Confidence Game

Treasury Secretary Timothy Geithner makes his case iin an op-ed n the New York Times:

The devastation wrought by the great recession is still all too real for millions of Americans who lost their jobs, businesses and homes. The scars of the crisis are fresh, and every new economic report brings another wave of anxiety. That uncertainty is understandable, but a review of recent data on the American economy shows that we are on a path back to growth.

He goes on to produce his evidence for this position:

…large parts of the private sector continue to strengthen. Business investment and consumption — the two keys to private demand — are getting stronger, better than last year and better than last quarter. Uncertainty is still inhibiting investment, but business capital spending increased at a solid annual rate of about 17 percent.

Together, private consumption and fixed investment contributed about 3.25 percent to growth. Even the surge in imports, which lowered the rate of increase of G.D.P., actually reflects healthy and growing American demand.

He also points out growth in exports, the clinging to life on the part of GM and Chrysler, and the increased savings rate, also taking note of the analysis by Alan Blinder and Mark Zandi that I discussed last week and which, as I observed, has been harshly critiqued on methodological grounds by a number of economists who would seem to be in a position to do so.

A year or two years from now Secretary Geithner’s view will either be held to be visionary or delusional. Put me down on the delusional side. Pending home sales are at a record series low. Personal income and spending were both flat in June. The current trend is down rather than up. It will take a decade or more for employment to return to its previous high even at a median increase in employment of 200,000 jobs a month (something we haven’t seen in a decade).

The factors which caused financial crisis are largely still in place and will continue to be despite the passage of massive bailouts for the financial sector and the enactment of reform for the sector. The toxic assets are still on the books of most banks. That banks are able to profit nicely by borrowing at historically low interest from the Federal Reserve, using the money to buy treasuries, and pocketing the net is neither a badge of honor nor the mark of a healthy sector.

Further, the segments of the economy that are doing well are, by and large, those that continue to receive the highest subsidies. We’re already on a collision course with our own past policy imprudence as the CBO pointed out last week.

Also see the Consumer Metrics Institute’s growth index. It has a good track record and it’s down.

Yes, the economy will recover. Economies do, ultimately. The present recovery is barely worthy of the name.

Perhaps I’ll return to Secretary Geithner’s views expressed in this op-ed next month, next quarter, and next year at this time. We’ll see if his confidence is warranted.