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.
“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.”
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.