Stimulus Spending Masks Huge Decline in 2nd Qtr. GDP

August 1, 2009

On Friday, the Commerce Department announced that real 2nd quarter GDP (gross domestic product) declined at an annual rate of only 1.0%, much better than the 1st quarter decline of 6.4%.  Analysts proclaim this as evidence that the free fall in the economy has been halted. 

But has it really?  How much of this is real improvement in the economy and how much is artificial economic activity generated by the government’s economic stimulus plan, sure to vanish once the allocation has been spent?  Of course, the whole purpose of the $787 billion economic stimulus plan is to be “stimulative,” like priming a pump.  Pour a little in and you can get a whole lot more out.  It’s seed money, intended to generate self-perpetuating growth in the economy.

So the critical question is whether it’s working.  Did the underlying economy perform better in the 2nd quarter as a result of this spending?  If so, that would be evidence that the stimulus plan is working.  If not, then the deterioration in the underlying economy may actually be accelerating. 

Through the end of the 2nd quarter, slightly more than $60 billion of the $787 billion has been spent. (See http://money.cnn.com/2009/07/31/news/economy/stimulus_GDP/?postversion=2009073115)  Assuming that virtually all of this was spent in the 2nd quarter (since the plan wasn’t authorized until mid-February), then this spending contributed to GDP at an annual rate of about $240 billion.  1st quarter GDP was reported as an annual rate of $12,925.4 billion (expressed in 2005 dollars).  2nd quarter GDP was reported as $12,892.4 billion, for a quarterly decline of 0.25% or an annual rate of decline of 1.0%.  (Thus the euphoria on Wall Street about the big “improvement” over a 1st quarter decline in GDP of 6.4%.) 

But if you take away the $240 billion in stimulus spending (annual rate at current pace), then 2nd quarter GDP would fall to $12,652.4 billion, for an annual rate of decline of 8.2%!  So we can conclude that, so far, the stimulus plan is failing to halt the slide in the underlying economy.  In fact, the rate of decline has accelerated, from 6.4% in the 1st quarter to 8.2% in the 2nd quarter.  Unless things change dramatically, while the stimulus spending may produce some artificial growth in the economy, once it’s spent we will surely slide back into a deep recession.  Why?  Because absolutely nothing has been done to fix the underlying problems in the economy, particularly our broken trade policy that has given away most of the entire manufacturing sector of our economy to overpopulated nations.  Six million manufacturing jobs sacrificed on the altar of crude, 18th century trade theories.

President Obama had better get busy on fixing the trade situation to restore a balance of trade, as he promised during his election campaign, or he’ll go down in history as another in the long line of caretaker presidents who kept the seat warm in the west wing for four years.


Obama, Beware Your Economic Advisors

February 4, 2009

http://www.usatoday.com/money/economy/2009-02-03-stimulus_N.htm

The photo at the top of this linked article says it all.  An evil-looking Larry Summers, Obama’s National Economic Council director, dominates the scene as a small, blurred Obama speaks in the background. 

The article goes on to report on Obama’s willingness to make some compromises on his economic stimulus plan, but that he won’t give up the key provisions.  I found this quote from Summers near the end:

Summers said Obama wants to keep his tax cuts but will consider other changes. He said “Buy American” provisions for U.S. manufacturers could “send a protectionist signal.”

President Obama, you need to be very wary of the advice coming from Summers, your Treasury Secretary, Tim Geithner, and others like Paul Volcker and Paul O’Neill.  All are on the board of the Peterson Institute for International Economics, a “think tank” whose mission is to promote global trade regardless of the effect on the American economy, and who just today came out in opposition to the “buy American” provision of your economic stimulus plan.  Here’s a partial list of other members of the board of the same organization:

When your economic team begins bashing trade measures designed to help American workers, ask yourself whose interests they’re really representing.  I know that you see our trade deficit as a huge problem and a major contributor to our financial collapse.  And I know that you believe in the concept of having a “team of rivals.”  But there seems to be little rivalry on your economic team when it comes to their attitudes about trade, the global economy, and where the American economy fits in their priorities.  Is this really a team of rivals or a team of co-conspirators whose allegiances border on treason?


Clumsy Trade Policy

January 31, 2009

http://www.reuters.com/article/newsOne/idUSTRE50T5Y820090130?sp=true

I originally began this post as merely criticism of the U.S. Chamber of Commerce for opposing the “buy American” provisions in Obama’s economic stimulus package. But I soon realized that there’s a bigger issue here – that clumsy trade policy at both ends of the spectrum has its costs, whether it’s foolishly placing blind faith in “free” trade or a heavy-handed application of protectionism that threatens all trade.
 
Let’s begin with the left end of the spectrum – the U.S. Chamber of Commerce’s position. At first glance, it seems hard to believe that they would oppose “buy American” provisions in Obama’s plan.

The U.S. Chamber of Commerce stepped up efforts on Friday to kill a popular “Buy American” provision before it reaches President Barack Obama‘s desk as part of an mammoth economic stimulus bill.

But it’s not surprising. I’ve constantly warned of the consequences of the trade deficit and the method used to finance it – a sell-off of American assets – and this is one of them: that with ownership comes control. Many of the members of the Chamber of Commerce are actually global corporations, largely foreign owned and controlled, with little allegiance to America, and have major stakes in foreign operations that would be jeopardized by any move toward restoring a balance of trade.
 
 
 

 

“Some have slammed the U.S. Chamber for opposing “Buy American” provisions, calling our position ‘economic treason,'” the group’s president Thomas Donohue said in a statement.

“Try economic patriotism. Such provisions would cost American jobs, trigger retaliation from our trading partners, slow economic recovery by delaying shovel-ready infrastructure projects and cede our leadership role as a longstanding proponent of free and fair trade and global engagement.”

Yes, actually, the Chamber’s position is rather treasonous. Throughout history, traitors have assuaged their consciences by convincing themselves that what they did was actually for the good of the country. Mr. Donahue doesn’t explain how “buy American” provisions would “cost American jobs.” That’s makes absolutely no sense. Only a worsening of the trade deficit would cost American jobs. Anything that reduces the trade deficit, as “buy American” provisions clearly would, creates American jobs. It’s as simple as that. And would “buy American” provisions result in “delaying shovel-ready infrastructure projects?” Possibly, but the delay would be time spent ramping up American manufacturing, creating even more jobs. Isn’t that the whole idea?
 
But the linked article goes on to raise an important issue:

In Canada, the main opposition Liberal Party called on Conservative Prime Minister Stephen Harper to raise the issue with Obama when he visits on February 19 if the United States has not made clear that Canadian iron and steel will be welcome.

“I presume the prime minister will make this a very important issue when President Obama is here, because it has huge implications for the steel industry obviously but Canada-U.S. relations overall,” Liberal House leader Ralph Goodale told reporters in Parliament.

This illustrates the hazards of the far right in the spectrum of trade policy, a clumsy, sledge hammer application of protectionism. Why would we want to anger Canada? Canada is our number one source of oil and is a country with whom we have a balance of trade in manufactured goods. We have a very beneficial trade relationship with Canada. But our overall trade deficit, a composite of trade deficits in both oil and manufactured products with many other countries, is a serious problem – the root cause of our financial collapse.
 
Our biggest deficit in manufactured goods is with China, simply because theirs is such an enormous country with one fifth of the world’s population. We’d like to reduce our deficit with them, but what rationale would we use to justify protectionist measures? Do we simply tell China “sorry, but we don’t want to trade with you any more?” Or do we try to couch it in some logic, perhaps blaming them for currency manipulation? That hardly seems fair either. Is it their fault that the dollar soars any time there’s the least bit of positive news on the American economy?
 
And what about Saudi Arabia? How do we reconcile “buy American” provisions with our thirst for cheap, imported oil? Do we exempt them from the provisions? The whole thing starts to sound rather arbitrary, doesn’t it? And we really don’t want the more powerful of these nations to start feeling that they’re being treated arbitrarily and unfairly.
 
The problem is that we’ve held fast to our free trade policy for decades, in spite of the mountain of evidence that something is wrong – culminating in global financial collapse, without ever questioning why. We’ve taken the 18th century theories of Adam Smith, David Ricardo and others, fathers of free trade theory, at face value without ever researching factors that may limit their application – like population density, for example. And without an understanding of what makes free trade work in some instances while producing horribly skewed results in others, we then have a tendency to lash out at all trade. At least the blunt force application of protectionism would restore a balance of trade, but the U.S. Chamber of Commerce is correct in warning of backlashes.
 
A trade policy rooted in an understanding of how trade really works and how disparities in population density skew the results could restore a balance of trade while avoiding unwanted consequences. A tariff structure on manufactured goods, indexed to population density, is the answer. Leaving natural resources free of tariffs, oil suppliers like Saudi Arabia, Venezuela, Canada and Norway would have no reason to retaliate. And these same countries, along with many others, would be free of tariffs on manufactured goods because of their low population densities. Protectionist tariffs would be focused like a laser on the real problem – overpopulated nations like Korea, Japan, Germany and China. They may not like it, but at least there would be a consistent and logical rationale behind the policy.  They may like to retaliate with their own tariffs but would probably think better of it, since it would only further jeopardize their exports.
 
Any policy that moves us toward a balance of trade and restores manufacturing jobs is better than what we have now, but an elegant approach that’s rooted in logic can avoid the unnecessary collateral damage of a trade war that would only buttress arguments for a pendulum-like swing back to the opposite end of the clumsy trade policy spectrum.
 
 

 


A Better Economic Stimulus Plan

January 9, 2009
The airwaves are filled with talk of the President-Elect’s economic stimulus plan – its magnitude, its cost and whether or not it will really work. The Congressional Budget Office announced that, not even counting such a plan, the budget deficit this year is expected to soar to $1.2 trillion. Include Mr. Obama’s plan and the annual deficit could approach $2 trillion. And Mr. Obama readily admits that trillion dollar deficits could be with us for years to come. For a nation already drowning in debt, that’s a bitter pill to swallow. In the long run, it could do more harm than good, perhaps leading to hyperinflation, the very last thing that income-challenged Americans need.

There’s a much better way to do this. Restoring a balance of trade with a return to the tariff policies successfully employed by this nation for the first 171 years of our history, prior to the signing of the Global Agreement on Tariffs and Trade in 1947, would grow our GDP (Gross Domestic Product) by $700 billion, not just for one year or two but every year from now on. And the program wouldn’t cost a dime. In fact, instead of adding trillions in debt, between the tariffs collected on imports and the tax revenue collected on the higher GDP, federal tax revenues would easily swell by $500 billion per year. Second and third shifts would be added at auto and parts plants across the country. Idled plants would be restarted. At the same time, the profit potential needed to justify domestic production of other products would be restored. Instead of creating a mere three million jobs under Mr. Obama’s plan, many of which would be temporary, six million permanent, high-paying manufacturing jobs would come home and millions of additional construction jobs would be created to rebuild America’s manufacturing infrastructure.

Sure, it’d be a tough sell with the global community. But if we are on the brink of “an economic catastrophe from which we may not be able to recover” as Mr. Obama claims, then this is no time for timidity. Over the past three decades, our trade deficit has poured $9 trillion into the global economy. We’ve done our part and we’re tapped out. It’s time for the rest of the world to stand on their own two feet. Mr. Obama has said that only the government can pull us out of this rapidly deepening recession, and he’s right. But fixing our broken trade policy is a far more effective way to do it than with any deficit spending programs. It’s time to stop pretending that we can have a vibrant economy with an emaciated manufacturing base. We need long-term solutions that fix our economy and our balance sheet permanently, not short-term gimmicks that make us feel better now at the expense of future generations.

 


Obama Confirms Climate Change a National Security Issue

December 10, 2008

http://www.reuters.com/article/environmentNews/idUSTRE4B86R920081209

Eight days ago, following Obama’s roll-out of his national security team, I wrote a post about the seemingly strange mention of climate change on a couple of occasions, and speculated that this meant the issue of climate change was being elevated to a national security issue.  (See “Hints of Hopeful Signs in Obama’s Press Conference.”)  As much as I scan the web for commentary on these kinds of things, I don’t think anyone else picked up on this nuance in that press conference. 

Does this mean that climate change, energy and food have been elevated to national security issues in this upcoming administration? And doesn’t talk of energy and food in terms of “shortage” and “scarcity” imply an understanding of the supply / demand relationship for these resources – an understanding that demand is at least part of the problem?

Now, in this linked Reuters article, we get confirmation from Obama himself that, in fact, this is exactly the case – he considers climate change a matter of national security.

“This is a matter of urgency and of national security and it has to be dealt with in a serious way. That’s what I intend my administration to do,” Obama said.

This is very good news!  No intelligent person (and Obama is very intelligent) who accepts that climate change exists and is caused by human activity – that is, by the burning of fossil fuels and the resultant CO2 emissions – can believe that the problem can be solved while allowing our population to grow unchecked.  I’m not saying that Obama has yet reached this realization but, once his staff gets down to the nuts and bolts of how to accomplish their objective, they will quickly run into the population growth wall.  It’ll be very interesting to see how Obama then reacts to this new reality.  Will he rein in immigration?  Will he begin to ponder the need for incentives for people to choose smaller families? 

The article goes on to mention that Obama sees tackling climate change as another opportunity for creating jobs.  No doubt, there will be a tremendous amount of work involved in converting our electrical generation to new technologies and in transitioning our home heating from oil and gas to more climate change-friendly technologies.  This is an example of the kind of thing I hope Obama has “up his sleeve” when he spoke recently of his economic stimulus plan, but seemed to come up short on jobs.  (See “Obama Jobs Plan: Please Tell Us There’s More.”)

It’s going to be exciting to see how all of this unfolds, as it appears that enormous changes for the better are finally in store for America!