Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Initial Unemployment Compensation Claims Exceeded 400,000 Week Ending January 28, 2012
Raymond Richman, 2/3/2012
Initial unemployment compensation claims exceeded 400,000 during the week ending Jan 28, 2012. What you did not see, hear, or read in the media Thursday or Friday Feb. 2-3, was the unadjusted number, i.e., the actual number of initial claims reported by the BLS beginning in the 4th paragraph below. Instead, the media, including Rick Santelli of CNBC, the Friday WSJ, Bloomerg, et al. reported that the number of claims filed was 379,000 when in fact it was 415,094. ...
Morici: 8.5% unemployment may be as good as it gets
Howard Richman, 1/31/2012
In his latest commentary, University of Maryland economist Peter Morici predicts that the unemployment rate won't go below 8.5% in the near future. Here's his reasoning:
Fourth quarter growth was exceptionally strong as the global economy recovered from first half disruptions such as the earthquake in Japan, but going forward economists expect growth to slow to about 2 percent.
Job growth in the range of 130,000 should be expected to accommodate labor force growth, but it won't do much to lower the unemployment rate. That is hardly a pace that will restore economic health or validate President Obama’s heavy intervention in the economy and industrial policies in the upcoming presidential campaign.
What could the U.S. government do? He writes:
Gains in manufacturing production are not accompanied by stronger improvements in employment largely because so much of the growth is focused in high-value activity. Assembly work, outside the auto patch, remains handicapped by the exchange rate situation with the Chinese yuan.
The situation with the yuan is the single largest impediment to more robust growth in manufacturing and its broader multiplier effects for the rest of the economy; the Obama administration indicated over the holidays it has no intention of challenging China on this issue, and it enjoys the unlikely support of House Speaker John Boehner.
The current Washington establishment is oblivious to reality. So long as China and almost all of the other emerging market countries are allowed to continue their currency manipulations, there will be little manufacturing job growth.
The only hope on the horizon is that likely Republican presidential candidate Mitt Romney might balance trade if elected president. His current trade position is:....
CNBC TV, Bloomberg TV, Fox Business Channel, the Wall Street Journal and the New York Times Mislead Investors on Initial Claims for Unemployment Compensation
Raymond Richman, 1/22/2012
Are the media mentioned above deliberately deceiving investors as to the initial claims for unemployment compensation during the week of January 14, 2012? Secretary of Labor Hilda Solis’s Bureau of Labor Statistics reported that seasonally adjusted initial claims were 352,000, a decrease of 50,000 from the previous week’s revised figure of 402,000. This was the data reported by CNBC TV, Bloomberg TV, and Fox business channel on January 19, and by the Wall Street Journal and the New York Times and other print media on January 20.
The same report in which the BLS reported the seasonally adjusted data also reported the actual number of claims and the total number receiving unemployment compensation but the media did not report it. ...
Investors Are Entitled to Better Reporting of Unemployment Insurance Claims
Raymond Richman, 1/12/2012
While no one ever went broke underestimating the intelligence of the American voter, why should the media underestimate the intelligence of the American investor by reciting statistically manipulated data rather than the original data when the latter is readily available. Readers of this blog were made aware months ago that the figures issued by the US Bureau of Labor Statistics of the number of initial claims for unemployment insurance made during the preceding week include one doctored set of data called “seasonally adjusted” (SA)and another set of unadjusted data (NSA), i.e., the actual number of claims. In its notice to subscribers of the availability of the Report for the week ending January 7, 2012, the BLS included this single paragraph:
"In the week ending January 7, the advance figure for seasonally adjusted initial claims was 399,000, an increase of 24,000 from the previous week's revised figure of 375,000. The 4-week moving average was 381,750, an increase of 7,750 from the previous week's revised average of 374,000."
Most reporters evidently did not go on to read the report itself. If they did they would have been amazed to find that the actual number of initial claims filed amounted to 642,381, 143,381 higher than the seasonally adjusted number. The difference is so great that it requires an explanation from the BLS. But none has been forthcoming. ...
Payroll tax cut -- a new entitlement?
Raymond Richman, 12/22/2011
The cut in payroll taxes proposed for 2011 was greeted by economists as a powerful contribution to economic recovery. There is no evidence that it contributed to recovery at all in 2011. The federal Bureau of Economic Analysis reported that the U.S. Gross National Product, the total amount of goods and services produced in the U.S., increased at a rate of only 1.3 percent in the second quarter of 2011 and 1.8 percent in the third quarter. Economists of Deutshe Bank in 2000, predicted that the economy would grow at a rate of 3 percent by the 3rd quarter of 2011 without the 2011 tax cut and 4 percent with the tax cut. They were obvously using a clouded crystal ball. We are now warned by the same economists that failure to pass the tax cuit would cause a downturn in the economy, presumably of 1 percent. They were wrong then and are wrong now. We believe the economy would do quite well if we had a government that was not hostile to private enterprise.
There is also little evidence that any growth at all resulted from the Recovery Act of 2009 which allocated nearly $800 billion dollars to be spent between 2009 and 2011 inclusive. We predicted its failure to induce economic growth because the projected government spending was concentrated on transfers to states, school districts, and local governments to finance their budget deficits (most of them have constitutions which limit their borrowing), wasteful expenditures on environmental projects none of which would be undertaken without major federal and state subsidies, and wasteful subsidies to hybrid and electric vehicles and biofuels, etc. The President’s proposed $500 billion stimulus package for 2012 is characterized by similar defects as we pointed out in a recent article of this site.
The hostility of this regime to private enterprise is also evidenced by the President’s refusal to allow the building of a pipeline from Canada to the Gulf, his ban on drilling in the Gulf, and by the so-called Environmental Protection Agency’s rulings apparently intended to destroy the productive coal industry. Private investment was also affected negatively by increased business regulations. Given that the payroll tax reductions were expected to be temporary anyway, the first effective for only 2011 and the recent Senate-passed recent two-month extension to February 28, 2012, it is unlikely to promote private investment. To make it permanent would be at the expense of the Social Security System unless the payroll tax cut were made up by other taxes or borrowed funds that add to the national debt and have to be paid by taxpayers in the future. Borrowing to finance the tax cut has international economic repercussions because it weakens the dollar which is the standard for international trade. There are already calls for a new world standard by China, which is beginning to promote its yuan, by the IMF which is promoting its drawing rights, and by the Eurozone at least until the recent collapse of sovereign debt in the eurozone....
United Kingdom's Prince Phillip Calls Wind Farms "Useless and a Disgrace"
Raymond Richman, 11/27/2011
Jonathan Wynne-Jones writing in the Daily Telegraph 11/21/2011 reported that Prince Phillip, Duke of Edinburgh, “in a withering assault on the onshore wind turbine industry .. said the farms were useless and ‘a disgrace’. He also criticised the industry’s reliance on subsidies from electricity customers, claimed wind farms would ‘never work’ and accused people who support them of believing in a ‘fairy tale’.” He also noted that the windmills have to be switched off during strong winds because of complaints about their noise and they produce electricity at a higher cost than traditional energy sources. The writer adds, “The Duke’s views are politically charged, as they put him at odds with the Government’s policy significantly to increase the amount of electricity generated by wind turbines.”
It was a brave thing to say but every word is true. It was not the monarch who has no clothes according to the fable but a prince telling his subjects and the politicians who want their votes that they are naked of reason. We would go further, much further than Prince Phillip.
Proponents of the wind and solar farm subsidies argue that the reduction in carbon emissions, the social benefits, justifies the subsidies. But there is no evidence that convinces us that the spending of trillions of dollars world-wide has had any effect at all on world temperatures. They frighten us by alleging frightful things that will happen in the future, whenever that is, if emissions are not reduced substantially. But look at the benefits that were created by the melting of the glaciers historically, long before men even expelled carbon by breathing. The Great Lakes were created. Millions of acres of land in what was to become the U.S. and Canada became tillable. Billions of people are being nourished by the increased lands that became available. People are living longer and billions are fed, clothed, and housed by the prosperity generated by global warming in the past. For all practical purposes, real poverty has been eliminated in the U.S. and Canada and Europe. ...
Bad Reporting of Initial Unemployment Insurance Claims Data Continues
Raymond Richman, 11/23/2011
Rick Santelli of CNBC, much as I admire his reporting on the bond markets, reported this morning, November 23, 2011, that seasonally adjusted initial unemployment insurance claims during the previous week amounted to 393,000 an increase of 2,000 from the previous week’s figure, hardly anything to get excited about. He was quoting from the weekly release by the US Department of Labor (Secretary Hilda Solis). The actual number of claims was included in the report but Santelli did not mention that it was not 393,000 but 437,049 an increase of 74,214 over the previous week, an alarming figure. Investors are not served by deficient reporting of economics data.
The week before Thanksgiving should have the same adjustments in seasonal factors from one year to the next so I decided to take a look at the 2010 figures. In the week ending Nov 20, 2010, the seasonally adjusted initial claims amounted to 410,000, a decrease of 29,000 from the previous week. The unadjusted figure was 462,813, an increase of 55,345. The unadjusted numbers of initial claims indicators a year ago were as favorable to economic growth prospects as this year’s data were as negative about the economy’s future prospects. While initial claims for unemployment compensation are only one factor is predicting the prospects of the economy, they should not be ignored by investors. They are an important indicator of the job market.
It seems to me that the actual figures should be reported by the media. ...
Economics of Greek, Italian, and U.S. Sovereign Debt Defaults
Raymond Richman, 11/14/2011
The Greek government’s expected default on its bonds has had an enormous effect on the volatility of securities markets worldwide far beyond what should be expected from an anticipated default by a country of less than eleven million people with a GDP of only $300 billion. Italy is a different matter. Italy is a country of 61 million people and a GDP in 2010 of $2.1 trillion. Both suffer chronic budget and trade deficits that have made servicing their bonds increasingly difficult and both face the likelihood of default. The same is true of Portugal and Spain.
U.S. trade with Portugal, Greece, Italy and Spain was and continues to be relatively insignificant, although the U.S. did account for 5.8 percent of Italy’s exports in 2010. European banks hold billions of the sovereign debt of the above four countries. The write down of their debt has already caused the bankruptcy of a large French-Belgian bank, Dexia. U.S. banks hold insignificant amount of their debt and the U.S. economy is unlikely to experience anything resembling a crisis as a result of defaults in Europe.
The world has experienced dozens of defaults on sovereign debt during the past century:...
Bernanke trying to hide the rise
Howard Richman, 11/6/2011
There are two key trends that the press isn't reporting these days:
- Sea levels have been falling at the rate of 5mm per year for the last two years, possibly in response to the reduced solar activity of the last decade.
- U.S. inflation rose steadily from 1.1% in November 2010 to 3.6% in May 2011, possibly as a result of the Federal Reserve Chairman Ben Bernanke's huge money creation to fund QE2 (his massive purchase of long-term US Treasury bonds), and it has stayed high since.
But here is how Bernanke describes it:
I would simply point to the record. For the last five years inflation, although it's been volatile because of commodity price fluctuations, has averaged about 2 percent, which is close to a reasonable definition of price stability, whereas the area that we have fallen short obviously is on the unemployment side....
Bernanke: China's currency policy is causing the slow growth in the advanced industrial countries
Howard Richman, 10/25/2011
Ben Bernanke said the following on October 4, when he testified before a joint congressional committee:
I do think that China's currency policy, besides creating problems for them -- in particular they've dealt with some inflation lately which is a result to a large extent of their currency policy -- has been to some extent preventing global adjustment. That is, we have a two-speed recovery, where emerging market economies have been growing very quickly and advanced industrial countries have been growing very slowly. A more balanced growth path could be achieved if there was greater flexibility in currencies. China's currency policy not only affects obviously U.S.-China relations, but it also affects third party currency policies as well."
In a commentary on October 24, University of Maryland economist Peter Morici (The Fed Is Out of Tricks to Jump Start Housing and Economy) went just a bit further. He argued that the trade deficit must be addressed in order to jump start the U.S. economy. He wrote:
Pres. Obama's Job Act Ignores the Jobs Lost as a Result of the Trade Deficits, Environmental Foolishness, and His Opposition to Oil and Gas Drilling
Raymond Richman, 9/21/2011
As we wrote a few days ago, Pres. Obama’s so-called Jobs Act is more appropriately titled a “No Jobs” Act. Is it a coincidence that three of the major causes of our stagnant economy were ignored in the president’s proposals. The three are 1) doing nothing about the foreign trade deficits, 2) preventing the development of our huge reserves of oil and natural gas, and 3) imposing enormous costs of government subsidies to green energy onto taxpayers and enormous regulatory costs on businesses.
1) The foreign trade deficits are the major cause of the de-industrialization of the U.S., the growth of China as a rival power, and have cost us five or more million jobs. The President knows this and so do all of his economic advisers. All that they advise is an increase in U.S. exports but have no idea how to achieve that. The trouble is that for three decade and increasingly since 1997, imports have been increasing faster than exports. Look at the following table showing our trade balance with the rest of the world from 1992 to the recession of 2009. ...
Lazy Analysts at CNBC, Bloomberg, and the Wall St. Journal
Raymond Richman, 9/19/2011
The report last Thursday morning that there were 428,000 initial unemployment claims during the week of September 10, an increase of 11,000 was FALSE. The media, including those which should know better, reported those numbers. Those numbers are so-called "seasonally adjusted" and are totally without merit. They are not credible. ...
The Jobs Act Is the Recovery ACT of 2009 Redux and If Possible Even Worse
Raymond Richman, 9/13/2011
The President’s proposed American Job Act will not stimulate the economy at all even though it proposes spending a huge amount of money, $447 billion, in the form of grants, tax credits, special funds, a government sponsored National Infrastructure Bank, and other costly new government programs.
The largest expenditure is the cut in the social security taxes paid by businesses from 6.2 percent to 3.1 percent on the “first $5 million in payroll”, grants a tax holiday (no payroll tax) for “added workers or increased wages” up to the first $50 million of wages and wage increases. This benefits businesses which are now paying the tax. Workers will have the payroll taxes reduced similarly to 3.1 percent. But these are “conditional” tax benefits. The government will deposit into the Social Security Trust Fund the revenues lost by the reduction of the payroll taxes, paying for it out of the general budget so it will have to be paid by taxpayers in general or borrowed to be paid by future taxpayers. Where is the net benefit? It looks like an attempt to buy votes by making a one-time gift to businesses and workers in an election year. Because it is a one-time gift, it will not encourage new investment or even additional consumption or the hiring of new workers at all. It does not benefit the unemployed or even encourage hiring new workers because it is a one-time deal. Businesses and households base their decisions to invest and consume on “permanent” expected income. Moreover, nothing else in the jobs act actually raises the prospect of sustainable future demand. The only jobs created will be the increased bureaucracy required to administer the Act.
Like the Recovery Act of 2009, a waste of $800 billion, it proposes to make grants to local governments to pay for 280,000 teachers, cops, and firefighters. It will pay to modernize “at least 35,000 public schools” (a state and local government responsibility), supporting new science labs, no doubt designed to teach the “science” of man-make global warming, provide internet-ready classrooms fitted with imported computers, no doubt, Presumably most will go to “blue” states which are generally unable to get their state budgets under control. ...
Mr. President, Here Are Some Ways to Create Millions of Jobs That Require No Increase in Government Expenditures
Raymond Richman, 9/5/2011
If the President in the forthcoming joint session of Congress is serious about creating jobs he would look not at the construction industry which has an oversupply of housing but at all of the following job-creating policies, none of which requires increased government expenditures and at least one earns billion of dollars of revenue.
1. Reign in the outsourcing of manufacturing jobs and the increase in the trade deficits. Economists observed the increasing trade deficits over the last decade or two but very few have suggested a way of reversing the trend. Indeed most, including the President’s Council of Economic Advisors hailed the increase as an increase in trade. An increase in trade is fine as long as trade is in balance. After all the purpose of trade is to exchange a bundle of goods that has less value in the domestic market for a bundle of goods produced abroad that has more value in the domestic market. Exchanging Treasury debt for goods postpones the day of reckoning.
Free trade is an ideology dating from the work of Adam Smith and David Ricardo. The increasing trade deficits over the past three decades put millions of Americans out of their well paying manufacturing jobs. The trade deficits did not affect jobs at the universities or on Wall Street. Americans in 2008 imported $800 billion dollars worth of goods, including automobiles and other motor vehicles, tractors, computers, appliances, i-pads and cellular telephones, clothing for men and women and children, electronic games, and, of course, crude oil, and much more. How many jobs were involved? We lost five to six million according to our calculations. Andy Groves, former CEO of Intel, pointed out earlier this year that our high tech companies like Apple, H-P, Dell, and many others, have ten times as many employees in China as they have in the U.S. And then they import those products to the U.S. duty-free.
We have to admit that economists have brain-washed our political leaders into believing in a policy of “free trade.” Free trade is a sound policy when there is free movement of labor, capital, and goods, as our constitution requires in the U.S. But most countries employ mercantilist practices – barriers to imports and subsidies to exports, and exchange rate controls – all of which were used by Japan during the last century and are still used. China has all sorts of barriers to our imports. Prof. Krugman has complained that it is perpetuating an artificially low exchange rate. ...
Unemployment claims Have Fallen But the Economy is Stagnating. What we need to do.
Raymond Richman, 8/28/2011
The economy is stagnating, growing at a very low rate. This was borne out by recent GDP data which showed that economic growth fell to .4 of a percent in the 4th quarter of 2010 and rose to only 1.4 percent in the 1st quarter of 2011. In the 2nd quarter 2011, GDP rose only one percent. Those are poor numbers especially after 2 ½ years of Keynesian policies to promote recovery. Employment has been increasing but at a very slow rate that barely covers new entrants into the labor force. Unemployment claims have fallen over the past year.
During the past few weeks, we’ve called attention to our readers that the US Bureau of Labor Statistics (BLS) in reporting initial unemployment claims during the preceding week was issuing a questionable statistic called “seasonally adjusted” initial claims. It is true that in the past, there were seasonal variations in the number of claims filed, for example, auto makers closed plants in the summer for the preparation of new models and in the fall retailers hired workers for expected increased sales before Christmas. To give the BLS credit, it also reports the actual number of initial claims. Due to laziness apparently, the media never report anything except the seasonally adjusted figure, which is a statistician’s estimate of what the claims would have been if you did not count the seasonal changes. ...
Unemployment Claims Fell and Did Not Rise As Reported. Did the Misinformation Help Cause the Fall in the Stock Markets?
Raymond Richman, 8/18/2011
With stock markets in a free fall today, Thursday, 8-18-11, mostly as a result of concern about European banks, it was disconcerting to hear the unpleasant news on CNBC that claims for unemployment insurance in the U.S., seasonally adjusted, in the week ending Aug 13 rose to 408,000 up 9.000 from the week before. Seasonally adjusted figures are statistical estimates based on earlier “normal” years. There have been no recent “normal” years. In any case, the actual number of claims filed is more reliable and is not an estimate. The actual number of claims filed totaled 342,669 , a decrease of 11,739 from the actual number in the previous week. What a difference! Instead of an increase in claims which the seasonal adjustment estimated, the number of claims fell 3.3 percent. Moreover, in the comparable week a year ago, there were 405,484 initial claims filed. There was a reduction of 62,815 compared to a year ago. That was not the only good news. The unadjusted number for persons claiming UI benefits in state programs totaled 3,535,364, a decrease of 45,069 from the preceding week and 745,7 10 or 17.4 percent from the comparable week a year ago.
Would the U.S. markets have collapsed had the actual number of claims been reported by CNBC and Bloomberg and Fox business news? No one knows but it is safe to say that it would have been more reassuring to investors and the short sellers would not have dominated the market as they did. Here is hoping that the news services will pick up this report and the markets will rally tomorrow. ...
Prof. Feldstein Has No Recovery Policy
Raymond Richman, 8/11/2011
We don’t often disagree with Prof. Martin Feldstein, a distinguished economist, but we do with his opinion piece in the WSJ, 8-1-11 in which he writes, “A falling dollar may be the only major economic change that can accelerate the anemic pace of recovery and prevent a new downturn in U.S. economic activity.” We believe there are a number of good policies that can be easily implemented and that a devaluation of the dollar is not one of them. He believes that a falling dollar will stimulate U.S. exports by making American goods cheaper to foreigners. “The declining dollar has been the key driver of American exports. … Although exports are only 10% of U.S. gross domestic product (GDP), the rise in exports during the past four quarters contributed more than 50% of GDP growth during that period.” We believe the data in the following table belies that assertion.
He does not mention imports although the trade balance, exports minus imports, is what contributes to the GDP and the trade balance was negative and growing during the past four quarters.
Let’s look at the foreign trade data from 2nd quarter 2010 to 2nd quarter 2011. ...
Double the Dip?
Jesse Richman, 8/8/2011
Nouriel Roubini's column in today's Financial Times presents a dark picture of the world economic situation. Roubini notes the diminishing leverage available to policy makers and central banks the west, and signs of slowing economic growth or economic contraction.
Roubini calls for the following actions:
1. short term economic stimulous from western countries that retain access to credit markets (including the US).
2. more quantitative easing by central banks.
3. aggressive restructuring of mortgage debt and bank balance sheets.
Roubini acknowledges, however, that all of these are more difficult to do now than two or three years ago. He concludes that preventing a severe recession may be impossible, but preventing a depression could still be feasible if the appropriate policies are enacted.
Roubini does not discuss measures to balance trade. But the next round of the crisis which is now coming is closely linked to the world's out-of-balance trade conditions. How the world emerges from this crisis depends very much on how trade is dealt with.
In a recent post Michael Petis writes on EconoMonitor concerning the criticisms made by China and Germany concerning the credit-worthyness of their trading partners, and the ways that the current crisis can end. He is spot on...
How Misleading Unemployment Claims Data Can Cause the Double Dip Recession
Raymond Richman, 8/4/2011
As usual, the BLS reported seasonally adjusted initial claims in the first paragraph of their weekly report dated August 4, 2011 and in the following section of the report it reported the actual number of claims filed. The report was published at 8:30 AM., Thursday, August 4. For the week ending July 30, it reported that seasonally adjusted initial claims were 400,000, a decrease of 1,000 from the previous week's revised figure of 401,000. In other words, for all practical purposes, there was no change in the number of claims from the previous week. The actual number of initial claims, not adjusted seasonally, totaled 339,348 in the week ending July 30, a decrease of 29,939 from the previous week, a decline of almost ten percent. There were 402,140 initial claims in the comparable week in 2010. The advance unadjusted number for persons claiming unemployment insurance benefits in state programs totaled 3,663,134, a decrease of 89,947 from the preceding week. A year earlier, the volume was 4,438,886. The total number of people claiming benefits in all programs for the week ending July 16 was 7,570,439, a decrease of 75,192 from the previous week. All this relatively good news was unreported in the media.
Before the New York stock markets opened, Asian markets showed a decline and markets in Europe substantial declines. It is not surprising that the New York Stock Exchange opened lower but the combination of bad news in Asia, Europe, and the dismal report of unemployment insurance claims in the U.S. led to the DOW falling 512 points, the second worst decline since the recession began. We expect the relative good news about unemployment claims to be repeated in the employment data to be released at 8:30 A.M. August 5, 2011 and hope it may restore some optimism about America’s future and rally the stock market.
We are not optimistic about our economic recovery. ...
The Depression Continues
Jesse Richman, 7/29/2011
To go along with Ray's posting, the Economist.com has a nice graphic of the revisions to GDP that accompanied the latest release by the BEA. One consequence of this major revision is that the U.S. economy is now believed to be smaller than it was before the crisis hit. The depression continues.
Can We Trust BEA's Quarterly Reports on the GDP?
Raymond Richman, 7/29/2011
The report of the Bureau of Economic Analysis of the Department of Commerce on the 2nd quarter GDP released today, Friday, July 29, 2011, indicates that the statistical agency may have become politicized. Readers of this site may be aware that we complained recently that the Bureau of Labor Statistics report on unemployment claims likewise showed evidence of political influence. It is not so much that either agency falsified data but they presented the data in such a way as to give the reader a false impression. This is how the BEA’s analysis released Friday July 29, 2011 began:
"National Income and Product Accounts
Gross Domestic Product: Second Quarter 2011 (Advance Estimate)
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.3 percent in the second quarter of 2011,(that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent.(italics ours)" We believe that it may have actually decreasedl ...
Prof. Boudreaux's Simplistic Ideology of Free Trade
Raymond Richman, 7/27/2011
In the Pittsburgh Tribune-Review of July 27, 2011, George Mason University’s Prof. Donald J. Boudreaux defends economists who qualify their counsel by saying “but on the other hand”, causing Pres. Truman to quip that he longed for a one-armed economist. Social reality is complex, he argues, and economists are unable to make precise predictions as those in the physical sciences can. Unfortunately he chooses to illustrate his thesis by making an argument for “free trade”, using the history of tariffs in the U.S. as an example. He writes,
"Protectionists today are fond of pointing out that U.S. tariffs in the 19th century were high by modern standards, and that economic growth during that century was also impressively robust. From these two facts, protectionists dive into the conclusion that America’s 19th century growth was promoted by tariffs. Protectionists then assert that if we would raise tariffs to heights not seen in generations, today’s economic troubles would be diminished. Reality, though allows no such simplistic conclusion."
Boudreaux raises a “straw man” in his argument that “If free trade discourages economic development, it’s difficult to explain the economic growth that took place in the 19th century among the tariffless U.S. states spanning a huge continent.” But that does not deny that our high tariffs facilitated the growth of American industry.
We know of no economist who advocates protective tariffs or who argues that free trade impedes economic growth. These are “straw men” and easy to knock down. We have no hesitancy in saying that the 19th century tariffs did contribute to the robust growth of the American economy just as China’s and Japan’s barriers to imports and subsidies to exports and adoption of other mercantilist policies, contributed to their robust growth in the 20th and 21st centuries. ...
Make the Current Debt Limit Permanent
Raymond Richman, 7/25/2011
Why should Congress impose a debt limit if it is not going to be enforced? Why pass a debt limit if it is going to be raised as soon as the debt approaches it? The purpose of the debt limits is to force Congress and the administration to live within its means. A good case can be made for making the current debt limit permanent. The House under the constitution has the obligation to initiate all spending bills. Its request that as a condition of temporarily increasing the debt limit, expenditures must be brought under control is entirely reasonable. As we have shown repeatedly on this site, the federal government has been wasting enormous resources.
The administration’s assertion that we risk another recession ignores the fact that that recession has already lasted long enough to be called a depression with some 26 million workers unemployed and underemployed. The fact that the Obama administration has been in power two and a half years and its budget deficits have amounted to more than four trillion dollars without making a dent in unemployment, tells us that we have been governed by economic incompetents.
The administration claims that refusal to raise the debt limit will have serious economic consequences. Raising the debt limit without balancing the budget is what would have the unfortunate consequence of destroying the U.S. economy. The dollar would continue its fall and would be replaced by a new international standard. China, Brazil, and Russia have already proposed a new standard. Reducing the federal deficit as a condition of any increase in the debt limit will have positive economic effects. And, if we add reducing our huge international trade deficit, the dollar would continue its status as the international standard that succeeded the gold standard....
Is the U.S. Bureau of Labor Statisics "Lying" About Unemployment Claims?
Raymond Richman, 7/17/2011
The U.S. Department of Labor is headed by a political appointee, Hilda Solis. It is natural that she would want the President who appointed her to look good. Not that she would order the employment data to be doctored in any way. However, she could ask the Bureau of Labor Statistics to present the data in a way that emphasizes “good” news, if possible. Whether or not any such request was made by the Secretary, the fact is that employment data that was released last week tends to emphasize the data most favorable to the President.
On Friday, July 15, 2011, the BLS reported the number of new unemployment claims filed during the week ending July 2nd, increased by 15,000 compared with the previous week. The first paragraph reported, “The advance number for seasonally adjusted insured unemployment during the week ending July 2 was 3,727,000, an increase of 15,000 from the preceding week's revised level of 3,712,000.” And that is what all the media reported. But that was not the actual number of claims filed. The actual numbers were reported in the second paragraph.
The BLS report of unemployment insurance claims for the week ending July 9, unadjusted, totaled 470,671, an increase of 45,031 from the previous week, not 15,000. The media reported only the data in the leading paragraph. ...
Are the Media Massaging the Unemployment Data?
Raymond Richman, 7/8/2011
On Thursday, July 7, 2011, the media reported that the U.S. Department of Labor announced a decrease in unemployment insurance claims to 418,000 during the week ending July 2 from the week before ending June 25, 2011. It was hailed as good news and the Dow gained 93points to close at 12,719. The fact is that the data cited was not the actual number but “seasonally adjusted” numbers. When you examine the unadjusted data as reported by the Bureau of Labor Statistics, my one-time employer when I was working on my Ph.D.in economics at the University of Chicago, you find that the actual number of claims actually increased during the last three reporting periods, not decreased. The actual number of new claims filed was 394,286 during the week ending June 18, 406,633 in the week ending June 25, and 416,798 during the week ending July 2. In other words, actual, not “adjusted” unemployment insurance claims were increasing not decreasing. The media reported a decrease in claims and not a single one on TV, radio and the press reported the actual figures which were included in the BLS report. The BLS chose to headline the “adjusted” figures.
Does the public have the right to know? A spokesman for the While House said he belives that the average voter worries only about his own job and therefore unemployment statistics will not affect his vote. It certainly is true that he won’t worry if only a cleaned-up version is publicized in the media. In the local Pittsburgh newspapers, one version based on an Associated Press story was that employment claims “fell by 14,000 to 418,000 in the week ended July 2, the lowest level since mid-May” . The other quoted from a Market Watch story that cited an Automated Data Processing report that the private-sector jobs gained 157,000 in June. The story continues, “Separate data showed that new claims for unemployment benefits fell by more than expected for the week ended July 2.”
The rosy reports somehow are not consistent with the employment data reported by the BLS July 8. “Nonfarm payroll employment was essentially unchanged in June (+18,000), and the unemployment rate was little changed at 9.2 percent, the U.S. Bureau of Labor Statistics reported today. Employment in most major private-sector industries changed little over the month.” Who would you believe? ...
Why President Obama's Economic Stimulus Plan Was a Failure
Raymond Richman, 7/6/2011
To most economists, the continuation of this recession is a mystery. They do not know why the $787 billion 2009 Recovery Act economic stimulus plan did not stimulate the economy very much, if at all. And many economists, including Prof. Summers of Harvard and Prof. Krugman of Princeton and many other Keynesian economists, believe it was not enough of a stimulus. But $787 billion was not the only stimulus. In 2008, the federal government budget deficit on current receipts and expenditures (excluding government investment) was $755 billion, in 2009 it amounted to $1.5 trillion, and in 2010, $1.5 trillion. From a Keynesian point of view, these ought to have had a multiplier effect. As we showed in a previous contribution to this site, there is no Keynesian multiplier. As soon as the money is spent, the stimulus effect disappears; the Keynesian multiplier equals 1 not 3, 4, or 5. Or. less than 1 as in the case of the President's stimulus plan.
We offered in another contribution on this site the hypothesis that the $787 billion of Recovery Act expenditures was misspent. As we pointed out in an analysis of the economic stimulus plan, the expenditures could not have been designed by the administration to create permanent jobs. About a third went to support of states and school districts, which saved government jobs but created few new jobs. About a third went to climate change private projects especially wind and sun and bio-energy which, while creating few “permanent” jobs, caused the loss of a great number of jobs by impeding the growth of employment in mines, drilling for oil and gas, and discouraging the building of factories here while encouraging outsourcing abroad. ...
Inflation climbs to 3.6% in May. Palin was Right -- We're published in today's American Thinker
Howard Richman, 6/23/2011
Federal Reserve Chairman Ben Bernanke held a press conference yesterday. He basically said that QE2 worked so well that he was lowering his growth estimates for the U.S. economy! In today's American Thinker, we quote Governor Palin extensively to point out that she was right about QE2. We conclude:
The mainstream media pretend that Palin is stupid. But she is actually blessed with a very rare commodity these days - economic common sense. She is the only potential presidential candidate currently advocating the three basic principles that would restore economic stability and long-term growth to the American economy: (1) balanced monetary growth, (2) balanced budgets, and (3) balanced trade.
You can read it at: http://www.americanthinker.com/2011/06/inflation_climbs_to_36_in_may_palin_was_right.html
The Unanticipated Costs of the Wars In Iraq, Afghanistan, and Libya
Raymond Richman, 6/22/2011
Under Pres. Obama’s leadership, the US, France, and the U.K., went to war with Libya under the pretext that Libya’s ruler Col. Gadhafi was “killing civilians” in Libya. Shortly afterward, the three nations managed to get NATO to sign on. What Gadhafi appeared to be doing was putting down a rebellion successfully. In the New York Times, June 10, 2011, it was reported that Defense Secretary Robert M. Gates sharply criticized NATO nations for what he said were shortages of military spending and political will.
Even with the United States leading from behind and playing an alleged currently secondary role, by mid-May its operations in Libya had already cost $664 million according to press reports citing Pentagon sources. On the same day, it was reported in USA Today that Secretary of State, Hillary Clinton stated at a meeting in Abu Dhabi of top officials from the more than 30-member Contact Group on Libya, that “We are working with our international partners through the U.N. to plan for the inevitable: a post-Gadhafi Libya.” Guess who will pay at least 75 percent of the costs of repairing the hundreds of millions of dollars of war damaged infrastructure and buildings in Libya and who will finance the new government, its police, and armed forcers through the five years that it will take to establish a functioning government. A reason estimate of the costs that will be borne by the U.S. is a trillion dollars, based on the costs of the war and rebuilding of Iraq and Afghanistan.
What is surprising is that the administration was already under pressure to balance the federal budget and Libya posed no threat to the U.S. To the contrary, Libya renounced its ambitions to build nuclear and other weapons of mass destruction. It was an operation that the Secretary of Defense opposed. It was a State Department initiative. Given the fact that the administration pretended to want to reduce the federal budget deficit, the President’s decision to embrace another costly war is inexplicable. ...
Inflation climbs to 3.57% in May
Howard Richman, 6/19/2011
In November, when Federal Reserve Chairman Ben Bernanke explained his second massive increase in the U.S. money supply (known as QE2) to his fellow central bankers, he told them that the Federal Reserve's Open Market Committee (FOMC) was aiming for an inflation rate no higher than 2%. Specifically, he said:
This policy tool will be used in a manner that is measured and responsive to economic conditions. In particular, the Committee stated that it would review its asset-purchase program regularly in light of incoming information and would adjust the program as needed to meet its objectives. Importantly, the Committee remains unwaveringly committed to price stability and does not seek inflation above the level of 2 percent or a bit less that most FOMC participants see as consistent with the Federal Reserve's mandate.
In May, the U.S. inflation rate hit 3.57% while rising rapidly as shown in the graph below:
Where is Housing Going? That Depends on Where You are Looking
Jesse Richman, 6/2/2011
The latest release of the Case Shiller Index confirms the continued decline of the housing market that we have predicted on this blog for some years. And the pain is likely to continue a bit longer. If one assumes that house prices tend to keep pace with inflation (as was the pattern from 1950 through 1998) then an additional decline in real estate values seems likely in most cities. Based on inflation adjustments to the January 1998 and January 2000 Case Shiller index, here are projections of the percentage decline or increase that may await particular cities if housing prices revert to the inflation-adjusted trend.
What the table shows is a bifurcated housing market.
In Praise of Inflation
Jesse Richman, 5/17/2011
Although it is fashionable to fear inflation (and inflation is very bad for those who have saved money in bonds, CDs, or other inflation-vulnerable instruments) there are strong advantages to continuing a monetary policy that will cause inflation. Indeed, in the absence of an effective policy response to our problems, inflation may be the next best thing.
Inflation reaches 3.16% in April
Howard Richman, 5/13/2011
According to the latest inflation data published today by the Bureau of Labor Statistics, the rise in consumer prices accelerated rapidly for the third month in a row from 2.68% in March to 3.16% in April, as shown in the graph below.
Some commentators are encouraged by these numbers. Reuters reports: "The pace of food and fuel price rises slowed considerably from March, suggesting inflation pressures may be peaking."
This can be seen by comparing the rise in the inflation rate from February to March of 0.57% with the rise in the inflation rate from March to April of 0.48%, as shown by the line getting less steep from March to April in the graph. If this decelleration would continue, then inflation would peak at 4.2% in September, and thereafter fall back downwards.
Alternatively, it is possible to look at the line from January to April as representing a continuous straight line in which inflation is climbing at about a .5% rate per month. If this straight line would continue, inflation would climb to about 7% in December....
9% Unemployment is Strike 3 for QE2
Howard Richman, 5/6/2011
The rise in unemployment to 9.0% in April was the third strike for QE2. The first strike was February's trade data (Exports down. Imports down. Growth estimates down), The second strke was the first quarter GDP growth data (GDP growth was just 1.8% in first quarter. New Depression not Over).
Bernanke's expansion of money supply to buy treasuries (QE2) was supposed to build up aggregate demand. It indeed helped bring GDP above 3% and unemployment below 9%, but those gains did not last. We're left with a collapsing dollar and surging inflation instead of lasting growth.
Bernanke's failure immediately followed Obama's failure. Obama tried expanding government spending to build up aggregate demand. His stimulus almost produced a "summer of recovery" in the second quarter of 2009, but a surging trade deficit took away all of his momentum. We're left with a huge and growing government debt instead of lasting growth....
Congress Fools Around and Does Nothing to Create Jobs. Here Is What It Should Do.
Raymond Richman, 5/1/2011
Republican leaders talk as though the most important thing for us to do is to reduce expenditures and bring the budget into better balance. It is true that the current budget deficit is unsustainable. Democrats have spent over $800 billion on a foolish Recovery plan that at most kept a million government employees in their largely unproductive jobs and may have cost up to millions of jobs in the private sector. Getting control of the federal budget is indeed important but getting the vast army of unemployed back to work is much more important. And it could be done quickly. What we should be doing is:
1. Bring trade into better balance. An annual trade imbalance of $600 billion dollars means that we lost 6,000,000 jobs to other nations. Before the recession, the trade imbalance was $800 billion. Trade, both exports and imports, declined as a result of the recession but it is growing again which means we are losing more jobs. We can do something immediately that would bring trade into better balance. That something single country flexible tariffs, what we have termed scaled tariffs. Imposing the single country scaled tariffs would create a million jobs within a year and millions more as the U.S. once again becomes a place to invest in new factories. The scale tariffs would bring in a trillion dollars the first year and as trade is balanced, the ensuing economic growth would bring in billions in revenues.
2. End the prohibition of drilling for oil and gas on public lands and offshore in the Atlantic, Pacific, and the Arctic. Brazil, Russia, Norway and others have found huge unexploited reserves of oil offshore and are going full speed ahead. We have allowed our environmental extremists to veto new sources of traditional energy. Pres. Obama still has not restored deep water drilling in the Gulf of Mexico and oil drilling rigs have left for friendlier waters. Yet he is willing to guarantee loans to Brazil for deep water drilling in the Atlantic. What hypocrisy! And just to appease an irrational group to get re-elected. A million jobs within a year.
3. Go full speed ahead on developing drilling for natural gas in our abundant shale deposits. It is estimated that we have sufficient reserves of natural gas to satisfy our energy needs for a century or more. Heavy vehicles like trucks and buses as Boone Pickens has urged could be converted readily and we would need thousands of filling stations. A million jobs within a year.
4. Postpone for fifty to 100 years the construction of wind and solar energy plants which cost jobs and don’t create jobs. ...
GDP growth was just 1.8% in first quarter. New Depression not Over.
Howard Richman, 4/28/2011
According to preliminary estimates released this morning by the BEA, economic growth slowed dramatically from 3.1% during the fourth quarter 2010 to just 1.8% during the first quarter of 2011. The following table shows the contributors to economic growth, and how they have been changing:
| Contributors to Real GDP Growth | |||||
|---|---|---|---|---|---|
| Year | 2010-1 | 2010-2 | 2010-3 | 2010-4 | 2011-1 |
| Household Consumption | 1.3% | 1.5% | 1.7% | 2.8% | 1.9% |
| Business Fixed Investment | 0.4% | 2.2% | 0.2% | 0.9% | 0.1% |
| Government Consumption | -0.3% | 0.8% | 0.8% | -0.3% | -1.0% |
| Net Exports | -0.3% | -3.4% | -1.7% | 3.2% | -0.1% |
| Inventory Change | 2.5% | 0.8% | 1.6% | -3.2% | 0.8% |
| Total Change in Real GDP | 3.7% | 1.7% | 2.5% | 3.1% | 1.8% |
Rand Paul: We need to cut spending. The American dream is at stake.
Howard Richman, 4/15/2011
According to the Congressional Budget Office, the 2011 budget compromise will not even cut $38 billion from the federal budget, just $352 million (essentially zero). The Tea Party is not pleased, and they have an articulate leader in Kentucky Senator Rand Paul. Here is a video of his latest speech on the Senate floor:
Exports down. Imports down. Growth estimates down.
Howard Richman, 4/13/2011
The trade data for February that were released on April 12 by the BEA show a fall in both U.S. exports and imports. The fall in imports suggests that U.S. demand is faltering, while the fall in exports suggests that world demand for U.S. products is stagnant. As a result, several groups have revised downward their estimates of first quarter U.S. growth to a paltry 1.5%.
Although most articles reporting the new trade data herald the tiny improvement between January and February, the annual trend is actually quite negative. In February 2010, the seasonally adjusted U.S. monthly trade deficit was $39.7 billion, while in February 2011 it had risen to $45.8 billion, as shown in the graph below:
Meanwhile, the U.S. trade deficit with China also continues to run above last year's levels, as shown by the blue line being above the red line every month for the past twelve months in the not seasonally adjusted graph below:...
Consumer confidence is tumbling - economic growth will likely slow during 2nd Quarter
Howard Richman, 3/28/2011
In March, consumer confidence tumbled to 67.5% from 77.5% in February. Before the New Depression hit in late 2007 consumer confidence was in the 90s. Then consumer confidence fell, hitting a 28 year low in November 2008 at 55.3%.
On Friday, the BEA released its final revision for GDP during the fourth quarter of 2010. The rise in GDP during that quarter was led by increased consumption demand and improved net exports. The following table shows the components of aggregate demand and their contributions to GDP growth during each of the four quarters of 2010:
| Contributors to Real GDP Growth | ||||
|---|---|---|---|---|
| Year | 2010-1 | 2010-2 | 2010-3 | 2010-4 |
| Household Consumption | 1.31% | 1.53% | 1.66% | 2.78% |
| Business Fixed Investment | 0.41% | 2.19% | 0.19% | 0.86% |
| Government Consumption | -0.31% | 0.75% | 0.75% | -0.33% |
| Net Exports | -0.26% | -3.37% | -1.70% | 3.23% |
| Inventory Change | 2.48% | 0.75% | 1.59% | -3.17% |
| Total Change in Real GDP | 3.68% | 1.71% | 2.53% | 3.08% |
Why Obama's $8billion Recovery Act Did Not Stimulate the Economy
Raymond Richman, 3/20/2011
On Feb. 13, 2009, Congress passed Pres. Obama’s American Recovery and Reinvestment Act of 2009, a $787 billion economic stimulus proposal. The Recovery Act stated that its goals were 1) to create new jobs and save existing ones and 2) to spur economic activity and invest in long-term growth. It provided $288 billion in tax cuts and benefits “for millions of working families and businesses,” $275 billion for federal contracts, grants and loans, and 244 billion in entitlements. In addition to offering financial aid directly to local school districts, expanding the Child Tax Credit, and underwriting a process to computerize health records to reduce medical errors and save on health care costs, the Recovery Act plans investment in the domestic renewable energy industry and the weatherizing of 75 percent of federal buildings as well as more than one million private homes. Given the enormous expenditure, Keynesian economists are hard put to explain why the Recovery Act created so few new jobs.
The reason for its failure to spur economic activity, we believe, is that a third of the expenditures were transfers to state and school districts which may have saved some jobs assuming the recipients could not have raised revenues or cut expenditures. Grants were made to households which used the proceeds to pay off debt preponderantly, creating few jobs. The tax benefits and entitlements, five-eighths of the total, did not get spent by the recipients on consumption or investment goods. Either that or too much of it was spent on imported goods and services which provided jobs abroad and not in the U.S.
A glance at the government agencies that paid out the most money indicates what the balance of the money went for. ...
German and Chinese Surpluses and Growth; PIIGS and the U.S. Deficits and No Growth
Raymond Richman, 3/15/2011
The enormous chronic trade deficits that the U.S. has been experiencing during the past decade have eliminated millions of U.S. manufacturing jobs. If we were to succeed in bringing our trade into reasonable balance, many of those jobs would be performed in the U.S. and the recession would be over. The U.S. has allowed these deficits because of its foolish ideology embraced by its economists of Free Trade, which has prevented the U.S. from dealing with its terrible consequences. It was exacerbated by other foolish domestic policies to be sure. Other nations contributed to our deficits by their mercantilist policies which have advanced their industries and the welfare of their workers at the expense of U.S. industry and American workers. The Financial Times reported (14 March 2011) that China has overtaken the U.S. as the World’s biggest goods producer. According to research conducted by consultancy IHS Global Insight, China accounted for 19.8% of world manufacturing output in 2010, edging ahead of the US which accounted for 19.4%.
The reaction of the overwhelming majority of U.S. economists is to ignore China’s growth as an industrial power, the result of the huge trade deficits between China and the U.S. A typical view of American economists is illustrated by a comment of an American economist that it “shows the need for the US to compete in the future not on the basis of commodity manufacturing but on innovation and new kinds of services that are driven by production industries,” said Deborah Wince-Smith, head of the Washington D.C.-based Council on Competitiveness. No mention of the trade deficits! This kind of passive acceptance of trade deficits will ultimately destroy the U.S. as an industrial power. Most of the consumer goods the U.S. imports from China are designed and produced by U.S. and other foreign firms which have outsourced their production to Chinese affiliates. Included are many of our largest and most respected corporations. It has been reported that Apple, HP, Dell, and many other high tech firms have ten times as many employees in China as they have in the U.S.
Just as the U.S. trade deficits adversely affected the U.S. economy, the trade deficits that Portugal, Italy, Ireland, Greece and Spain ( the so-called PIIGS) have been experiencing have resulted in a shortage of Euros among those countries and a surplus of Euros in Germany. Oh, how wonderful it is to have a positive trade balance. ...
Money Supply during the Great Depression
Howard Richman, 2/27/2011
In Friday's posting, I compared the U.S. economy of 2010 to 1937, but the more accurate comparison is to 1936. As shown in the graph below, real GDP growth slowed in 1937 and it went into a double dip in 1938:
In 1936, the Federal Reserve overly expanded money supply. This resulted in increasing inflation in 1937, so in 1938, the Federal Reserve clamped down so much on money supply that it actually caused deflation and negative growth, as shown in the chart below:...
Pat Buchanan Gets the Trade Deficits Right But the Solution Wrong
Raymond Richman, 2/26/2011
It was a pleasure to read Pat Buchanan’s syndicated column entitled “A dismal decade for industry” in the Pittsburgh Tribune-Review on Saturday, February 26, 2011. In it, he cites the bad news that we have been reciting for years on the internet and in our book Trading Away Our Future (Pittsburgh: Ideal Taxes Assn, 2008) namely that the growing trade deficits have been de-industrializing the U.S., costing American workers 5 million good manufacturing jobs, worsening the distribution of income, putting us in enormous debt to countries hostile to us, and weakening the dollar.
Pat points out that in the decade between December, 2000 and December, 2010, American ran a total of $6.1 trillion in trade deficits. Since the trade deficits are a subtraction from Gross Domestic Product, our GDP would be 40 percent higher that it now is and we would have full employment not a deep recession if we had balanced trade during the past decade.
He points out, “With China, the U.S. trade deficit in advanced technology alone in the past four years has totaled more than $300 billion.” As we have pointed out, many of our imports come from such high tech firms as Apple, Hewlett-Packard, Dell, etc. etc. many of whom have ten times as many employees producing for them in China than they employ in the U.S. They are more Chinese than American. ...
Will 2011 be another 1938 or another 1941?
Howard Richman, 2/25/2011
At the moment, the U.S. economy is poised to exit the New Depression (Richard Duncan's name for the current depression), as shown in the graph below:
But last time the U.S. economy almost got out (1937), it fell back into a double dip and didn't leap out until 1941, as shown by the graph below:
...
How to Create Productive Jobs and Avoid Global Warming Bankruptcy
Raymond Richman, 2/9/2011
Yesterday, we suggested some measures that would promote a quick recovery. These included:
- 1. Getting our international trade into reasonable balance by means of our proposed scaled tariffs that we would impost on China, Germany, Japan, and OPEC countries. It would create an estimated 4 million manufacturing jobs in a relatively short time. No government expenditures are involved. To the contrary, to the extent they maintain a trade surplus with us, we’ll realize billions in revenues. All we have to do is tell those countries that trade is a two-way street and that they have to increase their imports from us or we will impose the scaled tariff on all imports from them.
- 2. Ending the foolish barriers to the drilling for oil and gas on public lands, offshore in the Atlantic and the Pacific. Besides creating a million jobs this would also diminish our dependence on foreign oil. The new oil and gas wells do not damage to the environment. Opening up public lands to drilling for oil and gas would create a million or more jobs.
- 3. Using natural gas, thanks to the invention of the new technology of drilling from shale, natural gas has become enormously abundant. Our reserves promise to make us energy independent. It is less polluting than oil or coal. We should move immediately to convert buses and trucks to natural gas as T. Boone Pickens has urged. Doing so would open natural gas filling stations across the country and open the market for consumers to purchase natural gas powered automobiles. The increased use of natural gas promises to lower the cost of energy not only as a fuel for motor vehicles but to heat our homes, offices, and factories, and to lower the cost of electric energy to businesses.
There are other things we could do to stimulate business investment in the U.S.
- 4. Abolish the corporate income tax. A distinguished University of Chicago economist, Prof. Arnold Harberger, now emeritus, showed recently that corporations that sell their products in the U.S. pass the tax on to consumers in the form of higher prices but they cannot do so for products sold internationally because their competitors are not subject to the U.S. corporate income tax. So the corporate income tax acts like a sales tax at home and puts American companies at a disadvantage in international markets. Moreover unlike the value-added tax, the fair tax, and other consumption taxes, corporate income taxes cannot be rebated to exporters. Most of our trading partners impose a value-added tax and rebate the tax to their exporters and impose the tax on our exports to them.
- 5. Reduce the barriers to the erection of nuclear energy plants. Those concerned with the environment should be aware that their opposition to nuclear plants is opposition to clean energy. France gets most of its electricity from nuclear plants....
A Quick Economic Recovery With Jobs, Jobs, Jobs
Raymond Richman, 2/8/2011
We have the means but not the will to recover from this recession in no time at all. What is preventing it are a President and a Congress more concerned with satisfying those who contributed to their election than the welfare of the nation. What is preventing it are the nation’s economists who are committed ideologically to false economic theories. What is preventing it are organized groups dedicated to destroying capitalism. What is preventing it are naïve self-described idealists who believe in a false theory of man-made global warming . Oh, why—oh why can’t a majority of voters think like us. Here is our program for a quick economic recovery and we shall follow it with our reasons for believing the President, the Congress, the academic economists, and the leftists are pursuing policies detrimental to our nation’s future and why a majority of our citizens are going along with these policies of self-destruction.
1. Get our foreign trade in reasonable balance. How do we accomplish this? We have invented what we call the “scaled tariff” which is imposed only on those countries with which we are experiencing large chronic trade deficits. Balancing trade will put million workers back to work in a very short time, some almost immediately, because of the stimulus of simply announcing the policy. Following are our trade deficits in goods and services in 2009 and the first three quarters of 2010 with Germany, Japan, China, and OPEC (US$ millions) : ...
American output increased at a 3.2% rate in the fourth quarter, but real American income only increased at a 1.3% rate!
Howard Richman, 2/4/2011
On January 28, the Bureau of Economic Analysis (BEA), released preliminary GDP numbers which stated that although American production grew at a 3.2% rate in the fourth quarter, real American incomes only grew at a 1.3% rate. The difference was the price of imports. Import prices rose at an 18.9% rate.
Specifically, nominal GDP grew by at a 3.4% rate, while inflation in the prices received by American producers grew at a 0.3% rate. Meanwhile, prices paid by American purchasers grew at a 2.1% rate making the growth in American purchasing power just a 1.3% rate....
U.S. Manufacturing Employment Rose in January
Howard Richman, 2/4/2011
According to the latest statistics released this morning by the Bureau of Labor Statistics, unemployment declined from 9.4% in December to 9.0% in January.
Part of the improvement came from the increase in manufacturing employment, which rose by 49,000 up to 11,617,000 in January from 11,568,000 in December. The chart below shows manufacturing employment over the past decade (seasonally adjusted):...
How is QE2 doing so far?
Howard Richman, 2/2/2011
Last fall, Federal Reserve Chairman Ben Bernanke launched QE2 (Quantitative Easing 2) in order to stimulate U.S. economic growth. Now that the preliminary fourth quarter 2010 data is in, it is possible to start evaluating how he is doing. His apparent goals, as I noted in a November 19 commentary (Will QE2 End in Disaster?), were to cause inflation in order to suppress private savings and increase consumption and to weaken the dollar in order to increase U.S. exports and reduce U.S. imports. I wrote:
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....
Inflation, Savings and Consumption
One of Bernanke's goals was to increase inflation to 2%, which he confirmed in a November 19 speech. With U.S. short-term interest rates close to 0%, the increased inflation rate would place a 2% inflation tax on short-term savings. This would cause the savings rate to fall, which in turn would cause consumption to increase.
He has been succeeding at increasing inflation. The Consumer Price Index climbed from a 1.1% rate in September to a 1.5% rate in December, and the Producer Price Index climbed from a 0.4% rate in September to a 1.1% rate in December. The only anomaly is the BEA's GDP deflator which decreased from a 2.08% rate in the third quarter to a 0.33% rate in the fourth quarter.
The effect on savings was as predicted. The U.S. savings rate fell from 5.9% of after-tax income during the third quarter to 5.4% in the fourth quarter. This, predictably, increased consumption.
Dollar Strength and Trade Balance
Another of Bernanke's apparent goals was to weaken the dollar. But the effect has been mixed, as shown in the chart below:
Sperling, a Poor Choice for Director of National Economic Council
Raymond Richman, 1/25/2011
Gene Sperling, who pretends to be an economist although he has no economics degree, has been chosen by Pres. Obama to be the Director of the National Economic Council. He has a law degree from Yale. He owes his excellent reputation as an economic policy expert to the fact that he served on Pres. Clinton’s National Economic Council and chaired the Council during Clinton’s second term. We decided to read his 2005 book, The Pro-Growth Progressive: An Economic Strategy for Shared Prosperity (NY: Simon & Schuster, 2005) to learn more about him. The title of the book tells you he would like to be known as a pro-growth Progressive by which he apparently means that he is devoted to the growth of the economy and wants to ensure that government economic policies create benefits for the lower economic classes. He is not a good enough economist to follow through on whether in fact the lower economic classes actually did benefit from earlier policies. He mentions some and some were failures. He paid no attention to the trade deficit with China that exploded during Clinton’s second term and cost American workers hundreds of thousands of well-paid manufacturing jobs and caused American wages to stagnate.
He writes that the “(t)raditional divides in American politics are increasingly ill-suited to a serious inquiry about how to ensure we grow together in a dynamic global economy.” [my italics] His solution to the loss of jobs is retraining. He writes that we are out of touch with the “growing imperative for public policies to help workers adjust to the uncertainties of the global market and ensure that growth is fair and consistent with our values.” In other words, he was then and presumably continues to be a free trader even, apparently, when we are the only ones practicing free trade. As the reader knows, we have been urging that a “scaled tariff” be imposed on imports from all countries with which we are experiencing chronic trade deficits. In 2008, while Sperling was Director of the National Economic Council, our trade deficit with China was close to $800 billion, an amount roughly equivalent to the output of 8 million American workers. Neither he nor the Council of Economic Advisors acknowledged any problems the huge deficit caused. ...
Government Wimps Masquerading as Economists
Raymond Richman, 1/12/2011
Dr. Lawrence Summers in a swan song speech to the White House’s Economic Progress Institute entitled “Economic Progress and Economic Policy” is more noteworthy for what he did not say than what he did say. ”It is by what happens to the middle class that our economic policies have to be judged.” He means the independent voters. Surely the welfare of the working class is equally important but the Democratic Party takes them for granted. 14 million or more unemployed and Summers offers them little or no hope for years.
Summers writes, “..(S)cholars .. will continue to debate just how close the American financial system and economy came to all-out collapse in the six months between September of 2008 and April of 2009.” In our opinion, there won’t be much debate. Pres. G. W. Bush’s $750 billion TARP program which lent billions to the banks, foreign and domestic, prevented the collapse.
As to what caused the recession and what we have done to prevent a recurrence? Not a word. Even the Community Development Act, which made ACORN rich and was a full employment act for communists and other leftists is still on the books. What we do know he says is: that during that time the stock market fell more sharply than in the six months after Black Tuesday in 1929, that global trade declined more rapidly than in the first year of the Great Depression. and that the economy was not self equilibrating and that a variety of vicious cycles were pulling it down even deeper, at a rate of 700,000 jobs a month at the worst of it. "Had it not been for President Obama’s willingness to support a sufficiently aggressive response – from the late stage of the presidential campaign to his first days and months in office – I have little doubt that we would be looking at a vastly different world today.” We suppose it is to be expected that Summers would laud Obama’s inadequate efforts. After all Summers himself must share the blame. The President wasted his first two years treating the economic crisis as second to reform of health care. The Recovery Act of 2009 was a failure because it consisted of huge transfers to the states and school districts which created no jobs and huge subsidies to wind and solar power which only increased the cost of energy. Although we were importing 60% of our crude oil, no steps were taken taken to increase our own output of crude oil. To the contrary, greater restrictions were applied on investment in oil drilling on public lands.
A Scaled Tariff would Help Balance the 2011 Budget - we're published in today's American Thinker
Howard Richman, 1/9/2011
We begin:
The last Congress passed a dangerous mixture of spending increases and tax cuts financed by borrowing. The American people saw this as a mistake and in the 2010 elections elected a Republican House of Representatives and an increased number of Republican senators. In the exit polls, 40 percent of voters said that the highest priority should be reducing the budget deficit (65 percent of them voted Republican). As a result, the Republicans were given a mandate to balance the federal government budget.
But the United States faces not only a huge budget deficit, but also a huge foreign trade deficit. A December 2010 National Review/Allstate Heartland Poll contained an extensive battery of questions on trade and U.S. manufacturing. The poll revealed strong public majorities in favor of a variety of measures that would move trade towards balance. For example, 68 percent of respondents supported a policy requiring that "a certain percentage of every high-end manufactured product, such as automobiles, heavy machinery, and transportation equipment, sold in the U.S. also be produced or assembled within the U.S., even if that means higher prices for their products." In 2006 and 2008, the Democrats won elections by advocating protectionism. The conservative pro-free-market alternative is balanced trade. When trade again becomes a dominant issue, Republicans could go back to minority status unless they address the trade issue themselves.
The two deficits -- budget and trade -- are easier to balance simultaneously than to balance separately. Balancing budgets reduces demand for American products, but balancing trade increases it. Balancing trade increases long-term interest rates, but balancing budgets reduces them. Moreover, the government revenue from tariffs that balance trade would help balance budgets!...
Follow the following link to read the rest:
http://www.americanthinker.com/2011/01/a_scaled_tariff_would_help_bal.html
With No Program for Economic Recovery, the Republlicans Will Lose in 2012
Raymond Richman, 11/16/2010
Now is the time for all good Republicans, including Tea Partyers, to come to the aid of their party and their country! With 9.6 percent unemployment – really more than twice that if you count those who dropped out of the labor force and those unwillingly reduced to part-time jobs -- Pres. Obama and the Democratic Congress spent -- no, wasted! -- his first two years in power occupied by domestic issues whose resolution should have been postponed until the economy had recovered. The issue that wasted the most time was health care. Republicans may want to repeal or amend the health care bill but if they do, they will waste another year and a half (and predictably won’t change it much) with no reduction in unemployment. Unemployment can be expected to increase, not decrease. And Republicans will suffer the same fate as the Dems did in the recent elections.
What did the Democrats do wrong that caused their tremendous loss of public support in just two years?
The Democrats passed Pres. Obama’s Recovery Act of 2009, his $800 billion dollar plus economic stimulus plan but which, for all practical purposes, did not create any new jobs although it may have preserved the jobs of supporters like the teachers that belong to the NEA and other unionized government employees. It financed the “klunkers” program which provided a temporary increase in auto sales. It had no lasting benefit. The Recovery Act financed investments in so-called “renewable” energy sources like windmills and solar but which are so expensive that, even with the subsidies they raise the cost of electricity. We learned nothing from the earlier Spanish experiment with alternative energy which proved how uneconomic and unsustainable alternative energy sources really are. They will require continuous subsidies over their whole lives and will hit consumers in two ways, higher energy prices and higher taxes.
The President acting like Venezuelan dictator Hugo Chavez, arbitrarily took over General Motors, causing the loss of thousands of jobs of workers producing Saturns and Pontiacs. In bankruptcy, those cars would still be being produced but with new owners. As a result, GM became known as Government Motors with the automobile union as co-owner. ...
Not "Free Trade". Let's Have Balanced Trade
Raymond Richman, 11/12/2010
We have been great admirers of Prof. Walter Williams who was for a long time Professor of Economics at George Mason University. He is an admirer of Prof. Milton Friedman and so am I. Friedman was my dissertation advisor. One of the areas where I disagreed with him was in his embrace of free trade as a policy to be pursued by a government unilaterally. There is in my opinion no economic theory that justifies a policy of free trade when your trading partners are practicing mercantilism, a policy of imposing barriers to imports and subsidizing exports.
A policy of free trade can only be justified when both labor and capital and goods can move freely between trading partners. Thanks to the U.S. Constitution we have free trade between the States of the Union. And even so, States compete with one another to attract investors, offering inducements of one sort or another. There is no such thing as free trade between nations. Yet American economists are almost unanimous in encouraging the U.S. to pursue a policy of free trade. The consequences have been tragic for American industrial workers. Prof. William in an opinion piece entitled “Worry Over Trade Deficits” on November 20 which echoes the predominant economic point of view.
He writes:
At the recent Group of 20 (G 20) meeting [of finance ministers)] U.S. Treasury Secretary Timothy F. Geithner called upon the largest industrialized economies to get their current account balance — whether a surplus or a deficit — below 4 percent of their gross domestic product by 2015…. Our annual trade deficit of $500 billion is less than 4 percent of our GDP.
We do not know how Geithner arrived at four percent. In 2008, the U.S. current account deficit was $670 billion, which was 4.67 percent of 2008 GDP. We estimate that it would take 6.7 million U.S. workers to produce $670 billion of manufactured and industrial goods. Prof. Williams apparently does not believe 6.7 million workers losing their jobs is too big a price to pay for free trade in a world dominated by mercantilist policies....
The Employment Report Portrays a Dismal Outlook For the Economy
Raymond Richman, 11/6/2010
The US Bureau of Labor Statistics released employment data for October, 2010 which received considerable media attention and a televised comment by President Barack Obama. They cited the report’s data that showed total private nonfarm employment increased by 159,000 over September, 2010. Unfortunately, no one in the popular media to my knowledge bothered to report the composition of the increase.
There was a net increase of only five thousand (+5,000) employees in the production of goods. There was an increase of seven thousand (+7,000) in mining and five thousand (+5,000) in construction, but a reduction of seven thousand (-7,000) in manufacturing, leaving a net increase of only five thousand (5,000) employees in the production of goods.
Of the remaining 154,000 jobs created, 27,900 were in retail and 7,300 in wholesale trade, 46,000 in professional and business services (including 34,900 in temporary help services), 53,000 in education and health services, 25,000 in other services, a reduction of five thousand ( -5,000) in leisure and hospitality, and two thousand one-hundred (-2100) in financial and information services. There was no growth in employment in transportation and warehousing. ...
Growing Trade Deficit continues U.S. Depression
Howard Richman, 10/31/2010
A depression continues until real GDP surpasses pre-depression levels and keeps rising. The United States did not climb out of the Great Depression until 1939, though it almost climbed out in 1937 as shown in the graph below:
Similarly, the United States is still locked in the Great Recession and will not be out of it until it surpasses the level Real GDP reached in the fourth quarter of 2007, as shown in the graph below:
The preliminary results for Real GDP for the third quarter of 2010, just released on October 29, show why the American economy is staying in the Great Recession. The growth in real GDP was just 2.0% due to the growing trade deficit subtracting a full 2.0% from GDP growth. The components of GDP growth were the following:
| Component | Contribution to Growth |
| Consumption | 1.8% |
| Fixed Investment | 0.1% |
| Government Purchases | 0.6% |
| Inventories | 1.4% |
| Foreign Trade | -2.0% |
| Total | 2.0% |
As can be seen from the table, consumption spending contributed 1.8% to GDP growth and inventories, perhaps due to businesses stocking up on commodities, contributed 1.4% to growth, while the trade deficit subtracted 2.0% from U.S. economic growth. If not for the growing trade deficit, U.S. economic growth would have been 4.0%....
Sound Monetary Policy Is Necessary But More Is Needed
Raymond Richman, 10/28/2010
David Wessel of the Wall Street Journal, in its edition of 10-28-2010, asks what the late Prof. Milton Friedman, the leading monetarist and proponent of free enterprise of the Chicago school, would think of Federal Reserve Chairman Bernanke’s “imminent move to print hundreds of billions of dollars to buy more Treasury bonds to put more money into the economy.” He put the question to one of Friedman’s eminent students, Prof. Robert Lucas. As a former student of Prof. Friedman, I found myself in agreement with their description of Friedman’s views on monetary policy. But to suggest that Friedman would have approved Bernanke’s policy for Quantitative Easing (QE2) is wrong. Much more needs to be done before monetary policy can make a real contribution to economic recovery.
Moreover, the notion expressed at the beginning of the article that “We can be sure (that Keynes) … would advise “more government spending to spur U.S. economic growth” assumes that he would have learned nothing from the recession of 1936-37 which demonstrated that government spending has no multiplier effect at all and which is confirmed by our experience with Pres. Obama’s 2009 Recovery Act. Spending $800 billion dollars has given a small temporary boost to income and employment as the data for 2009-10 confirm.
As the article points out, Friedman did not trust central bankers and blamed the Fed for the severity of the Great Depression and its cause. Friedman also warned against “erratic swings” in the money supply, which has indeed been swinging erratically lately, as shown by the black line in the graph below. The red line shows the change in M1, which is controlled by the Federal Reserve through open market purchases of short-term US Treasury Notes. The Federal Reserve uses its control over M1 to affect M2, a broader measure of the Money Supply. Right now, the Federal Reserve is growing M1 quite rapidly in order to bring up M2 growth, possibly to the 8% range, which will likely cause inflation to rise. This is erratic alright...
Achieving Reasonably Balanced Trade Is an Act of Self Preservation
Raymond Richman, 10/26/2010
US Treasury Secretary Geithner, in a letter addressed to the G20 member nations, called for the G20 at its forthcoming meeting in Korea to set targets limiting current account surpluses. He described these targets as necessary to ensure the “orderly rebalancing of global demand”. He also wanted the G20 members to bar its members from engaging in deliberate currency devaluation as a way to boost exports at the expense of other nations. The finance ministers in their meeting preparatory to the official G20 meeting debated these proposals and agreed only to recommend barring the use of devaluation as a tactic to gain a trade surplus.
Geithner said countries were interfering with the free flow of goods and services, both on the demand side and the supply side. Yes, even the U.S. does that. We oppose unrestricted immigration and we impose some tariffs and quotas. Only money and capital is free to enter the U.S. What he said was clear and what he meant was China.
Why was Geithner being so divorced from reality at the meeting of finance ministers of the G-20 as to urge the G-20 to set China’s exchange rate for the yuan with the rest of the world? At the same time, the G20 would be setting the exchange value of all countries, the U.S. dollar, the euro, the Japanese yen. But what about the other conditions necessary to make it work: unrestricted movement of people, money, and goods as our Constitution requires of the states of the union.
Our proposal for “scaled tariffs” which would be imposed only against countries with which we are experiencing trade deficits does not affect the rate of exchange between countries and fully accords with World Trade Organization (WTO) rules which empower countries to impose tariffs for the purpose of correcting Balance of Payments(BoP) imbalances. Taking advantage of these rules does not require approval in advance of any country or group of countries. ...
Why Pres. Obama's Economic Stimulus Has Failed
Raymond Richman, 10/19/2010
The Obama administration’s 2009 Recovery Act allocated $787 billion intended to stimulate the economy. To Keynesians spending is fungible and it does not matter what the increased spending is for so long as it is spent on goods and services. But as is evident from the data which appears on the government site, www.recovery.com, which is supposed to keep track of the Recovery Act’s progress, most of the expenditures were not for goods and services: $288 billion or 29 percent consisted of Tax Benefits and $224 billion, or 28 percent were for Entitlements. Thus more than half consisted of income transfers. The remainder was for Contracts, Grants & Loans to individuals, businesses, organizations, and governmental units. The payouts are continuing: 85 percent of the Tax Benefits have been paid out, only 54 percent of the Contracts, Grants and Loans, and only 73 percent of the Entitlements.
The vast majority of the Recipients of Recovery awards consist of state and local governments including school districts, universities and research institutions, NGOs (non-governmental organizations, and private companies. The Act looks like a list of ear-marks, a politically inspired set of expenditures and not of a recovery act. The President’s advisors learned nothing from the failure of Pres. Roosevelt’s “New Deal”. The CCC, WPA, and PWA, etc., etc. stimulated the economy but had no multiplier effects as the recession of 1957-58 showed. No one should be surprised that the Recovery Act, in spite of the billions already paid out, appears to have contributed little and, like the increased expenditures in the 1930s , will produce just a temporary increase in GDP and will likewise have no multiplier effects. But the Recovery Act faced another challelnge which the New Deal" did not, a growing trade defricit which drags down the Gross National Product and does have a multiplier effect.
The President has indicated his disappointment with the lack of so-called “shovel-ready” projects. But even if there were a great many “shovel-ready” projects, it would have no multiplier effects. That the economy will experience a double-dip in the GDP cannot be ruled out although it may be deferred by the billions still remaining to be paid out. Unfortunately, there was little in the Act to stimulate industry. Like the trade deficits, economists chose to ignore the fact that the large corporations were outsourcing the production of their new products. As Andy Grove, a founder and former CEO of Intel pointed out, Apple, HP, Dell and other innovators have ten times as many employees producing their products abroad than they employ in the U.S. Our commitment to unilateral free trade continues in spite of fifteen to twenty percent unemployment, counting those working part-time and those who stopped looking for jobs. ...
Only the USA's Leaders Are Foolish Enough to Embrace Unilateral Free Trade
Raymond Richman, 10/12/2010
As every economist knows, the editors of the Wall Street Journal believe in free trade. They can be forgiven; they are not economists. But economists should not be forgiven. There is no economic theory that supports a unilateral policy of free trade. Yet most economists believe it is the best policy for the U.S. to follow. Free trade is an ideology, based on faith, not science.
In its weekend edition, 10-9-10, the WSJ features an article by Professor of Economics Douglas Irwin of Dartmouth College entitled “Goodbye, Free Trade.” How distant the title is from reality is indicated by the fact that there is no such thing as free trade among nations and probably never will be. There is no free trade theory in any economics textbook. But every text decries mercantilism. We, too, decry mercantilism but we believe in balanced trade, not free trade. Economic theory shows that when trade is in balance all the trading partners benefit.
Every country has some trade barriers. America’s barriers to trade are among the lowest in the world and the lowest of any large country. The U.S. Constitution forbids the states from imposing tariffs or interfering with the free movement of citizens and the free movement of capital among the states. Those are the conditions required for a free trade policy, no barriers to trade, or to the movement of capital, or to immigration. Ever since the classical economists, Adam Smith and David Ricardo, condemned mercantilism, U.S. economists have preached free trade and to turn the other cheek if other countries employ mercantilist policies....
Being Deaf, Dumb, and Blind on Our Huge Trade Deficits!
Raymond Richman, 10/8/2010
The employment data continue to be poor. New claims for unemployment compensation continue high, amounting to 445,000 for the week ending Sept. 25, 2010. Similarly, the unemployment news released October 8, 2010 reported that nonfarm payroll employment edged down (-95,000) in September, and the unemployment rate was unchanged at 9.6 percent. Government employment declined (-159,000), reflecting both a drop in the number of temporary jobs for Census 2010 and job losses in local government. Private-sector payroll employment continued to trend up modestly (+64,000). There was a lot of wailing on CNBC about the poor unemployment data. Nevertheless one hour after the release of the data, the stock markets opened -- UP!
None of the analysts on CNBC mentioned the fact that balancing the trade deficits would immediately change the employment prospects from negative to positive. Although estimates vary, at least five million well-paid manufacturing jobs have been lost over the past two decades to China, Germany, and other countries as the trade deficits worsened and the government-created housing boom burst. And under the rules of the World Trade Organization, countries suffering from chronic trade deficits are legally entitled to impose tariffs and other barriers to imports from specific countries with which trade is unbalanced. So why have both Republican and Democratic administrations done nothing to prevent million workers from losing their jobs? ...
We Are Out of the Recession But Mired In a Depression
Raymond Richman, 9/24/2010
The NBER's Business Cycle Dating Committee, consisting of a dozen distinguished economists, announced on September 20 that the U.S. economy reached a trough in June 2009, making the 18-month recession that began in December 2007 the longest in the post-war period. Three economists have left the Obama administration. No, they did not leave the administration because the recession was over. The notion that the economy bottomed out with unemployment continuing to grow and millions leaving the labor force should be sufficient to make us realize that figuring out when the downturn ended was an exercise in futility. It has not ended and we have not recovered. The rise in GDP since the trough was achieved by billions of dollars of government spending which will largely end by the next quarter and we will have had no growth and no reduction in unemployment.
In a discussion that appeared in the Sep 20 -26 issue of Bloomberg Business Week, five well-known financial experts gave their ideas about “How to Fix the Economy. They included William Gross, who runs PIMCO , the world’s biggest bond fund, Peter Orszag until recently director of Obama’s Office of Management and Budget, Robert Shiller, professor of economics at Yale University, Charles Calomiris, Henry Kaufman Professor of Financial Institution at Columbia University, Henry Kaufman himself, former head of Salomon Brothers,
Peter Orszag agreed with Bill Gross, that recovery will take years. Henry Kaufman, thought it could be accomplished sooner if we raised household incomes so that they could meet their debt burdens or by doing something “about the size of that debt.” But “We don’t have the capacity or the willingness to do that.” ...
Prof. Gomory Urges a National Policy of Balanced Trade Not Free Trade
Raymond Richman, 9/23/2010
Prof. Ralph E. Gomory, currently Research Professor at New York University, former President of the Sloan Foundation, and former Senior Vice-President of IBM in charge of Science and Technology, in a seminal article entitled “Jobs, Trade, and Mercantilism – Part 1 – Facing Reality” (published in the Huffington Post on 9-22-10) begins by stating, “Our nations’s continuing massive trade deficits are destroying important sectors of American industry and eliminating desperately needed jobs, yet balancing trade is not even on our government’s agenda. This is happening because we are not facing reality, the reality that we are not living in a free trade world but that we are dealing with countries that practice mercantilism.” We recommend that everyone read it.
Prof. Gomory is the co-author with distinguished Professor William J. Baumol of a seminal work, Global Trade and Conflicting National Interest on the role of comparative advantage. In that book, the authors show that free trade is not always and automatically benign. They show that there can be inherent conflicts as well as mutual gain for nations engaged in global trade. Countries can pursue policies that beggar their neighbors. Or countries can pursue trade policies that are mutually beneficial. Our current trade with China falls in the former category....
A Conservative Proposal for Economic Recovery That Won't Work
Raymond Richman, 9/19/2010
(this is actually a joint posting by Howard Richman and Raymond Richman)
With the U.S. federal budget spiraling out of control due to Keynesian policies that are not even making a dent in unemployment, America is hungry for fiscally responsible economics. Mostly, what we hear from conservatives is the supply-siders' recommendations of more tax cuts, like the ones that made the budget deficits much worse during the GWBush years. But there is a fiscally-conservative school of economics: the monetarist school founded by Milton Friedman, the dissertation advisor of one of us (Raymond).
Monetarism recommends balanced monetary growth and balanced budgets in order to attain stable economic growth and avoid inflation and big recessions. It keeps long-term growth in mind while taking short-term economic fluctuations in stride.
On September 16, several conservatives with huge Republican-establishment credentials, proposed a monetarist solution to the current malaise in an op ed that nearly took up a full page in the Wall Street Journal. George P. Shultz (former Treasury Sec’y), Michael J. Boskin (Chair Council of Economic Advisors under first Bush), John F. Cogan (former Dep Director of Mgt and budget under Reagan), Allan Meltzer (prof of econ at CMU and reknown expert on Federal Reserve history), and John F. Taylor (prof of econ at Stanford and undersec’y of Treas under GWBush), outlined their “Principles for Economic Survival.” In general, it was an excellent exposition of fiscally conservative policies for economic recovery. Unfortunately, it wouldn't work....
Boeckh Nails It, but Opposes the Solution
Howard Richman, 8/30/2010
J. Anthony Boeckh nailed it (Increasing Risks). The world economy is heading downhill because of the failure to rebalance trade. His graphs clarify. His investment recommendations seem sound. If his 2010 book is as perceptive (The Great Reflation) then it is well worth buying. Here is his summary of how mercantilism is sapping U.S. growth at the moment:
Effectively, the surplus countries [e.g., China, Germany, Japan, etc.] are stealing growth from the deficit countries [e.g., the United States, Greece, Portugal, etc.] and not allowing them to adjust to external and internal disequilibrium. In the U.S., this can be seen most clearly by the simultaneous rise in the savings rate, the trade deficit and the deterioration in labor market data. When the natural forces of the adjustment process to economic disequilibrium are blocked, political tension must necessarily increase. In an election year, you can expect vulnerable politicians to act.
Boeckh fears that U.S. policy makers choose his "third option":...
Reducing the Trade Deficits Is Essential for Economic Recovery
Raymond Richman, 8/28/2010
There was bad news on Friday, August 27, with the release of updated figures for economic output in the second quarter of 2010. The Bureau of Economic Analysis correctly presented the data. It reported:
The deceleration in real GDP in the second quarter primarily reflected a sharp acceleration in imports [my emphasis] and a sharp deceleration in private inventory investment that were partly offset by an upturn in resistential fixed investment, an acceleration in nonresidential fixed investment, an upturn in state and local government spending, and an acceleration in federal government spending.
No one. journalist or economist or government official mentioned the sharp acceleration in imports to which the BEA refers and which appears in the first paragraph of the BEA report. The fact appears to be that our leaders, our political and academic elite, are so committed to “free trade” that everyone is afraid to call attention to the disaster in the making, to the deficits that are de-industrializing the U.S. and have cost millions of good-paying jobs.
The reader may be unaware, because it is mentioned so rarely, that exports and imports are part of the Gross Domestic Product. The formula is...
The Housing Bust Redux
Jesse Richman, 8/26/2010
When housing numbers were released on Tuesday and Wednesday for July, the picture they painted of the housing market was pretty bleak. Sales volume tanked, inventory increased. The only surprising aspect of the associated news stories was that they noted economists had predicted substantially smaller declines. If we believe that long-run housing prices are shaped by supply (houses on the market) and demand (income and population growth), the recent drop should come as no surprise.
During the housing bubble demand for housing soared, fueled by unrealistic expectations of continued hyper-growth-stock returns from a traditionally stodgy investment that in the long term keeps up with inflation and little more. Now consumers have learned...
Economists Don't Know How to Recover From the Recession
Raymond Richman, 8/24/2010
In an Op-ed in the Pittsburgh Tribune Review on 8-17-2010 (Obama's Reverse Progres), Kevin Hassett, director of economic policy studies of the American Enterprise Institute and senior economic adviser to Sen. George McCain in the latter’s 2008 election campaign, brings into question whether a Republican majority in the Congress would do any better than Pres. Obama in dealing with this recession. He demonstrates the bankruptcy of economists of both parties in dealing with the recession. He asserts that Pres. Obama’s “massive intervention” to rescue General Motors and Chrysler is anachronistic. Manufacturing is, in his view, “no more valuable than other types of output.” He writes: “Manufacturing has been on a decline as a share of national output for decades, part of the evolution of the U.S. economy.” His notion that a decline of U.S. manufacturing as a share of GDP is “normal” and to be expected is almost universally held among economists. But the rapid rate of decline of manufacturing during recent decades is not normal at all. It is a result of mercantilist practices of some of our trading partners and the failure of Democratic and Republican administrations to pursue policies that would bring our international trade in goods and services into balance.
As Hassett notes, “Manufacturing as a share of U.S. gross domestic product has fallen from about 28 percent in 1950 to about 11 percent in 2009.” But as a share of U.S. household consumption, it has not fallen at all as the following table shows:...
U.S. Growth Slows Due to Trade Deficit -- we were published in the American Thinker this morning
Howard Richman, 8/7/2010
Here's how we begin:
No private sector tire repairman would keep pumping up a flat tire again and again without patching the leak, but that is exactly what our governing class keeps trying. The Obama administration and the Democratic Congress have been pumping the economic tire without patching the trade deficit leak for a year and a half now.
The preliminary data for second quarter GDP, released on Friday (July 30) by the Bureau of Economic Analysis (BEA), show U.S. economic growth slowing from a 3.7% rate in the first quarter to a 2.4% rate in the second quarter. But the details were even worse. A full 1.0% of that 2.4% was due to produced goods that went unsold due to lack of demand. In fact, demand for American products rose at a paltry annual rate of just 1.4%!
The U.S. economy has now been depressed for a full two and a half years, ever since the fourth quarter of 2007. And with the current growth rate amounting to a paltry 1.4%, the near term prospects do not look good at all. The United States is clearly locked in a persistent recession with little prospect for recovery at any time soon.
We then discuss the Obama administration's mistakes and present our Scaled Tariff plan. We conclude:
This plan would be opposed by misinformed progressives who have been claiming that that the Smoot-Hawley tariff made the Great Depression deeper than it would have been. But those who have studied the Great Depression know that this is not true. For example, in her Encyclopedia Britannica entry about the Great Depression, Council of Economic Advisors Chair Christina Romer wrote: "Scholars now believe that these [protectionist] policies may have reduced trade somewhat, but were not a significant cause of the Depression in the large industrial producers."
Despite their bad reputation, tariffs are actually as traditional as apple pie. They were the main source of federal government revenue from our country's founding until Woodrow Wilson enacted the progressive income tax. Their main drawback is that they can be used to protect one or another politically-powerful industry, at the expense of other industries. But the scaled tariff would be an across-the-board tariff. It would not pick winners and losers. It would not only boost production by those Americans who compete with imports, but it would also increase American exports.
Its only drawback is that it would reduce the loans we are receiving from the currency-manipulation governments, resulting in higher U.S. interest rates, making it more expensive for the federal government to borrow. The higher interest rates would encourage Americans to save. And the federal government could reduce interest rates by moving toward a tax system that leaves household savings and undistributed business profits untaxed.
The greatly increased investment opportunities would increase business investment, despite the higher interest rates. The result would be a rapidly expanding private sector and an expanding GDP....
Krugman: G-20 summit will continue the depression
Howard Richman, 6/28/2010
In his blog entry today, Paul Krugman realized, based upon the results of the G-20 meeting, that the world's governments are not going to run budget deficits to pull the world out of the depression. Here is a selection:
And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.
Krugman has almost figured it out. But he hasn't yet figured out that chronic trade deficit countries cannot afford to run huge budget deficits without risking bankruptcy....
Bush and Obama's Economic Stimulus Attempts
Raymond Richman, 6/28/2010
The problem with the recovery and the reason we have 20 million unemployed is that the President and his economic advisors refuse to acknowledge the principal causes of the recession, the federal government’s policy of encouraging the banks and other lenders to make home loans on the basis of insufficient security and the federal government’s policy of tolerating the enormous trade deficits which have cost millions of good-paying factory jobs, caused wages to stagnate, and worsened the distribution of income.
The response of our economic planners in the Bush Administration was a $170 billion economic stimulus package which took the form of tax rebate checks of $500 per household. It had little or no stimulating effect. Nevertheless, the Obama administration came up with a similar gift to each householder with similar results. The Bush administration under Secretary of the Treasury Henry Paulson did come up with one successful program, the $700 billion fund, known by its initials TARP, the Troubled Asset Relief Program, which saved the entire U.S. financial system from bankruptcy. The public thinks of it erroneously as a bailout. Instead of buying the troubled mortgages and derivatives from the banks, et. al., it lent enormous sums to the banks and insurance companies which urgently needed to raise cash or succumb to bankruptcy. Much of the money TARP lent has been paid back. But it did not create a single job except for new TARP bureaucracy. Unfortunately, the banks still have hundreds of billions of troubled mortgages. If the economy should dip again, TARP will once again have to come to the rescue. ...
Geithner and Summers Make Their Economic Mistakes Transparent
Raymond Richman, 6/25/2010
In a joint op-ed in the Wall Street Journal (6-23-10) entitled “Our Agenda for the G-20”, Secretary of the Treasury Timothy Geithner and Lawrence Summers, Director of the National Economic Council revealed the administration’s economic agenda for economic recovery. The recovery, they write, depends on an expanding global economy: “Stronger growth with solid job creation here in the U.S. depends on an expanding global economy.” One has to ask since when has the economy of the U.S. depended on a expanding global economy? Recent historical evidence suggests that the contrary is true; the growth of the world economy has depended on an expanding U.S. economy and U.S. trade deficits. What the U.S. needs is reasonably balanced trade with the rest of the world. A growing world economy would be helpful so long as it is not one that grows at the expense of the American worker.
World trade and U.S. trade declined substantially as a result of the recession. As the downward plunge ended and trade began to increase, recovering only a portion of their pre-recession level, U.S. exports and imports increased but the latter unfortunately grew faster than exports. In the most recent period for which data is available, January to April, 2010, our trade deficit increased compared to the same period in 2009 from $-118.9 billion to $-155.5 billion. Under World Trade Organization rules, the U.S. has the right impose trade barriers to bring its trade into reasonable balance. We have not exercised this power. Geithner and Summers want the G-20 to do it.
They write the G-20 “must continue to work together to secure the global recovery it did so much to bring about.” They are kidding, right? Except for the Asian countries, where is the global recovery they observed. With 17 million still unemployed or underemployed, the U.S. recovery cannot be said to have been secured. What country are they living in? What are they smoking? At the G-20 meetings in London and Pittsburgh, the members talked a lot but accomplished little or nothing. They did nothing to “ ensure that global demand is both strong and balanced.”...
Congress Is Responsible for This Recession; Not the Banks, Not Wall Street
Raymond Richman, 6/22/2010
A few days ago, in a bid to stem taxpayer losses for bad loans guaranteed by federal housing agencies Fanny Mae and Freddy Mac, Senator Bob Corker (R-Tenn) proposed that borrowers be required to make a 5% down payment in order to qualify. His proposal was rejected 57-42 on a party-line vote.
The Senate and House are investigating the Banks and Wall Street for causing this recession but they should be investigating themselves....
How the False Doctrine of "Free Trade" is Crippling the U.S. Economy.
Raymond Richman, 6/16/2010
It is no secret to our readers that the U.S. has been experiencing enormous growing chronic trade deficits for two decades that converted the U.S. from the world’s leading creditor to the world’s leading debtor. Our political leaders, Republicans and Democrats, and their advisers ignored the awful consequences of the growing trade deficits and they continue to do so. These deficits cost the U.S. millions of well-paying industrial jobs to foreign competition. The workers who lost their jobs were forced to seek employment in other sectors of the economy. They found jobs at lower wages. Their competition for jobs depressed wages generally throughout the economy. The result has been wage stagnation and a worsening of the distribution of income observed in the U.S. during the past two decades.
On this site and in our book, Trading Away Our Future (Ideal Taxes Assn., 2008) we condemned the American economists’ infatuation with free trade, a legacy of Adam Smith’s 1776 criticism of mercantilism. Mercantilist practices – barriers to imports and subsidies to exports – are rightfully to be condemned but we find nothing in the economic literature that justifies free trade as an appropriate response to the mercantilist practices of our trading partners. To be sure, free trade is an appropriate policy between the states of the United States which enjoy a common currency, a common tariff, and the free flow of capital and labor as the U.S. Constitution obliges the states to do. The European Union Treaty of 1992 (Maastricht Treaty) obliges its member states to use a common currency and imposes common tariffs, and allows capital to flow freely among its members. But it lacks any obligation to allow the free flow of labor and makes no provision except budget austerity to balance trade. Thus, Germany experiences chronic trade surpluses while Greece, Portugal, and Spain experience chronic trade deficits. The latter countries are in difficulty because their debt is expressed in euros and they are unable to earn enough euros to service their debt. The U.S. has experienced growing trade deficits for decades and would long ago have defaulted on its debt were it expressed in gold or foreign exchange rather than dollars which it can simply print. (Poor Greece, it cannot print euros). ...
After the Euro, Fluctuating Currencies
Raymond Richman, 6/10/2010
Edmund Conway reported in London’s The Sunday Telegraph June 5, 2010 that, in a survey he conducted of 25 leading “City” (the English equivalent of Wall Street) economists, “12 predicted that the euro would not survive in its current form this Parliamentary term, compared with eight who suspected it would. Five declared themselves undecided.” Our view is that the euro cannot be sustained any more than any system of fixed exchange rates can be sustained. Historically, no countries were able to maintain a fixed rate to gold so the Gold Standard had to give way to the gold exchange standard based on the U.S. dollar, which itself was revalued from $20 per ounce to $35, and then to no standard at all, the current system of relatively flexible exchange rates. We believe that the EU’s attempted Greek bailout may delay the demise of the euro but when and how the euro will be abandoned is uncertain. But it won’t be long. Even a fund twice or three times greater than the three-fourths of a trillion euros contemplated will not save the Euro. It will only bail out the banks that made foolish loans to “sovereign” countries expressed in unsovereign euros. The Royal Bank of Scotland Group issued a statement that the fund, while “Herculean,” might fail to save the euro and could usher in an extended period of market stress and disorder. We agree.
The fund, called The European Financial Stability Facility is being created backed by €440 billion in national guarantees, seeking to halt the spread of Greece’s debt crisis. The fund would sell bonds backed by ECB guarantees and use the money it raises to make loans to euro-area nations in need. The fund is part of a €750 billion aid package designed to combat sovereign debt crises like the one Greece is experiencing. Another 60 billion euros will come from the European Commission -- the EU’s executive arm -- and €250 billion from the International Monetary Fund to which the U.S. is the chief contributor. What business does the U.S. have to bail Europe out of its mistakes? Were it not for the fact that U.S. debt is expressed in U.S. dollars which the U.S. can print at will, the U.S. would long ago been forced into bankruptcy. ...
Bernanke optimistic that stagnation will continue
Howard Richman, 6/8/2010
According to third hand reports of a late June 7 interview, Chairman of the Federal Reserve Ben Bernanke is optimistic that the current high unemployment economic stagnation will continue (i.e., that the U.S. economy will not slip back into a recession):
"My best guess is we'll have a continued recovery [but] it won't feel terrific," he said....Bernanke quickly noted that there were "caveats" to this forecast. Growth was still not fast enough to bring down the high unemployment rate.
The basis of his optimism is his wishful thinking that consumer spending and business investment will continue to rise, because they now have momentum.
But for consumer spending to continue its momentum, consumers will have to continue to spend an ever greater proportion of their income. They can be encouraged to do so when the stock market is rising or when their house prices are rising, but both appear to be falling at the moment.
And for business spending to continue its momentum, businesses have to be convinced that new investments will be profitable. But with the dollar rising vs. the euro, manufacturers will wonder whether it is wise to invest in anything that competes against European products in U.S. or international markets....
G-20 Foreign Ministers give up on stimulus spending
Howard Richman, 6/6/2010
On Saturday June 5, the G-20 Finance Ministers gave up on their failed plan to exit the Great Recession with stimulus spending. The following is an excerpt from the Reuters analysis by Alan Wheatley (Analysis: G20 doesn't even try to put brave face on debt mess):
South Korea (Reuters) - Finance ministers can usually be relied upon to put the best spin on whatever is happening to the global economy.Not at this weekend's Group of 20 meeting in Busan....
With Europe signing up for austerity, it is no wonder that pessimists such as U.S. economist Nouriel Roubini see the euro zone heading for stagnation if not recession.
And in the absence of a burst in private sector demand in current account surplus countries such as Germany and China, global economic imbalances could deteriorate again -- especially if a resurgent dollar undercuts the revival in U.S. exports....
US Treasury Secretary Geithner is the only finance minister who hasn't given up on the idea of new stimulus spending. But the trade-surplus governments are all rejecting his request that they spend more. Wheatley reports:...
Employment report shows that the recovery is losing its thrust
Howard Richman, 6/4/2010
On May 26, Ambrose Evans-Pritchard wrote that Larry Summers' call for a new $200bn stimulus was "a tacit admission that the economy is already losing thrust and may stall later this year as stimulus from the original $800bn package starts to fade."
Now we know what Summers was looking at. In all, employment rose by 431,000 jobs in May, but 411,000 of those jobs were temporary census workers, whose jobs will soon disappear.
The graph below of construction employment tells the story of a weakening recovery in the construction sector. After rising in March to 5,612,000 workers and April to 5,625,000 workers, construction employment fell in May to 5,591,000 workers.
Manufacturing employment was the one bright spot. It rose by 29,000 jobs in May, as shown in the following graph:
Dramatic Changes Needed to Recover From This Depression, Not Earmarks
Raymond Richman, 5/29/2010
Pres. Obama’s economic stimulus plan which the president signed on Feb. 17, 2009, known as the American Recovery and Reinvestment Act of 2009 paid out as of 5/21/2010, $398.7 billion or 50.7 percent of the amount appropriated. This, to be sure, is not a great administrative accomplishment. As the following table shows, $162.7 billion or 20.7% consisted officially of tax benefits, 13.6% contract, grants, and loans, and 16.4 % entitlements. These expenditures produced no permanent jobs. Most of the administration’s activities during its first year gave unjustified priority to the Obama health care program and mortgage relief. The current economic crisis requires dramatic changes to create the conditions for economic growth. The stimulus program does not even appear to be designed to create any permanent jobs at all. ...
Evans-Pritchard: Summers call for yet another stimulus package is a tacit admission that the economy is losing thrust
Howard Richman, 5/27/2010
Ambrose Evans Pritchard writes:
Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to "grit its teeth" and approve a fresh fiscal boost of $200bn to keep growth on track. "We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on," he said....
Congress Is Responsible For This Recession; Not the Banks, Not Wall Street
Raymond Richman, 5/25/2010
The Senate and House are investigating the Banks and Wall Street for causing this recession but they should be investigating themselves. Every Congress and every President since James Earl Carter, who signed the original Community Reinvestment Act (CRA) of 1977, bear responsibility for this recession. The act was a government intrusion in private sector banking where it had no right to be. It also involved two government-sponsored enterprises, Fannie Mae and Freddie Mac, which, when created, were stated to be independent of the government but which had to be bailed out as total losses.
The close involvement of the U.S. government in making it very easy to obtain a mortgage led Wall Street and Lombard Street and banks all over the world to believe all our mortgages were government insured. The bipartisan support for the CRA, Fannie Mae, and Freddy Mac was also misleading; it gave the impression that Republicans and Democrats would, when push came to shove, save investors in those government-sponsored mortgages. In any case, the consequence was the housing bubble whose collapse ushered in the most serious financial crisis and economic recession since the Great Depression.
In the sixties, leftist agitators and a few academics claimed that the banks were red-lining black neighborhoods, i.e., they were not making proportionately as many loans to households in those neighborhoods as they were in white neighborhoods. Indeed, fewer loans per inhabitant were being made in such neighborhoods. But the conclusion that this evidenced racial discrimination was spurious. Fewer loans are made to poorer households than richer regardless of the location of their residence. Unfortunately, then as now, a higher percentage of black households were poor. If the federal government wanted poor households who were unable to qualify for mortgages to own houses, all it needed to do was to guarantee them as they did with FHA and GI bill mortgages. No new bureaucracy needed to be created. ...
Michael Pettis predicts Europe will be moving toward a trade surplus
Howard Richman, 5/23/2010
In a May 19 blog posting about the internal deate within China over whether or not to let their currency strengthen v. the dollar, Michael Pettis predicted a huge movement in Europe toward trade surplus. His reasoning is impeccable....
Wishful Thinking on House Prices and the Economy
Howard Richman, 5/20/2010
A nursery rhyme goes, "If wishes were horses, then beggers would ride." The wishful thinking of beggers continues to dominate American policy making circles as was apparent in two predictions made yesterday, one made by housing market experts and the other by the Federal Reserve:
Prediction 1: House Prices will soon be off to the races again
The above graph from the businessinsider.com website shows the Case-Shiller index of inflation-adjusted sale-and-resale prices of the same homes. To its credit, Business Insider is skeptical of the expected rise in house prices shown by the dashed line. It reports:
"Le Tarpe" will not work any better than did TARP
Howard Richman, 5/16/2010
A foolish decision is haunting both North America and Europe. I refer to the decision by the American and European elites to bail-out their big banks without addressing the underlying cause of the financial crisis, the trade deficits. The fact is that trade-deficit countries accumulate debt in return for mercantilist-produced baubles. The result of the bail-outs was an immense transfer of bad debts from banking sectors to governments. The result of the continuing trade deficits is that the underlying debt problem will continue to grow.
In America, the transfer of bad debts from banks to governments was first realized with the $700 billion TARP bill, and was followed up with the Federal Reserve buying $1 trillion of soon-to-be-worthless mortgage-backed securities and the U.S. government subsidizing purchases of used residences.
In Europe, the decision to transfer bad debts from banks to governments is playing out now with the $1 trillion rescue plan known as "Le Tarpe," for the banks that have loaned money to Europe's three most heavily indebted trade-deficit governments. It will continue with the upcoming purchases by the European Central Bank of junk-bonds issued by Greece.
As a result of ignoring Asian and German mercantilism, trade-deficit countries on both continents will be mired in the perpetual depression which, Keynes predicted, comes to countries that permit trade deficits. Specifically, in his magnum opus (The General Theory of Employment Interest and Money) Keynes pointed out:
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)
Just as the Great Depression did not alleviate until policy makers figured out that governments need to maintain a growing money supply, the current stagnation in Europe and North America will not end until American and European policy makers figure out that governments need to maintain relatively balanced trade. Unfortunately, most American economists, including President Obama's advisors, are such free-trade ideologues that they are still impervious to this reality.
But not all American economists are free-trade ideologues. Peter Navarro is one of the first of our premier economists to see where all of this is going. In an excellent May 15 commentary, he laid out a realistic case that the euro may be dead and that gold is probably the best investment at the moment because we are heading toward a "de facto" gold standard. He succinctly explained why the euro bail out will fail:...
Construction Employment has first uptick since June 2007
Howard Richman, 5/9/2010
Construction employment has been declining ever since the house price bubble burst in 2006. The following graph shows the US Construction Employment statistics (on a seasonally-adjusted basis) from Friday's employment report:
US Manufacturing Employment is Rising
Howard Richman, 5/7/2010
The latest employment statistics for April, just released, show U.S. Manufacturing employment continuing to rebound. The following is the graph:
Obama administration is impoverishing the U.S. middle class
Howard Richman, 5/2/2010
On Friday, the BEA reported its preliminary report of U.S. GDP during the first quarter of 2010. One thing that struck me, when looking at the statistics, is that the U.S. trade deficits are coming back strong. The following is the quarterly trade deficit (reported on an annualized basis):
I expect the trade deficit for the first quarter to be revised downward after the March data is reported, because of China's decision to buy lots of commodities that month, instead of running a trade surplus. But, I expect that the U.S. trade deficits will be $50 billion higher when the second quarter statistics are reported.
University of Maryland economist Peter Morici's take on the statisitics (This Recovery is Anti-Middle Class) is that the recovery from the recession is quite weak and that it won't benefit the U.S. middle class. He wrote:...
The Greek and the American Financial Crises -- Similarities and Differences.
Raymond Richman, 4/8/2010
Greece is experiencing a monetary crisis. It is incapable of servicing her debt which is payable in euros. It faces defaulting. No one mentions the true cause of its difficulties, the trade deficits with other euro countries, particularly Germany. It has to pay for its imports in euros. In 2009, Greece’s trade deficit with Germany amounted to €4.81 billion. Other euro countries are having similar difficulties balancing their trade with Germany. In 2009, Italy’s trade deficit with Germany amounted to €11.4 billion; Portugal, €2.62 billion; and Spain, €12 billion. We mention these countries because analysts have suggested that they are beginning to face the same problem that Greece faces, a scarcity of euros.
Greece faces the problem that many countries experienced under the gold standard, a scarcity of legal tender to service their debt. Were the U.S. on the gold standard, it, too, would face a scarcity of gold that would threaten its economic stability.
The problem is that the European countries, with the exception of the United Kingdom, Norway, and Sweden, are on the euro standard. ...
Rogoff predicts a U.S. Debt Crisis
Howard Richman, 3/31/2010
Harvard economics professor Ken Rogoff is predicting that within the next few years, higher interest rates will precipitate a debt crisis in the United States. He predicted this economic future in comments at an economic forum, as reported by Bloomberg.com:...
Morici expects good jobs report on Friday
Howard Richman, 3/30/2010
Peter Morici has been following the numbers for durable goods orders and thinks that they predict a good jobs report on Friday when the Bureau of Labor Statistics releases the employment and unemployment numbers for March. In an article at Seeking Alpha (Breakthrough Jobs Report Expected), he wrote:...
Prof. Ralph Gomory on Thomas Friedman's Innovation Delusion
Raymond Richman, 3/4/2010
What will post-industrial society look like? Why, just like pre-industrial society -- a few rich people and a lot of poor people. Like Brazil. Like India. Like Russia. The U.S. is becoming a post-industrial society. It is heading for bankruptcy, the inevitable result of the huge trade deficits we are running with the rest of the world. In 2008, our trade deficit on goods amounted to more than $800 billion, about equal to Pres. Obama's economic stimulus plan. Our industrial value-added in 2008 was $100,000 per worker. So the trade deficit on goods was the equivalent of 8,000,000 industrial jobs. Were our trade in balance with our imports, we would be experiencing full employment.
As Prof. Ralph Gomory, a mathematician turned economist, Pres. Emeritus of the Sloan Foundation, and former VP of Research and Development for IBM, put it in an opinion piece posted in The Huffington Post on-line entitled Manufacturing and the Limits of Comparative Advantage (7-8-09):
Each year we make up for the year's huge trade deficit, not by shipping gold, but by shipping IOU's: treasury bills which are essentially promises to pay later. As Warren Buffet puts it, "we are selling the nation out from under us." When we come to pay this enormous accumulation later we will then be poor indeed.
Prof. Gomory, who has become my favorite economist, has published another opinion piece in The Huffington Post (3-2-10) entitled “The Innovation Delusion,” this time lambasting Thomas Friedman, the well-known New York Times journalist and author, who believes we do not need to export manufactures – we can export innovation. Prof. Gomory writes:...
How not to export your way out of a recession
Howard Richman, 3/2/2010
Wishful thinking is not working. Many trade deficit countries are hoping that growing exports will get their economies moving, but the trade surplus countries are not cooperating. The US economy is stagnating because of our trade deficit with China. The UK and Sourthern Europe are stagnating because of their trade deficits with Germany.
Bank of England Governor Merwyn King, UK's equivalent of Fed Chairman Ben Bernanke, understands the problem and sees a possible double-dip recession on the horizon as a result. The London Daily Telegraph (Europe at risk of a double-dip recession) reports:
Mr King said [trade] surplus countries around the world are not stimulating enough to offset belt-tightening by deficit states such as the UK, US and Spain, citing the eurozone as a "microcosm" of the problem. "I was struck by the mood at the G7 meeting in Canada, where several of the major economies around the world said quite openly that they were relying on external demand growth to generate growth in their economy. That can't be true of everybody," he said....
The Costly Obama Stimulus Is Not Working
Raymond Richman, 2/25/2010
A distinguished economist, Prof. Robert J. Barro, Harvard University, in an op-ed in the Wall St. Journal, 2-23-2010, calculated the likely contribution of the Obama stimulus package to the Gross Domestic Product (GDP) over the five year period beginning February, 2009, a year ago, and estimated the effect it would have on the GDP. He estimated an increase in the GDP of $120 billion in 2009, $180 billion in 2010, $60 billion in 2011, minus $330 billion in 2012, and minus $330 billion in 2013. Over the five year period, the sum of the effect on Consumption, Private Investment, and Net Exports is minus $900 billion. He concludes,
Thus, viewed over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. This is a bad deal. The fiscal stimulus package of 2009 was a mistake. It follows that an additional stimulus package in 2010 would be another mistake. ...
Bernanke starting to raise interest rates
Howard Richman, 2/12/2010
Bloomberg.com reports (Fed in Talks With Money Market Funds to Help Drain $1 Trillion) that Federal Reserve chairman Ben Bernanke is planning to sell $1 trillion worth of short term US Treasury Bonds to money market funds. The Fed would take the money it gets from selling those bonds out of the monetary base and, in effect, burn it.
There are two things that can be deduced from this story:
- Bernanke thinks that inflation will get started soon if he doesn't act.
- Short term interest rates will soon go up from their current near-zero rates.
For the last two years (since Bush's stimulus package in February 2008), Bernanke has been, in effect, printing money in order to buy Fannie Mae, Freddie Mac, and US Treasury Bonds. He has been doing so to keep U.S. interest rates low.
Now he appears to be changing course. U.S. interest rates should start rising, and this could have the following effects upon the economy:...
Is the U.S. Economy Growing?
Raymond Richman, 2/5/2010
With great fanfare, government officials and stock market pundits reported that real U.S. Gross Domestic Product in the fourth quarter of 2009 grew $182 billion or 1.4 percent compared with the third quarter. Were this rate to continue for three additional quarters, the rate of increase during the year would be 5.7 percent. Hence the reported annual rate was roughly 5.7%, obtained by multiplying the quarterly growth by 4. The 5.7 percent annual rate assumes that the economy will continue to grow during the next three quarters at 1.4 percent per quarter.
Examining the data casts doubt that the economy will grow at all...
4th Quarter GDP Shows Economy Heading Upward
Howard Richman, 1/29/2010
Real GDP grew at an annual rate of 5.9% according to the January 29 press release from the Bureau of Economic Analysis:
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 5.7 percent in the fourth quarter of 2009, (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.2 percent.
The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 4). The "second" estimate for the fourth quarter, based on more complete data, will be released on February 26, 2010.
The increase in real GDP in the fourth quarter primarily reflected positive contributions from private inventory investment, exports, and personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, increased.
Back in November, most predictors expected that GDP would grow at less than a 3% rate, according to a November 16 survey published by the Federal Reserve Bank of Philadelphia:
The U.S. economy will grow over each of the next five quarters, according to 41 forecasters surveyed by the Federal Reserve Bank of Philadelphia. The forecasters see real GDP growing at an annual rate of 2.7 percent this quarter. On an annual-average over annual-average basis, forecasters see real GDP falling 2.5 percent in 2009 before rebounding in each of the following three years. Real GDP will grow 2.4 percent in 2010, 3.1 percent in 2011, and 3.3 percent in 2012. As the table below shows, these estimates are a bit higher than those the forecasters projected in last quarter's survey.
I was the worst predictor. In a November 23 Seeking Alpha commentary, I predicted that GDP would shrink during the fourth quarter. I gave the following reasons:
- Trade. The widely reported statistic that real GDP rose by 3.5% during the fourth quarter was obtained by multiplying the actual increase of 0.87% by four (by assuming that the same rate of increase would continue for the next four quarters). And that was before the September trade deficit data came in much worse than expected. It will be revised downward when the final estimates are reported.
- Housing Starts. During the third quarter, first time home buyers moved forward purchases planned for future quarters because they thought that the tax subsidies for first time home buyers would expire. The 0.87% increase in GDP during the third quarter was led by a 5.4% rise in fixed investment in residential structures. But housing starts declined by an "unexpected" 10.8% from September to October. As a result, there will be a decrease in fixed investment in residential structures during the fourth quarter.
- Exchange Rates. There is no prospect for further exchange rate fall for the dollar. The dollar-euro exchange rate has stabilized at below $1.50 per euro. The dollar-yen exchange rate has stabilized at above 88 yen per dollar. President Obama just came back from an Asian trip during which he failed to persuade Chinese leaders to stop pegging the dollar-yuan exchange rate. Nonresidential fixed investment in the American economy fell by 0.64% during the third quarter. It has now fallen for five straight quarters and is likely to fall during the fourth quarter of 2009.
How did my specific predictions do?
1. Trade. Indeed, as I predicted, the third quarter statistics were revised downward, largely due to a revision of the trade numbers. That's one of the main reasons that the 3rd Q GDP declined from 3.5% in the initial estimate to 2.2% in the final estimate.
2. Residential Fixed Investment. I predicted that residential investment would fall during the fourth quarter, but it actually increased, albeit at a slower rate than the third quarter. The initial estimate of the third quarter growth was 5.4%, which was eventually revised down to 4.4%. The initial estimate of the fourth quarter growth rate in this statistic was 1.4%. The residential construction surge that began during the third quarter is continuing, but at a much slower rate.
3, Exchange Rates. I was correct that the dollar would not continue to fall against other currencies. The dollar-euro exchange rate has indeed stabilized at below $1.50 per euro, the latest is $1.40 per euro. . The dollar-yen exchange rate has indeed stabilized at above 88 yen per dollar. It is now 90.3 yen per dollar. But despite the lack of improvement in the exchange rate, business fixed investment increased at an annual rate of 0.7% during the fourth quarter, the first increase in many quarters, as shown in the graph below:
A large part of the GDP surge was due to an increase in automobile inventories by car dealers. Car dealers apparently waited until the 2010 models were available during the fourth quarter before they replenished inventory following the sales surge caused by cash for clunkers. This surge will not be sustained.
But don't expect falling GDP this year. The economy has turned the corner. Fixed investment started heading up. The rise in residential fixed investment (1.4% annual rate during the fourth quarter) and in business fixed investment in structures and tools (0.7% annual rate during the fourth quarter) bodes well for the future.
Jobs, Jobs, Jobs - We were published in American Thinker this morning
Howard Richman, 1/15/2010
Here is how we begin:
The economic news for January has been dominated by disappointing employment news released on January 8 by the U.S. Bureau of Labor Statistics. Total non-farm payroll employment edged down by 85,000 in December from November, led by a loss of 57,000 construction jobs and 27,000 manufacturing jobs. Public dissatisfaction with the Obama administration's handling of the economy has been following employment levels down.Here's how we begin:
Follow the following link to read the commentary: http://www.americanthinker.com/2010/01/jobs_jobs_jobs.html
Ambrose Pritchard: America Slides Deeper into Depression
Howard Richman, 1/11/2010
In an analysis that parallels my own, British journalist Ambrose Pritchard wrote a commentary yesterday (January 10) which concluded, based upon the housing market, that the American economy is in a depression. Here are some of the statistics that he cites:
Realtytrac says defaults and repossessions have been running at over 300,000 a month since February. One million American families lost their homes in the fourth quarter. Moody's Economy.com expects another 2.4m homes to go this year....
It takes heroic naivety to think the US housing market has turned the corner (apologies to Goldman Sachs, as always). The fuse has yet to detonate on the next mortgage bomb, $134bn (£83bn) of "option ARM" contracts due to reset violently upwards this year and next.
US house prices have eked out five months of gains on the Case-Shiller index, but momentum stalled in October in half the cities even before the latest surge of 40 basis points in mortgage rates. Karl Case (of the index) says prices may sink another 15pc. "If the 2008 and 2009 loans go bad, then we're back where we were before – in a nightmare."
The US government has spent hundreds of billions of dollars in an attempt to stabilize home prices above their normal levels. But that huge bet may be about to come up bust, as I predicted at the end of a July 31 2009 commentary (Why House Prices will Resume Their Fall):
The victory of Bernanke and Obama over the forces of economic nature in April and May will be as short-lived as a sand castle built on a beach near the water line while the tide is coming in.
Historians will look back at it as an illustration of the fact that you can't fight the forces of economic nature. It will be paired in the economic textbooks with President Nixon's failed attempt to fight inflation through wage and price controls.
Manufacturing employment continued to decline in December
Howard Richman, 1/8/2010
According to preliminary statistics released by the Bureau of Labor Statistics this morning, manufacturing employment declined from 11,657,000 workers in November to 11,630,000 workers in December, as shown in the above graph. Overall, non-farm employment declined by 85,000, but unemployment remained unchanged at 10%.
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- Initial Unemployment Compensation Claims Exceeded 400,000 Week Ending January 28, 2012
- Morici: 8.5% unemployment may be as good as it gets
- CNBC TV, Bloomberg TV, Fox Business Channel, the Wall Street Journal and the New York Times Mislead Investors on Initial Claims for Unemployment Compensation
- Investors Are Entitled to Better Reporting of Unemployment Insurance Claims
- Payroll tax cut -- a new entitlement?
- United Kingdom's Prince Phillip Calls Wind Farms "Useless and a Disgrace"
- Bad Reporting of Initial Unemployment Insurance Claims Data Continues
- Economics of Greek, Italian, and U.S. Sovereign Debt Defaults
- Bernanke trying to hide the rise
- Bernanke: China's currency policy is causing the slow growth in the advanced industrial countries
- Pres. Obama's Job Act Ignores the Jobs Lost as a Result of the Trade Deficits, Environmental Foolishness, and His Opposition to Oil and Gas Drilling
- Lazy Analysts at CNBC, Bloomberg, and the Wall St. Journal
- The Jobs Act Is the Recovery ACT of 2009 Redux and If Possible Even Worse
- Mr. President, Here Are Some Ways to Create Millions of Jobs That Require No Increase in Government Expenditures
- Unemployment claims Have Fallen But the Economy is Stagnating. What we need to do.
- Unemployment Claims Fell and Did Not Rise As Reported. Did the Misinformation Help Cause the Fall in the Stock Markets?
- Prof. Feldstein Has No Recovery Policy
- Double the Dip?
- How Misleading Unemployment Claims Data Can Cause the Double Dip Recession
- The Depression Continues
- Can We Trust BEA's Quarterly Reports on the GDP?
- Prof. Boudreaux's Simplistic Ideology of Free Trade
- Make the Current Debt Limit Permanent
- Is the U.S. Bureau of Labor Statisics "Lying" About Unemployment Claims?
- Are the Media Massaging the Unemployment Data?
- Why President Obama's Economic Stimulus Plan Was a Failure
- Inflation climbs to 3.6% in May. Palin was Right -- We're published in today's American Thinker
- The Unanticipated Costs of the Wars In Iraq, Afghanistan, and Libya
- Inflation climbs to 3.57% in May
- Where is Housing Going? That Depends on Where You are Looking
- In Praise of Inflation
- Inflation reaches 3.16% in April
- 9% Unemployment is Strike 3 for QE2
- Congress Fools Around and Does Nothing to Create Jobs. Here Is What It Should Do.
- GDP growth was just 1.8% in first quarter. New Depression not Over.
- Rand Paul: We need to cut spending. The American dream is at stake.
- Exports down. Imports down. Growth estimates down.
- Consumer confidence is tumbling - economic growth will likely slow during 2nd Quarter
- Why Obama's $8billion Recovery Act Did Not Stimulate the Economy
- German and Chinese Surpluses and Growth; PIIGS and the U.S. Deficits and No Growth
- Money Supply during the Great Depression
- Pat Buchanan Gets the Trade Deficits Right But the Solution Wrong
- Will 2011 be another 1938 or another 1941?
- How to Create Productive Jobs and Avoid Global Warming Bankruptcy
- A Quick Economic Recovery With Jobs, Jobs, Jobs
- American output increased at a 3.2% rate in the fourth quarter, but real American income only increased at a 1.3% rate!
- U.S. Manufacturing Employment Rose in January
- How is QE2 doing so far?
- Sperling, a Poor Choice for Director of National Economic Council
- Government Wimps Masquerading as Economists
- A Scaled Tariff would Help Balance the 2011 Budget - we're published in today's American Thinker
- With No Program for Economic Recovery, the Republlicans Will Lose in 2012
- Not "Free Trade". Let's Have Balanced Trade
- The Employment Report Portrays a Dismal Outlook For the Economy
- Growing Trade Deficit continues U.S. Depression
- Sound Monetary Policy Is Necessary But More Is Needed
- Achieving Reasonably Balanced Trade Is an Act of Self Preservation
- Why Pres. Obama's Economic Stimulus Has Failed
- Only the USA's Leaders Are Foolish Enough to Embrace Unilateral Free Trade
- Being Deaf, Dumb, and Blind on Our Huge Trade Deficits!
- We Are Out of the Recession But Mired In a Depression
- Prof. Gomory Urges a National Policy of Balanced Trade Not Free Trade
- A Conservative Proposal for Economic Recovery That Won't Work
- Boeckh Nails It, but Opposes the Solution
- Reducing the Trade Deficits Is Essential for Economic Recovery
- The Housing Bust Redux
- Economists Don't Know How to Recover From the Recession
- U.S. Growth Slows Due to Trade Deficit -- we were published in the American Thinker this morning
- Krugman: G-20 summit will continue the depression
- Bush and Obama's Economic Stimulus Attempts
- Geithner and Summers Make Their Economic Mistakes Transparent
- Congress Is Responsible for This Recession; Not the Banks, Not Wall Street
- How the False Doctrine of "Free Trade" is Crippling the U.S. Economy.
- After the Euro, Fluctuating Currencies
- Bernanke optimistic that stagnation will continue
- G-20 Foreign Ministers give up on stimulus spending
- Employment report shows that the recovery is losing its thrust
- Dramatic Changes Needed to Recover From This Depression, Not Earmarks
- Evans-Pritchard: Summers call for yet another stimulus package is a tacit admission that the economy is losing thrust
- Congress Is Responsible For This Recession; Not the Banks, Not Wall Street
- Michael Pettis predicts Europe will be moving toward a trade surplus
- Wishful Thinking on House Prices and the Economy
- "Le Tarpe" will not work any better than did TARP
- Construction Employment has first uptick since June 2007
- US Manufacturing Employment is Rising
- Obama administration is impoverishing the U.S. middle class
- The Greek and the American Financial Crisis -- Similarities and Differences.
- Rogoff predicts high interest rates will force budget balancing
- Morici expects good jobs report on Friday
- Prof. Ralph Gomory on Thomas Friedman's Innovation Delusion
- How not to export your way out of a recession
- The Costly Obama Stimulus Is Not Working
- Bernanke starting to raise interest rates
- Is the U.S. Economy Growing?
- 4th Quarter GDP Shows Economy Heading Upward
- Jobs, Jobs, Jobs - We were published in American Thinker this morning
- Ambrose Pritchard: America Slides Deeper into Depression
- Manufacturing employment continued to decline in December
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Trade
Miscellaneous
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