Kass: The Hangover

This blog post originally appeared on RealMoney Silver on Oct. 2 at 7:42 a.m. EDT.

Yesterday's Wall Street Journal editorial by Robert J. Barro and Charles J. Redlick, which is a working paper for the National Bureau of Economic Research, addresses something I have written about extensively -- namely, whether programs such as cash for clunkers, housing tax credits and other stimulus efforts provide any multiplier effect above one.

I have argued (and the authors do as well) that the stimulus spending proposals above, particularly in their current form, don't have a meaningful multiplier effect but, more importantly, borrow from future sales of automobiles, housing and, generally speaking, retail sales. It seems to me that the recent slowdown in car sales and housing sales activity provides some temporary support to my conclusion.

It also seems to me that, following decades of credit expansion and financial inventiveness that (among other things) have lifted consumer debt and debt service to record levels, the consensus for a consistent, smooth and certain recovery in the economy and in corporate profits (which have elevated P/E multiples by over 40% from the lows) might be approached with a more conservative stance. The baton handoff from private sector contribution to growth to an overwhelming dependency on the public sector to stabilize and fuel economic activity may not be as easy as investors appear to be accepting in their forecasts. And its aftermath, with its due bills, could hold unknown ramifications for our currency, interest rates, inflation and the funding of U.S. debt (among other issues). Finally, the effects of other nontraditional headwinds loom over the horizon -- for instance, the disrepair of state and local governments and the prospects for higher marginal tax rates.