Category Archives: Economics

The U.S. Economy Is in Better Shape Than You Might Realize

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It isn’t commonly known, but we have the highest post-pandemic growth among the G7 nations, the group that includes the U.S., Canada, France, Germany, Italy, Japan and the United Kingdom.

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We also have the lowest inflation.

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Could last year’s biggest piece of legislation, the Inflation Reduction Act — which passed with zero Republican support — have helped reduce inflation?

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We also have our lowest unemployment rate since 1970, more than 50 years ago.

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Perhaps more voters will understand how well the economy is doing by next year’s election — unless, of course, they’re locked into the right-wing media/propaganda bubble. For them, the country is in horrible shape and there is no hope for a better tomorrow unless their favorite felon is returned to office.

Police Reform and Fake Capitalism (They’re Not Related)

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Calling the police can be dangerous. New Jersey is doing something about it. The state created a program called ARRIVE Together. A mental health professional accompanies the police when they go out on a call involving someone in mental distress. A study showed that in 342 such cases, only 3% resulted in the use of force and only 2% resulted in an arrest (usually because of an unrelated issue, such as an outstanding warrant). The program is being expanded and should serve as a model for police departments around the country (see this report from the Brookings Institution).

So much for some good news. Now back to harsh reality. From The Guardian:

One of the most deeply held and frequently heard propositions about capitalism is that it revolves around private companies and individuals taking risks. When, earlier this year, the US government arranged a rescue package for Silicon Valley Bank, for instance, among the many objections to it was the claim that the rescue contravened capitalism’s risk norms.

This view of the world directly informs wide swaths of economic policymaking today….But examine the economy, and it becomes clear: capitalism has become less and less about corporate risk-taking in recent decades. To be sure, many businesses do take significant risks. The independent small business owner who opens a new cafe in London generally faces intense competition and massive risk. But as political scientist Jacob Hacker has argued, business in general has been enormously skilled in recent times at offloading risk – principally by dumping it on those least able to bear it: ordinary households.

… The best example of a business usually regarded as being fundamentally about risk-taking, but which in fact is not, is … alternative asset management, an umbrella term for hedge funds, private equity and the like. (“Alternative” here means anything other than publicly listed stocks and bonds.) Asset managers are anything but marginal, exotic firms – they manage more than $100 trillion of clients’ money globally and control everything from [Benihana to PetSmart to Westinghouse].

But let’s look at what asset management companies in places like Britain and the US actually do. Three considerations are paramount.

First, there is the matter of whose capital is put at risk when alternative asset managers such as Citadel, Blackstone and KKR invest. In large part, it’s not theirs. The proportion of equity invested by a typical hedge or private equity fund that is the asset manager’s own is usually between 1% and 3%. The rest is that of their external investor clients (the “limited partners”), which include pension funds.

Second, consider how an asset manager’s investments are designed. For one thing, its own financial participation in, and management of, its investment funds is usually through a vehicle (the “general partnership”) that is constituted as a separate entity, precisely in order to insulate the firm and its professionals from liability risk.

Furthermore, the fund and its manager is generally distanced from underlying investments by a chain of intermediary holding companies that protect it from the risk inherent in those investments. In leveraged buyouts, where money is borrowed to help finance a deal,the debt goes on to the balance sheet of the company the fund has acquired. This means if trouble arises in repaying the debt, it is not the investment fund that is on the hook, still less its manager.

Third and last, fee structures also distance asset managers from risk. If a fund underperforms, they may earn no performance fee (based on fund profits), but they do have the considerable consolation – a form of risk insurance, if you like – of the guaranteed management fee, usually representing about 2% of limited partners’ committed capital, year after year. Essentially, management fees pay asset managers’ base salaries; performance fees pay bonuses.

In short, then, it would be far-fetched to suggest that what hedge funds and the like do amounts substantially to risk-taking. The only meaningful risk they themselves face is that of losing customers if fund returns prove underwhelming…. In reality, the business of alternative asset management is less about taking on risk than, in Hacker’s terms, moving it elsewhere. So when things go wrong, others bear the brunt….

Why does this matter? Because unless elected policymakers understand how risk is produced and distributed in modern economies, they will not be in a position to act appropriately and proportionately. That is why vague talk from politicians of being “pro-business” or “entrepreneurship” mean so little; the point is to learn from economic realities as they actually are, as opposed to how economics textbooks say they could or should be.

There is one very obvious policy recommendation for alternative asset management that flows from our understanding what they actually do with “risk”: taxing them more.

The main performance fee earned by alternative asset managers is “carried interest” – effectively, a profit share. In the UK and US, most asset management firms pay tax on this revenue at the capital gains rate, rather than the usually higher income tax rate. This is because the asset manager has typically been understood to be “taking on the entrepreneurial risk of the [investment]” – a standard justification for taxation as capital gain.

But as we have seen, this simply does not hold water. In 2017, the New York Times called the beneficial tax treatment of carried interest “a tax loophole for the rich that just won’t die”. It’s time to close it….

Note: To pass Biden’s Inflation Reduction Act last year, Democrats needed Sen. Kyrsten Sinema’s vote. But she wouldn’t vote for the bill unless Democrats dropped the provision that would have closed the carried interest loophole. She insisted on preserving the tax break that favors the securities and investment industry. Wouldn’t you know that hedge fund managers and private equity executives gave her more than $2 million between 2018 and 2022? Since then, she left the Democratic Party to run in Arizona as an “Independent” [CNBC].

Truth vs. Fantasy in Today’s Politics, Part 2

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My previous post dealt with false talking points Republican presidential candidates are repeating over and over. It may not be a surprise that these clowns are ignoring reality regarding the economy, immigration and crime. But there are even bigger myths worth noting. Here are two big differences between reality and Republican bullshit.

Republicans have convinced many voters that they’re better at handling the economy than Democrats. Is it because Republicans claim to love capitalism, especially big business, so much? Here’s the job growth under the most recent Democratic and Republican presidents. The difference is rather amazing and certainly not well-known. Under the last three Democrats, the economy added 46.9 million jobs. Under the last three Republican presidents, the ones who supposedly know how to nurture the economy, the increase was a pathetic 1.9 million (from the Bureau of Labor Statistics and Simon Rosenberg):

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But wait! Does the economy grow under Democrats because they’re the party of “borrow and spend”? Hardly. It’s because Democrats try to spread the wealth, not concentrate it at the top. Since Reagan was president, Republicans have added red ink through reckless, unproductive tax cuts, while Democrats have restored fiscal sanity (from the Federal Reserve Bank of St. Louis and the Tennessee Holler site):

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Deficits went up under Reagan, the two Bushes and the last guy. They’ve gone down under Clinton, Obama and Biden. It’s no surprise that cutting taxes for the rich and corporations increases the national debt but a healthier economy under Democratic presidents makes deficits go down.

Here’s one last chart. Politicians have been talking about bringing back American manufacturing jobs for as long as I can remember. Now it looks like it’s actually happening. This chart shows spending on factory construction (adjusted for inflation). To the left is the second Bush presidency, showing factory construction increasing until the 2008 financial crisis (the vertical gray line) that started in Bush’s second term. Construction recovered in Obama’s first term, was stagnant or declined during the last president’s single term, and then took off with Biden in the White House.  From the Bureau of Labor Statistics, the Census Bureau and Steven Rattner:

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From Yahoo Financial News:

President Obama tried to revitalize American manufacturing, with little to show for it. President Txxxx tried too, with similarly unimpressive results.

Under President Biden, however, a manufacturing boom finally seems to be getting started. Since the beginning of 2022, construction spending on new factories has more than doubled, from an annualized rate of $91 billion in January 2022 to $189 billion in April 2023, the latest data available. That’s the biggest jump, by far, in data going back to 2002….

Private-sector firms are building more US factories to cash in on an unprecedented spate of legislation Biden has signed providing federal funding and incentives for infrastructure development, a massive green-energy buildout, and a revitalized semiconductor industry. Three separate bills passed by the Democratic Congress in 2021 and 2022, and signed by Biden, will provide well over $1 trillion in federal spending, tax breaks, and other incentives meant to build more important products in the United States and reduce reliance on importers, mostly China.

Republicans would have you believe the American economy is in deep trouble and they’d do a better job with it than Democrats. The evidence says otherwise. Republican economic competence is a myth.

Truth vs. Fantasy in Today’s Politics

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A recent poll showed that most Americans think they’re doing okay economically speaking, but think the national economy is in terrible shape. This chart is from a recent Federal Reserve report on the economic well-being of U.S. households.

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The top line shows that around 75% of us have been relatively satisfied with our own finances since 2017, despite the pandemic. That 75% includes people who thought their own finances were “okay” or better. The bottom two lines, however, show that people’s opinion of their local economies and the national economy went down quite a bit during the pandemic, with lots of people thinking the country’s economy is even worse than where they live.

What’s very odd is that those negative sentiments from 2020 have lingered, or even gotten worse, even though the percentage of us who think our own finances are okay or better hasn’t changed much at all.

Another oddity is that, although people aren’t thrilled about their local economy — only 38% saying it’s good or excellent — hardly anybody likes the national economy — only 18% saying it’s good or excellent.

Why would so many of us think we ourselves aren’t suffering economically although people who live near us are and the nation as a whole is even worse off? The obvious answer is that the national media have convinced people that the country is in deep economic trouble, much worse than where they live and work, and despite the fact that they themselves are in pretty good shape. (It shouldn’t be a surprise that Republicans have the worst opinion of other people’s economic situation, given where they get their news and what their favorite politicians tell them.

This brings me to an article in The Washington Monthly: “Republicans Say Inflation, Crime, and Immigration Are Out of Control. The Numbers Disagree”.

The Republican presidential candidates are on the same page regarding Joe Biden: He’s a disaster on inflation, immigration, and crime.

“We have no borders. We have inflation. We have everything going wrong,” said [their leading candidate] … in his apocalyptic fashion…. “Everybody is being murdered.”

Former Vice President Mike Pence … began a CNN-hosted town hall event with a pithy critique: “Literally, we have a crisis at our border. We have inflation at a 40-year high. We have a crime wave in our cities.” Pence suggested Biden’s border policies are to blame for “a flood of fentanyl coming into every city.” 

There’s one problem with this Republican portrayal of a Democratic president presiding over chaos: None of it is true.  

Inflation was at a 40-year high. During 2022, the inflation rate started at 7.5 percent, peaked in June at 9.1 percent, and ended the year at 6.5 percent, a mark that hadn’t been cleared since June 1982.  

But 2023 is a different story. The inflation rate for May is down to 4 percent, less than half of the June 2022 peak. But even back in March, when it fell to 5 percent, the “40-year high” talking point was obsolete. In July 2008, during the George W. Bush administration, inflation was 5.6 percent. And in October and November 1990, during the George H. W. Bush administration, it was 6.3 percent.

From the Bureau of Labor Statistics:

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As we get further away from the pandemic and the Federal Reserve keeps raising interest rates, the rate of inflation should continue to fall (despite the fact that corporations have used inflation as an excuse to increase their prices and profits even more than they needed to, as reported by The New York Times). Back to the article:

Has southern border security collapsed? Hardly. Unlawful entries have dropped by 70 percent in the last few weeks, according to the Department of Homeland Security, after Biden implemented a new border management policy.  

… Border crossings spiked just before Biden ended “Title 42,” the public health emergency rules that Txxxx enacted in 2020, using the COVID-19 pandemic to expedite the removal of asylum-seekers…. Many skeptics … assumed that the end of Title 42 would prompt a surge of migrants. The opposite happened. 

If the current pace of border crossings—about 3,700 per day—remains stable throughout June, the monthly total would be 111,000, … somewhat higher than the 93,000 in the last full month of Txxxx’s presidency.  

When assessing those numbers, remember that while Title 42 made it easier for the Border Patrol to send back asylum seekers, it did nothing to prevent those removed from trying again. In turn, many of the illegal crossings in Biden’s first two and a half years—under policies designed by Txxxx—were made by repeat offenders. Between 2019 and 2022, the recidivism rate jumped from 20 to 49 percent.

In Biden’s new system, those illegally crossing the border can be banned from applying for asylum for five years and risk jail time if they violate the ban. We saw a spike in crossings just before the administration implemented the smart new policy because migrants hoped to avoid the Biden ban.To tame an unruly border, Biden is steering asylum seekers away from treacherous desert treks and towards a more orderly online application process.

What about fentanyl coming over the southern border? … Biden’s administration has intercepted more fentanyl than Txxxx’s ever did…. According to PolitiFact, Biden deserves partial credit for the higher seizure numbers because his administration is employing more and better detection technology at the border. Besides, immigration across the southern border has little to do with the fentanyl crisis. Eighty-six percent of people arrested for trafficking fentanyl are American citizens, as “the vast majority of fentanyl being smuggled in comes through ports of entry, not people trying to sneak into the country.”  

Republicans may talk up crime, and there are no shortages of alarming anecdotes, but there is no Biden crime wave. “Murder is down about 12 percent year-to-date in more than 90 cities that have released data for 2023, compared with data as of the same date in 2022,” according to …The Atlantic, a trend that could lead to “one of the largest annual percent changes in murder ever recorded.” … In fact, over the past five years, the worst month for homicides was July 2020—when Txxxx  was president.  

Another set of promising data comes from the Violent Crime Survey by the Major Cities Chiefs Association, which looked at data from 70 cities. During the first quarter of 2023, homicides, rapes, and robberies dropped about 8 percent from the first quarter of 2022….  

Where Republicans have the best argument is in the category of stolen cars: up 21 percent from 2021 and a whopping 59 percent from 2019. But they haven’t argued that we’re only suffering from a wave of car thefts. They assert America is suffering a collapse of law and order, on every front, solely on Biden’s watch. That’s not true. A mixed picture is not a crime wave.  

Republicans are not updating their talking points to reflect this new data, preferring to insist that America is falling apart. They’re betting that either the data trajectories will reverse course, belatedly validating Republican attack lines, or Americans will be so convinced everything is terrible that additional positive data won’t “feel” true, and voters will disregard it. At least, that is the Republican hope….

We can’t know what these metrics will be in the run-up to Election Day. But in the meantime, reporters and voters should not allow Republican candidates to paint a dystopian picture of America without being forced to address the numbers that don’t fit their narrative. 

November 5, 2024, is more than 500 days away. Let’s hope more of the good news sinks in by then.

Government Finances Aren’t Family Finances

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Economist Paul Krugman replies to confused readers:

Whenever I write about debt and deficits, I receive the same letter — OK, not exactly the same letter, but a number of letters with more or less the same gist. They read something like this: “If I borrow money from the bank, the bank expects me to pay the money back. Why isn’t the same true for the government? Why can we keep borrowing when we already owe $31 trillion?”

Just about every economist will reply that it’s misleading to make an analogy between household and government finances. But it seems to me that we often aren’t clear enough about why, perhaps because we don’t say it bluntly enough. So here’s the difference: You are going to get old and eventually die. The government isn’t.

I don’t mean that governments are immortal. Nothing is, and no doubt someday America will, as Rudyard Kipling put it, be “one with Nineveh and Tyre.” But individuals face a more or less predictable life cycle in which their earnings will eventually dwindle.

And lenders therefore demand that individual borrowers pay off their debts while they still have the income to do so.

Governments, on the other hand, normally see their revenues rise, generation after generation, as the economies they regulate and tax grow.

Governments, then, must service their debts — pay interest and repay principal when bonds come due — but they don’t necessarily have to pay them off; they can issue new bonds to pay principal on old bonds, and even borrow to pay interest as long as overall debt doesn’t rise too much faster than revenue.

In fact, when governments for one reason or another run up large debts, it is, as far as I can tell, unusual to pay those debts off.

The most famous example, albeit one that many people apparently don’t know about, is the debt America incurred to fight World War II. By the war’s end, this debt was around 100 percent of gross domestic product — roughly comparable to the debt level today. So how did we pay off that debt?

We didn’t. John F. Kennedy entered the White House with federal debt roughly the same as it was on V-J Day. [This shows the gross federal debt between 1940 and 1960 — I assume adjusted for inflation.]

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Why, then, wasn’t the 1960 election dominated by questions of how to pay off the national debt? Because while the dollar value of debt hadn’t gone down, economic growth and modest inflation meant that the ratio of debt to [Gross Domestic Product] had fallen by half. [This shows the same period, 1940 to 1960.]

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For all those whose instinct is to assume that a responsible government would, like a responsible individual, pay off its debts as soon as it can, again: Governments aren’t like people. If death and taxes are the only sure things in life, well, death isn’t an issue for governments, and taxes are an asset — a growing asset — rather than a liability.

Unquote.

Of course, it isn’t exactly true that old debts aren’t paid off. The government is constantly paying investors interest on the government bonds and notes they’ve purchased, and those bonds and notes eventually mature, making old debts disappear. But investors are buying  new bonds and notes at the same time (which will eventually be paid off as well).