July 3, 2008
STIMULUS OR BUST
The stimulus checks may be propping up consumer spending, at least temporarily, but the job market is still weakening.
Initial jobless claims jumped to 404,000 mark last week, up from 388,000 the week previous the Labor Department reports. That's only the second time the 400,000 mark has been passed on the upside in many a moon, the previous instance coming this past March 29 when claims reached 406,000.
As our chart below shows, the trend is clear: new filings for unemployment benefits continue running higher. It's not clear that the stimulus checks will deliver salvation. There are many negatives weighing on the economy, from rising energy prices to the unwinding of various debt burdens, and those ills aren't about to evaporate next week because consumers are receiving checks in the mail for $600 to $1,200.
Reading the writing on the economic wall, Washington is now talking about a second stimulus package.The political inclination to act is understandable, but at some point the correction will have its way. Trying to keep the growth cycle alive indefinitely isn't plausible, nor is it possible--or even healthy. Yes, the past 20 years suggests otherwise, but the pain has simply been pushed forward.
Strong growth ultimately arises from ashes of recessions--a harsh but ultimately accurate fact. Artificially keeping the growth alive in order to avoid recessions risks nipping future growth in the bud. Again, politics calls for no less, but in the end it's not obvious that letting the political mindset run the show is the best long-term strategy for the man in the street. That won't stop Washington from moving heaven and earth to try and re-engineer a more comforting outlook, although the patient may not respond as expected this time.
Posted by jp at July 3, 2008 9:39 AM
Sell Italian bonds. Italian public debt has reached a record high at 1646,7 billion euros.It is worse than 1992 when the country went very near to declare default(insolvency)
Posted by: frank at July 6, 2008 11:00 PM
Allow me to respectfully disagree with your assessment. As for invoking the Great Depression, I believe you're way off base. That was a horrific economic contraction, much of it self inflicted by ill-advised economic policies. Short of a complete collapse in common sense at the Fed and Congress. But in the very unlikely scenario of another Great Depression, I would advise the powers that be that all bets are off and the government needs to pull out all the stops to reverse the pain for working people, in the here and now. Fortunately, we are no where near that point, nor do I believe such a danger is imminent.
Now on to the subject at hand: the idea that the economic cycle can be tamed. In short, this quest has limits. Although you make an effort to equate my views with Andrew Mellon, you're analysis is flawed. I'm not saying the government should end its economic interventions on behalf of workers and the poor; am I not saying that the government should stand idle when economic pain arrives. When people are hurting because of broad economic troubles, government assistance is warranted and necessary. But extending direct aid for food, employment assistance, etc., is distinct and separate from trying to prevent prices from falling and keeping corrections in various markets from occurring. Yes, the devil, as they say, is in the details, but this distinction is valid, even if it's a bit blurry at times.
We can debate the merits of various government policies to tame cycles, but all of economic history reminds that the market forces will win eventually and so we're fooling ourselves if we think we've discovered a new formula for overcoming the laws of the dismal science. Rather, the quest is to figure out the optimal way to make the cyclical process, which is ultimately unavoidable, work to our collective advantage and at the same time ease the short-term suffering of those pinched by the macro upheavals. Yes, we want to maximize growth and minimize contraction, but this isn't possible in the extreme as a long term proposition.
Yes, the Federal Reserve and the even the U.S. Congress have learned a thing or two about providing useful economic stimulus at well-timed moments. But there's a limit to how much the cycle can be tamed. It's true that recessions have been shorter, less frequent and generally mild in the last 20 years compared with history. Some of that can be attributed to enlightened monetary policies. (See my WM story on this point at: http://www.capitalspectator.com/WM/2008/04/steady_as_she_goes.html#more
But the progress in taming the cycle has its limits. One example: further cuts in interest rates from this point (or leaving rates unchanged as rates elsewhere rise) risks promoting higher oil prices by way of a weaker dollar. As such, the act of trying to help the little guy by cutting rates may actually end up hurting him.
In fact, there are two broad risks as I see it by ignoring the limits of cycle management. That's not to say that we shouldn't try to tame the cycle, but the effort carries risks and we should be aware of those risks and (gasp) maybe even write about them. One, a generation of moderating cycles has promoted imbalances, starting with a higher level or moral hazard in which expectations rise that the bull will never go away. Two, as the low-hanging fruit is picked, and it gets harder to engineer further taming, monetary and perhaps fiscal policy becomes desperate (in part for political reasons) for more results and therefore goes overboard in reaching for additional progress. The result: higher inflation and planting the seeds of more imbalances. This experiment was tried in the 1970s, and with poor results.
You say that there's no cycle in economic history. But 200 years of U.S. history suggest otherwise. We can all dream of a world where GDP rises forever, with no recessions and no inflation. But reality isn't so kind. The only question is how to deal with the cycle, which is quite real, and probably always will be. More to the point, at what point do we trade short-term gains for long-term pain in trying to keep the growth going? You don't recognize this strategic choice, but the empirical evidence, and countless economic studies stand in sharp contrast with your assertions.
Granted, there are no easy answers. But at the very least we should be aware of the trap in thinking that there's a free lunch. There isn't. But at least there's historical context and maybe, just maybe, we won't repeat the same mistakes. With that in mind, as a starting point for further study on this related issues, I recommend James Grant's The Trouble With Prosperity: A Contrarian's Tale of Boom, Bust, and Speculation.
Posted by: JP at July 4, 2008 8:48 AM
"Trying to keep the growth cycle alive indefinitely isn't plausible, nor is it possible--or even healthy."
This is the same kind of pseudo-moralistic thinking that Andrew Mellon used in his famous:
"Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate . . . purge the rottenness out of the system."
and that lead to the horrors of the Great Depression where government "stood aside" and let hunger and misery "purge" the working class of America.
There is no reason for an economy to "rest". There is no need for an economy to "purge" itself.
An economy is simply the sum of all the actions of the people within the economy. Yes, it can overheat. But you treat overheating like you would a mechanical device, e.g. adjusting and tinkering. You don't treat it like a naughty child and "sent it for a time out". Nutty!
An economic cycle has no "life" of its own. It is simply aggregated behaviour. There is no reason why that behaviour cannot continue to grow other than resource exhaustion. There is no "life" to a cycle that needs a "rest". This is anthropomorphic thinking that has no place in modern scientific economic thinking.
Quit talking mumbo-jumbo. Try to be more scientific and less metaphysical in your economic comments.
Generally I enjoy your blog and the information it makes available. But this comment sent me over the top!
Posted by: RYviewpoint at July 3, 2008 2:18 PM