Alan Blinder and Those Hateful Republicans

Every week I wonder where and when the inspiration will hit for my next spout. I had finished my morning bowl of Rice Krispies and JD and was well into my favorite newspaper, the WSJ, when the inspiration came. As often happens I can’t stop myself from reading columns written by Alan Blinder, economics professor at Princeton. I especially love the pictures but this time he supplied the words that make writing this blog so much fun. The title of the article (WSJ, page A15, October 25, 2016) is “It’s Not the Economy Stupid. It’s the Political Gridlock.”

The main point of the article is that if voters and other people are not happy in the USA it is because of politics. The economy is just spiffy. It is the politicians that make us feel unhappy about our lives. And guess which ones are persona non grata? You got it. Those pesky Republicans did it.  I felt at first relieved that if I wanted to accuse someone for my irritable bowel I now know exactly who to blame. But then after thinking about it for about 10 seconds I realized that Professor Blinder was either kidding us or he was just plain wrong. Or maybe he was hoping that his column would sway voters to the Democrat party. You will have to ask him which explanation is correct for wasting our time on his article on October 25^th.

Blinder begins by quoting some well-known polls that show that people think the US is on the wrong track. Then he launched into the most one-sided discussion since Paul Winchell spoke to Jerry Mahoney about birth control. Blinder quoted all the economic indicators we are already familiar with. For example, who doesn’t already know that the unemployment rate is around 5%? Or that the stock market is much higher than its trough  in 2009? Of course, anything that might puncture his carefully constructed happy balloon was somehow ignored. Are people unhappy with zero interest rates? I think so. How do the recent stock market highs compare to highs before 2009? Not so great. The absolutely worse business capital spending and productivity increases that one can remember are not cause for indigestion? Export sales make us itchy. Even those at his former employer, the Fed, are lamenting the plight of souls who are still struggling despite a 5% unemployment rate. Most people just shrug when an economist explains that the economy has not grown so slowly for so long since the Great Depression. And even Fuzzy was not alive in the Great Depression.

To discount the economy as a major source of the country’s poor mental attitude is just plain wrong. But like most liberals these days Blinder doesn’t much care about the truth because he is all about politics and about making sure that liberal candidates get elected. Which gets me to the second part of his story. Blinder believes that our dissatisfaction with the USA today is not due to the economy but rather is due to “The fact that Republicans have blocked almost everything and proposed very little.” That’s it in a nutshell. Case closed. 

Lucky for George Bush, Alan Blinder is not blaming everything on him. Now it is all Republicans who make our people so unhappy. Spread the blame baby. Blinder cites Obamacare as evidence of Republican resistance. But Obama, with a huge majority rammed the largest change in social policy in decades down our collective pie-holes without one Republican to support it. Wow – who is the cause of political dysfunction there?  And please note the headlines reporting huge increases in Obamacare premiums. The Democrats created this monster – and now our negativity is the fault of Republicans?

And how can Blinder talk about blocking by Republicans? If the Republicans had a NFL team they’d be penalized for missing too many blocks – not too few. Listen to Obama make speeches today about all he has accomplished during his eight years. Listening to him you would think he was Abe Lincoln, Teddy Roosevelt, and General George Patton combined. He got Dodd-Frank. He got energy regulation. He stopped a pipeline. He stopped a recession. He contained ISIS. And there were examples of bipartisan support for a Doc Fix, a Highway Bill, a budget deal and so on.

No, Obama and the Democrats did not get everything they wanted. Yes, they met a determined opposition at every turn. But come on folks. Every President without a clear Congressional majority has had to fight tooth and nail. And that is as it should be since the absence of a majority government says that the country lacks agreement on key issues.

In summary, Blinder is very wrong to de-emphasize the role of a slow economy and to exaggerate the negative consequences of Republican resistance to a Democratic president. An honest appraisal would admit two things – it is the economy and it is a dysfunctional Federal Government that make us unhappy. Unfortunately extremes in both parties make the rest of us pay for their harmful antics. 

Weak and Unbalanced: The Story of US Economic Growth Since 2007

We are now beginning our seventh year following the end of the previous business cycle. Most business cycles don’t last seven years. Yet the story is that we continue to struggle with recovery and despite a relatively strong end to 2013, many Americans believe we remain mired in a recession. So it is helpful to examine the last six years of growth to see what is what.

It is a pretty simple story. The economy is well below where it should be. The main strength in the economy has come from consumer durables largely the result of historically low interest rates and American’s love of autos. Close behind autos is government spending on non-defense items. While export sales of goods and services seem impressive – import sales on services have also increased – so even international trade ends up as a modest factor when we net imports from exports. On the negative side is a failure to revive spending in construction and reductions in state and local government spending. Federal government spending on defense has also not recovered to 2007 levels. Business spending on equipment grew by a mere 4% in six years.

Below is the analysis that supports those conclusions. The table below comes from newly released figures for real (chained) GDP from www.bea.gov .

At the end of 2013 real GDP reached almost $16 trillion. There is much being written about the US economy growing by 3.2% in the fourth quarter of 2013 and more than 4% in the quarter before that. Clearly the economy is gaining some momentum as I said in an earlier post. It is helpful, however, to take a longer term view of the US economy’s growth. In that way we get a more complete picture as to where we have come in the past six years. Last week I focused on 6-year employment changes. This week the focus is on national output or real GDP.

In the third data column in the table below I calculate the change in real GDP since the fourth quarter of 2007. In those six years real GDP has grown by almost a trillion dollars – or $970 billion. That $970 billion amounted to a 6.5% change since 2007. Percentage changes are in the fourth column of the table. National production was 6.5% higher at the end of 2013 than it was in the closing quarter of 2007. Think of real GDP as a big pile of stuff (goods and services) that the country produces in a year. The pile was some 6.5% higher in 2013 than it was in 2007.

While we all know that we suffered a recession in 2008 and half of 2009, this 2013 pile is pitiful. Yes, it is 6.5% bigger than the pile of 2007. But keep in mind that we have had almost five years to grow after the end of the recession. It is not unusual in past recoveries that real GDP would grow by 6.5% in one year. But then this was not a typical recession. So let’s ask what would have happened if the economy had grown by 3% each year since bottom of the recession. The economy bottomed at about $14.4 trillion, so a 3% annual growth rate would have brought the economy to about $16.5 trillion by the end of 2013. If the economy had grown at an average of about 4% per year since the recession, real GDP would have reached about $17.1 trillion at the end of 2013. The slow post-recession growth has cost the country's output somewhere between $500 billion and $1.1 trillion. Of course, since population growth did not stand still over these six years the result has been virtually no increase in output per person.

We could also ask what would have happened if the economy had grown by 3% since 2007. Normal growth in the economy without a recession would have brought us to producing about $18 trillion per year. Thus, the economy is about $2 trillion behind where it normally would have reached. We cannot revoke the recession but it helps to have a benchmark that shows what we have lost from a combination of the recession and the subsequent slow growth. We could say the recession cost us about a trillion and the slow growth another trillion.

The next question concerns the allocation of these goods. The shortfall in national production was not evenly shared. The data shows that some sectors have done much better than others. Traditional macroeconomic analysis breaks GDP into buying components based on who does the buying – generally referred to as consumption, investment, net exports, and government. The table lists most of the key GDP demand-side components.

Here is what we learn from GDP components from 2007 to 2013

·        We have very unbalanced growth

·        Despite massive stimulus and extreme monetary policy, the evolution of real estate is incomplete. Spending by households on new shelter and companies on structures, remain 17-20% behind 2007. Keep in mind that these sectors are recovering from a very low base. So low percentage increases on a low base are especially weak. 

·        Household spending on durable goods – especially automobiles – is carrying much of the load of spending. Other consumer spending – on nondurables (like food and clothing) and consumer services – have grown roughly equal to the lackluster pace of the overall economy.

·        Spending on business equipment rose by 4% in six years. This is an important sector for productivity and competitiveness since it pays for new capital and drives innovation and modernization

·        Government stimulus has come mostly from federal spending on non-defense. Defense spending and State and Local Government Spending remain well below 2007 levels.

·        What remains is foreign trade. Exports of both goods and services have been a mainstay of the spending increases but some of the growth in domestic spending has been imported services and goods. Inasmuch, the net impact from trade is not impressive.

Consider the components that were still languishing in late 2013. These GDP components have not regained spending levels of 2007 (in parentheses is the percentage amount in 2013 relative to 2007)

·        Structures (-19%)

·        Residential Construction (-17%)

·        State and Local Government (-5%)

·        National Defense (-2%)

GDP demand sectors showing the most strength since 2007 were:

·        Consumer Durable Goods (18%)

·        Exports of Goods (22%)

·        Exports of Services (17%)

·        Imports of Services (17%)

·        Federal Government on Non-defense (11%)

TABLE. Selected GDP Components 2007, 2013, and Change

(billions and percent change)

Source: www.bea.gov  Chained version of Real GDP

	2007	22013	CHG	%CHG
GDP	14,996	15,966	970	6.5
C Durable goods	1,156	1,368	213	18.4
C Nondurable goods	2,238	2,374	136	6.1
C Services	6,676	7,108	432	6.5
I  Structures	537	437	-100	-18.6
I  Equipment	910	946	36	4.0
I Residential	586	487	-100	-17.0
Exports Goods	1,181	1,442	262	22.1
Exports  Services	536	630	94	17.6
Imports Goods	1,936	2,006	70	3.6
Imports Services	388	437	49	12.6
G National defense	708	695	-14	-1.9
G Nondefense	390	431	41	10.6
G State and local	1,843	1,745	-97	-5.3

What is a Healthy Economy?

Cartoon by Jim Gibson

Your tweenage daughter wants to know when she can start dating guys with beards and motorcycles. Your first reaction is to tell her she can have her way when hell freezes over. But you are smarter than that. You tell her she is free to date whomever she pleases once she shows more maturity. Satisfied she goes back to texting her best friend about when they will meet at the mall.

This approach has great merit. What does it mean to show more maturity? Does it mean that she makes her bed every morning or does it mean that she has saved enough money for retirement? Clearly, any time she comes to you with another reached milestone in maturity, you can tell her she is still deficient and cannot yet date guys with beards and motorcycles.

Where is this heading? Has LSD been into the JD this morning? It sure sounds like it. My point is that this is exactly how the FED is treating us. Mr. Bernanke tells us that the economy is not mature enough yet to let it go out alone without a chaperone (Mr. Bernanke).  But Ben, when will we be mature enough to stand on our own? The answer is – when Ben says you can stand alone. Be good and go to the mall and spend a lot of money. Ask Ben again tomorrow.

When will the economy be strong enough for the Fed to taper? When will it be strong enough for the Fed to remove all that unwanted and unneeded monetary flab from the system?

Macro does not make this question easy to answer because there are so many ways to judge the present and expected future health of an economy. Most of us think the unemployment rate is a great macro indicator but we also know that the unemployment rate can go lower simply because more people give up looking for work. So it is possible that the unemployment rate could go to 6.9% and the Fed would still judge the economy too weak to walk without a cane.

So maybe if the unemployment rate was falling AND employment was growing, that would be good evidence of strength? But what if most of the new jobs were low-wage and/or part-time? What if most of the jobs were in occupations featuring pole dancing? 

What if employment was growing while events abroad portended a weakened China, Brazil, Canada or parts of Europe? What if those and other countries actively depreciate their currencies against the dollar? Wouldn’t we worry about exports and the President’s goal to double exports as our engine of growth and stability?

Or perhaps employment and unemployment are both improving but continued ambiguity about regulation in housing and financial markets leaves housing demand and supply weak. With housing at present depressed levels it would be hard to conclude that the US economy was out of the woods. What if interest rates start rising as employment improves? Won’t we worry about another housing crash?

You should be getting my point. If not, try a little more Soju. The Fed says the economy needs to be out of the woods but there always are and there always will be conflicting signals in the US economy. Business investment could remain weak for quite a while. The consumer has not exactly rebounded. So what really matters is not so much this excuse about the strength of the economy but rather the Fed’s intent.

This might sound blasphemous but whether it is Bernanke or Yellen, the truth is that we have two popular leaders who will always have a tendency to see weakness in the economy and worse yet – will not cherish the long fight for Fed independence and credibility. Without an independent and credible Fed we might as well let the Department of the Treasury spew money from helicopters as the government deems necessary. And of course, that will lead us sooner or later to catastrophe.

Surely I exaggerate? I don’t think so. Government debt is in outer space and on a trajectory to reach the sun. Yet the government has no plan to constrain our nation’s debt. Notice that the current congressional debate has almost nothing to do with future debt issues.We have known since about 1964 that the baby boom generation would bust the budget today and have had almost 60 years to deal with that – yet we are not much better off in 2013 than we were when I was 18 years old. 

What does Congress and national debt have to do with the Fed? This government debt has to be sold each year. The Treasury has been selling roughly a trillion dollars of debt each year. While the economic recovery is reducing that amount, the respite is temporary and the government will continue selling a s---load of debt each year. Someone has to buy it. That’s a lot of US bonds to soak up. To make this avalanche of bonds desirable the markets would ordinarily need to raise interest rates on the debt. While this is wonderful for the bondholder we all know this would be bad for the economy.

So the Fed plows in with its capacity to create infinite waves of money and buys government bonds. A trillion dollars for bonds? No problem. Ben just writes a check. One does not need to be conspiratorial to believe Obama “makes” Bernanke buy those bonds – one can simply believe the Fed is trying to help the economy overcome this giant wake of the government’s incessant and huge demands for credit. Thus the Fed acts “as if” it were a part of the liberal democratic administration.

In doing so, the Fed abdicates its independence and along with that goes its credibility and ability to function. You know why credibility is important. Without credibility your threats as a parent go ignored. Honey – don’t put that screwdriver in the electrical outlet or I will put you in timeout with Dr. Phil. If the kid never gets put in timeout – the chances are she will ignore your directions. Likewise if the Fed puts in a policy designed to reduce interest rates and we all know that the Fed never acts against rising inflation – then it is likely that at some point a policy designed to reduce rates and stimulate the economy will fail. Future attempts to reduce interest rates will raise inflation expectations and will raise, not lower, interest rates. The Fed at that point becomes largely redundant.

The Fed needs to be independent. The Fed needs credibility. The Fed needs to point its boney fingers and forcefully lecture the government about proper fiscal finance. The Fed has to admit that the economy is ready to walk if not run. They will always find some data or some excuse to postpone proper monetary policy so long as they are in denial about proper central banking and its limits in solving all of man’s problems. The Fed can wait but in doing so it risks a jump from the frying pan into a volcano!