Markups, Competitiveness, and the Bush Tax Cuts and Deficits
The Administration released the annual Economic Report of the President on Friday. Many topics were covered, but here I’ll remark upon a few issues, motivated by several graphs.
First is price markup over unit labor cost. The interesting trend since 2001 has been the rise in this variable.
Source: Economic Report of the President, 2012.
From this graph, one would be hard pressed to find American business in terrible shape. Productivity has increased, labor compensation growth has been modest, so that it’s obvious where profits have come from. This also means (to me) that there is substantial space for rising wages to be absorbed without a commensurate wage-price spiral.
As I noted in this recent post, rapid productivity growth combined with slow compensation growth has improved American competitiveness. Nominal dollar depreciation over that period emphasized that improvement.
The next graph decomposes the budget deficit into its constituent components, going forward. The graph highlights the impact of the 2001 and 2003 tax cuts on the Nation’s fiscal prospects. In a word, disastrous.
Source: Economic Report of the President, 2012.
Figure 3-1 demonstrates that the much maligned ARRA and other stimulus measures are of minor importance going forward. Rather the sheer magnitude of the economic downturn that started at the end of the Bush Administration combined with the operation of automatic stabilizers was important. But not as important as the exploding costs associated with EGTRRA and JGTRRA and AMT patches.
As I said back in 2006, we would rue the day we engaged on this bout of fiscal profligacy, as the boom became a bust, and the deficits that benefitted primarily the wealthiest constrained our range of fiscal policy. It’s a prediction I think has proven much more right than wrong.
That being said, I believe that policymakers did respond as best they could, given these constraints, under the conditions they inherited from the Bush Administration. To remind readers, CEA notes:
When President Obama took office on January 20, 2009, the U.S. economy was contracting at an alarming rate, and employment was falling by more than 700,000 jobs a month. The plunge in economic activity was even deeper than the Bureau of Economic Analysis initially reported: revised estimates show that the economy contracted at an 8.9 percent annualized rate in the last quarter of 2008, from the initial advanced estimate of 3.8 percent. This was the largest quarterly downward revision ever reported.
Upon taking office, the Obama Administration immediately took bold steps to turn around an economy in free fall. It worked to stem the economic and financial collapse and put people back to work through the American Recovery and Reinvestment Act of 2009 (the Recovery Act), and it shored up the banking system and stabilized the financial sector through a series of measures including stress tests for banks and rigorous requirements for banks to raise private capital and repay the government for funds from the Troubled Asset Relief Program, and it rescued the American auto industry.
Soon after the Recovery Act was passed, the contraction of GDP slowed markedly to -0.7 percent in the second quarter of 2009 from -6.7 percent in the preceding quarter. Economic growth turned positive in the third quarter of 2009, and the economy has grown at an annualized growth rate of 2.4 percent over the past 10 quarters. Private sector employment has grown for 23 straight months, and employers have added a total of 3.7 million jobs in that period.
It bears repeating that ARRA was passed only five months after Don Luskin declared:
in the final analysis let’s just stick to facts. We are not in a recession
It amazes me that so many of the people who denied the likelihood of a long, deep and persistent recession were the same ones who thought no action was necessary (aside from getting rid of regulations), and continue to argue that all we need is a little more deregulation. (For more on the intellectual backing for that view, see this critique.
The entire document is here; the CEA blogpost is here. And for some hysterically funny attacks on the ERP and spirited (and predictable) defense of “job creators” (aka those with lots of unearned income), see here.
Update, 2/26, 2pm Pacific: Readers Rich Berger and hv ask how Figure 2-11 from the Economic Report of the President was generated. Since this seems to be a common question, I decided to actually do the calculation. It took me five minutes to go to the proper section of FRED, download the nonfarm business sector unit labor cost and the implicit price deflator, in excel spreadsheet, enter into my statistical package and generate the below graph.
Figure 1: Replication of CEA (2012) Figure 2-11, ratio of price to unit labor cost. Source: BLS data on productivity and costs, downloaded from FRED; series IPDNBS for price and series ULCNBS for unit labor costs. Data downloaded on 26 February 2012.
Since these are indices, then one cannot actually get the actual price to ULC ratio. I have plotted p/ulc, where p and ulc denote indices of P and ULC, specifically (P/Pbase) = p, and (ULC/ULCbase) = ulc. CEA plots (P/ULC). Note (p/ulc)× (Pbase/ULCbase) = P/ULC . I can approximate (Pbase/ULCbase) by setting the share of income going to labor to 60%. The implied price to cost ratio is 1.66. So multiply p/ulc by 1.66 to obtain the following series:
Figure 2: Approximation of CEA (2012) Figure 2-11. Source: BLS data on productivity and costs, downloaded from FRED; series IPDNBS for price and series ULCNBS for unit labor costs; see text for adjustment. Data downloaded on 26 February 2012.
This seems reasonably close to Figure 2-11 in the ERP.