Great article (at least this is a portion of it) by Hoisington investment Management Company:
The Impossible Promise
The federal government's promise to extricate the U.S. economy from this recession involves more spending (increasing public debt) and more subsidies for consumers, such as car rebates and home buying incentives (more private debt). In other words, more debt is supposed to solve the problem of over-indebtedness. The truth is that this policy merely indentures its citizens further without providing any income for repayment of debt. In previous letters we have discussed the fact that the government spending multiplier is zero (read Professor Robert Barro's book, Macroeconomics - a Modern Approach, p. 370). This means there is no long term income benefit from stimulus programs. According to the latest academic research, the most recent $800 billion stimulus plan will boost economic activity in the short run, but will surely depress economic activity over time. The government problem is complicated by the fact that the tax multiplier is 3, meaning that a 1% change in taxes will change GDP by about 3% over time. More recent research (Barro & Redlick, September 2009, "NBER Working Paper 15369") suggests that a 1% cut in the marginal tax rate would raise GDP in the ensuing year by 0.6%. With the deficit rising due to a zero spending multiplier, the tendency will be to try to raise taxes to pay for this higher level of expenditures, which will further depress aggregate spending and output.
From a fiscal policy perspective the outlook for economic growth appears to be one of stagnation for several years due to the size of the federal debt, which is expected to rise 35.7% from 2008 levels to 76.5% of GDP over the next ten years according to the Office of Management and Budget (Chart 4). This exercise in government spending is, of course, an exact replica of the Japanese experience from 1989 to the present. Their debt to GDP ratios have gone from about 50% in 1988 to about 178% today, and yet their nominal GDP is no higher than it was 17 years ago, and their employment stands at twenty year ago levels. It is somewhat unsettling that as of the last employment report the United States employed 131 million people, a level that was first reached in 2000, which means the United States has had no net job gains for almost ten years.
Indeed, it appears that the fiscal chain around the free market neck is sufficiently onerous to restrain growth for several years. The promise of the government to revive growth through increased indebtedness is, indeed, an impossible promise.
3 weeks ago
Posts
4 comments:
This comment is mostly based on your last post and my comment then, but it may relate to this one, as well.
As I was thinking about chaos theory as it relates to the economy, as with the sand piles analogy in the last article, I realized that Kondratiev waves are merely descriptive of the process rather than a prediction of anything. Our best efforts to stall future economic troubles in essence just makes the proverbial sand pile bigger and more unstable in the long run. In reality, the only way to lessen the likelihood and reach of economic downturns we would have to (using the words of the sand pile analogy) do just as they do with snowy canyons and ski slopes: controlled avalanches. No one is going to advocate "controlled recessions," but the answer definitely isn't, I don't think, trying to prevent recessions and depressions all together, because that just makes our sand pile all that much more unstable.
Very interesting comment Tom.
That's interesting that you say that, because I read in another article that was done that the market actually naturally does cause its own avalanches through regular business cycle corrections (recessions, which contrary to popular belief are necessary in a real free market). What has happened this time, compared to the last few recessions, is that instead of allowing the market to naturally grow we have been loading tons more sand through debt leveraging and spending. This artificially grows the economy, better yet it's kind of like putting loads of air bubbles into the sand pile; sure the pile is bigger, but if it were to collapse we would see massive destruction to the pile.
This has, according to the researchers I was reading, only happened one other time in history and that was in the Great Depression. What we have seen in this instance is a massive drop off a cliff. In a way some in the government have done a good job because they have stabalized some of the areas of avalanche, but in others, rather than let it fall they have thrown in more bubbles delaying the inevitable collapse.
As John Mauldin put it - "How can we avoid such an upheaval? The only way is to make some very difficult choices. There have to be some adults making the choices, as the teenagers now in control clearly cannot make them."
With these deep thoughts, I have only a short response. Stupid is as stupid does. The Goodists (see editorials in Wall Street Journal on Nobel Prize) have blind faith that good intentions trump effectiveness. Jimmy Carter is a Goodist. For WWII, Nobels were handed out to pacificists, not Churchill, Roosevelt or Eisenhower who brought about peace. As for the economy, the Revolutionaries in Washington intend to create jobs, therefore, their acts are perfect.
Post a Comment