Tag Archives: stimulus

Government Is Not the Solution

Last week, we reported on the epiphany of Larry Summers.  In his speech to the IMF, Mr. Summers reluctantly admits our economy has structural problems that stimulus can’t fix.  This was a watershed moment in economic policy.  If you didn’t know from the content, you would certainly know it from the reaction.

Understandably, people want to pillory Summers because much of this failed policy was his idea.  You have to give the guy credit, though, for recognizing a mistake and admitting it publicly.  Less flexible thinkers have been caught off guard.  Paul Krugman is here, rearranging his position so that he continues – retroactively – to have been right all along.

Apparently our structural problems, demographic challenge, and persistent trade deficit are news to Dr. Krugman.  He is still not changing his policy, though.  It just means we’ll need fiscal and monetary stimulus for much longer than expected.

Jeffrey Sachs was more satisfying.  He repeats his call for a new framework to stimulate private investment in new industries – not “the old standard-bearers of housing, cars, and consumer goods.”  This sounds a lot like the restructuring Robert Dugger recommended for Japan.  Coincidentally, the Economist has an update on that.  Japan’s economy is stifled by red tape and bureaucracy.  We are truly following their footsteps, just as Dugger predicted.

There is an investment shortfall because the financial, regulatory, and policy barriers to high-return investments have not been addressed.

Sachs has the most practical solution we have heard, although we are a little wary of public-private investment schemes.  Jeremiah would like to try private-private solutions first.  Japan’s MITI worked well until it didn’t, and central planning in America – except for DARPA ­–has a pretty poor record.

Summers may have been the first to say it out loud, but we find this (emphasis added) in the FOMC minutes from October:

Participants also considered scenarios under which it might, at some stage, be appropriate to begin to wind down the program before an unambiguous improvement in the outlook …

So, the establishment is preparing for an early end to the stimulus – no digging ditches and filling them up, no alien invasion.  We will have to knock down those policy barriers or, as the entrepreneurs say, “get government off my back.”

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Potemkin Economy

It’s not so unusual for Jeremiah to agree with Paul Krugman.  That is, we agree on the nature and severity of our employment problem, which Prof. Krugman frames poignantly in his editorial.

These dry numbers translate into millions of human tragedies — homes lost, careers destroyed, young people who can’t get their lives started.

By the way, if you don’t know that Friday’s employment report was dismal, we invite you to peruse table B-1 and discover where the 204,000 new jobs were created.  One post calls them “dead end jobs,” while labor force participation continues its five year descent.

labor forceKrugman deserves credit for framing the problem.  Many pundits seized on the headline number and declared victory.  That’s propaganda.  You will be better informed if you can keep track of which pundits are political shills.

We differ from the professor, however, on solutions.  He seems to have dropped monetary stimulus, at last, but he is still promoting fiscal stimulus.  His editorial also features a straw man, in the form of “debt scolds” unwilling to finance the stimulus.

There are two good arguments against further fiscal stimulus, one practical and one philosophical.  We have already run trillion dollar deficits for five years, including the ARRA stimulus program.  This approach isn’t working.  One analysis found costs up to $500,000 to create a single job.

This brings us to the second argument, which is that we do not trust the federal government to administer a stimulus competently, or even honestly.  We would prefer to have value producing jobs in the private sector, rather than Potemkin jobs in the government.

In clinging to the textbook approach, Krugman is, so to speak, “fighting the last war.”  We differ from his approach because we have a different analysis of the root cause.

Keynes’ great insight was to reanalyze employment in terms of how entrepreneurs make decisions in the real world.  Entrepreneurs today have different reasons not to hire than they did eighty years ago.

Happily, Prof. Krugman does not have to visit the real world.  The Fed does that for us, in the form of their beige book survey.  Entrepreneurs today are fearful of what they perceive to be an anti-business environment in general, and health care reform in particular.

Boeing tangles with the NLRB, and lays off 5,800 workers.  J.P. Morgan tangles with the DOJ, lays off 19,000 workers.  ANR tangles with the EPA, lays off 1,200 workers.  We read stories like this every day in the business press.  It’s not cause and effect, but it creates a climate of fear.

Real intellects know when to adapt their methods.  If Keynes were alive today, he might just say, “let’s try helping the private sector, this time.”

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Consumer Economy

It makes Jeremiah crazy to hear America described as a “consumer economy.”  What is this supposed to mean?  Is the “producer economy” somewhere else?  We should thank them for all this cool stuff.

People who say “consumer economy” call themselves Keynesians, and they have the best imaginable fiscal policy.  All we have to do is spend more!  On credit!  Policy makers who talk like this are mostly crooks, who think you are dumb enough to keep voting for a gravy train which is now plainly off the rails.

The problem Sir John presented in the General Theory was, “what if aggregate demand is too low to support full employment?”  Since one man’s purchase is another man’s revenue, reduced consumption can hurt the jobs market.  Consumption, production, and employment go round in a circle. KeynesIf it’s a circle, though, how can aggregate demand be less than income?  It’s because people are putting money in the bank, making productive investments, and storing their capacity for future consumption.  That’s why we have added the electrical symbol for a capacitor.

Keynes described the problem of too much saving – hardly the problem we have today.  In this case, fiscal and monetary stimulus could be used to jump start the economy – inflation, to prise money out of the banks, and government spending to create jobs.

This is why people think, “the debt doesn’t matter because we owe it to ourselves.”  Once upon a time, our economy was a closed system, and  the national debt was held by American banks.  Keynes never imagined that we  would be in debt 100% of GDP, still spending, and still without jobs.

This brings us to our second electrical symbol, the one for “ground.”  No amount of stimulus is going to create jobs, if the money is used to buy foreign goods – at least, not jobs in America.

See also:  Essay on Protectionism

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Glass, Steagall, and Bernanke

Jeremiah has previously described the challenge of trying to create jobs through monetary stimulus.  To be effective, QE money must find its way to job-creating investments.  Glass-Steagall would have helped.

You may recall that the Glass-Steagall Act separated commercial banking from investment banking.  Some say that the Act, repealed by President Clinton in 1999, could have prevented the financial crisis.  In any case, the separation of banking activities would have given the Fed a handy way to direct its stimulus.

Instead of cheap funds for all banks, the Fed could have directed QE money only to commercial banks.  These are the ordinary, decent banks that lend to business and create jobs.

See also:  Want to revive Glass-Steagall?

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Never in Doubt

KrugmanNow, here is a man who is ideologically married to his position.  One thing Jeremiah wants for his readers is the ability to change their position when new facts turn up.  It is ironic that Prof. Krugman, a noted Keynesian, has forgotten Sir John’s advice.

In Krugman’s analysis, there is only the employment situation and the inflation rate.  Those who disagree with continued easing are either strong dollar people, whom Jeremiah has answered already, or austerity zealots.  The professor calls these economic naïfs “the right.”

Critics argue that easy-money policies are having damaging side-effects [but] whatever damage low rates may do is trivial compared with … the resulting rise in unemployment.

We agree that the unemployment situation is a disaster.  Like the professor, we follow the participation rate – not the rather sketchy headline rate.  We also agree that quantitative easing, initially, averted a depression, and we have been a supporter of Chairman Bernanke.

After four years, though, one should consider new information.  Why isn’t there more inflation, after $3 trillion?  Why hasn’t employment improved?  What are those “trivial” side effects?

  • First and foremost, retirees are getting crushed.  These aren’t just rich people living on their investments.  This is the biggest pension fund on the planet.
  • The stock market is in full-on bubble mode, with three-digit swings in the Dow every time a Fed head goes on TV.
  • Hedge funds are buying whole neighborhoods.  That’s right, Wall Street can now buy Main Street, literally.
  • Euro traders are borrowing cheap dollars to engage in foreign debt arbitrage.

It should be clear to Prof. Krugman – as it is to Bernanke, the BIS, and any objective observer – that the link between monetary stimulus and employment is simply not working.  Like a leaking hydraulic system, money is squirting out all over and may never reach the job market.  We agree the problem is severe, but this is not the solution.

See also:  Message from Keynes

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Transmission Problems

AAMCOWe have talked before about how the Fed is trying to stimulate our economy  by making new money available to banks.  They want banks to write more mortgages and stimulate the housing sector.  They also want them to lend to small business and stimulate hiring.

Unfortunately, the Fed has no way to direct funds toward these goals.  They can only flood the banks with money and hope some of it goes where they want.  This is what the Fed calls a “transmission mechanism,” and it’s not working.  After $3 trillion of new money, it is clear that the stimulus is outweighed by the side effects:

Some of these were expected, and some are novel.  We’ve already covered the currency war, but – no one expected hedge funds to start buying up whole neighborhoods.  This is the very model of an unintended consequence.  It seems obvious now, but it was completely unexpected.

First-time buyers simply can’t compete with the investors offering cash, some of whom are buying properties above retail cost. And investors don’t have to have worry about their credit score.

So, the housing market may rebound, but ordinary Americans won’t enjoy it.  For clarity, let’s define “ordinary Americans” as owner occupants of single family dwellings.  We all learned a lesson from the housing bubble, and the lesson the banks learned is that eviction is easy but foreclosure is difficult.

Americans won’t be homeowners anymore.  We will all be Blackstone’s tenants.  The chain of unintended effects goes all the way back to the mortgage interest deduction, the Community Reinvestment Act, and a variety of other schemes to stimulate home ownership.  It has now snapped back in the opposite direction.

See also:  Bonds and Discipline

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America’s Payday Loan

Bill Gross has a new article out, on financial repression.  His writing is a little goofy, but the math is good and he tries to keep it non-partisan.  Here’s a quote:

“Misguided monetary and fiscal policy might lead to disruptive markets at some point.  The approaching fiscal cliff might be the first of a series of disruptions.”

Okay, that’s alarmist, but we wanted to introduce the topic of “misguided monetary and fiscal policy.”  Jeremiah has written sympathetically about Chairman Bernanke’s monetary stimulus, up to a point.  The Fed has lately created $2 to 3 trillion – depending on how you count it – in a failed effort to stimulate the economy.

On the fiscal side, President Obama has kicked in $1 trillion of ARRA money, and he has run deficits of roughly $1 trillion per year for four years.  Together, Obama and Bernanke have injected almost $8 trillion of stimulus.  It’s hard to believe the Keynesian argument that just $1 trillion more would tip the balance.

Keynes believed that when ordinary people are too busy queuing up in the soup line to go spend money they don’t have, the government should do it for them.

Keynes believed that when ordinary people are too busy queuing up in the soup line to go spend money they don’t have, the government should do it for them.  Like his bearded disciple, Keynes was right – up to a point.  Deficit spending is a valid short-term measure, like a payday loan – but there has to be a payday on the horizon.

Financial repression means punishing people for saving money – and it works!  Printing trillions of dollars is, as Bill Gross will tell you, a hidden tax on savings accounts.  That’s why he’s whining about his paltry interest rate.

So, why should we worry about some rich guy’s savings account?  Because it’s not really a savings account he’s talking about.  Bill Gross manages a big pension fund – the biggest, in fact.  If you have a pension – from GM, California, anywhere – the odds are good that Bill has your money.  That means you eat cat food in your golden years because GM funded your pension assuming 4.0% and Bill only got 0.1%

Lucky for you, PIMCO – that’s the fund – can still get a decent return by investing your money in Brazil or Vietnam.  No kidding, Vietnam.  As the Economist puts it:

“Savers have the freedom of the globe and there are plenty of countries where real interest rates are positive and growth prospects are more attractive.”

Financial repression in America will result in some combination of old people starving, money going overseas, jobs following the money, and China cutting off our credit – or we might just have “disruptions,” as Bill says.

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