Posted by Joseph Y. Calhoun, III

The handicapping of the March payroll report has already begun and expectations are rising:

March 10 (Bloomberg) — The U.S. may add as many as 300,000 jobs in March, the most in four years, setting the stage for what some economists say will be sustained employment gains.

Better weather, hiring of temporary government workers and a growing economy may bring the biggest job increases since March 2006, said David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The rise would be the second since President Barack Obama took office in January 2009.

February payrolls dropped by 36,000, the Labor Department reported last week, depressed in part by East Coast snowstorms that closed many businesses. Excluding the effects of the weather and the hiring of government workers to conduct the 2010 Census, payrolls would have climbed by about 100,000, Greenlaw said yesterday in a Bloomberg Radio interview.

“If you get a plus 100,000 number again in March, then you’d be talking about a headline reading of a little bit better than 300,000 when you factor in the weather bounce-back and the census effect,” he said.

Later in the article Bruce Kasman at JP Morgan is quoted as expecting 200 -300k and Jon Hatzius at Goldman recently raised his estimate to 275k. Joe LaVorgna of Deutsche Bank is expecting to average 300,000 for the next few months:

“We have overcut inventories, we have overcut capital spending and we have overcut jobs,” said LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. A March payroll gain of as much as 450,000 “can’t be ruled out,” he said, and further increases are “going to convince people of the sustainability and durability of the recovery.”

Regular readers know that I’ve been among the more bullish since the low last March. I never thought the economy was that bad to begin with and if Paulson, Bernanke and especially Bush hadn’t panicked, I don’t think we would have ever seen the type of job destruction we did. Of course that can’t be proved but I think if we start getting some rapid job growth soon, that view will be at least partially vindicated. Productivity has soared throughout the recession, something which isn’t normal for a recession, demand has been amazingly resilient given the circumstances and now we’re starting to see investment come back. The only piece left is for hiring to pick up and like these economists I think we’re on the verge of that as well.

Having said all that, if the market continues to rally into the March payroll report, we could be setting up for a major disappointment if the numbers aren’t big. In fact with expectations this high so far from the report, expectations will probably continue to rise and a disappointment then becomes more likely. Of course that assumes the market continues to rally into the report. I am bullish on the market and the economy so that is what I expect but I have to say, I don’t much like all these people agreeing with me.

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Posted by Joseph Y. Calhoun, III

If you want to know why the UK economy is in such bad shape, reading this dribble from David G. Blanchflower, former member of the MPC, should be enlightening. He is quite concerned that governments will get a clue and cut spending. Since he reveres Keynes that is seen as tantamount to economic suicide:

March 10 (Bloomberg) — John Maynard Keynes wrote during the Great Depression that only “fools and madmen” will tell you “the path of escape is to be found in strict economy.”

Several countries have now started “strict economy,” or fiscal tightening, after the biggest financial crisis since World War II. The most obvious examples are Greece and Ireland. Portugal has released plans to cut its deficit to 2.8 percent of gross domestic product in 2013 from 8.3 percent this year by reducing spending on civil servants and public investment, and raising taxes on high incomes and stock-market gains.

Any cuts in spending need to be dependent on evidence of growth in private industry. Growth is what will generate an increase in tax revenue. A sensible proposal would seem to be that the fiscal and monetary stimulus should continue at least until half of the loss in growth since the start of the recession has been re-established. Later is better than sooner.

In Blanchflower’s view of the economy, further debt is the only cure for the pain wrought by excessive debt. If you find that a bit confusing that’s because you obviously haven’t read John Maynard Keynes. Or it could be because you have - The General Theory is hard read. Here’s one area where the Keynesians go wrong:

All this talk of fiscal retrenchment is too much, too soon. Cutting public spending will increase unemployment, unless monetary policy can be loosened to compensate, and there seems little leeway to do that.

Well, I’d have to agree that tightening the fiscal purse and not offsetting it with a loosening of monetary policy would likely lead to another dip in the economy. But why is monetary policy constrained? It is constrained because of the huge current fiscal deficits. Central banks do not want to be seen as enabling the government spending by monetizing the debt and so must run a tighter policy than they normally would to compensate. If the fiscal deficits were less - or even better eliminated - then the central bank would have the leeway to accomodate the demand for money and prevent deflation. Any positives from a deficit financed fiscal stimulus will almost totally be offset by a tighter monetary policy.

There is a price to pay for the past profligacy of governments and individuals, both of which ran up debts spending more than they could afford. The price can be paid in several ways but it must be paid. If you use fiscal policy to try and improve the economy you just make the problem worse. The debt that is the source of the problem just grows larger and any positive effects are largely offset by the central bank running a monetary policy that is tighter than it would otherwise be. They have to do that to maintain market credibility on inflation. If the market perceives the central bank as monetizing government debt it is game over. On the other hand, if you use monetary policy to stimulate demand, the debt doesn’t rise and the economy will respond through a rise in exports via a lower exchange rate. This isn’t perfect since you get higher inflation and more malinvestment but it is better than deflation and it is better than fiscal stimulus.

If Mr. Blanchflower is typical of the thinking of the MPC in the UK it is no wonder their economy is in such sad shape.

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Posted by Joseph Y. Calhoun, III

That’s what this Bloomberg article seems to imply:

March 10 (Bloomberg) — The political consensus may be that President Barack Obama’s handling of the economy has been weak. The judgment of money in all its forms has been overwhelmingly positive, and that may be the more lasting appraisal.

One year after U.S stocks hit their post-financial-crisis low on March 9, 2009, the benchmark Standard & Poor’s 500 Index has risen more than 68 percent, and it’s up more than 41 percent since Obama took office. Credit spreads have narrowed. Commodity prices have surged. Housing prices have stabilized.

“We’ve had a phenomenal run in asset classes across the board,” said Dan Greenhaus, chief economic strategist for Miller Tabak & Co. in New York. “If he was a Republican, we would hear a never-ending drumbeat of news stories about markets voting in favor of the president.”

The economy has also strengthened beyond expectations at the time Obama took office. The gross domestic product grew at a 5.9 percent annual pace in the fourth quarter, compared with a median forecast of 2.0 percent in a Bloomberg survey of economists a week before Obama’s Jan. 20, 2009, inauguration. The median forecast for GDP growth this year is 3.0 percent, according to Bloomberg’s February survey of economists, versus 2.1 percent for 2010 in the survey taken 13 months earlier.

And what exactly has President Obama’s administration done that warrants credit for the improvement in the economy? The stimulus package? That’s an ongoing disucussion and those who approved of it beforehand claim it has done wonderful things and those who didn’t approve (including me) say it has provided marginal support at best if not an outright headwind to the economy. Economists can’t agree on the impact, but the public has decided that it was ineffective. Why? Well, my guess is that the various corruption scandals surrounding politicians at all levels means that the public just doesn’t trust anyone in government to tell the truth about the impact. Indeed we have reached a point where if a politician says one thing, the knee jerk reaction of the public is to believe the opposite. In other words, the trust deficit is why Obama gets no credit for any stimulus effects. Effective or not, the public doesn’t trust the administration to tell the truth.

All of the things cited above can actually be credited to the Fed’s efforts. It isn’t coincidence that the economy started to improve at the same time the Fed announced their Quantitative easing program last March. It was around the same time that Geithner announced his stress tests and later the PPIP, but the stress tests were a joke and the PPIP is basically non existent. Call that another strike out for the administration.

I am willing to concede only that the stimulus has had a minor effect, primarily on disposable income due to the tax rebates. Everything else the administration has done has been, at best, ineffective and at worst a hindrance to recovery. Cash for clunkers merely pulled auto sales forward and paid people to do what they would have done anyway. The same is true of the first time home buyer’s tax credit. We are experiencing the hangover from both those programs right now and it should be noted that the economy hasn’t fallen back into recession because cash for clunkers expired. And it won’t fall back into recession when the tax credit expires.

Obama’s approval rating isn’t in the toilet because of what he has done. It’s in the dumper because of the things he’s tried to do but failed at - so far - such as health care reform and cap’n trade. If he actually had passed those two pieces of legislation in the form preferred by the Democratic Congress, there wouldn’t be a debate about who gets credit for the recovery because there wouldn’t be one.

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Posted by Joseph Y. Calhoun, III

From Cato, Six reasons to downsize the federal government. Here’s the first three:

1. Additional federal spending transfers resources from the more productive private sector to the less productive public sector of the economy. The bulk of federal spending goes toward subsidies and benefit payments, which generally do not enhance economic productivity. With lower productivity, average American incomes will fall.

2. As federal spending rises, it creates pressure to raise taxes now and in the future. Higher taxes reduce incentives for productive activities such as working, saving, investing, and starting businesses. Higher taxes also increase incentives to engage in unproductive activities such as tax avoidance.

3. Much federal spending is wasteful and many federal programs are mismanaged. Cost overruns, fraud and abuse, and other bureaucratic failures are endemic in many agencies. It’s true that failures also occur in the private sector, but they are weeded out by competition, bankruptcy, and other market forces. We need to similarly weed out government failures.

Go read the rest here and also visit DownsizingGovernment.org