Wednesday, December 4, 2013

The President's Speach on the Economy: a Review

Let's critique the President's speech and see what it tells us.

"Nevertheless, during the post-World War II years, the economic ground felt stable and secure for most Americans, and the future looked brighter than the past. "  - Yes, he's got the right idea.  We had good policies and programs that supported the middle class and a prosperous future for all.

"But starting in the late ‘70s, this social compact began to unravel." - Actually, it started in the early '70s, but no one noticed.

“Technology made it easier for companies to do more with less, eliminating certain job occupations. “ – NO.  This is always true, but not a cause of long term unemployment or dwindling prospects.  A common mistake made today.

“A more competitive world lets companies ship jobs anywhere. “  - NO.  Again, a common misconception.  The world has always been competitive, and globalized.  It was changing trade policies that allowed US corporations to ship jobs overseas, at least for now.

“And as good manufacturing jobs automated or headed offshore, workers lost their leverage, jobs paid less and offered fewer benefits.”  - Yep.
“As values of community broke down,…”  - He hits it on the head here.  We are no longer “One Nation”.  We have become “us” and “them”.

“As a trickle-down ideology became more prominent, taxes were slashed for the wealthiest, while investments in things that make us all richer, like schools and infrastructure, were allowed to wither.  And for a certain period of time, we could ignore this weakening economic foundation, in part because more families were relying on two earners as women entered the workforce.  We took on more debt financed by a juiced-up housing market.  But when the music stopped, and the crisis hit, millions of families were stripped of whatever cushion they had left.”  - So true.  Investment in future productivity makes us richer.

“Since 1979, when I graduated from high school, our productivity is up by more than 90 percent, but the income of the typical family has increased by less than eight percent.” – So true, so sad.

“The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American Dream, our way of life, and what we stand for around the globe. “  - Yes.  This is what being American is all about.  The current challenges being brought onto America are an existential threat.

“…and together with lax regulation, may contribute to risky speculative bubbles.” – The lax regulations, rather than the concentration of wealth itself, are the chief culprit.  Bring back Glass-Steagall.

“The opportunity gap in America is now as much about class as it is about race, and that gap is growing.”  - Yes, this is class issue and always has been.

“Second, we need to dispel the myth that the goals of growing the economy and reducing inequality are necessarily in conflict, when they should actually work in concert.  We know from our history that our economy grows best from the middle out, when growth is more widely shared.  And we know that beyond a certain level of inequality, growth actually slows altogether.”  - Absolutely.  Spot on.

“Third, we need to set aside the belief that government cannot do anything about reducing inequality.” – Again, right on.

“To begin with, we have to continue to relentlessly push a growth agenda.” – Good, but the devil is in the details as they say.

” And that means simplifying our corporate tax code in a way that closes wasteful loopholes and ends incentives to ship jobs overseas.” – Yes to ending the incentives to move jobs overseas, but too much emphasis on corporate taxes which have little impact on hiring.  This is just a cave in to special interests, and ignores the problems of trade imbalances and more appropriate mechanisms to remedy this such as tariffs.

“It means a trade agenda that grows exports and works for the middle class.  It means streamlining regulations that are outdated or unnecessary or too costly.”  - yes, but the problem is not regulations!!  It’s the trade imbalance caused by a lack of protective measures like tariffs which are traditionally used by all advanced countries.
Overall, the President ignores the trade deficit and does not tackle financial regulation that is needed for any meaningful recovery.

“Step two is making sure we empower more Americans with the skills and education they need to compete in a highly competitive global economy.”  - Good, we all need education to get good jobs.

“so we’ve helped more students go to college with grants and loans that go farther than before.  We’ve made it more practical to repay those loans.  And today, more students are graduating from college than ever before.” – Umm, I’m not sure what he’s talking about as grants are almost non-existent for the middle class and the costs of college are more burdensome than ever.  Also, more college graduates aren’t necessarily a good thing.  We need the proper education for kids as not everyone should go to college; sometimes vocational training is what is more useful.

“So we should offer our people the best technical education in the world.  That’s why we’ve worked to connect local businesses with community colleges, so that workers young and old can earn the new skills that earn them more money.” – As long as he’s not referring to ‘STEM’ because we have plenty of computer people.  We need more broad based skills for a wide variety of jobs.

“the third part of this middle-class economics is empowering our workers.  It’s time to ensure our collective bargaining laws function as they’re supposed to so unions have a level playing field to organize for a better deal for workers and better wages for the middle class.” – Good, this is how it’s supposed to work.  Unions have lost most of the clout that they had acquired by the 1950’s.  They need to organize and act more vigorously than ever.

“And that’s why it’s well past the time to raise a minimum wage that in real terms right now is below where it was when Harry Truman was in office. “  - Yes, the free market needs a bottom so people don’t drop right through.

“But there’s no solid evidence that a higher minimum wage costs jobs, and research shows it raises incomes for low-wage workers and boosts short-term economic growth. “ – Correct.

“Number four, as I alluded to earlier, we still need targeted programs for the communities and workers that have been hit hardest by economic change and the Great Recession… Promise Zones, urban and rural communities where we’re going to support local efforts focused on a national goal -- and that is a child’s course in life should not be determined by the zip code he’s born in, but by the strength of his work ethic and the scope of his dreams. “  - This is misguided and does not help the middle class which he so touted through the speech.  This will not help the structural problems of the economy or financial system.

“So we’re going to have to do more to encourage private savings and shore up the promise of Social Security for future generations.  And remember, these are promises we make to one another.  We don’t do it to replace the free market, but we do it to reduce risk in our society by giving people the ability to take a chance and catch them if they fall.” – Yes.  The name says it all: Social Security.  Only the Federal government has the ability to guarantee income in spite of the vagaries of life that befall all of us.

“…SNAP…unemployment insurance… These programs are almost always temporary means for hardworking people to stay afloat while they try to find a new job or go into school to retrain themselves for the jobs that are out there, or sometimes just to cope with a bout of bad luck. “  - Yes, the idea is that the normal state is for people to have good, well-paying jobs, that the government supplies support when those good jobs become unavailable for a time.

“That’s why we fought for the Affordable Care Act -- (applause) -- because 14,000 Americans lost their health insurance every single day, and even more died each year because they didn’t have health insurance at all.  We did it because millions of families who thought they had coverage were driven into bankruptcy by out-of-pocket costs that they didn't realize would be there.  Tens of millions of our fellow citizens couldn’t get any coverage at all.  And Dr. King once said, "Of all the forms of inequality, injustice in health care is the most shocking and inhumane.” – Yes, the American people, acting through their government, has a responsibility to see that all Americans get needed health care.  Is the ACA it, probably not, but it might be better than what existed before.

The President has some idea of the forces acting against the middle class, but does not seem to comprehend the fundamental causes of these.  Those are: the lack of balanced trade, the lack of trade protections for industries which provide high value added, high wage jobs and the economic foundation of our country, the regulation of finance which separated depository institutions from investment and speculation, the control over the money creation process, and the restoration of a trade settlement system like Bretton Woods.  All the good intentions and laudable goals will do nothing if these fundamental issues are not addressed.

What can we learn about trade from Germany???

The Germans are taking a lot of heat lately for their large trade surplus of nearly $250B this year.  This kind of criticism is par for the course from the talking heads, but what really stunned me is that nobody asked "how did Germany manage to have such a large trade surplus when they have such high labor and structural costs?"  This to me is the key issue here, so I did a little searching around and found this great article from 2010 about just this issue.  Ian Fletcher has written an interesting piece about what the Germans are doing right and how they do it.  You can find it here:

The principle reason for the German trade surplus is the underlying philosophy of the Germans which Ian describes as: "Germany, like the U.S., is nominally a free-trading country. The difference is that while the U.S. genuinely believes in free trade, Germany quietly follows a contrary tradition that goes back to the 19th-century German economist Friedrich List (who was, ironically, a student of our own Alexander Hamilton, the man on the $10 bill). So despite Germany's nominal policy of free trade, in reality, a huge key to its trading success is a vast and half-hidden thicket of de facto non-tariff trade barriers."  They, being disciples of List, understand the importance of protecting their high value added, high wage, high tech industries and never running trade deficits as the path to prosperity.  List wrote the brilliant critique of Adam Smith in "The National System of Political Economy", which I highly recommend to all.

What is unfortunate about the German trade policy is that they must maintain the pretense of "free trade" while they nonetheless go about instituting obscure policies which provide protections.  Wouldn't it be easier, clearer, fairer, and more straightforward to simply replace many of these rules and regulations with tariffs?  Let's just state again that all nations have the right to balanced trade, and that tariffs are a legitimate mechanism for achieving this balanced condition.  Indeed tariffs should be the preferred mechanism due to the reasons above.  Certainly, the need for balanced trade is self evident as in the long run trade deficits are unsustainable and trade will come back into balance as the "free trade" crowd insists, but this will likely be accomplished through a variety of shocks that will inflict more suffering on the public.

Now List goes beyond balanced trade to requiring protection of key industries that provide for high value, high wage jobs be protected and promoted above  that necessary for domestic consumption, with the surplus being exported in exchange for low value commodities produced at low wages.  This policy, will as List adequately shows, create prosperity at home, but at the cost of prosperity for other nations.  A balance of trade with all providing roughly for their own needs, or trading for similarly value added goods will likely be more palatable to all.

As to the current criticism that the Germans are suffering?  Well, there is some merit in that, as we'll say again, all nations have the right to balanced trade, including the Germans.  They will eventually have to spend what they are saving from running a trade surplus so they might as well do it now and give a demand boost to production in other EU countries, such as Spain and Greece, which are running far below their production potential.  This may induce some inflation in the Eurozone, but maybe that will provide the impetus that the Germans need to exit the EU.