No Recovery Until America Invests Again

by Robert Higgs

The below analysis by Robert Higgs is important in that it outlines the current state of the economy, and what has occurred over the last two years. Of note is the relative strength of consumer purchases versus the weakness of investment spending. This is the type of movement from capital goods spending to consumer goods spending that you would expect based on Austrian Business Cycle Theory, as the economy re-adjusts from the previously Federal Reserve distorted consumption/capital goods structure. The growth that Higgs notes in the government sector also falls in line with what I have stated we are seeing, i.e. a recovery that is in fact a government manipulated recovery. This government manipulated recovery is not the  that will lead to real growth in the economy, as Higgs makes clear. (htBobMurphy)

While most Americans are familiar with the broad ups and downs of the economy and the job market — the stuff of daily headlines — the deeper story of the continuing recession can be found buried in the statistical appendix to the 2010 report of the president's Council of Economic Advisers.

That story: a devastating decline in investment spending.

The government's data reveal that, contrary to popular belief, consumer spending held up fairly well during the recession, falling less than 2% from the fourth quarter of 2007 to the second quarter of '09.

Most of this decline was erased during the third and fourth quarters of 2009, so by the final quarter of last year real private consumption spending was less than 1% below its previous quarterly peak.

Although the drop in private consumption spending obviously contributed to the recession, the drop in private investment spending — primarily business purchases of structures, equipment, software and additions to inventories — was far more significant.

Gross private domestic investment peaked in 2006. Between the first quarter of that year and the second quarter of 2009, it fell precipitously, by nearly 34%.

During the second half of 2009, investment spending increased by only 10%, so that late last year it was still (when measured at an annual rate) running 29% below its early 2006 level.

This huge decline in investment spending portends an extended period of slow economic growth, lasting several years and perhaps longer. Worn-out equipment, obsolete software, ill-maintained structures and depleted inventories are not the stuff of which rapid, sustained economic growth is made.

The current investment drought does not simply reflect the housing bust that followed the residential investment boom that peaked in 2005. To be sure, real residential investment fell tremendously, by almost 53% from 2005 to 2009, with especially rapid declines the past three years. Yet real nonresidential investment also fell greatly last year, by 18% from its 2008 peak.

Even real investment in equipment and software — a category only loosely connected to the housing boom and bust — declined last year by 17% after occupying a high plateau during the preceding three years. Business firms have also fled from inventory investment, trimming their holdings by an unprecedented $125 billion in 2009 after lopping off $35 billion in 2008.

Federal government spending, meanwhile, has raced ahead. From 2007 to 2009, government purchases of newly produced final goods and services — the federal government's "contribution" to GDP — increased by over 13% in constant dollars.

Read the rest here.

Robert Higgs is senior fellow in political economy for the Independent Institute in Oakland, Calif., editor of the Independent Review and author of "Against Leviathan: Government Power and a Free Society."

Timothy Gethner: Captain Regime Uncertainty

As Bill Anderson points out, Robert Higgs in 1997 wrote one of the best and most important papers on the Great Depression called "Regime Uncertainty." It explained one of the reasons that long-term private investment stayed low throughout the 1930's: Because of uncertainty, created by government, businessmen did not make long-term investments for fear of changes in rules and regulations that might take place that would damage their investments.

Tim Geithner seems to want to prove Higgs theory correct all by himself. First, we had his absurd press conference, and now we have a leak, reported by WaPo, from the Treasury trying to explain why Geithner's performance was so bad.

The leaker is obviously Geithner, or someone close to him. The leaker tells WaPo that:

Just days before Treasury Secretary Timothy F. Geithner was scheduled to lay out his much-anticipated plan to deal with the toxic assets imperiling the financial system, he and his team made a sudden about-face.

According to several sources involved in the deliberations, Geithner had come to the conclusion that the strategies he and his team had spent weeks working on were too expensive, too complex and too risky for taxpayers... There was one problem: They didn't have enough time to work out many details or consult with others before the plan was supposed to be unveiled.

The sharp course change was one of the key reasons why Geithner's plan -- his first major policy initiative as Treasury secretary -- landed with such a thud last Tuesday

Is Geithner really this clueless? He changed his entire rescue plan for an on the edge banking sector just days before he was to outline his plan to the country, and is now using this fact, which paints him as totally clueless, for justification for his clueless press conference. Is it any wonder the market was down by 4.0% today? Folks, this is as clear a case of regime uncertainty as you are ever going to get. Nobody has read the playbook because there isn't one. How can anyone invest in the banking sector under these clueless conditions?

FDR's Grandson: "New Deal Was Not Big Enough"

Whoa.

FDR's grandson is an economics professor at Sarah Lawrence College in Yonkers.

And the grandkid, Frank Roosevelt, now 70, doesn't think his grandfather went far enough to get the economy out of the Great Depression. The Gannett News Service reports:

"FDR never did get the Keynesian thing, and therefore the whole New Deal effort was not big enough," said Roosevelt, 70. "I mean, it didn't get us out of the Depression, really, until World War II came along, and then government spending really got big enough to really employ everybody and then some."

"I think Obama has to learn from that and forget about balancing the budget," Roosevelt said. "Spend, spend, spend until we've done enough to stop this decline.

"So if I could talk with him I would say go for broke," he said. "Literally, go for broke."

One has to wonder what Frank has been doing for the last few decades. He needs to catch up on the literature instead of reading his grandfathers scrapbooks. The Chicago Tribune reports:

John Cochrane, a professor at the University of Chicago Booth School of Business, says that among academics over the last 30 years, the idea of fiscal stimulus has been discredited and in graduate courses, it is "taught only for its fallacies."

New York University economist Thomas Sargent agrees: "The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research."

In an article in the August issue of the Journal of Political Economy, UCLA economists Harold L. Cole and Lee E. Ohanian blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933 for prolonging the Great Depression for 7 years.

"Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump," said Ohanian, vice chair of UCLA's Department of Economics. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

And Robert Higgs in his book, Depression, War, and Cold War: Studies in Political Economy, has exposed the fallacy in the commonly held belief that World War II ended the depression. According to Higgs, the war gave only the appearance of recovery, when in reality private consumption and investment declined while Americans fought and died. A return to genuine prosperity did not occur until after the war ended.

Big, big, big spender Frank needs to chill. You don't "Literally go for broke" with the United States economy. That's an outrageous idea. We are not at a craps table in Vegas with the economy on the pass line. What needs to be done is that stability needs to be brought to the entire economy by stopping all these erratic interventions. Otherwise, we might as well mail the keys to the entire economy over to President Kim Il-sung of North Korea. He's about the only expert left on how to run a heavily regulated command economy.

Bernanke, Paulson, Bush, the Obama Gang and the Dollar

Given the moves and signalled futures moves of Bernanke, Paulson, Bush, and the Obama gang, it is difficult to see how the dollar and economy will survive. Bob Higgs provides a great overview of the current situation, here.

Hank Paulson Must Think Water Freezes at 60 Degrees

The latest news from our Treasury Secretary is that the consumer credit markets are frozen. The only problem is that Hank Paulson's idea of frozen is different than yours and mine. This guy is probably the only person lookng, in August, for the ice skating rink in New York's Central Park.

Robert Higgs explains:

Notwithstanding the many developments on the bailout front during the past six weeks, the New York Times, like other media outlets, continues to quote Wall Street insiders who report, as Alex Roever of JPMorgan Chase did recently: "You have a market that is frozen." What planet do these guys live on? It certainly is not the same one to which the Federal Reserve's data apply. I’ve been singing this song for many weeks, but I’m going to keep singing it until somebody in the news media wakes up and realizes that these "frozen credit market" tales are pure hooey. Look at the data, for crissake. By now we should all be ready to move beyond hysteria, get a grip on reality, and begin thinking about how to repeal everything the government has done during the past six weeks...

Memo to NYT: check the data on consumer loans published by the Federal Reserve System. The latest report, dated November 7, says: "Consumer credit increased at an annual rate of 1-1/4 percent in the third quarter. Revolving credit increased at an annual rate of 2-1/2 percent, and nonrevolving credit increased at an annual rate of 1/2 percent. In September, consumer credit increased at an annual rate of 3-1/4 percent." Would you describe this report as indicating a "frozen" credit market? Total consumer credit outstanding in September, $2,588 billion, exceeded the average amount outstanding in any year from 2003 to 2007, the period of the credit bubble.

My gut tells me that in Henry's mind unfreezing this non-frozen market means shipping more billions to the Robert Rubin wing of Goldman Sachs, i.e. Citigroup.

Is the US A Communist Country Yet?

We are pretty damn close. Robert Higgs explains.

More Reaction To The Krugman Nobel

Peter J. Boettke (again--it seems he has calmed down just a bit) is here.

Robert Higgs rips Krugman's Noble press conference comments, here.

Russell Roberts' commentary comes closest to making it understandable as to what the Krugman Nobel backlash is all about.

Alex Tabarrok provdides a primer on Krugman's New Trade Theory, here.

How Confusing Are Current Federal Reserve Operations?

Even a top flght economist, such as Robert Higgs, clearly doesn't get what is going on.

In a column today, Higgs states with regard to Federal Reserve money being offered to Freddie Mac and Fannie Mae that:

...because the Fed itself is the lender, the loan will take the form of newly created money – that is, the loan will be pure inflation, a hidden tax on all assets denominated in dollar units, including dollar balances themselves.

The Fed to date has not been inflating as a result of recent money injections into the financial sector. It has been sterilizing its transactions by selling Treasury Securities it owns to finance the injections, from over $800 billion in Treasury securities owned last year, the Fed is down to only $380 billion.

In the last two months, the money supply measure M2NSA has not grown at all.