Economic Ramblings

First off...

The picture to the right is of my parent’s dog, Sophie Alice Duncan, and has nothing to do with this post. I just thought I’d use it because I thought it was funny. The picture is taken at her “graduation” from obedience school.

My parents must have paid off the school to let her graduate because she has a muzzle on. To her credit, I think she is starting to calm down a bit, but that isn’t saying much given how much of a little hell hound she is/was.

Also, I’d like to apologize to the young lady that I got into an economic/political debate with about 9 months ago. Despite not knowing the definition of a recession, it turns out that she was correct when she stated that we were currently in one.

Moving on…

The other day the National Bureau of Economic Research (NBER) announced that the United States is officially in a recession (two consecutive quarters of declining Gross Domestic Product) that dates back to December 2007. Why are they only now announcing this? Well, since the economic data used to calculate GDP is released after the fact, a recession can’t really be made official until you’ve actually been in one for 6 months.

A quick macroeconomic refresher…

GDP is “the total market value of all final goods and services produced within a country in a given period of time.” It is commonly calculated using the following method:

GDP = consumption + gross investment + government spending + (exports – imports)

To summarize these parts…

Consumption: Personal expenditures like food, clothing, and booze.

Investment: Investments in capital by business or households such as a house, machinery, or equipment.

Note: financial products (i.e. stocks, bonds, mortgage backed securities…) are not considered “investments” in economics; rather, they are considered “savings.”

Government Spending: Spending by the government on things like infrastructure, research, and weapons of mass destruction.

Imports/Exports: Good that we bring into the country and goods that we ship out. When we import goods we send money out of the country, meaning we decrease our GDP. When we export goods we bring money into the country, which increases our GDP.

Refreshed? Let’s continue…
GDP is down. We are in a recession. While this doesn’t necessarily mean each component of GDP is down, in this case, well… it does.

If you turn on the news you will no doubt see something about decreased spending by holiday shoppers this year. Reduced consumption? Check.

Drive around town a bit and you will probably see a fair number of “for sale” signs. Reduced investment? Got it.

Anyone see any weapons of mass destruction lying about? No? So much for Government spending.

I wonder how many American cars are being driven around in Japan/South Korea? Not a lot I’m guessing. Imports > Exports.

Okay, so maybe the whole WMD thing is a joke and I’m sure many people will argue that Government spending is actually up (see: $700 billion dollar bailout), but that money isn’t exactly going to “final goods and services” and won’t directly affect GDP.

Questions… Questions… Questions…

Q: Okay, so how does the bailout affect GDP?
A: One of the major affects of the bailout is that financial institutions are still able to operate and lend money. These loans allow people and companies to make investments, such as buy homes or business equipment. Investments by businesses hopefully assist in the growth of companies, which leads to more job opportunities. As these new jobs are created and filled and paychecks start to come in, consumption will also increase.

However, even with lending available, there are not many companies out there who are looking to expand. It isn’t exactly a great time to stick your neck out there and grow in hopes that your income will grow proportionally.

Q: So, in other words, the bailout “ain’t doin’ s***” for our GDP?
A: Not exactly. Let’s take a look at what happens to GDP if the bailout never passed. Without a bailout there is no question that many of the financial institutions out there go under and are forced to close shop. This creates unemployment. In turn, unemployment leads to lower consumption and lower investment.

For instance, let’s say the Russell Investment Group had to close shop. That’s 1,100 people in Tacoma who would be looking for jobs, which does not include other businesses in the area who would suffer from the loss of business from Russell employees. On top of that, imagine how many MORE homes in the North Tacoma area would go on the market.

Granted, Russell realistically won’t be going out of business, but there is a strong possibility that they will leave Tacoma. Why? Because a new building in Seattle just opened up as the result of WaMu shedding 3,400 employees. Speaking of which, even with the bailout, WaMu is firing 3,400 people. Luckily, these layoffs do not include layoffs to any of the WaMu branches. If the bailout never went through, you can imagine how many of those people would have lost their jobs also.

Q: Who cares? If a company fails it is probably because they suck and screwed up. Let them have what they deserve.
A: This is certainly a prevalent argument and I can certainly see the logic behind it. Why are we bailing out greedy corporate CEO’s for their mistakes? Sadly, it isn’t that simple. For every CEO out there that made bad decisions and deserve the boot, there are thousands of hard working people that will lose their jobs as a result of no one stepping in to help the situation. These hard working people have families to support and to a large degree; play a significant role in supporting our economy as a whole.

For instance, take a look at the current situation with the Big 3 Detroit auto makers (Ford, GM, and Chrysler). Right now they are asking for a combined total of $34 billion dollars to bail them out. If no one steps up to help (i.e. the Government, since there aren’t many people with $34 billion dollars lying around) they will move into bankruptcy.

It is estimated that 10% of all US employees are either directly employed by the auto industry, or work for one of their suppliers/dealers. Out of this 10%, the Big 3 employs roughly 20%, or 2% of the total US workforce. That’s about 2.5 million people. Look how bad things are with a 6% unemployment rate. Now imagine if that number jumped to 8% just because of the US auto industry.

Another report that I read estimated that the US auto industry accounts for 4% of our country’s GDP. On top of that, is the amount of consumption that the employees of the US auto industry account for. Like it or not, if the US auto industry goes under, expect this recession to go deeper and last even longer.

Note: If I was not trying to be a mature adult, I’d probably make a joke here.

Q: If they file chapter 11 bankruptcy they could still restructure and continue to operate…
A: This is true. Still, there would be a lot of layoffs. On top of this, who wants to buy a car from a company that just went into bankruptcy? I sure as hell wouldn’t. Unless there is government support, bankruptcy for the Big 3 = death.

Q: Let’s say they did disappear. Wouldn’t other car manufactures just take their place?
A: Yes, except these would most likely be foreign auto manufactures. Going back to the economic refresher, imports subtract from GDP, not add. Eventually, this could lead to additional US jobs if foreign auto makers decided to add plants in the US, however they are having enough problems of their own right now and new investments don’t seem likely.

Q: The WSJ’s headline today is “U.S. Job Losses are the Worst in 30 Years.” Your thoughts?
A: Ouch… according to the article 533,000 jobs were lost in November alone. That’s over double the population of Tacoma, and roughly the same number of people who live in the city of Seattle. Something needs to happen. And soon.

Q: What needs to happen? How do we get out of this recession?
A: The typical answers are to increase government spending (to make up for lower investment spending) or to enact monetary policy and lower interest rates as to encourage more investment spending. Here is the problem as I see it.

The country is already running a huge deficit. Recession = less tax revenue, which makes this deficit even larger. Throw on the war in Iraq and the bailout and we aren’t looking at a whole lot left (Of note, is that in the report by the WSJ today, the government was just about the only sector that added jobs recently).

As for monetary policy and interest rates, they are already extremely low and lowering them further probably won’t do much. So far, monetary policy, combined with the bailout, has only been able to do just enough to keep lending options open. Even with these options open, the outlook for our economy is so bleak that people are avoiding borrowing money like the plague (unless they already have the plague, in which case they are trying to borrow as much money as possible, except who wants to lend to people with the plague?).

Borrowing money is only really smart when you have a form of repayment that is certain. Many businesses have no idea what their revenues will be like in the future so they make the smart decision to avoid borrowing. On the other hand, borrowing money if you are about to go under isn’t such a bad idea, after all, what do you have to lose? Lending to someone like that however, is what put us here in the first place.

Q: Hold up. Are you saying that the government lending to the Big 3 auto makers is a bad idea? Flip-flop much?
A: It may sound like that, but in truth, none of the available options are really ideal. Looking at the Big 3 and their situation is getting back to this whole idea of “too big to fail.” Honestly, I don’t have all the information on what the proposals are for the Big 3. I’m just hopeful that if they are viable plans that have a good chance to succeed, that politics won’t get in the way of making them happen. If it’s the case that it is only delaying the inevitable, then I guess we might as well not delay it…

Q: Back to the “How do we get out of this” question…
A: Recap: Government spending and monetary policy, probably not going to work to well right now.

So what then? Well, another option (which we saw last year) is to give tax-rebates. In theory, this will encourage people to spend and consume more, thus stimulating the economy. This sounds great and all, and I’m definitely for receiving a $600 check in the mail, except my feeling are that most of this money wouldn’t go towards increasing consumption.

People who are struggling will most likely either save the money or put it towards paying down bills that are already past due. Neither of which, will increase consumption. At the same time, giving a tax-rebate might only hinder government spending even more.

What it comes down to (yet again) is this silly little thing called confidence. Companies won’t invest until they are confident of growth. The government won’t be handing out money until they are confident that it will help. People won’t spend until they are confident that they are confident that they will have a paycheck coming in the next week. Take away any once piece of this and it will cause a ripple effect.

No government help to the US auto makers? That will lead to people not being confident about their jobs, which will reduce their spending. This leads to companies that depend on those consumers to slow their growth and investments.

People not being confident that they will have their jobs next month? Again, this leads to reduced spending and slower growth of companies. Think a bailout will help the Big 3 if no one buys their cars? Probably not.

Companies unwilling to invest in order to grow? Unemployment will remain high. Make no mistake, we are in a mess here. Somewhere we need to find a little bit of confidence and eventually we might be able to grow on it and dig ourselves out of this hole. I think the hope is that our new President Elect, Barack Obama, will help bring this confidence.

Q: Let’s say you had $34 billion dollars lying around. What would you do?
A: The two options I see are save it, or spend it. When I say save it, I’m using the economic definition of save, i.e. invest it.

As the saying goes, “buy low, sell high.” Invest that cash and watch that money roll in… right? Not so fast. Here is the problem with that. Let’s say everyone does this. Instead of spending their money they just invest it all hoping to make a quick buck. Well, the companies that they invest in will see lower consumption as a result of everyone “saving” and that will lead to many not-so-great investments.

On the other, spending $34 billion dollars sounds pretty fun. I’m sure I could buy a lot of pretty sweet things with that amount of money, and at the same time I’d be helping the economy out by increasing consumption and investments. Great idea, except I’d much rather see my money grow, than diminish.

Ideally, everyone out there would spend half the money they have, and invest the other half. That way everyone would help and everyone would benefit. Obviously, this isn’t going to happen, nor am I actually suggesting that it should happen.

What I am suggesting is that everyone should spend their money and I should invest the $34 billion dollars that I don’t have and becoming a trillionaire. Obviously, I’d give some money back to all the chumps out there for helping make me rich.

Q: Seriously?
A: Seriously, I don’t know what the hell I’d do with $34 billion dollars. Maybe I’d buy up a large amount of land somewhere and try and make my own little utopia. Obviously, you all would be invited.

To be quite honest, I don’t even know what makes sense for bringing us out of this recession right now. As you can probably tell this entire blog, all I have is a bundle of thoughts about how things aren’t working like they should, but at the same time knowing that something needs to happen.

In all my ramblings I guess my best answer to these economic issues is confidence. Hopefully, that’s something Barack Obama will instill when he comes into office. At least, that’s why I voted for him…

p.s. Usually I try to do a through job of proof reading my blogs before I post them. This one was just to long and jumbled up that I decided to not put anymore time into it. My apologies.

-dunkie