What Economic Policy?

That we are in an economic mess is well known. That the so-called economic policies applied by Washington will do little to correct the problems (indeed, they will exacerbate the problems and greatly extend the economic misery) is less well-known and less widely accepted.

Here is an excerpt from this morning’s free email from David Rosenberg, in my opinion the best analyst of current economic conditions. (Sign up for his newsletter if you want timely and insightful analysis.) In it he details the results for the Cash-for-Clunkers “success” and additional programs to be provided by Washington:

THE ECONOMY LOOKS SICK OUTSIDE OF GOVERNMENT STIMULUS

Now that Cash-for-Clunkers is over, auto sales are collapsing again. Edmunds.com says the run-rate so far in September is down to 8.8 million units at an annual rate, but we see now that JD Power’s tracking is down to 590,000, which would be little better than a 7.0 million rate or half the pace of August and 24% below the already-depressed levels of a year ago. The November 30th expiry date for the first-time homebuyer subsidy, and this group has been responsible for one-third of housing activity, may also have something to do with the below-consensus sales figures for August that came out last week.

But don’t worry — Uncle Sam is coming back to the rescue. Congress is moving to extend emergency jobless benefits to over one million workers who are about to see their benefits expire by year-end. The House already approved on Tuesday a 15-week extension in states with unemployment rates of 8.5% or higher (oh — that only includes 27 states right now, by the way) and now Congress is looking at extending and expanding the homeownership tax credit. The short-term-ism in fiscal policymaking in terms of still trying to promote consumption and credit remains is fully intact and is actually quite sad because the U.S. boomer population is seriously short of savings needed to fund a boom in the retirement community over the next two decades. A Harvard University report shows that 60% of Americans do not have enough savings to fund their retirement. Why the government wants to resist the natural trend towards higher savings rates is … well, it’s unnatural. When your homeownership rate is over 67% and your consumption-to-GDP ratio is over 70%, you’re no exactly suffering from under-spending.

All Cash for Clunkers did was advance demand for autos. In doing so, it guaranteed that future auto sales will be lower than they otherwise would have been. The micro-economic distortions created by such programs (higher automobile sales at the expense of other consumption, encouraging consumers to go deeper into debt, etc.) are probably more important than the macro effects but are impossible to measure. This program was typical government — good politics but terrible economics. It is just another version of the game of “kick the can down the road and worry about the problems when they show up tomorrow.”

Government spending may succeed in pumping up GDP for the next quarter or two. If so, Wall Street touts will celebrate the news, and politicians will endanger their backs bowing to the masses. But nothing positive has been accomplished except politically. Economically, the condition of the economy has been made worse. GDP goes up because it is defined to include government spending as a component. But GDP is supposed to measure the well-being of a region as defined by economic activity. Economic activity can only improve by the increased production of real goods and/or capital formation, neither of which any government can do. If the private sector shrinks but is offset by an increase in the public sector, we are not better off. We become poorer, not richer via that outcome. It is only the private sector that produces; government only consumes.

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