Sunday, February 10, 2008

state of the economy

(Warning: reading this column make make you so bored you end up in a worse condition than I am.)

In retrospect, I really regret ever saying I would do this post, as I haven't really been paying attention to the economy too much. Also, I realized it was a lot more work than I wanted to put in. I have watched a lot of political news, but it's all about the election. Listening to most of candidates speak actually hurts your economic knowledge, so I hope I don't say too much that doesn't make sense. I will tell you now, that raising the minimum wage to $11.15, as Edwards wanted, does not make sense (more later), and injecting $1 billion into the housing market, as Hillary wanted, does not make sense. I am not really sure where these people get their numbers. Do they just randomly think they make sense, or do they have economists who crunched the numbers and found they were the best? My guess is the former.

My other reason for not wanting to do a state of the economy blog is that surprisingly, I know very little about Macroeconomics--the area that deals with things like recessions. There are no Macroeconomist researcher on staff at U of A, and the one "Macro" class we do take is literally just a theory course on Dynamic Programming. The most helpful textbook was an operations research textbook, followed by Stokey, Lucas, Prescott. Basically, I know the math behind Macro, but nothing about Macro. This probably means nothing to most people, I just wanted to say I know very little about Macro. In fact, if you read the Economist weekly, you know more than I do.

So, all analysis here will really come from an introductory Econ class.

First, I need to talk about the dollar, because I am so annoyed by this McDonald's commercial. In case you haven't seen it, a group of nincompoops is sitting around talking about how the dollar is tanking. Then, a smug worker comes in saying he got a double cheeseburger for a dollar, and then all the nincompoops start talking about how strong the dollar is. The commercial makes me so upset, because these workers are confusing inflation with the strength of the dollar. Let's get one thing strait: changes in the price of domestic goods represents inflation. You paying more for a pair of Levi's, movie ticket, and other goods is inflation. If prices go down, that is deflation. Most likely, neither is correlated with the strength of the dollar.

The strength of the dollar represents how costly it is to buy a particular foreign currency. The dollar only rises and falls with respect to a particular other currency. For instance, it could rise against the pound but fall against the Euro. It so happens, that the dollar has continuously fallen against all: pound, Euro, Yen, Loonie, and other major currencies.

What does this mean? It means if you want to buy a European good or a European stock, it is going to now cost you more, because you have to trade in more dollars to get the same amount of Euros.

If you read a Newsweek article on the subject a year or two ago, you would think the falling dollar was a sign of the apocolypse, but what are the real consequences? They are both good and bad, but a weak dollar is not the end of the world. For instance, it is well known that the United States has a very bad trade imbalance. Since the 70's we have imported more than we have exported and keep doing so in larger proportions. A weaker dollar will help alleviate this problem, since it means that foreign goods are now more expensive. Also, for foreigners, our goods are relatively cheaper. So, foreigners will buy more of our goods and we will buy less of their goods; thus, reducing the trade imbalance.

The downside to a weak dollar is that if a foreigner wants to invest in U.S. stocks or bonds (and they do heavily) it is now more expensive for them to do do. Say someone in Japan wants to buy a 5 year Treasury note. Well, now they have to trade in more Yen than they used to in order to buy the note. So, we would expect a lowering of foreign investment into the United States.

Is this a problem? Yes. Investment is perhaps the biggest catalyst of growth. Firms (businesses) obviously need capital in order to finance new projects or to expand their businesses. We want firms to expand, because that means more jobs. It also means more innovation. We want there to be sufficient capital to help start new businesses and to help businesses develop new ideas. It may be cheesy, but it is true that this entrepreneurial spirit is what makes the U.S. so great, and it will be necessary to sustain our greatness in the future.

Aside: this is why the "big three" auto manufacturers make me so mad. They fail innovate and just stick with the same mold year in and year out. It makes me so mad, that I have had to start rooting against them. I don't understand how you could compete so poorly with foreign auto manufacturers. I do blame part of it on the unions, although they shouldn't bear the brunt of the blame. I can't find the numbers, but I once heard that union costs add somewhere between $500 to $1,000 to the price of every domestic car. The real reason for the "big three's" failure is an inability to innovate. They failed to forsee the compact car revolution and they failed to forsee the hybrid revolution. Ford does have a legitimate hybrid in the Escape but had to license the technology from Toyota after they violated Toyota's patent right. GM has as abundant amount of commericals lauding their hybrids but nothing to really compete with the Prius or Civic. Also, they have tended to focus on alternative fuels rather than electic cells like Toyota and Honda. If you look, the Malibu hybrid gets a whopping 32 mpg on the highway! Wow!

Aside2: It does not make sense to try to develop hydrogen or ethanol fuel compatible engines in the U.S. as GM is doing. First, how do we get hyrogen? In the U.S. we get it buy buring coal. So, calling hydrogen, "a green alternative" doesn't make sense. The U.S. currently gets about 50% of all its energy from coal, which is an issue I may discuss later, but coal is the worst option for producing energy, and I can't see why we'd want to use more of it. Second, ethanol can be used in fuel and is made from crops like sugar and corn. The problem is (1) why do we keep looking to natural resources as an answer when there is currently technology that allows propulsion to occur based on an automobiles' own energy. I.e. Toyota and Honda have developed a way to power a car using no outside fuel inputs. Shouldn't we be following this route rather than just looking for other inputs? (2) A surge in using agricultural commodities drastically affects agricultural markets. It doesn't take an Econ PhD to tell you what will happen to the price of corn when demand for it shoots through the roof-- it is going to raise high. In turn then, some people will turn to substitutes like wheat instead, and that increase in demand is going to raise the price of wheat. So, what you are doing is raising the prices of agricultural goods, and ultimately food prices in the U.S. Plus, the U.S. already consumes an unbelievable amount of corn. If you look at what you eat, you will be very surprised to see that you probably can't go a day without consuming corn. Anyone who simply drinks a soda will do so.

Sorry for the asides, but my point with the dollar is that it is not as bad as it is made out to be. If you are staying in the U.S. and not traveling abroad, it really shouldn't affect you too much. Also, as long as U.S. firms remain dominant, people will keep investing here.

So, Steve, what about this recession! First, contrary to what you might think, the economy is still in an expansionary phase, and we're not in a recession. Yes, many signs point to an upcoming recession. The Dow, Nasdaq, and S&P 500 all had down weeks; jobless numbers are up; and consumer confidence is down. These are all three indicators that an upcoming recession is LIKELY but does not mean that we will have own. I do lean towards there being a recession simply because of all the talk of a recession. The politicians and media have been working overtime to scare consumers, and just creating the expectation of a recession can cause a recession. Consumers will cutback on spending out of fear for their jobs or financial security and cause a recession. I didn't read a recent Newsweek, but again, the cover was a nightmarish prophecy of a doomed economy. I am not sure why Newsweek is so pessimistic, but they are not helping matters by scaring people. (If you did read this issue and I am wrong about scaring people, please let me know.)

In order to have a recession, we need two consecutive quarters of negative growth in real GDP (gross domestic product). In other words, we need to produce less as a country for two consecutive quarters. My guess is that if there is a recession, it will be relatively short and mild, much like the previous recession. That's one reason I can't understand this rush to create a stimulus package. The other reason is that stimulus packages rarely work. I am not a believer that President Bush's tax cuts got us out of the previous recession. I think we were on our way out anyway. I also think that by the time you get your $200 dollar check, the economy will probably be fine. Aside from the fact that stimulus packages like these are usually so poorly timed, there is no economic evidence that these types of stimulus packages do anything to help the economy. They only thing they do is help politicians. Stimulus packages are politically popular, because politicians need to be able to say, "look what I'm doing to help you." And most Americans buy into it. Unfortunately a lot of times no action is better than action, but politicians are too afraid to say this. John McCain was the only politician I saw who said he didn't know if he would do anything about the housing "crisis." Thank you John.

Let's talk for a minute about this "crisis." First, everyone saw it coming, but no one did anything. The Economist magazine had been predicting a collapse in the U.S. housing market at least two years before it actually happened and did so regularly. Did this cause financial institutions to change their lending practices, or homeowners to change their borrowing habits? No. So it is hard for me to feel too sorry for companies like Countrywide. To me, they were greedy in their practices of giving out loans, and should not be surprised that a large number of people had to default. If you are giving out no-doc loans you shouldn't be surprised when people can't pay. On the campaign trail Hillary Clinton has been talking about the family that took out a second mortgage to finance a college eduction for their kid and then had to default on their home. Well, Hillary, I don't think this is the average reason Americans were taking out second mortgages. Most saw that interest rates were low (temporarily) and decided to refinance to milk as much cash as they could out of their house. Most probably bought a new car, television, etc. Then, when interest rates went up, they were unable to pay because they signed some sort of variable interest mortgage. While, I feel for a lot of these people, I don't think a bail out of the mortgage industry is a good idea. In economics there is a term called moral hazard. It simply means that people act differently when they don't bear the consequences of their actions. I.e. people drive more recklessly when they have car insurance. Or here, financial institutions behave more poorly (take on too much risk) when they know the government is going to bail them out. If financial institutions know they are going to be bailed out by the government, then they are going to be too greedy in their actions. So, the government needs to set a precedent now, that they don't bail out companies that behaved poorly. Thank you to John McCain for being the only one to agree.

Back to the recession. The housing market will correct itself in time, and its impact on the economy will become minimal.

But, Steve, should the government do anything? The only thing I would do is TEMPORARILY alter unemployment benefits. You should see research/articles by Alan Krueger on the matter. In most times, I do not believe in high unemployment benefits. It has been well shown that high unemployment benefits lead to a much higher unemployment rate. This is why the unemployment rate in the U.S. is two times lower that most Western European countries. Western European countries have a very large unemployment web to fall into, and unemployment benefits last for a long time and benefits are very high. I don't think you have to be an economist to see why unemployment would be a lot higher. During times of downturn though, high benefits don't keep people from working as much, and as I said, they help ease consumer fears. Consumers won't spend much less, knowing that if they lose their job, they wond't lose their financial security. I emphasized temporary, because many social fixes start out as temporary but become permanent.

I think the government needs to be a little more worried about the long term health of the economy, and there are a few things that hinder it. The first, is the much talked about dependence on foreign energy. The solution has been to invest in things like ethanol, which I just don't get, and cannot understand why we aren't looking at other alternatives. One is wind. Wind power has steadily grown in the U.S. but setting up a "wind farm" is such a capital intensive operation that an insufficient number are set up. Also, there were originally problems with the blades cutting down flocks of birds, but the blades now turn slow enough that this isn't a problem. Another benefit of wind power is that once the "farm" is set up, there are really no additional costs. Wind power isn't popular though, because there is no one to lobby for it like there is for ethanol. President Bush is going to promote ethanol because that's where the money is.

Another option is nuclear energy. France actually gets something like 70% of its energy from nuclear sources. My main point though, is that there are other means than ethanol to look into.

The second hindrance for long term growth is the U.S.'s high corporate tax rate. The U.S. corporate income tax rate is 34%, and is the highest among OECD countries. As a reference, in Ireland the corporate income tax rate is 12.5% and since Ireland lowered their corporate income tax rate, they have seen an incredible surge in their economy. You may have heard the term "Celtic Tiger" to describe Ireland's economy. As American's it is natural to be concerned with the exodous of U.S. corporations to other countries, but we must ask ourselves why is this happening. Part of the answer is cheap labor abroad, but part of the answer is that the tax situation in other countries is much more friendly. Many Asian economies have areas that are no tax zones, so that a U.S. corporation could move there are pay no corporate income tax. It's then not hard to see why it is tempting for U.S. corporations to move off-shore.

Corporations have to compete, and the fact is that not all corporations are as successful as Microsoft. Many struggle to be viable, and those that are viable have to maintain healthy profits to satisfy shareholders. We can make it less attractive for marginal corporations to move off-shore if we lower the corporate income tax rate. It is not Microsoft that we are worried about moving its headquarters to Thailand. Companies like this can afford to pay the high rate. In fact, they probably prefer the high rate because it drives out marginal competitors. So, its not like you are really socking it to the Wall-Street fat cats by having a high corporate income tax. You are socking it to the marginal corporation operating in an ordinary American city.

Lastly, this is my problem with the minimum wage. You are not hurting Microsoft with a high minimum wage. But you are hurting your local coffee shop or sandwich shop. These businesses that are on the margin of surviving are the ones that are hurt and are the ones that will either have to lay people off or go out of business. If they can't lay off people, then they have to raise their prices, which is what happened to many shops in Tucson after the recent minimum wage increase. I think there is a common misperception that just because you have a business you must be doing well and can afford to have money taken away from you, but this is just not the case for the vast majority of businesses in the U.S. I recently talked with a local coffee shop owner who said her business was already struggling and with a new increase in the Arizona minimum wage was really worried about her shop. She did say she was for the increase, but that it did hurt her business. I only bring this up, because John Edwards wanted to raise the minimum wage even way higher to like $11.15. Well, this may make sense in Seattle, but what do you think this is going to do in West Virginia. I guarantee you it would hurt employment. And who do you think is going to have a hard time finding a job? Well-educated people? No, poor, uneducated people are hurt the most be the minimum wage, because their jobs are the first to go. Some people end up winners-those that can keep their jobs, but some end up losers because they can't get a job at that high of a wage rate.

If you made it this far congratulations. I hope I didn't bore you too much and feel free to criticize me all you want. Like I said, I am not an expert on the subject, but do have an opinion. I could very well be wrong on a number of things, but the alternative energy and corporate tax thing I am pretty passionate about.

Steve


Oh, and my last two points were going to be the educational system in the United States and the amount of visas given out to educated foreigners. I think its silly to restrict these visas, as we have. I think our primary and secondary educational systems are broken. But I am not one to believe in some national fix. I think it's each state's responsibility to invest heavily in education and to try to innovate. By not nationalizing education, hopefully we promote innovation, where different states try different things and we can learn from the successes and failures in order to grow.

28 comments:

Jenny Hawkins said...

whoa, cowboy.

unclejim said...

Well done. For the most part I agree with what you say. Unfirtunately, I think we have a few other problems.

One of the ramifications of a weak dollar is that what we produce is now cheaper in other countries, as you pointed out. This is a good thing when it comes to iPods or computers. It is a very bad thing when it comes to corn. I have bought mass quantities of corn during most of my professional life. Over the past 15 years, one of the biggest influences on the price of corn has been China.

This year, we have the double whammy of a weak dollar and the fact that we are putting corn into gas tanks. Bigest we planted the largest corn crop in our history, we will sneak by this year, albeit with corn prices that right now are about $5 per bushel. For a point of reference, a couple years ago, that price was around $2.50. We use about 200,000 bushels of corn per month. And we are not alone. Beef, pork, dairy and chicken producers use a commensurate amount. The result, higher food costs. But the situation is about to get worse. Next year's crop, which is not in the ground yet, will not be enough. Period. For various agricultural reasons that I won't go into, what was a 13+ billion bushel crop this year, will be a best about a 12.3 bushel crop. It won't be enough. The ethanol plants will either have to go silent or there won't be enough corn to go around. And it will be very cheap for China to be a net importer of corn again.

The effect will be inflationary pressure on the dollar (remember Steven's definition). What is the government's normal reponse to inflation? Tighening the money supply. What is the worst thing to do during a recession, tighten the money supply. Hmmm. What is the Fed to do?

The negative backlash of the sub-prime debacle is that the credit markets have pulled back credit. As Steven pointed out, if we are to come out of this recession and if it is to be a mild one, we need to encourage small businesses. But a lack of access to credit will hinder that growth. Every path out of a recession has been on the back of small business. But our financial institutions and the secondary and tertiary credit markets have lost so much money, that they approaching new requests for credit extremely cautiosly. More than the corporate interest rate, this is going to slow down our recovery.

One more thing. The crack down on the immigrant laborer is also having a deleterious affect on the economy, especially in Arizona. Crop farmers are cutting back their current plantings strictly from the fear that they will not have the labor to harvest them. On top of that, do the math. You had around 500,000 Mexican immigrant workers in Arizona. Even at an average annual wage of slightly more than minimum wage, they contributed greatly to our local economy. Let's hope Janet can get a test expansion of the H2A program here before its too late.

My recommendations. One, do away with the ethanol program. As Steven has pointed out, it was a flawed program from the onset. Unfortunately, there has been way too much invested capital by some very powerful industires for that to happen. But we need to cut back and most certainly, we cannot expand the program. As it is there is little chance we can reach the target by 2012. Let's not expand the requirement.

We need to scrap the stimulus givaway and we need to quit lowering the Fed discount rate. There is a danger of inflation as it is. We cannot fuel the fire and the continued drops have had no affect on anything other than Wall Street. We need a stimulus program that encourages investment in small businesses. I don't agree with Steven that the tax rate is that important. What they need is access to capital.

I have probably dropped the rest of your readers, Steven.

Danny King said...

Its everything that I thought it would be and more...

A. Smith

Unknown said...

Are you turning liberal? Thanks for including secondary education reform, something that I can follow. No national program will turn around secondary schools.

When's the mirco economics post? There must be some way to pull this all off into a dissertation? I was just about to suggest something about taco trucks and public schools, and decided not to as I have yet to take an ECON course.

Unknown said...

I'm not an economist but I play one on TV.

Why not remove the tariffs on imported sugar cane to help take the pressure off the price of corn? It is several times more efficient to make ethanol from cane.

As it stands, corn based ethanol for your car does not improve the fossil fuel problem.

Nuclear is great from a carbon emission standpoint but what about the fish with three eyes in Springfield? Would anyone build a plant if they had to take the full responsibility for waste storage and disposal? I don't think their ROI presentation would be quite so attractive if we removed the subsidies.

I agree with Uncle Jim. Scrap the refund. The economy is slowing down because of a credit crunch because people "over-borrowed". What is the politician's solution? Borrow!!! The most recent federal budget weighed in at over three trillion dollars. The refund package is not included. I doubt that the stimulus package will be balanced by a corresponding spending cut.

Adrian said...

To me it's amazing you find the resources to write all these This is a blog that's supposed to be positive so I will refrain from dumping my pessimism about the prospects of US economy. Suffice to say I am in the same boat with Nouriel Roubini from NYU. If you guys check his blog you can get as much negativity as possible. Steve, I don't recommend you that blog for now.
So I will continue, since you touched on the corn thing, with some words of a farmer from Kentucky:

The peace of wild things
Wendell Berry

When despair for the world grows in me
and I wake in the night at the least sound
in fear of what my life and my children's lives may be,
I go and lie down where the wood drake
rests in his beauty on the water, and the great heron feeds.
I come into the peace of wild things
who do not tax their lives with forethought
of grief. I come into the presence of still water.
And I feel above me the day-blind stars
waiting with their light. For a time
I rest in the grace of the world, and am free.

You are in my thoughts. Hope the week will go quickly.

breanne demore said...

wow! i officially learned more in this one post than i do in two weeks of school. and the great thing was that i was fully able to pay attention during the whole thing! Thank you very much steve, now i will actually feel like i know what my history class is talking about when they discuss this. This must have been really hard work, but i for one aprreciate it! Stay strong!

Unknown said...

Wow Steven, what a post. Jim, you nearly did run me off with all that corn talk, but I suppose one man’s healthcare is another man’s corn… This economist wannabee couldn’t resist commenting.

I do agree with your comment that enough talk about a recession could lead to a recession. However, I recall that real GDP in Q4 2007 was something like .6%. That’s hardly expansionary in my estimation. I have read several articles that suggest that the fed funds rate will decline to about 1% by the end of 2008, early 2009, which suggests that the feds will be trying their best to stimulate this economy. One of the things I’ve learned in healthcare over the years is that our business tends to be a leading indicator of the economy. In 2007, we saw a significant decline in primary care visits in our owned physician practices. Why? Because consumers will not spend on healthcare given other needs. We also saw a significant decline in our elective outpatient procedures, while our emergency and inpatient volume was increasing. While I’m not ready to predict a recession, I do believe that our economy is in trouble.

So, what impact will the feds lowering rates have on the economy? For starters, most short term investment rates will decline. Just check the slide in CD and money market rates the last couple of months. Anyone on a fixed income will feel the pinch. Just ask Maw Maw how her investments are doing and I bet you will get an earful.

The other rather insidious impact of lowering the feds funds rate is that other rates will likely decline. And what is tied to money indices? That’s right, can anyone say variable rate mortgages? Yikes, I bet that all the lenders will be gun shy and very selective about offering variable rate mortgages, so the drop in rates may not have the desired effect on mortgage lending. We have had a flat to inverted yield curve over the last several years, so the long end (30 year mortgages) of the curve may not drop as rapidly as the short end of the curve (1 to 5 year mortgages). In addition, some economists are predicting another 25% drop in housing prices with the bottom hitting in 2010. Housing inflation created much of the increase in wealth from 2000 – 2005. Price declines will be a blow to overall wealth and inhibit spending, at least in the short term.

I agree with you about the corporate tax rate. One of the dilemmas about lowering the tax rate is the assumption that there will be enough business expansion to cover the tax shortfall caused by decreasing the marginal tax rate. Not an easy call for politicians. Talking about taxes, did you know that personal income taxes were introduced to cover the civil war and the government levied a 3% tax on incomes above $800, rising to 5% for incomes above $10,000? Rates were raised in 1864, but repealed in 1872. Boy have we come a long way…

I also agree with your assessment about the minimum wage. Let economic forces drive wages. That should be enough fuel to keep the responses flowing!!

Adrian said...

I forgot: the big photo from the desert is superb!

Unknown said...

Hi Baby,
I sure hope you had a better weekend. I woke up this morning and immediately (after getting my java) looked on your blog to see if you wrote something new, and you hadn't....so I immediately thought you were having a bad weekend.

Then I checked tonight and I was surprised to see how much you wrote-so I assumed that you must be OK...I can't imagine feeling bad, and putting your thoughts together and typing away on such a difficult topic. I did read everything you and Jim wrote, then looked at David, and said that I needed to read more (or at least different types of books) take a few classes, because there were some things my feeble brain could not comprehend. So David responded for us. Yipee, a new blogger!

It's midnight and my eyes are drooping. We sure missed mama Jean and Jenny at the shower last night. I think we took a picture of Mary Beth opening Jenny's and Jean's presents. There weren't many items that were passed around, but Jenny's did.It was very cute and also very useful in a fun way. I thank mama Jean and Jenny, for taking time out of their insanely busy schedules to shop for the baby, and then make arrangements to get the gifts to Phoenix.

The picture we did not take was of me doing two shots (one for Jenny and the other for Jean). Well Aunt Mary has the biggest shot glasses I've have ever seen. The next problem was that Mary didn't have any tequila, so she poured straight vodka...I don't think I will be drinkingpogbazwp for awhile.

Well I am so proud that I have such a smart nephew, who in turn has a smart girlfriend.

I'm blowing kisses your way, and praying this week will go quickly
and better than last! Love to you whole family!

I'll love you forever....

Love,
Aunt Lynnie

Aunt Mary said...

Steve,
After reading your entry this morning, I thought about calling in Collin Blattener, the little tool, to show him what he may have learned. Very impressive. sweetie. Linds and I just had one question.......Is the price of True Religion jeans going to go up or down in the coming months....and Danny is wondering the same thing about bacon......

Jenny Hawkins said...

Mary,

True Religion jeans and bacon are imperfect substitutes, since very few of us can consume them jointly -- you wear one or the other. Thus, their prices should follow each other. If price of bacon decreases, fewer will fit into TR jeans, so demand should decrease, thus decreasing prices. I'd say the pork market is the best indicator for True Religion prices.

Speaking of consuming pork and True Religion jeans simultaneously, the lovely Gisele could classify them as complementary goods. She also has taken a strong stance on the weakening dollar -- she won't accept the USD for payment ("Gisele Dumps Ben"). That's gotta be a blow to the US economy.

Mary said...

Jen...This is the type of economics I can comprehend...thank you for bringing it down to my level!

Thinking of you and Steve often...wishing you all the best!

Love,

Mary G.

Aunt Mary said...

Jen,
Thanks for that outstanding clarification. Now bring on the BLT'S....

Love you!

Greg said...

Steven -
I did start to read your posting, but Jen took the words right out of my mouth, "Whoa, cowboy" - although for me, it had a very different meaning. I also glanced at the comments of the others, but it all reminded me of my abbreviated attempt at Stephen Hawking's book (also supposedly dumbed down for the masses)- it's all above my pay rank. Some sleepless night I'll take another crack at it.
Beginning of another week. Hope it's a good one for you, Moke. Love, Greg

Unknown said...

Moke: Pretty dense material for a Monday afternoon. Very interesting though, at least the parts I could understand. My take -- we need to be looking at the bigger picture of inflation instead of scaring ourselves into a recession.

Point being, if the Fed continues to lower interest rates, isn't that a precursor to inflation? If so, when does the Fed have to say to itself, "how much more can we cut interest rates before the effects get to be inflationary?" Correct me (Moke/Jim/David) if I'm wrong, but cutting interest rates at the pace the Fed has in the last few months correlates to a weaker currency down the road. And with that, continous unemployment, decline in foreign investments, etc. Instead of a recession, we'll be hearing of a depression.
Jim hit on the inflation point, and I agree that the Fed is in a bind. But, as Moke suggests, if the impending recession is going to be mild and short-lived, why take precautions (i.e, like continuously lowering interest rates) that will presumably create a bigger, more complex problem? Steve? Buellar? Buellar?

Btw, I heard on NPR last week that Zimbabwe, the country with the world's highest inflation (150,000 %), printed a ten million dollar bill.

Unknown said...

I forgot to mention the cheesy stuff like I'm thinking of you constantly...and that I can't wait to be on the beach with you, Poder, Ted, Wack, and Dan playing some otl. All my thoughts.

edward said...

Steve,

Very interesting observations, many of which I was surprised to find that at least in part, I agreed with. O.K. We, have Jim in Agriculture and David in Health Care. The only area I find myself with any shred of credibility is as a traveler and as someone fairly well informed about the current political atmosphere.
You alluded to the fact that the "weak dollar" shouldn't affect us as long as we spend them inside the country. Well, I don't want to do that. I'd like to go back to Europe, but the prospect of a $11 dollar pint of Guinness is a bit harrowing. On a more abstract level, the inability for us financially to travel outside North America as individuals is going to make us more isolationist as a nation. This is something I don't think we really need given global political circumstances. "No man is an island" but the current administration is working very hard to make sure that an entire nation can be.
As we've discussed before, Steve, it's disgusting how much stock people put in the Executive Branch's ability to steer fiscal policy. OPEC, China,the EU and other entities increasingly (and not necessarily regrettably)are becoming bigger player, even when it comes to the price you pay for something as simple as a Snickers bar.
The talk of the "recession" and how they [politicians] are going to "fix the problems" is like someone saying the're going to stop an oncoming runaway freight train by throwing a marble at it. Americans are simply too short-sighted to see that not Barack Obama, Not Hillary, Not McCain, not anybody can solve the problem of a potential recession.
Is the recession a self-fulfilling prophecy? Are people going to stop spending because of the fear tactics of politicians and the media? Maybe. But let's be fair. The Economist did have a cover of a diving line on a graph (meant, I assume, to signify growth in a nose dive) with the accompanying "It's Rough Out There" quote (Jan. 26th to feb. 1st.). It's not just Michael Moore and Newsweek. I think the issue is all about personal interpretation. Think about the idea you alluded to that implied that fear is that which the economy has to fear. How many of us have let the news of the last month prompt us to spend more (or less), drive less, buy local, adjust travel plans or make any real changes to our lifestyles?
I truly think it takes a longer time than most people might think to allow changing realities in the market to change the way we live our lives. Concerned about the price of gas? Don't write your politician, ride your bike. Concerned about the high cost of using of corn as a source of energy because of our trade deficit with China to curb our dependence on foreign oil? Dont' boycott Chinese imports,become a vegetarian (it takes about 10 lbs of corn produce one Outback's steak) . Concerned about the price of a baguette in Paris? Well, I guess I'm screwed there. The point is, our vote for who we want to run our country is not the most important way we can change our country and the world. It is in the choices we make as individual consumers. Namely, the choice to consume less and simplify our lives.
O.K., Steve, I'm done now. I'm gonna go stick a "save the whales" sticker on my VW, throw on my birkenstocks (with socks), down some granola and hug a tree...and figure out how the hell I'm ever going to afford to visit Switzerland.

beannotsotiny said...

Oh, how I miss you! So much of you came out in this piece. I wish we could aimlessly drive the back roads of CT to discuss the state of the US economic affairs further.

We employ over 800+ minimum wage earners. We have had state mandated hourly wage increases in CT and MA. We were forced to accept living wage initiatives in Vermont, and we are still in business and growing. I am not taking sides on an issue but merely giving one employer's facts.

As long as there exists a level playing field, domestically and internationally, jobs numbers should feel very little affect with mandated minimums.

Employee health insurance is a prime example of the affect of uneven playing fields. Most businesses are not experts in the field of in insurance. With the burden of employee health insurance belonging to the employer, employers have to become educated in an industry which has no bearing on their own. Let all employers pay the same amount for employee health insurance and then let us move on.

Level playing fields are what it is all about.

I am ussually not so public with my thoughts, a combination of your father and Jim. Something I read in your blog today, made me want to be with you.

Thanks for the Blog!

The Chadds said...

Wow. I read this on Sunday night and it took me until tonight to comment, mostly because I am speechless. I am thrilled by this blog. Not because I understand it, not because I have a heart for economics, but because if this is any measure of the energy you have left to beat this cancer, we no longer need to be concerned! All of the talk about the weak dollar also brought up some highschool memories of all of you guys trying to bribe cashiers with the almighty "George Washington." "Are you sure you don't have seats left for the 7:15 movie? Because George Washington says you do!"

Mary Driscoll King said...

I too would like to thank Mary N, Lindsey, Mary G., and Jen for clarifying this post for me. While I did read everyword (more because I could not believe you found the energy to be so passionate than because I understood) all was clarified by Jen in her post. I hope this week is good to you. We love you so.

Mary D.

Diane said...

Hi Steve, That certainly was a very thoughtful analysis! Hayak, Walter Williams, Thomas Sowell etc. would be very proud of you. I took it home with me last night to digest it. Too few Americans know anything about economics. Such ignorance can be very, very costly. I do so hope that when you are finished with all of your treatments and are feeling better that you can send us yet another blog on the economy. In the meantime, I hope that you are feeling a lot better. May you soon be able to eat and discourse on economics to your hearts content. I love you very much and continue to pray for you every day. May God strengthen and heal you. Love, Aunt Diane.

annabelle said...

Hey Steven,
I don't know why you and David can't admit we ARE in a recession. On NPR yesterday they said "61% of the population think we are in a recession as do MOST ECONOMISTS.Now, I agree with Brian's blog. I don't know you but you're right. Jim you are right about the Fed's lowering the interest. I say this for selfish reasons as David remarked. I agree whole heartedly with Bean's assessment of the minimum wage problem (or lack of)and Ted's blog mentioning OPEC< China and Eu being bigger players. Aren't they the loaners and we the borrowers now? Sad. As for the economy as a whole, it stinks. I paid $1.00 for one white onion, a dollar for one bell pepper and a dollar for one navel orange. Thankfully I can afford it, pity the ones that can't. I know I'm not in your class as far as understanding ecconomics but I do have one advantage....I have lived longer than any of you guys.

unclejim said...

A know the technical definition of a recession is two consecutive quarters with negative growth and so we are not in one technically. But I agree with Mooch in that in a lay person's view, a recession is when all the economic factors are negative and we are certainly at that point now. She also makes my corn argument better than I. It appears on the surface that corn prices play a bigger part in my life than in the rest of yours. But my point was that right now, they are playing a huge point in everyone's life. The cost of food is skyrocketing, as Maw-Maw pointed out. And it is going to get much worse before it gets better. And what excerbates this whole mess is that living costs are rising as unemployment rises. This makes the standard reaction to either one difficult because they are opposite in nature. And in this case, the price of food is tied directly to the price of fuel. The two things we all need are increasing. Throw in water, as the ethanol project uses mass quantities of that also, and you are left with even a bigger mess.

I think the commonlaw definition of a recession is probably more valid now than the economic definition. We have so many negative factors. Construction is almost non-existant. The decrease in the commercial market lagged behind the residential, but it is now tanked also. Tom has told me the percentage of local governments, cities and towns, that relied on the construction industry were huge. So, the government is out of money. With construction comes all of the subsidiary industries, banks, mortage companies, title companies, Home Depot, carpettime. What is left to pull us out?

Steven is right that the only thing that has ever brought us back is small businesses. But if they cannot get capital for expansion, then they too are stagnant. Instead of handing out checks to everyone, the Government should have guaranteed small business capital needs. This would generate jobs.

I don't agree that this recession will be short or mild.

Anonymous said...

It is dissapointing that recess is so awesome and recessions are not.

AJ said...

Steve I found your thoughts to be well thought out and full of several valid points. I could not agree with you more about the min. wage increase and the ramifications of establishing a price floor and the subsequent excess supply of workers. Beyond the higher unemployment rate, it will often lead firms to decrease the quantity of nonmonetary benefits such as safe work environments and on the job training due to the deadweight loss.

Your comments on alternative energy and the eventual increase of commodity prices, sounds as though you were describing our current problems with oil. Just as oil prices have spiked upwards and we are left with no alternatives it seems as though we would eventually create a similar situation, substituting corn or sugar.

The one group that I think you let off the hook were all of the banks on the street. Even though the process was initiated through the lenders, there is no way that anyone could have looked at this style of debt, especially the sub-prime debt, and felt as though this was a suitable investment. Which has led us into a sticky situation, one in which it the Fed has to create liquidity, but at what cost?, seen as how inflation has begun to pickup steam agian. Luckily much smarter people, like yourself, can sort this out.

The topic regarding the stimulus package seems to be no more than pandering to the public, in a sense a way for politicians to say "look at how much we care."

Alright Steve I'm going to get out on my recent trip to Boise. To help create a visual for you think of "Tommy Boy," during the sales pitch when he is demonstrating the brake pads and smashes the model cars. Upon arrival the weather was 40 at midnight, my thought was I'm going to catch a break, as Lee Corso says "not so fast my friend." What followed was a snow storm for the next 72 hours. Luckily Hertz provided me with a 2 wheel drive vehicle and a pat on the back, neither of which came in handy. So I'm driving along, begin to think Tommy Boy, driving along and I see a detour sign up ahead (side note: I have grown accustomed to streets being encompassed by sidewalks and curbs). So, I decided to make the logical decision (philosophy major at work) "U-turn." However the roads, now on hour 40 of the ice storm, were a little slick, so as I went to make my turn the only thing I could think of as I was spinning is "I can't stop!" Or so I thought thank god for that ditch, not curb, which brought me to sudden stop. 45 minutes a tow truck pulls up tows me out and the new guy was in the corner puking his guts out.

Steve hope all is well,

AJ

Unknown said...

Steve,

Enjoyed your post! I have studied two years in B-School just so I could understand it - money well spent! A few thoughts (is anyone still following this, though?)

- I'd love you sometime go talk about the differences between consumption, investing, and saving. Saving is, obviously, putting money in a bank or security (like a bond or something). And people (especially republicans) think consumption and investing is the same (ricardian econ, i believe?). But they're not. Consumption is buying $150 True Religion jeans. (Sorry Novak ladies - they look great, but it ain't doing nothing for the economy). Investment is backing your friend who is starting up a restaurant. US proportions of consumption vs. investment vs. saving are WAY out of whack with our international peers. In case you couldn't guess, we're pretty consumption heavy, they're pretty savings heavy. Then when we (or some idiot) thinks we need to build some more bombs, we have to borrow money from singapore to do it. And yes, strong/weak dollar values can sometimes make this really painful. My advice to anyone wanting to do their part: stop spending money, and if you are spending it - spend it on an investment, not new shoes. (Note: Do as I say, but not as I do on that one...)

Next, to address Steve's dissatisfaction with US automakers: allow me to be the stinker who drops this bomb on the Manos clan: unions are indeed crippling Detroit, and the government is making sure they stay that way.

Will all the accountants, red and blue alike, please stand up and read the balance sheets of the Big 3 and pay specific attention to pension liabilities? Shame on the companies themselves for making such deals with these people, but you gotta feel for them. Not only are they shelling out money for pensions, but now that people are living so long these liabilities are ballooning to the moon. The unions also try to run the actual business itself!

Don't believe me? Watch GMC sell it's commercial truck division to International (Harvester) this year. Less competition in all already slim industry lessens the need for product leadership and innovation for firms to create competitive advantage. How is this the union's fault? You tell me how it's not when the company had paying customers lining up (don't tell anyone, we're supposed to be in a recession!) to go away because it couldn't increase capacity because the union wouldn't allow the plant in Flint, MI to bring on more workers for a second shift.

Shutting down a much-needed sale and then influencing the fire sale of an entire division is not what I like to see unions getting their hands in. But don't take my word for it; look at unemployment rates abroad. they will correlate with union membership. Wage floors and employment guarantees are great... for doing hurting the same people they're supposed to help.

I've said it before and I'll say it again: Unions are like political parties in that they purport to serve one group... but the only thing they serve are themselves.

As for the automakers and government and innovation, Bill and Edsel Ford told me (personally!!!!!) that the reason Ford is such a stinker on cleaner drivetrains is because at the scale they have to invest to bring a product to market (hundreds of millions), they felt they had to adopt a strategy of keeping one toe in every swimming pool: bio-diesel, Plug-in Hybrid (PHEV), battery electric (BEV), regular hybrid. Why this strategy? Because they thought the laws that will one day mandate their behavior are voted on by headline-savvy politicians (read: Hillary) that simply want to make a name for themselves - and there's no guarantee that the headline-producing solution will be the right one. So they took a wait-and-see strategy because going headlong into one of them (a la toyota) seemed too risky at the time - they're not exactly flush with cash, remember? It obviously didn't pan out, but it wasn't because they didn't want to innovate: they did, but they were hamstrung! And there's STILL no decision from the politicians, and Ford still has invested millions into each of the above technologies waiting to learn of their fate. And to preempt comments about"getting in on the front side", it's hard to get in on the front side when every time you go to congress you are asked to give away costly and competitive knowledge to your competitor and then bbq'd in front of the committee just for good measure. Bill Ford is one of the "greenest" people I've ever met.

The real story on Ford's committment to their national community? Google "ford 3 wet paint" or wait for reporters NOT to do a story on the plug-in hybrid F500 heavy duty trucks that Ford and U-Haul will be putting into service in So Cal (these trucks will put electricity BACK into the grid at night).

Are the big 3 fat and bloated? sure - but there are plenty of companies like that don't have unions or tough regulation that are lauded by media and are doing quite nicely for themselves.

OK, enough finger pointing. Focus on saving and Just feed the pig, ok? Keep fighting the good fight!

Stu

Mike said...

I was watching The Closing Bell on CNBC today on my lunch break and they had the president of Tyson Foods on the show. They had just reported a Q1 loss, compared to I believe a $40B gain in Q1 2007. He said it is mostly due to everyone pushing for ethanol fuel from corn. He said that 30% of the corn produced in the US has gone to ethanol which has drastically increased the price of corn that they use in their feed for the chicken, cows, pigs etc and as such consumers should start to expect drastic increases in food costs.

So looks like you hit the nail on the head with that one.

Hope your doing well.

-Oaf