The Number

Tomorrow, a monthly ritual will be played out for the investing and political classes.  It happens on the first Friday every month, and part of the ritual is endless discussion of what “the Number” means, politically and economically.

One such Friday a couple of years ago, I wrote some thoughts on the circus presented that morning on CNBC.  I didn’t put them on my blog because I thought they might be “too political.”

I was still thinking I might end up on Wall Street or with a major money manager at the time, so why take the risk of rubbing a key decision-maker the wrong way?

Now, I don’t care any more. It’s too important an issue for me to stay silent when the corporate Powers That Be (PTB) are gearing up to finish the job of screwing us that started several decades ago, and nearly finished in 2008.

Sadly, the people pushing policies that will destroy most of our citizens economically if it resulted in a dollar more of profit or an extra seat in Congress are still calling the shots.  They are also revving up the propaganda machine for the coming election, and the result if they succeed will be very ugly for the vast majority of us.

Maybe we shouldn’t be surprised that we have such a pathetic economic recovery today, since the “wise old men” the current administration trusts are the same people (in many cases), and believe the same discredited crap about economics as the “wise old men” who engineered the debt- and leverage-driven collapse of the world economy a few years ago.

Below are the thoughts I had jotted down a few years ago about this but did not share on my blog.  Rereading them, I realized that mirroring the lack of progress in improving the economy has been the lack of progress in economic thinking.  The same old policies, policies that have been proven not to work, are still being pushed by the same eminent old men.  So, unfortunately, my thoughts then are just as relevant today as they were then.

My thoughts then had been provoked by listening to a CNBC  broadcast leading up to the release of the monthly employment numbers.

For a couple of hours, the once-revered Alan Greenspan was the guest in the studio, followed by a Greek chorus of professional economists as the 8:30 AM employment report was made public.

Strangely enough (or maybe not), Alan and the rest of the economists were all talking nonsense and another guest who isn’t a business leader, isn’t a politician and isn’t an economist, was the only one making any sense – Tom Friedman, columnist for the New York Times.

He asked the basic question “Where do jobs come from?” and proceeded to answer that question completely and sensibly – so much more sensibly, to this reality-based observer at least, than the stale political hackery the professional “economists” had spouted, that I had to note it down.

Paraphrasing Friedman:

“Think about it. Jobs come from having more and more Americans inventing goods and services that make peoples’ lives more healthy, more secure, more productive, more entertained and more comfortable, and then making them here and selling them to more people around the world – made by workers who are so well educated and have such good infrastructure that they’re able to be ten times as productive as Chinese workers and can therefore be paid like ten Chinese.”

Makes sense to me.

We likely have lost forever the ability to compete at making low end technology, albeit with factories “manned” by robots. Even if we did that and only had to pay a handful of humans, I suspect that whichever economy lets the rest of society suffer the extra costs of pollution, or subsidizes its parts manufacture, or otherwise alters the true market cost of production, that will be the economy that builds more DVD players.

Friedman’s single best observation, in my (not at all humble) opinion, is that the end of the Cold War did two severely damaging things to our economy. First, it eliminated what had been trillions of dollars of spending on products we hoped to never use (nuclear armaments, the peripheral infrastructure to deliver them and protect them, and the R&D spending to develop them). Second, though it freed roughly two billion people in other countries to consume (a good thing), it also freed them to begin producing consumer goods (a bad thing for our wages and jobs).

Again paraphrasing Friedman:

“Instead of redoubling our efforts to be an efficient seller of goods and services from a macro viewpoint, we decided to coast.

We stopped maintaining huge swaths of our transportation infrastructure, much less improving it.  

Foreign students continued to come here for graduate school, but we ignored their increasing tendency to go back home afterwards, taking with them the benefits of our educational infrastructure investment.  In fact, we even made it harder for them to stay here and succeed.  We no longer had the benefit of so many of the best minds from around the entire world.  

We let processing medical payments become one of our largest “industries.” I’m sure you have a few favorite examples of poor policies that made us less competitive in a suddenly much more competitive world.

His second excellent point, which came up in discussion of our international affairs, was the fact that we are “addicted to oil, and became addicted to debt.”

Obvious enough.

But Friedman went one step farther.

He pointed out that addicts always lie to their dealers in order to keep their supply coming. Since Saudi Arabia is our main oil pusher, and China our main supplier of debt financing, the U.S. will tell them whatever it thinks they want to hear if it will get us another fix. If that means telling China we mean to balance our budget or that we won’t let our banks or mortgage insurers fail, we do it. If that means reassuring the Saudis that we’ll get tough with Israel, or provide another round of first-line military hardware, so be it.

To this point I would add that addicts will also lie for their dealers if they think that will help keep their supply uninterrupted. As a nation, we ignored inconvenient facts like the nationality of most of the 9/11 bombers, or the source of the funding for al Q’aeda. We’re for human rights unless China might not buy our bonds or the House of Saud might be insulted by us making a big deal about an upcoming execution by stoning.

Our twin addictions leave our domestic and international policy hostage to our pushers.

On CNBC, I was then treated to another string of the economist sock puppets all saying it was uncertainty about the future of tax rates for 2% of our population or 3% of our small businesses that was stopping companies from hiring.  Give me a break!  If the demand existed and a company was running at 100% capacity and selling everything it could deliver, a potential 4% difference in profits after tax would never keep them from hiring right now to meet demand and increase gross profits.

I never heard a CEO say they couldn’t consider adding capacity (by hiring, not even long-term investment) when orders outnumbered their ability to deliver just because

  • the price of fuel might go up,
  • or interest rates might change,
  • or a competitor might come up with a better product.

These uncertainties – all with a far greater range of consequences than a couple of percentage points of tax – are normal parts of the business environment, and never stopped a business from hiring or investing if running at full capacity.

Then the numbers came out.

We still had 9.8% unemployment. We were nowhere near full capacity.

We still are not at capacity in 2012, and unemployment is still at 8.1%, higher than any year (prior to this recession) since 1976.  That’s not even counting the millions who have become too discouraged to look for a job or those who are under-employed.

This is first-semester economics.  Companies won’t increase supply – or hire more workers – unless demand grows.  And demand won’t grow by eliminating the inheritance tax, cutting the top marginal tax rate, or declaring a “tax holiday” for corporate profits sitting overseas in tax havens.

If we want to guarantee another leg downward for the economy, the way to do it is to eviscerate millions of middle class families’ income.  The way to do that is to follow the vision of the “austerity” crowd, and fire as many teachers, police, and others as possible, with no prospect of those people finding similar employment after being cut.  Just ask the people of the UK how well that is working out.

We have the results without having to run the experiment on ourselves.

If debt and deficits are the problem, then take a look at the revenue side of the income statement, not just the expense side.

If competing in the global economy is the problem, then align the incentives so we become more competitive.  Stop rewarding offshoring, for example.  Get our employers out from under an oppressive cost structure imposed by a grossly inefficient medical payments system.  Make it easier for smart, productive people to move here and become citizens.

If overwhelming government cost is the problem, then stop spending so much on guaranteed profits for corporations, as we do with Medicare Advantage and have done for decades with government-guaranteed mortgages and education loans.  While we’re at it, let’s negotiate for pharmaceuticals with all our buying power under Medicare Part D.  Let’s let the Army feed its field forces again rather than handing a quarter million per year to a corporate contractor for each cafeteria hash-slinger.  Stop sugar subsidies that were an “emergency” in the Spanish-American war.  Stop oil drilling subsidies that gave incentives to explore when oil was under $10 a barrel.  Those few steps should be good for $400 or $500 billion a year.  Then tax income the same whether you make it managing other people’s money or by collecting a salary.  Income is income, after all, and selecting one kind of income and taxing it as if it was capital at risk is blatantly absurd.

That’s a start.

Tomorrow I predict the White House will say that two years of adding private enterprise jobs shows good policies.  I predict the opposition will say that 8% unemployment shows bad policies.

I predict that both sides will ignore the elephant in the room — that overcapacity is not solved by making taxes lower or loans cheaper or firing millions of workers or propping up failing businesses or banks.

Overcapacity is solved by getting more disposable income into the hands of those who are in the bottom half of the pyramid.  Those at the top will get a lot of that extra money by owning the companies that sell stuff to those consumers.

The saddest part of this whole mess?  That the largest Communist country in the world understands how to manage a capitalist economy faced with global free markets better than we do.



15 Responses to The Number

  1. r3fman says:

    The leaders of that “largest Communist country” don’t have to operate under the same restrictions imposed on the so-called ‘free market’ countries, so its not really a fair complaint that they manage better than we do, but other than that, you are spot on.

    • hhill51 says:

      I’m still impressed with the way China responded to the 2008 crisis. They did real stimulus spending of 2% of GDP over six months, and didn’t waste any of their firepower as we did, with useless tax breaks that didn’t create hiring or stop the freefall of asset values in the real estate market. Less than a year later, their economy was humming along at a high single digit growth rate. We did only about one fourth of one percent of actual stimulus. What a pathetic way to deal with the worst mess in our economy in most people’s lifetimes.

      • Conscience of a Conservative says:

        I suggest reading up on Michael Pettis. The result of China’s 2008 stimulus was to drive down consumption as a percent of GDP to dangerously low levels. There’s a great deal of Mal-investment in China as seen by the empty malls and unlit office towers and a rail system that doesn’t work. State banks are forced to lend to these uneconomic initiatives and depositors are forced to subsidize this by earning negative real interest rates. There’s a huge , not so behind the scenes debate going on in China on how to rebalance the economy there, the investment led model is not working and everyone there knows it. Please consider the following:

  2. Judy says:

    Here’s a coincidence. Greenspan is scheduled for CNBÇ guest host tomorrow on Squawk Box

    • hhill51 says:

      That’s really quite a coincidence, Judy. I missed it, but, as you can see, I already knew what he was going to say. The fact that anyone still listens to him at all is probably the best indicator that our troubles are not over, and that “we the people” are going to get gouged yet again to bail out the bankers.

  3. Excellent commentary, if we would end the incentives to export jobs and industries, and consider ALL jobs important to maintain a healthy employment market in the US, our spendable income needed to grow the economy would create a positive growth cycle.

    While today, we have the exact opposite, and the rewards have favored off shoring, to the point where all domestic markets for EVERYTHING have been negatively impacted.

    Beyond raw materials, our domestic labor market is the ROOT market for all of our possibilities for economic growth, which is something that Wall Street, academic economists, and politicians of both parties have forgotten, or perhaps never realized in the first place.

    Since the Reagan era, our economy has been on the wrong track, aiming for short term gains at the expense of workers and American labor, for the benefit of short term mechanisms favoring a small segment of society, Wall Street and corporate executives.

  4. Luther says:

    Maybe the point of “austerity” is the destruction of the middle class and the further concentration of ownership & wealth into the hands of the elite? The creation of a nation of virtual slaves?

    • hhill51 says:

      That’s also the point, IMO, of putting so many of us earning in the bottom two quartiles into positions where we depend on “handouts” to survive. Imagine, if you will, a hardworking family of five with two full-time jobs at the minimum of $7.25 per hour. After the FICA tax taken from the first dollar, and after employee contribution of a couple hundred a month for minimal and (very) high-deductible health insurance, those two full time jobs bring in less than $500 a week. That means other corporate middleman government programs like student loans or housing are virtually required for that family with three children to improve their lot in life. The big welfare is for the corporations that administer these things, and the right wing has a perfect whipping boy in the form of families “dependent” on government largesse. Serfdom, in other words. And if a health problem arises in one of the children or one of the breadwinners, the picture only gets grimmer, while the right has even more to complain about as Big Agro gets its share via Food Stamps. Naturally, a pool of desperate potential workers is perfect for the Walmarts of the world, as they give people jobs and fire them a week before they qualify to join the health insurance coverage, such as it is. That revolving door of low-end retail jobs is what our policies these past 30 years has done with the formerly most productive workforce in the world.

  5. ka says:

    revoke insurance paid for by the people of the united states for all Govt workers!
    Senators, Congressmen, locals mayors etc..and lets seee what happens!

  6. Conscience of a Conservative says:

    I guess yesterday’s number was bad…

  7. Not Rick says:

    I’ve been telling people for years that the PTB find our system too confusing – we have the Have Nots, The Middle Class, and the Haves – that’s one too many groups to apease – much easer to just have the Haves and Have Nots. Given that – it’s much easier to turn us in to Have Nots than Haves – so that’s what they’re doing.

  8. Robert Groover says:

    Stiglitz made an interesting comment just today, very much in line with some of the comments here – see on the destruction of the middle class.

  9. Z says:

    A propos the Number: I met a statistician/economist who works at producing the number. I joked that it might be fun to know it beforehand. He replied that everyone in his office does, but that no one has yet correctly predicted the reaction the next day! And this is what they do…

  10. Z says:

    A combination of Chinese and US tax laws allows high tech and some other industries to operate virtually tax free in China. China, in many ways, is a 51st state (peg to $, access to trade and finance in opposite directions, etc…,) hence deflation on a scale that will let us coast till their per capita gdp is the same as ours, regardless of commodity prices and of course, the growth of consumption by the former com/socialists who have effectively been tipped into our economy!

    As an aside, China in 1980 had 23 taxpayers! in 2003, it had 1.000.000 tax collectors!

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