Ron Paul (Republican candidate for President) had an interesting op ed piece in the Wall Street Journal yesterday (Thursday, Oct 20, 2011), claiming that our current economic mess is mainly the fault of the Federal Reserve and calling into question the need to have the Fed at all.
It is true that some economists and analysts have blamed at least part of both the Great Depression and the so-called Great Recession (which may or may not be over now) on incorrect monetary policy by the Fed. In the case of the Depression, they are accused of persisting with deflationary monetary policy even as catastrophic deflation was already happening. In regard to our current situation, they are accused of having an "easy money" policy that expanded the money supply too much.
There were booms and busts and banking panics before the Fed was established; the Fed was supposed to be a solution to that problem. But as often happens with solutions, if they are not based on a total understanding of what the problem actually is, the solution itself becomes a problem, often even worse than the original problem. The booms and busts and panics that happened before the Fed was invented were more frequent than, but not as bad as, the ones that happened after.
Having smart people in charge of managing our currency and economy sounds like a good idea, but it could be that the complexity of these things has outpaced the ability of these smart people to understand them. Economic theory, which is always changing, may be behind the 8-ball on these matters.
What would take the place of the Fed if it were abolished is not clear. At any rate, what are the chances of that happening? Slim to none.
Friday, October 21, 2011
Tuesday, October 18, 2011
A Long View--Part 2
Until the fall of communism, the economies of a large part of the world were held down by their governments. Most of their people were locked into perpetual poverty.
Communism, however, was not the only culprit. India, though nominally capitalist, was heavily socialist. Its economy too was held down by excessive state control.
China's economy had been brutalized by Mao, with various Five Year Plans and the infamous Great Leap Forward. But in the late 1970's, things began to change. The vise-like grip loosened.
Today, though China's government is still heavily involved in the economy, the winds of capitalism and free enterprise are blowing hot and heavy. The Chinese economy is growing like crazy. And they seem to be kicking our butt.
China has the advantage that Japan had 30 to 40 years ago--low-cost labor that can do quality work. And their population is huge. It would seem that it would take a very long time for their wages to rise, as Japan's did, to the level of developed nations.
India, too, has reduced government control of its economy, and it too is growing rapidly. It too has a large population that works for wages far lower than those in the US.
Other areas of the world are entering the so-called global economy. Most of Asia is proceeding with rapid growth.
All these billions of people producing low-cost products and services represent a down-draft for wages and prices in the US.
To look at it in a positive way, after so many years of talking about lifting people in poor countries out of poverty, now we are doing it. We are doing it by buying products made in their factories and by buying services out-sourced to them by American companies.
Wages in China are actually starting to rise a little. Thus it would appear that their supply of cheap labor is not quite as infinite as we might have thought.
This is a fluid situation, not one that will always remain the way it is now. Maybe China will catch up and pass us. But we thought Japan would do that. They didn't. However, it is certainly true that China is much bigger than Japan.
But the question is not one of who will be bigger or richer. The question is whether wages and standards of living will reach some kind of equilibrium.
And, since the pie we share is not static but ever growing, can that equilibrium be at a high level? Can we avoid having our standard of living pulled down by theirs? Can we raise theirs up instead?
In reality we may be experiencing some degree of drag on our standard of living from the current lack of equilibrium.
We could erect trade barriers against cheap products from overseas. But the lessons of the past seem to indicate that trade barriers lead in one direction: down. Everybody loses.
We have embraced and pursued free trade. It is dangerous and uncomfortable. But we feel that the competition makes us stronger.
Other nations may pursue us and come close to catching up. But so far no one has been able to lead like we can.
It is easier to pursue than to lead.
Communism, however, was not the only culprit. India, though nominally capitalist, was heavily socialist. Its economy too was held down by excessive state control.
China's economy had been brutalized by Mao, with various Five Year Plans and the infamous Great Leap Forward. But in the late 1970's, things began to change. The vise-like grip loosened.
Today, though China's government is still heavily involved in the economy, the winds of capitalism and free enterprise are blowing hot and heavy. The Chinese economy is growing like crazy. And they seem to be kicking our butt.
China has the advantage that Japan had 30 to 40 years ago--low-cost labor that can do quality work. And their population is huge. It would seem that it would take a very long time for their wages to rise, as Japan's did, to the level of developed nations.
India, too, has reduced government control of its economy, and it too is growing rapidly. It too has a large population that works for wages far lower than those in the US.
Other areas of the world are entering the so-called global economy. Most of Asia is proceeding with rapid growth.
All these billions of people producing low-cost products and services represent a down-draft for wages and prices in the US.
To look at it in a positive way, after so many years of talking about lifting people in poor countries out of poverty, now we are doing it. We are doing it by buying products made in their factories and by buying services out-sourced to them by American companies.
Wages in China are actually starting to rise a little. Thus it would appear that their supply of cheap labor is not quite as infinite as we might have thought.
This is a fluid situation, not one that will always remain the way it is now. Maybe China will catch up and pass us. But we thought Japan would do that. They didn't. However, it is certainly true that China is much bigger than Japan.
But the question is not one of who will be bigger or richer. The question is whether wages and standards of living will reach some kind of equilibrium.
And, since the pie we share is not static but ever growing, can that equilibrium be at a high level? Can we avoid having our standard of living pulled down by theirs? Can we raise theirs up instead?
In reality we may be experiencing some degree of drag on our standard of living from the current lack of equilibrium.
We could erect trade barriers against cheap products from overseas. But the lessons of the past seem to indicate that trade barriers lead in one direction: down. Everybody loses.
We have embraced and pursued free trade. It is dangerous and uncomfortable. But we feel that the competition makes us stronger.
Other nations may pursue us and come close to catching up. But so far no one has been able to lead like we can.
It is easier to pursue than to lead.
Monday, October 17, 2011
A Long View--part 1
After World War Two, a large proportion of the factories in the developed world had been bombed out--except in the United States. The US's industrial capacity was a key reason it had won the war. Its ability to produce tanks, planes and ships was unmatched. When the war ended with Europe, Russia and Japan mainly in rubble, demand for peacetime production was high, and US industry obliged. Times were good for factories and their workers. Wages rose, and unions were strong.
Demand for military production continued as well, since the Soviet Union was a major threat to Europe. And we were providing funds to rebuild Europe.
Over the next couple of decades, Europe revived, and Japan re-emerged as an industrial power.
Wages in Japan started out low, giving them an advantage over factories in the US. The US began to experience the rising tide of imports from Asia. The impact seemed to be particularly severe in the auto industry. The US ended up making a series of deals with Japan in which Japan agreed to limit its exports of autos to the US. This seemed to help, but on the other hand, Japanese car makers sent over more expensive cars rather than the hordes of cheap ones. Thus they did not lose much money on the deal.
Meanwhile Japanese wages and general standard of living rose until it reached the range of that of the US and Europe. Japan became part of the developed world. It lost its low-wage, low-cost advantage over the US and Europe. Yet its manufacturers were still almost legendarily efficient, profitable and high-quality. They continued to be a formidable competitor.
In the 1980s the Japanese overextended themselves, running up huge debts to invest in US assets. Some of the assets they bought at their high water mark seemed to be symbolic of a Japanese economic victory over the US.
The government-directed industrial policy of Japan also reached a point where they were done catching up, and if they were going to really overtake the US, they would have to lead the world in new directions in technology and innovation. Artificial intelligence seemed to be a new frontier with huge potential. They embarked on a course to advance heavily in that area.
But the debts they ran up in over-expanding into the US, plus the unexpected difficulty encountered in developing artificial intelligence, led to Japan's "lost decade." Growth ground to a halt, and unemployment rose. The government began a long period of deficit spending to try to stimulate the economy. Yet structural problems in various areas of their economy, particularly their finance industry, have kept japan from recovering from their slump. The lost decade has stretched out into another decade.
Japan is still one of the largest economies in the world, but it does not at this time appear to be a threat to overtake the US.
Part 2 will consider China.
Demand for military production continued as well, since the Soviet Union was a major threat to Europe. And we were providing funds to rebuild Europe.
Over the next couple of decades, Europe revived, and Japan re-emerged as an industrial power.
Wages in Japan started out low, giving them an advantage over factories in the US. The US began to experience the rising tide of imports from Asia. The impact seemed to be particularly severe in the auto industry. The US ended up making a series of deals with Japan in which Japan agreed to limit its exports of autos to the US. This seemed to help, but on the other hand, Japanese car makers sent over more expensive cars rather than the hordes of cheap ones. Thus they did not lose much money on the deal.
Meanwhile Japanese wages and general standard of living rose until it reached the range of that of the US and Europe. Japan became part of the developed world. It lost its low-wage, low-cost advantage over the US and Europe. Yet its manufacturers were still almost legendarily efficient, profitable and high-quality. They continued to be a formidable competitor.
In the 1980s the Japanese overextended themselves, running up huge debts to invest in US assets. Some of the assets they bought at their high water mark seemed to be symbolic of a Japanese economic victory over the US.
The government-directed industrial policy of Japan also reached a point where they were done catching up, and if they were going to really overtake the US, they would have to lead the world in new directions in technology and innovation. Artificial intelligence seemed to be a new frontier with huge potential. They embarked on a course to advance heavily in that area.
But the debts they ran up in over-expanding into the US, plus the unexpected difficulty encountered in developing artificial intelligence, led to Japan's "lost decade." Growth ground to a halt, and unemployment rose. The government began a long period of deficit spending to try to stimulate the economy. Yet structural problems in various areas of their economy, particularly their finance industry, have kept japan from recovering from their slump. The lost decade has stretched out into another decade.
Japan is still one of the largest economies in the world, but it does not at this time appear to be a threat to overtake the US.
Part 2 will consider China.
Friday, October 7, 2011
Recession?
There has been a lot of hand-wringing in the media, especially the financial press, about whether we are about to experience the second dip of a double-dip recession. At the same time there are people who say that, with 10% unemployment, why should we say we are not in a recession now?
It may indeed turn out that future economists will look back at this period of time--especially if we do have another dip--as one long recession. The anemic growth that we do have is totally created by government action: stimulus spending by Congress and easy money by the Federal Reserve. The conditions that created the recession have not yet been resolved.
On the other hand, the doomsday predictions from some quarters of a catastrophic failure of our economy and indeed our civilization have not come to pass, despite the fact that the potential did definitely seem to be there for a very hard landing. We are not out of the woods yet (see Europe), but maybe we will survive.
Though conditions existed in 2008 that could have led to as big a collapse as the one that led to the Great Depression, there are three huge differences in how the crisis has been handled compared to how things were handled at the beginning of the Depression.
1. In 1929 and 1930, nothing was done to stop the world's currencies from deflating catastrophically. In today's crisis, everything possible was done to prevent that, and so far it appears that those efforts have been successful.
2. In the Depression, banks were allowed to fail, and they did in droves, with disastrous effect. People's life savings were wiped out. Many (but by no means all!) ended up with no money, no job and often with no place to live. In 2008, banks were not allowed to fail; they were bailed out. This was a necessary action, distasteful as it was to many people.
3. At the beginning of the Depression, taxes were raised significantly. Though there are voices calling for more taxes today, so far everyone has been sensible enough to realize that that would be a bad thing for the economy.
Stimulus spending has also been used more extensively now than during the Depression, but it depends on which economist you talk to as to whether that is a good thing or not.
In short, it appears that we have actually learned something, and we are not totally repeating the mistakes of the past. We may have done just as bad a job when it came to getting ourselves into this mess, but the people who have been handling it have been aware of the things that were done wrong during the Depression, and they have done something different. This, I guess, is progress.
The market forces that always handle and heal the causes and lingering effects of a recession are at work, and they will resolve these things in time. (Two or three more years perhaps.) Then we will have a real recovery, and it will be a good one.
It may indeed turn out that future economists will look back at this period of time--especially if we do have another dip--as one long recession. The anemic growth that we do have is totally created by government action: stimulus spending by Congress and easy money by the Federal Reserve. The conditions that created the recession have not yet been resolved.
On the other hand, the doomsday predictions from some quarters of a catastrophic failure of our economy and indeed our civilization have not come to pass, despite the fact that the potential did definitely seem to be there for a very hard landing. We are not out of the woods yet (see Europe), but maybe we will survive.
Though conditions existed in 2008 that could have led to as big a collapse as the one that led to the Great Depression, there are three huge differences in how the crisis has been handled compared to how things were handled at the beginning of the Depression.
1. In 1929 and 1930, nothing was done to stop the world's currencies from deflating catastrophically. In today's crisis, everything possible was done to prevent that, and so far it appears that those efforts have been successful.
2. In the Depression, banks were allowed to fail, and they did in droves, with disastrous effect. People's life savings were wiped out. Many (but by no means all!) ended up with no money, no job and often with no place to live. In 2008, banks were not allowed to fail; they were bailed out. This was a necessary action, distasteful as it was to many people.
3. At the beginning of the Depression, taxes were raised significantly. Though there are voices calling for more taxes today, so far everyone has been sensible enough to realize that that would be a bad thing for the economy.
Stimulus spending has also been used more extensively now than during the Depression, but it depends on which economist you talk to as to whether that is a good thing or not.
In short, it appears that we have actually learned something, and we are not totally repeating the mistakes of the past. We may have done just as bad a job when it came to getting ourselves into this mess, but the people who have been handling it have been aware of the things that were done wrong during the Depression, and they have done something different. This, I guess, is progress.
The market forces that always handle and heal the causes and lingering effects of a recession are at work, and they will resolve these things in time. (Two or three more years perhaps.) Then we will have a real recovery, and it will be a good one.
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