Cartoon: Economic Stimulus Package

A Sham GDP for a Sham Economy

Americans rejoice! GDP grew by 3.5% in the third quarter and the recession is over.

It’s time to drink champagne, dance in the streets, and have a group hug with Nancy Pelosi and Ben Bernanke. But whatever you do, don’t ask yourself why the recession has ended. The answer might ruin the party.

The recession is over only because Washington decided it should be. With billions in fresh government spending, it was only a matter of time before GDP posted some growth.

It’s too bad all that government spending is borrowed money. Someday, we’ll actually have to pay off this year’s $1.4 trillion deficit.

Of course, all of the president’s Keynesian men will argue that everything is working to plan — the stimulus is stimulating. But it’s hard not to see today’s GDP bounce as a bit of a sham.
Just check out where the economy grew. Almost half — or 1.7% of the pickup in GDP growth came from “motor vehicle output.” That’s the summer’s $3 billion cash-for-clunkers program doing its thing. But at what cost?

Edmunds.com just released some compelling analysis on cash-for-clunkers. Apparently, it cost the U.S. taxpayer about $24,000 per vehicle sold. Edmunds gets that number by dividing the $3 billion by the 125,000 additional car sales generated by the program. The methodology makes sense to me, but click here and decide for yourself...

Consider another one of Washington’s smashing successes: the $8,000 credit for first-time home buyers. For the third quarter, “real residential fixed investment” — also known as “homebuilding” — jumped 23.4%. That boosted GDP by another 0.5%. Do you feel like hugging Harry Reid now?

But we’re not seeing the real cost of the homebuyer tax credit. This is very expensive stuff. The Calculated Risk blog figures the home-buyer credit costs the taxpayer $43,000 per incremental home sale. Goldman Sachs ran its own numbers, reckoning that each incremental home sale cost the taxpayer an astounding $80,000. Again, the methodology seems right to me, but decide for yourself.

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Debt Ceiling: $12.1 Trillion

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Cash for Clunkers: $24,000 per Car

A total of 690,000 new vehicles were sold under the Cash for Clunkers program last summer, but only 125,000 of those were vehicles that would not have been sold anyway, according to an analysis released Wednesday by the automotive Web site Edmunds.com.

Still, auto sales contributed heavily to the economy's expansion in the third quarter, adding 1.7 percentage points to the nation's gross domestic product growth...

The Cash for Clunkers program gave car buyers rebates of up to $4,500 if they traded in less fuel-efficient vehicles for new vehicles that met certain fuel economy requirements. A total of $3 billion was allotted for those rebates.

The average rebate was $4,000. But the overwhelming majority of sales would have taken place anyway at some time in the last half of 2009, according to Edmunds.com. That means the government ended up spending about $24,000 each for those 125,000 additional vehicle sales...

Emunds.com's projection indicates that, without Cash for Clunkers, October's sales increase would be even higher.

read the CNN article

3rd Quarter GDP 3.5%

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3rd Quarter GDP: 3.5% Increase

US Federal Deficit As Percent Of GDP

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Health Care Reform and the Budget Deficit

In the Mid-Session Review of the 2010 Budget issued last August, the Administration estimated that we were on a path that would result in a cumulative deficit over the ten-year budget window from 2010 to 2019 of $9 trillion...

Finally, by far the lion’s share of the projected cumulative deficit is due to policy actions taken in the last Administration. Economists Alan Auerbach and William Gale find that policies from the last eight years that we failed to pay for, including cutting taxes, introducing a new entitlement program for prescription drug benefits, and fighting two wars, are contributing approximately $700 billion per year to the budget deficit. Before those actions were taken, we had been on track to run large budget surpluses over the coming decade.

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Marc Faber: On the Dollar and the Economy

On Bernanke: "He's a money printer. He does that well."

Cartoon: Life Ain't Fair

Cartoon: Bank Failures

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Housing Crisis

Cartoon: Goldman Sachs

Stimulus or Sowing the Seeds of Depression?

Government intervention, in all of its forms, distorts the market place; it directs scarce resources away from productive ventures to unproductive ventures. The measures, taxation, borrowing, and monetary inflation, which the government utilizes to pay for the extravagances of its various stimulus proposals and other constitutionally dubious programs, generate negative economic consequences. Economic prosperity is the product of innovative entrepreneurs who use capital, which is derived from real savings, to produce additional goods and services that market participants can purchase at lower prices. The government stimulus plans encourage capital consumption, which reduces the supply of goods available to consumers, and lays the foundation for an economic depression. The government’s response to the current economic crisis is the identical policies that contributed to the Great Depression. This is not the appropriate foundation for long term economic prosperity, but the inappropriate path to economic ruin.

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My thoughts: An outstanding essay.

Housing Crisis Round 2

These helped frame where we are in the mortgage crisis, which has been the main shark in the water over the past couple of years. You should know where that shark is and whether or not it is hungry…

Clearly, it is not yet safe to get back in the water: Years 2010 and 2011 face big resets in so-called Alt-A and Option ARM loans. What this means is more write-downs and more losses for banks and others who hold these mortgages.

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Cartoon: Pay Czar

Is Limited Government an Oxymoron?

Lessons of 1920-21

History is nothing but a long list of disasters in chronological order. Historians love calamity...

Harding was the last American president to deal honestly with a major financial crisis. Every president since has tried to scam his way out of it.

By the time Harding took office in ’21 the Panic of 1920 was taking the unemployment rate from 4% to nearly 12%. GDP fell 17%. Then, as now, the president’s subordinates urged him to intervene. Secretary of Commerce Herbert Hoover wanted to meddle – as he would 10 years later. But Harding resisted. No bailouts. No stimulus. No monetary policy. No fiscal policy. Harding had a better approach; he cut government spending and went out to play poker...

“No statute enacted by man can repeal the inexorable laws of nature,” he announced. “Our most dangerous tendency is to expect too much of government…”

Harding was not the first to see the economy as a ‘natural’ order…one that you disturbed at your peril. A Taoist named Zhuangzi, who lived about the same time as Alexander, observed: “Good order results spontaneously when things are let alone.”...

Keynes came along a few years later. Keynes was a genius; everybody said so. And he had an answer for everything. Nature? Government could do better. Debt? Don’t worry about it, he said. Why not just let capitalism sort itself out? Without government intervention, it will only get worse, said Keynes.

But Harding had already proved him wrong. Harding did the very opposite of what Keynes recommended. Instead of increasing government spending, he reduced it. He cut the budget almost in half. He slashed taxes too…and cut the national debt by a third...

This lesson was entirely lost on the world’s economists. When the next crisis hit a decade later, they turned to Keynes. Of course, it turned out to be a moral world after all. They got what they deserved.

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Tom Woods and Steve Forbes on the Economic Crisis

Permanent Job Loss

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FY 2009 Budget Deficit $1.42

The Obama administration on Friday said the government ran a $1.42 trillion deficit in fiscal year 2009.

That made it the worst year on record since World War II, according to data from the Treasury and the White House Office of Management and Budget.

Tax receipts for the year fell 16.6% overall, while spending soared 18.2% compared to fiscal year 2008. The causes: rising unemployment, the economic slowdown and the extraordinary measures taken by lawmakers to stem the economic meltdown that hit in fall 2008.

Consequently, the annual deficit rose 212% to the record dollar amount of $1.42 trillion, from $455 billion a year earlier.

As a share of the economy, the deficit accounted for 10% of gross domestic product, up from 3.2% in 2008. As breath-taking as that may be, it's still not in the same stratosphere as the 1945 deficit, which hit 21% of GDP.

read the CNN article

The Dow Hits 10,000

Stocks rallied Wednesday afternoon, with the Dow industrials briefly touching 10,000 for the first time in over a year, following better-than-expected quarterly profit reports from Intel and JPMorgan Chase.

The Dow Jones industrial average (INDU)rose as high as 10,001.58 with about 2-1/2 hours left in the session. It then stepped back slightly, to a gain of 128 points, or 1.3%, to 9,997.
The last time the Dow crossed 10,000 during a trading session was Oct. 7, 2008, when it briefly touched 10,124.03...

read the CNN article

Cartoon: Congress and Lobbyists

Minimum Wage to Decline

Colorado will become the first state to reduce its minimum wage because of a falling cost of living.

The state Department of Labor and Employment ordered the wage down to $7.24 from $7.28. That's lower than the federal minimum wage of $7.25, so most minimum wage workers would lose only 3 cents an hour.

Colorado is one of 10 states where the minimum wage is tied to inflation. The indexing is thought to protect low-wage workers from having flat wages as the cost of living goes up.

But because Colorado's provision allows wage declines, the minimum wage will drop because of a falling consumer price index. It will be the first decrease in any state since the federal minimum wage law was passed in 1938.

"We can't see that there would be any other option" except lowering the wage, department spokesman Bill Thoennes said Tuesday. He said there will still be a public hearing on the question in early November, though the drop appears inevitable. The lower wage will take effect Jan. 1.

Advocacy groups for the poor have been warning of the wage drop since August, when the consumer price index for the Denver area was released. The index fell 0.6 percent between the middle of 2008 and the middle of 2009, mostly as a result of falling fuel prices.

Other states with adjustable minimum wages have seen their consumer price indexes fall, such as Ohio. But Colorado is one of the few states where the law is interpreted to mean the wage can fall. Other states are planning to keep wages flat.

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Cartoon: Government-Business Collusion

The Correction is Coming...

Of course, everyone now knows that the recession is over. NABE interviewed 44 economic forecasters. Four-fifths of them said the recession was over.

But we don’t care what they said. These are the same seers who missed the biggest single event in financial history. There are many banking crises, recessions, panics and defaults in the record books. But none were as great as the one that hit September a year ago. Most economists didn’t see it coming; why should we trust them to tell us when it is going?

Besides they’ve got the whole thing wrong. It isn’t a recession; it’s a depression. There is no recovery from a depression; instead, the economy has to re-invent itself in another form. Things aren’t going ‘back to normal,’ in other words. Because the period leading up to the crisis was not ‘normal;’ it was a bubble. After a bubble explodes, you have a lot of debris to clean up. The bigger the bubble, the more damage it does when it blows up.

“The force of a correction is equal and opposite to the deception that preceded it.”

You’ve heard our dictum before. In fact, you’ve heard our explanations for all these points before.

We just lived through the biggest bubble in history. Get ready for the biggest bust. Not just two years of falling stock prices and news-making bailouts. Not just 10% unemployment. Not just 100 bank failures and 30% off housing prices.

Noooo… We’re talking about a worthy correction…a real correction…a noble and distinguished correction…a correction that can hold its head up in public.

This is a correction that will take many years…one that will knock housing prices down for at least five years…and stock prices down to the point where people no longer want to buy them. It’s a correction that goes deep enough and continues long enough to do its work – wiping out the bad investments and mistakes of the Bubble Era, while allowing the survivors to pay down their debts and build up their savings.

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Gross Private Domestic Investment

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The Depression of 1920-21

It is a cliché that if we do not study the past we are condemned to repeat it. Almost equally certain, however, is that if there are lessons to be learned from an historical episode, the political class will draw all the wrong ones—and often deliberately so. Far from viewing the past as a potential source of wisdom and insight, political regimes have a habit of employing history as an ideological weapon, to be distorted and manipulated in the service of present-day ambitions. That’s what Winston Churchill meant when he described the history of the Soviet Union as “unpredictable.”...

If the Austrian view is correct—and I believe the theoretical and empirical evidence strongly indicates that it is—then the best approach to recovery would be close to the opposite of these Keynesian strategies. The government budget should be cut, not increased, thereby releasing resources that private actors can use to realign the capital structure. The money supply should not be increased. Bailouts merely freeze entrepreneurial error in place, instead of allowing the redistribution of resources into the hands of parties better able to provide for consumer demands in light of entrepreneurs’ new understanding of real conditions. Emergency lending to troubled firms perpetuates the misallocation of resources and extends favoritism to firms engaged in unsustainable activities at the expense of sound firms prepared to put those resources to more appropriate use....

The experience of 1920–21 reinforces the contention of genuine free-market economists that government intervention is a hindrance to economic recovery. It is not in spite of the absence of fiscal and monetary stimulus that the economy recovered from the 1920–21 depression. It is because those things were avoided that recovery came. The next time we are solemnly warned to recall the lessons of history lest our economy deteriorate still further, we ought to refer to this episode—and observe how hastily our interrogators try to change the subject.

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Barack Obama and the Nobel Prize

The Press Release:

The Norwegian Nobel Committee has decided that the Nobel Peace Prize for 2009 is to be awarded to President Barack Obama for his extraordinary efforts to strengthen international diplomacy and cooperation between peoples. The Committee has attached special importance to Obama's vision of and work for a world without nuclear weapons.

Obama has as President created a new climate in international politics. Multilateral diplomacy has regained a central position, with emphasis on the role that the United Nations and other international institutions can play. Dialogue and negotiations are preferred as instruments for resolving even the most difficult international conflicts. The vision of a world free from nuclear arms has powerfully stimulated disarmament and arms control negotiations. Thanks to Obama's initiative, the USA is now playing a more constructive role in meeting the great climatic challenges the world is confronting. Democracy and human rights are to be strengthened.

Only very rarely has a person to the same extent as Obama captured the world's attention and given its people hope for a better future. His diplomacy is founded in the concept that those who are to lead the world must do so on the basis of values and attitudes that are shared by the majority of the world's population.

For 108 years, the Norwegian Nobel Committee has sought to stimulate precisely that international policy and those attitudes for which Obama is now the world's leading spokesman. The Committee endorses Obama's appeal that "Now is the time for all of us to take our share of responsibility for a global response to global challenges."

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Wall Street Journal editorial

The Nobel Peace Prize awarded to President Obama yesterday was greeted with astonishment as much as any other emotion, even among many of his admirers. Our own reaction is bemusement at the Norwegian decision to offer what amounts to the world's first futures prize in diplomacy, with the Nobel Committee anticipating the heroic concessions that it believes Mr. Obama will make to secure treaties that will produce a new era of global serenity.

Maybe he really is The One.

Mr. Obama seemed more than a little amazed himself, after only nine months on the job and having been inaugurated only 12 days before Nobel nominations were due in February. The prize isn't "a recognition of my own accomplishment," the President said yesterday, adding that "I do not feel that I deserve to be in the company of so many of the transformative figures who've been honored by this prize." Humility grace note accepted...

Mr. Obama sees the U.S. differently, as weaker than it was and the rest of the planet as stronger, and so he calls for a humbler America, at best a first among equals, working primarily through the U.N. The world's challenges, he emphasized yesterday, "can't be met by any one leader or any one nation." What this suggests to us—and to the Norwegians—is the end of what has been called "American exceptionalism." This is the view that U.S. values have universal application and should be promoted without apology, and defended with military force when necessary.


James Pethokoukis

The complete abdication by the Obama administration on trade should disqualify him from the Nobel Peace Prize. Free trade has lifted hundred of millions out of poverty worldwide and promoted a closer global society. But the Obama White House has been as protectionist as any in memory. Free trade is that the core of foundation of the post-World War II economic order.

Sheldon Richman on Frederic Passy

Peter Schiff: Gold to Hit $5,000

Do We Need Another Stimulus?

If there is any “recovery,” it is a false recovery, one based not on any tangible economic progress but rather on financial trickery and printing money. Our “recovery” is a fraud perpetrated by Washington and its Amen Chorus in elite higher education and the mainstream media.

For the U.S. economy to have a real recovery, the economy first must shed the huge number of malinvestments that piled up like garbage on New York streets during the last unsustainable boom. Unfortunately, as the economy dumps these failed investments, that means people who were employed in those areas also lose their jobs, which simply is unacceptable to the political classes.

Had the Bush and Obama administrations left the economy alone, those malinvestments would have been shed quickly and the economy now would be moving toward a real recovery that could be sustained over time, employing new people in those sectors. Alas, the political classes believe that “inactivity” is anathema, so Bush and Obama engineered hundreds of billions of dollars of “bailouts,” which have served to prop up whole sectors of failing enterprises.

What does that mean, economically speaking? It means that instead of being directed into those sectors that could have grown without aid from the government, resources are being shoveled into the economic equivalents of bottomless pits. Americans are forced to prop up domestic automakers that are bankrupt, keep zombie financial institutions going on life-supports, engage in energy policies that literally destroy wealth and produce less energy, and to be taxed even more so government can destroy the part of the medical sector it has not already ruined.

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Financial Crisis and Too Big to Fail

[T]he financial crisis that began in the summer of 2007 has posed a major problem. We had grown rather accustomed to singing the praises of free financial markets. The crisis threatens to discredit them.

But this crisis was not the result of deregulation and market failure. In reality, it was born of a highly distorted financial market, in which excessive concentration, excessive leverage, spurious theories of risk management and, above all, moral hazard in the form of implicit state guarantees, combined to create huge ticking time-bombs on both sides of the Atlantic. The greatest danger we currently face is that the emergency measures adopted to remedy the crisis have made matters even worse...

Economists have long held that bank failures pose a "systemic" economic risk, because failed banks are associated with monetary contractions for the economy as a whole. There is therefore a presumption that, if big banks are threatened with liquidity or solvency problems, they should be bailed out by the action of the central bank or government. Despite much pious talk of "moral hazard" prior to 2007, little was done to disabuse big financial institutions of this notion. They could and did assume that they enjoyed an implicit government guarantee...

During the crisis it was often said that officials at the Federal Reserve and Treasury would do "whatever it takes" to avoid a Great Depression. Now they must do whatever it takes to address one of the key causes of the financial crisis: the existence of financial institutions that consider themselves too big to fail – but which are run in such a way that they are bound to do so.

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Jobless Recoveries

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TARP: One Year Later

Taxpayers stand to lose between $100 billion and $200 billion on TARP -- Treasury's $700 billion financial market bailout.

While that's nothing to sneeze at, many experts say that the Troubled Asset Relief Program helped rescue the economy from a second Great Depression.

But there are others who argue that the billions of dollars that taxpayers shelled out simply delayed an inevitable epic collapse of the financial sector.

A year ago, when the financial markets were in turmoil, the Bush administration and supporters in Congress said TARP would be used to buy banks' troubled assets, and would be an investment -- it could even turn a profit.

But TARP, which celebrates its first birthday on Oct. 3, has been used for many programs it was not initially intended for, like saving AIG, automakers and helping struggling homeowners.

read the CNN article

Historic Long Term Unemployment

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TARP: One Year Later

TARP, the Troubled Asset Relief Program, is a year old now. On Sept. 19, 2008, former Treasury Secretary Henry Paulson announced the need for a $700 billion program to purchase toxic assets held by banks to prevent a financial meltdown, and after some modification Congress rapidly approved TARP on Oct. 3. Looking back after a year, was TARP necessary?

Did it work?

The answers are No, and No...

Instead of buying up toxic assets, the TARP money was used to partially nationalize the banking industry. It was also used for a federal takeover of AIG (after it was initially rescued by the Fed) and the bailout of Chrysler and General Motors...

Ultimately, what TARP did was provide funds for the government to take an ownership interest in private firms. Nationalizing our financial and industrial firms is not in the public interest. The federal government now owns 80 percent of AIG and 61 percent of GM. TARP was not necessary. It didn’t work. And what it actually did was undesirable.

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Cash for Clunkers

Remember "cash for clunkers," the program that subsidized Americans to the tune of nearly $3 billion to buy a new car and destroy an old one? Transportation Secretary Ray LaHood declared in August that, "This is the one stimulus program that seems to be working better than just about any other program."

If that's true, heaven help the other programs. Last week U.S. automakers reported that new car sales for September, the first month since the clunker program expired, sank by 25% from a year earlier. Sales at GM and Chrysler fell by 45% and 42%, respectively. Ford was down about 5%. Some 700,000 cars were sold in the summer under the program as buyers received up to $4,500 to buy a new car they would probably have purchased anyway, so all the program seems to have done is steal those sales from the future. Exactly as critics predicted...

The basic fallacy of cash for clunkers is that you can somehow create wealth by destroying existing assets that are still productive, in this case cars that still work. Under the program, auto dealers were required to destroy the car engines of trade-ins with a sodium silicate solution, then smash them and send them to the junk yard. As the journalist Henry Hazlitt wrote in his classic, "Economics in One Lesson," you can't raise living standards by breaking windows so some people can get jobs repairing them.

read the WSJ article

Greenspan on the Economy

Greenspan told the ABC program "This Week" that he expected 3 percent growth in the third quarter, up from the 2.5 percent he previously predicted. However, he said a "pretty awful" September employment report released Friday showed the jobless rate continued to climb.

A slowing or halt in job losses is different from reversing the rise in unemployment, Greenspan noted, adding that the nation's unemployment rate -- currently 9.8 percent -- is "going to penetrate the 10 percent barrier before heading down."...

Obama said Saturday his administration would focus on job creation, and Greenspan said he supported that approach. However, Greenspan said it was too soon to consider another economic stimulus package or other major spending plan.

"We are in a recovery, and I think it would be a mistake to say the September numbers alter that significantly," Greenspan said, adding: "This is what a recovery looks like. ... It's premature to act on this type of information."

read the CNN article

Recession Job Loss Chart

Cartoon: Exchange Rates

Cartoon: Economic Bubbles

Ron Paul: End the Fed

Private Sector Unemployment Changes

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Cartoon: Phones and Productivity