Welcome to The Economy page of the Policy Corner!
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More reasons why our economy is coming back (posted May 15, 2012)
A huge slice of the “Real” American economy (in contrast to the financial sector) is construction. Construction is both labor-intensive and materials-intensive, and so pumps money into the economy by two channels. In the most recent few years, new construction has frozen up because of the housing bubble crash and subsequent capital flight. But in the interim, the overhang of buildings in the residential housing market has swung into a rather deep undersupply:
(The line with the arrow indicates the population growth). There are still lots of vacant properties of course, but there are also lots of extended families living in the same house (the kids moving back in with mom and dad story), and rental housing demand is way up. So there is need for new home construction as well as the filling-out of existing home stocks – the problem is getting the loans.
Well, money is beginning to flow again, and the construction sector is showing some growth, finally:
If this trend keeps up, there should be lots of new economic activity generated in 2012.
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Why our economy is coming back (posted Feb. 27, 2012)
Yes, economies in recession do eventually climb back. But there was no guarantee that our economy would be picking up speed now rather than next year (post-election, as Mitch McConnell would have preferred). Indeed, the European economies are mostly quite weak, and have not shared the most recent half year’s growth that America has enjoyed. Why?
The Europeans are being forced to cut spending and lay off workers to satisfy the markets to continue loaning them money. But in so doing, they weaken their economies, making it still harder to service their debts. This makes the demands for more cutting even stronger. It’s a vicious circle. Had we in America been forced to cut deeply and quickly as the Republicans wanted, we would be in that boat too.
Simply put, the bond markets do not believe the US will cut (at least not much, and not quickly). They can point to the failure of the so-called “Supercommittee” of Congress last year as evidence to support that belief. The consequence of that failure is big defense cuts and the expiration of the Bush tax cuts come January. And in response, and also because of the problems in Europe, it has become incredibly cheap for the US to borrow money.
Currently, the one-year Treasury Bills are commanding an interest rate of 0.17%. That’s seventeen one-hundredths of one percent, or 17 cents interest for the government to borrow one hundred dollars for one year. This is phenomenal. In real value, these investors buying our bonds are losing around 2% a year to inflation. If you could borrow money for yourself at that rate, you’d be a fool not to borrow as much as they would let you have, because it would be trivial to make more than 0.17% on just about any investment (GE Corporate Bonds are earning 5.75% per year!), so at the end of the year you could pay off your creditor and pocket some nice profit.
Well, this is what the government is doing, to the howls of people like Ron Paul. In a policy called Quantitative Easing, the Federal Reserve is buying up private bank asset holdings in return for all that cash it can get for next to nothing. And the banks are freed up to loan it (this new money is on top of their reserves that are stuck in the continuing housing mess, so it can be put into new loans without sacrificing their reserve requirements). And that money injection is what makes the economy go – ask GM about how their cars are selling.
It’s truly a failure of the Republican ideology to not appreciate how government intervention can counter bad economic trends.
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Corporate Taxes – some facts to counter the spin (posted Feb. 8, 2012)
Republicans are doing their typical tribal wails over corporate taxation. While it’s true that America’s statutory top corporate tax rate is 35%, high by international standards, the Republicans throw around this number glibly to imply that corporations pay that rate. Of course that’s not true. GE famously paid zero federal corporate income taxes last year, with plenty others. Saying that corporations pay 35% is like saying a really rich guy (um, ahem, Mitt Romney) pays the top individual income tax rate (also 35%), when we know that last year he paid 14%. The great big gorilla in the room is that the top rates are only paid by fools, and the more wealthy the taxpayer, individual or corporation, the likelihood of them paying anything close to the top marginal rate is pretty much zero.
Let’s compare corporate taxes in the US against those of other countries, using the broadest and most transparent measure possible to avoid these shell games with marginal rates. As a fraction of the country’s total output, the Gross Domestic Product (GDP), it turns out that America ranks dead lowest in corporate taxes among the developed nations of the world:
Now, this is for 2008. Today, the number for the US is 1.3%. The fact is that no amount of corporate tax lowering will promote growth when the tax burden is already pretty tiny. Also, we should be wary of creating any significant difference in corporate and personal income tax rates, because it would be easy for the wealthy to disguise personal income with corporate income, opening up all kinds of arbitrage possibilities.
Thanks to Bruce Bartlett and the NY Times for this data.