It may be that the best long-term hope for the American economy will be the growth of China and India. Just as America was the world's engine of growth in the 1980s, these two, and other emerging economies, are projected to be engines of growth during the next couple of decades. They are already growing quickly.
Thus, even if America does not solve its own internal economic problems, it could continue to muddle through as a trading partner of economies that are actually doing well.
However, since the American economy is still about twice as big as the second largest economy in the world (China), it would still be a pretty tough job for any other combination of trading partners to pull us out of a serious ditch if we were to slide back into one. Thus it would be best if we could solve our own problems and resume a leadership role.
Thursday, November 18, 2010
Long-term trends
1. Asian growth rates faster than Western growth rates
2. Decline of the dollar as the defacto international currency.
3. Population trends:
The United States is the only major developed country in the world that has a birth rate plus immigration rate sufficient to generate population growth. Western Europe and Japan are faced with a growing burden of elderly and retired people and with population declines down the road. In those countries the shrinking percentage of working-age people will have to support a growing percentage of retired people. Even China is facing that problem. For many years the Chinese government has imposed a limit of one child per family. Now it looks as though that policy is working to curb population growth. In fact the projection for China is population decline.
It is strange to think, after so many decades of hearing about the dangers of population growth, that the success of efforts to curb that growth could turn out to be a problem. The United States could turn out to be lucky that its population is growing, because that growth could turn out to be a solution to the problem of supporting so many Baby Boomers on Social Security. (Probably not a real solution, but perhaps an amelioration.) If we have more people entering the work force, that's more people paying into the Social Security pot. If we have enough growth, we might not go broke quite so fast. Theoretically enough growth, coupled with some reforms, could even result in our survival.
The people who are campaigning against letting more people into our country are really not doing us any favors. We need more willing and able workers. We need them not just to fund our Social Security checks. We need more dreamers of the American Dream, or simply more people with a practical conviction that they can do better here than elsewhere.
It may feel like there are too many people in the world, but that is more of an opinion than a fact. There are benefits to a growing population, not the least of which is that the alternative to growth is decline.
The supposed negative impact of immigration on the social welfare system may be exaggerated, especially in light of the potential positive impact on the Social Security equation. But in the areas in which the social welfare system is negatively impacted, the better solution would be to cut back on government-sponsored social warfare programs, not to cut immigration. If we made the availability of work (and freedom and opportunity) the main incentives for people to come here, we would obviously still get plenty of people. These things really already are the main incentives, but we could make it more so.
Our best days could still be ahead of us, not behind us.
2. Decline of the dollar as the defacto international currency.
3. Population trends:
The United States is the only major developed country in the world that has a birth rate plus immigration rate sufficient to generate population growth. Western Europe and Japan are faced with a growing burden of elderly and retired people and with population declines down the road. In those countries the shrinking percentage of working-age people will have to support a growing percentage of retired people. Even China is facing that problem. For many years the Chinese government has imposed a limit of one child per family. Now it looks as though that policy is working to curb population growth. In fact the projection for China is population decline.
It is strange to think, after so many decades of hearing about the dangers of population growth, that the success of efforts to curb that growth could turn out to be a problem. The United States could turn out to be lucky that its population is growing, because that growth could turn out to be a solution to the problem of supporting so many Baby Boomers on Social Security. (Probably not a real solution, but perhaps an amelioration.) If we have more people entering the work force, that's more people paying into the Social Security pot. If we have enough growth, we might not go broke quite so fast. Theoretically enough growth, coupled with some reforms, could even result in our survival.
The people who are campaigning against letting more people into our country are really not doing us any favors. We need more willing and able workers. We need them not just to fund our Social Security checks. We need more dreamers of the American Dream, or simply more people with a practical conviction that they can do better here than elsewhere.
It may feel like there are too many people in the world, but that is more of an opinion than a fact. There are benefits to a growing population, not the least of which is that the alternative to growth is decline.
The supposed negative impact of immigration on the social welfare system may be exaggerated, especially in light of the potential positive impact on the Social Security equation. But in the areas in which the social welfare system is negatively impacted, the better solution would be to cut back on government-sponsored social warfare programs, not to cut immigration. If we made the availability of work (and freedom and opportunity) the main incentives for people to come here, we would obviously still get plenty of people. These things really already are the main incentives, but we could make it more so.
Our best days could still be ahead of us, not behind us.
Thursday, November 11, 2010
Cross-Currents
There are a lot of things going on in the world economy these days. China on the rise, currency ups and downs, European bond crises, etc. It is tough to see a path forward through all this.
The US economy remains sluggish, and the recent decision by the Federal Reserve to do more "quantitative easing," has not met with universal approval amongst its trading partners. The Fed would probably appreciate some sensible help from Congress, but lacking that, it is probably doing the best it can.
Congress itself is in a bit of a bind. First of all, it is composed mainly of lawyers, an occupation that does not specifically prepare its members to deal with matters of economics, business or finance (except for the legal aspects of those fields).
Secondly, it is somewhat at the mercy of the various passions and fears of the general populace. E.g., we can't have too many foreign people coming into the country, because they would take jobs away from Americans.
A lot of things going on, a lot of mud to wade through...
The US economy remains sluggish, and the recent decision by the Federal Reserve to do more "quantitative easing," has not met with universal approval amongst its trading partners. The Fed would probably appreciate some sensible help from Congress, but lacking that, it is probably doing the best it can.
Congress itself is in a bit of a bind. First of all, it is composed mainly of lawyers, an occupation that does not specifically prepare its members to deal with matters of economics, business or finance (except for the legal aspects of those fields).
Secondly, it is somewhat at the mercy of the various passions and fears of the general populace. E.g., we can't have too many foreign people coming into the country, because they would take jobs away from Americans.
A lot of things going on, a lot of mud to wade through...
Monday, September 20, 2010
Manifesto
Preamble: There is nothing wrong with wanting to help people, but it is a mistake to think that in order to do that we have to punish people who are doing well. It is a mistake on many levels, not the least of which is the fact that people who are doing well are a vital part of the economy, and it is better for all concerned that they not be punished for doing well. Among other things, they provide natural "stimulus" to the economy.
1. The fact that some people have more money than others is just a natural fact that flows from the natural differences amongst individuals. The statement in the Declaration of Independence that "all men are created equal" is just a statement of what happened at the beginning, not a statement of how everything should turn out in the end. We should all start out the same at the starting line, and in America we have tried hard to create that condition. What happens after that is up to the individual.
2. The fact that some people have more money than others does not make those who have money automatically bad. Similarly, the fact that there have been some bad people who acquired wealth illegally does not mean that ALL people who acquire wealth are not playing "by the rules." Furthermore, there are plenty of laws that can be enforced against those who do obtain wealth illegally or actually unfairly.
3. Americans, statistically, give more money to charity than any other people in the world. They want to help. Many of the richest give huge sums.
4. The economy is not a zero sum-game. If some people get more, it DOES NOT FOLLOW that necessarily others get less. On the contrary, the EXACT OPPOSITE can happen. Because of the GROWTH factor, EVERYONE GETS MORE!!!!!!!! If a business grows, provides needed goods or services and creates jobs, everyone benefits. If "everyone" includes the owner of the business, well, that is the fulfillment of the American Dream for him.
5. To expect everyone to end up with the same amount or even remotely similar amounts is unnatural and artificial. It is a nice thought, but to try to force that outcome gums up the whole works.
6. To take money away from key people in the economy (those in positions to enhance economic growth) and from productive businesses is DESTRUCTIVE to the economy.
7. To take money away from people who make a lot because they are highly skilled and do work that is of major benefit to the society as a whole (e.g., doctors, engineers and such) is DESTRUCTIVE to the society at large.
8. Rich people are as imperfect as everyone else. They can be obnoxious or caught up in the trappings of their wealth. This is not nice, but it is not a crime. They should get religion or something, but taking money away from them is not the answer.
9. If we stop punishing productive people and businesses by taking resources away from them, the scariest thing about it would be how fast we will grow. (And of course sometimes we would go too fast and have a crash. Then we would start this debate all over again.)
10. There would be plenty of money and resources to care for those unable to care for themselves. The flow of money to charity would be immense.
11. The government is NOT the best entity to help those who need help. It just creates jobs for politicians and bureaucrats.
1. The fact that some people have more money than others is just a natural fact that flows from the natural differences amongst individuals. The statement in the Declaration of Independence that "all men are created equal" is just a statement of what happened at the beginning, not a statement of how everything should turn out in the end. We should all start out the same at the starting line, and in America we have tried hard to create that condition. What happens after that is up to the individual.
2. The fact that some people have more money than others does not make those who have money automatically bad. Similarly, the fact that there have been some bad people who acquired wealth illegally does not mean that ALL people who acquire wealth are not playing "by the rules." Furthermore, there are plenty of laws that can be enforced against those who do obtain wealth illegally or actually unfairly.
3. Americans, statistically, give more money to charity than any other people in the world. They want to help. Many of the richest give huge sums.
4. The economy is not a zero sum-game. If some people get more, it DOES NOT FOLLOW that necessarily others get less. On the contrary, the EXACT OPPOSITE can happen. Because of the GROWTH factor, EVERYONE GETS MORE!!!!!!!! If a business grows, provides needed goods or services and creates jobs, everyone benefits. If "everyone" includes the owner of the business, well, that is the fulfillment of the American Dream for him.
5. To expect everyone to end up with the same amount or even remotely similar amounts is unnatural and artificial. It is a nice thought, but to try to force that outcome gums up the whole works.
6. To take money away from key people in the economy (those in positions to enhance economic growth) and from productive businesses is DESTRUCTIVE to the economy.
7. To take money away from people who make a lot because they are highly skilled and do work that is of major benefit to the society as a whole (e.g., doctors, engineers and such) is DESTRUCTIVE to the society at large.
8. Rich people are as imperfect as everyone else. They can be obnoxious or caught up in the trappings of their wealth. This is not nice, but it is not a crime. They should get religion or something, but taking money away from them is not the answer.
9. If we stop punishing productive people and businesses by taking resources away from them, the scariest thing about it would be how fast we will grow. (And of course sometimes we would go too fast and have a crash. Then we would start this debate all over again.)
10. There would be plenty of money and resources to care for those unable to care for themselves. The flow of money to charity would be immense.
11. The government is NOT the best entity to help those who need help. It just creates jobs for politicians and bureaucrats.
Cover-of-Time Theory
Time Magazine's 9/6/2010 cover proclaimed "Rethinking Homeownership." Inside, the cover story speculated that homeownership may no longer makes economic sense.
Funny thing about the cover of Time. Many times over the years, trends that have appeared on the cover were just about played out and were on the verge of reversing.
They didn't miss the top of the housing bubble by very much in 2005 when they extolled the virtues of owning a home, wondering on their cover if your home would make you rich.
Many years earlier, when interest rates were the highest they've been in the memory of several generations, Time's cover featured those sky-high rates. Not long after that, interest rates were on the way down.
Maybe the editors are just very slow at recognizing a trend. Or maybe they don't put these things on their cover until the trend is on everyone's mind.
If it is the latter, it fits in with the contrarian view that when everyone is stampeding in a certain direction, the best thing to do is to head the other way. If the cover-of-Time theory is correct (i.e., the cover of Time is a contrarian indicator), your home may be about to make a comeback as a valid investment.
Let's hope that is the case.
Funny thing about the cover of Time. Many times over the years, trends that have appeared on the cover were just about played out and were on the verge of reversing.
They didn't miss the top of the housing bubble by very much in 2005 when they extolled the virtues of owning a home, wondering on their cover if your home would make you rich.
Many years earlier, when interest rates were the highest they've been in the memory of several generations, Time's cover featured those sky-high rates. Not long after that, interest rates were on the way down.
Maybe the editors are just very slow at recognizing a trend. Or maybe they don't put these things on their cover until the trend is on everyone's mind.
If it is the latter, it fits in with the contrarian view that when everyone is stampeding in a certain direction, the best thing to do is to head the other way. If the cover-of-Time theory is correct (i.e., the cover of Time is a contrarian indicator), your home may be about to make a comeback as a valid investment.
Let's hope that is the case.
Wednesday, August 25, 2010
That was then, this is now
There is a line of thought that has persisted amongst some people since the financial crisis began, that because it looks similar to what happened in 1929, we must be in for another Great Depression. (Similarly, some media pundits have referred to the current recession as the Great Recession.)
First of all, the fact that something looks similar does not indicate that it is the same thing. There are definite differences between then and now.
It has long been conventional wisdom that the Depression was caused by the stock market crash of 1929. That is not correct. The crash was an early symptom of what was going on at that time, but it was not a cause. It did precipitate a banking crisis which became very serious. But where 1929 diverges from 2008 was in the response to the banking crisis.
In 1929, the Federal reserve kept on following the tight money, deflationary policy it had been following for some time before the crisis. It was a course of action that had been followed many times in the past by those who controlled banking systems, to keep the currency stable and weed out weak and overextended players. However, this time the result was worse than ever before, because the imbalances in the economy, on a long term basis, were more extreme, and the powers-that-be of that time basically read the whole situation incorrectly (to put it charitably). The result was made worse by the persistence in the deflationary policy long after the crisis developed.
Conversely, in 2008 the Federal Reserve pulled out all the stops in an effort to provide liquidity to the system and even invented new ways to keep everything afloat. There was no deflationary policy in play. One might even argue that the crisis developed partly because the Fed had been too accommodating for too long in the years leading up to the crisis. The Federal Reserve did learn something from the Great Depression. They learned what not to do, and in our present day crisis they basically did just the opposite of what they did then.
Three other factors were different then. One is that, just as the Depression was getting started, major income tax increases were put into effect. That has not happened yet in the present. However, (1) the new health care law could act like a tax increase and be a damper on the economy, and (2) the tax cuts that were enacted during the Bush administration are scheduled to expire at the end of this year. If they are allowed to expire, the result would be an automatic tax increase. It is more widely understood today, even in Congress, that tax increases are counterproductive in a weak economic environment. Therefore there is some hope that Congress will extend those tax cuts for another year. But nothing is certain at this point.
Another difference between then and now is that in the 1930's, world trade was seriously hampered by extremely high tariffs passed by all the major trading nations. There has been a little of that today, but nothing like back then.
The third major difference is that during the Depression, the whole world was affected. Today, several important countries have already resumed rapid growth, in particular China. Germany, whose economy depends to a large extent on exports, is experiencing growth through its trade with China and others. The prospects for US exports to China and India, etc., are good, and some major companies (e.g., Caterpillar) are already benefiting strongly.
Looking back, it almost seems a miracle that we survived the egregious policy mistakes of the first half of the twentieth century, and we should keep in mind that today we are doing our best not to make the same mistakes. Also, today is not yesterday. Today is today.
First of all, the fact that something looks similar does not indicate that it is the same thing. There are definite differences between then and now.
It has long been conventional wisdom that the Depression was caused by the stock market crash of 1929. That is not correct. The crash was an early symptom of what was going on at that time, but it was not a cause. It did precipitate a banking crisis which became very serious. But where 1929 diverges from 2008 was in the response to the banking crisis.
In 1929, the Federal reserve kept on following the tight money, deflationary policy it had been following for some time before the crisis. It was a course of action that had been followed many times in the past by those who controlled banking systems, to keep the currency stable and weed out weak and overextended players. However, this time the result was worse than ever before, because the imbalances in the economy, on a long term basis, were more extreme, and the powers-that-be of that time basically read the whole situation incorrectly (to put it charitably). The result was made worse by the persistence in the deflationary policy long after the crisis developed.
Conversely, in 2008 the Federal Reserve pulled out all the stops in an effort to provide liquidity to the system and even invented new ways to keep everything afloat. There was no deflationary policy in play. One might even argue that the crisis developed partly because the Fed had been too accommodating for too long in the years leading up to the crisis. The Federal Reserve did learn something from the Great Depression. They learned what not to do, and in our present day crisis they basically did just the opposite of what they did then.
Three other factors were different then. One is that, just as the Depression was getting started, major income tax increases were put into effect. That has not happened yet in the present. However, (1) the new health care law could act like a tax increase and be a damper on the economy, and (2) the tax cuts that were enacted during the Bush administration are scheduled to expire at the end of this year. If they are allowed to expire, the result would be an automatic tax increase. It is more widely understood today, even in Congress, that tax increases are counterproductive in a weak economic environment. Therefore there is some hope that Congress will extend those tax cuts for another year. But nothing is certain at this point.
Another difference between then and now is that in the 1930's, world trade was seriously hampered by extremely high tariffs passed by all the major trading nations. There has been a little of that today, but nothing like back then.
The third major difference is that during the Depression, the whole world was affected. Today, several important countries have already resumed rapid growth, in particular China. Germany, whose economy depends to a large extent on exports, is experiencing growth through its trade with China and others. The prospects for US exports to China and India, etc., are good, and some major companies (e.g., Caterpillar) are already benefiting strongly.
Looking back, it almost seems a miracle that we survived the egregious policy mistakes of the first half of the twentieth century, and we should keep in mind that today we are doing our best not to make the same mistakes. Also, today is not yesterday. Today is today.
Wednesday, August 4, 2010
Mass growth
Rosy payroll growth stats released by U Mass on 7/30/10 are thrown off a bit by US Census hiring. The 4.5 percent annual growth rate was the best since 1984, but government spending and hiring played a big role in it. Still, up is up, and the private sector did show some growth. The unemployment rate declined from 9.3% in March to 9.0 in June.
China and other developing countries are growing quickly again. This is good for any company that exports to them, including Massachusetts information technology firms.
China and other developing countries are growing quickly again. This is good for any company that exports to them, including Massachusetts information technology firms.
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