Saturday, April 08, 2006
The unstoppable American economy
The economy is turning in a monster performance. Without necessarily giving the Bush administration credit -- I am not sure that a particular administration is responsible for more than perhaps 20% of the performance of the economy over the short and medium term -- the "fact sheet" that the White House put out yesterday tells at least some of the story:
GDP Growth Is Strong. Real GDP increased 3.5 percent in 2005. The economy has been growing for 17 straight quarters, and the composite index of leading indicators has risen the past 6 months, indicating continued growth.
The Conference Board Index Of Consumer Confidence Rose To 107.2 In March - The Highest Level In Nearly Four Years.
Inflation Remains Contained. The core Consumer Price Index (CPI) rose just 0.1 percent in February. Core CPI has increased a moderate 2.1 percent over the past 12 months, indicating core inflation remains contained.
Over The Past Year, Employment Has Increased In 48 States.
Real Disposable Incomes Have Risen 2.2 Percent Over The Past 12 Months. Since January 2001, real after-tax income per person has risen 8.3 percent. Real household net worth is at an all-time high of $52.1 trillion, and the median net worth of American households rose 1.5 percent between 2001 and 2004.
Consumer Spending Is Strong. Real consumer spending has increased 3.2 percent over the past year, and nominal retail sales are up 6.7 percent over the past 12 months.
College Graduates Face The Best Job Market In Five Years According To Employment Consulting Firm Challenger, Gray & Christmas.
Manufacturing Expansion Continues. The Institute for Supply Management (ISM), a private research group, reports manufacturing activity grew for the 34th consecutive month in March, and its reading of 55.2 indicates continued sector expansion. According to the Federal Reserve, over the past 12 months total industrial production rose 3.3 percent, including a 0.7 percent increase in February, and manufacturing industrial production rose 4.2 percent.
New Orders For Durable Goods Surpassed Expectations And Rose 2.6 Percent In February.
Construction Spending Is At An All-Time High, Rising 0.8 Percent In February To Reach A Seasonally Adjusted Annual Rate Of $1.185 Trillion.
Service Sector Grows. The ISM reports non-manufacturing business activity grew for the 36th consecutive month in March. The ISM's business activity index reading of 60.5 indicates continued sector growth.
Productivity Growth Continues. During the past four quarters, productivity has increased 2.5 percent. Productivity has grown at a 3.4 percent annual rate since the business-cycle peak in the first quarter of 2001. America has the most productive workers of any major economy in the world.
For obvious political reasons, the White House does not mention that corporate profits as a percentage of GDP are also at a 40-year high, which fact is particularly startling in light of the huge new transactions costs imposed on public companies in the wake of the post-bubble accounting scandals.
The performance of this economy is all the more arresting in light of the shocks of the last five years. In early 2000, even before the end of the Clinton administration, the NASDAQ bubble burst, sucking hundreds of billions of dollars of wealth effect out of the economy. Lots of people felt poorer, and were poorer. The next year the telecom bubble burst, disappearing even more putative value. On September 11, 2001, we woke up and finally noticed we were at war. Not only did this shock the economy into inactivity for the better part of a year, but it imposed huge new unproductive security costs (all those guards and metal detectors in buildings, concrete barriers, and corporate security consultants cost money that do not really create wealth -- they are dead weight, like a tax). That same fall the post-bubble scandals surfaced, destroying hundreds of billions more in perceived wealth and, worse, scaring the Republicans into passing astonishingly costly and poorly conceived new regulation. Last year, Hurricane Katrina destroyed an entire American city, and drove the price of gasoline, at one time thought to be the oxygen of the American economy, to (inflation adjusted) prices not seen since the Carter administration.
And yet the American economy motors on.
Now, there are those who claim that this is coming at the expense of wages, and that may be true in the near term. But even that is changing. If you are personally reliable, pay attention to your work, do your job without roiling your co-workers or palpably violating ever-more-burdensome company policy manuals, are open to learning new things and adapting to the many changes that roll through American business, and keep your own eyes open for opportunities in your own company and elsewhere, your wages or salary will go up smartly over time. Employees who do these very basic things -- the essential elements of which are a positive attitude, personal dedication and a willingness to change -- will succeed in this economy almost regardless of their academic training or accomplishments. That sounds like a small thing, but it is in fact true in very few places in the world other than America.
As I hinted above, I doubt that the Bush era tax cuts have much to do with the strengths or weaknesses of this economy. We had huge growth during the Clinton years in the face of huge tax increases. Sure, lower taxes or at least lower government spending is probably better for growth in the long run, but the key is to retain our national admiration for enterprise, our cultural openness, our personal flexibility, and our aspiration for a better, bigger, more exciting future. None of this means that there won't be temporary setbacks. My grandfather, who was a great American optimist, observed that the stock market was flat on a net basis for two very long periods during his lifetime. The Dow did not go above its 1929 peak again until 1954, a stretch of 25 years that must have seemed like painful stagnation. It effectively peaked again in 1966, and with the exception of a couple of days in 1973 did not exceed that high for 16 years. But as tough as those times seemed to be, we always had the future and we still do because of our love of change, our national ambition, and propensity for practical solutions.
There are a great many enemies of the future in the world, but very few of them are Americans. Let's keep it that way.
22 Comments:
By 
Gordon Smith, at
Sat Apr 08, 10:26:00 AM:
Maybe it's just my connection, but your site now has a black background?
Hard to read, IMHO.
By 
, at
Sat Apr 08, 10:31:00 AM:
Federal tax receipts have now exceeded the prior peak in 2001.
There is a chart out there somewhere that shows declining tax receipts prior to the 2003 tax cuts. Tax receipts started increasing within a quarter of the tax cuts.
This I think is strong evidence that the tax cuts were responsible for the economic turnaround.
By Cardinalpark, at
Sat Apr 08, 10:37:00 AM:
Single causation theories are almost always wrong. but I would say that the combination of massive Fiscal (tax cuts) and Monetary (interest rate cuts) stimulus were instrumental in minimizing the economic damage associated with the massive decline in equity markets arising as a consequence of the burst bubble, economic contraction and the attack on NY.
I would say equally that if Congress fails to renew the cuts -- the equivalent of significant tax increases -- we will suffer an economic contraction as a result.
Don't minimize the impact of tax policy changes. The empirical evidence is incredibly clear that the impact of important changes is in fact substantial. Count on it.
:)
By , at
Sat Apr 08, 10:43:00 AM:
In fact the Skeptical Optimist has a nice chart which shows tax receipts vs government spending showing that if current trends continue the budget will balance by '08 as Bush has predicted in the past. Note that tax receipts started increasing in '03...correlation is not causation of course but it is striking.
Sorry I have never attempted to master the link thingy but the chart can be found by googling "federal tax receipts" and finding the link to the Skeptical Economist.
By , at
Sat Apr 08, 10:49:00 AM:
I agree CardinalPark. However I will point out that the Fed slashed interest rates immediately after 9/11 yet Fed tax receipts continued to fall until after the tax cuts were passed.
By , at
Sat Apr 08, 11:02:00 AM:
"finding the link to the Skeptical Economist" should read "finding the link to the Skeptical Optimist"
By , at
Sat Apr 08, 11:56:00 AM:
Terrorists attacked on 911 because they wanted the US to retaliate and get trapped in a military quagmire which they thought would wreck the US economy. This is what they believed destroyed the Soviet Union.
By Dawnfire82, at
Sat Apr 08, 12:40:00 PM:
Umm... terrorists attacked on 9/11 because they hate the United States and wanted to kill as many Americans as possible in the hopes of intimidating us into withdrawing our influence from their homelands, as per Beirut 1983 and Mogadishu 1993.
By Lanky_Bastard, at
Sat Apr 08, 02:30:00 PM:
Nice post. And of course a rising GDP is a good thing, no arguments there. But I'm gonna go a little liberal on you and suggest that there's more to a strong economy than a rising GDP. I bet the Saudi GDP rose dramatically on increased oil prices this year. Good for the princes, but it doesn't necessarily benefit the average Saudi Arabian. I get the impression that the majority of modern Republican tax policies (especially capital gains tax cuts) specifically benefit the investment class (those people who accrue a majority of their yearly income from investment). And let's be honest about it. They don't need a positive attitude, personal dedication, or a willingness to change. All they need is a good investment counselor and their previously aquired wealth generates more wealth.
I think the line "Lots of people felt poorer and were poorer" is particularly astute. And the economic question I want to ask is: relative to only a few years ago, do lots of people feel poorer and are they? My personal views are probably skewed by the pay cut I took in quitting my cushy job and returning to grad school (Ironically, my positive attitude, personal dedication, and willingness to change cost me a bundle). My point is: if you want to argue that the American economy is doing good things, I think you have to show how it is doing good things for the average American.
By , at
Sat Apr 08, 02:56:00 PM:
I've got a rooster that can make the sun come up.
MaxSpeak
http://maxspeak.org/mt
By , at
Sat Apr 08, 02:57:00 PM:
Wealth inequality increased in the '80's, '90's, and now the 21st century. The '80's were labelled the decade of "greed" which followed the Reagan supply side tax cuts (prior to passage the marginal tax rate was 70%!).
The question seems to be: shall we have more income equality and slower economic growth or higher economic growth and more income inequality? Take your pick. If you think those aren't the only two choices...then I would submit you don't know economic history.
By Counter Trey, at
Sat Apr 08, 06:41:00 PM:
Lanky,
“Investment class?” Maybe you should change your pseudonym to the Thorstein Veblen Bastard.
First, let’s look at your statement: “Wealth generates more wealth?” In which world is that guaranteed? A lot of wealthy investors jumped off of buildings in 1929, and I’ll bet quite a few more in 1973-1974, 1978-1979, and 2000-2002. And, that’s just US equity investors. There has been quite a bit of episodic destruction of world-wide wealth in the past 100 years. In fact, free societies allow for that destruction to arise because it is a key ingredient to future wealth creation. The lack of safety nets and the promise of wealth accrual do wonders to focus the mind, and it’s that focus of mind—aka human ingenuity—that generates wealth. Only free societies unleash that ingenuity.
Second, your “willingness to change” is only part of the equation. I might want to be the best beer drinker in the country, and I’ve been working on that goal for a while, but I shouldn’t expect to make a living doing it. So, here’s hoping that you are not majoring in African-American or Women’s Studies at that grad school of yours.
Finally, if you want to show that the American economy is doing good things, all one has to do is show that it affords everyone the opportunity to compete on a level playing field. In that regard, freedom—in the form of flatter taxes, fewer “safety” nets, and fewer regulations—goes a long way.
So look at that; freedom not only unleashes wealth-creating human ingenuity, but it also levels the playing field. It’s a “two-fer.” Just as wealth can be quickly destroyed, it can also be quickly created. In free societies, nothing is more mobile than capital and it flows to the industrious.
By Lanky_Bastard, at
Sun Apr 09, 02:02:00 AM:
Counter,
Not only have I no idea who Thorstein Veblen is, I was under the impression we already live in a free society. Shows what I know.
However, if you want to argue that wealth doesn't generate more wealth, you've got an uphill battle. Pretending I claimed it as a "guarantee" is a good trick, but probably won't work for anyone who actaully reads what I wrote. The basic principle of investment (to make more money from existing money) is not altered by the fact that some people fail at it (note the phrase "good investment counselor").
I think a level playing field is a fine idea, but I view it differently than you do. If you happen to be born with a million dollar trust-fund, you get your own playing field, not a level one. I think earnings should be taxed less and capital gains taxed more. If that argues against being industrious (or any of the other virtues TH extolled), show me how. I support reinstating the estate/death tax as it was (noting the spousal exception). If some heirs and heiresses have to sell mummy and daddy's 3rd home (or get a job) to cover the taxes, so what? Let those sorry progeny earn enough money to buy their own summer houses. What if they have to be productive to support themselves? If they fail in the department of wealth-creating human ingenuity, then they don't deserve what their parents earned. Call that the lack of a safety net if you like. Call it economic survival of the fittest. I'll call it the barest nod towards leveling the playing field.
By TigerHawk, at
Sun Apr 09, 07:31:00 AM:
Lanky,
We are moving a bit far afield, but I'd like to respond to your tax proposals.
I think most, or at least many, people agree in principle that capital gains and ordinary income should be taxed at the same rate. That would work in an inflation-free world, because all the gains on sale would be investment gains -- none would be additional implicit tax because the government decided to print more money. The issue has always been, how do you do calculate away the additional implicit tax from inflation?
The complex way to do that is to require everybody to calculate the "real" gain of each asset sold, and then tax only that. Even in an age of computers, though, that exercise would be so complicated for taxpayers that it would be wildly unpopular because of its complexity, rather than its justice or injustice.
So instead we say that capital gains over the short-term will simply be taxed as ordinary income, but capital gains over the long term will be taxed at a much lower rate. This simple approach probably does away with a lot of the implicit tax, although it does result in over and under compensation, depending on holding periods.
During periods of low inflation, an investor who holds an asset for only a short period beyond the one year horizon pays a much lower tax on gains than he would under a complicated approach. On the other hand, an investor that holds an asset that does not appreciate much for a very long time -- property in North Dakota, maybe, or the shares of plenty of old industrial companies -- is probably grossly overtaxed on the gains. If today I sell land that I bought in 1975 for only three times what I paid for it, any capital gains tax is confiscatory, because I have no actual gains. The entire gain comes from inflation, which is itself a tax.
Finally, if you want to tax all capital gains at ordinary income rates, it seems to me that you have to allow the deduction of capital losses against ordinary income. In your world, if I lose a bundle in the stock market, I should be able to deduct those losses against the income I earn through my salary. Anything else would be unjust. But then, during periods of a declining stock market, lots of people in the investor class would pay little or no tax on their actual salaries. I can see the outraged headlines now, about "corporate chieftains" not paying taxes on their salaries. So I view the low capital gains rate as compensation for all the other asymmetries in the system, including the implicit tax of inflation and the inability to deduct capital losses from ordinary income.
Having said all of that, I would support extending the holding period for long-term status (i.e., the 15% tax) to three years, and in return lowering the tax to 10% for assets held more than 5-7 years (I'm open to negotiation!).
On the estate tax, all I can say is this: Why should death be a taxable event at all? All that money has already been taxed as income to the person who died?
The estate tax is stupid, because it is largely just a trap for the unwary. Anybody with lots of money can structure around it, and the result is we support a huge dead-weight industry of estate planners who would be put to much more productive use doing something else. Only the ignorant, or people who die by surprise, pay the tax.
My strong opinion is that the estate tax should be eliminated, but that we should also eliminate the step-up in basis at death. If you inherit the family business and then decide to sell it, your basis should be your father's basis, not the value of the business at his death. I'm guessing that the increased capital gains taxes would generate more revenue than the estate tax does, but in a much fairer way.
By , at
Sun Apr 09, 10:27:00 AM:
Maxspeak...apparently to defeat any suggestion that tax cuts could be fueling the economic expansion, offers the "rooster and surise" argument. Of course, he, you, and me would gamble our entire fortunes that the Sun would rise whether his pet rooster crowed or not.
"Correlation is not causation" should be amended to "Correlation is not NECESSARILY causation". In the case of economics, the inability to do controlled experiments severely contrains our ability to settle arguments. Dismal "science" indeed!
By TigerHawk, at
Sun Apr 09, 11:02:00 AM:
Lanky,
In re-reading your comment, I noticed this bit: "If you happen to be born with a million dollar trust-fund, you get your own playing field, not a level one."
Actually, I think a million dollars at age 18 is as likely to be destructive as helpful. I've known a lot teenagers who thought that family affluence was a reason not to work hard, and it meant that when they burned through those advantages they had nothing. That is the key to American social mobility -- it is almost as easy to fall out of affluence, at least in the span of a generation, as it is to rise into it. The first generation makes a few million bucks in a family business, the second generation inherits and dissipates that small fortune, and the third generation is back squarely in the middle class. Any stockbroker can tell you that story ten times over.
Now, this version I would agree with: "If you happen to be born into a family with a deep respect for education and a culture of life-long learning, you get your own playing field, not a level one." That tradition, which in my experience is only loosely correlated with wealth, is the trick to sustaining upper middle class comfort from one generation to the next.
By SeekerBlog.com, at
Sun Apr 09, 01:07:00 PM:
Tigerhawk,
Excellent comments on the capital gains tax - need to think a bit about your support changes in holding period vs. rates.
What do you think about a zero long-term gains rate?
And what do you think about a flat tax on income? I've seen summaries [no details] indicating good results in the ex-Soviet Bloc countries that have adopted a flat tax [10 countries I think]. But I've not researched that yet.
By Counter Trey, at
Sun Apr 09, 01:20:00 PM:
Lanky,
Seriously, curl up with Veblen's The Theory of the Leisure Class. I think you'll find affirmation.
The goal for anyone that wishes to be self-sustaining is to create more wealth, but wealth creation is not a monotonic function. Every analysis of IRS returns has shown that earners in the extreme quintiles rarely stay there for long. If you take an objective view of "progressive" tax, spend, and regulatory policies you'd find that they hamper the income mobility that is indicative of a level field.
Finally, when you call for a death tax, I think you are missing an important point: One incentive to be industrious is to provide your own safety net for your children and heirs so that you and they do not have to rely on government. The death tax--government's second bite at the apple after taxing a lifetime of income--severely limits that incentive. The death tax is incentive for "conspicuous consumption," not saving and investing. The death tax is a weapon in the type of class warfare of which Veblen would be proud.
By Lanky_Bastard, at
Sun Apr 09, 07:04:00 PM:
Tiger:
Sorry to take the thread astray. (though possibly more on topic than the motivations of terroists?)
So for this post I'll simply reiterate my intial (on topic?) point that I think "a good economy" means a good economy for everyone, and hope to see that we are in such a period.
Counter:
I'll look into Thorstein Velben. I might have to thank you for the reccomendation...but it better not be a treatise on how much his parents must have hated him to name him Thorstein.
By Counter Trey, at
Mon Apr 10, 11:22:00 AM:
Lanky,
It was probably a popular name in the 19th century.
By Cassandra, at
Tue Apr 11, 05:36:00 AM:
I'd like to second whoever recommended The Skeptical Optimist (above).
It's not every day you find a blogger who combine a thorough knowledge of economics with a deep interest in national security.
Steve is a great blogger and a very entertaining and nice guy to boot. And he has a positive gift for condensing information into colorful and easy to read charts that get the point across. I consider him a must-read.
Well worth checking out:
http://www.optimist123.com/
By Cassandra, at
Tue Apr 11, 05:37:00 AM:
Arggggh! combines...
Too early in the morning for my poor eyeballs :)
