FedUpUSA

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From The Daily Capitalist

As my readers know, every so often I really get fed up with what comes out of Washington (Our Nation’s Capital) and feel the need to vent. My recent irritation is a letter Christina Romer, the president of Obama’s Council of Economic Advisers, published in the Wall Street Journal.

The letter is an apologia for the economic policies she and Summers and Geithner have been recommending to the president. She seems like such a nice lady, and she’s the wife of economist David Romer. Both were econ professors at Berkeley and both studied economics at MIT. But …

Here are some excerpts from her letter, with my comments:

Within a month of taking office, the administration had announced its Financial Stability Plan and signed the American Recovery and Reinvestment Act. The Recovery Act helped stem the decline in spending caused by consumers and businesses reeling from the fall in asset prices and the drying up of credit. Real GDP, which had fallen at a 6.4% annual rate in the first quarter of 2009, began to grow again just two quarters later. …

She seriously believes this. But she has a slight problem with the cause and effect, post hoc ergo propter hoc*, thingie. That is, there is no evidence, theoretical or empirical, that the Recovery Act did anything positive or lasting. Even assuming Keynesian stimulus works, the government hadn’t spent enough money to make it work according to the Keynesian formula. At least that’s what Paul Krugman said. Whatever, no one has ever offered any proof that such stimulus works.

And, as far as I know, PCE (consumer spending) is still very low, asset prices are still declining, and credit is worse.

We’ve already seen from the Recovery Act that spending on infrastructure—everything from roads and bridges to schools and municipal buildings—is an effective way to put people back to work while creating lasting investments that raise future productivity. …

Yadda, yadda, yadda. Again more spending on things the government wants, not the things that the market wants. The jobs are already fizzling. See this excellent article in the WSJ, ironically published on the same day as Mrs. Romer’s piece. The gist is that when the government money ends, the jobs dry up.

Subsequently the president pushed for the Cash for Clunkers program that was successful in boosting demand and job creation. …

All this did was to junk a bunch of good cars, fill the pockets of auto dealers, and appease the UAW. Auto sales are already declining again. It just accelerated future sales of people who would have bought cars anyway.

[A]bout a month ago the president announced the latest in a series of measures to encourage banks to lend to small businesses. …

As we all know credit is still shrinking, not growing. They have tried every trick in the Keynesian book to loosen credit but to no avail. I’m sure this new legislation will be different.

[I]n early November the president signed into law a measure that would provide relief and spur job creation by adding additional weeks of unemployment insurance, cutting taxes for businesses, and expanding and extending the home-buyer tax credit. …

That must have worked really fast, because unemployment, according to the Bureau of Labor Statistics, dropped from 10.2% to 10% in November. Wow, that’s great legislation. But, as we all know, Things Are Not What They Seem. As David Rosenberg pointed out in one of his reports, the government stats look funny because they are so different from what ADP reported. 

Despite these positive developments, the job market remains very weak. … American businesses appear hesitant to hire, and are producing more with fewer workers. …

Didn’t she just say that things are getting better?

Tomorrow [the President] will convene a meeting of business and labor leaders, small-business owners, economists and community representatives to discuss our ideas and solicit others for accelerating hiring. … [W]e need to harness the private sector, bringing large and small firms in off the sidelines to boost job creation. …

This is the part that really upset me. First, this is a typical political move. “Let’s all get together and come up with some great ideas!” No offense to the community organizers out there, but getting a bunch of people in a room like this gets nowhere. The best thing they could do is cancel all meetings, and get the hell out of the way.

But what really got me was the “harness the private sector” comment. I hope she didn’t mean it in the way I’m thinking, but if she didn’t then it’s even worse because she doesn’t realize the implications of her policies. When government gets together with business and labor to create policies for political benefit, it is called fascism, or national socialism. The words she used were rather telling: a “harness” is not something I would want to be in. You know who has the whip.

While the words seem innocent, it is all about losing our freedoms. Here’s the conclusion from a piece I wrote about the takeover of GM (in homage to Ayn Rand):

Sometimes it’s hard to see what is happening in front of your eyes. It seems rather benign and logical when you read about it, but it’s not. Nationalizing GM is just good old fashioned fascism–just like what happened in Italy in the 1920s and ‘30s … And now us. If you think I’m exaggerating, it’s probably because you think everything the government does is OK because we’re having a crisis. As Wesley Mouch said in Atlas Shrugged, “We’ve got to act!” That’s how we are losing our freedom, by a thousand cuts.

*Since that event followed this one, that event must have been caused by this one.

For the first time since March, the stock market actually
showed a little reaction to reality based information. As it turns out, even removing any hint of
stimulus will cause the market to retreat.
We already expected the cash for clunkers program was largely a gimmick
with auto sales dropping like a stone in the last reading. Home sales are being artificially juiced by
the $8,000 tax credit and the Federal
Reserve keeping 30 year mortgages near historical lows. You can expect that if the Fed and the tax
credit were removed we would see a similar reaction as the cash for clunkers
program in the housing market. It is
amazing that so much energy and focus is being put on bailouts, gimmicks, and
transient market forces all the while ignoring one major component. Jobs.

The jobs report issued on Friday was another
disappointment. The problem with how the
jobs argument has been framed since the start of the year is any report is
going to look good compared to the 741,000 job losses in January. Did anyone really think we were going to stay
at an annualized job loss pace of nearly 9 million? Of course not. So every subsequent reading seemed like a
blessing to the media. The rate of
change on a month over month basis has been referred to as the second
derivative (or more specifically the rate of change OF the rate of change). Let us look at both job losses and the rate
of change:

It is rather obvious that we were not going to see 741,000
job cuts per month even if we were heading into another Great
Depression. So as you can see from
the chart above the second derivative from February to May of 2009 was
positive. Yet anyone can see how flawed
this argument really is. It is using the
ground shaking monthly loss of -741,000 as a backdrop for every subsequent
month. Nothing can compete with
that. In fact, the following months had
equally bad reports:

February 2009: -681,000

March 2009: -652,000

April 2009: -519,000

And then in June, we had the second derivative give out
again. Of course the market being guided
by easy money and unlimited stimulus kept moving on up. This minor hiccup was nothing to worry
about. That is until the last report
that shows the rate of change giving way again.
Even at our current pace, we are losing over 3 million jobs a year yet
somehow this is good.

Yet in this new economy apparently buying a car and buying a
home are more important than having a stable job. Even Henry Ford understood that you needed to
pay workers a wage to afford the product you were dishing out. In this new economy, apparently having a job
is an afterthought.

Let us set aside the job losses for the moment.
Who in the world is hiring?
Apparently very few:

Those hiring are still at the levels seen in the March
abyss. Virtually nothing has changed on
the jobs front since March of this year.
Instead of playing hide and seek with mortgages and creating a massive shadow
inventory why not at least focus
some energy on the employment situation?

There is this pervasive tunnel vision focus on everything
put job creation. It seems like very few
want to talk about this. They want to
obsess that the Case Shiller has stabilized or that home sales have increased
but fail to examine the employment front.
For the first time in our history did we have an economy largely built
on a housing and credit bubble. So why
are we to expect similar outcomes in this so-called recovery? In fact, many of these jobs losses are
permanent:

5.4 million people have been unemployed for 27 weeks or
more. In times like this simple
questions bring out the best answers.
This is like asking how a person with no income and no job is going to
pay a $500,000 mortgage in California? If you asked a question like that the outcome
would have been obvious. So with this
above chart, we ask who or what industry is going to employ these people? That is the question that has no answer even
as we pass 21 months of our deep recession.