Economy – The Progressive Zone

Economies in mirror appear larger than they are

During the 2016 presidential race, Donald Trump promised Americans that, as their president, he would usher in “tremendous” economic expansion of as much as six percent. While that growth rate has not materialized, the USA’s gross domestic product (GDP) grew at an annual rate of 4.1% in the second quarter of 2018. That’s respectable growth, so president Trump boasted that “we have accomplished an economic turnaround of historic proportions.” That’s true if you look back only the year and a half that Trump has occupied the Oval Office. However, if your historical perspective is longer, the proportion of the GDP’s growth is not so large after all (click chart below to view full size).

Quarterly GDP change higher than 4 percent — Highlighted quarters had greater than four percent GDP growth (annualized)

Other than Q2 2018, the GDP has grown less than three percent each quarter since Trump’s inauguration. In comparison:

There were four quarters during president Barack Obama’s term in which the growth rate exceeded 4.1%—once even surpassing five percent. And Obama had to start his term with the economy mired in the Great Recession that president Bush handed off to him.
The GDP growth was larger yet during president Bill Clinton’s administration. Trump’s best quarter so far would have been only the thirteenth best quarter during Clinton’s term, when eight quarters were larger than five percent and one even reached 7.5%. Now that’s HUGE by historic proportions!

It’s also important to understand that the Bureau of Economic Analysis reports quarterly results on an annualized basis. That means the growth rate it reports for each quarter is the amount the GDP would grow if the rate in the given quarter were to be sustained for an entire fiscal year. So the 4.1% annual growth rate Trump is touting is much larger than the actual rate the GDP has grown for any full year he has been POTUS.

Yes, growth was strong in Q2 2018. But the GDP only grew 2.2% (annualized) in the first quarter of this year. Therefore, for the GDP to achieve an actual growth rate of 4.1% for the full fiscal year 2018, the quarterly growth will have to average over five percent (annualized) in both of the remaining quarters of fiscal year 2018. It would be nice for the economy to grow that fast this year but, with the growing headwinds of an escalating trade war, it will be a very tall order.

So Americans should be pleased to see the strong growth the GDP underwent last quarter. But they need to keep in mind that it’s only a snapshot of a single quarter. In retrospect, the growth of the GDP appears larger than it was.

Capitalism can coexist with a socialist democracy

When asked if he’s a capitalist, Senator Bernie Sanders says he is not. He doubled down on that claim during the Democratic debate last night when he reasserted it. Instead, Sanders claims to be a democratic socialist.

I think this is a tactical error on Sanders’ part. There’s nothing inherently wrong with being a democratic socialist but Sanders should not disavow capitalism. Sanders should more explicitly recognize that the two philosophies are not mutually exclusive.

He implied as much when Sanders stated that:

“Everybody is in agreement that we are a great entrepreneurial nation. We have got to encourage that. Of course we have to support small- and medium-sized businesses.”

Capitalism is defined as an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state. But this system can exist side-by-side with Bernie Sanders’ view of democratic socialism. Neither has to be (or even should be) an all-or-nothing system.

Sanders only proposes socializing those sectors that capitalism does not do well. For example, private health insurance companies (like those used in Obamacare) have almost a 25% overhead because of the cost of advertising, executive salaries, stock holder dividends, and administrative overhead. Medicare, which is a single-payer system like Sanders proposes, has only a nine percent overhead.

He also proposes using tax dollars to rebuild America’s aging and crumbling infrastructure. If the federal government didn’t do it, no capitalist company would rebuild our highways, bridges, sea & airports, power grid, schools, and telecommunications networks. But without rebuilding the national infrastructure, American companies will be unable to be compete globally in the heart of the 21st century.

While Sanders proposes socializing those sectors and a couple of others, he does not advocate eliminating free enterprise. He explicitly says that we need to support small- and medium-sized companies, calling them the backbone of our economy. He does not call for eliminating investment banking. He just thinks investment banking needs to be regulated like it was under the Glass-Steagall Act because it was the deregulation of the banking industry that led to its near collapse in 2008. Sanders demonstrates that he is a believer in capitalism.

The countries that Bernie Sanders cites as examples of successful socialist democracies all have robust capitalism in their economies. Too bad Sanders doesn’t clearly state that they do. It’s fine for him to say that he is a socialist democrat because he is. But Americans would be more accepting of it if he also said that a foundation of capitalism that builds a strong middle class is critical to a healthy socialist democracy.

Putting the ‘home’ into homeopathy

The decline in home values is hurting millions of Americans. After all, many had built up a great deal of equity in their homes by the time values had reached their peaks. Now the rates are resetting on many homeowners’ ARMs and the monthly payments are increasing to the point of unaffordability. In the meantime, their equity has evaporated and they are underwater with their mortgages. The only option left if they can’t afford to service their debt is a short sale or foreclosure.

The obvious course of action is to reverse the direction of the trend in home values, right? Wrong! Declining home values are not the disease, they’re the symptom, so turning them around is not the cure. Or as Alan Reynolds, a senior fellow with the Cato Institute and the author of Income and Wealth put it, “Falling home prices are not the problem, they’re the solution.” The cure for home values is some homeopathic medicine—that is, the feds keeping their hands off the housing market and letting homes return to their intrinsic values.

President Barack Obama disagrees. Earlier this month while remarking on the mortgage crisis, the President said:

In the end, all of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to continue to deepen—a crisis which is unraveling home ownership, the middle class, and the American Dream itself. But if we act boldly and swiftly to arrest this downward spiral, then every American will benefit.

His solution is the Homeowner Affordability and Stability Plan. His plan has four key elements:

financing help for four- to five-million homeowners who receive their mortgages through Fannie Mae or Freddie Mac
new incentives for lenders to modify the terms of sub-prime loans at risk of default and foreclosure
steps to keep mortgage rates low for millions of middle class families looking to secure new mortgages
additional reforms designed to help families stay in their homes

Few would refute that this plan will cost much more than $75-billion Obama has dedicated to it. Responsible taxpayers who chose not to buy homes they could not afford will subsidize others who couldn’t resist jumping onto the home-as-the-breadwinner bandwagon. Those of us who resisted the lure of “creative financing” knew that home prices could not continue rising forever. Instead we will bail out the countless HELOC abusers who have cashed out their homes under Obama’s plan.

Professor Robert Shiller is an economist from Yale who saw the burst of the housing bubble coming at least two years before the market hit its peak. He performed a study of historical home values that clearly illustrated where the housing market is headed:

The chart shows the Case-Shiller home price index from 1890 to 2012 — Case–Shiller home price index data, 1890–2012

All Obama’s plan will do is postpone the inevitable…and cost America a price tag that will reach into trillions of dollars if Americans don’t put a stop to it. Anyone who has studied economics knows that all markets return to a state of equilibrium. No matter how much of our treasury we throw at the declining housing market, we will not be able to prevent a drop of another twenty percent in median home values and much more than that in some hyper-inflated regions.

The cure to the housing market is some homeopathic medicine. The idea of homeopathy is to treat disease with a dose of medicine that would produce in a healthy person symptoms similar to those of the disease. In the case of our diseased housing market, the medicine is lower home values. Lower home values would make home ownership more affordable to average Americans. It would make for healthier mortgages. And it would loosen up the credit market because home loans would be much less risky to lenders.