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Home Publications Blogs Beat the Press Des Moines Register Endorsement of Romney Flunks the Which Way is Up Test on Economics

Des Moines Register Endorsement of Romney Flunks the Which Way is Up Test on Economics

Wednesday, 31 October 2012 04:29

Back in the 2000 presidential campaign, then Governor George W. Bush, described his plans for education and raised the famous question "is our children learning?" Unfortunately when it comes to former children who write on economic policy issues, the answer is a resounding "no!"

The Des Moines Registrar editorial encouraging readers to vote for Governor Romney managed to get just about every major aspect of the current economic situation wrong. For beginners, it told readers that:

"consumers must feel more confident about their own economic futures to begin spending on the products and services that power the economy."

Sorry, folks that one is clearly not a problem. A quick trip to the Commerce Department's website (Table 2.1, line 34 gives the saving rate, which is the percentage of income not consumed) will tell people that consumers are actually spending a much higher portion of their income than is typically the case. While the consumption share of income is not as high as the stock bubble driven peak of the late 90s or the housing bubble driven peak of the last decade, consumption is higher as a share of income now that it was in the 1960s, 1970s, 1980s, or even the 1990s.


 Source: Bureau of Economic Analysis.

Then the editorial told readers:

"A renewed sense of confidence will spark renewed investment by American companies."

This implies that investment has been seriously lagging. Again, folks who rely on data would not say such silly things. Investment in structures remains somewhat depressed because the bubble in non-residential real estate led to overbuilding in most categories of non-residential structures. Even in Washington, DC, which has escaped the worst of the downturn, there are signs everywhere advertising vacant office and retail space. No one in their right mind starts a big office building project or a new mall when the existing ones are half empty.

The area of investment where we might expect to see the impact of confidence right now is equipment and software. The data do not support the sagging confidence story. If we go back to the Commerce Department website (Table 1.1.5, line 11 divided by line 1) and look at investment in equipment and software as a share of GDP, we find that it is almost back to its pre-recession level. In fact, while it's below the peaks reached during the Internet bubble, it's pretty much back to the "morning in America" Reagan era levels.


                                                                    Source: Bureau of Economic Analysis.

This level of investment is actually quite impressive given that large sectors of the economy still have huge amounts of excess capacity. 

If consumption and investment are both pretty much back to normal why is the economy still in the doldrums? The answer is simple, we have nothing to replace the demand that was generated by the housing bubble. The overbuilding of residential housing led to a fall in construction of more than 4 percentage points of GDP (@ $600 billion in annual demand). While housing is creeping back, it will take a long time to work through the excess supply so that builders are again operating at normal levels. There is a similar but less important story with non-residential construction.

The other big part of the story is that while consumption is still healthy, it is below its bubble driven peak. The loss of $8 trillion in ephemeral housing bubble equity has led to a decline in annual consumption of $400-$500 billion. This also will not be easily replaced. 

This gets us back to the Register's other big complaint, the budget deficit. In the short-term, the deficit is the only source of demand holding up the economy. The Register is welcome to dislike government all it wants, but the reality is that if we did not have large deficits right now we would simply have less output and more unemployment. None of Governor Romney's job creating friends invest based on the government's decision to cut spending or raise taxes. That doesn't make any sense and of course we've had the chance to test this theory. The U.K. generously agreed to throw its economy back into a recession just so that people in the United States could see that cutting a budget deficit in the middle of a downturn will slow growth and cost jobs. In the longer term we will have to look to get our trade deficit closer to balance to sustain demand, but for the immediate future, the government is the only game in town.

The final fact that all numerate people should know is that we have not had chronic deficit problems. (Both parties have wanted to promote this untruth for different reasons.) In fact, the deficits were relatively modest before the collapse of the housing bubble sank the economy. And they were projected to remain relatively modest as visitors to the Congressional Budget Office website can verify.

alt                                                                        Source: Congressional Budget Office.

As can be seen, the deficits before the collapse were just over 1.0 percent of GDP and were projected to remain in that range until the expiration of the Bush tax cuts pushed the budget into surplus in 2012. This meant that the ratio of the debt to GDP was falling, we can run deficits of this size literally forever. In short, the tale of out of control deficits is utter nonsense. The large deficits are the result of the downturn caused by the collapsed housing bubble, end of story.

So the Register may still want to endorse Governor Romney for president, but its economic reasoning is 100 percent wrong. It may want brush up on some intro econ so it doesn't mislead its readers again.


Comments (10)Add Comment
written by Ron Alley, October 31, 2012 7:38

Your point about the housing bubble is well received. However, there is more than a housing bubble affecting consumers just as the housing bubble was only one aspect of the financial bubble that collapsed. There is a tremendous debt overload that both businesses and consumers are struggling to work off and I don't believe the employment will return to "normal" until that debt overhang is resolved. What we are now seeing is that wages are stagnant while prices are increasing.

I think that wages, if looked at on a per capita basis (i.e. total wages divided by the working-age population), would actually be in decline. While that may sound like a proxy for the unemployment number, it is actually more meaningful in that many of the employed share their income with unemployed family members and changes in per capita wages more accurately reflect disposable income.
Des Moines Register Doesn't Understand the Hole In Demand
written by Robert Salzberg, October 31, 2012 7:46

"That stimulus was necessary to bridge the nation from recession to recovery, but the time is past for more government stimulus."

If the DMR understood that lack of demand not lack of 'confidence' is holding back the economy, then they would know that additional stimulus is still very much needed.
written by skeptonomist, October 31, 2012 8:42
Total private investment is still far below the long-term trend:


although it is actually recovering at a good rate; it is unrealistic to expect it to recover instantly from a deep hole to normal level. As Dean says, demand is still low and businessmen are just not going to unilaterally expand on the assumption that demand will follow; conservatives' belief in Say's law is a lot less in reality than in theory. Under conditions like the present, only government can make the decision to expand ahead of demand.

The fact that demand is low despite historically low levels of saving is actually discouraging. This is probably a manifestation of much higher inequality than before.
written by PeonInChief, October 31, 2012 10:23
One of the factors in the declining savings rate is the increasing rents in many parts of the country. In many states the percentage of the population paying more than half their gross income for rent has risen substantially. See http://www.nhc.org/media/files/Landscape2012.pdf
the depression
written by mel in oregon, October 31, 2012 4:52
the economy will not recover under a taxcut program & entitlement cuts. that won't cause employers to bring in new employees. the only possible recovery would be a tremendous increase in government stimulus which is impossible given the obama/romney policies & the total control of the economy by wallstreet. most people don't understand anything at all about finance or economics, & as dean has pointed out many times, neither do 90% of economists. it's a real shame as this depression could have easily been prevented, & could be solved were it not for the tremendous power in ny city, wash dc- heck all the power centers across the country who are making out like bandits & have no desire to help those that need it most. this recession, depression, whatever you want to call it, will go on for decades, watch & see.
written by Jay, October 31, 2012 5:21
I do not understand why confidence is the purported problem with the economy. The newspaper makes it sound like we're taking about asking someone out on a date.

But for the sake of argument, why should people have more confidence to spend at high levels when salaries have been flat for at least 10 years, job security is limited with at will employment or reductions in force due to budget cuts, health care costs increased, retirement contributions nixed, increased student debt when retraining is pursued, expectations have readjusted after inflated housing values, a significant number of people are underemployed or unemployed that could be providing more demand, and at record low interest rates the government has no confidence that it can spend to increase demand because things will inevitably improve.

If there is any lack of confidence, it's in Washington. They don't have to resuscitate the economy forever. They just need to get the wind back in the sails.
The sign said ...
written by David, October 31, 2012 8:50
"Abandon fatalism, all ye who enter." C'mon Mel don't buy their message of inevitability. Write letters like mad. Speak out loud.
written by bmz, November 01, 2012 7:36
The Des Moines Register editorial represents the end of an era. Under editor Michael Gardner, the Des Moines Register and Tribune reached quality and influence heights that far transcended its size. That excellence lasted a full generation; but now, it is just another farm belt rag.
Confidence fairy or confidence man?
written by William Berkson, November 01, 2012 9:34
Wonderful post, thanks Dean. It shows that Romney is not the 'confidence fairy', as Krugman calls it, but a confidence man. I've linked your post in my blog: http://therepublicon.blogspot....-game.html
written by kharris, November 01, 2012 10:29
Confidence has to be the issue, because Romney said that if he were elected, the economy would grow faster just because of the awe he would inspire. Now, that's where the Des Moines Register realizes that economics is not just magic, so there have to be mechanisms by which the awe Romney inspires would spur growth. What could those mechanisms be? Well, investment and spending are really good candidates, unless Romney (or the editorial board) wants to argue that a higher savings rate would boost growth. So you see, the editorial board does understand economics, just not in the way that works outside the bubble. Once you accept Romney's own view of his awe-inspiringness (or in an earlier version of the language his "awfulness"), economics requires that you identify a mechansim.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.