Relevant and even prescient commentary on news, politics and the economy.

Income and spending decline: the back end of January stimulus payments

February personal income and spending decline: the back end of January stimulus payments

by New Deal democrat

Last month I wrote that the:

“report on January personal income and spending shows just how important the stimulus packages enacted by the federal government both last spring and last month have been to sustaining the economy.”

The truth of that was confirmed on the back end in this morning’s report for February, in which January’s 10% increase in income was followed by a -7.1% decrease (red). January’s increase of 3.4% in spending was also partially reversed by a -1.0% decrease in February (blue):

In its release, the Census Bureau confirmed this analysis, writing:

“The decrease in personal income in February was more than accounted for by a decrease in government social benefits to persons. Within government social benefits, ‘other’ social benefits, specifically the economic impact payments to households, decreased. The CRRSA Act authorized a round of direct economic impact payments that were mostly distributed in January.”

The importance of the stimulus is further shown dramatically when we subtract government transfer receipts from the equation, shown in red in the graph below:

Real personal income excluding government transfer receipts *rose* slightly in February.

Since this last metric is the last of the four coincident metrics to be reported for February, we can now plot the general outline of the economy through last month, including production (blue), jobs (red), real retail sales (green), and real income (purple):

Employment is down over 5% since last February, while production is down 4%. Meanwhile income is down only 2.5%, and real sales have actually increased by nearly 5%!  Most recently, in the combined two month period since December, two of the series – payrolls and real sales – have increased, while the other two – industrial production and income less government payments – have declined. Since the Big Texas Freeze impacted probably substantially impacted all of these, the underlying situation is presumably better.

Government aid has kept the pandemic from turning into a true economic disaster. Going forward, I expect improvement throughout spring into summer in all of this data.

 Atrios is an economist and reminds us of an option not taken:

I don’t think Bernanke can legally start mailing checks to
us, though I think when he hits the “emergency powers” button he can
probably do just about anything, but it isn’t said often enough by the
right people that there are alternatives to giving free money to
banks, such as giving free money to me. At this particular point in
time, those alternatives are clearly superior.

We have a problem that can be easily solved by giving free money to
people, perhaps the most popular solution to a problem ever. And it
isn’t happening.

I want spending, I want spending, I WANT SPENDING!

By: Daniel Becker
There is some new information from Adam Hersh of Center for American Progress showing what has happened in the states that have followed the conservative economic approach (yes, talking to you Obama, DLC, Clintonites).  Keep cutting at your own risk.

Here’s the thing.  Like the Wile E Coyote, we seem to have run off the cliff.  Our feet are still moving like we are running because we have not noticed we are off the cliff.   Or I should say those in the lofty parts of our power house and economy have not noticed.   Now, in cartoons, sometimes the charater makes the realization and can scramble back to safety at the edge of the cliff.  However,  Wile E never did get it and always fell.

I’m not interested in being taken down by Senator, Represenative, President, Chairman Wile E Coyote.  No thank you.  I know we’re off the cliff as do the vast majority of not only the USA but it seems the rest of the 1st world nations.  So listen up Wile E.  We’re not following you any more ( I hear you Greek patrons).  Not going to try to catch that road runner your way anymore.   And here is why:

Relative to national economic trends, states that increased spending enjoyed on average:
0.2 percentage point decrease in the unemployment rate
1.4 percent increase in private employment
0.5 percent real economic growth since the start of the recession.

In contrast, states that cut spending saw on average:
1 percentage point increase in the unemployment rate
2.1 percent loss of private employment
2.9 percent real economic contraction relative to the national economic trend.

So, I hope the IMF is happy now.  I have to be honest, the study does note:

The three figures presented in the accompanying charts demonstrate that steep state government spending cuts have gone hand-in-hand with rising unemployment, falling private-sector payroll employment, and lower real growth in states’ gross domestic product, or GDP—the sum of all goods and services produced by labor and equipment in each state, minus imports. The analysis, however, does not tell us whether the spending cuts caused the negative economic outcomes. But in all three cases, steep spending cuts are statistically associated with markedly worse economic performance.

There are some nice charts at the linked article if you are more visual.  Personally, I feel this new info just further supports my position that people are not drowning (debt is not money and thus not water), they are dehydrating.  We need more of the water that already exists.  It’s the income inequality issue.  I am rather certain that more government cutting has no chance, zero chance of reversing the inequality. 

If we can’t reverse the inequality, then we’re going to continue with what I pointed out in 2008.  That is, the top is taking money from the economy as income faster than the economy can produce it.  Can you keep spending more than you make?  No, is the conservative answer.  Well, can you keep taking it faster than you can produce it?  No, is the liberal/progressive answer. 

The issue is not that we are spending too much via government because the government is not just another player in the economy.  As I have noted, as long as the government acts counter to the players in the economy and does so in a manor that assures equality and the reduction of risk in living, it is not a competitor.  It does not “crowd out” the private sector. 

This leaves the real issue of a stalling economy, and declining living security one of  to much money being taken out of the economy.  For decades as noted, one group has been taking too much money out of the economy and have been doing it at ever increasing rates: the top 1%.  They are doing it faster than the economy can produce it.  This, as far as I am concerned is no different than government cutting spending.  Either way, money is taken out.  Velocity is what we are talking; how much and how fast money is moving through the economy.   Of course to understand such, one has to appreciate that Wall Street, banks, and markets are not an economy.  This is why the government, acting to fulfill it’s prime purpose of equality of power is never a competitior in the economy.

So, how convienent the conservative issue is debt.  Too much of it they say.  Too much spending.  HA!  The real debt is in the lack of income to everyone other than those in the top 1%.  They took and are taking so much money out of the system in the form of income (decrease union membership, tax cuts, off shoring, financialization, consolidation) that they have damaged the machine which allowed them to have growing income.  This is the real debt.  It is the lack of economic growth.  And the rich have caused it.  Yet there solution is to cut government spending and further reduce the amount of money in the active (remember velocity) part of the economy all the while taking even more out as income in their pockets?

Do you see how nuts Wile E Coyote is?

Math is Math: There Was No "Second Stimulus"

One of the best rules in mathematics is that, to determine the value of all the variables, you need only as many distinct equations as you have variables. (previous sentence edited for clarity.) So let’s combine a couple of recent articles (h/t Mark Thoma for the first, Digby for the second.)

Richard Florida finds three studies of State Government Spending Multipliers. The three studies find multipliers of 1.5, 1.7, and 2.12. Let’s be nice (in context) and use the lower one. StateMultiplier = 1.5

David Dayden notes that budget cuts in just two (large) states can be matched against the Fed’s “stimulus” monies. Let’s see how much, putting the best face possible on the data (i.e., taking the most optimistic projections). CADeficit (ignoring “reserve”): $26.4B (12.5 + 12 + 1.9). ILDeficit: $19B (13 + 6).

That gives us a CA-ILEconomyCost of (26.4 + 19)*1.5 = US$68.1B

The Federal Stimulus is $55-60B. Again, let’s be optimists and say $60B. The required multiplier is then:

FedMultiplier * FedStim = CA-ILEconomyCost

FedMultiplier * $60B = $68.1B

FedMultiplier = 1.135

That’s the minimum multiplier needed just to counter those two states. Add in Texas (whose shortfall appears to be on par with California’s, and is larger than Illinois)and you’re at 1.77.

Only 47 states to go.

The maximum multiplier needed just to solve the CA-IL gap is 1.71. Add in TX and you’re at 2.63 with 47 states to go.

The Right-Leaning Econ Bloggers (e.g., Tyler Cowen and Greg Mankiw; I apologize to the former for linking him to the latter) argued in 2008-2009 that Federal Stimulus has a multiplier of 1.3 or less.*

1.3 would put the economy at neutral if the multiplier is 1.7 (median estimate) and most but not all of the CA ambiguities break the wrong way.

And that’s just eliminating the effect of those two states. Add in TX and the multiplier goes to 2.64—rather close to Christina Romer’s 3.0 that was attacked continually by Mankiw et al.

Repeat after me: There was No “Second Stimulus.” If the economy is going to go into full recovery—i.e., can I have jobs with that?—it will have to be from Private Sector Investment, which has been (let’s be nice) on the sidelines so far,* and really doesn’t appear to be warming up to replace TARP.

*Strangely, this was not argued by them as an argument that the initial “stimulus” was too small for the even-then-obvious shortfalls in C and I; I can’t believe they thought MX was going to cover the difference, but that’s a side discussion, perhaps.

*We can quibble over whether that was and remains the correct decision. As has often been noted here, a lack of demand is not exactly an incentive to expand, unless you think that will be changing soon. A true recovery should have convinced firms that a change is gonna come.

Ending Stimulus and the Shape of the Recovery

by Tom Bozzo

Brad DeLong observes that the FY2011 budget features “big, very big” tightening on the revenue and spending sides (2.5% of GDP “from 2010 to 2011”) for the prevailing labor market conditions. DeLong wants his “morning in America” (don’t we all?), and is understandably alarmed at the pessimistic forecast of the rate of labor market improvement. Paul Krugman echoes the sentiment on “near-term” fiscal tightening.

As is always the case, the tightening question has to be “relative to what?” [1] Receipts as a fraction of GDP are expected to increase fairly substantially, for example, but that’s largely a consequence of expected economic growth.

Compared to the current-policy baseline, the FY 2011 (10/2010-9/2011) budget increases the FY 2011 deficit by around 0.8 percent of GDP. In FY 2012, the budget would subtract around 0.7 percent of GDP from the current-policy deficit. Krugman is correct to attribute this to the winding-down of ARRA stimulus and of our “overseas contingency operations” better known as the wars in Iraq and Afghanistan. Go see Table S-2 here [PDF]. Additionally, current policy has some stimulus on top of current law. Allowing most of the Bush tax cuts to become permanent reduces FY 2011 receipts by around 0.9 percent of GDP. (See Table 14-2, here.)

As for the timing, the budget assumes (see Table 2-1) that real GDP in quarter 4 of calendar year 2010 will be 3 percent higher year-over-year; in Q4 of 2011 (a/k/a Q1 of FY 2012), real GDP is expected to increase another 4.3 percent. Even with the tightening, Q4 2012 real GDP would increase another 4.3 percent y/y. So the FY 2012 tightening only arrives after two years of modest growth.

If measures labeled as such are actually to be temporary economic stimulus measures, they obviously must end sometime. Ending them after the expansion ends is stupid — the tightening would reinforce the subsequent downturn — so it’s going to take some steam out of the expansion one way or another. The most pressing timing concern would be not to take away the stimulus before it’s clear that the recent GDP growth is sustainable; I’d argue that after two years of growth, should we get there, the case that measured GDP growth is a matter of one-time shots and/or statistical glitches will be fairly weak.

The slow assumed labor market recovery Brad DeLong notes might be seen as a mirror-image of the GDP recovery assumed in the budget baseline:

The budget’s baseline economy (with the triangle marks) isn’t as pessimistic as OMB is willing to imagine in public (and if you’re Ken Houghton, you might see all of these as irrationally exuberant), but the ‘output gap’ opened by the recession is assumed to close very slowly. While higher-frequency data are not equally optimistic, there’s building evidence (so far, outside of employment) for a reasonably strong recovery. And as Maynard explains at Creative Destruction, it’s arguably in the administration’s interest to err on the pessimistic side since people (again, even including some economists) don’t understand counterfactuals and thus tend to inappropriately place blame (or credit) for surprises.

[1] Every economics professor who disparages the “jobs created or saved” concept should be immediately stripped of tenure and exposed to the current labor market for forgetting that all economic analysis is counterfactual.

A scaled model of debt driven stimulus

by divorced one like Bush

Well, here is what I’m doing to support the US of A’s economy. It’s a lesson in the real model of economics. It is a scaled version of the concept of stimulus. I even did it by using financing just to make the model as close to real as possible. (OK, I had to finance it but…I used my credit union.) Yes, I’m driving up the debt, but I’m creating jobs and I’m build wealth.

I purchased locally to assure my bank supplied money (debt) is multiplied as much as possible. When this garage is done, I will have created over a dozen or more jobs directly and who knows how many as the debt money goes from the first exchange of hands (me to who ever) to the second exchange (whoever to whoever’s whoever). Notice, that this is all happening via a producer economy not a financial economy. Any rescuing of banks is taking place by moving money into the hands of people first.

I’m even adapting to these hard economic times. I’m looking else where to earn a living. Actually, I’m looking to reduce my expenses by improving the effectiveness of my time. The practice (yes, health care has taken a hit) and the flower shop are slow so I will be honing my mechanic skills and fixing my vehicles my self.

Alas, there is a down side. The wealthy rent collector will no longer be collecting the rent.

Government Site to Check

Mish sends us to “Track the Money,”’s breakdown of where funds have been sent and spent.

He’s not happy, but I suspect he’s suffering the Jared Bernstein Problem: only looking at one side of the equation.

But—and this is the key “but”—the reason it is right to do that is that ARRA money has two-way flow. It supports jobs and production, both priming the pump and moving production forward. This works if (1) the cost is minimal and (2) the production will be saleable (avoid the “double-dip”). Which implies (1) domestic interest rates must remain near zero and either (2a) U.S. consumer demand for domestic goods must increase or (2b) the U.S. dollar must depreciate, making our goods more desired abroad.

All of the above is reasonable and conceivable, even if it does imply the stock market may be overvalued.

And if the recent reports are true, the biggest effect of the stimulus has been in stabilizing education, which reaps long-term benefits, as conservative economist Ed Glaeser noted last month.

But that’s the stimulus. The bailout money, well, that’s another question. And another post.

Small Business topic


H/T Naked Capitalism for this New York Times article concerning the loan program established in May to help small businesses as part of the stimulus program.

With $255 million, the program is prepared to make about 10,000 loans of up to $35,000 each. As of Monday, the agency reported that only 1,127 loans, totaling $36.8 million, had been extended.

While the agency maintains that the program is on track, some in the banking industry say the banks are moving slowly because they have little incentive. “There’s not a lot of profit motive in a $35,000 loan stretched over six years,” said Paul Merski, chief economist for the Independent Community Bankers of America, a trade association.

Bob Seiwert, of the Center for Commercial Lending and Business Banking at the American Bankers Association, says “stringent underwriting standards” will require as much work as larger loans, making these even less economical.

Rdan here. What is a small business? is discussed here at Angry Bear and Small Business link is here,

SBA loans to big box stores ,

small business as an American dream ,

and the real world of small businesses ,

and gov intervention discourages local agricultural development.

Update: kharris points us to Grameens Foundation. Especially for the really small business.

Stock market under Obama

By Spencer:

Well at least the stock market seems to like Obama’s economic package.

But every day I listen to CNBC analysts and others who seem to believe they did better under Bush’s and want to stick with the policies that generated a 40% stock market decline.

RIlands Governor, Stimulus money means Trickle Down policy

by Divorced one like Bush

So you have been reading about the southern GOP’ers that are refusing parts of the stimulus money. Something about being true to their crede. Well, we here in RIland have a GOP governor who is doing one better. He want the money! The problem is in how he plans to use it to stimulate our economy.

Are you ready? Here it is: Tax Cuts! Is this not kind of like living with grand parents who refuse to acknowledge that the times have changed? Hey Grandpa, have you heard the news? Trickle down never fixed those shoes.

Our governor Carcieri is proposing the following for RIland’s share of the stimulus money: Reduce the corporate income tax from 9% to 7.5 in 2010 with a continued reduction to 0% (zero percent) by 2014. (Mass is lowering theirs to 8.75 next year, we are currently second to Mass.) Savings next year for business: $14.5 million The Chamber says this will help start up companies. I didn’t know start ups paid corporate income taxes. Based on the states own data, 3500 companies of 50,000 pay the current 9%.

Next tax cut: Lower the annual business tax from $500 to $450. My two businesses pay this tax. I’ll get a $50 break, but the big guy’s will get to share millions.

Next tax cut: Raise the estate tax to $1 million from $675,000 which was set in 2001. It would match the Mass threshold. Estate tax filers would save $1.5 million.

Next tax cut: Reduce the income tax from 5 levels of 9.9% to 3.75% to 3 levels of 5.5 to 3.5%. We already lowered the top once so that more rich would come live in RIland ’cause you know, they’re the only ones that make an economy. Well, the rich population has not increased.

RI has already had this discussion and guess what? The rich make out every time.

The best-off Rhode Islanders pay 9.9 percent of their income in Rhode Island state and local taxes, while middle income families pay around 11 percent and low-income families pay over 14 percent.
Furthermore, the well-off have recently received significant reductions in Rhode Island taxes. The state has chosen to phase-down the percentage of federal personal income tax used to calculate Rhode Island tax–from 27 percent to 25 percent. When the rate reduction and the pass-through of the federal cuts are combined, Rhode Island’s well-off have already received a large tax cut. When the rate cut is fully phased-in, the average cut will be $5,200 for the highest-income one-percent, but average only $97 for everybody else.

And the State loses every time:

State income taxes are deductible on the federal tax return. Thus, when a state cuts its personal income tax, the amount deducted on the federal tax return is reduced. With the lower deduction, the federal tax goes up. For example, for most taxpayers paying at the top federal marginal rate, every dollar in reduced deductions due to cuts in the state income tax will cause federal tax liability to go up by about 40 cents. Thus, the net cut for the taxpayer is 60 cents even though the state loses a full dollar in revenue.

Here is some more on RI’s taxes.

He does want to treat capital gains as ordinary income. Currently our rate is 1.67% “…or .83% in some circumstances.” There has to be a catch here somewhere.

Back in 1999 when we were having the discussion the alternative was:

For a tax cut of this size, there are some attractive alternatives. $42 million could hire 1,000 teachers. 1,000 teachers could reduce the average class size for 50,000 students from 25 to 17. It is a perfectly fair question to ask which is more important: giving an average tax cut of $7,900 to the richest people in the state, or improving these children’s education?(2)

Education is not the only option. 1,000 police officers could be hired instead, infrastructure improved, drug rehabilitation programs initiated or job training programs funded. Or a tax cut could be targeted to lower income taxpayers.

Kind of sounds like what the president and congress had in mind when they just passed this stimulus plan.

He’s going to end a variety of deductions: mortgage, property taxes and charitable contributions. Being that property taxes range from 5.9% (bottom 20%) to 4.7% (96 to 99%) but only 2.8% for the top 1%, I guess it’s bend over time for the majority.

In the end:

An estimated 110,179 filers will each pay an average of $1261 more in income taxes according to Carcieri’s tax study commission. The vast majority of them are individuals and couples making less than $75,000 annually…

It doesn’t end there. Oh no. He want to use the stimulus to pay the $10 million settlement in the Station nightclub fire. Well, at least the money would get in the hands of those who could use it and would put it to work (as in spend it, as in stimulate the economy).

Lastly he’s going to use the stimulus to close our deficits. $192.3 million for 2009and $239.2 million for 2010. What we do after that, I have no clue. But then again, we’re the state that used the tobacco settlement money to close our past deficits. It is why we are in the mess we are in now. I guess we’ll just hope another uncle dies and leaves us a fortune again when year 3 rolls around.

And finally, to help reduce the spending, he’s going to reduce the revenue sharing to the towns and abolish the Pharmaceutical Assistance to the Elderly program. Hope those 1%’ers say thank you to those elderly who will take the bullet for them.

So, what’s your governor proposing?