demandside

Plus stimulus (cont.) and a long and long overdue look in our mailbag……Forecast Friday without a forecast.

Since Demand Side does better with economic forecasting than political forecasting, while at the same time, the policy direction is an important component of any outlook, we are withholding our updated forecast until next week.  We’ll give you a list of pluses and minuses that will be in the mix in a moment.

First today’s lineup — After the pluses and minuses, a continuation of the discussion of the prospect of stimulus, particularly addressing the question of whether you can have stimulus that is paid for, or do we have to go further into debt?

Followed by the mailbag.

Followed by the report on our Demand Side speculative portfolio.

Now.  The next forecast may or may not need to factor in the positive effect, which we’ve detailed before, of a Democrat in the White House.  We can predict one thing.  If a Democrat is elected, the unemployment rate will drop after the first year.  This is the nearly universal experience of the labor market under Democrats, a drop year after year in unemployment.

Many economists and financial observers — most, in fact, by far — do not look at the politics.  There is no column on the spreadsheet.  This is how pro-growth can still be assumed as a Republican attribute in spite of the low-growth experience with the GOP.  But here’s our look at the pluses and minuses that will be informing next weeks forecast.

In the plus column:

• dropping energy prices
• apparently there will be early action on a stimulus/recovery program
• there is good support for increased infrastructure spending
• a home owners loan corporation will be put in place.  Both Obama and McCain support something along these lines.  McCain’s idea is to buy up mortgages at full value and this would likely not fly.  The logical alternative is the New Deal style, where mortgages are bought at discounts.  This is what will be passed and McCain would no doubt sign.

Should Obama be elected, you could add

• rationalized health care will be on the horizon
• a service corps may be an early help to employment
• a home owners loan corporation of appropriate dimensions will be in place.
• dramatically higher spending on infrastructure
• a fundamental rebuilding of the financial architecture from the ground up.

Now, the minuses

There is an ongoing credit crunch

Tremendous losses in financial assets have yet to be realized

The fallout from the financial sector has not hit the real economy.  That is, the housing bust set off the first quarters of the recession; the financial sector meltdown followed; but the credit freeze and the full impact of the consumer retrenching have not yet hit.

The consumer is dead

The dollar is stronger, strangling the export market

fuel prices are erratic

interest rates are erratic

farm prices are collapsing, which will send the farm states into a tailspin

the financial crisis has been a huge distraction from other priorities, including global warming.

the current condition of infrastructure is weak.

international trading partners are getting hammered

no coherent trade regime/currency exchange system is in place.

Fed policies to date have been futile, but have compromised the central bank’s balance sheet.  Hopes for a new consumer bubble arising from lower interest rates or potentially reduced reserve requirements will never happen

You can see our previous forecasts at DemandSide one word dot net.  Remember when you look there that our calls for negative growth and high unemployment came at the same time many others, including the Fed’s governors were predicting the potential avoidance of a recession.

The consensus forecast is now dismal.  We may surprise to the upside, you never know.

MUSIC

Now back to stimulus

Among the casualties of the failure of the last stimulus package has to be Larry Summers, who arrived on Capitol Hill during the height of concern with the stone tablet and the three commandments:  Targeted, Temporary, Timely.  Summers was the successor to Robert Rubin as Treasury Secretary under Bill Clinton.  He then went off to Harvard to be head man.  One or another episodes led to an early time from that position.  He now appears at Congressional hearings and academic symposia as one of Harvard’s select University Professors.

He got the timely and temporary, though it is less clear about the targeted.

The staging was perfect, the Congress acted swiftly, the checks were in the mail in a bare three months.  We should have been suspicious, however, when the most ardent supporter of the measure turned out to be George W. Bush.

I understand the rebate checks were precisely what Ben Bernanke would have suggested.  In fact, I heard yesterday that in Bernanke’s academic career he was known as helicopter Ben, for suggesting that money from helicopters was a good way to avoid depression.

You have heard us use the phrase “dropping checks from helicopters,” but we must admit we did not know this was the actual recommendation of Mr. Bernanke.  Perhaps he thought it was similar to John Maynard Keynes’ famous example, of burying ten pound notes in bottles and hiring people to dig them up.  Not similar enough.  At least with Keynes, you have a job to begin the cycle with.

Back to Stimulus One passed in February, signed in February, implemented starting in May.

As you heard here before it happened, the business tax break component was pocketed with no comment, while the rebate checks themselves resulted in about forty cents of spending on the dollar.  The balance of the rebates was used to pay down credit, to save, to buy Chinese goods at WalMart, or just to offset the higher cost of fuel.

It’s hard to imagine a less stimulative use of the deficit unless, perhaps, you were to give insolvent banks tens of billions at low interest rates and call it equity, or something like that.

Competing with Summers three T’s in another hearing room at the Capitol were the three P’s — Permanent, Productive and Paid For.  We heard it from Congressman Brian Baird, though we cannot testify that he originated the three P’s.  The occasion was the report of a blue ribbon commission on transportation infrastructure.

The commission proposed the phase-in, at five cents per year, of a gasoline tax of — eventually — 83 cents per gallon.  The tax could provide $250 billion in infrastructure spending for roads, bridges, rail, and mass transit for fifty years.  That is what the commission figured would be needed to overcome past infrastructure neglect and produce a modern transportation system.

Had that plan been initiated, the nation would have $250 billion in infrastructure spending now in place and another $250 teed up for next year.  The cost of a gallon of gasoline would be only a dollar less.  Hundreds of thousands of people would be employed who are idle now.  Dozens and hundreds of companies would be ramping up for new bids rather than cutting staff.

I call this costless, even though there is a gas tax increase.  Costless because we are producing infrastructure that will substitute for imported oil.  Inasmuch as there is a supply-demand component to the price, the future price will be less than the non-infrastructure price.

Now imagine global warming.  Avoiding costs from global warming is no longer possible.  Our opportunity is past.  But we can avoid extinction.  The earlier we act on this, the better, the less costly, and the more sane.  We simply need the financial scheme to bring forward the survival premium to the present day.  Is that so much to ask?

If we can bring forward the cost of building a MacMansion on the tenuous cord of a subprime loan, we can bring forward the immense benefit of saving the planet on the rope of rationality.

Again, we are going to suspend our discussion of stimulus before we get too far into the tax question, because we need to pay tribute to our listeners.   We’ll pick it up again on Monday.  Many of you will be disturbed with one of my suggestions.  But that is then and this is

Now, too long delayed, the mailbag.

We’ve gotten some very nice e-mails, and we appreciate them very much.

Author : R McKenna

These are excellent articles about Keynes. Two other books worth looking at on Keynes are:

Donald Moggridge, “John Maynard Keynes: An Economist’s Biography” (1992)

Donald Markwell, “John Maynard Keynes and International Relations: Economic Paths to War and Peace” (2006)

The latter is especially topical - highly relevant to the present crisis, and (for example) Keynes’s thinking about the need for international coordination of economic policies, and the development of international economic institutions. Should be essential reading for the global economic summits/’new Bretton Woods’.

Hello Alan,

I continue to listen to your podcasts.  I like them very much. I always learn something about economics.

I thought I would like to share with you a link to this page: http://www.archive.org/bookmarks/siliconchip

There you can find access to 5 talks given by Mr. Joseph Stiglitz about Globalization.  You can hear the audio as a stream or download them to your PC.

I think I heard you say once that you had a problem with the bandwidth limit for your podcasts. If you are interested I think you can upload your audio files to www.archive.org where they will be hosted without charge and I think without bandwidth limitations. You can also choose if you want to give it any special license.

Have a good day.

Paul

I would like to recommend the podcasts (especially those from early June) to my friends .. but they seem to be missing.

Hoping this is a simple oversight and not intentional ..

Keep up the good work,

- Roger Humphrey

Alan,

Just wanted to send a quick thank you for your enlightening podcasts!  Your work has done much to broaden my awareness and win me over to the demand side.

C

_________________________________________________

Christopher Conner, PharmD, PhD

You said the Dubai and London loopholes were closed. I  must have missed that on the mainstream media. Can you provide some reference for that? In light of Michael Greenbergers testimony that seems very significant.  Of course I just erased the podcast of his testimony after keeping it for so long thinking I might need to reference it.

Where do you go to get old podcast?

Here is something you might be interested in ;

http://www.kaisernetwork.org/health_cast/hcast_index.cfm? display=detail&hc=2484

The opening speaker is Uwe Reinhardt of Princeton who is a foremost thinkers on medical economics. I’d suggest to watch his talk via the video. He is a great speaker and it seems he is proposing universal health care in a demand side fashion that will make it like infrastructure rebuilding the next growth industry for our economy.

Thanks again for your podcast.  I do my best to spread the word.

George Balella MD

Great podcast as always. You need a greater audience. I will tell all 2 of my friends and push your podcast on all the sites I blog on ( liberal and conservative and classic liberal and neo-liberal).

Have you applied for a job with Barak Obama. Seriously the message you tell is not getting out by his campaign as far as I can tell.

A Princeton man I think I heard.  You must know of  Uwe Rheinhart then. I’m a Pediatrician ( that’s a doctor who didn’t go into it for the money) and Uwe spoke to us eloquently and re-assuredly of how nationalized health care is not only doable but will be a growth industry and will be a boom to the economy as entrepreneurs are more likely to strike it out on their own not changed to a job for health insurance reasons.  This message is just one of many you put forth that I’d love to see enter Barak national speeches.

Thanks again, George Balella MD

Mr. Harvey -

Given a $700 billion (min.) debt financing approach on a $15 trillion economy (U.S.), why not restart the fiat economy.

Q:  What would be the impact globally for all debt to be forgiven, as in the Bible:

Lev 25:10  And ye shall hallow the fiftieth year, and proclaim liberty throughout all the land unto all the inhabitants thereof: it shall be a jubilee unto you; and ye shall return every man unto his possession, and ye shall return every man unto his family.

I am no economist, but am curious what your response would be.

I listen to and enjoy your Podcast.  I think you do your country a great service.

Thank you.

But here’s a letter

from windy city

Mr Harvey,

I listen to every one of your podcasts. My beliefs are more in line with a Cato style liberal, but I do enjoy hearing and considering other points of view.

But simply replaying Bloomberg podcasts is below you. You can do better than that.

As a suggestion, the Jeffrey Sachs\’ Bloomberg interview could have been stopped in certain places for you to make points (or I suppose disagree with). Then at least there would have been ‘some’ content from you.

You\’ve had other podcasts from political hacks and the other 2 or 3 economists that agree with you that have been little more than an intro from you and a replay of other peoples work.

Simply replaying other peoples work and claiming it as your own is intellectually lazy and borders on plagiarism. It also lends itself well to jokes that the left wants to live off the work of others. And in this case it is true.

from Windy City

I appreciate this e-mail.  You can e-mail too at Alan@demandside dot net.

In this era of U Tube, rebroadcasting may be vaguely plagaristic, but

I do hope nobody thinks I taking credit for the economists that appear on the specials.  It is entirely for your convenience that I root these out from the various sources. I would add, too, that excerpting these voices from their original broadcast source is by no means an easy task.  You should compare, for example, the original Joseph Stiglitz to our edited version.  It is a matter of literally hours.  So plagarism?  I am giving, I hope, complete recognition to the voices.  I edit out the interviewers not to take credit for their work, but to shorten and focus the pieces.

That being said, I do take some encouragement to blather on myself more often.

As far as hacks who agree with me.  Yes, Roubini, Stiglitz, Soros, Schumer, agree with me, but no, they are not hacks.

One of the definitions of an economist is a person who can cogently tell you why what he predicted would happen didn’t.  And economists benefit greatly from a general absence of interest in calling them on their mistakes.  That is not necessary with the people you hear here.  Their calls have been affirmed by events time and time again.

I would like to add James Galbraith to this list and recommend you pick up his conversation with Bill Moyers last Friday on your iPod.

I condense them to make them useful, but I do not interrupt them because for the most part they are correct in my view, and who am I to interrupt Joseph Stiglitz?  or George Soros?  I let Jeffrey Sachs ramble on about Russia last week because I was among those who had misunderstood his assistance to that nation in the early 1990s and actually blamed him for the Shock Therapy that destroyed that great opportunity to move Russia into a mixed economy.

As to the joke about the Left wanting to live off the work of others.  I don’t know that joke.  It certainly is not much of a living.  You COULD send me money.

The purpose of Demand Side is to offer the perspective of this student of economics who has not drunk the kool-aid and continues to channel the orthodoxy of the New Deal and Keynesianism.  The bad news for the general, educated citizen is that the economics profession is a mess of Neo-Classical and Monetarist pap sponsored by an ideological aristocracy who show up at seminars and use mathematics and statistics on human behavior.  The good news is that you can learn more than these guys know in a very short time, since most of it is based on assumptions that are absurd and so they and the models they allow can quickly be eliminated from the reading list.

But speaking of making a living — and again, a sincere thank you to Windy City — let’s take a look at our funny money investment account.  One month ago, beginning actually on September 16, we took an imaginary $100,000 and began investing it in the markets.  We operated on the idea that the oil market was a bubble and we could invest on the downside.  Plus we are afraid that the fundamentals of the U.S. economy are so poor that the dollar might collapse.  And during the past two weeks we took some profits and bought GE on the idea that infrastructure is the only way out of an economic collapse.

So,

Security	No. Shares	Price	Date	Transaction Amount	Balance on Account	Security Description
					100,000
DDG: US	200	82.87	9/24/2008	(16,574)	83,426	ProShares Oil & Gas
DDG: US	200	82.87	9/24/2008	(16,574)	66,852	ProShares Oil & Gas
DUG: US	400	35.1	9/24/2008	(14,040)	52,812	ProShares UltraShort Oil and Gas
FXE: US	400	141.62	9/16/2008	(56,648)	(3,836)	CurrencyShares Euro Trust
DDG: US	-200	109.71	10/16/2008	21,942	18,106
GE: US	500	20.45	10/10/2008	(10,225)	7,881
DDG: US	-200	118	10/27/2008	23,600	31,481
DUG US	-400	56.8	10/27/2008	22,720	54,201
FXE: US	-300	125.39	10/27/2008	37,617	91,818
GE: US	-500	17.73	10/27/2008	8,865	100,683

This is Alan Harvey

from the Demand Side