Tag: economics

But how many were saved?

The Wall Street Journal finally begins to notice that there is no economic recovery underlying the March 2009 advance:

The jobs picture is much worse than they’re telling you. Forget the “official” unemployment rate of 9.5%. Alternative measures? Try this: Just 61% of the adult population, age 20 or over, has any kind of job right now. That’s the lowest since the early 1980s — when many women stayed at home through choice, driving the numbers down. Among men today, it’s 66.9%. Back in the ’50s, incidentally, that figure was around 85%, though allowances should be made for the higher number of elderly people alive today. And many of those still working right now can only find part-time work, so just 59% of men age 20 or over currently have a full-time job. This is bullish?

(Today’s bonus question: If a laid-off contractor with two kids, a mortgage and a car loan is working three night shifts a week at his local gas station, how many iPads can he buy for Christmas?)

Any predictions on when the first serious mention of Great Depression 2.0 occurs in the WSJ? This can’t be an airy dismissal, but should be accompanied by an admission that there is no double-dip, it’s all just one giant multi-year contraction.

The Home of the Bankrupt

The bankrupt banks are pretending to be solvent. So, it should come as no surprise that the Federal government has been following their lead.

[T]he IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled.

The scary thing is that these calculations indicating national insolvency are based on numbers that are ludicrously optimistic. As I have been saying for more than two years now, it’s not a question of if the system collapses, it’s only a question of when.

Anticipating the excuse

Paul Krugman finally produces what was always a totally predictable excuse for the failure of the Obama stimulus package:

It’s crucial to keep state and local government in mind when you hear people ranting about runaway government spending under President Obama. Yes, the federal government is spending more, although not as much as you might think. But state and local governments are cutting back. And if you add them together, it turns out that the only big spending increases have been in safety-net programs like unemployment insurance, which have soared in cost thanks to the severity of the slump. That is, for all the talk of a failed stimulus, if you look at government spending as a whole you see hardly any stimulus at all. And with federal spending now trailing off, while big state and local cutbacks continue, we’re going into reverse.

Krugman’s excuse for the failure of the Bush (2008) and Obama (2009) stimuli isn’t even new. Consider the following passage from a brilliant book written by an astonishingly handsome author more than one year ago:

Ironically, there is no shortage of historical examples to support the idea that even those who nominally subscribe to an empirical approach don’t hesitate to abandon their empiricism when the data doesn’t support their theories. Consider, for example, how two decades of failing mainstream economic policies in Japan have no more caused mainstream economists to conclude that their theories are incorrect than 70 years of economic failure in the Soviet Union caused socialist economists to abandon Marxism. Some excuse is always found to explain away the theory’s failure and rationalize its continued application; if the fiscal stimulus was not too small or too late, then the interest rate hikes were too large or too early. If the federal government’s expansionary efforts were unsuccessful during the New Deal, then it must have been due to their being overwhelmed by the contractionary policies of the state and local governments.
– The Return of the Great Depression, 134

There’s really no reason to read Paul Krugman’s columns when you can read this blog and anticipate what he’s going to be writing one year later. Because Neo-Keynesians never learn from the inevitable failures of their economic models. In the Telegraph today, Ambrose Evans-Pritchard writes: “In Japan itself core CPI deflation has reached -1.5pc, the lowest since the great fiasco began 20 years ago. 10-year yields fell briefly below 1pc last week. Premier Naoto Kan has begun to talk of yet another stimulus package. “The time has come to examine whether it is necessary for us take some kind of action,” he said.”

Past as prologue

The New York Times embraces the myth of “the new normal” in an attempt to evade the obvious:

The new normal challenges the optimism that’s been at the root of American success for decades, if not centuries. And if it is here, the new normal could force Democrats and Republicans to rethink their traditional approach to unemployment and other social problems.

Some unusual suspects, like Glenn Hubbard, dean of the Columbia Graduate School of Business and an economic adviser to George W. Bush, are talking about a new, expanded role for the government in addressing the problem. In particular, Mr. Hubbard favors investing more in education to retrain workers whose jobs are never coming back. “If there is a new normal, it’s more about the labor market than G.D.P.,” he said. “We have to help people face a new world.”

For his part, Mr. Gross, also a free-market advocate, believes that it’s time for the government to spend tens of billions on new infrastructure projects to put people to work and stimulate demand.

First, if you believe it is time for the government to spend billions of dollars to put people to work and stimulate demand, you are not a free market advocate. Second, how is spending government money to “stimulate” the economy anything but a traditional approach to unemployment? The problem is debt and adding more public debt to the equation is only going to make matters worse. You would think this would be obvious, given that both Hoover and FDR tried spending billions of dollars to put people to work and what they got was the Great Depression. It is intriguing, but not surprising, to see all of the politicians and media figures so intent on taking the very actions that will cause the outcome they hope to avoid. What is remarkable is that they are doing this with the benefit of hindsight.

The limited debate

The NYT doesn’t know what a real deflationista is:

The split between the chief economists, whose work helps inform trading strategies recommended to investors by their firms, echoes a broader and sometimes fiercer debate among academic economists and commentators about the threat posed by deflation and what the government’s response should be.

According to the deflationistas, as they are nicknamed, a new round of stimulus spending by Washington is urgently required to stave off a Depression-like cycle of falling prices and wages that is difficult to reverse once it is set in motion.

Inflationistas, by contrast, worry more about the effect that additional government borrowing could have on the recovery. With the budget deficit expected to hover around $1 trillion a year for the next decade, they say, interest rates could eventually surge, making borrowing — and goods — more expensive. A double dip, they say, is highly unlikely.

This isn’t a genuine inflation vs deflation debate, it’s merely an intra-Keynesian one that completely misses the points made by the hyperinflationists and the true deflationists alike. A true deflationista is someone like Bob Prechter, who has long predicted that neither fiscal nor monetary policy can possibly prevent deflation brought about by the collapse of credit. The real debate – although it is more a question than a proper debate – is whether the central banks can print money faster than credit collapses in a fractional-reserve, debt-money system.

Given that there is $53 trillion in total credit market debt compared to $8.6 trillion in M2 and the mainstream deflationary fears have been caused by total credit merely remaining flat for the last two years thanks to the heroic debt-creation measures of the Soebarkah administration and the Federal Reserve increasing M2 at an annual rate of 5 percent, the outcome increasingly appears to favor the real deflationist camp.

Employing the imprisoned

One in 31 adults are under the control of the correctional system (prison, parole, probation) according to a March 2009 Pew Center Report. 1 in every one hundred adults are imprisoned in jail, state prisons, or federal facilities. 25 years ago those under the control of the correctional system was one in 77 adults…. By historical standards the rate of imprisonment in the US is 350+ percent of what it was in 1980. Globally, the US is 3 times higher than the next in line for imprisonment, seven times higher than the median rate for an OCED country, and seventeen times higher than Iceland which has the lowest rate of incarceration.

After reading this, I did a little research and learned that according to the National Institute of Corrections, the cost of imprisoning my father will be right around $500,000 if he serves most of the 15 years he was sentenced. That is just over 40% of the amount he was convicted of not paying in taxes; if one takes into account the amount of taxes he actually did pay over the previous decade, the federal government can expect to be out around 13x more than they believe to have lost on his taxes alone. And that doesn’t even begin to take into account all of the jobs that were lost and the opportunities that are presently being forgone as a result of locking up a proven entrepreneur. I understand the logic of making an example, of course, but I tend to doubt even those who conceptually support the long-term imprisonment of “tax evaders” would conclude that spending at least $13 to chase $1 is an intelligent investment, especially not for a nation in which the debt per taxpayer is already $120,000.

Meanwhile, John Kerry, Tim Geithner and other “public servants” who have never contributed anything in the way of creating jobs or economic activity continue to go about their business of interfering with the economy unmolested. Now, I’m not looking for any justice here nor am I ranting about the US tax or correctional systems; they are what they are and I’m not interested in their idiosyncracies. I am merely observing that the statistics related to them are another obvious sign of the structural precariousness of the current economic system.

Rather than borrowing money to imprison people, wouldn’t it make more sense to hire out minimum-security prisoners on foreign contracts? That’s not all that far off from how the English settled Australia, after all, and surely it would be to everyone’s benefit if the US had talented business executives, computer programmers, technical experts and even movie stars available for overseas hire. Let them remain in exile for the duration of their sentence and have one-quarter of the revenue they generate go towards paying the costs of the correctional system. Another quarter would go towards allowing them to pay off their fines before they are released from the system, and half would be their incentive to perform well.

This would also help mitigate an imminent problem. With the increase in crime and decline in tax payments that have already been observed as a result of the economic contraction, it is very unlikely that the automatic reaction – to imprison all of the new offenders – is going to be an option given the way in which the overloaded correctional system is already helping drive states like California and Illinois into bankruptcy. We know that 1 in 77 is sustainable. But I don’t think either the economy or the nation can hope to survive a ratio of 1 in 25, which at this rate will be reached in early 2014.

Perhaps exile employment contracts sound too exotic and potentially enjoyable to serve as “corrections”. But I don’t think too many people would sign up for running a technology company in Iraq, overseeing mining operations in Afghanistan, or starring in low-budget Venezuelan action-flicks of their own accord. And as the projections indicate, the system is going to be forced to change very, very soon.

WND column

You Were Warned

The ECRI’s Weekly Leading Indicators has now fallen eight consecutive weeks and has been below -10 for two consecutive weeks. … [T]here has never been a WLI plunge in history of this depth and duration, nor any dip at all below -10 that has not been associated with a recession.
– Mike Shedlock, ECRI WLI in Negative Territory, July 31, 2010

The percent change from the preceding year in real GDP was revised down for all 3 years: from 2.1 percent to 1.9 percent for 2007, from an increase of 0.4 percent to 0.0 percent for 2008, and from a decrease of 2.4 percent to a decrease of 2.6 percent for 2009.
– Bureau of Economic Analysis, Revised Estimates: 2007 through First Quarter 2010, July 30, 2010

As the government statisticians revise their statistics downward and the leading indicators suggest that the so-called recovery is nothing more than an artifact of massive federal borrowing and spending, I thought it would be useful to revisit the scenario that I considered to be the most likely when I finished writing “The Return of the Great Depression” thirteen months ago. Given the advantage of one year of hindsight, I see absolutely no reason to change my conclusion regarding the ongoing global economic contraction. “It is not over. It has only begun.”

Mailvox: responding to a liberal

CG asks for help in responding to this, but I think he is probably looking in the wrong place by coming here:

Conservatives have no clue about business. They think that business can sell MORE AND MORE to people who have jobs paying less money, with a collapsing middle class. Who is going to buy stuff after we get through gutting the system and eliminating the buying power of workers in this country? What fuels consumption now that the borrowing binge we’ve been on for thirty years is over. Can consumers borrow their way to prosperity, along with our economy. How do you pay for the $10s of trillions in private debt that has masked a collapsing real economy which used to be fueled by savings and investment?

40 years ago we had a third of the private work force unionized, tariffs to protect domestic industry, 70% marginal rates on income over about 3 million, and were the most prosperous country on earth, the exporter and lender to the world. Now that Reaganomics has worked it’s magic for 30 years, China owns us.

Not sure how you think us running 30-40 billion per month trade and current account deficits will work out long term. Love to hear the theory of how we import our way to prosperity, trading jobs that produce wealth, transform raw materials into valuable to valuable goods, for “service” jobs that add no wealth and don’t sustain any economy that I’ve known of in all of recorded history. How long can we keep sending the rest of the world paper, and they send us oil and TVs and cars, and clothes and electronics, etc. Seem unsustainable to me, but I don’t understand how business works.

This demonstrates why the Democrat/Republican, liberal/conservative poles simply don’t apply to the present economic situation very well. CG’s liberal interlocutor is correct in diagnosing the problem as debt and “free trade”, but he is incorrect in thinking that Reaganomics is to blame for either of them and he is deeply mistaken to think that high marginal tax rates helped produce societal wealth. One doesn’t increase savings and investment through taxation, after all, and while it is absolutely true that consumers can’t borrow their way to prosperity, governments can’t tax-and-spend their way there either, Keynesian arguments to the contrary notwithstanding.

The reason we were the most prosperous country on Earth 40 years ago was very simple and easily proved. The USA was about the only major economy on Earth that had not had its industrial infrastructure completely destroyed by World War II and American industry made an absurd amount of money selling both consumer and capital goods into European and Asian markets that had to rebuild their industrial base. This was the source of our post-1940s economic growth and concomitant wealth. Now that all of our former competitors have rebuilt their economies and numerous other countries have succeeded in developing theirs, it has naturally become much more difficult to maintain our economic primacy vis-a-vis the rest of the world. As I have previously stated, but have yet to conclusively prove, the Ricardian concept of comparative advantage has turned out to be incorrect and therefore American wealth should be expected to decline in both a relative and absolute sense as other countries grow at the expense of American industry and workers in a free trade environment.

It’s not that conservatives have no clue about business, they have no clue about economics. But neither do liberals; the fact that one party is incorrect does not automatically make the other right. The fact that conservative Republicans and liberal Democrats alike supported TARP, the banking bailouts, and the automotive bailouts demonstrates that the intrinsic problem is superpolitical and therefore will not be solved regardless of which political faction ends up temporarily on top.

Not that tape, the other one

Paul Krugman attempts to whitewash his record on the failed stimulus program:

Those of us who say that the stimulus was too small are often accused of after-the-fact rationalization: you said this would work, but now that it hasn’t, you’re just saying it wasn’t big enough. The quick answer to that accusation is that people like me said that the stimulus was too small in advance. But the longer answer is that it’s all in the math: Keynesian analysis provides numbers as well as qualitative predictions, and given reasonable projections of the economy’s path in January 2009, the proposed stimulus just wasn’t big enough. Let’s go back to the tape, January 9, 2009:

Even the C.B.O. says, however, that “economic output over the next two years will average 6.8 percent below its potential.” This translates into $2.1 trillion of lost production. “Our economy could fall $1 trillion short of its full capacity,” declared Mr. Obama on Thursday. Well, he was actually understating things. To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that’s not enough.

Brilliant stuff! How does he do it? And now let’s go back to the tape only two months before, to November 8, 2008:

I wrote this morning’s column partly because I had a hunch that the Obama people might be thinking too small on stimulus. Now I have more than a hunch – I’ve heard an unreliable rumor! So let’s talk about stimulus math, as I see it….So we need a fiscal stimulus big enough to close a 7% output gap. Remember, if the stimulus is too big, it does much less harm than if it’s too small. What’s the multiplier? Better, we hope, than on the early-2008 package. But you’d be hard pressed to argue for an overall multiplier as high as 2. When I put all this together, I conclude that the stimulus package should be at least 4% of GDP, or $600 billion.

Now, I may not be a Nobel Prize winner or a professional economist, but even lacking such credentials, I think I can successfully work out that $600 billion is SMALLER than $775 billion. Put not your trust in Keynesians.

Why I am not an economist

“The development of a profession of economists is an offshoot of interventionism. The professional economist is the specialist who is instrumental in designing various measures of government interference with business.”
– Ludwig von Mises, Human Action

In other words, if you want to understand what’s actually happening as opposed to learning the latest justifications for more government intervention, you would be wise to find yourself an informed amateur. It wasn’t as if Smith, Ricardo, or Marx had any professional credentials, after all. And consider, for example, that Bruce Bartlett is the first professional economist to finally reach the conclusion that I have been telling everyone for literally years: there is nothing that either the government or the central banks can do to “fix” the financial crisis or the economic contraction.

For the last three weeks, my Fiscal Times columns have been focusing on Fed policy. The main reason is that although I think there is scope for additional fiscal stimulus, there is simply no support in Congress for doing more than has been done. Like it or not, those favoring stimulus got one bite at the apple and they didn’t do enough….

That basically leaves two things that the Fed can do: buy longer term securities and buy very unconventional assets such foreign currency denominated bonds. The first it has already done some of without doing much to get money circulating. The second would put the Fed at war with the Treasury, which jealously guards its dominion over exchange rate policy. It will also raise holy hell with the “strong dollar” crowd and undoubtedly invite foreign retaliation. It’s even possible that China could effectively sterilize the intervention by soaking up all the dollars created by the Fed.

Thus it appears that there is virtually nothing that can be done to stimulate the economy. For various reasons—political, institutional and substantive—there is no prospect of either fiscal or monetary stimulus.

More importantly, it wouldn’t work anyhow! Bartlett, who is correct in discerning that there is no realistic political chance for more fiscal stimulus even though he is incorrect to think it could possibly help, calls for “new thinking” on stimulus. I’d be happier if they’d all just throw up their hands in despair, admit that they have no idea what they’re doing, and stop digging the damn hole deeper.