The Christmas Economic Stimulus

Keynesian economists argue that when the economy is not providing enough jobs, the problem is a lack of demand. If more consumers were clamoring for additional goods and services, businesses would hire workers to provide them. If borrowers are tapped out, either overloaded with debt or saving more because of uncertainty, they cannot increase spending.

Governments, however, can usually continue borrowing even if individuals cannot. When the economy is in recession, the government can run a deficit, and spend the money to pump up demand. Once demand is higher, businesses will hire more workers. With more money in their pockets, workers will spend more, creating even more demand. Once the consumer demand recovers, government can then drop the deficit spending, as aggregate demand will have recovered. Keynes likened it to priming a pump.

This is the economic theory behind the various government stimulus packages that we have seen in the last few years. President Obama’s job program proposal was another along these same lines. It did not get off the ground, due both to partisan politics and a legitimate concern that the Federal government is already carrying too much debt.

It occurs to me, however, that the private sector is about to undergo a burst of increased demand. It’s called the Christmas selling season.

Goods are moving from the warehouses onto store shelves in anticipation of Black Friday. Retailers are hiring additional staff to handle the expected surge in buyers. And the increase in demand is not just limited to presents. At my employer, we are already making deposits for the caterer and DJ at our annual Christmas party. Folks are booking airline flights as they plan their holiday travel.

Viewed as a temporary increase in demand, the holiday season fulfills the same function of a government stimulus package. But we all know what happens after the first of the year. Seasonal workers get laid off. The inevitable credit card bills arrive, causing December’s free spending consumers to retrench in January. Economic activity drops back down again as people tighten their belts.

So when the private sector does a stimulus package, the effects are short term in nature. I wonder why we think it will be longer lasting when the government does it?

Qualitative Easing Explained...Twice

There is a service that takes text and converts it to simple animated video. Here is one that has been making the rounds. It is quite critical of the Fed's move towards quantative easing (AKA pumping money into the economy). The deadpan delivery of the computer generated voices makes it hysterically funny.


The video above got enough play to cause somebody to generate a response in the same format:


It is not as funny as the first one, but probably a little more balanced. I still think the Fed is playing with fire by running the printing presses.

The gurus have spoken!

Well, it's official.

The National Bureau of Economic Research came out Monday and announced that the US economy was in a recession. Their statement said that the economy had been contracting since December 2007. That means this recession has already gone longer than the post World War II average, which is ten months.

Yup, it's official: the economy has been contracting for a whole year now. This makes me want to channel the late, great "screamer" comedian, Sam Kinnison:

WELL, WHAT WAS YOUR FIRST CLUE?! WAS IT THE 50% COLLAPSE IN HOUSING STARTS? THE TRIPLING IN THE FORECLOSURE RATE? MAYBE IT WAS FACT THAT THE BIG THREE DOMESTIC CARMAKERS ARE ON THE VERGE OF BANKRUPTCY? OR COULD IT BE THE COMBINATION OF HUNDREDS OF BILLIONS IN BANK LOSSES, THE FAILURE OR FORCED MERGER OF MAJOR INVESTMENT BANKS, AND THE TOTAL FREEZE UP IN THE CREDIT MARKETS?

The business I work in has been hunkered down in survival mode all year, but the official announcement is just now being made. It hardly seems worth calling a news conference to announce the finding. What great finding will be announced next? Water is wet? Gravity pulls you down? Oh, I know: The Earth revolves around the Sun!

Now, if somebody knew when the recession would end, and the economy start growing again, that would be news you could use.

Be Calm

From all indications, the US economy is in bad shape. Unemployment is rising, as more companies announce layoffs. The fall in stock prices has gotten to the level that many of us have stopped looking at our 401K balances. The credit markets are still largely frozen up, making it difficult for even profitable companies to get financing for their operations. It is clear that we are in a recession, and by all indications it will be a bad one.

In the face of all this bad news, the cries for a new stimulus package from Washington have become louder and more insistent. Paul Krugman, the Nobel winning economist and New York Times columnist, is calling for an immediate fiscal stimulus of $300 to $600 billion. Gail Collins, another New York Times columnist, is calling on President Bush to resign as the only way to save the country. "Orderly transfer of power be damned! Save us, Obama, save us!" Any impediment to handing out the fat envelopes of government cash, such as the Constitution, is considered as perilous in this time of crisis.

Two things are being missed in the panicked rush to increase the national debt in the name of keeping the economy going.

First, it's not that bad out there. The unemployment rate has risen, that's true. But 93% of us still have jobs. Banks have had to write off hundreds of billions of dollars worth of bad mortgages, and a number of banks have failed, that's true. But not a single depositor has lost his savings. Credit has gotten scarcer and more expensive, that's true. But my credit card still works and I expect it to keep working, as long as I keep paying off the bill. Standards may be a bit higher, but banks are still making loans to individuals with good credit ratings. Corporate profits are down, but aside from financial services and the domestic auto makers, companies in most sectors are not losing money.

Perform a little thought experiment: when you drive past Wal-Mart, is the parking lot still full of cars? If you go out to eat at a restaurant, is the place half empty, or do you have to wait for a table? My experience has been that the economy is still functioning. It may be harder to make a buck, but rumors of a new Great Depression are greatly exaggerated.

The other factor that has been missed by the pundits is that gas prices have dropped in half over the last couple of months. Gasoline that was at $4 a gallon over the summer now costs under $2 at the pump. For the average household, this frees up between $50 and $100 a week. Between now and the end of the year that could be worth up to $500, with another chunk of budgetary relief in January. And another in February, and so on. Over the next few months, lower gas prices will but as much money back into the economy as any proposed stimulus package.

Money that isn't literally burned is availible for keeping mortgages current, and paying down credit card debt, and shopping for Christmas presents. All activities that will reduce the level of financial panic. We just have to be patient.

Stimulus Package, Part I

There has been a great deal of coverage of the proposed economic stimulus package in the news for the last week or so. Today's news is that the bill that passed the House will not pass quickly through the Senate, largely because the esteemed Senators do not think there is enough being done. From my admittedly superficial research, it looks like the Senate wants to load on a whole bunch more giveaways onto the plan. This is because handing out $150 billion is not enough to satisfy the Solons of the Beltway.

If you're going to give a bunch of politicians a chance to hand out other people's money, you better be prepared to jump back quick to avoid getting trampled. Now, I don't want to seem as if I object to getting handed envelopes full of money. I love a windfall as much as the next guy, and my household's share of the swag would be about $1200. But frankly, I don't think this stimulus is going to work. To paraphrase Tennessee Ernie Ford: "You load $150 billion, and what do you get? Another day older and deeper in dept...I owe my soul to the Chinese government." After all, where do you think the money is going to come from?

The stimulus plan won't work for two reasons:
1. The current ecomomic malaise is being caused by structural problems in the financial services and banking industries, which in turn were triggered by the collapse of the housing bubble. Six hundrred dollars per person ain't going to reinflate the housing market. It is only enough to cover the increased mortgage payment on a subprime loan that resets this year. For a month. The next month, that home owner (sorry, that mortgagee; it's actually the bank that owns the home--poor bastards) will be unable to make the higher payment and then he starts to slide into default.

2. The other problem with the proposed stimulus is that since the US is already running a massive government deficit, another deficit piled on top of that will have little to no effect. For a Keynesian stimulus to work, the assumption is that government spending is in balance with revenue. The burst of deficit spending in a stimulus package jumpstarts economic activity, leading to a virtuous circle of economic growth. I'm going to say a little more about Keynesian theory in my next post.