A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Saturday, July 18, 2009

Podcast Transcript 07.18.09 Bad News: Borrowing is not earning

Net Real GDP

If you want to see the hole into which the prosperity of the American people has been shoveled, take a look at the chart up on the blog and web site on Net Real GDP

This is a Demand Side exclusive statistic as far as I know. It is simply Real GDP minus federal borrowing from all sources, including the Socoial Security Trust Fund and other social insurance trust funds. Real GDP is monetized activity adjusted for inflation, nothing more. It goes up when we go out for a meal rather than cook at home. The wife going into the workforce makes a lot of monetized activity like this. GDP measures bads and goods above the line. Alcohol counts as much as nutrition. Prisons as much as schools. Mayhem as much as -- or more -- than harmony.

Net Real GDP subtracts from this monetized activity the federal deficits. After all, deficits are run in theory to increase activity in bad times and jump start growth. Otherwise they are simply the American blue plate special of borrowing to consume. There is some discussion about the appropriate size of deficits as a percentage of GDP. But the idea that government borrowing is in itself economic growth does not stand up to even a cursory examination. It is like counting the water used to prime the pump as a product of the well.

But the federal government borrows not only from China and Uncle Fred and XYZ Fund, but also from the social insurance trust funds -- Social Security and Medicare being the biggest. This is the source of confusion both about the real size of the deficit and about the integrity of Social Security retirement and disability.

Social Security is on very firm financial footing for decades outward, IF the government bonds that fill it up are any good. It is a model program, and the rest of us should be so lucky as to have our portfolio in government bonds. But when they come due, they will need to be paid. That will mean higher taxes.

This borrowing from the trust funds has masked the size of the deficit, because of the fiction of the so-called unified budget. Rather than explicitly say the operating slash capital side is raiding the retirement and disability funds, the budget process reduces the official deficit by the amount of these borrowings without a word.

Aside: This is not the great "unfunded liabilities" debate, wherein some would have us set aside capital that could earn the needed payouts. The pay-as-you-go scheme was appropriate for the 1930s when it was instituted as part of the New Deal, and it has worked well so far, and why not?

In the early 1980s, Alan Greenspan led a commission to fix social security, because even then they could see that the baby boomers would retire someday. They fixed it by raising payroll taxes, taxes which would never have passed to fund anything other than social security. These regressive payroll taxes were almost immediately passed out of the trust funds into the operating budget. The entire Greenspan exercise turned out to be a Trojan Horse for more regressive taxation.

Perhaps it would be different if the retirement and disability trust funds were the ONLY place from which the federal government borrowed. But they are not. The big spenders have also been the big borrowers from the public at large.

And it's not as if these are productive assets we're borrowing to build. Education, infrastructure, R&D. No. The vast majority of debt built up since Ronald Reagan made deficits acceptable in polite company have gone for war, war machines, and tax cuts.

All of which is a long way of saying there is no silver lining to the deficits. They are borrowing from the future, and because half of that borrowiing is hidden inside the unified budget, they are much less benign than many have said. They do matter, Mr. Cheney. This is simple borrowing, not earning.

For this combination of reasons, to get an accurate view of the earnings of the economy, we subtract federal borrowing from all sources from gross Real GDP and obtain Net Real GDP, a measure which describes the health and vitality of the economy clean of the artificial animation of borrowing.

Gross Real GDP favors a Democrat in the White House by an average of 1.3 percentage points per year. Net Real GDP favors Democrats by 2.7 percent. Gross Real GDP has been 2.7 percent per year under Republicans, 4.0 under Democrats. When federal borrowing is subtracted, Republicans net only 0.8 percent average annual growth. Democrats 3.5 percentage points.

More startling, the net real GDP number since Gerald Ford is negative for all presidents of the Republican persuasion. More than one hundred percent of growth has been borrowed.

Specifically, Eisenhower led Republicans with 3.5 percent net real GDP growth. Nixon came second with 1.5 percent. Ford -0.1, Reagan -0.1, Bush I -2.0, Bush II -0.2. To be fair, you'd have to shift some of the red from Bush II back into the Reagan policies that he inherited.

Among Democrats, Truman 4.5, Kennedy 5.2, Johnson 4.6, Carter 2.2, Clinton 2.1.

Two things about this. The period of Keynesian influence, before 1970, is at a level above that since. And the Democrats Carter and Clinton may have suffered from following Republicans. Clinton, in particular, as is evident from the chart by year, climbed out of a deep hole. That era of "fiscal responsibility" ended abruptly with the arrival of Bush II. The Net Real GDP of Clinton's second term was 4.1, back in the pre-1970 range.

It is the Demand Side suggestion that Democrats do not have the inside dope on the economy.

As one of our listeners Jack Stewart put up on his USvotersite, link on the blog,
Jack Stewart's USvotersite


Much like Alice's Cheshire cat in the Disney cartoon Alice in Wonderland - political parties have disappeared, leaving behind nothing but the many similar smiles of very independent, entrepreneur politicians.

Instead, they have the constituency which, when served, leads the economy higher. The Republicans on the other hand, are the party of tax give-aways, which policy has shown little positive benefit for the economy as a whole.

There it is. Charts on demandsideblog.blogspot.com.

Net Real GDP

President Democrat Republican
Truman 4.5
Kennedy 5.2
Johnson 4.6
Carter 2.2
Bush I
Clinton 2.1
Bush II

Casting back to previous podcasts' discussion of Bernanke and the banks, David Goldman of the Inner Workings blog, defines zombie more precisely for us. Goldman writes:

As I predicted last March, American banks are hoarding rather than divesting the so-called toxic assets. The volume of trading in non-agency mortgage backed securities is considerably lower than many traders might have expected. Financial institutions That makes the stabilization of asset prices along with the stabilization of bank equity prices a self-referential argument: asset prices are doing well because banks (and other financial institutions) are buying them, and that reassures the equity market.

Rather than relying on distressed investors to bail them out, banks ARE the main distressed investors. After the suspension of FAS 157 banks have an incentive to hold rather than sell securities trading at low dollar prices.

The toxic waste never came out. The zombies are living quite happily on it. The banks will continue to tip back and forth between credit losses and elevated income from their distressed portfolios.

And I forgot James K. Galbraith's response when I criticized his giving Bernanke a "C" in the handling of the economy. I said, C? When the pilot crashes the plane, he shouldn't get a passing grade just because nobody died. Galbraith e-mailed me in what is still one of the nicest things this podcast has produced. He said, "I was grading on the curve."

From Brad DeLong on the stimulus package:

Jared Bernstein and Christy Romer constructed extremely crude estimates of the delta-effect of the stimulus package on the economy by taking when they thought the different components of the $787 billion would be spent and how long it would then take for the government spending to have an impact on the economy. Their estimate is that we saw the effect of $0 (zero) (none) (nada) dollars of the stimulus package on the economy in the first quarter, that we saw the effects of only $14.5 billion in the second quarter, and that we are about to see the effects of $38.6 billion now in the third quarter as the effects of the package ramp up to their peak in the fall of 2010, when we will see $82.1 billion of stimulus spending hit the economy.

To say that what happened in the second quarter means that "the last few hundred billion dollars have had virtually no effect" is like sticking your toe into the ocean and pointing out that your hair is still dry...

The Demand Side observation is that a broader stimulus is needed, a recovery program, involving ongoing spending, and this will do much better because private contractors will begin to invest more deeply themselves, the jobs will come with more security and hence higher consumption functions, and the transition away from the consumer society will be accelerated.

from Krugman

Jan Hatzius of Goldman Sachs has a new note (no link) responding to claims that government support for the economy is postponing the necessary adjustment. He doesn’t think much of that argument; neither do I. But one passage in particular caught my eye:

The private sector financial balance—defined as the difference between private saving and private investment, or equivalently between private income and private spending—has risen from -3.6% of GDP in the 2006Q3 to +5.6% in 2009Q1. This 8.2% of GDP adjustment is already by far the biggest in postwar history and is in fact bigger than the increase seen in the early 1930s.

That’s an interesting way to think about what has happened — and it also suggests a startling conclusion: namely, government deficits, mainly the result of automatic stabilizers rather than discretionary policy, are the only thing that has saved us from a second Great Depression.

No comments:

Post a Comment