Some of the prescriptions we citizens are given for a strong economy are mutually exclusive. We need to spend more. No, we need to save more. No, we need to borrow more. We should invest. No, we should keep cash on hand.
It's even more opaque in the realm of public policy advisements. We should send more money to state and local governments. No, we should boost defense spending. We should increase unemployment benefits. No, we should create government jobs. We should secure living wages. No, we should limit compensation. We should spend more. No, we should keep to our budget. We should own the banks. No, we should get out of that racket, stat.
What's a person to think?
Well, why don't we run some correlations on the past 60 years of financial history data and get some answers for you there?
Because once you do that, and muddle through the clutter. The answer gets realllllll obvious.
Anything that maximizes per capita personal disposable income for the most number of consumers is probably a really good thing for the economy.
Any plan that does not do this, probably isn't very good.
Because if people don't have money to spend, or save, or invest, then it all falls apart. All of it.
The Data
Using U.S. Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), Census Bureau (Census) and St. Louis Federal Reserve (Fed) data, I compiled a pool of historical statistics from First Quarter 1948 through Fourth Quarter 2008.
That's 244 quarters, covering a vast range of economic conditions and cross-tabs. Don't let the talk of "unprecedented" crisis fool you; the laws of human behavior have not suddenly changed because banks got caught making bets they shouldn't have. This has happened many times before and will happen many times again before human history has completed its course.
It just hasn't been so obvious an epic fail before.
Correlates of Gross Domestic Product - A Way to Sort our Options?
Since we are all in this together, I'm sticking with real (2005 chained dollars) GDP as the variable, from 1 to 8 quarters (GDP+1 through GDP+8) into the future. For purposes of this discussion, I will be comparing correlations for GDP+1 and GDP+8. For right now, that means what variables (such as, say, unemployment, Aaa yield rates, nondefense Federal government spending, and lots more) seem to be the strongest correlates with GDP as it will be at the end of June 2009, and what variables seem to have the strongest like to what it might be come March 2011.
Mainly, I want to see what different prescriptions might arise, if rank-ordering correlation coefficients is assumed to be a rational basis for prioritizing solutions for the current economic crisis.
The big assumption remains that we are not suddenly in a transcendent economic situation where everything we used to know is now wrong.
I don't buy that for a second. In fact, I believe that dismissing historical lessons is why we are in this situation in the first place.
Gross Domestic Product
Gross Domestic Product, in a nutshell, is the sum of
- Personal Consumption
- Private Investment
- Net Trade (Exports and Imports) and
- Government spending
When the BEA puts out its stats, you get the following more detailed categories:
- Gross domestic product
- Personal consumption expenditures
- Personal Consumption - Durable goods
- Personal Consumption - Nondurable goods
- Personal Consumption - Services
- Gross private domestic investment
- Private Investment - Fixed
- Private Investment - Nonresidential
- Private Investment - Nonresidential Structures
- Private Investment - Nonresidential Equipment and software
- Private Investment - Residential
- Change in private inventories
- Net exports of goods and services
- Exports
- Exports - Goods
- Exports - Services
- Imports
- Imports - Goods
- Imports - Services
- Government consumption expenditures and gross investment
- Government - Federal
- Government - Federal - National defense
- Government - Federal - Nondefense
- Government - State and local
Which of these you'd like to see promoted first and most depends very much on who you are and what your interests are... or whose interests (perhaps, say, your country's? Your community's? Your children's?) you place alongside or ahead of your own.
But we're interested in helping everyone out in aggregate, here. To come up with a systematic rationale for saying - we should do this first, and most. Something empirically testable, grounded in past American economic experience and, we hope, transparent and fair and effective.
There are other variables, from the Personal Income data tables from the BEA that overlap and add detailed texture to the official economic picture of the past six decades.
Exogenous Factors - Structural Changes to the Economy?
These statistics take place in a context, which brings us to exogenous factors. These out of the box variables can have a huge impact on the vitality of an economy. Incorporated here:
- Life expectancy (death rates by gender)
- Education (years attained, by gender)
- Dow Jones Industrial Average as metric for market performance
- Unemployment
- Duration of unemployment
- Civilian population
- Civilian participation rate (not precisely the opposite of unemployment)
- Short bond yields (3month TBILL)
- Aaa and Baa credit yields as metric for credit worthiness
- Energy prices (West Texas crude prices)
- Strength of manufacturing sector using Purchasing Managers Index (PMI)
- Demand/Inflation metric using PPI and CPI (producer and consumer price indices)
Top 10 Things You'd Do if you were rational and focused on the next quarterly earnings and nothing else
- The key is increasing disposable personal income. This is the goal.
- Incentivize compensation increases, not reductions
- Focus on private sector jobs creation
- Bloc disbursements to state and local governments
- Discourage drastic deferrals of non-durable consumer spending to prepare for possible needs, not leaving cash idle. Stocking up for possible hard times can be done thoughtfully and in advance, and actually mitigate risk to overall economy.
- Encourage short-term supplements to wages and salaries (front-load compensation or benefits? Stimulus checks?)
- Support living benefits programs from private and public insurance. Corollary - compel timely disbursement of obligations from private insurers.
- Encourage consumption of services to be same. Don't put off dental and doctor visits, haircuts, etc. These are the easiest things to defer so many people do so; the impact is felt very quickly for these and other service providers and those who depend on them.
- Public sector jobs creation
- Increase government purchase of goods, services and investment in economy (Stimulus spending across the board).
Top 10 Things You'd Do if you were rational, needed some immediate results but wanted to build for sustained recovery
This produces a somewhat different list.
- Discourage drastic deferrals of non-durable consumer spending to prepare for possible needs, not leaving cash idle. Stocking up for possible hard times can be done thoughtfully and in advance, and actually mitigate risk to overall economy.
- Public sector jobs creation, specifically nondefense projects
- Increase government purchase of goods, services and investment in economy (Stimulus spending across the board). Ditto on the nondefense angle.
- Promote an attitude of neighborliness, community support, charitable giving. Do it now, not when it's desperate - both the asking and the giving. It's not just good for the recipient, it's good for the overall economy, and therefore good for you.
- Encourage purchase of consumer durables, with a focus on ways to increase disposable income (ex might be a breadmaking machine)
- Promote increasing per capita disposable income
- Increase not reduce disbursement of government social benefits (accelerate disbursements, perhaps freeze or even lower eligibility age for benefits)
- Promote continued participation in international trade; importing services is valuable knowledge transfer, keep doing this. Obviously, promote exports of services, also as this is a strong, strong card of the American economy.
- Promoting exports of goods doesn't hurt at all, either.
- Avoid deflationary cycle if at all possible
Now, let's just say you are a long-range planner type
What do you choose to make America strong and prosperous in the 1-2 year planning range?
I'll just toss in the entire list for this.
- Increasing disposable personal income
- Incentivize compensation increases, not reductions
- Bloc disbursements to state and local governments
- Spend same, just more needfully (less junk more produce, more dry goods)
- Expand government payroll
- Supplements to wages and salaries
- Private sector jobs creation
- Support living benefits programs from private and public insurance
- Increase government purchase of goods, services and investment in economy (nondefense pleez, kthbai)
- Buy durables to increase your disposable income
- Ask for help if you need it - from govt, charities, family, friends, give it if asked if you can
- Increase not reduce government social benefits
- Encourage consumption of services
- Encourage raising contributions to worksite benefits like 401K, insurance to secure household financing in case of unemployment or disability or loss of life
- Promote fixed investment
- Encourage new business starts of all kinds
- Encourage nonresidential investment
- Encourage corporate use of equipment and software purchases with eye to productivity improvements and appropriate system management and upgrade
- Promote not demote international trade, promote exports of goods
- Encourage taking advantage of low rates where available, and where qualified
- Promote exports of services
- Importing services is valuable knowledge transfer, keep doing this
- Avoid deflationary cycle if at all possible
- Home ownership, improvements good. Encourage right-sizing and some of this can be upward in this market. Incentive ownership but disincentive new builds for time being
- Secure innovation and entrepreneurship. Creative programs to encourage use of existing commercial real estate
- Increase vet's benefits
- Encourage investment as source of dividends. Cap gains not affected here, tax on dividends tweak?
- Increase defense spending, focus on missions that add long run value to American interests. Defend SOMETHING valuable
- Grow eligible civilian population for workforce - two ways are reduce army, prison and student population
- Increase SUCCESSFUL years of participation in education
- Promote investment in equities
- Be patient
- Increase civilian participation in workforce
- Government unemployment insurance quick but there are better ways to do the same with the money at hand - create the jobs
- Encourage family assistance but there are better ways statistically to convert this to economic performance.
- Encourage renting or taking on boarders, a lot of people looking for affordable housing. Saves them money, makes you money.
- Domestic energy production - energy independence!
- Promote farm incomes - that means private proprietors not Monsanto.
But want about teh Trillions for the Banker Cats
Oh, just in case you were wondering?
I couldn't find "Bail out bad bets by banks anywhere". The closest variables I had - those relating to debt instruments and bond yields, were surprisingly weak correlates of GDP.
But this was the EASY part. I wuz teh Rational.
Conclusion - But what if you were Republican?
Well, then all of this is really quite easy and you are wondering why someone wasted so much time digging into the details and history when the answer is so stupefyingly obvious.
No, really.
If you are Republican, this is your Three Month Plan
- Lower taxes
- Less regulation
- Redistribute what remains of federal wealth to subsidize state and local level tax cuts.
- End public social insurance
- Cut government spending and jobs
(See: Basic GDP formula and tell me what happens if the "G" spending goes down when C consumption and I investment are already low and T trade is net negative.)
But recall - you are only looking three months ahead so what do you care?
Also, I left out the part about diverting taxpayer equity to profit the very banks and financial entities that bet your superpower status away.
And with that, I'm gonna wrap this puppy up and hand it over to open discussion. :)