Washington Drinking the Kool-Aid of Incompetent Economists 34 comments
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I saw two of my friends Saturday, both of whom work as engineers in manufacturing near Latrobe PA. Their stories about layoffs and bankruptcies in American manufacturing were truly depressing. American manufacturing is shrinking severely. Yet, foolish American economists are still predicting an American recovery from this depression, fueled, no less, by American exports! Who do they think will produce those exports?
I joked that I am happy that my predictions are coming true. In fact the unemployment numbers on Friday came in at 9.4%, just a week after we wrote that the latest unemployment numbers were proving that Obama's plan wasn't working.
My father, son, and I have been making accurate predictions, but those in Washington prefer to listen to the incompetent economists who didn't see this depression coming, still don't understand what is happening, and have no solutions that would work.
Here's a brief review of our many predictions that the Bush-Obama stimulus plans would fail:
- When discussing Bush's foolish February 2008 stimulus package, we concluded: "Manufacturing businesses will not invest in the United States until the U.S. government shows that it can and will bring the trade deficits under control. The Pacific Rim countries will not stimulate their consumption of American products until they know that they have to do so. For these reasons, the stimulus package will not work unless it addresses the trade deficits." (An Economic Stimulus for China, February 11, 2009)
- When discussing Bush's foolish October 2008 Wall Street Bailout, we wrote: "The money involved will be paid for by the U.S. taxpayer who will not only pay interest on these loans, but will also pay for them with U.S. manufacturing jobs!" (Palin Gets it but the Bailout Makes it Worse, October 6, 2008)
- When I predicted the current depression, I explained why it would occur: "Whoever gets elected president will probably continue the policy begun by the Bush administration of borrowing ever-increasing amounts of money from foreign governments to fund giveaways in hopes of stimulating the U.S. economy.... These giveaways will decrease our domestic savings which will cause our trade deficits to grow. The eventual result will be that the United States will lose many of its remaining manufacturing industries, the U.S. government's credit rating will eventually deteriorate, and eventually the United States will be forced to repudiate or inflate-away its debt. That's when things will get really bad in the United States." (A Worldwide Depression Started This Week, October 7, 2009)
- When Obama's stimulus package passed, I wrote: "The other big losers [besides America's children] will be the industrial workers. The money to pay for the stimulus will largely be borrowed from abroad which will drive up the dollar in currency markets. As a result American produced goods will be less competitive. American corporations will lose market share in world markets and in United States markets. The result will be that many American manufacturing workers will permanently lose their jobs." (Infrastructure Dream Deferred: Disaster for America's Children and Industrial Workers, February 11, 2009)
- Just a week before the May unemployment statistics were published showing another huge rise, we wrote: "Obama's Plan A is failing because it does not recognize the causes of the Great Recession and does not propose appropriate remedies.... Detroit is going bankrupt because American made products have been excluded from growing world markets. In 2008, China and India broke off the Doha Round of renegotiation of the WTO rules so that they could maintain their 25% tariffs on American vehicles on top of their hidden duties imposed by value-added taxes and currency manipulations. American companies have learned that investments in American production do not pay off." (Obama's Plan A is Not Working, May 29, 2009)
The subtitle of our 2008 book, Trading Away Our Future was "How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it's Too Late." At the rate we are giving away our industry right now, it may soon be too late.
After we suffer through a currency crash a few years from now, we will not be able to afford to buy imports from abroad. We will have to pay for our imports through exports, but we will have very little industry left that is capable of generating exports or producing the things that we import. It is truly amazing that Washington is drinking the kool-aid of incompetent economists and committing economic suicide.
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As if thinking positive will make jobs appear.
What he said was clear, deficit spending on non-production stimulus, bailouts, money printing, and artificially low interest rates will eventually debase the value of the dollar and bring about inflation or hyper-inflation.
That is clear throughout history and economic theory, unless of course, you are drinking "Hope" and "Change" spiked koolaid.
On Jun 07 09:53 AM goldenhinde wrote:
> I think the word is sophmoric. Your article says very little of substance
> and is something I would expect from a sophmore in college who finds
> it easier to take shots than to offer solutions. To "predict" a collapse
> of manufacturing jobs by virtue of the political activity thus far
> is more "dah" than substantive. This is nothing new for the last
> 25 years. So, championing your predictive prowess is very nice but
> those of us wondering what can be done that is constructive cannot
> find an iota of value in your post.
>
> I'd like to suggest that it is a good thing you aren't making policy
> and merely rant from the sidelines. Please illustrate capacity for
> thought in your next post.
I share your cynicism about Fair Trade policies. That's why we advocate Balanced Trade, not Fair Trade. Unlike the "pretend" Free Trade we have today, Balanced Trade cannot be easily manipulated. The country that subsidizes rice production in the desert to get exports hurts themselves in another market.
Incidentally, John Maynard Keynes was the first balanced trade advocate. He was a practical economist who kept his feet planted firmly in reality. He tried to set up a sustainable system after WW II, but instead we got the WTO and the IMF and this Great Recession.
The incompetent economists currently making US policy are following Keynes advice for trade-surplus countries. His advice to trade deficit countries was quite different. His international system would have let trade deficit countries (such as the US today) limit imports and subsidize exports.
Warren Buffett recommended an Import Certificates plan that subsidizes exports and limits imports as a way to balance trade. His plan would be ideal right now. You can read about it in his 2003 Fortune Magazine piece at:
money.cnn.com/magazine...
In an auto engine plant the equipment is constantly in need of repair. This is the life blood of the skilled workers. Most understand this; as a friend said, "It pays the mortgage."
There is usually a vocal minority who see greener pastures. They want work that is sexier than repair work, and their weight is felt. Management bows - "If you win the bid you get the job." The one who voted against this had to do the job, because he was the only one who could. He had to partially disassemble one machine and assemble to another machine. Then he misread the blueprint.
After I retired I investigated, and it appeared that the repair work that I had done was now being sent out, probably to a small shop led by an entepreneurial soul.
A successful career (tenure and job security) is more important than independent thinking and questioning the status quo. The way you get tenure both in the United States and the Soviet Union is/was by showing your professors that you can do, and can think, almost exactly the same as they do and think but with even less creativity (so that you don't threaten their positions of power.)
In every academic field there are ten thousand third rails and no one touches them without being ejected into an ether of silence and academic obscurity.
It is impossible for anyone to calculate, with any degree of certainty, the the economic future of the huge financial machine that is the world economy. But most of us, including economists, are afraid to face this fact.
I think there is a genetic facet of our human existence that makes manufacturing a desirable activity, even if it is making a meal, a crop or anything else without regard to its service life. I think the problem is that technology has made it possible to build more and more with less and less sophisticated workers or craftsmen. Most Mexicans with a fifth grade level education in a foreign language can manage to push the buttons that will operate a machine that will turn out something almost untouched by human hands. The dollar value of US manufacturing goods is fairly stable, about 21% no matter what the decade is.
Manufacturing wages, though rising in current dollars, are falling in real dollars. The resulting loss of buying power, not only in the manufacturing sector also means a decline in per capita consumption. Many people are mystified by the lack of economic impact by old reliable events such as business starts, housing and infrastructure construction. These multipliers seem to be declining but not our expectations of the old multipliers staying the same or better.
Someone predicted that the construction of the Interstate created a rate of return of 30% when it was first built but for some reason, the same methodology only foresees a rate of return of less than 10% now. The reason for that is that the new construction rarely offers an incremental benefit in terms of speed and mobility over the old system. The original Interstate construction created new opportunities that were not there before and it also caused massive loss of jobs, businesses and possibly was implicated in the decay of the central part of cities. The pluses outweighed the minuses however.
The current problem with manufacturing employment is that there is no reason for manufacturing wages to be better than working at the Wal-Mart. When I worked in an engine cfactory in 1965, I never used any math, science or schooling much past the fourth grade. I expect the decline to continue until manufacturing and non-manufacturing wages come much closer together. Wal-Mart probably has better health benefits than some manufacturing plants. Manufacturing gets more efficient every year but the higher productivity has no chance of overcomming health care cost increases in the future.
Manufacturer's don't need help with capital costs, but they will take it. They don't need land, buildings nor do they need super educated people as much as they need honest people with a work ethic. All of the things that are so likely to be offered as an incentive to manufacturers is on average about 3.5% of the total per unit cost of manufacturing. They need help with their people costs, in particular their cost of health care and cost of living. Taxing people more to buy incentives only reduces the disposable income of everyone in the community and does not always end up doing a lot for the quality of life that any business would naturally value. Excessive tax incentives to manufacturing also reduces disposable income because it increases the taxes that everyone else has to pay.
As long as real income is on the decline, I see very little that the government can do in a positive sense about excessive imports, especially if those imports help people cope with a devalued currency and a declining real paycheck.
It just kills me that no one questions these numbers more and that someone has to be a respected authority on such numbers. WHO IS THAT????
On Jun 07 10:43 AM Jplout wrote:
> Great article, but the Kool-Aid drinking has been going on for some
> time by all of us. Example: 9% unemployment? Who R we kidding?
> True unemployment is more like 15% and 20% is some areas. The bogus
> unemployment numbers they serve us with the Kool-Aid is just one
> example how we'v grown complacent to the Masters' orders. Unless
> we come up with 4 to 5 million jobs soon the definition of middle
> class in the US will be changed for good. It would be difficult to
> recover without creating jobs. We all know now that most of the
> stimulus package $$$ when to bail out local governments with unsustainable
> largesse budgets. Are Florida & California broke? yea.
> Stock market at unsustainable levels on low trading volume just helps
> the Government broadcast the illusion that recovery is in the horizon.
>
> I don't think anyone is going to declare on October the 7th a worldwide
> depression, but the sooner we hit bottom the sooner the recovery.
Actually, what Hoover did was to < government spending and cut taxes in the middle of a recession, which helped push us into a depression. This is not what the administration is doing (thankfully), so I don't buy the analogy at all.
On Jun 07 09:48 AM Prudent Man CFA wrote:
> It has been told that Bernanke is a student of the Great Depression.
> Unfortunately, he didn't learn anything. The Paulson/Geithner/Bernanke
> advice to GW/BHO parallels that given to Hoover/FDR.
>
> What a better way to get a politicians favor than proposing policies
> that will give that politician more power regardless of the economic
> consequences and personal pain and destruction?
>
> The egomaniacs and insane with power and no one will stand up to
> them because those who can are on the payroll.
Congress is populated by many clowns, no doubt elected by math ignorant clowns. Congress and those who elected them are the chief culprits in this downturn.
complained about reckless spending during the 1932 campaign,
then proceeded to drastically increase the spending after he took
office. It is propaganda to claim that Hoover made the Depression
worse by cutting spending and taxes. You can dig up the truth
in old encyclopedia yearbooks, the Time.com archives, and
various online encyclopedias including BIGpedia.
On Jun 07 05:36 PM diogeron wrote:
>
> Actually, what Hoover did was to < government spending and cut taxes
> in the middle of a recession, which helped push us into a depression.
> This is not what the administration is doing (thankfully), so I don't
> buy the analogy at all.
>
> On Jun 07 09:48 AM Prudent Man CFA wrote:
You must be kidding those so called experts you like are political hacks. they are guessing and hoping. I guess that is what was meant by hope and change. More like rope a dope.
I would just like to dispute two of the interpretations you gave to the statistics you cited:
1. You pointed out that manufacturing employment peaked in 1979. Indeed, manufacturing employment has been declining worldwide in response to greater efficiencies of production. But it has been declining much faster in the United States.
2. You claimed that the skills of a manufacturing worker and a Walmart worker are similar. But the average manufacturing worker adds about $100,000 value to our GDP. Whenever a lost manufacturing job becomes a trade deficit, that's $100,000 in American income lost. Moreover, when the laid-off manufacturing worker takes a less skillled job at Walmart, that drives down Walmart wages.
Howard
The Great Depression of the 1930s was caused by a huge contraction in the money supply. At that time most economists had not yet figured out that governments need to maintain a steady money supply. Now days the Fed prevents that sort of depression.
Today's Great Recession was caused by huge trade imbalances. The trade surplus countries are still relying upon the trade deficit countries, especially the United States, to go ever deeper into debt to buy their products. But trade deficit countries can only go so deep into debt until they experience serious financial crises. Most American economists haven't yet figured out that governments need to maintain relatively balanced trade.
The saying, "As GM goes, so goes the U.S." is true. We, the U.S., are not productive anymore. We only produce money and power, nothing of substance for the good of mankind.
On Jun 07 09:28 PM Alphameister wrote:
Unions destroyed the US manufacturing base
Say what? No, I think the initial rise in the value of the dollar had more to do with the lack of good alternatives when the world financial system was looking ever so more bleak. Now that world perception about the state of the world financial system has improved somewhat, the dollar is doing exactly what should be expected since we have flooded the markets. The dollar is dropping in value which will make American made goods cheaper, but with the added cost of inflation to the American consumer.
First, that you say you predicted the crash in October 2008 suggests that you - like those economists you complain about - are also trailing the facts. Second, your piece in the American Thinker "Obama's Plan A is not Working" is incorrect in suggesting that the breakup of the Doha Round was so India and China could maintain tariffs on American vehicles. Actually, those negotiations broke up over something much more irrelevant to the US trade deficit - the Special Safeguard Mechanism and agricultural subsidies (see en.wikipedia.org/wiki/...).
I agree that few policymakers seem to be working on the root causes. But for you, there are probably better ways to promote that book, than use them as scapegoats with little else to offer.
He is correct, but so am I. At the time that Doha broke off, the deal on the table was unilateral concessions by the west (Europe and United States) on agriculture in return for more access by the west to the developing world's automobile markets (and some other markets that the developing world labeled as "strategic"). China and India were especially resistent to opening their automobile markets to the west. As William R. Hawkins pointed out:
"The developing countries were always going to be allowed to keep higher average tariffs, but they have also kept the right to protect strategic sectors with 'safeguards' that could undo the liberalization of the 1994 agreement. In this effort, they are not just protecting themselves from the developed countries, but from each other. Ebrahim Patel, a South African labor leader, criticized Western pressure to limit the 'flexibilities' his country needed to shelter sectors like textiles, automobiles and electronics.... Even more than South Africa, India and China see the auto industry as a strategic sector...."
Hawkins commentary on why Doha failed can be read at:
frontpagemagazine.com/...
But I am also correct. In order to secure loans from China to finance these stimulus packages, the US Treasury under both Bush and Obama stopped pressuring China to strengthen its currency vs. the dollar. The result is that China stopped strengthening the RMB in April 2008, instead pegging the dollar to the RMB.
Furthermore, US government borrowing is now causing US long-term interest rates to rise steeply inviting more dollars into the country to take advantage of our very high long-term interest rates. Obama's government borrowing will cause our long-term interest rates to rise sufficiently to invite the foreign savings he needs. And the increased foreign savings flowing into our country will cause increased trade deficits by causing the dollar to be priced higher than it otherwise would.
However, that said, I agree that Duude regarding the dismal long-term prospects for the dollar. In fact, I am predicting an eventual dollar crash.
And in reading most of the readers comments, I find that many are erudite but confused.
The whole thing is so damned simple: vote mongering political populism versus the needs of capitalism. We were all sold out by the vote mongerers to bring things like "affordable housing for the poor" and tax the shit out of the corporations so Joe Six Pac wouldn't have to dig in his pocket. Corporate America responded by A) taking the business out of the country, and B) Borrowing unneeded money so that the tax burden could be reduced by the size of interest payments. And C) Giving the unions carte blanche in all issues to because of government mandates.
And so now we are gnashing our teeth and trying to understand the perfectly obvious. So now for repairs we have band aids, chewing gum and mucho palaver.