Citizen Economists » U.S. Economics

Net Jobs Growth Begins – Substantial Additions By Spring

Eldon Mast — Tue, 09 Feb 2010 13:01:06 +0000

You may recall our optimistic prediction in November that the positive trending in the labor market pointed to net jobs growth by Christmas. Revised government numbers on Friday bolstered that assertion.

Further it is now clear that for job seekers in 2010, the economy will likely be their friend. With a 5.7% GDP growth in the fourth quarter of 2009, following the 2.2% increase in the third quarter, this recovery is already stronger than the last two.

Furthermore, (as our updated chart illustrates) the U.S. labor market is on the cusp of substantial, sustained positive job growth. And this net jobs creation is coming only two quarters after the end of our deep recession. That’s just one-third of the 21 months it took for job growth to resume after the 2001 recession. A jobless recovery? Not this time. As our chart suggests, given current trending, the U.S economy will likely add more than 100,000 jobs in February. And the picture looks even better come springtime.

The government’s monthly job report on Friday showed that the disastrous labor situation that plagued the nation’s economy going into 2009 is now on the mend. The unemployment rate has peaked and now fallen in January to 9.7%.

Perhaps the most encouraging sign from the current report was the addition of 52,000 temporary workers. Temporary worker hiring often signals that employers are starting to gear up again.

Additionally — the report shows — employers brought many “reduced hour” workers back to full-time work status in January. That concrete move is frequently seen as a precursor to hiring additional workers as recovery takes root.

Even cautious economists like Mark Vitner of Wells Fargo remarked on Friday that despite his opinion that the January falling unemployment rate “showed an exaggerated sense of improvement in labor market,” he continued, “But there is improvement. I don’t want to take that away.”

New Factory Orders Continue Steady Rise

Eldon Mast — Fri, 05 Feb 2010 13:20:50 +0000

Factory orders continued their solid advance in December, up another 1.0% on top of their 1.0 percent gain in November and 0.8% percent gain in October. The advance is strong in durable goods and non-durable goods, both up 1.0%. Perhaps most encouraging is a capital goods reading that also shows strength in the month. Thursday’s report underscores strong momentum for the manufacturing sector going into the New Year. Additionally, on Monday accelerating momentum was observed in the ISM manufacturing report on business for January.

Shipments also continue to rise — jumping 1.9%, which adds to a 1.6% rise in November and October’s 0.9% gain.

How HR 627 The Credit Card Act Blunts The Vampire Squids Beak

Trace Mayer — Thu, 04 Feb 2010 16:20:22 +0000

H.R. 627 The Credit Card Act of 2009 is a sweeping reform of credit card law. Many consumers are concerned over how this act will affect their spending capacity throughout the new year. The act is called into effect in February, meaning consumers will have very little time to determine how to use the act to their advantage.

While there are advantages to the consumer in 2010, the act may also adversely affect the economy, according to some analysts. However, conclusions are anything but cut and dried. For those that need a little more information, here are some details about the way the first serious credit card reform in history may affect you—and the economy at large—in 2010 and beyond.

WHAT IS H.R. 627 – THE CREDIT CARD ACT OF 2009

H.R. 3639 The Expedited Credit Card Accountability, Responsibility, and Disclosure Act of 2009, also known as H.R. 627 The Credit CARD Act of 2009, will dramatically affect regulations on credit cards beginning in 2010. The act aims to improve transparency between credit card companies and the American public, many of whom hold credit cards, under what the government calls an “open-end consumer credit plan.”

The act requires first and foremost for credit card companies to give consumers a month and a half (45 days) of notice if any increases in interest rates are going to be enacted. It also gives card owners the right to cancel their credit cards and pay any outstanding balances once these hikes are enacted.

Credit card companies are prohibited from retroactively increasing their interest rates for cardholders in good standing with the company, and the act does not allow credit card companies to arbitrarily change their agreement with cardholders. Finally, the act prevents companies from imposing unfair or excessive fees on cardholders, which will likely effect those with subprime and secured credit cards.

In summary, the bipartisan measure is meant to protect cardholders from unfair or unclear actions on the part of credit card companies and the big banks like Bank of America (BAC), JP Morgan Chase (JPM), Citigroup (C), Wells Fargo (WFC), and etc. along with their nefarious cohort Visa (V).

POSITIVE EFFECTS OF H.R. 627

It is no secret that some credit card companies and big banks have been acting unfairly for years, like Monex, and that the fees they collect from the general public are not clear and reasonable. Unfair fees and interest adjustments have been banned, meaning that consumers will be given information on how credit card companies are changing their terms at least 45 days in advance.

“Overdraft” coverage will also be opt-in instead of opt-out, which means that over limit charges may not be incurred automatically due to consumer unawareness, and that the card may be denied if you are over the limit and this may have a positive effect with credit cards and identification with potential credit report issues.

The terminology of credit card companies must be made clear in advance, with promotions being disclosed in plain and simple language, and terms that do not change during the first year of a contract. Terms of credit cards marketed to youths and college students must be plainly stated by both the company and the university. Finally, fees may not be placed on store credit cards and gift cards which have not been used for a period of time.

NEGATIVE EFFECTS OF H.R. 627

Unfortunately, as with any piece of legislation the CARD act is not without its drawbacks. The reason that companies are able to keep interest rates so low is that they are not accountable to a governing body for the terms of the contracts and promotions that they use to entice customers. Under the credit card act, it is likely that interest rates will rise substantially. This will make new credit cards unobtainable for many individuals with poor or no credit.

No-fee credit cards will likely disappear as a result, and credit score checks, especially on the best credit cards, will probably become stricter, limiting the number of individuals who can apply for new cards. Although many Americans expect a freeze on interest rates until the act takes effect, most credit card companies will continue to raise rates until they are prohibited by law.

The result may be a slowing economy—many individuals expect to buy and borrow on credit; if they cannot, they will not buy at all. Without consumer purchases stimulating economy, the slump could last longer and consumers could end up frustrated with the lack of options. Less spending means less stimulus, and less spending may be the result of the act. This is a good example of credit contraction.

IMPACT ON BANK EARNINGS

Andrew Martin of The New York Times recently wrote an extremely high quality article about the ginormous fees Visa (V) charges and nefarious practices in the credit card industry between Visa, Mastercard and the banks. He wrote:

Competition, of course, usually forces prices lower. But for payment networks like Visa and MasterCard, competition in the card business is more about winning over banks that actually issue the cards than consumers who use them. Visa and MasterCard set the fees that merchants must pay the cardholder’s bank. And higher fees mean higher profits for banks, even if it means that merchants shift the cost to consumers.

Seizing on this odd twist, Visa enticed banks to embrace signature debit — the higher-priced method of handling debit cards — and turned over the fees to banks as an incentive to issue more Visa cards. At least initially, MasterCard and other rivals promoted PIN debit instead.

As debit cards became the preferred plastic in American wallets, Visa has turned its attention to PIN debit too and increased its market share even more. And it has succeeded — not by lowering the fees that merchants pay, but often by pushing them up, making its bank customers happier.

In an effort to catch up, MasterCard and other rivals eventually raised fees on debit cards too, sometimes higher than Visa, to try to woo bank customers back.

“What we witnessed was truly a perverse form of competition,” said Ronald Congemi, the former chief executive of Star Systems, one of the regional PIN-based networks that has struggled to compete with Visa. “They competed on the basis of raising prices. What other industry do you know that gets away with that?”

Visa has managed to dominate the debit landscape despite more than a decade of litigation and antitrust investigations into high fees and anticompetitive behavior, including a settlement in 2003 in which Visa paid $2 billion that some predicted would inject more competition into the debit industry.

The Visa, Mastercard and the big banks like Bank of America, Citigroup, etc. are profiting tremendously while charging outrageous fees to merchants and consumers. The populist call is to “Starve the vampire squids!” and that is precisely what this legislation is intended to do. But legislation has an interesting way of working unintended consequences.

This act will likely contribute to a decline in fees and profits for the large banks like Bank of America, Citigroup, Wells Fargo, etc. while also increasing their exposure to credit risk with debtors that are carrying balances and interest rate risk by not being able to maneuver as efficiently in response to interest rate increases by the Federal Reserve. According to Bloomberg Wells Fargo already raised rates while sacrificing about $1B on a bet that interest rates will rise.

CONCLUSION

The banking industry and credit card companies are facing a public relations nightmare; after all, they get to privatize the gains with massive bonuses while socializing the losses through multi-billion dollar bailouts. Matt Taibbi described it best:

The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.

H.R. 627 and H.R. 3639 are intended to be the Nanny State coddling the American public and protecting them from the evil big banks. But this type of legislation will most likely have unintended consequences such as raising the cost of credit, decreasing its availability and preventing the savers, not that there are any real savers and producers in the economy anymore as they have all left for Galt’s Gulch, from being able to efficiently allocate their capital to the entrepreneur.

While I am no fan of the big banks and their vampire squid blood funnel there is an easier way to blunt their beak and starve them while at the same time providing a sound foundation for the American economy: buy gold, silver or platinum, use them as currency and pass H.R. 4248 The Free Competition In Currency Act of 2009 which would repeal the capital gains on the precious metals that is the major deterrent to their circulating as currency in ordinary daily transactions.

DISCLOSURES: Long physical gold and silver with no interest in BAC, JPM, WFC, C, V or the problematic SLV, Streettracks Gold ETF Trust Shares or the platinum ETFs.

The Continuing AIG Hellstorm: Jihad Bailout and Money Laundering

Benjamin Weingarten — Thu, 04 Feb 2010 13:10:55 +0000

Pamela over at Atlas Shrugs has been doing an exceptional job exposing the Jihad bailout of AIG. To go along with being a terrible hedge fund manager in AIGFP, it just so happens that “AIG was (and still is) the world leader in promoting Sharia-compliant insurance products.” The problem? As noted in the press release on attorney David Yerushalmi’s site, “By propping up AIG with tax payer funds, the U.S. government is directly and indirectly promoting Islam and, more troubling, Sharia.“ The crux of the court case is below:

David Yerushalmi, who is co-counsel with Robert Muise, laid out the grounds for the motion:

At the time of the takeover decision, Secretary Geithner was the head of the Federal Reserve Bank of New York and he was the leading advocate of the AIG takeover. Moreover, he designed how the U.S. government would not only bail out AIG with taxpayer dollars, but how the government would illegally take control of 80% of the voting shares through what was patently an illegal and invalid trust arrangement. It is apparent from the discovery we’ve conducted to date that this was done purposefully and with an intent to conceal the illegal takeover with a fraudulent trust.

Attorneys Yerushalmi and Muise want to ask Secretary Geithner:

· Why he forced AIG to take on so much debt that AIG’s credit rating, already in peril, was sure to collapse without yet additional government funds, essentially guaranteeing AIG would remain a ward of the state?
· Why he imposed such Draconian terms on AIG that there was no way it could survive without additional billions from U.S. taxpayers?
· Why he then used AIG to secretly funnel 100% payoffs to AIG’s counterparties, including his colleagues and friends at Goldman Sachs, Merrill Lynch, and the European giant, Société Générale. In other words, why did Geithner decide to destroy AIG’s chances of survival as a private entity while surreptitiously saving and preserving private ownership of other domestic and foreign financial companies? And,
· Why he took control of 80% of AIG’s voting shares without legal authority to do so and used a fraudulent trust arrangement to conceal the illegal takeover?

For more on the matter check out (via Big Government) this transcript from 2008 in which Yerushalmi gives a detailed explanation on the problems regarding taxpayer dollars and Shariah and this interview from yesterday between Frank Gaffney and Yerushalmi on this landmark case of Murray v. Geithner.

On Shariah, Yerushalmi’s moral if not legal argument is well taken:

FrontPage Mag: Why do we care if AIG is offering a Muslim-friendly insurance product as just another way to make money even if the USG is now a shareholder? Doesn’t the USG invest in other companies that might offer religious consumers unique products? For example, what if the USG invests federal employee pension plan funds in a company that publishes books, including a line of religious books?

Yerushalmi: We should care a great deal. First, when the USG invests federal employee pension plans it is acting as an employer, not a government agency per se. In fact, the investment has nothing to do with the government’s tax and spending authority. Second, the investment in such plans is generally through an intermediary investment fund which in turn only invests passively and through minority holdings. In this case, we have the USG acting not as an employer but expressly through its tax and spending authority and taking an absolute controlling position. AIG is in effect nationalized. It is a government company.

But, beyond these strictly legal arguments, there is an overarching concern. Can it really be the case that we want the USG involved in a theologically based legal doctrine that calls for our conversion, subjugation or murder? Have we abdicated even the rudiments of good sense in the name of a PC-driven, non-judgmental multi-culturalism? If we have, we have abdicated our very right to exist as a nation.

Red Hot New Orders Rate Driving Manufacturing Uptick

Eldon Mast — Tue, 02 Feb 2010 16:03:45 +0000

On Monday the Institute for Supply Management said that the U.S. factory-sector booked its best performance in more than five years in January. Hiring continued to recover and the rate of month-to-month growth was driven by a red-hot pace of new orders that is now accelerating higher each month.

The ISM report points to exceptional overall growth through the rest of the first quarter. The ISM’s manufacturing index jumped more than 3 points to 58.4 for its sixth straight indication of month-to-month growth. The reading easily beat consensus estimates and even beat the most optimistic of economists surveyed for such consensus.

In addition the report showed that new orders are now overflowing into backlogs — which jumped a sharp 6 points to 56.0. This is a first for this recovery. Now all three — overall manufacturing, as well as orders and backlog are all growing.

Norbert J. Ore, chair of the Institute stated, “the past relationship between the PMI and the overall economy indicates that the PMI for January (58.4 percent) corresponds to a 5.5 percent increase in real gross domestic product (GDP) on an annual basis.”

We of course are happy to point out that the current chart and outlook matches surprisingly well with our post, chart, and prediction almost a year ago. (No one believed us back then.)

GDP, Manufacturing, Confidence, and Earnings — All Up

Eldon Mast — Mon, 01 Feb 2010 14:02:32 +0000

To round out the first month of 2010, reports this past week all painted positive business signs for the year to come.

As we’ve been predicting for quite some time, GDP for Q4 was anything but lackluster. The gross domestic product rose at a 5.7% annual pace, the Commerce Department reported Friday, up from a 2.2% rise in the third quarter. The growth rate was the fastest pace reported in six years.

Another regional manufacturing report out from Chicago-land showed additional expansion in January. Their index rose to a healthy 61.5% in January from 58.7% in December. Any readings above 50% indicate business expansion and it is clear now in that region that expansion continues to accelerate.

And in further good news for the retail sector, the University of Michigan consumer sentiment survey beat expectations moving higher to a reading of 74.4 for January. The reading is now at a two-year high and a full point and one half better than economists’ consensus expectations.

Also on Friday, President Obama proposed a $33 billion package of tax credits for small businesses as part of his plan to boost job creation.

Obama wants to give small businesses a $5,000 tax credit for each net new employee they hire this year and companies that reduce their payrolls at any point this year would not be eligible for the any of the hiring credits and or wage bonuses.

Further, earnings reports for Q4 and positive business expectations for Q1 continued to roll in this week during company earnings releases and conference calls.

On Friday, Honeywell (HON) said it earned $698 million, or 91 cents per share, beating expections by a penny per share. The firm reaffirmed a full year 2010 profit forecast of between $2.20 and $2.40 per share on revenues of $31.3 billion to $32.2 billion. Their CEO, Dave Cote said, “we are encouraged by the improving order trends and stabilization in many of our end markets.”

Microsoft also beat by a penny this week. Late Thursday, Microsoft said it earned $6.66 billion, or 74 cents per share, up from $4.17 billion, or 47 cents a share, in the same period a year earlier. Their revenues rose 14% to $19.02 billion.

But perhaps the strongest of company news came from Apple Computer (APPL) on Wednesday. The firm reported earnings that surged well past Wall Street estimates.

The iMaker said it earned $290 million, or 34 cents per share (a dime above estimates), on sales of $3.24 billion (250M above estimates) in the three months ended March 26. In the same quarter a year ago, Apple earned only $46 million, or 6 cents per share, on revenue of $1.91 billion.

As everyone now knows Apple released the iPad later in the week, but speaking specifically to earnings on Wednesday, CEO Steve Jobs noted, “Apple is firing on all cylinders.” The comments were indeed in line with our observations of PC shipments that rocketed higher in Q4.

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Real Estate Prices Firming As Consumer Confidence Grows

Eldon Mast — Thu, 28 Jan 2010 16:15:44 +0000

So far this week, we’ve continued a string of good news following last week’s focus on banking reform. More specifically reports on consumer confidence and the housing market confirm the worst of the recession’s detriments are now behind us.

First in December, existing home prices firmed significantly — up a sizable 4.9% on the median to $178,300 and up 6.4% on the average to $225,400. The National Association of Realtors attributed the gains to a higher proportion of repeat buyers during the month.

The report on new home sales also confirmed the December trend indicating a firming in those prices as well. Their median month on month price rose 5.2% to $231,000 while the average rose 7.6% to $290,600. The year-on-year rate for the average price is now actually up 10.5%.

The conference board’s consumer confidence index edged forward in January to 55.9 vs. December’s 53.6 in continued welcome news. The assessment of the present situation improved noticeably, up nearly 5 points to 25.0. The present situation added another 7 tenths to 76.5 and is inching closer to the important 80 milestone. A reading of 80 or better for the expectations index is widely considered to be a signal of economic health.

The assessment of the present jobs market has now improved for three straight months. Those saying jobs are hard to get fell again to 47.4% vs. 48.1% in December and 49.2% in November.

And on Wednesday, markets cheered as Fed policy makers kept the funds and discount rates unchanged at very low levels. Their summary assessment is that the economy is strengthening, labor market declines are abating, and household spending is expanding at a moderate rate.

Dishonest or Just Incompetent?

Dan McLaughlin — Tue, 26 Jan 2010 16:27:48 +0000

Robert Shiller wrote a recent New York Times editorial, suggesting that the United States Government sell shares of the gross domestic product (GDP), similar to how corporations sell stocks. Mr. Shiller is obviously a very smart person. He is an economics professor at Yale University and authored various books on finance and the economy. He should know what he is talking about. So let’s look a little closer at his proposal.

People buy stocks of corporations because they have an underlying value. Yes, there are real assets that the paper certificate represents, but the fundamental value to an investor is the cash flow that is ultimately expected. In essence, a business sells shares in the present value of its anticipated future profits. The investor believes that the future dividends and capital appreciation will pay back the investment with an additional return. That is a very rational expectation. Those companies that perform well enough to have excess cash flow can reward the investors with dividends, or with capital growth and higher future earning potential if the money is plowed back into the business. Investors pay more for stocks of profitable ventures.

It is an obvious fact, one that is the foundation for investment in stocks, that the company owns productive assets and processes. It also owns all of the profits that those assets and processes earn. Because it owns them, it can also sell them to others. The business sells the right to future profits and cash flow in exchange for cash in the present.

Gross domestic product is a very different animal. It is a crude and rather arbitrary gauge of the productivity of all of the people in an economy. It is a measure of your wages, your business income, and your investment income added to that of everyone else. The assumption is that the higher the GDP, the more productive the population.

Mr. Shiller’s proposition is that, just as businesses sell shares of their earning potential, the government should sell shares of the GDP. They could issue what he calls “trills”, or trillionths of the GDP of the entire economy. The logic is that, if significant trill markets could be developed, it would be a vast new source of revenue for governments. Investors, like you, or like the government of China, would be able to count on a return from future economic growth, which would, presumably, mitigate the risk of investing in increasingly risky government debt alone.

There is one itsy-bitsy problem with your proposition, Mr. Shiller. The government doesn’t own GDP. It doesn’t own my salary, my business income or my investment returns, nor does it own anyone else’s. By selling a portion of GDP that it doesn’t own, it is stealing that productivity from the people. It is assuming that people are slaves of the state. It is nothing more than another clever stealth tax so that irresponsible politicians can spend more money buying votes and power.

Mr. Shiller, are you being dishonest, trying to scam the people of this country and any other country brazen enough consider it, or do you really not know what GDP is? Whether it is lying or incompetence, the result is the same. You are not telling the truth.

That is nothing new. Shiller is one of the large and growing breed of influential economists who don’t let truth or economic laws get in the way of shilling for politicians and big government. His 2009 book, “Animal Spirits”, was written in conjunction with George Akerlof, another smart, influential and arrogant economics professor, who’s idea of practical economics is to think of a problem in the world and then decide what he and government should do to fix it. The underlying assumption in the book is that economic cycles are caused by a mysterious psychological manifestation called “animal spirits.” According to them, it is the government’s job to direct those unruly spirits so they don’t get out of hand. Seeing that they have been actively directing those spirits for decades, we can see just how well that works out.

There really are generally accepted economic laws that even Shiller and Akerlof must recognize. True economics has helped to understand cause and effect relationships in societies. It is extremely unfortunate for the people of the world that the profession has been taken over by a bunch of scam artists. It is a black mark on the economics community that this proposal is treated with anything other than scorn and ridicule.

State by State, Year by Year, Employment by Sector by Blue-Red Political Alignment

D H Smith — Wed, 20 Jan 2010 13:15:18 +0000

This preliminary study started with a blog post I did several months ago entitled “New Jersey, the Sorry State”, a deep dive into Bureau of Labor Statistics data showing that my state is hardly generating employment outside the government sector.

The blame for this sorry state of affairs I heaped on NJ’s political culture, which is high-taxing, heavily-regulating, pro-union, anti-business and Democrat-dominated. As the power of Democrats, the self-proclaimed friends of the working man, has risen in this state, fewer working men have actually had work.

One of my readers suggested extending the work to all states. A daunting prospect, but I have made a start — back to BLS data for 51 deep dives. This time I’m looking longer term, with data from 1990 to the present.

To try to get to grips with party politics in all states through time, I researched affiliations of the governor and two senators and the plurality of the House of Representatives delegations and the state senate and legislatures for each year since 1990, using wikipedia and such other sources as I could find. No doubt there are some errors at this stage, particularly in identifying the leanings of state legislatures 15 or more years ago. These errors are minor; it’s unlikely that I could mistake Idaho for a blue state or Washington for a red state, for example.

Those two next door neighbors bracket my best ranking of the 50 states + DC by political complexion, from most Democrat to most Republican:

>> bluest: WA DC WV MA AR NJ CA MD IL HI DE
>> next: NY VT IA WI RI MI OR CT ME NC
>> middle: NM MN MT LA COPA NH ND IN TN
>> next: SD VA MS NV AL MO NE KS OK FL
>> reddest: KY OH AZ SC WY AK GA UT TX ID

Next best alternative ranking is so similar:

>> bluest: DC WA WV MA AR MD CA HI NJ DE VT
>> next: IL RI NY MI OR CT IA WI LA NM
>> middle: NC ME MN ND MT IN PA VA NV CO
>> next: TN AL SD GA NH KY MS MO FL NE
>> reddest: AZ KS OH TX OK AK SC WY UT ID

Let me point out a few things by way of caveats and highlight a few preliminary conclusions.

Conclusion 1: Government is not just New Jersey’s growth industry; it’s a growth industry in most states, Democrat or Republican. In fact, it is only in a handful of blue states and territories that government employment has been static or falling: MA, MI, NY, DC, and RI.

Conclusion 2: The predominant pattern in the last ten years has been for employment in goods-producing industry to be declining, in service-providing business to be growing somewhat, and in government to be growing fastest of the three. That pattern is seen in 37 states: AL, AK, AZ, AR, CA, CO, CT, DE, FL, GA, IL, IN, IA, KS, KY, MD, MS, MO, NE, NV, NH, NJ, NC, OH, OK, OR, PA, SD, TN, TX, UT, VT, VA, WA, WV, and WI; in MI it was declining but less than other employment. So at bottom, government is growing at the expense of goods production. In the limit, this places fiscal drag on the economy, which reinforces the original trend and makes it worse. That is our New Jersey experience.

Conclusion 3: The states that have experienced the greatest declines in employment in goods-producing industry are (worst first): RI, MI, NJ, CT, NY, NC, OH, ME, MA, and PA. Mostly northeastern/midwestern, mostly unionized, and mostly Democrat.

Conclusion 4: The states that have experienced the best performance in growing employment in goods-producing industry are (worst first): NE, CO, NM, SD, ID, MT, UT, WY, NV, ND. Near runners-up were TX, AZ, and OK. Mostly western, mostly right-to-work, and mostly Republican.

Conclusion 5: Only in Wyoming is employment growth in goods-producing industry positive and higher than either services or government.

Caveat: A Democrat is not the same wherever you go, nor is a Republican. A Maine Republican is a very different animal than a Texas or Wyoming Republican; in fact, some say it is a RINO. A Mississippi Democrat in 2009 is not ever the same as a Massachusetts Democrat, nor a Mississippi Democrat of twenty years ago.

Caveat, speaking of Massachusetts: In connection with the special election there on 1/19/2010, I and many others have taken to calling the Bay State “the bluest of all blue states.” This is incorrect. It yields to the blueness of the Washingtons (state & district) and West Virginia.

Caveat: Employment in goods-producing industry is not a holy grail and need not be the object of all economic policy. If someone leaves a job in the declining textile industry in North Carolina, retrains as a radiological technician and get a better job in that field, no one argues that either that person or the state of North Carolina are worse off. The problem is when employment in the goods-producing sector as a whole is in total headlong decline. That means industry is giving up on a place. That means industry prefers to take its chances with the Chinese Communist than the Michigan Democrats.

Caveat: Productivity has improved in goods producing industry, meaning fewer workers are needed to do the same or greater work. I know. That’s wonderful. But that productivity itself should incentivize capital to come into a place and employ workers who have worked themselves out of their jobs. If it’s not enough, other things are wrong, and the benefit of their productivity is not for workers to share. Politicians must ask the question, what else is needed to attract industry? Republicans ask that question; Democrats ask instead what other self-defeating social costs and regulations they can impose on job-creating enterprise.

Here’s one final caveat, and it is important. I don’t know which way the causation runs. I am not sure whether the growth states of the West are Republican because they are prosperous, or prosperous because they are Republican. I am more certain that employment grows in right-to-work states because it can, without restriction; that’s just economic common sense. Capital goes where it is well treated.

This much is clear. The employment restrictions and the class struggle nonsense offered by those friends of the working man, the Democrats, isn’t offering the working man in the post-industrial Northeast and Midwest any tangible economic return on his long-term political investment.

I say if you want to work, go R. If you want to stand on the unemployment line complaining about the Man, go D.

American Disease, 2010

D H Smith — Tue, 19 Jan 2010 19:45:10 +0000

Ann Elk: Where? Oh, what is my theory? This is it. My theory that belongs to me is as follows. This is how it goes. The next thing I’m going to say is my theory. Ready?

TV Interviewer: Yes.

Ann Elk: … This theory goes as follows and begins now. All brontosauruses are thin at one end; much, much thicker in the middle; and then thin again at the far end.

(From Monty Python’s Flying Circus)

I too have a theory, which is to say it is a theory and it is mine. I hope it’s a bit less silly than Ann Elk’s theory, but in any case let’s try it on. The next thing I’m going to say is actually not my theory, but another theory, which is someone else’s and got me to thinking about my theory.

This other theory is something called Dutch Disease, which is an economic diagnosis of the Netherlands’s loss of competitiveness in goods producing industries following a 1959 discovery of natural gas off its North Sea coast. In the simplest terms, this led to inflows of investment, which pumped up the exchange rate and altered terms of trade in such a way that exports became uncompetitive. In this perverse fashion, Dutch Disease describes how a lucky strike in natural resources creates not employment and growth but unemployment and stagnation.

America, my theory proposes, has a version of that, only the resource is money. I want to name the problem “American Disease,” but I read in an article by Bryan Caplan that that’s the name of a syndrome of Americans living beyond their means. Actually the problem I pose is closely related, just as H1N1 influenza is closely related to other strains of the flu. Perhaps I can say “American Disease, 2010” to differentiate it from old established strains, or should I call it “California Disease” to reflect the fact that the disease has advanced furthest in the Golden State?

America is a country with real natural resources, of course, but the high costs of extraction and environmental compliance and restrictions on land use places them increasingly out of reach. In the days when the country did produce resources and processed them into manufactured goods which foreigners bought, the U.S. generated a vast amount of wealth, much of which was invested in buildings and infrastructure. These remain visible in the present day, residual wealth as monuments to our peak of economic power.

(Exactly the same is true of Argentina, by the way, which was the wealthiest country in the world 100 years ago and still has the buildings and boulevards to prove it, even though Mr. Juan Peron and the generals set the country on an unusual course from first world to third world status.)

Now, even after the financial crisis, America’s most important industry is finance, broadly defined. The financial industry differs from the auto industry and the chemicals industry in one interesting respect. The auto industry inputs steel, glass, and plastic and outputs autos; the chemicals industry inputs primary and intermediate materials and outputs finished chemical products – in other words, they work on raw and intermediate goods and change them into something else. Most industries do this. But the finance industry has money both as input and output – it changes money’s form but not its nature in its processes. Money is both the input and the output, the resource base and the finished product.

The American finance industry is competitive, one of the nation’s success stories in terms of services exports. Our political class, which increasingly impedes us from taking coal out of our mountains, irrigating our farmlands, and manufacturing products with processes that are not squeaky clean, has long promoted clean, non-polluting financial services, and it has prospered as the industry prospered.

However, I believe that too much money in an economy based on financial services has given us a condition akin to Dutch Disease. It could probably be shown that the maintenance of the U.S. as a financial center has made the American dollar stronger than it would otherwise have been, reducing our competitiveness in global markets for tradeable goods and services. Moreover, the high level of compensation in the financial industry and supporting services has probably driven up wages and benefits right across the U.S. labor economy, another blow to the competitiveness of any entrepreneur bold enough to defy the odds and manufacture a product for sale in America.

While the American political class stands in the way of development of our (real) natural resources and domestic manufacturing, it does see the residual financial wealth of the nation as a resource that it can cut and drill and strip mine – endlessly, in fact, as it recognizes no restraint on the size of resource, but treats it as effectively infinite. The people entrusted to run the country give no thought to the necessary diminution of the resource as taxes, penalties, and compliance costs leave less and less to reinvest, even as the potential returns on investment are inevitably being reduced. They use static models that fail to capture the fact that producers will not produce – or innovate, or hire – out of sheer altruism and public spirit while the returns on their capital and labor are collapsing.

The impoverishment of the United States by the Argentine model is thus well under way.

Oh, and why do I say California has the most advanced case of the “American Disease, 2010?” Well, just look at the Golden State. There is oil offshore, but its development is not permitted. Manufacturing is being driven out. And the Central Valley is experiencing 40% unemployment in agriculture in order to protect mudfish habitat; but California’s fiscal position continues to deteriorate as its political class absolutely will not live within its means, as dictated by the state’s reduced economic circumstances.

As California is the United States only more so, California’s political class is America’s in microcosm, with all its pathologies subjected to magnification.

The mindlessness with which the American money resource is to be run down puts me in mind of a passage from Atlas Shrugged:

As they proclaim their right to consume the unearned, and blank out the question of who’s to produce it—so they proclaim that there is no law of identity, that nothing exists but change, and blank out the fact that change presupposes the concepts of what changes, from what and to what, that, without the law of identity no such concept as ‘change’ is possible. As they rob an industrialist while denying his value, so they seek to seize power over all of existence while denying that existence exists.