Summers’ Prescription for “Fixing Income Inequality”

November 22, 2011

I can’t help commenting when an economist of Larry Summers’ stature (as former head of Obama’s economic team) prescribes a fix for some aspect of the economy.  I suspect that others’ immediate reaction to this is much the same as my own.  What credibility does he have when he was actually in a position to effect such changes, yet was cast aside by Obama (along with the rest of his economic team) in response to the failure of their economic policies? 

Having said that, let’s take a look at some things he’s said in this Reuters op-ed piece.  Though at times it doesn’t seem like it, I’m always looking for glimmers of hope that a new awakening among economists may be on the horizon.  (I know, I know.  Stop chuckling.)  Summers begins with this:

The principal problem facing the United States and Europe for the next few years is an output shortfall caused by lack of demand.

A lack of demand?  I’m sure that Summers would acknowledge that total aggregate demand, along with total global output, has never been greater.  So the real problem is a failure of per capita demand to keep pace with the growing population. 

Then there’s this:

… it is no longer true that the overall growth rate of the economy is the principal determinant of middle class income growth—how the growth pie is sliced is at least equally important.

What Summers is talking about here is how the pie is sliced inequitably between the top 1% and the rest of us.  But it’s encouraging to hear an economist begin to think in per capita terms instead of a single-minded focus on macroeconomic growth.  Once they begin to think about how the pie is sliced, it’s not such a stretch to wonder what happens if the crowd at the dinner table grows faster than the size of the pie.  But perhaps I’m grasping at straws. 

Summers then closes with his 3-step prescription for fixing income inequality, which can be summarized (no pun intended) as follows:

  1. Government shouldn’t make matters worse by rewarding the rich even more.
  2. Keep the estate tax.
  3. Keep college affordable for the middle class.

In other words, rearrange the deck chairs of our tax policy.  Come on, does anyone believe such timid measures are going to make one bit of difference in our economy or in income inequality?  Minor changes in how revenue is collected and redistributed offers no hope of putting nearly 20 million people back to work when the net effect of revenue vs. spending remains the same or, as it must, actually results in more money being taken out of our economy.  Our economic problems go way, way past the point of being solvable by such minute tinkering. 

The real problem is a failure of the field of economics itself, devoted since its founding two centuries ago to the always-impossible concept of never-ending growth in a finite world.  Summers speaks in this piece about a transformation to a “knowledge-based economy” while, at the same time, peddling us economic ignorance and fantasies.  Has Larry Summers or any of his colleagues spent even one minute pondering the economic effects of crowding people ever more closely together?  Have any of them ever considered, in light of the obvious failure of their field, that perhaps they should collectively back-pedal and try to figure out where they went wrong? 

Larry Summers’ time (and that of his colleagues) would be far better spent thinking about such things as population density and per capita consumption instead of writing op-ed pieces designed to propagate and perpetuate their economic folly.


Groudhog Day at the APEC Summit

November 14, 2011

It’s difficult to know where to begin my criticism of Obama’s performance at the APEC summit in Honolulu this week.  First, there’s his meeting with Chinese President Hu Jintao.  (See http://www.reuters.com/article/2011/11/13/apec-obama-ceo-china-idUSN1E7AB0AF20111113.)  It seems that Obama “adopted a more steely tone” with the Chinese president in conveying Americans’ frustration with China. 

“What I have said since I first came into office and what we’ve exhibited in terms of our interactions with the Chinese is we want you to play by the rules. And currency is probably a good example,” Obama said.

“He made it very clear that the American people and the American business community were growing increasingly impatient and frustrated with the state of change in China economic policy and the evolution of the U.S.-China economic relationship,” senior White House aide Michael Froman told reporters.

Wow, that’s really tough.  The President didn’t just make his feelings clear, he made them very clear.  Maybe he felt he wasn’t clear enough the last time they had this discussion, or the time before that, or the time before that.  The next time, he’ll be very, very clear.  After that, he’ll make it abundantly clear.  And so on. 

I can just see the Chinese president, rolling his eyes and simultaneously stifling a condescending chuckle.  As long as Obama doesn’t talk about implementing tariffs, Hu couldn’t care less what Obama has to say.  He knows it’s just talk – the same talk he’s heard dozens of times before.  The same talk other nations like Japan heard countless times before China came along.  It’s all a performance designed to give the voters back in the states the impression that he’s doing something about the economy. 

Obama has also been meeting with some other APEC members, without China in attendance, to try to open up their markets and make China nervous about losing some of America’s business.  He’s sort of saying, “We’ll show you, China.”  “We’ll take our trade deficit elsewhere.”  Okay, that might make China a little nervous, but it doesn’t do anything to restore a balance of trade and bring jobs back to the U.S.  Anytime a U.S. president or his trade delegation tries to “open up markets,” watch out.  As we’ve seen time and again, these nations want something in return, and that something is always the same thing – we open up our market first.  Goodbye jobs. 

Or how about the president calling the U.S. “lazy?” 

 in remarks that could cause political ripples back in Washington, Obama also took his own country to task, saying it needed to do more to encourage foreign investors to seek opportunities in the United States.

In a question-and-answer session at the business forum moderated by Boeing Co chief executive James McNerney, Obama said the United States is attractive to businesses because of its open economy, innovativeness and stability.

“But we’ve been a little bit lazy, I think, over the last couple of decades. We’ve kind of taken for granted — well, people will want to come here and we aren’t out there hungry, selling America and trying to attract new business into America,” Obama said.

Wow, that’ll really endear him to voters back home.  “New business?”  Get a clue, Mr. President.  Every “new business” that has come along in the last two decades began in America but was quickly outsourced.  Personal computers, cell phones, I-pods, I-pads – you name it.  But can you name one product that’s been invented here in the last two decades that’s still here?  Thanks to the trade policies implemented by your predecessors, policies which you now embrace, we can’t even keep our own new businesses here.  Why would somebody else bring their’s here? 

Finally, there’s this – Obama telling the APEC nations that our prosperity depends on them.  (See http://content.usatoday.com/communities/theoval/post/2011/11/obama-us-prosperity-depends-on-asia-pacific-nations/1.) 

President Obama opened the Asia-Pacific Economic Cooperation summit today by telling regional leaders that economic recovery in the United States depends on Asian-Pacific nations.

“We’re not going to be able to put our folks back to work and grow our economy and expand opportunity unless the Asia-Pacific region is also successful,” the president said.

That’s not what history tells us.  Back when China was still a stauchly communist nation, the U.S. had no trade with China whatsoever, and Americans were far better off for it.  Everyone knows that if China suddenly sank into the sea, America would enjoy an instantaneous economic revival. 

But I know what the president is saying – what he thinks.  He thinks like economists – that if these grossly overpopulated Asian nations would just transform themselves into American-style consumers, they’ll buy just as much from us as we buy from them, boosting exports and restoring a balance of trade. 

Never mind the obvious question about how much sense it makes to produce the same products on both sides of the Pacific and then burn billions of gallons of fuel in container ships in order to swap them.  The real problem is that it can never happen.  People who live in such badly overcrowded conditions found in many of these APEC nations, stacked like cord wood in rabbit hutches, have no room for home furnishings, no room to drive cars, no lawns to mow, no gardens to maintain and no recreation or sports facilities.  They only have enough room to dress, cram like sardines into their commuter trains and take up their posts at the factory jobs that they robbed from Americans because they’re incapable of having a healthy domestic economy of their own.

Our economy depends on growth in APEC nations?  In 2010, our trade deficit with APEC nations was $462 billion.  Our economy’s demise has been at the hands of APEC nations.  It’s recovery depends on restoring a balance of trade with those nations, and that depends on the use of tariffs to make it happen.  Decades of experience have proven that all the talk in the world – the same talk we heard again last week at the APEC summit – will make no difference whatsoever.

Albert Einstein once defined insanity as doing the same thing over and over again and expecting different results.  But that’s exactly what the U.S. does at every trade negotiation, every G8 meeting, every G20 meeting, every World Trade Organization meeting and every APEC summit.  Like in the movie “Groundhog Day,” the same idiotic scene plays out over and over and over, like a bad dream.  And, as Einstein noted, the results are always the same.  Obama will return home, feeling optimistic about the effect his performance will have on his poll numbers, and the economy will sink further along with Americans’ incomes.


September Trade Deficit Improves for 3rd Month in a Row

November 10, 2011

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

The Bureau of Economic Analysis announced this morning that the U.S. trade deficit fell to $43.1 billion in September, its 3rd consecutive monthly decline.  A $2.8 billion increase in exports of manufactured products led the way (partially offset by a $0.3 billion increase in manufactured imports).  This is good news, but I wouldn’t make too much of it, given that, as you can see from the following chart, the trade deficit remains range-bound at a pretty poor level:  Balance of Trade

As measured by overall exports, we remain on track to meet the president’s goal of doubling exports in five years.  But, as you can see from the following chart, imports have risen just as fast, so no significant progress has been made in reducing the deficit:  Obamas Goal to Double Exports

And, as you can see from the following graph, we continue to lag slightly on the goal of doubling the exports of manufactured goods:  Manf’d Goods Balance.  The good news here is that the deficit in manufactured goods has shrunk back a bit in the last few months to its lowest level since January, 2010.


2012 Predictions

November 10, 2011

I just want to draw your attention to my new predictions for the coming year, which I’ve made every year in November since starting this blog in 2008.  See the “2012 predictions” link on the right side of this page. 

Unlike most economists who see the economy improving incrementally in 2012, applying their “time heals all wounds” philosophy to the economy, I see a bad year ahead – potentially very bad.  There are far too many economic, financial and political headwinds blowing hard on the economy without even a hint of a tailwind anywhere in sight. 

The longer that economists fail to recognize the role of ever-worsening overpopulation in driving down per capita consumption, driving up unemployment and poverty and exacerbating the global trade imbalances that threaten to collapse the world’s financial system, the worse things are going to get.  Sadly, I see no hope of this changing in 2012.


Poverty in U.S. at Record Level

November 7, 2011

http://www.census.gov/newsroom/releases/archives/income_wealth/cb11-157.html

You probably heard reports about this story last week when the Census Bureau released its annual report on Income, Poverty and Health Insurance Coverage.  The report revealed that the percentage of Americans living at less than 50% of the poverty level hit a new record in 2010.  (See the above link for highlights of the report.)   One out of every 15 Americans (6.7%) has an income of less than $5,570 for an individual or $11,157 for a family of four.  Here’s a link to the table: 

http://www.census.gov/hhes/www/poverty/data/historical/people.html    (see table 5)

The percentage of Americans living at or below the poverty level rose for the fourth year in a row to 15.1%, the highest level since 1993.  The Census Bureau began tracking poverty in 1959.  At that time, it was over 22%.  It fell steadily every year until reaching 12% in 1969.  Since then, it has exceeded 15% only three times – in 1983 (15.2%) , 1993 (15.1%) and 2010 (15.1%).  Here’s the chart: 

http://www.census.gov/hhes/www/poverty/data/incpovhlth/2010/figure4.pdf

Given that incomes are continuing to decline, it’s a sure bet that the overall poverty rate will rise in 2011 to its worst level since 1966.

This data is of special significance for those who understand the new economic theory I put forward in Five Short Blasts.  If that theory is valid, there are a few key events that we should witness as the U.S. and the world grow more crowded.  We should see unemployment steadily rising and, as a result, we should see poverty rise as well. 

We’ve already seen unemployment rise dramatically with virtually no prospect of decline, at least not as long as current trade and immigration policies are maintained.  And now we see that poverty is on the rise as well, hitting record levels by one measure and close to 40-year highs by another.  One parameter remains – life expectancy.  We should soon see declines in that measure as a result of increasing poverty.  But, alas, it seems that the Center for Disease Control stopped publishing life expectancy data in 2007.  One can only speculate as to the reason why, but perhaps its because the data would be too inflamatory to release to the public.  It’s one thing to hear that the economy is bad.  It’s quite another to hear that you can expect to die sooner.

Since developing this theory in 1993 (and finally publishing the book in 2007), I have seen absolutely nothing to call into question the validity of the inverse relationship between population density and per capita consumption, nor its implications for trade policy.  Conversely, virtually everything we’ve witnessed casts doubt on the prevailing economic theories of growth and free trade – enormous global trade imbalances, the implosion of the global financial system, falling incomes, soaring unemployment, rising poverty and nations collapsing under the weight of their accumulated debts.  And what do we get from the field of economics in response?  Almost comical rationalizations and a shift in focus to goofy new economic theories about “happiness” and “promoting life.” 

Don’t get me wrong, I’m not opposed to life.  I enjoy the hell out of it.  But, after centuries of promoting population growth because it seemed to make economic sense, to now divert attention from this theory’s failings by suggesting that life should be promoted for some kind of intangible, intrinsic value is indeed preposterous, goofy and comical.  The other sciences once mocked the field of economics for accepting the theories of Malthus.  Where are they now when economists truly deserve to be mocked for abandoning data, reason and scientific curiosity in favor of something more akin to some kind of irrational voodoo-ism? 

* * * * *

There are a couple of nuggets in the summary of the report that merit comment:

  • If you scan the highlights of the report, you’ll see that in some regions of the country or in some demographic group, the data held steady.  But nowhere in the report is there a single instance of any improvement in any group or region in any of the paramters measured – income, poverty and health insurance.
  • Since 2007, the year before the most recent recession, real median household income has declined 6.4 percent and is 7.1 percent below the median household income peak that occurred prior to the 2001 recession in 1999.
  • Since 2007, the number of men working full time, year-round with earnings decreased by 6.6 million and the number of corresponding women declined by 2.8 million.  (In other words, 9.4 million have gone to the unemployment line, not to mention the 6 million new workers who have gone there as well.  That’s a total of 15.4 million added to the ranks of the unemployed since 2007.)
  • In spring 2011, 5.9 million young adults age 25-34 (14.2 percent) resided in their parents’ household, compared with 4.7 million (11.8 percent) before the recession, an increase of 2.4 percentage points.  It is difficult to precisely assess the impact of doubling up on overall poverty rates. Young adults age 25-34, living with their parents, had an official poverty rate of 8.4 percent, but if their poverty status were determined using their own income, 45.3 percent had an income below the poverty threshold for a single person under age 65. 

Regarding that last item, consider the effect on per capita consumption when the number of young people living at home is on the rise and their poverty rate is 45.3%.  Aside from food and clothing, they consume virtually nothing.  Remember, as per capita consumption goes, so too goes employment and poverty – a cycle that begins to feed on itself.


Sub-Par Job Growth in October, but Employment Level Up

November 4, 2011

http://www.bls.gov/news.release/pdf/empsit.pdf

This morning’s employment report (link provided above) was a mixed bag of bad news and good news which, taken together, only provide further verification of an economy stuck in a “New Normal” mode of high unemployment. 

The bad news is that the BLS’s (Bureau of Labor Statistics) “establishment survey” shows that only 80,000 jobs were added in October, well below the pace of 125,000 needed to keep pace with growth in the labor foce. 

The good news is that the unemployment rate, determined by the BLS’s “household survey,”  fell from 9.1% to 9.0%.  The reason that it fell is more good news – the employment level rose by 277,000 (the 3rd consecutive monthly increase) – a rate that would have reduced unemployment even more if the BLS didn’t claim that the civilian labor force grew by 181,000.  In other words, it used the opportunity to reduce the pool of workers that it claims had given up looking for work. 

Here’s the chart of the work force and employment level:

Labor Force & Employment Level

As you can see, employment level has been slowly rising, but no faster than the real growth in the labor force.  The net result is that the number of unemployed Americans has been holding pretty steady and per capita employment remains stuck at recession lows:

Unemployed Americans     Per Capita Employment

And here’s my monthly update of the BLS data and my calculation of unemployment, along with the chart:

Unemployment Calculation     Unemployment Chart

This economy is headed nowhere, in spite of being propped up with trillions of dollars of stimulus in the past three years, all of which is coming to an end with big federal budget cuts (sure to be followed by more state and local budget cuts) on the horizon.  While some analysts see the potential for a double-dip recession fading, I see it as virtually a sure thing. 

* * * * *

Here’s a breakdown of the 80,000 new jobs reported in the establishment survey:

  • professional & business services:  + 32,000
  • leisure & hospitality:  + 22,000
  • retail trade:  + 16,000
  • health care:  + 12,000
  • mining:  + 6,000
  • manufacturing:  + 5,000
  • construction:  – 20,000
  • government:  – 24,000

Manufacturing employment, where the Obama administration has pinned its hopes for reviving the economy, has been flat for 3 months. 


Reuters Columnist’s Defense of Overpopulation

November 3, 2011

http://blogs.reuters.com/edward-hadas/2011/11/02/7-billion-reasons-why-malthus-was-wrong/

The above-linked editorial appeared on Reuters yesterday.  It’s one of the most twisted-logic-defenses of population growth that I’ve seen yet.  The author, Edward Hadas, begins with a denial that Malthus correctly predicted some of the effects we’re witnessing today:

 The early 19thcentury British thinker decided (without providing any reasons) that people would always have more children than the physical world could possibly support. Population growth would always be restrained by death from want. At the time he wrote, the world’s population was about 1 billion. By the 1960s, the population had increased to about 3 billion people, and Malthus’s gloom was often cited. Some ecologists then claimed that the combination of industrial production and overpopulation would inevitably lead to environmental catastrophes – and many deaths from want.

And yet up to now, Malthus has been wrong

Is this guy really denying that there have been no environmental catastrophes?  A few quickly come to mind:  climate change, the BP oil spill disaster in the gulf, the Exxon Valdez oil spill disaster in Prince William Sound, nuclear disasters in Chernobyl and Fukushima.  The list goes on and on.  And there have been no “deaths from want?”  Is this guy completely blind to the fate of people in the undeveloped world, which represents a large percentage of the world’s population?

But then, after mocking Malthus for being wrong up to this point (in his eyes), he then seems to admit that Malthus may yet be proven to be right:

Still, it cannot be proven that Malthus was wrong, that the world will never run out of stuff or that humanity’s resourcefulness will always rise to environmental, economic and social challenges.

But then, once again, Hadas hears the siren call of the “don’t worry, be happy” economists, more concerned with the problems associated with an aging and declining population. 

… while grim environmental forecasts are still easy to find, demographers these days talk more about the stresses that come with ageing and declining populations.

… the practical challenges can be met easily.

Instead of worrying, economists should take the latest demographic milestone as an opportunity to stop thinking like Malthus …

Of course, it’d be easier to stop worrying if it weren’t for all the data that screams warnings at us about overpopulation.  What to do about that?  “Don’t worry, be happy!”  Ignore it!  Hadas then singles out one of the biggest red flags of all, the one I’ve featured in this blog many times – GDP per capita.

A good starting point would be to stop relying on GDP per capita when comparing the wealth of nations. In this calculation of average income, population is the denominator. If that increases, the per capita GDP will fall, unless the numerator – production – increases commensurately. In effect, this measure makes each new person an economic drag.

Yes, if GDP holds constant as the population continues to grow, then everyone is getting poorer and population growth becomes a drag.  It’s an inescapable fact.  Hadas seems to have a hard time dealing with facts, especially (I suspect) if those facts cry out for an economic change that might threaten the growth prospects for his stock portfolio.  So, at this point, Hadas simply chooses to ignore the facts and gets all sappy on us:

A new person is indeed a consumer who will need to work to avoid being a net drain on the world’s resources. But he or she is also a wonder worth celebrating. Parents know it, and economists should recognize that reproduction is a sort of production – brought forth through maternal labor and parental care. Economic activity should aim at the promotion of life, not merely at the production of stuff.

What?!?!?  If economists theories are failing us economically, then economists should ignore the data and focus instead on “the promotion of life?”  If we’re driving toward a cliff, we should just close our eyes and put the pedal to the metal?!?!? 

This conclusion caps off one of the stupidest, most illogical defenses of overpopulation that I’ve seen yet.  There are three kinds of people in this world:  (a) those who continue to believe as they do because they’ve never pondered the facts, (b) those who have taken the time to ponder reality and change their opinion accordingly, and (c) those who ponder the facts and reality but then continue to promote what they now know to be lies, to the detriment of humanity,  just because it suits their purpose.  I suspect that that last group of people will be judged harshly in the end.