Tuesday, January 6, 2009

Do you believe in magic?

No belief in magic?
How about Santa Claus? ...or the tooth fairy?

How about stimulus programs?

Ah, stimulus programs...

Open wide, say AHHH.. Oh yes some stimulus programs are hard to swallow then some are just second helpings of your favorite dish.

Tax credits extended help...whom?
The tax credit portion of the Obama plan is such an example. This will allow firms to write off losses over five years so those with past (boom era) profits will be able to write off some bust-era (current) losses to generate cash. The cost is not free it's federal and it means a larges fiscal deficit. The good news is that this will help to funnel money into the firms that are being hurt the most and that are in the greatest need of help. In that sense it seems targeted. The bad news is that these are the very same firms that made the biggest mistakes. It's like a reward for failure. Banks and homebuilders are expected to be among the biggest beneficiaries of this largesse. I guess that the old saying is true. On Wall Street we always used to say if you don't want to be fired, be sure to lose a lot of money if you are going to have a loss.

Fiddle Dee dee please help ME!
Such a credit will help them. But that won't make homebuilders build more homes or make banks lend more money. Fiddle dee dee.

Still out in the cold
By the way all this and still nothing concrete for homeowners... except maybe some concrete. You got a problem wit dat? Housing is still widely said to be at the bottom of all the troubles. Unfortunately lip service is not mortgage servicing.

There are plans...
There are plans to help displaced workers. Plans to help them to make their Cobra payments. There are public works plans. There are tax rebate plans and even outright payments to families with children at income levels below past thresholds that used to determine who would receive 'rebate' monies. There are a lot of plans and a lot of moving parts. And all of these actions will help the people that get these monies. But none of this will reverse recession.

How to save a life...an economic one
Recession is a process. It has to run its course or be diverted by an authentic new trend. Government monies are temporary infusions. They can help to prop income but apart from the funds given to the truly desperate, not all of them will be spent. And there is no promise of follow-up spending for retailers who will be glad to sell their existing stocks of goods and then NOT REORDER... Tax credits for investment will not be used until the economy turns higher. So before these stimulus plans really kick in, the economy itself needs to be in a better state. That, seemingly, is a paradox, but even in medicine we know that patients have to be healthy enough before we can operate on them. Why should the economy be any different?

Splenda is not Sugar... artificial stimulus is not real growth
The economy does well when business is profitable and expanding, paying wages that in turn are supporting consumption. The idea of a stimulus plan is to artificially create some of these same circumstances. But a cost incentive to invest is not the same as a profit motive that looks ahead. A one time boost to income is not the same as a real job and the sense of security it imparts to a family. Make-work public works programs can be more potent when the projects are long lived, but then the monies get into the economy slowly. Just as artificial strawberry flavoring may bear a resemblance to the real thing, it still is not that. In the economy some may find the artificial help of some use, others may remain the skeptical consumers or businesses that they were before getting the extra help.

Recovery is a process not a destination
It is hard to mimic with artificial means the health of a real and vital economy. This economy has some bad investments that are lingering, and lines of business that are in the process of being shut down. Unfortunately they are impacting other sectors. Housing is a still vital sector but one that underwent too much expansion and price appreciation. That is a travesty since excess housing stock is worked off so much more slowly that an excess of shirts or dresses. What miracle of stimulus can put that right? Answer: Nothing. Recovery is a process; it takes time.

Tax credits and help: which ones work?
But working our way out of these excesses is the path to a better economy. Some artificial stimulus can help, but think it through. Do you really want to help the homebuilders who overbuilt homes with such high prices tags? Do this and you encourage their homes - currently for sale -- to stay on the market at barely reduced prices. Bankrupt them and others buy their assets and resell the stock of unsold new homes for pennies on the dollar, since that is what they purchase them for. Housing prices must adjust to what the population can afford, not to the cost that builders have in them. Does bankruptcy suit home builders? Does it suit and help the economy? These should be the central questions for policymakers.

Stimulus and models
It is hard to create a stimulus program and while econometric models may show some benefit (indeed current growth will respond to such hefty sums of spending) in truth the impact is a guessing game. It is the way funds are channeled as much as it is how many funds are channeled and in ways models often don't account for that is really critical. The impact of income on an individual is the money it means he or she can spend today and in the future. Simple money given today lacks many of the characteristics of income rightly earned and projectable into the future. The recipient of such funds knows that best of all and his/her propensity to spend such funds reflects this knowledge.

At heart a stimu-skeptic
Recessions are processes that must wring certain accumulated excesses out of the system. In this one the Treasury acted to make sure banks were not a casualty that could drag everything down with them. Good choice. But that is damage control not stimulus. Damage control is much easier to do. The last stimulus package in 2008 did not give us much more than the spending in the quarter in which it was executed. There was no spillover. The economy continued down its slippery slope after a one-quarter bounce. Was that really worth it? As we look as what could be $775bln in stimulus in 2009 and 2010, we have to ask if it is the sort of thing that will help boost the economy or is it wasted? Is it damage control? Even if it cushions those that recession might take advantage of, that alone could be reason enough to do it. But that is a different objective and rationale than 'stimulus' per se. Into 2010, with nothing much done, the economy should be recovering. After all we already are one year into it so we are talking about a 2-3 year period when, in fact, the longest Post-War recession was 16-months. I do believe in these packages as damage control and as band aids for the injured but I remain skeptical of stimulus. Keep spending long enough and you'll get a recovery. That does not mean your spending created the recovery. But we know who will take credit for it...




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