Global Boom ?
We've mentioned the Recency effect several times of late. You can see no better example of this cognitive bias than in David Malpass' WSJ editorial today, crowing over Friday's NFP data.
To his credit, Malpass at least tries to contextualize the release into some historical framework, looking at the drivers of the global boom over the past few years. IMO, he downplays what's significant and overemphasizes what is less significant, but give him credit for looking at the bigger picture.
Excerpt:
"The sea change in global conditions toward fuller employment has profound implications. This is an opportunity to build on success rather than dwell on U.S. recession odds. Developing countries could double their housing stock by adopting stable currencies and market-based banking systems, the building blocks for tapping into global liquidity and mortgage finance. Mexico, vital to U.S. immigration concerns and behind in global job creation, has the opportunity to take an economic leap forward, using today's plentiful liquidity to expand housing, raise living standards, and transform energy exploration and development. Brazil, India, Israel, South Africa and others could use part of their international reserves to reform their anti-growth tax systems, a step blocked until now by the fear that tax revenues from the existing system would decline before tax receipts from the new system replaced it.
What's driving the improvement in the global economic and labor environment? In the 1990s, the strong and strengthening dollar created a shortage of global capital and a crippling global deflation as the U.S. drew liquidity inward. U.S. big businesses, especially their stock prices, did well as global investors chased after "king" dollar, but most of the rest of the world sank. Europe was stagnant, while Asia suffered an extended deflation crisis.
But the post-9/11 switch in U.S. monetary policy injected liquidity into the global economy, lowered real interest rates, and brought the value of the dollar down, stopping deflation.
The 2003 tax cuts accelerated the expansion, adding profits, jobs and asset price gains. These two key growth steps -- reflation and the reduction in the marginal tax rates on labor and capital -- are largely ignored in economic headlines dominated by concerns about global imbalances and looming recessions. Meanwhile, the global economy is adding more to jobs, output, literacy and government tax receipts than ever in its history."
Source:
Global Boom
DAVID MALPASS
April 9, 2007; Page A13
http://online.wsj.com/article/SB117607451984663549.html
Monday, April 09, 2007 | 10:30 AM | Permalink
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Comments
I guess we don't have to surmize his political leanings as it's there in the last paragraph, first sentence of yor excerp.
Why can't these people see those for what they truly were?? Tax subsidies to the top 5%...
The last paragraph should just be a political ad for any republican running...all they have to do is cut and paste that into a current "speech"..
Ciao
MS
Posted by: michaelmschumacher | Apr 9, 2007 10:37:28 AM
I also see nothing temporary about the Fed doing this every single day for a month straight:
http://www.newyorkfed.org/markets/omo/dmm/temp.cfm
Temporary means on an as needed basis....apparently our economy, in it's "great shape" needs intervention every day now....
Ciao
MS
Posted by: michael schumacher | Apr 9, 2007 10:49:26 AM
That's a rather interesting commentary were it true. I guess Mr. Malpass doesn't understand human behavior. Now, why would Mexico, one of the most corrupt caste systems in the world where the majority live in abject poverty reform it's economy? Those in charge are skimming the country's wealth and have been since the modern incarnation of Mexico. Reform would mean that gravy train would end. NAFTA offers the them even more riches and control over the country's finances.
Ditto for cronyism and corruption in every other nondemocratic or marginal country. This boom also tightens the grip of oil and natural resource goons everywhere. It's noble to be innocent and positive but it's naive to believe human nature amongst dictators and those who are blinded by power will all become altruistic.
Posted by: BDG123 | Apr 9, 2007 10:49:31 AM
Without those tax cuts we would have, no doubt, had the recession the bears have longed for. The capital markets were headed for the sewer.
Question...are tax reciepts rising or falling?
Flame away.
Posted by: Fred | Apr 9, 2007 10:56:18 AM
"Why can't these people see those for what they truly were?? Tax subsidies to the top 5%..."
They are only subsidies if those "receiving" the subsidies did not have a claim on the tax money. Or perhaps (a) the income was simply expropriated from the workers to begin with and/or (b) the funds in question are actually the property of the government (or the "people" if you prefer)
The USSR failed, but that doen't mean that the underlying philospohy has been discredited. From what I see and hear, far from it.
Posted by: The Dirty Mac | Apr 9, 2007 11:12:19 AM
Which tax cut?
The 2001 cuts, that had little effect?
Or the 2003 tax cuts, which occured contemporaneously with the Fed slashing rates to multi-generational lows?
Posted by: Barry Ritholtz | Apr 9, 2007 11:18:35 AM
Fred-
you know better...and so do I.....
place your bait for someone "willing" to take it.
aside from the current topic I have a question: For the last 5-6 weeks we've been PR'ed to death (on mondays no less) about how M&A activity in the private equity area is supposedly good for the economy.....quite how they expect "investors" to benefit from lowered access to equities is beyond me, however are they expecting people to say" Oh since this company is going private I NEED (a cramerism if there ever was one) to buy other equaties at extremely inflated valuations just so I can feel like I'm participating". I don't get the rationale behind limiting the supply of anything and that is supposed to be good for the consumer and it's economy.
PS: That brit kid sure is embarrasing my former team.......
Ciao
MS
Posted by: michael schumacher | Apr 9, 2007 11:23:39 AM
Well, u can bad mouth the marts if u want, but I for 1 think its great that they're letting us know about the deals before they take place.
I got in early on the HD takeover, too.
Posted by: tjofpa | Apr 9, 2007 11:45:27 AM
"The 2003 tax cuts accelerated the expansion, adding profits, jobs and asset price gains."
No, they resulted in record high federal budget deficits, rising unemployment, declining real wages, and a declining stock market in inflation-adjusted dollars. Not to mention the record bankruptcies, record home foreclosures, rising Poverty, and a savings rate that went negative for the first time since the Great Depression.
.
Posted by: VJ | Apr 9, 2007 11:50:51 AM
I'm not bad mouthing them....just the rationalization that it's a good thing for private equity to take that off the market and the coincidence of all this happening on mondays......as if to say "all is well...see what we have for you to start out the week"
You miss the point if you think it's about the actual information...
Ciao
MS
Posted by: michael schumacher | Apr 9, 2007 11:52:47 AM
Fred,
"Question...are tax reciepts rising or falling?"
Tax receipts are rising, but ONLY because a tax cut expired. Tax receipts fall when tax rates are cut, and tax receipts rise when tax rates are increased.
Basic math, outside of anyone from Bizarro World.
.
Posted by: VJ | Apr 9, 2007 11:54:10 AM
Example of tax reciepts rising due to lower taxes:
1. Tax rate is 28% on capital gains - thus, I don't sell my apprciated stock. = zero tax receipt.
2. Tax rate is 15% on LT Cap Gains - thus I do sell my appreciated sotck. = Gain x 15% = higher tax receipts than in example #1.
Basic math my friend.
Posted by: Jdamon | Apr 9, 2007 12:11:45 PM
MS - Maybe I'm missing your point on your NYFed posts.
My understanding is that these operations are done to keep the average overnight rate at 5.25%. They don't do it because they want to, they do it because that's the rate set by the FOMC, and the NYFed is responsible for the mechanics of implementing FOMC policy until the FOMC changes the policy rate.
Is there something nefarious in this?
Posted by: Estragon | Apr 9, 2007 12:17:29 PM
"No, they resulted in record high federal budget deficits, rising unemployment, declining real wages, and a declining stock market in inflation-adjusted dollars. Not to mention the record bankruptcies, record home foreclosures, rising Poverty, and a savings rate that went negative for the first time since the Great Depression."
VJ!!! I've never seen it so eloquently stated. Thanks.
Posted by: Aaron | Apr 9, 2007 12:22:51 PM
that is the intent of the REpo. agreements.....there is a big difference between intent and reality. As other's have tried to point out there are rules.....and my reposnse is that rules are for stupid people and have nothing to do with the reality of what that money is used for.
Bottom line: You don't have to do that many repo. agrements unless something else is going on along with it. It is an abused system whose "rules" for operation were written in what year???? 1929. Big difference in absuing the system now than in 1929..However some take great pains to make sure I "understand" the intent of the original rule which is long outlived the usefullness that it was originally written for. Another "great rule"...uptick rule.....enough said..
Ciao
MS
Posted by: michael schumacher | Apr 9, 2007 12:32:04 PM
The temporary open market operation are a small part of the US Repo market. The overblown importance given to it by some, imho, is a deeper hope the almighty US gov is doing all they can to save the day.
Posted by: mhm | Apr 9, 2007 2:37:17 PM
Jdamon, you can have a short-term bump in tax receipts if you lower cap gains taxes, but in the long term, receipts will at best equalize (if you get more people selling because the cap gains tax is lower) and more likely be lower than they would have been.
btw, wrt to the 2003 tax cut, let's remember: bush promised that tax cut would produce 5.5M new jobs between july 1, 2003 and december 31, 2004. roughly 2 years later, we made it!
more broadly, this is really something: i have never seen the argument made before that having a strong dollar in the US is a bad thing....
Posted by: howard | Apr 9, 2007 2:50:03 PM
VJ,
"No, they resulted in record high federal budget deficits"
Not true.
http://tinyurl.com/3yf8k5
The other thing that you failed to mention is that massive spending and a recession resulted in probably 75% of the budget swing from 2000-2004.
"rising unemployment"
Unemployment started to rise in late 2000 and evened out the beginning of 2002. It then started to fall as soon as the 2003 tax cuts were signed and interest rates fell to 1%.
"declining real wages"
Wages are always one of the last things to see gains. Look at this 1998 article about how wages weren't increasing.
http://tinyurl.com/2l4usv
The same thing is happening this expansion, we heard constant complaining about no wage gains but we are finally seeing them.
"savings rate that went negative for the first time since the Great Depression."
The savings rate has been in a slow, steady decline since the mid 70s or so. If anything tax cuts should increase the savings rate... they obviously haven't, but tax cuts certainly haven't decreased the savings rate.
Do you really think any of these (unfair) examples would be better if there hadn't been tax cuts? Isn't it very possible they could be worse?
Posted by: Syphax | Apr 9, 2007 2:52:43 PM
Syphax, in order:
i don't believe that we are at the historic high in budget deficit, but your link doesn't show us anything since it doesn't reflect the general fund (rather, it incorporates the social security surplus). i believe we are just below historic record territory.
the recession lasted all of 2 quarters in 2001; you can't blame the deficits of 2002, 2003, and 2004 on it. they resulted from high spending and low revenues by design, not by recession.
your link to a 1998 article references real wage gains beginning in 1996; you might want to bear than in mind before you tell us how right on track everything is.
you are little overly generalized about the savings rate. The SF fed noted:
From 1980 through 1994, the U.S. saving rate averaged 8%.
http://www.frbsf.org/publications/economics/letter/2002/el2002-09.html
as for tax cuts, no, i don't think a single one of these would be worse had we passed an intelligent tax cut in 2001 and not bothered with the further cut in 2003. remember, these aren't tax cuts, anyhow: they are tax deferrals.
Posted by: howard | Apr 9, 2007 3:23:13 PM
'Syphax' posted:
"Not true. http://tinyurl.com/3yf8k5"
That doesn't count all the off-budget spending on the Iraq war, the Afghanistan war, Homeland Security, and lots of other stuff. It also masks the size of the federal deficits with the Social Security, Medicare, and other trust funds.
"The other thing that you failed to mention is that massive spending and a recession resulted in probably 75% of the budget swing from 2000-2004."
Nope.
The vast majority of the federal deficits and debt is as a result of the tax cuts. According to the Congressional Budget Office, the cost of the four previous rounds of tax cuts enacted is almost THREE TIMES AS GREAT as the cost of the Iraq war (including the costs of the military operations and subsequent reconstruction), all homeland security expenditures, the costs of rebuilding after September 11, all military action in Afghanistan, and all other costs of the 'Global War On Terrorism', COMBINED.
"Unemployment started to rise in late 2000 and evened out the beginning of 2002. It then started to fall as soon as the 2003 tax cuts were signed and interest rates fell to 1%."
Nope.
Since the unemployment insurance extensions were not enacted during a recession for the first time since WWII, more and more jobless workers were relegated to the classification of the 'Long-term Unemployed' and are no longer counted as unemployed. This was evidenced by the 'National Labor Participation Rate' displaying millions fewer workers in the national workforce than in 2000. Hence, the dropping 'Unemployment Rate' was indicative of HIGHER unemployment, not lower unemployment, as it was the national labor pool that was shrinking, not the numbers of unemployed jobless workers.
"Wages are always one of the last things to see gains."
A) Not always true. Wages rose fairly quickly during the latter half of the '90s.
B) It's been more than six years.
"If anything tax cuts should increase the savings rate..."
It's never happened.
"Do you really think any of these (unfair) examples would be better if there hadn't been tax cuts?"
Absolutely.
Later.
.
Posted by: VJ | Apr 9, 2007 3:55:49 PM
"(rather, it incorporates the social security surplus)"
I don't bother excluding the social security surplus because social security under current law is not sustainable. By 2075 social security will run annual deficits of 8 trillion dollars(about the size of the national debt now) so I'm not too concerned about the measly 300 billion we are borrowing from social security.
"the recession lasted all of 2 quarters in 2001; you can't blame the deficits of 2002, 2003, and 2004 on it. they resulted from high spending and low revenues by design, not by recession."
Since taxes are paid on income earned the previous year the recession was indeed partially to blame for lower revenues. There is a clear pattern the last couple of cycles that shows that revenues(% of GDP) fall 2-4 years after a recession and then begin to recover again. This happened in 1975, 1981, 1990 and 2000.
"your link to a 1998 article references real wage gains beginning in 1996"
The recession ended in 1991, wage gains began 1996(5 years into recovery). The latest recession ended in 2001, wage gains began 2006(again, 5 years).
"From 1980 through 1994, the U.S. saving rate averaged 8%."
It was still in a steady decline, especially if you factor in interest rates. To say the negative savings rate is the result of tax cuts when the savings rate has been declining constantly is just not true. Furthermore, deficits/surpluses appear to have no impact on the savings rate.
"not bothered with the further cut in 2003."
Personally I think the 2001 tax cut was the bad one. It probably slowed the recovery as it gradually phased in the cuts. This encourages people to delay economic activity.
"they are tax deferrals."
Thats not true, all we need to do is not increase spending and the deficit will fall as it has recently. Tax revenues have increased dramatically the last 2 or 3 years.
Posted by: Syphax | Apr 9, 2007 4:20:29 PM
VJ,
"That doesn't count all the off-budget spending on the Iraq war, the Afghanistan war, Homeland Security, and lots of other stuff. It also masks the size of the federal deficits with the Social Security, Medicare, and other trust funds."
None of those things have anything to do with the tax cuts... so basically you just confirmed what I said. Higher spending and the recession led to higher deficits.
"The vast majority ... 'Global War On Terrorism', COMBINED."
The tax cuts are 3 times the cost of all of those things that you mentioned combined... but you don't mention that spending has been increasing in many other areas as well. so although what CBO said may be true, it still does not mean tax cuts are the main reason for the shift from a surplus to a deficit. Overall spending and the recession are still the main reasons for the 2000-2004 shift.
Lets also not forget that one of the biggest sources of additional revenues during the late 90s was from the capital gains tax(The tax for capital gains was reduced in the 90s by the way). The fall in capital gains from sky high levels to below average levels after 2000 also contributed strongly to the shift.
"Hence, the dropping 'Unemployment Rate' was indicative of HIGHER unemployment, not lower unemployment, as it was the national labor pool that was shrinking, not the numbers of unemployed jobless workers."
A good article about the fall in the National Labor Participation Rate.
http://www.econbrowser.com/archives/2005/07/how_many_people.html
That explains much better than I ever could how the idea the labor market is poor because the participation rate is low is dead wrong.
"A) Not always true. Wages rose fairly quickly during the latter half of the '90s."
That was my point, wages didn't grow until 5 years into the recovery back then... but then they started growing quickly.
"B) It's been more than six years."
And we are now seeing wage gains.
"It's never happened."
I never said it did, I simply said if tax cuts had any impact they would increase the savings rate. Tax cuts have no impact one way or the other.
"Absolutely."
Any evidence to support that theory? The deficit would probably be a little smaller although deficits appear to have no impact on the economy(at least short term). The labor market wouldn probably be worse. The subprime mess wouldn't be affected. Wages would be lower after-tax. Government spending would be just as high(perhaps higher). At worst they have helped Americans (poor, middle class and rich) by allowing them to keep more of their own money.
Posted by: Syphax | Apr 9, 2007 5:04:59 PM
Time for some HARD facts, people. Don't take anyone's word for it, and just look at the www.IRS.gov website for a dataset of Total Internal Revenue Collections by Fiscal Year, 1960-2006, if you want to cut through all the supposed "cut" or "hike" or "effective rate" BS. This figure went up at a compound annual rate of 7.6% during Reagan's 8 years, 2.3% during Bush's 4 years, 8.1% during Clinton's 8, and 3.1% during Bush's 1st 6 years. Read 'em and weep. 2-term Repubs tend to swing wildly down then wildly up, while Clinton slowly ramped up at 1st then stayed at the same growth rate throughout the majority of his term.
Posted by: worth | Apr 9, 2007 5:12:13 PM
Syphax, you are simply wrong about social security; even if you were write, yes, that measly $300B makes an enormous difference in the extent of our budget deficit.
i will give you a marginal impact through april, 2002 on the 2001 recession, but no more than that.
the real wage gains that began in 2006 were 2%; let me know when we get to 2% real wage gains currently, ok?
i personally don't think the tax cuts had anything to do with the savings rate, but since part of the pitch for supply-side tax cuts is that they increase national savings leading to greater investment, i think that's rather telling, don't you? my point is that you are grandly overgeneralizing about the savings rate.
the 2001 tax cut was not an intelligently designed cut, i agree; the 2003 tax cut failed to deliver on its promises. what is it that you like about it?
and yes, it is true that we are talking about tax deferrals. the general fund has no chance of being in balance short of spending cuts (not just failure to increase) that have no chance of happening.
Posted by: howard | Apr 9, 2007 5:36:11 PM
Clinton inherited an accelerating economy, and his tax reciepts were helped by a cap gains tax CUT. Bush inherited a nightmare economy, and turned it around.
"Facts" in a vacume are worthless.
I actually believe that the next President will inherit a declining economy (after a strong run into 2008).
Posted by: Fred | Apr 9, 2007 5:48:50 PM
