Robert Samuelson is Optimistic About the Economy

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Monday, 25 March 2013 04:52

Well, at least someone is. Let's look at his case:

"The long-dormant housing market is reviving. Home prices and sales are up; homebuilders are increasing production to satisfy rising demand. Personal finances have improved. Loans have been repaid or written off. Since year-end 2009, the ratio of household debt to disposable income has dropped from 130 percent to 111 percent, according to Federal Reserve data. It’s probably still declining. Over the same period, a rising stock market and higher home values have increased household wealth by almost $10 trillion.

"The other piece of good news is the job market. 'The last five months . . . we’ve seen over 200,000 jobs a month in the private sector,' Fed Chairman Ben Bernanke noted last week at a news conference. 'Unemployment [insurance] claims are at the lowest level they’ve been since the crisis.'

"So two large sources of middle-class anxiety and insecurity — jobs and wealth — are slowly easing. The share of 'underwater' homeowners (with mortgages exceeding the value of their homes) has dropped from 21.2 percent in mid-2009 to 14.8 percent in the third quarter of 2012, reports Moody’s Analytics."

Starting with the household debt story, it is important to realize that consumption was unusually high relative to disposable income at the peak of the bubble. It is unlikely to return to such heights unless the bubble returns, which it is not close to doing (thankfully in my view). The vast majority of the wealth created since 2009 has been in the stock market which has doubled in value. The housing market, which was still falling in 2009, is roughly back to its 2009 levels.

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By the way, the Moody's figures on underwater homeowners refer to the roughly 50 million who have a mortgage. Almost a third of homeowners own their home outright.

Before anyone gets too excited about Bernanke's assessment of the job picture, it's worth noting that if he made the speech at the same time last year he could have boasted that the economy had created over 240,000 jobs a month over the last five months. The decline in jobless claims is good news, but it is important to realize that many job losers probably no longer qualify for unemployment benefits because they have worked little over the last two years. The rising portion of the unemployed who are ineligible for benefits would lead to a drop in claims even if the rate of layoffs remained unchanged.

In short, some of the factors that Samuelson cites at the end of his piece, like the sequester and the end of the payroll tax cut, are likely to prevent much of an economic takeoff. It is worth noting that we probably don't have to share his concern about:

"Obamacare’s disincentives for job creation (example: Because firms with fewer than 50 workers aren’t required to provide health insurance, the temptation is to stop hiring at 49)"

There are few firms in this situation. (Some small firms already offer health care coverage.) The impact of firms struggling with the 50 employee problem is likely to be invisible in the data.

One point mentioned by Samuelson is worth highlighting. He notes that the Obama administration had been overly optimistic about the pace of the recovery:

"Here’s how the White House Council of Economic Advisers puts it in its latest annual report: 'The administration forecast overpredicted output growth by a small amount in 2010 and by larger amounts in 2011 and the first half of 2012.' Specifically, the Obama administration expected GDP to grow 3 percent in 2012; the actual figure was 2.2 percent."

The timing here is important. The excessive optimism was not a 2010 story, it was a 2011 and 2012 story. The stimulus was in full force in 2010 and faded to near zero in 2011. The problem was not that the administration exaggerated the impact of the stimulus. The problem was that it underestimated the underlying weakness of the economy. It's good to see Samuelson mention this fact in his column, even if he might have done so inadvertently.