Thoughts on the economy

[clifp]

Japan is still the third largest economy, though...

Yes but they were #2 and there was some (foolish IMO) talk of them being #1 by the end of the century. Didn't quite work out that way.

 

[Hamlet]

When you manage to produce the same amount of goods with 10% fewer people, it generally makes for very good profits.

how are earnings up but employment flat?

 

[ERD50]

Japan is still the third largest economy, though...

Yes but they were #2 and there was some (foolish IMO) talk of them being #1 by the end of the century. Didn't quite work out that way.

I'm curious - we hear about how Japan's economy has been flat-lined (or worse?) for decades (or something along those lines). But what does that mean for the average Japanese person/family? I get the impression that life goes on. Are they in bad shape, doing OK, or just barely managing, or what? I just don't have any perspective on this.

-ERD50

 

[Gone4Good]

I'm curious - we hear about how Japan's economy has been flat-lined (or worse?) for decades (or something along those lines). But what does that mean for the average Japanese person/family? I get the impression that life goes on. Are they in bad shape, doing OK, or just barely managing, or what? I just don't have any perspective on this.

-ERD50

My understanding is that things in Japan are not as bad as many in the West assume. From the outside we look at a stock market that never recovered and a GDP that never seems to grow and conclude things must be horrible. Life on the ground is a bit of a different story. Much of Japan's aggregate GDP stagnation can be explained by an ageing population and shrinking workforce. According to economist Tyler Cowen:

Between 1990-2007, GDP per working age adult increased by 31.8% in the United States, by 29.6% in EU.15 and by 31.0% in Japan. The figures are nearly identical! Japan has simply not been growing slower than other advanced countries once we adjust for demographic change.

So you can imagine the income of the average Japanese worker should have kept pace with their international peers. Meanwhile, Japan's unemployment rate is roughly half of ours at 4.3% and has rarely exceeded 5% over the past 30 years and never exceeded 6%. We might be so lucky.

 

[Alan]

My understanding is that things in Japan are not as bad as many in the West assume. From the outside we look at a stock market that never recovered and a GDP that never seems to grow and conclude things must be horrible. Life on the ground is a bit of a different story. Much of Japan's aggregate GDP stagnation can be explained by an ageing population and shrinking workforce. According to economist Tyler Cowen:



The other thing to consider is that Japan's unemployment rate is currently 4.3% and has rarely exceeded 5% over the past 3 decades. We might be so lucky.

I also believe that the average Japanese person does not invest in the stock and bond market so a flat market means nothing to them directly.

 

[Khufu]

I didn’t major in economics, and actually don’t have a very good knowledge of how the economy works, but I’m becoming increasingly concerned that the fed has to keep taking action to stimulate the economy. Don’t get me wrong, I love it when my investments go up (awesome day so far today), but part of me believes things are a lot worse that we are led to believe and the fed is artificially keeping our economy on life support. Does anyone share these concerns or am I just too cynical? Isn't it healthy for the economy to go in cycles?

If I may say so, you, like most people, probably think of the national economy as like a household, which is something we all understand at least to some degree. For a household to borrow money, to spend more when its income is reduced is a reckless policy that will eventually lead to financial ruin. However, the national economy, even though it comprises, among other things, all the households in the country, is itself nothing like a household. A better analogy would be to a human body for which demand, i.e. borrowing and spending, is like flowing blood. If the blood doesn't flow the body will die. Unlike a human body though, the economy can die in pieces and to a degree, but as far as the essential life-giving aspect of maintaining demand the analogy has value.

So, the Fed's policy of lowering interest rates to the point of the zero rate lower bound and then buying up bonds to provide liquidity, is an attempt to stimulate demand by lowering the cost of money. You are right that "things" are worse than you realize because those "things" are jobs that people need and don't have. In huge numbers. You probably don't realize the extent to which the US is in a jobs depression, either because you still have one yourself or you don't need one. In addition to the lives that are being ruined, the output of those workers who are not engaged during this period is forever lost, which constitutes the "output gap" in GDP.

But the effect of monetary policy, which is the best the Fed can do, is limited and insufficient. Despite the complaints of the Hooverites, gold bugs and inflationistas, the Fed is not the cause of the jobs depression. The $8 trillion losses in the housing bubble plus the related losses in the financial markets are the cause. As in all other cases of recessions caused by the bursting of debt and speculation bubbles, the recovery is very slow. It would be much better if the govt pursued a fiscal policy of borrowing and increasing spending, such as investment in education, infrastructure and research in a wide range of areas from medical to energy. But the shocking polarization of wealth in America during the last few decades has also polarized politics to the point that investments in the future of this kind are no longer acceptable to the 1% because their interests have diverged from those of the middle class.

 

[clifp]

I'm curious - we hear about how Japan's economy has been flat-lined (or worse?) for decades (or something along those lines). But what does that mean for the average Japanese person/family? I get the impression that life goes on. Are they in bad shape, doing OK, or just barely managing, or what? I just don't have any perspective on this.

-ERD50

It seems to me that several years ago we had a Japanese forum member who spent a lot of time in the US. IIRC and I could easily be wrong but he painted a pretty dismal picture.

I am pretty familiar with the Hawaii tourism business. When I first moved here in 2000. Hawaii had 1.8 million Japanese visitor and 4.3 Mil US tourist. In 2010 the number of Japanese visitors had shrunk to 1.2 Mil while the US had increased to 4.8 Mil. (We say huge increases in visitors for the rest of Asia). Just as importantly the spending per Japanese visitor also declined. So I can say there was a pretty dramatic cutback in Japanese retirees traveling to Hawaii.

It seems to me the person to ask is Wade Pfau. I would think with his knowledge of retirement and living in Japan, he could publish some interesting things.

I personally would love to know how Japanese retirees without pension adapted to a zero interest environment.

Any of you who have corresponded with him want to make the suggestion?

 

[Khufu]

I personally would love to know how Japanese retirees without pension adapted to a zero interest environment.

According to the Times deflation in Japan benefits retirees who see the purchasing power of their yen increasing.

http://www.nytimes.com/2012/08/02/w...tion-gap.html?pagewanted=all&_moc.semityn.www

 

[Tyro]

It would be much better if the govt pursued a fiscal policy of borrowing and increasing spending, such as investment in education, infrastructure and research in a wide range of areas from medical to energy. But the shocking polarization of wealth in America during the last few decades has also polarized politics to the point that investments in the future of this kind are no longer acceptable to the 1% because their interests have diverged from those of the middle class.

+1

The economy is a complex situation, and economics an empirical science. Economists have never been in agreement about how things work, and that seems to apply even moreso today. Since the 1980s, 3 things began to happen that changed our economy for the long term -- perhaps (probably) forever.

1. We shifted from a production-based economy to a service-based economy (productivity is increased, but in a service-based economy, that can occur {as pointed out in the QE-3 thread} that it doesn't take 10x as many employees to increase production of services by 10x)
2. The trade deficit went negative for the first time since the American industrial revolution
   Balance of trade - Wikipedia, the free encyclopedia
3. Our net international investment position began a longterm downward trend
   Net international investment position - Wikipedia, the free encyclopedia

The rules of the game -- in fact the entire game (IMO) -- has shifted, yet some are still playing with the old (pre-1980s) play book (that doesn't, and won't, work anymore). We also need to pay more attention to the world economy than just our own to a greater degree than ever before.

Whilst the economists argue it out, the system will have to figure it out, and that will take some time.

Part of what may benefit the Japanese is that they have always planned and invested for the long term, while we have tended to look for the quick fix band-aid approach to the economy. This is why I agree with Khufu above -- investing in education, infrastructure, and research will create jobs and (IMO) lay the foundation for future economic health (though the road may be rough & rocky).

 

[tmm99]

Japan tried a very similar approach and now look where they are.

Debt at 225 percent of GDP
sluggish to no growth
an ageing population at risk

Could this be us in a decade ?

I believe Nikkei Index is at the level it was around 1983. The interest rate is 0.00%. Slight deflation from what I can see. How could you live off of savings or investment?? Government bonds??

 

[HFWR]

All this funny money is scary indeed, but it could be that, with the chance to delever provided by cheap money, and the eventual equilibrium in housing and construction that will happen naturally given enough time, Big Ben might turn out to be the smartest guy in the room. Of course, the last time we used that phrase, it was about Enron's management...

 

[audreyh1]

If I may say so, you, like most people, probably think of the national economy as like a household, which is something we all understand at least to some degree. For a household to borrow money, to spend more when its income is reduced is a reckless policy that will eventually lead to financial ruin. However, the national economy, even though it comprises, among other things, all the households in the country, is itself nothing like a household. A better analogy would be to a human body for which demand, i.e. borrowing and spending, is like flowing blood. If the blood doesn't flow the body will die. Unlike a human body though, the economy can die in pieces and to a degree, but as far as the essential life-giving aspect of maintaining demand the analogy has value.

So, the Fed's policy of lowering interest rates to the point of the zero rate lower bound and then buying up bonds to provide liquidity, is an attempt to stimulate demand by lowering the cost of money. You are right that "things" are worse than you realize because those "things" are jobs that people need and don't have. In huge numbers. You probably don't realize the extent to which the US is in a jobs depression, either because you still have one yourself or you don't need one. In addition to the lives that are being ruined, the output of those workers who are not engaged during this period is forever lost, which constitutes the "output gap" in GDP.

But the effect of monetary policy, which is the best the Fed can do, is limited and insufficient. Despite the complaints of the Hooverites, gold bugs and inflationistas, the Fed is not the cause of the jobs depression. The $8 trillion losses in the housing bubble plus the related losses in the financial markets are the cause. As in all other cases of recessions caused by the bursting of debt and speculation bubbles, the recovery is very slow. It would be much better if the govt pursued a fiscal policy of borrowing and increasing spending, such as investment in education, infrastructure and research in a wide range of areas from medical to energy. But the shocking polarization of wealth in America during the last few decades has also polarized politics to the point that investments in the future of this kind are no longer acceptable to the 1% because their interests have diverged from those of the middle class.

A very interesting and well presented perspective. I hadn't thought about the roots of our current polarization quite in that way, but I think you have a great point.

I agree about what caused the jobs depression, and without those industries rebounding (yet), the jobs haven't returned. There is more though - a shift in attitude of company hiring policies. Companies in ALL industries went very lean in response to the credit crunch/financial crisis of 2008 (this also caused the recession), and they are now inclined to stay that way - maximizing profits and minimizing hiring. The competition (demand) that usually spurs hiring and investment just doesn't exist at the moment.

 

[Nemo2]

I fail to see where 'jobs' are coming from; unlike bygone eras there is virtually nothing that requires masses of unskilled/semi-skilled workers.

Most everything is automated, and therefore non labor intensive; I had the opportunity to tour our local Proctor & Gamble plant recently, and although it was admittedly the evening shift I was quite surprised by how few employees it requires to operate a large factory.

The days of masses of 'working class' people making good money in industry is over, and I simply cannot envision them ever returning.......the guy who used to put the hubcaps on as the cars rolled off the assembly line...gone forever.

Combine that with the goods manufactured overseas; we were scanning over a flyer/catalogue today and looking at the prices of appliances......thinking of the individual costs starting from the mining/making of the base materials utilized, the factory, boxing, shipping, on/offloading, trucking, advertising, stocking in stores, rents, operating costs, insurance...etc, etc, and wondering how, (even if all the employees along the way were paid zero), how they can sell these things and still make a profit.

You cannot just 'make jobs up', regardless of the need for them; there has to be a demand, and there has to be a profit...other than pork barreling with taxpayer's money who's going to knowingly invest in losing propositions?

 

[Midpack]

I fail to see where 'jobs' are coming from; unlike bygone eras there is virtually nothing that requires masses of unskilled/semi-skilled workers.

Most everything is automated, and therefore non labor intensive; I had the opportunity to tour our local Proctor & Gamble plant recently, and although it was admittedly the evening shift I was quite surprised by how few employees it requires to operate a large factory.

I can attest to this, I made a career of improving manufacturing productivity. When I retired, my plant had revenues of $2.2 million per employee, so labor had become almost trivial despite the very high wages/hour (and benefits) we paid. It was nothing like that when I began my manufacturing career in the late 70's, labor was a huge cost component.

And with so many unknowns ahead, no business would hire anyone they're not absolutely positive they'd need for the long run - we surely didn't. While profits are indeed generally high (now) with volume somewhat restored, when the next downturn hits and volume gets whacked, profits will also evaporate - it's not a linear correlation as many of you undoubtedly know. So lean is the name of the game (LEAN and lean). That trend is not new, it's been going on for decades and the 2008 meltdown just made productivity increases all the more critical.

 

[brewer12345]

I fail to see where 'jobs' are coming from; unlike bygone eras there is virtually nothing that requires masses of unskilled/semi-skilled workers.

Most everything is automated, and therefore non labor intensive; I had the opportunity to tour our local Proctor & Gamble plant recently, and although it was admittedly the evening shift I was quite surprised by how few employees it requires to operate a large factory.

The days of masses of 'working class' people making good money in industry is over, and I simply cannot envision them ever returning.......the guy who used to put the hubcaps on as the cars rolled off the assembly line...gone forever.

Combine that with the goods manufactured overseas; we were scanning over a flyer/catalogue today and looking at the prices of appliances......thinking of the individual costs starting from the mining/making of the base materials utilized, the factory, boxing, shipping, on/offloading, trucking, advertising, stocking in stores, rents, operating costs, insurance...etc, etc, and wondering how, (even if all the employees along the way were paid zero), how they can sell these things and still make a profit.

You cannot just 'make jobs up', regardless of the need for them; there has to be a demand, and there has to be a profit...other than pork barreling with taxpayer's money who's going to knowingly invest in losing propositions?

I guess we are entering the utopian future envisioned long ago where much of the populace no longer had to work as robots did most of the labor and we all have flying cars...

 

[Amethyst]

I agree with everything Khufu says.

Amethyst

If I may say so, you, like most people, probably think of the national economy as like a household, which is something we all understand at least to some degree. For a household to borrow money, to spend more when its income is reduced is a reckless policy that will eventually lead to financial ruin. However, the national economy, even though it comprises, among other things, all the households in the country, is itself nothing like a household. A better analogy would be to a human body for which demand, i.e. borrowing and spending, is like flowing blood. If the blood doesn't flow the body will die. Unlike a human body though, the economy can die in pieces and to a degree, but as far as the essential life-giving aspect of maintaining demand the analogy has value.

So, the Fed's policy of lowering interest rates to the point of the zero rate lower bound and then buying up bonds to provide liquidity, is an attempt to stimulate demand by lowering the cost of money. You are right that "things" are worse than you realize because those "things" are jobs that people need and don't have. In huge numbers. You probably don't realize the extent to which the US is in a jobs depression, either because you still have one yourself or you don't need one. In addition to the lives that are being ruined, the output of those workers who are not engaged during this period is forever lost, which constitutes the "output gap" in GDP.

But the effect of monetary policy, which is the best the Fed can do, is limited and insufficient. Despite the complaints of the Hooverites, gold bugs and inflationistas, the Fed is not the cause of the jobs depression. The $8 trillion losses in the housing bubble plus the related losses in the financial markets are the cause. As in all other cases of recessions caused by the bursting of debt and speculation bubbles, the recovery is very slow. It would be much better if the govt pursued a fiscal policy of borrowing and increasing spending, such as investment in education, infrastructure and research in a wide range of areas from medical to energy. But the shocking polarization of wealth in America during the last few decades has also polarized politics to the point that investments in the future of this kind are no longer acceptable to the 1% because their interests have diverged from those of the middle class.

 

[sheehs1]

If I may say so, you, like most people, probably think of the national economy as like a household, which is something we all understand at least to some degree. For a household to borrow money, to spend more when its income is reduced is a reckless policy that will eventually lead to financial ruin. However, the national economy, even though it comprises, among other things, all the households in the country, is itself nothing like a household. A better analogy would be to a human body for which demand, i.e. borrowing and spending, is like flowing blood. If the blood doesn't flow the body will die. Unlike a human body though, the economy can die in pieces and to a degree, but as far as the essential life-giving aspect of maintaining demand the analogy has value.

So, the Fed's policy of lowering interest rates to the point of the zero rate lower bound and then buying up bonds to provide liquidity, is an attempt to stimulate demand by lowering the cost of money. You are right that "things" are worse than you realize because those "things" are jobs that people need and don't have. In huge numbers. You probably don't realize the extent to which the US is in a jobs depression, either because you still have one yourself or you don't need one. In addition to the lives that are being ruined, the output of those workers who are not engaged during this period is forever lost, which constitutes the "output gap" in GDP.

But the effect of monetary policy, which is the best the Fed can do, is limited and insufficient. Despite the complaints of the Hooverites, gold bugs and inflationistas, the Fed is not the cause of the jobs depression. The $8 trillion losses in the housing bubble plus the related losses in the financial markets are the cause. As in all other cases of recessions caused by the bursting of debt and speculation bubbles, the recovery is very slow. It would be much better if the govt pursued a fiscal policy of borrowing and increasing spending, such as investment in education, infrastructure and research in a wide range of areas from medical to energy. But the shocking polarization of wealth in America during the last few decades has also polarized politics to the point that investments in the future of this kind are no longer acceptable to the 1% because their interests have diverged from those of the middle class.

While I agree with first several paragraphs, don't know that I agree with the last 2 or 3 sentences. We have sent tons of money towards education, infrastructure and research of all kinds to include medical and energy. Can't say that it was managed well...but it was most certainly doled out. We all know of the government backed contracts whose costs sky rocketed out of control. The other thing I somewhat disagree with are the "causes" for the polarization of wealth. I dare say, the losses of our manufacturing sector and "blue collar" type positions have been as responsible for hurting our middle class and polarizing wealth as say perhaps the factors that led to the housing crisis. The housing and bank crisis (greed) nailed it shut...for a while. While it has become almost politically correct to blame the 1% I think the truth lies in the deeper reasons. Loss of industry sectors that once supported the middle class. We can thank years of Congressional decisions for that.
I have a view that the 1% have become the scapegoats. It wasn't a problem as long as everyone was doing moderately well. So the question is what happened to the middle class such they aren't doing well and such that the so called 1% have become the scapegoats? My answer is loss of industries that supported the middle class.
Just my opinion.

 

[tmm99]

I also believe that the average Japanese person does not invest in the stock and bond market so a flat market means nothing to them directly.

Exactly my opinion too that It is not affecting the Japanese as much as it would here.

Can you imagine the same thing happening here (dji acting like nikkei index) where almost every retiree is counting on 4% returns on their investment?

I would like to think we are too greedy to let that happen in this country...to let the stock prices stay low, you know. I hope there is a bunch of speculators who would buy tons when the prices are low and perpetuate the market game...

 

[Khufu]

While I agree with first several paragraphs, don't know that I agree with the last 2 or 3 sentences. We have sent tons of money towards education, infrastructure and research of all kinds to include medical and energy. Can't say that it was managed well...but it was most certainly doled out. We all know of the government backed contracts whose costs sky rocketed out of control. The other thing I somewhat disagree with are the "causes" for the polarization of wealth. I dare say, the losses of our manufacturing sector and "blue collar" type positions have been as responsible for hurting our middle class and polarizing wealth as say perhaps the factors that led to the housing crisis. The housing and bank crisis (greed) nailed it shut...for a while. While it has become almost politically correct to blame the 1% I think the truth lies in the deeper reasons. Loss of industry sectors that once supported the middle class. We can thank years of Congressional decisions for that.
I have a view that the 1% have become the scapegoats. It wasn't a problem as long as everyone was doing moderately well. So the question is what happened to the middle class such they aren't doing well and such that the so called 1% have become the scapegoats? My answer is loss of industries that supported the middle class.
Just my opinion.

Globalization is certainly one of the causes of the income losses for workers in manufacturing, but this was not the inevitable outcome of a natural process that was beyond the influence of policy. Indeed, Rubin's strong dollar policy of the 90's directly helped bring about this result. At the same time that blue-collar workers were ruthlessly exposed to competition from cheap labor countries by Walmart for instance, other sectors of the economy have retained effective protection against foreign competition such as doctors. At no point in the discussion of the many possible reforms to US medicine, for instance, did we ever hear a discussion about the pros and cons of a wholesale offering of green cards to any foreign doctors who can pass a US medical competency test as a method of relieving the doctor shortage in such areas as general practice. Free trade in medical skills would allow the US to benefit from the comparative advantages of countries with lower cost and more efficient medical training programs. The fact that this possible solution never emerged for discussion is evidence that the doctors have much more political influence than the blue collar workers.

And there are many other examples of policy choices that were made to benefit the upper classes at the expense of the general citizenry, such as:

Bush cuts in income tax rates for the rich
preferential tax rates on investment income over labor income
income ceiling on the payroll tax
Medicare Part D that provides for Medicare to buy drugs from the pharmaceutical companies, but prevents Medicare from negotiating on price
state govts reducing support for state universities resulting in tuition increases that affect lower income students disproportionately
the Citizen's United decision of SCOTUS extending more political influence to corporations, the ownership of which is largely in the hands of the rich
refusal of Greenspan's Fed to regulate the mortgage industry
extension of monopoly protections for copyright and patents benefiting corporations
failure of the FBI to institute massive investigations/prosecutions of fraud in the mortgage industry in 2004 when it reported the large increase in fraudulent activity

The list could go on to book length. Far from being scapegoats the 1% have successfully waged class war against the middle and working classes. Far from being the "job creators" of myth, the top percentiles have engaged increasingly in rent-seeking behavior, i.e. extracting money from economic activity while adding little or no economic benefit.

Those were just a few of the policy decisions that benefitted the rich. And what about the results for the rest of us? Median US household income in real terms is back to 1989 levels, but not for the upper percentiles. The US taxation system is less progressive than Europe's while social mobility in the US is less than in Europe. American medicine produces poorer outcomes at vastly higher expense than those of other highly developed countries. In the 2000's up until the crash 40% of profits of the S&P 500 went to financial companies, whose last beneficial innovation, as Volcker points out, was the ATM machine. And so on.

 

[clifp]

Globalization is certainly one of the causes of the income losses for workers in manufacturing, but this was not the inevitable outcome of a natural process that was beyond the influence of policy. Indeed, Rubin's strong dollar policy of the 90's directly helped bring about this result. At the same time that blue-collar workers were ruthlessly exposed to competition from cheap labor countries by Walmart for instance, other sectors of the economy have retained effective protection against foreign competition such as doctors. At no point in the discussion of the many possible reforms to US medicine, for instance, did we ever hear a discussion about the pros and cons of a wholesale offering of green cards to any foreign doctors who can pass a US medical competency test as a method of relieving the doctor shortage in such areas as general practice. Free trade in medical skills would allow the US to benefit from the comparative advantages of countries with lower cost and more efficient medical training programs. The fact that this possible solution never emerged for discussion is evidence that the doctors have much more political influence than the blue collar workers.

Since the rest of your point are close to a political discussion I'll steer clear of them. But I don't find the Dr. argument at all compelling.

I don't think there has been high tech CEO (i.e. rich guy) for the last 25 years that hasn't advocated that a green card gets attached to the diploma of any foreign student who gets a Masters or Doctorate in a STEM field, including an MD. There is not a lot of opposition to the idea, some from professional engineering organization, and some from unions. But I don't look at the failure of this idea which draws wide bipartisan support as the power of labor unions lobbies, or the brilliant lobbying of the IEEE (Electrical Engineer organization) but rather I see this as the basic dysfunctional nature of our government. Even things that 75% of Congress agree on get held hostage to political games.

 

[clifp]

If I may say so, you, like most people, probably think of the national economy as like a household, which is something we all understand at least to some degree. For a household to borrow money, to spend more when its income is reduced is a reckless policy that will eventually lead to financial ruin. However, the national economy, even though it comprises, among other things, all the households in the country, is itself nothing like a household. A better analogy would be to a human body for which demand, i.e. borrowing and spending, is like flowing blood. If the blood doesn't flow the body will die. Unlike a human body though, the economy can die in pieces and to a degree, but as far as the essential life-giving aspect of maintaining demand the analogy has value.

I agree that are profound difference household economy and national economy. But I think it is important to understand that there is also profound differences between the national economy of 2012 and the world of John Maynard Keynes in 1933 when The Means to Prosperity was written. A lot has changed in the last 75+ years and some of the Keynes ideas which made sense during the Great Depression may no longer make sense as cure for the Great Recession.

One main differences is the size of government, back in the 30s total government (Fed+local) spending was in the teens for most developed countries. Now days it is 35% to almost 50% in Northern European countries. What this means is that if we increase the deficit spending by 5% of GDP (say from 3% to 8%), if government was 15% back in the 30s and goes to 20% that much larger increase than 30-35% today. This decreases the multiplier effect.

Second capital is vastly more liquid than it was back in the last century,much less in the 1930s. It isn't just the obvious things; how I can shift 200K from the US equity markets to the international equity markets with a few mouse clicks. How computerized trading program can shift billions in milliseconds. In search of higher returns I have been flying into Vegas and buying rentals properties. I can do a lot of looking at these properties, get assessment of the fair market price from my house in Hawaii something not possible a decade ago. But what is truly remarkable is my Realtor in Vegas has investors not only from the out of town, but from foreign countries like Canada and the Philippines and she's never even met some of them.

I am not a big fan of analogies but to me a much better one is the national economy is network on the internet. We have watched for 20 years as government have tried and fail to keep information from their citizens. As one of the internet pioneers said "the internet treats censorship as damage and routes around it." I think the same thing is true of capital markets , when central banks try to manipulate the currency and government try and play games with fiscal policy. The markets (eventually) see through the game and gets around it searching for the highest risk adjusted return. The result is these policies are far less effective than predicted and there are unintended consequences.

So for instance in QE3 Bernanke acknowledges that this will be painful for retirees and savers. Lower interest rates means lower spending for retirees like myself with no pension or social security, counteracting some of the stimulus. One of the best explanation I've seen what is really behind QE3 is attempt to trigger the wealth effect, if our 401Ks go up and houses price raise because of even lower mortgage rates maybe we will spend more. However, what isn't talked about is that some of the money Bernake creates will flow into other asset class like commodities; precious metals, oil, gas, agricultural products. The higher prices of these will increase cost to both business and consumers further counter acting the stimulus effect.

The one thing that has not changed since Keynes times is the mobility of labor. In part because of the housing crisis, it is not much easier for unemployed mortgage loan broker to travel to the Dakotas to work in the oil fields than it was for the Okie farmer to go to California and get job in the aviation business in the 1930s.

But what has changed is in last decade or so is we have seen a billion new worker in the BRIC countries move from subsistence agriculture to become part of the global economy. A billion new workers means lower wages and the developed world has been very slow to accept this. Despite all the prattle about American workers are the most productive in the world, I am skeptical. But I am especially skeptical than a factory with 100 American workers and 10 million in capital is much more productive than 100 Chinese workers and 10 million in capital. Since it is easy for capital to move, I think the productivity gap between developed country workers and Asian workers will continue to narrow and so will wages.

For much of the last decade we have been in denial about these lower wages. Individuals have maintained their standard of living by borrowing heavily. Countries have attempted to cushion the blow, by borrowing heavily from the Chinese and other, in order to provide their citizens with better health care, pensions, earlier retirement ages, and shorter work weeks. I'm afraid the game ended back in 2008 and people simply need to accept that we are going have to live with the hangover of our excesses from earlier in the decade.

Sure in the short term a few stiff drinks sound very appealing but in the long run, heavy drinking will kill us to use your body analogy.

 

[Nemo2]

preferential tax rates on investment income over labor income

You want to eliminate the risk premium? Why would those who start up/invest in businesses wherein there's a possibility of losing some/most/all of their money choose to take this route if they're going to be taxed at the same rate as someone who, say, puts their money in fixed income CDs?

I can envision at least two outcomes:

- Investors will demand higher returns to offset the increased taxation rates, which will impact the cost of doing business, and result in a price upswing that will disproportionately affect lower wage earners.

and/or

- There will be fewer people starting/investing in companies, which will result in lower employment opportunities......or increased offshoring to areas with better tax rates.

 

[audreyh1]

On the doctor thing - we DO have a huge influx of foreign doctors from foreign medical schools due to the AMA restricting the number of doctors graduating form US medical schools. These doctors fill open residency positions and go on to become board certified in their specialty in the US. Where I live only a tiny percentage of doctors went to US medical schools.

 

[ERD50]

Originally Posted by Khufu ...

preferential tax rates on investment income over labor income

As has been discussed here before, there are many cases where the tax rates on investment not only exceed those on labor, but losses (due to inflation) are taxed as gains, when they rightly ought to be allowed to offset gains.

At any rate, if you want more investment in capital here to stimulate jobs, it's tough to see how increasing taxes on investment rewards will help.

-ERD50

 

[Mike10]

We could sure use a Solomon like figure to lead us out of these trying times.

I understand the theory about the government spending more money to stimulate the economy. What I do not understand is how we get out of the spending spree if things turn around. Will that not in turn effect the economy if the money stops flowing. It is a similar argument as the Bush tax cuts. Though the Bush tax cuts are unpopular with some, at the time they were instituted they did what the intent was and that was to stimulate the economy. Remember at the time the country was in a recession and then 9-11 came and there was legitemate fear for the economy. Both Democrats and Republicans voted for it with the stipulation that they expire in ten years.

Our representatives feared the impact on the economy if they let them expire and so they keep extending them. Is this not what we will face with the increased spending? When does it end?

To blame successful people for the problems with the economy is going a bit far. I would think that most if not all members of this forum have stock or mutual funds, or pensions that invest in them. Do you wish that these companies do poorly? That people only work for companies that are financially struggling?

You can point to companies that have strectched the limits ethically but at the same time you should not overlook the people who are dependent on the government by choice and not need.