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Joe’s “Boom”: Mendacity or Memory Loss?

06 Tuesday Oct 2020

Posted by Nuetzel in economic growth, Executive Authority

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Barack Obama, Coronavirus, Donald Trump, economic growth, Economic Stimulus of 2009, Issues & Insights, Job Growth, Joe Biden, Lockdowns, Non-Pharmaceutical interventions, Pandemic, Presidential Debate, Public Health, Shovel-Ready Projects

Joe Biden has claimed that he and Barack Obama had left Donald Trump with a “booming” economy to start his term in office. Of course, if he had anything to do with economic performance during the Obama Administration, it may have been his oversight of the mismanaged and ineffective “shovel-ready” stimulus program of 2009, For his sake, one might hope (and suspect) his oversight was nominal. In any case, his characterization of the Obama economy is not really accurate, as this editorial at Issues and Insights demonstrates. I could argue with a few of their points, but the thrust of it is correct. The economy weakened in 2015 and 2016, and expectations were for continued slow growth or possibly a recession in 2017 or after. At that point, many economists thought the aging expansion might be on its last legs. But economic growth exceeded expectations after Trump took office. As for job growth, economists predicted relatively sluggish growth in 2017-2019, but actual job growth exceeded those projections by more than three times.

Finally, Biden’s assertion that “Trump caused the recession” was laughable, especially when the punchline is his willingness to “shut down the economy“! He insists “I would listen to the scientists”, presumably the same knuckleheads who don’t understand the public health tradeoffs between the pandemic itself and lockdown risks (and who don’t understand the Constitution). Biden might not understand that the President lacks constitutional powers to demand a nationwide shutdown. Trump was quite sensibly persuaded to leave non-pharmaceutical interventions in the hands of the private sector as well as state and local governments, with guidance from federal health authorities. That some state and local leaders instituted draconian policies, which were largely ineffective and often damaging. was and is a terrible misfortune. The more sensible approach is to  protect the most vulnerable and allow others to gauge their own risks, as we always have in earlier pandemics.

Not Obama’s Economy

01 Sunday Mar 2020

Posted by Nuetzel in economic growth, Macroeconomics

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Barack Obama, Caronavirus, Chuck Jones, Donald Trump, Federal Reserve, Forbes, Great Recession, Joe Biden, Minority Unemployment, Minority Wage Growth, Monetary policy, NPR.org, Shovel-Ready Projects, Trump Economy

The “Trump economy” hasn’t been half bad, though one can’t attribute all of the results to the economic policies of his administration. In fact, the economy was growing when he took office, though it took several years after the Great Recession to recover under Barack Obama, and various sectors were showing strains before Trump took office. And yes, Obama inherited a very bad economy, but he went off the rails a few weeks ago in a pathetic attempt to take credit for ten-plus years of economic growth. Here is one of his tweets:

“Eleven years ago today, near the bottom of the worst recession in generations, I signed the Recovery Act, paving the way for more than a decade of economic growth and the longest streak of job creation in American history,”

The tweet was immediately ridiculed by Trump, as is his habit, but at best Obama received lukewarm support from his usually adoring media outlets. How interesting, however, that just a few days before Obama’s tweet, Chuck Jones, a regular Forbes contributor who really needn’t prove he’s an Obama hack, submitted a scorecard of economic performance covering President Trump’s first three years in office. It was an exercise in throwing shade at a series of good numbers. Then, a week later, Jones had the chutzpah to claim the Obama’s “shovel-ready” stimulus program of a decade ago, which proved anemic in its effects, was the proximate cause of healthy growth under Trump’s watch. Who gave him that idea?

Jones’ effort to diminish Trump’s economic accomplishments is music to the ears of leftists wistful for the days of Obama. They fancy Jones’ appearance in what they assume to be a right-leaning outlet as an enhancement to the credibility of his claims. Forbes, however, is certainly not the bastion of conservatism the Left would have you believe. Their model pays contributors who drive circulation, which has little to do with political alignment. To the extent that Jones is able to stroke the predilections of the Left, he probably can play well at that game.

The truth is it’s difficult to attribute variations in economic growth to different presidential administrations. This fairly well-balanced piece at NPR.org gives one very simple reason:

“Let’s stipulate that presidents of both parties often get more credit and blame for economic conditions than they deserve, given that much of what happens is outside their control.”

It is true that a new administration inherits economic conditions and policies from its predecessor. Trump inherited an economy that was growing, but there were plenty of strains, including sluggish wage growth, low labor force participation, weak business startups, and a languid housing sector, as this link makes clear. Moreover, economic expansions have lasted an average of only about five years in the post-WW2 era. The current expansion was about 90 months running at the time of Trump’s inauguration, a stage at which vulnerabilities might develop. But new policies often lead to new economic realities. In Trump’s case, that included tax cuts, and especially corporate tax cuts that spurred hiring and wage growth, and more liberalized regulation. Accommodative monetary policy by the Federal Reserve also provided an assist. As the chart at the top shows, Trump’s platform lifted small business enthusiasm considerably, which is a broad indicator of economic vibrancy. Of course, his trade initiatives have probably had negative effects thus far, but his way of negotiating new trade agreements might well end up making a positive contribution, on balance.

Now, the danger of a caronavirus pandemic is presenting major economic challenges. It’s unlikely to produce as many deaths as a bad flu season in the U.S., in part because the Trump Administration took quick action to limit domestic exposure. Nevertheless, the economic consequences of the virus and attempts to control its spread will be significant. At least the economy was strong when the shock occurred, so it is reasonable to expect a rebound if the outbreak runs its course over the next month or two.

The economic record since Trump took office has been impressive given the stage of the business cycle at which he took office. Not only that, but minority wage growth has surged, and minority unemployment has fallen substantially. Let’s face it: Obama and Joe Biden are eager to neutralize any plaudits a strong economy might earn Trump in an election year, but they shouldn’t embarrass themselves by trying to take credit for it, and Chuck Jones could do better than carrying their water.

 

 

Enduring A Dead-Weight Dominion

13 Wednesday Jan 2016

Posted by Nuetzel in Big Government, Macroeconomics

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Anthony de Jasay, Automatic Stabilizers, Big government, Boom and Bust Cycle, central planning, Code of Federal Regulations, Double Taxation, Federal Reserve, Final Output, Government intervention, infrastructure, Intermediate Transactions, John Maynard Keynes, Keynesian Economics, Malinvestment, Mark Skousen, Mercatus Center, Shovel-Ready Projects, Spontaneous Order, Stabilization policy, Too big to fail, Underconsumption

government-intervention

If you hope for government to solve economic problems, try to maintain some perspective: the state has unique abilities to botch it, and its power to distort and degrade the economy in the process of “helping” is vast. Government spending at all levels copped about 18% of the U.S.  economy’s final output in 2014, but the public sector’s impact is far more pervasive than that suggests. Private fixed investment in new structures and equipment accounted for only about 16% of Gross Domestic Product (GDP); the nonresidential portion of fixed investment was less than 13% of GDP. I highlight these two components of GDP because no one doubts the importance of capital investment as a determinant of the economy’s productive capacity. But government is a larger share of spending, it can divert saving away from investment, and it creates a host of other impediments to productivity and efficient resource allocation.

The private economy is remarkable in its capacity to satisfy human wants. The market is a manifestation of spontaneous order, lacking the conscious design of any supreme authority. It is able to adjust to dynamic shifts in desires and resource constraints; it provides reliable feedback in the form of changing prices to modulate and guide the responses of participants through all stages of production. Most forms of government activity, however, are not guided by these signals. Instead, the state imposes binding and sometimes immediate constraints on the decisions of market participants. The interference takes a number of forms, including price controls, but they all have the power to damage the performance and outcomes of markets.

The productive base at each stage of the market process is a consequence of the interplay of perceived business opportunities and acts of saving or deferred consumption. The available flow of saving depends on its rewards, which are heavily influenced by taxes and government intervention in financial markets. It’s worth noting here that the U.S. has the highest corporate tax rates in the developed world, as well as double taxation of corporate income paid out to owners. In addition, the tax system is used as a tool to manipulate the allocation of resources, drawing them into uses that are politically favored and punishing those in disfavor. The damaging impact is compounded by the fact that changes in taxes are often unknown ex ante. This adds a degree of political risk to any investment decision, thus discouraging capital spending and growth in the economy’s productive base.

The government is also a massive and growing regulator of economic activity. Over 100,000 new regulatory restrictions were added to the Code of Federal Regulations between 2008 and 2012. Regulation can have prohibitive compliance costs and may forbid certain efficiencies, often based on flimsy or nonexistent cost/benefit comparisons. It therefore damages the value and returns on embedded capital and discourages new investment. It is usually uneven in its effects across industries and it typically reduces the level of competition in markets because small firms are less capable of surviving the costs it imposes. Innovation is stifled and prices are higher as a result.

From a philosophical perspective, even the best cost/benefit comparisons are suspect as tools for evaluating government intervention. Don Boudreaux quotes Anthony de Jasay’s The State on this point:

“What could be more innocuous, more unexceptional than to refrain from intervening unless the cost-benefit comparison is favourable? Yet it treats the balancing of benefits and costs, good and bad consequences, as if the logical status of such balancing were a settled matter, as if it were technically perhaps demanding but philosophically straightforward. Costs and benefits, however, stretch into the future (problems of predictability) and benefits do not normally or exclusively accrue to the same persons who bear the costs (problems of externality). … Treating it as a pragmatic question of factual analysis, one of information and measurement, is tacitly taking the prior and much larger questions as having been somehow, somewhere resolved. Only they have not been.“

Poorly-executed and inappropriate stabilization policy is another way in which government distorts decisions at all stages of production. There are many reasons why these policies tend to be ineffective and potentially destructive, especially in the long run. Keynesian economics, based on ideas articulated by John Maynard Keynes, offers prescriptions for government action during times of instability. That means “expansionary” policy when the economy is weak and “contractionary” policy when it is strong.  At least that is the intent. This framework relies on the notion that components of aggregate demand determine the economy’s output, prices and employment.

The major components of GDP in the National Income and Product Accounts are consumer spending, private investment, government spending, and net foreign spending. In a Keynesian world, these are treated as four distinct parts of aggregate “demand”, and each is governed by particular kinds of assumed behavior. Supply effects are treated with little rigor, if at all, and earlier stages of production are considered only to the extent that their value added is included, and that the finished value of  investment (including new inventories) is one of the components of aggregate demand.

Final spending on goods and services (GDP) may be convenient because it corresponds to GDP, but that is simply an accounting identity. In fact, GDP represents less than 45% of all transactions. (See the end note below.) In other words, intermediate transactions for raw materials, business-to-business (B2B) exchange of services and goods in a partly fabricated state, and payments for distributional services are not counted, but they exceed GDP. They are also more variable than GDP over the course of the business cycle. Income is generated and value is added at each stage of production, not only in final transactions. To say that “value-added” is counted across all stages is a restatement of the accounting identity. It does not mean that those stages are treated behaviorally. Technology, capital, employees, and complex decision-making are required at each stage to meet demands in competitive markets. Aggregation at the final goods level glosses over all this detail.

The focus of the media and government policymakers in a weak economy is usually on “underconsumption”. The claim is often heard that consumer spending represents “over two-thirds of the economy”, but it is only about one-third of total transactions at all levels. It is therefore not as powerful an engine as many analysts assert. Government efforts to stimulate consumption are often thwarted by consumers themselves, who behave in ways that are difficult for models to capture accurately.

Government spending to combat weakness is another typical prescription, but such efforts are usually ill-timed and are difficult to reverse as the economy regains strength. The value of most government “output” is not tested in markets and it is not subject to competitive pressure, so as the government absorbs additional resources, the ability of the economy to grow is compromised. Programmatic ratcheting is always a risk when transfer payments are expanded. (Fixed programs that act as “automatic stabilizers”, and that are fiscally neutral over the business cycle, are less objectionable on these grounds, but only to the extent that they are not manipulated by politicians or subject to fraud.) Furthermore, any measure that adds to government deficits creates competition for the savings available for private capital investment. Thus, deficits can reduce the private economy’s productive capacity.

Government investment in infrastructure is a common refrain, but infrastructure spending should be tied to actual needs, not to the business cycle. Using public infrastructure spending for stabilization policy creates severe problems of timing. Few projects are ever “shovel-ready”, and rushing into them is a prescription for poor management, cost overruns and low quality.

Historically, economic instability has often been a consequence of poorly-timed monetary policy actions. Excessive money growth engineered by the Federal Reserve has stimulated excessive booms and inflation in the prices of goods and assets. These boom episodes were followed by market busts and recessions when the Fed attempted to course-correct by restraining money growth. Booms tend to foster misjudgments about risk that end in over-investment in certain assets. This is especially true when government encourages risk-taking via implicit “guarantees” (Fannie Mae and Freddie Mac) and “too-big-to-fail” promises, or among individuals who can least afford it, such as low-income homebuyers.

Given a boom-and-bust cycle inflicted by monetary mismanagement, attempts to stimulate demand are usually the wrong prescription for a weak economy. Unemployed resources during recessions are a direct consequence of the earlier malinvestment. It is better to let asset prices and wages adjust to bring them into line with reality, while assisting those who must transition to new employment. The best prescription for instability is a neutral stance toward market risks combined with stable policy, not more badly-timed countercyclical efforts. The best prescription for economic growth is to shrink government’s absorption of resources, restoring their availability to those with incentives to use them optimally.

The more that central authorities attempt to guide the economy, the worse it gets. The torpid recovery from the last recession, despite great efforts at stimulus, demonstrates the futility of demand-side stabilization policy. The sluggishness of the current expansion also bears witness to the counterproductive nature of government activism. It’s a great credit to the private market that it is so resilient in the face of long-standing government economic and regulatory mismanagement. A bureaucracy employing a large cadre of technocrats is a “luxury” that only a productive, dynamic economy can afford. Or can it?

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

A Note On Output Measures

More complete aggregations of economic activity than GDP are gross output (GO) and gross domestic expenditures (GDE). These were developed in detail by economist Mark Skousen in his book “The Structure of Production“, published in 1990. GO includes all final transactions plus business-to-business (B2B) transactions, while GDE adds the costs of wholesale and retail distribution to GO. Or as Skousen says in this paper:

“GDE is defined as the value of all transactions (sales) in the production of new goods and services, both finished and unfinished, at all stages of production inside a country during a calendar year.“

GO and GDE show the dominance of business transactions in economic activity. GDE is more than twice as large as GDP, and B2B transactions plus business investment are twice the size of consumer spending. According to Skousen, GDE varies with the business cycle much more than GDP. Many economic indicators focus on statistics at earlier stages of production, yet real final spending is often assumed to be the only measure of transactions that matters.

 

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