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Economic News, Data and Analysis

Real wage declines

My colleague Jared points out the recent drop in real hourly and weekly wages.
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Real wage reversal persists
by Jared Bernstein
Data released this morning by the Bureau of Labor Statistics show that a combination of slower wage growth and faster inflation has led to falling real hourly and weekly earnings for most workers.
The Figure shows the yearly change in real earnings for the approximately 80% of the workforce that are non-managers in services and blue-collar factory workers. After handily beating inflation last year, wage growth began to slow as the economy lost speed in the last quarter of 2007. A year ago, annual hourly wage growth before inflation was 4.3%; this year (from January 2007 to January 2008), it was 3.7%.
Yearly change in real earnings, hourly and weekly (January 2007 – January 2008)
Inflation, conversely, driven up by higher energy prices, is growing about twice as fast as was the case one year ago.
This combination has led to the dramatic shift in the buying power of workers’ paychecks. A year ago, real hourly and weekly earnings grew on a yearly basis by over 2%; this January, they are both down by about 1%. Note also that over the past two months, due to the decline in average weekly hours–a function of the weakening job market–real weekly earnings are falling more quickly than hourly earnings.
These trends have important implications. First, falling real wages will likely lead to diminished consumption, reinforcing slower macroeconomic growth. Second, the reality of squeezed paychecks for most workers helps to explain the primacy of economic concerns among voters in the presidential primaries.

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Newseum | Today’s Front Pages | Gallery View

If you’re interested in front pages…

Newseum | Today’s Front Pages | Gallery View

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Stimulus, UI, Infrastructure

DeLong has moved towards stimulus (see below).
To be most effective, however, the Senate still needs to add on 1) unemployment insurance, 2) aid to states, and 3) direct job creation via school and bridge repair.
UI may be added today. State aid is not part of the mix, but I suspect will come up before too long as more states feel the revenue pinch. And unfortunately infrastructure spending is not part of the mix.
On the last point. Critics often argue that infrastructure spending takes too long to impact the economy. But…

  1. If we spend the $ on repairs – there is little to no planning needed. We already know which bridges are unsafe, and what schools need to get spruced up.
  2. The planning lag is much shorter than in the past. Remember the Minneapolis bridge collapsed last August? There are already boots on the ground, workers are pouring concrete for the footing of a new bridge.
  3. Even if the spending takes longer (say a year or so), we will likely still see higher unemployment. The last 2 recessions show that employment takes significantly longer to recover than the end of the official recession.
  4. And so what if we’re slightly late? These are projects we will need to do anyway – so lets just speed them up a bit.

Grasping Reality with Both Hands: Economist Brad DeLong’s Fair, Balanced, and Reality-Based Semi-Daily Journal

More on the Stimulus Package
On the phone just now, Larry Summers just moved me appreciably toward enthusiastic support of the stimulus package by arguing, roughly:
* The big arguments against the stimulus package are two:
o It will become a destructive lobbyist Christmas tree
o It will increase the deficit and yet fail to stimulate the economy
* We appear to have dodged the bullet on the first argument
* The second argument is incoherent because:
o The U.S. government is not going to go bankrupt
o Hence the reason to fear increasing the deficit is the fear that increasing the deficit will reduce national saving
o But if the stimulus package fails to boost spending, it will be because people save their tax rebate checks, in which case the stimulus will have no effect on national saving. Hence you can believe:
+ Either that the stimulus package will be ineffective as a stimulus but will not reduce national saving–in which case it is a zero.
+ Or that it will be effective as a stimulus–in which case it will be both good for employment and probably good for national saving as well, because few things are worse for national saving than a recession.
+ But the argument that the stimulus package is bad because it will be ineffective at boosting demand and will reduce national savings is not coherent

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Notes on the President’s FY 2009 budget

Spending

  • The budget would spend $3.1 trillion in FY2009.
  • Non-security discretionary spending under the proposal will decline by about 2 and a half percent after adjusting for inflation, security-related spending would see about a 5 and a half percent increase.
  • Department of Defense would see a 5 percent increase after adjusting for inflation and will total over $500 billion, which is

    • 1 out of ever 6 dollars spent by the federal government
    • More than all non-security discretionary spending combined.

  • The budget assumes sharp declines in both security and non-security discretionary spending over the next 5 years. By 2012, security spending would decrease by 22 percent, while non-security would decrease by 18 percent.
  • The budget contains at least $3 billion in reduction to grants to states in 2009.

Deficits:

  • The deficit for 2009 under the proposal is $407 billion, or 2.7 percent of GDP; thus, debt as a share of the economy would increase this year.
  • The proposal suggests declining deficits, and that a surplus would be reached in 2012, however this conclusion is built on an illusion:
    • Despite a stated desire for a permanent solution, the budget only includes a 1 year patch of the AMT. Extending the patch would cost around $100 billion in 2012.
    • The budget only includes $70 billion in war spending for 2009 (by contrast, 2008 funding totaled over $108 billion) and no spending thereafter.
    • The budget contains tens of billions in annual cuts to health care for the elderly and the poor that are unlikely to be enacted. In 2012, the budget includes $50 billion worth of cuts.
    • The budget assumes sharp declines in both security and non-security discretionary spending over the next 5 years. By 2012, security spending would decrease by 22 percent, while non-security would decrease by 18 percent.

Revenue

  • The proposal would reduce federal revenues by $117 billion in 2009, and over $2.3 trillion over the next 10 years. The 10-year figure is an understatement of the revenue loss since it does not include a fix for the AMT.
  • The Budget includes the impact of a stimulus package, which would reduce revenues by $125 billion in 2008, and $20 billion in 2009 (and small revenue increases in later years.

Economy

  • The budget assumes only a very mild economic slowdown:
    • Real GDP for calendar year 2008 is assumed to be 2.7 percent, returning to 3 percent next year.
    • Unemployment is assumed to average just 4.9 percent.

For the reception on the Hill see…

Bush Unveils $3.1 Trillion Spending Plan – washingtonpost.com

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Budget Fiction

Bush’s final budget will be released tomorrow – here’s the link once it goes live. I don’t think anyone is expecting this to be anything but DOA on capital hill.
The bottom line will probably show growing deficits in next year or two, and then some improvement thereafter. However, the supposed improvements later in the budget window, will be an purely an illusion since the budget will likely:

  • not include full out-year costs for military operations in Iraq.
  • not include cost of AMT reform.
  • assume large cuts in health care for the elderly and poor.

These are tricks used by the administration in recent budgets, and looks to be the same this year as well according to press reports.

In his new budget, to be unveiled Monday, President Bush will call for large cuts in the growth of Medicare, far exceeding what he proposed last year, and he will again seek major savings in Medicaid, according to administration officials and budget documents….The president’s budget will not seek money for another full year of the wars in Iraq and Afghanistan.

Update: Looks like the war spending included won’t even include a full-year request.

Pentagon won’t detail war spending plan – Los Angeles Times

WASHINGTON — When the Pentagon unveils its budget request Monday for the next fiscal year, it will back away from a commitment it made to Congress just a year ago — to estimate how much the wars in Iraq and Afghanistan are likely to cost.
Last year, for the first time since the wars began, department budget officials detailed war spending plans for the year ahead at the same time it told Congress what its normal operating expenses would be.
But this year, although the Pentagon will go into great detail about how it plans to spend the billions of dollars it gets to run its normal operations, it will include only what officials call a “place-holder” for war funding.

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Cold, plus Polls

I’ve been out sick with a nasty cold this past week. I hope to return to posting soon.
In the meantime:

Opus Comics, by Bloom County’s Berkeley Breathed – Salon

Payback for pollsters and the rabid, slobbering media

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