectations play a big role in business investment. If the president comes into office with plans to increase the cost and burden of government, business waits to see how much more burdensome it will be and if its business model will still be profitable. On the other hand, if a president announces plans to reduce the cost of government and reduce regulations, capital starts flowing since the future environment will be better than the current one. Thus, Trump’s stated goals of repealing the Affordable Care Act (less burden), cutting taxes (less cost), cutting regulations (less burden), and reducing the federal workforce through attrition (less cost & burden) all indicate that the business landscape will be better tomorrow than it is today. The Trump Economy started on November 9th.

Bernie Sanders: Economic Illiterate

Looking at Bernie Sander's website and his views on Income and Wealth Equality, I discover that his plans didn't survive some back of the envelope math.

Putting at least 13 million Americans to work by investing $1 trillion over five years towards rebuilding our crumbling roads, bridges, railways, airports, public transit systems, ports, dams, wastewater plants, and other infrastructure needs.

 

Although I thought Obama had already dealt with this with his trillion dollar stimulus - no, wait.  He said shovel-ready wasn't as shovel-ready as he thought.  Okay, this still needs to get done.  That being the case, let's check the numbers.  $1 trillion dollars over a five year period will be $200 billion a year.  That $200 billion paid out as salary to 13 million (he said "at least" so we'll go with the minimum) would be $15,384.62 each.  Wow, that's not much, certainly not enough to raise a family.  And this doesn't even account for the materials needed to do all the rebuilding, so that is a maximum salary.

 

Increasing the federal minimum wage from $7.25 to $15 an hour by 2020. In the year 2015, no one who works 40 hours a week should be living in poverty.

 

$15 per hour would lead to $120 per 8 hour day or $600 per 5 day week.  That would amount to $31,200 a year, more than double what he plans to allocate for workers on his infrastructure project.  Well, let's look at that number.  $15,384.62 a year comes to $295.86 per week and $59.17 per day.  That would be $7.40 an hour, just above the current minimum wage.  Could that be a coincidence?  Extremely unlikely.  Of course, if he gets his minimum wage increase, we'll just have to allocate $2 trillion to the 5 year plan.  Easy as pie.  It will work much better when Bernie spends twice as much as Obama did.  Maybe they are finally shovel-ready?

Creating 1 million jobs for disadvantaged young Americans by investing $5.5 billion in a youth jobs program. Today, the youth unemployment rate is off the charts. We have got to end this tragedy by making sure teenagers and young adults have the jobs they need to move up the economic ladder.

 

They may be disadvantaged youth but they require the new minimum wage too, right?  Therefore, that $5.5 billion divide equally (Bernie is big on income equality) among the million youths would be $5,500 each.  At $15 per hour, that is 366 hours and 40 minutes of work or about 9 weeks of full time employment.  Is this a summer jobs program?  If it is meant to be year round, it will be 7 hours a week.  If not, these disadvantaged youth will be unemployed for 43 weeks of the year.

 

Requiring employers to provide at least 12 weeks of paid family and medical leave; two weeks of paid vacation; and 7 days of paid sick days. Real family values are about making sure that parents have the time they need to bond with their babies and take care of their children and relatives when they get ill.

That sounds very compassionate but increases the cost of labor.  How?  Let's break it down.  Looking at my minimum wage employee who is paid $31,200 a year, even if he and all his family is perfectly healthy, I am only getting $30,000 of labor, the other $1,200 going to his paid vacation.  Since I don't get those 80 hours of labor, I have to amortize that over the rest of the year.  It works out that I am really paying $15.60 per hour.  What if he takes all 7 paid sick days?  Now he is costing me $16.05 per hour.  Gads, what if he is out for the 12 week paid family medical leave too?  Now he is costing $21.31 per hour.  Sure, that is the worst case scenario but any woman in her childbearing years will use most or all of her 12 weeks.

 

With this huge and continuous shift of costs onto employers, is it any wonder that manufacturing is moving overseas?  As the cost of labor domestically rises relative to foreign labor, the issue becomes the cost of shipping.  With the proliferation of free trade agreements that erase tariffs, that cost is dropping.  Voila, China becomes the new manufacturing hub of the world, increased shipping costs are more than offset by the reduction in labor costs, and corporate profits skyrocket.  Corporations can move.  They will only stay while it is profitable to do so.  Bernie's prescriptions will accelerate the exodus.  Oh, but Bernie thought of that.

 

Reversing trade policies like NAFTA, CAFTA, and PNTR with China that have driven down wages and caused the loss of millions of jobs. If corporate America wants us to buy their products they need to manufacture those products in this country, not in China or other low-wage countries.

 

Not only is Bernie going to more than double the minimum wage, he's going to engage in protectionism.  The Smoot-Hawley Tariff Act of 1930 was supposed to get Americans to buy domestically manufactured goods and spur growth after the 1929 market crash.  Instead, it cut imports and exports by half through a trade war.  Didn't do the Great Depression a bit of good.  But maybe it will work for Bernie.  The World Trade Organization - of which we are a member - is going to love that.  Ignoring all that, let's just ponder where this goes.  The price of all goods in the US is currently based upon the importation of a large percentage of our manufactured goods.  Merely undoing that will cause the price of goods to rise dramatically as US labor costs are already higher than overseas.  Add to this the greatly increased labor costs.  To make up for this upheaval, corporations are going to have to raise prices dramatically.  And though government will have been the architect of the disaster, business will be blamed for gouging and being greedy, just like is happening with Obamacare now.

 

At the end of Bernie's proposed path is an economy worse than what currently exists, perhaps a great deal worse.

Over the Cliff

A month ago, I predicted that we would go off the Fiscal Cliff.  So far, my prediction still holds water.  There is now talk of a mini-deal to somewhat mitigate the cliff but it will only deal with taxes, not spending.  So, in effect, the President is asking the Republicans to raise taxes in exchange for nothing.  Well, not entirely nothing.  Provided the mini-deal passes, the Republicans won't be raising taxes on the middle class.  Yes, the balanced approach that the President spoke about throughout the campaign is all tax and no cut.  Of course, the President says we already have the cuts.  We're not going to spend billions in Iraq or Afghanistan for the next 10 years.  As Charles Krauthammer noted, we could save $800 billion by not building a ski resort on Mars.  The mini-deal, whether it passes or not, is of little consequence.  The movers and shakers of the economy are about to be hit with a tax increase.  Also, the middle class is going to suffer the Obamacare taxes.

 

The next big thing will be the debt ceiling.  If the Republicans are serious (they aren't), they will refuse to raise the debt ceiling.  Shutdown the government.  The debt is bigger than the economy and growing several times as fast as the economy.  Current projections add another $8 trillion to the debt over the next ten years.  This will lead to several possible outcomes:

 

1. Hyperinflation: the government puts the printing presses in high gear and produce trillions of new dollars to debase the currency.  This is never good for an economy and tends to collapse the government.
 

2. Tax hikes: Massive tax hikes would be required.  The government is spending 40% of GDP but only collecting just over half that in taxes.  If the government is going to spend 40% of GDP, it needs to tax that percentage of GDP.  It won't be enough to only tax the 'rich' to make that work.  Everyone gets hit.

3. Default: Not really an option but included for completeness.  The government stops paying its bills.  If we default on Social Security, Medicare, Drug Benefit, and Obamacare, the budget could be instantly balanced but the Congress would be voted out to person and possibly attacked by angry constituents.

 

All of this is obvious.  Everyone in DC knows that the current trajectory is suicidal but they are all children.  The President wants the US to be more like Europe and he's succeeding brilliantly.  Unless there is some massive growth in the economy, the government CANNOT possibly pay the money it has PROMISED to pay to future retirees.

 

If the Republicans shutdown the government (they won't) and hold the line until the fiscal house is put on a sustainable glide path (they won't), then there might be reason for hope.  But that won't happen.  Because, as mentioned in a previous post, Republicans are spineless.  I don't understand this since they will be blamed for whatever disaster befalls so they may as well earn the blame and save the country in the process.

Start the Presses!

Ben Bernanke has launched QE3, the latest effort to goose the economy with a constant infusion of freshly-printed cash.  In related news, the US credit rating was downgraded to AA- the following day.  One wonders why Bernanke would seek to print more money when the previous two printings demonstrably failed to get the economy rolling.

Though printing money doesn't do much good for the economy, it does wonders for the stock market.  Yes, no sooner had the Fed Chairman announced QE3 than stocks began to climb.  Though more people than ever before own stocks, the majority of them are still owned by a small slice of Americans in the upper income brackets.  So, one might say this is a boon to the rich more than anyone else.  But that's beside the point.  The Dow Jones has long been associated with the state of the economy.  If the Dow is climbing, the economy must be doing well.  No, not necessarily but it makes for a great sound bite.  It is easier to say the economy is roaring back if you can point to a rising stock market.

 

There is more than enough money already sitting out there but banks aren't lending it and businesses aren't spending it.  There is too much uncertainty which is preventing the money from flowing.  Taxmageddon - the expiration of the Bush tax cuts and the imposition of some Obamacare taxes - is just over three months away.  Obamacare is not yet fully-implemented and the associated costs are still not known.  In a recent speech, Obama promised to follow FDR's experimentation to repair the economy; FDR presided over the Great Depression and, despite what everyone on the left says, exacerbated it with his experimentation.  Economic recoveries never took long until government tried to help.

 

In a funny scene in Around the World in 80 Days (the one with Jackie Chan), Phileas tries to help in a fight by offering advice.  Jackie is getting beaten and finally cries, "Stop helping me!"  That's what we need to say to government.

The Money Illusion

Some months ago, I heard Scott Sumner (PhD Economist) on a Podcast I follow (EconTalk with Russ Roberts) and was intrigued.  He kept arguing for growth in Nominal Gross Domestic Product (NGDP), which is denominated in current dollars which may be less valuable than last year's dollars.  Thus, NGDP can be different from Real GDP.  One can have nominal growth simply by printing more currency even in an economy with RGDP of zero.  This seems somehow wrong to me.  It's like he wants to trick the economy into thinking there is growth even when there isn't.  Nonetheless, I found his blog and have followed it since then.  He says the darnedest things and makes a surprisingly good case.

Sumner holds that the Federal Reserve should have a targeted NGDP, assuring that the economy is constantly expanding.  I have long thought that money was supposed to be a reliable store of value but Sumner is proposing to forever decrease its value through this constant rate of inflation.  I was long a supporter of the gold standard but that is unrealistic since the supply of gold is not growing at a rate equal to the growth of world economies.  As such, the gold standard would effectively shrink the money supply.  Likewise, it is difficult to target fiat money to the actual growth rate and that might, in recessions, prove to be a problem by again shrinking the money suppy (as happened in the Great Depression).  So, I find myself in agreement with much of what he has to say but still find the idea of constant, planned inflation disagreeable.

Some other things Sumner has declared have also grated on me.  For instance, he proclaims that we have a very tight money supply, which seems impossible with all the Quantitative Easing.  How can you pour cash into a stagnant economy and not have inflation?  He has explained but that bit has yet to make sense for me.  Still, he keeps me coming back and has surely changed some of my thinking.  He may yet win me over to his NGDP targeting and I don't think I will forgive him if he does.

Check out his blog here:

http://www.themoneyillusion.com/

The Buffet Rule

The president has become a broken record about the Buffet Rule. Used to be that he claimed Warren Buffet wanted to pay more taxes than his secretary. Now Obama tells us that Ronald Reagan would be on his side in this. I rather doubt that. There was talk of this as a deficit-reduction measure but then someone ran the numbers. The rule would - provided the targets didn't modify their behavior once the tax was passed - raise $47 billion over the next ten years.

Quick math: $47 billion divide by 10 years = $4.7 billion a year. The deficit is somewhere north of $1 trillion dollars, making this less than 0.5% of the deficit. $1.3 trillion becomes $1.295 trillion. Yeah, that's much better. The government is currently spending $3.5 trillion a year. A 0.5% cut (1 penny out of every $2) across the board would reduce the deficit by $17 billion a year, more than triple the impact of the Buffet Rule. Sounds like the Buffet Rule is an election year gimmick that will have no real impact but certainly fuels a class war.

Gimmicky tax increases will not resolve our fiscal problems. However, they might help Obama get re-elected. It serves as yet another distraction from the sputtering economy. There will be no end to the distractions because Obama cannot run on the state of the economy.