Friday, December 30, 2005

The 2002-05 expansion: Less difference than meets the eye 

I always repay debts, and since I once used the signal for a KAR fisking of some student's silly screediness I stand ready to help out my brethren. (Note: KAR fiskings tend to the PG-13 side of things, if you get my drift. And please don't ask them about chaps.) And they have signaled for a close shave on this STrib editorial. As it turns out, this one I'd do for free.

I don't do the line-for-line thing much in this, because the problems with this thing are threefold, and you can pull many quotes to the one or more of the three. The first part is the usual sort of thing: Republican Congress and President have given us tax cuts, four of them in fact, and they're planning a fifth. (The scoundrels! Giving taxpayers their money back! We must stop them!) And all of it going to the rich. You can't swing a dead cat around the blogosphere without hitting two or three posts in this meme.

Actually, the STrib doesn't say the "all going to the rich" part. That comes from their claimed source, a report by the Center for Budget and Policy Priorities. Don't worry that it's a liberal think tank, says the STrib -- the Economic Report of the President says the same thing.

The first error that it makes is in comparing this recession to nine others while skipping over the fact that this recovery looks quite a bit like the last one on a majority of scores. The STrib offers a single sentence that draws a comparison:
...on key measures such as job creation, wage growth and business investment, the current expansion even lags behind the expansion of the 1990s -- when Congress and President Bill Clinton were raising taxes to reduce deficits.
Clinton raised taxes in the 1990s? Let me remind you. There was a tax hike in 1993. There was a tax cut in 1997. Guess which half of the Clinton years GDP grew faster in?

And what that clip does is cherry-pick the only three elements of that expansion that are different from the current one. By folding the 1991-99 expansion into the prior eight, the STrib ignores the following.
A comparison of the current period with the economic cycle of the early 1990s yields a more mixed picture, whether measured since the trough of the downturn or relative to the last economic peak. (Again, see Table 1.)
� GDP and personal consumption expenditure growth differed little during the two periods.
� Net worth has grown modestly faster during this period than in the early 1990s.
� Corporate profits have increased roughly twice as fast during the current period as in the earlier period.
� But labor market indicators have been significantly weaker during this period. For instance, during this economic recovery, job growth has occurred at just one-third of the pace that it did during the comparable part of the economic recovery of the early 1990s.
� Fixed non-residential investment also has grown significantly more slowly during this economic cycle. During this recovery, it has grown at a 3.7 percent annual rate, well below the 5.7 percent annual rate at which it grew over the comparable portion of the early 1990s recovery.
That, by the way, isn't from the Bush administration's ERP but from the CBPP report itself (p. 5). (Here's the full version.) If the STrib had actually bothered to read the ERP, it might know as well that consumption spending was never an issue in this recession.
In the prior recessions, on average, consumption growth moderated starting six quarters before the recession�s eventual trough, did not actually fall until two quarters before the trough, and began to rise in the quarter before the trough. In the 1990-1991 recession, consumption rose rapidly until two quarters before the trough, dropped sharply until the trough, and mostly grew thereafter. The most recent recession stands out as different in that consumption continued to grow throughout. This likely reflects the important role of fiscal and monetary stimulus in supporting demand and the unusual extent to which the recession resulted from a collapse in investment following the bubble of the late 1990s. (pp. 51-52, emphasis added.)
Here then is a second important point. The weird behavior of consumption and investment result from those tax cuts. The reason consumption doesn't rise rapidly in this expansion is because it never slowed down in the recession. You may wish to argue that the tax cuts had little to do with keeping consumption strong; I don't see how you avoid the conclusion that the recovery would have been much slower without the cuts.

That leaves two areas of concern over the current expansion. First, the slowness in investment is real, though if you look at the 2005 data and most projections for 2006, we see a turnaround in the making. It is absurd, in my view, to think that investment would rise as fast as other elements of GDP in this recovery when the recession was set off by a collapse in investment following the tech bubble of the 1990s. (See, for instance, this 2003 letter by San Francisco Fed researcher Kevin Lansing, esp. Figure 3.) If there was excess capacity generated by the late 1990s bubble, it would be expected to take time to unwind the excess investment. It would be hard to blame the Bush administration for that bubble bursting; it's also hard to imagine that any tax cut or spending program would fix it.

That leaves us with the dilemma macroeconomists have wondered for years now, which is where are the jobs while we're experiencing this expansion? For that we can look to Atlanta Fed researcher Julie Hotchkiss' paper on labor force participation and the level of job creation needed to keep unemployment falling. What we don't know is why fewer people are participating in the labor force.

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