2nd Quarter GDP Growth Revised Downward To 1.6%
Another set of bad economic numbers are out today, and one wonders when we'll start getting the good news.
The second quarter Gross Domestic Product numbers that looked anemic a month ago, look downright pathetic after this morning’s announced revision:
Economic statistics released Friday offered the clearest sign yet that the recovery, already acknowledged to be sauntering, had slowed to a crawl.
The government lowered its estimate of economic growth in the second quarter to an annual rate of 1.6 percent, after originally reporting last month that growth in the three-month period was 2.4 percent.
The revision is a significant slowdown from the annual rate of 3.7 percent in the first quarter and 5 percent in the last three months of 2009.
The news came at the end of a week that showed the economic retrenchment that began in the second quarter has spilled over into the summer. Existing home sales in July were down to their lowest level in a decade, and sales of new homes that month were at their lowest level since the government began tracking such data in 1963. Orders for large factory goods, excluding the volatile transportation sector, dropped in July, indicating that recovery in the manufacturing sector is also stalling.
With such grim reports, economists are now concerned that the outlook for job creation, which has been spluttering all summer, could deteriorate further. Companies and consumers tend to be spooked by bad news, and market analysts and economists worry that faltering confidence could cause employers to hold back on hiring.
“When you get a downshift in growth there is a risk that it will feed on itself,” the chief economist at MF Global, James F. O’Sullivan, said. “The question now is to what extent has the improving trend just been temporarily set back or has it really been short-circuited.”
The markets were also awaiting a speech Friday morning from the chairman of the Federal Reserve, Ben S. Bernanke, as well as fresh indicators of consumer sentiment from a closely watched survey by the University of Michigan and Thomson Reuters.
The bulk of the downgrade in the second-quarter G.D.P. resulted from the fact that government analysts had assumed that American companies added more inventories to their warehouse shelves than they actually did. The adjustment also took into account a wider-than-estimated trade deficit.
Economists polled by Bloomberg had been expecting the second quarter growth figure to be revised down to 1.4 percent.
Economists have been revising their forecasts for growth in the second half, with Goldman Sachs now projecting annual growth of 1.5 percent. Ben Herzon, a senior economist at Macroeconomic Advisers, a forecasting group, said the firm had taken its estimate for third-quarter growth down to 1.7 percent from 2.5 percent at the beginning of July.
In other words, almost no real growth at all, and certainly not enough to create significant job growth any time soon. Quite honestly, I’m not sure what can be done to make that happen, and apparently neither does anyone else:
[J]ust as there is widespread agreement that the economy is faltering, there is also a sense that the federal government is running out of options to rebuild momentum.
“Housing is in the tank. Confidence is going down. The stock market is going down. It’s hard to imagine how consumers will spend,” said Sung Won Sohn, an economics professor at Cal State Channel Islands and former chief economist for Wells Fargo.
He put the probability that economic growth will slide back into negative territory — a double-dip recession — at “40% and going up.”
On Thursday, the Dow Jones industrial average closed below the 10,000 benchmark on the heels of worrisome new economic reports.
The government said that while initial unemployment claims last week dipped to to 473,000, from 504,000 the week before, the four-week average still reached its highest point since November. Unemployment was at 9.5% nationally in July and higher in many states, including 14.3% in Nevada, 13.1% in Michigan and 12.3% in California.
And a mortgage trade group said that, while foreclosures overall continued to ebb, more homeowners fell behind on their payments — the second straight quarter in which that has happened. With unemployment still stubbornly high, the data suggest that foreclosures could soon ramp up again.
Those reports followed news earlier in the week that home sales had fallen to their lowest level in more than a decade, despite mortgage interest rates that are at their lowest levels in nearly 40 years.
“All the indicators at the moment are pointing in the wrong direction,” said Bart van Ark, chief economist for the Conference Board, a business research group.
He doesn’t think the nation will dip back into recession, but said the risk of that happening was rising amid continuing high unemployment.
“We are in the slow lane at this moment,” he said. “The risk of things turning wrong and then dropping the economy into recession is significant.”
All of which creates more uncertainty, which means that consumers and businesses will continue sitting on the sidelines. Frankly, I’m not sure how we’ll get out of this one.
Next Friday, we’ll be getting the August unemployment numbers and, based on this and on the reports we’ve been getting for the past month, I think we can expect more bad news.
“In other words, almost no real growth at all,”
Doug 1.6% growth is not no real growth at all. By comparison with other mature economies it’s actually quite reasonable and if anything I’m relieved it wasn’t worse. The problem is it’s not enough to create jobs at the rate required to recover the 8 million lost in the recession and absorb new entrants into the job market. At bottom the problem is lack of sustainable demand. I’m starting to think Krugman was right after all. We needed a bigger stimulus.
If we were in month 40 of a recovery, you’d have a point. 1.6% growth isn’t anywhere near what’s necessary to actually have a recovery that’s anywhere close to decent.
I predict a speech where Obama once again blames Bush.
But honestly I don’t think there is an easy answer to this. I do think it is easy to say “Congress needs to stop spending money” but when it comes down to it, what money do they need to stop spending? Whose ox is going to get gored? And can congress really do something to get the economy moving again, or is it more just a matter of buckling in and riding it out?
Re “apparently neither does anyone else”
Only in the liberal world and mindset. Conservatives have recommended many ideas to boost the economy. Here are just a few.
Make Bush tax cuts permanent or at least a 10 year extension.
Have an administration that is pro business instead of anti-business.
Repeal the Health care bill.
Promote pro business regulations instead of strangling oppressive regulations.
Promote discovery and development of energy resources and power plants now. When the economy does recover, we will need them. If we don’t do it now, it will cause the recovery to hit a wall.
Stop the massive Government spending and debt creation.
And those are just a few.
Re Just me
Stop spending on the bailouts and unspent money on the stimulus bill is a good start. Many of the pet and\or fell good projects need to be cut. A million dollars may not seem much in overall picture but they add up. They need to stop or preferable shorten and cut jobless benefits. Welfare programs needs to be redone.
The list go on but you are right that very few want to get their hands bloody.
Yes there is no one area that going to solve the problem but pieces of many areas will greatly help.
It will at least show the people and business that Congress may be serious about controlling spending. The only area liberals seem to want to cut are defense ones.
I meant to say the need to stop extending jobless benefits.
“1.6% growth isn’t anywhere near what’s necessary to actually have a recovery that’s anywhere close to decent.”
Er I thought that was what I said. The problem is how do you boost demand (you certainly don’t do it by cutting govt spending as some “experts” are suggesting). Bernanke doesn’t have many conventional monetary tools at his disposal like buying T bills because rates are already on the floor (thirty year mortgages can be had for 4.35%) so let’s hope he has some unconventional ones. If he hasn’t this leaves only fiscal stimulus which is Krugman’s point. There were some silver linings in the restated numbers. a) they weren’t as bad as predicted b) such growth as there was was business investment c) inventories didn’t jump d) the major cause of the restatement was surging imports which doesn’t suggest an economy that has actually stalled.
Wayne says:
Friday, August 27, 2010 at 09:39
“Re Just me
Stop spending on the bailouts and unspent money on the stimulus bill is a good start. Many of the pet and\or fell good projects need to be cut. A million dollars may not seem much in overall picture but they add up. They need to stop or preferable shorten and cut jobless benefits. Welfare programs needs to be redone.”
And how exactly Wayne does all this actually increase aggregate demand in the economy which is the problem?
Here we see examples of the incoherence of the rightwing. Its all about the ranting, not about any thinking. The view seems to be that somehow government spending is depressing economic growth. That somehow not spending stimulus money is going to stimulate the economy. That if we had let the automotive industry collapse, we would somehow be in better economic shape. Or if we had allowed the financial system to completely melt down, we would be in full recovery now.
It is stunning, actually.
Look Wayne, if you’re going to promote those old ideas that have worked in the past, well, you’re just going to have to turn in your Progressive decoder ring.
Look at the solid accomplishments: ballooning healthcare impacts, unrestrained illegal immigration, European economic growth, epic deficits, etc.
Against that you used pro-business twice. You should go wash your hand, typing like that.
But you are correct, it should read: “…apparently neither does anyone else” in the Obama administration or the Democrat controlled Congress.
Wayne is correct. I few weeks back I suggested the same sort of ideas only to be ridiculed by our resident liberals. The thing is so far their ideas are not working so I hardly think they any credibility on the economy.
The problem is consumer and business confidence. The current president is anti business and because of that we are overly cautious. No new hires, no new equipment purchases, no expansion at all. The policies of the left will always be a negative influence on the economy. We have endured those policies over the years but now the burden is too great for continued prosperity like we have enjoyed.
Well, Tano, you see it isn’t the government spending but rather the government borrowing. Had the government cut back in other areas so that they simply reallocated funds, then the negative impact would have been far less. They could sell some assets, like that ugly NEA art we’ve been funding. instead, they’ve gone on an apparent unrestrained and unfinished spending spree that requires more and more of future economic development to cover their bet. Since the government is claiming more of the future gains, people are less likely to jump into the pool while the water is draining out.
> The problem is consumer and business confidence.
In view of the fact that your crew led us to the brink of a depression, is lack of confidence a surprise?
The thing that boggles me about the comments is that “stop spending, stop stimulus” is an answer to a downturn. I mean, it’s fine if you understand that this is the pain-and-hardship path to recovery. It’s fine if you understand that a spending/stimulus cut will mean more lost homes and bankruptcies on the path to your proposed better future.
But if you think less spending means more jobs out of the blue, that’s kind of crazy.
FWIW, I think we’ll be forced by circumstance to split the difference. We’ll have less spending than the Krugmans want and more than the Verdons want. We’ll also have more e lost homes and bankruptcies than either of them want, though of course fingers will point both ways.
One thing that I’ve noticed is that the IT sector seems to have recovered decently. All of my students, even the mediocre ones, are finding jobs. (I’m a professor in computer science.) I wonder why the difference.
JKB
One pro-business pertains to the administration attitude\speeches and the other pertains to actual regulations\actions.
Government spending takes away from current and\or future private spending . Private spending is where you get the most growth and economic expansion from. Private sector is much more efficient. But that is coming from a believer in free-enterprise capitalist system. Yes I understand that Socialist believes the government is much better at controlling people’s spending and the economy. I simply don’t agree.
“They could sell some assets, like that ugly NEA art we’ve been funding. instead, they’ve gone on an apparent unrestrained and unfinished spending spree that requires more and more of future economic development to cover their bet.”
Yeah, selling that NEA art is going to make a huge dent in the deficit. In fact if you look at the deficit which is currently running at around 1.3 trillion this exactly corresponds with the size of the deficit during Bush’s last calendar year in office. Basically the deficit is made up of spending that was contracted during the Bush admin ( tax cuts, two wars, unfunded prescription drug benefits, etc) or new spending created to counteract the effect of the recession that commenced 14 months before Bush left office.
Anon, there are two proposed explanations (or components) to unemployment. There is cyclical unemployment, where jobs go away when total spending is reduced, but come back when spending returns. There is also structural unemployment, in which jobs go away for deeper reasons and stay gone.
The thing about comp-sci hiring is that it might be either. It might be a cyclical return to hiring, where comp-sci is a bellweather, a leading component. It might also be a structural difference. Comp-sci jobs might be more of a component of the future US workforce than other (lost) sectors.
We can guess at which factor is in greater play, but no one knows for sure.
Wayne, when you say “Government spending takes away from current and\or future private spending” you name the key distinction, current or future.
I think it’s hard to claim that private-future spending is _really_ held down by fear of future taxes. No one really acts that way. They buy a new car if the like it, and if they can make the payments.
Right now, they’ll have a hard time even getting the loan.
Steve Plunk says:
Friday, August 27, 2010 at 10:27
“Wayne is correct.”
Well since Wayne has failed to tell us how reducing aggregate demand in the economy by cutting govt spending, eliminating unemployment benefits etc is going actually increase GDP perhaps you’d like to tell us.
And Wayne how exactly right now is
“Government spending takes (ing) away from current and\or future private spending.”
Wayne can you give us a little detail about your career as a capitalist? How many companies you have founded, how many jobs you have created and so on?
Interestingly the market seems to be taking the restated GDP numbers in stride probably for the reasons I stated at 9.52.
The problem Steve is that Obama has consistently avoided the liberal solution to coddle the right- i.e. the very same geniuses that caused this mess. When the stimulus came along obama let it get cut down to bare bones and made way too much of it useless tax cuts (hello laffer curve- we’re NOT on the right side of it). When Health Care Reform came along Obama took single payer, you know the one system that is proven to save crap loads of money and generally provides better service too, off the table before negotiations even started. Obama’s economic policies have been at best center and are bordering on center right. After 8 years of the right crashing our economy into dust that’s still way too far towards the stupid end of the spectrum.
So you’re wrong, it’s not that liberal economics haven’t worked, it’s that Obama’s too much of a douche to actually put them in place. Don;t blame us for the ruinous continued implementation of your failed policies.
I guess in my mind I’ve never thought of software engineering as a leading component, though I’ve never tried to determine this with any rigor. The reason I don’t think of it as a leading component is that I assume that a company must see increased business before they can afford to invest more in IT systems. So the IT company is second in the cascade. That’s obviously a very naive model, but hey, I’m not an economist.
Yet more incoherence. When the government spends money, where is that money going? To the private sector, Sherlock. The government buys stuff from private industry. Or it pays money, in salary, or any number of quasi-welfare payments, to consumers, who then spend the money in the private sector.
More ridiculousness. The private sector is not more efficient. The WINNERS in the private sector are more efficient – that is why they win. But the private sector as a whole – the competitive marketplace as a whole, is necessarily made up of firms that will be winners AND firms that will be losers. The efficient and the inefficient.
When it comes to the issues that are at play in this discussion – the government is far more efficient than the private sector as a whole. The government can make a decision – to spend money in a certain area, and then money is spent. The government accumulates a large sum of money and can deposit it in various sectors, at will. A bottom up approach out in the private sector is far more inefficient at getting needed stimulus going.
Strawman argumentation. You may believe in the free-enterprise system, but you don’t seem to understand it very well. The issue is not some “socialists’ controlling people’s spending. The issue is how to most efficiently stimulate the economy. By deficit spending, the government is not taking money out of the consumer economy (as it would if it raised taxes to pay for the stimulus), but it is accumulating ‘capital’ and buying things from private businesses, keeping them in business, and/or stimulating their growth. If the government would not do that, it would not happen (the consumers are not in the mood or position to do enough spending). The result would be lots of businesses going under.
<em>Promote pro business regulations instead of strangling oppressive regulations.</em>
What regulations are oppressive?
In theory, Wayne is right, but his assumptions is that government has no place in our society is wrong. Here is the point.
Wayne is right, if you cut up a pie chart into thirds. 1/3 to the government, 1/3 to the business sector, and 1/3 to the consumer. Now, if the government spends more, then it takes away from the people and business in form of taxes, deficits, or inflation. It means that business has less money to spend on their projects, and it means that consumers has less money to spend and save. And this is one reason why you will get the tax cuts from the conservatives to stimulate the economy. But the problem is that conservatives believe that government is bad and then with the tax cuts, they just go to a laissez-faire approach and think the government has no role in society. And that is the problem we run into today. Conservatives ignores globalization and/or praises it while we lose our jobs. We are actually losing the middle class. And their theory no longer works as the private sector cannot deliver the “investments” needed to move our country forward.
We had the Bush tax cuts and that money is spent. And Obama is doing something but he is lost. The fact remains is that we cannot produce jobs while we are sending jobs overseas. And that is where the government has to step in if they do it right. The government has to invest in the country, in the people, and in the future. And that may include ideas from the right as well as the left. But to ignore our problems as Bush did has put us in a precarious position.
Again, we cannot compete with 2 billion cheap laborers. The stimulus effect of the tax cuts and low interest rates are not being as stimulative as before. And it ignores our biggest problem of globalization. Putting the money in the hands of the consumer when half the products are foreign made is not as stimulative as 20 or 30 years ago. And what products can be made here and not in some other country.\?
So the dynamics have changed and government and the political parties have to change with those dynamics. We are not in a world of our own. We have to adjust to the world. The republicans only answer is to reduce wages. I refuse to accept that we have to lose our middle class. Our government can send us into the right direction, but it has failed to deliver. And our private sector fails to deliver. Bottom line, the political parties in which almost all are lawyers have failed the American people. They simply do not know how to run the country. And it is so simple to invest in the country, in the people, and in the future, but they are so caught up with ideologies and we cannot move forward.
So when we here conservatives that say government has to get out of the way and that the private sector will create jobs, that makes no sense in a globalized world. And when you see factories closed, no small business will build in that community. So there are problems with the theory that business alone can fix the problems.
I lean toward the structural explanation myself, though I think that some cyclical component must be superimposed.
Just to give one data point. Probably 80% of the students in my grad-level computer science classes are international students from India and China. The vast majority of these students go on to find decent-paying jobs ($60-$90K) in the US as software engineers of some type.
What does this mean? I dunno. If I had the time to produce a few well-reasoned paragraphs on it, I’d be a blogger, and not a anonymous commenter. 🙂
Clearly, we need to vote a bunch of Republicans into office so they can exercise some of that fiscal discipline that characterized their last stint….
Oh wait, never mind.
Tlaloc says:
Friday, August 27, 2010 at 11:20
“When the stimulus came along obama let it get cut down to bare bones and made way too much of it useless tax cuts (hello laffer curve- we’re NOT on the right side of it).”
Obama didn’t “let it” get cut down to the bare bones. He had to fight tooth and nail to pass the 825 billion stimulus and only did so with three Republican votes which wouldn’t have been there for a larger amount. This entire summary demonstrates how the left ignores political reality while the comments from Wayne and others demonstrate how the right ignores economic reality. Hard to know which is worse.
Re ” but his assumptions is that government has no place in our society is wrong”
I never said that. There is a place for Government but it should be very limited. Dictating when and where people and business spend a large part of their money is not one of them.
Re “The government has to invest in the country, in the people, and in the future”
Once again I trust the people and business to this more wisely and efficient than the government. Now the taxes and varying other regulation on imports would be a good place for change by the government.
Re “The issue is how to most efficiently stimulate the economy.” and
Re “When the government spends money, where is that money going? To the private sector, Sherlock.”
The Government spends money in very inefficient manner. Remember the $700 hammers? They are not very concern and\or not very good at getting the most return for the money they spend. They are often more concern with political coverage, fulfilling even ridiculous politically place policies (the two are different), or the feeling of needing to have to spend the money than trying to get the most bang for the buck. If they were a business they would have went bankrupt a long time ago.
The end result is they “may” pay the money to the private company\person but they will get much less in return and much more waste from it than if a Private company would by taking the same money and pay it to the same private company\person and\or others of their choosing.
Wayne says:
Friday, August 27, 2010 at 12:37
Still waiting for that explanation of how cutting government spending and eliminating unemployment benefits assists an economy where aggregate demand is very anaemic Wayne. Surely you’ve had chance to google an explanation from Heritage by now!
If you want to stimulate the economy, $700 hammers are great. Hammer makers go out and buy new trucks. (Stimulus uses a different kind of efficiency. Jobs per dollar rather than hammers per dollar.)
Perhaps I should back up and say I dislike $700 hammers to the extent that I have to pay for them, but that normal frugality should be the baseline, before we hit major recessions.
In the best of all possible worlds, we’d have sailed into this crash with government surpluses and balanced budgets. Then we could have cut taxes, increased spending, and stimulated the economy without undue debt. Obama (or McCain) couldn’t start that way, because thats not the economy they were given.
The question is really, given a whack economy and a whack budget, what do you do first? I don’t see any rational argument that cutting spending is the quick fix.
Shorter: If you notice, Ireland and Greece aren’t really lovin’ the austerity.
Re “If you want to stimulate the economy, $700 hammers are great. Hammer makers go out and buy new trucks.”
Not true. The reason the hammers cost so much is in large part the large government bureaucracy. When you have to spend money paying your workers for filling out massive documentation, hiring “quality panels”, and spending time and effort to jump through the government hoops, you are not making the massive profits that one would think. Not only that but the quality of hammer the government is getting is not great like the price tag would suggest.
Brum
I did not say eliminate all unemployment benefits. Not extending them or decreasing them from their current level will encourage those on it to take lower paying jobs. That will increase the cheaper labor force and get those off of it that don’t need it. It will also decrease government spending.
Decrease government spending does many things. One it gives a signal that the government has some self control. It makes business\people more comfortable in spending their saving and\or investing in the future. They are less concern that the government will be taxing the hell out of them to cover government expenses or having mass inflation. Another is it puts money current\future back in the consumer pockets who as I already stated are much more efficient at using it. Basically it creates a much better business friendly environment.
As someone once say. The government can eliminate almost all unemployment. Hire half of those unemployed to dig a hole and the other half to fill them in. Doesn’t produce anything and isn’t a very efficient use of resources but hey they will spend the money they make on something right. Most likely most of it will end up paying other for digging or filling in holes.
Nothing says “economic growth” like taking a lower paying job!
How many GOP votes did Obama need? Oh yeah: Zero. He went out of his way to court the right when he had all the power he needed to force whatever bill he wanted through on a straight party vote. Make the republicans filibuster the stimulus and then override it anyway with 60 Dems. But no he wanted to coddle the right and reach out to them (while simultaneously never reaching out to the left, instead us DFH get attacked).
Wayne, I do agree that government is inefficient. But there are some things that the private sector is not going to do. The private sector is not going to build our infrastructure, nor do the preliminary science that takes billions of dollars of research. And the problem with republicans of late is that they just fall into their ideology of the laffer curve and supply side economics. Even with inefficiencies, the government has to give a certain support to the country’s needs.
I understand the fear that government cannot dictate where to spend the money. And that makes a good point. We have seen how the government targeted falsely targeted housing. Investing in the country, in the people, and in the future is what our country did before all this hogwash on trickle down ideology. We had a good infrastructure, we had people working and there were jobs available, and we invested in science for our future. Since when does tax cuts do that.
Putting taxes or tariffs on imports is a temporary remedy and I am for that. But that is not the end all. We cannot ignore 2 billion cheap laborers and what that is doing to our country and what that means to the middle class. The fact is that the dynamics have changed and we have to adapt to that change. Now that our government is so willing to let our jobs go, we have to fix the damage. And that still gets us back to investing in the country (like not blowing a trillion dollars on war), investing in the people (to adapt to globalization), and investing in the future (which we used to do with a greater amount of money in preliminary science.) All these things help the private sector. Both the government and the private sector can work together. And this divergence by not working together is killing our country.
This has nothing to do with solving our problems. And having people go to cheaper jobs is just trashing the middle class. Need a better answer to this.
While true, what do you do when factories are closed and there is no business environment for small business. You have to have traffic.
Doesn’t solve our long term structural issues.
Wayne, I think you missed my meaning completely.
“efficiency” in the sense of product for a buck has nothing to do with stimulus bang for a buck.
Remember the old saying “hire people to dig holes and fill them up again?” At the end of it you have something worse than a $700 hole. You have no hole.
Or, you could hire them for $700 to just pretend they dug and filled up the hole. In fact, you could hire zillions of workers to do that. That would be a government boondoggle tax rebate tax cut socialism capitalism …er something.
@Wayne
Even those guys on Wall Street who believed in Li formula magic?
Anon, we could hire them to meditate on holes that are there and not there. Then we’d have a spiritual society with spending money in their pockets.
Tlaloc says:
Friday, August 27, 2010 at 13:57
“Make the republicans filibuster the stimulus and then override it anyway with 60 Dems.”
He didn’t have sixty Democratic votes, do you have a memory problem or a math problem?
Wayne says:
Friday, August 27, 2010 at 13:30
“Brum
I did not say eliminate all unemployment benefits. Not extending them or decreasing them from their current level will encourage those on it to take lower paying jobs.”
There aren’t any lower paying jobs. There’s a roughly 5 million gap between those seeking work and vacancies or didn’t you know this? And it amounts to the same thing on benefits and stimulus. You’re proposing taking billions of dollars of govt spending out of the economy by one means and another. This will have the effect of weakening demand even further. How does this assist economic recovery? Please explain. Business is not investing because of uncertainty or regulation, it’s not investing because there’s loads of spare capacity in the economy already and there isn’t sufficient forecast increase in demand from consumers or business to cause them to add to that capacity. Fannie and Freddie are currently purchasing around 90% mortgages in the secondary market not because their owners (the govt) want them to but because the private sector are not willing to step up to the plate with a govt guarantee. Without F/F housing finance would have completely dried up or only available at interest rates in the high teens.Two of the main drivers of economic activity housing and autos are either in intensive care (we’ve just had the worst existing home sales for 25 years) or operating well below historic levels (auto sales are annualising at around 11.5 million units). Lack of demand is the problem and your solution is to reduce it further while delivering rather childish homilies about pot holes.
“but because the private sector are not willing to step up to the plate with a govt guarantee.”
oops that should have been “without” a govt guarantee.
Re “You’re proposing taking billions of dollars of govt spending out of the economy by one means and another”
That is right. We can spend our own money or have the Government spend it for us. I prefer the first.
The whole point of the hole example is that the government simply spending money to “create” jobs is foolish and a waste of time. Much of the money that the Government spends is done in a foolish and wasteful manner. The Government is very inefficient. The Government isn’t design to be a business and we shouldn’t ask it to.
So the question once again is who do you trust to spend money in an efficient and productive way, the government or the private sector?
Gerry
I agree that some areas we need the government, infrastructure and defense to name two. However it should be very limited. We don’t need them in the car making business. Them sticking their nose and going overboard (natural government tendency) in the housing business is what cause that major blowup. The government does not do things using good business principles but for feel good and political reasons.
Our foreign trade policies need to be address but that is a lengthy discussion that probably won’t fly in this thread.
Yes we are not going to outdo China on cheap labor. However once again I trust the private industry to make adjustments over the government. A major obstacle for private business adjustments is big Government regulations. I am not suggesting eliminating them all. However this anti-business attitude that the administration and government has now, will do one thing and that is impede business. Now the administration wants to use slimy backdoor technique to tax dust, CO2, and lead bullets. Is it no wonder that businesses are wary of investing in the USA.
Are you saying cutting Job benefits will not cut government spending? The deficit is one of our problems. Cutting one program won’t solve it but it will help. Moving a mountain starts with moving that first piece of dirt.
Wayne, no one is arguing that in general, a centrally-planned economy is more productive that a free-market based economy. The question is, given $X, and an economy in recession, what is the most effective way to use $X? One argument is to simply give it back to the people in the form of some kind of tax cut or rebate. The other is to pump the money into the economy by having the government spend it.
The danger of the former is that people won’t spend it, but simply save it or spend it in ways that have less network effect. That won’t boost the economy out of a recession. The danger of the latter is more or less what you are worrying about, which is that the money will be spent so inefficiently that the multiplicative, network effects (the “multiplier”) will be too low. So the key question is, what are the correct multipliers?
Well, there are people much more knowledgeable than I who debate this quite a bit. I have no idea. But the point is that there is where the real debate is, not whether or not a top-down economy is a good idea. As is often the case, reality is hard, complex, and subtle.
Also, as some of us have tried to point out, you can’t use your normal intuition of what is wasteful to evaluate a stimulus. For example, paying lots of people $700 to do nothing but meditate for 10 minutes would be extremely foolish for any individual business, but that is exactly what a tax rebate is, which is something that I would guess you would support.
I like that summary, Anon. One complicating factor comes here though:
“The question is, given $X, and an economy in recession, what is the most effective way to use $X?”
The trick is that in a government surplus situation, $X is there, in a government debt situation, $X is borrowed. This affects “rebates” as well.
“For example, paying lots of people $700 to do nothing but meditate for 10 minutes would be extremely foolish for any individual business, but that is exactly what a tax rebate is,”
Someone might say of rebates, “hey, it’s my money” but it only really is in the surplus situation. In the debt situation even rebates are passed on to those future generations we hear so much about.
I’m a little curious as to how many of our liberal friends own a business and understand business. Right now it all comes down to individual small businesses and how they feel going forward.
Brian asks what regulations are oppressive? They all are. Especially when taken as a whole.
Anon you made some good points and not so good of points.
Do you really consider giving people $700 tax rebates or tax cuts as the same as paying them $700 to meditate?
Now I do consider jobless benefits and many of the Government program as doing that because what we getting back is nothing in return for giving them the money except them spending other people’s money. Tax cuts are allowing people to keep their own money that “they” earned. We get what labor they did to get the money in addition to them spending and\or “investing” their own money. In addition it is giving people more incentives to do even more work to make even more money therefore producing even more which grows the economy.
Once again people’s money that they earn is their money because they produce a product through work or investment. That is until the Government takes it.
Thinking all labor and assets are the government until the government decides how much of their labor a person gets to keep is called socialism.
I’m a moderate so I don’t have to answer ;-), but I’ve been Schedule C most of my life. Though, turning captive for options in the dot-com was the best thing I ever did. Semi-retired now.
Ha! I correctly predicted this answer and addressed it ahead of time. (Not in a net-government-debt situation, it isn’t.)
Wayne,
I do not agree that private industry can fix our economy. If that was the case, we would have seen it under the Bush tax cuts. I do agree that there has to be a better business environment. But I have seen very little from the republicans. I live in a small town where we lost a lot of jobs. And those jobs in factories of 1300, 500, and 200 people are not coming back. And small business cannot survive in this environment. My town is ruined. And nothing by the way of tax cuts or free market principles will bring my town back.
And I ask you. What widgets can be made here and not in China?
If you put money in the hands of the consumer, and half the products are foreign made, how stimulative is that?
And what new business environment can we create in our country? We already have too much competition with the same businesses. We have no upward movement for the middle class as one business knocks out the other competitor.
And that is why you need the government that invests in our country, in our people, and in the future. And this has not been done for a decade or two. And this is where republicans get it wrong. Just tax cuts will not make it in this environment.
Today it is extension of unemployment benefits, cash for clunkers, and casinos for every state. This is the wrong thing to do. But we are doing the wrong things because both democrats and republicans still don’t get it.
And the fact remains is that we had the tax cuts and they are less stimulative today. The fed has had low interest rates for a long time and that is less stimulative. And we lost the jobs. So there is nothing to stimulate. And that is why we have a major structural problem that will take 10 to 20 years to fix. Add to that the deficits and debt, wars, the loss of jobs, the loss of housing, and we have a real mess. We have a near depression, and there is little wiggle room to get out of it. Wishing and hoping on tax cuts are for fools.
Gerry
I will go into some of what you ask. However in case you get easily bored, let me once again state that whatever the solution is it will almost certainly come from the Private sector and not the government.
Yes tax cuts\low taxes don’t guarantee a booming economy any more than having a good running will guarantee your team will win the Super Bowl but it helps. Yes control government spending doesn’t guarantee a booming economy any more than having a good wide receiver will guarantee your team will win the Super Bowl but it helps. Yes pro-business policies don’t guarantee a booming economy any more than having a good Quarter Back will guarantee your team will win the Super Bowl but it greatly helps.
For most of Bush’s term we had a pretty good economy. When he first took office and after the Democrats took control of Congress in 2006 is about the only time it didn’t. Not that they are the only one at fault but even as a minority they filibuster until they a good part of what they wanted so they do “share” in the blame.
Yes we can’t outdo China in the cheap labor market but we can in quality. Jacking the minimum wage into the stratosphere is not going to cut it. Also Union stranglehold on work and quality control will not help. China also has an advantage in not adhering to environmental impact restraints. IMO they are about max out in that area and will need to clean their industry up or suffer the consequences.
The USA has gone way overboard in the other direction. Yes we must protect our environment but this idea of zero impact is ridiculous. Also the US has vast amount of resources. However if we can’t exploit them they do us no good. Remember one of the reasons we came into being a Super Power is due to the discovery of vast oil reserves.
We must make foreign trade an even playing field. We give way to many benefits to foreign companies while allowing other countries to place barriers for out trade. We need to get tough on those countries and pretty much say “what you do to us we will do to you”.
“Not that they are the only one at fault but even as a minority they filibuster until they a good part of what they wanted so they do ‘share’ in the blame.”
Using that logic, the current GOP minority shares the blame for our current economic woes…so putting them back into the majority in Congress doesn’t seem like a winning goal…well, unless the goal is to present all kinds of dog and pony shows as “investigations” into our president and his administration…careful what you wish for there, Darrell Issa…
Wayne says:
Friday, August 27, 2010 at 18:49
Re “You’re proposing taking billions of dollars of govt spending out of the economy by one means and another”
That is right. We can spend our own money or have the Government spend it for us. I prefer the first.
SO how does taking billions of dollars out of the economy assist recovery when our major problem is weak demand. You never answer the question all you do is advance highly theoretical bromides. We’re already hovering perilously close to a deflationary spiral and you seem anxious to bring it about. I took the trouble to explain that our big problem at the moment is that economy has a lot of spare capacity and is underperforming its potential. It’s fairly obvious you either don’t understand this most fundamental fact or are ignoring it.
“For most of Bush’s term we had a pretty good economy. When he first took office and after the Democrats took control of Congress in 2006 is about the only time it didn’t.”
Apart from the fact it was all based on a vast housing bubble and expansion of domestic credit that when it all collapsed it threatened the entire financial system that had to be rescued by the govt and brought on the longest and most serious economic recession since the war. Apart from that it was just dandy.
Wayne,
This is where republicans get it wrong on the Bush policies and they want to blame the democrat congress in 2007. We saw our jobs leave before the democrats came in office. Bush came to Ohio and said “free trade is good” as we saw our factories closed. We saw the deficits and debt long and the failure of tax cuts long before the democrats came in. And just as much we can’t believe “change we can believe in” by Obama, Bush said “stay the course” which meant a total disaster and ignoring our problems as he totally relied on his tax cuts.
Bush also pulled a “guns and butter” economics. The last time we had this was under LBJ (Vietnam and The Great Society) and we suffered years of inflation. Bush did the same with Iraq, tax cuts, and Medicare and this was done with deficits and debt. So we will suffer many years. Doing a “guns and butter” economics is about the worst thing you can do.
The reason that we are having a hard time getting out of this recession is that we gave away our jobs, and you just can’t replace them. On top of that we had too much in tax cuts and today they are less effective. Add to that the fed and they had low interest rates for a long time and that is less effective. So we used all our ammunition and we have nothing to stimulate the economy with. Now we are sitting with deficits and debt and the loss of jobs.
Your demeanor shows your insensitivity towards the middle class and unions. We had a middle class in our country. You are blaming the middle class because China is making the goods. And this is the area where the republicans drop the ball on the middle class. That is not to say we can’t drop wage, etc. a little bit. But the fact remains that there are 2 billion cheap laborers who want our jobs and there is simply not enough jobs to go around. The middle class will feel the pressure of jobs and wages.
Now, if we gave up our jobs, then we need something to replace those jobs. And there is nothing to replace those jobs. There is nothing in the private industry and nothing in small business that will replace what we had. And it is funny how politicians and economists that say we need to support small business, and that means small business will never hire dozens or hundreds of people like the factories did and they will not pay the wages as the factories did.
Controlling foreign trade is difficult, but I do believe that there should be a tax or tariff to supplement the loss of jobs in our country. It is only fare for an American corporation to pay something and not abandon our country.
I do agree that we have natural resources and we need to exploit those resources. Hence, investing in your country as I have said.
We also have to retrain people to compete in a globalized world and that is investing in your people.
And we need to invest in the future, which is preliminary and scientific research to our universities. And this area has been neglected.
And I emphasize invest in your country, in your people, and in the future because tax cuts does not do that in the pure sense. That is all Bush relied on. And only a moron would say that.
China will have their problems, but they are the ones making the irons and toasters. There is no guarantee that a widget made can be made here. Apple could have chosen the U.S. but they make the i phone and i pad in China. This would not have happened 20 or 30 years ago.
So, what I am saying is that we have a globalized economy and we have to act like it if we want to save the middle class and compete in the world instead of going by some ideology.
What you have shown is the ignorance that republicans have shown all my life. They will always give tax cuts and they drop the ball on the middle class all the time. It is always a letdown and that is where the phrase “the republicans are for the rich” comes from.
And that is the point under Bush, it was tax cuts only and everyone went on the housing bubble and ignored globalization. And they still ignore globalization to this day. The tax cuts did not invest in our future, it did not prepare us for the loss of jobs.
And yet, you have Veronique De Rugy, economist from George Mason Univ., who says it is okay for our jobs to leave the country and that we had Wal Mart jobs to go to. (30 minutes into the video)
C-SPAN Video Player – Veronique de Rugy, George Mason University-Mercatus Center, Senior Fellow
And also Carlos Gutierrez, former Bush Commerce Secretary, saying “dynamics have not changed.” Well, dynamics have changed.
And then you have the Sarah Palins who say we should go with “free market principles.” And this makes no sense to the average person. We don’t want some abstract ideology. We want a plan. A plan to preserve the middle class and middle class wages. We are still waiting.
Wayne wrote:
I just want to say the line in there about protecting resources is a very good one. Obviously the practical discussion would be about how close, or how far, we are from “zero impact.” Coal mining and burning is pretty nasty, for instance. On the other hand, we seem to be coming up with more domestic natural gas than expected, and burning it is very clean in comparison to the other fossil fuels.
(Oil from sands and shales, not so much.)
should be “the line about protecting environment” not “protecting resources”, sorry.
I noted upstream that computer science students from India and China are finding decent, middle-class jobs in the US. Obviously, it’s only a single anecdote, so it’s not data. But the point is that there are jobs out there, but there is still unemployment. So what if we are undergoing a painful restructuring of our economy?
In that case, the plan is massive retraining, long-term safety nets, readjustment in attitudes, etc. But I don’t think the American electorate is ready to hear this yet.
I’m also concerned about growing income inequality. My speculation is that it is in part due to the discriminatory effects of technology on productivity (not my original idea). Let’s say that there is a 20% difference between the native abilities of two people A and B. If we think of technology as having a square-law effect on productivity, then the difference in productivity under this relationship would be 1 X 1 = 1 to .8 X .8 = .64.
As another example, consider a star athlete. As a first approximation, let’s say that the income potential of such a person is proportional to the number of people per year that he can entertain. Before the development of broadcast technology, the income potential of such a person was limited by the number of people who could actually see him in person. With broadcast technology, the physical limitations were removed, leading to the mega-incomes that you see today.
Anon, if I recall correctly CompSci enrollments have actually been falling in absolute numbers. I think engineering enrollment in general is just small compared to the small number of openings. That gives kids at the margin an opportunity, but it would certainly be possible to swamp those openings with “too much” retraining.
BTW, I’ve made similar population-renumeration arguments in the past. It’s amusing that a related phenomenon has a name, one which denigrates a specific entertainer. It’s the Justin Timberlake effect. Given a large number of consumers in a social network, someone will get rich and famous. Which someone may be quite random.
http://www.nytimes.com/2007/04/15/magazine/15wwlnidealab.t.html
I think you are talking of a different circumstance with the students from India and China at least from my perspective. We have Midwestern towns that had industry and that has left. And the people have houses and and family and they cannot leave the area. It is a generation of 50 year olds that may not be able to change. It is cities and towns that are losing also. And states cannot do much against 2 billion cheap laborers. So states, in their desperation go for bailouts, extension of unemployment benefits, and casinos. The students from India and China wants to learn sciences and what I see around me is who worked in factories. We are not a high tech area. We are not a tourist area. We sit in the middle of a corn field and factories was a way of life. And the experts in Washington and in New York said we did not need the manufacturing and that we are going to be an information and service society. Well, like one guy who called in to C-span, he said “all the economists should be shot.” So this is where we are.
Now, you say the “the electorate is not ready to hear it yet.” Well, I don’t know when there will be a better time and we are a decade or two behind already. People are pleading for jobs, and there are no jobs here. People need to make house payments and they are losing their houses. Cities and states cannot meet their budgets. And half the people are not paying taxes to keep our government running and part of that is attributing to the deficit.
On income inequality, I have written down, corporate CEO’s in 1980 was 48 times the average worker. In 2008 it is 319 times.
Now, no one is addressing these problems. And also, we gave up some of our steel and autos over the years. We gave up our electronics and we gave up our textiles. And there is a plant of 17000 in China that can make toasters, irons, etc. And they can change the line in a minute to whatever product they want to make. We have a glut of workers and there is simply not enough jobs to go around. And someday, those workers in China will be out of a job as automation takes place. And even now, some companies have moved from China to Vietnam for cheaper labor.
The other problem I see, when I look at a nearby town. There is three auto stores in a four block area. What we have is too much competition with no upward movement. One store at some time will lose out on the competition, but there is no place for the employees to go to. As we have not created any other industry, at least in the Midwest.
In any case, if we are supposed to give up our middle class jobs, then they have to substitute those jobs. But there is no answers. You lose your job, “because of our stupidity (Washington), then that is your fault.” Well, we had the rug pulled from under us, and I will never forget it.
Now, you need someone with a loud voice (like a Donald Trump) and say this is what we are going to do. But so far, there is no one out there that speaks for the middle class. The tea party is taken over by the right and is a joke. Once again, the middle class loses.
BTW, related to (re)training, I finished an interesting and somewhat good book today. It’s called “Made By Hand” and is by boingboing/wired founder Mark Frauenfelder. It documents a rise in hacking things rather than bits, and what some call the maker movement.
It is possible there is some space in that for unconventional reinvention in the US economy. It also has the benefit of being bottom-up. Want to be retrained? Go do it. You don’t need government, and probably not even a school.
I say its possible that this could lead to economic reinvention, though in my more skeptical moments I think it might just be a brief flurry, of makers selling to makers, hoping for something big.
That said, I’ve got my Arduino (clone) …
My concern is: What if there simply is no solution? What if there is a large swath of the population that is simply unemployable at their current wage? Should we abandon free trade? That cure might be worse than the disease, and seems like it could spark a global depression.
I think more of the same will go on. We will lose a generation of 50 year old workers. How they get by, I don’t know. There is more families moving in together. In my area we lost more than 2000 jobs, Home Depot built a warehouse on I 75 and that picks up 250 people, and a casket company will be building a new place 15 miles away and that will employ 50 people. The best places for job security is hospitals and universities (tax money). A lot of small and family businesses have closed, as there is just no local support. I don’t see my town recovering from the hay days of the 50’s, 60’s and 70’s.
The only thing I have said in the past is that we need to invest in our country, in our people, and in the future. And that may mean energy independence, high speed rail, high speed internet, training people, and investing in future sciences to create the new patents and new products. But as time goes on, the jobs will get more technical. Glad I am retired.
Other problems like antitrust laws should be looked into. There are too many mergers and consolidation and people are losing jobs that way.
Who Broke America’s Jobs Machine? | NewAmerica.net
Another problem is Urban Sprawl. PBS just showed this the other day. And what we are doing is we keep building out into the farmland and leaving the old part of cities. This is controversial, but as they say, we will have to deal with it at some time.
I was in Toledo last week and they have just built a new shopping area three miles out in farmland country from any city limits. So last week I drive down Reynolds road which is a main street in what was a suburban area, and we see that Southwyck Mall is torn down and as many as 20 other building on the street are closed. It is really tragic looking. And what we are doing is destroying our own cities. In Europe, every city and town has a square and everyone congregates to the center of the city. Those cities thrive, but we abandon ours. And I think, we need a city planner for our country. We can’t go on like this. In Detroit, they are buying up abandon property and making it into farmland. It is too costly for city services to be stretched across abandon areas. So I think there needs to be some serious thinking in this area of blight.
And when we visited the new open mall, there were not many people there. Just wonder if this will last. Just as much as government creates white elephants, it looks like the private sector has its white elephants.
PBS – STORE WARS: Sprawl
> Not extending them or decreasing them from their current level will encourage those on it to take lower paying jobs.”
One of the things Republicans do not seem to understand is that there have been some structural changes in our labor market. The hidden cost of all the cheap Chinese goods that people purchase by the SUV load from Wal Mart and Target is that a lot of jobs have left our country and they are not coming back.
Where is the next driver for the economy coming from? The dot com boom actually produced something of great long-term value, the internet as a mature platform in a short period of time, as well as a highly skilled workforce to support it. The real estate boom, well I am still looking for a long term plus…
Not all workers are smart enough to train for highly skilled IT or health care jobs. So were are they going to work? The only thing I see is infrastructure projects. We have neglected infrastructure to a degree that is truly shameful.
Anon wote:
I think we have a similar perspective, looking out from (loosely) the software business, and I think we have similar conclusions. Yeah, I think once we went free trade (esp. with Asia) a lot of this was baked in. I’ve sometimes said that “almost free trade” might have been a better path, with a uniform reduction in tariff over time. Unfortunately now any small reversal would be seen as a complete one, with full Smoot–Hawley implications.
No, I’m afraid that if we want to be compassionate now, the only path is a welfare state. There will be structurally unemployed, and the only choice we have is whether we kick them to the curb.
(I don’t think we can afford an inflated version of our current welfare state. We probably need something different, something that gives the poor civilized lives, rather than pretends that they can be propped into the middle class. We need more low cost apartments, public transport, parks, libraries. Not more home loans for the poor.)