September 3, 2010

It’s the Spending, Stupid (or ‘How a $115 Billion Accounting Entry Is Misleading the Nation About the Deficit’)

Filed under: Economy,Taxes & Government — Tom @ 1:08 pm

Federal spending is out of control. Even the nominal spending and deficit reductions claimed by the Congressional Budget Office aren’t real.

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Note: This column went up at Pajamas Media and was teased here at BizzyBlog on Wednesday.

Thanks to Real Clear Politics for linking to the PJM column.

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If the ad agency that produces those MasterCard “Priceless” commercials ever wrote a commercial that critiqued government spending, it would go something like this:

  • Annual salary and benefits of Bell, California’s former city manager: Over $1.5 million.
  • New 4,200 K-12 school complex in Los Angeles for 4,200 students: $578 million.
  • One earmark for a “near-zero emissions coal power plant in Illinois that the (U.S.) Dept. of Energy (had previously) defunded because the project was inefficient”: $2 billion.
  • Spending appetite of government at all levels: Bottomless.

The above recitation illustrates that as bad as the Bell and LA examples are, it’s the federal government that can waste money like no other entity ever seen on Planet Earth. Fiscal restraint has of course been a problem for decades, but the spending that has occurred under congresses controlled by Democrats since 2007 has taken this country to the edge of a fiscal and economic precipice.

A little-known fact is that federal spending rose by only 2.8% during fiscal 2007 under the final budget passed by a Republican Congress. I know, 0% would have been preferable, and it was way too little and too late for a bunch that had let spending grow way too quickly during the previous five years.

Then came the Democrats. Spending during the fiscal year that ended in September 2008, the first full budget year under the control of Nancy Pelosi and Harry Reid, increased by 9.1% to almost $3 trillion. That percentage increase was greater than any Republican Congress under George W. Bush.

They were just warming up. Fiscal 2009 brought the beginning of the $787 billion (before interest) “economic stimulus plan.” All but those in serious denial acknowledge that it has failed to revive the economy, which economist David Rosenberg described on August 25 as already being in a depression. Despite representations to the contrary, the stimulus plan had 9,000 earmarks, including that $2 billion Illinois energy debacle. More generally, entitlement and other spending went into overdrive. Fiscal 2009 ended with a reported deficit of $1.416 trillion.

Recently, the Congressional Budget Office estimated that the deficit for fiscal 2010 will be a bit lower, predicting a figure of $1.342 trillion (see page three at this large-PDF report) after the dust settles. Wowee zowee.

The problem is that both last year’s and this year’s numbers are fudged. Even before considering the off-budget baloney and the Fed’s massive “quantitative easing,” each of which would require at least an additional column to treat properly, Uncle Sam’s real 2009 deficit was $115 billion lower than reported, while the 2010 deficit, assuming no additional non-cash adjustments, will be higher by the same amount.

This situation is not the CBO’s fault, as it follows the accounting rules implemented by the administration. The problem is with one of those accounting rules.

Beginning in April 2009, the Treasury Department began reporting its “investments” under the Troubled Asset Relief Program (TARP) using what is known as “Net Present Value” accounting. As I noted in a May 2009 column, this was a major departure from the cash-in, cash-out reporting people had come to previously expect, and which most believe still occurs.

Here in capsule form is how it works, and what occurred that has distorted reported results:

  • The government no longer treats the money “invested” in propping up banks, other financial institutions, car companies, and other businesses as “outlays.” Similarly, it doesn’t recognize principal repayments as receipts.
  • If (more like when) it becomes clear that the government isn’t going to get all of its money back, Treasury estimates how much those losses will be, and includes that estimate in “outlays.” This is a highly judgmental calculation that is vulnerable to political manipulation. During fiscal 2009, Treasury write-downs amounted to hundreds of billions of dollars.
  • But in March 2010 (shazam!), Treasury decided that it had overestimated its fiscal 2009 TARP losses. It arbitrary revalued its TARP investments upward by $115 billion, thereby reducing reported 2010 “outlays” by the same amount.

Here was my plain-English summary of that $115 billion adjustment when it occurred:

… the administration pushed as much “bad news” (asset writedowns) as it could into last year’s financial reporting, since last year was going to be a disaster no matter what. But since they overdid it with the writedowns last year (“Gosh, how did that happen?”), they can make this year look better than it really has been.

After adjusting for the $115 billion non-cash item just noted (and wryly noting that TARP somehow is treated as “mandatory spending”), and assuming that there are no more surprise TARP writedowns or writeups before the end of the current year, here’s how things really turned out last year, and how they will end up this year if the CBO’s estimates are otherwise accurate (all figures are in billions; numbers that changed from CBO’s original are highlighted):

CBOvCash082610Large

Well, well. While the administration and CBO will claim that spending and the deficit started to head downward in fiscal 2010, the reality is that fiscal 2010 will be significantly worse on both fronts.

One look at Table 3 in the July 2010 Monthly Treasury Statement confirms that there has been no letup in spending in most areas of the government. There’s a lot of competition for the most offensive increase, but my nominee would be the Department of Education, which through July had spent almost $81 billion compared to “only” $42 billion as of the same time last year. It would be nice to think that nearly doubling federal spending and building Taj Mahal schools with local tax dollars have made American students twice as smart. Dream on.

The administration’s accounting shift cleverly masks what it has really been up to during its nineteen months in office: Creating a permanently high spending structure that will become ever more difficult to reduce to a decent size when (or if) sanity finally prevails. A year ago, Victor Davis Hanson called this the “Gorge the Beast” strategy. Its aim is to justify tax increases and enhance the power of the ruling class over everyone else.

It must be stopped. A massive change in Congressional representation in Washington is a prerequisite, but it will only be a start.

The August Employment Situation Report (090310)

Filed under: Economy,Taxes & Government — Tom @ 6:33 am

The run-up:

  • As noted yesterday, ADP’s employment report showed 10,000 private sector jobs lost.
  • Also as noted yesterday, the Wall Street Journal carried a prediction that “the unemployment rate is “expected to creep up to 9.6% as U.S. employers drop another 110,000 people off the payrolls.” Just in time for the disengaged to start paying attention.”
  • Here’s the Associated Press, as of early Thursday evening: “The Labor Department is forecast to report Friday that private businesses added a net total of only 41,000 jobs last month, the fourth straight month of anemic hiring. When government jobs are included, total payrolls are forecast to drop by 100,000 – based mostly on about 115,000 temporary census jobs ending. The jobless rate is projected to rise to 9.6 percent from 9.5 percent, according to Thomson Reuters. Many economists expect growth to proceed at such a weak pace that the unemployment rate could top 10 percent by next year.”
  • I haven’t previously commented on the government’s productivity report released yesterday. While manufacturing productivity ticked up nicely at an annualized +4.1% during the second quarter (meaning an actual 1.02%), productivity everywhere else fell by an annualized 1.9%. The AP’s interpretation of this is that companies might be forced to hire people whether they really want to or not. I don’ think so. If manufacturing stays flat, those entities will be able to get by with the people they have. In services, if topline revenues aren’t increasing, companies won’t be able to afford extra people, and will try to work those on board harder, especially those who are salaried (the second quarter result may indicate that such efforts have diminishing returns).

This Month’s Benchmark

Readers here know that yours truly likes to look at the actual numbers (i.e., before seasonal adjustment). Last month, I was an outlier in saying that the July 2010 Employment Situation Report wasn’t as bad as seasonalized, er, advertised. In fact, the 91,000 private-sector jobs added on the ground in the real world was the best July performance since 1999. Unfortunately for Team Obama, it got a bad break when the seasonalizers took over and turned the best July on the ground in over a decade into a mediocre seasonally adjusted +71,000. By contrast, in July 2006, BLS converted a 79,000 on-the-ground job loss in the private sector into a 158,000 seasonally adjusted gain. C’mon.

Seasonal, schmeasonal. The first 18 or so months of the POR (Pelosi-Obama-Reid) Economy (i.e., June 2008 through November 2009) are going to make the seasonally adjusted calculations screwy for a long time to come. Why others don’t or won’t recognize this point is beyond me.

Anyway, here are the on the ground private sector numbers for the past 7-1/2 years:

BLSprivateSectorNSAthru0710

Treating August 2003-2007, which had average job additions of 90,000, as “typical,” and given how good last month really was, I would suggest that an acceptable August on-the-ground performance would be 75,000 or more jobs added. Anything below that will indicate that July might have been a favorable blip, and nothing more. I’m benchmarking on a curve, as a repeat best-in-a-decade performance would require 214,000 net job additions. Also be on the lookout for possible downward adjustments to the June and July on-the-ground figures, and for excessive additions in the Birth/Death model.

Heaven knows how BLS will seasonalize all of this, but I hope the point that the seasonalization exercise has become divorced from reality is starting to sink in. The law of averages would seem to dictate that Team Obama might get an upward break in seasonalization this time around, and a PR boost heading into Labor Day.

The August report will appear here at 8:30 a.m.

Here’s the first paragraph:

Nonfarm payroll employment changed little (-54,000) in August, and the unemployment rate was about unchanged at 9.6 percent, the U.S. Bureau of Labor Statistics reported today. Government employment fell, as 114,000 temporary workers hired for the decennial census completed their work. Private-sector payroll employment continued to trend up modestly (+67,000).

That looks like a “beats expectations,” but the proof will be in the actuals.

Here’s more (keep in mind that all figures are seasonally adjusted, so take with large amounts of salt):

… The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) increased by 331,000 over the month to 8.9 million. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

… Manufacturing employment declined by 27,000 over the month. A decline in motor vehicles and parts (-22,000) offset a gain of similar magnitude in July as the industry departed somewhat from its usual layoff and recall pattern for annual retooling.

Within professional and business services, employment in temporary help services was up by 17,000. This industry has added 392,000 jobs since a recent employment low in September 2009.

The change in total nonfarm payroll employment for June was revised from -221,000 to -175,000, and the change for July was revised from -131,000 to -54,000.

Those are nice prior-period revisions in the right direction totaling 123,000.

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UPDATE: Those looking for an Obama bash are going to be a bit disappointed for a second straight month. The actual result in the private sector beat the threshold by a lot:

BLSnotSeasAdjPrivateSectorTo0810

If there’s a qualifier, it’s that 115,000 of the BLS’s estimate of 131,000 jobs added on the ground came from the Birth/Death Model, and I do think that Birth/Death is generally being overestimated (otherwise, I don’t think we would have seen the comprehensive 900,000-job writedown that occurred in February).

But even if you cut Birth/Death in half, the result would have been +73,500 (131,000 minus half of the 115,000 Birth/Death number). That’s barely short of the +75,000 threshold set in advance.

August was also the second month during which more people were working than were during the same month a year ago, following a 27-month losing streak.

Thus, on balance, while August’s on-the-ground number compared to previous normal-economy Augusts isn’t nearly as good as July’s compared to previous Julys, it’s acceptable, but needs to accelerate in the coming months to be convincing.

All of this was deliberately written without reference to what media reports are saying, so it will be interesting later today or this evening to note the contrast, if any.

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UPDATE 2: As to the unemployment-related data, the unemployment rate went up primarily because (on a seasonally adjusted basis) more people started looking for work, and weren’t particularly successful at finding it. Again on a seasonally adjusted basis, 290,000 more people were working in August than were in July. This result, plus the positive prior-month adjustments in the Establishment Survey noted above, may mean that there’s more job growth occurring than the Establishment Survey is picking up. Let’s hope so, for the sake of both the unemployed and the taxpayers who are funding their extended benefits.

Positivity: Spanish officials thank Catholic Church for ‘important role’ in release of Cuban prisoners

Filed under: Positivity — Tom @ 6:32 am

From Havana, Cuba:

Sep 2, 2010 / 10:04 pm

During a visit to Cuba, two officials from Spain’s Socialist Party expressed gratitude to the Catholic Church for its “important role” in securing the release of several political prisoners.

Leire Pajin and Elena Valenciano from the Socialist Party, praised the release of political prisoners in Cuba and announced that six more newly-freed dissidents will be arriving in Spain tomorrow.

The six will follow in the footsteps of the 20 political prisoners released earlier this summer who were also immediately sent to Spain. The Cuban government announced last June its intention to free the 52 dissidents arrested in 2003. …

Go here for the rest of the story.