We end the week with news of only modest economic growth, but also with a set of revised data that does not seriously worsen the economic outlook. Today the Bureau of Economic Analysis announced the release of an advanced estimate of 2^nd quarter GDP, as well as revised data for 2009Q1 through 2012Q1. Their press release notes that:

“Real gross domestic product—the output of goods and services produced by labor and property located in the United States—increased at an annual rate of 1.5 percent in the second quarter of 2012, (that is, from the first quarter to the second quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 percent.”

An article from the FT  points out that consumption grew by 1.5 percent, while government spending at all levels of government fell by 1.4 percent. Leaving the drop in government spending out of the calculation would raise the overall growth rate to 1.8 percent per year, or .3 percent higher than the actual figure released today.

Here is a graphical comparison of the old and new data series:

As the figure shows, the new data series implies that the fall in real GDP during the 2007–09 recession was not as deep as previously believed, though this difference is rather small. (Note: This earlier FT article mentions some of the reasons the GDP series needs to be revised, and well as some of the anticipated policy implications of today’s data release.)

Also, the revisions make only a slight difference in an estimated trend line for all the data, as seen in the figure below, where the blue line is hidden behind the red one. However, these trend lines are much different from a similar estimate constructed using prerecession data (1947Q1–2007Q3) only, which is also seen below.

The continuing weakness of the actual GDP data compared to the prerecession trend line provides further support to the notion that the economy has a lot of extra room to grow. In other words, such a sharp drop in economic activity relative to an existing trend is an indication that private-sector output can recover to a great extent without straining supplies of labor and most other resources. Hence, economic stimulus designed to increase aggregate demand is in order, as we have argued for some time. The reported decline in government spending is of some concern indeed.

These numbers of course do not constitute a good measure of national well-being, but at their recent levels, they are symptomatic of an economy experiencing a prolonged period of high unemployment rates, which can contribute to many other social and economic problems.

Postscript, July 27: Interesting, same-day posts by New York Times bloggers  point out that the revised data reveal a shrinking government sector and analyze the effects of the revisions.

The cliff approaches, and politicians and pundits in Washington are pondering how to deal with it. For those who have forgotten, recent nontechnical summaries of the legislative issues and amounts of money at stake can be found here , here, and in this old post. But essentially, the term “fiscal cliff” refers to a massive group of tax increases and spending cuts due to take effect on or around January 1 of next year. President Obama and some Congressional Democrats are seeking to take a stand for distributional fairness and deficit reduction at the same time by pushing for a renewal of the Bush tax cuts, but only for those with incomes less than perhaps $250,000 for a couple. On the other hand, some long-time fiscal conservatives are seeking to cushion the blow by delaying the impact of the spending cuts and tax increases and by seeking a less indiscriminate choice of program cuts. They emphasize that in any case, draconian measures must in their view be taken eventually and committed to now.

From the point of view of Keynesian macroeconomics, what the fiscal conservatives fail to understand is that the economy requires even more fiscal ease than they have been willing to contemplate so far; otherwise, like Spain and many other European nations (see the FT and the WSJ on the European austerity debate), this country will experience such weak economic performance that even the goal of reducing the deficit will be elusive—let alone feeding the hungry, keeping states and localities from going broke, maintaining an adequate defense, or funding scientific research.

The automatic spending cuts (known also as sequesters) due to take effect soon are designed to hit almost every discretionary defense and nondefense spending item—to the tune of 10- to 15-percent cuts in what the federal government spends each day on average on these items. continue reading…

Correlation is not causation, of course, but I’m beginning to suspect that there might be some operational relationship between the frequency with which you hear people complaining about the crippling burden of government debt, and a fall in the cost of government borrowing.

Last week the Financial Times reported that investors had accepted “the lowest yields ever for 10-year paper in a US Treasury auction.”  Right on schedule, the Washington Post announced yesterday that a shiny new campaign, organized by former politicians and business leaders, has been put together to tackle the clear and present dangers of government debt, advocating “a far-reaching plan to raise taxes, cut popular retirement programs and tame the national debt.”

To be fair, it seems there is always a new campaign being announced for taming the national debt (this particular initiative features some plucky newcomers named Erskine Bowles and Alan Simpson).  But there are problems with the projections underlying these arguments about the long-term unsustainability of federal debt.  And in the short run, it’s becoming increasingly difficult to understand what problem is supposed to be solved by decreasing government borrowing.

Thankfully, the conventional wisdom is beginning to solidify around the belief that we need to avoid the “fiscal cliff,” but this justified fear of the huge fiscal contraction scheduled for 2013 has so far not translated into equal concern for the smaller-scale budget austerity we’re already imposing (or for what would seem like a logical extension of that fear of fiscal contraction:  namely, a push for expansionary fiscal policy).

With negative real interest rates being “paid” on 10-year government debt, one runs out of ways of explaining how foolish it is that, for example, spending by state and local governments on public infrastructure is at its lowest levels in seven years.  We’ve covered the sarcastic approach in the first sentence, so let’s set the question up in as dull and uncontroversial a manner as possible: continue reading…

As the Center on Budget and Policy Priorities (CBPP) has reported in several recent postings, cuts to SNAP—formerly known as the food stamp program—now being considered in Washington would impose severe hardship on millions of people who use SNAP benefits to buy groceries in retail stores. For example, the Center released a report a few days ago on cuts to the program contained in the farm bill recently proposed by House Agriculture Committee leaders. These three points, quoted from the report, summarize the impact of the proposed cuts:

• The bill would terminate SNAP eligibility to several million people.  By eliminating categorical eligibility, which over 40 states have adopted, the bill would cut 2 to 3 million low-income people off food assistance.
• Several hundred thousand low-income children would lose access to free school meals.  According to the Congressional Budget Office (CBO), 280,000 children in low-income families whose eligibility for free school meals is tied to their receipt of SNAP would lose free meals when their families lost SNAP benefits.
• Some working families would lose access to SNAP because they own a modest car, which they often need to commute to their jobs.  Eliminating categorical eligibility would cause some low-income working households to lose benefits simply because of the value of a modest car they own.  These families would be forced to choose between owning a reliable car and receiving food assistance to help feed their families.

(The Ryan budget would lead to even larger cuts, as this report shows.) As a macroeconomist, I tend to be in favor of government programs that automatically increase in size as the economy falls into a recession. Of course, such programs help to maintain spending when households and/or businesses suffer a setback due to a financial crisis or some other macroeconomic problem. Many of these programs have the added advantage that they focus on the most adversely affected individuals. They are aimed at providing people with the most basic essentials. They reduce the need for ad hoc “stimulus bills” during recessions. Finally, they are known for achieving an especially high level of “bang for the buck,” as a form of fiscal stimulus, because they go mostly to individuals who spend almost all of their small-to-modest incomes. (An employer-of-last-resort program would represent perhaps the “alpha and omega” of such automatic-stabilizer programs.)

The proposed cuts would fall on a program that has grown rapidly in recent years. continue reading…

This received little attention, but President Obama recently sat down for an interview with Mark Halperin of Time magazine.  The interview didn’t generate anything you might call “newsworthy,” littered as it was with tired exchanges like this one:

Q: “Why not in the first year, if you’re [re-]elected — why not in 2013, go all the way and propose the kind of budget with spending restraints that you’d like to see after four years in office?  Why not do it more quickly?”

A: “Well because, if you take a trillion dollars for instance, out of the first year of the federal budget, that would shrink GDP over 5%.  That is by definition throwing us into recession or depression.  So I’m not going to do that, of course.”

No, of course not.  There isn’t anything surprising about this response, with the President mechanically delivering the Keynesian line.  But it does reinforce something about this election:  that it’s shaping up to be a battle between contrasting visions, Keynesian vs. Austerian, and a referendum on the President’s implementation of his preferred Keynesian approach.  That’s what will make this election so satisfying for anyone interested in economic policy and what makes it a rare occasion for the public to deliver their verdict on the last few years’ worth of Keynesian management, and to decide if they want to move in a different direction.

Except that’s all false.  That’s not what this election is about—not at all.

The exchange quoted above is actually taken from an interview of Republican presidential nominee Mitt Romney.  It’s Romney who is explaining in a matter-of-fact, offhand way that reducing the deficit in the short term would be disastrous for the economy.  It’s Romney embracing the Keynesian argument.

This election may be about optimal tax rates for the wealthy and the long-term size of government (or more accurately, the size of government programs serving the poor), but it is not, as Romney’s unguarded moment demonstrates, about competing visions of short-term macroeconomic management.  Instead, it’s a battle of pretend visions—of economic policy, of the way the political system works, and of fiscal reality. continue reading…

On the topic of public policy, this Works Progress Administration (WPA) poster from the 1930s seems particularly relevant this year. You may have heard of the “fiscal cliff” that the federal budget will fall off in January, under existing law. It will be quite a fiscal contraction, if it happens as scheduled: about 4 percent of last year’s GDP, to use these numbers from the Congressional Budget Office (CBO). This total includes both tax increases and spending cuts, but not the offsetting effects of “automatic stabilizers,” such as lower income taxes for people whose incomes are adversely affected by the cliff itself. The CBO report projects that this set of changes would lead to a recession early next year. (Briefly, the changes that make up the cliff are (1) the expiration of the “Bush tax cuts,” the 2 percent payroll-tax holiday, and some other tax cuts; (2) the across-the-board spending cuts broadly agreed to by President Obama and Congress as part of last summer’s deal to raise the debt limit; (3) the end of new emergency extended unemployment benefits; (4) reduced Medicare doctor payment rates; and (5) tax increases included in the “Obamacare” health act passed by Congress in 2010.)

I chose the image at the top of this post out of many available free-of-charge at the Library of Congress’s WPA-poster archive mostly because of its cliff theme (this poster happens to depict a place in the state of New York, perhaps a few hours’ drive from the Institute). But we also hope the image will offer readers some hope—as the WPA did for unemployed artists and others during the 1930s. The White House and many in Congress are working on legislation that may lessen the severity of next year’s fiscal crunch. These important proposals will mostly aim to delay or cancel scheduled changes to spending programs and the tax code. To really tackle the unemployment problem, however, Washington ought to consider a large-scale public-employment program a bit like the WPA. As the website for our employment policy and labor markets research program points out, “Levy Institute scholars have proposed a full-employment, or job opportunity, program that would employ all who are willing to work and increase flexibility between economic sectors…”  You might want to take a look at some of the many publications at that website that deal with the potential design and impact of full-employment, direct job creation programs.

An update on the distressing state of fiscal and monetary policy in the United States and Europe:

Chairman of the Federal Reserve to Congress:  “I’d be much more comfortable, in fact, if Congress would take some of this burden from us ….”

Congress to Bernanke:  No thanks.  And while we’re on the subject, we would be much more comfortable, in fact, if you’d just stop carrying the load entirely. Kindly leave the economy in the ditch right there.  Or as Binyamin Appelbaum put it in his NYTimes report:

Republicans on the committee pressed repeatedly for Mr. Bernanke to make a clear commitment that the Fed would take no further action to stimulate growth.  “I wish you would look the markets in the eye and say that the Fed has done too much,” Representative Kevin Brady of Texas told Mr. Bernanke.  Democrats, by contrast, inquired politely after the Fed’s plans and showed surprisingly little interest in urging the Fed to expand its efforts.

Perhaps the private sector can muddle through on its own?  Here’s a graph from the Levy Institute’s Strategic Analysis showing employment and unemployment rates going back to 2000:

To fill the gap in the employment rate represented by that orange area, according to the macro team “the nation needs to find jobs for about 6 percent of the working-age population, or roughly 15 million people. Since the working age population has been growing on average by 2.4 million people per year, or 205,000 each month, job creation that barely reaches a threshold of that number multiplied by the current employment-population ratio of about .59 will not narrow the gap.”  Last month the economy generated an estimated 69,000 new jobs.  You don’t need your calculator to figure out that won’t narrow the gap.

And how are things in Euroland?  continue reading…

You wonder what will happen when markets finally start working. How about, for example, a market that changes prices and wages quickly in response to fluctuations in demand? In a mixed economy with a government that tries to provide fiscal stimulus as needed, will it be of help to move toward such fast-adjusting markets? The two interactive diagrams in this post are based on figures 9a, 9b, 10a, and 10b in a Levy Institute working paper of mine called “Fiscal Policy, Unemployment Insurance, and Financial Crises in a Model of Growth and Distribution,” which was issued just this month and posted on the Institute’s site (math content somewhat crucial).

Each of the two figures shows one pathway followed by an imaginary economy. The pathways are computed by simulating a heterodox model, using a set of parameters as well as a starting point for each of the following variables: capacity utilization, public (government) production, the markup on labor costs used by businesses to calculate their prices, and the size of the labor force. As I explain in the paper, my parameter choices are not based on econometric estimates, but rather on a rough sense of what might be reasonable for a developed economy. In a moment, a new technology will give you a chance to see the impact of varying one of these assumed numbers. In fact, this post represents the first use on this blog of Wolfram’s interactive cdf format. You’ll need a free cdf reader and browser plug-in, which are downloadable at this link, if you don’t already have them.

The pathway shown in the figure just below is followed by public production, capacity utilization, and the markup. As shown, the pathway leads gradually upward in the figure toward an endless orbit called a “limit cycle.” The stabilizing effects of fiscal policy seem to be creating a steady, repeated elliptical pattern.
[WolframCDF source=”http://blogs.bard.edu/multiplier-effect/files/2012/10/blog-cdf-1-revised.cdf” CDFwidth=”435″ CDFheight=”468″ altimage=”http://blogs.bard.edu/multiplier-effect/files/2012/10/blog-cdf-1-alternative-image-rev.png”]

Now, move the lever above the diagram to the right by clicking and dragging with your mouse (or similar move with a touchpad or whatever hardware you have). As you move the lever to the right, you are increasing a parameter that controls the speed at which the markup changes in response to high or low levels of customer demand. continue reading…

A little while back the Wall Street Journal observed that if there were as many people employed by government today as there were in the last month of George W. Bush’s tenure, the unemployment rate would be around 7.1 percent.  Job creation policy, in other words, can sometimes be quite simple.  Step One:  stop firing so many people.

Reuters’ Edward Hadas picks up Pavlina Tcherneva’s research on the reorientation of fiscal policy and points us in the direction of a Step Two:  offer a job to anyone who wants to work but can’t find paid employment.  Tcherneva’s research reveals that the standard way of doing fiscal stimulus,  trying to boost economic growth with traditional pump-priming and hoping that the jobs follow, has it backwards.  Instead of the traditional “trickle-down Keynesian” approach, Tcherneva suggests that targeting the unemployed with direct job creation policies that run throughout the business cycle would be far more efficient. Tcherneva envisions a direct job creation program that would function as a more effective automatic stabilizer, expanding in recessions and contracting in booms.

She argues that this “bottom up” approach is not only closer to what Keynes actually advocated, but that it is also more likely to bring us back to full employment—while being less inflationary and more equitable.  Although expanding government payrolls for projects fulfilling various public purposes would be one way of accomplishing this, Tcherneva advocates using social enterpreneurs and the nonprofit sector to offer jobs to all those willing and able to work (with funding provided by government).

From the standpoint of an ongoing debate about counterfactuals and whether the Federal Reserve would have allowed a more aggressive fiscal stimulus to take effect, one intriguing aspect of Tcherneva’s research stems from her finding that direct employment policies tend to be less inflationary, suggesting that reorienting fiscal policy in this direction might be able to get us closer to full employment before triggering a reaction from the Fed.

The article Hadas cites from the Review of Social Economy is behind a paywall but Tcherneva’s previous working papers on this topic can be downloaded here.  Her newest working paper is here.

In a good blog post for the Financial Times that did get money (mostly) right, Martin Wolf promised a Part II on the topic of appropriate monetary and fiscal policy in a “liquidity trap,” which he has provided here. Wolf also indicated he would write a piece on Modern Money Theory, an approach he does not address in either of these two articles. I look forward to that.

Meanwhile, let me say that I do not disagree with the substantive points made in his Part II—which examines an article by Brad DeLong and Larry Summers. The main argument is this: when there is substantial excess capacity and unemployed labor, fiscal expansion is a “free lunch”. There really should be no surprise about that—it was a major conclusion of J.M. Keynes’s 1936 General Theory, and indeed already had some respectability even before his book. Expansionary fiscal policy can put otherwise unemployed resources to work, so we can enjoy more output.

So what DeLong and Summers do is to show that given assumptions about the size of the government spending multiplier as well as a link between income growth and tax revenues (so that economic growth increases revenues from income taxes and sales taxes, for example) then it is entirely possible for a fiscal expansion to “pay for itself” in the sense that tax revenue will rise. If the “real” interest rate is low, then one can show that the “debt burden” of servicing additional government debt due to an increase of budget deficits does not rise. Hence “the fiscal expansion is self-financing.” (I have problems with all the terms in quotation marks, but will deal with only the first of these here, the notion that expansion can “pay for itself”.)

Let me skip to Wolf’s summary conclusion, with which I wholeheartedly agree: “Policy-makers have allowed a huge financial crisis to impose a permanent blight on economies, with devastating social effects. It makes one wonder why the Obama administration, in which prof Summers was an influential adviser, did not do more, or at least argue for more, as many outsiders argued. The private sector needs to deleverage. The government can help by holding up the economy. It should do so. People who reject free lunches are fools.”

Absolutely.

But….. well, you knew there had to be a catch. continue reading…