U.S. Slides Back Into Recession in 2nd Quarter

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

The Bureau of Economic Analysis (BEA) released its first estimate of GDP (gross domestic product) for the 2nd quarter this morning.  (Link provided above.)  The news is not good, which should come as no surprise.  GDP was anemic in the first quarter, at an annual growth rate of 1.8%, and all indications have been that the economy slowed markedly in the 2nd quarter.  Now we have verification of that, with second quarter GDP coming in at annual rate of increase of 1.3%. 

However, as I’ve said before, what matters most is not the size of the GDP pie, but the size of the slice that’s left for you when everyone sits down at the table.  So, when population growth is factored into the equation, real per capita GDP actually declined in the 2nd quarter at an annual rate of 0.5%, falling from $43,191 to $43,132 per person.  No wonder the economy doesn’t feel as though it’s in recovery.  In per capita terms, we’ve actually begun the 2nd dip of the long-predicted (by me, anyway) double-dip recession. 

Actually, the U.S. has been in a continuous recession since the end of 2007, when per capita GDP peaked at just over $44,000 per person. 

Here’s a chart of real (adjusted for inflation) per capita GDP:

Real Per Capita GDP

The biggest reason for this slowing of the economy is detailed in the BEA’s report:

 Real personal consumption expenditures increased 0.1 percent in the second quarter, compared with an increase of 2.1 percent in the first.  Durable goods decreased 4.4 percent, in contrast to an increase of 11.7 percent.  Nondurable goods increased 0.1 percent, compared with an increase of 1.6 percent. 

In other words, the consumer is tapped out.  No surprise, given that unemployment is sky high and rising.  Time and again in recent days I’ve heard economists say that “we’ve got to stimulate consumption.”  Bull.  Americans are consuming as much as they possibly can.  We’ll explode if we consume any more.  The real problem is that we’ve given away the production of all the products we consume to foreign manufacturers through our idiotic trade policy.  Whose economy would it stimulate if we consume even more?  China’s.  Japan’s.  Germany’s.  Not ours. 

Mindlessly, the federal government continues to throw fuel on the fire by importing more workers even as unemployment is on the rise, and by crowding more and more people around the table to stare hopelessly at an ever-shrinking slice of pie. 

Since Obama took office, I’ve predicted that, if he didn’t take action to fix our trade policy and restore a balance of trade before the stimulus spending ran out, we’d slide right back into recession before the next election.  And that’s exactly what’s happening.

Economists Question Their Own Relevance

A couple of very interesting op-ed pieces, written by economists, have appeared on Reuters in the past couple of days.  The first questions the relevance of the field of economics, noting that academic economists have little connection with reality.  Here’s a link:

http://blogs.reuters.com/great-debate/2011/07/26/a-great-divide-holds-back-the-relevance-of-economists/

You can find my response among the comments, but to save you the trouble of scrolling down through the responses, here it is:

Mr. Thoma, congratulations for having the courage to take your field to task. I am convinced that there are no solutions to our economic problems that will be found in the realm of politics. It makes little difference which party or ideology is in power when they all take their economic advice from economists who basically adhere to the same dogma and remain focused on one thing – macroeconomic growth. It’s the field of economics that must change if we are to have any hope of fixing our economy.

Among the other sciences, nothing is sacred. Everything is put to the test and old theories give way to new when the data and facts prove them wrong. This is what’s wrong with the field of economics. There is one parameter of economics – indeed, the most important parameter – that no economist dares to tackle. I’m speaking of the economic ramifications of population growth. Ever since the beat-down endured by economists following the seeming failure of Malthus’ theory, economists have steadfastly refused to ever again consider the subject of overpopulation, and anyone who does is immediately dismissed and riciculed as a “Malthusian.” Economists are united in their response: man is ingenious enough to overcome any obstacle to further growth.

Perhaps man is clever enough to stretch resources and mitigate stress on the environment indefinitely. But, since it’s impossible for population growth to continue forever, even if we tried, shouldn’t economists at least be curious enough to ponder what, then, will bring it to an end? If they did, they might discover the relationship between population density and per capita consumption, and the role that an excessive population density plays in driving down per capita consumption and, consequently, in driving up unemployment and poverty. And they may discover the role that disparities in population density play in driving global trade imbalances in manufactured products, the imbalance that now threatens to collapse our economy.

If the field of economics wants to better understand how the economy works, then it must be willing to consider the impact of every parameter.

In response to this first piece, another economist then wrote the following, suggesting that the real problem is a lack of accountability:

http://blogs.reuters.com/great-debate/2011/07/26/theres-zero-accountability-in-economics/

My response to this one was written when I was in a little more cynical mood.  Here it is:

Want to know what’s wrong with the field of economics? Consider your response if I were to suggest to you that there are economic consequences of overpopulation that go far beyond a strain on resources and stress on the environment. It’s easy to predict your response, since it would be the same response of any economist. You would dismiss me as a “Malthusian” and refuse to even consider the subject. That’s what’s wrong with economics. This field of “science” instantly curls into a fetal position any time the most dominant parameter at work in economics is even mentioned. If the other sciences reacted the same way to such challenges, the world would still be flat and lie at the center of the universe with the sun rotating around it.

It should be obvious by now that there are no political solutions to our economic ills.  It matters not if we cut the deficit by cutting spending or by raising taxes.  Either approach will have the same effect – cutting macroeconomic growth and jobs, leaving us with reduced revenues and the same deficit that we started with, which can only lead to another round of the same thing.  Nothing can change until the field of economics reforms itself into a real science, fully exploring the consequences of all economic parameters, especially the unpleasant topic of population growth, and then developing policy recommendations that are rooted in reality.  The fact that these economists are questioning their own profession may be the first small step in that direction.

The Truth about Prospects for Cutting The National Debt

Given the bitter and stalemated debate in Washington about the debt ceiling and the national debt, it’s a good time to take a close look at the issue to see whether it’s really as bad as our political leaders would have us believe.  Or is it possible that it’s even worse? 

Most economists talk about the national debt as a fraction of our Gross Domestic Product, or “GDP.”  The reason it’s getting so much attention now is that the national debt is about to exceed our GDP, the point in economists’ minds where a nation’s ability to deal with its debt is called into question.  The following is a chart of our national debt relative to our GDP, dating back to 1929 and projecting forward (using Congressional Budget Office projections) to the year 2021 – ten years from now.  (All of the debate in Washington right now is focused on this ten-year projection.)

National Debt as Fraction of GDP

As you can see, the national debt has been here before, quickly soaring to 120% of GDP during World War II, driven by the massive war effort.  But once the war was over, spending fell to a fraction of its war-time level and a post-war economic boom cut that figure to 32% by 1974.  Then it began slowly rising again.  Not so coincidentally, the U.S. had its last trade surplus in 1975.  Since that time, deficit spending has been used to offset the negative economic effects of the steady outflow of money from the U.S. 

So, as a fraction of GDP, it isn’t such an ugly picture after all.  We’ve been there before and we recovered.  We can do it again, right?  Maybe not.  The problem is that it isn’t the GDP that will have to pay back the debt.  It’s the American citizens.  In other words, it’s you.  While lawmakers and economists may conclude that we merely need to raise revenues to some larger fraction of the GDP, every dollar of that revenue will be paid by you and me.  If it’s revenue generated by taxes on business profits, those taxes will be passed along to consumers in the form of higher prices.  One way or the other, you’re going to pay.  Therefore, what really matters is the national debt expressed in per capita terms (that is, divided by the population).  Here’s a chart of the national debt per capita over the same time frame:

National Debt Per Capita

Yikes!!  Looks a little scarier now, doesn’t it?  Right now, every man, woman and child owes about $44,000 on the national debt – about $176,000 for every family of four.  By 2021, those figures rise to $78,500 and $314,000 respectively. 

But, to be honest, much of what you’re seeing here is merely a measure of inflation.  Personal incomes have also increased a lot over this same time frame and, if the CBO is to be believed, will continue to grow at the same pace.  I have serious doubts about that, but let’s suppose the CBO is right.  The following chart shows the national debt relative to your ability to pay it; that is, as a fraction of personal income.

National Debt as Fraction of PI

Now it looks like the first chart of the national debt as a fraction of the GDP, but a little worse.  The debt already exceeds the average personal income.  And, using the CBO projections, it’ll exceed personal income by 30% by 2021.  And that’s if the CBO projections, a bit rosy in my opinion, are correct.  What if, instead of growing by an annual rate of 3%, GDP grows by only 2.5%?  And what if personal income rises at a rate of only 2.5% (just keeping pace with GDP growth), instead of the CBO’s average projected rate of increase of 3.65% which, in my opinion, is wildly optimistic given the current state of unemployment.  If that were to happen, the per capita national debt would soar to nearly 150% of personal income by 2021. 

OK, back to the debt ceiling/deficit reduction negotiations in Washington.  Two scenarios that have been discussed involve cutting the deficit by $2 trillion over the next ten years and the other scenario – the one the president was pushing for – the “big deal” – would cut it by $4 trillion.  Just exactly what would that do to the trajectory of the national debt?  Here’s how it would look under the first scenario, assuming that the $2 trillion reduction is spread evenly over those 10 years:

2 trillion cut from debt

It goes a long way toward slowing the growth in the debt as a fraction of personal income, but it continues to grow.  What if the president got his way, and the debt was cut by $4 trillion over 10 years? 

4 trillion cut from debt

Yeah, it helps, but barely.  As a fraction of personal income, the national debt does begin to decline ever so slightly but, by the end of that ten-year period, you can see that it starts ticking up again.  And, make no mistake, cutting $4 trillion from the deficit, whether it’s done entirely by spending cuts, tax increases or some combination of the two, is going to be a tremendous hardship and will likely drive the economy into recession, which would really send the debt skyrocketing again.  And that’s exactly what Federal Reserve Chairman Ben Bernanke has warned of in the last couple of days.  The point I’m trying to make is that we can never “get there from here.”  We can never make any serious headway on the national debt by focusing only on spending and taxes.  If anything, it’s likely to make matters much worse. 

But there’s an alternative.  What if we focused on restoring a balance of trade instead of on spending and taxes?  Our trade deficit is currently $600 billion per year.  What if, through the use of tariffs, we were able to eliminate it?  The results would be:

• GDP would be boosted by $1.2 trillion per year.  Why twice the trade deficit?  Because imports are a subtraction from GDP.  Eliminate those imports, and GDP rises by $600 billion.  Now, manufacture those products domestically, and GDP rises by another $600 billion.
• Revenues from tariffs would easily bring in an additional $400 billion per year, assuming an average tariff of 20% on $2 trillion worth of imports.
• Revenues from the increase in GDP would bring in approximately another $200 billion, using the CBO average rate of about 17% of GDP.

Even if spending isn’t cut at all, here’s the effect on the national debt projection (again, expressed as a fraction of personal income):

trade balanced

With a balance of trade restored, now we’re making real progress on the national debt, and with no pain – no spending cuts and no increase in tax rates.  And isn’t it interesting that, under this scenario, the projected rate of decline in the national debt mirrors the rate in decline following World War II, when the U.S. still had a positive balance of trade?  This lends credibility to the projection. 

In summary, the approach to reducing the deficit and the debt now being negotiated in Washington barely has any hope of slowing the rise in the national debt at all and, in all likelihood, will actually make it worse by driving the ecnomy into recession, reducing revenues and increasing the need for more safety net spending.  It’s simply impossible to make headway on the national debt without first addressing our enormous trade deficit.

U.S. Trade Deficit in May Soars to Worst Level of Obama’s Administration

http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf

As reported by the Bureau of Economic Analysis (BEA) this morning (link provided above), America’s trade deficit jumped in May to $50.2 billion, easily beating the previous worst level of the Obama administration, $47.9 billion in January of this year.  Since President Obama took office in January, 2009, the overall trade deficit has risen by 35%.  The goods deficit soared to $64.9 billion in May (an annual rate of $779 billion), and is up by 39% since President Obama took office.  Since January of 2010, when President Obama pledged to double exports, America’s overall trade deficit, the deficit in goods and the deficit in manufactured goods are up by 34%, 33% and 26% respectively.  The following is a chart of the overall trade deficit since the president made his pledge in January, 2010.  As you can see, I actually had to increase the scale of the y-axis this month (from -$50 billion to -$55 billion) in order for May’s deficit to register on the chart:

Balance of Trade

However, the president can legitimately claim that he is meeting his goal.  Here’s a chart of exports and the trajectory they must take to meet his goal of doubling exports in five years:

Obamas Goal to Double Exports

But what does that matter?  The problem here is that, like so many others, the president has made the classic mistake of focusing on only one half of the trade equation.  Yes, increasing exports boosts jobs, but rising imports destroys them just as quickly.  And, given the lack of focus on imports, it’s no surprise that they’re rising more quickly than exports, just as they have for decades.  The president puts all of his focus on exports, where we have virtually no control, and completely ignores imports, over which we have total control (if we would simply return to the use of tariffs to manage the overall balance of trade).  Such trade policy, which is nothing more than the continuation of the same trade policy we’ve followed since the signing of the Global Agreement on Tariffs and Trade (GATT) in 1947, makes absolutely no sense whatsoever.  It’s negligent and irresponsible. 

Today the president will meet with congressional leaders  for the umpteenth time in the nearly year-long battle to raise the debt ceiling as they struggle mightily to identify spending cuts and revenue increases to cut the projected budget deficit by $2 trillion over the next ten years.  Compare that to the cumulative goods trade deficit of nearly $8 trillion during the same time frame, and that’s if the trade deficit freezes at today’s level.  Is it any wonder that we have fiscal problems?  If trade in goods were balanced, the increase in revenue from the increase in GDP alone would cut the budget deficit more than $2 trillion. 

With the exception of overall exports, by every other measure the president’s trade policy has been an abysmal failure.  And it’s likely that even that one measure will begin to lag as the global debt crisis begins to erode the rest of the world’s ability to absorb American exports.  But let’s put the blame where it really lies, at the feet of the economists who guide his economic  policy.  After all, Obama is just a politician, like every president before him, and takes his guidance on economic policy from a team of economists.  Until the field of economics crawls out from under the rock of their early-1800s trade theories, until they uncurl themselves from the fetal position adopted in response to their beat-down by the other sciences in response to Malthus’ theory, and once again consider the full ramifications of the parameter that, by far, most dominates today’s economy – overpopulation – nothing will change, regardless of whether we leave Obama in office or replace him with someone else who takes their guidance on the economy from another team of economists.

Economists Admit to Being Clueless about Jobs

http://www.cnbc.com/id/43711926

The above-linked article just appeared on CNBC this afternoon.  It seems that economists are admitting to being flummoxed by the incredibly bad June employment report when all of them were expecting some halfway decent job growth. 

I posted a comment in reply to the article at about 1:21 PM, if you want to find it.  But to make it easier, here was my reply:

Economists are clueless about jobs because economists steadfastly refuse to consider the most dominant parameter affecting our economy today – population growth. Since the seeming failure of Malthus’s economic theory about population in the 1800s, anyone who dares to suggest that overpopulation could present a problem for the economy is instantly dismissed as a “Malthsian.”

 

That’s a pity because if economists would once again open their eyes to the full ramifications of population growth and not just the strain on resources and stress on the environment, they may discover very serious consequences for the economy itself in the form of falling per capita consumption and rising unemployment, and the role that population density disparities play in driving global trade imbalances.

Ever-worsening unemployment, destructive trade imbalances and the global debt problem – these are no mystery. They’re completely predictable when you understand the relationship between excessive population densities and low per capita consumption.

Pete Murphy
Author, “Five Short Blasts”

So, “economists,” what are you going to do about it?  Cling to your incomplete economic models or open your minds to the one parameter you refuse to consider in your economic equations?  Sadly, I think I know what their reply will be.  “Malthusian.”

Globalization and “The Common Good”

Just thought I’d share with you a letter I wrote to Notre Dame Magazine  (published quarterly, with a circulation of 150,000) in response to an article in the previous issue which sang the praises of globalization and its impact on Asian nations.  My letter was published in the most recent issue.  Click on the following image.  It’s in the lower right corner of the page.  You’ll have to magnify it to make it legible.

 

 

Employment Level Plunges 445,000 in June

http://www.bls.gov/news.release/empsit.nr0.htm

As detailed in the above-linked June “Employment Situation Summary” from the Bureau of Labor Statistics (BLS), only 18,000 non-farm jobs were added in June while the unemployment rate ticked upward again to 9.2%.  Those headline numbers alone were disastrous, when economists were expecting 105,000 jobs and a slight decline in the unemployment rate – expectations that were already pessimistic, given that the economy needs to add about 150,000 jobs a month just to keep pace with growth in the labor force, and that the economy needs to add several thousand per month to begin making real progress on reducing unemployment. 

But, look into the details and the report is much, much worse.  Here are the “low-lites”.  (There are no “hi-lites.”):

• In contrast to the claim that 18,000 jobs were added, the “employment level” – the number of Americans employed – actually plunged by 445,000.  That’s the worst decline since December, 2009.  The employment level is now at its lowest since January of this year. 
• The number of unemployed Americans in June tied the worst level of the recession at 18,917,000, a mark previously reached in November of 2010.
• The “official” unemployment rate (the BLS’s “U3” calculation), now at 9.2%, is the highest rate since December, 2010.  Given the plunge in the employment level, why didn’t it rise more than just 0.1%?  Because, once again, the BLS relied on its old trick of claiming that the civilian labor force shrank by another 272,000 workers.  According to the BLS, the civilian labor force, now 153,421,000, is smaller than it was in November, 2007, in spite of the fact that the U.S. population has grown by nearly 10 million people (about five million workers) during that same period.  Truth be told, the “real” unemployment rate (my “U3a” calculation that holds the civilian labor force at a steady percentage of the population) rose by 0.4% in June to 12.0%, matching its highest level since the beginning of the recession. 
• Per capita employment (the employment level divided by the population), fell for the third month in a row, only 0.02% above the lowest levels of the recession reached in December 2009 and matched in November, 2010.
• While the BLS’s broader measure of unemployment, “U6,” rose by 0.4% to 16.2% in June, it too was kept artificially low by the “vanishing labor force” trick.  My “U6a” measure rose by more than 0.6% to 21.2%, just shy of its worst level of 21.3% reached in November, 2010. 

The following is my calculation, followed by charts of the above data:

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

As I predicted, now that the stimulus programs have ended, the economy is quickly plunging back into recession.  It isn’t hard to imagine that matters will get much worse when Congress finally agrees to a debt-reduction plan consisting of job-killing tax increases and job-killing spending cuts. 

President Obama has failed to turn the economy around.  The employment level has fallen by three million workers since he took office.  Real unemployment has risen by 50%.  Five million more Americans are now unemployed.  It’s no mystery.  He’s failed to take action on the only two matters that could change this situation – fixing our trade and immigration policies.  He’s stood idly by and watched as our trade deficit exploded back to near pre-recession levels and has done nothing about immigration policies that have continued importing more workers while jobs have continued to decline. 

* * * * *

Where are those 18,000 jobs that the BLS claims were added in June?  Here’s the breakdown from their establishment survey:

• Leisure and hospitality:  + 34,000
• Professional and technical services:  + 24,000
• Health care:  + 14,000
• Mining:  + 8,000
• Manufacturing:  unchanged
• Construction:  unchanged
• State & local government:  – 25,000
• Federal government:  -14,000

That doesn’t add up to + 18,000 but the BLS offers no explanation for the discrepancy.  The growth in health care employment is slowing.  The decline in government employment is likely to accelerate in the months ahead.  And two of the biggest sectors of the economy – manufacturing and construction – are contributing nothing.  There are no good signs anywhere in the entire report. 

Population Density a Factor in State-by-State Unemployment

http://finance.yahoo.com/blogs/daniel-gross/north-dakota-spurred-energy-ag-boom-3-2-122815061.html

The above-linked article reports that the lowest unemployment in the nation is found in the state of North Dakota.  The article cites a number of factors but, of course, makes no linkage to population density.  With a population density of only nine people per square mile, North Dakota is the fourth most sparsely populated state in the nation, beaten only by Montana (6 people/square mile), Wyoming (5 people per square mile) and Alaska (1 person per square mile).  A coincidence?  I think not. 

However, if I were to simply make a linkage between North Dakota’s low population density and their low unemployment rate, one could easily refute my argument by pointing to other states with low population density and high rates of unemployment.  Nevada, for example, with a population density of only 22 people per square mile has an unemployment rate of more than 12%, the highest in the nation. 

The only way to settle the argument is to do a scatter chart of the unemployment rate for all 50 states and see whether a pattern emerges.  This is something I’ve not done before, since a cursory examination of the data shows a lot of scatter, and since free trade between the 50 states tends to level out unemployment across the nation, exporting jobs from low density states to high density states and exporting unemployment in the other direction, exactly in the same way that it works between nations on a global scale. 

But this single data point for North Dakota compelled me to finally compile the data and see whether any relationship is evident at all, or if the data produces a shotgun scatter with zero correlation.  The following is the result:

Unemployment vs Pop Density

In spite of the unemployment-leveling effects of free trade between the states, a relationship does indeed emerge.  Yes, there’s a lot of scatter, but the relationship becomes evident when the trend line (that line that begins near zero and slowly rises along the bottom of the graph) is inserted and the “coefficient of determination” is calculated.  If no relationship existed, the trend line would be flat and the coefficient of determination would be zero.  A perfect relationship would have all of the data points fall in line (either a straight line or a curved line) and the coefficient of determination would be “1”. 

In this case, there is a definite upward trend which follows a “power” equation, and the coefficient of determination is .14 – weak, but a definite correlation.  Getting back to Nevada, the state one would use to refute my argument, it must be remembered that within my theory that relates population density to per capita consumption (and thus to unemployment), what’s important is not actual population density but “effective” population density; that is, the population divided not by the total area but by the inhabitable area.  And a major fraction of Nevada is indeed uninhabitable, thanks to vast deserts and moutainous regions.  The “effective” population density of Nevada is actually quite high.  If just that one data point out of 50 is removed from the data set, the coefficient of determination rises to .18. 

Looking at the data another way, let’s divide the states evenly around the median population density of 95 people per square mile.  Among the more densely populated 25 states, only 8 have unemployment rates of less than 8%.  Among the less densley populated 25 states, there are 15 such states.  Only one state in the more densley populated half of states has an unemployment rate of less than 6% – New Hampshire.  There are five such states in the less densely populated half of states – North Dakota, South Dakota, Nebraska, Oklahoma and Vermont. 

The moral of this story?  If you’re unemployed, think about moving to one of these less densely populated states.  (Of course, if everyone did that, those states would soon no longer be sparsely populated, nor would they have low rates of unemployment.)  Secondly, contrary to what most people would say, a growing population in your state is not good for its economy.  Get involved in promoting legislation that discourages illegal immigration and encourage your federal legislators to oppose high rates of immigration in general – both legal and illegal.  Finally, consider what happens when less densely populated nations like the U.S. trade freely with those far more populated.  If you do, you’ll also want to encourage your legislators to demand changes to U.S. trade policy. 

If you like unemployment, then just keep quiet about trade and immigration policy.  It’ll get worse.  If you don’t like it, then find out what really lies at the core of the problem and start demanding changes.

Debt Ceiling Negotiations to End Badly

By this time next month, the long-running battle over raising our nation’s debt ceiling will have come to a resolution, one way or another.  Either the U.S. will be forced to default (or not?  see below) or an agreement will have been reached to raise the ceiling in return for a cut in the projected size of the deficit.  Possible outcomes range from a catastrophic global financial melt-down at one end of the scale to a mere collapse into the 2nd dip of the recession at the other end of the scale.  There are no possible good outcomes here.  This is going to end badly. 

Those who have bought into the notion that cutting our deficit, especially by cutting government spending, will somehow stimulate the economy couldn’t be more wrong.  Cutting the deficit, regardless of whether it’s done by cutting spending, increasing revenue or some combination of the two, will take money out of the economy.  Collecting revenue takes money out of the economy as Republicans correctly point out.  Government spending puts money back in, as Democrats correctly claim.  Taking more out in the form of revenues or putting less back by cutting spending leaves the economy with less than it started.  While that helps the nation’s balance sheet in the long run, leaving the next generations better off, it’s bad for the economy in the short run. 

So the only possible outcomes here are either a U.S. default on its interest obligations on its bonds, which could conceivably render all U.S. bonds instantly worthless, wiping out banks and investors across the globe, or a recession-triggering pulling of the rug from under the feet of the U.S. economy, an economy barely kept above water by trillions in deficit spending by the federal government and quantitative easing by the Federal Reserve – all of which has come to an end.  No wonder the two sides are battling so bitterly.  Both know the outcome will be bad.  Each wants the other to take the blame. 

And that’s not the half of it.  Even if a deal is reached, the deficit is cut and the debt ceiling is raised, the only thing that will have been accomplished is that the “can” will have been kicked a bit further down the road.  It’s not as though we’ll be cutting the deficit; we’ll only be cutting the projected growth in the deficit.  The deficit, projected to grow by another $15 trillion or so in the next ten years, will instead grow by only $10 or 11 trillion, a situation that will leave us in far worse shape than now.  What are the odds that it’ll be dealt with then?

I’m not arguing that the problem shouldn’t be addressed or that no good outcome is possible regardless of what our lawmakers do.  The problem is that nowhere in these talks is the real problem that drives the deficit spending being addressed, and that is the trade deficit.  As I said earlier, anything that takes money out of the economy, which includes taxes, cuts in deficit spending – even personal savings, is a drag on the economy.  And our trade deficit currently drains over $500 billion per year from the economy.  If that draw-down from the economy isn’t made up by deficit spending, then economic recession is absolutely unavoidable.  Furthermore, without any deficit spending, then the U.S. will not be issuing any more bonds, leaving foreign countries with trade surpluses with the U.S. no way to plow those dollars back into the American economy, throwing a big monkey wrench into the gears of the global economy.  Ultimately, that might be a good thing, forcing a rebalancing of the global economy and global trade. 

So, without a comprehensive approach to fixing our economy that includes restoring a balance of trade (and perhaps even addressing our goofy immigration policy, but that’s a different topic), merely cutting the deficit and raising the debt ceiling is just another round in a game of economic whack-a-mole, a futile effort to deal with economic side-effects that pop up faster than Congress can swing its little economic mallet. 

Greece is a good example of what we’re facing.  Like the U.S., Greece has a large trade deficit – about the same as the U.S. in per capita terms.  Like the U.S., Greece is heavily dependent on imported oil.  And like the U.S., its debt exceeds its GDP and has been growing rapidly.  The austerity measures imposed upon Greece by its creditors have resulted in violent civil unrest in that nation in recent weeks.  And the Euro zone has warned Greece that it faces loss of its sovereignty and the prospect of much higher unemployment as these austerity measures take hold.  (See http://www.reuters.com/article/2011/07/03/us-eurogroup-greece-idUSTRE76219J20110703.)  The U.S. will face the exact same things if we implement drastic deficit reduction programs without addressing our trade deficit.

Things are coming to a head soon and, regardless of how it turns out, it won’t be good. 

* * * * *

Regarding the whole issue of default, there is a little-known sentence in the 14th amendment that seems to forbid the U.S. from failing to pay its obligations.  That sentence reads, “The validity of the public debt of the United States … shall not be questioned.”  The Obama administration is considering whether, in the event that the debt ceiling isn’t raised, it can invoke this statement and ignore the debt ceiling and continue paying the government’s bills.  Imagine the ramifications.  Without the limitation of the debt ceiling, there will be no rein on government spending.  It would be interesting to see just how fast an amendment to balance the budget, already being suggested by Republicans, would be introduced.  But, again, bear in mind that balancing the budget without balancing trade is a virtual (if not physical) impossibility.  At least such an amendment would pretty quickly force a re-evaluation of trade policy.