Dismal Economists: Getting Real on those Green Shoots

greenshootsI’ve been concerned about the lack of real evidence for the administration’s green shoot hypothesis. It seems that I’m not the only one. A new Wall Street Journal Poll shows that Americans are increasingly ‘wary’ of the deficit and Obama’s economic intervention as Obama’s poll number’s slip.

But the poll suggests Mr. Obama faces challenges on multiple fronts, including growing concerns about government spending and the bailout of auto companies. A majority of people also disapprove of his decision to close the military prison at Guantanamo Bay, Cuba.

Nearly seven in 10 survey respondents said they had concerns about federal interventions into the economy, including Mr. Obama’s decision to take an ownership stake in General Motors Corp., limits on executive compensation and the prospect of more government involvement in health care. The negative feeling toward the GM rescue was reflected elsewhere in the survey as well.

A solid majority — 58% — said that the president and Congress should focus on keeping the budget deficit down, even if takes longer for the economy to recover.

Laura Zamora, 40, of Orange, Calif., voted for Mr. Obama but says she is frustrated by the economy and finds her support for the president waning. She says she’s facing a possible layoff as a local government worker in California.

“He’s bailing out the private sector. He’s putting all kinds of money into the private sector,” says Mrs. Zamora. “The money should be going to social programs, not to bailing out banks and GM. It should go to people who are unemployed.”

The survey of 1,008 adults, conducted Friday to Monday, had a margin of error of plus or minus 3.1 percentage points for the full sample.

The poll shows as the economy really worsens, people are becoming more reality-based. Speaking of reality based, let’s get back to numbers that show the public’s concerns are much warranted. You will not want to miss this VOXEU study showing what two economists have found when comparing the Great Depression with the current Great Recession. They’ve charted the numbers back-t0-back and are even going as far as saying that we are in a Global economic Depression. You really need to check the graphs and the analysis out in “A Tale of Two Depressions”. Dr. Barry Eichengreen and Dr. Kevin O’Rourke are both research/historical economists and bring the stylized facts home.

This is an update of the authors’ 6 April 2009 column comparing today’s global crisis to the Great Depression. World industrial production, trade, and stock markets are diving faster now than during 1929-30. Fortunately, the policy response to date is much better. The update shows that trade and stock markets have shown some improvement without reversing the overall conclusion — today’s crisis is at least as bad as the Great Depression.

New findings:

  • World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.
  • World stock markets have rebounded a bit since March, and world trade has stabilised, but these are still following paths far below the ones they followed in the Great Depression.
  • There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
  • The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
  • Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.

For some adroit analysis, check the Financial Times Columnist (one of my personal favorites) Martin Wolfe who provides the punchline to the data (as well as spiffier graphs) in The Recession Tracks the Great Depression.

stylized factsCertainly any one who sees green shoots in these fundamentals must be smoking them. Here’s Wolf’s synopsis.

First, global industrial output tracks the decline in industrial output during the Great Depression horrifyingly closely. Within Europe, the decline in the industrial output of France and Italy has been worse than at this point in the 1930s, while that of the UK and Germany is much the same. The declines in the US and Canada are also close to those in the 1930s. But Japan’s industrial collapse has been far worse than in the 1930s, despite a very recent recovery.

Second, the collapse in the volume of world trade has been far worse than during the first year of the Great Depression. Indeed, the decline in world trade in the first year is equal to that in the first two years of the Great Depression. This is not because of protection, but because of collapsing demand for manufactures.

Third, despite the recent bounce, the decline in world stock markets is far bigger than in the corresponding period of the Great Depression.

The two authors sum up starkly: “Globally we are tracking or doing even worse than the Great Depression … This is a Depression-sized event.”

Kenneth Rogoff, Harvard professor of both Public Policy and Economics, discusses the one statistic that is booming in the U.S. Economy; the budget deficit. This is also a commentary published by the Financial Times. Rogoff weaves the story of the exploding deficit into a bigger picture of coming deficits in Medicare and eventually Social Security. He focuses on the noticeable lack of trust in our biggest investors, the Chinese and our desire to work out issues with health care. He speaks to funding for health care as well as these other issues. His bottom line is equally depressing and scary.

All of these considerations appear to underscore the importance of finding ways to keep the new health plan from being overly burdensome, and to avoid unduly optimistic projections on efficiency savings. Healthcare reform is no substitute for finding a credible path to fiscal sustainability. If badly handled, it could prove the straw that breaks the camel’s back.

Make no mistake, the US and much of the developed world is in a frighteningly precarious fiscal state. Exploding debt levels have remained manageable in no small part thanks to the extraordinarily low level of global real interest rates. Should the general level of global interest rates rise substantially, perhaps owing to a pick-up in emerging market growth over the next few years, a number of developed countries, including the US, may have to tighten their belts sharply in order to maintain stable debt ratios. Countries that fail to do so will suffer severe consequences, including spiralling interest rates and, ultimately, default by direct means or through high inflation.

It is a disgrace that the world’s richest country cannot provide reliable basic care for its poorest citizens. But if the politics of reform produces too extravagant a plan when the nation’s fiscal health is already so weak, the US may experience a form of financial crisis even more virulent than the one it is recovering from. Any healthcare plan would then be dead on arrival.

Each of these economists bring up the tremendous challenge facing our world and our country in the economic front. This begs the question of are we currently up to the challenge? We continue to face an administration that is in complete denial about the systemic problems with the financial system whose policy continues to enable big finance. The political system and the health care lobby (which of course includes both the AMA and the private insurance industry) continues to dominate the discussion on health care reform. Both of these lobbies are essentially over-priced, market-destroying, vastly-over paid middle men for the majority part. These are the very third parties to the market that have corrupting the pricing capacity of the market as well as taken the markets from the realm of competition towards oligopoly. Markets based in perfect competition see equal importance of customers and service providers. Markets with third party payers and oligopolistic structures usually see collapse and manipulation/rivalry best modeled by game theory. They rarely reflect the best outcomes for buyers. (Take a basic microeconomics course and you’ll see the truth in this.)

Frankly, I’m overwhelmed by how unprepared we seem to be to deal with these crises. It is because public policy, at this point, seems to completely ignore what we have learned to date about financial crisis and the Great Depression. I do not believe with the resource constraints that we will face in the near future that this bodes well for any of us. Somebody responsible for public policy needs to get real about things very quickly or we’ll have put us ourselves on a path to permanent second class world citizen status. Put the hope bong down. If there are so many green shoots, why does this still look like a depression?

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