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Over 400 articles
Rebuilding the Economy
Today - the crises at hand
Today we are in the middle of several crises. We have a world-wide financial crisis that has exposed where we need to improve our economic systems to avoid world-wide disasters. We are in a natural and man-made climate crisis that threatens to destroy the world as we know it if we don't take corrective action to avoid tipping over the brink. We are in a long war that is draining us economically.
We have a $10 trillion dollar national debt, which means every person in the US owes over $33 thousand dollars. That's close to a college education or 7 years of health care insurance for every person in the US. We have a medical system that people can't afford, is spiraling out of control, and leaving out more people every day.
Unemployment is rising rapidly and many businesses are closing, with major losses such as Lehman Brothers financial services, and most banks and other financial services in big trouble. Even the Detroit big 3 automakers could collapse. Most people in the US think that the US has been going in the wrong direction, which is an opinion shared by the rest of the world. Economic issues decided the election. Not to be an alarmist, but we do seem to be awfully close to the brink of disaster, and each week we have a new crisis of confidence that drops the stock market even further, with reverberations closing businesses and costing jobs.
How did the wealthiest and most successful economies in history get to this point? How are we going to rebuild?
For the blame game, there is plenty enough blame to go around. More importantly, we do learn from our experience. This article doesn't pin the blame on the donkey. It doesn't play politics or promote ideology. It looks at what we have learned from experience from past economic woes and current ones, as related by various noted economists, and what we can do to go forward and upward.
Side note: I have studied economics, and watched the economy, for several years, and lean neither liberal nor conservative - just progressive about solving problems. Nor am I anti- or pro-union. I like complex mysteries and have been both intrigued and concerned by the last eight years of our economic performance. These article series, since 1996, are intended to be an informed part of the national dialogue, and are presented without bias or ideology. They are intended to inform and promote healthy dialogue. They ask us a simple question: "What kind of world are we creating for ourselves?"
We live in an era that is highly competitive between businesses. Each quarter, whether they are manufacturing large earth moving equipment, or selling financial instruments, businesses have to tell how they are doing versus expectations. As a manager, in 13 years of creating business financial forecasts for my part of a major corporation (Fortune 10), I was often asked for up to a 20% increase in earnings, or even to double the business in 5 years - but never was there room for flat or negative growth no matter how bad the outlook. It just isn't done.
Why? Investors (through investment fund managers) demand high returns for their investments. So earnings expectations rarely go down, and if you aren't doing well then stockholders not only won't invest in you, they will pull their investment and you lose the capital needed to grow or even survive - or you have to borrow money from banks, which is more expensive. In many large businesses, if the growth is too small, they shut down the division, even if it is making a small profit. This characterizes business in the US: The demand for high returns on investment.
Add to this environment the CEO incentive to show higher stock prices as a requirement of their performance, for which they are rewarded with... stock. Many CEOs in the last 8 years weren't rewarded for company growth or earnings - they were rewarded because the stock price went up. And investment fund managers have similar incentives. So there is unrelenting pressure to report high earnings that keep stock prices high. The practice of rewarding CEOs for stock price increases is now diminishing.
There are only so many ways to have higher corporate profits, so what happens is that all kinds of mechanisms are used to make things appear more profitable than they are, and higher risks are encouraged. Mergers increase to prop up prices and lower expenses. Accounting gets more misleading, risky, and fraudulent as captains continue to bow to pressure. At some point reality invades the artificial world and the market re-adjusts. The captain abandons the airship in his golden parachute.
Side note: The only real increased contribution to the economy by business is by increasing productivity. Either goods produced goes up or the cost of production comes down. There are only a few ways to control costs. The price of material, labor, shipping, credit, business overhead, sales, and advertising, must come down. The main driver in producing more or controlling costs is new or improved technology.
Business has intense pressure to perform. The world-wide competitive market creates even more intense pressure. And then there are companies like the Detroit big 3. Just as business, investors, and home buyers follow the model that profit always goes up, Detroit followed the model that size and profit always goes up. They focused on what they make best: large American style gas guzzling automobiles, SUVs, and pickup trucks that a huge market continued to buy.
Did Detroit's automakers look in their crystal ball and foresee oil prices going through the roof, or the economic crisis? No, things always go up. But they were certainly guilty of failing to innovate to compete with European models. They were guilty of failing to innovate for fuel efficiency and new technologies. When they did try to create fuel efficient cars, they priced them so high that they were doomed to failure - no one could buy one. That's marketing foolishness. Eventually some stopped those development programs. And the unions forced them to guarantee golden parachutes that provided 48 to 60 months of nearly full pay, plus unemployment, if employees are laid off - when no one else in the world (except some CEOs) get such treatment.
The big 3 are near collapse. We are learning - yet again - that companies that fail to innovate and fail to control inefficient practices cannot last. We learned this in the 1970s.
What about the housing crisis? Young families tried to purchase the American dream of home ownership during a time of skyrocketing prices. Agencies tried to make the dream possible. After all, people and mortgage companies can count on home prices always going up. Government sponsored agencies like Fannie May and Freddie Mac, and many other mortgage firms, tried hard to make the American dream possible.
Side note: Fannie May and Freddie Mac were not government owned - they were private companies, which typically is more efficient business than government owned.
At the end of the dot.com crisis, investors turned to safer investments. Real estate was considered about as safe as you can get. Prices began going up as the demand for homes went up, fueled by speculators who purchased homes as investments.
Stockholders (like you and me who have 401K retirement investments) want high returns - real estate was the hot commodity and the market went into overdrive with everything imaginable going on. The investment firms continuously traded the most lucrative stocks and began to create risky financial instruments.
So there we have a tiny picture of what was happening. Everyone expected the economy to continue to rise, and everyone got into risky territory. We all bet that the economy would continue to go up - the sky was the limit.
The pop of the housing bubble was just the fuse that ignited the bomb of excesses in the stock market that has been subject to bubble after bubble and scandal after scandal. In the 1980s, the many Savings and Loan organizations failed from their excesses. In the late 1990s, the dot.com bubble burst from risky investments in businesses with no business profitability model. Car manufacturers bet on ever-larger models in the last ten years, and failed to see oil supply shortages and a weakening economy. Oil monopolies thought they could create artificial shortages (supply) and drive up prices with no consequences. People overextended themselves to get the American Dream of home ownership, just as they always have.
The housing bubble burst showed just how untenable the system was before it got to the point of complete self-destruction. It demonstrated that the economy doesn't have a brain - there has to be a certain amount of control or we go to the brink of disaster. There is blame to share, more accurately labeled as "bad experience to learn from," but most of the control has to come from the top down, and the top failed to control. It's time for the excesses to be controlled. What we see is the vulnerability of the financial system to these kinds of excesses, and it points to the need for regulation that prevents excesses from occurring, for the protection of the trade markets, the investors, the companies, and especially the people.
We have learned many very important lessons from our experience with the economy.
The "natural economy"
The economy doesn't occur naturally in nature, although there has always been trade and all of the accompanying problems. What is the "natural economy?" If we just allow commerce to exist without any guidance, we have a natural economy. These were the feudal economies of the 16th. Century. It was a very dangerous time and filled with misery. Wealth and power accumulated to those who controlled and protected their territories: kings, lords, armies. Even religious power went to these wealthy individuals.
There was no middle class, except for a few preferred providers who worked for the upper class. The kings owned all property. People were uniformly poor and typically hungry. Trade was primarily within a circle of preferred providers. There was no way for most people to become preferred providers, so they remained poor and grubbed for a living. They made their own rough clothing, built their own inadequate homes, raised their own food... and were miserable and starved. They literally wore themselves out at an early age through a life of hard labor, and were more susceptible to death from famine, injury, and disease.
The upper class had what it wanted, so there was little incentive for technological innovation to improve manufacturing to end suffering in the lives of people. No one could afford to purchase things anyway. Most people lived in suffering and died in suffering. This is the natural economy.
Throughout history, strong governments such as the Roman Empire in the centuries bordering BC to AD, even though they were despised by people as foreign occupiers who took their money and changed their culture, actually helped the overall lives and prosperity of the people by creating laws, a strong defense necessary for protection, and the political stability necessary for trade to flourish. Markets expanded between territories, ethnic groups, and nations of people, putting people to work, and making items available to improve lives. But feudalism more often dominated societies. If feudalism didn't dominate and protect, then invading nations frequently swept in and destroyed or took captives. Those were the good old days. One way or another a strong government is required for people to survive.
There are plenty of examples of feudalistic or weak societies today. They are the third world countries that can't get their economic act together. They have no middle class, and most of the trade is between preferred providers, so most of the population is left out of commerce - they have no jobs and no income. They have governments, but laws are not well enforced and many people live in tyranny and oppression. People live in poverty and misery. Feudalism and poverty are not the goal, but it is the result.
Before we go on, how does the economy work?
The economy is a system that we create. What we know today is that you can think of the economy as a balance. These are presented in the square below. Business and people make up two important sides that must balance each other. Business must do well and people must do well. When one suffers the other suffers. We know this from inflationary spirals where wages and prices chase each other. We see it today when the supply side has been given free reign and the people have seen wage erosion and fewer jobs. The economy is out of balance.
On the other two sides are mechanisms to promote and regulate. The only true growth in an economy comes from expansion and technology (credit, production, and efficiency). This requires mechanisms that encourage growth such as credit (banking) and technology. The opposite side of the square prevents the economy from destroying itself when it gets out of control (inflation, bubbles, dishonesty), or lack of competition. The government has to provide enough regulation to keep businesses from destroying the economy. One can't thrive without the other.
The industrialist economy - power still in the hands of the few
How do we know how the economy works? From the painful lessons of historical experience, and you can see these same destructive patterns in the economy of today. They are always with us.
For example, strong government, a free economy, and technological innovation don't guarantee the prosperity of the people. Nor does a strong work ethic mean that those who help themselves will succeed. Confirmation comes from the natural economy, and more importantly from the industrial revolution when people worked very hard in a free economy during great technological change.
In the late 19th. and early 20th. Centuries, we learned a very difficult lesson. Capitalism in the hands of the tight-fisted meant that power and control were in the hands of those at the reigns of industry and trade. These were the industrialists late in the 1800s and first third of the 1900s who worked people to death, ignored the suffering of humanity, underpaid workers, and only put money where it would build their own empires. These were the Scrooges of the world. Most people were simply poor and hungry, and remained poor and hungry. Wages were very low and world-wide unemployment ran around 30%.
During those years, companies failed to innovate. They failed to expand. They failed to put money into the economy so that there would be more customers. The banking system failed to include the general public in its system so that people could become better off. After all, people believed, borrowing money was not healthy, and paying people more money was a waste of money.
Where did that lead? People were starving and there were no jobs. World economies did not have the power to recuperate. Trade with the US and the world fell. People generally lacked confidence in their economies. In the US, banks loaned money against security (property), and as recession deepened people and businesses defaulted on their debts, so banks were stuck with worthless property. As fear set in, the money supply tightened, furthering the downward spiral. In 1929, the Stock Markets failed, and by 1933 all the world was in the Great Depression that lasted through the 1930s decade.
What have the corporations today been doing with their wealth for the last eight years? Not creating jobs. They have been buying other companies in the greatest merger-mania that the world has ever seen. They are keeping wealth to themselves. What are banks doing? Holding worthless housing paper and the money supply is nearly frozen. Sound familiar.
The Keynes economy - putting everyone to work through deficit spending
The first great experiment that transformed the economy was Keynes economics. It was the John Meynard Keynes formula of government investment through deficit spending. On the Economic Square illustration, it created jobs for the people. The impact was huge. Many countries that followed this model experienced full employment, higher wages, technological innovation, and a better life for all. People got jobs, purchased food, and purchased homes. They economy flourished. One of the most important discoveries in economics had been found and proven.
Today the Keynes formula is out of favor because it is often labeled "socialism" by those who oppose it, and because of the excesses that occurred in the system. The influx of government money into the economy caused inflation. To keep up, unions kept pushing wages up without a corresponding increase in productivity, which also drove up prices. You can't fault people for keeping up with inflation, but you can for union excesses that drive inflation. Between government deficit spending, inefficient bureaucracies, and union excesses, inflation became a runaway cancer that ate the heart out of the economy.
Government regulation at its extreme - wage a price freezes - could not stop it. During this time, government intervention became huge (bureaucracies) and both business and government bureaucracies became very inefficient, which also eroded the economy. So with stimulating this side of the economy, we know that deficit spending can be an extremely effective quick stimulus, but if it continues it will eventually backfire.
Because of the danger of inflation, deficit spending went out of favor, and the Fed found another very important key to the economy. The Fed regulates inflation by regulating the flow of government money into the economy, by controlling interest rates on government lending to banks.
Today one of the reasons we are at the brink of disaster is because of deficit spending. We have a rapidly growing ten trillion dollar national debt that shows no sign of slowing down. Servicing the debt (paying interest), eats the heart of the economy so that we either have inflation or our purchasing ability falls, which it has been. Wages have not kept up with inflation, and the value of the dollar has steadily fallen against foreign currencies. In the 1960s a German Mark was worth about 25 cents. In the 1990s, European and US currency were of about equivalent value. Today the Euro (all European currency) is worth about $1.50. The value of the dollar is affected by many factors, but national debt is a primary one.
There have been many accusations that the recent government rescue of the banking system is "socialism." Socialism is the opposite of capitalism. The people, who are represented by the government, hold all things in common. In the pure form, the people, through the government, control everything. All industry is state operated, everyone is employed, wages and prices are controlled, and the monetary supply is regulated.
In the former communist political systems, which used a version of the socialist economic system, there is no private ownership of land and no private enterprise. The government owns everything and the communist party controls everything.
Some forms of socialism, or blends of socialism and capitalism, actually work well in some countries, just as some are led well by kings. But in former communist forms, the end result of government ownership and control was that industries become bloated and ineffective, and inefficient. Supply of products becomes scarce and limited in variety. People are often not paid for months. Corruption in government and society is rampant. People are hungry and uniformly poor. Socialism lacks the incentives of capitalist systems: prosperity for all, competition, and technological improvement. Most communist/socialist and socialist systems are adopting more and more capitalist structures.
In Europe, Keynes economic theory was blended with socialism. The result was full employment but at the cost of inflation and very inefficient and ineffective enterprises that were owned by the government. Unions continuously struck and forced wages up, creating greater inefficiency. The companies failed to innovate or be competitive. The drain on the government was crippling, and the economy faltered. The US had a similar experience, but generally not as bad since socialism was shunned here. Economies on both continents faltered.
Today's government intervention in the economic system, such as rescuing banks that have made fatal mistakes, should not be confused with socialism. Government investment in preferred stock or loans, with requirements to adjust management and operations and repay the loan is no where close to socialism. It is a legitimate government action to stabilize the economy.
Deficit spending to create jobs is an effective method, but government ownership of companies to create full employment leads to inefficiency, excesses, and economic downfall.
Supply Side Economics (AKA Reagonomics)
For the next lesson in economics, President Reagan, following economists advice from the Chicago School, favored Supply Side Economic theory, which basically was about allowing trade to occur with minimal regulation, and doing things like business tax cuts to stimulate the business sector. This also worked very well and gave the world a flourishing economy through the 1990s. The Europeans jumped on the bandwagon (Margaret Thatcher). Money did seem to "trickle down" to employees. But Europe realized early that supply side economics had its limitations and began to change their course.
In 2000 things changed for the US. The dot.com excessive investment bubble burst, Al Qaida brought down the twin towers, and an era of extreme conservatism took hold. People looked for safe investments, shifted money to the housing sector, and we got another bubble. Businesses became overcome with self-interest during this period and quit creating jobs at the rate necessary to support the economy. Overall wages declined in many sectors while only keeping up with inflation in other sectors. Average wages trailed inflation slightly, while higher wages disappeared as businesses rid themselves of high paying jobs. Business did well and gave good returns to investors, but the promise to make the people prosper failed. Scandal after scandal had unfolded in the business and banking industries.
One of the major money supply problems that affects business today is that business is not paying people well, so people have no money to buy products from business. To compensate, people have maxed out their credit cards and have ceased saving, and ultimately quit spending. Prices are beginning to fall. It can become a deflationary cycle: Fewer jobs, less pay, lower prices, which feeds on itself. Today we have people not able to afford health care and food.
"Stagflation" can precede deflation and erode the economy. Prices can't actually fall very far without manufacturers resorting to draconian measures. They let employees go, manufacture less, there are shortages which drive prices slightly higher. With fewer employees making wages, there are fewer people purchasing products. Like inflation, deflation can quickly eat the heart out of an economy.
So the lesson we have been learning from supply side stimulus is that sometimes it works, and sometimes not, and if prolonged it can encourage excesses in business. Businesses basically have to watch out for themselves, and the people often get shorted.
During the last twenty or so years, the middle class has been disappearing. We are in danger of recreating a 16th. Century world of lords and vassals where most of the money is held by a few (1%). Today 40% of wealth is held by 1% of individuals (compared with 18% of wealth in the 1970s), and they direct where the power of money is focused. As in weaker nations, the money flows in tightly controlled circles of preferred traders (and purchasing other companies).
Today the business world is an economy of preferred traders all to themselves, as is the medical system. People on the outside can't get into these systems. Today 80% of business in the US is small business. Over the last decade, they created 60 to 80 percent of the annual new jobs, and employed half of the private sector jobs. They export 97 percent of the goods that get exported. They generate the majority of innovations that come from US firms. We are fortunate that we have a system in which we take a larger part than in the 16th. Century, and we can prosper, but we are seeing where excesses of unrestricted corporate and financial market power can lead us. It isn't the intent of unregulated free trade to create a weak or feudal society, but it is drifting that way just the same.
We don't know what we don't know, but now we do know what we now know (sounds Rumsfeldesque doesn't it? Sorry)
What we do know is that economic theories don't pan out like you think they might, and that those who espouse or parrot particular theories probably are at least half wrong. Pieces of the financial puzzle were found in industrialism and technology in an unregulated and unfinanced economy, deficit spending and credit (Keynes), and supply side (Chicago school), but none could put the puzzle together.
We know how to stimulate the economy through jobs creation, deficit spending, and supply side stimulation. All are equally important and necessary. What we don't currently have (in President W. Bush and the overly conservative administration) is people who can fairly see both sides.
Sometimes the government needs to step into a crisis and make sure the economy doesn't fail, such as by rescuing banks, mortgage holders, or creating jobs. The government also has to take the roll of leadership. Business doesn't have a collective brain or a collective sense of direction. Businesses simply are (and must be) self-serving mechanisms that do what makes them happy - the rest of the world is irrelevant.
Side note: Today's business managers typically have a greater concern for their employees, the environment, society, and other things, than in the past. But business can't step outside itself and look at the larger world problems and make solutions. If they did, they would fail in their primary mission of creating products, paying employees, and paying investors.
For example, BP has a wonderfully diversified energy portfolio with gas, petroleum, wind, oil, solar, and biofuels. But does this mean that BP will focus on a particular technology that is good for the environment and energy efficiency. I would expect, knowing the way companies work, that when they have an option they will typically promote their most lucrative solution and balance that against their long-term interests. Diversification is probably an action of self-interest - their portfolio positions them to take advantage of any energy direction forced on them. (No disrespect intended to BP - I typically purchase their gasoline.) The point is, something outside of business has to provide leadership.
In an economy, the government has to provide regulation and oversight to keep the playing field level and prevent the potential excesses inherent in the system. This has been the long recognized place of government. This is what the government has failed to do. Oversight and regulation would have prevented the Savings and Loan problems, business fraud and failures, and the current banking problems. Risks have to be limited or the people are hurt by the fallout.
And here's another fine mess you've got us in! - Laurel and Hardy comedy team
Now we have a real problem on our hands. The Fed has done about all it can with its traditional mechanism of stimulating the economy by lowering interest rates. Low interest rates typically lead to inflation, so the Fed keeps the money supply limited by keeping interest rates high until the economy needs a stimulus. Deficit spending is a valuable tool for creating jobs. But the deficit is at ten trillion, and driving it higher may cause other countries to stop investing in us and call in their loans. The 2008 budget deficit is still within historical limits as a percentage [1.9%] of Gross Domestic Product (GDP), but with a ten trillion dollar national debt, it is much more difficult to use deficit spending as a mechanism.
Capitalizing industry through favorable non-regulation of the supply side has not worked since 2001. So that mechanism is unlikely to be effective, even though the government is having to do massive recapitalization of the banking system to keep the economic system afloat. People have very little access to credit at the moment, so they can't spend on new cars, new houses, or tomorrow's meal - we can't borrow and spend our way to prosperity to get out of this one.
Why is credit so important? It is what makes it possible for banks to lend to businesses who need it to expand. For every dollar that is placed on deposit, banks can legally loan three dollars. Other financial institutions can leverage many times that, which is one big reason we are in trouble now. (I've explained this mechanism in previous articles, so I won't get into this any deeper here.) Businesses often use credit to purchase manufacturing inventory, new equipment, and even to pay wages when business is slow. They use it to expand into new facilities and make new products. Without this expansive mechanism, and the ability to sell financial instruments for cash (such as mortgage packages), businesses can only expand as they did during the industrial revolution - very slowly.
It's vitally important that money keep flowing through the economy. The speed (velocity) of money through the economy dictates our spending power. During the last several years, the velocity has slowed - our spending power has eroded. I believe this is because money has been detoured into purchases (mergers) of other businesses (which also inevitably destroys jobs), and because of servicing the massive national debt and the excessive use of credit card debt by consumers. What will help this is fewer mergers, less national debt, and less credit card debt.
GDP rate of growth slowing, unemployment rising, major budget deficits, enormous national debt, credit frozen, the Fed unable to reduce borrowing percentages much more - what a complex mess!
What to do, what to do?
There is a better mechanism that stimulates both sides, jobs and industry, without causing so much inflation or conservative excesses. The mechanism: Redirect government funds to stimulate new economic enterprise that creates new markets and new jobs. Typically this includes the use of new technology. Government stimulates through defining a new market, outlining the technology to be used, and giving financial assistance (tax incentives, low interest loans, regulation, etc.). This way, the government doesn't run the risk of bureaucratic excesses, the debt doesn't increase as much, and the capitalist mechanisms get to do their good things without their excesses.
Long-term, this mechanism can be the thing that creates sound economies from communities to the entire world, so that when an area is about to be impacted by falling employment or a fading technology it can change to something new. This isn't a substitute for the free market. The marketplace is still free to create its own new things. But it puts a brain atop the economy and a mechanism in place to keep the economy going when things get tough.
I have described this mechanism many times on this Web site for two sectors: energy and healthcare.
In energy, for example, the government would dedicate a portion of its energy needs to new energy sources, target part of the US energy market for incentives for alternative energy sources, decide which new technologies it wants to encourage (no single technology is likely to be the answer), provide financial assistance (loans and grants), and protect the fledgling industries from special interest anti-competitive legislation.
One of the main problems new energy sources have had is inconsistency in government funding. Consistency is important. Another problem is finding the right direction. Trials through university and community business incubators and trial industries may also be a key to finding the right technology for a new enterprise.
Side note: Biofuels is an example that has shown that non-agricultural land needs to be used for bio-energy sources because using agricultural land drives up world food prices and causes starvation. Some said this would happen, some said it wouldn't. It takes both advanced study and experience to find out this kind of thing. Cellulose, rather than produce from those plants, and byproducts from lumbering, may be the better option - if plant waste isn't needed for agricultural tilling.
Those in government have long maintained that the government has little control over the economy. This was good because in the early part of the 20th. Century, politicians were continually trying to manipulate the economy - usually ineffectively - for political gain. The Fed control of interest rates, and regulation, proved to be far more effective mechanisms. Politics should not be the driving factor in the economy. But it isn't true that politicians have little control of the economy. They control the spending of a sizable percentage of GDP (18%), and they direct which projects are funded.
I believe that the current regulatory agencies in government need to be centralized under one new economic chairman with the mandate to stimulate and regulate the economy so that the major problems faced by our nation (and world) are addressed in a way that creates effective solutions. But no single head can be an expert in all areas. Each of these agencies should retain their own department heads (similar to the Department of Homeland Security model.) There are too many major problems that need to be resolved soon, and Congress, since the 1970s when we became aware of an energy crisis, has not provided leadership, direction, nor effective legislation. Congress has simply lacked the capacity to understand the problems and solve them effectively. Hopefully the new President and Congress will.
We have major problems in infrastructure maintenance (bridges, highways, energy [transmission lines and pipelines], etc.), health care expense and access, energy and environmental warming, and good paying job creation. Infrastructure maintenance has been shoved aside by politicians to favor other spending - well when you do that, bridges collapse - you can't do that. Infrastructure maintenance should not be subject to the whims of politicians who leave office before the bridges fall in. Healthcare is continuously influenced by special interest groups who serve their own interests, not the consumers' interests. These problems are too big and complex to be addressed by any single industry initiative, or reactive legislation, or a single technology, all of which are simply self-serving out of the box.
Past legislation has been very piecemeal, inconsistent, reactive, and influenced by outside interests, so has not addressed these major problems effectively. Most of these involve systemic issues that have no single solution, and require concerted effort in many areas. Only someone like an economic chairman can gain the insight and traction to recommend effective legislation or do the necessary actions, and also have the power to stimulate business free of the legislative process and special interest anti-competitive interference, much the same as the Fed does.
It is true that the US tax rate on businesses is the highest in the world (up to 35% plus the tax it pays other companies when purchasing manufacturing materials from them) and it does drive some companies to move outside the US to avoid paying high taxes. The reason taxes drive companies away is that the high taxes (and often the higher employee benefit packages), make the companies un-competitive in the world market that includes the US base market. They can't even compete at home.
Businesses often use every tax dodge they can to reduce costs, such as licensing their transport trucks in state with lower licensing fees. A tax dodge is just something that companies do - they can point to anything to justify their action. The US tax burden isn't quite as uneven as it seems. Other countries typically put the financial burden of things like universal health care onto their gasoline tax or other taxes instead of on corporations, which in that country raises wages and thus the price of goods and services - the competitive price evens out. The US also has the advantage of technology and know-how. So the US corporate tax burden isn't totally unfair, but when competing with countries like China, which has very low wages and sells products to us at 1960s prices, it is a major problem. We need to effectively resolve the corporate tax problem.
Side note: Free trade agreements are great in that they open up new markets for products. We all gain by selling more. But it also places economies and certain businesses in peril. New markets can get flooded with inexpensive products that put existing businesses out of business. In developing countries, the problem is especially acute as subsistence level businesses in agriculture get displaced by modern products - an entire population suffers. Like the rest of the economy, free trade agreements need a brain to make sure they don't do more harm than good.
During the last 8+ years of deregulation, we have seen prices for deregulated items go up, corporations have not improved the economy nor kept employment up, nor kept wages up. The free market purists and supply side proponents have reached the limit of their economic power. What has been happening is the elimination of many jobs by merger or by sending them overseas. Employees are paying more and more of the rapidly accelerating costs of healthcare. People are borrowing at their limits, and not saving at all. Supply side theory is simply not working.
To fix this, there must be a quid pro quo (something for something deal) with the US taxpayer. Each new job means new tax revenue. Here is a sketch of things that might resolve several problems. (This is just a sketch - it would require much adjustment by Congress, and Obama has his own similar plan.)
Lower taxes for a corporation by 10% (up to 70%) for each of the following:
Jobs mean families are supported, people buy products so business is stimulated, and the economy improves. Corporations and small business alike get their burden for healthcare and other things lowered so they have a more level playing field.
Housing, transportation, and jobs
There are few things more fundamental to the consumer than jobs, housing, and transportation. We need a place to live, we need a way to get to our jobs, and we need jobs to support our families. We have major problems in all of these sectors. In the old West, if you stole someone's horse they hung you. In today's age of easy loans and easy repossession, we have forgotten some of the principals of making it in life. We don't protect our necessities.
The Secretary of the treasury, Henry Paulson, made it plain recently before Congress that his mission in the $700 billion rescue package is only to recapitalize the supply side. (The Treasury is staying within its area of expertise and fixing financial markets, not consumers. With Citi, he is buying risky paper and again asking Citi to work with lenders.) Mortgage foreclosures are not in his scheme, even though they are creating the problem. They have used a large portion of the $350 billion allotted for now, and at this date (Nov. 21, 2008) the money supply is getting tight again. Banks can't loan again. What's next?
Money is gushing out of banks in losses as mortgages continue to move into foreclosure. Foreclosures are expected to peak in July 2009. Banks have been asked by the government to restructure mortgage loans, but they don't. Only around 4% are actually restructured. Banks will foreclose and sell the property for pennies on the dollar and put families out of their home, rather than restructure a loan. Banks ask the Treasury to save them, by sweeping the problem under the Treasury carpet. The Treasury doesn't want to get involved with foreclosures - it would mean work for the Treasury to try to examine these loans and make a determination on restructuring them. Treasury will not step up to the plate - it is dedicated to only supply side economic stimulation.
Does anyone see anything wrong with this picture? We are a nation that collectively believes in assisting others. Together we all survive. Apart we can all fail. But our Treasury and our banks don't reflect our values - in fact would rather see bank and family home failure than see their rigid rules and ideologies broken. And the Treasury even sharply rejects plans by other departments such as the FDIC, HUD, FHA, Fannie May, and Freddie Mac to assist homeowners with staying in their homes. It could cost the $350 billion left in the $700 billion rescue package. Never mind that it would actually stop the foreclosure problem and stop the social wreckage we are having from it.
Usually you rescue patients by stopping the bleeding, not by seeing how much blood you can pump into them. But in a world ruled by ideology, you keep doing the wrong thing while expecting a different result. In contrast, even in the Great Depression, they restructured loans and kept people in their homes.
The automotive industry has major problems that are threatening to sink the big three. A Mac truck couldn't drag the leaders in front of Congress to beg for a handout if they had solutions. They don't. They are locked into heavy long-term overhead costs for labor that keeps them uncompetitive, while other manufacturers make cars in this country for much less. They have invested their future in large gas guzzling machines that the public wanted, but no longer wants. They have restructured and restructured and restructured and are still nowhere close to economic viability - they are dangerously close to collapse and the unions have told them "no concessions." (You can't really blame people for not wanting to cut their wages.) They are trapped and to get help from Congress they must come up with a plan by Dec. 2.
The big 3 are likely to get replaced by companies with more modern structures, and fade out like the Oldsmobile. The infrastructure that is in place will likely get spun off, like Delphi, with wages at 1/3 of what they were, and these companies will supply the new companies. If I was GM, I would invest in GM Lite, an independent company, and create new modern labor structures and business strategies in place of existing ones from the 1960s era, with sleek and energy efficient cars that the public is now demanding.
If I was an area like Franklin and Jefferson County Missouri, which has the resources to design and create a new brand of energy efficient car, I would go for it. They have plenty of excellent engineers from Macdonald Douglas, and many other large area companies - that even designed for NASA. They have skilled automotive engineers, and a huge well trained manufacturing labor market to draw from. They have state of the art manufacturing facilities available, but now offline, at Chrysler. They have pioneering refrigeration innovators (Sporlan) in Washington that could design energy efficient air conditioning systems for automobiles. If they build an electric commuter car, I will even donate a super capacitor from local supplier Cooper Bussman, for energy recovery and bursts. The St. Louis area that once was a major builder and supplier of trolley cars, that has been a major automotive manufacturer, and has a magnetic commuter train, can solve the nations transportation problems while providing jobs. (Trains haul cars at hundreds of miles per gallon.) The talent is there, it just needs vision and capital investment. If I was Chrysler, I would invest in a new company with a mission to solve the nations transportation problems, and lease them their state-of-the-art facilities in Fenton. If I was the government, I would provide loans and guarantees to get it off the ground and insure its survival.
Side note: A manufacturer of high-end electric sports cars in California, costing over $100,000.00 and with a range of over 200 miles, has developed a viable product, but may not survive because like Detroit, they have limited their target market. Cars have to be affordable and have the economy of scale.
What can we do?
We have good reason to be confident of our economy. It's suffering, but it can rebound. We have enormous strength in our ability to innovate, to manufacture, and in our local and world-wide markets. The entire rest of the world realizes that we are the largest economic power in the world (soon to be followed by China), and we are in the position of economic leadership. We need to have confidence in ourselves. Individually we have little power, but collectively we're only stoppable by our own fear.
Tell your congressman that we don't need any more ideology about the economy, and especially don't need the polarizing bickering that keeps people divided. We need informed people with intelligent answers to work together on these problems that threaten to destroy us - especially solutions that reflect our values. Tell them that we have problems in energy, in housing, in healthcare, in transportation, in the environment, and in infrastructure, and each one of these is a grand opportunity to stimulate the economy and put people to work through solutions that grow these sectors using government stimulation.
To express your opinion to your congressman, go to Contacting the Congress.
Tell your local economic development commission to diversify your industry and commerce, building new skills and products, while leveraging the talents in your community, so that when the economy turns down it doesn't destroy the community.
Support your own economy. Free trade is great, but buying from home keeps your own economy strong.
The stock market is essential to our economy, and the stock market runs on confidence. The more confident we are in the abilities of our corporations the more prosperous we become. The economy is down, but we have good reason for confidence.
Update 1 - Feb. 9, 2009
Unemployment is closing in on 10%, and is up to 15% in some areas. A few economic theorists are beginning to talk about depression. We have to wonder about politicians that still think that giving money to big corporations instead of people is the answer. For over a decade financial institutions and large corporations have been "shovel ready" receptors of government handouts in the form of reduced taxes, lax oversight, and an ineffective government.
Thanks to government favoritism and corporate excesses we have many institutions going out of business, many relying on handouts from us, world-wide economic collapse, people starving, rapidly growing unemployment, millions of people losing their homes, food contamination resulting in deaths, energy costs skyrocketing... not to mention the planet in peril because of global warming that companies won't address. For well over a decade money has been flowing to the wealthy, while wages for you and I have been declining with jobs that pay less, with fewer of them.
Instead of creating jobs, as theorized, corporations have been on a paper chase buying other companies, false accounting, and gambling on bad paper of little value, so that the money they take in never reaches us (velocity has slowed). It finally collapsed on their heads like a ponzi scheme, and we all lost big. Companies depend on our spending money to keep them alive, so that they in turn can pay us and create more jobs. The system has irretrievably broken. We're not going to fix it with more of the same. Supply-side economics has reached the extent of its power - it has been overemphasized to the point of creating corporate excesses and completely unbalancing the system.
Stimulating the banks has helped only minimally. They are marginally loaning money, and reports are that they are not likely to loan much more even with an additional $350 Billion. They are too arrogant to even tell us what they did with the initial $350 Billion loan, some have zealously wasted the money on lavish lifestyles and bonuses, and they are too bound up in knots of their own making to save people's mortgages - their large investors wouldn't like it and it doesn't fit in their rules. We need to stop bailing out the banks, let them take some losses now, and focus the remaining $350 Billion on mortgages so that we stop the bleeding that is killing the banks. The mortgage crisis won't even peak until July, without intervention.
Money has to come to us so that we spend it and keep the economy alive. "We" are where it all starts - we are the root of the economy, not corporations or financial institutions, important as they are. We can get money through tax cuts for taxpayers, through new jobs created by government stimulus and spending, and through keeping existing jobs alive. Each measure in the Stimulus package before Congress will help with that, and much of it will create new jobs for the future - it may not be perfect but it will work. What won't work is the tailspin we are in toward depression (ask a few people who have been there, or who recently lost their jobs and homes), nor will more losing ideas about propping up financial institutions and giving corporate tax breaks (and I'm against corporate income taxes - but now is not the time). We should all talk to our Congressmen and tell them to get the $800 Billion Stimulus package passed so that rebuilding our economy later doesn't cost us and several generations many trillions of dollars, decades of lost tax revenue, and major suffering by all.
To express your opinion to your congressman, go to Contacting the Congress.
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