Are we there yet? What parent does not hear those words ringing in their ears? Well, in regard to our economic trail, let’s revisit an insightful piece of economic analysis put forth by Professor Kenneth Rogoff of Harvard and Professor Carmen Reinhart of the University of Maryland.
I initially reviewed Rogoff’s and Reinhart’s treatise in my January piece, “Time, Why You Punish Me?” Let’s revisit and review if we’re there yet, and if not just how much further we may have to drive. I wrote at the time:
In the midst of ongoing reading and research, I was fortunate to come across a presentation prepared by Professor Kenneth Rogoff of Harvard University and Carmen Reinhart of the University of Maryland, entitled “Aftermath of Economic Crises”
This work reviews a total of 18 banking crises which led to economic recessions since WW II. They put particular emphasis on 5 of these crises: Spain in 1977, Norway 1987, Finland 1991, Sweden 1991, Japan 1992. Each of the crises they studied share three characteristics:
1. Asset Market Collapse
Housing price declines averaged 35% over a 6 year timeframe. Equity price collapses averaged 55% over three and a half years.
Our housing markets are widely divergent with the major metropolitan cities within CA, AZ, NV, FL, and MI down anywhere from 25-35% over the last 12 months and down approximately 10-15% the year before that. Other markets have held up much better and are down approximately 10-15% in the last year. The national average declined 19% in the last year.
Our equity markets are currently 40% off the highs having declined slightly north of 50% at the March lows.
2. Declines in Output and Unemployment
Output declines from peak to trough on an average of 9% with a duration of roughly two years.
Unemployment rises on average 7% over a 4 year time frame (they discounted this figure somewhat by a rise in unemployment in emerging economies…they projected a figure of 5+% for developed markets).
Unemployment to this point has risen approximately 4%. Little doubt we have more to go on this front. In my opinion, given the automotive situation along with the problems in the municipal sector, we will see a double digit unemployment rate this year.
3. Government Debt Explodes
Government Deficit increases on average 86% primarily due to a collapse in tax revenues and not an increase in government bailouts (although, the world has never seen the types of bailouts currently in place here in the U.S).
Have you ever come across a politician who has not been overly aggressive in projecting revenues and equally aggressive in spending those funds? I am sure there is some politician out there who does not fit that bill, but I have never heard of him, and that includes the fiscal conservatives.
As Rogoff and Reinhart predicted, we are now experiencing a MAJOR decline in tax revenues at all levels. It is happening in California and every other state, city, and county across the land. At the federal level, the income in the form of tax revenues is flowing like a gutter in the middle of the Oklahoma plains. The American Institute for Economic Research released a report yesterday, Tax Revenue Plummets:
Income tax season is over and the numbers are in, and from the standpoint of the U.S. Treasury, they’re not good.
Federal tax revenues are collected throughout the year but are highest in the month of April, when most tax returns are filed. A year ago, the Treasury’s April revenue totaled $404 billion. This April, it fell to just $266 billion. That’s the largest April-to-April decrease since at least 1981 (the earliest year for which we could find monthly data).
The Institute further adds:
The Obama administration projects that revenues will rebound in 2011, partly as a result of the stimulus package. Indeed, they project that revenues will eventually be larger, relative to GDP, than they were even during the boom years of the late 1990s (when we had budget surpluses). Even if that does happen, the administration also projects that government spending will be so much higher each year that large deficits will continue, and the national debt held by the public will double over the next 10 years. If revenues don’t rebound as much as projected, the debt will be that much higher.
We are not there yet on all these fronts. Moreover, the GLOBAL nature of this recession puts further pressure on parts of our economy. In my opinion, the declining tax revenue is a factor not fully appreciated by politicians, economists, and market participants. As such, our ride will likely be that much longer.