Why I Predict No Economic Recovery 40 comments
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Some economists are predicting a normal recovery. Some are predicting a jobless recovery. I predict that there will be no recovery at all, other than a very temporary one caused by a blip in government spending.
Let me explain why in terms of the four factors that economists use to divide up the total spending in an economy (i.e., the "aggregate demand"). In order for a recovery to occur, the sum of these factors has to rise. Here's why I don't expect that sum to rise:
- 1. Consumption. Wages and salaries won't be increasing, and people are too deeply in debt to spend more money without more income.
- 2. Investment. None of the following types of business investment are likely to increase:
- a. Manufacturing investment won't increase because China, following a mercantilist policy, will keep the dollar pegged to a rate where they can prevent investments in American manufacturing from becoming profitable, and President Obama will continue to do nothing about this problem.
- b. Construction investment won't increase because of over-construction during the house price bubble and because house prices still have a way to fall.
- c. Retail investment won't increase because consumption won't be increasing.
- d. Energy investment in nuclear or fossil fuel energy sources won't increase because they will be discouraged by the Obama administration and the Democratic Congress.
- 3. Government Purchases. Although government purchases and subsidies of unprofitable energy production will stay strong, the government can't increase its already huge deficit spending much more.
- 4. Trade Surplus. An improving trade surplus (i.e. more exports or less imports) would help. But I expect the trade surplus to go the opposite way because many countries, including China, will manipulate their exchange rates to prevent American exports from increasing more than American imports, and President Obama will continue to do nothing about the problem.
I am not saying that there will never be a recovery, just that there won't be a recovery until our trade problem is solved. This prediction is not original with me. Economist John Maynard Keynes made the same prediction when he wrote in his magnum opus (The General Theory of Employment Interest and Money):
(A) favorable [trade] balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression. (p. 338)
Keynes's solution was for a trade deficit country to subsidize exports and restrict imports in order to balance trade. But President Obama's economic advisors are all unilateral-free-traders, so they won't do anything to solve the problem. And the Democratic Congress is much too subservient to the Democratic administration to do anything on its own.
A currency crash could also provide a solution. After a dollar crash, Americans would have a much lower standard of living, but the American economy would grow rapidly, led by foreign and domestic business investments in America's manufacturing sector. The main task of the President would be to get the government out of the way of the recovery.
Thus, due to the incompetence of his economic advisors, President Obama's term will either be marked by recession and stagnation or by a dollar crash. In either case, he will be a one-term president.
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More importantly, there is a fundamentally sound way of achieving the same thing: devalue the dollar. For some reason, Buffett didn't want to devalue the dollar (clue: he owns quite a lot of them).
On Sep 09 11:08 AM Howard Richman wrote:
> Chap 8 asks: ""to subsidize exports and restrict imports" .... is
> a recipe for disaster. Is your next post going to be in favor of
> Smoot Hawley?"
>
> The tariffs of Smoot Hawley produced counter-tariffs, reducing America's
> exports. What I am advocating would increase America's exports. Warren
> Buffett's Import Certificates plan would be an example of what Keynes
> suggested. See:
>
> money.cnn.com/magazine...
The only reason I bring it up is so that we don't forget timeline and history. It's kind of like a hurricane. The outer rings were the problems with Home Equities in 2006. Then came the front edge of the storm in 2007 (massive defaults). Then in 2008 came the front edge of the eye-of-the-storm the Wall Street problem whereby these guys were all in long on mortgages but borrowing short-term money on those strips and the market started to question the foundation on which they were lending short. Then the eye of the hurricane total credit market freeze and stock market crash (August thru Oct 2008). Now we are on the back edge of the hurricane and the sky is getting clearer and we can see the carnage but we are like FEMA after Katrina not getting the supplies where they need to be. We are not getting the rescue supplies to small business and the consumers are like the people in the streets of New Orleans- saying where's all the help you promised?
Digression I know but I think it's a good analogy.
Your 4 points are well taken. There were many good comments above. But let me add one observation.
The folks at the helm in Washington, D.C. are prescribing old medications (blindsided subconscously) to an ailing economy loaded with new problems and issues. An example of my daily experience below illustrates my point: -
I once was on business travel to attend a conference and I had a rental car. When I walked off from the door of the conference center onto the parking lot, I kept walking to a wrong car that resembled "that car I had at home in my garage". I found out of course when I closely approached that "wrong car".
This is akin to the mistakes being made by our politicians and bureaucrats. We are in new and uncharted waters, folks!
TK
"Corporate tax receipts fell 58%, as individual revenues fell 21%. So how do we fund everything by cutting corporate taxes that are down 40% already"
I would substitute a Value-Added Tax for the Corporate Income Tax. One of the huge benefits would be that the VAT is charged on imports and excluded for Imports, making American production more competitive.
Whoops I meant to write "excluded from exports" not "excluded for imports." The VAT is rebated to US producers at the border.
On Sep 09 12:44 PM Howard Richman wrote:
> ConceptWizard makes more good points and asks a good question:<br/>
>
> "Corporate tax receipts fell 58%, as individual revenues fell 21%.
> So how do we fund everything by cutting corporate taxes that are
> down 40% already"
>
> I would substitute a Value-Added Tax for the Corporate Income Tax.
> One of the huge benefits would be that the VAT is charged on imports
> and excluded for Imports, making American production more competitive.
Buffett's plan would result in a new bureaucracy and some cheating. Buffett would issue marketable Import Certificates to exporters which would allow the same value of Imports.
Neither the bureaucracy nor the cheating need be extensive. If necessary, the plan could be limited to those goods that can be monitored at our borders.
Your suggestion that a dollar devaluation could balance trade is sound. But I don't see any way to get to a devalued dollar except through a crash. Foreign central banks have been preventing exchange rate adjustments for over a decade. Nouriell Roubini predicted a few days ago that the Europeans and Japanese aren't going to let the dollar go down further against the euro and yen for fear of harming their recoveries. That leaves the BRIC countries. But China's is not going to budge from its dollar peg unless it is forced to do so. And Obama won't force them. Meanwhile, India and Brazil can't afford to let China underprice them, so they will resume their currency manipulations.
Moreover, the Buffett plan is superior to a dollar devaluation. It would not only remove the currency manipulation barriers placed upon our exports, but also the many other barriers. China is so successful at keeping out our exports that it is managing to reduce them at the same time that its economy is growing by 8% (acccording to most predictions).
According to McKinsey Global Institute, Homeowners withdrew "$2.3 trillion in home equity loans and cash-out refinancing between 2003 and 2008." Most of the money was spent on personal consumption.
Thank You for your clarification.
On Sep 09 12:19 PM HardwoodFlooring wrote:
> CW- Not sure why they reference 2003-2008 in terms of the consumer
> pulling money of their houses. Home equities became very hard to
> get in late 2006. By 2007 the mortgage market had changed dramatically
> and by 2008 we were in full blown credit crisis and wall street was
> shut down for "bundles" of mortgages. I know it seems strange but
> we have been living with this crisis now for along time. Even the
> recession started in Dec. of 2007. There were re-fis going on in
> 2008 but most of these were Arms and people were trying to move into
> fixed mortgages.
>
> The only reason I bring it up is so that we don't forget timeline
> and history. It's kind of like a hurricane. The outer rings were
> the problems with Home Equities in 2006. Then came the front edge
> of the storm in 2007 (massive defaults). Then in 2008 came the front
> edge of the eye-of-the-storm the Wall Street problem whereby these
> guys were all in long on mortgages but borrowing short-term money
> on those strips and the market started to question the foundation
> on which they were lending short. Then the eye of the hurricane total
> credit market freeze and stock market crash (August thru Oct 2008).
> Now we are on the back edge of the hurricane and the sky is getting
> clearer and we can see the carnage but we are like FEMA after Katrina
> not getting the supplies where they need to be. We are not getting
> the rescue supplies to small business and the consumers are like
> the people in the streets of New Orleans- saying where's all the
> help you promised?
>
> Digression I know but I think it's a good analogy.
That is wrong minded thinking. It is like saying, "salaries go down everytime we come up with a new technology to replace workers". If your logic was sound, we should just outlaw tractors and we'd all have jobs as farmers. Whoops, there is one small problem: rampant inflation would occur. I agree that Chinese currency manipulation is a large part of what is wrong with the global economy, but the solution isn't to purposefully increase costs for US businesses by forcing them to keep all workers in the US. Imagine if Walmart could only hire workers from its city of origin? Would that really benefit Walmart?
On Sep 09 11:01 AM Howard Richman wrote:
> Keep in mind that median incomes decline whenever we let China steal
> the jobs of our productive, well paid manufacturing workers. Bush
> allowed this to happen throughout his eight years in office and Obama
> is letting it happen today.
>
> Dr. Richman
On Sep 09 02:00 PM conceptwizard wrote:
> I was relying on the accuracy of the following article.
>
> According to McKinsey Global Institute, Homeowners withdrew "$2.3
> trillion in home equity loans and cash-out refinancing between 2003
> and 2008." Most of the money was spent on personal consumption.<br/>
>
> Thank You for your clarification.
" Keep in mind that median incomes decline whenever we let China steal the jobs of our productive, well paid manufacturing workers. Bush allowed this to happen throughout his eight years in office and Obama is letting it happen today."
He responded: "That is wrong minded thinking. It is like saying, "salaries go down everytime we come up with a new technology to replace workers".
He would be entirely correct if I were arguing that improvements in technology were causing good paying jobs to disappear. Indeed, there have been constant improvements in manufacturing over the years making each manufacturing worker more productive (and better paid).
He would also be entirely correct if US trade were balanced. Even though there might be fewer workers producing the goods, they would be more productive (and better paid).
However, he is entirely incorrect when a country is running a trade deficit that is intentionally being produced by mercantilist trading partners in order to steal market share. The US has been losing jobs without gaining other, more efficient jobs, as recompense.
Dr. Richman
On Sep 09 04:36 PM Howard Richman wrote:
> thiazole is partly correct when he wrote that the following statement
> of mine was based upon a fallacy. I wrote:
>
> " Keep in mind that median incomes decline whenever we let China
> steal the jobs of our productive, well paid manufacturing workers.
> Bush allowed this to happen throughout his eight years in office
> and Obama is letting it happen today."
>
> He responded: "That is wrong minded thinking. It is like saying,
> "salaries go down everytime we come up with a new technology to replace
> workers".
>
> He would be entirely correct if I were arguing that improvements
> in technology were causing good paying jobs to disappear. Indeed,
> there have been constant improvements in manufacturing over the years
> making each manufacturing worker more productive (and better paid).
>
>
> He would also be entirely correct if US trade were balanced. Even
> though there might be fewer workers producing the goods, they would
> be more productive (and better paid).
>
> However, he is entirely incorrect when a country is running a trade
> deficit that is intentionally being produced by mercantilist trading
> partners in order to steal market share. The US has been losing jobs
> without gaining other, more efficient jobs, as recompense.
>
>
> Dr. Richman
I urge you to look again at Buffett's solution. It is really quite brilliant. It does not at all interfere with comparative advantage, as tariffs would. It simply balances trade.
For example, let's say an American exporter imports parts from China. That exporter would get Import Certificates equalling to the value of its exports. Those Import Certificates would allow the equal value of Imports. That exporter would use some of those Import Certificates when it imported the Chinese parts and would auction the rest.
Howard
On Sep 09 11:01 AM Howard Richman wrote:
> ConceptWizard,
>
> You are correct that the economy cannot recover without a strong
> consumer, but I am not quite as pessimistic as you about the possibility
> of a solution.
>
> If we would balance trade while eliminating the corporate income
> tax, business implementation of new technologies and processes in
> American manufacturing would produce higher wages and stronger consumers.
>
>
> Keep in mind that median incomes decline whenever we let China steal
> the jobs of our productive, well paid manufacturing workers. Bush
> allowed this to happen throughout his eight years in office and Obama
> is letting it happen today.
>
> Dr. Richman
Obama will be a one-term president. He's not helping to solve this financial crisis; taxes, bailouts, unfathomable reforms, and pandering to special interests (UAW) doesn't help our economy as a whole. I predict 2010 to be a mirror of 1994 -- Democrats will lose big.
On Sep 09 10:34 AM Michael Clark wrote:
> "Thus, due to the incompetence of his economic advisors, President
> Obama's term will either be marked by recession and stagnation or
> by a dollar crash. In either case, he will be a one-term president."
>
>
> My prediction is that Obama won't be a one-term president. Most people
> understand he didn't create this crisis. Most people also understand
> that it is an historical cycle he inherited, one that cannot be easily
> fixed.
>
> Also, who will the Republicans send to the plate? The Republicans
> will not be electable for many years now: the are going to carry
> the Herbert Hoover stigma for a generation.
The FairTax would accomplish more vis-a-vis reducing imports and increasing exports than a VAT. The FairTax would effectively "reapply" foreign VAT on imports at the border and would not be embedded in exports.
On Sep 10 11:27 AM Howard Richman wrote:
> Thiazole,
>
> I urge you to look again at Buffett's solution. It is really quite
> brilliant. It does not at all interfere with comparative advantage,
> as tariffs would. It simply balances trade.
>
> For example, let's say an American exporter imports parts from China.
> That exporter would get Import Certificates equalling to the value
> of its exports. Those Import Certificates would allow the equal value
> of Imports. That exporter would use some of those Import Certificates
> when it imported the Chinese parts and would auction the rest.<br/>
>
> Howard
I like the FairTax a lot also, and have written several positive commentaries about it. See for example:
The Club Against Growth:
www.wnd.com/news/artic...
FairTax Cut for Two Parent Families:
www.wnd.com/news/artic...
I see the FairTax and the VAT as very very similar. But I was responding to a question about how to replace the revenue of just the Corporate Income Tax, not a question about how to replace the entire tax code. I would replace the Corporate Income Tax with a VAT just on goods (not services), but I would replace the entire tax code with the FairTax.
Even so, I agree with your criticism that the VAT is hidden. I would rather see the VAT appear on all sales receipts. There is no reason why it should not appear, except that the taxrate is easier for the government to raise when it is hidden.
Howard
On Sep 10 12:05 PM Paco6945 wrote:
> Ultimately, corporate/business taxes are all paid by consumers, for
> the most part without the consumer being aware. They are also easier
> to "sell" politically for exactly that reason. Clearly, some type
> of tax based on "value added" is the way to go -- but because it
> is a hidden tax, a VAT is not the answer.
>
> The FairTax would accomplish more vis-a-vis reducing imports and
> increasing exports than a VAT. The FairTax would effectively "reapply"
> foreign VAT on imports at the border and would not be embedded in
> exports.
Buffett's solution would not require any negotiations with anybody. It is something that the United States could impose entirely on its own.
Howard
On Sep 10 05:08 PM thiazole wrote:
> I agree, that sounds like a great idea. I hope something like that
> happens. Personally, I'm skeptical that China would sign up for something
> like that even though the long term benefit would be huge (compared
> to holding vast amounts of a depreciating asset).