A friend suggested that I recycle some of my older gems from the blog. Today I rehash and remind about the needs for much better policies if we are going to keep the US economy growing. We all want that, right? Whether you are Ds or Rs you want to find a way to have our robots and our jobs too.
I published Out of the Economic Wilderness in January 2018. http://larrydavidsonspoutsoff.blogspot.com/2018/01/out-of-economic-wilderness.html
If anything the process of delivering macroeconomic policies in Washington has gotten worse. There seems to be no party strongly advocating fiscal responsibility. And neither party has anything to say about what to do about the replacement of jobs with technology. Why do we put up with all that crap?
Out of the Economic Wilderness offers no specific solutions but surely the remedies for our current problems are not impossible. Rocky came back several times against heavy odds and he did it without magic. He did it by training smart and training hard. There is no bucket of JD Old Fashions out there that will fix our problems. We need to hunker down and do the tough things it takes to be the most globally competitive country in the world. We need to have the most educated, best trained, and highly motivated employees in the world. It's sad that we don't even think that way.
After the Sputnik challenge this country reacted with energy and focus. The global economic threats today are no less threatening. I hope we get off the dime before its too late.
I hope you enjoy re-reading Out of the Economic Wilderness.
Tuesday, April 30, 2019
Tuesday, April 23, 2019
I wrote this yesterday, April 22, 2019. The usual financial market experts are lamenting that we might be near another stock market peak and subsequent decline. Apparently the market today does not believe these forecasts as so far the S&P 500 is holding its own.
We all know why these experts are predicting a peak. If they get this prediction right at least once in their lives they will become rich and famous and get to dine with other rich and famous persons. Unfortunately predicting da market is a lot like predicting when Nolan will pull down his trousers and pee on an unsuspecting bush.
This topic wouldn’t be so much fun if it weren’t for the obvious and erroneous misrepresentations made by these prognosticators. For example, they point out that when the S&P hit 2905 on April 19 of this year, that it was nearing a previous high. Simple, right? Da market was approaching a new high. On Saturday night when you have that last glass of Pinot and are approaching a new all-time high – it’s important that you order an Uber to take you home. Just as your evening is about to end, these snake charmers are worrying that the market is about to retire as well. You should sell your stocks so those folks will make a nice commission on the sale.
While it is true that the market went up a lot between Christmas Eve 2018 and April 19, 2019 – it is also true that the market barely edged up an inch between October 1, 2018 and April 19, 2019. Actually, it fell a bit during that almost seven month time period. So was the market high on April 19?
Or compare it to January 26, 2018 and you get a wild and crazy 1.1% increase in that 16 month interval between January 2018 and April 2019. No cigar for that performance.
Some of you want to wring my neck because I have not admitted a key point – if you compare the S&P value today to two years ago and before two years ago – yes the market has risen. Yes, it has even risen at a pretty good clip. But come on dudes – has it risen enough to call off the S&P party? Has it risen enough to cause a major and significant downturn? Has it risen enough for you to sell all of Grandmas’ stocks?
I doubt it. Keep in mind what the market does. Unless the world has fallen totally apart – the S&P goes up. That means the previous peaks are historical points. We go from one peak to the next peak. Going from one peak to the next is normal!
Like Nolan and the unfortunate plants he waters, we don’t know when and where the stock market will take a breather. Of course it will. But let’s face it, companies are doing pretty well these days. If the S&P value is at least approximately impacted by the ups and downs of these companies, then it is not easy to see why we would soon have a sustained stock market collapse. The economy is growing. Wages and incomes are growing and jobs are being created every month. Everyone knows a recession is due by looking at the calendar but very few serious people are predicting when and where it will arrive.
Sell your stocks or don’t. But surely don’t put much stock into these stock market forecasts. Okay, sell a few shares and buy some JD. That sounds good to me.
Posted by Larry Davidson at 10:36 AM
Tuesday, April 16, 2019
Modern Monetary Theory (MMT). Really, it isn’t so modern. I can remember learning MMT at Georgia Tech from Bill Schaffer in the 1960s. It was a special case of the Keynesian Model. Without going through all the history of who John M. Keynes was, let’s just say he was the father of macroeconomic theory. He was also married to a ballerina. Pretty cool guy.
Professor John Hicks penetrated Keynes’ impenetrable writings, especially what he wrote in the General Theory. Whew, the hardest reading I have ever done. But Hicks figured it out and created something called the IS-LM model. This had nothing to do with religion. The IS curve modeled the goods and services market (Investment equals Saving). The LM curve was all about money (demand [L] and supply [M]). Putting IS and LM together was almost as cool as Joe Biden touching Madonna’s hair.
The IS-LM model was the way we explained the economy and discussed monetary and fiscal policy. One very special and weird case of the model was when the IS curve was vertical and the LM curve was as flat as the tires on my 1956 Mercury in 1964.
These extreme assumptions led to a policy conclusion that fiscal policy was all powerful and monetary policy had no impact on the real economy. And this is exactly what these modern-day MMTers are saying. They say, forget about monetary policy.
What we need to do to keep the economy humming, according to MMT, is to have the government create stimulus with its fiscal policy. That is, raise government spending and reduce taxes so spending grows. If there is a role for monetary policy, it is to not get in the way. As the economy expands, the Fed should create as much money as is needed.
So here’s the cool thing. Back when Hicks and Dick Froyen were explaining all this stuff to us young'ns, they explained that the assumptions for that variant of the model were an infinite demand for money and a zero elasticity of aggregate demand with respect to interest rates. Viola – with those assumptions all money gets gobbled up to be held and never gets spent. With those assumptions, even if bigger government deficits caused interest rates to rise, they would not harm interest sensitive spending like autos and capital goods. Sweet. Let government deficits soar and pump as much money as needed.
Why did Hicks invent this special case? What was he smoking? Basically, this was supposed to be the Great Depression Case of the model. Hicks mimicked Keynes by saying that in very extreme times like a Great Depression, people acted really weird. And thus he and Keynes believed that money would not rescue us in the 1940s but they thought fiscal deficits would.
My question: Why are we assuming the same assumptions hold in 2019? If MMT is based on behaviors that are typical in a Great Depression, why would we want to make those assumptions now when the unemployment rate is low and output is growing? Seems kinda weird to me. Who moved my JD?
Posted by Larry Davidson at 11:46 AM
Tuesday, April 9, 2019
John Manzella, founder of the ManzellaReport.com, is an author, speaker, and nationally syndicated columnist on global business, emerging risks, and economic trends. To contact him, visit www.JohnManzella.com.
This article was nationally syndicated by Tribune News Service/Tribune Content Agency and appeared in newspapers across the United States.
American free-market capitalism has generated the greatest economic growth the world has ever seen. At the core of its brilliance is its ability to create incentives to produce solutions to problems and to distribute those solutions worldwide. In doing so, it has paved the way for tremendous gains in efficiency and productivity while lifting millions of people out of poverty.
When discussing its benefits, the late author and philosopher Michael Novak said: “No other system so rapidly raises up the living standards of the poor, so thoroughly improves the conditions of life, or generates greater social wealth and distributes it more broadly. In the long competition of the last 100 years, neither socialist nor third-world experiments have performed as well in improving the lot of common people.”
For centuries, the American experiment has embraced free-market capitalism along with the rule of law, separation of church and state, entrepreneurialism, balance of power, the welcoming of immigrants, and a brilliant Constitution. This “secret sauce” has created a stable environment encouraging entrepreneurs to take risks and empowering people to unleash their creativity to achieve their dreams.
After dozens of speaking engagements in Mexico in the early 1990s, I found that many in the audience either had an American passport or badly wanted one. When I crossed through Checkpoint Charlie into East Berlin as the Berlin Wall was coming down, I was told by countless East Germans of their wish to move to the United States to seek a better life. And when visiting China, young Chinese often tell me of their desire to study in America or permanently move here.
What draws so many people to the United States? America’s “secret sauce” continues to provide tremendous advantages that few other countries can.
However, due to flaws revealed during the Great Recession that began in 2008 and throughout its slow and uneven recovery, many Americans began to question the credibility of our economic model.
In efforts to help those struggling to get ahead and create greater economic opportunities for all, some elected officials are advocating left-leaning (some would say “socialist”) policies that give the state too much decision-making authority. And herein lies the problem.
Stated by author John Steele Gordon, “Politicians can only make political decisions, not economic ones. They are, after all, first and foremost in the re-election business. Because of the need to be re-elected, politicians are always likely to have a short-term bias.”
Additionally, government service providers lack competition, a primary factor that makes capitalism so successful, and have less incentive to become more efficient, productive, innovative, and accountable. If left unchecked, economic decisions made by the market today could become decisions made by policymakers tomorrow who assume they know better.
Michael Novak also stressed that checks and balances are to the political order what competition is to capitalism. China, for example, does not have a system of checks and balances, nor one that promotes competition. As a result, its brand of one-party capitalism is undergoing difficulties that are likely to become more severe in the years ahead.
Other examples where the state substituted its decision-making ability for that of the market include the former Soviet Union, North Korea, and Venezuela — all failed states.
On the other hand, the American system of capitalism is far from perfect.
Some argue that our system is in a constant struggle to achieve a balance between the wealthiest and the rest, but in recent years has shifted too much power to the top, creating greater inequality. Others assert that crony capitalism, which exists when competition is unfairly limited, is too pervasive. And still others claim that their ability to reach the middle class has become nearly impossible.
In an effort to improve economic outcomes for all Americans, it’s essential to continually improve our system of free-market capitalism — not move toward a more socialist-like model that empowers politicians to make decisions that should be made by the market.
Free-market capitalism is responsible for improving the living standards of millions or even billions of people around the world. It’s also responsible for creating the wealth that, through taxation, supports essential government services, social programs, and safety nets.
Seeking the right balance between the market and the state is critical. But in the process let’s be sure to improve America’s “secret sauce,” not poison it.
Posted by Larry Davidson at 10:43 AM
Tuesday, April 2, 2019
I love how we are debating socialism. The Ds love to taunt the Rs with this stuff. Capitalism is bad. Socialism is good. No, it isn’t. Your mother wears combat boots. No, she wears Sketchers. Blah blah.
As usual, we get all pumped up by these pols and we start fist-pumping and breast-bumping. It’s almost better than Perry Como reruns.
Let’s start with some definitions I found in Wikipedia:
Socialism is a range of economic and social systems characterised by social ownership of the means of production and workers' self-management, as well as the political theories and movements associated with them. Social ownership can be public, collective or cooperative ownership, or citizen ownership of equity.
Capitalism is an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state.
The main distinction--and an important one--is that capitalism is run by private owners for profit and socialism is run by social ownership.
So what does that mean in theory and practice?
In theory, the distinction arises out of what roles we play as citizens when it comes to who makes the donuts. Notice it is the same people in either system – the citizens. In socialism, we all come together and decide how many donuts to make and at what price to sell them. We then create a sharing scheme to distribute the revenues. In capitalism, we let people self-select so that some people make and sell the donuts while the rest of us make steel or farm the land. Those who farm the land don’t share their profits with those who make the donuts and vice versa.
That’s the theory. What about the practice? I doubt there has ever been either of these systems working any place at any time. It is impossible for all of us much less the people in Bloomington to make the donuts together. What happens in reality is that some folks get selected to do the work. Then the political process decides who gets what.
Capitalism is never tried either. Notice that countries have governments and governments never let capitalists run willy nilly. Governments scoop off their share of the revenues with something called taxes. And of course they cannot resist regulating these companies in the name of the people.
So if we never see socialism or capitalism, what’s the big debate about? The reality is that most modern countries are somewhere on the socialism/capitalism scale. In some countries the ratio of government to private is higher; in other countries it is lower. The best most countries can do is to move the needle at little one way in one year, a little the other way in another year.
So we are all Sociacaps now. And what we are doing in the political arena today is to move the needle. The Ds want to move it left. But in reality it isn’t as theoretical as you might think. Arthur Okun wrote a book a long time ago called Equality and Efficiency: The Big Tradeoff. In that book he wrote that if you want more equality (free schools, free healthcare, etc.), then efficiency and economic growth will suffer.
That is what the coming election is about. Will the Ds come up with something that effectively improves equality without throwing the baby (the economy) out with the dirty bathwater?
I suspect we will hear a lot about that this year. Thus the need for plenty of JD... and donuts.
Posted by Larry Davidson at 10:41 AM