When an economic bubble bursts, normalcy can only return when price excesses created during the bubble are wrung out of the market. A recession is often the painful but necessary market mechanism that corrects the pricing distortion and consequent misallocation of capital that occurs in a bubble. When government intervention prevents the mispriced asset class from fully deflating, capital continues to be misallocated and economic malaise lingers on. This is the takeaway message from Peter Schiff’s Wall Street Journal editorial:

Schiff defended his thesis on CNBC:

Schiff’s holiday forecasts have become a regular feature on this blog. As long as his prognostications prove to be more right than wrong (as we’ve seen over the last five years) it is a tradition we will continue to observe. I do not find it particularly difficult to appreciate the wisdom in his common sense analysis. In fact, I find it much more difficult to understand how anyone could expect that a problem that was:

• Triggered by Federal government market-distorting social engineering policies intended to permit people to buy homes they cannot afford…
• Enabled by Federal Reserve Bank expanding the money supply and keeping interest rates artificially low to create the illusion of affordability for overpriced housing…
• Fueled with massive deficit spending…

could be solved by:

• More federal government market-distorting social engineering policies intended to allow people to to stay in homes they cannot afford…
• Even more Federal Reserve Bank expansion of the money supply enabling even lower artificial interest rates perpetuating the illusion of affordability for overpriced housing and…
• Fueling it all with even more massive deficit spending.

Definition of insanity anyone?

UPDATE: 1/4/10
Instead of insanity, how about Insana? On Friday last, Ron Insana opined specifically to refute Schiff’s thesis. Basically he is saying there is so much pent-up demand, real estate prices are so low, and the economy is improving enough that the housing market will stabilize here:

^{Cross-posted from “Divided We Stand United We Fall“}

We do requests:

“I’m leaving on vacation or I would do it, but can someone do an overlay chart of the post-WWII recessions and the subsequent recovery? I suspect we’ll see a pattern. Recessions tend to end after a certain number of months, depending on the depth of the recession, whether Congress spends money or not.” – FH

Frank is leaving and I am just getting back from vacation, so I’ll take the baton. The following screenshots are from a nifty tool on the Minneapolis Federal Reserve Bank website. The red line is the current recession.

Post-WWII Recessions Tracked by Changes in US Output:

“The graphic points out an interesting aspect of recessions. They all end. And, surprisingly, they didn’t all need a trillion dollar stimulus bill from the Feds to end them. In fact, all of them combined up to now did not need a trillion dollar stimulus to end.”

This is worth repeating. If you pass a stimulus bill, recessions end. If you don’t pass a stimulus bill, recessions end. If you pass a small stimulus bill, recessions end. If you pass a large stimulus bill, recessions end. Recessions end. Full stop.

In terms of US Output, the graphs show the 2007 recession to be comparable to the ’53, ’57, and ’81 recessions (slightly worse than ’81, not as bad than ’57). In terms of employment, this is the worst recession since WWII. By any measure, this recession is lasting longer than any recession since WWII.

In terms of output, the recovery is underway. In terms of employment, it is not. Justin asserts that “…credit needs to be given to [the administration] for helping turn our economy around in such a dramatic fashion.” I am not sure what is so dramatic about the longest recession and slowest recovery of any recession since WWII, nor am I sure why any administration would want credit for it. Still, Justin is the voice of moderation compared to the hero worshiping fantasy found in the comments.

Given that this is the slowest recovery from the deepest recession in the modern era, any argument on what impact the stimulus package or the Obama administration did or did not have on the duration or strength of the recovery can only be made on a counterfactual basis – “expressing what has not happened but could, would, or might under differing conditions”. Despite the massive expenditures, you cannot say this recovery is more robust than any that has gone before. The only case that can be made in defense of administration policy is speculation that the recovery would have been even more tepid without the stimulus.

Problem being, a case can also be made that the uncertainty created by this administration’s wild spending, insane deficits, threatened increases in health care taxes, likely increases in health care insurance premiums on employers, an energy tax (cap & trade), repeal of the Bush tax cuts, increases in the minimum wage, uncertainty created in the health care, financial, and energy industries with the imposition of radical government mandated top down changes in industrial policy – all contributed to increasing uncertainty in the private sector and made the recession worse.

Both are counterfactual scenarios. Neither can ever be proven with certainty.

There are statements about administration policy on the economy that can be made with certainty. Clearly, administration policy has cushioned the pain of the recession for many who were hit hardest. Realistically and practically, this is a legitimate and necessary function of the federal government. Another certainty is that only about one third of the stimulus package allocation has been spent, and a significant percentage of that was in the form of pork for congressional districts that was not focused on creating new jobs (but may have arguably saved government jobs at the expense of the private sector). Unsurprising, since the bill was written by Nancy Pelosi’s House of Representatives, slightly trimmed by the Senate, and rubber stamped by the President. Based on the percentage of the bill spent to date, it is unarguable that a focused bill 20-30% the size of the one that passed would have had the exact same effect of “turning the economy around in such a dramatic fashion” to this point – without further inflaming the deficit and currency fears the stimulus package produced.

So should we applaud the administration for the economic performance of a bloated, politics-as-usual, pork-filled stimulus package that passed a year ago on a strong-armed partisan vote? It did provide one valuable service. In a single stroke it disabused independents of any illusion that the Obama administration would be vaguely centrist, post-partisan, fiscally responsible, more transparent, or agents of change in Washington D.C. We were immediately back to old-style back-room dealing, partisan politics and favoritism pushed by a classic borrow, tax and spend liberal. It set the tone and became the template for everything that the administration has done since. Credit for turning the economy around? I remain unconvinced.

Last week President Obama announced the “Volcker Rule” proposing tough constraints on big banks. During the announcement Barney Frank stood behind the president on the podium in visual support of the policy. As noted in my last post, the Chairman of the House Financial Services Committee then proceeded directly to an interview on CNBC, the media outlet that is arguably the most direct conduit to the banking industry affected by that policy. In the interview Barney Frank soft pedaled the impact of the proposed policy, saying it would not go into effect for 3 – 5 years.

Yesterday, in a background briefing, the administration announced a three year spending freeze on portions of the budget. Since departments with the fastest growing government expenditures like Defense, VA, the State Department, and entitlements are excluded from the “freeze”, it will have a negligible effect on the ballooning deficit. NYT:

“The payoff in budget savings would be small relative to the deficit: The estimated $250 billion in savings over 10 years would be less than 3 percent of the roughly $9 trillion in additional deficits the government is expected to accumulate over that time.”

Shortly after the announcement, Jared Bernstein, economist and economic adviser to Vice President Biden, appeared on the Rachel Maddow Show – the media outlet that is arguably the most direct conduit to the progressive community. Mr. Bernstein proceeds to soft pedal even the very modest impact the policy would have on deficits, almost apologizing for it, and practically promising that the administration will really continue to be the big spenders that the progressives know and love. Maddow wasn’t buying what Jared was selling:

I am sure the President will clear all of this up in the State of the Union address tomorrow.

A new website for the controversial, popular program is up and it includes some things you need to know if you’d like to take advantage.

• Your vehicle must be less than 25 years old on the trade-in date
• Only purchase or lease of new vehicles qualify
• Generally, trade-in vehicles must get 18 or less MPG (some very large pick-up trucks and cargo vans have different requirements)
• Trade-in vehicles must be registered and insured continuously for the full year preceding the trade-in
• You don’t need a voucher, dealers will apply a credit at purchase
• Program runs through Nov 1, 2009 or when the funds are exhausted, whichever comes first.
• The program requires the scrapping of your eligible trade-in vehicle, and that the dealer disclose to you an estimate of the scrap value of your trade-in. The scrap value, however minimal, will be in addition to the rebate, and not in place of the rebate.

So what are your thought about the program? Will you take advantage of it?

Thanks to Justin and company for welcoming me on here as a regular contributor. I will be posting on a number of issues, but one area you can expect that I will regularly be tracking is technology related developments and how they interact with the political world and policy. I also live less than ten miles from the Nebraska/Iowa border, so I’ll try to keep an eye on 2012 developments as the contenders test the waters there as well, on top of other interests like election reform, social issues, polling analysis and any number of things that I come across while skimming the hundreds of tweets and RSS feeds I go through every day. I hope you enjoy it, and now… on with the show!

We’ve been hearing about cellulosic ethanol for several years now, generally with the caveat that were at least a few years, and a few scientific breakthroughs, away from it coming to market and helping wean us from foreign oil. Unlike corn, which breaks down into the sugars necessary to be processed into ethanol relatively easily, cellulose is a hardy material that takes time and energy to break down. Its upside is that there happens to be more cellulose present than any other organic molecule on the planet. This is why millions upon millions of dollars has been poured into cellulosic ethanol research, genetically modifying naturally occurring enzymes to break it down faster and looking for ways to bring the price per gallon down closer to the price of gasoline.

Unlike corn, which takes land out of food production, is inefficient as far as how much energy it takes to produce and is a high maintenance crop, finding raw material for a cellulosic plant is easy. Wood chips from sawmills, the kudzu scourge spreading through the hot and humid Southeast, agricultural waste and even up to 80 percent of what ends up in our landfills could be used to make cellulosic ethanol.  Thankfully, the millions of dollars in research and development have begun to bear fruit.

A gas station near Ottawa is the first in the world to begin selling a cellulosic blend, called CE-10, to the public. Iogen, the company behind the demonstration plant that produced the fuel, plans to build its first full scale cellulosic ethanol plant in Saskatchewan. It has reached an agreement with the local government and Royal Dutch Shell to convert an old Mill site to their purposes, with the government even agreeing to purchase any green energy produced at the site. The running demonstration plant only has the capacity to produce about 3 million liters of ethanol each year, using wheat straw agricultural waste, while the new plant will be able to pump out about 75 million liters. It will make use of a more diverse feed stock, including agricultural waste from other crops, grasses native to nearby areas and even wood chips from area mills.

The march of progress continues, with a number of large companies making big investments into these technologies. Last year GM purchased a large share of Coskata, a big player in the emerging cellulosic ethanol industry, who claims to have developed a process that simplefies the complex and costly process of breaking down cellulose and brings the cost of production down to being competitive with gasoline. There are as many as two dozen companies with plans to build plants similar to Iogen’s, but the economic downturn is effecting their ability to finance these projects. Coskata is hoping to get some stimulus money, in the form of loan guarantees, to help finance its plant, with an estimated production of 50-100 million gallons a year.

As President Obama often says, if we intend to be a leader in the green energy industry of tomorrow, we need to move boldly in that direction today. Now is not the time to let companies who wish to lead us in there falter because of financing problems. Some are talking about a new stimulus bill, which most people reasonably see as a terrible idea, that would focus on these kinds of projects and job creation. The first should have done so, and I have little confidence that a new one would make it through congress without being similarly unfocused and pork laden.

We don’t get too many of these chances, where we can kill three birds with one stone. Job creation, independence from foreign oil and environmental progress can all be had with some smart funding priorities. Lets hope the administration recognizes this in time.

Talked about this recently when Biden admitted that there might be need for a second stimulus package at some point, but that the administration wanted to see how the first round would suss out.

Still, looks like Dems need to get their stories straight because they aren’t saying the same things.

Read more at True/Slant.

Over at The Atlantic, Megan McArdle supported Barack Obama’s candidacy because of his economic team. Now, she worries that support may have been misplaced. Namely, she thinks Obama’s budget numbers are insane (her words) and the stimulus package was far too ideological.

The budget numbers are just one more blow to the credibility he worked hard to establish during the election. Back then, people like me handed him kudoes for using numbers that were really much less mendacious than the general run of candidate program promises. Now, he’s building a budget on the promise that this recession will be milder than average, with growth merely dipping to 1.2% this year and returning to trend in 2010. Isn’t there anyone at BLS who could have filled him in on the unemployment figures, or at Treasury who could have explained what a disproportionate impact finance salaries have on tax revenue? These numbers . . . well, I can’t really fully describe them on a family blog. But he has now raced passed Bush in the Delusional Budget Math olympics.

Remember, McArdle is a fiscal conservative, but she’s no Limbaugh-loving right winger. In fact, she makes the excellent point that one of the problems in Washington is that the non-leftist position is sadly represented by a group of Republicans obsessed with the wrong issues.

It’s therefore frankly more than a little disappointing that the free marketers are represented by Grover Norquist, who trots out conservative boilerplate to the effect that we’re all going to hell because of EFCA and marginal tax rate increases. Republicans will not fight delusional accounting by demonstrating that they’re still tangled up in the Laffer Curve. Growth can still hit 1.2%–or even 3.2%–if EFCA passes. But it manifestly cannot in the middle of an ugly recession.

I think many of us centrist types, like McArdle, ended up supporting Obama because we were willing to believe he’d approach the economy from a non-partisan standpoint. But between the leftist agenda items shoved into the stimulus bill, the earmark fest that was the recent spending bill and the budget numbers that are the same kind of wool-over-the-eyes “projections” we have come to expect from the White House, no matter the resident, Obama and his team are leaving the perception that, while they might be a great group of minds, they either lack the political will or the political clout to direct the kind of hard-reality, hard-choice economic policies we really need.

This is not to say Obama’s plans will fail. McCardle’s concerns, like my concerns, might be misplaced. Maybe a leftward agenda, rather than a non-partisan agenda really is the best course. Or maybe it’s the complete lack of a coherent fiscally conservative solution that’s making it too easy for the administration to stick to leftward ideas and/or politics as usual.

As I’ve said before, it’s far too soon to assume Obama’s first 50+ days will define his entire presidency. He has inherited a huge mess and is still learning how to manage congress and present his ideas to the public. Still, those of us concerned with the direction so far can’t keep quiet. Obama needs some nudging from those to his right who share his hopes if not, as of yet, his economic ideas.

The Obama Administration might be talking about fiscal responsibility, but such wisdom doesn’t look likely to arrive in Washington this year. On the heels of the massive stimulus package comes the next wave of spending.

On Wednesday, the House will consider a proposed $410 billion spending plan for the rest of fiscal 2009 — and there’s been no attempt to hold down spending:

That package would spend about 8 percent more than the same programs got last year, the second biggest annual increase since 1978 for discretionary spending, programs that the government isn’t required to fund, unlike Social Security and Medicare.

…

House Speaker Nancy Pelosi , D- Calif. , on Monday defended the coming spending spree, which includes an estimated 9,000 earmarks, or local projects, said to cost about $5 billion . She called the bill “the unfinished business of last year, when the president refused to address the priorities and needs of the American people.”

The stimulus bill was rushed through Congress. Look for this spending bill to go through even faster. The bill has to get passed by March 6th to keep government programs from running out of money. No wonder the Democrats feel unpressured to show some restraint. This thing could be sign, sealed and delivered before most Americans know any of its details.

Granted, Congress is obliged to pass enormous spending bills every year in order to keep the federal government running. But, with the stimulus bill already signed into law, does Congress really need to be increasing other types of spending? Let’s not forget, the more we spend now, the more we have to pay back in the future. In fact:

The CBO projects that the GDP in 2015 and beyond will be as much as 0.2 percent smaller than it would have been without the stimulus package, dragged down by financing all the debt that’s being piled up. In addition, noted the Committee for a Responsible Federal Budget, a bipartisan fiscal research group, the bill will “have a permanent impact on the deficit through higher interest payments on additional public debt.”

Clearly President Obama is right to be pushing for fiscal responsibility. But he’s going to have to do more than make speeches to get his own party to comply. If his pledge to cut the deficit in half by the end of his term is an earnest one, he should start by demanding Congress decrease the spending proposed in the upcoming bill.

A spending bill as enormous as the current stimulus package is going to include its fair share of expenditures that have nothing to do with stimulating the economy. Our representatives can’t help themselves. They’ll use any spending bill as an excuse to fund pet projects. The AP details some of the non-stimulus related projects lurking in the bill now in front of the Senate.

There’s $345 million for Agriculture Department computers, $650 million for TV converter boxes, $15 billion for college scholarships.
…
There’s $1 billion to deal with Census problems and $88 million to help move the Public Health Service into a new building next year. The Senate would devote $2.1 billion to pay off a looming shortfall in public housing accounts, $870 million to combat the flu and $400 million to slow the spread HIV and other sexually transmitted diseases such as chlamydia.

Some of the spending proposals are worthy, but I’m uncomfortable with a stimulus package that isn’t solely focused on improving the economy. This bill should not be an excuse to fund other projects. Those projects should be put before Congress separately and debated on their own merits rather than being lumped in with the current bill.

We are already $10 trillion in debt. We do not have room to spend billions of dollars on projects not directly related to economic improvement. Despite what some would have you believe, not every dollar the government spends is good for the economy. Dollars should be spent in ways that maximize their potential for fueling economic growth.

Fortunately, several Democratic senators are voicing concern over the non-essential spending in the stimulus package. I can only hope the Senate strips the bill of its excesses.

I strongly support a massive fiscal stimulus to restore an atmosphere of confidence, avert a continued, severe downward spiral, and give the economy a big enough jolt to jump start a recovery.

But the $819 billion plan (really a $1.2 trillion plan including interest on the debt) adopted by the House of Representatives yesterday isn’t it. A large part of that plan dresses up a Christmas tree of programs sought by Congressional Democrats as “economic stimulus.” I like a lot of these programs and might well support them on their own merits; but many are not “stimulus.”

The problem with cramming everything you’d like to do into a single bill under the pretense that it’s “stimulus” is this: with a trillion dollar federal deficit already on the books, $700 billion almost out the door to shore up the financial system (and according to recent reports, much more dough still needed on that front), we may only have one shot at a really effective stimulus program. So we need to be as sure as we possibly can that it will work.

As we listen to pols, pundits, economists, and self-appointed analysts, we should keep in mind that no one has a very good idea of how to make a comprehensive counter-cyclical fiscal policy work. No one. We haven’t really done it before! Consequently, the arguments about it are largely theoretical debates between competing groups of academics or, as in the present instance, a confused jumble of claims in which all parties insist their favored programs are more stimulating than the other guy’s.

As a practical matter in recent decades, monetary policy won out as the principal tool of decision makers, Democrats and Republicans, because it could be wielded in a carefully calibrated and timed fashion. The knock against fiscal policy was that by the time we knew the economy was headed down, Congress got its act together and did something, and that something bore fruit, it would probably be too late. The economy would already be headed back up, and the fiscal stimulus would hit just in time to drive inflation.

Well, guess what? That appears to be exactly what’s happening today.

A new report by the Congressional Budget office projects that about 65% of the total funds in the House bill, spending and tax cuts, will be out the door by September 30, 2010, or within 19 months. The Obama Administration contends that 75% will be spent by that time. (See the graph above for the year-by-year projection of federal deficit spending.)

This is really a distinction without much of a difference. According to the National Bureau of Economic Research, the average length of recessions in the U.S. over the past 100 years has been 13 months, with recent recessions shorter. The last prolonged and deep recession was that of 1980-82, which lasted two years. The current recession is already in its 13th month. Most analysts expect it to continue through the first half of 2009, after which there are divergent views on the speed or length of the recovery.

Of course, anyone who actually knows how long or deep it will be is bound to get rich. Everyone is guessing, so it’s critical to assume it will be worse, not better, to ensure that we stimulate enough.

The House plan, as it stands, simply does not do that — not because it’s not big enough, but because it dribbles out too much of the money too slowly and fails to put enough money where it will have the greatest impact. In that bar graph, we should see the tallest bar for 2009, so we deliver a big jolt this spring, summer and fall, not next year. The 2010 bar should still be up there, with the larger share out during the first half. After 2010

There is just no excuse for planning to spend $200 billion in those out years and calling it “stimulus.” (If the programs are sound, given that the Democrats have the votes they need to approve anything, those expenditures can be taken up separately and passed anyway.)

There are many ways to ensure that the stimulus impact is felt in 2009 and, at the latest, 2010 — but accelerating the spending side of proposals in the House bill may not be one of them. The CBO has told Congress that speeding up outlays for infrastructure projects and the like would “not be easy” because such projects take time, often more time than thought at the outset.

That advice was contained in a letter to Senate Budget Committee Chairman Conrad (Dem-N.D.). Conrad and other Democrats in the Senate are looking closely at ways to make sure the stimulus is really stimulating. As Sen. Byron Dorgan (Dem-N.D.) put it, “We’re not interested in promoting employment five years from now. We’re interested in promoting employment five months from now.”

One proposal that I think has merit is to slash the roughly 13% payroll tax for employees and employers. As of the next paycheck, that would put money into the hands of workers who would spend it and businesses who would invest it. The program could be designed to sunset after 10 or 12 months or more, unless renewed by Congress.

Harvard economist Martin Feldstein has some interesting ideas for directing stimulus to sectors of the economy where a boost is most needed. For example, he suggests tax incentives for consumers to spend on big ticket items, such as a temporary tax credit to purchase a car or make home improvements. I’d go a step further with that concept and consider a tax credit — also temporary — against the purchase of a primary residence to stimulate home building and help stabilize housing prices.

Alas, there already may be too much water under the bridge to expect that the House-approved package can be fundamentally altered.

Hopefully, the Senate will make improvements and the final bill signed by President Obama will be more front-loaded and more on target.

I strongly suspect that Obama and his economic team clearly understand the importance of speed and targeting but had limited control of the bill developed by the House Majority. Obama is also keenly aware of the fact that the success of his Presidency will be closely tied to success in stimulating an economic recovery.

Let’s hope the Senate will give him a bill that comes closer to what he and the country need.

(Visit me at The Purple Center)