So Much For That
President Obama’s “Son of Stimulus” (aka the American Jobs Act) is already dying the slow, tortuous death of a thousand paper cuts. And for good reason: the majority of Americans don’t buy the President’s latest smoke-and-mirrors plan. After all, stimulus was tried in 2009 and failed miserably. We were assured that spending nearly $800 billion in direct stimulus, plus billions more for “cash-for clunkers,” the automotive industry bailouts and banking industry bailouts would curb unemployment to 8% and have us under 7% by this point. More telling than the fact that was a terrible overshoot, is that nobody in the administration is willing to put any kind of number on how many jobs this latest round of stimulus would create. I doubt anyone in the White House actually believes this would really do much for the economy.
Americans intuitively understand that stimulus spending doesn’t really do much, except exacerbate the underlying cause of our economic malaise. Economists will tell you that the reason we’re in such a mess is because consumer demand – which fuels around 70% of total economic activity – is depressed. If only that were true.
The real cause for depressed sales is much more basic: people can no longer afford to buy consumer goods. They still want iPads®, flat-screen TV’s and new cell phones. But when they sit down with their bills each month, they aren’t willing to incur new debt to purchase them. After all, the debt frenzy that drove the last 20 years of economic growth met its inevitable end with the financial collapse of 2008. We’re still busy digging our way out from that mess and until the typical household reduces their debt burden, don’t expect them to begin spending again.
The same goes for government. The massive expansion of federal debt leaves Americans feeling equally queasy – after all, we just learned a valuable lesson about what happens when people and companies are over-leveraged. When public debt exceeds the total value of the economy and projected spending continues to go up, not down… Well, let’s just say we aren’t interested in finding out if an over-leveraged government can suffer the same fate as an over-leveraged household.
Economic Revival: Fact or Fiction?
This article appeared in yesterday’s edition of Forbes. The authors, economists employed by First Trust Advisors, postulate that the economy is in recovery is underway. The only thing holding us back is unwarranted pessimism.
Phil Gramm’s thoughts on the economy have come back, it seems. You remember Gramm – during the 2008 election, he spouted off that the only thing wrong with the economy was the public’s perception. Shortly thereafter, Gramm joined the long unemployment line that was merely a figment of his imagination.
The indicators they point to, such as the increasing trade imbalance and devalued housing stock, are rife with the reasons the economy is in such a mess. Once again, we have economists pointing to debt-fueled consumption as the way to end the current economic slump. Nobody in their right mind is going to increase their debt load in this climate and for good reason. Basic common sense; the type of common sense missing from many economists and politicians psyches, tells us that we cannot borrow our way to prosperity any longer. Yet these types of articles continue to be published and their views continue to corrupt our discourse.
What is needed to get the economy rolling again is demand. The right type of demand, fueled by sustainable methods of production and innovation, not by gimmicks derived from debt restructuring, is the surest way to sustainable growth. So how do we get there – and remove the parasites who feed on debt?
We start by demanding government remove the binders on innovation and consumption. By continually bailing out mismanaged companies and decrepit industries, governments are preventing new industries and companies from establishing roots and flourishing. Regardless of the political unsavoriness that allowing large companies to fail and industries to wither presents, the process of “creative destruction” is essential to a growing and vibrant economy. The same way you prune dead shoots from a rose bush to allow larger blooms to grow is the same way the government should approach handling the economy.
Pursuing such a policy will cause employment displacement – but government officials can hardly claim the policy of propping up failed businesses hasn’t resulted in the same (nearly 1M newly unemployed this month can attest to that). This is where the government can assert a positive force, by providing short-term financial assistance to those displaced by the new economy. Likewise, government can fuel new growth by ensuring those displaced receive the training they need to compete.
Unfortunately, we’ve already wasted more than $1T in bailing out failed industries, leaving a huge debt sinkhole without anything to show for it. Instead of prudent financial management, it looks like our leaders – enamored with, and products of, the culture of debt – consigned the nation to a long period of economic malaise. While the second half of the program outlined above was made infeasible by the debt policies pursued by the federal government, the first half can be attained. The economic pain will not be any worse than what the nation currently feels. But given an intransigent White House and bickering Congress, it doesn’t seem likely they will change course.
Joe Fed Makes Twice What You Do (and for Doing 1/2 the Work)
More depressing news from Washington. According to this article in USA today, if you work for the federal government you’ll earn; er, make about twice as much as if you worked in the real world.
I did some back of the napkin calculations to see how much money that wastes in a year, even assuming we need all of those federal workers. (I don’t think we do, but until we get the private sector hiring again, leave ’em where they are). The number is…staggering. This is based on the average fed worker receiving $121K in annual compensation, the number specified in the article.
(Number of federal employees x $121,000) / 2=estimated overpayments
(2,150,000 x $121,000) / 2 = $130,075,000,000.
That is 130 billion, 75 million dollars.
Or, as my dear departed Granddad would say, “that’s a shitload of samoleans!” (I never really found out what a “samolean” was, but I always assumed it was something mean that traveled in big packs – like government employees).
I don’t know about you, but if the Keynesians want to spend some government dough around, I’d suggest they have a way to pay for it without adding to the debt. Simply tell all those federal employees they’re getting a 50% reduction in pay. It would also accomplish something else: all those beauracrats would actually begin to understand what it’s like to take drastic pay-cuts, only to see your job disappear 6 months later.
We can only hope…
Time for a New Consensus
One thing is becoming painfully obvious: the way we, as Americans, view economic opportunity is out of step with the way the world operates today. It is time that we recognize this and address it in a positive manner, without the political fire-bombing that is hurled daily on both the left and the right.
The left is stuck with an early 20th century Keyensian view of economics. I’d argue that particular view didn’t really work then and won’t work today. Massive infusions of government capital during the 1930’s into public works projects did build some marvelous edifices, such as the Hoover Dam, but did not absolutely nothing to end the Great Depression. America didn’t return to full employment until the advent of World War 2 – the result of increased war production and more than 10 million men entering military service. Once the war ended, the economy again returned to near-Depression era levels of unemployment. What finally proved the cure for the economic ills of the 1st half of the 20th century was that in the post-war period, only the US remained capable of providing the goods and services needed by the world. It was an export economy, fueled by international demand, which put America back to work.
The right seems permanently wed to supply-side economics. Strict adherence to that model might have worked, but we’ll never know. While government receipts during the supply-side era (1981-2008) outpaced inflation by (See fig. 1), government spending at all levels increased at an even more dramatic pace, leaving us with unsustainable levels of debt and continuing government deficits – and a seemingly insatiable public demand for services that we cannot afford.
The current model being followed is a strange amalgam of the two diametrically opposed economic philosophies, with government interventions and expanded spending coupled with “targeted” tax breaks. In one sense, this new model has worked: businesses are sitting on a virtual mountain of cash. But in a much larger sense, these haven’t worked to stoke the economy – and for one simple reason, the demand needed by businesses to invest that capital doesn’t exist now. Employment data continues to remain bleak, representative of the fact that businesses are not investing in human capital. Part of the reason is undoubtedly tied to regulatory uncertainty, since anyone running a business needs to properly plan and account for the funds allocated for human resources. But that uncertainty alone cannot account for the downward pressure July’s economic data displayed on employment.
What is needed is recognition by both those on the right and the left that a new demand model is required for our current age. Modern technologies have made many labor-intensive occupations of the late 20th century redundant. Cloud computing and SaaS technology reduce the need for office and technical staffing, closing off two of the high-growth industries of the past 30 years. Manufacturing tasks that once required dozens of people can now be fully automated, with only one operator required. (Just last night I watched a documentary on Zippo lighters – the entire assembly line only needs 5 people to run it; a perfect example). Even many low-wage jobs have been replaced – the other day I went food shopping. No cashiers were available; the entire checkout line was self-service with two people running 20 checkout lanes.
In other words, there are two possibilities now facing the country:
- Current unemployment levels are now the “new normal” and a return to sub-5% unemployment is unlikely. In this event, the current social services are inadequate and need serious revamping. Unemployment insurance as currently exists needs to be discarded, replaced by a system that is more proactive in returning the unemployable to the workforce while ensuring that people are not discarded like yesterdays news. Such a program needs to be structured so that chronic unemployment and other abuses are not permitted. In short, in such a world, unemployment services should not be a state duty, they should very much be a federal-corporate symbiosis. It is impossible – and against a state’s interests – to train somebody for employment opportunities in another state, but it is in a company’s best interest to do so.
- Current unemployment levels are an aberration; a temporary result of career displacement due to a technology upheaval. Such upheavals have occurred before and the nation weathered those storms, most recently in the late-1970’s as the nation shifted from a manufacturing base to a services based economy. In this case, the government needn’t do much of anything, except make career retraining available and mandatory, in order to continue receiving unemployment insurance payments. Once, that is, the new employment needs are identified.
I’m not going to pretend I’m smart enough to know which of the two scenarios is correct. What I do know is that until we begin to honestly discuss them, no action can be planned or undertaken. But as I mentioned at the top of this post, neither side seems ready to abandon decades-old dogma. I doubt either will over the next 90 days, as we begin a new national election cycle and both sides seem to only care about scoring political points by feeding raw meat to their adherents.
It’s up to the American people to put aside our natural inclination to fear in uncertain times and force our political leaders to engage in an honest discussion of the situation. And if they won’t?
Then it’s up to us to replace them this November with people who will.
The fear economy?
I love reading all of these articles about how the reason the economy isn’t picking up because the American consumer is “afraid.” Like this one from CNN.
What is it that all of these pundits fail to understand? The reason Americans aren’t spending, the reason for the fear about the economy is…well, because in real world terms, the economy sucks. Look, the President can talk all he wants about how the economy could be worse. He can pat himself on the back all for a stimulus package that only stimulated the national debt, but those of us who don’t live in big mansions in the District of Columbia understand one very vital thing: there aren’t any jobs out there. And the few that do exist have more intense competition than ever before. As noted in this article from Daily Finance, the US Department of Labor’s unemployment statistics amount to books-cooking. While the government touts a 9.5% unemployment number (bad enough), the actual unemployment rate looks to be closer to 22%. If you or I tried to pass off that type of accounting, we’d be in prison.
To put it simply: until people start getting hired again, nobody is going to be spending anything beyond what is absolutely necessary. Unfortunately, the one thing the current administration has displayed is an absolute disregard for getting folks hired. Why else would they be pushing the largest tax hike in history on the nation? Why would they talk about how wonderful it was to save GM – when GM just offshored another 32,000 jobs? Why would they talk about how they love the technology sector, while Verizon is in the middle of laying off over 24,000? That’s 56,000 jobs gone in 10 days from just 2 corporations, but they’ll never show up in the official DoL statistics.
Until this administration stops putting nonsense like “climate change” on the front burner and starts getting serious about job creation, the economy will continue to free fall. The object lesson in job creation can be found pretty easily, too – if Obama just opens up a history book. In 1962, President Kennedy spurred job creation by reducing income and corporate taxes and reducing regulation. In 1981, President Reagan did the same. And in 1995, President Clinton did the same, again. President Obama should also note that two of those presidents were Democrats – funny how job creation understands only one ideology. It’s not the one the current President espouses, though – so I guess we’re stuck int he “Fear Economy” until 2012.
I’m certain many of you have been watching the unfolding – seemingly in slow-motion – debate on extending unemployment benefits. Then again, I’m also certain that quite a few of my fellow citizens haven’t given it more thought than which sunscreen to bring to the beach. After all, it is July. This is hardly the time of year when political juices get flowing for most of the electorate.
However, I have two strikes against me when thinking about this: for one, I am an admitted political junkie and two; I am one of those approximately 6,800,000 Americans who has been officially unemployed for longer than 6 months. (That’s a pretty dismal number, but it’s actually rosy when compared to the long-term underemployment number and the actual numbers of Americans who have been unemployed so long that the feds stopped counting them. But I digress.) So, I’ve been watching and listening with keen interest.
Being fiscally conservative (ok, ϋber-conservative) and also unable to secure new, permanent employment, I find myself torn between the two very real issues at play. Those two issues are, to put it simply, how do we reconcile a real need to prevent utter destitution for the millions like myself – and at the same time, do it in a way that doesn’t further bankrupt the country? It seems to most reasonable Americans that the proposal put forth by the Republican caucus – paying for the cost of extending unemployment benefits by using some of the remaining funds from last year’s gargantuan stimulus package – is a good compromise. Why the Democratic caucus is so opposed to the idea has been beyond me. After all, even that most liberal of economists, Paul Krugman has said repeatedly that unemployment benefits are “a highly effective form of stimulus.” Congress loves “earmarks,” or setting aside money for pet projects. In an election year when there are likely upwards of 20 million voters who face the prospect of losing everything on a daily basis, it seems logical that Congress would earmark $38 billion of pre-existing expenditures on a pretty popular program. It would be a win-win, something that almost never happens for a politician: they could claim both the labels of “caring liberal” and “fiscal conservative” with one vote. So why won’t they?
The answer (as with almost everything Congress does these days) lies in the details. The program is part of H.R. 4213, a 412 page megalith that deals with a whole of stuff not at all related to employment or economic stimulus. In fact, the section dealing with the benefit extensions is Title V, subtitle A of the bill. It incorporates all of 9 ½ pages of the bill.
I’m sure you’re asking yourself what could be in the other 402 pages of the bill. Well, here are a few highlights. Feel free to hit the link and read it for yourself:
*Provisions to build sewer systems
*Alternative fuels vehicle credits
*Energy efficient appliance tax credits
*New standards for windows and doors (You can’t make this up, folks)
*Railroad track maintenance credits
*Rum excise tax relief for Puerto Rico and the US Virgin Islands. Hey, even if we’re all broke, at least we should be able to swig cheap rum, get drunk and forget this mess!
The list goes on and on. There are over 500 individual line items in this bill. Not only have our congressmen been busy putting earmarks into this thing, it seems they’ve taken special care to pack it with more pork than a Jimmy Dean breakfast sausage. No wonder they couldn’t find the $38 billion! (By the way, by the Obama administrations own estimates, there should be nearly $340 billion left from last year’s budget buster.)
Oh, and one final note regarding the supposed disincentive of providing unemployment benefits: In ordinary times, I agree that extending unemployment benefits can be a disincentive to finding gainful employment. But these are not ordinary times; not when estimates range from five to eight people for every available job opening. And speaking from personal experience, I can assure you that getting 30% of my prior earnings in an unemployment check doesn’t exactly meet my monthly commitments. Here’s hoping Sen. Jon Kyl and Senatorial candidate Sharron Angle, who have publicly espoused this thought, take a good look around their respective states and come to their senses. They are not properly representing their constituents, their party or the nation as long as they hold that view.