Where are we?
from Peter Radford
It’s tough to tell exactly how the recovery in the United States is going. Since this is a busy week for data reports it behooves us to step back and set the stage.
If you recall, at the end of last year the economy was growing at around 3.0% to 3.5% at annual rates. That was a marked improvement, but not earth shattering in the context of post-war recoveries. The general opinion was that we would pick up speed into the first quarter before settling down into a post-recovery ‘normal’ period of steady growth. I was always a slight dissenter to this view because I put more emphasis on our lingering unemployment problems, the risk still abundant in banking, and the downward weight resulting from the real estate collapse. Plus the fourth quarter had one or two oddities – trade and inventories – that pulled reported growth from its underlying trajectory. So my view was that growth would stick in that 3.0% range and then fall a little as we went through this year.
It looks as if we were all wrong.
The problem with the first quarter, we sill see the initial estimate this week, is that the string of oddities has continued. This time things like the very bad weather have taken their toll, and so we should all expect a much lower growth rate than originally thought. If we use the so-called Blue Chip consensus as our guide, the original commonly accepted growth rate was somewhere near 4.0%. This was based on the idea that the recovery was still accelerating, and had not yet peaked, and that consumer demand was bouncing nicely away from the depths plumbed in the recession.
Now that same consensus is looking for a first quarter of 1.7%, with the dramatic revision due to the weather and the fact that consumers have turned much more pessimistic again.
Apparently, one bad winter, and a sudden spike in oil and food prices, have done the recovery in.
So much for robust.
This, in a roundabout way, supports my view, although I make no claim for prescience. The issue is straightforward: as long as unemployment is high, and as long as home prices are weak, households will not shake off their sense of siege completely. It won’t take much to set them back into a savings mode. Likewise, banks may be reporting solid profits – or at least some of them are – but much of the improvement is coming from changes in loss rates, and trading rather form the basic banking that engages with the real economy. This is why I still think we are in a long haul and slow recovery, rather than in the middle stages of a typical post-war bounce back.
Add in the short term rise in consumer inflation caused by those food and oil price increases, and the mood has changed quickly.
This morning’s data on real estate is illustrative.
Sales of new homes in March climbed well: up 11% from February. On its face this is solid. But February was especially depresses because of that bad weather, so a large share of the rebound is simply the working off of a mild backlog. The average between the two months gives us a better longer term measure of sales, and that is essentially flat. Couple this with the news that builder expectations are still at incredibly low levels, and that the inventory of unsold new homes, at 183,000, is stuck somewhere around its 1967 levels – i.e. at near all time lows – and any image of recovery pales away to be replaced by one of decidedly abnormal and low activity. Certainly nothing in real estate suggests a return to good growth. Right now moderate growth would suffice.
The reason I am belaboring this is that when GDP for the first quarter is announced we will all be trying to divine its import for the rest of the year. I am arguing that it may not be much of a signpost at all. It may be too riddled with quirks. That implies we are better served looking at the more frequently announced numbers to get an idea of the general health of the economy.
And those numbers support a very modest outlook.
So what are the risks or problems that prevent us from moving along at a great clip?
- The absolute size of the hole we dug back in 2008/2009. This was one mother of a recession, and it has left immense slack throughout the economy. Until that slack is picked up there is little to no incentive for businesses to invest. This is despite interest rates being at ludicrously low levels. Some analysts argue that the Fed’s loose monetary policy has had no discernible effect on investment and thus is a failure. I disagree. It wasn’t a bust. It wasn’t a roaring success either. It just was. It is tough to critique the Fed when the entire system was so close to crumbling. Let’s all remember: the private sector vanished in very short order. Were it not for the government we would have vanished along with it. Business is rightly cagey when faced with skittish consumers and goods of spare capacity. So we can take robust investment off the table as a driver of near term growth.
- Austerity budgets will cause at least short term pain. They probably will cause long term pain as well, but that’s not our issue here. Luckily for us the debate will ramble of for a while, so the impact of less government spending will not be hugely significant this year. But it will be a real and noticeable drag when it does show up.
- Unemployment is still way too high. Yes, the trends have improved, but by any standard we are a very long way from a return to normal. The labor markets are very fragile. I expect them to stay this way for many more quarters.
- World imbalances will leak over into the US economy. Particularly in the form of a continued run up in some consumer prices. There is an argument to make that the world economy is headed into a period of generally higher prices due to the rapid growth of emerging economies and the stress that puts on supply of raw materials and food. But the recent spike in prices is not necessarily indicative of where that longer term price level will be. Short term supply constraints and like the turmoil in the Middle East, and rotten harvests, are masking the long term trend. I expect prices to settle back down, rather than to escalate wildly out of control. Nonetheless in the near term this spike has illustrated jut how vulnerable consumers are.
- That is the lesson we need to absorb. Confidence is fragile. To the extent that we rely on consumption and a return to healthy levels of sustainable demand, we are a long way from cured. This past few months have taught us, vividly, that consumers are acting as if on a knife edge. They are pessimistic one day, then optimistic, and then back in the doldrums. The battering they have taken has numbed them sufficiently that they will take a great deal of persuasion before they declare the recovery complete enough to spend the way they once did.
- Banking is not yet safe. Since we didn’t reform the banks to make them less dangerous, we have to assume that they are busily constructing their next disaster. Which we, inevitably, will be expected to pay for. Like all habitual blackmailers, the banks will not reform of their own accord. They need to be forced to behave. We will not achieve long term sustainable growth whilst banks are more interested in gambling than in underwriting loans that support the real economy. This shouldn’t be hard to understand, But apparently it is.
- Imbalances within the economy lower its potential trajectory. This is a longer term effect and perhaps out of place here, but I would be remiss for not mentioning that our enormously divided economy, between the haves and the have nots, is in itself acting as a brake on growth. It is my view that when the middle class is deprived of disposable income over long periods it cannot act as the economy’s primary consumption engine. It is no secret that the American economy is now so split with respect to the fruits of productivity, and thus income allocation, that its the middle class is now no longer capable of driving spending with sufficient force to justify investment. This sets in motion a steady spiral downwards. As investment is restricted, so future income growth is impaired. This encourages short term thinking in business in the form of cost cutting and wage freezes in order to maintain profit growth. The net result being a shift in income allocation away from wages towards profits and the steady throttling back of potential growth. If this view is correct, then the very clear bias in favor of profits as opposed to wage growth that has dominated American business for the past three decades will end up reducing long term profit. The greed of shareholders will ultimately be self-defeating as they stifle the middle class and thus the very source of their profit.
This is not an exhaustive list, but one point I want to make quite clear: I don’t think that the Federal deficit or the near term bulge in US debt is a particular problem. Our response maybe. Meanwhile we have left unaddressed many of the more obvious sources of risk, like the ones listed above. So as long as were are exposed to such a list we should expect a bumpy and not very fast growth pattern. There’s just too much out there lurking to derail us, and too little policy focus on a long term strategy to reduce inequality, for us to be upbeat.
So look for a lot of sideways motion.
All the “great” economic news we have been bombarded with the past month is all rear view mirror data. We are in the same position as we were in this same time in 2008. If you remember, all the Washington talking heads were railing about the sound fundamentals the economy was in. The problem with, as now, was extremely high gas prices. People are struggling to find money for one of the necessities of life: transportation. Wait until the fall to feel what is going on now. It will be alot like 2008.
Danny L. McDaniel
Lafayette, Indiana
From across the pond, where our idiot leader is rejoicing in 0.5% first quarter growth, I thought this post contained a lot of interesting ideas about addressing unemployment in circumstances where we mostly have no need for a recovery based on buying more crap from the shops.
http://www.taxresearch.org.uk/Blog/2011/04/27/we-can-have-all-the-services-we-want-right-now-and-still-balance-the-governmentss-books/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+org%2FlWWh+%28Tax+Research+UK+2%29
I’d be interested in US reaction to this kind of thinking.
Not a Yank, but here’s my reaction anyway, as sent to the taxresearch blog.
Richard
I entirely agree with your headline, and that you are pretty close to what Keynes intended. There is, however, an alternative to the Keynesian tax and spend route, along lines spotted by Keynes in ch.23.vi of the General Theory, i.e. in his discussion of Gesell’s negation of liquidity preference by date-stamping money. That in effect states openly the fact that a positive rate of interest is of negative value to a borrower: staying in debt is costly. If that is true of the interest, what of the capital?
An SSADM systems analysis maps things, changes and time in terms of the (static) relationships between types of thing, the (dynamic) processes which cause change, and the history of each type of thing: how it is created, changed, destroyed. So we have a thing called ‘money’. What is it? How is it created?
It is not created by digging for gold, as in the old days, or by printing it, as very often these days we trade with it on-line. A clue may be got from the historic goldsmith’s scam. Goldsmiths stored other people’s gold, but when people needed that for trade what they took out didn’t need to be the same gold, and indeed people found it more convenient to trade with receipts for the gold they had deposited. However, the goldsmiths found they could issue more receipts than they had gold, though they covered themselves by requiring as collateral a receipt for other types of property, e.g. deeds of ownership (or shares thereof) to about the same value. Their scam was, that though no gold was actually being issued, they still rented it out (i.e. charged interest) as if it was; and if the receipts were not received back with interest, they claimed the mortgaged property.
Jump forward a bit to people objecting to kings wanting the wherewithall to do their work – their taxes – paid with such dangerous money, and you have the roots of England’s “Glorious Revolution”. Invasion by William of Orange was financed with borrowed money backed by Amsterdam’s city bank, and the subsequent adoption of that city’s banking system, where its citizens had agreed to make good any shortfall by the bank. Hence Britain’s National Debt, the Americans fighting to get away from it and Lincoln fighting [its] slavery simply by spending Greenbacks into circulation, but the bankers surreptitiously imposing their system on America in the form of the Federal Reserve Bank. The story is well documented in ‘The Money Makers’, but the point is that money is now increased simply by bankers recording and issuing receipts for the borrower’s indebtedness, only a small proportion (the reserve) even being backed by Government sureties.
Thus the whole economic system isn’t based on the positive value of gold, it is based on the negative value of the indebtedness of the community; and rightly; if it uses resources (if it receives real credit by exchanging its promises to pay for goods already made), it needs to do the work necessary to replace them. The enumeration of this and the incremental issue of it in standard packages makes no difference to what it IS. But if a bank lends me X amount of money (or an employer accounts with his money for his indebtedness to me for work already done), I can spend no more; in short, what the bank or employer is actually giving me is not even notional credit but merely a credit limit.
So Richard, why bother to tax at all? Why go through all the administrative complication and paperwork of paying people at all when all one is doing is recording debt? Keynes was trying to resolve unemployment quickly, so as far as possible he stuck with what people were used to, but on paper we can cut to the quick. The Copernican revolution made astronomy simpler, and here we now see a similar inversion: money represents not value but debt. A much more elegant system emerges if one simply gives everyone a fair ration of credit to live on and government focuses our attention on what needs doing if we are going to continue to live. For enough of us that will be sufficient incentive.
Has everyone here gone on holiday? There is, anyway, further to and fro on this on the taxresearch.org site.
@Dave Taylor. I was interested in your comment on Richard’s blog re Gesell. He was rather unique in that he realised the importance of both money and land in the economy. Unfortunately his policy recommendations for both are impractical: time stamping money and nationalising the land.
I’m frustrated that Richard does not fully understand the case for collecting all land rent which would ameliorate the tax avoidance/evasion situation immensely. If queried about this he will always say that he sees LVT as part of a good tax system but never once has he positively promoted it.
Thanks, Carol. To get back to Peter Radford’s question, “Where are we?”, I’m similarly frustrated such obviously talented and thoughtful commentators as Peter and Richard are still looking at where we are, rather than what’s the root CAUSE of us being there so we can seriously consider what can be done about it.
I loved Danny’s “rear view mirror data” at #1, and at #5 you are adding a crucial point to my argument, for paper/electronic money is just one of three ways of storing value: a short-term, non-productive way as against property and the good-will which gets us to actually do the necessary. When the good-will necessary to release credit is only there to those who already possess more property than they need, that’s when these both inflate property prices and unnecessarily accumulate property while pushing up rents.
It is worth looking at just the titles of Peter’s points to see their pattern more easily:
1. The absolute size of the hole we dug back in 2008/2009. [Not we; the bankers dug and profit-seeking "investors" feared].
2. Austerity budgets will cause at least short term pain. [Only for those affected or near the bread line?].
3. Unemployment is still way too high. [So what about job sharing? See Merijn Knibbe on Flexibility].
4. World imbalances will leak over into the US economy. [And vice versa: we matter too].
5. That is the lesson we need to absorb. Confidence is fragile. [YES. Keynes was right on this too].
6. Banking is not yet safe. [It never will be with "for profit" banking, insurance and share selling].
7. Imbalances within the economy lower its potential trajectory. [Due to short-circuiting money flows, for which Tax Dodgers and the Exchequer blame each other].
Keynes is very interesting, for he had first hand experience at once of academic theorising, government as civil service, political blinkers after WWI and (as bursar of Cambridge University) of Stock Market trading – “diverting” profits into its endowments (the equivalent of a company pension fund) – at which he was tremendously successful. Even that is sufficient reason to trust his judgement more than that of armchair academics, and like Richard I trust his judgements. Liquidity Preference can be controlled not only by Gesell’s impractical stamped money, but quite simply, by a little inflation. Over-accumulation of property can be prevented by localising money (i.e. credit), with currency controls having the same effect as Eire’s law preventing foreigners from owning more than three acres of their land; their legacy to their children.
Shades of what is happening now, apart from dishonest banks, pension fund mismanagement and military plundering. Britain has been sold to the international bidders willing to sign the biggest IOU, and America looks as though its self-mortgage has gone off-shore and is likely to be called in. I would be very happy to go back to the real Keynes and not the academics, but as I see it, the root of the problem is the “for profit” motive (the old usury), which really shouldn’t be applied to the use of people, land and money. The deepest of these is the monetary one, where appearances (fools’ gold) were, and tradition still is, so deceptive.
The beauty of Gesell’s primitive scheme is that you can see what is going on in it. I earned similar lessons working with primitive computers and industrial control systems, in which logic and information feedback circuits were physically obvious, e.g. power driving a motor which drove a generator to tell the system how fast it was going so its power supply could be automatically adjusted. Fairly obviously an aeroplane’s wings keep it up, but until theory had revealed the power used getting air round the end of the wings, it was not obvious why planes didn’t stay up. The theory needed to show what is going on in economics is legislation, and economics won’t take off safely while money-making is the legal objective of business.
I’d be interested to hear what Peter Radford thinks of all this – and Strategist at #2 still hasn’t had his US reaction. …
Dave says ” I would be very happy to go back to the real Keynes and not the academics, but as I see it, the root of the problem is the “for profit” motive (the old usury), which really shouldn’t be applied to the use of people, land and money.
The problem is the acdemics Dave and who they have been “training” and how they have been “training” (ie with rubbish statistical packages and ornate high art mathematics in servitude to investors protfolios, thos lucky enough to have a potfolio, to banks that “mamage portfolios” and thought they sould get a millimtre mark up in the speculattors market with a well trained, well equipped, well modelled robt fresh out of an economics department and willing to serve his bank friendly research on a platter.
Neoclassical economics works for whom? Speculators and financial markets gamblers.
Oh and for ambitious economic modellers.
Ive got bad news. The high art mathematic modellers dont want to go back to Keynes. Banks pay better.
Well, Alice, thank you for spelling out, so much more colourfully than I can, why I am not happy being stuck with academics – especially those whose willingness to serve derives from a profit motive. Your “bad news”, though, is for me just a sad reminder.
Peter says “and too little policy focus on a long term strategy to reduce inequality, for us to be upbeat.
The bleeding obvious.
As a woman called Deirdre McCloskey says “All the Chicago economists strode past meaning — love, temperance, courage, justice, faith, hope — and fixed on the individual agent’s prudent self-interest”.
Stay with this delightful story….
http://www.deirdremccloskey.com/articles/rhet-polity.php