Entries Tagged as 'Weak Economy'

The Debt Deal’s
Biggest Losers

David Frum August 4th, 2011 at 12:01 am 67 Comments

In my new column for The Week I discuss who has lost the most in the new debt deal:

The first and most obvious loser: National security.

The economist Herb Stein used to advocate a simple model of federal budgeting:

a) Decide how much it costs to defend the country.

b) Pay for it.

c) Then see what else you can afford.

Adam Smith phrased the same idea more elegantly, by saying that “defense is superior to opulence.” The point is that the defense of the nation is not just another line-item. It’s the first obligation of government, more important than any other form of spending, and way more important than minimizing taxes.

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Were Our Enemies Right?

David Frum August 3rd, 2011 at 3:16 pm 187 Comments

In February 1982, Susan Sontag made a fierce challenge to a left-wing audience gathered at New York’s Town Hall:

Imagine, if you will, someone who read only the Reader’s Digest between 1950 and 1970, and someone in the same period who read only The Nation or The New Statesman. Which reader would have been better informed about the realities of Communism? The answer, I think, should give us pause. Can it be that our enemies were right?

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How I’d Fix Unemployment

David Frum August 2nd, 2011 at 8:31 am 87 Comments

We’re introducing a new occasional feature today, “Easy for Me to Say,” in which readers are invited to pose questions that more or less take the form: “OK – so what would you do instead of this or that politician you’ve criticized?” (Readers who want to ask questions should email them to editor[at]frumforum.com with “Easy for Me to Say” as the subject line.)

Today’s question comes from a reader in California who asks, “What would you do instead to create jobs?”

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Mitt Romney: Job Creator?

August 1st, 2011 at 5:30 pm 29 Comments

Democratic talkers are already testing a line of attack on Republican front-runner Mitt Romney.

Romney, malady they say, was not much of a job creator as governor of Massachusetts. In fact, during the Romney years 2003-2007, Massachusetts ranked 47th of the 50 states new jobs created. While the Massachusetts unemployment rate did decline during Romney’s tenure, that decline was more due (according to Northeastern University) to a consistent out-migration of working-age residents. Click here to read more

Government Spending: Better Than No Spending

David Frum July 21st, 2011 at 7:39 am 38 Comments

In my column for The Week, I write about how even wasteful government spending is better then no spending at all:

Government spending is often wasteful. But it’s still spending.

When the Department of Waste, Fraud & Abuse buys toothpicks for the office cafeteria, that money is received by somebody. The recipient then buys other goods and services, circulating money through the economy. The money may not flow to its highest and best use, but it still flows.

What happens when the government money stops flowing?

If the economy is growing normally, then the ex-government money can be returned to the taxpayers who will spend it on something else, probably something more useful.

But what if the economy is not growing normally?

President Obama’s 2012 budget, submitted in February of this year, proposed $33 billion in cuts from federal agencies as part of an overall five-year freeze in non-defense discretionary spending.

Since then, the scale of proposed cuts has grown bigger and bigger and bigger. These cuts may not ever materialize. But if they did — you know, that’s real money they’re talking about. If the government were to spend less at a time when households and businesses still hesitate to spend more, well then … you don’t have to be an Orthodox Keynesian to recognize that less money would be spent.

And spending less money has real-world consequences for real-world suppliers and vendors.

So here’s the question:

If government is to cease providing extra demand to the U.S. economy sometime after, say, August 2 of this year, who will provide that demand instead? And how?

Click here to read the full column.

Winners From a Cheaper Dollar

David Frum July 20th, 2011 at 11:31 pm 6 Comments

My Marketplace commentary broadcast today celebrates the US export boom.

An economy as big as the U.S. cannot export its way out of recession. But the export surge does contain promising signals of the U.S. economy of tomorrow.

The U.S. is increasing its exports to China faster than to any other country — despite China’s manipulated currency. Computer technology and foodstuffs head the list of sales.

U.S. grain exports have surged to their second best year since 1982, as the droughts in Russia and Ukraine impelled those governments to halt international sales.

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Lack of Money Keeps the Jobless Off DC’s Radar

David Frum July 18th, 2011 at 7:50 am 17 Comments

Why doesn’t the political system care about the unemployed?

Ezra Klein today offers a bitter answer. The American political system responds to one thing: money. And that’s the thing the unemployed of course have not got.

[I]t’s money that gets the political system interested in your agenda:

Gilens has been collecting the results of nearly 2,000 survey questions reaching back to the 1980s, looking for evidence that when opinions change, so too does policy. And he found it — but only for the rich. “Most policy changes with majority support didn’t become law,” Hacker and Pierson write. The exception was “when they were supported by those at the top. When the opinions of the poor diverged from those of the well-off, the opinions of the poor ceased to have any apparent influence: If 90 percent of poor Americans supported a policy change, it was no more likely to happen than if 10 percent did. By contrast, when more of the well-off supported a change, it was substantially more likely to happen.”

If 15 million college-educated professionals were unemployed right now, the political system would care.

Signs of Good News
in the Recovery

David Frum July 14th, 2011 at 12:16 am 28 Comments

The economy is currently very weak, but as I write in my column for The Week, there are some signs of good news.

It’s been a summer of bad news: Bad job news, bad housing news, bad Iraq news, bad Libya news, bad news on the Euro and the debt ceiling and — OK, let me change the subject to the good news. Because it exists, too.

1) Americans are pulling out of debt. Before the recession, households were spending 14 cents out of every after-tax dollar to service their debts. Today debt service costs 11.5 cents — and still plunging. Americans have not spent this little on debt since 1995, and at the rate things are going, it won’t be long before households have de-leveraged themselves back to where they were in 1980.

Check out this chart, which maps household debt service payments as a percentage of personal income over time.

Indeed, as Fed Chairman Ben Bernanke testified to Congress on Wednesday:

“[D]elinquency rates on credit card and auto loans are down significantly, and the number of homeowners missing a mortgage payment for the first time is decreasing. “

Americans’ credit problems are turning around.

2) Exports are surging. The U.S. sold $175.6 billion of goods and services abroad in April 2011, a record. May was not quite as good of a month as April, but still, altogether, the U.S. has exported 25 percent more over the past 12 months than it did in 2009. If current growth trends hold, by 2014, the U.S. should sell twice as much abroad as it did in 2009.

Increasingly, America is financing its purchases from the world with sales to the world, rather than through borrowing.

Click here to read the full column.

How to Make 2011 a Repeat of 1931

David Frum July 12th, 2011 at 11:04 am 32 Comments

The US government is the largest purchaser of goods and services on planet earth.

The government buys everything from equipment for cancer research to metal for warships to toothpicks for federal cafeterias. Suppose the governmetn had to cut 44% from its budget on 2 weeks notice? How sharp a shock would that be to the world economy?

Here’s a comparative. In the worst quarter of 2009, American consumers cut their spending by … not 44%, not even 4.4%, but 1.2%. That 1.2% drop in consumer spending helped tumble the US economy into the worst collapse since the 1930s.

The US consumer sector is even larger than the federal government sector. But it’s not unimaginably larger. US consumers spend about about $10 trillion a year. The federal government spends about $3.4 trillion.

If a cut of 1.2% from $10 trillion was an economic shock, a cut of 44% from $3.4 trillion will be a much, much, much bigger shock.

Yet a huge portion of conservative punditry this week amounts to a sustained denial of this seemingly self-evident arithmetic fact.

Here’s an example from this morning’s Washington Examiner.

Geithner could pay: the interest on the debt, all Social Security obligations, all Medicare and Medicaid obligations, all Defense contractor bills, all Veterans payments, and all active duty troops; and still have almost $7 billion left over for other items.

Yes, Geithner would still have to cut overall federal spending by 44%, and that would have economic consequences. But those consequences would not be as  bad as defaulting on the debt would be. Not paying civilian federal workers would be unpopular, but not paying active duty troops would be far more unpopular.

Not raising the debt limit would cause a limited government shutdown, not default, as Obama has been claiming. The reason why Obama has not been honest with the American people about that fact is because he wants to maximize their fear.

Now imagine that you are an information systems vendor with a contract to service the computers of the Social Security Administration. You have a contract worth $12 million a year. It’s your single biggest contract.

Sometime around August 1, you receive word that the federal government will not be able to pay your contract. The government does not know when it will regain the ability to pay.

What do you do?

For starters, you sue. You may not be a bondholder backed by the full faith and credit of the United States. But you do have a legally binding contract, enforceable in a court of law. The money is owed and must be paid.

The second thing you do is you go to the bank to borrow some money to cover your payroll pending payment of the contract. Maybe the banker lends you the money. Maybe not.

If not, the third thing you do is lay off people. You’re not being paid, so of course you cannot afford to pay out.

The fourth thing you do is try to cut other short-term costs. You test how long you can defer payments to your suppliers.

The fifth thing you do is begin to default on your own financial obligations: the mortgage on the office building, the line of credit that temporarily sustained your employment.

Now those suppliers face the same cycle of options as you previously faced: (1) litigate, (2) attempt to borrow, (3) lay off, (4) defer payments, (5) default on their own obligations. It’ll be 1931 all over again.

The litigation piece is especially interesting.

If it’s right that on Aug. 2, the federal government will have income of $140 billion a month to cover $300 billion of obligations, then we’re going to see some scramble among the creditors, won’t we? Those who move first will have considerable advantages.

What moves might they make?

They could for example seek court orders to attach any cash they can find belonging to the federal government. Republicans may wish to prioritize defense over non-defense vendors. It’s unlikely that the courts will support that distinction. Republicans may want to prioritize Medicare vendors over non-Medicare vendors. Ditto, ditto. All will fight against all, and payments will flow in very random ways, but generally at a rate of 50 cents on the dollar.

If the situation lasts only a day or two, then we’ll have a financial event with long-term consequences for US interest rates.

But if it continues for weeks or longer, then we’ll have a real-world economic event, a massive demand-side shock sufficient to trigger a true global depression.

Perhaps it’s true that such an event would be “less bad” than a straightforward debt default. That’s hard to estimate. No question: it would be plenty bad enough. Harder question: why are conservatives – supposedly the party of business and the private sector – so sanguine about heedlessly provoking an entirely unnecessary crisis that will bear so hard on so many businesses and the whole private economy?

Slow Recovery? Blame the Housing Boom

David Frum July 11th, 2011 at 4:38 pm 30 Comments

Why has recovery been so weak and slow?

Businessweek argues: because we are still unwinding the consequences of the housing boom of the 2000s.

“It’s still a vicious cycle of foreclosures, prices falling, and buyers remaining on the sidelines,” says Jonathan Smoke, head of research for Hanley Wood, a housing data company. With the homeownership rate possibly headed to its pre-bubble level of 64 percent from 69 percent at the peak, Smoke calculates that the nation needs 1.6 million fewer homes that it now has. “We’ve gone through a period when we should have been tearing down houses,” he says. “The supply of total housing stock is beyond what is necessary.”

Scott Simon, a portfolio manager who heads real estate analysis for bond giant Pimco, says because this housing bust is so much worse than previous ones, it’s hard to tell when it will end. “There are all these things going on that we have never seen before,” he says. “No one knows how or what to model.”

Simon has been traveling the country with a 28-page PowerPoint presentation for clients that illustrates the dire state of today’s housing market. Three of 10 homes, he notes, are now sold for a loss. American homeowners have equity (market value minus mortgage debt) equal to 38 percent of their homes’ worth, down a third since 2005 and half what it was in 1950. A lot of the decline is attributable to people who have negative equity—they owe more on their mortgages than their homes are worth.

The conventions of political chat require us to debate the performance of the US economy as a function of something the president or the Congress did or didn’t do. But actual market participants do not have to subscribe to that convention.

The slump we are experiencing remains much more the consequence of the business and regulatory decisions of prior decade than of the political choices of the current decade. (The benefits or harms of those decisions will likely not seriously show up until the next decade.)