Democracy Gone Astray

Democracy, being a human construct, needs to be thought of as directionality rather than an object. As such, to understand it requires not so much a description of existing structures and/or other related phenomena but a declaration of intentionality.
This blog aims at creating labeled lists of published infringements of such intentionality, of points in time where democracy strays from its intended directionality. In addition to outright infringements, this blog also collects important contemporary information and/or discussions that impact our socio-political landscape.

All the posts here were published in the electronic media – main-stream as well as fringe, and maintain links to the original texts.

[NOTE: Due to changes I haven't caught on time in the blogging software, all of the 'Original Article' links were nullified between September 11, 2012 and December 11, 2012. My apologies.]

Wednesday, May 01, 2013

Two Economies: Private Sector, Good; Public Sector, Bad

The news that house prices have risen by almost ten per cent during the past twelve months, the fastest rate of increase in almost seven years, confirms a trend seen in other recent reports on the economy: the private sector—excluding the unemployed—is doing pretty well. But retrenchments in the public sector, which accounts for roughly a fifth of G.D.P., are holding back the recovery, and, indeed, jeopardizing its future.

Let’s start with the positive developments. One of the reasons that this recovery, which technically began in July, 2009, has been so weak is that the bombed-out housing sector has acted as a big drag on spending. In most recoveries, residential construction, and other spending associated with housing, is a key engine of growth. But for at least the first couple of years of this recovery, the housing sector was actually detracting from G.D.P. growth. Last year, things picked up a bit, and the trend is continuing. Since last summer, residential investment has been rising at an annual rate of about fifteen per cent, albeit from a low base.

Rising house prices mean this trend is likely to continue. According to the closely-watched S. & P. Case-Shilller house-price index, which tracks prices in twenty big cities, prices rose by 9.3 per cent in the year to March—the highest rate of increase since March 2006, when the housing bubble was at its peak. Over the past twelve months, prices rose in all of the cities that S. & P. tracks, and some places, such as Atlanta, Phoenix, and Las Vegas, have seen prices jump by more than fifteen per cent.

When prices are rising, developers build more new homes and homeowners spend more on renovations. If you’ve been to Home Depot lately, you’ve most likely seen evidence of this happening. In its most recent quarter, the retailer saw its sales and profits surge. Construction companies are also doing very well. On a conference call with Wall Street analysts last week, Donald Tomnitz, the chief executive of D. R. Horton, the country’s biggest homebuilder, said, “The first half of fiscal year 2013 was nothing short of phenomenal. We expect the second half to be even better.”

Housing isn’t the only sector in which the recovery is picking up. Sales of cars and trucks are pretty strong. So are sales of things like clothing, electronics, and furniture. Taking overall household consumption into account, spending rose by 3.2 per cent in the first quarter of the year, according to last week’s G.D.P. report, compared to an increase of 1.8 per cent in the previous quarter.

The buoyancy of consumer spending, which accounts for about two-thirds of the G.D.P., is encouraging and somewhat surprising. At the start of the year, the Obama Administration and Congress agreed to end a payroll-tax cut, which will cost a typical family about a thousand dollars over the course of the year. But rather than cutting back on purchasing new gadgets and outfits, many Americans appear to be saving less. In the period from January to March, the personal-savings rate fell to 2.7 per cent, compared to 4.7 per cent in the previous three months.

With spending strong and wages stagnant, American businesses are enjoying record earnings. Corporate profits topped two trillion dollars last year, according to the Commerce Department, and they appear to have grown again in the first quarter. Unfortunately, most businesses aren’t investing very much in new buildings or equipment such as machinery and computers, nor are they going on hiring sprees. Spending on new offices and factories actually fell slightly between January and March, and spending on equipment and software rose at an annual rate of just three per cent. Rather than investing in their businesses, many corporations are holding onto their cash or using it to purchase back their own stock. For the recovery really to get going, and unemployment to come down further, we need businesses to display some confidence in the future and expand at a more rapid rate.

But for all its weakness, business investment is still contributing modestly to G.D.P.—which is more than can be said for the public sector. In the first quarter of the year, overall government expenditures—spending at the federal, state, and local level—declined by more than four per cent, according to the Commerce Department. And this fall in outlays deducted almost a full percentage point from overall G.D.P. growth.

Even now, it isn’t fully appreciated how much trimming the public sector has been through in the past couple of years. If you listened to the House Republicans or Fox News, you would believe that overall government spending is still racing ahead. Last week’s G.D.P. report showed that this simply isn’t true—at the national or local level. In the first three months of the year, inflation-adjusted federal non-defense spending declined at an annual rate of two per cent, and federal spending on defense fell at an annual rate of 11.5 per cent. State and local spending declined at an annual rate of 1.2 per cent.

If this was just an isolated quarter, it might not mean very much. But it isn’t: in 2011, overall federal spending (inflation-adjusted) fell by 2.8 per cent, and in 2012 it fell by 2.2 per cent. At the state and local level, spending fell by 3.4 per cent in 2011 and by 1.4 per cent in 2012.

These figures are worth restating in another way. Since the start of 2011, when the Tea Party contingent arrived in Congress and started banging on about the government being out of control, overall federal spending has fallen by more than five per cent, as has spending at the state and local level. The cuts the Republicans are calling for are already a reality.

Some of this drop in spending reflects lower outlays on things like unemployment benefits and food stamps, as the jobless rate has come down from ten per cent in October, 2009, to 7.6 per cent last month. But some of it reflects policy decisions. The Obama stimulus package was allowed to expire. The Budget Control Act of 2011, which the President signed as part of a deal to avoid breaching the debt ceiling, established caps on discretionary spending through 2021. And the decision to pull U.S. troops out of Iraq and Afghanistan led to a sharp decline in military spending.

When you look at the government spending figures and think about them for a moment, is it any surprise that the recovery, post-2010, has been so weak? It’s simple arithmetic that if spending in a third of economy declines for more than two years running, there has to be a sustained uptick somewhere else to prevent an overall decline. So far, the private sector, and particularly consumer spending, has managed to make up the gap, and a modest rate of G.D.P. growth has been sustained. But with the rise in payroll taxes still being felt, and the impact of the sequester just starting to become clear, what will happen going forward?

Given the rebound in the private sector, and the Fed’s determination to keep interest rates at rock bottom, I’m still reasonably confident it won’t be anything too terrible. But it’s a situation worth watching, and it’s one we didn’t have to get ourselves into. If the public sector—and here, I am including state and local governments, which are a significant part of the story—hadn’t been forced to retrench prematurely, the economy would now be in better shape.

Original Article
Source: newyorker.com
Author: John Cassidy

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