The downside to government incentives

airborne18

One factor in economic recovery is that demand for durable goods and large ticket items eventually builds up and helps propel a recovery. There are a few metrics, like average age of cars on the road and such.

The problem with all of the various incentives, like the credit for energy effiecent appliances that basically made them almost free is that they temper the demand.

The 8000 cash for clunkers burned up alot of demand from the system, and so did the home buyers credit for homes.

Basically the government played their hand early, and now they have very few incentives left. The worst part is that built up demand is deflated, on the cheap.

It could be argued that it slowed the decline, but fact lies in that consumer demand has been depleted for durable goods.

http://www.bloomberg.com/news/2010-0...estimated.html

mugaliens

I would argue not that it slowed the decline (which I may indeed have done), but that it stalled the recovery. Best of intentions, yes, but we know which road was paved with the best of intentions.

Ivan Seeking

The goals of those programs were, first, to help prime the economy in the midst of the greatest disaster since the depression, and next, to add to a framework of foundation-building for the new economy - a global economy. It is no secret that these programs reduce future spending, but that too is short term.

It is a matter of timing, not totals. The question is: Did the flow of cash into the economy have a greater impact then, than it would have now? Given that Obama and his team have helped to pull us from the brink of disaster, I'm inclined to assume that his methods have been justified; though not always as successful as was hoped.

The real problem is that the jobs market hasn't improved as much as hoped. On the up side, they stopped the crash. That matters most of all. And the recovery has been strong in some areas. For example, the Dow is over 10K from a low of about 6500, in about March, of 2008. That is a 53% increase in the Dow in a little over two years. And whereas we were losing over 500,000 jobs a month at peak of the crisis, at least we are adding jobs now. But unemployment is still way too high.

It appears that pressure is building for employers to start hiring, banks to start lending, and consumers to start spending. Note for example that personal savings are at their highest levels since the I think the 1970s. It is a timing issue. And the Fed still has some room to maneuver. I guess the next move is to start buying back bonds.

Gokul43201

Then argue it - you have an audience.

Ivan Seeking

Note that the cash for clunkers program, and any program that reduces the demand for petroleum products, has a direct, long-term impact on the GDP, by reducing the trade deficit, by reducing our demand for imported crude. What is the life of a car; maybe 15 years? How about home improvements; maybe 10 years for appliances, and 25 years for efficiency improvements?

Recall that the incentive in the cfc program was to buy a fuel-efficient car.

Note also that, depending on the price of crude and our import rate, oil imports account for 50%-60% of our trade deficit. While the outsourcing of jobs [overseas] is quick to get the blame and cause tempers to flare, when it comes to the bottom line, imported oil is half of the problem.

Ivan Seeking

Sorry, I'm losing track of time on some of this stuff. The Dow hits its low in March of 2009, not 2008. So that is a 53% increase in a year. In fact the market peaked at 11,000 earlier this year, with a slight decline [normal oscillations] since then.

airborne18

The energy sector is what I follow, from source to demand, and people do not realize the cost on the economy that energy as a whole drains.

And the largest contributor to the waste is transportation. Americans do not realize how much they can individually impact the energy issue. And I am not talking mass transit, just by buying a car that gets better gas mileage and driving less.

You see efforts for people to all stop driving for a day, but those are misguided. People must change their overall behavior.

How much gas do we use a year? Well so much that minor fluctuations in the retail price impact Walmarts sales numbers. They even footnote it on their revenue numbers. Think about it, of all the merchandise and crap they sell, gas prices have a significant impact on their revenue numbers..

talk2glenn

By what metric do you rest the claim that "Obama and his team have helped to pull us from the brink of disaster"? None of the presidents economic prognostications (worst case or best case, the latter being promised outcomes if we pass the stimulus) were born out by reality.

Is it simply the fact that economic malperformance has peaked? This is an inane basis. Every recession is history has peaked. This is the first recession in history to feature Obama as president. Why does it just follow, as a matter of fact, that the peak was in any way caused or influenced by the president or his advisers? I could make a stronger claim that this recession followed a typical semiannual cyclical form, which has characterized every negative cyclical period since the Great Depression. It takes capital markets about 18 months to divest themselves from their worst investments, and labor markets a bit longer to reach a new labor market equilibrium consistent with the change in supply and demand.

That is where we are now - a market equilibrium. Private sector job growth and GDP growth are both practically zero. The American economy is not growing, and it is not shrinking. It is not shrinking because the systemic risks have been removed from the system, with help from the government (TARP, not ARRA). The economy is not growing because investors have no confidence in the systems structural future, again because of government (excessive spending on the wrong things, dramatic regulatory structural changes in healthcare, energy, and financial services that will take years to work out at the agency-level, tax hikes, etc).

Government didn't stop the crash; companies did when they'd fired enough employees to remain productive and profitable given new market realities. There was no observable correlation between stimulus spending and changes in the private sector job market (this is not true for the public sector, however).

Job markets don't just crash forever every time there's a crisis, just as they don't just expand forever every time there's economic growth. When the demand or supply curves for labor shift, the market adjusts labor rates (number of jobs and pay) to meet a new equilibrium; this takes time.

Ivan Seeking

Cripes, do you have any idea what has transpired over the last few years? This was not just a recession, but thanks to the final actions of Bush [the one thing he did right was to initiate the first bailout and then nationalize Fannie and Freddie], and the followup by Obama, we didn't lose the entire global economy. Do you remember the world economic summits?

Learn the facts:
http://www.pbs.org/wgbh/pages/frontline/meltdown/view/

See also
http://www.pbs.org/wgbh/pages/frontline/warning/view/

mugaliens

Actually, I do.

Global economics isn't a simple, closed classroom system. It's a mega-hydra comprised of thousands of variables which we can barely measure, and most of which are beyond our control to manage, and tens of thousands more variables about which we still really do not have a clue.

Neither Bush, Obama nor the global economic summits had anything to do with any recession or degree of recovery, save for one thing: As world leaders, their actions have calmed the hearts and minds of people around the world.

And that is saying something! But that's their role, and at that, they performed acceptably well, although I think they'd have done a better job if they spent less time trying to throw billions of good dollars after bad, or convince people their economic policies had any direct or measurable effect on the situation.

They most certainly did not.

Exceptionally well said, talk2glenn. This matches my twenty years of experience and training working for the U.S. Government, as well that from my MBA, and the year I spent as a consultant in the private sector before government service. Much of this thread reads like some folks aren't too sure of the difference between MB and MZM. Well, no time like the present for a refresher. :)

As for how this works in life, there are three basic theories, much of which are in contention with one another:

Real Business Cycle

Sticky Economics

New Keynesian Economics

There are many more, but what I took away from my MBA is that these three include most of the precepts from all of them, and that it's not so much that any of the three are wrong, but rather, that each tends to focus on one facet or another of the rather large (as in thousands) of variables which comrpise market cycles. The other thing I gathered is that none of these models delve much into market psychology, which can largely negate predictions from any or all of the models, depending on what's going on in the hearts and minds of the folks out there spending the money, all the way from end consumers who control thousands of dollars to corporate execs who control billions of dollars.

There are a few post-doctorate all-sciences models out there which are unbelievably complex but which do a much better job of both tracking and using the thousands of factors for predictive analysis than anything else. These are staffed by the super-wizards behind the scenes throughout the gobal financial markets. The folks will work for a decade or two before retiring to a beach house somewhere in the world where they can surf the waves, or the Internet, for the rest of their lives in comfortable abandon.