KC Fed Financial Stress Index => Still low U.S. Financial Stress in October 2012

The Kansas City Federal Reserve calculates a monthly Financial Stress Index (here).  See the following description to by the KC Fed of the KCFSI….

**********************

KC Fed – Financial Stress Index

The Kansas City Financial Stress Index (KCFSI) is a monthly measure of stress in the U.S. financial system based on 11 financial market variables.

A positive value indicates that financial stress is above the long-run average, while a negative value signifies that financial stress is below the long-run average. Another useful way to assess the current level of financial stress is to compare the index to its value during past, widely recognized episodes of financial stress.

How should the index be interpreted? The KCFSI is constructed to have a mean value of zero and a standard deviation of one. A positive value of the KCSFI indicates that financial stress is above the longrun average, while a negative value signifies that financial stress is below the long-run average. A useful way to assess the level of financial stress is to compare the index in the current month to the index during a previous episode of financial stress, such as October 2008.

**********************

The most recent KCFSI report for October is available at the following web address, with exerpts from the report to follow:

http://www.kansascityfed.org/publicat/research/indicatorsdata/KCFSI/kcfsi.oct.2012.pdf

“The Kansas City Financial Stress Index (KCFSI) continues to indicate that financial stress remains low. The KCFSI measured -0.40 in October, a slight increase from September’s value but below its long-run average. This is the first increase in the KCFSI since May 2012.”

Comment by Daniel O’Brien – blog author:

These numbers seem to indicate that the U.S. economy is not in extreme financial stress in the fall of 2012 to the degree that it was in the fall of 2008.  These findings suggest that although serious financial issues are facing the U.S. economy and the U.S. consumer, at this time the U.S. is not experiencing a period of extreme financial stress.  If one political party in the U.S. was basing its 2012 election campaign on jobs and economic growth potential being lost, it may just be that some significant numbers of swing voters among the American public at large was not feeling or perceiving enough personal, kitchen table level economic stress to motivate them to change the party in presidential power.

Recognizing (my) government subsidies

The list of government subsidies that I benefit from is pretty lengthly.  Here are just a few of the DIRECT government subsidies that I can think of…

1) Tax deduction for interest paid on my house loan

2) Government payments on the small amount of farmland that my wife and I own

3) Crop insurance subsidies for a proportion of our crop revenue coverage as a crop share land owner

4) Income tax deductions for each of my children

5) State matching support for my government employee retirement account

6) Tax deductions for my church / religious charitable giving

On the surface, all else being equal, my family and myself have benefited financially from each of these elements of tax support.  But in a macro economic, wholistic systems sense, this level of government support is unsustainable (with millions of U.S. citizens all involved in receiving similar tax subsidies).   In my desire to protect my own government subsidies, am I unwilling to recognize the that the broader U.S. economy and the economic livelihood of my children for decades to come is put at risk by this much government support? Am I myself a “tragedy of the commons” in regards to my lack of recognition of how my portion of the government “pie” is a significant part of the cumulative budget problem here in the U.S.?

My contention is that we in the U.S.  (me first) have to recognize that without the elimination or at least more effective targeting of these government subsidies (or changing them to a true safety net for the most needy instead of an entitlement program for all), the economic future of the country is at risk.  I want my children to have an opportunity to make an honest living in the future.  The subsidies for my house, my farmland, my crop insurance, my charitable giving, and yes, even my child tax credits likely need to go.  IF I had a lower tax rate with equitable application across the U.S. tax payer base, I may end up better off financially.  These subsidies from the government have made us weak, timid and fearful —- scared to independently take responsibility for our own finances apart from government support.

US Economic “Growth, Deficits, and the Future” (J.D. Foster – Heritage Foundation)

Following is an article by J. D. Foster, Ph.D., who is the Norman B. Ture Senior Fellow in the Economics of Fiscal Policy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation (http://www.heritage.org/).

 J.D. Foster, Ph.D., The Heritage Foundation

Foster’s article addresses the anticipated impact of further government spending (i.e., fiscal stimulus) upon the U.S. economy, in the short run and beyond.  Foster provides a counter-argument to the recommendations and justifications of Economist Paul Krugman for further government spending.  The crux of the article is that the most healthy approach to helping the U.S. economy to recover from the current recession is not by increased fiscal stimulus, but rather by reducing taxes at all levels of the economy to encourage growth in private, nongovernment business.

Following are some noteworthy selections from the complete article (here).  (Bold, italicized,  and underlined text are provided by myself to draw attention to key thoughts in Foster’s article.)  

************

“Growth, Deficits, and the Future”

by J.D. Foster, Ph.D., The Heritage Foundation
WebMemo #2150, December 3, 2008

—
Paul Krugman, in his article in The New York Times on December 1, “Deficits and the Future,” discusses deficit spending reflecting both the weakening state of the economy and his response to the changed political climate in Washington, D.C.  Krugman tells a good story, but in calling for even more spending he misses the punch line badly. Tax rate reduction, not another dose of deficit spending, is the key to a stronger economy.

Globally, and certainly in the United States, an intense debate is underway as to the proper magnitude of fiscal stimulus programs to “jumpstart,” “jolt,” or otherwise stimulate national economies as the global economy slides into a deep contraction. For some, a big boost to government spending is the natural solution, especially since they can identify so many “unmet needs” awaiting federal largesse. Neither desperation nor opportunism justifies ineffective and misguided action. These troubled times demand policies that work.

Fiscal Stimulus That Works

The global economic downturn looks to be quite deep. Even optimists do not foresee the recession that began in the United States at the end of 2007 to end until the second half of 2009. Naturally, the focus is on a government response, as though all solutions come from Washington. And, naturally, the response from Washington is to do what Washington excels at: spending money.

……

Suppose for a moment that the fiscal stimulus is effective in pumping up aggregate demand. The budget deficits under current policy for 2009 through 2011 are already around $1 trillion for each year, not counting the budget effects of the various financial bailouts. Put those figures in perspective: In dollar terms, the largest federal budget deficit ever was recorded in 2004 at $413 billion. As a percent of the economy, the largest was 6 percent in 1983. Even before any new policies, the deficit in 2009 is already an astonishing 8 percent of gross domestic product or more. If deficit spending stimulates the economy, then a $1 trillion deficit should suffice to launch a rapid expansion. If $1 trillion is not enough to end the recession, then another $500 billion in deficit spending surely will not do any better.

No Downsides to Deficit Spending?

… The (often wrong) conventional wisdom is that Congress will pass a fiscal stimulus plan of a half trillion dollars or more early in 2009, including some mixture of extended unemployment insurance benefits, food stamp spending, relief to the states, highway spending, and whatever other ingredients can be tossed into the fiscal goulash.

Krugman argues that there can be none of the traditional crowding out of private investment when government increases its borrowing (driving the deficit up from a trillion dollars). There may be none of the traditional downsides, but there are none of the promised upsides, either. The simple fact is that when government borrows a dollar, either the dollar was borrowed at home (reducing domestic consumption or investment) or it was borrowed from abroad, thereby increasing the trade deficit. Either way, the increase in aggregate demand from government spending is matched by a reduction in aggregate demand from the private sector.

Investing for the Future

The economy is weak and weakening, so prudent, effective fiscal stimulus is certainly called for. But that does not mean increased spending. At a minimum, it means making the tax relief enacted in 2001 and 2003 permanent–especially the reductions in individual income tax rates, the reduction in the dividends tax rate, and the reduction in the capital gains tax rate. Threatening rate increases is no way to stimulate an economy, as Krugman notes in his editorial. …

Keeping current tax policy is not stimulus; it is the elimination of a threat. True stimulus means cutting individual and corporate tax rates to encourage entrepreneurs to start new businesses and existing businesses to invest more. The economy is certainly weak today, but business startups and investment are about the future. Current economic troubles will pass and the economy will regain its strength. Lower tax rates will encourage businesses to prepare better now for future growth and in so doing will bring about a future of stronger economic growth. An effective fiscal stimulus means cutting tax rates—not because of the resulting higher deficits but because tax rate cuts improve the incentives for workers, investors, and producers to do more, thus stimulating the economy.

The Grand Teton Mountains, Wyoming, USA (www.ohranger.com)