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Economic News, Data and Analysis

Homer’s Budget

[Update 6pm: The House passed the not-quite-reconciled budget by 5 votes, and passed the Senate by the tie-breaking vote of VP Cheney.]
The Congress is today voting on two version of a $2.27 trillion federal budget. For those not familiar with the usual process (and the unusual trick employed this week), I though I would illustrate with a quick example: The case of the Simpsons (Father Homer, wife Marge, son Bart, and daughters Lisa and Maggie).
The basics of their budgeting go something like this. Suppose that, for several years, the Simpsons have been running up credit card bills. One night they sit down and decide that they should really get their finances in order to start to pay-off their credit cards (or at least try to stop the debt explosion).
So, in an effort to restrain the family budgetary excess, Homer and Marge get together to try to come up with a budget. They lay out generally how much will be spent spend on things like food, allowances to the kids, car payments, slushies at Apu’s, etc., and agree to stick to the overall plan. They often have different ideas about how much to spend on various items, but they compromise and come up with a solution they can both agree to.
Makes sense so far, right? The federal government (usually) does roughly the same thing every year by passing a budget “resolution” which lays out the general overall budget amounts for spending and taxes. (Actual spending on specific areas is done via various appropriations bills).
Now, just like Homer and Marge sometimes differ initially, the House and Senate often pass different versions of bills. When this happens, representatives from each group get together in a “conference” to write a final version of the bill, which is often (but not always) a compromise between the house and senate version. This final version is then voted by the House and Senate before being sent to the President’s desk.
Now here’s where it gets weird. Suppose Homer and Marge, when making up thier budget, each have their own idea about how much to earn and spend. Most years, they get together to agree on a single number. This year, however, they can’t agree on a compromise and go about making their decisions separately, each using their own numbers!
Congress is playing some similar games with the current budget. The House of Representatives initially passed over $700 billion in cuts, primarily in the form of a dividend tax cut, white the Senate passed $350 billion. These bills went to conference, and what came out was… well… not so much of a compromise.
The “reconciled” bill gave a $550 billion figure to the House, and a $350 billion figure to the Senate. Huh?
It looks like the reason for the strange hybrid was a bid to delay the tough decisions until moderate Republicans (who are balking at greater revenue reductions) can be convinced to change their votes. (Attached were also a set of rules to make it likely that the final result would be closer to the $550 billion number.)
Now, I realize that this kind of a procedural maneuver is primarily the concern of inside-the-beltway types (like myself!), but what should be clear to everyone is that there are a lot of gimmicks being employed to try and force through a controversial budget. (See article below)
[Update: 4/12 12pm. The NYTimes is reporting that the budget passed only “…when Senator Charles E. Grassley, the Iowa Republican who is chairman of the Finance Committee … promised on the Senate floor that he would not permit, under any circumstances, a law this year that would reduce taxes by more than $350 billion over 10 years.”]
Now back to the Simpsons.
Suppose both that, this year, Homer and Marge decide it’s ok to run up some extra credit card debt – say because Homer has worked fewer overtime hours at the power plant recently, plus Bart got into a fight with Nelson, the local bully, and there were some unexpected medical bills to pay.
Sounds reasonable. When the economy goes into recession, overall tax revenue is lower, and expenditures are higher, so it makes sense to run a temporary deficit.
Now here’s where it gets weird again. In typical Homer fashion, he decides the best strategy is to work less and thus take in less income – for the next 10 years and beyond, with the hope that perhaps they might spend less money in the future. However, they know that there are going to be additional expenses coming up soon (Bart needs braces, Lisa keeps talking about going to college, and Maggie’s eating more everyday).
What will be the result of this action on the Simpson’s household budget? At best, huge credit card debts probably delaying Homer’s retirement. At worst, a repossessed car, no college for Lisa, and Bart’s overbite stays.
What about the economy? While a temporary deficit is OK in times of recession, current policies will drag the budget into deficit into the distant future. These deficits caused by revenue reductions, measured in the hundreds of billions, are especially concerning since there are important and necessary expenses on the horizon. Iraqi war and reconstruction costs, prescription drug benefits, and social security reform, to name a few, will cost many hundreds of billions. In addition, the deficit itself is a drag on private investment.
(A recent NYTimes editorial by Concord Coalition members Bob Kerrey, Sam Nunn, Warren B. Rudman, Peter G. Peterson, Robert E. Rubin, Paul A. Volcker: No New Tax Cuts provides a better summary ot these arguments.)
I’m afraid Homer would be proud of the current budget!

GOP Leaders Strive for Unusual Deal On Budget (

Under the proposed deal, the House and Senate would pass a $2.2 trillion budget resolution by week’s end calling for a $350 billion tax cut in the Senate and $626 billion in the House. Late last night, however, GOP leaders were warned that the Senate parliamentarian might not allow the unorthodox deal to go through as planned, two GOP aides said. A senior House GOP leadership aide said it could fall apart at an emergency meeting of top Republicans this morning.
A final decision is expected today. Never before has Congress passed a budget resolution with different tax numbers for the two chambers.
House and Senate members must settle on one number before they can send a tax cut bill to Bush for his signature. The easiest way for Republicans to achieve a big tax cut is to approve a budget resolution, which would set the parameters for spending and tax cuts for 2004. Under Congress’s budget rules, Republicans would need 50 votes in the 100-member Senate for a tax cut if a budget resolution has been passed. Without a resolution, they would need 60 votes, a dubious proposition in the narrowly divided chamber.
Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) accused his GOP colleagues of simply “passing the buck” because budget writers couldn’t “figure out” a compromise between conservatives who want large tax cuts to spur economic growth, and liberals and moderates who want smaller tax reductions to keep a lid on budget deficits.
Most Democrats oppose the GOP’s unorthodox solution. “There will be an uproar of some magnitude if somebody tries to do this,” said Senate Minority Leader Thomas A. Daschle (D-S.D.). The Republicans’ strategy is twofold: They want to appear fiscally responsible by passing a budget resolution by the April 15 statutory deadline and providing Bush more time to woo four Senate Republican opponents of his tax cut plan. It now will take Congress weeks, if not months, to settle on a final tax number.


Filed under: Economy, Fiscal Policy, Policy, Politics, Recession

The Employment Situation

The employment situation remains poor. Data released by the Bureau of Labor Statistics shows that the unemployment rate for March remains unchanged at 5.8%, and, in addition, total nonfarm payroll employment declined by 108,000 after seasonal adjustment.
Overall, these numbers again point to the idea that the economy is in somewhat of a holding pattern. Overall growth appears to be weak, leading to the decline in employment, yet the unemployment rate has been holding steady at just under 6% for the past year (see graphs below).

Employment Situation
Total nonfarm payroll employment declined by 108,000 in March, while the unemployment rate was unchanged at 5.8 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment continued to decline in manufacturing, retail trade, and transportation. Government employment also was down over the month.

Filed under: Data, Economy, Recession

The Investment Situation

The current economic situation in the US continues to be mixed. Employment is weak; GDP growth is slow, but positive; consumer spending is holding up, but confidence is down.
What about investment?
The graph below shows that there were signs of life at the end of last year. I would credit the Fed’s decision to lower interest rates over the past year (and to keep them at low levels) with this beginning of a recovery in investment spending.
Will it continue to recover?
Advance data for the first quarter won’t be released until the end of the month. In the meantime, data shows that Industrial Production has stabilized over the first part of the year. Unfortunately, an investment boom seems to me to be unlikely. Even though interest rates continue to be low, the start of the War in Iraq and general geo-political uncertainty will likely keep investment growth at low levels for the first quarter and into the near future.


Source: Nat Ec Trends, p. 22

Filed under: Data, Economy, Monetary Policy, Recession

Do Deficits Matter?

The short answer is “yes.”
The long answer (nicely laid out in a recent Macroeconomics Forum at Brookings) is that it depends on the time horizon.
Here are the basic ideas.
In the long run, persistent deficits can lower national savings and hence investment; thus harming the economy in the future.
In the short run, reducing national savings may be a good idea, if we have an economy that is operating below potential, and if we need some additional current expenditures to get the economy moving again. (*However, see note below.)
Of course the easy question is “does it matter?” – the harder question is “how much?” Unfortunately, this is a fundamentally hard question to answer (since just about everything depends on everything else in the macroeconomy, and we can’t exactly run controlled experiments on economies).
As a result, there is no consensus about the magnitude of the effect of deficits on, for example, interest rates or long-run growth. At most we can say that there is potentially a large and significant effect – it would seem prudent then, at the very least, to limit persistent deficits as much as possible.
For more on the effect of deficits, see the link below. For current and projected deficit numbers, see CBO: The Budget and Economic Outlook: Fiscal Years 2004-2013
*note – The more astute macroeconomists will of course note that Ricardian equivalence provides a theory in which private savings decisions may perfectly counteract the effect of deficits. My view is that Ricardian equivalence, while a nice extreme case, which provides some good intuition as to how the economy potentially works, fails both theoretically and empirically as a guide to policy. I think my view is common among most economists (although I haven’t done an exhaustive poll!)

The Brookings Institution
Controversies over the effects of fiscal policy on the economy have been at the heart of the policy debate surrounding the chronic deficits of the 1980s, the sharp rise in official budget surpluses in the late 1990s, and the equally sharp decline in the fiscal outlook recently.
This panel discussion, the first in an ongoing series on macroeconomic issues sponsored by the Brookings Institution, will examine a variety of questions regarding the effects of deficits on the economy: Do budget deficits matter? Under what circumstances and what time horizons are they good, bad, or neutral? How important are they to strong economic growth?
Following their remarks, panelists will answer questions from the audience.

Filed under: Data, Economics, Economy, Fiscal Policy, Policy, Recession

Employment Situation: Not good

The Bureau of Labor Statistics released its monthly employment report today. The unemployment rate was up 0.1 to 5.8% in February.
The big news in the report, though, was that total (non-farm) payroll employment fell by 308,000 after seasonal adjustment. This seemes to have been interpreted as a big negative for the economy and was much larger that expected.
Keep in mind that the employment data is often called a “lagging indicator,” meaning that the statistic tends to reflect the past state of the economy more that it indicates where the economy is headed. The weak employment number tends to indicates what we already know – that the economy was indeed weak; but it does not necessarily mean the economy is headed further downward.
However, for the unemployed – and those looking for jobs – it is certainly not good news.

Total nonfarm payroll employment fell by 308,000 in February, while the unemployment rate was about unchanged at 5.8 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Job losses were widespread, with retail trade and services posting especially large declines.

Filed under: Data, Economics, Economy, Recession

Tracking the Economy

This has been a busy week for economic news; I thought I would give an update for the week:

  • 2002Q4 GDP growth revised up to 1.4% annual rate (from a previously estimated 0.7%). Better, but not great.
  • Hubbard out, Mankiw in at the CEA. His nomination shouldn’t have been controversial – he is an accomplished and respected academic macroeconomist (and a fellow MIT PhD), but some right-wing supply-side economists are unhappy about what he wrote in his Principles book about Reagan’s policies.
  • Oil Prices are hitting 12-year highs and getting close to 40$ a barrel.
  • Consumer prices rose 0.3% in January and wholesale prices (the PPI) jumped 1.6%. The increases were due in part because of rising energy prices. The core CPI and PPI (which exclude food and energy) increased by 0.1% and 0.9%, respectively. If the PPI increases continue and make their way to consumer prices, it will cause the Fed to think twice before reducing interest rates in the case of a “double dip” recession. On the bright side, the increases should lessen deflation fears.
  • Consumer confidence fell to 9-year lows. The link between the Conference Boards’ index and spending is weak, so we shouldn’t be too worried; however, if consumer spending fails to hold up, expect a second recession.
  • On the bright side, it was announced that durable goods orders jumped 3.3% in January.

Filed under: Data, Economics, Economy, Policy, Recession

More Letters for Economists to Sign

It’s been a while since I have seen so much political activism from the economics profession. This past month, there have been three major sign-this-statement pushes trying to get economists to speak out.
Currently circulating is an anti-war Statement by US Economists on Iraq by ECAAR. (Over 100 have already signed).
Two statements on Bush’s economic proposal were also presented this past month.
Economistsí Statement Opposing the Bush Tax Cuts, Feb. 10 (Around 450 signers.) For a critique of the letter (but not the substance), see Don Luskin’s comments.
In response, a short letter to Bush was drafted: Economists Endorse President Bush’s Jobs and Growth Plan Feb. 12 (Around 250 signers.) For a critique, see DeLong’s Thoughts on the Republican Economists’ Letter.

Filed under: Economics, Economists, Economy, Fiscal Policy, Policy, Politics, Recession

Economists on Proposed Economic Policy

The Economic Policy Institute has coordinated a statement by economists on the Bush approach to economic stimulus.
The signers include 10 Nobel Prize winners, as well as several hundred academic and non-academic economists.

Economists’ statement opposing the Bush tax cuts
Economic growth, though positive, has not been sufficient to generate jobs and prevent unemployment from rising. In fact, there are now more than two million fewer private sector jobs than at the start of the current recession. Overcapacity, corporate scandals, and uncertainty have and will continue to weigh down the economy.
The tax cut plan proposed by President Bush is not the answer to these problems. Regardless of how one views the specifics of the Bush plan, there is wide agreement that its purpose is a permanent change in the tax structure and not the creation
of jobs and growth in the near-term. The permanent dividend tax cut, in particular, is not credible as a short-term stimulus. As tax reform, the dividend tax cut is misdirected in that it targets individuals rather than corporations, is overly complex, and could be, but is not, part of a revenue-neutral tax reform effort.
Passing these tax cuts will worsen the long-term budget outlook, adding to the nationís projected chronic deficits. This fiscal deterioration will reduce the capacity of the government to finance Social Security and Medicare benefits as well as investments in schools, health, infrastructure, and basic research. Moreover, the proposed tax cuts will generate further inequalities in after-tax income.
To be effective, a stimulus plan should rely on immediate but temporary spending and tax measures to expand demand, and it should also rely on immediate but temporary incentives for investment. Such a stimulus plan would spur growth and jobs in the short term without exacerbating the long-term budget outlook.

Filed under: Economics, Economy, Fiscal Policy, Policy, Recession

Unemployment to 5.7 percent

The unemployment rate dropped to a seasonally adjusted rate of 5.7 percent in January. This seems to be good news (at least it’s not bad news) on the status of employment growth in the US.
However, it does look like this number is slightly misleading due to the seasonal adjustment process. See Delong’s report of Henwood’s explanation. The best interpretation is that employment situation is roughly unchanged from last month.
(Basically, the seasonal adjustment is meant to rid the data of regular effects that occur every year. This can be a good idea if we want to compare, say, January unemployment data with July unemployment data and interpret the result as a real shift in real economic activity. If we didn’t do this, a difference in the unemployment number would be a combination of real economic activity as well as some weather-caused change. For you statisticians out there, the CPS is now using X-12 ARIMA adjustment; an update from X-11 used since 1980.)

Employment Situation
Unemployment (Household Survey Data)
The unemployment rate fell to 5.7 percent in January; the number of unemployed persons was 8.3 million. The jobless rates for the major demographic groups were as follows: adult men (5.4 percent), adult women (4.7 percent), teenagers (16.8 percent), whites (5.1 percent), blacks or African Americans (10.3 percent), Asians (5.6 percent, not seasonally adjusted), and Hispanics or Latinos (7.8 percent). (See tables A-1, A-2, and A-3.)
Total Employment and the Labor Force (Household Survey Data)
Total employment in January was 137.5 million. The employment-population ratio–the proportion of the population age 16 and older with jobs–was 62.5 percent. The civilian labor force in January was 145.8 million and the labor force participation rate was 66.3 percent. (See table A-1.)

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Filed under: Data, Economics, Recession

Economic Report of the President

An email from Bruce Bartlett alerts me to the recent release of the Economic Report of the President.
Looks like I have some weekend reading to do!

Filed under: Economics, Economy, Fiscal Policy, Policy, Politics, Recession