James Pethokoukis

This from the WaPo:

IHS Global Insight, an economic consulting firm, estimates that the stimulus has increased the 2009 gross domestic product by about 1 percent over what it otherwise would have been, with the benefit almost entirely in the second half of the year.

The firm also forecasts that the package will, in total, result in about 2 million more jobs than otherwise would have existed at the end of 2010. Moody’s Economy.com estimates that the initiative will increase employment by 2.5 million jobs. Both estimates are below the 3 million to 3.5 million jobs the Obama administration estimated the package would create or save …

Me: Again, arguing that the economy would have been worse without the stimulus plan is not as helpful as arguing the plan has restored prosperity.

A fun factoid from Gov. Mitch Daniels of Indiana shows just how much trouble states are in (via WSJ):

From 1930 to 2008, our national average annual real GDP growth rate was 3.49%. After crunching the numbers, my team has estimated that it would take GDP growth of at least twice the historical average to return state tax revenues to their previous long-term trend line by 2012.

I will say, though, that the worst-case scenario for unemployment is fading fast as this chart from economist Robert Brusca shows. (Though one cautionary note: watch out for more state/local government layoffs).

The unemployment rate in August jumped to 9.7 percent from 9.4 percent. The economy lost another 216,000 jobs. While the economy may be shifting into recovery mode, the labor market clearly still needs lots of work. The best-case scenario I can find (4 percent GDP growth next year) still would have the jobless rate at 8.5 percent or so a year from now. Also note that the labor force participation rate remained steady last month. So the blip up in unemployment was not caused by discouraged workers returning to the workforce. Also the broader U6 rate surged to 16.8 percent.

A great factoid from the Calafia Beach Pundit, Scott Grannis:

Gold prices peaked in January 1980 at $850. In today’s dollars, that would be equivalent to $2,300. (The chart shows a peak of $1,800 because it uses month-end data.) So in rough terms, let’s say that gold today is worth about half of what it was at the peak of the inflation fears in early 1980.

Gold prices rise when there is “too much money” in the system; when people fear that an excess of money will depress the value of their money. Gold prices also rise when people are just plain scared about something going very wrong.  …  Could gold rise above $1000? Why not? Could it get to $2000? Perhaps, but I think things would have to get an awful lot worse than they are today.

I listened to VP Joe Biden today talking abut the Obama stimulus package, aka, the American Recovery and Reinvestment Act. A few thoughts:

– Biden credited the stimulus plan for preventing the recession from turning into a depression. I would certainly place the $140 billion or so in stimulus spending behind the Fed’s action and the natural rebound in the economy after a period of intense fear and retrenchment.

– Even though “reinvestment” is part of the name of the plan, at least two-thirds of the plan has nothing to do with long-term growth.

– If the economy was much worse than the White House expected, why wasn’t a) the stimulus bigger, and b) more front loaded toward 2009?  That was a huge misjudgment.

– Clearing some fiscal space with entitlement reform would allow the WH the ability to do a second stimulus for infrastructure or reducing taxes on company and capital.

– Perhaps the smartest thing the WH has done so far is resist calls for raising taxes (like from Pelosi) or to focus on near-term deficit reduction. Those are exactly the sorts of policies that helped retard America’s recovery during the Great Depression and Japan’s during the Lose Dedade.

The Cleveland Fed gives the bad news:

First, without a correction on the spending side, more tax revenue will need to be raised, with the consequence of subjecting the economy to greater tax-associated inefficiencies.

The risk of default may also increase, leading to higher risk premiums, higher interest payments, and a greater cost to be sustained in the future to address the fiscal imbalance.

In addition, a sustained demand for funds by the government sector will likely put upward pressure on future real interest rates, with adverse consequences for private investment and growth.

The increase in domestic interest rates will likely attract further financial flows from countries with higher saving rates, which may lead to a dollar appreciation and a worsening of our current account deficit.

Edward Harrison has an interesting and worth-reading take on financial reform :

I propose the following:

1. Shelve any talk of a super-regulator.  It is a dangerous idea that will prove both politically unpopular and ineffective.
2. Enforce the regulations that currently exist. For example, anti-trust law should prohibit any institution from holding more than 10% of banking assets. Another example is the Home Owner Equity Protection Act of 1994, which gave the Federal Reserve the authority to stop abusive mortgage lending practices.
3. Promote smaller community banks. The Bush and Obama Administration’s policies during this crisis have favoured big banks. Meanwhile, community banks are being held to a disadvantage in access to cheap capital. Why doesn’t the FDIC spin off seized assets as small community banks with new leadership instead of gifting them to private equity or other banks?
4. Regulate OTC derivatives. Full-stop.  No clearinghouses. No loopholes.  We need an exchange-traded OTC derivatives market. (listen to the audio at the bottom of this post to hear how lobbyists gutted the OTC derivatives regulation in Obama’s reform package).
5. Keep the Consumer Finance Protection Agency. If we want any new regulators, this is where we need them.  The Fed failed to protect consumers from abusive mortgage lending practices and there is now a balkanized regulatory structure to oversee consumer protections. The CFPA would change this.

Pimco’s Bill Gross paints a dreary future is his monthly letter:

We are heading into what we call the New Normal, which is a period of time in which economies grow very slowly as opposed to growing like weeds, the way children do; in which profits are relatively static; in which the government plays a significant role in terms of deficits and reregulation and control of the economy; in which the consumer stops shopping until he drops and begins, as they do in Japan (to be a little ghoulish), starts saving to the grave.

Me: The Counter-Reformation is hand. This is probably the economic consensus, especially if you toss in the probability of higher taxes.

American unions. Democrats, anti-globalization wreckers and British regulators may love the idea of financial transaction, or Tobin, taxes, but not me. Here is why (some of these points came from a great article by  Dan Matthison of Credit Suisse):

1)  Even a 0.10 percent tax would double the cost of US stock trading where the average commission cost is just under a dime. Welcome back to the pre-Internet early 1990s.

2) It would reduce market volumes and make the equity market less attractive. Kind of dumb thing to do in a time of constrained credit markets where it is tough to raise money.

3) That supposed $100 billion-$150 billion in revenue wouldn’t appear out of thin air. It would come from investment firms who would pass along costs to customers.

4) It would drive trading activity to less costly trading centers, such as the Toronto Stock Exchange (at least if we are talking about the US). Goodbye US jobs.

5) It is a solution in search of a problem. Trading didn’t cause the financial crisis. What did? As William Beuiter puts it:

The financial sector is too big throughout the overdeveloped world in part because much of it enjoys a free state guarantee against default on its unsecured debt. Retail deposits are explicitly insured, but at premiums that imply a taxpayer subsidy. Other counterparties of banks and other systemically important financial institutions also benefit from implicit default guarantees. The cost of capital to the banking sector is subsidised, causing the sector to be too large.

6) We are already going to raise cap gains taxes here in the US. A Tobin tax seems like piling on given the huge losses folks have suffered in their portfolios.

Bottom line: Tobin taxes were hijacked by anti-globalists (James Tobin himself says so) who view capitalism and the financial sectors as a leeches on the “real” economy and destructive to developing nations. (I wonder if China agrees?) Today, they are pushed by folks who are looking for a way to raise taxes in a politically palatable way. Just like instead of raising healthcare taxes in the US, we might raise taxes on healthcare insurance companies — who would then pass along the costs. Phony.