Monday, June 27, 2011

Fact-checking the Romney campaign

On June 13th, Mitt Romney policy director Lanhee Chen posted a blog on the Romney web site titled "Taxed and Spent: American Workers Suffering Under Obama". Following is the first paragraph:

President Obama’s policies have failed the American people. And nowhere has this failure been more evident than in this Administration’s handling of our nation’s economy. In the month that President Obama was inaugurated, the unemployment rate was 7.8%, the national debt stood at $10.6 trillion, and the average price for a gallon of gas was $1.83. Today, in the third year of his presidency, unemployment has ballooned to 9.1%, the national debt tops $14 trillion, and Americans are paying double—$3.70 a gallon—for gas.

Technically, the numbers appear to be correct. This page on the Federal Reserve web site shows that the employment rate was 7.8% on January 1st, 2009 and is 9.1% as of May 1st, 2011. However, note that the unemployment rate reached 9.4% in May, just 4 months after Obama was inaugurated and reached the maximum of 10.1% in October, just 9 months after. As I previously discussed at this link, it likely makes far more sense to allow some time lag for economic policies to take effect and/or to measure that effect over full business cycles. According to the National Bureau of Economic Research (NBER), the recession ended in June of 2009. The unemployment rate was 9.5% at that time so it has improved since then. This improvement can be seen in the following graph:

unemployment rate

The graph also shows that unemployment was already on a steady rise at the time of the Obama inauguration.

Looking the numbers up at TreasuryDirect, the national debt was about $10.6 trillion on January 20, 2009 and is now about $14.3 trillion. As with the unemployment rate, however, it makes sense to allow a time lag. The policies for fiscal year 2009, which ended on September 30, 2009, were proposed by President Bush and passed by the existing Congress. The prior link shows the national debt on October 1, 2009, the first year of Obama's first fiscal year, to have been $11.9 trillion, a full $1.3 trillion above the number given on Romney's blog. This seems like the earliest point at which Obama's performance should be measured. As with the unemployment numbers, it can even be argued that the first two years, 2009 and 2010, should to be skipped or ignored as they are heavily effect by prior economic policies.

Finally, the graphs at this link and this link suggest that the numbers for the price of gasoline are approximately correct. However, note for the second graph that the price was $4.26 per gallon on 7/7/2008, just a few months before Obama's inauguration and happened to have been near a recent low during the inauguration. In addition, the recent rise is corresponds with the recent conflicts in Libya and other oil-producing states. Hence, it seems difficult to draw any conclusions from the change in gas prices.

All of above shows how important it is to look at as much data as possible when analyzing economic issues and not just look at a few, isolated numbers. This is especially the case when those numbers come from a partisan source and may be cherry-picked or otherwise manipulated.

Note: There is a discussion of this post at this link.

Thursday, June 23, 2011

The Long-Run Budget Outlook (2012 Budget)

The U.S. Budget for fiscal year 2012 was released on February 14, 2011. As in prior years, it included the Analytical Perspectives which contains a section on the long-run budget outlook. The following graph shows the outlook for federal receipts, outlays, and debt held by the public as projected by this section.

Projected Federal  Debt, Receipts, and Outlays: 1980-2085

The actual numbers and sources for this and the following graph can be found at this link. As can be seen, receipts are projected to rise and spending is projected to drop over the next 10 years, causing the deficit to narrow to 3.1 percent of GDP by 2020. However, outlays are then projected to begin a steady rise, causing the deficit to reach 12.3 percent of GDP by 2085. This is projected to cause the debt held by the public to rise to 239.9 percent of GDP. This is more than double the prior high of 108.7 percent of GDP reached in 1946, at the end of World War II.

Still, this is a major improvement over the projections from the prior budget. The dashed lines in the above graph show the receipts, outlays, and debt held by the public as projected in the prior budget. As can be seen from the third table at this link, the debt held by the public had been projected to rise to 829.7 percent of GDP, over seven times the prior high reached in 1946. What was the cause of this major improvement from the prior budget? On this topic, the first and third tables at the above link show the projected receipts and outlays from the 2012 and 2011 budgets. Following is a copy of the fifth table which shows the change in the projected receipts and outlays from the 2011 to the 2012 budget:


CHANGE IN LONG-RUN BUDGET PROJECTIONS FROM THE 2011 TO THE 2012 BUDGET: 1980-2085
(percent of GDP)
------------------------------------------------------------------------
1980 1990 2000 2010 2020 2030 2050 2060 2085
------------------------------------------------------------------------
Receipts........... 0.0 0.0 0.0 0.1 0.3 0.0 0.5 0.8 2.5
Outlays............ 0.0 0.0 0.0 -1.6 -0.7 -1.5 -8.5 -15.0 -47.5
Discretionary.... 0.0 0.0 0.0 -0.6 -0.5 -0.6 -0.6 -0.6 -0.6
Mandatory........ 0.0 0.0 0.0 -1.0 -0.2 -0.3 -4.4 -7.3 -19.8
Social Security 0.0 0.0 0.0 -0.1 0.1 0.1 0.2 0.3 0.8
Medicare....... 0.0 0.0 0.0 0.0 -0.7 -1.0 -4.5 -6.7 -16.7
Medicaid....... 0.0 0.0 0.0 0.0 0.4 0.4 -0.2 -0.8 -3.3
Other.......... 0.0 0.0 0.0 -1.0 0.1 0.2 0.1 0.0 -0.5
Net Interest..... 0.0 0.0 0.0 0.1 -0.1 -0.4 -3.5 -7.1 -27.1
Surplus/Deficit (-) 0.0 0.0 0.0 1.7 1.1 1.4 8.9 15.8 50.0
Primary Surplus/Def 0.0 0.0 0.0 1.8 0.9 0.9 5.5 8.8 22.9
Debt Held by Public 0.0 0.0 0.0 -1.4 -0.5 -8.4 -73.8 -153.7 -589.8


As can be seen, there is an improvement of 50% of GDP in the projected deficit in 2085 (from 62% to 12% of GDP). Of this 50% of GDP, nearly all (47.5% of GDP) is from lower projected outlays. Of this 47.5% of GDP, 27.1% is from lower Net Interest, 19.8 is from lower Mandatory Spending, and a mere 0.6% is from lower Discretionary Spending. Finally, of the 19.8% of GDP from lower Mandatory Spending, a majority of 16.7% of GDP is from lower Medicare spending and a much lower 3.3% of GDP is from lower Medicaid spending. The lower Medicare and Medicaid spending is largely due to passage of the Affordable Care Act (ACA). This is described in the following excerpt from pages 50 and 51 of the Analytical Perspectives:

Medicare and Medicaid.— In the long-run projections in this chapter, different assumptions about the growth rate of health care costs are made. In the base case, a continuation of current policy assumes that the provisions of the ACA are fully implemented, limiting health care costs in the long run compared with prior law. The long-run Medicare assumptions are essentially the same as those used in the latest Medicare Trustees’ report (August 2010), which is consistent with how these long-term budget projections have generally been made in the past. The Trustees’ projections imply that average long range annual growth in Medicare spending per enrollee is 0.3 percentage points per year above the growth in GDP per capita. This growth rate is significantly smaller than their previous projections—a reduction they largely attribute to the ACA.

This section goes on to describe the relevant reforms in the ACA:

Along with the rules for Medicare, there are a number of reforms in the ACA that experts believe could produce significant savings relative to the historical trend and that would affect medical costs more broadly. One is an excise tax on the highest-cost insurance plans, which will encourage substitution of plans with lower costs, while raising take-home pay. There is also an array of delivery system reforms, including incentives for accountable care organizations and payment reform demonstrations that have the potential to re-orient the medical system toward providing higher quality care, not just more care, and thus reduce cost growth in the future. Finally, the ACA established an independent payment advisory board that will be empowered to propose changes in Medicare should Medicare costs exceed the growth rate specified in law. The proposed changes in Medicare would take effect automatically, unless overridden by the Congress. Because of these broader reforms, Medicaid spending per beneficiary and private health spending per capita are also projected to slow, though not as much as Medicare.

The following graph shows the growth in outlays that are projected, given the ACA reforms and all other assumptions of the 2012 budget:

Projected Federal Outlays: 1980-2085

As can be seen, Medicare and Medicaid costs do grow somewhat until about 2040 but seem to pretty well stabilize (as a percentage of GDP) from then until 2085. This is a large improvement from the second graph at this link which shows the prior year's projections that Medicare and Medicaid costs would grow rapidly until 2085. This shows the importance of insuring that the reforms of the ACA (or similar reforms) take place and have their projected effect. However, the above graph also shows that, even though non-interest spending is projected to stabilize at just above total projected revenues, Net Interest is projected to keep growing, pushing the deficit ever higher. This is because, as can be seen in the first graph above, the debt on which that interest is paid is projected to keep growing. This shows that non-interest spending needs to be stabilized at a lower level and/or receipts need to rise. Regarding this, page 50 of the Analytical Perspectives states the following:

Without further adjustments to spending and revenue, the deficit will rise relative to the overall economy and the debt-to-GDP ratio will far exceed its previous peak level reached at the end of World War II. Reforms are needed to avoid such a development. The Administration aims to work with the Congress so that the ratio of debt to GDP stabilizes at an acceptable level once the economy has recovered.

Note: There is a discussion of this post at this link.

Tuesday, June 7, 2011

Long-term Unemployment of a Year or More

On June 3rd, an article titled "Nearly 1 in 3 Unemployed Out of Work More Than a Year" was posted on the WSJ (Wall Street Journal) Blogs. Following is the second paragraph:

Even as some people are re-entering the work force, some of the extremely long-term unemployed may be giving up. The number of people unemployed for more than a year dropped a bit last month to 4.006 million from 4.076 million. They now represent 32.6% of the unemployed.

I found this especially interesting as I've never seen data for the number of people unemployed for more than a year. The following graph shows unemployment divided up into the four durations commonly released by the BLS (Bureau of Labor Statistics):

Weeks of Unemployment: 1948 to present

Links to the actual data used to create this graph can be found at this link and on the BLS web site. As can be seen, the longest duration is for workers unemployed for 27 weeks (about a half year) or more. And, although the number of such workers reached record levels in early 2010, the number appears to have dropped recently. In fact, the data shows that the number of workers unemployed for 27 weeks or more reached a record of 6.71 million in May of 2010 and has since dropped to 6.2 million. However, this drop seems somewhat at odds which the following graph which shows the average and median duration of unemployment since 1948:

Average and Median Duration of Unemployment: 1948 to present

As before, links to the actual data used to create this graph can be found at this link and on the BLS web site. As can be seen, the median duration of unemployment appears to have dropped since early 2010 but the average duration of unemployment has kept on rising. In fact, the data shows that the average duration of unemployment has reached a record level of 39.7 weeks. How can this measure continue to rise while the others have begun to drop? The most reasonable explanation would be that the number of the very long-term unemployed has continued to rise, pushing the average duration higher.

As I mentioned, I've never seen data for the number of people unemployed for more than a year. The article referenced at the start of this post does not give the source for those numbers. A bit of googling turned up this page on the BLS web site which contains a chart (Chart 2) showing the percent of workers unemployed for a year or more, followed by a link to the numbers through June of 2010. A further search of the BLS web site turned up updated numbers for Series LNU03026300, showing the percent of the unemployed who have been out of work for more than a year. The following graph was obtained on that page by changing the time span to the maximum available:

Percent of the Total Unemployed who have been Unemployed for 52 Weeks or More



As can be seen, the percent of the unemployed who have been out of work for a year or more is more than double its prior high since 1976. In fact, the data shows that it reached a record level of 32.6 percent in May, more than double the prior record of 14.8 percent reached in October of 1983.

The above graphs show that, while unemployment continues to be a problem, very long-term (more than a year) unemployment is an especially serious problem. This would suggest that long-term unemployment may require special attention in the effort to put the unemployed back to work.

Note: At the time of this posting, all of the graphs show data through May of 2011. However, the first two graphs graphs are dynamically retrieved from the Federal Reserve web site and their end dates should continue to increase. The last graph, however, is static and its end date will remain May of 2011.

Sunday, January 16, 2011

Effect of the Bush Tax Cuts on Revenues and GDP (updated)

There have been three major tax cuts under Bush. Briefly, the 2001 tax cut created a new 10% individual tax rate and phased in the lowering of individual tax rates. It also phased in an increase in the child tax credit, marriage penalty relief provisions, an increase of the estate tax exemption, an increase in the IRA contribution limit, and the repeal of limits on itemized deductions and personal exemptions. The 2002 tax cut was chiefly aimed at business, creating 30% expensing for certain capital asset purchases, extending the exception under Subpart F for active financing income, and increasing the carryback of net operating losses to 5 years. Finally, the 2003 tax cut lowered the top individual income tax rate on dividends and capital gains and accelerated most of the phased-in provisions of the 2001 tax cut. For a more complete description of the tax cuts, see page 14 of Revenue Effects of Major Tax Bills.

Enough time has now passed that it's possible to take a look at the effect of these tax cuts on government revenues. The growth of receipts by source, outlays, and GDP over every 8-year period since 1940 is shown in the following graph:

Real Growth in Receipts, Outlays, and GDP (8-year spans): 1950-2015

The actual numbers and sources can be found at recgro8y.html. As can be seen in the graph and second table, real (corrected for inflation) individual income tax receipts declined 25.06% from 2001 to 2009. Even real total receipts declined 13.93% over that period. Finally, real GDP grew just 13.36% from 2001 to 2009. This was the lowest real GDP growth over any 8-year span since 13.33% from 1966 to 1976. Hence, although it's been just about eight years since the 2001 tax cut and six years since the 2003 tax cut, the evidence to this point is that the Bush tax cuts decreased revenues over what they would have been, at least over the short term. This was true even in my prior analysis based on data through 2007, before the financial crisis of 2008.

About Me

I became interested in U.S. budget and economic matters back in 1992, the first time that I remember the debt becoming a major issue in a presidential election. Along with this blog, I have a website on the subject at http://www.econdataus.com/budget.html. I have blogged further about my motivations for creating this blog and website at this link. Recently, I've been working on replicating studies such as the analysis at this link.

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