Trends and where we're headed…

Some economic trends as I see them… and my best read on where things are going.

1.  Productivity gains – we can now produce more ‘stuff’ with less labor input than ever.  In other words, labor is more productive than in the past.

2.  Capacity to produce than we can consume – possible output appears to be more than we can ‘sell’ or ‘afford’.  For example, the car companies are shutting down plants because they can’t sell all the cars they could produce.

3.  More labor in service jobs – since fewer labor resources are needed to produce the ‘stuff’, many people are now engaged in services jobs.  While some of these pay well (i.e. have high value add), many of them don’t pay very well.  What this means for overall buying power seems to be a relative decline…

4.  Massive use of credit has disguised the fact that we can no longer really afford all the things that we are capable of producing (at current prices anyway).  Krugman and others are calling this an ‘output gap’. In a related sense, the easy availability of credit has pushed up prices in some areas, such as housing and very likely stock prices (and even dividends, as noted in this NYT article “Easy Loans Financed Dividends”).  Unless prices come down again (or wages rise), there will be an imbalance.  Overuse of credit now finally appears to be leading to at least a short term upward bump in personal savings – however this may lead to a severe drop in business profitability, since consumption will drop further.  What is credit?  Ability to spend tomorrow’s productive work today.  We seem to have already spent quite a few tomorrow’s worth…

5.  Some business models are collapsing (music, newspapers, possibly most publishing).  Largely due to changes driven by the internet, producers in these fields are finding it hard to maintain revenues.  Other industries have too much capacity, such as real estate, construction, finance – they probably need to shrink.

6.  Where do we go from here?  It looks like some fairly large government stimulus plan will pass early in 2009.  Some things this may do:  (1) cut some payroll taxes – leading to slightly higher wages and lower labor costs, (2) some government spending, hopefully spurring some infrastructure maintenance that is needed in any case, and some new technology platforms (green energy? greener transportation?), and (3) some effort to provide assistance to homeowners in trouble (this seems tricky and problematic – what about speculative buyers? what about buyers who put no money down?  what about all the mortgage slicing and dicing into securities?).  Are these things enough to make up for the ‘output gap’? – seems unlikely, without some way of creating a transition from economic output that is no longer needed, to that which is needed and can be paid for.

Is there any alternative?  What if we didn’t do a stimulus plan?  Presumably the economy would slow down more, resulting in higher unemployment, which adds to an ugly downward spiral…  Would it achieve the necessary transition?  It would indeed achieve some destruction of output.  The bet is that a stimulus plan can ease the short-term pain and also help set the stage for a transition to more fruitful enterprise in the future.  But I wish those who argue for ever larger stimulus plans would admit that there are dangers and risks involved.  If a stimulus was always a net positive, then we might as well be doing it all the time…

7.  Where does the money for this stimulus come from?  Well, it has to be borrowed.  We’re already deficit spending by several hundred billion dollars, so the stimulus is all additional borrowing.  Will creditors line up to lend the U.S. more money?  What kind of interest rate will they ask for?  Is it a good bet to lend to the U.S. at this point?  (On the other hand, is there a better alternative for those with money to lend?).  All this is the tricky part, where it seems to be the most unknowns lie.  What all this does to the US Dollar over the next few years is anybody’s guess.

Update on Jan. 16:
8. The continuing mysterious bailouts of the banks is very troubling.  The amount of ‘paper money’ that appears to have gone up in smoke grows by 10’s or 100’s of billions at a time, and instead of having the people who made all these ‘bad bets’ paying the price, we the taxpayers are getting stuck with it.  The low information flow seems like a terrible sign – desperate officials are just somehow hoping that the massive losses will stop, but no one really knows what the banks are holding and how much more will disappear…  why any of us should have trust and confidence in our banking system at this point is a pretty fair question.

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  • Jim  On January 19, 2009 at 10:41 am

    Will comment on your analysis later. In the meantime the WSJ printed an interesting editorial on “The Bush Economy” on Saturday. Thought it was applicable to your comments:

    Although the WSJ leans right I think this editorial is the best critique of Bush’s 8 years I have seen and seems fair to me, laying much of the blame for the current “recession” at the feet of Bush and Greenspan!

  • Curt  On January 19, 2009 at 11:28 am

    Thanks for the link. I agree with much of their analysis, although I think they give too much credit to the second round of Bush tax cuts. I suspect the economy would have been turning upwards by that time in any case, but particularly because of the low Fed interest rates.

    But there’s plenty of blame to go around – this bit puts it pretty well:

    For that matter, most everyone else was also drinking the free booze: from homebuyers who put nothing down for a loan, to a White House that bragged about record home ownership, to the Democrats who promoted and protected Fannie Mae and Freddie Mac. (Those two companies helped turbocharge the mania by using a taxpayer subsidy to attract trillions of dollars of foreign capital into U.S. housing.) No one wanted the party to end, though sooner or later it had to.

    As they say, no one wanted it to end, and if anybody had seriously tried to end it, I think they would have gotten no traction at all, and in fact been simply criticized for being all ‘doom and gloom’.

    Also worth pointing out, I think, though the WSJ doesn’t, are a couple points: (1) what role does the war spending play? and (2) that the ‘recovery years may have been good for tax revenue, but were never that good in terms of employment growth or wage gains.

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