Archive for June, 2012

The Romney Recovery

Friday, June 22nd, 2012

While things continue to sluggish across the country, the election will actually be decided based on the outcome in maybe ten states or less.  In some of those states the economy is actually recovering quite well.  This is making it very difficult from Romney to get traction with his national message that Obama’s policies are leading the nation down the wrong path.  Worse than that, in those key battleground states, Romney’s message is being contradicted by Republican governors who are eager to take credit for the recovery.  It has gotten so bad, that the Romney campaign had to ask embattled Florida governor Rick Scott to tone down his re-election message that Florida is on the rebound.

As predicted, economic improvement in Florida has not only improved the position of Republican Governor Rick Scott, but also President Obama.   According to the latest Quinnipiac University Poll, a six point May deficit in Florida for Obama has become a four point June lead.

Florida is crucial to the Romney election strategy.  For example, if Obama wins Florida, he only needs Pennsylvania where he has a big lead and Wisconsin which hasn’t been won by a Republican President since 1984 to get to 271.

In Ohio, Governor John Kasich is publicly touting the state’s falling unemployment rate and 75,700 jobs added during the past year.

Michigan Governor Rick Snyder on June 19 called Michigan “the comeback state of the United States,” noting its jobless rate dropped to 8.5 percent in May from 14.2 percent in August 2009.

In Virginia, Governor Robert McDonnell’s Opportunity Virginia political action committee aired an ad in April that touts gains in the economy since he took office in 2010.  “Virginia is growing strong again, and so is our future,” gushed the narrator, adding that Virginians were now enjoying “the lowest unemployment rate in over three years.”

Wisconsin Governor Scott Walker said economic progress was a key component of his successful defense against a June 5 recall election. Walker pointed to the state’s unemployment rate, which was 6.8 percent in May, down from 7.7 percent when he took office in January 2011.

This is really the crux of the issue.

Republicans have blocked Obama’s Job’s bill which would have put 2M more people back to work.

They have also bottled up the Transportation Bill which has a lot of jobs associated with it too.

They pushed the country to the brink of default and now are poised to roll back the defense budget cuts agreed to as part of the debt ceiling bill.

In spite of a rapidly contracting public sector, and slowing exports to Europe and China, the private sector continues to expand.

In many ways, the economy of the last two years is as much the result of Republican obstructionism as it is Democratic policy.

Finally the latest Bloomberg poll suggests that the voters are starting to take notice.  They are blaming the Republicans and their candidate for the failure of the Republican House to act and the failure of Romney to outline a credible jobs plan.  As a result they view Romney as out of touch with the needs and concerns of the working man.

Bloomberg polls also directly contradict Romney’s fundamental question, “are you better off now that you were four years ago”.  58% of those polled said, “Yes”.

Same old Story

Saturday, June 16th, 2012

The economy isn’t recovering as fast as it should because Obama, at least according to the Republicans, has the wrong plan.

The evidence is that the unemployment rate is still too high.  Whether that is the published unemployment rate or the real unemployment rate doesn’t really matter.  I think that we can all agree that there aren’t enough jobs for the number of people who would like to work.

Obama says that the major drag on the economy right now is the continued downsizing of government at the state and local level.  This is primarily teachers and first responders (fire and police).  The data support his claim even though he was criticized for the observation.

Obama’s plan is to funnel more money short term to states and cities to help them retain more of these employees and invest in infrastructure to create construction jobs.  The hope is that this growth in both private and public sector employment will improve state and local revenue to the point that they can retain more of these public sector workers when the federal money runs out.  We are already seeing this sort of revenue growth here in Michigan as a result of the robust rebound of the auto industry, though the Republican governor is unwilling to use this increased revenue to refund his education cuts.

What is Romney’s plan?

Here’s what we know so far.

Romney last September said that his administration would create 11.5M jobs in his first term by growing the economy at a 4% rate.  The problem is that his plan has no math associated with it to demonstrate how he plans to create those jobs.  Is he, for example, claiming credit for all of the jobs that economy creates if it expands at a 4% rate, or just the jobs that his policies would add over and above the jobs that would have been created anyway if his policies were not enacted?

Here’s how the experts across the political spectrum responded.

“Nowhere in the 160 page plan could I find a stated job creation number,” wrote Rebecca Thiess of Enterprise Policy Institute. “The math doesn’t just appear to be fuzzy — it appears to be nonexistent.”

“It is a plan from the Republican candidate for president designed to maximize corporate profits. What it doesn’t do is help the middle class or create jobs.” David Madland of the Center for American Progress

The Wall Street Journal called Romney’s fifty-nine-point economic tome “surprisingly timid and tactical considering our economic predicament.”

Last month, in response to the poor May jobs report, he did offer more specifics.  Those included:

  • Taping our energy resources to “put a lot of people to work in the energy sector.”
  • Repealing Obamacare, which is “scaring small businesses from hiring.”
  • Balancing the budget so people know “investing in America is going to yield a return in dollars worth something.”
  • “Open(ing) up new markets in American trade.”
  • Revamping the National Labor Relations Board and lowering tax rates on employers, both of which would make it easier to hire people.

Economists were just a skeptical about this plan as they were his original plan.

“On net, all of these policies would do more harm in the short term,” responded Mark Hopkins, a senior adviser at Moody’s Analytics. “If we implemented all of his policies, it would push us deeper into recession and make the recovery slower.”  That’s mainly due to the deep cuts in government spending that would be required to balance the budget.  The CBO also supports this conclusion that even implementing the $500B+ in planned cuts currently on the books could drive the economy into recession and those cuts are far short of what would be required to balance the budget.

We have also already heard, as a result of the oil pipeline controversy, that all the experienced oil and pipeline people are already working and even the construction job estimates may be inflated.

Romney hasn’t said what new markets he would open beyond what Obama is already doing.  The balance of trade under Obama has been declining because of increased exports and cheap oil.  He has also outlined a future based on increased domestic energy production which could turn the US into a net exporter.  Future growth of trade for the next couple of years will likely depend on how quickly Europe recovers more than anything else.  That’s because slowing growth in Europe will affect the rest of the world’s ability to buy too.

Romney has provided no data which suggests that the Affordable Care Act, deficits, NLB regulations, or lower tax rates will spur hiring.

In fact the data suggests exactly the opposite.

According to analysis by Moody’s commissioned by the Fiscal Times, US businesses are more profitable over the past few quarters than they have been in the last 50 years.

 

“Giving more tax breaks to corporations that are awash in cash is not going to lead to anything,” said Joseph Stiglitz, a Nobel Prize-winning economist at Columbia University after serving as President Clinton’s chief economic adviser and top economist at the World Bank. “It’s a lack of demand that’s really impeding investment.”

Lack of demand is the result of unemployment, underemployment, and personal incomes which have lagged corporate profits.  Recent data supports this claim that middle class families are reluctant to spend because they are still recovering from the 40% loss in net worth that they suffered during the recession.  It is middle class consumers, not corporations or wealthy individuals, which drives our economy.

What is even more troubling is that the percentage of corporate profit going to employees as a whole is dropping.  That’s good news for investors but bad news for workers and our economy.  That means that it is going to take middle class families who rely on salary rather than investment income, longer to recover than it might have in past recessions because corporations are keeping a higher percentage of the profits they generate for themselves.

Aaron Smith, a senior economist at Moody’s Analytics, said, “What is clear going forward is that in the absence of debt and government support, we’re going to need the labor share to stop declining if consumers are to regain their prowess as drivers of the U.S. economy.”  In other words, without direct government stimulation to drive up employment which as we get below 8% unemployment levels will also drive up wages, the current corporate position on wages points to continued slow growth.

Summary

The Romney jobs plan is a fiction.  His economic recovery plan will not only fail, it will make things worse because it will continue to shrink the public sector workforce that is currently dragging down the recovery.

The Republican supply side solution is based on several false premises.  The first is that corporate profits are the driver for employment.  The second is that Obama’s policies are suppressing corporate profits.  Corporate profits are the highest they have been in recent history and we are still struggling with high unemployment.  The current economic conditions have created what the Republican plan is supposed to deliver (smaller government and higher corporate profits) AND IT’S NOT WORKING.

The REAL solution is to invest both in public and private sector hiring to stimulate demand which will ultimately grow the economy.   The CBO essentially said the same thing in their most recent report.  Keep taxes low and don’t reduce the size of government any more, and the economy will grow at 4% all on its own.  That plan comes with a risk, however, because it will add to the debt and adopting a rational program that reduces the debt by restructuring Medicare and to a lesser extent Social Security appears to something he problem is that neither party seems willing to address.

Next up: A look at the current recovery in a little more detail

The Thin Red Line

Wednesday, June 6th, 2012

CBO came out with their annual report on the economy.

As you might expect, it wasn’t pretty.

The country is essentially caught between a rock and a hard place.

On one hand, without any other changes in current policy, federal debt will hit 93% of GDP in ten years.  That reflects some improvement from the outlook issued a year ago based on the spending cuts enacted as a result of the debt crisis compromise.

“Current Policy” by the way is that tax levels don’t change (existing tax cuts get extended) and current Medicare benefits remain unchanged.

The CBO also warned that if the current tax cuts are allowed to expire in 2013 and the full scheduled set of $560B in federal spending cuts that have been agreed to are enacted, the economy will likely go into recession.

Finally, if Congress renews the tax cuts and does not enact the budget cuts, the economy would likely grow at 4.4% which would put us among some of the fastest growing economies in the world.

What we are left with then is this Scylla and Charybdis moment that has absolutely nothing to do with ideology.

Neither political party has a whole solution.  Both parties have part of the solution and part of the risk.

We can’t continue to reduce the size of government and as a result extract more dollars from the economy.  If the cuts that are currently on the books are implemented, we risk recession.  That means the Republican strategy to aggressively reduce government spending is now officially dangerous.

This Congress can’t even kick the can down the road as other Congresses before them have done.  That’s because the debt crisis is now a clear and present danger that could become a reality within the next decade.

What is left is a very thin line through the middle of this problem.  Spending cuts have to continue but they have to be more gradual and occur only after the economy has improved to the point where it can absorb them.  Taxes also have to go up because you just can’t cut enough government spending fast enough to bring the deficit down and also not risk shocking the economy into recession.  Those new tax increases also have to be gradual and take effect only when economic growth is strong enough to withstand the shock.  Finally Medicare has to be reformed, but only in a way that doesn’t affect the ability of seniors who depend on that program to continue to receive care.  Otherwise, there is also a risk of recession as seniors reduce their spending in order to cover their higher medical expenses.  Some sort of means test is an example.

These sorts of highly coordinated actions imply a Congress that recognizes the problem, is on the same page with regard to the solution, and is willing to put the good of the country ahead of personal and party issues.

The bad news is that both parties are blaming the other for getting to this point.

The additional bad news is that a deeply divided congress is not going to be able to walk this thin line with any precision UNLESS those who hold elected office finally agree to put down their swords and work together to get us onto firmer ground.

It will be interesting to see how all of this plays out.

We also can’t raise taxes in any significant way without a similar risk.  So the Democratic strategy of raising taxes on the rich also has to be examined very carefully.

Perhaps the best outcome would be continued gridlock, except that Congress will have to act to limit the cuts already scheduled and to renew the tax cuts that are scheduled to expire.