fiscal cliff

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.