Tuesday, October 30, 2012

The Middle Class, Macro, and TinkerBell

The middle class has become one if not the major concept for the coming US election. Both parties attempt to capture it. VP Biden almost cried as he described in his debate his oneness with the middle class. His opponent Ryan was cooler as he claimed his party knows the right ways to help the middle class. It is clear that both sides need more middle class voters to win the coming election.

While middle class comes up in many different campaign and policy issues it most often comes up in the context of the budget – whether controlling entitlement spending or extending the Bush tax cuts – the focus always comes back to the impacts on the middle class. The Democrats want to continue these entitlements and possibly expand them while mostly paying for it with higher taxes on the rich. Let’s call this the direct approach to helping middle class at the expense of the rich.  The Republicans think the middle class is better served in a low tax rate environment, with stronger control over debt, and resulting higher economic growth. Let’s call that the indirect effect because it believes that hurting the rich eventually ends up hurting the middle class.

While the above position descriptions are brief I hope they reasonably and fairly connect the topic of middle class with typical macro policies. If the above already inflames you then I am in big trouble.

The above is meant to reveal or present a strong connection between what I would call the fiscal policy debate and the status of the middle class. Admittedly I am getting old and forgetful but my recollection of my economic education is that there is no strong and clear theory that relates macroeconomic policy and the middle class. In fact, take out any successful macro text book – freshman level or advanced graduate – and I doubt you will find a chapter or a section on macro policy and the middle class. In fact, you might not even be able to find a paragraph.

A little personal history may help put further light on this. I may have more credit hours in economics than any human being or reptile alive. I took a lot of econ as an undergrad at Georgia Tech. After Tech I was lucky enough to draw the short straw that sent me into the US Air Force for four years. While stationed in Arizona I took all the courses to receive an MA in Econ from the University of Arizona. Go Wildcats. Upon release from the USAF I went back to GA Tech and completed an MS program in Economics. Even more courses! Go Yellow Jackets. That’s when I decided to get a PhD at the University of North Carolina – and took courses for another three years. While at UNC I participated in a non-credit activity called the Macro Workshop. That workshop met once a week – even in the summers – for three years. Go Tarheels.

Your response might be – Larry – you are a very slow learner. And I would find it very hard to disagree with you and we can make that the topic of my next blog. But the point is in ALL THOSE COURSES I never ran into a course or a chapter or a topic called “Macro Policy and the Middle Class.”

This is important because it shows that all the so-called political and economic experts (you know who you are Paul Krugman) are just making this stuff up. Both sides of the aisle are making this stuff up as if it were a fairy tale. Take any macro model you want from any macro course you desire. It can be Keynesian, Monetarist or Gangnamian. Look at IS-LM curves, AD curves, AS curves or whatever – there is no middle class curve. Look at independent, dependent, or mutually dependent variables – there are no variables for middle class. There are equations for such things as output, employment, interest rates, consumer spending, business spending, etc – but there is NOTHING representing the middle class.

Larry you are screaming! Okay I took a big breath. That feels much better. Thanks. If I had taken Marxian Macro or if I perhaps had paid a little more attention to some specialized literatures in economics I might have found some theories and models about class and distribution of income. And you know what – I am not saying that distribution of income is not an important subject. It is important. It is very important.  And we should focus on it in a very direct and objective way.  But that is very different from two parties acting as if they had some great insights into how to improve the lot of the middle class via entitlement spending and tax rate changes. They know squat and they are using us in their frequent misleading and thoughtless conjectures about how their policies will impact the middle class.

This reminds us of what macro does. Most of what macro does is to help us better understand changes in key macro indicators like economic growth, inflation, interest rates and exchange rates. It does it in models that represent behaviors of consumers, workers, owners, foreigners, and the government. It mostly filters or tracks their behaviors by examining markets for consumer goods services, new housing, business structures and equipment, stocks, bonds, labor, and foreign exchange. That is macro and let’s admit – that’s a lot. 

Macro does not tell us about energy and food. It does not explain why companies move from north to the south. It does not tell us what causes poverty and why people give to charity. It does not discriminate the wages or the dividends or other sources of income for the middle class or the rich.

What politicians are doing is starting with bonafide macro and then adding fairy tales. Their passionate speeches make it sound like it all fits together and sound like a good story but they have nothing real to back it up. It is hot air. It is like when your doctor tells you how to improve your golf swing. He knows some anatomy but if he isn’t a golf coach I am not sure he has that much to offer.

The upshot about all this is that, again, these politicians create false debates to get us riled up and to distract us from their deficiencies. I wish we could get rid of the whole lot. We have real poverty issues in this country that need resolving. We need to improve education and job opportunities and economic growth.  We need stronger financial institutions. We need regulatory transparency. We need a smaller national debt. We need a lot. But instead of getting the tiniest amount of real analysis or policy we get Tinkerbell stories that have no basis in reality. Now where is that JD when I really need it?

Tuesday, October 23, 2012

Jeopardy, Taxes and Liar Liar

On June 7 of 2011 I wrote about jeopardy in Jeopardy, US Debt, and Funny Cigarettes. So this post today is Jeopardy II. It is more than a year later and apparently no one on the planet Earth took my profound advice. So here we go again.

One of the things the candidates and the media have latched onto is tax cuts. Obama points to a study that shows that tax revenues are going to fall off a cliff under a Romney presidency. Romney retorts that they won’t because his goal is to make sure that his tax cut plan does not increase the size of the government deficit. Romney won’t be specific about the tax loopholes he will close that will bring about his desired result. So the Democrats are calling Romney a liar. Liar liar tongue on fire hang your pants on a telephone wire.

The Rs line up behind Romney and the Ds enjoy the liar liar story. While they do that I am sitting here thinking about jeopardy. No not Alex Trabek and the show on television. I am thinking about the word jeopardy. My Dad was big on that word. Jeopardy is danger or the probability of an adverse event impacting you. If you walk across a street you put yourself in jeopardy. That is, you put yourself in the way of danger. Most of us do a quick cost-benefit analysis when we decide to take a course of action. If the benefits of walking across the street outweigh the possibility of a car running you over and creating harm, then you knowingly put yourself in jeopardy. Most of us don’t actually do a calculation. Most of us just use common sense and practical experience so we don’t really think about jeopardy for everyday things.

But sometimes we should think twice. For example, inviting all your friends via Facebook to a party at your parents’ house might not be the best thing to do – especially if you have 9000 Facebook friends.  Or driving at 120 MPH on the left-hand-side of a mountain road near Seattle might not be prudent. Drinking JD straight from the bottle has also been known to create less than favorable outcomes. This is what jeopardy means – knowingly putting yourself in harm’s way.

So now we get back to the tax issue. I know our candidates are earnest about this issue – but really folks – it is not what we should be getting hot and bothered about. If you look carefully at the expressed plans of both candidates, neither one really goes after the central problem of national deficits and debt. When I say “goes after” I am using this phrase in the way a great linebacker might go after a tailback; a lion closes in on its prey; or a Georgia Tech freshman who “bird-dogs” on 10th street. Going after something means a couple things. First, the object of your attention is very important to you. Second, you go after it was gusto. Does Obama or Romney have lust in his heart and a gleam in his eye when he discusses deficits and debt? Are you bowled over when Romney says his tax plan will keep the $1 trillion + deficit from getting larger? If you said no then you need to think more about jeopardy.  

Let’s look at some official future budget projections. This data comes from the Office of Management and Budget. You might call this Obama’s plan for the future. I will not quote figures for Romney’s budget since we really don’t know them. But as I said above, his only real promise is that his plans will not make the deficit larger. So I am guessing the below numbers clearly understate what will really happen in the US in the way of Federal Government budgeting under either Obama or Romney.

The government deficit averaged approximately $1.3 trillion per year from 2009 to 2012. This caused the gross national debt to increase from $11.9 trillion to $16.4 trillion in four years. The part of that debt held by the public went from $7.5 trillion to $11.6 trillion. We all agree those increases are huge. But here is the point – we have been able to survive it. This is like the guy driving much too fast on the mountain road – everything might seem okay so far but he puts himself in serious jeopardy. What happens if a troop of Cub Scouts is suddenly seen crossing the road?

So one would think that after our dear politicians see this data in 2012 they would clearly want to remove this sense of jeopardy. But no way – here is what they plan for our future – and of course this is pretty rosey stuff compared to what will probably transpire under either candidate. Between 2012 and 2017 Obama plans these changes (in trillions):
                                                           2012               2017                      
Tax Revenue                          $2.1                 $3.9
            Outlays                                    $3.8                 $4.5 
            Deficit                                      $1.3                 $0.6
            Gross Debt                             $16.4               $21.3
            Debt held by the Public          $11.6               $15.7

The gross debt will go up about as fast as the economy – remaining at about 105% of GDP in 2017. In 2000 the gross debt was 56% of GDP and was 65% as recent as 2007. The more important debt held by the public will go from 74% of GDP in 2012 to 77% in 2017. It was about 32% of GDP in 2001 and rose to 36% by 2007. Thus, as a share of the national economy, debt in 2017 will have than doubled since 2007.

Let’s be clear. This is alarming. Let’s suppose you let your weight get away from you on your last Mediterranean cruise. You went from a svelte 200 pounds to a little more than 250. Yikes – even your pantyhose doesn’t fit. So your doctor says you need to lose some weight and you tell him you have a very ambitious plan that is almost guaranteed to keep you at 250 for the next five years. No way are you going to gain one more pound above 250! That doesn’t sound like progress and it just raises the probability that harm will come to you.

Most of us know the complications that can occur if you remain grossly overweight. The economy seems to have weathered these debt increases so why can’t we continue to do that? Why care that the debt remains at about 105% of national output in the next five years?  The answer is jeopardy. Once debt has reached 100% of GDP people notice. They notice a lot of things:

o   It is much harder to pay off debt at 105% of the nation’s income than if it were 56%.
o   That implies that the longer you wait to deal with this problem the more pain there will be – the larger the future spending reductions and tax increases will have to be.
o   The interest expense of the debt gets larger and larger and makes it even harder to reduce government spending and the deficit. So it makes the problem even more difficult. In 2001 the net interest paid by the Federal Government was $206 billion. It rose to $225 billion by 2012 and is expected to be $565 billion by 2017. Of course, interest rates are incredibly low now. If interest rates were to rise to levels considered normal, we could see net interest rise to about $1 trillion in 2017.

What happens when you suddenly see the Cub Scouts in the road? What happens if on the way to 2017 another significant world economic slowdown or recession occurs? What if the US goes into another recession? We had a recession in 2008-2009 – it would not be unusual for another recession to hit us by 2017. Then you can just kiss your sweet butt good-bye. We will have put ourselves in jeopardy and we will pay dearly.

In such a recession national income will fall and automatic government stabilizers will make the government deficit even larger. Discretionary policy will likely add even more to spending increases and tax cuts. Our ability to pay off the debt will fall with our incomes. Debt to GDP would rise to 150% or more of GDP.

Do you want to live in Greece? Do you want to live in a country that has no good alternatives left? Do you want to read every day in the paper about world investors selling US stocks and bonds – and watch whatever wealth you might have had dwindle to nothing? Do you want to read about all those companies that resume layoffs and plant closures? Do you want to see on TV the results of the US dollar deprecating by 20% -- and the resulting raging inflation rates of all those things we import?

I hope the answer to all those questions is no. The interesting thing is that once you reach 250 pounds, you don’t have to stay at that weight. If you were stupid and once drove too fast down the mountain road you can be thankful that nothing happened and you don’t ever do that again. If you are President Obama or Governor Romney you can look at our national debt mess and preach fire and brimstone until those clowns we call a government do something real about the jeopardy we find ourselves in. It isn’t too late. Jeopardy means putting yourself in harm’s way. This country needs a real diet and now! We need to make real progress against deficits and debt. Planning to get the deficit down to $600 billion in five years is not going to cut it. Keeping national debt at roughly 105% is just irresponsible. 

Tuesday, October 16, 2012

US Unemployment, Garter Belts, and Lemonade Stands

When the US unemployment number came out for September it was followed by a firestorm as hot as a kimchi pot in August. The Democrats were delighted that the unemployment rate had fallen below 8%. They were even more delighted that the number of people finding employment had increased by a whopping amount. Who could argue with that? The Republicans, of course! Digging deeper into the September number they found that much of that spectacular increase could be explained by part-time employment and by people moving into self-employment. One interpretation was that the reduction in the unemployment rate was a negative signal – revealing that desperate people had moved from unemployment to part-time work or had at last gasp started their own lemonade stands.

So which one is right about the implication of a falling unemployment rate in September? NEITHER IS RIGHT.  Both are wrong. Both are wrong for the simple reason that you cannot judge what is happening in the US economy from one month’s sample. The household employment survey is notoriously small and therefore it has a lot of variability from month to month. The huge increase in September, for example, followed weakness in the month before. It is possible that some of the employment that was reported for September actually came at the end of August and that the former was underestimated and the later overestimated. This happens all the time with monthly data. It is also possible that the sample was biased by unusual outcomes. For example, weather, holidays, timing of back-to-school sales, and other unusual factors may have made September 2012 different from past Septembers.  
So what we usually do is try to interpret monthly changes as best as we can but realize we need several months of outcomes before we can assign a new trend to the economy. September numbers say almost nothing about the direction of the economy.
We need to look at longer trends in this data. So I took a little digital trip to the Bureau of Labor Statistics (www.bls.gov). They are nice enough to have relevant data back to 1612 when Columbus discovered Plymouth Rock.  Because of my great respect for Great Britain and statistics, I decided to confine my hunt for data to years since 1990. And I found some interesting things.

First, let’s back-up and define what we are talking about. Each month the Labor Department surveys companies about payroll jobs. That number is reported to the public despite the fact that it does not enter into the calculation of the unemployment rate. The payroll jobs number was not in dispute in September.  It showed some modest employment growth at non-agricultural companies as it has been doing of late. This post is not about the payroll jobs number.
The Labor Department conducts a second survey each month. In this case they talk to a sample of households and ask the persons in that household about their status in the labor market. Do they have a job? Is it part-time or fulltime? Is it for a company or is it self-employment.  Does it involve Jack Daniels? Are they now looking for a job? Does the dress requirement of the job invovled high heels and garter belts? And so on. Based on the answers the government estimates the labor force, employment, unemployment, and the unemployment rate.

Second, rather than focus on month-to-month changes – let’s see how some of these key labor market indicators have behaved over more extended time periods. The largest employment category published is what they called Wage and Salary Employment in non-agricultural companies. In September of 2012 it was estimated to be 111,024. Yes, it leapt by a considerable amount compared to August of 2012. But what has it been doing over a longer time period? One benchmark is before the recession began when it was 113,298 in September of 2007. We can conclude, therefore, that household employment at firms remains lower in 2012 by 2.3 million employees.  So we are not back to where we were in 2007.  Employment in this category decreased to 106.5 million in 2009 and has been improving since the worst of the recession.  It increased in 2010, 2011, and 2012. This gradual growth is very compatible with what we have seen from the payroll survey employment figure – modest growth but so far we have not caught up to employment levels of the 2007.
Of considerable interest is the measure of part-time employment. Plotting it over time reveals that it is very counter-cyclical – meaning that it increases in recessions and then dramatically reverses in strong economic years. In the strong economic growth between 2004 to 2006 the number of part-time jobs held by household in the USA decreased by 18%. From 2006 until now part-time employment has increased by more than 100%! Now that is volatility.

But more than the volatility is the number. Between 2007 and 2009 the number of wage and salary workers decreased by 6.8 million. Part-time jobs rose during those two years by 4.5 million. Bringing us up to present, between 2006 and 2012, the number of wage and salary jobs decreased by 2.3 million persons. The number of part-time jobs increased by 4.1 million. Clearly from 2006 to 2012 there was a conversion away from full-time work to part-time.
But what about the changes occurring more recently? From 2009 to 2012 the number of W&S jobs increased by an impressive 4.4 million jobs. But we don’t know how many of those were fulltime positions. We do know that during that time the number of part-time jobs remained stubbornly high.

What we take from this analysis is a very different story than what we get from one-month changes. While things have improved for wage and salary workers in the last few years we still have about double the number of part-time workers we usually have. Progress is being made. But we are still not back to past benchmarks and that is why the unemployment rate is still much too high to satisfy anyone. Obama can gloat that employment does seem to have turned but clearly we are not back to levels of the past and we have many too many people working at part-time employment who don’t want to be there.
That leaves the issue of the self-employed. While this category of employment did increase in September 2012 there is no clear pattern in recent years. It did rise gradually between 1990 and 2007 and then has generally fallen. Since 2007 it is down by about 7%. It fell by about half a million jobs from September 2011 to September 2012. This deviation from the longer term trend suggests less confidence in self-employment.

In short, employment is growing but too slowly. Households are finding more opportunity at non-agricultural firms but many of these are part-time positions. Households have slowed their attempts to start their own businesses. The economy needs more growth to make a difference. The parties should argue about the best way to create sustainable growth – not about September or October’s employment number.
Note: this post is long enough without getting into the related issues of the ideal way to measure unemployment. The unemployment rate that gets the most attention each month considers a part-time job the same as a fulltime job. Alternative measures do not. Furthermore, other measures estimate how many people belong in the unemployed category who dropped out of the labor force. As a result there are measures of unemployment that range from 17% to more than 20%. That is the topic for a future blog.

Tuesday, October 9, 2012

The Age of Uncertainty

By Buck Klemosky -- Guest blogger. Buck is the former Dean of the Graduate School of Business at Sungkyunkwan University in Seoul.

“The world seems more uncertain today than at any other time in my life,” stated Howard Marks, a successful money manager for nearly 50 years, to his Oaktree clients. John Bogle, the legendary founder of Vanguard echoes the same message in the New York Times: “This is the worst time for investors that he has ever seen – and after 60 years in the business that is saying a lot.”

The source of this uncertainty comes from the Eurozone, the U.S. economy, the global economy, the Chinese economy and other developing countries, QE3, corporate earnings, confidence on the part of both consumers and corporate leaders, structured deficits and sovereign debt, the fiscal cliff, the depressing state of politics, and government regulatory initiatives

A long list of problems and challenges, to be sure. But they all lead to four possible scenarios for the U.S. economy:

1.       The U.S. replicates Japan’s experience of slow growth and deflation in the next decade.
2.       The U.S. economy falls into a recession in 2013.
3.       The U.S. economy returns to normal with real growth of 3.0-3.5 percent.
4.       The U.S. economy experiences higher than expected inflation (2 percent annually), which could be coupled with a growing economy or a stagnant economy.

Because of the uncertainties mentioned earlier, it is extremely difficult to assign reasonable probabilities to the four scenarios with any degree of confidence. Europe continues to be an unsolved problem with huge risks and much uncertainty. We are not sure what should be done to fix the problem, what can be done, let alone what will be done. The best that can probably be expected is that Europe will muddle through.

The U.S. fiscal situation is a mess. Long term, the entitlement programs need to be curtailed, the fiscal deficit needs to be reduced, and government debt kept at a reasonable level relative to GDP. State and local governments have the same problem, plus the federal government continues to download fiscal burdens to the states. If spending on government health and retirement programs cannot be curtailed, there is no hope of getting federal deficits and debt under control. The present value of all federal entitlement programs is $60-80 trillion versus GDP of $15 trillion in 2012. The programs are not sustainable, especially with the 76 million baby-boomers reaching retirement age and living longer than expected.

Politicians have refused to take any action to solve some of these problems. The fiscal cliff looms ahead. Nothing certainly will be done before the Nov. 6 election, but come January 2013, the Bush tax cuts could expire in combination with massive spending cuts at the federal level. The combination of tax increases and spending cuts could push the U.S. economy off a cliff into recession. Hopefully Congress and the president can put away their partisanship and ideological purity to take actions to prevent the cliff scenario.

The Chinese economy has slowed, not so much by government economic statistics, but by more measurable statistics such as electricity usage, exports and imports of material resources. Global economic weakness and inflation have eroded China’s cost advantages in exports, the main prop of China’s economy. It will make a big difference whether China’s economy will experience a soft landing or a hard landing.

Confidence plays a big role – perhaps a self-fulfilling one – in influencing economic growth. While consumer confidence has perked up recently, they still appear to be affected by the trauma of the financial crisis, the decline of home and stock prices, unemployment, government bailouts, and political uncertainty. Given the depth of the trauma, it may take time for consumer confidence to fully recover. This has certainly been reflected in the stock market. While the S&P 500 has more than doubled in value since the March 2009 lows, investors have withdrawn nearly $500 billion from U.S. stocks during that period, and the trend continues.

Corporate confidence and investment play a big role in economic growth, and right now confidence among U.S. chief executives has reached a three-year low, according to a recent survey by the Business Roundtable. The end result being that corporations are sitting on $2 trillion of cash and not making the capital expenditures needed for economic growth. Corporations face the same uncertainties listed earlier, plus the possibility of new regulations, Obamacare, slowing export markets, and a host of others. It will take sustainable economic growth for them to regain their animal spirits and invest the cash sitting on the sidelines.

The Fed has been extraordinarily aggressive in its monetary policy since the financial crisis and recession. Short-term and long-term interest rates are at historical lows. The Fed has also implemented quantitative easing, QE1, QE2 and QE3, as well as Operation Twist. QE1 and QE2 resulted in the Fed purchasing more than $2 trillion of U.S. government securities and mortgage-backed securities. Operation Twist resulted in the lengthening of the duration of the Fed’s bond portfolio. While QE1 and QE2 had definite upper bounds in the amount of bonds to be purchased, QE3 is opened ended in that the Fed will purchase $40 billion of mortgage-backed securities each month until the employment market improves. The QEs have taken the Fed in directions never taken before. Risks abound, especially the possibility of higher inflation because of the massive amounts of liquidity pumped into the economy and the risk of exit if and when inflation picks up. There is now $2 trillion to $4 trillion of excess liquidity available and where it goes could have good or bad consequences for the U.S. economy.

To quote Donald Rumsfeld, the U.S. Secretary of Defense in 2002, “There are known knowns – there are things we know that we know. There are known unknowns – there are things we now know we don’t know. But there are also unknown unknowns – there are things we do not know we don’t know.”

It appears the world economy today is dominated more by the unknown unknowns. But uncertainty doesn’t always mean downside. There could be an upside to all of the problems and challenges facing the U.S. economy. So  things may not turn out as bad as expected. While the U.S. has been experiencing the slow growth scenario lately, there are some economic positives. Both U.S. manufacturing and service sectors have shown positive growth recently, U.S. home prices have increased 6.9 percent over the first six months of 2012, stock prices are up 14.6 percent over the first three quarters of 2012, corporate earnings, while growth has slowed, have held up in the slow-growth economy, and the U.S. is becoming more self-sufficient in energy.

But the bottom line is that it’s probably wise to be cautious until some of these uncertainties become more predictable and/or resolved. While uncertainty creates both risk and opportunity, it may be better to emphasize safety over aggressiveness in the foreseeable future. There could also be some event not listed above or predictable that could impact investment results. We live and invest in interesting but uncertain times. More things can happen than will happen. But that is what uncertainty is all about.

Tuesday, October 2, 2012

Why Macro Isn’t Macro

The obsession today besides Gangnam Style and kimchi hotdogs is figuring out why the US economy does not operate on all cylinders. Many of us have been moaning about too much stimulus from the Fed and the government. Others defend stimulus as if it came down from a mountain on a stone tablet. It occurred to me that there is another way to explain why monetary and fiscal stimuli are at once ineffective, impotent, and wasteful. No I am not talking about any of my relatives.

The problem is that macro isn’t always macro. If you apply a macro remedy to a non-macro problem then you are not heading in the right direction. Sort of like having a heart problem and the doctor takes out your liver. It doesn’t make much sense right?

So let’s dig into what macro means – macroeconomics that is. No offense to macrobiology or macrobiotics or macrophilia. Let’s use an example. Suppose we have an athletic team with 5 members who average 150 pounds (for you non-Americans that’s roughly 700 kilos). One of the team members quits and is replaced by a new team member who weighs 300 pounds. If the guy who left weighed near the average it is pretty obvious from my exciting and colorful example that the average weight of the team has now increased substantially. So the coach weighs the team and exclaims – “this team weighs too much – we must do something about it.” So the coach tells each player to lose 30 pounds. Does that make sense? If the entire reason the team weighs more is because of this one new player – why don’t you do something about that? Just fire that player and hire one that weighs 150 pounds. That sounds more logical – the coach has confused the average weight of the team with the reason the team got heavier.

This example is making me hungry. So let’s get back to macroeconomics. The economy of any country is incredibly complex. One day you buy a house the next day you buy a bottle of JD. One day you buy a roundtrip ticket to Ellettsville and the next day you buy a JD with Coke at the Uptown Cafe. One day you receive a stock dividend from the Jack Daniels Company. Aside from JD the economy produces a lot of different things. When someone asks how the economy is doing – we don’t spend hours describing the changing outputs of each and every one of these things. We usually refer instead to how much is left in your gallon bottle of JD. No – that is silly. You call up your friendly macroeconomist and say – Larry what is going on with GDP? You see, Gross Domestic Product is a measure of how much stuff (stuff is a very technical term I use in graduate macro classes to define all the crap measured in GDP) a country produces.

GDP is macro! In 2011 USA GDP totaled about $15 trillion. Imagine all that stuff piled up in front of you. If GDP increases to $16 trillion in 2012 then we will say something like – Holy Smokes Petula – our nation produced more in 2012 than 2011. Let’s celebrate with a little JD. We say this because you actually know someone named Petula and because you identify a nation’s output  as GDP. You then start imagining about all the wonderful things that we produced – more t-shirts that say dumb things, a bigger harvest of tomatoes, more automatic weapons, a bunch of cool tattoos, and on and on. You can imagine the quantities of most things we buy increasing more or less in proportion to GDP’s increase.

But the truth is that the increases and decreases are not usually so equally proportioned among the different kinds of goods and services. The truth is that in some years much of the increase is services to consumers. In another year much of the increase is computers and other equipment used by businesses. This is normal. But in some years the changes can be VERY unequal. Imagine in one year that all of the $1 trillion increase was JD. Or instead the entire increase came from Viagra. You see what I mean? Your interpretation of what is happening to national output might not be correct. If you don’t approve of Tennessee sour mash or little blue pills, then upon learning that the increase in GDP of $1 trillion was all bottles of JD or Viagra, you might be less approving. You might worry about the producers of all those other goods and services. The $1 trillion increase might not look so beneficial.

This is very much what is happening in the USA now. The situation now has to do with the less-than-spectacular performance of the national economy. I put some numbers together below to try to convince you that the performance of the national economy or the changes in GDP have been dominated by one or two parts of the overall economy. Mistaking the problem of a few sectors as a national or macro problem is like worrying in the above example that the average weight of the team is too high. Yes the weight was too high but not because each team member was too heavy. The remedy should fit the problem. If the problem with GDP is focused in a few sectors, then broad brush fiscal and monetary policies that are meant to revive the entire economy are going to be inefficient and impotent.

So let me turn to the actual numbers. These numbers are the published figures for real GDP for the USA – where real means that the impact of inflation has been removed and the numbers reflect only output or volume changes. These are standard numbers published by the Bureau of Economic Analysis at www.bea.gov

The last US recession started at the beginning of 2008 and lasted for most of two years – 2008 and 2009. Real GDP contracted at a rate of about -1.7% per year. In the two years that followed the recession the economy recovered growing at an average rate (over 2010 and 2011) of about 2.1% per year. The economy seems to be growing at a slower pace than that in 2012. So over three years of recovery let’s suppose the annual growth rate turns out to be a little less than 2%. People look at that number and compare it to past recoveries and find the current experience to be very disappointing. The slow employment growth and stubbornly high unemployment rate support this disappointment.

This disappointment leads our policymakers to want to raise the amount of stimulus. They want to spur on spending in the national economy. They lament middle class people who are unable to buy enough goods and service. They worry about teachers and police who cannot buy enough and therefore firms do not produce more. But this is a very misleading picture. What I do below is compare the growth rates of major national spending categories during the two years of the recovery (2010 and 2011) to the growth rates prevailing in the two years prior to the beginning of the recession (2006 and 2007):
                                    Annual Average Growth Rate
                                          2006-2007      2010-2011
Consumer Durable goods           4.8                   6.4
Consumer Non-durable goods    2.3                   2.3
Consumer Services                     2.3                   1.5
Business Equipment                    5.5                10.0
Exports                                      9.2                   8.9
Imports                                      4.3                   8.7
Federal government defense       1.9                 0.2
Federal government non-defense 1.2                2.3
State and local government         1.2                2.6                

From the above table it is not easy to see why the macro economy is stalling. Many of these categories are growing stronger after than before the recession started. While it is true that state and local government, federal defense spending, and consumer services have not helped, take a gander at the two categories I purposely left out:
                              Annual Average Growth Rate
                              2006-2007             2010-2011
Business structures       11.8                     -6.5
Residential investment -13.0                     -2.6

These two categories of real GDP comprise the real estate part of national output. With respect to business structures we see a very strong pre-recession sector that has still not turned positive. Focusing on the demand for new houses for families we see that the problems started well before the recession. If there is a sector that appears to be the leading indicator or the cause of what was to come – it is residential investment. It was contracting at double-digit rates BEFORE the recession started – and it continues to contract.

It is true that we had a national recession in the US during 2008 and 2009. But as we look at the past 6 years and try to decide on policy in 2012 and 2013 – it seems pretty clear that we do not have a macro problem today. The recession started with real estate and it ended with real estate. And real estate continues to plague us.  Most of the other categories are growing plus or minus at about their pre-recession rates. As such this is not the time for general stimulus – a policy aimed at expanding spending in all categories of spending would be both wasteful and dangerous. Why stimulate sectors that have recovered?

If real estate is really the issue, then why don’t policymakers focus their policy energy on the real issue? Maybe I should leave it there. The current policies are tantamount to making all the players on the team lose 30 pounds. What do you think? These policymakers have access to this same data. Why do they waste our time and money on policies that won’t work? Why don’t they spend more time dealing with what actually caused our current mess?