Echo

U.S. recession? Won't know for a long time

Tuesday, April 29, 2008

The article, Saying Times Are Difficult, Bush Presses Congress to Act, was published in the New York Times on April 30, 2008.

A quote from the article: “In declining to embrace the word ‘recession,’ Mr. Bush said that many Americans were just beginning to receive their tax rebate checks as part of an $168 billion stimulus program, and that it would be some time before the effects of those checks on the economy were clear.

The fact of the matter is: nobody can say whether we are in a recession or not, it is all speculation. The organization in charge of dating a recession is the National Bureau of Economic Research (NBER). You may view the dated U.S. recessions at the NBER website. The website indicates the recessions, expansions, and the number of months after the recession until the recession was actually dated by the NBER. On average, it took the NBER 15 months to date the last four recessions! If President Bush states that we are in a recession in April 2008, the media will be printing a follow-up story if he was wrong (it is unlikely that they will follow up if he was right) in 15 months or so.

Another reason that Pres. Bush cannot say whether or not we are in a recession is that the data The NBER defines a recession as a significant decline in economic activity. The decline is measured using six broad statistics: real GDP, real income, employment, industrial production, and wholesale-retail sales. The table below lists the last four months of data. The obvious mix of green and red data indicates why we cannot say whether or not the U.S. economy is in a recession. cannot clearly point to a recession.

The primary reason why the NBER waits to date a recession is that it takes time to determine an economic trend. First, much of the data covered by the media (employment, industrial production, and wholesale-retail trade) are reported on a monthly basis. Not until several months have passed can a real economic trend, upward or downward, be determined.

Recently, the media reports have turned away from “whether or not we are in a recession” to “how quickly (slowly) will the recovery be.” The stock market is usually said to be forward looking. When making decisions on what stocks to buy, investors often look to the future (as best they can) and try to predict what the health of the economy. Investors that see a stronger U.S. economy will buy stocks now. The figure below shows that the S&P 500 has recently trended upward, roughly indicating a light at the end of the economic-slump tunnel. Put it another way, if we were (are) in a recession, it will likely be over soon.

In truth, nobody knows what is in store for the U.S. With the price of oil hitting record highs, driving up energy prices (mainly transportation and heating concerns for the average consumer), a financial sector that continues to suffer, and a housing crisis that simply won't end, perhaps we can look at a 40-watt, rather than a 100-watt, future.

Please leave any questions/comments that you may have. Nontruths

Read more...

The Economy Suffers Under the Proposed 80% Emission Reduction

Monday, April 28, 2008

The article, The Real Cost of Tackling Climate Change, was published in the Wall Street Journal on April 28, 2008.

By Steven F. Hayward, who is a fellow at the American Enterprise Institute and the author of the annual "Index of Leading Environmental Indicators," from which this article is adapted.

For those of you who do not have access to this article, I outline Mr. Hayward’s findings:

  • Both Hillary Clinton and Barack Obama push an 80% across the board reduction in human-made emissions by the year 2050. John McCain pushes a 65% reduction. Both are unrealistic and unattainable.
  • In 2006, the Department of Energy (DOE) estimates U.S. emissions at 5.8 billion metric tons of C02 (20 tons per person).
  • From 1990 levels, an 80% reduction puts the emission levels at 1 billion metric tons in 2050.
  • The above level of emissions was last seen in 1910 (days of Henry Ford’s “new” assembly line technique).
  • An 80% reduction will result in not enough to: heat the average size hot water tank, run plasma TV set, heat food in a microwave, dry clothes in a dryer.
  • Substituting to natural gas won’t solve it – would still have 50% of the target to go.
  • Renewable energies can likely only produce 20% of our energy needs.
  • If everyone across the country drove a Prius, still be over the transportation abatement target by 40%.

So, where does this leave us? In order to reach the audacious target of 80% emissions reduction, one of two things needs to happen:

  1. Use abatement technologies and renewable resources to get to that level.
  2. Produce at that level.

Regarding point 1., the article clearly states that given our current available abatement technologies, the target is unrealistic. Unless there is a large and unexpected technical shift (which can happen), the target is simply not feasible, leading us to point 2.

Driving economic production back to Henry Ford’s era in order to meet 1910 production and emission levels will result in negative economic growth! Yes, the air will be much cleaner, but will it be worth it because income per person will revert to 1910 levels. Many of the goods and services that we are accustomed to were not available in a more recent year, 1980. The biggie is the internet, a device that has changed the front of production and the flow of information. Digital cameras were unavailable, the latest medical techniques were archaic compared to today’s standards, life expectancy rates were lower, no microwaves, no iPods, no VCRs. Average income per person in 1980 was $22,666 in current dollars, which is just 60% of that in 2007, $38,289. The figure below illustrates the sharp reduction in quality of life that would result from a drop to 1929 production levels.

Pushing aside the obvious limits of realistic emission abatement clearly outlined by Mr. Hayward, all three Presidential hopefuls suggest the policy du jour to tackle emissions by implementing, a tradeable permits program. Under the tradeable permits system, a market for emissions is created, where firms buy or sell the right to emit. The government generates the appropriate number of emitting permits, which are traded by the firms. Sounds great, but the program is riddled with problems. Look at Europe, where the tradeable permit system was implemented. Emissions rose, rather than fell, 1.1% last year.

Tradeable permits are fundamentally flawed, and in fact, the best way to force firms to abate is to place a tax on emissions. Firms will reduce accordingly (because the cost of production just rose), reaching a sensible target (something much less than 80%). The biggest problem is the monitoring of emissions, which is costly.

Again, Presidential Candidates list a slew of policy changes with no merit, let alone probability of success (see related article, Clinton and Obama simply can’t have it all!). Climate Change is a problem that must be corrected at the household and firm level. Today, when I get home, I will think of a new way to conserve energy on my own.

I am interested to hear your comments, please note them below. Nontruths

Read more...

Clinton and Obama simply can’t have it all!

Sunday, April 27, 2008

The article, 3 Candidates With 3 Financial Plans, but One Deficit was published in the NY Times on April 27, 2008.

The marathon of a primary season continues with attention focused on the candidates' issues regarding deficit spending (high government spending relative to tax receipts) or deficit tax receipts (low tax receipts relative to government spending). The Republican Party is famous for its Reaganomics view of tax reductions, which would result in deficit tax receipts if spending is left unchecked. Lowering taxes produces incentive to both firms and workers to increase production, and the economy grows. Alternatively, the Democratic Party focuses on increased spending, which results in a deficit spending if tax rates are left unchecked. Higher spending produces new programs, leading to new jobs and production, and the economy grows.

Regarding stated policies on fiscal measures, the Democratic Candidates, Hillary Clinton and Barack Obama, do not adhere to their strong party fundamentals, while the Republican Candidate, John McCain does adhere to his party's fundamentals. Further, Hillary Clinton and Barack Obama promote plans that simply don’t add up.

Tax Rebates are economically impotent

Simply put, a tax rebate is a very temporary tax cut that has little or no economic impact. Amid a slew of spending ideas with high price tags, Senators Clinton and Obama support further tax rebates (short-term cuts), which is not part of the Democratic machine regarding high spending. Further, there is little or no long-term benefit to a tax rebate. It will likely result in higher consumer spending, giving a much-needed boost to the economy, but for only a quarter or two (up to six months). After that, consumer spending will decline. The one positive point comes from the nature of the national accounts where GDP is measured. If, for two quarters, consumer spending (which accounts for 70% of GDP) receives a boost, the economic numbers may just skirt recession territory. The economy is in a slump, but the technical analysis would not support a recession.

Permanent Tax Cuts are economically powerful

A tax rebate is a small creek with just enough water to trickle down its path, while a permanent tax cut is the Nile River. Families and firms plan ahead, monitoring their future income and costs. On balance, higher life income from lower tax payments results in a rise in spending for many years. The more permanent the tax cut, the longer will the effect last.

Spending still needs to be monitored

Either way, with higher spending or lower taxes, loose fiscal policy, if left unchecked, leads to economic problems. The Democrats, in their proposals of healthcare reform, banking regulation and a mortgage moratorium, and subsidy spending, must raise taxes, rather than promoting rebate checks, to balance the budget. Higher taxes will result in lower consumer spending, hurting economic activity in the long run. It is simply just not feasible to have both higher spending and tax rebates, and one must make a choice. Wouldn’t it be great to have more than 24 hours in a day? John McCain adheres to his party fundamentals by pushing tax reform only. He has not proposed new spending, like healthcare reform, understanding that one cannot attend the baseball game and clean his bathroom at the same time. Further, lowering taxes leads to higher consumer spending, stimulating economic activity in the long run.

Putting the merits of deficit spending or deficit tax receipts aside, if the government continues to run an un-balanced budget for too long, without paying down any debt, future economic activity will suffer. Think about borrowing money from the bank every month. If the debt is never paid down (even partially), the bank loans will stop and the borrower will be faced not only with a lack of new funds (to buy a house, to finance a car, or to start a business), but a growing share of income will go to pay off existing debt. This is the situation with the U.S. government – it is okay to borrow from foreigners (selling debt securities like the 10-yr bond to finance two wars or rebates), but it must be paid off, at least partially, at some point.

Welfare is obviously an issue

In the end, a political leader’s policies should be tied to the voters and the well-being of all who live in the United States (and abroad). The answer is not obvious, but it seems that given our current international obligations, John McCain’s taxing policies are more surely implemented, rather than the Cheesecake Factory menu-size list of spending and tax relief policies pushed by Senators Clinton and Obama.

I am happy to read and post answers to any comments/questions that you may have. Nontruths

Read more...

  © Free Blogger Templates Columnus by Ourblogtemplates.com 2008

Back to TOP