The rationale for the $787 billion stimulus legislation enacted in February 2009 is that government spending is necessary for juicing economic activity that would otherwise lie fallow. The idea comes from The General Theory of Employment, Interest and Money, the 1936 tome by Keynes that put macroeconomics on the map and launched a debate about the role of the state in managing the business cycle.
Economics being economics, definitive answers are forever lacking. We have only one run of history to analyze and so it’s never clear what might have transpired if we tried x vs. y. Such is life in the dismal science, leaving mere mortals to argue over the scraps of evidence dispensed in the numbers. With that in mind, we offer the following statistical crumbs, fully aware that there are a billion or so other perspectives one might conjure from the sea of data.

Continue reading →

Enron-esque bookkeeping in the healthcare reform legislation? Say it ain’t so. Too late. James Pethokoukis of Reuters just did.

Deciding if the fiscal stimulus is productive, a wash or a drag on economic activity has inspired a furious debate in economic circles this year. Some of the analysis is wickedly complex. In the interest of brevity (and clarity), Professor Eugene Fama has boiled down the key issues as follows:
1. Bailouts and stimulus plans must be financed.
2. If the financing takes the form of additional government debt, the added debt displaces other uses of the same funds.
3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.
The debate necessarily focuses on #3. That is, will the government’s stimulus spending end up in more productive investments relative to what the private sector would do with the money? History suggests we should be skeptical in answering “yes” in anything close to absolute terms. Of course, some government spending is productive, particularly when it goes into projects that are unlikely to find financing otherwise. The development of highways, for instance, to cite the standard example.

Continue reading →

We’ve had the Great Recession and the Great Liquidity. Next comes the Great Unknown.
Central banks have averted the Great Depression 2.0 courtesy of liquidity injections on an unprecedented scale over the past 18 months. In essence, the Federal Reserve and its counterparts around the world have eased the economic and financial pain relative to what would have occurred in the absence of government intervention. If you give the patient enough morphine, he feels better. But what happens when the nurse visits cease? Or will they cease?
The first phase of the Great Intervention has generally drawn cheers and high marks. Certainly the capital and commodity markets in 2009 have registered their approval by way of higher prices. The risk of deflation has been materially reduced. Meanwhile, economic growth has returned. News that that U.S. GDP expanded in the third quarter, for instance, is widely celebrated as proof that the monetary and fiscal stimulus have been a success.

Continue reading →

The great economic question in the year ahead will center on job growth: Will there be any?
The answer will almost certainly be “yes,” but that invokes the inevitable follow-up: How much? In turn, that inspires the equally burning inquiry: “How soon?”
The latter two are the primary unknowns at the moment, and the stakes are high. Much of economic fate now depends on the outcome of job growth, or the lack thereof. We can be reasonably sure that 2010 will witness job creation, but there’s still an unusually high degree of uncertainty as to when this glorious moment will come, how quickly the upward momentum will kick in and how many jobs the trend produces in the business cycle ahead.

Continue reading →

Posting will be light to nonexistent as the Capital Spectator winds down the final days of the year. We’ll be returning to our usual schedule on Monday, January 4.
Meantime, best wishes to all our readers. Thank you for your support. If we can survive 2008/2009, we can do anything. Bring on 2010!

Last month we voiced some skepticism over the idea that higher government spending just shy of a trillion dollars for a redo on healthcare would reduce the budget deficit. A month later, this particular strain of our apprehension remains alive and well.
The devil, of course, is always in the details when it comes to complex pieces of new legislation of a certain magnitude and there’s no reason this evening to think that Mephistopheles has changed his stripes when it comes to the latest round of economic logic in the healthcare debate. In particular, James Pethokoukis at Reuters is reporting that the problem of double counting Medicare tax hikes is painting a misleading picture of how much healthcare “reform” will reduce red ink in Washington. The Congressional Budget Office has been dragged into the argument over who’s spending what and how often. To quote the CBO analysis:
To describe the full amount of [hospital insurance] trust fund savings as both improving the government’s ability to pay future Medicare benefits and financing new spending outside of Medicare would essentially double-count a large share of those savings and thus overstate the improvement in the government’s fiscal position.
Apparently the pols in the capitol are playing fast and loose with the budgetary projections. Shocking, shocking. Yes, Virginia, there may be savings when all the healthcare reform dust clears, but you can continue to count us as skeptical.

Is there no way, said I, of escaping Charybdis, and at the same time keeping Scylla off when she is trying to harm my men?
Homer’s Odyssey
We can argue if today’s encouraging numbers on consumer spending and personal income for November are skewed because it’s the holiday season (a.k.a. an excuse-to-spend season). We can also debate if yesterday’s downward revision in third-quarter GDP implies that the recovery will be unusually sluggish. And we can go back and forth over yesterday’s sharp rise in November sales of existing homes on whether that’s due a first-time buyer’s tax credit that expired last month. Of course, we can also throw around some ideas about how much if any of the government’s stimulus deserves credit for keeping the country out of the black hole of economics. But for now, the recovery trend in post-apocalyptic America is intact.
Deciding if it’ll remain intact is the great unknown. More than likely this will be a debate over the degree of the recovery’s magnitude and duration. Never say never, but short of a new and unexpected negative of some consequence arriving on the economic scene in the weeks and months ahead, the U.S. recovery has legs. Exactly how wobbly those legs prove to be is the question. But if we step back and look at the broader trend in the statistical front line for economic fate—spending and income—there’s no denying the upward bias, as our chart below shows.

There’s still plenty to worry about, but most of the anxiety is related to how the growth in 2010 plays out. Yes, there’s an expansion building, but it’s not yet clear it’ll suffice for the challenge ahead.
“I think we’ll be ‘driving sideways’ in both the California economy and the U.S. economy,” UC Berkeley economist Barry Eichengreen opines today. Meanwhile, Brian Bethune, an economist with IHS Global Insight, predicts the U.S. economy will expand by a modest 2.0% to 2.5% next year. “It’s a half-speed recovery.”

Continue reading →

The 2000s have been the worst decade for U.S. stocks in 200 years, reports yesterday’s Wall Street Journal. Meanwhile, it’s been a somewhat better decade for the Global Market Index, a passively weighted mix of all the major asset classes that’s the benchmark for our sister publication, The Beta Investment Report.
There are still two weeks left to 2009 and the decade and so it’s not over until it’s over. But barring a massive change in prices in the days ahead, the mystery is fading quickly for year- and decade-end numbers. Using performance through the end of last month, the 10-year annualized total returns for the major asset classes and GMI stack up as follows:

U.S stocks were dead last, returning a trifling 0.1% on an annualized basis for the past 10 years. By contrast, the best performer among the major asset classes has been emerging market bonds, which soared by an 11.5% annualized total return. As for our Global Market Index, it returned 4.2% over the past decade.

Continue reading →

There are many things to worry about for the economy in 2010, but perhaps the leading cause of anxiety is bank lending, or the diminishing state thereof.
Commercial and industrial loans made by U.S. commercial banks fell in November to the $1.36 trillion, the lowest since September 2007, reports the Federal Reserve. This isn’t surprising after the large negative economic shock over the past two years, but it’s troubling nonetheless.

The Federal Reserve can print all the money it wants, but if the liquidity isn’t finding its way into the coffers of businesses, the recovery will suffer. Financial institutions, of course, are only too happy to accept the central bank’s monetary gifts of late. Nothing makes a banker smile more than a world where he can borrow short and lend long. But while there’s a whole lot of borrowing short going on, there’s a dearth of lending. What are they doing with the money? For reasons that need no explanation at this point, banks have been focused on rebuilding their balance sheets.

Continue reading →