Supply Side Economics
The questions of the day are:
- Are the supply side tax cuts responsible for this expansion since 2003?
- Is the job market humming along nicely?
If one wants to credit supply side tax cuts for creating jobs and stimulating the economy it is a back handed compliment at best. We are currently in 6 years of expansion and job growth has been anemic at least as far as expansions go.
The above chart is from Jobs Picture with thanks to the EPI. The chart puts into perspective just how weak this recovery has been from the jobs side. Wages sure have not followed suit either as corporate profits soared.
The current boom is really more the result of an unwarranted slashing of interest rates to 1% in a panic move by Greenspan in the wake of a dotcom bubble bust followed by 911 but certainly tax cuts did not hurt.
For such massive stimulus we have little to show for it. Outsourcing continues unabated with losses of jobs to India and China, and gold and metals have been soaring as a result of our "spend and spend" implicit weak dollar policy. In aggregate all both really accomplished was a massive housing bubble with consumers going ever deeper in debt.
It is now payback time. The question is if we have a recession but how severe that recession will be. For all this huge boom the supply siders are bragging about, many states are in a trouble with unfunded pension plans and falling tax revenues in the wake of a housing bust.
In Housing Slump Pinches States in Pocketbook The New York Times is reporting on tax shortfalls.
- In Florida tax revenue is projected to drop this year for the first time since the energy crisis of the 1970s.
- New Jersey could face a $2.5 billion shortfall by mid-2008, according to Governor Jon S. Corzine, and may lease its turnpike or its lottery to a private company to raise money.
- In California income tax receipts in January were $1 billion less than forecast.
- Maryland's real estate transfer tax revenue has tumbled by 22 percent this fiscal year.
- Connecticut's real estate transfer tax revenue, which state budget analysts predicted would fall by 3.6 percent, is down by 13.3 percent so far.
"It's the year of the housing hangover," said Sean M. Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida.
So what's, the solution? More tax cuts? And that will stimulate exactly what? What is it that we need that will create more jobs? Houses? Home Depots? Nail Salons? Pizza Huts? Anything? Overcapacity is rampant everywhere. And to top it off outside of construction which is now waning, most of the jobs we did create were at the low end of the wage scale.
The two most telling indicators of the economy are the inverted yield curve and falling money supply as measured by an annual rate of change on the CPI adjusted monetary base. That combination has called 7 of 7 recessions since 1960 with no misses and no false positive as noted in Foolproof Recession Indicators.
According to research at the Northern Trust, close to 50% of the jobs in this recovery came directly or indirectly from housing. As residential construction expanded, retail stores of all sorts followed. But we are in the waning moments of that expansion with a dramatic drop in capital spending as noted in Capital Spending Myth and Reality.
While everyone says there will be no spillover there are signs of spillover everywhere including 2.1 million people who missed a housing payment last year. And we have not yet seen the full effect of mortgage rate ARMS resets that will occur later this year.
In retrospect it should be clear to everyone that what happened was a drunk induced orgy of unsustainable spending fueled by a massive carry trade and panic by the Greenspan Fed as opposed to some sort of supply side tax cut miracle. And sad to say we have so little to show for that boom except a massive hangover that is destined to get worse.