Is Santa Coming This Year?

With the end of 2010 upon us, we would like to think that Santa, or some other magical figure is going to come and spread a good economy on the country. Actually, despite the high levels of unemployment, we are probably in a good economy right now, at least the economy we are going to have to get used to.

Corporate profits are booming, consumers are starting to spend again, and those with marketable skills are actually in short supply. What we don't have is an economy that will put our manual labor workforce to work.

For much of our history, we had a great need for workers who might not possess much more than a willingness to work hard. Our manufacturing, mining, farming, construction and similar industries needed and utilized these workers, training them just enough to do the job that need to be done.

Well, those jobs while not completely gone are in short supply, considering the labor force we have available.

The replacement jobs are those in various service industries, but even those jobs are disappearing.

There are a lot of factors that contribute to this and barring some more bubbles in construction or some other industry, the number of workers needed is simply not going to absorb our unemployed. Companies are outsourcing or automating as many of these jobs as they can, especially since turning off a machine in slow times is a lot less painful than laying off workers.

I might be short sighted, but the future I see is simply going to continue this trend. If you fit into this category, and are over 45, you are facing a tough competitive job market. Retraining is often brought up, but let's be honest. Even if they have the temperament, they will be competing with younger workers who grew up in a world where interacting with machines and computers was second nature to them.

I do think the problem will most likely take care of itself in the future as these workers age more and leave the workforce, but they will create a tremendous drain on social services and other resources for years to come. Looking at our deficits and national debt, the country is ill prepared to support this group.

We need to put them to work rebuilding America. There are so many things we need that will help this country thrive. The Government can't be the employer of these people, but Government policies need to support the projects we need that will rebuild the country and employ our people. Clean energy credits for homeowners, incentives for cars that run on Natural Gas, yes, Government funded projects to rebuild highways, bridges, railways and airports that will prepare us for the future. Each of these needs to be truly beneficial, we don't need bridges to nowhere, but much of our infrastructure is old and needs to be repaired or replaced.

On the way into work the other day I was looking at the results of American labor from the last century. We as a country need to get the spirit of America back and do the work we need to do. It will pay for itself as employment increases and efficiency improves, making the country a better place to work, and live.

The Republican Party has managed to be the party of big deficits while pretending to be fiscally conservative. They accomplish this by attacking federal revenues and they complaining about spending. Of course they are also responsible for a tremendous increase in the spending on Defense and in turn demand that the Government cut spending on major social programs such as Social Security and Medicare.

Now, of course they don't stop their sleight of hand there. They maintain that they don't want to cut those particular programs but instead want to root out waste and abuse in the rest of the Government budget. Of course, in order to cut enough from the budget if you exclude Defense, Social Security, Medicare and Debt Payments, you almost have to eliminate the rest of the Government. The programs mentioned as well as other mandatory safety net programs account for about 80% of the total budget.

So, in some fictional world, we can reduce 20% of the budget enough to eliminate the deficit while not raising taxes. Of course no one who looks at the numbers realistically believe this is possible and I doubt very much that even the people who propose such a thing could possibly believe it, so we are faced with typical political disinformation in order to gain office and perhaps a future advantage.

By presenting an impossibility to the President, they hope to portray him as ineffectual because his liberal agenda prevents the country from addressing its problems. One would like to think that the country would be better served if all our elected officials actually focused on finding a real solution to our issues.

I guess that is my own unrealistic dream with no chance of actually happening.

Jobs and the Health Insurance Blues

The United States is faced with a lack of jobs for people who are willing to work but are no longer economically viable. Demand around the world is starting to pick up and there is increasing manufacturing activity in Asia and Europe. However, while we see a small increase in this country, it is probably pure fantasy to believe that we will create anywhere near enough jobs to reduce our unemployment rate significantly in a structural way.

There may very well be some spurts in employment if we see the housing market hear up again (not desirable) or if we get smart enough to use our tax dollars to rebuild the country's infrastructure. However these measures are not going to restore the private sector manufacturing jobs we are losing to overseas competitors unless we address the fundamental affordability problem.

If you hire someone in the United States you are generally expected to provide a benefit package that includes health insurance, especially if you are a large company. This makes the cost of health insurance an economic factor in the hiring decision. In our competitors, health insurance is provided by the Government and whether it is better or worse, cheaper or more expensive, becomes a non-factor in the hiring decision.

I recently was reviewing numbers related to health insurance costs for the upcoming year and we find costs approaching $10,000 a year or greater for family coverage. Even requiring employees to pick up 25% of the premium leaves a cost of approximately $7,500 to be borne by the employer. This is of course on top of the payroll tax for social security and any pension cost, but let's just consider the implications of that $7,500 cost to the hiring of lower level employees (the ones having the most trouble finding jobs).

Suppose you want to operate a manufacturing or service business and have a choice about where to locate your primary production facility. If you locate it in the United States, you have to pay a competitive salary, let's put the entry level at $20,000. At that rate the real cost to you is that amount plus the payroll tax of about 7% and the cost of health insurance as well as any other benefits you offer. Now, $7,500 increases that cost by 37.5%.

Now suppose you compare that to a location such as England, or China. The amount that you have to pay in salary will vary of course but a lot of that variation may be offset by the logistical problems of dealing with their tax structures and cultural differences. However, the cost of health insurance can easily change the dynamics of that analysis, in favor of locating that job elsewhere.

Currently we see a reaction to the inadequate health reform bill that actually failed to address this very problem via some misguided belief that a National Health Insurance plan would be less effective. Of course that is debatable, and certainly under a National plan, some could buy supplemental plans anyway but those who bought into the idea that such a plan was anti-capitalist or socialist, are creating a situation that will create a permanent unemployable class that will be dependent on the Government for their very survival. Not sure what is more socialistic that that.

Making health insurance a marginal cost of employment instead of something paid for out of general taxation, is exporting jobs. Those unemployed who oppose a national health insurance plan have been fooled into doing the one thing that almost ensures they will become a permanent underclass. While you can't fool all of the people all of the time, you can fool some of the people most of the time.

Increasing employment

I recently read an internal report that discussed the cost of health care for companies. Effectively, the average cost is over $13,000 a year for family coverage and after employee contributions approaches $10,000 a year to the employer. Now consider this in relation to people's salaries. If you want to hire an employee for a $25,000 a year job, and provide health coverage, you are looking at a 40% health care tax. Of course, if the employee is making $100,000 a year, the health care cost is only 10%.

Now if you have the opportunity, why not either outsource the work of that $25,000 a year person or move the job to a country that has national health care? It is likely that you will actually pay less in salary also but the biggest savings is likely to be the avoidance of that health care bill. There are additional problems and costs associated with moving the work but in any cost/benefit analysis, the cost of employee provided health care in this country is likely to be among the most significant elements.

So consider the current proposals we are seeing about how to increase employment in this country. Many of them are geared to providing short term tax breaks. They could be effective if the tax break was big enough, but think about the impact of taking the cost of health care out of the hire equation. Yes, the bill would still have to be paid for, and how we tax individuals and corporations to do so would be an issue to be discussed, but the cost benefit analysis on whether to hire an employee would have a $10,000 reduction on the cost side.

Let create jobs to reduce the deficit.

The best thing we can do to help with deficit reduction is to create jobs in this country for our unemployed. In order to create those jobs, especially jobs for manual laborers, we need to take a number of what seem to be obvious steps.

The easiest of these steps would be to have an aggressive program to switch to domestic energy sources. These domestic sources right now would have to be natural gas, coal, ethanol and biodiesel as we develop nuclear and renewable power sources. Critics of this approach talk about how far we are from getting off our dependence on foreign oil. True enough, but every kilowatt of domestic energy that replaces a kilowatt of foreign oil helps incrementally. The added benefit of natural gas is that it is cleaner than foreign oil and we have a tremendous amount of it.

Building the infrastructure to deliver the natural gas would in and of itself create thousands of jobs. In addition, the added benefit of reducing our balance of trade deficit would leave more wealth in this country and add thousands of additional jobs. The ongoing development of these resources would increase this benefit year after year.

The other thing we have to fix is the high cost of hiring labor in this country. Business is asking for tax cuts but there is no evidence that allowing corporations to keep additional profits will result in employment. The cost of labor has to be less than the contribution of that labor. Understanding that health care is generally a cost of labor in this country while in most other industrialized countries, the cost of health care is a societal cost, not a labor cost. As long as our model inflates the cost of labor by adding what is effectively a health care tax, companies will analyze the choices and move jobs to more economical locations. Our failure to fix this is costing Americans jobs. It is not the only factor, but the cost of labor in this country would have a much better chance of being competitive without this impediment.

These two things would go a long way to creating jobs and promoting growth. The creation of jobs has two benefits, more people paying taxes and less requiring benefits. This clearly helps the balance sheets at all levels of Government.

Eliminating the Deficit

I think everyone can agree that reducing the deficit and the national debt should be one of our priorities. It is certainly not the only priority and not necessarily even the most important, but a priority none-the-less. It is of course a somewhat painful process but actually quite a simple one. The cost of Government has to be reduced to an amount less than its income.

Now, there are two factors to accomplishing this, reduce expenses and increase income. Most of the current focus is on reducing expenses since increasing income, is associated with raising taxes, a more unpopular idea than the fiction that Government spending reductions are not also a tax on the American people. When the Government spends money, it goes somewhere, either to the public or business that employ the public. Government workers get paid for providing a service, whether they get paid more than they should or less, if they are not there the service they provide will be diminished.

Of course it is important, as it has always been to eliminate waste and excessive spending. However when you hear about the tremendous amount of Medicare fraud in this country, it is not because we have too many Medicare auditors, it is because we have too few. Years ago I remember a time when the state I live in decided to save money by reducing workers. This included sales tax auditors. Of course for every sales tax auditor the state eliminated, they lost about 10 times as much is tax collections. Eventually they wised up and hired most of them back.

If we have waste or non-productive workers, they should be eliminated, but this needs to be balance with the cost benefit analysis Government has so much trouble with. If we have a lot of Medicare fraud, we need more auditors to eliminate it. If we have tax fraud we need more IRS employees. Each agency should be able to figure out the best use of their resources, if they can overcome political interference.

Remember that the entire discretionary non-defense portion of the budget is only a little over $500 Billion, not an insignificant number but not even close to the reductions needed to eliminate the deficit. Further, reductions in these numbers would likely lead to more fraud in the programs they oversee.

In reality then we need to address the need for entitlement programs and whether they are a cost effective use of the taxpayers' money. The recent bi-partisan commission has made some recommendations that need to be considered. Whether these are enough is hard to say, and politics being what it is, the debate will probably gut many of the recommendations'.

We need to include defense in this discussion because it is such a large part of the budget. The size of our defense requirements and our capacity to support foreign interventions needs to be scrutinized. The trillion dollars we spent in Iraq and Afghanistan over the last decade has not helped the deficit by any means and the benefit received has been hard to determine. Is American safer now than it was? As terrible an event as 9-11 was, was our reaction the most effective way to prevent another one? Remember that the Soviet Union was ultimately destroyed by overspending on defense. We have to avoid making the same mistake. Defense spending should guarantee that we are fully capable of defending this country in all potential scenarios. We certainly need to maintain allies and have joint support initiatives, but can anyone truly explain the current mission of NATO and why we have troops stationed in Europe?

Realistically, with everything on the table, the trillion dollar deficit will not be eliminated by spending reductions. If the economy improves, tax income will increase naturally but it is unlikely to be enough. We need to get smart as a nation and increase economic activity here, to increase our tax base. The easiest thing to do would be to get off our dependence on foreign oil and use domestic resources, such as natural gas, biodiesel, and ethanol. Renewable energy is a wonderful idea but we need to do something right now. We also need to revamp the way we tax business.

We need to tax products sold in this country and not tax business profits. Our current system effectively punishes American companies who operate in this country.

Healthier but leaner

While it isn't the best of all analogies, one can look at the state of the economy and compare it to the health of an individual. In the last two decades it partied like it was 1999 and overindulged itself in all sorts of things. The ultimate result of this was a series of illness related to this overindulgence.

Recovering from an illness, assuming it isn't fatal, always involves some pain. If we ruined our economic teeth by chewing on two much sweet housing bubblegum, the resulting dental work to remove the rotten teeth and replace them with new ones is painful and expensive. If we got obese on cheap equity and credit card loans, the diet and exercise regimen to get healthy is long and painful and reduces our consumption greatly.

Is the pain worth it? Ultimately yes, but far too many fail to succeed. However, when you do lose the extra pounds, or get your new tooth inserts, you are better off and the memory of the pain fades.

The economy is getting better and healthier, but it is not there yet and the work is still plenty painful.

The Big Lie Theory

What we are seeing develop in American politics is a principle perfected originally by the totalitarian regimes of the 20^th Century and characterized in George Orwell's "1984", namely the Big Lie. Simply if you circulate enough Big Lies and get them repeated often enough, a percentage of the population will simply believe it. It seemed to gain momentum during the 2004 campaign when John Kerry's war record was questioned (whatever happened to that) and was tried in 2008 when Obama's citizen status was questioned (while believed by some the disaster of the Bush administration was hard to overcome).

The last two years saw it used more than can be believed as, it seems, conservative talk show hosts try to outdo each other. Lies that have been circulated include the ongoing allegations about Obama's religion and birthplace, numerous lies about the health care bill, purported Government takeover, increased costs, death squads, etc. etc., lies about tax increases over the last two years, and most recently lies about the cost of Presidential travel.

Most of us, feel that the lies are so preposterous, that no one would believe them. However, an old maxim comes into play here, no one ever lost money by underestimating the intelligence of the American public. Now, I think the statement is more related to the attention span rather than innate intelligence, but the basic principle holds. The public doesn't like to work hard at either entertainment or politics.

If you compare the ratings of low brow entertainment to high brow entertainment, the first easily trumps the latter. This isn't a condemnation of low brow entertainment, I greatly enjoy those shows myself, it is simply reality. Unfortunately, you will hear certain people, who consider themselves and who may be intellectuals, rant about how the public needs to be better informed and learn to appreciate the finer things.

Screw them. The public is always right, just like the customer and the voter. If you want to entertain them you have to actually give them something they will enjoy. People have the right; it's in the bill of rights, to pursue happiness. If you think the way they pursue it is wrong, you are wrong. By the same token, if you take the high ground in Politics, the odds are that you will lose.

The last two years demonstrated that the debate about major social initiatives was lost by the Democrats. I believe it is clear that in many cases, and maybe the President needs to think about his role, they let the grounds for debate be dictated by the opposition. I know most Americans believe that people are entitled to health care. However, they were told the Government was going to make them change doctors, decide what sort of treatment they could have and greatly increase their costs. None of these things are true, yet they are believed by significant numbers of Americans. The selling of the Health Care Act was perhaps the single greatest failure of the last two years. It was done so terribly that many Democratic candidates attempted to distance themselves from the act like naughty children with their hands in the cookie jar. Reforming health care was one of the greatest accomplishments of the last 50 years and over time will be perceived that way, but shame on Democratic opinion makers for failing to extol its virtues.

Similarly the stimulus package likely helped us avoid a complete financial collapse. Unfortunately, as big as it was it wasn't big enough or fast enough to reverse the fallout from the economic crisis the Administration inherited. The biggest failure here was probably the initial selling of the package as a way to keep unemployment below 8%. It didn't and in fact unemployment hit that level before any impact from it was felt. The loss of equity in people's homes took a tremendous amount of spending power out of the economy and the stimulus was not big enough to offset that.

The lesson that needs to be learned is that if you care about the country and your countrymen you have to be willing to fight for your beliefs. I believe a lot of the American public will become quickly disillusioned by the new crop of congressmen who really have no coherent ideas about how to fix things, but I also know the problems that will persist will be blamed on the President and the Senate by those same unethical conservative talk show hosts. If the Democrats don't figure out how to seize the debate 2012 will be another bloodbath.

Coogan’s Bluff looking at Highbridge

Failure, again

One of the great disconnects in politics is the let down that inevitably comes after a charismatic leader is voted into office. In our representative Government, only so much can be accomplished when we elect a group, or a cause. Most recently we see the election of Obama and the large Democratic majorities as another example of failed expectations. Running on a platform of change, he was able to defeat arguably much better qualified opponents in the primaries and ride a wave of disgust over the failed policies of the Bush administration into office.

Now two years late we see tea party republicans stirring up enough enthusiasm about the "failed" policies of the Obama administration to most likely take control of the House of Representatives and possibly the Senate. Of course this may be the best thing for the potential reelection of Mr Obama, since the failures of the next two years will discredit the winners of this election and may lead to a belief that the President was right in the first place. Hard to predict right now, but I think the example from 1994 when Gingrich and the republicans took control, only to bicker so much that they guaranteed Clinton's reelection could serve as an example.

The problem with all of this is that there is really only so much any party can accomplish, no matter the size of the majority, in our system. We have checks and balances and enough differences of opinion, even in the parties themselves that a change that is clearly something most Americans have wanted for quite a while, such as Health Care Reform, has been so argued about and so distorted in people's minds that the law that was passed, ended up not pleasing anyone very much, even though it is going to lead to quite a few changes that most Americans favor.

However, many Americans don't let facts get in the way of a good rant about Government and the health care bill has been blamed for ills that predated it by decades, such as the growth in health costs. Certainly the growth we have seen to date is unnerving, but the cause is not the health care bill, and based on almost every objective analysis I have seen, it will reduce the rate of increase in the future.

Providing health care to everyone in this country is simply the right thing to do, and something we already do, inefficiently and at great profit to the Health Insurance Industry. The New England Journal of Medicine had a recent article about how as much as 40% of health care insurance premium went to profit and overhead and not to claims payment. Wouldn't reducing that 40% seem like a good thing?

However, I digress. The election of charismatic leaders can only lead to truly revolutionary change, if it is accompanied by a revolution. Since revolutions are messy and unpredictable (take a look at history) we are probably going to continue to elect charismatic leaders who are doomed to failure, again and again and again.

Cirque de Congress

One of the things that is odd about the current election, and only one of many, is the fact that the Democrats swept into power, so to speak, on a campaign of Change you can Believe In. Well they gave us change, and I think most Americans believe they did, but it seems a good number of them are angry about it.

Over the last two years, perhaps the biggest change was the Health Reform Bill. It seems like a historic bill that is going to increase care for millions of Americans, reduce cost, provide protections for all Americans related to losing coverage in a catastrophic illness or inability to find coverage due to a pre-existing condition, failed to please just about anyone. The Republicans and Tea Partiers are attacking the bill as a Government takeover of health care, it isn't, an expensive bill that will increase the deficit, it won't, and just a move to socialism. The liberals don't think the bill went far enough fast enough.

Now in the world of negotiation, it is commonly believed that if everyone leaves the table a little unhappy the deal that was struck was probably a good one for everybody. That is probably the case here, but unfortunately the debate has been controlled by the extremes on both sides. Generally, the Democrats are afraid their votes for the bill is going to end their political career have been afraid to tout its benefits.

In fact the thing that seems to upset Americans the most is that the congress actually did quite a bit over the last two years. An activist congress during a period of economic distress is not something Americans like. Most years Congress is assailed as a bunch of do-nothings. Not this year. They seem to be to blame for just about everything.

Now, the election is only a few days away and the results are probably pretty much determined. It seems like the Democrats will hold on to the Senate but probably lose control of the House. The Senate majority certainly won't be enough to overcome Republican opposition and I expect the House to become one gigantic press opportunity. Of course a certain number of Tea Party Candidates will be there to add some entertainment value, but they are in a no-lose situation, since they hate Government and the more they can hinder any progress the better for them.

I anticipate a budget impasse over all the spending bills for 2012 as the concept of compromise gets voted out next week. It may be OK, especially if the lame duck congress can get some things done before they go home. The best you can hope for is that Congress doesn't actually make things terribly worse at this point; the group coming in has no chance of making things better.

Misinformation and lies

One of the things we have to decide in this country is whether we want to make decisions about our future based on facts or based on misinformation and lies. Now, for most politicians, the only thing they care about is being elected. So, while most (not all but most) avoid actually lying, they are generally OK about misinformation that puts their opponent in a bad light. In fact, they can sometimes further parlay it by saying something like "I'm not going to discuss the rumor about my opponent" seeming to take the high road but not taking a stand that clearly ends the misinformation.

You may feel that all is fair in love, war and politics and as history is written by the victors, maybe winning isn't the most important thing, it truly is the only thing. Of course the only way to fix this would be for the voters to recognise the lies and misinformation and demand honesty for their votes.

Sadly, I don't see a lot of that. What I do see are rumors circulated by third parties, clearly affiliated with one side or the other, that take on a life of their own even when clearly wrong. For example, a recent article in the NY Times showed that 95% of Americans did not realize that the stimulus package included a tax cut in the form of a tax credit. Even sadder was the fact that commenter's to that article assumed it was a liberal lie and accused the writer of trying to deceive them. Now, however you feel about the NY Times, this article presented something that was easily verified to be true, yet at least half the readers refused to accept a verifiable fact.

I see more and more of this and don't know if it is simply the short attention spans Americans seem to have or the fact that we have purported news stations that gain viewers by being confrontational and outrageous. Recently some one sent me a video where a women on the fox network was attacking a representative from CAIRN about their reaction to the NPR person who was fired. She was strident and offensive and responded to a question posed by the CAIRN representative by saying as the anchor she got to ask the questions, not him. Really? And this person passes as a news person? Not being a regular viewer I don't know who she is but I'm familiar with her style of false outrage and misinformation. Sadly, it sells and appeals to people who are angry over the state of the economy.

Of course the fact that the policies that pushed the economy to where it is today are more the result of Republicans than of Democrats, although bought share the blame, is mostly ignored. We have allowed open borders, a Republican ideal that will lead to jobs being exported and products being imported. That path leads to unbalanced trade, a huge deficit and high unemployment. We have succeeded.

I almost never see this discussed because neither party wants to address these issues. The America I grew up in was wealthier than most of the rest of the world. If we equalize trade and open our borders, the inevitable result is a decline in the American standard of living as this situation corrects itself. The best one could hope for would be the rate of change being slow enough that the world catching up doesn't lead to major disruption here. This is not what is happening.

There are things we need to do to fix this, but the policies that would correct it are closer to Democratic policies than they are to Republican policies. We can give big corporations large tax breaks and those who have the requisite skills will see better opportunities for employment, higher stock prices and a continuation of the growing inequality between the rich and poor in this country. For most of the unemployed Americans who are so angry, manufacturing is not going to return, but they may be able to find low paying service jobs.

Yet it is these very people whose anger is going to elect the people who really don't care about them at all.

Ironic, isn't it?

Stimulus, success or failure

We are now almost two years into the stimulus program that passed shortly after President Obama was inaugurated. As we approach the mid-term elections, we are faced with a constant chorus about how the stimulus didn't work. Of course, those claims seem valid enough looking at the current level of unemployment and certainly considering certain expectations at the time the package was passed. However looking at the stimulus and whether it worked or not depends on certain assumptions. For example, one stated goal of the stimulus was to save 900,000 to 2.3 million jobs. I believe the data shows that it did achieve that result. However, it was believed at the time that saving that many jobs would reduce the unemployment rate. Unfortunately, between the time the package was proposed and the start of spending, a tremendous number of additional job losses took place. So instead of stabilizing the unemployment rate in the 7-8% range, the stimulus ended up stabilizing it in the 9-10% range. Success in the goal was not enough to achieve the hoped for result.

Certainly, in the early days of 2009, there was a real threat of a depression similar to that of the 1930s, and consumers stopped spending and industry shed jobs at an unprecedented pace. The Government was face with a moving target, and the conditions in January were bad, but by March they seemed almost like the good old days. There were other problems impacting the stimulus that turned it into more than a stimulus package. If you consider many of the provisions, such as some of the subsidies provided to states to help them overcome reduced tax revenue, they had more of a social agenda than a jobs agenda. If you simply took the 787 billion ten year program, and used 78.7 billion a year to fund payrolls, assuming a cost of $50,000 per employee, you would have created over 1.5 million jobs for ten years. If programs were targeted to things like providing entry level jobs for recent graduates you could probably have created even more jobs.

Of course that is not what happened and many of the other provisions of the program did help mitigate the impact of the downturn, but ultimately, it did not target job creation enough. It is probably a safe statement to say that at the time of the Stimulus the full extent of the economic crisis wasn't understood.

The other factor that wasn't fully considered was the loss of wealth that led many Americans to start saving any money they could. Providing money to people who lost significant wealth in housing or their investment portfolio, and who therefore are forced to realize that goals such as retirement are much more remote, or debt they felt comfortable with is now onerous, will lead to pay down of that debt or increased savings. We wanted them to spend the money and they turned frugal on us. Without spending, production is not going to be robust. In fact, Corporations who restored profitability via cost cutting (i.e. layoffs) didn't see any reason to spend their profits since the future continued to be uncertain.

Was this a failure of the Stimulus package or a failure to understand the new reality that, in hindsight, is now obvious? I think it is the latter. Consumer confidence has been jolted and the easy credit of the past, is largely gone. No stimulus package can undo the history of 2008-2009 and it will take years to overcome the change in behavior.

Who benefits?

When you consider the human condition and the progress we have made in technology and labor saving devices, the question that has to be asked is who benefits? I believe we all do to some extent, but some benefit much more than others.

In the 1950s, the great fear was that communism was trying to take over the world, at least in some western countries. Now, it wasn't just communism the economic systems that spurred this fear but also the Government that existed in the Soviet Union and China. The economic system was scary enough, but of course much scarier to those who had the most wealth. The idea that "international" communism would triumph and destroy our American way of life led to the red scare and ultimately the equations of communism to evil.

Then the Soviet Union collapsed and China went to a market economy, although still maintaining a communist Government. Suddenly internationalism was good, not bad, and by promoting free trade and expanding business markets, the world as a whole would enjoy the benefits of free enterprise.

Now what does free enterprise accomplish? Well it allows production to move to cheaper locals, thereby reducing the cost of goods. It increases competition, driving down prices further. These lower prices allow greater access to the good things in life. One aspect though is that over time, the world will tend to level out economically. If you have a large population of people living in poverty, willing to work long hours for subsistence pay, someone will find a way to utilize those people.

Now, there is an obvious fallout from this. The people, who used to do that work, lose their jobs. In order to avoid this, consumption would have to increase so much that demand could only be met by employing everybody to produce product. But how can it? The goods being created are not affordable to those workers barely making enough to survive. Now over time, salaries will increase and consumption will follow. But in the immediate future, the consumption is not going to increase enough and the people who used to be the consumer's are losing their high paying jobs.

So overall fewer goods are needed, at least for high end profitable goods, and we have overcapacity in production capability including labor. This keeps labor costs down and companies start to realize that they can produce less and be as profitable, if they get rid of excess assets and use technology and outsourcing to reduce their costs of production. This is a paradigm shift. The road to profitability used to require growth. Now, profits are being squeezed out of productivity.

Of course, there is still growth in some areas, and most always knew that productivity could help profitability, but if you don't see market growth, you can capture market share by being cheaper and better (or at least the same).

So when are we going to see job growth in this country? Not until we create jobs in the domestic and renewable energy fields, level the playing field so business is not encouraged to export jobs and use the stimulus to create meaningful jobs rebuilding infrastructure.

So going back to the opening of this blog, who benefits. If you have money the things you want are getting cheaper. If you are employed you are part of the haves but if that is the only source of your income, you may be living on borrowed time. If you are one of the wealthy, clipping coupons or collecting dividends, things really couldn't be better, cheaper goods, less crowds filled with those wannabes, and, while your assets had a decline, they have recovered pretty nicely.

So we export jobs to make life better for the rich.

Disappearing Middle Class

One of the questions that we should consider is whether the American situation we think of as normal can continue. From the very early days of this country, the immigrants were able to aspire to a standard of living that was significantly better than they could have achieved in the world they left behind. This concept, often referred to as the American Dream, while certainly not true in all cases did permeate the society.

Does the dream survive? For most of history and to some extent even in America, the natural progression of things is that wealth accumulates in fewer and fewer hands while the vast majority of people struggle. In America, the formula was different, we had our rich people but because of the great wealth available we developed a large Middle Class.

This Middle Class was in many ways the defining characteristic of our society. Especially in the middle of the 20^th century following World War 2, whether fully accurate or not, most Americans considered themselves as Middle Class. This definition had certain characteristics that defined that status, home ownership, one or more cars, annual vacations, health care, etc. etc. If you had these things you felt that you "belonged". Of course we had rebels and members of the counter culture who rejected these tokens, but mostly when you scratched the surface they were in fact fully entrenched in the Middle Class ideology and most, after a rebellious period returned to the fold.

The question facing America today is whether this model of America can survive. As we see more and more of the national wealth consolidated in fewer and fewer hands or sent overseas, the middle class is shrinking. We have more poor and richer rich. Jobs that used to enable workers to maintain a middle class lifestyle are going overseas and being replaced partially by jobs that simply will not support that standard of living.

This trend is clear and if it continues we will see the end of the American Dream of a country inhabited by Middle Class citizens. Unfortunately I seldom hear our policy makers addressing this problem.

Assuming good intentions

One thing that history should have taught us is that many people do not act in good faith. Any number of incidents that are well documented, show that many agreements have been signed where one of the parties felt absolutely no moral obligation to honor it. Consider Hitler at Munich in 1938, he promised to behave in a certain manner in the future in order to get what he wanted then. The promise meant nothing to him. More recently you can consider Bernie Madoff, not to compare him to Hitler in scope of destruction, who lied to people who trusted him because he was "one of them".

Perhaps a better example is to consider how many people violate their wedding vows. They rationalize their behavior in any number of ways, if you believe a vow can simply be violated because you think it can. I would argue that if the old adage about history repeating itself has any meaning it is in the fact that agreements will be broken and betrayal is a fundamental human characteristic.

It may not be a universal one. The problem of the magic ring that Plato posited is still out there for moralists to struggle with. If you possessed a ring that could make you invisible (read immune to prosecution) would there be any reason to be honest? If there is no earthly or spiritual consequence to anything you do, would you just take anything your heart desires even if it meant others would suffer?

The question has no meaning if it doesn't hurt someone else. Are we our brother's keeper? In nature the fit survive and the most fit are usually rather brutal if you think about it. When a predator kills and eats prey, it feels no remorse and has no sense that it has done something wrong. Their survival is what matters to them. Now, in nature, we do have altruism, primarily towards offspring since that trait is genetically important for a species to survive. Those offspring simply abandoned at birth generally have a reduced chance of survival.

So it is probably safe to suppose that humans share this fundamental trait with the rest of the animal kingdom. What we have developed to a greater degree than most if not all animals is the ability to deceive and betray. Now betrayal does accompany predation. Predators need to fool their prey if they want to improve their chances. Nature provides many examples, but there is no creature better skilled at betrayal than humans.

Run on your record, not from it

If you have served the country honestly and voted for things you felt were right, why would you run from your record? We are faced with a situation where the economy is still sluggish but we avoided a Depression. We passed health care reform, but could only go so far because of Republican opposition. We reduced our presence in Iraq and refocused our efforts in Afghanistan. There are efforts underway to help small business, improve the country's infrastructure, improve the environment, increase taxes on the wealthy and maintain middle class tax breaks.

Yet, we see a situation where the public is angry and has been fired up by misinformation provided by, in many cases, wealthy individuals who don't want to pay higher taxes. Stand up and educate, don't slink away!

There is a lot more that needs to be done, and failure to finish the job will simply lead to further prosperity for the few at the cost to the many. I'm not talking socialism, but our policies need to restore our declining middle class. The amount of wealth concentrated in the top 1% of our population has never been higher. More and more Americans are falling below the poverty line. Millions of Americans nearing retirement have inadequate resources and without effective social policies that save Social Security and Medicare will find themselves up the creek without, well a nest egg.

Propaganda about wealthy people creating jobs is simply that. They act in their own best interest and if creating a job increases their profitability they will create a job. Let's remember that. They are not, in the business world, altruistic. We have to always remember policies have to encourage job creation in this country. Just letting them keep more profits will not accomplish that. It has to be profitable to employ Americans.

I don't know how the election is going to turn out, and suspect that the misinformation will succeed unless it is countered by the truth. Health care reform is important. Education is important. Helping job creation is important. Improving the environment is important.

It's time to stand up and be counted.

Free Trade equals fewer jobs but more rich people

For the last couple of days the circus on the East Side of Manhattan was in full swing. Now I do think that countries should work together and am by no means opposed to a world forum. However, when you have someone like Mahmoud Ahmadinejad espousing ludicrous theories about an event that happened almost ten years ago, you have to say "wtf?"

Now politics is politics and we know he is playing to a specific audience. The video of him making his outrageous accusations will get played for a receptive audience and actually increase his prestige.

Of course criticizing the UN for allowing this behavior is really not fair since we have plenty of similar examples in our own current political races. The country is suffering significant economic problems, caused by many different factors but certainly exacerbated by the widespread export of jobs due to lifting of trade restrictions under our business oriented past administrations. Now, free trade is good on a macro basis, but if you have the highest standard of living, what free trade will do is level the playing field over time, meaning that those on the top will suffer some while those on the bottom will benefit. So we have an increase in unemployment while large corporations send jobs to India and China (either directly or by replacing American made products with theirs) and they boom while we suffer. Of course it is not convenient to let most Americans in on this so instead the problems are blamed on policies that really had nothing to do with the problem.

Since we seem unable to improve our competitive position, and increase jobs in this country, we are left with a large number of angry Americans who are willing to listen to almost anyone who promises to make things better. Lets extend the tax cuts for wealthy Americans so they can invest more money overseas. Lets cut benefits to our poorest Americans to force them to accept jobs that won't support their families. This is basically the tea party platform and to a large extent the Pledge to America. It isn't worded that way but they perpetuate a myth that allowing tax rates to revert back to what they were when we didn't have a deficit will destroy the economy.

The economy we have now is the recovered economy. Growth is going to remain anemic unless we improve the competitive posture of the country. The policies we need to pursue are actually pretty simple, reduce dependence on foreign energy, switch to a tax on products sold in this country, and make pension and health insurance costs a social responsibility and not a business cost. Simply this would reduce much of the incentive to export jobs. It certainly wouldn't destroy incentive to work but would allow all Americans some peace of mind related to medical bills and old age.

Certainly, the benefit level can be supplemented with private insurance and private investments, but for those who work at low paying jobs their entire lives, in their old age they would have enough to get by.

Now the Tea Party Tools of the rich denounce common sense proposals like this as socialism and unamerican. Of course many of these angry people would have a hard time actually saying why socialism is so bad, but these policies are social policies, not socialist policies. Generally it levels the capitalistic playing field.

The Pledge to America promises to enforce the constitution as originally intended. Really? In 1789 we had slavery, no voting rights for women, no direct election of senators, no income tax, etc, etc. I guess they mean as originally written and subsequently amended, but maybe not, I can't tell.

Do they think we can’t do the math?

I just get insulted when I hear proposals that promise things that just don't add up. If you want to get to a balanced budget and reduce taxes, you have to stop spending. A proposal that acts as if they can eliminate enough discretionary spending (only 1/3 of the budget) to accomplish these goals. Republicans won't even reduce subsidies to rich absentee farmers since they tend to be Republican supporters.

I would like to see a plan by program as to how to achieve a balanced budget. It's not going to be achieved by not collecting taxes.

Rehabilitation

Today we hear that the recession ended back in June 2009. Of course this is a technical call based on whether we had growth in a quarter or not. Now, if you lost 20% of the economy in the recession and have anemic growth, you may be technically out of recession but you are certainly not back to where you were. It will take years to recover from the losses. For some individuals, and the NY Times had an article today about over 50 workers who may never get jobs at the same level they had, the recession is permanent.

Many of the jobs we lost will never return. I've discussed this previously and the main hope is that we create jobs in new industries, such as environmental related jobs. I expect that jobs will be created in unanticipated areas. However, it is also likely that the skills for these new jobs will require training that many of our unemployed don't have and they are now competing with new entrants who may very well have these new skills.

At any given time the economy has winners and losers. The winners are not always deserving and the losers aren't either. If you followed the rules, worked hard, contributed to a company's success for many years but that company simple goes away or sends your job overseas leaving you in the loser group did you deserve that?

If you believed that the American dream required you to buy a house in the suburbs and an SUV when you were working and you did those things, only to find the house worth less than your mortgage, did you deserve that?

Suppose you became unable to work due to illness or disability and lost your employer provided health insurance, did you deserve that?

People talk about economic recovery as if the economy is going to be just as healthy as it was right before it. This is going to require a lot of rehab before we are normal again.

The mess we are in

As we head into the fall we are starting to see some glimmers that the recovery will continue, or perhaps better to say that the economy will continue to grow weakly from its new baseline. The dramatic events of 2008-2009 were really like the earthquake that causes devastation but is really the release of all the pent up energy built up in the tectonic plates in the preceding period.

The country had a large number of negative long term factors that were masked by the apparent increase in housing prices which allowed much of the population to spend well above their means and create an aura of prosperity when really it was more like play money.

We simply have too many Americans who are not equipped for the world we live in, who expect to maintain a standard of living that they can't earn in the world marketplace and a technological revolution that is exposing these facts.

Most of the problems were probably inevitable, but the deregulation and free trade groups (things that are good for big business but not so good for the undertrained/overpaid American worker) sped them along. In addition, we accelerated the stress by enacting unaffordable tax breaks that quickly turned a surplus into a deficit and proceeded to fight an unnecessary war in Iraq that cost billions and billions of dollars while achieving little. The war against the terrorist camps in Afghanistan was necessary but the one in Iraq was simply an ego trip by our late President.

So we have too many houses and too many unemployed Americans. The jobs that many of these unemployed performed are gone and not coming back. Generally the jobs they might be qualified for will pay much less than they used to make and they have lost the houses, or at least the equity, that financed their lifestyles.

The contraction of 2008-2009 was not a temporary thing, like some of the recessions in the past, with a bounce back recovery. The new baseline is what it is and growth is going to be slow unless we take some actions to help the root cause of our issues.

We need to create jobs by exploiting our national energy resources, meaning gas, coal and renewable to improve our balance of payments and reduce our trade deficit.

We need to encourage conversion of homes and businesses to be more energy efficient increasing construction jobs for the renovation.

We need to fix our infrastructure creating jobs.

We need to switch to a tax on sales and reduce taxes that encourage job exportation.

We need to fix the way we fund health care and join the rest of the civilized world.

We should be encouraging immigration to increase the number of young workers willing to start at the bottom and achieve the American dream.

We need to make sure our schools are imparting the skills our young people need for the future, not the skills of the past.

Government spending must be brought in line with Government income, and this might be painful but the choice has to be made to reduce services or increase taxes (possibly some of both).

We need to get started and the politicians need to put the interests of the country ahead of their own.

Its time.

Media Uproars

It I

It may be obvious to many but a lot of the issues that appear in our media are at best minor events that are stirred up to get an audience. Famously, going back to the late 1890s, the Hearst paper may have created the public outcry that led to the Spanish American War over an incident involving an explosion on a ship that many think was an accident versus an act of terrorism.

What I find interesting is when those who use the freedom of speech protections in our constitution decry others, such as the Koran burning minister (he never burned one) in Florida for exercising his freedom of speech. Had the national media ignored him he could have had a jolly old bonfire and outside of a few local supporters, no one would have known. However the coverage that ended up getting the President to take a position (one that seems to be anti-free speech) led to protests and probably a number of deaths.

Now, I don't see much purpose in burning Korans, but isn't it likely that at least some Koran's that don't sell eventually get destroyed? How many simply end up in the trash considered useless clutter by purchasers who bought them at some point for who knows what reason. Quite a few years ago I bought one to see what it said during a period of religious exploration I was going through and since I no longer have it I guess I threw it out. Of course I didn't think of it as anything special and certainly didn't dispose of it in any special way. Maybe I should expect protestors to show up soon.

Now of course my disposing of the Koran wasn't announced, in fact I don't remember what I did with it and it may simply be at the bottom of some box in the attic, but let's get real, it's a book with a binding and some pages that a man created. Even if the words represent a holy message, the object I was able to purchase wasn't anything special. This is true of bibles, flags, Talmud's and anything else created by man. The fact that some other people want to attach some ridiculous concept to the object is really of no concern to me, unless of course they actually do something to me.

You can't cry fire, unless of course there is a fire, in a movie theatre since doing so creates an immediate hazard to the people that you deceive. You can announce that the movie sucks, and you can be ejected but not imprisoned, because you are entitled to that opinion. Now, if you burn a Koran, or using a 1960s analogy, an American Flag, are you creating an immediate danger? Certainly not since the symbolism does not deceive anyone. In the 60s flag burning created counter protests and now Koran burning cause's Muslim outrage. These responses are not a reason to restrict the right to freedom of speech. I don't have to agree with either to support the right they have to express their opinion.

However, the media can use the uproar largely created by the media to sell more media I guess.

Times twists facts for Back to School Article

The on-line and print versions of the New York Times had an article implying that the back to school season was disappointing for retailers. It had a number of interviews with shoppers and had at best two facts that it linked to in the article, both of which were misrepresented. The first was a statistic that bases on a Chase survey 73% of shoppers were budgeting the same or less this year for back to school than last year. A link was included and at the end of this article are the relevant results. First of all, only 38% of those interviewed had back to school budgets. Of those 73% planned to spend the same or less. Of course this meant that 59% meant to spend the same or more. Realistically though, common sense tells us that those who budget almost always do it to control spending and many fail to stay within the budget. Second, only 38% bothered to have a budget. Those without budgets tend to spend more impulsively. Generally this statistic has little if any predictive relevance as demonstrated by the strangest twist of fact in the article.

"That pattern was reflected in the August sales results from several retailers, where there were only small sales increases at stores open more than a year despite heavy discounts."

Ok, but when you go to the link provided it shows that overall same store sales were up 3.3% (higher than expected) and the analyst felt that represented a sign that the consumer was back. Now of course, some of the stores didn't do as well as others, so the quote is probably technically accurate, but it certainly misrepresents the information in the linked article.

What probably happened here was that they expected a disappointing back to school season and had this article prepared. When the facts didn't quite support the premise they simply twisted them a little and ran the article anyways.

 

 

Chase Slate-U.S. News Consumer Monitor FINAL

NOTE:  all results shown are percentages unless otherwise labeled

 

Below are findings of an Ipsos poll conducted by telephone August 3-9, 2010 on behalf of Chase Card Services & U.S. News and World Report. For the survey, a nationally representative, randomly selected sample of exactly 1,080 adults aged 18 and older across the United States was interviewed by Ipsos. With a sample of this size, the results are considered accurate within 3 percentage points, 19 times out of 20, of what they would have been had the entire adult population in the U.S. been polled. The margin of error for sub-segments is higher, and base size refers to weighted bases. All sample surveys and polls may be subject to other sources of error, including, but not limited to coverage error, and measurement error. These data were weighted to ensure that the sample's composition reflects that of the actual U.S. population according to U.S. Census figures. Respondents had the option to be interviewed in English or Spanish.
An asterisk (*) indicates a percentage value of greater than zero but less than 0.5. Wave 1 data is contained in parenthesis next to this wave's data, and was carried out June 15-21, 2010 according to the same technical specifications as Wave 2.

 

ASK ALL IN SCHOOL OR WITH CHILDREN IN SCHOOL

 

1. Do you have a set budget for your back to school shopping? (Base = 346)
   

 

Yes	38
No	62
(DK/Refused) (VOL)	*

 

IF YES AT Q13

1. Would you say your back to school budget this year is bigger or smaller than it was last year? (Base = 131)
   

 

Bigger	27
Smaller	41
The same	32
(DK/Refused) (VOL)	0

What we didn’t do

Today we found out that the European stress tests were not as comprehensive as they might have been and the markets have decided to sell risk assets. Of course I don't think anyone is actually surprised that the tests, designed by a group that was trying to provide reassurance to investors, was not the most stressful stress test. However, the revelation provides an opportunity to short some stocks and make some profit from the volatility.

One would think that any concerns about the stress tests would have been offset by the increasing likelihood that the mid-term elections are going to lead to a deadlock in congress. It's pretty clear that Wall Street and probably Main Street are not convinced that the Government really has any good ideas, and having them debate a lot and produce nothing of substance is the preferred status quo.

It is sad how ineffective our leadership has become, not because they are not bright people, but because they are too influenced by unrealistic fringe groups that aren't pragmatic enough to be successful. If you want to have cleaner energy we should have moved, on an intermediate basis, into natural gas. It is plentiful, burns cleaner than oil and would help the balance of payments. It isn't good enough to satisfy the environ-nuts who want to go right to a solution that can't be implemented for many years, leaving us with an oil based economy.

If you want to create jobs, you needed to create real jobs by improving the infrastructure and providing credits to convert to friendlier energy sources. It would also help a lot to even the playing field with foreign manufacturers by reforming the way we tax business, relieving them of health insurance and pension concerns and making sure everyone selling product in this country is paying a comparable share of the costs of these programs.

If you want to help housing, well it may not be helpable, but if you incentivized banks to reduce current mortgage burdens in exchange for a future share in the sales price it might have avoided a lot of foreclosures.

Instead, the visionaries of this crisis came up with what are past described as multiple level derivative actions that hopefully would improve the situation. We increased the money supply and drove interest rates down hoping that it would ease credit opportunities and make mortgages more affordable. However, in a situation with so much lost wealth, the cash was used by banks and corporations to increase their balance sheet and not to increase the amount loaned out and not to increase investment and not to lower mortgage burdens,

In fact there was so much cash being hoarded that we have a possible bubble in treasuries.

If there is a lesson learned it should be the following. If you want a to happen do the most direct possible thing to get there. If b is a direct cause of a, do b. Once you decide that e influences d and c which then influence b which influences a, the logic may be good but the links are subject to unexpected consequences.

 

1938 Again?

In the New York Times there was an op-ed piece that discussed the similarities between 1938 and today by Paul Krugman. The point of the article is that we are repeating the mistake that FDR made in 1938 where worries about the deficit overrode the need for more stimulus leading to a revived recession. He goes on to state that the beginning of World War II led to massive deficit spending that led to prosperity and the boom years that followed the war.

Of course one thing that we know about that period is that in addition to the massive deficit spending, much of the world infrastructure was destroyed in other parts of the world, giving this country with it great industrial base a significant advantage in selling products. In addition, the deficit spending was accompanied by rationing that led to a great pent up demand for consumer products following the end of hostilities. Another factor that can't be ignored, or at least shouldn't be ignored is that the war reduced the labor force in a number of ways. The most obvious would be the casualties but just as significant was the GI Bill that sent so many returning GIs back to school to receive training that they otherwise would not have had. Also, the threat of communism led to an expansion in the size of our military posture and spending that ebbed and flowed but consistently exceeded depression era levels.

One other factor in the post war years that shouldn't be ignored is the baby boom. This led to a tremendous increase in demand for housing and services in the newly created suburbs that exemplified the prosperity of the 50s and 60s.

Which one of these factors led to the prosperity we experienced post War? I would have trouble picking only one. So if we want to bring about a new prosperity I guess we have to spend trillions building up the army, diverting industry to war production, destroying much of the world's infrastructure and have another baby boom.

The Recovery

Can our anemic recovery continue? It isn't even clear that we really have a recovery if you listen to some analysts. According to them, without job growth, we can't see any real improvement. Of course, there is some validity to this. If you are unemployed, things are certainly not going well. However, we always have unemployed and the question to ask is what the "new normal" for unemployment is?

There is an article in the times that points out a trend that has been going on in this country for a while. Certain jobs that provided good wages and a decent standard of living are simply going away. They are being outsourced to other countries or eliminated via automation. To some extent these jobs are being replaced by lower paying service jobs or being replace by higher paying technical jobs that require training and education. If you are in the middle, you will probably have a problem qualifying for the higher paying jobs and you may be reluctant to accept the lower paying service job. In fact, it is possible that the lower paying job won't replace the benefits you get by being unemployed.

If you are getting unemployment insurance and are eligible for Medicaid because of your low income, taking a low paying job without benefits may decrease your standard of living. In fact, we have set up many people in this country to see a reduction in their standards of living. Without a dramatic reform in the way we do health care in this country, it is somewhat unavoidable. The added cost of benefits being imposed on employer's simply makes it uneconomical to higher low priced workers.

In the scheme of things, businesses who want to be profitable simply can't afford to hire these people, since they cost more than they produce. Make no mistake about it, profitability is the key and for the immediate future American business is not going to spend unless the profit potential is clear. We have seen the increase in productivity and what we have failed to accept is that the American economy has shrunk and will grow in a health way. This is sure footed growth and the existing industries are not going to rehire all the people who were let go.

However, if history tells us anything it is that a resource will eventually be utilized. Those unemployed are a resource and sooner or later they will be absorbed into the economy, at least most of them will. Of course they may get paid less than they did previously.

Simply, businesses have shrunk in response to demand and are now at profitable levels. They will grow as demand grows, but they are not going to take wild gambles.

It's the recovery and it is anemic, but it is the only recovery we have.

 

The triumph of speculation

When you buy stock in a company, theoretically at least, you become a partial owner of that company. The reason to own a company is that hopefully the company will make money now and in the future. If a company does make money it can either be re-utilized or used to increase the companies value. Either way a profitable company increases value to the investor while an unprofitable company decreases value.

Now, the other aspect is whether the company will continue to make profit and maybe even increase its profitability via growth. However, suppose you had a company that produced a steady income stream, now and into the future, with no particular growth aspect but by the same token a steady business where profitability could increase via productivity improvements and possibly acquisitions, would it be a worthwhile investment? For an investor the answer is definitely yes but for a speculator, that company is of little to no interest. It isn't likely to see significant price movement so the ability to make a short term profit is limited.

Now I maintain that the investors are being driven out of the stock market by the speculators. The market, instead of a place where companies can raise money by selling stocks and bonds is becoming more and more a casino. This casino aspect is making regular people/investors take ridiculously low bond returns when perfectly good stocks pay higher returns via dividends. One reason for this is that many funds buy the S&P basket of stocks and try to maintain it in balance. So, when the speculative stocks go down, money is pulled out of the funds and they have to sell off all positions.

So investors see excessive volatility in stocks that should have little. They don't want this so they get out. Of course less investors increases volatility as speculators dominate the trading. I think we see where this is going.

What to do

If we have seen a pendulum shift from the ever expanding consumer spending and associated credit of the last few decades to a more stable, consumer saving and living within his/her means does that mean the economy is in a constant recession? The formal definition of a recession is one where there is negative GDP for two quarters in a row. In a society where consumers are saving more, the companies that produce products will produce less. However not less quarter to quarter. Suppose we have an economy where the general consumption level stay about the same year after year.

Companies will have to adapt, and in fact many of them already have. They will grow profits (which really is the point after all) by becoming more efficient and finding new markets. Competition will increase and weak players will be driven out. We will also see an excess of labor that will have the effect of driving certain labor rates lower, especially those where required skills are minimal or easily obtained. Those who have skills in more specialized areas will of course be in better shape. If labor rates decline or stabilize, this will make certain domestic products more competitive with foreign ones.

Of course areas where we could see growth is in the domestic and renewable energy markets. Also, if American products get more competitive we may see growth in exports to the growing demand from developing countries.

On the down side is the fact that without growth and very significant growth, the drain of the deficit will be greater and reduce future spending. Of course the answer is to reduce spending and increase revenues in the smartest possible way. Simply, subsidies to those who don't really need them should be eliminated and fees should be charged for services provided. Programs such as Social Security and Medicare need to be made self sustaining over the long haul.

Things do change

There is a saying that generals always prepare for the war they just fought instead of the one that is going to happen. Of course, this is true in many areas, not the least of which is economic forecasting.

It is tempting and certainly sometimes useful to look at what has happened in the past and assume it will happen again. In situations where there have been no fundamental changes, this is definitely a valid approach. Many economists, or pseudo-economists, are of the opinion that nothing really changes and therefore the past is a sure precursor of the future.

But things do change and what needs to be determined is if we have seen a fundamental shift in behavior in the US consumer.

I think we have to some extent and perhaps it is more accurate to say we are seeing abnormal behavior the arose in the generation that grew up after the prewar economic problems, revert to a more normal approach. As a member of that generation, we grew up in an extremely optimistic period and pretty much ignored the warnings of the earlier generation. Certainly bigger was better, the stock market would always go up, real estate would always appreciate, each generation would do better than the previous one, America was a land of opportunity.

However, the last ten years or so have put each of those assumptions into doubt and we see the baby boomers reassessing things. Many find themselves in situations they never expected. Recently a good friend of mine complained that she never expected to have so much financial doubt at this point in her life. She is not alone. For many Americans, the one asset they really expected to sustain them was their home. However, over expansion and easy credit led to a glut that led to prices collapsing and home devaluations. It will take years for this excess inventory to be absorbed. This in turn led to a financial crisis, a severe recession and a realization that economic prospects for the next generation may not be so rosy.

The change in behavior may only be temporary or maybe, and this is more likely, be part of a cycle where the current generation will see wealth preservation as something you have to work at. Only time will tell.

The sky is falling!!

Panic in the street (Wall Street) led to a sell of that dropped the markets over 2% yesterday. This was based on a Fed announcement that the economic recovery was going slower than hoped for and that they would keep interest rates low for an extended period of time.

Really? This is the reason for the sell off?

There is nothing in the Fed announcement that is surprising. What we do have is an opportunity of for market manipulation, and market manipulation is what we got. Once the selling momentum gets going, other big traders feel they have to sell to avoid being caught. The equities they sold (pretty much everything) were not any worse than they were last week and will be next week.

Now, when the manipulators smell the blood in the water they start to short everything. They know that the little bit of uncertainty caused by the Fed announcement is going to put a damper on buying and they can start the downward spiral. As it picks up, others actually dump positions with the intention of reestablishing them at a lower price point. If you look at the statistics, you find that short sales were up 200 million shares since Monday. Now there is, in today's market always a significant amount of short selling as hedge funds basically take and drop short term positions. However, when the blood is in the water we see a tremendous increase an when it is successful, as it often is, the stock market goes down.

Now, at some point these short positions have to be covered and that will theoretically lead to a market rebound. However, I think the American public is simply tired of it and as the manipulation continues they are taking money out and putting it in bonds.

In my opinion, allowing short selling serves no legitimate purpose. It is not investing, it is gambling, but gambling that impacts investors. It allows some people to make money simply by manipulating stocks that otherwise might would probably behave quite differently.

The mess we're in

In a country that has as many advantages as this one does, it is hard to believe things have gotten so bad. Of course bad is a relative term, since most people in this country still have a standard of living envied almost everywhere else.

So what exactly is causing the problem? Well partly because of our past success and the development of better communications and transportation technologies, it is cheaper to offload work to other countries. So, if you were in manufacturing or a service that is now done elsewhere, what is your new role? We haven't figured that one out yet and it may take quite a while before we do.

Pretty clearly this type of transition will work itself out. However, it will be painful. If you think about it, when the American industrialization took off, we lived off the cheap labor of European and Asian immigrants who couldn't find suitable work in their native lands.

In previous blogs I have talked about the wealth equation and while we create a considerable amount of new wealth every year, it is no longer enough to offset the wealth we send overseas. This net deficit is going to result in a better standard of living elsewhere and a declining standard of living here. Now, it is certainly not impossible to return to a stable or improving standard of living, but it takes some smart policies to do so.

The first thing is to reduce the wealth being exported in exchange for energy. We need to use domestic and/or renewable energy resources more and more. Its not gong to be like turning a switch but every bit of energy changed from foreign to domestic reduces wealth being exported.

Second we need to level the playing field for jobs. If you sell products in this country, you should pay a fair share of taxes. There has to be a better relationship between the profit made and the taxes paid. If you manufacture in this country you employ workers who pay taxes. You as a company shouldn't pay taxes until you sell your product and then only if you sell the product in this country should it be taxed.

Third, we need to eliminate health insurance and pension as a business cost and accept it as a societal cost. There is no logic in making it more expensive for a company to do business here because of medical and pension responsibilities.

Three simple things that would go a long way to cleaning up the current mess.

Jobs again

I just get a kick out of the reactions that you read when an economic report comes out. Now I understand that the people writing have two issues they have to deal with, writing for an uncertain audience which means having to over explain things, and dealing with their own point of view, bias.

When the jobs report came out, it was generally treated as horrible since overall the economy lost 131,000 jobs. A lot of these jobs were the elimination of temporary census jobs and as much as these jobs were somewhat discounted when they were created, they should be just as discounted when they go away. Consider them a constitutional blip that comes every four years.

Now, if you take that out of the report, what you have left is the loss of local government jobs and the creation of private industry jobs. Now, I would like to see a lot more private industry jobs created but that isn't going to happen until the economy gets a lot more robust and/or the government figures out how to incentivize business in this country a lot better than they seem capable of.

But going back to the primary trend, every public job eliminated reduces to some extent a burden on the taxpayer and every private job created increases the tax base. Yes, public workers pay taxes too, I should know, but that is simply returning a bit of what they got from the taxpayer in the first place.

This was an excellent trend for the economy, although once again, not enough private jobs. Public jobs are certainly important and necessary, we need teachers, police, and firemen (of either gender) and there are many other functions that have to be performed. Still, there is always going to be some level of inefficiency in government (of course in private industry as well) but a private job is a net revenue creator while a public job is generally a net revenue loser.

It doesn't have to be this way, if we consider the value added of a public job and make sure the value provided is greater than the cost. If you consider police activity, certainly the prevention of crime is paramount. This is a high value endeavor, if the crimes are real. Certainly a crime that destroys property or inflicts bodily harm needs to be prevented if at all possible. However, what about victimless crimes?

When you consider vice and drug offenses, and to some extent traffic violations such as speeding, who is the victim and why are the police intervening? Now, traffic violations may actually generate revenue but the last statistics I saw indicated a tremendous number of people in jail for drug offenses. Why? Really, if we legalized most drugs and put them under FDA oversight, instead of being a crime it would become an industry.

Yes we would have addicts but would that be worse than the addicts we already have plus the tremendous cost of enforcement? I'm not encouraging anyone to use drugs, but in all honesty, why do I care?

You either believe in individual responsibility or you don't. The same with vice. Why do I care what consenting adults do as long as it doesn't involve minors or uninvited violence? I may not approve, but I don't approve of lots of legal things already, such as smoking. It just isn't my business and it certainly should cost society as much as it does to try to prevent it.

Lots of people would and have argued that it would cost more to ignore it. Really? If it was legal, and taxed, it would generate more than enough revenue to support rehab and education efforts. The economics are clear.

Look, less government is a good thing since it equates to less taxes. More business is a good thing since it equate to more taxes. When are we going to wize up?

Wealth

Similar to when the stress tests were done for US Banks, you hear a lot of analysts taking the position that since most European banks "passes" their stress tests that the tests were "too easy". Of course that logic assumes that the banks have real problems and that there is a conspiracy to cover it up.

Honestly, the problems facing Europe and the United States are by no means insurmountable. During prosperous times, generous commitments to social programs were made that in reduce economic conditions look unsustainable. However, the basic output for these countries and their ability to sustain themselves hasn't really changed.

Ultimately the prosperity of a nation is based on how much it produces versus how much it consumes. The distribution is not in and of itself an issue. What may be an issue that is related is the fact that those receiving the benefits are no longer producing and therefore impact the actual equation.

The real equation is produced vs consumed. This is true at all levels and ultimately, at the global level. However, if an individual, a local government, a state government, a federal government or the world as a whole consumes more than it produces, it will get poorer. The only way to consume more is to use accumulated wealth or to borrow against future wealth.

There are many other factors that influence the perception of wealth. However, the value of the goods produced versus the value of the goods consumed is the ultimate determinant.

Dismal Science

If you read just a little economic news, you should be quite depressed. We have the potential for a double dip, the American consumer is not spending, industry is not hiring, real estate is falling again, and any bit of good news that does get out is immediately explained away by the dark linings around it. So your profit is up, but what about total sales? Can you maintain it if the economy falters? What if the dollar gets stronger, will exports suffer or if it gets weaker will energy prices overwhelm us.

The dismal science indeed. Like most news, there is much upside to being a Pollyanna. If you accept good news at face value, you suffer from credibility problems. Generally, you want to hedge your news with some gloom. The unemployment rate is down, but only because so many job seekers have despaired.

Then, the pundits are shocked that consumer sentiment is down. Further, real estate sentiment is down too!!

There are real problems in our economy, but company after company has found ways to make money. This profitability will lead to jobs, although we have to accept that productivity improvements are not going to be simply thrown away.

Real job growth has to come from the growth of domestic and renewable energy including the retrofitting of many structures and a reform of our tax system to make sure everyone doing business in this country is on an equal footing.

Time to get going

We are continuing to see the development of an economy where many of the past excesses are going away. The recent crisis will have a sobering effect on many people for at least some time. Further, some of the access to easy money and easy equity loans is just not there anymore.

The good news is that the future economy will be built on a sounder footing. The bad news is that many of the jobs and other sources of income will be more difficult to come by.

A return to some frugality is a good thing but it reduces demand and businesses are not going to expand past the point where they have a high level of confidence. Further, as we see expanding technological communications, the need to visit certain establishments will continue to diminish. I haven't needed to visit my bank, except to use an ATM, for quite a while. It saves on gas but reduces the need for tellers.

The new type of online stores and services will continue to garner greater and greater acceptance. We need to build our jobs in two ways. As I've been saying for quite a while, we need to reduce our use of foreign energy and use domestic and renewable sources. In addition to keeping wealth inside the country, it will also create jobs that can't be exported or eliminated. I'm starting to see some movement in that area and it simply has to happen.

The other thing we need to do is level the playing field so that it is not automatically better to export many jobs. Our current tax system and health insurance system are problematic and penalize companies that make product in this country. If we switched to a more neutral tax system, tax consumption not production, and used that money to fund health insurance for all, we would reduce much of the motivation to export jobs. Yes, some jobs would still be more efficiently performed outside the country, but many other jobs would become location neutral and remain here.

Lets get smart and get going.

Transitions

I haven't posted in a while since I was in the process of changing jobs and moved my base of operations from DC to NY. I'm still getting settled in and it will take a bit longer to get fully operational, but I've worked out most of the major issues and will be able to increase my productivity on the new position.

Going through a transition is always somewhat stressful and since I maintain the economy is doing just that, the country as a whole is undergoing stress. This is not the first time a society has had to adjust to changing circumstances and generally, the stress results in all sort of dire predictions.

What is true is that those who recognize and adapt to the change will do better than those who don't.

Going into earnings season again we will see if American companies can maintain their profitability as the recovery continues to sputter along. There will come a time at some future point when the recovery will speed up but before that point there is still issues that need to be resolved as we finalize our transition from a manufacturing based society to a technological service economy.

That is quite a simplification of what is happening but I think it is reasonable accurate. I'm also quite sure that companies will continue to be profitable as the inventory, store and employee reduction cost savings will allow them to make money on reduced volume. Americans have less to spend and will have for the foreseeable future. Successful companies have recognized this and adjusted their business models accordingly.

I'm not sure if Wall Street has accepted this changed reality and I expect to hear how companies are still disappointing with gloomy forecasts and missed sales goals while becoming ever more profitable. However, profitability is what increases the value of a company. I'm a big fan of it.

Trend Analysis

When you do analysis, depending on the data used the results have some degree of objectivity. For example, if you have a population of rats and feed them large quantities of a substance and have another population that has the same diet except for the particular substance, variation between the two populations may be related to the presence or absence of that substance. The more you can eliminate other potential causes of variation, such as genetics and environment, the results increase in value. However, even in a controlled experiment, the potential for some unknown factor to enter the experiment that normally you need to prove the results are repeatable, meaning that someone performing he same analysis halfway around the world would get the same results.

Now when you have analysis performed in an area where variables cannot be controlled the reliability of the results is questionable. For example, you often hear free market advocates talk about how a free market is the best way to promote growth and prosperity. Of course, it is hard to prove this experimentally so they use logic and examples. Now, the United States with something of a free market economy did better than the Soviet Union under communism. This may have been because of the economic systems or any of a million other differences between those two countries. Certainly I have no way of proving the free market economy of the United States was not a significant influence in the outcome, I just can't prove it one way or the other.

Now, consider some of the analysis you hear about financial trends. There are so many different factors influencing most industries that even if you successfully spot a trend, it is impossible to know for certain that there is not some countervailing trend you haven't spotted. Of course, if you can accurately predict that smart phones are taking more and more market share and therefore manufacturers of smart phones and smart phone components should do well, you also have to factor in how much they are losing if they currently manufacture dumb phones and if the phone they come out with is going to be popular or successfully promoted. The i-Phone was a phenomenal success and the Palm Pre and Palm Pixi weren't. I have read many reviews where the Palm products were considered technically better than the Apple phone but one took off with the right amount of hype and growing market share and one didn't.

Of course after the fact you see analysis as to what happened, and sometimes this post mortem seems perfectly logical, however, that is after the fact and somewhat irrelevant to most investors. Consider the events that happened today and the impact they had on the market. First China's announcement concerning the Yuan led to a higher start as this was perceived as another indication that the economic recovery was continuing and that foreign products would become more affordable in China. This trend held the market up for a while and then we had the assault on the banks as first one analyst said that a double dip in the housing market was a certainty and another analyst said that the financial reform bill would be a disaster for the banks. Further, we found out China was holding more gold than previously thought. Each of these factoids and analysis had some impact on the market and by late afternoon, the earlier increases had been erased and the overall market was slightly down. Of course the afternoon sell off may have nothing to do with the negative comments, it could simply be a combination of fund managers taking some profits and others seeing a trend develop, jumping aboard.

In fact, the one thing that is certain is that no trend goes unobserved. Once a sell off becomes clear, selling becomes the thing to do. You can always buy the stock back cheaper after it goes down some. If you are shorting the market, a sell off is a cause for jubilation. In fact, one thing you can count on is that on days with late day drops, there will be a bounce near the close as some traders get out of positions to avoid overnight risk.

Of course that trend analysis has very little real validity.