Coyote Blog

Cooler heads are looking at the world economic data, and starting to come to the conclusion, voiced by yours truly a number of times, that the US financial crisis was/is a symptom of a world economic slowdown, not the other way around

Compare the decline in real GDP over the past 4 quarters (from The Economist):

U.S.	-0.2%
France	-1.0
Germany	-1.6
Britain	-1.8
Italy	-2.6
Japan	-4.6

Does it make sense to blame the largest declines in GDP on one country with the smallest decline?  If so, then we need some explanation of how some uniquely American "illness has spread" to so many innocent victims.

If the explanation is supposed to be falling U.S. imports, then the worst decline by far would have been in Canada and Mexico (where real GDP was rising even in the third quarter).  If the alleged causality is supposed to be because of some undefined links between financial centers, then Italy would not be among the hardest hit.

When it comes to trade, in fact, the shoe is mainly on the other foot: Collapsing foreign economies crushed U.S. exports.

In the second quarter of 2008, U.S. exports accounted for 1.54 percentage points of the 2.83% annualized rise in real GDP.  But falling exports subtracted 2.84 percentage points from fourth quarter GDP.  Falling exports, not falling consumption, were the biggest single contributor to the overall drop of 3.8%.

After looking at which economies fell first and fastest, it might be more accurate to say that some foreign  illness has spread to the U.S. economy than to assert or assume the causality ran only in the opposite direction.

I think most readers of this site will understand the meme that somehow the recent Wall Street meltdown represented "unfettered capitalism under George Bush" is absurd.  The US financial industry is the most highly regulated sector of the economy, and George Bush was in no way a free market capitalist.  Bill Clinton, for example, had a better laissez faire record than Bush, in my scoring.

But those pushing for a Euro-Japanese style corporate state (e.g. Barack Obama) might beware.  It probably comes as no surprise the US economy has outperformed the EU and Japan over the last decade, but would you believe we have also out-performed them over the last year?  The chart below is from Paul Kedrosky, and shows GDP indexed to 4Q07  (the graph is not the way I would have drawn it -- the third small hash mark is actually the fourth, not the third, quarter).

As I wrote the other day:

This is why our recessions tend to be shorter than those in Japan and Europe.  These other economies are generally more of a corporate state, with a major goal of the government to maintain the incumbents in the corporate world.   I would argue that the key determinants to recovering from a recession quickly are asset, capital, and labor mobility.  Japan has many structural limitations on these, and it dragged their recession out for years.

Apparently, Obama is trumpeting victory because a company that will recieve a lot of the stimulus money will likely hire more people.

President Barack Obama says Caterpillar's chief executive has told him the company will rehire some laid-off workers if the stimulus bill passes.

The heavy equipment maker announced more than 22,000 job cuts last month as it scales back production amid the economic slowdown.

Seriously, do proponents of the stimulus really think that we opponents don't understand that individual projects funded by this new bill will employ people on the project?  I guess they do, because I had this very argument last night.  So, to clarify my position, I fully understand and comprehend that projects that get additional funding in the new bill will likely employ more people on that project than if they had not been funded by the bill.

The issue is that the $800 billion of "stimulus" comes from somewhere, in this case borrowing paid for by future taxes. At any point in time, there is only so much investment capital out there in the world.  So, the real question is not whether Caterpillar will hire more people if the government throws money its way. The real issue is who won't be hired somewhere else because $800 billion of investment capital that was going to be employed for some private purpose is now going to be spent by the government.

For those who are not confused about this, and want to discuss the multiplier, which is another way of asking how the net gains and losses described above balance, there is a good back and forth here.

One thing this country just seems incapable of considering -- it may be that there is simply nothing the government can do to make this recession better.  Everyone, from consumers to lenders, find themselves overleveraged and new spending is simply going to go down for a while until everyone feels comfortable with their reserves.  The only thing Obama has done so far is, by spreading panic, to increase the size of reserve everyone thinks they need (example here, and my analysis here)

Postscript: Obama's actions  of late are kind of funny.  He has been criticized for lacking experience and having only really demonstrated the ability to campaign well.  So, when things get tough and he starts to come in for some here-to-fore unprecedented criticism, he runs back to what he does best - campaign.

Frequent readers will know that I do not buy into the Keynesian multiplier effect for government spending.  But there is an even better reason why the stimulus bill will never work:   it is simply impossible to break ground on any new government construction project in less than a year.

A year from now, any truly new incremental project in the stimulus bill will still be sitting on some planners desk with unfinished environmental impact assessments, the subject of arguments between multiple government agencies, tied up in court with environmental or NIMBY challenges, snarled in zoning fights, subject to conflicts between state, county, and city governments, or all of the above.  Most of the money will have been spent by planners, bureaucrats, and lawyers, with little to show for in actual facilities.

The couple of exceptions I can think of are:

• The project has already been proceeding for years, and thus is just about to start construction anyway.  Which implies the spending is not incremental and that we are just substituting federal dollars for local dollars in completing local projects, never a good idea.
• It may be possible to get a repair project going faster, but even that is probably impossible.  The contract award process alone can take up to 6 months, and it is probably no accident that federal highway funds are one of the few areas the government budgets multi-year.

To illustrate, let me tell a story.  We operate a marina and campground on a lake in Ventura County, California.  The marina office and store used to be a small floating building attached to the dock and floating on the lake (this is a fairly typical arrangement in small marinas).  The County decided it, for whatever reason, did not like having a floating store building any more, and it wanted the floating building closed and a new modular building put in a corner of the parking lot, on dry land.

So we get a modular building and park it in the parking lot near the dock entrance, as ordered.  Having been required by the county to take these steps, we were subsequently shocked to find that a variety of County offices refused to permit the new structure.  Eventually, it took nearly 4 months and $10,000 in fees to obtain the 8 County permits and approvals we needed to park a trailer in the parking lot.   And this does not include the cost of a fairly senior manager spending half his time chasing down all these approvals.  At one point, the County demanded a soil sample, and so we had to have a company come out and saw into the concrete parking lot to obtain a sample of the soil underneath.  God knows how long it would take to approve new construction on virgin land with water, sewer, etc.

Finally, some of you might be thinking that these government hurdles would be easier for the government itself to clear.  Wrong.  You have never, ever seen a government employee display as much energy as they will muster when they think another government agency is bypassing his or her authority.  I made a presentation a while back to a group of county commissioners in California, and it seems like most of their jobs involve dueling with various state agencies and local governments.