Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Abolish the IRS As We Know It and Restore the Power of the States
The recent scandal involving the IRS illustrates the out-of-control growth of the federal bureaucracy. Instead of limited powers of the federal government and reservation of all powers to the states not specifically granted to the federal government, spelled out in the first ten amendments to the U.S. Constitution, the reverse is now true. The states are not only dependent fiscally on the federal government but it is they who have limited powers. In this paper, we propose to limit the powers of the IRS and reassert the predominance of the States.
The IRS would, under our proposal, administer only an income tax on wages and salaries. Since most wages and salaries are taxed at the source, corporations and other employers will pay over to the IRS nearly all of the wage taxes collected. Recipients will have only a simple return to file, dealing mostly with allowances for dependents. Most will have to file no return at all. The billions now spent by the IRS in administering a tax code of many thousands of pages will be reduced 95 percent.
Taxes on interest, capital gains and corporate income would be replaced by a form of tax on wealth, a tax on the capitalized value of all business enterprises. Given the total value of business enterprises, a very small rate of perhaps 3 percent, together with the tax on wages and salaries, would yield more than the current yield of the personal and corporate income taxes. ...
The Gods of the Copybook Headings are in Cyprus - We're published in today's American Thinker
Here's is a selection:
To read the rest, follow this link:
The Gods of the Copybook Headings are in Cyprus Now, and Coming Here Soon
The above you-tube video shows Glenn Beck reading Rudyard Kipling's 1919 poem, The Gods of the Copybook Headings. In that poem, Kipling compares the truths of the real world ("the Gods of the Copybook Headings") with the promises of social progressives ("the Gods of the Market Place"), and he concludes that nations which follow the false promises of the social progressives eventually rediscover reality, often when it is too late.
In his April 2 column (Today, Cyprus, Tomorrow…) Pat Buchanan sees the Gods of the Copybook Headings at work in Cyprus today. He argues that those investors who loaned their money to Cypriot banks were ignoring reality, writing:
No Recovery From the Great Recession Is in Sight
As I reported last week, initial claims for unemployment compensation during the week ending March 16, 2013 broke below 300,000 for the first time since 2007. And I asked if it marked the beginning of a recovery from the Great Recession. It turns out that the answer is negative. The number of initial claims rose in the following week ending March 23, 2013. The seasonally adjusted number of initial claims rose by 16,500 to 357,000 and the seasonally unadjusted (the actual!) number rose 14,706 to 315,659. Of course, the preceding week’s numbers could have been a fluke and so could the latest week’s numbers.
What is hampering the recovery? Just this week in an op-ed in the Wall Street Journal, Mortimer Zuckerman, editor and publisher of the US News and World Report, labeled the claims of recovery to be a fantasy, pointing out as we have done, that the true unemployment figure is 14.9 percent, not 7.7 as reported officially.
The claims of recovery appear to be substantiated by the rise in the prices of stocks as indicated by the Dow-Jones and other stock markets indices. But the quantitative easing by the Federal Reserve Board has provided financial institutions with increased money for lending, much, if not most of it, has simply increased the prices of assets such as stocks and real estate. The FED’s financing of the trillion dollar deficits has enabled increased government spending which is a stimulus to the economy as long as it lasts but is at the expense of diminished private expenditures.
The stimulative effects of increased government spending on consumption and investment are largely offset by the fact that it stimulates imports and does nothing to increase exports. In fact, it is government policy to stifle the production of fossil fuels which we still import. The trade deficit rose to $44.4 billion in January, 2013 from $38.1 billion in December, 2012. Fortunately, the private sector has been increasing the output of oil and natural gas in spite of environmental extremists’ powerful influence on government policy. In fact, the fossil fuel boom is the strongest stimulus to the recovery we have and helps to offset the depressing effects of the government’s “green” policies. ...
Pres. Obama Policies Are Leading to the Loss of More American Jobs
Mortimer Zuckerman, editor in chief of U.S. News & World Report, in an op-ed piece in the Wall St. Journal (2-16-13) entitled “By Any Measure, the Jobs Disaster Continues”, confirms what we have been writing in this space for months namely that the press has been misreporting the unemployment data because they employ the seasonally adjusted numbers reported by the Bureau of Labor Statistics instead of the actual numbers. He writes:
“January was supposed to have seen 157,000 jobs created…But the supposed hiring was based on seasonally adjusted numbers … The real, unadjusted figures for January show that nearly 2.8 million jobs disappeared, which happened to be worse than the 2.63 million lost in January 2012.”
He also points out that the statistics do not include the number of “discouraged workers who have dropped out of the labor force.” Were they included, “the formally announced unemployment rate would be around 9.8%, not the headline 7.9%.” And, “After four years America remains in a jobs depression as great as the Great Depression.” ...
More Than a Million Workers Lost Their Jobs Since Obama's Re-Election. Recession Is in Prospect
Over one and a quarter million workers have lost their jobs since Pres. Barack Hussein Obama won re-election. In the five weeks before the election, the average number of initial claims filed for unemployment insurance amounted to 347,918 per week but the average in the 13 weeks since the election amounted to 447,908. This contradicts the administration’s and the media’s reporting that the economy is growing, but is consisted with the decline in Gross Domestic Product in the fourth quarters of 2012. At the same time, Obama’s rich friends benefited from a stock market boom as a result of his easy money policies and from government subsidies. The Fed’s increase in the money supply created few if any jobs but created an asset boom, fueled by expectations of run-away inflation.
The fact is that increased government expenditures financed by public debt creates few new productive jobs and few are lasting. As soon as government expenditures are reduced, the temporary jobs created are lost. Many of the jobs created by government deficit spending are unproductive, for example, the government subsidized jobs in wind and solar energy. Even though more than half the cost is borne by government subsidies, the favored companies are subsidized even further by tax credits and by orders to the electric utilities to buy their output even though it is more costly. In addition, the utilities must have back-up facilities for those periods in which little or no electricity is generated because of the lack of wind or sunlight. The rising cost of electricity is a burden on the economy.
Insanity has been defined as doing the same thing over and over again and expecting a different result. The President wants to increase federal government spending which he has been doing and financing by deficits for four years and which has done little or nothing to create improved economic conditions. Unemployment, including involuntary part-time employment and the number who are no longer seeking work or who have dropped out of the labor force, is higher than when he took office. Republicans on the Senate Budget Committee reported that the federal government spent more than a trillion dollars (the amount of the federal deficit last year) on welfare programs and that more than forty-seven million, a new high, were enrolled to receive food stamps. ...
Treat Corporations as Partnerships for Personal Income Taxation
Many taxpayers believe that the Corporate Income Tax falls mainly on the wealthy. In fact, the wealthy do own a large proportion of corporate wealth. But workers pension funds own a significant share of corporate wealth. An organization noted for its opposition to wealth and income inequality produced the following estimates:
Distribution of US Stock Market wealth, 2007
Population % of Stocket Market Wealth
Top one percent 38.2
90 -99th percentile 43.0
80-90th percentile 9.9
60-80th percentile 6.4
0-60th percentile 2.5
What is surprising about the above distribution of stock market wealth is not that stock market wealth is highly concentrated but that the bottom eighty percent owns as much as 8.9 percent of total stock market wealth. This means that they were taxed at up to 35% on their corporate earnings, most of it probably in their IRAs, 401s, or other pension accounts. The burden of the corporate tax on the wealthiest ten percent is taxed at the top corporate rate of 35 percent which was also the top rate of personal income tax. In effect, the bottom eighty percent are taxed by the corporate income tax at the same rate as the wealthiest one percent. The bottom one percent probably pay no personal income tax but their share of corporate income is tax at the highest corporate rate.
There is an additional important reason for integrating the corporate income tax with the personal income tax. An eminent University of Chicago economist in a seminal article which has been largely ignored argues that the corporate income tax is shifted to American consumers and is therefore a regressive tax but that it cannot be shifted to foreign consumers when exported because its foreign competitors are untaxed.This puts American corporations at a competitive disadvantage in international trade as we pointed out on this site in a recent posting. ...
December 31, 2012, is a date that will live in economic infamy
December 31, 2012, is a date that will live in economic infamy. Six days after Christmas, Republican and Democratic leaders decided to reverse the effects of Santa Claus. They agreed to steal from America's children so that adults could have some short term benefits.
Instead of reducing the federal budget deficit from $1,327 billion to $825, as would have occurred automatically, had the negotiations failed, the final deal will only reduce budget deficits by $63.5 billion according to Fox News' Ed Henry. Up to $100 billion more could be subtracted following the sequester debate. The national debt will continue to grow at at least a $1,163 billion per year pace while GDP will probably continue to grow at about its current $647 billion per year pace....
The Reverse-Santa-Claus Negotiations Continue
If they can't cut the budget deficits right after a presidential election, when will they do so?
It is the final day of the Reverse-Santa-Claus fiscal cliff negotiations. The main thing that has already been decided by the Republican and Democratic leaders negotiating is that they will steal from America's children. Almost everything has been taken off the table that would reduce the budget deficits. The latest to go is the provision that would slow the cost-of-living increases for entitlements.
They have already negotiated away the fiscal cliff's automatic $502 budget deficit reduction of the $1,327 billion budget deficit. Every time a new deficit reduction target is revealed, the amount of projected deficit reduction has been reduced, $260 billion, then $220 billion then $200 billion. This week, they have stopped mentioning figures altogether.
They justify their irresponsibility by holding that a recession would occur in 2013 if they did not act. There would indeed be a recession, but it would not reach the 9.1% unemployment rate for the fourth quarter of 2013 predicted by the Congressional Budget Office. Ideal Taxes Association has continually been correct regarding the ineffectiveness of budget deficits in one prediction after another:
A Genuine Tax Reform: Increased Use of the Estate Tax and Integration of the Corporate And Personal Income Tax
Congress makes changes in the personal income tax code annually. This affects the behavior of investors violating the basic principle of certainty. For example, effective January 1, 2013, the rate of taxation of realized capital gains will increase from 15% to 20%. For many years, capital gains had a different treatment. Fifty percent of long-term realized capital gains was counted as taxable income.and was subject to a maximum tax rate of 25%. Congress changed the treatment several times since then and for the taxable year 2012, there was a single tax rate of 15% applied to long-term realized capital gains. During some years, gains from the sale of dwellings were untaxed if a new dwelling costing more than the realized gain was purchased within two years. During the Clinton administration, the condition that a new dwelling must be purchased within two years was eliminated. As we have shown, there is only one correct treatment of capital gains, namely that realized gains be taxed as ordinary income if consumed and left untaxed if reinvested. A realized appreciation of capital is income only if the proceeds are not reinvested. Capital gains of a decedent escape taxation when the capital asset is inherited. The U.K. until a few decades ago did not tax capital gains believing that an appreciation in the value of capital is not income at all. Indeed they began to tax realized capital gains but not under the income tax. Most American economists have been raided to believe that accrued (unrealized) capital gains are also income but if that were true, an accrued capital gain is simultaneously the source of income and income itself. An accrued capital gain can be defined as the present value of an increase in the expected stream of income as we have shown previously in our book and on this blog. Economists can be wrong. If the economists advising the Congress and the administration, how can we expect rationality from the Congress and the federal administration? .
The owners of corporations are their shareholders. Corporations pay income tax and shareholders pay income tax on corporate dividends. It is not surprising that shareholders try to convert some of their corporate income into capital gains which have been taxed at lower rates than dividends. Corporations pay income tax on income generated domestically and on income earned abroad when and if the income is repatriated. A great deal of corporate income earned abroad is never repatriated. Many governments have a territorial definition of income and do not tax income earned abroad at all. But our unitary definition of income holds that income wherever earned is subject to tax. It is to be expected therefore that the political parties change policies whenever they win an election.
The parties also differ on the estate tax. The conservative opposition to the federal estate tax is misguided. By all the criteria or principles of taxation, the estate tax is one of the best taxes. It accords with ability to pay, it is not arbitrary, it has good interpersonal equity both horizontal and vertical, its economic effects are good or at least not bad, it is economical to administer and to comply with. ...
Will this be Boehner's "Peace in Our Time" Moment?
After insuring World War II by capitulating to Adolf Hitler in Munich, British Prime Minister Neville Chamberlain defended the agreement that he had just negotiated in what has come to be known as his "Peace in Our Time Speech." Chamberlain claimed that all parties at Munich wanted to avoid war. He said:
If a fiscal cliff settlement is arranged along the lines currently being discussed, look for House Speaker John Boehner to make a similar speech in the near future. He would say that all parties in the negotiations wanted to rein in the American budget deficits, something like this:...
Sarah Palin: "We’ve Already Gone Over the Fiscal Cliff, Now It’s About How Hard We Hit Bottom"
This November 30 interview with Sarah Palin restores my hope that there is intelligence left within the Republican Party:
She's right that we're already over the fiscal cliff in that there's not going to be a painless way to bring down the budget deficits and prevent the collapse that will occur if they continue to grow, in proportion to GDP.
Meanwhile, the House Republicans are currently negotiating an agreement with President Obama that will substitute $200 to $250 billion in budget cuts for the $502 billion that would place if no agreement was reached.
By not dealing with the problem right after the election, they are insuring that trillion dollar deficits will continue to raise the U.S. debt-to-GDP ratio into the forseeable future.
As Palin points out, they are simply postponing the pain and making it much much worse when it does come in the future. This future is easily foreseen:...
Fiscal Cliff: Negotiation Failure Could be the Best Option - we're published in today's American Thinker
Follow the following link to read the rest:
$260 billion in deficit cuts is not enough
If they can't agree to bring the budget toward a sustainable balance when the next elections are 2 years away, when will they do it?
According to Politico, the tax increases and spending cuts of the compromise deal being worked out between President Obama and the Republican House leadership will only reduce the federal budget deficit by about $260 billion per year.
Currently the U.S. federal government budget deficit is $1,327 billion per year. Without this deal, the tax increases and spending cuts of the fiscal cliff would have reduced the deficit to $825 billion per year. This deal will only reduce the budget deficit to $1,067 billion per year, resulting in a 6.7% rate of budget deficit growth which is about 4% faster than GDP growth.
Here's how this growing debt to GDP ratio will eventually play out, according to the Congressional Budget Office:
And here is how my father, son and I described this future in our American Thinker article about the fiscal cliff (The Fiscal Cliff is a Good Thing):
Mark Faber predicts economic future if House Republicans kick fiscal cliff down road
In an interview on CNBC's Squawk Box, Mark Faber, author of "The Gloom, Boom, & Doom Report," laid out the economic future if the House Republicans kick the can down the road in the Fiscal Cliff negotiations.
In his scenario, the fiscal cliff results in nothing more than minor tax increases and minor cuts in spending. Meanwhile, the world economy will continue to stagnate until it goes over the precipice with a "complete collapse of society in 5 or 10 years time".
The Fiscal Cliff is a Good Thing -- we're published in today's American Thinker
To read the rest, go to:
Obama's Freudian Slip: He Wants to Export Jobs -- we're published in today's American Thinker
You can read it here: http://www.americanthinker.com/2012/10/obamas_freudian_slip_he_wants_to_export_jobs.html
Even though we wrote it before the debate, much of what we said tied in directly with what the candidates said last night. Again last night, Romney highlighted his plans to crack down on China's trade cheating. It was in his five point summary of his position. We began our American Thinker piece with that promise.
In this piece we quoted a portion from the last 2008 debate when Obama claimed (falsely, as it turned out) that he would take on China's currency manipulations while McCain said that he would instead send unemployed manufacturing workers to community colleges for non-existent jobs.
Last night Obama, channeled the 2008 McCain. He noted that he was re-educating manufacturing workers at community colleges for existing jobs, while Romney pointed out that half of college graduates can't find employment.
Again in the debate last night and again in his closing statement, Obama rehashed his phony way of dealing with trade from the 2008 campaign, his proposed tax on outsourcers. We explained that issue this morning, when we wrote:...
Writing for National Journal, Jim Tankersley raises what he terms "The Only Debate Question that Matters" of "Why aren't you serious about trying to solve the jobs crisis?" in a forceful way. Tankersley notes that neither candidate has a jobs plan that can credibly be claimed to be up to the scale of the jobs challenge...
The New Jobs and Trade Numbers are Related
President Obama claims to be a champion of U.S. manufacturing workers. In his advertising, he accuses Romney (falsely) of outsourcing jobs when he was CEO of Bain Capital. In his stump speech, he claims to be the champion of "made in the USA." But the latest economic reports from the U.S. Labor and Commerce Departments tell a different story:
The relationship between trade and unemployment was first observed by John Maynard Keynes. In a chapter toward the end of his 1936 book, The General Theory of Employment, Interest and Money, he discussed the danger of tolerating mercantilism, the trade strategy designed to produce trade surpluses. Keynes wrote:
Of the overall U.S. trade deficit of $42 billion in July, about 2/3 ($28 billion) could be attributed to China. The following graph shows that our merchandise trade deficit (negative net exports) reached a record $310 billion for the twelve months ending in July:
The Chinese government keeps out American products through high tariffs and through government fiat. For example:...
The U.S. Housing Bubble Wasn't Special
Some narratives about the housing price bubble in the United States that are adopted by the political right (community reinvestment act) and the political left (corrupt bankers left unregulated) fail a basic and simple test. Both are explantions that are United States centric. They focus on policy changes enacted in the U.S. and seek to explain housing price changes in the U.S.
But they ignore the fact that many other countries experienced similar housing booms (some haven't fully gone bust yet either) at roughly the same time.
The USA Must Follow Spain's Lead in Ending Wind and Solar Subsidies
Spain has cleared the decks for its economic recovery by ending its subsidies to “Green” energy. The crisis in the Eurozone requires Spain to bring its fiscal budget in better balance. Spain has ended its subsidies for building wind and solar plants. New wind and solar plants will have to be financed by investors with no subsidies in the form of cash grants and tax subsidies. The average wind and solar plant built in the U.S. receives subsidies from state governments and the federal government which amount to an estimated 50% of the total costs of the project. This is at the expense of the American taxpayer who, in addition, pays higher prices for electricity and outsourcing of his job. Spanish Associate Professor of Economics, Gabriel Calzada Alvarez, of King Juan Carlos University concluded that the wind and solar plants crowd out two jobs in the economy’s private sector for every job they create in the alternative energy sector. He testified before a U.S. Congressional Committee that the same is true of the alternative energy plants built in the U.S.
More than $69 billion of wind and solar plants have been installed in Spain since 2004. The unreliability of wind and solar energy means that there is no saving in capital since back-up power facilities using traditional fuel sources are required to ensure a continuous supply of electricity.
To make matters worse, public utilities have been ordered to purchase electricity from wind and solar plants at prices exceeding the costs of electricity from traditional sources, coal, natural gas, nuclear, etc. The same is true in the U.S. The effect is to raise the prices of electricity to households and businesses on whom it acts like a sales tax. It raise the cost of living and it dampens the desire to invest in new factories in the U.S. since it will increase the future prices of electricity. ...
Does China Have a "New Economic Policy" for Dealing With Foreign-Owned Enterprises
Dr. Derek Scissors of the Heritage Foundation in testimony before the U.S-China Economic and Security Review Commission in March, 2011 described the fall and subsequent rise of Chinese state-owned enterprises. From 1993-2001, the state sector shrank but from 2008 it grew and currently predominates over the private sector. What is the future of the private sector in China? We believe there is a good likelihood that all foreign enterprises in China will eventually be nationalized.
The Chinese Communist strategy can be divined by studying Lenin’s New Economic Policy (NEP), which lasted from March, 1921 to 1929. It became necessary because of the shortages of food that reigned as a result of the policy of forcing farmers to “sell” all their product to the government at a price that gave farmers no incentive to produce more than they could consume. The new policy permitted peasants to sell their products on the open market after meeting some obligatory transfers to the government. Its success led to the denationalization of small-scale industry, and even permitted foreign companies to build factories. Lenin insisted that the NEP had to be pursued "seriously and for a long time." Under NEP the Soviet economy revived reaching in the middle 1920s to its pre-war levels or close to it. A capitalist class was emerging, creating demands by ideological communists for an end to NEP. It was ended by Stalin in 1929, with tragic consequences for the independent farmers and ultimately for the Soviet Union itself.
If the orthodox communists in China behave similarly, China may have a similar experience. China has clearly adopted its own NEP which, if it learns from Russia’s experience, it will pursue “seriously and for a long time” at least until it surpasses its major competitor for world supremacy, the USA....
How Keynes would save the euro
World leaders are lending euros to the PIGS (Portugal, Italy, Greece and Spain); that won't work. They are trying to recapitalize the PIGS' banks; that won't work. The loans will simply flow out of the PIGS to buy imports.
The real problem is trade balances. In statistical terms, trade balances (i.e., current account balances) explain more than 40% of the variation in unemployment rate within euro-zone countries that have GDPs of at least $100 billion (and more than 20% of the variation worldwide). As shown in the graph below, all of the failing countries of the euro-zone have high unemployment rates and large trade deficits (as a percentage of GDP):
Keynes summarized the relationship between trade balances and unemployment in the chapter about mercantilism in The General Theory of Employment Interest and Money (1937):
Less than 2 years before his death, negotiating for the United Kingdom at the Bretton Woods Conference, Keynes tried to create an international organization that would keep trade balanced. The resulting organization, the International Monetary Fund, has largely been a failure.
It doesn't even bother to enforce its own Articles of Agreement. For example, China and many other emerging market countries freely violate Article IV which prohibits "manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members."
The organization that Keynes tried to create would have had different rules for trade deficit and trade surplus countries. Trade deficit countries would be allowed to charge tariffs, while trade surplus countries would be required to stimulate their demand for imports. Such rules are vitally needed in the euro-zone today.
If Keynes were in charge, Germany and the other trade surplus countries of the euro-zone would be required to stop charging their value-added tax on the products of the trade deficit countries of the euro-zone. Meanwhile, the trade deficit countries would be permitted to charge trade-balancing tariffs on the products of the trade surplus countries. These steps would lead to business investment in the trade deficit countries and save the euro.
The same principle applies to the rest of the world as well....
The Undiscussed Measures That Would Result in an Economic Boom
Why have we not recovered from the recession? Because governments all around the world and particularly the USA have ignored the major causes of this recession. This depression was caused by the bursting of the housing bubble. The bubble was the result of the Community Reinvestment Act of 1977, sponsored by sentimental politicians who fell for leftist propaganda that the banks were systematically red-lining disadvantaged neighborhoods. The CRA was the wrong tool. The Fed was in effect forcing the banks to make loans to unqualified persons. It had the support of Democrats who wanted to enable the poor, especially blacks, to own their own homes and Republicans who wanted to enable more families to own their own homes. After all, home owners tend to be conservative. The CRA made blackmailers like ACORN rich and powerful. The loose lending policy led to the housing bubble.
Congress put in charge of administering the CRA the same Federal banking agencies that are responsible for keeping depository institutions healthy, namely, the Federal Reserve Board, the FDIC, the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision(OTS). In 1981, to help achieve the goals of the CRA, each of the Federal Reserve banks established a Community Affairs Office to work with banking institutions and the public in identifying credit needs within the community and ways to address those needs. Paul Volcker was the Fed chairman at the time. Why he and his successor Alan Greenspan went along with legislation that made the Fed an agent to determine what loans the banks should make reflects on their understanding of how free markets are supposed to work. (See Wikipedia for more information about the CRA.) In any case, these supervisory agencies permitted the banks to to pay blackmail, to employ ACORN and other leftist groups as mortgage initiators, and to enncourage banks to make loans with little or no money down to everyone pretending to be a legitimate home buyer. The only duty of the Fed should be determining the supply of money needed for stable growth....
Saving Greece, Spain, Portugal, Italy, France, and the U.S. From Bankruptcy
Greece, Spain, Portugal, Italy, France and the U.S. are close to bankruptcy and they all have the same causes: profligate government, large trade deficits, and bewildered economists. They are dysfunctional and incapable of doing what is necessary to survive as prosperous nations. By contrast, Germany, China, and Japan are doing very well. As the following table reveals, the countries on the list that face economic collapse are those with large trade deficits and the countries doing well are those with large trade surpluses. No revolution is required for the former to resolve their problems.
That the troubles of Greece and the other eurozone countries and the recession in the U.S. are related to their trade deficits is evidenced in the following table relating the level of employment in various countries to their current-accounts balance:
The International Monetary Fund, whose SDRs (special drawing rights) are a candidate to succeed the dollar as the world’s monetary standard, reported in early April that China’s enormous trade surplus with the world was narrowing. It failed to note that China's trade surplus with the U.S. continues to increase. Is this coincidence or deliberate policy? The Wall Street Journal hailed the notion that world imbalances were being corrected by market forces. That is in line with its ideology of "free trade" but it ignores the reality that China's trade surplus with the U.S. continues to increase.
In a recent analysis in the New York Times (5/1/2012), Eduardo Porter, a member of the Times editorial board, citing IMF sources, notes that the Chinese trade surplus had fallen from 10 percent of its GDP in 2007 to 2.8 percent in 2011. The U.S. trade deficit declined from 5.1 percent of GDP to 3.1 percent during the same period. The fact is that the worldwide recession in 2008-09, reduced the exports and imports of every large trading nation creating the impression that trade was being balanced. The IMF did succeed in blunting the increasing demand that China allow its yuan to appreciate to make imports cheaper and exports more expensive. The IMF made it appear that market forces were doing the job of bringing trade into balance. In fact, the effect of the recession was only temporary....
Notwithstanding that the recesion of 1937-38 indicated that there was no Keynesian multiplier--as soon as the stimulus of the preceding four years was reduced, the economy tanked--Keynesians maintained that the Roosevelt administration reduced its stimulus spending too soon. The same agument is being made by Nobel prize winner Prof. Paul Krugman and former Chairman of the Council of Economic Advisers, Prof. Christina Romer, and many others after the failure of the $800 billion Recovery Act of 2009.
Keynes was a great English economist who sought a solution to the problem of depressions and business cycles in general. He thought he found the answer and wrote his epic, the General Theory of Employment, Interest, and Money (1936) . While Keynes took a scientific approach to the problem of recovering from a depression, he turned out to be wrong about his “multiplier”; increased government spending creates employment temporarily but the jobs disappear when the stimulus is ended.
Dr. Valerie Ramey, Professor of Economics at the University of California, San Diego recently published in the NBER Working Paper Series the results of her research entitled “Government Spending and Private Activity” in which she concluded that “For the most part, it appears that a rise in government spending does not stimulate private spending; most estimates suggest that it significantly lowers private spending. .. The results imply a multiplier on total GDP of around 0.5.” And further, “For all but one specification, though, it appears that all of the employment increase is from an increase in government employment, not private employment.” ...
Santorum's Federal Reserve position shows economic common sense
In a February 23 interview on GBTV, Senator Santorum's discussion of the Federal Reserve showed off his economic common sense. Here is the relevant segment:
Santorum was being interviewed by Glenn Beck, who has taken the foolish position that the Federal Reserve should be eliminated and that the United States return to a gold standard. Santorum did not agree, but he had sensible ideas of how the Federal Reserve should be reformed. His discussion showed his understanding of three key economic principles:...
The Economist Declares the US Economy Is Being Suffocated By Over-regulation
We would like to call your attention to an editorial in The Economistof Feb. 18, 2012 entitled “Over-regulated America” and sub-titled, “The home of laissez-faire is being suffocated by excessive and badly written regulations.” It cites inter aliathe Dodd-Frank law of 2010 as “far too complex and becoming more so. At 848 pages…”. Yes, you read that right! “Worse, every other page demands that regulators fill in further detail. Some of these clarifications are hundreds of pages long. Just one bit, the ‘Volcker rule’, which aims to curb risky proprietary trading by banks, includes 383 questions that break down into 1,420 subquestions.” And “.. of the 400 rules in mandates, only 93 have been finalized. So financial firms in America must prepare to comply with a law that is partly unintelligible and partly unknowable.”
As for Obamacare, “Every hour spent treating a patient in America creates at least 30 minutes of paper-work , and often a whole hour. Next year the number of federally mandated categories of illness and injury for which hospitals may claim reimbursement will rise from 18,000 to 140,000.” And a study for the Small Business Administration “found that regulations in general add $10.585 in costs per employee.” The Economist is to be congratulated for calling attention to the problem of over-regulation that is so harmful to the American economy.
Unfortunately, The Economist is not against government regulations but only to their complexity....
The Revealing Moon Debate -- We're published in today's American Thinker
Republican candidates revealed how they think during the moon debate
The discussion of Gingrich’s moon colony proposal at the January 26 Republican presidential candidate debate tells us a lot about the Republican Final Four. It reveals how they would approach their decisions as President and lets us predict the economies that they would produce. (Click here to watch this portion of the debate.)
Speaker Gingrich: The Big Idea Man
Speaker Gingrich initiated the discussion of a possible moon colony during a speech in Florida designed to appeal to NASA workers that was televised by CSPAN the day before the debate. He urged that the United States set a new national goal to put a permanent colony on the moon by the end of the decade and make that colony the 51st state. But the most creative part of his idea was his method for involving entrepreneurs in the venture.
He is aware that NASA, as is true of almost all government-run institutions, has deteriorated over time. These days, it can’t even get satellites up into space. Gingrich would largely replace NASA with contests. He said:...
Obama's SOTU: Still No Manufacturing Jobs -- we're published in today's American Thinker
Here's how we begin:
To read the rest go to:
Follow the following link to download the MP3:
Real house prices will probably keep falling
On December 29, S&P Case-Shiller published its October estimate of average house prices using sales and resales of the same houses to make their estimate. The latest data shows the continuing fall in real house prices since June 2010 shown in the graph below:
The latest data agrees with our prediction of how fast house prices would fall. Specifically, in the April 14, 2011, American Thinker (House Prices in Free Fall) we wrote:
Romney's Theory about Why Companies and Countries Decline - We're published in today's American Thinker
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Romney’s Theory about Why Companies and Countries Decline
When Republican presidential candidate Gov. Mitt Romney was growing up, his father was rescuing American Motors Corporation by focusing upon a new type of car, the compact, putting his company’s resources into the Rambler. When his father took over, American Motors stock was selling for $5 per share. After the success of the Rambler, it rose to $95.
How did American Motors succeed when it was competing with General Motors, which had all the advantages that experience, size and wealth confer? In his 2010 book No Apologies, Romney writes:
Romney is a student of why companies and countries go into decline. After graduate school, he went to work for the Boston Consulting Group where his boss did a study of the advantages of leadership:
According to Romney, companies and businesses decline for the same reasons. They ignore challenges and threats. They squander their advantages. Due to easy money, they stop doing the things which made them great in the first place. According to Romney, the following made America great and should be part of our revival:...
Required Reading, Michael Lind's "The Cost of Free Trade"
Every once in a while, we read an article or a commentary that we believe should be called to everyone’s attention. If you want to know why the U.S. went from being the world’s leading creditor to leading debtor in three decades, we are unable to recommend anything better that Michael Lind’s superb article in The American Prospect on December 1, 2011(www.prospect.org/article/cost-free-trade) entitled The Cost of Free Trade. Mr. Lind is policy director of the Economic Growth Program at the New America Foundation. He describes the politics of free trade and protectionism from the founding of the republic, how politicians in both the Democratic and Republican parties not only allowed but encouraged the deindustrialization of the U.S., and how all the presidents since WWII, Republican and Democrat, sacrificed American industry and American workers to achieve international political objectives and continue to do so to this day.
Every citizen should be aware of this history. But knowing how it all came about and developing policies to correct the situation requires more than one article. We disagree with the policies the author recommends. We believe we have proposed on this site the correct policies to balance our trade and restore our manufacturing sector. But his assessment of how and why we became the world’s leading debtor and how much it cost us is a pre-requisite for doing anything about it.
Lind argues that our international trade policies need to be reversed “both in general and in particular toward China.” We would include Japan and Germany as well. “Over the past two decades, leading U.S. manufacturers, both the venerable (like General Electric) and the new (like Apple), have offshored millions of jobs—by one recent estimate, 2.9 million—to China to take advantage of the cheap labor, generous state subsidies, and low currency valuation that are linchpins of China’s mercantilist development strategy.” In our view, China has been implementing a number of mercantilist (promoting exports and discouraging imports) policies in addition to those mentioned....
Balanced Trade Monetarism
Economic depressions, like the present one which began in the first quarter of 2008, are long periods of economic stagnation, characterized by high unemployment. They result from insufficient Aggregate Demand (AD) for the goods that an economy can produce. Aggregate Demand can be divided into its components:
AD = C+ I + G + (X-M)
where C = Consumption, I = Investment by businesses in tools and structures, G = Government consumption, and (X-M) is net exports (eXports minus iMports).
John Maynard Keynes was the first to point out that if a country had a trade deficit (i.e., negative net exports), then the trade deficit would act as a drag on Aggregate Demand. He more or less predicted the current depressions in the United States, Greece, Spain, Portugal and Italy in 1936 in his chapter about mercantilism and its victims from his magnum opus (The General Theory of Employment Interest and Money) when he wrote:
(A) favorable [trade] balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression. (p. 338)
Modern mercantilism is based upon the twin goals of mercantilism as explained by University of Chicago economist Jacob Viner: (1) maximizing a country's power through accumulation of foreign assets while (2) maximizing long-term consumption by delaying present consumption in favor of future consumption. In order to accomplish these ends it places tariffs (and other barriers) upon foreign products while at the same time buying foreign assets (mainly interest-bearing bonds today; gold in the past) in order to produce trade surpluses. In other words, mercantilist governments maximize their power and their people's future consumption, and bring down their trading partners' power and future consumption, through the combination of import barriers and foreign loans.
But American economists never paid attention to Keynes' and Viner's writings about mercantilism. They thought that an economy beset by mercantilist trading partners could increase AD simply by increasing Consumption or Investment or Government purchases. The methods that they have been recommending have all been failing: ...
Two Great Economists Offer Solution to Restore U.S. Economic Growth
“Any considered examination of the prospects for a major economy is dependant, as never before, on that economy’s performance in the realm of international trade.” With that remarkable beginning, Profs. Ralph Gomory and William Baumol note that their fellow economists, “having been nurtured on the doctrine of mutual gains from trade, seem to resist serious consideration” of the possible negative effects of free trade “and the threat they pose to the welfare of the United States and other countries.” Their article entitled, “Trade, education, and innovation: Prospects for the U.S. economy” appeared in the Journal of Policy Modeling recently.This lack of awareness among economists was the principle reason for writing our own book, Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before It's Too Late (Pittsburgh: Ideal Taxes Assn, 2008). And as we have stated many times on this site, the so-called "free trade" ideology has been an unmitigated disaster for the U.S.
Profs. Gomory and Baumol in their seminal book Global Trade and Conflicting National Interests (MIT Press, 2001) challenged the centuries old doctrine of mutual gains from trade based on the Ricardian theory of comparative advantage. They showed in the book and summarize their argument in this paper that countries can, by employing mercantilist or protectionist policies, achieve a competitive advantage that is harmful to their trading partners.
They arrive at the remarkable conclusion that the invention of new products, like I-pad, laptop computers, and many others, without retaining the manufacture of those products in the U.S. is causing Americans a great deal of harm. Citing China as an example, they note that China has no tradition of inventing new products but it has succeeded in inducing American inventors to outsource the production of their inventions to China. Andy Grove, a founder of Intel, recently pointed out that a large number of high tech American product innovations are outsourced for production in China, with the effect that Apple, HP, Dell and dozens of others have ten times as many employees in China than they have in the U.S. Chinese workers gain good manufacturing jobs while U.S. manufacturing workers face a lower standard of living competing for fewer and relatively inferior jobs. ...
An Economist's Look at Mythical Man-Made Global Warming(AGW)
As an economist and a former student of Prof. Milton Friedman at the University of Chicago, I am by education skeptical about any theory of climate change that explains warming but not cooling. The anthropogenic theory of climate change (AGW) blames man-caused carbon emissions for global warming but cannot explain past periods of global warming and cooling when there were no human beings to blame for climate change. Another economist who shares this view is former Czech President and Prime Minister,Vaclav Klaus, who fought against Communism and recognized in the movement that blames man for causing global warming, a new threat to our freedom saying:
It not only cannot explain past periods of global warming and cooling, it cannot explain the most recent decade of global cooling. Just fifty years there were allegations that we were entering a period of global cooling. There are reasons to be skeptical.
But even if the AGW theory had some basis, economists have to ask , “What is the best policy to deal with global warming?” Whatever policy is selected should meet the standard economic criteria of economic benefit-cost analysis. World leaders have picked the worst policy --forcing businesses and households into the most costly and ineffective policy -- reducing man-made carbon emissions which has had the effect of lowering living standards of workers around the world. ...
Obama's Jobs Act Wouldn't Work. Here's What Would -- We were published in today's American Thinker
Here's the link:
The Current Depression Is Caused By Fanatical Belief in Man-Made-Global-Warming
We know what caused the recession of 2008-09. It was the bursting of the housing bubble which created a financial crisis that endangered every large bank in the U.S. and many abroad. The federal government enacted Troubled Asset Relief Program (TARP), the program which sustained the liquidity of almost all of the large financial institutions, giving them time to deal with the enormous number of mortgages in default on their payments. An economic stimulus was enacted which succeeded in stabilizing the level of unemployed at about 9.2% of the workforce not counting involuntary part-timers and the number who dropped out of the labor force. Then much to the surprise of the administration’s economic team, employment fell, causing a substantial drop in the securities’ markets and concern to be expressed about the possibility of a double-dip recession.
Meanwhile, the eurozone had to face the possibility that Greece would not be able to pay its soon to mature sovereign debt much of it created pursuing man-made-global-warming. The principal other country having difficulty managing its sovereign debt is the USA but fortunately its debt is expressed in dollars and it has the ability to print as much of it as it needs. Greece does not. The euro standard is much like the gold standard. If a country runs out of euros, there is nothing it can do except tighten its belt.
No one mentioned the fact that the reason that Greece was short of Euros with which to pay its debt was its international trade deficit which in 2010 amounted to an estimated €14 billion. Of course it was not the only European country experiencing a trade deficit. What all the PIIGS had in common in 2010 were trade deficits: Spain, €-45.5 billion; Italy, €-48.5 billion; Portugal, €-15.9 billion; Greece, €-14 billion; and Ireland, €-1.1 billion. France likewise had a trade deficit, €-38.9 billions. But Germany had a trade surplus, €134.6. ...
Here Is a Real Jobs Plan in Contrast to Pres. Obama's No-Jobs Plan
As we pointed out yesterday on this site, President Obama’s American Jobs Act does not, for practical purposes, create any jobs at all. He proposed one-time cuts in payroll taxes for businesses and their employees when business needs long-term solutions. It makes huge transfers to the States to pay teachers’ salaries which is not a federal responsibility at all and does not create any new jobs at all. It is nothing but a list of earmarks for his voting constituencies none of which wants to create any real jobs in the private sector. Nothing in the proposed bill would be a stimulus to business to invest here rather than abroad nor discourage outsourcing which has been increasing for decades.
As the bankruptcy of Solyndra, whose $535 million of borrowed capital was guaranteed by the federal government under the 2009 stimulus plan and which received other benefits such as tax credits, demonstrates the fact that the President favors green energy plants over more efficient fossil fuel plants. And as his opposition to private oil and natural gas development on public lands and offshore in the Gulf, Alaska, and the Arctic shows, he is willing to sacrifice millions of jobs to create an uneconomic green economy that will impoverish the American workers. As Tapan Munro, a “clean energy” proponent wrote on August 8, 2011, in an article entitled “U.S. Clean Energy's Bubble is Set to Burst”, because “Clean energy today is more expensive and less reliable than coal- and natural-gas-based energy. Large subsidies artificially maintain clean energy's price competitiveness. These subsidies are likely to cease in a few years because of severe budgetary cutbacks proposed for coming years. This should not be a surprise to us. The industry has crashed before -- in the mid-1990s, in 2002 and 2004 -- mostly because Congress did not extend the tax credits that made the industry commercially viable.’ The Energy Department has closed $37.8 billion in loan guarantees for 36 nuclear, wind and solar projects. Solyndra is not the largest loan guarantee. The DOE reported a $967 million loan guarantee for the Agua Caliente Solar Project.
Not one green plant would be profitable without government subsidies. By contrast private corporations paid $304 billion in federal corporate income taxes in 2010, although all you hear or read in the media is about those companies like General Electric (an administration darling!) that paid no corporate income taxes last year. Private corporations, except when the president wants to rescue his union supporters as was the case with GM, got few subsidies and no protection from foreign competition. ...
A return to manufacturing?
Writing in the September 4th Washington Times, Harold Meyerson presents stark and sobering statistics about the decline of America, and the increasing interest in regaining American manufacturing power. What he does not discuss is a road to get there. But it is good that he and others are increasingly advocating efforts to strengthen manufacturing by ending the blythe policies that have produced imbalanced trade and deindustrialization.
How Economic Recovery Is Being Sabotaged By Bad Economic Policies
President’s economic advisors want to spend more trillions to stimulate the economy. They are joined by a large number of Keynesian economists. The huge federal budget deficits of 2009 and 2010 of over $1.5 trillion each, and the President’s $800 billion dollar economic stimulus plan of 2009 – 2011, as we pointed out in this site several times, was poorly designed to stimulate investment in the private sector, a sine qua non for a growing industrial economy. The trillions spent by the federal government must be considered an utter waste of precious resources. Very little of it was de gned to stimulate the demand for new housing or stimulate other private investment. The hundreds of billions spent on subsidizing activities intended to reduce carbon emissions was totally wasted.
Business reluctance to invest in housing is understandable with so many millions of houses awaiting foreclosure and so many mortgages in default. There is thus a surplus of houses, which will take years to work off. The government has made housing into an unattractive investment. As we have indicated on this site more than once, Democrats wanted to make it easy for unqualified households to purchase homes and Republicans supported the policy because home-owners are more likely to be conservative and vote Republican.
It is not hard to explain the reluctance of American businesses to invest in the U.S. while they continue to invest huge sums abroad. The answer is that they can produce their products much cheaper abroad and they can import the products they produce abroad free of duties. Both parties are committed to the false doctrine of “free trade”. ...
Economic Stagnation: Have We Run Out of New Products? No, But We Are Outsourcing Their Production
The stagnation of the U.S. economy in spite of federal deficits of $1.5 trillion dollars in both 2009 and 2010 has added to the belief that Keynesian deficit spending is ineffective. We subscribe to that thesis. The President’s $800 billion dollar economic stimulus plan, 2009 – 2011, as we pointed out in this site several times, was poorly designed to stimulate investment in the private sector, a sine qua non for a growing economy. None of the investments in wind and solar energy would have passed cost-benefit analysis and they provided very little sustainable employment. The housing sector has not recovered from the burst of the housing bubble which stranded millions of construction workers who are still mostly unemployed. In the manufacturing sector, investments in new plant in the U.S. barely cover the depreciation allowances let alone stimulate net new investment.
The failure of the Recovery Act of 2009 to increase employment while spending over $782 billion and running budget deficits of $1.5 billion per year had a number of possible causes: 1) the continued malaise in the housing sector hung over by hundreds of billions of dollars of mortgages in default, 2) the fact that the stimulus package ear-marked spending for every cause backed by Obama supporters, none of which included incentives to unsubsidized private investment, 3) the continuing trade deficits, which increased to $53 billion in June, 2011, represent a continuous drag on the GDP of over $600 billion a year, and keep costing us millions of manufacturing jobs, 4) government policies actually impede the development of fossil fuel exploration, drilling, and production by the Obama administration in its subservience to its anti-carbon emission obsession, 5) the anti-business policies of the Democratic Congress including its actions to regulate banks and other firms in the financial sector and EPA’s inflicting foolish environmental burdens on new and existing manufacturing businesses,
All of the foregoing contribute to the unwillingness of businesses to invest in new or expanded production facilities in the U.S. New products like the I-Pad and mobile telephones were invented here but are produced overseas, with most of the product exported free of duty to the U.S The only exceptions are the investments of foreign automobile makers in the U.S.,and investments in the highly subsidized so-called renewable energy plantations. As to the latter, it is worth noting in the news today (8-15-11) the announcement of the bankruptcy of Evergreen Solar which listed $485 million of debts, much of it owed to state and federal agencies which subsidized the building of its solar panel factories in Massachusetts and Michigan. Last year the company began producing solar panels in China. That entity is expected to survive the bankruptcy with different ownership. ...
Morici: Obama's proposal for taxing U.S. oil companies would reduce U.S. economic growth
On July 15, U. of Maryland economist Peter Morici (US debt ceiling deal a prelude to ultimate default) pointed out that President Obama's proposed tax hike for foreign oil companies would actually slow economic growth. He wrote:
How to Cut Government Expenditures and Create Millions of Jobs Doing It
No doubt in coming days, the debt limit will be raised -- more’s the pity – but the country will be no better off as a result. Oh, raising the debt limit might prevent uncertainty in stock and bond markets but we do not suffer angst at the problems of investors in those markets. We are depressed by the fact that nothing – literally nothing of significance --is being done to create good jobs for the 26 million unemployed and underemployed (part-time) workers who are without good full-time jobs. We have two parties afraid to offend any significant block of voters. The Republicans to their credit are willing to make changes as the Cut, Cap, and Balance legislation passed in the Republican House and tabled in the Democratic Senate shows. There is no Democratic proposal to cut expenditures on the table, only proposals for increased taxes.
We have two parties – except for the Tea Party supporters and libertarians -- beholden to their corporate contributors which derive most of their profits from foreign subsidiaries and then add insult to injury by importing their foreign-made products. We have one party dedicated to union leaders who have a Luddite mentality. When was the last time you bought a costly advanced technological product made in the U.S.? Only the Tea Party, which is not beholden to any special group, are willing to do something serious about our problems.
The Cut, Cap, and Balance Act of 2011 which passed the House and was tabled in the Senate reduces discretionary spending by $31 billion compared to last year, and reduces mandatory spending by $51 billion in fiscal year (FY) 2012. From FY 2013-2021, the legislation caps federal spending at the same levels (as a percentage of GDP) as the House-passed FY 2012 budget resolution. Ultimately the legislation will save $5.8 trillion over 10 years. And what has the President proposed? Nothing but higher taxes and growing deficits.
But there are many cuts that should be made outside of the entitlement programs. The Department of Education spends $36 billion per year. There is no evidence of improved educational outcomes as a result of federal spending of hundreds of billions of dollars. End the program; it is not a federal responsibility at all. Saving $36 billion per year. And there is more. ...
Government Leaders and Their Economic Advisers Have No Idea How to Create Jobs
Princeton Prof. Alan Blinder, in an opinion piece in the Wall Street Journal, 7-13-11 demonstrates the mental bankruptcy of most of America’s leading economists when it comes to developing solutions to reduce unemployment. He finds the May and June, 2011 unemployment reports “catastrophic”. The fraction of the population that is employed is lower than it was “when the recession officially ended in June, 2009”. (Officially?!). Republican proposals “to slash government spending” are “ways to kill jobs, not create them”. So what does the professor, a former member of the Board of Governors of the Federal Reserve System and a member of Pres. Clinton’s first Council of Economic Advisors, recommend?
He prefaces his recommendations with two statements one of which we challenge. First, he writes, there is no magic bullet. Yes there is as we show below– it is called “balancing trade” by our single-country scaled-tariffs. Over the last four decades, China and other countries, including Japan, Germany, and the OPEC countries have siphoned an estimated five to eight million jobs from the U.S. manufacturing sector. We can recover those eight million jobs.
Second, “there is no free lunch” by which he means the U.S. taxpayers will have to pay for the solution. And what is his solution? He begins his proposal with the statement that “Creating jobs cost money –whether it’s via tax cuts or more spending." We have already spent trillions of dollars since 2009 in tax cuts and more spending, including a Keynesian $800 billion economic stimulus plan, and as Blinder pointed out, the result of all this spending was a level of employment lower in 2011 than it was in 2009. ...
How to Restore America's Manufacturing Innovation -- we're published in this morning's American Thinker
Here's how we begin:
How to Encourage Manufacturing Innovation
On December 5, 1791, President Washington’s Treasury Secretary Alexander Hamilton presented a Report on Manufactures to Congress which established America's tariff-based industrial policy for the next 150 years. He began by noting the general recognition of the importance of manufacturing to an economy:
And later in the report he noted the general recognition that the American people have a special aptitude for innovation:
In June 2011, President Obama’s President’s Council of Advisors on Science and Technology (PCAST) put together a Report to the President on Ensuring American Leadership in Advanced Manufacturing with a similar emphasis upon the importance of manufacturing and manufacturing innovation....
Keynesian Economists Offer No Solution to the Deepening Recession
In the Wall St. Journal of June 21, 2011, Prof. Alan S. Blinder of Princeton U. opined that “Right now, I’m worried about the damage that might be done by one particularly wrong-headed idea: the notion that, in stark contrast to Keynes’s teaching, government spending destroys jobs.” He asks, “How exactly, could more government spending ‘kill jobs’? and “ [H]ow is it that public purchases of computers destroy jobs but private purchases of computers create them?”
In the first place Keynes’s teaching was shown many decades ago by Prof. Milton Friedman, Nobel laureate, of the University of Chicago Prof. Franco Modigliani, Nobel laureate, of Harvard and other economists, to be wrong about the consumption function that Keynes assumed. As a result, as we pointed out in this space, a week ago, there is no such thing as the Keynesian multiplier. It took workers to make the computers and when they have been produced and sold, the stimulus ends. As soon as government purchases end, any employment created by the government order comes to an end. Pres. Obama’s stimulus plans created jobs only while the spending continued. As soon as the spending wound down, GDP went down.
Prof. Blinder’s choice of computers in his example was unfortunate. All the computers sold in the U.S., are produced abroad, mainly in China. While companies like Apple, Dell, Hewlett Packard, and many others make some things in the U.S. and make profits on the computers, et. al., they import from their subsidiaries abroad, they have ten times as many employees abroad than they employ in the U.S. If the government purchase of computers stimulated employment, it was in China, not in the U.S.. Using employment as a criterion, the companies mentioned are Chinese, not American. ...
A Program for a Strong America? Not from these parties
In his most recent column (Published June 15 in the Virginia Pilot) David Brooks describes himself as a "Pundit under protest" because he thinks neither national party is seriously proposing policies that will tackle the major structural problems of the U.S. economy.
"I'm registering a protest because for someone of my Hamiltonian/National Greatness perspective, the two parties contesting this election are unusually pathetic... The Republican growth agenda -- tax cuts and nothing else -- is stupefyingly boring, fiscally irresponsible and politically impossible. ... As for the Democrats, they offer practically nothing. They acknowledge huge problems like wage stagnation and then offer ... light rail! Solar panels!"
Brooks is right that neither party offers an effective program to address the policy challenges that he has identified. The challenge: to solve the problems.
Our War On Drugs Has Cost Us the War in Afghanistan
Our invasion of Afghanistan was to punish the Taliban for giving haven to Osama Bin Laden and his supporters. The Taliban, who outlawed the growing of poppies in 2000-2001 and whose brutality reduced the production of poppies to nearly zero, became hated in the countryside and our troops were welcomed as liberators. In a whirlwind operation, we quickly eliminated the Taliban as a fighting force. They were exiled and bankrupt and no longer had an army. We thought the Taliban would never come back. But we could not let well-enough alone.
We decided to recreate Afghanistan in our image. Unfortunately, our image included one of our blemishes, our failed war on drugs. At the urging of the United Nation’s Office of Drugs and Crime (UNODC), in a reversal of the Opium wars in which the European powers forced China to allow the importation of opium, we established a policy to get rid of the growing of poppies, Afghanistan’s leading agricultural crop.
In return for the Taliban’s reversal of its ban on the growing of poppies, the drug traffickers financed the Taliban and helped it create a new military force. The Taliban’s new policy was successful beyond their expectations and ours. The costs of the war in Afghanistan, which had been falling, escalated since 2006 and has cost us an estimated trillion US dollars. Our army was enlisted in the war on poppies and was used to destroy poppies growing in the fields. Billions were spent trying to get the poppy growers to plant wheat and other grains which yielded less than poppies. The Taliban were welcomed back as liberators by the growers of poppies and the hundreds of thousands who are dependent on the poppy industry for their livelihood. We became their oppressors. ...
9.1% unemployment shows that Obama's recovery & QE2 have failed
This morning, the Bureau of Labor Statistics announced that unemployment rose to 9.1% in May, after a rise to 9.0% in April. With unemployment staying high, it is clear that the Obama recovery and Ben Bernanke's QE2 have both failed. And let's not forget the projected Unemployment Rate, shown in blue, that was made by President Obama's economic advisers based upon their expectations of how well his recovery plan would work.
Those who have been reading my postings should not be surprised. I predicted all of this. For example, I predicted the failure of Obama's recovery plan after I read President Obama's inaugural address. I wrote on January 23, 2009:...
Prof. Krugman Gives Congress Bad Advice on How to Reduce Unemployment
In his NYT column that I read in the Sacramento Bee today, Tuesday, May 31, 2011, economist Paul Krugman writes that we could “cut back joblessness”: 1) by employing FDR’s “WPA-type programs putting the unemployed to work doing useful things like repairing roads.” We have the money for repairing roads and some of the 2009 Recovery Act’s $782 billion went to the states to repair roads and bridges. How many jobs were created? Not as much as the money appropriated would indicate. Most of the road and bridge projects were already planned by the states; only the source of funding changed. 2) “We could have a serious program of mortgage modifications, reducing the debts of troubled homeowners.” That is exactly what the Obama government has been doing, spending a lot of money and hardly making an impact on the problem. 3) “We could try to get inflation back up to the 4 percent rate that prevailed during Ronald Reagan’s second term, which would help to reduce the real burden of debt.” During the past 12 months the Consumers Price Index increased to 3.2 percent,
A worse set of recommendations can hardly be imagined. Inflation is not likely create much employment. All it will do is create economic distortions. Leading economists like Obama’s Harvard professor Lawrence Summers, who was his chief economist, Prof. Christina Romer, his chief of the Council of Economic Advisers and one of the authors of the Recovery Act of 2009, must have given the president similar advice. So Krugman is only saying, “Do more of the same” i.e., another economic stimulus plan that will widen the enormous budget deficit and create a trillion more of debt. The Tea Party supporters may not be economists but their instincts tell them that widening the budget deficit is no solution at all.
Is increased government spending the answer? Of course, not. ...
Like every other goal, increased expenditures on the environment are subject to the economic law of diminishing returns. The first billion makes an enormous contribution to a better environment. The second may make an even greater contribution\ but eventually additional billions make a lesser and lesser or no contribution at all. For the past half decade, our government has wasted hundreds of billions of dollar on environmental programs that for all practical purposes have yielded no benefits at all and created practically zero sustainable jobs. Meanwhile the waste of resources has been dramatized by our failure to do anything to control hurricanes and tornados like the one that inflicted enormous losses to lives and property in Joplin, Missouri. Even if it turns out that carbon emissions have contributed to global warming, it is not clear that global warming has more costs than benefits.
Our citizens have embraced the anthropogenic theory of global warming and have already spent billions on trying, without success, to reduce carbon emissions in the atmosphere. We have spent hundreds of billions of dollars as a nation and succeeded only in reducing the living standards of the American workers.
And while its proponents claim the theory is settled, hundreds of scientists are on record as saying the theory is wrong. They allege that 50 years of global warming is correlated with increased carbon emissions but, as every statistician knows, correlation is not proof that carbon emissions are the cause of global warming, especially when the data is confined to about 50 years. How are periods of global warming and cooling during the past millennium to be explained? Moreover, the proponents have no idea why the past decade has been one of global cooling. A British scientist who correctly predicted the cold winters this year and last has been quoted as saying that we are at the beginning of a period of global cooling. ...
In the last year or two there has been increased attention paid to the budget deficit. However, most of the plans that have been proposed so far are remarkably weak. Debt reduction is not in the plans. Not in the Ryan plan, not in the Bipartisan Deficit Reduction Commission plan, not in the President’s plan. The graph below shows projected debt held by the “public” (by which is meant both ordinary citizens and foreign central banks) under the Ryan plan over the next ten years as projected by Ryan's plan itself. Note that the line increases pretty steadily throughout the ten years. Thus, even with all of the smoke, mirrors, and optimistic assumptions in this and all deficit reduction plans, it clearly does next to nothing to tackle the debt, except to the extent that inflation and economic growth may reduce its weight.
Ask Not for Whom the Trade Deficit Tolls. It Tolls for the American Worker and America’s Future.
The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced last Wednesday that total March exports of $172.7 billion and imports of $220.8 billion resulted in a goods and services deficit of $48.2 billion, up from $45.4 billion in February. March exports were $7.7 billion more than February exports of $165.0 billion but March imports were $10.4 billion. The trade deficit has the effect of reducing our Gross Domestic Product in March by $48.2 billion and represents a drag on employment of 482,000 workers.
The Pollyannas in Washington and New York greeted the data by saying and writing that increased exports and increased exports mean jobs. None of them said that imports increased even faster and that increased imports means a loss of jobs.
For the three months ending in March, exports of goods and services averaged $168.4 billion, while imports of goods and services averaged $215.3 billion, resulting in an average trade deficit of $46.9 billion, a drag on employment of 469,000 jobs. If the trade deficit is extrapolated to the remainder of the year, we can expect that the trade deficit for 2011 will be in the neighborhood of $562.8 billion, a drag on employment of 5.6 million jobs.
In February and March, 2011, the following group of selected countries recorded trade deficits as indicated, in billions of dollars. In the third column, we estimate the 2011 trade deficit based on the numbers in the first two columns. In the fourth column, we estimate the number of jobs that would be created if trade were balanced at the level of imports from each.
If trade were to be balanced, it would create up to 5.52 million jobs mostly in manufacturing, arresting the deindustrialization of the U.S. and restoring the labor force to full employment....
Why weaker dollar won't help exports very much
Most economists think that the weaker dollar will revive American exports. The sequence of events they hypothesize is the following: weaker dollar -> higher profits -> investment in new factories -> greater exports. There is no way to get much greater exports without increased investment in new highly-efficient modern factories.
The weaker dollar does indeed lead to higher profits, but the higher profits don't lead to much investment in new factories. That's because investments are based upon long-term considerations, and manufacturers don't see the weak dollar as being a long-term change. They expect that the exchange rate will bounce up again as it has been doing. The chart below, shows how the dollar's price has yo-yo'd up and down versus the euro for the past five years:
House Republican Budget would Benefit the Poor -- We're published in today's American Thinker!
Here is a selection:
To read it, go to: http://www.americanthinker.com/2011/05/house_republican_budget_plan_w.html
Has the dollar started to collapse?
At the moment, Bernanke's huge expansion of the monetary base to buy long-term US Treasury bonds (QE2) is bringing the dollar perilously close to a collapse. In fact that collapse may have already begun, as shown by the near vertical line shown at the tail end of the chart below:
I explained why QE2 might cause a dollar collapse in a November 15 commentary (Will QE2 End in Disaster?). I wrote:...
"Green" Energy Is an Economic Disaster in the Making
Increasingly, questions are being raised about the “science” of anthropogenic global warming. For all practical purposes, there is no dissent at American universities. What little there is has been and continues to be stifled. Billions of dollars of research is being funded by the U.S. government but none of it goes to any scientist who challenges the notion that man’s consumption of fossil fuels is responsible for global warming. Some physicists have protested and a Senate committee has listed the names of a couple of hundred academicians who believe the theory to be baseless. There is a growing awareness among what is a small band of scientists that we have a lot to learn about the causes of climate change.
A novel experiment known as CLOUD, is being conducted at CERN in Geneva, Switzerland under the direction of Prof. Jasper Kirkby (firstname.lastname@example.org). The CLOUD project is an attempt to ascertain whether and how cosmic rays from outer space may be affecting the earth’s climate. It includes among its collaborators, besides CERN, such institutions as Caltech, U Frankfurt, FMI Helsinki, U Helsinki, U Innsbruck, UEF Kuopio, U Leeds, Ift Leipzig, U Lisbon, LPI Moscow, PSI, RAL, U Reading, INRNE Sofia, U Tampere, and U Vienna. The experiment is taking place at the CERN Proton Synchrotron and aims to study, under controlled conditions, the effects of cosmic rays on aerosol nucleation and growth, cloud droplets and ice particles. In earlier studies, Prof. Kirkby made some palaeoclimatic reconstructions which showed that the climate has frequently varied during the last 10,000 years by amounts comparable to the past century’s warming. Since man was not burning fossil fuels until the last two centuries, his studies have cast doubt on the current theory that anthropogenic greenhouse gases are responsible for global warming.
While the world awaits the results of the CLOUD experiment, many political leaders around the world have become aware of the enormous government subsidies required to induce production of “green energy”, its few benefits, and its negative economic effects....
How to achieve Economic Recovery and Full Employment --Balance the Budget and Balance Trade
Princeton Professor Alan S. Blinder in an opinion piece in the Wall St. Journal on April 10, 2011 excoriates Rep. Paul Ryan’s plan for reducing the federal budget deficit as just about the worst conceivable, far inferior to the Bowles-Simpson and the earlier Domenici-Rivlin budget cuts proposal. Republican Sen. Paul Ryan’s plan would reduce the deficit by $4.4 trillion over ten years by repealing Obamacare, substituting private health plans and making block grants to the states for Medicaid. It also imposes hard spending caps on domestic spending. What is Prof. Blinder’s principle complaint? It is regressive, it is “reverse Robin Hood redistribution.” He ignores the fact that the bulk of government expenditures disproportionately “benefits” lower-income families, from public schools, parks and libraries to entitlements like medicare. Too bad he did not analyze similarly Pres. Obama’s economic stimulus plan. He would find that Pres. Obama had sold out the American worker in the name of climate change.
If Prof. Blinder were to do that, he would discover real regressivity. About a third of the nearly $800 billion stimulus plan simply kept teachers and other state and municipal employees in their jobs. These are by no means an underpaid group. Teachers get superior annual salaries for working less than ten months a year. That apparently is what Prof. Blinder meant when he said the Recovery Act prevented a depression. It obviously did not increase employment in the private sector.
And talk about regressive, about a third of the Recovery Act’s billions went to uneconomic wind and solar plants that in addition to the direct subsidies for their construction are subsidized by the higher prices guaranteed them for the electricity they produce – double or triple the cost of electricity produced by natural gas, coal, or nuclear energy. Worse, these plants hire very few permanent workers. As we reported previously, a $220 million wind or solar plant creates only about 40 permanent jobs. WOW! Each sustainable job created required $55 million of expenditure per job. Not only a really regressive expenditure but one quite likely to usher in another depression when manufacturers flee abroad as a result of rising energy prices....
American People the Big Losers in the Budget Deal
Dick Morris has a pretty clear assessment of what happened. He wrote (It's no deal, it's a sellout):
Retired Gulf VP Charles Campbell nails US economic problems and their solution
Retired Gulf Oil Senior VP Charles Campbell nails our chief problems and their solutions in his brilliant March 23 Baltimore Sun commentary (End America's addiction to Mideast oil: Only hope for U.S. economy is to bring down our trade deficit, become self-sufficient in energy).
He is correct that if we fail to solve these problems, we are headed toward economic disaster. In fact, our government debt problem may be about to get worse as a result of upcoming sales by Japan of dollar reserves and the expense of Obama's military intervention in Libya. As far as energy production is concerned, his area of expertise, he argues that we need to develop domestic energy resources but are moving in the opposite direction. He writes:
Richard Duncan names the current depression the "New Depression"
In a February 22 commentary (The Great Depression and the New Depression) that appeared in The Daily Reckoning, Richard Duncan, who had predicted the current depression years before it began, compared the two depressions. Here is a selection:
He does not think that the depression is over:...
How to Avoid the Coming Dollar Collapse
There has been increasing concern in American foreign policy circles lately about the coming dollar collapse. The writers often point to "Triffin's Dilemma" as an explanation of why the crash is inevitable and why only delaying actions are possible. Here's Wikipedia's summary of that dilemma:
In a June 2010 paper (How Dangerous Is U.S. Government Debt? The Risks of a Sudden Spike in U.S. Interest Rates), CFR's Francis E. Warnock argued that we are now nearing the endgame in which the flight from the dollar produces a dollar collapse. In fact, he even claimed that we almost experienced that crash in 2009:...
71% of Americans oppose raising the debt ceiling
According to a Reuters/Ipsos poll, 71% of Americans oppose raising the debt ceiling. Here's a selection from a Reuters article about the poll results:
When asked where to cut:...
The Irresponsible Tax Compromise
The current leaders of both political parties have been totally irresponsible. They are following the same foolish strategy that some of my beginning economic students try in one of the simulation games that we play. They continually run large government deficits to keep their economy stimulated. At first the government deficit spending helps. But eventually debt payments become such a huge part of government spending that the government loses its ability to ever balance its budgets. From then on, the growing government spending causes hyper inflation which makes the economy totally unmanageable.
Peter Morici had a great Seeking Alpha commentary on December 20 (Downgrade U.S. Treasuries to Junk). He pointed out that the irresponsible tax compromise between the Obama administration and the Republican congressional leadership will result in huge budget deficits into the distant future:
Then he pointed out that this will cause term-term U.S interest rates to climb and climb, as has already begun:...
UN bureaucracy being expanded by Cancun Climate Conference
Viscount Monckton of Benchley reports the happenings of the Cancun conference in a December 9 commentary (The Abdication of the West) published on the Science and Public Policy website. Here is his paragraph in which he lists all of the new bureaucratic agencies being created to be paid from a $100 billion per year fund (by 2020) from the advanced economies:...
Mort Zuckerman: Western decline caused by trade & budget deficits
In a December 1, 2010, commentary (The Danger of a Global Double Dip Recession is Real), Mort Zuckerman, editor in chief of U.S. News and World Report, comments on the decline of the west in general and the United States in particular. He largely attributes the decline to the combination of trade deficits (i.e., "current account deficits") and budget deficits. Specifically:
And, as he notes, U.S. policy makers have no solutions:...
Roger Altman may replace Lawrence Summers
According to news reports, President Obama may soon pick Roger Altman, a former Deputy Secretary of the Treasury under President Clinton, to replace Lawrence Summers as his chief economic advisor. I just listened to an hour long July 2009 interview that Charlie Rose had with Altman, you can watch it here:
The good news is that Altman is a budget deficit hawk. More good news is that he thinks the higher U.S. private savings rate is a good thing because it will help long-term growth. Maybe he will bring some long-term thinking to the U.S. government.
The bad news is that he doesn't understand mercantilism. He thought that the trade deficits would stay down after the November 2008 crash. He did not foresee that our trade deficits would shoot up and stifle the recovery because the Asian nations would increase their mercantilist predations. He did not realize that China intentionally keeps its people's savings high by denying them credit....
Program for economic recovery and 2012 victory -- we're published in today's American Thinker
Here's how we conclude:
Follow the following link to read it: http://www.americanthinker.com/2010/11/program_for_economic_recovery.html
Bernanke on China
QE2 could becomeTitanic2
“QE2” are the initials of the Queen Elizabeth 2, a great ocean liner which was the sequel of a great ocean liner. They are also the initials of “Quantitative Easing 2,” Federal Reserve Chairman Ben Bernanke’s second huge increase in the United States money supply. Although QE1 was a huge success, QE2 could end in disaster. If so, it may be renamed “Titanic2,” after another ocean liner, one that sank.
QE1 restored liquidity to the U.S. money supply during and after the October 2008 financial crash. The extra liquidity provided by the Fed let American banks lend short term so that businesses could meet payrolls and buy inventory. As part of the QE1 package, Bernanke even made currency swaps with fellow central banks, which made dollars available around the world to foreign businesses whose debt payments required dollars. QE1 was Bernanke at his best.
QE2 is designed to reduce American private savings and also to cause private foreign savings to flee from the United States. Its goal is to increase inflation from its current 1% to at least 2% or 3% while keeping short-term U.S. interest rates close to 0%, producing an “inflation tax” upon private American and foreign savers.
Bernanke hopes that reducing private American savings will increase American consumption and that sending private savings abroad will improve America’s trade balance. Indeed, the short-term result of QE2 will be beneficial. Consumption will increase and private savings will flee the country for better interest rates abroad. Already, the dollar has weakened versus most foreign currencies, which makes American products more competitive in U.S. and world markets.
But in the long term, Bernanke’s discouragement of American savings will reduce investment in America’s economic future and his decision to increase inflation will provide a new element of uncertainty in business decision making.
The effect upon the dollar can’t help much. It will either be temporary or disastrous, depending upon what foreign central banks do:...
Message from the People of Kentucky: America's Problem is Debt
Victorious Kentucky Senator-elect Rand Paul eloquently summarized the message of his election in his victory speech on Tuesday. America's problem is debt.He is correct. First came excess consumer debt, which spread to include bank debt when houses fell in price, which spread to include government debt when the Bush and Obama administrations tried to stimulate the economy while letting the trade deficits expand. Here's what Rand Paul said:
If you watch to the end, you'll see the snide sophisticated CNN commentators pretending that Paul is a madman threatening to cause a worldwide depression. But Rand Paul is right and Washington is wrong.
There is a simple recipe for both short-term and long-term growth. Balanced Trade Monetarism simply requires: (1) balanced budgets, (2) balanced monetary growth, and (3) balanced trade.
Caterpillar's New Chinese Factory ignites Voter Rage
This week, Caterpillar announced that it will build its new factory in China in order to have access to the Chinese market. Meanwhile, many of Caterpillar's American workers are laid off.
But Caterpillar doesn't have any choice, were Caterpillar to expand its American factories it would be able to protect its proprietary technologies, but it would have little access to China's rapidly growing market due to the Chinese government tariff, non-tariff, and currency-manipulation barriers. And U.S. markets are not growing, due to our government's toleration of Chinese tariff, non-tariff, and currency-manipulation barriers.
Tim Sullivan, CEO of American heavy-equipment manufacturer Bucyrus International, explained the Chinese market to Presidential candidate John McCain back in April 2008. Business columnist John Torinus witnessed the exchange:
Meanwhile, American voters are furious with Washington and with American corporations according to the latest Wall Street Journal/NBC News poll. Here's how WSJ reporter Janet Hook summarizes the results:...
Why Summers Resigned
My father predicted Larry Summers resignation as Obama's chief economic advisor after observing Summers' body language when he was interviewed by reporters after coming back from his trip to Beijjing earlier this month. Let's review the situation. Here's what I wrote on September 7:
Summers economic policy has failed and his last-ditch attempt to rescue it in China failed. So he is taking the dignified way out. The White House has a different story. Bloomberg reports:...
Obama Did Create 3 Million Jobs -- In China (we're published in this morning's American Thinker)
We're published in this morning's American Thinker, just follow the following link:
Paul Craig Roberts: Balance Trade and Budgets Now or Dollar Crash Soon
Paul Craig Roberts, head of policy at the Department of Treasury under Reagan, predicted an upcoming dollar crash in an August 16 commentary (The Ecstacy of Empire). He began: "The United States is running out of time to get its budget and trade deficits under control." He goes on to describe the upcoming dollar crash if this is not done:
Part of Roberts' solution is to bring U.S. troops home now. The other part is to switch our tax system to a value-added tax which has two tax rates, depending upon where the value is added. If the value is added abroad, the rate is higher. He wrote:...
Cato Institute's Richard W. Rahn only sees 2 alternatives for reviving economy
In his August 3 commentary about the latest GDP figures in the Washington Times (Evidence and Denial) Richard W. Rahn was quite accurate about the economic dreamworld that the Democrats are living in. He writes:
Last Friday, it was reported that economic growth was only 2.4 percent in the second quarter of this year - far below what the Obama administration had forecast. Yet the administration and its supporters continue to be in denial about the fact that their policies are not working. Psychologists refer to the refusal to change one's mind when confronted with contrary evidence as cognitive dissonance.
But he misses the fact that the Republican establishment is living in a dreamworld also If he were to look closely at the second quarter numbers, he would have discovered that the rising trade deficits caused GDP to fall. Obama’s failure to deal the trade deficits is sinking his presidency....
Pres. Obama's $787 Billion Recovery Act Has Produced Few Sustainable Jobs
On Feb. 13, 2009, Congress passed the $787 billion American Recovery and Reinvestment Act of 2009 (ARRA), commonly referred to as Pres. Obama’s economic stimulus plan. As of May, 2010, about 62% has been paid out. According to Prof. Romer, the Chairman of the Council of Economic Advisers, the act has saved or created 2.5 million to 3.5 million jobs. If the purpose of the act was to save some jobs, it may have succeeded. Indeed, analysis of the expenditures suggests that the act was poorly conceived. If its object was to create jobs and promote a recovery, it was a complete failure. The employment data of the Bureau of Labor Statistics as the following table shows does not evidence any net job creation. The number employed fell by 3.0 millions from March 2009 to December, 2009 and increased just over 1.1 million by the end of March, 2010 for a net job loss of 1.9 million jobs.
Prof. Blinder Believes He and Obama are Keynesians But Keynes Would Disown Them
In the Wall Street Journal 7-19-10, Alan S. Blinder, a professor of economics and public affairs at Princeton University writes in an opinion piece entitled “Obama’s Fiscal Priorities Are Right”, writes: that the “deficit hawks” believe the federal budget deficit is already too large and that the first stimulus failed. He disagrees. He writes, “The hawks have even dug in their heels against extending unemployment insurance benefits at a time when the unemployment rate is 9.5%, or helping states and localities avoid laying off teachers in September. That’s pretty anti-Keynesian thinking.” The first part is not even true; the Republican leadership wants Congress to specify the source of the funds. Why not the Tarp program or the economic stimulus bill? They are loaded with billions of unspent funds. Why are the Democrats against specifying the source of the funds? And while it may not be popular in the polls to say so, many economists believe, that many, not all, receiving unemployment compensation are really not making a serious effort to find work. And these economists could be Keynesians and they include Prof. Blinder. Prof. Blinder’s answer later in his piece is that “the right level of unemployment insurance means balancing these costs and benefits—a tricky calculation.”
As for school districts that the economic stimulus plan is supporting, not a single new job has been created supporting them. Yes, Prof. Blinder, we believe the economic stimulus bill has been a failure. We believe the money should have been used to stimulate private investment in new factories and equipment. New factories create sustained employment and have a real multiplier effect. ...
Real Policies for a Sustained Economic Recovery
For reasons that we have mentioned many times in this space, we believe the Obama administration’s policies to recover from this depression (technically, a recession) have been practically worthless, notwithstanding their enormous cost. The administration’s economists, who should know better, have endorsed the economic stimulus plan notwithstanding the fact that it throws money at a variety of programs that provide no sustainable stimulus to the private sector. Oh, the rebates, the klunkers’ program, subsidies for energy spending give temporary stimuli but nothing sustainable. To achieve sustainable economic growth, investment in manufacturing and industry is required. Stimuli to alternative sources of energy, principally wind, solar, and biochemical will not produce sustainable growth until we begin to run out of petroleum and natural gas which is likely to be delayed three to six decades.
All the while, there were cost-free and revenue-producing measures that could have been taken to stimulate private investment. In a posting on this site on June 28, 2010 entitled “ Bush and Obama's Economic Stimulus Attempts”, we criticized the administration’s policies as well as Republican proposals and promised to put forth our own proposals for a speedy recovery. Our first proposal is to end our foreign trade deficits which have caused the closing of thousands of American factories and the loss of millions of good-paying industrial jobs. We need to stop the outsourcing of the production of goods that Americans consume and produce the products of American ingenuity here. ...
Outsourcing Production Is Committing National Suicide, Says Andy Grove, Former Intel CEO
There is growing concern in this country about the outsourcing of manufacturing production and its effect on American jobs. In our book, Trading Away Our Future (Ideal Taxes Assn., 2008), we blamed foolish U.S. government policies recommended by foolish free trade academics for permitting the trade deficits that have led to our industrial decline and permitted our former enemies Germany and Japan, and our current enemy China to grow their industry dramatically at the expense of the American worker. In the July 5, 2010 issue of Business Week, Andy Grove, a founder of Intel and its former CEO makes the spectacular prediction that the outsourcing of production of technologically advanced products by our product innovators is an act of economic suicide. He writes,
The great Silicon Valley innovation machine hasn’t been creating many jobs of late -- unless you are counting Asia, where American technology companies have been adding jobs like mad for years. …Today, manufacturing employment in the U.S. computer industry is about 166,000 -- lower than it was before the first personal computer, the MITS Altair 2800, was assembled in 1975. Meanwhile, a very effective computer-manufacturing industry has emerged in Asia, employing about 1.5 million workers -- factory employees, engineers and managers. … Some 250,000 Foxconn employees in southern China produce Apple’s products. Apple, meanwhile, has about 25,000 employees in the U.S. -- that means for every Apple worker in the U.S. there are 10 people in China working on iMacs, iPods and iPhones. The same roughly 10-to-1 relationship holds for Dell, disk-drive maker Seagate Technology, and other U.S. tech companies.
American economists viewed this development with benign neglect. Groves cites the following quote by Princeton professor and former member of the Council of Economic Advisers under Clinton and member of the Board of Governors of the Federal Reserve System under Greenspan: “The TV manufacturing industry really started here, and at one point employed many workers. But as TV sets became ‘just a commodity,’ their production moved offshore to locations with much lower wages. And nowadays the number of television sets manufactured in the U.S. is zero. A failure? No, a success.” (Italics mine.)...
The First Step for a Sustainable Economic Recovery -- Balanced Trade
Now gather round all you Democrats and all you Republicans, and all you left and right leaning independents and all you tea party people and we’ll tell you how to quickly turn this recession into sustainable prosperity, with real jobs, millions of them. We know most of you who haven’t read our book, Trading Away Our Future (Ideal Taxes, 2008) are in a state of disbelief. How could we, three relatively unknown Ph.D.s, know what we must do when the former Chancellor of Harvard University, economist Larry Summers, and his protégé, former head of the Federal Reserve Bank of New York, Secretary of the Treasury, Timothy Geithner, and, Cristina Romer, Chairman of the President’s Council of Economic Advisers, approved the 2009 Recovery Act that budgeted the costly $787 billion economic stimulus program which created not a single net new sustainable job to date? The answer my friends is not blowing in the wind, nor even on Facebook. The answer is because the economic elite to which they belong are Keynesian and we aren’t. And they are ideologues on "free trade" and we are not.
They believe that increased government spending regardless of what it is spent on will stimulate the economy and promote a recovery. We maintain that an increase in deficit spending will provide only a temporary stimulus which will disappear as soon as the money runs out. Lord Keynes would turn over in his urn to observe what is being done in his name.
It isn’t that the Obama economic stimulus program doesn’t create or save some jobs, especially for teachers and other government employees, ninety-nine percent of whom voted for Obama, surely a coincidence. It just has no sustainable stimulating effect, i.e., it has no multiplier. It raises GDP temporarily and the stimulus disappears as soon as the money appropriated is exhausted. Plus, they are “free trade” ideologues. We know of no economic theory that holds that free trade is beneficial to both trading partners even when it is one-sided. Free trade does work in the 50 states where the U.S. Constitution forbids the states from imposing barriers to trade and the free movement among the states of workers and capital. Free trade works only when the trading partners are subject to those conditions, which means nowhere except in the U.S. ...
Why is the Fed no longer effective?
In a June 22 Seeking Alpha commentary (The Fed, the Yuan and the Failure of Diplomacy), Peter Morici accurately discussed U.S. economic history, pointing out the ineffectiveness of the Federal Reserve in recent years:
Fed policy is much less relevant to US growth and price stability than in the days of Fed chairman Paul Volcker (1979-1987), because China's yuan policy has substantially limited the importance of Fed interest rate decisions by severing the historic link between short interest rates - like the federal funds rate it targets - and long rates on mortgages, corporate bonds, and the securities banks use to finance lending on cars and credit cards.
He is thinking through the problem in the same way that we have been. As usual, he is way ahead of most of the economic profession, which is still living in a dreamworld in which unilateral free trade is a good policy.
But my father, son and I are actually still a bit ahead of Morici here. We are advocates of the economic philosophy called "monetarism." The founder of monetarism, Milton Friedman, was my father's dissertation advisor at the University of Chicago.
Back on December 4, 2008 (Keynesian borrowing won't solve our economic problems), we enunciated the general principles that should guide economic policy. We wrote:...
Senate only passes a quarter of Obama's $266 billion stimulus
Congress is starting to lose its enthusiasm for failing stimulus plans. Washington Post staff writer Lisa Montgomery reports (Election-year deficit fears stall Obama stimulus plan) that the Senate just recessed after only passing a quarter of President Obama's latest $266 billion stimulus plan:...
World needs US taxpayer bailout - but Atlas is about to Shrug
Fred Bergsten of the Peterson Institute for International Economics, a thinktank with close ties to the Obama administration, wrote a commentary for the Financial Times (New imbalances will threaten global recovery) which foresaw continuing world economic stagnation unless the US taxpayer bails out the world with increased deficit spending. Here is his reasoning:
Global imbalances are about to jump again. New estimates from the Organisation for Economic Co-operation and Development suggest that the sharp decline in the exchange rate of the euro, along with tepid European growth, will produce eurozone surpluses of at least $300bn (€251bn, £208bn) annually within the next few years. The tightening of fiscal policies throughout Europe in response to the crisis, along with the new balanced budget amendment in Germany, will both depress domestic demand and require easier monetary policy that will weaken the euro further....
Are Data Problems Undermining U.S. Policymaking?
I recently recieved the following question:
"Interesting article... Is Manufacturing Going the Way of Agriculture? Manufacturing output may not actually be dropping in the USA even as employment in manufacturing is. How accurate do you think their #s are?"
My response: The authors are quite right that manufacturing employment has dropped more than manufacturing output. One explanation (presented as the only explanation in the article) would be that this is because productivity is increasing. Hence, manufacturing employment is going the way of agriculture employment. Few people work on farms anymore, but the U.S. still grows a lot of food because many of the farms that remain are extremely efficient and highly mechanized.
There is one thing that gives me pause about these figures, however, and that is that the manufacturing output and the productivity figures both are probably distorted by increased outsourcing of component production...
The Greek Crisis Reveals the Fatal Weakness of the Euro and the Gold Standard
The headline in the WSJ (4-28-10) reads, “Crisis Spreads in Europe, Debt Downgrades in Portugal, Greece Sow Fear of Contagion.” The same article recites “The yield on Germany’s 10-year bond fell to 2.99%.” The following day, the headline read “Contagion Fear Hits Spain.” What is Germany doing right that Greece, Portugal, and Spain are doing wrong? For one thing, and we believe the main thing, Germany exports more than it imports while the others import more than they export. So Germany accumulates euros and foreign exchange while the others run out of euros and foreign exchange. Since their debts are payable in euros, they become unable to service their debts. As the following table shows, Greece, Portugal, and Spain display trade deficits in 2008 and 2009, the first a more or less normal year of growth, the latter a recession year.
Source: CIA, World Fact Book
The solution the article talks about is a loan of €45 billion from the EU and the IMF, a condition of which would be for Greece to tighten its belt and balance its budget averting its need to borrow. But a balanced budget is no guarantee that exports will rise and imports will fall. The U.S. enjoyed a balanced budget in 2000. Nevertheless, the trade deficits exploded....
Tom Goergen foresees the coming financial crisis
The Democrats and Republicans in Washington are getting together this week on new financial regulations. But they are ignoring the cause of the last financial crisis and of the next. Meanwhile, writing in The Pilot, a local Soutnern paper, Tom Goergen nails it:...
Deficit Commission should address both deficits
The bipartisan U.S. Deficit Commission meets for the first time today (April 27). In December it will report its recommendations to Congress. The commission is expected to recommend some combination of tax increases and spending cuts to rein in our huge government budget deficits.
But there is another deficit problem that should be addressed at the same time. Our foreign debt has been skyrocketing. On July 13, 2009, we wrote a commentary (America Sliding Into a Pit of Foreign Debt) for the American Thinker about it. We wrote:
Eventually, when payments to foreigners get too high, a currency crash becomes inevitable. We also wrote about this back in July:...
Why Financial Reform Now? Why Not a Bill That Creates Jobs?
The President’s motives in offering a financial reform bill to regulate Wall Street and the banks has all the appearances of a Mein Kampf strategy for national socialism. Like burning down the Reichstag and blaming it on your political foes. Pretend that the banks and investment houses caused this recession when everyone in Washington knows it was the housing bubble that created the financial crisis, a bubble one of whose authors was Barney Frank who reported out the House version of this bill. Taking advantage of the negative public reaction to bailouts, which actually turned out to be pretty inexpensive, the reform bill speaks of avoiding the need for bailouts in the future. Why? TARP’s toxic assets were rendered harmless at very low cost. Why not plan on repeating it during the next recession? Say, sixty years from now.
You won’t need any new taxes, no phony fund to slice up companies too big to fail. Why break them up? Make them a loan and get back your principal with interest! That is what happened during this recession. The loans, negatively referred to as bailouts, stabilized the banking system at amazingly low cost to the taxpayers. In the future it will be at a very high cost represented by the taxes to create a fund that will have as little reality as the social security fund. The taxes will all be used as the social security fund is used, to finance government borrowing. ...
Congress Caused This Depression. Not Wall Street. Not the Banks
A bi-partisan Congress and successive Democratic and Republican administrations caused this depression. What else should one call an economic situation in which nearly 10 percent of the work force is unemployed and an additional 8.5 percent have given up looking for jobs. The administration would like you to believe that it was caused by the big investment houses on Wall Street and by the banks. The banks caved in under government threats and blackmail by ACORN and other self-appointed community groups and made the rotten loans whose defaults were responsible for this depression. Wall Street, seeing there were profits to be made, volunteered to raise the capital to convert the trillions of dollars of foolish mortgages into foolish investment vehicles. It turned out to be very profitable in the short-run but catastrophic in the long-run. But the bubble had been set in motion by Congress, not Wall Street and not the banks.
It all began innocently enough with the passage of the Community Reinvestment Act of 1977 which required the banks to end their alleged discrimination against the poor, mostly black, residents in poor, so-called, red-lined neighborhoods. It was leftist propaganda that accused the banks of deliberately discriminating against blacks and the line was bought hook, line, and sinker by Sen. Proxmire, the bill’s sponsor, President Carter, and a know-nothing Congress. Banks, including black owned banks, as is to be expected, made fewer mortgages in economically deteriorating neighborhoods. But the act ignored reality and required banks to make loans in such areas and if they failed to do so, they would suffer penalties. ...
Revaluing the Yuan Will Not Balance Our Trade with China; Tariffs Will.
Nobel Prize-winning economist Prof. Paul Krugman, in a series of recent op-eds, has decried China’s policy of keeping its currency, the renminbi or yuan, undervalued to maintain and grow its chronic trade surpluses with the U.S. and other nations. An increase in the value of the rrenminbi relative to the dollar would make Chinese goods more expensive to Americans and U.S. goods less expensive to the Chinese which economists believe would stimulate demand for U.S. made goods and reduce demand for Chinese made goods. The trouble with this view is that the Chinese government denies consumers the foreign exchange required to import U.S. goods and services. In 2008, our trade deficit with China reached $268 billion, representing a loss of about 2.7 million US industrial jobs over the course of the last two decades. In 1989, our trade deficit with China amounted to $6.2 billion, or about 1/40th of the 2008 deficit. In 2008, our trade deficit with the rest of the world totaled over $800 billion, roughly equal to Pres. Obama’s economic stimulus plan to exit the recession. Balancing the trade deficit at the 2008 level of imports would create 8 million U.S. jobs.
In his most recent op-ed which appeared on the internet, March 14, Prof. Krugman called for a 25% percent increase in the value of the yuan relative to the US dollar, implying that such a revaluation of the renminbi would bring our trade with China into reasonable balance. A hundred and thirty US legislators of both parties have called for the U.S. to put pressure on China to revalue her currency. We do not believe that fluctuating exchange rates would be successful in reducing the trade imbalance. We believe there are many ways for mercantilist nations to restrict imports and subsidize exports in spite of a revaluation of currencies. ...
The Obama Administration's Agenda to Balance Trade
On March 1, 2010, Ambassador Ron Kirk, United States Trade Representative, disclosed “The President's 2010 Trade Policy Agenda”, a suicide pill for the U.S. economy. For three decades, every administration had more or less the same agenda and ideology: Ignore the trade deficits and just accept them as the inevitable result of competitive forces, which they are not. It follows that if China, Japan, Germany, and others want to exchange their valuable goods for mere greenbacks, why should we complain? We can print more.
It is hard to believe that that was and continues to be the attitude of the vast majority of economists. They’ve been brain-washed into believing that market forces must inevitably restore a balance of trade. Economic theory does not support that view. It applies only under certain conditions as we pointed out in our book, Trading Away Our Future (Ideal Taxes Assn, Jan., 2008). China, like Japan before it, was and continues to deliberately pursue the mercantilist policy of promoting a surplus of exports over imports by erecting all sorts of barriers to imports while subsidizing exports, keeping its currency artificially undervalued to make its imports expensive and its exports cheap, by buying U.S. financial assets to keep U.S.interest rates low to American consumers, to discourage savings and encourage consumption. Not until recently did an eminent economist like Prof. Paul Krugman condemn China’s mercantilist practices and suggest U.S. counteraction.
The slow-acting suicide pill suddenly accelerated in the mid-1990s. The result was the loss of millions of U.S. industrial jobs. How many? To balance trade at the level of imports in 2008, we would have to create eight million industrial jobs. The defenders of U.S. trade policy point to our achievement of full employment in 2007, neglecting to mention that the competition of factory workers who lost their well-paying jobs lowered the earnings of all workers. As a result, wages have stagnated over the past three decades, fewer workers enjoy middle class incomes, income distribution has worsened, and the U.S. is on the verge of becoming a second-rate industrial power if it has not already achieved that distinction. ...
Germany, Greece, the Euro, and the Gold Standard
Many commentators believe that dysfunctional Greece is the cause of Greece’s pending bankruptcy and many believe that dysfunctional USA is the cause of the USA’s pending bankruptcy. Time has run out for Greece and is running out for the USA. But the U.S. is more fortunate than Greece; its bonds are payable in U.S. dollars, issued as needed by its central bank, the Federal Reserve System. Poor Greece, its debt is payable in euros which are printed by the European central bank whose policies require Germany’s approval. And Germany does not approve profligacy.
The cause of Greece’s problems is alleged to be financial profligacy but its immediate cause is really its chronic trade deficit with Germany and the European community which causes it to run out of euros. The cause of the USA’s problem is alleged to be financial profligacy but its immediate cause is its chronic trade deficits with China, Japan, Germany, and OPEC which flood the world with dollars which the world hoards as reserves or sends to the U.S. in return for U.S. Treasury bonds and other U.S. financial assets. Unfortunately, this is not sustainable. . . .
McCain's economic advisors cost him the Presidency and may cost him his Senate seat
A February 22 interview with the Arizona Republic editorial staff (Sen. John McCain: I was misled on bailout) shows that Senator McCain still doesn’t understand that his economic advisors' lack of common sense cost him the presidential election. They made four huge mistakes.
Mistake #1, The TARP Bailout
The American people have enough common sense to recognize a give-away to Wall Street lobbyists. Yet McCain voted for TARP, suggesting that his anti-lobbyist rhetoric was phony. Dick Morris and Eileen McGann noted at the time that McCain's TARP position may have cost him the presidency.
But McCain still doesn't understand his mistake. In his interview with the Arizona Republic editorial staff, he claimed that Paulson and Bernanke misled him about how the TARP money would be spent. But he again defended his vote, citing his economic advisors:...
Ralph Gomory: Does America Need Manufacturing?
Ralph E. Gomory is a former Senior Vice President for Science and Technology at IBM and the former President of the Alfred P. Sloan foundation. He is also the author of a mathematical theorem that bears his name.
Why There Has Been No Keynesian Multiplier
The Keynesian multiplier posited that an increase (decrease) in investment (I) or in government purchases (G) will cause an increase (decrease) in national output equal to 1/(1-MPC) where MPC is the percent change in consumption that results from an increase in income. To illustrate, an increase in domestic investment of $10 billion will increase income directly by $10 billion. If the MPC is 80 percent, the recipients will spend $8 billion on increased consumption, the recipients of the $8 billion will increase their consumption by $6.4 billion, which in turn will increase consumption by $ 5.12, and so on. The increase in I plus the successive increases in consumption amount to $50 billion. We believe there is no multiplier effect from governmnent-financed temporary employment. Mulltiplier effects can be expected only when enduring jobs are created increasing expected lifetime income, a conclusion that follows from Prof. Milton Friedman's hypothesis that consumption depends on expected lifetime income. Jobs that are expected to be temporary do not have multiplier effects.
The Bush and Obama administrations spent several hundred billions in the TARP program to stabilize the banking system in the belief that the banks in turn would make loans to businesses. No demand for loans for investment in factories and equipment materialized and there was no increase in private investment and therefore no multiplier effects. Pres. Obama's so-called economic stimulus program spent a couple of hundred millions to stimulate public works which created no expected increase in lifetime income because of the temporary natrure of the jobs created and spent hundreds of billions more on programs that simply supported existing state government budgets. No job creation there! It subsidized some school construction but created few jobs. Unemployment continued to rise throughout Pres. Obama’s first year which accords with the permanent income hypothesis.
We have no quarrel with the idea of the multiplier when it is applied to increases in productive investment. Our quarrel is with those who believe the multiplier applies to purchase of financial assets of financial institutions, to support of state and local government budgets, to subsidies like “klunkers”, to buying mortgages, to nationalizing businesses and insurance companies, to the gifts made to households by the Bush and Obama administrations, or to payments of unemployment compensation, etc., etc. None of the legislation that the administration has been pushing – health care, capping carbon emissions, man-made global warming grants and subsidies -- create enduring jobs.
There would be a multiplier only if there were increased private investment in enduring productive facilities. Unfortunately, private investment in manufacturing and construction in the United States has been nil. Investment in renewable resources subsidized by government is offset by the inefficiency of such enterprises which for all practical purposed produce nothing of value. The electricity they produce if valued at the cost of electricity produced by fossil fuels, hydro-electric, and nuclear plants would result in a negative return on investment which means they are equivalent to digging trenches and then re-filling them. The higher prices of electricity reduce the income of households and raise the costs of producing goods. Lowering demand and leading to a negative multiplier.
Nothing that either administration has done has positive multiplier effects.
Here are some of the things we have been recommending that do have multiplier effects:
Policies to Get the Economy Going
The news during the week Friday, January 8 to Thursday, January 14, 2010, was dominated by two events indicating a worsening economic outlook. The first was the disappointing employment news released by the U.S. Bureau of Labor Statistics that showed that total nonfarm payroll employment declined by 85,000 workers between November and December, 2009 while economists were expecting a much smaller decline as though any decline is good. The decline was led by a loss of 57,000 construction jobs and 27,000 manufacturing jobs. The former is understandable; the latter is scandalous.
The second was the trade data released by the Department of Commerce that showed that U.S. exports rose in November to $138 billion, up 0.9 of one percent but imports rose faster, up 2.6 percent to $175 billion, the difference equivalent to a loss of about 370 thousand jobs. Manufacturing jobs have been declining precipitously since the explosion of the trade deficits since the late 90s. This is the sector whose growth is the key to ending the recession. Below we offer some suggestions that will create millions of jobs in a few years and won’t require “trillion economic stimuli” based on a disproved theory of a Keynesian multiplier.
There are a number of reasons why we are not getting much investment in American manufacturing. The major reason is that it is much cheaper to produce goods abroad and export them to the U.S. than produce them here. The Obama administration and preceding Republican and Democrat administrations let Japan and Germany since WWII and China and other Asian countries more recently to employ mercantilist policies such as import barriers and export subsidies and keep their currencies undervalued in order to keep their products less expensive and American products more expensive. American manufacturers have learned that it is foolish to invest in manufacturing facilities in the U.S. They joined the club, producing abroad and exporting to the U.S.
There is a simple solution, balanced trade. Under the rules of international trade, countries experiencing chronic trade deficits have a right to impose tariffs and restrict imports. My recommendation is that a uniform tariff of one-third or more be levied on imports from those countries and only those countries with which we have sizable chronic deficits. Some fear China will retaliate. As Prof. Paul Krugman wrote in a recent article, we have little to fear. Besides, retaliation would hurt China more than it would hurt us. They and we will talk the talk and walk the walk.
Should the tariff be applied to oil companies who sell to the U.S.? Yes, to those which have large chronic trade deficits with us and belong to the illegal oligopoly called OPEC.
There are many other actions we could take. Millions of jobs could be created quickly at no cost to the US taxpayer or even increase government revenues as the tariff revenues would.
Drill, drill, drill! Permit drilling for oil on public lands and off shore in the Atlantic and Pacific and in the Arctic (as Russia is doing). This would diminish the demand for foreign fuel and lower world prices even if we continue to import crude oil. Likewise, we should be encouraging the use of natural gas, which is abundant, as an automotive fuel. Huge amounts are available and a pipeline from Alaska is being built from Prudhoe to Alberta and Saskatchewan by Alaska, Canada, and Exxon-Mobile. Under pressure from leftist environmentalists, the U.S. administration and Congress has ignored the job-creating potential of prospecting, producing, and distributing additional supplies of oil and gas. Hundreds of good-paying jobs are being forfeited on the altar of environmentalism. (I am tempted to use the word “treasonous” to describe some of the policies of environmental activists. Recent evidence suggests that the hypothesis that global warming is man-made may have been a hoax perpetrated by leftist academics. A large number of distinguished physicists believe that changes in the sun’s geomagnetic emissions are the principal cause of climate warming and cooling, not carbon emissions. Carbon emissions are unable to explain the earth’s recent cooling that lasted more than a decade and continues to this day.)
Abolish the Corporate income tax to stimulate manufacturing investment in the U.S. A distinguished American economist has shown that corporations that sell in the U.S. are able to shift the burden of the tax to consumers whereas they cannot do so in international markets. This puts the American corporation at a great disadvantage. Whereas foreign nations are permitted to rebate value-added taxes under WTO rules, income taxes may not be rebated. We should replace the corporate income tax with a value-added tax that can be rebated to our exporters and imposed on all our imports.
There is a lot we can do, but unfortunately we have elected one government after another that talks the talk but doesn’t act.
Cost of treasury bailout of FNMA and Freddie MXC
The Treasury Department announced on December 24, 2009 that it removed the $400 billion financial cap on the money it will provide to keep Fannie Mae and Freddie Mac afloat. According to the Associated Press, taxpayers have shelled out $111 billion to the pair, and a senior Treasury official said losses are not expected to exceed the government's estimate this summer of $170 billion over 10 years. Nevertheless, it appears that the Treasury did not believe its own forecast that $400 billion would be enough. The date chosen to remove the financial cap -- Christmas Eve -- was no accident. Not only was it buried by the passage the same day of the Senate's health care biil but it obviated the need for Congressional approval. "Treasury officials said they decided to lift the caps to eliminate any uncertainty among investors about the government's commitments. But the timing of the announcement on a traditionally slow news day raised eyebrows." The two Government Sponsored Enterprises (GSEs) constitute the secondary for mortgages. The financial commitment provides a limitless supply of money to the two government run entities for four to five more years.
Foreclosures.com: "House Prices Will Roar Back in 2009"
If you are about to buy a house because of this forecast, then you are a sucker. Here's a quote from the story:
SACRAMENTO, Calif., Dec 09, 2008 (BUSINESS WIRE) -- The nation's foreclosure hemorrhage has finally slowed and 2009 should see a significant decline in foreclosures as buyers return, pushing home prices up and fueling a real estate recovery, according to the 2009 Outlook from ForeclosureS.com, the leading real estate and property information and education specialists.
But, here's the graph of the housing bubble so far:
As you can see, house prices are nowhere close to their normal levels. (.) A little review of how we got here could help.
This is non-seasonally adjusted data through September 2008
Interest rates probably caused some of the price appreciation after 1997. Governments around the world have been building up their dollar reserves since 1996, sending their countries’ savings to the United States. The increase of foreign savings flowing into the United States caused real-long term interest rates to fall precipitously from 4.5% in 1996 to 1.3% in 2005 (see Chapter 2 of our book). The fall in interest rates tends to push up house prices, both because it reduces mortgage interest rates and also because it reduces the returns to competing investments.
[Property owners] can claim the exclusion [from capital gains taxation] even if they convert an investment property or vacation house into their principal residence and live there for at least two years. This flexibility has been a boon to many tax-wise owners of multiple houses – particularly during the bubble years when values doubled in some parts of the country.
The Housing Bubble that began in 1998 had other contributing factors, but Vernon L. Smith, a Nobel Prize winning economist largely due to his laboratory study of economic bubbles, held that it was primarily caused by the 1997 legislation. He pointed out that, at the time it was enacted, the 1997 legislation was quite popular among the industries that were most severely hurt when the bubble burst. He wrote, sarcastically:
Thank you President Bill Clinton for your 1997 action, applauded by the banks, the realtors and all citizens in search of half-millionaire status from an investment they could understand and self deceptively believe to be low risk; thank you for fueling the mother of all housing bubbles; thank you for enabling so many of us who bought second or third homes, and homes before construction began, which we then sold to someone else who dreamed of riches from owning homes long enough to sell to another fool.
Smith argued that, instead, Congress should have done exactly what we recommend in our book. Specifically:
More daring than the action to exempt real estate from the capital gains tax -- and in lasting service to the poor -- would have been actions allowing capital gains on all assets to go tax free, provided that the capital was reinvested -- i.e., not consumed, and yes, good citizens, housing counts as consumption.
During the asset bubble, homeowners depleted their savings, leaving them with less money for a future downpayment. Tyler Cowen (2008) described this psychology in a New York Times commentary:
The fundamental problem in the American economy is that, for years, people treated rising asset prices as a substitute for personal savings. The thinking went something like this: As long as your home’s value rose every year, you didn’t have to set aside so much from your paycheck….
In fact, people did more than stop adding to their personal savings. They began subtracting from their personal savings. As documented by Louise Story in the New York Times, bank advertising campaigns encouraged people to consider the rising value of their homes to be income, to be consumed in the present. They urged homeowners to take out second mortgages on their homes so that they could increase their current consumption and coined the new term “equity access” to replace “second mortgage.” Borrowing on home equity increased steadily.
[This piece was initially published on our old blog on December 9, 2008]
Wall Street Journal's take on Bush economic mistakes
On Friday [Jan. 16, 2009], the Wall Street Journal editorial staff analyzed President Bush's economic mistakes (The Bush Economy) while completely ignoring two of them: (1) tolerating the foreign savings inflows that caused the trade deficits and (2) causing the stock buybacks that slowed economic growth.
Tolerating Foreign Savings Inflows
The Wall Street Journal begins by correctly pointing out that Bush inherited a recession when he took office in 2000:
Mr. Bush inherited a recession. The dot-com bubble had burst in 2000, and the economy was sinking even before the shock of 9/11, the corporate scandals and Sarbanes-Oxley....
He also inherited a growing trade deficit. During the late 1990s, when the bubble was occurring, foreigners were selling their currencies to buy dollars so that they could buy US stocks. As a result, they bid up the dollar and caused the US trade deficits to worsen, as shown in the graph below:
After 2002, the trade deficit would have fallen, but foreign central banks greatly increased their dollar reserve purchases so that they could keep the dollar high compared to their currencies. In the graph below, the US trade deficit (i.e., the current account deficit) is shown in red and the portion caused by foreign central banks is shown in green:
Bush and Greenspan did nothing to stop these increased foreign central bank dollar purchases. Greenspan could have easily counteracted them by buying the same amount of foreign currency reserves. Because he didn't do anything, net fixed investment in US manufacturing collapsed, as shown in the graph below, making American products less and less competitive in world markets:
The other effect of the foreign government reserve purchases was that they caused US long-term interest rates to fall, which contributed to the house price bubble. The Wall Street Journal blames these low interest rates on Greenspan's monetary policy. But Greenspan wasn't causing inflation.
His real mistake was that he, like the Wall Street Journal editorial staff, believed in the "free flow of capital ideology" which holds that the inflow of foreign capital is good for a country, even when it causes trade deficits. That's why neither he nor Bernanke nor the Bush administration did anything to counteract the inflow, even when it was deliberately being produced by foreign central banks, at the behest of their governments, in order to steal manufacturing market share from American producers.
The main central bank to follow this strategy was the People's Bank of China. The Bush administration never counteracted their successful attempts to manipulate their currency and ours in order to steal market share from American manufacturers.
Causing Stock Buybacks with a Capital Gains Tax Cut
The Bush administration's record is not entirely negative. They did do a good job with a tax cut in 2003 that helped the economy recover from a recession. The Wall Street Journal editorial notes:
This time the tax rate reductions were immediate, and they included cuts in capital gains and dividends designed to spur business incentives. As the tax cuts became law in late May 2003, the recovery began in earnest. Growth averaged nearly 4% over the next three years, the jobless rate fell from 6.3% in June 2003 to 4.4% in October 2006, and real wages began to grow despite rising food and energy prices. The 2003 tax cut was the high point of Bush economic policy.
Indeed, Bush's tax cuts provided the short-term stimulus which got the economy out of the recession. Unfortunately, the capital gains tax cut part of the stimulus severely hurt the economy in the long-term. Capital gains tax cuts increase tax revenue because investors take advantage of them to cash in and consume their capital.
Investors always face the choice of whether or not to keep their capital invested in order to earn the future income. When capital gains tax rates fall, as they did in 2003, investors are more likely to choose present consumption over future income. When they cash-in their wealth, aggregate demand temporarily increases while future income permanently decreases.
After 2003, Corporate managers, especially, cashed in their companies' wealth through stock buybacks. They would have their companies borrow at the cheap interest rates produced by the foreign savings inflow and use the borrowed money to buyback their own stock. They gave themselves stock options and then bid up their own companies stock price through stock buybacks. In this way they took advantage of Bush's 15% capital gains tax rate, as compared to the 35% tax rate they would have had to pay if they had received salary bonuses.
In all, from 2004 through 2007, America’s 500 largest corporations earned $2,505 billion while spending $1,578 billion on buybacks and $853 billion on dividends, leaving only $84 billion of their profits for reinvestment and corporate income taxes. The increase in stock buybacks began immediately after the 2003 capital gains tax cut, as shown below:
When the financial crisis hit in 2008, the very same corporations that were coming to the government for help had been depleting their corporate reserves through buybacks.
[Note: We recommend the rollover tax treatment for capital gains: High tax rate when capital consumed, but taxation deferred when capital rolled-over from one asset to another.]
Bush Administration's Failures in 2008
At the end of their editorial, the Wall Street Journal blames the Bush administration for the fact that their February 2008 stimulus package and October 2008 TARP bill did not turn around the economy. They argue that if these stimulus packages had been different in their composition or if they had been timed differently, they would have worked.
But these stimulus packages completely failed to address the real cause of the current recession: The American consumer could not continue borrowing more and more money to pay for the trade deficits. As the economics analysis of the Levy Economics Institute of Bard College makes clear, no stimulus package will end this recession unless the trade deficits are also addressed.
In an May 15 commentary, we summarized Bush's economic mistakes with the following words:
There are four major Republican economic ideas. Two of them work and two of them don't. Unfortunately, President Bush chose the two that don't work, and that is the reason for the current U.S. economic stagnation. These two Republican economic ideas work:
1. Reduce the size of U.S. government.
2. Cut business taxes.
These two Republican economic ideas don't work:
1. Cut capital gains taxes.
2. Welcome foreign investment that costs jobs.
The Republican Party has lost the Presidency, the House, and the Senate because of President Bush's economic mistakes. It is ill-served when the Wall Street Journal ignores those mistakes.
[This was originally posted on Jan. 19, 2009 on our old blog.]
Requiem to an Improvident Generation
In his most recent column, Cal Thomas provides a sweeping summary of the financial difficulties faced by the American Republic. He argues that the projected 9.1 trillion next-decade budget deficit is actually overly optimistic, and that a more realistic figure would be 13 trillion. Thomas concludes with the warning that
If we don't [ask government to let us take care for ourselves and vote accordingly], the future belongs not to us but to China, Japan, Qatar, Venezuela and Saudi Arabia, among others -- all holders of our national debt.
Thomas' warnings concerning the improvidence of American government are well placed, but they are likely to go unheard. The last four decades have been decades of improvidence, a period in which government has heeded the calls of a narciscistic generation unwilling to plan and cooperate effectively for the future, whether personal or collective.
At the personal level many Americans have abandoned thrift and saving for improvident waste. Personal savings rates have recovered slightly over the last year, but this probably reflects the inability of the irresponsible to get additional credit more than a true change in national culture.
At the collective level the Federal government has run budget deficits through most of the last four decades. The current levels of deficit spending would be far more modest were it not for the massive interest payments that are already due, currently running about 400 billion per year. Democrats favor spending increases and Republicans favor tax cuts. Unless balanced by painful tax increases or spending decreases the result is quite the same in the end.
The Federal government under both Democratic and Republican administrations has also done little or nothing to stop three decades of massive trade deficits that have transformed the United States from a creditor to the worlds largest debtor. In the process, trade deficits (and the government policies that sustain them) have eviscerated American comparative advantage across a wide range of fields, diminishing the prospects that the U.S. will be able to successfully pay back decades of borrowing without suffering broad declines in living standards.
The illusion persists among those in the improvident generations that have wrought the current and coming crises that somehow they will escape. That this will all be passed on "to the kids."
Thomas remains in delusion. He writes "(the kids will be paying for this)." It is unquestionably the case that the kids will (and are) paying for this. But the assumption that only the kids will pay for this is an illusion of the first order. Perhaps Thomas plans to die soon. But it is us, and our parents as well as our children who will be and are paying for the improvidence of ourselves and our forebears. We have met the improvident and it is us.
It is also a delusion of the first order to claim that either the Republican or Democratic parties stand for fiscal responsibility or serious efforts to right our international balance of payments. Such efforts would smack too much of the self control, care for the future, and discipline that the improvident have ever lacked.
Thomas calls for mobilization:
Vote for a Democrat who supports substantial and specific spending cuts or a Republican who takes a stand for real and sizable tax increases if you can find one. They are rare in this improvident land.
[This is a re-post of an entry originally dated from October 2009 on our old trade and taxes blog. I'm reposting it because the old blog is currently not accessable, and I like this piece.]
Real Estate Taxation
Journal of Economic Literature:
Atlantic Economic Journal: