Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
George The Proposed Border Tax Would Derail President's Proposals to Reduce Trade Deficits
Our State retail sales taxes are border taxes and are not imposed on exports. Under international law, retail sales taxes and value-added taxes can be exempted from and deducted from exports without violating the rules against dumping, defined as selling abroad at lower price than sales at home. The proposed border tax seeks to impose a 20% tax on all imports. Under international law, the border tax may not be considered a sales tax and therefore might not be deductible. The issue will be decided in the courts which will take years. Congress could pass a value-added tax which would be deductible, but popular opposition to a sales tax at the federal government level would prevent it ever from passing. The border tax is a modified value-added tax. Under the plan, companies wouldn't be able to deduct the cost of imports from their revenue, a move that today enables them to lower their overall tax burden. At the same time, exports and other foreign sales would be made tax-free. The plan would operate like a tax on the trade deficit and raise about $100 billion per year which could help pay for lower income tax rates.
Congress could pass a 20% value-added tax, which amounts to a 20% retail sales tax, but there is no way such a proposal could pass the Congress or be signed by any President in his first term. The border tax is a sort of value-added tax; after all, the value of goods is the sum of value-added. Value-added is the sum of wages, profits, interest, and rent incurred in the course of producing goods and services, which equals the price of the goods and services produced. The IMF for decades has been promoting the value-added tax, concealing the fact that it is equivalent to a retail sales tax to make it easier to be enacted.
The border tax falls on all our trading partners, even those with which we have trade surpluses. Why would we want to hurt them? And the border tax raises the prices of all imports not merely those from countries with which we are experiencing huge deficits. ...
Prof. Martin Feldstein Makes a Poor Case For the Border Fax
Martin Feldstein, professor of economics at Harvard, former chairman of the Council of Economic Advisors, and a recognized tax expert, writes in an opinion piece in the Wall Street Journal, 2/27/2017, that the border-adjustment tax proposed by some House Republicans “would not hurt American consumers and businesses,” nor affect the overall trade deficit. He gave the following reason for his astonishing conclusion:
Retailers and importers understandably fear that the tax would raise the cost of their products, ultimately increasing the prices to consumers. But the border tax would also cause the international value of the dollar to rise, reducing the cost of imports by enough to offset the tax.
Here’s why the dollar would rise: Without a change in the currency’s value, the border adjustment would cause imports to fall and exports to rise, reducing the overall trade deficit. But it is a fundamental fact of economics that the size of a country’s trade deficit equals the difference between national investment and national savings. Since the border adjustment tax would not alter either investment or saving, there must be no change in the trade deficit
Economic theory does not support Feldstein’s analysis. A country’s investment and savings are affected by trade deficits and surpluses but private investment and savings depend on rates on rates of return and rates on borrowed capital and government investment depends on Congressional and administration decisions while savings depends on the amount of income after tax of individuals and corporations. The author’s conclusion confuses an accounting identity with a statement of causes and effects. ...
Free Trade Has Been a Disastrous Policy for the USA
Many Republicans continue to espouse free trade under the impression that free trade is a conservative policy. Indeed trade is a conservative policy in the sense that both parties benefit from trade, each giving up goods of less value for goods of greater value. Adam Smith rightfully condemned mercantilist policies and favored a “free exchange”. He never used the term “free trade” and he was always thinking of a free exchange of goods for goods. It never occurred to him to prescribe a unilateral free exchange policy, which unfortunately most economists seem to favor to the everlasting shame of the discipline. The shame is that they never analyzed the consequences of a possible chronic trade deficits. Free trade is an appropriate policy 1) when both trade partners have a common currency, 2) neither imposes tariffs or subsidizes exporters, i.e., neither is pursuing mercantilist policies, and 3) labor and capital can freely move between them. These conditions are imposed upon the States by the U.S. Constitution. They do not exist in international trade. ...
The Border Tax and the Value-Added Tax Are Bad Proposals
All kinds of foolish tax ideas are being promoted since Trump proposed corporate and individual tax reforms. One is converting the corporate income tax to a tax on revenues from production and sales in the U.S. plus a 20% tax on imported inputs. This in effect amounts to a border tax of 20% on imports with exports free of tax. Our analysis of this proposal indicates that the border tax will have no lasting effect on the trade deficits. Indeed our State sales taxes are a border tax; exports are exempt from sales taxes. Another proposal is adding a value-added tax, equivalent to a retail sales tax at the federal government level. The value-added will add to the bloated federal bureaucracy. Its justification is to compensate for the loss of revenue resulting from the proposed reduction in the rate of the corporate income tax. A third proposal is to repeal the estate tax, the only measure we have that reduces wealth inequality. Wealth inequality has been increasing for decades; there is no justification for making it more unequal. None of these proposals is necessary or called for. All that we need is the Scaled Tariff, a single-country-variable-tariff which rises and falls with trade deficits, which will bring in lots of revenue until economic growth escalates as a result of trade being balanced. We do not need trade agreements or jaw-boning. ...
Answer to Prof. D. J. Boudreaux’s Questions for Trump’s Supporters
As an economist and a Trump supporter, I hasten to answer Prof. Boudreaux’s “Some questions for Trump’s supporters” (Trib-Review, 9/7/2016). Prof. Boudreaux is Professor of Economics at George Mason University.
First, he sets up a straw man that Trump is against immigration. He asks: "Do you believe that America would be a better place today had your ancestors been kept from immigrating?" Trump and this supporter of Trump are against illegal immigration and the immigration of Muslims who may become terrorists. So what is the question to be answered? Prof. Boudreaux as a respected professor who in asking a question should avoid innuendos that Trump is against legal immigration. He should at least have hie facts straight.
Second question, “If Mr. Trump is correct that NAFTA was a boom to Mexicans but a bust for Americans, why do you worry that Mexicans, in the absence of a “big beautiful wall,” will continue to flock to America in search of work and prosperity.” Because the Mexican boom does not benefit all Mexicans, just as American “prosperity” has left millions of American workers, both black and white but disproportionately black, without jobs or the hope of securing a job. So, many Mexicans and Central Americans who come to the U.S. via Mexico will continue to seek to migrate illegally to the U.S.
Third, Boudreaux asserts that Americans benefit from Chinese low prices. Some do, but many don’t. Some Chinese goods are sold in America at low prices, but the price of an Apple cell-phone imported from China is as high as it would be if it were made here. Competition from other cell-phone manufacturers limits the price Apple can charge here. Boudreaux does not mention the devastating effects that our trade deficits have had on our levels of manufacturing and employment. He seems to be unaware that the U. S. Department of Commerce statistics on national output show that our trade deficits with the rest of the world are a subtraction from Gross Domestic Product. The rate of economic growth would have been double during the past two decades had our trade with the rest of the world been in balance. The trade deficits have caused our economy to stagnate and caused the loss of jobs of millions of workers in manufacturing.
Fourth, Boudreaux writes, “Can you explain why – in a world with nearly 200 countries – we should expect with fair trade, that the Mexicans will each year buy from us exactly the same dollar amount amount of goods and services that we buy from them, and that the Chinese will do likewise?” Trump has not said that trade has to be balanced with every country and of course it does not need to be. We say that trade should be balanced with the 200 countries. Our trade deficits are huge with China, Japan, Germany, Korea, and Mexico. We need to start somewhere to balance trade. Should we start with the countries with whom we have a surplus? Of course not....
Time to End the “Free Trade” Ideology and Substitute “Balanced Trade” Economics Instead
In his essay “The Consequences of Neglecting Manufacturing”(4/20/15), Robert E. Scott of the Economics Policy Institute, compares trade in goods exports, goods imports, and the ratio of imports to exports for the United States and its top three international competitors, China, Germany, and Japan in the year. The smallness of the ratio of imports to exports, the more likely the country is restricting imports and subsidizing exports, a practice called mercantilism. He writes, “Overall, the United States had a trade deficit of $67.4 billion in [the] top 30 exporting industries. The top 30 exporting industries in those other countries had sizeable trade surpluses that ranged from $223.2 billion in Japan to $285.3 billion in Germany to $647.7 billion in China.” The trade deficits the U.S. has been experiencing for the past two decades has caused the displacement of millions of U.S. workers in manufacturing and has contributed to the weakness of the U.S. economy and caused the U.S. becoming the world’s leading debtor nation.
Here are the facts as Scott details them.
Without exception, the top 30 export industries in China, Japan, and Germany were all manufacturing industries. Six of the top 30 U.S. export industries were primary commodity exporters including grains, seeds, and nuts. This commodities sector was responsible for a trade surplus of $69.7 billion. The United States also had a trade surplus in aircraft and parts (two sectors) of $76.2 billion. However, these surpluses were more than offset by trade deficits in two other sectors, motor vehicles and parts, with a trade deficit of $117.2 billion, and electronics, with a trade deficit of $110.2 billion, both important U.S. manufacturing industries. ...
Bubbles are popping - a recession is coming!
An economic bubble occurs when people have been bidding up something because they think that the price will keep going up. Once the price starts heading down, it goes down fast. There have been several famous bubbles in history including:
1. The Tulip Bubble
2. The South See Company Bubble
3. The U.S. House Price Bubble
David Stockman, former budget director under President Reagan, writes (Bubbles Don't Correct, They Burst):...
How Trump could get the Economy Going -- we were published in the American Thinker this morning
Read the rest at:
An Economist's Plan to Increase Economic Growth And Create Jobs
Mortimer Zuckerman, Chairman and Editor-in-Chief of U.S. News and World Report asked in an opinion piece in the Wall St. Journal, 8/21/2015, “Who Will Get the Dreary Economy Going?” We face another recession on the horizon, he says. “Yet there is little urgency from the White House these days regarding the economy. And what is the focus of the current presidential candidates and the media covering them?” They are focused on Hillary’s email, on illegal immigration and immigration reform, overturning the Affordable Care Act, and a wide number of domestic issues none of which have anything to do with economic growth or increasing employment. Little has been accomplished since 2009. Millions are employed part time, millions have left the labor force and given up on finding a job. “..(W)hat we need is a public discussion of where, precisely, America is headed economically.”
The rest of this article is an attempt to show how economic growth can be stimulated, good jobs can be created, prosperity regained, and, as Donald Trump claims, America can be great again. This is what he and the other candidates can pledge to accomplish.
The Economics of the Greek Crisis and Its Economic Solution
Greece has been portrayed as a country living beyond its means and the recommended corrective action is for Greece to consume less, a policy of austerity. The world faced a similar crisis in 1930 and the Keynesian solution was for governments to spend more, not less. Greece could not spend more even though the Greek people voted against a policy of austerity because it does not have the money to spend more. It needs Euros and Germany will not lend it any Euros until it agrees to tighten its belt. It is caught between Scylla and Charybdis. Prof. Peter Morici of the University of Maryland has a solution for Greece. In a column published July 13, 2015 in the Pittsburgh Trib-Treview, he calls on the Greek Parliament to reject the $86 billion bailout, offered by Germany, dump the euro, and reintroduce the drachma.
Prof. Morici castigates German economic policy as mercantilist, which is true, writing that “Germany and its northern neighbors pursue growth strategies premised on exports – in particular, running trade surpluses.” This mercantilist policy is often called a “beggar-ones-neighbor policy. Germany has employed the policy not only against its Eurozone neighbors but against the USA as well. According to the US Bureau of the Census, Germany’s trade surplus with the US amounted to $74 billion in 2014. Its trade surplus with the world was $250 billion, exceeded only by China. Germany ran a trade surplus every year with Greece and many other Eurozone countries, principally its Southern neighbors from 2002 to 2014, including Portugal, Italy, and France. Mercantilist policies promote employment and prosperity in the trade surplus countries and unemployment and slow growth in the trade deficit countries.
Unfortunately, Greece does not have the wherewithal to return to the drachma. It would need money that has a known purchasing power, like a Euroloan of some billions of Euros. But there is a solution. ...
Is it 1929 again? - reposted from August 29, 2003
[Note: I first posted this on this blog on August 29, 2003. With the Chinese stock market in free fall, it is becoming more and more apparent that I was correct.]
This is very close to my June 26 analysis (see Why US Interest Rates have been Rising since May 1). At that time, I quoted an article which said that Chinese banks were selling their U.S. Treasury bonds, due to a liquidity crunch in China. Apparently, the liquidity crunch is emerging-market wide....
The Negative Consequences of a Free Trade Policy in an Unfree Trade World
As you have been reading on this blog, US free trade policies have resulted in huge chronic trade deficits for decades which have converted the US from the world’s leading creditor to the world’s leading debtor. Pres. Obama is seeking to extend free trade with the low-wage countries in the Pacific region. He is committed to equalizing income and wealth but his policies have only succeeded in exacerbating inequality in the US. He is equalizing wages but only with low wage countries around the world He has succeeded only in reducing wages as a proportion of US national income domestically. The policy of globalization pursued by him and previous administration has been a disaster for the United States. It is equalizing wages around the world which means that US real wages are tending lower and will continue to edge lower while real wages are increasing in the rest of the world. Unbalanced trade with low wage countries like China means lower wages for US workers in American manufacturing.
William Galston in an opinion piece entitled “How the Vise on U.S. Wages Tightened” (Wall Street Journal, 4/1/2015) writes: “According to the Wall Street Journal’s James Hagerty and Jeff Bennett in a March 24 article, the U.S. imported $138 billion in car parts last year, which works out to $12,135 of foreign content for every light vehicle built in America. …The story isn’t restricted to auto parts.” Galston also cites a paper written by Avraham Ebenstein, Ann Harrison, and Margaret McMillan published by the National Bureau of Economic Research in which they “…found significant wage declines for workers exposed to globalization, especially among workers performing routine tasks. Older workers and workers without post-secondary education are disproportionately affected.” ...
Government Interference in the Economy Has Been an Unmitigated Disaster
Few Americans know the economic harm that government mismanagement of the economy has caused. And government intervention in the economy continues to cause untold economic harm. The mere growth of government slows down the rate of economic growth. But the trend is exacerbated by numerous government interventions in the economy such as bad taxes, subsidies to favored businesses, fixing prices, levying tariffs that favor those businesses, fixing prices as in the case of the minimum wage law, building low rental but high cost housing for the poor, and encouraging loans to unqualified home buyers, ineffective projects to delay global warming, tuition loans to students whose studies do not prepare them for high-paying jobs. The list goes on and on. Here are some of the major government prograns that adversely affect the economy:. ...
Chinese Firms Particularly Vulnerable?
ODU Professor of International Business Shaomin Li published a piece in Fortune Magazine on the 12th which made an interesting argument about the vulnerability of Chinese firms to declining economic growth. The title is: "Corporate Ponzi Game in China?"
They report a series of interesting findings.
1. Many Chinese firms have relatively low profit margins.
2. In order to grow rapidly such firms have relied upon debt financing.
3. The debt-financed growth of capacity in the absence of substantial profits makes China's economy particularly vulnerable to a slow-down in economic growth...
China's imports up just 0.6% in 2014
China just released its December 2014 trade statistics. After rapid growth from 2005 to 2013, the dollar value of Chinese imports was stagnant in 2014.
Here is the rate of Chinese import growth:
China pulls December trade statistics
China in 2015 is like the United States in 1929. It has grown rapidly by practicing mercantilism. Instead of buying imports from its customers, it destroyed the market for its exports. The Chinese stock market may be about to lead the world down into an economic recession.
The Chinese stock market began tomorrow morning's (Monday's) trading in free fall after the default of a Chinese property developer. Zerohedge.com reports:
Meanwhile, in a supposedly unrelated development, Reuters reports that the Chinese government briefly published its trade statistics for December 2014, and then pulled them:...
November trade report suggests that a worldwide recession is starting
On Wednesday, the Bureau of Economic Analysis released the trade report for November 2014. The good news is that the U.S. trade deficit went down, despite the high flying dollar. The bad news is that the report shows a decline in investment spending in the world as a whole and in the United States in particular. It could be that the world and the United States are going into a recession at the moment....
US Economic Growth 2.7% over last year. China about same.
On December 23, the Bureau of Economic Analysis (BEA) of the Commerce Department issued its latest revision of U.S. economic growth during the third quarter period (July through September) of 2014. According to the BEA, the U.S. economy grew at a 5.0% annual rate during that quarter.
A more accurate estimate of the U.S. growth rate can be found by comparing each quarter with the quarter one year earlier. If the third quarter of 2014 is compared with the third quarter of 2013, the growth rate was 2.7%, not 5.0%, as shown in the graph below.
Unfortunately, the once honorable Bureau of Economic Analysis of the Census Bureau tweaked the quarterly GDP numbers in order to achieve the supposedly high growth rate. This tweaking was predicted by Tyler Durden of zerohedge.com.
When Durden analyzed the final revision for the first quarter back on June 25 (Here's the reason for the total collapse in Q1 GDP), he discovered that Obamacare payments had been removed by the BEA from the already dismal results for the first quarter. He predicted that they would be added to later quarters in order to achieve 5% growth during a quarter. Specifically, he wrote:...
Why are oil prices falling?
When prices fall, there are two possibilities: (1) increased supply or (2) reduced demand. If oil prices are falling because of increased oil supply, that can be very good for the U.S. economy. On the other hand, if oil prices are falling due to weakening world aggregate demand, then the price collapse could be a signal that the world economy is about to collapse. Thus, it is important to determine why oil prices are falling.
One way to determine whether supply is rising or demand falling is to look at quantity sold. If quantity is rising, then supply is rising. If quantity is falling, then demand is falling. I found some statistics that might cast some light on whether world oil consumption was rising or falling on the U.S. Energy Information Administration's (EIA) website. According to their short term energy outlook, total world consumption of oil is rising from 90.48 million barrels per day in 2013 to 91.44 in 2014. Thus, unless the EIA has missed a fourth quarter collapse in oil consumption, it appears that world oil consumption is rising.
I see no signs of a fourth quarter collapse in world aggregate demand. In fact, according to the Bureau of Economic Analysis, U.S. exports of goods and services in October increased to $197.5 billion in October, $2.3 billion more than September exports. If world aggregate demand were collapsing, then U.S. exports would likely be falling. So, we can rule out collapsing fourth quarter world demand for oil.
OIL-PRICE.NET has a good summary (Oil Price Drops on Oversupply) of geo-political reasons why oil price supply is increasing at the moment. Here are some of the ones that they list:...
Conservatives Want to Eliminate the Ex-Im Bank Which Creates Jobs While Costing the Taxpayer Nothing
Conservatives oppose renewal by the Congress of the Ex-Im Bank whose guaranteed loans have facilitated exports and created and preserved American jobs while costing the government and taxpayers nothing at all. At the same time, conservatives are silent about the World Bank world socialist bank which the U.S. created and financed at a cost of hundreds of billions of dollars and continues to do so to this day. This is ideology being promoted at the expense of U.S. taxpayers and U.S. workers. There are plenty of government programs that ought to be cut. Why should the one selected be one that costs taxpayers nothing and does create jobs.
The Heritage Foundation is a conservative think tank promoting a stronger economy and reduced government, traditional family values, and a strong America in the international arena. More often than not, its analyses and recommendations are sound in each of these areas. But one can quarrel with its opposition to Congressional renewal of the charter of the U.S. Export-Import Bank, an independent government agency whose loans to importers of US. goods, loans made usually by U.S. commercial banks, are guaranteed by the government. There can be no doubt of our need to close the U.S. trade gap which has caused extensive dis-employment in the U.S., more than four million jobs over the past two decades in our estimate. Does the Heritage Foundation have a case in opposing the Ex-Im Bank?
The government does not, other than giving its guarantee, subsidize the loans the Ex-Im Bank guarantees. It does not in fact cost the government a dime, something really rare for any government enterprise. The Ex-Im Bank’s default rate is less than one-quarter of one percent and is covered many times over by its successful loans. Diane Katz, a Heritage Foundation Research Fellow writes, “Taxpayers are ultimately on the hook for the $140 billion in loans and other credit that is currently outstanding.” Yes, but it has not cost the government anything, which she does not mention. ...
Conservative Opposition to the Ex-Im Bank is Misguided; They Should Consider Opposing the World Bank
The Heritage Foundation is a conservative think tank promoting a stronger economy and reduced government, traditional family values, and a strong America in the international arena. More often than not, its analyses and recommendations are sound in each of these areas. But one can quarrel with its opposition to Congress renewal of the charter of the U.S. Export-Import Bank, an independent government agency whose loans to exporters of US. goods are guaranteed by the government. There can be no doubt of our need to close the U.S. trade gap which has caused extensive dis-employment in the U.S., more than four million jobs over the past two decaades in our estimate. So does the Heritage Foundation have a case in opposing the Ex-Im Bank?
The government does not, other than giving its guarantee, subsidize the loans the Ex-Im Bank guarantees. It does not in fact cost the government a dime. The Ex-Im Bank’s default rate is less than one-quarter of one percent, covered amply by its successful loans. Diane Katz, a Heritage Foundation Research Fellow writes, “Taxpayers are ultimately on the hook for the $140 billion in loans and other credit that is currently outstanding.” Yes, but it has not cost the government anything, which she does not mention.
Heritage Foundation’s objection is that the Ex-Im bank is in competition with commercial banks and other lenders who do not enjoy the government’s guarantee of foreign investments that are sometimes risky. The Heritage Foundation’s objection is that the Ex-Im Bank unfairly competes with the private banks because of its ability to make loans at a lower interest rates than commercial banks on risky loans. True. But instead of recommending an end to the Ex-Im Bank, it could recommend guaranteeing the loans of commercial banks in some way. Stimulating exports is a worthwhile objective, especially when it involves no government expenditure at all. ...
Inversions Are Not a Problem; the Real Problem Is Outsourcing
Burger King’s purchase of Canada’s Tim Hortons chain of coffee houses is called an inversion, a term used to describe a company’s moving its headquarters abroad to avoid paying U.S. taxes on the income of a foreign company it purchased. Tim Hortons has a number of locations in the U.S. as well (600) and it pays U.S. and state corporate income taxes on its U.S. operations. Burger King’s inversion does not reduce U.S. revenues from Burger King’s and Tim Hortons' operations in the U.S. at all. All the Burger Kings and Tim Hortons in the U.S. will continue to pay U.S. and state corporate income taxes. The fuss about inversions is a smokescreen that conceal the problem, U.S. manufacturing companies moving abroad and outsourcing their production. Now that is a real problem for the U.S. economy.
An inversion is not to be confused with outsourcing which does affect revenue, causes massive unemployment here at home, and worsens our balance of trade. Inversions do no. Nearly all the leading American corporations engage in outsourcing, including Apple, Nike, Honeywell, Caterpillar, Hewlett-Packard, Motorola, IBM, NCR, Lev-Strauss, and many, many others. They add insult to injury by importing the products they produce overseas to compete with product made here. By contrast, inversions like Burger King-Tim Hortons do not change the place of production or cause unemployment at all or worsen the trade imbalance.
The U.S. Congress and the Obama Administration in their arrogance want to tax Tim Hortons (now Burger King’s) Canadian operations at 35 percent, the U.S. corporate income tax rate. (In addition, the states have rates ranging from zero to Pennsylvania’s 9.99 percent.) The Canadian general corporate income tax rate is 28 percent and on manufacturing and processing corporations, it is 15 percent currently. Canada’s principal provinces levy corporate income taxes of 10 to 12 percent. Canada reduced its corporate income tax rates from 38 percent to enable Canadian companies to compete with such countries as Ireland which has a 15 percent corporate income tax rate.
All that Burger King wants is to avoid paying more in taxes on the combined company than the two pay at present. The administration wants to increase those taxes as a result of the merger. Most countries have a territorial basis for income taxation and do not tax the foreign income of its companies; we do. All countries are entitled to tax the income earned within its boundaries. But the exercise of an extra-territorial right to tax does appear on the face of it arbitrary and unjustified. ...
The Unemployment Claims Filed Last Week Were Even Worse than the Week Before Reported Below
We have another instance this week of the Unemployment Insurance Weekly Claims Report of the U.S. Department of Labor reporting incredible numbers....
How is the Economy Doing? The Weekly Unemployment Insurance Claims Say "Not So Good"
In the week ending July 5, the advance number of actual initial claims for unemployment insurance, totaled 322,248, an increase of 16,542 (or +5.4 percent) from the previous week. The figure the media reported was for seasonally adjusted initial claims, 304,000, a decrease of 11,000 from the previous week's unrevised level of 315,000. The seasonal factors had expected an increase of 28,394 (or + 9.3 percent) from the previous week. We do not know what seasonal factors could produce the expectation of a 9.3 percent increase in a single week with the exception of seasonal factors such as annual layoffs in the auto industry perhaps. They did not occur. The actual number of claims filed is a more reliable figure than the seasonally adjusted figure as I have long argued on this blog. The BLS should report the actual number of claims filed and then append what seasonal factors may be affecting the number of claims.
After several weeks of actual claims falling below 300,000, which indicated a strengthening economy, it is unnerving to see such a substantial increase in unemployment insurance claims. We viewed the numbers below 300,000 as very promising but we need several weeks of claims data to determine where the economy is heading. The interruption of the downward trend must give us pause especially when coupled with the dismal decline in Gross National Product of 2.9 percent in the first quarter of 2014. The trade deficit in May amounted to $44 billion, equivalent to about 360 to 440 thousand jobs. ...
Is the U.S. stock market going up because of Central Bank Purchases?
On June 17, the Official Monetary and Financial Institutions Forum is going to launch its Global Public Investor Report in London. If you check out their website today (June 16), you will find the following headline for that forthcoming report:
Financial Times has already published an article based upon that report, and Zero Hedge has already put up a blog posting about it which includes a graph that shows that as predictions of future world economic growth go down world stock markets go up. The mechanism could be the following:
The Central Bank of Japan may be the chief culprit here. As part of Abenomics...
Obamacare Slowdown: Economy Shrank at 1% rate in first quarter
On May 29, the Bureau of Economic Analysis reported that the U.S. economy shrank at a 1.0% rate during the first quarter of 2014. The size of the slowdown caught analysts by surprise. As recently as April 29, the Associated Press was predicting a 1.1% growth rate during the first quarter, not a 1.0% shrinkage rate.
The following table shows the contributors to real GDP growth. You can add up the contributions from the components in each column to get the rate of Real GDP growth shown in the bottom row:
The largest component of the slowdown was the decrease in inventories. If not for that, economic growth would have been a positive 0.6%. Inventories tend to go up and down. The decrease in inventories by 1.6% during the first quarter of 2014, which made GDP artificially low, corresponded with the increase by 1.5% in the third quarter of 2013, which made GDP artificially high.
On April 30, the Obama administration's Council of Economic Advisers attributed the slowdown to the cold weather during the first quarter. This is nonsense. Increased consumption, including higher payments to utility companies, would have contributed more than 2% to economic growth, had other factors not intervened.
Other causes of the slowdown were: (1) the fall in business fixed investment which contributed a negative 0.4% to GDP growth, and (2) the fall in net exports which contributed a negative 0.9% to GDP growth....
Fiscal and Monetary Policies Are Ineffective in an Economy Characterized by Monopolistic Competition
More than five years into Pres. Obama’s administration, the U.S. economic recovery has been slow and lethargic. Keynesian economists are at a loss to explain why the billions of dollars the federal government borrowed and spent and the billions of dollars created by the Federal Reserve System failed to stimulate the economy. The principle accomplishment was to increase the value of capital assets, especially corporate securities and real estate. The stock market experienced a boom as corporate earnings grew and the capitalized value of those increased earnings sky-rocketed. Why were economists like Profs. Summers, Bernanke, Romer, who were advising the president so wrong, not to speak of those like Prof. Krugman who believed the federal government should have spent more? They could not be more wrong.
As we have pointed out many times on this blog and in our newly published book, Balanced Trade, the failure to balance our foreign trade was a huge drag of the economy. But those foreign trade deficits were as great as or greater during the recovery after the 2001 recession than they have been since the recession of 2007-08.
The answer to the question, “Why were the Keynesians so wrong?” is, we believe, the fact that economists have ignored for eight decades the revolutionary insight of Harvard Prof. Edward Chamberlin’s that nearly all firms have some monopoly power, ranging from hardly any economic power in industries producing homogeneous products, natural resources and agriculture, for example, to pure monopolies protected by government policies, patents, for example. Counter-recession policies affect firms with different amounts of monopoly power differently. ...
Why Stock Markets Boomed While Economic Growth and Employment Stagnated
Economists have been unable to explain why the stock market has been booming while the economy has been stagnating. Perhaps one reason is that they have ignored the economic theory that could explain it.
The most important contribution to economics in the twentieth century got little recognition from economists. Prof. Edward Chamberlain of Harvard invented monopolistic competition which unlike perfect competition describes most of the economy. It is not “imperfect competition”, economist Joan Robinson’s phrase. All enterprises have some monopoly power except for producers of agricultural products, raw materials, and minerals whose prices are determined by nearly perfect markets. The degree of monopoly varies from nearly zero to 100 percent. Producers of homogeneous natural resources and farm products operate in nearly perfectly competitive markets. Automakers and nearly all manufactures not protected by patents all have some degree of monopoly power largely created by advertising (illusory product differentiation) and with varying degrees of real product differentiation. Some businesses enjoy location advantages such as greater accessibility, better access to transportation, parking, etc. And many enterprises gain greater confidence by its consumers and their competitors enjoy simply as the result of the experience of their customers.
As a result, enterprises enjoy varying power in their ability to charge higher prices than their competitors.
Where Is the Economy Going? Sideways, Mostly.
As we noted on this site in January, the outlook for the economy looked bad for the economy. The number of claims for unemployment insurance unadjusted was quite high but one had to consider the much lower seasonally adjusted numbers as the table below shows. The range of the unadjusted figures for the weeks ending 12/28/13 to l/18/14 was between 411,678 and 532,698 but the seasonally adjusted figures were in a much lower range of 300,000 to 326,000. So we had to wait and see. From March 15, 2014, the unadjusted figures dropped below 300,000, quite good figures, really, and the seasonally adjusted figures were slightly higher ranging from 300,000 to 326,000. ...
How the Corporate Income Tax Contributes to Income Inequality
The growing number of millionaires and billionaires and the increase in the inequality of income has being raised as a political issue by Pres. Obama. But his policies and those of his “liberal constituencies have helped exacerbate income inequality. One of the reasons there are so many millionaires and billionaires is the corporate income tax, which turns out on analysis to exclude corporate income from any tax at all. As the readers of this site are aware, we have been campaigning for the integration of the corporate and personal income taxes, essentially to treat corporations as we treat partnerships. Partners report their share of partnership profits as personal income. There is no separate partnership income tax as there is for corporations.
Not only is the corporate income tax a very bad tax from an economic point of view, economists are not even in agreement that the shareholders bear the burden of the tax. Some believe that the tax is passed on to consumers and that little if any of the burden of the tax is borne by shareholders. To make matters worse, corporations that export are disadvantaged compared to those that produce for the domestic market. In international markets, the likelihood of passing the tax on to consumers is practically nil because their competitors may pay little or no corporate income tax. Value-added and sales taxes may be rebated to exporters but income taxes cannot be rebated under international law.
Rising Initial Unemployment Insurance Claims Bodes an Economic Downturn
Once again, there are grounds for concern that we are experiencing a downturn in economic activity and may headed for an Obama recession. The advance number of actual number of initial claims totaled 534,431 during the week ending January 11, 2014 an increase of 51,190 over the previous week. During the preceding week ending January 4, 2014, an increase in initial claims of 34,384 was reported and in the week ending December 28, 2013, an increase of 25,875 was reported. This increase in the number of claims was not reported in the media.
The media reported the BLS “seasonally adjusted” estimated of initial claims which reported a decrease of 2,000 in the number of initial claims. We consider the seasonally adjusted figure as unreliable. For weekly data, there is no good reason for a seasonal adjustment. But that is what the BLSs reports and the media publish. We consider that to be a great disservice to the community.
In the last few months, one sees a steady deterioration in the employment data. Starting from a relatively good showing of 229,485 to 255,110 initial claims in September, one observes a range of 311,516 to 368,832 in October and November, and, with the exception of the week of 12-28-2013 when 397,667 was reported, a range of 414,002 to 534,431 in December, 2013 and January, 2014. The trend is unmistakable and does not bode well for the future of the economy. Following are the data:
Initial Claims for Unemployment Insurance Are a Wake Up Call Again
In the week ending January 4, the advance figure for seasonally adjusted initial claims reported by the Department of Labor was 330,000, a decrease of 15,000 from the previous week's revised figure of 345,000. But the actual number of initial claims totaled 486,033 an increase of 34,384. The advance unadjusted number for persons claiming UI benefits in state programs totaled 3,295,112, an increase of 451,828 from the preceding week. We consider this a negative report and reinforces our conclusion last week that the economy may be slowing. While it is too soon to cry wolf, the optimism of spokesmen for the Federal Reserve and the administration and others appears to us to be wholly unjustified. ...
Turkey in free fall
Spengler (David P. Goldman) is one of the few commentators on the world scene who understands trade surpluses and deficits. I look forward to his postings. On December 27, he reported on his blog that Turkey is in free fall:
Are We About to Experience the Obama Recession?
In the week ending December 28, 2013, the advance number of actual initial claims for unemployment insurance, unadjusted, totaled 443,513, an increase of 25,875 from the previous week. The Department of Labor and the media reported a “seasonally adjusted” decrease of 2,000 and 399,000 claims. As we have reported in this site a number of times, we know no reason for a seasonal adjustment of weekly data. The actual number of claims totaled was over 100,000 more than the “seasonally adjusted” figure and is a cause for alarm. It is a harbinger of bad economic news.
Taking into consideration 1) that the Gross Domestic Product increase reported in the fourth quarter showed a big increase in inventories that will have to be reduced in the following quarter, the usual means for making the reduction being to reduce production, plus 2) the huge burden that Obamacare will impose on the middle class–the huge increase in monthly health costs imposed by Obamacare is equivalent to a huge increase in income taxes on the middle class, 3) the prospect that the Federal Reserve Board will reduce the rate of money creation (called "tapering", and 4) an expected bursting of the stock market bubble generated by the Fed’s keeping interest rates at an artificially low level, it is not unreasonable to expect a serious economic shock to the economy, not unreasonable to expect another recession. ...
Jobless Claims Up -- Ray and I were published on the American Thinker blog this morning
We discuss the rising Jobless Claims numbers and the reports of hospital layoffs and conclude:
To read the posting, go to:
The Media Silence on the Explosion in Unemployment Insurance Claims
In the week ending December 7, the advance figure for seasonally adjusted initial claims was 368,000, an increase of 68,000 from the previous week's revised figure of 300,000. The advance number of actual initial claims unadjusted, totaled 461,422 in the week ending December 7, an increase of 146,241 from the previous week. The 461,422 figure is consistent with an economic downturn.
Regular readers of this blog know that we believe the number of unemployment insurance claims filed is one of the most important indicators of economic activity and is the most up-to-date of any of the important indicators. Going into the recession of 2008-09, both the seasonally-adjusted and unadjusted figures were under 400,000 until July, 2008. They rose consistently throughout the remainder of 2008 and 2009, reaching numbers of 600,000+ in January, 2009. ...
World Economic Growth is Slowing -- we were published in today's American Thinker
To read the rest, go to:
World Economic Growth is Slowing
I suspected that world economic growth was slowing when gasoline prices started to decline this fall. My hypothesis has been that short-term changes in world oil prices are largely driven by changes in world-wide demand, not supply. When the world economy is growing, world oil prices tend to rise. When the world economy is slowing, oil prices tend to fall. Thus the price you pay at your local gas station is one of the chief indicators of world economic demand. But falling oil prices could have other causes as well. Perhaps an increase in Iranian oil production, due to the lifting of sanctions, was causing them to fall.
My suspicions of a worldwide demand slowdown were given support by the latest report of United States trade. In September 2013, U.S. exports fell by $3.0 billion, on a seasonally adjusted basis, from $191.9 billion the previous quarter. When worldwide demand declines, demand for U.S. exports tends to decline. But a one-month decline in exports does not a trend make. This decline could have been an aberration.
My suspicions were confirmed by a November 19 report from the OECD, one of the organizations that tracks world economic data. It predicts that, by the time growth is calculated for 2013, world economic growth will increase just 2.7% this year, down from a 3.1% increase last year. There appears to be a consistent trend of declining world economic growth:...
Obamacare is a Classic Case of Bad Economics From Conception to Implementation
The Patient Protection and Affordable Healthcare Act of 2010 (commonly called “Obamacare”) is a classic case of a misguided and badly implemented government program from an economic point of view. It restricts freedom of choice and imposes a series of bad new taxes. While taxes are needed to subsidize those Obamare participants who do not pay the full cost of their Obamacare insurance, the selected taxes violate the accepted principles of taxation in every instance. Moreover, the Act mandates coverages that increase the cost to those who do not want those coverages.
Not a single Republican voted for the Act. No wonder since so many provisions violate traditional American values such as financing the abortion of healthy fetuses, the provision of contraceptives, et al., not to speak of the Act’s prohibition of free choice among health insurance plans and health savings plans, and the numerous tax increases to finance the legislation. Obviously, the Democrats who controlled both houses of the Congress at the time did not need or even want any Republican support for it. They wanted full credit for it and are now getting it!
From an economist’s point of view, the major defects of the law are:
Because it prescribes what the insurance policies must cover, consumers have little choice in selecting a plan. As a result, insurance companies cannot compete by offering alternative policies. Consumer freedom of choice is non-existent.
a misguided and badly implemented government program from an economic point of view. It restricts freedom of choice and imposes a series of bad new taxes. While taxes are needed to subsidize those Obamare participants who do not pay the full cost of their Obamacare insurance, the selected taxes violate the accepted principles of taxation in every instance. Moreover, the Act mandates coverages that increase the cost to those who do not want those coverages.
Not a single Republican voted for the Act. No wonder since so many provisions violate traditional American values. such as financing the abortion of healthy fetuses, the provision of contraceptives, et al., not to speak of the Act’s prohibition of free choice among health insurance plans and health savings plans, and the numerous tax increases to finance the legislation. Obviously, the Democrats who controlled both houses of the Congress at the time did not need or even want any Republican support for it. They wanted full credit for it and are now getting it.
From an economist’s point of view, the major defects of the law are:
Because it prescribes what the insurance policies must cover, consumers have little choice in selecting a plan. As a result, insurance companies cannot compete by offering alternative policies. Consumer freedom of choice is non-existent.
Some of the taxes it imposes are the following, together with some comments:...
The US Did Not Create 205,000 New Jobs in October, 2013 -- Jobs Fell by 499,000
As we have been pointing out for several months, the data with respect to employment and unemployment published by the BLS needs to be read carefully before accepting the summaries, the news reports, and television reporting. We prefer to ignore the seasonally adjusted weekly data because as economists we see no need to seasonally adjust weekly data. If the data is seasonally adjusted, the actual data should be reported and an explanation why the trend, if any, may not be relied on because of seasonal factors could be mentioned in a footnote. Another example of the misuse of seasonal data appeared last week.
The Bureau of Labor Statistics reported that in October, 2013, 205,000 new non-agricultural jobs were created, according to a survey of employers. We were surprised by the figure since the four weekly reports made during the month indicated that more than a 1.2 million new claims for unemployment insurance were filed in October. Checking Table 1 of the monthly report corroborated what the BLS reported.
But what is one to make of Table 8, which contains both unadjusted and adjusted data from the household survey. Not seasonally adjusted non-agricultural employment decreased 499,000 and seasonally adjusted non-ag employment decreased even more by 667,000....
Weekly Unemployment Insurance Claims Week Ending October 26
The weekly unemployment insurance weekly claims report is in our opinion the most timely indication of changes in the state of the economy. We consider a reduction in the claims filed below 300,000 to be positive for the economic future. We called your attention to that fact when that occurred a few months ago. It has since returned to levels in the mid-300s, which we view as economic stagnation. Unemployment, including those who left the labor force and those working part-time is as great as it has been since 2009. We favor giving greater weight to the unadjusted data since we know no reason for seasonally adjusting weekly data. The first few paragraphs of today’s report reads as follows:...
How the Republicans Could Have "Won" the Partial Government Shutdown
The Republicans could have won had they concentrated on the so-called “government shutdown” and, early on, had raised the debt limit temporarily. In any case, the shutdown was only a partial shutdown. It furloughed only employees not covered by the federal Antideficiency Act, which permits certain essential government functions to keep operating in the absence of authorized legislative funding. Had the House raised the debt ceiling before shutting down any government agencies, Americans would not have even noticed the partial shutdown. The Republicans missed the public relations gain they could have gotten if they had pointed how partial the shutdown was. But the threat to permit no new government borrowing scared the public to death.
The public could have been shown how little they were affected by the partial shutdown. The veterans showed at the WWII memorial that the President unnecessarily barricaded entry to public monuments and parks to make the public believe that the shutdown seriously affected government operations when it actually eliminated the inessential and some of the fraud, waste, and abuse in the federal budget.
As for the debt ceiling, it should not have been imposed in the first place. ...
Is it 1929 again?
This is very close to my June 26 analysis (see Why US Interest Rates have been Rising since May 1). At that time, I quoted an article which said that Chinese banks were selling their U.S. Treasury bonds, due to a liquidity crunch in China. Apparently, the liquidity crunch is emerging-market wide....
US long term interest rate up due to sales of dollars by foreign investors
Just recently, the U.S. long-term interest rate resumed its rapid climb, which had begun on May 1 as shown in the following graph of the U.S. Treasury bond yield:
In an August 19 commentary in Market Watch, Carla Mozee attributes the rising U.S. long-term interest rate to selling of U.S. Treasuries by Chinese and Japanese investors. Mozee writes:
Rise in Initial Unemployment Claims Shows Lack of Economic Recovery
The US Bureau of Labor Statistics seems to be playing games with its so-called seasonally adjusted data on unemployment. In the week ending July 13, the advance figure for seasonally adjusted initial claims was 334,000, adecrease of 24,000 from the previous week's revised figure of 358,000. The unadjusted rate, the actual number of claims filed, was 408,710, an increase of 25,350 from the preceding week’s claims of 383,360. Instead of the improvement indicated by the seasonally adjusted data, there was a worsening indicated by the actual data. CNBC as usual only reported the seasonally adjusted figure, which no doubt gave the stock markets a lift.
A comparison of the seasonally adjusted columns with the unadjusted columns for the two years reveals little if any correlation. As an economist, I find little value in seasonally adjusting weekly data. One can caution the user of actual data that any significant changes or unusual circumstances such as strikes, seasonal layoffs, etc. affected the data. Those circumstances can change weekly but it is hard to visualize seasonal changes that affect weekly numbers significantly. The seasonal variations in the two periods show no seasonal pattern. The Bureau would be better advised to simply report the actual weekly data adding only unusual circumstances that probably affected the actual numbers. ...
Rise in Initial Unemployment Claims Portends Another Recession
Why U.S. long-term interest rates have been rising since May 1
On or about May 1, the U.S. long-term interest rate started to rise as indicated by the interest rate on U.S. Treasury Bonds. I follow the movement of long-term U.S. interest rates on the following page:
The graph shows that around May 1, the 10 year U.S.Treasury bond interest rate turned on a dime. It had been going down from about March 11 (about 2.05%) to May 1 (about 1.65%). It has since headed up to about 2.55% today.
I have been trying to figure out the cause. There are several possibilities that could cause the U.S. Treasury bond rate to rise, including:
According to Lars Christensen, Danske Bank's chief emerging-markets analyst, China's big regional banks have been selling their Treasury Bonds because they are facing a short-term cash crunch. Here's a selection from a Bloomberg article about his explanation (Is China to Blame for Rising U.S. Interest Rates?):...
Manufacturing Employment Down for Third Month in a Row
According to the employment survey statistics released by the Bureau of Labor Statistics, manufacturing employment fell in May for the third month in a row, down from 11,988,000 in February to 11,967,000 in May.
The graph below shows that manufacturing employment has generally been rising from the depths of the Great Recession of 2008-2009, though the recovery has been small, compared to the number of jobs lost during the Great Recession:
The fall in manufacturing jobs is likely to become a trend due to:...
Household Consumption Falls and the Market Plunges
On Friday morning, the Bureau of Economic Analysis reported that household disposable income (personal income after taxes) fell 0.1% in April after rising in March. The fall in household consumption was even larger (0.2%), again after rising in March. The response of the U.S. stock market was immediate. Both the Dow Jones Industrial Average and the S&P 500 closed down 1.4% with the Dow falling 209 points.
Some economists have been hoping that consumer spending will drive an economic recovery, perhaps due to rising stock prices and rising home values. They were brought back to reality by these statistics. Households can only increase consumer spending over the long-term if their incomes are rising, and those incomes are not rising. It is becoming evident that economic stagnation will continue with real GDP growth staying at about the 1.8% rate that the U.S. economy experienced from the first quarter of 2012 to the first quarter of 2013.
A real recovery is going to require an increase in the rate of business investment spending and/or a reduction in the trade deficit. And neither of them are likely to improve much so long as the United States retains the highest corporate income tax rate in the world and continues to let trade cheaters keep our trade out of balance.
Former Reagan speechwriter Pat Buchanan has a solution: abolish the U.S. corporate income tax and replace it with a 10% tariff. In his May 31 column (Abolish the Corporate Income Tax!), he points out that corporate income tax revenue has declined to 10% of tax revenues, despite the U.S. having, by far, the highest corporate income tax rate in the world. He points to all of the following benefits of eliminating that tax altogether:...
Shale gas, not government, fueling our recovery - Ray was published in the Tribune Review on Friday
To read the rest go to:
David Stockman’s background made him uniquely qualified to write this insightful analysis of the follies committed by politicians, economists, investors, and business leaders over the past half century. He graduated as a history major at Michigan State, did graduate work at Harvard in 1968-70, served in the House of Representatives from 1977 until his resignation in 1981 to join the Reagan Administration and served as Director of the Office of Management and Budget until his resignation in 1985. He spent the decades since then working first for Salomon Brothers and left to create his own investment fund, and headed an auto parts firm that went bankrupt in 2005. Paul Krugman, commenting on the book, called him “a cranky old man”. Unlike Stockman, Krugman does not worry about the deficit, believing it is manageable whereas Stockman believes that “the fiscal cliff is permanent and insurmountable. “It stands at the edge of a $20 trillion abyss of deficits over the next decade.” He writes that it is now “Sundown in America: the end of free markets and democracy.”
Stockman is right that we are close to the end of free markets and democracy. How did we arrive at this point? Who was responsible? What brought us to this point? This book is an attempt to answer those questions. ...
Shale Natural Gas Stimulates Economy As Federal Government Weakens the Recovery
The weekly report of actual initial unemployment insurance claims for the week ending April 27, 2013, coupled with the decrease during the previous week, showed that 298,692 claims were filed. A showing under 300,000 is consistent with a mild recovery; 250,00 would be more desirable. But the administration cannot claim credit. The boom in the natural-gas-from- shale industry, a private sector phenomenon opposed by the administration’s Environmental Protection Agency, is responsible. Serendipity has once again saved the American people from Washington’s idiotic policies.
The federal government has run budget deficits amounting to many trillions of dollars and the Federal Reserve has printed money like mad but it has hardly been enough to make a dent in our massive unemployment. It has barely accommodated new entrants to the labor force and has been so ineffective that involuntary unemployment is still 15 percent not the 7 percent the Department of Labor has been reporting because it does not count as unemployed people no longer looking for work.
The Keynesian policies pursued by the administration have been ineffective. Pres. Obama’s 2009 $800 billion economic stimulus ran out of stimulus as soon as the spending stopped. There was no Keynesian multiplier. And the massive annual government budget deficits had no Keynesian multiplier. ...
Morici predicts manufacturing and house price slumps
University of Maryland economist Peter Morici predicts a deceptively strong GDP report for the first quarter (Deceptively strong US GDP report expected). On the near horizon he sees slowdowns coming in U.S. manufacturing and house prices.
As far as U.S. manufacturing is concerned, he sees layoffs on the horizon due to President Obama's decisions to tolerate Asian mercantilism:
He argues that rising house and agricultural land prices are due to a speculative boom, that will eventually bust. Morici writes:...
ALERT: Good or Bad Economic News, Report of Initial Unemployment Claims
Once again, there is an unexplained divergence between CNBC reports of a decrease in initial weekly unemployment claims when, in fact, there was a substantial increase in the number. The media always report the “seasonally adjusted” number. For the week ending April 6, CNBC reported that number of initial unemployment claims filed declined 42,000. The actual, the not seasonally adjusted number, the unadjusted number, was an increase of 37,025 in the number of unemployment claims to 353,933. As I reported previously, we had a report that during one week in March, the actual number of claims had fallen below 300,000, a very good number. It turned out as I reported the following week that it was not repeated and therefore was not a good indication that our economy was beginning to recover....
At Last, There Are Signs of a Beginning to Recovery From the Recession
Actual Initial Unemployment Insurance Claims fell below 300,000 during the week ending March 16, 2013 for the first time since May 12, 2007! So the economy is at last beginning to show signs of recovery from the recession. To what do we owe this spark of improvement? Will the recovery last?
The media reported that during the week 336,000 seasonally adjusted initial claims were filed, an increase of 2,000 from the previous week. If the reporters read the report of the U.S. Bureau of Labor Statistics, they would have read that the actual number of claims filed was 299,143. Neither CNBC nor Bloomberg TV reported the actual number which would have caused the stock market to rise. Instead, it fell on the news that unemployment claims had risen.
How the BLS calculated the seasonally adjusted number, God knows. It is hard to believe a seasonal adjustment in the month of March would differ by nearly 37,000, more than ten percent. (Moreover, the BLS made similar calculations in 2012 and 2011, so the statisticians apparently don’t ever get around to recalculating the seasonal adjustments!)
There are a number of reasons why unemployment claims have fallen. The government has been “stimulating” the economy by keeping the federal budget in the red by over a billion dollars a year for the past four years. This represents an increase in the demand for goods and services. Unfortunately, much of this demand was for foreign goods and services. The international trade deficits that the U.S. has experienced since the 1990s created employment abroad and caused unemployment at home. As a result, the increase in government spending had a much smaller effect than it would have had in the absence of the trade deficits. ...
The Unemployment Rate Is Closer to 15% Than 7.7%
Employment reports dominate the economic news on Thursday and Friday and sent the Dow Jones average to record heights. While the employment news was labeled as encouraging by the media, a look at the numbers was not very encouraging at all.
The first report, the number of initial claims for unemployment, was declared to be encouraging because the seasonally adjusted number of initial claims was positive, having fallen by 7,000 during the week ending March 1, 2013. To the contrary, the actual number of initial claims during that week increased by 23,198.
Two other reports were equally negative. The first was widely ignored. It showed that the trade deficit worsened in February. The third report was widely declared to show economic growth. It reported that over 200,000 new jobs were created in February. The bad news was the continued decline of manufacturing jobs, the real key to economic growth. Taking into consideration those no longer looking for a job who are not counted as unemployed and those employed part-time involuntarily, the real unemployment rate is fifteen percent not 7.7 percent as officially reported.
Following is what the Bureau of Labor Statistics actually reported about initial unemployment claims in the week ending March 1, 2013:
Trade Deficits Increase U.S. Debt Vulnerability
A paper presented earlier today suggests that countries with trade deficits are substantially more vulnerable to debt crisis / inflation spirals. Whether the U.S. is equally vulnerable to such problems remains a subject to debate though. David Greenlaw, James D. Hamilton, Peter Hooper, and Frederic S. Mishkin write:
"Our nonlinear regression results imply that a country can quickly move from the group without problems to the group that faces nearly insurmountable problems if its debt rises significantly above 80 percent of GDP, particularly if it is running a large current-account deficit...
The economy is really growing at about a 1.5% rate
The negative growth of GDP of -0.1% during the fourth quarter was no more real than was the 3.1% growth in GDP during the third quarter. The real growth rate of the American economy is closer to the half way point between them -- 1.5%.
According to preliminary statistics released by the BEA yesterday, real GDP fell at a 0.1% annual rate during the fourth quarter of 2012 after rising by 3.1% annual rate during the third quarter. What caused the dramatic change?
The following table shows the contributors to GDP Growth over the last four quarters:
As shown in the table, Household consumption and business investment rose from the third to the fourth quarter. The factors that fell from the third to fourth quarters were government consumption, net exports and inventories....
Ray was right -- the Obama Recession Begins!
On January 15, Ray Richman wrote on this blog (Obama Recession Begins? Unemployment Claims Escalate):
This morning, the Bureau of Economic Analysis (BEA) confirmed Ray's reading of the unemployment claims tea leaves. They announced that GDP actually declined during the fourth quarter of 2012. Here is the beginning of the BEA press release:...
New Unemployment Claims still far above 2007 levels
Half way through - Obama's first 5-year plan is a failure
Obama's trade agenda announced that President Obama had set a goal “of doubling U.S. exports in the next five years” to create 2 million jobs. Half way through the goal, in September 2012, exports had risen by 25%, but imports had risen even faster. The number of manufacturing jobs had gone up by 481,000 to 11,958, but that was still 601,000 less than the number of manufacturing jobs when Obama took office.
So, why did Obama’s plan fail? The answer is simple, he didn’t do anything about Chinese mercantilism. He created a new bureaucracy called the Export Promotion Cabinet. It joined hundred of federal agencies designed to do-good but which end up doing-nothing. Just how are we going to increase our exports when the world’s fastest growing markets exclude our goods?
Alan Tonelsen of American Economic Alert pairs a revealing set of quotes in a May 10, 2010, blog posting (Obama Administration's China Trade Brain-Locke):...
Obama Recession Begins? Unemployment Claims Escalate
The number of actual initial claims for unemployment insurance totaled 552,043 in the week ending January 5, an increase of 61,944 from the previous week. The press did not report this figure. Instead, they reported a figure of 371,000, a figure 181,043 lower. The 371,000 figure was the advance figure for seasonally adjusted initial claims, an increase of only 4,000 from the previous week's revised figure of 367,000. To be charitable to the media, 371,000 was the figure headlined by the Bureau of Labor Statistics of the US Department of Labor when announcing the availability of its weekly report. But it is apparent that the media reported the data without reading the first page of the report. ...
It Is "Across-the-Board" and a Tax Increase; It Is NOT "Over-the-Cliff"
In 2011, Congress and President Obama could not agree on how to reduce the federal deficit. After much wrangling, Congress passed and Pres. Obama signed the Budget Control Act of 2011, which effectively “kicked the can down the road” and provided that it would become law on January 1, 2013. The phrase “over-the-cliff” has been popularized by the media, giving the impression that the proposal if allowed to become law would cause another recession. The media bought hook, line, and sinker the Keynesian nonsense of Federal Reserve Chairman Ben Bernanke that in the country’s current economic situation trying to balance the federal budget by reducing expenditures and raising taxes would plunge the economy into recession. It was he who first uttered the cliche, “over the cliff”.
The Act called for across-the-board cuts in federal government discretionary expenditures and for allowing the Bush and other tax cuts to expire. To Keynesian economists, cuts in government expenditures and raising taxes would slow the recovery and depress the economy. By this false reasoning, the federal debt can never be reduced. For the past four years, the federal government has been pursuing Keynesian policies, spending trillions of dollars on foolishness and the result has been massive unemployment and stifled growth and a national debt that is out of control. Millions are working part-time and other millions have dropped out of the labor force....
Obama Wants to Continue the Discredited Keynesian Policies of the Past
Congress, in a bill signed by Pres. Obama in 2011, called for sequestering expenditures and mandating that taxes return to the levels that existed before the Bush tax cut if the federal government does not take other steps to reduce the federal deficit. Dr. Bernanke, chairman of the Federal Reserve Board, because he subscribes to the discredited Keynesian policy of stimulating the economy by means of increased government expenditures, described the bill’s provisions, as “going over the cliff” if they were implemented because it would increase taxes and reduce expenditures and thereby force the economy into another recession. The media unanimously approved and popularized the metaphor.
The bill violates the Keynesian rule that to provide economic stimulus taxes should be lowered not increased and government expenditures should be increased and not reduced. The bill does both. It cuts expenditures and raises taxes. Pres. Obama has been pursuing Keyesian policies since his first inauguration with a notable lack of success. The recovery from the 2008 recession has been incorrectly described as the slowest recovery in our history. That is wrong. The recovery from the Great Depression was slower. The trouble is that Keynesian policies cause a decrease in private investment expenditures and an increase in investment is required for economic growth. Keynesian policies do not stimulate growth but actually impede growth because of their negative effect on private investment in plant and equipment....
Profiles of Courage on the Fiscal Cliff
In Requiem to an Improvident Generation I concluded three years ago "Vote for a Democrat who supports substantial and specific spending cuts or a Republican who takes a stand for real and sizable tax increases if you can find one. They are rare in this improvident land."
By this standard Republican representative Scott Rigell deserves note for his courage. Rigell has been unusual in the clarity with which he has called for a budget deal which addresses both revenue and spending. He deserves plaudits for facing the fiscal facts without resort to the dreamy fallacies that cutting taxes while cutting spending (Republicans) or increasing spending while increasing taxes on the rich (Democrats) will somehow lead to a balanced budget. He is behaving like a true fiscal conservative. Copied below is a letter Rigell sent to all House Republicans on December 12.
Rise in Initial Unemployment Claims Shows Lack of Economic Recovery
Unemployment sky-rocketed during the weeks preceding December 1, 2012 as the actual number of initial claims for unemployment compensation filed during the week ending December l, 200012 reached the astronomical figure, during a supposed economic recovery, of 498,619. As usual the media did not report the actual number of claims, but something they called the “seasonally adjusted” number of claims filed. I can think of no good reason for reporting the seasonally adjusted number of claims filed. Agricultural labor is seasonal; manufacturing items for sale at Christmas may be seasonal and falls in October and November; and retail trade, transport, and related activities rise in November and December. None of those are sufficient to account for the reported seasonaldecrease of 25,000 in initial unemployment claims in the week ending December 1 when the actual increase in claims was 139,000. ...
The Real Fiscal Cliff
Conrad Black published a piece today in National Review Online that insightfully chronicles the true and the phony fiscal cliffs. On the real cliff he writes:
But, as I among many others have recounted here and everywhere, economics in a sophisticated economy like that of the United States is half Psychology 101 and half Grade 3 arithmetic. But no one, including the learned debaters last week, at this point seems to have grasped that both tests will be flunked...
Approaching the Fiscal Cliff Intelligently
Ezra Klein published a good essay about the nature of the fiscal cliff, and the appropriate response to it last week. While one might disagree with him about certain of the numbers, and his analysis leaves out some key policy approaches that would likely add revenue while spurring growth (e.g. the scaled tariff) he focuses the analysis on the right problem (which is unusual) and attempts to establish metrics that will allow reasoned analysis of the best approaches.
As Klein properly notes, the Fiscal cliff is properly identified as an "austerity crisis". The problem with the "cliff" such as it is, is that it involves very rapid imposition of austerity in a way that has a significant potential to shock (or scare -- GDP numbers are looking weak for the fourth quarter) the economy back into recession. The basic concern about the fiscal cliff is one of too much austerity too fast. Detox without treatment of withdrawl symptoms can be extremely unpleasant. Going cold turkey on deficit spending...
Nonsense Proposals by Pres. Obama and the Republican Leaders Are Over-the-Cliff
The literate public must be very confused about the position of Pres. Obama whose solution to the federal budget deficit is to raise the marginal rates of personal income tax of those households whose income exceeds $250,000. They are no less confused about the position of the Republican leadership in the Congress whose solution to the public deficit is to eliminate some deductions in calculating income that they believe are unjustified, like the deduction of interest paid on home mortgages.
Economists on the left base their support of the President’s view on the fact that it would make the personal income tax more progressive. Economists on the right argue that higher progressivity would impede investment and prevent recovery from the depressed economy. Investors, they argue correctly, base their decision to invest on the expected returns after tax which is affected by the rates of tax on corporate income. What is the effect of elimination of the deduction on mortgage interest? The value of a house is equal to the value placed on its occupancy less real estate taxes, maintenance expenses and depreciation. The deductibility of interest paid on a possible mortgage is a benefit of owning the home. It has the same effect as a subsidy to home ownership; in fact, it is a subsidy to home ownership. Eliminating it would have the same effect as a rise in real estate taxes.
One may conclude that raising the rates of income tax on personal incomes over $250,000 will impede investment in all capital assets and delay recovery while elimination of the deduction of mortgage interest will diminish housing values and reduce the demand for new houses. Older houses will simply have less value and the burden will fall on the home-owner at the time the deduction is eliminated.
A needed real major tax reform without these major impediments to investment would be to integrate the corporate income tax and the personal income tax. The corporate income tax makes us uncompetitive in world markets and is a drag on economic growth and employment. The trade deficits to which the corporate income tax has contributed have caused the loss of millions of manufacturing jobs. ...
The Going Over-the-Cliff nonsense. What we need to do.
If the Budget Control Act of 2001 is allowed to take effect, we won’t be going over a cliff. There will be a rise in income taxes to its level ten years ago and a cut in expenditures to their level four years ago. These are the least we should do. The CBO estimates that the cut in expenditures would reduce federal spending by $103 billion and the rise in taxes would increase tax revenues by $399 billion. To put this in perspective, federal receipts were estimated for 2012 at $2,627 billion; outlays, $3,729 billion, and the budget deficit, $1,101 billion. So the reduced spending is only 2.8 percent of 2012 spending and increased tax receipts 15.2 percent of 2012 revenues. To avoid taxing the “middle class”, Pres, Obama would impose a tax increase only on those with incomes over $250,000. Republicans would not increase taxes at all. These would decrease the rate of increase in the debt hardly at all.
The CBO’s prediction that Pres. Obama’s 2009 $800 billion economic stimulus plan would reduce unemployment to 6.5 percent was wrong. So is their prediction that letting the Budget Control Act take effect would raise the unemployment rate to 9.1 percent. Instead of increasing unemployment it would reduce unemployment. It would restore somewhat investor confidence that the government will gain control over its wildly out-of–control budget. ...
CBO is Wrong about the fiscal cliff. House Republicans should Stand Strong.
In 2013, when the "fiscal cliff" kicks in (i.e., the end of the Bush tax cuts and the implementation of the Budget Control Act of 2011), the new fiscal responsibility would move the federal budget toward balance. But the incompetent economists at the Congressional Budget Office (CBO) are trying to panic the House Republicans into abandoning fiscal responsibility.
In an incorrect November 8 report (Economic Effects of Policies Contributing to Fiscal Tightening in 2013), the CBO mistakenly claimed that fiscal responsibility (popularly misnamed the "fiscal cliff") would cause unemployment to spike to 9.1% by the fourth quarter of 2013, specifically:
Have they learned no economics from recent history? Don't they understand yet why the stimulus that Congress passed in February 2008 failed? Don't they yet understand why Obama's Recovery Plan of 2009 failed? Unemployment has been declining due to declining wages, not due to government stimuli. That's why the work force participation rate is declining at the same time that the unemployment rate declines.
As my father, son and I have pointed out through worldwide economic statistics, economic stimuli don't much reduce unemployment in trade deficit countries. That's because the stimulus leaks out as a higher trade deficit. Similarly, fiscal responsibility doesn't hurt. Its effects are softened by a lower trade deficit. The resulting unemployment increase would mostly occur abroad, not in the United States.
The real fiscal cliff would be much worse....
Employment Data Show No Economic Growth
On November 2, 2012, the US Department of Labor issued its weekly employment report, the results of sampling households and establishments during the previous week. The household survey, reported that total non-farm employment increased by 171,000 during the month of October, which the Obama campaign and the media widely interpreted as an indication that the economy was growing. According to the BLS, the establishment survey employment series has a smaller margin of error than the household survey because of the difference in their sample sizes. An employment change of about 100,000 is statistically significant in the establishment survey, while the threshold for a statistically significant change in the household survey is about 400,000. The problem is that the media failed to report that in August, 2012, two month’s earlier, the increase was 192,000 and fell in September to 148,000. This does not mean that the data are unreliable, only that it is not convincing that there is growth.
The household survey shows that unemployment increased last month from 7.8 to 7.9 percent. It shows that 12.3 million are unemployed, that 23.7 percent of teenagers seeking work cannot find employment, that 14.3 percent of blacks and 10 percent of Hispanics seeking work are unemployed, but only 4.9 percent of Asians seeking work are unemployed. Is unemployment a cultural phenomenon?
The establishment survey shows that the average number of hours worked per week was 34.4 and that the average earnings per week was $96. Total nonfarm payroll employment increased by 171,000 in October. Employment growth has averaged 157,000 per month thus far in 2012, about the same as the average monthly gain of 153,000 in 2011.
What the data do show is that the economy is stagnating. They do not show that we are on the way to economic recovery. As the BLS employment report itself states, “Total nonfarm payroll employment increased by 171,000 in October. Employment growth averaged 157,000 per month thus far in 2012, about the same as the average monthly gain of 153,000 in 2011....
Environmental Fanatics and Governments That Do Their Bidding Are Preventing Economic Recovery
Government subsidies to “green” energy financed by government borrowing may be the principal cause of the economic crisis gripping the Eurozone and the world. According to a Forbes story, based on a United Nation’s report, global investment in renewable energy reached $257 billion in 2011. China was responsible for almost one-fifth of total global investment, spending $52 billion on renewable energy last year. The United States was close behind with investments of $51 billion, Germany, Italy and India rounded out the list of the top five countries. In 2011, solar led the way as far as global investment in renewable energy, with investment surging to $147 billion, a year-on-year increase of 52 percent, due to strong demand for rooftop photovoltaic installations in Germany, Italy, China and Britain. Large-scale solar thermal installations in Spain and the United States also contributed to growth during the year. Wind power investment slipped 12 percent to $84 billion as a result of uncertainty about energy policy in Europe and fewer new installations in China, according to the report.
Spain was forced to end its subsidies to “green” energy last year because the subsidies brought Spain to the brink of bankruptcy and created few jobs. Unemployment in Spain is over 20%. Its trade deficit grew and the government was running out of euros. Prof. Gabriel Calzada, an economics professor at King Juan Carlos University in Madrid, concluded that 2.2 jobs are lost for each permanent job "created" by wind and solar plants. The professor believes that subsidizing renewable energy in the U.S. may likewise be destroying two jobs for every one created and he testified to that effect before a U.S. congressional committee. He repeated his findings in a recent interview with Ed Lasky, editor of the blog American Thinker. ...
On Thursday, the Labor Department posted phony numbers for the weekly jobless claims report. In response, the stock market went up. But Ray wasn't fooled. (See his last posting.)
After the release of the report, a Labor Department economist told Dow Jones that an entire state's renewal numbers had been left out of the report without any mention within the report. Here's a selection from a CNBC article (Why Jobless Claims May Not Be as Good as Market Thinks):...
U.S. Department of Labor Reports Implausible Employment Data
Evidence that the U.S. Bureau of Labor Statistics of the Department of Labor may be fudging the data to help
Pres. Obama recover from the beating he took in the first debate between him and challenger Gov. Romney is
the latest report on unemployment insurance claims during the week ending October 6, 2012. It reported that
the number of claims seasonally adjusted decreased by 30,000 and this was the number that CNBC reported
and which all the media will report. The BLS also reported the actual number of claims filed, the unadjusted
data, and it showed an increase of 25,990. I know of no statistical process that could produce such a
difference given the fact that both adjusted and unadjusted data in the weeks preceding were close to
one another and heading in the same direction. ...
The Shrinking Labor Force – More Important Than 7.8% Unemployment
Many economists have been confused by the seeming disconnect between the jobs numbers and the unemployment rate in recent reports by the Bureau of Labor Statistics (BLS). But there is a simple explanation. People are leaving the labor force in droves. Although the “sexy” figure in Friday’s unemployment report was a decline in the unemployment rate from 8.1% to 7.8%, the more significant number was the decline in the labor force by an enormous 211,000.
But the 211,000 decline in September was paltry compared to the 1,777,000 people who left the labor force in January, according to BLS statistics. At that time, former Reagan budget director David Stockman suggested that we might be experiencing "The Economists' Truman Show." (To find this December-to-January adjustment in the January BLS press release, check out Table C.)
Some observers have even thought that the BLS might be classifying unemployed workers as “out of the labor force,” in order to reduce the unemployment rate. After all, if an unemployed person has not looked for work within the last four weeks, he is no longer part of the labor force, and thus no longer classified as unemployed.
Conservative radio show host Rush Limbaugh incorrectly predicted, months ago, that the Obama administration would produce a 7.9% unemployment rate in time to influence the election. He was wrong: they produced a 7.8% rate....
Free Trade With China? No, Fair Trade. No Artificial Barriers to Trade
In an editorial entitled “Romney’s Trade Pessimism”, the Wall Street Journal 9/15/2012 criticized Gov. Romney for publishing an ad attacking Pres. Obama for the latter’s failure to deal with our trade deficit with China. In the last twenty years, the U.S. trade deficit in goods and services increased from $39 billion in 1992 to $506 billion in 2011. Our deficit with China in 2011accounted for $280 billion, more than half, costing about 2.8 million jobs. Allowing such a huge deficit to continue is a disservice to the American worker.
Free trade is a policy that assumes that the trading partners are not imposing artificial barriers to imports or subsidies to exports. Thanks to our constitution, there is no barrier to the free movement of goods among the states, the essential condition for an enduring policy of free trade. Free trade advocates often argue that if our trading partner is foolish enough to exchange its goods for our “paper”, why should we complain? The basis for such a statement is that at some time in the future, the debt will have to be repaid and we shall have to have a trade surplus to do it. But with China setting the official value of its currency and employing other mercantilist practices such as tariffs, there are no market forces to produce such a turnaround. In the meantime, the trade surplus country experiences a stimulus to growth in GDP and employment while the trade deficit country experiences a drag on GDP and employment. If one looks at the GDP accounts, one can see why. An excess of imports over exports detracts from GDP while a surplus adds to GDP. In other words, a trade deficit means we are losing jobs. ...
Investors Should Keep an Eye on Initial Unemployment Insurance Claims Data
On Thursday of each week, the U.S. Bureau of Labor Statistics reports the number of initial claims for unemployment insurance filed during the preceding week. On September 20, it made its report for the week ending September 15. It reports seasonally adjusted and non-seasonally adjusted numbers. The media reported only the seasonally adjusted initial claims for the week ending September 15. They reported that the number of weekly claims was 382,000, a decrease of 3,000 from the previous week’s revised figure. The report states that the actual, not seasonally number of claims to be 327,797 an increase of 28,068 over the previous week. It is not unusual for the seasonally adjusted figures to differ in direction, an increase or decrease, and the unadjusted figure to show the opposite. The media do a disservice by reporting the seasonally adjusted figures only. Since they are reported weekly while most economic data is reported monthly or quarterly, the unemployment compensation claims data is useful in predicting where the economy is heading. ...
Getting the Fiscal Cliff Backwards
There was extensive media coverage of a recent Moody's warning concerning U.S. government debt ratings (issued September 11th) but most of it reflects a fundamental misunderstanding of the shape of the fiscal cliff, and of the nature of Moody's warning.
For example, NPR stated
Today, Moody's sounded one more alarm saying if Congress remains in a stalemate, it would downgrade the U.S. credit rating from a AAA to a AA1.
In fact Moody's actually said that going off the fiscal cliff is a second-best way to save the triple A bond rating.
If you believe the debt matters a lot, then going off the fiscal cliff is the most politically feasible way to solve the problem. Instead of a deal being needed, all that is required is for Congress and the President to do nothing...
Manufacturing Declines Continue
The newest Institute for Supply Management survey shows continued contraction in the manufacturing sector. For more see the Reuters story: http://www.reuters.com/article/2012/09/04/us-usa-economy-manufacturing-idUSBRE8830MA20120904.
The End of the Housing Bubble
The United States real estate bubble is dead at last. In the first quarter of 2012 the quarterly inflation-adjusted Case-Shiller index dipped to 113, a level it had not held since 1998 at the very beginning of the housing bubble. What this means is that nearly the entirety of the bubble gains in housing value have now been squeezed out of housing prices. This is cause for some modest celebration. The market for housing is no longer dangerously and dramatically out of balance.
How the Federal Reserve Under Greenspan and Bernanke Caused the Housing Bubble and the Recession
Every administration from Jimmie Carter to GW Bush contributed to the housing bubble and the recession that followed its collapse. So did every Chairman of the Federal Reserve Board particularly Chairmen Greenspan and Bernanke. They were responsible for the housing bubble that caused the long-lasting recession when it burst. As we have noted on this site more than once, their support of the Community Reinvestment Act of 1977 was the principal cause of the housing bubble and the recession that followed when the bubble burst. Greenspan by his policy of low interest rates and both by their administration of the CRA.
CRA examinations are conducted by the Fed, the Fewderal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Office of Thrift Supervision. But the Fed is clearly the dominant administrator. The law does not require the banks to make high-risk loans and in fact recites that they should require banks to make loans in a safe and sound manner. As the number of subprime loans and the number of defaults and foreclosures clearly show, the supervisory institutions actually condoned making loans that violated customary good banking practices. ...
The CRA was based on a widely believed myth that banks were denying blacks mortgage loans because of their race. There was no evidence of that. It was a conclusion drawn from the fact that fewer mortgage loans were being made in poor neighborhoods where in fact there were a smaller percentage of qualified borrowers than in richer neighborhoods. The relaxed standards that followed for making loans resulted in a huge number of subprime mortgages and encouraged speculation in building houses that caused the housing bubble. When the bubble burst, it caused a world-wide financial crisis and ushered in the recession. An unintended consequence was that it made communist and other left-wing organizations like ACORN rich by enabling them to blackmail banks and force the banks to hire them as mortgage agents. ...
Again! Failure of the Media to Report Actual Claims for Unemployment Insurance
If you were watching CNBC this morning, Thursday, July 12, 2012, you heard the “great news” that the number of initial unemployment unemployment insurance claims decreased during the week ending July 7, to 350,000 from the previous week’s revised figure of 376,000. While the US Bureau of Labor Statistics was circumspect in calling the number “the advance figure for seasonally adjusted” initial claims, none of the commentators did. The BLS is also circumspect by also reporting “the advance number of actual claims” which totaled 439,743 during the same week, an increase of 69,971 from the previous week....
Obama's Economic Stimulus Plans Are Actually Retarding Recovery
Obama’s economic stimulus plan, the American Recovery and Reinvestment Act of 2009, actually retarded the recovery rather than stimulated it. The subsidies to alternative energy sources were counter-productive, increasing the federal budget deficit and increasing the cost of electricity to households and businesses, thus making a negative contribution to recovery. The so-called “Tax benefits” which amounted to nearly $300 billion to date allowed states, schools, municipalities, individuals and businesses to deleverage, to pay off some of their debts but made no contribution to employment. It may have saved the jobs of public employees – teachers, firemen, and police – which saved jobs but contributed nothing to recovery. As Prof. Tower of Stanford University notes in testimony before the Congress. when you look at what state and local governments did with the funds, you find that they did not increase purchases of goods and services or increase infrastructure projects. To date, the ARRA spent $226 billion on entitlements with no evident increase in consumption, and $234 billion on “contracts, grants, and loans”, including insulating house and factories, payments for “junkers”, and subsidies for hybid cars and electric vehicles, and alternative energy.
The administration claims that it created millions of jobs but counted the jobs created by other programs. The budget deficits in 2009, 2010, and 2011 ranged from $1.5 to $1.2 trillion which must have created some jobs, not to count the billions in tax credits to alternative energy projects and guarantees of loans to companies in alternative energy businesses. It includes the jobs created by the increase in bank loans made possible by TARP. The budget deficits and the stimulus expenditures worsened our trade deficits causing millions of jobs to be outsourced to China and others.
The jobs created by all debt financed expenditures were anemic. Although the official rate of unemployment is 8.2%, there are millions employed part-time and millions who have left the labor force. New jobs cannot even keep up to the number of new entrants to the labor force each month.
Very little of the ARRA expenditures were made by the federal government itself. The amount allocated to infrastructure investment was trivial. It was the basis of one of Pres. Obama’s jokes, while holding a shovel at a ground-breaking ceremony that next time we ought to really have shovel-ready infrastructure projects. ...
Europe Is Committing Economic Suicide and So Is the United States
On Monday, June 4, 2012, we posted an article entitled The Undiscussed Measures That Would Result in an Economic Boom. We identified the loss of millions of jobs as a result of our trade deficits and environmental policies. These foolish policies are being ignored by economists, by the federal government, and by the media. Recovery would be speedy and strong if we balanced our foreign trade and ended the enormous subsidies to wind, solar, and biofuel energy. Imagine my pleasant surprise when two days later on Wednesday, June 6, theWall Street Journal published an article by Rael Jean Isaac, entitled “Europe’s Green Energy Suicide”, in which she writes, “Unless Europe radically rethinks its obsession with carbon-dioxide emissions and the anti-fossil fuel energy policies that flow from it, growth is likely to remain elusive.” My point exactly and I was referring to the United States. ...
Distinguished Economist Attacks Free Trade as Bankrupting the U.S.
One of the most creative people writing about international trade, is Professor Ralph Gomory. The book on comparative advantage that he wrote with Prof. William Baumol (Gomory, R. E., and W. J. Baumol, Global Trade and Conflicting National Interest, Cambridge,Massachusetts: MIT Press, 2000) is a modern economic classic. On May 22, 2012, he wrote in the Huffington Post (Mercantilism, Manufacturing, and a Political Problem):
He asks what can we do to induce American companies to produce their products in the U.S.?
Eurozone experiment proves that imbalanced trade leads to disaster
The 13-year-old Eurozone experiment gave the world a laboratory in which to test the theory that free trade leads to prosperity. The results of the experiment prove, instead, that free trade, when imbalanced, leads to disaster.
The common perception is that the Eurozone crisis is due to the huge national debts of the Southern European countries. Although government debt is clearly part of the problem, it is not the only part or even the main part. The following graph shows the weak relationship between national debt (government debt divided by GDP) and unemployment rates.
Although Greece, the worst off of the Eurozone countries, has a huge government debt at 165% of its GDP, Spain and Portugal are close to bankruptcy even though Spain’s government debt is a modest 69% of GDP and Portugal’s government debt is just 108%. Both Germany (81% of GDP) and Belgium (98% of GDP) have similar government debt levels, but no crisis whatsoever, since they have trade surpluses....
Wasting a Trillion Dollars to "Prevent" Global Warming Is Stifling Economic Recovery
Last March 29, 2012, the President of the United States told two untruths when he called on the Congress to end taxpayer giveaways to the oil industry and instead to double-down on investments in clean energy industries “that have never been more promising”.
The first untruth is that we have been giving special benefits to the oil industry. That would only be true if one includes the industry’s “social costs”, the costs of pollution from emissions from the burning of fossil fuels, but not if you also include the “social benefits” which environmental extremists always ignore. Indeed, the “social costs” have not been very costly while the “social benefits” have been enormous. The alleged social costs include health effects while the evidence is clear that we are living longer healthier lives. The industrial revolution which raised living standards throughout the world was made possible by plentiful and cheap fossil fuels.
The huge expenditures and costs placed on households and businesses by the government (EPA et al) and so-called clean air laws have had no measurable effect on climate change. Indeed, a growing number of physicists, geologists, archeologists¸ and other climate change scientists reject the “undeniable” anthropogenic or man-made global warming (AGW) theory and argue that natural forces, especially the sun’s magnetic disturbances and their effect on the amount of cosmic rays reaching the earth, are more likely the major cause of climate change. An experiment is under way at CERN, the world’s foremost nuclear laboratory to test that hypothesis. The world is spending trillions of dollars on the basis of unproven AGW theory.
The second untruth is that investments in clean energy industries “have never been more promising.” The truth is that neither wind nor solar will be economical for decades if not a century or more. Neither is reliable and both need to have back-up generating facilities and neither is competitive with nuclear, natural gas, coal, and water power. The President mentioned algae as a source and even the Obama-supporting press laughed at that. All the alternative so-called renewable sources have serious social costs. Wind mills are noisy and are destructive to birds and solar is more expensive and requires huge amounts of acreage. Their growth is limited in any case and both are inherently unreliable. They will always require government subsidies and will never pay their own way. The evidence is clear that so-called renewable energy plants, wind and solar, are unsustainable. The fact is that every wind and solar plant has needed subsidies equal to or greater than half its cost. ...
Pres. Obama Appoints Non-Economists to Key Economic Positions
Pres. Obama’s latest appointment, last week, of a non-economist as head of the World Bank suggests that he disdains economists. Jim Yong Kim, , currently Dartmouth’s president, was formerly the Chair of the Department of Global Health and Social Medicine at Harvard Medical School, and was a co-founder and executive director of Partners in Health. All preceding appointments to head the World Bank were economists.
Pres. Obama’s first Chairman of his Council of Economic Advisers was Prof. Christina Romer, a Professor of Economics at the University of California at Berkeley. Prior to Pres. Obama’s inauguration, Romer worked with Jared Bernstein on the administration's economic stimulus plan for recovery from the 2008 recession. As a Keynesian, it apparently did not matter to Romer what the money would be spent on; it would stimulate the economy.
When she resigned as chair of the CEA to return to academia, she stated in a speech at the National Press Club that more stimulus was needed. She should have said that more ineffective stimulus was needed! (See below.) The first evidence of the non-existence of the Keynesian multiplier was the downturn in the economy between 1936 and 1937 which occurred as soon as the Roosevelt administration reduced expenditures in preparation for the 1936 election. Additional evidence is very recent. When Recovery Act expenditures moderated in 2010, the temporary increase in employment diminished.
The real architect of the Recovery Act of 2009 appears to have been Jared Bernstein who had no economics degree at all....
Bernanke needs to get with the program
Today, Federal Reserve chairman Ben Bernanke told the House Financial Services Committee that the rapidly falling unemployment rate reported this past year by the Bureau of Labor Statistics does not fit with the other data he has been seeing. He said:
Bernanke is showing a lot of common sense here. Although he has not looked carefully at the BLS data, he realizes that something is fishy. Former Reagan budget director David Stockman calls the manipulations of the data by the Bureau of Labor Statistics (BLS) and the Bureau of Economic Analysis (BEA) "The Economists' Truman Show."
For example, the unemployment rate fell in January partly because the Bureau of Labor Statistics (BLS) reclassified 1.177 million people who might otherwise have been considered as unemployed as having dropped out of the labor force. (To find this December-to-January adjustment in the BLS press release, check out Table C.)
Bernanke probably looked carefully at the GDP numbers just released this morning. The headlines trumpeted the increase in real GDP in the fourth quarter at an annual rate of 3.0%, but a closer examination reveals that real GDP would only have grown by a minute annual rate of 1.3% if not for inventories growing at a 1.7% of GDP clip. The following table shows the contributors to GDP growth during each quarter of the past year....
Rules vs. Authorities -- Listen to Ray's Feb. 18 radio interview
Follow the following link to hear a February 18 interview with Ray Richman on the Ron Morris' American Entrepreneur radio show.
The discussion of rules vs. authorities was especially interesting. The monetarists at the University of Chicago, where Ray got his doctorate, believed that the government should be bound by rules. Instead, we have Federal agencies making up the rules as they go along. These agencies are using their authority to discourage investments in the American economy. Follow the following link to download the mp3 of this segment of the show:
David Stockman: The statistics coming out of the BLS and BEA are "The Economists' Truman Show"
Writing in the Wall Street Examiner on February 5, Bruce Krasting and David Stockman (President Reagan's budget director) discussed the sudden fall in the labor force participation rate reported by the Bureau of Labor Statistics (BLS) in January. A full 1.177 million people who might otherwise have been considered as unemployed were reclassified as having dropped out of the labor force in a single month.
The BLS is not trying to hide their sudden change in the labor force participation rate, they discuss it in a table at the bottom of their press release. But with the exception of the business press, the mainstream press publishes the headline data that the BEA puts at the top of the press release and they ignore the rest.
Stockman calls the statistics coming out of the BLS and BEA (Bureau of Economic Analysis), "the economists' Truman Show." He writes:
Jobs gain in January partly due to warm winter in U.S.
President Obama received some good news when the January jobs and unemployment numbers came in better than economists expected. But the numbers were not nearly as good as they seemed. They were largely the result of an incorrect seasonal adjustment. Action Forex, a weekly Internet publication of Wells Fargo, makes this point:
Still, Wells Fargo sees these jobs numbers as a positive sign. They write:...
Initial Unemployment Compensation Claims Exceeded 400,000 Week Ending January 28, 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
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:
What could the U.S. government do? He writes:
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:....
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
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?
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"
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
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
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
There are two key trends that the press isn't reporting these days:
But here is how Bernanke describes it:
Bernanke: China's currency policy is causing the slow growth in the advanced industrial countries
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:
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
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
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. ...
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.
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. ...
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
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?
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
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
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?
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
Prof. Boudreaux's Simplistic Ideology of Free Trade
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
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?
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?
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
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
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 Unanticipated Costs of the Wars In Iraq, Afghanistan, and Libya
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
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
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
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
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
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.
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.
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:
Rand Paul: We need to cut spending. The American dream is at stake.
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.
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
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:
Why Obama's $8billion Recovery Act Did Not Stimulate the Economy
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
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
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
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?
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
Yesterday, we suggested some measures that would promote a quick recovery. These included:
There are other things we could do to stimulate business investment in the U.S.
A Quick Economic Recovery With Jobs, Jobs, Jobs
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) : ...
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
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?
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:
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
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
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
Follow the following link to read the rest:
With No Program for Economic Recovery, the Republlicans Will Lose in 2012
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
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.
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
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
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:
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
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
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
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
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!
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
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
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
(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
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:
Boeckh fears that U.S. policy makers choose his "third option":...
Reducing the Trade Deficits Is Essential for Economic Recovery
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:
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
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
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
Here's how we begin:
We then discuss the Obama administration's mistakes and present our Scaled Tariff plan. We conclude:
Krugman: G-20 summit will continue the depression
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:
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
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
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
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.
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
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
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....
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
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.
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
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
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. ...
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
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
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
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
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:
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
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
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
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.
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
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
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
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
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
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
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:
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?
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
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:
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
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
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
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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