CBO says lower deifcit, slower growth. Do we want that?

This week, the Congressional Budget Office released its updated figures based on the fiscal cliff deal at the start of the year, and it featured two interesting forecasts. The CBO estimated that the deficit would fall by more than $200 billion this year, but that GDP growth would be lower than in recent years, and both can be chalked up to the budget-cutting sequester that's due to hit in 3 weeks.

Economic growth will remain slow this year, the Congressional Budget Office (CBO) anticipates, as gradual improvement in many of the forces that drive the economy is offset by the effects of budgetary changes that are scheduled to occur under current law. After this year, economic growth will speed up, CBO projects, causing the unemployment rate to decline and inflation and interest rates to eventually rise from their current low levels. Nevertheless, the unemployment rate is expected to remain above 7½ percent through next year; if that happens, 2014 will be the sixth consecutive year with unemployment exceeding 7½ percent of the labor
force—the longest such period in the past 70 years.

If the current laws that govern federal taxes and spending do not change, the budget deficit will shrink this year to $845 billion, or 5.3 percent of gross domestic product (GDP), its smallest size since 2008.

So if you're a believer in the deficit being handled above all other priorities, this should be good news to you. In fact, the CBO says the 2013 deficit will be cut in half again by 2015, due to other changes in tax and spending policy that would automatically hit over the next two years if the laws are not changed over the next two years. The CBO also assumes that all agencies will continue to be funded at the same levels after March 27, so the only overall spendng cuts would be due to the March 1 sequester. Obviously if spending is cut further after March 27, these numbers would be further modified.

However, the long-term deficit persists, and they are expected to grow again after 2015, with more to follow if Congress continues to allow Medicare payments to providers to increase as they have in recent years (often called the "doc fix"). A big reasons behind this is an assumption that interest rates will not remain at the low levels that they have been (still under 2% on the 10-year note) and this would raise the cost of interest on the debt, increasing deficits in future years.

The other interesting part is that the CBO anticipates the worst-case scenario it mentioned two months ago does not seem like it will happen- there will be no decline in GDP growth for 2013, and instead the CBO now predicts GDP growth of 1.4% for this year, even if the sequester takes effect. (Here's a post I did 3 months ago on those scenarios, and you'll see the GDP number largely matches the "Social Security tax cuts and tax breaks for the rich goes away" scenario). From there, the CBO says the economy will pick up and grow by an average of 3.5% from 2014-2018, which means the economy will finally get back to full potential with unemployment below 6%, which it hasn't been able to do since the Great Recession hit at the end of 2007.

But then things are projected to slow again, and a lot of the reason why is demographic.

For the second half of the coming decade, CBO does not attempt to predict the cyclical ups and downs of the economy; rather, CBO assumes that GDP will stay at its maximum sustainable level. On that basis, CBO projects that both actual and potential real GDP will grow at an average rate of 2¼ percent a year between 2019 and 2023. That pace is much slower than the average growth rate of potential GDP since 1950. The main reason is that the growth of the labor force will slow down because of the retirement of the baby boomers and an end to the long-standing increase in women’s participation in the labor force. CBO also projects that the unemployment rate will fall to 5.2 percent by 2023 and that inflation and interest rates will stay at about their 2018 levels throughout the 2019–2023 period.

One other noteworthy part in the CBO's report comes later on, where it breaks down individual programs. And as you'll see, several programs are already having cutbacks in spending from where they were at the depths of the recession, and that trend will continue in 2013. We'll start with Medicare, which might already be seeing some bending of the cost curve due to Obamacare.

Medicare. Net outlays for Medicare (excluding the effects of the shift in the timing of the first scheduled payments to health plans from fiscal year 2012 into fiscal year 2011) grew by 3 percent (or $16 billion) in 2012— a slower rate of growth than any recorded since 2000. Medicare’s outlays will increase by 4 percent (or $21 billion) in 2013, CBO estimates. (Those amounts are net of receipts from premiums paid by the program’s beneficiaries.)

Unemployment Compensation. The largest decline in spending in 2012 was for unemployment compensation. The number of people receiving first-time payments of regular unemployment benefits, which peaked in 2009 at 14.4 million, continued to fall in 2012, totaling 8.7 million. As a result, outlays for unemployment compensation dropped by $26 billion last year, to $93 billion. The decline is expected to continue—to $76 billion in 2013—as fewer of the long-term unemployed will be in states that qualify to provide the maximum number of weeks of emergency and extended unemployment benefits. (Wisconsin is one of these states)

Medicaid. Medicaid spending also declined in 2012—by $24 billion (or 9 percent)—primarily because a temporary increase in the federal share of the program’s costs expired in June 2011. That increase initially took effect in 2009 under the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5) and was extended in modified form through June 2011; it was therefore not in place in fiscal year 2012. In 2013, Medicaid outlays will increase by $15 billion (or 6 percent), CBO estimates.

The Making Work Pay Tax Credit. This refundable tax credit (which expired at the end of December 2010) amounted to 6.2 percent of an eligible individual’s earned income for tax years 2009 and 2010 (up to a maximum of $400 for individuals or $800 for joint filers). Because it was refundable, any portion that exceeded an individual’s tax liability was paid to that person and recorded as an outlay in the budget. Because the credit expired, its associated outlays fell by $14 billion between fiscal year 2011 and fiscal year 2012.

This doesn't even bring up the cutbacks at the state and local levels, which have combined with the federal cutbacks to drop expenses lower than they were 5 years ago, despite an increasing population.

So the CBO report should blow up any suggestion of "out of control government spending", because it isn't happening in America. Some of that has happened due to legislative action (like state and local budget cuts), but a lot of it is a result of a recovering economy since the middle of 2009. And this leads to my point- why aren't we concentrating on getting unemployment down, and further reducing the need for spending like unemployment compensation and Medicaid? At the same time, this will raise revenues and could possibly keep us at the same reduced deficit figure, while having more employment than a GOP-approved austerity scenario would give us. If Dems are smart, they're saying we should stay the course of the gradual "brake" of the 2009 stimulus, while continuing some spending and stabilization that allows GDP growth to continue.

And there's an unlikely group that also would like the growth scenario to continue- the large number of TeaBag governors that are up for re-election in 2014. Many of these states rely on help from the feds to keep their budgets in balance, and even Governor Walker's own DOA admitted that if sequestration hit, it would increase the state's budget deficit by $174 million in the next budget. Sequestration and related austerity would also cut the projected growth that the LFB gave in its revenue estimates last month, as the LFB estimated that growth would be 1.7% for the U.S. this year, above the 1.3% the CBO figures with the sequester.

So keep an eye on the events in D.C. over the next month, as allowing the sequester and related austerity would hold back the economic recovery that seemed to be picking up at the end of 2012. And keep it in mind when Governor Walker releases his 2-year budget next week, because I got a feeling that it's going to include a rosy scenario that his GOP buddies in Congress don't want to allow. We have to be ready for this obvious deception, and call it out before it gets passed into law, and dooms Wisconsin to a big deficit that it might not be able to fix after the new governor would come in for 2015.

Sure feels like March

  No econ or politics for this post. Not when I'm still coming down from THIS

  I was just planning to creep downtown around non, have a bloody, and check out the end of what I figured would be a big game. Then that shot happened, Brust's OT winner happened, and Saturday got a lot more festive in downtown Madison. One woman came from the game, walked into the bar I was at, saw a friend that was also at the game, and immediately started jumping up and down with her mouth wide open, saying nothing. Apparently the guys on the team felt the same way.



   The crazy part is, it seems like we get one of these kinds of games almost every day. Badgers go double OT with Iowa, Illinois beats Indiana at the buzzer, Notre Dame and Louisville play 5 OTs last night. And we're still 5 weeks from the Big Dance even starting. Watching this sure beats ruminating about the snow, ice and other ugly crap that keeps falling from the skies here.
  

WisGOP, Wisconsin losing Minnesota border war

Apparently the Wisconsin GOP doesn't learn too quickly. 2 weeks after Gov. Walker tried to mock Minnesota Governor Dayton's tax proposals, only to find that the data showed that Minnesota has kicked our ass economically for the last 2 years and now has more jobs than we do, they were back at it.

This time it was State Rep. Erik Severson, who represents an area of Wisconsin that borders Minnesota. Severson encouraging them to come across the St. Croix River.

In the private sector, one of the most important rules for running a business is not spending more than you have. It’s a concept with which your governor, Mark Dayton, seems unfamiliar

In response to Minnesota's $1.1 billion budget deficit, Governor Dayton has proposed a new $2.1 billion tax increase on consumer goods and services, as well as a new tax on business-to-business transactions. He does not seem to understand that high taxes drive businesses out—out of business and out of his state. Fortunately your neighbors to the east are ready to welcome your business with open arms and low taxes.

Ah yes, the old Confederate "race to the bottom" theory of job creation. It's why Alabama and Mississippi and South Carolina has just boomed the last 30 years, and lowered their poverty rates and raised their incomes in the process (oh wait, none of that has happened...).

Rep. Severson's letter goes on to repeat the lie that Walker and WisGOP closed a $3.6 billion deficit (it never was that high) and that they have a surplus for the future (they put 2011-2013 on a credit card of borrowing and actually have a deficit in the hundreds of millions of dollars for the next budget).

But Severson does admit that taxes on manufacturing and other corporations are set to be lowered to near zero in the next couple of years in Wisconsin. Of course he leaves out that this will force further cuts in services and tax raises on the real job creators in America- everday workers and consumers, and drive down the quality of life that used to be one of our state's biggest economic advantages.

In addition, the alleged "job-killing tax increase" Severson brings up is discussing is part of Gov. Dayton's larger plan to restructure Minnesota's tax code.

Dayton’s proposals include cutting the sales tax rate from 6.875 percent to 5.5 percent, while broadening the tax to many goods and services that are currently exempt. He also seeks to create a new income tax bracket on the wealthiest 2 percent of Minnesotans, while providing a rebate for the first $500 of property taxes paid going forward from 2013.

Some of the governor’s other proposals include the following:

•Reducing the corporate tax rate from 9.8 percent to 8.4 percent, dropping Minnesota’s rate from fourth to 12th highest in the nation
•Raising the cigarette tax 94 cents per pack
•Extending the sales tax to clothing costing more than $100 (previously, Minnesotans paid 0% sales tax on ALL clothes, and still would on all clothes less than $100).
•Increasing local government aid $80 million a year and county program aid $40 million per year
•Increasing funding for special education by $125 million

Hmmm, increased state aid to schools and local commuities, cutting property taxes, and a lowering of the general sales tax? Sounds good to me! It's even got a lowering of the corporate tax to help all of Rep. Severson's beloved "job creators." Not that they needed the help when they were adding nearly 5,000 private sector jobs a month in Minnesota in 2012.

By the way, the ridiculing of Dayton's proposed higher sales taxes on expensive clothes really seemed stupid to say when Wisconsin DOA Secretary Mike Huebsch came out the day after Severson's letter and floated an idea to raise Wisconsin's sales tax up to 13% in order to eliminate the state's income taxes, and idea so stupid it forced Gov. Walker to have to shoot down those rumors the next day after Wisconsinites responded with outrage. If Rep. Severson wants to talk about thieving business from Minnesota, he should think about what would happen to the amount of business stores and car dealerships that would be lost in his district if consumers flocked across the St. Croix to save 8% on their purchases in Minnesota.

Don't think Dayton hasn't noticed the assclownery in Wisconsin's GOP. He responded to Walker's and Severson's needling with the best smack talk there is- the facts. As Dayton laid out in his State-of-the-State address

Minnesota’s job growth in 2012 was the 12th best among all 50 states, We outperformed three of our four neighbors. Iowa ranked 30th best; South Dakota was 44th and Wisconsin, which by the way is open for business, helped bring up the rear at 42nd. And help spread the word across the St. Croix. Their unemployment rate last month was 20 percent higher than ours, while our per capita income was 12 percent higher than theirs.  

Dayton could also have mentioned that 1,300 more Wisconsinites left for Minnesota in 2011 vs. 'Sotans who headed east into Dairyland - the first year that both Dayton and Walker were in office (you can download the data here). That migration number probably understates how many left Wisconsin for greener pastures in the Land of 10,000 Lakes, because the county with the highest percentage increase in population in Wisconsin from 2000-2010 was St. Croix County- the county closest to the Twin Cities. It's a good bet that a solid amount of people going from Minnesota to Wisconsin went to places like Hudson in St. Croix County- and those moves had very little to do with Wisconsin's economic picture and a whole lot more to do with Minnesota's.

Oh, and Dayton also came out in favor of marriage equality in the State of the State address (after state voters rejected a ban this November), while the Wisconsin GOP continues to pursue backwards legislation on abortion, voting rights, and public education. If you were a young person with talent, which state would you want to be associated with? The one with the improving economy and progressive values, or the redneck one that won't improve its quality of life, can't create jobs and seems to want to turn our formerly progressive state into a neo-Confederate cesspool?

I'm tired of having our state being a laughingstock to our neighbors because of its politicians and oligarchs, and it's time that it ends.

WEDC disaster reaches Skyward

Apparently the old "Friday news dump" still works, as another great example of a Scott Walker cronyist failure was revealed over the Super Bowl weekend, and it was largely hidden by the major newspapers in the state. And yes, it involved the money-losing and corrupt Wisconsin Economic Development Corporation (WEDC).

This time it involved the statewide bid for student information for all of Wisconsin's school districts. You may recall this multi-million dollar bid was in the news this Summer, and not for a good reason.

The head of a semi-private state development agency that offered, and then rescinded, tax credits to a Wisconsin company contingent upon it winning a multi-million dollar state contract said Friday he believes the proposal was legal.

[WEDC] leader Paul Jadin told The Associated Press his legal team advised him that the offer to Skyward Inc. was allowed because the year-old agency isn’t bound by procurement laws that forbid bid-rigging.

“It was indicated that we could make a contingency offer,” Jadin said in his first public remarks on the controversy since it came to a head earlier this month. “We’re satisfied that we could make the offer.”

Others in state government didn’t see it that way, and Democrats on Friday issued their most forceful criticisms of the deal to date, calling it sleazy and illegal....

When Gov. Scott Walker found out about the offer the day after he won his recall election on June 5, he said it raised a red flag and he alerted his legal staff (or the WEDC Board Chair realized he wouldn't be able to cover this up, and that people would catch on to how sketchy this was). Walker’s office then contacted the state Department of Administration, which was in charge of putting out the call for bids on the $15 million project to run a new statewide information system for schools.

The day before bids were due, on June 18, DOA halted the process and said the offer Jadin had made to the Stevens Point-based company violated the spirit of a competitive bid. Giving preferential treatment to any company bidding for a state contract is illegal.

I pointed out at the time how this was an example of how WEDC was rife with potential conflicts of interests and a lack of accountability for the millions of taxpayer dollars that go into WEDC's business plans.

Well, the student info project's bid had to be re-done, and it just closed recently. And without the tax credits being included and the bid being messed with, Skyward lost out to Minnesota-based Infinite Campus, and the Wisconsin Department of Administration is scheduled to start negotations with the Minnesotans later this month. So not only did WEDC corruption put an ugly stain on this $15-million project, but now it also has sent the project to an out-of-state company, and Skyward along with Stevens Point-area politicians are decrying the process, and demanding that the state not officially hire Infinite Campus.

By the way, I'm OK with an out-of-state company winning the bid, if Infinite Campus is truly the better company for the student info systems project. As taxpayers, we should demand the best performance and cost-effectiveness when it comes to projects that we fund, and the Stevens Point Journal story notes that Infinite Systems does do student info for some Wisconsin districts already. But what we should ask is why the bid was screwed up in June to begin with, and why did the (now former) head of WEDC feel he could violate clean-government laws. It's almost like sketchy, cronyist bids and avoidance of independent, clean bidding was the intelligence of WEDC's design!

The real coup de grace would be if Skyward tried to shake down the state or the City of Stevens Point for funding or tax breaks by threatening to leave. Or even worse, they could pack up and leave town, they threatened to do over the Summmer if they didn't get this bid. And all of it was avoidable, if only WEDC had done a transparent, open bidding process without any of the monkey business that has now become endemic to the failing Scott Walker creation known as WEDC.

EDIT: This story just broke. WEDC wanted to use $200 million of state pension funds to go toward start-ups of new businesses. Fortunately, the State of Wisconsin Investment Board told WEDC to stuff it, saying "use of WRS trust fund monies to fund economic development initiatives does not meet our fiduciary duty." Given that SWIB has kept the WRS state pension 100% funded despite the horrible downturn in the stock market in 2008 while WEDC has lost track of millions in loans in less than 2 years, I think I'll trust the SWIB's judgment on this one.

Hey, look who's back!

I just got off of work, so I'm checking out Sly's return to the airwaves, and you should click here to do the same.

Doesn't sound too different, but it's sure nice to have some local reality back on the airwaves. And especially with the signal reaching deep into the same counties that voted heavily for Obama, but wimped out when it came to removing Walker in the recall election. Got a feeling SW Wisconsin won't make that mistake again.

Heading toward recession? Not really (jobs version)

2 days ago featured a "jobs Friday," with the release of the monthly jobs and unemployment numbers. And the January report had extra resonance on the state of the economy- the first being the release of the 0.1% drop in U.S. GDP from the day before (which I went over in this post). The second reason is that the January report also features benchmarking of the previous 12 months, as data gets refined over time.

The immediate report was fine- January had another 157,000 jobs overall and 166,000 jobs in the private sector- a decent report that was not much different than previous months. But it was in the benchmarks that the real news of the report was shown, as 2012's figures were even better than first thought.

Page 3 of the report shows

In accordance with annual practice, the establishment survey data released today have been benchmarked to reflect comprehensive counts of payroll jobs. These counts are derived principally from unemployment insurance tax records for March 2012. The benchmark process results in revisions to not seasonally adjusted data from April 2011 forward. Seasonally adjusted data from January 2008 forward are subject to revision. In addition, data for some series prior to 2008, both seasonally adjusted and unadjusted, incorporate minor revisions.

The total nonfarm employment level for March 2012 was revised upward by 422,000 (424,000 on a not seasonally adjusted basis).

The report gives the monthly changes for total jobs in every month of 2012 as well, and it shows that the first part three months in particular had big gains. In addition, after a soft patch in the 2nd quarter, job growth continued at a pace of 150,000-200,000 a month for the last 6 months of the year.

Job gains by quarter, U.S. 2012
2012 Q1 +787,000 jobs
2012 Q2 +324,000 jobs
2012 Q3 +456,000 jobs
2012 Q4 +603,000 jobs
TOTAL 2012- +2.17 million jobs

It also illustrates tht Wisconsin is even further behind the rest of the nation than we previously knew. Granted, Wisconsin's numbers will be benchmarked as well when they release next month's jobs report, but as it stands right now, the Walker jobs gap has stretched to 104,000. You can also see the effect of the revisions around December 2011 for the U.S. figures in these charts.

These figures certainly aren't indicative of any type of recession, and while hourly earnings aren't going gangbusters (and need to do better, given our increased productivity), they were still around the rate of inflation at 2.1% over the last 12 months. The average hours worked per employee are basically the same as we had this time last year, so what it means is that we have more people working, and those who are working are making what they made similar to last year, so that would indicate economic growth.

That doesn't mean things are necessarily booming, and the unemployment rate stuck between 7.8% and 7.9% the last 4 months shows that while job growth is making up for the 1.3 million new entrants to the work force in the last year, it's not grabbing that many others on top of those new entrants. But it does mean we remain in a moderate growth pattern, and that we should continue to emphasize employment and better wages in the near term over austerity and deficit-based budget-cutting.

Heading toward recession? Not really (GDP version)

Like a lot of people, I was surprised to see Wednesday's report that U.S. GDP shrank by 0.1% between the end of September and December. But a quick look at the reasons why this happened shows the contraction to be a one-time dip, with the underlying numbers indicating an economy continuing to recover at a steady pace...unless Baggers try to get in the way of it.

The biggest reasons for the decline in GDP are obvious- major decreases in Government expenditures, and leaner inventories. After a surprising jump up in government expenditures in Summer, the decline in government spending that started with the end of the Census in Summer 2010 continued in the 4th Quarter of 2012, and reduced GDP by 1.33% for the quarter.

This decrease was led by a $42.5 billion drop in defense spending, and Brad Plumer of the Washington Post explained that this was caused by a combination of the end of the fiscal year in September and the prospect of the fiscal cliff.

"In the Pentagon, you have to use it or lose it by the end of the fiscal year in September,” said Lawrence Korb, a former assistant secretary of defense now at the Center for American Progress, in a recent interview. “You see this a lot. ‘We’ve got to fly a lot this month for training, otherwise Congress will take back the money they gave us.’”

Yet the ups and downs were especially sharp in 2012 — soaring 13 percent in the third quarter and dropping 22.2 percent in the fourth quarter. Part of that is due to the fact that defense spending is shrinking overall, thanks to budget pressures and the drawdowns in Iraq and Afghanistan.

Another possibility, as Michael O’Hanlon of Brookings told me, is that the Pentagon has been preparing for the sequester budget cuts that had originally been scheduled for January. (They’ve since been pushed back until March.) The Defense Department was facing the prospect of losing money that had already been budgeted over multiple years but hadn’t been spent. That led to a big spending spree in the third quarter, which was followed, inevitably, by a drought in outlays in the October through December.

Now I'm OK with the military being put on a diet, but there's also no question that this will drop the country's GDP as well (on the flip side, the invasion of Iraq went a long way toward warding off a double-dip recession in early 2003).

So if you pull out the defense-inspired austerity at the end of last year, you'll see that the private-sector economy kept on chugging along much like it has for the last 3 years.

Another item that held back our economy's growth at the end of last year was the largest drop in inventories in 2 years, which took away another 1.27% from GDP for the quarter. So if you isolate that one category, and go on final purchases of goods and services, you'll see that the U.S. had its 7th straight quarter of growth between 1 and 2.5%. And this chart even includes the declines in government spending over that same time period.

So you'd think that this would be a right-winger's fantasy- drops in government spending, a growing economy that continues to add jobs (more on that in an upcoming post), and a deficit that's dropped 23% in the last 3 years. And you would be wrong, as Politico's Glenn Thrush writes.

Tim Miller, also of the RNC, presented an argument on Twitter that is hard for the White House to refute: "Obama's 2nd term focus from speech to hill priorities has not been job growth. Simple argument to articulate."

Former CBO Director and McCain '08 adviser Douglas Holtz-Eakin put an even finer point on it: "This is what happens when you grow too slowly. If you're growing too close to [zero] you can't insulate against shock."

Brad Woodhouse of DNC evoked GOP snickering by retweeting an economist who claimed that it was "The best-looking contraction in U.S. GDP you’ll ever see.”...

The fact that the shock this time came from a plunge in defense/federal spending should, in theory, bolster Obama's contention that budget-cutting and trimming entitlement spending is the worst thing for the economy right now. It should, in a more Spock-like world, be an argument against the sequester cuts and big changes to Medicare and Social Security. Forget about that.

All nuance is lost in the howling gale of an economic "contraction" -- and the advantage, at least in the current news cycle, shifts to a down-in-mouth GOP. It's not likely to be a major shift in the dynamics of looming fiscal fights, but Republicans, in the words of one senior Hill staffer I spoke to this morning, "will take any leverage we can get."

Huh, and the Republicans wonder why they're in such a desperate situation to "take any leverage they can get." Ignoring the reality that GOP-style austerity is keeping our good economy from being even stronger goes a long way toward explaining why Republicans being rejected by the large part of America that deals with that reality, and decides their actions based on results instead of pathetic, failed poses.