Tuesday, June 14, 2011

Change on the margin is the key

Clifford Asness has a very nice op-ed in today's WSJ: "Uncertainty is not the Problem." I'm guilty of doing what he describes, which is arguing that the uncertainties created by massive quantitative easing and a huge expansion of government spending are acting as headwinds to economic growth. It's not the uncertainty surrounding bad policies (e.g., a huge increase in spending today means we could see a huge increase in future tax burdens) that is bad for the economy, it's the bad policies themselves. Unless policies change, we will see higher tax burdens and greater regulatory burdens, and that is bad; the fact that there is still some uncertainty about how bad it will be for the economy, or exactly how much tax burdens will rise, is not as important as the fact that the future looks less attractive for business.

... the stimulus was wasteful and politicized, and the American people, not being idiots, know they will have to pay for it eventually. People adjust their plans to account for the additional debt heaped on them, meaning lower investment and consumption.

He goes on to illustrate how things could improve dramatically even if the degree of improvement were still uncertain:

... consider good policies surrounded by uncertainty. Imagine we will move from here toward free-market health-care reforms appropriate for a free people. We will reduce government spending and our debt, letting people spend their own money as they see fit. We will lower taxes across the board for individuals and businesses, and we'll reduce and simplify deductions.
Imagine even more that we'll make grown-up decisions and reform entitlements to levels we might possibly afford. Now imagine that while we know the direction of each of these policy changes, alas, we are very uncertain about how far these wonderful ideas will go. Imagine this uncertainty is even higher than it is around today's bad policies. Would these changes, uncertainty and all, make things better or worse? Well, it seems pretty clear that should these changes occur in any nontrivial fashion, you would have to duck to get out of the way of the ensuing economic boom, regardless of the uncertainty.
Focusing on "uncertainty" takes our eyes off the ball. We should not seek clarity about the many new drags on our economy. We should seek to have the administration cease and desist, then reverse them.

This reinforces my belief that the plunge in equity prices in the early months of 2009 was largely driven by the horror show that was otherwise known as almost $1 trillion of fiscal "stimulus." Prices have rallied since then because a) the economy did not collapse into a black hole of depression and deflation as the market expected in late 2008, b) the market began to see that Obama's lurch to the left was meeting resistance, and c) more recently, the market has begun to believe that policies might at some point reverse, in a more growth-friendly direction. If the elections next year have the effect of reducing spending, reforming entitlements, flattening tax rates and broadening the tax base, then there is a tremendous amount of upside potential in the market. The only uncertainty is the degree to which things will improve. Already we see that the political debate has shifted meaningfully: nobody can argue successfully for more spending and new entitlement programs—the political debates now turn on whether and by how much we can cut spending and reform entitlement programs.


Benjamin Cole said...

I read and agree with this editorial in the WSJ--and yet, when the GOP'ers talk, they never, ever mention the $3 trillion we have unloaded in Iraqistan, or the $1 trillion annually we tax away from productive citizens to fund Defense, Homeland Security, and the VA.

Until the GOP-Tea Party can frankly deal with our largest federal agencies, I find their sermonettes and pettifogging to be hypocritical.

Ron Paul is an exception, and an interesting fellow.

brodero said...

I don't agree the markets reaction
in early 2009 was due to the stimulus. It was a reaction the threats and rumors about the nationaliztion ( and cpossible collapse) of our financial system. This blog is your to run
and full of great insight but your
earnestness to push politcal points misses the obvious.
Since we are being politcal why do you have no outrage about the 850 billion we sent to fight in Iraq??? Stimulus may have been lousy way of doing things but the 850 billion is gone forever.

Scott Grannis said...

brodero: you make a fair point, but I would argue that a permanent, 25% increase in government spending (i.e., raising federal spending as a % of GDP from 20% to 25%), as Obama has proposed, is far more onerous than spending $850 on the Iraq war, which will not be repeated in perpetuity.

Edward said...

I drop by this blog once in a while because it is one of the rare blogs that understands a bull market, which is what we are in. In fact, strong beginnings like we have had since 2009 always set up long term runs, this one probably up to 2015, IF we have a re-election. Yes, Scott, that is the caveat with all the hedgies I talk to, they know the historical data (1984, 1996, 2004 etc...). single terms do not usually end well for the markets.
But what I find extremely disingenuous is how the current policy makers never get credit for anything good that happens and all the blame for anything negative. This is somewhat hypocritical, much like Jamie Dimon blaming banking regulation for the recent slump (and what does he blame the crash of 2008 on? Too much regulation as well?). Secondly, in response to the previous comment, the war is not an 850 billion one time deal. It is well over a trillion so far (12 billion a month for 8 years), and counting VA care will add up to 3 trillion in the next 10 years, far more than the often maligned Obamacare. Money that will never come back to us in any menaginful way, unlike infrastructure spending, something republicans never seem to be able to indulge in, unless it is a pork project for their own state. No vision there. Furthermore, the war money was taken out of discretionary (hidden away from the budget by Bush, reinstated in the budget by Obama, hence a big bump) while lowering taxes, probably the most unpatriotic move our country has ever seen, giving all the burden of the cost of the war to our soldiers and of course our children with the massive debt it created. Where is the outrage?
It's your blog, but please retain a semblance of credibility by not being so partisan. Your market takes are very interesting, but your politics, like putting up with the blowhard Santelli, are a little hard to take at times.

Public Library said...

The difficult thing for me to understand is how will the average person make a so called 'informed decisions' about health care when it takes a medical degree to understand your health trajectory?

I see this going the way of the financial markets. The majority of people making poor decisions fed to them by a soon-to-be new breed of 'Healthcare Brokers'. Most people know brokers are the last people (besides their clients) to know where and how to invest.

We need a better way of thinking about people and resource allocation. Instead of becoming specialized and efficient, we are forcing everyone to become an expert in everything from finance to healthcare. This seems like a poor allocation of our collective skill-sets if you ask me.

Scott Grannis said...

Re politics: I am not shy about my distaste for the policies of Bush II, and that includes TARP. Bush got off to running start towards bigger government, then passed the baton to Obama, who then set a new record for expansive government policies. I think it's very important to understand that the government cannot spend money better or more productively or more efficiently than the private sector. In my book there is no such thing as fiscal stimulus that comes from increased government expenditures. Even tax cuts are not always good, unless they result in a permanent lowering and flattening of marginal tax rates. From the very beginning (late 2008) I warned that fiscal "stimulus" that was being considered would only retard the economy's recovery, and I believe that has been borne out by the facts. I've also warned repeatedly that monetary stimulus is only inflationary and also a source of economic headwinds. Bernanke was appointed by Bush, and that was another Bush mistake. I'm an equal opportunity critic of public policies that don't make sense, regardless of which side of the aisle they come from. As for our Middle Eastern wars, I think they have also been a drag on growth. Defense spending, however, is not a very big share of total government spending, the lion's share of which (about two-thirds) is transfer payments.

Scott Grannis said...

Re: healthcare. I think one essential healthcare reform is needed above all: we've got to put consumers in charge of the spending their dollars on healthcare. The third-party payer problem is a huge source of our problems. The fix is easy: remove the asymmetrical tax incentive that allows only employers to deduct healthcare costs. Consumers have figured out how to buy life insurance and car insurance just fine, and I don't see why they can't figure out health insurance if given the chance and the incentives.

Edward said...

re defense:
DOD budget is 705 billion, add defense related expenditures it goes up to 1.030-1.415 trillion dollars. But well hidden, is discretionary spending, which the military uses 50%. )
This accounts for 40$ of global arms spending and 6 times larger than what China spends.

As for health care, it's all fine and dandy to request citizens to be responsible and buy health care without a mandate, but in reality many don't because they know they can get free treatment at the expense of tax payers by walking into a county hospital. Millions of perfectly capable young Americans (and non-Americans) do this, thus placing a massive burden on those of us who actually buy health insurance.
Mandatory health insurance for those who can buy it was a republican proposal back in 1993, why is now all of a sudden anathema?

Bob said...


It's fine to state your opinion, some of which I agree with and some of which I don't, but why malign Scott with a remark about his politics? You surely don't mind showing yours.

By the way and not in defense of the war in Iraq/Afganistan, but expenditures are not zero sum. There is employment, profits, and wealth distribution in any and every war. There are also scientific and technological breakthroughs that find there way into the mainstream economy that can further create growth and jobs. Again, this is not a statement in favor of any war, but just an observation of the realities of war.

The truth of the matter is that economics and politics are joined at the hip. Scott can no more talk his economic theories and beliefs without reveiling his politics than you can.

So drop on by anytime, but maybe without the patronizing attitude.


brodero said...

I found when economics and politics are joined at the hip...
double check the facts and do your
own ( if possible unbiased) analysis. Economists with a strong
politcal bent from the left and the
right often times diminish the data
they present with their political opinions. Always try to look at data
from both sides to get an effective
(and profitable)answer

Frozen in the North said...

Although the idea of freedom in "choosing" one's medical care sound outstanding, for most the reality is the opposite -- what can i afford? The best example of waste I can think of is yesterday's vote to maintain ethanol subsidy.

Although Democrats can be excused for being bleeding hard "green" environmentalists give more subsidies to poor farmers -- the Republicans didn't have that excuse, and yet they could not even agree to that.

Maybe the Tea Party's real objective is the correct one: it is only when America faces the abyss that it will take the hard decisions that are needed.

One caveat, I don't think most Americans understand what that means, it will be a brutal wake-up call, because with a 40% operating deficit, the cuts are going to be where's meat: Defense, Social Security, Medicaid and Medicare

William said...
This comment has been removed by the author.
William said...

I defend Mr. Grannis right to publish what he chooses but I think that Edward makes very valid points when he wrote: "...the current policy makers never get credit for anything good that happens and all the blame for anything negative".

Would anyone care to speculate where this nation's economy would be if olde John McCain and naive Sarah Palin had been elected in 2008? Just image them comming into office facing what President Obama has faced: what would they have done about the auto industry, what about the banks - stand on Tea Party dogma and let them fail?

What if indeed McCain had vetoed an economic stimulus plan which included $200 Billion in tax cuts, support for state budget deficits and funding of schools, unemployment checks and Medicaid?