Misguided Gratitude for Government Stimulus

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Well, August washed up. It was the worst month for US stocks in almost a decade. And yesterday didn’t help. The Dow couldn’t manage a rally. It rose just 4 points.

The British newspaper, The Telegraph, has the story:


“It’s pretty clear the US economy has hit a wall,” said Barry Knapp, head of US equity strategy at Barclays Capital. “The macro picture is dominating and, right now, it’s not clear what’s going to get the market out of this spot.”

Those fears took centre stage again during the final day of trading.

In New York, markets enjoyed some brief respite from the blizzard of weak data as reports on the US housing market and consumer confidence proved better than feared. The Conference Board’s index of consumer confidence climbed to 53.5 last month from 51 in July, while the latest reading from the respected S&P/Case-Shiller index showed that home prices were up 4.2pc in June compared with a year ago.

The day’s rally proved short-lived, however, after the minutes of the Federal Reserve’s latest meeting returned investors to the summer’s familiar themes. Fed chairman Ben Bernanke has spent the past few weeks facing increasing pressure from markets to publicly declare he will do more to fight the prospect of a second recession if the recovery stumbles further. According to the minutes, some members of the Fed’s Open Market Committee saw “increased downside risks to the outlook for both growth and inflation”.

That admission left the Dow up just 4.99 points at 10,014.72 for the day, while the S&P ended the day up 0.41 at 1,049.33.

As predicted on this page, both Martin Wolf and Paul Krugman are taking the low road. Not that we wouldn’t take it too, were we in their position. They urged the Obama team to undertake massive programs of “stimulus.” Now that the stimulus hasn’t worked, they say it wasn’t massive enough.

And thank God the administration at least took some of our advice, they add. Otherwise, things would be a lot worse!

In today’s Financial Times, Wolf refers to a recent paper by Alan Blinder and Mark Zandi. The two use a “standard macro-economic model” to determine that without the feds’ intervention the decline in GDP would have been three times worse and unemployment would have risen to over 16%. And, can you believe it, we would have had a federal deficit of $2.6 trillion.

Oh man, oh man…we’re so grateful to Wolf, Krugman, Summers, Obama, Bernanke and all the other savants who protected us from such a dreadful fate.

But wait a minute, this “standard macro-economic model” sounds great and all…but we can’t help but wonder. It can predict precise outcomes based on federal policy inputs, right? That is, if the feds were to do such and such…it tells us what will happen, right? And Wolf says it’s “standard,” so we imagine that you can get it at any Wal-Mart or filling station. So, the Obama team must have had it two years ago, right? We can’t help wonder if this was the same model they used when they forecast that unemployment wouldn’t go over 8% – if Congress agreed to the stimulus bill the administration proposed. Must have been a different one… Because Congress did pass the stimulus bill and unemployment rose over 9% anyway.

And it’s still over 9% – almost 2 years after the stimulus effort got underway.

So, maybe this “standard macro-economic model” is full of… But let’s imagine that it isn’t. Let’s allow our imaginations to take flight…to soar…to loose themselves from the gravity of worldly cares or practical reality. Let’s imagine that these economists have a clue!

Imagine that the feds had done nothing – which was more or less standard policy for the nation from its founding in 1776 up until the middle of Herbert Hoover’s term in 1930…and for all the years that preceded them…all the way back to the founding of Rome. Now, let’s imagine that Blinder and Zandi are right. Without fed intervention, GDP would have sunk 12% – three times more than the actual loss…and half the loss of the Great Depression. Well, that would have been a disaster, right?

Well. Maybe not. It might have been a blessing. The point of a correction is to correct. The Blinder/Zandi study tells us that the economy had mistakes equal to 12% of GDP. Okay…well, maybe the correction overshoots. Who knows? But think of the crazy years of the Bubble Epoque…when lenders were giving unemployed people a mortgage for 110% of the inflated value of a house. Think about the Private Equity deals based on growth assumptions that were hallucinatory. Think about the hundreds of trillions’ worth of derivatives based on complex formulae that were phony and silly? Think of all the decisions made on the assumption that consumer credit would continue to expand as it had from 1949 to 2007. Was one of every 8 of them too optimistic? Too ambitious? Too unrealistic? We’d be surprised if there weren’t more errors…far more than 12% of GDP.

Now ask yourself…what good was done by failing to correct those mistakes? By failing to wash out the excess debt? Failing to allow insolvent banks to go broke? Failing to permit worn-out, uncompetitive businesses to die in peace?

We don’t know how many mistakes there were. We don’t know how far GDP SHOULD go down. And we don’t know what would have happened if willing buyers and sellers had been allowed to sort themselves out in the age- old ways – by panic, default, bankruptcy, restructuring, and reconstruction.

We don’t know. We’ll never know. But there is no reason to think we’d be any worse off if we’d found out a year ago. A 12% drop in GDP might have been just what we needed. We could be on the road to prosperity now, rather than looking at another 5 to 15 years of stagnation, decline, and desperation.

And more thoughts…

But we have good news. Yes, dear reader, genuine, no-doubt-about-it good news.

Two bits of good news, actually.

First, the café across the street from our office serves a proper café au lait. A real one.

In Paris these days, if you ask for a “café au lait” they mark you as a foreigner. Parisians ask for a “café crème.” Trouble is, the café crème doesn’t have much milk in it. It tends to be a bit watery and bitter.

A proper café au lait, on the other hand, is served with a little pitcher of hot milk. Not many cafes in Paris still serve it that way – unless you ask them specifically. Fortunately, the one across the street still does it the right way.

Second, and perhaps more important, we discovered yesterday that tea- totallers die sooner than heavy drinkers. This comes as a great relief to your editor. He sat down last night with a bottle of Lussac St. Emilion to celebrate.

Here’s the story from John Cloud (originally appearing in Time Magazine):

Why Do Heavy Drinkers Outlive Nondrinkers?

One of the most contentious issues in the vast literature about alcohol consumption has been the consistent finding that those who don’t drink actually tend to die sooner than those who do. The standard Alcoholics Anonymous explanation for this finding is that many of those who show up as abstainers in such research are actually former hard-core drunks who had already incurred health problems associated with drinking.

But a new paper in the journal Alcoholism: Clinical and Experimental Research suggests that – for reasons that aren’t entirely clear – abstaining from alcohol does actually tend to increase one’s risk of dying even when you exclude former drinkers. The most shocking part? Abstainers’ mortality rates are higher than those of heavy drinkers.

Moderate drinking, which is defined as one to three drinks per day, is associated with the lowest mortality rates in alcohol studies. Moderate alcohol use (especially when the beverage of choice is red wine) is thought to improve heart health, circulation and sociability, which can be important because people who are isolated don’t have as many family members and friends who can notice and help treat health problems.

But why would abstaining from alcohol lead to a shorter life? It’s true that those who abstain from alcohol tend to be from lower socioeconomic classes, since drinking can be expensive. And people of lower socioeconomic status have more life stressors – job and child-care worries that might not only keep them from the bottle but also cause stress-related illnesses over long periods. (They also don’t get the stress-reducing benefits of a drink or two after work.)

But even after controlling for nearly all imaginable variables – socioeconomic status, level of physical activity, number of close friends, quality of social support and so on – the researchers (a six- member team led by psychologist Charles Holahan of the University of Texas at Austin) found that over a 20-year period, mortality rates were highest for those who had never been drinkers, second-highest for heavy drinkers and lowest for moderate drinkers.

The sample of those who were studied included individuals between ages 55 and 65 who had had any kind of outpatient care in the previous three years. The 1,824 participants were followed for 20 years. One drawback of the sample: a disproportionate number, 63%, were men. Just over 69% of the never-drinkers died during the 20 years, 60% of the heavy drinkers died and only 41% of moderate drinkers died.

These are remarkable statistics. Even though heavy drinking is associated with higher risk for cirrhosis and several types of cancer (particularly cancers in the mouth and esophagus), heavy drinkers are less likely to die than people who have never drunk. One important reason is that alcohol lubricates so many social interactions, and social interactions are vital for maintaining mental and physical health. As I pointed out last year, nondrinkers show greater signs of depression than those who allow themselves to join the party.

The authors of the new paper are careful to note that even if drinking is associated with longer life, it can be dangerous: it can impair your memory severely and it can lead to nonlethal falls and other mishaps (like, say, cheating on your spouse in a drunken haze) that can screw up your life. There’s also the dependency issue: if you become addicted to alcohol, you may spend a long time trying to get off the bottle.

That said, the new study provides the strongest evidence yet that moderate drinking is not only fun but good for you. So make mine a double.

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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