About America’s economic recovery: the good news and the bad
Summary: The news media provide a fire hose-like stream of information and analysis about the US economy. Most of it consists of the consensus viewpoint repeated endlessly. A consensus opinion suitably optimistic for politicians in Washington and bankers in New York. Here we look behind the veil.
- Looking at winners and losers
- Another perspective: GDP changes since the recession, by nation
- Conclusions, what this means for us
- A reminder of what comes next
- For more information
(1) Looking at winners and losers
The period since the 2008 crash has been the most stressful peacetime period since the 1930’s. To understand these events let’s start with a list the winners and losers. One way to distinguish the two groups is by their government’s fiscal balance. Winners strengthen their balance sheet (preparing for the large retirement payouts to come). Losers borrow and spend frantically to maintain social and economic stability.
More specifically, look at general government cyclically adjusted 2011 overall balances as a percent of potential GDP (the standard metric for international comparisons), from statistical table 3 of the April 2012 IMF Fiscal Monitor. First, the winners (listed with the largest surplus on top):
- USA: -7.2%
- Singapore: +7.1%
- Korea: +2.4%
- Sweden: +0.2%
- Swiss: +0.2%
This shows the many paths to success. Singapore, Korea, Sweden, and Switzerland all have different economic and social structures. And, yes, the USA does not belong in that list. Let’s put the USA in its proper context, among nations with similar fiscal balances. Loserville. Let’s see the nations with the largest 2011 fiscal deficits (with the largest deficit last):
- UK: -6.3% now in recession, again
- Hungary: -6.5% under extreme political stress
- Greece: -6.8% another default widely expected
- Spain: -6.9% near-25% unemployment, in recession
- US: -7.2%
- Ireland: -8.0% no recovery; see Krugman’s note
- Japan: -8.1% no exit visible
- India: -9.1% painful but tolerable due to their 16% nominal GDP growth
Healthy nations do not run sustained 7-8% deficits. Consider two others nations in the news are further up this list: Italy and Portugal both have -2.7% deficits. If they had our deficits, perhaps they’d look more like us. If we had their deficits, perhaps we’d look more like them.
This reinforces a point made frequently on the FM website during the past three years: it is daft to discuss the US recovery without mentioning its extraordinary level of fiscal and monetary stimulus. To use a vivid metaphor, patients in the Intensive Care Ward can be “recovering”, but they’re not healthy. If the others in our company are in dire straits, why is the US a boom story?
(2) Another perspective: GDP changes since the crash, by nation
From: “Why UK GDP continues to lag the G7“, Gavyn Davies, Financial Times, 24 April 2012. $1.3 trillion in government borrowing helped push the US to third from the top, below Canada (3.6% deficit, boosted by oil and mineral exports) and Germany (-1.2%, benefiting from its rigging of the European Monetary Union). Graph shows nominal GDP.
(3) Conclusions, what this means for us
Consider a thought experiment (Gedankenexperiment). What if the ECB could force spending cuts and tax increases to reduce the US deficit to 2.7% in 2012 or 2013? Instant recession, probably a severe one.
The US economy is not healthy. It’s heavily medicated and feeling no pain, wired into a battery of life-support machines (using financial theory and technology not available in the 1930’s). As a result it has slowly grow since the 2008-2009 crash. Employment up 1.7% in the past year, real final sales still below 2008 level, real final sales to private domestic purchasers still below 2008 level. The private sector deleverages by shifting debt to the government’s balance sheet — and to a far lesser extent through default — so the US is not deleveraging in any significant sense.
We can draw some conclusions.
(a) Our leaders know about our true situation, although they lie about it. Which is why the deficit was issue #1 in the November 2010 election, immediately followed by bipartisan majorities for another round of fiscal stimulus (spending and tax cuts) …
(b) These large-scale stimulus programs have side-effects, which at some unknown point in the future will become problematic or even untenable. But the worst side effects were unexpected, even by those critical of government stimulus programs.
(c) First, the stimulus stabilized the economy, but in doing so it eliminated the pressure for reform. We have had the New Deal stimulus without the New Deal reforms (some of which failed, but some setup the great post-war boom).
(d) Second, like Japan we’ve wasted the fiscal stimulus. In the 1930’s we built useful infrastructure (eg, parks, Hoover Dam), which generated long-term social and economic benefits for America. What do we have to show for the trillions of spending and tax cuts since 2007? Not much, and little that generates an economic return to help pay down the debt we’ve accumulated.
(e) Third, like Japan we’re in a cycle of stimulus-falling savings-falling inventories-expansion and stimulus reduced-rising savings-rising inventories-slowing gdp. We may be entering the second phase of the cycle.
(f) The financial sector has become hooked on monetary stimulus. Wall Street economists talk about little else than when they’ll get their next fix of quantitative easing, like junkies begging on the street corner. Nobody any longer even pretends that QE3 will help the economy.
For more about this see:
- “U.S. Consumers: Still Key to the Outlook“, A. Gary Shilling, INSIGHT, April 2012 — Excerpt
- “Growth Chill About to Hit the US“, Humayun Shahryar & Santi Rasanayagam, posted at Roubini Global Economics, 30 April 2012
- This analysis by David Rosenberg (ex-economist of Merrill), re-posted at Zero Hedge (they repost material from some of the best sources), 30 April 2012
(4) A reminder of what comes next
Whoever wins the elections will discover our problems in January 2013. With luck, we’ll get reforms: raising taxes, reduced spending, health care reforms. The alternative is too horrible to contemplate, as events (eg, markets) eventually force drastic change. For details see:
- The good news: America’s politics are neither polarized nor dysfunctional. That’s also the bad news., 16 August 2011
- A look at the future of America, unlike the expectations of conservatives and liberals, 10 August 2011 — What to expect in 2013.
- President Romney will prove an effective President, reshaping America for his key supporters, 17 April 2012
(5) For more information
- The US economy must go to Defcon 1, 13 November 2008
- A certain casualty of the recession: the US Government’s solvency, 25 November 2008
- Everything you need to know about government stimulus programs (read this – it’s about your money), 30 January 2009
- Government economic stimulus is financial heroin, 28 December 2009
- Our government’s finances are broken. How do we compare with our peers?, 8 April 2010
- A status report about the US economy (we party so hard we cannot hear the alarms ringing), 27 March 2012
- About the March jobs report – a few jobs bought at great cost, 7 April 2012