Sunday, February 22, 2009

We're In For The Long Haul, In Spite of the Stimulus

Barron's has an article by Alan Abelson that expresses my sentiments better than I could today. Here's the crux:

"House prices, in our bloodshot view, have another 20% or so to fall before hitting bottom and, at the earliest, we're talking sometime next year. And, possibly more important, a meaningful brightening of the current, profoundly bleak jobs picture, isn't in the cards for certainly as long, if not longer."

A sad assessment of affairs, with which I agree.

[Thanks to for the touching image.]

He bases this conclusion on a study by ISI Group (not web-accessible) and its two charts that really tell the picture like nothing else I've seen recently. They can be found on the second page of his article. They are (1) the ratio of house prices to rents, and (2) the median house price divided by median family income.

Both of these long-term lines, drawn from 1975 or before to date, demonstrate with stark clarity that house prices are still on the high downside slope of this bubble.

A majority of people believe that government intervention of the kind our legislators have just put in place can stop this "drop" (read "re-normalization") of housing prices. But this legislation has a good chance of missing the mark, at least as far as arresting housing price falls is concerned. As Abelson says:

"While fewer foreclosures are likely to slow the rate of decline, they won't reverse the downtrend or determine 'where homes prices end up.' ... [G]iven the remorseless rise in unemployment, which, if anything, is destined to accelerate in the months ahead, the simple fact that so many people are too strapped to afford to buy a home, is, we believe, the most formidable barrier to even a tepid housing recovery."

Right on. It's called pushing the string. (See my cartoon on this subject.)

And frankly, I think it would be criminal to deprive us of the benefits of lower prices, whether it be for food, gas, or housing. Lower prices enrich us all.

Personal footnote: I am a commentator, not a researcher. I do not claim to have a Ph.D. in economics. For those readers who would like the academic nuts and bolts under my skepticism, start here, here, here, and here. You will find the deeper research papers accessible on other pages of their website.

Some may object that all of these come from the same think tank, Cato, with its libertarian-oriented research team. This is true. I happen to follow their reasoning on most subjects, having yet to come across a more "progressive" reasoning that can hold a candle to it.

Academics can provide us with some very useful thinking and writing, but they don't have a monopoly on logic. There are many non-academics who have contributed valuable work. There are also academics who have steered us astray. Here are some examples of both:

A few non-academic leaders: Henry George, Mark Twain, Bill Gates (honorary doctorates only), and Benjamin Franklin, to name only four.

Academics who should have had more humility: Robert C. Merton and his economics Nobel Prize partner at LTCM, Myron Scholes; and Margaret Mead, to name only three.

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Thursday, February 19, 2009

Let Those on the Floor Speak

The country is very divided now about whether or not the "stimulus package" will work. I have already expressed my opinion that it will not, provoking much heated debate among my commentators. I'll be adding more gas to that fire soon.

Meanwhile, I found out today that I'm not the only one who's frustrated with the American people's lack of understanding about the economics underlying the Keynesian spending, government intervention, and wholesale destruction of free-market values (e.g. respect for contracts) that will soon be taking place, the likes of which we have never seen to this degree before, ever.

Listen to these people who have their ear to the ground, the traders in Chicago:

Chicago Traders Video

It's heartwarming to see that there is someone else out there who gets it, even though I can already hear the retort: "But those guys are Wall Street, or the equivalent. They're the bad guys."

It looks like Ben Franklin and the others will continue to spin for a very long time, while Mr. Marx chuckles with glee.

[Thanks to for the image.]

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Saturday, February 07, 2009

Why a Spending Bill Won't Cut It

Last night, I had to chuckle and cry at the same time as I watched Rachel Maddow's "Bull Puckey" speech.

Rachel's declarations about the job-creating values of spending are about as insightful as Janeane Garofalo's outburst on the radio in 2005, paraphrased thus: "... those free-market wackos with their 'invisible hand' mumbo jumbo."

Both ladies' understanding of the workings of the market typify the overconfidence of those who jump to conclusions without looking at the whole story.

Rachel claims that spending in and of itself is sufficient to create jobs and get the country out of a recession. Obama has embarrassed himself by making the same point. They have both overlooked that the statistical link between government spending and long-term job creation doesn't exist. To illustrate:


Let's take an extreme and therefore abstract example. We can hire 15 million workers (10% workforce unemployed) to dig holes and fill them up. Cost: $800,000,000,000. 100% job creation. After the job is done, they go back on unemployment. Job creation for one year: 15 million. Job creation after one year and a half: Zero. Capital available for permanent job creation: X minus $800 billion. And don't give me the argument that the government intends to do more than just dig holes and fill them up. Building bridges and roads that we can't pay for is just as bad.

[Thanks to for the photo.]

Permanent Job creation:

At the other extreme, let's say we do nothing, and therefore the government does not sap the marketplace of $800 billion. Cost: Zero. The money is thus available to businesses, small and large, to rev up their engines as this recession starts its uptick. Jobs created during one year: Admittedly, perhaps zero. Jobs created after one year and a half, or sometime thereafter: 7 million, year after year, as unemployment falls back to around 4% or less. These jobs are permanent.

The lenders of the $800 billion know this, as we will soon find out when the US government finds it harder and harder to finance its debt. Why isn't this difference clear to the President and to his supportive progressives? Because these people are short-sighted, and they grasp at whatever supports their political culture instead of looking at all the facts.

Rachel quotes Moody's statistics. Example: "Most Stimulative Spending: Non-refundable tax rebates: $1.00 = $1.02/economic activity. Infrastructure: $1.00 = $1.59/economic activity." These stats make no mention of the duration of job creation in each instance, what kind of jobs are created, and what money was used to do it. Statistics can be the best liars when you don't tell the whole story.

More twisted logic:

- Who will be employed on the construction sites of the Spending Package's bridges, railroads, and roads? Will the government try to pick and choose among the unemployed? Can legislators get the most expensive unemployed (Wall Street workers, lawyers, and others like them) onto the dirt? Does the construction industry worker deserve a job more than an investment banker or lawyer?

- Rachel says that people on unemployment don't spend. Isn't she forgetting that they receive unemployment benefits that are paid out of future income from existing tax structures and not borrowed 100% from the world's capital pool? Then she turns around and almost makes the argument that we should all go on Food Stamps. This is strange thinking.

- We are all (including me) complaining about the big bonuses and the Las Vegas junkets, but isn't this also spending a la Rachel? Aren't we forgetting that jets are made by American workers, that pilots fly those jets, and that lots of people work in Las Vegas? We are also forgetting that the rich spend a portion of those bonuses and invest the rest in things like the stock market, i.e. in the very same instruments that are in all of our 401(k)'s, which could use a little help right now. (Don't get me wrong, those bonuses give me goose bumps; but I believe their size was determined by excessive money and credit supply and by the competitive marketplace, not only by individual greed. See this post, for example.)

- We want to put American manufacturing back on track by recommending we all "buy American." Aren't we forgetting that if we refuse to buy foreign products, foreigners will refuse to buy ours? And that this type of thinking is what ultimately repressed the world economy in the 1930s?

- We want China to allow their currency to rise in value, but aren't we forgetting that for this to happen, China has to stop buying our debt? Do we really want that?

Much illogic should be examined here.

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