Category: Macroeconomics

A New Price Tag for Stimulus: $814 Billion

Last week the Congressional Budget Office released updated budget projections — a treasure trove of information for budget wonks. For example, CBO released new estimates of the direct budget costs of the 2009 stimulus bill, officially known as the American Recovery and Reinvestment Act (ARRA).

CBO now estimates that ARRA will cost $814 billion from 2009 through 2019. That’s up from the original $787 billion estimate, but down from the revised, $862 billion estimate released in January.

Spending exceeded original expectations because both unemployment and food prices rose more than anticipated, driving up the cost of extended unemployment benefits and expanded food stamp benefits. On the other hand, spending estimates have come down because “recently enacted legislation rescinded some of the funds appropriated in ARRA and limited the period in which higher payments under the Supplemental Nutrition Assistance Program [formerly known as food stamps] will be available.” (CBO did not update estimates for the tax provisions in ARRA.)

For a discussion of why the $814 billion figure (formerly known as the $862 billion figure or the $787 billion figure) is not really the right measure of stimulus, see this post.

On a related note: Earlier today, CBO released an updated analysis of the economic effects of ARRA. It estimates that ARRA reduced unemployment in the current quarter by 0.8 to 2.0 percentage points. In other words, without that stimulus CBO believes that the unemployment rate today would be between 10.3 percent and 11.5 percent, not the 9.5 percent reported in July.

Double Dippin’

I am more than a week behind on this, but in case you missed it, Merle Hazard has a new ditty out called “Double Dippin’.” This comes with a warning: the opening scene may make you crave ice cream:

Rising concern about a double dip makes sense given the weakness of recent macroeconomic data. On the other hand, it would be highly unusual for the United States to fall into recession with such a steep yield curve.

Fiscal Policy in Interesting Times

Back on August 5, I gave a speech at the Retirement Research Consortium’s annual conference “Retirement, Planning, and Social Security in Interesting Times.” I’ve been saving up the link to the C-Span video to share during my vacation.

Here it is. (I hope the link still works; if not, I will fix it once I get back on the grid.)

Keeping with the spirit of the event, I spoke about “Fiscal Policy in Interesting Times.” And with that title, I simply had to mention the famous curse, “May you live in interesting times.”

As the helpful folks at Wikipedia point out, chances are good that this curse originated in England or the United States not, as often alleged, China. Regardless of its origin, it’s still an excellent curse, which I remember my mom invoking often in my childhood (rhetorically, I should note, not at me). For an audience of policy researchers, however, it’s a curse with a silver lining. We may not want interesting things to happen (financial crises, trillion-dollar deficits, 9.5% unemployment, etc.), but they do increase the odds that policymakers, journalists, and the public will pay attention to what we are saying (whether they should is a separate question …).

What makes today particularly interesting is that we face lots of uncertainty and major challenges. That a potent mix. We know less about what’s going on than usual, but we are playing for bigger stakes. Case in point: Fed Chairman Ben Bernanke’s recent statement about the outlook being “unusually uncertain” while the economy still struggles to heal from the financial crisis. Is it a rebound or a relapse? I fear it may be the latter, but we just don’t know.

The meat of the speech considers the economic and fiscal uncertainties and challenges we face. For example, I lament the ridiculous uncertainty in our tax system. Not only do we not know what will happen in 2011, after the scheduled expiration of the 2001 and 2003 tax cuts, we don’t even know what the tax code is in 2010. Will there be an AMT patch? A retroactive change to the temporarily extinct estate tax? What about the (in)famous tax extenders?

I wrap up by sharing one other thing I learned from Wikipedia. The “interesting times” curse is apparently the mildest of a trio of curses.

If you are feeling really mad, the appropriate curse is “May you come to the attention of people in authority.” Which again is rather a mixed curse for policy researchers who want policymkaers to pay attention.

And if you are really, really mad, then you should bring out the worst of the curses: “May you find what you are looking for.”

P.S. At the moment, I am looking for puffins, humpback whales, glaciers, and grizzly bears.

“Tracking” the Economy

The fine folks at the Association of American Railroads are out with their latest edition of Rail Time Indicators. Total traffic (carloads plus intermodal) in July was about 11% higher than the dismal levels of a year ago, but remains about 10% below earlier years:

The rebound has been weaker in carloads (think bulk materials like coal, grains, minerals, and chemicals plus autos); they are up about 4% over 2009:

And stronger in intermodal (think trailers and containers), which are up about 17%:

House Prices: Demographics Giveth and Taketh Away

Over at the Bank for International Settlements, Elod Takats has a new working paper that examines how demographics may affect asset prices (ht Torsten Slok). As he notes, standard economic theories suggest that aging will lead to lower asset prices. In an overlapping generations model, for example:

[T]he young save for old age by buying assets, while the old sell assets to finance retirement. This asset transfer can happen directly or through institutions such as pension funds. In this setting, the changes in the relative size of asset buyers (the young) and sellers (the old) have consequences for asset prices. In particular, the asset purchases of a large working age generation, such as the baby boomers in the United States, drives asset prices up. Conversely, if the economy is ageing, ie the subsequent young generation is relatively smaller, then asset prices decline.

Takats tests this theory on international data on house prices and finds a significant link with population age.  He uses that relationship to estimate how much demographics affected house prices in recent decades and to project, based on demographic estimates from the UN, how population aging will affect house prices in the future:

He concludes that demographic trends boosted U.S. house prices by almost 40% over the past four decades. Given current population trends, however, his model predicts that aging will trim about 30% off of house prices over the next forty years.

I should emphasize that this does not mean that house prices will actually fall over that period. Other factors, e.g., growing incomes, should continue to boost prices. But house prices will now face a demographic headwind–blowing at about 80 basis points per year–rather than a demographic tailwind.

These headwinds will be even stronger in Europe:

We’re Still #1 (Unfortunately)

The Bureau of Economic Analysis rewrote history on Friday. Along with GDP data for the second quarter, BEA also published revisions to its GDP estimates since the start of 2007.

Bottom line: The recession was worse than originally thought. The economy contracted by 4.1% from peak to trough (Q2 2008 to Q2 2009), up from the 3.9% previously estimated.

The Great Recession has thus solidified its position as the worst downturn since World War II:

As painful as it has been, the recession remains a far cry from the Great Depression, when economic activity plummeted almost 27%:

Which raises an important question: Just how close did the Great Recession get to being the Great Depression 2.0?

Mark Zandi and Alan Blinder took a crack at that question in a paper released last week.  Their answer: If it weren’t for aggressive monetary and fiscal policy responses, the U.S. economy would have contracted more than 12% during 2008, 2009, and 2010 — about half a Great Depression (and arithmetically, but not economically, comparable to the demobilization after WW II).

A Silver Lining in Second Quarter GDP?

Last Friday the Bureau of Economic Analysis released its first look at GDP growth in the second quarter. BEA estimates that the economy grew at a moderate 2.4% annual pace in the quarter, notably slower than the 3.7% pace in the first quarter and the 5.0% pace in the fourth quarter of 2009 (both those figures were revised in this release).

As usual, I think it’s helpful to break down economic growth into its key components. The following chart illustrates how much various types of economic activity contributed to (or subtracted from) second quarter growth:

The chart illustrates the silver lining in an otherwise tepid GDP report: every major category of domestic demand expanded in the second quarter. Consumers, businesses, export markets, and governments all increased their purchases. That’s a good sign. Indeed, you have to go back more than five years, to the first quarter of 2005, for the last time that happened.

Investment showed particular strength. Business investment in equipment and software (E&S) grew at a 22% pace, thus adding about 1.4 percentage points to overall GDP growth. Boosted by the end (hopefully permanent) of the new homebuyer tax credit, housing investment grew at a bubble-like 28% pace (adding about 0.6 percentage points to GDP). And business investment in new structures recorded its first gain in two years

Despite solid growth in disposable incomes–up 4.4% adjusted for inflation–consumer spending grew at only a 1.6% pace.  As a result, the saving rate increased to 6.2%, compared with 5.5% in the first quarter.

And then there are imports. As I’ve discussed before, BEA calculates GDP by adding up all the components of demand for U.S. products–consumers, businesses, governments, and export markets–and then subtracting the portion of that demand that is supplied by imports. That means that any growth in imports appears as though it subtracts from overall economic growth.

That’s what happened in the second quarter. Imports grew at a brisk 29% pace, thus subtracting (using BEA’s accounting approach) 4.0 percentage points from overall growth. Which is why all those blue bars in the graph net out to only 2.4% growth in GDP.

I should hasten to add that this does not actually mean that imports are bad for growth. The big red bar is an accounting convention, not a measure of economic impact. Indeed, many imports are essential to our economy, at least in the foreseeable future (think oil for transportation and coffee for Starbucks).

I should also note that BEA’s calculation of contributions to GDP growth, which I graphed above, is subject to the same criticism that I’ve leveled at the claim that consumer spending is 70% of the economy. In a perfect world, an appropriate share of the imports (the red bar) would be netted against each of the components of demand (the blue bars). The result would be a graph of contributions that would truly illustrate how much each category of demand actually contributed to U.S. GDP growth. I will take a crack at that in the future.

A New Low in Home Construction

Yesterday’s housing data were suitably glum, with single-family starts and permits both down (0.7% and 3.4%, respectively).

And what about my favorite metric, the number of houses under construction? It fell a hefty 5.3%. Which puts the number of single-family homes under construction at its lowest level in decades:

After the expiration of the new home buyer tax credit, only 286,000 single-family homes were under construction at the end of June. That’s down modestly from the 298,000 to 318,000 levels of the past year, when it looked construction was trying to put in a bottom. Just one more sign of continued weakness in housing markets.

The Rise and Fall of World House Prices

The Bank for International Settlements has a great chart of house prices in its latest annual report (p. 39):

The rise and fall of U.S. house prices (red) is painfully familiar. The U.K. (brown) outdid the U.S. on the upswing, but hasn’t corrected quite as much. (Some other European nations also saw strong booms, but they are averaged into the figures for the Euro area (green)).

House prices in Canada (black) and Australia (olive green) have been showing notable strength. But is it sustainable? Or are some places (e.g., Vancouver) in bubbles?

And then there’s Japan (blue) and its persistent declines. If you worry that the U.S. is turning Japanese (an increasingly popular view with 10-year Treasury rates below 3%), you may want to ponder what a continuing, relentless decline in house prices would do the American financial system.