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On today’s edition of Coffee and Markets, Brad Jackson and Ben Domenech are joined by Francis Cianfrocca to discuss the slow growth stagnant economy and a nearly nonexistent market for electric cars.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

Related Links:

An Upside-Down Recovery Goes Back to Square One: Caroline Baum
Foreclosure filings hit four-year low in 2011
U.S. retail sales rise scant 0.1% in December
Detroit unsure over the future of green cars

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The fact that Paul Krugman received the Nobel Prize in economics makes sense given that both Al Gore and Obama received the Nobel Peace Prize. But that is the only way that it makes sense.

In his December 29^th column in the New York Times, Keynes Was Right, he continues to make the case that the only reason we haven’t come roaring out of the Great Recession is because we spent too little.

Krugman cites the downturn of 1937 when FDR’s government programs were curtailed and unemployment rose. He says that unlike in that fateful year we should instead redouble our efforts and spend more to prime the economic pump. Austerity is insanity he says. We must spend more as Keynes would have advised, deficits (and inflation) be damned.

Build pyramids as Keynes said we should. So what if the they do not contribute, and probably detract, from the quality of the economy. It is the quantity of economic activity that we are interested in not quality. Get people employed doing whatever. This is the road to prosperity!

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On today’s edition of Coffee and Markets, Brad Jackson and Ben Domenech are joined by Brian Domitrovic author of a new paper published at The Laffer Center entitled, The Secret Term in the Fed’s Triple Mandate. We’ll discuss how Ben Bernanke’s Federal Reserve stacks up against those of the past, the role they’ve played in today’s stagnant economy, and how a shift of their policy could help push us out of the Great Recession.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

Related Links:

The Secret Term in the Fed’s Triple Mandate: A Critical History
Buy Brian’s book Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity on Amazon
Elastic Currency, With a Vengeance
Brian Domitrovic’s writings at Forbes
Brian Domitrovic at The Laffer Center

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Over the last five months the strength of the United States economy has surprised on the up-side. America posted its strongest quarterly economic growth since the end of 2006 and U.S. corporate profits hit an all-time record high. But with the end of 100% “bonus depreciation, government spending shrinking for the first time since the 1940s and rising tax rates”; I project America is falling into a recession that will drive up unemployment to a new highs during the 2012 election.

Although the U.S. economy officially emerged from recession twenty-six months ago, most Americans report that they believe there has been little or no growth and 75% believe the nation is headed down the economic wrong track. The “Great Recession” of 2007 to 2009 was the longest since the Great Depression and was the first time U.S Gross Domestic Product actually fell in any year since 1948. Unemployment according to the Labor Department peaked in October 2009 at 10.1% and then declined to 9% last month. But this statistic does not include those unemployed who have been out of work for so long they no longer “participate” in registering for unemployment benefits. As shown below; labor force “participation” shrank by 2% since 2009. Add in these jobless and real unemployment rate is at a record 11% right now:

The stimulus that has recently been driving GDP growth is a provision contained in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This tax incentive allows businesses to book 100 percent “bonus depreciation” for any qualified capital expenditures purchased and taken delivery by December 31, 2011. This explains why the industrial production index has jumped back up to its average level for the last 40 years. The good news is businesses substantially increased capital investments in everything from $25,000 new Ford cars to $335 million Boeing 747 airplanes. The bad news is that business investments are being pulled forward into 2011 and 2012 suffer an off-setting fall in demand. Next year the U.S. economy will surprise on the down-side and unemployment will be on the upswing.

To fund spending increases on salary and pension benefits during the Great Recession; state and local governments raised taxes so much the effective percentage of all taxes paid by the average household in America jumped from 17.5% to 17.9%. This $247 billion tax increase more than off-set the stimulus effects of the last year’s federal payroll tax cut stimulus; but was not enough to prevent the lay-off of over 900,000 workers. But with voters in revolt and tax collection falling; state and local governments will cut spending this year for the first time since 1944.

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American Exceptionalism has routinely been underestimated by America’s adversaries. We have argued for the last year that powerful trends are reshaping U.S. that will lead to result a rebirth of American manufacturing, coupled with positive business trends, and just as powerful political trends are shrinking the size of government and its capacity to intervene in the economy. The combination of these trends will create a sustained upward spike in the American economy.

Last week the Financial Times newspaper published an editorial: “America Must Manage Its Decline”. The jest of the FT article was that United States must develop an effect foreign policy, similar to Great Britain’s in 1945, to manage her economic and political decline:

“If America were able openly to acknowledge that its global power is in decline, it would be much easier to have a rational debate about what to do about it. Denial is not a strategy.”

President Obama, the American press, the rabid right wing, and even a Harvard professor were all excoriated by the FT for their pathetic reliance on such homilies as: “Decline is not a condition. Decline is a choice.” From the high floor in the FT’s office tower, the author cynically snarled down at America’s inability to take “determined action” to increase higher education funding and “self-indulgent episodes such as the summer’s near-debt default” as prime evidence of America’s “declinism” and the inevitable rise to economic dominance by China.

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When I introduced the concept of regime uncertainty in 1997, attempting to improve our understanding of the Great Depression’s extraordinary duration, I anticipated that many people—especially my fellow economists—would not welcome this contribution. Their primary objection, I ventured, would be that the concept remained too vague and, most of all, that it had not been reduced to a quantitative index of the sort that modern mainstream economists customarily work with, especially in their empirical macroeconomic analyses.

My argument did not lack evidence, however, and I regarded the agreement of several different forms of evidence as an important element of the argument’s force. The evidence I adduced with regard to changes in the yield spreads for high-grade corporate bonds of differing maturities seemed to me both systematic and especially compelling, though not decisive because alternative explanations of those changes might be offered. (I considered several such explanations and rejected them as unpersuasive in one way or another.) Recently, in my application of the concept of regime uncertainty to help us understand better the persistent economic troubles since 2007, I again advanced several different kinds of evidence, including as before an analysis of changes in the yield curves for high-grade corporate bonds. This time, too, the evidence is consistent with the underlying argument.

Nevertheless, the argument scarcely gained widespread assent, and most analysts either ignored it completely or, like Paul Krugman, dismissed it as a fairy tale—in his view, the sort of wholly fictitious notion that would be peddled only by think-tank whores in the pay of Republican plutocrats. (I trust that everyone who knows me will see how closely I fit this template.)

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Once upon a time in a land far, far away, there was a country famous for its apples. In fact, it produced nothing but apples and so was called Appleonia. The people ate many apples in many different ways: raw apples, baked apples, apple pies, apple fritters, and candied apples, to name just a few. They found lots of different ways to use their apples, even as fuel.

But Appleonians didn’t consume all of their apples. They saved lots and lots of apples for their seeds so they could enlarge their orchards and grow more and more. For hundreds of years, the Appleonians consumed lots of apples and made their orchards bigger and bigger. Everyone in Appleonia worked in the apple business and prospered.

It turned out though that not every place in Appleonia was perfect for growing apples. Some areas were filled with worms that just loved apples. Little by little, the worms began to infest the orchards. No one noticed until one day a young boy opened a barrel and, taking a big bite out of an apple, bit right into a worm. Undeterred, he picked up another, with the same result, and another and another. At last he found an apple that was as good inside as it was outside.

But word spread quickly that there were worms in the apples and that the worms seemed to be spreading from orchard to orchard. People quit harvesting in the infested areas and, even worse, they could no longer guarantee the high quality of their apples as they had in the past. For the first time, they produced fewer apples, and many people were put out of work.

The Appleonian government grew very worried and, after brief consultation with academic experts, came up with an idea. To put people back to work and restore faith in the apples, the government hired lots of people to polish all the rotten apples. Of course, this didn’t really work: the polished apples may have looked better on the outside, but they were still rotten on the inside. Things didn’t get any better. People were still out of work, and the quality of the apples was still hit and miss. Government officials came up with another plan. They hired another bunch of people to spray a thin layer of wax on the rotten apples. Again, their remedy was superficial: the bad apples may have looked gorgeous, but they were still rotten on the inside, and hence worthless.

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Dear Mr. President,

The Keynesian school of thought on the economy is that of the potential instability of the private sector and the undependability of the market driven self-adjustment factor. Keynes during his day said that in times of depression (or deep recessions) the government should focus entirely on spending by  injecting the national economy with lots of cash. So the task was simple: spend more on goods and services thereby shifting aggregate demand in the other direction and presto we are out of the recession.

However, Keynes put forth these thoughts during the Great Depression. In which inflation was not a threat, prices were falling, and unemployment was reaching 25 percent. Since the goal was to get the national economy back to full employment, the only model used for analysis was the aggregate demand curve in relation to real GDP gaps. There was no need to study aggregate supply and aggregate demand, prices and real job growth because he was only interested in what market participants would buy during the depression if the economy was producing at full capacity. So a new model called the Keynesian Cross was coined which basically focuses on the differences in total spending to the value of total output. It doesn’t account for true distinctions for price levels and real output, i.e., real job growth.

An increase in aggregate demand effects real output and prices but doesn’t always translate to a dollar-for-dollar improvement in real GDP. Again, and to his defense, Keynes’ ideas were during the Great Depression — falling prices, etc., — this is not the Great Depression, so when supply and demand increases so do prices. As a result we still stay short of full employment, consumer spending stays down, wages become relatively low, the economy fails to rebound and possibly falls back into recession.

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The world price of crude oil has been on a roller coaster lately, gyrating above and below $100 a barrel. Several weeks ago, prices at the pump reached $5 a gallon in some places but seem to have settled down, at least temporarily, to less than $4 in many parts of the country. The elevated cost of gasoline—and of heating oil, aviation fuel and other energy products derived from “black gold”—understandably is a matter of great concern to most Americans.

Rising energy costs already have changed many families’ summer vacation plans, threatened to short-circuit the weak recovery from the Great Recession and, combined with recent increases in food prices, contributed to incipient inflationary pressures that foreshadow a lower standard of living and a return to the stagflation of Jimmy Carter’s presidency.

Fluctuations in crude oil prices are being driven mostly by uncertainty over supplies from oil-producing countries in North Africa and the Middle East, along with a weakening U.S. dollar and other political factors that largely are beyond the control of the much-maligned U.S. oil industry.

But they are not totally beyond Washington’s control. Just recently, President Obama reversed course once again, announcing policy initiatives that the White House claims will increase domestic oil production.

The president says he now wants to lease more drilling areas in the Gulf of Mexico and reduce bureaucratic delays in issuing permits for energy exploration and recovery.

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While many people are cheering the revolts going on throughout the Middle East and shudder at the horrible violence few people are discussing the possible effect that these revolts will have on the world/US Economy.  Should these revolts continue to spike up the cost of oil, the world will be thrown into an economic crisis worse than the recession that began in 2007.

Certainly the crash of the sub-prime housing boom, which was caused by the progressive belief that owning a home was a right, is the primary reason behind the financial crisis and what was to become known as the  “great recession.”  The part that most people forget is that the “pin” that pricked the housing bubble, and led us down the economic abyss was oil prices.  In fact every rescission we have had since the mid-1970s has shown an accompanying spike in oil prices. It is not a coincidence that the worst recession in that period has been accompanied by the largest oil  price spike.

Economist Jeffrey Rubin said in 2008:

Curiously, an over-500% increase in the real price of oil gets virtually ignored as a culprit behind today’s economy, eclipsed by the ongoing crisis in financial markets. Yet the run-up in real oil prices this cycle is over twice the spike in oil prices that occurred during the first or second OPEC oil shock. And those oil shocks produced two of the deepest recessions in the entire post-war period, including the 1980-82 double dip.

The price of oil influences more than just how you heat your house or drive your car.

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The Great Depression has been a deeply contested subject from the very beginning. After John Maynard Keynes’s General Theory became sacred writ for most mainstream economists, Keynesian interpretations generally prevailed, notwithstanding pockets of resistance among older economists, in general, and Austrian school economists, in particular. Milton Friedman and Anna Schwartz’s monumental Monetary History of the United States eventually helped to displace Keynesian interpretations with a monetarist interpretation, especially after the stagflation of the 1970s worked to discredit Keynesian macroeconomics.

Nevertheless, in part because mainstream macroeconomics never settled into a fixed orthodoxy for very long, competing interpretations of the Great Depression continued to attract adherents and to incorporate new elements of analysis during the past thirty years. The Austrians, once again attracting young economists to their ranks from the 1970s onward, persisted in waging guerrilla warfare against Keynesian, monetarist, New Classical, and other varieties of interpretation of the Depression.

With the onset of the current economic troubles—what some call the Great Recession—the debate about the Great Depression flared up anew, because many commentators began to compare these two episodes of exceptionally subpar overall economic performance. In 2008, an article by Gauti Eggertsson, “Great Expectations and the End of the Depression,” was published in the leading mainstream journal, the American Economic Review. This article advances a variation on one of the leading themes among mainstream economists, attributing the U.S. recovery after 1933 to a regime change associated with the New Deal’s abandonment of the gold standard and its commitment to active intervention in the private economy, allegedly in sharp contrast to the Hoover administration’s hands-off policy stance.

Steven Horwitz has taken issue with Eggertsson’s article in an important critique published in 2009 in the online journal Econ Journal Watch, edited by Daniel B. Klein. Eggertsson replied to Horwitz’s critique in 2010. Now, Horwitz has rejoined this back-and-forth in a new contribution to Econ Journal Watch titled “Unfortunately Unfamiliar with Robert Higgs and Others: A Rejoinder to Gauti Eggertsson on the 1930s.” No one will be surprised if I recommend Horwitz’s original critique and his follow-up piece as important contributions to this highly significant debate.

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The progressive Democrats in power must believe that the citizens of this country are absolute morons, either that or they haven’t read a newspaper in two years and don’t realize that George Bush is no longer president. The Democratic party plans on retaining their change message for their 2010. Their new tag line is “vote for us, or its back to the bad old economic policies of George Bush. That’s right Barack Obama and his progressive majority are going to campaign as if they were all still in kindergarten “Its not my fault….blame Bush.”

Not only is that approach childish, but it belies the truth.  Allow me to suggest that the policies of Barney Frank had more to do with the bursting of the housing bubble, the resulting bank crisis and the “great recession,” than the policies of George Bush. Led by Frank the Democratic party brought down the banking industry by forcing banks to give loans to people who couldn’t afford them, then he   blunted the Republican attempts to regulate the industry

Frank aggressively fought reform efforts by the Bush administration. He told The New York Times on Sept. 11, 2003, Fannie Mae and Freddie Mac’s problems were “exaggerated.” Exaggerated? Thanks to Fannie and Freddie the housing market collapsed and we fell into this “great recession.”

“These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis,” Frank Opined to the Times. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

The 10/8/03  Washington Post reported that Frank opposed giving the Bush administration the approval rights over banking business activities that “could pose risk to the taxpayers.” He worried the Treasury Department “would sacrifice activities that are good for consumers in the name of lowering the companies’ market risks.”

In the video below Frank sits in a 9/10/03 House Financial Services Committee hearing and says Fannie and Freddie are sound, and there is no housing disaster coming.

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I received many emails on Friday and this weekend about the data published here showing that on average Democratic districts are getting almost twice the amount of stimulus money than Republican districts. Republican districts also received smaller awards on average. The average dollars awarded per Republican district is $260,675,663, while the average dollars awarded per Democratic district is $471,533,539.

Several readers asked if the difference could be explained by the fact that Democratic districts have many more people than Republican districts have. So I looked at the numbers and here is the result. It’s not.

Republican districts get $362 per capita on average

Democratic districts get $692 per capita on average

Also, on average, Democratic districts received one-and-a-half times as many awards as Republican ones. Democratic districts also received two-and-a-half times more stimulus dollars than Republican districts ($122 million vs. $46 million). Of course, there are more Democratic districts than Republican districts in the Congress.

Is the politics part of the allocation decision?

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As unemployment stubbornly sticks near 10 percent and any sort of economic recovery seems a long way off, think about this: The one part of the economy that’s going gangbusters is government work.

Indeed, since the Great Recession started in December 2007, over 8 million jobs have been lost in the private sector while the public sector has added at least 100,000 positions. It’s time to recognize that public-sector employment is killing the economy for at least three reasons:

1. They cost too much. As USA Today recently noted, federal employees make on average almost $8,000 more than their private-sector counterparts. When you add in benefits, the gap spreads to about $30,000. State and local government workers make around the same as private-sector counterparts, but their health and retirement packages mean they make significantly more in the end.

2. We can’t fire them. The private sector has shed positions in response to slackening demand and the economic downturn. That sort of adjustment is painful but necessary, as it allows the economy to adjust to changing circumstances and workers and employers to move into new activities. Because it is guaranteed certain amounts of tax revenue and has a non-market mind-set, the public sector is largely insulated from such forces and keeps or even adds workers despite changed conditions. The result? We keep paying for things that we don’t use, need, or want.

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A recent Pew survey revealed the nation’s big banks are drawing the most ire from the American public, and now that the Federal Reserve is poised to hand them another victory, it’s easy to see why Main Street’s anger burns deep.

Wednesday, Federal Reserve Chairman Ben Bernanke released a statement to the House Committee on Financial Services which detailed the accommodative policy the Fed implemented as a result of the Great Recession and outlined its exit strategy from that policy.

The objective of the Fed’s intervention was to alleviate the pressure on the balance sheets of the banks, which would provide them with the financial flexibility necessary to begin lending to consumers and businesses once again. To meet such an end, the Fed increased the size of its balance sheet through purchases of securities and real-estate loans from the banks, and decreased the interest-rate for interbank lending to nearly zero percent.

The banks’ first ‘Win’ came as a result of those sales to the Fed which produced billions of dollars in revenue. Afterwards, many of us were wondering why the banks weren’t lending again, despite raking in record profits, but the answer was simple. They quickly realized they had found themselves with a can’t lose proposition, as they could make guaranteed money instead of taking on more risk from lending to consumers and businesses during a period of economic uncertainty.

How could they do that?

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For anyone who thinks that big Wall Street and Big Government aren’t joined at the hip, promoting policies and laws that keep each other fat and happy often at the expense of the American taxpayer, consider the career of Robert Rubin.

Rubin, of course, is largely gone from the public scene after spending 10 disastrous years as a board member and senior executive at Citigroup, the banking giant that epitomizes all that is wrong with American finance, and before that, a largely successful run as Treasury Secretary in the Clinton Administration, which he joined after running another controversial bank, Goldman Sachs. But his legacy looms large, mainly because I believe he was one of the reasons why the financial crisis occurred in the first place.

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