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The Economy in
the 2012 Election
Andrew Samwick
Dartmouth Club of the Upper ValleyFebruary 4, 2012
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Our Objective Today
Since the U.S. economy is
going to be the majorissue in the race, we were
hoping that you might be
willing to discuss the
economic situation, the jobs issue, the federal
budget, etc.
2/4/2012 2(c) Andrew A. Samwick
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A Macroeconomic Refresher
GDP Component
Average Share
of GDP1995 2011
Standard
Deviation of
Quarterly
Percent Change1995 2011
Consumption 69.2 2.3
Investment 15.6 14.7
Government 18.8 3.1
Exports 11.1 9.7
(Minus) Imports -14.7 9.5
Total 100.0 2.82/4/2012 3(c) Andrew A. Samwick
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Changing GDP Shares
GDP
Component
2007
Q4
2008
Q4
2009
Q4
2010
Q4
2011
Q4
Investment 15.9 13.6 11.3 12.3 13.1
Government 19.2 20.6 20.9 20.5 19.7
Consumption 69.8 70.0 70.9 70.6 71.0
Net Exports -4.9 -4.2 -3.1 -3.4 -3.8
2/4/2012 4(c) Andrew A. Samwick
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The bursting of the tech bubble:-2% of GDP over 3 years.
The bursting of the
housing bubble: -4%
of GDP over 5 years.
2/4/2012 5(c) Andrew A. Samwick
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What Does All of This Tell Us?
Consumption is the largest component of GDP,
but it is also the least volatile.
Investment is the most volatile component of GDP.
Investment drives the business cycle. From
this perspective, we wont be out of the
downturn until investment rates fully revert.
2/4/2012 6(c) Andrew A. Samwick
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Implications for the Labor Market
We can also see the business cycle play out inthe labor market.
There are two important news releasesregarding the labor market:
The weekly Initial Unemployment InsuranceClaims report
The monthly Employment Situation Summary
Heres how to interpret both of them duringthe remainder of this election cycle.
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Meanwhile, in the Labor Market
Sustained Economic Expansions Require
Weekly Initial UI Claims < 400,000
It is possible to approach 400,000
weekly initial claims without crossing it.
And look where
we are now.
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So follow the newsevery Thursday
morning at 8:30
a.m. to see if initial
UI claims are stayingbelow 400,000 (or
375,000, according
to the AP).
2/4/2012 9(c) Andrew A. Samwick
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So What Is the Economic Situation?
I assert that there are three macroeconomic
regimes, based on the monthly Employment
Situation Summary and the market response.
When the net job growth number is negative or
barely positive.
When the net job growth number is positive and
the stock market increases in response.When the net job growth number is positive and
the stock market falls in response.
2/4/2012 10(c) Andrew A. Samwick
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Reading the Economic News
Weakly Positive or
Negative Job Growth
Economic growth is
not supporting job
growth. This could
be due to negative
GDP growth (a
recession) or highproductivity growth
relative to GDP
growth (a jobless
recovery).
Positive Job Growth,
Negative Stock
Market Response
The economy is
growing so quickly
that investors expect
the Fed to raise
interest rates, tolower inflation
expectations or
investor sentiment.
Positive Job Growth,
Positive Stock
Market Response
The economy is
growing quickly
enough to add jobs,
but not reliably
enough to cause theFed to worry about
curbing inflation or
deflating bubbles.
2/4/2012 11(c) Andrew A. Samwick
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Which Regime Are We In?
So follow the news on the first Friday of every month at 8:30 a.m. for any signs
of a regime switch from yellow to green
(and hopefully not back to red).2/4/2012 12(c) Andrew A. Samwick
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Zooming In on the Close Contests
GA
MT
MO
NC
IN
FL
OH
VA
CO
IAMN
NH
PA
5
6
7
8
9
1 0
U n e m
p l o y m e n t R a t e i n D e
c e m b e r 2 0 1 1
46 48 50 52 54
Obama Share in 2008
Vice President Rubio?
Vice President Portman?
2/4/2012 14(c) Andrew A. Samwick
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On Policy, What Have We Learned?
This recession, like the last two, has had a jobless
recovery despite aggressive monetary policy.
Tight monetary policy didnt cause these recessions.
Easy money wont necessarily end them.
These recessions are the result of a sectoral
mismatch in the economy (the wrong kind of
investment, too much consumption)The path out of these recessions is aggressive
fiscal policy, not (just) easy monetary policy.
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The (Old) Principles of Fiscal Stimulus
To respond to an incipient downturn, fiscalpolicy has to have its impact in a timelymanner.
It has to be targeted to assure that increasedgovernment borrowing translates directly intoincreased spending and demand.
And, critically, it has to be temporary so thatits effects are not offset by higher long-terminterest rates.
As stated by Summers (12/19/07), quoting Sperling (12/17/07).
See also Elmendorf & Furman (1/10/2008).2/4/2012 16(c) Andrew A. Samwick
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How Big Should This Stimulus Be?
Quoting Summers (late 2007):
It is reasonable to suggest that stimulus approaching
$50-$75 billion -- roughly in the range of 1/2 of 1% of
GDP -- is likely to be appropriate.
The largest part of this stimulus should come in the
form of tax cuts distributed equally among all
taxpayers and recipients of tax refunds.
During the throes of the recession (early 2009):Calls for additional stimulus of $1 trillion and more,
with ARRA passed at $787 billion.
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Did the Stimuli Work?
Sahm, Shapiro, and Slemrod (2009) on the 2008 taxrebates:
Only about one-fifth of respondents in the
Reuters/University of Michigan survey report that the 2008tax rebates led them to mostly increase spending, whileover half said it would lead them to mostly pay off debt.
Of those in the mostly-spend category, the response wasswift, with over 80 percent reporting increasing theirspending within three months of receiving their rebate.
Older households, households with higher wealth andhigher income, and those expecting future income growthwere generally more likely to spend the rebates.
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Did the Stimuli Work?
Feyrer and Sacerdote (2011) on ARRA, using
variation in receipts by states and counties:
Their analyses suggest that one additional job was created
by each $170,000 - $400,000 in stimulus spending.Grants to states for education do not appear to have created any
additional jobs.
Support programs for low-income households and infrastructure
spending are found to be highly expansionary.
Estimates excluding education spending suggest fiscalpolicy multipliers of about 2.0 with per job cost of under
$100,000.
2/4/2012 19(c) Andrew A. Samwick
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I Disagreed With This Approach Early
2/4/2012 20(c) Andrew A. Samwick
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These Principles Are
Not Aggressive EnoughThe marketing is great. How could anyone
want something untimely or untargeted?
The problem is the temporary.Temporary measures dont increase consumption
unless a person is borrowing constrained (and
even then, only temporarily).
Temporary measures do not boost expectations of future activity and thus do not improve asset
values or motivate longer term investments.
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Searching for a Better Way
Timely, targeted, and temporary elevatesspeed (and presumed multipliers) over value.
It also emboldens opportunistic behavior inour budgeting process.
Are there things of value that:
We currently need to invest in,
The government has a critical role in providing,Provide benefits well into the future, and
Can be prioritized and scheduled well in advance?
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Consider Infrastructure Investment
From the American Society of Civil Engineers
2009 report card:
An estimated $2.2 trillion is required over a five-
year period to restore the nations physical
infrastructure to good condition.
Only half of this is projected to be spent under
current practices (including ARRA authorizations).Using the ASCE calculations, ARRA addressed only
about 10% of the total estimated shortfall.
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A Capital Budget: As Stimulus
If we had a capital budget, some projectswould be slated for completion each year.
When economic growth falters, the
government would be in a position to movesome of the projects from later years into thepresent year.
Having a plan in place allows these shifts to betimely, possibly targeted, and appropriatelytemporary.
2/4/2012 24(c) Andrew A. Samwick
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A Capital Budget: Advantages
It forces the government to establishpriorities.
It reduces overall expenditures (i.e., generates
wealth) by doing more of the work in times of economic slack, when costs are lower.
It also abides by pay-go rules, since projectsmoved up to 2009 need not be done in 2010.
I believe that effective capital projects boostexpectations in a way that tax rebates do not.
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Where Is Current Policy?
President Obamas infrastructure initiatives are inthe low hundreds of billions.
ARRA had at most $100 - $150 bln (out of $787bln)
He has repeatedly called for $50 billion for a NationalInfrastructure Bank.
His rhetoric picked up around the midterm elections:This is Work That Needs to Be Done. There Are WorkersWho Are Ready to Do It. [Speech on 10/11/2010,
Treasury/CEA white paper released the same day]These policies are an order of magnitude too small not nearly aggressive enough.
2/4/2012 26(c) Andrew A. Samwick
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Our Current Political Dynamic
ARRA + HASP = Tea Party Movement Begins within amonth of President Obamas inauguration.
The Tea Party was an extremely successful political
movement.Consider how nothing like ARRA or HASP has beenpassed since the 2010 elections, despite ongoingneed as defined by the President.
Every policy President Obama has gotten passed sincethen has been with tax cuts (reflecting Republicanpriorities regarding tax cuts versus deficit reduction orcapital investments).
2/4/2012 27(c) Andrew A. Samwick
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The Deficit Will Be An Issue in 2012
Current deficits are high by historicalstandards, due to lingering weakness in theeconomy and policy interventions.
But projected deficits in the next decade willbe high only if Congress and the Presidentcontinue the policy interventions.
Beyond that, our fiscal problems are solelydue to population aging and excess healthcare cost growth.
2/4/2012 28(c) Andrew A. Samwick
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0
5
10
15
20
25
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Historical Deficits as a Share of GDP
Revenues Outlays2/4/2012 29(c) Andrew A. Samwick
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0
1
2
3
4
5
6
7
8
7
3.7
2.11.5 1.6
1.1 0.9 1.2 1.2 1.2 1.4
Projected Deficits as a Percent of GDP:
Baseline vs Alternative Policy
Additional Debt Service
Prevent Spending Cuts
Extend Tax Policies
Baseline
2/4/2012 30(c) Andrew A. Samwick
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Sources of Growth in Federal Spending
on Major Mandatory Health Care
Programs and Social Security
2/4/2012 31(c) Andrew A. Samwick
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In Conclusion
Our economy may be on the verge of asustained recovery.
Our fiscal policy problems are fixable, if we
can put together a coalition in Washington tofix them.
A parting question: Under which President arewe more likely to see that coalition form,assuming no changes in the majorities in theHouse or Senate Obama or Romney?
2/4/2012 32(c) Andrew A. Samwick
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