Tuesday, August 03, 2010

Logic=Fail by Top Economists (Part Deux)

Another example of absurd reasoning by the economists that drive our monetary policy and influence our political leaders:Nobel-Prize winning economist Paul Krugman, of the New York Times and Obama confidant

Krugman has criticized both Bush and Obama for "not doing enough" to either 1) Avoid a massive depression or 2) Create a magical economic recovery filled with jobs and growth in GDP (Gross Domestic Product- a broad measure of economic activity) .

First of all, we ARE NOT IN A DEPRESSION. It seems scare tactics are a key ingredient to creating headlines and generating an unnecesary response from politicians/central bankers. GDP for 2009 was $14.2 Trillion, near an all-time high and up approximately 1% from 2007. Thus, in spite of the massive housing and credit collapse in our country, our economy continues to hum along near its all-time high. Consumer prices and company profit margins remain high and deflation is virtually non-existent outside of technology/housing.

Second, a recovery in jobs that is driven by the government increasing its own payroll does not create productivity or sustainable economic value in the long run.In spite of our "GDP data" appearing strong, many people are unemployed as a significant number of unproductive jobs were shed from the system. Many of these jobs were associated with unnecessary car production, mortgage financing, realtors, construction, leisure, gambling, etc. So if many private-sector jobs disappeared, how has our economic data remained strong?

Answer- Massive increases in government spending. Since 9/11, our government spending has increased at a rabid pace, only more-so since the housing bubble reached an unsustainable size.Currently, the government is nearly 40% of our economy.

So our economy only appears stable because of the excessive government spending (Lesson of the day- When people spend more than they earn, its called going into "hock". When governments spend more than they earn from taxes, its called "stimulus"). So our federal government is akin to someone that has lost his job, but wants to feel good about himself by pulling out the credit card and treating himself to a few fun foreign wars (Iraq/Afghanistan), unnecessary new tech(defense) gadgets, and extra perks (massive increases in transfer/social payments).

Curiously, many cities and states are reporting massive deficits, in large part because of the high pension benefits guaranteed to their many workers. The suckle of permanent government employment ensures that budgets cannot be right-sized in a downturn, to the extent that the private sector rationalizes its profit/loss. Yet, economists suggest that the correct course of action is for the government to further increase its spending role in the economy?

How much government is too much? 50% of our economy? 60%? Once the government hires workers and subsidizes poor investments (i.e- our housing bubble in the 2000's), it typically has a long and ugly end. For markets such as Detroit, which have seen a massive exodus of people, it is equally difficult to tear-down excess housing stock as it is to fire highly-paid municipal workers. In fact, one of the drivers behind Detroit's decision to bulldoze thousands of homes was the high cost of employing unionized police/fire workers to protect their communities.

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