Saturday, September 29, 2012

Latest GDP Revision Carries a Mixed Message for the Election: Economy Weak, but Corporate Profits Strong

The revised third estimate of GDP for Q2 2012, released Thursday by the Bureau of Economic Analysis, carries a mixed message for the election campaign.

The revised data show real GDP growing at an annual rate of just 1.3 percent in Q2, down from the already weak 1.7 percent of the previous estimate. The slowdown supports the GOP contention that the economy as a whole remains weak despite the Obama team’s efforts.

At the same time, corporate profits after taxes grew faster than previously estimated. They continued to grow faster than the economy as a whole and remain near the all-time highs reached later last year. Taxes paid by corporations actually fell in the second quarter while total profits grew. All of those data bolster the Democratic narrative that corporate managers and shareholders are doing quite nicely, thank you, while the rest struggle. True, economic policy needs a tune-up, but are tax cuts for wealthy “job creators” really what we need most? >>>Read more

Follow this link to view or download a classroom-ready slideshow with charts of the latest GDP and profits data

Wednesday, September 26, 2012

Looming Demise of Wind Power Subsidy Shows the Need to Rethink Both Energy and Tax Policy

Wind power has been a success story of green energy. After several years of rapid growth, it now accounts for about 3 percent of all electricity produced in the United States. It has benefitted from federal support, but that support is scheduled to end on December 31, throwing the industry into a crisis of layoffs and cancelled installations.

The country needs wind power, and wind power needs a favorable policy environment. For those reasons, it is tempting to support a simple extension of the current policy. However, it would be even better to use the looming deadline as an occasion to rethink both energy policy and tax policy.

Makers, Takers, and Energy Policy

It has become fashionable during this presidential campaign to glorify “makers” and disparage “takers.” The distinction applies as much to energy as to any other industry. Makers are those who produce energy that has a value to users that exceeds its costs. Takers are those who make a profit from producing energy that costs more than it is worth by shifting part of those costs to others. >>>Read more

Thursday, September 20, 2012

Could QE3 Cause the Fed to Go Broke?

Each time the Fed undertakes a new program of quantitative easing, questions arise about the possible impact on its solvency. I addressed that concern in November 2010, at the time QE2 was announced. Here is an updated version of that post that looks at the solvency issue in the context of QE3.

The Fed’s new program of quantitative easing, QE3, once again raises an old question: Can central banks go broke? Conventional analysis, aptly summarized by Willem Buiter in a 2008 report, says “Never–Well, hardly ever.” The Fed is most assuredly not going to suffer a run or become unable to meet its obligations, but under some scenarios, keeping it from going going broke could raise difficult political issues and perhaps even threaten its independence. >>>Read more

Follow this link to view or download a classroom-ready presentation of the material from this post, including detailed balance sheets

Tuesday, September 18, 2012

Quantitative Easing: A Tutorial

On September 13, 2012, the Fed announced a further program of quantitative easing, or QE. The program, which we will all call by its unofficial name, QE3, will consist of purchases of some $40 billion in mortgage-backed securities each month plus continuation of some existing asset purchase programs. We are told that QE is the most powerful weapon left in the Fed’s arsenal—but it is also among the least understood. For the benefit of everyone who wants to understand the mechanics of QE and review its effects on the economy to date, I am posting a QE tutorial in the form of a brief slideshow.

Will QE3 work? All but one of the voting members of the Federal Open Market Commission appear to think it is at least worth a try. In his August 31 speech at Jackson Hole, Fed Chairman Ben Bernanke cited estimates that QE1 and QE2 together have lowered long-term interest rates by 0.8 to 1.2 percentage points. He also suggested that output is 3 percent higher than it otherwise would be and that about 2 million additional jobs have been created as a result of QE1 and QE2.

However, Bernanke also warns that the Fed cannot solve the country’s economic problems alone. >>>Read more

Follow this link to download the classroom-ready tutorial in slideshow format

Sunday, September 16, 2012

Does the August Inflation Spike Mean QE3 was a Mistake?

One day after the Fed announced a new program of quantitative easing (QE3), the BLS reported that headline inflation spiked to an annual rate of 7.44 percent in August. Does that mean that QE3 was a mistake?

Superficially, it might seem so. After all, the announced justification for QE3 was that both parts of the Fed’s dual mandate—unemployment and inflation—have been running well below target. If one of them, inflation, is now above target, that could be taken as a sign for cautious watching and waiting, not a bold new program of monetary stimulus. But not so fast. >>>Read more

Follow this link to view or download a classroom-ready slideshow with charts of all the latest inflation data.

Friday, September 7, 2012

U.S. Job Growth Weak in August but Unemployment Indicators Improve

The August job numbers released today by the BLS will come as a disappointment, especially to Democrats who were hoping for a strong headline number during their convention week. The U.S. economy created just 96,000 new payroll jobs last month. An increase of 103,000 private-sector jobs was partly offset by a loss of 7,000 government jobs. Private-sector goods-producing jobs actually fell by 16,000. To make matters worse, the June jobs number was revised downward by 19,000 to a very weak 45,000, and the July jobs gain was revised downward by 22,000 to a more modest 141,000.

The unemployment rate decreased from 8.3 percent to 8.1 percent, but there was not as much good news in that number as it might seem. For one thing, the unemployment rate had already hit 8.1 percent once before, in April, so the August number did not break new ground. Also, much of the drop in the unemployment rate was due to a decrease in the size of the labor force. The number of employed persons, according to the household survey on which the unemployment rate is based, actually fell by 119,000 in August. The unemployment rate is based on a survey of household that is entirely separate from the establishment survey on which the payroll jobs report is based. The two surveys can produce numbers on job loss or gain that differ substantially, partly for methodological reasons and partly because the household survey, unlike the payroll survey, includes farm workers and self-employed persons. >>>Read more

Follow this link to view or download a classroom-ready slideshow with charts of all the latest employment data

Tuesday, September 4, 2012

Do the Latest GDP and Profit Data Justify Tax Cuts for ‘Job Creators’?

This week’s second estimate of US GDP shows a disappointing Q2 growth rate of 1.7 percent, just slightly faster than the 1.5 percent of the advance estimate released a month ago (see attached slideshow for details). These latest data ensure that weak GDP growth and what to do about it will remain major issues in the presidential election campaign.

 On the GOP side, the leading proposal for getting growth back on track is to cut taxes for ‘job creators,’ to use the favored code word for top income earners. The idea has a certain logic to it. We know that growth comes from investment. We know that profits motivate investment and profits taxes reduce that motivation. It stands to reason, then, that weak profits and high taxes would be likely culprits for slow growth–except for one awkward fact.

The awkward fact is that corporate profits, both before and after taxes, are running at or close to record levels. >>>Read more

Follow this link to view or download a classroom-ready slideshow with charts of the latest GDP and profits data