We ARE smart people! Yes! Yes! We ARE!!

Then why are our best minds failing us?   Why is the economy in the toilet and there is not good sign of recovery anytime soon?

I just think our economists have it wrong.  This is from a guy who may become an economist one day.  My thought is that our recession is not in a normal business cycle recession which says that manufacturers build up inventories until demand fails off, at which point manufacturing pulls back until inventories fall back to normal levels and consumption increases.   Keynesian expansion was made for this type of downturn. 

This is an accountant’s view of the problem.  This is a balance sheet recession.  There was not an over supply of inventories in September 2009.  Instead we devalued our assets over night, and we had a leverage problem.  When banks have fewer assets on their balance sheets to leverage against our loans, they have less to loan, and business contracts.  When we have less equity in our houses and our neighbors are moving out of theirs, we become more conservative, pay off our own individual debt, and restrict our buying.  So, if the Government stimulates the economy, we won’t respond as normal.  The Federal Reserve can flood the banks with cash and the cash will just sit there, especially after the banks raises the criteria for borrowing.  

The entire balance sheet of the country has been devalued, when our country borrows for the stimulus, we accelerate sovereign debt problems. 

What this adds up to is that there are no easy fixes to the recession.  Knee jerk reactions won’t work.  We may be in this thing for a long period of time.

Michael Hirsh says that our best minds are no longer becoming economists.  They are AWOL and have become financial engineers.   Ugh!

Incompetence is a Political Risk

One of the gifts that President Bush gave President Obama is that he made incompetence a political risk.  Simply because President Obama avoids terms like “strategery” and “lock box” does not put him in a position where he can avoid looking incompetent.

To solve a problem, President Obama likes to get the best minds in the country in one room and select the policy that represents a consensus.  He does not necessarily know the subject matter at hand, but if everyone else in the room agrees, it must be right.  Right?  Wrong!  A President must know the subject matter enough to recognize bad alternatives and get them out of the room.  If he doesn’t do it, know one will.  Those smart people are afraid of speaking truth to power and will not speak up.  The result will be bad policy.

If, as the previous post suggests, that some basic college level education would help, especially in economics, then the President would have known that short term tax cuts have limited usefulness.  Even his predecessor had a tax rebate in his final year and it benefited the economy for only two quarters.  We all should have learned from that.  He would have also known that fiscal stimulus projects of two to three years in length severely dilute the impact needed today to reduce unemployment.  Even people on the street would have told him that incentives for home and car purchases merely move demand up in time, but don’t really create additional demand, which explains why home and car sales are down now that those rebates are over. 

A basic course in project management would have helped the President in the gulf oil spill.  It would have told him to identify all his potential solutions on day one of the crisis, and crash, or expedite, them all.  Instead, he took them one at a time, including the berm designed to protect the wetlands.  I am quite sure that some of the President’s competition in 2012 will point out lots of ways for him to have shortened the 80 days it took him to stop the leak.  

I have spent my life around some of the most brilliant and overeducated minds in a host of industries and some of them could not lead you to a restroom.   Yes, they could after studying the matter, but many of them are so consumed with their own thoughts that they fail to notice where the restrooms are when the walk through the building.  They are often arrogant and self-absorbed to the point that they fail to listen and understand the self-interests of those who are affected by the policies they create.  Now that I possibly alienated some of my friends, I lay myself open for the same criticism.

There is a political risk brewing for the President in health care.  There is a case that is moving up to the Supreme Court that seeks to declare the new health care law unconstitutional on two grounds, namely that it violates the commerce and taxation clauses of the Constitution.  The health care law has a provision in it that says if the Court voids any part of the law, the entire law will be voided.  This is unusual, and if voided, as some predict, it will bring questions of to why the President took more than a year to put our country through the national exercise of adopting this law during a severe economic recession, and the law was not even competently constructed?

Now I have to find a restroom.

Educate!

I turn on the TV and I turn to Fox and I get one interpretation of public policy.   I turn on MSNBC and I get a different view.  I turn on CNN and I am not sure what I get.  But common to all three of these news outlets is that none of them really concentrate on educating the audience as to the basics of how things work.   To the reader of this blog, the following may seem tedious, but work with me here, please.  This is an educational piece that explains one of the key themes of this blog.  Or, you can skip this and move on to the next post.

During the Enron crisis, the stock market was crashing and President Bush stabilized it by making it a criminal offense to put forward financial statements that misrepresented the financial condition of a public company.  Instead, the press concentrated on the Sarbanes-Oxley bill.  But if one reads the first few chapters of a basic text in financial management, one will learn that information risk is a major factor that has to be controlled in order to stabilize market values and lower interest rates.  History has proven Bush right in that instance and the Sarbanes-Oxley bill has proven to be excessive.  The press could have educated the public on something important, but they focused on the wrong thing.  We, as a public, could have learned something important.

During a debate on Social Security, one Democratic Representative, said that a bankrupt Social Security Fund was okay.  It would pay out 40% of its commitments.  The press did not jump on this and they should have.  Just the mere thought of a 40% payout is offensive, but another education opportunity was lost.  A basic first year text in accounting would explain that bankruptcy is the inability of a company to pay current obligations with current cash.  Again, a major opportunity to educate all of us was lost. 

During the debate on General Motors and Chrysler, no one in the press talked about public versus private goods.  Many of our freedoms and responsibilities as an electorate are present in a discussion on this subject.  The freedom to own property is embedded in this right.  A basic text in economics discusses this.  Again, the press was silent on this subject, and the Government went ahead without an educated electorate to help with the decision.  

During the debate on fiscal stimulus, the press failed to educate on the efficiencies of tax cuts versus direct government programs.  Guess what?  A basic text in economics addresses this.

During the debate on banks and TARP, the press failed to educate on monetary policy.  Again, a basic text in economics discusses this.

I heard people recommend that when writing for the general public, it is best to write to a 10^th grade level of education.  I also heard that we should peg our writing at the 8^th grade level.  We spend so much on education and this is the result?  I am advocating that we raise it to a first year college level of education.  After all, 85% of our fellow citizens have completed high school.  This is just a little higher.  If low expectation is the standard of our press, then no good policy will be the result.  Every smooth politician will think that he or she can sell us anything.

I really don’t care that Fox is conservative and MSNBC is liberal.  I care that they educate and enable us, the electorate, to competently engage in public discussion.  We need some economic education.  Good policies are the result of an educated electorate.

A Numbers Game?

Valerie Jarrett was on “The View” recently defending the stimulus plan on the basis that it helped keep 3 million jobs.  If you visit www.recovery.gov, the Administration’s official website on the stimulus, it says that the stimulus funded 749,779 jobs during the first 15 months of the program.  Last week, the Controller’s Office of Los Angeles reported that $111 million dollars of stimulus funds were used to create 55 new jobs. 

If we project from the City of Los Angeles experience, maybe only 270,000 jobs have been created to date?  If this even begins to approach the truth, where did all the money go?

According to the IBTimes.com, Robert Inman, an economics professor at the University of Pennsylvania, theorized that state governments have been using the money to promote their own selfish agendas and are not using the funds in the best interest of the country.   

GM, TARP, and China

My wife and I proudly own only GM cars.  All told, we have owned eight GM cars, as well as a few Fords, in our combined lifetimes.  To me, it was a patriotic thing to buy an American car and create more American jobs.

So, it pains me to present the following, all of which have been sourced from mainstream financial and auto industry publications.

• The government owns 60.8% of GM. 
• GM is planning to sell a portion of the government’s share in an IPO right after the elections.
• GM needs an estimated $133.78 per share for the government to re-coup its $49.5 B investment.
• Financial press has speculated for months that GM and the government will lose money on the initial sale of shares in the upcoming IPO.  In fact, the latest speculation is that the IPO will yield only $10 B when the initial target was $16 B.
• The new GM CEO has said that it will take years for the American taxpayer to realize a payback.

But wait, there’s more.

• SAIC, a Chinese auto company intends to buy GM shares in the upcoming IPO.
• China has signaled its intent to force US and other automakers operating in China to share its technology.  Rep. Dingell, a Michigan Democrat, has voiced his strong objections.  This means that the new battery technology behind the Volt will be at risk.
• GM recently sponsored a film in China promoting the Chinese Communist Party.
• GM has recently begun giving money to various candidates for the upcoming election, mostly incumbents from both parties.

Just a few more facts. Most Apple, HP, or Dell computers are made in China when the technology was invented here.  China is at the top of the FBI’s list of nations sponsoring industrial espionage? 

My boss’ favorite saying is ‘you can’t make this stuff up.’

I have been visiting the AutoTrader website recently and found myself looking at BMW coupes, 3-series, automatic with paddle shifters, and a sunroof.  White with a tan interior would be nice.

When is a Stimulus Like a Boat?

In an earlier post I reported Christine Romer predicted that the stimulus package would add 1.6% GDP to the economy.  So, let’s have some fun with her prediction. 

When the stimulus bill was passed, the economy was $14,050 B and it has grown to $14,575 B over a year and a half, a difference of $525 B.  Now in the same period of time the Federal Government has spent $512 B of the $787 B in the stimulus bill.  So, what can we conclude?  The stimulus caused the economy to expand by $13 B beyond the stimulus itself?  At 3%, that only covers the first year’s interest on the money borrowed for the stimulus. 

Let’s keep Christine’s Romer’s 1.6% expansion in mind.  We should have grown by $225B more than the stimulus.  But not all of our growth can be attributed to the stimulus.  Let’s assume that half of the $525B is the product of our individual private labor and companies.  Also, we must give some credit to Ben Bernecke and the Federal Reserve’s expansionary money supply policies.  Then we are getting about a 50% return on the dollar from the stimulus. 

Annualized we are growing at something like 2% per year when we should be getting 5-6% in the initial phase coming out of a recession.  We shouldn’t be threatened with slipping back into a second recession.  In Keynesian terms, the multiplier effect of the stimulus is between .5 and 1 when it should be between 2 and 3.

President Obama wants to add $50B for transportation improvements, and he does not want to call it a stimulus.

When I thought about this post, I thought of some very clever things to say, but now that I laid out this information, I think I’ll stop writing.

Republican Tax Cuts

Politicians and their economic policy analysts can engineer the economy. They are not always successful, but they attempt to engineer it.  The Republicans generally do it through tax cuts to stimulate consumption.  Democrats tend to emphasize government purchases.  Any entry-level college text in macroeconomics will say that the GDP is a combination of consumption, government purchases, investments, and expenditures by foreigners. 

Tax cuts have the advantage of working quickly and effectively.  The Bush tax cuts were very successful in stimulating consumption with an average 6.5% per year increase in GDP from 2002 to 2008.  Give people money to consume and they consume.  Unfortunately, a lot of what they consume is foreign.    In 2006, when the Federal Budget deficit was $247 B, the trade deficit was $235 B, and China bought $200 B in US Treasuries alone to finance our deficit.  Where did China get the money?   From us.  So, here are the connections.  The US Government cuts tax rates for people to spend, and they spend a lot of it on foreign goods that transfer wealth to foreign countries that buy up our debt.  This wealth then becomes a basis for them to build up their industries and eventually begin to buy our industries and our wealth creation capabilities.  A case in point is Ford selling Volvo to a Chinese car company. 

As Mr. Spock would say, “This is not logical.”  And I did not even begin to get into structural unemployment.

Next post - equal bashing for the Democrats.