Pyrrhic Stimulus

Posted On Nov 1, 2012 By Addison Wiggin

November 1, 2012

  • As sure as sunshine follows a hurricane: claims of “economic stimulus” from Sandy reconstruction…
  • The scam of flood insurance, the folly of GDP numbers and other debris left behind by the storm…
  • A spike in dividend cuts, at the same time special dividends surge: Kelly Green unpacks a seeming contradiction…
  • Spain’s stunning discovery… France’s relentless punishment of beer drinkers…
  • “I’m starting to take you less seriously”… readers unleash “War on The 5“… and more!

  “Disasters,” writes the bow-tied celebrity economist Peter Morici, “can give the ailing construction sector a boost, and unleash smart reinvestment that actually improves stricken areas and the lives of those that survive intact.”

Oy… Hurricane Sandy appears to be having a number of perverse effects…

  • Knight Capital — the outfit that sent more than 100 stocks on wild swings in August thanks to a “software glitch” — ran into generator problems at its New Jersey headquarters yesterday and couldn’t execute orders from brokers
  • ADP accidentally released revisions to its September jobs report a day early — about which more below
  • And economists who should know better are playing up the storm’s “stimulus” effects.

Look! It’s a boon to the auto industry!“Rebuilding after Sandy,” Mr. Morici writes at Yahoo Finance, “especially in an economy with high unemployment and underused resources in the construction industry, will unleash at least $15-20 billion in new direct private spending.”


  Mr. Morici is hardly alone. “You certainly don’t want to get a stimulus out of disaster,” adds Mesirow Capital’s Diane Swonk, “but they certainly do tend to stimulate.

“Much of it is infrastructure spending,” she tells MarketWatch, “so the subways, the electrical grid, the downed power lines, the roadwork, the overtime on that. That’s the initial stuff that’s done immediately, along with window replacement.”

Window replacement?


  “The broken-window fallacy,” wrote Henry Hazlitt in his 1946 gem Economics in One Lesson, “under a hundred disguises, is the most persistent — and rabble-rousing — misunderstanding in the history of economics.”

Taking his cue from the 19th-century French economist Frederic Bastiat, Hazlitt tells the story of a vandal who breaks a bakery window. The baker supposedly stimulates the economy with his purchase of a new window. Never mind that he’d hoped to buy a new suit with the money and the glazier’s gain is the tailor’s loss.

“No new ’employment’ has been added,” Hazlitt sums up.

100  Here, the clumsy Morici, likely aware of this reality, tries to justify his position by pointing out that many storm victims will “rebuild larger than before.

“On the shore,” he says, “older smaller homes on large plots are replaced by larger dwellings that can accommodate more families during the summer tourist season. The Outer Banks of North Carolina saw such gains several decades ago after rebuilding from a storm of similar scale.”

  Um, wait a minute: Aren’t many of those homes “on the shore” insured by the federal government?

Why yes, they are: “Four months before Hurricane Sandy hit the East Coast,” Ira Stoll writes at Reason, “President Obama quietly signed legislation expanding the federal program that offers taxpayer-subsidized flood insurance to oceanfront homeowners.”

Now multifamily dwellings are covered in addition to the single-family variety. It’s right there in the catchall “transportation bill” that links your passport to your back taxes and requires a “black box” in all new cars.

Rebuilding “bigger and better” will take place with money taken out of a taxpayer’s pocket and put into the pocket of property owners who built in a flood zone.

“Net-net,” we’re still no better off.

  “For the umpteeth time,” writes Jeffrey Tucker at Laissez Faire Today, “there is no upside to wealth destruction. But try telling that to the folks who calculate GDP.

“It is very likely the Sandy will be given credit for any fourth-quarter fake economic growth. After all, that’s how government affects the GDP. The more it spends, the higher economic growth appears to be.”

Look at the GDP figures that came out last Friday. We pointed out then how government spending accounted for most of the “growth.” Indeed, economists at George Mason University’s Mercatus Center figure it’s the biggest quarterly increase in federal spending in two years.

And it gets worse: Private-sector production — the stuff that doesn’t get shifted from one pocket to another, or is run up on Uncle Sam’s no-limit card — is falling.

“This is not economic growth,” says Mr. Tucker. “No matter how many economists tell us that the storm will inspire all kinds of new and wonderful things, this storm has been a disaster and a serious blow to the economy when we least needed it.”

  We’re tempted to take up a collection and send our four-volume “Economics in One Library” set to 100 random economists to try to shake some sense into the profession.

Unfortunately, we’ve become adept at recognizing lost causes as soon as they pop into our heads…

What we can do is put this set in your own hands so you’ll have a chance to talk sense into your neighbors who might spout the same fallacies. The set includes…

  • Henry Hazlitt’s Economics in One Lesson
  • Frederic Bastiat’s The Law
  • Garet Garrett’s A Bubble That Broke the World
  • Freidrich von Hayek’s A Tiger by the Tail.

The first two titles are timeless classics. The other two are less well-known… but they offer keen insights to the crises of their era (Garrett’s volume is from the 1930s, Hayek’s from the 70s) and you’ll instantly recognize how history is rhyming, if not repeating, today.

Each volume has new forewords by authors like Robert Murphy, Keynes-vs.-Hayek video creator John Papola, our own Chris Mayer and Agora Inc. founder Bill Bonner.

We’ve made it possible for you to get all four volumes — not e-books, but bound the old-fashioned way — absolutely free. Details here.

  Stock traders have donned their rally caps this morning. At last check the Dow and the Nasdaq were both up about 1%. Gold is flat at $1,719.

For the moment earnings have taken a back seat to economic numbers. Consumer confidence as deduced by the Conference Board is at its highest since February 2008. And there’s more…

  U.S. factory activity expanded last month, according to the October ISM manufacturing survey out this morning.

With 50 as the dividing line between expansion and contraction, the number came in at 51.7. That’s two consecutive months of growth after three straight months of shrinkage.

A similar report from China overnight crossed the line from contraction in September (49.8) to expansion in October (50.2).

  Also on the radar this morning: Two measures of the jobs market in advance of tomorrow’s nonfarm payroll report from the Labor Department…

  • First-time unemployment claims: Down 9,000 last week to 363,000. It amounts to statistical noise; the four-week moving average is again nearly unchanged
  • Private payrolls: Up 158,000 last month, in the estimation of the payroll firm ADP. ADP made a big deal about its new-and-improved methodology starting with this morning’s report. But yesterday it accidentally released revisions to the September number — revisions to the downside. But that’s now a distant memory with October’s semi-robust figure.

And yes, the Labor Department will issue its October jobs report on schedule tomorrow morning; no Sandy-related delay as was suggested earlier in the week.

  “September saw the most dividend cuts since August 2009,” writes Kelly Green of our income desk.

And yet… “We’re also seeing more special dividend announcements than anytime except the last two months of 2010.” She says the October total should prove even more dramatic.

“So far, 139 companies have issued special payments this year. There’s plenty of room before we hit 2010’s numbers. But most of those came in November and December of that year.”

The special dividends, and the dividend cuts, both spring from the same source — uncertainty over the fate of dividend tax rates come next year: Will they stay at 15%, or will they be taxed as ordinary income?

“Even in the worst-case scenario,” Kelly advises, “it’s not all bad news.

“According to Goldman Sachs, this debate should force the hands of a lot of companies to reward their shareholders by the end of the year. The bank notes that in the fourth quarter of 2010 — the original reset year — the number of special dividends issued by U.S. companies doubled what had been released in the previous 11 years.

“We suspect this year will be even better than 2010.”

Kelly has teamed up with our other dividend hound Jim Nelson to assemble a toolbox of techniques you can use to get ahead of the crowd. Begin here.

  From the Federal Department of Duh: A tax increase — an austerity measure, wouldn’t you know — helps shrink the Spanish economy.

While the Spanish mull through details of basic macroeconomics, “the economy,” The Telegraph reports, “which only emerged from the last recession at the end of 2010, has now contracted for five straight quarters,” according to data the National Statistics Institute.

Despite a shriveling economy, Prime Minister Mariano Rajoy is determined to hold off on outside help. “It’s not essential at this moment,” he said at a press conference. “I will do it when I think it is in Spain’s best interest.”

Instead, he decided it is in Spain’s best interest to increase the value-added tax (VAT) from 18% to 21%… causing the economy to shrink 0.3% and unemployment to hit a new high of 25.1%.

A shocking revelation for Spain: the correlation between taxes and economic activity.

  While Spain tries to squeeze blood from shale, Francois Hollande targets the lesser of two French pastimes: beer.

In another half-hearted attempt to keep their own heads above water, the French government is pushing to increase taxes on beer by 160%. Fortunately for the black market, governments still haven’t learned the power of unintended consequences. Smugglers, start your engines.

Although beer represents only 16% of France’s alcohol market, “This measure will affect all brewers, including small entrepreneurs” the head of Brewers of Europe told AP.

This glass is half-empty…What’s more outstanding? Hollande’s efforts to raise €480 million ($623 million) aren’t to reduce the ever-expanding deficit. Instead, they’re to boost existing social benefits.

The Brewers of Europe scream that beer is being “singled out” compared to wine and are calling this measure a “kick in the teeth,” and they might be right…

Who in their right mind would mess with the French when it comes to their wine?

  The 5 used to be pleasant reading every day,” a reader writes. “Alas! Not anymore. It has turned into a collection of photos of your editors and a pile of lengthy and stupid topics.”


We’ve received a number of emails like this in recent days. So much so we’ve dedicated special folder in the inbox to them. We call it: “War on The 5.” A selection of the more civilized messages follows…

  “I’ve been a subscriber and an avid reader for almost two years,” reads another entrant, “I’ve paid two subscriptions, but I’m starting to take you less seriously.

“Not at all for content,” the reader goes on. “You tackle current issues with voracity, oftentimes before they appear in the press (are we surprised?). However, you’ve sunk into a lot of hyperbole and long-winded essays on why I need to read and buy the next ‘generation’ of information.

“And you’ve become a bit political. Not that politics in this day and age can be avoided. However, you’re becoming a bit smug. I want to hear the ‘punch line’; not many and many paragraphs of why I should read the ‘punch line’… which often leads me to another sales pitch to buy another series connected with or recommended by The 5.

“I actually work and am highly capable of understanding the juste of the presentation. I don’t need many minutes of reading to qualify the speaker — nor the concept. I just want the facts. If I didn’t believe in your ideas and your assessment of things, I wouldn’t subscribe to The 5. Unfortunately, outside of your mounting sarcasm, I’m more and more led to links that spend enormous amounts of time building the ‘drama’ of their presentation prior to getting to the point.

“Please, don’t misunderstand me. I really like The 5.

“However, you are becoming a bit too comfortable with your writing chair. You are not writing to friends. You are exchanging ideas with a select public that values and digests your ideas in a complicated and multimessage communications environment.

“Get back to where you were and quit making The 5 a maze. I have enough of that with the daily press, of which I follow The New York Times, the LA Times, The Economist… and YOU.”

The 5: We pause here for a breather.

[Sound of reader panting.]

  “I’m a single mom,” the reader continues, “now approaching 62 years old. I put my son through USC with no student loans and support myself with the rental of four lovely middle-class residences in Sacramento (which I bought after the crisis), and I am most informed as to the regulations being imposed on the middle class, ‘never ask for anything from the government’ class. Sometimes you insult my intelligence. Just give your great message succinctly, and when you lead me to other links… please ensure that they will not insult my intelligence as well. Just get to the point.

“I read the news. I just need your valued assessment.”

  I do enjoy reading Agora Financial and glean much valuable insight beyond those financial/economic subjects that you opine upon,” writes another.

[We’re sensing a built up to the inevitable “but…”]

“Your thoughts on those nonfinancial issues are very entertaining and interesting, and lead to some understanding of human nature and some of ‘why’ things are the way they are, and will remain, human nature, what it is. Your between-the-lines point of views, and especially when you poke the autocratic establishment historians or sophomoric media for their slanted and biased writings, should be read by more than just your subscribers.


[There it is…]

“Your writings as of late seem to more and more resemble those of an arrogant elite. Sarcasm in one’s writing can be and is entertaining. In fact, I enjoy good sarcasm, which is only effective if there is a resemblance of some truth. That which you do very well. So my discord is not your opinions or the use of sarcasm. We agree on way more than those few differences. The writers are very good wordsmiths, and knowledgeable too.

“Being correct, or believing one is correct on a subject(s), should not entail fancying oneself on a pedestal.

“Love your publication. But sometimes it seems to be preachy. I think we get your good points without the perch.”

The 5: Can I get an amen, brother!


Addison Wiggin

The 5 Min. Forecast

P.S. The War on You,” writes a lone complimentary reader, “is the most important theme in your newsletter. It’s an indicator of a culture in collapse. Keep publishing these items.”

All is not lost… thank you.

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