One day we’ll look back on 2009 and wonder what all the confusion was about. All will become clear and we’ll know when the recession ended, when the bull market began anew and how and why the cycle turned. Meanwhile, we’re wondering if the data du jour can be trusted.
Judging by the numbers of late, clarity is upon us, or so it seems. Income and spending are up among consumers. What’s not to like? If this keeps up, we’ll be back to the good old days by, oh, let’s say the third week of September.
As for what we know today, disposable personal income jumped 1.6% last month on a seasonally adjusted basis, the Bureau of Economic Analysis reports this morning. That’s the biggest monthly gain in a year. Not bad for what we’ve repeatedly been told is the deepest recession since the Great Depression.
That’s only half the fun. The government also advises that personal consumption expenditures gained 0.2% in May, the best since February.
Is it a miracle? No, it’s just your tax dollars at work. As the BEA noted in its press release today, “the pattern of changes in personal income and in DPI reflect, in part, the pattern of increased government social benefit payments associated with the American Recovery and Reinvestment Act of 2009.” In other words, the guys and gals in Washington continue to print money and distribute it, creating a revival that otherwise doesn’t exist. The extent of the government’s intervention can be surmised once we recognize that wages and salaries actually fell by 0.1% last month.
There are two ways to interpret the news. The optimistic view is that the government’s stimulus efforts will steady an otherwise anxious consumer. By putting more money into his pocket, the incentive to spend is heightened and the odds improved that a return to old consumption habits is near. The government payments are a bridge until the day when the private sector can resume more of the burden of financing consumption.
The darker view is that government-financed consumption is a tenuous lifeline that’s a pale replacement for the real McCoy. As such, the burning question is one of asking when the labor market will revive? By that standard, there’ still reason to be cautious about the remainder of 2009. The recession may be technically over, as we’ve discussed. But even making that leap of faith offers no short cut to good times.
The job market, after all, is typically the last to show convincing signs of recovery. For that reason, the National Bureau of Economic Research shuns employment trends for putting official dates on business cycle turning points. Minting new jobs, in other words, is usually the response to other economic stimuli. Conventional recoveries, then, don’t begin with the labor market. Then again, this isn’t a conventional business cycle.
Clearly, the government has moved heaven and earth to keep the economy afloat. Ours is an era of triumph for public-financed consumption. In both magnitude and timeliness, no government has ever acted with greater speed and depth in keeping the forces of contraction at bay. But that raises a question of whether Washington can keep the engineered consumption going long enough to wait for a bonafide economic recovery. We’ll have an answer, perhaps soon. But at the moment we’re still knee-deep in the first great macroeconomic experiment of the 21st century.
Originally published at The Capital Spectator and reproduced here with the author’s permission.
2 Responses to “THE GREAT EXPERIMENT BEARS FRUIT…SO FAR”
God of FinanceEarthlings, listen up. I am your God, stupid, not him, your God of Finance. I, as you know …hadn’d been with you as long; only 700 years since Emperor Kublai Khan started paying paper instead of silver money. Of course scoundrels immediately started to cheat with faked look-alikes but the punishment was sufficient to deter these devious beings to spoil my coming-out party, heard of Death-by-a-Thousand-Cuts.I was once almost dead, chained by these little rules that they called regulations and destroyed over half of the planet by the halfling who called himself Marx. Devilish wasn’t he; the you-know-who compensated for his you-know-what by that gigantic beard. I was then freed by that odd couple, Ron and Margaret, I thought; but it was she, I believe, said “can do business”. Sorry to say it, but it is true that I am a fickle god and there had been many upheavals, not only in the land of my origin in the Yuan empire but also in much of the new European ones like that has-been Holy Roman province of the Tulip fields, the kill-all-the-Reds British South Seas, the new-paradigm swamps of the French Mississippi, the Versailles victimized Weimar, and of course the blindly blissful 1929 New York. Well, admit it; you are living in one!Contrary to common belief, I do not usually strike a touch of anger unannounced. There were some unchained souls like M. Roubini, Shiller, and even this halfling Krugman; all gentlemen of immense intelligence, and almost my ego, surely would have spoiled my next party, had it not been for your, say, l’armour d’argent. Ah, the causes. It was actually quit simple depiste what your weatherman tells you; I naturally live in your economy, which usually has a productive side, and a financial side. Like, some work and put food on the table, and others count it. So long as the two are balanced, the financial side supports the productive side and the productive side puts more demand on the financial side, which creates the wealth, you know, things like that shining suit on your chest, the sleek iPod in your pocket, and even that seedy establishment, you call it the mall, that you frequent.But unlike me, who is divine, you are only human. Every so often, especially with Ron and Margaret in business, you mistake the shenanigans as “Financial Innovation” – something like “efficient finance” actually produces real wealth by counting it many times. It happens like this. Production gets you feeling rich; you then juice it up by borrowing. Being low in intelligence and high on greed, you are carried away by borrowing so much, until that is, there is nowhere to borrow, only debts to repay, if you can repay at all. Your losses are also piling up at the same time.But, but, but… This time it’s different! You have a New Economy. I have these gifts to you of these talented banksters. Your friendly neighbourhood bankers, if you still remember them, and your scholarly central bankers, you see, are no longer your ally; much now mine and more of his, you know, the one who is denoted 666.I always had this small column of i-banksters, but this splendid army, I have to thank your Green spinomist, and your weatherman in many a fine season. They gave me the shadow-banksters, and with their aid, I won over these your-smiling-uncle-banksters with huge bonuses and you-know-you-don’t-understand giant pay-packages. To make it certain, I make sure they are paid each year-end so I can have my joyous party on year 5. Even your dignified officials, you know the ones you elect, are in my banksters’ pockets. How do you think they are elected? Not to mention their Italian white shoes, English hand-tailored pinstrips, and trophy blondes around the elbows.You know you cannot win, but still tempted to jump in with these NYSE TRAPs; I deliberately stir them up each quarter so you feel you have no choice. With each passing high-and-low, you feel your gut churn and churn, and I just watch on the sidelines with amusement. Just to magnify my drama, I reward your greed with higher-and-higher highs, and of course, when the end comes, I direct a tsunami on your fine behind.Like all gods, I cannot have mercy. I will have to punish you hard until you are pants down. I remember in 1929, those who feared me jumped and many a window had been thrown on the streets. This year, there hadn’t been a lot of that, only that little puddle of French red, but still it wasn’t fun. The thing is, if you are illusory thinking you all can get ahead by counting money, instead of producing it, you will be very sorry indeed. Like this year, your economy is really lopsided; so many counting, so few producing, and all are greedy.It looks like, all over again, nothing is learned. Your weatherman, he was a bean counter, wasn’t he, is telling you that great for your taxes, you will be on it again; it is all very predictable. What is going to happen is just going to be “the same old game of the same people, intoxicated with the same old drug, pushing around the same amount of real money and each taking a same amount of little cut and then pushes it to the next stop”. After enough of that go-around, you know there won’t be any cuts left but for the one on your tummy, almost sounds familiar. Oh really, it is not even the same amount of real money, remember you will have to repay your debts. When you are sorry again these more years, don’t say I haven’t told you so.
I wonder if the sum of private and government borrowing in the US doesn’t need to taper off to a lower level consistent with lower real GDP growth at some point (assuming that the BRIC’s don’t present a strong and stable export opportunity for the US in the near future and/or some high return on investment opportunity isn’t innovated…).If borrowing does need to taper to a lower level, how does the economy make the transition to that lower level without creating “a recession within a recession?” Without demoralizing the labor market?One could conduct thought experiments where such a transition might be made. For example, laws could be passed restricting consumers access to excessive credit on the one hand while simultaneously inflating away previously accumulated (private and public) debt burdens on the other.Asset bubbles might be partially tamed via a similar tinkering with legislation (in addition to reinstating financial market regulations) and tax codes.This could be followed by a Volcker type austerity to bring inflation expectations back to a reasonable level – but without triggering a severely contractionary cascade of insolvencies throughout the economy in the process.The labor market might then be granted more bargaining power during the associated downturn via shortening the workweek by 5% or so. Since lower growth not only suggests less aggregate debt, but less work in the capital formation sector as well; such a policy would appear to complement the direction the invisible hand is pushing the economy anyway.Perhaps the thought experiment above is not as farfetched as it appears however. From 1965 to 1979 in the US, increased government spending, inflation, and labor movements were part of the process of adjustment to the strong global growth during the previous 15 year period. The only difference here would be that greater limits on personal and private debt would be legislated – somewhat akin to the spirit of the European Stability and Growth Pact. The “equitization of finance” would be reigned in similarly. As a bonus, lower aggregate demand should partially rectify current account imbalances as well.If something like the above plan is not worked out, policy makers are likely to find themselves very frustrated with attempts to stabilize the economy as any attempt to avert a catastrophe brings back the same imbalances that brought about the current near-catastrophe in the first place.