Rant for a Friend - the Conclusion

I have another rant planned, but I want to wrap up this series before my train of thought gets permanently derailed, so the next post will have to wait for the weekend (or perhaps later; I'm headed out of town with my lovely wife for some R&R and a little wine-tasting in Hermann, MO).

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Let me describe for you exactly how I think the first-time homebuyers' tax credit and cash-for-clunkers were hatched.

In a smoke-filled room in Washington, a bunch of pols were pounding the table and saying, "We have GOT to end this recession - and NOW!" "But how?" they asked. Then they trooped in some hack economist like like the ones you see them troop out to testify before them when they need somebody to tell them what they want to hear. We'll call him Dr. Z.

Dr. Z said, "First, you're not going to salvage the first or second quarter - the first is pretty much cooked, and the second is going to be really ugly. So focus on trying to make it look like the recession's over by the third quarter. Then, maybe people will go nuts on holiday shopping and the fourth won't be so bad either."

"Again, HOW?" asked the Congressmen.

"Well, the consumer is pretty much out of the picture on his own, and you can't replace 70% of the US economy with government spending, especially with the current and projected deficits. But you could give the consumer a fat incentive to buy stuff."

"It would take a lot of stuff being bought to bring this economy out of the tank," said the Congressmen. "You're not going to make up for the decline in consumption with chicken noodle soup from Aldi and toilet paper from Wal-Mart."

"Well, then focus on big-ticket items - the bigger, the better, since consumption is measured in dollar terms," said Dr. Z.

"Like houses?" said the Congressmen. "Sure," said Dr. Z, "offer a tax break for first-time homebuyers, and say that it's going to sunset shortly after the quarter ends. Don't make it too obvious - require that they close on the homes by the end of November. That way, given the 60 days it typically takes to close on a house, they'll rush to buy in September, before the third quarter ends. That may get you something on the order of, oh I don't know, a 9.4% increase in existing home sales in September - just in time to filter into the third quarter GDP numbers."

"Brilliant!" said the Congressmen. "But surely there's more we can do - we want a big GDP number for the third quarter."

"Well," said Dr. Z, "you could offer an incentive to buy new cars. Make it big, and make it only in the third quarter, to boost GDP on a one-time basis. Again, don't make it obvious - do it in July and August, don't have it expire at quarter-end. Tie it to making America 'greener,' and you'll garner broader support when it comes to a vote."

One Congressman had an aide who had actually gotten a degree in economics and understood the topic, and he whispered in the boss' ear. The Congressman piped up: "Wait a minute - won't this just front-load demand? You're not going to get people to buy houses or cars in this economy that otherwise wouldn't have within a few months or quarters, right?"

"So what?" acknowledged Dr. Z. "The objective is to boost the third quarter's GDP, to make it positive so you can declare an end to the recession."

The aide whispered to his boss again, who spoke up once more: "But the definition of the end of a recession is two consecutive quarters of positive GDP growth, not just one."

Again, Dr. Z replied, "So what? Most of the American public is too dumb to know that. And if their government tells them something, they tend to believe it. So don't ask the National Bureau of Economic Research, which officially declares the beginning and ending points of recessions, whether we're out of the woods yet. Have the Commerce Department declare the recession is over the day the third quarter GDP report is released. Then people will gain confidence and start spending again."

The aide whispered once more, and once more his boss regurgitated what he'd heard. "Are you sure?" the Congressman asked. "After front-loaded demand dissipates, won't there be a 'hangover,' with consumption dropping, and maybe negative GDP in the fourth quarter?"

"Maybe," said Dr. Z, "but that's why you have to be ready to extend the homebuyers' credit and maybe enact a second auto stimulus. You can say, 'Sure it's expensive, but look how well the first one worked, and we can't afford to let the economy double-dip.' Plus, that'll be in fiscal 2010, so it won't affect this year's budget, and by the time the new one's rolled out whatever you spend will already have to be in it, because it'll already be spent."

And thus we have the recipe for an even larger deficit. The beauty part is that Congress did just that - extend and expand the homebuyers' tax credit, that is - and they even added an extension of unemployment benefits, something I've been predicted since early summer would be done after fiscal 2009 ended. (By the way, ever notice that if you lose your job in a good economy, you're screwed, but if it happens in a recession, you can pretty much stay on unemployment as long as you want? Shouldn't that be the time we're providing an incentive for people to beat the bushes all the harder and get back to work?)

The price tag for this largess is $24 billion, automatically added to next year's budget - and deficit. But not factored into the deficit projections the administration made earlier this calendar year.

Ah well, what's another measly $24 bil in a world of trillion-dollar deficits? By the way again, next week we'll see the budget shortfall for the first month of fiscal 2010. It's expected to be $150 billion, for just the one month. Remember 2008, when the deficit hit a new record - of just about four times that amount? Remember how the left was howling about it? What kind of noise are they making now?

Wait, I hear them ... "Chirp, chirp ..." Nope. My bad. Just crickets.