Tag Archive for recession

Come Fly With Me

I know an old woman who swallowed a fly . . .

The silly song from decades gone by has some relevance today. The American populace in general seems ready to hitch the wagon of their fortunes to the marauding savages. While I wonder how the cavalry might try to handle that, if they are able to come to the rescue later, it is more germane to divine and define where we sit first.

Some derisively sneer and laugh at the call by the Business Cycle Dating Committee of the National Bureau of Economic Research. This august group, which has tracked, monitored, and back-tested every economic downturn in the USA since 1929, now says the big recession is over. What that means is that a period of diminishing activity came to a close in mid-2009. It does not mean that diminished activity was removed from our economy or our consciousness. With all the talk here and overseas about “austerity,” we need to realize and understand that such a practice in the near term would act like a rock tied to the neck of a drowning animal.

Austerity per se is a good thing. But its application to a severely weakened economy simply means two things: a halt to investment (there has actually been some lately), and deflation. I didn’t make that up; Paul McCulley of PIMCO, about the world’s biggest manager of bond money, said it. Ask grandma if deflation was a good thing. It was prevalent from 1930 until 1940. Back then the economy hit bottom the month FDR took office; the stock market failed to regain its summer 1929 level until the 1950s.

She swallowed the spider to catch the fly . . . I think she’ll die.

Investment, too, can be a good thing. Except when it’s overdone. The tech bubble that ended in 2001 is one example; we were all going to be rich; remember? And the Internet was going to stir our coffee, fix our teeth, and mine copper. As recently as 2007 the mountains of money searching for yield and piling into subprime and other mortgages proved the adage, Excess profits lead to ruinous competition. Moreover, high overcapacity is a huge disincentive to capital expenditures. Whence overcapacity? Low demand. What is the source of low demand? Not government largesse, which largely passes to corporations and executives, but rather persistent unemployment among the rest of us.

Reducing the deficit just now will withdraw most of the little buying power – both direct and indirect — out there. The indirect is doubly important, for the reality of economic multipliers works in both directions. What these mean is that every job has other jobs depending on it. See how many people buy cars when they are out of work. GM and Ford feel their pain. Since 2008 fifty large U.S. businesses have each directly destroyed (remember the multiplier!) more than 3,000 jobs. The CEOs of those firms took home 42% more pay on average than did the average S&P 500 company.

A stimulus-induced recovery is meaningless until the private sector joins the party. If American firms are trying to make a statement or sway the midterm election by failing to hire, then we really have entered a new era. Corporate CEOs seem willing to kill the rest of the economy to save their golden geese.

The Congressional Budget Office, which serves both GOP-controlled and Democrat-controlled legislatures, says tax cuts are the least effective of all the ways to goose the economy. Worries about the federal government somehow “crowding out” private investment or inducing markedly higher interest rates are likely misplaced. Interest rates are determined by economic growth and the demand for money, not government borrowing (per Frank James, Ph.D., another investment adviser). We should remember that government securities (bonds, usually) are assets of the private or foreign sector. Who knows? Austerity advocates might start a conflagration that consumes their own houses! In 2009 federal government revenue showed the largest drop since 1932. Once again, that era would not be worth repeating.

It’s useful to recall that the Conference Board’s Consumer Confidence Index, released monthly, rose steadily from roughly 60 to about 140 between 1993 and 2000. In 2009 it stood at 57 or so and was never higher than 107 after 2001. Many so-called conservatives aim to derail national health-care reform. There’s a topic for a dissertation. To be blunt, we will find it necessary even without the reform to raise taxes for things like Medicare, or we will face health-care rationing. You might want to explain this to your sixty-something cousins as you drive them to the post office to mail their ballots.

She swallowed the dog to catch the cat; she swallowed the cat to catch the mouse . . .

The GOP and its Tea Pot Dome allies should be very careful. Some want to do away with Social Security. No kidding? Social Security taxes have subsidized tax cuts for 25 years. I assume these misguided pols and their well-heeled supporters prefer the artificially low long-term interest rates of the last decade. Part of the cause for those was a global savings glut, itself a consequence of America’s large trade deficit (Scott Brown, Ph.D.). Could one factor leading to our large and persistent trade deficit be the manic off-shoring of American jobs? To me an import is an import, even if it comes from a factory owned by GE or Dell.

Go ahead, folks; vote the tornado back into the cellar. If you do, you can expect to soon hear proposals from Rep. Paul Ryan (R-WI) making the rounds. He would cut in half the tax bite of the richest one per cent of Americans, in addition to the benefit from extending the Bush tax cuts. To pay for these, the incomes of Americans pulling down $20,000 to $200,000 would see tax increases (sources: Center on Budget and Policy Priorities and personal communication with Rep. Ryan’s office). And this is just the federal case.

I get my tires remounted and balanced by a firm fifty miles from home. Why? Because they use plastic tools; therefore, the wheels don’t get scratched. When the concern found its business volume dropping off in 2008 it had to raise its prices in an effort to maintain revenues. I was happy to meet their new pricing; their service is of value to me. Why is it okay for a business to do something like this, but it is not okay for a state government hamstrung by Doug Bruce and his blind army? Everyone who thinks state and local governments in these parts find fewer real needs facing them, raise your hand. Everyone who thinks asphalt or printers or gasoline bought by state or local government does not go up, or has not gone up in price, hold up your other hand. Measures on this fall’s statewide ballot would require government to “pay as you go.” How that’s done in an inflationary environment I can’t guess. Saving for a rainy day that gets cloudier each year is bound to get ugly.

So deflation, or inflation; which will it be? No matter which, I can assure any reader he or she is not going to like it. And shrinking services are the probable result, if certain self-styled reformers attempting to capitalize on the pain of 99% of America have their way. Under a “Teapot” regime there will be fewer public services. Like your local public library. You might want to attend its closing party. And be sure to carry a shovel and your own oil heater, to patch the pavement on the way to your Aunt Harriet’s. And you might want to quit your job so you have time to home-school your kids. Your spouse is pulling down $125 grand; right? No problem, then.

We should hope that the daredevil sharpshooter aiming his pistol over his shoulder in a mirror not only misses the sweet young assistant bound in feathers, but also does not shoot himself. If the GTP-Dome wants to shoot itself in the foot, please warn me. I’d like to get a pair of Brazilian steel-toed boots on first.

I know an old woman who swallowed a horse . . . She died of course.

Rescued against all odds

Some people toss terms like snowballs – terms such as “socialism” and names of political parties, etc. I’m not a member of the latter or an advocate of the former, per se. But it’s a shame that misinformation and angry rhetoric make reasoned debate impossible.

Start with taxation. Income taxes are marginal – that is, only the income between amount x and amount y is taxable at a certain rate z. That income above $374,000 a year is today subject to the top rate. The top 1 percent of income earners in the U.S. paid an average federal tax rate of 19 percent in 2007 (2008 data are not yet available). The top 5 percent paid an average of less than 18 percent.

There cannot have been much “socialism” around lately if U.S. corporations were able to amass more than $1.8 trillion – a mountain – in cash. That’s a lot of Ford trucks.

A few years ago, Sweden suffered what would today seem to us a minor economic setback. Its socialistic system quickly righted the ship, and now that country faces far fewer challenges than we do. Norway displays extensive government economic planning based on welfare capitalism. The Norwegians boast the highest GDP per capita on the planet.

What of the dark side? Lacking stimulus, Ireland’s economy contracted last year by 7.1 percent. The Irish, by the way, significantly reduced their corporate tax rate in the late 1990s. Here in the U.S., private-sector wage income shrank last year by about 5 percent. Since early 2008, the dollar loss exceeds $300 billion. That’s also a lot of Ford trucks.

Since New Year’s Eve, American business has added a net of only about 200,000 jobs. The federal stimulus is the reason firms are back on their feet. Europe was more tentative with stimulus, a big reason why that region is in worse shape today. In short, the folly of opposition to relief efforts such as extension of unemployment benefits is like throwing a cigar butt instead of a life preserver to a drowning man. Unemployment is quite corrosive. There is peril in allowing creation of a stratified society.

Venture capitalists today structure their business plans with a specification regarding maximum and most speedy transfer of jobs from a young enterprise to China. There’s loyalty for you.

It is clear to most economists today that lingering corporate refusal to hire poses a significant risk to the onset of a sustainable recovery. Talk about a self-fulfilling prophecy. Business has a responsibility to maintain the industrial base and the society whose stability we may have taken for granted. Who said that? Former Intel CEO Andy Grove.

No less prominent Republicans than Richard Cheney and Ronald Reagan asserted (one in word, the other in deed) that “deficits don’t matter. ” Without significant changes to the tax code, revenues cannot deliver a balanced budget. Weak revenues are the largest cause of the deficit – federal tax receipts in the first quarter amounted to 15.76 percent of (a reduced) GDP, while the average since 1947 is 18.04 percent. We grew a lot since 1947. To rapidly reduce deficits at this point would mean flirting with a severe economic decline that looks “downright frightening.” I didn’t make this up; the writer is Jeremy Grantham, one of the most respected money managers on the planet. It is essential for everyone to comprehend that the only significant contributions to positive economic indicators (and there still are some) have since early last year been reflective of government efforts to shore up the economy.

What would some rather have? Depending on the discretion of that 1 percent to dole out a little largesse now and then? I don’t know about you, but slavery has never appealed much to me.

The U .N.’s Human Development Report of June 8 tells us the United States is “better” than Turkmenistan in terms of income inequality, but 76 countries place ahead of us. Perhaps now we can all see what’s behind all the talk about deficits and socialism. The well-off among us should recruit workers, not word warriors.

Gregory Iwan retired to Longmont in 2007. Mercifully, only about one-fourth of his career was spent as an economist.