Tuesday, February 21, 2012

Does the recovery have legs? Part 2: The income strikes back

I think the single most important indicator to predict our near-term economic growth is personal income growth. This follows from my previous posts, where I suggest that consumer spending is the key to our recovery, and it's no great insight to suggest that for spending to grow, income must grow. This is particularly true in an environment like ours, where consumers are generally over-indebted and therefore are less likely to use debt to increase spending.

This chart shows growth in compensation people receive from private businesses. This is strictly private wages - that is, I've excluded things like the income of government employees, investment earnings, income from social security and other government programs, and indirect compensation like employer pension contributions. The idea is to specifically focus on the personal income most sensitive to our growth trajectory: the payrolls of businesses.

The story this tells is something of a mixed bag. We are not seeing consistent growth over each of the last few months, and what growth there has been is lower than the gains we saw Jan-Feb 2011 or even Mar-May 2010, for that matter. On the other hand, the last 4-5 months overall look better than the 4-5 before them. So, the jury is still out here, which makes it all the more important that we follow this closely over the next few months. The report on January's performance comes out March 1, and we should be looking to see if private compensation grew more or less rapidly than it did in December.

My guess - and it's only a guess - is that the report will show that January's wage growth was good, and I'm basing that on the chart below, which shows that the number of people submitting claims for unemployment insurance has dropped more in the last 8 weeks than in the previous 8 months.

It would stand to reason that if private payrolls are expanding, unemployment compensation claims would decline. However, there are other factors that drive these numbers - for example, maybe people stopped filing claims simply because they exhausted their eligibility - so it's just a speculation, but I'm optimistic.

Sunday, February 19, 2012

Does the recovery have legs? Part 1: housing on the rebound

It's only been a few months since I became confident enough in our recovery's strength to start blogging about it and it's still tenuous enough to bear close monitoring. But what exactly should we be watching for? One of the great challenges in evaluating economic situations in general is that reality is fluid and it's often hard to distinguish between cause and effect (e.g., are higher wages pushing inflation up or is inflation forcing employers to pay more?). In this and other posts I am going to provide my take.

It's widely understood that the housing market's recovery is key to the sustainability of the broader recovery, and a bird's eye view suggests things are rebounding:

What this chart shows is that in each of the last 3 quarters residential investment has positively contributed to our economic growth, even after adjusting for inflation. And while the contributions were relatively modest as compared to individual quarters in 2009 and 2010, I like to think the consistency of 3 consecutive upticks is meaningful in its own right. I would caution that this simplistic analysis may be missing important considerations, like that a flood of foreclosures on the heels of the recent bank settlement could swamp the market with inventory and depress investment in new construction. Still, after what we've been through it is helpful to see any sign that activity in the most troubled sector of our economy is trending in the right direction.

Sunday, February 12, 2012

The simple case for progressive taxation

It's not enough to make the moral argument that rich people should pay more. A flat tax where everyone pays the same rate accomplishes that much. No, the argument for progressive taxes, that is, a tax structure where higher incomes are taxed at higher rates, is simply that rich people realize a higher rate of return on our public investments and like anything else they should pay what it's worth to them.

I laid this on a friend of mine recently and he almost sprained his neck trying to politely register his dissent. It's counter-intuitive because when we think about how people benefit from public infrastructure we might first think of food stamps and welfare and medicaid (i.e., programs that aid lower income people). But consider this: would Apple exist if Steve Jobs had been born and raised in, say, Yemen?

It's as simple as that.

Monday, February 6, 2012

Europe crisis: don't believe the hype about what it means to the US

Washington Post blogger Ezra Klein's morning missive was titled "Obama's Fresh Lead Vulnerable to Europe's Woes," and in it he notes that a Greek debt default would have "untold, but clearly disastrous, consequences for both Europe and the United States." I'm not sure I see it. Maybe we shouldn't leave these consequences as "untold" before we declare them to be "clearly disastrous." To me, the likely fallout doesn't necessarily rise to the level of disaster.

For one thing, according to the EU Trade Commission, in 2010 US exports to the 27 EU nations represented less than 3% of US GDP. Moreover, most of this business is with the stronger nations, like Germany, the Netherlands, and France. Another concern might be that a euro currency collapse would hurt our exports overall, as it would make our products relatively more expensive than European ones, but even still, with all exports representing less than 13% of US GDP in 2010, it would have to be a massive devaluation to really hurt us. This is also an unlikely scenario - for example, if Greece goes down, it's more likely to be booted out of the euro currency altogether rather than degrade it.

To be sure, the crisis in Europe can't be good for us, and their handling of it doesn't give me confidence that it'll be resolved cleanly, but it's far from a no-brainer that it would spark a crisis here. My analysis is admittedly simplistic, but until someone smarter than me takes the time to really think this through we won't have a clear idea until it actually hits the fan. So perhaps the most significant impact is that it's just more bad news that gets amplified by the media and scares people. In other words, maybe the problem here isn't so much that Greece can't pay its bills, it's that too many journalists are taking shortcuts.

UPDATE: 12 hours after this was published, Klein came clean:

"Since I've written many, many Wonkbooks on the threat that Europe poses to America's recovery, it's worth pointing out that there is an increasing number of smart observers downgrading -- if not entirely dismissing -- the continent's importance to the American economy."