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 Richmans' Trade and Taxes Blog

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.”

Charles Calomiris, declared that the problem switched “from being a private-sector leveraging problem to a public sector leveraging problem.”  There might be some room for optimism “if the growth rate of the economy could get going. The problem is that the public sector debt is a terrible drain on the growth rate of the economy.”  Orszag agreed but said it was unlikely that entitlements would be cut back although their growth may be restrained. So we shall have to increase government revenue, he indicated. Calomiris disagreed arguing that cutting back government expenditures was possible. Orszag replied that nondefense discretionary  expenditures were only 4% of GDP.

Yale University professor of economics Robert Shiller said the single biggest cause of this crisis was the housing “bubble and burst” cycle that has left “so many underwater, and so may unemployed.” The Home Buyer Tax Credit did succeed in sustaining home prices temporarily but they “may go down.” He has a solution, modernize the housing sector by improving the “kind of mortgages” we offer.  For example, shared appreciation mortgages. The Dodds-Frank bill calls for HUD to study it. This would make the lender in effect the household’s partner and should lower mortgage interest rates! Was he suggesting paying householders for that right or would it apply to new mortgages only? Calomiris called the 2300 page Dodds-Frank bill the worst piece of legislation ever passed!

Kaufman agreed, saying the bill leaves a lot to be desired and does not deal at all with the too-big-to-fail issue. And Orszag said the legislative and political system has never been good in considering and approving long-run solutions to anythng.

Tom Keene, the moderator, asked how, then, are we to jump-start jobs? Calomiris states that the solution may involve the U.S. in a trade war with China because of the likelihood there will be a political backlash against global trade.  To forestall that he advocates a long-term payroll tax cut and a 30 percent cut in Social Security taxes for four years.  [Why not a 30 percent tariff?! The fact is that most of the tax cut will go to purchase imports as they did last quarter as the trade data shows.] Orszag says he expected workers to become xenophobic. Instead their anger has been directed at Wall Street and corporate excess instead. And he doubted that business would respond to cuts in payroll taxes and social security. The key reason business is not investing are the poor prospects for recovery. Calomiris agreed. Uncertainty about government policies respecting taxation, health care costs, and energy are huge unresolved issues.

We agree. In addition, business has every reason to believe that outsourcing to China, India, and other countries will continue. Indeed not one of the participants suggested doing anything about the trade deficits although all would agree with Krugman (a free trader, too!) that China needs to revalue the yuan by 25% or more. We have no faith that a higher-priced yuan would markedly reduce our trade deficit with China. We prefer our invention, a cross the board “scaled tariff”, that would yield tons of revenue so long as China continues to restrict its imports from us.

Kaufmann and Shiller propose massive public projects, the Keynesian solution that works, however, only as long as the projects continue. That is what is happening under the Recovery Act of 2009 which has large sums remaining to be spent.  It probably was responsible for preventing GDP from collapsing more than it has. But it is running out and there is little to replace it.

What is needed, they all agreed, is optimism. They discussed who is to blame for the continuing crisis and the lack of progress. Shiller continued to extol the Dodds-Frank bill and states that Congress cannot be blamed.  But Calomiris disagreed. Congress is to be blamed completely for it, he said.

What they did not discuss is worth calling attention to. There was no discussion of the jobs that could be created by emphasizing traditional energy sources and opening up vast areas of public lands for oil drilling. The ANWR area comes to mind; we ought to end our sentimental concern for animals. We should convert all of our large vehicles such as buses and trucks to natural gas as T. Boone Pickens has suggested. We have a 200 year supply of natural gas and converting vehicles to natural gas would create much employment and reduce or even eliminate our reliance on imported oil.  And, as we have proposed, impose “scaled tariffs” to close the trade gap. These measures alone would promote full employment.

Our view is that foolish sentimentality created the Community Reinvestment Act of 1977, which is still in existence but no longer being implemented. It resulted in millions of inadequately secured mortgages which fueled the housing boom whose bust we are living with. And we shall continue to live with them for years. The $800 billion trade deficit on goods in 2008 represented the loss of up to eight million manufacturing jobs and is the principle cause of the worsening distribution of income. Nearly all of the DOW corporations and most of the S&P 500 have maintained profitability by outsourcing their production and/or laying off workers.  The “scaled tariffs” that we have proposed would enable us to produce domestically most of the goods that we import. Free trade is fine when trade is in balance

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]