Tag: recession

Comparing Reaganomics and Obamanomics

Ronald Reagan would have been 100 years old on February 6, so let’s celebrate his life by comparing the success of his pro-market policies with the failure of Barack Obama’s policies (which are basically a continuation of George W. Bush’s policies, so this is not a partisan jab).

The Federal Reserve Bank of Minneapolis has a fascinating (at least for economic geeks) interactive webpage that allows readers to compare economic downturns and recoveries, both on the basis of output and employment.

The results are remarkable. Reagan focused on reducing the burden of government and the economy responded. Obama (and Bush) tried the opposite approach, but spending, bailouts, and intervention have not worked. This first chart shows economic output.

The employment chart below provides an equally stark comparison. If anything, this second chart is even more damning since employment has not bounced back from the trough. But that shouldn’t be too surprising. Why create jobs when government is subsidizing unemployment and penalizing production? And we already know the so-called stimulus has been a flop.

None of this should be interpreted to mean Reagan is ready for sainthood. He made plenty of compromises during his eight years in office, and some of them were detours in the wrong direction. But the general direction was positive, which is why he’s the best President of my lifetime.*

*Though he may not be the best President of the 20th Century.

A Happier New Year for the Beltway

An article in the Washington Post provides another example of how the Washington metro area has become virtually recession-proof:

The Washington region posted the highest year-over-year home price gains in the nation this fall, as real estate values slumped in nearly every other metropolitan area, a key housing report said Tuesday.

A healthy job market, particularly for high-salaried workers, buoyed demand and prices for housing in the D.C. area, local economists said. Home values climbed 3.7 percent in Washington in October from a year earlier, making it one of only four regions nationally to avoid a dip in prices, the Standard & Poor’s Case-Shiller home-price index said.

My colleagues David Boaz and Walter Olsen have highlighted numerous examples of how the Washington metro economy has prospered relative to the rest of the recession-battered country.

A map of Virginia’s unemployment rate by county produced by the Bureau of Labor Statistics is illustrative:

Unemployment rates for counties closest to the “Imperial City” are dramatically lower than the rates for those counties that are further removed. Arlington County unemployment is 3.8 percent, Alexandria City is 4.4 percent, and Fairfax County is 4.6 percent.

As David points out, the Washington region’s relative prosperity is a reflection of high pay for federal workers and “the boom in lobbying as government comes to claim and redistribute more of the wealth produced in all those other metropolitan areas.” Like an insatiable parasite, the Beltway class continues to gorge itself at the expense of the country’s productive class.

Taxpaying citizens should bear this in mind the next time they are tempted to look to Washington for “solutions” to the country’s problems.

The ‘Consumer Spending’ Myth

Journalists talk endlessly these days about the need for more consumer spending to revive the economy, and for government programs to juice consumer spending. Economist Steven Horwitz takes on the assumption that spending is the key to economic activity:

One of the most pernicious and widespread economic fallacies is the belief that consumption is the key to a healthy economy.  We hear this idea all the time in the popular press and casual conversation, particularly during economic downturns.  People say things like, “Well, if folks would just start buying things again, the economy would pick up” or “If we could only get more money in the hands of consumers, we’d get out of this recession.”  This belief in the power of consumption is also what has guided much of economic policy in the last couple of years, with its endless stream of stimulus packages.

This belief is an inheritance of misguided Keynesian thinking. Production, not consumption, is the source of wealth.  If we want a healthy economy, we need to create the conditions under which producers can get on with the process of creating wealth for others to consume, and under which households and firms can engage in thesaving necessary to finance that production….

Putting more resources in the hands of consumers through a government stimulus package fails precisely because the wealth so transferred ultimately has to come from producers.  This is obvious when the spending is financed by taxation, but it’s equally true for deficit spending and inflation.  With deficit spending the wealth comes from producers’ purchases of government bonds.  With inflation it comes proportionately from holders of dollars (obtained through acts of production) whose purchasing power is weakened by the excess supply of money.  In neither case does government create wealth. Nor does consumption.  The new ability to consume still originates in prior acts of production.  If we want real stimulus, we need to free up producers by creating a more hospitable environment for production and not penalize the saving that finances them.

Rise of an Imperial City, Cont’d

From time to time my colleague David Boaz posts about the many ongoing ways in which the economy of Washington, D.C. continues to outpace that of the rest of the country, thanks to a well-paid and layoff-resistant workforce of federal employees and contractors, a thriving lobbying sector, and so forth. Thus David noted this week that the Washington, D.C. metro area has now attained the highest family median income of any major city, and last month that, according to Census Bureau figures analyzed by Newsweek, “seven of the 10 richest counties in America, including the top three, are in the Washington area.” I thought I’d add three more data points to this picture:

  • Even as most of the country remains mired in serious housing recession, the capital has bounced back smartly: “The District claims the top ranking on the agency’s state-by-state list of annual price appreciation, with 5.29 percent growth since the third quarter of last year,” compared with a 3.2 percent decline nationally. Virginia and Maryland did less well, but most of both states’ population lives outside the D.C. orbit. [Washington Post]
  • Commercial rents in downtown Washington have likewise defied the steep national slump, as the federal government expands its demand for office space: “The rise has been so dramatic that for the first time in five years, the average asking rent in D.C. is higher than in New York City, according to CoStar and a new report of third-quarter activity by commercial real estate firm Cassidy Turley…. ‘The federal government has created a smooth but slow rise in rents [in D.C.],’” noted one real estate economist. [Washington Post again]
  • A business boom – in journalism? Even as veteran reporters elsewhere scrounge for work, talent and money continue to pour into Washington’s specialized news-gathering business, most particularly the sorts of newsletters that (for a subscription price in the thousands of dollars) will bring you fresh and fine-grained news of the doings of federal regulatory agencies in fields like energy, pharmaceuticals, securities and telecommunications. “[B]y dint of its regulatory powers, its executive orders, its judicial decisions, its ability to conjure money out of thin air, and its budget-making authority, Washington dictates who can do business and how,” writes Jack Shafer. “… Although $5,700 for a subscription to Bloomberg Government might sound steep to you, it’s chump change for businessmen who become the first in their cohort to read Line 125 in a pending bit of legislation and can place a bet on – or against – it in the market.” [Slate]

No Recession in Washington

Forbes looks at new data on household income in different metro areas:

Median family incomes across the country decreased dramatically from 2008 to 2009, and no region was left untouched by the recession. But despite shrinking paychecks nearly across the board, some cities still stand out for their bigger-than-average salaries.

To find the places where Americans earn the most, we looked at median family income data for 2009, as reported by the U.S. Census Bureau. In September, as part of its annual American Community Survey, the Census released updated data for several hundred Metropolitan Statistical Areas — geographic entities defined by the U.S. government that roughly correspond to major cities.

The place with the highest median family income is the Washington, D.C., metro area, which includes the nation’s capital, as well as wealthy suburbs in Virginia and Maryland. In 2009 families in this region earned a median income of $102,340, a 0.7 percent increase from 2008. D.C. also boasts a better than average unemployment rate of 5.9 percent, far below the September’s 9.2 percent national average.

As we’ve reported here before, these trends began even before the Obama administration started concentrating job creation on the federal sector. In the middle of the Bush bubble, the Washington Post reported:

The three most prosperous large counties in the United States are in the Washington suburbs, according to census figures released yesterday, which show that the region has the second-highest income and the least poverty of any major metropolitan area in the country.

Rapidly growing Loudoun County has emerged as the wealthiest jurisdiction in the nation, with its households last year having a median income of more than $98,000. It is followed by Fairfax and Howard counties, with Montgomery County not far behind.

This of course reflects partly the high level of federal pay, as Chris Edwards and Tad DeHaven have been detailing. And it also reflects the boom in lobbying as government comes to claim and redistribute more of the wealth produced in all those other metropolitan areas.

To slightly amend a ditty I posted a few years ago,

Mamas, don’t let your babies grow up to be cowboys,

Don’t let ‘em make software and sell people trucks,

Make ‘em be bureaucrats and lobbyists and such.

Postal Service Announces $8.5 Billion Loss

The U.S. Postal service has announced a net loss of $8.5 billion for fiscal 2010. Since 2006, the USPS has lost $20 billion, and the organization is close to maxing out its $15 billion line of credit with the U.S. Treasury. Although the USPS has achieved some cost savings, they haven’t been enough to overcome a large drop in revenue due to the recession and the greater use of electronic alternatives by the public.

The USPS is required to make substantial annual payments to pre-fund retiree health care benefits. Last year, Congress allowed the USPS to postpone $4 billion of its fiscal 2009 into the future. However, Congress did not provide similar relief on this year’s required payment of $5.5 billion.

Critics of the retiree health care pre-funding requirement argue that no other federal agencies or private companies face such obligations. The argument is largely irrelevant for two reasons. First, the federal government’s financial practices are nothing to emulate. Second, very few private sector workers even receive retiree health care benefits.

In 2008, only 17 percent of private sector workers were employed at a business that offered health benefits to Medicare-eligible retirees, down from 28 percent in 1997. The actual number of private sector workers receiving these benefits is even lower as not all employees employed at the 17 percent of businesses that offers retiree health benefits are eligible to receive them.

The retiree health care benefit pre-funding requirement has become a rallying cry for the postal unions, as any threat to USPS solvency is a threat to the excessive compensation and benefits they’ve been able to extract from the postal service for their membership over the years.

Policymakers should properly view the retiree health care benefit as a symbol of postal labor excess, which continues to weigh the USPS down like an anchor. Therefore, they should avoid allowing the USPS to further postpone these payments into the future, which could lead to a taxpayer bailout. Instead, policymakers should recognize that the USPS’s financial woes require bolder action: privatization.

The GM ‘Turnaround’ in Bastiat’s View

GM’s long-rumored initial public stock offering will take place Thursday and self-anointed savior of the U.S. auto industry, Steven Rattner, is pretty bullish about the prospect of investors turning out in droves. 

I’ve been saying for a while that I thought the government’s exposure [euphemism for taxpayer losses] in the auto bailout was in the $10-billion to $20-billion range.

But since investor interest has pushed the initial price up from the $26-to-$29 per share range to the $32-$33 range, Rattner now believes:

[T]his exposure is in the single-digit billion range, and arguably potentially better.

I won’t argue with Rattner’s numbers.  After all, they affirm one of my many criticisms of the bailout: that taxpayers would never recoup the value of their “investment.”  My bigger problem is with Rattner’s cavalier disregard for the other enduring—and arguably more significant—costs of the auto bailouts.

Rattner is like the foil in Frederic Bastiat’s excellent, but not-famous-enough, 1850 parable, That Which is Seen and That Which is Unseen.    Rattner touts what is seen, namely that GM and Chrysler still exist.  And they exist because of his and his colleagues’ commitment to a plan to ensure their survival, along with the hundreds of thousands (if not millions, as some “estimates” had it) of jobs that were imperiled had those companies vanished.  (For starters, I very much question even what is seen here. I am skeptical of the counterfactual that GM and Chrysler would have disappeared and that there would have been significantly more job loss in the industry than there actually was during the recession and restructuring.  But I’ll grant his view of what is seen because, frankly, the specifics are irrelevant in the final analysis).

For what is seen, Rattner admirably admits of a cost.  And that cost is not insignificant.  It is anywhere from $65 billion to $82 billion (the range of the cost of the bailout) minus what is being paid back and what investors are willing to pay for GM shares—in the “single-digit billion range,” as Rattner says.  But Rattner is willing to stand by that trade-off, claiming his efforts and the billions in “government exposure” were a small price to pay for saving the U.S. auto industry, as it were.  It’s merely a difference in philosophy or compassion that animates bailout critics, according to this position.

No.  Not so fast.  All along (quite contemptuously in this op-ed, which I criticized here) Rattner has been unwilling to acknowledge the costs that are unseen.  Those unseen costs include:

  • the added uncertainty that pervades the private sector and assigns higher risks and thus higher costs to investing and hiring (whom might government favor or punish next?);
  • the diversion of resources from productive to political purposes in the business community (instead of buying that machinery to churn out better or more lawn mower engines, better to hire lobbyists to keep Washington apprised of how important we are or how this or that policy might be beneficial to the national employment picture!);
  • excessive risk-taking and other uneconomic behavior that falls under the rubric of moral hazard from entities that might consider themselves too-big-to-fail (perhaps, even, the New GM!);
  • growing aversion to—and rising cost of—corporate debt (don’t forget what happened to Chrysler’s “preferred” bondholders in the bankruptcy process!);
  • the sales and market share that should have gone to Ford or Honda or VW as part of the evolutionary market process;
  • the fruitful R&D expenditures of those more disciplined companies;
  • the expansion of job opportunities at those companies and their suppliers;
  • productivity gains passed on to workers in the form of higher wages or to consumers as lower prices;
  • the diminution of the credibility needed to discourage foreign governments from meddling in markets, often to the detriment of U.S. enterprises.

 The list goes on.

 Yet, Rattner, seemingly oblivious to the fact that the economy remains stuck in the mire, speaks triumphantly of the successful auto bailout.  But nobody ever doubted that taxpayer resources in the hands of policymakers willing to push the bounds of legality could “rescue” GM from a fate it deserved.  The concern was that policymakers would do just that, leaving behind wreckage to our institutions not immediately discernible.  But anemic economic activity, 9.6 percent unemployment, and a private sector unwilling to invest is pretty darn discernible at this point.

Rattner should take off the tails, put down the champagne flute, and acknowledge what was originally unseen.