CBO: Government austerity has hurt the economy

gap between gdp and potential gdp

Austerity Has Harmed The Economy According To CBO | TPMDC:

In other words, intentional efforts to reduce annual deficits and stabilize the debt are working. But if you retrain your gaze from the government’s balance sheet to the real economy, you’ll see the impact of that austerity is fewer people working and slower growth. According to CBO, the recovery won’t really pick up steam until next year, and the economy won’t have recovered until the end of 2017, when it will reach its output potential, and unemployment will fall to 5.5 percent.

Austerity does not work. Austerity hurts the economy. Duh.

At least Obama gets to say he accomplished a campaign promise:

The report does contain a thin silver lining for President Obama, who pledged in his 2008 campaign to halve the deficit in his first term.

“At an estimated $845 billion, the 2013 imbalance would be the first deficit in five years below $1 trillion; and at 5.3 percent of GDP, it would be only about half as large, relative to the size of the economy, as the deficit was in 2009,” if current laws don’t change, according to CBO.

This isn’t a real victory. A real win for Obama would have been getting unemployment down below 7% during his first term and fixing the long-term deficit via adjustments to Social Security and Medicare.

Obama’s reckless spending spree

Economics and Politics by Paul Krugman – The Conscience of a Liberal – NYTimes.com:

Conservatives were, of course, having none of it — Obama was permanently enlarging the government to European size. So, how’s it going?

In the figure below the blue line shows government spending at all levels as a share of GDP; the red line shows the share of potential GDP — what we’d be producing at normal employment — as estimated by the Congressional Budget Office; it’s lower than the first line because the economy is still operating well below capacity.

No, that huge surge isn’t Obama instituting socialism in the United States. There are two related factors contributing to it: 

  1. People were losing their jobs, businesses were closing down. This means that the chunk of the economy that wasn’t government spending got smaller, making the government look bigger.
  2. When people are unemployed, they require more government services – food stamps, unemployment benefits, Medicaid, and for older workers, Medicare and Social Security. This isn’t a permanent increase. As the graph shows, the government’s share of the economy has been falling consistently since late 2009, when stimulus spending had run its course.

The lessons we can learn from the Nordic nations

The Economist has put up a great piece taking a look at what the Nordic countries (The Netherlands, Norway, Denmark, Sweden, and Finland) are doing differently from the United States and the rest of Europe and how this could be used as a model going forward. I decided to add some commentary and data to the most interesting bits from the article.

The Nordic countries: The next supermodel | The Economist:

If you had to be reborn anywhere in the world as a person with average talents and income, you would want to be a Viking. The Nordics cluster at the top of league tables of everything from economic competitiveness to social health to happiness. They have avoided both southern Europe’s economic sclerosis and America’s extreme inequality. Development theorists have taken to calling successful modernisation ‘getting to Denmark’. Meanwhile a region that was once synonymous with do-it-yourself furniture and Abba has even become a cultural haven, home to ‘The Killing’, Noma and ‘Angry Birds’.

Here’s the United Nations’s World Happiness Report for 2012. The Nordic countries dominate the top of the list, while the United States comes in 11th place. Here’s a graph of the employment rates in the Nordic countries versus in the United States, from the OECD’s statistics database:

Employment for all person Nordic countries versus United States

Socialism is clearly taking its toll on the Swedish work ethic. Of course, one major reason the United States is so far behind is our employment of women compared to the Nordic countries:

Employment rates in Nordic countries versus United States

Employment males Nordic countries versus United States

Government’s share of GDP in Sweden, which has dropped by around 18 percentage points, is lower than France’s and could soon be lower than Britain’s. Taxes have been cut: the corporate rate is 22%, far lower than America’s. The Nordics have focused on balancing the books. While Mr Obama and Congress dither over entitlement reform, Sweden has reformed its pension system (see Free exchange). Its budget deficit is 0.3% of GDP; America’s is 7%.

The Free exchange article about notional savings accounts sounds a lot like the suggestions put forward in a piece in The Atlantic I talked about a few weeks ago. Such cuts would make Social Security sustainable for the foreseeable future and help to balance the budget.

So long as public services work, they do not mind who provides them. Denmark and Norway allow private firms to run public hospitals. Sweden has a universal system of school vouchers, with private for-profit schools competing with public schools. Denmark also has vouchers—but ones that you can top up. When it comes to choice, Milton Friedman would be more at home in Stockholm than in Washington, DC.

Private firms running anything with public funds has a bad reputation here in the United States for a few big reasons. The biggest is probably the money pit that is Medicare Advantage, the program that lets you get Medicare benefits via a private plan. As an example of how wasteful this program has been, a 2008 study found that the United States government was overpaying for Medicare Advantage plans by about 12%. As for school vouchers, studies of programs here in the United States have found either no impact or decreases in student achievement. While the necessary changes to how school works in the United States are massive, perhaps taking a look at how the Nordic countries implement their systems would point us in the right direction.

This may sound like enhanced Thatcherism, but the Nordics also offer something for the progressive left by proving that it is possible to combine competitive capitalism with a large state: they employ 30% of their workforce in the public sector, compared with an OECD average of 15%. They are stout free-traders who resist the temptation to intervene even to protect iconic companies: Sweden let Saab go bankrupt and Volvo is now owned by China’s Geeley. But they also focus on the long term—most obviously through Norway’s $600 billion sovereign-wealth fund—and they look for ways to temper capitalism’s harsher effects. Denmark, for instance, has a system of “flexicurity” that makes it easier for employers to sack people but provides support and training for the unemployed, and Finland organises venture-capital networks.

This is definitely something that Americans can learn from – having the government employ lots of people to provide services is not what makes “big government” a problem, it’s when government oversteps into your private life (you know, by telling you who you should sleep with, deciding what chemicals you can put in your body, and snooping through your mail). Additionally, the Nordic countries are clearly strong believers in the idea of a strong free market backed by a strong safety net to help people get back on their feet when things go bad.

The main lesson to learn from the Nordics is not ideological but practical. The state is popular not because it is big but because it works. A Swede pays tax more willingly than a Californian because he gets decent schools and free health care. The Nordics have pushed far-reaching reforms past unions and business lobbies. The proof is there. You can inject market mechanisms into the welfare state to sharpen its performance. You can put entitlement programmes on sound foundations to avoid beggaring future generations. But you need to be willing to root out corruption and vested interests. And you must be ready to abandon tired orthodoxies of the left and right and forage for good ideas across the political spectrum. The world will be studying the Nordic model for years to come.

I couldn’t have said the first three quarters of this paragraph better myself. The one major problem is that short sentence near the end, about rooting out corruption in vested interests. I probably don’t need to tell you how bad those are here in the United States. Lobbyists, Super PACS, corporations with the ability to donate as much as they want – all of these make for a system where those who have money can buy the government they want. Unless we can clean up the system and bring this country back in line with the ideals of representative democracy, it seems that it would be incredibly difficult to make the reforms that could bring us closer to something like the Nordic model.

China and Beijing to offer $19,000 subsidy to buy electric cars

Chinese firm approved to buy U.S. electric car battery company | Marketplace.org:

“The central government gives electric car buyers a check worth $9,500. Last week, amidst a public outcry over hazardous air pollution, the city of Beijing matched that sum resulting in a whopping $19,000 subsidy for people who buy electric cars.”

That is a huge subsidy. Here in the United States, the government will give you a $7,500 tax subsidy for buying an electric car. Pollution in Beijing must be terrible.

Wind energy top source for new generation in 2012

American Wind Energy Association:

“The U.S. wind energy industry had its strongest year ever in 2012, the American Wind Energy Association announced today, installing a record 13,124 megawatts (MW) of electric generating capacity, leveraging $25 billion in private investment,and achieving over 60,000 MW of cumulative wind capacity.  

The milestone of 60,000 MW (60 gigawatts) was reached just five months after AWEA announced last August that the U.S. industry had 50,000 MW installed. Today’s 60,007 MW is enough clean, affordable, American wind power to power the equivalent of almost 15 million homes, or the number in Colorado, Iowa, Maryland, Michigan, Nevada, and Ohio combined.”

Nearly one fourth of all wind capacity in one year. One fifth of all wind capacity in the last five months. Definitely a good trend. 

Conservatives upset over GDP fall due to cutting military spending

GDP Report: Spending Falls, Conservatives Upset – Business Insider:

“Conservatives are slamming President Barack Obama for a shock drop in GDP last quarter. But we’ve pointed out that the big reason for a surprise shrink was due to a fall in government spending — particularly a big plunge in military spending associated with war drawdown. That’s not a good thing for GDP growth, but it also means that the shrink isn’t a reflection of weakness in the economy or current economic policy. It’s a reflection of reduced government spending, with more to come in the form of sequestration next month. The Republican argument, as noted by RNC communications director Tim Miller, is that the economy is not in a good spot when government spending cuts combined with running large deficits creates GDP shrinkage. “

You cannot win with these people.

Republicans: “The deficit is too high! We have to cut spending!”

Average person: Okay, so let’s stop spending so much money on killing people overseas.

Republican: “The economy is shrinking because you cut spending while we have large deficits! You don’t care about people or their jobs!”

What the what?

Prices are higher in small towns than in big cities (also, a tutorial for R)

So I’ve decided to start learning about statistical computing ahead of the harder stats classes that I’ll be taking this fall (my subfield within the political science major is Empirical Theory and Quantitative Methods) and as my first little project to teach myself the basics of the R language/environment I decided to take a look at the consumer price index in small cities (population less than 50,000) versus large cities (population greater than 1,500,000). To do that, I needed to get that data, format it in a way that was R-friendly, and then present it in a way that makes sense. Since I noticed that many of the R tutorials out there aren’t very clear on some things, I decided to document my steps as I figured out what worked.

Getting data

The Bureau of Labor Statistics gives anyone access to their consumer price index database, and lets you see the information for specific regions. The two pieces of data I chose were Size Class A (over 1,500,000) and Size Class D (under 50,000) for 1993 to 2012. Retrieving the data as tables, I pasted each into a separate Numbers spreadsheet (this is on my MacBook Air) and exported them to my Downloads as “cpibig19932012.csv” and “cpi19932012.csv”, respectively. 

Getting it into R

Working in RStudio, I clicked on the Files tab in the bottom right window, clicked Home, clicked Downloads (or wherever you decided to save the .csv files), clicked More, then Set As Working Directory. This lets us access the .csv files in the R environment.

In a new script in the top left window, I import the data into variables cpi and cpiBig for the small cities and big cities, respectively:

cpi <- read.csv(file=”cpi19932012.csv”,head=TRUE,sep=”,”)
cpiBig <- read.csv(file=”cpibig19932012.csv”,head=TRUE,sep=”,”)

Making a graph

I decided that the best way to represent the data over time would be a line chart showing both data sets on the same graph. I start by deciding on a heading, “Consumer Price Index in small vs. large cities 1993-2012”:

heading = “Consumer Price Index in small vs. large cities 1993-2012”

Next, I had to set up the axes of the graph:

xlab = “Year”,
ylab = “Average Annual CPI”)

This line:

  • sets the x-axis as the years from the small cities dataset, 
  • sets the y-axis as the Average Annual consumer price index from the small cities data set,
  • tells R not to also show the data points as a scatter plot on the graph,
  • labels the x-axis as Year,
  • labels the y-axis as Average Annual CPI 

Note that to see all of your options for data to assign to axes for a dataset, you can type the following into the Console in the bottom left window:


Where you can replace “cpi” with whatever variable you’re interested in.

Then we graph the data as lines, with small cities colored red and large cities colored blue:

lines(cpi$Year, cpi$Annual, type=”l”, col=”red”)
lines(cpiBig$Year, cpiBig$Annual, type=”l”, col=”blue”)

Finally, we give the chart a legend:

legend(“topleft” , title=”City Size”, cex=0.75, pch=16,
col=c(“red”, “blue”), legend=c(“Pop. < 50,000”, “Pop. > 1,500,000”), ncol=2)

This tells R to put the legend in the top left of the chart, title it City Size, colors the lines the correct color values, and gives them the correct label for each line.

To see the output of your script, click Source and then Run in the top left window. You should have something like this show up in the bottom right window:

Plot of CPI in small and big cities

So what’s happening?

The line for small cities is consistently higher than the line for big cities. How does that make sense? Aren’t small towns full of poor rednecks, and cities full of wealthy-ish hipster urbanites? 

I asked my friend Jason Zeng, an economic analyst friend here in Berkeley about it and he gave the following explanation: it comes down to rich suburbanites and urban squalor. The poor in big cities can’t buy the quality goods that the wealthier commuters in suburbs do, so their prices are lower. There are more poor in the cities than in the suburbs, so the CPI for cities is dragged lower than the CPI for suburbs.

Obama’s impact on the rich

Paul Krugman:

The Tax Policy Center — whose work I do trust — has the Act reducing the after-tax income of the top 1 percent by 1.8 percent, the top 0.1 percent by 2.5 percent.

Meanwhile, ATRA raises taxes relative to a continuation of the Bush high-end tax cuts: after-tax income down 4.5 percent for the 1-percenters, 6.2 percent for the top 0.1 percent.

Putting this together, we have a roughly 6 percent hit to the 1 percent, around 9 to the superelite. That’s only a partial rollback of these groups’ huge gains since 1980, but it’s not trivial.

Someone go get me the world’s smallest violin!

Why the US economy went into a depression after Andrew Jackson payed off the national debt

It wasn’t because of the fact that we didn’t have the debt. It was because Jackson got rid of the national bank and required national land sales (a big market back then) take place via gold or silver:

When Jackson took office, the national debt was about $58 million. Six years later, it was all gone. Paid off. And the government was actually running a surplus, taking in more money than it was spending.

That created a new problem: What to do with all that surplus money?

Jackson had already killed off the national bank (which he hated more than debt). So he couldn’t put the money there. He decided to divide the money among the states.

But, according to economic historian John Steele Gordon, the party didn’t last for long.

The state banks went a little crazy. They were printing massive amounts of money. The land bubble was out of control.

Andrew Jackson tried to slow everything down by requiring that all government land sales needed to be done with gold or silver. Bad idea.

“It was a huge crash, and the beginning of the longest depression in American history,” Gordon says. “It actually lasted six years before the economy began to grow again.”

Remember this the next time someone tells you that we’d be better off if we abolished the Federal Reserve and switched to the gold standard.

An issue of framing

Maybe, if instead of bitching about unions and government workers and how it’s so unfair that they bargain for their pensions, it would be more productive to question why *you* don’t have one. Your company is profitable, why should all of that be going to shareholders? I say this as a man who has most of his money in the stock market, so I’m not proposing communism here, I like my healthy returns just as much as the next guy.

A lot of problems in America would go away if our society demanded that our successes be shared. Not redistributed – I’m not saying we should have a wealth tax, so don’t come at me with that attack either. I’m saying that if management at companies decided to reinvest their profits in the livelihoods of their employees, there would be many, many benefits – better quality of life for the workers, lower crime rates (you don’t steal a television when you can afford a nice one yourself), and higher growth thanks to increased consumption.

This isn’t a new idea – Ford did it decades ago. A shame we tend to forget the lessons of the past.