I just heard Cass Sunstein speak on Obama’s attempt to trim unnecessary rules and reduce the burden on the private sector. Yet here’s a fact: over the past year, employment at federal regulatory agencies has grown by more than 5%. By comparison, private sector jobs only rose by about 1.5% over the same period. That suggests regulatory intensity is still rising, even as the recovery lags.
A few details of the calculation are below the fold.
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As we begin to consider how best to rebuild the nation’s physical, human, and knowledge capital, we need to think about the appropriate level of military spending. There’s a nice piece by Jim Arkedis of the Progressive Policy Institute on New Congress and Military Spending: This is Going to Be Fun. Jim writes:
we could be approaching the tipping point on fiscal responsibility and military spending. Mainstream Republicans, who want to shovel money towards the Pentagon that even it doesn’t want, are beginning to swim upstream more and more.
It certainly would be interesting if military spending turned out to be a wedge issue for the Republicans.
Did the first quarter mark the end of the fiscal stimulus? And will it be enough to work?
People are always trying to judge the fiscal stimulus by whether it creates jobs. But that was never the real justification for spending all that money. The theory was that the economy has multiple equilibria–a good equilibrium where everyone is optimistic about the future, companies invest, and households spend, and a bad equilibrium where everyone is locked into a mutually reinforcing gloom about the future. Then a big enough fiscal stimulus can forcibly kick the economy from the bad equilibrium to the good equilibrium.
The key term here is ‘big enough’. I think of the stimulus as a big booster rocket for the economy. If the rocket is strong enough, it can put a satellite (the economy) into a stable orbit. Not enough boost, jobs are created by spending money, but the economy falls back to earth again once the stimulus stops (wow, that was a mixed metaphor, but I’m good with it).
By this measure, the stimulus can only be judged successful or not after it stops firing. Or to put it another way, we want to see if the private sector continues to grow once the government stimulus is removed.
As it looks like tht critical moment has arrived. Based on the latest BEA data, the stimulus ran out of fuel in the first quarter, and we’re about to find out whether it gave the economy enough oomph to get back into orbit.
Take a look at these two charts. First, the government contribution to GDP growth was negative in the first quarter–roughly one-third of a percentage point. This reflects mainly contraction of state and local governments–layoffs and reductions in investment. Basically any new building projects on the state and local level have been put into the cold freeze.
But the GDP stats don’t tell the full story, because transfer payments (Social Security, Medicare, unemployment insurance) are not included in the ‘government’ category of GDP. Instead, they show up in personal income. So I calculated the government contribution to real personal disposable income growth. That includes the change in government benefit payments and government wages and salaries, minus the change in income taxes and payroll taxes.
Surprisingly–at least to me–the government was a net drag on real disposable income growth in the first quarter of 2010. A small drag to be sure–roughly 0.2% of disposable income–but certainly not a boost. An increase in benefits was more than offset by an increase in taxes paid.
In other words, the fiscal stimulus pretty much petered out in the first quarter.
So the second and third quarters will be key. Will the private sector be able to use the boost from the stimulus to get back into some reasonable economic orbit? Or will it fall back to earth again in a big splat?
Right now I’m evenly balanced between the optimistic and pessimistic possibilities in the short-run. I see good signs of life, especially in the communications sector. But I worry about Europe, about cutbacks on state and local level, about trade and borrowing from overseas. But that’s a different post.
Tyler Cowen writes:
There’s a different way to think about the bailouts, namely that the U.S. government stands at the center of a giant nexus of money raising, most of all to finance the U.S. government budget deficit and keep the whole show up and running.
<snip>
If you do wish to break or limit the power of the major banks, running a balanced budget is probably the most important step we could take.
I’ll make a similar but not identical argument. I think the reason why Wall Street is thriving, even today, is that it plays a critical role in financing the trade deficit.
Right now the trade deficit is running at an annual rate of $475 billion per year, and rising. It’s up almost 40% over the past year. Virtually all that money has to flow in through Wall Street, directly or indirectly–Treasury bonds, corporate bonds, stocks, financing for consumer purchases.
The trade deficit cannot be financed without Wall Street, which has a crucial role as a financial intermediary.
That’s not quite the same as saying, as Tyler does, that the financial sector has a key role in financing the budget deficit. During the beginning of the decade, the federal budget was in balance, but the size of the financial sector was growing along with the trade deficit.
Take a look at this chart:
Tthe finance sector steadily grew with the expansion of the trade deficit. The two peaked together around 2005 and 2006.
Basically, in my view, Wall Street has been making big profits serving as an intermediary between the U.S. and the rest of the world, sometimes in complicated ways. The big losers in the Goldman Sachs fraud case were European financial institutions. But remember that 80% of John Paulson’s assets came from foreign investors as well. In essence, Goldman enabled non-US investors to bet against other non-US investors, on the outcome of U.S. borrowing.
More generally, the whole subprime debacle was about creating dollar assets that foreign investors, flush with dollars, could invest in. Assuming that I’m right, the Chinese were conservative and smart here–they put their money into Treasuries and agencies, that were fully supported by the U.S. government. The European banks, on the other hand, wanted better returns–they took the trade mammoth surpluses that Europe was running with the U.S. ($700 billion between 2000 and 2008), and poured them back into higher yield but supposedly safe securities. That flow of money fueled Wall Street prosperity.
As the trade deficit expands again, the need for savvy financial institutions to connect overseas funders with U.S. borrowers increases.
So here’s the hell of it. Wall Street provides a socially useful function, facilitating the flow of money into the country. But it’s not money that’s good for us.
Each month the BEA releases figures for personal income and disposable personal income. These figures are a mix of private sector income and money received by individuals from the government. These government payments take the form of wages paid to government employees, and social benefits such as Medicare and Medicaid.
So I decided to take a shot at calculating ‘private’ personal income. From personal income I removed government social benefits (about $2.1 trillion in 2009) and wages paid to government employees (about $1.2 trillion). Then I added back in contributions for government social insurance, such as Social Security and Medicare payroll taxes (just under $1 trillion). Finally, I adjusted for inflation and population size to get a figure for real ‘private’ personal income per capita.
Here’s a chart of the 10-year growth rate of real private personal income per capita (the first quarter figure for 2010 is based on the average of January and February).
Over the past decade, real private personal income per capita has fallen at a 0.2% annual pace, the first time that has happened since the Great Depression.
Let’s compare this with the usual figure quoted by economists, real disposable income per capita. Real disposable income per capita–which includes government wages and social benefits, and adjusts for tax changes–rose at a 1.2% rate over the past ten years. In other words, when we add in government spending increases and tax cuts, real incomes per capita rose rather than fell.
The logical conclusion is that the private sector has been crapped out for the past ten years. Even before the crisis hit, the main thing that kept the economy afloat was the succession of Bush tax cuts and the expansion of federal spending which boosted benefits, particularly in healthcare.
This was a bad bad decade.
A quick look through Obama’s proposed 2011 budget shows that nondefense health R&D is still getting top priority over nondefense nonhealth R&D–that is, pretty much everything else. Take a look at this chart:
The Obama budget continues the trend of the Bush years–a rising share of GDP going for health R&D, while federal nonhealth nondefense R&D is basically flat as a share of GDP. Nonhealth R&D includes space, energy, environment, information technology, physics, chemistry, and pretty much the whole range of science and technologies, outside of the life sciences.
Since FY 2001, funding for health R&D has exceeded funding for nonhealth nondefense R&D, and the gap has been growing. The President’s proposed budget for 2011 calls for nondefense health R&D to exceed nondefense nonhealth R&D by 31%.
Given that the Obama Administration has made green technologies a priority, it’s worth looking at federal funding for potentially ‘green’ R&D: Transportation, energy, natural resources, and environment.
This chart shows federal nondefense R&D spending in these key areas, as a share of GDP. Certainly it’s on an uptick compared to the 2006-2008 lows. But even then, the 2011 level of funding for transportation/energy/environment R&D, measured as a share of GDP, is roughly half where it was in 1992.
If you believe that the U.S. is falling behind in nonhealth science and technology, these charts suggest one reason why.
