economic policy

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Manufacturing Increases – Just

Let’s not get too excited. It’s more the absence of loss than the presence of gain we are applauding.

Today’s report by the Institute of Supply Management on manufacturing conditions and expectations showed an increase for September, with the index compiled from a survey of purchasing managers reaching 51.5, up from 49.6 in August. Obviously that increase is slight and not really indicative of a sea change in conditions. It is the best showing for a few months, and reverses a three month decline, so that is the good news. The bad news is that, as you can tell, only about half our factories are reporting heavier activity. While this is not very good in the context of an economy humming along, it provides a little relief in our current context of lingering malaise and steady drift.

Indeed, in many ways, the ISM index has become the poster child of our recovery: it has staggered about that halfway mark for months. After having lifted itself from the depths of the crisis manufacturing simply cannot get itself accelerating at anything resembling ‘normal’ speed. We should take heart that US manufacturing is doing a little better than its European counterpart, but that is small comfort given the awful mess that Europe has made for itself.

There is no point in re-hashing the causes. They are too well known. Rotten economic policies, bad management, a deluge of debt, and a toxic banking system are all contributing to the drift.

I hear some saying that it is the uncertainty emanating from Washington that is the real killer. If so then those who argue this have to hold the Republicans responsible due to their intransigence and policy obstruction. Instead I usually hear the opposite: that it is the Obama administration’s ‘anti-business’ attitudes that are stalling investment. With the stock market nicely recovered from the crisis, profits at near all time highs, and borrowing costs at near all time lows the inducement to invest is compelling. But. And I am getting tired of repeating this: until demand picks up those terrific investment conditions are meaningless. So increasing demand ought to be the be-all and end-all of policy.

It isn’t.

Far from it. The so-called smart talk about post-election policy is already obsessing about austerity and the ‘need’ to slash into our federal budget deficit. Absurd though this is on any objective measure – particularly the economy’s debt carrying capacity at today’s interest rates – it has become the only topic of conversation.

Just this morning I read that some are pressing a re-elected Obama to replace the retiring Tim Geithner with a more budget savvy Treasury Secretary. Erskine Bowles name has surfaced as a strong candidate. So let me say it clearly: that would be a terrible choice. Bowles – as a part of the Simpson-Bowles deficit cutting commission – has come up with a long series of anti-social suggestions that would place the burden of austerity on the elderly, the sick, the poor and the middle class. The Simpson-Bowles report has attracted a lot of insider support precisely because it looks tough. And tough is an easy sell in Washington where three to four decades of error are hard to admit to. So, in order to avoid admitting that the entire Reagan/Clinton/Bush era was a policy mistake, insiders have decided to run and hide behind an image of tough love. They intend to burn the village in order to save it. This is essentially a long standing Republican narrative and strategic goal. The idea being to sell voters on the so-called crippling cost of entitlements, which must, therefore, be slashed. That those costs are not crippling is never argued. Nor is the general state of health care, not just the public sector cost of it, mentioned as a problem. It is an act of stupendous folly to budget as if the government’s mid-crisis revenue stream represents its long term ability to fund itself. Sound policy is built on a foundation of sustainable budgeting, and thus ‘normal’ revenues. Simpson-Bowles doesn’t do this. And, sadly, no one else does either.

Perhaps the most sickening aspect of our upcoming election is that Obama – who still looks like the potential winner – has apparently bought into the need for austerity. Worse, with the so-called ‘fiscal cliff’ due to become reality in January, budget negotiations will be urgent and rushed. There will be precious little time for debate, so attitudes are already being locked in.

So look for demand to be dampened. Which validates the ISM outlook: malaise as far as the eye can see.

 

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Weekend September 28, 2012

This week was dominate by two themes: the continuation of muddle as our economy wallowed along, better but not a whole lot; and the apparent implosion of the Romney presidential campaign.

First the economy:

The big disappointment was the downward revision of GDP for the second quarter. The final numbers – this is the third and ‘final’ figure we will get – has growth at a meagre 1.3%. This means that in the three years since the last quarter with negative GDP we have experienced an average of 2.2% growth per quarter. That is low by historical standards and suggests an economy deeply mired in its lingering problems. There have been breakout attempts: we had growth of 4.1% at the end of last year, but that faster growth has not been sustained. To put this in some perspective: during the year and a half of crisis we had an average of -3.1% change in GDP; and in the two years before the crisis we saw quarterly growth of … 2.2%. And that last number bears discussion.

While we all constantly berate post-crisis growth as being inadequate we forget that the years prior to the crisis were hardly golden. The economy was sputtering under the weight of its debt and asymmetrical distribution of incomes well before it collapsed. Much of the growth during those years was an illusion propped up by the unsustainable accumulation of debt, and the over reliance on the bubble induced activity in real estate and construction. Take away those bubble effects and the economy has been anemic for the best part of a decade. Indeed going back further we can also argue that much of the supposed boom in the 1990’s was also bubble induced – the hi-tech bubble in that case – and before that, in the late 1980’s we saw an economy propped up by an earlier bout of debt accumulation – the Reagan deficit financing of defense spending in particular.

So the recent performance, if set in this longer term perspective, is not so bad. It is still not good, but it sits more clearly within a long term view of slower growth when compared with early periods such as the 1950’s and 1960’s. We are still at the wrong end of the growth spectrum, but we fit well within the Reagan/Bush trajectory.

This suggests, of course, that our problems are more deep rooted and thus more difficult to resolve than ‘merely’ recovering from the crisis. We have many distortions to unwind and rebalance. Income inequality has to be reduced so that more purchasing power resides in the lower and middle strata, where money gets spent and not simply shipped to the Cayman Islands; the long term Federal budget needs to be better balanced which implies higher revenues as well as cost reduction – in defense primarily; and the financial industry needs to be reduced in size and scope so that our resources flow into the real economy and not into ponzi financial schemes. These all require political adjustments before economic policy can be corrected. And that requires a clear victor in our upcoming election.

Which brings us to the second theme of the week.

Has there ever been a weaker presidential candidate than Mitt Romney? He is awful. His plutocratic airs and graces have finally been fully exposed. His prejudices and his arrogance are in full display. He seems lost and genuinely hurt by the negative reaction to his astonishing diatribe about the 47%. That off the cuff and private talk sank him. It is especially damaging because it was private. It cannot thus be ‘spun’. It was clearly what he thinks. That is what has hurt him the most. Whilst we all thought he looked stiff and awkward, like any prep school kid trying to be one of the guys, he was able to get away with it because he projected a competence and an attempted outreach to the regular voter. People, may not have liked what he is – corporate raiders are not inherently nice – but they could bring themselves to vote for him as a rejection of Obama. They could tolerate Romney. But not after that 47% speech. It stripped away any pretense he had. It showed him to be exactly what we feared he was – a spoiled brat, entitled, out of touch, and mean spirited. His dismissal of half the population as being moochers beyond help and respect was the most clear insight we can have into the mindset of the plutocracy that is trying to cement its control over us. They actually think they are hard done by! In their cramped and distorted world they sincerely believe themselves to be under-appreciated, over-taxed, and despised for being successful.

Perhaps they are. Perhaps not. What we do know is that the post-Reagan plutocracy has not produced an economy worth a lick. For all their supposed smarts, clever financial tricks, and hard work their entire generation has managed only to run the economy into the ground in an epic failure only matched by an earlier generation of plutocrats in the 1920’s and 1930’s.

Their success is based on rent-seeking not skill. They specialize in regulatory capture, corruption, and lobbying. They use these skills to distort the economy for their own gain. This creates excess cash which they then flood Washington with. They mingle only with themselves. They live behind gated communities. They go to private schools. They belong to the right clubs. They act out their expensive lives within a small sector of the world that, to them, is the entire world. They presume to have the right to lead because of their self-promoted success.

But. That success is hollow. It depends entirely upon their ability to continue to twist the game in their own favor. And as the effects of their squeezing gradually dries out the economy, they must resort to ever more blatant and destructive activities. They have to double down on their rent-seeking. They have to invent ever more risky financial trickery. They have to extend their reach further and further. Until the dead weight of their excesses brings the entire game to a screeching halt, forcing us to endure a depression.

Romney exists within this vortex. He is swept up by it. He is self-validated by it. He cannot see beyond it. To him it is the real world with all its own justifications, rules, institutions, and culture. That it is profoundly anti-social is beyond his comprehension. So when he sees a veteran living off a government pension he can genuinely see a moocher. Or he can genuinely mean it when he advises poor kids to start a business by borrowing the capital from their parents. And he simply doesn’t see anything wrong with making the uninsured go to the emergency room for health care. The list of indifference and uncaring goes on. It is typical of his ilk.

And, remember, they are the ones who advocate austerity and hardship as the cure to our economic ills. They are the ones who privilege capital over labor. And they are the ones who protect creditors rather than debtors.

Romney’s whole life was lived through this prism. He steadily checked off boxes on his resume. It was inevitable he would run for ever higher office. What else was a rich kid to do?

Then he exposed himself. And by so doing exposed his plutocratic class.

The single most effective political ad running on TV this year uses Romney’s words. It uses only his voice. It announces itself as an ad for Obama and then simply allows Romney to talk. Nothing else. It is an act of self-destruction like no other. And it is working.

Perhaps, just perhaps, the plutocrats have over-reached, and this election marks the beginning of repair and recapture of the economy for the rest of us.

Who knows.

A lot depends on Obama. And he hasn’t said much lately. He hasn’t needed to.

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Here We Go A-Wallowing

This is what floundering looks like. Well, perhaps I am being a bit harsh. After all we had a couple of good reports earlier this week, and today’s news on new claims for unemployment assistance is fairly decent. But the final revision of second quarter GDP and the durable goods data confirm that the economy is best described as being a doggie paddle swim rather than a free-stroke. There’s a lot of splashing but not a lot of movement.

The second quarter saw GDP rise a paltry annualized 1.3%. That’s nowhere near good enough to resolve our employment problems and leaves us very vulnerable to the twin impending crises of the Euro’s ongoing unravelling and our own self-inflicted budget impasse. We have precious few degrees of freedom which means that everything needs to go well – which I doubt they will – if we are to avoid even slower growth in upcoming quarters.

Recall that the last estimate for second quarter GDP was 1.7%, so the final tally represents more pessimistic view and confirms what we all felt about the midsummer: we became becalmed. This is especially downbeat because the two major factors contributing to the downward revision are exactly those we are hoping will drive us into a more rapid recovery. Personal consumption growth was revised down from 1.7% to 1.5%; and business investment growth was revised down from 4.2% to 3.6%. Since the other two components of GDP, trade and government spending, are both either relatively flat and/or highly dependent on the impending crises I mentioned earlier, we are dependent on the private sector to fuel the recovery. And the private sector is still wallowing in the aftermath of its bubble induced, debt retrenchment.

This is, of course, not news, but today’s news is a vivid reminder of how much work is yet to be done. No amount of political sharp talk can mask the failure of economic policy over the past decade – or more depending on how meticulous you want to be in tracing back the causes of our problems.

There is no point in re-hashing the discussion: we suffer from a lack of demand, and the longer we fail to address that issue the longer our wallowing will continue.

Today’s durable goods order report was decidedly different from most expectations. August’s 13.2% decline was much steeper than anyone predicted. It is, however, a very distorted number. Durable goods orders are highly volatile because they include some very large items such as aircraft orders and defense spending on capital goods. For instance, aircraft orders fell a whopping 102% in August alone because airlines had bunched their orders up during the Paris Air Show producing a spike up in July of 51%. Stripping out the effects of those two categories leaves us with a very different impression: the other categories actually grew slightly, at an annualized rate of 1.1%,reversing the declines of 5.2% in July and 2.7% in June.

I think it is fair to expect a slight pause in business investment, as illustrated in durable goods orders, while companies assess the likely damage to demand resulting from the upcoming, post-election, negotiations over the Federal budget. Failure to re-work the current arrangement would send us over the proverbial fiscal ‘cliff’ and by most accounts produce an immediate recession. Congressional failure to reach an agreement over the budget is injecting a level of uncertainty that inhibits growth. As you know, my opinion is that we ought to be augmenting not diminishing demand, but that is not the prevalent view in Washington where austerity in some form appears to be the more likely outcome. We are paying a heavy price for the impasse in Washington, and every quarter that goes by without a sensible long term budget in place adds to the pain.

Finally a little good news: today’s report on weekly claims for unemployment assistance was a modest step in the right direction. At 359,000 it was 26,000 down on the prior week and managed to produce a slight 4,000 improvement in its four week moving average. So that’s the good news. Unfortunately that four week average is almost spot on where it has lingered all year, and is woefully above a rate consistent with a rapid recovery in employment. While supporters of Obama will no doubt crow that this is much better than we saw at the depths of crisis – true – and is better than the record of the Bush administration -also true – it is nothing to be proud of. We are generating jobs at about the same rate the population is growing. That is insufficient and speaks to rotten economic policy in the face of a human crisis that everyone in Washington pays lip service to, but substantially ignores.

Of course it would help if economists could agree on what a good policy would be, but that, I fear, is a pipe dream. But, come to think of it, most economic theory is a pipe dream anyway, so why should we expect economists to be of value in fixing an economy?

Of that, another time.

 

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Puff The Magic Romney

Well what a week that was. Mitt Romney has not yet lost the election, but he has come perilously close. If he pulls out a win, which is now looking like a long odds bet, it will not be because of his economic plan. This is because he doesn’t have one. Or, rather, that his plan is vacuous, vague, incoherent, and lacking in anything we can reasonably call a plan.

Or perhaps I just misunderstand what a plan is.

In my lexicon a plan is something with concrete steps – causes – that have some semblance of connection with a desired results – effects. Cause and effect. I realize in this uncertain world that plans have to have some latitude so that the unexpected can be accommodated nicely within the overall goal, but the entire plan ought not to consist of latitude. There’s such a thing as being too loose.

And Romney’s plan is loose in ways that make it impossible to understand.

The main thrust of it is that simply by ousting Obama things will look up. That is to say that our business leaders are so in a funk over Obama’s supposed anti-business rhetoric and policies that once he is swept away they will stop cowering and sulking and come roaring to life. They will repatriate all their off shore bank accounts. They will unleash the hounds of investment. They will build new factories, buy new equipment, open up the throttle and drive us happily out of the doldrums.

This is stupid. And it’s not a plan. But it is exactly what Romney appears to believe. In which case he is an incompetent dolt, and an ignoramus to boot.

Which he is not.

So why the stupid plan?

Because he is strapped into the cockpit of the Republican party’s economic aircraft, which, dodo-like, cannot fly. Ever.

The rickety contraption called  Republican economic policy is riven through with massive contradictions. It is a kluged together mash-up of  elements each of which is designed to appease a different part of the whacky coalition we know as the Republican party. And since that coalition is full of disparate and often contradictory pieces, so too is its economic platform.

So continued tax cutting sits uncomfortably beside budget austerity without any attempt to reconcile the yawning gap between them. On the one hand the Republican party’s rabid Tea Party base wants lower taxes – especially for the ‘job creators’ – and on the other it’s ultra conservative fiscal hawks want to balance the Federal budget. Without cutting defense spending of course. This is simply not plausible without gutting Federal entitlement programs, which the libertarian part of the GOP salivate at, but nowhere does Romney mention abolishing those entitlement programs. Instead he talks about ‘reform’ of insufficient scale to close the budget gap his proposed tax cut would open up. Worse, he attacks Obama for having cut those entitlements – wrongly as it turns out.

If part of the Republican plan to balance the budget they will cause first to make worse is by slashing entitlements, then criticizing Obama for slashing entitlements is not a very clear way of articulating what they plan. In fact it is lying.

But at least they are lying with some clarity.

The rest of the plan is foggy to say the least.

It really can be summed up as a confidence trick. It relies entirely on the boost in confidence that business will get – presumably – from ditching Obama and his socialist ways.

It takes a very complex mind to take the current economy, in which business investment is growing decently, where profits are strong, and where banks are knee deep in resources awaiting lending, and make the lack of investment, profit opportunity, and loans the source of all our problems.

Maybe complex is the wrong word. Perhaps deluded is better.

The problem the Republicans have is that they have become the poster child for one trick ponies. They have precisely one economic policy. Cut taxes. They remind me of Samuel Beckett when he talked about failure as being worthy if we learn from it. His saying was: “Try again. Fail again. Fail better.” The Republicans have turned this into “Try again. Fail again. Fail again. Fail again …”. They forgot the better part. They forgot to learn. So they are stuck with a self-contradictory policy that we know, a priori, will fail. It has failed in the past. Re-branding it the ‘Ryan Plan’ doesn’t alter its rottenness. Call it ‘supply side’. Call it ‘trickle down’. Call it what you will. It still won’t work.

The deeper issue for the Republicans then becomes clear. They cannot solve our problems because they are ideologically committed to the course of action that created those problems. So they are boxed in. The facts don’t fit their narrative, so they are forced to invent facts. Hence the slurs against Obama. Hence his demonization as being anti-business, when in fact he is nothing of the sort.

This is not to argue that confidence and expectations are not part of economics. They are. But business expectations are far more pragmatically based than right wing economists and politicians like to believe. They are based on hard-headed estimates of demand. Absent the prospect of strong demand and any sensible business leader will avoid the risks associated with new investment. Instead they will try to squeeze every last drop of profit from their existing operations. They will cut costs, lengthen the work week for existing employees, use older equipment beyond its original expected life, and otherwise coax cash out from the corners they would normally ignore.

This pragmatic picture fits well with the data. It is exactly what we would expect to see were demand the driver of activity. It is exactly what we find when we examine the facts. We do not live in a supply driven economy. We live in a demand driven economy. One where the Republican economic ideology does not fit. Which is why, ever since Reagan first foisted it upon us, it has failed – repeatedly – to deliver the nirvana we were told it would. Instead it has delivered huge inequality, social regression, and hardship for everyday workers. We got the unintended consequences – and I am being polite – without any of the intended consequences.

In face of these facts it is hardly surprising that Romney cannot articulate an economic plan worthy of being called a plan. He couldn’t. It isn’t possible. So he is condemned to being vague, vacuous, and incoherent. He doesn’t look comfortable with his situation. He is far too much of a control freak to feel at ease with the mess that is Republican economics.

But that’s his problem, not mine. So I don’t care about that.

It also means he’s being dishonest. And that I care about.

He deserves the mess he’s in.

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