The Bulls Are Charging!
Photo Credit: Charging Bull — NYC via photopin (license)/ Sam Valadi

Every now and then, I experience  a modicum of doubt about my pessimistic picture of the economy. In an effort to persuade myself I am not insane, given the many optimistic voices out there, I am writing this essay.     

The Sunny, Optimistic Views of the Economy

In fact, there are a great many economic optimists who are easily found on the internet. Some are stock dealers, who would like to sell you some stock. Others like President Obama have a political interest in persuading you the economy is just great. Still others have an academic interest in the success of Keynesian economic ideas, which dominate most countries in the West, Japan, and probably China as well.  There is absolutely no shortage of voices in the United Staes trying to tell you the economy is doing just fine, thank you. Here are a few of them:

• Michael Brush, a Manhattan-based financial writer: In the post Opinion: Six myths about the U.S. Economy that are just plain wrong, Brush tells us these myths are:
  1. The economy is close to stall speed, so stocks are vulnerable. Brush claims that despite very low GDP growth in the last two quarters, Gross Domestic Income (GDI, which should equal GDP) grew at a more solid 2.9%. Other bullish signs he cites are high auto sales, employment growth, and robust loan growth (8.2%-8.6% growth in the first half of 2016).
  2. No one has gotten a raise in several decades. Brush points to a report from Automatic Data Processing that wages rose 4.6% in the first quarter, and that government statistics show a wage gain of 3.1%. Brush claims the numbers often cited from the housing-income  analysis of the Census Bureau, showing median household income virtually flat for the past 20 years is misleading.
  3. People are angry and worried about the sluggish economy, so they support Trump.  This is more a political point than one on economics.
  4. We are a nation that’s drowning in debt. Brush has the grace to concede this is quite true about the federal government, but is skeptical this is also true about the private sector.
  5. Low oil prices devastated the oil patch, hurting jobs growth overall.  Brush states that while the oil-producing states have been hard-hit, other states may have benefitted from cheaper energy.
  6. Technology helps us get more done at work. While this was true in the 1990s and the 2000s, Brush says this has not been true since then. Labor productivity, the dollar worth of goods produced per hour of labor, has fallen in the past three quarters, and its increase since 2010 has been extremely weak. This point seems to me to be more a point about the economy’s weakness than its strength.
     
     
• Bryan Rich, a contributor to Forbes.com, in Betting On A Down Year For Stocks Is A Bad Bet. This post is more a discussion about the stock market than about the economy in general. However, Rich seems to assume a healthy U.S. economy. He writes:
  

  The value of these core assets will grow faster than the value of cash.
  That comes with one simple assumption. The world, over time, will improve, will grow and will be a better and more efficient place to live than it was before. If that assumption turned out to be wrong, we have a lot more to worry about than the value of our stock portfolio.
  
  

• David Wessel, director of the Hutchins Center at the Brookings Institution, in an interview with NPR. In this interview, David Greene of NPR asked Wessel: Is the U.S. economy getting better? Wessel answered, 
  
  

  Absolutely. The U.S. economy is unquestionably getting better, though it’s not great for everyone. We’ve recovered all the jobs we lost during the great recession, and the government reported last week we now have four-and-a-half million more jobs than we did before the recession. The official unemployment rate, which peaked at 10 percent, is down to 5 percent. And broader measures of the job market are improving as well.

The Pessimistic View

The three optimists cited above seem to be representative of current optimists on the economy. What do I have to counter their optimism? First, to check out Michael Brush’s claim that the GDI has recently been growing considerably more robustly than the GDP, and therefore the GDP was an inconsistent statistic, I went to the Federal Reserve Economic Database (FRED) to graph both curves on the same plot. Remember, they should be exactly the same since they both measure the same thing: the economic output of the nation over a single year. The GDP measures it by summing up all production, while the GDI measures it by summing up all incomes. In practice, they are never exactly equal because of errors in both measures. However, we should expect the two curves to more or less coincide over time. The graph I produced is shown below.

Needless to say the considerably more robustly growing GDI Brush reported is nowhere to be seen! Instead what we see is both GDP and GDI have been trending downwards for the past two-and-one-half years. Score one for the pessimists!

Another statistic that has been bothering me a lot, has been the M2 velocity of money, which I reproduce below between Q1 of 1997 to Q2 of 2016. The red line is a linear fit to the data. It declines from a velocity of 2.23 to the velocity 1.46, a decrease of 34.4 per cent!

Of course, you could quite correctly argue that the supply of M2 money has been increasing at the same time, such that the increase in money supply cancels out the decrease in money velocity to leave the price level relatively unchanged. This is the conclusion I came to when estimating the inflation rate in the post What Does Falling Money Velocity Tell Us?  This is in fact a very striking conclusion. It tells us that economic agents (people and organizations that produce and buy goods and services) decreased the rate at which they exchanged dollars for goods at just the same rate at which the Federal Reserve was increasing the money supply! All along the Fed was pushing on a limp string to no effect! As the Fed put vast amounts of new money into the system through Quantitative Easing (QE), the rate at which people exchanged dollars for goods slowed just enough to cancel the effects of the increased M2 supply.

As I have reported before, most of the new QE money (approximately 81% of it) was withdrawn from circulation almost immediately and put into excess reserves with the Federal Reserve. Initially, member commercial banks received the QE money by selling long-term assets to the Fed.  By offering a small interest on excess reserves to the commercial banks, the Fed induced the commercial banks to take the money out of circulation to sit with the Fed. This may well be the largest part of the explanation for why QE has had such little effect on economic activity. The rest can be explained by other government actions depressing economic activity. You can find such depressing government actions in the following posts:

• The Burden of Economic Regulations
• The Debilitating Effects of Obamacare
• Economic Effects of the Dodd-Frank Act
• The EPA. CO2, Mercury Emissions, and “Green” Energy
• Economic Effects of Current Tax Policy
• Economic Damage Created by the Fed
• The US is Drowning In Debt

Another reason for pessimism that has not been countered by anyone: the lack of corporate investments within the United States. Rather than borrow money to invest in new U.S. productive capacity, companies have been borrowing money at close to zero real rates to buy back their own stock. The fact that stock buy-backs are more attractive to companies than producing new productive capacity should speak volumes to anyone willing to listen about the hostile economic climate within the United States.

Surveying the claims of the optimists compared to available data, I am afraid I remain a pessimist.

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