What does it mean that Martin Feldstein (hat tip Mark Thoma) is now one of my favorite economists, when it comes to commenting on the current economic crisis? Feldstein’s analysis:
- Evidence of recovery so far is thin.
- The stimulus package will kick in and provide a short period of growth.
- But as the stimulus wears off, growth will fade away again.
- The Obama Administration’s policies are pointed in roughly the right direction but not big enough to turn the tide.
Here’s his conclusion:
The positive effect of the stimulus package is simply not large enough to offset the negative impact of dramatically lower household wealth, declines in residential construction, a dysfunctional banking system that does not increase credit creation, and the downward spiral of house prices. The Obama administration has developed policies to counter these negative effects, but, in my judgment, they are not adequate to turn the economy around and produce a sustained recovery.
Having said that, these policies are still works in progress. If they are strengthened in the months ahead – to increase demand, fix the banking system, and stop the fall in house prices – we can hope to see a sustained recovery start in 2010. If not, we will just have to keep waiting and hoping.
By James Kwak
This guest post is by occasional contributor Ilya Podolyako, a third-year student at the Yale Law School and an executive editor of the Yale Journal on Regulation.
In my last post, I compared Obama’s plan for the automakers to that of the Chinese government. I concluded that the two shared goals, but that these goals fit poorly into the traditional American ethos of free enterprise. For better or worse, the administration will have to remedy this mismatch sometime soon, either by letting the automakers fail or by openly stating that jobs, national pride, and a green fleet justify a government-backed industry.
Some of the comments to that piece strongly favored the latter course of action. Accordingly, I think it is worthwhile to take a normative look at directed industrial policy generally. In the abstract sense, this system is the opposite of laissez-faire capitalism – the government owns enterprises and dictates both the nature and quantity of their output. This description naturally evokes images of the USSR, Cuba, or the People’s Republic of China (before 1992), all countries with “command” economies. The distinctive characteristic of these nations, however, was not the presence of state-owned enterprises (SOEs) per se, but the absence of a legal, noticeable private sector.
Countries like Sweden, South Korea (before 1988), and, indeed, the modern China have demonstrated that directed industrial policy is not an all-or-nothing game.
One concept that has gotten a lot of attention the last few months is the household balance sheet: the relationship between household assets and liabilities, and what that means for household behavior (consumption versus saving). Though not the precipitating factor in the current crisis, the weakening of household balance sheets (fewer assets, same liabilities, less net worth, more anxiety) has likely had a significant effect in depressing consumption, which has been the single largest factor in our recent decline in GDP. The Federal Reserve recently released a snapshot of the household balance sheet in its triennial Survey of Consumer Finances, so we can see what the situation looks like in some detail. The survey was actually taking in 2007, but with a few adjustments we can see what the current balance sheet looks like.
On the headline level, median income fell from $47,500 to $47,300 (all figures are in constant 2007 dollars), while median net worth (assets minus liabilities) grew from $102,200 to $120,300. No surprise there: we already knew wages stagnated, while real estate and stocks appreciated. However, since the survey was conducted in 2007, median net worth fell by 17.8% according to the Fed estimate, to $99,300, and that’s just to October 2008. Given that the cumulative returns of the stock market have been about -15% since October 31, and that housing prices have fallen as well (and the Fed used a housing index that has fallen less than the Case-Shiller index*), that net worth is probably between $90,000 and $95,000 – significantly less than in 2004, and back around 1998 levels ($91,300).
By now I imagine you know that GDP contracted at an annual rate of 3.8% in Q4, beating economists’ “consensus” prediction of a 5.4% decrease. (Why do people insist on calling an average of forecasts a “consensus?”) A few thoughts:
- You can waste a lot of time looking over GDP statistics. Go to the news release page and download the Excel tables in the right-hand sidebar.
- The “consensus” is that the reason for the positive surprise was an unexpected increase in inventories. (Goods added to inventory count as production, even if they aren’t bought off the shelves.) But . . .
- With any set of numbers that add up to their totals, you can’t really find true causality. All you can do is point out numbers you think are particularly interesting. Another way to look at it is that the numbers were helped out a lot by short-term deflation, particularly due to falling gasoline prices. Personal consumption expenditures (PCE) , the biggest component of GDP by far, fell at an 8.9% annual rate in nominal terms. But the price deflator for PCE fell by so much – an annual rate of 5.5% – that in real terms PCE only fell at a 3.5% annual rate. That fall in prices was almost entirely due to the fall energy prices, which is highly unlikely to be repeated. But do people consciously reduce their spending in nominal or real terms? Nominal, I would think. So, as I “predicted” in December (I always have so many caveats that it’s not really fair to say that I ever predict anything), Q4 was better than expected, but Q1 is likely to be worse than predicted (before today, that is, since everyone is revising their Q1 forecasts down right now), since people will keep ratcheting down spending in nominal terms, but we won’t be bailed out by such a steep fall in prices.
- The savings rate climbed from 1.2% to 2.9% – but it still has a long way to go (it was over 10% in the 1980s).
- Real expenditures on food were down 4% (that’s not an annual rate, that means people spent 4% less on food in Q4 than in Q3). Ouch. I hope that was mainly a shift from restaurants to eating at home.
Back to more useful things.
We got one of our last batches of economic data for this calendar year today, and there may have been a glimmer of good news in there. In the news stories about the November data, I read that personal income went down, but real personal consumption went up, and the savings rate went up, which I found confusing, so I looked directly at the Bureau of Economic Analysis news release.
To summarize (all numbers are November’s change from October), personal income went down by 0.2%, and disposable personal income (after taxes) went down 0.1%, but in real terms (after adjusting for inflation, or deflation in this case), disposable personal income went up by 1.0%, which is huge (remember, that’s month over month). This was entirely due to falls in food and energy prices (mainly gasoline), since the core price deflator (excluding food and energy) was flat. Of that 1.0% increase in real disposable personal income, 0.6% turned into increased consumption, and 0.4% turned into increased saving, raising the savings rate from 2.4% to 2.8%.
Barack Obama has been getting a mountain of unsolicated economic advice; here’s one selection. In case he needs more to read, we posted our long-term recommendations on the WSJ Real Time Economics blog today. In short, we see a long-term challenge – and opportunity – to shift resources from the financial sector and into what is colloquially called the “real economy.” This will require, among other things, investment in education, openness to immigration, consolidated financial regulation, and assistance for workers affected by restructuring.
Posted in Op-ed
Tagged real economy
Over in the real economy, perhaps the biggest story is the impending and highly likely merger of GM and Chrysler, in which GM would swap its 49% stake in GMAC, its consumer finance company, to Cerberus (which owns the other 51%), in exchange for Chrysler, which is currently owned by Cerberus. It seems that the deal may hinge on financial assistance from the government, at least according to six governors attempting to pressure the dynamic duo of Paulson and Bernanke to help out. Until Thursday, GM was seeking $10 billion from the Treasury Department’s $700 billion bailout fund – yes, the same one that has been used to recapitalize banks – but Paulson’s preference is that GM tap a $25 billion low-interest loan program set up by the Energy Department in September.
It’s easy to argue for bailing out the auto industry, with its hundreds of thousands of factory workers, as opposed to the financial sector and its Wall Street bonus babies. (It’s less easy to argue for bailing out Cerberus, which is a private equity firm.) But I want to point out one difference.