All of this noise out of Greece has taken attention away from the fastly approaching U.S. fiscal cliff: the end-of-year deadline that threatens to lop off an estimated 3 to 5 percentage points off of GDP growth in 2013.
Reinhart’s note discusses the timetable regarding the fiscal cliff:
Unfortunately, there is no clear timetable for action. Congress will deal with the situation when it is good and ready to do so. And, the lessons from similar experiences in recent years suggests that such action will occur at the last minute.
But as an economist who’s getting paid to make forecasts and opinions, he shares with us the key dates that he’ll be watching. Here’s his assesment:
[T]here is a strong likelihood that there will be a lame duck session of Congress following the November election. Ideally, legislators will reach agreement on a plan which avoids the 2013 fiscal cliff and, at the same time, addresses the unsustainable longer-term course of US fiscal policy. However, given the elevated degree of gridlock in DC and the likelihood that some degree of gridlock will remain no matter what the election outcome (it is mathematically impossible for either party to achieve a filibuster proof majority in the Senate), this is an awful lot to expect during a post-election session of Congress that may last six weeks or so at most. A more likely scenario might involve a short-term extension of the major budget provisions or delayed action until debt ceiling constraints help to force a compromise agreement in early 2013. Of course, the longer the delay, the greater the likelihood that policy uncertainty will negatively impact the real economy.
- Morgan Stanley Just Slashed Its US GDP Forecast And Warned Things Could Get A Lot Worse (businessinsider.com)
- CBO Warning: Recession Will Follow 2013 ‘Fiscal Cliff’ (theatlanticwire.com)
- Fiscal cliffs, multipliers, and the myth of central bank independence (economist.com)
Obama’s emphasis on saving government workers hurts American business
By now, just about everyone has had an opportunity to pick apart President Obama’s fatuous remarks about how the private sector is “doing fine,” while public employees are suffering. The president’s comments, of course, were not even within viewing distance of reality. After all, despite some recent hiring, the private sector is still 4.5 million jobs below its 2008 employment peak. And while public employment is also down from 2008, that ignores a boom in state and local government hiring from 2006 to 2008. The current decline still leaves state and local employment about where it was in 2006. Meanwhile, federal employment is up 88,000 jobs.
But a much bigger question is: Why is the private sector doing so poorly? Perhaps because most businessmen are not that dumb.
If one includes the unfunded liabilities of Social Security and Medicare, this country’s real total indebtedness could run as high as $129 trillion (in current present value). Even under the most optimistic scenarios, our real debt exceeds $92 trillion. Measured as a percentage of GDP, our total debt exceeds the total debt of Greece or Spain. By comparison, the total book value of all U.S. companies is roughly $23 trillion. It’s not a perfect comparison (future taxes will be paid out of future wealth), but it does put things in perspective. Any business owner looking down the road, and seeing debt four to five times the size of his or her company, is likely to decide that this is not a great time to expand or hire new workers.
That is why the president’s preferred solution of offsetting private-sector losses with increased public-sector hiring is so mistaken. Those new public-sector jobs must be paid for with more debt and taxes borne by the private sector. As Frédéric Bastiat wrote in 1848, public employment “gives jobs to certain workers. That is what is seen. But it deprives certain other laborers of employment. That is what is not seen.” Bastiat concluded that trying to increase employment through government was “a ruinous hoax, an impossibility, a contradiction.”
For example, a study done for the European Commission by economists at the University of Paris looked at public employment in 17 countries between 1960 and 2000. It found that for every public-sector job created, 1.5 private-sector jobs were destroyed. Thus, hiring more government workers actually increases the level of unemployment.
And, perhaps more directly relevant, a study of President Obama’s stimulus bill by Timothy Conley of the University of Western Ontario and Bill Dupor of Ohio State concluded that, while the stimulus created or saved some 450,000 government jobs, it destroyed or prevented the creation of more than twice as many private-sector jobs.
Of course, in general, we know that an increase in the size of government slows economic growth. As Harvard’s Robert Barro points out, there is a “significantly negative relation between the growth of real GDP and the growth of the government share of GDP.” Under President Obama the federal government consumes 24 percent of GDP, a one-third increase over the historic post–World War II average of 19.8 percent. Throw in state and local government spending, and government spending now amounts to 36 percent of GDP.
President Obama is correct that much of this spending binge began under President Bush, but Obama’s policies have taken the Bush spending (including one-time spending hikes such as TARP) and turned them into the new baseline for future spending. And the president would have spent even more if he could have gotten away with. The purpose of last week’s press conference, after all, was to renew his call for more spending.
The president says “more spending,” and businesses correctly hear “more debt” and “higher taxes.”
This long-term burden on American business comes on top of short-term uncertainty. In January 2013, the Bush tax cuts will expire, leading to the largest tax hike in U.S. history unless Congress can reach an agreement. If reelected, President Obama seems determined to use this potential “fiscal cliff” to push for higher taxes on the wealthy, businesses, and investors. The president’s insistence, in particular, on raising capital-gains taxes will discourage business investment and expansion, while the hike in federal income taxes will fall especially hard on small businesses and Subchapter S corporations, which often file taxes as individuals.
Also ahead, pending a decision from the Supreme Court, is the potential implementation of Obamacare. Most of the law’s tax hikes, $569 billion over the first ten years, fall on businesses. Next year, for example, there would be new taxes on medical devices and investment income, among others.
And in 2014, the law will impose a mandate on employers with 50 or more workers to provide their workers with health insurance, at a cost of $4,450 on average, or else pay a $2,000-per-employee fine. As former Labor Department economist Diana Furchtgott-Roth explains:
The $2,000 per worker penalty raises significantly the cost of employing full-time workers, especially low-skill workers, because the penalty is a higher proportion of their compensation than for high-skill workers, and employers cannot take the penalty out of employee compensation packages. Suppose that a firm with 49 employees does not provide health benefits. Hiring one more worker will trigger a penalty of $2,000 per worker multiplied by the entire workforce, after subtracting the statutory exemption for the first 30 workers. In this case the tax would be $40,000, or $2,000 times 20 (50 minus 30).
If you were that small-business owner with 49 employees, how fast would you run out to hire that 50th worker? In fact, a Gallup survey of small businesses found that nearly half (48 percent) cited Obamacare as a reason why they are not hiring. It’s worth noting that in France, another country where numerous government regulations kick in at 50 workers, there are 1,500 companies with 48 employees and 1,600 with 49 employees, but just 660 with 50 and only 500 with 51.
And, if Obamacare is not enough of a burden on business, 2013 will also see the onset of many of the new Dodd-Frank regulations on banking, lending, and finance.
President Obama seems wedded to an old-fashioned Keynesian philosophy of trying to revive the economy by using government hiring and spending to increase consumer demand. By now we should have learned that no amount of pump-priming is going to help, as long as businesses are worried about the crushing burden of debt, taxes, and regulation in their future.
That’s the real truth behind President Obama’s gaffe: He’s not just out of touch; he’s wrong.
— Michael Tanner is a senior fellow at the Cato Institute and the author of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution.
- Has President Obama’s Stimulus Made the Private Sector Lazy and Hurt Job Growth? (txwclp.org)
- The Private Sector is Not ‘Doing Fine’ (hawaiireporter.com)
- David Axelrod Got It All Wrong: How He, The President, And All Progressives Need To Address Obama’s Economic Record (crooksandliars.com)
- Morning Bell: The Private Sector is Not “Doing Fine” (heritage.org)
The 2012 Barrons Roundtable came out this morning and the discussion is always interesting.
I think he’s a bit dramatic, but given that he’s one of the few roundtable members who has been able to connect the dots (for the most part) his comments are always worth considering (see past performance from Roundtable members here):
Zulauf: Europe is going to be key this year for the markets and the economy. China is slowing; the emerging world is slowing, and the U.S. is barely above water, constrained by its structural problems. I have called the euro a misconstruction since its birth. The problem is a difference in competitiveness among European countries, and you can’t solve it by lending money to the less competitive countries. You have to deflate wages and prices in the south, and inflate the north. But given Germany’s history, it will never inflate.
The members of the euro zone agreed in December that each country could have a structural deficit of no more than half a percent of GDP. If a deficit goes above 3% of GDP, the country will be sanctioned. This agreement now has to be ratified in all countries. But when you agree to such a prescription and you are uncompetitive, your currency is overvalued by 30%, you can’t devalue, and your nominal interest rates are too high, that is a recipe for a depression. It is a death sentence. Several countries won’t ratify the contract, and the next day their markets will be repriced accordingly. They will exit the euro, and the turmoil will go to the next level. Greece is bust in either case. If you can devalue your currency by 40% or 50% in that situation, at least you will have the chance to see the sun again and recover.
Zulauf: The banking system goes bust. Assume Greece won’t repay anything, or at most 10% of its total debt. It is not just the government but the private sector that is bust. That means banks in other countries will be in trouble, which means they will be nationalized. Governments won’t have the money to pay for this, so they will assume even more debt. That is the chain of events I expect in 2012, and if you believe it won’t affect the U.S. you are dreaming. The estimated notional value of the over-the-counter fixed-income-derivatives market in Europe is estimated to be about 60 trillion euros. There are many links to the U.S. banking system, although we don’t yet know who is positioned how. If one country exits the euro, all hell will break loose.
Zulauf: Every European country will be in recession in 2012, and probably in 2013.
- Felix Zulauf: The Die is Cast (ritholtz.com)
- Felix Zulauf, Interviewed by King World (ritholtz.com)
- Felix Zulauf on Europe and more (investmentpostcards.com)
- The lure to leave the euro may prove irresistible (finance.fortune.cnn.com)
- Europe’s economies: A false dawn (economist.com)
- Running Through Italian Default Scenarios (businessinsider.com)
Image: Mark J. Perry
Of course, people are going to try to draw all kinds of different lessons from this chart. For example, some will see it as a sign that we’re in a golden-age of technological productivity, that’s allowed the overall economy to prosper, while a cohort of unemployable, skill-less workers suffer.
There’s also a political angle, namely that the needs of workers are obviously not in alignment with the interests of corporate America: Remember, the corollary to that record GDP is record corporate profits, as seen here.
Regardless of the root cause of the disconnect, this is a real and growing problem, as the lack of jobs translates into political strife, and perhaps even unrest.
- Income Inequality, Economic Mobility, and Investment (thewesternexperience.com)
- Kevin L: The “Imaginary Hobgoblin” of Income Inequality (mjperry.blogspot.com)
- CHART OF THE DAY: Keep This Chart Handy, And You’ll Know When Greece Is About To Blow Up (businessinsider.com)
- Recession? No. We’re In The Second Great Contraction (businessinsider.com)
Bold decisions are needed from the G20 leaders meeting in Cannes this week to get the global economy back on track, said OECD Secretary-General Angel Gurría.
An important first step has already been taken with the debt and banking crisis rescue plan announced by EU leaders on October 26 2011, but these measures must be implemented “promptly and forcefully”, he added.
Presenting a special Briefing Note ahead of the Cannes Summit, Mr Gurría said without decisive action the outlook is gloomy. The OECD projects GDP growth to remain weak in the advanced G20 economies over the next two years while the pace of activity in the major emerging markets is likely to be lower than in the pre-crisis period.
The near-term outlook
- Uncertainties regarding the short-term economic outlook have risen dramatically in recent months. A number of events, notably related to the euro area debt crisis and fiscal policy in the United States, are likely to dominate economic developments in the coming two years. In an “events-free” scenario and in the absence of comprehensive policy action to resolve current problems, real GDP is projected to grow by about 3.9% this year, 3.8% in 2012 and 4.6% in 2013 on average in G20 countries.1 This average masks a wide divergence among country groupings, and emerging-market economies are much more buoyant, despite some softening. In the euro area, a marked slowdown with patches of mild negative growth is likely. Growth is also projected to remain weak in the United States, with a gradual pick-up from 2012 towards the end of the projection period. Unemployment is set to remain high in many advanced countries.
- A better upside scenario can materialize if the policy measures that were announced at the Euro Summit of 26 October are implemented promptly and forcefully. These measures go in the right direction and could help restore confidence and create positive feed-back effects that could trigger a scenario of stronger growth.
- In contrast, the outlook would be gloomier if the commitments made by EU Leaders fail to restore confidence and a disorderly sovereign debt situation were to occur in the euro area with contagion to other countries, and/or if fiscal policy turned out to be excessively tight in the United States. OECD analysis suggests that a deterioration of financial conditions of the magnitude observed during the global crisis (between the latter half of 2007 and the first quarter of 2009) could lead to a drop in the level of GDP in some of the major OECD economies of up to 5% by the first half of 2013.
Appropriate policy responses
- To resolve the euro area crisis, it is important to clarify and implement fully and decisively the measures announced on 26 October to break the link between sovereign debt and banking distress, to deal with Greece, to ensure that the sovereign debt crisis does not spread to other European countries and to secure appropriate capitalization and funding for banks. Detailed information is needed on how the package will be implemented.
- In the advanced G20 economies, interest rates should remain on hold or, where possible, be reduced; notably in the euro area. Central banks should continue to provide ample liquidity to ease financial market tensions. Further monetary relaxation, including through unconventional measures, would be warranted if downside risks intensify. In the emerging-market economies, the stance of monetary policy should be guided by the outlook for growth and inflation, which remains comparatively high.
- Strong, credible medium-term frameworks for fiscal consolidation and durable growth are needed to restore confidence in the longer-term sustainability of the public finances and to build budgetary space to deal with short-term economic weakness. Those advanced economies with sounder public finances can provide additional counter-cyclical support.
- Structural reforms are essential to boost the growth potential of G20 countries, to tackle high unemployment and to rebalance global demand. In view of weak growth in the near term and impaired fiscal positions in most advanced economies, priority should be given to reforms that offer comparatively strong short-term activity gains and facilitate longer-term fiscal consolidation.
- In Cannes, G20 leaders will discuss an Action Plan with bold commitments for mutually reinforcing macroeconomic policies and structural reforms. In 2008, G20 leaders rose to the challenge with a clear and coherent plan and we avoided a second Great Depression. Today, the adoption and implementation of the Action Plan is just as imperative to restore confidence through decisive actions in specific countries and regions.
The projections reported in the Briefing Note are preliminary and will be updated in the OECD Economic Outlook No. 90 to be released on 28 November 2011.
- PRESENTING: The OECD’s Complete Grim Assessment Of The Global Economy (businessinsider.com)
- European debt crisis live: Markets fall as optimism fades (guardian.co.uk)