Stimulus, Growth and Recovery: The Debate Continues

There is growing intelligent dissent to the administration’s stimulus policy.  Critics argue that recent growth is the result of market principles.  Edward P. Lazear wrote Monday in the WSJ, that he forecasted a return to growth without stimulus spending.  He goes on to argue, along with others, that  housing programs have had questionable results.  Lazear said that Uncle Sam is fibbing about job growth as well, reporting job retention as if it where job creation.  John Irons of the Economic Policy Institute agrees.  The administration has an incentive to report positive unemployment numbers- the most popular, but also misunderstood indicator.

Unemployment is only part of the overall picture.  Other improving indicators reported this week tell us that the economy is turning around-but for whom? It depends on how you define growth.  A technical definition says that growth is positive GDP.  That means little to most people.  Real growth, theoretically, is an improvement in living standards for the entire country.  That’s why Main Street understands the unemployment rate.  Accordingly, the media use it as the sole judge for growth.  The problem is, as Lazear mentioned,  job growth is the final component of recovery- behind financial stability and GDP growth.  Unemployment lags years behind an actual recovery.   If unemployment is a lagging indicator, Lazear cannot empirically link failed stimulus policy to persistent unemployment.  He says that the administration is ignoring job losses while inflating job creation numbers.  Isn’t he doing the same thing by ignoring market stabilization and GDP growth? 

BEA Released GDP Data This Week 

According to the BEA, GDP is up for a number of reasons.  Look closely at the report.  Exports rose 14 percent over last quarter and consumer spending rose 3.4 percent.  Market Watch reported that positive numbers where in part due to stimulus spending, but as I argued in the past, these gains are only temporary.  The purpose of the stimulus is to stabilize the economy so that private markets can function again.  There is no wider conspiracy.  The government will roll back stimulus as soon as it sees the return of private investment.  There is evidence of this already: government spending actually slowed by 3.5 percent.

Not all the news was good.  Personal income fell and prices rose.  Hopefully this is a temporary trend based on slight price increases and high unemployment.  However, as long as export growth remains positive, I see no need to fear 70s style stagflation.  

Savings and Long-Term Growth

According to the old Solow Model, a country’s savings rate is positively related to long-term growth.  Today, personal savings is around five percent, that’s up from around one percent just four years ago.  This bodes well for long-term growth in the US.  And now is a great time to invest.  As private investment (including people’s savings) replaces public spending in the next few years, markets will rebound.  Private investment will power an upswing in the business cycle, spark growth and reduce unemployment. The sooner the government rolls back stimulus, the better.  In the mean time, citizens can take advantage of great opportunities in real estate and other deflated markets.  This transfer of savings from a stock to a flow will jump-start the economy in way no stimulus could.  It would take tens of trillions of dollars in government spending to match the power of private investors.

Thomas J. Powell

The Great Recession is not over

While Wall Street celebrates the apparent passing of systemic financial failure, there is a different reality on America’s streets. The Great Recession is not over. Millions of jobs have been lost, and most people’s incomes have fallen. So has America’s ability to consume and pay down debt. Because consumption is the most important component of GDP in America, without shoppers filling stores, production, income and job growth will remain weak.
A side effect of reduced incomes is falling prices. When consumers feel financially pinched, they become more frugal. Wariness to spend forces businesses to lower prices in an effort to entice shoppers. Rents, too, will continue to fall as massive home and commercial real estate supply compete for available renters.
For years, the answer to every income short fall was credit. Want some new $250 jeans – Charge it! Don’t have cash for the big ticket item? – Put it on an adjustable rate payment plan. Trillions of dollars were pulled out of homes as prices soared, with the money spent on improvements, trips, and a multitude of consumer goods. Now, this debt is coming due, and incomes are falling!
In short, the great boom of the last twenty years was a story of debt expansion. As long as credit kept growing, more money could be spent. Easy money created a multi decade spending boom, which created an illusion of affluence. But, the credit party is over. The only way out is to spend less and pay off debt. Unfortunately both society and our political process are in denial. History has shown that every debt bubble ends the same way – prices fall until existing incomes can support them. All of the debt spending in Washington only delays the inevitable deflationary pain, and that new debt weakens us as an international economic power.
To finish the story, lower income will, along with tight credit, push down a buyer’s ability to support high rents. Lower rents make real estate less enticing as an investment until the property prices fall far enough to align with the new lower rent levels. Here in Nevada, this saga continues.
On the bright side, many are rediscovering the simple things in life. Family and friends are more important than weekends in Las Vegas! Perhaps this reality check will bring us back to what made this country the greatest in the world, namely, hard work and entrepreneurship.
Matt Marcewicz
Robert Barone, Ph.D.
Robert Barone and Matt Marcewicz are Investment Advisor Representatives of Ancora West Advisors LLC an SEC Registered Investment Advisor. They are also a Registered Representatives of Ancora Securities, Inc. (Member FINRA/SIPC). Mr. Barone is a Principal of Ancora West Advisors and a Registered Principal of Ancora Securities.

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