Everyone and his dog is now engaged in debate which aims to find ways to boost job creation in the US. More than a fair few are proposing further stimulus programmes. They wrongly tend to call it "second stimulus" - it is far from being the second one.
It’s not like the Bush tax cuts and Fed-inspired interest rate cuts could or should be excluded. In fact, one could argue that America has been on a debt-fuelled stimulus since the 1980s when total debt in relation to GDP went from 160% to more than 360%. Steve Keen argues that the contribution to demand from rising private debt was far greater during the recent boom than during the Roaring Twenties — accounting for over 22% of aggregate demand versus a mere 8.7% in 1928.
People argue against increased government spending based on the fact that the private sector does indeed have a better grip on what constitutes productive spending, but one could again make a decent case that recent private spending was from inducing sustainable growth.
What distorts the debate, however, is that proponents of stimulus spending point to good uses of public money, such as infrastructure and energy, which do actually provide a decent return on investment - but because of the practicality of government spending we will see those funds go nowhere near a productive use. How you put the money to work makes all the difference. What has China done? They built up the necessary infrastructure that enables exporters to move into the cheaper Western provinces and gives coastal provinces the opportunity to move up the value chain. They can even allow the RMB to rise higher.
We have had a massive stimulus for decades. It’s time to acknowledge this fact and realize that it did not contribute to a healthy economic structure. As a German I am wary of economists bluntly explaining trade differentials by proclaiming undervalued currencies all over the world. As long as financing is available and consumption rates differ to a large degree, as they do in the case of America and China, imports and exports need not be balanced. In fact America runs a trade deficit with almost any nation, quite a feat.
The problem isn’t really the incurred debt. What’s problematic is that if this process goes on for decades, the economy will be shaped by it and respond with job creation in those areas.
The FIRE economy (Finance/Insurance/Real Estate) did not come out of nowhere, it was a direct result of people responding to incentives. The correlation between changes in private debt and unemployment is strikingly high.
Exports to the Fore!
If changes in aggregate demand and unemployment were thus highly affected by changes in debt, gaining jobs by increasing exports looks like a way out; hence, I thought it would be interesting to have a closer look at the structure of the US economy. Unfortunately, I have come to the conclusion that job creation is all but impossible unless the structure changes.
Obama wants to double exports within five years, arguably one of the aims being jobs, but has anyone had a word with the BLS? According to their employment projection the occupations which will increase employment the most have little to nothing to do with trade.
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Flexibility and the ability of new companies to create jobs is one of the advantages the US economy enjoys, but there’s a caveat. For years, American economists handed out advice to continental Europeans that they needed to increase flexibility in their labor markets, but what they failed to realize (even though some of what they suggested made sense) is that turnover is lower in countries like Germany. The American economy used to destroy more jobs than any other, but at the same time create more than any other. This dynamism comes with a price and translates into other countries taking up more conventional industries.
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Just as an example, Korea exported 8,410 cars to the US while it imported a mere 492. What this shows is that other nations have already staked their claim in traditional industries. There was even a $60 billion deficit in advanced technology.
If this route is seemingly blocked, one might try pushing into new areas, and the US has a very good track record on that one. Companies like Intel (NASDAQ:INTC) and Apple (NASDAQ:AAPL) are proof enough. Andy Grove, however, noted that start-ups can’t really help on this issue as the process of scaling largely happens in Asia. For every American Apple or Dell (NASDAQ:DELL) worker, there’s ten in Asia.
This is why the US is deadlocked and unemployment so high. Traditional industries have already been taken up, the FIRE economy is in tatters, innovation will spur jobs in Asia and to add insult to injury, the government is in no fiscal position to do anything about it.
A Way Out?
There might be a way out, but this one needs much more research. What’s been left out so far is the issue of deflation. Philosophically, I would argue that deflation needs to run its course and that prices need to come down to their true level. However, this blends out the enormous challenge posed by debt-deflation. Hereby, I agree with Mish’s definition of deflation as a net contraction of money and credit.
Now, if credit in the private sector is destroyed faster than money printed by the Fed (for the public sector), would this open up the way to hold up fiscal measures via QE and avoid debt-deflation? The UK is experiencing roughly 5% inflation as the Bank of England did a year's worth of deficit printing, but they’re holding out fine.
Yes, I understand that savers and bondholders get punished and yes, this is terribly bad ethics, but it might just be the least worst way out. Former German Bundesbank President Otmar Emminger is famous for saying "if you flirt with inflation you end up marrying it" but unless we find a way out of this it may not only be capitalism that’s at stake but democracy.
The Chinese Communist Party will have a field day justifying its rule when it can point out to riots in democratic hotbeds such as the UK and America. This is about more than economics.
Disclosure: No positions