From 8/5

I am going to try and tackle some of the issues afflicting the U.S. economy. Some I dealt with before; others are new. Some are very difficult to put one’s arms around; others are easy.

Is the economy today better than what it was four and a half years ago when Obama came to power? 

The answer to this question is an unequivocal yes. Of course it is. Democrats, liberals, and progressives keep harping on this point as vindication of the president’s economic policies. This, of course, is nonsense. The economy would have been better now than it was in early 2009, even if there was no president. Economies and especially market-driven economies have self-healing powers and administrations’ interventions can help or hinder, but cannot STOP it. The fact that the president and his cohorts keep using this improvement as a vindication for their economic policies means that:

  • Either they are ignorant and do not understand economics at all, or
  • They are hypocrites and have nothing else to point a finger at, so they are using something that they know is natural.
  • Or both!

In any case, it is a completely moot point. The economy today is better than it was 4.5 years ago. No question, no argument, and no achievement either.

Did Obama’s economic policy help or hinder the recovery?

This is a much more difficult question but ultimately it is clear that Obama’s policies hindered the natural economic recovery. This can be seen by the terrible macro statistics. The annual GDP growth 4 years after the end of the recession is still running at 1.5% level, growth in personal incomes is muted, median income is DOWN since the END of the recession. Less people are at work today, 4 years after the end of the recession, than were at work 6 years ago before the recession started. Home ownership is at an 18-year low; food stamps, poverty ranks, and disability claims are all at all-time highs and there is more. So, the answer is clear but the analysis is complicated.

One cannot spend $6 Trillion more than one earns, as the U.S. government did, without creating some positive impact. One cannot print $3 Trillion over a space of about 4 years without making some people rich and creating some economic benefit. However there are counter forces, too:

  • The heavy burden of $6 Trillion of additional debt,
  • The potential risk of inflation resulting from printing this huge quantity of money,
  • The cost in lost growth of Obama’s regulation regime: ObamaCare, Dodd-Franks, EPA, NLRB, etc.
  • The cost of the Obama administration’s major litigation campaign against businesses (see my blog), and more since.
  • The psychological effect on the business community resulting from the president’s constant attack on them (“you did not build that,” and much, much more). That translates to less economic activity.

If we naturalize the power of a free market economy to rejuvenate itself, we have the positive effects of the largest stimulating policy experiment ever embarked upon by mankind over the last four years on both the fiscal and monetary sides, pitched against all the above negatives.

On balance, I believe that the answer is clear—Obama’s policies hindered the recovery. As I indicated above, the macro measurements of the economy show that since WWII, no recovery has ever been so slow and weak, so long and so debilitating as per micro-economic indicators, based on my own personal observations of the economy.

The Austerity Bugaboo

Listening to some progressive stalwarts and pundits, you would have thought that “austerity” is what brought the world economy to its knees over the last few years. The fact that what actually happened is the exact opposite does not matter to them. Do not confuse them with facts; they made up their minds. The world is where it is now due to an unprecedented monetary and fiscal profligacy, indeed recklessness. The bloated balance sheets of all developed countries burdened by unprecedented level of debt are the testament to this fact. These pundits like to use the UK as a “proof,” according to them, that austerity does not work. The fact that the UK clocked in an annual rate of GDP growth over the last quarter of about 2.5%, as compared with the 1.5% level of GDP growth during this quarter in the U.S. does not matter to them. Do not confuse them with facts they made up their minds… The unemployment rate is 7.8%, only slightly above that of the U.S., and labor participation rates are similar. Yet the UK is still the poster child for the “horrors” of austerity, according to them.

What is austerity anyway? Is allowing government deficits to be ONLY 6% of GDP, as opposed to the 10%-plus that it used to be. Is that austerity? Not really but that does not stop these economic ignorants from trumpeting the horrors of austerity. Austerity was NEVER the CAUSE of the problem. It was the RESULT of the problem. The few countries that did enact real economic austerity, countries like Greece and Spain, did it because they had NO OTHER CHOICE. They could not continue to borrow the money necessary to sustain their deficit financing. Austerity was not the driver of the depression these countries are suffering from, but a result foisted on them by the market, due to their reckless fiscal and monetary policies that preceded the austerity. And therein lies the point: Unless the U.S. starts now to bring its fiscal house in order at some stage, maybe 5 years down the line; maybe 10 years—at some stage austerity will be foisted on the U.S., too. If this were to occur, the U.S. would suffer from Spain-like levels of unemployment rates—25%. If it were to occur, that would be a direct result of the economic recklessness promoted by democrats, liberals and progressives and especially this president. Yet they keep harping that austerity is the problem. Do not confuse them with facts they made up their minds…

Ambivalent Signals

If the economy is so slow and doing so badly, why is Wall Street reaching new heights every day more or less?

This is actually typical of a central command and control economy. The elite always enjoy the effects of crony capitalism. The U.S. is not yet close to the levels of a full centrally planned and command economy of the Soviet style, but the fact that the government budget is now over 25% of GDP as compared to about 21% average of post-war economies is enough to create bubbles. Wall Street is a bubble. Large corporate profits are a bubble. It is clearly a two-track economy: Wall Street is at new heights and Main Street is lagging. The benefits of the huge fiscal and monetary stimulus goes to Wall Street in a large proportion. There is an effect on Main Street, clearly, but it is much more subdued. In addition, all the negatives I mentioned above affect smaller economic entities, Main Street, much more than they do the big ones like Wall Street. Thus we have the double whammy effect:

  • The benefits flow disproportionally to Wall Street.
  • Yet the negative affect Main Street more.

This creates an unholy alliance between the progressive administration and the top capitalist players—that is typical crony capitalism and that is cancerous for society. It is paradoxical that this president who came to power on the wave of middle-class dissatisfaction promising to fight for the middle class does exactly the opposite. It is due to his economic ignorance. He simply does not understand that he is harming the people he is trying to help. The best way to improve the fortunes of the middle class is to set the market free. Free market forces do their job, not linearly, not smoothly, but over time there is no greater force of good for the middle class, no system that raised more people from poverty to middle class than the forces of free-market capitalism.

Bernanke the Enabler

Ben S. Bernanke is coming to the end of his extraordinary tenure as chairman of the Federal Reserve. Extraordinary does not necessarily mean good. It is my view that history will judge him harshly. He did take some resolute actions once the crisis erupted and for that, he should be given credit. But this is his job. This is what we have a central bank for, to take resolute actions in times of deep crisis. On the other side of the equation, however:

  • He did nothing to prevent the crisis BEFORE it occurred.
  • He could have done much more to contain it by changing some of the stupid rules that artificially made the crisis much worse than what it really was (Mark to Market first and foremost amongst them).
  • He went way overboard in his efforts to ENABLE the Obama profligacy and extreme spending spree.

I believe that once the full consequences of his “enabling” policy will “ripe” and be clear for all to see over the next 5–10 years, he will be judged as one of the most harmful Fed Chairmans in modern times.

The president dissed him in public, announcing that he will not be extending his term on a TV interview, without the normal dignity and respect that a Fed Chairman deserves. While shocking, this is not surprising from a president who has dissed so many other people, who has shown zero respect for decorum, who does whatever he wants whenever he wants to, and who has no regard for the truth.

Bernanke the “enabler” did a big disservice to the economy in my mind when he allowed Obama to carry out his policy. The president’s ungratefulness must sting doubly because of that. The two deserve each other.

Long, Shallow Recession or Short, Deep Recession?

It is obvious that without the unprecedented and huge flood of fiscal input from the federal government, the recession would have been deeper. Without the so-called “stimulus act” of early 2009, without the unprecedented deficits that the federal government ran, and all the programs aimed at helping the economy, things would have been worse. However badly managed and indeed largely wasted those programs were, one cannot inject an extra $6 Trillion into the economy over four years without having at least some effect. So yes, if Obama did nothing, the recession would have been deeper. The big question is what would have happened to the recovery after the recession?

It is impossible to prove something that “might have been,” but history shows us that in ALL past recoveries, the economy grows much faster than it is doing now. The conclusion is that while his policies alleviated some of the potential suffering, they also extended the period of suffering by much. Although we are not in a recession now, the mood of the people, their unhappiness and outlook, according to all available data, is one that fits into a recessionary period. That is due to the two-speed economy (see my comments above on Ambivalent Signals) and due to the very, very long period of this very slow “recovery” we are in. It feels like a recession.

So the question is what is better? A sharp, deep but short recession followed by a strong powerful recovery? Or a long, ongoing, very slow, and painful recovery? Opinions differ. I stick with what my mother told me: If you want to take a Band-Aid off, do it in one quick movement. It will hurt but it will be over. More importantly, it is also what Friedrich Hayek is telling us. He is more of an authority on the economy than even my mother is.

In his famous book, The Road to Serfdom, Hayek explains why socialism is inherently not democratic and takes liberty away. One of the lesser-known themes of his book is that over a long period of time, the people, under socialism, become less entrepreneurial, more followers than leaders, in short—serfs. It is this loss of personal vitality and animal spirits that is probably the most damaging in long periods of recession, stagnation, and slow and agonizing recovery. People are getting used to relying on government. The number of people receiving Federal aid today is in excess of 100,000,000! More than a third of the population. All these people are getting used to sitting on their bums and doing very little. This is THE biggest damage of Obama’s economic policies and the one that will be hardest to fix. What one sees in Greece, riots and demonstration, is the result of many years of slow encroaching serfdom. We need to prevent it from happening here in the U.S. and the sooner we start, the better.

ObamaCare and Part-time Employment

The strange thing about the headline unemployment figure is that it does count as fully employed people who are only part-time employees and as does NOT count as unemployed people who would like to work but have given up looking, due to the fact that there are no jobs. In effect, it reduces the denominator by all those people that would like to work, but are not taking any action to find work, and increases the numerator by adding those at work on part-time jobs. Thus it paints a much better picture than what reality is.

At least the erroneous denominator issue can be gleaned by the “workforce participation percentage” and indeed a lot has been made of how low this participation percentage is. Very little discussion, however, is given to how high the part-time jobs figure is in the numerator.

Take the last job report for July published on Friday:

  • The headline news is that the rate of unemployment dropped by .2%. That is a big movement. Unfortunately once one delves into the details, it becomes apparent that the drop is due to an even larger drop in those that are seeking jobs. The denominator was reduced, thus a very tepid 162,000 net new jobs growth was enough to show a drop in unemployment.
  • More serious is the fact that the average hourly earnings DROPPED by .1% in July AND the number of hours worked on average DROPPED by .2% . With such reduction in the average payroll per employee, and given that the total labor force is about 100,000,000 for total payroll to all U.S. employees, to remain static, about 300,000 jobs would have had to be added. But only 162,000 were added, thus total income dropped significantly.

How can that be? How can there be a net growth of new jobs but LESS overall incomes? This is due to the significant increase of part-time employment and that is a new phenomenon. It is only in the last few months that this number, part timers, has been escalating beyond normal patterns. What we can see is that the number of part-time employees is growing by MORE than the number of net additional new jobs. This means that there is a significant shift, or to use a favorite term of our president, there is a pivot toward part-time employment. The effects of this on the economy are obvious and are all bad. Part-time workers earn less, specialize less, are less productive, have less opportunity to get promoted, and more.

The question is, why is this happening? Why is the economy in effect turning full-time employees to part-time in numbers vastly more than ever before? The answer is very simple—ObamaCare. According to the law, employers who have more than 50 full-time employees must provide them with healthcare benefits. So what do employers do? There are three ways to avoid this costly and unwanted legal obligation:

  • Do not hire more than 49 employees—that is a solution for small companies only.
  • Break up your company into separate operating units, each of which will be a separate legal entity and will employ less than 50 employees. This is very burdensome, complicated, and costly.
  • Hire two 20-hour employees each instead of one 40-hour employee. The one would have counted toward the 50 threshold, while the two are not counted.

If you think that I am the only one who noticed this issue and how dangerous it is, then consider the following:

  • Why did the Obama administration decide to delay the deadline of this 50-employee rule taking effect on January 2014 to January 2015? Could it be that they understood how damaging it is and wanted to delay the damage until after the November 2014 elections?
  • Three of the country’s largest labor unions, top supporters of Obama, have written to the Democratic leaders of the house and Senate telling them that this element of the law is a disaster. In their words, it will “…destroy the foundation of the 40-hour work week that is the backbone of the American middle class.” See this blog.

Like everything else with this president, he sees it all through the narrow tunnel vision of the next elections. Delaying the rule by one year, something that he has no legal authority to do, will not change the behaviors of many employers. Having come to terms with this new law and its rules, employers are going to act as if it is here already and start getting used to it, rather than wait for the last moment and delaying the part-time “pivot” till 2015.

Bond Trap
I have written about the bond trap before, the first time here, three years ago. It is nice to be vindicated and see the WSJ pay a lot of attention to it.

See article at the WSJ from Tuesday July 30th by Ronald I. McKinnon, economy professor at Stanford University, and another one, “Bond Slump Leaves Banks in a Bind,” from August 1st. My only question is where were they all when it started to happen? Why did it take them all this time and seeing an actual demonstration of the problem to start warning others about it?

In short, the bond trap works as follows:

Due to a number of reasons (all bad reasons and related to the Obama command and control economy), both banks and private companies have generated huge surpluses of liquidity and rather than invest it in loans (banks) and fixed investments (companies), they have accumulated US Treasury and related bonds. Over the last four years, the U.S. issued about $5 Trillion EXTRA, more than the normal run-rate of bonds. We know that the Federal Reserve bought about $3 Trillion of that (money printing!) but the remaining EXTRA $2 Trillion were bought by banks and corporations. The amounts of extra liquidity over and above the required reserves for banks to hold with the Fed Reserve is about $1.5 Trillion, while companies hold $2 Trillion of liquidity on their balance sheet. The one consistent weak reading in the GDP growth numbers is investment by corporations in fixed assets. By the way, this is probably THE most important part of GDP growth, as it portends future growth. Everything else is just consumption.

Due to regulatory intervention intended to encourage this massive buying of bonds, they are being held by the banks and the corporations as if they are an entirely safe instrument. If banks want to start making more loans, or companies want to start investing more extensively, they will need to start selling these excessive holdings of bonds. Once this starts, there will not be enough buyers to buy the bonds, certainly not at their current inflated prices (resulting from the Federal reserve QE policy). It is likely that when the mood changes and banks/companies want to start investing, there will be many more sellers of bonds than there are buyers. Like any other product, when there are more sellers than buyers, the price will drop. When the price drops, banks and companies will suffer huge losses to their holdings. As an example, every 1% reduction in the value of these bonds will cause a loss of $13 Billion only to the large four banks in the U.S. Such losses can be huge and destabilizing so the banks will not want to sell the bonds. But if they do not want to sell the bonds, they cannot make the loans—hence a TRAP. Similar considerations apply to companies. You cannot generate real growth with the bond bubble hanging over the market, but piercing it will cause huge damages and destabilize the market.

As I concluded in my blog mentioned above, this means a “lost decade” type of economy—at least a decade of very slow growth close to recession or stagnation. Coming out of it will be painful and will take time, but in order to start the process, the profligacy of the treasury in running huge deficits must stop. The sooner the better!

Median Incomes

President Obama positions himself rhetorically as fighting for the middle class. Unfortunately, his policies have the exact opposite effect as I discussed above, and as the facts/the data prove. Generally speaking, median income in the U.S. has been going up very slowly (always inflation adjusted and in real terms) but consistently. Every decade, one can see an increase in the median income (see here) until the 2000s. As an example, during the decade from 1990–2000, income rose by about 10%. According to the report published by Sentier research titled “Household Income Trends Report June 2013,” the median income DROPPED by 6% during the first decade of this millennium, and in the three years of this decade it dropped an additional 1%. This masks a much more dramatic 3.5% drop in the first 18 months of this decade, and a slow uptrend that has seen it recover about 2% since.

Analyzing these numbers by presidential terms, the drop started under Clinton. In the last 12 months of Clinton’s presidency, median income dropped more than 2%. That is shocking. It is a dramatic reduction and it occurred during the period that most consider the best economic period ever for the U.S. However, it is in line with the fact that, as I said many times in earlier blogs, Bush inherited a difficult economy from Clinton. The piercing of the Dotcom bubble that triggered the collapse of NASDAQ from its peak at about 5,500 to just over 1,000 (by the way, it is the ONLY stock index to have not yet conquered its peak, and indeed it is far from it), pushed the economy into recession and materially affected median incomes even before Bush took office. During the next 8 years of Bush’s administration, median income went up (from the 2001 level) by nearly 3% and down again by about 2%, and finished on January 2009 at more or less the same place where it was on January 2001. Clearly a total stagnation for the 8 years of Bush’s presidency. During the first 4 years of the Obama presidency, it went down by 6.5%! In FOUR years. It has gone up a little since the beginning of his second term, but it is, of course, too early to determine what the total second-term picture will look like.

So what does this tell us? Clearly Bush’s policies did not help median income, but they did not hinder it either, while Obama’s policies devastated median income. We all know that the president will blame the fall on the Bush administration, but he had 4 years to fix it. Why did he not do that? Why is it that the steepest fall in median incomes came about AFTER the recession ended? If, for argument’s sake, one accepts that there is always a delayed reaction and what happened in Obama’s first, say, 12 months is due to Bush (Obama would blame Bush for everything bad that happens during his entire 8 years, but that defies reason), can we assume that the slow recovery in Median Income that started in October 11 is due to the political upheaval that happened in November 2010—the election of a Republican house of representatives and the freeze that that brought for Obamanomics?

The truth is that starting in the middle of the 90s, median incomes in the U.S. have clearly been affected by the growing globalization of the world economy. It is obvious that the rise from poverty of hundreds of millions of Chinese and other Asian people caused U.S. median-income employees to have to work harder and more in order to maintain their income. They ran harder to stay still. At least during the Bush administration, his pro-free market policies (on balance) helped the middle class to stay still. During the Obama administration’s anti-capitalism and pro-government policies, median income collapsed and the middle class suffered heavily. Again and again it is evident that Obama’s policies achieve the EXACT opposite of his stated aims. He is trying to help the middle class yet he ends up harming them. It would be ironic if it were not for the fact that we are dealing with people’s lives and that makes it a tragedy!

Inequality: Fairness Versus Growth

In his speeches and in his policies, the president focuses on fairness, not on growth. Striving to be fair is laudable, except that it misses the point and tragically achieves just the opposite. Capitalism is NOT a fair system. It is actually pretty cruel, but it is the best that we have. It is true that the role of government is to create a safety net for the poor. But we have that. A good safety net is one which is limited, focused on a small minority that really needs it, and is full of incentives to push them out and above the safety net levels. The problem with the safety net that we currently have is that over the 80 years since it started, progressives, liberals, and mostly Obama has pushed for it to be bigger and to cover so many people that it is likely to make us all bankrupt, and first and foremost, those who need it most. The best way to achieve fairness is to generate growth. A rising tide lifts all boats. Growth may even increase the income gap but it will pull the poor higher and proportionately improve their lives much more.

I will end with few anecdotes:

  • Many years ago, Baron Rothschild, then one of the richest men in the world, was accosted in the street by an anarchist who kept shouting and insulting him. When, against his minders’ advice, the Baron engaged him, the anarchist told the Baron that he is way too rich and that in the name of fairness, he should spread his wealth (a term liked so very much by Obama, too). The Baron responded by telling his minders to give the man a dime. When the man asked what it was for, the Baron responded by saying, “If I were to spread my entire wealth over the population of the world, this will be your share. Good luck.”
  • Margret Thatcher used to say that the problem with socialism is that very soon, one runs out of other people’s money.

I say, make the poor richer not the rich poorer!