Wednesday, July 8, 2009
However, I believe the author of the comment makes a few incorrect points and confuses "less government" with honest government:
With respect to Social Security Insurance the author writes "You have to look back at the government's ability to predict what these plans will cost to see how bad government's planning really is. For example, when social security was first introduced, it was funded with a 1% tax on the first $3000 of wages, or $30 per year. How has that funding mechanism stood the test of time and plan expansion? Well, today, the bite from payroll taxes is 15.3% of the first $102,000 ignoring the taxes applied above that point which are still substantial, but for arguments sake, I am keeping this simple. Plan expansion has resulted in tax expansion to the point that $30 per year has morphed into $15,606 dollars per year for higher compensated workers, yet these plans are still under funded."
The writer goes on: "It obviously makes no difference how much the government takes in payroll taxes, these plans will never be fully funded because the government has not been able to save one thin dime in our 233 year history..."
I disagree. Social Security was sold as an insurance plan. The premiums were originally kept track of as a unique item within the general fund. The plan worked properly until President Clinton removed the special label of Social Security account funds to make his budget look like it had less of a deficit. To preserve the Social Security Insurance's ability to pay into the future, we must restore the earmarked funds and their compound interest over the years that were removed by the Clinton administration and the Bush administration. Of course, that will increase the current budget shortfall, but Social Security will be honestly and better funded, thank you. Thieves have robbed the capital from our Social Security insurance policies. Your policy, my policy, and our children's and grandchildren's... Those stolen monies should be repaid today. I will be happy to help calculate how much was stolen and how much compound interest for each year's stolen funds must be returned to the Social Security account forthwith.
In my opinion, "LessGovernment" is wrong about needing less government. All the rules put in by the Roosevelt Administration were essential to the preservation of our economy and of our social fabric. What we do need is honest government.
Below is a good portion of the comment by LesGovernment..
HOW WE GOT INTO THIS MESS
July 07, 2009, at 7:50 PM
Following the last great depression, Congress met and discussed the root causes of what killed the economy way back there in 1929. The result of their findings was that reckless behavior and speculative buying on wall street created a bubble that was not supportable by balance sheet assets. Stocks, banks, and life savings crashed as a result.
to keep this problem from occurring again, Congress created some support for the bank depositor in the form of the FDIC (Federal Deposit Insurance Corporation) and also mandated through the Glass-Steagall Act that banks that were federally insured would not be allowed to engage in insurance and other high risk businesses. If the government was going to insure your deposits at the local bank for your benefit and security, the local bank was going to behave and not engage in risky activities. We had learned a lesson in 1929 at great cost for the education, and this legislation was going to prevent the depression from happening again.
Congress passed the Federal Election Campaign Act which permitted Political Action Committees to make larger contributions to Congressional candidates than what was allowed by law for individuals. In short, Congress passed their own version of campaign finance reform that created the ability to have unlimited funding since there is no limit on the number of PAC's that can be created and nothing to prevent multiple PAC's from contributing to the same candidate. This (bad) legislation was intended to give the incumbent a definite edge over any challenger and help insure political dynasties.
Congress passed legislation called ERISA (Employee Retirement Income Security Act) through which the taxpayer would guarantee retirement expenses for any defined benefit plan that went into default. With this legislation also came the mandate for Congressional oversight through sub agencies that would require businesses to fully fund their plans. Well, oversight did not occur and plan administrators were allowed to use wildly optimistic assumptions to show the plans were funded when in fact they were not fully funded. These assumptions went something like this "The assets in the plan next year will earn 18% in the stock market, so we don't have to invest earnings into the plan and in fact, can remove money from the plan because based on our assumptions, the plan is over funded". As a result of the lack of oversight and enforcement, under funded retirement plans are now common. The Pension Benefit Guarantee Corporation (the fund now guaranteeing these plans that was created under ERISA) lacks sufficient funds to perform its function of guaranteeing these under funded plans. As a result of the lax oversight and the regulators allowing the use of the wildly optimistic assumptions as to funding needs, this Act will claim more and more taxpayer monies as more and more plans that have not been funded as required by law will have to be funded by the government (taxpayers). What has been set in motion is taxpayers with drastically reduced discretionary incomes for now and well into the future will now be the source of funding for the under funded plans that have on average much higher benefits than anything the average taxpayer now providing the funding will ever receive. Just another of the many unintended consequences of government run amuck as government drives headlong into socializing corporate losses to the taxpayer.
The Community Reinvestment Act (CRA) was passed. This act, as stated in its own words, "intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low and moderate income neighborhoods, consistent with safe and sound banking operations". What was intended, and what occurred through enforcement are two entirely different results. This Act would later become instrumental in the economic disaster of 2007, some 30 years after passage of this act, because this Act enabled Congress and at least one President to "manage" (socialize) banking, mortgages, and credit which directly caused an overall lowering of quality of the mortgages used to back securities sold around the world. This was especially true during the Clinton administration from which pressure was applied to Fannie Mae and Freddie Mac to ease the credit restrictions on the mortgages they were buying. This was done to allow those without sufficient credit to still have access to a mortgage with only a slight increase in the interest rate to be paid. In other words, under enforcement of this act, the higher risk of loaning money to less credit worthy applicants was not to be offset with higher potential rewards in the form of a much higher interest rate. In fact, the interest rate differential for the much higher risk of default was only 1 percentage point and even then for only two years if the loan was paid on time. This "socialist" approach to the mortgage industry was obviously dangerous, and accordingly, the alarm was sounded by New York times writer Steven A. Holmes in an article entitled Fannie Mae Eases Credit To Aid Mortgage Lending dated September 30, 1999 (Google it to read it). Unfortunately, few if any of those that read the article (including all members of Congress) understood the ultimate scope and horrific impact this credit easing would eventually have. Few if any also understood how this very credit easing would ultimately lead to a major problem in the banking industry due to the failure of derivatives based on the mortgages created using these lax credit standards. This act, as enforced and regulated, actually lowered the mortgage standards for the entire mortgage industry and helped create the atmosphere of lax enforcement that also allowed shoddy appraisal work, little or no verification of ability to repay the loan, sloppy ratings of collateralized debt instruments, and what later became known as "predatory lending". In addition, enforcement of this act time and again caused banks to pay what amounted to extortion in order to gain regulatory approval for a new branch or an acquisition of another bank. This Act, and its socialist enforcement severely weakened the banking and credit industries.
Congressional oversight allowed Citi Bank to buy Travelers Insurance even though this transaction was in total violation of the Glass-Steagall Act passed by Congress in 1933. Thus the illegal birth of the era of "Financial Services" in which banking businesses insured by the government through the FDIC and other agencies were now to be allowed to get involved in the riskier aspects of financial services such as insurance and investment banking while still being federally insured.
Congress granted the illegal new business entity now called Citi-Group an exemption to the Glass-Steagall Act so it could operate in the temporary legal status of violating the Glass-Steagall Act but do so with permission from Congress. This is about as close to a Congressional "Get out of jail Free" card as you will ever see. PAC's were at the heart of this exemption being granted.
the Graham-Leach-Bliley Act was passed basically repealing the Glass-Steagall Act altogether. Citi-Group, as well as many, many others, could now legally operate without the Glass-Steagall Act exemption granted by Congress. The doors were now wide open to mix federally insured banking with risky investment banking, insurance, and "insurance like" businesses such as credit default swaps. Out the window went the knowledge and lessens learned from the great depression, and the stage was now set for a repeat of history as PAC's applied pressure to Congress for more and more deregulation in exchange for more and more campaign funds. The only thing now standing between loosely regulated banking and federal insurance and total banking failure is the requirement to hold sufficient amounts of capital to backup the "insurance like" promises of credit default swaps and debt instruments and derivatives. The exact wording in this legislation as to these important aspects follows:
Repeals the restrictions on banks affiliating with securities firms contained in sections 20 and 32 of the Glass-Steagall Act.
Creates a new "financial holding company" under section 4 of the Bank Holding Company Act. Such holding company can engage in a statutorily provided list of financial activities, including insurance and securities underwriting and agency activities, merchant banking and insurance company portfolio investment activities.
Oddly, this act did ask for a study to be conducted on derivatives and their risk, but apparently, no one got the message or if they did, they either performed a bad study (surprised?) or they failed to share it with anyone. This act also shows that as early as 1999, there was growing concern over the Frankenstein of banking "sort-of-banking" that this legislation was bringing to life. Frankenstein would later be known as "to big to fail". The exact wording in this legislation as to this important aspect follows:
Provides for a study of the use of subordinated debt to protect the financial system and deposit funds from "too big to fail" institutions and a study on the effect of financial modernization on the accessibility of small business and farm loans.
This piece of legislation, not yet harmful enough, also reinforced the Community Reinvestment Act (CRA) of 1977 in a couple of significant and harmful ways. This was done by withholding Federal Reserve permits for a new branch or to form a new bank holding company if the entity applying for the permit did not rate "high" enough during the latest CRA compliance exam. CRA compliance regulators now had the power to stop a bank's growth or even withhold its permit to operate. This provision is referred to in the 1977 CRA paragraph above as having "…caused banks to pay what amounted to extortion". The exact wording (and it is despicable) in this legislation that did this follows:
The Federal Reserve may not permit a company to form a financial holding company if any of its insured depository institution subsidiaries are not well capitalized and well managed, or did not receive at least a satisfactory rating in their most recent CRA exam.
If any insured depository institution or insured depository institution affiliate of a financial holding company received less than a satisfactory rating in its most recent CRA exam, the appropriate Federal banking agency may not approve any additional new activities or acquisitions under the authorities granted under the Act.
My Explanation of the above- If any single branch of your thousands of branches (if you are a large bank) did not "earn" a satisfactory rating from the CRA examiner, the entire banking operation had a big problem. The CRA examiner at this point has too much power, the CRA exam is too suggestive, and the CRA exam has absolutely nothing to do with sound banking practices, and in fact, throws sound banking out the window as the CRA forces banks to be politically correct at the expense of sound banking. This is where the banks were forced to pay "extortion" in the form of knowingly making bad loans in order to survive and prosper under CRA. This is a world gone mad and the entire world will pay a dear price for this in 2007-2008-2009-2010-2011 and beyond.
The Commodity Futures Modernization Act was passed with support from Fed Chairman Alan Greenspan and mostly Republican support in congress. It and was introduced and supported in the House as H. R. 5660 by Thomas Ewing (R-IL), Thomas J. Bliley, Jr. (R-VA), Larry Combest (R-TX), John J. LaFalce (D-NY), Jim Leach (R-IA), and was introduced and supported in the Senate as S. 3283 and was sponsored and supported by Sen. Richard Lugar (R-IN), Sen. Peter Fitzgerald (R-IL), Sen. Phil Gramm (R-TX), Sen. Chuck Hagel (R-NE), Sen. Thomas Harkin (D-IA), and Sen. Tim Johnson (D-SD).
This Act was signed into law by President Bill Clinton (the same president that had been pushing Fannie and Freddie to lower credit standards on the loans they would buy) in December 2000
What this Act did that was so bad was simply to make most over-the-counter derivatives contracts outside the regulatory purview of all federal agencies, even the Commodity Futures Trading Commission.
With the new law on the books, the market for credit default swaps exploded from $632 billion outstanding in the first half of 2001, according to the International Swaps and Derivatives Association, to $62 trillion in the second half of 2007.
The reader should take note that Congress has at this point:
Removed the banking industry safeguards put in place following the great depression
Forced banks to make what amounts to bad loans
Forced Fannie Mae and Freddie Mac to lower their credit standards
Forced Fannie and Freddie to buy the bad loans banks and other loan originators were being forced to make under the Community Reinvestment Act
Allowed Fannie and Freddie to securitize and sell to the world AAA rated securitized debt that used bad loans as collateral
Forced (through CRA enforcement policies) the entire banking industry to become politically correct regardless of risk and potential cost
Failed to regulate the banking industry adequately
Placed regulation responsibility of international banks onto states for the insurance like activities of the banks (an impossibility)
Failed to regulate and enforce ERISA law
Failed to ensure pension plans were adequately funded as required by law
Allowed government insured banks to get more and more involved in the riskier banking functions regardless of the risk being transferred to the taxpayer.
In short, Congressional legislation and lack of oversight had at this point put the entire economy on a course to disaster. This disaster could still have been avoided, but people, especially those in Congress, had to listen to the warnings. They didn't.
In 2002 and 2003, with the stage set as described above, Congress failed to listen to the testimony in Congress, on the record, from experts that Fannie Mae and Freddie Mac now represented huge systemic risk to the entire financial system through the "assumed" risk that the GSE's were backed by the government. Keep in mind that at this point in time, the GSE's were, by act of Congress, NOT backed by the federal government. All that was being asked of Congress in this testimony was to simply make that fact clear, that no government guarantee existed.
Instead, Congress (under the leadership of Barney Frank and others) pushed even harder for the GSE's to increase home ownership through purchasing even more risky mortgages with little or no money down and other obviously bad practices. In the process, the balance sheet exposure (risk to the taxpayer) increased from 132 billion of exposure in 1990, to 1.5 trillion in 2005, to 5.2 trillion in 2007. When the housing bubble began to pop in late 2005 or early 2006, Fannie and Freddie immediately fell into desperate financial condition due to the accounting irregularities on their books and their low grade collateral that was being used to back the trillions of dollars of securitized debt.
Now, with the stage completely set for economic catastrophe, that is exactly what America got.
There is only one reasonable reaction at this point in time and that is to Fire Congress. Do not vote for an incumbent ever in the future. Do not re-elect anyone. This, and only this, will remove the power and influence of the PAC's (bad legislation) and curtail the need to write ear marks to benefit special interests in exchange for campaign funds.
We have now reached the point where the Federal Reserve Bank itself is giving IOU's to the Treasury for the Treasury debt it is purchasing. In other words, we are now at the point of selling our debt on credit. This is simply nuts.
ERISA funds are over committed, the FDIC is running low on funds and will need more from the Treasury, the federal highway fund is broke, Social Security is unfunded, Medicare is unfunded, federal retirement is unfunded, and now states are coming forward and asking to be bailed out of their own multi-billion dollar problems.
We will most likely add over five trillion dollars of debt and exposure (guarantees) to our 9 trillion dollar November 2007 national debt before the end of 2011. Our unfunded obligations of Social Security, Medicare, federal retirement, and others now exceed 80 trillion dollars. And what is the government now trying to do? Are they cutting spending? Are they trying to get the financial house in order? No. They are trying to create yet another plan called government provided health care that they will also not be able to fund.
If they want this plan, we should first insist that social security is put on a track of being totally funded first, and the same for Medicare, and the same for government retirement, and the same for the federal highway fund, and the same for PBGC, and the same for FDIC, and the same for FSLIC, and the same for all the others, or kill one or more of these plans if they can not be fully funded. Once all these unfunded obligations are totally funded or killed, then and only then should we proceed with any new entitlements. However, judging from the careless and reckless legislation from the past, and the speeches and promises of today, there is little hope that the new administration and Congress will be this logical.
You have to look back at the government's ability to predict what these plans will cost to see how bad government's planning really is. For example, when social security was first introduced, it was funded with a 1% tax on the first $3000 of wages, or $30 per year. How has that funding mechanism stood the test of time and plan expansion? Well, today, the bite from payroll taxes is 15.3% of the first $102,000 ignoring the taxes applied above that point which are still substantial, but for arguments sake, I am keeping this simple. Plan expansion has resulted in tax expansion to the point that $30 per year has morphed into $15,606 dollars per year for higher compensated workers, yet these plans are still under funded.
It obviously makes no difference how much the government takes in payroll taxes, these plans will never be fully funded because the government has not been able to save one thin dime in our 233 year history. And with the government tax bite growing all the time, the taxpayer due to tax creep is now nearing the position, or is already in the position of not being able to save. This is the quandary we now face. The government won't save and the taxpayer can't save so we borrow the money we need to run our lives from countries around the world and commit yet more tax dollars to debt service making the matter worse. This is ridiculous. What is even more ridiculous is the president wants to add yet another plan...
Tuesday, July 7, 2009
The causes are more fundamental than those identified by the author in the following two paragraphs of the article:
1. "In short, many "prime" borrowers might just be subprimers with inflated credit scores. This is also true for people who used the proceeds from home equity loans on one property as a down payment for another. The big down payment made the borrowers look financially fit, but it was all an illusion that didn't reflect their true creditworthiness. They were simply moving debt from one inflated house to another."
2. "In addition, the housing bubble's income distortion also made millions appear more creditworthy than they really were. According to noted economist Mark Zandi, 23% of all new jobs created during the 2003-2006 recovery were housing-related. This includes everyone from mortgage bankers at Citigroup (NYSE: C) to construction workers at KB Home (NYSE: KBH) to (ostensibly) checkers at Home Depot (NYSE: HD). To some degree, the prosperity of all of these jobs was artificially magnified. In a wildly extreme example, Faber's book describes people who went from delivering pizza to working as mortgage brokers making $20,000 a month. (I'd assume they ultimately wound up in the unemployment line). All of this created a stunning short-term illusion of prosperity that allowed armies of borrowers to qualify as "prime" when they were far, far from it."
Due diligence, or should I say Honest Due Diligence, on the part of the lender would not permit granting any high rating to these borrowers. As of last week, the Hudson City Bancorp which is good sized, has six (6) defaults in New Jersey. Yes, six, not six thousand. All of these six are due to second mortgages issued by large "Banks." Hudson City Bancorp (HCBK Quote) Chairman, President and CEO, Ron Hermance, has noted that he realizes a good profit from each of these defaults, because he underwrote, if memory serves me correctly, only a fraction of the current actual value today!!! He and his mortgage writers just did their homework and loaned on value. ALL of the phony reasons cited for lending to people whose property had much lower values were fraudulent.
This was ALL the same scam. The scam is turning in phony information with inadequate documentation. I have bought and sold lots property over the years. In the last twenty years I had to provide proof of everything. That included two years of Federal tax returns!!! That was true when I bought my current house in Tucson in 2000. The need to prove ability to pay went away in the last few years.
Phony credit scores are irrelevant. Where was the due diligence on the part of the issuing lender and on the part of the receiving lender?
There was a lot of fraud because the fees and bonuses for being a conspirator in this large scale conspiracy to commit fraud were so large.
OK, the "Writers" at mortgage companies of the low or no documentation mortgages and the bank officers who purchased them were crooks. We can identify further the appraisers who asked "what number are you looking for"?
Let us not forget the folks at the rating agencies who rated the credit worthiness of these sliced and diced phony "financial instruments" as AAA when it was clear they were intrinsically worthless. If you are lending to those who will not be able to meet the payment in 39 months, then you know there is no one who will be left to buy from them at that time in the future. That means prices will have to fall. That means refinancing at higher prices will no longer be possible. The rating agencies should have flagged that! However, the rating agencies were paid by the lenders, often big banks., The government encouraged the phony ratings so it could say the Gross Domestic Product was rising, as it was actually falling.
Stupidity did play a role, but this had nothing to do with stupidity on the part of all the conspirators I have mentioned.
This appears to be grounds for prosecution under the Rico Act. We just need to find an aggressive and relentless prosecutor who can be guaranteed protection for himself and his or her family by the same folks who guard the President. "POTUS is moving" would then mean Prosecutor Of the Undeserving Sleaze-bags is traveling.
I really am simply pointing out the causes stated in the articles, while interesting, are not the actual root causes, which are the ones I have noted.
Wednesday, May 6, 2009
1. It's extremely fascinating.
2. It indicates a window of opportunity for the US to go about recapturing our valuable manufacturing jobs with their intrinsically high "value added" to the economy. (We still need to cover that more deeply in another post.)
3. Because there are a number of valuable conclusions it supports. These are crucial to a rebuilding of the US economy that will work and become self sustaining. Some of these have been stated by individual comments in Menzie's article. What Does the Collapse of US Imports and Exports Signify?
4. It's exciting to see a number of like minded people who have had similar realizations that the local, state, regional, and national economies can be rebuilt only with the return of a manufacturing base! i first decided this was the case in the eighties when I heard the ridiculous assumption set of the "Chicago Genius Economics School Standard model." It depends on a constant stream of new miracles occurring as often as needed to replace whole industries and their lost jobs with better ones. Belief in the tooth fairy comes to mind. The words "efficient" and "low margin" were freely sprinkled in their assumptions.
Please read the comments at the end of Menzie Chinn's article from Menzie's well informed readers. I have reproduced them below with my highlighting and comments.
Many of his readers strongly support my thesis about the importance of Governmental action to restoring manufacturing jobs in rebuilding the severely damaged, yet HOPEFULLY not totally and irrecoverably destroyed US economy.
This is a rough draft. Not finished, but it will have to do as duty calls.
In his blog, of April 27th, Menzie Chinn showed The Decline in US Imports.
On his blog yesterday, May 4th, Menzie goes much further. He poses the following question: What Does the Collapse of US Imports and Exports Signify?
He calls attention to the very unusual collapse in both US imports and exports for the last two quarters, 2008Q1 and 2009Q2. His observation, based on earlier work, is reinforced with a similar observation using data from the Organisation for Economic Co-operation and Development (OECD)
It shows that "This decline is not restricted to the United States, as noted in an OECD report "Trade flows collapse in Q4 2008 but signs of falls easing in early 2009" released last week (h/t Torsten Slok):" The report states:
"G7 exports fell 9.5% while imports were down 5.6% quarter-on-quarter in the final quarter of 2008. Year-on-year exports dropped 7.9% and imports fell 6.4% in the fourth quarter.
In the United States, export volume growth dropped 7.8% and imports fell 5.1%. Compared with the previous 12 months, exports declined by 2.3% for the first time since the last quarter of 2006. The 8.4% fall in import volumes accelerated the downward trend from the first quarter 2008.
Japan’s exports plunged 19.3% in the fourth quarter 2008, about twice the rate of the G7, while imports fell 4.6%. This pattern was also reflected year-on-year with a 20.1% drop for exports and a 6.8% decline in imports.
German quarter-on-quarter exports dropped by 9.0% and imports by 6.1% in the fourth quarter. On a year-on-year basis exports fell 7.8% while imports were down 1.8%: the first falls for Germany since the fourth quarter 2006.
EU15 Extra-EU quarter-to-quarter exports dropped with 6.3% less sharply than G7 exports, while the fall in imports was more pronounced with 7.3%. This pattern was also reflected year-on-year with a 5.2% decline for exports, while imports were down 5.7%.
Menzie Chin notes a strong, and highly unusual, correlation between imports and exports for the last two quarters. This is not typical of previous recessions. He proposes reasons this may be happening.
Menzie writes about Causes
"So, we come to the question of what is causing this correlated and deep decrease in trade flows. A recent VoxEU post The big drop: Trade and the Great Recession, on May 2nd, Joseph Francois and Julia Woerz documented the decline in US and European trade flows, arguing that this decline is more likely associated with depressed economic activity and diminished access to credit, rather than to trade protectionism. I agree that thus far, this characterization seems correct. So, this leads to the other possibilities."
Menzie Chinn asks:
"Is it trade financing?
Is it inventory decumulation?
Is it vertical specialization?
(By the way, I don't have a definitive answer; and these explanations are not mutually exclusive)
I think the downturn is in large part due to the lack of trade financing. But box 1.2 in the most recent OECD Economic Outlook Interim Report notes that it is difficult to explain the decline in trade growth using proxy measures for credit problems."
In the above cited article, The big drop: Trade and the Great Recession, on May 2nd, Joseph Francois and Julia Woerz evaluate the causes: "Is the current collapse in trade unprecedented, inconsistent with the general level of economic downturn, and indicative of a trade-related set of problems calling for trade-specific solutions? This column, by carefully comparing real and nominal trade trends, finds that trade seems to be a victim of non-trade weaknesses in credit and demand. While we should maintain a rearguard action on the protectionism front, the cure for the symptoms lies in curing the underlying illness."
What did his clearly knowledgable readers have to say about Menzies article? See the article and loook for the comments at the end. I have singed aout a few that resonate with me...
My Favorite Comments
"So, we come to the question of what is causing this correlated and deep decrease in trade flows."
Is it TOO MUCH CONSUMER DEBT on the lower and middle class in the high wage countries because they are trying to make up for negative real earnings growth due to a globally oversupplied labor market?
Chicbee adds: "Negative real earnings growth" can be corrected by bringing the manufacturing jobs back to the Good Old USA
Is the money supply mix out of whack too?
Did something similar happen right before or during the Great Depression?
Are central bankers to blame for too much debt?
Other Brad Setser articles:
Posted by: Get Rid of the Fed at May 4, 2009 11:54 PM
Chicbee adds: This type of actual observation and counting is worth its weight in platinum. I would prefer a real sit down and count exercise, to establish trends, as exemplified by my hardware store counting of inventory to see what's made in the US.
I watch trains, to evidence the vitality of the export/import trade with Canada. Lately, I've noticed trains are tending to be full, though shorter heading north and often empty heading south. Reasons by priority of impact:
1) American consumer demand (low to middle class) is a freefall, no relief for 48 to 60 mos.
2) Credit is tight, even for the imort/export folks
3) Inventories are being burned off due to lack of demand and ability to get credit for restock.
I also watch the shelves at the local stores. The inventory level in some stores has reached the point where there are empty spots between products and in some cases, for the first time in my life, age 52, product is not in stock.
Chicbee adds: Excellent job!!!
Real world thus suggests America's chickens have in fact come to roost. The good news is we are now saving at an astounding rate!!
Posted by: Steve at May 5, 2009 07:02 AM
Since the Asian mercantilists refuse to trade, wanting only to export and refusing to import, and to enforce that state manipulate their exchange rates such that goods from other nations cannot be exported to them at competitive prices, consumers in other nations can buy the Asian exports only if they themselves, or their governments on their behalf, are willing to go evermore into debt to the Asians.
Chicbee adds: Excellent point... Yes, they control imports, why can't we learn from them?
As credit-worthy Western consumers have more debt than they want, and the mechanisms of the housing bubble for lending to un-credit-worthy consumers have ceased to function, the only entities left to do the borrowing are Western governments. Clearly, those governments have not stepped up to the plate. Unless they do, it's over.
We are not going to return to the status quo ante in which Western consumers' debt loads rose every year, seemingly without limit.
There was a limit. Western consumers not only reached but went over it, and are now deleveraging back down to it.
Posted by: jm at May 5, 2009 07:41 AM
So much for the myth of "free trade," That is only practiced by the US in favor of other nations.
My first inclination was to go with Joseph - its just nobody's buying. The data disagree.
Imports as a share of personal consumption expenditures declines by 6 percentage points between third quarter 2008 and first quarter 2009 (from 25% to 19%).
When we compare goods imports to goods consumed by personal sector it is even worse. 16 point decline in goods imports as a share of personal consumption of goods. Goes from 55% (I checked these numbers twice) to 40%.
I realize that maybe a third of imports go to production rather than consumption, nevertheless, imports are suffering.
I think fear and panic has a lot to do with this. Imports have a long lead time. US companies that import goods did not want to be caught with a lot of goods in transit while the economy was still in freefall.
Chicbee adds: Excellent point
There must be a silver lining in every cloud. I hope that problem will remain unsolved long enough to jumpstart production in the U.S. Maybe being able to get some goods in a hurry, if need be, will become more important than costs and the trade deficit will remain low.
Chicbee adds: Excellent point
My personal bias is for the U.S. government to reject free trade and use its power to reduce imports to a level near exports - PERMANENTLY.
Chicbee adds: Excellent point
Posted by: ReformerRay at May 5, 2009 03:30 PM
Perhaps lending credence to the argument that there is a shortage of trade credits, I have noticed that for some time the DOW futures market has been below the spot, and by significant margins (20-40 points). Arbitrage flows should reverse this gap.
Posted by: don at May 5, 2009 05:16 PM
For some time neocons have been, under the guise of so called free trade which is really one way trade with jobs only going the other way, taking $50K chunks out of world economic demand and replacing them with $0 - thereby shrinking the basis for global economic demand and the global economic pie by $50K increments.
We have been unemploying the champion consumers of all time , N. American middle class workers making roughly $50K/yr, and replacing them with 1.5 Asian subsistence slave wage workers hardly capable of feeding and clothing themselves never mind contributing to global economic demand - $0 addition to world economic demand.
Chicbee adds: Excellent point
How can anyone expect N. American economic recovery when the neocons have gotten us to think that exporting all of our manufacturing jobs is a good thing? It also sucks for China because they are destroying the consumers responsible for their economic growth - they are busy killing the goose that has laid the golden egg.
Chicbee adds: Excellent point.
How, under this neocon trade regime, can either N. America or Asia ever recover economically? Even if we develop new 'green' products and technology, under current conditions the manufacturing jobs will go to Asia and the subsistence workers and N. American workers will continue to be unemployed!
Chicbee adds: Excellent point. However its not just "neocons," but all who have been convinced by the ideology of the Chicago School Economics Standard Model. It's all politicians of the left and right persuasion. (;-)
Posted by: Michael Warhurst at May 5, 2009 05:17 PM
Related to Ray's point, given that trade is collapsing at such a level, does it become more sensible now to put up some barriers to encourage level standards of trade and keep the manufacturing sector from completely slipping out of sight in the U.S.?
Chicbee adds: Yes it does seem eminently sensible.
The damage from any kind of trade war would be extremely small compared to a few years ago, and the groundwork could be laid to keep trade imbalances from springing up once (if?) the economy picks up again. The higher standards and wages can combine with dollar depreciation to keep export-driven businesses afloat for a time when they will be needed in recovery.
Chicbee adds: Excellent point.
A lot of these trade problems are due to lack of demand world-wide, so wouldn't maintaining higher wages (albeit artificially) more than offset the cosmetic gains from lower prices (the alleged "gains from trade")? And couldn't the raised demand from maintaining wages spark the need for more production in industries that are sorely lacking in the U.S. right now?
Chicbee adds: Excellent point. This provides the kernel of a viable approach to keeping manufacturing and other jobs here, and rebuilding the middle class that in many communities is dependent on a local base of stable manufacturing industries
Posted by: J. Miller at May 5, 2009 05:17 PM
Speaking of inventory, I went to the outdoor shop last week and they were completely out of 9mm ammo of any and all types.
Posted by: mrrunangun at May 5, 2009 08:59 PM
I agree with you that the change in imports/exports is not due to protectionism.
I would like to qualify this statement a little. Prior to Nixon pulling us off of the gold standard it was much more difficult to manipulate currencies. Protectionism was almost totally engaged through tariff policy and so was easy to detect.
Nixon pulled us off of the gold standard primarily to allow the US to engage in monetary battles against Japan under the theory that by manipulating the value of the dollar we could counter their economic gains.
Today China has taken the place of Japan in out monetary attacks, but the US monetary authorities also engage others in monetary battles. This has created a condition that greatly hinders international trade. This is especially true in a country appreciating its currency.
That said, US currency manipulation has been used to attack China, then congress threatens trade war against the Chinese for pegging their currency to the dollar. This is in fact protectionism. The rhetoric has slowed recently - even though one of Geithner's first announcements attacked the Chinese monetary authorities as has Sec. of State Clinton - so I believe that international protectionism has slowed. But do not be deceived. Protectionism no longer resides in tariffs but in currency maniputlation.
Chicbee adds: Excellent point
Posted by: DickF at May 6, 2009 08:41 AM
"Murky Protectionism" is the use of subsidies of all kinds (in the U.S., France and other nations), tax policy (Germany and most other European countries) and well trained customs agents who can delay imports indefinitely, to reduce imports into a country. Everybody should know that Murky Protectionism is widespread. However, less imports will go to poor countries, regardless of the degree and kind of protectionism.
I would like to see all nations agree on this matter. Rather than trying to root out protectionism, which is impossible, we should all just agree that our goal, for every nation, is equal trade and that EACH NATIION SHOULD ADOPT EXPLICITY POLICIES WHICH LEAD THAT NATION TOWARD EQUAL TRADE.
Chicbee adds: Excellent point
There is no reason why a trade deficit country should be ashamed to adopt actions which move the imports toward a balance with exports sold. I want the U.S. to be explicit, up front with import restrictions. If every nation adopted the same kind of import restrictions, all the nations of the world would benefit, not just the U.S.
Chicbee adds: Excellent point
"protectionism" is a scare word, to stop people from thinking.
Chicbee adds: Excellent point
I am torn between being ashamed that I keep harping on this same theme, which is really tangential to the topic of the day and proud that I am one of the people who can see clearly where the U.S. has gone wrong and what should be done about it.
Posted by: ReformerRay at May 6, 2009 11:52 AM
Monday, May 4, 2009
Problems and frictions arise when the different economies attempt to export the same manufactured goods to each other. The resulting competition can be good if the competition is only between different designs, quality, and intellectual properties. This serves to increase the overall quality of goods and services. However, as is frequently the case, the cost of production in different countries differs due to historical processes, and on the ground facts. That provides an unhealthy and unfair competition that does not take these accidental and temporary realities into account. Accidental, because they are accidents of history. Temporary, because as the industrialization continues, costs to manufacture, including labor costs, change. It makes no sense for the United States, to allow an existing manufacturer in the US, with strong and stable local ties to a community of loyal workers, to be driven out of business because of an accidental and temporary advantage held by a manufacturer in another industrializing society. It makes no sense to encourage the US manufacturer to move his production "offshore." It makes super duper no sense at all to grant him a reduction in taxes to do so. If you are a supply sider, such as Jack Kemp, you know that lowering taxes is a compelling way to encourage behaviors, just as is raising taxes. It pays to change taxes carefully and wisely with specific local consequences in mind.
I will be adding to this blog entry today and over the course of next few days.
Sunday, May 3, 2009
However, I am beginning to wonder if we shouldn't try to expose everyone possible to the H1N1 flu virus now, since this strain appears to be quite mild in the US, and in the world as a whole. That might well include Mexico, since Mexico has not revealed their full exposure, only the deaths, so it could have been a mild flu there too. That is beginning to appear increasingly likely.
When the N1H1 virus returns to the northern hemisphere during our usual flu season around next October, it might have mutated in countries in the southern hemisphere to a more virulent form, possibly via transmission to and from an animal vector. Having been exposed previously to a milder form could then prove to be a blessing.
In an article in the Dallas morning News titled John M. Barry: What's next for swine flu? John M. Barry points out: "What's important to keep in mind in assessing the threat of the current outbreak is that all four of the well-known pandemics seem to have come in waves. The 1918 virus surfaced by March and set in motion a spring and summer wave that hit some communities and skipped others. This first wave was extremely mild, more so even than ordinary influenza: Of the 10,313 sailors in the British Grand Fleet who became ill, for example, only four died. But autumn brought a second, more lethal wave, which was followed by a less severe third wave in early 1919."
"The first wave in 1918 was relatively mild, many experts speculate, because the virus had not fully adapted to humans. And as it did adapt, it also became more lethal. However, there is very good evidence that people who were exposed during the first wave developed immunity – much as people get protection from a modern vaccine."
Later in his article, Barry points out:
"In all four instances, the gap between the time the virus was first recognized and a second, more dangerous wave swelled was about six months. It will take a minimum of four months to produce vaccine in any volume, possibly longer, and much longer than that to produce enough vaccine to protect most Americans. The race has begun."
That might argue for the wisdom of encouraging exposure to this "first wave."
Sunday, April 12, 2009
I went back and did a search on "manufacture." There are only two relevant hits, see pages 96 and 119, Their approach involves aiding the US automobile industry including their suppliers through the purchase by St. Louise County of American made hybrid cars. A desired outcome: "Maintain good paying jobs for the auto manufacturers and their suppliers." This makes perfect sense. It should be a major focus of this plan. Unfortunately it is not. But it wouldn't take too much additional work to make it so!
The plan does focus on reducing energy usage, and increasing research and development jobs. Both are very positive and needed. However, they are not sufficient.
The big gap in this plan is there is no planned approach to bringing manufacturing jobs back to the county, region, state and nation. Without that, the linchpin and major generator of wealth for any major modern society. including revenues to all the above organizations, is missing. A linchpin, or lynchpin, is a fastener used to prevent a wheel or other rotating part from sliding off the axle upon which it is riding. We have slid right off our economic axles, and we need to get back on board. It's really a sine qua non for sustainable economic growth for St Louis County, St Louis, Missouri, and the Good Old USA.
To get a gut feel for what has happened to us, and how important it is to change it, just spend a half hour in your local hardware store and count all the Made in USA labels you find as you go slowly down any aisle. See my earlier post on that very topic. It's really scary.
Remember, the exporting of the enormous number of jobs did not happen by accident, It was pushed upon us by a particular group of economists, who became well paid advisors to industry. Larry Summers, just as one example, made a few million dollars, last year alone, from the financial firms he is tasked with "controlling" (and aiding} using trillions of dollars of your money and mine. The corporation they advised and aided when in government service were major beneficiaries of the removal of control and regulation in economic activity that removed any and all tariffs on imported goods. Our government also stopped taxing the companies that moved their production offshore. A real double whammy, if you are old enough to know what "double whammy" means. These firms and the Chicago group of economic advisors, still lobby the government which has gone along with them since the days of President Reagan. President Clinton was a Rhodes scholar at Oxford University Oxford is a major proponent of the Chicago plan for redistributing our "wealth" to the rich. We can go into the spin engines required to make all this seem palatable as our middle class American Dream jobs were actively pushed out of our borders. But, let's leave that aside for now. Assume for the moment, that it is what happened. Yes Virginia, it really is.
If that is really the case, what could St Louis County do to bring back manufacturing jobs in general? And what about all the other formerly "low margin" manufacturing cities, counties, regions, states in a formerly "low margin" manufacturing nation, that had many tens of millions of "low margin"manufacturing jobs that was the major engine of prosperity for us all? Of course, that was before they all became glorious "High Margin Post Industrial" Cities and Counties, "High Margin Post Industrial" Regions, and "High Margin Post Industrial" States in a glorious "High Margin Post Industrial" Nation? What can any of them, or any of us actually do to bring back those dismally middle class "low margin" manufacturing jobs? That is the subject of my next blog, I hope. We will go into what suddenly made them "low margin" and beneath contempt in the eyes of the Chicago school of economists. Also we will address why they didn't appear to be low margin until the Chicago economic and social redistribution of wealth geniuses opened our eyes.
Your ideas are welcome. You may agree or disagree, politely of course.
I just remembered, there are at least two other analysts who agree with these thoughts. I will research that and get back to you. Have a great evening and week.
Friday, March 27, 2009
Why It is Crucial to Maintain Manufacturing Plants and Jobs In The US If We Wish to Retain Related Design Jobs
Do we understand that it is crucial to maintain manufacturing jobs within our country if we want to dominate related design fields and keep those jobs in the US? (Hint, the answer is "Yes, some of us do.) Why do I pose this as a question? Simply because this experienced fact known to every fashion and every industrial designer, is in complete disagreement with the current paradigm, that I admiringly call "The Chicago Economic School's Standard Business Model" (CESSBM.) They have Nobel Prize winners aboard, so they have cachet and respect and admiration. However they have very limited knowledge and understanding of the design field. (Do they even watch "Project Runway"?) Certainly no understanding of any field where both the "raw materials," i.e. hardware and software used in the design, and the resulting designed product are in fact manufactured products. Design fields where this is true include women's clothing fashion design, computer chips, network computers, missile design, automobile design, aircraft design, office design, etc. The list of design fields for which it is true is long and very real.
Now let's list some design fields where dominating the manufacturing industry does not make the design field fall into your hand like a ripe plum off the tree... There must be quite a few, since the "Chicago Economics Group" says it is the norm that giving away the manufacturing industry leads to ensuring and maximizing control of the design process and the retention of all the design jobs for lots and lots of designers making good money. They claim you will have a much more focused effort and therefore a tighter grip of the design field.
I can't offhand come up with a good example. I am at a loss... Can someone help me out here. Does someone know of any field where this is, or was, actually the case?
The (CESSBM) also claims that US workers are much more innovative, and that training foreign students in our schools will have no negative unintended effects on our industry when they return to their countries of origin. Is that even politically correct? PC or not, it is totally false! Engineers from all over the world with whom I have worked are sharp as tacks.
So, why and how is it that shedding control of the manufacture of a product gives your company or your country an advantage in retaining and expanding quality, well paying, jobs in the associated design industries?
I cannot think of even one reason or example, so let's see what manufacturers and designers themselves, in a few disparate fields, say about that.
Women's Clothing, The Fashion Industry of New York
Anna Sui, a successful New York Fashion Designer was born in Detroit and educated at Parsons School of Design, Ms. Sui made all the journeyman stations of the cross before achieving overnight success when she was close to 40. Her company is privately held and remains profitable, she says. (Dun & Bradstreet estimates annual sales of $20 million.) Her clothing label is substantially underwritten by earnings from the 14 global fragrance and cosmetics licenses she operates in partnership with Procter & Gamble and her 42 store franchises in China, Japan, Taiwan and Kuwait. — Excerpted from a New York Times article titled “Testing Her Strong Suit,” by Guy Trebay, The Times, Feb. 12, 2009. In the article, Ms. Sui points out
“It’s not just designers who are affected,” by the impact of the economy on fashion, she said. As a longtime advocate for preserving the Garment Center, Ms. Sui is attuned to the perils to the industry over all when any designer or collection fails. Long before the recession hit, high rents had driven businesses out of the area. Employment in the apparel trade has shrunk drastically from its 1950s peak of 250,000 jobs to fewer than 20,000 today."
Now here is the key point:
"Without a production core, it becomes increasingly difficult for young designers to set up shop in the city," Ms. Sui said. “When I was starting, there were wool mills in the U.S. that could make you anything. The U.S. used to produce the most beautiful cotton denim in the world. Now all that is gone.”
The article continues... A person walking down Seventh Avenue runs little risk anymore of being mowed down by a pushcart. Just a handful of workrooms remain that can whip up custom trimmings, and there are few skilled workers capable of operating the bulky machinery required to make gossamer fripperies like Schiffli lace. Come 2010, when the runway shows move from Bryant Park to Lincoln Center, the last symbolic link between Seventh Avenue and Fashion Week will also be lost.
Fashion was a radically different business when she was starting out in the 1980s, Ms. Sui said — less corporate, more subject to the whims and intuitions of gifted merchants and also influenced by the fact that department stores could still afford to showcase unknowns thanks to open-to-buy budgets.
“Every decision is harder for everyone to make now because things are so expensive,” Ms. Sui said, referring both to the steep cost of retail goods and the expenses designers incur to produce and mount collections two times a year.
High rents are hardly the only problems plaguing the city’s fashion industry. Employment in the apparel trades has been shrinking drastically for decades, as tens of thousands of jobs have moved to China and other low-wage countries. After peaking around 275,000 in the 1950s, the number of apparel manufacturing jobs in New York has steadily declined to around 20,000 today, according to Barbara Byrne Denham, the chief economist at Eastern Consolidated, a New York broker.
A New York Times article titled Rents Falling In New York's Garment District , observes that
Some fashion designers like Ms. Nanette Lepore, a New York fashion designer who manufactures 85 percent of her clothing line in almost 30 independent factories within a few blocks of her office on West 35th Street, says that unless the remaining core apparel industry is preserved, it will be difficult for them to design their fashion lines in New York — and next to impossible for young designers coming out of school to set up shop in the garment district, which spans the West Side of Manhattan on streets numbered in the 30s.
Computer Processor Chips:
Is Intel pushing to divest itself of chip manufacturing so it can do even better at design? Or is it finding and hiring the best design teams and providing them with state of the art manufacturing facilities to work with? It's the latter. Intel, a multinational company, has manufacturing and design teams in close proximity in the US, and in India, and in Israel. It is running into significant challenges from Taiwan, where other companies outsourced to separately owned Taiwanese companies to manufacture computer components. As a result, control of network computer design is rapidly evolving to Taiwanese hardware and software designers.
In an insightful article in Wired magazine The Netbook Effect: How Cheap Little Laptops Hit the Big Time, Clive Thompson writes:
"In The Innovator's Dilemma, Clayton Christensen famously argued that true breakthroughs almost always come from upstarts, since profitable firms rarely want to upend their business models. "Netbooks are a classic Christensenian disruptive innovation for the PC industry," says Willy Shih, a Harvard Business School professor who has studied both Quanta's work on the One Laptop per Child project and Asustek's development of the netbook."
" Clive Thompson then drives in to the key point: "The Taiwanese firms, Shih argues, now have enormous clout in the PC industry. In the US, we regard branding and marketing—convincing people what to buy—as core business functions. What Asustek proved is that the companies with real leverage are the ones that actually make desirable products. The Taiwanese laptop builders possess the atom-hacking smarts that once defined America but which have atrophied here along with our industrial base. As far as laptop manufacturing goes, Taiwan essentially now owns the market; the devices aren't produced in significant volumes anywhere else."
Here he really rubs it in:
"If you had asked Taiwanese hardware CEOs a few years ago about their relationship with Dell, HP, and Apple, they'd have told you that the American companies did the branding and sales while outsourcing their design and production to Taiwan. Today the view from Asia is increasingly the reverse."
"When I talk to them now," Shih laughs, "they say, 'We outsource our branding and sales to them.'"
Well now, to me, that says it all... In a relatively short time, the manufacturer inevitably sets the rules.
So we have seen that in computers and in fashion, design jobs physically follow the manufacturing jobs. The Chicago Economic School's Standard Business Model (CESSBM) that claims they are spatially decoupled is dead. The facts do not support CESSBM dogmas. The facts always rule.
If you want sustainable design jobs in your country or company, you had better retain the manufacturing jobs, since they are key to all wealth producing activities, and well paying blue collar jobs, as opposed to lower paying service industry jobs.
But you will say, (assuming you have internalized the Chicago school of economics dogma,) we got rid of our "low margin jobs" and kept the good jobs. There was nothing about these jobs that was "low margin" until the government decided to remove all equalizations because of differences in wage scales. Suddenly, "unfair competition" became acceptable and desirable Our Japanese competitors (head of Sony) thought our policy was madness, but he raised no voice of protest. All's fair in love and insanity.
The lobbyists for the multinational manufacturers say in addition to getting rid of these "low margin jobs," in favor of the remaining good jobs, the US was now free to concentrate on creating lots of new high paying, high skill, "post industrial jobs." The remaining good, i.e., "high margin jobs" are meant to include design and production of aircraft, and automobiles for example. The even better new "post industrial" jobs include the creation and sales of derivative type investment vehicles and credit default swaps. (The Government and financial whiz kids at the bloated banks did not even understand why the latter instruments could not possibly reduce risk, and, of course they did not reduce risk. I may get around to explaining why that was obvious to anyone who looked at them even casually, as I did). Remind me if I forget.
As an aside, I discovered that, being a Physicist trained in systems engineering, made it easy to see things not visible to economists and financiers. I will only explain that, if asked. It's a really big deal, and President Obama and Treasury Secretary Tim Geitner do need to understand it. Their current economist advisors with their Chicago Economic School's Standard Business Model (CESSBM) do not. That's a guaranteed lock!
I should make it clear that the close relationship between manufacturing and design; and the need to have them in close proximity is well understood by technical people. Clearly the current crop of economists do not get it. I assume that is because most economists advising the US Government have not produced anything, so they have no technical or factual knowledge concerning it at all... Just dogma! Unfortunately it's the wrong dogma, and it's toxic.
To see for yourself that what I am saying is well understood by tech folks, take a look at this website assessing the likelihood of finding design engineering jobs The article, written before 2006, states:
" Additionally, some companies use design firms overseas, especially for the design of high-technology products. These overseas design firms are located closer to their suppliers, which reduces the time it takes to design and sell a product—an important consideration when technology is changing quickly. This offshoring of design work could continue to slow employment growth of U.S. commercial and industrial designers."
"Despite the increase in design work performed overseas, most design jobs, particularly jobs not related to high-technology product design, will still remain in the U.S. Design is essential to a firm’s success, and firms will want to retain control over the design process."
"Competition for jobs will be keen because many talented individuals are attracted to the design field. The best job opportunities will be in specialized design firms which are used by manufacturers to design products or parts of products. Designers with strong backgrounds in engineering and computer-aided design and extensive business expertise will have the best prospects."
"As the demand for design work becomes more consumer-driven, designers who can closely monitor, and react to, changing customer demands—and who can work with marking and strategic planning staffs to come up with new products—will also improve their job prospects."
"Employment of designers can be affected by fluctuations in the economy. For example, during periods of economic downturns, companies may cut research and development spending, including new product development."
Source: Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook, 2008-09 Edition
So as you can plainly see, even the government knew it. However the US Government for the last thirty years at least has continued to actively push for the movement of manufacturing jobs to locations in other countries where the cost of labor is lower.
Who benefits from this? Its main beneficiaries are the multinational companies whose profit is raised dramatically through a lowering of their labor costs, and a happily gratuitous lowering of their corporate taxes. Their Management team benefits, and so do their shareholders. Workers clearly do not. It is the major reason that the real wages of American workers in the US have not risen, and have even declined, while the incomes of wealthy non-wage earners has risen dramatically. Municipal, State and Federal corporate tax revenues from these companies do not benefit. The manufacturers spin this as good for the consumer, since prices for goods do decline. So yes, the consumer does benefit from the lower prices. However that is more than offset by the loss in real income, combined with the hidden costs to the same consumer of degradation of the infrastructure, public buildings, services to the poor, services to the middle class, lowering of healthcare and other benefits to all; the disproportionate income taxes at the lower levels, and the increase in sales taxes, education costs, health costs and property taxes. The float was kept going by the apparent rise in the sales prices of houses. The rise in perceived value of their houses was a Ponzi scheme of gigantic proportions. Those rising house prices pushed by risky mortgage terms enabled the government to claim the GDP was rising steadily, when it was not!. The Ponzi House Price Rises orchestrated by Government and its agencies, enabled the spin to be continually pushed by multinational manufacturers, their lobbyists and the esteemed Chicago School Economists, who, unfortunately are still the President's Advisors.
Why do I say "unfortunately"? Because their weltaunshang, i.e. the CESSBM leads to preventing the rapid creation of lots of high paying jobs that are sustainable. It seeks to get rid of such jobs as demonstrated by history and many public statements. Plus, the remedial approaches floated and implemented to date are accompanied by the semi permanent need for a long term dole, which, is unsustainable.
Thursday, March 26, 2009
Do You Know, and Does it Matter, How Many Items In Your Favorite Store Are Made in The United States?
Would you call that a sea change? I think that conveys the right impression. The perfect storm is upon us. I will explain the arguments why this made perfect sense to a small group in our society and our nation. For most of us the results are rather grim. Jack Welch, was from Lynn, MA, where I counted my first stock in a hardware store, and realized how bad this accelerating trend would be for the cities and towns, and for the national budget. For Mr. Welch, reshaping and transforming General Electric into General Financial was the path to personal riches. His mantra? If you are not number one in an innovative age, stop wasting money on tough, possibly slow improvement through R&D. Just get rid of the difficult-to-create-and-nurture technical skill set, and move into areas that require no technical skill, or very little. The new mantra is: Just switch to creating information laden or financial products that only need the agreement of a few in power and the skill set of an alley cat. The short term results of changing the company's focus are spectacular, when they reach the near term bottom line for the enterprise. The shareholders, the customers (a different set of customers of course), and the management stand to profit beyond their wildest dreams. The "method of steepest descents" takes you to the nearest local minimum (or maximum in the case of profits.) It is unlikely to be the actual maximum for profits in the longer term, but the long term is years away, since spending money now on research and development, so necessary for maximizing future profits, reduces this year's profits. Not to worry. It's not on my watch man!
Once you have the keys to the candy store, who needs to manufacture candy? And then later, comes the new paradigm realization, that it's even more profitable to sell the illusion, the smell of candy, and no candy to back it up. That's much more profitable. And apparently legal. I suppose it depends on who is writing the laws. Just walk around Kendal Square, near MIT, in Cambridge Mass, and inhale the wonderful Necco factory aroma to get that paradigm message. It does smell good. But, I digress. Please forgive me.
Not 20 years earlier than my first True Value hardware store "stock characterization counting" in Lynn, this country was the greatest manufacturing giant the world had ever seen. In my childhood it was known as The Arsenal of Democracy. This country has undergone a major change, to put it mildly. No one I know thinks the results are an improvement. The implications for the future are equally vast, and left unchanged, much worse.
Don't we need to ask, how did this happen? And, why was it allowed to happen? What are the implications and inexorable concomitants that cannot any longer be avoided by ignoring the reality and enormity of this "event"? It has unfortunately turned out to be one of the four or five major events of my lifetime. If you are in your fifties or younger, it may be the the single most important event of yours. "Event" is not the right word. Would "Change" be more accurate or meaningful? We are witnessing the final chapter of a major change in the "book of business" of this country. It didn't just happen by chance. It is the result of concerted national economic and social policy. An important part of the basis for this policy was, and still is, the belief of a new group of economists, whose main center of learning was in Chicago, that we should stop manufacturing any item in the US that could be done more cheaply (they use the word "efficiently") in any other country in the world. The US would be fortunate to enter the Information Age, and become the first Post Industrial Society.
We will have to explore a bit the implications of their definition of "efficient" in economics. This is not nuclear physics, and it is not rocket science, but it is extremely important to our day-to-day, year-to-year and decade-to-decade well being and happiness. Or is the pursuit of happiness no longer a motivator in the post industrial world? Shades of 1984 indeed! Unfortunately we are the target of this economic rocket and it is carrying the economic equivalent of a nuclear weapon on our used-to-be way of life.
Here are other questions we need to address:
Is efficiency as defined by the Chicago School a reasonable definition of efficiency? What key elements, crucial to The American Dream, or any Sane Society does it ignore?
What is the actual impact of manufacturing and manufacturing jobs on national wealth, not just short term corporate profits?
Do we understand that manufacturing jobs are crucial to maintain within our country if you want to dominate design fields? (Hint, the answer is "Yes, some of us do.)
Since they are a crucial part of job formation and "job retention," aka "Job Sustainability,"of many blue collar, well paying jobs, what steps are needed to rebuild our manufacturing sector to at least be able to supply our day to day needs as a society? (We can identify those.)
Is it true that the steps needed can result in creation of sustainable good incomes with reasonable growth? (Hint, the answer is yes.)
Is it also true that doing the steps is a lot cheaper than borrowing vast sums to mitigate the collapses that the financial wiseguys can bring upon us if we don't stop this foolishness? (Hint, the answer is yes.)
Monday, March 23, 2009
One approach is to prolong unemployment and even enhance unemployment benefit packages. Enhancing unemployment benefits to provide healthcare is an option. Such action can possibly lead to new job creation in the healthcare fields.
A second approach to dealing with unemployment is to stimulate economic activity so new private sector jobs based on private sector activities are created. Has anyone seen any information that shows self sustaining economic growth based on the current "post industrial" model for the US economy? You know, that's the one where we create or manufacture few of the physical goods people need to sustain and conduct their lives, just services and financial products of whatever quality, durability, and reliability. (Much more to come on this topic in subsequent blog entries.)
An unstated assumption in Approach 2 is that to make the economy grow and create new self sustaining jobs we have to do two main things. The first is to "save" the banking system as it currently exists; and the second is to create new R&D activities, or greatly enhance existing R&D funds available for business and government to spend productively.
The first idea for job creation via economic stimulation is that the banking system (including bank insurers) just needs to be coddled and coaxed using vast capital infusions to return to the old style functions of the banking system. You know, those are the ones that involved making loans to businesses and consumers whom the banker knew and trusted to run businesses and even expand the businesses in a safe manner, and to make consumer purchases in an orderly manner so as to not overextend. That means returning to the thrilling days of yesteryear when securitization was not yet invented. In future blog entries, we will discuss why securitization was invented. Of course, this will require a much diminished financial industry in terms of employment. We simply cannot survive as a society in which the fantasies of infants are allowed to dominate the adult world and expect to survive as a culture, and economic model, or perhaps as a nation.
The second idea for job creation mentioned above is to create or enhance research and development activity in productive areas leading to the creation of scientific and engineering R & D jobs themselves and also leading to opportunities for new commercial products to be manufactured.
In the time remaining today, let's go back and say a bit more about the impact of enhanced benefits for American workers on sustainable job creation. It is a surprise each day to see that there has not been explicit information presented about how to make any such newly created jobs resulting from government benefit programs self sustaining. That would require putting an unemployed person to work in a new or previously existing job that caused a profit to be generated somewhere or somehow that is sufficient to at least cover the cost of the new benefit.
Let's explore that a bit. Let's say an unemployed person who has a new healthcare benefit causes a new job to be created in an ER (emrgency room), Urgent Care facility, or possibly in other existing and/or new types of medical facilities. That's good, but clearly the unemployed person is not paying additional or any taxes to cause that healthcare job to be self sustaining for the following year.
What about employed persons who have a new or enhanced health benefit. Someone will be paying for that increased benefit. Is it the worker through enhanced taxes, the employer through enhanced healthcare benefit contributions, or solely the government? If solely the government, it is again not self sustaining. If it is the employer and/or the worker then the American worker under the current "post industrial" model that our esteemed Economic theorists and B school professors have successfully sold and totally implemented in this country, those jobs will not exist here for long. They will be offshored as soon as offshore employers can figure out how to do the same work abroad for a lower delivered price. More on why this is true in subsequent blog entries.