How’s the Economy Doing?

There are any number of analysts and pundits who attempt to answer that question, and I read what a lot of them write. For my money, the best overviews are published by Jeff Harding at The Daily Capitalist. Today’s overview is excellent. The economy is not.

Tradeoffs in Everything

Every decision in life involves trade-offs. Sometimes they’re obvious, sometimes not so obvious. Ed Glaeser points out one trade-off that most people miss: our housing policy vs our environmental policy. Will Congress and the President sacrifice the environment in order to stimulate the economy? Or will they leave a moribund economy alone in the quest to counter global warming? Whichever they do, someone is going to be upset. Let’s see – who has the most votes? Oops – too bad for the folks concerned about global warming!

Public Banks

One of the more unusual ideas floating around the Internet is the creation of public banks. This strikes me as an especially bad idea, even though it has apparently been successful in North Dakota. Their success appears to come from prudent banking practices, which is a good idea for all banks.

The problem with publicly owned banks would be politics. Just look at how politicians have interfered with the publicly owned auto companies and the banks already partially owned by the government.

The motivation of the proponents is ire at the banks and our ongoing financial turmoil. But many analysts say that the banks acted rationally given the crazy rules that politicians put in place. Our government created a market for shaky debt (see Fannie Mae) and otherwise pressured banks to make shaky loans (see HUD, federal bank regulators, etc.). Our government created a moral hazard which encouraged excessive risk (see FDIC) and established bizarre accounting conventions. It’s hard for me to see how any other outcome was possible!

The real tragedy is that this was a true bipartisan effort spanning multiple presidencies and Congresses. The only conclusion I can draw is that ideas with strong bipartisan support can sometimes be real stinkers.

Capitalism Defended

The system of voluntary exchange and experimentation based on secure private-property rights — what we loosely call “capitalism” — expands rather than restricts our material and nonmaterial opportunities. Substituting elite power for voluntary exchange invites all sorts of epistemological problems and moral disasters.

Thus concludes Art Carden in a wide ranging defense of what we loosely call capitalism. His comments on health care are especially intriguing.

High Taxes and Lousy Service

This article provides an interesting comparison of between the governance and outcomes of California and Texas. It contrast not only how much they tax, but how they spend, and who benefits. The story of California is instructive, especially for states like Minnesota, where there is a long running debate between the “high tax” and “low tax” camps.

What makes this interesting is that California’s large revenue streams are spent so differently. The big beneficiaries are state employees. It’s difficult to see how California will work its way out of the mess it’s in. The same probably applies to other “tax and spend” jurisdictions like New York and New Jersey. My worry is that many politicians in Minnesota seem eager to adopt the policies that have gotten those states in so much trouble.

How the World Views Us

I read a lot of financial stuff on the Web, but I rarely reference it here because it would bore most people. But financial analysis has to have a context, a worldview that supports more detailed opinions. This advisory report has some interesting context:

The actors in world finance do not trust the United States. Who can blame them after what we have delivered to the world during the last two years.

There are other reasons for dollar weakness, too. Here is a short list: massive issuance of federal debt, dramatic and expansive federal spending programs, Obama policies that will hurt productivity, layers of government regulation on top of what is already in the pipeline, forthcoming tax increases that will ultimately take the top US personal-income bracket to somewhere between the rate in Denmark and that in Sweden. Denmark and Sweden rank number one and two among the most highly taxed and socially managed people and economies in the world. The US will be vying for the top position in 2011 if all the present offerings are enacted into law.

In some ways, investors should be neutral about this and similar issues. It’s just context that gives guidance to investing decisions. There’s money to be made in almost any circumstance. But as citizens …. well, that’s another story.

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?