Why Quantitative Easing And Fiscal Stimulus Are Unnecessary

This article originally appeared in The Daily Capitalist.

"Believe what your eyes see, not what you want to believe." 


In my article "Something Is Happening" I noted a glimmer of positive economic data. I was cautious to not call it a "recovery" yet because there isn't a clear trend. In addition there is some uncertainty about policies of the Fed and the federal government that may well thwart the recovery. But I can't ignore positive signs. I read the same data as other free market oriented blogs out there, I am just about the only one seeing this. As I reported in "Something Is Happening," economies repair themselves, absent government intervention in the process,.

I believe because of the massive debt buildup during the crack-up boom, that the bust will be much longer than the average recession. At some point, though, banks start to clear out bad debt, especially CRE, residential foreclosures increase until the market absorbs overbuilt housing, and consumers cut back spending, pay down debt, and boost their savings. All these things are occurring now, especially, the CRE problems of banks which is the main problem of local and regional lenders who provide much of the credit to middle and small American businesses.

The government's response to this crisis has been almost entirely wrong and has served to only delay the recovery by thwarting the liquidation process and reallocation of capital from bad deals to profitable ones. Mark-to-make-believe, extend-and-pretend, bailouts, incentives for failing businesses and the housing market, fiscal stimulus, money pumping by the Fed, and other projects have been their main tools and they have all failed. They have only created more uncertainty for small(er) businesses who are reluctant to expand and borrow ("regime uncertainty").

But now, they have run out of money. The end of tax supports for housing or cars and mark-to-make believe for banks and the wind down of massive spending on wasteful projects or bailouts is finally allowing businesses and banks to emerge from the crash. The ineffective fiscal stimulus is pretty well flushed through the system. Yesterday's construction report from the Census Bureau shows that overall construction gained only 0.8% in October, and of that gain, the public construction portion was up only 0.4% (i.e., negligible). None of their efforts have had any lasting impact on the economy. Any recovery is due solely to the factors mentioned above.

I wouldn't go as far to say that the government won't still muck things up, they will, but I believe their tools have diminished. I also believe that "recovery" is more likely to look like stagflation than strong growth, which is another topic.

So along the lines of "Something Is Happening," including some of the positive data I reported yesterday, today' reports from ADP on employment is still encouraging, and productivity and manufacturing are improving, but I'm not jumping for joy. The Challenger Job Cut report was up significantly.

Here is the data.


Manufacturing activity continued to expand in November, according to the Institute of Supply Management, but the pace of growth slowed a bit. Separately, U.S. productivity rose more than previously thought in the third quarter as companies boosted output while also holding down labor costs.

The ISM's manufacturing purchasing managers' index slipped to 56.6 in November from 56.9 in October. Readings above 50 indicate expanding activity. Economists surveyed by Dow Jones Newswires had expected the November index to remain at 56.9.

Productivity for Q3

Nonfarm business productivity rose at a 2.3% annual rate in the July to September period, the Labor Department said Wednesday, compared with an earlier estimate of 1.9%.


Despite the rise, the sharp gains in productivity growth seen in 2009, ranging from 3.4% to 8.4%, may be over. Productivity usually picks up sharply at the end of recessions as companies increase output but hold back on hiring. The economy started to grow again in the third quarter of 2009 following the worst recession since the 1930s, though the pace of recovery, and hiring, has remained weak.

U.S. productivity fell 1.8% in the second quarter.


Wednesday's report also showed that unit labor costs--a key gauge of where prices are heading -- fell at a 0.1% annual rate last quarter, unchanged from the Labor Department's preliminary estimate.


Unit labor costs rose 4.9% in the second quarter, compared with a preliminary estimate of 1.3%, due to a sharp revision in hourly compensation. But over the past four quarters unit labor costs have fallen 1.1%, the Labor Department said.

Economists had forecast a 0.3% third-quarter drop.


Nonfarm business output rose 3.7% during the third quarter, at an annual rate. That compared to the Labor Department's earlier estimate of a 3.0% rise and a 1.6% increase in the second quarter.


Hours worked ticked up by 1.4%, compared with an earlier estimate of 1.1% and following a 3.5% increase in the second quarter.


Productivity in manufacturing, a sector that's been slowing after leading the economy's recovery, rose 0.6% in the third quarter, compared with an earlier estimate of 0.4%. Manufacturing productivity had increased by a revised 5.6% in the April to June period.


Hours worked in the manufacturing sector rose by 3.6%, unchanged from the preliminary estimate.


Private-sector jobs in the U.S. rose by 93,000 last month, according to a national employment report published by payroll company Automatic Data Processing Inc. and consultancy Macroeconomic Advisers. It was the largest monthly gain in three years, the report said. ...


The report said the survey "shows an acceleration of employment and suggests the nation's employment situation is brightening somewhat."


The ADP survey tallies only private-sector jobs, while the Bureau of Labor Statistics' nonfarm payroll data, to be released Friday, include government workers. ...


The latest ADP report showed large businesses with 500 employees or more added 2,000 employees, medium-size businesses added 37,000 workers in November, and small businesses that employ fewer than 50 workers hired 54,000 new workers.

The Challenger Job Cut report was less sanguine. Announced layoffs for November were significantly up, 48,711, from October's 37,986.

Today's Jobless claims report showed an up-tick to 436,000, up from last week's 410,000, but it still reflects a downward trend.

State Tax Revenues

A report from the Rockefeller Institute shows that state tax revenues have increased. Note sales tax increases.

Preliminary tax collection data for the July-September quarter of 2010 show continued improvement in overall state tax collections as well as for personal income tax and sales tax revenue. However, revenue collections remain significantly below peak levels and are still weak in a number of states. ... The Rockefeller Institute’s compilation of data from 48 early reporting states shows collections from major tax sources increased by 3.9 percent in nominal terms compared to the third quarter of 2009, but was 7.0 percent below the same period two years ago.


Gains were widespread, with 42 states showing an increase in revenues compared to a year earlier. After adjusting for inflation, tax revenues increased by 2.6 percent in the third quarter of 2010 compared to the same quarter of 2009. States’ personal income taxes represented a $2.5 billion gain and sales taxes a $2.0 billion gain for the period. In terms of dollars, New York reported the largest increases in total tax collections in the third quarter of 2010, with revenue collections rising by $577 million or 4.5 percent. This was mostly driven by growth in personal income tax collections and by modest growth in the sales tax. ...

Sales tax collections increased by 4.1 percent in the third quarter of 2010 compared to the same quarter of 2009, but were still 5.1 percent lower than two years ago. With 43 of 45 sales-tax states reporting so far, only six states reported declines in sales tax collections compared with the same quarter last year.

The Fed and the government should immediately stop what they are doing and get out of the way of a recovery or they risk killing it.


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