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Real Discretionary Spending
The Great Recession is giving us a lesson in just how "discretionary" most spending is. Auto sales fell off a cliff in the last three months. It was obviously easy for most people to postpone the purchase of a car, despite massive sales incentives. But surprisingly the same is true for many medical procedures.
Forty-four percent of hospitals have seen declines in surgeries, with hip procedures showing the steepest drop-off at 45%, according to another new survey. As a result, 47% of the hospitals surveyed expect to make staff cuts, and 69% plan to cancel or delay equipment purchases, according to the survey by Novation, a company that manages supplier contracts for hospitals.
One of the things the Obama Administration has to be careful of in both the Auto bailout and the Health Care investments is to not pour money into industries that are suffering from massive overcapacity. The nation's savings rate has rocketed to 5% from zero in four months. Assuming we will go back to our old profligate habits of buying a new car every three years or getting plastic surgery on a whim is probably a bad bet.
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Jon, that's a very good point. It's likely that we will not go back to our old habits after this is "over". And that could make things much worse (or, rather, prevent it from ever being "over").
I just read an interesting article about this by Jon Markman on MSN:
http://articles.moneycentral.msn.com/Investing/SuperModels/how-savers-could-doom-the-economy.aspx
It talks about "an obscure but well-regarded model of economic behavior called the Levy-Kalecki formula", which basically says that "high levels of saving and a decline in borrowing can lead to the devastation of profits".
It implies that if the savings rate goes to 7%, it could push the S&P down to 550 (or Dow 5,300), and if the savings rate goes to 10%, we would see the S&P at 420 (and Dow 4,000). As things get worse, the savings rate goes up even more.
Believers in this theory say that the stimulus plan we just passed falls short by about $1 Trillion.
Scary.
-- ARG
March 4, 2009 12:47 PM | Reply | Permalink
This tells us that what we need to be doing is what many have proposed: Light rail and buses in cities, intercity rail to go cross-country, national health, and an energy infrastructure that takes advantage of wind, tides, currents, and geothermal wherever possible. None of these is consumption-based. They all create highly value-additive work at the front end, and involve people working in operations in the long term.
They are not a panacea. By themselves, they are only part of a set of solutions. A vital part, to be sure, for multiple reasons, and yielding long-term benefits well beyond their upfront investment outlays.
Getting out of this mess is not going to be simple. It can be done - if we approach it with some vision and some determination.
March 4, 2009 1:00 PM | Reply | Permalink
We are now entering the realm where the "smartest people in the room" are going to kill the economy. The economy isn't physics, it doesn't conform to mathematical models. It's sociology.
It's the study of what a person will do with a dollar in a given set of circumstances. But it has to recognize that each individual will likely do something different than predicted. Human nature is not strictly quantifiable. Each individual's history and biases are too numerous to catalog in an equation.
So here we are with Government spending untold sums on vague premises to be paid for, primarily by people making over $250,000. It's a redistributionist's dream. Who are these people?
According to this from the CBO it comes to about the top 15% of earners in the US. (educated guess) Halfway between the top 10% and top 20%.
That 15% group pays roughly 60% of all the individual Fed taxes including SS. That's fair according to quite a few here. But there's a caveat. If that 15% feels threatened like the doctor in the article, and goes on a spending strike, they have a huge influence on the health of business, and tax revenue. The government is now leveraged like a bank. A very small portion of the populace controls the majority of spending and taxes.
It would seem prudent not to scare the bejeesus out of your main income stream, but the "smartest people in the room" expect people to act a certain way. If they don't... there really isn't a plan "B".
So sure, raise those taxes, kill those exemptions, charge for carbon credits and tax energy some more. Drive down the value of people's investments and threaten them with rationed healthcare. After all, "we're smart and we have a model."
Right. remember the Long Term Capital implosion a while back? Started by two Nobel winners. Worse, stupid people gave one of them more money for a new fund. Kaboom.
To the Old Guy. Do you actually think the doctor in the article linked by ARG give a rat's patootie about something that would take a decade, and he would never use? or some science fiction energy generation scheme with no current feasibility? What have you got that will fix the mood of the top 15% by next week?
March 4, 2009 1:53 PM | Reply | Permalink
You're still advocating for the stupid? Even they must be embarrassed to count you as a member.
Really, put down the Cheetos, wipe the dust and drool off your chin, and come up out of your mother's basement some time. If only because you're long overdue for a shower.
Yes, it's an ad hominem reply. I don't respect you, why should I bother being nice to you?
March 4, 2009 2:38 PM | Reply | Permalink
Golly, shooter is off by less than a factor of 10. In 2006 (and I expect things haven't changed much for this year) a little under 2% of US households had incomes over $250K, according to the census bureau.
And they're going to see an increase of 3 percentage points in their tax rate on income over $250K. How will they possibly effing function?
What's funny to me is that George Bush and the leaders of the congressional GOP swore up and down that their tax cuts would expire in 2011 as a condition of getting them passed. Now, when a new president wants to fulfill their promise, they scream bloody murder. What they're really screaming is "We're liars! Don't believe a word we say!"
And yes, the real reason we're going to need a lot more infrastructure and other investment is that in so many areas people are finding out that consumption and welfare are not particularly correlated. (Of course in other areas people found that out years ago; they just weren't upper-class people, so it didn't count.)
March 4, 2009 4:12 PM | Reply | Permalink
This is good. Factcheck.org gives the same number with extras.
Actually the difference is from 39.6% up from 35% currently. That would be 4.6% not 3. Tsk. Add in new deduction phaseouts, a likely bump in FICA to all salary, and say California's income tax rate of 9.3% and a taxpayer could see anything over $250k taxed at 57.5% (Guess). That would be just on income. Government would get more than half. Not to mention taxes on sales, property, transfers, cars, cable, phone, and whatever else.According to them that mere 2% earns 24% of income while paying 44% of all Fed taxes including SS. This sharpens my point nicely. 2% controls almost half the tax revenue. And that 2% is going on strike. This is going to be fun.
Is it any wonder consumption is tanking? It's not a good idea to spook one's Goose into paralysis. Thanks for the help, Paul. Heh.
March 4, 2009 5:03 PM | Reply | Permalink
What percentage of consumer spending is done by those top 2% of earners?
I don't know the answer, but it's not 24%. Not even close.
Shooter, you're missing the point behind Jon's post and the article I linked to. It isn't about taxes. Period.
-- ARG
March 4, 2009 5:09 PM | Reply | Permalink
57.5%? Heaven forfend we should return to the tax rates of the 1960s, when as we all know the economy was in the toilet. (And when less than a fiftiethof households had not managed to trouser almost a quarter of total national income.)
I have to admit, also, that I don't fully understand the notion that increasing someone's taxes makes them work less hard. In my bracket, when some external force reduces someone's income, they work harder if they can, so that they still have the same amount of money to spend at the end of the year. I guess for people who have more money than they think they need, the incentives are different.
On the other hand, from a purely market perspective this is a great thing: if the work is out there and needs doing, other people who haven't reached the magic $250K cutoff, or who for some reason feel they're better off with more money even if it's less more money than before, will be doing that work and getting paid for it. So you'll have a nice leveling effect independent of the direct effects of taxation, and it's generally agreed among economists that societies with less income inequality are healthier, all other things being equal.
(and sorry, I know I shouldn't be feeding the troll, but he was so fact-free the first time around.)
March 4, 2009 8:50 PM | Reply | Permalink
Neither of the quotes you post suggest that the "panic" is the result of the deficit. In fact, no one suggested a "panic" of any kind.
The non-panic predicted is, in fact, a natural reaction to the economic downturn. People aren't fretting about the long-term consequences of the increased national debt. They're worried about losing their jobs NOW, and having enough money to deal with that. So they save more. But that makes the economy worse (because 70% of economic activity involves consumer spending). And the worse the economy gets, the more the people save. It becomes a spiral, a self-perpetuating feedback loop.
The point is that in order to break this cycle, the government should be taking much bolder steps, and spending much more money -- according to those who believe in this model of behavior.
The tax issue you are flogging has nothing to do with this. The small additional tax on the wealthy will not reduce total consumer spending significantly. Most spending is done by the poor and middle class.
-- ARG
March 4, 2009 5:06 PM | Reply | Permalink
You're right that this isn't totally about taxes, But when the President publicly singles out a group for punishment, it tends to concentrate the mind.
Too all:
Actually I'm curious to know whether most think this is trickle up economics, and if not, why not.
March 4, 2009 5:43 PM | Reply | Permalink
But the very next line says "Yet it's becoming increasingly clear that the dispute will be moot..."
Translation: "BUT IT DOES NOT MATTER!"
So the very quote you cite makes my point -- the article is NOT about taxes!! And it is not the case that it's not "totally about taxes". It is not about taxes at all! The man is saying that the raging debate about taxes and class warfare DOES NOT MATTER (for the reasons the rest of the article goes on to explain).
This tax issue is clearly all you can think about. But it is not the point of Jon Taplin's post, nor Jon Markman's article. So please go hijack some other thread to rant about taxes. Oh wait, you already have.
-- ARG
March 4, 2009 6:19 PM | Reply | Permalink
My, my. Feeling a little testy today? Tsk, tsk.
I'm saying taxes do matter, and if you don't like it, too bad. You and Taplin can tut-tut about spending declines, and at some point one of you will ask why the stimulus isn't working and what can be done about it.
I think I'll save your last response for just that moment.
March 4, 2009 7:26 PM | Reply | Permalink
Shooter-You are just trotting out the old saw that if you raise taxes on people earning more than $250,000 a year, you will kill their incentive to work.Likely story. In the 1950's when the American economy was growing at the fastest rate (one we have never equaled since then) the top marginal tax rate was 80%+.
Maybe you earn more than $250K per year so you can gripe, but don't give us that trickle down nonsense. We didn't just fall off the turnip truck.
March 4, 2009 8:59 PM | Reply | Permalink
The reason we grew so well in the 50's is because we were the last standing intact economy. Bombing one's competitors into rubble gives one a competitive edge, not higher tax rates.
Actually you have seem to have little idea how money works in real life, so yes, I think you just fell off the turnip truck. You seem surprised at how much of the economy reflected wealth large enough to support all that consumption.What I'd like to know, is whether you and others consider this spending to be trickle up economics.
If not, why not. You've declared trickle down to be nonsense, are we now experiencing whatever you consider more appropriate?
March 4, 2009 10:09 PM | Reply | Permalink
Spisst- look around,
we're once again the last standing economy. Bombing ones competitors with your toxic assets will give you that advantage.
Get ready for 39%, and thats likely just the beginning. Where the f--k you gonna go?
And I'll take the bait. Its what always happens when the rich take too much, noone else can buy anything and then suddenly we all realize we are actually poor. We have to start over and build up widespread demand, which means trickle up (and yes that capital will come from the rich). It is no coincidence that every crash is foreshadowed by the highest levels of inequeity seen since the last crash.
Of course we could just go back to serfdom with the few lords holding everything and zero economic progress, that probably appeals to you. But funny thing is that is usually followed by a charismatic leader who wipes out all the royalty (Or a specter who wipes it all out). Just the nature of society it seems.
Your right, 'human nature is not strictly quantifiable', hence arguments over the relative merits of a tax tweak here or there are somewhat ridiculous, particularly in times of upheaval. The pendulum swings, as it should because the current direction is untenable and undesirable.
Don't worry the rich will still be better off than the rest of us; and in human psychology it is is in that comparison that ones' success is defined.
March 5, 2009 2:26 AM | Reply | Permalink
God, this is a silly argument!
We have had an unbalanced economy -- nationally and internationally -- in which unusually high profits (and incomes) were sought and acquired by non-real economic actors -- that is, financial interests.
These financial interests goosed the economy by lending "money" created out of leverage. We are now deleveraging.
What more do we need to know?
March 4, 2009 11:18 PM | Reply | Permalink
It's about to get worse.
March 5, 2009 10:55 AM | Reply | Permalink
Hey Taplin,
just in case you're reviewing, "eds" informed me on your previous thread that I was out of bounds to protest your use of Fuhrer as a label for Limbaugh. After thinking about it, he might be right. Obama is the leader of the Democrats (guide) so he would be a Fuhrer too, right?
So, in references to Obama from here on I'll just call him Fuhrer. When complaints start in I'll be referring them to you as the style setter. Like so.
And after I protest vociferously....
So if you have a problem with this please address your complaints to Mr. Taplin.
You reap what you sow sport, and I'm expecting a bumper crop this year.
March 5, 2009 10:54 AM | Reply | Permalink
Shorter shooter: "You have the right to remain silent. Anything you say can and will be used against you in the future."
Get a life, dog.
-- ARG
March 5, 2009 11:20 AM | Reply | Permalink