The Coming Recession

Seven observers debate the (sorry) state of the economy.

From the June 2008 issue

(Page 2 of 4)

But if we’re not exactly hoofing it to Hooverville, we nonetheless face one hell of a rough patch. Record high oil prices, surpassing even the momentous spikes of the 1970s, have brought with them another piece of ’70s memorabilia: stagflation. Federal Reserve bankers are faced with an extremely unpalatable choice. They can tighten up the money supply to combat inflation, at the cost of making the probable recession even deeper. Or they can hang loose and watch inflation march upward while the economy does God knows what. With the credit markets broken, the Fed may end up losing its hard-won credibility as an inflation fighter while producing only marginal benefits to growth.

The president has no control over any of this, but that won’t stop people from blaming him anyway. He will also almost certainly have to come up with some regulatory scheme for increasing transparency and accountability in the vast new financial markets that have been created by the securitization of loans during the last 30 years. It will be a tough order to give investors better information without strangling valuable financial innovation.

But by far his biggest quandary will be the budget. Obama (who I assume will be the Democratic nominee) wants a big new health care entitlement; John McCain wants even more tax cuts. Both will be frustrated by adverse budget math. The economic slowdown is going to cut into tax revenues, and most economists agree that a recession is not a good time to raise taxes—nay, not even on “the rich.” Meanwhile, the baby boomers are about to start retiring, turning Social Security, Medicare, and Medicaid into the sucking chest wound of the federal budget. Assurances that the trust fund won’t run out until 2042 notwithstanding, the president will have to start coping with Medicare deficits as soon as next year, and a falling Social Security surplus soon thereafter. All this will be compounded by the slowdown in GDP growth made inevitable by declining labor force participation and service-intensive elder care.

Any future president should be panicking. That doesn’t mean the rest of us should. At the end of the day, America has the most flexible and resilient economy in the world. We’ll pull through somehow, although a lot of us won’t be very happy in the process. But least happy of all will be the president—the bum we get to throw out when things don’t go our way.

Megan McArdle blogs about economics at The Atlantic.

First, Do No (More) Harm
Ron Paul
This nation is facing an economic crisis the likes of which have not been seen in several generations. It is crucial that we take to heart the lesson that should have been learned after the Great Depression, which is that the central bank should do nothing.

I have been writing and speaking for years about the dangers of the Federal Reserve, but the importance of the actions of the Fed in laying the groundwork for the downturn in the business cycle pales in comparison to the damage done by actions the Fed takes once the downturn arrives. At the first sign of crisis, even with growing inflation, the Fed began to further inflate, lowering interest rates, stepping up open market operations, and injecting liquidity. World markets, already jittery, see these steps as affirmations of their worst fears and react accordingly by selling assets denominated in smoke-and-mirrors fiat currency and fleeing to the solid value of gold, oil, and commodities.

Every action the Fed takes sends a signal that the U.S. dollar will continue to be inflated and therefore debased, which is why the correct action is no action at all. Lower interest rates and liquidity injections are viewed with alarm by foreign markets, while higher interest rates and money tightening are anathema to many domestic investors. The Fed is between a rock and a hard place, and its insistence on inflating the money supply to manage the brittle economy will likely be our undoing.

Until we realize that the Federal Reserve system itself is flawed, and until we recognize that no one economic maestro or committee of economic experts can set prices and plan the economy, this nation will continue to flounder about in an economic malaise. Ending that may take a much more serious downturn than anything we’ve seen yet. It is beyond doubt that our economy is in recession, and the only rational response is for the government to allow malinvested resources to liquidate so that we can return to a stable economy.

While the Fed should take a hands-off approach, Congress should aggressively cut taxes and spending and repeal regulations that stifle economic growth, such as the Sarbanes-Oxley Act. This country has enormous economic potential, an industrious work force, and an enviable history of innovation and entrepreneurship. If the government would learn from its past mistakes and abstain from further interference, we could get back on a solid footing and grow to our full potential.

My fear is that the Fed will continue with its policy of inflation and Congress will be pressured to continue to stimulate the economy with government spending, probably extending to even more outright taxpayer-funded bailouts of financial institutions, subprime mortgages, and government-sponsored enterprises that are “too big to fail.” These debt-funded efforts reward the recklessness of some institutions at the expense of the productive sectors of our economy. Until the federal government acts to extricate itself from intervention in the markets, economic activity will be hindered and true recovery will not take place.

Rep. Ron Paul (R-Texas) is a nine-term congressman and a candidate for the Republican presidential nomination.

The Vicious Ethanol Cycle
Robert Bryce
I see three big dangers to the global economy: the ongoing fallout from the mortgage mess, rising energy prices, and rising food prices. That last item is the most maddening, because surging food prices are largely the result of the ethanol scam.

As U.S. ethanol distilleries vacuum up ever increasing quantities of corn, and corn takes up an ever larger percentage of arable land, prices for all types of food are skyrocketing. During the last two years, corn prices have more than doubled and soybean prices have nearly tripled. In 2007 food prices in the U.S. increased by nearly 5 percent. Bill Lapp, of the Omaha-based research firm Advanced Economic Solutions, told The Boston Globe in March that he expects food prices to increase at an annual rate of 7.5 percent for the next five years.

Because of mandates requiring gasoline producers to mix ethanol with their fuel, 20 percent of the U.S. corn crop in 2006—about 2.1 billion bushels—was diverted into ethanol production. By 2009, according to the National Corn Growers Association, about one-third of the expected crop—some 4 billion bushels—will be used to make motor fuel. And those projections were made in April 2007, eight months before Congress passed the Energy Independence and Security Act of 2007, which requires the consumption of 36 billion gallons of ethanol by 2020, a fivefold increase over current levels.

The far-reaching economic impact of ethanol mandates is already being felt. In early 2007, tens of thousands of people marched in the streets of Mexico City to protest the rising cost of tortillas, an increase that Mexico’s secretary of economy, Eduardo Sojo, blamed on American corn ethanol production. In March of this year, Pilgrim’s Pride, the world’s largest poultry processor, shuttered a plant in Siler City, North Carolina, and fired 1,100 workers. Company CEO Clint Rivers laid the blame squarely on the ethanol mandates, predicting that “there is much more to come” in the way of food price increases. “We’re spending our tax dollars to raise the price of our food to subsidize the ethanol industry,” he said.

Congressional meddling in the energy market has created what Lester Brown, the president of the Earth Policy Institute, calls an “epic competition” between “the world’s supermarkets and its service stations.” Therein lies the perversity of ethanol mandates: As the global economy heads for rougher times, food prices are soaring. And those prices will increase anxiety among consumers, who will further reduce their discretionary spending. Congress has created a negative feedback loop that will reverberate for years to come.

Robert Bryce is the managing editor of Energy Tribune. His latest book is Gusher of Lies: The Dangerous Delusions of “Energy Independence” (PublicAffairs).

War Is the Health of the Civilian State
Robert Higgs
Adam Smith famously observed that there is “a great deal of ruin in a nation”—that is, nations can take a lot of abuse. Let’s hope he was right, because the George W. Bush administration has taken a great many actions during the past seven years that contribute to economic ruin.

Comments

Grand Poobah|5.5.08 @ 12:23PM|#

You forgot the requisite reference to those dastardly newsletters. How can you mention Ron Paul without dragging out the mythical LRC KKK hood?

Cosmotariat|5.5.08 @ 12:34PM|#

Grand Poobah | May 5, 2008, 12:23pm | #

Did you not see him talk about the Fed? Scary stuff...what a loon...you know when somebody mentions banks they mean "the jooos."

frankstallone|5.5.08 @ 12:59PM|#

Well, according to forbes I live in the country's most recession proof city (OKC). But good luck to the rest of you.

|5.5.08 @ 1:21PM|#

Urged on in part by the example set by their profligate leaders, Americans wallow in a huge pile of private debt as well.

I never quite understood statements like this. Does anyone really base their personal financial decisions on how much debt the federal government has? "Well, Honey, I was going to put this extra $2000 we have in a Roth IRA, but I just looked at the latest federal budget and said 'Screw it! Let the good times roll...'"

The Democratic Republican|5.5.08 @ 1:36PM|#

Hey frank! I don't live too far from you. Ya, it's good living in Oklahoma right about now!

Naga Sadow|5.5.08 @ 1:43PM|#

NAL,

I do. Also, some use it to judge loan timing. A set 160,000 dollar loan looks better if you anticipate inflationary pressures kicking your wages up due to "high cost of living increases".

Brandon|5.5.08 @ 1:53PM|#

Poobah said, "How can you mention Ron Paul without dragging out the mythical LRC KKK hood?"

This article wasn't compiled by David Weigel.

David Weigel|5.5.08 @ 2:10PM|#

This article wasn't compiled by David Weigel.

But I talked to him for the article, JUST BECAUSE I HATE HIM SO MUCH.

|5.5.08 @ 2:10PM|#

I never quite understood statements like this. Does anyone really base their personal financial decisions on how much debt the federal government has? "Well, Honey, I was going to put this extra $2000 we have in a Roth IRA, but I just looked at the latest federal budget and said 'Screw it! Let the good times roll...'"

Probably not literally. But in a broader sense, we now live in a society where debt is no longer a four-letter word, so to speak. Our ancestors were terrified of indebtedness, and rightfully so. But so many Americans today live in a dream world of thinking that they can always buy everything today and pay tomorrow. And the federal government's profligate nature sets a very bad example, to say the least. It's not enough to say that we get the government we deserve. We ARE the government, so it will always reflect us as we really are.

BTW, kudos to the Reason folks for this roundtable. A welcome relief from all of the Obama/Clinton crap that has dominated H&R lately.

PC|5.5.08 @ 2:22PM|#

David Weigel | May 5, 2008, 2:10pm | #

I don't think you hate him. You probably love him the same way Obama loves his racist evil grandmother.

Invisible Finger|5.5.08 @ 2:30PM|#

Does anyone really base their personal financial decisions on how much debt the federal government has?

No, but it IS based on the government's attitude toward debt versus savings. If the government goes deeper into debt, and the government is much smarter than me, then debt must not be a bad thing. So gimme that 120% LTV mortgage, please.

Plus, capital gains and savings are taxed up the ass, so it's not like the government rewards you for saving. Whereas there's always another debt bailout just around the corner.

Sam Grove|5.5.08 @ 2:31PM|#

Another thing that is different now is the proportion of people working in agriculture is much lower and most people are now dependent upon 'the system' for their daily bread.

As long as people keep going to work, we'll be able eat and maintain comfort. And they will keep going to work because they have to.

Brandybuck|5.5.08 @ 2:33PM|#

OMG! Two, not one, but two Austrian economists! Reason may have to turn in its Cosmotarian card, and Lew may have to tone down his snark!

Kolohe|5.5.08 @ 4:11PM|#

"There is a wonderful parallel here to the collapse of the Soviet Union. "

I'm only up to here so far, but this a crappy parallel.

What the big brains on wallstreet were trying to do was get towed into Jaws during a winter swell. Most get wiped out, but a few are able to surf it through a combo of prep, skill, and luck.

What the soviet union was trying to do was build a wave machine.

|5.5.08 @ 4:42PM|#

There is only two things wrong with our economy.

1. Gas prices. These are the fault of the environmental wacos and the global warming hysterics. They are stopping us from drilling for cheap local oil, building new refineries and changing the number of blends down from 60 to 10 or so, that refineries must produce.

This is mostly the fault of liberal Democrats. It amazes me when Americans think the Democrats will be better on the economy. They will push gas to $10/gallon if allowed to and raise our taxes to boot.

2. The fictional home mortage crunch. Once again it was liberals who said it was racist to give high risk borrowers good mortgage rates. So they gave them floaters and the rate went up a few points. They should never have been given credit in the first place unless it was at a very high rate so they would pay for the defaults of their deadbeat fellow travelers. Yet it was the liberals who presured banks to do this.

Now it is a buyers market. Most of the problems are in over priced California and Florida anyway.

Outside of that our economy is wonderful. The only reason anyone thinks otherwise is because of the propaganda coming out of the leftist press who want a Democrat in the white house. A pack of lies every day fools stupid Democrats.

If the press was fair and accurate none of this would be happening!

|5.5.08 @ 5:09PM|#

"There is only two things wrong with our economy. 1. Gas prices. 2. The fictional home mortage crunch."

Those two things don't bother me. The two that worry me are: 1. Potential for insolvent US Treasury. 2. Potential for hyperinflation.

1. With $9T outstanding UST debt, why does anyone want to buy T-bills anymore? When are bond purchasers going to wake up and think "Gee, I'm standing at the end of a long, long line. How the heck am I ever going to get paid back on these treasuries?"

2. If debt investors _do_ wake up, then what does the US do? Hyperinflate the money supply so that all the treasury-holders can get paid back (albeit in worthless dollars.)

I think these two things are most worth worrying about, since the worst historical economic disasters involved either or both.

|5.5.08 @ 7:03PM|#

The $9.4 trillion Bush debt burden in notes with its requisite vacuum of over $200 billion yearly INTEREST payments is the "main" problem with the economy.

The debt lowers the value of the dollar, ignites inflation via Fed rate cuts and sucks capital out of worthwhile endeavors - which in turn drives up the cost of oil and other commodities.

The Bush/GOP sycophants that make up the bulk of posters here can't get past their Christ-Faggotry long enough to recognize basic economics though.

Oh - and they beat off to the war dead too.... Fascists like TallDave take their perversion to Dr. Strangelove levels.

|5.5.08 @ 7:49PM|#

Sorry, but I will not be joining in the doom-and-gloom (note, traditionally, a great buy signal). With a net worth up 50% since Bush took office (as it is for most long-term, well-diversified investors --check pension funds and university endowments, for example), happy days are here again.

|5.5.08 @ 8:02PM|#

"up 50% since Bush took office" - DP

Pure bullshit.

I do, HOWEVER, believe many institutions are up 50% since the market lows of late 2002. The markets plunged from Inauguration Day to fall of 2002 following the Enron and Worldcom debacles.

Kolohe|5.5.08 @ 8:32PM|#

The Bush/GOP sycophants that make up the bulk of posters here can't get past their Christ-Faggotry long enough to recognize basic economics though.

um, perhaps you are confusing this with redstate? or perhaps townhall? lgf?

There are maybe 3 non-troll 'conventional' right-wing committed christians who post here fairly regularly. (talldave, john, and mad max).


And as another point of order, I propose that using the words 'basic economics' should be part of the drinking rules.

|5.5.08 @ 9:07PM|#

"There are maybe 3 non-troll 'conventional' right-wing committed christians who post here fairly regularly. (talldave, john, and mad max)." Kolohe

Well, there is Neil and Guy - if they count.

You no doubt know the posters better than I do.


I just hate fascists.

|5.5.08 @ 10:08PM|#

Well, there is Neil and Guy - if they count.

No Neil does not count as he is clearly performance art.

|5.5.08 @ 10:09PM|#

And as another point of order, I propose that using the words 'basic economics' should be part of the drinking rules.

Subject to invocation of DEMAND KURV, or independent?

|5.5.08 @ 10:16PM|#

The $9.4 trillion Bush debt burden in notes with its requisite vacuum of over $200 billion yearly INTEREST payments is the "main" problem with the economy.

The debt lowers the value of the dollar, ignites inflation via Fed rate cuts and sucks capital out of worthwhile endeavors - which in turn drives up the cost of oil and other commodities.

This is what I wrote that matters.

I have been "Wrighted".

Mr. Blather|5.5.08 @ 10:22PM|#

What is the source of the "two consecutive quarters" definition of a recession.?

This seems very odd to me:
Monday: I have $100
Tuesday: I lose $3.
Wednesday: I earn $1.
Thursday: I lose $2.
Friday: I earn $1.
Saturday: I lose $3.
Sunday: I earn $2.

By my math, I've $4 less by the next Monday, but I've never had two days of loss in a row. Isn't that a recession?

|5.5.08 @ 10:37PM|#

Blather, your understanding of economics is a thing of wonder.

|5.5.08 @ 10:47PM|#

Here, in small town, South Carolina, I'd say the economy is really, really bleak. Bush can be as cheery as he wants but the reality is people are actually walking to work here. I mean if they want to lose weight, more power to them, but I don't think that's the case.
Not to mention the price of milk.
And the truckers, some of them aren't moving their trucks cause it's not worth it.
I think we can only deny the inevitable for so long.

|5.5.08 @ 10:55PM|#

Sorry, Jeb.

The Bush fans will argue, but the trend is set.

Oil is going to $150 a barrel before the election. Food is going up 20% too.

Hang in there. The GOP is dying.

George Dubya Bush|5.6.08 @ 12:02AM|#

Recession? What recession? We aren't in a recession - my friends and I have never made so much money.

gmatts|5.6.08 @ 3:11AM|#

"Sen. Hillary Clinton (D-N.Y.) took a different tack: The "economic crisis is, at its core, a housing crisis," she said in a major Philadelphia address"

Nonsense. The housing "crisis" is endemic of our country's overall economic philosophy: "Don't worry about today, tomorrow simply must be better. After all, its America". Consequences of actions taken seem to be pooh-poohed to a bizarre degree nowadays.
IF someone can present a reasonable scenario where the federal governments fiscal house will be in order in the next 10-20 years I'd love to hear it. If not, I don't see how the expenditures that the gov't is on the hook for the next 20 years in anyway leaves the US economy in a strong position.
Odd that a President, when a private citizen, was only able to head oil companies that drilled empty holes and created debt has taken that "expertise" to the federal level.
But he'll be comfortably retired to his ranch with no cattle at that point. Let freedom ring!

Is there anyone here that would base their own personal finances on the model that our federal gov't is basing it's own fiscal policy on now?

Ebeneezer Scrooge|5.6.08 @ 4:07AM|#

Hang in there. The GOP is dying.

Yeah buddy. And the socialist Democrats will be here to stay for GOOD this time.

We'll be so much better off won't we.

|5.6.08 @ 9:40AM|#

America's worst enemy, economic wise, the US Congress. Gone are the days when upstanding men went to Washington because they had a vision to make things better. Today we have a congress of professional con-men whose sole purpose in life is to get re-elected and experience la dolce vida sucking the life out of the taxpayers. We also have embedded in the Washington establishment a powerful group of socialists who have never learned that since the great Socialist International of 1899, socialism has never delivered on its promise, not once.

|5.6.08 @ 10:17AM|#

I meant "la dolce vita".

|5.6.08 @ 11:10AM|#

In regards to Megan's 'big new health care entitlement' comment:

I find the continuing myth that we need to spend more money to get Universal Health Care (UHC) coverage disturbing. There are numerous industrialized countries that provide UHC to their citizens with better results, universal coverage, less medically-forced bankruptcies than the current US system. The kicker is that they all do so, get this, while spending less of a percentage of their GDP than the US currently does. Some cut the inefficiencies by almost a half.

Part of the problem is thinking that every UHC system needs to be socialized. It doesn't. Some are, but others are a mix of private and public institutions, while some are wholly private and are way less expensive (as a percentage of GDP) than the US system.

PBS and Frontline just aired a examination of UHC systems across the industrialized world. It might be worth the effort to be better informed before making the same old argument about health care being unaffordable and a budget buster.

|5.6.08 @ 5:53PM|#

joe sez The kicker is that they all do so, get this, while spending less of a percentage of their GDP than the US currently does. Some cut the inefficiencies by almost a half.

I don't have the reference handy, but I recall a study that indicated that healthcare spending goes up with income. In which case, it isn't a matter of inefficiency.

Kevin|5.14.08 @ 11:41PM|#

Joe, your comment avoids the question of why we would want universal healthcare coverage in the first place, regardless of how much or little it costs. The next question is why we can't make the US system less, rather than more socialistic, and save money that way instead (I would certainly save money).