Deficit Update

The federal deficit will be over $400 billion for fiscal year 2008, according to the Congressional Budget Office:

CBO estimates that the deficit for 2008 will be $407 billion, substantially higher than last year’s $161 billion. As a share of the economy, the deficit is projected to rise to 2.9 percent of GDP this year, up from 1.2 percent of GDP in 2007. That 1.7 percentage point increase as a share of GDP is roughly evenly split between a 0.9 percentage point decline in revenue relative to GDP (reflecting the impact of lower corporate tax revenue and the rebates enacted as part of stimulus legislation this year) and a 0.8 percentage point increase in spending relative to GDP.

As a share of GDP, that is not as bad as the Reagan-era deficits (which peaked at 6% of GDP in 1983).

Including the $184 billion borrowing from the social security trust fund (i.e. the "on-budget" deficit), the 2008 deficit is $592 billion, or 4.2% of GDP.

Of course, that's a significant deterioration from the picture eight years ago - remember when we thought the problem would be what to do with all those surpluses? What happened?

Comparing the CBO's most recent forecast for 2009 with the one it made in January 2001, the Center on Budget and Policy Priorities made this breakdown: According to the CBPP, the total deterioration of the fiscal picture is $1.256 trillion; the chart is based on the parts due to tax and spending policy ($1 trillion), and doesn't include the $256 billion due to the economic slowdown. (Hat tip: Ezra Klein).

Al Gore's "lockbox" is looking pretty good right now...

Glazed Intervention

The NY Times' Dealbook reports on the latest measure to address the credit crunch, from Krispy Kreme.

Competition in the Antitrust Business

The Times reports:

The Justice Department laid out a broad policy on antitrust enforcement on Monday that drew an unusually sharp rebuke from three federal trade commissioners, who said it would protect monopolies from prosecution.

A 215-page report from the Justice Department, coming after nearly a year of public hearings, was originally meant to lay out a governmentwide approach to combating anticompetitive business practices. Instead, it exposed a rift between the Justice Department and the Federal Trade Commission over whether the government was protecting consumers or big businesses.

In a quick response to the Justice Department report, three of the four commissioners on the F.T.C. issued a statement saying that the policy was “a blueprint for radically weakened enforcement” against anticompetitive practices. They said the Justice Department guidelines allowed monopolies to act “with impunity” and “would make it nearly impossible to prosecute a case.”

This is far outside my bailiwick, but it sure sounds like a good thing that the Justice Dept. does not have a monopoly on antitrust. Hm... I wonder would Cournot or Bertrand be more appropriate to model this duopoly? (And that's all the I.O. I know..)

Unemployment vs. Output

Last week's employment report from the BLS had unemployment rising from 5.7% to 6.1% in August. As Brad DeLong, James Hamilton and others note, it sure looks like a recession:But past recessions have also been clearly visible in data for output growth:The "recovery" looks pretty anemic by historical standards, but there is not the sharp drop in output growth (yet?) that we've seen in past recessions. As Krugman puts it:

[T]his is an odd slowdown, by historical norms: no clear decline in GDP, no months of 6-digit job losses. Instead, the economy is being slowly ground down.

What I suspect, however, is that this is what the 21st-century business cycle looks like. The sharp slumps of the past partly reflected an inflation-prone environment, in which the Fed occasionally had to slam on the brakes; it also reflected a mainly goods-producing economy, with lots of inventories, in which recessions had a lot to do with inventory adjustments.

Among other things, rising output and falling employment implies that labor productivity is doing well (indeed, the BLS reported 4.2% growth in the second quarter). Usually, that's good news. Hm...

Equal Time

Not really, but I should point out that Martin Feldstein and John Taylor, eminent economists both, make the case for McCain's tax proposals in the WSJ.

Some debunking here. See also the Tax Policy Center's study.

Also, Feldstein and Taylor recycle the misleading claim about the US corporate tax rate being the "second highest among all industrial countries," which is debunked here.

Fundamentally Sound?

In the Times, a useful reminder from Louis Uchitelle of the inadequacy of Gross Domestic Product as a proxy for economic well-being. He writes:

While the G.D.P. has continued to rise, wages have stagnated, pensions have shrunk or disappeared and income inequality has increased. Other shortcomings have become apparent. The boom in prison construction, for example, has added greatly to the G.D.P., but the damage from the crimes that made the prisons necessary is not subtracted. Neither is environmental damage nor depleted forests, although lumbering shows up in government statistics as value added. So does health care, which is measured by the money spent, not by improvements in people’s health. Obesity is on the rise in America, undermining health, but that is not subtracted.

Those are some of the bigger issues, but last week's upward revision of the second-quarter growth rate up to 3.3% (from 1.9%) illustrated the disconnect that sometimes exists between economic statistics and perceptions in the short run.

At Econbrowser, Menzie Chinn looked into the numbers, asking "why does it feel like recession?" As he notes, much of the growth is coming from net exports (i.e., NX in the equation GDP = C + I + G + NX); with both increasing exports and decreasing imports. That is, in part, the declining dollar at work... the price deflator for exports rose at a 10.9% rate, and import prices were rising at a 28.5% pace (!!; the second quarter included a big run-up in oil prices, which has since partly reversed...). Hence a divergence between inflation for gross domestic purchases (C+I+G), at 4.2% and overall (GDP deflator) inflation of 1.2%.

The news on output growth was too good to be credible for some - the conspiracy theories appear to focus on the deflator calculations. Devotees of Okun's law will note that a 3.3% real GDP growth rate does not appear consistent with unemployment rising from 5.1% to 5.5% during the quarter.

Update (9/3): Macroblog on the deflator issue.

Obama the Healer (of Krugman's Blues)

Paul Krugman, Aug. 4:

Post-partisan depression

Obama’s big economy speech, last week:

Back in the 1990s, your incomes grew by $6,000, and over the last several years, they’ve actually fallen by nearly $1,000.

“Back in the 90s?” Why not, “When a Democrat was president?” “Over the last several years?” Why not, “under Bush?”

A prominent Democratic Hillary supporter once told me that Obama gives him “post-partisan depression.” Indeed — his apparent unwillingness to take such clear shots is starting to seem bizarre.

Barack Obama, Aug. 28:

You see, you see, we Democrats have a very different measure of what constitutes progress in this country.

We measure progress by how many people can find a job that pays the mortgage, whether you can put a little extra money away at the end of each month so you can someday watch your child receive her college diploma.

We measure progress in the 23 million new jobs that were created when Bill Clinton was president...

(APPLAUSE)

... when the average American family saw its income go up $7,500 instead of go down $2,000, like it has under George Bush.

Limits of Tax-Based Redistribution

Washington Post columnist Steven Pearlstein makes some good points about inequality, and Barack Obama's plans to chip away at it through the tax code, by lowering taxes for middle- and lower-income people while raising them at the top. Pearlstein writes:

Two things to note about the Obama tax plan:

First, there is little evidence that the proposed tax increases on high-income households would seriously harm the economy. The effective average tax rates at the top would be about the same as they were in the mid-'90s, which if memory serves were boom years for investment and entrepreneurship, boom years for the U.S. economy, and boom years for federal revenue.

Second, even with the Obama tax plan, the distribution of after-tax income would still be roughly where it was only four years ago.

The reality is that the market's tilt toward unequal outcomes is now so strong that you can't just rely on a progressive tax code to counteract its effects...

How True This Is

Piled Higher and Deeper examines "How Professors Spend Their Time."

An Effective Stimulus?

As I noted recently, the effects of the fiscal stimulus tax rebate should be judged relative to the counter-factual of how consumption and output would have behaved in the policy's absence. This, of course, is unobservable, but Christian Broda and Jonathan Parker have found a clever way around this problem. They exploited the fact that the checks went out in a staggered fashion and compared the behavior of the households that had received checks with those whose hadn't come yet.

In a Vox column describing their findings, they report that the policy did work, after all. A couple of the main conclusions:

[T]he average household increased its weekly expenditures on non-durable goods by 3.5% after receipt of the rebate. The impact is highest in the week where the rebate is received (not reported) with weekly spending increasing by almost 6% on average during the first week. We find no impact on spending in the few weeks prior to the receipt of the rebate.

Interesting - economic theory would imply that households should change their consumption when they get the news of the stimulus, rather than waiting for the check actually arriving. This suggests that households are either myopic, or that credit constraints are binding.

Overall,

[O]ur estimates imply that the receipt of the tax rebates directly raised nondurable PCE by 2.4% in the second quarter of 2008 and will raise it by 4.1% in the third quarter.

Update (8/20): Macroblog (hooray, it's back) weighs in.