An Economic Worse-Case Scenario

The other day, a man asked me where I thought the economy was heading. I'd made the mistake of mentioning that I work in finance (it's easier than launching into the long list of what I really do). This man, this stranger, began speaking to me as I sat on one of my writing mornings, despite the earbuds in my ears, the moving pen. He said he was surprised to see someone writing by hand in a journal. "A diary", he called it. So, this bit of small talk led suddenly to the economy. My answer for him? I told him I'm more frightened now than I was six months ago.

I can easily envision a future where things get worse for most Americans, where wealth is harder to attain for most people. Jobs don't come back. At least until workers are so desperate for income that they're willing to accept pay at nearly the same depressed levels as Mexico or Vietnam. Prices for staples continue to rise, squeezing out spending for discretionary items. Government slashes so-called entitlement programs, all sorts of public assistance. State and local governments are in trouble. Basic services disappear. I can envision towns that can't fix roads, that can't ensure public safety. Lawlessness and decay. The middle class disappears, with some ascending to the rich classes and the others falling behind. The housing situation only gets worse. The suburbs drain of life. I can see things getting difficult. (There's a story somewhere in this worse-case scenario.)

The reason for his scenario is politics. All of this nonsensical grandstanding. No one has the will to take a position unless it is opposition to the other side. Real work needs to be done. But any attempt to speed up a flagging recovery has devolved into a fight over the deficit and the debt ceiling. This argument has only made things worse. Everything things that they benefit from holding some righteous position, forgetting that the real work of politics is the crafting of compromise. If we wanted the most radical to govern we would let everything be decided by popular vote.

This man put the whole stalled recovery down to the Administration's energy policy. He was in energy. While he might benefit, it's not like opening up development--drilling--would lower fuel prices or make companies feel like spending money or hiring. And it isn't likely to make the consumer feel like suddenly spending money. He went on to use the words "environmentalists" and "socialism." It was time for me to leave.

The truth is that I'm frightened. I feel like squirrelling away every penny. I don't know that things are likely to turn negative again, but I think that it's more likely today. And in my mind I'm picturing dusty streets, dead grass and hollow, empty buildings.

Another Dissent of the FOMC Statement?

With the meeting of the FOMC starting today, there seems to be a great deal of uncertainty about what the Fed statement will say. I’m pretty certain that there will be no change in the target rate (with the “extended period” statement remaining), the comments about the economy will be dour (but not likely strong enough to drive the market dramatically downward), and they will reiterate that they are prepared to take whatever measures are necessary as conditions warrant. The real question for me is whether Kansas City Fed Chief Thomas Hoenig will continue to dissent. For the last year or more of Fed statements, Hoenig has insisted that the Fed should be raising the target rate in order stave off inflation or the creation of another housing bubble. The facts, though, continue to point away from his fears. In fact, many are now suggesting that there is a greater risk of deflation than inflation in the near term.

I would like to see him drop his dissent. Bernanke runs a more democratic Fed and is willing to support the differences of opinion, but a dissent now will only add to the uncertainty. Investors, not just fed-watchers, are looking for something definitive out of the FOMC. They’re not likely to get it, but a dissent now, at this inflection point, would leave them questioning the statement in its entirety. It’s not a matter of differences of opinion on how to chart the course of recovery; the concern now is slipping backwards. Saying that we need to raise rates in the face of the current economic conditions isn’t going to add any much-needed stability.

A Solution for Job Creation

I’ve just read former Intel chief Andy Grove’s article “How to Make an American Job” in the July 5-11 issue of Bloomberg Businessweek and I have to quibble. He argues that we ship jobs overseas at our own peril. Not only do we lose the jobs, we also are left out of the next round of development in that industry. To solve the problem, he states, “Long term, we need a job-centric economic theory—and job-centric political leadership—to guide our plans and actions.”

Surely, the US cannot survive on knowledge and service work alone. I would agree. Manufacturing in the US gives the country the flexibility to change and grow and to be a part of new technological revolutions. Pressing the government to get involved in this, in any way, walks us straight into dangerous territory.

Incentives provided by the government for job creation can hardly be effective. I would bet that for every dollar of incentive provided, less than fifty cents pass through in the form of wages. Probably a greater portion goes straight to corporate profits. We cannot forget that profit creation is the greater incentive for companies, coming well before job creation. Wringing the profit out of every dollar is the way things work.

Inefficiencies of government spending or tax breaks aside, other methods to encourage domestic manufacturing are dangerous. Tariffs on imported goods may protect American jobs, but often at a higher cost for American companies. They will pay higher prices on imported raw materials, higher wages, and will likely see import tariffs on their own products overseas. Duties are a bit of an arms race. As long as we have the same amount as our competitor, we are secure. An escalation by either side will be equally met by the other. Grove, though, thinks this okay. “Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars—fight to win.)”

What works is when American businesses seize opportunities, finding the right spots to take advantage of things. Here, Grove is onto something. He suggests the promotion of scaling, of moving a product from development and small-run manufacturing to complete large-run, full-scale production. This is a particular pinch-point in the process. US companies have had trouble relying on overseas manufacturers to take a new product to full-scale production because of the normal tweaks to design and production that are necessary. Keeping that work in the US can allow companies to be better tuned to making quick changes, refining processes, and making better products.

But instead of penalizing US companies through taxes or tariffs on overseas production, we need to help them get what they need to keep this scaling in the US: access to capital. A program of government-backed loans available to companies looking to scale up would be exactly what is needed. Let’s face it, shareholders or the bond market are probably unwilling to take this risk and help a company fund the creation of US manufacturing. Why would they when they continue to see the profits that come from displacing American workers for Chinese? Venture capital isn’t interested, as Grove points out. And banks aren’t willing to take the risk without government support. Yet, it is in the country’s interest to create jobs here and to take a little risk in the process. There is no up-front cost to the taxpayer, no taxpayer dollars going to line the pockets of greedy corporate execs or handout-seeking labor. There is market-rate interest to be made by banks and a little downside risk to the government.

The dangers of a US devoid of manufacturing jobs should be apparent. It may provide greater profits to US corporations, their executives, and the smaller base of knowledge workers, but all of their spending cannot support our service and retail sectors. Yes, maybe shipping jobs overseas and rising US unemployment can be severe enough to depress US wages to the level of those of Chinese workers, making it cost efficient to return jobs to the US. Indeed, maybe this is the intent of some. But the US thrives on a diverse workforce. We need not only manufacturing workers, we need the line managers, the division chiefs, and all the other middle managers as well. Maybe with a little government backing (not support, incentives, or protectionism) we can get them back.

Dow and Euro-Dollar Forecasts

As an assignment for the first day of a class on Financial Strategy and Valuation, we were asked to forecast what the Dow and the Euro-Dollar exchange rate would be at the end of the year. I wrote my first forecast on Wednesday and, as you will see, subsequent events forced me to revise the forecast. Below is what I wrote:

Dow Jones Industrial Average at the close on March 19, 2010 = 10,560 10,120.08

Fourth quarter earnings and forecasts for 2010 earnings will continue to be optimistic through the rest of earnings season. Companies have managed to cut costs and grow profits despite decreases in revenue. Seeing an economic recovery beginning, companies believe that they can capitalize on new, revitalized cost structures and reap generous profits on the way up. Investors and analysts are likely to believe them.

In the near-term (late-January through early-February), the Dow should continue its climb. Economic reports in February should begin to bring investors back down to Earth. U.S. GDP figures will be revised down (as they were for the third-quarter) and consumer sentiment will continue to be weighed down by jobs numbers that don’t live up to expectations. Even as companies begin to rehire in light of increasing sales and maxed-out productivity, the unemployment rate will not show improvement as those who have dropped off the rolls and stopped looking for work will start again and will be included in the unemployment numbers.

The Dow Jones Industrial Average, because of the industrial components, should see the results of the recovery first, while retail and other consumer-dependant sectors will lag. The Dow has increased 2.9% from 10,428.5 to 10,725.43 at the close on January 19, 2010. The index should continue to climb in the near term and we should see a close above 11,000. After an increase of over 2.5%, the Dow should see a decrease in the neighborhood of 4% from the peak. I am projecting the DJIA will close on March 19, 2010 at 10,560.

UPDATE: After writing the above paragraphs, the Dow lost 552.45 points in three days. The sell-off demonstrates the way that unknowns can influence the market in ways that forecasts cannot predict. The announcement from China that they would look to curb lending in attempt to reduce the impact of inflation, coupled with the announcement by the Obama Administration of proposed rules that would restrict risk taking by U.S. banks, put fear into investors about the limits of recovery—despite positive earnings statements by Dow components.

A loss of more than 5% points in just a few days was not factored into my previous forecast. I cannot see the market falling too much farther within the next several days, but the mood on Wall Street has been seriously dampened. Any boost we would see from positive earnings statements, like the one this morning from GE, will be muted. The fundamentals of what I stated above should still be in play. Good earnings may stabilize the market and provide some price improvement, but economic factors will pull the market back down by the 19th of March. My revised forecast is for the Dow to close on March 19, 2010 at 10,120.08.

Euro-Dollar Exchange Rate on March 19, 2010 = $1.4445

Many counter-acting forces are currently at play in the foreign exchange market. The U.S. recovery is beginning and may soon advance at a higher rate than Europe given the risks for further turmoil, especially in places like Spain. On the other hand, our domestic recovery will be slow, possibly slower than expected. Slow U.S. GDP growth will continue to weigh on the dollar.

From the beginning of the year through January 19, the Euro-Dollar exchange rate has declined only slightly, from $1.4326 to $1.4302. These gains should be wiped away with a weakening dollar as recovery lags expectations. I am projecting a decrease of 1% in the value of the dollar against the Euro between January 20 and March 19, 2010 to $1.4445 to the Euro.

UPDATE: The Dow’s slide since the above forecast was written is not likely to have a great affect on Euro-Dollar during the next quarter. The rate should remain range-bound, despite dipping to the low end of that range this week. The Dow is more volatile than the dollar, certainly against the European currency. I do not see a reason to adjust the above forecast at this time.

Banking Rules, the Dow, Bernanke, Campaign Finance

While I would like to offer some deep thoughts on the following news items, time only allows me to offer this quick bit of off-the-cuff analysis and opinion.

Proposed Banking Rules
Controlling the risks that banks can take when backed by US taxpayers, sounds much more reasonable than the more punitive fee on transactions. Goldman is the only one to really be hurt by the new rules anyway.

The Dow's Slide
The fear over how China's tightening of lending will restrict growth and slow the global recovery is understandable. Financials, though, should not have this great an impact on the broader market.

The Vote on Bernanke
A question for those thinking of voting against Bernanke: Who would you rather have at the Fed? There's no question that he didn't get everything right going into this mess, and he won't raise rates as quickly as the inflation hawks want him to. You can't punish him for Wall Street's failings, though. And I don't think you can find a better guy to see us through this mess.

Corporate Personhood
The Supreme Court's ruling yesterday that did away with McCain-Feingold restrictions on corporate and union money going to political campaigns sets, I think, a dangerous precedent. We ought to be careful about granting rights to companies and organizations that we normally reserve for individuals. Should corporations have the same free-speech privileges as you or I? If so, what other rights of individuals should they have?

BNSF and Warren Buffet: Does it mean anything?

After the announcement this week that Warren Buffet was going to buy out the remaining bit of Burlington Northern Santa Fe that he didn't already own seemed to spark some debate about what it should mean. I suggest that we might not want to read too much into it.

Buffet deserves a huge amount of deference because of his ability to make money, to make smart choices, to see the fundamentals of the fundamentals, but it might not always be a good idea to think that the common investor, or even an economist, should mimic his actions.

A GDP play was how most people seemed to read it this week. The idea is that as the economy cranks back up so will the fortunes of BNSF. There is truth in it. When cargo falls away to nothing there is nowhere to go but up.

An oil-price play is another way to take it. If the price of a barrel continues to climb, and as the dollar falls, fuel prices will escalate. Trucking becomes increasingly inefficient and rail begins to make a lot more sense for moving freight around this country.

The problem with both of these notions is that any advantage rail has is strictly near-term. Until there is significant investment in the rail infrastructure, until we can actually move more trains and more freight, the growth potential is limited. Expansion of the US rail lines is absolutely necessary. Passenger rail is limited by the constraints on freight rail. When they compete for the same space on the same set of tracks, we are losing some potential in both.

Unless Buffet knows something more about real infrastructure investment, the chances of making huge sums of money in his purchase of BNSF seems unlikely. He'll make some money in the recovery, and he'll make some money as the price of fuel climbs, but it is unlikely that he bought it for any of these reasons.

The two reasons Buffet gave are the more likely reasons than any of the speculative motives: he is always willing to buy more of anything he is invested in---and his father never bought him a toy train when he was a child

Dismissing Slack to Raise Inflation Fears

The Wall Street Journal on Monday (yes, I am that far behind) had a lengthy article on the slack in the economy. And while the article goes in depth on various components of the economy that have room to make up before inflation could ever begin to kick in, they of course get it (purposefully) wrong.

The begin the discussion on track:
The interplay between slack and inflation is at the heart of that decision [for the Fed to raise interest rates]. Slack is important to their equation because, in theory, it should suppress wages and keep inflation down.

You can sense the skepticism there, but it continues:
But if the Fed misreads the dimensions or significance of slack, it could unleash an unwelcome bout of rising prices.

Not wrong, but you're beginning to see their thesis. And then:
The risk of inflation is significant.

Alright, back down. There is a difference between long-term and short-term here. Sure, keeping rates low after the recovery begins kicking in (like the Fed did under a different Administration) could certainly lead to inflation. I'll agree that the timing is critical, but the risk right now is not significant.

Of course, it's not just a question of rates. The liquidity in the system, will need to be absorbed as well. And budget deficits don't help. But durable goods order shrunk last month, the ISM manufacturing index barely crossed 50 into positive territory, and jobs will continue to be a problem for some time. I don't think we're in much danger right now of rising prices.

The article then injects an interesting theory:
If businesses and workers expect more inflation, the theory goes, they start demanding wage and price increases and set off the inflation they fear.

So, I'm a manufacturer, let's say, who believes that the Fed is really mucking things up and inflation is right around the corner. And, though, I haven't seen an increase in raw material prices yet, I'm going to raise prices in a struggling economy to try and recapture some of the money I think I'm going to lose in the future.

Or, I'm a union rep negotiating a new contract, when job losses are happening all around me, and I'm going to demand wage increases for men and women who are grateful to have jobs because I think that the cost of living is going to rise, at some point.

Both things would be a mistake. And, yes, I could see how those things could help stir up inflation, but the likelihood of anyone taking those risks when recovery is still uncertain is pretty low.

Though the article throws in plenty of numbers and some good quotes on the extent of slack in the economy, the purpose of the article is clearly to gin up inflation fears. Maybe it's just a supply-side issue, and the people overly concerned about inflation are just ignoring the demand side of things that becomes increasingly critical when things turn bad. Waiting too long to raise interest rates is dangerous, but raising interest rates will not lead us to recovery.

The Fed Needs to Look to the Future

The FOMC statement released yesterday made it clear that, despite improvements in the economy, the Fed is not interested in raising rates or reabsorbing any of the liquidity out there. In fact, they "will continue to employ a wide range of tools to promote economic recovery and to preserve price stability."

I don't expect a change right now. Raising rates now or trying to get the Fed's balance sheet back to normal anytime soon would shock the system. Now is not the time. But we don't really read the Fed statement to read the committee's take on the current economic stituation. We are looking for some hints to the future. Apparently, the Fed is not looking far enough into the future to even hint in changes in policy. Alright, they "will gradually slow the pace of these purchases [mortgage-backed securities] in order to promote a smooth transition in markets," but this doesn't provide much guidance.
The main concern over rates is the impact on mortgage rates, and thus home purchases. If the Fed raises the target range for the federal funds rate from its current 0.0%-0.25%, the arguement goes, then mortgage rates go up and less people will buy homes. This is true, but not necessarily a bad thing. Many blame the whole housing bubble on Greenspan keeping rates low for so long, letting many people who shouldn't own homes get into them cheaply. Higher mortgage rates could slow recovery, but we face some risk in keeping rates low.

The real problem with low fed rate now, as I see it, is the effect on financial markets. With low rates, the yields that banks make on lending is also low. So, not only are banks reluctant to take on too much risk right now (for good reason), but they also don't have much financial incentive to do so. If the statement had hinted at the possiblity of raising rates even as soon as the first quarter of 2010 this would have gone a long way in getting money flowing again, inspiring banks to lend, helping businesses make the investments they should be making in this downturn.

I certainly agree with the inflation statement:
With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.
When prices are dropping there is little need to raise rates to slow down anything. I would have liked, and it seems like the market would have liked, a stronger hint as to when and how the Fed will reign in all of its liquidity programs and begin to inch up interest rates. It also would have helped people to believe that a real recovery is taking place.

Beware "Grim" Retail Sales Data

It's bad. But it's not that bad. The Commerce Department reported yesterday that retail sales fell 0.1% last month. The figure was a surprise to some because it follows two positive months, and the "cash for clunkers" thing along with a looming recovery were expected to lift sales more. Then when you strip sales of autos and parts, sales dropped 0.6%. This figure should not be surprising given the level of discounting retailers are doing, and the general reluctance by consumers to spend.

Though the WSJ pushes this as "grim data," it is a story about the past, not the future. Beware the negative feedback loop. If a slower sales figure makes us disbelieve a recovery is around the corner, and thus we spend less, then sales will decline again. Consumer spending and consumer confidence will some of the last figures to rise in any recovery. Unemployment will continue to go up though GDP may improve and that will be enough to make people reluctant to spend. There's enough information to say that some segments of the economy may improve quickly, but it would be foolish to bet on a quick recovery. That may be so, but let's not make things worse by getting gloomy over figures that aren't as bad as they seem.

The Meaning and Impact of Cash for Clunkers

With an additional $2 billion being poured into the Cash for Clunkers program, it is easy to define the program as a success. Never mind the fact that there was no foresight into the extent of the demand that depleted the the program's funds in ten days. Even if the program is, on its face, a success, there are plenty of questions about its effect and just what the success might signify.

To me, the number of people who were willing, despite questionable economic times and mounting job losses, to purchase a new car implies a large amount of pent-up demand. People have been holding off purchases because of economic conditions, because of fear, and not necessarily because they can't afford the purchase. Indeed, they are only waiting for signs of stabilization and some strong incentives. Certainly the incentives help, but if there is this much pent-up demand for some thing as expensive as cars, then the demand for other goods is likely to be pretty high. This is a sign to me that recovery could be swift.

Some have said that all the program has done is to pull in sales that would have normally occurred in the next couple of months. And, sure, there is some of that. I think it's more likely that these are sales that should have happened over the last several months. We'll not get back to the normal pace of auto sales for some time, but there are obviously people out there who want to buy cars. With the right incentives, including lower prices, people may again start buying cars and other things like computers or appliances.

Auto dealers have reasons to be happy and sad about cash for clunkers. Without a doubt it is a good thing to have people thinking about buying cars again, even if they don't do it now. Anything that puts buyers on the lot is a good for business. Low inventories because of producer plant shut downs and bankruptcies, may cause some difficulties but it is better than having the opposite problem. It's the back lot at the dealers' that may be the issue. But even if they have the responsibility to disable and scrap these clunkers, it only makes the other used cars on their lots more valuable. They'll find reasons to complain, but the auto dealers (despite the many difficulties of the last several months) have reasons to be happy.

Auto mechanics are also complaining about the program, because people have begun trading in their cars instead of taking them in for repair. I think, though, that taking 200,000 old cars off the road is not likely to have a great impact on the total number of cars rolling into the garage.

What bothers me, as a car guy at heart, is all of the car parts that won't be reused. I've been that guy scouring scrap yards looking for a replacement alternator, radiator, or taillight. I've also known enough people who restore cars and have spent a great deal of energy searching for that elusive part. Now, I doubt that in another twenty years there will be many people looking for a particular piece of chrome on a 1992 F150 or Grand Cherokee, but for every clunker we happily remove from the road a car-ful of useful parts is wasted.

New Standards for Executive Pay

Many people will be lodging complaints about the Obama administration's meddling in the affairs of private companies by imposing controls on CEO pay at firms that have received TARP funds. I'm with those who say that the White House should not be involved in controlling how companies choose to compensate executives. Those companies who have taken TARP funds or bailout money have sacrificed their independence, though, and we should all be concerned about how the heads of these companies are being paid. Does it make sense to have a company that has essentially failed, made bad choices, giving excessive pay to the CEO who was in charge? Shouldn't their be a downside for these guys when they screw up?

The trouble with executive compensation derives from perverse incentives. My beef is with earnings per share. Barely "beating the street" is game companies continue to play. And it works. The street doesn't always care that beating current analysts' estimates might not be best in the long run. Compensating executives on continued earnings or stock growth can lead to short-cutting the company's long-term objectives. But this is only part of the problem. Compensating with stock options often leads management to, again, manage the stock price (or properly manage the street's expectations) and neglect the true well-being of the company.

The real problem, as I see it, is that there is little downside risk to executives. Maybe boards can argue that with enough upside, anything else is downside. We've seen enough companies fail in the last year and executives from those companies walk away with huge packages, that I'm can hardly believe that there is shared risk. A CEO's well-being should depend on the company's well-being. And not just for the current quarter. A pay scheme that allows for a measure of future performance might help align interests. It is easy to believe that some of the drastic job cuts we've seen have been out of management's need to cut costs today, to preserve today's earnings, without regard for the health of the company a year from now. Cutting mid-management professionals, those next-generation executives, will prove to have been a mistake for many companies.

We may object to a government's hand in private industry, but the Obama administration has an opportunity to set standards, essentially guidelines for boards in constructing compensation packages. If they can avoid overreach, they can establish compensation packages that are fair to CEO's and shareholders, and give boards the cover they need to reign in escalating executive pay.

Why I Don't Care about AIG: Outrage and Indifference

We live in hyperbolic times. Extreme reactions are the mode of the day. Everything is the "worst." Everyone has something to be angry about. Me? I couldn't care less.

This whole AIG mess is a disappointment, but it has been since Day One. In some ways it's like watching a friend with a drinking problem get himself into trouble again. Maybe you could be upset about it the first time something similar happened, but when you find out that he's used the money you lent him to buy more booze, you should not be surprised. Or outraged.

Who should I be angry with? AIG and the poor sap the government (we) put in charge? The government officials who "didn't realize" that they had bonuses to pay out? The derivative traders who took the irrational risks in the first place and got us into this whole mess? The new administration who wasn't even in place when we wrote the company the first check? Or Chris Dodd or Barney Frank?

None of them. I can't bring myself to be mad at any of them. Maybe it's because I have other things to worry about. Maybe because I think there are more fundamental problems with our economy than AIG paying out retention bonuses with our money. I now think we should never have got involved. Though there are problems in that.

The question in my mind is How big is too big to fail? Letting Lehman Bros go under spooked the market and we haven't yet recovered (I blame Hank Paulson for this--he, ex-Goldman Sachs, seemed happy to help out his friends, but when someone he didn't like was in trouble, he said "screw 'em"). So maybe letting AIG, who is responsible for insuring a lot of the debt out there, go under would be a bad idea. And I'll definitely agree that there's moral hazard in all of this. It leads to irrational risk taking. If I keep bailing my drunk friend out of jail, when does he ever learn to shape up?

Couldn't we have said that AIG was too big? Couldn't we have forced them to sell off or just dissolve the division that had put them in this position? Why just say, here you go, here's a big check, and in exchange we'll take a stake in this mess of a company?

But we haven't learned the 'too big to fail' lesson yet. When Merrill got into trouble, we pushed Bank of America into taking them, making them bigger in the process. I understood the theory for all of the bail outs at the time, but I'm ready for a little creative destruction. We have a banking and investment system that is all screwed up. They're all tangled up and twisted around, with no one paying for the risks they've taken.

And sure I could be mad at CNBC and all the cheerleaders telling us to buy and buy, all the people saying the market was going up so things must be great, the economy is strong while out in the real world things were turning sour. The media issue is separate. There should be no mistaking that CNBC or the Wall Street Journal is on the side of business. That's your mistake if you thought otherwise.

Really, I'm disappointed. One would have thought that someone would have realized earlier that using lent money to pay huge bonuses was not a good idea. One would have thought that taking a majority stake or any large stake would have given us a seat at the table. One would have thought that the government officials and legislators would have had the best interest of all of us in mind. One would have thought that there were people around who were smart enough to figure out how to get us out of this mess. One would have thought we'd have known better to believe any of this was true. I'm disappointed--with us.

Fiction and the Economic Crisis

So, we're in the middle of a deepening economic crisis, with the Dow losing 45% in the last 15 months, and with around 3 million jobs lost in the last five months. Personally, my own industry is, as an article on the industry stated yesterday, "running off a cliff." While the pain isn't hitting everyone, the economists are scared. The consensus seems to be that we might at least stop the slide downward by year's end, though the job losses will continue to mount in the meantime, making the prospect of a recovery even further in the future. Some think it may well be a decade before we get to the same level of growth we were seeing before this whole crisis hit.

Crisis is always interesting from an artistic perspective. What will the American fiction of the next few years look like? What sort of country will it describe? First, there will be a lot less of it published. With the big publishing houses shuttering divisions, and book stores struggling to keep their doors open, there will be fewer new books. These changes--this crisis--are subjects for another conversation.

The books being written now could very well describe a country in turmoil, lost in a mix of hope and pessimism. Just when things looked up, like the country might be restored and the outlook brighter, greed at every level has driven us to this precipice. And if it's not us falling over that edge, it's the 43,000 workers at GM who will lose their jobs this year, the 10,000 at Boeing. Suddenly, we look at our credit card bills in horror. What was once the normal way of operating now has proved to be incredibly reckless. Our 401(k)s? Don't even look at them. And add a few more years to your planned retirement age. And the mortgage? Even if you're making your payments, knowing that your house has lost 20% of its value makes you question the reasonableness of the purchase.

Thinking about losing your home, though, is as frightening as the prospect of losing your job. Our identities are wrapped up in these things. How lost is a person who has lost either, or both?
How would such a crisis shift his/her perspective? In what way would he overcome?

It is hard to argue against the powerful notion of the American Dream because it is so much a part of our psyche. But we know it fails at times. We know that hard work and the desire for more doesn't save us from ruin. Alternatively, it seems like the country has developed a sense of entitlement. As if we deserve good things to come our way. And if they don't, by God, someone had better step in and make things right. It's at every level. The bank who expects not to suffer when the risks they've been taking have led them to near-collapse. And it's the home buyer who bought well out of his/her price range with a questionable loan who now wants the government to step in and stop the bank from foreclosing.

All of these things are bound to manifest themselves in the fiction we read in the next few years. Maybe these novels will moralize, tells where we went wrong--as if we don't know. Maybe they will offer hope, they will show us an American Spirit that is truer and more noble than the capitalist American Dream. Or maybe they will show a state of ruin in which we will stay and in which we had damn well better find our way, or perish.

Cato protests govt spending in full-page WSJ ad

I suppose it is no surprise that the Cato Institute would oppose government spending. That it would choose to protest government stimulus in a full-page ad in the Wall Street Journal, is a little more surprising. What is really worth noting is that they state, "Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth," and then support the statement with a long list of people who support that statement. My question for the Cato Institute: Where are all the Yale and Harvard economists on this issue?

The ad begins with a quote from the President, "There is no disagreement that we need action by our government, a recovery plan that will help to jump start the economy." Then Cato begins their ridiculous disagreement: "With all due respect,Mr.President,that is not true.

Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we the undersigned do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s “lost decade” in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.

The undersigned include two members of the faculty of my not very prestigious undergraduate alma mater, Metropolitan State College of Denver. Not exactly A-class economists.

Let's look at their arguments. I do think that most economists would agree that the government needs to spend, if no one else will. When things seize up, as they have, the government is the only one with the purse big enough, and the responsibility to move the economy along by spending.

What led to delays in recovery from the Great Depression were attempts to balance the budget which required increased taxation. And Japan's "Lost Decade"? Government inaction was the culprit there. The belief that things would get better without intervention was the problem then, and it is the reason the US government is choosing to act as quickly as possible. Many economists will tell you that if recovery comes swift, it will be in large part because of fed action.

Now, to the belief that tax cuts cure all, we know it's not true. I'd love to shed my "tax burden" as well, but reducing taxes is not going to get us out of this hole. Tax cuts for individuals tend to be saved. How much of last year's stimulus checks actually got spent? And tax cuts for businesses are not going to encourage businesses to hire or increase output when the demand does not exist. It is estimated that every dollar of government infrastructure spending creates $1.59 in GDP growth, while tax cuts generate $1.01. And considering the lack of consumer confidence, expect most of that to be saved.

I tend to support Cato on a lot of issues because of my own libertarian leanings, but we will not find a way out of this problem by telling the government to get out of the way. My question for my Metro State economists, John Cochran and Kishore Kulkarni: What percentage of tax cuts would actually improve economic performance?