Over at Naked Capitalism there’s a post on the various sources of drag we can expect on the economy in upcoming months:
The manufacturing sector has pancaked in June and July after giving roughly a 1% boost to GDP over the last 4 quarters. Moody’s says we can expect to subtract that 1% mfg boost to the economy in 2011. “It’s becoming increasingly clear that the biggest lift from the inventory cycle is over. The inventory swing added nearly a percentage point to real GDP growth over the past year and is unlikely to add anything during the coming year. This will weigh on manufacturing output over the next several months.â€
David Rosenberg adds that there will be a 1.5% fiscal drag in 2011, and reminds us of a third potential drag on the economy in 2011, the expiration of the Bush tax cuts.
This highlights a point I’ve been trying to make none too articulately around here for some time. A slowdown in manufacturing is dragging GDP down. Fiscal problems are dragging the economy down. If there’s a tax increase, that’ll be a drag, too.
Those aren’t the only sources of drag. We have enormous over-investment in the financial sector, the construction sector, the retail sector, and the healthcare sector, all consequences of government bungling over a long period of time. That has an attendant deadweight loss, another major drag on the economy. Then there’s the general deadweight loss of government.
How much drag can the economy stand before it has all the buoyancy of a lead balloon?
I think one thing is for certain: we’ll never solve our problems by adding additional drag.
