It's Wednesday, and today I discuss the latest US inflation data, which shows a significant…
Today, I read a Bloomberg article – How the IMF Can Help Reduce Unemployment – which, in part, makes out that the IMF know what they are talking about when it comes to macroeconomic policy (that was the hilarious aspect). The article also claims that the US government has pursued “expansionary fiscal policy … aggressively but growth has remained too weak”. That claim, which surfaces most days, is being used to indoctrinate people into holding the view that fiscal policy has failed and there is little the government can now do other than turn it over the market (with very substantial handouts to the powerful lobby groups – of-course – but that isn’t really government spending is it – not like helping the pitifully poor unemployed who have no income and no power)! This theme repeats like a worn out record. The reality is that the US government didn’t give fiscal policy a chance to work fully. It was clear that the stimulus packages underpinned economic growth in 2009 and 2010 and led to an increase in private confidence (backed by growth in consumption and private investment spending). But the fiscal support was withdrawn too soon as the latest national accounts data clearly shows. The point is that the US government wasn’t aggressive enough, got cold feet too soon, and has never exhausted its fiscal options.
The Bloomberg article also claims that:
The U.S. isn’t expected to return to full employment for at least six more years, and the consensus in Washington seems to be that President Barack Obama’s administration has no options to improve that dreary outlook.
The “consensus” in Washington. I am sure the gang at the Washington-based – Center for Economic and Policy Research – don’t agree with that fatalism (aka as ideological banter designed to convince the public that government has not effective policy tools) – which means there is no consensus in Washington.
The pitifully-weak and ignorant political class and their hangers-on might want American people to believe that all stops have been pulled out but the data tells us a different story.
Last week (January 30, 2013) the – US Bureau of Economic Analysis – published the – US National Income and Product Accounts – for the December-quarter 2012 (the advanced estimates – which might be revised subsequently as new data comes in).
The BEA said in the release that:
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 0.1 percent in the fourth quarter of 2012 … In the third quarter, real GDP increased 3.1 percent … The decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased.
The following sequence of graphs captures the story. The first compares the September-quarter 2012 with the December-quarter 2012 contributions to real GDP growth at the level of the broad spending aggregate. The only aggregate source of growth came from private consumption spending, which contributed 1.52 points to the overall figure of -0.1 per cent real GDP growth.
The contraction of the government sector scythed 1.33 points of real GDP growth in the December-quarter with the largest component of that coming from the federal level. Net exports were responsible from 0.25 points contraction, by in the scheme of things, net exports rarely is the driver of real GDP growth in the US.
The next graph decomposes the government sector into its parts and reveals that it was the contraction in military spending that did the damage. Now for the likes of me the reduction in US military spending is a massive bonus for world peace. I don’t buy the argument that peace only comes if all nations arm themselves to the teeth. The massive military spending in the US allows it to bully nations, invade them illegally and generally worsen localised ethnic tensions, dramatically infringe on human rights and, overall, destabilise World peace.
But the macroeconomist in me says that with unemployment as high as it is – (see yesterday’s blog – The US labour market is still in a deplorable state) – and growth now lagging well below that which is necessary to reduce that unemployment, particularly to be able to eat into the pool of long-term unemployed, now is not the time to be cutting federal spending overall.
Yes, I support a dramatic cut in US military spending. Yes, I support a dramatic increase in spending on job programs, public infrastructure, public education, public health (and the destruction of the hold that the private insurance industry and the pharmaceutical companies have on health spending in the US), and environmental investments in renewable energy.
No, I don’t support an overall contractionary fiscal policy position in the US (or nearly anywhere for that matter). That is, the latter “dramatic” should be a few percentage points of GDP larger than the former “dramatic”.
In the first graph, you will note that private investment spending was also a drag on real GDP growth in the December-quarter 2012 – by -0.08 points. However, that is not the full story. The next graph decomposes the spending categories that constitute total gross capital formation.
While overall investment dragged on growth, fixed investment added 1.19 points, non-residential added 0.83 points, structures dragged -0.03 points, equipment and software added 0.36 points and the change in private inventories dragged growth down by a fairly large 1.27 percentage points.
The BEA say:
The change in real private inventories subtracted 1.27 percentage points from the fourth-quarter change in real GDP after adding 0.73 percentage point to the third-quarter change. Private businesses increased inventories $20.0 billion in the fourth quarter, following increases of $60.3 billion in the third and $41.4 billion in the second.
The question that is unclear is whether this buildup of inventories was unintended. That is, whether it marks the start of an inventory cycle that reflects weak demand and a further contraction in output and income in the coming year.
My guess at this stage (and I will wait until the “second” estimate for the fourth quarter, based on more complete data … [is] … released on February 28, 2013″ before I firm up the guess into a view – is that with private consumption spending being strong (increased by 2.2 per cent in the fourth quarter) – building on growth of 1.6 per cent in the third-quarter 2012 – that the build-up in inventories may have been more planned than involuntary. Judgement is reserved on that one at present though.
The following sequence of graphs show the contributions to quarterly real GDP growth in the US since the March-quarter 1980 to the December-quarter 2012 by government level (total, federal and state/local in order).
It allows us to see the behaviour of government during the very severe 1982 recession relative to its current behaviour. In the lowest graph I have superimposed the quarterly percentage real GDP growth (right-axis) to let you see the turning points in the cycle and the recovery aftermath over the course of recent history.
The 1982 downturn began after real GDP growth peaked in July 1981 and it took 16 months to reach the trough in November 1982. There had been an earlier official recession – (see NBER cycle dating) – from January 1980 to July 1980 (a 6-month descent).
The data shows that the US government sector (under the self-styled Thatcherite “Ronny Raygun”) consistently supported growth through the recession (one quarter of contraction) and, importantly, maintained that support in the recovery phase.
That stands in stark contrast to the behaviour of the federal government in the current downturn and recovery.
Since late December 2010, the overall government sector in the US has been undermining real GDP growth as its dysfunctional Congress battles for the title of which political party can do the most damage.
The US government overall started to drag on real growth almost immediately after it had begun. Overall real GDP growth turned positive again in September 2009.
The federal level has been a negative contributor to quarterly real GDP growth for 8 of the last 9 quarters since December 2010. That should put in perspective the claims that “we tried aggressive fiscal policy and it didn’t work”.
The correct statement is that the US government injected a stimulus throughout 2008 and maintained it until September 2009, whereupon it got bullied into submission by the lunatic right, which includes Blue Democrats, most of the Republican party and all the fringe groups with money that consistently lie to the American people about matters fiscal.
The situation is even worse at the State and Local government levels.
Since March 2008, state and local governments together have been negative contributors to real GDP growth in 16 of the 20 quarters, and every quarter since September 2010.
If you consider the previous recession periods, both levels of government were running counter-cyclical strategies (contributing positively to growth) in contrast to the present recession.
This is especially so when you consider the State and Local governments.
So as the private sector struggles to build momentum, the support that is typically (and correctly) provided by the public sector in the early phases of recovery has been absent in this crisis.
State and Local government revenues cannot expand when their economies are stagnating or recessing. It is a myopic strategy to attempt to run budget balances by cutting spending in a downward chase of cyclically declining revenue. We have several years of data to confirm that proposition.
While many (most) states are tied by balanced budget legislation (which I urge them to repeal and allow themselves fiscal freedom) the solution to their declining tax bases was clear.
The Federal government which has not such legislative constraint should have engaged in significant transfers to the states to ensure that state and local employment and activity was maintained during the crisis.
While I am extremely critical of the Eurozone for designing a flawed monetary union from the outset that was always destined to fail once it was hit by a large negative aggregate demand shock, the US system is not doing that much better. However, the Europeans will have to alter their entire monetary system to overcome its intrinsic flaw if it wants to avoid a worsening situation.
In the case of the US, all that was needed was some responsible federal fiscal policy initiatives to buffer the declining state revenues and allow these non-currency issuing levels of government to maintain employment.
The fact that the US government has largely failed to do that is an indictment of their fiscal irresponsibility.
The pro-cyclical government cutbacks have introduced a vicious circle of income loss, saving loss, wealth destruction, continuing real estate crisis, loss of state and local revenue, further cutbacks according to the application of their inappropriate fiscal rules (balanced budget amendments).
The pro-cyclical nature of state and local government employment is one of the principle reasons the US recession has endured and will ensure the long-term damage to that nation’s vitality and ability to provide high quality services to its people.
The reasoning in the public debate about the future consequences of government budget deficits is wrong-headed. The capacity of the US to provide for an ageing society amidst the long-term decline in its industry doesn’t depend on cutting in to public spending now – which is patently causing law and order to deteriorate, the standard of public education and health to slip.
Exactly the opposite response is required. Schools need to be revitalised. Communities need to be sure the streets are safe so that businesses will have an incentive to invest. People need to be mentally and physically well.
As I noted yesterday, the true burden the US government is leaving the grandchildren of American is not the public debt that it has outstanding (however large that level might become). Rather, it is the lost employment opportunities, the lost public investment opportunities, the decline of the US urban environments and the persistently high unemployment, especially among the youth.
They can never regain those opportunities and the damage is enormous. They should stop adding to the damage today.
As a postscript – Spain has found a clever way to avoid producing anything much – just make sure overall unemployment rates continue to rise (approaching 26 per cent) and have upwards of 55 per cent of the willing youth labour force out of work. Devilishly clever economic strategy! That is what the latest data shows – which I might comment on in more detail if I can overcome the depression associated with reading it.
That is enough for today!
(c) Copyright 2012 Bill Mitchell. All Rights Reserved.