Wednesday, April 30, 2014

Taking the measure of our discontent

The Great Recession of 2008-2009 wasn't your typical recession. In every other recession in postwar history, the economy rebounded within a few years to return to its long-term growth path. But not this time, and it has nothing to do with the rich getting richer or the alleged increase in inequality. Instead, it has to do with the average person and the average family not making the kind of progress to which they've been accustomed. Understandably, people are upset.

The chart above compares the actual growth of real GDP (blue) with its long-term trend of about 3% per year. Never before has real GDP fallen below its trend by so much for so long—and still, as we are about to enter the sixth year of recovery, there is no sign of a true recovery. The current "gap" between actual GDP and its long-term trend is about 10% by my calculations. That translates into a national income shortfall of roughly $1.7 trillion.

This is the measure of the country's discontent: $1.7 trillion in missing income.

The chart above compares the actual growth of a subset of retail sales (which excludes certain volatile categories) to its long-term trend. These are the expenditures made by ordinary folk, not the mega-billionaires. This helps dramatize just how radically things changed beginning in the latter half of 2008. Retail sales by this measure would have to increase 16% overnight to get back on their long-term trend path. This is the measure of how much middle class families are hurting.

After growing for decades at about a 1% annual pace, the labor force suddenly stopped growing in late 2008, as the chart above shows.

If one thing stands out in these charts, it is the abruptness and the severity and the persistence of the divergence from long-term trends that began in 2008. Something REALLY BIG happened; what was it?

It was not demographics, since demographics change at glacial speed. The population didn't suddenly got older and start to retire en masse in late 2008.

It was not monetary policy. The Fed was arguably slow to launch its QE efforts in late 2008, but since then they have been working overtime to make sure the economy is not starved of liquidity and interest rates are as low as possible. (I could be persuaded that the persistence of extremely low interest rates has been a problem for savers, and that this has led to weak investment, but corporate profits have been setting records throughout the recovery.)

The one thing that changed in a really big and durable way, starting in 2008, was fiscal policy. The Bush administration launched TARP in late 2008, and the Obama administration followed up with ARRA in 2009. Then came Obamacare in 2010, which purported to restructure fully one-sixth of the US economy within the space of a few years. Then came the Dodd-Frank super-regulation of the financial industry. Beginning in 2013, top marginal tax rates were increased.

As the first of the above two charts shows, massive fiscal "stimulus" increased the federal government's debt from $5.34 trillion in June '08 to $12.45 trillion as of this week. As the second chart shows, that surge of borrowing doubled the federal debt burden, raising it from 36% of GDP to 72% of GDP in a mere four and a half years. The only other time something of this magnitude happened with fiscal policy was WW II.

The federal government borrowed $7.1 trillion over the course of five and a half years and handed most of the proceeds out in the form of various transfer payments. Our leaders in Washington did this in the belief that this would stimulate spending and that would convince businesses to create more jobs. The federal government restructured the entire healthcare industry in the belief that this would lower costs and give everyone healthcare insurance coverage. The federal government rewrote the rules for the entire financial industry, in the belief that a more-highly-regulated banking system and greater consumer protections would restore confidence and optimism. And to top it off, the federal government increased taxes on the rich, in the belief that this would benefit the middle class by more fairly distributing the fruits of progress. But it didn't work. Spending wasn't stimulated; job growth didn't surge; healthcare costs continue to rise, the vast majority of the uninsured are still uninsured, and millions are now losing what coverage they used to have; banks are reluctant to lend and consumers are reluctant to borrow; consumer optimism remains relatively weak; and the middle class has taken it on the chin.

If anything, the massive growth of government intervention in the economy since 2008 looks to be the Occam's Razor explanation for what caused the weakest recovery in history.

If there is a reason for widespread discontent, it is our federal government and its overbearing and intrusive ways. Thanks to all the government "help" that has been heaped upon us in the past six years, we have the weakest recovery in history. And the bill for all this is a staggering $1.7 trillion per year and counting.


McKibbinUSA said...

Given the vast extent of the US debt, I believe it's time to talk national default -- let's face it, there is no chance of ever paying back the debt -- and now that inflation has been squelched, the only left to get rid of the national debt is to start new countries to replace the US -- any notion of paying back the national debt out of my pocket does not pass the laugh test -- I suspect everyone feels the same way -- and since everyone feels that way, it's high time to cancel the US debt and get on with what comes...

PS: Repeating myself, no one wants to repay the national debt -- not the 99% crowd -- not the 1% club -- not the government -- a decision to default on the national debt therefore has the potential to be massively popular and unanimous!

Scott Grannis said...

Re the national debt. Our debt burden was much bigger at the end of WW II than it is now, and we repaid it easily. All it took was a burst of growth. Growth has been meager these past 5-6 years because of bad policies. Fix those policies and watch the economy boom and the debt burden shrink. Also note that the deficit as a % of GDP has fallen dramatically. Things are moving in the right direction.

In any event, it would be the end of the world as we know it if the US defaulted on its debt. It's unthinkable and completely unnecessary.

Lidman said...

'Fix those policies…' You make it sound so simple. I think we have to come to grips that global growth will be subdued, bringing down the 'neutral' interest rate. Leverage is lower, but the remains a debt burden that rising interest rates will only exacerbate. So, while things are moving in the right direction, it's difficult to see the US having a similar 'burst of growth' seen after WW2. Technology has made the world a much more productive place, so many of the jobs created post WW2 are no longer applicable. So, while I am still bullish on the US, I simply believe growth is likely to be much lower, for much longer, than people had become used to.

I hope I am wrong.

William said...

I think the short fall was because individuals and some corporation when into debt to buy good, things and services in one massively leveraged party based upon residential housing loans and home equity loans.

Remember that during 2005 to 2007 consumers' saving rates was negative - they were borrowing to spend more than they earned.

The net result was that future purchases were brought forward into those years using various forms of debt including primary home mortgages of more than 100% of the value of the residence; home equity loans to purchase remodeled bathrooms and kitchens, new cars, pay for college, other consumer good.

When the debt party was over, spending on such items plummeted and the over-consumers were left with a big pile of debt to be repaid during a severe recession when many lost their jobs.

Given there circumstances it was impossible to return to former spending habits of 2003 - to much of 2008. Many consumers are still underwater on their prized homes and too many are still out of work or in jobs which pay them much less than before.

Much of the government spending actually went to fight two wars; to build up and out homeland security; for massive intelligence programs; and finally for benefits to the unemployment including medicaid and food subsidies.

Vespasianus said...

Looking on the bright side, we can hope that a reversal of current policies towards a more friendly-business approach, could boost growth strongly, given the huge GDP output. Unfortunately, this sudden change of attitude is possible in USA, but almost unthinkable in many countries of Europe, whose economies will stagnate in coming years, not only because of the deleveraging process, but the anti-supply side politics so usual in most of the continent.

Anonymous said...

Let me suggest that the economy is adding about 2.5% a year to employment -- you may prefer a different number -- that is about what the economy does in good times, and the difficulty is in a different place. Instead of having shallow recessions every 2-3 years, as I remember from the 1950s, we managed to have a huge recession after a lot of years without one. We are climbing out of the pit at the usual rate, more or less, but the hole was much deeper. A little math will show that more frequent shallow recessions create less misery than a huge recession.

PerformanceSpeaksForItself said...

Scott, the Occam's razor explanation is the high debt of households, not federal spending and regulation. The only reason the burden on households is so low is that interest rates are low; not enough has yet been paid down.
The comparison to post-WWII is not apples to apples - at that time, the economies of Japan and Europe were destroyed and the U.S. was untouched. Their technology, skilled labor and jobs came to the U.S. post-war, a situation the U.S. still benefits from, but has been slowly unwinding ever since.
Yes, policy improvements can do alot to help, but they are not the root of the problem, imho, debt was/is.

Scott Grannis said...

Re household debt: Household liabilities as a % of assets has plunged from 20% to 14%, and is now back to levels that prevailed in the early 1990s. Household debt service burdens are the lowest they have been in over 30 years. Households have deleveraged significantly. I don't see household debt as the problem. It's the big increase in government borrowing that is clearly the problem. It financed spending that was unproductive and wasteful; it has essentially placed a huge tax burden on the economy with nothing to show for the spending.

PD Dennison said...



Great article, right to the point and it says it all.

My conclusion is that only a long, political process can change this and it is no where in sight. So, for now, the new normal is here to stay.

It very sad that we have to experience again, what should have been learned from FDR's mess. History not learned, being repeated (albeit, on a smaller scale), though the controlling political class is benefiting greatly.

William said...

Debt levels may be down sharply but a lot of that is due to foreclose, default, bankruptcy, etc. Those folks made not have the debt burden any more but there credit rating is destroyed. Thus they aren't purchasing as they did in the boom times especially those in the middle class and lower whose wages and income adjusted for inflation has barely risen.

Scott, a lot of the data that you quote is "in aggregate" - like the total assets and total liabilities of Americans. But a lot of the assets are at the top end of the income ladder and those folks can only eat so much, drive so many miles, buy so many cars and refrigerators, etc.

Scott Grannis said...

William: demand is not what drives the economy. It's supply: investment, work, risk-taking, new jobs, productivity, etc. Household balance sheets are much healthier, but that means that households have been risk averse. Same goes for businesses, with record levels of profits, lots of cash on hand, but not much investment. When policies change for the better, optimism will return and the economy will be ready for a burst of investment-led growth and many more jobs.

Benjamin Cole said...

In general I agree with the always solid posting of Scott Grannis.

But how the right-wing talks about the excessive size and intrusiveness of the federal government without mentioning national defense is...well, not encouraging for those of us who really do want to cut the federal government.

The feds will spend $1 trillion of your tax dollars this year on DoD, VA, DHS, intelligence. Next year too, and the year after that and on into infinity.

When it comes to income and capital gains taxes, the bulk of your money is eaten up by defense-VA. (The huge Social Security and Medicare program are largely financed by payroll taxes).

There are some right-wingers, Ron Paul, Pat Buchana, Cato Institute, David Stockman, even Dick Armey, who recognize this horrendous waste of money and talk about it.

I just wish Grannis would too.

If you think taxes are too high on income and capital gains, it would behoove a sensible person to think about limiting outlays on defense. That is what those taxes are used for.

PD Dennison said...

Defense has declined since WWII from 70% plus of the Federal Budget to about 18% today, heading ever lower.

Direct payments to individuals has gone from about 15% to nearly 70% today, heading ever higher. Welfare, SS and Medicare driving this.

US spends nearly $1T on welfare per year from 100s of Depts, while Dept of Defense spends $500B, a declining number.

Do facts matter on the Left? Can we cut both Defense and Welfare for once!!!

Kenneth said...

Scott, I wish you would present your analysis to potential Republican presidential candidates so they see what needs to be done. The country is underperforming due to anti growth policies. I think more people than not still want prosperity. Maybe too enough disillusion has set in with the pro government approach that people will embrace a well presented set of pro growth policies. Even some of the media are starting to question some of Obama's policies realizing they are based on politics rather than what is really in the best interest of the country. I'm thinking Keystone pipeline as the most recent example
When the mandates start to be implemented on Obama care the reaction is going to be very negative. Hopefully that awareness will begin before November as notices begin to be sent out by insurance companies of the surge in premiums and less coverage and choice.

Scott Grannis said...

I would love to see Republican candidates follow my advice. The November election is their's to lose at this point. Larry Kudlow feels the same way, and fortunately his voice is louder than mine:

Benjamin Cole said...

PD Dennison:

Please remember the VA and its $157 billion budget, and the DHS, and the "black budget" (hidden) of US intelligence agencies, now estimated at $50 to $100 billion, but unseen.

It is an accounting fiction to not include VA under "defense outlays." This is akin to your local school district or police department trying to convince you that pension or disability costs are not part of the school or police budget. You would laugh them out of office.

The VA is part and parcel of the personnel costs of running defense.

Yes, payroll taxes have exploded in the last 20 years.

But as a fraction of income and capital gains taxes---and that is what is used to fund national defense---more than half of your tax money is eaten up there.

And no one is going to invade the US.

I am all for raising the retirement age to 68---for everybody, including the age at which retirement benefits can be collected by veterans---and sharply limiting what Medicare will pay for, in terms of end of life coverage. In other words, if you are going go, go quickly.

A wipe out of the USDA and all other rural subsidies is also a good idea. Rural America is a pink-o wonderland.