Wonkbook: If austerity is so bad, why is the economy doing so well?

May 29, 2013

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A waitress serves customers at a bakery in a shopping center. Consumer confidence has hit a five-year high. (Photo by Victor J. Blue)
A waitress serves customers at a bakery in New York. Consumer confidence has hit a five-year high. (Photo by Victor J. Blue)

Here are some numbers that make you go "wow." The S&P 500 has risen more than 25 percent over the last year. It's risen more than 100 percent since President Obama was inaugurated.

Median wages, as you might have noticed, have not seen the same stunning recovery.

But wages might pick up soon. After all, most everything else is. Housing prices are rising faster than at any time since 2007. Autos are doing great. Consumer confidence just hit a five-year high. These aren't just the kinds of numbers that foretell recovery. They're the kinds of numbers that lead to recovery. A rising stock market doesn't necessarily mean more jobs anytime soon. Rising housing prices and car sales almost certainly do.

The recovery could always be faster. But those of us who fretted over the looming austerity early in the year need to grapple with how fast and how steady it's actually been. As Neil irwin and Ylan Mui write, "in a year when tax increases and spending cuts by the federal government were expected to bleed life out of the economy, the strengthening housing and financial markets are proving to be more powerful than acts of Congress."

I'm not willing to throw out the idea that raising payroll taxes hurts the economy. But I have to admit that the payroll tax increase hasn't hurt as much as I expected. Of course, as always, everything depends on the counterfactual.

"So was the impact of Washington’s austerity oversold?" ask Irwin and Mui. "Not necessarily. Growth is holding up well in 2013, but would be even stronger if the federal purse strings were not being tightened, according to economic models used by both private forecasters and independent agencies like the Congressional Budget Office."

They quote Michelle Girard, chief economist of RBS, who says, “the impact of the fiscal drag isn’t things getting worse, it’s the absence of things getting much better.” That's evident in the numbers, too. In the first four months of 2012, we added roughly 225,000 jobs a month. In the first four months of 2013, we would expect job growth to outpace that. Instead, we've added only 195,000 jobs a month.

Over in the New York Times, Jackie Calmes and Jonathan Weisman recently asked economists what would've happened absent the austerity. They fired up their models and said that "the nation’s unemployment rate would probably be nearly a point lower, roughly 6.5 percent, and economic growth almost two points higher this year if Washington had not cut spending and raised taxes as it has since 2011, according to private-sector and government economists."

Scott Sumner, an economist at Bentley University, has a different take. Congress might've hurt the economy this year but Federal Reserve Chairman Ben Bernanke has been working overtime to help it. "The Fed does monetary stimulus in late 2012, citing the need to offset the drag from fiscal austerity," he writes. "Then 2013 turns out to be a pretty decent year, no worse than 2012." Perhaps there's no mystery here at all. We just owe Bernanke a fruit basket.

Or perhaps the numbers will soften. What we have right now isn't so much a strong recovery as decent job growth, the absence of expected weakness and a bunch of numbers that seem to point toward a strengthening recovery. But as Irwin and Mui note, we're not there yet. "For the economy to continue growing even as the sequestration and tax increases have their full effects, higher housing prices will need to translate into more home construction, higher stock prices will need to translate into companies making new investments, and consumers’ higher level of confidence will need to translate into spending more money."

My view is that extending the payroll tax cut, replacing sequestration and investing in infrastructure would've led to a significantly stronger 2013 than we've had. But I'm less confident that those policies would've made a big difference, as opposed to a small difference, than I was six months ago.

Wonkbook's Number of the Day: 25.97 percent. That's the year-over-year percentage gain of the S&P 500, a common index of domestic stocks, as of the Tuesday close.

Wonkbook's Quotation of the Day: "I believe that Ben Bernanke and the Federal Reserve decide the total number of jobs nationwide," wrote Jason Furman in a 2006 piece for Slate.

Wonkblog's Graphs of the Day: Central banks spring into action. Here's some data.

Wonkbook's Top 5 Stories: 1) austerity and growth; 2) did the GOP just back the individual mandate?; 3) everything on Jason Furman; 4) immigration reform by August?; and 5) coal making a comeback.

1) Top story: If austerity is so bad, why is the economy doing so well?

The economy is holding up well in an age of austerity. "Housing prices rose faster over the past year than they have in the past seven, according to data out Tuesday. Consumer confidence hit its highest level in five years. The stock market rallied another 0.6 percent as measured by the Standard & Poor’s 500, leaving it just short of an all-time high reached last week. And the national retail price of gasoline fell for six days straight through Monday and is down 16 cents a gallon since late February...It adds up to this reality: In a year when tax increases and spending cuts by the federal government were expected to bleed life out of the economy, the strengthening housing and financial markets are proving to be more powerful than acts of Congress." Neil Irwin and Ylan Q. Mui in The Washington Post.

Why hasn't there been more of a drag? "At the start of the year, it looked like 2013 would be a battle between positive and negative forces shaping the economy...So far, the positives seem to be winning...Meanwhile, the direct evidence that tighter fiscal policy is damaging growth is scarce, so far at least; study the internal details of major economic reports, and even if you squint you don’t see a lot of concrete evidence of the squeeze."

@dandrezner: Question to Econ tweeps: in the wake of a bad few months for austerity advocates, what's been the best substantive pro-austerity response?

...One reason: Central banks are acting. "[T]he economic stagnation of the major developed nations has driven central banks in the United States, Japan, Britain and the European Union to take increasingly aggressive action. Because governments are not taking steps to revive economies, like increasing spending or cutting taxes, the traditional concern of central bankers that economic growth will cause too much inflation has been supplanted by the fear that growth is not fast enough to prevent deflation, or falling prices." Binyamin Appelbaum, Jack Ewing, Hiroko Tabuchi, and Landon Thomas Jr. in The New York Times.

@kaushikbasu: It is impossible to use the word austerity anymore because "supporting austerity" is taken to mean "I'm right wing". "Opposing" "left wing".

...Another: real estate is doing really well. "Home prices increased at the fastest rate in seven years, jumping 10.9 percent in March, according to data released Tuesday, as buyers continued to compete for a limited supply of homes and the spring buying season kicked off. Prices rose in all 20 cities tracked by the Standard & Poor’s Case-Shiller home price index. Phoenix, San Francisco and Las Vegas led the pack, with home prices rising more than 20 percent in each of those cities compared with a year ago." Amrita Jayakumar in The Washington Post.

@rodrikdani: I don't know of a single critic of austerity who argues Keynesian stimulus is solution for long run. Why the straw man?

How South Carolina is feeling the sequester. "Mulvaney, 45, came to Washington in 2010 promising to pare spending even if it meant fewer projects and near-term pain for his South Carolina district...Now three years later, he was coming home just as the budget cuts he has so passionately advocated were starting to bite, particularly in the area around Shaw, where more than 1,000 civilian workers face furloughs and lucrative construction jobs are drying up." Greg Jaffe in The Washington Post.

@dkthomp: I'm afraid we'll have to wait for a bridge collapse to inconvenience a member of congress before infrastructure is rescued from austerity.

Regulators probe banks' debt collection practices. "Federal regulators are widening an investigation into whether the nation’s biggest banks used flawed documents and incomplete records to collect on delinquent credit card debts, according to four people familiar with the probe. The scope of the inquiry is unclear, but those familiar with it say the Office of the Comptroller of the Currency is expanding a probe that began in 2011 with allegations that JPMorgan Chase was using error-filled documents in lawsuits against debtors." Danielle Douglas in The Washington Post.

SOLTAS: When sequestration becomes devastation. ""There are going to be some ugly numbers in there," Representative Mike Simpson, a committee member, told Politico. Here's what he means: a 26 percent cut in the budget for the departments of Labor, Health and Human Services, and Education [in the House Appropriations Committee plan]. These agencies are losing a combined $43 billion relative to their 2012 budget, adjusted for inflation. Such cuts aren't merely unreasonable or inhumane, they're also likely to be operationally impossible. It's hard to see how this budget would allow the Department of Health and Human Services to put the Affordable Care Act into place in 2014." Evan Soltas in Bloomberg.

Music recommendations interlude: Crosby, Stills, Nash and Young, "Helpless," 1970.

Top op-eds

ORSZAG: Upside of low employment is longer life. "This is a morbid column about some unexpected and encouraging news: Deep economic declines, such as the one we experienced in the U.S. a few years ago, probably lengthen life expectancy. A reasonable estimate is that for every percentage-point increase in the unemployment rate, the U.S. mortality rate drops by 0.3 percentage point. In other words, and although it runs counter to our intuition, recessions may be bad for our wallets but good for our health." Peter Orszag in Bloomberg.

SALAM: Conservative reformism is still basically conservative. "The much bigger issue, in my view, is that many of the conservative who object to conservative reformism — who’ve been fighting House Majority Leader Eric Cantor’s efforts to reform higher education and efforts to craft a coherent and workable replacement for the Affordable Care Act, etc. — don’t seem to appreciate that reform is necessary to preserve what conservatives value most about American life." Reihan Salam in National Review Online.

TYSON: America's rehearsals for retirement. "the first wave of America’s baby boomers begins to retire, the retirement system is revealing its flaws. More than half of all workers (and more than 60% of low-income workers) are at risk of lacking sufficient savings to maintain their living standards after they stop working. In a recent international comparison, America’s retirement system received a passing grade of C; but, for a large and growing number of Americans, the system is failing." Laura Tyson in Project Syndicate.

MALKIEL: The duped investor. "Passive portfolios that held all the stocks in a broad-based market index have substantially outperformed the average active manager since 1980. Therefore, the increase in fees likely represents a deadweight loss for investors...The lesson for investors is very clear: You can't control what markets can do, but you can control the costs you pay. The less you pay to the purveyors of investment services, the more there will be for you. The quintessential low-cost investment vehicles are index funds, which should comprise the core of every investment portfolio. The high fees charged for active management cannot be justified." Burton G. Malkiel in The Wall Street Journal.

BARRO: Obamacare's original sin. ""If you like your health care plan, you can keep your health care plan."...The latter pledge forced Obama try to do two things at once: keep employer-based coverage for the 45 percent of Americans who have it, while getting coverage to the 17 percent of Americans who don't have any at all. To achieve the latter, you have to offer subsidies to people who don't get health care through work, which would ordinarily give employers a reason to stop offering coverage. So, Obama had to come up with a series of carrots and sticks to induce employers to keep offering coverage -- and those sticks and carrots are about to cause all sorts of economic distortions." Josh Barro in Bloomberg.

PORTER: The trouble with taxing corporations. "[W]ith countries around the globe in constant competition to lure investment by lowering tax rates and offering assorted breaks, taxing corporations will be an uphill battle. Multinational companies just have too many options to minimize their tax bill by routing profits through low-tax jurisdictions and losses through high-tax ones." Eduardo Porter in The New York Times.

CROOK: Lessons on moderation from the first conservative. "Burke was the prototypical political moderate -- and his moderation followed from his view that these and other abstract principles are inevitably in tension. That this insight should be controversial seems odd, yet it was and still is. Politics, in Burke’s view, ought not to be about one principle simply prevailing over others, even if it commands majority support. It should be about balancing countervailing principles. No abstract rule can determine how this balance should be struck." Clive Crook in Bloomberg.

Political animals interlude: A cat repeatedly saying 'Al Gore.'

2) Did the GOP just back the individual mandate?

Study: Differences in Medicare spending due mainly to health differences. "The idea that uneven Medicare health care spending around the country is due to wasteful practices and overtreatment—a concept that influenced the federal health law -- takes another hit in a study published Tuesday. The paper concludes that health differences around the country explain between 75 percent and 85 percent of the cost variations...The new paper disputes this by looking at conditions such as hip fractures, head injuries and heart attacks, in which there’s little diagnosing discretion. The geographic differences in spending for those conditions were “strikingly consistent” with conditions where doctors might have more wiggle room in attaching a diagnosis." Jordan Rau in Kaiser Health News.

A second chance at insuring the masses. "Years ago, Peter V. Lee presided over a failed effort to help California small businesses buy health insurance by pooling their purchasing power. Now he is getting another shot at expanding health-care access as executive director of Covered California, the largest state exchange spawned by the 2010 federal health-care law...The stakes are high, not only for 54-year-old Mr. Lee but for the Obama administration, which hopes the state will be a showcase for its efforts to remake the U.S. health-care system. California, where one in seven uninsured people live, according to the Kaiser Family Foundation, is a strong proponent of the law and has spent more time and money than any other state building an exchange." Vauhini Vara in The Wall Street Journal.

How House Democrats are taking on outreach for the Affordable Care Act. "House Democratic leaders have asked each member to designate a district office contact on the health law, planned state-by-state training sessions with administration officials and distributed Q & As on how to sign up for health coverage...[T]he Centers for Medicare & Medicaid Services is setting up a phone line for Hill staffers who have specific constituent questions on the law. It is scheduled to go live June 1." Jennifer Haberkorn in Politico.

GOP learns to love individual mandate--for immigrants. "Members of a House immigration group are considering a rule that would force immigrants to buy their own health insurance while they wait for citizenship. The Republicans and other conservatives say their rule wouldn’t be like Obamacare’s at all. Their argument: It’s simply fair to ask immigrants to show they won’t be a drain on the system before getting full citizenship." David Nather in Politico.

...They are also floating a permanent 'doc fix.' "A permanent doc fix would cost roughly $140 billion over 10 years, according to the Congressional Budget Office — but that's about $100 billion cheaper than it was expected to cost just last year. The discount has prompted lawmakers to look seriously at a permanent solution, with the goal of passing a bill before the price goes back up." Sam Baker in The Hill.

California didn't have 'rate shock.' But California isn't most other states. "Premiums on California’s health exchange will, in 2014, be significantly lower than actuaries and federal budget forecasters had expected. That news has gotten lots of positive attention from health law supporters, who have lauded the lower rates as a sign that forecasts of huge premium spikes will never materialize...In an active purchaser exchange, health plans know that they’re competing against others for the chance to access millions of customers with tax subsidies. That could easily effect the bids that they submit, the ones they hope will get them into the new marketplace. That’s the dynamic in California, but not in most other states. That makes it a bit difficult to generalize what the state’s insurance rates say about what will happen elsewhere, where this downward pressure doesn’t exist." Sarah Kliff in The Washington Post.

Medicare billed for rising number of eye lift surgeries. "The public health insurance program for people over 65 typically does not cover cosmetic surgery, but for cases in which a patient’s sagging eyelids significantly hinder their vision, it does pay to have them lifted. In recent years, though, a rapid rise in the number of so-called functional eyelid lifts, or blepharoplasty, has led some to question whether Medicare is letting procedures that are really cosmetic slip through the cracks — at a cost of millions of dollars." Joe Eaton and David Donald for The Center for Public Integrity.

Is this real life interlude: A letter from the past finally arrives.

3) Everything you need to know about Jason Furman

Jason Furman to chair CEA. "Jason Furman, a longtime economic adviser to President Obama, will become the next chairman of the White House Council of Economic Advisers, according to sources familiar with the decision who asked not to be identified because it has not been publicly announced. Furman, who now serves as assistant to the president for economic policy and the principal deputy director of the National Economic Council, has advised Obama on economic matters since his first presidential bid." Juliet Eilperin in The Washington Post.

Furman has experience. But he's not an outside voice. "Whether this is exactly the right choice or an example of everything that’s wrong with the White House economic team depends on what you think the CEA chair should be doing, and what you think of the White House’s broader theory of personnel. Typically, the Council of Economic Advisers is the place where top economists go to influence policy...Furman is a bit of a hybrid choice. His economics PhD is from Harvard, and he came to Washington when future-Nobelist Joe Stiglitz tapped him to help out in the Clinton administration. But he’s pretty much been in Washington since the 90s." Ezra Klein in The Washington Post.

Jared Bernstein on what you should know about know about him. "Roughly speaking, I’d describe the values of Furmanomics thusly: Progressive taxation that raises ample revenue; Boosting efficiencies and squeezing out inefficiencies in the tax code and the health care system; Solidly Keynesian in recession (he was ally in those arguments back in the day); Crafting policies with a clear eye to implementation constraints (something you only develop from pretty long experience in the gov’t sector); Strong supporter of the safety net.Jared Bernstein on his blog.

More on Furman: "I’d add a bit to Furman’s support of a strong safety net: He tends to believe that the government should leave the economy to be productive and then use the proceeds to fund whatever level of safety net is needed. So back in the day, Furman made waves for being a pro-Wal-Mart progressive...[B]ack when he was leading the Hamilton Project, Furman had a very creative idea for a universal system of progressively structured high-deductible health-care plans. That, too, tried to merge traditional approaches to economic efficiency with a deep commitment to the safety net." Ezra Klein in The Washington Post.

Animals animals interlude: How about ones you didn't know existed?

4) Immigration reform by August?

Pelosi hoping for August deadline for immigration reform. "House Minority Leader Nancy Pelosi (D-Calif.) told a reporter on Monday that there is enough "general agreement" to pass an immigration deal in Congress by August. A report from the Chicago Sun-Times said Pelosi is hoping the House can work on its own bipartisan immigration bill while the Senate considers its own legislation. That, she says, would put Congress on track to give something for President Obama to sign by the end of the summer." Pete Kasperowicz in The Hill.

The bill is proving slow to stir opposition passion. "Coordinated rallies last week to oppose the current bipartisan immigration legislation drew sparse crowds, with fewer than 10 people showing up for a protest in Dover, Del. The number of phone calls to lawmakers' offices opposing the bill has been a fraction of what it was six years ago...[T]his year's bill hasn't stirred as much opposition. It has more support from mainstream Republicans eager to improve the party's standing with the fast-growing Hispanic population, and from many evangelical Christian leaders. Also, a steep drop in illegal immigration in recent years has meant fewer television images of migrants sneaking into the country." Miriam Jordan in The Wall Street Journal.

Shame interlude: What it must feel like to have 1.3 billion people know who you are, and to hate you.

5) Coal's comeback

Coal is making a comeback in 2013. "Remember all the stories about how a glut of cheap shale gas was killing off coal in the United States and slashing the country’s carbon-dioxide emissions? It’s time to revise those headlines slightly. According to the latest data from the Energy Information Administration, coal has been reclaiming some — though not all — of its market share in 2013.Brad Plumer in The Washington Post.

Tesla stock soars. "Tesla’s stock soared 13 percent, giving the company a market value of $12.75 billion. The jump appeared to be driven by a report that Goldman Sachs analysts hosted a “field visit” to Tesla’s plant in Fremont, Calif. Analysts left impressed by rising sales in Europe and China that could eventually more than double Tesla’s 21,000 car sales target for this year." Steven Mufson in The Washington Post.

Woah, slow down on these rules, number one: "The Interior Department is coming under fresh pressure to slow down planned rules to govern oil-and-gas “fracking” on public lands. The American Petroleum Institute (API) on Tuesday urged Interior to extend the public comment period on revised draft rules to regulate the process called hydraulic fracturing. The industry group, which opposes the rules floated on May 16, wants the public comment period quadrupled to 120 days." Ben German in The Hill.

...And number two: "The Environmental Protection Agency (EPA) is extending the public comment period on draft gasoline and vehicle emissions rules that the refining industry alleges the EPA is ramming through without enough input. The agency is extending the comment period by 18 days — from June 13 until July 1 — on draft rules that will force refiners to sharply cut the sulfur content of gasoline. The EPA unveiled the rules in late March, but published them just last week in the Federal Register, a step that formally opened the comment period." Ben German in The Hill.

Reading material interlude: The best sentences Wonkblog read today.

Wonkblog Roundup

Seven men charged in Liberty Reserve global money-laundering operationTimothy B. Lee.

‘Arrested Development’ was a Communist utopia, and season four ruined itPeter Queck and Bhaskar Sunkara.

Jason FurmanomicsEzra Klein.

California didn’t have ‘rate shock.’ But California isn’t like most other statesSarah Kliff.

Coal is making a comeback in 2013Brad Plumer.

Why hasn’t austerity been more of a drag on the U.S. economyNeil Irwin.

Surprise! Inequality and the top marginal tax rate are closely linked by international comparisonDylan Matthews.

In his second term, Obama wants experience, not outside voicesEzra Klein.

Did I get the money-and-politics debate all wrongEzra Klein.

The economy is holding up surprisingly well in a year of austerityNeil Irwin and Ylan Q. Mui.

Et Cetera

Your Tuesday longread: "This Is How the NRA Ends," Alec MacGillis, The New Republic.

One area in which Congress excels: naming post officesJeremy W. Peters in The New York Times.

Obama, Christie tour Garden StateDavid Nakamura in The Washington Post.

Obama nominate 3 at once to D.C. circuitJuliet Eilperin in The Washington Post.

Democrats have been less than ruthless on gun controlAaron Blake in The Washington Post.

Got tips, additions, or comments? E-mail me.

Wonkbook is produced with help from Michelle Williams.

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Neil Irwin · May 28, 2013