Professor Mark J. Perry's Blog for Economics and Finance
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
42 Comments:
this is a tricky metric to use to determine economic recovery.
have tax rates changed? are there new taxes? fewer exemptions?
how does this look on a population adjusted basis?
if population is up 2% and revenues up 1.6%, that's a more difficult burden in terms of many services.
this number is considerably at odds with personal income.
real personal income has recovered only about half its peak to trough losses.
http://cr4re.com/charts/charts.html?GDP#category=GDP&chart=PersonalIncomelessTransferFeb2011.jpg
that would imply that nominal increases are being driven as much by inflation as recovery (and perhaps a great deal more if the deflator in RPI is understated)
that would not alleviate the burden on local governments at all and could well make it worse if the prices for things they buy are going up more rapidly than tax receipts.
Looks like a graph of my wife's mood swings.
Ah, Benji; you do offer up a wonderfully "target-rich" environment. :)
Ruifus:
I need a drink. Where is the ethanol? And what is with the "II"
The slow U-shaped economic recovery is a result of money being shifted around from federal, state, and local governments rather than a net tax cut. Also, TARP was paid back by consumers.
Small tax cuts by the federal government (e.g. $14 a week) spread out over two years were offset by higher state and local taxes, fees, fines, fares, tolls, etc.
A bold tax cut (e.g. $5,000 per worker) would've strengthened household balance sheets (e.g. paying-down high interest rate debt down first to increase monthly incomes), strengthened the banking system, and spurred demand.
A virtuous cycle of consumption-employment would've taken hold (where consumption generates employment and employment generates consumption) to raise tax revenues and lower unemployment and welfare payments.
Or Peak Trader, maybe the government can stop dicking around with our money and just let the recession pass. It seemed to work before the 30s.
Whenever some expert tries to meddle with the economy, there are inevitable unforeseen consequences.
I don't care how smart you are, you're not smarter than 300,000,000+ people all doing their own thing.
Isnt everyone doing their own thing what leads to tragedy of the commons?
Looks like the atmospheric CO2 graph from Mauna Loa.
peak-
"Also, TARP was paid back by consumers."
perhaps you could explain that statement? last i heard, much of tarp was paid back by the borrowers.
it looks like taxpayers will only wind up on the hook for about 150 of the 700.
much of that went to freddy and fannie, who showered benefits on consumers for some time prior in the form of subsidized interest rates.
but even that has not been "repaid" by anyone. it's debt.
Misterjosh, before the 1930s, there were many more economic boom-bust cycles, which are inherently inefficient (since resources are utilized suboptimally both in the boom and bust phases).
The Fed prevented a deep depression from 1973-82 (although, there were four recessions, including two severe recessions), or prevented a period similar to 1929-38, and created a long economic boom from 1982-07 (with only two recessions, including one recession that was so mild it wasn't a recession based on annual real per capita GDP growth).
Without massive borrowing and creative accounting by federal and state governments, over the past few years, we would be in another deep depression, or in an even worse economic situation.
Morganovich, consumers-borrowers-households paid back TARP, i.e. the private sector.
peak-
if i loan you 100 and you pay it back, how does that retard the economy?
presumably you borrowed it for a reason.
Benji, let's just say the "II" is a testament to my total lack of competence in anything computer-related. :)
Oh, and if there were any ethanol left I woulda drunk it a long time ago. :)
Morganovich, the money was lent by the government to insolvent banks and consumers-borrowers-households paid the banks, which paid back the government.
We can also add the banks managed to pay back TARP out of earnings that were artificially increased by the Fed's ZIRP. That meant the elderly, savers, and owners of capital were forced to accept very low returns so the banks could earn more by paying nothing on deposits.
peak-
you reasoning doesn't make any sense.
you are also confusing illiquid with insolvent.
customers paid the banks no more than they did before. there was no "tarp" surcharge.
further, that's not how the banks repaid tarp at all. mostly, it was on investment income.
most of those getting tarp funds were illiquid, not insolvent. they just needed time to be able to free up cash in an orderly fashion.
that money came from the recovery of asset prices, not from consumers.
Big banks raising fees, savvy customers dodging them
March 26, 2011
The average overdraft fee hit an all-time high of $30.47 in 2010, and the typical ATM charge reached a record $2.33, according to Bankrate.com . ATM fees are expected to keep rising - banking giant Chase is testing fees of $5 in Illinois and $4 in Texas for customers of other banks who use Chase ATMs.
Meanwhile, free checking is slowly disappearing as banks impose more restrictions on no-fee accounts. Only 65 percent of banks offered free checking last year, down from 76 percent in 2009, according to Bankrate. And the average monthly fee for no-interest checking accounts rose to $2.49 last year, a 40 percent increase.
TD Bank, now requires a $100 minimum balance for its basic checking account, and imposes a $15 fee if the depositor's balance falls below $100.
One big bank already has begun charging some customers for such things as transactions at teller windows.
Bank of America's "eBanking" account requires depositors to do virtually all their banking online or through ATMs. Receiving paper statements or talking to a teller triggers an $8.95 monthly fee.
I have a question(s) about the graph if you're reading comments, Mr. Perry.
It looks like the fairly consistent pattern of growth was a peak followed by a small valley followed by a higher peak (like a shallow "m"). This was true through the recession of the 90's and after '01. Now the pattern seems to be a peak with an extended valley (more like a shallow "w")...
Does this mean anything to you - and is it possible that one of the reasons states are in such trouble is that they based budgets on future tax revenue, assuming it would continue to follow the pattern?
When making a budget in '08 (and following this rate of growth) one might expect to see a small valley and additional peak, instead, they got a large, extended decrease (not to mention, the swings are much larger).
Is this just a meaningless observation?
*Peak Trader, is this what you were saying about TARP?
peak-
that's like saying that the $5 i paid you back was the money you spent at the track.
fees were being raised before tarp as well in response to increased default rates and and a need to compensate for the loss of debit card revenue.
PT: I'm with Morganovich on this one. Your reasoning makes no sense.
"State and Local Tax Revenues Set Record in QIV"
Makes one wonder how many of the states with jacked up tax rates are losing both business and population...
From Americans For Tax Reform: The Millionaire Migration
From Investors Business Daily: Illinois Taxes: How Blue Can You Get?
peak-
another way to look at it would eb this:
banks businesses deteriorated. bad loans increased dramatically.
in response, they raised prices. (banks have the advantage of being one of the few businesses that can do this in a downturn)
what does that have to do with tarp?
as anyone who tried to refi a mortgage in 2005-6 knows, they were already raising many fees even before the crisis hit.
Morganovich,
GM "paid back" TARP from a taxpayer financed escrow held for it at Treasury. Its post-bankruptcy IPO was hugely tax-advantaged ($40B of tax advantage if memory serves).
Banks were recapitalized on the backs of every USD saver. They are now able to raise capital cheaply because they are explicitly too big to fail. Thus, the true cost of capital is not adequately reflected because the taxpayer is on the hook for losses. That's just TARP in another dress.
I don't think TARP has been repaid so much as it has been better disguised.
The graph does not show that the economy is better.
Will the biased economic reporting never end? We have yet another time trend graph with the dollar values not corrected for inflation. $1.00 in 1988 was worth $1.84 in 2010. Thus, more than half of the slope of the graph is due to inflation.
The graph also was not corrected for population which increased by 26% from the end of 1988 to the end of 2010.
In recent years, state and local tax revenues increased primarily because cash-strapped governments increased their income tax rates, sales tax rates, property tax rates, fuel taxes, and "sin" taxes.
The graph shows that state and local tax collections increase because the value of the dollar falls, population grows, and state and local governments add taxes or increase tax rates at need. It says nothing about the strength of our economy.
"The graph shows that state and local tax collections increase because the value of the dollar falls, population grows, and state and local governments add taxes or increase tax rates at need. It says nothing about the strength of our economy"...
AMEN!
Morganovich, banks suffered huge losses, and ultimately it's consumers-borrowers-households who make up those losses and more.
methinks-
i agree with you on GM. i was not really thinking of that as a part of TARP (though you are correct, that's where the funds came from).
GM was just a give away.
as you say, the "repayment" is coming from tax breaks.
it's just taking money out of one pocket and putting it in the other.
that said, while an egregious use of government power, it's not enough money to throttle back the economy as a whole as peak was arguing.
an interesting argument as to why this may not be as good a sign as one might hope for state and local solvency:
From Conor Dougherty at the WSJ: Tax Revenue Snaps Back
State and local tax revenue has nearly snapped back to the peak hit several years ago—a gain attributed to a reviving economy and tax increases implemented during the recession.
But the improvement masks deeper problems for state and local governments that are likely to linger for years. To weather the recession, state governments relied on now-depleted federal stimulus funds ...
Total tax receipts for state and local governments hit $1.29 trillion in 2010, just 2.3% shy of the $1.32 trillion taken in during 2008, not adjusted for inflation, according to Census Bureau data.
Local governments are mostly funded by property taxes, and it usually takes some time for falling prices to show up in property taxes. Local property tax revenue is just starting to decline in the Census data.
State revenue is mostly from individual income taxes and sales taxes (see tables at the Census Bureau) and this revenue is still well below the pre-recession levels.
Morgonovich,
I wasn't offering support for Peak's argument. i just independently don't think TARP has been repaid by either the banks or GM.
It's a bit like the Social Security trust fund scam. Money was taken out of the taxpayers' right pocket to repay the left pocket.
mehtinks-
TARP has been largely repaid by the banks to the profit of the treasury.
there is only $150 of the original $700 still in doubt.
note however that this would have been better accomplished by paulsons original plan to buy assets, not make equity investments.
that's what the UK did and they are making a tidy profit.
it's also what the us did during the S+L crisis which also turned a huge profit (as the lender of last resort should).
the advantage to buying assets as opposed to equity infusions is that it distinguishes between banks that are illiquid and those that are insolvent.
this is precisely why pelosi frank, dodd, et al would not support such a plan and demanding to use equity so that they could prop up catastrophic failures like freddy, fannie, and GM.
such losses as emerge from this program ought be laid directly at the feet of the ones who screwed up its structure.
TARP is part and parcel of the $14 trillion plus of the outstanding Public Debt...
Consider the following: Dismantling the “TARP was paid back” lie
Morgonovich,
I take issue with your assertion that the S&L crisis turned a huge profit.
"The savings and loan crisis of the 1980s and early 1990s produced the greatest collapse of U.S. financial institutions since the Great Depression. Over the 1986–1995 period, 1,043 thrifts with total assets of over $500 billion failed. The large number of failures over- whelmed the resources of the FSLIC, so U.S. taxpay- ers were required to back up the commitment extended to insured depositors of the failed institu- tions. As of December 31, 1999, the thrift crisis had cost taxpayers approximately $124 billion and the thrift industry another $29 billion, for an estimated total loss of approximately $153 billion. The losses were higher than those predicted in the late 1980s, when the RTC was established, but below those fore- casted during the early to mid-1990s, at the height of the crisis."
http://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf
WRT to TARP, I fail to see how forcing taxpayers to overpay for deflated assets benefits the taxpayer. I fail to see how devaluing the currency in an effort to re-inflate the prices of assets held by banks at the expense of savers benefits the average American. I also fail to see how the increased moral hazard of the explicit government backing of politically connected financial institutions benefits the taxpayer. TARP is, was, and always will be a huge wealth transfer from savers and taxpayers to the creditors of large, politically connected institutions. TARP is also an uncompensated transfer of risk from large too big to fails to American savers and taxpayers.
There are many lies we can tell ourselves with accounting. I don't think TARP accounting reflects the underlying economic reality.
methinks-
i think you are combining two issues.
the asset based bailout made the treasury money.
it was stepping in and bailout out insolvent firms that led to costs.
the RTC's issuance of long term bonds to dispense money and effect rollups looked more like the current tarp.
"I fail to see how forcing taxpayers to overpay for deflated assets benefits the taxpayer"
have you never heard of buy low sell high?
when everyone needs to sell MBS's at once to cover teir 1 requirements, they drop in price, often to well below their intrinsic value.
if you can buy mortgages that will be worth 80 for 60, that is of tremendous benefit to the taxpayer.
lots of people (myself included) make a living buying assets like that.
it just depends on the price.
you could even argue that buying up the MBS's etc at full notional value would ultimately have been cheaper.
many of these bonds had 3-10X their face value in derivative contingencies (like CDS's).
thus, taking them out at face would eliminate liabilities of 3-10X face, a pretty good ROI.
that said, i don't support such a plan as 1. it loses money for the treasury and 2. it capriciously reapportions winners and losers.
companies like AIG that were dumb enough to sell massive piles of CDS's deserved to fail just as investors like paulson that were smart enough to buy them deserved to prosper.
we disrupt the flow of capital from dumb hands to smart ones at our peril...
oops, hit return too quickly.
one the other hand, it occurs to me that buying up the bonds backed by freddy and fannie mortgages at face would not be a net loss of capital to the treasury as they were already on the hook for the defaults anyway. that was an incredibly stupid place for them to be, but, as in golf, you have to play the ball where it lies.
I went ahead and also adjusted these numbers for population. The real per capita series from 1990-2009 is here:
http://emergentfool.com/2011/03/30/ratcheting-state-and-local-taxes/
have you never heard of buy low sell high?
Sounds familiar. Have you ever heard of overpaying for an asset?
lots of people (myself included) make a living buying assets like that.
Yes. We're basically in the same business - although, I'm a market maker.
if you can buy mortgages that will be worth 80 for 60, that is of tremendous benefit to the taxpayer.
Oh, if only. You assert a fair value price of 80. Maybe you're right, maybe you're not. You assert your edge is 20 if you buy at 60. That's huge huge calculated edge. How do you hedge it? Oh, you don't need to. It's only taxpayer money, not yours. You're the Fed and you will simply inflate the price of the asset and pretend you've made money.
Here's my question to you, Morgonovich: If there is so much money chasing such rich edge (and there is more the bigger the edge), then why did the Fed need to step in to buy assets at all? If the Fed were not overpaying, why would the banks prefer to sell to the Fed rather than to Hedge Funds like yours?
companies like AIG that were dumb enough to sell massive piles of CDS's deserved to fail just as investors like paulson that were smart enough to buy them deserved to prosper.
Agreed. And the counterparties dumb enough to be their counterparties should go down with them. Of course, you know that "bailing out" AIG had nothing to do with AIG. Paying out the full value of the CDS to AIG's counterparties was merely the Fed's way of funneling money to institutions to which it is not authorized to dispense money.
BTW,
It may be true that banks could not meet reserve requirements selling their MBS holdings at the market price. But, that seems more like a reserve requirement issue to me and it should have been handled as such. Why not simply allow the banks to temporarily lever more while allowing the market to clear?
Or Peak Trader, maybe the government can stop dicking around with our money and just let the recession pass. It seemed to work before the 30s.
In a system that rewards 'activity,' no matter how stupid and harmful it may be, there is no incentive to let the necessary corrections take place. To see how the US does look to Japan a decade ago and factor in the fact that the US has no savings as the Japanese did.
Post a Comment
<< Home