Link: http://www.washingtontimes.com/news/2010/apr/23/government-motors-repayment-fraud/

I was as surprised as anybody to hear GM CEO Ed Whitacre claim in a recent commercial that “we have repaid our government loans in full — with interest — five years ahead of the original schedule". As pointed out by a lead editorial in the Washington Times and by a Fox News report, a government watchdog has indicated that $4.7 billion of the $6.7 billion repaid came from another bailout account, and the FTC could become involved to investigate truth-in-advertising violations. And that’s not to mention that, even if the money flow had come directly from auto sales (which it didn’t), as the administration has been trying to say, the claim in the commercial leads the listener to believe that the company is free of all bailout debt (i.e. “repaid our government loans in full” seems to mean all government loans).

So you have a government-financed company lying on taxpayer-funded commercials that the taxpayer funding has been paid back. That’s rather creepily familiar: Democratic government employees used taxpayer funds in the stimulus package to lie to the taxpayers about how many jobs were being created or “saved” by the stimulus package itself. You are paying for your government to lie to you about whether it is actually working.

There have been a lot of empty promises in the age of Obama. And much that is Orwellian. But this is about as inimical to transparency and clean government as anything I’ve yet seen.

Here is my compiled list of the presidential elections of the last 60 years and the reaction of the stock market (as measured by the S&P 500 index) in the following four months:

(1) NOTE: In yesterday’s post, I wrote that the return of the market since Obama was elected was -32.1%. That reflected yesterday’s close on March 5. However, that is four months and one day (election day was November 4 and is the day of comparison, since it is still not known at the market close that day who will be elected). Here that extra day is removed to round it to four months exactly.

How about the first six weeks after inauguration?

There is nothing scientific about this. There are many factors that may arise that affect stock prices which are beyond the control of the presidency. But this does give some indication that absent these factors our newly elected president’s policies are not viewed favorably by people or institutions who would invest in the American economy.

After five continuous days of losses in the American stock market, President Obama had this to say in the Oval Office on Tuesday:

The stock market is sort of like a tracking poll in politics. You know, it bobs up and down day to day. And if you spend all your time worrying about that, then you’re probably going to get the long-term strategy wrong.

Up and down? How about just down. As of it’s close today, since the stimulus bill passed the Congress, the market (S&P 500) is down 17.5%. Since inauguration, it is down 17.8%. Since Obama was elected, it is down 32.1%. Remember that all this is after its drop following the financial meltdown. Between September 14, 2008, when Lehman filed for bankruptcy and Merrill Lynch was sold to BofA, to election day, the market had already lost 19.6%. Obama has been an even bigger burden to investors than the financial meltdown.

So Obama has lost us 32.1% in the four months since election day. When was the last time that the stock market lost this much in four months? That big crash back in 1987? No. The bear market of 1973-74? Uh-uh. The last time was in the last four months of 1937. Think about that.

How about this, Mr. Obama: if you look at the stock market and it loses a third of its value in the four months since you were elected our chief economic strategist, then you’re probably getting the long-term strategy wrong.

And your insensitive comments about the “investor class", after all your giveaways to the debtor class or mortgage delinquents, really pisses us off.

He also said this:

Profit-and-earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.

The fact that they’re not a good enough deal for people to buy them means you are doing something terribly, terribly wrong.

According to the Washington Times, Allan Meltzer, an economist teaching at Carnegie Mellon University, refuted Mr. Obama’s characterization of the market as fluctuating:

The stock market has not been ‘up and down’ since January 20. It is mostly down substantially. And it falls especially on days when the administration announces its plans and proposals. A wise president would not dismiss this vote of no confidence … The administration and the Congress propose to redistribute a large share of income from upper to middle- and lower-income groups. They have set off a race between the tax rate, the inflation rate, and controls. I believe all three will win the race.

You better right this ship fast, Mr. President. My life savings are going down the drain, through “no fault of my own", as you would put it. And I blame you.

Bob Casey, U.S. senator from Pennsylvania:

I was asked recently by a reporter — a couple of different reporters, actually — who said to me very simply — or asked me, I should say, very simply the question: Are we in recession?
I answered them without blinking, without even stopping to think, because I know it is the truth, and the answer is yes, we are in a recession. I don’t care about, nor do I need to wait, for some academic dissertation or some economist to tell us what is the textbook definition of a recession. We are in a recession.

Well, well. So where does Sen. Casey get this information? While the rest of us DO wait for the facts before passing judgment on the state of the economy, the vitality of a patient, the verdict of a court case, or the results of an election, apparently Casey is all-knowing or has a magic 8-ball that works every time.

Or maybe, like so many myopic individuals, he takes anecdotal evidence to be conclusive, and what he sees in his travels around Pennsylvania or Washington DC, he extrapolates to the whole country.

Unless he has visited every state, every county, every business, at some point he must rely on statistics. And where does he get those from, if not from economists? He must also have enough information to make the judgment of whether such statistics indicate a recession as the word is acceptably defined. Otherwise, he is replacing what is known as a definition for recession by most people and replacing it with his personal definition.

Well, what if someone had done that when he ran for Senate. Specifically, what if the Pennsylvania Secretary of State said at the time: “I not need vote tallies or mere voters to tell me who won this election. Rick Santorum won.” Should we have listened to the SOS if he had said this? No. So should we listen to Casey’s opinion on whether we are in a recession? Of course not.

Economic stimulus is intended to expand the economy, not grow it. The difference?

Suppposedly, the problem is that the economy has enough infrastructure (plant, equipment, etc.), but that the amount of consumer demand has contracted and is not using it all. The factory has enough equipment and workers to produce 10,000 laptops a month, but they are getting orders for only 8,000. If consumer demand is increased such that they order another 2,000 (or less), the business does not need to hire more workers or adjust any fixed or variable costs such that they would need to raise prices. The economy can just expand back to its current capacity.

But there is also the possibility that the economy is at full capacity. A recession occurs if the economy does not GROW (i.e. real GDP growth) for two full quarters. And the concern about recession has occurred because of a concern about increases in real GDP (or consumer spending, an underlying factor). But real GDP growth has two components: (1) an economy expanding towards its capacity; (2) increases in investment and productivity which grow the capacity of the economy. So from one year to the next, an economy operating at 95% of 100% capacity could have 5% growth without new investment (beyond replacement) or productivity gains, due to expansion. Or an economy at 100% capacity could have 5% growth by increasing the capacity of the economy by investment or productivity (resulting in an economy that is now 105% the capacity of the former). Similarly, a recession (negative growth) could happen because of contraction (from using 100% to 95% of 100% capacity) or because of lower total capacity (95%) still operating at maximum capacity (100% of 95% is now 95% of what it used to be).

So what could be happening in the economy now is that the economy is still running at full capacity, but that the capacity itself is not growing (therefore, no real GDP growth). This happens if there is a structural issue with the economy, or losses in productivity or negative investment spending (beyond replacement). Given the nature of the current crisis, an adjustment in the risk expectations of consumer credit, this seems logical. It is not a cyclical contraction. It may seem like that because cyclical solutions usually involve giving consumers money and that would appear to cancel out the tightening of consumer credit, the structural changes in the economy are happening (or have happened) in the sense that banks are adjusting their procedures to demand more proof of viable credit from consumers. So the total capacity of the finance sector is going to contract and the total economy will not grow (or not much).

Any efforts at general stimulus will therefore result in consumers spending funds in all sectors, most of which are at full capacity. There is not enough slack in the economy. This excess demand will thus cause price increases. Here is some proof. First, the unemployment rate is at 5%; there are very few workers out there to be hired:

Most unemployment right now is frictional, with some structural elements due to shifts in the financial sector and other areas that need adjustment; there can not possibly be enough cyclically unemployed to be snatched up by employers in industries reponding to an increase in consumer demand. Second, capacity utilization figures also point to levels that are high:

Undoubtedly, both of these graphs appear to indicate changes in capacity that in earlier periods foretold of a coming recession. That is not in dispute. The point is that since it is a structural problem, capacity levels are such that it is difficult to see how stimulus would result in higher GDP growth instead of higher prices.