Entries for February 2008

As Barack Obama would happily concede, words are powerful. Words matter. So let's briefly look at the words of Obama on trade. Here is Obama from his book The Audacity of Hope, sounding all Tom Friedman:

We can try to slow globalization, but we can't stop it. The U.S. economy is now so integrated with the rest of the world, and digital commerce so widespread, that it's hard to imagine, much less enforce, an effective regime of protectionism. A tariff on imported steel may give temporary relief to U.S. steel producers, but it will make every U.S. manufacturer who uses steel in its products less competitive on the world market.... U.S. Border Patrol agents can't interdict the services of a call center in India, or stop an electrical engineer in Prague from sending his work via email to a company in Dubuque. When it comes to trade, there are few borders left.

Let's see now, President Bush doesn't think there's going to be a recession in 2008. Neither does Federal Reserve Chairman Ben Bernanke—though clearly he's pretty concerned about "downside risks." And, increasingly, neither do the betting markets. Over at Intrade, the odds of a recession have fallen to 55.8 percent from a high of 77.5 percent a month ago. Maybe the sharpies on Wall Street are figuring out what my friend Rich Karlgaard of Forbes already knows:

The subprime mortgage mess. How big a problem is this? No one really knows, but so far banks have written off about $150 billion in bad loans. Now, $150 billion sounds huge. But it is only 1% of America's annual GDP. It is also less than 1% of the market capitalization of U.S. stocks. In any typically volatile trading day U.S. stocks gain or lose $150 billion every hour. How often does one hear that?...The nearest historical comparison we have is the savings-and-loan crisis of 1986-95. On a constant dollar basis—so we can compare apples with apples—the S&L crisis saw $700 billion in bad loans. Nearly five times as much as we've seen in the subprime mess so far. The S&L crisis caused some damage, to be sure. But during the 1986-95 period the U.S. economy grew and stocks went up. We survived stock shocks in 1987 and 1989 and a mild recession in 1990. The country did not collapse into a 1930s-like depression.

Two British economists don't care for the Patriot Employer Act, a bill introduced last August by Barack Obama and several other Democrats. The legislation would provide a tax credit equal to 1 percent of taxable income to employers that meet a number of requirements, such as keeping steady the ratio of full-time workers in the United States to full-time workers outside the United States and maintaining their corporate headquarters here. (I notice that my old pals at the left-of-center Angry Bear site also don't seem to think much of the idea.) The critique of the Brits is as follows:

Companies ought to decide the location of their headquarters and their domestic and foreign employment levels without being subjected to fiscal incentives. It is also unenforceable. Foreign branches of domestic companies, whose workers count as employees of the parent, would be changed to subsidiaries, whose workers no longer count as employees of the parent. Companies ever headquartered in the United States would be sold to shell companies or shut down and immediately reopened with a different name and legal identity, headquartered abroad. Let Commerce Department lawyers try to use corporate DNA fingerprinting to determine the ancestry of these new corporations! Unfortunately, idiotic legislation that is unenforceable is not harmless—it breeds contempt for laws and institutions.

I see Team Bush has returned—at least temporarily—to its mission of rebranding the GOP as a party that again believes in fiscal responsibility and small government. The AP tells us all about it:

Treasury Secretary Henry Paulson said Thursday that various proposals being put forward to deal with the housing slump would do more harm than good.... "So while some in Washington are proposing big interventions, most of the proposals I've seen would do more harm than good," the secretary said in remarks prepared for delivery Thursday night before the Economic Club of Chicago. "I'm not interested in bailing out investors, lenders, and speculators," he said. "I'm focused on solutions targeted at struggling homeowners who want to keep their homes."

I stumbled across this great slide presentation on U.S. manufacturing given by an economist at the Chicago Fed. The key points:

1) The decline in manufacturing jobs really parallels (though over a more compressed period of time) the decline in agricultural jobs.

2) Manufacturing employment as a percentage of national employment has been dropping for 60 years.

3) But manufacturing output has been growing faster than the overall economy since the early 1990s, though lower prices have meant manufacturing makes up a smaller share of gross domestic product.

4) Average annual productivity growth for manufacturing grew at a 4.2 percent annual pace from 2000 through 2006 vs. 2.7 percent for the rest of the economy.

What does it all mean? It means automation is what's really affecting manufacturing jobs. But domestic machines don't make as compelling a political target as low-cost workers in China and Vietnam.

Gosh, it sure seems like a funny time to be worried about NAFTA and foreign trade considering that exports are what seem to be keeping us out of a recession. This from Global Insight:

The economy just kept its head above water in the fourth quarter. Domestic spending contracted—for the first time since the 2001 recession—but overall growth stayed positive thanks to foreign trade. Export growth was better than first thought, and imports actually fell—indicating that the U.S. is passing on some of its weakness to the rest of the world.... We think that it is probable that GDP will decline, albeit only slightly, during the first half of 2008. Domestic spending is likely to fall faster still, as housing activity continues to plunge and consumers are pulling back. Foreign trade will continue to be a big plus, but we do not think that it can do enough to keep growth in positive territory.

Those rising inflation numbers have spooked Larry Kudlow, who now wants the Fed to take a break:

While I've been a bit dovish on inflation, data over the last 3 or 4 months are changing my mind. Inflation first peaked in July 2005, and then gradually declined through the end of 2006. But since the summer of 2007—and especially in recent months—there has been an alarming rise of inflation.... Here's another problem. The Fed is going to be easing interest rates in the teeth of $950 gold and $101 oil! This can't make any sense to the average Main Street Joe out there. At the end of the day, the job of the Fed is to stabilize the level of prices, or at least to keep the increase in the price level to less than 2 percent. But the yearly changes are way, way above 2 percent.... The Fed should stop easing right now, and it should maintain that posture until commodity prices start falling.

Here are some interesting questions: Can the next U.S. president hike taxes when so many countries are cutting theirs? Can the next U.S. president boost spending despite a big current budget deficit and huge upcoming entitlement liabilities? Can the next U.S. president put up barriers to trade and outsourcing without driving American companies offshore? Can the next U.S. president reregulate the American economy without also driving companies offshore?

And overarching all those queries is this megaquestion: Won't global stock and bond investors punish the equity and fixed-income assets—not to mention the currencies—of countries that attempt to run high-tax, high-regulation, high-debt, protectionist economies? (This is the very point raised by the always perspicacious Larry Kudlow during my spot last night on CNBC.)

Blogger and economist Dani Rodrick hammers Bill Kristol for his criticism of Michelle Obama's statement that for the "first time in my adult lifetime, I'm really proud of my country." Kristol counters that "in almost every empirical respect, American lives have in fact gotten better over the last quarter century."

Not true, says Rodrick, pointing to the usual government data showing worker compensation stagnating for the past 25 years. "Who do you think has a better sense of what has happened to 'regular folk' since 1980? Michelle Obama or Mr. Kristol?" Rodrick asks.

Of course, if you tweak the inflation numbers to account for the fact that they most likely have been overstating inflation for years—many economists on the left and right agree on this—you'll find that real compensation rose from 20 to 40 percent over that period, depending on how you run the numbers. Score one for Kristol.

Superstrategist Tom Barnett has some wise words on sovereign wealth funds (as always, boldface is mine):

As for getting scared of these funds, the fear remains misplaced. The same money could be used for military buildups and all sorts of scary or stupid stuff. Instead, it's being re-invested in America.... Yes, SWFs need a voluntary code of conduct and yes, transparency must be improved. As for new rules...apply the same ones we've always had for big funds: certain industries (banks and defense) come with limits of ownership. As for their big size, SWFs remain about 2% of the world's $165 trillion world of securities, and they're collectively tiny compared to the combined weight of the three heavies (insurance companies, mutual funds and pension funds).... the real danger of SWFs right now is that they may trigger stupid protectionism instead of acceptance as yet another balancing mechanism in our increasingly globalized economy—something it's doing right now quite nicely.

Do the housing meltdown and the credit crunch it has spawned provide an example of a "market failure" that requires a big government bailout? Former Fed Vice Chairman Alan Blinder, for instance, proposes creating a $300 billion 21st-century version of the New Deal-era Home Owners Loan Corp. to help struggling homeowners refinance their mortgages. To get a better handle on this issue, I asked a variety of folks for their two cents on this multibillion-dollar issue.

Russell Roberts, economics professor at George Mason University and Café Hayek blogger:

The political calculus of a bailout is straightforward—there are a lot more taxpayers than people whose houses have negative equity. Those who are bailed out jump for joy while the taxpayers may not notice the loss or may not feel it deeply, especially when it's financed by borrowing.

So Ralph Nader is going to give it another go. Might libertarian Ron Paul yet join him? It would seem that there is even more room on the right than on the left for an independent bid. Look at it this way: John McCain, Barack Obama, and Hillary Clinton all agree that 1) the Bush tax cuts were too focused on wealthier Americans; 2) the government needs to create a cap-and-trade system to deal with carbon emissions, essentially an energy tax; 3) there is something unseemly about corporate America these days.

Now I will note that Paul has seemed focused on retaining his Republican House seat in Texas, and the betting markets give only a 5 percent chance to a third-party run by him. Maybe Paul could run, and he and Nader could come to an agreement: Nader would get on the presidential ballot only in deep red states and Paul in deep blue states, so neither would influence the final result—yet they could make their points and positions better known.

Let's start Monday morning with a dose of pessimism. First, here's the dour outlook of economists surveyed by the National Association for Business Economics. Although fewer than half—45 percent—think the United States will suffer a recession this year, the numbers still stink. On average, 49 economists surveyed expect the economy to grow just 0.4 percent in the first quarter of 2008, followed by 1 percent growth in the second quarter.

Next, a Bloomberg story speculates that any pickup in growth later this year from the combo of Fed rate cuts and the fiscal stimulus package will soon fade, "leaving the economy vulnerable to its underlying weaknesses: a retrenching financial industry, indebted consumers and slowing productivity growth." The story then quotes Credit Suisse economist Neal Soss as predicting the economy will grow 1.3 percent this year and just 1.5 percent next. And Lehman economist Ethan Harris weighs in with an equally lousy outlook, 1.1 percent growth this year, 0.9 percent in 2009.

If the 25-year economic boom dies in 2008, I think I will symbolically mark the time of death at exactly 23 minutes and 37 seconds into the Democratic presidential debate last night in Austin. It was at that very moment that Hillary Clinton said she would "freeze interest rates for five years because these adjustable-rate mortgages, if they keep going up, millions of Americans are going to be homeless." And the crowd cheered, and front-runner Barack Obama was silent. See, what that idea would end up doing is raising interest rates on new mortgages—about the last thing the imploding housing market needs right now. (Good luck finding an economist who disagrees with that.)

But it's not just that Clinton offered a funky idea during a heated political campaign. That is a bipartisan malady that comes every four years. (Indeed, some would argue that I should mark the time of death to back when President Bush signed the fiscal stimulus bill.) It's that the crowd ate it up and Obama (who has not supported such a move) let it slide—let slide a proposal for the federal government to massively intervene in the private economy. (If only Uncle Sam had frozen tech stock prices back in 2000.)

"No recession," says the sliding bond market. "No recession," say surging oil prices. "No recession," say rising commodity prices. "No recession," says Gail Fosler, the highly respected chief economist at the Conference Board. Well, that may be overstating things a touch. At least a downturn is not imminent, she says. Here are her fairly bullish bullet points from a new report:

1) Balance sheets in the nonfinancial business sector are as strong as they have been since the 1960s.