Piecemeal Policy is Populist and Perhaps Ponzi

After I wrote about federal spending last week, the press was filled with new ideas about tax change and tax reform. On one level that sounds good. Many of us have been harping about a lack of attention to the tax side. On another level, this cornucopia of tax ideas warns of a continued breakdown in Washington and the increasing potential for a fiscal meltdown.

Consider the guy who gets in a car accident and damages his 1988 Vanagon pretty badly. He takes his pride and joy to his favorite mechanic, Claus. Claus wrings his hands and tells the guy, let’s call him Jason for fun, that the bill will be large because he has to fix everything from the brakes to the rolled and pleated cream and crimson upholstery. Jason luckily is covered by the Deutsche Hefeweizen Car Insurance Company and tells Claus to go ahead and do the work.  Imagine how Jason felt when Claus called him and told him the car is ready. When Jason arrived he found that the front end was fixed but nothing else. Claus explained that if Jason is satisfied, he would work on the rest of the car. Imagine that Claus and Jason go through this same thing each time Claus fixed one more part of the car. Finally Jason, usually a mild-mannered and thoughtful fellow, began screaming at Claus – DO NOT CALL ME AGAIN UNTIL THE WHOLE D___CAR IS FINISHED. I CANNOT EVALUATE YOUR WORK AND KNOW MY CAR IS FIXED UNTIL ALL PARTS ARE WORKING AT THE SAME TIME.

I think you get the point. Claus might take great pride in his brake work but Jason cannot really evaluate the brakes until he can actually drive the car forward and step on the brake pedal. It would also help to check the brakes after the steering system is fixed and he could see how the car braked while turning.

A sequential method is good for building a house. First you dig the hole then you lay the foundation, etc. But some things are best done and understood simultaneously. I think our fiscal system is broken. It behooves some politicians to amaze us with one partial solution after another. But the truth is that you cannot really evaluate a spending plan without knowing how you are going to finance it. Think of all the fiscal policies that have been dribbled out by the President or Congress lately. We fix employment one day with a continuing payroll tax reduction.  We make markets more efficient the next day by reducing corporate tax rates. We raise the tax on dividends and capital gains another time. One policy is all about fairness. Another one is about efficiency. Another pretends to impact growth. Hollow words talk about medium-term budget restructuring. All these policies have implications for national fiscal health in the near-term. All will impact it in the long-term. We cannot evaluate the brake fix without the steering. We cannot know the impact of a spending plan without a revenue fix and tax reform.

I can just see those politicians sitting around their favorite watering hole in DC drinking $20 Manhattans laughing with each other about how stupid we voters are. Let’s hit the voters with housing reform on Tuesday, says Senator 1. Yes, and then on Wednesday we will save the planet from killer bees chortled Senator 2. Senator 3 chuckled that Thursday should be when they publish the three million page document on fair taxes. They toast the voters and then text their chauffeurs to take them to the next stop for donuts. 

Okay I make fun but the sad truth is that this piecemeal approach is about nothing except the manipulation of us by politicians. They divide us and we happily line up in our respective camps while they go to the bank. 

Talk about a Ponzi scheme. These politicians vote for schemes that have done nothing but make things worse. I don’t care whether you talk about the war on poverty or on Afghanistan – the policies are not raving successes. Then they pit us against each other when it comes to another round of policies that don’t work. When the last round of policies clearly don’t work, they play a game of blaming each other and gain even more power to do equally bad policy. The game is nearing the end and we citizens are left with a mess.

I can hear you now. Larry – get real. You expect these politicians to actually sit in one place long enough to come up with a comprehensive economic plan for the economy? You want them to deal simultaneously with a number of the most important fiscal tools that could make progress towards advancing our goals for employment, economic growth, poverty, energy, and security? You want them to stop playing the bait and switch game?

I agree that what I am saying sound really crazy. I want our politicians to have a plan to improve our country. I want our politicians to recognize that there are tradeoffs when it comes to making progress on important goals like growth and poverty and environment.  I want our politicians to stop playing cheap games that artificially create animosity between the rich and the poor, the young and the old, and the wage earner and the owner. I want our politicians to lead in a way that raises our aspirations and creates realistic hope that we can succeed in an increasingly competitive global economy.

Okay, so maybe I am engaging in some early morning JD with my raisin bran. But we do need to recognize that the current approach to policy during an election year is just going to make things worse. Worse yet is what has happened to our expectations. Notice that it sounds crazy when I propose that our politicians act as leaders and statesmen. Have we really come so far (down) that we can only expect crass and selfish behavior of our political leaders? This is a great country with great people. We should expect more.

More should not be so much to ask for. Most of it we know already.  Below I will try to prioritize some things that most of would agree with. If you don’t agree that gives you something to comment about.

(1) Send a signal to ourselves and the world that our temporary deficits and debt position must be confronted immediately. That means we must reduce spending and increase tax revenues. We could always sell the Grand Canyon to the Chinese but I am not suggesting that yet. 

(2) Don’t let a solution for deficits/debt jeopardize our fragile growth position. By that I mean that too much austerity too soon might be a bad idea. So restructure the budget numbers in a gradual way. They can argue about the speed of the solution. But at the end of the day come up with a temporal plan.

(3) Ask the appropriate czars to move more quickly to finding ways to deal with housing issues, with reducing excessive leverage, and with using the legal system to penalize the bad guys.

(4) When dealing with government spending and tax revenues, leave no stone unturned. Allow no sacred cows. Spending restraint will not get anywhere if Social Security, Medicare, and Medicaid are taken off the table. Similarly tax revenue enhancement cannot be done unless the entire realm of tax rates, deductions, loopholes, and credits are reviewed together.

(5) If we evaluate the efficiency or the fairness of every change individually we will never take the first step. Instead we should take everything together – all the ideas above – and then make a summary statement about the overall impact on employment, growth, poverty, income distribution, etc. If one multifaceted plan fails to muster enough support, then they should adjust the plan until they get something that appears to be better when it comes to employment, growth, poverty, income distribution, etc.

If some of you have gotten this far you might be screaming – Larry – are you crazy or drunk? Can you really expect Washington to do something like this? Humbly I beg you to notice that the piecemeal approach does not work. It is taking us to the vigilante’s abyss. America does not face an inevitable decline because of the external meanness of China, PIIGS, OPEC, Terrorists, etc.  As Pogo said, “We have met the enemy and he is us.”

We have the firepower to adopt a comprehensive plan. We already believe nothing will get done this year because it is an election year. Wouldn’t it be nice if some folks in Washington took this year to work hard on a perhaps flawed but comprehensive plan that addresses our real problems? Isn't that what we pay them handsomely to do? 

The Obama Budget -- Ornaments or Armaments?

President Obama presented his 2013 budget to the nation last week. It made me feel the same way I feel when my irrigation system starts all my sprinklers going in the middle of a rain storm. I feel like screaming at the controller box – IT’S RAINING OUTSIDE. STOP SPRINKLING.

Mr. President, we have a government deficit problem. Stop spending money like a lottery winner at Walmart. Many of you reading this will notice that I once again am harping about federal government spending and you want me to talk about taxes. But as Betty will tell you, I can do only one thing at a time. Let me just say that I agree that tax revenue enhancement is important and necessary. I promise to get to that topic another time. So grant me a reprieve to focus only on spending right now.  

Luckily the Office of Management and Budget (http://www.whitehouse.gov/omb/budget/Historicals ) estimates the impacts of Presidential proposals so we have oodles and oodles of tables at omb.gov that shows how the President thinks his proposal will affect spending between 2013 and 2017. Of course his proposal would have to be passed by Congress to have an impact but it is instructive to see what’s in this plan for federal government spending. Surely it is revealing as to what the President thinks is necessary and good for the country. I read and my son affirms that like the presidential proposal of this or any other president, this first version envisions that much will be changed before Congress is finished. In fact, it is possible that nothing gets done in the coming year with respect to the 2013 budget. Nevertheless it is good to look at what he is proposing.

The following table comes from Table 1.1 Summary of Receipts, Outlays, and Surpluses or Deficits (from the above link). I have abstracted just the information about government spending or outlays for the years indicated below. I added defense spending from Table 3.2 Outlays by Function and Subfunction.

                        Average Annual Percentage Change in Federal Government Spending

On-Budget          On-Budget          Off-Budget

Total                      Defense             (Mostly SSN)

1990 to 2007          1.4                       5.0                          13.0

2007 to 2011          9.1                       7.0                            2.5

2011 to 2017          3.1                     -2.8                            12.1

The story from the rates of growth is pretty simple. The 1990 to 2007 data are provided for benchmarks – or to register some degree of normality. On-Budget Government spending during that 17 year period grew by an average of about 1.4% per year. On-Budget includes most items in the budget and defense spending but not social security outlays. Notice that the defense spending part of On-Budget grew by 5% per year – faster than overall On-Budget. Spending Off-Budget was the fastest with an average annual increase of 13% per year.

The second line of the table calculates annual average percentage change over a four year period that includes the recession and the following slow growth years. This period mostly coincides with Obama’s tenure. Notice that SSN spending slows greatly during  these years while On-Budget spending rises by 9.1%. On-Budget spending increased from $2.3 trillion in 2007 to about $3.1 trillion in 2011. A more normal increase during that time period would have found it growing to about $2.43 trillion. Thus we see On-Budget government spending growing by about $670 billion more than normal.

There was a recession and because of the recession we found On-Budget government spending about $670 billion higher than the amount it ordinarily would have increased. Since the recession is now over it might be reasonable that sometime after 2011 or sometime in the future, that extra or excess spending could be removed. A normal spending amount for 2011 should have been $2.43 trillion. So reducing the actual amount of $3.1 trillion back down toward $2.43 would be reasonable. The spending was meant to be temporary. Temporary means you add it when necessary and then remove it when not necessary.

Here is where the English language really creates problems for us. Getting rid of spending that is in excess of what would be normal is called a normalization by some people – a horrendous cut by other people. In my mind, you can’t call it a cut if it was meant to be tempory and if you are letting the normal progress of government spending rise. Government spending was $2.3 trillion in 2007 and normalization would imply spending of about $2.43 trillion in 2012 or thereafter. That is not a cut – it is an increase -- so long as we let spending rise towards $2.43 trillion.

Okay so some of you think I am being draconian. But let’s see what the President’s budget estimates for spending after 2011. Do we see anything bordering on a cut from the bloated levels of 2011? Absolutely not. The table shows SSN spending going back to its double-digit increases.  On-Budget spending is estimated to grow by an average annual rate of 3.1% per year from 2011 to 2017. Notice that is not only NOT A CUT but that growth rate is EVEN HIGHER than what prevailed during the 17 years from 1990 to 2007. In fact the average annual rate after 2011 is more than double the normal rate of the past. President OBAMA is not suggesting a cut – he is taking a bloated level of spending of $3.1 trillion and raising it over the next six years to $3.7 trillion.

This reminds me of someone gaining 50 unwanted pounds in February deciding to gain only 40 pounds in March. That’s quite a cut, right? Would it be so crazy for this person to plan to lose 1 pound next month?  While losing more than that would seem more effective clearly no one would consider gaining 40 pounds a cut.

  

If any politicians boldly tries to use this perverse Presidential logic to stop the increase – for example if anyone dares to cut the increase to only $3.6 trillion by 2017 they will be pointed out and ridiculed and called mean-spirited souls who care not for those who receive government spending. But this is crazy politics. Only a King with No Clothes could get away with calling another $600 billion increase on top of a temporary and bloated figure a cut in spending.

You might notice that almost nothing is being cut – except On-Budget Defense which goes from $705 billion in 2011 to $589 billion in 2017 – a cut of $117 billion. Yes – there is a real cut in Obama’s budget and it is Defense spending.But alas, this cut is not used to cut or slow spending since it is more than made-up with more ornaments for the Christmas Tree called Non-Defense On-Budget spending. 

This amounts to the lunatics running the institution. Those of you who think I focus too much on spending and not enough on taxes read on a little farther. If this budget were passed and if we do want the budget deficit to decline over time, this proposal  requires EVEN MORE tax increases to move in that direction.  We already need a large tax revenue infusion to cover the deficit from the recession years. Obama’s budget asks us to fork over even more each year through 2017. Clearly he has no plan to cut the national deficit through spending reductions. 

Keynesian Wolves, Life Boats, and Cruises

The Keynesian wolves never get enough chickens. They keep circling the hen house long after their tummies are full. I just read the editorial page of the New York Times (Feb 7). This is not something I normally put myself through but I am on an island and do not have easy access to my usual propaganda. But it is not like the NYT is alone. The President said recently after the good news of the last employment report – “Get it done.” Get it done now. Bernanke chimed in to say this was not the time to upset the markets with worries about high interest rates and fiscal austerity. The clear implication is that we need more fiscal and monetary stimulus.

I have been writing about this unflinching attitude toward stimulus since the beginning of the recession. The biggest problem with monetary and fiscal policy is that it never knows when to end the party – and we end up going from the frying pan to the fire. Ouch. It happens over and over and over. Decade after decade. Century after century.  The wolf goes to Farmer Bernanke and says – you have way too many chickens. Just let me and a couple of my helpful friends inside the fence. Give us a couple of JDs and we promise to take only a few of the older chicks and then we will go back to the woods and leave you alone. I don’t think so.

It seems strange to me is that these Keynesian voices get louder and louder the better the economy performs. How can you explain this? It seems simple to me – that their concern is totally focused on politics. They continue to support an invested ideology of populism that almost guarantees election.

I sound extreme and political myself. But I hope to suggest otherwise. It is sort of like the guy who sells insurance or life rafts to cruise customers. It is easy to make a case for insurance and life rafts before the cruise. There is plenty of uncertainty before the cruise. But does it make sense to sell this stuff after the bloated and sunburned cruisers have completed their journeys and are back on the dock? I think not. 

Under absolutely no measure of any macroeconomic indicator is the US economy in a recession or headed towards one. The boat is back at the dock. It is true that we are frustrated with the improvements in employment. We hear estimates that approximately 15% of the nation’s labor force are without work, without adequate work, or have simply given up. That is too much. The human tragedy is unacceptable. There should not be any debate about this. But there is plenty of evidence that additional Keynesian stimulus at this stage will not quickly improve employment opportunities and that it is possible that a slow and steady recovery in employment is the best that we can hope for.

I have written continuously about the fact that the past recession and our slow growth were the result of a perfect storm of negative economic shocks. This deep hole was worsened by the chickens coming home to roost – too much borrowing and consumption by the private and government sectors for decades and decades finally hit the wall. This is not an easy hole to dig out of. In the very beginning, our policy leaders should have been more forthcoming about this but instead these populists wanted to sell you a life jacket and raise your expectations to unrealistic levels. The reality is clearer today. We see that all those trillions of stimulus we spent could do no more than fill in the bottoms of a few holes and we are left with the residue of perhaps 60 years of excessive spending. We are growing but the path to high employment is slow.

Let me advance one more point about not engaging in more stimulus now. I think we are excessively worried about a double-dip. The economy is stronger than we think. If we don’t want to do the frying pan-fire dance, then we need to let the forces at work play out. These forces will not create a fast remedy for employment but as I argue above, nothing is going to do that anyway. But easing off the accelerator will still leave us going forward at a decent rate. Here is why. Just as the economy was showing some decent growth at the end of 2010 the world got smacked with some new shocks. What happened in 2011 was not the direct result of our inability to escape the recession. It was more the result of earthquakes, tsunamis, and then the recognition of the worsening of the European sovereign debt crisis. It is testament to the underlying flexibility and strength of the US economy that this second round of body blows did not send us back to recession land. It did slow the US but as we begin 2012 we are seeing the dissipation of the residues of the original and then the secondary shocks.

But even better than this end of the shocks is the expected expansionary impacts of the spending multiplier in 2012. Many critics have blasted the Keynesian multiplier when it came to past stimulus. And this criticism was for good reason. Stimulus policies that created negative expectations meant a small multiplier for past stimulus. But macroeconomics also attaches a spending multiplier to non-policy shocks that propel the economy. When, for example, improvements in wealth caused confidence to increase, wealth effects are having multiplier effects. We are already seeing this in 2012 and the confidence effects will continue to build as more good news reinforces more good news. Spending is broadening across many sectors.

Confidence and spending are building in the system. Not only is the US growing but China is doing better and resolutions for the European crisis are more likely. 

This is not the time to top these effects off with more stimulus. There is no quick solution to our employment problems and too much medicine is going to make the patient wobbly. Clearly the risks are present that too much stimulus will do nothing but slow the economy. We saw a quick reminder of this when interest rates started to rise at the end of 2010. Let world growth pick up a little more in 2012 and we will see long-term rates rising and inflation creeping above target values. Rising interest rates will be bad for the recovery and could create dire results for government budgeting.

The economy is on the right path. We might be surprised with the results if we just show a little restraint at this critical time. Resist temptation. Keep those Keynesian wolves at bay. 

Class Warfare or Inexperience?

I was watching the recent speech the President made concerning a new policy for housing. In this blog I have often argued that no real recovery will sustain until we have good policy attacking the real issues in the housing and financial markets. Watching the speech I could not help but think that this might be a case of doing something that moves in the right direction but which might be enunciated wrongly or positioned inappropriately. As such, it will probably fail. Then I thought a little while longer (ie downed another JD) and it occurred to me that what bothered me about this speech was similar to the indigestion created by previous Obama policy speeches.

His strongest political opponents might rail that despite Obama’s protestations, he relishes in class warfare. They might worry that this new housing solution (which makes it easier for people to remain in their homes and is financed by increases taxes on banks) pits the poor against the rich. That’s a viable option but in this posting I am going to try to convince you that the real problem with Obama’s policies is simple inexperience.  

A good way way to summarize his experience is as a community organizer. He is a speech maker and a rebel rouser. He got a degree at Harvard in law and the closest he came to an MBA degree or an economics course is when he made a wrong turn on his way to the theatre building. There is nothing wrong with this. He is what he is and someone with those kinds of skills could be a great president. But let’s face it – in his case it is the words he chooses in his speeches that belie his real knowledge and experience.

What am I blathering about? Let’s take a funny pill that makes this moment not a presidential election year. Let’s suppose we are simply interested in defining some things as they are. What is a bank? What is a university? What is a pipeline? What is a pharmaceutical company? What is a ________ (you fill in the blank)? What is a bitter and why do people put them in perfectly good drinks?

Let’s consider these companies for a moment – bank, pipeline, pharma,university, etc. Companies exist to produce a good or service for a customer. These companies I mentioned above exist to serve real and important needs for people who want an education, a safe place to put their money, to receive in their home town oil or gas that was produced on the other side of the country, or to take a pill that makes them dance like James Brown (yeow). Okay Prince and Michael could dance okay too.  To serve these needs these companies find investors or savers who would like a good return and use the proceeds to buy or pay for real estate, equipment, materials, workers, and other means of production. Image how hard all that is – especially when other companies are competing with you and try to beat you to the consumers.  And of course these companies have to deal with theft and weather and regulations and all sorts of factors. It is pretty dicey. The closest I came to all this was a Kool-Aid Stand in the summer of 1962 and it gave me so much stress I turned to a life of economics and JD.

Okay, some of you want me to put away the violin and crying towel. But it is true – big or small, there are companies in every country that assemble people and resources every day who take risks and work hard to meet our needs. Owners, managers and employees of these companies also are major sources of charitable giving, community arts programs, political parties, and more. Charities in my community take this support and give money and/or services to the elderly, to people for food, they build houses for the poor and they contribute to the Boy’s and Girl’s Club and many many activities that are good for all of us.

Sorry if the above seems too naive but that is the truth. It is also the truth that some companies – large and small – take advantage of their workers, their customers, and their investors. And that is why I am an economic conservative. Look in any principles of economics text book and you will find a chapter that sets out numerous good and accepted reasons why government needs to exist to police and regulate private enterprise. When small or large companies break our laws or when they simply take advantage of us in legal ways, I believe it is up to government or other organizations to expose and prosecute them.

So when I hear my President’s speech I am offended and disappointed that he neither understands nor seems to care a lick about the difference between good bankers and bad ones. Go back and carefully listen to his words as he labels them all monsters. These monsters make you read small print. These monsters do this to trick us so they can earn unlimited profits. These monsters are smart people who know that the rest of us are dumb. The President waved in front of you a simple mortgage document. Why? Because mean and evil bankers create complicated forms to confuse you and hurt you. All of them do it. Right? There is apparently no other reason for a long and complicated form. 

I don’t think so. What is wrong with this supposedly educated and intelligent President is that he thinks that he knows how to serve the needs of the customers better than thousands of bankers who have been legally and helpfully doing business for decades and decades? Why is it that these folks who day in and day out support their customers, employees, and communities can be called monsters that cannot do their jobs appropriately without the President looking over their shoulders at every detail of their business? Why in his remarks does he aim his poison darts directly at bankers and mortgage lenders (and college presidents, and pipeline executives, and drug makers...) when most experts already admit that a major share of the housing and financial collapse had roots in (1) expansive monetary policy which kept rates too low for too long, (2) government agencies that promoted risky lending, (3) selfish and greedy individuals who took money knowing that with even small changes in their economic situations they could not afford to pay for the money they borrowed, and finally (4) people making what they thought were prudent decisions but not believing that the housing bubble would burst as soon as it did.

In other words, while bad bankers might have some share in the blame, clearly the housing problem was much more complicated than our leader eluded when the cameras started rolling. There are several hypotheses about why an intelligent President could ignore all this. First, Obama really does not have enough knowledge and experience to understand the difference between a good company and a bad one. The second possible explanation relates to the huge number of Is in his speeches. Is he an egomaniac who must be able to solve all the problems of all people all the time? Third, is he simply too lazy to do the real research into what caused problems between companies and their customers – to dig into the facts about bankers, for example, who did break the law and who did purposely swindle people out of their hard earned money. 

Does he really think that a simpler mortgage document is going to help banks make better loans? Will his one page document help prevent banks from making bad loans? Fourth is that Obama is simply playing to his base – a base that is already prejudiced against companies and will take any opportunity to impugn not only the companies but the market system in which they operate. When playing to his base does he not understand that all banks and financial institutions have already faced new and tighter regulations and have been asked to reduce leverage and keep more capital available for future bad times.

It is quite possible that some form of bank tax is necessary to support solutions to the housing and financial crisis. This ought to be on the table. But it ought to be on the table with a true examination of all the facts and causes and all the appropriate ways of funding his solutions. And of course, pointing his boney finger once again at companies in unrealistic, misleading and inflammatory ways is nothing but a prelude to his own downfall.  Just as the Tea Party arose to protest his unreasonable actions in his first two years, he stands to inflame and irate many rational voters if he continues to paint dangerous stereotypes that harm innocent people. These and other companies always have and always will be the institutions that create the sustainable employment opportunities. This is not class warfare – this is just ignorance bad politics. 

Guest Blogger 2012: What’s Ahead for the World Economy by John Manzella

Slow growth, high unemployment, political gridlock, European fallout, Chinese tension, and a bright spot in manufacturing.

Caution, volatility and uncertainty are three key words we will continue to hear in 2012. Due to slow economic growth, which is projected to hover around 2 percent, the unemployment rate likely will continue to remain in the 8 to 9 percent range this year. Prior to the Great Recession, the United States had not experienced similar unemployment levels since 1983. When including those who have stopped looking for work or have reluctantly accepted part-time jobs, the rate could be as high as 16 percent, analysts say.

Several factors will continue to put a drag on growth. For example, some estimates indicate one in five homeowners owe more on their mortgages than their homes are worth. Until home values stabilize and consumers feel more confident about their future, consumer demand, which typically represents 70 percent of gross domestic product, will continue to lag.

In addition, declining U.S. federal and state government spending will depress U.S. growth in 2012. And with the presidential election this November, we can expect continued gridlock and an inability of our policymakers to come together to execute necessary reforms, restructure entitlement programs, increase investment in education, research and infrastructure, and improve immigration laws and the tax code.

Gerrymandering, the redrawing of congressional districts to assure dominance by one party over the other, shares some responsibility. It has enabled politicians to stake out extreme positions and no longer seek approval of the moderate-voting public. This makes compromise difficult.

European Fallout

A major factor impacting U.S. growth this year will be the European debt crisis. Although this was a big story in 2011, its impact certainly will be felt in 2012.

On a cumulative basis, Europe is the source of 72 percent of foreign direct investment in the United States. It‘s also the destination of 22 percent of our exports. A disruption in U.S.-European trade and investment, as well as major European defaults, can have serious consequences on this side of the Atlantic.

The 27 members of the European Union (EU) have different economies, fiscal disciplines, democracies, histories, values, and languages. Holding together a group this diverse is difficult in the best of times. Now, due to its debt crisis, many are wondering if the eurozone, the 17 EU member countries using the euro, will survive.

An underlying problem with many EU members has been their inability to adapt to globalization. When a country recognizes the rules of the free market and globalization, and decides to abide by them, it puts on what author and New York Times columnist, Thomas Friedman, in 1999 called the “Golden Straitjacket.” But to fit, Friedman said, countries must adhere to various policies to enhance national competitiveness.

The United States began squeezing into the Golden Straitjacket in the 1980s. However, one could argue that Greece, and perhaps Spain and Italy, haven’t donned the straitjacket or, in some ways, adapted as well to globalization as the United States or several northern European countries like Germany, Austria and the Netherlands.

Stronger American Manufacturing

According to the Institute for Supply Chain Management, economic activity in the manufacturing sector expanded in December for the 29th consecutive month. Output will continue to rise as it has for decades. Surprising to many, American manufacturing value-added output has tripled since 1980, rising from $558 billion to $1.7 trillion in 2010.

However, due to new technologies and automation, fewer employees can produce much more in less time. Consequently, manufacturing employment has fallen from its high of 19.5 million in 1979 to 11.7 million last November. In December, Americans were reminded of this fact by President Obama, who said “Steel mills that needed 1,000 employees are now able to do the same work with 100 employees, so layoffs too often became permanent, not just a temporary part of the business cycle.”

In turn, labor as a percentage of a product’s total costs has decreased to approximately 10 to 30 percent, on average, analysts say. As the labor component continues to shrink, and Chinese labor rates, fuel costs and expenses related to long distance supply chain logistics continue to rise, it makes sense for some U.S. producers to “backshore” or return previously offshored manufacturing from China to the United States.

Rising U.S.-Chinese Tensions

Due to upcoming U.S. elections and the selection of new Chinese Central Committee members, including China’s presidency, expect harsh rhetoric on both sides this year to escalate as political candidates pander to their constituents. Plus, difficult issues, including piracy of American intellectual property, the protection of certain Chinese strategic sectors, and the Chinese military buildup, will continue to fuel the fire. But the currency issue will continue to remain a primary irritant.

Since July 2005, when the Chinese yuan, also known as the renminbi, was allowed to climb in value, it has risen from about 8.28 to nearly 6.36 per U.S. dollar. Nevertheless, most economists agree that it still is considerably undervalued giving Chinese exporters an unfair advantage that’s boosting the U.S. trade deficit. But much of the tension here is caused by misinformation. Why? The true U.S. trade deficit with China is not accurately reflected in conventional trade statistics. Thus, Chinese value-added, as a component of Chinese exports to the United States, is about 50 percent, according to the U.S. International Trade Commission. Others put this figure much lower.

Consider Apple’s Ipod. When imported into the United States from China, the iPod‘s value is identified at approximately $150. Yet, only about $4 of this is Chinese value-added derived from Chinese labor and components, according to the University of California. The remaining $146 represents the value of components produced in the United States, Japan, Singapore, Taiwan, and Korea. Nevertheless, $150, not $4, is added to U.S. import statistics, artificially increasing the U.S.-China trade deficit.

Long-Term Optimism

Although our economy will remain weak this year, American optimism, free market capitalism, acceptance of immigrants and a brilliant Constitution will propel the United States forward for generations to come.

John Manzella is a frequent speaker, author of "Grasping Globalization," and president of Manzella Trade Communications (www.ManzellaTrade.com), a strategic communications firm focusing on global business and today’s leading economic issues. His firm provides insight and analysis, and crafts communications programs to help clients educate stakeholders and decision makers. Services include custom publishing, public affairs, public relations, marketing, consulting, and speaking engagements.

Federal Reserve Process and Bratwurst

Isn’t it interesting that the Fed is making noises now about the process of monetary policy.  It reminds me of sausage-making despite the fact that I have never really engaged in that process. I am, however, the final consumer. I can think of nothing better than being in the Hanover train station in Germany and ordering a brat from a vendor. For about 2 euros he would quickly dispense a well-browned brat surrounded by a small hard roll – more a handle than an actual roll. Anyway, my mouth is watering as I think about those German brats. What was I writing about? Oh yes, the Fed and process!

So long as the brat tastes good and doesn’t kill me, what do I care what order they mix the meats? Or whether they stir or shake the ingredients? I don’t really want or need to know the exact percent comprised of pork and chicken? I just want the darn thing to be tasty and get me to the next train station. Most of us feel the same way about Fed policy. Most of us know almost nothing about required reserves and interest rate forecasts, and policy rules. We hope the experts know a lot about these technical things and they do their jobs well.

So why is the Fed spending so much time talking about inflation targeting and policy transparency? Why now? I believe this is a perfect example of them trying to get us to take our eyes off the proverbial ball. This is like the teenager sneaking in at 3 am getting caught and quickly asking his parents whether he should apply to IU or Purdue upon finishing his senior year of high school.

I am not trying to say that inflation targeting and policy transparency are unimportant monetary issues. But what I am trying to say is that the Fed wants us all thinking about these issues rather than observing that there is a bull in the china shop. So let’s quickly review the bull in the china shop. The Fed is a central bank and as such is supposed to supply money to the economy. Every economy needs money because money is the stuff you buy things with.  I know that you use a credit card but at the end of the month you need to send the credit card company money. Unlike regular stiffs like you and me, the Fed is given the right and the responsibility to create money. Talk about a cool job. What do you do sir? I work at the Fed and I create money. Now that is cool. Really cool.

Many critics of the Fed have pointed out that since the Fed does not have to dig up gold or do anything arduous to increase the amount of money in circulation, that this creates too much temptation to spew the stuff out as if it was JD at 2 am at your favorite local watering hole.  But there have been plenty of central banks at many times and places that have overcome the urge to spew in favor of more conservative policies. That is, despite a public outcry for more money, some central banks have simply said, nyet, and explained that their job was to make sure the economy only had enough money to meet the needs for transactions without causing unsightly inflation.

You do not have to be a mathematician to know that in the last few years the Fed has emitted enough money to sink an Italian cruise liner. It is also easy to learn that the recession was over a long time ago. It is time to be thinking about withdrawing a little of that overhang but alas there are still folks at the Fed who want the flexibility to goose the economy on and on and on.  But instead of public discussions of the pros and cons of such policies instead we get the gobbly gook of policy transparency and inflation targeting.  Gee mom I was camping with Pete when it started to rain and somehow someone spilled liquor all of me and I don’t know why I smell like a cigar. And I was at the library too.

Transparency means we get to learn more about the sausage-making. Transparency seems to mean that we will learn regularly what Fed officials think about the future. We will learn about their forecasts for policy interest rates three years ahead. Oh my God – why don’t they also tell us their forecasts for satellites falling from the sky? Take a look at any interest chart and notice the abrupt changes that come from time to time. Did Fed officials forecast those major turnarounds? Sorry Ben, but publishing these interest rate forecasts will add virtually nothing of value to the policy  rumors we get today and will most likely create even more uncertainty about the future. This will be good for the economy since over-paid consultants will now have a lot more to do and your friendly news commentators will be able to talk endlessly about the latest set of Fed forecasts of interest rates.

Since this is starting to sound too much like sausage-making let me just briefly say that the same story applies to inflation targeting.  Do you really care if the Fed announces that their inflation target is 3.2% or 3.4%? I think we all know what their public forecast is. And, of course, knowing their forecast means nothing because the Fed will distance themselves from the latest forecast the second it seems advantageous to do so. Do you REALLY think that a 2% target will mean anything if inflation this year rises to 3% and the unemployment rate remains in the 8%+ range? Again, this kind of process innovation has the potential to create much more policy uncertainty -- not less. 

  

All this confusion does little to help us with the most current challenges. Inflation and unemployment remain at the top of their ranges. Interest rates are incredibly low. The economy continues to gather steam while our friends in government in the EU and at home dither with budget debt and raise the risk of another fall from economic grace. The Fed is tilted to too much stimulus thus raising the risk of a hyperventilated economy in the midst of high unemployment. This makes me even more wanting to be at the Hanover train station ordering another one of those fine brats. 

The Fed Capitulates to Populism

Another example of macro confusion was evidenced in some of the responses to the Labor Department’s recent employment release. Apparently employment went up more than expected (200,000 jobs) and unemployment went down more than expected (to 8.5%). So what was the response? The US stock market declined and one expert said the market was not impressed by the progress. The expert went on to tell us how many jobs had been lost since 2007. Another response quoted Fed officials who said that this was evidence that the Fed ought to do more to assist housing. Apparently we need even lower mortgage rates to make sure the economy recovers.

This reveals one of two things. Either these experts live on the moon or medical marijuana is more prevalent than I thought. I hear Joe Biden is promoting legislation that would give any recipient of a new handicapped parking sticker a year’s worth of naturally grown weed. Apparently seventeen red states, including Pakistan have now indicated a willingness to commit to the Obama ticket.

As a practitioner of the arcane metaphysical enterprise called macro, I am offended by all this nonsense. Is it not possible that good news could actually be taken as good news? Of course, it was not great news but keep in mind that the employment report DID NOT say that employment tanked by 100,000 jobs and it DID NOT say that all American manufacturing jobs have moved to Haiti. It said we had a decent run of the employment numbers in December. Keep in mind that these numbers are seasonally adjusted so a decent run does not mean that Christmas came in December. It means that Christmas came as usual on December 25^th and that employment growth was higher than it usually is in December. So smile a little bit. Let’s have a little toast to jobs in December.

Okay I admit that I am always ready to toast whether the employment news is good or bad. But let’s not exaggerate. This news is sort of like me announcing to my wife that I lost 5 pounds on my latest low JD diet.  Losing 5 pounds does not mean that I can eat obscene amounts of ribeye steaks at Little Zagreb’s steak restaurant. And it does not mean that I have succeeded in restoring my body to the svelte 200 pounds I weighed when I was in Mrs. Montgomery’s fifth grade class in Coconut Grove Elementary School. But let’s face it – 5 pounds is 5 pounds and it calls for a little cheese cake and JD.

No one in their right minds expected employment to increase by 400,000 jobs and no one thinks the US economy is healed of its 40 years of economic orgies. But lighten up guys. The increase in December supports a view that the US economy is slowly mending. As such it indicates that the US is a little less vulnerable to outside shocks. Our banks are better prepared to withstand Europe’s wake and our firms are poised to expand should these new growth sprouts continue spread and continue to take hold.

The other part of this has to do with the Fed making noises about the jobs report showing that the Fed needs to do something about housing. First and foremost please make note that the Fed’s job is not to affect housing – or outdoor grills or electric cars or litter boxes. The last time I checked it was classified as a central bank whose job it is to produce a stable inflation and unemployment rate. It essentially has one tool called money growth to accomplish these macroeconomic goals. It is true that Mr. Bernanke and his buds have added some new tools lately in the crisis environment but most of those were still aimed at macro indicators and goals. If you follow the idea – not mine – that the Fed should bail out housing why be so inefficient? Why not just admit that democratic government via Congress and the Executive Branch has failed us in the US and let’s crown Bernanke macro-czar and have him direct controls that will allow him to order companies to hire workers.

You think old Lar is either trying to be funny or that he is well into the JD. But the truth is that when we ask the Fed to focus on housing it is no different from asking them to focus on manufacturing workers or refrigerators or pee pee pumps. The Fed’s charter gives the Fed no real power to focus on sectors and as such it will fail if it tries. Think of what they are suggesting the Fed do. First, some experts want the Fed to buy mortgage securities or derivatives so as to push down the interest rate on mortgages. Please – do banks not have piles of money lying around? I think so. And have you checked mortgage rates lately? Do you really think banks want to lend at even lower rates? Do you think there are families sitting around counting their money (imagine Scrooge McDuck in his cash vault) just waiting for mortgage rates to drop from 3.9% to 3.8%? No No No. Even if the Fed rams more money into mortgages and even if rates fall further they will have accomplished exactly nothing. They will have not solved the problem of the housing market that took at least a decade to create and produced a whole big enough for to drive a new Equus through.

The other thing they want the Fed to do is make it easier for people to get loans. Apparently we live in a world of only extremes. In 2006 any animal, including homosepiens, could slither into a bank and be shown the mortgage vault. Hi there, want some money? Promise to repay?  No crossing your fingers behind your back! Okay, here’s the money. Aw heck – here’s a little more money for your next cruise. Enjoy your new mansion. Then somehow after the crisis banks started asking really mean and unrealistic questions like – Do you have a job? Do you have a means to repay this loan besides prayer? So now we want the Fed (or somebody) to find a way to return to the good old days when people had the right to have loans just because they were able to spell or otherwise mouth the word “gimme”.

It is truly amazing how brazen our Fed has become. It pretends that good news is bad. And then it continues to avoid real solutions to housing problems in favor of lame and ineffective worn out inappropriate solutions. Another round of quantitative easing; another reduction in long-term interest rates; another invitation to create leverage and high risk are only going to make things worse. But the real solutions are hard and involve a little pain. It used to be that we could count on the Fed to offer sensible advice. Apparently now the Fed has become one more institution that caters to populist nonsense. 

Guest Blogger -- What do we know about Education? by Jim Gibson

Jim Gibson is Co- Founder and CEO of Adsil – Manufacturing – Technical glass film surface treatments for metal. He is founder of Leadership Daytona and President Elect Volusia Manufacturing Assoc.He has a BS Industrial Management from  Georgia Tech; an MBA from UNC Chapel Hill; and 30 hours coursework in Urban Planning at Georgia Tech.

I am pleased to be asked by the esteemed Dr. LSD to service as a guest blogger….more because the Dr. assumes you may need a rest from his blither for a week.  Whichever the case, I am here warts and all. Over the past year we have discussed the issues that have driven our country to its current position in a macro sort of way. These discussions were lively and sometimes sober enough to drive me to partake of my favorite beverage… Cabernet...and when I have a few extra pennies to spare… then the Opus brand. It beats JD any day.

The other day, while pondering the news for the first time after my 9 day long vacation at my daughters’ extended families in Charlotte NC it came to me that solutions had to be found or even we boomers will be feeling the pain sooner than we think…or maybe just moving to Panama or some other third world country where we can live in luxury in an American style town.  I contacted Dr.D and asked if he could jump out of the macro stuff for a while and get down to the core issues so we could find ways…in our own small way to... affect some sustainable solutions.

I do not write blogs but instead focus on lively letters to customers and shareholders.  So if you feel a nod coming on …wake up…there is something interesting and your comments are welcome…if not needed.

Education has been bantered around and unless somebody has been snoozing in a parallel time matrix there should be agreement on a solution for improving education.  However, what are we talking about here?  K-12? Adult? College? Trade School? Charter Schools? Content? Applied or just academic?

Should there be a national program or should that be left to the states, counties or communities?

Here are some factoids:

1. 1.       Since 1928 when records began to be kept….only 25%+ or – 1.5% of high school graduates finish a recognized four year college.  Why?  Should everyone get a college education?   Are the degrees that are offered now meaningful for the new norm (define the norm)?
2. 2.       College Board (SAT) scores began to decline in 1969…just shortly after Dr. D graduated from GT. They have continued to decline or be flat since then.  I say this because I wonder if more unqualified people are taking the test and watering down the average. Conversely, is it because the curriculum is watered down?
3. 3.       The dropout rate from high school students is also 25%.
4. 4.       Manufacturing jobs decreased in number by 35% since 1985 and were replaced with technology or some other pair of hands in an off-shore country.
5. 5.       By 2020 Hispanics and blacks will represent close to 50% of the population and the data presented above is worse for this group than for whites.  Indians (not US) and other Asians coming to this country fiercely love the right and ability to get a good education and often take it back home to compete with us. 
6. 6.       There is a green card problem here with all of the fervor about illegal immigrants…a side bar issue for further discussions with several bottles of CAB or JD.
7. 7.       During this past 35 years, the US has dropped to 8^th place in K-12 education within the G22….and still declining.
8. 8.       During the past 10 years China has risen to # 2 in GDP and India is rapidly catching China.  The other two countries in the BRIC are quickly catching up.
9. 9.       We are a marketplace that rewards creativity, technical knowledge and application, intelligence over physical power and that has the ability to see through the fast pace to come up with new ideas, solutions and applications.

 What will it mean …at the speed at which this happening… to our children? Grandchildren? Us…yes us…because the average life span for the healthy among us is 85 to 90 and it is also projected than many of the early boomer retirees will have to come out of retirement or at least work part time..doing what?

OK so we can guess a little at what this means but how do we indentify the core causes and find ways to improve the education system…or maybe even create a new one?  Without it we will become a sub-par nation in terms of intellectual effectiveness.

Was Stimulus Meant to Be Temporary or Not?

When is enough enough? The US government extended payroll tax relief and unemployment benefits again. The European Central Bank lent a ton of money to commercial banks. Everyone but Germany seems to be afraid of fixing things. When does this stop?

Larry – you just ate three servings of pecan pie to “wash down” that 72 ounce ribeye.  I know honey, don’t worry I will get on that diet tomorrow. But you said the same thing yesterday. True but then I was feeding my fever – that’s no time to cut down to two servings of chocolate cake. I gotta keep my strength up!

This is making me hungry but I am beginning to get a sense that my past worries were correct. Writing in this blog almost two years ago I tearfully agreed that some stimulus was warranted for the US and world economy but also predicted that the worse thing about stimulus is that policy makers wait too late to withdraw it. And like the fact that I have to wear expando-sweat pants everywhere I go now, waiting too late to put our countries on a diet is starting to bite.

Continuing the weight analogy, few economists are really recommending an extreme basic training approach to economic policy. If anything, the reasonable people are suggesting that we simply gain 3 pounds this week instead of the usual 5. Losing weight will come soon but not yet. That doesn’t sound severe to me. Deficits that took years to build are not going to be turned into surpluses in the next year or two. But like gaining only 3 pounds this week, it is possible to have a plan that would gradually reduce the deficits over the next 3-5 years. The surplus can come later. While that approach won’t allow Italy a chance to compete in any Iron-man competitions now, it will send the right message to everyone – including existing and potential holders of Italian debt.

Pundits were extremely loud and clear last week when they pointed out how unfair it was that we might let the tax and unemployment extensions die. One congressman could hardly contain himself on the Senate floor as he described how failing to extend would undermine fairness to the least advantaged in our society. But let’s be honest. That’s depiction is a gross exaggeration. Maybe it is a lie. Put the point in this context. It will NEVER seem fair to take this money away from the people who seem to need it the most. Never. How can you take money away from people and have it seem fair? But also remember that these specific legislations were ALWAYS meant to be temporary. How is it possible that politicians who vote for things that will be temporary are never willing to let them end? How?  My answer is that they fibbed in the beginning. It is only now that they are being honest.  They want to keep these entitlements as long as possible.

After all, how else can we help people who are unemployed or who have lower incomes? This is the part that is so ludicrous and disingenuous. Keep in mind that we elect these people to govern our country and to put in place policies to meet our national goals. It is their JOB to solve these kinds of problems. So what do they do to attack unemployment and poverty problems? They legislate exactly nothing that one might call an employment or poverty program.  Instead they give us gruel – they give us supposedly temporary legislation that spreads crumbs around on the ground that are soon to disappear the next time a flock of black birds swoop in. 

These elected officials get good salaries and benefits and do nothing that even approximates an understanding of and policy towards the main challenges of our economy. What if you went to your doctor with a pain in your chest? You told her that the pain has been there for a long time but it is really hurting now. What if she told you to take a couple of aspirins and come back in the summer? I am thinking that you could have gotten that advice and help from your local barber. You wouldn’t put up with it. Yet we let these legislators take their pay to the bank every month while they treat our most pressing national problems as if they were heartburn. Of course they cannot tell us the truth so instead they inflame us with rhetoric that heats up animosity between people in both parties who would love to see our country return to growth. 

To resolve our worst problems right now we need a medium term plan to remove temporary tax changes and entitlements. We need to supplement that with real policies aimed at the things that caused our current slow growth -- a housing bubble bursting and excessive leverage among households, businesses, and government. We do not need politicians who would rather play needless class warfare games than attend to the real issues. 

My Forecasts for 2012

Since it is only a couple days after Christmas I thought I might try something a little different in the blog this time.  All of you are probably still in the giving spirit or in the spirits. So there is no sense in me trying to be too analytical. Many of you are already sick of shopping and you have returned most of your gifts to Walmart so you are open for diversion. Those of you with visiting relatives are posting signs on your refrigerator that indicate that fish and visitors begin to smell after three days.

But this is a MACRO blog and I can’t just blather on about post-Christmas blahs. So what I am going to do is provide you with my forecasts for 2012.

First Peyton Manning will overcome his neck injury and will star with Kim Kardashian in a new reality TV show about the art of hiking a football. I won’t say who will play center but some of you wise guys have already figured it out.

Second, the Indiana University Football Team will win the conference championship in 2012 but will not be bowl-eligible because high school conference winners are not allowed to compete at the university level.

Third, the US election in 2012 will be won by David Letterman. He will run on the Funny Party Ticket arguing that the current batch of DC politicians are not funny and he is.

Fourth, the euro currency will go out of use and will be replaced by the Hungarian forint.

Fifth, Andra Klemkosky will replace Robert Klemkosky as the Dean of Business at SungKyunKwan University in Seoul.

Sixth, small business owners will be given a new Eli Lilly growth hormone so they are not so small.

Seventh, with the FDA closed for roof repair, any drug having gone through testing by movie stars at the Betty Ford Clinic will be approved and available for immediate sale at whatever price the market will bear.

Eighth, Pharmaceutical companies,  Cook Medical, the Post Office, and Topless Bars in DC will become government enterprises managed jointly by Kim Jung Un and the Donald.

Ninth, Vietnam, North Korea, Sanibel Island, and Ireland will become the 59^th and 60^th states of the USA.

Tenth, US rich people will be asked to move to Nova Scotia and Latvia but will be required to send their pay checks to President Letterman.

Eleventh, poverty status will be extended to all remaining US citizens so there will be no need for anyone to have to work or even pretend to work. The unemployment rate, therefore, will fall to zero percent, the lowest level in 362 years, guaranteeing re-election of the Letterman /Bashar al-Assad ticket.

Twelfth, world GDP will be equal to this year’s plus or minus.

Thirteenth, I cannot remember where I left my car keys and the 13^th thing.

I hope you are having a great holiday with lots of spirits and whatever else your usual holiday rituals might dictate. Please do not harm your relatives because some of them might be planning to leave you money. I look forward to bringing you more Macrocrapola in the New Year. 

Don’t Open that Gift if from Obama, Reid and Boehner!

The political debate in the USA over the extension of payroll tax cuts and the unemployment benefits (Extensions) is as hot as it is wrong-headed. It’s like two caged female dogs in heat. They both have incredible passion but they have no real ability to make the transaction work. Please no angry letters from dog lovers or my lesbian relatives and friends. No insult is intended.

Anyway, this Extensions fiasco reveals what is so wrong with politics now. Consider first that both parties seem to agree that the extensions are necessary.  They disagree about how to pay for them but they seem to say over and over and over and over and over – getting irritated? – and over that they want to extend the cuts but the extensions must be paid for. The guys wearing stripes think the rich should pay for them while the guys in the polka dots believe it has to come out of other spending.

Like the two dogs in heat, this dog won’t hunt. That’s not the metaphor I was after but I think you know what I mean.  Both sides seem to agree that without these extensions, the US economy is going to go careening off the ends of the earth.  Like driving on the right and eating foot-long chili dogs with ROC-CO-COLA, one cannot question the validity of this truth.  Either we do the EXTENSIONS or the US economy is going to slide head-first into the outer atmosphere.

But we do drive on the left on one-way streets and we sometimes eat foot-long Philadelphia Steak and Cheese sandwiches, so it might be possible to think a teeny-weeny little bit about what might happen if we did not do the extensions. Will the US really slide off the planet? First and foremost it is possible that if we did not make these extensions we would find that US government and other bonds would increase in value. The very thought of increasing government spending right now in a time of huge government deficits could be taken as another sign that the US government cannot govern. This would be true whether or not we enact means to pay for these Extensions. Notice where we are today. It is not yesterday it is today. Today we have failed yet another time to do anything about a solution for government debt and deficits. We can't even find a solution for next year's budget. Not only did the special committee not come to a decision, but now we are being told that the so-called automatic cuts are going to be undone. So let’s be honest here—in financial terms we are looking like the guy who applies for his tenth credit card after maxing out the other nine.

Okay – it’s just another $100 billion or so. To some it seems like nothing. But they are living in yesterday. Yesterday was when love was such an easy game to play. Now I need a place to hide away. Oh yesterday came suddenly. Anyway, the Beatles were right-on in many ways. $110 billion three years ago might have been okay. But now we are on our 10^th credit card. Pass these extensions with or without a tax on the rich and the credit markets are going to chew up our bonds and precious dollar as if they were a male dog coming between those females in heat.

What that means is that interest rates will soar, net worth will decline, and spending will come to a halt. Some of you will say it is worth taking the risk. You will say that by not doing the Extensions we have two major sure-thing problems – the average family will lose income per month and those families will curtail their spending. You will conclude that stopping the extensions, then, is both unfair to the average family and will lead to reductions in national spending.

But let’s put these two points together. Let’s suppose that the average family understands that when financial markets look down their collective snoot at the US demand for a 10^th credit card, all hell will break out. Let’s suppose this makes the average employed or unemployed worker worry even more worried about the economy. I am guessing that those workers will not readily part with their extension money. They will become even more judicious about how they spend because they need to make sure they continue to have some spending power in the future – as this stupid economic policy makes sure the economy stays weak for a long, long time. Notice that the extension plan does two things – (1) it initially gives more income to some Americans but they will prudently reduce their spending anyway; and (2) it creates a gigantic financial disturbance that will reduce even more spending by all Americans.

So call me insensitive if you want. But the fact that both parties are saying we need these Extensions is exactly the reason you should believe we don’t. Do you really believe these guys? They are continuing to do what they have been doing for years --- avoid the real solutions and pander to people who they think are easily fooled – you and me. Can you imagine what you will get when a smiling trio of Obama, Reed, and Boehner hand you your Christmas gift. I suggest you leave it on the ground and run like hell!

It seems to me that we would all be better-off without this cut...or more succinctly, without this cut in isolation. What we really need is an overall solution for the debt/deficit/growth issues. The special committee failed but Congress could do it tomorrow. Part of that overall solution could include these Extensions but in a responsible fashion whose goal is to deal with deficit/debt/growth.

GUEST BLOGGER: Lies, Damn Lies and Occupy Wall Street—Charles Trzcinka

Charles Trzcinka is the James W. & Virginia E. Cozad Chair in Finance at the IU Kelley School of Business

In all the discussion about the tactics of the OWS movement there has not been much attention on what the movement believes about the economy.  The purpose of this memo is to provide students with facts, analysis and a guide to sources of information to help evaluate the claims of the OWS movement. From the title you can see my opinion—the OWS assertions are just anti-establishment babble. I strongly believe that a career choice in finance is both socially useful, moral and clearly remunerative.

Investment Banks are Bad

If any opinion is clear, it is that OWS do not like investment banks. It is not clear what they would do differently. Investment banks help companies raise capital to create jobs. Countries without this ability are poor and the poor in these countries are destitute relative to the United States. How else will savings get to companies who need to invest?  During the 20^th century many countries attempted to severely restrict investment banking by government ownership of firms. The result was large scale poverty. There a many studies examining this and for a nice overview read:  Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity by Raghuram Rajan and Luigi Zingales.

Banks Caused the Crash of 2008

Wrong again. The crash was caused by the fall in housing prices. Some banks took big risks with securitization and made the situation worse but the crash also happened in countries where the banks did not take the risks such as Canada and China.  There have been many books written about the crash. For a review of 21 books (10 by academics and 11 by journalists) see http://www.argentumlux.org/documents/Lo__2011__-_Reading_About_the_Financial_Crisis__JEL_.pdf

The article describes some facts that would make the OWS crowd uncomfortable:

·         There were higher levels of leverage in 1998 than 2006 for Goldman Sachs, Merrill Lynch, and Lehman Brothers.   In 2006 the compensation of the top 95 bank CEO was almost all concentrated  in stocks and options which means that the CEO stood to lose the most personally by any risk-taking and they did lose. 

Bank Bailout hurt the common person

This is not close to true. The bailout was about $250 billion and was mostly paid back. The Obama administration claims that the taxpayers have already made $20 billion on this deal. That is, the administration is bragging about its investment. You can see a report by the General Accounting Office that more or less supports this (www.gao.gov). It’s worth noting that the Tea Party movement also made this claim and they were also wrong.

Corporate Greed Causes Poverty

It’s often shouted that corporate greed is causing the income distribution to be skewed to the rich, commonly defined as the top 1% of the income distribution. The claim ignores the fact that corporations have been seeking profits for over 200 years. They are not more profit –seeking today than they were 50 years ago when the income distribution was much flatter.

Corporate Greed is immoral

The OWS movement is constantly asserting that the profit motive is immoral. To me this is a perversion of Judeo-Christian values since capitalism is by far the best system for raising the income of everyone. For a mainstream argument, you could look at Michael Novak, a leading Catholic social theorist, who has written widely on the morality of democratic capitalism - and advocated a moral-cultural system that would nourish the values and virtues on which free societies depend. "Three in One: Essays on Democratic Capitalism" introduces his basic ideas. The point is simple: if we want to increase human welfare this is no better way than the market system.

The Income Distribution is the widest its ever been

This is another distortion -lie. Here is a graph from Paul Krugman. The 1% is increasing but is not yet close to the “gilded age” 


(Note from Larry -- I could not insert the diagram. Sorry. It shows the share of the top 1% was much higher than now until about 1940. The share declined and then began to rise. Chuck gives you a link below where you can draw income share graphs for many countries from the early 20th century through 2008.)

You can generate more plots like this at (http://g-mond.parisschoolofeconomics.eu/topincomes/).  You find a similar U-shaped pattern in Australia, Canada, Ireland, and New Zealand but less so in France, Germany, Japan, and Sweden. The rising tide started during the Carter administration and continued through Reagan, Bush, Clinton, Bush and Obama. It is worldwide and hardly due to US policy. It appears to be strongly related to education.

Finally it is worth noting that the “99%” has also gained in the past 10-20 years just not enough to satisfy the OWS crowd.

Wall Street Controls Politics with its money

This is simply wrong. Nobody has ever found a reliable relationship between political contributions and policy. Most conclude that campaign spending has a very small effect on election outcomes regardless of who does the spending. (For example see Stephen Levitt’s Using Repeat Challengers to Estimate the Effect of Campaign Spending on Election Outcomes in the U.S. House." Journal of Political Economy, 1994, 102(4), pp. 777-98. ). There are of course examples of how money twisted some policy but for every such example there are plenty of examples of political contributors who wasted their money.  The OWS movement appears to believe that because people have money and because some of them make big contributions that politics is corrupted by money. But this is like arguing that because companies spend money on advertising, it must be effective. It is not. Most advertising expenditures are wasted because it’s so hard to predict which will be effective. Political contributions are for the most part simply wasted and there is plenty of money on both sides of most issues.

Challenges for Capitalism
The OWS movement appears to believe that the 2008 global financial crisis marks the beginning of the end of modern capitalism. It is a strange belief because it presumes that there is a viable replacement waiting in the wings. The truth is that, for now at least, the only serious alternatives to today’s dominant Anglo-American paradigm are other forms of capitalism. But there are challenges to market economies. See for example an essay by  Kenneth Rogoff (http://www.project-syndicate.org/commentary/rogoff87/English)


Rogoff points to five serious challenges currently facing modern capitalism: a failure to price public goods (clean air, water, etc.) effectively, high levels of inequality, “the provision and distribution of medical care,” the undervaluing of “the welfare of unborn generations” and, finally, financial crises. Rogoff points out that economics has solutions these problems, if politicians dare to implement them:


On being a finance major
Your choice to be a finance major puts you at the heart of these challenges. Congratulations on having the insight, intelligence and now the courage to do so.

Good Policy and Employment Growth in the USA

Hey Pete isn’t it a pity that you can’t run the mile in eight minutes.  Yes, Pete said, but I am happy to be walking after that hip operation last month.  But the surgeon said you would be as good as new in a couple of weeks. Yes, and the surgeon needed a new hot tub cover too. Anyway, despite worries that the US economy is not improving fast enough to bring us back to normal, the Labor Department release last Friday was heartening and suggests further improvement. The payroll survey revised upward job growth in October and reported an increase in jobs for November of 120,000. The companion and broader household employment survey showed employment growing by 278,000 jobs. The unemployment rate fell below 9% to 8.6% as well.

In terms of the overall economy, this is a bit like Pete being able to walk a mile but it is still a ways from his normal mile run. The real issue today is one of false expectations. Activist politicians and economists wanted us all to believe that that their hocus pocus policies would have us running faster much quicker than was really possible. They are just now admitting that the global crisis was larger and deeper than first described – and will take longer than normal to heal.  So while we won’t do a back flip over the recent report, the truth is that the US economy seems to be on the mend.

One of my colleagues – let’s call him Joe since that is actually his name – pointed out to me as I was busting a gut trying to do three consecutive push-ups at the gym – that Europe was at it again. All the news last week was about a possible new compromise that would save the euro, Europe, and seals. But Joe pointed out that every time the EU seems on the verge of an agreement, Merkel and Sarkozy once again decide they are going to re-enact the economic equivalent to World War II.  Merkel wants Europeans to behave more like the Swiss – Sarkozy wants them to act more like Zorba.  Maybe Merkozy could come together and agree that Europeans should act more like the Dutch.  The Dutch are very conservative, save parts of their paychecks each month, smoke dope in Turtle Bars, and generally enjoy life as they ride around the town square on 300 pound 25 year-old bicycles that were given to them by their grandparents. They also say things like Als tublieft and debankt.

Before I go much farther I just wanted to tell you that I have not had sex with any sports coaches or Herman Cain. I do recall several times in high school when my coach said that if I didn’t play better he was going to put his size 16 High Top Converse All Star up my youknowwhat. But that is the closest I came to sex with coaches or politicians.

Financial markets want to see real solutions to our global financial problems. It seems worth thinking about that if the EU and the US were to fashion reasonable compromises that these markets would  be utterly delighted and increase further, consumers would feel wealthier, banking bottlenecks would be relieved, and the world economy could get back to an 8 minute mile. If I was a US politician up for re-election next year I would think about the political payoff to finding a real solution. The payoff to good policy choices has never been stronger. I would worry a lot, however, that if the EU actually does fashion a decent compromise while US government officials continue to approximate the monkey cage at the zoo, the political cost could be quite heavy. Our politicians will look even dumber than the monkeys if they are the only ones to let the milk spoil.

I keep saying words like – real solution.  It is possible that the Europeans and US politicians might come to some agreement or compromise that was not a real solution – and I am NOT advocating that. The room for real solutions, however, is quite ample. For those nuts who read me regularly, you may find this next part redundant but a compromise does not necessarily mean we sell our souls to Bobby Knight. A compromise recognizes that you cannot get exactly what you want but you do not have to give up on your basic principles. It is sort of like me when I agree to participate in our household’s Christmas decoration activities. As a relative to the famous Grinch and the son of two unreligious Jews, I don’t love the idea of spending hours putting together manger scenes, Christmas villages, and lifting a 900 pounds Santa out of the basement. But I do it anyway because I know two things. First, Betty will buy me some really nice Christmas presents. Second, my kids will buy me expensive bourbon.  So it is a good compromise.

A reasonable fiscal package in the US would recognize that housing and finance are the source of our current problems and need to be addressed. This  would entail dealing with the housing default overhang in a way that recognizes the difference between those who might realistically be able to repay with some contract adjustment – and those who might be able to repay but only if they won the top prize in the lottery. A real solution would also put us on a path toward smaller debts and deficits though recognizing that stimulus cannot be withdrawn too fast. A plan to begin reducing government stimulus but at a pace that accelerates over time could be designed by economists.  Should the US Congress come up with something that seriously addresses these two issues, incumbents could laugh their way back to their usual payola and corruption in 2012.

In summary, things in the USA are not as alarming as some people say but are not as good as they could be. We are on the mend from a serious illness but we need to keep following the doctor’s orders. The time for alarm and extreme policies has passed. Even small changes in the right direction can and will have great impacts on wealth, confidence, economic growth and employment. Politicians have much to gain by doing the right things. They do not realize how much they will personally lose if they continue to fritter away time and voter patience.