I hope the U.S. economy isn’t like my old Massey Ferguson 165 tractor. Last week, I began using it after it had been parked all winter. It fired up just fine at first. But once it had to work hard, it would sputter episodically and would pull only if I continually nursed the choke. (Yes, I should have bought a diesel, but that is another column.)
The most recent data from the SP Case-Shiller survey of housing prices is another sign the U.S. economy is having similar problems getting going. The most recent data, for March, indicated declines for 13 of the 20 metropolitan statistical areas surveyed.
The Minneapolis-St. Paul area, which includes Pierce and St. Croix counties in Wisconsin, showed the second-worst drop at 2.7 percent for the month. This is the sixth consecutive month in which the index showed some drop for our metro area. However, prices in March were still 6.5 percent above a year earlier, as the gains from April through September last year have not been completely erased.
Prices for a composite of the 20 metro areas included in the survey also edged down for the sixth month but remained slightly above where they were a year ago. The overall conclusion is that while housing prices recovered somewhat in mid-2009, they are eroding again.
So what does this have to do with a 36-year-old tractor? The answer is that just as my usually reliable 165 would not run well by itself, the U.S. economy shows little evidence of growing by itself.
Yes, “cash for clunkers” gave a temporary boost to auto sales. A large tax credit and the Federal Reserve buying more than $1 trillion worth of mortgage securities to keep home loan interest rates at historic lows gave some temporary support to housing sales and prices. The Fed’s general flooding of the economy with new money has made stock markets look healthier than underlying conditions warrant.
But just as my Massey would die away as soon as I pushed the choke back in, any withdrawal of government stimulus seems to make the economy sputter. And just as my tractor did not have much pulling power while I jockeyed the choke to keep it from dying completely, the U.S. economy is anemic in terms of job growth. All that can be said is that some indicators show employment conditions to be marginally less bad than in 2009.
My problem was that the gasoline-ethanol mixture in my fuel tank had sat there since October, absorbing moisture. The U.S. economy absorbed problems over six years rather than six months. They include a massively unsustainable run-up in housing construction and prices, a banking sector that is riddled with bad loans from top to bottom and a decade of large federal deficits.
I was able to cure my tractor’s problems by draining 12 gallons of old gasoline, ethanol and water from the tank and refilling with new gas and a can of additive to clean out the carburetor.
But there is no simple fix for the U.S. economy. The hangover of excessive money growth, overbuilding, inflated real estate and financial asset prices, bad investments and an inflation-adjusted doubling of the national debt between 2001 and 2010 is one that cannot be cured with aspirin or a can of gas treatment. It simply will take time, years rather than months.
If I didn’t fiddle with the choke just right, my tractor would die completely. The U.S. economy won’t die completely, but it will sputter whenever monetary and fiscal policy are not calibrated perfectly. And six decades of experience with using Keynesian policies to manage economies proved that perfect calibration is impossible.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.