Tuesday, January 15, 2008

Recovery Policy

The shape of the Economy seems bad, but I have much more favorable expectations; believing that We have been in Recession since last July, and are climbing out of it, with good numbers coming in the Spring. I have already received Comment which basically assured me that the numbers precluded a Recession starting last year, but I will assure that lack of adjustments for Population Growth, and Household Construction to house that increased Population, created false Readings in the traditional numbers. Slowdown of actual Consumer Consumption has been continuous since July, and Credit Card debt has been increasing at the same speed as occurred in 2001; all indicative of a Recession. The evidence of the Recovery coming in the Spring is harder to track, though Oil price is expected to recede in the coming months, and the Beige Book hopefully with show stronger draft of Capital Goods.

The worst threat for the Economy may come from here. All plans to provide economic stimulus either is directed at incited increases of Consumer Spending which will not occur, or consist of Tax Cuts that will only destabilize Tax revenues further–increasing the levels of national debt without benefit; in either case, such action will come too late to affect the current economic condition of Capitalization choice. Any Fed funds rate cut will only incite hazardous loan processes, without any increase in Investment in the Short-term. The viability of Tax Cuts are themselves highly debatable.

Mark Thoma gives a link to Lane Kenworthy, his own reaction to Justin Fox, and Brad DeLong. The basic position of Thoma and DeLong states that all Tax Cuts are Revenue-losers, and accepted by All almost. Kenworthy, on the other hand, finds little evidence that Tax Cuts actually spurred economic activity, making the Revenue Cuts costly without sustainable benefit. Continuance of the Tax Cuts of 2001 and 2003 expresses little benefit economically, and Paul Krugman can find little only reduced Recovery from the 2000-01 Recession. This equates to the Tax Cuts being relatively poor economic stimulus, with the interjection that the previous Tech Boom was itself an economic aberration, where there was an artificial run-up of both Employment and Income. I side with Krugman, though I would suggest that the last Recovery possessed about 80% of the effectiveness of the prior Recoveries in history.

My basic Contention has always been that the Tax Cuts have put too much Cash into the Economy, where real physical Capital Construction potential did not exist, and which created a widespread Paper Boom–which is basically the interjection of middleman Profits-Taking (Some would call it artificial Rent-Seeking) simply to absorb the excess Cash. Now We are in a state of over-flush Paper assets, and an excess amount of middleman Profits demanded. The Economy really needs to drain both Paper assets and Cash, and Fed policy will be wrong if and when they start to extend extra Cash simply to maintain those Paper asset Profits. lgl

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