GDP Stumble and Defense Expenditures

The 0.1 percent decline in GDP in the last quarter of 2012 has aroused a good deal of comment, including the tracing of it to decline in government expenditures. More tellingly, decline in military expenditures. The Bureau of Economic Analysis provides a series that tracks such expenditures. It is called National Defense Consumption Expenditures & Gross Investment (FDEFX). I am here reproducing a graphic of such expenditures from the Federal Reserve Bank of St. Louis, more specifically its FRED data service:

So what are we to think? The decline from the 3Q 2012 to 4Q 2012 was $46.8 billion. I wouldn’t mind getting, say, a tenth of that. My financial worries would be over. But in the context of our economy, and in light of the Himalaya-sized increase in military expenditures since the war on terror started, that’s just a little jiggle. Our graphic, up there, barely shows it. Herewith a bit of an enlargement:

If such a relatively small decline in defense consumption can cause the GDP to dip a toe into negative territory, the meaning is that our GDP is barely growing. This dip, at the tail of 2012, is a bit surprising, actually. I would have expected it sooner—say with the end of our withdrawal from Iraq. But no. We’ve been busy elsewhere at expanding rates. Now the mindlessly hawkish right will make the most of this dip. The dip will serve as ammunition for holding defense expenditures steady at minimum—while improving targeting of seniors (SS, Medicare) and the poor (Obamacare), and the young (tuitions).

I thank Monique for alerting me to this development. She sent me a link to a Chart of the Day (link) where its publisher provides a graphic of changes to total expenditure since 2000. The graphic exaggerates the change by this choice of presentation. Let us, by all means, hide the big picture and stir up the emotions. Whom the gods would destroy…

Mind Your Spellchecker

In making a posting on Facebook, Brigitte mentioned Seasonal Affective Disorder (SAD). It amused us to discover that Facebook’s spellchecker marked affective as misspelled. In a culture where everything is feeling, feeling, feeling, it is interesting that the King of Social Networks has no robotic awareness of affect. We might call that SAD—if it were not amusing.

Worth Noting

A post on Market Size Blog today (link)—the subject is the total money held in IRAs—is worth noting. Straws in the wind? More like bales of straw in the wind:

The sort of pension plans that used to be regularly offered by large companies—a plan in which an employee was promised a defined monthly payout after retirement—are fast disappearing in favor of hybrid plans that offer employees a framework into which they may invest for their own retirements, thus 401(k) and other similar plans. To illustrate the speed of change in this field, a glimpse at the coverage offered by the largest of firms, those most likely to offer a traditional pension plan. In 1998, 90% of the companies in the Fortune 100 provided their new employees with a traditional pension. In 2012, that number had fallen to 30%.

Capitalist Stumbles

It’s quite possible to admire a company’s products while, at the same time, disliking its management. In such cases, the company used to have a great management—the reason why we like its products. But while the products are still great, the company is evidently changing for the worse. My favorite example is Hewlett-Packard. I write this on an HP computer; next to it stand two HP printers. A story in the Wall Street Journal today, disemboweling a turgid HP acquisition and its troubling consequences for HP’s stock performance, reminded me of my love-hate attitude. The WSJ looks at stocks—but HP’s capitalist stumbles endanger a genuine value, the technology now retired managements at HP created to win a huge following. HP is still the leading personal computer and printer producer.

Back in August of 2011 I registered my dislike on this blog (link) when the company announced its plans to sell its personal computer group. I knew then that a capitalist management group had taken the reins from earlier groups inspired by engineering and customer services.

Herewith some details which are backed by HP’s own 10-K SEC filing, available from HP’s website. Here is a company that, in 2011, had revenues of $127 billion of which $38.4 billion were personal computers (30.2% of revenues). The company had a pretax profit of 6.1 percent on its PC revenues, which also represented 16.9 percent of its total pretax profits. Why would a company want to dump a business—indeed a core business—that is both significant in size and profitable? The answer? Because a capitalist mentality came to be in charge.

Looking now at three years of data, 2010 through 2012, HP had seven revenue-producing segments. The three largest were PCs, Printers, and Services. The others were Servers/Networks, Software, Financial Services, and Corporate Investments. In the 2010-2012 period, the first three, while profitable, exhibited declining sales. They moved from representing 80.2 to 77.5 percent of total HP revenues. The growing segments were the next three. Revenues from Corporate Investments were not only declining, they were also losing money.

In the capitalist universe, a company is nothing other than a machine for harvesting profits from something, never mind what. And the profits must be growing. Companies do not exist to serve the public. Product doesn’t matter. Therefore HP set about in 2011 to become mighty in Software and in Financial Services, the first growing at an annual 20.2, the other at an annual 11.6 percent (2010 to 2012). HP therefore undertook the acquisition of the British Autonomy Corp. and announced plans of dumping its personal computers. Soon after acquiring Autonomy, HP had to write off $8 billion because Autonomy had been a bad purchase. And thus far the PC Group is still within HP. But I can well imagine the morale in that group since August 2011. And the mood within the Printer Group must also be ecstatic.

Now we’ve been made to think that some kind of law of nature is at work in business—and that it is right and proper for corporate entities to operate without any concern whatever for the customer base on which they rest. Never mind the product, the society, the communities—even when plentiful profits are flowing from providing the latter with services. What matters is growth and the stockholder. But such behavior is not a law of nature. It is the consequence of human nature—where self-centered greed must be resisted and transcended—and public protection of corporations through laws of incorporation must be earned by service to the public.

It’s a Law of Nature

When visiting the battery basket

It’s just like looking for a gasket,

Or for a washer for the sink.

It always drives me to the brink:

I know I’ll find objects galore,

But not the one I’m looking for.

Notes on Growth

Economies are, quite obviously, just another kind of ecosystem. Now it amused me this morning to see that when I did an “Images” search on Google using the search-word ecosystem, a large number of the images I got were circular. What goes around, comes around, you might say. The image that is usually placed outside the circle is that of the sun, signaling that it is the fundamental driver of the circulation.

In that circulation, growth is not the be-all and the end-all. It is one stage in a process. In that process inorganic resources are first produced into life with solar heat—and this is where growth takes place. Next the life produced is consumed, either by other life or by the sheer passage of time. That which has been consumed is decomposed back into minerals and gases, and the circulation thus continues.

Therefore the pop-business belief in growth—at all costs—is short-sighted. Growth is a natural aspect of economies. So is decline. The only more or less sustainable reality is the economy as a whole—but all ecologies, economies included, have limits. Energy is one. Population is the other. The optimum economies will be adaptive—limiting growth to population growth. Anything above that is to endanger the entire economy, sooner or later. Yet that, over-consumption, appears to be the suicidal aim of all modern free-market economies.

We are today approaching one of the limits—that of energy based on fossil fuels. But even suppose that we’ll come up with something to replace them. Then we shall have conquered Peak Oil but we shall be facing Peak People next.

I detected early signs of “irrational exuberance” yesterday—the punditry hoping that soon we shall be back to the free-for-all of growth, growth, growth.  Coincidentally, I saw previews of a documentary that shows the overwhelming decline of our infrastructure. Replacing all of that, the glory of the twentieth century’s publicly-led infrastructure building, is not in the cards, however. The coming growth, if it does revive, will be focused on ephemera.

In ordinary ecosystems—where humanity has not as yet invaded—the “free market” works effectively because consciousness is excluded. But in the economies of the world, consciousness must take the lead—both in the building up of things and in checking maladaptive behavior. We need a Guided Market, not a free one. Even when it’s guided, it will only take us so far. Overpopulation will sooner or later loom, signaled by water shortages. I won’t be here to see that, having declined and fallen into the possession of the decomposers. The bacteria and fungi will get my body in the end—but the core of me will leave the circle that, in this life, holds us all.

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My image is an overhead used by Knox College in Galesburg, IL (link).

Shale Sham in the Making

A very revealing article (ht to Brigitte) appeared on Foreign Policy In Focus (link) on January 10, “The Great Oil Swindle: Scaling the Peak of Fossil Fuel Scarcity,” by Nafeez Masaddeq Ahmed. In very abbreviated summary: (1) a rash of articles dismissing the reality of fossil fuel production peaking is misguided hype based on overstating shale resources and understating the costs of their recovery; (2) some studies projecting future supplies contain highly fudged data; (3) detailed data, some buried at the bottom of overly optimistic reports, show that Peak Oil is already upon us; (4) shale gas is turning out to be much more costly to produce; wells have a sharply dipping rate of productivity, in the range of 40 percent per annum; and (5) therefore a shale bust is developing while all the news is about the shale boom. Anyone following this subject closely should read the story. It is professionally done and full of revealing detail.

A look at shale as a resource, and the technology of its recovery, is presented on this blog here.

New Model of Development and Economics

This year, on the occasion of the World Day of Peace, Pope Benedict XVI’s message focused in part on economics. I thought I would highlight parts of that message over the next two or three weeks. This is the second such posting. The designation of January 1 as the World Day of Peace began in 1968 under Pope Paul VI. Herewith some thoughts on the right to work. The full message is accessible here.

In order to emerge from the present financial and economic crisis—which has engendered ever greater inequalities—we need people, groups and institutions which will promote life by fostering human creativity, in order to draw from the crisis itself an opportunity for discernment and for a new economic model. The predominant model of recent decades called for seeking maximum profit and consumption, on the basis of an individualistic and selfish mindset, aimed at considering individuals solely in terms of their ability to meet the demands of competitiveness. Yet, from another standpoint, true and lasting success is attained through the gift of ourselves, our intellectual abilities and our entrepreneurial skills, since a “livable” or truly human economic development requires the principle of gratuitousness as an expression of fraternity and the logic of gift.

Concretely, in economic activity, peacemakers are those who establish bonds of fairness and reciprocity with their colleagues, workers, clients and consumers. They engage in economic activity for the sake of the common good and they experience this commitment as something transcending their self-interest, for the benefit of present and future generations. Thus they work not only for themselves, but also to ensure for others a future and a dignified employment.

In the economic sector, states in particular need to articulate policies of industrial and agricultural development concerned with social progress and the growth everywhere of constitutional and democratic states. The creation of ethical structures for currency, financial and commercial markets is also fundamental and indispensable; these must be stabilized and better coordinated and controlled so as not to prove harmful to the very poor. With greater resolve than has hitherto been the case, the concern of peacemakers must also focus upon the food crisis, which is graver than the financial crisis. The issue of food security is once more central to the international political agenda, as a result of interrelated crises, including sudden shifts in the price of basic foodstuffs, irresponsible behavior by some economic actors and insufficient control on the part of governments and the international community. To face this crisis, peacemakers are called to work together in a spirit of solidarity, from the local to the international level, with the aim of enabling farmers, especially in small rural holdings, to carry out their activity in a dignified and sustainable way from the social, environmental and economic points of view.

In the lead-in to this section, the Pope emphasizes that the underlying value system must be “structured with God as the ultimate point of reference.” Therefore, obviously, we see here, implicitly, the contrast between two kinds of value systems, a utilitarian and a transcendental. The utilitarian or pragmatic may be tailored large or small. It will be tailored small if only the interests of the owners of property and means are considered. Viewing society in the whole—and time as extended beyond the next quarter or the next budget cycle—is easy if a transcendental value system is inherently felt within.

The Right to Work

This year, on the occasion of the World Day of Peace, Pope Benedict XVI’s message focused in part on economics. I thought I would highlight parts of that message over the next two or three weeks. The designation of January 1 as the World Day of Peace began in 1968 under Pope Paul VI. Herewith some thoughts on the right to work. The full message is accessible here.

Peacemakers must also bear in mind that, in growing sectors of public opinion, the ideologies of radical liberalism and technocracy are spreading the conviction that economic growth should be pursued even to the detriment of the state’s social responsibilities and civil society’s networks of solidarity, together with social rights and duties. It should be remembered that these rights and duties are fundamental for the full realization of other rights and duties, starting with those which are civil and political. 

One of the social rights and duties most under threat today is the right to work. The reason for this is that labor and the rightful recognition of workers’ juridical status are increasingly undervalued, since economic development is thought to depend principally on completely free markets. Labor is thus regarded as a variable dependent on economic and financial mechanisms. In this regard, I would reaffirm that human dignity and economic, social and political factors, demand that we continue “to prioritize the goal of access to steady employment for everyone.” If this ambitious goal is to be realized, one prior condition is a fresh outlook on work, based on ethical principles and spiritual values that reinforce the notion of work as a fundamental good for the individual, for the family, and for society. Corresponding to this good are a duty and a right that demand courageous new policies of universal employment.
     [Pope Benedict XVI’s Message for World Day of Peace 2013]

Right to Work, as a political slogan in the United States, has a very different meaning. It is aimed at union-busting. Now it might be thought that unionization is a kind of class warfare, labor rising to confront management. But the union movement  was a reaction to injustice—a failure of society to heed the higher message that is still being offered by the Church today.

Employment Update: December 2012

At least preliminary employment data for the entire year 2012 were published this morning by the Bureau of Labor Statistics (link). All told, 155,000 jobs were added in December, and revisions to October and November data increased employment over the previous report here by 13,000 jobs. News reports yesterday projected an increase of more than 200,000 jobs by such experts as JP Morgan. Therefore, today, disappointment may be registered. Indeed, as will be shown below, 2012 under performed 2011. Herewith the graphic:

As I did last year so again this year, I can now also show these data annualized. That graphic is next:

The bottom line here is that after two horrendous years, 2008 and 2009, when we lost 8.663 million jobs, in the next three years we’ve recovered 4.701 million jobs, thus a little more than half (54.3%). If the current pattern continues, it will take us another 2.5 years to reach the level we had in 2007.

The longer these patterns continue, the more I am inclined to think that perhaps the Great Recession heralded a more fundamental change than, as recessions typically do, just a spell to catch our breath in the all-out Consumption Marathon. The sluggish results for 2012 seem to confirm that suspicion. When things are confusing, contentions, unpredictable—and jobs are ever harder to get—people do respond by curbing their buying. It would be madness to do otherwise.

Notes on State Taxes

The motivation for creating the featured chart today came from a post on Market Size Blog on the subject of sales taxes collected by states in 2011 (link). I went in search of historical data and found them on the Census Bureau website (link). My presentation shows all revenues collected by states for the 20-year period, 1992-2011. Here is the graphic:

The chart clearly shows the importance of sales tax collections in state-level revenues. In this 20-year period they have averaged to 48.3 percent of total state income, and the same percent in 2011. They reached their highest share in 2003 (49.9%), the same year when state income taxes reached their lowest share in this time period (38.3%). Note here the much more cyclic behavior of state income taxes. Sales taxes also weaken in period of economic down-turn, but nowhere near as sharply as income—thus underlining Monique’s comment that sales taxes are regressive. They fall most heavily on the poor.

The third curve is a combination of property taxes, license fees, and a category labeled All Other.  Of these, in 2011, Licenses accounted for 56.3 percent, All Other for 28.5 percent, and Property taxes for 15.1 percent. Property taxes have been losing share of this category, having been 18.3 percent in 1992—and as low as 13.6 percent in 2008 when real estate fell down its own unique cliff and nearly sank the whole economy.

Progressivity or Lack Thereof

Now that the mountain has labored and brought forth a mouse, herewith a little doodling to show how the likely new tax rate would compare to a genuinely progressive income tax. In the example shown, I have subdivided a minimum household income of $17,000 and a hypothetical top income (for purposes of this illustration) of $500,000 into even ranges. Then I’ve assumed a minimum tax of 10 percent and a maximum of 50 percent divided into segments the same way. This then represents a progressive form of taxation. Against this I have charted the likely 2013 taxation level, thus using the existing rates up to $450,000 and a top rate of 39.6 after that.

What emerges from this view is just how far our current tax code diverges from the ideal of a progressive pattern. Note especially that rates for households between $125,000 and $286,000 are well above the progressive rate—and the income of those from $339,000 to the top, which is here arbitrarily defined as $500,000, is below the line where a progressive taxation system would put the rates. One could also calculate a progressive line, for these data, topping out at 39.6 percent. In that case, all groups but two would get a lower tax rate. The two exceptions would be the very bottom and the very top.

As things stand, those in the well-off middle get the whack, those in the upper reaches get the miss. Genuine tax reform? We’d need a Napoleon for that.

Blame the Right People, Brooks

In his column in the New York Times today, David Brooks has found the culprit for our fiscal miseries. Surprise. The guilty party is the American voter. And Brooks’ proof is this statement:

The average Medicare couple pay [sic] $109,000 into the program and gets $343,000 in benefits out, according to the Urban Institute.

Brooks’ implicit assumption is that the American voter has consciously arranged things this way and that the voter controls the prices paid for medical services as he/she controls the actions of the politicians. Having noted my initial reaction, I thought I’d find the numbers at the Urban Institute’s web site. In that process I learned, with some bemusement, that Brooks had used these numbers before, on October 8, 2012. And the NYTimes eXaminer, a fact-checking site, published (here) an analysis of that statement the day after noting that Brooks’ numbers evidently came from another source. That site also pointed to an Urban Institute document (last revised in 2011) where similar numbers are cited. That document is here.

In that tabulation (a Table titled “Two-earner couple both earning an average wage ($43,500 each in 2011)” — alas there are no page numbers) the Urban Institute cites lifetime payments cumulating in 2011 to $119,000 and benefits to $357,000. Close, to be sure. In Brooks’ case the “unpaid” amount is $234,000, in the Urban Institute’s case it is $238,000. Thus, based on Brooks’ attribution of his numbers to the Urban Institute, all he may be accused of is laziness. But let’s look at the other issues. The Urban Institute figures are all inflation-adjusted, not nominal.

Now Brooks’ assumption of voter control is a pure projection. Voters do not control medical pricing. Medical practices have vastly changed, not least the proliferation of extraordinarily expensive testing devices and their essentially routine use. The very existence of a national insurance program for the elderly—without a national cost control program that accompanies it—will lead to an expansion of prices just because the insurance exists. We notice the same phenomenon in student loans—where government loan programs, without cost-control imposed on tuition levels, has caused tuitions to sky-rocket. Voters also do not control the legislators in any direct way, thus relating specifically to medical insurance management.

Ultimately the responsible parties for the mess are the legislators. They are not managing correctly. That is why, in my opinion, national health care, to work properly, must include management of medical service providers and the pharmaceuticals industry as well. Until it does, politicians will get the credit and the voter will get the blame.