Economic Notes: Stimu-Lite
2/13/2009
Larry Summers, the President’s chief economic advisor, argued (while still an academic) for an economic stimulus measure that was “timely, targeted, and temporary.” Congress is about to adopt a package that is slow, scattered, and sustained.
The question is not whether the bill will have a positive impact. It most certainly will (i.e., on net, the economy will contract less and recover sooner than otherwise). But will it have the optimal impact per dollar of deficit (i.e., government borrowing)? No, in large measure because it fails Summers’ standards, which reflected economic - not political - considerations.
The immediate downside of Stimu-Lite lies in lost potential. Under other circumstances, foregone opportunities would not matter as much as they do now. Why? Because borrowing to finance stimulus for the general economy is not the end of Uncle Sam’s credit needs.
Not far in the future are mega-financings to recapitalize the financial system, sustain systemic liquidity, stabilize real estate (i.e., foreclosure mitigation), restructure manufacturing’s largest component (autos) and, eventually, implement President Obama’s campaign agenda. At what point do lenders demand a risk premium? At what point are private borrowers crowded out?
That time comes closer as deficits grow larger.
Retail Bounce: After declining for six consecutive months, retail sales were up by 1% in January. Despite the month-on-month (m/m) increase, sales were still 9.7% below the prior year’s level according to the Census Bureau.
The improvement was broad based, with sales of food, gasoline and electronics scoring gains of more than 2.0% according to the Census Bureau’s advance report on monthly retail sales. Non-store (e.g., internet) sales were up 2.7%.
Although this does not signal the beginning of a rebound, it demonstrates that even under duress consumers continue to eat and drive; and have to replace clothes (up 1.6%) and cars (+1.8% on a lot of used-car sales).
In just January, retailers chalked up $344 billion in sales - almost double Stimu-Lite’s fiscal impact over the next eight months. Government helps, but the consumer is king; which is why the decline in the University of Michigan’s consumer confidence index bears noting. It had been up in the past two months, coincident with the rise in retail sales. What does the most recent decline portend?
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