News What is wrong with the US economy?

[mathwonk]

it is amusing that some people are willing to argue the average guy gets his gloomy view of the economy by reading the ny times. what about by looking in his wallet? or at his salary, or retirement check, or the price of goods?

i have always felt that the real economy and quality of life suffers when goods (and people) are simply burned up in wars, and resources are diverted from health, education, infrastructure, the arts,...

 

[russ_watters]

it is amusing that some people are willing to argue the average guy gets his gloomy view of the economy by reading the ny times. what about by looking in his wallet? or at his salary, or retirement check, or the price of goods?

When little has changed in a person's individual situation, many people will still just echo what they see on TV or read in the paper. That's a fact of life. The current situation is a perfect example of this: for most people, the only noticeable change in their personal economic outlook manifests as higher gas prices. The real effect of that is relatively small except for those heavily dependent on driving.

i have always felt that the real economy and quality of life suffers when goods (and people) are simply burned up in wars, and resources are diverted from health, education, infrastructure, the arts,...

That is generally true, but fortunately we haven't had a war big enough to actually drain the economy much in a very long time. Depending on how you calculate the numbers, the Iraq war costs somewhere between 1 and 2% of our gdp, whereas Vietnam sucked-up 12% and WWII a staggering 40%. http://news.bbc.co.uk/1/hi/world/americas/4201812.stm

 

[russ_watters]

I think people's view of the economy reflect their own experiences.

That's partly true, yes.

With the high fuel and food prices and dropping wages, a lot of people are not doing very well personally.

Well, the part about dropping wages is factually wrong, but ok - people will notice an extra few percent of their monthly income going toward gas and food. But how much is that, really?

The economy as a whole may be doing all right, but the majority of people are not.

Isn't that self-contradictory? If the majority of people are not doing all right, that would imply to me that the economy as a whole was not doing all right. That's kinda how an economist measures how the economy is doing.

 

[russ_watters]

No one is hoping for a recession, and certainly doesn't need one.

A politician campaigning on the platform of pulling us out of the recession most certainly does does need us to be in a recession for such a campaign strategy to work. For example, the link you gave was about John Edwards' campaign strategy - how's he doing these days?

I not sure why one would want to have a recession.

Politicans care about little else besides their own ambition. For a politician who'se ambition hinges on there being a recession, they want negative numbers as much as an average guy looking at his paycheck wants to see the numbers increasing.

I'll go further and say that this is one of the primary reasons why Bush got two terms as President instead of none (but hey - at least they can thank Bush for handing them Congress!). Democratic candidates need people to believe their econmic view is correct in order win elections. Trouble is: their economic view is not correct and they have a hard time selling it to moderates.

This is the reason why the only way a Democrat can be elected President in the modern age is if we are in a recession at the time of the election and a Rebublican is President (if a democrat is president, they are caught in a catch-22 the way Gore was): that's the only time enough people buy their economic view to enable them to win. And it's why prospects for the Democrats this November are not looking good.

And it's also why PF is populated by so many pessimists: pessimists tend to be democrats/liberals while optomists tend to be republicans/conservative and we have a glut of the former here.

Certainly there has been 232+ years of economic disparity.

So does that mean you agree that that must mean either the economy has actually been poor continuously for 232 years or that people are viewing it through poop-colored glasses?

How to fix places like rural Kentucky or rural Maine or Allentown, PA (you know, like the Billy Joel song) is a separate discussion, but a big part of the answer was contained in that link you posted:

I can't figure out how to change things, can't go to college.

My extended family on my mother's side is from Allentown, PA. I was born there and lived there for the first 9 years of my life. It certainly is a depressing place, though not as bad as some others we've talked about. Of the 10 kids in my generation (cousins, me, and my sister), only 3 completed college. Perhaps not coincidentally, none of those three lives within 50 miles of Allentown and all 7 of the others live within 15 miles of Allentown. Of the 3, two (myself and my sister) would probably be considered upper-middle class. Of the other 7, probably 2 would be considered middle-middle or upper-middle class (mostly due to their husbands, but they at least half half decent jobs themselves) and the rest lower-middle or upper-lower.

One of my cousins, much to the disappointment of my sister and I (we've talked about it many times), went to Penn State (like my sister) and is a pretty bright guy, but he dropped out.

The point is, this is one of the reasons optomism and ambition go hand in hand and are so important. If people don't believe they can change their situation, they won't even try. People talk about the reality of class mobility not being especially high in the US. The reason for that is purely cultural. People don't try to improve themselves and their situation.

Now I won't claim that I'm an example of class mobility: my mother didn't get out of Allentown on her own, she married out, and I just took after my father. People tend to follow after their parents because the know little else.

 

[mathwonk]

gee i thought allentown was the big city, my roommate in college was from palmerton. he is now a physicist.

 

[Gokul43201]

Well, the part about dropping wages is factually wrong

Russ, that's not true either. Two quarters of negative per capita GDP growth = two quarters of shrinking per capita income.

Isn't that self-contradictory? If the majority of people are not doing all right, that would imply to me that the economy as a whole was not doing all right. That's kinda how an economist measures how the economy is doing.

The answer here too, is yes and no. Often, economic indicators reflect economic conditions among the majority of the population, but sometimes they don't. The latter is particularly true when distributions are heavily weighted towards a small segment of the population

 

[mathwonk]

i think the contrast between the general economy and the individual refers to the modern phenomenon that ceo's and perhaps stockholders take a much larger slice of the proceeds from a booming economy than do salaried workers, as compared to 30-40-50 years ago.

e.g. one might say that some big medical insurance companies like the one that took over BCBS in georgia a while back, are doing well by looking at its stock price, but doctors and patients may feel differently when care and compensation both suffer under new managed care guidelines, while company officials record new profits.

so if the managed care industry gets rich while patients cannot afford treatment and doctors cannot afford to accept industry mandated rates, is the industry and the economy doing well or not?

i.e. is an industry doing well when it makes large profits by denying the services it is designed to provide? only the shareholders seem to think so.

i don't know what the economists would say, but from reading "the economist" it seems they are content.

 

[mathwonk]

I think i disagree that the iraq war is too small to be a drain on the economy. it is not surprizing that it is smaller than vietnam and ww2, which changed the entire course of the world or of at least one generation of lives.

still the money for iraq comes from somewhere, and in such situations it tends to come from very valuable but politically weak places, like health care, education, and scientific research.

i suspect the iraq price tag is quite large compared to funding for college scholarships for the bright but needy, or healthcare for the poor. and it would be even higher if it were even adequate to provide material and recovery care actually needed by the soldiers.

 

[Astronuc]

Well, the part about dropping wages is factually wrong

I must disagree. If the economy (GDP) grew at 0.6% (1Q 2007), or 2.2% in 2007, someone has to be experience declining wages, since folks at the top 10% (who earn ~ > $100 K /year) see their earnings (income) increase by 2, 3, 4+%. So to average out at a lower number (like 0.6%, 2.2%, . . .) means that someone is receiving decreasing income (especially when we properly weight by income). My income has been increasing 3-4+% per year, and my income is more than twice the national average or median. My retirement income plan increases by an even greater rate.

Certainly brief periods of unemployment cut into one's earnings.

Also, if the Big 3 auto makers are buying out the employment contracts of older employees who earn ~$28/hr and replace them with younger workers who earn ~$14/hr, I'd have to say, the wages are decreasing.

 

[Astronuc]

A politician campaigning on the platform of pulling us out of the recession most certainly does does need us to be in a recession for such a campaign strategy to work.

Russ, you touch on a number of interesting points, each of which is worthy of a separate discussion.

As for Edwards, he strongly focussed on a single issue, which wasn't particularly relevant with most voters.


I disagree that the pessimists are necessarily democrats/liberals, because I know a lot of conservatives who are concerned about the economy. The so-called pessimists are not pessimists, but rather realists. The US economy is not in great shape at the moment, but it is rather mediocre, and it could get worse. At the moment there are 1.3 million homes in various stages of foreclosure, and there are another 3 million homes at risk of foreclosure through this summer.

Economist Puts Economic Downturn in Perspective
http://www.npr.org/templates/story/story.php?storyId=90343995

Weekend Edition Saturday, May 10, 2008 · Many Americans are uneasy about the country's current economic instability. Adam Posen of the Peterson Institute for International Economics talks with John Ydstie about the possible length and severity of the current economic downturn, which some are already calling a recession.

Listen to what Posen says about the next few years and future. Bascially, a majority of Americans need to learn to enjoy a lower standard of living. The reality is that a lot of things (including homes) were purchased on credit, and many do not have the ability to repay that debt.

The financial markets (vis-a-vis Global Pool of Money) got reckless, and somewhere between $500 billion and 41 trillion just evaporated, because money was spent on assets that now are worth much less than money invested in them.

The US economy got caught in a perfect storm - overleveraged financial markets, declining asset value, increased cost (particularly for imported energy), and increased competition for resources.

 

[Jimmy Snyder]

You could take the GDP and divide it by all the tea in China. But what would it mean? The fact that people are willing to divide it by the number of people who live in the US and then insist that the resulting number has some kind of meaning is an encouraging sign.

 

[mheslep]

I must disagree. If the economy (GDP) grew at 0.6% (1Q 2007), or 2.2% in 2007, someone has to be experience declining wages, since folks at the top 10% (who earn ~ > $100 K /year) see their earnings (income) increase by 2, 3, 4+%. So to average out at a lower number (like 0.6%, 2.2%, . . .) means that someone is receiving decreasing income (especially when we properly weight by income). My income has been increasing 3-4+% per year, and my income is more than twice the national average or median. My retirement income plan increases by an even greater rate.

Are you accounting for inflation? The reported GDP growth is in real terms, i.e. adjusted for inflation. I'm guessing your salary observations are not. A 3% US dollar salary increase is about zero in real terms.

 

[Astronuc]

Are you accounting for inflation? The reported GDP growth is in real terms, i.e. adjusted for inflation. I'm guessing your salary observations are not. A 3% US dollar salary increase is about zero in real terms.

Yes - I am accounting for inflation.

I know parts of the economy are doing extremely well. I was at a meeting recently, and one guy asked if anybody wanted a few million dollars. He offered to introduce any interested party to a venture capitalist who's looking to invest, that investor is apparently one of several looking for opportunities - even in the middle of the current situation.

 

[Astronuc]

I heard this discussion this morning. Interesting persepective, but keep in mind George has an interest in selling his book.

Soros: Financial Crisis Stems from 'Super-Bubble'
http://www.npr.org/templates/story/story.php?storyId=90328243

Morning Edition, May 12, 2008 · The famous financier George Soros has made billions betting where the economy — and the markets — are heading. He's been less prescient in his books, where twice before he predicted financial disasters that didn't fully materialize.

But in his latest book, The New Paradigm for Financial Markets, Soros writes that we are now in a financial crisis that's unparalleled.

"It's the worst, most serious crisis of our lifetime," Soros tells Steve Inskeep.

Soros blames what he calls a "super-bubble" that started about 25 years ago. That's when a less-is-more philosophy became popular with economic regulators. That allowed Wall Street to invest increasing amounts of money in credit.

"The idea was that regulators always make mistakes, state interference in the markets just messes things up," Soros says. "And that was a false idea ... Regulators are human and bound to make mistakes, but markets are also human and they are also bound to make mistakes. Instead of markets always being right, they're actually always groping at trying to find out what the facts are. But they never get it right."

I found the last paragraph (bolded) interesting.

Some blame too much regulation for the current situation. I'm on the side that there is too little regulation or it's too lax. Regulation needs to be simple and straightforward. Perhaps it is too prescriptive, which many laws tend to be, but how does one effectively regulate and maintain a fair and honest system.

 

[russ_watters]

More (intentionally?) misleading economic news:

Foreclosure filings surge 65% in April

More U.S. homeowners fell behind on mortgage payments last month, driving the number of homes facing foreclosure up 65% vs. the same month last year and contributing to a deepening slide in home values, a research company said Wednesday.
Nationwide, 243,353 homes received at least one foreclosure-related filing in April, up 4% since March, RealtyTrac said.

http://www.usatoday.com/money/economy/housing/2008-05-14-foreclosures-mortgage-apps_N.htm

Did the person who wrote the title misread the article? Given that these news stories are written and edited by professional writers, I have a hard time accepted that such a thing can be a mistake. But hey, 65% is a lot sexier than 4%, right?

 

[russ_watters]

Russ, that's not true either. Two quarters of negative per capita GDP growth = two quarters of shrinking per capita income.

GDP and personal income are two completely separate measuring-sticks. GDP is not a measure of per capita income, it is a measure of the total output of goods and services in the country (ie, not including foreign trade). Personal income only accounts for about a third of the GDP.

There is a caveat on my statement though, but it cuts both ways: income data is put out yearly, six months or so after the end of the previous year. So we don't have very recent data on income. Income for 2007 is almost certain to be higher than for 2006. Income for 2008 is still an open question, but given the predictions from the experts about the economy rebounding hard in the second half of the year, it is unlikely to drop for the year.

The answer here too, is yes and no. Often, economic indicators reflect economic conditions among the majority of the population, but sometimes they don't. The latter is particularly true when distributions are heavily weighted towards a small segment of the population

That's true, but the "majority" we're talking about here is a big majority - like 95%. So the other 5% need to experience a pretty extrordinary decline in order to make a big impact on the average. And the areas being mentioned are perpetually poor, so they do not have a big impact on the motion of the average.

 

[russ_watters]

gee i thought allentown was the big city, my roommate in college was from palmerton. he is now a physicist.

The Billy Joel song was written in the 1982, when Bethlehem Steel was dying. I'm not sure if Allentown has been rejuvinated since, but it almost seems like the suburbs of Allentown are more like suburbs of Philadelphia. Until the housing bubble burst, anyway, people were turing farms into subdivisions with $500k homes at an extrordinary rate out there.

 

[russ_watters]

i think the contrast between the general economy and the individual refers to the modern phenomenon that ceo's and perhaps stockholders take a much larger slice of the proceeds from a booming economy than do salaried workers, as compared to 30-40-50 years ago.

That is related to Gokul's statement above about the people on top vs "everyone else". The idea that you have there is based on the well-publicised fact that the income distribution in the US is stretching, but the idea you've constructed from that fact is a popular myth. The "robber-barons" of the early 20th century were every bit as rich as the super-rich of today (if not more - have you seen the Hearst house?!) . What has changed is the shape of the distribution. 100 years ago, it really was the very few super-rich and "everybody else". Today, instead of having a very small handful of super-rich, we have thousands of them as well as millions of people who are merely very rich. Not to mention, now we have something called a "middle class"

The point is, yes, the wealth situation is different today from 30-40-50---100 years ago, but not in the way that most people like to believe.

 

[russ_watters]

I think i disagree that the iraq war is too small to be a drain on the economy. it is not surprizing that it is smaller than vietnam and ww2, which changed the entire course of the world or of at least one generation of lives.

still the money for iraq comes from somewhere, and in such situations it tends to come from very valuable but politically weak places, like health care, education, and scientific research.

i suspect the iraq price tag is quite large compared to funding for college scholarships for the bright but needy, or healthcare for the poor. and it would be even higher if it were even adequate to provide material and recovery care actually needed by the soldiers.

You're changing the point (even while restating it!). Yes, I'm sure some things were cut from the federal budget to pay for the Iraq war - though most of the money was simply borrowed - but the things that got cut aren't "the economy".

 

[russ_watters]

I must disagree. If the economy (GDP) grew at 0.6% (1Q 2007), or 2.2% in 2007, someone has to be experience declining wages, since folks at the top 10% (who earn ~ > $100 K /year) see their earnings (income) increase by 2, 3, 4+%. So to average out at a lower number (like 0.6%, 2.2%, . . .) means that someone is receiving decreasing income (especially when we properly weight by income).

How does pulling numbers out of the air consitute evidence? Do you have a reference for this "2, 3, 4+%" for the people in the top 10%? And who is this "someone"? How many times are you guys going to go after the "someone" strawman? You guys are too smart for that to be a comprehension error, but repeating it over and over again doesn't make it true/relevant. But I guess I have to address it again (same way as always):

Yes, "someone" saw their income decrease in 2007 - probably millions of "someones". This is irrelevant and no one has suggested otherwise. The only relevant thing we could be discussing - and you guys must accept this, given the title of the thread - is that overall, there is no evidence of a drop in income. That means for the average, per capita, per income bracket (fifths), etc. You know: the measuring-sticks by which you can objectively assess the health of "the economy". The overall economy.

You also seem to be making the same mistake as Gokul, somehow thinking that the GDP=personal income. It doesn't.

 

[russ_watters]

I disagree that the pessimists are necessarily democrats/liberals, because I know a lot of conservatives who are concerned about the economy. [emphasis added]

I made no such statement. I said:

pessimists tend to be democrats/liberals while optomists tend to be republicans/conservative and we have a glut of the former here. [emphasis added]

Changing my generalization into an absolute is an attempt at strawman.

My statement was accurate. It is true that the Democratic party's primary economic campaign tactic is selling pessimism to low-income people. Each candidate is, of course, different, and you happened to pick one one of the bigger offenders in Edwards (we've discussed his 'The rich get richer while the poor get poorer' lie here relatively recently - and in this thread, I think!). It is true that the Republican party pushes general optomism. That's what Reagan brought to the table: http://www.washingtonpost.com/wp-dyn/articles/A19168-2004Jun5.html

It basically boils down to:
Republicans: You can succeed on your own. That's optomism.
Democrats: You are incapable of succeeding on your own. You need the government to support you. That's pessimism.

The so-called pessimists are not pessimists, but rather realists.

When the predictions they are making are worse than what actually happens, that, by definition, makes the predictions overly pessimistic.

Economist Puts Economic Downturn in Perspective
http://www.npr.org/templates/story/story.php?storyId=90343995

Listen to what Posen says about the next few years and future. Bascially, a majority of Americans need to learn to enjoy a lower standard of living. The reality is that a lot of things (including homes) were purchased on credit, and many do not have the ability to repay that debt.

I guess we'll see. Looking over his bio, his area of expertise is Japan and Europe (Germany is mentioned specifically). I presume, then, that he expects the type of problems that affected Japan to affect the US - an extended period of economic malaise. I don't see why that has to happen.

Certainly credit spending was a problem. It contributed to the boost we got the past 10 years and is leading the current funk. But that's the credit market correcting itself. And the result is that that era of real estate growth is over for a long, long time. But despite that, economists are predicting a rapid, strong recovery from the current funk.

Regarding productivity, that could be a problem, but I hadn't heard before that we face a productivity problem. The data would suggest otherwise: http://www.bls.gov/lpc/home.htm
(btw, that link also shows hourly wages up substantially in Q1 08. I hadn't seen this form of data before). I do know our GDP growth has been consistently above our European peers, and I was under the impression that better productivity growth was part of the reason why. It's only an abstract, but:

There is a stark contrast between the recent evolution of labor productivity (and TFP) in the US and EU countries. In the US it accelerated around the mid-1990s and there is evidence of reversion to a high-growth regime. In some EU countries, while employment-population ratios started to rise after a period of stagnant employment, labor productivity (and TFP) decelerated. In this paper we apply univariate and multivariate methods, that have been used to detect structural breaks in productivity growth in the US economy, to EU data to confirm the existence of a significant permanent shift to lower productivity growth in some European countries around the mid-1990s. We find a structural break in mean labour productivity growth in the US around the mid-1990s (towards higher growth), in Continental Europe around the early 1990s (towards lower growth) and no evidence of structural breaks in the UK.

http://ideas.repec.org/p/bde/wpaper/0625.html

In any case, we do need to make sure in this discussion that we clearly separate the short term and mid-term predictions. At the moment, I'm focusing on the short term (the next year) and prospects for recovery. You're focusing on the next 5-10 (20?). I don't share your pessimism about our prospects in that timeframe, but the predictions are necessarily tougher to come by and I don't have a whole lot to say about it.

The financial markets (vis-a-vis Global Pool of Money) got reckless, and somewhere between $500 billion and 41 trillion just evaporated, because money was spent on assets that now are worth much less than money invested in them.

The US economy got caught in a perfect storm - overleveraged financial markets, declining asset value, increased cost (particularly for imported energy), and increased competition for resources.

This again is short vs mid/long term. "Perfect storm" is fine terminoloty if we consider it a short term thing (as opposed to "global warming"...). I do see the current financial funk to be a short term thing, though "perfect storm" implies to me a level of severity that just isn't there.

 

[Gokul43201]

GDP and personal income are two completely separate measuring-sticks. GDP is not a measure of per capita income, it is a measure of the total output of goods and services in the country (ie, not including foreign trade).

According to my copy of Samuelson, income and output are essentially the same thing. The GDP that does not go into incomes of American citizens goes into incomes of foreign investors and undistributed corporate profits. I think the latter two are both small fractions of the GDP.

Personal income only accounts for about a third of the GDP.

That doesn't sound right, but I'd have to check the numbers to make sure.

 

[rewebster]

What is wrong with the US economy?

bush: "Don't you dare point your finger at me...

<pointing off into the distance>


Blame Saddam Hussein, and Hussein Obama!"

 

[Art]

GDP and personal income are two completely separate measuring-sticks. GDP is not a measure of per capita income, it is a measure of the total output of goods and services in the country (ie, not including foreign trade). Personal income only accounts for about a third of the GDP.

GDP is a measure of personal income and it does include foreign trade, although unlike GNP it doesn't include income earned by citizens abroad perhaps that is what you were thinking of?

Also there are 3 ways to calculate GDP all of which produce much the same answer (other than slight timing issues) one of which is the GDI approach ie gross domestic income so I can't fathom where you get your 1/3 of GDP figure from? Unless you are referring to household income in which case you are still wrong as household incomes are by far the largest component of GDP which is pretty obvious as US households are the largest consumers of US products.

Interestingly real GDP fell by 0.2% in the first qtr based on final sales. The 0.6% annualised growth reported was based on the output method which includes increases in unsold inventories.

 

[Jimmy Snyder]

Personal income only accounts for about a third of the GDP.

According to the Commerce Dept. release annualized GDP in the first quarter 2008 was $14,185 billion and annualized personal income was $11,986 billion.

http://www.bea.gov/newsreleases/national/gdp/2008/txt/gdp108a.txt"

For some reason, they report real GDP increase, but current-dollar personal income increase. The GDP increase was 0.6%, and the personal income increase was 4.4%. I think we need to subtract 2.6% from the latter figure to make a direct comparison. Personal income grew at 1.8% real growth, better than the .9% US population growth. (https://www.cia.gov/library/publications/the-world-factbook/print/us.html"). This contradicts Gokul's post:

Two quarters of negative per capita GDP growth = two quarters of shrinking per capita income.

 

[mheslep]

According to the Commerce Dept. release annualized GDP in the first quarter 2008 was $14,185 billion and annualized personal income was $11,986 billion.

That's trillion, I hope, or somebody needs cut back on dinner out right away.

 

[Jimmy Snyder]

That's trillion, I hope, or somebody needs cut back on dinner out right away.

Sorry, in the US we use commas and periods the way you are supposed to. $14,000 billion is $14 trillion, which is heaven knows how many billiards. Get in line or we'll iraq you next.

 

[mheslep]

Arg, I'm a US comma user, you were correct of course. Dang I miss that delete post feature.

 

[Gokul43201]

According to the Commerce Dept. release annualized GDP in the first quarter 2008 was $14,185 billion and annualized personal income was $11,986 billion.

http://www.bea.gov/newsreleases/national/gdp/2008/txt/gdp108a.txt"

For some reason, they report real GDP increase, but current-dollar personal income increase. The GDP increase was 0.6%, and the personal income increase was 4.4%. I think we need to subtract 2.6% from the latter figure to make a direct comparison. Personal income grew at 1.8% real growth, better than the .9% US population growth. (https://www.cia.gov/library/publications/the-world-factbook/print/us.html"). This contradicts Gokul's post:...

Wow! That's a little surprising (that $12 trillion of the $14 trillion GDP grew at 1.8%). In order for the net real GDP growth to be 0.6% it would require the remaining $2 trillion or so from other sources to have declined by a whopping 8%, wouldn't it? That sounds strange.

jimmy, (haven't read the report carefully, so...) where does the 2.6% correction come from?

 

[Jimmy Snyder]

where does the 2.6% correction come from?

It's the difference between real growth and current-dollar growth. The current-dollar GDP growth was 3.2%, but inflation was 2.6%, so they knocked it down to .6% real GDP growth. I was too lazy to do the real calculation so I just subtracted 2.6 from the current-dollar personal income growth to get an estimate of real personal income growth to get the 1.8% figure. Perhaps it should be 1.7% or 1.9%, but it wouldn't change the final conclusion of my post, the Gokul equation is contradicted. What's more, per capita personal income was up. While that doesn't mean much in my opinion, it means more than per capita GDP which has gotten so much more press in this thread. Good news travels slow.