How Bush killed the Left

It's not news that Bush the Younger is not held in high regard. One recent poll shows that he is the least popular of the living ex-presidents, the only one with a sub 50% approval rating. The GOP knows this, and his absence from the campaign trail contrasts sharply with Bill Clinton's activism.

This masks an important point: Bush has done more to advance the libertarian cause than any other single person. His truly spectacular mismanagement convinced people across the political spectrum that Reagan was right, "government isn't the solution to our problem: it's the problem." While Grover Norquist aligned the GOP around the mission of shrinking government to where they could "drown it in a bathtub," it was Bush who got the rubber to meet the road by disillusioning the broader electorate -including the far left- to the point where they have wholly abandoned the premise that government is good. Consider the following two excerpts from a 2011 Gallup report titled "Americans Express Historic Negativity Toward U.S. Government":

1. "A record-high 81% of Americans are dissatisfied with the way the country is being governed, adding to negativity that has been building for the past 10 years."

2. "Americans believe, on average, that the federal government wastes 51 cents of every tax dollar...up significantly from 46 cents a decade ago, and from an average 43 cents three decades ago."

Game, set, and match. In a future post, I'll explore the enormity of this to the progressive movement. Or maybe not. Why bother? (damn - get him out of my head!) 

You didn't build that. No, really.

Is the US a meritocracy? This chart, lifted from a fascinating OECD paper on social mobility, seems to suggest otherwise, because in a meritocracy your birthright should be less predictive of your destiny, and we're showing up behind such objects of libertarian scorn as France, Germany, Sweden and Canada (Canada!):

This is relevant to our current political debate because Romney is trying to make hay off of Obama's comments to this effect (the "you didn't build that" kerfuffle). As opposed to most of the campaign noise - I pity swing state tv watchers - this particular debate is actually important.

Romney argues for what amounts to economic elitism, where tax policy favors "job creators" (aka rich people). Obama argues for essentially a means-based taxation system. Both are predicated on the principle that our system should be funded by the people that benefit most from it; the difference is in who you perceive to be its primary beneficiaries. 

The argument I've made previously on this blog is that rich people benefit more from our government than poor people, and the logic is simple: if government isn't a key enabler of wealth creation, then relatively lawless places should be comparative hotbeds of innovation and "job creation". So, what do you imagine is the unemployment rate in, say, Somalia? 75%, according to this UN study. What?!? Where are my job creators at? It's an extreme example, but it helps make the point that the value you get from the enforcement of property rights, to name but one governmental function, is commensurate with the value of your property.

Republican orthodoxy counters that the more we make the rich pay in taxes, the less incentive we give people to strive to better their economic situation; that is, that the best way to promote a meritocracy is to increase the rewards of success. At this point we should refer back to the chart at the top of this post, which essentially suggests that rather than spend our resources encouraging people to want to improve their lot (never met someone that needed encouragement on this front, btw), we can best promote meritocratic principles by helping those who didn't win the birth lottery.

Updated look at income and savings: in which I eat crow

The Bureau of Economic Analysis released their first view of May's economic activity yesterday and also revised their Jan-April numbers, too. Unfortunately, the update is not entirely consistent with the view I offered last week, and so I must revise my analysis (please pass the crow). Here's an updated view of the same chart I showed you last week, limited to just the more recent months:

Source: Bureau of Economic Analysis

If you'll recall, my take before was that, with consumers' buying power rising and their savings rates falling, consumption would accelerate and thus the fears of a slowdown in our recovery were unfounded. This was a contrarian view to what we've been hearing about job growth stalling and consumer sentiment souring. However, the updated data shows that while buying power is indeed picking up steam, so has the savings rate.

The rise in savings rate is consistent with several recent surveys that have suggested that consumers are less optimistic than they were a few months ago. My interpretation was that the surveys were less meaningful than the savings data, because money speaks louder than words (call it the Bobbi Fleckman principle). Still, the income gains don't reflect a basis for the relative pessimism. Even if you look at buying power on a per capita basis, things are clearly getting better:

Ok, so maybe the nice 3-month run we're on will later get revised down. Or maybe consumers take longer to acknowledge the improvements and they'll perk up over the summer. Or maybe the improvements are too mild to overshadow the b.s. you hear on the news. Who knows, but I do believe there is a slight disconnect between reality and our perception of it. Or maybe my perception of it. Pass the ketchup.

The stability of the recovery

First, let me apologize for being away for so long. Work got busy and then I was overwhelmed by an apartment hunt (still am, in fact). It occurs to me that if everyone were busy with work and buying real estate then I suppose I wouldn't need to be making a case for optimism, nor would anyone be reading it, but that's not quite where we are, are we?

If you follow economic news, then when you aren't deluged with hand-wringing over Europe, you're getting slammed with worries over the recent jobs numbers. My take on Europe's influence on our economy is essentially unchanged since I last posted about it, so I am going to focus on the jobs concern. Employers don't seem to be adding jobs at a pace necessary to put everyone back to work within a reasonable amount of time. But as disturbing as this is, it doesn't mean we're headed toward another recession. For one thing, jobs lag demand (employers don't hire extra help until they can't keep up with customer demand) and consumer demand growth is steady, if unspectacular. Meanwhile, improvements in consumer sentiment and buying power suggest that it's reasonable to expect demand growth to accelerate modestly going forward.

Ok, I know this chart is ridiculous, but bear with me.

The solid blue line is showing changes in the total disposable income of US consumers from January, 2007 through April, 2012. It has been adjusted for inflation, so it is a good measure of consumer buying power - as the line goes up, consumers are collectively able to buy more stuff than they were before, and as the line goes down either inflation is rising or income is declining, or some combination of the two is taking place.

The red dotted line represents the consumer savings rate, defined as the percentage of disposable income that isn't spent. There are different reasons why this can fluctuate over time, but one of them certainly is consumer sentiment. If you are pessimistic about your financial future, you are likely to try to save more, and the opposite is true - if you feel relatively secure, there is less of a sense of urgency to prepare for seemingly unlikely bad times. So, it's fairly intuitive to appreciate how consumer spending is a function of these two factors; meanwhile, a review of how they have fluctuated in recent years lends insight into our prospects. 


Consider the shaded period (1). This corresponds roughly with the last recession, and it's plain to see that not only was buying power lower at the end of the recession than it was at the beginning, but also the savings rate ends the recession higher. (By the way, if you're curious about that income spike in early 2008, that was Bush's emergency stimulus tax rebates he sent out. It's interesting to note that the savings rate spiked along with it, indicating that people chose to save the rebate rather than spend it, which is entirely consistent with how you would expect a pessimistic populace to behave.) These trends are precisely what we should expect to see: bad times were occasioned by - if not defined by - a drop in buying power, and we collectively responded by getting more conservative in our spending habits. Indeed, almost half of the drop in consumer spending during the recession can be attributed to the increased savings rate.

Now look at the second shaded period (2), basically representing the last two years, where we see the opposite happened. Buying power rose slowly but surely, and the savings rate dropped like a stone. This is likewise intuitive; as our situation improved, we loosened the purse strings. Analyzing the consumer spending gains during this period, it's interesting that fully 60% of the increased consumer spending over the last two years was due to brightening consumer sentiment as articulated in the drop in the savings rate.

What does all this mean going forward? One conclusion we can easily draw is that, now that the savings rate is more-or-less back down to pre-recession levels, each additional dollar of buying power will generate more consumer spending than it did previously. So, to the extent we base our expectations on recent history (as the so-called conventional wisdom often tends to do), we will underestimate the effect even modest increases in buying power will have on consumer demand and, eventually, on job growth.

blaming the banks

People are still pissed at the banks for screwing us all over and this anger is horribly misplaced. It's like blaming the bartender for your hangover, and it's disturbing to think we may be learning the wrong lessons from this whole economic debacle. Consider the chart below, which shows that in the decade leading up to the Great Recession, the average person's debt grew at a rate roughly twice as fast as their income:

It's pretty easy to see the connection between this debt run-up and the economic collapse, but did the banks force us to borrow beyond our means? Did the bartender force us to chug down those extra shots? Many states have laws that restrict bartenders from serving obviously drunk people, and likewise our financial system used to have reasonably effective safeguards against these kinds of excesses. But they were dismantled by anti-regulatory zealots in the 1980s, 1990s, and 2000s. Who kept voting these people into power?

Similarly, there is a widespread misunderstanding about why we bailed out the banks. Some people smell a conspiracy but this overlooks the simple truth that we did it to save ourselves. If the local nuclear power plant started overheating beyond the control of its managers, it would be a no-brainer to send in public safety resources to prevent a meltdown that could ruin the surrounding communities. It was a similar concern that motivated the bailout of the banks. Our financial power system is as potent as our electrical power system and should be regulated accordingly.

But while re-regulating the financial system deals with the proximate cause of imprudent banking practices, it misses entirely the ultimate cause of out of control consumer debt. Why were people borrowing so far beyond what they could afford? As I argue in my Jan. 4 post ("Dirty Money"), I believe it was due in part to the Reagan and Bush II tax cuts that disproportionately favored the wealthiest and increased income inequality. In his timely, if tragically under-appreciated,  2007 book "Falling Behind: How Inequality Harms the Middle Class", the great economist Bob Frank argues that a good deal of consumer spending is positional - that is, much of it is aimed at gaining a competitive advantage in the great Darwinian game that is life on earth. For example, only half of our children can have an above-average education, so a scenario where the wealthiest bid up homes in the best school districts forces everyone else to spend more so as not to fall behind.

Sure, bankers behaved badly, but any worse than the rest of us who backed this ideology with our political support? Besides, the bankers' behavior was entirely predictable - the fact that many of the regulations we dismantled were themselves antidotes to the Great Depression puts such moves squarely into the "fool me twice, shame on me" category. Bottom line: to scapegoat Wall Street is to deny our own culpability and the fact that the GOP is still peddling these so thoroughly discredited ideas and the magical thinking they require only highlights the importance of getting our facts straight. We've already paid a heavy price for our schooling, so let's make sure we learn the right lessons: progressive taxes and responsible regulation are cornerstones of our prosperity.