The Economic Way of Thinking

Our Keith Richards Economy

 

The Rolling Stones are, hands down, my favorite band.  I often surf around the Web in search of new tour rumors, and I'm proud to say I own merchandise like What Would Keith Richards Do? (a birthday gift from Anemone).  One of my favorite Keefism's from the book is his explanation of why he takes a turn as front-man: "The only joy I got out of being a front-man was I didn't have to look at [Mick Jagger's] *ss."     

My love for the Stones makes it all the more satisfying (no pun intended!) to report to you all that I worked in a Stones reference on the radio this morning.  When talking about America's current growth path with Kenny & Charles, I referenced an old comment by Pete and described the US economy as "the Keith Richards economy." 

The real GDP growth of 3.5% for the US, which was reported on Friday, is "totally fake."  More injections are ahead, and I just hope the US can make it as long as Keith has in our experiment of "better living through chemistry."    

$250,000 Per Job Saved?

The White House has an entertaining site called Recovery.gov.  The site has a "Jobs Saved/Created" counter to the left, which makes it seem like counting jobs saved/created is about as easy as counting hits to the EWOT blog!  According to the Washington Post, the web site will soon announce that 650,000 jobs have been saved. 

These numbers, of course, are all make believe; here's Douglas Holtz-Eakin in a very short clip explaining why.  Listen closely to the very end for his guesstimate of the cost per job saved.

Kenny & Charles Time

UPDATE: My radio appearance has been pushed to Monday at 6:35 am.  You can watch me here.   

For anyone interested in hearing my latest thoughts on the US economy, feel free to watch me on the Kenny B & Charles E show tomorrow morning at 6:35 am or tune into WPGA 100.9 FM locally.  

 

The Godfather?

Steve Horwitz just finished up the beginning of his Liberty Tour of the South 2009.  He's now on his way to Berry College for the next stop on his tour.  While visiting Mercer, Steve was great in his lectures and with our students.  He's a McCloskeyite when on campus (i.e., he wants to be kept busy), and he went way beyond the call of duty in his three presentations and many hours of informal conversations with students and faculty. 

A few highlights and random tid-bits about Steve's visit can be found below the fold:

Let's Drink To The Salt Of The Earth

Or, if the salt of the earth isn't being reflected in this poll, let's drink to the large majority of folks in the poll who think Obama's economic stimulus efforts are on the wrong track. 

Anatomy Of A Crisis

Most economists and policymakers looking for crises similar to the 2008 financial crisis have looked back to America's Great Depression for lessons on what was done then and what should be done now.  As long as the interpretations of the past are correct, studying events like the Great Depression to better understand the present makes good sense.  Our studies shouldn't be limited solely to the Depression, however, if other crises provide information to us as well.

For example, the Asian financial crisis of 1998 is one such crisis that seems to have largely been ignored by policymakers rushing to call 2008 the 21st century Great Depression.  In 1997-1998, banks in Latin and South America, the former Soviet Union, and East Asia were highly leveraged; the banks were also lacking transparency and were tangled up in complicated assets.  Like the US in the early 2000s through 2008, consumption and government spending in many of the countries affected by the "contagion" was deemed "too high" by experts and many warning signs were present in advance of the crisis.     

Instead of recommending easy money and fiscal stimulus, Western policymakers responded to the crisis by recommending transparent banking, controlled government spending, and higher interest rates.  In other words, the recommendations for Asia was for tighter restraints on monetary and fiscal policy--the exact opposite of what has been recommended this time around.  For people interested, here's a time-line of the 1997-99 events produced by Frontline.  Here is a list of the policy positions taken by major players involved in the crisis.

The easy way to dismiss comparisons of the Asian crisis to the present is to say (1) the scale of the crisis is much larger this time; and (2) the crisis originated in a big country (i.e., the US).  When you look more closely at the past, however, the similarities of the Asian financial crisis to the present are striking and cause one to wonder about the wild divergence in policy recommendations by experts then compared to now.   

One Year Ago Today

There have been a lot of "on this date" stories and television programs discussing different events related to the financial crisis from one year ago.  On this date one year ago, Pete Boettke and I published this op-ed in the Atlanta Journal Constitution.  Here's the New Yorker cartoon mentioned in the piece. 

I know I haven't wavered from what I said then, and it's clear from posts like this one that Pete hasn't either. 

Richard Ebeling On The Crisis

Austrian economist Richard Ebeling delivered this fine, understandable lecture on the financial crisis to an audience at Northwood University.  Take a look.

The Obama Rally

A colleague of mine recently asked me if economists are doing much research and/or have a good explanation for the rapid run-up in US stock indices like the S&P 500 and the Dow Jones Industrial Average since March.  I said I didn't know off the top of my head but that I'd look into it. 

Here were the three answers I would have provided on the spot:

(1) Market prices move up and down all of the time.  The movement back up since March is the market "searching" for an equilibrium that lies somewhere between 7,000ish and 14,000ish. 

(2) If you pour enough money into any market, you can get short-term movements up in prices. 

(3) The market could be experiencing a relief rally in that Obama's craziest ideas are being curbed by his falling approval ratings, internal party dissension, and gridlock.  While this article says there isn't much of a relationship between presidential approval ratings and stock market performance, there is evidence that divided government is good for stocks.  At the moment, even though the Dems have the numbers, the de facto scene in DC appears to be one of divided government.

Any thoughts, readers?

Go, Baby, Go!

My retirement has been spread out in a number of different TIAA-CREF assets since I became a professor in 2004.  Sometime in the fall of 2008 every asset I own in my TIAA-CREF account--with the exception of a bond index fund and an annuity--went into the red.  The decline for each investment was so deep, in fact, that I was negative in every asset for the 2004 period to the present.

For the first time since the crisis began, I have finally seen the total value of one of my investments go positive.  Here's the asset.  Here's a five year chart:

 

As of Thursday, it's returned a whopping $13 for me over a five year time frame.  (Additional purchases are made on a monthly basis, so the $13 total has dollar cost averaging baked into it.). 

Investment, Not Consumer Spending, Leads To Growth

That affects the bottom line of businesses relying on customers who could more easily get credit in better times. For example, retailer Target Corp., where about one-third of overall sales are made on credit cards, said tightening credit standards on its proprietary cards may have contributed as much as half a percentage point to its sales declines in the second quarter at stores open more than a year.

Nonrevolving credit, such as loans for autos, vacations and education, declined at an 11.7% annual rate. Economists expected a far smaller decline, given the increase in auto sales from the federal "cash for clunkers" program. The program, which ramped up in late July, gave consumers a government rebate if they traded in certain vehicles for more fuel-efficient models.

Tighter credit played a part in this realm, too, as 33% of banks in the Fed's loan officer survey reported tighter terms and conditions for approving consumer loans other than credit cards. None of the banks said they loosened credit standards.

Now wait a minute.  We want to see more consumer debt?  What about the billions upon billions of consumer defaults on their mortgages?  We are now concerned about a tightening of credit standards?  Sounds awful.  Read more of this morning's Wall Street Journal piece here.

The problem in this reasoning is clear.  It's the old Keynesian notion that "C," in the familiar C+I+G equation, can pick up the economy.  (Oh, and let's not forget, of course, the "G" element.)

Business investment drives the economy, not consumer spending.  Investment generates jobs, new jobs generate higher levels of income.  Higher income provides more opportunities for consumption spending and saving, which leads to further rounds of investment.

But let's not move too fast here.  If the new investment is spurred by artificially lower interest rates, it cannot be sustained. 

What do you think the government can do to move the economy back toward long run economic growth?

ADDENDUM:  Or, is it more saving that we need?

How We Got Into This Mess

Here's a nice lecture by our friend Steve Horwitz on the causes of the current recession.

That Big Number

Dave recently reminded us that there are one million millions in one trillion.  Here's a recent CNBC slide show that helps readers fully grasp the magnitude of $1 trillion.  Here's one example from the slides:

This year, Bill Gates was once again named the world’s richest man by Forbes, with a net worth of $40 billion. If this amount was denominated in $1 bills, this stack would measure about 2,714 miles, which is approximately the distance between Miami and Seattle.

Think about how far one trillion stacked $1 bills would stretch...

Bond Blues

News of the UK's AAA credit rating being at risk of a cut by S&P led to a number of news stories last month about a similar cut in US treasury ratings.  The stories and speculation about UK and US credit ratings, such as this one from this morning, persist.

While the US credit rating is said to be safe for now, here's a list of colleges and universities that have had credit rating downgrades this year.

The Coming Currency Crisis?

I highly recommend this Jim Rogers interview from late last week.  I share a similar concern about future inflation, a serious sell-off in US Treasuries, and a weakening of the US dollar.

Though, I am too much of a Julian Simonite and have not put my money where my mouth is like Rogers by going long on commodities and short (eventually) on government paper.