Samwick DCUV 20120204

8/3/2019 Samwick DCUV 20120204

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The Economy in

the 2012 Election

Andrew Samwick

Dartmouth Club of the Upper ValleyFebruary 4, 2012

8/3/2019 Samwick DCUV 20120204


Our Objective Today

Since the U.S. economy is

going to be the majorissue in the race, we were

hoping that you might be

willing to discuss the

economic situation, the jobs issue, the federal

budget, etc.

2/4/2012 2(c) Andrew A. Samwick

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A Macroeconomic Refresher

GDP Component

Average Share

of GDP1995 2011

Standard

Deviation of

Quarterly

Percent Change1995 2011

Consumption 69.2 2.3

Investment 15.6 14.7

Government 18.8 3.1

Exports 11.1 9.7

(Minus) Imports -14.7 9.5

Total 100.0 2.82/4/2012 3(c) Andrew A. Samwick

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Changing GDP Shares

GDP

Component

2007

Q4

2008

Q4

2009

Q4

2010

Q4

2011

Q4

Investment 15.9 13.6 11.3 12.3 13.1

Government 19.2 20.6 20.9 20.5 19.7

Consumption 69.8 70.0 70.9 70.6 71.0

Net Exports -4.9 -4.2 -3.1 -3.4 -3.8


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The bursting of the tech bubble:-2% of GDP over 3 years.

The bursting of the

housing bubble: -4%

of GDP over 5 years.


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What Does All of This Tell Us?

Consumption is the largest component of GDP,

but it is also the least volatile.

Investment is the most volatile component of GDP.

Investment drives the business cycle. From

this perspective, we wont be out of the

downturn until investment rates fully revert.


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Implications for the Labor Market

We can also see the business cycle play out inthe labor market.

There are two important news releasesregarding the labor market:

The weekly Initial Unemployment InsuranceClaims report

The monthly Employment Situation Summary

Heres how to interpret both of them duringthe remainder of this election cycle.


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Meanwhile, in the Labor Market

Sustained Economic Expansions Require

Weekly Initial UI Claims < 400,000

It is possible to approach 400,000

weekly initial claims without crossing it.

And look where

we are now.


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So follow the newsevery Thursday

morning at 8:30

a.m. to see if initial

UI claims are stayingbelow 400,000 (or

375,000, according

to the AP).


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So What Is the Economic Situation?

I assert that there are three macroeconomic

regimes, based on the monthly Employment

Situation Summary and the market response.

When the net job growth number is negative or

barely positive.

When the net job growth number is positive and

the stock market increases in response.When the net job growth number is positive and

the stock market falls in response.


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Reading the Economic News

Weakly Positive or

Negative Job Growth

Economic growth is

not supporting job

growth. This could

be due to negative

GDP growth (a

recession) or highproductivity growth

relative to GDP

growth (a jobless

recovery).

Positive Job Growth,

Negative Stock

Market Response

The economy is

growing so quickly

that investors expect

the Fed to raise

interest rates, tolower inflation

expectations or

investor sentiment.

Positive Job Growth,

Positive Stock

Market Response

The economy is

growing quickly

enough to add jobs,

but not reliably

enough to cause theFed to worry about

curbing inflation or

deflating bubbles.


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Which Regime Are We In?

So follow the news on the first Friday of every month at 8:30 a.m. for any signs

of a regime switch from yellow to green

(and hopefully not back to red).2/4/2012 12(c) Andrew A. Samwick

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Zooming In on the Close Contests

GA

MT

MO

NC

IN

FL

OH

VA

CO

IAMN

NH

PA

5

6

7

8

9

1 0

U n e m

p l o y m e n t R a t e i n D e

c e m b e r 2 0 1 1

46 48 50 52 54

Obama Share in 2008

Vice President Rubio?

Vice President Portman?


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On Policy, What Have We Learned?

This recession, like the last two, has had a jobless

recovery despite aggressive monetary policy.

Tight monetary policy didnt cause these recessions.

Easy money wont necessarily end them.

These recessions are the result of a sectoral

mismatch in the economy (the wrong kind of

investment, too much consumption)The path out of these recessions is aggressive

fiscal policy, not (just) easy monetary policy.


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The (Old) Principles of Fiscal Stimulus

To respond to an incipient downturn, fiscalpolicy has to have its impact in a timelymanner.

It has to be targeted to assure that increasedgovernment borrowing translates directly intoincreased spending and demand.

And, critically, it has to be temporary so thatits effects are not offset by higher long-terminterest rates.

As stated by Summers (12/19/07), quoting Sperling (12/17/07).

See also Elmendorf & Furman (1/10/2008).2/4/2012 16(c) Andrew A. Samwick

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How Big Should This Stimulus Be?

Quoting Summers (late 2007):

It is reasonable to suggest that stimulus approaching

$50-$75 billion -- roughly in the range of 1/2 of 1% of

GDP -- is likely to be appropriate.

The largest part of this stimulus should come in the

form of tax cuts distributed equally among all

taxpayers and recipients of tax refunds.

During the throes of the recession (early 2009):Calls for additional stimulus of $1 trillion and more,

with ARRA passed at $787 billion.


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Did the Stimuli Work?

Sahm, Shapiro, and Slemrod (2009) on the 2008 taxrebates:

Only about one-fifth of respondents in the

Reuters/University of Michigan survey report that the 2008tax rebates led them to mostly increase spending, whileover half said it would lead them to mostly pay off debt.

Of those in the mostly-spend category, the response wasswift, with over 80 percent reporting increasing theirspending within three months of receiving their rebate.

Older households, households with higher wealth andhigher income, and those expecting future income growthwere generally more likely to spend the rebates.


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Did the Stimuli Work?

Feyrer and Sacerdote (2011) on ARRA, using

variation in receipts by states and counties:

Their analyses suggest that one additional job was created

by each $170,000 - $400,000 in stimulus spending.Grants to states for education do not appear to have created any

additional jobs.

Support programs for low-income households and infrastructure

spending are found to be highly expansionary.

Estimates excluding education spending suggest fiscalpolicy multipliers of about 2.0 with per job cost of under

$100,000.


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I Disagreed With This Approach Early


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These Principles Are

Not Aggressive EnoughThe marketing is great. How could anyone

want something untimely or untargeted?

The problem is the temporary.Temporary measures dont increase consumption

unless a person is borrowing constrained (and

even then, only temporarily).

Temporary measures do not boost expectations of future activity and thus do not improve asset

values or motivate longer term investments.


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Searching for a Better Way

Timely, targeted, and temporary elevatesspeed (and presumed multipliers) over value.

It also emboldens opportunistic behavior inour budgeting process.

Are there things of value that:

We currently need to invest in,

The government has a critical role in providing,Provide benefits well into the future, and

Can be prioritized and scheduled well in advance?


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Consider Infrastructure Investment

From the American Society of Civil Engineers

2009 report card:

An estimated $2.2 trillion is required over a five-

year period to restore the nations physical

infrastructure to good condition.

Only half of this is projected to be spent under

current practices (including ARRA authorizations).Using the ASCE calculations, ARRA addressed only

about 10% of the total estimated shortfall.


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A Capital Budget: As Stimulus

If we had a capital budget, some projectswould be slated for completion each year.

When economic growth falters, the

government would be in a position to movesome of the projects from later years into thepresent year.

Having a plan in place allows these shifts to betimely, possibly targeted, and appropriatelytemporary.


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A Capital Budget: Advantages

It forces the government to establishpriorities.

It reduces overall expenditures (i.e., generates

wealth) by doing more of the work in times of economic slack, when costs are lower.

It also abides by pay-go rules, since projectsmoved up to 2009 need not be done in 2010.

I believe that effective capital projects boostexpectations in a way that tax rebates do not.


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Where Is Current Policy?

President Obamas infrastructure initiatives are inthe low hundreds of billions.

ARRA had at most $100 - $150 bln (out of $787bln)

He has repeatedly called for $50 billion for a NationalInfrastructure Bank.

His rhetoric picked up around the midterm elections:This is Work That Needs to Be Done. There Are WorkersWho Are Ready to Do It. [Speech on 10/11/2010,

Treasury/CEA white paper released the same day]These policies are an order of magnitude too small not nearly aggressive enough.


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Our Current Political Dynamic

ARRA + HASP = Tea Party Movement Begins within amonth of President Obamas inauguration.

The Tea Party was an extremely successful political

movement.Consider how nothing like ARRA or HASP has beenpassed since the 2010 elections, despite ongoingneed as defined by the President.

Every policy President Obama has gotten passed sincethen has been with tax cuts (reflecting Republicanpriorities regarding tax cuts versus deficit reduction orcapital investments).


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The Deficit Will Be An Issue in 2012

Current deficits are high by historicalstandards, due to lingering weakness in theeconomy and policy interventions.

But projected deficits in the next decade willbe high only if Congress and the Presidentcontinue the policy interventions.

Beyond that, our fiscal problems are solelydue to population aging and excess healthcare cost growth.


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0

5

10

15

20

25

30

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Historical Deficits as a Share of GDP

Revenues Outlays2/4/2012 29(c) Andrew A. Samwick

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0

1

2

3

4

5

6

7

8

7

3.7

2.11.5 1.6

1.1 0.9 1.2 1.2 1.2 1.4

Projected Deficits as a Percent of GDP:

Baseline vs Alternative Policy

Additional Debt Service

Prevent Spending Cuts

Extend Tax Policies

Baseline


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Sources of Growth in Federal Spending

on Major Mandatory Health Care

Programs and Social Security


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In Conclusion

Our economy may be on the verge of asustained recovery.

Our fiscal policy problems are fixable, if we

can put together a coalition in Washington tofix them.

A parting question: Under which President arewe more likely to see that coalition form,assuming no changes in the majorities in theHouse or Senate Obama or Romney?


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Samwick DCUV 20120204