What Does "Create or Save" Jobs Really Mean??

Greg Mankiw has a useful political commentary on President Obama's "creating or saving" jobs with the stimulus bill. I agree with him that this phrasing is politically genius because it is not provable and virtually any outcome can be justified by the statement...ludicrous.

"Green Payments" in Agriculture

The Southwest Farm Press reported on a discussion by Secretary of Agriculture Vilsack about green payments in agriculture. In a nutshell, Vilsack is discussing the potential that agriculture receive payments for environmental amenities (for example, carbon sequestration) produced on farms. This would, theoretically, be in place of traditional farm income support payments (I say "theoretically" because existing programs rarely disappear when new programs are introduced; but may have to now given the financial mess we are in). Although I have long argued that this was the direction we were headed with farm programs, I do think two questions are relevant before embarking down this road:

1. Current payments are related to factors such as farm size, crops, etc., that lead to a certain distribution of these payments across the country. Land values, equipment loans, etc., are tied to the existence of those payments. Changing payments to be based on environmental amenities is likely to result in a distribution of payments that is at least somewhat different than the current distribution, which could have impacts on land values, cropping patterns, etc. Do we understand this process well enough? Are we ready to accept the consequences of those changes?
2. Green payments are presumably not tied to farm revenue, prices, production, or any other historical variable related to the farm. As such, the revenue these payments would provide are not counter-cyclical to farm revenue. Do we care if farm policy does not provide income risk protection?
   

These are but a couple of questions relevant to the debate that is likely to begin soon.

Some Clear Explanations...

Thomas Sowell provides a clear, concise, easy-to-read explanation of a, in my opinion, key component of our current market breakdown. Most importantly, Mr. Sowell questions the current media and political mantra that we need MORE government involvement in the market when, at least in the case cited, it was government intervention that led to the calamity in the first place.

"Executive" Pay Caps in Wonderland...

This Fox News story highlights the absurdity of President Obama's executive pay caps. Here is the "CEO" of a publicly funded/managed entity that is consistently unprofitable, yet there is no discussion of limiting his compensation to $400,000...

Some "Better" Housing News...

The following graph shows an interesting trend:


The red bars show quarterly new home sales and the blue bars is quarterly housing starts. Note that 2006-most of 2007, starts exceeded purchases, which implies growing inventories. But, during 2008, purchases exceeded starts, which signals a draw down in inventories. This is relative, of course, because both are racing to the bottom right now...but, maybe we will bleed off inventories enough to start to stabilize price.

The FED Provides More Bleak News...

The Federal Reserve Board released its summary of economic projections. The graph below shows actuals and mean estimates going forward for key economic variables.


Their projections show a return to positive growth in 2010, with a spike in unemployment of around 9%. Let's hope they are not being too optimistic.

More Peanut Business...

This Wall Street Journal editorial echos some of my earlier comments. The market has punished Peanut Corp. of America by driving it into bankruptcy. But, as I predicted, the reaction to this failure of regulators to do their job will be to create more regulation. Yeah...that makes sense...

Capacity Utilization...

In support of my discussion on inventories below, the following graph is illustrative.


Industrial capacity is being idled at a quick pace. Although we have not reached levels of the 80s, we are getting there quickly. Note, however, that this is somewhat of a lagging indicator because it bottoms out after a recession has passed...the draw down in inventories occurs prior to the restart of production, which is why I favor watching inventories more than industrial capacity utilization numbers.

Asian Unemployment

This article discusses the impacts of the current crisis on Asian employment. I discuss this for political rather than economic reasons. Higher unemployment in the US and Europe will be met largely with big stimulus bills including expanded social insurance programs. In much of Asia, however, this will not be possible. Higher unemployment could lead to social unrest if the high unemployment is severe and long-lasting enough. I am not suggesting we are headed for the next global war like some doomsayers...rather, this is worth keeping an eye on for investment and political purposes.

Inventories...

This Washington Post article is important from a macro sense. Inventories are a good, albeit imperfect, indicator of what is going on. Build-ups in inventory indicate either rapid increases in production or falloff in demand. Well, I think we can eliminate the increases in production right now... So, that leaves us with a falloff in demand. I know...we knew that. I bring it to attention here as a key variable to watch. As inventories get drawn down, it will entice producers to begin producing again. So watching inventories in the near term may tell us something about directions of change in other variables such as employment...

Some more perspective on the 'crisis'

The stock market is not, I repeat, NOT, the economy. But, activity in the stock market is a useful lens through which to view the economy. The graph below from Doug Short at dshort.com is useful in the regard:


The gray line is the crash of 1929, green the tech crash, red the oil crisis, and blue the current bear market (all but the 1929 data are S&P 500 data; the 1929 is based on the DOW). Note that we are percentage decreases in the market consistent with the tech and oil crashes, but in much shorter time frames. Interestingly, the oil crisis was a "classic V" with a final dip to a bottom and then a recovery. The tech crash has a "double V" pattern with a test of the 50% level twice before recovery. This does not mean much except that we have tested the 50% decline once and are close to that level again. What happens next is anyone's guess...but let's hope it is not cliff diving.

Rush to Wait...

Thomas Sowell raises an interesting question:

The big story last week was the incredible Congressional rush to pass a bill that was more than a thousand pages long in just two days-- after which it sat on the President's desk for three days while the Obamas were away on a holiday.

There is the same complete inconsistency in the bill itself. Despite the urgency in President Obama's rhetoric, as well as in Congress' haste in passing a bill which few-- if any-- members had time to read, much less consider, most of the actual spending will take place next year, at the earliest.

The Dangers of Protectionist Sentiments...

The Associated Press reported:

Measures in a $789 billion U.S. stimulus package that favor American goods are a "poison" that will hurt efforts solve the financial crisis, an editorial by China's official news agency said.

Provisions in the U.S. stimulus bill approved Friday favoring American steel, iron and manufactured goods for government projects are protectionist measures that could trigger trade disputes, said the editorial issued late Saturday by the Xinhua News Agency.

"History and economics have told us, facing a global financial crisis, trade protectionism is not a solution, but a poison to the solution," the editorial said.

Protectionism is a problem that can spiral into outright trade wars. Waves of protectionist policies pervaded the world in the lead-up to World War II. We are not there yet, but protectionism is a popular political subject because of the perceived need to "protect our people" in times of economic hardship. Keep your eyes open on this one...

European Exceptionalism and Trade Policy

Well, it seems that Europe has decided to return to the time honored policy mechanisms of intervention buying (stock accumulation) and export subsidies on dairy products in the face of the on-going economic downturn. Didn't the U.S. recently lose a case in the World Trade Organization involving export subsidies in cotton...hmmm...I wonder if the European Union will be brought to task for the same behavior???

Executive Pay Caps...

Even law professors understand incentives... More importantly, this article provides a critique of executive pay caps not from a values perspective (capitalism vs. socialism), but from a corporate governance/economic perspective. Interesting read...

Stimulus Scaremongering

More on the stimulus scaremongering of politicians...

Cattle Industry Needs to Adapt...

In a recent article, Lowell Catlett of New Mexico State opined (in a rather flamboyant way) that the U.S. cattle industry needs to adapt by considering changing demographics (that is, taste and preferences) trends as well as the consumers in international markets. This article provides some perspective on issues facing this industry from a consumption perspective that will affect future demand.

More Economic Downturn Ruminating

Here is a article that provides a lucid discussion of the difference between a good old fashioned recession and the deleveraging that our economy is going through right now. For those interested in understanding (at least more realistically) why the stimulus will not likely work (at least in the long term).

Income Elasticity of Demand...High End Autos

Here is an example of the income (both real and expectations of future) elasticity of demand effects. Note that luxury products such as high end cars take a bigger blow in bad economic times than necessities.

Politics Matters Too...

For those of you who wonder why: "Well, if you economists are right, why are we in such a mess???" Well, the answer is two part. First, economics, as much as we would like to think differently, is an inexact science. We are generally pretty good at getting directions of change and identifying driving forces...but precise (correct) answers are not usually forthcoming. But, and probably much more importantly, economics is embedded in the broader political world. Consider this article...especially this passage:

Early in the hearing, Mr. Frank urged all lenders not to foreclose on any mortgage borrowers until Treasury Secretary Timothy Geithner unveils a new foreclosure mitigation plan. In fact, foreclosures had already started to decline due to Treasury-created uncertainty. Mr. Frank's admonition will cause a more rapid fall, since Citigroup, Bank of America and J.P. Morgan "volunteered" to a temporary freeze after the hearing.

Don't confuse this with a sign that the housing market is improving. The pols are simply delaying the pain until they decide how much to inflict on taxpayers versus investors. It's true that investors in consumer debt can expect subsidized financing from Mr. Geithner, but it's a flip of the coin whether the new subsidies will outweigh the costs of new foreclosure limits. (My emphasis added)

Here is an illustration of how politics affects economic outcomes by changing the "rules of the game." Ultimately, politicians are not so much concerned about correct courses of action as reelection. This is not to say they are nefarious...just looking out for their own interests. This is an important lesson for both amateur and professional economists. For the amateur, don't forget that economics must operate in a political world. For professional economists...ditto.

More Psychology...It REALLY DOES MATTER...

More about the psychology of markets...

Treasury Yields Rise...Duh...

Read and carefully consider the impact of government borrowing. As I stated in a previous post, higher interest rates are a necessary consequence of all of this additional borrowing for "stimulus." Hope you locked in your mortgage rates...

Bank 'Nationalization'

According to this WSJ report, it is increasingly likely that the U.S. government will need to 'nationalize' some banks. This is a bit unsettling. I am, by no means, an expert on the subject. Greg Mankiw provides an explanation that seems to indicate this is necessary and workable...we shall see where this goes.

Some more perspective on the 'crisis'

The folks at CalculatedRISK have generated an interesting set of graphs that should be considered. First, take a look at bank closures since the inception of the Federal Deposit Insurance Corporation:

Note the number of failures now compared with the number of failures in the 1980s...perhaps declaring this as "the worst crisis since the Great Depression" is a bit premature. In terms of banking, the 1980s was much worse than the Depression, and we have not even approached the numbers of the depression. But, wait...what about the value of assets:

This figure appears to indicate that we are, in fact, closing down more value (in terms of assets) in the bank. But, most of the value of closings in 2008 is WaMu, which was closed and then sold to JP Morgan at no cost to the government. So, if you take out WaMu, we are still way below what was closed down in the 1980s. There will, no doubt, be more bank closings in the future...but let's keep it in perspective.