Among the bills that passed the legislature and are awaiting Perdue's signature are laws that would:
► Call for regional referenda in 2012 on whether to ease traffic gridlock by levying a 1 percent sales tax devoted to local transportation projects.
► Permanently ban outdoor watering from 10 a.m. to 4 p.m. that will save millions of gallons.
► Add stricter requirements for lobbyists to report publicly the money they spend wining and dining legislators.
► Make it easier for homeowners to appeal their property tax bills.
► Get rid of the state's property tax, which will save the average homeowner about $12 per year.
► Cancel a tax credit for low-income Georgians that ranges from $5 to $20.
► Add a 1.7 percent tax on hospitals that will fund higher Medicaid reimbursements, helping hospitals with a poorer clientele like Grady Memorial Hospital in Atlanta.
► Call for a statewide referendum on whether to add $10 to car tag fees to raise about $80 million for trauma care.
► Remove taxes on retirement income.
► Bar teenagers from texting or talking on cell phones while driving.
► Require pickup-truck drivers to buckle their seat belts.
► Allow concealed-carry license-holders to come to more places armed, including in bars.
► Switch to zero-based budgeting, where legislators look at the entire budget every year, rather than just the changes from the past year.
► Increase the amount of money the state puts into a rainy-day fund during flush times.
Sunday, May 2, 2010
Athens Banner-Herald wrap up of 2010 Session
Economic Recovery Watch
In the economic news, the recovery continues, with a couple of decent reports coming out of the housing market. Sales of both existing and especially new houses were up nicely in March. Much of the life, it’s hard to say just how much, came from the tax credit for first-time buyers—you do have to wonder if the market can survive the withdrawal of that stimulus. Prices aren’t recovering so quickly. The best measure of house prices we have, the S&P/Case-Shiller index, is up not quite 1% over the last year (though it’s most recent figure is for February, ancient history in these precincts). But much of the gain happened last year; prices in recent months have been pretty flat.
But the trend I’ve noted here over the last few weeks continues—people are buying again. The weekly chain store sales numbers are showing their best gain in years. Appropriately enough, the consumer confidence numbers from the Conference Board are showing an improving mood among the masses—mostly for the future, but perceptions of improvement in the job market were also impressive. It’s hard to say how much of that perceived improvement comes from personal experience and how much from hearing some more upbeat news in the media. But it does look like a recovery is underway. Or so the financial markets believe—at least until the bad news out of Europe (on which much more in a few moments) inspired more prudent sorts to put the champagne back in the chiller for now.
And, in the accurate words of Mohamed El-Erian, head man at Pimco, the world’s largest bondholder:
Markets are placing too much emphasis on the cyclical tail winds and not enough on the structural head winds. We recognize that it will take time for the market to fully understand that the global financial crisis was not a flesh wound, that the balance sheet adjustment hasn’t yet ended, and that the post-crisis phase is inherently complex. We have seen a massive stabilization of the financial market, but the hand-off from financial stabilization to a robust recovery on Main Street, which translates into the large employment creation we need [for] growth, is proving more difficult. So we worry over persistently high unemployment as well the robustness of the social safety nets.
Aside from the use of the tired “Main Street,” which would never appear on here except in a quote, this formulation can hardly be improved upon. It’s striking to see one of the royalty of finance show more concern about social safety nets than just about anyone in political life.
As I keep pointing out, the history of economies after financial crises is bleak; it typically takes years to mount any kind of sustained recovery. For now, we’re being lifted by tax breaks and deficit spending. But tax breaks expire and the deficit spending is set to be reversed within a year. (And Obama’s deficit commission is getting ready to bring out the really big and sharp knives—though there could be some political obstacles to realizing the agenda.) Our credit system is still a mess, and it would be insane to go back to the model of the 2001–2007 expansion, when debt grew nearly twice as fast as GDP, the most lopsided ratio in modern business cycle history—and despite all that credit juice, it was also the weakest of all the expansions. The tailwinds are pleasant at the moment, but without any serious structural reforms, it’s hard to see how the headwinds won’t be back.
Are they still gonna scoff and laugh when they chant drill baby drill?
The news out of the Gulf just gets more and more grim.
Efforts to halt the flow of oil anytime soon have failed; the remaining options have an effective timeframe measured in months. And experts are warning that the flow estimate — already quintupled from 1,000 barrels a day to 5,000 barrels a day — may have to be quintupled again, to 25,000 barrels. If so, they say, the spill already compares in scale to the historic 1969 disaster in Santa Barbara, Calif., and the Exxon Valdez in 1989.
And by every indication, it’s going to get a lot lot worse.
BP PLC, the oil giant that leased the rig whose sinking last week caused the disaster, has failed in efforts using unmanned submarines to activate a shutoff device on the undersea well.
A stopgap solution BP is planning—covering the well with containers and pumping the oil out—will take weeks to roll out and is untested at the one-mile depth of this well, however…..
Industry scientists say the permanent solution is to close the entire well. To do that, they must drill another hole—through 13,000 feet of rock a mile under the ocean’s floor—that will intercept the leaking well. They can then pump in cement to try to plug the leaks.
This operation will take up to three months and is highly complex; the drills must precisely hit the leaking well—which is just seven inches wide. When a well off the coast of Australia blew out last year, it took five attempts over 10 weeks to hit the old well and shut it down.
Twenty-five-thousands barrels of raw oil a day, every day, for another month or two or three…
It’s just hard to grasp the magnitude of what’s happening.
From Environment News Service:
The oil spill, now 100 miles long by 48 miles wide, is being pushed onshore by the prevailing southeast winds and is expected to hit the Louisiana’s Chandeleur Islands on Saturday.
The state bird of Louisiana, the brown pelican, removed from the U.S. Endangered Species list only late last year, nests on the Louisiana coastal islands of Breton National Wildlife Refuge, which encompasses the Chandeleur Islands. Their breeding season just began and many pairs are already incubating eggs.
The weather forecast calls for “persistent southeast winds through the weekend which will push surface oil towards shore and hamper surface recovery efforts until a forecast shift on Monday.” And here’s the latest map from NOAA, tracking the spread of the spill from April 27 with projections through tomorrow, May 2.
But the enormously sad truth is, the day-to-day weather reports may not matter much. Nor does the map. A spill on this apparent scale has the potential over time to devastate the entire Gulf coast — beaches, fisheries, human livelihoods, bird species — from Mexico to the west coast of Florida. We may be well into hurricane season by the time they get the leak capped, which could compound the damage in ways hard to imagine.
What a nightmare.
What Milton Friedman got wrong....
Friedman had two fundamental problems with business regulation. His first is that the business would capture the regulator, and therefore use regulation to establish monopoly power. My field leads me to find this line of argument compelling: real estate developers love (regulatory) barriers to entry that keep competitors from building. His second, though, is just wrong. He argues that in order to preserve their reputations, businesses will self-regulate. Among other things, this ignores that managers often have short-term horizons. It also ignores that when large businesses implode, they leave victims with whom they never engaged in a transaction in their wake. BP did nothing illegal--how's that reputation thing working out? And having now read a whole lot on Goldman-Abacus (including the SEC complaint, the response on GS's web site, the offering circular, and excellent commentary from James Surowiecki, Yves Smith and others), it is not clear to me that Goldman did anything illegal or actionable (but I could be persuaded to change my mind). It is just that what it did (including investing long in CDS) should be unambiguously illegal and actionable. I can't think of anyone who had a bigger reputation franchise than Goldman.
The Deficit and Our Children: Just the Facts
The country faces real problems. In the short-term we face the problem of re-employing people in an economy with near double-digit unemployment. In the longer term we need to rebuild the economy on a cleaner more energy efficient path. And, we desperately need to fix our health care system. How we deal with these problems will determine the well being of our children and grandchildren.
- Under any plausible set of projections, our children and grandchildren will enjoy far higher standards of living than we do today. On average, real hourly compensation is projected to rise by at least 1.2 percent a year. This means that workers in the year 2040 will enjoy compensation levels that on average are more than 40 percent higher than what workers receive today. This means that even if they paid hugely higher taxes, our children and grandchildren will have far more after-tax income than we do today. There is a problem of inequality so that most workers may not share in this income growth. Due to the growth of inequality, most workers have seen little improvement in living standards over the last three decades. If the trend towards growing inequality continues, then workers in 2040 may not be much better off than workers today, but that is an issue of intra-generational inequality, not inter-generational inequality. Fixing inequality would cause us to focus on issues like trade policy, the ability of workers to join unions and taxpayer subsidies to the financial sector, not budget deficit.
- The reason that the country is projected to face enormous deficits in the future is our broken health care system. We pay more than twice as much per person for our health care as people in Canada, Germany and other wealthy countries. This gap is projected to grow even larger in future decades. We have little obvious benefit from this additional spending, since people in all these countries have longer life expectancies than we do. If our per person health care costs were comparable to those in other countries then our budget projections would show huge surpluses, not deficits.
- The debt to China has nothing to do with the budget deficit and does not present the disastrous risks claimed by the deficit hawks. The United States borrows money from China because of the trade deficit. The budget deficit is beside the point. If we had the same level of GDP and the same value of the dollar against the Chinese yuan, we would have just as large a trade deficit with China today even if the budget were balanced. If we are concerned about borrowings from China, then we should focus on reducing the value of the dollar, not the budget deficit. If we didn’t have a budget deficit, China could be offsetting its trade surplus by buying private assets like shares of General Electric stock or bonds issued by private corporations. Of course, if China wanted to acquire government bonds it could sell these other assets and buy government bonds any day of the week. So, there is no special reason for anyone to be concerned about China owning U.S. government bonds as opposed to any other U.S. financial asset. Finally, the scare story, that China might one day dump its bonds and send the dollar tumbling, is absurd on its face. Both the Bush and Obama administrations were pressuring the Chinese to raise the value of its currency. Are we worried that one day they will dump their huge holdings of dollars and send the yuan soaring against the dollar? In other words, the deficit hawks want us to be worried that the Chinese government will one day do exactly what we have been asking them to do for years: stop buying up dollars to depress the value of the yuan against the dollar.
Declines in State and Local Government Spending Continue to Drag Economy Down
Here’s some important details buried inside the new GDP figures:
Real federal government consumption expenditures and gross investment increased 1.4 percent in the first quarter, compared with no change in the fourth. National defense increased 1.2 percent, incontrast to a decrease of 3.6 percent. Nondefense increased 1.7 percent, compared with an increase of 8.3 percent. Real state and local government consumption expenditures and gross investment decreased 3.8 percent, compared with a decrease of 2.2 percent.
The point here is that contrary to the impression fostered by the right of a grasping federal government crushing everything, all increases in federal spending have been doing lately is partially offsetting recession-induced declines in state and local government spending. Those declines are very economically damaging. If you ignore the large element of the American Recovery and Reinvestment Act that was dedicated to cutting taxes, the largest spending element was aid to state and local governments to prevent tax hikes and these kind of spending cuts. In an ideal world, Congress would have appropriated even more funds for these purposes than was in the initial problem. Instead, the Senators from Maine teamed up with some moderate Democrats to scale it back. It’s been a huge mistake and we’re likely to continue paying the price for it in terms of sub-trend output for years to come.
Via stimulus money teachers to be hired to tutor foster kids
Kudos to the Division of Family and Children Services for committing resources to the education of children in foster care!
An article in today’s AJC announces DFCS’s plans to use federal stimulus dollars to hire 150 certified teachers to tutor the 3,000 Georgia foster children who are falling behind in school. According to the article foster children in Fulton and DeKalb counties fail the 3rd grade math CRCT at twice the rate and the 8th grade math CRCT at triple the rate of their non-foster care peers.
Children in foster care have experienced trauma and upheaval in their lives that make them vulnerable to many poor outcomes. It is essential that we target resources to help them succeed and this program appears to be a solid commitment to doing just that.
DFCS and the GA Dept of Education have been working together for a while now to share data and to examine ways they can partner to improve student success. Voices commends the efforts of DFCS to share the responsibility for educating these children and we encourage all state agencies and non-profits working with children and parents to do the same.
We also encourage DFCS to collect data on the effectiveness of the program and to openly share the results with the community so successes can be built upon and challenges addressed.
Calculated Risk on residential investment
Residential Investment (RI) made a small positive contribution to GDP in the second half of 2009, but was a drag in Q1 2010. The rolling four quarter change is moving up, but as expected there has been no strong boost to GDP from RI. Equipment and software investment has made a positive contribution to GDP for three straight quarters (it is coincident). Nonresidential investment in structures continues to be a drag on the economy, and as usual the economy is recovering long before nonresidential investment in structures recovers. The key leading sector - residential investment - is lagging the recovery because of the huge overhang of existing inventory. Usually RI is a strong contributor to GDP growth and employment in the early stages of a recovery, but not this time - and this is a key reason why the recovery has been sluggish so far.
Saturday, May 1, 2010
Gross Domestic Product: First Quarter 2010
Productivity growth will be close to 2.4 percent for the quarter.The first increase in inventories since the first quarter of 2008 raised GDP growth in the first quarter of 2010 to 3.2 percent. The 33.1 billion annual rate of accumulation added 1.6 percentage points to growth. Final demand in the first quarter grew at a 1.6 percent annual rate, almost the exact same rate as for the prior two quarters. Consumption grew at a 3.6 percent annual rate, adding 2.55 percentage points to GDP growth. Car purchases were a big part of this story, adding 0.79 percentage points to growth for the quarter. Consumption of non-durable goods and services grew at 3.9 percent and 2.4 percent annual rates, respectively. This rise in consumption was associated with a decline in the savings rate from 3.9 to 3.1 percent. While many analysts have portrayed consumers as being pessimistic, this is an extremely low savings rate by historical standards. With house prices resuming their decline, more homeowners are likely to recognize the loss of wealth associated with the collapse of the housing bubble. As a result, it is more likely that the savings rate will go higher than lower. Construction of non-residential structures fell at a 14.0 percent annual rate, continuing a decline that began in the third quarter of 2008. It is likely that output in this sector will decline further, at least through 2010, given the enormous overbuilding in the sector. Investment in equipment and software grew at a respectable 13.4 percent annual rate, which was down somewhat from the 19.0 percent rate in the fourth quarter. Spending on software added 0.36 percentage points to GDP growth for the quarter. Non-residential investment as a whole added 0.38 percentage points to GDP growth. Housing construction dropped at a 10.9 percent rate, following two consecutive quarters of growth, subtracting 0.29 percentage points from GDP. Given the current slow pace of construction, it is likely that there will be some uptick in housing, although probably not enough to have a substantial impact on growth. Trade is again turning into a big subtraction from growth as the growth in imports far exceeds the growth in exports. Exports grew at 5.8 percent annual rate, adding 0.66 percentage points to growth, while imports grew at an 8.9 percent rate, subtracting 1.28 percentage points from growth, leaving a net effect of trade of –0.61 percentage points. Greece’s troubles have produced a flight to the dollar, raising its value against the euro and other currencies. This is likely to contribute to further increases in the trade deficit through the rest of 2010. The state and local budget crises are leading to sharp cutbacks in spending. The state and local sector contracted at a 3.8 percent annual rate, subtracting 0.48 percentage points from growth in the quarter. Most of the cutbacks were in investment spending, which fell at a 14.7 percent annual rate. Governments apparently are opting to deal with their budget squeezes by putting off capital expenditures in order to continue to provide current services. This may be the best option at present, but in the long-term this pattern of cutbacks will slow the growth of productivity. Federal spending grew at a 1.4 percent rate, but the government sector as a whole subtracted 0.37 percentage points from growth in the quarter. There is little reason to expect that final demand will pick up substantially from its current rate of growth. The savings rate is unlikely to decline further, which means that consumption growth will be weak, and non-residential construction, state and local government spending and foreign trade are all likely to be substantial drags on growth. If the rate of inventory growth stabilizes, then this would imply GDP growth of close to 2.0 percent, which is not enough to generate jobs.The “positive” side of this report is that analysts who feared that rapid productivity growth was preventing job growth now have less to worry about. Output in the non-farm sector grew at a 4.4 percent annual rate. With hours having risen at close to a 2.0 percent rate, this implies a modest 2.4 percent rate of productivity growth for the quarter. The prior uptick in productivity was typical for the end of a recession and now it appears that growth has returned to normal levels.
I have been worried since November of last year about the economy moving sideways, and more specifically about stagnating employment since February. Yesterday’s release of initial claims for unemployment, which saw average claims increasing slightly, did nothing to change that assessment:
In the week ending April 24, the advance figure for seasonally adjusted initial claims was 448,000, a decrease of 11,000 from the previous week’s revised figure of 459,000. The 4-week moving average was 462,500, an increase of 1,500 from the previous week’s revised average of 461,000.
Initial claims have been moving sideways for four months, and are above the approximately 400,000 level many people believe represents the point at which jobs are being created rather than lost. Here’s a graph of the series:
The Red line is actual claims. The Black line is the four week average.Here’s a graph since 2007 that makes the recent sideways movement in claims more apparent:
The Red line is actual claims. The Black line is the four week average.Turning to other economic news, the Bureau of Economic Analysis released its advanced estimate of GDP growth for the 1st quarter this morning, and GDP growth was estimated to be 3.2 percent:
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.2 percent in the first quarter of 2010, (that is, from the fourth quarter to the first quarter), according to the “advance” estimate released by the Bureau of Economic Analysis.
While some are reading this as encouraging news, and positive growth is certainly better than the alternative, a growth rate of 3.2% is not enough to make up for lost ground. That is, the economy is currently operating at below its potential level. A growth rate of 3.2% will keep things from getting worse — the distance between the actual level of output and its potential level will not increase — but the distance will not decrease either.(Potential output also grows at around 3 percent per year, the potential and actual output lines are moving parallel, but what we want is for the distance between the two lines to decrease.)
A 3.2 percent growth rate is not large enough to make up for the lost GDP during the recession. In past recoveries, GDP growth rates of 7% or more for several quarters were not unusual, but so far we are not seeing growth rates at that level. Until we do, the economy — employment in particular — is likely to continue its sideways movement.
[On the GDP figures, see also: Calculated Risk (here too).]
The change in private inventories was smaller this quarter - adding 1.7% to GDP in Q1 2010 compared to 4.4% in Q4 2009. It is important to note that the inventory contribution to Q4 GDP was from a slowdown in the liquidation of inventories, but in Q1 businesses were building inventories - and this inventory build will probably slow in Q2. As I noted earlier, the two leading sectors, residential investment (RI) and personal consumption expenditures (PCE), were mixed. RI declined to a new record low as percent of GDP, however PCE increased at a 3.6% real annualized rate. The increase in PCE does not seem sustainable unless employment and incomes increase soon. A large portion of the increase in PCE came from a decrease in personal saving.Click on graph for larger image in new window. This graph shows personal saving as a percent of disposable personal income.It is not unusual for the saving rate to decline at the beginning of a recovery as people become more confident. This helps drive consumer spending, but with the high levels of household debt, I expect the saving rate to increase over the rest of the year. Here are some Q1 numbers (all annualized):
Personal consumption expenditures (PCE) increased $130.7 billion Personal saving declined $88.5 billion. Government social benefits to persons increased $61.1 billion.So the boost in PCE came from the decline in saving and the increase in benefits. That is not sustainable. The second graph shows real personal income less transfer payments as a percent of the previous peak. Unlike the recovery in GDP, real personal income less transfer payments has barely increased and is still 6.6% below the pre-recession level.The peak of the stimulus spending is in Q2 2010 (right now), and then the stimulus spending starts to taper off in the 2nd half of 2010. So underlying demand better increase soon - and that means jobs and incomes going forward. Unfortunately residential investment is usually one of the key engines for employment and growth at the beginning of a recovery - and I expect RI to be sluggish all year because of the huge overhang of existing housing units. So my guess is the recovery will probably remain sluggish, and I still expect a slowdown in the 2nd half of 2010.
The recession is over.That's the big take-away from today's report from the Bureau of Economic Analysis that the seasonally adjusted real value of the nation's production of goods and services grew at a 3.2% annual rate during the first quarter of 2010. But the details behind today's report suggest that the recovery so far remains pretty weak by historical standards....Nevertheless, the details behind the 3.2% growth for 2010:Q1 are disappointing. Half of the growth came from the fact that firms were no longer drawing down inventories and have started to rebuild them slightly; real sales of final goods and services only increased at a 1.6% rate during the quarter, which would be an anemic rate in normal times and is particularly disappointing at this point in a recovery. And even 3.2% growth in GDP may not be enough to make progress in bringing the unemployment rate down....Spending declines by state and local governments subtracted half a percent from the GDP annual growth rate, and residential housing another third of a percent. Nonresidential fixed investment and exports made modest positive contributions to first quarter growth, but I'd really like to be seeing them contribute much more.
But I suppose an optimist could see in all this the potential for much better numbers to come once the recovery gets on track. And even if growth of real final sales remains tepid, Inventory restocking could continue to make a big contribution to GDP growth the rest of this year.
(1) Both the optimists and pessimists are correct. What matters is the relative strength of the optimistic factors vs. the pessimistic factors.
(2) If there were no pessimistic factors operating, we should have expected a strong V-shaped recovery like 1983-84. Because the pessimists are correct about elements of weakness in the economy, we are likely to get a recovery that is only half as strong, maybe a bit more, than 1983-84, in the range of 3% to 4%. (The annualized growth rate of real GDP between fourth quarter 1982 and fourth quarter 1984 was 6.4%).
Here’s one way of pulling the case of the optimists and the pessimists out of today’s BEA release. These are contributions to real GDP growth and by definition these contributions must sum to total growth of real GDP of 3.24%.
Optimists: total 5.06
Personal consumption expenditures +2.55 (of this 1.40 was goods, 1.15 was services)
Inventory change +1.57
Producers durable equipment and software +0.83
Federal government +0.11Pessimists total -1.82
Residential structures -0.29
Nonresidential structures -0.44
State and local government -0.48
Net exports -0.61What about the future? Clearly the contribution of inventory change is going to wind down to a smaller positive number. But both producers durable equipment and personal consumption expenditures seem to be picking up steam and are likely to be stronger in the second quarter than the first. The turnaround of employment from shrinkage to growth will inevitably boost growth in disposable income and thus in consumption. Producers durable equipment seems to be picking up as firms are replacing their IT equipment after a pause in 2008-09 when capital spending budgets were slashed.
Also, one component of the pessimists’ case is likely to turn around soon, and this is residential structures. The BEA artificially distributes housing starts across subsequent quarters, so the negative for the first quarter of 2010 reflects the decline in housing starts that happened a year ago. Actual housing starts in the first quatyer were up 19% year over year and building permits were up 22%, according to National Association of Home Builders data.
One point to note is that the federal government number doesn’t provide much evidence of any effect from the Obama stimulus. A big puzzle is why it is taking so long for the stimulus money to show up in the GDP accounts. The major downside risk for the economy is that the negative contribution of state and local government will get progressively worse.