Posted tagged ‘economic recovery’

Standing Pat

December 5, 2010

There was something peculiar about our last Presidents, George W Bush.  He found his groove early and stayed with it in good times and bad.  It now looks like President Obama has the same characteristic.

President Obama inherited a woeful national debt situation (thanks in a big way to “W”) and an imploding global financial sector which, in turn, lead to more unfunded government spending.  He stepped up to a shameful health care setup that allowed citizens to be denied coverage and others to be priced out of the market.  But, then he shied away from health care changes that were needed just as much, the yearly run away, out of control increase in health care costs.

While President Obama gave speeches where he has said the national debt problem cannot be solved without first solving the health care cost dilemma, he has done nothing to fix health care costs.   He turned his attention to the national debt and formed a blue ribbon commission.   His blue ribbon national debt commission has now presented the Country with the magnitude of changes necessary to get control of national debt levels.  The results were breath taking.

The recommended combination of tax increases and spending cuts should, if nothing else, provide shock value and wake both Congress and citizens to what lies in front of us.  What impact has this had on President Obama?

The answer appears to be very little.  He is standing pat.  The President continues to say he wants to extend the Bush tax cuts for those earning less than $250,000 annually in the face of his Commissions dire report.  He is so adamant that he has hinted he would be willing to extend all the tax breaks including those for millionaires.

This policy does no favor for America, and certainly no favor for the middle class.  The Country’s bills must be paid someday and that day is fast approaching.

Also fast approaching is the last chance for President Obama deal fairly with the national debt.  Next year, it will be a cold day in July before the Republican controlled House of Representatives votes to raise any taxes and any day would be a good day for Republicans to reduce government services, especially those that help the middle class.

Standing pat does not look like a wise strategy.


The Plan?

November 4, 2010

President Obama held a traditional news conference yesterday, traditional, it seems, when the party in power loses its majority in a big way.  In addition to the mandatory “I feel awful” and “I feel really bad about those good legislators who voted as I asked and now are not in Congress”, there was something conspicuously missing.  What is the plan to go forward?

The President rightly surmised that the Democrat’s problem lay in the 9+% unemployment figures and that was something he could not argue away from.  The size of government was not the real issue since most Americans do not want to do away with Medicare/Medicaid or Social Security.  The two most recent expansions of government have been the creation and build up of Homeland Security and the Military (for Iraq and Afghanistan), and both of those were done on President Bush’s watch.  The deficit is poorly understood by the public and Republicans have not a clue as to how to deal with it and keep their political base in line.

Health care, especially the use of the term “government run health care” is just as bogus an issue.  Today we have “insurance company run” health care and it ranks about 16th in the world in terms of efficacy, and costs 50-100% more than any of these other systems.  There is no successful health care system in the world that gives the keys to “for profit” insurance companies and allows doctors, hospitals and drug firms to charge what ever they wish.  As a consequence, you can be assured that health care costs will continue to rise faster than inflation until the government does step in.

But, back to jobs and the economy.  What is President Obama’s plan?  What principles will he follow?  What facts about the loss of jobs will he explain to the American people?  What few steps does he want the Country to take?

The US Chamber of Commerce, however, wants to advance policies that allow American businesses to outsource jobs to China and other low wage countries and offers no clues how to employ the displaced American workers.  If the President cannot set forth a plan, who then can?

If the only answer to that question comes from Republicans, then the outcome of the next election is already known.  On the other hand, if the President does lay out a plan, he will have something to compare and contrast his approach with the Republicans.  Under these conditions, if the Republicans actually have a better plan, then they should get the keys.

Without any Obama plan, we will see no Republican plan, other than political dribble.  Screw the “working together” rhetoric.  Without a plan that clearly says where you want to go, how can there be a discussion?


The China Myth

September 18, 2010

China is manipulating its currency in order to hold a preset exchange rate with the dollar. Myth or Truth? You must be living under a rock if you do not recognize that China has held a long standing policy of fixing the rate of exchange between the US and China. There should be no doubt about that.

The artificially low value of the Chinese RMB provides an unfair advantage for Chinese manufactured goods. This advantage in turn supports the huge trade imbalance that favors China and hurts the US. Myth or Truth? This is a little more difficult to call but when the dust settles, this is a true statement. The only question is how much higher the RMB must rise in value to significantly impact the China-US trade imbalance.

Therefore, China’s currency policy is contributing to the high US unemployment and slowing the US economic recovery. Myth or Truth? There is no need to even ponder this statement. It is clearly a myth and in fact the Chinese exchange rate has little to do with American jobs. Here’s why.

Most manufacturing jobs are completely portable. The manufacture of goods will flow to where ever the cost to make is sufficiently low. China has simply done a magnificent job of organizing its labor and raw material supply resources.   As a result, China dominates the manufacture of labor intensive goods. As China’s labor force demands higher wages, Chinese entrepreneurs will simply move more farmers into the factories displacing current workers. At some point even this source of labor will be fully used and costs to make will rise. Will that point bring jobs to the US?

Not a chance. The US and international companies that have sourced production in China and then import these goods into the US will just move to another country for manufacturing. When this happens the US trade imbalance will remain unchanged. It will simply be composed of imbalances with other countries.

Righteous speeches (like President Obama has recently made) where politicians castigate China are seriously misplaced. They endanger relations with China. More important, they hide the real causes for the loss of manufacturing jobs from the American public. Consequently, any fundamental US economic recovery effort is delayed.

The US public was offered, accepted, and drank the toxic liquor that said the future was service sector jobs. Starbucks on one end and commercial banks at the other. In between was building houses. “Good” jobs were to be found in IT and investment firms. Financial products were the buzz words. Creating real value was replaced with an unspoken Ponzi scheme reality.

The naivety of the service sector strategy (we don’t need manufacturing jobs when we can sell financial services products around the world) was that developing countries would outrightly block these products and sophisticated countries as in Europe would find clever ways to delay the introduction of US financial products until they had equivalent or superior home grown alternatives. Jobs (especially good ones) are well understood and appreciated in other countries. Exporting financial products while an attractive concept does not work in practice.

Free trade must be fair trade too. When US products are blocked by other countries, the US must have the means to treat the offending country in a equal and off setting manner. With a severely limited manufacturing base (as with alternative energy production), the US is fighting trade infractions with one hand tied behind its back.

Does It Add Up?

September 9, 2010

It’s the Economy Stupid…

There is little doubt that the overall US economy is not running on all cylinders. And there is little doubt that if you are unemployed, new jobs are few and far between. The question is, do those unemployed make up enough voters to vote out Democrats in favor of Republicans?

If we judge by the popular media, the answer is yes. In fact, in the media’s opinion the race is already over. You can save some time by looking up how your district or State will vote, and then stay home. The vote is in the oven and on November 3 we can wake up to what we “know” today.

But I wonder what real voters will think if they simply ask their Republican candidate what would they recommend for the economy and jobs. Or, how would they deal with health care costs and the out of control increases each year? Or, what would they do about do about regulations and “too big to fail”?

I suspect this election is a big gamble. Republicans are betting that voters will not ask these questions or even think about the consequences of their vote. Accordingly, Republican strategies are to affirm nothing and criticize everything.

What is more shameful, however, is American big businesses who in fact understand the economy and what it takes to generate new jobs, and choose to say nothing or only that which supports new tax breaks. Where is the leadership that would invest and return American manufacture to world class? Or, where are American universities’ great minds who can speak to these issues in a non-political basis? (for example, if none or loose regulations are best, how do they work in a complex global economy (?), forgetting for a moment about the 2008 melt down of the financial sector)

I guess this will be a year of surprises, but which ones?

The Argument for a Bright Future

September 8, 2010

Most of the polls today indicate that Americans are less optimistic about the future than the past. The current slow economy and high unemployment rate are linked as indicators. But why stop there. High health care cost and the certainty that next year will be even higher does not make people optimistic. And, it is simply the case that wages have stagnated over the past 10 years and the middle class, as such, is not doing so well as their parents did.

There are some, however, who argue that a brighter future lays just around the corner. They cite America’s past resilience and then throw in some irrational thought like god is on our side, or a return to America’s values will clear the way. But there is a rational argument too.

The American society is probably the most open and least inhibited of any in the world. There is a separation of State and Business and as good a set of laws to govern business behavior as any place in the world. Americans have a history of real diversity where ability trumps privilege. It is hard to find this in other Countries. So, why is this important?

The economy is really screwed up and out of balance. The housing industry has driven the economy (by jobs to create or remodel homes, and by providing the assets that irrational exuberance puffed up in paper value). With the bursting of this bubble, we have woken up to the fact that most homes are worth less than we thought and in many cities there are plenty of houses on the market and no need to build new ones. Hence, no jobs are needed by this sector for a while.

A second factor which was taken place during the run up to the house bubble burst is the plight of manufacturing jobs. Steadily manufacturing jobs have migrated to lower wage countries (read less costly and no union interference). Now we are looking for jobs but they no longer exist in the US.

We are living within a world economy where jobs will flow where the costs are most favorable (if Governments do not interfere). The bright future argument goes that American innovation and ingenuity will cause the restructuring of businesses and labor that support business, and it will become more competitive with the products it chooses to make. Central planning and excessive wage control that other countries may have used to gain advantage today will be out maneuvered by America’s invisible hand.

I think this is a reasonable argument providing we do not play Ostrich. America needs to deal with its health care cost problem and the solution lies outside out boarders. America needs to deal with it education and skills problem and simply focusing on the better schools will not produce the overall improvement that will be needed. America needs to welcome all minority groups but demand they make tomorrow better than today.

If you look around the world of civilized and modern Countries (Germany, France, UK, Italy, Spain, Netherlands, Canada, and Japan for example), these countries all possess less costly and better health care, produce better educated and skilled work forces, and in general offer a nice standard of living. On the down side, they offer a more rigid society with less upward movement. They all are far more restrictive on immigrants. In general without their governments intervention, they are less able to fend off foreign competition.

This suggests that a “back to basics” approach with a willingness to accept world class systems can return the US to a growing economy.  It will also be an economy that is more evenly shared, and becomes highly competitive in the global markets.

The Banks Fault?

August 30, 2010

Banks are not lending. That is what Americans are being told. Credit is tight and therefore the economy is having a difficult time getting any traction. That’s number two for the Banks. First they precipitated the financial crisis and consequent recession. Now they are doing their best to act righteous and are holding back on credit. Their lack of action is killing the economy.  What should we do with banks?

How can you blame Banks when just a few years ago they were giving out money to anyone (and in many cases with no documents). Banks got burned and received a lot of unfavorable press coverage. Why shouldn’t banks be more prudent on who they loan to?

The answer is Banks should be prudent (and should have been long before the housing bubble burst). A better question might be, what should banks do with funds they receive from FDIC insured deposits? Or, what should big banks do with funds they borrow from the Fed?

In one way or another, these are public funds back by tax payers guarantees. Under this light, these funds should be used only in building a common wealth application (read create jobs). For example, banks using funds from these sources should be encouraged (maybe required but probably an onerous tax penalty could also work) to invest in small businesses and home construction. In essence, money from these sources could  only be used for this type of purpose. It could not be used by banks to buy bonds or any other proprietary trading purpose. Banks, of course, could still  get funds from investors who would not receive FDIC protection, and then invest in what ever they chose. The point here is that Federal cheap money and insurance protection should be only for funds that would be used to make investments in the common wealth (jobs).

So, what if banks still felt they could not find sound deals in the common wealth area? The simple answer is that they should not make deals just to make deals. I suspect, however, that small banks that know the local market much better, could fill in the gap nicely. Anyone who has dealt with the large banks recently has experienced an attitude that screams out their disdain for small business and mortgage loans. It is very possible that the large banks we are familiar with are like General Motors and will not be able to reform until bankruptcy sets in.

In the 2000s, Banks were primarily interested in mortgages and business loans only if they could repackage them and sell them as bonds (or CDOs). It was the resale where they cleared their books of the risk while collecting large fees that was the beef in the sandwich, not the mortgage or loan.

Like when a field is overgrown with weeds, a controlled grass fire will bring back fresh and vibrant growth.

The Mountain Ahead

August 25, 2010

Opinion polls in the Pennsylvania Senate race are favoring Republican Pat Toomey over Democrat Joe Sestak. TV ads supporting Toomey have thundered all summer that Joe Sestak is too liberal. They cite his support of the stimulus package and a straightline vote with the House Democratic majority. While these claims are factually true, what is absent is “so what”.

Health care reform, the stimulus package, and several extensions of unemployment benefits have all been legislation aimed at helping middle class citizens, many of whom consider themselves independent voters. Republican and conservative interests have framed all issues as either an Obama/Pelosi/Reid liberal thing or what? That’s the point, Republicans and conservatives have stopped offering any alternative, and instead are just saying the Democratic way is the wrong way.

Republicans got to this point when they realized that their previous positions were too similar to those that resulted in the financial sector melt down and our current recession (near depression). Imagine trying to fix social security through private sector investment on the heals of most people’s 401K’s having nose dived to as much as 50% of their original value.

It is all about framing the issues. Ads in support of Sestak have pictured Toomey as a friend of Wall Street. While true, this leaves most people wondering what’s so bad about that. Sestak and all other Democrats are going to need to explain how (1) they propose to get the economy moving, and (2) how much they have accomplished in two short years (in terms that mean something to the average person) and specifically how that has helped the voter.

Getting the economy going is not an easy question to answer. Economic growth recently has occurred where credit have been made widely available and easy to obtain. This does result in a lot of new growth and demand, but has always been followed with a lot of wasteful spending and resulting bad debt (for example, the US, Ireland, England, Greece, Italy, Portugal and Spain). Asian economies (especially China) have grown by putting to work cheap labor. In the US, many people are set on pushing out Mexicans who are willing to work for low wages. Those who are left will not and can not work as hard or as cheaply, This is catch 22.

I suspect the current economic hole we find the country in will take a substantial time to get out of.  Our free enterprise system will need to find new industries to excel at.    Many States have, in the last 100 years, retooled their local economies, and the same is probably going to be true of the US as a whole. Education and training coupled with tax code stimulus will be key. Probably the most important key is hope and confidence in the future.

Hope and confidence are easiest to project if the candidate speaks reasonably and honestly. In the end, voters place their hope on candidates based upon a mix of impressions. The mountain between Democrats and maintaining a Congressional majority can be made much smaller if Democrats would stop running from their accomplishments and start explaining them in terms middle class people can understand.