What You Should Think About Recession

November 28, 2007

“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.”

–William Arthur Ward

My first experience analyzing the cultural resonance of the word “recession” comes from the media treatment of conditions leading up to the 1992 Presidential election. It is clear that the first President Bush presided over a weakening American economy as the end of his term approached. Yet it is also clear (all the more with hindsight) that a some of this was the inevitable adjustment of indicators and indices tugged away from realities by the fervor of Reaganomics jingoism.

Today, jingoism is almost too soft a term for an institutional predisposition to spin economic news. Anchors with almost every major network tiptoe around the fundamentals and treat “the R word” as if it were a vulgarity that should never be uttered in polite company. In fact, recession is a technical term that should be fluently employed in any applicable discussion of economics. Alas, it is also something of an ambiguous term, made all the more fuzzy by the abuses of journalists, pundits, and politicians themselves.

Perhaps the most sensible definition of “recession” holds that it is a period of time when economic growth across two consecutive quarters does not keep pace with population growth. Yet economic growth is itself a much fuzzier concept than tends to be widely believed. If an expensive and fragile device is replaced by a cheap durable device that fulfills the same need, adopting the innovation registers as a negative on the scorecard of economic growth. Acting promptly to minimize the damage caused by a natural disaster may also compare unfavorably with the activity involved in rebuilding efforts.

Then there is the matter of war. While much of education, child care, resource conservation, domestic toil, etc. is not included in the calculations that shape growth assessments, even the most destructive of military activities registers as economic accomplishment. For years the present Bush Administration has turned out mediocre economic performance — a feat that might be considered more than mediocre in light of the damage the attacks of 9/11 inflicted on key institutions as well as public morale.

Yet it is legitimate, even important, to have some sense of context in these matters. Attributing the economic components of declining public morale to terrorist attacks seems a serious error in judgement. If anything, the United States was energized and mobilized, more than at any other time in recent decades, as a response to the 9/11 attacks. A strong national leader with real vision about how to solve real problems could have accomplished amazing things while marginalizing apathy for the foreseeable future. As our sitting leader chose a different approach to directing the resources of the nation, we have experienced a different outcome.

Insofar as there are problems with public morale today, they have little to do with fears Al Qaeda is about to take the roof off the local Pamida store and more to do with weariness. People have grown weary of the persistent disconnect between the stated purposes and the predictable outcomes of White House initiatives. People have grown weary of the persistent deference to market forces in almost all matters, as if trickle-down thinking was still considered to be a perfect panacea to all social ills. Perhaps most of all, people have grown weary of a horrendously bloody and costly counterterrorism strategy that does at least as much to produce new terrorist recruits as it does to neutralize existing terrorist operatives.

The war in Iraq continues to bleed this nation, both literally and economically, to a significant degree. Yet that significance also registers as a net positive in the Gross Domestic Product. An end to the wartime spending binge would mean less spending to stimulate economic activity (unless policy also called for expensive peaceful initiatives like universal health care, universal access to higher education, and whatever else could be funded with the mountains of money funding the occupation of Iraq.) A short term thinker cannot help but see perpetuating the war as vital from the perspective that it also perpetuates wartime spending.

Yet focusing exclusively on short term thinking is almost never a sound approach to economics. So much spending creates more government debt. More government debt means more difficulty in securing creditors for the Treasury. Other than raising interest rates, there is little legitimate action a government can take to expand support from investors. Yet this all happens against a backdrop of interest rate cuts. Even now, Wall Street svengalis continue to promote loose credit as a way of encouraging business growth.

Somewhat like a balloon, applying hard restraints to the economy in one area at best merely transfers pressure to a different area. If our nation spends more and more while issuing bonds that are less and less rewarding, ultimately the medium of exchange itself takes a hit in value. While this eases debt pressure by reducing the real value of that debt, another inevitable consequence is increased pressure on working class citizens (or really all citizens with ordinary levels of personal income.) Less value in the dollar means more dollars are required to obtain goods or services of value — but the process does not provide more dollars to income recipients until terms of employment change.

On top of this great tangle of fundamental problems, oil speculators have driven energy prices up, and thus by extension made inflation that much more severe. If there is any bright spot in the big picture here, it is that the speculation cannot persist indefinitely. Unless the Bush-Cheney team starts a shooting war with Iran, the climb of oil should be arrested in spite of the continued decline of the American dollar. In fact, a general sense that U.S. belligerence is a declining phenomenon could drive a long-needed correction in the price of that particular commodity.

Still, when President Bush’s chief economic advisor Allan Hubbard declared that the prospect of a recession was more likely now than it seemed one year ago, he was doing so with some awareness of these hard facts. As this moment of frankness was almost immediately followed by a resignation, it is hard to say if many others inside the administration have even tried to wrap their minds around the particularly complex and particularly messy state of the national economy today.

Will the unraveling of Dubyanomics have such a severe impact as to bring about a national recession? This is a difficult question to answer, even if one accepts a concrete technical definition for the term “recession.” It may well be the case that American industriousness will sustain some measure of real growth even as the ongoing series of small shocks continue to reduce the median purchasing power of the American consumer. It may even be the case that a sense of hope brought on by a pending change in national direction could inspire major changes for the better.

Yet there should be no doubt — military aggression and widespread corruption fostered by this President have done no favors to the American economy. If we fail to get out economic house in order relatively quickly, the price we have already paid for his follies will be multiplied as it rests on the shoulders of future Presidents and even future generations of American taxpayers.

What You Should Think About Pork Barrel Spending

November 12, 2007

“The defense budget is more than a piggy bank for people who want to get busy beating swords into pork barrels.”

–George H. W. Bush

Over the past two days, I’ve encountered an assortment of media items related to NASA’s practice of honoring people associated with the Space Shuttle program with receptions, banquets, and a ceremony coinciding with each launch. One television network even went so far as to run down the contents of a recent buffet item by item. As the unremarkable list was illustrated by computer graphics and emphasized with alarmist narration, I was much more disturbed by this sloppy attempt at journalism than by the fact that there was no limit on how much beef, turkey, or shrimp attendees might consume.

It did sound like the event was nice, but I did not feel the term “lavish” was being used properly in various accounts of it. Certainly the event was nowhere near the kind of extreme decadence one tends to see when corporate entertaining goes beyond the bounds responsible oversight should establish. One report holds that NASA may have spent $4 million on the last seven of these events. That amounts to roughly 0.025% of the actual spending involved in NASA operations during that time.

What public good is accomplished by journalists reacting so dramatically to the idea that NASA might actually spend $250 out of every million dollars under their control to give hard-working scientists, technicians, inspectors, et al. a pat on the back? There was plenty of “taxpayers should resent this” nonsense flowing through the coverage, but there was no effort at all to show some sense of proportion about the matter. Frankly, I think NASA could double up on this, spending a whopping 0.05% of their budget for special events to award good technical work on the Shuttle program, and still be considered responsible in their use of taxpayer funds.

There certainly are situations where it is right for citizens to be outraged by government waste. Unfortunately, politicians and journalists tend to spend so much time stimulating outrage about trivial spending and/or perfectly legitimate spending that there is no keen focus on real corruption and the most costly abuses in the system. In my opinion, the spending in this NASA story was both trivial relative to the big picture and legitimate insofar as it was perfectly reasonable for its purpose. Yet I imagine most American citizens inclined to read a daily newspaper or watch a significant amount of television news encountered this misleading and emotionally charged item.

Of course, it is but one of many. Every time there is a legislative pay raise up for debate, some grandstanding nincompoop sets about depicting Congressional salaries as a form of government waste. I believe the nation would see more fiscal discipline and better legislative work product if the job paid $10 million per year. Being a Representative or Senator is surely more consequential than being able to play a sport extremely well. The only reason I hesitate to advocate that approach to drawing a better class of citizen into the realm of politics is that such high salaries would make unseating an incumbent that much more difficult for challengers.

This nation started building costly missile defense installations before inventing the technology to actually defend against long range ballistic missile attacks. Even in the unlikely event all that rocketry infrastructure finds future use as part of a working missile defense shield, billions upon billions of dollars will have been squandered by putting the proverbial cart before the horse. Yet the role Senators Hillary Clinton and Chuck Schumer played in earmarking $1 million for a museum near the site of the Woodstock music festival has generated far more public criticism than the role George W. Bush played in deploying a major military system before developing the hardware essential to making that system function in any useful way.

Another item fluttering about the news in recent days has been the mysterious problem that brought down an F-15 fighter during a routine training flight. I cannot dispute what Air Force officers have to say about that warplane. It is an old design, most of the chassis have seen heavy use for decades, and the time has come to consider retiring them outright. Yet the initiative building up steam on Capitol Hill is not for a simple strike fighter replacement. Instead the plan is to double the build orders for the F-22, a powerful (and powerfully expensive) yet stealthy air superiority warplane.

It may well be the case that the Air Force and the Navy need to go beyond existing plans to modernize their aircraft fleets. The problem is that in the military-industrial complex’s uncompromising pursuit of excellence, there is also no room for compromise in spending. The wealthiest nation in the world cannot manage $35 billion to insure health care for children for the next decade, but we can find a larger sum to avoid losing a single step in the arms race? Considering that no other nation is foolish enough to run that race with us anymore, we have all the more reason to reconsider maintaining this extreme pace.

Widespread public perception holds that the $9 trillion debt accumulated by our federal government is a function of “all that damned waste.” Spending like NASA’s banquets or the Museum at Bethel Woods are not at all the real problem here. Now that museum’s funding has been abandoned, all because of misdirected outrage about government waste. So long as politicians and journalists continue to stir up public outrage about little things, many of which actually are not as ridiculous as they are made to seem by sensationalist media accounts, it becomes more difficult to rally the public behind fiscal restraints that are both non-trivial and reasonable.

George W. Bush, happily in league with strong Congressional majorities for the first six years of his Presidency, never vetoed a single spending measure during that time. While pundits bickered about the “waste” of a million here and a million there for projects like the study of an exotic species or a fact-finding mission to some Hawaiian resort, the President and his allies gave out billions in subsidies to profitable oil and gas companies. Not only was this a useless drain on the treasury — it also serves to place business rivals in fields like alternative energy and nuclear power at a relative disadvantage. It was a deliberate step away from energy independence.

Perhaps it is true that a million dollars saved is a million dollars earned. Yet policymakers must cut a million dollars one thousand times to compensate for squandering one billion dollars. If we do not develop a sense of proportion about these matters, then we cannot hope to have an informed national debate about how to bring government spending under control. While the media continues to focus on everything except the major problem areas in our national budget, that sense of proportion will continue to be elusive. I can only hope that in the mean time NASA is not reduced to rewarding its best engineers with nothing more than a literal pat on the back.

What You Should Think About Interest Rate Cuts

October 28, 2007

“Start with the idea that you cannot repeal the laws of economics, even if they are inconvenient.”

–Larry Summers

Conventional wisdom in some circles holds that lowering interest rates is good for business. This week policymakers with the Federal Reserve will meet to discuss the prospect of a fresh cut. Though this only involves the rates charged to banks borrowing money within the system, it is true that lower rates there translate quickly into greater availability of credit for businesses and homeowners. It also translates into greater availability of credit for speculative investors, though some would call me an economic heretic for suggesting loose credit has any downside.

Yet promoting unsound speculation is not the only downside it possesses. Another is not so much controversial as it is ignored. When credit is loosened by lowering key Federal Reserve rates, supporting the American national debt becomes less rewarding. The long term consequences of cut after cut after cut include lower foreign faith in the traditional reliability of the American dollar’s value along with less willingness to support the ever-growing national debt.

Recently that debt surpassed $9 trillion. To put it another way, our federal government owes individuals, foreign governments and other institutions nine thousand thousand thousand thousand dollars. To put it still another way, the U.S. Treasury is on the brink of being $30,000 in debt for every person living within our borders. It is true that the sitting President inherited most of this debt. It is also true that the archetypical “compassionate conservative” conserved the nation into and beyond a 50% increase in the size of that debt.

So our government needs much more support to remain solvent, yet again and again the investment environment is shifted to lower returns on the most stable varieties of long term investments. Of course, this is precisely what the groupmind on Wall Street desires. The same warped thinking that raises stock values when a company becomes smaller by severing ties with human assets and often lowers corporate valuations in response to expansion of American operations also holds that interest rate cuts are always a good thing.

To get to the heart of this, I’d like to look to the words of John Bogle, founder of The Vanguard Group. In an appearance last month on Bill Moyer’s Journal, the mutual find pioneer explained, “in the first 15 years I was in this business, the average mutual fund held the average stock for seven years. Call that long term investing. Now, the average mutual fund holds the average stock for one year. That’s short term speculation.” Keep in mind, mutual funds are generally considered a slow and steady component of capital markets. A proliferation of online activity and day traders creates much more churn.

Why is it bad that more and more stock transactions take place with an eye toward immediate gains? This kind of behavior takes the focus off of business practices and management initiatives likely to produce sustainable growth. Among other things, the present situation means that architects of “pump and dump” schemes can more easily degrade the integrity of capital markets. Yet it also means that stock exchanges suffer from a general loss of integrity as their useful purpose — to enable investors to profit while supporting the expansion of successful businesses — gives way to a casino mentality that marginalizes shareholder oversight of business operations.

After so many delays, the day of reckoning brought on by rising spending coupled with falling federal interest rates seems to be moving from inevitable to imminent. The longer deliberately optimistic estimates (and in some cases deliberately distorted official reports on present conditions) delay recognition of real inflationary pressures, the stronger those pressures become. Not many Americans understand how much Pollyanna economics induces fundamental weakness. Yet almost all Americans have a sense something huge has happened when told that our greenbacks are no longer as valuable as that funny money Canada prints.

I believe macroeconomic stewardship is a lot like being an old man’s private physician. The human body is full of complex interdependent systems. Attentive diligence is required to get a sense of current trouble spots and determine the correct treatments for maximum health. It is as much an art as a science. Sometimes, it really is best not to meddle at all. Sometimes a very small change can produce a major result. Then sometimes, a condition emerges that requires bold, even drastic, action. Obsession with a single approach tends to be counterproductive in such efforts, as it is no substitute for cultivating awareness of crucial specifics that vary from case to case.

I would not go so far as to predict that drastic action is required right this moment. Unwarranted economic alarmism probably devastates short term growth just as unwarranted economic optimism may devastate long term growth. I suspect few economists would dispute that the key to real long term growth involves sustainability in business practices.

Wall Street and other capital markets lose some of their usefulness if they become insensitive to quarterly profit statements and other short term considerations. Yet Wall Street has lost more than a little of its usefulness by becoming exclusively sensitive to those variables. In the process, the institution has become insensitive to the quality of long term planning, investments in human capital, cultivation of consumer trust, and many other important factors that should influence the value of a business.

Failure to think of growth in sustainable terms also leads to a mismatch of huge national debt and loose domestic credit that only supports the exodus of American wealth. Remember, businesses exploiting access to cheap credit are under no obligation to expand their operations inside the United States. This approach to stimulus may enable the rich to become richer, but whatever wealth actually trickles down from this tends to wind up putting food on tables far from American shores. I have nothing against gainfully employed foreigners. However, I think we all should be unhappy with “job creation” strategies that channel American resources without regard for where new jobs are actually created.

Again this all comes back to sustainability. In the present international climate, further bold expansion of the national debt seems unwise, to say the least. Already our currency has shown a measure of weakness unlike anything most living Americans have ever experienced. This week it is likely the Federal Reserve will cut interest rates out of fear that doing anything else would weaken the performance of capital markets.

Given that the performance of capital markets is actually weakening the broader national economy, is it really wise to act again on this fear? Didn’t this habit of loosening credit as a means to increase growth contribute to some of the problems already at issue? Will the need to promote sustainable economic growth ever be given priority over the need to placate speculative investors? As I see it, there is only one way to prevent harsh realities from forcing our hand. That way demands taking stock of the bigger picture, and responding to what we see before economic myopia sends our nation strolling right off a fiscal cliff.