Econ-Recon: November 2007: Archives

November 27, 2007

And Down Will Come The Economy, Tax Cuts & All genre: Econ-Recon & Polispeak

Down Will Come The Economy

It's one thing to talk abstractly about a house of cards; its another thing to be living with an economy built upon that very premise. Throughout the Bush administration, we have been sold on the benefits of tax cuts for the wealthy; with the promise of insuring a healthy economy. All the while, I believe this paper tiger economy was actually built and sustained by the implementation of artificially low interest rates and shoddy mortgage lending practices.

This shortsighted effort was designed to limit the depth of an economic downturn and to spur equity spending on the part of middle income Americans in the absence of the fundamentals necessary to create real economic mojo. At the same time, the tax cut strategy served to bolster the GOP's alliance with wealthy benefactors. Unfortunately, the winds of a weak financial environment have returned to find an economy which is all the more vulnerable and far more suspect.

At the moment, we are witnessing a conflation of events that at best signals a tumultuous period of tepid GDP growth. A candid reality check likely suggests we are on the leading edge of a recession that may persist well into 2009. Let's look at the indicators.

From Bloomberg:

Home prices in the U.S. fell in the third quarter by the most in at least two decades as the subprime lending crisis caused sales to slump.

Home values retreated 4.5 percent in the three months through September from the same period a year before, the most since records began in 1988, according to a report today by S&P/Case-Shiller. It followed a 3.3 percent drop in the second quarter.

Prices will probably keep sliding as foreclosures force more properties on to the market and sales weaken as mortgages become harder to get. The slump threatens to slow consumer spending as fewer homeowners will be able to afford vacations, new autos or home improvement projects.

From Reuters:

Lehman Brothers said the decline in home prices is the start of an extended decline in the market.

"We look for home prices to fall well into 2009 as excess inventory is slowly cleared and foreclosed homes return to the market at a discounted price," the company said in commentary published Tuesday.

This will translate to a 15 percent decline in national home prices from peak to trough, Lehman Brothers said.

From The Wall Street Journal:

The property value of U.S. homes will fall by $1.2 trillion, and "at least" 1.4 million homeowners will lose their properties to foreclosure in 2008, according to a study released Tuesday by the U.S. Conference of Mayors and the Council for the New American City.

Global Insight predicted that the economy would grow at a 1.9% rate in 2008, "a full percentage point lower than would have been the case without the mortgage crisis." It also said U.S. gross domestic product growth would be $166 billion lower next year because of mortgage market problems, and that consumer spending would fall to 2% growth.

If you've followed the reports on housing and the subprime lending crisis, the news has gotten progressively worse each time new data is released. Frankly, I see no reason to conclude we won't see more of the same. Given the fact that so much of our current economic growth has been the result of consumers spending the equity they've accumulated from the recent housing bubble, the impact of lower housing prices, foreclosures facilitated by adjustable rate mortgages, generally higher interest rates, and stricter mortgage terms has not yet been fully calculated or understood.

Add in the projections that housing prices will fall at least fifteen percent before the downturn has reached bottom and one begins to see the magnitude of the pending economic slide. While difficult to calculate the amount of spending which results from homeowner's borrowing against expanding home values, it isn't difficult to imagine the significance of declining home values...and that ignores the impact of existing inflationary pressures which will no doubt cut into any discretionary spending that remains feasible.

Let's look more closely at the reports which measure consumer confidence.

From The Associated Press:

With Christmas only a month away, American consumers became more pessimistic about the economy in November, sending a widely watched barometer of confidence to the lowest level in two years amid worries about rising fuel costs and a housing market slump.

The New York-based Conference Board said Tuesday that its Consumer Confidence Index dropped to 87.3, marking a four-month slide and continuing down almost 8 points from the revised 95.2 in October.

It was the lowest reading since 85.2 in October 2005 when gas and oil prices soared after hurricanes flooded New Orleans and shut down a large chunk of the nation's oil refineries. It also marked the sharpest drop since September 2005 when the index plummeted 18 points from the previous month.

The big worry is that shoppers will take their time returning to the stores this holiday season amid worries that higher gas, an escalating credit crisis and a slumping housing market could push the economy into a recession.

With consumer spending accounting for two-thirds of U.S. economic activity, any further dropoff of consumer spending increases the risks of a recession.

Pretty simple stuff...if you have less money to spend and lack the equity to borrow it, then the only answer is to spend less money. Once that reality sets in, consumer confidence is apt to fall even further in what becomes nothing short of a cause and effect downward spiral. Once this happens, job losses can't be far behind as retailers and manufacturers are forced to lay off employees in the absence of stable or expanding sales.

From China View:

The Fed also forecast that the unemployment rate would rise to between 4.8 percent and 4.9 percent next year, compared to the previously estimated 4.75 percent for 2008.

In the past two months, U.S. unemployment rate stood at 4.7 percent, a level still considered low by historical standards. Before September, the jobless rate had remained in a range of 4.4 percent to 4.6 percent since the same month of 2006.

With economic growth slowing, the unemployment rate would increase "modestly" next year, stabilize in 2009 and then decline slightly in 2010, the Fed said.

Yes, this anticipated increase in unemployment is minimal...if only that were the end of the story. Projecting unemployment is not only difficult; it is dependent on all of the factors mentioned above. Should the economy follow a worse case scenario, then one would expect unemployment rates to exceed these preliminary projections. Again, all of these measurements feed off of the others and once recessionary momentum is unleashed, predicting the bottom becomes a crap shoot. In an economic downturn, bad news relating to each individual item exerts a downward ratchet effect upon all of the others.

Further, the one item that must improve in order to help halt the effects of a recession...consumer confidence...is often the most difficult to impact and the slowest to respond to signs of improvement. As such, the fix may well be in place long before one begins to see a shift in momentum.

I would equate the economic process to what one might experience if one were in a line of individuals holding hands and spinning in a circle...those anchored in place at the front of the line start moving first and by the time the person at the end of the line starts moving, the momentum is in full swing and apt to send that person flying at a pace they cannot control or maintain. The process (momentum) continues until the links that keep the line functional and turning begin to break (holding hands in this example). The same is true of the economy.

A view of the economy isn't complete without looking at the stock market...and the news isn't any better.

From The Chicago Tribune:

Stocks took it on the chin again late in Monday's session, as investors dumped shares across a broad range of companies.

The Dow Jones industrial average plummeted 237.44 points, or 1.8 percent, to 12,743.44.

Based on daily closing prices, the Dow and the Standard & Poor's 500 index reached 10 percent declines from their Oct. 9 highs, a move known on Wall Street as a "correction." It was the first such correction since the late winter of 2003.

The repetition of headline-grabbing market declines so far this month appears to be having self-fulfilling impact on investor sentiment.

Would-be stock market investors these days are like people prone to panic attacks, said Jack Tilton, technical analyst at Channel Trend. "When in the middle of the night with the wind howling do you decide to open that closet door?" he said.

Of all the economic indicators, the stock market is likely the least predictive of recessions. While corrections happen far more often than recessions, the recent weakness doesn't help consumer confidence. In essence, if the economy is teetering on the edge, a stock market correction may simply provide the final psychological nudge.

I want to close by returning to the politics of economics. The GOP, under the guidance of George Bush, has argued that the tax cuts enacted shortly after the President took office served to move the economy out of recession. If one accepts that premise, then a new recession would seem to suggest two things. One, the tax cuts may not have been responsible for bringing us out of the prior recession...especially since they don't appear to be capable of keeping us out of a new recession. Two, if we are entering another recession, then perhaps the tax cuts were little more than a political calculation.

If, as I've argued, the economy was actually propped up through other means (low interest rates and lenient mortgage terms), then one would hope the GOP would now focus on measures that would actually benefit and buttress the economy. Unfortunately, just today we find Larry Kudlow arguing that the GOP should not only embrace the past tax cuts; they should put forth the argument that they are once again essential to jump start our sluggish economy.

The Wall Street Journal’s Gerald Seib has an excellent column this morning on the threat of an economic downturn and the relevance of tax cuts to reignite the economy. He notes that Republicans have an important opportunity to push tax cuts as a spur to the slumping economy, whereas Democrats are still stuck with a tired tax-hike message and an obsessive desire to undo the Bush tax cuts.

Seib does not go into the incentive effects of lower marginal tax rates versus the one-shot demand-side effects of temporary tax cuts.

Former Clinton Treasury Secretary Lawrence Summers is now predicting a 2008 recession. But he’s calling for temporary tax cuts for low and middle-class families. Unfortunately, history clearly shows this approach will not work.

Democrats also will try and make the case that taxes should be cut for the so-called middle class, and raised on upper-income earners. This is futile. It’s also bad politics. Taxing successful earners is a tax on capital and investment, which has recently become scarce during the housing crisis.

Republicans should take care to propose lower tax rates on middle-income earners, as well as successful investors. The real supply-side “bang for the buck" comes at the top-end, but across-the-board rate reductions do have positive economic and political benefits. Collapsing the middle-income brackets — 15 percent, 25 percent, and 28 percent — would make a lot of sense.

Given the economic and credit-market concerns sweeping down Wall Street and Main Street these days, it’s time to talk tax cuts. But the right kind of tax-rate reduction must be part of the new-tax-cut riff.

Now you have to admire Kudlow's moxie...but little else. Try as I might, his argument seems to be akin to suggesting we embrace more of the same despite lacking the evidence needed to substantiate doing so. Truth be told, when the average American looks back on the Bush years...and compares where he or she now stands financially...there should be little doubt that the bubble has burst and the bank account is bleak.

I suspect most Americans will be hard pressed to get on board with a "new-tax-cut riff" when they come to the realization that its being brazenly advanced by those individuals who were fortunate enough to actually benefit measurably from the last round of the Bush administration's "conning-me-economy".

As I recall, the average family received approximately $650 in tax savings. The relevant question is whether one believes the resulting economy continued to enrich the average American or merely those wealthy individuals who received the lion's share of the savings.

Think about it...don't those individuals promoting another round of "trickle-down" tax cuts have to be better off now than they were seven years ago? If they are, then why should the average American (who isn't better off) be in favor of rewarding the very people who told us the last tax cuts were an insurance policy against recession as well as a guarantee of a robust economy? How many tax cuts followed by recession do we have to have before we say never again?

Tagged as: Consumer Confidence, Economics, GDP, George W. Bush, Housing Bubble, Inflation, Interest Rates, Larry Kudlow, Recession, Stock Market, Subprime Lending, Tax Cuts, Trickle-Down, Unemployment

Daniel DiRito | November 27, 2007 | 12:45 PM | link | Comments (3)
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November 17, 2007

Follow The $: Yes - Tainted Toys; No - Cheaper Meds genre: Econ-Recon & Little Red Ribbon-Hood & Six Degrees of Speculation

Follow The Money

Time has a way of exposing inconsistencies...and when it does, it often shines a bright light upon previously ignored or hidden hypocrisies. For me, Thursday's Democratic debate helped crystallize my thoughts on one of those situations.

We've all heard plenty about the tainted toys being imported from China...toys which have been recalled due to lead content and other dangerous chemicals harmful to America's children. As the candidates were debating the merits of our trade agreements, it occurred to me that the response of the Bush administration to the questionable imports warranted further analysis.

Following an exchange on the topic of our existing trade agreements and whether they provide the mechanisms necessary to monitor and penalize the improper acts (like the exportation of dangerous toys) of those nations and companies (often American owned) doing business in those countries, I took particular notice of Senator Biden's comments.

After a number of the candidates expressed their criticism of the handling of the imported toys as well as NAFTA and CAFTA (the trade agreements typically associated with questionable trade issues), Biden offered the following with regard to the outrage at the lack of response to the toys in question:

From The New York Times:

SEN. BIDEN: Look, it's not the agreement; it's the man. Under the WTO, we can shut this down. What are they all talking about here? It's about a president who won't enforce the law. (Applause.) When they contaminated chicken, what happened? They cut off all chickens going in from Delaware -- a $3 billion industry -- into China. They cut it off. We have power under the -- this agreement. I don't know what anybody's talking about here. Enforce the agreement.

MR. BLITZER: Thank you.

SEN. BIDEN: Shut it down. (Applause.)

As I listened, I recalled another situation which I think even better demonstrates the inconsistencies of the current administration with regard to trade and the safety and protection of the American public...one that exposes a level of hypocrisy that we shouldn't accept from our government.

Following the passage of President Bush's Medicare prescription drug benefit in 2003...and in response to the President's insistence upon a provision to prevent Medicare from negotiating bulk discounts for drugs...there was a push in the Congress to allow the importation of cheaper prescription drugs from Canada in order to assist those in need of less expensive drugs. As it was being discussed, the President threatened to veto legislation which would enable Americans to import prescription drugs from Canada. Back then, he stated he would do so because there would be no way for the FDA to insure the safety of the drugs which would be imported.

When the issue resurfaced earlier this year, the President once again promised to veto the proposed legislation; arguing that it would risk the importation of "unsafe, unapproved, and counterfeit drugs".

In the absence of sufficient comparisons, one might be inclined to believe that the President's persistent opposition to imported drugs signals his concern for the safety of the American public...and while I'm sure such concerns exist and may well be sincere...they may not be the primary motivation. I contend that the tepid response to the importation of dangerous toys from China provides an important comparison...one that is necessary to identify an inconsistency...and therefore serves to illuminate an obvious hypocrisy.

Here's the thing. There are millions of elderly and poor Americans lacking sufficient insurance coverage and in need of affordable medications. The fact that our President refuses to allow these individuals to purchase drugs from Canada...drugs that Canadians apparently trust and drugs which no doubt keep Canadians well...speaks to one underlying motive. Isn't is probable that the President's opposition to the importation of Canadian medications is first and foremost about protecting the profits of large drug companies who charge Americans premium prices for their medications? Keep in mind this is the same President who also vetoed legislation to extend health care coverage to more of America's poor children. As I look at these issues in conjunction with the measures to insure the safety of imported toys, I struggle to reconcile the contradictions.

One must question the lack of substantive action on the part of the Bush administration with regard to tainted toys from China...toys that are often manufactured in China by large corporations seeking cheap labor and higher profits. If we're willing to make the argument that it is prudent to prevent ill Americans from obtaining Canadian medications that are arguably safe and beneficial, then why aren't we also acting forcefully and preemptively to protect healthy American children and prevent them from obtaining unsafe toys manufactured in China?

I'll answer my own question. We do so because the Bush administration places more weight upon cozying up to corporate interests and protecting their profits than he does upon looking out for the welfare of American citizens. Should the two concerns intersect, all the better; should they not, then we apparently turn a blind eye to danger.

Toss in the fact that we are constantly being bombarded by the Bush administration's mantra that they're fighting the war on terror in Iraq (at a cost of 10 billion per month) in order to protect Americans at home and the breadth and depth of this President's efforts to distort and deceive suddenly becomes crystal clear. Protecting Americans ought to extend beyond the concerns for the coffers of corporate collaborators and the political aspirations of those who have found that fueling fear wins elections.

If this represents the manner in which the Bush administration intends to execute its responsibilities to protect us and keep us secure, I'm afraid I join many Americans in believing the outcome is woefully inadequate.

Tagged as: 2008 Presidential Election, CAFTA, Canada, China, Democratic Debate Las Vegas, George Bush, Imported Prescription drugs, Iraq, Lead Tainted Toys, Multi-national Corporations, NAFTA, Prescription Drug Benefit, Trade Agreements, Veto Power, War On Terror, WTO

Daniel DiRito | November 17, 2007 | 11:05 AM | link | Comments (0)
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