Opportunity Knocking?

What we need to do to correct our economy is not recreate a past that isn't coming back but jump into the future where we have sustainable energy, new industries, healthcare for all and free merit based education.

While we are still using too many fossil fuels we should only be building solar, wind or hydro ones going forward.  The industries to support that need to be in this country so we can have good paying jobs for Americans.  We also need to provide recharging stations for electric cars.  This is the future and we need to start building it.

We also need to invest in infrastructure for our highways, bridges, rail systems and dams.  It will provide jobs and help the economy become more robust.  

We also need to expand free health care to all residents of this country.  The only actual reason people oppose this is because they think they will get worse care when it is shared equally.  For those of you who enjoy elite care now, we can probably allow you to buy into a private system similar to Great Britain.

Similarly we need to make public colleges free and merit based.  In addition private colleges can continue for those who don't mind the cost.

In order to pay for this and our other expenses we need to consider reforming our tax system.  We need to balance the budget and work on the national debt.  Similar to business some long term project may need to be funded using bonds but we can't continue to massive deficits we see now.

Providing growth and jobs will help but other efficiencies may be need or additional sources of revenue.

We certainly can't take money out of our seniors pensions or health care, they have earned it.  

This country has had its ups and downs and the next great expansion is ready to happen.

We just need to open the door to opportunity.

What we need to do

It is pretty clear that there is a lot of nervousness in the stock market. While there are some pretty clear signs that the economy is going into a sort of recovery, there is a wide divergence of opinion over how strong that recovery will be.

I've talked in prior writings here about how the economy has made a semi permanent contraction of 15% or so and that the growth is not going to recover that amount anytime soon. Companies have adjusted to the reduced level of sales and have figured out how to be profitable at the lower levels. We will see some growth, but consumer spending has to start from the new base, and if anyone expects spending to jump to where it was two years ago anytime soon, they really need to look at the economics.

A lot of the credit that was available due to home equity is simply gone. A lot of that debt has also been liquidated in foreclosures and credit card defaults and this was the major adjustment that led us to where we are today. There are still more foreclosures and defaults to come, but most Americans are not going to abandon their homes. Most Americans are going to make a good faith effort to pay their debts. What has hopefully happened is that those who count on easy credit and lax standards to support an unsustainable lifestyle can no longer get credit.

In order to reduce unemployment we need to promote new growth industries, one of which is the renewable energy area. I see more and more promising information related to that area and as we reduce our need for foreign oil we will see wealth and jobs created in this country. This is potentially an explosive growth area, once we pass a critical point. For example, if we start to convert Semi to run on Natural Gas we will need to convert or manufacture the semis and build infrastructure to support them. If we start to see a great increase in the use of home solar due to incentives, we will need to manufacture the panels in mass (probably driving down the cost) and installing them on homes.

Another thing that will lead to sustainable growth is the steps necessary to make manufacturing economical in this country. I believe a change in our tax system to a consumption tax on all products sold here instead of the current system could go a long way towards accomplishing that. Now, this would only work it that system replaced at the very least the business taxes we impose, it can't be an add on tax. We can actually keep payroll taxes, especially if we gear them to paying for services specific to our citizens, such as social security, medicare, etc.

I believe the first growth area is going to gain steam at last but could be jeopardized by a return to cheap oil. I would suggest that oil be taxed to assure that its price does not fall below a level that keeps alternate energy competitive.

We are in the midst of a transition in our economy. A lot of the pain has already been felt, but we are not complete and there may be additional pain. However, if we don't learn from our mistakes and take the actions needed to create future growth and prosperity, we have only ourselves to blame.

Smaller economy

There was a good documentary on CNBC last night called "House of Cards" that spelled out how the flow of credit led to the housing bubble. Of course the biggest issue in the whole process was the simple fact that the frenzy allowed people who normally would never qualify for a mortgage to get extremely large ones and encouraged people to pursue excessive life styles using the growth in housing prices.

Since the whole system was dependant on home prices rising ad infinitum, when they did stop going up, the bubble crashed. We have been seeing the aftermath of that for the last couple of years.

Now as far as housing prices go, the correction in prices is either over, or almost over in most parts of the country. This is obviously debatable, but one of the things driving average prices down is the re-establishment of the spread between the high end of the market and the low end. The initial crisis impacted to low end of the market dramatically. Now of course, in some states such as California, the low end of the market has valuations that are higher than the high end of the market elsewhere, but still, the first houses impacted were generally the low end of the market. This crash in prices increased the spread between entry level housing and higher levels of the market.

Now even as the real estate bottoms have started to stabilize, we are going to have a period where the higher end of the market will have to adjust down. I don't expect this to be as catastrophic as the price drops in the low end, but it will continue to feed the impression that housing is in trouble. Many of these houses are owned by people who don't necessarily have to sell. Also, in many cases they still have significant equity in these houses, so even when they sell at values lower than the peak, they are still ahead of the original basis.

What continues to be the most problematic aspect of the housing problem is the fact that so much of our economy was based on people spending paper wealth. I've shown statistics previously where the amount of discretionary income available has not changed dramatically. Now even if a larger percentage of this amount was diverted into savings, you would only have a small economic contraction. However, consumer spending in the bubble years was tremendously supplemented by housing wealth and that spending is simply not coming back anytime soon. That is why we need to adjust to an economy that has to be viable at about 85% of the prior levels.

This will lead to unemployment higher than it used to be, but not necessarily at an unsustainable level. We do have a chance to help the economy dramatically by investing heavily in the renewable energy area.

Thoughts about jobs and taxes

After the S&P dropped to the 666 level in March, it bounced back in April and May to the low 900s. Since then it has been flat to down going to the high 800s right now. This pattern comes very close to the pattern we saw in the early 1970s and if that example holds the S&P will have to drop to about 825 after which it should climb to around 11-1200.

Following that example further, after it reaches that level it will consolidate there for a number of years with variations of as much as 15-20% up and down. Two things characterized that period of stagflation, excess money and high unemployment. The reason for the high unemployment then was that we were transitioning from a manufacturing based economy to a more technological and service based one. Millions of jobs in industries that had dominated the US economy in the 50s and 60s effectively went elsewhere as it was cheaper to buy foreign items then to make them here. Eventually, the rise of high tech and service industries increased employment leading to increased consumption, rise in real estate values and adjustment in valuations to the money supply.

Now, looking at the next ten years in America we face similar problems. The remnants of the old industrial jobs are under fire again but also, we are seeing a direct challenge to tech and service jobs. It is clearly cheaper to manufacture almost everything overseas but services were at least local. However, as less and less services are performed in person, there really is no reason for service jobs to be local. Also, as more and more sales go on-line, even relatively low paying jobs in retail will be reduced. If I complete an on-line purchase, there is no need to deal with a person at all. Further, I have grown quite fond of the self service checkout at places like home depot and some grocery stores. Yes they have a person monitoring these by instead of 4 people, they only need one. These are jobs that are not coming back. Considering the long term hit to construction (which at least for now still has to be locally) there are millions of jobs going away that are not going to return.

Now, even if the service jobs go on-line, they could still be performed in this country if it made economic sense. Certainly not all jobs are going away but think about this for a second. If we have 100 million people looking for work and 95 million jobs we have a 5% unemployment rate. Assuming the number of people looking for work stays the same but 5 million jobs go overseas or simply disappear because technology replaces them (only 5%) we now have 100 million job seekers for 90 million jobs we now have a 10% unemployment rate.

So are we doomed to live with high unemployment? Until the next growth industry comes along to create jobs the answer is yes. There are some things we can do to mitigate the problem, make the relative cost of employment cheaper by centralizing health insurance cost (if you are going to pay it whether you have employees or not, it stops being a deterrent to hiring), but technology is not going to stop getting better and the trend towards on-line or self-service will continue.

I believe jobs can be created by invigorating the renewable energy industry and by providing funds to fix our aging infrastructure. Further, we need to make sure the cost of doing business in this country is not higher than it should be. I believe we should switch to a tax on consumption to even the playing field. If you sell product in this country you should pay a fair amount of tax.

Currently faced with massive deficits and an increasing national debt, we see our politicians scrambling to find more things to tax. I recently saw a proposal that would take the difference between income and savings and tax it. Generally, that is a better system than what we currently have, but still requires millions of returns to be filed. It really seems simpler to tax sales and do it strictly.

Growth

Read a blog today that argued that there will be no real growth in the California economy for many years to come and by extension none in the US economy as a whole.

The argument centers around the fact that our two primary post war growth industries, housing and automobiles, are both unlikely to show any growth, and without that stimulus, overall growth will be stagnant. I agree that we need to adjust expectations in both of those industries, but think that it will take years to absorb excess housing, unless we simply raze much of it and reuse the land to grow biomass for bio fuels, I believe that the automotive industry has an opportunity to grow as we replace our current fossil based vehicles with vehicles that run on electricity, bio diesel or natural gas. In addition, the development of infrastructure to supply that fuel and delivery systems hold tremendous potential.

Further, while we have enough housing stock, I believe there is ample opportunity to incentivize energy remodeling that will sustain much of the construction industry. Use of solar panels to reduce electricity needs, better insulation, more efficient appliances and conversion of heating systems to more efficient ones can create jobs.

This growth is an offshoot of the need to develop a renewable energy imperative in this country and the development of industries to make it happen. Solar, wind and conversion of bio mass and/or coal into clean alternatives will reduce our balance of payment problems and create a tremendous number of jobs.

There isn't really a choice about this change in the long run, but if we continue to send wealth offshore only so we can borrow it back because it has a short term cost advantage, we, as a nation are being short sighted. The Government can influence this by reforming the way we collect taxes and while continuing to promote world trade, make sure American industries are not put at a disadvantage.

For those who see gloom and doom because of some of our current problems, that were exacerbated by those who failed to follow up on the initiatives from the 1970s, realize that this country has tremendous potential still and simply needs to reform our energy and tax profile to realize it.

Time to get started.

Independence day

Jobs report yesterday confirmed that business is still cutting back in order to improve profitability. While eventually there will be some hiring in our legacy industries, our best hope to achieve high employment levels is to foster new growth.

Some of this will happen in technology, but realistically, considering the cost of labor, the actual production will most likely not take place in this country. We only exacerbate this by our current tax system that increases the cost of manufacturing domestically.

The area that I believe holds the most promise is in the area of domestic/renewable energy development. Another area is the improvement of infrastructure. We have a ton of roads, bridges, and other infrastructure that has been ignored or under maintained.

We will have job growth, but some areas, such as construction and heavy manufacturing may very well have seen their peaks. Consumer spending is simply not going to recover as fast as it has in the past. Too much wealth has been lost in the real estate collapse. However, the country can build profitable industries and reduce some of our structural issues by reducing dependence on foreign oil and reforming our tax code.

July 4, 1776 was the day we proclaimed our independence from England. I think it is time to declare our independence from foreign oil.

Recovery formula

There are two things that need to happen for a real recovery to take place in the US Economy. The first requires that housing prices stabilize and start to increase and the second is that we need to create jobs.

The current stimulus efforts are directed at symptoms and not root causes. Providing people on Social Security a $300 stimulus check adds up to a lot of money in the aggregate, but not very much to each individual. What are they going to spend it on? First the check went into their direct deposits. Second, they live on a monthly budget and the extra $300 or $600 for a couple is probably not going to inspire them to run out and buy a new car and the odds are they aren't that into smart phones. Since the money wasn't enough to do much for them, it simply stayed in the bank to cover potential increases in health costs, taxes and/or any number of rainy day possibilities. The fact that economists were surprised, if they were, that the money was reflected as higher savings vs higher spending for the most part is what surprises me.

Also, instead of focusing on what should be and I believe will be our new growth industry in renewable energy, money is being given to protect a relatively small number of jobs in politically significant but economically neutral legacy industries. We are not going to see significant new job growth in the auto related industries. We may see some, but new plants will make better use of robotics and there is going to be fewer cars sold as Americans will be thriftier in the near term, keeping old cars longer. If we were to invest the same amount of money in either converting coal to oil, increasing wind and solar, increasing use of natural gas and increasing the use of ethanol, it would create new jobs, improve spending and reduce our balance of trade and dependence of foreign oil. This is a cumulative impact since every equivalent barrel of US energy we use means we need one less imported. Further it would start to position the US towards the future. We need to get to a fully carbon neutral renewable energy future and we need to start getting there now, but smartly.

The current bill that wants to use CAP and TRADE is a heavily compromised attempt to move in the right direction but is probably doomed. It is hoped that the bill will lead to increased jobs but we can get to increased jobs simply by providing funding to private industry to build renewable or at least domestic energy infrastructure.

Improvement in the real estate markets has already started. TARP money should be used to buy distressed properties. Valuations for these properties should be close to Market but having a guaranteed buyer would stabilize those prices. The houses should then be returned to the marketplace at a rate that doesn't cause a further collapse in values. I believe that speculators would be found to buy these houses with the hope of increases. I also believe this was the original intent of the Troubled Asset Relief Program. Yes this interferes with the market, but we have had a tremendous economic crisis that requires Government intervention. I think the cost of this type of TARP program may actually turn out to be much less than anticipated as the assets will start to increase in value. However, getting them revalued to appropriate levels and back into the marketplace with stable mortgages returns them to the tax rolls.

Stimulating growth

Right now the economy is faced with a significant conflict. In general demand for most products is down, a deflationary factor while the amount of money in circulation is greatly increased, an inflationary factor.

If you focus on the demand aspect you may very well predict negative growth, deflation and massive unemployment.

If you focus on the money supply you may very well predict high inflation.

Of course you can't have both deflation and inflation, so should we average the two and come out just about right? Would seem unlikely but it does seem that the weak economy will resist the inflationary pressures for a while.

However, the only real way to eventually avoid economic collapse is to grow the economy. There are, and have been a number of challenges facing the economy that have been developing. Perhaps the most serious is the aging of the population. If we assume that the baby boomer generation is going to start, or has already started, to leave the workforce in great numbers, then the demographics tell us that less and less workers will have to support more and more retirees.

This demographic to a large extent drives the medicare finance problem. it also drives the social security problem. These systems were designed as pay-as-you-go systems meaning that the amount collected each year pays for the benefits of the folks collecting benefits. Now if you have more and more people collecting benefits and less people paying into the system, it is pretty obvious that the burden will at some point become untenable.

Of course the recent loss in value of baby boomer assets in real estate and many retirement accounts may slow the number of retirements, and the added stress may reduce the numbers somewhat, but it isn't a long term solution.

The best solution to this problem would be to somehow create massive growth followed by a increase in jobs. Additional jobs would be filled either by these very boomers, immigrants or by exporting the jobs. Recently the last of these options has been the more common, and that creates the big issue related to taxation. We rely on income and corporate taxes in this country and if we export jobs, we lose the income tax portion. Now it is unlikely we are going to start imposing income taxes on workers in other countries, so if we are going to continue this practice we really need to consider switching from an income tax to a consumption tax. Then every product sold in this country would pick up a fair share of the tax burden, no matter where the workers were.

Now without going off on a tax discussion, where is this growth going to come from. Generally, a single growth industry is enough to drive the economy if it is indeed robust enough. As that industry creates jobs, those people increase demand in other areas, driving an upward spiral of growth.

It would seem that a massive effort to switch to renewable resources in this country has the most potential. It would create jobs in this country, inspire new technology and construction and improve the balance of payments.

If you look at the recent economic crisis, it had a lot of fundamental reasons, massive debt and inflated asset values, but perhaps the most critical and the one that actually drove the start of the collapse was our dependence on foreign energy and the massive balance of trade issue that creates. You never really can solve a problem if you don't address the root cause and I firmly believe the root cause is fairly obvious and its time we solved it.

Renewable resources

Resources come in two varieties, renewable and non-renewable. Non-renewable resources have a limit, i.e. amount of oil that actually exists. Renewable resources on the other hand can continue to support us for an indefinite period if not destroyed in some way.

If you accept that basic premise, then you should also accept that moving from non-renewable resources to renewable resources is ultimately inevitable. So, power generated via oil, gas and coal will have to be replaced at some time in the future by solar, wind and hydro. The only real question is the time frame.

As long as non-renewable sources of energy are cheap it does not make economic sense to convert. Of course as the cost of non-renewable energy increases and the cost of renewable energy decreases, there will come a point when it does make economic sense.

The Government can, as a matter of social policy, influence that outcome. By increasing taxes on non-renewable resources and providing tax credits for renewable ones, the economic balance can be changed. This could potentially be revenue neutral if the credits were financed by the taxes on non-renewable energy, but the current infrastructure is heavily reliant on non-renewable energy and it would drive that cost up.

So, lets say the Government increased taxes on gasoline to a level such as $4 a gallon and utilized that revenue to provide tax credits for electric car usage. Would this be effective? I think it would be, but a bigger question may be what would be the impact on the economy?

The increased cost would be experienced almost immediately and the conversion process would take time. So using another example, if the price of home heating oil was increased but tax credits were made available for solar alternatives, it would increase cost to the average consumer. Of course the money generated would create jobs and as the renewable energy industry became more efficient costs should come down, and as an added bonus, the trade deficit could very well be reduced.

So the real question is, would the increased economic activity based on conversion from non-renewable to renewable outweigh the decrease in economic activity based on increased cost for energy in the short term?

I think it can be demonstrated that at some point the increased economic activity would more than offset the cost impact, especially as the cost of renewable energy decreased and the use of non-renewable energy decreased. How long would it take?

When you consider the slack in our current economy, in almost all sectors, the increased employment in something as simple as installing solar panels on houses would likely have a fairly immediate impact. Manufacture and installation would be a growth industry for a long time. Similarly, if the car manufacturers can retool quickly, the demand for electric and/or hybrid cars will boost the auto industry. Other areas may very well take a longer time. Many solar and wind projects get delayed by local issues. It may very well take a significant public affairs campaign to overcome some of this, but I do believe that most Americans will get on board if there is a consistent public message about how this reduces dependency on foreign oil and is good for the environment.

Generally, I believe the downward impact would be quickly offset by the increase economic activity.

Just something to think about.