Archive for the ‘Structural Crisis’ Category
With the election over, the news is now focused, somewhat hysterically, on the threat of the fiscal cliff.
The fiscal cliff refers to the fact that at the end of this calendar year several temporary tax cuts are scheduled to expire (including those that lowered rates on income and capital gains as well as payroll taxes) and early in the next year spending cuts are scheduled for military and non-military federal programs. See here for details on the taxes and programs.
Most analysts agree that if tax rates rise and federal spending is cut the result will be a significant contraction in aggregate demand, pushing the U.S. economy into recession in 2013.
The U.S. economy is already losing steam. GDP growth in the second half of 2009, which marked the start of the recovery, averaged 2.7% on an annualized basis. GDP growth in 2010 was a lower 2.4%. GDP growth in 2011 averaged a still lower 2.0%. And growth in the first half of this year declined again, to an annualized rate of 1.8%.
With banks unwilling to loan, businesses unwilling to invest or hire, and government spending already on the decline, there can be little doubt that a further fiscal tightening will indeed mean recession.
So, assuming we don’t want to go over the fiscal cliff, what are our choices?
Both Republicans and Democrats face this moment in agreement that our national deficits and debt are out of control and must be reduced regardless of the consequences for overall economic activity. What they disagree on is how best to achieve the reduction. Most Republicans argue that we should renew the existing tax cuts and protect the military budget. Deficit reduction should come from slashing the non-military discretionary portion of the budget, which, as Ethan Pollack explains, includes:
safety net programs like housing vouchers and nutrition assistance for women and infants; most of the funding for the enforcement of consumer protection, environmental protection, and financial regulation; and practically all of the federal government’s civilian public investments, such as infrastructure, education, training, and research and development.
The table below shows the various programs/budgets that make up the non-security discretionary budget and their relative size. The chart that follows shows how spending on this part of the budget is already under attack by both Democrats and Republicans.
Unfortunately, the Democrat’s response to the fiscal cliff is only marginally better than that of the Republicans. President Obama also wants to shrink the deficit and national debt, but in “a more balanced way.” He wants both tax increases and spending cuts. He is on record seeking $4 trillion in deficit reduction over a ten year period, with a ratio of $2.50 in spending cuts for every $1 in new revenue.
The additional revenue in his plan will come from allowing tax cuts for the wealthy to expire, raising the tax rate on the top income tax bracket, and limiting the value of tax deductions. While an important improvement, President Obama is also committed to significant cuts in non-military discretionary spending. Although his cuts would not be as great as those advocated by the Republicans, reducing spending on most of the targeted programs makes little social or economic sense given current economic conditions.
So, how do we scale the fiscal cliff in a responsible way?
We need to start with the understanding that we do not face a serious national deficit or debt problem. As Jamie Galbraith notes:
. . . is there a looming crisis of debt or deficits, such that sacrifices in general are necessary? No, there is not. Not in the short run – as almost everyone agrees. But also: not in the long run. What we have are computer projections, based on arbitrary – and in fact capricious – assumptions. But even the computer projections no longer show much of a crisis. CBO has adjusted its interest rate forecast, and even under its “alternative fiscal scenario” the debt/GDP ratio now stabilizes after a few years.
Actually, as the chart below shows, the deficit is already rapidly falling. In fact, the decline in government spending over the last few years is likely one of the reasons why our economic growth is slowing so dramatically.
As Jed Graham points out:
From fiscal 2009 to fiscal 2012, the deficit shrank 3.1 percentage points, from 10.1% to 7.0% of GDP. That’s just a bit faster than the 3.0 percentage point deficit improvement from 1995 to ’98, but at that point, the economy had everything going for it.
Other occasions when the federal deficit contracted by much more than 1 percentage point a year have coincided with recession. Some examples include 1937, 1960 and 1969.
In short, we do not face a serious problem of growing government deficits. Rather the problem is one of too fast a reduction in the deficit in light of our slowing economy.
As to the challenge of the fiscal cliff—here we have to recognize, as Josh Bivens and Andrew Fieldhouse explain, that:
the budget impact and the economic impact are not necessarily the same. Some policies that are expensive in budgetary terms have only modest economic impacts (for example, the 2001 and 2003 tax cuts aimed at high-income households are costly but do not have much economic impact). Conversely, other policies with small budgetary costs have big economic impacts (for example, extended unemployment insurance benefits).
In other words, we should indeed allow the temporary tax rate deductions for the wealthy to expire, on both income and capital gains taxes. These deductions cost us dearly on the budget side without adding much on the economic side. As shown here and here, the evidence is strong that the only thing produced by lowering taxes on the wealthy is greater income inequality.
Letting existing tax rates rise for individuals making over $200,000 and families making over $250,000 a year, raising the top income tax bracket for both couples and singles that make more than $388,350, and limiting tax deductions will generate close to $1.5 trillion dollars over ten years as highlighted below in a Wall Street Journal graphic .
However, in contrast to President Obama’s proposal, we should also support the planned $500 billion in cuts to the military budget. We don’t need the new weapons and studies are clear that spending on the military (as well as tax cuts) is a poor way to generate jobs. For example, the table below shows the employment effects of spending $1 billion on the military versus spending the same amount on education, health care, clean energy, or tax cuts.
And, we should also oppose any cuts in our non-security discretionary budget. Instead, we should take at least half the savings from the higher tax revenues and military spending cuts–that would be a minimum of $1 trillion–and spend it on programs designed to boost our physical and social infrastructure. Here I have in mind retrofitting buildings, improving our mass transit systems, increasing our development and use of safe and renewable energy sources like wind and solar, and expanding and strengthening our social services, including education, health care, libraries, and the like.
Our goal should be a strong and accountable public sector, good jobs for all, and healthy communities, not debt reduction. The above policy begins to move us in the right direction.
One of the biggest obstacles to improving economic conditions has been majority belief that our current economic system is capable of delivering steady improvements in living and working conditions. Because of that belief, it has been easy for economic and political elites to convince large numbers of people that current economic problems must be the result of too much government spending, or immigrants, or unions, or taxes or . . . . In other words anything but capitalism itself.
However, there are now signs that the times may be changing.
A New York Times blog post by Thomas B. Edsall discusses some recent polling data which suggests that growing numbers of Americans, what many analysts are calling the rising American electorate–unmarried women, young people, Hispanics, and African Americans–are open to serious economic change.
For example, Edsall summarizes the results of one poll as follows:
When voters were asked whether cutting taxes or investing in education and infrastructure is the better policy to promote economic growth, the constituencies of the new liberal electorate consistently chose education and infrastructure by margins ranging from 2-1 to 3-2 — African Americans by 62-33, Hispanics by 61-37, never-married men by 56-38, never-married women by 64-30, voters under 30 by 63-34, and those with post-graduate education by 60-33.
Conservative constituencies generally chose lowering taxes by strong margins — whites by 52-42, married men by 59-34, married women by 51-44, all men by 52-41; older voters between the ages of 50 and 65 by 54-42.
The constituencies that make up the rising American electorate are firmly in favor of government action to reduce the gap between rich and poor, by 85-15 among blacks, 74-26 for Hispanics; 70-30 never-married men; 83-15 never-married women; and 76-24 among voters under 30. Conservative groups range from lukewarm to opposed: 53-47 for men; 53-47 among voters 50-65; 46-54 among married men; 52-47 among all whites.
One of the clearest divides between the rising American electorate and the rest of the country is in responses to the statement “Government is providing too many social services that should be left to religious groups and private charities. Black disagree 67-32; Hispanics disagree 57-40; never-married women 70-27; never-married men, 59-41; young voters, 66-34; and post-grad, 65-34. Conversely, whites agree with the statement 54-45; married men agree, 60-39; married women, 55-44; all men, 55-43.
Edsall also cites a 2011 Pew Research Center Poll that is even more suggestive of support for fundamental change. Although it is impossible to know what people mean by the terms capitalism and socialism, the table below, taken from the poll, suggests that opposition to capitalism is at significant levels among many of the groups that comprise the rising American electorate.
Polling data is not the same as political action of course. But the negative views of capitalism and surprisingly strong support for socialism among many in the population must be worrisome to those who continue to benefit from existing economic relations.
One can only imagine that far more people will come to hold these views if government leaders succeed in using the artificially created “fiscal cliff” to further cut key social programs. People want action on jobs, not cuts in government spending, regardless of whether those cuts are accompanied by tax increases on the wealthy.
There is growing talk that the economy is finally on its way to recovery—“A Steady, Slo-Mo Recovery”—in the words of Businessweek.
Here is how Peter Coy, writing in Businessweek, explains the growing consensus:
Job growth is poised to continue increasing tax revenue, which will make it easier to shrink the budget deficit while keeping taxes low and preserving essential spending. All this will occur without any magic emanating from the Oval Office. It would have occurred if Mitt Romney had been elected president. “The economy’s operating well below potential, and there’s a lot of room for growth” regardless of who’s in office, says Mark Zandi, chief economist of forecaster Moody’s Analytics.
Something could still go wrong, but the median prediction of 37 economists surveyed by Blue Chip Economic Indicators is that during the next four years, economic growth will gather momentum as jobless people go back to work and unused machinery is put back into service. “The self-correcting forces in the economy will prevail,” predicts Ben Herzon, senior economist at Macroeconomic Advisers, a forecasting firm in St. Louis.
Before we get lulled to sleep, we need some perspective about the challenges ahead. How about this: we face a 9 million jobs gap, and this doesn’t even address the low quality of the jobs being created.
The chart below, taken from an Economic Policy Institute blog post, illustrates the gap.
As Heidi Shierholz, the author of the post, explains:
The labor market has added nearly 5 million jobs since the post-Great Recession low in Feb. 2010. Because of the historic job loss of the Great Recession, however, the labor market still has 3.8 million fewer jobs than it had before the recession began in Dec. 2007. Furthermore, because the potential labor force grows as the population expands, in the nearly five years since the recession started we should have added 5.2 million jobs just to keep the unemployment rate stable. Putting these numbers together means the current gap in the labor market is 9.0 million jobs. To put that number in context: filling the 9 million jobs gap in three years—by fall 2015—while still keeping up with the growth in the potential labor force, would require adding around 330,000 jobs every single month between now and then.
Unfortunately, our “job creators” only created 171,000 net jobs in October. And that was considered a relatively good month. The chart below, from the Center on Budget and Policy Priorities, gives a sense of what we are up against.
Of course, weak job growth in the past doesn’t mean that we cannot have strong job growth in the future. On the other hand, such a change would require consensus on radically different policies than those currently being discussed and debated by those in power.
A big debate is underway about fiscal multipliers. Sounds esoteric but it is not—it reveals that economics is far from an exact science and the outcome appears to confirm what most working people thought, which is that government spending can help an economy grow.
A fiscal multiplier is an estimate of the economic impact of a change in government spending. The debate was triggered, surprisingly enough, by a small box in the International Monetary Fund’s annual publication, World Economic Outlook. There, the International Monetary Fund (IMF) admitted that its previous estimates of fiscal multipliers were too low.
Here is what the IMF chief economist Olivier Blanchard wrote:
The main finding, based on data for 28 economies, is that the multipliers used in generating growth forecasts have been systematically too low since the start of the Great Recession, by 0.4 to 1.2, depending on the forecast source and the specifics of the estimation approach. Informal evidence suggests that the multipliers implicitly used to generate these forecasts are about 0.5. So actual multipliers may be higher, in the range of 0.9 to 1.7.
As part of the attack on the role of government in the economy, many economists, prior to the Great Recession, argued that fiscal multipliers were roughly equal to 1. That meant a 1% reduction in government spending would likely cause a 1% decline in GDP, and a 1% increase in government spending would likely generate a 1% increase in GDP.
As the Great Recession got under way, many economists, including those at the IMF, began arguing for substantially lower multipliers, on the order of 0.5%. On the basis of this reduced value, many forecasters argued for the benefits of austerity. Debt was seen as a major problem and if fiscal multipliers were only 0.5%, a $1 cut in government spending would reduce debt by $1 but GDP by only 50 cents.
Well, after watching how austerity policies collapsed many economies around the world, especially in Europe, the IMF acknowledged that it had badly misjudged the size of the fiscal multiplier. As Cornel Ban explains:
In contrast [to its previous low estimates], the October 2012 WEO found that in fact [fiscal multipliers] ranged between .9 to 1.7 (the Eurozone periphery is closer to the higher end of the range), an error that explained the IMF’s extremely optimistic growth projections for countries who front-loaded fiscal consolidation. Assuming the multiplier was 1.5, a fiscal adjustment of 3 percent of GDP-as much as Spain has to do next year- would lead to a GDP contraction of 4.5 percent. It was momentous finding and those who had been skeptical of the virtues of austerity felt vindicated.
Barry Eichengreen and Kevin H O’Rourke provide additional evidence for large fiscal multipliers, in fact for larger multipliers than those proposed by the IMF. According to them:
The problem is that standard theory doesn’t tell us much about the precise magnitude of the multiplier under [current] conditions. The IMF’s analysis, moreover, relies on observations for only a handful of national experiences. It is limited to the post-2009 period. And it has been criticized for its sensitivity to the inclusion of influential outliers.
Fortunately, history provides more evidence on the relevant magnitudes. In a paper written together with Miguel Almunia, Agustin Bénétrix and Gisela Rua, we considered the experience of 27 countries in the 1930s, the last time when interest rates were at or near the zero lower bound, and when post-2009-like monetary conditions therefore applied (Almunia et al. 2010).
Our results depart from the earlier historical literature. Generalizing from the experience of the US it is frequently said, echoing E Cary Brown, that fiscal policy didn’t work in the 1930s because it wasn’t tried. In fact it was tried, in Japan, Italy, and Germany, for rearmament- and military-related reasons, and even in the US, where a Veterans’ Bonus amounting to 2% of GDP was paid out in 1936. Fiscal policy could have been used more actively, as Keynes was later to lament, but there was at least enough variation across countries and over time to permit systematic quantitative analysis of its effects.
We analyze the size of fiscal multipliers in several ways. First, we estimate panel vector regressions, relying on recursive ordering to identify shocks and using defense spending as our fiscal policy variable. The idea is that levels of defense spending are typically chosen for reasons unrelated to the current state of the economy, so defense spending can thus be placed before output in the recursive ordering. We also let interest rates and government revenues respond to output fluctuations. We find defense-spending multipliers in this 1930s setting as large as 2.5 on impact and 1.2 after the initial year.
Second, we estimate the response of output to government spending using a panel of annual data and defense spending as an instrument for the fiscal stance.
Here too we control for the level of interest rates, although these were low virtually everywhere, reflecting the prevalence of economic slack and ongoing deflation. Using this approach, our estimate of the multiplier is 1.6 when evaluated at the median values of the independent variables.
These estimates based on 1930s data are at the higher end of those in the literature, consistent with the idea that the multiplier will be greater when interest rates do not respond to the fiscal impulse, whether because they are at the lower bound or for other reasons. The 1930s experience thus suggests that the IMF’s new estimates are, if anything, on the conservative side.
Some economists remain unconvinced—in fact, some actually argue that government spending is incapable of creating jobs. The economist Robert J. Samuelson was so upset to read a New York Times editorial which claimed that government spending creates jobs that he had to respond:
In 35 years, I can’t recall ever writing a column refuting an editorial. But this one warrants special treatment because the Times’ argument is so simplistic, the subject is so important and the Times is such an influential institution.
Here is the nub of his argument:
it’s true that, legally, government does expand employment. But economically, it doesn’t — and that’s what people usually mean when they say “government doesn’t create jobs.”
What the Times omits is the money to support all these government jobs. It must come from somewhere — generally, taxes or loans (bonds, bills). But if the people whose money is taken via taxation or borrowing had kept the money, they would have spent most or all of it on something — and that spending would have boosted employment.
In other words, because the government relies on the private sector for the money it spends, the jobs created by its spending cannot be a net addition to the economy. Said differently, jobs supported by public spending are not real jobs. There is a lot that can be said, but here is Dean Baker’s response:
Samuelson tells us that if the government didn’t tax or borrow or the money to pay its workers (he makes a recession exception later in the piece) people “would have spent most or all of it on something — and that spending would have boosted employment.”
Again, this is true, but how does it differ from the private sector? If the new iPhone wasn’t released last month people would have spent most or all of that money on something — and that spending would have boosted employment. Does this mean that workers at Apple don’t have real jobs either?
The confusion gets even greater when we start to consider the range of services that can be provided by either the public or private sector. In Robert Samuelson’s world we know that public school teachers don’t have real jobs, but what about teachers at private schools? Presumably the jobs held by professors at major public universities, like Berkeley or the University of Michigan are not real, but the jobs held at for-profit universities, like Phoenix or the Washington Post’s own Kaplan Inc., are real.
How about health care? Currently the vast majority of workers in the health care industry are employed by the private sector. Presumably these are real jobs according to Samuelson. Suppose that we replace our private health care system with a national health care service like the one they have in the U.K. Would the jobs in the health care no longer be real? . . .
How about when the government finances an industry by granting it a state sanctioned monopoly as when it grants patent monopolies on prescription drugs. Do the researchers at Pfizer have real jobs even though their income is dependent on a government granted monopoly? Would they have real jobs if the government instead paid for research out of tax revenue and let drugs be sold in a free market, saving consumers $250 billion a year?
Robert Samuelson obviously thinks there is something very important about the difference between working for the government and working in the private sector. Unfortunately his column does not do a very good job of explaining why. It would probably be best if he waited another 35 years before again attacking a newspaper editorial.
If people are confused about how our economy works, or doesn’t work, it is no wonder.
Politicians always seem to be talking about the middle class. They need some new focus groups. According to the Pew Research Center, over the past four years the percentage of adult Americans that say they are in the lower class has risen significantly, from a quarter to almost one-third (see chart below).
Pew also found that the demographic profile of the self-defined lower class has also changed. Young people, according to Pew, “are disproportionately swelling the ranks of the self-defined lower classes.” More specifically some 40% of those between 18 to 29 years of age now identify as being in the lower classs compared to only 25% in 2008.
Strikingly the percentage of whites and blacks that see themselves in the lower class is now basically equal. The percentage of whites who consider themselves in the lower class rose from less than a quarter in 2008 to 31% in 2012. This brought them in line with blacks, whose percentage remained at a third. The percentage of Latinos describing themselves as lower class rose to 40%, a ten percentage point increase from 2008.
And not surprisingly, as the chart below shows, many who self-identify as being in the lower class are experiencing great hardships. In fact, one in three faced four or all five of the problem addressed in the survey.
In short, there is a lot of hurting in our economy.
The media has focused on the lack of jobs as a major election issue. But the concern needs to go beyond jobs to the quality of those jobs.
As a report by the National Employment Law Project makes clear, we are experiencing a low wage employment recovery. This trend, the result of an ongoing restructuring of economic activity, has profound consequences for issues of poverty, inequality, and community stability.
The authors of the report examined 366 occupations and divided them into three equally sized groups by wage. The lower-wage group included occupations which paid median hourly wages ranging from $7.69 to $13.83. The mid-wage group range was from $13.84 to $21.13. The higher-wage group range was from $21.14 to $54.55.
The figure below shows net employment changes in each of these groups during the recession period (2008Q1 to 2010Q1) and the current recovery (2010Q1 to 2012Q1). Specifically:
- Lower-wage occupations were 21 percent of recession losses, but 58 percent of recovery growth.
- Mid-wage occupations were 60 percent of recession losses, but only 22 percent of recovery growth.
- Higher-wage occupations were 19 percent of recession job losses, and 20 percent of recovery growth.
The next figure shows the lower-wage occupations with the fastest growth and their median hourly wages. According to the report, three low-wage industries (food services, retail, and employment services) added 1.7 million jobs over the past two years, 43 percent of net employment growth. According to Bureau of Labor Statistics projections these are precisely the occupations that can be expected to provide the greatest number of new jobs over the next 5-10 years.
As the final figure shows, the decline in mid-wage occupations predates the recession. Since the first quarter of 2001, employment has grown by 8.7 percent in lower-wage occupations and by 6.6 percent in higher-wage occupations. By contrast, employment in mid-wage occupations has fallen by 7.3.
Significantly, as the report also notes, “the wages paid by these occupations has changed. Between the first quarters of 2001 and 2012, median real wages for lower-wage and mid-wage occupations declined (by 2.1 and 0.2 percent, respectively), but increased for higher-wage occupations (by 4.1 percent).”
A New York Times article commenting on this report included the following:
This “polarization” of skills and wages has been documented meticulously by David H. Autor, an economics professor at the Massachusetts Institute of Technology. A recent study found that this polarization accelerated in the last three recessions, particularly the last one, as financial pressures forced companies to reorganize more quickly.
“This is not just a nice, smooth process,” said Henry E. Siu, an economics professor at the University of British Columbia, who helped write the recent study about polarization and the business cycle. “A lot of these jobs were suddenly wiped out during recession and are not coming back.”
Steady as she goes is just not going to do it and changes in taxes and spending programs, regardless of how significant, cannot compensate for the increasingly negative trends generated by private sector decisions about the organization and location of, as well as compensation for production.
Its election season and Republicans and Democrats are working hard to demonstrate that they support dramatically different policies for rejuvenating the economy.
While the Democratic Party’s call for more government spending makes far more sense than the Republican Party’s call for cuts in government spending (see below), the resulting back and forth hides the far more serious reality that our existing economic system no longer appears capable of supporting meaningful social progress for the great majority of Americans.
The chart below helps to highlight our economy’s worsening stagnation tendencies. Each point shows the 10 year annual average rate of growth and the chart reveals a decade long growth trend that is moving sharply downward.
As David Leonhardt explains:
The economy’s recent struggles arguably began in late 2001, when a relatively mild recession ended and a new expansion began. The problem with this new recovery was that it wasn’t especially strong. From the fourth quarter of 2001 through the fourth quarter of 2007 (when the financial crisis began), the economy grew at an average annual rate of only 2.7 percent. By comparison, the average annual growth rate of both the 1990s and 1980s expansions exceeded 3.5 percent.
This mediocre expansion was followed by the severe recession and weak recovery brought on by the financial crisis. The combined result is that, in recent years, the economy has posted its slowest 10-year average growth rates since the Commerce Department began keeping statistics in 1947.
In fact, the economic growth figures for the period 1995 to 2007 were artificially propped up by a series of bubbles, first stock and then housing. Once those bubbles popped, average growth rates began steadily falling.
The weakness (and unbalanced nature) of our current weak recovery is well captured in the following chart from Catherine Rampell, which compares the percent change in various indicators in the current recovery (which began in June 2009) with previous post-war recoveries. The first point to stress is that the current recovery lags the average in all indicators but one: corporate profits. The second is that government spending has actually been falling during the current recovery, no doubt one reason that the percent increase in so many indictors remains below the average in previous recoveries; the public sector is actually smaller today than it was three years ago.
The relative strength in the performance of corporate profits helps to explain why the two established political parties feel no real pressure to focus on our long term economic problems; corporations just don’t find the current situation problematic despite the economy’s weak overall economic performance.
Even more telling of the growing class divide is the explosion in income inequality over the last thirty years, which is illustrated in the following chart.
In other words, while corporations have succeeded in raising profits at the expense of wages, those in the top income brackets have been even more successful in raising their income at the expense of almost everyone else. Notice, for example, that median household income in 2010 is roughly where it was in the late 1980s while the median income of the top households racked up impressive gains. Thus, the very wealthy have every reason to do what they are currently doing, which is using their wealth to ensure that candidates restrict their economic proposals to reforms that will do little to change the existing system.
The takeaway: without a mass movement demanding change, election debates are unlikely to seriously address our steady national economic decline.
The Pew Research Center recently published a report titled “Pervasive Gloom About the World Economy.” The following two charts come from Chapter 4 which is called “The Causalities: Faith in Hard Work and Capitalism.”
The first suggests that the belief that hard work pays off remains strong in only a few countries: Pakistan (81%), the U.S. (77%), Tunisia (73%), Brazil (69%), India (67%) and Mexico (65%). The low scores in China, Germany, and Japan are worth noting. This is not to say that people everywhere are not working hard, just that many no longer believe there is a strong connection between their effort and outcome.
The second chart highlights the fact that growing numbers of people are losing faith in free market capitalism. Despite mainstream claims that “there is no alternative,” a high percentage of people in many countries do not believe that the free market system makes people better off.
GlobeScan polled more than 12,000 adults across 23 countries about their attitudes towards economic inequality and, as the chart below reveals, the results were remarkably similar to those highlighted above. In fact, as GlobeScan noted, “In 12 countries over 50% of people said they did not believe that the rich deserved their wealth.
It certainly seems that large numbers of people in many different countries are open to new ways of organizing economic activity. This is a hopeful development.
The conventional wisdom seems to be that our biggest economic challenge is runaway government spending. The reality is that government spending is contracting and pulling economic growth down with it. And worse is yet to come.
Perhaps the best measure of active government intervention in the economy is something called “government consumption expenditure and gross investment.” It includes total spending by all levels of government (federal, state, and local) on all activities except transfer payments (such as unemployment benefits, social security, and Medicare).
The chart below shows the yearly percentage change in real government consumption expenditure and gross investment over the period 2000 to 2012 (first quarter). As you can see, while the rate of growth in real spending began declining after the end of the recession, it took a nose dive beginning in 2011 and turned negative, which means that government spending (adjusted for inflation) is actually contracting.
The following chart, which shows the ratio of government consumption expenditure and gross investment to GDP, highlights the fact that government spending is also falling as a share of GDP.
Adding transfer payments, which have indeed grown substantially because of the weak economy, does little to change the picture. As the chart below shows, total government spending in current dollars, which means unadjusted for inflation, has stopped growing. If we take inflation into account, there can be no doubt that total real government spending, including spending on transfer payments, is also contracting.
The same is true for the federal government, everyone’s favorite villain. As the next chart shows, total federal spending, unadjusted for inflation, has also stopped growing.
Not surprisingly, this decline in government spending is having an effect on GDP. Real GDP in the 4th Quarter of 2011 grew at an estimated 3 percent annual rate. The advanced estimate for 1st Quarter 2012 GDP growth was 2.2 percent. A just released second estimate for this same quarter revised that figure down to 1.9 percent. In other words, our economy is rapidly slowing.
What caused the downward revision? The answer says Ed Dolan is the ever deepening contraction in government spending:
What is driving the apparent slowdown? It would be comforting to be able to blame a faltering world economy and a strengthening dollar, but judging by the GDP numbers that does not seem to be the case. The following table (see below) shows the contributions of each sector to real GDP growth according to the advance and second estimates from the Bureau of Economic Analysis. Exports, which we would expect to show the effects of a slowing world economy, held up well in the first quarter. In fact, the second estimate showed them even stronger than did the advance estimate. The contribution of private investment also increased from the advance to the second estimate, although not by as much. Exports and investment, then, turn out to be the relatively good news, not the bad, in the latest GDP report.
Instead, the largest share of the decrease in estimated real GDP growth came from an accelerated shrinkage of the government sector. The negative .78 percentage point decrease of the government sector is the main indicator that we are already on the downward slope toward the fiscal cliff.
If current trends aren’t bad enough, we are rapidly approaching, as Ed Dolan noted, the “fiscal cliff.” That is what I was referring to above when I said that worse is yet to come. As Bloomberg Businessweek explains:
Last summer, as part of its agreement to end the debt-ceiling debate (debacle?), Congress strapped a bomb to the economy and set the timer for January 2013. Into it they packed billions of dollars of mandatory discretionary spending cuts, timed to go off at exactly the same time a number of tax cuts [for example, the Bush tax cuts and the Obama payroll-tax holiday] were set to expire
The congressional deficit supercommittee had a chance to disarm the bomb last fall, but of course it didn’t. And so the timer has kept ticking. The resulting double-whammy explosion of spending cuts and tax increases will likely send the economy careening off a $600 billion “fiscal cliff.”
The fiscal contraction will actually be even worse, since the extended unemployment benefits program is also scheduled to expire at the end of the year.
So, what does all of this mean? According to Bloomberg Businessweek:
If Congress does nothing, the U.S. will almost certainly go into recession early next year, as the combo of spending cuts and tax hikes will wipe out nearly 4 percentage points of economic growth in the first half of 2013, according to research by Goldman’s Alec Phillips, a political analyst and economist. Since most estimates project the economy will grow only about 3 percent next year, that puts the U.S. solidly in the red.
One can only wonder how it has come to pass that we think government spending is growing when it is not and that it is the cause of our problems when quite the opposite is true. Painful lessons lie ahead—if only we are able to learn them.
The situation for the unemployed is a case in point. We have a complex, but comparatively miserly, unemployment compensation system.
Workers are generally entitled to 26 weeks of unemployment benefits. However, there are two programs that potentially extend the benefit period for the unemployed. The first is the Emergency Unemployment Compensation (EUC) program, which was enacted in 2008 in response to the economic crisis. As the table below shows, the EUC offers workers in states with high rates of unemployment up to 53 additional weeks of benefits.
Workers who exhaust both their regular unemployment insurance and EUC benefits can receive additional support through the second program, the permanent federal-state Extended Benefits (EB) program. As the table above shows, that program offers a maximum of 20 extra weeks of benefits depending on state unemployment rate levels. However, there is an additional provision to the EB program that is now coming into play with negative consequences.
As Hanna Shaw, of the Center on Budget and Policy Priorities, explains:
A state may offer additional weeks of UI benefits through EB if its unemployment rate reaches certain thresholds . . . and if this rate is at least 10 percent higher than it was in any of the three prior years. But unemployment rates have remained so elevated for so long that most states no longer meet this latter criterion (referred to as the “three-year lookback”).
Because of this lookback provision hundreds of thousands of unemployed workers are now losing benefits, not because conditions are improving but because they are not continuing to worsen. The table below highlights the 25 states that have been forced to stop providing EB benefits this year and the number of workers in each state that have been cut adrift as a result. Look at California–more than 95,000 workers have lost their benefits so far this year despite the fact that the state unemployment rate is almost 11 percent.
This is no accidental outcome. In fact, according to Shaw,
Policymakers could have addressed the “lookback” when they extended federal UI at the beginning of the year, but they didn’t. Instead, Congress not only allowed EB payments to fade out, but it also made changes that over the course of the year will reduce the number of weeks of benefits available in the temporary Emergency Unemployment Compensation (EUC) program, which provides up to 53 additional weeks to the long-term unemployed based on the unemployment rate in their state.
How serious is the long term unemployment problem? Check out the chart below. As it shows, the share of the labor force that is unemployed for more than 26 weeks is higher than at any point in the last six decades. Perhaps even more striking is the fact that 41.3 percent of the 12.5 million people who were unemployed in April 2012 had been looking for work for 27 weeks or longer.
In terms of the master narrative, this is just another of the necessary adjustments required to stabilize the “system;” no need for alarm. Makes you wonder about the aims of the system, doesn’t it?