Economics

Has the US economy improved because of the policies of the current administration?

Its easy enough to argue both sides of that, we have seen continued increased economic growth and reduced unemployment, but we were seeing those before the election.

The reduced business taxes and regulation reductions are providing some stimulus, but we see the increased deficits and tariffs as headwinds to future growth.

If you live in the fantasy world of this administration, he has turned the economy around.  He is creating manufacturing and mining jobs and making America energy independent.

Of course the amount of truth in those statements is negligible but there is a little truth there.

His policies have started to hurt farmers as one of their biggest customers has made American products more expensive leading to lost sales.

His immigration policies have also led to labor shortages in certain seasonal industries.

We are seeing some increases in energy costs and those will have an impact.

If you simply look at trend lines since the great recession, the change between the two administrations is simply not dramatic.

Remember we had some pretty major stimulus, the tax cuts and the increased Government spending that should cause a growth spurt, and we see some impact, but of course that is really borrowed money since our deficit is so high.

We are seeing some interest rate increases which will slow growth a bit and while I doubt the congress can do anything at all short term, we see the administration trying to pass another tax break.

There is certainly no economic miracle and the long term impact seems negative, but short term there is some increased growth.

If you believe that the growth will become permanent and propel the economy, we may be able to pay for these cuts.

If not, well we have a growing debt problem to deal with.

If the interest rates go high enough it will be a disastrous issue.

Unemployment turnaround?

If you consider the supply side argument of economics, the argument is that if you make supply more abundant, it will drive down prices and create demand. The way to increase supply is to incentivize the businesses with tax breaks.

Businesses pass the cost reductions on to consumers as lower prices leading to the greater consumption, leading to additional production, more jobs, more demand, economies of scale, and so on and so on.

The only potential flaw in this approach would be if the cost reductions are not passed along, or not passed along fully. In classic supply and demand analysis, the price reductions must be significant enough to truly stimulate demand.

Now, in our recent economic contraction, we saw significant price reductions because of the fall in demand. In order to sell off inventory businesses were required to reduce prices and those that survived then reduced costs in order to return to profitability.

To some extent, some of this cost reduction was enabled by the cheap credit policy the Government has followed. The other cost reductions were primarily achieved by reducing locations and employment. Now, these type of cost reductions, lead to reduced demand and the cycle will continue until at some point demand is increased in some fashion.

We have seen one program on the demand side that may actually have the potential to reverse the cycle. This was the so called cash for clunkers program. This program increased demand by stimulating the demand side and effectively reducing the cost of product via a Government subsidy.

As the Auto manufacturers start to ramp up to cover demand, the wave of hiring will spread throughout all their suppliers including commodity suppliers. Will this be enough of a spark to reverse the cycle? By itself, maybe not, but if we start to see the stimulus create additional jobs in road construction and infrastructure repair or creation we may see a bottom.

Economic revival

There is a quote by B.C Forbes that goes, "The victors of the battles of tomorrow will be those who can best harness thought to action."

Yesterday I watched a speech given by President Obama in Indiana where he announced a grant to the local factory to build electric vehicles or a component thereof. The actual grant was one of many from the stimulus and similar announcements were apparently being made by the Vice President and other members of the cabinet.

What I found significant was that he talked about the need for American to take leadership in the renewable energy field.

I couldn't agree with him more, and the question is can we?

The Government stimulus and the bank bailouts have been widely criticized. However, they shouldn't be in fact they serve as real investments in America. As far as the bank bailouts, if the banks generally recover, as many of them seem to be, and they repay the Tarp money with interest computed at the Treasury rate, they are simply investments that transfer money borrowed by the Government to a future period. Since they provided needed reserves and allowed the financial system to recover they are in fact not a debt being handed to the next generation. Further, our stock positions in C and AIG may end up being profitable as well as the amounts we get for the warrants the financial institutions gave us.

Similarly, while it may take a while longer, the amounts provided to the Auto industry have similar potential. When I hear analysts arguing against them, they immediately assume we will never get paid back. I don't really know, but I do see some signs of recovery in the Auto industry, helped in part by Cash for Clunkers. So maybe that money will return to the treasury and not add to the debt down the road.

I would also like to address a comment I hear about cash for clunkers that sort of is inane yet often repeated. It is arguing that it is stealing sales from the future. There is no proof of this and further, what about all those sales that didn't happen between the middle of 2008 and now? I know that I have been thinking about replacing my wife's car and when I heard about Cash for Clunkers coming, decided to wait. Turns out her car doesn't qualify but I don't think I was the only one thinking that way. Further, cars wear out. There is some normal turnover cycle for cars and it is greater than the rate that we have seen recently. The cars being sold in this program are not just cars that would have been sold anyways. They are in many cases cars that should have been sold over the last six months. Another factor is that it is stirring other economic activity. There has been an uptick in used cars recently. Ever occur to anyone that it might be well worthwhile to buy a clunker if you don't already own one? Finally, every car turned in generates jobs, sales tax and improves gas mileage reducing the need for foreign oil and improving air quality. I challenge anyone to find a more productive Government use for the $3 Billion dollars.

Considering the need to reduce foreign oil dependence and increase jobs in this country, the investment in renewable energy has the potential to do both of these things. We need to be the ones to win the battles of tomorrow by harnessing thought to action. Every person working generates taxes, every product that gets built in this country creates jobs. A lot of the analysts who pooh pooh the stimulus, are in the financial sector and they don't care if the work is performed in this country or somewhere else as long as they can profit from it. I have no problem with them betting against America, and I also think the rest of the world has some wonderful investment opportunities that don't conflict with American prosperity. But if you are betting that America is down and not getting back up, I think you are going to lose that one.