Big Business Not Investing
In a recent post, I argued that while third-quarter GDP was positive, the underlying data revealed that U.S. private investment was still in the toilet. While government spending might be providing a short-term “sugar high” for the economy, U.S. business investment remains in recession. I speculated that Obama’s anti-business agenda is likely one cause of the problem.
For those observations, economist Brad DeLong called me an “utter fool.”
Let me draw your attention to an article in the Washington Post today entitled “Corporate giants sit on piles of cash.” Nucor Steel is sitting on piles of cash that it is unwilling to invest. Nucor’s chief executive Daniel Dimicco explains:
Everything is still on hold because we don’t have a lot of confidence that the right things are being done in Washington to reinvigorate the economy.
To story goes on:
Nucor isn’t alone. The balance sheets of large U.S. corporations are for the most part in good shape. Many big companies have piles of cash on hand and credit markets have thawed so that they can raise new funds… But most U.S. executives lack enough confidence in the economy to expand their businesses.
Filed under: Government and Politics; Regulatory Studies; Tax and Budget Policy
The Death of Private Investment
The Bureau of Economic Analysis released third-quarter gross domestic product numbers yesterday, and overall real growth at 3.5 percent was pretty good.
But examining the components of GDP reveals a more disturbing picture. While consumption, exports, and the government sector were up, private investment has fallen through the floor.
Figure 1 reveals a dramatic collapse of private investment over the last two years. In nominal dollars, private investment in 2009 has only been at about the same level as the bottom of the last recession eight years ago (BEA Table 1.1.5).
Figure 2 has the same data in real 2005 dollars (BEA Table 1.1.6). It shows that private investment is stuck in a rut at about 17 percent below the lowest level reached at the bottom of the last recession.
So Much for the Obama Administration’s Fiscal Free Lunch
So far the Obama administration has been enjoying the ultimate fiscal free lunch. Massive borrowing, massive spending, lower taxes, and low interest rates.
Alas, all good things must come to an end.
The nation’s debt clock is ticking faster than ever — and Wall Street is getting worried.
As the Obama administration racks up an unprecedented spending bill for bank bailouts, Detroit rescues, health care overhauls and stimulus plans, the bond market is starting to push up the cost of trillions of dollars in borrowing for the government.
Last week, the yield on 10-year Treasury notes rose to its highest level since November, briefly touching 3.17 percent, a sign that investors are demanding larger returns on the masses of United States debt being issued to finance an economic recovery.
While that is still low by historical standards — it averaged about 5.7 percent in the late 1990s, as deficits turned to surpluses under President Bill Clinton — investors are starting to wonder whether the United States is headed for a new era of rising market interest rates as the government borrows, borrows and borrows some more.
Already, in the first six months of this fiscal year, the federal deficit is running at $956.8 billion, or nearly one seventh of gross domestic product — levels not seen since World War II, according to Wrightson ICAP, a research firm.
Debt held by the public is projected by the Congressional Budget Office to rise from 41 percent of gross domestic product in 2008 to 51 percent in 2009 and to a peak of around 54 percent in 2011 before declining again in the following years. For all of 2009, the administration probably needs to borrow about $2 trillion.
The rising tab has prompted warnings from the Treasury that the Congressionally mandated debt ceiling of $12.1 trillion will most likely be breached in the second half of this year.
Last week, the Treasury Borrowing Advisory Committee, a group of industry officials that advises the Treasury on its financing needs, warned about the consequences of higher deficits at a time when tax revenues were “collapsing” by 14 percent in the first half of the fiscal year.
“Given the outlook for the economy, the cost of restoring a smoothly functioning financial system and the pending entitlement obligations to retiring baby boomers,” a report from the committee said, “the fiscal outlook is one of rapidly increasing debt in the years ahead.”
While the real long-term interest rate will not rise immediately, the committee concluded, “such a fiscal path could force real rates notably higher at some point in the future.”
Alas, this is just the beginning. Three quarters of the spending in the misnamed stimulus bill (it would more accurately be called the “Pork and Social Spending We’ve Been Waiting Years to Foist on the Unsuspecting Public Bill”) occurs next year and beyond, when most economists expect the economy to be growing again. Moreover, much of the so-called stimulus outlays do nothing to actually stimulate the economy, being used for income transfers and the usual social programs.
However, we will be paying for these outlays for years. Even as, the Congressional Budget Office warns, the GDP ultimately shrinks as federal expenditures and borrowing “crowd out” private investment. Indeed, the CBO figures that incomes will suffer a permanent decline–even as taxes are climbing dramatically to pay off all of the debt accumulated by Uncle Sam.
And you don’t want to think about the total bill as Washington bails out (almost $13 trillion worth so far) everyone within reach, “stimulates” (the bill passed earlier this year ran $787 billion) everything within reach, and spends money (Congress approved a budget of $3.5 trillion for next year) within reach. Indeed, according to CBO, the president’s budget envisions increasing the additional collective federal deficit between 2010 and 2019 from $4.4 trillion to $9.3 trillion.) Then there will be more federal spending for wastral government entities, such as the Federal Housing Administration; failing banks, which are being closed at a record rate by the FDIC; pension pay-offs for bankrupt companies, administered by the Pension Benefit Guaranty Corporation; and covering the big tab being up run up by Social Security and Medicare, which currently sport unfunded liabilities of around $100 trillion.
Oh, to be an American taxpayer — and especially a young American taxpayer — who will be paying Uncle Sam’s endless bills for the rest of his or her life!
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Health, Welfare & Entitlements; Tax and Budget Policy
Chrysler: Everybody Relax, This Is Exactly What Should Have Happened
A small group of Chrysler debt holders rejected the Obama administration’s restructuring plan last night, leaving Chapter 11 bankruptcy as the most salient option for the company.
The Obama administration accused the investors who walked away of “failure to act…in the national interest.” But it’s not difficult to understand why these secured creditors rejected the government’s offer of essentially 29 cents on their investment dollar. If that is how the Obama administration treats capital markets, how exactly do they expect to spur private investment in American companies, as the White House claims it wants to do?
Bankruptcy reorganization will probably yield a better deal for investors than the government’s plan. It also will imbue the process with more financial sanity than anything the Obama administration cooked up. For instance: the historically overindulged United Auto Workers might be forced to make more “sacrifices” than being handed a 55 percent stake in the company—essentially what the core of the administration’s plan would have accomplished—or reducing their CBA-mandated breaks from 16 minutes to 13 minutes.
Bankruptcy has been the best option all along. That was clear the moment it was determined that new private capital or adequate sales revenues would not be available to fund operations. But once the Bush administration circumvented Congress to throw Chrysler (and GM) a lifeline, and the Obama administration followed suit with implicit backing, uncertainty prevailed and the problem persisted. The bankruptcy process will produce a less politically driven solution.
Filed under: Cato Publications; Finance, Banking & Monetary Policy; Trade and Immigration
Social Security Is Running a Surplus…Oops
For years, opponents of Social Security reform have told us that there is no need to rush into changing the program because, after all, Social Security is running a surplus today. Well, according to a new report by the Congressional Budget Office, not so much.
CBO reports that the Social Security surplus, originally expected to be $80-90 billion this year and next will shrink to $16 billion this year and just $3 billion next year (essentially a rounding error) as a result of the recession and rising unemployment. And those estimates may be far too optimistic. In February of this year, for example, Social Security actually ran a deficit—spending more than it took in through taxes and interest combined.
And, while CBO expects a return to modest surpluses after 2010, as the recession ends and unemployment falls, that is betting on the success of the unproven Obama economic program. If unemployment stays at current levels, Social Security will begin running permanent cash flow deficits in 2011 (eight years earlier than previously predicted).
Opponents of personal accounts have pointed out recent declines in the stock market as a reason why private investment should no longer be considered an option for Social Security reform. The evidence suggests that, even with recent market declines, private investment would still produce higher returns than Social Security. The new surplus numbers provide yet another lesson: if the economy is in such a mess that it hurts private investment, traditional Social Security isn’t going to be in any better shape.
The case for personal accounts remains as strong as ever.
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