Waiting for a Piece of that Yummy Pie

Glenn Hubbard says the public is wrong about the economy. It's a good economy and the only worry people should have is that taxes might go up:

Hidden Treasury, by Glenn Hubbard, Commentary, WSJ: President Bush's selection of Hank Paulson to be the next Treasury secretary is cause for ... reflection on the economy's performance ... [M]any forecasters estimate that GDP growth over the full year will be in line with the economy's potential GDP growth... Outside the U.S., much improved growth prospects for Japan and nascent growth in Europe are good news for global activity.

Yet the public's anxiety over the economy does not align with those headlines. One possibility is that the economy's performance simply is not as good as the data suggest. In this view, Americans used housing equity gains to finance consumption, expanding the already large current account deficit. As housing price appreciation starts to vanish, the engine for spending growth stalls, and foreign investors may lose faith in the U.S. economy's spendthrift ways.

While such a story offers drama, economic practice is likely to be more subtle. Flattening house price growth -- embedded in forecasts of reasonably good GDP growth -- will lead consumers gradually to raise saving. And the recovery's strength has already rotated to business capital spending. Gradually rising U.S. saving and a pickup in domestic demand growth in key emerging economies should facilitate gradual adjustment of U.S. external imbalances.

Proponents of the "imbalances in the recovery" view often suggest that public policy played an unwelcome role. The Fed pursued an accommodative monetary policy ... and that policy stimulated the housing market, consumer spending and the current account deficit. Inflation risks are a legitimate concern. But can one seriously believe that a much tighter monetary policy over that period would have proven better for incomes and employment?

And tax policy? Investment incentives, lower marginal tax rates and cuts in dividend and capital gains taxes promoted investment at a time when investment decisions faced many headwinds... Are we to believe that higher marginal tax rates would have led to better outcomes for output and employment over the past five years? Should we think that raising taxes on capital income would be an encouraging sign for foreign investors about the U.S. investment climate?

While pundits' hand-wringing about the economy misses the mark, there is a void in talking about the big story -- the extraordinary performance of productivity growth in the U.S. economy over the past decade. Productivity growth has accelerated a full percentage point.... And this growth reflects the power of openness, innovation and entrepreneurship in the economy...

It is tempting to credit "technology" with our central success story. But ... these companies did not become more productive simply by buying faster computers. They became more productive by having managers and entrepreneurs who faced global competition and knew how to integrate these investments with new business models to raise productivity. ... To maintain growth, we must resist the strong political pressure to protect existing "jobs" and "firms." Rather, well functioning labor and capital markets -- cushioned by public support for training and education -- offer a better route to success.

Many question whether workers are sharing in the surplus created by faster productivity growth. In a competitive economy, workers should see the benefits of higher productivity. And looking at postwar data for the U.S., productivity and real compensation grow together.

But at the same time, the co-movement is not instantaneous. In the mid-1990s, for example, higher productivity was not immediately reflected in compensation. GDP growth at roughly potential in 1994 was drowned out by worries over job cuts and downsizing until compensation shared more fully in productivity growth's dividends later in the decade. ...

But there is real danger. A legitimate fear is likely weighing on the public's mind -- a large tax increase that could leach the innovative capacity of our vibrant and entrepreneurial business sector and eliminate the growth dividend of the past decade. ... Secretary Snow has rightly celebrated the economy's success, and Mr. Paulson will no doubt do so as well....

The biggest, best pie ever is on the table and one group is having a feast. Fat and happy they are.

This group, managers and entrepreneurs are, after all, the ones responsible for increasing productivity so they should get to eat first:

They became more productive by having managers and entrepreneurs who faced global competition and knew how to ... raise productivity.

The other group is told they will have to wait to get their share of the pie, hopefully not too much longer. They are not fat, and they are certainly not happy.

It is noted that workers also had to wait for their share when pie making technology improved in the 1990s, so they should be used to waiting by now. And workers shouldn't worry that the pie was financed by borrowing from neighbors, there is a plan to take care of that. Tax cuts will ensure that there will be more than enough pie to give everyone what they've been promised.

The fat and happy crowd cannot understand why those eating nothing but promises aren't as happy and worry free as they are.

Comments

[Emmanuel]

This article is typical for Bush's acolytes. Bottom line: we're too dumb to recognize how well the economy is doing.

Productivity growth has accelerated a full percentage point, with enormous implications for growth in living standards.

He's kidding, right? As household take on even more debt and real wages fall or remain stagnant, it seems living standards are getting worse and will get even worse as the debt burden increases.

What about "wage stagnation"? Health-care costs rising more rapidly than inflation strip out potential wage growth (while allowing greater compensation growth, including employer-paid health-care costs). Allowing productivity growth to pass more completely into wages would be easier if market forces were used to help restrain health costs.

If I recall correctly, it was the Bush administration that came up with a health care plan that did not allow for collecting bulk discounts from pharmaceutical firms. "Market forces" usually means that when you buy more of the same, you get quantity discounts. It seems to me that the administration was the one that defeated the logic of "market forces" so it could give handouts to Big Pharma.

This dreck is a joke, and an offensive one at that.

[Ridchard]

Market fundamentalists always believe that all information is available in the average. If the average goes up, then everyone is better off, and if everyone is not better off, then the market will apportion it in the fashion that will maximize future gains.

De Tocquville commented on how Europeans, unlike Americans, focused most of their efforst on rent-seeking behavior, and that the relatively egalitarian nature of American rewarded effort over connections. Times have changed: CEOs are now the nobility pursuing rents and the spoils of the system go to them.

[sunlight]

The comment I made about the Morris article also applies here. Real median wages have fallen in every year of the second Bush Administration. More and more people are have become worse and worse off since Bush took office. A rise in the aggregate GDP number in these circumstances proves that people in the upper income brackets are doing better while most are doing worse.

[pgl]

Hubbard is still drinking the Kool Aid - especially that comment regarding tax policy (see the update to my Angrybear post).

[Bruce Webb]

"Productivity growth has accelerated a full percentage point, with enormous implications for growth in living standards."

Except it didn't. The Social Security Trustees explained that Productivity shrank from 3.0% in 2004 to 2.0% in 2005. Well "explained" might be a little strong. But certainly three Bush Cabinet Secretaries were comfortable enough with that number to put it into the 2006 Social Security Report. Which is it? Did economic growth actually collapse in a way that kept it under Low Cost? Or did it accelerate by a "full percentage point"?

Enquiring minds want to know but no one with authority even seems to want to raise the question. Is 2.0% an honest number for 2005? Or did productivity in fact come in ahead of the 2.1% that Low Cost shows is enough to fully fund Social Security forever?

Table V.B1 is just floating around in the punch bowl and nobody seems willing to call it for what it is. All I know is that I am not sipping and at this point resigned to waiting for next years batch of punch.
http://www.ssa.gov/OACT/TR/TR06/V_economic.html#wp188118

It is hard to believe that the Bush Administration gets to brag about the economy, bitch like hell that the media is not giving them credit, and simply slip a 2.0% 2005 productivity number in their prime economic table on their signature issue.

Hey You!! Glenn! Which is it!! Yes I'm yelling!! From the bottom of a god damn well from all evidence I see!

It's like numbers don't even matter. I mean if exactly one person had defended 2.0% productivity I could in principle just conclude I just didn't get it. But no one has even done that. I look at Low Cost and conclude that not only is it doable but that is done. Yet yammerheads like Hubbard simply get away with bragging out how strong productivity is.

It's been exactly five weeks since the release of the 2006 Report of the Trustees of Social Security. I could give you a link.

(oddly enough, like every year I ordered my paper copy the first day and then reordered it a couple of weeks later. In years past I would receive it within a week, first class postage (about $7.50) paid. This year's copy hasn't reached me yet. If I was a paranoid I might think I was on some 'do not mail' list.)

[bakho]

The public is NEVER wrong about the economy. We either have money in our purse or we don't. We have the job we want or we don't. We are out on our own and successful or moving back in with Ma and Pa. We are NEVER wrong about the economy that we experience.

[marcel]

What's this about pie? Fafnir has been offline for over 2 months, now. I think someone (Giblets is my bet) may have mistaken him for a blackbird and baked him into a pie. This post is in really bad taste.

[Holly W.]

If the economy is so great, why is the stock market so cruddy?

[Robert]

My beef with apologists for Bush-o-nomics is that they all disingenuously trumpet the state of the here and the now (mmmm...yummmy!!) without context, whilst what really mattters in the macroeconomic sense (and with respect to any policy analysis) is the cost of one's actions upon the future, versus the benefits (if any) upon the present or the recent past.

When I think of Hubbard justifying the coincidentally loose fiscal & monetary policies over the last years,

But can one seriously believe that a much tighter monetary policy over that period would have proven better for incomes and employment?

I think of a guy justifying to his wife, the benefits of the new expensive (and obviously unaffordable) SUV or sports car he's just "bought" without respect to how he'll meet the monthly payments, and so in the process jeopardized the future solvency of the household, and the needs of his offspring.

[me]

Thank you bakho.

And as far as this goofs ideas on taxes, it looks like the UK conservative party has looked at what has happened to the deficits from tax cuts for the rich in the US and want no part of it:

Conservatives rule out any pledge to cut taxes
Thu Jun 1, 2006 12:58 PM BST
LONDON (Reuters) - Conservative Shadow Chancellor George Osborne will say on Thursday Britain needs to be moving towards lower taxes but he is ruling out making any tax cut pledges until nearer the next election.

In a speech to business leaders in Manchester, Osborne also suggests that, unlike in the last three elections which the Conservatives lost to Labour, the party may go into the next poll without an upfront promise to cut tax.

"We need to move towards lower taxes in a way that supports economic stability and helps strengthen public services," Osborne will say.

"It means we put stability before promises of up-front tax cuts. The simple truth is this: thanks to the state of the public finances, up-front promises of tax cuts are very unlikely to be on offer at the next election."

Osborne's pre-released comments reflect Conservative leader David Cameron's desire to make the party more modern and inclusive rather than focus on traditional Tory issues, such as lower tax.

He admitted the policy would be a disappointment to some in the party.

Email This Article | Print This Article | RSS [-] Text [+] LONDON (Reuters) - Conservative Shadow Chancellor George Osborne will say on Thursday Britain needs to be moving towards lower taxes but he is ruling out making any tax cut pledges until nearer the next election.

In a speech to business leaders in Manchester, Osborne also suggests that, unlike in the last three elections which the Conservatives lost to Labour, the party may go into the next poll without an upfront promise to cut tax.

"We need to move towards lower taxes in a way that supports economic stability and helps strengthen public services," Osborne will say.

"It means we put stability before promises of up-front tax cuts. The simple truth is this: thanks to the state of the public finances, up-front promises of tax cuts are very unlikely to be on offer at the next election."

Osborne's pre-released comments reflect Conservative leader David Cameron's desire to make the party more modern and inclusive rather than focus on traditional Tory issues, such as lower tax.

He admitted the policy would be a disappointment to some in the party.

http://today.reuters.co.uk/news/newsarticle.aspx?type=topNews&storyid=2006-06-01T132347Z_01_L01740018_RTRUKOC_0_UK-BRITAIN-CONSERVATIVES.xml&src=rss

[bailey]

Piece is not worth a response, but HOW are Columbia Bus. School grads going to convince anyone to hire them?

[Lord]

We should be happy for them that they are doing so well. (Is there a moral here?)

[billy]

When Sweet Statistics Clash With a Sour Mood
By DANIEL GROSS

http://www.nytimes.com/2006/06/04/business/yourmoney/04view.html?_r=1&oref=slogin

---
Aggregates — big-picture figures like the unemployment rate, productivity and growth in the gross domestic product — are highly useful to economists. But to most people, they're abstractions. You can't use a low unemployment rate to pay a mortgage.

As a result, large aggregates "are something that people may hear about in the news, but don't have a direct impact on how people feel," said Lynn Franco, director of the Consumer Research Survey at the Conference Board.

.....
Dean Baker, a director of the Center for Economic and Policy Research in Washington,puts the Consumer Price Index — the main gauge of inflation — at the top of the list.

"It has no direct relationship to what people perceive as inflation," he said. Mr. Baker notes that the index doesn't take account of rapidly rising co-payments and higher insurance deductibles when it calculates health and medical costs. And to gauge inflation in housing, the index approximates a measure of rent instead of looking at home purchase prices.

----

[dogfacegeorge]

"well functioning labor and capital markets -- cushioned by public support for training and education -- offer a better route to success."

If we could only get the Republicans behind such a program!

[save_the_rustbelt]

Send Glenn to Toledo, I'll pick him up at the airport and give him a tour of what NAFTA and Bush-o-nomics has done to people.

We will start at the bankruptcy court, then go to a foreclosure sale, and then hit Wal-Mart.

Are these guys really this stupid? Can they not understand record low polling data? Are they that isoloated from reality?

Why should we ever believe an economist? (Sorry Mark) Weathermen are more accurate.

[anne]

"If the economy is so great, why is the stock market so cruddy?"

The yearly return for the S&P stock index since January 2000 has been about 1%, corporate profits however have been excellent save for the brief recession period, also the S&P regularly replaces weaker corporations with stronger. So, valuation have come to attractive levels no matter whether the market falls or rises for quite a while from here.

[anne]

Careful about using the stock market as an economic guide, for that the bond market is far more helpful. Look to stocks for relative value, while the bond market allows for a sense of economic conditions.

[anne]

Holly had better not even think of asking me what the bond market is saying just now, however. Notice how I avoided saying anything about that :) The vauge sense I have is a long term Treasury rate about 5% will allow for the Federal Reserve to continue to tighten while moderate growth continues, but I know well that I am talking about a falt flat flat yield curve.

[ilsm]

The economy is doing so well, we cannot afford for you al to retire.

[dWj]

http://research.stlouisfed.org/fred2/series/RCPHBS/2/10yrs?cs=Medium&crb=on

Inflation-adjusted compensation per hour peaked at the beginning of 2005. It retreated over the course of last year, particularly after Katrina, but is back up, ahead of any level it ever attained before late 2004.

[rana]

The figures below show the average increases for compensation and for its two components, wages and benefits, over the past five years ending in March (using the ECI). Over the past three years wages have risen only 2-1/2 to 2-3/4 percent per year. This is below the rate of inflation. It is not hard to see why workers think this economy is performing at a sub-par rate. Now the ECI excludes stock options, so it understates CEO compensation and thus may not capture R. Glenn Hubbard's or Paulson's reality. But is does capture my world. Overall cpensation has grown at a more rapid clip because of benefit costs-i.e. health insurance, but with fewer insured each year, that doesn't seem like a reason to rejoice either.

2001 2002 2003 2004 2005 2006
Compensation costs
3.9, 3.8, 3.8, 3.7, 3.6, 2.8
Wages and salaries
3.7, 3.5, 2.9, 2.6, 2.5, 2.7
Benefit costs
4.7, 4.5, 5.9, 6.7, 5.9 , 3.4

[Lord]

The moral is perhaps that the haves should be a little more concerned about the have-nots, and not just flaunt their success.

[calmo]

As always, I wonder if it is genuine, this sentiment that the economy is doing well.
Could it be possible that Hubbard believes it? As evidenced by...robust plant expansions? rising consumer sentiments? rising stock markets? rising wages?
What would count, for Hubbard, as an economy that is not doing well?
No, I think it's a deliberate lie marketed to support a sagging confidence level.
As bakho points out, telling us to get happy is more than insulting.
How low does sentiment have to go before Hubbard throws in the towel and admits that those people whining out there have legitimate complaints?
My feeling is there is no lower limit and so there is no honesty with Hubbard.

Kudos to Mr Webb for leveraging the SSTF productivity number here.

[lonesome moderate]

As economics this is unworthy of a serious response (I'm amazed that I find myself saying this about the dean of Columbia's business school). As an exercise in pre-emptive spin, though, it's interesting. Anything bad that happens will be because congress raised taxes. And if bad things happen without anyone raising taxes, it'll be because lots of people talked about raising taxes, or thought about it. Not the most convincing explanation for an economic downturn, but it's better than nothing.

[dWj]

Excluding benefits from compensation is, from an economic standpoint, a bit arbitrary; if you're going to do that, though, whatever inflation rate you're going to compare to wages ought at least to back out price increases in things that tend to get paid for as benefits. In the past year, wages adjusted by even that measure of inflation may have gone down; in the first term of the current presidency, though, the rate of inflation on goods purchased from wages was notably lower than the rate for all consumer goods.

Of course, if consumers had previously been paying directly for their own health care, and now weren't, it would seem strange to count this as positive or negative. Compensation is the appropriate measure, though perhaps a median compensation or some such would be better than a mean.

[Ninjaplease]

"The moral is perhaps that the haves should be a little more concerned about the have-nots, and not just flaunt their success. "

Because money is not enough, they require you to be in awe of their presence, their decision making, and that you never complain--just like a "good slave or indentured servant."

[cm]

dWj: First of all, you shouldn't say inflation-adjusted but at best CPI-adjusted. Which gets me to the second point -- sure benefits should be included (but then please subtract out my biweekly healthcare paycheck deduction), but with no discernible improvements in service quality (or at least so I claim as a casual user) and rising copays, the (supposedly) rising healthcare benefit payments are precisely inflationary. But I doubt that's adequately captured in CPI.

[cm]

Ninja: Well, at some point even those guys have to acknowledge, and even if only subconsciously, that money is just a means towards an end.

[Blissex]

«What they are saying is essentially code for "these profit numbers are fake. In the current regulatory climate you can still legally fake profit numbers, but only for a few quarters. The real numbers will have to start coming out at the end of this quarter or next".»

But quarterly or annual profit figures are always fake, because profit is just a different between two estimated numbers.

They are estimated because for most companies both headlines involve very significant multiple year numbers, and some are projections...

There is another very, very important issue:

* Management is often paid ''target'' bonuses, where they get a pile of cash of they reach or exceed a target, but nothing if they don't.

* Management often can control to some extent how many sale or cost events happen per quarter or per year.

To bring home this point, example: assume that management is paid a bonus if sales are at least 110 in a given quarter for the next year. Which of the following nets more bonuses for management?

* Q1: 80 Q2: 80 Q3: 110 Q4: 110; total: 380

* Q1: 100 Q2: 100 Q3: 100 Q4: 100; total: 400

In other words, ''target'' bonuses encourage management to ''bunch up'' things if they can, artificially whacking some periods to make others look better. Also, if the ''whacked'' periods are below target, it does not matter how much below, because the bonus is not payable regardless.

There are several ways of doing this, like delaying sales at the expense of losing some now, or pushing sales forward at the expense of later sales, or underestimating costs and then taking writeoffs later.

Guess why ''target'' based bonuses are so popular? It is not just because they are simple to understand, but also because they are simple to game.

[Blissex]

«As always, I wonder if it is genuine, this sentiment that the economy is doing well.»

Well, coming from certain parties it is propaganda, but it is indeed doing well for most people, those with the more secure jobs and the most assets. There are lots of home owners whose assets have vastly appreciated, there are lots of government employees with really generous benefits, there are lots of small business owners finding ever cheaper employees; and all these are enjoying the benefits of free trade in labour and goods, delighted by how cheap big flat screen TVs and cleaners are.

BTW, entirely amazing graph of the 30-year mortage rate over time (followed by that of prime bank rate):

http://research.stlouisfed.org/fred2/series/MORTG/114
http://research.stlouisfed.org/fred2/series/MPRIME/117

and its obvious result:

http://research.stlouisfed.org/fred2/series/HSN1F/97

My feeling is that for perhaps most people, and certainly for most voters, and in particular Republican voters, things have been doing quite fine, and this administration and its supporters are fond of reminding them of this.

The people who have suffered, those who compete with immigrants, labour saving technology, or offshore replacements, those without political protection, have been hit hard, and are many, but my impression is that they are not the majority.

The Economist in this (pay-view) article:

http://www.economist.com/agenda/displayStory.cfm?story_id=5677433

summarizes the well know notion that:

«in 2004 the richest 10% of Americans scooped a staggering 43% of pre-tax income and held 57% of net worth, up from 39% and 51% respectively in 1995. The poorest 40% gathered just 10% of income in 2004, a little less than their 11% in 1995.»
http://www.economist.com/finance/displayStory.cfm?story_id=5468383
«That does not mean, however, that all or even most workers have seen the fruits of faster productivity growth. Which workers benefit depends not just on labour's overall share, but also on changes in the distribution of wage income. And it is well known that inequality has risen in America in recent decades as incomes at the top, in particular, have soared.»
«the top 1% of Americans now receive about 15% of all income, up from about 8% in the 1960s and 1970.»

That 10% in 2004 may be more in absolute terms than 11% in 1995 as the economy has grown, but that there has been a small shrinking in the share from an already low level means that the leverage of the bottom 40% must have weakened a fair bit, which does lead to unhappiness...

«http://research.stlouisfed.org/fred2/series/RCPHBS/2/10yrs?cs=Medium&crb=on
Inflation-adjusted compensation per hour peaked at the beginning of 2005.»

Uhm, I would rather look at nonfarm compensation (not that different though), someone has objected to the CPI, and then it is an average of two rather different trends, one sharply upwards that overcompensates for another which is downwards.

There is a further and potentially big problem here: thats compensation per hour of people who have jobs (I also wonder if that includes the black economy and illegal immigrants).

If in a couple the tenure and union protected teacher wife gets a raise, and the engineer husband gets sacked, that ''compensation per hour'' goes up, but those people don't feel any happier. Indeed despite the many people who have benefited hugely from globalization and low interest rates in the past few years, average consumer sentiment is gloomy, even if not as bad as in the early 80s or early 9090s (I remember 1990-1993 and it was terrible).

http://research.stlouisfed.org/fred2/series/UMCSENT/1

If one looks at the ''hours for all persons'' graph:

http://research.stlouisfed.org/fred2/series/HOABS/2/Max?cs=Large&crb=on

It is pretty clear that in the few years there has been a huge hit, which is being recovered, but the memory is fresh and painful. Interesting statistics here, about employment and population numbers:

http://research.stlouisfed.org/fred2/categories/10

for example the median duration of unemployment, which is recovering too, but was pretty bad for a while:

http://research.stlouisfed.org/fred2/series/UEMPMED/10

Help wanted in newspaper index instead is still quite scary:

http://research.stlouisfed.org/fred2/series/HELPWANT/10

But let's hope because all those ads have moved to Craiglist or the web (or maybe instead because there is so much demand for low-end jobs that advertising them is pointless).

The civilian participation rate is as many point out not doing well, but anybody pointing out the vast increased in the past 30 years (and especially in the past 20) is forgetting that means lots more women entering the labour pool (and competing with men).

Perhaps the scariest graph of all is the long term unemployement one, but that's recovering too:

http://research.stlouisfed.org/fred2/series/UEMP15OV/10

However all these are averages, and the distributional impact is not obvious. The bottom 40% of the population is being hammered, even while the top 1% is doing pretty well:

Looking simplistically at averages, here is the hourly real compensation in manufacturing:

http://research.stlouisfed.org/fred2/series/COMPRMS/1

which has zoomed up (30%) in 1996/1997, after being rather flat for a decade previously. Is manufacturing is back in fashion in the USA, or is that it has been shrinking to the point where only the highest value added and best paying industries are left?