Power And Dollar

When Will Gov’t Get Us Out Of Recession?

McCain promises a gas tax relief to fight recession, see chart.  This is another political talk completely for electoral consumption.  This piecewill explain why.  In a time like this, mergers are expected.  And this industry is very sensitive to the price of oil.  If it were not because of pilot union and anti-trust issues, mergers in airline industry could have happened long agon.  Will a recovery prevent more mergers? 

More importantly, when will we get out of this recession? 

We can buy all sorts of data.  We can then plug the data into all kinds of models.  Depending which economist and which paper / website you land on, you get a different estimate.  Of all these estimates, only one (1) of them will be correct.  So, as you get more and more estimates, the probability of getting the correct one among these will turn to zero (probability = 1/N, as N increases, probability goes to 0).  So, when will the government get out of this hole? What can the government do to get us out? This is an election year, they better say something! Right?

This piece does not interpret economics based on knowledge from the discipline of economics.  This piece explains some of the political certainties around this recession.

We are in an election year.  In particular, an open race election year.  That means no one can play and say “well, I will just stick with the same guy this time.  Although I did not vote for him and I don’t like him much, I feel even less certain about the other guy.  If I vote for the incumbent, at least I know what is in store.”  Everyone is forced to choose for a new guy.

This is a political risk to the equity market, to the currency market.  As the output of US slowly decrease in proportion to the rest of the world, more of the investment $ are from outside.  So, while all the money want to find a place to wait this out, they naturally take the money home for a couple months.  So, even if we were having a boom, our boom would not be as smooth.  And of course if we go down, we go down harder, faster and longer. 

Political risk will evaporate when the election result is settled.  Given our interesting history, I doubt all the players have a fixed date in mind as to when the election will be settled. 

Similarly, no politician wants to get their hands dirty at this time of the political cycle.  They are either busy running their re-election campaign and therefore no time to study the fix of the recession legislation or they are waiting for the next White House tenant and bargain their best deal out of any kind of recession fix.  So, no meaningful fix can come.   We will get a tax rebate.  However, this rebate is not a meaningful fix.  A tax rebate is a political fix during a recession, i.e. to make the voters feel good enought to vote for the incumbent.

Next, when the election is settled, the out going president is unable to fix anything.  And he should not.  For if he passes any legislation or even by executive order, how can such action be honored by the next president?  It would only get messier.  A responsible outgoing elected official would not do such a thing. 

Then it comes the new President.  Now, when will this happen?  That would already be 2009 January.  A new President still has to check the pulse and any other mess under the carpet that the previous president did not pass along “informatively”.  But the time the new guy can have prescrition, we will be looking at another 2 or 3 months.  That will work out to be 2009 April.

When there will be an idea, a decent idea, it has to get through the negotiation with the House and Senate.  Every Joe, Dick and Harry has his own pet proect, pet cause, pet donor to put on a price to pass the legislation and what not.  That will also take a little of time.  Let’s give it a month for all phone tags, tea times, the favours and scores to get settled over with.  We are now looking at 2009 May.  Forget about the summer and all that.  Any economic plan to overcome a recession will not work over a weekend. 

If the economy will come back based on government intervention, the earliest time will be by the fall of next year.  We have two (2) recessions that lasted 16 months (73 and 81) in the last 60 years.  If an economy can only get back on its feet based on government intervention, then this is usually not a recession.  This probably is a depression. 

So, don’t listen to the political talk.  These “solutions” usually cannot do a dent.  The effects of government fiscal policies and programmes do not affect the economy in such a time span (as in months).  These interventions affect the market set up and their effects are measured in years and decades. 

Short term interventions require government’s active participation in the market (whatever market we are concerned with).  This kind of short term interventions are effective when the action 1) is rare and 2) is taken shiftly. 

Interest rate fluctuation is the first kind, however the Fed has been too active and its effect is wearing out. 

Shiftly is a time element.  The reaction has to be quick.  Such a quick action can only be carried out by an undemocratic institution, like the Fed.  And China’s interventions are effective because they are undemocratic.  They can shut down all real estate transaction given one day’s notice in order to freeze the price drop.  But we do not want that kind of life, do we?

The checks the federal government cannot save you, right?  “They are better than nothing” is exactly what it is.  It is a feel-good thing.  It does not save you and the politicians knew it.  It is for them to say they did their work and it is unfortunate that it did not work you, in this case.  

The moral of the story is that expect government interventions to be ineffective to save us given the time frame we wish a recovery will happen.  Some of the government interventions will be effective though, if we can sit with a much longer time span. 

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April 15, 2008 - Posted by | Current Events, economics, politics, wordpress-political-blogs

1 Comment »

  1. […] Read the rest of this great post here […]

    Pingback by » When Will Gov’t Get Us Out Of Recession? | April 15, 2008 | Reply


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