James Pethokoukis of Reuters reports that we might see the current administration use the Bush-era HARP program to forgive hundreds of billions in bad mortgages. The bailout would not require congressional approval, since the money would go to Freddie and Fannie. Both of those entities have no ceiling on their bailout amounts. Unemployment is heading back up, GDP growth is sluggish, and Obama’s numbers are low. Three reasons why we might see an August Surprise.

Cash for Clunkers, the one-off housing credits, and the hiring for the census all boosted the economy and put dollars into it to increase AD. However, all those programs have ended. The car industry is still in a mess. There is still a 40+ month supply of houses and new home construction is very low to non-existent. Unemployment remains above 9% and would be much higher without birth/death adjustments arbitrarily placed on the figures. (One of the B/D adjustments is to automatically fudge in an increase in housing construction and hospitality jobs during the late spring and summer. Both of these increases account for almost all of the job growth in recent months. Data show that housing construction is very low and the hospitality sector is enduring a very rough season, meaning those B/D adjustments are misplaced in the jobs environment of 2010.)

What the increase in G has accomplished is, following a temporary statistical boost, no net gain to GDP, an increase in the federal government’s share of total USA indebtedness, and an increase in USG interest payment obligations. The net impact of the increased spending was zero.

That doesn’t mean the government should cut all programs: that’s a recipe for a disaster of a different sort. But so-called stimulus programs will stimulate the economy only as long as they are in existence. We saw the same thing in Depression-era programs. If the fundamentals of the economy remain troubled, as they do in the wake of severe asset devaluation recessions, no amount of stimulus spending will get the economy back on its feet permanently. Put another way, a true Keynesian solution means regulating the economy to prevent it from melting down in the first place, thereby keeping the fundamentals in the banking and finance sector sound enough to provide a foundation for further recovery. In those cases, government stimulus can help reduce the impact of a short recession.

The BP oil spill in the Gulf of Mexico remains a terrible problem and its pollution will have an impact on wildlife for decades. It’ll also wipe out competition for the major oil companies, giving the majors even more power over the US energy market. The US (and other big nations) will make stiffer regulations for pollution controls and the only players that will be able to afford them will be the major oil companies. They’re the ones that pollute the most, and they’re the ones that benefit the most from wrecking the environment. They have enough money to hire lobbyists to assist in writing the legislation that will go before Congress. They’ll get their way, all thanks to the BP disaster.

On the AP Economics discussion list, a teacher mentioned how he teaches the concept of externalities – costs or benefits that happen to someone not party to an economic decision – with a discussion about smoking in public places. He mentioned he was glad that public smoking bans, when passed, are followed by a dramatic drop in heart attacks at local hospitals. He then lamented a recent repeal of such a ban.

Another person responded with praise for the repeal of the ban, indicating it to be a victory for freedom in his view. This is known as a “normative” statement in economics. Normative statements imply a value or other judgment. Positive statements in economics merely describe conditions, regardless of value. “Unemployment is at 9.7%” is a positive statement, for example.

Anyway, I had to respond to the idea of smoking as a freedom for one and all to enjoy. Here’s my response…

***

Ah, the glories of the normative arguments of freedom in issues regarding externalities! But for every normative argument, there is at least one equal and opposite normative argument, so let’s explore the issue.

If the smokers aren’t paying the medical bills of the people they impact, that’s one massive externality. If the cost cannot be passed on to the smoker through increased taxes, banning the activity reduces the extent of the externality and its impact.

If I claim to get pleasure from placing unshielded high-grade uranium ore on the table in front of me (and go to www.unitednuclear.com to order your hunk today!), and then go to a restaurant and sit next you with my hunk of unshielded 31,000-50,000 CPM pitchblende, you might have one of several legal reactions:

1. You might decide it’s my right as an American to enjoy the pleasures of uranium wherever I go. You endure the beta and gamma radiation and bear an increased chance of cancer from that moment forward. If it’s a big meal, you might develop radiation sickness within a week.

2. You can decide that if I’m gonna irradiate the room, I can pay for it, as well. Results are as in 1, but we now have a civil suit regarding who pays your medical bills. Since I’m already wiped out from paying for my own treatment, your lawyers advise you to pay your own. You’re now out the cost of your combined legal and medical bills.

3. You could also go after the company that sold the uranium ore. When you go to http://unitednuclear.com/index.php?main_page=product_info&cPath=2_4&products_id=463, you discover a disclaimer that your lawyers tell you is sufficient for their coverage. Since I used the uranium in a manner inconsistent with their instructions, they’re clean. Results as in 2, but with a much lower legal bill – probably just $50 for the initial consultation.

4. You could charge me with aggravated battery. That would at least get me off the streets with that radiation rock. Assuming your case prevails over my cries of, “I didn’t know! I was intoxicated! He got cancer somewhere else! I was eating Twinkies!”, I pay an economic price for my crime of injuring you by being put in jail for a period of time.

5. You could retaliate by lighting up a cigarette and giving me a taste of my own medicine. Freedom is freedom, right?

6. You could work with other like-minded individuals to pass a law that criminalizes possession or transport of unshielded radioactive materials. I can’t even have them in my own home under the statute. I grumble about it, move to a trailer home in a remote location, put barbed wire around my home, and continue using it in solitude. The small-town cops out there choose to tolerate my activity rather than follow a path of strict enforcement. I still injure myself and, if indigent, society bears the cost of my treatment, but the law has reduced the risk to others.

Exposing people to chemicals that will knowingly injure or kill them forces them to bear the costs of an economic decision they were not party to: it should therefore be their legal right to take proper recourse to reduce their exposure to those chemicals. In so doing, they enjoy the freedoms associated with a healthier lifestyle than one impacted by second-hand smoke. And, truthfully, I think we can all be happier with the statutory option than with the nuclear one.

Now that I think about it, maybe there are a few guys out there planning the nuclear option… better start passing some laws!

As I read the news this morning, I came across a story about how a supposedly independent government agency, wasn’t. The Prime Minister was upset about the high unemployment numbers, so five minutes before he had to face questions in Parliament, his bureaucrats redefined unemployment and submitted lower figures to him.

While this happened in England, it happens here in the States, too. One of the realities of US Government is that politicians can sometimes get the quick fix they want not through actual action, but through fiddling with the figures. That’s why I wish media would run more stories like this one. The job of journalists should be to scrutinize those in power, not to serve as proponents of ideological propaganda.

A Ponzi scheme survives so long as new buyers enter the scheme to support the skim the operator is taking and the payments to the people at the top of the pyramid. Once new entrants cease, the scheme collapses and a chase scene ensues.

Government debts require servicing, and servicing those debts with increasing government payout demands for other programs depends upon a growing economy. Economic growth depends upon two factors: productivity increases and population growth. In Europe and Japan, populations are on a reverse course overall. Birth ratios in those regions are lower than what is required to maintain a steady population. That means, as the populations decline there, their government spending programs will be unsustainable without unprecedented levels of productivity increases.

The USA has a similar situation, but immigration flows help to sustain the growth in the US population. Immigration flows bring in other issues, and the current mood among many Americans is to implement tighter restrictions on illegal immigration. Legally, that makes sense. After all, illegal immigration is illegal. Cutting it off will have economic consequences in reducing the growth of the US population and thereby reducing its overall capacity to grow.

I’m not advocating opening the borders and letting everyone just show up in the States, looking for a job. I’m just pointing out that there is a cost for everything. Restricting immigration can lead to a decline in growth, which can be a contributing factor to increased unsustainability of government programs. Cutting those programs themselves will also depress overall demand, putting a state in deeper economic woes.

Something to think about.

Why is there a question of the US bailing out Europe? The answer is simple: Bankers.

If the US doesn’t help bail out Europe, the bankers lose their shirts. If the US does help bail out Europe, then they get paid.

Need more proof that the bankers have a hold on the US government? The Republicans are blocking the Merkley-Levin amendment in the Senate. That amendment is the “Volcker Plan,” which would keep banks from wrecking the economy the way they did in 2008. Banks don’t want that, and their chorus in the Republican ranks is singing their tune.

Greece is having hard times. The Greeks hope they can export more stuff in order to earn more money.

The problem is that Greece isn’t the only nation trying to export and run a current account surplus. It’s not even the most successful of the neo-mercantilist states: look to Japan and China as champs in those roles. The US wishes it could export more stuff, though, and resents the way China keeps exporting everything from inside its borders that isn’t nailed down.

That’s the danger sign: resentment in trade issues. When the world economy is going through hard times, some nations can weather the storm better than others by running a current account surplus. It’s just that for every current account surplus, there has to be an equal and opposite deficit somewhere else. When the nations in deficit despair of ever running a surplus, they can turn to protectionist trade policies to at least stop running up the deficits.

When the protectionist barriers go up in one place, other nations follow suit to the point where world trade is choked off and no nation is running a current account surplus and all nations endure the brunt of those hard times.

It happened in the 1930s. There’s a possibility it happens in the 2010s. And when it does happen, it does not help the nations that ran a huge trade deficit – because there goes their current account surplus that was investing in their nation.