What Does “Recovery” Mean?

Let’s engage in a little thought experiment. Imagine just for a moment that we corporately take out a loan for $1 trillion and give the whole kit and kaboodle to just one guy, Mr. X. Mr. X could take the entire trillion and put it in his mattress (pretty big mattress). He could buy houses, car, and pretty nearly anything else he (or she: it could just as well be a Ms. X) wanted.

He could invest it. He could give it away. Or he could do a little of all of the above. Would the country be $1 trillion richer? Or even more? That’s what you believe if you believe that the Keynesian multiplier of such a choice would be greater than 1. Even with the “trickle down” effects of all of that money I don’t think so but, importantly, I don’t think that most people would feel richer because Mr. X had been given all of that money. They might even feel poorer for reasons of envy or just thinking about the interest payments on the trillion dollars.

We’ve been engaging in just such an experiment for the last year or so. I don’t just mean the $800 billion or so ARRA stimulus package. I mean the stimulus package and the bailouts of GM, Chrysler, and AIG and the low, zero, or even negative effective interest rates at which banks have reportedly been getting money for quite some time now.

The effect of those ultra-low interest rates is that banks can take the money and do practically anything they want with it—there’s no downside. I strongly suspect that when the final economic histories are written of the last six months or so we’re going to see that an enormous proportion of the run-ups in stock prices, for example, that have gone on for the last couple of months largely without any basis in the performance of the companies are directly related to free money.

This reminds me of one quarter a few years back when the entirety in national GDP growth could be attributed to stock sales on the part of a handful, i.e. three or four, Microsoft stockholders. I wasn’t particularly envious of them but I didn’t feel better off because they’d increased per capita GDP.

What I’m getting at with all of this meandering is that I don’t think that you can reasonably talk about economic recovery in terms of increasing GDP or income unless the increasing GDP and income are in the form of broadly based increases in income and there’s a pervasive feeling that individuals’ own finances are improving.

That manifestly isn’t the case:

The Rasmussen Consumer Index, which measures the economic confidence of consumers on a daily basis, fell two points on Wednesday to 81.6. Today’s index is down three points from a week ago, but up three points from a month ago. Consumer confidence is up 10 points from its level measured one year ago.

Nationally, 69% of adults say the U.S. is currently in a recession. Just 14% disagree with this assesment. More men (72%) feel the U.S. is in a recession than women (66%). Seventy-five percent (75%) say the U.S. is in a recession, while 71% of private company employees and 70% of entrepreneurs say the same.

The Rasmussen Investor Index, which measures the economic confidence of investors on a daily basis, dipped slightly today to 94.8. The index is down four points from a week ago and up six points from a month ago. Investor confidence is up 15 points from its reading this time last year.

Among investors, 69% say the U.S. in currently in a recession, while 18% disagree.

In Gallup’s “personal wellbeing index 49% report that they are living from day to day, unable to make a major purchase or a significant home repair. More than half of those making under $60,000 report that.

Consequently, regardless of the green shoots that some commentators are seeing I think we’re some little distance from a real recovery.

4 comments… add one
  • Drew Link

    My meanderings…

    On the multiplier. You may recall that Kevin Murphy laid out factors of the type you cite in a (highly stylized) quantitative assessment, concluding it was less than 1. Robert Barro has done alot of work. I’d be interested to know if Steve V is familiar with that work and has a view.

    Stock prices and free money. I’d come at it a bit differently, and call it yield chase as a byproduct of low interest rates. That is, if investors can’t get yield on debt they pile it into the stock market, despite fundamentals. And if I’m right, that would make the current market rise and valuation a self fulfilling prophesy…..but in the end a game of musical chairs. This evening I am attending a presentation by Jack Ablin, Harris Bank’s CIO. This is one of the topics he is covering.

    Recovery Breadth. (and the little guy) I couldn’t agree more, and I wish people could take off their partisan hats more often and think about that. The reason I gripe about ever increasin taxation and government intervention, anti-business policies, bad (my words) public policy isn’t that I hold some brief for Wall Street, “Corporate America” or the Republicans in general. It is that my personal experience strongly suggests that these policies in fact hurt the proverbial Average Joe, who are the majority. The very rich and the very poor appear to make out just fine. (although so many of the poor become perpetual wards of the state.) This is not good. It is not caring.

    I just finished reading an economic overview. As you cite, waning confidence. Also, despite many year over year comparisons that are touted as positive: household net worth is only at 2005 levels, people are drawing down savings to support PCE, wages are declining and private sector unemployment is rising. This does not bode well for long term and broad based GDP growth and unemployment declines.

    The rich will still be rich. The poor still on the dole. But what about the majority in the middle?

  • PD Shaw Link

    One of the things that I’ve been wondering about with the stock prices or more particularly corporate earnings, is how much might be the result of cut-backs in R&D or other long-term investments in favor of maximizing short-term sales and cash reserves.

  • Drew Link

    PD –

    I think its more labor productivity, but I’ll report back after this evening’s discussion.

  • Imagine just for a moment that we corporately take out a loan for $1 trillion and give the whole kit and kaboodle to just one guy, Mr. X.


    Would the country be $1 trillion richer?

    Well it depends doesn’t it? If that $1 trillion was going to be loaned out to Mr. Y(1),…Mr. Y(N) where N is a suitably large number, then maybe not. After all the assorted Mr. Ys would be doing the same stuff with that money as Mr. X would be doing. You’d need to be in the case where that $1 trillion wasn’t going to be leant out at all for such an action to be beneficial.

    As for the recovery’s breadth, I agree largely with Drew.

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