Thursday, April 15, 2010

Gross incoherence

There's no way to sugarcoat it: Daniel Gross is simply a very poor economics writer. He is to economics what the RPG is to Mogadishu architecture. His admiration for both statism and the dynamism of the U.S. economy inevitably results in contradictory and incoherent nonsense, so much so that I have assigned my critiques of his writings their own label. Less than a year after Newsweek let him author a cover story on the end of the recession, they've given him another:

Gross's premise, that the economy is recovering nicely, may well be correct. His explanation of why this is occurring, however, is based on logic which is faulty in the extreme. Note, for example, his contention that an economic rebound is taking place because the U.S. has taken a page out of Japan's playbook:
The recovery came quickly because the public and private sectors reacted with great speed. In the 1990s, Japanese policymakers deliberated and delayed before embarking on a program that included interest-rate cuts, a huge stimulus program, expanded bank insurance, and the nationalization of failed institutions. In 2008 and 2009 it took the U.S. just 18 months to conduct the aggressive fiscal and monetary actions that Japan waited for 12 years to carry out.
This might be a good point if Japan hadn't spent most of the past 20 years locked in an economic torpor. Just compare GDP growth rates between the U.S. and Japan from the early 1990s, when Japan kicked off its massive stimulus spending:

(click to enlarge)

As one can see, Japan underperforms the U.S. every single year beginning in about 1992, and ended up with little to show for its massive government spending efforts other than the largest debt-to-GDP ratio in the Western world. So why on earth should the fact that the U.S. is copying Japan's policy response on an accelerated schedule a good thing?

What's more maddening is that Gross actually tacitly acknowledges the failures of Japan's approach when, in the second paragraph of his story, he notes fears the U.S. could enter a "Japan-style lost decade." Does he think that Japan would have been a different story had it implemented all of its measures simultaneously rather than in piecemeal fashion? That's its lag time in implementation was the only thing separating boom from bust?

This isn't the only obvious contradiction in the column. Gross attempts to make the case the U.S. economy is position for renewed growth because of -- wait for it -- green jobs initiatives supported by government:
Now consider two interrelated systems: energy and auto manufacturing. In the past two years, the old policy of subsidizing housing and Wall Street has been replaced by a new one that seeks to boost national operating income through efficiency. Skepticism about the potential for millions of "green jobs" to materialize overnight is warranted. But in some areas, a process similar to the iTunes experience is developing. The Danish wind-turbine maker Vestas in recent years has announced investments of nearly $1 billion in wind-turbine-manufacturing plants in Colorado, which, when completed, will directly employ about 2,500 people.

But Vestas has also attracted a dozen-odd suppliers, including components producers like Aluwind, PMC Technology, Bach Composite, and Hexcel. And it's not just about the hardware. Renewable Energy Systems Americas, the largest manager of wind farms, moved its corporate headquarters to Broomfield, Colo., in 2008. Last month Colorado mandated that 30 percent of the state's energy be produced from renewable sources by 2020.
I'm always intrigued by stories of green energy successes, so I decided to dig a little deeper into Vestas. Turns out, business was so bad late last year the company had to furlough workers at its Colorado plant:
The Danish wind-turbine maker Vestas Wind Systems A/S plans to halt production at its Windsor blade manufacturing plant in the first part of 2010.

Vestas spokesman Peter Kruse says most, if not all, of the plant's 500 employees at the plant will be placed on furlough. No layoffs are planned. He says the move is a temporary setback.

Kruse says the first quarter of the year is historically slow, but credit markets are also tight and gas prices are relatively low. He says the company is building up slowly due to a lack of orders.
Fortunately for Vestas business has picked up, thanks to a recent order from Wisconsin. What's noteworthy, however, is why Wisconsin Energy Corp. ordered the windmills:
The wind farm will help We Energies meet the state’s requirement to get 10 percent of the utility’s power from renewable energy resources by 2015, [the company spokeswoman] said.
So the only reason the windmills are being ordered is because of government regulations which mandate their use, not because they make economic sense. Wind is more expensive than other types of power and is an example of doing less with more. Cited by Gross as a reason for the economy's turnaround, it's actually a sign of wealth destruction and should be properly viewed as putting sugar rather than fuel in the economic gas tank.

Moving along with the anecdotes, Gross cites developments in hybrid cars:
A similar dynamic is playing out in the wounded auto industry, in which even small gains in efficiency can produce big economic gains. Simply improving the mileage of the U.S. fleet by one mile per gallon would save 6.1 billion gallons of gas per year, or $17 billion at today's prices. To help the industry respond to a new mandate that the U.S. car and light-truck fleet reach average fuel efficiency of 35.5 miles per gallon by 2016, up from 20.5 today, the Energy Department is providing loans and loan guarantees to large companies—Ford has received $5.9 billion in loans to transform several factories—and to startups like Fisker Automotive.

Henrik Fisker, a veteran auto executive born in Denmark, started his eponymous company in August 2007 to produce a premium plug-in hybrid. "The U.S. is traditionally a nation of innovators, but the reason it makes the most sense to be here is because the consumer is also willing to take risks," he says. Fisker raised $250 million in venture capital, snapped up engineering talent on the cheap, and has tapped into the automotive supply chain, which is eager for new business. Last October the company bought a recently shuttered General Motors plant in Wilmington, Dela., for the knockdown price of $18 million. Armed with a $528.7 million federal loan guarantee, Fisker plans to spend more than $150 million retooling the plant. It's preparing to ship the first Karma (retail price: $87,000) to dealers by the end of this year.
In other words, the U.S. government is acting as a de facto venture capital fund to support the production of ridiculously expensive vehicles (basically subsidies for the rich to upgrade from their Priuses). All this, despite the fact that the federal government has no demonstrated capacity to identify the "next big thing" in innovation which will drive economic growth. But don't take my word for it, just ask Daniel Gross, who wrote this earlier in the column:
By definition, it's hard to identify the next transformative economic force—the next steam engine or interstate-highway system. White House economic adviser Larry Summers tells a story about the economic summit in Little Rock after the 1992 election. In the thousands of pages of briefing papers and policy briefs, one word didn't appear: Internet.
Gross certainly isn't ignorant, and given his lofty perch writing cover stories for Newsweek it would be unduly harsh to label him stupid. I am therefore left to conclude that his left-wing politics are almost religious in nature, impervious to facts he himself acknowledges. It's truly something to behold.

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