As professionals replace ideologues in Executive departments, look for improvements to well-being, but they won’t show up on GDP

Today, the competence boom and our baseline forecast.

Just a short note today as we prepare for a major renovation of the Demand Side Podcast. We are moving to a once a week, longer format beginning Wednesday morning, February 18, to hopefully consolidate our preparation time, leave room for some of the other necessary activities of life, and allow us to expand and improve our presence on the web, beginning with the Demand Side Blog, which has been dreadfully neglected.

We appreciate each of the faithful thirty-nine and very much enjoy doing this podcast.

COMPETENCE BOOM

The competence boom ushered in by the Obama administration ought not to be dismissed in its effect, even though it is likely to take hold only over an extended period of time.

We’ve talked before about the limitations of GDP as a metric for economic health. GDP reflects monetized activity in which goods and bads get the same weight — war and education, alcoholism and nutrition, and so on. Further, GDP can be ginned up by borrowing. We noted that one hundred percent of GDP growth under Republican presidents since 1980 has been on the back of increases in the federal debt. Again, efficiency may show up as a drop in GDP, as more efficient health care, for example, would result in the absence of growth in GDP numbers based on a treatment model.

So, too, competence will not show up on the GDP radar. Government will be blamed, not credited for better economic outcomes beceause they don’t make money for somebody.

Targeting the government is the great American game. Even now, after the greatest corporate market failure in absolute terms, if not relative terms, it is the government who is blamed. The architects of the bust couldn’t have government interference, and bought off the regulators. But when the collapse arrives, the response is not, “We take responsibility and we’ll do what we can to fix things,” but “You need to bail us out and not expect us to do anything that would not produce a profit.”

It has not been government spending on schools, police, fire, courts, roads, unemployment insurance or anything else. It is the waste, fraud and abuse in the private sector, in securitized financial instruments and the great housing and commodities bubbles, pricing things at twice their value and then cutting the rug out. Where is the great private investment of the past eight years?

These investments have turned to dust for no mechanism other than private market incompetence and corruption. Bush began with Enron and ended with the entire financial sector in a state of self-directed collapse. And who is talking about paying back the government for the bailout, perhaps by a financial transactions tax? Ha! Instead they are holding hostage the credit and money mechanism to exchange for complete exoneration from their folly.

WE suspect the competence boom will lead to major improvements, but THE major improvement needs to be the extrication of government from control by the corporate oligarchs in Finance, Drugs, Oil and other key sectors. Absent that, full efficiency will not return.

The selection of so many Clinton hands reflects a desire to get things in order as quickly as possible, and not a philosophical affinity with Clinton policies. In particular, it is hoped the Summers-Rubin philosophy and connections don’t cling too closely to the incoming officials.

One very good idea is using the Internet to expose as many government programs as possible to the inspection of the public. This could greatly increase efficiency, if at the cost of adding talking points to those who would demagogue the issues.

It is less than palatable when Republican Senators hold up some program or other — I should say a caraciture of some program or other — as an example of wasteful spending. They should be required to justify the Iraq War in the same breath. The waste, fraud and abuse is in the grandest scale possible.

And the balance sheet operations of the Fed ought to be on the same web site, rather than in some back accounting room that is operates only without lighting. What the Fed has done without oversight by elected officials is the next great scandal, just as Ben Bernanke is the last bastion of Bush era incompetence.

Now before we get to the baseline Demand Side Forecast, some observations on the passage of he most massive stimulus bill in American history. First, it is too small. Second, it is a remarkable political achievement for a president not in office for quite yet a month. And third, we have a bit of a different take about the political dance and the advent of post-partisan Washington.

Many have said that Mr. Obama was naive and inept by compromising early on tax cuts and reaching out in a bi-partisan manner to Republicans.

That aside, and in reference to Mr. Obama’s supposed naivite, we have noticed a strategy by our new president, which he employed both in the primary against Mrs. Clinton and in the general election, to go out of his way to be conciliatory and noncombative. He has made a strategy of always taking the first punch.

While we do not doubt his sincerity in wanting a more civil discourse, we do note the strength of position this allows him from which to counterpunch. Both in the primary and in the general election, his opponents came off as mean-spirited and petty. Polls routinely showed this. We believe he has again used this technique with regard to the Republicans in Congress.

Republicans, have said any bipartisanship was style not substance and the Democrats ran the show. We suspect the GOP desperately do not want to repeat the experience of the 1930s, by which we mean the demolition of Republican influence after a crash brought on by Republican market fundamentalist policies. Remember there were no Republican presidents between 1933 and 1953, twenty years, and only one between 1933 and 1969, a period of thirty-six years. Unfortunately they have no leadership, nor any positive message. The tired old strategies that have failed so well and the clear disconnect of some from the experience of the American people is not going to serve them well, no matter whether the economy recovers or not.

At least the Democrats are doing something.

Meanwhile Mr. Obama’s campaign promises on tax cuts, green energy and infrastructure are coming to fruition.

Now on to the Demand Side Forecast. This will be a regular feature of our weekly format.

THE DEMAND SIDE FORECAST IS PUBLISHED IRREGULARLY AND HAS NEEDED FAR FEWER REVISIONS THAN THOSE OF THE MAINSTREAM ECONOMISTS.

THREE DECADES OF STAGNATING MIDDLE CLASS INCOMES AND WEAKENING PUBLIC SECTOR CONTRIBUTIONS HAVE HOLLOWED OUT THE AMERICAN ECONOMY. FINANCIAL SECTOR EXCESSES BASED ON EXTREME BORROWING BY CONSUMERS, GOVERNMENT AND THE PRIVATE BUSINESS SECTOR FINALLY RESULTED IN THE CURRENT COLLAPSE. THE HOUSING BUBBLE BEGAN DEFLATING IN 2006. THE FINANCIAL SECTOR FOLLOWED IN 2007. A COMMODITIES BUBBLE ROSE AND FELL BETWEEN LATE 2007 AND MID 2008, FURTHER AND RADICALLY REDUCING INCOMES AND PUTTING SEVERE STRESS ON MAJOR U.S. INDUSTRIES. INEFFECTIVE AND COUNTERPRODUCTIVE POLICY FROM THE FEDERAL RESERVE DID NOT AVERT THE COMPLETE COLLAPSE OF THE FINANCIAL SECTOR IN LATE 2008.

BENEATH THE BUBBLE ECONOMY WAS REVEALED A DECREPIT SOCIAL AND PHYSICAL INFRASTRUCTURE, A WEAK MIDDLE CLASS AND A MANUFACTURING BASE GUTTED BY YEARS OF CURRENT ACCOUNT, THAT IS, TRADE DEFICITS.

CONSUMER DEMAND, BASED ON BORROWING, HAS COLLAPSED. CONSUMER DEMAND BASED ON INCOMES IS FAR OFF. THE UNITED STATES AS CONSUMER TO THE WORLD DISAPPEARED. THE EXPORT ECONOMIES OF ASIA AND PARTS OF EUROPE, THE COMMODITY ECONOMIES ACROSS THE GLOBE, AND THE DEVELOPING ECONOMIES BASED ON CAPITAL FROM OTHER NATIONS, FOLLOWED THE AMERICAN CONSUMER. NO EFFECTIVE ACTION EITHER FROM THE UNITED STATES OR THE WORLD EMERGED DURING 2008 EITHER FROM THE ADMINISTRATION OF GEORGE W. BUSH, THE FEDERAL RESERVE UNDER BEN BERNANKE, NOR THE INTERNATIONAL COMMUNITY. THE INAUGURATION OF BARACK OBAMA AS PRESIDENT IN JANUARY 2009 MARKED THE BEGINNING OF SERIOUS POLICY ACTION.

THE DEMAND SIDE FORECAST HAS BEEN ESSENTIALLY UNCHANGED EXCEPT FOR INFLATION SINCE A DOWNWARD REVISION IN MID-2008, REFLECTING A NEGATIVE OUTLOOK IN VIEW OF REPEATED INEFFECTIVE POLICY RESPONSE.

THE DEMAND SIDE FORECAST CALLS FOR SHARPLY HIGHER UNEMPLOYMENT THROUGH THE FIRST TWO QUARTERS OF 2009, REACHING A HIGH OF TEN PERCENT ON THE HEADLINE MEASURE AND SIXTEEN PERCENT IN THE ALL-IN UNDEREMPLOYED NUMBER. CONDITIONS SHOULD REBOUND SHARPLY IN THE LAST QUARTER OF 2009, PARTICULARLY IF AND WHEN THE FINANCIAL SECTOR WRECKAGE IS CLEARED AND A NEW AND FUNCTIONAL CREDIT SECTOR IS ESTABLISHED.

We notice yesterday from EPI

Real unemployment rate is probably close to 10% By Heidi Shierholz

In January, the unemployment rate was 7.6%. In the calculation of the official unemployment rate, however, only jobless workers who are in the labor force actively seeking work are considered. So, to the extent that workers have dropped out of (or never entered) the labor force because they felt they would not be able to secure meaningful work, the official unemployment rate understates weakness in the labor market. From January 2001 to January 2009, the labor force participation rate dropped 1.7 percentage points, from 67.2% to 65.5%. If the labor force participation rate had not declined over that period, today there would be an additional four million workers in the labor force. And if those missing workers were counted as unemployed instead of as not being in the labor force, the unemployment rate today would be 9.9%.

WE EXPECT STRONG EMPLOYMENT GROWTH TO BEGIN IN THE THIRD QUARTER AND CONTINUE THROUGHOUT 2011.

WE EXPECT THE HEADLINE REAL GDP NUMBER TO DROP TO MINUS FOUR OVER THE FIRST TWO QUARTERS AND BEGIN TO REBOUND STRONGLY IN THE FINAL MONTHS OF THE YEAR. MUCH OF THIS WILL REFLECT THE ENORMOUS DEFICITS NEEDED TO COMPENSATE FOR THE FINANCIAL MARKET CRASH AND THE DEATH OF THE AMERICAN CONSUMER. OUR EXCLUSIVE DEMAND SIDE METRIC — NET REAL GDP — WILL CONTINUE TO DROP THROUGH THE FIRST HALF OF 2010 AND REMAIN WEAK UNTIL REFORM TO THE TAX SYSTEM ALLOWS ADEQUATELY FUNDED GOVERNMENT.

INVESTMENT IN INFRASTRUCTURE, GREEN ENERGY AND EDUCATION WILL LEAD THE UNITED STATES OUT OF THE SUPPLY SIDE MAILAISE AND INTO AN ECONOMY THAT HAS A CHANCE AGAINST THE IMPENDING CHALLENGES OF GLOBAL CLIMATE CHANGE AND GLOBAL POVERTY. THE SOONER THIS TRANSITION IS MADE FROM THE CONSUMER ECONOMY TO A MIXED OR SHARED ECONOMY, THE MORE SECURE, PROSPEROUS AND SUSTAINABLE WILL BE THE LIVES OF THE NATION’S CITIZENS. THE SOONER THE WORLD RECOGNIZES THE AMERICAN CONSUMER WILL NOT RETURN IN HIS PREVIOUS FORM, THE SOONER ESSENTIAL STRUCTURAL CHANGES CAN BEGIN.

We will develop this as events warrant.

Remember to look for us on Wednesday mornings from here on out.

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