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Unforced Error, or How Well Has That Worked Out for You, BarryO?

PGL, in the process of an optimistic piece, points us to Martin Feldstein ringing in 2011. Apparently, the reason is this:

The most substantial potential boost to spending comes from a temporary reduction of the payroll tax, lowering the rate paid by employees on income up to about $100,000 from 6.2 per cent to 4.2 per cent. But, while the decline in tax payments will be about 0.8 per cent of GDP, it is not clear how much of this will translate into additional consumer spending and how much into additional saving. Because this tax cut will take the form of lower withholding from weekly or monthly wages, it may seem more permanent than it really is, and therefore has a greater impact on spending than households’ very feeble response to the previous temporary tax changes.

Feldstein attempts a free-finesse with “it may seem more permanent than it really is.” This is like playing the seven to the Queen when you’re only other holding is 10-x and expecting it to work.

It’s six months later. The crowd jewel of BarryO’s deficit-saving agreement, per Feldstein, was a low-impact change that was mostly (if my paycheck is any indication) neutralized by other factors (such as increases in health insurance costs). So the payroll cut is going to UHC or Aetna, or BCBS, or some other place where the money multiplier will be significantly less than one.

Even more interesting is that, just three paragraphs before, Feldstein understood that workers are still engaged in balance-sheet repair, and the likely consequences of same:

Even for those taxpayers who had feared a tax increase in 2011 and 2012, it is not clear how much the lower tax payments will actually boost consumer spending. The previous temporary tax cuts in 2008 and 2009 appear to have gone largely into saving and debt reduction rather than increased spending.

It is surprising, therefore, that forecasters raised their GDP growth forecasts for 2011 significantly on the basis of the tax agreement.

But Feldstein did see some good in the greater tax deal—it would temper deficit fears:

Obama wanted to continue the 2010 tax rates permanently for all taxpayers except those with annual incomes over $250,000….By agreeing to limit the current tax rates for just two years, the tax package reduces the projected national debt at the end of the decade (relative to what it would have been with the Obama Budget) by some $2 trillion or nearly 10 per cent of GDP in 2020.

That reduction in potential deficits and debt can by itself give a boost to the economy in 2011 by calming fears that an exploding national debt would eventually force the Federal Reserve to raise interest rates — perhaps sharply if foreign buyers of US Treasuries suddenly became frightened by the deficit prospects.

There can be only one remaining question:

When will Martin Feldstein endorse Jon Hunstman for President?

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Predicting Recessions, The Great Stagnation, and Will There Be a Double Dip?

by Mike Kimel

Predicting Recessions, The Great Stagnation, and Will There Be a Double Dip?

There’s a lot of talk about a double dip recession these days. I don’t think there’s a precise definition of a double dip recession, but I think if there was it would be something like this: “a recession, followed by a recovery which doesn’t last very long, leading into another recession.” Given the official end of the recession occurred in June of 2009, if the current slow down is (or results in) a recession which gets labeled a double dip, that would imply a double dip recession is one that occurs no more than about two years after the previous recession ended.

By that standard, there’s only been one double recession in the last few decades – a recession began in July ’81, 12 months after the previous one ended. Before that, you have to go back to the supposedly “Roaring” 1920s, when you’ll find quite a few recessions coming back to back to back. You’ll also find multiple and large tax cuts, I might add. A cool graph of tax rates and recessions from 1920 to 1940 can be found here. Its really cool because the data just refuses to match up with what they’ve been teaching in econ classes for the past three decades.

Now, I was curious – how do you tell when you’re in a recession? (Long time readers may recall my frustration, having called both the start and end of the Great Recession in complete anonymity when I had a book to sell!. I guess the pay is better in being always wrong. The book, by the way, is still for sale and still provides a very different way of looking at the world that matches up with data very nicely.)

In this post, I want to stick to some of the traditional views. Basically, if you corner enough economists, you might get them to tell you recessions begin if there’s a big drop in private consumption, private investment, or gov’t spending. I hasten to add – that’s mostly investment in stuff, not in stocks and bonds. (Not all economists would agree with each of these items, I might add. So, let’s cut to the data and see what it shows. Data on real (inflation adjusted) private consumption and investment, and government spending is available from the BEA’s NIPA Table 1.16. Quarterly data goes back to 1947, and annual data goes back to 1929. (And please, please, please, don’t write to me about using some data set of suspect provenience developed decades after the fact. I don’t make up numbers, and I don’t use anyone else’s made up numbers either except when I’m pointing out problems with such data sets.) Recession dates come from the NBER.

Now, for every recession beginning with the one that started in October of ’48, I looked at the change over four quarters in real personal consumption, real private investment, and real gov’t spending through the quarter in which the recession began. For the recessions that began in May ’37 and February ’45, quarterly data wasn’t available, so I looked at the one year change in real personal consumption, real private investment, and real gov’t spending through the year when the recession began . The recession of 1929 was ignored because data began that year – hence, the one year change through 1929 is not available.

The table below indicates with an X if there was a drop in any of these three factors for any given recession.

Figure 1.

As the table shows, five of the eight recessions between 1937 and 1973 were preceded by a cut in real gov’t spending. None of the recessions after 1973 were preceded by a government spending cut. On the other hand, cuts in private investment also preceded two recessions that occurred before 1973, and all but one (four out of five) of the recessions that came after that date.

So… before 1973, cuts in gov’t may have been responsible for some recessions, and reduced investment may have been responsible for most recessions since the 1970s. (If that break sounds familiar, it is more less where Tyler Cowen puts the start of his Great Stagnation, though as I’ve pointed out, Cowen’s philosophy doesn’t allow him to understand what happened to cause that Great Stagnation. My guess is this can be added to that list.)

In recent decades, big drops in private investment have often been portents of recessions. And if you’re wondering… according to the May update of Table 1.1.6 (link above), private investment (in 2005 dollars) reached a post-recession high of 1.855 trillion in the third quarter of 2010. It fell to 1.761 trillion in the fourth quarter of 2010, and 1.813 trillion in the first quarter of 2011. We won’t know for a while what happened in the second quarter of 2011, but… things are a bit shaky. Ironically, at this point in time, one thing that might shellac private investment is a big reduction in gov’t spending. Right now I think there’s a good chance we’re just going to skate along on feeble growth rather than an outright second recession, but its going to be near miss at best. Public confidence is really poor, and its easy to see how private investment might fall even further if the gov’t takes its ball and goes home. (As regular readers know, I’m a big deficit hawk so it hurts to write that, though I’d hope to see the gov’t spending to be done more rationally than it has been since the whole mess started in 2008.) Of course, it also would help if proper incentives were provided.

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