At the White House (If Nowhere Else), Economic Optimism Abounds

With the ink barely dry on the recent stimulus package, commentators are already calling for a fresh round of stimulus. But will these calls be heeded, or fall on deaf ears? For now, it looks like the Obama Administration is standing firm. And, really, what else could we expect? A call for more stimulus at this juncture is only a signal that the first package was destined to be a failure from the beginning, an admission that this Administration could not afford so early in the term. Christina Romer, chair of the Council of Economic Advisers, delivered a clear message today:

“We absolutely need to let this one work,” Christina Romer, chair of the White House’s Council of Economic Advisers, said Monday at the Brookings Institution. Tax withholding tables are just now being changed to get more money into consumers’ pockets, she said, and many forecasters are saying the recent uptick in consumption may mean the economy is approaching bottom. “I think people are perhaps seeing some light at the end of the tunnel,” Ms. Romer said.

Light at the end of the tunnel...what information exactly is flowing into the Oval Office? Did the White House get the same jobs report the rest of us saw last Friday? Not so much light in that report as pitch black. Another 651k employees cut from payrolls, unemployment pushed to 8.1%, and the U6 rate pushed to a whopping 14.8%. These numbers are all expected to deteriorate in the months ahead. What else did we see last week? Perhaps the light was the in the ISM reports? Manufacturing barely budged, and remains mired deep in recession territory; nonmanufacturing tells a similar tale. Initial claims fell, but at 639k still signalscontinued sharp deterioration in the labor market, and the 4-week moving average still edged up. Maybe she is referring to the downward revision to 4Q08 productivity, which suggests firms still have more work to do in reducing labor costs.

Recent data shows little light, in my opinion. It describes an economy in virtual free fall. Romer appears to be holding onto the hope that the relative stabilization in real consumption expenditures signals a bottom of activity. I hope she is correct, but I remain cautious - households are getting a significant boost right now from declining energy prices, but with oil prices settling out in the $35 to $50 zone, future gains are less likely. Moreover, the confidence numbers are not supportive of a bounce back in consumer spending (click on chart to enlarge):

Most irritating is that Romer knows all this; she is much too smart to not appreciate the severity of the data. But once you go are in the Administration - whatever Administration - you heed to the party line. Romer continues the line:

The White House is betting that addressing the root cause of the economic downturn — the housing and financial-sector trouble — will be enough (along with the stimulus spending) to return the U.S. to growth. Tim Geithner, the Treasury secretary, “loves to say, ‘There’s more stimulus in financial rescue than in stimulus,’” Ms. Romer said. “By getting our financial markets back, getting lending going again, that’s incredibly important for aggregate demand and for spending.”

Sometimes I feel like I am in Oz. And I want to go home, so badly do I want to go home. To a time that credit flowed like water from a spring, and the answer to all life's problems could be found in a home equity line of credit. And Geithner is whispering to me, "just click your heels, and say 'I want to go home.'" Yet for months I have been clicking my heels - since Fall of 2007 - and still I am stuck in Oz.

Efforts to unglue the financial system are important, but I sense that the Administration's expectations of what will be delivered by a fix will fall far short of what is necessary to fill the growing hole in the US economy. Even BOA (BAC) CEO Ken Lewis, in a self-serving WSJ op ed, admits as much:

Second, one of our greatest challenges is balancing the need to extend credit with the need of households to pay down excessive debt. In an economy that became too dependent on debt-driven consumption to create growth, the prospect of household deleveraging is sobering. The answer, in my view, is to let competitive forces lead us back to responsible lending practices, not the type of indiscriminate lending that has created so many problems.

Even if households suddenly rediscover their love affair with credit, a big if given the destruction of wealth in recent months, they will find themselves stymied by tighter credit conditions. A healthy, well functioning financial system simply will not extend credit on the scale seen in recent years. Without a replacement for that demand, economic activity will slide into a sub par equilibrium, and would likely remain sub par for an extended period of time as structural imbalances are corrected. David Altig at macroblog summarizes:

When I look ahead, I envision the U.S. economy over the next several years in terms of a simultaneous process of recovery and reformation: Recovery in the sense that the actual contraction of GDP will end, but reformation in the sense of structural transformation in financial markets, consumer behavior, and perhaps an adjustment of the global imbalances that are arguably at the root of much of the financial instability that has characterized the past decade.

Additionally, what is the time line for a financial market fix? One month, or one year? Will TALF jump start the securitization market overnight? How much damage will be done to the US economy while we wait? This Administration appears willing to find out.

In short, I grow increasingly fearful that the pace of economic deterioration will leave the US economy in a much deeper hole than this Administration expected, swallowing the stimulus package. Moreover, that even with a functional financial market, crawling out of that hole will be difficult at best. I see little but fiscal stimulus that could fill that hole. You might not like it, you might worry about the long term budgetary consequences, but we all might soon fall back on the old battlefield adage: There are no atheists in foxholes.

Comments

[Dave Wrixon:]

Perhaps Obama is starting to have doubts as to whether spending yourself out of a hole actually works.

Unfortunately, it is a bit like being in a road accident at 70mph where you try to accelerate out of the bend, but actually end up hitting the tree at 100mph.

Mar 10 06:48 AM

[atlasman:]

Tim - Nice article. I wish there were problems with your piece that I could pick apart but sadly it is a pretty good indictment of our "Leaders". It is about time we dusted off that "Term Limit" law and figure out a way to get it through the Supremes.

Atlasman

Mar 10 07:26 AM

[ArkansasAngie:]

The stimulus will kick in -- eventually. But will it yield the desired effect?

The BO Administration appears to be in a holding period -- fingers crossed that the FEDury's action over the last 9 months will be just what the doctor ordered.

What I find disturbing is the constant use of terms like "bet" and "gamble" by BO and company. They are betting that their gamble pays off. Have any of these yahoos ever heard of fiduciary responsibility? You know … protecting little ole ladies and orphans.

Are they making the same mistake that all the super duper, hot dog, financial gee-whiz kids made -- risking other people's money for their own personal (political) gain?

Mar 10 07:38 AM

[Chris of NH:]

Of course they are optimistic. They have guaranteed jobs for 4 years... who, in this depression, would not want a guarantee of 4 more years with a steady paycheck?

Give us a break.

Mar 10 08:08 AM

[Speedspirit:]

No doubt the economy is burning but remember that the public only gets to hear what they want us to hear. The real problems like the British Obama is handling like a PRO. The economy and the financial system needed a bit of correction so he is letting it corrrect without taking down the whole USA. Keeping the enemy close (GEITHNER) gives him the upper hand. Things this serious will take time its people who are impatient that got us into this mess.

Mar 10 08:34 AM

[TeresaE:]

No, they have guaranteed paychecks and health care FOR LIFE.

On my back. Great gig.


On Mar 10 08:08 AM Chris Who Says Barney Frank is a Moron wrote:

> Of course they are optimistic. They have guaranteed jobs for 4 years...
> who, in this depression, would not want a guarantee of 4 more years
> with a steady paycheck?
>
> Give us a break.

Mar 10 08:39 AM

[Doc 224899:]

So, Atlasman, you want a 1-year term, or a 2-year term?


On Mar 10 07:26 AM atlasman wrote:

> Tim - Nice article. I wish there were problems with your piece that
> I could pick apart but sadly it is a pretty good indictment of our
> "Leaders". It is about time we dusted off that "Term Limit" law and
> figure out a way to get it through the Supremes.
>
> Atlasman

Mar 10 09:04 AM

[fireball:]

maybe the optimism comes from the elation that the failed socialist experiment will once again raise its' ugly head. it is being forced down our throats. anybody gagging?
i sympathize with atlasman but do not wish to rearrange any of the constitution. simply abiding by it would remedy most of the "out of its' cage bloated parasite enabling federal government".
fire like government is a dangerous servant and terrible master. forgive my paraphrase.
protect the 1st ammendment. no yeild on the 2nd.

Mar 10 09:33 AM

[Chris of NH:]

I know... and it's a crime beyond imagination that they get that gravy train, unvoted on, from us.


On Mar 10 08:39 AM TeresaE wrote:

> No, they have guaranteed paychecks and health care FOR LIFE.
>
> On my back. Great gig.

Mar 10 09:34 AM

[@TexasER:]

Not that I approve of their spending priorities, but I don’t see that the administration has any choice here. They are walking a tight rope, constrained by two problems:

1. If the overall stimulus is too large, then the inflationary effects on prices might quickly become impossible to control. The only way to do this is little bits and pieces at a time, with pauses to gauge the effects. It would be reckless to do otherwise.

2. If the stimulus is too shocking, then we might see panic, bank runs, trade wars and hyperinflation. People are very nervous right now and anything could set them off. For example, announcing a 3 for 1 split of the dollar would probably freak people out.

In short, being slow to respond may delay recovery while being too quick may be fatal.

Sticking my head back in the sand now.

Mar 10 10:16 AM

[Jimbo:]

I support Atlasman: Members of Congress limited to an absolute twelve years which who equal two terms in the Senate and six in the House.Next we need a law making it a CRIMINAL offense for a former member of Congress to lobby. Unfortunately, the path to these reforms is through the very Congress that is so corrupt.

Mar 10 10:48 AM

[Leftfield:]

The best hope we have is to repeatedly vote the incumbents out. It's been tough during Alice in Wonderland times to wake people up. With the paid-for media promoting ignorance, I'm not sure when they will.

People who have been responsible should look more at voting out incumbents. Too many haven't, I'm sure.

Mar 10 11:00 AM

[fireball:]

jimbo and atlasman
i must agree on term limits for congress and jimbo yes all lobbying should be illegal. it is bribery to betray your constituants. i thought atlasman was refering to the supremes. they too should be forced to comply to their constitutional role. we are 3 legsl forms. democracy in our election of representatives, a king (by democratic process) in the executive, and judges by appointment (but still affected by the democratic process). however like rock paper scissors none is all powerful. the senators like the judges were supposed to be similar to the judges by appointment chosen by the preferred process (many had the state legislators appoint the federal senators. again an influence of the democratic process.) of each state. now we just have 100 more greasy slimy politicians that are riding herd on the house. even the house process is corrupted to elitism because each representative is supposed to represent 30 to 40 thousand citizens. talk about gridlock.....mark twain would love it as would i. this would break the "two" party stranglehold. the founders envisioned a diverse free society with many parties, thus the electoral college. the vice president was supposed to be the runner-up and the tie breaking vote for the senate might have been completely at odds with the president. a wonderful system of divided powers that was not broke so they had to fix it. our military was divided for similar reasons. if one branch followed a bad leader the other branch could counter.
most americans don't understand that the president is only commander and chief when we are in a state of congressionally declared war.
lot of repair and undoing to get our government right again so the nation and people can prosper.

Mar 10 11:29 AM

[atlasman:]

I am pretty flexible. How about 4 2-year terms for Conrgess and 2 4-year terms for senators?

We also need some form of computer generated districting alogorithm that prevents Gerrymandering. The only inputs to the algorithm would be the location of each eligible voters and let the computer figure out the optimum district based on population density.


On Mar 10 09:04 AM User 224899 wrote:

> So, Atlasman, you want a 1-year term, or a 2-year term?

Mar 10 01:36 PM

[PainfullyAware:]

On Mar 10 11:00 AM Leftfield wrote:

> The best hope we have is to repeatedly vote the incumbents out.
> It's been tough during Alice in Wonderland times to wake people up.
> With the paid-for media promoting ignorance, I'm not sure when they
> will.
>
> People who have been responsible should look more at voting out incumbents.
> Too many haven't, I'm sure.
>


The "Fix Is Almost In.". - Electronic Voting with a dubious track record of "Hacking" and "No Hard Accounting" will remove any possibility, short of a landslide, for removing the incumbents. They have been implemented in the most influential areas.

The "King Makers" keep the mentally minuscule "Fighting Over Labels And Preconceived Notions" to make it close enough to "Game Without Recognition".

Germany has outlawed their use and others should pique interest as to why.

Mar 10 04:49 PM

[Amitabha Mu...:]

The very sad projections of the future is hundred percent true. The governmental effort to rescue the economy may be good but then all the future ideas that are emerging from the present administration at best gives a glimpse of a world of fantasy of a dreamy eyed young man whose grasp of the real world, the time worn conservative world, is far from the real thing.
It is no wonder smarter civilizations would make the hay in this semi paralysed situation of once mighty leader.

Mar 11 03:45 AM