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Tuesday, May 10, 2011

Constraints And Circumstance

If Jane Austen were a modern day economist, I do believe she'd write a white paper with the above title. One of the aspects of Austen's writing that has always engrossed me is the solid balance displayed. The woman who skewered the cult of sensibility in Sense And Sensibility and lampooned the Gothic romances in Northanger Abbey with such skill could bring considerable vim and vigor to our current economic cults.

But, sense we no longer have Jane Austen with us, and since we have lost our Tanta (a modern day Austen of mortgages), we are left to stagger on by ourselves, with a soundtrack of fable-blathering politicians. It would not hurt so much if their political tunes and lyrics were not written by professional economists.

I'd like to direct your attention to Mauldin's current Does Unreal GDP Drive Our Policy Choices?

My response, on seeing the title, was "Of course it does!" The current letter is a white paper by Rob Arnott which discusses why the longer-term trend that matters is the private economy. I don't want to steal any of the work, but I do think it's an important read. The basic points:
As I have often written before, the measure that determines future growth of the economy is Gross Private Domestic Investment (GPDI). Over the longer term, the rise and fall of GPDI shifts the economy from contraction to expansion and back again.

It's obvious that at some levels of debt, the ability to spark a meaningful increase in the private economy through more government debt is very limited. You can spark an increase in current consumption very easily - just send everyone checks or cut taxes. But if the cut or the subsidy is temporary, then the effect in the private economy is temporary also. And that's why it is not real growth.

If you spend money on structural improvements that have a longer term effect (cheaper power, power where none existed, public medicine that reduces disease rates - anything that adds usable potential to the economy) then you can get a longer term payoff. If you make structural changes in the economy that reduce potential or efficiency (like any measure that increases energy costs) then your spending has a negative net multiplier; you would have been far better off not spending anything.

Unfortunately, significant chunks of the "stimulus" money spent were in the negative net multiplier category, and most of the rest may have been in the temporary category, because it does appear that we are going to have to constrict spending on social welfare very sharply.

Most of the spending on housing, especially the purchase-money tax credit, was a negative net multiplier.

Tomorrow we get the Treasury budget, and I am working on some graphs for you. Probably tomorrow night I'll have those up.

You just made my girlfriend's day. She doesn't even know it yet.

I read your headline and immediately thought of Jane Austen. It was like a Pavlov response. It can only mean that I have been trained!


I am from the Pacific Northwest. These Jane Austen mind tricks might not work on everyone as well as real GDP per capita growth (via higher debt burdens) does.
Some of the best bits of the New Deal were the farm education programs, and rural electrification. The raw power those programs (and their broader consequences) have given the U.S. over the world's food supply through the last six decades is nothing to sneeze at, whatever else resulted from FDR's policies. If some portion of the stimulus had done similar things for manufacturing, we'd be talking a whole different ball game now.

But the stimulus was pretty much the opposite of the New Deal.
Neil - I have been wondering with no little angst if in fact the stimulus (and rounds 2, 3, 4...) aren't going to wind up destroying the New Deal programs.

And then we'll be left still with no real strong financial reforms, with very little ability to counter credit shocks with Keynesian programs, with a financially weaker population, and with bubbles....

Color me a bit traumatized (trauma is sort of a taupe color).
Mark - I'm pleased to have been of domestic service.

Tanta has been much on my mind lately, and whenever I think of Tanta I think of Jane Austen, and whenever I think of great popular delusions, I think of Jane Austen.

Jane Austen mind tactics are not tricks - they are all about getting people to confront reality.

I'm a bit bitter about things in general. Is this even a Democratic administration? I have a hard time seeing it as such. And is the higher real GDP per capita really giving much to most people? I don't think people are benefiting. I think only a very few are benefiting, and that the future burden will be spread widely and borne heavily by the portion of the population that will be most hurt.

They say taupe is very soothing.
It wasn't a stimulus but a looting of the Treasury.
The elite managed to rob the Treasury while claiming
the sky was falling. That fact alone should have caused a revolution, but our population is too old and
divided for a revolution.

"I'm a bit bitter about things in general. Is this even a Democratic administration? I have a hard time seeing it as such."

Legislature turns to education to balance budget

"Students at the UW have seen tuition skyrocket by more than 30-percent over the past two years. In-state undergraduate students were paying about $6,800 in tuition in the 2008-2009 academic year. They're now paying about $8,700. That figure could climb to more than $11,000 under current tuition-increase projections and even higher if regents exercise their authority under HB 1795."


Well, that's certainly one way to boost the CPI and protect us from a deflationary mess.

MOM - You pretty much re-state my post of Mon at 4:04.

Is this even a Democratic administration?

Every Democrat admin of the last 61 years has been a catastrophe, as they laid all the economy-destroying bombs that are starting to go off, starting with JFK's order permitting unionization of Federal employees, and continuing at a greater pace with Johnson's Great Society, which would more accurately be described as " Making idleness pay."
The money spent on the housing incentives would have been better spent on incentives to investors to buy housing and turn it into rentals. As it stands the investors are hanging back because the administration is so anti- capital. As a result, investors have no idea what's coming down the road.

I just finished raeding a long treatise on the future of housing in Fine Homebuilder magazine. One pundit talked about this becoming a nation of renters. Surely a segment of the population has been soured on the idea of home ownership. And that is a shame because the quality of our housing stock is due in no small part to the stewardship of the owners. I live in a small farming community that has many homes that should be nearing the end of their useful lives (40-50 years). Yet many are still in quite livable condition because of loving care from the owners. It would be a shame to lose that.

So many of the democrats don't seem to recognize the cause and effect of an economy in which opportunity is being foreclosed because "someone might make some money out of someone elese's misfortune." And yet that is exactly what happens year after year in our stock and commodity markets. They just don't seem to get the connection. They envision equality of outcomes, in which direction lies equality of misery.
The blue paragraph is good, but you should run the numbers back to 1974 or so.

The key sentence from your post:
It's obvious that at some levels of debt, the ability to spark a meaningful increase in the private economy through more government debt is very limited.

Yes. And it doesn't matter WHOSE debt exceeds the troublesome level. 'Sparking a meaningful increase in the private economy through government debt' ain't working, because there is too much debt already, total debt.

Come to think of it, the reason we need to spark that meaningful increase is: there has been too much debt in the private sector... since 1974 or so.

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