Monday, January 28, 2008

Are We Too Pessimistic?

Bush is out tonight giving his State of the Union speech. His last State of the Union address (thankfully). In general, it was a ho-hum speech. Not very inspiring, and it reminds us of how many false promises he made and how his Presidency has largely been a failure. There have been many lost opportunities on fixing the problems with health care, education, immigration, social security, medicare, and energy independence. The national debt and trade deficit have ballooned, and we're stuck in the middle of a quagmire in Iraq (and Afghanistan).

Also, of course, he urged congress to quickly pass the economic stimulus package worth $150 billion because of economic concerns.

I wonder if the media and government are blowing the doom and gloom of the economy out of proportion. Yes, no question the economy is slowing somewhat. Unemployment rates are creeping up slowly, but are still quite low historically, and we are close to full employment (full employment is about 3% per expert economists). There is always ebb and flow to everything. We cannot always have a raging economy. Also, look at this figure...unemployment is really not high at all compared to previous recessions.

Larry Kudlow calls it the "Goldilocks" economy (not too hot, not too cold). But, alas it is an election year, both for the Presidency and many seats in Congress. Thus, everyone is eager to get a plan and cash out to the people. But, it is such a short-term band-aid that will be placed on a large gash that will likely heal by secondary intention in due time. It is a temporary plan.

I think we are better served by enacting the monetary policy that the Fed has done recently (i.e., cutting interest rates), rather than this bogus fiscal stimulus. This plan is not going to result in much long-term incentive for economic growth, while in the short-term, is only going to increase the deficit. Better plans would be to keep capital gains taxes low to encourage new investment by businesses. Would should not try to tax and thus cripple American businesses/corporations...they are the entities that employ people!!

The inciting stimulus for this whole recession is likely the credit and housing crisis (people are spending less because they feel "less wealthy" because of the loss in value of their homes...consumer spending makes up 70% of GDP). However, maybe in the long-term, this "correction" is a healthy thing. Housing prices were increasing at an insane rate. It was unrealistic, and a bubble was called a few years ago...we have been waiting for it to "pop". Hopefully, now that this is all exposed, banks and mortgage lenders will have learned their lesson, and will not lend money to people who will not be able to afford to pay it back. Future mortgages will be more secure.

There are more "silver linings" from this correction/recession:

1. Americans get healthier as the economy gets worse. While unemployment tends to increase during recessions, economist Christopher J. Ruhm of the University of North Carolina at Greensboro has found that a temporary one percentage point increase in the unemployment rate leads to a 0.5 to 0.6 percent reduction in the mortality rate, or about 14,000 fewer deaths per year.

Why the health benefits? With more free time and less money on their hands, people tend to consume less tobacco, exercise more, prepare healthier meals and lose weight. In addition, they are much less likely to have car and other accidents, and to catch communicable and sometimes fatal diseases such as influenza. Among the top 10 causes of death in the United States, only suicide rates show a substantial unemployment-driven increase. Even deaths caused by heart disease fall substantially.

2. People just looking to enter the housing market will get some great deals

3. People wanting to enter the stock market are going to buy stocks "on sale" and also get great deals

4. The recession is likely going to be short (average length of recession in only 6 months). We probably have started the recession in late October/Early November. Thus, it is almost over. Sometimes you need to feel pain in order to appreciate the good times.

5. The stock market will start picking up sooner than the end of the true is forward looking. To wit, look at the railroad stocks...they have been skyrocketing in the past 2 weeks. These means demand for shipping goods is increasing or will be increasing very soon. Also, companies like Microsoft (MSFT) and Corning (GLW) recently reported excellent earnings and do not see much weakness domestically or globally.

Finally, let's come back to the economic stimulus plan. This check will probably be delivered in May or June...too little, too late. What is this small, one time tax credit check going to do for the economy? This brings out the 2nd poll....what are you going to do with your $600 refund check (or $1200 if you are married). There is a phase-out for those who make > $75,00o (single) or > $150,000 (married). Are you going to spend it, save it, or use it to pay off debt?

1 comment:

Bob said...

I agree. Rebate check is not the answer. All about public approval.