A China Perspective

http://www.nytimes.com/2011/08/25/world/asia/25china.html?nl=todaysheadlines&emc=tha22

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"The joy is in creating, not maintaining." (Vince Lombardi)

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A brief note here to say that Steve Jobs is someone that historians will look back on with the same perspective as Henry Ford and Thomas Edison. In spite of his illness, his creativity continued to produce products that benefited us all. My quote for this post was chosen as much for "who" said it as it was for the point it made.

On to China. Today's NY Times has an excellent article on the study published 8/17 by the Eurasia Group on China's new 5 year plan. You can click on the article link provided to read the study.

Its overall conclusion was that Beijing might meet some of the plan goals but "... ultimately, the country's leaders lack the political stomach and sense of the moment to implement a comprehensive and ambitious rebalancing agenda."

It's an interesting dichotomy to read the report and see that China's leaders have defined the problem and are taking steps but knowledgeable observers don't think the plan, or the resolve to implement it, will work.

China has incentives to change it's macroeconomic model: it's economic policies contribute to wasted resources, vast social inequality and a soaring inflation which leaders fear will fuel social instability. So, what are they doing about it? They're putting out a new 5 year plan that says they need to rely less on exports. So, what happened to the $586 billion in stimulus money they spent in 2008? Well, at the same time, they loosened lending by state banks which lent to local governments that borrowed heavily: a rough estimate from Victor Shih at Northwestern University puts the upper end of that debt at $3.1 trillion, or half of China's GDP in 2010. Again "so," while the $586 billion was being spent on roads, trains and entire cities that are not yet occupied, "loans" were given to economic entities with the potential not to perform on those loans.

Thus, overall, there would appear to be a shaky economic model on which the new 5 year plan is based.

Yao Yang, an economist at Peking University interviewed by the Times, said Chinese leaders knew that the domestic economy put too much money in the hands of corporations and the government. Again, so they knew that was wrong but felt they had no choice. Later in that same interview, Mr. Yao said that the aging of China's 1.3 billion people, and the dwindling of its young, cheap labor, "... naturally means more domestic consumption and less exports, therefor going towards a more balanced economy."

This is one way to look at a demographic time bomb. Another would be that China's economy will tank because of an aging population and there is nothing they can do about it.

The Eurasia Group has done an excellent analysis of China's situation but a future economy built on non-performing loans and building empty cities doesn't look like real GDP growth to me.

At whatever point China's economy reaches "stall speed," we'll watch unemployment take off and then what?

Our Future Leaders

http://www.nytimes.com/2011/08/06/opinion/the-decade-of-lost-children.html?emc=eta1

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"Every child is an artist. The problem is how to remain an artist once he grows up." (Pablo Picasso)

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Last Friday, Charles M. Blow opined in the NY Times that one of the greatest casualties of the Great Recession may well be a decade of lost children. He summarized a report issued last month by the Children's Defense Fund that indicated the impact of the recession on children's well-being has been catastrophic ("The State of America's Children 2011").

The highlights:

* The number of children living in poverty has increased by 4 million since 2000, and the number of children that have fallen into poverty between 2008 and 2009 was the largest single-year increase ever recorded.
* The number of homeless children in public schools increased 41% between the 2006-7 and 2008-9 school years.
* In 2009, an average of 15.6 million children received food stamps monthly, a 65% increase over 10 years.
* A majority of children in all racial groups and 79% or more of black and Hispanic children in public schools cannot read or do math at grade level in fourth, eighth or 12th grades.
* The annual cost of center-based child care for a 4-year-old is more than the annual in-state tuition at a public four-year college in 33 states and the District of Columbia.

Blow's fear was/is that this situation implies a negative future for U.S. economic growth and our place on the world stage. He sees the state budget cuts that are ongoing as undercutting a U.S. economic recovery and undermining efforts to create jobs over the next year.

How can we argue with that?

From a business point of view, where do we get the best employees for tomorrow. We've spent 10 years and how much money in Afghanistan? This century started with a U.S. government surplus, not a deficit.

Spending some money on infrastructure (including schools) will, as any economist will attest, provide a multiple of cash into the community creating jobs and lessening poverty.

I, personally, don't want to see a single child here go hungry or without an education.

Economic Incompetence

http://www.nytimes.com/2011/08/05/business/economy/double-dip-recession-may-be-returning.html?emc=eta1

http://www.nytimes.com/2011/08/05/opinion/the-wrong-worries.html?emc=eta1

http://www.nytimes.com/2011/08/08/business/a-second-recession-could-be-much-worse-than-the-first.html?emc=eta1

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"The difficulty lies not so much in developing new ideas as in escaping from the old ones." (John Maynard Keynes)

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I think I've developed a new term "Economic Incompetence." Hence, the title of this post. The term refers to the combined total of actions taken by the powers that be (government regulators, congress, etc.) since the economic downturn (recession) was declared "retroactively" as having started in December of 2007. The retroactive aspect of it involves the center of all economic thought declaring (I forget the name of the non-partisan agency that declares such things) two quarters into the Great Recession that we were in a recession because economists define recessions as two consecutive quarters of negative economic growth (GDP growth in minus numbers). This, of course, cannot be measured until it's happened - then it is fact. Imagine if you were running a business and you waited for official retroactive confirmation of a recession - what would you do with all those cars you produced that nobody's going to buy?

Somewhere along the line, those same "gurus" declared a "recovery" in June of 2009. Many of us who follow "jobs" didn't see the recovery as declarable: jobs are, and always have been, a lagging indicator. And jobs were reflected in unemployment statistics that were in the 9% plus (standard measurements) to 17% plus (BLS U6 unemployment rate which includes those who have given up) area. Perhaps the gurus saw all time record corporate profits as a positive sign. Unfortunately, those profits were not being turned into capital spending (except in areas that would improve productivity - like enhanced software that would delay or eliminate the need to hire people back) here in the U.S.

Paul Krugman's post last week, just after the Dow dropped 500 points (attached), pointed out that, considering one crucial measure, the ratio of employment to population, we were nowhere:

June 2007 - 63% of adults were employed

June 2009 - 59.4% of adults were employed

June 2011 - 58.2% of adults were employed

Krugman's perspective on this is that we're facing a "terrible reality:" not only are vast numbers of Americans unemployed or underemployed, but for the first time since the Great Depression, many American workers are facing the prospect of very-long-term - maybe permanent - unemployment.

As Floyd Norris pointed out on the same day (attached), if this is the beginning of a new double dip, it will have two things in common with the dual recessions of 1980 and 1981-82: in each case the first recession was caused in large part by a sudden withdrawal of credit from the economy. And, in each case, the second recession began at a time when the usual government policies to fight economic weakness were deemed unavailable. Then, the need to fight inflation ruled out an easier monetary policy. Now, the perceived need to reduce government spending rules out a more accommodating fiscal policy.

Catherine Rampell, of the NY Times "ECONOMIX" blog, has chimed in today (attached) with Krugman and Norris, to point out that in the four years since the recession began, the civilian working age population has grown by about 3%. Given a healthy economy, she estimates that jobs would have grown by about the same amount - instead, the number of jobs has shrunk. Today the economy has 5% fewer jobs - or 6.8 million - than it had before the last recession began: the unemployment rate was 5% then, compared with 9.1% today.

Fareed Zakaria has a somewhat simpler (and easier for me to remember) way of putting this: The U.S. GDP is no larger than it was in December of 2007 but there are 10 million less jobs.

As Rampell puts it, with construction nearly nonexistent and home prices down 24% since December 2007, the country does not have a buffer of housing to fall back on. She goes on to point out that economists refer to the difference between where the economy is and where it could be if it met its economic potential as the "output gap." Menzie Chinn (an economics professor at the University of Wisconsin) has estimated that the economy was about 7% smaller than its potential at the beginning of this year.

Given all of the above, it's difficult to envision a way out of what was described last week as an economy growing at "stall speed" (I think that was 1.8%). I'm not an economist but I have experienced the economy for a long time from the business side of things and I see a kind of collective incompetence which i referred to above as "Economic Incompetence" which has grown out of what I learned in grade school was the virtue of America's foundation: a pluralistic society where everyone was represented in government. The problem we have now (and, I hate to write about politics) is that we have "too many cooks" represented in government, all with their own ideas and all of them looking to gain something politically from outcomes. So, "compromise," which we're all taught is the civilized thing to do, doesn't work out well for the collective population (what better example is there than the "debt ceiling" debate?).

Here's an idea: throw some tax incentives at all those corporations sitting out there on all that "cash" to spend capital money here in the U.S. on infrastructure or infrastructure-related projects that are much needed. I think it was Mark Zandi (who is quoted by both Republicans and Democrats as knowing what he's talking about), chief economist for Moody's Analytics, who said in testimony before congress that infrastructure spending has the highest multiple for job creation.

My hope is that we will come out of this economic malaise soon but it doesn't look like it.

The Cost of Lisa Jackson

http://online.wsj.com/article/SB10001424052702303661904576453893688343246.html?mod=WSJ_Opinion_AboveLEFTTop

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"A strategy that doesn't take into account resources is doomed to failure." (John C. Maxwell)

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The Wall Street Journal Editorial Board sometimes comes up with a nice, concise approach to federal government agencies running amok. Today's article on the "EPA" does a wonderful job of emphasizing "JOBS." What a concept! Is it possible that the impact of a rule change on employment could begin to be a consideration now? The Train Act is evidently a beginning to the definition of real "costs" of rule changes or implementations.

The status quo is that the EPA can define almost anything as a benefit. But, as the WSJ points out about new EPA rules, "... the EPA rarely considers more tangible economic consequences, like its effects on employment, the price and reliability of energy, or the competitiveness of U.S. companies."

What I like about the WSJ perspective is this: if we have to shut some coal fired power plants down in Texas in the near future because of new EPA rules, and this causes unemployment, power interruptions and higher prices, maybe some of that expense can be included in the kinds of considerations present in the Train Act. Those are real costs. What is needed is some consideration on, for example, retraining those who maybe laid off (is that an expense or a cost that should be considered?). Does the pace of rule enforcement correlate with the pace of unemployment and the possibility of re-employment?

I'll close with the ending quote from the article: "In a recent Joan of Arc interview with the New York Times, Ms. Jackson said that 'The only thing worse than no EPA is an EPA that exists and doesn't do its job.' Try that one on people who don't have a job because of Ms. Jackson's grandiose views."

Deficits & Politics

http://www.nytimes.com/2011/08/01/opinion/the-president-surrenders-on-debt-ceiling.html?emc=eta1

http://online.wsj.com/article/SB10001424053111903554904576458413656841844.html?mod=googlenews_wsj

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"The one with the plan is the one with the power." (John C. Maxwell)

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I always find myself amazed at the selfishness of politicians attacking a major economic problem with sound bites that they feel will give them an advantage.

This blog is not about politics and I try to stay away from that but still ...

Today I've attached Krugman on what's happened and where we're going: "banana republic" anyone? As a companion piece, I've attached a very thoughtful article from a UCLA professor sent to me by one of my all time great former students. Professor Rumelt (the UCLA prof) opines that Krugman has it wrong when he says that government spending on WW II is the only thing that stopped the Great Depression. So, to Professor Rumelt, Krugman is wrong now by consistently pointing out that government spending shortfalls, where the economy could have been helped, are only going to be compounded now by "deficit cuts."

This is an interesting arguement and I'd never seen the figures that Rumelt quotes about WW II. But, whatever the numbers, it does appear that "full employment" (i.e. "Full Employment" = the dreaded 5% unemployed number representing the group that's "unemployable") was achieved by virtue of the fact that 95% of those employment-eligible were "employed" (active army and civilian support occupations, albeit at lower wage levels, were the "adder" to other civilian occupations to make up full employment).

OK. Back to today. We now have a government that, according to another one of my all time great students, spends $23 billion per year on "air conditioning" for our troops in Afghanistan (this according to "NPR"). First of all, our troops need whatever support they need wherever they are, but the $23 billion just makes the point that the U.S. has spent more money than it has on specious war efforts overseas - we don't need to "nation-build" in Afghanistan in order to track down and eliminate terrorists. And, because of the politics of the deficit situation, the troops over there are worried about getting their paychecks. This is ridiculous.

According to Krugman, we will probably have a depressed economy until 2013 (best case). Here, all reducing government spending does is depress the economy even further. So, we're extending a bleak economic situation by making it bleaker.

When Krugman calls something a "catastrophe on multiple levels," I tend to listen. I'm not sure that any of the players in the deficit reduction drama have a Nobel Prize in economics, so I'll go with Krugman's opinion of what's happening and where it's going.

What's next?