Consumer Confidence Boom!

Consumer confidence has hit a 16 year high.  That this comes two month into a new presidency is surely just a coincidence.  As shown in a previous blog, the last two presidents have the worst economic records in more than 50 years.  George H. W. Bush and Jimmy Carter, both one term presidents, presided over better economies than Obama and W, who each somehow served two terms.  By historical standards, the last 16 years have been a disaster.

 

From JFK to Clinton's final year, the US growth rate averaged 3.6%.  From the beginning of George W. Bush to the end of the Obama presidency, the US growth rate was 1.8%!  In the last 16 years, the growth exceeded the average of 3.6% only once: 3.8% in 2004, nicely timed for W's reelection.  What if the last 16 years had just been average?  Let's do some math!

 

Bob puts $100 in a CD that offers 1.8% interest and another CD that offers 3.6%.  After a year, the difference is paltry: $1.80.  After 5 years, the gap is $10.01.  At 10 years, it is $22.90.  At the end of 16 years, Bob finds that his CDs are worth $133.03 and $176.10.  Of course, on this scale, $43 is not a big difference for a 16 year investment.  But what if we were talking about a trillion dollars?  That would be a gap of $430 billion!  The economy would be 30% larger than it is today and maybe the debt wouldn't be $20 trillion.

 

Trump has clearly shown his intent to abandon many of the policies of the last 16 years.  He didn't like Bush's activist foreign policy and has decried Obama's Affordable Care Act.  There is the promise of unleashing the economy from the mountains of regulations that have accumulated.  The long blocked pipelines have been approved.  It is clear that business has an ally in the White House rather than an adversary.  The economy improves when businesses grow, not when government grows.

Whose Economy Is It?

Trump taking credit for Obama's economy is like someone inheriting millions from his dad and bragging about what a smart businessman he is.

Oliver Griswold, Twitter

 

As seen on Facebook, this is pretty funny. Throughout the Obama years, the anemic economy was blamed on the mismanagement of the Bush Administration. I recall posing the question that, if Romney won, would he be inheriting the Bush or Obama economy? Indeed, Obama's first term saw an average growth rate of less than 1%. His second term was quite a bit better at 2.1% but still anemic by historic standards. Let's explore the numbers, shall we.

 

 

Obama had inherited the worst economy of any president shown and it got worse. He is the first president since Hoover who never saw a year break 3% growth. His best year – 2010 - is worse than Bill Clinton’s worst year -1995. George W Bush does not compare well to Clinton either. The direction of the economy since Clinton left office has not been promising.

 

 

Both Bush and Obama had good excuses for a weak start. Bush had to contend with the Tech Bubble bursting and then 9/11. Obama started his presidency with the economy plunging into the deepest recession since the Depression. On the other hand, both Bush and Obama entered the presidency with plans to expand government. Bush had No Child Left Behind and the Medicare Part D Drug Benefit already in the queue when 9/11 prompted the creation of the Department of Homeland Security. Likewise, Obama entered with the promise of a health care overhaul, an $800 billion stimulus, and what eventually became the Dodd-Frank Act to further regulate the financial sector. Therefore, both entered in difficult economic times with plans to expand the scope and expense of government.

 

President Clinton’s first term had a very respectable average growth rate of 3.3%, despite his raising taxes and trying to nationalize the healthcare system. In 1996, he declared the era of big government to be over. His second term saw a phenomenal average growth rate of 4.4%. Moreover, the federal debt shrank during this period and the government was running surpluses.

 

Expectations play a big role in business investment. If the president comes into office with plans to increase the cost and burden of government, business waits to see how much more burdensome it will be and if its business model will still be profitable. On the other hand, if a president announces plans to reduce the cost of government and reduce regulations, capital starts flowing since the future environment will be better than the current one. Thus, Trump’s stated goals of repealing the Affordable Care Act (less burden), cutting taxes (less cost), cutting regulations (less burden), and reducing the federal workforce through attrition (less cost & burden) all indicate that the business landscape will be better tomorrow than it is today. The Trump Economy started on November 9th.

National Default

I am stunned by how many noted economist are reporting that a failure to raise the debt ceiling equals default on the debt.  Somehow, not incurring additional debt equals defaulting on the existing debt.  How does that work?  With the money coming in, the government can easily pay the interest on the $16 trillion debt, send out Social Security checks, pay Medicare, and maintain pensions.  Those would be the debts.  Everything else is just spending that can be cut without risk of default.

 

Stranger still, I read one fellow who said he was opposed to using the debt ceiling as a route to cut spending but was okay with the idea of shutting down the government to put a brake on spending.  Doesn't a failure to raise the debt ceiling do exactly that?  It will cause the government to shutdown all 'non-essential' functions so that it runs on incoming cash rather than the Credit Card of China.  The reason everyone uses 'default' is to instill panic in the populace so that the spending can go on and on.  The spending will stop eventually, on terms we won't like.  Better to stop it now while we still have some hope of digging out of the hole.

 

On a related point, big government tends to slow growth.  Our best hope in recovering is a high growth rate which is becoming more and more out of our reach as government expands.  Look at Europe: massive governments and sluggish economies.  Why go down that path?

The Money Illusion

Some months ago, I heard Scott Sumner (PhD Economist) on a Podcast I follow (EconTalk with Russ Roberts) and was intrigued.  He kept arguing for growth in Nominal Gross Domestic Product (NGDP), which is denominated in current dollars which may be less valuable than last year's dollars.  Thus, NGDP can be different from Real GDP.  One can have nominal growth simply by printing more currency even in an economy with RGDP of zero.  This seems somehow wrong to me.  It's like he wants to trick the economy into thinking there is growth even when there isn't.  Nonetheless, I found his blog and have followed it since then.  He says the darnedest things and makes a surprisingly good case.

Sumner holds that the Federal Reserve should have a targeted NGDP, assuring that the economy is constantly expanding.  I have long thought that money was supposed to be a reliable store of value but Sumner is proposing to forever decrease its value through this constant rate of inflation.  I was long a supporter of the gold standard but that is unrealistic since the supply of gold is not growing at a rate equal to the growth of world economies.  As such, the gold standard would effectively shrink the money supply.  Likewise, it is difficult to target fiat money to the actual growth rate and that might, in recessions, prove to be a problem by again shrinking the money suppy (as happened in the Great Depression).  So, I find myself in agreement with much of what he has to say but still find the idea of constant, planned inflation disagreeable.

Some other things Sumner has declared have also grated on me.  For instance, he proclaims that we have a very tight money supply, which seems impossible with all the Quantitative Easing.  How can you pour cash into a stagnant economy and not have inflation?  He has explained but that bit has yet to make sense for me.  Still, he keeps me coming back and has surely changed some of my thinking.  He may yet win me over to his NGDP targeting and I don't think I will forgive him if he does.

Check out his blog here:

http://www.themoneyillusion.com/

How's that Stimulus Working?

Back when the stimulus was being discussed, I said it was folly. It wouldn't work. It was like taking water out of one end of the pool, poring it back into the other end, and concluding that there was now more water. It has been a year and a half and the economy is sputtering. There is talk of a double-dip recessions. Gosh, all those smart people in Washington somehow didn't see this coming but yours truly wrote a blog on February 5, 2009 called 'Stimulus Stupidity.' How does that happen? Is it possible that my mere minor in economics can trump the multiple PhDs in Obama's economic team?

Much of economics is common sense. You don't encourage job creation by making it more expensive to create jobs. You don't encourage working by increasing the tax rate. Nor do you encourage work by constantly extending unemployment benefits. In order to spend money, the government must first acquire it through taxation; therefore, it is incapable of 'stimulating' an economy through spending. However, it could stimulate an economy by taking less money (i.e. cut taxes). The Obama Administration is doing the opposite of these common sense measures and is surprised the economy isn't growing.

VAT

The balloon has been floated. The debt is so bad and so out of control that the US may need to institute a Value Added Tax, basically a national sales tax, in order to raise sufficient revenue to stave off bankruptcy. Amazing. Didn't Obama promise not to raise taxes on anyone earning less that $250K a year? A VAT will raise everyone's taxes, no one exempted. Prices for everything will go up, even items supposedly exempt from the tax. For example, let's say apples are exempt. The trucks that deliver them aren't, nor will the gas that fuels the trucks be. As transport costs rise, the price of tax-exempt apples will go up. What happens when prices go up? Demand falls?

One should think of the economy as a race horse and the government as the jockey. The heavier the jockey (government taxes/regulation), the slower the horse (economic growth). Most of Europe has the VAT and look at the economic growth and unemployment numbers. It is not an example that the US should follow.

If you want more of something, subsidize it. If you want less of something, tax it.