Monday, February 1, 2010

Consumption has recovered, jobs will follow


As a supply-sider, I don't believe that consumption drives economic growth. The driver of growth is supply, and supply goes up when people work more, when the factors of production become more productive, when investment goes up, and when risk-taking goes up. I show this chart of real personal consumption expenditures merely to show that what has happened in the economy over the past year is typical of every business cycle recovery. With almost all economic indicators confirming a decent recovery, with productivity up strongly, with business capital spending up strongly, with risk appetites increasing (e.g., the 60% rebound in the S&P 500 and the dramatic narrowing of credit spreads) and with consumption up as well, it is only a matter of time before we see an increase in the number of jobs. Jobs are the last place that a recovery will show up.

Things could have been a lot better, unfortunately, if it weren't for all the government "stimulus" spending. The bulk of that spending consisted of transfer payments which, because they take money from one person and give it to another, do nothing to create new growth. And the massive deficit that resulted from all the "stimulus" spending has sopped up a huge portion of the economy's savings that could have been directed to truly productive activities instead.

The recovery skeptics keep insisting that the economy is on "stimulus life support," and that any move to cut back on fiscal or monetary stimulus would threaten a double-dip recession. I don't believe it for one second. On the contrary, I keep insisting that the economy is recovering despite the government's best efforts to suppress growth. It never pays to underestimate the strength and dynamism of the U.S. economy.

12 comments:

brodero said...

One of the better explanations on the positives of supply side economics.....

alstry said...

Scott,

When Government spends and consumes $7 Trillion dollars per year at all levels....much of it from printed currency and not tax receipts.......how long do you think this can continue before inflationary pressures stunt growth and destroy the dollar?

Thanks

LIL said...

As usual, your commentary is completely somewhere in outer space. Why aren't you on MSNBC? You'd fit right in.

Scott Grannis said...

alstry: about half that amount represents transfer payments that take money from one person and give it to another. This is not really "spending." When you look at government consumption of goods and services, the number is much much smaller than $7 trillion. But it's true that we can't run trillion dollar deficits funded by the Federal Reserve forever without running into serious problems.

alstry said...

Scott,

This is the point I am not very artfully trying to make.....has anyone calcuated how much of government tax receipts are a direct result of government spending?

For example, if tax receipts continue on the current downward trajectory...it is very conceivable Obama's deficit will be closer to $2 Trillion dollars.

$2T is about half of total spending at the Federal level and that spending will generate a lot of employment and corporate profits.

Have you seen anyone calculate the total tax dollars generated simply from deficit spending....and then also calculate receipts from total government spending?

My guess is the world might be shocked how much tax dollars are generated simply paying salaries to government workers and contractors and adding in profits from government contracts to business and supplementary corporate profits from entitlement payments such as medicare and medicaid profits in health care and drug industries.

Scott Grannis said...

I don't believe that the federal deficit has created a lot of jobs or that it has generated lots of profits. The vast majority of the deficit is transfer payments, very little of which is taxable. I view the deficit as a net drag on the economy, and we would be much better off without it.

alstry said...

Scott,

The Federal Deficit is now half the Federal budget........much of that spending translates into immediate consumption creating massive numbers of jobs and revenues for the economy.

Going forward, the government will need to print the money to fund the deficit.....as no nation in the world has the capacity to loan $2 Trillion dollars.....or half of China's GDP.

My concern is a collapse of our currency if we continue down this path printing trillions of dollars per year.....the other concern is America will shut down if we don't.

Look at what is happening to Colorado Springs .....probably the most conservative city in America.

COLORADO SPRINGS — This tax-averse city is about to learn what it looks and feels like when budget cuts slash services most Americans consider part of the urban fabric.

More than a third of the streetlights in Colorado Springs will go dark Monday. The police helicopters are for sale on the Internet. The city is dumping firefighting jobs, a vice team, burglary investigators, beat cops — dozens of police and fire positions will go unfilled.

The parks department removed trash cans last week, replacing them with signs urging users to pack out their own litter.

Neighbors are encouraged to bring their own lawn mowers to local green spaces, because parks workers will mow them only once every twoeeks. If that.

Water cutbacks mean most parks will be dead, brown turf by July; the flower and fertilizer budget is zero.

City recreation centers, indoor and outdoor pools, and a handful of museums will close for good March 31 unless they find private funding to stay open. Buses no longer run on evenings and weekends. The city won't pay for any street paving, relying instead on a regional authority that can meet only about 10 percent of the need.

"I guess we're going to find out what the tolerance level is for people," said businessman Chuck Fowler, who is helping lead a private task force brainstorming for city budget fixes. "It's a new day."

Some residents are less sanguine, arguing that cuts to bus services, drug enforcement and treatment and job development are attacks on basic needs for the working class.

"How are people supposed to live? We're not a 'Mayberry R.F.D.' anymore," said Addy Hansen, a criminal justice student who has spoken out about safety cuts. "We're the second-largest city, and growing, in Colorado. We're in trouble. We're in big trouble."

Mayor flinches at revenue

Colorado Springs' woes are more visceral versions of local and state cuts across the nation. Denver has cut salaries and human services workers, trimmed library hours and raised fees; Aurora shuttered four libraries; the state budget has seen round after round of wholesale cuts in education and personnel.

The deep recession bit into Colorado Springs sales-tax collections, while pension and health care costs for city employees continued to soar. Sales-tax updates have become a regular exercise in flinching for Mayor Lionel Rivera.

"Every month I open it up, and I look for a plus in front of the numbers instead of a minus," he said. The 2010 sales-tax forecast is almost $22 million less than 2007.


http://www.denverpost.com/news/ci_14303473#ixzz0eK48UCCQ

Interesting paradox....without government spending, the life as we know it shuts down.....with massive deficits, our currency may become worthless shutting down our nation anyway.

seekingtraceevidence said...

The economy cycles between excess spending/leverage and a basic replacement rate. During down turns we reduce employment till profitability occurs which is in line with the need to replace things that are worn-out or we face reducing our standard of living. It is at this level that stability occurs and any increase in sales generates higher employment.

Benjamin said...

Public pensions are a killer.

The Los Angeles Police Department is on a jag to boost payroll to 10,000 officers from 7,500 several years back, despite little population growth and declining crime rates.

Every officer hired comes with a long, 75-year tail attached.

Pensions, and even pensions payments for life to survivors, such as younger spouses can extend for 70-80 years into the horizon.

No one cares.

After just 20 years of service, employees can retire from our federal military and receive payments for life, again extrending for decades and decades, as life spans lengthen.

No one carse.

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