Tag Archives: economics

Shrinking Government & the Impending “Fiscal Cliff”

The conventional wisdom seems to be that our biggest economic challenge is runaway government spending. The reality is that government spending is contracting and pulling economic growth down with it.  And worse is yet to come.

Perhaps the best measure of active government intervention in the economy is something called “government consumption expenditure and gross investment.”  It includes total spending by all levels of government (federal, state, and local) on all activities except transfer payments (such as unemployment benefits, social security, and Medicare).  

The chart below shows the yearly percentage change in real government consumption expenditure and gross investment over the period 2000 to 2012 (first quarter).  As you can see, while the rate of growth in real spending began declining after the end of the recession, it took a nose dive beginning in 2011 and turned negative, which means that government spending (adjusted for inflation) is actually contracting.

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The next chart, which shows the ratio of government consumption expenditure and gross investment to GDP, highlights the fact that government spending is also falling as a share of GDP.

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Adding transfer payments, which have indeed grown substantially because of the weak economy, does little to change the picture.  As the chart below shows, total government spending in current dollars, which means unadjusted for inflation, has stopped growing.  If we take inflation into account, there can be no doubt that total real government spending, including spending on transfer payments, is also contracting. 

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The same is true for the federal government, everyone’s favorite villain.  As the next chart shows, total federal spending, unadjusted for inflation, has also stopped growing.

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Not surprisingly, this decline in government spending is having an effect on GDP. Real GDP in the 4th Quarter of 2011 grew at an estimated 3 percent annual rate.  The advanced estimate for 1st Quarter 2012 GDP growth was 2.2 percent.  A just released second estimate for this same quarter revised that figure down to 1.9 percent.  In other words, our economy is rapidly slowing.

What caused the downward revision? 

The answer, says Ed Dolan, is the ever deepening contraction in government spending:  

What is driving the apparent slowdown? It would be comforting to be able to blame a faltering world economy and a strengthening dollar, but judging by the GDP numbers that does not seem to be the case. The following table (see below) shows the contributions of each sector to real GDP growth according to the advance and second estimates from the Bureau of Economic Analysis. Exports, which we would expect to show the effects of a slowing world economy, held up well in the first quarter. In fact, the second estimate showed them even stronger than did the advance estimate. The contribution of private investment also increased from the advance to the second estimate, although not by as much. Exports and investment, then, turn out to be the relatively good news, not the bad, in the latest GDP report.

Instead, the largest share of the decrease in estimated real GDP growth came from an accelerated shrinkage of the government sector. The negative .78 percentage point decrease of the government sector is the main indicator that we are already on the downward slope toward the fiscal cliff.

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If current trends aren’t bad enough, we are rapidly approaching, as Ed Dolan noted, the “fiscal cliff.” That is what I was referring to above when I said that worse is yet to come. As Bloomberg Businessweek explains 

Last summer, as part of its agreement to end the debt-ceiling debate (debacle?), Congress strapped a bomb to the economy and set the timer for January 2013. Into it they packed billions of dollars of mandatory discretionary spending cuts, timed to go off at exactly the same time a number of tax cuts [for example, the Bush tax cuts and the Obama payroll-tax holiday] were set to expire  

The congressional deficit supercommittee had a chance to disarm the bomb last fall, but of course it didn’t. And so the timer has kept ticking. The resulting double-whammy explosion of spending cuts and tax increases will likely send the economy careening off a $600 billion “fiscal cliff.”

The fiscal contraction will actually be even worse, since the extended unemployment benefits program is also scheduled to expire at the end of the year.  

So, what does all of this mean?  According to Bloomberg Businessweek:

If Congress does nothing, the U.S. will almost certainly go into recession early next year, as the combo of spending cuts and tax hikes will wipe out nearly 4 percentage points of economic growth in the first half of 2013, according to research by Goldman’s Alec Phillips, a political analyst and economist. Since most estimates project the economy will grow only about 3 percent next year, that puts the U.S. solidly in the red.

One can only wonder how it has come to pass that we think government spending is growing when it is not and that it is the cause of our problems when quite the opposite is true.  Painful lessons lie ahead — if only we are able to learn them.

Relative Value of the Minimum Wage

Remapping Debate has posted an interactive graph that lets you look at the decreasing relative value of the federal minimum wage. The graph shows the gap, at various points in time, between the annual income of a full-time worker earning minimum wage and the poverty line for a family of four (all expressed in 2011 dollars; you can see specific historical, unadjusted minimum wage rates here). In 1968, a single minimum-wage earner made about 94% of the federal poverty line for four people:

By 2011, the gap had widened significantly; one minimum-wage worker earns about 66% of the poverty threshold for a family of four:

Though the federal minimum wage has gone up over time, its relative value covers less and less of the costs of living in the U.S.

Apple’s Tax Bill Rising Much Slower Than Its Profits

Apple’s profits more than quintupled in the last five years, but their tax burden has risen much more slowly.  Last year, just 9.8% of their profits went to taxes.   “By comparison,” writes economist Marty Hart-Landsberg, “Wal-Mart was downright patriotic — paying a tax rate of 24 percent.”

How does the company do it?  Hart-Landsberg summarizes the New York Times: “The answer is tax loopholes and a number of subsidiaries in low tax places like Ireland, the Netherlands, Luxembourg and the British Virgin Islands. ”  More details at Reports from the Economic Front.

Lisa Wade is a professor of sociology at Occidental College and the co-author of Gender: Ideas, Interactions, Institutions. You can follow her on Twitter and Facebook.

Incarceration on the Cheap in Louisiana

Yesterday I posted about the extraordinary number of people in Louisiana prisons.  The rise in imprisonment mirrors the U.S. growth that began with the so-called war on drugs, but was also triggered by a crisis in the early 1990s, after two decades of growth.  A federal court ordered Louisiana to reduce overcrowding in prisons, which had risen to an inhumane level.  They  had to either let criminals out or build more prisons.  They did the latter.

Instead of building more state-funded prisons, though, for-profit prisons were built by sheriffs and residents of local parishes.  Today there are more inmates housed in local, for-profit prisons than in state prisons (left) and Louisiana has more inmates in private prisons than any other state in the U.S. (right):

Why should we care if so many prisoners are housed in private, for-profit institutions?

The conditions in these prisons are worse than those in state prisons, especially when it comes to quality of life (like the opportunity to develop hobbies or practice their religion) and rehabilitative services (like high school equivalency classes and job training). These are desperately needed services; the average Louisiana prisoner has a 7th grade education and nearly a 3rd read below a 5th grade level:

State facilities simply spend more money, while for-profit prisons skim as much off the top as possible.  Writes reporter Cindy Chang:

An inmate at the Angola state penitentiary costs $63.15 a day, compared with the $24.39 sheriff’s per diem. State facilities house the sickest and oldest, but [Department of Corrections] Secretary Jimmy LeBlanc admits part of the differential is the lack of educational offerings.

In fact, Louisiana spends less on its prisoners (in state and private facilities combined) than any other state in the U.S.:

Law enforcement officials and parish residents may not like what’s happened in Louisiana, but many feel trapped.  For-profit prisons are sustaining local communities: they fund police departments and employ residents. Often they are the only local jobs with decent wages and benefits. Those residents support the local economies and keep small towns alive.

In this short video, an employee talks about the occupational opportunity the prison provides:

Many Louisianans, then, see the harsh sentences and high imprisonment as a price worth paying.  Says Sheriff Charles McDonald: “I know it sounds crazy and impersonal… but we’re stuck with this jail. We can’t walk away. We’ve got investors, employees.”

Lisa Wade is a professor of sociology at Occidental College and the co-author of Gender: Ideas, Interactions, Institutions. You can follow her on Twitter and Facebook.

Imprisonment in Louisiana: “First in the World”

A new 8-part Times Picayune series on the prison industry in Louisiana starts off with these foreboding sentences:

Louisiana is the world’s prison capital. The state imprisons more of its people, per head, than any of its U.S. counterparts. First among Americans means first in the world. Louisiana’s incarceration rate is nearly five times Iran’s, 13 times China’s and 20 times Germany’s.

One out of every 86 Louisianans is in prison.

The motivation is money.   Most prisoners in Louisiana are in for-profit prisons.  The state spends $663 million a year on imprisonment; $182 million of that goes to for-profit correctional companies or contracted local sheriffs.  Many small towns depend on the prisons to fund their law enforcement.

Burk Foster, a criminologist who’s been studying Louisiana prisons, explains:

They don’t want to see the prison system get smaller or the number of people in custody reduced, even though the crime rate is down, because the good old boys are all linked together in the punishment network, which is good for them financially and politically.

State Rep. Joseph Lopinto (R-Metairie) agrees:

The bottom line is, if locking everybody up and throwing away the key works, then we should have the lowest crime rate in the United States. We don’t. So then you have to really look at your policies. In my opinion, it’s strictly a fiscal issue.

Those who benefit from the prison industry have pushed through some of the severest sentencing laws in the country and aggressively resist reform.  “Few lobbies in Louisiana,” writes reporter Cindy Chang, “are as powerful as the sheriffs association.”  As a result, Louisiana’s sentencing laws are out-of-step with the rest of the country:

All life sentences are, automatically, without any chance of parole and more than one in ten Louisiana prisoners are serving life sentences (the majority of lifers were convicted before age 30):

Harsh where other states are lenient, and harsh where other states are harsh, Louisiana has “a much higher percentage behind bars for [non-violent] drug offenses.”  In 2009, 82% of the 17,223 new admissions to Louisiana prisons were convicted of non-violent felonies.

Tomorrow I’ll follow up with a post on why there are so many for-profit prisons in Louisiana and how it’s affected the lives of prisoners both during and after incarceration.

Lisa Wade is a professor of sociology at Occidental College and the co-author of Gender: Ideas, Interactions, Institutions. You can follow her on Twitter and Facebook.

Asian Americans and Unemployment

The Economic Policy Institute recently released a report looking at the impacts of the recession and its aftermath on the Asian American population. Due to the model minority stereotype, Asian Americans are often overlooked in discussions of the economic crisis or of poverty and inequality more broadly.  It is true that Asian Americans have generally had lower unemployment rates than other racial/ethnic groups, due to their overall higher educational levels. However, if we look within educational levels beyond a high school diploma, Asian Americans have higher unemployment rates than comparable Whites, with the gap widest for those with bachelor’s degrees:

The economic difficulties faced by some Asian Americans is even more noticeable when we look at long-term unemployment (joblessness that lasts 27+ weeks, or more than about half a year). The proportion of the unemployed that fall into this category has risen for every group since 2007, with African-Americans and Asian-Americans more likely than Whites or Hispanics to be unemployed for long periods:

EPI then released an update to the report, incorporating 2011 data. Long-term unemployment has inched upward for every group; half of unemployed African- and Asian-Americans have now been out of work for at least 27 weeks:

And in fact, despite their higher overall levels of education, Asian Americans now have a higher unemployment rate than Whites (though the rate for both groups is down from the peak in 2010):

For a discussion of factors that may contribute to these patterns among Asian Americans, such as their concentration in states particularly hard-hit by the recession and the proportion of the population that is foreign-born, see the full report.

The Minimum Wage and the Cost of Housing

Each year the Department of Housing and Urban Development (HUD) calculates the fair market rents for apartments throughout the U.S. in order to set standards for housing assistance payments and vouchers for Section 8. Using data from the Census and the American Community Surveys, HUD figures out the average cost for various sizes of apartments. You can easily look up data for fiscal year 2012 here.

The generally-accepted standard for affordable, sustainable housing costs is that they should be about a third of a household’s income. The National Low Income Housing Coalition recently released a report on the mismatch between minimum wage — currently set at $7.25 nationally, with some states and municipalities having higher minimum wages within their boundaries — and the standard of living. The NLIHC report included this map showing the hourly wage that would be required for the HUD-calculated fair market rent to be about 30% of a full-time worker’s income:

In no state does the minimum wage pay enough to hit the 30%-of-income standard of affordable housing costs. How many hours would a minimum-wage worker need to work per week to make enough that the fair market rent would be about a third of their income? A lot, from a low of 63 hours a week in West Virginia to a high of 175 in Hawaii:

Thanks to Dmitriy T.M. for the tip!

Housing Market Blues

Cross-posted at Reports from the Economic Front.

Economic recoveries often depend on the state of the housing market.  While an April increase in housing prices has led many analysts to talk of a housing recovery, U.S. home values still remain depressed.  According to a Zillow real estate research report, they are still some 25% below their 2007 peak.

Perhaps the most telling indicator of the state of the housing market is that, as of the first quarter 2012, 31% of all owner-occupied homeowners with a mortgage were “underwater,” which means they had a mortgage greater than the market value of their home. As the table below shows, these homeowners owed, on average, $75,644 more than what their home was worth.

To this point, the high percentage of underwater homeowners represents, in the words of Zillow, only “a potential danger.”  That is because “the majority of underwater homeowners continue to make regular payments on their mortgage, with only 10% percent of the 31% nationwide being delinquent.”  The following figure highlights the percent of delinquent/underwater homeowners in the largest metropolitan areas.

At the same time, as Zillow notes:

With nearly a third of the nation’s mortgaged homeowners in negative equity and the average underwater homeowner having a home value that is 31 percent lower than their mortgage balance, negative equity will prove both to be difficult to fully eradicate near-term and to have pernicious effects longer term as some households continue to encounter short-term financial trouble even with a slowly improving broader economy. Should economic growth slow, more homeowners will not be able to make timely mortgage payments, thereby increasing delinquency rates and eventually foreclosures.

In other words, if the economy slows, or interest rates rise, two very likely possibilities, the housing market could deteriorate quickly, intensifying economic problems.  In short, we are a long way from recovery.