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A 'Lost Decade' for America
Tweet Share on Facebook October 21, 2008 Comment (6)The econ team over at Wachovia argues that rather than "reaching back decades for a guidepost to the trajectory of the U.S. economy over the next few years, the Japanese experience of the 1990s may be more illustrative than the Great Depression of the early 1930s." And what was that like?
1) The Nikkei stock market index climbed about sixfold between late 1982 and the last trading day in 1989, only to give up most of its gains over the subsequent 14 years.
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Bernanke to Obama, Dems: Don't Raise Taxes
Tweet Share on Facebook October 20, 2008 Comment (10)So in his testimony to Congress today, Bernanke gets asked about the wisdom of letting the 2001 and 2003 Bush tax cuts expire. Bernanke said a) "there is the Keynesian effect of tax and spending," and b) "our tax system needs to be made more efficient." Let me translate: a) "raising taxes right now would make the economy worse," and b) "the tax system should be about promoting economic growth." Basic economics, gang. If only Congress would listen.
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A V-Shaped Recovery. I Want to Believe
Tweet Share on Facebook October 20, 2008 Comment (3)Sunshine Supermen Brian Wesbury and Bob Stein of First Trust Advisors offer a dose of economic optimism:
Rather than being the first of several negative quarters of economic growth, we expect this will be a temporary capitulation to the credit crunch, with almost all of the economic losses postponing economic activity into what will turn out to be a healthy period of growth in the second half of 2009. To be precise, we expect real GDP to be flat in Q1-2009, but then grow at an average annual rate of 3.0% in the final three quarters of next year.
The reason: This sharp drop in growth is due to a temporary drop in velocity due to a true credit crunch with some panic thrown in for good measure. It is not a typical recession caused by fundamental, economy-changing events such as higher tax rates, tighter money, protectionism, or other public policies that stifle innovation or entrepreneurship.
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Why a Deep Recession Must Be Avoided
Tweet Share on Facebook October 20, 2008 Comment (1)Some folks want the government to do nothing to ameliorate the economic downturn. Better a depression than a big expansion in government power, they say. But a sharp downturn could actually result in worse economic measures being undertaken. As Nobel Prize winner Gary Becker blogs:
On the other hand, if I am wrong, and there is a prolonged and deep worldwide depression, not simply a recession, the retreat from capitalism and globalization could be severe, as happened during the Great Depression. Many countries would increase their tariffs and other trade barriers to reduce the competition to domestic production from imports. Nationalization rather than privatization will be in favor as governments take over ownership of many weak companies. Regulation of executive salaries and other wage and price controls will become much more common. Competition will be stifled as governments encourage companies to coordinate their pricing and other policies, and change laws to make it much easier for unions to organize workers. These are not attractive prospects.
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Joe the Plumber: How Big Is Obama's Small-Business Tax?
Tweet Share on Facebook October 20, 2008 Comment (1)The folks over at Americans for Tax Reform did a little digging and found that according to the IRS Statistics of Income Division, there were about 28 million small-business owners in 2006. As ATR does the math: "Almost 3 million of these earned at least the Obama tax hike-triggering $200,000 per year. Altogether, these business owners reported $700 billion in profits. And two thirds of these profits—$470 billion—were earned in the Obama tax hike households." I think the level is $250,000, not $200,000, but the point is taken. You have to look at the size of the small businesses affected, not just the number.
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A Buy Signal for Washington
Tweet Share on Facebook October 18, 2008 Comment (1)Next to Al Gore's zero carbon emissions idea, the Paulson plan may be the most audacious way ever proposed to spend a trillion bucks (OK, $700 billion), turning the Treasury Department into a leveraged sovereign wealth fund that buys distressed debt or takes equity stakes in shaky banks. But it's not the first $700 billion megaspending idea to come from Washington.
Back in 1999, President Clinton proposed taking that exact amount from future budget surpluses and investing it directly in the stock market to help make Social Security solvent. Clearly, Clinton's not much of a market timer. The Dow Jones industrial average closed at 9355 on the day Clinton made that proposal in his State of the Union address. Almost exactly a year later, the tech stock bubble started to deflate, triggering a terrible bear market. Now, close to a "lost decade" later, the Dow's back in the same range. Adjusting for inflation, the stock market is actually about a fifth lower than it was in 1999 when the investor-in-chief flashed the buy signal.
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Here Comes the Mother of All Housing Bailout Bills
Tweet Share on Facebook October 17, 2008 Comment (5)All along, the Fed's big fear has been the emergence of what it calls an "adverse feedback loop": a housing implosion cripples the financial system, which undercuts the economy, which hurts housing, and so on, and so on. And more and more policymakers are convinced that to break that cycle, you have to stabilize the housing market. Until that happens, credit markets and therefore the economy will stay anemic. That is why you will likely see in 2009 an attempt to go beyond the Dodd-Frank housing bailout bill to more directly and expansively boost the housing market. As Capitol Hill maven Jaret Seiberg of the Stanford Group writes today: "The second housing stimulus would focus again on stabilizing housing markets by providing more assistance to those looking to purchase a home. Such support is intended to slow—if not reverse—the home price declines that are at the heart of the crisis."
So unlike some plans, like John McCain's $300 billion idea to give everyone a new mortgage, Washington may opt for some sort of package of tax credits to help buyers. Of course, what policymakers should be doing long term is taking steps to remove the tax preference for housing versus other sorts of investments.
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Warren Buffett: Cowboy Up and Buy American. I Am.
Tweet Share on Facebook October 17, 2008 Comment (7)I hope Barack Obama reads this: Warren Buffett, the Oracle of Omaha, called it right this morning in the New York Times. As he puts it, "Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."
Quick thoughts:
1) Unless you think America is about to enter a decade or more of stagnation, like Japan has since its credit crisis, you shouldn't question Buffett's advice—and probably not even then. We are moving far faster to deal with our financial problems, and we have better long-term fundamentals, particularly in demographics. Japan is old and suffering population loss, both growth killers.
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Did Barack "Spread the Wealth" Obama Just Blow the Election?
Tweet Share on Facebook October 16, 2008 Comment (878)No. Really. You're kidding me. Barack Obama actually told that Joe the Plumber guy that he wants to "spread the wealth around." What, did Obama just get done reading the Wikipedia entry on Huey "Share the Wealth" Long or something? Was he somehow channeling that left-wing populist from the Depression? Talk about playing into the most extreme stereotype of your party, that it is infested with socialists.
A while back I chatted with a University of Chicago professor who was a frequent lunch companion of Obama's. This professor said that Obama was as close to a full-out Marxist as anyone who has ever run for president of the United States. Now, I tend to quickly dismiss that kind of talk as way over the top. My working assumption is that Obama is firmly within the mainstream of Democratic politics. But if he is as free with that sort of redistributive philosophy in private as he was on the campaign trail this week, I have no doubt that U of C professor really does figure him as a radical. And after last night's debate, a few more Americans might think that way, too. McCain's best line: "Now, of all times in America, we need to cut people's taxes. We need to encourage business, create jobs, not spread the wealth around."
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Bailout Watch: Uncle Sam's Buying Binge May Not Be Over
Tweet Share on Facebook October 15, 2008 Comment (3)Mortgage debt securities. Commercial paper. Shares in banks. What else can the feds buy? Well, pretty much anything, really. Not only does the Paulson plan have a broad mandate, but economist Lyle Gramley, a former Federal Reserve governor, notes that the Fed has within its powers the authority to do just about whatever ever it takes to keep the financial system up and running. Let's say a credit freeze is preventing a small business from getting a loan that it would have gotten under normal conditions. The Fed could go to that small-town bank and tell it to go ahead and make the loan and then the Fed would buy it from the bank. Now if only Bernanke would buy my student loan...
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