Q3 GDP – Nothing to Celebrate

Jeff Harding has written an excellent analysis of Q3 GDP. I’ve read several such efforts, but this is clearer, more concise, and more conclusive than most. Here’s his bottom line outlook:

This leads me to conclude that we’ll have a sluggish economy, propped up by stimulus spending. Like most government projects, the impact of the $787 billion stimulus spending will not have a lasting effect, and will leave us with high debt, high taxes, and a lackluster economy. I would expect Q4 GDP to show positive, but close to flat,  growth, most of it will be from government stimulus.

After that it will depend on the state of our personal, bank, and institutional balance sheets. If toxic debt is wiped out from bankruptcy, write off, foreclosure, or recapitalization, then we’ll see real growth and recovery, although it will be subdued. If the government continues to discourage its liquidation, then credit will remain scarce and the economy will stagnate.

I see the elimination of bad debt as needing years to complete. The sheer size of the required liquidation is overwhelming the institutions involved. There are plenty of bad mortgages in the queue for processing and the disaster of commercial real estate is just starting to reveal itself. I’m amazed that the economy is as strong as it is!

Fiscal Policy in a Nutshell

Arnold Kling says most of what you need to know about fiscal policy:

If you want to grow the economy, cut taxes. If you want to balance the budget, cut spending.

 

We Are What We Do

Crony capitalism is not capitalism.

Russ Roberts’ testimony to Congress (pdf) is magnificent. Early on, he says this:

We are what we do. Not what we wish to be. Not what we say we are. But what we do. And what we do here in Washington is rescue big companies and rich people from the,consequences of their mistakes. When mistakes don’t cost you anything, you do more of them.

When your teenager drives drunk and wrecks the car, and you keep giving him a do-over—repairing the car and handing him back the keys—he’s going to keep driving drunk. Washington keeps giving the bad banks and Wall Street firms a do-over. Here are the keys. Keep driving. The story always ends with a crash.

Capitalism is a profit and loss system. The profits encourage risk-taking. The losses encourage prudence. Is it a surprise that when the government takes the losses, instead of the investors, that investing gets less prudent? If you always bail out lenders, is it surprising that firms can borrow enormous amounts of money living on the edge of insolvency?

I’m mad at Wall Street. But I’m a lot madder at the people who gave them the keys to drive our economy off the cliff. I’m mad at the people who have taken hundreds of billions of taxpayer money and given it to some of the richest people in human history. I’m mad at Bush and Obama and Paulson and Geithner and Bernanake. And I’m mad at Congress. You made sure that risk-takers continue to expect that the rules that apply to the rest of us don’t apply to people with the right connections.

And then he gets wound up! Roberts is right: it’s time to take the “crony” out of crony capitalism.

How This World Ends This Time

There are a lot of people out there and many of them are a lot smarter than me. I’m grateful that I can understand what they’re writing (sometimes). I enjoy reading a good analysis of what’s going on, and this piece is great. Great – but depressing. Well, it’s only depressing if you can understand the issues being discussed. I fear this is WAY over the heads of the people we elect to run our government. I suppose we get the government and the economy that we deserve. But the situation seems to be turning from bleak to really bleak. I hate to be thinking about “war, famine and pestilence”, but that seems to be the more probable outcome. Ugh – why can’t I read stuff that’s more cheery?

Prolonging The Pain

This is well worth the read, but I have a quibble. Here’s a good quote:

To grossly oversimplify, the problem with debt is it sets up fairly fixed future cash flow commitments, of which there is no automatic mechanism guaranteeing that future cash flow generation by the economy will be sufficient to meet. If private sector leverage gets large enough – and Minsky argues there are inherent dynamics that drive the economy in this direction – then the failure to meet contractual commitments can lead to forced asset sales, falling asset prices, and a restricted propensity to invest out of profit income flows and to spend out of wage and salary income flows, all of which can fuel a vicious, self-reinforcing cycle very much like we witnessed from September 2008 to March 2009 before massive policy intervention broke the maelstrom.

I’m not sure that intervention broke the maelstrom. Many observers think there is at least one more shoe to drop, i.e commercial real estate. And it’s far from clear that the home collapse is really over. We may be in a brief pause: the paperwork required to liquidate home mortgages has overwhelmed the system, freezing the system into inaction. That won’t last forever. Mortgages that would normally be foreclosed are sitting dormant due to inattention. The real questions for the next wave is how many and for how long?

The cycle of falling asset prices can’t last forever. Sooner or later, everything that should be liquidated will be liquidated. That’s when good times will return. I remained unconvinced by the arguments that some magic fiscal or monetary problem will make the pain go away. All they can do is prolong the pain.

Looters from the Future

Are we being looted?

This post has a long but interesting discussion of some of the economic problems facing us now. The money line is this: All three systems allow giant businesses which are friendly to the government to keep enormous private profits but to pass the losses on to the government and ultimately the citizens.

As you might expect, the tone of the post is one of moral outrage, which is understandable. But let’s look deeper.

The focus of popular moral outrage is the excessive compensation of some corporate executives. But with very rare exceptions, executive compensation is an insignificant portion of a corporation’s financial flows. The question to ask is who are the big beneficiaries? And the answer is simple: the owners.

So, who are these owners? Well, there are lots of them. Most are big institutions investing money on other’s behalf. The ultimate beneficiaries are the investors who directly and indirectly own the company. And the biggest group of owners are pension funds, 401K owners, and IRA owners. In other words, retirement funds.

If we are being looted, our future selves are responsible.

This is indeed a structural problem. Fortunately, this kind of situation has been thoroughly studied in some branches of economics. The solution is known, but it would be wildly unpopular, and therefore unrealistic.

Before there is any decent chance of correcting our structural problems, there has to be wide spread recognition among the governing elites of what the problem is. We have a long long way to go.

Island Health Care

To teach the key concepts of economics, many teachers have used life on a desert island as a means of simplification. I have found this “Crusoe economics” very helpful as a way of illustrating concepts to others. It’s helpful to remove the complexities of money from economics so that real issues can be examined in a isolation.

So, I was delighted to find an essay that uses this technique to examine the economics of health care and health insurance. It certainly clarifies a lot of things by removing distractions, especially the distraction of money.

The Future of Taxes

Megan hits the nail on the head:

I think we’ve finally hit the wall on deficit spending.  There is no more room for tax cuts, or new spending, or anything else government wants to do.  Unless the budget picture improves dramatically, there is but one inevitable course, which is whacking great tax hikes to pay, not for any new program, but for the spending we’re already doing.  Obama’s trying to put off that discussion for as long as possible, because once it starts, there isn’t going to be much appetite for $100 billion worth of new annual spending, whether or not it’s “paid for”.  All “paying for it” means is that we have to raise other taxes even further.

Read the whole thing for a sobering peek at the future.

Dog Gone

Help the planet and trade in your dog for a new Land Cruiser.

Pay Cuts

Well well well. The Obama administration is forcing massive pay cuts on some of the top executives in companies that received TARP funding. A lot of people seem happy about this, but the happiest are probably these companies’ competitors. What a great opportunity to poach some top talent and leave the government’s wards to stumble forward with a second or third string team at the top. What a great way to give a big advantage to foreign firms at the expense of American firms!

I doubt having second raters running the show bothers Team Obama – look how well that’s worked for them!