Sunday, November 1, 2009

Perhaps the Economic Downturn Has Not Ended

Every day at 2 PM Eastern time, publishes summary data of polling related to the economy. I visit daily, as it is free. My single favorite statistics are whether people see their firms hiring or not hiring (layoffs or a hiring freeze leading to fewer workers), and daily spending as self-recalled without counting routine recurring monthly bills etc. Of the two, the jobs data is the most important. About 16 months ago, as unemployment started a rapid rise, the ratio of hiring:not hiring moved from a pre-recession 4:1 to close to 2:1. Almost a year ago, it went to a bit below 1:1, that is, more firms not hiring or net firing than net hiring. About 2 weeks ago, that ratio began to move just a bit in the favorable side of things.

Today this number is back to -1, meaning marginally more people seeing their firms reducing headcount than gaining workers. There has only been one quarter of GDP growth, and much of that was of the "command and control" nature, with the government saying to people: borrow and spend now, or you may never get such a good deal again. The homebuyer tax credit, which is really what the administration cares about because of the benefits it gives the financial community, looks to be in an extension mode, and the Fed continues to buy mortgage-backed securities.

The administration has also responded to various analyses of the cost per job saved or created by the "stimulus" bill (ARRA). From

. . . Jared Bernstein, the chief economist and senior economic advisor to Vice President Joe Biden, said he is confident that the stimulus bill “saved or created over a million jobs, and we’re on track to save or create the 3.5 million jobs we estimated over the life of the recovery act.”

The article continues:

That boils down to a cost per job of $92,000, Bernstein said.

Different analyses give different numbers. Let us say $100,000 per job. What am I missing? Isn't this a money-loser? Wouldn't unemployment insurance have been less expensive? How about Christina Romer's own research that tax cuts have a much greater economic multiplier effect than government spending?

Why are various measures of consumer confidence deep in traditional recession, not recovery mode? Do the people not know their own job situation and that of their family, friends and neighbors, and what they see their employers doing?

Has Team Obama given a scintilla of thought that perhaps their efforts have been making the economy worse, in part by saying how terrible things were when they came into power and then with all the "stimulus", bailouts, etc.? Perhaps their economists were correct when they predicted an 8.5% peak unemployment rate if the administration had done nothing!

Maybe, just maybe, the economy is not following the script because the administration is focused on solutions for a traditional industrial recession caused by inventory imbalances and deliberate Fed tightening, not one caused by gross malfeasance and incompetence in the financial markets. One in which Goldman Sachs can "earn" $9 B in one quarter while the economy continues shedding jobs rapidly.

If the stockholders and their bondholders of Team Finance simplify their balance sheets, dump all Level 3 mark to "whatever" assets, provide proof of balance sheet strength, then the smart money may well return to the U. S. from its unproductive use in Swiss gold vaults and want to reinvest in the U. S.

Till then, perhaps all that's happened is that the winds have died down from hurricane strength to tropical storm strength but remain, doing damage all the same.

Copyright (C) Long Lake LLC 2009


  1. Dr.,

    Romer would tell you that tax cuts are not as effective now as spending because the beneficiaries of tax cuts will deposit the money in banks or buy assets on the secondary market to rebuild their wealth. I agree with this argument, because that is precisely what I would do.

    The economic malaise is captured in this graph:[1][id]=BUSLOANS&s[1][range]=5yrs

    It is rational to pay down debt after a credit shock, but it is not economically expansionary.

    The firm I work for manufactures capital equipment with purchase prices starting at $100K and ranging up to $1,000K and more. Although there are a lot of queries for pricing, there are few purchase orders coming in. We have zero interest in purchasing additional capacity, we're keeping debt as low as possible because future cash flow is uncertain, and we don't want to increase fixed expenses by hiring. Our business is pro-cyclical though, so I expect our recovery to trail the economy as a whole.

    I agree that the incentives for housing are perverse. As you point out, you can't export a house. But the special interests who support these subsidies are pervasive in local, state, and national government. My local government is dominated by real estate developers - motivated to take a position that most people find distinctly uninteresting so they can channel profits into their personal bank accounts. My local city council never met a development project they didn't like, which is not surprising since the councilors often stand to benefit personally from the development.

    The other reason not to subsidize auto manufacturers is that better capitalized, better managed manufacturers are willing to locate in the U.S. and produce products with U.S. labor. A Honda out of Marysville in the driveway is fine by me and a job with Honda seems far more secure than one with Government Motors, Chrysler-Fiat, or even the highly leveraged FoMoCo.

    As long as it is more profitable to speculate in paper assets and real estate than productive assets, we'll get the economy we deserve. It would take longer than a 2 or 4 year election cycle to increase productive investment at the expense of leveraged speculation. It would also take the will to resist the lobbying of the leveraged speculation industry. The purpose and will is lacking.

  2. Well said, Oregon Guy

    I do not favor tax cuts, either. But targeted PERMANENT tax cuts for those w a high propensity to spend will have a significant multiplier effect. The one-time tax cuts (that have occurred 2 years in a row) represent silliness and vote-buying.