Perhaps It’s Not a Problem that the U.S. Is Growing Slowly

I’m not happy that the U.S. is growing slowly. But it’s my job to look at all sides of the debate.

There’s a phrase in sports called “winning ugly”. It means that you don’t look like you should win, but you win anyway. Casual fans don’t like “winning ugly”, but coaches and players are usually pretty OK with it.

Maybe, just maybe, the U.S. economy is winning ugly right now.

How would we know? Consider these graphs from Calculated Risk.

The blue is actual growth rates in the labor force, while the red dashed line has been smoothed. Our labor force isn’t growing as quickly as it was 40 years ago. No, duh. That was when the baby boomers were hitting the market in force, and now they’re retiring in force. And check out the previous post: labor force participation is down because retirees and students are up.

Now look at real GDP growth rates:

They’ve been trending down too, when smoothed.

Now superimpose the two:

The difference between the blue and red lines is productivity: how much is tacked on to labor force growth by capital accumulation and technological improvements. And it looks … pretty stable over the last 50 years.

The upshot of this is that if we’re fans of real GDP growth, then we’re going to be disappointed. But if we’re fans of per capita real GDP growth, then there’s no problem with America.

But it does mean that we’ll have to revise what we think is normal for real GDP growth. Perhaps the 2-3% under Obama is the new normal and that it’s not a bad thing.

Why Aren’t More Americans Working?

Ask a conservative this question.

Well, really, why bother. You know what the answer will be: everyone is lazy and claiming disability.

Or not. That’s the funny thing when you look actually look at data. It tells you things you might not hear otherwise.

What is incontestable is that labor force participation is way down over the last decade. This means there are more people who just aren’t interested in working. Who are those people?

It turns out, it’s mostly retirees and students (with the disabled trailing behind).

Here’s the story on retirees:

The panel on the left indicates that total retirees has risen, while the panel on the right indicates that early retirees has fallen. Put bluntly, this means that old people are living longer, choosing not to work when doing that (and who can blame them). That will decrease labor force participation, but I’d hardly call it a bad thing.

Then there’s students. Here’s their story:

Note that while students and the disabled are both up, that students actually opened a big lead after the Great Recession (that’s closed down now that it’s easier to get a job).

How is this all possible? It turns out that labor force participation, when measured by households, is down most sharply in the rich ones. The poor are actually more likely to be working now than they were before the Great Recession.

Think about this: it means that both political parties are full of it. Democrats would have you believe that the poor aren’t working as much as they’d like because the economy is weak. Except they’re working more. The Republicans would have you believe that people are faking disability to avoid work, when maybe all they’re faking is paying attention in class.

What ELA Means for Greece

Here’s one opinion:

… The ECB really didn’t have much option but to do what it did. Syriza’s strategy was all over the place … At the end of the first ten days, they had said that they were defaulting, but not defaulting, that they didn’t want to borrow any more money, except maybe EUR10bn of treasury bills, that there would be no debt reduction, except that this was a euphemism for “yes there will”, and primary surplus would be maintained, although this didn’t necessarily mean any change in tax or spending plans. They’d also emphasised that they wanted to get a deal with the troika, but were not prepared to talk to the representatives of the troika.

When a borrower starts behaving like this, the natural instinct of any creditor who knows what they’re doing is to “shorten the leash”. … That’s the reasoning behind the collateral changes and the moves toward restricting ELA.

But everyone is worried about this, because ELA and its controls have always been seen as something of a nuclear threat — a policy lever that can never be pulled because the consequences are so drastic.

How drastic? People are envisioning immediate runs on Greek banks if ELA is stopped.

Alternatively, it’s possible that the ECB has no intention of cancelling ELA. Instead, they are using it as pressure to get Syriza to sacrifice domestic bank depositors in order to pay its debts. This is kind of what happened in Cyprus two years ago.

Via Marginal Revolution.

Greek Banks and ELA

The noose is tightening on Greece. Until last Thursday, private Greek banks that were having liquidity problems were allowed to get emergency financing from the European Central Bank by providing collateral for new loans.

The thing is, the collateral the ECB was willing to accept was the government bonds of the Greek government.

On last Thursday, the ECB announced that it would no longer accept this collateral.

This is a rather bald statement that they are no longer sure, that if the banks expect to make interest payments based on debt service paid by the Greek government, that this business plan will work.

For now, the ECB has switched to a more serious form of short-term relief for Greek banks called ELA, along with a higher interest rate. ELA gets reviewed every two weeks, and if it gets stopped, it’s hard to see the Greek financial system avoiding collapse.

This is not an improvement.

4th Quarter GDP Report

The advance announcement of real GDP for 2014 IV came out on Friday morning. The rate of growth of real GDP was estimated at an annualized rate of 2.6% for the quarter.

This is below the historical average of 3.0 to 3.5% per year, although it's little bit better than we've been averaging since the last trough in 2009.

The weak performance during this recovery is shown here:

One thing you should keep in mind, especially in Utah where everything associated with Obama typically gets the negative treatment, is that we've had 3 expansions in a row that started out weakly. In fact, if you look closely at the right hand side of the chart, you can see just the beginnings of the high growth that Clinton is remembered for, and which didn't start until about 5 years after he took office.

One of the notable things about this somewhat weak growth report is that the number was dragged down by net exports, as shown in the bottom center panel of this chart:

Recall that exports are added into GDP but imports are subtracted out.

This is perverse. Here's why.

What do you want? Goods or work? This is a no-brainer: you want the goods, and you don't want to work to get them.

But what it means for your imports to exceed your exports is that you're getting more goods for less work. That's what you want, right? Except that when we count GDP, we do the opposite.

Why do we do that? It goes back to the reasons we started measuring GDP in the first place: who was going to win a war because their economy is bigger. If you want that, you want people working and exporting, rather than importing and enjoying their stuff. In short, GDP measures what the government wants its subjects to do, not what they'd actually like.

Now, this position does require an overhaul of how we think about GDP and GDP growth. That's beyond the scope of this post. But it does mean that every time you see a GDP growth rate, you should look and see if it's boosted by exports (which is what they want but not what you want) or brought down by imports (which is what you want but not what they want).

So what does it mean that imports brought down the growth rate in the fourth quarter? It means that Americans were feeling good about the economic situation, and buying more of everything ... no matter where it was made. I don't know about you, but I feel good when I walk out of the store with more stuff ... no matter where it was made.

Read the whole thing, entitled "U.S. Economy Hits Speed Bumps" in the January 31 issue of The Wall Street Journal.

Unusual New Croatian Policy

I'm not sure what to make of this at all ... and it really isn't on any macroeconomists radar screen just yet.

Anyway, Croatia put in place a policy today by which the government is cancelling the debts of a small chunk of the population.

This may or may not be related to the appreciation of the Swiss franc, in which many Croatian mortgages are denominated.

Interestingly, part of the reason for this policy change is that Croatia, as a relatively new country, has no bankruptcy law whatsoever. So there's no way for anyone to get out from under their debt burden, whether they have a good reason or not.

There are lots of links to this on the internet, but they all say pretty much the same thing. Here's one.

Uh-Oh

The thing you should always worry about in democracy is that you’re voting for a package deal: if you like the person/party and vote for them, you get all their positions … not just the ones you like.

And what if those positions are bizarrely dumb? What does that say about the rest of the package?

So, in Greece, Syriza … within a week of winning the election … has put limiting all-inclusive vacation resorts on its agenda of things to fix.

You can’t make this stuff up.

When a new Greek activist government — under pressure to look like it’s doing something — declares that they believe all-inclusive resorts are bad because tourists stay on property instead of benefiting the local town economies nearby but promise they’re only talking theoretically and you should trust them that they aren’t going to do anything about it… you should trust them as much as you do that they’ll repay all of their bonds in full.

…

Tourism represents about a fifth of GDP. All-inclusive package tours are a key segment of the European market, especially for tourists coming from the UK and Germany.

Since tourism is important to the economy, and the economy is doing badly, it must be tourism’s fault.

FWIW: That makes the tourism industries size in Greece comparable proportional to the largest industry in the U.S. That would be FREI: finance, real estate, and insurance. Except that the latter are difficult, and people get paid a lot to do them because they’re valuable.

Via Marginal Revolution.