Howard Richman

How Long Will the Great Recession Last?

Russ,

You were exactly correct when you wrote: "How long will the recession last? Short answer is that it depends. It depends on how long it takes us to get our personal and public financial houses in order."

But don't miss the fact that our debt problems are increasing so long as we continue to run trade deficits. In order to buy more imports than we receive from exports, we have to borrow money from foreigners.

Howard

On Oct 30 01:47 PM Russ Wetherill wrote:

> How long will the recession last? Short answer is that it depends.
> It depends on how long it takes us to get our personal and public
> financial houses in order.
>
> It takes time to pay off debts, it takes time to divest non-performing
> assets, and it takes time for politicians to realize that more spending
> and more taxes do not lead to economic prosperity - they lead to
> financial ruin.
>
> When will the recession end? The only answer to this question, given
> the spendthrift ways of the current administration is not soon, may
> not ever. The CBO projects a decade of deficits, perhaps $10T in
> total.
>
> How will these deficits be reduced? More taxes. How will the health
> care, and carbon tax programs be funded? Even more taxes. How will
> Social Security payments be sustained in an era of aging population?
> Not even by taxes.
>
> More taxes equals less discretionary spending for investment and
> consumption. This means fewer jobs, economic stagnation, and lower
> standards of living for all. Historically, the only effective way
> to expand the economy has been reducing government spending, decreasing
> taxes, and maintaining positive cash flow.
>
> All levels of government, most financial organizations, and many
> individuals have, and remain, headed down the wrong road. Taking
> on more debt does not make you richer, it makes you poorer. Being
> broke is far better than being in debt because every dollar you earn
> is your own, no one else has a claim to it.

How to Boost U.S. Exports

bob adamson wrote that I had misinterpreted the very clear language of the WTO rule, specifically:

"That rule is not designed to allow the quantity or value of merchandise of a specified country to be targeted for protectionist actions."

He is clearly mistaken:

1. Invoking this rule would not be a "protectionist" action. The WTO rules do not allow protectionism. The purpose of this rule is to achieve "balanced trade" in order to prevent a serious financial crisis in the trade deficit country.

2. The language that follows the rule talks about discussions between contracting parties about other possible ways to alleviate the trade deficit. If a country were able to restrict imports from countries with whom it was *not* running a trade deficit, this language would not make sense.

3. If a country were *not* able to restrict imports from a country with whom it was running a trade deficit, as bob suggests, then the language of this provision could never be applied.

This provision recognizes the reality that trade deficits threaten the financial stability of the country running the deficit. Our experience in October 2008 illustrates this reality. We should have invoked this provision long ago!

Howard

How to Boost U.S. Exports

Paco6945 correctly wrote: "Another way to increase exports would be to eliminate taxes on production (i.e., income taxes and payroll taxes) and replace them with a consumption tax such as the FairTax."

And Paco6945 is not even mentioning one of the huge advantages of the FairTax (and VAT), they are, what economists call "border adjustible." This means that they are excluded from American exports and charged on American imports.

Currently, American producers have to pay all US taxes, then when they cross the borders into our trading partners they have to pay their consumption taxes as well, and all of our trading partners have larger consumption taxes than us, usually 15 to 23%.

Howard

How to Boost U.S. Exports

H.J. Huneycutt is clearly identifying part of the reason for US government inaction when he wrote, "The primary reason we have one-sided 'free trade' deals where we are expected not to have barriers to trades, but the other parties are allowed to have them, is because our politicians mindlessly pander to lobbyists representing industries that stood to benefit from the trade deals."

But there are other reasons as well:

1. Economists. Most American economists don't understand mercantilism, and the media follow their lead.

2. Bankers. Some banks think they can get rich as the middlemen for mercantilist loans.

3. Leftists. Some leftists want to see the Communist government of China triumph.

Howard

Good News: Dollar Headed Down

conceptwizzard,

You were correct in pointing out that we are a "70% consumer based economy", but that doesn't mean that we are not also a manufacturing economy. Consumers do 70% of the paying. But a lot of what they buy is manufactured goods.

Howard





On Sep 17 11:38 AM conceptwizard wrote:

> Not sure I agree with the dollar falling will lead us out of the
> recession. I agree that this will help our exports, but manufacturing
> is a small part of our GDP. The main issue for me here is the fact
> that our dollar is worth less so buys less on the import side. For
> a 70% consumer based economy I dont see how charging us more for
> goods when average income, weekly hours worked, house equity and
> portfolio values are still down 30% from their highs and U6 unemployment
> over 20% is going to supercharge consumers to buy more.
>
> The bulls are raging away, grabbing at each scrap of no news/good
> news/bad news and going along with the huge bubble that the FED is
> creating. While the average America is being foreclosed on, by the
> way which is one in every 7 seconds in the US, there will be no sustainable
> recovery.

Good News: Dollar Headed Down

tadpole76,

Like you, I agree with Jeff. The dollar is not and will not fall vs. the Chinese yuan. The acquiescence of the Obama administration to China's dollar peg is a scandal as well as a betrayal of his campaign promise in the final presidential debate when Obama said, "We should enforce rules against China manipulating its currency to make our exports more expensive and their exports to us cheaper."

I also agree with you that the falling dollar will reduce the purchasing power of the American consumer. Indeed I expect inflation to increase dramatically as the dollar falls.

However I disagree with your assessment that because of China, our overall exports won't increase as a result of the dollar falling vs. the euro and yen. Not only will we export more to Europe and Japan, but also many American goods will gain market share in their competition with European and Japanese goods in world markets.

Howard

On Sep 17 11:15 AM tadpole76 wrote:

> Yes, a falling US dollar makes our exports more competitive in the
> international market. But it also reduces the purchasing power of
> the US consumer. I agree with JeffDB. A falling US dollar will not
> close our trade deficit with China and the rest of the world. Over
> the last 15 years NAFTA has killed our domestic factory production
> base and led to offshoring of millions of jobs. Because more things
> are made abroad, the US consumer has had no choice but to buy more
> imported goods. Instead of a competitive devaluation of our currency
> to boost exports; a more responsible approach is to renegotiate NAFTA
> to reflect current realities, get everyone on a level playing field
> and incentivize US-based companies to bring their jobs back home.

Why Economic Stagnation Will Continue

vivafuego,

You were correct! Thank you for catching this. I just did a quick check of the data. There is indeed seasonal variability involved as you suspected.

In order to test your theory, I added up our cumulative trade deficit in goods for each quarter with China. The quarterly data on the BEA site go back to the first quarter of 1999 and end with the first quarter of 2009. Thus there are 11 first quarters and 10 second, third, and fourth quarters in the data. Here is the raw data:

www.bea.gov/internatio...

And here are the average deficits per quarter over this span:

First Quarter: $34.1 billion
Second Quarter: $37.4 billion
Third Quarter: $45.3 billion
Fourth Quarter $43.9 billion

In March 2009, our trade deficit with China was $15.618 billion. In June it was $18.430 billion, for an increase of 11.8%. The average increase from the first to second quarter is 9.8%.

Howard Richman

Why Economic Stagnation Will Continue

I agree with Roger Knights when he wrote: "The recession has ended; the depression has begun. (Debt-driven defaults and delevering = deadly dominoes.) "

A "recession" is characterized by declining GDP. A "depression" is characterized by high unemployment combined with economic stagnation.

By the way, John Maynard Keynes predicted the depression that the United States is now experiencing. He might have been writing about China and the United States today when he wrote 80 years ago:

"(A) favorable balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression."

Why Economic Stagnation Will Continue

Chap08 points out, "To be honest with your readers, you should have discussed the Smoot-Hawley tariffs. You may argue that they were different but they are still relevant. Don't expect that you can threaten China with no response."

With China only importing 25¢ for every $1 we import from her, we have little to lose. Any trade war would actually stimulate the US economy! When we foolishly initiated a trade war by passing Smoot-Hawley, we had a trade surplus, not a trade deficit.

Furthermore, Import Certificates are in full accordance with WTO rules which specify that any country suffering from a dangerous balance of payments problem can limit its imports from any country with whom it has a trade deficit.

But the main difference is that Import Certificates, unlike tariffs, cannot be responded to in kind. When we tie Chinese imports to their imports from us, any attempt by China to further limit imports from us, reduces the amount we import from her. The trade deficit country wins any trade war when Import Certificates are used.

Furthermore, the time to act is now. If we wat a few more years, China may have moved her US assets from long-term bonds to stocks and IMF SDRs. At that point, she will be able to crash the dollar without harming herself.

Trade Deficit with China Continues to Expand: Why?

Sober Realist:

Thank you for the kind words as well as the link to Tonelson's piece in the Washington Times piece. I'll blog about it next week.

In answer to your question, I don't think the answer is prohibiting Multi-National Corporations from setting up shop in China. They are just responding to the financial incentives that we have permitted. If we eliminate those perverse incentives, they will only locate new plants in China when there is a comparative advantage for doing so.

Howard

Trade Deficit with China Continues to Expand: Why?

Ralph Gomory is another person who understands the problem of our trade with China. See:

www.huffingtonpost.com...

The wikipedia entry about Gomory reports that he created new areas of applied mathematics. There is even a theorem (Gomory's Theorem) named after him. The group of scientists that he put together when he was the Senior VP in charge of science and technology at IBM produced three Nobel Prizes. More recently he served as the President of the Alfred P. Sloan Foundation, where he "contributed to programs in new areas involving economic growth and industrial competitiveness." He is also an NYU Professor Emeritus.

The economists and business leaders who advocate addressing this problem are not crackpots. They are people who understand what is happening. .

Trade Deficit with China Continues to Expand: Why?

mna wrote: "I think it's pretty clear the author wants protectionism. Let's make it clear. Protectionism helps no one. The last thing we want is a retaliatory trade war. Yes, China is not importing much now. So we reap some short term rewards if we go protectionist. But in the future, the chinese market is gonna be huge..."

People have been making your argument for well over a decade. The argument used to be that we would soon be selling American manufactured automobiles and automobile parts in China's burgeoning automobile market. Well that market has indeed been growing, but Chinese tariffs of about 25% and Chinese currency manipulations have pretty much completely kept Detroit production out.

The argument that you are making does not recognize that China is practicing mercantilism, the strategy of maximizing exports and minimizing imports. We would actually sell much more to China if we demanded balanced trade. They would be forced to take down their many barriers to American products if they wanted to continue to export to us.

Trade Deficit with China Continues to Expand: Why?

Haavbline wrote: "Use your arithmatic skills! If Mexico get a chance to double the product they can manufacture there and double their exports to US, they wouldn't need to by 75 cents from us because they would have all the over-capacity problems from China and would not need our exports."

Here's how it would work if Mexico doubles the product they manufacture: (1) The Mexican peso rises relative to the dollar; (2) Mexican workers' income goes way up; (3) Mexican consumption goes way up; (4) Mexican consumption of imports, including American imports, goes way up. The difference is that Mexico is not practicing mercantilism.

Trade Deficit with China Continues to Expand: Why?

By the way, America's top business economist, Peter Navarro, is saying about the same things as me about our trade with China. Check out his interview in the Huffington Post about his new book:

www.huffingtonpost.com...

Trade Deficit with China Continues to Expand: Why?

HaveBline predicts that if we balanced trade with China:

"Trade deficit against Mexico multiplies, factories booms south of the border. Author takes a chance to wade across the river and apply for jobs there."

There is a huge difference. Mexico imports 75 cents from us for every dollar we buy from them. China imports 25 cents from us for every dollar we buy from them. Mexico does not practice mercantilism (the strategy of maximizing exports while minimizing imports). China does.