Message: A Long Recession Already by any Standard.
A Long Recession Already by any Standard.
This recession from peak (November 2007) to present is roughly 16 months, putting it in the category of the longest lasting recessions in US history. Of course we need to make clear that the current Administration inherited this recession in the event there was any confusion on that subject. I have heard that for three months now and frankly, it doesn't make it any better or worse for any businesses or individuals we talk with. The implication is that the prior Administration caused it, but every person willing to own up to the truth knows it was a combination of lack of oversight by the prior Administration, policies promulgated by the Administration before that, Congressional policies and bald-faced denial of the problems when presented, Fed monetary policy, and as always, a handful of unscrupulous individuals in industry determined to squeeze out every nickel of personal gain they could get. When you are talking the amounts of easy money that was out there for the unscrupulous people (in industry, Congress, and the several Administrations overseeing the creation of this mess), you get these kind of excesses and this kind of crushing recession.
The problem we are having now is not the deep recession. It is bad no doubt, but as history shows, even bad recession will turn around. No the problem is how we are handling it. The Bush Administration was too hands off, so much so that it did not require the oversight agencies to actually perform oversight. The rules were in place, they were just not enforced and the Executive branch was not requiring enforcement. Ironic, isn't it as enforcement is the Executive's primary role. The Bush administration parroted the free market mantra, but it didn't really know what it was saying. It was not the Reagan free markets that worked so well. Bush initiated steel tariffs, pursued a weaker dollar, initiated massive new spending entitlements (e.g. Medicare prescription coverage). His 'compassionate conservatism' mixed and matched policies that created massive spending without the massive power of the supply side initiatives under Reagan. He did get some of it right but he hamstrung the benefits with his social policies. Thus a mess.
The new Administration looks only at the supply side aspects of the Bush administration and labels that as the reason for failure. That is wrong as history shows. Kennedy, Reagan, Clinton (capital gains tax cuts, welfare reform/entitlement reduction), and even Bush II with his second tax incentive package again showed that supply side incentives really do rev up economic activity AND bring in increased tax revenues despite lower tax rates. It is the SPENDING that kills the budget because Congress and the Administration see all those dollars and go on spending sprees that create huge burdens we then struggle under when the economy, as now, goes belly up.
Anyway, Obama carefully points out the 'failed ways of the past' with each speech as he pushes his massive spending and social engineering budget and 'stimulus' package. The irony is, HIS package is the worst part of the Bush package, i.e. the massive, massive government spending. Indeed his is far worse as his debt creation is greater than the total of all prior presidents combined.
This is precisely the kind of spending and programs used before in our past. It was done in the 1960's and that threw us into the horrible malaise of the 1970's, the other really, really bad economic period in the US outside of the current one and . . . the Great Depression. That spending in the 1960's on the Great Society and the 1970's on the regulation (and not all of it was bad, as we had to clean up the water and air) put us in a long period of economic malaise where the free market could not work due to price and wage controls (Nixon), mandated mileage standards that produced an auto industry that could not compete globally (Carter), and a multitude of big government, centralized planning attitude that our country was not founded upon. We struggled until the yoke was thrown off in the 1980's.
Government Spending did not End the Great Depression.
That brings us to the other period of massive spending and central government growth, the Great Depression. The stock market crashed in the late 1920's as the Fed tried to quash growth and the specter of inflation that it thought had to arise given the roaring US economy. It hiked and hiked rates, the final hike an unreal 1% jump until it succeeded in slowing the US economy. It slowed it alright. The stock market crashed and with the trade and tariff wars the US helped spur, the US economy along with the world collapsed. Over a third of all US banks closed, unemployment at similar levels, soup lines, you name it.
Roosevelt thought the answer was government spending, the old 'pump priming' plan. The government spends some money and that gets others to do the same. Keynes said you could pay a fellow to dig and fill holes in the ground and that would provide the stimulus because he would go out and spend the money. The government basically did that and the fellow did spend the money, but it never went past that. Government spends to pay the guy to paint the Golden Gate bridge, dig a ditch, fill a ditch, build a bridge, etc. Once the painting was done, the hold dug, the bridge built, the feds stopped spending, the worker spent his wages, nothing happened. More stagnation. So, more government borrowing to spend on more holes, painting, bridges, etc. and the cycle repeats.
Current scholars of the Great Depression say that this very act of diverting economic capital into these 'garbage in, garbage out' make work programs bleeds the economy of money it needs and thus actually PROLONGED the Great Depression many years. The economy did not get the money as the federal government cornered the market on industry and sucked up all the funds to do so. Indeed we did not breakout from the Depression until WWII.
And you know what? We were WAY, WAY behind the Germans and the Japanese in technology because our industry had basically done nothing during the big government spending Depression years. We had to play catch up, and the GREATEST DISPLAY OF THE POWER OF CAPITALISM ever resulted as we bridged the technology gap between us and the Axis powers in a matter of a few short years. We not only conceived and then produced the best war machines the world had seen in a short period, but we also conceived the MANUFACTURING PROCESSES that allowed us to produce them quickly and cheaply. When the US entrepreneurs and workers were unleashed the results were nothing short of astounding. Germany did not think we could do it. Some in Japan feared awaking the 'sleeping giant.'
The Current Plans are a Throwback to the Old.
We awoke, but now we are being put back to sleep by the 'Europeanization' of our economy as we move toward massive government spending, nationalizing healthcare, the Executive acting as the 'Super CEO' for US businesses, replacing CEO's and making decisions for the companies.
First, where in the Constitution does it authorize this executive authority? Hint: NOWHERE. That begs the next question: why are we not rioting in the streets similar to the Europeans protesting the G20? Our rights are being taken in front of us without a whisper of protest. There are some getting involved in the 'Tea Parties,' but where are the advocates filing lawsuits to stop this action so that the Supreme Court can get into this power grab and put a stop to it?
Second, we have a President with no business experience and that has not, to our knowledge, held a post-graduate job for a for profit entity that did not receive large portions of its funding from the federal government. Not really the savvy business type you want to run a company and get it out of financial trouble. Yes, but what about his advisors? Larry Summers never ran a business; he is an ivory tower type spending most of his life lecturing or getting paid by the government. He was Energy Secretary under Clinton and did a fairly terrible job. There is another irony with Summers as well. A scholar that denies the leading scholars on the Great Depression and the historical, empirical evidence of the lack of impact of government spending, at least as far as improving the economy and our standard of living.
The Current Recession. Why not just spend our way out?
As noted above, this has already been a long recession by US and indeed global standards (throwing out Japan's 12 year depression starting in the 1980's), and now we are promulgating policies that duplicate those of the other long recession periods and indeed the Great Depression itself, namely massive government growth and massive growth in government spending.
But even if history shows that 'pump priming' doesn't work, it still appeals to people: get the money out in the system and let them spend it, thereby generating economic activity. Problem is, and sadly so, if you give it to the low end workers they spend it on basics needed to live, e.g. gasoline, food, rent/mortgage. Those areas DO NOT create more economic activity. You have to get money in the hands and provide incentives to those that will create new companies and technologies and thus new jobs. That is how you get out of these economic depressions.
Think about it, if more government spending worked, why would we only spend a measly 5 to 7 trillion dollars? The Obama administration says that for every dollar spent it will produce $1.50 in economic activity. If that is the case spend $10T or more and get $15T back. What a deal. Spend $1 to make $1.50. No businessman would turn that down.
Sounds great, but it doesn't work. As we have discussed, history is replete with attempts to spend our way to prosperity and each time it failed and failed miserably. And what of that $1.50 you get back for the $1 spent? EVEN IF THAT WERE TRUE, and history shows it is not, that $1.50 would be worth less than $1.50 was before the spending. Why? Because this kind of spending sends your currency down as if a rock was tied around its neck. Massive spending debases your currency. Just look at the recent bond sales needed to fund the stimulus. The US is the gold standard for bonds, but we had to pay a lot more interest last week to sell our bonds than normally required all because the trillions of dollars we are spending on these programs that many around the world don't think will work. So, a $1 spent today, even if it could return $1.50 down the road, would not really return $1.50. Indeed if we continue spending such massive amounts it will return less than the inflation adjusted value of the dollar initially spent. That is no deal. That is a recipe for prolonged economic malaise as we have seen in our past.
God help us......No one else seems to want to....
This recession from peak (November 2007) to present is roughly 16 months, putting it in the category of the longest lasting recessions in US history. Of course we need to make clear that the current Administration inherited this recession in the event there was any confusion on that subject. I have heard that for three months now and frankly, it doesn't make it any better or worse for any businesses or individuals we talk with. The implication is that the prior Administration caused it, but every person willing to own up to the truth knows it was a combination of lack of oversight by the prior Administration, policies promulgated by the Administration before that, Congressional policies and bald-faced denial of the problems when presented, Fed monetary policy, and as always, a handful of unscrupulous individuals in industry determined to squeeze out every nickel of personal gain they could get. When you are talking the amounts of easy money that was out there for the unscrupulous people (in industry, Congress, and the several Administrations overseeing the creation of this mess), you get these kind of excesses and this kind of crushing recession.
The problem we are having now is not the deep recession. It is bad no doubt, but as history shows, even bad recession will turn around. No the problem is how we are handling it. The Bush Administration was too hands off, so much so that it did not require the oversight agencies to actually perform oversight. The rules were in place, they were just not enforced and the Executive branch was not requiring enforcement. Ironic, isn't it as enforcement is the Executive's primary role. The Bush administration parroted the free market mantra, but it didn't really know what it was saying. It was not the Reagan free markets that worked so well. Bush initiated steel tariffs, pursued a weaker dollar, initiated massive new spending entitlements (e.g. Medicare prescription coverage). His 'compassionate conservatism' mixed and matched policies that created massive spending without the massive power of the supply side initiatives under Reagan. He did get some of it right but he hamstrung the benefits with his social policies. Thus a mess.
The new Administration looks only at the supply side aspects of the Bush administration and labels that as the reason for failure. That is wrong as history shows. Kennedy, Reagan, Clinton (capital gains tax cuts, welfare reform/entitlement reduction), and even Bush II with his second tax incentive package again showed that supply side incentives really do rev up economic activity AND bring in increased tax revenues despite lower tax rates. It is the SPENDING that kills the budget because Congress and the Administration see all those dollars and go on spending sprees that create huge burdens we then struggle under when the economy, as now, goes belly up.
Anyway, Obama carefully points out the 'failed ways of the past' with each speech as he pushes his massive spending and social engineering budget and 'stimulus' package. The irony is, HIS package is the worst part of the Bush package, i.e. the massive, massive government spending. Indeed his is far worse as his debt creation is greater than the total of all prior presidents combined.
This is precisely the kind of spending and programs used before in our past. It was done in the 1960's and that threw us into the horrible malaise of the 1970's, the other really, really bad economic period in the US outside of the current one and . . . the Great Depression. That spending in the 1960's on the Great Society and the 1970's on the regulation (and not all of it was bad, as we had to clean up the water and air) put us in a long period of economic malaise where the free market could not work due to price and wage controls (Nixon), mandated mileage standards that produced an auto industry that could not compete globally (Carter), and a multitude of big government, centralized planning attitude that our country was not founded upon. We struggled until the yoke was thrown off in the 1980's.
Government Spending did not End the Great Depression.
That brings us to the other period of massive spending and central government growth, the Great Depression. The stock market crashed in the late 1920's as the Fed tried to quash growth and the specter of inflation that it thought had to arise given the roaring US economy. It hiked and hiked rates, the final hike an unreal 1% jump until it succeeded in slowing the US economy. It slowed it alright. The stock market crashed and with the trade and tariff wars the US helped spur, the US economy along with the world collapsed. Over a third of all US banks closed, unemployment at similar levels, soup lines, you name it.
Roosevelt thought the answer was government spending, the old 'pump priming' plan. The government spends some money and that gets others to do the same. Keynes said you could pay a fellow to dig and fill holes in the ground and that would provide the stimulus because he would go out and spend the money. The government basically did that and the fellow did spend the money, but it never went past that. Government spends to pay the guy to paint the Golden Gate bridge, dig a ditch, fill a ditch, build a bridge, etc. Once the painting was done, the hold dug, the bridge built, the feds stopped spending, the worker spent his wages, nothing happened. More stagnation. So, more government borrowing to spend on more holes, painting, bridges, etc. and the cycle repeats.
Current scholars of the Great Depression say that this very act of diverting economic capital into these 'garbage in, garbage out' make work programs bleeds the economy of money it needs and thus actually PROLONGED the Great Depression many years. The economy did not get the money as the federal government cornered the market on industry and sucked up all the funds to do so. Indeed we did not breakout from the Depression until WWII.
And you know what? We were WAY, WAY behind the Germans and the Japanese in technology because our industry had basically done nothing during the big government spending Depression years. We had to play catch up, and the GREATEST DISPLAY OF THE POWER OF CAPITALISM ever resulted as we bridged the technology gap between us and the Axis powers in a matter of a few short years. We not only conceived and then produced the best war machines the world had seen in a short period, but we also conceived the MANUFACTURING PROCESSES that allowed us to produce them quickly and cheaply. When the US entrepreneurs and workers were unleashed the results were nothing short of astounding. Germany did not think we could do it. Some in Japan feared awaking the 'sleeping giant.'
The Current Plans are a Throwback to the Old.
We awoke, but now we are being put back to sleep by the 'Europeanization' of our economy as we move toward massive government spending, nationalizing healthcare, the Executive acting as the 'Super CEO' for US businesses, replacing CEO's and making decisions for the companies.
First, where in the Constitution does it authorize this executive authority? Hint: NOWHERE. That begs the next question: why are we not rioting in the streets similar to the Europeans protesting the G20? Our rights are being taken in front of us without a whisper of protest. There are some getting involved in the 'Tea Parties,' but where are the advocates filing lawsuits to stop this action so that the Supreme Court can get into this power grab and put a stop to it?
Second, we have a President with no business experience and that has not, to our knowledge, held a post-graduate job for a for profit entity that did not receive large portions of its funding from the federal government. Not really the savvy business type you want to run a company and get it out of financial trouble. Yes, but what about his advisors? Larry Summers never ran a business; he is an ivory tower type spending most of his life lecturing or getting paid by the government. He was Energy Secretary under Clinton and did a fairly terrible job. There is another irony with Summers as well. A scholar that denies the leading scholars on the Great Depression and the historical, empirical evidence of the lack of impact of government spending, at least as far as improving the economy and our standard of living.
The Current Recession. Why not just spend our way out?
As noted above, this has already been a long recession by US and indeed global standards (throwing out Japan's 12 year depression starting in the 1980's), and now we are promulgating policies that duplicate those of the other long recession periods and indeed the Great Depression itself, namely massive government growth and massive growth in government spending.
But even if history shows that 'pump priming' doesn't work, it still appeals to people: get the money out in the system and let them spend it, thereby generating economic activity. Problem is, and sadly so, if you give it to the low end workers they spend it on basics needed to live, e.g. gasoline, food, rent/mortgage. Those areas DO NOT create more economic activity. You have to get money in the hands and provide incentives to those that will create new companies and technologies and thus new jobs. That is how you get out of these economic depressions.
Think about it, if more government spending worked, why would we only spend a measly 5 to 7 trillion dollars? The Obama administration says that for every dollar spent it will produce $1.50 in economic activity. If that is the case spend $10T or more and get $15T back. What a deal. Spend $1 to make $1.50. No businessman would turn that down.
Sounds great, but it doesn't work. As we have discussed, history is replete with attempts to spend our way to prosperity and each time it failed and failed miserably. And what of that $1.50 you get back for the $1 spent? EVEN IF THAT WERE TRUE, and history shows it is not, that $1.50 would be worth less than $1.50 was before the spending. Why? Because this kind of spending sends your currency down as if a rock was tied around its neck. Massive spending debases your currency. Just look at the recent bond sales needed to fund the stimulus. The US is the gold standard for bonds, but we had to pay a lot more interest last week to sell our bonds than normally required all because the trillions of dollars we are spending on these programs that many around the world don't think will work. So, a $1 spent today, even if it could return $1.50 down the road, would not really return $1.50. Indeed if we continue spending such massive amounts it will return less than the inflation adjusted value of the dollar initially spent. That is no deal. That is a recipe for prolonged economic malaise as we have seen in our past.
God help us......No one else seems to want to....
OBAMA, GM: YOU BREAK IT, YOU OWN IT
By DICK MORRIS
By DICK MORRIS
GM, now renamed Government Motors, has a new CEO: President Barack Obama.
By replacing the head of the company and demanding a restructuring of its board in return for further TARP aid, Obama has taken upon himself the responsibility for the future of the company. As Gen. Colin Powell said when Bush was considering invading Iraq and toppling the Saddam Hussein government there: "If you break it, you own it." Now it is Obama's company.
This move will backfire big time! The auto giant is very, very unlikely to be saved by this current TARP infusion. Doubtless it will need more in the near term. But the resentment now focused on the management of the company will then turn to Obama. Having demanded a replacement of the management, it is he who will be held responsible for the company's future.
And each time GM asks for more money, Obama will face a choice: take personal responsibility for laying off 100,000 auto workers or anteing up the additional cash. By inserting himself so deeply into the management of the company, Obama makes himself central to its future. If Obama lets the company fail, having already extended credit, he will have all of Michigan on his case. If he keeps coming up with more and more tax money, he will earn the contempt of the voters.
Socialism has its price. By taking over the management of a company, you become the determinant of its fate in the public's mind.
Obama does not seem to realize that government takeover is the beginning, not the end, of the problem. He should have stuck with being president and left making cars to others.
And, as the new CEO of General Motors, what will his policy be on corporate compensation? Will the public tolerate his letting his new company pay salaries sufficient to attract the talent necessary to salvaging the firm? Or will he have to rely on a bunch of kids right out of school, willing to work for one or two hundred thousand a year, for the company's salvation?
When it comes to the hard work of cutting retiree health benefits, reducing salaries, laying off workers and closing plants, is Obama willing to resist calls for his intervention? Is he up for taking the blame for all the "heartless" measures GM will have to take to salvage its future? He has put himself squarely in a position to pay a steep political price for his assumption of power at GM.
Most troubling is the sense that Obama cannot have thought this through. He can't have planned this. President Clinton used to say at strategy meetings that we needed to think three or four moves ahead and not just "kick the can down the road." Obama is clearly not following his predecessor's advice. He realized GM needed money. He knew the public would have a fit if he gave it. So he decided that he would appease his electorate by exacting blood from the company's management and directors by using his guillotine on some of its old gray heads.
But, had he thought before he acted, he would have realized that it would have been far better to have criticized GM from a distance even as he extended more money -- rather than to, in effect, take over the company.
The president's protestations that the government does not want to own a car company are quite beside the point. It's his now, and he better figure out what to do with it.
By replacing the head of the company and demanding a restructuring of its board in return for further TARP aid, Obama has taken upon himself the responsibility for the future of the company. As Gen. Colin Powell said when Bush was considering invading Iraq and toppling the Saddam Hussein government there: "If you break it, you own it." Now it is Obama's company.
This move will backfire big time! The auto giant is very, very unlikely to be saved by this current TARP infusion. Doubtless it will need more in the near term. But the resentment now focused on the management of the company will then turn to Obama. Having demanded a replacement of the management, it is he who will be held responsible for the company's future.
And each time GM asks for more money, Obama will face a choice: take personal responsibility for laying off 100,000 auto workers or anteing up the additional cash. By inserting himself so deeply into the management of the company, Obama makes himself central to its future. If Obama lets the company fail, having already extended credit, he will have all of Michigan on his case. If he keeps coming up with more and more tax money, he will earn the contempt of the voters.
Socialism has its price. By taking over the management of a company, you become the determinant of its fate in the public's mind.
Obama does not seem to realize that government takeover is the beginning, not the end, of the problem. He should have stuck with being president and left making cars to others.
And, as the new CEO of General Motors, what will his policy be on corporate compensation? Will the public tolerate his letting his new company pay salaries sufficient to attract the talent necessary to salvaging the firm? Or will he have to rely on a bunch of kids right out of school, willing to work for one or two hundred thousand a year, for the company's salvation?
When it comes to the hard work of cutting retiree health benefits, reducing salaries, laying off workers and closing plants, is Obama willing to resist calls for his intervention? Is he up for taking the blame for all the "heartless" measures GM will have to take to salvage its future? He has put himself squarely in a position to pay a steep political price for his assumption of power at GM.
Most troubling is the sense that Obama cannot have thought this through. He can't have planned this. President Clinton used to say at strategy meetings that we needed to think three or four moves ahead and not just "kick the can down the road." Obama is clearly not following his predecessor's advice. He realized GM needed money. He knew the public would have a fit if he gave it. So he decided that he would appease his electorate by exacting blood from the company's management and directors by using his guillotine on some of its old gray heads.
But, had he thought before he acted, he would have realized that it would have been far better to have criticized GM from a distance even as he extended more money -- rather than to, in effect, take over the company.
The president's protestations that the government does not want to own a car company are quite beside the point. It's his now, and he better figure out what to do with it.
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