"Toyota was receiving subsidies worth $300m to build its Mississippi plant"

Another Helicopter post. From Richard Adams in the Guardian:

"The worst piece of economic news coming out of the US in the last week wasn't yesterday's move by the Federal Reserve to cut its fed funds interest rate to a Depression-era floor of zero. True, the fact that official interest rates are hovering around 0% is eye-catching, but the move was more symbolism than anything else – since some US Treasuries are already being traded at close to zero interest. In other words, the Fed's cut was merely a reflection of reality.

(And in case anyone in the UK or Europe was feeling smug about this event, don't worry – the Bank of England and the European Central Bank will be joining the "zero club" soon enough in 2009.) ( TRUE )

And no, the worst piece of economic news wasn't even the more significant discovery that US consumer prices fell by 1.7% last month, given that it raises the spectre of deflation, a dangerous spiral of falling prices and consumers sitting on their hands, asking why they should buy now when things will be cheaper next month? ( WON'T HAPPEN )

No, potentially the worst piece of news passed by almost without notice: the decision by the Japanese carmaker Toyota to hit the brakes on its construction of a new factory in Mississippi. That decision wrapped up the past and future prospects for the US into one unhappy package. If Toyota cancels its plant, the US economy won't collapse, of course. But it is more than just a bad omen. It's a warning of what is to come for the Federal Reserve and the incoming Obama administration.

Toyota's new car plant wasn't just any assembly line. It was to be the first US factory to make the famous Prius hybrid. Toyota had already invested $300m in it – but it may prefer to kiss that money goodbye than commit the extra $1bn needed to open it. That's a vote of no-confidence in the US economy for starters. More importantly, the Prius was to the 2000s economic bubble what the Aeron chair was to the dotcom boom. For the last couple of years it has been impossible to buy a new Prius off a dealer's lot – the waiting list was too long. Then the sharp spike in the price of oil this year gave another reason to buy the fuel-efficient Prius. Hence Toyota's decision to build a plant in Mississippi. ( MIGHT IT HAVE SOMETHING TO DO WITH THE FALLING PRICE OF OIL, AND THE STRENGTH OF THE YEN? )

But let's not forget that the major economic story of the last couple of weeks – before Bernard Madoff made the front pages – was the begging by Detroit's Big Three carmakers for a government bail-out.

Opponents of the bail-out made much of Detroit's inability to compete with the Japanese manufacturers such as Toyota (a situation largely the result of Congress's decision to restrict car imports from Japan in the 1980s, but that's another matter)( BUT A GOOD POINT. IT LET THE US AUTOMAKERS FEEL FREE NOT TO INNOVATE ), arguing that this would be throwing good money after bad. Most Republicans opposed giving the money to General Motors and Chrysler, including those southern senators who boasted a thriving car industry based on new foreign car factories built in their states. ( PURE POLITICS )

Among the Republicans who shot down the bail-out were Roger Wicker and Thad Cochran, the senators from the great state of Mississippi. But here's the question that could haunt them and their constituents: if the Detroit bail-out had passed, Toyota would have been less likely to have put its Prius factory on ice, and the 2,000 jobs that were to come with it. (Toyota has a choice that GM doesn't have. The Japanese firm can scrap its plans for Mississippi and ship in cars from Japan instead. But that doesn't bring any jobs to Tupelo.)

After all, it's not just sales at Ford and GM that are suffering: in November 2007 Toyota sold more than 16,000 Prius models. Last month it sold just 8,000. The problems of the auto industry are long-term – over-capacity, in the main – but with a short-term kicker: car sales are intimately connected to personal borrowing, since most Americans rely on loans to buy a car (especially new ones). Since the credit crunch has trickled down from Wall Street, it has become harder to get credit to buy a car, since lenders are now more cautious. On top of that, the state of the economy is such that people are delaying a big purchase like a car (or a house) if their income is being squeezed and they decide to pay off earlier debts ( TRUE. I POSTED ABOUT THIS EARLIER ). Even cutting prices may not work ( TRUE, BUT IT WOULD HELP ). The dreaded deflation effects mentioned above may make matters worse. ( INDUBITABLY )

Toyota won't be the only foreign investor changing its plans in the face of a recession. Rebuilding US balance sheets, both commercial and personal, is going to take some time, as businesses and consumers untangle themselves from debt. That task will be made longer and harder if the dinosaurs of Detroit collapse, whether they deserve to or not, or if a new wave of manufacturers such as Toyota are scared away by the toxicity of the economy. (Toyota was receiving subsidies worth $300m to build its Mississippi plant,( FANCY THAT.FREE MARKETS YOU SAY ) in case anyone thinks only Detroit has carmakers who want government funds to help them.)

The woes of Toyota and Mississippi, GM and Detroit, and the fed funds rate hitting zero are all connected. The US economy – along with much of the rest of the so-called developed world – has entered what economists call a "liquidity trap", where holding cash (which earns 0% interest, but is entirely safe) is as good an investment as any other low-risk asset. At that point, central banks may as well just print money to re-inflate their economies – as the FT's Martin Wolf ( DOES EVERYBODY READ WOLF? ) remarked: "As Robert Mugabe has shown, anybody can run a printing press successfully."( I BLOGGED ABOUT THIS POST ) (Certainly, deflation isn't a problem in Zimbabwe.) In that case, why not bail-out Detroit and offer zero-interest loans to the likes of Toyota as well? After all, building eco-friendly, greener cars such as the Prius was part of the Obama economic platform. ( THEY MIGHT WELL DO IT )

The longer-term problems will remain, such as cleaning out the Augean stables( CALL HERAKLES ) of bank balance sheets – and the time has surely come for more radical action in that regard. But in the short term, there's no point in building a new factory if no one is buying cars ( SHARP ).

Milton Friedman once wrote about using helicopters to drop cash on a population and provoke price rises. Time to polish up the rotors and rev the engines. ( IT'S A LOVELY SOUND )

"committing the government to actions that would bring deficits under control once the economy recovers."

President Obama on Budget Savings in the NY Times:

"President-elect Barack Obama vowed on Tuesday to scour wasteful spending from the federal budget to help offset an investment in a huge recovery plan to jump-start the ailing economy, a pledge that he called part of his “mandate to move the country in a new direction.”

For the second straight day, Mr. Obama called a news conference to explain how his administration would respond to the nation’s financial crisis. He named no specific government programs to be eliminated but said tightening the budget was part of the sacrifice he would ask Americans to endure.

“We can’t sustain a system that bleeds billions of taxpayer dollars on programs that have outlived their usefulness or exist solely because of the power of politicians, lobbyists or interest groups,” Mr. Obama said. “We simply can’t afford it.”

This is good news. I understand that he's not being very specific, but at least he keeps saying it over and over. That's a good start.

"With an eye on the economy, Mr. Obama announced that he would nominate Peter R. Orszag as director of the Office of Management and Budget. After running the Congressional Budget Office for nearly two years, as well as handling economic policy in the Clinton and Bush administrations, Mr. Orszag “doesn’t need a map to tell him where the bodies are buried in the federal budget,” Mr. Obama said."

He's a good appointment.

"Together with a two-year economic recovery package of hundreds of billions of dollars in spending and tax cuts, Mr. Obama hopes to win early approval in Congress next year for separate language committing the government to actions that would bring deficits under control once the economy recovers."

This is important to reassure investors that we will not default or print money, but will raise taxes or cut spending in the future. We need to say it and mean it, whether or not anyone believes us.

"Advisers to Mr. Obama and to Congressional leaders say they have hardly begun to figure out what kind of process they could devise to enforce fiscal discipline. But Obama advisers, in particular, consider it essential to signal that Democrats are not using the economic crisis to go on a spending binge without concerns for future deficits.

“In these challenging times, when we are facing both rising deficits and a sinking economy, budget reform is not an option,” Mr. Obama said. “It’s a necessity.”

Totally agree.

"Budget controls are also considered important to securing the votes of conservative Democrats in the House and the Senate, who might otherwise balk at an economic stimulus package that could exceed $500 billion. One of those at the center of the effort to draw up proposals is Rahm Emanuel, who was the fourth-ranking House Democratic leader until Mr. Obama tapped him to be the White House chief of staff."

This is good news.

"Mr. Obama cited, as an example of the possible cuts he expects Mr. Orszag and the rest of his budget team to find, the findings of a recent government report indicating that farmers whose incomes exceeded $2.5 million had most likely been mistakenly paid about $49 million in government subsidies from 2003 to 2006.

He did not offer any other specific targets, and by itself, correcting the problem with the farm program would make an undetectable dent in the government’s soaring deficits. After the financial recovery is under way, Mr. Obama said, the chase after wasteful spending will begin in earnest.

“Just because a program, a special interest tax break or corporate subsidy is hidden in this year’s budget does not mean that it will survive the next,” he said. “The old ways of Washington simply can’t meet the challenges of today and tomorrow.”

Time will tell.