Update On The Economy
It’s been a long break occasioned by a string of visitors. What happened in the interim? Not a whole lot. Washington is now deeply immersed in the three ring circus known as the fiscal cliff, an event, we are told, so horrendous that we all ought to be prepared to sacrifice our preconceived notions of fairness in order to rush helter-skelter into a fudged ‘grand bargain’.
No thanks.
Meanwhile the economy muddles along.
It would be nice to see some of the energy being directed towards the entirely pointless fiscal cliff activities being diverted and put to better use. Like getting the economy onto a secure, sustainable growth path. In my dreams.
Still the economy is hobbling along by itself. Today we read the latest GDP numbers. This is the second estimate and represents quite a jump up from the first. According to the report GDP grew 2.7% during the third quarter, up from 1.3% in the second and 2.0% in the first. So on the face of things the economy appears to have picked up the pace.
The problem with this is that the first estimate of the third quarter had consumption considerably higher than the 1.4% in the current version. Likewise business investment, excluding inventories, actually declined rather than increasing as was reported before. These are signs of weakness not accelerating strength, so the top line numbers are somewhat deceiving.
Looking more deeply into the data it becomes obvious that much of the apparent strength during the third quarter came from inventory accumulation. This is an ambiguous source of growth. The question we need to ask is what caused businesses to build up their stocks. If it was anticipation of demand, then it might signal continued good growth. If it was an error created by a miscalculation of demand it may signal a retrenchment ahead and weakening growth. Nothing is ever simple. Looking through the lens of subsequent activity, especially reports of strong sales during the early part of this holiday season we can – for the moment – speculate that it is the former reason, not the latter. It looks as if businesses built stocks ahead of stronger sales, got the call right, and that activity will continue at a more rapid pace.
When we deconstruct the 2.7% overall growth we find it has the following components:
Personal consumption contributed +1.0%
Private investment contributed +0.1%
Inventory change contributed +0.8%
Net trade contributed +0.1%
Government spending contributed +0.7%
You can see clearly from this list the significance of inventories. Everything else looks a little weak.
Elsewhere today we heard about new claims for unemployment assistance. They fell dramatically, by 23,000, to 393,000 last week, and down from the 451,000 of a couple of weeks ago. Once again I urge caution. These numbers are highly skewed by the effects of hurricane Sandy and are not a reliable barometer of the economy. It will take a while for things to settle down, by which time we will be into the funny numbers of seasonal employment. Of course the data is seasonally adjusted, but there are always blips that obscure trends. So don’t go celebrating today’s report, it is simply part of a return to normality, rather than an indicator of a new, stronger, normality.
Looking further afield we also heard about pending home sales which rose 5.2% in October, the eighteenth straight month of gain. Pending sales are now 13.2% higher than a year ago and continue their long road to recovery. As a comparison: this level of activity is roughly the same as that in late 2001, which is decent, not great, and not frenzied. We can safely say that real estate is back on its feet, albeit at much lower levels of activity than those reached during the insanity of the bubble years. Let’s hope it stays that way.
Finally, let me return to the fiscal cliff.
It is a contrived problem designed to scare us. Of course we don’t want a dramatic tightening of fiscal policy next year. That would be awful. But we must not forget that we do not have a Federal debt problem. At least not now. The annual deficit as a percentage of GDP shot up exactly as we would expect during a deep recession. It went from an order of magnitude of about 1.2% to around 9.0% of GDP. This explosion was predictable and temporary. Once growth is re-established it will decline back to its former levels of its own accord. No significant policy changes are needed. Remember: non-health care transfer payments have been a fairly constant proportion of GDP for decades. They rise during recessions and then fall back subsequently. Absent health care, transfer payments are not a cause of our supposed debt problem. By the way: defense spending has been a reasonably steady proportion of GDP as well. This irks me and others who would like to build a case to cut it, but that case has to rest on non-budgetary reasoning, not on false debt crises.
So, if the fiscal cliff is a made up problem, who made it up? and, why?
The fiscal cliff is an artifact of class war. It arises from the longstanding attempt of the political right wing to defund and shrink government, deregulate, and boost business profits. Hacking away at the safety net is simply part of that long term plan. Likewise the horror stories on the left are all designed to fight a rearguard sufficient to protect the safety net from the predation of our plutocracy. We happen to be living through a moment when the right came close to winning. They were perilously close to ramming through more tax cuts for the wealthy to be paid for by stripping funding from social programs. The result of this would be the long term impoverishment of the middle class and the continued enrichment of the top tier of income earners. So these are tense times when compromise is dangerous and thus difficult.
In this sense the fiscal cliff is also the first battle in a war designed to tackle inequality. Hence the obsessive focus on raising taxes on the wealthy, even though such an increase is insufficient to make much of a dent in the long term deficit.
In other words, the fiscal cliff is a political construct that results from our deeply divided views on social policy. It has less economic significance other than the near term negative shock it would deliver were all its aspects to come to pass.
Ironically, as I have pointed out before, anyone who is alarmed at such a negative shock is, by definition, making the statement that they see benefit in stimulus. For if sudden contraction in fiscal policy is capable of sending the economy into recession, as they argue, then sudden expansion of fiscal policy will drive the economy out of recession. The fiscal cliff rhetoric thus hides a stunning level of agreement. Apparently, and perhaps unwittingly, our right wingers are now ardent Keynesians.
Similarly, anyone who has made a fuss of the damage to inflationary potential of large deficits and government spending should now be applauding the imminent slashing of spending incorporated within the fiscal cliff packages. Think of the rating agencies. They are an example of the confusion on the right. On the one hand they warn us that failure to resolve the fiscal cliff issues will force them to downgrade US bond ratings. On the other they claim that reduced spending is a criterion for getting a higher rating. But the fiscal cliff would produce exactly such reduced spending. Clearly they don’t mean reduced spending. They mean reduced social spending. They have declared their ideological colors.
So we hear no applause, nor do we see consistency.
Which is why I make my claim about class war. The fiscal cliff is artificial. It exists as a ploy by the right to hack away at social spending. The rational response is thus to drive off the cliff, and then to negotiate backwards. This would make the right the fall guy for a hike in taxes on the middle class and consequently provide a major incentive for them to bargain quickly to undo the damage.
All this is my way of saying: tune the fiscal cliff blather out and enjoy the upcoming holiday season!
But wouldn’t it be nice were Washington to tackle some of our real problems instead of the mad up ones? Oh well. Dream on.
