On the recession, stimulus, politics, and adjusting perspective

New car sales are way down. Not a surprise. Sales of durable goods, goods expected to last three or more years are particularly sensitive to consumer confidence. Lost equity in homes and lower retirement accounts have made people poorer and they feel poorer. Interestingly sales of Hyundi and Suburu increased. However, the numbers suggest new car sales for the year to be about 10 million, similar to last year and down about 7 million from two years ago.

Existing home sales, or rather pending sales, jumped. That's what happens eventually when prices fall and the cost of borrowing money - mortgage rates - falls. From Bloomberg, via the City Paper...

Purchases of previously owned homes, which account for about 90 percent of the market, climbed 6.5 percent in December from the prior month as foreclosures helped drive median prices down 15 percent from a year earlier.

I know the Business and Economic Research Center at UT is forecasting an unemployment rate of near 10% in Tennessee by this time next year. Two things: Unemployment is a lagging indicator. In the last two recessions the unemployment rate peaked roughly 18 months after the onset of recovery. Part of that phenomenon is that people get back into the labor market - start looking for work - when firms start to hire. That increases the measured rate of unemployment. Second, macro economic forecasting exists, according to some, to make astrologers look respectable.

On the stimulus: Yes, it can increase GDP and lower unemployment. That doesn't mean, or shouldn't be taken that it is successful. Anytime you have idle resources you can increase GDP via deficit spending. You can pay people, on an hourly basis, to cut their lawns with a pair of scissors. Unemployment isn't the primary problem but rather the drop in income, savings, and investment; poverty and the prospect of poverty are what hurt both at the household level and the macro level. Alice Rivlin, Congressional Budget Office chief under Clinton, said some good things recently that have been promoted by center-right economists.

On transfers to states (a way to enable states to run deficits via the federal government):

Aiding states will prevent them from taking actions to balance their budgets--cutting spending and raising taxes--that will make the recession worse.

On transfers to people (that are superior to having people employed building something stupid):

Another important element of the anti-recession package should be substantial transfers to lower and middle income people, because they need the money and will spend it quickly.

On the tax cut side:

On the tax side, my favorite vehicle would be a payroll tax holiday, because payroll tax is paid by all workers and is far more significant than the income tax for people in the lower half of the income distribution.

Payroll taxes distort labor markets. That is they suppress employment.

On infrastructure that will enhance productivity:

The anti-recession package should be distinguished from longer-run investments needed to enhance the future growth and productivity of the economy.

In other words, in a rush to pass a stimulus we will sacrifice efficiency, get caught doing too many silly projects in the districts of powerful members of Congress. Pass "anti-recession" spending quickly and take your time on the roads, bridges, and public transport.

The timing of all this can be great for Obama politically. Getting elected president when he did is like getting the head coaching job at Temple University. Win a couple of games and you look great. Remember Ronald Reagan took over during a nasty recession and period of high inflation. God willing and the creek don't rise (longer and deeper recession than expected), what do you think will be the answer when Obama asks during the next cycle, "Are you better off than you were four years ago?"

On GDP generally, we should stop being so obsessed. It is an imperfect measure of one's quality of life. The most worthwhile things in life do not involve market transactions and therefore are not captured in GDP statistics.