Printing Presses Work Overtime to Save Economy

A long weekend is coming to an end in America. On Thursday we celebrated Thanksgiving day by consuming more than 250m turkeys. Millions watched the Detroit football team lose its eleventh consecutive match – it is headed for an all-loss 16-game season, its highly paid players emulating the Motor City’s auto industry, with its appalling managers, overpaid workers, bloated dealership system, and fleet of executive jets. President-elect Barack Obama has promised relief, at least for the carmakers, but even he can’t do much for the football team.

On Friday, 50m consumers trooped to early-opening stores to snap up bargains on what is known here as “Black Friday”, the day that legend has it (not quite accurately) retailers go into the black for the year.

The queues included thousands of small-time entrepreneurs. They arrive early to be first in the queue, snap up the few 42-inch television sets and laptops that are the shops’ lowest-priced teasers, and immediately resell them on eBay at a profit, trousering several thousand dollars in profit.

But Friday’s crowds did little to cheer retailers. Consumers who have lost their jobs, homeowners who have watched the value of their properties and pensions plummet, and workers who fear that the next pay cheque might be their last, are understandably disinclined to splurge, and are telling pollsters that they will not be as generous to themselves and friends as in Christmases past. In the third quarter, consumer spending dropped 3.7%, resulting in a rise in the savings rate, something policymakers only recently thought would be a good thing. Make them save, but not just yet, seems to be the wish of the St Augustine-like economists.

There has not yet been time for favourable developments other than falling petrol prices to affect consumer behaviour. The government’s decision to inject $200 billion to make consumer credit easier and cheaper came only a few days ago, as did the decision by the Treasury and the Federal Reserve to pump $600 billion into the mortgage markets. For consumers with good credit the move pushed rates on 30-year fixed-rate mortgages down by somewhere between half and a full percentage point, to 5.5%, and set off a frenzy of applications to refinance higher-rate mortgages.

It will be a while before those applications are processed, and some potential homeowners might decide that the new rates and lower prices make it possible for them to buy homes that are currently languishing in builders’ huge inventories of unsold houses. (Meanwhile, home sales continue to fall, and prices to drop – they are now about 15% below last year’s level.) Most people greeted these programmes with cheers, as credit markets did ease up, but a few wonder aloud whether it is a good idea to encourage borrowing to revive an economy that has been brought low by excessive borrowing.

The government has so far committed more than $7 trillion – $7,000 billion to old-fashioned readers – to a variety of efforts to kick-start the sputtering economy. That’s equal to about half of America’s annual output of goods and services. Money has been pumped into banks, insurers, mortgage markets, consumer and student lenders, with the line of supplicants lengthening daily. Obama has promised that his star-studded economic team will figure out how to save General Motors and troubled banks, succour the unemployed and get bridges, roads, schools, wind farms and solar installations built, printing however many billions of dollars are needed to create or save 2.5m jobs.

That has given share prices a lift, but not the real economy – at least not yet. Forecasters are wearing out their erasers and delete buttons in a rush to revise their forecasts downward. To cite just one example, economists at Goldman Sachs – you remember Goldman Sachs, the one-time master of the universe that has now sheltered in the arms of the Fed by becoming a garden-variety commercial bank – “downgraded our forecast yet again”. It now expects real GDP to fall at an annual rate of 5% in this quarter and 3% in the first quarter of 2009, and the unemployment rate to rise by almost 50%, to 9% late next year.

However, in my conversations with economists who have been worth listening to in the past I detect some scepticism about the consensus that we are in a tunnel in which no light is discernible. They sense unreasoned panic among consumers, related more to media fixation on share prices than to an appraisal of their own economic circumstances. The overwhelming majority are in work and are paying their mortgages on time. That is not to say that there is no real suffering out there. There is, especially among the unemployed. But this isn’t the 1930s, or even the early 1980s. These mavericks are predicting that the slide will abate by mid-2009, and a slow recovery begin later that year, or by early in 2010.

We are also witnessing the beginning of a fight-back against the idea that there is no limit to what governments can and must spend to turn things round. An increasing number of economists are concerned that keeping the printing presses on overtime might trigger the sort of double-digit inflation and 20% interest rates that Jimmy Carter willed to Ronald Reagan. Paul Volcker, chairman of the Federal Reserve Board at that time, and now the head of Obama’s new Economic Recovery Advisory Board, undoubtedly remembers the pain inflicted by the inflation he had to wring out of the economy in the 1980s. He just might be an effective voice for spending restraint – if he can make his voice heard over that of spending-advocate Larry Summers, the chairman-designate of Obama’s National Economic Council.

All of which proves one thing. At least for now, the job of allocating resources has moved from New York and other business centres to Washington. The government has decided that AIG shall live and Lehman Brothers shall die, and that GM will be allowed to survive only if it produces green vehicles. Not exactly what Adam Smith had in mind when he dubbed our profession “political economy”.