Tag: recession

The Fed: ObamaCare “Leading to Layoffs”

The Hill has the story:

The Federal Reserve on Wednesday released an edition of its so-called “beige book,” that said the 2010 healthcare law is being cited as a reason for layoffs and a slowdown in hiring.

“Employers in several Districts cited the unknown effects of the Affordable Care Act as reasons for planned layoffs and reluctance to hire more staff,” said the March 6 beige book, which examines economic conditions across various Federal Reserve districts across the country.

Or in other words, yes, ObamaCare will eliminate some 800,000 jobs.

Osborne Risks a Triple-Dip for the UK

U.K. Chancellor of the Exchequer George Osborne has resumed his saber-rattling over raising capital requirements for British banks. Most recently, Osborne has fixated on alleged problems with banks’ risk-weighting metrics that, according to him, have left banks undercapitalized. Regardless of Osborne’s rationale, this is just the latest wave in a five-year assault on the U.K. banking system – one which has had disastrous effects on the country’s money supply. The initial rounds of capital hikes took their toll on the British economy – in the form of a double-dip recession. Now, Osborne appears poised to light the fuse on a triple-dip recession.

Even before the Conservative, Osborne, took the reins of Her Majesty’s Treasury, hiking capital requirements on banks was in vogue among British regulators. Indeed, it was under Gordon Brown’s Labour government, in late 2007, that this wrong-headed idea took off.

In the aftermath of his government’s bungling of the Northern Rock crisis, Gordon Brown – along with his fellow members of the political chattering classes in the U.K. – turned his crosshairs on the banks, touting “recapitalization” as the only way to make banks “safer” and prevent future bailouts.

It turns out that Mr. Brown attracted many like-minded souls, including the central bankers who endorsed Basel III, which mandates higher capital-asset ratios for banks. In response to Basel III, banks have shrunk their loan books and dramatically increased their cash and government securities positions, which are viewed under Basel as “risk-free,” requiring no capital backing. By contrast, loans, mortgages, etc. are “risk-weighted” – meaning banks are required by law to back them with capital. This makes risk-weighted assets more “expensive” for a bank to hold on its balance sheet, giving banks an incentive to lend less as capital requirements are increased. 

Five years later, Osborne is attempting to ratchet up the weights on these assets. Indeed, he is taking another whack at banks’ balance sheets – and the result will be the same as when the U.K. Financial Services Authority first took aim at the banking system (under Gordon Brown). As the accompanying chart shows, the first round of capital requirement hikes (in 2008) dealt a devastating blow to the U.K. money supply. Indeed, it tightened the noose on the supply of bank money – the portion of the total money supply produced by the banking system, through deposit creation.

Not surprisingly, this sent the British economy spiraling into its first recessionary dip. The second hit to the money supply came shortly after the Bank for International Settlements announced the imposition of capital hikes under the Basel III accords, in October 2010. Despite numerous infusions of state money (reserve money) via the Bank of England’s quantitative easing schemes, these first two squeezes on bank money have put the squeeze on the U.K.’s total money supply.

This is the case because state money makes up only 16.3% of the U.K.’s total money supply. The remaining 83.7% of the money supply is made up of bank money. In consequence, the Bank of England would have to undertake a massive expansion of state money, via quantitative easing, to offset the U.K.’s bank money squeeze.

It is doubtful, however, that the British pound sterling would be able to withstand such a move. Indeed, there are more storm clouds brewing over Threadneedle Street. The sterling recently touched a 15-month low against the euro, and it has fallen 8% against the euro since late July. For the time being, at least, the pound’s tenuous position will likely put a constraint on any further significant expansion of state money, through quantitative easing. It appears markets simply wouldn’t tolerate it.

Accordingly, the only viable option to jumpstart the faltering U.K. economy is to release the banking system from the grips of the government-imposed bank-money squeeze. Alas, Osborne’s most recent initiative on bank recapitalization goes in exactly the wrong direction.

Italy Slowly Recognizes that the Substance of ‘Austerity’ Matters

Apologists for big government have regularly warned that Europe’s austerity measures would push the European economy into a recession. To some extent they’ve been correct, but not for the reasons they claim. So far austerity in countries like Greece and Italy have been austerity for the private sector, not the public. They’ve attempted to close budget gaps by tax increases rather than spending cuts. Witness Mario Monti’s implementation of a tax on first home purchases (sure to do wonders for your housing and construction labor markets).

Fortunately there is some small ray of hope that Italy has come to recognize the error of its ways. As reported in today’s Financial Times, instead of pushing for an increase in the value-added tax, Italy will focus its next austerity measures on cutting government.  As the Financial Times goes on to explain:

The new government’s €30bn austerity package, passed in December, was heavily oriented towards tax increases rather than spending cuts, an emphasis that is now widely recognised by ministers as having driven Italy deeper into recession.

When even the Financial Times recognizes that tax increases are contractionary, then perhaps there is some hope for Italy (and Europe) after all. Now if we can actually get spending costs of real significance (€30 billion is a rounding error for the Italian government’s budget).

One Year Later, Another Look at Obamanomics vs. Reaganomics

On this day last year, I posted two charts that I developed using the Minneapolis Federal Reserve Bank’s interactive website.

Those two charts showed that the current recovery was very weak compared to the boom of the early 1980s.

But perhaps that was an unfair comparison. Maybe the Reagan recovery started strong and then hit a wall. Or maybe the Obama recovery was the economic equivalent of a late bloomer.

So let’s look at the same charts, but add an extra year of data. Does it make a difference?

Meh… not so much.

Let’s start with the GDP data. The comparison is striking. Under Reagan’s policies, the economy skyrocketed.  Heck, the chart prepared by the Minneapolis Fed doesn’t even go high enough to show how well the economy performed during the 1980s.

Under Obama’s policies, by contrast, we’ve just barely gotten back to where we were when the recession began. Unlike past recessions, we haven’t enjoyed a strong bounce. And this means we haven’t recovered the output that was lost during the downturn.

This is a damning indictment of Obamanomics

Indeed, I made this point several months ago when analyzing some work by Nobel laureate Robert Lucas. And it’s been highlighted more recently by James Pethokoukis of the American Enterprise Institute and the news pages of the Wall Street Journal.

Unfortunately, the jobs chart is probably even more discouraging. As you can see, employment is still far below where it started.

This is in stark contrast to the jobs boom during the Reagan years.

So what does this mean? How do we measure the human cost of the foregone growth and jobs that haven’t been created?

Writing in today’s Wall Street Journal, former Senator Phil Gramm and budgetary expert Mike Solon compare the current recovery to the post-war average as well as to what happened under Reagan.

If in this “recovery” our economy had grown and generated jobs at the average rate achieved following the 10 previous postwar recessions, GDP per person would be $4,528 higher and 13.7 million more Americans would be working today. …President Ronald Reagan’s policies ignited a recovery so powerful that if it were being repeated today, real per capita GDP would be $5,694 higher than it is now—an extra $22,776 for a family of four. Some 16.9 million more Americans would have jobs.

By the way, the Gramm-Solon column also addresses the argument that this recovery is anemic because the downturn was caused by a financial crisis. That’s certainly a reasonable argument, but they point out that Reagan had to deal with the damage caused by high inflation, which certainly wreaked havoc with parts of the financial system. They also compare today’s weak recovery to the boom that followed the financial crisis of 1907.

But I want to make a different point. As I’ve written before, Obama is not responsible for the current downturn. Yes, he was a Senator and he was part of the bipartisan consensus for easy money, Fannie/Freddie subsidies, bailout-fueled moral hazard, and a playing field tilted in favor of debt, but his share of the blame wouldn’t even merit an asterisk.

My problem with Obama is that he hasn’t fixed any of the problems. Instead, he has kept in place all of the bad policies - and in some cases made them worse. Indeed, I challenge anyone to identify a meaningful difference between the economic policy of Obama and the economic policy of Bush.

  • Bush increased government spending. Obama has been increasing government spending.
  • Bush adopted Keynesian “stimulus” policies. Obama adopted Keynesian “stimulus” policies.
  • Bush bailed out politically connected companies. Obama has been bailing out politically connected companies.
  • Bush supported the Fed’s easy-money policy. Obama has been supporting the Fed’s easy-money policy.
  • Bush created a new health care entitlement. Obama created a new health care entitlement.
  • Bush imposed costly new regulations on the financial sector. Obama imposed costly new regulations on the financial sector.

I could continue, but you probably get the  point. On economic issues, the only real difference is that Bush cut taxes and Obama is in favor of higher taxes. Though even that difference is somewhat overblown since Obama’s tax policies - up to this point - haven’t had a big impact on the overall tax burden (though that could change if his plans for higher tax rates ever go into effect).

This is why I always tell people not to pay attention to party labels. Bigger government doesn’t work, regardless of whether a politician is a Republican or Democrat. The problem isn’t Obamanomics, it’s Bushobamanomics. But since that’s a bit awkward, let’s just call it statism.

Tina Brown and the Economics of Recession

Talking about royal weddings on NPR, Tina Brown says that there’s high unemployment in Britain, as there was in 1981, because of Conservative governments’ budget cuts (transcript edited to match broadcast):

Of course, the wedding of Prince Charles and Diana occurred three decades ago, but Brown points out that there are plenty of similarities between the two eras. “2.5 million are out of work right now with the budget slashes and all the economic austerity that’s happening in England,” Brown says. “There were actually the same amount of people exactly out of work at the time of Charles and Diana, when Mrs. Thatcher came in and began her draconian moves.”

I know that Tina Brown is a journalist, not an economist, but surely she’s heard of the recessions of 1979 and 2009, both of which may have helped to usher in a new government pledged to economic reform. It isn’t budget cuts that have increased British unemployment, it’s the recession. The unemployment rate started rising in early 2008 and kept right on rising during the world financial crisis, which featured not budget cuts but massive spending by governments around the world.

New Era of Big Government

The George W. Bush administration ushered in a new era of big government. The Obama administration has built on Bush’s profligacy, and the president’s new fiscal 2012 budget proposal would further cement the trend.

Spending as a percentage of GDP has increased dramatically since the surplus years of the late 1990s. As the chart shows, the president’s budget once again seeks a permanently high level of federal spending as a share of the economy:

While the numbers drop from their stimulus- and recession-induced highs, it is not because the president has suddenly decided that he desires a less active government. Rather, optimistic economic assumptions largely account for the slight retrenchment.

Tax increases and optimistic economic assumptions explain the projected rise in revenue as a share of the economy. While the president would like us to believe he’s found religion on spending cuts, he’s actually relying on a rosy economic forecast and sucking more money out of the private sector to reduce annual deficits.

Taking more money from the productive private economy to maintain destructively high levels of federal spending is not a recipe for economic growth. Therefore, this budget proposal is as dangerous as it is disingenuous. Fortunately, it’s also dead on arrival in the Republican-controlled House.

Debunking the Myth of Oil Dependence

An article in today’s Boston Globe might help to debunk one of the more pervasive myths that distorts U.S. foreign policy: the belief that access to oil from the Middle East is a vital national security issue for the United States.

I discuss the issue in my book, The Power Problem (pp. 107-114). In addition, the Cato Institute and/or Cato scholars have published no fewer than five papers and articles over the past two decades documenting the many reasons why access to oil – or any other natural resource, for that matter – should not be cast as a national security threat. (See, e.g. here, here, here, here and here).

An article in the journal Security Studies expands on the last of these papers, published by Eugene Gholz, at the University of Texas, and Daryl Press, at Dartmouth College. (Justin Logan deserves credit for locating an early version of this paper, and working with Gholz and Press to publish the paper in Cato’s Policy Analysis series in 2007).

But the Gholz/Press plea that U.S. policy not fall victim to ”energy alarmism” isn’t particularly controversial. Or, at least, it shouldn’t be. Writes the Globe’s Jeremy Kahn:

Gholz and Press are hardly the only researchers who have concluded that we are far too worried about oil shocks. The economy also faced a large increase in prices in the mid-2000s, largely as the result of surging demand from emerging markets, with no ill effects. “If you take any economics textbook written before 2000, it would talk about what a calamitous effect a doubling in oil prices would have,” said Philip Auerswald, an associate professor at George Mason University’s School of Public Policy who has written about oil shocks and their implications for US foreign policy. “Well, we had a price quadrupling from 2003 and 2007 and nothing bad happened.” (The recession of 2008-9 was triggered by factors unrelated to oil prices.)

And yet, the idea that is rejected by most economists is almost universally believed by politicians, and hyped by interest groups who stand to gain by stoking public fears. Auerswald explains: 

“This argument is like the familiar old jeans of American politics,” he said. “They are nice and cozy and comfortable and everyone can wear them. Because of ethanol, the farm lobby loves it; for coal, well it’s their core argument; for the offshore drilling folks, they love it.” Even the environmental movement relies on it, he said, because they use it as bogeyman to scare Americans into taking renewable energy and energy conservation more seriously. As for the US military, “The US Navy is not interested in hearing that one of their two main theaters of operation has no justification for being,” Auerswald said.

Here’s hoping that Jeremy Kahn’s article will help to set the record straight.

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