Stimulus Plan: The Need and the Size
The core problem we face is not access to capital. The Treasury has already flooded Wall Street and the banking system with money, committing nearly $350 billion; the Federal Reserve Board has exchanged Treasury bills for some $2.2 trillion of troubled assets; other agencies, such as the FDIC, have guaranteed trillions more. But there has been no appreciable result. Banks will not lend because they fear borrowers will not repay; businesses will not borrow because they do not have adequate markets for their goods and services; individuals cannot and will not borrow because they do not have enough reliable income to do so.
The core problem lies on the demand side. American consumers, whose purchases represent 70 percent of the economy, do not have the purchasing power to maintain overall demand for American goods and services. Businesses will not invest unless consumers are able to buy. Exports cannot possibly fill the gap. Inadequate demand is forcing the private sector to lay off large numbers of workers, which, in turn, is further reducing the buying power of consumers. In 2008, 1.9 million jobs vanished -- the biggest drop in non-farm payrolls in thirty-four years. We are caught in a vicious cycle.
As the buyer of last resort, the federal government must respond if that cycle is to be reversed. In my judgment, this will require a stimulus of about 6 and a half percent of gross domestic product, or a total of some $900 billion, spread over two years. That’s my estimate for the shortfall in private demand. But the federal government should stand ready to spend larger sums if necessary to get the economy back on track toward full capacity. The danger is not that the government will do too much; the danger is that it will do too little, too late.
Without such action, I estimate that another 3 million jobs will be lost in 2009, unemployment will rise to 10 percent of the workforce by the end of this year, and under-employment – including people working part-time who would rather be working full time, and those too discouraged even to look for work – will reach 15 percent. Without federal action, next year could be even worse.
People often ask where the money for the stimulus will come from. The answer is the same places from which the Federal Reserve and the Treasury have financed their far larger attempt to rescue the financial system. The bulk of the money will have to be borrowed from abroad, largely from China and Japan. This is less than ideal, but failure to adequately stimulate the U.S. economy, resulting in years of economic stagnation, would be far worse – both for us and for the rest of the world. Moreover, our current ratio of debt to gross domestic product is still below 50 percent, not substantially higher than that of most other industrialized nations. In 1946, our debt to GDP ratio was over 100 percent. Most of the declines in our debt-GDP ratio over the years have been achieved through higher levels of economic growth rather than through less debt. The sooner we return to growth, the better able we will be to reduce this ratio.
No stimulus can fully succeed if millions of American families continue to lose their homes through foreclosure. Housing markets will continue to decline, people cannot move to take new jobs, and industries such as construction and retail services will continue to shed jobs.
Mortgage mitigation efforts to date have failed largely because investors won’t agree to take their losses on bad investments. In my view, the answer is to enable families to write down their home mortgages in bankruptcy – just the way businesses can do with commercial property and people can do with vacation homes and investment properties. This change in bankruptcy law should be part of the stimulus plan.
Overall, the federal government’s responsibility for restoring aggregate demand is at least as great – arguably, far greater – than its responsibility for rescuing the financial system and helping U.S. automakers restructure. Without adequate demand, credit markets will continue to be frozen and major American industries will languish. Yet there is no ready formula for how the federal government should proceed because we have not been here before.
This largest and most serious economic downturn in more than sixty years will require both a willingness to try new policies and to change course if those policies appear to be ineffective relative to their costs. The danger is not that the federal government will do too much but, rather, that it will do too little.
Whatever is contained in the stimulus plan must also be clear and transparent, so that the public can know and understand what is being tried. Finally, although the ferocity of the downturn necessitates quick action, policy makers and the public will need to be reasonably patient. Even with the best of policies, a substantial and sustainable turnaround cannot be expected any time soon.
The core problem lies on the demand side. American consumers, whose purchases represent 70 percent of the economy, do not have the purchasing power to maintain overall demand for American goods and services. Businesses will not invest unless consumers are able to buy. Exports cannot possibly fill the gap. Inadequate demand is forcing the private sector to lay off large numbers of workers, which, in turn, is further reducing the buying power of consumers. In 2008, 1.9 million jobs vanished -- the biggest drop in non-farm payrolls in thirty-four years. We are caught in a vicious cycle.
As the buyer of last resort, the federal government must respond if that cycle is to be reversed. In my judgment, this will require a stimulus of about 6 and a half percent of gross domestic product, or a total of some $900 billion, spread over two years. That’s my estimate for the shortfall in private demand. But the federal government should stand ready to spend larger sums if necessary to get the economy back on track toward full capacity. The danger is not that the government will do too much; the danger is that it will do too little, too late.
Without such action, I estimate that another 3 million jobs will be lost in 2009, unemployment will rise to 10 percent of the workforce by the end of this year, and under-employment – including people working part-time who would rather be working full time, and those too discouraged even to look for work – will reach 15 percent. Without federal action, next year could be even worse.
People often ask where the money for the stimulus will come from. The answer is the same places from which the Federal Reserve and the Treasury have financed their far larger attempt to rescue the financial system. The bulk of the money will have to be borrowed from abroad, largely from China and Japan. This is less than ideal, but failure to adequately stimulate the U.S. economy, resulting in years of economic stagnation, would be far worse – both for us and for the rest of the world. Moreover, our current ratio of debt to gross domestic product is still below 50 percent, not substantially higher than that of most other industrialized nations. In 1946, our debt to GDP ratio was over 100 percent. Most of the declines in our debt-GDP ratio over the years have been achieved through higher levels of economic growth rather than through less debt. The sooner we return to growth, the better able we will be to reduce this ratio.
No stimulus can fully succeed if millions of American families continue to lose their homes through foreclosure. Housing markets will continue to decline, people cannot move to take new jobs, and industries such as construction and retail services will continue to shed jobs.
Mortgage mitigation efforts to date have failed largely because investors won’t agree to take their losses on bad investments. In my view, the answer is to enable families to write down their home mortgages in bankruptcy – just the way businesses can do with commercial property and people can do with vacation homes and investment properties. This change in bankruptcy law should be part of the stimulus plan.
Overall, the federal government’s responsibility for restoring aggregate demand is at least as great – arguably, far greater – than its responsibility for rescuing the financial system and helping U.S. automakers restructure. Without adequate demand, credit markets will continue to be frozen and major American industries will languish. Yet there is no ready formula for how the federal government should proceed because we have not been here before.
This largest and most serious economic downturn in more than sixty years will require both a willingness to try new policies and to change course if those policies appear to be ineffective relative to their costs. The danger is not that the federal government will do too much but, rather, that it will do too little.
Whatever is contained in the stimulus plan must also be clear and transparent, so that the public can know and understand what is being tried. Finally, although the ferocity of the downturn necessitates quick action, policy makers and the public will need to be reasonably patient. Even with the best of policies, a substantial and sustainable turnaround cannot be expected any time soon.
posted by Robert Reich | 6:02 AM
248 Comments:
Instead of borrowing from China, it might a better idea to convince China to use some of their US dollars to clean up, maintain, and even improve their food supply by purchasing services from the US.
http://www.telegraph.co.uk/news/worldnews/northamerica/usa/4043733/US-officials-crack-down-on-Chinese-honey-laundering.html
Otherwise they will find that their stack of US dollars will rapidly turn into tiny bits of high quality paper.
Dr. Reich said:
"Mortgage mitigation efforts to date have failed largely because investors won’t agree to take their losses on bad investments."
Precisely. Because we believe they are "too big to fail", this problem actually has no solution. Bailouts by the government will only make it much worse. All such efforts only prolong the inevitable structural shift that needs to occur. We are settling on an attempt to mortgage Ella's future even more instead of allowing the titans of power to fail and starting over.
To quote Robert's comment:
"The core problem lies on the demand side. American consumers, whose purchases represent 70 percent of the economy, do not have the purchasing power to maintain overall demand for American goods and services."
The 'core question' ought to be, why has this situation developed in a country that has experienced tremendous GDP growth over the past few decades? We are the richest country in the world,yet our working middle class appear to be getting marginally poorer year after year.
Were it not for the easy availability of unlimited credit for every possible purchase, we would have been in crisis years ago. But eventually the use of credit has it limits, and those limits have been reached now.
In business we used to examine problems by a process known as "root cause analysis". Yet there appears to be, on the national scene, no serious inquiry into the root cause for the failure of the working middle class to participate in the steady growth of the nation's ever increasing wealth.
A Federal stimulus program will be as effective in curing the current financial problems just as much as a pain killing medicine will cure a broken arm or leg. Until a concerted attack is initiated against the prime causes for the "pooring of middle class America", we might as well depend on alcohol and drugs, which in the long run will be as useful as the stimulus programs.
All the stimulus will do is postpone the worst phase of the crisis for a few years. Eventually the stimulus will increase the National Debt to politically unsupportable levels and than be terminated, at which time the fundamental issues will again appear and initiate a continued downward drive in the economy.
The American economy which is composed of 70% consumer spending resembles the process of force feeding geese to obtain foie gras. The force feeding is done by means of advertising. Dr. Reich is right in that the problem lies in the demand side, not the supply side. The problem isn't getting banks to loan more money when consumers are tapped out with debt. The problem lies in correcting the overcommercialized consumer economy in the first place.
First, financial support has to be given to those in dire need: the jobless, the homeless, those in danger of foreclosure. Foreclosure relief, extended unemployment benefits, extended food banks and other direct help and support to those in need. Second, jobs need to be created with a WPA style program. When the private sector fails as its done now, the government needs to be the engine of the economy of last resort.
Even with support for the needy and a WPA style jobs program, certain businesses will fail and others will have to downsize. This is only natural as consumers scale back from a 70% of GDP consumption level with no savings to a 60 or 65% consumption level with 5% savings, as Frank Thomas has recommended in his many comments on this blog. It is more desirable in the long run that consumers scale back their consumption rather than go into debt to support the current consumption level for the sake of business. What matter is it if the GDP contracts if everyone has a place to live, food to eat, good schools to send their children to and meaningful work.
If people start to save more and consume less, government needs to invest more in order to maintain the current GDP. But forget GDP. The problem is meaningful job creation in order to build a world class infrastructure not to mention a world class society, decrease our dependence on foreign oil and capital and get our house in order. Just creating the economic conditions for car manufacturers to sell more autos accomplishes none of the above. In fact fiscal prudence on the household level suggests that not buying a new car and repairing the old one makes more sense. We shouldn't be wringing our hands over the lack of auto sales or encouaging more consumer debt in order to buy them. The problem is for consumers to reduce their debt not to accumulate more. If this is bad for the overall economy, so be it. The overall economy needs to adjust to something more sane at the citizen level. It's bass ackwards to suggest that consumers need to spend more to support the overall economy. The economy needs to refashion itself to accomodate a saner, healthier life for its citizens.
If citizens have their basic needs met with government support of food, housing, schools, energy and transportation, then the overall economy can adjust to that. If retail stores in malls have to close, maybe that's for the best. If people buy less merchandise that they don't really need, maybe that's for the best. If the mall store employees lose their jobs but have support from unemployment insurance, housing assistance and generous food banks, maybe that's for the best. What they need is a ladder of opportunity to a better job that's not being supplied by the current supply side economy. So government will have to step in to make up for the failures of unfettered laissez-faire capitalism. It has already stepped in, without much success, to bail out the wealthy. Now it's time for it to step in to bail out the poor and middle class.
The goal should be not to save meaningless jobs but to create meaningful ones. Most retail employees would probably rather have a more meaningful job creating a world class infrastructure and society in the US. The paradigm has to shift from Milton Friedman-Alan Greenspan Chicago School, Ayn Randish supply side, trickle down economics which has dominated not only the US but the whole world (via the IMF and World Bank) for the last 30 years to an economic model more in tune with the other successful models already used in other parts of the developed world which support a healthy middle class. If wealthy people have to become middle class in this process, they will probably be better off in the long run. If they have to eat granola rather than foie gras, they will probably be healthier. The important thing is to alleviate the pain of those who are ill-housed, ill-clothed and ill-fed. I would add to that list: undereducated and underemployed.
Also posted on Will Blog For Food
Listen to Gerald Celente from The Trends Institute on the "Collapse of the US". He predicted this situation:
http://www.youtube.com/watch?v=BtskokB3l_o&feature=PlayList&p=1E0A44F21E8DBD94&index=1
Anonymous DWP
We don't need more debt in the country, we need JOBS !!!! We need GROWTH !!! We need TRUST !!!
What you are proposing is a socialistic debt society.
Dr. Reich said: “businesses will not borrow because they do not have adequate markets for their goods and services; individuals cannot and will not borrow because they do not have enough reliable income to do so….The core problem lies on the demand side…..the answer is to enable families to write down their home mortgages in bankruptcy”
And:
silverfox said...
“no serious inquiry into the root cause for the failure of the working middle class to participate in the steady growth of the nation's ever increasing wealth……A Federal stimulus program will be as effective in curing the current financial problems just as much as a pain killing medicine will cure a broken arm or leg. Until a concerted attack is initiated against the prime causes for the "pooring of middle class America"
Now I think we’re getting somewhere… I’ve always been one for finding the “root cause” in any system. Unless you look for the genesis anything else you do is only a band aid. And I feel it’s true we don’t really know why demand really died. And it’s more than simple “job loss” or “housing bubble”. It may be an overall emptiness from raw consumption for many years. We haven’t been working to any “real” causes for too many years. Like Pinocchio’s fun party night we now have the hangover and are turning into donkeys. Had we been maintaining a baseline of truly useful work we’d have that baseline to fall back on. Perhaps this baseline of work needs to be on this 6% scale. Had we been seriously working on infrastructure the past 20+ years, we might not have seen this happen. Had we been working on energy independence as well, we might not have seen this. Pick any serious large scale project we could have been doing, and the same result of helping us thru this issue might have occurred.
And if we had something of substance going on, these “too big to fail” companies could have been allowed to fail.
And the lack of foresight in any of our leaders the past 30 years to see a need for this “project” sum up to part of this root cause.
I believe like a family - with the country scaled up quite large – the country still needs a purpose and can not be a raw consumer. Recently we as a culture look at Bill Gates and others with their huge amount of philanthropy and simple say “wow”. Now, why can’t such an effort be our country’s project?
We haven’t done any large scale country projects since the moon race. And that ending seems to couple with the 1974 recession. I wonder how the other periodic recessions coincide with the ends of other projects such as the highways, the flood control (Hoover dams) and any others.
Every job saved is a meaningful job.
One apparent problem isn't that we are consumer-driven (the purpose of economic activity is to provide goods and services), it's that our labor force is majority service-sector, which, because of our history, is low-paid and has little voice in either politics or economics. This is a result of its status as unorganized (or, non-organized) labor.
Don't fault people for buying things in an economy - what else do you do with it? - instead, ensure that, as workers, they don't have to rely on credit to get things, but by saving some money, they can get things they want, while still maintaining their needs. That means harder credit, but higher wages.
Dr. Reich is right-on about government being the spender of last resort. The question is, however, where should we (we as gov't.) spend to encourage a more stable economy? If we maintain our current structure, we'll either: A) Be back here in a few years; or worse, B) Only help ensure the wealthiest that they can ride this out. Neither is appealing, and the financial bailout seems to have accomplished B with great results. For them.
maybe i'm bent this way, but i always have felt we need to "make stuff". if we do not "make stuff" we can forget about ever exporting anything of substance (besides weapons). and if we export very little, we eventually borrow a lot instead.
roll back the clock a few thousand years and all we see of the old civilizations is the "stuff" they made.
and the people who "make stuff" need to be respected for that ability.
in 1994 i was laid off like a lot of other engineers. it occured to me that walking up or down the street to see if anyone wanted me to do a stress analysis of a piece of metal would yield zero results. however on my 1st unemployed day i sold a bunch of pottery to a flower shop.
i learned that i needed to "make stuff" to survive.
This issue might be a little to deep for my pea sized brain so I will related how my spending has changed. In 2005 when we got wind that Delphi might go bankrupt, I changed my life style and spending drastically. Three years later being debt free growing a garden and learning to be more frugal everyday has become much more relaxing "its a nice life style". I think more people have learned this and no matter what the Government does people aren't going to spend like the old days
"Most of the declines in our debt-GDP ratio over the years have been achieved through higher levels of economic growth rather than through less debt. The sooner we return to growth, the better able we will be to reduce this ratio."
Wow! That's a heck of a gamble. I guess if it comes up snake eyes, the next generation can pay it down. Real growth is gone. The post-WWII home-quity-based retail economy has reached its limit. All we can do is pursue some new efficiencies at the margins ("green") to free up some money for consumer retail spending and savings. That's it. Game, set, match. Otherwise, we'd need fundamental restructuring of the economy and that ain't on the table. Might not even be possible. FDR had a blank-slate--that is, a nation migratng from farms to factories. No such migration today.
Dr Reich -
John Lawrence and especially
t jefferson are right on.
I think t jefferson and maybe John Lawrence read "Total Money Makeover".
Most businesses in the US are considered small businesses. The ones that don't have a debt load, and aren't trying to borrow money, are the ones that will survive. Households that are living debt free, or that are closest to it, will be fine.
But really Dr Reich, Handouts, and more bankruptcies, and more borrowing ? That's what got us here, and we need to get off this path and go a different direction. If we keep doing the same thing, we're going to get even worse results.
I applaud you t jefferson.
Chris D. said...
you might bring up the fact that we need to think of an economy not so much "boomer-based" but based in something else. so much has occured since the boomers that we might think "that is our purpose". housing, consumer products, boomer-feeding.
or we shift our "boomer based" methods over to other countries? that's an export of products.
~ oh yeah, we gave that to china...
Steve is also right on about the need to make things. Exporting manufacturing jobs and re-importing the stuff might work for a while but sooner or later a $2.00shirt at Wal mart is cheap but the consumer will only have a dollar.
"Without adequate demand, credit markets will continue to be frozen and major American industries will languish. Yet there is no ready formula for how the federal government should proceed because we have not been here before."
Gov't spending will spike GDP numbers but do little for the underlying issue of keeping consumer demand levels anywhere north of 70 per cent. The consumer component of GDP will shrink back to the low 60's as leveraged credit creation on a world wide basis has ended and with it these unstable level of luxuary consumer spending.
It is better that the Democrats begin preparing the public for a lower standard of living, cutting immigration levels,reduce multi-national corp power political and financial power along with a stronger gov't support for family health and welfare.
The party is over for the elite class as the political,university,financial sectors will be shrinking as excess baggage.
The primary growth model over the past 20 years has been the conversion of raw land into subdivision's which has created additonal growth in, new road construction,malls & shopping centers, new schools, fire and police stations, enlarged city services,larger pensions for state and city workers,mew furniture,applicances, well the list is large.
Gov't spending on roads and bridges and some IT projects will not replace the suburban growth model which has run its course.
My concern is this: you have stressed repeatedly that the question is not whether the government will do too much or too little, and that 'too little" will be a big mistake, a waste of time. The problem is, that while that all makes perfect sense, we do not have economists and people looking out for the good of the country making these decisions: we have politicians.
The stink and discussion for the last 24 hours has revolved around what has come (to some) as a surprise that the Obama stimulus package will include a 40% portion devoted to tax cuts rather than cash infusions. Lefties are horrified and righties are gloating. Republicans have already vowed to assail, contort, delay and hamper all efforts to get a package signed unless they have their way and the Obama folks seem to be working toward a compromise which will be only a luke-warm solution which fails to do enough. I.e., it will do "too little" but the politicians will be happy because their side "won".
You are preaching to the choir, Dr., but the choir is still paying the salaries of the politicians,and they have the purse strings and the check book. Unless this paradigm is altered, you and Krugman, et.al, are pissing into the wind.
Fox:
Do you propose that we leave the current status quo or the continual decline to go on while we embark of a huge study to determine "root cause"?
This is not a question of why market share is declining or why material costs are increasing or why line A is no longer producing at previous levels. You're talking here about a huge complex system that has seemingly gone awry. A system that few, even among experts, can fully understand or agree upon how to control. Chances are there is no "root cause" but rather a confluence of "causes", some feeding from further down and others that may be mutually exclusive of other events. Further muddling any analysis is that intermingled in our system are various cultural/psychological aspects.
I'm not disputing your analysis of what has changed, for the worse, nor what should be the goal going forward: To restablish a strong middle class, with decent earnings levels, coupled with a decline in the rate of wealth growth among a small segment of our society, in addition to a renewed focus on the really poor among us. If collectively we agree that should be the new goal, I'm not sure energies expended to determine the "root cause" of why that dream died in the first place, is a good use of resources.
We are well aware of some of the major concerns ("causes") that led us down this path. Supply side economics, at the forefront; globalization and outsourcing; union busting; easy credit; deregulation across a wide spectrum of economic activity; overconsumption, and on and on.
Ironically, and I in no way believe in supply side economics, but globalization and outsourcing negatively influenced any benefits we might have gotten from the concept. If the only investment alternatives available to the wealthy had been within the US, it might have had some favorable effect.
Since we know the goals, and I do think Obama has exhibited a decent understanding of the needs, then it seems to me that the first order of the day is to get the economy functioning again, even if fraught with some of the old problems, and once we have people working again and hopefully tax revenues rising, we can then begin to attack the additional "root causes" that need correcting.
I would doubt that in your heyday in the working world, you ever saw the plants shut down while a "root cause analysis" was carried out.
Granted stimuli, alone, are not going to turn everything around but they are simply that, stimuli, employed to churn economic activity, with its attendant multiplier effects. To continue the current decline awaiting a free market correction will, likely, end us up with a marvelous analysis, establishing all the "root causes" of our decline, but in a hole, too deep to climb back out of.
In the interim, as we try to right the ship, we do have to focus on those most affected by the current fiasco and I agree with Doc and John and Angry and Lauren and many others, that beefing up safety nets is necessary. I also agree that improving health care, right now, should be among the first steps.
Now I haven't done any "root cause analysis" but off the top of my head, if there is a "root cause", I'd guarantee you it would come back to be us; the American voting, consuming populace.
ok, i should read more. but is there anything in basic economics that says there is only so much cash in the world?
i don't understand how one country could "grow" and make stuff and consume and not run out of money unless they export products to another country to gain THEIR cash infusion.
so today while we'll borrow from japan, china. how will that bank source ever end possitively unless we do something to improve our exports?
Under the radar,
How will helping people stay in their homes and helping the most vulnerable and already unemployed retain some connection to the economy make us "worse off" in your estimation? Further, how have "Handouts, and more bankruptcies, and more borrowing" "got us here"?! Handouts to whom? Which bankruptcies? What borrowing? If you mean handouts to the financial institutions and our pastime of borrowing from China, that really needs to be separated out of the picture here. We're talking about American citizens and what needs to be done to protect them/us and our country from free-falling into another depression.
We cannot dig ourselves out of this by consuming as individuals. Some people attach blame to consumers for the continued "downturn," without seeming to notice that consumers do not have the will or the ability to save the economy. One would think it might occur to such people at this point that there is something very wrong with the notion of citizens working for the economy (via increasingly crappy jobs and wages, longer hours, fewer benefits, and a societal expectation that we account for 70% of the GDP buying crap made overseas by child slaves). The economy should work for citizens, instead. But that's not where we are.
You correctly point out that "Most businesses in the US are considered small businesses." They are, indeed. They do not, however, employee the amount of people that larger companies and corporations do. So standing back and watching the small businesses of America play out their survival of the fittest routine will do nothing except allow us to tally up more causalities of the economy.
The wait-and-see approach is the worst one we can take.
John Lawrence,
Once again, you are right on target. About "meaningful jobs," meaningful is of course in the eye of the job-holder. It could be slaving for enough money to keep the bills paid and the family fed, or it could be doing what one loves and being able to live comfortably that way. One thing that we all have reason to hope for is that if health insurance is reformed in such a way as to unchain employees from their employers, more people will be able to have some choice in the future about what kinds of jobs are meaningful for them.
Steve,
You said, "Now I think we’re getting somewhere… I’ve always been one for finding the “root cause” in any system." Don't look for it, friend. Whether it be the "root cause" of consumers pulling back or the root structural causes of this depression, the corporate media will not go there. It is in their interests to have as many people as possible continue to believe that this is just a normal slump and that once we ride it out, all can go on as normal. It should tell us something that Dr. Reich is the only person out there who has integrity enough to speak of economic inequality and how our entire system has transformed over the past 3 decades to the detriment of the American poor, middle-class, and citizens in general.
Dr. Reich,
Thanks for explaining where we are and for focusing squarely on where the economic focus needs to be right now. You do us all a great service by generously sharing your thoughts and allowing us to weigh in.
Obviously, China or any other country is not going to lend the US any more money until it puts its economic house in order. The first step has to be to balance the budget. This will be painful, but it has to be done, regardless of the consequences on American employment. In the long run, doing so will increase jobs. But there is no choice. Then, after we have stemmed the hemorrhaging of money, we can begin to talk about stimulus plans and other investments. But first we need to put our house in order.
Anonymous:
Have you read nothing of FDR's actions in trying to stem the Great Depression? Balancing the budget is the last thing we need to worry about right now!
There is much haranguing here about our consumption habits and the negative effects thereof. Best be remembered that the one reason China and Japan and oil producing countries will keep funding our country is because of our consumption. Reduce our consumption greatly and not only do we take down much of the world economy with us but those countries with excess wealth, currently, will focus their efforts on their internal economies and quit lending to us. Where does that leave us?
Some of the reduction is occurring and will continue to decline given the current economic situation. To the rest of the world that's understandable and they realize that if we are trying to resurrect our economy, benefitting all of them and us, then those who can help out will likely do so. Should they get the sense that any turnaround is going to result in a serious reduction of consumption anyway, their interests could wane.
It's easy to break out the elements of our economy and suggest that we need to improve this or reduce that but it is a web, a system, and similar to the third law of motion, To every action there is an equal and opposite reaction.
Anon,
Balance the budget first? You must be kidding. The objective is to stave off a severe depression, not to walk into one willingly.
China and Japan have a vested interest in our economy (as do all countries), and China is willing to lend to us. Check out the Atlantic article "Be Nice to the Countries That Lend You Money."
Sawdust said :Unless this paradigm is altered, you and Krugman, et.al, are pissing into the wind.
I agree. However, I think Obama himself IS the paradigm change.
I think Obama is going to STUN you and everyone else with how different things are going to be.
If you look carefully, there are many signs about the coming change.
I have an earlier post on Dr Reich's prior blog entry about how much change Obama is already bringing. Well, an hour after I wrote that post, Obama went and changed the paradigm AGAIN: today he announced he is deeply concerned about civilian deaths in Gaza. This is yet another earthquake change in US Presidential politics. It will have significant ripple effects in the way deal with the Palestinian/Israeli issue.
The Palestinian/Israeli issue is at the CORE of Islamic fundamentalism and 911 itself. This is an issue largely ignored by Bush.
For too long our Presidents took a one-sided approach to Israeli's side of the issue.
I am for Israel's guaranteed existence. I am for Israel's right to defend itself. I think Israel has done more to fight for peace than the Arabs. But I am not for Israel's siege of Gaza, which started years ago. Israel and the Arabs have both made things worse for themselves, and it's going to take an even-handed approach to make any progress. I predict Obama will be the FIRST President since Carter to tackle this issue HEAD-ON from the get-go, instead of waiting until the final year of his tenure.
Panetta's appt to the CIA is another earthquake change. People who criticize this appt, people like Feinstein and Rockefeller, can go to HELL. They are trying to maintain the status quo. They benefit and profit from the status quo.
Those here who are afraid of BOLD ACTION by Obama would doom our economy to continue its spiral towards another depression, which WILL last for decades if we do not nip it in the bud NOW.
The debt Obama is going to create in the near term to nip this thing in the bud is part of the consequences for voting for neocons like Bush. This new debt, even that part of it created by Obama, will be Bush's legacy.
There are ways to deal with the debt. But there are not ways to deal with an economic malaise that will last for decades.
The Internet boom in the 90s PROVES how fast an economy can turn around if the right variables are in play.
WWII proved the same thing.
BOLD ACTION -- not fearful cowering -- will nip this depression in the bud.
We are at WAR with this depression. Not to take BOLD action NOW is to surrender.
I believe Obama is the PERFECT person to have as President right now in this dire time. He will make mistakes. But I think it is clear he is committed to BOLD action. And after it becomes clear that is the case, Americans will be inspired, their confidence will return in droves, and the markets will respond. Already his appointments and plans have helped stabilize the stock market despite all this doom and gloom and a perceived failure by Bush and Paulson to effectively manage the first bailout.
With the right leadership, Americans will respond to this crisis just as they did under FDR. Obama is the man. No other politician in office today could have ran the kind of nearly flawless campaign Obama did, or give hope of party reconciliation as he is doing. 80% of Americans right now admire him and think his appointments are outstanding.
Art said: Have you read nothing of FDR's actions in trying to stem the Great Depression? Balancing the budget is the last thing we need to worry about right now!
Thanks for that. I am no economist. But even I have heard how FDR first tried to fight the GD by cutting taxes and balancing the budget, and how that only made things worse. Only after he started the New Deal and took BOLD ACTION did things start turning around.
Lauren:
Not surprisingly you've heard about FDR's efforts, Dr. Reich mentioned them in a fairly recent blog entry.
Keep in mind, and I am in your court about believing in Obama, that the ultimate turnaround of the GD came as a result of WWII. Without WWII no one is sure how long the GD would have lasted.
As Fox has mentioned, Obama doesn't have that option.
There is no need to borrow more from china, even tough they would be happy to do more of it, since they depend on our economy, If only option for us is to print money, inflation would destroy chinas loans to US. i do not think they would not save us to save them.
On the other hand there is a lot of free capitall in US waiting to be invested in something. There is not much left in our economy that has prospects of returning investments. The proof is Treassury yield. It is at almost 0%. There is opportunity to borrow at very low rate. Treassury can sell trillions of bonds to finance stimulus packages before it has to raise T-bills yield up to 5%. If it happens gradually it would never have to reach that number. US can borrow $5 trill more before it downgrades its credit rating.
Lauren:
Though I'm not inclined to condemn Feinstein and Rockefeller as vehemently as you, I do agree that Panetta's appointment may be a stroke of genius.
Not completely familiar with the Director of CIA job responsibilities but one would guess, given Tenet's performance, that the Director does not vet all the reports.
Though the subject matter may be more heinous, I doubt the CIA Director or most other department heads in government, can equal the process management skills required of a Chief of Staff to the Prez.
Art:
Being neither an accountant nor an economist, I can not declare with absolute certainty what the "Root cause" of the current economic crisis is, but as a reasonably intelligent and knowledgeable though admittedly uncredentialed observer of history, I can express an opinion on conditions that are both obvious and highly questionable.
The first observation is that there is far too much capital around chasing far too little high quality investments. Consider the pre crash return of equity investments. The average stock was paying the owner a dividend of less than 2% a year, whereas the local banks were offering FDIC insured certificates of deposit for twice that amount. And at it's peak a couple of years ago, the 10 year Treasury note just barely climbed over 5%. All this when GDP was growing between 3% to 4% a year and inflation was just under 2%. So a modestly conservative investor would and should expect his riskier stock purchase to reward him with a minimum of 6% or more. But with all that surplus cash pouring into Wall Street, corporations never felt any competitve pressure to raise dividends. They just promised perpetual growth in price due to an equally never ending line of 'greater fool' buyers. It was this lack of quality investments that gave birth to the packaging of risky but high yield mortgages and selling them off to more aggressive investors seeking a meaningful yield on their money.
Even now, with markets crashing and the US borrowing vast amounts of cash, the bidding for those instruments has driven Treasury notes yields down to near zero for the short term bonds, and little over 2.5% for the ten year note.
At the same time the average working middle class experienced very little if any of the annual GDP growth our economy was achieving. There have been a number of reports on this in the media to need to give statistics.
The remedy to this decline in income growth triggered the exaggerated growth in credit,which like mortgages, was also packaged and sold off to investors seeking high though risky returns.
So in over-simplfication , too much of the nation's wealth increase was going to investments, which were largely non existent, a trend attributed to Reagan's supply side economic policies.
One could argue that Americans were saving too much money instead of spending it, and those who did reap surplus incomes, instead of spending their cash, were investing it and borrowing cash to fund purchases.
So my deduction of root cause it that we as a nation are laboring under an impossible belief that we all can become rich and financially secure in near total dependency on the free market. But how much money can the nation effectively absorb for productive investment purposes year after year ? Note the key word here is productive, for there would be no limit to the demand for low interest funds to finance corporate takeovers, mergers and aquisitions, which generate great profits for the few players but do not add to the nation's total wealth nor are of benefit to any significant numbers of citizens.
It is a simple supply and demand situation. A near unlimited demand and a very limited supply of quality investments to absorb that demand. The result was simple asset inflation.
I'll stop here, as this has gotten far too wordy.
Art,
Thom Hartmann recently talked at length about a recent study that purported that WWII may have actually slowed the recovery that had started in the late 30s.
http://www.thomhartmann.com/
index.php?option=com_content&
task=view&id=1104&Itemid=119
If WWII is truly AND ALONE to be credited with bringing us out of the GD, then the reason is that the gvmt was inspired to spend and invest and employ people. While Obama has no Nazis to target, he is able to spend and invest and employ people.
Fox:
I think I explicitly stated that I had no disagreement with your assessment of the situation nor many of its causes. To my mind you are spot on. My only argument was with your stated desire to seek a "root cause".
The only exception I would take to your recent, excellent, summary, is that with the exception of a few depending on dividends for retirement, few investors, for years have worried or even considered dividends when making a stock purchase. It's all about rising stock values and in a thriving stock market, wise investments will gain much better that a 6% return. To your point, there was so much capital seeking gains out there that even a 6% return was paltry. Go for those leveraged returns of 8 or 10 or 12 or 15%.
Obama's going to ban all earmarks in the recovery and stimulus package.
WAHOO!!!
Lauren:
Not familiar with Hartmann or the study, will read your link, and it may be true that WWII had a negative rather than positive effect on the GD but I think conventional wisdom has it that, NOT ALONE, WWII had a great deal to do with closing the sale.
Again you get into a number of variables, many intangible. Besides the conversion and ramping up of factories and jobs and the ability to completely ignore budget deficits, the war provided a catalyst to bring all factions together with one focus. Nothing tends to invigorate our society/economy more than real patriotic fervor.
Art, I agree with that. I do think we are at a critical juncture similar to WWII in that we as a people are going to come together in the next few years unlike we have done for decades. At least the potential is there.
I happen to think we can achieve major changes WITHOUT going to war. The Internet boom proved that. I also happen to think that the internet boom was cut short by Greenspan's attack on middle class wealth and the Republican witch hunts on Clinton.
I believe I have read that Obama intends to find ways to restore large numbers of hi-tech jobs lost during the Bush years.
There has been much discussion of "root causes" lately. Look no farther than Milton Friedman and the Chicago School of unfettered laissez faire, free tradee economics as inspired by Ayn Rand with disciple Alan Greenspan which manifested itself in Reaganomics - supply side, trickle down economics. Or one could read Karl Marx about the concentration of capital in fewer and fewer hands.
To those in favor of Dr. Reich's proposals for stimulus . . . might I suggest:
1) Contacting the Obama-Biden transition team
2) Contacting your representatives
I'm in the process of contacting them about both the economy and the situation in Gaza.
Angry Citizen:
Thanks for the link Be Nice to the Countries Who Lend You Money
Y'all should read it. Priceless!!
John thank you. Finally someone else had it right about warnings about dangers of free market capitalisam. You can read Marx as an attempt to prematurelly demonifies capitalisam, but should not skip detailed warnings about inherent flaws and where they lead to. Today's situation prooves Marx right, and GD also did so smart people found ways to prevent such occurence with New Deal and workers Acts. All of it was to save capitalisam. Well in time that wisdom was lost. Maybe there is a chance to, again,save it, by doing the same thing. protect workers and investors from natural ingenuity of free market to optimise everything and chase profit margins on expense of buyers/workers.
As Immanuel Wallerstain says there has to be a huge change. One way is to keep going toward fashisam where corporations own gowernment (which in my opinion is unsustainable and can lead to selfdestruction only) or to go tovard more egailtarian society which would be socialist sytem with safety nets embeded in system.
Art:
I quote this excerpt from your posting:
"..is that with the exception of a few depending on dividends for retirement, few investors, for years have worried or even considered dividends when making a stock purchase. It's all about rising stock values and in a thriving stock market, wise investments will gain..."
This substantiates the point I made, in that we all assumed we would all get rich by ignoring the basic fundamentals of rational investment. Buy something, anything, whether stocks or houses or art or oil or whatever, and the value would go up forever and we will all get rich. No one seems to stop and think to themselves' what would make the stock values rise year after year ?' We just assumed since it was "common knowlege" that stocks and houses ALWAYS go up in value, we didn't have to THINK about what we are doing.
I assume you are familar with the famous Holland Tulip bubble, where normal people made insane investment decisions to buy a fraction of a single tulip bulb?
Well, we modern Americans can and have fallen victim to the same irrational dream. We would all get rich if we worked at middle class jobs and participated in the stock market and traded up our homes every few years.
Although I don't generally believe in blaming corporations for the power to shape our beliefs and desires, Wall Street and the Main Street real estate agents certainly were eager to encourage as many new converts to the dream as possible, and most of the US fell for it. And it was obviously good politics for conservative Republican supporters of supply side economics.
This country will never effectively cure our economic illness as long as we insist on supporting the unsupportable and refuse to face the painfull necessity that we can not insure a comfortable level of lifestyle solely depending on the private sector and a free market economy. At some point government must take on a much larger role, or alternately resign ourselves to becoming a Third World country with vast extremes of wealth and poverty.
Someone needs to revisit Frederick Bastiat on things seen and unseen and recheck their economic logic.
I still don't understand what that $350 billion accomplished. I thought the financial institutions were supposed to use it to extend loans, instead they seem to have just feathered their nests.
We should get it back.
John,
You're welcome. I found it to be pretty eye-opening to get a Chinese perspective.
Before I forget to mention it again, I checked out your blog weeks back . . . you have a very beautiful family! What a lucky man you are!
To me, this deficit spending is the scariest part of the entire future. OK it was done in the 1930s, but things were different then. People and businesses didn't buy on credit, they weren't in debt. There were lots of Mom and Pop businesses, this was the pre-global, pre-bigbox era.
Who stands to benefit from stimulus spending? Obviously, people who get jobs. But if they spend all their income at Walmart, what good does that do American business or Main Street?
The other thing is that I am not sure Keynesian economics EVER worked. What pulled us out of the 1930s Depression was the WWII.
Futher I am very concerned about what happens to the USD once the U.S. consumer stops buying foreign imports. China and Europe buy T-bills because we're they're best consumers, but what happens when we stop? Many pundits are predicting that the USD is done for.
So that brings me to the question at the end of the page...what is the consequence of deficit spending, all this "phony money." If the USD goes kaput, then what happens to the US gov't? I have no idea, but I don't think that issuing T-bills can go on endlessly without consequences...
After all the things we buy with money are things of consequence, products of labor and limited resources.
Dr. Reich, you should really study some international finance before presenting any more arguments. If we borrow money for the stimulus from Japan and China, then the trade deficit will widen by the amount of the new borrowing (look up 'balance of payments') and the resultant adverse effect on U.S. GDP will exactly offset the stimulus (look up 'national income and product accounts').
You said the 'core' problem is inadequate U.S. aggregate demand. More rubbish. U.S. aggregate demand already exceeds U.S. income. The core problem is, part of the demand is being used to support foreign production and the imbalance is unustainable, because it is going to current consumption rather than to augment investment.
Art, Silverfox, others
“No one seems to stop and think to themselves' what would make the stock values rise year after year?' We just assumed since it was "common knowledge" that stocks and houses ALWAYS go up in value, we didn't have to THINK about what we are doing.”
Actually to defend myself I really have no choice for my retirement. I’m so far down the money ladder I can only buy mutual funds as part of my 401K-IRA savings. Basic banks are not enough return to match inflation. I ride whatever the fund managers put my money in. Dividends, returns, whatever. My only selection is one of the 10,000 mutual funds available. Even the big boys (American funds, Magellan, etc) have several funds within their portfolio.
The “common knowledge” that we have been given is over time stocks grow in value more than any other investment. So little people like me have only this to use for any hope of a retirement with any money.
I imagine these funds have, and still have, millions flowing into their funds to be spent on stocks. Payroll deductions are still flowing albeit slower than before but they still are occurring with regularity.
The frustrating thing to me is recommendation to do this kind of retirement savings has been coming from all sources including the US government. yet I feel my retirement money has gone to private jets and CEO bonus programs. Talk about weak investments!
So is this more of the big root cause? We have a BIG cash flow system in place: payroll deductions for mutual funds.
This sets up a “false demand” in a sense. Money burning in their pockets to get spent. On a steady basis funds have money to invest. What to buy? What else can we buy that will give us a leg up and better return than the other funds?
And did the funds even need to wait until truly good investments came along?
Looking at the history graph of the stock market from inception to date (http://moneycentral.msn.com/investor/charts/chartdl.aspx?Symbol=%24INDU&CP=0&PT=11 ) it is uncanny how the stock market was rather regular in performance until about the mid 80’s when IRAs and 401K plans and widespread use of payroll deposits started to happen.
Angry Citizen - maybe not a retort - but a question retort - I don'r believe in Bankruptcies as Dr Reich suggested. I have always paid my bills. I know bank ruptcies are on a meteoric rise. Home values have dropped in this country anywhere from 10 to 50 or 60 % ? 20 % on average ?
I currently, am one of the lucky ones still paying my mortgage, have tried to refinance, but am unable to because of a drop in value. At some point - who knows ? Maybe I'm the stupidest guy in the area. Worked hard my whole life, 50 yrs old, etc. How many other folks like ? And yes, I believe that as a nation, at some point, we have to draw a line, and say no more borrowing. And I do believe, that too much borrowing is what got us here. I believe it was Einstein that said "The definition of Insanity is doing the same thing and expecting different results". Has anybody seen a recent inflation rate recently ? I believe someone said on this blog in the past day or two that those with large debt would benefit from high inflation and a devalued dollar, so maybe I'll be OK. Or maybe it was the link Ms Magdalena provided. That was really cool by the way. Maybe I should be AnCit2.
But your points are well taken.
I think mine are too. I just wish I was more like t jefferson, debt free, cause I guarantee you, t jefferson has less stress than most of us.
Stop with your little microcosmic complaints. They meaning nothing because they are as meaningless as you...particles of sand on the sea of humanity in this country. You guys need to look at the BIG PICTURE...what is going to happen to this COUNTRY? Will we even have a country in ten years?
Well Anon,
1. Quit Borrowing. Now.
2. Health Care. Improve it alot.
3. Mr Obama announced Trillion Dollar Deficits for the next few Years. It's a plan. Yea ! Forget Balancing the budgets. Write all the letters you want. The Congress didn't listen about the original TARP, and they won't listen about this either. Borrow that money. It's OK.
4. Gaza ? Hamas is still shooting missiles at Israel. They are Idiots. And Terrorists. Bad Things will continue to happen to them and other terrorists until they and the other Terrorists stop. In Gaza, Afghanistan, Nepal, Pakistan, and other places around the world, and not just from the USA. It's a list.
5. Quit making so much Ethanol cause the runoff from the fertilizer is poisoning the Gulf. 1500 miles out, it kills sea life. Take your favorite Greenpeace guy fishing. And it increases the price of Vegetables and Meat, because of the land it takes to produce the corn and soybeans. Also, it destroys the guts of engines, because Detroit refuses to make an engine the Japanese figured out before WWII. The Model T was the first vehicle to run on Ethanol by the way. It's bad stuff though.
5. The more money you print, the more paycheck have to make, and the less it's worth, and there are fewer jobs now. So everybody likes everybody less cause their families are getting hungry, and the light bill is late, and the med insurance sucks and you can't take the baby to the doctor. And the Credit card companies are jacking up the rates on guys like ME who pay their bills on time, because of people who don't, or can't. People who declared bankruptcy. People who had no choice, no way out. But bankruptcy should not be an option...I still can pay my bills, as many others.
Life is Hard. Suck It Up And Drive On.
Now multiply that times
100,000,000.
So, Anon, is that Macro enough ?
But no attacks. Or, you can sit on the warm sand and watch and make snide remarks.
Me, I've helped the people in some of those countries, and I've sat on the sand to rest in between.
When was your last go round ?
Magdalena you wrote "The other thing is that I am not sure Keynesian economics EVER worked. What pulled us out of the 1930s Depression was the WWII."
DUH..... the spending in WWII came from the GOVERNMENT! It was Keyne's theories put into action but instead of paying people to uild roads, they paid them to build bombs! It jsut took far far more money in government spending than had been tried before the armaments build up starting in 1939 and paid for by the GOVERNMENT.
Lauren - you may have had some interesting points but I closed my eyes and scrolled right on down past your blindly worshipful lament of love and adoration to Obama. Too much sticky gooey he-walks-on-water stuff.
----
It is not complicated at all as to how we ended up where we are. Disclosure: My one degree is a specialization in the political, social and economi history of the 1930's (and the decade before and after.)
Aunt Tilly and Uncle Jake are broke. Their incomes stayed flat or fell for really about the past 30 years (think Reagan and voodoo econmics.) The only way they could afford the house, the cars (2 so they could both get to work where only one had been needed before), the medical care and the rest was to borrow. They can not borrow anymore - and quite likely can not pay back all they have borrowed.
In 1976 a Nova (basic small-medium sedan) was around $3000. A similar sized car is now around $20,000-25,000. Incomes have not gone up 7 or 8 times from what they were in 1976 in the past 32 years.
Most of the symptoms present in 2008 were present from 1928 and thereafter. These include:
(1) Household incomes were flat
(2) Income inequality was huge. (Between 2003-05, the after-tax incoms of the upper 1% went up 43.5%.)
(3) Households were over-extended on credit having been introduced to the new-fangled idea of 'buying on time.'
(4) Households cut back on spending (too much debt, couldn't borrow more and incomes were flat) which meant sellers cut back on goods in their shops and manufacturers cut back on making because orders were reduced - and it all caused layoffs and more drops in income and spirled onwards and downwards.
Problem is there are two huge discrepancies.
(1) In 1929, the US was a creditor nation. Now it is the biggest debtor in the world. Tariffs hurt creditor countries who impose them but help debtor countires who impose them. In 1929, we inposed tariffs. In 2008, the US is enamoured with reducing its living standards to that of the 3rd world through 'global free trade.'
(2) In 1929, the plants to make things - durable and long-term goods in demand all over the world - were merely shuttered and could be restarted if buyers gained income to buy again. Now we make very very little and selling each other 5000 sq ft houses and junk from China is not sustainable. The difference is that in 1929, there were jobs 'making stuff' if the plants reopened. What jobs are there now if selling houses and selling frou-frou junk do not exist? And therein lies the problem. What do you put people back to work doing? (And keep in mind that the paper-pushing and 'advising' jobs can be done anywhere in the world at cheaper wages and a large portion of the populationn is not going to get that PhD in computers and work for Google.)
Yes it is nice that some of the stimulus will go for creating new energy technology. Problem is the technology has to be created before it can regularly be manufactured and sold and that can take anywhere from 6 months to 20 years for it to even be created. Cars were invented roughly around the 1890's, the Model T came along about 25-30 years later (1st affordable car for the masses) and the infrastrucutre of gas stations did not become widespread until the '40s and 50s. We are at 1890 with new energy technologies.
It is a very very dificult problem to answer in terms of the question of 'put people to work doing what?'
Further, unless tax provisions are enacted to force the redistriubtion of income so that the workers share in the productivity gains, they will still NOT have the money to purchase goods and services to drive demand.
Eisenhower' top marginal bracket of 90% has something to recommend it. Putting money into a real bricks & mortar business (as opposed to gambling on Wall St) has always been one of the best tax shelters going. Put the top brackets high enough and the top 1% will stop hoarding and strat putting their money into real businesses with real employees - and stop playing the market.
Anonymous - I think I get You,
I stand Semi-Corrected.
Forgive me, I'm just coming out of the Woods.
I am becoming MacroEconomically Enhanced.
-UTR
Anonymous said:(1) In 1929, the US was a creditor nation. Now it is the biggest debtor in the world. Tariffs hurt creditor countries who impose them but help debtor countires who impose them. In 1929, we inposed tariffs. In 2008, the US is enamoured with reducing its living standards to that of the 3rd world through 'global free trade.'
I believe we have cut our own throats with our headlong plunge to cut tariffs since the early 1980s, something Reagan made popular and other Presidents since then have followed on.
Alexander Hamilton long ago taught the US how to become an industrialized nation.
Reagan taught us how to stop being an industrialized nation, and now we are suffering the consequences.
This is Thom Hartmann's writeup on Hamilton's 11-point plan. Obama would do well to re-consider Hamilton's advice.
http://www.thomhartmann.com/
index.php?option=com_content&task=view&
id=1122&Itemid=9
I have just had an e-mail from an economist friend who was commenting on another economy article. He noted that it takes 13 to 18 months for a major fiscal or monetary effect to work its way through the economy. First, we need to counsel some patience, which is hard to have when your personal economy is going down the tube. We do need to do some actions that will ameliorate the worst of the effects of this recession or depression on American citizens. Wiping out their savings and having them lose everything in a bankruptcy what might be avoided doesn't cut it. The children need food every day as we do. They will need more clothes even if we can get by with what we have. Life is going on while the "cure" is working.
The economy must work for the average and below average American. If it isn't, then we have a severe problem.
It is interesting to read your personal reactions to Dr. Reich's blog.
I have a question of Dr. Reich. How great is the risk of deflation across the board? We are experiencing some now in housing. Also, with vast amounts of money being pumped into the economy, what is the risk of severe, even, runaway inflation? I am struck that both are very bad for the working middle class.
When I was in the Army we had a saying about what we might called Reaganomics. It didn't rain on most of us, but on the very affluent and the rich did get their taxes cut so I guess it did rain on them.
I believe in free enterprise economics because it works. But, it is not without flaws. Consolidation an monopoly are one. The effect of what in Christian circles we call sin can permeate through the system as it has done with the banking fiasco. Unregulated free enterprise is nothing less than a state of anarchy where each person does that which is right in their own eyes. Some of those eyes are asocial such as Ann Rand. If the problems had been handled early and firmly a major part of the banking fiasco would not have happened in all likelyhood. We now need some after provision to see to it that the banks don't run off and enrich their managers and stockholders with public funds. It was not provided because these banks provided a public service. It was provided because they did not sufficiently police themselves and we have a problem that needs addressed.
Anonymous said: Problem is the technology has to be created before it can regularly be manufactured and sold and that can take anywhere from 6 months to 20 years for it to even be created.
Lauren replies: The Internet came into existence in a flash, and millions of new jobs and 1000s of companies were created almost overnight. In WWII, we re-tooled the factories of the entire country within, I believe, six months. Much can be done when great opportunity and/or great danger is clearly evident.
Anonymous said: It is a very very dificult problem to answer in terms of the question of 'put people to work doing what?'
Lauren replies: We re-build our basic, existing infrastructure, fix roads and bridges, create a smart power grid, etc.. This will provide instantaneous jobs and tax revenues and help shore-up confidence as we attempt to jumpstart green industries or restart hi-tech jobs, etc..
It is far better to have a stimulus and income for people because they are working. Working builds their confidence, reinforces their work skills, and maybe even teaches them new skills. We will also get something out of it -- the upgraded infrastructure we need. There is enought to be done and enought that can be included to keep most people happy. The stimulus would also stimulate private business by providing a market for the products they manufacture (I hope much of it can be American made). The expansion of the money through the economy will further stimulate business for many non-related businesses. Taxes will be paid on income and on sales that will help to provide governments needs at all levels.
Let's do it!
Jordan said:
One way is to keep going toward fascism where corporations own government (which in my opinion is unsustainable and can lead to self destruction only) or to go toward more egaltarian society which would be socialist system with safety nets embedded in system.
Fox said:
At some point government must take on a much larger role, or alternately resign ourselves to becoming a Third World country with vast extremes of wealth and poverty.
Totally agree with you gentlemen.
I think the neocon plan for the economic crisis is just to add another 5-10% of the population to the underclass who will never be heard from again politically or economically and then have the economy resume humming along.
When you consider that today approximately 5% of the population is homeless (without any great hue or cry), 10% are in need of food assistance (again no outburst) and 5% are unemployed, we have approximately 20% of our population already economically disenfranchised. Now these figures are only approximations for the sake of argument, but you get the picture. What the neocons would like to have happen is to add another 5-10% to those figures so that, say for the sake of argument, that 30% of the American population are disenfranchised again withou any big hue or cry. Then the rest of the economy could go humming along nicely.
Now people on welfare are nicely forgotten about after 60 months when they lose their benefits. They are statistically and de facto economically "disappeared." They don't appear in any of the ongoing statistics. Same with the unemployed. After their benefits are up, they are not counted any more in the unemployment statistics. They are effectively "disappeared" from the economic system. And, of course, the homeless are totally disappeared except for their visibiliity when you have to step over them as they lay sleeping on the sidewalks of our great nation.
I'm glad Dr. Reich includes the underemployed and part time employed persons in his statistics. Actually everyone who has not gotten another job should be considered still unemployed irregardless of benefits. Instead our wise political leaders don't even consider that. They just disappear these people right out of the statistics in order to enhance the statistics and make themselves look better.
Now, as you gentlemen suggest, we can have a society with more government involvement in order to create more economic equality or we can have a corporatist state. The point is the neocons have already destroyed middle classes all over the world through the IMF and World Bank and their penchant for privatization. That was the plan for Iraq too. So it's only logical that they would do the same thing to the American people out of philosophical consistency.
Now we have a chance with Obama as President to "save capitalism" as FDR did. BTW, only right wing economists argue that it wasn't FDR but WW2 that got the economy working again. Anything to discredit FDR.
Meanwhile, other countries are well on their way to weaving a tapestry that consists of various parts capitalism and various parts socialism. They are far ahead of us. I'll be frank. Here are the countries that are ahead of us: western Europe, China, Japan, Saudi Arabia. These countries have different backgrounds (both capitalist and communist) but they all have accumulated wealth whereas the US has only accumulated debt. Norway, China, Russia and many other countries (even Kazhakstan for crying out loud!) have sovereign wealth funds. That's accumulated wealth. Many of them are US creditors. They are doing something right and the US is doing something wrong and has been doing it disastrously for the last 30 years.
We should heed Alexander Hamilton's advice on import/export as Lauren suggests. Thom Hartmann's blog lays it out. “'Tis for the United States to consider by what means they can render themselves least dependent,” of other nation’s manufactures, Hamilton wrote, “on the combinations, right or wrong of foreign policy.”
So these are the two possibilities for the US as I see it:
1) Add another 5-10% to the economically disfranchised without civil unrest, and the rest of the economy goes humming along with an unfettered, laissez-faire Chicago School economic agenda or
2) Increased government involvement to create an economic system that combines capitalism with socialism that doesn't disenfranchise its citizens and looks out for the "general welfare" as it says in the preamble to the Constitution.
Dear Lord, asking the government to artificially stimulate demand is indicative of the psychology that got us into this mess in the first place. No matter how much money the government spends, it will not overcome our fundamental problem.
Our fundamental problem is one of simple math: consumption exceeds resources. In a study I read recently, if all the world consumed at the rate of the US, it would take 3 earth's worth of natural resources.
We can accept this and plan for it or we can have it imposed upon us.
Spending future generation's money on yesterday's solutions is just plain stupid. All we have to do is look at the last decade or two to know that.
UTR,
Here is a brief blog in support of the bankrupcy fix for home foreclosures that you may be interested in reading. About credit cards, from what I've heard, most people have seen interest rates go up on cards--regardless of credit history. Call me a cynic, but I doubt that the rates are climbing just because some people can't pay their bills. I still believe that most of our large banks are insolvent, and are doing everything that they can to milk additional money out of their customers.
I agree with you that borrowing has become a big problem. However, in my mind, it is not what led us to this precipice. I see the underlying causes as having more to do with the rules of the road being written for corporations and the wealthiest few (how else did finance achieve such fantastic deregulation and the wealthiest Americans get the biggest tax cuts?! In the case of the housing debacle, how did predatory lenders slink past the watchful eye of those who were supposed to protect American citizens?), and the cards being heavily stacked against ordinary Americans (e.g., stagnant wages, increasing job insecurity, higher health care costs, higher food, energy, and education costs, NO REPRESENTATION, etc).
Whether we like it or not, we need a massive stimulus, and our only options are 1) foreign investment/borrowing and 2) the printing press.
Steve,
One of the few problems I had with "Supercapitalism" was that Dr. Reich appeared to imply that all investors are created equally. While some fund managers of average Americans' investments may pressure companies for higher returns and threaten to withdraw their capital if said returns don't materialize in a timely fashion, I highly doubt that happens to the extent that it does with very wealthy individuals and their fund managers. When we consider that almost 90% of the stock market's increase went to the top 10% of households--42% going to the top 1%--at the same time that real wages declined to a point less than they were when Nixon was president, it should be apparent that all investors are NOT created equally.
At any rate, here are a couple of videos re: "free markets" and how the "little guy" investor is taken advantage of that I think you might be interested in:
Max Keiser on People & Power in Rigged Markets Pt.1
and Max Keiser in Rigged Markets Pt.2
Steve,
Also just came across this interesting piece about ditching 401k plans.
The entire nation is living above its means with a savings rate that has gone negative. This is unsustainable, and government spending more money on make-work projects will not generate real wealth. If we couldn't afford these projects when things were going well, it is insane to think we can afford them now. We're spending 20% of the total federal budget on Social Security, one of the leftovers from the last New Deal.
Angry Citizen - this year most of what would normal have gone to my 401K-IRA is simply going to pay down my home loan.
if the house was paid off (i have about 8 years left) i would not worry about a lot of things.
if i lost my day job and owned my house i could just be a pot dealer and eat well (selling pottery that is).
and work on those other cool product ideas of mine...
In general we don't need "Increased government involvement", that is simply increasing the national debt even further. Unfortunately some of it may be necessary at this point and it will help some folks in the short run but it will bankrupt us all in the long run.
Put another way, although we can "create" jobs artificially and the multiplier effect will stimulate the economy IN THE SHORT RUN, we will have to pay for this enormous labor cost via higher taxes and/or devalued currency IN THE LONG RUN.
Instead (or perhaps in tandem) we need to take back the jobs corporate America and our politicians stole from us via insourcing and outsourcing. My fear is that the nation will only address the short run and ignore the long run strategy of taking back our jobs. THAT is the future we should be working towards. And by the way, we wouldn't have to worry about "living above our means" if we had the good paying jobs of a decade ago.
"It's the jobs, stupid!!"
~ What Bill Clinton SHOULD BE saying today
Angry Citizen:
http://www.thealbanyproject.com/
I found this for Bankruptcy Fix for Foreclosures, through Google. I wasn't able to access through the other link, Thanks though. I do understand better though....
Re: Credit Cards, I should add that many companies are raising Interest Rates right now just because they can. My understanding is that hopefully, a new law will go into effect shortly changing the universal default provisions, in effect stopping the companies from raising the rates at whim.
Anon,
Don't you think the negative savings rate has anything to do with ordinary Americans' wages remaining relatively stagnant during the past 30 years while the cost of necessities have all been increasing?
Steve,
Let me know when you have an online store up. I'd be happy to buy a plant . . . er, a planter from your pot dealing store. ;-)
Try this one for Bankruptcy Foreclosure info:
http://www.thealbanyproject.com/showDiary.do?diaryId=5445
Thanks, UTR, I must've screwed up the link.
BTW, somebody asked about links once before. I'm pretty computer literate, although I'm not much of a blogger, so I just figured out recently how to create links. For those who have no clue but would like to, look under "Basic link" here.
Consumption at 70% of GDP is both unhealthy and unsustainable. Consumption needs to drop while production, including exports, needs to increase. We have been living beyond our means -- drunk on the opiate of debt spending, both public and private. Time to cleanup and get honest.
Suggesting more debt as the cure is, sadly, the same kind of defective group think that has gotten us here. Government, and it's people, have to learn to live within their means.
Grumpy,
Monetary policy can NOT help us anymore. Consumers can't help. Who does that leave? Gov't. Gov't needs to spend. We either print to spend or we borrow to spend, right?
I agree with you that we need to change our ways, but first we need to avert a serious depression. Then, we can spend some time creating new jobs and putting in place new laws and regulations so that we all can live within our means more. We can't "live closer to our means"/avoid debt if our politicians continue to ignore us and continue to ignore the shameful economic disparities in this country and across the globe.
"Inadequate demand is forcing the private sector to lay off large numbers of workers..."
The problem is not "inadequate demand" - a main problems is that in all of the advanced economies around the world most people already have what they need in terms of goods/services and no longer feel the need to blow money or go in to debt just to prop up wasteful industries like retail, entertainment, unneeded electronics, or the luxury goods markets.
We need to focus on the basics now - food/water, housing, and basic healthcare, etc...and stop being misled by all of these unneeded economic sectors of secondary importance.
It is absurd that in such an advanced country we cannot provide these basic goods/services (food/water, housing, healthcare, clothing, etc) at very low cost because so many people feel the need to PROFIT off of the basic living expenses of other peoples.
Consumer confidence and local support of local industry could be a dual way of helping the crisis and the climate issues. We need to shrink our circles of where the products come from - decreasing transport costs and pollution and giving money back to ourselves and our neighbours.
A shift like this is very hard to do quickly, but education is the start!
Debt Relief is really only a temporary solution.
Dr. Reich, I really enjoy reading your book: Supercapitalism. I have lived until 1989 in a communist country, until the Iron Courtain has fallen and then my country immersed in the wildest type of capitalsm. Back in the late 80s I have kept on hearing that only the communist economy would do multiannual planning, but I see it has been the same strategy in the Not So Golden Age America. Please don't get me wrong, I am glad we are out from the dark ages of totalitarism, I just wonder though, looking back, if the bad mouthing of the economic accomplishments of those years - bad mouthing I have heard after the fall of communism from a lot of political analists is not a bit hypocritical...
Dr. Reich,
Your dire predictions of continued demand destruction and its related affects on increasing the unemployment rate are alarming. However, I believe the figures may be understated. There is considerable pressure brewing among influential leaders, businesses and many taxpayers to apply the business model of cost cutting to federal, state, and local public employees.
This truly is a vicious cycle mentality as throwing more workers, especially those with decent wages, into the unemployment ranks will accelerate the decline of the economy.
Now is the time to stop the hemorrhaging of jobs and get as many people back to work as possible. Unemployment compensation should be connected to a work component, putting people receiving benefits to work doing anything that provides a benefit to society and helps build confidence in the unemployed.
I support the positions of two Republicans I consider the greatest presidents in our nation's history:
"Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration."
Abraham Lincoln
"It is essential that there should be organization of labor. This is an era of organization. Capital organizes and therefore labor must organize."
Theodore Roosevelt
I am a strong supporter of our economic structure of capitalism. However, I do not want our economic structure to displace democracy as our governmental structure. Like Lincoln and TR alluded, if it comes to deciding between capital and labor, I defer to labor.
Camelia - It is quite possible you have have seen tougher times than all of us, most of us for sure. At least ideologically. Unless there is someone else blogging here who grew up in a former communist country. So, I would say you have a fresh perspective. I would ask that you blog away. And you're right, I don't know if hypocrisy is the right word or not, but surely we're myopic to think it's just us. Most of the world slept on a dirt floor last night, and woke up this morning with little or no food.
However, we have to make things the best we can, as do all countries, after all, moving forward in the best way possible is the goal. The new person with the fresh viewpoint in a setting is many times the one who sees what is out of kilter. That may be you, and your thoughts are valid.
Re: Jobs and other rebuilding Comments
Works for large cities, because of diversity of Jobs. Rural areas or small towns may have one or two small to medium size companies, they need to be the targets of the retooling, rather than the large scale first. The more rural areas are forgotten in these discussions, and will probably remain forgotten over the next few years, and that's most of the country. Thought here is, why not do the smaller, less expensive, more widespread areas first ? Don't go cynical on me - these are shoe factories, and "Ditch Witch", and outboard engine manufacturing concerns, and all type of corps. These can be retooled, etc.
2d thought: everyone keeps mentioning roads. That's down the list, really. Problem I see in this area is Bridges. That is what is needed. Get it done. They are falling. Everywhere. Little to Big.
But Number 1 still remains Health, and Nurses.
And I know many of you are down on the military. Pres Elect mentioned a Natl Sec Force, but quit talking about it, I guess it rattled too many folks, although I was eager to see the plans. I think this was not aptly named, and I believe it was for a WPA or rebuilding type organization. If this organization was modeled (HR wise) along the lines of the military, or a large corporation, it could be very succesful. When people think of the military, they usually think go to war. Well, that's the purpose. But the military also has most of it's numbers devoted as mechanics, accountants, air traffic controllers...who can be the structure of a city. So why not use the same structure wise minus the combat types ? And fill in the blanks with retrains and refocused ?
Operational
Planning
Training
Administration
Logistical
The number and size, and types, would vary based on the size and type of the area. Not remaking the wheel, and not militarization. Anyone wanting details, query "US Civil Affairs". This one we definitely need to keep away from the military. But we can definitely use a proven blueprint, that has been in use since the Marshall Plan.
You seem to yelling into the abyss. Sad, I think your estimates of unemployment are way too low...as the unemployment rates are currently under tallied.
I hope for the best...but the fact that Clintonomics (ala Reaganomics) has returned to offset the even worse Bushwhacking of the middle class...we'll see more gambling on the stock market and futures markets and less investment in real employment.
e.g. IBM will layoff 10-20 percent in the next month..multiply that by 50 or more percent..
then local govts and the fed will be starved of funds in April...and downward we go.
we need drastic measures: A massive CCC - WPA employment scheme to keep people out of squatter nests and camping in forests and prevent them from sleeping in their cars.
Expecting China and Japan to loan more money to us when their people could be starving soon is a bit much to hope for. Remember unemployment rates are even higher in China and they have no unemployment insurance. They need to focus on their own internal markets...and we need to tax the rich more for their unethical gains in the last 8 years.
http://www.stripes.com/article.asp?section=104&article=19283
For the skeptics....see above article. You might know these folks. Truly capable people.
Angry Citizen,
Wages remaining stagnant relative to inflation is probably part of the reason behind a negative savings rate. Gov't also has many policies to promote debt instead of savings and to discourage work and promote consumption:
1. mortgage interest tax deduction
2. income tax and dividend tax rather than consumption tax
3. capital gains tax
4. constant inflation caused by loose monetary policy
5. understatement of true inflation due to manipulation of the CPI
6. bailouts of failing companies and sectors, encouraging further risks by others knowing that the gov't will clean up any mistakes
Our nation would be better served if each of these policies were exactly the opposite of what they are.
Print your way to prosperity! Call 1-800-ZIMBABWE for your free brochure!
Hyperinflation guaranteed or your money back!
Angry Citizen:
Again thank you for the excellent link regarding a foreclosure fix, and, BTW, thanks for your compliments on my family. Although the link didn't actually work (some others have been suggested - here's mine), the proposal is a very simple and I believe effective one. Allow mortgage terms to be readjusted in bankruptcy court. This includes adjusting principle to present market values and converting interest rates to reasonable 30 year fixed rates.
Why doesn't the investor class want to do this? Because they would lose money, that's why. But they are exactly the ones who should lose money because they are the ones awash in it from the economic policies of the last 30 years. If their losing money can bring the economy into balance so that it can function normally again and dry up excess investor money that contributed to the financialization of the economy, then that's a good thing, as Martha Stewart would say.
Another reason the investor class doesn't want this solution is that then all those actually paying on "underwater mortgages" will seek the same relief. That's a ton of homeowners who are contributing to the profits of the investor class that they don't want to lose. I say tough twicky, let all these people also have their mortgages readjusted although most of them would probably not want to go through bankruptcy to do so. So therein lies a slight problem.
BTW, bankruptcy protection has been stripped from middle class people while reserving it for the rich. Cases in point: (1)you can use it in the case of vacation homes but not in the case of your primary home. (2) you can not use it to get rid of student loan debt no matter how hopeless your situation. See Student Loan Justice and Sallie Mae Pauperizes Students.
Bankruptcy protection has also been at least partially taken away from credit card debt with a full removal likely if neocons had their way. Fortunately, McCain was not elected. The whole scenario is to create a permanent class of middle class debtors to supply profits to bond holders ad infinitum.
Dr. Reich:
What about the “Ricardian Equivalence” effect. Government spending only has a multiplier of 1 and if the government borrows to finance a tax cut, no new wealth has been created.
“But there is also another reason not to be too sanguine about borrowing to pay for the stimulus. There is an old idea in economics called Ricardian Equivalence, put forth originally by David Ricardo and restated in modern terms by Robert Barro. It states, briefly, that if the government borrows to finance a tax cut, no new wealth has been created. Because households are going to have to pay taxes eventually to retire the debt, they will save more in anticipation and the effect of the tax cuts on consumption is nil. There are both theoretical reasons and empirical evidence to suggest this is not literally true, but it is not completely irrelevant either. To the extent that consumers are "Ricardian," their consumption response to tax cuts will be muted.
There is one group that is absolutely going to benefit from the economic recovery program--economists and future generations of economic students. We don’t often get to run big experiments on big economies--and this is shaping up to be the mother of all experiments. Put on your lab coats.”
Check it out at:
http://www.forbes.com/home/2009/01/06/stimulus-spending-taxes-oped-cx_tc_0107cooley.html
America won’t need new roads and bridges, if no one is employed. We will just sit at home and eat government cheese loafs.
Anonymous DWP
Anonymous, I am no economist and you are certainly right about government spending pulling us out of Depression in WWII..but the character of that spending was a little different. We weren't building roads and bridges to nowhere, or mending infrastructure. We were building weapons and military vehicles, ships, and planes, items of vital national and international importance...things of great consequence and international value... My concern about the present is that the money that is spent in the stimulus is going to be phony money with a phony value and the result will not be filling some sort of vital concrete need, but merely inflation.
WWII didn't just pull us out of the Depression because it generated more spending...it created huge needs and giant goals to overcome. It was a cause, we had to save the world, we had concrete objectives. Everybody worked harder in the war effort.
What is money anyway? It is a promissory note representing a value of some sort, but the paper it is printed on is worthless. I think economists get so impressed with their numbers that they forget that there is a huge ideological component to value, and the value of money. All values in society, even monetary values, are ultimately defined by cultural values.
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This post has been removed by the author.
Jordan,
This discussion on spending brings me to an interesting point you made in an earlier blog about capital needing a place to go. I am not an economist and I don't tend to think like one, but it suddenly occurred to me that Investment and Debt are--as Wallerstein might say--"two sides of the same coin."
We have always tended to think of Investment as a positive thing without realizing that the other side of the Investment is Debt, Debt that has to be repaid . In the past half century, our economy has become more and more investment-oriented, and more and more debt-dependent. And I think you are absolutely right that when you say that this has been creating Kapital that has no place to go. I had never thought of it that way.
All these retirement plans, pensions, and savings require debtors that will pay large returns...when the economy is in a growth mode, population growing, settlement expanding, more families being creating needing cars, homes, food, etc., this works. But returns on investments stop coming back when growth as a whole is in check.
When that happens, it can be temporarily solved by creating consumers outside national boundaries, but as globalization progresses, the economy become more interconnected and more confined.
I think that it the situation we are in now. We need to think about how to manage an economy without growth, without increased spending. I am not sure what the answer is, I am just throwing this out as an idea.
I believe that Sandwichman mentioned a book that had been written by an economist on this subject several weeks ago. Anybody familiar with it?
Wednesday, 07 January, 2009
Magdalena said...
investment and debt are--as Wallerstein might say--"two sides of the same coin."
Which means the investments we all made the past bunch of years were in nothing “solid”. No brick and mortar, nothing such as “real stuff”. Virtual investments that went poof!
Which means we need to get back to the investments of WHY invest in company XYZ? Because they have a ground breaking product? Something significant to offer the world? Or just because we feel there is a groundswell simply telling us we need to invest in something or else we get left behind? (be it housing or stocks).
I confess to being a job-jumper the past few years. in my first 24 years of this engineering career my employer companies either got sold, moved out of state, went out of business, or sold my division.
Now I say “screw it” and join a company staying as long as I see fit to me. it’s selfish in many ways, but I also do not see why I should spend my time at a company if they show little real future in the work they are doing. They look unsteady to me. on the verge of collapse. Not being one to wait until I get the tap on my shoulder (anymore) I jump ship.
And the past 6 years I’ve jumped from 4 jobs because the companies were not going anywhere with their products & product ideas. That to me is bad on my part, bad personal choices, bad interview skills; but also showing a lot of companies are in a floundering mode.
My labor is another form of investment to me. just as cash, I see no reason to invest myself in a company that does not have a vision for their growth.
and i have not seen very many strong companies the past number of years.
So angry: look me up as “The Steve Tool” guy if you want to buy POTtery…
Govt caused the 1920s boom/bust (low interest rates)
Govt caused the protracted Gt Depression (deficit spending)
Govt caused repeat of this (same policies last 15 years)
The government is not going to fix the economy. Nor is the stimulus going to stop the ultimate unemployment crisis. There is one way out of this and no one is discussing it. So, we'll continue to fall into the abyss. Obama is going to have the crises of the millenia to deal with.
So Obama now wants to cut Govt waste...We've heard this before, starting with Reagan
He could start with NASA (won't happen)
So increase consumer purchasing power with mild CPI deflation (lower prices lead to more sales on virtually all product charts). This has the added benefit of increasing the standard of living of most consumers over time.
Magdalena
Most of the progress we had in last 50 years was due to constant influx of immigrants that need new housing and more products. Full employment Act has set up grounds for it. There was order and equality between debt and investment, between investment and buyers of products of those investments.
After the WWII the rest of the world was destroyed so there was no negative effects of globalisation. We benefited greatly from it, we did not import nothing, only basic material and exporting finished goods. That changed as the world recovered, but we forgot about protectionisam trough tariffs.
We also enjoyed Unions that were keeping in check the profit forces.Everything was expensive but people were payed good wages to pay for all necessities and to have extra for some new things. Consumption and production was in balance, without outside influence.
When world recovered after destruction, Thanks mostly to the Marshall Plan, they strted to influence our economy, it was even before Reagan.
In time we gained so many new gadgets and prosperity that was paid by loosing competitivness in the world. We gained something but lost abbility to produce most of the technology needed for new housing. The world with their cheaper and newer technology, ours wasnt destroyed in WWII, chased profit margins that are smaller then ours. They had nothing to loose, only to gain.
Instead evening profit margins, our leaders decided to stay on the same profits and lower the costs of production. That destroyed Unions over the years.
As workers make less money, products are becoming cheaper, not only cause cheaper labor in the world but also cause production costs are lowered by using computers and robots. then we gained extra prosperity from what computers gave us. Again we gained more prosperity, just imagine what a huge difference there is now in what we have and size of our houses comparing to things in 60s and 70s.
The difference in what people make and want is made up of debt, which provides further advances and prosperity at a faster rate then othervise. But the whole world is chasing that, knowing that if we lagg, someone else will gain huge advantage. Debt is just a way to jump few years ahead of others, at some cost. It works tremendously in the short run, but losses in the long run since you have some extra cost on interest that you can not use, that is wasted. Plan is that if i can advance by debt then i will have more money to pay off that debt easier. That works only if you are the only one with advantage of debt. When everyone chases the same, there is no advantage. So we have to pay off the debt and loose what we lost on interest and no benefits.
Please stop talking about high tax rate to rich becouse they did something unethical, we all would do the same in their position.
Rich has to pay higher tax only because they are the only that CAN pay more so we can pay off the debt wheather future or present debt.
If they don't they will lose it anyway by inflation of their investment. Others do not have anything left to loose. Of course everything is gradual, more you have more you can loose. Except those super rich that will not loose. And those super poor that wil not gain anything.
Treassury can sell bonds internally, there is a lot of capital on the side waiting. They do not want to do that because it will further take away from Wall street stocks and hurt pension plans and municipality bonds.
But, choises HAVE to be made, otherwise everything will colapse, they would loose it anyway if nothings done.
WWII was extension of New Deal, plus many unemployed were taken of the market and sent to war. Sudden O unemployment and extra production brought women into market. Extra production and extra wages balanced the economy.
Transportation pathways are essential for economy, not as something to fix unemployment. More jobs is just an extra benefit. are the rates of returns important whether stimulus is in infrastructure or tax cuts when most important thing is to start doing it? Wage inequality has to be balanced out one way or the other. Tax cuts witll give more buying power to consumers and infrastructure will do the same. But most important now is to feed and keep shelter to all of those that might need. Otherwise govt will have to spend directly for that without any side benefits, like renewd infrastructure and. And spending will be almost the same. But jobs will provide more money back into Fed budget.
So Govt is playing margin game again for all of us to benefit.
But all that has to be payed by those that can, by those that advanced trough debt: rich. Debt is a mean to jump trough time and reach, hopefully, better times.
datadave,
Don't know about you but I like Dr. Reich's unemployment numbers better than the prediction of 30%-40% unemployment. (Not counting the 1st italicized paragraph, look 7 paragraphs down for the prediction.)
Switching subjects, I saw an article a couple days ago that suggested that California taxpayers expecting tax returns may get IOUs instead this year. Since Cali. currently has one of the highest state unemployment rates, if IOUs really get sent, that could hurt Californians pretty bad. One has to wonder if there are any other states considering the same thing, and what effect that could have on individuals who count on tax return money to subsidize their other expenses, and what effect it would have on their local economies.
I have great respect for Robert Reich, and I would like his opinion on the following stimulus plan. It would create jobs, make American industry more competitive and reduce the deficit. Simply eliminate the job killing business payroll tax and replace it with a business gross receipts tax. That way, domestic businesses would pay less and foreign businesses selling here would pay more. Does this make sense?
Jordan & others,
Thanx for the interesting points about investment and capital.
I am beginning to think of ALL investment as a giant Ponzi scheme...all investment is made with the idea of future and uncertain returns. Social Security is a Ponzi scheme..We are at a critical point right now because the Baby Boomers are reaching retirement age, and want to cash in on their retirement plans. Perfect timing for our economic crisis...was this all purely coincidence? Or an outcome of the need for a large return on investments (debts) that cannot be serviced by current economic demand?
I don't know what the answers are. As an anthropologist, I do know that more primitive societies have developed cultural traditions that tend to keep the size of the population within the carrying capacity of the environment.
An example: the Nuer of the Sudan, studied by the British anthropologist Evans-Pritchard in the early part of the last century. Population was controlled by bride price which was paid in cattle. The entire population was nearly 100% dependent on cattle for survival..cattle provided meat, fertilizer for crops, dung for fuel, milk, and served as a form of money,"standing wealth." A man's stature and wealth in society could be measured directly by the number of cattle he owned.
Young men could not get married until they had accumulated enough cattle to pay the customary bride price which was usually set high enough that it was a difficult goal to accomplish and often delayed marriage until men were in their early 30s.
This cultural tradition had the overall effect of limiting population growth and was a way of keeping family size directly proportional to the "means of production" (cattle).
In medieval Europe when most people lived on a peasant economy, marriage was regulated by dowry which was often paid in workable land. If you did not have land to farm, if you did not have access to the means of production, then you couldn't start a family. Population was again regulated by marriage customs.
However, during the industrial revolution when people started moving to cities, most of the natural constraints on marriage and family size got lost as factories in need of labor payed minimal wages to people of all ages, and population growth was encouraged.
I am just citing these examples to give you an idea of cultural traditions that limit access to the means of production and control population variables. I don't know of any such controls that work in our present-day society...except possibly education, which delays the age of marriage and reduces the number of reproductive years. The need to provide one's children with education is a brake on the size of a family one can afford.
I don't know if we can find ways to regulate our economy, unless we find ways of limiting population, but as long as retirement is a Ponzi scheme we are working at cross purposes...
Is it possible to visualize a complex society such as our own, with civil rights, with laws or social customs that regulate growth? If there were, how would we get from A to B? I have no idea except through such human castrophes as famine, plague, or war.
Just as Seve pointed out
Many companies are stagnating and any investments in them lead to failing investments. Corporations came up first with bonds in order to borrow money. After they reached the limit, then they do IPO and sell stocks in order to borrow more. Then in this lending spree they came up with CDOs to borrow more.
In order to borow and survive that debt and interest you have to profit more to repay it. Many corporations squandered that debt on executive salaries and aquisitons, but never made any effort to sell more. They did profit more but only when they squezze out workers.
When you borrow for home you stop wasting rent money so you should be fine in the long run. But when corporation aquire other company there is no added benefit if other company does not have a profit to help repay the debt. Stocks are just another way of borrowing with never repaying the principal. With larger company there should be sharing of overhead but that rarely happens, usually there is more overhead. So company has to keep borrowing in order to survive. Not to mention how much of stocks are wasted on executives, when stocks were supposed to bring more money in.
They all planed to jump time and get ahead of other companies, but all did the same and all are ahead, and all are at the same point in reference to each other. It was a race that all finish together. And now they all have to go back at the starting point.
Value of stocks are going down to meat corporation's equity equivalent. Since corporations hid their debt trough magic accounting suddenly all stock owners realize that there is no equity in them and stocks go down to meet the walue of the equity.
Question is how to increase walue of their equity? by taking away from low wages or to take away from those that take too much anyway? It becomes power strugle that was going on last 30-40 years. since there is not much left in low wages only option is to take away from those that have what to give. And they were taking too much anyway comparing to how much they worked.
SS is not a ponzy scheme, it might seem like that since those that paid in it are not sure if they will get anything back.
The problem is that SS is not totaly separated from Federal budget. US owes more then $10 trill since they do not count how much they owe to SS. All tax and ss and medicare intermindled in one budget, and our govt spent all of it together. SS money was not kept aside in separate account, it was lended to US governemt, yes it was in separate account but treated just as it did not. There are US T-bills in SS account and in few years SS will need to start cashing those bonds to pay off baby boomers. That will happen when SS receipts become smaller then pay outs. That is why our govt is scared now. They spent all that money and there is nothing to show for. It was just as added tax.
That means that even now our govt is spending all of that extra cash that is comming to SS, but they do not wanna pay back. The same thing can be said for madicare account. They wanna to spread that margin of incoming and outgoing cash. But do they want to do the right thing and keep it separate? No, they wanna raise the tax effectively but not to call it a tax increase.
Especially since SS and medicare are not deducted by nonrefundable tax credits.
Why they do not want to call it a tax increase? because they are afraid of elections. But if they all do it unanimously there is no negative effects of tax increase. But since there is nothing on their platforms to be realected thats only thing they hang onto. Taxes are paid on net income anyway, not on gross.
Now the question is who can pay more taxes? can poor pay more or rich? Thats why it has to be progressive towards who can pay more. Not to punish them, since any off us would like to be in that tax bracket.
Linda,
I don't know about social customs, but no matter how squeamish we may be about the subject, we do have abortion rights. Imagine what the population would look like if women didn't have the choice. Higher education definitely keeps people from having tons of children early. I know very few graduate students who have their own families--the majority aren't even married, and these are people in their mid-20s to late 30s.
If we actually taught teens about proper protection instead of pretending that they don't have sex, and taught them things such as how expensive children are and what their emotional and material needs are, perhaps we'd see population growth slow down some. The last time I looked, African-American women were starting to look an awful lot like caucasian women in terms of their fertility rate. (A-A women are having fewer kids than they used to.) Hispanic women still have more children than any other group of women. That should be no surprise given the generally lower educational attainment and income of Hispanics. My answer to most of our social problems is usually more opportunity, equality, and education.
In some countries, the gov't actually has incentives to have children since their population growths are lagging too much. Japan is one such country. I want to say that Sweden is another, but I may be wrong. If it weren't for US immigrants, we might be doing the same thing here.
Thanks for the anthro. lesson!
Magdalena said...
We are at a critical point right now because the Baby Boomers are reaching retirement age, and want to cash in on their retirement plans. Perfect timing for our economic crisis...was this all purely coincidence?.... as long as retirement is a Ponzi scheme we are working at cross purposes...
Jordan said:
Many corporations squandered that debt on executive salaries and acquisitions, but never made any effort to sell more. They did profit more but only when they squeeze out workers……how much of stocks are wasted on executives, when stocks were supposed to bring more money in.
I wondered about the boomer “sell” affect for a while. I was too stupid to think about selling first… but all those people who have been in 401K’s, etc, truly are reaching a “sell” stage in their life. Coupled with this other mess it becomes a perfect storm…
Everything we’ve seen the past good number of years seems to have been built on a house of cards. All borrowed funds in “virtual” products.
Thinking back the past number of years what really has come along that is “new?”
I see the late 80’s and early nineties when aerospace dumped engineers. We went to commercial work, and there was a serious gain in commercial products (to me) in he early to mid nineties.
Then what?
It seems no more “stuff” was developed in the late 90's and 200's. “stuff” was exported to china for manufacture. The worker was screwed. CEO’s took home a lot of profit in bonuses (which never came back to us investors as truly fair dividends?).
We as a country impose rules on workers here, yet allow products made elsewhere under virtually zero worker rights rules without a compensating difference in import costs to balance this choice out.
That sounds like another root cause issue.
Doc:
One could make a strong argument, looking at the various problem/solution sets laid out by your commenters, that government by the people ain't such a good idea.
Hold on folks! Not saying that there are not many valid ideas posted nor that many can't see the forest for the trees, but the variety of ideologies represented in the various posts and the solutions or criticisms derived from those ideologies, gives us a view of the complexities in attempting to reach a solution.
This should give us some idea of the difficulties in our legislative/executive process. Granted there are not 535 commenters here but were you to scour the blogsphere you would find a lot more than 535 opinions. Many of them would concur with the various proposals here but there would be many new and different views as well. Trying to find consensus among all these offerings can make your hair hurt.
There does seem to be reasonable consensus that our consumptive habits are a primary reason we find ourselves, as individuals, in such dangerous territory. Hard to argue against that. On the other hand it is posited that consumption, as a precent of GDP, should reduce to 60 or 65% instead of 70%. In aggregate a huge reduction. Individually probably not so much. Even at 60 or 65%, our GDP growth will continue to be highly dependent on consumption.
I am in Fox's and John's camp, in that going forward, I believe government is going to have to be more active in aiding GDP growth, especially if consumption does drop. Of course that's a double edged sword because we will be faced with a need for budget surpluses to pay back some of the debt we have, and will continue to acquire, and to reduce the debt service, which is approaching suffocation levels. That will mean higher taxes and then you get to; but on whom? No matter whom, that drains money from the economy and has a depressing effect on GDP growth.
There is also much concern expressed about our financiers; China, Japan, the Middle East, etc. The concern is not invalid but we should remember, in the meantime, these countries, far less than we, are not inclined to shoot craps with their sovereign wealth. They're not buying our bonds assuming that they will eventually be worth zilch. They understand, often more than the US populace, that a return to a strong US economy is paramount to their future successes.
Being the eternal optimist I can even envision a scenario where, after this heinous unfolding event, they might better understand the need for maintaining a solid wage base in America, to offer them more opportunity for their own growth. Longer term that could be problematic for them for at some point it becomes, once again, an us versus them competition.
There is also much haranguing about US savings rates. Frank Thomas and I have had an ongoing discussion about that and I am still of the impression that the problem is not low, or no, US savings, it is the formula is constructed such that the huge increase in debt obscures the savings. To one posters point, many people are socking away savings in 401Ks or IRAs and then fulfilling their consumption needs or desires through credit; both credit cards and home equity loans. Either way the net picture is not promising but like Fox I am inclined to seek root causes. If we were to return to our previous norm and we put an extreme emphasis on more savings, we could see even more credit spending. If we understand that credit spending is the problem new legislation might be enacted to severely limit credit use. Not so much through hard restrictions on consumers directly but by fixing allowable interest and fee charges to such that the industry itself will rein in easy credit.
I think we need to remember that debt, in and of itself, is not all bad, it is not evil. Like all other things it needs to be managed and used, preferably, in moderation. Not easy in a populace that is not steeped in financial management skills. Are we suggesting that if we, as individuals, have a problem understanding something then we should defer to a big brother government to shield us from ourselves? We do need them to level the playing field of fairness and transparency and regulating the industry is the best method for that.
One poster suggests that the tax deductibility of mortgage interest is a bad thing because it promotes debt. Now if our options were, buy a house or live in a tent on government property, the argument might hold water. Since most of us, for comfort and raising a family, need a dwelling to live in, that leaves us with rent or a mortgage payment. Studies abound that homeowners are more stable and better citizens than non-homeowners. Historically, landlords have not been held in high esteem and de-incentivizing home ownership is incentivizing more renters; thus more landlords. To my mind it's awfully hard to argue that mortgage debt is comparable to credit card abuse.
Do we need changes to bankruptcy laws giving more flexibility to individuals in settling all debts? I vote aye. I see little reason that, once choosing that option, an individual should be faced with anymore constraints than a corporation. It is argued that individuals, unbridled, might be more inclined to file bankruptcy but I see that as another example of legislating the norm based on the exceptions. Besides, Chapter 11 filings have become an everyday business strategy for many big businesses.
Throughout your blogs we see references, usually derogative, to the "isms". To the best of my knowledge, and that's covering a lot of years, no one has yet come up with the perfect confluence of a business/government/citizen system. Historically it can be argued that our "free market" approach has been more successful than any others tried but over our history there have been so many major changes in vital variables that it's hard to say going forward, in today's world, that it remains such. Pre-twentieth century we were primarily agrarian with only minimal international activity. Through much of the twentieth century, especially the truly great growth years, we had almost no manufacturing or commercial competition. In today's world all that has changed.
Our successes, coupled with some of our government's failings, have yielded significant capital accumulations. Had those accumulations been reinvested in US endeavors, likely we would not be where we are today. Even before globalization set firmly in, financial movements of capital were proliferating around the world. Hopefully, another of my optimistic dreams, a lesson to be learned by our vaunted business leaders from all this, will be a need to look inward and figure out ways to profitably invest in America. In the long term, the government can't completely fill that role.
Though I am very sensitive to John's concerns for the homeless and the poverty stricken, at this time I'm not sure I agree that should be our first priority. No doubt that is an absurd situation for a country with our collective wealth but if we focus our attention there, we will be seeing more and more folks falling into that abyss. We've got to focus on getting our workers back to work. In doing that some of the homeless, perhaps the newer entrants, will be helped. I do agree that if we can turn our dilemma around we need to shift our focus to the really needy in our society.
We take great pride in our belief that all of us are born equal, arguably in opportunity, but it's far from the truth. There are some who will always need taken care of. Many others merely need a helping hand but often more than a momentary helping hand.
The irony and the shame is that if we can turn things around without real pain, we are apt to go back to business as usual; seeking personal gain and appeasement, ignoring all those among us who need help. One of the great benefits of the GD, also muddled by WWII, was, as a populace we began to pull together to improve the plights of all. From the top to the bottom there seemed to be a unity develop that has slowly dissipated. A really painful road might resurrect that but the pain will be suffered by many who are undeserving of it.
Magdalena,
All of those means to curb population in the past were very effective means to keep classes separate, to never allow those from poor class to get ahead and reach middle class. Population growth is the best mean to keep economies going, due to demand for new housing.
But in time we reach another step of limited resources that we have to overcome. Technology always find the way to cross that trashold of limited resources. Remember one of my previous posts about how just a simple TV comes from weighing 60 pounds to todays 10 pounds, even tough energy used is way higher then for making old stuff, but it uses less material for the same thing and even more.
And as california enjoyed boom due to increased borrowing you have to keep borrowing more and more to keep enjoying the boom, if you base growth on it. They jumped the time and now time is catching up with them. Or, they have to go back to what should they enjoy if they didn't borrow, even further back since they wasted money on interest.
We all borrowed, from personal, to corporate, to local govt, to state and to federal, and to world borrowed-jumped the time of progress, now we have to all go back unless we find aliens in space and borrow more.
Max Keiser agrees with Magdalena: Social Security is a ponzi scheme.
Yuo can hear Max talk more about other alleged ponzi schemes in his latest radio address and look for him to smack his global audience in the head with some truth when his new BBC World News show, The Oracle begins airing on January 9th.
The reason for discrepancie in low saving rate of US populations is derivatives and investment banking system. Even tough we do have a lot of savings in form of 401k and ini bank savings, even stock purchase is that all our savings were used as a leverage to borrow more, up to 10 times and then invest that. Thats what hedge funds, investment banks and other funds did. They invested our hard cash into borrowing tenfold and then invest into another investment bank. That another bank will take that investment and use it to leverage, once again 10 times more and then invest. That is how they came to leverage ratio of 35:1 using derivatives. So if you pull out a $1 the bottom bank has to pull out of investmants whole $35 or find a replacement. The crash came when there was no replacements willing to use that bank.
Not to mention haw many commisions has to be cut to many brokers comming from that single dollar. Previos leverage ratios were 5:1 or at most 9:1 untill investment banks were allowed to split from regular deposit banks that were ragulated.
SS has helped millions of elderly and impaired people to survive or to have a vastly better life.
Madof's ponzi scheme helped exactly one person--himself.
There is absolutely no doubt SS has been one of this nation's great success stories, and that is why most Americans do not want to see it ended or privatized.
Dr. Reich,
The responses to your essay cover the issues and possible solutions rather well. However, I want to challenge you on one point: you mention that "our debt is 50% of GDP" and thus not out of line with most industrial nations today.
I assume your use of the word `debt´ refers to our "National Debt." If so, this figure is
over $10 trillion now and has climbed quickly to ±$12 trillion with Paulson's and Obama's recently announced added rescue and revitalization funding. This gives a Debt/GDP ratio of about 84%for 2009, far higher than your 50%.
However, as I demonstrated in actual data provided to you some time ago comparing the Swedish and Japanese equally serious 1992 economic breakdowns, both countries entered their respëctive crisis with National Debt/GDP ratios of ±70% in 1992. However, Sweden´s tough approach to its banking crisis brought this ratio down to 40% by 2004 while Japan's approach brought its ratio up to an astonishing 170% by 2004!
Yet, Japan, despite this exceptionally high National Debt to GDP range today, is still managing to be a world-class competitive player in marketing highly advanced, innovative products, and services across the globe. While their recovery during the 1992-2004 period was painfully slow and costly versus Sweden´s, Japan has managed to achieve budget surpluses since 2003.
So I agree with you, Dr. Reich, that the U.S. National Debt/GDP position, while far from being acceptable and a cause of great concern, is not categorically `life threatening´ at ±84%.
Presuming this ratio will likely increase further, say up to 120% by 2016, is also not the end of the world PROVIDING the added debt is CONSTRUCTIVE DEBT that reflects a broad-based paradigm change to aggressively stimulate innovations, small business growth, exports, and net new job generation in the 6 million plus range over next 6-8 years ... without question a bold strategy to lift our economy´s industrial base and export potential significantly over the long-term while simultaneously to provide the near term economic resusitation so critically needed.
Of course, this implies having the appropriate system-regulatory and oversight measures firmly in place and transparent ... effectively controlling the excesses of all types of debt lending and borrowing. It implies a first class selection and coordination of projects at federal, state, and local levels, (including elimination of `Pork and Earmarks).´ It implies a realistic and dedicated approach to project cost controls and full accountability.
Now is a time for clear heads and sharp focus on productive Investment and Renewal options, and related Returns.
A few comments on some reaction on my description of the role of cultural tradition in limiting population...
1. Jordan...the Nuer of the Sudan were a classless society, except in the sense that older men tended to be richer than younger men. The peasants of medieval Europe as a group were classless. Their society and traditions could reproduce itself WITHOUT an upper class, though we know that a military, royal class overlaid itself onto the peasant population and exacted tribute and taxes in exchange for military protection. But the peasants--as a group--were economically capable of reproducing themselves without an upper class. Dowry and bride price did nothing to promote class. You don't really get distinctive classes in cultural evolution until the Industrial Revolution.
2. Social security is a Ponzi scheme in that it pays out proceeds from current income. The money you pay to Social Security doesn't go to a safe vault and sit there and wait for you...we paid retirees incomes when we paid our Social Security taxes, and our social security pensions will be paid the same way. SS falls apart when the payout exceeds the tax input; it works only so long as new "investors" are adding to the fund and postponing benefits.
3. Controlling Population Growth. I think any economy that depends entirely on population growth or continued growth is inherently instable, and I think this is the main problem we are with our current economy.
At least one other modern society has been limiting population, the Chinese. They have been actively promoting birth control by taxing children after the first child. I don't know what the exact rules are, but in the past generation China has produced a new generation of only children.."little Emporers"...
To me, the important question we need to be asking is not "how do we stimulate the economy?" but "how do we make sure that all sectors of our population have access to necessary goods and services--housing, food, clothing, medical care, education WITHOUT the need for continued growth and excessive waste?"
Correction...when I say you don't get classes in cultural evolution I am focusing mainly on Western Europe culture..there were certainly many other class based and slave based societies at various times all around the globe.
Angry:
Not familiar with Max Keiser but watched your first link and am not impressed.
His was not a startling revelation. Most of us knew that although we don't think of it in terms of a Ponzi scheme primarily because it is not a swindle. The concept of current workers funding current retirees has been part of the process from the get go and I don't know that it was ever hidden.
From the start, those over 65 were eligible for benefits and they had never paid in a dime. Admittedly this should have been corrected, adjusted, along the way but political will is not made of stern stuff.
Prior to the current rise in unemployment, and I have no idea of the cutoffs, we are still collecting more in taxes than is being paid out and last year that was expected to continue until 2017 when the real wave of babyboomers starts retiring.
All in all, it seemed that Mr. Keiser interjected his analogy out of some sort of pet peeve.
Magdalena:
Your anthropology lessons are interesting but the implications seem to be that these cultures attempted to manage population growth via their systems. Is that really the case or was the contained population growth simply an adjunct of other goals?
Usually when we speak of "stimulating the economy", we are talking of stimulating the growth of the economy.
Even if we were all to learn to live with so much less, as long as that less is material goods, whether food, housing, clothing, medical care and education, we will need to produce them and as long as we need to produce we will need new births to provide a follow on workforce. If life spans continue to extend we will always have a "population growth" unless we can micromanage the hell out of the process.
I'm not sure either, but my recollections are that the Chinese methodology for limiting births is slightly more heinous than taxing.
This post has been removed by the author.
Magdalena:
Not meaning to pick on you but what is this statement?
We have always tended to think of Investment as a positive thing without realizing that the other side of the Investment is Debt, Debt that has to be repaid .
Are you talking about the investor or the investee as incurring debt? Not necessarily true in either case. If the investment is in bonds, then yes the borrower is incurring debt, which generally he intends to have no problem paying back at the specified time. if the investment is in stocks, the investor may have borrowed money to invest it but he also may have done it from existing funds, in which case he has no debt. The stock issuing entity incurs no debt because for common stock, as opposed to preferred, which is really a loan, there is no guarantee of dividends or repayment, so the stock issuer incurs no debt.
Investments are always made in an anticipation of gains. Nothing wrong with the basic paradigm. The problems always arise from excess.
Without investments we'd all be walking or riding bareback because even saddle makers probably required outside investment.
Art,
In the two societies I described the only coercive factor holding these customs in place was that potential parents were divorced from the means of production...there was nothing in Nuer society that prevents younger men and women from having sex and having children (except illicitly) except that a family could not feed itself WITHOUT cattle.
A woman in medieval Europe could not marry or have children that were socially acceptable without a husband, and she often could not have a husband without a dowry. The dowry, tillable land, was the means of production that allowed a peasant family to feed itself.
Both of these social controls limited access to the means of production.
In today's society, most high paying jobs are limited to those with appropriate educational degrees and licenses. This is not an accidental outcome of a custom, but a direct outcome of a rule that is designed to maintain a level of medical care. In complex societies with a division of labor, these customs do not control population directly.
Magdalena:
Your answer suggest to me that instead of a practice established for population growth it was a practice developed to ensure that society didn't have to bear the burden of supporting have-nots.
And surely, the old man who had a lot of daughters could expect to get rich. ;)
Them were the days when women really were worth something. ;) ;)
Art, I am not an economist and I don't know a lot about the stock market so I am open to correction, but in my way of thinking, an investment in a particular stock does incur a debt on the part of the company. The company is expected to generate profit and return that profit to the stockholder, so it is, in effect, borrowing capital from stockholders to produce profit.
"Going public" on the stock market is a well known way of building capital for enterprise; it is a way of borrowing money which is eventually to be repaid with dividends.
FYI
@ 7:00 p.m. Eastern Time CNBC interview with Obama on Stimulus Plan - his thoughts.
@ 10:00 p.m. The B & C of Mortgage Fraud.
Magdalena:
Debt is not necessarily an economic phenomenon. It is common business, as well as personal, parlance for an obligation that must be repaid.
Now doubt all investors buy stocks expecting a return. In today's world, it is often not dividends, most corporations that pay dividends pay puny rates of return, but rather stock price appreciation. It is inherent in the contract, although not explicit, that the company will use best efforts to produce profits and maybe, someday pay dividends, but always with an eye for increasing stock value. Microsoft made huge profits for years before commencing paying a dividend.
Dividends or stock appreciation, in either case the company is not honor, or legally bound, to meet investors expectations. There is an area of fiduciary responsibility but that is usually limted to fraud or gross negligence.
On the other hand a "debt" contract specifically states that the borrowed funds will be paid back, usually with interest, in some manner or another.
Maybe another way of differentiating is that stockholders cannot force a company into bankruptcy but debtors can.
I understand what your trying to say but it's a good idea when discussing any subject that we clearly define the terms we use so that we're all understanding what is being said.
Going public is a godsend for the original owners but again any repayment obligation is more in the mind of the investor than from the company receiving the funds.
If you accept the premise that I have put forward in previous postings that we have too much investment money chasing too few quality investment uses, than I suggest a radical measure that we cease saving and investing for retirement and instead fund retirement from greater Social Security taxes and disbursements. Saving for most people should be for down payments on major purchases such as homes, cars, college educations for he kids and unexpected expenses.
At the same time there should be stricter controls over all consumer lending, including maximum interest rates pegged on prime rates, but keep as low as possible to discourage lenders from pricing in risk and lending to subprime borrowers.
Had the couple of trillion dollars lost in the stock market crash not been invested but spent for cash purchases in lieu of credit, we would have a strong economy and no credit crisis.
Of course that will require tax policies that resemble the 1950's rates, up to 90% of high incomes, but as Art pointed out, living on just a couple of million a year probably should not be considered a hardship.
We could benefit from copying the Japanese corporate model where top executives earn around 20 times the average workers wage, and the lowest wage levels are significantly higher than comparable in the US.
Anyway, whatever is done, we need far less extremes of wealth and poverty, less debt financed consumption and a more human utilization of taxpayer funds.
Have the Fed pay off my mortgage to the bank at a significant discount. I promise to spend like crazy with the extra $2K per month in disposable income. I will also invest a percentage in the bank as thank you for helping us out.
A smattering of responses to remarks you made...
"The core problem lies on the demand side."
Or is the core problem insufficient productivity? We're not creating real wealth enough to pay principle, plus interest, plus generate a reasonable profit.
"Exports cannot possibly fill the gap."
Not when financial claims created by a Ponzi scheme are held sacrosanct. So, you're right. However, were the securities-based financial system sent through a bankruptcy reorganization (as should be done), then exports could become a powerful engine.
"We are caught in a vicious cycle."
Yes, and it begins with some lie about "magic" and "free" markets ... and ends with no courage in political life to bury the dead once and for all.
"Mortgage mitigation efforts to date have failed largely because investors won’t agree to take their losses on bad investments."
A movement to shut down the securities-based financial system would change this faster than you can say, "George Soros is a former Nazi collaborator turned drug pusher."
Art,
His point was just that eventually--like the Madoff scam--so many people will be drawing their money from the system that we'll realize there isn't enough to pay everyone out. The implication wasn't that SS IS a scam, just that its structure is very much like a pyramid and will one day topple.
So no, the idea is not a novel one in itself, but Keiser is a pretty brilliant (and entertaining) guy.
Art, thanx for the correction on how stocks work. As an investment vehicle, stocks seem to be a much more sensitive barometer of what the economy can take..and more of a good thing than a bad thing. There is the presumption of profit, but not the obligation to pay...
Silverfox, you are getting very close to what I am thinking when you say:
.. we have too much investment money chasing too few quality investment uses, than I suggest a radical measure that we cease saving and investing for retirement and instead fund retirement from greater Social Security taxes and disbursements. Saving for most people should be for down payments on major purchases such as homes, cars, college educations for he kids and unexpected expenses...
I think what we need to do to control population and growth is to turn the system upside down. There should be some sort of financial barrier to getting married and starting a family..a way to curb population growth and demand for goods and services that is tied to current state of the economy. Instead of investing for old age, we should invest in our youth and our offspring. Something like a marriage tax that would be the modern day equivalent of bride price or dowry... Families should invest in their children and their children's families.
Of course, this kind of thing would be ideologically very difficult to swallow, but it might work.
TC said...
I NEVER understand how the productivity numbers are developed! I swear they do not include the gains I have seen in my own work.
I swear one engineer today can accomplish the work of 20 some 30 years ago.
I never saw the improvements so clearly until I worked at a light fixture company and released 9 new products in 9 months via just me. paperless, burn a CD, and send it to the fabrication house. (plus my boss for reviews).
that helps explain why with enrollment in engineering dropping year over year for the same 30 years we have not seen an engineering shortage. (so there could be near 20:1 fewer engineers today?) (and that's OK?).
meanwhile, the manufacturing details also have seen huge gains by using software that integrates engineering designs into manufacturing processes.
I contend that the productivity dividend has gone into the CEO bonus plans... it sure went somewhere. generally product prices stayed flat or dropped.
to me the biggest leap in my productivity was between 1995 to 2004. software and hardware gains were stunning! (and fun!) since then it's been pretty flat for any significant improvements.
Magdalena:
Wow. Stalin had some effective ways of controlling population growth.
Have you ever heard of the term liberty?
Steve:
Some productivity gains went to the CEOs. A lot went to gov't too, directly via taxes, and indirectly via inflation of our money supply.
Now Obama is just going to continue the same old same old. More gov't spending, borrowing, printing, and intervention. I can still hear the campaign sound bites about the "failed policies of President Bush". What a huckster.
Magdalena:
Very difficult if not downright impossible to control population, specifically putting obstacles to marriage. Ever hear of the " sexual revolution "? Modern life which has forced sexually mature folks at age 14 or 15 to defer marriage for another ten years is impossible, so now everybody engages in sex long before marriage, and one in three births is out of wedlock. Legislating more restrictions to marriage will push the illicit birthrate to near 100% !!!
Nor is legally enforced birth rates very effective. In rural China where families may have only one child, farmers want sons to help them work the farm in old age, so infant females are killed at birth. The result is towns and villages in the back country where there are literally no young females, so young men practice transvestite and homosexual behavior on a grand scale.
You can't fool around with Mother Nature !
You must have GDP growth to absorb population growth and to satisfy human ambitions. You don't have to get to revolutionary to create a rational economy, but you do have to accept that the extremes of income and wealth distribution can not coexist in a balanced . stable democracy over the long term. Here is what I would do.
1.Index minimum wage to annual GDP growth and inflation, to insure some sharing of wealth increase among the lowest sectors of the economy and to create a "bottom up" pressure to further share growth up through all levels of wages.
2.Impose reasonable controls on lending. Require down payments on larger borrowings, say 20% minimum on homes and cars, 10% of smaller appliances, plus cap interest to a few percent over prime rate to discourage lenders from extending credit to poor risks and covering the risk with high interest. You currently pay 22% interest on your credit card to cover the bank's loss when other high risk borrowers fail to pay off their debt. People with good credit act as insurers against losses from people with bad credit potentials.
3. Limit the amount of tax deductions a corporation can take against executive compensation. Perhaps a sliding progressive scale, wherein total compensation over a certain amount, say $3 million dollars,is only 10% deductable. Stock holders will be less willing to pay high compensation when they realize it all comes out of their profits and dividends.
4.Restore WWII progressive tax rates to the maximums of 70%, 80% or more on very high income.
5.Adjust the Alternative Minimum Tax to balance against Capital Gains taxes,to close the current loopholes where people earning hundreds of millions of dollars pay at rates far below what the poorest taxpayers pay in taxes.
6.Increase Social Security taxes to double or more their current level,and take off any cap on the amount of income subject to the tax, to permit much higher payout rates for folks when they retire, increasing everyones sense of personal security and providing less incentive for people to treat the stock market like the Wall Street Lottery that it has actually become. It is sheer madness to believe the average wage earner, earning less than $20.00 per hour, can save enough money and live on it for 20 or 30 years after retirement. At present, the only possible way to do that is to bet a percentage of your salary for your entire working life on winning the Wall Steet Lotto. But like now, sometimes we all lose. What is going to happen to the tens of millions of retirees and near retirees who will need that lost
money in a couple of years? Will everybody go on Welfare ?
As radical as all this may seem, just wait a few more months, or maybe even a year or two, when it finally sinks in on everybody what has happened with this financial disaster. Our lost retirement nest eggs, our extra home equity to fund a comfortable life, it is all gone and won't be back, if not forever, at least not for another twenty or thirty years.
So as a nation we have a choice: radically change the way we operate our economy and share the wealth, or watch as we sink below the level and condition of a Third World country. I don't think the majority of the people wil let the latter happen.`
STIMULUS NEWS FLASH
I just heard on CNN/Campbell Brown where Larry Flynn of Hustler, and Joe Francis, CEO of Girls Gone Wild, requested 5 Billion Dollars in Bailout Money, from the Federal Government. The basis for their request, was that they felt the Porn industry needed to be revitalized.
Well, I'm more than ready to ask for mine. My basis will be I want it to pay bills Because I think people I don't know used my money when I didn't say they could and I want it back. I figure twice as much money as I owe. And I know that to the penny. So, does anybody know where we can ALL get some of those Federal Bailout Request Forms ? They gotta have a special form for that, cause they sure have a form for everything else. Please post the form number so we can all apply. I'm gonna start looking now. This can be our own little tax payer revolt.
-UTR
Why must Dr. Reich and others cling to the premise that a homeowner in default is, by definition, entitled to a bailout courtesy of his or her fellow taxpayers? If the homeowner's lender is willing to modify the loan terms, fine. Such would come at no, or at least very little, cost to the rest of us. If a buyer bought the home on the hill with the killer view, only to learn that he paid more than he can afford, his fellow taxpayers have no duty to keep him in that home. (Likewise as to a homeowner who paid a then reasonable price, yet once values became inflated treated his home as an ATM.) One key condition of the economy's recovery is a correction of housing prices. Until those prices once again become reasonable in relation to incomes, based on the typical 30-year fixed mortgage, that is, housing, along with the rest of our economy, will remain in the toilet.
Mr. Reich, I agree that the regulators have injected sufficient capital into the markets that give them the liquidity they need. However, it hasn't been nearly enough time to effectively gauge the long run impact of these efforts. As I'm sure you know, a good portion of research shows that the impact from LOLR activities is typically not seen for at least a year or more after the event happens. So, we can't really expect much from these measures, except near term stabilization of insolvent and/or illiquid firms. Also, I'm sure you've seen the research that shows often times in situations of severe financial instability, fiscal stabilization efforts often increase the severity of the situation, rather than achieving the intended objective.
braininboise - please allow me to introduce myself, We have something in common. We think, or at least I used to, that we should keep making those big mortgage payments for that American Dream we live in. That view from the hill. (My picture by the way I took from a Helicopter I was flying). That big piece of Ground with the horses, and dogs, fenced, with a barn. I don't live in a city, folks. Won't do it. Don't see how people can. Too crowded.
Anyway, I want to apply for that bailout. If a couple of crackpot porno publishers can actually petition the US Government for FIVE BILLION DOLLARS of OUR MONEY then by GOD we can too. Because you and me, and the other folks on this blog, are a damn site better than Larry F and the dude doing the girl vids.
You get me ?
This whole bailout thing is totally whack. I love Baseball. Some mayor asked for 20 million, or 200 million or a ridiculous amount for a museum for minor league baseball. Stupid.
An environmentally friendly golf course in Ohio. Stupid. Arrows in Oregon. STupid. Stupid stuff that people don't need.
We need to be spending OUR Tax money on things that we need.
When the feds came up with the original TARP figure, I heard on the news, they just pretty much threw a dart and said "700 Bil sounds good". If it was a real figure it would have been like 639,258,000. I want reality. I want real people having a voice, like the people here. These idiots that are in DC, don't listen, and 90% should be fired, sent home, and the other 10% put on notice that they have 90 days to get it right or they are next. Because that is what's happening to us.
Why should DC be different ?
Your new bud - UTR
-brianinboise
Comrade in America savers and taxpayers pick up the bill for spenders and those who pay no tax.
Welcome to The United States of Socialism.
-Under The Radar
Comrade This is The United States of Socialism. In the USS you the taxpayer who lives within your means gets 1 vote. The person who over spends and pays not taxes gets 1 vote and the bailout.
-got the picture Comrade?
crybabies,
Where were you when Bush and Reagan said we were going to slash taxes and increase borrowing? I didn't hear you yelping then about how much debt we were going to cause as a result of those policies.
Bush and Reagan took trillions of OUR money and inserted it directly into the pockets of the wealthiest Americans. Now we see the results of trickle-down economics.
So Obama comes along and, rather than choosing to wallow for decades in the economic malaise Bush and Reagan created, he wants to INVEST in the country from the bottom-up RATHER THAN THE TOP-DOWN. He wants to create jobs and fix roads and bridges, and rebuild our power grid and energy infrastructure, and have things to show for that investment other than a burned-out middle east landscape.
Still, the crybabies refuse to understand or acknowledge the difference between a top-down or a bottom-up approach, and they refuse to admit that history has proven that bottom-up investments in the past have ALWAYS IMPROVED the economy.
Instead, the crybabies whine about socialism and bailouts and use other buzzwords.
HIstory has shown over and over again in every country where it has been tried, that a bottom-up investment strategy will improve an economy, whereas a top-down approach of giving your riches to the wealthy will result in AT-BEST a short bubble followed by a serious recession or depression.
Depressions in the USA have come about every 80 years as a result of top-down thievery cycles, perpetrated upon us by Republicans or their predecessors.
If you're gonna complain about socialism and bailouts, have the decency to acknowledge the difference between a top-down thievery approach (where everyone's money is given to the rich in the hope they will let it trickle down), and a bottom-up approach where the money is invested into things in which every man and woman regardless of their social stature can share.
If a bottom-up investment strategy is properly implemented by Obama, I predict the economy will show drastic signs of lasting improvement well before 2012, with resulting CBO predictions of balanced budgets within four years after that, and surpluses following (unless of course, we again decide to elect neo-cons). The reason that will happen is because of renewed confidence and faith of the system once we all understand we have finally made some important and lasting decisions.
Lookie here Lauren, Anonymous said I could have 2 votes, pay my taxes, and get a bailout. And brianinboise is being entertained, maybe. I like the 2 vote thing.
And I've tried to make friends with you, and I made my Obamapology, and drank the Obama'aid. So where's my bailout form ? Or a website or something or a statisticalanomalically?
Just kidding. Sort of. Not Really. No crying here. Trickle sidewise maybe.
I'm a Real Democrat. I'm going to make more money. Conservative Dem way back. A Vanishing Breed. Here's to me and those like me. Independent fits me best now though. I'll be one of the people putting other people back to work, not quoting others and statistics. So go ahead and depend on someone else. I'll depend on me. Not you, or Barry. I'll win, cause I always do.
Wake up America. Anonymous is Right.
But if someone has the Bailout form........
Under, anon
where do you guys get idea that Flint and Girl dude are getting what they applied for? You think that by cloging the system will do benefit our country. Did you guys ever heard of patriotisam?
Does anybody has idea that those bailouts will have to be repaid?
That is not a free money, as you would wannt to receive. I bet you are the part of the problem instead a part of solution. Your greed blinded you. Jelousy blinded you. You guys must have nice life and not care for those that worked harder then you and lost all by whim of their location or by working in a company that colapsed.
Under The Radar,
Everyone can buy a powerball ticket. Doesn't mean you win.
Anyone can apply for a bailout. Doesn't mean you will get one--unless you are a major corporation and a Republican is in office. That's why Bush only gets to spend the first $350 billion (Congress sort of figured he'd screw things up, so hedged their bets).
It's interesting Larry Flynt wants a bailout, but that's all it is--interesting. It has no bearing on policy, though it will generate lots of emails over the next few days that will take several years to get debunked.
Tks for being a Democrat. I don't mean to actually offend anyone with my style of posting. Just trying to get attention (sort of the way Flynt is doing with his bailout request).
Anon
If you ever visited a socialist country, maybe you would want to live there. McCarthy instilled such a fear in you that you would not even dare to check out dictionary and see definition of socialisam. i bet you are afraid that Big Brother is checking out all google word search.
Comrade Jordan - you must have recently immigrated to the Grand New United Socialist States/ We are having some fun here tonight. We're all patriots dude. That's why we're not too happy.
We all, and that includes, Lauren, who probably doesn't like me, and Anonymous, and Brian, and Magdalena, OldHistorian, and a bunch of great folks, and especially Dr Reich; and You, who I suspect, is not Natural Born US, are Americans. We all think differently, and that's why I love this country, and that's why we can make fun of our shortcomings, and get through it. And we will have a country 10 years from now. One way or the other. But Patriot ? We're all patriots, because we care.
Do you have the website for the bailout form ? (That would be a joke) -UTR
Under'
How can you say I don't like you? I am hurt. If you think crybaby is a bad term for me to use, well you should hear what I call my right-wing boyfriend (when we argue about politics). ha ha
Reich’s assertion that we need now to expand aggregate demand will resonate with Keynesian economists worldwide. Yet an effective test of the assertion’s sufficiency is to scale it up worldwide and see what the implications are. Ireland needs to follow a similar Keynesian policy. England, France, Germany, Spain and Italy need to do likewise. The same holds for Turkey, Greece, Russian, Hungary, Poland, Argentina, Columbia, Mexico and Peru. Keynesians worldwide are advancing similar arguments before their respective governmental councils. And thus here we encounter an unavoidable question: can the Earth’s troposphere accommodate the added carbon emissions produced by economic stimulation policies without triggering irreversible climate change. Those close to the question assert that, without outrageously aggressive innovations in energy efficiency and carbon efficiency, continued economic growth is incompatible with climate stability. Thus it is not sufficient to argue for substantial public stimulation of aggregate demand. One is also obliged to trace out how this stimulus is to be directed so as to avoid an all-to-evident clash with global warming. It is not sufficient to argue that we need to save the economy from further job loss. We must also define how this might be done while protecting the Earth’s capacity to provide continued support for economic well being worldwide.
Lauren- I'm getting easy in my old age. Too many jumps, and too long in the woods. But damn, I can't believe the gall of these porn guys, and all these clowns that are actually asking for Money. Real money. I really am putting together a business proposal now, that involves a half dozen former associates, doing infrastructure assessments. All highly skilled people. It will work. Just don't know how far out on the limb to go, but what the heck. It's an out of pocket business, private contractor only.
Remember, "Think Globally, Act Locally". Like That. I do believe that's the ticket. In adversity, there is opportunity. We have to quit worrying about what got us here, yet we need to remember past mistakes.
And Jordan - Welcome to the USA.
Way to be persistent, Under the Radar.
Here is your TARP Capital Purchase application form.
Your application is already late, but maybe if you just change the due date on the form, nobody will notice. I hear they're not very fond of following any kind of rules or regulations where that form is going, anyway.
Good luck!
Angry Citizen -
Your Kung Fu is Strong.
I only may hope to someday embody the semi-lunacy you so strongly exhibit.
May the force be with you.
- UTR sends
Under
thank you. I lived here for last 11 years and learned differnce between socialisam, communisam and capitalisam, since i lived under all those systems. You guys have a wrong view about communisam. You have no idea why McCarthy spent so much energy to destroy it and never educate anybody about it. Even now, most of the americANS DO NOT HAVE IDEA WHAT IS SOCIALISAM AND IT IS ENOUGH JUST TO CHECK OUT DICTIONARY TO KNOW.
I come from country that lived as close as it can be to communisam, way closer then Russia and China. They were dictatorships, not communists. But even we were tought in school that communisam is impossible to achieve, because of human nature. Since communisam is based on "give as u can, and take as you need" Nobody can be trusted today to take only as much as they need. Today in US, senators and congressmen live by that slogan. But they say no, communisam is evil.
They are so afraid of atractivness of communisam that they banned any interess in it.
My ex country lived best in the world in 70s. The biggest thing was to get a job, after that all life problems are solved. Taxes pay for schools, public transportation, health care, police, govt and HOUSING. We did not have to worry about bills, we could party. Quality of provisions dependend solely on succes of the company you worked for. Workers were shareholders of the company they work for and anything important was democraticaly woted on within a company. CEOs and cleaners had wage ratio of 4:1 maybe more benefits but that would top to 5:1. We had worked 8 hours shifts and lunch break was paid to all, there were free kitchen within every bigger company, where it was viable. Otherwise it was compensated for lunch. All schools were free so entrances were allowed based on grades. That made sure that best minds will enter best schools.
Thats for you comrades
Whoo
So many good propositions!
To John Lawrence:
Yes the neo-cons - and probably many of our elected corrupt officials including Obama - want to add another 5-10% of the population to the underclass, leaving them w no voice. In fact, they will be slaves in the new Economy that started w Reaganomics. That is as long as they are not pushed too far and riot... But "they" are also prepared for such civil unrest (don't U love this euphemism?): marshall law, concentration (Fema) camps and now already the military on the streets (Forget POSSE COMITATUS 1878).
IE: Obama can't go too far but he will go as far as his masters will tell him.
To angrycitizen: Indeed CCards'rates are not going up because people can't pay (I've seen it in my own case) but because banks are MILKING customers (GREED...). Moreover, since many use their CCards before defaulying on their mortgages, a sudden raise - from 7 to 33% on the CC balance ensures that the bank (perhaps the same one or a friend of theirs will foreclose on them. If there is equity in the house as is more often than we think that's a net profit!
NOW: i am surprised no-one is reminding us of a proposal Nader and others have made to bring cash into Govt coffers:2 TAXES that will NOT slow down the economy at all
- have a tax on all "large " financial transactions (2-3 years ago it was assumed a 1/4% tax would solve world hunger. It was floated at the UN (by Pt Chirac I think); guess who opposed it among the major players? The US!
- Nader wants a % tax on all derivatives (pure speculation of zero economic value). 5% is the number I'd like to see. That's on $100-300Trillions in yearly transactions, from people who can truly afford it. It might even convince them to invest instead of speculating...
That's $5 to 15 Trillions on a worldwide basis and ALL countries would have to agree. Unlikely, but IF Obama + European + Chinese and big players pushed for it, it w'd happen overnight.
$15T, even in a devalued currency, might go along way to jumpstart the Econnomy IF well spent (see excellent propositions made, by others).
A 2% subsidy - on Mortgage loans'interest - and a 6 mo moratorium on home foreclosures are also NECESSARY for all paying over 40% of income on mortgages (I am one of those at 60-65%). The 2% govt subsidy would be an expense but, as another commenter said there is an urgent need to help those who need it most. The moral and budgetary cost of taking care of the homeless is real; it can't be ignored in the cost/benefit analysis.
Two reasons for colapse of that system was that everything made in that country was undestructable, everything was made at par with John Deere or Craftsman. So once you buy it, it lasts till your grandsons lend it to someone and forget about it, It usually lasts two generations. That only changed with cars, they could not last more then 20 years.
Another reason was that people loose motivation to work harder when you can not achieve much better by working harder.And too good of the times for too long, eased up on watching misssteps of control.
Another reason was that along with prosperous times there was a great trust in people, but unreasonably too high trust. One side, in multinational country, decided to take all at one point.
John said: “Meanwhile, other countries are well on their way to weaving a tapestry that consists of various parts capitalism and various parts socialism. They are far ahead of us. I'll be frank. Here are the countries that are ahead of us: western Europe, China, Japan, Saudi Arabia. These countries have different backgrounds (both capitalist and communist) but they all have accumulated wealth whereas the US has only accumulated debt. Norway, China, Russia and many other countries (even Kazhakstan for crying out loud!) have sovereign wealth funds. That's accumulated wealth. Many of them are US creditors.”
Yes, things need to change but in fairness to the old Red White and Blue Consider this information.
Kazhakstan? Sure they have Oil which gave them a big boost up to perhaps provide some social programs recently. But they are just getting indoor plumbing in many areas of Kazhakstan. I do not believe many people want to go to Kazhakstan to vacation or live –yet.
China –well we know America consumers made china. And you can bet the average rural citizen of china today has much less than their American counterparts. Yes, if things don’t change their middle class standard of living will rise while ours falls.
If were going to spend money like drunken sailors then let's get the money from China. Why? The more money we owe China the less we have to worry about possible military conflicts.
Saudi Arabia, well lets face it if America had Saudi Arabia’s oil (and small population) we would have a sovereign wealth fund too. Yes when Oil cost you $12 to pump it and you where selling it for $100+ life is good. And to keep yourself in power and Islamic fundamentalist out of power you spend a little oil money to provide many social services for Saudis. But keep in mind the Saudi population is very small. And I’d suggest the UAE has done an even better job of creating Economic growth beyond oil.
Russia, keep in mind when oil fell to around $15 around 1997 Russia had to default on its debt and fell on economic had times while USA economy was in much better shape. Many Russia’s immigrating to this country but few going the other way. Also, I believe you’ll find the gap between Rich and Poor in Russia about the same as USA. Russia has most Billionaires. Few housing defaults in Russia because few loans are made.
Two key variables were instrumental in Russia’s last 8-10 years economic rebound 1) The price of Oil soared and NG climbed and Russia has a lot of both natural resources. 2) Russia has a very simple FEDERAL FLAT TAX REGRESSIVE SYSTEM. Its only 13%. No Typo –that’s only 13%. Its so simple and hard to cheat. They joke and call America’s Tax System a Communist System.
Lauren:
Japan tried all the Keynesian "spend your way out of recession" ideas in its lost decade of the 1990s. Still they were stagnant for a decade. It didn't work.
But forgetting all that, the politicians are saying that all we need is some more gov't intervention and more gov't spending to get us out of this mess. I want to know why the enormous level of gov't intervention and spending that we have already wasn't enough to keep us out of this mess. Isn't the whole reason for the existence of the Federal Reserve to prevent this? Now, as in the Great Depression, the Federal Reserve has proven itself to be an utter failure.
If you don't believe me, believe Ben Bernanke himself (from the Wikipedia article on Ben Bernanke):
On Milton Friedman's ninetieth birthday, November 8, 2002, [Ben Bernanke] stated: "Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve System. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
Guess what... they did it again.
Bob,
There's a Commerce post waiting for you.
--cm
crispy:
I think allowing a bankruptcy judge to modify terms of a mortgage loan as is done in commercial bankruptcy proceedings is a good idea.
As for gov't subsidizing 2% of mortgage payments or interest or whatever... the Fed holding interest rates artificially low is one of the biggest reasons for the housing price bubble in the first place. Housing prices must fall.
A 6 month moratorium on foreclosures just means delaying the pain another 6 months. The sooner the economy hits bottom, the sooner it can start going up again and people can have confidence again. All these attempts to delay reality are just prolonging the pain. Bad investments must be liquidated so we can move forward.
anon,
I not an economist, so I not know the difference between a keynesian and a polynesian.
That why I didn't use the word keynesian in my earlier post, to which you referred when you later mentioned Japan tried the keynesian experiment in the 90s and failed.
Well, when I say we should invest in bottom-up approach, as opposed to top-down approach, I specifically mean we should not only bailout banks and corporations, but rather concentrate on creating jobs and such.
It is my understanding that Japan went wrong by investing primarily in top-down approach, by giving large sums of money to banks, just like Paulson has been doing.
So you tell me, of all Japan's keynesian investing that you mention, what percentage went towards creating jobs or rebuilding infrastructure and assisting working people? What percentage went towards flushing out banks and big corporations?
Maybe then we can better judge whether Japan is the SOLE exception to my claim that bottom-up approach always works better than top-down approach. Even if Japan is the SOLE exception, there still may be much to learn from common sense application of tried and true methods that have worked MOST of the time?
Sorry for broken english. I in japan mode.
P.S. I am not a big fan of fed reserve. We should mint a series of one trillion dollar coins and use them to buy the fed reserve, and abolish it and its held debt.
Angry Citizen, Art:
Max Keiser is right! Social Security is a Ponzi scheme. Contrast it with a pension fund which takes in money, invests that money and then pays out from its earnings from the investment as well as principal. At least that's how it's supposed to work. By contrast, social security takes in FICA taxes which are separately taxed from income or anything else, spends the money as if it were general fund money and pays out to social security recipients essentially from the same general fund. So it's actually worse than a Ponzi scheme. At least in a Ponzi scheme the payouts are from the incoming monies that are kept separate from other accounts. They aren't used for something else and then the money for payouts found elsewhere as well.
Now even a lot of pension funds are Ponzi schemes and worse. Take CALpers, for example, the world's largest pension fund. They take in money from public sources and then leverage it borrowing more money and then invest it. If they lose money on the investment, they still have to pay back all the money they borrowed. This is worse than a Ponzi scheme too unless Mr. Ponzi leveraged the money he took in from investors.
Now concerning Mr. Madoff, I can't believe that he didn't invest at least some of the money investors parked with him in which case he was no diffrent from any other hedge fund manager that lost money and collapsed due to bad investments. In which case what's the difference between Mr. Madoff and any other bad hedge fund manager?
I don't expect the Federal government to get into the business of investing the social security money it takes in in order to multiply the money necessary to pay recipients, but at least they could recreate an honest system. That would be one in which the money they take in as social security tax would be kept in a separate account and be sufficient to pay social security recipients as projected over the next 50 years, for example. That would mean no commingling with the general fund. And it would mean eliminating the cap on social security taxes so that the rich paid FICA taxes on their entire income and not just the first $100,000. or so. In addition social security should be means tested. Warren Buffet and Bill Gates don't need to receive it. One step in the right direction is that they bare already starting to means test Medicare taxes i.e. rich retirees now pay in more monthly in return for their Medicare benefits. It's no big secret what it would take to make social security both honest and solvent. Instead Republicans want to get rid of it altogether so they try to convince the populace that it's untenable and in danger of collapse. Unless it's changed by an act of political will, it will collapse. The Republicans will be happy to see that. The Democrats have to step up to the plate and make the necessary changes to prevent that. Hopefully, Obama will.
So let's not be too hard on Mr. Madoff. What's the difference between a failed, overleveraged hedge fund manager and a proprietor of a Ponzi scheme. At least Mr. Ponzi didn't leverage his intake.
Also posted on Will Blog For Food.
Here's an idea to generate or recoup bailout money:
Securities Turnover Excise Tax (STET)
http://www.opednews.com/articles/1/
How-Wall-Street-Can-Bail-I-by
-Thom-Hartmann-080929-780.html
"....We did the same thing here in the US from 1914 to 1966 (and, before that, we did it to finance the Spanish American War and the Civil War)...."
John said: So let's not be too hard on Mr. Madoff. What's the difference between a failed, overleveraged hedge fund manager and a proprietor of a Ponzi scheme.
What's the difference between alchohol and illegal drugs? Answer: Illegal drugs are ILLEGAL
Madoff is a criminal, pure and simple.
P.S. Hedge funds ought to be outlawed. They serve no good purpose to society at large and instead hurt it.
Hedge funds are not regulated by the Investment Company Act of 1940.
They leverage their assets with options and futures with no control over capital requirements or margin limits.
Basically they take $10 and buy derivatives that would make a bet on a market direction, which may represent a total portfolio value of $300.
This is a 30-to-1 leverage bet.
The problem with 30-to-1 leverage is that risk is increased by 30 times.
These hedge fund can climb or fall very fast.
They have become socially acceptable form of financial gambling.
Hedge funds do not have to disclose as much information as a mutual fund.
This industry needs to die.
Anonymous DWP
It's not easy for the little guy to invest in a hedge fund. They have rules preventing small net-worth investors from getting in. So what if wealthy individuals want to gamble their money?
Contrast that with adjustable rate mortgages, where lots of little people gambled their money that they would be able to sell their house at a higher price before the teaser interest rate reset to a higher interest rate. Lenders had no qualms about what was going on because Fannie and Freddie guaranteed them. And the gov't had shown by its past actions with savings and loan and other bailouts that if things went really south they would be bailed out. Now gov't is making more bailouts, further reinforcing the mindset that "the worst that can happen is that the gov't bails me out" and encouraging more risky behavior in the future.
John and Fox...
To your earliest comments here...which I missed...so many comments I hadn't read them all. I think you both make excellent points about demand side economics and the importance of having meaningful jobs.
I have hated the notion of "consumer" since the first time I heard the word used. It reduced us to a bunch of dunces, more stupid than animals, who can be induced to buy things that they didn't even know they needed. (I can't even get my cats to eat food that isn't good for them!) John, your image of Americans being force fed like geese was priceless!! I really appreciate your comment about the need for meaningful jobs.
If we accept the hypothesis that there is not enough demand in this country to keep the economy going...and I don't think we materially need nearly as much as the people in power think we do...and we have too many idle hands...Why not create things for people to do that are meaningful?
Like teaching them the arts, making music, refining the art of story telling, creating theatre, beautifying our communities with gardens, improving social relationships, strengthening our social and spiritual bonds...now here's a void we can really fill...the void left by TV and film and all those media that leave us as passive observers and non-participants in this one chance thing we have called LIFE.
There is so much here that could be done to improve real QUALITY of it.
Anonymous (above):
So, letting the investment industry leverage themselves 30-to-1 with no disclosure or transparency, is O.K.
We have a global glut of $55 trillion in CMO and this is unwinding, which has led us into a global depression, and you think it is O.K.
Remember, these industries are too big to fail because they "are not decoupled" from the nation's economy.
We are in this financial crisis because of the excessive "insurance" on bonds against default. But guess what... they are defaulting.
By its coddling bailout actions, gov't is like a poor parent raising a bunch of spoiled brats who don't understand the restraints of economic reality.
And by brats I mean both businesses and individuals.
Absolutely 30 to 1 leverage is ok. As long as they don't come crying to the taxpayers when they lose it all. Whoever is handing out 30 to 1 leverage sounds pretty stupid to me, and should be allowed to fail if they get caught with their pants down. "Too big to fail" is a bigger problem than 30 to 1. Entire gov'ts can fail. To think that 1 company is too big to fail is silly.
Jordan,
You are a valuable resource for us, and thank you for pointing how the fact that few people here understand what socialism is.
In describing socialisim in the 70s you said, "The biggest thing was to get a job, after that all life problems are solved. Taxes pay for schools, public transportation, health care, police, govt and HOUSING. We did not have to worry about bills, we could party. Quality of provisions depended solely on success of the company you worked for. Workers were shareholders of the company they work for and anything important was democratically voted on within a company."
Now why couldn't something like that work here? Why didn't it ultimately work in your country?
In many ways, the socialist system you describe is far from "democratic" than the extreme disparity we have been poverty and wealth in the US.
Al Gore...who I believe to be a brilliant man...had the project of reinventing gov't when he served under Clinton. As a result, much of the hierarchy was flattened... the overall result was very positive in the agency where people I know work.
If there isn't enough demand, and there aren't enough jobs...perhaps what we need to do is shorten the work week (as some of the Europeans have) and spread out the work more equitably. If we leveled out wealth in a similar fashion, then the main problem we'd have is what to do with our idle time..that's where the arts, community building, and gardens come in..
There's plenty here for quality of life...why can't we redistribute wealth and opportunities more equitably?!!
We are also partly in this crisis because the Fed manipulated interest rates to historic lows for several years, causing low mortgage rates, causing buyers and speculators to bid up prices on houses.
Why did the Fed manipulate the interest rate so low for so long? Because the dotcom bubble was bursting and they didn't want the economy to feel the pain. In so doing they only managed to delay the pain, shift it to another sector, and magnify it. Had the economy felt a little more pain back then, perhaps people would have been more prudent when they saw a housing bubble looming, but the housing bubble couldn't have loomed anyway if not for the interest rate manipulation.
The fed lowered interest rates to force people out of savings and into the stock market. This was intended to temporarily shore up the weakening stock market, which was reflecting a weakening economy in general, and thereby give the illusion all was well. Bush was hoping he'd be out of office by the time everything crashed, and then he'd blame the collapse on whoever followed him.
Magdelena, you are free to redistribute your wealth any way you see fit. If you prefer redistributing it to the gov't, send a donation to the IRS today and I guarantee they will not complain and neither will I. If you want it to go to the arts, may I suggest sending a donation to your local arts organization. Cutting out the middleman (gov't) allows your money to do more good. Another way to support the arts is to spend your money on their goods and services.
Just let me be free to restribute my wealth any way I see fit.
google "why hedge funds hurt society" and you will get a smattering of how hedge fund investors have helped to destroy good companies.
It is stupid to have reduced taxes on the walthy, only to allow them to gamble with that extra money in hedge funds. Better off taxing that income, because then businesses wouldn't overpay executives and would prefer to keep that capital as R&D. Instead, the money is now funneled into wallstreet coffers.
Anon, you are free not to claim your SS benefits.
Magdalena, you can also talk to your employer and see if they will allow you to shorten your work week to spread some wealth around. In these difficult economic times, they may be eager to find someone to voluntarily reduce their hours. They will likely shorten your pay as well, but you never know until you ask.
Just don't lobby gov't to force my employer to cut my hours to spread my wealth around.
"Anon, you are free not to claim your SS benefits."
Yes, as our liberties continue to erode, at least that one is still available.
For individuals, debt is usually evaluated against income. But for countries, debt is evaluated against GDP. Can you explain why? It doesn't make sense to me; it makes more sense to compare money owed against revenue available to pay down the debt (income). Is there something I'm missing here?
"...why can't we redistribute wealth and opportunities more equitably?!!"
Comrade Magdalena, come to Cuba, we redistibute wealth over 50 years ago, now we are all equally poor.
Cuba has no foolish hedge funds. We give you free health care.
Come join us Comrade, you will love it here.
"my wealth"
How does one get "their wealth"?
You would think supply and demand rouoghly determines how much wealth you get for your work or service. But that's not strictly true.
People like Magdelena ought to be able to LOBBY to redefine how wealth is distributed because after all, the wealthy are wealthy precisely because they have lobbied in the past for a system where they in many cases are unfairly paid for what they provide.
Executive pay is an example. It is absurd how much they make. They make what they make because they have jimmied the system to allow them to legally take whatever they can get their hands on.
Hedge funds are another example. Wealthy people gamble with excess money and in many cases make huge gains by destroying good companies.
Progressive tax rates are a great way to re-balance things.
Magdalena, that was a description of communisam in Yugoslavia, from 50s til '88. I gave reason why it failed. Prety much same forces as did it here. Good times for too long and regulatory buirocracy failes to see anything as bad.
Another reason was that we were under economic embargo from Soviet block, because we rejected Stallin and russian influence. And after the fall of soviet, we were prime example what communisam can be, so rest of the world turned against our order. And workers lost motivation to do the right thing, due to inability to advance.
Magdalena is of course free to ignore the statement of an anonymous internet writer to not lobby.
Ben and Jerry of Ben and Jerry's ice cream voluntarily limited their own pay as executives. It seems to me that their company was rewarded handsomely for it by the market. But if some company thinks they need a rock star to run the company, why shouldn't they pay for a rock star?
Many companies have decided to pay their executives large amounts of money even as they run their companies into the ground. I think that's misguided, but the people with much larger stock holdings than me seem to be happy with the situation. When the dust settles in the current climate, perhaps they will put more thought into only paying for good performance without any need for gov't to step in.
America needs jobs that create wealth. We need to make things that add value, such as taking in raw materials and producing finished goods.
Here is a little story that explains why America will continue to decline:
John Smith started the day early having set his alarm clock (MADE IN JAPAN) for 6 am.
While his coffeepot (MADE IN CHINA ) was perking, he shaved with his electric razor (MADE IN HONG KONG ).
He put on a dress shirt (MADE IN SRI LANKA ), designer jeans (MADE IN SINGAPORE ) and tennis shoes (MADE IN KOREA )
After cooking his breakfast in his new electric skillet (MADE IN INDIA ) he sat down with his calculator (MADE IN MEXICO ) to see how much he could spend today
After setting his watch (MADE IN TAIWAN ) to the radio (MADE IN INDIA )
he got in his car (MADE IN GERMANY ) filled it with GAS (from Saudi Arabia )
and continued his search for a good paying AMERICAN JOB.
At the end of yet another discouraging and fruitless day checking his Computer (Made In Malaysia ),
Joe decided to relax for a while.
He put on his sandals (MADE IN BRAZIL ) poured himself a glass of wine (MADE IN FRANCE )
and turned on his TV (MADE IN INDONESIA ), and then wondered why he can't find
a good paying job in AMERICA.
Dr. Reich ... you need to review the fundamentals of REAL ECONOMICS.
Perhaps this proposed stimulous plan is just some smoke-and-mirrors to squelch the fears of the shell-shocked American consumer.
We are solving debt problems ... with debt.
Where are the long -term American job growth opportunities.
Spending $1 trillion for 3 million (temporary) jobs, once the infrastructure is built.
What about a sustaining model for long-term growth?
What about bringing strategic manufacturing industries back on shore.
America is weaker and at more risk because we are dependent upon other nations providing our goods.
WE NEED JOBS ... STUPID !!!!
Anonymous DWP
Anonymous DWP said:
"What about bringing strategic manufacturing industries back on shore."
That's easier said than done. Do you think that consumers would buy more expensive (and sometimes lower quality) products (e.g., cars made by big-3 automakers)? That's why Walmart has been doing better than other stores. One of the essence of free-market capitalism is price competition. There are many american cars, but many US consumers prefer other cars (also made in the US). If you want to resort to protectionism, remember that GM also sells cars abroad. (There are many other US companies selling abroad.) A retaliation on protectionism would not help US consumers, US workers, and US export industries.
we keep circling around recurring comments. We need jobs. Decent jobs. We outsourced our futures under “free trade”. We buy from those with lower humanitarian concerns than we have, at a “cheaper” cost which in the long run makes us quite poor. Yet still impose worker rules on ourselves that these other sources could care less about, killing our ability to compete on fair grounds.
Perhaps next up is to lower various OSHA and work day rules? Go back to 80 hour work weeks? Get rid of those pesky vacation days? Get 100% employment down to all minimum wages?
Ross Perot’s “Great Sucking Sound” seems to be quite loud now….
Art, John cc: Dr. Reich
It was great being back in the New World (`with old problems´) recently. Had good fortune of seeing our son-in-law perform in Carnegie Hall with NY Pops orchestra, just renewing acquaintenances, getting in close touch with fellow Americans in troublesome times.
We've been writing about the U.S. Mess for over a year now covering many of the issues and corrective measures being brought up lately on Dr. Reich's blog. But it never ceases to inspire me to hear some new voices with other nuanced, open, bold approaches to our self-inflicted crisis ... which of course has multi-faceted causal roots.
I try not to get caught up in grand scheme solutions/theories or causes of problems ... simply because my experience and view of history is that grand theories seem always doomed to failure (e.g., communism, marxism, oligarchy, socialism, authoritarian capitalism and, yes, excessive capitalism. As you know, I have a inveterate dislike and suspicion of all "Isms, secular or non-secular.
The perpetual struggle is in evolving and adjusting a society's mix of basic cultural values, rule of law and freedoms, common welfare needs to the Reality of internal and external environmental changes. Some countries do this better than others.
During our visit with family it was amusing to hear some pretty bright conservative relations constantly bring up that word "SOCIALISM" whenever Europe's social-economic system was discussed. Having lived and worked so long in Europe for European firms, I can honestly say most mature European countries have a form of "Social-Democracy" that is perfect for them which strikes a rather good BALANCE between capitalist/individualistic impulses and social structures whereby both contribute over time to an improved General Welfare for all. This explanation elicits an immediate standard American reply that Europe can afford their social structures because America contributes over 50% of all military weaponry and protection. My answer here is that we are fools for doing this on the sacle we do!
Concerning the misleading use of the buzzword "Socialism" about European systems, Americans don't understand that each European country is largely a cultural-social-economic unity unto itself where labor movement flexibility, for example, is relatively severely limited ... one who loses his job in The Hague doesn´t by far automatically think it´s possible to drive 5 hours south to get a job in France and vice-versa -- quite opposite to the possibilites and cultural mindset for the worker who loses his job in Boston and who would seldom hesitate to view at least the entire East Coast as a potential employment opportunity search.
The contrasting European self-inclusiveness has many other cultural implications ... all causing each country to optimize and protect their societal BALANCE within somewhat more restricted national norms and values that incorporate a deep human and quality of life context. (This includes protecting their products form imports more carefully than we do).
And when the system isn´t working ideally, the mature countries admit their errors and make rather prompt adjustments to get the new balance right with the new realities. Regulations concerning safety nets, banking reserve requirements, personal debt levels, lending practices, unemployment compensation, safety nets -- while not perfect -- are far more effective in avoiding recurrent financial crisises we Americans seem to have a cultural appetite for.
The European tendency of constantly correcting system imbalances/inequities is easier considering each country's relatively ethnically harmonious, dense populations occupying a relatively small land space ... e.g., Holland´s 17 million people live on a land territory half the size of my home state, Maine.
We Americans are so immersed with the concept our system is the BEST that we fail to admit to our evolving excesses and inequities until a Crisis makes Reality the ultimate enforcer under conditions of enormous pain. We remain, for a host of reasons noted by others herein, in DENIAL of our imperfections. In this flat world, we also continue to fail to learn from what other societies do best ... while others certainly pick and choose from the proven positives in our society (not including developing pyramiding, exotic financial products, thank God).
Adjustments and refinements to the American social-economic model as a natural habit are missing. There are all kinds of reasons for this
-- one of the most obvious being our Two-Party system which has evolved for so long into an Ideological Purity contest supported by lobbys with consequent loss of Compromise, Common Sense, Creativity, and Civility in objectively addressing a balance and fair playing field among social, capitalistic and human resource factors ... without undermining our naturally unique innovative drives and individual initiatives.
The result is that we have seriously impoverished our middle class and social infrastructurtes
... but we can land on Mars with perfection, possess the best medical specialists in the world, send strike-out missiles hundreds of thousands of miles away with pin-point accuracy.
As I've said for so long now, our Economic Model is Out of Balance among the main drivers of GDP which are Consumption, Investment, Savings and Exports. In this current crisis, certain European countries who copied the American model a bit too much have also, not surprisingly, landed in very serious problems, e.g., Ireland, UK, and Iceland.
The root cause of severe disequilibriums developing is not simply that Americans don't Save or that Americans systematically Consume and Borrow beyond their limitations or that Savings encourage debt proliferation (national Savings defined as minus debt obligations) ... the comforting chicken or egg reasonings.
I'm convinced one key root cause is that we don't face up to fact that NO social or financial schemes or grand theories remain in perfect equilibrium over time due to basic human interactions of Greed, Envy and Fear ... eternal human emotions emerging from all directions to change the social-economic fair playing field.
In this regard, Europeans long ago have realized that societal problems do not blend themselves to EITHER/OR utopian Conservative vs. Liberal themes and solutions. To most Europeans this thinking is not only simplistic and unrealistic but also ultimately destructive to the core values necessarily inherent in a productive and balanced social-economic system.
Very simply, in European eyes some problems call for conservative approaches, others liberal approaches, but most require a mixture of the best of conservative and liberal ideals and pragmatism. And getting the balance right doesn't necessarily mean undertaking political suicide or a detrimental loss of human freedoms or dynamic enterprise ... the buzzwords we like to dogmatize ourselves with.
That's why in most European countries one finds at least 3 or 4parties contributing (not marginally) relatively constructively to the more balanced structures required for a diverse society in complex, changing times.
That's probably why even America is migrating finally to a third unformalized party called the Independent Party (of which I´m a member) which accounted for up to a third of all votes in our recent national elections. Independents, utterly frustrated with the two-party system´s sharply divisive, unproductive workings, generally are not driven by the Ideological Purity syndrome but by a fused balance of conservative and liberal values ... for example, so representative of Eisenhower´s approach and advocacy during his magnificent Presidency.
Coming back to my main point, the essence of any reasonably stable society also combining dynamic qualities is that it knows its
limitations, inequities and strengths ... and constantly modify the model when necessary with ideology that makes sense. Such a society recognizes the need for offsetting governmental oversight, traffic laws and incentives, safety nets to insure the General Welfare in a world of scarce resources and where people are often the innocent victims of change or sudden tragic occurences.
I reamin optimistic that we'll come together to correct some interwoven root causes of our repetitive social-financial disasters including, among others:
1. Impoverishing concentration of Wealth and Income in top 10% of society;
2. Excessive waste and overspending on Military;
3. Deplorable dependency on polluting fossil fuels;
4. Irresponsible lending practices, oversight, transparency, and controls of proper personal debt levels;
5. Third-class infrastructure health-care, and pre-college education systems
6. Inhuman unemployment compensation levels;
7. Excessive conspicuous and trivial Consumption with Zero Savings and relatively low societal Investment levels as a % of GDP; a deficiency that also compromises people's ability to enjoy sensible vacations to renew family connections, energy and new ideas;
8. Increasingly unaffordable college education costs.
Unfortunately, we have to increase our National Debt levels to regenerate our economy away from a long stagnant abyss or even a possible depression ... and doing such in a way that fundamentally and realistically confronts step-by-step the above problem areas even if this means a new social-economic paradigm of slower (but less volitile) growth rates.
Some time ago I showed that the mature European countries with a much lower Consumption (and Debt level) but much higher Investment and Savings levels have rather solid and stable GDP 3-4% growth rates and acceptable unemployment levels.
This slower, prudent approach to growth and life-style quality -- while not always proceeding smoothly in this interconnected world -- is now being combined with a noticeable step-up in focusing on new innovations having long-lasting value such as Algae, Solar, and Wind as vital, green sources of energy; even more fuel efficient cars and transit systems; improved computerized information systems, etc.
We may be caught up in a spiraling paradigm where MONEY is GOD and the rest who don't meet the success standard are LOSERS. This is fertile terrirory for the forces of Greed, Envy and Fear ... which, in combination with laissez-faire capitalism, are silently undermining the positive workings of our social-economic model.
Bold, courageous but pragmatic repairs are essential that balance and restore respect for humans in our system's progress ... borrowing from some of the lessons learned from other societies.
Frank Thomas, The Netherlands
John:
C'mon, you're an engineer and most engineers have pretty decent analytical abilities.
Deferring to Fox; "root causes", root causes", "root causes"!
Your outline is not wrong other than you start with the premise that SS is the problem, i.e., a Ponzi scheme. SS is not the problem, in the near term. How the federal government has managed SS funds is the problem. You do also point that out but I still think your initial premise is flawed.
SS is solid until, at least 2041, assuming the government honors all the IOUs they have issued when they borrowed money from SS fund.
Hard to argue with the "lock box" theory but since Reagan raised SS tax rates, SS collections have far exceeded payouts, again, expected to remain so through 2017. If we segregated all those funds what would we do with them? Given inflation, we would have had to receive some rate of return to stay even.
I doubt you would approve of investing those funds in the stock or bond markets, especially since they could create mayhem in that venue. Opening up a bank account with a solid bank, maybe like Washington Mutual, would have proved catastrophic. Further depositing the funds in the normal banking system, and we're talking huge sums here, would have had the effect of increasing the money supply, perhaps countering efforts of the Fed. What to do?
Loan it to the federal government with interest bearing IOUs! Helps the country; doesn't mess up the investment markets nor the money markets and when the IOUs come due ensures the necessary SS funding for a few decades.
The fact that SS is not treated as a separate trust fund is troublesome but is more likely a semantic argument. In essence, SS is just more income tax, with a separate promise that it will be returned to you, with interest, if you live long enough.
The definition of a Ponzi scheme is that it's a swindle. SS was never, nor is now, a swindle. It's Ponzi scheme-like provisions have been known since its outset. It seems that everytime a detailed analysis is done of the future prospects of SS, the deathknell year is moved out.
Net, net, whether we call it SS or XY or ZZ, it is a promise by your government to provide retirement benefits. If the government defaults on that promise at some point, there will be hell to pay.
The options you mention are those most generally looked at for fixing SS, especially beyond 2017, when receipts will be less than payouts. There are some fairness issues involved in both lifting the cap or means testing benefits but those seem to be the simplest solutions at this point.
It could be argued that if you lift the cap then any progressive adjustment to income tax rates should take that into consideration. I'm strongly in favor of much higher income tax rates for excessive incomes but a semblance of fairness has to be considered as well. The same is true of means testing. If you must pay into SS but at some point it becomes clear that you won't be allowed the benefits it becomes another income tax.
As to Mr. Madoff, what possible difference does it make whether he invested some of the money, or leveraged it, he admitted to operating a fraudulent scheme. Am not a big fan of hedge funds or their managers, but most of them are honest folks, admittedly doing business in a less than honest system, but they did, and some continue to, provide returns to investors without destroying their principal. That cannot be said of Mr. Madoff.
When i listen to republicans debate in senate or congress, i wonder who could vote for such low knowlegable person in matter of economics. Most of the blogs i checked out show the same. there is a small precentage of people knowing basics of economy and rest of them try to prove opposite. It is about 10-20% people educated in economy and took serious thinking about cause and effect in todays economic collapse. Way larger number of people is that firmly took their stand and do not try to learn more.
That is the reason that republican candidates can openly talk about programs that will destroy economy and still get a lots of votes. Many democrats do not understand it either. In such environment anybody can start ponzy schemes and be legal.
Luckyly, blogs like this are great to change ignorance and aknowlege people for what is economy. When people learn about economy, itwould be good starting point for change and better times
Robert
The simplist and fairest way to stimulate economy is just give us each equal share of stimulus.
About 300 million Americans. Subtract top 10% of Rich people you get 270 million people / by one trillion dollar stimulus plan.
Just send us our money. Very simply, very fast. Everyone get egual bail-out.
Steve:
When we buy goods from China, we give dollars to the Chinese. Because we have no goods to give back to them, what can they do with those dollars? Currently they like to save them for a rainy day. Uncle Sam keeps issuing debt, and so they buy it. If Uncle Sam stopped issuing so much debt, they would be forced to spend dollars on things that actually improve our economy, such as products produced here or companies based here.
Instead of reigning in our debt Obama will do the opposite and increase it, along with printing more money.
Anonymous,
You (or another anonymous) said, Absolutely 30 to 1 leverage is ok. As long as they don't come crying to the taxpayers when they lose it all.
Isn't that what happened? Only they all went crying to Paulson & Co., instead?
My understanding is that the purpose of the $700 billion and the several additional trillions was to bail out the derivatives industry. The public is supposed to be protected from the high-risk gambles of the "sophisticated" hedge fund investors and managers--in the event of default, hedge funds, derivatives brokers, and equity funds are supposed to have no access to government loans. Their ultimate risk is that in the case of default, they have NO MONEY to pay out their debts . . . debts that were based on nothing to begin with.
Part of the motivation for Greenspan's low interest insanity was to keep interest low in order to artificially grow our GDP. With average American workers' wages being stagnant for 30 years, and unable to maintain their standard of living, the only way to increase CONSUMPTION--the dominant component of GDP--(short of turning his attention to full employment or instructing the Republican gov't to do something about wages, taxes, trade, and economic inequality generally) was to lower interest rates and keep them low so that more and more Americans liquidated their savings and took on new debt. Since Greenspan, the Bush administration, Wall Street, and the majority of politicians in Washington are completely out-of-touch with the REAL ECONOMY, they continued to ignore it, ignored the "whinings" of Americans, and were stupefied when the investment bubbles created by Greenspan, which encouraged savings liquidation and debt expansion started popping and homeowners who had long since maxed out on their credit started defaulting on their mortgages and other debt (e.g., student loans, credit cards, home equity loans, medical payments).
It was ONLY when house prices began sliding, mortgages started losing value, and manufacturing orders started to dive that the "sophisticated" financial gurus began to stop trading mortgage-backed securities . . . not because it was the right thing to do or they had some sort of an epiphany, but because they KNEW that soon, their losses would have to be visibly accounted for. Those were the circumstances that led investors to begin withdrawing their funds. Those were the circumstances that surrounded the Bear Stearns collapse and the collapse of Wall Street.
Paulson has not been doing anything all along besides bailing out the derivatives industry, which otherwise were on the hook for trillions of dollars in payouts on the mortgage-backed securities they sold. (Fannie and Freddie, btw, held 80% of home mortgage loans, lost around 90% of their value, and were in debt $80 to every $1 they had in capital reserves. The Federal Reserve took them over so that they could supply them with an unlimited line of credit and bypass Congressional approval. F & F were on the hook for over $5 trillion.)
So please let's not be confused or continue to legitimize hedge funds and the criminality of exotic financial instruments. Let's pretty please not do that while crucifying ordinary American citizens who have done nothing wrong and are paying the price for the greed, fraud, criminality, and negligence of Wall Street and Washington.
I would like to see hedge funds go the way of all things, too. I could get behind banning speculative trade and abolishing all exotic financial instruments, too. The only purpose of those instruments is to maximize profits to the sellers of the instruments by increasing leverage. And as we've seen, again, the public is NOT shielded from the risk of such astonishing and dangerous GREED.
In putting this excellent conversation into context, I'd like to see everyone comment on whether they supported Bush's tax cuts or not.
I, for one, did not support his tax cuts. I, like the CBO, predicted skyrocketing annual budget deficits would result. We we're right.
How about you? Stand up and be heard.
Lauren,
No, but that was part and parcel of not supporting Bush.
Off your topic: I just learned last night that Bush has borrowed more than all of the previous 42 US Presidents combined. For whatever reason, I never knew that before. Just amazing.
Angry, I have known for a year or so that Reagan, BushSr and BushJr had created more debt than all other President's combined. The factoid you just mentioned makes it even more astounding.
Angry:
That's why the public needs to throw out the clowns who are using taxpayer money to bailout failed businesses.
By bailing out all these derivatives, gov't has made them attractive once again. Ban derivatives, and some new even more complicated risky thing will be created the next time around, secure in the knowledge that taxpayers will bail it out if it doesn't work out. I'm simply arguing that banning risky things is a waste of time. Letting them fail and be more prudent next time helps everyone.
As for F&F, why was taxpayer money being used to buy all these mortgages? Why did our gov't get into the home mortgage business? Once again taxpayers are left holding the bag.
Anon,
Angry, I have known for a year or so that Reagan, BushSr and BushJr had created more debt than all other President's combined. The factoid you just mentioned makes it even more astounding.
Good for you. I, however, did not know that Bush Jr. alone has borrowed more than all of our former presidents combined. Sorry that you think that makes me stupid. I'm sure I know a lot that you don't know, but I know enough to know that whatever knowledge I have that others don't does not make them stupid or me in any way superior.
Anon said : "When we buy goods from China, we give dollars to the Chinese."
I just ordered an Apple Mac Book Pro from the store on apple.com.
As soon as I received the tracking number I was aghast to see my unit was being shipped from Shanghai, China!
I henceforth cancelled the order (primarily for that reason, but also for a few other reasons I shall not go into now).
I can not believe Apple mac books are assembled in China. I knew the iPods were built there, and I figured the mac book components might be built there, but to have them also assemble the unit goes too far.
I understand that 40% of trade with China occurs from intra-company trade. Companies setup shop in China and then because of Reagan-ish free-trade laws, anything shipped from that "shop" on behalf of the parent company in the US is exempt from significant (or all ?) tariffs and the like.
Anonymous...whoever you are. You've made some pretty bold statements here, and you have some pretty strong opinions and you are very very critical...I always respect someone who has the courage to say what they think, EXCEPT when
..they do not have enough courage to standup for themselves and take responsibility for what they say.
Why don't you say who you are?
Angry said: Sorry that you think that makes me stupid. I'm sure I know a lot that you don't know, but I know enough to know that whatever knowledge I have that others don't does not make them stupid or me in any way superior.
Hey angry, i did not intend anywhere to imply or suggest directly or indirectly you were stupid. If I did, I apologize. I am quite amazed by the things I am learning here by almost everyone.
I feel like the stupid one here. I can't converse at the formal economic level that many of you here do. But, I have been closely watching events for the last 16 years and observing debates, etc.. I sort of try to contribute from a lay-person or common-sense POV.
Anyway, sorry again. Please don't interpret any foolish thing I might say as meaning you are stupid. I do think one or two people here are as stupid as I am, but mostly they seem to have disappeared lately.
Angrycitizen, “Paulson has not been doing anything all along besides bailing out the derivatives industry, which otherwise were on the hook for trillions of dollars in payouts on the mortgage-backed securities they sold. (Fannie and Freddie, btw, held 80% of home mortgage loans, lost around 90% of their value, and were in debt $80 to every $1 they had in capital reserves.”
And guess which political party wanted to leverage up?
Angrycitizen gives you the typical liberal propaganda. Paulson is bail-out all the liberal policies the Democrats created. Liberals and HUD forced these agencies to leverage up. They wanted every person to have a home with no money down to win votes and keep their cronies in high paying HUD, FHA jobs.
Learn the truth about how Republican’s tried to prevent this crisis in 2004, but liberal Democrats covered up the truth. Learn the truth.
http://www.youtube.com/watch?v=_MGT_cSi7Rs
We need more jobs not more endless liberal propaganda.
Angry:
Methinks you're too bright to get caught up in conspiracy theories.
Now Mr. Greenspan is guilty of many things and I'm not sure what your reference points are but maybe another view:
One of the primary charges to the Fed is to maintain stable employment. Now the 2001 recession ended in November 2001. GDP growth returned, sometimes with impressive numbers. Greenspan, or any other Fed chief, has to be careful about rocking a rising boat by raising interest rates too soon in a recovering economy.
While GDP was growing well, unemployment numbers remained stagnant or rising until mid 2003. For whatever reason the recovery was not including new jobs and since that is a major responsibility of the Fed, does it not make sense to keep interest rates low to get the job machine back on track? Certainly raising rates and dampening economic growth was not going to create new jobs.
New job growth got back to net positive in August 2003, this is why the Bushies kept referring to that date for cumulative new job growth instead of the beginning of his first term. As GDP kept growing and new jobs were increasing, Greenspan started raising interest rates again. Since the economy didn't appear to be overheating and inflation remained under control, my belief has always been that he started raising rates again because he had to get off bottom and give the Fed, going forward, some room to deal with another economic downturn or slowdown.
No doubt there are a myriad of criteria that drive actions of the Fed and even my assumptions here overlook a majority of them but given their principle goals I don't see where Greenspan had a lot of choices until job growth returned.
Let's hang Greenspan for his failings, many of which are known and he even admits. Let's not conjure up a new villain for Batman by thinking Greenspan was seeking to blow up Gotham city.
Lauren:
Hell, I didn't even favor Reagan's tax cuts and I got more benefit from those than from Dumbya's.
Anon said "Learn the truth about how Republican’s tried to prevent this crisis in 2004, but liberal Democrats covered up the truth. Learn the truth."
Don't make us watch youtube. Post your point so everyone knows what your point is.
And gee. Bush and McCain and most Republicans said just a few months ago the economy was sound, only to weeks later say it was in danger.
Prior to 2006, the GOP controlled the gvmt at every level of gvmt (fed or local). The GOP threatened to use the nuke option to stop any debate of any GOP bill. The Dems backed down. The GOP never had problems with voting on ANY bill they wanted. They never had problems with passing bills that most Dems did not want (Iraq war, re-funding of the war, bankruptcy bill, No Child, Bush's tax cuts, and many, many others). It's a real stretch to try to make the case the almost non-existent Dems somehow stopped the GOP from fixing the economy in 2004 when in fact the GOP was having a field day passing all kinds of GOP-friendly bills.
Lauren,
You confused me by posting as Anonymous. Since most people who post as Anonymous are verbally combative and use loose logic, I interpreted your comment to mean that you knew about the debt and the fact that I didn't was astonishing.
My bad. Thanks for letting me know it was you and no malice was intended.
Anonymous,
It's too bad that you took my post to be "liberal propaganda." It's also too bad that Republican propaganda is your answer.
HI Art,
Yep, I benefitted personally from GWB's tax cuts. Probably saved several $100,000s due to him. Still, I'd rather the country be on sound footing than save a small percentage of my money. In the end, this mini-depression may become worse and cost me more in the long run as siblings and others lose jobs and I am forced to help. I probably have lost in the last year's stock market all that I originally saved, and every year that goes by with me not earning more from sound investments (because none exist right now) means I lose even more. In essence, my instincts back then were right--I was better off in the long run not supporting foolish tax cuts that would only serve to destabilize the entire economy. Unfortunately, the USSC did not agree with me and picked Bush instead of Gore.
Lauren, everyone:
commercial companies today buy automatically from china. the "understanding" is it is automatically cheaper than USA. and generally it is. Initial out of pocket costs ARE cheaper.
USA aerospace companies buy from USA pretty much exclusively.
having worked both aerospace and commercial, I have seen however that many USA companies are clueless with today's technology. there are still good companies, but MANY (smaller ones especially) shops are clueless on today's efficient technologies.
I worked for a company that actually had a lot of suppliers who didn't even have e-mail much less an ability to take and understand CAD files... they would re-enter our designs into their software not bothering to learn how to simply import the files into their software.
china is strong with paperless technology and the ability to receive CAD files.
except:
china tooling for example is cheap by low cost labor and low overhead subsidized by their government. in a review I did at a lighting company, USA tooling would actually have been better in the long run being smarter (classier?) to make parts faster. "cycle time" is the plastic injection molding term. china tooling had long cycle times, USA very short.
however USA tooling for one product was $150k, china tooling was $5k. china was also allowed to simply make a tool for themselves and sell our design THAT WAY (their country) and we'd sell THIS WAY (this country mainly). so management gave away the design and bought "cheap" tooling. A part of the value equation not provided to the USA supplier.
That lighting company has other products that have been selling for 25 years so this new batch of products might very well sell for 25 years. the USA tooling would have had a payback in around 7 years. that was too long for the management to bother with. Up front “cheap” out of pocket costs were the key. Long term value was not.
Now, if there was something to compensate the tooling costs for also coming from a country that uses child labor, etc, unlike our rules, there would be more credible incentive to have tooled the product here.
If there was a clearing house to note the absurd low cost of tooling from china against USA prices, there might be a way to retain this kind of work.
If the company was to pay a tax on what was essentially a sale the company profited from, they might not have gone overseas.
"You confused me by posting as Anonymous. "
Yes, I clicked the wrong button that time. Sometimes I'll post as anonymous if the comment is trivial and I don't care to take credit. BUt I won't do that to hide an attack or stupid idea, or be nasty or anything like that. Sorry bout the confusion.
Lauren:
Given your latest post, I think I'm in love with you. ;)
Govt should do nothing and let the econ find its own equalibrium - albeit at a much more realistic lower level of affulence.
This would have the added advantage of attracting fewer legal & illegal immigrants solving this headache (US pop now 305mil).
In fact they'll turn around and go home like they did in the 30's.
See, it's not rocket science, Laissez Faire is easy
Art, in that case, I'll provide less "details" about me next time. LOL
Laissez faire, it isn't immigrants who are screwing the country up. It's mostly white Republicans doing that job, with the help of a smaller number of Democrats.
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