If you want to really know what your friends and family think of you
—die broke, and then see who shows up for the funeral.
Gregory Nunn
GDP Numbers Disappoint:
From 3.0% (Q4 2011) to 2.2% (Q1 2012)
The consensus had been a lesser drop to 2.5%. Now to provide some context, there is Okun's law, law in the sense of being a heuristic or rule of thumb. Let me quote from a CBO report: "'Okun’s Law' has been included in a list of “core ideas” that are widely accepted in the economics profession. Over the postwar period, economic growth of about 3.5% has been associated with a stable unemployment rate." In essence, if we assume at full employment (roughly 5%), we expect a 2-1 ratio between economic growth and unemployment percentage points from the 3.2-3.5% trend in GDP growth. For example, if we drop 1 percentage point from a long-term GDP growth trend of 3.2% to 2.2%, we should expect a half-point increase in the unemployment rate, say from 5% to 5.5%. There have been well-known anomalies to this general observation: for example, economists did not expect 2009's sharp increase in unemployment: while real GDP was flat versus, say, its long-term trend of 3.2 percentage points, we should have seen unemployment increase by 1.6%, but instead it increased almost the same number of points that growth dropped (i.e., around 3 points). Why? Primarily it had to do with very high labor productivity increases (plus a drop in labor force, as discouraged workers moved out of official statistics). (Labor productivity has a less reliable trend over time.)
One should never take a single data point out of context. Certainly 2.2% is better than zero growth. There is some good news in terms of auto sales. But with Spain's recent debt rating drop and the worrisome prospects of a socialist winning the French Presidency from Nicolas Sarkozy, whom has played a strong role with German Chancellor Merkle in a leadership role during the European crisis, we could see the American economy itself adversely affected by Europe's problems, something Fed Reserve Chairman Ben Bernanke recently acknowledged.
Politically? This is not good news for Obama--or any of us, really. It's unlikely Obama will even reach the unemployment rate he inherited from Bush (and I argue we should be using the November 2008 numbers, because employers were not considering lame duck Bush's policies in 2009 planning). More importantly, Obama has seen a sky high increase in long-term unemployment, which is much more difficult to resolve.
The biggest hang over the economy (I'll ignore Obama's policies for the moment)? Recovering from the housing bubble. Obama and the Democrats have seen their chickens come home to roost. By subordinating risk assessment to social policy goals and championing the federal government's exposure in the real estate market (through implicit federal guarantees behind the GSE's), and given the fact that most American families' biggest investment is their home, we now see millions of people with little or no equity in their homes, and with a fragile jobless growth economy, Americans are going to spend more cautiously, which makes for a slow comeback--too slow to save Obama this fall, no matter how promising the polls today suggest; if this time Obama experiences Economic Tsunami v. 2 over the next 6 months, it almost doesn't matter what Romney says or does: Romney will win in a landslide. It could be anything, e.g., the Iran crisis and an oil price shock that makes 2008 look trivial.
I don't think the public will soon forget what happened when they put the Democrats in charge of all the Congress and the White House. I think everyone knows that the national debt is another bubble; it's one thing when the bubble is stocks or real estate--but what government is going to save us when the government itself is in its own bubble?
I am absolutely convinced that Obama and the Democrats blew it from a big picture perspective. The smart thing would have been to focus on the knitting: things like maintaining the existing safety net, getting out of the way of the private sector and engaging in genuine compromise. By focusing on ideological goals like health care and financial reform, neither of which was a significant priority for the majority of the American people, they forgot the bitter lessons of Clinton's first two years in office.
Follow-Up Odds and Ends
I am initiating a new cross-referenced feature called 'follow-up odds and ends'
Miscellany: 4/26/12:
- A Nightmare on K Street (real estate bubble): "Fannie Mae, Freddie Mac and the Federal Housing Administration combined to purchase or guarantee (with taxpayer money) 95 percent of all new mortgages in 2011. This is largely because the GSEs are able to price out competition, particularly since the maximum loan size Fannie and Freddie can purchase expanded from $417,000 in 2008 to as high as $729,750 in mid-2011, but only back down to $625,500 at the end of 2011." See page 6 of Reason's newly released 2011 federal privatization report. The GSE's are able to undercut private market because the private sector can't match the "free" GSE advantages of cheap government debt and/or loan guarantees/subsidies. (I.e., a guarantee is a form of insurance that protects creditors (just like the FDIC protects depositors), and there are costs to guarantees, e.g., outstanding balance on default or non-performing loans plus administrative costs. We can estimate the value of the guarantee by the market price difference for a given level of risk.)
- Student Loan Subsidies? I thought about pointing out the average aggregate loan was about the equivalent of a new car loan. Obama has a number of Trojan horse proposals (e.g., the unreasonable capping of loan payments as a percentage of future income--where do we find these terms in the loan industry? Are car loan payments capped on a percentage of income, including loan forgiveness?) which are blatant pandering for the young adult vote and put the taxpayer at undue risk: why should the federal government subsidize certain loans versus others? Is the federal government's claim on future college graduate income a lower priority than their paying other expenses, e.g., paying off a car loan or a credit card? (Maybe I should stop while I'm ahead: no idea what the Demagogue-in-Chief will do if I unintentionally give him new ideas--e.g., as an incentive to graduate, Obama could extend similar terms to college graduate new Government Motors auto purchases...)
- The ICC/MD200: I wrote "People do all sorts of weird things while sitting in traffic; I pass the time thinking of things like--I wonder if they ever thought of taking HOV lanes and converting them into toll lanes." There are, in fact, a number of relevant projects under the name of "HOT (high occupancy toll) Lanes" or a more recent, general term "Managed Lanes". Reason's newly released 2011 surface transportation report discusses these in part 5; there does seem to be political resistance against converting existing lanes to toll lanes and instead reserving the concept for new lanes. (I disagree--with the restriction.)
NB: I mentioned in this segment two sections of the new Reason 2011 privatization report; other section reports are available and can be downloaded without (any Reason) cost here.
"Bring Your Child to Work Day — that's how we got George W. Bush." - David Letterman
[That's how New York got Andrew Cuomo. That's how California got stuck with Jerry Brown...
Maybe taxpayers should agree to cover birth control expenses for Democratic politicians and their spouses. We could call it 'preventive government debt care'...]
"Today is the 20th annual Bring Your Child to Work Day — or as it's known in China, Thursday." - Jimmy Kimmel
[It's bad enough that the Democrats want parents to foot the bill for their adult children's health care, but do the Dems really expect parents to also be their chauffeurs?]
Musical Interlude: My Favorite Groups
The Rolling Stones, "Mothers Little Helper"
