Monday, January 02, 2006

The Two Sides of the American Economy

As readers of this blog no doubt have noticed, I am more bearish (pessimistic) about the outlook for the American economy than most other libertarians and objectivists, particularly the Swedish ones. That is because they either tend to focus exclusively on the microeconomic conditions in America or because they are guided by non-misesian monetary theories like supply-side economics or Friedmanite theories.

The microeconomic conditions in America are indeed highly competitive, one of the strongest in the world with just a few exceptions like Hong Kong and Latvia and Estonia. Tax rates are much lower than in Western Europe, unions are very weak (almost non-existent outside the government sector and a handful private industries like the Detroit car industry)and the federal minimum wage of $5.15 is so low (In France and other Western European countries minimum wages are twice as high) that it doesn't create much unemployment. Extremely few companies are state-owned (with the notable exception of the U.S. Postal Service).Meanwhile, the U.S. have a more reliable property rights than most third world countries and a far less corrupt justice system than for example Mexico.

These strong microeconomic characteristics are the reason why America have kept outperforming most other advanced economies and why it is the world's third richest country after only the tiny bank haven Luxembourg and oil rich Norway.

However, while the microeconomic characteristics of America is strong, the macroeconomic characteristics is very troublesome. First of all, the budget deficit for the entire public sector is the largest of all mayor economies except for Japan . And secondly and more importantly, the U.S. have long had a highly inflationary monetary policy worse than most other advanced countries, as I have highlighted in this blog and in several articles (See here, here and here ). For the specific statistics of the situation, I refer to the linked articles, but in short, Alan Greenspan's policies have created large imbalances with dangerously low savings and a dangerously high debt burden, particularly in the household sector.

So far the strong microeconomics of the U.S. economy mostly won out over the weak macroeconomics, particularly since the short-term effects of the macroeconomic imbalances on GDP is actually positive. However, in a likely not too distant future, the macroeconomic imbalances will be proven unsustainable, something which will create a recession, most likely a severe one (though probably nothing like the Great Depression).

The problem for the libertarians who use America as a role model on account of its strong microeconomics is that at that point, socialists will use the recession to reject, not Bush's reckless fiscal policies or Greenspan's reckless monetary policies, but the relatively low taxes and flexible labor market in America. By failing to recognice America's weak macroeconomics, Swedish libertarians are setting themselves up for socialist attacks on the relatively good microeconomic policies of America.


Anonymous Ames Tiedeman said...

Bernanke has a big job ahead of him.
We cannot sustain 800 bilion a year trade deficits. We cannot export our way out of this mess. The only answer is a sharply lower dollar to drive manufactruing home and to lower the trade deficit. The dollar has much farther to fall. What you are seeing is a long term effort (it will take 20 years) to get the trade deficit back under 1% of GDP. We are currently running a trade imbalance of nearly 6% of GDP. No nation can do this. The IMF would be stepping in to help any nation if its trade imbalance went to 6% of GDP becuase its currency would collapse! The U.S. is different, but still, we cannot sustain a trade deficit of this magnitude. People must understand that when we buy an item from say China, we pay in dollars. The Chinese company we just bought from them goes to an Exchange Bank in China and converts those dollars to Yuan. The Chinese banking system (Chinese Government) is now sitting on those dollars. They can either 1, buy oil, 2, buy Treasuries, 3. buy U.S goods, 4. buy U.S. Corporations, 5. other. Over time if we (the U.S. ) continue to run a trade deficit we could simply be completely bought and controlled by foreigners. Warren Buffet has explained the situation as being like a rich Texas farmer who loses a small piece of his land year after year and never notices for a while. When he then notices, tragedy sets in because he no longer controls his land. So in sum, we need to get the trade deficit way down. This is why the Fed has abandoned the dollar. It wil be going down for the next 20 years. That is how long it is going to take to correct this imbalance mess.

3:39 PM  
Anonymous metanoia8 said...

I find it baffling that while we in the United States say we are concerned about "homeland security" our government is failing us. Not only are our borders unprotected, the greater threat is economic terrorism. I have spent thirty years in TV news. TV news is all about video like 9/11. "Horrific" we say and we are frightened. Of course we don't see much of the blood and gore from the war on TV because the media is asleep at the wheel and George W has censored most of the media coverage of this invisible war. He has done this more successfully than any other president in time of war or conflict. Economic terrorism is not sexy video like flames, the carrnage after a bomb attack, and people jumping to their deaths. But economic terrorism with our low and ever lower dollar leaves us totally open to being bought by foreign interests. It is like the frog who screams when thrown in hot water, but if you put him in there and gradually increase the temperature he won't know he is dying. We are one big fire sale to switch metaphors. When (not if) foreign interests use their assets ro control us such as utilities, transportation systems, financial institutions, like the frog we will be close to death before we know. Then we will be unable to afford anything more than the barest necessities. The media is not a tool of the liberal left as the talk show hosts would have us believe. It is asleep at the wheel in showing us a crisis we are living through day by day. The average person doesn't put falling dollar, falling interest rates, rising prices of commodities together in any meaningful way. This is the job of the media. Instead we wait for Brad and Angelina's twins to be born and we curse the Chinese who are eating all of our bread.

1:26 AM  
Blogger Networking said...

Stefan, Ames,

You have provided several considerations but most of the views are centered around the US as a solitary economy. If you considered that the 800 bUSD trade deficit has in the end created the Chinese market and subsequently the single "flea market" for everyone to peddle their wares - there is a bigger purpose in play. I agree it cannot be at the cost of selling itself out and I see that in many ways. But the moderation of trade deficit - while not entirely through exports - has to be related to exporting to these emerging economies. It is definitely not by closing trade borders.

I would start to re-look at the Most Favored Nation type treatment that China is getting today without any reciprocation. The other thing that needs to be done is to make it attractive (tax breaks, some amount of carrot-and-stick) to foreign companies to bring their wares into the US, manufacture it locally and sell it locally.

Ajay Madwesh

9:11 PM  
Anonymous Anonymous said...

Jim says:

I think Barney Frank has a lot to do with this mess we're in. He stopped inquiries into and regulation designed to reign in Fannie and Freddie. I hope Barney as well as all others who contributed to this mess get voted out of office. In fact, half of Washington needs to be voted out of office. They are all running scared and want this bailout to help THEIR CHANCES of getting back to Washington. I don't really see too many of them who are concerned about the average American. Instead, they talk down to us, saying we "just don't understand" why the bailout is necessary. I fully understand. I'm willing to risk a drop in my 401k to purge the market and to purg Washington of those who are in this only for themselves.

7:59 PM  
Anonymous Anonymous said...

Please read, copy, and paste to every blog you know of.

Remember: "Together we Bargain- Divided we BEG.
So let's get down to the real issue at hand. The economy

I'm against the $85 BILLION bailout of AIG.
Instead, I'm in favor of giving $85,000,000,000 to America in a 'We DeserveIt' dividend.

To make the math simple, let's assume there are 200,000,000 bona fide U.S.citizens, aged 18+.
Our population is about 301 million counting every man, woman, and child. So, 200,000,000 might be a fair stab at adults 18 and up. Now, divide 200 million, 18+ adults into $85 billion - that equals $425,000.00 each!

Yes, my plan is to give that $425,000 to every adult as a 'We Deserve It' dividend.

Of course, it would NOT be tax free. So, let's assume a tax rate of 30%. Everyone would pay $127,500.00 in taxes.
That sends $25.5 billion right back to Uncle Sam! It also means that every adult 18+ has $297,500.00 in their pocket.

A husband and wife would have $595,000.00!
What would you do with $297,500.00 to $595,000.00?
• Pay off your mortgage – housing crisis solved
• Repay college loans – what a great boost to new grads
• Put away money for college – it'll really be there
• Save in a bank – create money to loan to entrepreneurs
• Buy a new car – create jobs
• Invest in the market – capital drives growth
• Pay for your parent's medical insurance – health care improves
• Enable Deadbeat Parents to come clean – or else

Remember this is for every adult U.S. citizen, 18 and older (including the folks who lost their jobs at Lehmann Brothers and every other company that is cutting back) and of course, for those serving in our Armed Forces.

If we're going to do an $85 billion bailout, let's bail out every adult U.S. citizen!!

As for AIG – liquidate it.
• Sell off its parts.
• Let American General go back to being American General.
• Sell off the real estate.
• Let the private sector bargain hunters cut it up and clean it

We deserve the money and AIG doesn't. Sure it's a crazy idea, but can you imagine the coast-to-coast block party?!

How do you spell Economic Boom? W-e D-e-s-e-r-v-e I-t d-i-v-i-d-e-n-d!

I trust my fellow adult Americans to know how to use the $85 Billion 'We Deserve It' dividend more than I do the geniuses at AIG or in Washington,

And remember, The plan only really costs $59.5 billion because $25.5 billion
is returned instantly in taxes to Uncle Sam.

Brian Rogers

6:19 AM  
Blogger jeeva123 said...

Great blog which provide us to know the economic condition of America in both the sides.
Economic terrorism is so horrible.

Sreevysh Corp

5:24 AM  
Blogger Mr. Bob said...

My personal experience over the last fourteen years has show me where we have lost the ability to make money from our innovation or ideas.
Just recently we saw where an inventor came forward with a wind shield wiper idea. The same thing happened to me only it was Sea Doo, a division of Bombardier. I am writing an Expose' on the experience. Unless you are rich don't rumble with the big guys. They will delay you into the poor house. My offering is based on this experience. Loss of the ability to produce my products, hire the people, rent the buildings, pay the taxes, and effect the balance of trade by producing and selling a product made in the U S.
Edison had over 1000 patents. Looking past the movie camera, telegraph tape machine, and phonograph, he put electricity in New York in six months. Now consider the jobs that have resulted from this innovation. The electrical union has over 600,000 members. Now let’s consider how many jobs and other patents have created businesses for America. Imagine how many middle class pay checks were created by just that one patented idea, electricity.

Now we come to present. As I stated earlier we have a way out of this theft of new ideas for domestic business. Our country was blessed with a mixture of immigrants, adding to its diversity of culture. Many scholars believe this gives our country a unique advantage in innovation and creativity. If you look back at our history you can see this with aircraft and the electric light as examples. Ideas flow from our unique human resource each day. Where do they go now? Where are the businesses that these ideas create? Business that hire people, rent and purchase buildings, pay taxes, use domestic suppliers which increase their work forces. This is where the “Middle Class” come from.

Through history, our forefathers recognized how important it was to protect these ideas for the innovator or inventor. They created the U.S. Patent and Trademark office to protect Americans from having their ideas taken by others who would take and then profit from them. This allowed the inventor to develop his new products, by investing capitol in a U.S. business. This enabled him to profit from those items, selling to customers all over the world. The profits he would gain from sales would go into buildings, employees, machines, and other factors of production in the U.S... This process is called Capitalism. The basis of this growth originates with the idea that innovation was protected and domestic or foreign competitors could not duplicate the inventor’s product, allowing him to profit and grow. Microsoft and many large companies were founded in this manor.

Today this is not the case. Large multinational corporations spend millions of dollars on Research and Development Divisions. The acronym (N.I.H.) or “Not in House” has become the buzz word for taking from the inventor what he hopes to profit from. Many foreign companies feel that with their large R & D divisions, they are entitled to these ideas for their companies. A large company in some cases will first attempt to purchase the idea. Most will just ignore the inventor and proceed to design around the patent using the same basic idea, which happened to me. With massive engineering departments, millions of dollars, industry control and political influence the inventor is eliminated. If the inventor wishes to sue, he will find himself in patent litigation taking years and costing millions of dollars. This condition stops the flow of new ideas and the related beneficial economic impact from American innovation.

I can offer numerous examples of wonderful ideas never being heard. Why would someone go through what I have, and spend the untold thousands of dollars needed to bring an idea out, only to have it taken by a large multinational corporation? Contact any patent law firm that takes contingency work and they will give you a list of cases like mine. A movie is coming out October 2008, detailing a case where a windshield wiper system was simply taken by Ford Motor Company. I would recommend that you see this movie. Look at what the inventor had to do to get paid for HIS idea. Thousands of such ideas can be harvested to solve the energy crisis, and many other problems facing our society today, but where are they. People, who know I am a conceptual designer, come to me all the time with ideas that will save time and increase productivity, what do I tell them. After my experience, I can hardly give them good advise.

In this present environment we need the benefits of innovation for the businesses and jobs they will create. Businesses will open, and plant and equipment they will require will be purchased. The money that will purchase American goods and services can be the profits from these small businesses. Businesses that will grow and needing more of everything we produce. We presently have a negative 800 billion dollar imbalance of trade. Our cash is flowing out much faster for imported goods. What do we have to sell? Steel, cars, electronics, cloths, shoes, or just about everything you pick up has a foreign origin. Large companies will continue to avail themselves of the cheaper factors of production. The small innovators business is going to them. Business in the US has turned into service based. What do we produce in the US any more, what do we sell to the world to offset our imbalance of trade.

At one point in recent history Poland was one of the best examples of Capitalism in the world. (Note The Commanding Heights Book, series shown on PBS). When England and the world drove Communism from Poland by assisting Lec Walesa to organize the ship yards, a drastic change occurred. Hundreds of small businesses sprang up. Dress Makers, Shoe Cobblers, Bakers, and so on. Each was making money and putting some into government. Shown in the book The Commanding Heights, also shown on the public broadcasting channel in a three part series, it was Capitalism at its best.
Robert Murray

4:26 PM  
Blogger Kellie said...

The U.S economy will get worst than it is. You can't expect to come out of debt by getting more money loaned to you. The FED will bankrupt the dollar and come out with a solution, the AMERO, for that the FED will call all Americans to pay out the public debt, about 33.000 per capita, if you don't have the money all of your property will be ceased. FDR did it, the FED will do it this time, expatriate before its too late.

9:09 PM  

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