Households, Government and Businesses Are In Position for a New Boom

The economy is in the best position it's been for all of this century.

Households have paid down debt and increased wealth, now positioned to comfortably begin spending again. That will show up as additional tax revenues for governments and additional sales for businesses.

The government has brought spending and taxes back within the normal range. This doesn't just mean a lower deficit. It also means that the government no longer has to drag the economy down through austerity measures that raise taxes and lower spending.

As households and governments return to business as normal, businesses will boom as well, which will feed back to the other two sectors.

The Government Has Recovered

The deficit has come down one trillion dollars in four years. This deficit reduction during  the recovery has taken 1% out of GDP growth during that time through higher taxes and lower spending, but that drag is likely to stop. Remarkably, we've gone from record deficit to normal within just five years.

In the graph to the left you can see two straight lines representing the average tax revenue as a percentage of GDP (the lower of the two lines) and the average federal spending as a percentage of GDP (the higher).

The line that raises above the band shows actual spending. The line below the band shows actual tax revenues. In 2009, they were both at their most extreme, taxes at 14.6% of GDP and spending at 24.4%.

Since then, austerity measures and the recovery have changed  this. At 17.6% of GDP, taxes this year are projected to run just above the average of 17.4%. At 20.4%, government spending will be just below the average of 20.5%. And reports so far this year suggest the deficit will be even lower than this projection.

Government spending will - at a minimum - now be a stabilizing force on the economy rather than a drag on expansion as it has been throughout this long recovery. Government austerity is one reason it took 6.5 years for the economy to create the jobs lost during the Great Recession. (The other, of course, being simply the massive number of jobs lost during this financial crisis, as can be seen in the graph below.)

Households Have Recovered

Last month the economy hit a milestone: total employment hit a new high, finally restoring all the jobs lost during the Great Recession. This is a big deal for so many reasons. Just as the government has finally brought taxes and spending to within normal bounds, this means that households are finally returning to something like normal as well.

For the first time since 2000, the economy created more than 200,000 jobs per month for four months in a row. These sorts of realities change how people feel about spending. Even people who have kept their jobs have been more cautious about spending or taking out loans when the economy was so bad. The improving labor market helps them to begin feeling more confident about spending. And households are, by some measures, in their best position to begin spending in a generation.

Last year household wealth rose by $10 trillion, finally restoring all the wealth lost during the Great Recession. The stock market is regularly hitting new highs. Home prices are up 20% in the last two years.  While assets have been appreciating, households have also been paying down debt. What households pay to service debt is the lowest it has been since the Fed began to track this in 1980, a generation ago. All of this suggests that households will begin to spend again and that is good news for everyone - from businesses to government to other households.

Businesses, Households, and Government Are Now Positioned to Boom

So imagine this combination.
Households feel emboldened by additional wealth and a healthier jobs market to spend again.
Government spending will begin to grow at normal rates again.
Businesses - facing increased spending from households and government - will begin to invest and expand.
The combination of household spending and business expansion will provide more tax revenues, allowing the government to spend more and to pay down more debt, putting more capital into financial markets.
The combination of household spending and government spending will mean more business for business, allowing them to hire more and pay out more to shareholders.
The combination of government spending and business expansion will provide more jobs and income to households.

For the first time this century, we will enjoy an economy in which all the pieces - government, households, and business - are moving towards full capacity without resorting to excessive debt.

It's been a long time.

And it could result in a boom that will be even more impressive than the ones we had in the 1980s and 1990s.

P.S. 10 June, I would add this graph of the ratio of unemployed workers per job opening from 538.

This shows that there are fewer workers competing for the same jobs, which is great news for job-seekers. That ratio is nearly back to pre-recession levels. Once it hits that level, I predict wages will again start to climb.

More Evidence for Optimism About 2013 - Car Sales

Reported in the Atlantic's new Quartz, it is not just stocks and homes that Americans are again buying.

US auto sales in March hit their highest level since 2007, showing American consumers are indeed in a mood to go shopping.... luxury Cadillac brand was up by almost 50% compared to the same period last year.The sales numbers show the US auto industry is in a sustainable recovery.  The news is even better for luxury brands, which posted stronger gains than their mass market counterparts. BMW, Audi, and Lexus all reported double-digit percentage growth in sales.

As mentioned previously in this blog, economists were oddly cautious in their forecast for 2013. I think they should have been optimistic instead. This, it seems to me, is further proof that GDP will grow by more than 3% in 2013. (That optimistic prediction is explained here, The Wealth Effect Will Boost 2013 GDP.) 

Giuliani & McCain - Is Dignity as a Victim Enough to Make a Great Leader?

Giuliani and McCain are the two front-runners for the Republican nomination for president. They curiously share something more profound than multiple wives. They are honorable victims.

John McCain is a different kind of war hero. He didn't orchestrate the invasion of Europe and defeat of Hitler, as did Eisenhower. He didn't defeat the British, as did Washington or Jackson. McCain's distinction did not come from victory but came instead from his bravery as a prisoner of war. I'm not about to denigrate something as profound as his courage in the face of torture and years of captivity. In fact, I think that such an experience would give him unique qualities that would be valuable in a president. But it is worth noting that his distinction was not that of a traditional war hero. John McCain was a POW in a war that America either lost or withdrew from - depending on how you keep score.

Rudy Giuliani, too, is a different kind of political leader. Before 9-11, Giuliani's political career was largely over. His choice to date another woman while still married had compounded other problems he had with the public. Before he won approval for his handling of the crisis of 9-11, Giuliani's political career was largely over. It is worth noting that Giuliani, a former prosecutor, did not break a case that revealed the plan to attack the twin towers. He did not heroically stop the slaughter in the 11th hour. Rather, Giuliani distinguished himself by tirelessly attending funerals, rallying rescue workers, and helping the city to recover emotionally from a devastating blow. Again, as with McCain, this experience likely imbued him with certain qualities that would be favorable in a president. But note, once again, that Giuliani is a different kind of hero. He, too, was more victim than conqueror.

So, what does this say about our national psyche? We have two Republican front-runners who have distinguished themselves as honorable victims, not as heroes who defeated the bad guys. Have we reached a point when the American public is so defeatist about issues like terrorism, climate change, the erosion of civil rights, occupations from which we can’t extricate ourselves, and competition from outsourcing that we've lost our optimism and are now desperate to recover our honor, even if it is tainted with defeat?

If so, it makes sense to me for the first time why the junior senator from Illinois, a man with so little experience that he can't be judged, might have such widespread appeal. The audacity of hope indeed.