The airways Friday morning were full of talk of the success of the "Cash for Clunkers" program. It has been so successful that Congress is racing to add more money. [As of Friday at 2 pm eastern the House had passed a bill to increase funding by $2 billion.]
What was the evidence of success? What lesson was learned?
Well, apparently, if the government offers to give people money, quite a few of them will take it.
Comments (6)Some Reminders from Econ 101:
GDP is an estimate of the total value of all final goods and services produced during a year (or in a quarter expressed at an annual rate).
It's the broadest most comprehensive estimate of the value of the total output (and income) produced in the economy.
Estimate. Yes, it's an estimate and would look much like making sausage, but don't worry about that. It's as good as smart people can make it, but, perhaps more important, it's reasonably consistent over time. The consistency makes it useful in the same way that my bathroom scales are, or the calorie count on my exercise equipment. You can measure relative performance without perfection on the level of performance.
Value. Price is the way we add up diverse elements-the common denominator. A three dollar broom adds half as much to GDP as a $6 hamburger.
(Breakdown of GDP Numbers after the Fold)
If I hadn't worked at the Fed for 36 years, I wouldn't know its history either. Several misconceptions muddy the current debate about the future role of the Fed as systemic risk regulator. The following statements, frequently heard in some forms, are very misleading.
1. The Fed was created to conduct monetary policy; so let it stick to it's knitting.
2. The Fed doesn't need to take on a new role on top of those it already has.
3. The Fed had a large role in creating the current mess, so it shouldn't be rewarded with new assignments.
The Fed was not created to conduct monetary policy. Monetary policy as we know it today hadn't been invented yet. The Fed was created to stabilize the financial system and prevent or ameliorate financial panics.
I sat in on a presentation this week where a picture of the Fed's balance sheet growth was shown as prima facie evidence that inflation looms down the road. The presenter wasn't sure when inflation would arrive, but it would arrive and be caused by the balance sheet expansion. No chain of causality was laid out. Just balance sheet expansion then, later, inflation.
He may be right, but I don't think so. It may happen, but it isn't an inevitable result of the balance sheet growth. Here is my reasoning:
1. The first point I would make is that all the balance sheet expansion took place last fall. There has been no further expansion since December-7 months ago.
The talks by our Secretary of State and Secretary of the Treasury with the Chinese about U.S. borrowing have once again created some mushy commentary by the talking heads. They speak in terms of how much U.S. debt China will be willing to buy in the short-term and in the long-term.
No one has thought to mention that those amounts depend almost entirely on the volume and balance of trade between the two countries. If the U.S. trade deficit (and Chinese surplus) grows, it will be necessary to borrow more to finance it. If trade shrinks, less borrowing will take place.
If the willingness to borrow changes independently of the financing needs of trade, then the trade will have to adjust. Either way, the two are linked, and it is foolish to talk about them as if there is no relationship at all.
A Grass Roots Report
When Wal-Mart recently announced support of the employer mandate portion of President Obama's Health Care proposal, a friend of my wife's, a small-business owner, expressed her anger during an extended manicure session. Not one to complain without action, she announced her intention to boycott Wal-Mart, where she had been a faithful shopper for years. She would begin her boycott as soon as she stocked up on some important staples, including washing detergent, fabric softener, and various types of canned goods. Good for her.
The stimulus plan was designed to fail- not deliberately, probably, but in effect. It reflected priorities other than job creation or preservation, as had been advertized. It was not timely- we're still waiting for most of it to be implemented- and it was not focused. It was scattershot. At the time I likened it to "Shooting Wild Hogs with a Shotgun."
But, let's be fair. The fact that employment has continued to fall and unemployment has continued to rise is not sufficient evidence of its failure. That was already baked into the cake, and I expect those trends to continue for some time even if the stimulus package is working. Unemployment will peak above 10 percent, if not 11 percent.
Hold on just a minute. Maybe; maybe not. What about extenuatin' circumstances?
Since I've already upset most of you, let me begin by establishing my bone fides on creative destruction. I've read Joseph Schumpeter. I appreciate his insight and agree with it under most circumstances.
Shortly after becoming President of the Dallas Fed, we devoted the essay in our 1992 Annual Report to creative destruction, which turned out to be extremely popular. Larry Kudlow even started calling the Dallas Fed the Schumpeterian Fed.
The essay in question was written by Mike Cox, AVP and Economist at the time, (later Chief Economist). Tellingly, we titled the essay, "The Churn: The Paradox of Progress." Our coinage of The Churn for Creative Destruction caught on. In establishing what came to be a precedent for me in my President's letters, I applied the points in our essay to my personal life experiences. I was straining for the concept of a human central banker.
Yesterday, I defended Gentle Ben Bernanke. I said I believed him when he said he didn’t say something and said it would have been appropriate if he had. Or, something like that. A committee of Congress had his partner in non-crime on the hot seat today accusing him of saying something he had already acknowledge saying. Got that?
In the process, Mr. Paulson clarified that he had reminded Ken Lewis, the CEO of Bank of America, that the Fed, as the primary regulator of his holding company, had the authority to remove management and the board if he did something they regarded as stupid as well as harmful to the bank, the financial system, and the economy. Of course, Mr. Lewis knew that already, as do all bankers.
I sat next to Ben Bernanke for almost three years at the FOMC table when he served as a Fed Governor. This was before he became Chairman of the President's Council of Economic Advisors and later returned as Chairman of the Board of Governors of the Federal Reserve System, appointed by President Bush. The cliché, "a gentleman and a scholar," was surely coined to describe Ben Bernanke. He seemed to be the quintessential Ivy League, high I.Q. nerd. I saw no bully in him. No attitude. Just a gentleman and a scholar.
He shocked me when he told me he was from South Carolina and had worked at South of the Border. I grew up in neighboring North Georgia and was familiar with South of the Border. As I recall, snakes were one of the tourist attractions. We had more in common than I ever dreamed, except, of course, for the high I.Q. and SAT scores. Not that he ever mentioned either. I inferred his high I.Q. from his career progression- which obviously required high-powered math skills- and learned of his almost-perfect SAT scores from a network TV special.
Last Friday I was on The Kudlow Report to discuss the proposal that the Fed be audited in connection with the question of any inappropriate influence applied by Chairman Bernanke on Mr. Lewis of the Bank of America in connection with the Merrill acquisition. I may follow up in a separate post on some of the issues raised in the interview. You may find part one of the interview here and part two here.
My recent post on The Illusion of Saving set a new record for me in visits and hits. That made me feel good. I would feel even better if hits and visits didn't come before the reading. In any case, here is some more on saving and savings.
There is a big difference between an economist's view and the educated layman's view of saving. In the years when the personal saving rate was near zero, it was common to hear the opinion that it really wasn't that low since the official measure doesn't count this or that. This or that might be equity in homes, capital gains in assets, 401K's, etc. This line of thinking confuses saving with savings.
If the money supply increases 10 percent in 3 months, we call it a 40 percent annualized increase. If it flattens at three months and is at the same level 3 months after that, it becomes a 20 percent annual rate for the 6 months. Six months later, if money growth remains flat, it becomes a 10 percent annual rate.
This is an oversimplification, but something like that has been happening. The money supply spiked, and then flattened out. Pre-spike until now still gives us pretty big numbers, but they are getting smaller every day. Yet, commentators treat the money growth statistics as if the rapid rise is ongoing.
Last Friday's weak jobs report accelerated discussions of a possible second stimulus package. Will wonders never cease?
I agreed that the first stimulus package should've been large and have come soon. We got large and we got soon, if soon is defined by the date of the legislation. Not soon as defined by when it might do some good. What happened to all those "shovel ready" projects? We've been out stimulated by China, and, now, by France. Yes, France!
Oil market speculation is back in the news. I'm afraid I don't have much to contribute since Milton Friedman convinced me long ago that profitable speculation is stabilizing and destabilizing speculation is unprofitable. Speculation is profitable if the speculator buys lower than he sells; it's unprofitable if he sells lower than he buys. Even if they don't make a profit, they are trying.
The collapse of confidence resulting from last Friday's bad employment report was overdone, not because the news wasn't that bad, but because expectations had gotten way too rosy. The search for green shoots with green-colored glasses had led to false hopes and denial– a false dawn if you will.
The employment report reminded us that the recession is not over. That does not mean that the recession isn't closer to being over than it was when the monthly employment losses were much larger. Encouraging signs still abound: financial Armageddon has apparently been avoided; financial markets are healing; confidence is off the floor; some leading indicators are rising. And, yes, the monthly employment losses have moderated.
Commentators, tired of the same old gloom and doom, became irrationally exuberant about the end of the recession. If they had been merely "encouraged," the May employment report would not have been such a shocker. Let's not compound our problem now by becoming irrationally discouraged.
Last Friday's disappointing jobs report elicited some strange responses on financial TV. The idea that the recession is over is one I find hard to take seriously. Yet, some commentators have bought into it so completely that the jobs report caused them to start talking about a "jobless recovery." Others hinted at the same thing by emphasizing that employment and unemployment are lagging indicators.
Here I go stating the obvious again: The recovery is not over. We don't have a jobless recovery; we just don't have a recovery yet.
With The Illusion of Saving as background let me explore a very counterintuitive proposition: That the growth in the budget deficit might indirectly strengthen the dollar.
It might do so by requiring a larger capital inflow (and thus a larger current account deficit) to make up for the shrinkage in domestic saving relative to investment caused by the growing budget deficit.
The market is headed toward recovery, but we're not there quite yet. This was my response to CNBC's Dennis Kneale last Friday when asked, "Is the Recession Over?" The market is healing but it's not healed yet.
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