12 August 2015

Jeb's Bold (But Vague) Plan for 4% GDP Growth (which we can only hope isn't the same one he had for Florida)

Jeb Bush is promsing 4% GDP growth. That would put him in the company of presidents FDR, LBJ, Reagan, and Clinton.

I've heard him say something like, "There is no reason we can't have 4% growth. We did it in Florida." He's fairly vague about how he'll do this, though. His big brother George W. promised to make Iraq a beacon of democracy in the Middle East but didn't seem very clear about how that would happen or why it wasn't already so. At first glance it would seem that Jeb has a similar problem of offering platitudes rather than actual policies but in his defense, Jeb has actually accomplished his goal. While he was governor of Florida, the state did hit 4% GDP growth.

FDR hit 4% GDP growth with a combination of New Deal and WWII spending. LBJ hit it with spending on Vietnam and the Great Society. Reagan outspent the Soviets on the Cold War arms race. Clinton rode a wave of dot-com innovations and investments.

It takes something historic to sustain 4% growth in a country as big as the US. 4% GDP growth for a full four years would result in GDP that's $3 trillion bigger than it is now. That's huge. Only four countries (US, China, Japan, and Germany) have an annual GDP greater than $3 trillion.

So what remarkable thing did Jeb do in Florida to hit 4% growth? Real estate.

George Packard, in The Unwinding, captures the dynamic of growth through real estate speculation in Tampa, Florida during Jeb's time as governor.
As long as more people came this year than last year, and next than this year, there would always be more houses to build, and more jobs in construction and real estate and hospitality. Property values would continue to go up, and the state could continue to do without an income tax, financing its budget with sales taxes and real estate fees. ... In the exurbs going up around Tampa Bay, property taxes could remain low, with new schools and fire stations funded by bond issues floated on the projection of future growth. ....
A few local critics pointed out the strategy's resemblance to a Ponzi scheme. But everything kept growing and no one paid attention. ...
The growth machine became the employment agency. Other than minimum wage jobs at restaurants and big-box stores, it was hard to find work outside the real estate industry. In the hierarchy of the boom years, the poor were Mexican day laborers on construction sites; the working class had jobs in the building trades; the lower middle class were bank tellers; the middle class were real estate agents, title insurance agents, and civil engineers; the upper middle class were land use attorneys and architects; and the rich were developers. ....
At the peak of the madness, in 2005, a house in Fort Myers sold for $399,000 on December 29 and $589,900 on December 30. Flippers were the ones driving prices to crazy heights. ..
What sort of culture promotes such growth? Packard writes that, "auto insurance was higher in Florida than elsewhere - insurers called it 'a fraudulent state.'" The demand for housing was not because of some booming industry. The demand for housing was the booming industry. During the peak of Jeb's governorship, about half the houses selling so rapidly around Tampa were going to investors. Speculators.

The real engine of this unsustainable growth was the banks' willingness to write mortgages for nearly anything, for nearly any amount, issued to nearly anyone. It didn't really matter who had the mortgage for two reasons. For one thing, these mortgages were now being re-packaged into securities and sold in global financial markets. The banks issuing the loans didn't hold the loans. For another, even if someone defaulted on a loan and the holder of the loan repossessed, what was the worst that could happen? With rising home prices, whoever owned the loan could easily end up making money by taking possession of a home now worth more than when they first financed it. A critical number of these mortgages were never going to be paid for with income; speculators merely needed short-term loans that would enable them to sell the home later for more.  No one really thought about what would happen to the equity behind those loans if huge swaths of households defaulted on their loans and home prices fell.

It took awhile for the boom to bust. For years it made for ... well, it made for 4% growth. Happy times.

Then, in 2007, Allied Van Lines started to move more people out of the state than in. "Between 2007 and 2008, the number of electrical hookups in Florida decreased for the first time in the forty years that records had been kept. And for the first time ever, the state's net flow of immigration, the engine of the growth machine, dwindled to zero," Packard writes. This could not end well. Given the mortgages were no longer owned by local banks, the wreckage was not going to be contained to the state. It would ripple across continents.

When these mortgages blew up, they blew a hole in the side of credit markets that nearly sunk the global economy. When the foreclosures came, they flooded into Florida's courtrooms. Judges in their 70s were called out of retirement and given as many as three thousand cases at a time, working through 20 an hour, each case another home foreclosed, leaving more people homeless and more investments written off than any hurricane in the state's history.

Jeb Bush was governor of Florida from Jan of 1999 through December of 2006. As it turned out, his timing was perfect for claiming economic boom and avoiding economic blame. When Florida's real estate market blew up, he had moved out of government housing - er, the governor's house - in Tallahassee.

The month that he left office, January of 2007, things were great. The unemployment rate in Florida was only 3.5%, impressively lower than the nation's healthy 4.6%. With a booming housing market, wealth was high and taxes were low. A year later, though, the unemployment rate in Florida was the same as the rest of the country; 3 years after Jeb had left office, when unemployment in the US was at a painful 9.7%, Florida's unemployment rate was a disastrous 11.2%.

4% GDP growth is a great goal. It is double what Jeb's father and brother achieved during their time in office and would put Jeb in the company of FDR, LBJ,  Reagan, and Clinton. History suggests, though, that a president intent on such growth needs to have a grand plan like fighting Nazis or building a welfare state. We can only hope that Jeb's plan is something other than another mortgage-leveraged real estate boom. So far, though, he hasn't explained it. If that doesn't worry you, I've got a beacon of democracy to sell you in the Middle East.

Update on 14 Sep 2015 - a month later.
fivethirtyeight ran an article about governor's records here and include a similar set of stats in the section about Jeb.

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