Wednesday, June 20, 2012

Rich Yamarone at Outside the Box

Today, John Mauldin has provided commentary for his Outside the Box readers from Rich Yamarone, Chief Economist at Bloomberg.  I read John Mauldin because he has access to many influential people and often provides good analysis.  However, I rarely agree with his prescriptions “for what ails us."

Yamarone titles his commentary “Flirtin’ With Disaster,” and opens with a few lines from the well-known Molly Hatchet ditty:

 I’m travelin’ down the road and I’m flirtin’ with disaster
 I’ve got the pedal to the floor and my life is running faster
 I’m outta money outta hope it looks like self destruction
 Well how much more can we take with all of this corruption

I must say, these are quite prophetic words for our economic times. 

Recently released economic data confirm the end of the strong patch; the lack of real disposable personal income has resulted in a slump in the primary driver of aggregate demand, consumer spending. In what seems like an annual event, economists are once again returning to their models for downward revisions to GDP growth estimates.

This after several years of $1.3 trillion plus federal deficits, additional state and local deficits, and unprecedented Federal Reserve support.  Molly Hatchet is right – policy makers are flirtin’ with disaster, and – after having spent countless trillions – are surely running "outta money."  Let’s see if this is where Yamarone is headed:

A sinking economy requires stimulus from two agents, the Federal Reserve and the government.

I have a sad feeling that Yamarone is not going to apply the common sense wisdom found in Molly Hatchet’s words to his commentary.  Hasn’t the Federal Reserve and the government been doing this in unprecedented amounts in the last four years already?  What could Yamarone be suggesting?

A sinking economy (and any economy) requires a few things, but not either of the two that Yamarone identifies: the main thing it needs is honored voluntary contracts.  The last thing it needs is central planners.  Yamarone suggest the preeminent role for central planners.

More specifically, what this current economy needs is liquidation of malinvestment and bad debt.  The sooner this happens the sooner comes the road to recovery.

Back to Yamarone:

Today, monetary policy is rendered impotent since the U.S. economy is mired in a liquidity trap, and the Fed’s actions have been as effective as “pushing on a string.”

As Yamarone sees the Fed actions to have been ineffective, will he suggest the Fed removes the liquidity it has injected?  I will not hold my breath.

Contrary to popular belief, we never had a legitimate fiscal stimulus – what we got was largely an extension of unemployment benefit insurance….  What should have happened, and perhaps looking ahead, may be the only effective government response, is a direct work relief program like in the 1930s.

What Yamarone is suggesting is that we need smarter central planners.  Spending $3.5 trillion with deficits of well over $1 trillion is OK; just spend it the way Yamarone suggests and everything will work out fine.

Central planning does not work, and cannot work no matter the IQ of the central planner.  No individual or handful of individuals can possess the knowledge of the market, to say nothing of the force required to compel market actors to behave in manners counter to their desires.

Consider further: Yamarone is suggesting the formula used unsuccessfully in the 16 year depression.  SIXTEEN YEARS!  Government work relief programs did not work then and will not work now.  Ultimately, when all other government work programs demonstrated their utter uselessness, the ultimate government relief program – war – was implemented.  Yet even this massive spending did not cure the depression.  Finally, with the demobilization and drastic decrease in government spending, recovery came.

As if to improve his standing with “Free Marketeers”, Yamarone invokes the name of Adam Smith:

Adherents of Adam Smith and Free Marketeers should welcome a bold government move like this since it was outlined in their bible, The Wealth of Nations. Smith promoted the government’s maintenance of “good roads and communications,” whereby they benefit the whole society. Smith thought it to be one of only a few reasons for governments to intervene – the others being education, defense, and the administration of justice.

Oh, if only government would limit itself to those areas identified by Smith!  But does Yamarone recommend such a drastic reduction of government?  No.  Why not this as the recommended cure? Instead, he ignores the government spending on everything else and latches on to the one bit of Smith that he believes supports his case.

There is much to commend Smith, and I will not take him to task for his allowance for government in these sectors.  I will suggest to Yamarone that if Smith saw the recommendations of today’s professional economists, he likely would ask to have his name removed from the Economist Guild Register.

Yamarone is no pie-in-the-sky idealist.  He realizes that the government is already running a tremendous deficit.  However, he believes he has a solution:

The lone saving grace is, if the United States has to borrow a boatload of money, and it does, it is best to do it during a low real interest rate environment. Assuming an inflation rate of 2.7 percent and a yield on the U.S. 30-year bond of 2.68 percent, the government is effectively borrowing real money for thirty years free.

Sadly, he does not explain how this debt will ever be repaid.  No mention is made of one day running a surplus.  Further, no mention is made of rolling over and refinancing the debt.  Certainly today, debt financing is cheap.  Does Yamarone anticipate this will remain the same for the next thirty years? 

Yamarone next moves to an even more crowded wing of today’s economics profession.  All it takes, he says, is spending by consumers:

What’s it take to get consumers (upwards of 72 percent of the U.S. economy) to spend?

Wealth does not come from spending.  Wealth comes from producing more than is consumed.  Wealth comes from increased productivity which comes from real savings – the excess of production over consumption, not the creation of credit from thin air. This is true for the individual and true for the economy.  I have many relatives who stand as proof that wealth does not come from spending.

Yamarone goes even further where only economists dwell - although, again, he has much company.  Efficiency is bad for the economy.  The efficiencies brought about by the internet in terms of productivity, less reliance on physical location, less requirement for brick and mortar, cheaper prices for the consumer…all of these benefits are BAD for the economy:

It’s no secret that there is a great transformation underway in the retail sector. Consumers have adopted a multi-channel buying process whereby the would-be buyer will browse bricks and mortar stores to try on sizes, feel styles, materials, colors, etc. Then, when satisfied, they head back to the internet (on their laptops or mobile applications) and order it free of delivery charges and in many instances, free of taxes.

There are several disconcerting issues with this trend. Obviously, the diminished need for bricks and mortar stores has resulted in widespread mall vacancies, which are lingering near all-time highs. This reduces employment opportunities. In addition, it hurts state and local governments. The reduction of commercial tax revenues – combined with losses in the residential and income tax base – as well as lost sales tax revenues force local municipalities to make cuts.

It seems not only does Yamarone want the consumer to spend more money (that he doesn’t have), but he suggests the consumer spend it in the least efficient manner possible.

What does Yamarone not get about the idea that I can spend my dollar to buy a hammer at big box store, or I can spend fifty cents online for the same hammer and spend the other fifty cents for nails (or save it)?  In which scenario am I wealthier? Where are the losses in employment?  I bought two things instead of one for my same dollar – someone worked to produce the second item, presumably.  Or if I saved the fifty cents, I am able to provide credit for someone else to utilize in a productive manner.

Similarly, several Big Box retailers like Wal-Mart and Best Buy are experimenting with smaller-sized stores. If consumers are only going to come in to browse, why possess so much space? It can be costly heating and cooling 50,000 square feet.

This is bad?  Instead of using resources in big boxes that are no longer demanded by the market, those resources can be applied in other areas with demand.  There is a harm in this?

I understand John Mauldin walks in high circles.  I understand that it is important to read the views of those with some access to the decision makers and influence peddlers.  But this is all bad economics.  All of this has been tried and deemed an utter failure.  In the introduction, Mauldin calls Yamarone “one really sharp talent.” 

Sharp as a knife, I am afraid, with the business end pointed in the wrong direction - at the heart of the productive class.

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