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 Richmans' Trade and Taxes Blog

The Outlook for the U.S. Economy is Continued Slow Recovery
Raymond Richman, 8/10/2014

That the economy may be recovering appears to have been borne out by the widely touted increase in second quarter Gross Domestic Product of 4.0 percent after a 2.9 percent decline in the first quarter and the reduction in the number of claims for unemployment insurance. The trouble with the second quarter’s increase is that private inventories of goods increased, the change in real private inventories added 1.66 percentage points to the second-quarter change. So the 4.0 growth rate includes a presumably undesired growth in inventories and perhaps the figure that should have been touted was 2.34 percent. Private businesses increased inventories $93.4 billion in the second quarter, following increases of $35.2 billion in the first quarter and $81.8 billion in the fourth quarter of 2013. An undesired increase in inventories is a drag on the economy. The trouble with the reduction of claims for unemployment insurance while positive has to be balanced by the sharp increase in part-time jobs and the increase in the number of persons no longer looking for jobs.

The growth that is occurring cannot be attributed to the government’s monetary and fiscal policies. On the monetary side, the stimulating effect has been primarily in raising asset prices. Corporate shareholders and real estate owners have benefitted. The unemployment rate alleged to be 6.2 percent is more than triple that if you count the millions of workers who lost their jobs and are no longer looking for jobs and if you count the millions of workers who are working part-time but want full-time jobs.

So what do the economic data tell us? That the performance of the economy is nothing to be proud of. So what should we do about it?  ...

In the week ending August 2, the unadjusted figure for unemployment insurance initial claims totaled 247,133 in the week ending August 2, a decrease of 10,492 from the previous week. The advance figure for seasonally adjusted initial claims was 289,000, a decrease of 14,000 from the previous week's revised level. A large number of claims, over 400.000, was reported from December 7, 2013 to January 18, 2013 and it remained over 300,000 until March 8, 2014 and has been trending lower since then with the exception of a few weeks in June and July. The data suggests that the economy is recovering. But the evidence is that it is a very  anaemic recovery. Our opinion is that the unnecessarily slow economic recovery is likely to continue.   

Economist George Schultz, former Secretary of State under Pres. Reagan and Secretary of State under Pres. Nixon, in the Wall Street Journal (8/ 9/14), in an opinion piece entitled “How to get America Moving Again”, made the following recommended the following: 1) reform the personal income tax system of deductions and lower the marginal rates as proposed in the 1986 Tax Act which passed the Senate 97-3, 2) lower the corporate income tax rates to be competitive with the rest of the world, 3) simplify and reform the multitude of business regulations and design them to work better, 4) establish rule-based rules for federal reserve policy for stable monetary growth, 5) get control of government spending, especially entitlement spending, and 6) replace Obamacare by neighborhood health clinics, health savings accounts, and protection against catastrophic illnesses.

The reforms suggested by Shultz, while they are all desirable, would have little effect on the recovery except for the reduction of the corporate tax rate. We suggested on this site recently to abolish the corporate income tax and tax corporate earnings as personal income. We also suggested that all the measures the government has taken to reduce carbon emission in the name of “man-made global warming”, principally carbon emissions, were a waste and a drag on the economy because they raised the cost of electricity to homes and businesses. An increasing number of scientists are even challenging the notion that carbon emissions have more than a minor effect on climate change.

Fortunately, the private sector, in spite of government policies stifling the coal industry, by unnecessary and undesirable regulations of business, by punishing financial institutions for a mortgage crisis caused by government policies, etc., continued to invest in this economy. In particular, the oil and gas producing industry and coal mining, which the government has hampered in every way it could to appease its environmental constituency, by their investment in exploration and growth, has done more to grow the economy than has monetary and fiscal policy. Employment in the mining sector, which included oil and gas and supporting activities, in 2012 was 793,000 compared with 640,000 in 2009, an increase of 22.4 percent. Employment in the private sector during the same period increased 4.1 percent while total employment increased only 2.9 percent. The only other industry that grew at a double-digit rate were the motor vehicle It was

Unlike Schultz, who does not mention the leading cause of the slow recovery in manufacturing our persistent trade deficits, we have argued for the federal government’s imposition of our invention, the scaled tariff, a single-country variable tariff that is imposed against the imports from a country with which we experience chronic international trade deficits. We have lost millions of jobs to China, Japan, and Germany who fall into the category of countries with whom we have chronic trade deficits.

And finally, Schultz does not mention the minimum wage laws of the federal and state governments that keep millions of teenagers and unskilled workers from finding jobs. It is scandalous that 42 percent of male black teenagers seeking jobs are unemployed. The minimum wage laws and the Davis-Bacon Act were originally designed to prevent competition from non-union employers from the South many if not most of whose workers were black. Before the minimum wage was adopted blacks had a lower rate of unemployment that whites.

Unfortunately, unless the Congress and the present administration take the actions suggested above the prospect for the U.S. economy is one of continued slow growth and massive unemployment and underemployment.

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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]