Obama's Plan A Failed, But Plan B Looks Promising 33 comments
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President Obama's Plan A tested the proposition that you can fix an economic crisis caused by too much borrowing from abroad, by borrowing more money from abroad. So far it hasn't worked.
The latest unemployment numbers are out, showing that the jobs created by his Recovery Act are largely imaginary. The blue line shows the projected unemployment rate at the inception of the plan. The red squares show the actual unemployment rate which just rose from 9.8% in September to 10.2% in October.
The employment numbers in the manufacturing sector continued their steady decline, as manufacturing shed 61,000 more jobs in October as shown in the graph below:
These falling manufacturing employment numbers come despite the fall of the dollar vs. the European and Japanese currencies, perhaps because China continues to peg its currency to the dollar, and many Asian countries have resumed their currency manipulations so as not to lose market share to China.
Plan B is Balanced Trade
Meanwhile, there is hope on the horizon. Balanced trade is precisely the remedy required for a trade deficit economy whose consumers are too deeply in debt to keep spending beyond their incomes.
The G-20 leaders are finally addressing the trade imbalances that are preventing recovery from the Great Recession. This weekend, the G-20 finance ministers will meet in St. Andrews, Scotland. According to Reuters, they are "expected to focus on a framework to foster future balanced trade."
This is an excellent development. The only problem is the word "future" in the above statement. It may take lots of time for the world to negotiate the framework that could lead to balanced trade. And the question remains whether or not the Asian countries will cooperate and whether the West will have the fortitude to take coordinated actions if they refuse.
Treasury Secretary Geithner could show that he means business. He could begin to balance trade now, without waiting for a framework for balanced trade to be negotiated. All he would have to do is tell the Asian countries that they had better start balancing trade with us by taking down their barriers to our exports and ending their currency manipulations, or we will start limiting our imports from them to the level of their imports from us. Such a policy would be in perfect accordance with WTO rules which state:
(A)ny contracting party, in order to safeguard its external financial position and its balance of payments, may restrict the quantity or value of merchandise permitted to be imported.
If we were to implement this policy, not only would U.S. manufacturing employment immediately turn around, but the new business investment that we would get in our manufacturing sector would pull the U.S. economy right out of the Great Recession.
Not only that, the Asian countries would be forced to stop suppressing their people's consumption, including their consumption of imports. The result would be a much higher standard of living for the people of Asia.
Disclosure: No Positions
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On Nov 06 11:20 PM bob adamson wrote:
>
> In short, to say that stimulus was a failed plan is simply to prop
> up a straw man for an easy tack-down. This diverts attention from
> an intelligent discussion of how the important goals set out in the
> preceding paragraph are best to be achieved.
On Nov 07 07:05 AM Papaswamp wrote:
> I'm stocking up on spam...
While it may be some time, if ever, before Glass-Steagall returns, its looking like the reintroduction of Smoot-Hawley is right around the corner.
Btw, the suit that lead to the imposition of traiffs on steel pipe was filed by the USW.......
On Nov 06 11:20 PM bob adamson wrote:
> Mr. Richman –
>
> To assume that the US government and central bank ever assumed that
> fiscal and monetary stimulus financed by foreign loans would alone
> end the financial crisis and recession is simply wrong. Paradoxical
> as it may seem to you, to forestall the imminent deflationary depression
> that threatened in October 2008 and for the eight following months
> it was first necessary to prevent the implosion of the debt bubble
> that overhung the US, UK, Japanese and several other mature economies.
> This meant that the first step was to stabilize the economy however
> artificially and even though this would entail both further foreign
> borrowing and some national debt monetizing. This has been essentially
> achieved and the partial re-inflation of assets that form the security
> for the debt bubble coupled with the vigourous relief stock rally
> since May is evidence of this achievement.
>
> It was always understood that several other issues (the structure,
> capitalization, risk management rules and regulation of investment
> banking being one and resolution in an orderly manner over time of
> the debt bubble being another with rebalancing of international trade
> being a third) needed to be actively and fundamentally addressed
> once the economy was stable enough to accept the stress this entailed.
>
>
> In short, to say that stimulus was a failed plan is simply to prop
> up a straw man for an easy tack-down. This diverts attention from
> an intelligent discussion of how the important goals set out in the
> preceding paragraph are best to be achieved.
> "(A)ny contracting party, in order to safeguard its external financial position and its balance of payments, may restrict the quantity or value of merchandise permitted to be imported."
>
> Everybody understands this is a massive tariff, right?
Actually, auctioned import certificates would be a more effective method than tariffs to implement import limitations. The Treasury would auction certificates which would allow the bearer to import a specified value of goods or services from China.
I disagree with your analysis. Your basic theory was that in order to solve a short-term problem, it was necessary to borrow money from foreigners, making our long-term problems worse. If we had instead balanced trade, we would have been solving both our short-term and long-term debt problems at the same time.
As you know, Aggregate Demand = C+I+G+(X-M). You are arguing that the increase in G (and C) was necessary, I am saying that we could have increased X-M instead.
Let me go through all of your statements point by point to make clear how our views differ:
1. You wrote:
> To assume that the US government and central bank ever assumed that fiscal and monetary stimulus financed by foreign loans would alone end the financial crisis and recession is simply wrong.
Not at all. That was indeed the assumption of those who promoted the Recovery Act.
2. You continued:
> Paradoxical as it may seem to you, to forestall the imminent deflationary depression that threatened in October 2008 and for the eight following months it was first necessary to prevent the implosion of the debt bubble that overhung the US, UK, Japanese and several other mature economies.
You are correct that the deflationary depression has been forestalled. Instead, we are getting an inflationary depression as the simultanous increases in the Consumer Price Index and the decrease in the employment numbers indicate. Face it, the Recovery Plan did not produce the positive effect upon business investment that was anticipated.
3. You continued:
> This meant that the first step was to stabilize the economy however artificially and even though this would entail both further foreign borrowing and some national debt monetizing.
The first task, back in October, was solving the liquidity crunch. The Fed accomplished this even before TARP money entered the system. Indeed this required debt monetizing and many of the other steps taken by the Fed.
4. You continued:
>(T)he partial re-inflation of assets that form the security for the debt bubble coupled with the vigourous relief stock rally since May is evidence of this achievement.
The rising stock market and rising house prices are certainly an achievement of the policy of giving away government money to banks and home owners.
5. You continued:
> It was always understood that several other issues (the structure, capitalization, risk management rules and regulation of investment banking being one and resolution in an orderly manner over time of the debt bubble being another with rebalancing of international trade being a third) needed to be actively and fundamentally addressed once the economy was stable enough to accept the stress this entailed.
Here's where we disagree. As I noted at the top of this comment. I favor short-term strategies that coincide with long-term goals. Obama's Plan A has not worked. While the money given to banks has increased the supply of loanable funds, it has done little to increase the actual loans. You can't "push on a string."
6. You concluded:
> In short, to say that stimulus was a failed plan is simply to prop up a straw man for an easy tack-down. This diverts attention from an intelligent discussion of how the important goals set out in the preceding paragraph are best to be achieved.
Up until this insulting comment, I very much appreciated your intelligent discussion here and the opportunity to respond in kind.
Howard
Rather, I find it more likely that a tripling of oil prices is around the corner (1-3 years). Energy cost for transportation will rise, even while natural gas is plentiful due to the horizontal drilling technologies. That means that the diesel in the container ships that cross the Pacific eventually will make the trip too expensive for some goods. To fill the void, industry will slowly increase in north america, improving the markets here. Regardless, the inflation that comes with increased transportation costs will fix this recession, and will conveniently reduce the national debt, drive up housing prices, and provide opportunities for the leadership to blame (will they ever stop blaming ? all year I hear nothing but blaming from Obama's people), while China quietly loses $1 Trillion.
The question is whether the fools in congress can stop their spending binge when rates jump. It's serendipitous that the country is spewing cash from the Treasury while rates are historically low. That needs to stop when rates rise or we'll get a banana republic.
Tim Geithner can go to all the meetings he wants, raise his eyebrows, and pontificate about everyone else being fair. The US under obama is on a one way path to Smoot-Hawley, or should I say, Obama-Stern?
Arguably stimulus did three things:
1. forestalled the deflationary depression,
2. stabilized both the economy and public sentiment to allow choices for future recovery to be devised, considered and implemented in an orderly fashion over a realistic time frame, and
3. allowed the US to work with the other mature economies in a coordinated effort to achieve this recovery.
You are quite right that the stimulus effort might in the end be found to have been a futile and expensive delay before a further and more serious depression but, arguably, this will only be so if the opportunity now before us to work out and implement the basis for a sound recovery is misused. To say otherwise assumes that the US and other nations are powerless to affect the course of economic events (except to make them even worse by attempting to influence that course. Without assuming that governments can dictate the economic future, I for one do not go to the opposite extreme and assume that sound policy and implementation can’t have a significant beneficial impact in the current environment.
The route ahead is going to be long, hard, uncertain and expensive but the alternative (i.e. no stimulus and leave it to the free market in October of 2008 to sort thing out), arguably, was a quick and certain descent into chaos and misery.
bob adamson
On Nov 07 02:40 PM The Geoffster wrote:
> I agree with your observations but question whether the stimulus
> has done anything but forestall the deflationary depression. Hasn't
> the can just been kicked down the road? Haven't we just created a
> much bigger bubble? All this asset inflation is being created with
> giant leverage. I'm not sure we inflate our way out of this. If we
> fail, won't we experience the mother of all deflation?
> One other point about the author - in the past when someone brought up the fact that in a trade war foreigners would very likely sell their existing Treasuries and not buy any more Treasuries - the author took the typical arrogant American attitude - those "fur-ners" have no choice but to buy our Treasuries, after all we're Americans and
we deserve beyond our means forever...I remember I could not stop laughing for hours...
Tony is incorrect. I have never made a statement even remotely similar to: "those 'fur-ners' have no choice but to buy our Treasuries, after all we're Americans and we deserve beyond our means forever." I challenge him to cite his source. It does not exist.
My positions are:
1. The United States is likely to suffer a dollar crash if we don't do anything.
2. The increased danger of a dollar crash resulting from balancing trade with China would be short-term, and we would be better off suffering the crash now while we still have plenty of industry upon which to rebuild, rather than later, after China steals most of our remaining industries.
3. If it became clear that the United States was serious about balancing trade with China, the inflow of foreign investments into the United States could counteract any selling of dollars by China.
4. In the long-run currency crashes are caused by increasing foreign debt, the problem that is solved when trade is balanced.
Howard
I disagree with your assessment that a stronger US industrial sector would hurt our service sector.
1. Both service exports and industrial exports would help balance trade. Balancing trade does not favor either sector over the other.
2. In the final analysis, services provided by Americans to Americans grow when Americans have more income. If trade is balanced through measures that force the Asian countries to take down their barriers to American exports, then Americans gain more income.
Howard
The proverbial, "you can't have your cake and eat it too" certainly applies to US economic policy when dealing with Asia. Until the US stops partying like a madman there is nothing Asia can do to help them. The US will keep on suffering their periodic economic hangovers from drinking too much of the green stuff (it must be dollar absenthe) no matter what the rest of the world does. A trip to AA is badly needed.
I regret that you found my concluding remarks to which you refer insulting. That certainly was not my intent as I simply meant to be plain and direct. I encourage you to be the same with me in return.
Turning to your expectations for what you describe as Plan B, unfortunately we will just have to disagree on whether the US could have implemented such a plan on the fly, as it were, in the teeth of the crisis in the last quarter of 2008. Now that the economy is somewhat stabilized (admittedly at great cost, which I think was unavoidable and you do not), the US can negotiate with its trading partners with some prospect that mutually beneficial terms can be derived.
The outcome of Pan B as you describe it is in optimum terms from the US perspective. Unfortunately I doubt very much that the outcome of upcoming negotiations will be as positive for the US as you suggest. That said, significant progress towards a more reasonable and sustainable trading regime is in the interests of all the principal players and a reasonable outcome, after hard negotiations over timing and details, is possible but will not be easy. All the more reason why it is highly doubtful if a Plan B like solution could have been achieve last year.
Ohhhh, my.....The G-20 is not going to do anything of substance. (We can all be thankful for that)
There are at least 19 too many members to come to an agreement about trade, because what benefits one nation will hurt another, and nobody is ever going to surrender anything of importance, especially during an economic mess. The trade treaties are so ridiculously complicated that there is absolutely no possibility of getting anything serious accomplished. And Geithner is in no position to dictate to anyone. He needs international cooperation to keep his and Bernanke's ponzi scheme from collapsing.
What they will do, however, is what politicians do best-- point with pride, bloviate, claim success (imaginary) and congratulate each other (for not destroying what is left of the financial world, I suppose).
It is a slam-dunk guarantee that the "framework to foster future balanced trade" will not be about this financial mess, but the next one they create. Or, maybe the one after that.
Health care will add massive new taxes killing even more employment opportunities. Cap and Trade also even more lost jobs and now a trade war. Looks like 25% may be the new "norm". I don't see how spending levels plus upcoming liabilities point to anything other than deliberate economic suicide.
He's been given an impossible situation. "Deliberate economic suicide' is pretty strong, considering he is listening to Republican stooges in Bernanke and Geithner as far as how to fix the economy. Those who think this is still a Republican vs Democrat issue don't really see what is going on. The last Republican administration turned the country over to the bankers -- and now Obama is trying to deal with this in the only way he knows, by listening to Bernanke, and doing what Bernanke says.
On Nov 08 01:31 AM dvdivx wrote:
> Obama is intent on destroying the economy not rebuilding it.
> Health care will add massive new taxes killing even more employment
> opportunities. Cap and Trade also even more lost jobs and now a trade
> war. Looks like 25% may be the new "norm". I don't see how spending
> levels plus upcoming liabilities point to anything other than deliberate
> economic suicide.
Americans suggest 'buy American' and the free-traders start to wring their hands and say 'I told you so'.... But there is no free trade. Free trade is an ideal that we never reach...and it is a long spectrum which is sometimes more liberal in its application and sometimes more conservative, more nationalistic.
We need to face the fact that the Old World, the Global Economy, pre-2007, is gone. We need to build a New World that is no longer going to be financed by Asia buying our debt and America buying Asia's toys. It's going to be a painful process. Trying to preserve it now is the fool's paradise. The Old World has huge holes in it and is on fire...no point talking about going back to it the way it was.