Saturday, July 30, 2016

The election should be all about growth

The economy is still stuck in slo-mo mode: it's been the weakest recovery ever for the past seven years: a mere 2.1% annualized. The first half of this year was even weaker than that (1%), but it's the nature of GDP numbers to be volatile; as with the payroll employment data, you have to look at the trends over months and years to get an approximate idea as to what is going on. Monthly, quarterly, and annual data are routinely revised after the fact, and sometimes significantly. It's amazing that the government statisticians can even come close to measuring all the activity inside an $18 trillion economy.

The data we can trust, however—tax receipts, market-based prices, corporate profits, unemployment claims—are in general agreement with the GDP stats, as I've been noting off and on for the past several months. The economy is most likely still growing at a sub-par pace of 2% or so, as it has on average since 2009 (see chart above). Just because it's growing slowly is no reason to worry that a recession is imminent. The analogy that says a slow-growing economy is like an airplane approaching stall speed is flawed. Indeed, recessions typically follow periods of excesses—soaring home prices, rising inflation, widespread optimism—rather than periods dominated by risk aversion such as we have today. Risk aversion can still be found in abundance: just look at the extremely low level of Treasury yields, and the lack of business investment despite strong corporate profits.

If Donald Trump wants to win the election, his campaign ought to promote the facts to be found in the chart above. The economy's ability to grow by a little more than 3% per year on average for over four decades suddenly vanished beginning in 2009. For the first time in post-war history, the economy failed to recover to its former growth path following the 2008-09 recession, and it has managed to grow only 2.1% since then. Seven years of slow growth following a big recession have left the economy about $3 trillion smaller than it could have been. We're missing out on approximately $3 trillion per year in income, and that's yuuge. Put another way, the average family could have been earning about 18% more this year if the economy had recovered in typical fashion, and of course there would have been many more people working. The $3 trillion GDP shortfall is the easiest way to understand the widespread level of discontent in the U.S. today.

As I noted some years ago, all the spending and borrowing that was supposed to "stimulate" the economy beginning in 2009 was essentially flushed down the toilet. Since 2009 we've conducted a laboratory experiment in the power of government spending and income redistribution to grow the economy by stimulating demand, and the result is proof that Keynesian theories are destructive, not stimulative. Neither government spending nor easy money has the power to create growth out of thin air, but politicians want to convince you that they do. The economy is weak today because we have wasted many trillions of dollars on transfer payments that only create perverse incentives to work less.

Hillary Clinton does not understand this, but Donald Trump most likely does. Clinton has vowed to "change" things for the better by raising taxes on the rich and profitable, and distributing the spoils to the middle class. But that is just a rehash of all that has gone wrong for the past seven years. Real change demands tax reform and simplification; lower and flatter marginal tax rates; a much lower corporate income tax; and extensive regulatory reform and relief. We've got to increase the after-tax incentives to work and take on risk, and reduce regulatory burdens (which add immeasurably to the cost of doing business), if we want a stronger economy. It's that simple. The reward to doing things right would be recapturing the $3 trillion annual shortfall in the economy's productive capacity. The upside potential lying dormant in today's economy is staggering. (And by the way, that's one big reason to remain optimistic.)

One of the best things about the past two decades is the strength of corporate profits, as illustrated in the chart above. From 1958 through the mid-90s after-tax corporate profits averaged about 5% of GDP (note that the right y-axis, corporate profits, is 5% of the left y-axis, nominal GDP). But while corporations have generated about $1.5 trillion in after-tax profits on average over the past seven years (about $10.5 trillion in total), federal government debt held by the public (i.e., net borrowing) has increased by about $6.8 trillion. That means that, in effect, our government has borrowed 2 out of every 3 dollars of corporate profits for the past seven years, and then handed the money out to favored constituencies. In return, the government has enjoyed the lowest borrowing costs in history, but the economy has squandered much of its scarce resources. We've plowed two-thirds of the profits of the most valuable companies in the world into (mostly) transfer payments that have generated zero net growth. This recovery has seen a colossal waste of money.

Another way to see this is to look at business investment, which has been miserable for many years. Businesses have been very profitable, but for whatever reason (e.g.,  the highest corporate tax rate in the developed world, which has discouraged businesses from repatriating trillions of dollars of overseas profits) they have been extraordinarily reluctant to reinvest those profits. Call it risk aversion, or as I've deemed it, the reluctant recovery.

Capital goods orders (see chart above) are a good proxy for business investment. Capital goods are the things that make labor more productive. You can't grow the economy without investing in tools and technology that make workers more productive. Lamentably, capital goods orders today are about the same as they were in the late 1990s. In real terms they have declined by 30%, even though the economy has grown by over one-third over the same period.

Private Fixed Investment tells the same story. Relative to GDP, fixed investment (structures, equipment, and software that are used in the production of goods and service) has declined by almost 20% since 2000. The go-go growth of the mid-80s and the late 90s were driven by strong investment. Today's weak investment climate has given us a miserably weak economy. It's not surprising. 

What is surprising is that so few seem to understand that the solution to our weak growth is to do things that encourage investment, work, and risk-taking. That includes not only lower taxes and reduced regulatory burdens but also greater confidence that conditions will remain favorable in the future. How many today are willing to bet huge sums that taxes will be lower and flatter across the board a year or two or three from now? It's almost impossible to know at this point, with the election still a toss-up between one candidate who vows to increase taxes and regulatory burdens and the other who would likely reduce them.

I despise Donald Trump as a person (just as I despised Bill Clinton as a person), but I do think both Donald and Bill have a much better understanding of how business and the economy work than Hillary does. If Trump were able to push through a growth agenda, the rewards could more than make up for his failings in other areas. It remains a mystery why Hillary wants to double down on Obama's failed economic agenda when her husband's was so different and so much more successful.

To judge from the rhetoric, the election is all about personalities: Hillary is a corrupt liar, Trump is a xenophobic, redneck egomaniac. The list of negatives is long for each. Instead it should be all about which one would be best for the economy. On that score, Trump should win hands down.


Andrew said...

Thanks for the graphs and updates. However, I disagree that the turning point in our economy was 2009. From the graphs, it appears that there were 2 bubbles prior to that time. The .bomb and the housing bubble. If those are backed out as unsustainable unique periods of time, then becomes evident that the slower growth rate started some time in the 1990's.

Either way, what seems to be lacking from the political discussion is the growth in entitlements. Nobody want to talk about it because it's a no gainers with the elections. Entitlements do no results in increased productivity and that is what's ailing our economy. Demographics are not going to help either with a greater percentage of the population going into retirement and the ratio of worker to recipients shrinking.

So we are looking at the very early stages of stagflation and it will take a major economic catastrophe to break out of it because that is the way politics work.

William said...

Velocity of M2 Money Stock Continues to Fall

M2V peaked in Q3 1997 at 2.2; fell to 1.71 in Q3 of 2009; rallied to 1.74 in Q3 2010 and has fallen relentlessly to its present reading of 1.45 .

Scott Grannis said...

The decline in M2 velocity (I.e., the rise in money demand) is another excellent indicator of the degree of risk aversion in the market.

George Phillies said...

However, I cannot complain about market performance over the last decade.

I am most grateful to Scott (and Mish and Bonddad) for economic discussions that have led me to a pleasant retirement. Not a house on the Pacific coast, but a pleasant retirement.

Having said that, "throwaway vote"? All votes count twice, once for the candidate, and once for the party's stands. And in most states, the victor is clear in advance, so voting for the loser (D or R) is as wasted or not wasted as voting L or G, and voting for the winner (R or D) is pointless, as there would have been same winner without you.

If risk aversion eventually wears off, say in another five years, we will then have lots of cash on the sidelines to spur the market along.

Benjamin Cole said...

Trump has been disappointing. He has not outlined a solid economic program.

Hillary is a victimist, globalist warmonger. The neocons have decamped to the Hillary campaign. Welfare and warfare the federalist fortes.

Monetary policy, property zoning, taxes on working---not topics in this election.

Good luck everybody.

Hans said...

A very well though out thread by, Mr Grannis.

Unfortunately, the macro trend continues on the axis
of a ever increasing Socshevik movement, which will
continue to "surge" until America experience economic

I except our path will follow something akin to Broke-O-Rico
before concrete action is taken.

Plan your investments wisely and make sure that precious metals
are incorporated.

Roy said...

Trump's business history shows that his greatest ability is to persuade creditors to provide him with credit with which he makes investments of low economic value, leading to various BKs. He is probably loaded up with debt, one of the main reasons he is not willing to provide his tax returns.

So, it is only reasonable to expect that he would continue to make similar decisions if he were to be POTUS, especially as he believes that he is good at it.

We can take it a few steps farther and it becomes much, much, much worse.

Christophe said...

Love your articles. Been reading you for years. By far most of my assets are in the stock market. So my first and main financial concern is the protection and growth of those assets. Trump at this point is just too risky. he could literally be a total idiot (low comprehension level) all the way to a megalo (i.e. Mini dictator). Voting for him seems like a crazy choice for anyone that has much to loose. On the other hand the stock market has done well under the previous Democrat administrations. Hilary will most likely be like Bill maybe even a bit more conservative, as they are now in their upper 60s and have millions of dollar they also want to conserve and grow.


The Cliff Claven of Finance said...

Dumbocrats (Hillary/ Bernie-style):
Economic growth is evil -- causes profits ... and even worse: carbon pollution!

Repooplicans (loud Donald style):
We must start trade war to fight "unfair" balances of trade with China, Mexico, Korea, etc.

The bond / stock / some real estate / student loan & non-prime car loan bubbles are going to burst no matter who gets elected.

This will be the third debt-fueled bubble to burst since tech stocks peaked in 2000.

Corporate profits are declining, while stock averages are rising as if that doesn't matter = danger !

The median Price / Sales Ratio has never been higher !

S&P 500 Market Cap as a percentage of GDP is about 75% above average
(one of Buffett's favorite indicators)

If a corrupt politician with no track record
and a LOUD billionaire
are the best we can nominate for President,
our nation is in decline.

Benjamin Cole said...

I know it is heresy but....I see nothing wrong in the judicious application of "helicopter money."

Scott Grannis said...

People who have lived in Argentina will strongly disagree with you, myself included.

Scott Grannis said...

Also: Have you checked conditions in Venezuela where the printing presses are working overtime?

Al said...

Your the man scott. I would vote trump if I was American (I'm canadian) just because I feel I can't trust Hilary based on her actions and lack of judgement with the whole email thing. I even saw a blue collar guy on the street corner this weekend saying vote trump. Was hilarious. This is very entertaining for us because our politics are so boring in comparison. Our most interesting thing is that the new guy has semi long nice hair.

Hans said...

Ben Jamin, rotor money is nothing more than another QE.

Benjamin Cole said...

Scott: there are examples in history, such as Argentina, the Weimar Republic, or Zimbabwe, in which too much money was printed.

There are also many other chapters, including the present, when money was too tight. Milton Friedman said that money was too tight in the Great Depression.

And then there are other chapters such as the Great Depression in Japan, wherein money-printing saved the nation and prompted 5% real annual growth.

I prefer to err on the side of economic growth, in tax, regulatory and monetary policies.

Sheesh, loosen up!

Scott Grannis said...

Benjamin: what evidence do you have to support your contention that money is too tight?

Frozen in the North said...


I agree with most of what your wrote except: Donald Trump understands... Sorry there are very few things that Trump understands, or cares about. He has made his lack of interest on the subject of economic growth well know.

Aside from that, one comment. Between election cycles you bitch and moan about how politicians have little to do about economic growth -- they just need to get out of the way... Which is it? They can do something about it or they are powerless interlopers. I'm almost certain it cannot be both


Scott Grannis said...

When I think about which candidate is more likely to understand the impact of taxes and regulations on business, I quickly conclude that Trump is the better choice. He may not do all the right things when it comes to helping the economy (by getting government out the way, reducing tax and regulatory burdens), but Hillary would almost certainly do most things wrong.

Johnny Bee Dawg said...

Scott's post is right on.

I don't know why people keep saying that Trump has not outlined a solid economic plan.
Its right on his web site along side all his other America First positions. Kudlow and Laffer helped design the tax plan.
Its specific.

Hillary wants to RAISE taxes on the most productive, and INCREASE regulations. This is wrong and AWFUL for growth.
She wants to give away FREE college and other goodies to buy votes with cash.
She used her position at State to take cash in exchange for favorable policy decisions.
She has stated that she wants to weaken our Bill of Rights...specifically amendments 2,4,9, and 10.

Its not just the bad policies that have kept us from a single year of 3% growth.
The incredible lawlessness of this government is the true hindrance to risk taking and to economic growth. We are going to have 8 more years of EVEN WORSE with Hillary the criminal. It will be a free-for-all of Soviet style cronyism.

Christophe said...

But Johnny the man seems a bit crazy. Is it just me? He knows nothing about world politics, he does not care. He knows very little about the world history. He knows nothing about an economy and does not careless about that it. He has a difficult time not offending someone. What exactly are his skills? This guy could easily create word war 3. He could go crazy...and want to be emperor. Major red flags guys....

Benjamin Cole said...


Is money too tight?

1) Well, if the Fed is serious about hitting its 2% average inflation target (IT) on the PCE, then it has missed on the underside now for years. So, in that regard money supply is too tight. And that IT is an average, not a ceiling. We could run for several years at 3% and still be in the "average" territory.

IMHO, a better IT would be a 2% to 3% range, or at the risk of appearing a bit fussy, a 2.25% to 3.25% range. The Reserve Bank of Australia has a 2% to 3% IT range, and they seem to do better than the Fed.

2) Something has changed in Western economies, and inflation is no longer the boogyman it was. For example, Japan has the tightest labor markets in 24 years and now again is in deflation. The yen is appreciating. I say in the U.S, let's take a chance, and put people to work, and see if inflation creeps up out of the 2% to 3% range. Yes, let's short for 4% unemployment or even less. Money is too tight if we are preventing assets from being deployed to fight ghost inflation. (As an aside, I do not believe we can unemploy people into believing free enterprise is the best option. Indeed, I think we would see a lot more free enterprise spirit if chronic labor shortages were the norm in the US. In contrast, the Fed believes it should create chronic job shortages).

3) The way housing feeds into inflation is rife with conflicts and expresses artificial shortages, not money-supply looseness. Until property zoning is reduced, we may have to live with some inflation, if we want a growing economy. Frankly, how can we have a growing economy and not strong housing inflation on the West Coast? I advise Calafia Beach to unzone entirely and embrace the subsequent business and property development boom. My advice falls on deaf ears. In a sense, to keep housing inflation in check in Calafia Beach, we must suffocate the national economy. That is the national situation now, as obviously Calafia Beach is the socialist norm up and down the West Coast, not the outlier.

4) There are global gluts of everything, from smartphones, to cars, to commodities, to clothes, to food. Name anything in short supply, even oil now (despite a cartel!). If there are gluts of everything, including capital to build more supply, then I think money is too tight.

But, to be sociable, I will say I agree that Trump, with a business background, is probably a better choice for Prezzy. But egads, he leaves his brains in the shoebox a lot.

For conspiracy types: How to explain the GOP establishment revulsion at Trump? Is Trump threatening various interest groups aligned with the GOP who survive on regulation and federal outlays? Oldies like Grannis and myself have never seen a major party presidential candidate snubbed by his own party establishment. The Bushes, the Romneys, the Kochs etc all absent. Trump is running as an independent in GOP-drag.

The free traders, open borders, globalist-neocons (military interventionists) and multinationals and Wall Street are decamping for Hillary!

I have a weakness for conspiracy theories, but something is going on underneath the surface here….

Unknown said...

If any of you are seriously considering a vote for Trump, who clearly seems a sociopath, please spend a few minutes listening to this:

I understand the economic preoccupation on this blog but please consider the wider ramifications. If you find Hilary so damning please consider Gary Johnson. It is not a wasted vote especially considering how desperately this country needs a third party and the effort it will take to support an alternative to this current mess.

steve said...

I just do not understand how and serious and thoughtful person could possibly pull the lever for trump. he's a loose canon and as vile and mendacious as hillary is, I think we can SURVIVE her one term presiidency especially if gop maintains congress and governor seats. with trump, someone could piss him off and we're staring at WW III. he's a bully and has always been one. gary johnson has my vote, hands down.

steve said...

to Benjamin's points re housing

Benjamin Cole said...

Steve---yes, except those "SF progressives" are outdone by building restrictions in Newport Beach and many other coastal towns. In Newport Beach you cannot build a building larger than 250,000 square feet without approval... from city voters in a direct vote.

Everyone is a Pinko Greenie in their own neighborhood.

Scott Grannis said...

RE Benjamin's claims that money is too tight:

1) Monetary policy does not lend itself to fine-tuning inflation. Changes in monetary policy can take years to show up in changes in inflation (Milton Friedman: "the lags between monetary policy and the economy are long and variable."). Just because core inflation is 1.5% and not 2.0% carries little meaning and in practice is of little importance. From a supply-side perspective, lower inflation is better than higher inflation.

2) There is an unwarranted fear of deflation in the world, spurred no doubt by the unproven assumption that Japan's weak growth is the result of its very low and sometimes negative inflation. The historical evidence in the U.S. shows that periods of deflation in the 1800s were usually associated with very strong growth. There is no a priori reason to assume that deflation is bad for growth. Deflation benefits savers, and more savings tend to support investment and growth.

3) While zoning laws can and do discourage housing supply and push up housing prices, this has only a minimal impact on overall inflation. Inflation is a monetary phenomenon, not a derivative of housing supply.

4) There can never be a "glut" of capital. But there can be a a shortage of investable opportunities, and I think that is the case today. Interest rates are low because the demand for capital to invest is weak. Investors prefer to buy sovereign debt rather than invest in new projects. That reflects deep-seated risk aversion, not a glut of capital. There is no glut of smartphones either, because their prices are not collapsing. There was a glut of oil recently, but collapsing prices of oil have restored an equilibrium of sorts by discouraging oil production.

Johnny Bee Dawg said...

I don't think Trump is crazy at all.
I also don't think he is racist or xenophobic.
People should listen to Trump's comments directly, instead of what the media reports he said.
Take time and actually watch one of his rallies live on Youtube. He isn't crazy, and doesn't act so.
He speaks a lot of truth, and nothing will get you in more trouble with those in power.

Just like Trump, I don't want illegal immigrants, and I want to enforce immigration law. Who could oppose that??
He made no disparaging remarks about Mexicans. He said that too many criminals are coming here.
He quoted the Homeland Security report that shows most females are raped while traveling here illegally from Mexico.
Legal, secure borders with lots of LEGAL immigration would end the entire corrupt Coyote trade and keep women safe.
It would also keep America safe. Who doesn't want that?

I agree with Trump that immigrants should assimilate into our culture and our Constitution, and frankly our English language.
That kind of statement gets anyone branded a bigot and racist these days. That branding is wrong.

Islam's religious texts, the Koran and the Haddiths command believers that they kill the Infidel. That is a fact. Read it yourself.
They also command believers to take over every nation and impose sharia. Forced conversions are commanded.
This is incompatible with our Constitution. Again...pointing this out is not racist, bigoted or xenophobic.
It is the truth. If you don't know this, you need to study those texts.
I organized a study group with our local Imam, to learn the strains of Islamic beliefs.
You could do the same if you wanted to find out.
None of other religion's texts command believers to kill or force conversions.
Just like Trump, I don't want Islamic extremists who want to kill me to ever come here. Who would?
Keeping them out will help keep America safe.

A religious test for new immigrants is NOT unconstitutional, nor unprecedented, even though Trump backed off in favor of restrictions on Muslim nations, instead.

Lots of rational, moral, successful, wise people are going to pull the lever for Trump. If you are surprised by that, then you are out of touch or not listening carefully.

His tax plan is the most pro growth of all other candidates.
Gary Johnson isn't much of a Libertarian, FWIW....he supports TPP, which is the opposite of Free Trade.
TPP gives away Congressional power over certain domestic issues to a body of other nations. What American could ever support such a thing?? And his running mate Weld is ANYTHING but Libertarian. And a vote for them is a vote for Hillary, who is a known criminal.

Unknown said...

Johnny - I can entertain the argument that Trump is not a crazy, racist, xenophobe and that it is in the realm of possibility that it is all an act for the masses.

Regardless Trump is a narcissist, ignoramus who is historically unqualified to be president. Please do listen to his words carefully. He is a con-man with no substance or thought out policies, a sexist, and has no experience in anything even resembling the stress of the presidency.

Hilary may be a corrupt liar, but it is clear she is sane, rational and deeply experienced. I'd rather take my chances with more of the same in the Clinton's than toss around the nitroglycerin that is Trump.

As the French so famously said in their 2002 Presidential election of Chirac vs. Le Pen - "Vote for the Crook, not the Fascist. It's Important"

Unknown said...

Former head of the CIA and NSA is worried about Trump having nuclear launch codes:

Meg Whitman backs Clinton and urges Republican leaders to do the same. Trump has “reckless and uninformed positions on critical issues”...“Donald Trump’s demagoguery has undermined the fabric of our national character.” - Whitman.

You guys need to take off your economist's hat from time to time. Trump as President is a serious threat to this democracy.

Grechster said...

Johnny Bee Dawg: Like you, I've noted the incredible difference between what Trump actually said (on any number of issues) and what's reported/spun in the media. It's something to behold.

I won't be voting for either major party candidate. But I wish his words were reported accurately. The fact that they have so frequently been spun to make him look even worse calls into question a lot of things... This election has a very ugly feel to it (in addition to the atrocious candidates).

Johnny Bee Dawg said...

LOL at the notion that Hillary Clinton has any degree of "experience". Can you name any accomplishments of hers? ANY??
Everything she has touched has turned to dog crap.
I don't think anybody can say that Hillary is "sane". Something is very wrong with a pathological liar.
NO ONE but Comey denies that she is a full blown criminal, and the Clinton Foundation scandal hasn't even hit yet.

You may disagree with him, but Trump is honest. And Trump doesn't have "erratic behavior". Prove it.

Im ready to Make America Great Again. Im tired of us losing, and sucking and underachieving. TWO TRILLION DOLLARS under trend is un-becoming and heartbreaking and totally preventable and fixable. It sucks. Im on the Trump Train. 8 more years of Obama malaise with Hillary at the helm will be unbearable, especially as the Supreme Court turns into a Marxist majority for the first time since FDR packed the court illegally. 2% growth is the best that Barack and Hillary can do, but its not even close to what America can do.

We've never had a businessman as POTUS before except Truman, who was a failed haberdasher. Its about time we try. We may never go back to professional politicians again after 8 years of a growing Trump economy. Hillary doesn't have the brains or brawn to deal with the onslaught of Islamic terrorism that is about to hit this country from years of open borders. Its coming, and she helped create it. No more.

steve said...

it's a moot point re trump for potus. he's gonna lose and lose BIG. my only real concern is that the gop loses house and senate. THAT would be a disaster!

Lawyer in NJ said...

It's kind of tough to impute growth to an administration when the POTUS is unstable and completely fact-averse, let alone a purveyor of racist memes on a regular basis, including retweeting white supremacist propaganda.

Johnny Bee Dawg said...

Despite better policy, Trump IS going to lose.
There are more Takers than Makers. It crossed 50% in the last election.

Top 20% now pay 96% of all tax.
Voting for fiscal responsibility and Constitutional government will NEVER win another national election.

Bottom 60% are net TAKERS of Federal cash.
They will NEVER vote away their money.

We have the most "progressive" tax code of any developed country.
Fundamental Transformation in full swing.

Lying about Trump's racist "memes" and supposed retweeting of white supremacist propaganda isn't even necessary.
Deadbeats are going to vote DEMs from now on nationally.
Spend, Spend, Spend.
Regulate, regulate, regulate.

Hillary's top economic advisor, Joe Stiglitz, praised Venezuela as a model for the US less than a decade ago.


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