Out of Office

June 8, 2011

No, this isn’t about Obama.  Just want to let everyone know that I’ll be “out of the office” for about 3 weeks, so my postings may be a bit scarce and my responses a bit slow for a while, but I’ll be back with a vengeance.  I’m anxious to find out what the trade figures will be tomorrow (sadly, there’s a good chance that the monthly trade deficit will top $50 billion for the first time since the start of the Great Recession), but my comments may be a bit slow.

In the meantime, I will continue to fill book orders as they come in.


Americans Giving Up The Hope That Swept Obama into Office

June 7, 2011


The above-linked piece appeared on CNBC’s web site a couple of days ago.  A new poll shows that Americans are losing hope that the economy will ever recover – not just anytime soon, but ever.

… according to the latest survey from business-advisory firm AlixPartners … an increasing number, some 61 percent, say they don’t expect to return to their respective pre-recession lifestyles until the spring of 2014, if ever.

What’s worse, a full 10 percent said they expect they will never return to pre-recession spending.

This morning, a new ABC poll finds that, if an election between Obama and Mitt Romney were held today, Romney comes out ahead by 3 percentage points among registered voters.  59% disapprove of the president’s handling of the economy.  89% say that the economy is in bad shape.  And 25% are “downright angry,” matching the highest reading on that poll question reached in 1992, when George H.W. Bush was swept out of office.

Since the election of Obama, the economy’s slide into recession – perhaps even depression – was arrested by a sugar high of deficit spending and quantitative easing (printing money) by the Federal Reserve.  As long as the sugar was flowing, the illusion of prosperity that was long maintained by one economic bubble after another, was kept alive a little longer and, with it, Obama’s approval ratings.  But now that the 2-year stimulus spending plan and the latest program by the Federal Reserve are simultaneously coming to an end, perception is once again giving way to reality.  The economy is tanking and, with virtually no appetite for any further deficit spending or Fed balance sheet expansion, the prospects are grim.  In spite of Republican assurances that the private sector will rush in to fill the void left by big cuts to government spending, few really believe it.  Most understand that, once the government shuts off the money tap, the party’s over. 

Obama was swept into office on a tidal wave of hope, fueled by his oft-repeated campaign promise to address our broken trade policy and bring back American manufacturing jobs.  Not a single promise on trade has been kept, including his promise to at least not make matters worse by signing any more job-killing free trade agreements like the one he signed with South Korea, limiting  our auto exports to 75,000 per year while giving the Koreans unlimited access to our auto market. 

Now it’s too late.  When 2nd quarter GDP numbers are released in July, it’ll confirm what everyone already knows – that the economy has slipped back into recession.  Although it’s never too late to fix our trade policies (not that Obama will do it), it’s too late for the effect to take hold before the next election.  Such a move would exacerbate inflation in the short term and only after manufacturing has begun its shift back to the U.S. – a process that would take a minimum of 2-4 years – would the positive effects of the change begin to be felt. 

So, at this point, Obama’s fate is sealed.  By the time the election rolls around, there will be proverbial pitchforks in the streets and his re-election hopes will be doomed.  Good riddance.  He broke his promise of “hope and change” and substituted the Democratic standard approach – deficit spending, leaving the root cause of our problems – the trade deficit and worsening overpopulation – untouched. 

Unfortunately for Americans, all we’ll get from Romney or whoever else survives the Republican primary, despite any promises to the contrary, will be the usual – tax cuts and trickle down economics (which, since the explosion of the trade deficit since Reagan, is more properly described as “trickle out” economics).  What will be the Republican mantra?  Instead of “hope and change,” it should be something like “change for the sake of change, since there is no hope.”

Bad May Unemployment Report Just More of The Same

June 3, 2011


This morning’s unemployment report got about the same reaction as a cockroach in a punch bowl.  The addition of 54,000 jobs in May was a huge disappointment, since the consensus forecast was a gain of 190,000 jobs.  To make matters worse, the U3 unemployment rate rose to 9.1%, moving in the opposite direction of forecasts of a decline to 8.9%.  The news was bad – true – but when you examine the details of the report, you find that the news is nothing more than a continuation of a bad trend that’s been in place since the “end”  (little more than a leveling off)  of the recession that began in 2008.

Here’s my spreadsheet and charts:

Unemployment Calculation     Unemployment Chart     Labor Force & Employment Level     Unemployed Americans     Per Capita Employment

As you can see, the latest data is nothing more than the continuation of the “new normal” that has set into the American economy – steady unemployment of about 9%.  The reason this report is getting more attention is that it confirms what has slowly begun to dawn on everyone – that the economic recovery is stalled and in danger of backsliding into a double dip. 

One of my favorite pieces of data used in calculating unemployment is the “employment level.”  If this number isn’t going up, no jobs are being created.  Examining the data, we find that this number has risen just slightly less than 2 million jobs since bottoming out in December of ’09.  While that may sound impressive, it has barely kept pace with the growth in the labor force, which has risen by the same amount.  Worse, nearly all of that increase took place from January through April of last year, when it rose by nearly 1.7 million jobs.  Since, then, in the past 13 months, it has risen by only 0.3 million jobs, far below the rate needed to absorb growth in the labor force.  Yet, during that period, the official U3 unemployment rate fell from 9.9% to 9.1%.  The numbers don’t add up, a situation explained away by the administration with the claim that a million workers have given up looking for work, while another million new workers haven’t even begun trying.

Per capita employment, the employment level divided by the U.S. population, slipped slightly for the 2nd month in a row and, at 44.88%, remains very, very close to the worst level of the recession – 44.68% in December, 2009 (a figure that was matched in November, 2010). 

Make no mistake, a double-dip is on the way – a new recession that may well be worse than the last since both the federal government and the Federal Reserve have virtually exhausted their gimmicks for creating the illusion of a recovery.  There is no appetite for any more stimulus, not by lawmakers and not by the credit markets.  If anything, spending is going to be cut drastically, exacerbating job losses among federal, state and local government workers.  (See below.)  The Federal Reserve has little appetite for another round of quantitative easing, seeing that the last round merely stoked inflation and market bubbles while doing little to boost the economy.  The Obama administration is left with only two options:  reform trade policy and restore a balance of trade while simultaneously reining in the importation of more foreign workers, or stand idly by and watch the economy sink into an even worse recession while unemployment resumes its climb above 10%.  I’ve never in my life seen the economy so boxed in on all sides.  Yet, I have my doubts that Obama will do the right thing. 

* * * * *

The anemic addition of 54,000 jobs breaks down as follows:

  • Professional and business services:  + 44,000
    • accounting & bookkeeping:  + 18,000
    • computer systems design, etc.:  + 8,000
  • Health care:  +17,000
  • Mining:  +7,000
  • Construction:  unchanged
  • Retail:  unchanged
  • Transportation & warehousing:  unchanged
  • Leisure & hospitality:  unchanged
  • Manufacturing:  – 5,000
  • Local governments:  -28,000

I know what you’re thinking:  these numbers don’t add up to 54,000.  I can’t explain it.  Makes you wonder if the real picture is even worse, doesn’t it?

This was the first decline in manufacturing employment in six months, a bad sign since manufacturing has been one of the few bright spots in the economy and the sector upon which the Obama administration was pinning all its hopes, with its plan to double exports in five years. 

Trade Policy with Ireland a Failure on Two Levels

June 2, 2011


The above linked op-ed piece from Reuters notes that Ireland is on the dole from the IMF and asks whether Ireland will be the next Greece. 

Coincidentally, I’ve been in the process of updating my trade data for 2010, going through the nations alphabetically, and just finished Ireland.  If you’ve read Five Short Blasts or if you’ve followed this blog, then you’re among the few people who understand that our trade deficit in manufactured goods with Ireland, when expressed in per capita terms, is the largest by far – more than 25 times worse than our deficit with China.  What I’ve been finding as I’ve updated my data is that trade in general rebounded a bit in 2010, following a big recession-driven plunge in 2009.  Deficits tended to grow once again while surpluses – primarily with nations less densely populated than the U.S. – also grew.  So I was curious to see what happened with Ireland.  Here’s the chart, updated with 2010 data:

Ireland Trade

Our trade deficit in manufactured goods with Ireland exploded to a new record of  $24.6 billion, shattering the old record of $20.8 billion set in 2008, driven by imports of pharmaceuticals of $22.7 billion.  In per capita terms, that’s $5,930 per Irish citizen, almost 27 times worse than our trade deficit with China.  It accounts for 16% of Ireland’s per capita income. 

By the way, going off an a tangent for a moment, remember when there was a lot of pressure to allow the importation of drugs from Canada as a remedy for high drug costs?  Remember the response?  “We can’t assure the safety of our drugs if we import them from Canada!”  Oh, really?  I wonder how many people realized that most of our drugs are imported anyway, not from Canada but from Ireland?  And, even if we imported them from Canada, most of those drugs would still come from Ireland anyway, imported from Ireland into Canada and then re-exported to the U.S., where they’d have otherwise gone in the first place. 

But let’s get back on topic.  Ireland is a nation almost twice as densely populated as the U.S.  As such, it would qualify for the lowest level of import tariffs under the population density-indexed tariff plan that I proposed in Five Short Blasts, a tariff of 5%.  That alone would generate $1.25 billion in new federal revenue.  Enough to motivate our drug companies to shift their production back to the U.S.?  Probably not. 

So, while our trade policy is a failure because it doesn’t account for the disparity in population density, there’s something else at work here too.  Even I’d be the first to admit that the disparity in population density, relatively small in comparison to other nations like Japan, Germany and China, doesn’t explain our deficit with Ireland.  The bigger factor is the free tax ride Ireland gives to foreign investment, especially the drug companies.  Ireland is subsidizing its pharmaceutical industry – providing them an unfair trade advantage. 

And now we see that they’re paying the price.  Ireland’s broke and is being subsidized by the IMF – in other words, by the American taxpayer.  So, in addition to our foolish trade policy shipping away our pharmaceutical industry, its jobs, and a not-insignificant chunk of our domestic economy, we further erode our own economy by adding to our own debt with the funding of the IMF. 

Free traders would say that we need to compete better with Ireland.  But how?  Give the pharmaceutical industry a tax break?  They already get that from Ireland!  So that’s no incentive.  And what exactly has the tax break gotten for Ireland except a big deficit and bankruptcy?  No, the real answer is to impose tariffs on Irish imports – not just the 5% tariff called for by the disparity in population density but an additional tariff to compensate for the unfair tax advantage offered by Ireland, perhaps raising the total tariff to 20% or more, boosting our increase in revenue to $5 billion. 

Free traders would howl, “but this will ignite a trade war with Ireland and we’ll lose out on all the exports to that country!”  Maybe.  But even if trade with Ireland came to a screeching halt, the loss of our $6 billion in exports to Ireland would be offset by the elimination of $31 billion in imports.  We’d be five times better off! 

Our trade policy is an abysmal failure and there may be no better example than Ireland.  It’s resulted in the loss of a big part of our pharmaceutical industry, the loss of many thousands of high-paying jobs, has left Ireland in no better fiscal position and now requires more from our taxpayers to fund the IMF to support Ireland’s policy of subsidizing foreign investors.  Does any of this make any sense whatsoever?