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.
"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."
April 9, 2007; Page A13
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”..
I also see nothing temporary about the Fed doing this every single day for a month straight:
Temporary means on an as needed basis….apparently our economy, in it’s “great shape” needs intervention every day now….
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.
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?
“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.
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?
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…….
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.
“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.
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…
“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.
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.
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?
“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.
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..
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.
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….
“No, they resulted in record high federal budget deficits”
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.
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.
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?
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%.
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.
“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.”
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%.”
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?”
“(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.
“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.
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.
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.
Time for some HARD facts, people. Don’t take anyone’s word for it, and just look at the http://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.
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.
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).
Syphax, stop trying to confuse them with the facts.
They know what they know and anything you post apart from “The Sky is Falling” pablum will be ridiculed or ignored.
A minor point and personal opinion:
it is unfortunate that the words ‘strong’ and ‘weak’ are applied to the value of the dollar. These words carry connotations beyond the economic reality and evoke argument and opinion for that reason alone.
“High” and “low” might have been better choices.
My apologies to Fred, who refuted and scoffed at my IRS-provided tax receipt “facts” (my mistake – I should have referred to the data as “numbers” or “data” rather than “facts”) with his rock-solid, hard-nosed, clearly non-subjective statements like “inherited a nightmare economy and turned it around.” I actually have no preference for who’s in office when it comes to tax policy, precisely for the reason that the long-term data illustrates, which is that regardless of who’s in office, the cost of freedom fluctuates in both directions and when it gets too far out of whack either way, it regresses to the mean.
When world’s two largest economies (by PPP not Us dollars) are growing roughly at 10% and many of the asian economies and eastern european economies doing well what are the odds that we will slip into a major recession in US.As much as it’s dangerous to think in terms of “it’s different this time” it’s equally dangerous not to recognize the winds of change sweeping the world today.World is getting flat and people are closer now than say they were even 100 years back.When so many human resources are working together with each having a vested interest in other’s prosperity there is bound to be growth and prosperity for all.After all our very first civilization (Sumer) was based on the phenomenon of close-knit human inetraction, where knowledge sharing, team work led to many inventions that’s been built and improved upon for thousands of years since.Thanks to Internet knowledge sharing is faster than ever and combine that with a reducing trade barriers among all the big countries in the world and we wre witnessing a major change that’s never been seen before.A small recession now mayn’t be such a bad thing as some systemic excesses could be fixed such as excessive debt propensity among US consumers and large trade imbalances.But otherwise closer ineraction of developed and developing world is good for all of us, the world citizens.God bless world.
I do not know but suspect D. Malpass to be or have been a proponent of the now largely discredited neoliberal/Washington Consensus ‘development’ strategy…
At least such is my opinion when reading of “the sea change in global conditions towards fuller employment” which, of necessity, must be counterposed to the closer-to-real 25 January, 2007, ILO statement:
GENEVA (ILO News) – The number of people unemployed worldwide remained at an historical high in 2006 despite strong global economic growth, the International Labour Office (ILO) said in its annual Global Employment Trends (Note 1) released today.
“The strong economic growth of the last half decade has only had a slight impact on the reduction of the number of workers who live with their families in poverty and this was only true in a handful of countries. In addition growth failed to reduce global unemployment”, said ILO Director-General Juan Somavia. “What’s more, even with continued strong global economic growth in 2007 there is serious concern about the prospects for decent job creation and reducing working poverty further.”
Other findings in the trends report showed that:
For the last decade, economic growth has been reflected more in rising levels of productivity and less in growing employment. While world productivity increased by 26 per cent the global number of those in employment rose by only 16.6 per cent.
Unemployment hit young people (aged 15 to 24) the hardest, with 86.3 million young people representing 44 per cent of the world’s total unemployed in 2006.
The employment gap between women and men persists. In 2006, only 48.9 per cent of women aged 15+ were working compared to 49.6 per cent in 1996. The comparable male employment-to-population ratios were 75.7 in 1996 and 74.0 in 2006.
In 2006, the share of the service sector in the global employment progressed from 39.5 per cent to 40 per cent and, for the first time, overtook the share of agriculture that decreased from 39.7 per cent to 38.7 per cent. The industry sector represented 21.3 per cent of total employment.
It seems then that there really is such thing as immiserizing growth, i.e. growth accompanied by, perhaps causing, net negative welfare effects…all the more evident from argument/data in books such as last years ‘Planet of Slums’…and still moreso when one has real world experience beyond the Wall St-D.C. ideological corridor.
Jdamon, why sell your stock and be taxed 15%? You should wait until the GOP reduces capital gain taxes to 5%. Or 1%. Or 0%. Isn’t that a fair extrapolation of your basic math?
Why do people give so much credit to the Prez for overall business revenue?
Clinton’s main economic success:
The internet and the Y2k bug were going to happen with or without tax cuts or increases. NAFTA and welfare reform were passed by a GOP supermajority. Not to trivialize it, but his best economic success was comparative foreign policy competence. (E.g., avoiding committing “military malpractice” of the sort W committed, to the tune of hundreds of billions in the short-term.)
W’s main economic success:
Putting interest rates at inter-generational lows and creating a climate where Americans overleverage themselves and spend more than they earn.
Tax rates go up and down. People eventually sell their stock when they want to buy something else. Moving the rates around makes people decide to sell their stocks at a time of low rates because they fear “oh, the Demoncrats will raise taxes”. To the extent folks are taking advantages of tax holidays, all that’s doing is moving income from one period to another, either forward or backward.
The government has to collect money or print it. Either way, you’re being taxed. The only way to “cut taxes” — real taxes — is to cut spending, something few are willing to do.
“I don’t bother excluding the social security surplus because social security under current law is not sustainable.”
Social Security is more financially sound today than it has been throughout most of its 71-year history.
“By 2075 social security will run annual deficits of 8 trillion dollars?”
Social Security will still be in FAR better financial shape in 2075 than the rest of the U.S. government is TODAY.
“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.”
Other than the CBO STATED the tax cuts were the major reason for the federal deficits.
“Clinton inherited an accelerating economy”
There hadn’t been a single net new job created in the private-sector during the previous four years. How does a national economy that has less jobs than there were four years earlier count as an “accelerating economy” ?
“Bush inherited a nightmare economy”
He “inherited” the longest economic expansion in our nation’s history, the creation of 23 million net new jobs (the majority paying higher than the average wage), the lowest national unemployment in decades, real wages rising at all income levels, the largest drop in Poverty in decades, the lowest inflation rates in decades, the largest federal deficit and debt reduction in history, and federal budget surpluses.
If that was a “nightmare“, then please bring on all of Elm Street.
VJ…you’re killing me with laughter.
The “Clinton Era” will go down as the “Era of Lies”. It was deemed ok to lie, as long as you didn’t get caught….the definition of is – is. Grade school childern looked on, as our President lied, got caught, perjurd, and got away with it.
That spread and spiraled to the bogus accounting, bogus “earnings”, bogus research, bogus demand, which led to a 90% drop in the Nazdaq. The Fed then put gas on the fire with an absurd tightening that killed the economy. Pulllease! It was all an allusion.
RIP, the Era of Lies!!!
PS…I’m no fan of Bush either. I know posters will point to Iraq as a lie. Could be, but the global “intelligence” community had the same “opinion” as he did.
Fred, I agree with you regarding the entire Clinton presidency having a foundation of deceit combined with neglect of important policy and foreign obligations which necessitated still further deceit to cover it up at every level (domestic, international, economic, military, you name it). And to your last line about not being a fan of Bush either – kudos for bothering to point that out, because as we all know from personal experience, being against something/someone automatically pegs you as being FOR its counterpart, and it’s unfortunate that people are so simpleminded in that respect.
* Changing the subject does not substantiate your unsubstantiated assertions.
* BTW, President Clinton did not “perjurd” (talk about laughter !), or commit perjury for that matter.
* NO, the “global ‘intelligence’ community” did NOT have “the same ‘opinion’” as the Bushies did:
GERMANY: Foreign Minister Joschka Fischer to the Security Council [3/7/03] – “Are we really in a situation that absolutely necessitates the very last resort? I think not, because the peaceful means are far from exhausted“.
RUSSIA: Foreign Minister Igor Ivanov [3/7/03] – “What is really in the genuine interests of the world community? Continuing the albeit difficult but clearly fruitful results of the inspectors’ work, or resorting to force, which inevitably will result in enormous loss of life and is fraught with serious and unpredictable consequences for regional and international stability? It is our deep conviction that the possibilities for disarming Iraq through political means do exist.”
FRANCE: President Jacques Chirac [3/17/03] – “France is not pacifist. We are not anti-American either. We are not just going to use our veto to nag and annoy the U.S. But we just feel that there is another option, another way, a less dramatic way than war, and that we have to go down that path. And we should pursue it until we have come to a dead end, but that is not the case yet.”
Got more if ya want them.
Keep drinking the Purple Kool-Aid Fred, lest you have to face reality.
Gotta go before I get sucked into your Bizarro World.
France, Russia, and Germany all did business with Saddam, genius.
So did the Bushies, you fool.
Where do you think Saddam got his chemical weapons from ?
Get a clue.
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Know where I can find any additional info on the other players?