(What’s Left of) Our Economy: U.S. Growth Takes a Bubbly Turn

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Barack Obama, bubble decade, Financial Crisis, GDP, gross domestic product, housing, inflation-adjusted growth, personal consumption, real GDP, Trump, {What's Left of) Our Economy

As encouraging as last week’s official report on U.S. economic growth was – with the rate picking up even more than expected in the second quarter despite numerous forecasts of continued and even worsening slowdown – one big fly was visible in this ointment. The quality of the nation’s expansion has been weakening considerably this year, and as known by RealityChek regulars, growth overly dependent on the wrong engines can inflate the kinds of bubbles that burst so disastrously a decade ago, and triggered a frightful global financial crisis and a deep, punishing recession.

The specific internals of these reports on the gross domestic product (GDP) to track for signs of bubble-ization are personal consumption and housing. For their bloat provided most of the hot air during the 2000s (along with most of the actual growth). And the GDP report for the third quarter of this year (the most recent data available), as was the case since the second quarter, showed that these two GDP elements have driven growth much more powerfully than during that deceptively prosperous era. Further, during the last two quarters overall, growth has looked far bubblier by this measure than at any time during former President Barack Obama’s administration, with one exception. In fact, the second quarter of this year was the bubbliest ever. (More specifically, since 2002, when government figures enabled these calculations to be made.)

The table below shows the actual annual figures from 2002 through 2018 (leaving out only the recession years 2007-2008, and 2008-2009). The left-hand column shows how much total inflation-adjusted growth (the growth rate most closely followed by students of the economy) in each year was fueled by growth in personal consumption plus growth in housing. The center column shows the annual after-inflation growth rate for that year. And the right-hand column shows the difference between that toxic combination’s growth rate, and growth itself.

That ratio is important because it helps makes clear the relationship between growth’s health on the one hand and its rate on the other. Put differently, it makes possible answering the question of whether and when the U.S. economy has been growing acceptably without excessive contributions from the toxic combination.

                      percent of growth       actual growth rate          difference

02-03:                     91.11%                     2.86%             31.86 times greater

03-04:                     74.65%                    3.80%              19.64 times greater

04-05:                     79.25%                    3.51%              22.58 times greater

05-06:                    58.86%                     2.86%              20.58 times greater

06-07:                    27.01%                     1.88%              14.37 times greater

09-10:                    43.77%                     2.56%              17.10 times greater

10-11:                    82.80%                    1.55%               53.42 times greater

11-12:                   59.64%                     2.25%               26.51 times greater

12-13:                   71.58%                    1.84%               38.90 times greater

13-14:                   83.80%                    2.54%               32.99 times greater

14-15:                   96.58%                    2.91%                33.19 times greater

15-16:                127.04%                    1.64%               77.46 times greater

16-17:                  81.13%                    2.37%               34.23 times greater

17-18:                 69.55%                     2.93%                23.74 times greater

One conclusion that leaps out from these results: They bounce around considerably. But they show that growth during the Obama years was somewhat bubblier than during the previous and notorious bubble decade (even leaving out the huge jump in 2015-16), and that its health from that anomalous year steadily improved during the first two years of the Trump administration.

Especially noteworthy: The best Trump growth year (2017-18) was significantly less bubbly than the best Obama year (2014-15) even though that Trump year saw somewhat faster growth.

But what a turnaround since then! As the table below shows, major growth quality improvement continued into the first quarter of this year. Was the economy finally demonstrating the ability to grow strongly by using much safer engines? Unfortunately not, as growth’s quality simply collapsed in the second quarter, and even the third quarter improvement registered so far has kept it in the danger zone. 

                       percent of growth           actual growth rate           difference 

1Q 19:                   24.62%                            3.06%              8.05 times greater

2Q 19:                 150.42%                            2.00%            75.21 times greater

3Q 19*                102.70%                            2.11%            48.67 times greater

*still preliminary

On a standstill basis, the economy lately has looked bubblier than at any time during the Obama years, and in fact is approaching its bubble decade condition. During that period, personal consumption and housing combined regularly stayed above 73 percent of real GDP. Its annual peak came in 2005 – 73.50 percent.

The toxic combination’s share of the economy fell fairly steadily thereafter until 2012 – as did the growth rate itself – and then began rising again (while growth itself continued to slump) from 70.62 percent to 72.58 percent in 2016.

The trend continued into 2017 (72.96 percent) before the percentage dropped the following year to 72.69 – as growth itself picked up.

After falling further in the first quarter of this year (to 72.35) as growth itself rose further, the toxic combination’s role swelled to 72.90 percent in the third quarter – not far off the bubble decade levels. Unfortunately, growth itself has tailed off dramatically to 2.11 percent annualized.

Overall, the Trump economy still remains less bubbly

than the Obama economy. For the 32 months during which the former President was in charge of economic performance, the toxic combination generated 80.74 percent of total growth. During the nine months of Mr. Trump’s economic stewardship, that figure stands at 72.64 percent. But the gap has been closing this year, and as long as it keeps narrowing, President Trump’s economic legacy will remain very much up in the air.

(What’s Left of) Our Economy: Why Amazon.com Could Kill the Entire Economy

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Amazon.com, bubble decade, bubbles, consumption, credit, Financial Crisis, gig economy, Great Depression, Great Recession, Henry George School of Social Science, housing, housing bubble, production, productivity, Robin Gaster, {What's Left of) Our Economy

Yesterday I was in New York City, on one of my monthly trips to attend board meetings of the Henry George School of Social Science, an economic research and educational institute I serve as a Trustee. And beforehand, I was privileged to moderate a school seminar focusing on the possibly revolutionary economic as well as social and cultural implications of Amazon.com’s move into book publishing.

You can watch the eye-opening presentation by economic and technology consultant Robin Gaster here, but I’m posting this item for another reason: It’s an opportunity to spotlight and explore a little further two Big Think questions raised toward the event’s end.

The first concerns what Amazon’s overall success means for the rough balance that any soundly structured economic needs between consumption and production. As known by RealityChek readers, consumption’s over-growth during the previous decade deserves major blame for the terrifying financial crisis and ensuing Great Recession – whose longer term effects have included the weakest (though longest) economic recovery in American history. (See, e.g., here.)

Simply put, the purchases (in particular of homes) by too many Americans way outpaced their ability to finance this spending responsibly, artificially and unprecedentedly cheap credit eagerly offered by the country’s foreign creditors and the Federal Reserve filled the gap. But once major repayment concerns (inevitably) surfaced, the consumption boom was exposed as a mega-bubble that proceeded to collapse and plunge the entire world economy into the deepest abyss since the Great Depression of the 1930s.

As also known by RealityChek regulars, U.S. consumption nowadays isn’t much below the dangerous and ultimately disastrous levels it reached during the Bubble Decade. And one of the points made by Gaster yesterday (full disclosure: he’s a personal friend as well as a valued professional colleague) is that by using its matchless market power to squeeze its supplier companies in industry after industry to provide their goods (and services, in the case of logistics companies) at the lowest possible prices, Amazon has delivered almost miraculous benefits to consumers (not only record low prices, but amazing convenience). But this very success may be threatening the ability of the economy’s productive dimension to play its vital role in two ways.

First, it may drive producing businesses out of business by denying them the profitability needed to survive over any length of time. Second, Amazon’s success may encourage so many of its suppliers to stay afloat by cutting labor costs so drastically that it prevents the vast majority of consumers who are also workers from financing adequate levels of consumption with their incomes, not via unsustainable borrowing. Indeed, as Gaster noted, it may push many of these suppliers to adopt Amazon’s practice of turning as much of it own enormous workforce into gig employees – i.e., workers paid bare bones wages and denied both benefits and any meaningful job security. And that can only undermine their ability to finance consumption responsibly and sustainably. 

I tried to identify a possible silver lining: The pricing pressures exerted by Amazon could force many of its suppliers to compensate, and preserve and even expand their profits, by boosting productivity. Such efficiency improvements would be an undeniable plus for the entire economy, and historically, anyway, they’ve helped workers, too, by creating entirely new industries and related new opportunities (along, eventually, with higher wages). Gaster was somewhat skeptical, and I can’t say I blame him. History never repeats itself exactly.

But to navigate the future successfully, Americans will need to know what’s emerging in the present. And when it comes to the economic impact of a trail-blazing, disruption-spreading corporate behemoth like Amazon, I can think of only one better place to start than Gaster’s presentation yesterday –  his upcoming book on the subject. I’ll be sure to plug it here on RealityChek as soon as it’s out.

(What’s Left of) Our Economy: What John Oliver Didn’t Tell You About Trade – or About RealityChek

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"Last Week Tonight, BMW, bubble decade, China, consumer prices, domestic content, Financial Crisis, Global Imbalances, Jobs, John Oliver, manufacturing, Peter Navarro, productivity, tariffs, Trade, Trade Deficits, Trump, wages, {What's Left of) Our Economy

In his segment last night on President Trump’s trade policy, HBO Will Rogers wannabe John Oliver had some good fun at my expense due to a technical glitch here on RealityChek, and I deserved it. In the course of making the case why Mr. Trump’s tariff-centered approach is dangerous economic Know-nothing-ism, the (profanity-philic) comedian argued that the President’s main trade adviser, Peter Navarro, once cited me as one of only two economists that agree with his views on the harm of trade deficits – and then correctly pointed out that I told an inquiring journalist soon after that I don’t hold an economics degree. (I recounted these events in this post.)

Oliver proceeded to go on to suggest that I don’t hold a degree in website design, either (and maybe nothing else?), spotlighting the RealityChek bio section where my portrait hasn’t been rotated correctly. And to that I plead “guilty.” I’m a stubborn techno-phobe and have never managed to figure out how to present the photo rightside up. But first impressions are important, and I should have somehow taken care of it. So my bad.

Oliver deserves credit on two other counts as well. First, he acknowledges that trade policy is complicated, and that unfettered trade can have major downsides. Indeed, he even specifies that for trade’s overall net gains to be realized, it needs to be “done right,” and that valid grounds exist for complaints about China’s trade policies in particular. Second, he asked one of his producers to check whether or not I still lack an economics degree.

But what’s also noteworthy (and not so commendable) about that instance of meticulousness is that, although this producer and I wound up having a fairly lengthy conversation about trade policy, my only “contribution” to the show was strengthening Oliver’s attack on Navarro. And that’s really too bad for anyone seeking genuinely to understand the pros and cons, and ins and outs of trade policy. Because had Oliver and his staff gone beyond my bio page, here’s some of what they would have found:

>Despite Oliver’s claim that tariffs are to be avoided in large part because they make goods for consumers and producers who use the tariff-ed products more expensive, there’s little evidence that, in today’s U.S. economy, many producers have the pricing power to pull this feat off. For that, you can thank a combination of the lingering impact of the last financial crisis and ensuing Great Recession (which resulted in part from American leaders ignoring the huge, trade-centered global imbalances that were building up during the bubble decade). And let’s not forget the longer-lasting wage stagnation that’s afflicted so much of the American labor force (which can also be blamed in part on trade policies that have exposed this workforce to penny-wage foreign competition and/or predatory practices by low- and high-wage foreign competitors alike).

>Although Oliver contends that Trump-like concerns about trade policy’s impact on U.S. domestic manufacturing overlook how much larger American industry is today than in 1984, during the current economic recovery, after-inflation manufacturing output has yet to regain its pre-recession production levels. And perhaps not so coincidentally, all the while, the manufacturing trade deficit has surged to the point where it’s likely to hit $1 trillion this year (in pre-inflation dollars). In other words, that’s a lot of American demand for manufactured products that was supplied from foreign economies rather than from the U.S. economy. 

>Oliver accepts as gospel the view that manufacturing’s recent employment losses are due mainly to the sector’s productivity gains, not to failed U.S. trade policies. But industry’s productivity performance has been so poor for so long that it’s lost its historic role as the country’s labor productivity growth leader. Further, it’s anything but difficult to find highly credentialed economists who finger inadequately dealt-with foreign competition instead.

>Oliver makes much of how Mr. Trump’s tariffs on steel and aluminum will cost many more jobs than they save or create by observing that they will harm metals-using industries – which employ many more Americans than the metals producers. Yet since the metals tariffs began to be imposed, these sectors have experienced growth and employment gains at least as strong as those of the rest of manufacturing.

>Like so many journalists, Oliver describes BMW as an American manufacturing gem because it builds so many of its vehicles in South Carolina – and an example of how the Trump trade approach simplistically assumes that domestic and foreign companies can be easily distinguished. Like many journalists, however, Oliver ignores readily available U.S. government data making clear that BMW in the United States mainly snaps together foreign-produced parts and components, and therefore adds relatively little value to the American economy.

>According to Oliver, Trump’s metals tariffs are also boneheaded because they are “pissing off the leaders of every other country on earth” and therefore sandbagging any hope of prevailing in trade diplomacy against the world’s main metals trade bad guy, China. Too bad he never mentioned that, as China’s metals glut ballooned, the United States emerged as far and away the world’s metals dumping ground of last resort because other metals-producing countries responded to Chinese pressure on their own industries either by transshipping Chinese metals, or stepping up their own exports to the United States to compensate. I.e., a global problem required a global response. P.S.: The world’s leading economies have been vowing to work on multilateral responses to China’s overcapacity for nearly two years, and have produced exactly nothing in the way of concrete results.

>Most disappointing, I asked Oliver’s fact-checker why her boss puts so much stock in economists’ views when nearly all of them (including those so confident in orthodox trade theories and their policy implications) clearly flunked the biggest test they’d faced in decades: warning that the economy of the previous decade was an immense bubble whose bursting would bring disaster. Or figuring out that anything was fundamentally wrong with the American economy in those years. Her response: Many of them did – which will come as a major surprise to anyone in the mid-2000s who owned a home or a share of stock.

There’s more, but let’s close with this irony: Even though Oliver made much of China’s decision to impose some retaliatory tariff on U.S. goods, in contrast to a Navarro prediction, a team of high level Chinese negotiators will arrive in Washington, D.C. in a few days to try and end a trade confrontation that has hammered their country’s stock markets and currency, and that, according to numerous reports, has President Xi Jinping worried that he’s overplayed China’s economic hand. Any chance that any of this upcoming highlight of this week’s news will be reported on the next edition of “Last Week Tonight”?

(What’s Left of) Our Economy: America’s Productivity Blahs Continue

Tags

bubble decade, Financial Crisis, Great Depression, labor productivity, manufacturing, multi-factor productivity, non-farm business, productivity, {What's Left of) Our Economy

Although productivity is widely seen by informed students of the U.S. economy as the biggest key to ensuring the nation’s prosperity over the longest run, the release of the government’s new figures on these measures of efficiency rarely generates many headlines. Last week was no exception, but as always, they’re worth considering in detail.

In this case, last Thursday’s new report on labor productivity – the most current but narrower of the two measures  — were most notable not for the preliminary estimate of the results for the first quarter of this year (which we’ll summarize below), but for revisions going back to 2013. And unfortunately, these resulted in little change to the feeble performance already reported in creating a unit of output per each person hour worked. Indeed, for manufacturing, the revisions amounted to a not-negligible downgrade.

Here are the two sets of figures for annual percentage gains in labor productivity between 2013 and 2017 for the non-farm business sector – the government’s main proxy for the entire American economy.

  Previous results                                                              Revised results

2013 +0.3 percent                                                               +0.3 percent

2014 +1.0 percent                                                               +1.0 percent

2015 +1.3 percent                                                               +1.2 percent

2016  -0.1 percent                                                                          0

2017 +1.2 percent                                                                +1.3 percent

Like I said, no important differences here. In fact, on net, the revisions brighten the picture marginally. Not so for manufacturing:

  Previous results                                                                Revised results

2013 +0.9 percent                                                                 +0.9 percent

2014    0                                                                                        0

2015 +0.2 percent                                                                 +0.3 percent

2016 +0.4 percent                                                                 -0.4 percent

2017 +0.7 percent                                                                +0.4 percent 

Here we see a marked weakening, especially for the last two years. And the extent of manufacturing’s lousy record is even clearer from comparisons among the current economic recovery and its two predecessors.

non-farm business                                                                  manufacturing

90s expansion: (2Q 1991 to 1Q 2001) +23.25 percent          +45.86 percent

bubble expansion (4Q 2001 to 4Q 2007) +16.03 percent      +30.23 percent

current expansion: (2Q 2009 to present)  +9.70 percent          +9.69 percent

Not only has labor productivity growth slowed much more dramatically in manufacturing than in the rest of the economy between the expansion of the 2000s – which of course ended in the worst national and global financial crisis since the Great Depression — and the current expansion. Manufacturing labor productivity actually has been growing more slowly in absolute terms during this recovery than non-farm business labor productivity. And it’s not as if non-farm business labor productivity has been killing it.

Those preliminary results for the first quarter of this year extend this narrative. On a quarter-to-quarter basis, both non-farm business labor productivity and manufacturing labor productivity increased – by 0.7 percent and 0.5 percent at an annual rate, respectively. But the revisions revealed a major slowdown in manufacturing labor productivity growth on a quarterly basis (from a downwardly revised — and kind of fishy — 4.5 percent on an annual basis) and a slight pickup in non-farm business productivity growth (from no growth at all at the end of last year).

The latest results for the broader measure of productivity growth – multi-factor productivity, which includes a range of inputs broader than just worker hours – showed a small uptick, too. So even though they’re not as current as the labor numbers, maybe we’re seeing the beginnings of lasting improvement in productivity growth generally speaking. But as the recovery-to-recovery data still make clear, the United States still has a long way to go before it genuinely shakes off its productivity blahs.

(What’s Left of) Our Economy: The Good Economic News that Trump Has Missed

Tags

bubble, bubble decade, business spending, CNBC, Commerce Department, Financial Crisis, GDP, gross domestic product, housing, inflation-adjusted growth, investment, Jeff Cox, personal consumption, real GDP, Trump, Wilbur Ross, {What's Left of) Our Economy

Here’s how badly the latest figures on U.S. economic growth (for the first quarter of this year) have been misunderstood: Even the Trump administration, which has displayed no hesitation to take credit for good economic news even when undeserved, failed to note a big possible silver lining.

As noted in last week’s coverage of these figures on gross domestic product (GDP), the inflation-adjusted growth figure reported by the Commerce Department in its initial read for the first quarter was a measly 0.69 percent. That’s the worst such performance since the 1.19 percent annualized contraction in the first quarter of 2014.

So it’s not entirely surprising that Commerce Secretary Wilbur Ross seized on this discouraging news to emphasize that “We need the President’s tax plan, regulatory relief, trade renegotiations and the unleashing of American energy sector to overcome the dismal economy inherited by the Trump Administration. Business and consumer sentiment is strong, but both must be released from the regulatory and tax shackles constraining economic growth.”

But especially given the rise in sentiment noted by Ross, it’s at least somewhat surprising that he didn’t make more of the strong rise in business spending revealed in the new GDP report. For it lends significant support to President Trump’s claim that his election is already liberated many of the “animal spirits” – i.e., a surge in business optimism – often needed to spur more hiring and especially more corporate spending on new plant and equipment.

For example, in absolute terms, such business spending rose sequentially by 9.1 percent at an annualized rate in the first quarter. That’s the fastest rate since the fourth quarter of 2013, when it jumped by 9.2 percent.

At the same time, back at the end of 2013, the economy expanded at a 3.90 percent real annual rate. In the first quarter of this year, after-inflation growth was only 0.69 percent annualized. So business spending punched far above its weight as a growth engine. As RealityChek regulars know, that’s an encouraging indication that the nation’s growth recipe is becoming more production oriented, and therefore healthier and more sustainable in the long run.

In fact, higher business spending accounted for all of the first quarter’s growth. (Other sectors of the economy contributed to and subtracted from the overall result, too, but their net effect was zero.) As a result, its relative contribution to expansion was its strongest since the first quarter of 2014, when such investment boosted real GDP by 0.84 percentage points but the economy actually contracted at a 1.19 percent annual rate.

And on a standstill basis, business investment in the first quarter represented its highest share of real GDP (13.34 percent) since the third quarter of 2015 (13.48 percent).

Not that one quarter’s results – which will be revised twice more in the next two months alone – are anywhere close to definitive. But the Trump administration had much more to crow about than it seemed to realize.

At the same time, the new GDP data showed that the economy remains way too personal consumption- and housing-heavy – the toxic combination whose bloat so powerfully inflated the bubbles that produced the previous decade’s global financial crisis.

As previously reported on RealityChek, at their pre-crisis peak, in the second quarter of 2005, the combined consumption and housing share of real GDP hit 73.27 percent. The comparable first quarter total was 73 percent even – not much lower. And that share was up slightly from the fourth quarter’s 72.95 percent.

So the United States is still a long way from achieving former President Obama’s goal of creating “an economy that’s built to last.” But from what we know of the first quarter’s growth this year, the economy made some progress that’s worth noting.

P.S. Partial credit for this post goes to CNBC’s Jeff Cox, whose report here first called my attention to the good business spending results.

(What’s Left of) Our Economy: Growth Keeps Getting Bubblier & Bubblier

Tags

bubble decade, bubbles, Financial Crisis, GDP, gross domestic product, housing, inflation-adjusted growth, personal consumption, {What's Left of) Our Economy

With the world economy having somehow survived Brexit – at least for now! – its economic focus should shift at least partly back to the United States this week. Unfortunately, major analysts and pundits are almost certain to keep ignoring a development that was reinforced by new data last week, and that poses a much bigger threat to the current recovery than the British public’s decision to leave the European Union: Eight years into this expansion, the U.S. economy’s structure looks ever more like its dangerously lopsided, bubble decade self.

We know this because last Tuesday, as Brexit fears were still near their peak, the U.S. government issued its final (for the time being) report on the economy’s growth for the first quarter of this year. As always, the headlines focused on…the headline figure – which revealed inflation-adjusted growth of a meager 1.07 percent during those months on an annualized basis.

At least as important, however, these gross domestic product (GDP) statistics also showed what the economy consists of, and the clear message is that it’s more housing- and personal consumption-heavy than during the run-up to the last, devastating financial crisis. Remember: Those sectors were the toxic combination whose reckless expansion ultimately triggered that near-death economic experience.

The historical GDP data makes clear that housing and consumption combined peaked at dominating American economic activity in the second quarter of 2005 – when they comprised 73.27 percent of GDP after inflation. Since the two chunks of the economy wax and wane at different rates, each of them maxed out at different times during the bubble decade – consumption at 67.84 percent of real GDP during the first quarter of 2007, and housing at 6.17 percent in the third quarter of 2005.

The most recent GDP figures show that housing has yet to regain those bubble-decade levels, or even close. As of the first quarter of this year, it stood at 3.44 percent of constant dollar GDP. But personal consumption’s share has hit an all-time record: 68.87 percent. Add them up and you see that the toxic combination accounted for 72.31 percent of all U.S. economic activity after inflation. That’s a post-crisis record.

But actually, matters nowadays could be even worse than while the bubble was inflating. For when housing hit its 2005 zenith (and consumption was robust, too), real growth was proceeding at a 3.34 percent annualized clip. When consumption peaked, in early 2007, growth was only 0.25 percent annualized. But when the toxic combination hit its 2005 all-time high, growth was 2.09 percent annualized.

In other words, at the start of this year, we just learned from the new GDP data, personal consumption and housing combined also were playing outsized economic roles in America. But they were helping to produce growth of only 1.07 percent annualized. In other words, nearly as much bubble-ization as took place before the financial crisis is spurring considerably less growth.

History never repeats itself exactly, so these figures don’t necessarily mean that America is inexorably moving towards Financial Crisis 2.0. But they indisputably demonstrate that the nation isn’t moving much – if any – further away, either.

Making News: More Press Hits Plus a Bubble Warning from 2004

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BBC, bubble, bubble decade, Dayton Daily News, debt, Mainstream Media, Making News, manufacturing, manufacturing trade deficit, Manufacturing.Net, Paul Solman, PBS, Trade, Trade Deficits, World Trade Organization, WTO

I’m pleased to report a few more media appearances – along with the (re)discovery of a speech I gave more than ten years ago that warned that the U.S. economy was becoming dangerously bubble-ized. Nearly as striking as my predictions were the reactions of the Mainstream Media moderator of the event.

But first the press hits. I just saw that my latest finding of a new monthly record American manufacturing trade deficit was picked up November 5 by the Manufacturing.Net news site. Here’s the link.

On Monday, December 14, I was interviewed by the BBC on the round of World Trade Organization talks that took place in Nairobi, Kenya last week. The resulting segment isn’t in easily linked form, but if you send me a request, I can email you a short podcast featuring the perspective I offered.

And yesterday, a Dayton Daily News piece on manufacturing in Ohio featured some information I provided exclusively to the reporter. Click here to read it.

As for that speech, you can see the video at this link. It shows that I was fretting about the American economy’s dangerous over-reliance on debt-led growth as early as March, 2004, and also presents an early version of my argument that Washington’s offshoring-focused trade policies were at the heart of the problem.

But also fascinating is the skepticism of PBS’ Paul Solman. He couldn’t imagine for the life of him why Americans spending much more than they earned could lead to anything but the best of all possible worlds – and that whatever comeuppance the nation would receive would be eminently bearable. And that wasn’t the only one of his howlers by any means!

And don’t despair! Even though the entire video is nearly an hour and a half long, the first half hour or so contains most of the highlights.

(What’s Left of) Our Economy: Bernanke Flunks Crisis History 101

Tags

Ben Bernanke, bubble decade, bubbles, Federal Reserve, finance, Financial Crisis, Great Recession, Lehman Brothers, monetary policy, recovery, regulation, Wall Street, zero interest rate policy, ZIRP, {What's Left of) Our Economy

Because America is unlikely to avoid a rerun of the last financial crisis and recession without recognizing why they broke out in the first place, it can’t be good news that former Fed Chair Ben Bernanke still apparently hasn’t learned the main lesson of this near-catastrophe (and its still punishing aftermath): The crisis was rooted ultimately not in failures of the American financial system, but in weaknesses in the real economy that remain largely neglected.

I say “apparently” because this judgment is based on interviews Bernanke has granted to tout his new memoir on the crisis, and I haven’t read the volume. But it must be significant that both Bernanke and the leading financial journalists who questioned him have concentrated exclusively on the role played by Wall Street’s behavior and structures on the one hand, and lax regulation on the other, in nearly destroying the global economy. No attention whatever has been paid to the deteriorating ability of the Main Street economy to generate adequate levels of real wealth and income; to decisions made going back to the early 2000s to mask these deficiencies with crackpot credit-creation practices; or to the reckless lending and investment patterns to which this artificial credit glut led.

Not that Bernanke is the last word in crisis-ology. Yes, he spearheaded Washington’s efforts to contain the meltdown and spark recovery. But since his tenure at the central bank began in 2002, just about when the bubbles began inflating, and his Chairmanship began in 2006, just before they started bursting, he clearly was as much part of the problem as he’s been part of what’s so far passed for a solution. So his memoir is obviously an opportunity for reputation-burnishing. But finance has so completely dominated America’s views of the crisis and its origins that Bernanke’s perspective can’t simply be dismissed as self-serving.

Here’s a typical Bernanke comment presenting his view that the crisis was rooted in a panic in the unregulated, uninsured non-bank portion of the financial system that had grown so large that it became capable of endangering an otherwise healthy non-financial economy:

“The previous six months [before Lehman Brothers failed], the economy had been growing, house prices had fallen moderately. After Lehman, the economy just went into a death spiral. The fourth quarter of 2008 and the first quarter of 2009 was among the sharpest declines in the economy in U.S. history. Once the crisis went into a new gear, house prices started falling more quickly, and that had a feedback mechanism. Absent the broad-based panic that froze credit markets, caused asset prices to drop sharply and punctured confidence, we wouldn’t have had nearly so bad a recession.”

Bernanke has even appeared to deny that the economy during the previous decade was bubble-ized by overly easy Fed monetary policy. Asked whether the central bank had kept interest rates too low for too long – in fact long after the shallow recession of 2001 had ended – Bernanke responded:

“The first part of a response is to ask whether monetary policy was, in fact, a major contributor to the housing bubble and all that happened. Serious studies that look at it don’t find that to be the case. People such as Bob Shiller [a Nobel laureate currently serving as a Sterling professor of economics at Yale University], who has a lot of credibility on this topic, says that: it wasn’t monetary policy at all; it came from a mania, a psychological phenomenon, that took off from the tech boom and moved into housing.”

Here’s the immensely big picture that Bernanke is missing. The 2001 to 2007 economy was indeed growing, but the growth was energetically propped up by artificial – and, as it turned out, completely unsustainable – government stimulus. In fact, as shown in this (admittedly complicated) chart I made up while that previous recovery was proceeding, the federal funds rate – the short-term rate directly controlled by the Fed – had been plunged to multi-decade lows during that period, whether in inflation-adjusted or current dollar terms. At the same time, within a few short years, George W. Bush’s administration and the Congresses it worked with drove the federal budget from its biggest surplus in decades as a share of the total economy into deep deficit.

But did this unprecedented peacetime stimulus result in unprecedented peacetime growth? As the chart shows, anything but. And the discrepancy between Washington’s herculean efforts and the the economy’s mediocre results could not have made clearer that the nation’s engines of real (not financial) wealth creation, and thus real prosperity, had broken down.

As I’ve written repeatedly, American leaders could have responded with programs to strengthen that real economy, and therefore the real spending power of American workers. Instead, they tried to create the illusion of prosperity by enabling consumer spending that was not remotely justified by consumer incomes.

Fast forward to 2015, and despite the literally trillions of dollars of stimulus poured into the economy by the Fed under Bernanke and his successor, Janet Yellen, U.S. incomes continue to lag and the current recovery has seen even weaker growth than that of the bubble decade. It’s true, as Bernanke and others have argued, that expansion today is being slowed by a significant reduction in federal deficits. But it’s even more important to recognize that the economy will never truly heal unless the private sector leads. And let’s not forget that, thanks to the zero interest rate policy put in effect by Bernanke’s Fed in December, 2008, credit in America has never been cheaper.

Bernanke by no means deserves all or even most of the blame for the nation’s recent economic malaise. The last time I checked, the president and Members of Congress have been cashing paychecks all this time as well. But since leaving the Fed last year, Bernanke has been outspoken enough to make clear his ambition to remain a major economic voice. Judging from his take on why the financial crisis broke out, however, he doesn’t have much of value to teach.

(What’s Left of) Our Economy: Growth is Now Not Only Bubbly, but Increasingly Government-Fueled

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an economy built to last, bubble, bubble decade, GDP, government spending, gross domestic product, housing, inflation-adjusted growth, Obama, personal consumption, recovery, state and local government, stimulus, {What's Left of) Our Economy

Popes and Chinese leaders and the like come and go through history and through Washington, but the basic developments shaping the U.S. economy keep rolling on – and not for the better. So I’ve decided to focus today on those that have been revealed by the latest government report on the economy’s growth rate, and on two especially disturbing takeaways.

The first should be familiar to RealityChek readers: The makeup of the U.S. economy is still excessively dominated by personal consumption and housing, the same toxic combination that inflated the bubble of the previous decade whose bursting nearly collapsed the American and global economies. The second is less familiar largely because it’s much newer – and because the media hasn’t picked it up yet: Government spending is now unmistakably making a comeback as a significant growth driver – but not where you might think.

Although President Obama, as I’ve noted, has done a great job in identifying the need to create an “economy that’s built to last” in America, consuming and housing still comprise a bigger share of the total economy than during that bubble decade. When the recession started, at the end of 2007, these two components of the inflation-adjusted gross domestic product GDP) added up to 71.16 percent of the economy after inflation.

Thanks largely to the recession and housing bust (which fed on each other), this share fell to 70.94 percent by mid-2009, when the recovery officially began. That drop of course wasn’t big, but at least it represented progress. Since then, however, the numbers have resumed moving in the wrong direction. So it was welcome to learn, last Friday morning, that the economy grew at a solid 3.90 percent annual rate in the second quarter of this year, according to the government’s final (for now) reading. But less decidedly less encouraging was learning that the personal spending and housing share of the economy had hit 71.65 percent.

Indeed, that’s only slightly lower than the 71.67 percent figure for the first quarter, and considerably higher than the 71.13 percent during the second quarter of 2014 and the 71.19 percent of the second quarter of 2013.

The new prominence of government as a growth engine isn’t good news, either – that is, if you believe that the private sector is the nation’s best hope for better and sustainable prosperity and living standards (which you should).

That latest second quarter GDP report estimated that government spending at all levels in the United States grew at a 2.60 percent annual rate during that three-month period – its best performance by far since the 2.90 percent advance in the second quarter of 2010, when government stimulus spending was fueling much of the emerging recovery. Just as important, the second quarter government spending gain represented the third such rise in the last five quarters. You’d need to go back to the recovery’s earliest stages, starting in mid-2009, to find a stretch like that.

Government’s contribution to real growth, therefore, has picked up notably, too. According to the (for now) final reading for the second quarter of this year, government’s growth accounted for 0.46 percentage points if the 3.90 percent overall annualized expansion. That’s 11.79 percent of total economic growth. As with the government growth rate as such, that’s the biggest growth contribution in absolute terms since the second quarter of 2010, although then, government’s growth role accounted for 15.35 percent of that quarter’s (identical) 3.90 percent real expansion.

Also as with government’s growth per se, government’s contribution to growth has now been positive for three of the last five quarters – which hasn’t been seen since that early, public-spending-led phase of the current economic recovery. Significant as well – the government contribution to growth during this year’s overall strong second quarter has been much greater than in the last quarters when growth has been impressive.

For instance, in the second quarter of 2014, when annualized real growth clocked in at 4.30 percent, higher government spending only generated 7.67 percent of that growth. In the following quarter, the economy’s hot streak continued, but the government spending increase came to only 4.57 percent of that improvement.

One other important aspect of the resurgence of government spending: It’s happening largely on the state and local level, and this was especially the case during the second quarter. During that period, state and local government spending in real terms grew by 4.30 percent on an annualized basis – the fastest rate since way back in the fourth quarter of 2001. Federal spending was literally flat. 

To repeat a point I’ve made before: Nothing in this or previous posts should be taken as an argument that government spending is either “good” or “bad,” or that government now, at whatever level, is spending too little or too much. But again, if you consider the private sector to be likelier to generate healthier growth than government, the public sector’s increasing role in fostering economic vigor should be a matter of concern. The big remaining questions facing the nation is whether this rebound represents a return to pre-financial crisis norms, and whether that in and of itself should be praised or condemned. You can bet I’ll be weighing in on that matter before long!