Why Does a Two-Year-Old Recovery Feel Like a Recession?

Remembering that a market economy will tend to recover from recession in around 18 months on its own, recovery strategies by government need to affect the general economy within that first year and a half, or it is wasted. Realizing that we need two or three quarters to confirm that we are in a recession, effective action is pretty much limited to a year after the administration discovers that the economy is in trouble. There are no “out years” to a responsible recovery plan.

This recession was set-off by the collapse of a housing bubble[1], whereby prices were artificially high (and climbing) due to decades of questionable federal housing policy. Because mortgages are a large part of banking holdings, and both housing and banking are largely backed by the federal government, when the bubble popped, its effect was pandemic and immediate. The credit markets froze as banks found their portfolios were upside down, and because of that, Fannie Mae and Freddie Mac were technically insolvent. As credit is the cardiovascular system of business, this had the earmarks of systemic breakdown that could threaten depression, rather than just recession. Something had to be done to revive the capital markets, and it was. Businesses are now experiencing recovering levels of activity.

But natural reactions to the cause of the recession, and Washington’s response, are still exerting downward pressure on nearly all non-business, and some business, activity. And this gets into why this recovery is acting like a recession.

The Toxic Asset Relief Program (TARP) was supposed to buy up the ill-advised loans government foisted on banks, but they had been hopelessly bundled in with other securities and sold as big-ticket derivatives to institutional investors both here and abroad, making the finding and procuring of them by government nearly impossible. Much of the allocation was used merely as grants to many banks (others were allowed to fail), and some of the funds are still unspent. Banks largely used the funds to shore up balance sheets – which is fine, as they needed to get rightside up again so they could serve their function in capital markets. This period saw the discussion of businesses that were “too big to fail,” a fiction that was not resolved by those discussions. General Motors, Chrysler and Ford also turned out to be “too big to fail,” but Ford, after looking at the strings attached to federal bailout, decided it could recover on its own. GM was given to the West Wing and Chrysler was given to the UAW (Fiat has since bought majority interest). But the reaction of banks has been to overreact and tighten up lending criteria to the point that it is stifling small business and many individuals from entering into economic activity that they otherwise would.

Since World War II, construction has been a major component driving economic recoveries. Not only does construction of new buildings and factories help make companies become more productive, but it (and new housing) also creates jobs for the overall economy as each order of concrete, for instance, demands workers to do everything from taking the order to delivering it from the warehouse to the building site, necessitating the ordering of more concrete for the warehouse, and so on. This has been stifled by the glut of overpriced foreclosures sitting on the market and high unemployment keeping many potential buyers off the market.

Given that S&P 500’s non-financial companies altogether hold more than $1.1 trillion in cash and short-term investments, it’s not as if America’s biggest companies don’t have the money to invest.  So what’s to blame for the pullback in spending? “It’s a question of why is it that we no longer in a recovery can fund long-term assets – basically 20 years or more – and the answer essentially is that there’s a huge element of uncertainty in this economy,” former Federal Reserve Chairman Alan Greenspan said in a recent interview with The Financial Times [London][2]. You’re not anxious to play Blackjack if the casino is apt to change the rules after the cards are dealt. This is on top of the slow unfolding of ObamaCare, which will only increasingly make employees more expensive to have. There is no incentive for business to invest or hire right now, and every incentive to hold cash for whatever emerges next.

So banks, construction and investment haven’t come out of recession-mode yet, leaving great swaths of the overall economy underserved by key recovery engines.

Consumer spending hasn’t recovered for much the same reason that banks lending hasn’t recovered – they’re gun-shy after having been burnt by over-extension, and the abnormally high unemployment has taken a bite out of discretionary consumer spending. As our economy is 70% consumer-driven, this is not a trivial impediment to recovery.

All of this is happening on top of a generalized realization that government at all levels have reached the natural consequences of over-promising and under-funding, resulting in nationwide layoffs of government employees, keeping unemployment high and concealing whatever private employment is taking place.

Those are the primary factors feeding a jobless and anemic recovery, so any policy aimed at accelerating the recovery must deal with these factors. I have some ideas, but will hold off until next time.


[1] The moral hazard of assuming that those who could not afford a house were entitled to one anyway was set in motion by the Community Reinvestment Act of 1977, and artificially inflated housing prices until the bubble burst, deflating housing prices and rendering millions of mortgages worth more than the homes they underwrote.

[2] Cited in Nin-Hai Tseng, Four ways this economic recovery is different, in Fortune, August 30 2011, p. 31.

… and Now What?

Well, Ben Bernanke gave his Federal Reserve speech at the Jackson Hole [WY] symposium, and he didn’t mention another round of “quantitative easing” (read: printing money), so the Fed isn’t gong to help the president with his “secret plan” for restarting the economy.

Mr Obama has been lamenting that he didn’t get his “Grand Bargain” in the debt ceiling deal, which scares me into thinking that may be his plan – a sweeping new “stimulus” package, tax increases, and reams of new regulations to draw-in fees and fines. He just doesn’t get it.

A trillion dollars worth of stimulus didn’t do anything but push the deficit into Star Wars territory; another round won’t do anything but depress the recovery further. Increased taxes will discourage anyone thinking of hiring from doing so, and more regulations will only further hamper the entities that he needs to flourish. If he wants a dramatic, sweeping gesture that will clear the way for recovery, he could pare back on government activity as much as possible – keep it to helping people, not punishing them and businesses.

If it’s not a grand plan, it’s going to be simple stuff around the edges, again, having no affect other than showing that “he’s trying.” The danger is, and always has been, Congress. They spent us into this, and they are going to have to cut us out of it. The only question is when. The longer they wait, the more pain will be inflicted. The test as to whether they get it will be where they cut. If cuts aren’t to programs that have huge and growing unfunded obligations, they aren’t solving anything. If they make no structural changes to programs that have huge and growing unfunded obligations, they aren’t solving anything.

It will also be interesting to see if Democrats even bother to offer a budget before September 30. Were I a betting man, I’d bet against.

a Memo to Republicans

If they’re not careful, the Republicans could sleep-walk into a repeat of the Sharron Angle fiasco. For those not afflicted with political junkyism – that is to say, those of you out there with real lives to lead – may have overlooked (or per chance forgotten) that Nevada Tea Partyers, after an exhaustive search, found the only living human in the state that couldn’t beat Harry Reid in the fall of 2010. Delaware Tea Partyers made a similar miscue with Christine O’Donnell, although she was more of a stealth nut than Ms Angle. This year’s presidentials provide an excruciating opportunity for Republicans, under heavy Tea Party influence, to show some restraint and cool-headed thought about general elections and how they differ from primaries.

We have the perennial libertarian candidate Ron Paul, who is heavyweight champion of the world of straw polls, but can’t get much further. His nearly anarchical views, however, will play better than usual in this anti-Big-Government mood. I still don’t see him as a serious threat for the nomination.

Then there is Sarah Palin, a gargantuan fundraiser and motivational speaker (to the already convinced), but is too polarizing to win national office. While she enjoys better favorable ratings than most politicians, she also owns more negative ratings than most, and negatives are far harder to shed than positives are to gain.

Michelle Bachmann made the Tea Parties swoon in the run-up to this silly-season, but two things have happened that should sink her chances – she is gaffe-prone, and Rick Perry has entered the race. These matter because the former just gives free material to the opposition as distraction from the issues (on which they can’t win), and the latter contrasts her with someone who is also attractive to Tea Partyers but has actual executive experience and a defendable record of accomplishment.

We might yet see another candidate on the Republican side – Representative Paul Ryan (R-WI), author of the GOP FY2012 budget. He’s a serious player, but a bit wonky, lacking an easy charisma. Mr Ryan is excellent on budgets (and God knows, we need that!), but a tabula rasa on foreign matters (and God knows we need someone conversant with the rest of the world!). I don’t see him – particularly as a late entrant – as a serious threat to capture the Republican flag in 2012.

What the Tea Parties must remember is that for the general election, the Republicans need to field a counter-Obama, not an anti-Obama. Both camps need the Independents in order to win, and a low turnout favors the incumbent – the best organized will probably net a higher percentage of a thin turnout, and Democrats, in general, and Unions and Blacks, in particular, are historically better organized then Republicans. Tea Parties are capable of mounting an impressive Get-Out-the-Vote effort, but it must be remembered that these really are grassroots people. They are political neophytes, especially at the national level. The candidate must generate enthusiasm in not-Obama voters, but must do so without high negatives. This should be rather easy this cycle, as the incumbent has most Independents looking for an alternative to vote for. Republicans need an alternative, not a mirror-image extremist.

The race, as I see it now, will coalesce into a dual between Mitt Romney and Rick Perry. Both can appeal to Independents (Romney leads here), and both can energize the Republican base (Perry leads here). Each campaign should begin (today) working with the other candidate in mind, because each needs to tack a different course through the primaries. Both should scrupulously follow Ronald Reagan’s Eleventh Commandment and not beat each other up – sell themselves to the voters rather than trashing their opponent.

This election is about more than any candidate, or even Barack Obama. The current administration is out of control because it has yet to demonstrate that it understands how this country works. Nothing they’ve tried has worked, and nothing they’ve tried would have passed a simple referendum. They are operating in the dark, and the importance in 2012 will be to replace them, and if the Tea Party doesn’t go off the deep end, a la Nevada or Delaware, the actual Republican candidate doesn’t really matter. Can’t be worse.

Here’s an Idea

Consumer confidence is at an all time low. More people believe that the country they give their children will be worse than the one they got from their parents than at any time since that question has been asked. Our “recovery” is European normality (flat GDP growth, 9+% unemployment). Our foreign policy makes our allies nervous and delights our adversaries. Our debt has crossed into banana republic territory at over 100% of GDP. Congress seems incapable of getting anything other than meaningless cosmetics done, and our president has yet to tell us how he intends to proceed (he does, he tells us, have a secret plan that he will reveal to the SuperCommittee – just as soon as Congress gets back from vacation). Nobody believes it will contain anything new, nobody believes it will contain anything other than diddling around the edges (payroll tax holidays, patent reform, trade deals he has had on his desk since day-one, etc).

This all leads me to an idea for a Republican slogan for the upcoming election – Hope and Change!

the Rest of the Year is Yours

We got to Cost of Government Freedom Day on Saturday, August 13. We worked 41 days to pay for the $1.5 trillion federal deficit; 62 days to pay for the $2.3 trillion federal non-deficit budget; 44 days to pay for the total of $1.6 trillion of state and local government spending; 49 days to pay for the $1.8 trillion cost of complying to federal regulations; 77 days to pay for the $2.8 trillion direct costs of federal regulations themselves[1]. That’s 273 days of your labor to pay for the cost of government – 75% of the year, you’re working for everybody else, 25% of the year you’re working for yourself and your family[2]. And liberals want more!

Wonder why people feel like we’ve lost our country? We have, and it’s being siphoned off by those we elect to “represent” us. By spending their taxpayer-paid days promising voters free this and free that; mandating activity by states or individuals with only partial or no funding; regulating with a sledgehammer and economizing with a scalpel; stealing money we have put into Social Security and Medicare (replacing it with Treasury Bonds that we must buy back in order to pay our own benefits); voting themselves pay raises at midnight sessions; photo-op’ing their way around the country and calling it official government business – the list goes on ad nauseum. The fact is, the government’s chief constituent is government. In their view, we are there just to pay the bills, and if not quickly enough, then we aren’t giving our “fair share.”

Yes, the perpetrators of these obscenities are politicians, but the responsibility is ours. The American polity has become lazy, complacent and out-of-touch with what’s being done to us in our name. We have allowed our federal government to evolve into a crony-driven ruling class that operates the political and economic mechanisms to grow their own power and to widen their influence-peddling footprint.

To paraphrase Britain’s Ms Thatcher, Liberalism works until you run out of everybody else’s money. Well, we’re three-quarters of the way there.


[1] These numbers were calculated by taking the cost of each category and dividing by the per working capita national income, to find the amount of each category assigned to each worker, and dividing that by eight to find the number of days of work it would take to pay that bill.

[2] By the way, it takes 19 days to pay for defense (which includes Iraq, Afghanistan and the intelligence budget) and 41 days to pay for entitlements. It took 5½ days just to pay for servicing the national debt (before President Obama took office).

Fourteen Democrats Could Save Obama’s Presidency

Some very wise advice to a young pilot went like this: “Whatever happens, don’t forget to fly the airplane.” Standard & Poor’s warning shot across the administration’s bow is telling the president to “fly the airplane.” All the talking heads (FOX included) are focusing on how unfair this downgrade is – pointing to France as a AAA-rated country, and not believing that we are worse off than France. It’s as if they didn’t read the report. What bothers S&P is this administration’s lack of recognition that a problem even exists. President Obama had to be dragged kicking and screaming to the table on debt-reduction (his budget called for another $1.4 trillion in deficit spending, and his first position on raising the debt-ceiling was “a clean bill” – no conditions or discussion about fiscal responsibility). Treasury Secretary Timothy Geithner’s reaction to the S&P downgrade was to call the agency “irresponsible” for insinuating that America has a serious spending problem. It’s not like they haven’t warned us, several times, that a lack of seriousness would result in a downgrade.

Giving the president the benefit of the doubt, I will say that in the first two years of his administration, he was implementing an agenda he thought to be “good for America.” Since the 2010s, he has been defending what he did before, assigning blame for the results to everything but policy. My best guess is that he is now in full re-election mode – not problem-solving mode. That effort is failing.

Barring unforeseen developments, I can see only one single action that would probably save his presidency (from both history and the ballot box) – lead the neutering of ObamaCare. Only Democrats believe (or say they do) that this mish-mash of programs won’t melt-down into a massive wealth-sink on the economy. He can chalk it up to timing rather than policy, but stump for an indefinite delay in its implementation. All he needs is 14 Senate Democrats – the House will pass it enthusiastically.

Ms Pelosi was right, and now that we’ve seen what’s in it, the program is even less popular than it was when it passed. The “stimulus” never enjoyed majority (or even plurality) support, and now that it obviously hasn’t worked, it, too, is less popular now than when it passed.

For better or worse, Barack Obama is President of the Liberals, for the Liberals, and by the Liberals. He had his way for two years, and only increased the antipathy of non-liberals; if he was ever serious about being post-partisan, it’s now time to prove it. Admit that the economy hasn’t responded as well as they thought it would to their recovery strategy, and that increasing entitlements was piled-on too soon. We should now back off and allow the economy to recover before adding sweeping change to one-sixth of it. That will speak volumes to Independents and moderate Republicans, neither of which are thrilled with the field of candidates so far – but neither of which will vote for Obama if he continues down the road he has charted.

Otherwise, he’s headed for the Jimmy Carter Wing of the What The Hell Were We Thinking Museum.

Kabuki of the Inevitable

Well, the great debt-ceiling debate has resolved itself into a program that no one likes. This was inevitable. The left was never going to like anything that even looked like a compromise on their ability to throw other people’s money into the wind; Tea Partyers were never going to like anything that even looked like a compromise on their ability to constrict Congress’ ability to throw other people’s money into the wind.

But we knew this was going to happen – both sides were going to dig in their heels, and like a bunch of eight-year-olds, stick out their lower lip for the cameras, and call each other names. This would go on until the very last minute, at which point, they would cobble together some horrible bill that shoved the real work onto future presidents and Congresses. Ho hum.

Yes, I know, they’re calling for yet another committee to draw up plans for an up-or-down vote in both Houses (under the pain of ruinous cuts in defense and Medicare). How like Congress to toss the hot-potato to as yet unnamed short-straw holders, threatening to damage the nation if they don’t do what these guys were supposed to do in the first place. And President Obama, apparently forgetting that to be the adult in the room, one has to actually be in the room, is gently chastising participants for not raising taxes, just to be fair (as though taxpayers had any hand in creating this mess). “We can’t balance the budget just by cutting spending,” he says, as though the debt isn’t entirely a creature of willy-nilly spending.

At any rate, have a seat, take a deep breath and enjoy a vodka … we have until September 30 when the current fiscal year ends, meaning there are less than sixty days to re-argue everything we’ve been listening to for the last sixty days. Enjoy.