Now that I have lulled you into a false sense of security with my various unemployment, GDP, and other economic indicator summaries, it is time to alienate my 80% Democrat and 19% Republican readers and pander to my 1% Libertarian reader(s?). Heck, we’ll see if I can’t alienate him (them?) as well.
People everywhere are praising the stimulus as successfully saving the economy. This would be comical if it weren’t so terribly tragic. Of course, these people cite renowned economic institutions that back their story. These economic institutions show, using the same models that said unemployment would never reach 10%, that housing prices always rise, that the Fed can always clean up any bubbles that arise, that the stimulus money added jobs, grew GDP, and saved the economy. Isn’t it amazing, that models that are incapable of making a single correct prediction are perfect justifications for wasting trillions of dollars?
Economics is the study of allocating scarce resources. Most goods produced consume scarce resources. And some resources, like oil, arable land, time, lithium, platinum, etc. are truly scarce. Money represents capital in a way that makes it unnecessary to revert to bartering. But increases in money don’t magically increase capital. Up to the point that liquidity reduces transaction costs, money by itself is good. Beyond that, and increases in the money supply can cause inflation, causing a transfer of capital from those holding money to those producing the money. It is a tax, though we normally think of taxes as transfers of money, not capital. Mainstream economists treat expansive monetary and fiscal policy as a universal good, neglecting the costs. Fortunately, they also assure us that holding interest rates low only encouraged people and businesses to take on debt they otherwise would not have in ways that helped the economy, not in ways that contributed towards a bubble based on leverage and credit expansion.
If there was a government spending project that paid every unemployed adult in the labor force $50,000 to chop down a tree and burn it, GDP would rise by $50,000 per person employed, and the unemployment rate would be zero. There would also be a “multiplier effect,” where axe-makers bought axe-making equipment and hired new workers. They may have bought new cars. This additional activity would also add to GDP. Because unemployment would be low, wages for axemakers and carmakers would rise. But would the economy be saved? We’d have lost a tree for each employed person. We’d have used steel and wood to make axes. We’d have used steel and platinum to make cars. Resources would have been spent that may have had better uses, possibly ones that will come back and hurt us in the long run. Furthermore, we’d have $50,000 per person employed in new debt to pay interest on. At that point, if the government stopped paying people to chop down trees, the unemployment rate would rise, GDP would fall, and we wouldn’t get the trees back. When Japan tried to pull away their stimulus more than a decade ago, they found that their tax revenues fell. It actually became harder to service their debt. They had made structural changes to their economy, and they were expensive to undo. So they made a decision to continue their stimulus. It’s hard to stop paying people to chop down the trees once you’ve started.
Our stimulus first came in the form of tax cuts. Some of these were probably good. I doubt many jobs came from the tax cuts, though. Times were still tough, and we were coming from a period of overproduction, overconsumption, and overindebtedness. Whether you give a business or an individual more money, it’s not likely going to get spent on consumption. It’s likely to be spent on servicing debt. Not that this is bad, it isn’t. It’s necessary that people reduce their debt burdens. But that doesn’t create jobs. Most of the spending that was responsible for job creation came in the form of military spending (check the Q32009 GDP report). This is arguably as damaging as paying people to chop down and burn trees. Military spending has the same structural problem that once it’s used up, the jobs disappear. The private sector doesn’t have much need for it. There are exceptions, of course. The internet has probably produced more wealth than any single military project in history. That it was designed for something completely different (a robust military communication network) and that if not for certain elected officials (yeah, Al Gore) it would have never been opened to the public should provide a moment’s pause, however. The odds of our currently spent stimulus money having that kind of return are indistinguishable from zero.
One of the important parts of the stimulus bill were the numerous infrastructure projects. Those lie largely in front of us. Efforts are made to promote the idea that the good stuff is still ahead while ignoring the fact that we’ve wasted huge amounts on temporary tree burning jobs. These infrastructure projects are important and necessary. Our infrastructure is in a shameful state of disrepair. It needs to be maintained. However, this maintenence is a form of asset depreciation, not expansion. In business accounting, these things are treated differently. In government accounting, they are not. Maintenence adds to GDP. Economically, though, it means that resources must continue to be consumed merely to maintain the status quo. In China, entire cities sit empty. The construction of those cities provided jobs and boosted GDP. As those cities decay, they will further add to GDP with maintenence costs. However, they represent a complete failure to allocate resources effectively. We look to Hoover Dam as an infrastructure project that had a huge payoff relative to its cost. Not every project is Hoover Dam. Some projects are closer to the empty cities in China than Hoover Dam, and we sometimes forget which ones those are. Take our road infrastructure. Hoover Dam or Ordos? Suburbia has certainly shaped our culture. Entire industries exist because of our suburban sprawl. It sounds like Hoover Dam. But, we traded arable land, energy independence, reliable mass transit, road maintenence costs, and a lot of natural resources for it. One of the most distinctly American infrastructure projects may be closer to Ordos than most would like to believe.
One of the things the stimulus bill has done is contribute to the national debt. Fortunately, America has the distinction of being the world’s reserve currency as well as the largest economy. This distinction made our debt the asset of choice when the economic downturn started. As a consequence, the average interest we owe on our debt is now lower than before we increased our spending. We’ve got fantastic terms. Unfortunately, the interest can’t go too much lower. Also unfortunate is that we will need to refinance most of our debt at higher rates in the future. Also unfortunate is that our last administration was not the Clinton administration. It was the Bush administration. We entered this crisis from a point of unsustainable deficits (even controlling for increases due to the War on Terror, Bush managed to boost government spending better than anyone). It isn’t Obama’s fault that Bush blew up the budget, but it is his fault that he chose to ignore it. We have an unsustainable structural deficit. We’re ironically at the point where cutting spending will lead to bigger deficits in the short term. It may take 20 years, but this will lead to a currency crisis. Also, despite claims that the stimulus avoided a depression, the world is still entering one. This one will also be accurately described by the famous description of the Great Depression, “Just when we thought it was over, it had only just begun.” Fortunately, unless we really screw this one up, this depression will not be as painful as the Great Depression. Food and clothes don’t take up nearly as much of a typical paycheck as they did back then.
There’s an interesting chart going around that will feature prominently in the upcoming elections. It shows the rate of job losses before and after Obama’s inauguration. What is ignored is that this is exactly the shape that the graph would have if nothing was done. Some businesses were slower than others to cut jobs. Once momentum was built, however, the floodgates opened. Then, at varying points, businesses had trimmed all the fat (and then some). This was responsible first for the stemming of losses, and then for the profit growth reported by businesses. It was all about cutting costs. Sales, however, have not substantially increased. Additional job cuts would lead to additional losses and business death. After the census, the graph will turn down again. Everyone hired for the census will be unemployed again. Then the states will start shedding jobs.
These problems will effect the vast majority of Americans. 58% of Americans are now dependent upon government spending for a majority of their income (this includes Social Security, but I couldn’t find a figure without it). Fiscal imbalances in government necessarily translates to significant pain down the road. This is what it means to have a structural problem. We can’t cut spending without exacerbating the problems that the spending was supposed to fix. Our legendary flexible workforce isn’t flexible enough. But this means that the temporary stimulus efforts will have to grow and become permanent, structural changes. The velocity of money collapsed. The “multiplier effect” from the stimulus spending was extremely limited as a consequence. But that means more deficit spending than what is projected. And that will have costs. There’s just no more room for interest rates to fall. They eventually must rise. Then our costs from the stimulus become exponential. We’ve got a deep hole to dig our way out of (c.f. Figure 1. Even in April our Outlays exceeded Receipts). Except for the possibility of blowing another 7 year bubble, our efforts to avoid or delay a reckoning has only added to the costs that will shortly be paid. And we never get those metaphorical trees back.
And yes, I feel better now. Back to the usual.
