Thursday, June 25, 2009

I'm in A Bad Mood on the Economy Again

An article in the WSJ about the potentially vicious downward spiral in business capital investment made me revert to my previous gloom and doom position on the economy.

In macroeconomics there is a classic equation to express national income: Y = C+I+G+nX. The Y is national income, the C is consumption, the I is investment, the G is government, and the nX is net exports. C is way down right now because people are not consuming since many are unemployed. I is down as well because people are scared to death to invest right now. No sense investing if people aren't consuming and we have a Commander in Chief who doesn't know what he's doing. Of course life moves on and people still care about their finances. Nevertheless insane fiscal policies dampen the outlook.

At least G is massively on the rise. The problem with expanding G via cartoon level spending is that it is too phased in and takes too long. It could be useful if it enters the economy upfront and just shocks demand and C. Unfortunately, there is the lag in fiscal policy that entry level econ students learn about. Phasing in G over multiple years doesn't have the effect of the other options such as tax cuts or investment tax credits do. In fact, it ends up just wasting money and delaying recovery since the focus is on providing jobs rather than encouraging people to invest, take risks, and become entrepreneurs who may provide a valuable product or service heretofore unknown such as Microsoft in the 1980s or Cisco or even Starbucks.

So all in all, I truly think economists are in for a rude awakening. I truly don't see a recovery anytime soon. The other day I thought I was seeing some gloom but the doom was dissipating. But I still can't help but feel that both of our harsh friends will be with us for some time to come. All the while, Obama's favored by 60% of the American people. Apparently it's still W's fault. Amazing.

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