The Great Recession Conspiracy

2012-01-29T11:35:00.001-08:00

Here Is Why Public Pension Reform Is Absolutely Necessary!!

The Los Angeles Times provides some more examples of how legislatures have allowed public pensions to become outrageous. In particular, note the state parole agent who retired at 52 and is now paid over $200,000 annually. The Governor of Wisconsin raised the right issue. He just did it in a really stupid manner.

Reporting from Sacramento—

"Gilbert Robles retired as a state parole agent at age 53, able to collect a $101,195 annual pension — 94% of his final salary. Last year, six months after he retired, the Arcadia resident accepted a political appointment with the same agency that pays an additional six figures.

Scott Hallabrin took retirement as the top attorney for the state's ethics agency on June 29, 2009. The next day, he went back to the same post, as he prepared to watch his pension checks roll in on top of a salary.

Los Angeles school administrator Norman Isaacs got a 35% raise in 2006, the year before he filed for his public pension. The increase sharply boosted his retirement benefits.

Robles, Hallabrin and Isaacs acted within their rights under California's pension rules, which the Legislature's independent budget analyst recently described as "among the most generous in the country." That generosity comes with a price: The main pension system for public employees is expected to cost taxpayers $2.3 billion this year and has long-term obligations that it is $85 billion short of being able to fund."

2012-01-29T11:35:00.000-08:00

Here Is Something That Is Beginning To Bother Me!

I am sure you have heard about the dust up between Barack Obama and Jan Brewer, the Governor of Arizona. As I under stand it, she wrote a book and in it she described a meeting in the White House where Obama blew her off and treated her like a not too bright student (Confession Here: I have not read her book and am relying on media reports. However, they are all so similar this is probably close to right.)

So when Obama gets off Air Force One in Arizona he lectures her on her description. They appear to get into an argument and he walks off.

Now there is enough politics between Arizona and the White House to just blow this all off to politics.

But now comes the January 23, 2012 issue of Business Week. It has a major article on Harold Hamm who is a hugely successful wild cat oil drilling expert in North Dakota. Harold is a high school drop out who took enough college courses to become an expert in geology. He has been good enough at geology and taking risks to become one of the richest men in America, a multi-billionaire. All of the evidence is that this is guy who really knows what he is talking about. That is why his recounting of his meeting in the White House is troubling.

"Hamm is convinced that the Bakken—and another formation right under it called Three Forks—can help North America take a big step toward energy independence. He gets downright angry talking about federal legislation that he says threatens tax benefits for oil exploration. Over a plate of chicken-fried steak at the Buckskin Bar & Grill in Killdeer, he sets his fork down and scowls, recalling a chat he had with President Barack Obama in July at a White House event for Hamm and others who’ve pledged most of their wealth to charity. Hamm says he told Obama there’s plenty of oil to be found in the U.S. He felt the President blew him off. “It was like, if you’re in the oil-and-gas industry, you don’t matter,” he says."

Put the two wildly different situations together and you get a troubling picture of a President who does not tolerate divergent opinions. And that is a really bad thing considering all of the truly terrible advice he does seem to be getting.

2012-01-28T18:24:00.000-08:00

Some Serious Questions To Ask Yourself!!

Michael (the Economic Collapse guy) raises a series of very pertinent questions you should ask yourself the next time you hear someone, i.e., the Cowardly Lion for one example, say everything is getting better.

"If the economy is getting better, then why did new home sales in the United States hit a brand new all-time record low during 2011?

If the economy is getting better, then why are there 6 million less jobs in America today than there were before the recession started?

If the economy is getting better, then why is the average duration of unemployment in this country close to an all-time record high?

If the economy is getting better, then why has the number of homeless female veterans more than doubled?

If the economy is getting better, then why has the number of Americans on food stamps increased by 3 million since this time last year and by more than 14 million since Barack Obama entered the White House?

If the economy is getting better, then why has the number of children living in poverty in America risen for four years in a row?

If the economy is getting better, then why is the percentage of Americans living in "extreme poverty" at an all-time high?

If the economy is getting better, then why is the Federal Housing Administration on the verge of a financial collapse?

If the economy is getting better, then why do only 23 percent of American companies plan to hire more employees in 2012?

If the economy is getting better, then why has the number of self-employed Americans fallen by more than 2 million since 2006?

If the economy is getting better, then why did an all-time record low percentage of U.S. teens have a job last summer?

If the economy is getting better, then why does median household income keep declining? Overall, median household income in the United States has declined by a total of 6.8% since December 2007 once you account for inflation.

If the economy is getting better, then why has the number of Americans living below the poverty line increased by 10 million since 2006?

If the economy is getting better, then why is the average age of a vehicle in America now sitting at an all-time high?

If the economy is getting better, then why are 18 percent of all homes in the state of Florida currently sitting vacant?

If the economy is getting better, then why are 19 percent of all American men between the ages of 25 and 34 living with their parents?

If the economy is getting better, then why does the number of "long-term unemployed workers" stay so high?

When Barack Obama first took office, the number of "long-term unemployed workers" in the United States was approximately 2.6 million. Today, that number is sitting at 5.6 million."

I don't have any answers to these questions. If you do, please share them. We could all use some actual good news.

2012-01-27T15:27:00.000-08:00

SOME AMAZING NUMBERS!!!!!

Here are some numbers from this week's Business Week that I find simply amazing.
Entry level bankers on Wall Street start at about $200,00 and in their second year, they can expect $250,000!
By their sixth year, they can expect to be getting $750,000!

At Goldman Sachs, they are poor mouthing because their revenues fell 26% in 2011. Now pay close attention here. Goldman Sachs has 33,300 employees. The average employee will get a BONUS this year of $367,057!!!!!!

And these are the poor Wall Street Bankers Obama feels so sorry for

2012-01-27T11:50:00.000-08:00

I Am Not The Only One!!

Here is Michael's (the EconomicCollapseBlog guy) take on Obama's State of the Union speech. He sounds just like me, only worse! However, Michael still does not understand the automobile industry. Non U.S. auto companies now provide over 500,000 jobs in the U.S. with good wages, good benefits, making cars Americans want to buy. Those jobs are just not in Michigan! General Motors should have been allowed to go bankrupt. Nothing much would have changed except that the U.S. government would not have lost a ton of our money.

The Man Without A Plan

Barack Obama is a man without a plan. When you are young, they often tell you to "fake it until you make it", but Barack Obama is taking this to ridiculous extremes. Barack Obama has absolutely no idea what he is doing when it comes to the economy, and yet he continues to give speeches in which he declares that he is the man for the job. The State of the Union speech the other night was just abysmal. The federal government is spending way too much money, and yet Barack Obama is proposing even more government spending. Entrepreneurs and small businesses are being taxed into oblivion and yet Barack Obama is proposing even higher taxes. Our economy is being strangled to death by crippling regulations, and yet Barack Obama is proposing a vast array of new regulations. Barack Obama always gives a nice speech, but it has become appallingly evident that he is totally out of ideas. So our country will continue to drift aimlessly along without a direction and without a plan until the next financial tsunami comes along and makes things even worse.

And the American people are starting to clue in to the fact that Obama does not have a plan and does not have anything new to say. Just check out how the audiences for his State of the Union addresses have declined each year....
2009: 52.3 million
2010: 48 million
2011: 42.8 million
2012: 37.8 million
His ratings are falling almost as fast as the ratings for American Idol are.

It is amazing how Barack Obama can use so many words to say so very little.
He always tickles our ears but then he never delivers the goods. Toward the beginning of his speech the other night, he made the following statement....

"Tonight, I want to speak about how we move forward, and lay out a blueprint for an economy that’s built to last—an economy built on American manufacturing, American energy, skills for American workers, and a renewal of American values"

Well, that sounds pretty good. Except for the fact that everything he has done for the past 3 years has been the exact opposite of that.

It is almost as if he woke up that morning and decided that he would try the whole "do the opposite" thing once made famous by George Costanza on Seinfeld.
Obama says that our employment situation is getting better, but that is not really true. The only way that the federal government can claim that there is an 8.5 percent unemployment rate is because they have decided that millions of Americans that have been unemployed for a long time should not be considered "part of the workforce" any longer.

If the number of Americans that were considered to be part of the workforce was the same today as it was back in 2007, the "official" unemployment rate put out by the U.S. government would be up to approximately 11 percent.
Sadly, the number of Americans that are dependent on the government continues to soar even higher.
Since Barack Obama took office, the number of Americans on food stamps has actually increased by 14 million.
Things have not gotten better for average Americans.
They have gotten worse
.
In fact, 10 million more Americans have fallen below the poverty line since 2006. And in 2010, more Americans fell into poverty than ever before.
A lot of people out there are really hurting, and the American people deserve some real answers.
But instead, Obama was saying stuff like this the other night....

"I intend to fight obstruction with action, and I will oppose any effort to return to the very same policies that brought on this economic crisis in the first place"

Oh really?

What is Obama actually doing about the things that caused the last financial crisis?
The "financial reform" bill was a complete and total joke. Obama has been shamefully soft on the big Wall Street banks that caused the last crisis.

Today, the "too big to fail" banks are larger than ever. The total assets of the six largest U.S. banks increased by 39 percent between September 30, 2006 and September 30, 2011.
So now they are more of a danger to the financial system than ever.
And not a single Wall Street executive has gone to jail for what they did during the last financial crisis.
Thanks Obama.

But of course Obama was never going to seriously go after Wall Street.
After all, they are the ones that fund his campaigns.
Most Americans don't realize this, but 3 of the top 7 donors to Obama's campaign in 2008 were "too big to fail" banks.

And the Obama administration has been absolutely packed with ex-Wall Street bankers. Last year, Michael Brenner wrote the following about the composition of the Obama administration....

Wall Street's takeover of the Obama administration is now complete. The mega-banks and their corporate allies control every economic policy position of consequence. Mr. Obama has moved rapidly since the November debacle to install business people where it counts most. Mr.William Daley from JP Morgan Chase as White House Chief of Staff. Mr. Gene Sperling from the Goldman Sachs payroll to be director of the National Economic Council. Eileen Rominger from Goldman Sachs named director of the SEC's Investment Management division. Even the National Security Advisor, Thomas Donilon, was executive vice president for law and policy at the disgraced Fannie Mae after serving as a corporate lobbyist with O'Melveny & Roberts. The keystone of the business friendly team was put in place on Friday. General Electric Chairman and CEO Jeffrey Immelt will serve as chair of the president's Council on Jobs and Competitiveness.

During his State of the Union address, Obama also promised to bring manufacturing jobs back to America....

"Think about the America within our reach: A country that leads the world in educating its people. An America that attracts a new generation of high-tech manufacturing and high-paying jobs"

That sounds great, except for the fact that Obama has been doing everything he can to get more American jobs shipped out of the country.
The Obama administration has been aggressively pushing new "free trade" agreements with Panama, South Korea and Colombia. The Obama administration has also made the Trans-Pacific Partnership ("the NAFTA of the Pacific") an extremely high priority.

And of course we have all seen how wonderfully the first NAFTA worked out.
Our "free trade" policies have been an absolute nightmare for the American worker.
During 2010, an average of 23 manufacturing facilities a day shut down in the United States. Overall, more than 56,000 manufacturing facilities in the United States have shut down since 2001.
We are bleeding jobs at a pace that is hard to believe.

Amazingly, the United States has lost an average of 50,000 manufacturing jobs a month since China joined the World Trade Organization in 2001.
Yet Obama promises more of the same and that is supposed to help?

During his speech, Obama correctly noted that many foreign manufacturers are heavily subsidized....

"It's not fair when foreign manufacturers have a leg up on ours, only because they're heavily subsidized"

So are we going to deeply penalize those that have been cheating?
Are we going to warn them that we will stop trading with them unless they stop?
Of course not.

Obama is going to do next to nothing to stop what China and other predatory nations are doing to us.
Today, the United States spends approximately 4 dollars on goods and services from China for every one dollar that China spends on goods and services from the United States, and the U.S. trade deficit with China in 2010 was 27 times larger than it was back in 1990.

But the Obama administration doesn't seem to care much about these things.
In fact, just check out what U.S. Trade Representative Ron Kirk told Tim Robertson of the Huffington Post about the Obama administration's attitude toward keeping manufacturing jobs in America....

Let's increase our competitiveness... the reality is about half of our imports, our trade deficit is because of how much oil [we import], so you take that out of the equation, you look at what percentage of it are things that frankly, we don't want to make in America, you know, cheaper products, low-skill jobs that frankly college kids that are graduating from, you know, UC Cal and Hastings [don't want], but what we do want is to capture those next generation jobs and build on our investments in our young people, our education infrastructure.

Oh, but Obama now says that he is going to toughen up on trade....

"I'm announcing the creation of a Trade Enforcement Unit that will be charged with investigating unfair trading practices in countries like China. There will be more inspections"

Oh boy - "inspections" - yeah, that is really going to have the Chinese shaking in their boots.
Meanwhile, the Chinese just keep hitting us with new tariffs. According to the New York Times, a Jeep Grand Cherokee that costs $27,490 in the United States will now cost about $85,000 in China thanks to these new tariffs.

So is Obama going to hit China with tough new tariffs in return?
Of course not.

Meanwhile, our economy continues to bleed businesses and jobs. According to Professor Alan Blinder of Princeton University, 40 million more U.S. jobs could be sent offshore over the next two decades if current trends continue.

But if you listen to Obama, he makes it seem like many of our industries are in better shape than ever....

"We bet on American ingenuity, and tonight the American auto industry is back."

Yes, the American auto industry is no longer on the brink of bankruptcy, but it is not "back". Just consider the following stats....
*In 1970, General Motors had about a 60 percent share of the U.S. automobile market. Today, that figure is down to about 20 percent.
*Back in 2000, about 17 million new automobiles were sold in the United States. During 2011, less than 13 million new automobiles were sold in the United States.
*Japan builds more cars than anyone else on the globe. Japan now manufactures about 5 million more automobiles than the United States does.
*Since Alan Mulally became CEO of Ford, the company has reduced its North American workforce by nearly half.
*In the year 2000, the U.S. auto industry employed more than 1.3 million Americans. Today, the U.S. auto industry employs about 698,000 people.

Obama bailed out the auto industry, and they responded by sending even more of our jobs overseas.
During his speech, Obama declared that there will be no more bailouts....

"No bailouts, no handouts, and no copouts."

That is kind of funny because Obama is basically the all-time champion of handing out bailouts.
If Barack Obama and John McCain had not aggressively pushed for the Wall Street bailouts back in 2008, they never would have happened.

And once Obama became president, there was a seemingly endless parade of bailouts and "stimulus packages".

So what do you honestly think he will do when the next financial crisis happens? Do you think he would actually be able to resist the temptation for more bailouts?

Obama also says that he wants to spend more money on training for American workers....

"Join me in a national commitment to train two million Americans with skills that will lead directly to a job."

But the American people already have enough training. There are tons of college-educated Americans that are among the ranks of the unemployed right now.

What the American people need are jobs.

Unfortunately, jobs are leaving this country at an unprecedented pace.
Back in the year 2000, more than 20 percent of all jobs in America were manufacturing jobs. Today, about 5 percent of all jobs in America are manufacturing jobs.

Not only that, but our incomes are also going down. Because U.S. workers now have to compete for jobs with workers that make slave labor wages on the other side of the globe, pay in this country continues to decline.

A recent White House reported entitled "Investing in America: Building an Economy That Lasts" actually bragged that our trade policies have driven wages in America down. The following chart is from that report....

The Obama administration has been very good for the largest corporations.
For the rest of us, not so much.

But Obama now says that he wants America to be a place that encourages entrepreneurs and small businesses to thrive....

"It means we should support everyone who’s willing to work; and every risk-taker and entrepreneur who aspires to become the next Steve Jobs."

Unfortunately, the reality is that the federal government is strangling entrepreneurs and small businesses to death with taxes and crippling regulations.

According to the Bureau of Labor Statistics, 16.6 million Americans were self-employed back in December 2006. Today, that number has shrunk to 14.5 million.
That is not a good trend.

And right now small businesses are extremely hesitant to bring on new workers.
One recent survey found that 77 percent of all U.S. small businesses do not plan to hire any more workers in the coming year.

So obviously what the Obama administration is doing is not working.
During his speech, Obama also spoke of developing our own energy resources....

"A future where we are in control of our own energy, and our security and prosperity aren't so tied to unstable parts of the world."

Hopefully most of those watching laughed when they heard this, because this had to have been a joke.
America is absolutely swimming in oil and natural gas, and yet the Obama administration has blocked the development of those resources at every turn.

Instead, Obama has been very busy trying to push green energy companies on us, but they have had a nasty habit of going bankrupt.

During his speech, Obama also spoke of the need for "comprehensive immigration reform".
But apparently Obama's idea of "immigration reform" is to grant "backdoor amnesty" to the vast majority of the illegal immigrants in the United States and to continue to leave our borders completely wide open.
The consequences of such a policy are very serious. As I wrote about the other day, there are now 1.4 million gang members living inside the United States, and that number has risen by an astounding 40 percent since 2009.

The last thing we need is more "immigration reform" from Barack Obama.
Of course the "class warfare" part was the centerpiece of Obama's speech the other night.
Referring to it as the "defining issue of our time", Obama said that now is the time to hit the wealthy with higher taxes....

"We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by. Or we can restore an economy where everyone gets a fair shot, everyone does their fair share, and everyone plays by the same set of rules."

This is going to be what Barack Obama is going to base his entire 2012 campaign on. He is going to try to tap into the economic frustrations of the poor and the middle class and he is going to try to get them to blame the rich and the "party of the rich" (the Republicans).

But taxing the rich is not going to solve our problems. If Bill Gates donated his entire fortune to the U.S. government, it would only cover the U.S. budget deficit for about 15 days.
The truth is that the ultra-wealthy are always several steps ahead of the U.S. government. The global elite are hiding 18 trillion dollars in offshore banks, and they are absolute experts at avoiding taxes.

No, the people that always get hit when taxes are raised are small business owners that try to do things "by the book" and middle class families that are barely scraping by.

What we need to do is to get rid of the income tax system entirely. It is deeply corrupt and it is full of thousands of loopholes.

Trust me, I know. I used to study this stuff.

But Obama seems to think that taxing the rich is the solution to all of our problems....

"We don’t begrudge financial success in this country. We admire it. When Americans talk about folks like me paying my fair share of taxes, it’s not because they envy the rich. It’s because they understand that when I get tax breaks I don’t need and the country can’t afford, it either adds to the deficit, or somebody else has to make up the difference – like a senior on a fixed income; or a student trying to get through school; or a family trying to make ends meet. That’s not right. Americans know it’s not right. They know that this generation’s success is only possible because past generations felt a responsibility to each other, and to their country’s future, and they know our way of life will only endure if we feel that same sense of shared responsibility. That’s how we’ll reduce our deficit."

Oh really?

If we just accept Obama's plan the deficit will be fixed?

That worked out so well during his first term. During the first three years of the Obama administration, the U.S. government accumulated more debt than it did from the time that George Washington took office to the time that Bill Clinton took office.

The truth is that Obama does not plan to fix anything. Barack Obama's proposed 2012 budget projects that the national debt will rise to 26 trillion dollars a decade from now. And his budget numbers are ridiculously optimistic.

Not that our tax system does not need reform.

If we are going to have an income tax system (which we should not), then it should at least be fair.

There is no way in the world that General Electric and Mitt Romney should pay a lower tax rate than you and I do.
In a previous article, I noted some of the big corporations that have made enormous profits and yet have paid less than zero in taxes in recent years....

What U.S. corporations are able to get away with is absolutely amazing.
The following figures come directly out of a report by Citizens for Tax Justice. These are combined figures for the tax years 2008, 2009 and 2010.
During those three years, all of the corporations below made a lot of money. Yet all of them paid net taxes that were below zero for those three years combined.
How is that possible? Well, it turns out that instead of paying in taxes to the federal government, they were actually getting money back.
So for these corporations, their rate of taxation was actually below zero.
If you have not seen these before, you are going to have a hard time believing some of these statistics.....
*Honeywell*
Profits: $4.9 billion
Taxes: -$34 million
*Fed Ex*
Profits: $3 billion
Taxes: -$23 million
*Wells Fargo*
Profits: $49.37 billion
Taxes: -$681 million
*Boeing*
Profits: $9.7 billion
Taxes: -$178 million
*Verizon*
Profits: $32.5 billion
Taxes: -$951 million
*Dupont*
Profits: $2.1 billion
Taxes -$72 million
*American Electric Power*
Profits: $5.89 billion
Taxes -$545 million
*General Electric*
Profits: $7.7 billion
Taxes: -$4.7 billion
Are you starting to get the picture?

Hopefully we can all agree that there is something seriously wrong with those numbers.
But fixing holes in the tax system is one thing - blaming America's economic ills on the wealthy is another.
During his speech, Obama made the following statement....

"You can call this class warfare all you want"

And yes, we will hear the term "class warfare" over and over again for the rest of 2012.
Obama actually believes that "blaming the 1%" can get him sent back to the White House again.
But that isn't going to solve any of our problems.

Instead, we should be focusing on the root causes of our economic problems.
I would love to see a president get up during a State of the Union address and declare that we need to shut down the Federal Reserve.
Since the Federal Reserve was created in 1913, the U.S. dollar has lost over 95 percent of its purchasing power.
Since the Federal Reserve was created in 1913, the U.S. national debt has gotten more than 5000 times larger.
Thanks to the debt-based Federal Reserve system, we are going into debt at a pace that is unlike anything the world has ever seen.
Right now, the federal government is stealing 150 million dollars an hour from our children and our grandchildren.
But Barack Obama loves the Federal Reserve.

In fact, he actually nominated Ben Bernanke for a second term as Federal Reserve Chairman even though Bernanke has a track record of incompetence that is legendary.
So no, nobody should be applauding Barack Obama for his absolutely abysmal speech the other night.
He is a man without a plan and he has been an absolute disaster for America.

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2012-01-27T11:20:00.000-08:00

What Do You Make Of This Guy??

Today's New York Times article paints the picture of a truly troubled man. He sounds to me like a real sociopath, but maybe it is something else. What do you think?

Gingrich Stuck to Caustic Path in Ethics Battles

By SHERYL GAY STOLBERG

WASHINGTON — Newt Gingrich had an urgent warning for conservatives: Jim Wright, the Democratic speaker of the House, was out to destroy America.

It was April 1988, a month before Mr. Gingrich, an up-and-coming Republican congressman, shocked colleagues by pressing ethics charges against the powerful Mr. Wright. Now, he was singling out the speaker as a major obstacle in a coming “civil war” with liberals.

“This war has to be fought with a scale and a duration and a savagery that is only true of civil wars,” Mr. Gingrich said, in a speech to the conservative Heritage Foundation. He branded Mr. Wright as part of “the hard left,” whose members, he warned, “will try by chameleon-like actions to destroy our country.”

The brutal civil war Mr. Gingrich predicted did indeed come to pass, during a nearly decadelong conflict in which ethics charges were the primary weapon. Mr. Gingrich lodged a complaint against Mr. Wright, which cost the Democratic speaker his job. Democrats, in turn, bombarded Mr. Gingrich with accusations of ethical impropriety, which led to a $300,000 fine and a reprimand for bringing discredit to the House.

Mr. Gingrich, Democrats and Republicans here agree, emerged as one of Washington’s most aggressive practitioners of slash-and-burn politics; many fault him for erasing whatever civility once existed in the capital. He believed, and preached, that harsh language could win elections; in 1990, the political action committee he ran, Gopac, instructed Republican candidates to learn to “speak like Newt,” and offered a list of words to describe Democrats — like decay, traitors, radical, sick, destroy, pathetic, corrupt and shame.

Those same qualities are now on display as Mr. Gingrich, a Republican candidate for president, turns his caustic tongue against Republicans and Democrats alike. He has tried to cut down Mitt Romney as promoting “pious baloney,” branded President Obama “the food stamp president” and mocked him for living on “Planet Obama.” He has gone after the “elite media” as well, denouncing the “destructive, vicious, negative nature” of those whose questions he does not like.

On the campaign trail, Mr. Gingrich, whose spokesman did not return calls or e-mails seeking comment for this article, promotes himself as an elder Republican statesman, often reminding voters that as House speaker, he worked with a Democratic president, Bill Clinton, to balance the budget and overhaul the welfare system.

But he neglects to mention that he also presided over Mr. Clinton’s impeachment (which later provoked charges of hypocrisy, because the case concerned Mr. Clinton’s adulterous behavior while Mr. Gingrich himself was having an extramarital affair) or that his bombastic style helped cost him his speakership; he stepped down in 1999.

Mr. Gingrich’s recent surge in the polls makes leading Republicans nervous; one, Bob Dole of Kansas, the former Senate majority leader, endorsed Mr. Romney on Thursday, saying Mr. Gingrich “loved picking a fight.” And his history of combat with Democrats — “the enemy of normal Americans,” Mr. Gingrich once called them — leads people in both parties to wonder if he could work in a bipartisan way.

“Government is dysfunctional because the presidency and Congress no longer have the ability to compromise, and I put Newt at the heart of that,” said Mickey Edwards, a Republican former congressman from Oklahoma who served in leadership alongside Mr. Gingrich, and who is neutral in the Republican primary.

“When he was in the House,” Mr. Edwards added, “he had some temptation to work across party lines because he wanted to be considered an equal with Bill Clinton. But I think if you were in a position where Newt had the upper hand as president, his style would not be to find a way to compromise, but to turn up the heat on Democrats.”

Ethics as a Weapon

Mr. Gingrich arrived on Capitol Hill in January 1979, as a freshman Republican from Georgia, having already made ethics an issue in his first political campaigns.

Once in Washington, Mr. Gingrich found an obvious target: Representative Charles C. Diggs, a Michigan Democrat and founder of the Congressional Black Caucus who had been convicted of taking kickbacks from staff members but re-elected while awaiting sentencing. Most newcomers to Congress would have remained silent on a delicate matter involving a senior member. But Mr. Gingrich led the charge to expel Mr. Diggs, confiding to one close colleague that it was a “gutsy thing to do,” because he risked accusations of racism. The House eventually censured Mr. Diggs, and he quit in disgrace.

Over time, Mr. Gingrich sought to make ethics his signature issue, an effort aimed mostly at Democrats.

He pushed for, and won, harsher punishment for two lawmakers, one a Republican and one a Democrat, who were accused of sexual misconduct. He railed against Democrats over a disputed election in Indiana, accusing them of stealing the seat, and maneuvered quietly behind the scenes to orchestrate the work of the so-called Gang of Seven, which in the early 1990s created a ruckus over lawmakers’ overdrafts at the private House bank and other Congressional perks. He called for the censure of Representative Barney Frank, the Massachusetts Democrat, over ethical breaches involving the use of his office to help a male prostitute. Mr. Frank received a lesser reprimand instead.

“Newt,” Mr. Frank says today, “is the single most influential factor in replacing the politics in which you accepted the bona fides of your opponents and disagreed with them civilly with the politics of insisting that your opponents are bad people.”

Mr. Gingrich has said he was on a mission to “repair the integrity of the House,” but critics are skeptical. Fred Wertheimer, then the head of Common Cause, says Mr. Gingrich saw ethics charges as “a vehicle for destroying the House as an institution and taking over what was left.”

But Steven M. Gillon, a University of Oklahoma historian who has written a book about Mr. Gingrich and Mr. Clinton, offers another explanation. Southern Republicans in the post-civil rights era often used race as a wedge issue, Mr. Gillon said. But Mr. Gingrich, a one-time Rockefeller Republican who embraced integration, needed a different line of attack. “He needed to find a wedge that would undermine the moral credibility of the Democratic Party,” Mr. Gillon said, adding, “He could use ethics as sort of a bludgeon, and that’s what he did.”

Empty House, Big Microphone

Mr. Gingrich’s arrival in Congress coincided with the rise of C-Span, the cable channel that televised House proceedings, and he figured out early on how to combine his gift for oratory with the power of the camera. Night after night, he would lambaste Democrats, speaking in an empty House chamber after the day’s legislative business was done. Mr. Gingrich would needle Democrats, challenging them to come forward and defend themselves. No one did, because no one was there.

Things came to a head in May 1984, on a day when the chamber was full. Mr. Gingrich had been pounding a group of Democrats over a letter they had written to Daniel Ortega, the Nicaraguan leader, accusing them of spreading “communist propaganda.” Thomas P. O’Neill Jr., the House speaker, let loose.

“You deliberately stood in that well before an empty House, and challenged these people, and challenged their Americanism,” he roared, wagging his forefinger at Mr. Gingrich, “and it’s the lowest thing I’ve ever seen in my 32 years in Congress.”

It was a rare breach of decorum; Mr. Gingrich had gotten the better of Mr. O’Neill. House rules forbid personal insults, so Mr. O’Neill’s words were “taken down”— stricken from the record, a rare rebuke and a turning point, many here say, in relations between Republicans and Democrats.

“That was the moment he became a real star,” said John J. Pitney Jr., a professor at Claremont McKenna College, who has written extensively about Mr. Gingrich and polarization in Congress. “It was David taking on Goliath.”

Some Republicans were uneasy. Among them was Trent Lott of Mississippi, then the Republican whip. Mr. Lott had called for Mr. O’Neill’s remarks to be stricken. Even so, he says he was uncomfortable with Mr. Gingrich’s take-no-prisoners rhetorical style.

“Newt was willing to tear up the system to get the majority,” Mr. Lott, who supports Mitt Romney, said in an interview last year, before Mr. Gingrich’s recent surge in the polls. “It got to be a really negative pit over there, but that was probably the beginnings of the Republicans being able to take control.”

A Fight Becomes a War

August 1987 was a “decisive moment” for Mr. Gingrich, he wrote in his 1998 mea culpa book, “Lessons Learned the Hard Way.” It was when he began to view his fight with Democrats as a civil war. “One culture or the other,” he wrote, “would have to go.”

By this time, Mr. Gingrich had already taken charge of Gopac, a once-sleepy political action committee dedicated to electing Republicans. Mr. Gingrich pumped it up into a fund-raising machine and a training organization in which Republican candidates were given step-by-step information on how to run for office. He produced seminars and a series of cassette tapes; today hundreds, if not thousands, of Republican officeholders in states around the country can recall riding around in their cars listening to Mr. Gingrich’s formula for winning.

Mr. Edwards, the former Republican congressman, described the tapes as “all about how to demonize the opposition, how to use invective and scary language,” adding: “It wasn’t that he trained them to have a better understanding of foreign policy, or economic policy. They were techniques in how to wage a nasty partisan war against your opponent.”

By August 1987, that opponent, for Mr. Gingrich at least, was Mr. Wright, the House speaker, whom he viewed as covering for the corrupt Democratic Party.

Mr. Gingrich spent more than a year making speeches against Mr. Wright, branding him “the least ethical speaker of the 20th century.” The charge that finally stuck involved a vanity book, “Reflections of a Public Man,” that Mr. Wright sold in bulk to lobbyists and supporters, under an unusual agreement for him to receive 55% of the royalties. (Years later, Mr. Gingrich would come under attack for his own book deal.)

The House Ethics Committee found “reason to believe” that Mr. Wright had violated House rules in 69 instances; seeking to avoid a drawn out disciplinary hearing, he resigned in June 1989, giving Mr. Gingrich his biggest Democratic scalp.

“He was as partisan as Newt was partisan,” Wilma Goldstein, a former Republican National Committee official who worked closely with Mr. Gingrich, said of Mr. Wright. “So Newt just decided, ‘By God, if we’re going to take them down, let’s start at the top.’ ”

But again, some Republicans were uncomfortable. Mr. Gingrich, by then the Republican whip, was clearly angling to replace the House Republican leader, Robert H. Michel, viewed by many in his party as too accommodating to Democrats. Mr. Michel, now 88, recalls warning Mr. Gingrich that what goes around comes around.

“I would say, ‘Newt, these fellows over there are not our enemy, they’re our political adversaries,’ ” Mr. Michel said. He reminded him that Democrats and Republicans often traded places in leadership. “That could happen to you,” Mr. Michel recalled saying. “If you don’t treat them with respect, boy, the next time around, they have a chance to really put the shivs to you.”

Time for Payback

Mr. Michel, it turned out, was right.

Mr. Gingrich climbed his way to the speakership in January 1995, and once he got there vowed to take the high road. He had spent years labeling Democrats as “counterculture” proponents of the “liberal welfare state,” and in 1994 went so far as to suggest the case of Susan Smith, a South Carolina mother who murdered her two sons, was evidence of “how sick the society is getting and how much we need to change things” by electing Republicans.

But once in power, he pledged to work cooperatively with Mr. Clinton, explaining that being in the majority freed him to be more conciliatory. “In the minority,” he said then, “it’s like the defense in football. You’re in a different position. You have to be more combative.”

It was too late. Democrats were already bombarding him with ethics charges. During his bid for re-election, Mr. Gingrich’s opponent filed a complaint accusing him of using a college course, “Renewing American Civilization,” to promote a partisan agenda, improperly mixing Gopac money with public funds.

And once he won, Mr. Gingrich came under withering criticism for a $4.5 million book advance from HarperCollins, whose owner, Rupert Murdoch, had business pending before the Congress. Under pressure, Mr. Gingrich turned down the advance. (His defense was that unlike Mr. Wright, he was writing “a real book.”)

Over the course of two years, more than 80 charges — ranging from alleged tax violations to complaints that he used Gopac money to finance one of his own campaigns — were filed against Mr. Gingrich with the House Ethics Committee. The convoluted inquiry consumed official Washington, with Democrats saying he was getting what he deserved and Republicans calling it a political vendetta.

“Yes, he filed ethics charges against Speaker Wright, and I would concede that it wasn’t just because Newt was out to clean up Congress,” said Dan Meyer, a former Gingrich aide. “I think he used it as a partisan tactic, but the scale of the response was way out of proportion.”

In the end, nearly all of the charges were dismissed. But the ethics committee did find that Mr. Gingrich had used tax-exempt money to promote Republican goals, and given the panel inaccurate information for its inquiry.

Mr. Gingrich formally apologized, conceding he had brought discredit on the House. He had always regarded himself as a “transformative figure” who would change the course of history, but on Jan. 21, 1997, he made history in another way.

The House voted 395-28 to reprimand him and fine him $300,000, making him the first speaker ever disciplined for unethical conduct.

2012-01-25T18:23:00.000-08:00

One Minute Lifesaver!!

This is not covered by Obamacare, but someday, somebody, might be very glad you took a couple of minutes to look at this video.
handsonlycpr.org

And always remember, if Paul Ryan gets his way, this is about all the healthcare you can expect.

2012-01-25T09:32:00.000-08:00

More Evidence The President Does Not Understand How This Economy Works.

Last night the President proposed solving the jobs problem by giving tax breaks to companies that returned manufacturing jobs to the U.S. He simply does not understand that those jobs went out of the U.S. for for some very specific reasons and a tax break won't bring them back. (And a tax break won't get any veterans hired either. What a stupid idea!!) Anyway, Steve Jobs told Obama that Apple's production jobs were never coming back and the New York Times had a long piece that explained exactly why that is true. You will find it fascinating.

And then there is the other thing that is never mentioned. Because things are made with low cost labor they are sold to you and me at a lower price. That big screen TV on your wall would cost two or three or four times as much if it were made in the U.S. How much do you think the Iphones and Ipads described in the New York Times story below would have cost if they had been made in the U.S.

Finally, those awful sounding jobs (by U.S. standards) are pretty good jobs in a country where there are no jobs for young people.

And in case you missed it, today Apple announced record breaking profits so a lot individual stockholders and big pension funds, among others, don't mind at all that Iphones and Ipads are made out of the country.

January 21, 2012

How the U.S. Lost Out on iPhone Work

By CHARLES DUHIGG and KEITH BRADSHER

When Barack Obama joined Silicon Valley’s top luminaries for dinner in California last February, each guest was asked to come with a question for the president.

But as Steven P. Jobs of Apple spoke, President Obama interrupted with an inquiry of his own: what would it take to make iPhones in the United States?

Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.

Why can’t that work come home? Mr. Obama asked.

Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said, according to another dinner guest.

The president’s question touched upon a central conviction at Apple. It isn’t just that workers are cheaper abroad. Rather, Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that “Made in the U.S.A.” is no longer a viable option for most Apple products.

Apple has become one of the best-known, most admired and most imitated companies on earth, in part through an unrelenting mastery of global operations. Last year, it earned over $400,000 in profit per employee, more than Goldman Sachs, Exxon Mobil or Google.

However, what has vexed Mr. Obama as well as economists and policy makers is that Apple — and many of its high-technology peers — are not nearly as avid in creating American jobs as other famous companies were in their heydays.

Apple employs 43,000 people in the United States and 20,000 overseas, a small fraction of the over 400,000 American workers at General Motors in the 1950s, or the hundreds of thousands at General Electric in the 1980s. Many more people work for Apple’s contractors: an additional 700,000 people engineer, build and assemble iPads, iPhones and Apple’s other products. But almost none of them work in the United States. Instead, they work for foreign companies in Asia, Europe and elsewhere, at factories that almost all electronics designers rely upon to build their wares.

“Apple’s an example of why it’s so hard to create middle-class jobs in the U.S. now,” said Jared Bernstein, who until last year was an economic adviser to the White House.

“If it’s the pinnacle of capitalism, we should be worried.”

Apple executives say that going overseas, at this point, is their only option. One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”

Similar stories could be told about almost any electronics company — and outsourcing has also become common in hundreds of industries, including accounting, legal services, banking, auto manufacturing and pharmaceuticals.

But while Apple is far from alone, it offers a window into why the success of some prominent companies has not translated into large numbers of domestic jobs. What’s more, the company’s decisions pose broader questions about what corporate America owes Americans as the global and national economies are increasingly intertwined.

“Companies once felt an obligation to support American workers, even when it wasn’t the best financial choice,” said Betsey Stevenson, the chief economist at the Labor Department until last September. “That’s disappeared. Profits and efficiency have trumped generosity.”

Companies and other economists say that notion is naïve. Though Americans are among the most educated workers in the world, the nation has stopped training enough people in the mid-level skills that factories need, executives say.

To thrive, companies argue they need to move work where it can generate enough profits to keep paying for innovation. Doing otherwise risks losing even more American jobs over time, as evidenced by the legions of once-proud domestic manufacturers — including G.M. and others — that have shrunk as nimble competitors have emerged.

Apple was provided with extensive summaries of The New York Times’s reporting for this article, but the company, which has a reputation for secrecy, declined to comment.

This article is based on interviews with more than three dozen current and former Apple employees and contractors — many of whom requested anonymity to protect their jobs — as well as economists, manufacturing experts, international trade specialists, technology analysts, academic researchers, employees at Apple’s suppliers, competitors and corporate partners, and government officials.

Privately, Apple executives say the world is now such a changed place that it is a mistake to measure a company’s contribution simply by tallying its employees — though they note that Apple employs more workers in the United States than ever before.

They say Apple’s success has benefited the economy by empowering entrepreneurs and creating jobs at companies like cellular providers and businesses shipping Apple products. And, ultimately, they say curing unemployment is not their job.

“We sell iPhones in over a hundred countries,” a current Apple executive said. “We don’t have an obligation to solve America’s problems. Our only obligation is making the best product possible.”

‘I Want a Glass Screen’

In 2007, a little over a month before the iPhone was scheduled to appear in stores, Mr. Jobs beckoned a handful of lieutenants into an office. For weeks, he had been carrying a prototype of the device in his pocket.

Mr. Jobs angrily held up his iPhone, angling it so everyone could see the dozens of tiny scratches marring its plastic screen, according to someone who attended the meeting. He then pulled his keys from his jeans.

People will carry this phone in their pocket, he said. People also carry their keys in their pocket. “I won’t sell a product that gets scratched,” he said tensely. The only solution was using unscratchable glass instead. “I want a glass screen, and I want it perfect in six weeks.”

After one executive left that meeting, he booked a flight to Shenzhen, China. If Mr. Jobs wanted perfect, there was nowhere else to go.

For over two years, the company had been working on a project — code-named Purple 2 — that presented the same questions at every turn: how do you completely reimagine the cellphone? And how do you design it at the highest quality — with an unscratchable screen, for instance — while also ensuring that millions can be manufactured quickly and inexpensively enough to earn a significant profit?

The answers, almost every time, were found outside the United States. Though components differ between versions, all iPhones contain hundreds of parts, an estimated 90 percent of which are manufactured abroad. Advanced semiconductors have come from Germany and Taiwan, memory from Korea and Japan, display panels and circuitry from Korea and Taiwan, chipsets from Europe and rare metals from Africa and Asia. And all of it is put together in China.

In its early days, Apple usually didn’t look beyond its own backyard for manufacturing solutions. A few years after Apple began building the Macintosh in 1983, for instance, Mr. Jobs bragged that it was “a machine that is made in America.” In 1990, while Mr. Jobs was running NeXT, which was eventually bought by Apple, the executive told a reporter that “I’m as proud of the factory as I am of the computer.” As late as 2002, top Apple executives occasionally drove two hours northeast of their headquarters to visit the company’s iMac plant in Elk Grove, Calif.

But by 2004, Apple had largely turned to foreign manufacturing. Guiding that decision was Apple’s operations expert, Timothy D. Cook, who replaced Mr. Jobs as chief executive last August, six weeks before Mr. Jobs’s death. Most other American electronics companies had already gone abroad, and Apple, which at the time was struggling, felt it had to grasp every advantage.

In part, Asia was attractive because the semiskilled workers there were cheaper. But that wasn’t driving Apple. For technology companies, the cost of labor is minimal compared with the expense of buying parts and managing supply chains that bring together components and services from hundreds of companies.

For Mr. Cook, the focus on Asia “came down to two things,” said one former high-ranking Apple executive. Factories in Asia “can scale up and down faster” and “Asian supply chains have surpassed what’s in the U.S.” The result is that “we can’t compete at this point,” the executive said.

The impact of such advantages became obvious as soon as Mr. Jobs demanded glass screens in 2007.

For years, cellphone makers had avoided using glass because it required precision in cutting and grinding that was extremely difficult to achieve. Apple had already selected an American company, Corning Inc., to manufacture large panes of strengthened glass. But figuring out how to cut those panes into millions of iPhone screens required finding an empty cutting plant, hundreds of pieces of glass to use in experiments and an army of midlevel engineers. It would cost a fortune simply to prepare.

Then a bid for the work arrived from a Chinese factory.

When an Apple team visited, the Chinese plant’s owners were already constructing a new wing. “This is in case you give us the contract,” the manager said, according to a former Apple executive. The Chinese government had agreed to underwrite costs for numerous industries, and those subsidies had trickled down to the glass-cutting factory. It had a warehouse filled with glass samples available to Apple, free of charge. The owners made engineers available at almost no cost. They had built on-site dormitories so employees would be available 24 hours a day.

The Chinese plant got the job.

“The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”

In Foxconn City

An eight-hour drive from that glass factory is a complex, known informally as Foxconn City, where the iPhone is assembled. To Apple executives, Foxconn City was further evidence that China could deliver workers — and diligence — that outpaced their American counterparts.

That’s because nothing like Foxconn City exists in the United States.

The facility has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day. When one Apple executive arrived during a shift change, his car was stuck in a river of employees streaming past. “The scale is unimaginable,” he said.

Foxconn employs nearly 300 guards to direct foot traffic so workers are not crushed in doorway bottlenecks. The facility’s central kitchen cooks an average of three tons of pork and 13 tons of rice a day. While factories are spotless, the air inside nearby teahouses is hazy with the smoke and stench of cigarettes.

Foxconn Technology has dozens of facilities in Asia and Eastern Europe, and in Mexico and Brazil, and it assembles an estimated 40 percent of the world’s consumer electronics for customers like Amazon, Dell, Hewlett-Packard, Motorola, Nintendo, Nokia, Samsung and Sony.

“They could hire 3,000 people overnight,” said Jennifer Rigoni, who was Apple’s worldwide supply demand manager until 2010, but declined to discuss specifics of her work. “What U.S. plant can find 3,000 people overnight and convince them to live in dorms?”

In mid-2007, after a month of experimentation, Apple’s engineers finally perfected a method for cutting strengthened glass so it could be used in the iPhone’s screen. The first truckloads of cut glass arrived at Foxconn City in the dead of night, according to the former Apple executive. That’s when managers woke thousands of workers, who crawled into their uniforms — white and black shirts for men, red for women — and quickly lined up to assemble, by hand, the phones. Within three months, Apple had sold one million iPhones. Since then, Foxconn has assembled over 200 million more.

Foxconn, in statements, declined to speak about specific clients.

“Any worker recruited by our firm is covered by a clear contract outlining terms and conditions and by Chinese government law that protects their rights,” the company wrote. Foxconn “takes our responsibility to our employees very seriously and we work hard to give our more than one million employees a safe and positive environment.”

The company disputed some details of the former Apple executive’s account, and wrote that a midnight shift, such as the one described, was impossible “because we have strict regulations regarding the working hours of our employees based on their designated shifts, and every employee has computerized timecards that would bar them from working at any facility at a time outside of their approved shift.” The company said that all shifts began at either 7 a.m. or 7 p.m., and that employees receive at least 12 hours’ notice of any schedule changes.

Foxconn employees, in interviews, have challenged those assertions.

Another critical advantage for Apple was that China provided engineers at a scale the United States could not match. Apple’s executives had estimated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPhones. The company’s analysts had forecast it would take as long as nine months to find that many qualified engineers in the United States.

In China, it took 15 days.

Companies like Apple “say the challenge in setting up U.S. plants is finding a technical work force,” said Martin Schmidt, associate provost at the Massachusetts Institute of Technology. In particular, companies say they need engineers with more than high school, but not necessarily a bachelor’s degree. Americans at that skill level are hard to find, executives contend. “They’re good jobs, but the country doesn’t have enough to feed the demand,” Mr. Schmidt said.

Some aspects of the iPhone are uniquely American. The device’s software, for instance, and its innovative marketing campaigns were largely created in the United States. Apple recently built a $500 million data center in North Carolina. Crucial semiconductors inside the iPhone 4 and 4S are manufactured in an Austin, Tex., factory by Samsung, of South Korea.

But even those facilities are not enormous sources of jobs. Apple’s North Carolina center, for instance, has only 100 full-time employees. The Samsung plant has an estimated 2,400 workers.

“If you scale up from selling one million phones to 30 million phones, you don’t really need more programmers,” said Jean-Louis Gassée, who oversaw product development and marketing for Apple until he left in 1990. “All these new companies — Facebook, Google, Twitter — benefit from this. They grow, but they don’t really need to hire much.”

It is hard to estimate how much more it would cost to build iPhones in the United States. However, various academics and manufacturing analysts estimate that because labor is such a small part of technology manufacturing, paying American wages would add up to $65 to each iPhone’s expense. Since Apple’s profits are often hundreds of dollars per phone, building domestically, in theory, would still give the company a healthy reward.

But such calculations are, in many respects, meaningless because building the iPhone in the United States would demand much more than hiring Americans — it would require transforming the national and global economies. Apple executives believe there simply aren’t enough American workers with the skills the company needs or factories with sufficient speed and flexibility. Other companies that work with Apple, like Corning, also say they must go abroad.

Manufacturing glass for the iPhone revived a Corning factory in Kentucky, and today, much of the glass in iPhones is still made there. After the iPhone became a success, Corning received a flood of orders from other companies hoping to imitate Apple’s designs. Its strengthened glass sales have grown to more than $700 million a year, and it has hired or continued employing about 1,000 Americans to support the emerging market.

But as that market has expanded, the bulk of Corning’s strengthened glass manufacturing has occurred at plants in Japan and Taiwan.

“Our customers are in Taiwan, Korea, Japan and China,” said James B. Flaws, Corning’s vice chairman and chief financial officer. “We could make the glass here, and then ship it by boat, but that takes 35 days. Or, we could ship it by air, but that’s 10 times as expensive. So we build our glass factories next door to assembly factories, and those are overseas.”

Corning was founded in America 161 years ago and its headquarters are still in upstate New York. Theoretically, the company could manufacture all its glass domestically. But it would “require a total overhaul in how the industry is structured,” Mr. Flaws said. “The consumer electronics business has become an Asian business. As an American, I worry about that, but there’s nothing I can do to stop it. Asia has become what the U.S. was for the last 40 years.”

Middle-Class Jobs Fade

The first time Eric Saragoza stepped into Apple’s manufacturing plant in Elk Grove, Calif., he felt as if he were entering an engineering wonderland.

It was 1995, and the facility near Sacramento employed more than 1,500 workers. It was a kaleidoscope of robotic arms, conveyor belts ferrying circuit boards and, eventually, candy-colored iMacs in various stages of assembly. Mr. Saragoza, an engineer, quickly moved up the plant’s ranks and joined an elite diagnostic team. His salary climbed to $50,000. He and his wife had three children. They bought a home with a pool.

“It felt like, finally, school was paying off,” he said. “I knew the world needed people who can build things.”

At the same time, however, the electronics industry was changing, and Apple — with products that were declining in popularity — was struggling to remake itself. One focus was improving manufacturing. A few years after Mr. Saragoza started his job, his bosses explained how the California plant stacked up against overseas factories: the cost, excluding the materials, of building a $1,500 computer in Elk Grove was $22 a machine. In Singapore, it was $6. In Taiwan, $4.85. Wages weren’t the major reason for the disparities. Rather it was costs like inventory and how long it took workers to finish a task.

“We were told we would have to do 12-hour days, and come in on Saturdays,” Mr. Saragoza said. “I had a family. I wanted to see my kids play soccer.”

Modernization has always caused some kinds of jobs to change or disappear. As the American economy transitioned from agriculture to manufacturing and then to other industries, farmers became steelworkers, and then salesmen and middle managers. These shifts have carried many economic benefits, and in general, with each progression, even unskilled workers received better wages and greater chances at upward mobility.

But in the last two decades, something more fundamental has changed, economists say. Midwage jobs started disappearing. Particularly among Americans without college degrees, today’s new jobs are disproportionately in service occupations — at restaurants or call centers, or as hospital attendants or temporary workers — that offer fewer opportunities for reaching the middle class.

Even Mr. Saragoza, with his college degree, was vulnerable to these trends. First, some of Elk Grove’s routine tasks were sent overseas. Mr. Saragoza didn’t mind. Then the robotics that made Apple a futuristic playground allowed executives to replace workers with machines. Some diagnostic engineering went to Singapore. Middle managers who oversaw the plant’s inventory were laid off because, suddenly, a few people with Internet connections were all that were needed.

Mr. Saragoza was too expensive for an unskilled position. He was also insufficiently credentialed for upper management. He was called into a small office in 2002 after a night shift, laid off and then escorted from the plant. He taught high school for a while, and then tried a return to technology. But Apple, which had helped anoint the region as “Silicon Valley North,” had by then converted much of the Elk Grove plant into an AppleCare call center, where new employees often earn $12 an hour.

There were employment prospects in Silicon Valley, but none of them panned out. “What they really want are 30-year-olds without children,” said Mr. Saragoza, who today is 48, and whose family now includes five of his own.

After a few months of looking for work, he started feeling desperate. Even teaching jobs had dried up. So he took a position with an electronics temp agency that had been hired by Apple to check returned iPhones and iPads before they were sent back to customers. Every day, Mr. Saragoza would drive to the building where he had once worked as an engineer, and for $10 an hour with no benefits, wipe thousands of glass screens and test audio ports by plugging in headphones.

Paydays for Apple

As Apple’s overseas operations and sales have expanded, its top employees have thrived. Last fiscal year, Apple’s revenue topped $108 billion, a sum larger than the combined state budgets of Michigan, New Jersey and Massachusetts. Since 2005, when the company’s stock split, share prices have risen from about $45 to more than $427.

Some of that wealth has gone to shareholders. Apple is among the most widely held stocks, and the rising share price has benefited millions of individual investors, 401(k)’s and pension plans. The bounty has also enriched Apple workers. Last fiscal year, in addition to their salaries, Apple’s employees and directors received stock worth $2 billion and exercised or vested stock and options worth an added $1.4 billion.

The biggest rewards, however, have often gone to Apple’s top employees. Mr. Cook, Apple’s chief, last year received stock grants — which vest over a 10-year period — that, at today’s share price, would be worth $427 million, and his salary was raised to $1.4 million. In 2010, Mr. Cook’s compensation package was valued at $59 million, according to Apple’s security filings.

A person close to Apple argued that the compensation received by Apple’s employees was fair, in part because the company had brought so much value to the nation and world. As the company has grown, it has expanded its domestic work force, including manufacturing jobs. Last year, Apple’s American work force grew by 8,000 people.

While other companies have sent call centers abroad, Apple has kept its centers in the United States. One source estimated that sales of Apple’s products have caused other companies to hire tens of thousands of Americans. FedEx and United Parcel Service, for instance, both say they have created American jobs because of the volume of Apple’s shipments, though neither would provide specific figures without permission from Apple, which the company declined to provide.

“We shouldn’t be criticized for using Chinese workers,” a current Apple executive said. “The U.S. has stopped producing people with the skills we need.”

What’s more, Apple sources say the company has created plenty of good American jobs inside its retail stores and among entrepreneurs selling iPhone and iPad applications.

After two months of testing iPads, Mr. Saragoza quit. The pay was so low that he was better off, he figured, spending those hours applying for other jobs. On a recent October evening, while Mr. Saragoza sat at his MacBook and submitted another round of résumés online, halfway around the world a woman arrived at her office. The worker, Lina Lin, is a project manager in Shenzhen, China, at PCH International, which contracts with Apple and other electronics companies to coordinate production of accessories, like the cases that protect the iPad’s glass screens. She is not an Apple employee. But Mrs. Lin is integral to Apple’s ability to deliver its products.

Mrs. Lin earns a bit less than what Mr. Saragoza was paid by Apple. She speaks fluent English, learned from watching television and in a Chinese university. She and her husband put a quarter of their salaries in the bank every month. They live in a 1,080-square-foot apartment, which they share with their in-laws and son.

“There are lots of jobs,” Mrs. Lin said. “Especially in Shenzhen.”

Innovation’s Losers

Toward the end of Mr. Obama’s dinner last year with Mr. Jobs and other Silicon Valley executives, as everyone stood to leave, a crowd of photo seekers formed around the president. A slightly smaller scrum gathered around Mr. Jobs. Rumors had spread that his illness had worsened, and some hoped for a photograph with him, perhaps for the last time.

Eventually, the orbits of the men overlapped. “I’m not worried about the country’s long-term future,” Mr. Jobs told Mr. Obama, according to one observer. “This country is insanely great. What I’m worried about is that we don’t talk enough about solutions.”

At dinner, for instance, the executives had suggested that the government should reform visa programs to help companies hire foreign engineers. Some had urged the president to give companies a “tax holiday” so they could bring back overseas profits which, they argued, would be used to create work. Mr. Jobs even suggested it might be possible, someday, to locate some of Apple’s skilled manufacturing in the United States if the government helped train more American engineers.

Economists debate the usefulness of those and other efforts, and note that a struggling economy is sometimes transformed by unexpected developments. The last time analysts wrung their hands about prolonged American unemployment, for instance, in the early 1980s, the Internet hardly existed. Few at the time would have guessed that a degree in graphic design was rapidly becoming a smart bet, while studying telephone repair a dead end.

What remains unknown, however, is whether the United States will be able to leverage tomorrow’s innovations into millions of jobs.

In the last decade, technological leaps in solar and wind energy, semiconductor fabrication and display technologies have created thousands of jobs. But while many of those industries started in America, much of the employment has occurred abroad. Companies have closed major facilities in the United States to reopen in China. By way of explanation, executives say they are competing with Apple for shareholders. If they cannot rival Apple’s growth and profit margins, they won’t survive.

“New middle-class jobs will eventually emerge,” said Lawrence Katz, a Harvard economist. “But will someone in his 40s have the skills for them? Or will he be bypassed for a new graduate and never find his way back into the middle class?”

The pace of innovation, say executives from a variety of industries, has been quickened by businessmen like Mr. Jobs. G.M. went as long as half a decade between major automobile redesigns. Apple, by comparison, has released five iPhones in four years, doubling the devices’ speed and memory while dropping the price that some consumers pay.

Before Mr. Obama and Mr. Jobs said goodbye, the Apple executive pulled an iPhone from his pocket to show off a new application — a driving game — with incredibly detailed graphics. The device reflected the soft glow of the room’s lights. The other executives, whose combined worth exceeded $69 billion, jostled for position to glance over his shoulder. The game, everyone agreed, was wonderful.

There wasn’t even a tiny scratch on the screen.

David Barboza, Peter Lattman and Catherine Rampell contributed reporting.

This article has been revised to reflect the following correction:
Correction: January 24, 2012

An article on Sunday about the reasons iPhones are largely produced overseas omitted a passage immediately after the second continuation, from Page A22 to Page A23, in one edition. The full passage should have read: “Another critical advantage for Apple was that China provided engineers at a scale the United States could not match. Apple’s executives had estimated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPhones. The company’s analysts had forecast it would take as long as nine months to find that many qualified engineers in the United States.”

2012-01-24T11:44:00.000-08:00

The Problem Started With Housing...... And It Remains With Housing!!

In today's Business Insider, Yves Smith explains what is happening in the housing market and why Obama has done nothing to fix the problem. Oh yes, once again, the banks are screwing everybody!!

"Paul Krugman Makes Housing Call He Will Likely Come to Regret

I’m behind on commenting on various opinion pieces, thanks to a mild case of food poisoning (ugh), but I wanted to take note of Paul Krugman’s current New York Times op ed, “Is Our Economy Healing?”
As an aside, Krugman has written a lot of good pieces lately that we’ve linked to on income inequality the disastrous austerian policies in Europe, and Republican derangement and duplicity. But he tends to cut the administration far more slack than it deserves.
His current piece voices cautious optimism on the prospects for the economy based on some strengthening in various economic indicators. But astonishingly, the core of his argument rests on the outlook for the housing market:

But the bubble began deflating almost six years ago; house prices are back to 2003 levels. And after a protracted slump in housing starts, America now looks seriously underprovided with houses, at least by historical standards.
So why aren’t people going out and buying? Because the depressed state of the economy leaves many people who would normally be buying homes either unable to afford them or too worried about job prospects to take the risk.
But the economy is depressed, in large part, because of the housing bust, which immediately suggests the possibility of a virtuous circle: an improving economy leads to a surge in home purchases, which leads to more construction, which strengthens the economy further, and so on. And if you squint hard at recent data, it looks as if something like that may be starting: home sales are up, unemployment claims are down, and builders’ confidence is rising.

Implicit in his discussion is that buyers are now irrationally pessimistic, and once the economy looks stronger, housing purchases will pick up.
Ahem. Let me use my rendering of a chart Krugman used in discussing oil prices in 2008:

See the “excess inventories”? If prices are artificially high, you expect to see unusually high inventories. As we have written on this blog, there is a remarkably large number of houses that will probably be liquidated, ex a radical change in housing policy. Top analyst Laurie Goodman pegs “shadow inventory” at between 8 and 10 million houses; our Michael Olenick came up with an estimate just below 10 million.
There are large numbers of homes NOW where the borrowers are severely delinquent, and in some cases have been foreclosed on, yet the bank has not taken the house (usually on behalf of a trust in a mortgage securitization). Why? It would be nice to believe that the servicers are trying to help investors by slowly bleeding the housing overhang into the market, but this instead appears to be a cynical effort to milk investors of the maximum amount of fees. Even when a borrower languishes in the zombie land of non-payment, the servicer keeps ringing up his servicing fee and various other charges, such as late fees, broker price opinions (sometimes impermissibly charged to both the borrower and the investor). He eventually pays himself back from the sale of the house.
Now there are also reasons to question whether we will return to historical patterns of homeownership. High unemployment among recent graduates and the great difficulty unemployed middle aged people have in finding work means we may see a sustained reversal of household formation rates, and it may even go as far as leading to larger average household sizes. Extended families living together used to be not all that uncommon; it may go from being a sign of desperation to being seen as a smart way to economize and conferring other benefits (sharing child care duties, for instance).
Finally, the 30 year mortgage does not fit with job tenures that now (per a Yankelovich survey commissioned by McKinsey in the mid 2000s) of under 3 years. The traditional mortgage assumes that the borrower has a rising, or at least stable, income over his working years. We now have shorter jobs and longer periods of unemployment, which sap savings and make defaults more likely. And that’s before you factor in that the mortgage was normally a household’s top priority payment, but the inability to discharge student debt in bankruptcy effectively makes it “senior” to mortgage payments. All this suggests that it may be necessary to go against the pet wishes of the mortgage industrial complex and implement housing policies that do more to promote rentals.
It would be better if Krugman were right, but the monumental legal mess in the housing market, along with the terrible incentives built into the servicing business model, means a housing recovery is likely to be much slower in coming than he hopes."

2012-01-22T14:10:00.000-08:00

We Have Outrageous Health Care Costs!!

If you want to understand why U.S. health care costs are on track to bankrupt the country, Google this; International Federation of Health Plans, and then look at their 2010 Comparative Price Report. You will find it stunning!!

2012-01-22T12:50:00.000-08:00

More Evidence That Obama Has No Idea How The World Economy Works!!

Today's New York Times has an excellent recount of how the world economy works using Apple as an example. What strikes me as interesting is exactly the same complaints were made when a lot of production moved South of the border to Mexico. Remember when Maquiladoras (sp) were all the rage??

In any case, here is the exchange between Steve Jobs and Barack Obama last February that starts the New York Times story. ( It is well worth your time to find it and read all of it.) After three years as President, there is no excuse for Obama to ask such a stupid question.

"When Barack Obama joined Silicon Valley’s top luminaries for dinner in California last February, each guest was asked to come with a question for the president.

The iEconomy

An Empire Built Abroad

Articles in this series are examining challenges posed by increasingly globalized high-tech industries.

Multimedia

The iPhone Economy

But as Steven P. Jobs of Apple spoke, President Obama interrupted with an inquiry of his own: what would it take to make iPhones in the United States?

Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.

Why can’t that work come home? Mr. Obama asked.
Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said, according to another dinner guest."

2012-01-21T15:55:00.000-08:00

Can Somebody Explain This?........Please!

*We have about 45,000 miles of Interstate Highway. 80% of all freight moves on that system. Roughly 75% of the Interstate system is in dreadful condition. Company after company reports that they are losing millions of dollars in delayed shipping, inventory and delivery costs.

*The U.S. Society of Engineers say we have 10,000 bridges that need major repair or replacement.

*We have tens of thousands of miles of pipeline moving petroleum products and gas. Many are over fifty years old and need repair and replacing.

*We have tens of thousands of water pipelines, some of which are over 150 years old.

*We have hundreds and hundreds of miles of dikes that need repairing.

*We have a dozen ports that need updating to handle deep draft ships.

*We have over 25,000 cities and towns, and everyone of them is in desperate need of street repairs.

*We have 100's of airports in need of updating and expansion.

We can not escape these costs. They are not Republican costs, and they are not Democrat costs. They are American costs, period.

We obviously do not have the cash on hand to handle all of these tasks. But the world is willing to lend us the money and do it at about a 1% interest rate. It will never get lower.

We could put millions of Americans back to work immediately. They would spend their paychecks in small businesses (and large), and every one of those dollars has what economists call a multiplier effect, e.g. each dollar will create about another $1.50.

We would end the costs of unemployment insurance, food stamps and a bunch of other social costs.

We would increase our tax income since all of those jobs would pay income taxes.

We would improve the efficiency and effectiveness of our distribution system immensely.

It is a win, win, win situation all around. But the Republicans refuse to recognize the problem or endorse the solution. I have just read a preview of Obama's next speech and there is some vague reference to infrastructure somewhere toward the end.

Can anybody explain to me why we are not doing this now???

REMEMBER!! We will have to spend the money sooner or later, and every day we delay increases the final cost because the repairs will be more expensive and the interest costs will be higher and higher.

2012-01-20T19:39:00.000-08:00

An Update!

Awhile back, I listed my favorite restaurants west of the Mississippi, and I need to modify that list.

Los Olivos Cafe has been a long time favorite. However, they have a new chef. We were there for dinner the first week he was on the job. The result with one of our favorites was not good. But it was his first week so it is only fair to give him a second chance.
So, about three months after our first encounter with the new chef, we tried again. Understand that it involves a 250 mile one way trip from Southern California to the Santa Ynez Valley.

The menu has been significantly changed, and it is now half pizza. Well , that may enchant rich gentlemen farmers in the Santa Ynez Valley, but it is not worth driving all day to eat.

So the Los Olivos Cafe is off my list.

But the good news is that I have two replacements. They are both in Palm Springs. One is Zen and the food is inventive and delicious. The other is Trio where the menu is also extremely thoughtful. However, be warned about Trio. The noise is extreme, but I guess that is part of the charm.

Enjoy.

2012-01-19T16:51:00.000-08:00

And One More Thing!!!

Go back to that last post, The Jobs Council, and see if you can find a single person from Obama's own Small Business Administration????? What a bunch of crap!!!!!!

2012-01-19T16:35:00.000-08:00

Here Is The Evidence That The Cowardly Lion Has Absolutely No Understanding Of How The U.S. Economy Works!!

Follow the bouncing ball here.

There are 15 million Americans without jobs today.

There are 15 million Americans underemployed today.

The most important problem facing Obama is jobs, jobs, jobs, jobs!!!

For over 50 years, over 70% of ALL new jobs have been created by small business!!!!!

So Obama appoints a Jobs Council to work on the problem.

Here are the members of that Council!! If you can find anyone remotely involved in a small business, I will put you in my will.

This is truly disgusting!! These people know a lot about fund raising, but I doubt any of them know a damn thing about running a small business!!!

Jeff Immelt, Chair of Jobs Council
CEO, General Electric

Ursala Burns
CEO Xerox

Steve Case
Ceo, Revolution LLC

Christopher Che
CEO Hooven-Dayton

Kenneth I. Chenault
CEO American Express

John Doerr
Kleiner Perkins Caulfield & Byers

Roger Ferguson
CEO TIAA-CREF

Mark Gallogly
Co-founder Centerbridge Partners

Joseph Hansen
President UFCW

Lewis Hay
CEO NextEra Energy

Gary Kelly
CEO Southwest Airlines

Ellen Kullman
CEO DuPont

A. G. Lafley
Former CEO Proctor & Gamble

Eric Lander
MIT

Monica Lozano
CEO ImpeMedia

Jim McNerney
CEO Boeing

Darlene Miller
CEO Permac Industries

Paul Otellini
CEO Intel

Richard Parsons
CEO Citigroup

Antonio Perez
CEO Kodak

Penny Pritzker
CEO Pritsker Realty Group

Brian Roberts
CEO Comcast

Matthew Rose
CEO BNSF Railway

Sheryl Sandberg
CEO Facebook

Richard Trumka
President AFL-CIO

Laura Tyson
UC Berkeley

Robert Wolf
Chairman UBS Bank

2012-01-18T19:56:00.000-08:00

Finally, Some Good News.....
Today's Los Angeles Times has some really good news.

But here is your thought problem for today. What happened about 1980 to cause the epidemic of over weight people??

latimes.com

Obesity rates in U.S. appear to be finally leveling off

After three decades of climbing steadily, obesity rates appear to be stabilizing nationwide. Increases among certain demographic groups are still evident, however.

By Shari Roan, Los Angeles Times
6:34 PM PST, January 17, 2012

After a 30-year, record-shattering rise, U.S. obesity rates appear to be stabilizing.

New statistics cited in two papers report only a slight uptick since 2005 — leaving public health experts tentatively optimistic that they may be gaining some ground in their efforts to slim down the nation.

Many obesity specialists say the new data, from the Centers for Disease Control and Prevention, are a sign that efforts to address the obesity problem — such as placing nutritional information on food packaging and revising school lunch menus — are beginning to have an effect in a country where two-thirds of adults and one-third of children and teens are overweight or obese.

"A good first step is to stop the increase, so I think this is very positive news," said James O. Hill, director of the Center for Human Nutrition at the University of Colorado Health Sciences Center in Denver. "It may suggest our efforts are starting to make a difference. The bad news is we still have obesity rates that are just astronomical."

Historically, there was little change in Americans' sizes from 1960 through 1980. But obesity rates soared through the end of the century, for reasons that are still debated.

The new studies reflect 2009-10 data, the most recent available, from the government's National Health and Nutrition Examination Survey, which examined 6,000 adults and 4,111 children, measuring their body mass index, among other items. Though a number of organizations measure obesity rates, the survey's data are considered among the most accurate.

The statistics showed that more than 35% of U.S. adults (78 million people) are obese, defined as having a body mass index of 30 or greater. That is similar to the 2005-06 rate. Calculated as weight in kilograms divided by height in meters squared, the BMI is not a perfect measure of fatness but is still viewed as the gold standard in assessing population-wide trends.

An additional third of adults are overweight, the analysis found, also similar to the rates in 2005-06.

Likewise, data in children and teenagers from birth to age 19 reflect little change from the survey's 2007-08 data, according to the reports, which were published online Tuesday in the Journal of the American Medical Assn. Almost 17% are obese and 32% are overweight or obese.

But though obesity rates may be flattening overall, increases and disparities can still be found in specific racial and ethnic groups.

Rates have risen to 58.5% among non-Hispanic black women and to nearly 45% among Mexican American women since 2004, for example. And among children and teens, about 21% of Hispanics and 24% of blacks are obese compared with 14% of non-Hispanic whites.

The report also found that gender differences appear to be fading, with percentages of overweight males catching up with or even overtaking those of females.

Among males under 19, obesity rose from 14% in 1999-2000 to 18.6% in the latest survey; in adult men, the rate jumped from 27.5% to 35.5%.

In addition, more adult men are now overweight or obese as compared with women — 73.9% to 63.7%. Severe obesity remains more common in women, however.

"We found no indication that the prevalence of obesity is declining in any group," the authors wrote in one of the papers, which looked at obesity rates among adults.

It's not clear why obesity rates are still rising in some groups while stabilizing in others, said Cynthia L. Ogden, a coauthor of the two papers and a researcher at the CDC. But the best bet of some leading obesity experts is that obesity prevention initiatives in some pockets of the country are paying off.

The Let's Move! program founded by First Lady Michelle Obama has raised national awareness through actions such as persuading Wal-Mart to stock more healthful foods and working with professional sports organizations to create public service announcements encouraging children to exercise.

Certain states, including California, have made obesity prevention a major health goal through measures to reduce access to sugary drinks and high-calorie, unhealthful snacks in schools.

A UCLA study released in November showed obesity rates ticking down in some parts of the state between 2005 and 2010, including a decline of 2.5% in Los Angeles County. And research published last month found obesity rates in New York City children fell 5% between the 2006-07 and 2010-11 school years.

"The places that are making serious changes in the schools and communities can take hope that these changes are starting to have an effect," said Dr. James S. Marks, senior vice president and director of the health group for the Robert Wood Johnson Foundation, a private organization aimed at improving health of Americans.

But, he added, a reduction in obesity rates will probably take many more years and more than the smattering of programs and initiatives so far underway.

The best hope for lowering rates, he said, is to stop people from getting fat to begin with: Experience and studies show that it is difficult for obese adults to permanently shed fat and that children who are already overweight or obese are highly likely to be overweight as adults.

Only one prescription anti-obesity medication is currently approved for long-term use, and researchers have stalled in their efforts to find more. Moreover, most obesity is untreated or under-treated.

Since obesity contributes to joint damage as well as diseases such as diabetes, heart disease and certain cancers, the epidemic truly is a national crisis, said Patrick M. O'Neil, president of the Obesity Society and director of the weight management center at the Medical University of South Carolina in Charleston.

"Even if the statistics stay at current prevalence rates, I see little good news in that," O'Neil said.

People should look to their own lives and individual experiences, and strive for progress by eating more healthfully and exercising more, he said.

"On a population basis you are trying to turn an aircraft carrier, and it's going to take a long time for it to change," he said.

shari.roan@latimes.com

2012-01-18T14:32:00.000-08:00

Capitalism Revisited...............

By attempting to put Mitt Romney on trial, the three dwarfs are actually putting capitalism on trial. I attempted to explain capitalism in the last rant, but here is John Kay, in a Financial Times opinion piece, saying the same thing from a different perspective.

I particularly liked his observation that you can seldom conduct real experiments in economic systems, but politics has given us three perfect examples, and that we should learn from them, e.g., North/South Korea, East/West Germany and Finland/Estonia.

A real market economy ensures that greed is good

By John Kay

Sixty years of division of the Korean peninsula has created two states with very different standards of living in one country. The Korean example is pathological. The division of Germany resulted in two states, both functional in economic terms, but one far richer. The less noticed comparison between the modern economic histories of Finland and Estonia had the same outcome.

There are few controlled experiments in economics, but these are as close as we get, and the results were clear. They were also unexpected. Hard though it is to believe today, in the 1960s many serious commentators on left and right believed that Russian economic progress threatened western hegemony. Those on the left were naively credulous and those on the right victims of paranoid fantasies.

A perhaps apocryphal story tells of a Russian visitor, impressed by the laden shelves in US supermarkets. He asked: “So who is in charge of the supply of bread to New York?” The market economy’s answer – that not only is no one in charge, but it is a criminal offence for anyone to seek that position – is surprising. In the words of the economists Kenneth Arrow and Frank Hahn, “the immediate common sense answer to the question ‘what will an economy motivated by individual greed and controlled by a very large number of different agents look like?’ is probably ‘there will be chaos’.” Our intuition is that a centrally planned allocation of resources will be more efficient than an uncoordinated one. In a market economy, that error constantly leads us to overestimate the economic advantages, and longevity, of large companies.

Our intuitions about the merits of scale and centralisation are generally wrong, partly because a price system can co-ordinate the decentralised decisions of many small companies and households well. Adam Smith’s insight about the invisible hand is often interpreted in this way and modern mathematical economists have established that proposition more precisely. But if co-ordination were the only strength of the market economy, a computer could do that job equally well. Computers are very good at processing information.
But the prices and entrepreneurs of the market economy are much better at eliciting the information, on preferences and products, needed to make the calculations. Prices, and entrepreneurs, manage the market’s process of discovery. A functioning market economy allows endless small-scale experimentation. When such experiments succeed, they are quickly imitated: when they fail, as experiments usually do, they are abandoned. Centralised economies, lacking this disciplined pluralism, experimented too rarely: when they did, they typically implemented on too large a scale. They often lacked honest feedback on performance. Subordinates had good reason to tell the great leader what he wanted to hear. We see the same mechanisms at work in our large corporations.

But what of profit? North Korea is hardly free of the profit motive. The Kim dynasty and the cliques around it may profess disdain for capitalism, but they understand the goal of personal enrichment as well as any Wall Street Master of the Universe. The difference between North Korea and the US is not that one society offers more scope for greed than the other. In both countries, as in many others, there are greedy people and many who are not, and those who are greedy are disproportionately represented in the controlling elite.

The difference lies in the channels of greed – the degree to which the quest for profit is directed towards the creation of new wealth rather than the appropriation of wealth already created by other people.
A successful market economy emphasises the former and restricts the latter through rules and institutions, in a structure that has evolved slowly and requires constant defence against those who would use economic and political power to subvert it. Success or failure in that endeavour is the central explanation for why some societies are rich and others poor. Crony capitalism is very different from the market economy.

2012-01-18T13:21:00.000-08:00

Let's Get Something Straight!!

As you know, politicians are frequently willing to distort facts, and that is certainly the case with all the crap being spouted about Bain Capital. Some of it is from ignorance (Perry) and some of it is plain deceit (Gingrich).

In any case, it is very, very important for you to know the facts, so here goes. Every economy is constantly changing so the players have to change. Some do it brilliantly, i.e., IBM, Dayton Hudson, while some do it slowly, Wal-Mart, Hewlett-Packard, and some fail completely, i.e. Kodak, Borders.

Some companies manage the change internally with existing managers. IBM has done that brilliantly, first with outside managers, and then with carefully selected and promoted insiders. But sometimes, the change management has to come from outside the company, and that is what companies like McKinsey, the Boston Consulting Group, Bain, et al. do. Walter Bain decided it might be a good idea to buy into the company and then stay around to see the recommendations actually implemented.

And that is what Mitt Romney did to get extremely rich. The idea of Creative Destruction is so important to understand that I included a number of examples in The Great Recession Conspiracy, and I am including that section of the book below.

While I am in complete agreement with the idea of change as important part of economic life, the question of who gets what is a separate question. There is a concept in wide use called carry interest that is outrageously inappropriate, but is completely legal. It is a section of the tax code that undoubtedly was created some special interests. Carry interest is extremely complex and should be abolished. And Mitt got a lot of his wealth from this tax dodge

So here is the economy really works.

New Industries: If the members of an economyare going to get richer (improve their lot) over time, then they must createmore goods and services (GNP) with the same, or a lesser, amount of availableresources. That means there is acontinuing need to experiment with finding new ways to do things. Each successful new project means that itmust dislodge an older way of doing things. The economist, Joseph Schumpeter called this process, “CreativeDestruction”, and that is a pretty good description, but a more accuratedescription might be “Creative Disruption”. Airplane travel did not destroy travel by train, but it certainlydisrupted it. The Internet has notdestroyed newspapers, but it has certainly have disrupted their businessmodel. So perhaps a better descriptionmight be “Creative Relocation”.

Creative Innovation: Here are three examples, one small and two large, ofindividuals finding a new way to do something better, and in the process,replacing an older method.

EncyclopaediaBritannica was a staple in American homes for 231 years. The bound volumes were sold to families bydoor-to-door salespeople and the books cost about $1,250 a set. In 1989, Britannica had a sales forcenumbering 2,300 and revenues of about $650 million.

In1993, Microsoft approached Britannica about including the Encyclopedia inMicrosoft’s Windows software. Britannicaturned them down flat, so Microsoft went to encyclopedia publisher Funk &Wagnalls and produced Encarta 99 Encyclopedia. Encarta was given away free with every copy of Windows.

Today,Britannica has less than 400 employees and seems to be tip- toeing aroundbankruptcy. Today, millions of familieshave access to an encyclopedia compared to a few thousand families in the pastwhen Britannica volumes were the only game in town. A greatly improved, less costly method ofdelivering information came into being and replaced an old, less efficientmethod. Indeed, creative relocation atits best.

Butthere is more to the encyclopedia story. In 2000, Jerry Wales and Larry Sanger had the idea for a FREE online encyclopedia. They called it Wikipedia and it has been arousing success. (Wiki for a collaborative effort and pedia as the obviouspart.) It currently contains 2,756,219 distinct articles, all of which havebeen written by volunteers. Wikipedia isnow available in nineteen different languages besides English. Wikipedia articles are continually update,something you can’t do with paper or plastic disk encyclopedias. Just how successful has Wikipedia been? In 2008, Wikipedia had 684 millionvisitors! (And no trees were harmed increating Wikipedia.)

Creativerelocation usually replaces an old way of doing things with a newer, bettermethod of doing the job. And, as theencyclopedia story makes clear, it is an unending process.

The Swiss Watch Industry: Now let’s try a biggerexample. At the end of World War II,Swiss companies made about 80% of all the watches made in the world. It was a very profitable and complacentbusiness. But during World War II, the British government needed inexpensive,but accurate timing devices to use in aerial bombs. You can understand the requirements; thetiming devices had to be cheap since they would not be making a round trip andthey had to be accurate because when the bombs exploded was critical to theirsuccessful use.

Todo that job, the pin lever mechanism was developed. It was inexpensive and accurate.

By1950, U.S. Time Company was selling a watch with a pin lever mechanism. By the 1960’s, one out of every three watchessold in the U.S. was a Timex, and the Swisswatch industry began a decline that lasted for decades.

However,traditional jewelry stores refused to handle Timex watches because they wereseen as “cheap”. Timex had to find otheroutlets for its products, and they did in a very big way. Timex turned to mass merchandisers and othernon-traditional outlets for watches. Bythe mid 1970’s Timex watches were being sold in over a quarter milliondifferent outlets.

Thisis a clear example of a new technology replacing an old technology and CreativeRelocation at its best.

Butwait, there is more to the watch story. In the 1970s’, some Japanese engineers were assigned the task of makingthe readout mechanisms in medical measuring instruments more legible in normalroom lighting conditions. Their work leddirectly to Light Emitting Diodes (LED) technology and the age of digitalwatches began. Digital watches decimatedthe world watch industry. Every watchmanufacturer in the U.S., except one, went out ofbusiness. Another example of CreativeRelocation at work.

Butthere is even more to the world watch story. By 1983, the Swiss share of the world watch market was less than30%. In a move born of desperation, theSwiss government forced the remaining two large Swiss watch makers to merge andbring in a new management as a condition for a government backed loan.

Thenew management re-defined what a watch is and decided that it was more of afashion accessory than a time piece. Thus, a whole new line of “fashion accessories” were designed, and theSwatch was born. As you know, the Swatchhas been a huge success. The Swiss shareof the world wide watch business is now around 60%. So we have one more example of CreativeRelocation at work and individuals inventing new processes to do a familiarjob.

Becertain that there is pain and discomfort in this process of CreativeRelocation just described. People losttheir jobs. Investors lost theirinvestments. Governments lost taxrevenues. Companies went bankrupt orsimply closed down. There are real coststo Creative Relocation, but the idea is “No pain, no gain”.

Improved Productivity: And one more story about CreativeRelocation. For hundreds of years,people bought books at book stores. In1995, a thirty-one year old man named Jeff Bezos incorporated a new company hecalled Amazon.com. His purpose was tovastly improve in the business of selling books and do it online. The success of Amazon.com has been huge. In 2008, Amazon.com had total sales of$19,166 Billion, had 20,700 employees (all new jobs) and has averaged about 30%annual growth in the past three years alone. It now serves 88 million customers.

Byway of contrast, Barnes & Noble is the top selling book seller through 799traditional book stores in fifty states. In 2007, B & N had total sales of $5,411 Billion, had about 40,000employees, and is currently teetering on the edge of bankruptcy.

Tobetter understand the positive effects of Creative Relocation, consider this;an average employee at Amazon.com produces $912,000 in sales annually. An employee at B & N produces about$130,000 annually. Jeff Bezos hasbrought incredible efficiency to the book selling business and since his book“store” is open 24 hours a day, seven days a week, he has brought unprecedentedconvenience to all of his customers. Joseph Schumpeter would surely be proud of Jeff Bezos.

Butalways remember that Creative Relocation has a down side. If B & N goes bankrupt, there will be 799stores standing empty and 40,000 people will have to find new jobs. Yes, progress has a price.

Inany event, you have now seen how the Expansion Phase of the Business Cyclecreates new industries, improves productivity and creates new jobs.

AND THOSE ARE THE FACTS!!

2012-01-17T18:14:00.000-08:00

Wisconsin???????

I am sure you know that there is a great brohaaaa going on in Wisconsin between the Governor and the public employee's unions. While I don't endorse the Governor's stupid hard ball tactics, he does raise a question that needs some serious and sober consideration.

For the past twenty-thirty years, public employee's unions have put extreme pressure on legislatures everywhere in the developed world for every increasing benefits. When industrial unions demand increases, the money can all be tied back to some sort of improvements in profits. Not so with public employee unions.

So we find hair dressers in Greece who can retire at age 50 with full benefits because they work in a "dangerous profession". And we find prison guards in California who can retire with full pensions at 50 while they make as much as $150,000 a year. And neither job needs higher education.

And everywhere, every year, the legislature "paid" the demands by kicking the can down the road, and guess what, we are now at the end of the road.

I watched this process from the inside of the California State University system for a quarter of a century. Every time the faculty (and others) needed a raise, the legislature put it off by sweetening the retirement program. They figured, rightly, that some other future legislature would have to figure out how to pay the bill when it comes due.

Now we need to figure out what needs doing to fix the situation, but we need to do it with civil tones and reason able behavior. None of which I can see anywhere.

2012-01-17T11:17:00.000-08:00

Another Travesty In Obamacare

Almost 500,000 Americans die every year from smoking related illnesses, i.e, lung cancer, heart disease, and chronic obstructive pulmonary disease. This outrage costs us almost $100 BILLION every year. In spite of this outrage, there is NOTHING in Obamacare to stop, or even slow down, this outrage.

So if you are a smoker trying to quit, you have my heartfelt sympathy, and my suggestion that you get help here. http://www.becomeanex.org/
That's more help than you got from Obamacare.

And think about it every time you see Boehner smoking a cigarette (and then look to see who are his major campaign finance contributors).

2012-01-17T10:37:00.000-08:00

More On Cost/Benefit Analysis

The engineering firm Parsons is in charge of the planning for the California High Speed Rail Project, a project beloved by both Barack Obama and Jerry Brown. The project is in deep trouble since the COST has more than tripled since it was originally proposed. Here is how Parsons has adjusted the BENEFIT part of the equation to justify the tripled costs.

"Parsons said the high speed rail system could carry 116 million passengers a year, based on running trains with 1,000 seats both north and south EVERY FIVE MINUTES, 19 hours a say and 365 days a year. The study assumes the trains would be 70% full on average." (Los Angeles Times January 17, 2012)

Read that again. EVERY FIVE MINUTES. 700 passengers would travel on the high speed train every five minutes 19 hours a day (basically 11PM to 4AM)!!! And note that ticket prices are not specified.

And just so you know. Parsons contributed heavily to the political campaign for $9.9 billion bond measure in 2008.

Get ready for a high speed train to nowhere and hundreds of closed schools in California.

2012-01-16T22:00:00.000-08:00

This Is What Makes People Crazy About Governments!!

Pythagoras' Theorem: .......................................               24 words.

Lord's prayer:.....................................................               66 words.

Archimedes' Principle: ....................................                67 words.

Ten Commandments: ........................................              179 words.

Gettysburg address: ..........................................             286 words.

US Declaration of Independence : ...................                1,300 words.

US Constitution with all 27 Amendments: ...                 7,818 words.

EU regulations on the sale of cabbages:.......                26,911 words.

2012-01-15T14:44:00.000-08:00

A New Thing Worries Me About Mitt
He is starting to degrade Europe as a place to live, as in Obama wants to turn the U.S. into Europe. That is really strange since he lived in France for over two years during his recruiting for the Mormon Church. I have lived for extended periods in France, the U.K., Spain and Portugal. While they are different from the U.S., they are not horrible places to live (Well, maybe the U.K.). In fact, there are a number of dimensions where Europe exceeds the U.S., i.e, live span in the EU exceeds the life span in the U.S. by years.

Nicholas Kristof examines the same topic in today's New York Times. (edited by me)

January 14, 2012

Why Is Europe a Dirty Word?

By NICHOLAS D. KRISTOF

PARIS
QUELLE horreur! One of the uglier revelations about President Obama emerging from the Republican primaries is that he is trying to turn the United States into Europe.

“He wants us to turn into a European-style welfare state,” warned Mitt Romney. Countless versions of that horrific vision creep into Romney’s speeches, suggesting that it would “poison the very spirit of America.”
Rick Santorum agrees, fretting that Obama is “trying to impose some sort of European socialism on the United States.”
Who knew? Our president is plotting to turn us into Europeans. Imagine:

Look out: another term of Obama, and we’ll all greet each other with double pecks on the cheek.
Yet there is something serious going on. The Republican candidates unleash these attacks on Obama because so many Americans have in mind a caricature of Europe as an effete, failed socialist system. As Romney puts it: “Europe isn’t working in Europe. It’s not going to work here.”
(Monsieur Romney is getting his comeuppance. Newt Gingrich has released an attack ad, called “The French Connection,” showing clips of Romney speaking the language of Paris. The scandalized narrator warns: “Just like John Kerry, he speaks French!”)

But the basic notion of Europe as a failure is a dangerous misconception. The reality is far more complicated.
What is true is that Europe is in an economic mess. Quite aside from the current economic crisis, labor laws are often too rigid, and the effect has been to make companies reluctant to hire in the first place. Unemployment rates therefore are stubbornly high, especially for the young. And Europe’s welfare state has been too generous, creating long-term budget problems as baby boomers retire.

“The dirty little secret of European governments was that we lived in a way we couldn’t afford,” Sylvie Kauffmann, the editorial director of the newspaper Le Monde, told me. “We lived beyond our means. We can’t live this lie anymore.”

Yet Kauffmann also notes that Europeans aren’t questioning the basic European model of safety nets, and are aghast that Americans tolerate the way bad luck sometimes leaves families homeless.
It’s absurd to dismiss Europe. After all, Norway is richer per capita than the United States. Moreover, according to figures from the United States Bureau of Labor Statistics, per-capita G.N.P. in France was 64 percent of the American figure in 1960. That rose to 73 percent by 2010. Zut alors! The socialists gained on us!
Meanwhile, they did it without breaking a sweat. The Bureau of Labor Statistics says that employed Americans averaged 1,741 hours at work in 2010. In France, the figure was 1,439 hours.
If Europe was as anticapitalist as Americans assume, its companies would be collapsing. But there are 172 European corporations among the Fortune Global 500, compared with just 133 from the United States.
Europe gets some important things right. It has addressed energy issues and climate change far more seriously than America has. It now has more economic mobility than the United States, partly because of strong public education systems. America used to have the highest proportion of college graduates in the world; now France and Britain are both ahead of us.

Back in 1960, French life expectancy was just a few months longer than in the United States, according to the Organization for Economic Cooperation and Development. By 2009, the French were living almost three years longer than we were.

So it is worth acknowledging Europe’s labor rigidities and its lethargy in resolving the current economic crisis. Its problems are real. But embracing a caricature of Europe as a failure reveals our own ignorance — and chauvinism.

2012-01-14T17:13:00.000-08:00

Here Is Another Example!

When he was elected, Obama took six months to study the war in Afghanistan. The Republicans derided him for being unable to make up his mind. I was very happy he was taking his time to truly understand the situation. It was a marked contrast with George Bush's shooting from the lip.

In the end, Obama extracted a promise from his generals that, if he gave them more troops, they would have won the war by 2010.

When that didn't happen, he didn't hold the generals to their promise. All he did was fire (promote) Petraeus and promote a new general. The action of a Cowardly Lion.

Now it turns out the National Intelligence Estimate (NIE), a joint report prepared by the CIA and 15 other intelligence agencies, concludes that we are losing badly in Afghanistan, and that it is unlikely that we can ever "win", whatever that means.

Now here is the best part. He was given an NIE report one year ago that said exactly the same thing.
So he has been given two opportunities to get us out of Afghanistan and he didn't have enough courage to
act on either of them. So more kids die every day and billions of dollars are wasted on a lost cause!

He doesn't seem to understand the Afghanistan bankrupted the Soviet Union and led to its disintegration. He doesn't seem to understand that nobody has ever won a war in Afghanistan, and that goes back to Genghis Khan.

A small aside here: When the Cowardly Lion was interviewing all his generals in 2008, I assembled a small panel of friends and asked them what we should do. They were;
A citizen of Pakistan.
An expert in petroleum exploration in Afghanistan.
A former diplomat with extensive experience in Afghanistan.
An academic currently (then) in Afghanistan working on agricultural issues.

Without speaking to each other, they each had the same advice; get the hell out of there. It is a collection of waring stone age tribes and it is not a place worth a single life or a single dollar. I sent that advice to Obama and Biden, to no avail of course. Just so you know.

2012-01-14T13:37:00.000-08:00

Here Is What I (and a precious few others) Have Been Saying All Along!!

Only Henry Blodget says it more elegantly.

HERE'S WHAT'S WRONG WITH THE ECONOMY... (And How To Fix It)

Henry Blodget | Oct. 1, 2011, 11:14 AM | 28,906 | 123

The United States is in a very tough spot, economically and politically.The 25-year debt-fueled boom of 1982-2007 has ended, and it has left the country with a stagnant economy, massive debts, high unemployment, huge wealth inequality, an enormous budget deficit, and a sense of entitlement engendered by a half-century of prosperity.
After decades of instant gratification, Americans have also come to believe that all problems can be solved instantly, if only the right leaders are put in charge and the right decisions are made. And so our government has devolved into a permanent election campaign, in which incumbents blame each other for the current mess, and challengers promise change.
The trouble is that our current problems cannot be solved with a simple fix. They also cannot be solved quickly. It took 25 years for us to get to this point, and it will likely take us at least a decade or two to work our way out of it, even if we make the right decisions.
So it is time that we began to face reality.
THE PROBLEM: TOO MUCH DEBT

The biggest debt binge in US history, by a mile.

Four years ago, when the debt-fueled boom ended and the economy plunged into recession, most economists and politicians misdiagnosed the problem.They thought we were having just another post-War recession—a serious recession, yes, but a cyclical one, a recession that easy money, government stimulus, and a return of "confidence" could fix.
A handful of economists, meanwhile, argued that the recession was actually fundamentally different—a "balance sheet" recession resulting from a quarter-century-long debt-binge, one that would take a decade or more to fix.
In the past four years, it has become increasingly clear that the latter diagnosis was correct: The US economy is behaving exactly the way other economies have behaved after piling up mountains of debt and eventually going through a financial crisis. It is bumping along with disappointing growth, high unemployment, and, increasingly (and understandably) social unrest.

St. Louis Fed.

Total US debt, including households, companies, and the government. Can you say "$50 Trillion"?

So how do you get out of a "balance sheet" recession triggered by too much debt?You reduce the debt.
More specifically—and here's the critical point—you reduce the debt that is crippling the productive part of the economy. This is the part that creates most of the jobs, prosperity, and wealth. It is also the part that pays for the rest of the economy. That part is the private sector.
What debt is crippling the private sector?
Consumer debt. The household mortgages, credit cards, student loans, and other obligations that is forcing consumers to save and pay down debts instead of spend. Consumers still account for about 70% of the spending in the US economy, and that spending is now constrained. (See chart below—click for larger).
(Consumer spending was also artificially boosted for 25 years by the debt binge, so there's no way we're going back to that era. And we shouldn't strive to).

Calculated Risk

Households are still in debt up to their eyeballs. Here's household debt as a percentage of GDP.

How can consumers reduce their debts?By doing what they are doing right now:

Spending less
Saving more
Paying down debt
Restructuring debt
Defaulting

Importantly, this process takes time. And unless you're willing to just tear up the laws and contracts that have formed the basis of the country's economy for the past two centuries, there's no way to just wave a magic wand and make the debts go away.
Also importantly, this healing process has nothing to do with "restoring confidence." Or "reducing regulation." Even if you could suddenly cast a spell and make all Americans (irrationally) exuberant again, you can't solve a debt problem with more debt. Specifically, you can't reduce the amount you owe by borrowing more.
So where does that leave the economy?
It leaves the private sector, the productive engine of the economy, nursing its way back to health.
And it leaves the public sector—the government—trying to minimize the pain while the private sector heals itself.

US Government Spending

The government also has debt coming out of its eyeballs. Here's government debt as a percent of GDP.

Complicating the US's problem, of course, is that the public sector—the government—has also racked up humongous debts in the past quarter century. For now, those debts are still manageable: Our creditors are still willing to lend us as much as we want, on ever-easier terms. But, eventually, these debts will have to be addressed. Specifically, at some point, the government will have to cut back spending and reduce its debts, at least as a percentage of GDP. Or the entire government will go bust.Those facts should be relatively uncontroversial. Where the disagreement comes is when and where the government should cut back—and how much.
One side argues that the government should cut back immediately and completely, forcing the country to "take its medicine" in one quick dose.
The other side argues that the government should continue spending to support the economy until the private sector is healthy enough to once again carry the torch.
The policies that arise from this argument affect the lives and livelihoods of hundreds of millions of people, so it's not surprising that people feel strongly about them.
THE SOLUTIONS
So what's the best approach to solving our problem?
Here's where philosophical differences come into play. "Best" is, at least somewhat, in the eye of the beholder.
The two extreme solutions are these:

Calculated Risk

Job losses from the peak, by recession. Our current recession is the bottom red line. Click for larger.

Do you want a violent, painful "adjustment" in which many million more Americans are thrown out of work and the incomes and spending of tens of millions of Americans are suddenly reduced, thus crushing American companies at the same time?Then immediately cut government spending from ~20%+ of GDP to the 15% of GDP the government collected in taxes last year and hope (pray) that the resulting dislocation doesn't further wallop GDP (which history suggests it almost certainly will).
Do you want to pretend we don't have serious problems and just keep the government spending vastly more than it takes in every year until our government debt load finally becomes unmanageable and the currency collapses?
Then just keep doing what we've been doing for most of the past 30 years.
For obvious reasons, neither of those two approaches are appealing.
Fortunately, there's a third option, which lies somewhere in the middle.
This solution consists of two parts:

Acknowledging the problem (and the problems with either extreme approach)
Designing an approach that addresses these problems and helps us work our way out of our predicament with the least possible pain, dislocation, and disruption.

THE "ACKNOWLEDGEMENT" PHASE...

Acknowledge the real problem with the economy—that we're in a "balance sheet" recession
Acknowledge that, to fix the economy, consumers need to work off their debts
Acknowledge that trend-line government spending is already too high relative to both GDP and the taxes that the government collects
Acknowledge that, eventually, to fix the latter problem, government spending will have to drop and taxes will have to go up
Acknowledge that, raising taxes and/or cutting spending sharply right now will wallop the economy
Acknowledge that walloping the economy right now will make the problem worse, not better, at least over the short term (consumers will have less money to spend, so the economy will shrink, and tax collection will drop...and then this vicious cycle will repeat. See Greece.)
Acknowledge that making the problem worse right now will increase social frustration and unrest (See Occupy Wall Street). It also won't help the rich get richer.
Acknowledge that denying the problem and continuing runaway government spending indefinitely will eventually lead to a debt and currency crisis (see Argentina)
Acknowledge that, right now, the government can borrow as much money as it wants at historically low interest rates—rates that are getting lower all the time
Acknowledge that the only spending in the economy that the government can directly control is government spending
Acknowledge, therefore, that the "best approach" given our current reality involves two specific goals:

Minimizing short-term pain while giving consumers time to nurse themselves back to health
Getting the long-term deficit under control before the government implodes

THIS LEADS TO A SOLUTION THAT SEEMS THE MOST REASONABLE AND LEAST RISKY AND DISRUPTIVE GIVEN THE CURRENT REALITY...

The government should construct and pass a long-term budget plan that

Minimizes short-term pain, while
Getting the long-term deficit under control

This budget plan should be designed to benefit all Americans, not just special-interest groups or different classes or industries
This budget plan can theoretically include an increase in short-term spending designed to minimize the country's pain, as long as it also includes a decrease in long-term spending (again, right now, the world is willing to lend us as much money as we want)
One form of government spending that unequivocally benefits all Americans is infrastructure spending (when the projects are finished, America has the infrastructure)
Infrastructure spending would help America address another reality that has emerged in the past three decades—the reality that the infrastructure of many countries in Europe, Asia, and other regions has vaulted past that in the US and made the US look like a second-world country
Infrastructure spending would boost employment in one sector of the economy hammered by the recession—construction
Infrastructure spending would involve fewer of the conflicts and misaligned incentives that infuriate many Americans about "entitlement programs," extended unemployment benefits, welfare, food stamps, and other government expenditures that seem to encourage sloth and laziness and "socialism"
The 10-year government budget designed to get us out of our current predicament, therefore, should probably include a massive, multi-year infrastructure spending program.

Robert Johnson

THE NEW DEPRESSION: Click for a tour of a homeless tent city in Lakewood, New Jersey

There, I said it. I have now revealed that I find merit in an approach advocated by one side in the religious war (Keynesians). And this religious war is so emotional that I will immediately be flamed as an enemy of the state, despite also advocating the reduced-spending approach held by the other side (Austerians).But so be it.
I think this is the most reasonable approach to solving our nation's problems. I'll explain more about why in the coming days.
SEE ALSO: Here's Why This Recession Is Fundamentally Different

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Tags: Economy, Great Recession, Homeless, Unemployment, Debt, Government, Republicans, Democrats | Get Alerts for these topics »

2012-01-14T13:24:00.000-08:00

Another Look At U.S. Debt

First, go back and look at the earlier graph on the history of U.S. debt. Then come back and read what Henry Blodget has to say in Business Insider. And note that he agrees that we need a massive spending program to fix our infrastructure before we become a second world country.

A QUESTION FOR PAUL KRUGMAN, Who Keeps Saying Our Huge Debt Mountain Is Of No Concern

Henry Blodget | Jan. 14, 2012, 12:04 PM | 2,962 | 69

Economist Paul Krugman has been right about pretty much everything for the past half-decade, shaming his right-wing critics in the process.He has been right that the U.S. (and world) are in a "liquidity trap" in which super-cheap money isn't saving the economy.
He has been right that fears about hyper-inflation caused by cheap money have been completely overblown.
He has been right that Obama's stimulus was too small to save the economy.
He has been right that interest rates haven't suddenly skyrocketed as our creditors freak out that we're swamped with debt.
And so on.
And now Professor Krugman is arguing that all the fears about our massive debt load are totally overblown. To help our economy, Prof. Krugman says, our government should spend like crazy in the short-term and then work off the debt later.
And when it comes to infrastructure spending, at least, Prof. Krugman is once again almost certainly right.
The U.S.'s public infrastructure is in an embarrassing state of repair. It's also about a half-century behind the state-of-the-art. Spending a few trillion dollars over the next several years to bring our infrastructure up to date would help the country for decades. It would also put millions of Americans back to work and pump trillions of dollars back into the economy. It would help ALL Americans, not just those in specific industries or socio-economic groups. And unlike debt incurred to prop up consumer consumption, the new debt incurred for this infrastructure buildout could, in large part, be secured by the infrastructure itself.

St. Louis Fed

Total US debt-to-GDP is down from the peak but still at an astounding level relative to all previous history--vastly higher than it was after World War 2.

So, Prof. Krugman has made us enthusiastic supporters of the spend-a-few-trillion-on-infrastructure-over-the-next-few-years plan.But we're still not persuaded that our debt problem isn't a huge concern.
Total U.S. debt has dropped modestly from the peak, but it's still fantastically high relative to all previous history (see chart above). And unlike prior periods of high debt, this debt mountain is composed of all major types of debt — consumer, government, and corporate. In previous eras, the huge debts were either private-sector OR government, not both.

US Government Debt

The government portion of our debt has, once, been higher than today's level--after World War 2 (see the spike in mid-century). And we worked it off. But there are many key differences between now and then--namely that TOTAL debt is much higher than it was then.

Prof. Krugman argues that we can ignore our spectacularly huge debts because, in the post-World-War-2 period, the government portion of these debts were even bigger (see second chart).In the two decades after World War 2, which were extraordinarily prosperous, we worked these debts off. And that's just what we're going to do this time, Prof. Krugman argues. So don't worry, be happy.
But to this non-economist, anyway, there appear to be at least several critical differences between now and the post-World-War-2 period:

There was very little consumer debt after World War 2 — in contrast to today, in which consumers have debt coming out of their ears. (See chart below)
World War 2 destroyed much of the world's manufacturing capacity, so we were in the unusual and enviable position of having most of the world's few functioning factories. Put differently, our companies had no competition. So they grew like mad.
The Marshall Plan, our huge loan program to help Europe rebuild, was effectively just massive vendor financing: We loaned demolished European countries billions of dollars with which to buy our products.

St. Louis Fed

See how low household debt was after World War 2? See how high it is now? After World War 2, consumers had tons of "borrowing capacity" to fund purchases. Now, they have none.

Put those three factors together, and the current debt situation seems VERY different from the post-World War 2 period.

Today, our global competitors have not just had their manufacturing capacity demolished (by us). On the contrary, like us, our global competitors have too much manufacturing capacity. So it's hard to see where an explosion of U.S. growth is going to come from — there's no global manufacturing vacuum to fill.
Second, our global customers (Europe, Asia, U.S. consumers, U.S. businesses), already have debt coming out of their ears. We can't lend them more money with which to buy our products, because they have already borrowed way too much money.
Third, our biggest customer group — U.S. consumers — also have debt coming out of their ears. Consumer debt is much, much higher than its historical average, and savings rates are far lower. This suggests it is unlikely that U.S. consumers are suddenly going to go on a drunken borrowing binge again — or simply start borrowing, the way they did after World War 2.

So that brings us to our big question for Prof. Krugman:
Why isn't today fundamentally different from post-World War 2 in key ways that make your comforting analogy flawed?
Namely:

Today there are massive consumer debts that didn't exist after World War 2
Today there are massive European debts that didn't exist after World War 2
Today there is massive global manufacturing over-capacity, whereas after WW2 much of the world's capacity had been destroyed (and needed to be rebuilt)
Today, there are (fewer) massive lending programs like the Marshall Plan with which we loaned customers money with which to buy our products (Admittedly, the Fed and ECB are trying their damndest, but as you point out, they're pushing on a string).

If Prof. Krugman can explain why none of these differences matter, we'll be more persuaded that the U.S. won't be completely screwed by its huge debt load.
In the meantime, although we support the idea of a huge infrastructure spending program, we're worried.
SEE ALSO: Here's What's Wrong With The US Economy (And How To Fix It)

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2012-01-14T12:59:00.000-08:00

The Cowardly Lion Makes Me Crazy!

As far as I can tell, every one knows that small businesses create 70% of all new jobs. This is not a secret! So what does Obama do? Here are two examples of what makes me crazy.

1) He convenes a panel to discuss creating new jobs. He invites the CEO's of Ford, DuPont and Intel, all well known small businesses.

2) He directs the head of the Small Business Administration to sit in on cabinet meetings. And then introduces a bill to do away with the SBA.

Aw jeeezzzzzzzz...................................................................

He truly does not know how the U.S. economy works!!

I continue to think he is a nice guy. And that he is smart guy. And that I would like to have him as a personal friend. But it is incredibly clear that he has no competence to be President.

2012-01-13T18:00:00.000-08:00

Michael Snyder Over Does It, But Not All That Much!

Basically, the trends he lists are real. Look back at the graph on the National Debt that was posted earlier. We have to make some fundamental changes,or his forecasts will come true. Sorry to say, there is absolutely no evidence ANYONE in Washington has any idea these trends exist, let alone what to do about them.

24 Stats To Crush Anyone Who Thinks America Has A Bright Economic Future

Michael Snyder, The Economic Collapse | Jan. 13, 2012, 9:28 AM | 7,456 | 46

Flickr

Beware of bubbles of false hope. Right now there is a lot of talk about how the U.S. economy is improving, but it is all a lie. The mainstream media can be very seductive. When you sit down to watch television your brain tends to go into a very relaxed mode. In such a state, it becomes easy to slip thoughts and ideas past your defenses. Sometimes when I am watching television I realize what the media is trying to do and yet I can still feel it happening to me. In this day and age, it is absolutely critical that we all think for ourselves. When you look at the long-term trends and the long-term numbers, a much different picture of the U.S economy emerges than the one that is painted for us on television.
Over the long-term, the number of good jobs in America has been steadily going down. Over the long-term, the number of Americans living in poverty and living on food stamps has been steadily going up. Over the past couple of decades, tens of thousands of businesses, millions of jobs and trillions of dollars of our national wealth have gone out of the country.
Our debt is nearly 15 times larger than it was 30 years ago, and U.S. consumer debt has soared by 1700% over the past 40 years. Year after year the rate of inflation goes up faster than our incomes do, and this is absolutely devastating the middle class. Anyone who believes that we can keep doing the same things that we have been doing and yet America will still have a bright economic future is delusional. Until the long-term trends which are taking the U.S. economy straight into the toilet are reversed, any talk of a bright economic future is absolute nonsense.
In America today, we have such a short-term focus. We are all so caught up with what is happening right now. Our attention spans seem to get shorter every single year. At this point it would not be hard to argue that kittens have longer attention spans than most of us do. (If you have ever owned a kitten you know how short their attention spans can be.) Things have gotten so bad that most of our high school students cannot even answer the most basic questions about our history. If people are not talking about it on Facebook or Twitter it is almost as if it does not even matter.
But any serious student of history knows that is is absolutely crucial to examine long-term trends. And when you look at the long-term trends, it rapidly becomes apparent that the U.S. economy is in the midst of a nightmarish long-term decline.
The following are 24 statistics to show to anyone who believes that America has a bright economic future....
#1 Inflation is a silent tax that steals wealth from all of us. We continue to shell out increasing amounts of money for the basic things that we need, and yet our incomes are not keeping pace. Just check out the following example. Gasoline prices have been trending higher for several years in a row as one blogger recently noted....
January 2009           $1.65
January 2010           $2.57
January 2011           $3.04
January 2012           $3.29
#2 If you can believe it, the average American household spent approximately $4,155 on gasoline during 2011.
#3 Electricity bills in the United States have risen faster than the overall rate of inflation for five years in a row.
#4 Health care costs continue to rise at a very alarming pace. According to the Bureau of Economic Analysis, health care costs accounted for just 9.5% of all personal consumption back in 1980. Today they account for approximately 16.3%.
#5 Getting a college education has also become insanely expensive in America. After adjusting for inflation, U.S. college students are borrowing about twice as much money as they did a decade ago.
#6 To get the same purchasing power that you got out of $20.00 back in 1970 you would have to have more than $116 today.
#7 To get the same purchasing power that you got out of $20.00 back in 1913 you would have to have more than $457 today.
#8 There are fewer payroll jobs in the United States today than there were back in 2000 even though we have added more than 30 million extra people to the population since then.
#9 The U.S. economy is bleeding millions of good jobs. Greedy CEOs are systematically shipping them overseas and our politicians are standing around and doing nothing about it. This has gone on year after year after year. The following is from a recent article by Paul Craig Roberts....

In the first decade of the 21st century, Americans lost 5,500,000 manufacturing jobs. US employment in the manufacture of computer and electronic products fell by 40%; in the production of machinery by 30%, in motor vehicles and and parts by 44%, and in the manufacture of clothing by 66%.

#10 Our economic infrastructure is being torn apart right in front of our eyes. In 2010, an average of 23 manufacturing facilities a day shut down in the United States. Overall, more than 56,000 manufacturing facilities in the United States have shut down since 2001.
We have made it legal for big corporations to send millions of jobs to countries where it is legal to pay slave labor wages, where the tax burden is much lighter and where there are barely any regulations. The following is a brief excerpt from a recent article posted on Economy in Crisis....

Back in the ‘80s, I called my friend Walter in California and asked: “On your next expansion we need a plant in South Carolina.” Walter replied: “We don’t produce anything in the United States. It’s all in China. China furnishes you the plant on a year-to-year basis. If your investment works out, you don’t have to pay any corporate tax; just reinvest it for another plant and more profit. If it doesn’t work out, you can walk away with no legacy costs. I send a quality controller to watch production. I check on it every day. I don’t have any labor, health, safety, or environmental concerns, and have time to play a round of golf.” The bleeding of jobs off-shore started in the ‘80s — now hemorrhages under Bush and Obama. Waiting for the economy to bounce back; calling this “the worst recession” is a bum rap. The reason the economy hasn’t bounced back since 2008 is because the economy is being off-shored.

#11 As a result of our insane economic policies, our trade balances are absolutely exploding. For example, the U.S. trade deficit with China in 2010 was 27 times larger than it was back in 1990.
#12 As you read this, there are millions of Americans out there wondering why they can't find any jobs. According to Reuters, 23.7 million American workers are either unemployed or underemployed right now.
#13 The number of good jobs has been steadily shrinking in America. Since the year 2000, the United States has lost 10% of its middle class jobs. In the year 2000 there were about 72 million middle class jobs in the United States but today there are only about 65 million middle class jobs.
#14 Over the last three decades, the percentage of low income jobs has consistently risen. Back in 1980, less than 30% of all jobs in the United States were low income jobs. Today, more than 40% of all jobs in the United States are low income jobs.
#15 The number of middle class neighborhoods also continues to decline. In 1970, 65 percent of all Americans lived in "middle class neighborhoods". By 2007, only 44 percent of all Americans lived in "middle class neighborhoods".
#16 A decade ago, the United States was ranked number one in average wealth per adult. By 2010, the United States had fallen to seventh.
#17 Our incomes continue to go down. Since December 2007, median household income in the United States has declined by a total of 6.8% once you account for inflation.
#18 Unfortunately, middle class Americans have been seeing their incomes decline for a very long time. According to one study, between 1969 and 2009 the median wages earned by American men between the ages of 30 and 50 dropped by 27 percent after you account for inflation.
#19 Since 1971, consumer debt in the United States has increased by a whopping 1700%. Unfortunately, U.S. consumers have still not learned how to stay out of debt. According to a recent article posted on Financial Armageddon, the rate of personal savings in the United States is rapidly falling right now at the same time that the total amount of consumer credit is absolutely skyrocketing.
#20 The number of children living in poverty in America keeps rising year after year. The percentage of children living in poverty in the United States increased from 16.9 percent in 2006 to nearly 22 percent in 2010.
#21 The number of Americans on food stamps continues to set new all-time records. Just check out the following progression....
October 2008: 30.8 million Americans on food stamps
October 2009: 37.6 million Americans on food stamps
October 2010: 43.2 million Americans on food stamps
October 2011: 46.2 million Americans on food stamps
#22 The U.S. debt problem has gotten completely and totally out of control. Recently, the debt of the federal government surpassed 100% of GDP for the first time ever.
#23 During the Obama administration, the U.S. government has accumulated more debt than it did from the time that George Washington took office to the time that Bill Clinton took office.
#24 Barack Obama's proposed 2012 budget projects that the national debt will rise to 26 trillion dollars a decade from now. And his budget numbers are ridiculously optimistic.
Are you starting to get the picture?
All of the long-term economic numbers are progressively getting worse.
As the economy continues to crumble, large numbers of Americans are becoming really desperate. For example, a recent Mother Jones article detailed how large numbers of formerly middle class Americans are now actually growing marijuana in an effort to make ends meet.
As things continue to get worse, people will become even more desperate. There are millions of people out there that find themselves unable to pay the mortgage and put food on the table for their families. When people hit rock bottom, they often find themselves doing things that they never dreamed that they would do.
Meanwhile, the big Wall Street banks just keep getting larger and more powerful. We have allowed the "too big to fail" banks to become much bigger than they have ever been before. The total assets of the six largest U.S. banks increased by 39 percent between September 30, 2006 and September 30, 2011.
Wealth is becoming increasingly concentrated at the very top even as the overall economic pie in America continues to get smaller.
As our economic problems become worse, more Americans than ever are trying to find ways to "escape".
For example, according to one new government report one out of every six adults in America is a binge drinker.
Other Americans "tune out" by watching endless hours of television, by playing endless hours of video games or by indulging in endless hours of other forms of entertainment.
There are even some Americans that are giving up completely. For example, one elderly man actually robbed a bank just so that he could get arrested and be taken to prison where he would get free health care.
But as I have written about previously, now is not the time to give up. Instead, now is the time to prepare for the great challenges that are ahead.
Almost every generation in history has been faced with great challenges and great hardships at some point.
Yes, there will be some incredibly hard times ahead, but that also means that there will be a need for some great heroes.
Just because the U.S. economy is falling apart does not mean that life is over.
We are living during one of the most exciting times in all of human history. Instead of cowering in fear, let us embrace these times and focus on becoming the people that we were created to be.

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The Map is Not the Territory: An Essay on the State of Economics

04 October 2011, Institute for New Economic Thinking

Click here to read the original article, along with responses from other economists, at the Institute for New Economic Thinking.
The reputation of economics and economists, never high, has been a victim of the crash of 2008. The Queen was hardly alone in asking why no one had predicted it. An even more serious criticism is that the economic policy debate that followed seems only to replay the similar debate after 1929. The issue is budgetary austerity versus fiscal stimulus, and the positions of the protagonists are entirely predictable from their previous political allegiances.
The doyen of modern macroeconomics, Robert Lucas, responded to the Queen’s question in a guest article in The Economist in August 2009.[1] The crisis was not predicted, he explained, because economic theory predicts that such events cannot be predicted. Faced with such a response, a wise sovereign will seek counsel elsewhere.
But not from the principal associates of Lucas, who are even less apologetic. Edward Prescott, like Lucas, a Nobel Prize winner, began a recent address to a gathering of Laureates by announcing ‘this is a great time in aggregate economics’. Thomas Sargent, whose role in developing Lucas’s ideas has been decisive, is more robust still.[2] Sargent observes that criticisms such as Her Majesty’s ‘reflect either woeful ignorance or intentional disregard of what modern macroeconomics is about’. ‘Off with his head’, perhaps. But before dismissing such responses as ridiculous, consider why these economists thought them appropriate.
In his lecture on the award of the Nobel Prize for Economics in 1995,[3] Lucas described his seminal model. That model developed into the dominant approach to macroeconomics today, now called dynamic stochastic general equilibrium. In that paper, Lucas makes (among others) the following assumptions: everyone lives for two periods, of equal length, and works for one and spends in another; there is only one good, and no possibility of storage of that good, or of investment; there is only one homogenous kind of labour; there is no mechanism of family support between older and younger generations. And so on.
All science uses unrealistic simplifying assumptions. Physicists describe motion on frictionless plains, gravity in a world without air resistance. Not because anyone believes that the world is frictionless and airless, but because it is too difficult to study everything at once. A simplifying model eliminates confounding factors and focuses on a particular issue of interest. To put such models to practical use, you must be willing to bring back the excluded factors. You will probably find that this modification will be important for some problems, and not others – air resistance makes a big difference to a falling feather but not to a falling cannonball.
But Lucas and those who follow him were plainly engaged in a very different exercise, as the philosopher Nancy Cartwright has explained.[4] The distinguishing characteristic of their approach is that the list of unrealistic simplifying assumptions is extremely long. Lucas was explicit about his objective[5] – ‘the construction of a mechanical artificial world populated by interacting robots that economics typically studies’. An economic theory, he explains, is something that ‘can be put on a computer and run’. Lucas has called structures like these ‘analogue economies’, because they are, in a sense, complete economic systems. They loosely resemble the world, but a world so pared down that everything about them is either known, or can be made up. Such models are akin to Tolkien’s Middle Earth, or a computer game like Grand Theft Auto.
The knowledge that every problem has an answer, even and perhaps especially if that answer may be difficult to find, meets a deeply felt human need. For that reason, many people become obsessive about artificial worlds, such as computer games, in which they can see the connection between actions and outcomes. Many economists who pursue these approaches are similarly asocial. It is probably no accident that economics is by far the most male of the social sciences.
One might learn skills or acquire useful ideas through playing these games, and some users do. If the compilers are good at their job, as of course they are, the sound effects, events, and outcomes of a computer game resemble those we hear and see – they can, in a phrase that Lucas and his colleagues have popularised, be calibrated against the real world. But that correspondence does not, in any other sense, validate the model. The nature of such self-contained systems is that successful strategies are the product of the assumptions made by the authors. It obviously cannot be inferred that policies that work in Grand Theft Auto are appropriate policies for governments and businesses.
Yet this correspondence does seem to be what the proponents of this approach hope to achieve – and even claim they have achieved. The debate on austerity versus stimulus, in academic circles, is in large part a debate about the validity of a property called Ricardian equivalence, which is observed in this type of model. If government engages in fiscal stimulus by spending more or by reducing taxes, people will realise that such a policy means higher taxes or lower spending in future. Even if they seem to be better off today, they will be poorer in future, and by a similar amount. Anticipating this, they will cut back and government spending will crowd out private spending. Fiscal policy is therefore ineffective as a means of responding to economic dislocation.
In a more extended defence of the DSGE approach, John Cochrane, Lucas’s Chicago colleague, puts forward the policy ineffectiveness thesis – immediately acknowledging that the assumptions that give rise to it ‘are, as usual, obviously not true’.[6] For most people, that might seem to be the end of the matter. But it isn’t. Cochrane goes on to say that ‘if you want to understand the effects of government spending, you have to specify why the assumptions leading to Ricardian equivalence are false’. That is a reasonable demand, though one that is easy to satisfy – as Cochrane himself readily acknowledges.
But Cochrane will not give up so easily. He goes on; ‘economists have spent a generation tossing and turning the Ricardian equivalence theory and assessing the likely effects of fiscal stimulus in its light, generalising the “ifs” and figuring out the likely “therefores”. This is exactly the right way to do things’. The programme Cochrane describes modifies the core model in a rather mechanical way that makes it more complex, but not necessarily more realistic, by introducing additional parameters that have labels such as ‘frictions’ or ‘transactions costs’ – in much the same way as a game compiler might introduce a new module or sound effect.
Why is this ‘exactly the right way to do things’? There are at least two alternative ways to proceed. You could build a different analogue economy. Joe Stiglitz, for example, favours a model that retains many of Lucas’s assumptions, but gives critical importance to imperfections of information.[7] After all, Ricardian equivalence requires that households have a great deal of information about future budgetary options, or at least behave as if they did. A more radical modification might be an agent-based model, for example, which assumes households respond routinely to events according to specific behavioural rules. Such models can also ‘be put on a computer and run’. It is not obvious in advance – or, generally, in retrospect – whether the assumptions, or conclusions, of these models are more, or less, plausible than those of the kind of model favoured by Lucas and Cochrane.
But another approach would discard altogether the idea that the economic world can be described by a universally applicable model in which all key relationships are predetermined. Economic behaviour is influenced by technologies and cultures, which evolve in ways that are certainly not random but which cannot be described fully, or perhaps at all, by the kinds of variables and equations with which economists are familiar. Models, when employed, must therefore be context specific, in the manner suggested in a recent book by Roman Frydman and Michael Goldberg.[8]
In that eclectic world, Ricardian equivalence is no more than a suggestive hypothesis. It is possible that some such effect exists. One might be sceptical about whether it is very large, and suspect its size depends on a range of confounding and contingent factors – the nature of the stimulus, the overall political situation, the nature of financial markets and welfare systems. This is what the generation of economists who followed Keynes did when they estimated a consumption function – they tried to measure how much of a fiscal stimulus was spent – and the ‘multiplier’ that resulted.
But you would not nowadays be able to publish similar articles in a good economics journal. You would be told that your model was theoretically inadequate – it lacked rigour, failed to demonstrate consistency. You might be accused of the cardinal sin of being ‘ad hoc’. Rigour and consistency are the two most powerful words in economics today.
They have undeniable virtues, but for economists they have particular interpretations. Consistency means that any statement about the world must be made in the light of a comprehensive descriptive theory of the world. Rigour means that the only valid claims are logical deductions from specified assumptions. Consistency is therefore an invitation to ideology, rigour an invitation to mathematics. This curious combination of ideology and mathematics is the hallmark of what is often called ‘freshwater economics’ – the name reflecting the proximity of Chicago, and other centres such as Minneapolis and Rochester, to the Great Lakes.
Consistency and rigour are features of a deductive approach, which draws conclusions from a group of axioms – and whose empirical relevance depends entirely on the universal validity of the axioms. The only descriptions that fully meet the requirements of consistency and rigour are complete artificial worlds, like those of Grand Theft Auto, which can ‘be put on a computer and run’.
For many people, deductive reasoning is the mark of science, while induction – in which the argument is derived from the subject matter – is the characteristic method of history or literary criticism. But this is an artificial, exaggerated distinction. ‘The first siren of beauty’, says Cochrane, ‘is logical consistency’. It seems impossible that anyone acquainted with great human achievements – whether in the arts, the humanities or the sciences – could really believe that the first siren of beauty is consistency. This is not how Shakespeare, Mozart or Picasso – or Newton or Darwin – approached their task.
The issue is therefore not mathematics versus poetry. Deductive reasoning of any kind necessarily draws on mathematics and formal logic; inductive reasoning is based on experience and above all on careful observation and may, or may not, make use of statistics and mathematics.   Much scientific progress has been inductive: empirical regularities are observed in advance of any clear understanding of the mechanisms that give rise to them. This is true even of hard sciences such as physics, and more true of applied disciplines such as medicine or engineering. Economists who assert that the only valid prescriptions in economic policy are logical deductions from complete axiomatic systems take prescriptions from doctors who often know little more about these medicines than that they appear to treat the disease. Such physicians are unashamedly ad hoc; perhaps pragmatic is a better word. With exquisite irony, Lucas holds a chair named for John Dewey, the theorist of American pragmatism.
Engineers and doctors can perhaps be criticised for attaching too much weight to their own experience and personal observations. They are often sceptical, not just of theory, but of data they have not themselves collected. In contrast, most modern economists make no personal observations at all. Empirical work in economics, of which there is a great deal, predominantly consists of the statistical analysis of large data sets compiled by other people.
Few modern economists would, for example, monitor the behaviour of Procter and Gamble, assemble data on the market for steel, or observe the behaviour of traders. The modern economist is the clinician with no patients, the engineer with no projects.   And since these economists do not appear to engage with the issues that confront real businesses and actual households, the clients do not come.
There are, nevertheless, many well paid jobs for economists outside academia. Not, any more, in industrial and commercial companies, which have mostly decided economists are of no use to them. Business economists work in financial institutions, which principally use them to entertain their clients at lunch or advertise their banks in fillers on CNBC. Economic consulting employs economists who write lobbying documents addressed to other economists in government or regulatory agencies.
The mutual disdain between economists and practical people is not a result of practical people not being interested in economic issues – they are obsessed with them. Frustrated, they base their macroeconomic views on rudimentary inductive reasoning, as in the attempts to find elementary patterns in data - will the recession be V-shaped, or L-shaped, or double dip? Freakonomics,[9] which applies simple analytic thinking to everyday problems, has been a best seller for years. Elegantly labeled ideas that resonate with recent experience – the Minsky moment, the tipping point,[10] the Black Swan[11] – are enthusiastically absorbed into popular discourse.
If much of the modern research agenda of the economics profession is thus unconnected to the everyday world of business and finance, this is also largely true of what is taught to students. Most people finishing an undergraduate course today would not be equipped to read the Financial Times. They could import data on GDP and consumer prices into a statistical package, and would have done so, but would have no idea how these numbers were derived. They would be little better equipped than the person in the street to answer questions such as ‘why were nationalised industries more efficient in France than in Britain?’, ‘why is a school teacher in Switzerland paid much more than an Indian one?’, or the oldest of examination chestnuts, ‘are cinema seats in London expensive because rents in London are high, or vice versa?’.
In a much mocked defence of his recent graduate school education, Kartik Athreya explains – with approval – that ‘much of my first year (PhD) homework involved writing down tedious definitions of internally consistent outcomes. Not analysing them, just defining them’.[12] Many subjects involve tedious rote acquisition of essential basic knowledge – think law or medicine – but can it really be right that the essence of advanced economic training is checking definitions of consistency?
A review of economics education two decades ago concluded that students should be taught ‘to think like economists’. But ‘thinking like an economist’ has come to be interpreted as the application of deductive reasoning based on a particular set of axioms. Another Chicago Nobel Prize winner, Gary Becker, offered the following definition: ‘the combined assumptions of maximising behaviour, market equilibrium, and stable preferences, used relentlessly and consistently form the heart of the economic approach’.[13] Becker’s Nobel citation rewards him for ‘having extended the domain of microeconomic analysis to a wide range of economic behavior.’ But such extension is not an end in itself: its value can lie only in new insights into that behaviour.
‘The economic approach’ as described by Becker is not, in itself, absurd. What is absurd is the claim to exclusivity he makes for it: a priori deduction from a particular set of unrealistic simplifying assumptions is not just a tool but ‘the heart of the economic approach’. A demand for universality is added to the requirements of consistency and rigour. Believing that economics is like they suppose physics to be – not necessarily correctly – economists like Becker regard a valid scientific theory as a representation of the truth – a description of the world that is independent of time, place, context, or the observer. That is what Prescott has in mind in insisting on the term ‘aggregate economics’ instead of macroeconomics – there is, he explains, only economics.
The further demand for universality with the consistency assumption leads to the hypothesis of rational expectations and a range of arguments grouped under the rubric of ‘the Lucas critique’. If there were to be such a universal model of the economic world, economic agents would have to behave as if they had knowledge of it, or at least as much knowledge of it as was available, otherwise their optimising behaviour be inconsistent with the predictions of the model. This is a reductio ad absurdum argument, which demonstrates the impossibility of any universal model – since the implications of the conclusion for everyday behaviour are preposterous, the assumption of model universality is false.
But this is not how the argument has been interpreted. Since the followers of this approach believe strongly in the premise – to deny that there is a single pre-specified model that determines the evolution of economic series would, as they see it, be to deny that there could be a science of economics – they accept the conclusion that expectations are formed by a process consistent with general knowledge of that model. It is by no means the first time that people blinded by faith or ideology have pursued false premises to absurd conclusions – and, like their religious and political predecessors, come to believe that those who disagree are driven by ‘woeful ignorance or intentional disregard’.
This is not science, however, but its opposite. Properly conducted science is always provisional, and open to revision in the light of new data or experience: but much of modern macroeconomics tortures data to demonstrate consistency with an a priori world view or elaborates the definition of rationality to render it consistent with any observed behaviour.
The fallacy here is well described by Donald Davidson:
‘It is perhaps natural to think there is a unique way of describing things which gets at their essential nature, ‘an interpretation of the world which gets it right’, and, a description of “Reality As It Is In Itself”. Of course there is no such unique “interpretation” or description, not even in the one or more languages each of us commands, not in any possible language. Or perhaps we should just say this is an idea of which no-one has made good sense.’ [14]
And economists have not made good sense of it either, though they have been persistent in trying.
Economic models are no more, or less, than potentially illuminating abstractions. Another philosopher, Alfred Korzybski, puts the issue more briefly: ‘the map is not the territory’.[15] Economics is not a technique in search of problems but a set of problems in need of solution. Such problems are varied and the solutions will inevitably be eclectic.
This is true for analysis of the financial market crisis of 2008. Lucas’s assertion that ‘no one could have predicted it’ contains an important, though partial, insight. There can be no objective basis for a prediction of the kind ‘Lehman Bros will go into liquidation on September 15’, because if there were, people would act on that expectation and, most likely, Lehman would go into liquidation straight away. The economic world, far more than the physical world, is influenced by our beliefs about it.
Such thinking leads, as Lucas explains, directly to the efficient market hypothesis – available knowledge is already incorporated in the price of securities. And there is a substantial amount of truth in this – the growth prospects of Apple and Google, the problems of Greece and the Eurozone, are all reflected in the prices of shares, bonds and currencies. The efficient market hypothesis is an illuminating idea, but it is not “Reality As It Is In Itself”. Information is reflected in prices, but not necessarily accurately, or completely. There are wide differences in understanding and belief, and different perceptions of a future that can be at best dimly perceived.
In his Economist response, Lucas acknowledges that ‘exceptions and anomalies’ to the efficient market hypothesis have been discovered, ‘but for the purposes of macroeconomic analyses and forecasts they are too small to matter’. But how could anyone know, in advance not just of this crisis but also of any future crisis, that exceptions and anomalies to the efficient market hypothesis are ‘too small to matter’?
You can learn a great deal about deviations from the efficient market hypothesis, and the role they played in the recent financial crisis, from journalistic descriptions by people like Michael Lewis[16] and Greg Zuckerman,[17] who describe the activities of some individuals who did predict it. The large volume of such material that has appeared suggests many avenues of understanding that might be explored. You could develop models in which some trading agents have incentives aligned with those of the investors who finance them and others do not. You might describe how prices are the product of a clash between competing narratives about the world. You might appreciate the natural human reactions that made it difficult to hold short positions when they returned losses quarter after quarter.
This pragmatic thinking, employing many tools, is a better means of understanding economic phenomena than ‘the combined assumptions of maximising behaviour, market equilibrium, and stable preferences, used relentlessly and consistently’ – and to the exclusion of any other ‘ad hoc’ approach. More eclectic analysis would require not just deductive logic but also an understanding of processes of belief formation, anthropology, psychology and organisational behaviour, and meticulous observation of what people, businesses, and governments actually do. You could learn nothing about how these things influence prices if you started with the proposition that deviations from a specific theory of price determination are ‘too small to matter’ because all that is knowable is already known and therefore ‘in the price’. And that is why today’s students do, in fact, learn nothing about these things, except perhaps from extra-curricular reading.
What Lucas means when he asserts that deviations are ‘too small to matter’ is that attempts to construct general models of deviations from the efficient market hypothesis – by specifying mechanical trading rules or by writing equations to identify bubbles in asset prices – have not met with much success. But this is to miss the point: the expert billiard player plays a nearly perfect game,[18] but it is the imperfections of play between experts that determine the result. There is a – trivial – sense in which the deviations from efficient markets are too small to matter – and a more important sense in which these deviations are the principal thing that matters.
The claim that most profit opportunities in business or in securities markets have been taken is justified. But it is the search for the profit opportunities that have not been taken that drives business forward, the belief that profit opportunities that have not been arbitraged away still exist that explains why there is so much trade in securities. Far from being ‘too small to matter’, these deviations from efficient market assumptions, not necessarily large, are the dynamic of the capitalist economy.
Such anomalies are idiosyncratic and cannot, by their very nature, be derived as logical deductions from an axiomatic system. The distinguishing characteristic of Henry Ford or Steve Jobs, Warren Buffett or George Soros, is that their behaviour cannot be predicted from any prespecified model. If the behaviour of these individuals could be predicted in this way, they would not have been either innovative or rich. But the consequences are plainly not ‘too small to matter’.
The preposterous claim that deviations from market efficiency were not only irrelevant to the recent crisis but could never be relevant is the product of an environment in which deduction has driven out induction and ideology has taken over from observation. The belief that models are not just useful tools but also are capable of yielding comprehensive and universal descriptions of the world has blinded its proponents to realities that have been staring them in the face. That blindness was an element in our present crisis, and conditions our still ineffectual responses. Economists – in government agencies as well as universities – were obsessively playing Grand Theft Auto while the world around them was falling apart.
[1] Lucas, R. – http://www.economist.com/node/14165405

[2] Sargent, T. – http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4526

[3] Lucas, R. – http://www.nobelprize.org/nobel_prizes/economics/laureates/1995/lucas-lecture.html

[4] Cartwright, N. – http://www.amazon.com/Hunting-Causes-Using-Them-Approaches/dp/052167798X

[5] Lucas, R. – http://www.sciencedirect.com/science/article/pii/0304393288901687

[6] Cochrane, J. – http://faculty.chicagobooth.edu/john.cochrane/research/Papers/krugman_response.htm

[7] Stiglitz, J. – http://econpapers.repec.org/RePEc:tpr:qjecon:v:90:y:1976:i:4:p:630-49
http://www.jstor.org/pss/2296899
http://econpapers.repec.org/RePEc:aea:aecrev:v:71:y:1981:i:3:p:393-410

[8] Frydman, R and M. Goldberg – http://www.amazon.com/Imperfect-Knowledge-Economics-Exchange-Rates/dp/0691121605

[9] Levitt, S. and J.S. Dubner – http://www.amazon.com/Freakonomics-Revised-Expanded-Economist-Everything/dp/0061234001

[10] Gladwell, M. – http://www.amazon.com/Tipping-Point-Little-Things-Difference/dp/0316346624

[11] Taleb, N. N. – http://www.amazon.com/Black-Swan-Improbable-Robustness-Fragility/dp/081297381X

[12] Athreya, K. – http://www.scribd.com/doc/33655771/Economics-is-Hard

[13] Becker, G. – http://www.amazon.com/Economic-Approach-Human-Behavior/dp/0226041123

[14] Davidson, D. – http://www.amazon.com/Rorty-His-Critics-Philosophers-their/dp/0631209824

[15] Korzybski, A. – “A Non-Aristotelian System and its Necessity for Rigour in Mathematics and Physics”

[16] Lewis, M. – http://www.amazon.com/Big-Short-Inside-Doomsday-Machine/dp/0393338827/

[17] Zuckerman, G. – http://www.amazon.com/Greatest-Trade-Ever-Behind—Scenes/dp/0385529945

[18] The example famously used by Friedman and Savage, 1948 – http://www.jstor.org/pss/1826045

Tags: Economy, financial crisis, Theory

2012-01-13T16:23:00.000-08:00

More Evidence That Macro Economists Are Useless At Best, Dangerous At Worst!!

Here are two pieces of evidence that macro economists are useless. The first is an accounting of the 2006 meeting of the Federal Reserve that appears in today's Los Angeles Times. The second is an excerpt for The Great Recession Conspiracy, written in 2008, describing the same period of time. Make up your own mind.

latimes.com

Federal Reserve missed signs as crisis loomed

Transcripts of 2006 policymaker meetings illustrate a glaring absence of alarm.

By Don Lee, Los Angeles Times
11:24 PM PST, January 12, 2012
Reporting from Washington

Despite signs of trouble for the nation's overheated housing market in 2006, there was plenty of banter and laughter around the big mahogany and granite table inside the Federal Reserve where top policymakers gathered one day in March.

Running his first meeting as chairman of the central bank, Ben S. Bernanke, in his collegial style, solicited observations about the economy from colleagues. Some of the Fed's staff earlier had talked about the potential risks, but in that meeting and in subsequent ones that year, there was a glaring absence of alarm about the dangers of the housing bubble and what might lie ahead for the broader economy.

Instead, concerns about a housing bust were largely dismissed by most officials, according to meeting transcripts released Thursday.

"We believe that, absent some large, negative shock to perceptions about employment and earned income, the effects of the expected cooling in housing prices are going to be modest," said Timothy F. Geithner, the current Treasury secretary, who then was president of the Federal Reserve Bank of New York.

When Geithner was finished, Bernanke asked, to a round of laughter, "Anything to report on co-op prices in Manhattan?"

"As in many cases, I am not sure what you can take from the anecdote, but I guess some people say that you see a little of the froth dissipating," Geithner replied. "But I don't think the adjustment is acute.

"If you see hiring at the New York Fed go up substantially in the market, that will be a good leading indicator of housing prices reverting somewhat," he said, prompting more laughter.

Bernanke, now in his second term as Fed chairman, as well as some other policymakers previously have acknowledged the central bank's failure in picking up warning signals of a housing market hurtling toward disaster.

But the transcripts of the Federal Open Market Committee's 2006 meetings, released with the usual five-year time lag, reveal in painfully embarrassing detail the high degree of overconfidence and lack of foresight just ahead of the real estate collapse and financial crisis that engulfed the nation.

That March meeting was the second of the year for Fed policymakers. The one preceding it, in January, was punctuated by accolades for departing Chairman Alan Greenspan, whose once-giant stature has since been diminished by criticisms that the Fed, under his stewardship, helped create the excesses in housing by keeping interest rates too low for too long and failing to protect consumers from predatory lenders.

"Needless to say, it's fitting for Chairman Greenspan to leave office with the economy in such solid shape," said Janet Yellen, at the time the president of the San Francisco Fed and now the Fed's vice chair.

"And if I might torture a simile, I would say, Mr. Chairman, that the situation you're handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot," she added as laughter broke out.

Roger Ferguson, then Fed vice chairman, described Greenspan at that January meeting as "the monetary policy Yoda," referring to the elfin guru in the movie "Star Wars."

The release of such fawning remarks, as well as light-hearted talk and jokes preceding America's worst economic crisis since the Great Depression, is certain to further tarnish the image of the Federal Reserve.

Since the recession and federal bailout of financial institutions, engineered by the Fed and the Treasury, Bernanke has been on the defensive as many in the public and in Congress have lashed out at the Fed for its failures.

In the last three years, Bernanke has sought to build up the Fed's reputation through greater transparency, and he has been lauded by many economists for taking aggressive and successful steps to help pull the country out of recession.

Fed officials weren't commenting Thursday on the 2006 transcripts.

"The transcripts doubtless will be used to question the central bank's credibility," said Ryan Sweet, an economist at Moody's Analytics who watches the Fed. But in a note to clients, he said policymakers had a defense: "The economy was growing near its potential rate in 2006.... Shocks are by definition difficult to predict."

don.lee@latimes.com

And then....................

Before we leave the discussion of how we got into thisrecession, it is worth noting that there were people shouting out warnings wellin advance of the crash.

Warren Buffett, the Sage of Omaha, is famous forcalling Credit Swaps, “Time bombs, both for the parties dealing in them andeconomic system.” And “Financial weapons of mass destruction”.

Brooksley Born was Chairman of the Commodity FuturesTrading Commission from 1996 to 1999. She understood the danger of unregulated credit derivative swaps andlobbying widely for regulation. Herattempts of achieve that regulation were thwarted repeatedly by Robert Rubin,Larry Summers, and Alan Greenspan, among others.

Private citizens like Gerard Jackson, the BrookesnewsEconomics Editor, said Alan Greenspan was “…once again laying the foundationfor another recession, “six years ago.

It wasn’t just Americans who foresaw the upcomingproblems. Riad Toufic Salame is thegovernor of the Lebanon’s central bank, theequivalent of our Federal Reserve Bank. In spite of extreme pressure from Lebanon’s business community andthe government, he barred any bank in Lebanon from investing in mortgagebacked securities. Incidentally, 2008was the best year ever for Lebanon’s Bankers.

As early as 2004, Chris Swecker, the FBI agent in chargeof criminal investigations, warned repeatedly of fraud running rampant in thehome mortgage business.

Felix Rohatyn, the financier who saved New York Cityfrom bankruptcy in the 1970’s, called the “innovations” that caused thisrecession, “financial hydrogen bombs , built on personal computers by 26 yearold M.B.A.s”.

Bill Gross, Chairman of Pimco, a huge investmentmanagement service, issued warnings on the company website and in its regularclient letter for more than two full years before the implosion began.

Unfortunately, nobody much paid any attention.

2012-01-11T17:31:00.000-08:00

The Two Tier Economy Is Beginning To Be Recognized Widely!!

NPR reports on the findings of a truly reliable survey of American attitudes. I find it interesting how quickly the knowledge of this very, very serious problem has spread. I suspect we have Occupy to thank for that.

Understand that I am not talking about redistributing income. What I am calling attention to are the people who have million plus incomes and pay no taxes. See an earlier rant for a perfect example. What I find annoying is the fact that I pay a higher percentage of my income than Warren Buffet pays. What I am questioning is just how many yachts do the Richy Riches have to have to be happy?

Oh, and did I mention that 67% of all U.S. Corporations pay NO income taxes whatsoever. See GE and Wells Fargo at a starting place.

In every case, no one did anything illegal. They just took advantage of the laws of the United States. I don't think you can fault anyone for doing that. The basic problem is all the laws passed by a thoroughly corrupt Congress to reward their campaign contributors.

And finally, what I want people to think about is what history tells us about societies that have allowed vast differences develop between the extremely rich and everybody else. It ain't a pretty picture, and I think it could happen here.

Survey Finds Rising Perception of Class Tension

By SABRINA TAVERNISE

Conflict between rich and poor now eclipses racial strain and friction between immigrants and the native-born as the greatest source of tension in American society, according to a survey released Wednesday.
About two-thirds of Americans now believe there are “strong conflicts” between rich and poor in the United States, a survey by the Pew Research Center found, a sign that the message of income inequality brandished by the Occupy Wall Street movement and pressed by Democrats may be seeping into the national consciousness.
The share was the largest since 1992, and represented about a 50 percent increase from the 2009 survey, when immigration was seen as the greatest source of tension. In that survey, 47 percent of those polled said there were strong conflicts between classes.
“Income inequality is no longer just for economists,” said Richard Morin, a senior editor at Pew Social & Demographic Trends, which conducted the latest survey. “It has moved off the business pages into the front page.”
The survey, which polled 2,048 adults from Dec. 6 to 19, found that perception of class conflict surged the most among white people, middle-income earners and independent voters. But it also increased substantially among Republicans, to 55 percent of those polled, up from 38 percent in 2009, even as the party leadership has railed against the concept of class divisions.
The change in perception is the result of a confluence of factors, Mr. Morin said, probably including the Occupy Wall Street movement, which put the issue of undeserved wealth and fairness in American society at the top of the news throughout most of the fall.
Traditionally, class has been less a part of the American political debate than it has been in Europe. Still, the concept has long existed for ordinary Americans.
“Americans have always acknowledged that there are Rockefellers and the lunch-bucket guy,” said Tom W. Smith, director of the General Social Survey at the National Opinion Research Center, based at the University of Chicago. “But they believe it is not a permanent caste, but a transitory condition. The real game-changer would be if they give up on that.”
Going by the survey’s results, they have not. Forty-three percent of those surveyed said the rich became wealthy “mainly because of their own hard work, ambition or education,” a number unchanged since 2008.
The survey’s main question — “In America, how much conflict is there between poor people and rich people?” — was based on language used by Mr. Smith’s center at the University of Chicago, Mr. Morin said.
Mr. Smith said the question was often understood to mean, “Do the rich and the poor get along?” and “Do they have the same objectives?”
The issue has also become a prominent part of the political debate. President Obama has pressed the case that income inequality is rising as election season has gotten under way.
It has even crept into the Republican presidential primary race. At a debate in New Hampshire last Saturday, Rick Santorum criticized Mitt Romney for using the phrase “middle class,” dismissing the words as Democratic weapons to divide society. And conservatives have been wringing their hands over Newt Gingrich’s recent attacks on Mr. Romney’s past in private equity, saying they are a misguided assault on free-market capitalism.
Independents, whose votes will be fought over by both parties, showed the single largest increase in perceptions of conflicts between rich and poor, up 23 percentage points, to 68 percent, compared with an 18-point rise among Democrats and a 17-point rise for Republicans. Sixty-eight percent of independents believe there are strong class conflicts, just below the 73 percent of Democrats who do. (The survey’s margin of sampling error is plus or minus three percentage points for results based on the total sample.)
“The story for me was the consistency of the change,” Mr. Morin said. “Everyone sees more conflict.”
The demographics were surprising, experts said. While blacks were still more likely than whites to see serious conflicts between rich and poor, the share of whites who held that view increased by 22 percentage points, more than triple the increase among blacks. The share of blacks and Hispanics who held the view grew by single digits.
What is more, people at the upper middle of the income ladder were most likely to see conflict. Seventy-one percent of those who earned from $40,000 to $75,000 said there were strong conflicts between rich and poor, up from 47 percent in 2009. The lowest income bracket, less than $20,000, changed the least.
The grinding economic downturn may be contributing to the heightened perception of conflict between rich and poor, said Christopher Jencks, a professor of social policy at the John F. Kennedy School of Government at Harvard University.
“Rich and poor aren’t terribly distinct from secure and unemployed,” he said.
The survey attributed the change, in part, to “underlying shifts in the distribution of wealth in American society,” citing a finding by the Census Bureau that the share of wealth held by the top 10 percent of the population increased to 56 percent in 2009, from 49 percent in 2005.
“There are facts behind it,” Mr. Smith said of the findings. “It’s not just rhetoric.”
Robert Rector, a fellow at the conservative Heritage Foundation, took issue with that, arguing that government data routinely undercounted aid to the poor and taxes taken from everyone else.
To him, the findings did not mean much, “other than that the topic has been in the press for the last two years.”

2012-01-11T15:48:00.001-08:00

I Suggest We Elect These Two Guys To Congress To Raise the IQ Of That Group!

Finally, THE WINNER!!!: [ Arkansas Democrat Gazette]:
Two local men were injured when their pickup truck left the road and struck a tree near Cotton Patch on State Highway 38 early Monday. Woodruff County Deputy Dovey Snyder reported the accident shortly after midnight Monday. Thurston Poole, 33, of Des Arc, and Billy Ray Wallis, 38, of Little Rock , were returning to Des Arc after a frog-catching trip. On an overcast Sunday night, Poole 's pickup truck headlights malfunctioned. The two men concluded that the headlight fuse on the older-model truck had burned out. As a replacement fuse was not available,
Wallis noticed that the 22 caliber bullets from his pistol fitted perfectly into the fuse box next to the steering-wheel column. Upon inserting
the bullet the headlights again began to operate properly, and the two men proceeded on eastbound toward the White River Bridge . After traveling approximately 20 miles, and just before crossing the river, the bullet apparently overheated, discharged and struck Poole in the testicles. The vehicle swerved sharply right, exited the pavement, and struck a tree. Poole suffered only minor cuts and abrasions from the accident but will require extensive surgery to repair the damage to his testicles, which will never again operate as intended. Wallis sustained a broken clavicle and was treated and released. "Thank God we weren't on that bridge when Thurston shot his balls off, or we might be dead," stated Wallis. "I've been a trooper for 10 years in this part of the world, but this is a first for me. I can't believe that those two would admit how this accident happened," said Deputy Snyder. Upon being notified of the wreck, Lavinia ( Poole 's wife) asked how many frogs the boys had caught and did anyone get them from the truck?

2012-01-10T13:41:00.000-08:00

More On The Two Tier Economy

This piece is also from The Financial Times and was written by The Blow Hard Of The Western World, Larry Summers. Here is what I think he is arguing. When we made huge strides in Agriculture in the late 1800's, it allowed millions of workers to go to cities to work in factories, and that should be seen as a normal progression. Now, I think he says, "technology" has released millions of workers from factories to work in education and health care, again a normal progression.

But then he argues that we need to reduce government expenditures without acknowledging that most healthcare jobs and almost all teaching jobs are funded by the government.

Am I missing something here??

Current woes call for smart reinvention not destruction

By Lawrence Summers

It would have been almost unimaginable five years ago that the Financial Times would convene a series of articles on “Capitalism in Crisis”. That it has done so is a reflection both of sour public opinion and distressing results on the ground in much of the industrial world.

The A-List

Our exclusive online section featuring agenda-setting commentary from leading contributors on global finance, economics and politics

Americans have traditionally been the most enthusiastic champions of capitalism. Yet, a recent public opinion survey found that among the US population as a whole 50 per cent had a positive opinion of capitalism while 40 per cent did not. The disillusionment was particularly marked among young people aged 18-29, African Americans and Hispanics, those with incomes under $30,000 and self-described Democrats.
Three elections in a row in the US have been, by recent standards, bloodbaths for incumbents. In 2006 and 2008 the left did well; in 2010 the right won comprehensively. With the rise of the Tea Party on the right and the Occupy movement on the left, this suggests that far more is up for grabs than usual in this election year.
So how justified is disillusionment with market capitalism? This depends on the answer to two critical questions. Do today’s problems inhere in the present form of market capitalism or are they subject to more direct solution? Are there imaginable better alternatives?

On this story

Analysis Promises that proved ultimately empty
Gideon Rachman Why I’m feeling strangely Austrian
Comment A letter to capitalists from Adam Smith
FT series Capitalism in crisis
Capitalism in crisis The code that forms a bar to harmony

FROM The A-List

Philip Zelikow Obama must act on his foreign policy plan
The A-List Debate from leading global commentators
The A-List Debate from leading global commentators
Stephen King US cannot hide from euro slowdown

The spread of stagnation and abnormal unemployment from Japan to the rest of the industrialised world does raise doubts about capitalism’s efficacy as a promoter of employment and rising living standards for a broad middle class. The problem is genuine. Few would confidently bet that the US or Europe will see a return to full employment, as previously defined, within the next five years. The economies of both are likely to be demand constrained for a long time.
But does this reflect an inherent flaw in capitalism or, as Keynes suggested, a “magneto” problem – like the failure of a car alternator – that can be addressed with proper fiscal and monetary policies and which will not benefit from large scale structural measures. I believe the evidence overwhelmingly supports the latter. Efforts to reform capitalism are more likely to divert from the steps needed to promote demand, than to contribute to putting people back to work. I suspect that if and when macro-economic policies are appropriately adjusted, much of the contemporary concern will fade away.
That said, serious questions about the fairness of capitalism are being raised. These are driven by sharp increases in unemployment beyond the business cycle – one in six of American men between 25 and 54 is likely to be out of work even after the economy recovers – combined with dramatic rises in the share of income going to the top 1 per cent (and even the top 0.01 per cent) of the population and declining social mobility. The problem is real and profound and seems very unlikely to correct itself untended. Unlike cyclical concerns there is no obvious solution at hand. Indeed, since even Chinese manufacturing employment appears well below the level of 15 years ago it suggests that the roots of the problem lie deep within the evolution of technology.
The agricultural economy gave way to the industrial one because progress enabled demands for food to be met by only a small fraction of the population freeing large numbers of people to work elsewhere. The same process is now under way with respect to manufacturing and a range of services, reducing employment prospects for most citizens. At the same time, just as in the early days of the industrial era the combination of substantial dislocations and greater ability to produce at scale is enabling a lucky few to acquire great fortunes.
The nature of the transformation is highlighted by the 50 fold change in the relative price of a television set of a constant quality and a day in a hospital over the last generation. While it is often observed that wages for median workers have stagnated, this obscures an important aspect of what is occurring. Measured via items such as appliances or clothing or telephone services, where productivity growth has been rapid, wages have actually risen rapidly over the last generation. The problem is that they have stagnated or fallen measured relative to the price of food, housing, healthcare, energy and education.

Capitalism in Crisis

An investigation into the future of capitalism scrutinising its legitimacy, its weaknesses and suggesting ways in which it could be reformed

As fewer people are needed to meet the population’s demand for goods like appliances and clothing it is natural that more people work in producing goods like healthcare and education where outcomes are manifestly unsatisfactory. Indeed as the economist Michael Spence has documented, a process of this kind is under way: essentially all US employment growth over the last generation has come in non-traded goods.
The difficulty is that in many of these areas the traditional case for market capitalism is weaker. It is surely not an accident that in almost every society the production of healthcare and education is much more involved with the public sector than is the case with the production of manufactured goods. There is an imperative to move workers from activities like steelmaking to activities like taking care of the aged. At the same time there is the imperative of shrinking or least slowing the growth of the public sector.
This brings us to the charge that the governments of industrial market capitalist societies are bankrupt. Even as market outcomes seem increasingly unsatisfactory, budget pressures have constrained the ability of the public sector to respond. How and when – not whether – basic programmes of social protection will be cut back is now back on the table. The basic solvency of too many capitalist states seems in question.
Again the problems are very real. While I believe more than most that the US government will be able to borrow on very attractive terms for a long time, if – as I fear – private borrowing remains depressed, there is no denying that the current path of planned spending and planned revenue collection are inconsistent. And Europe is teaching us that markets can take significant fiscal problems and make them catastrophic by becoming too alarmed too rapidly.
At one level the answer here is simply to insist on more political will and courage. But at a deeper level, citizens of the industrial world who believe that they live in progressive societies are right to wonder why increasingly affluent societies need to roll back levels of social protection. Paradoxically, the answer lies in the very success of capitalism which has made the opportunity-cost of an individual teaching or nursing or administering that much more expensive
When outcomes are unsatisfactory, as they surely are at present, there is always a debate between those who believe that the current course needs to be pursued with increased vigour and those who argue for a radical change in direction. That debate is somewhat beside the point in the case of market capitalism.
Where it has been applied it has been an enormous success. The challenge for the next generation is that success will increasingly be taken for granted and indeed will become an increasing source of frustration, for in these pinched times, its success cannot be matched outside the market’s natural domain. It is not so much the most capitalist parts of the contemporary economy but the least – those concerned with health education and social protection that are in most need of reinvention.
The writer is former US Treasury secretary and Charles W. Eliot university professor at Harvard

2012-01-10T13:18:00.000-08:00

Another View Of The Two Tier Economy

As you know from reading this rant, I am deeply concerned that we are developing a two tier economy. The Occupy folks call it the 1% vs. 99%. The social costs of this financial imbalance could well spell the end of democracy. Now The Financial Times has presented a very good analysis of what is happening and the role that bankers are playing. You will find the story from this perspective quite interesting.

Yes, I said THE FINANCIAL TIMES of London, the Wall Street Journal of the City.

Capitalism in crisis: The code that forms a bar to harmony

By John Plender

The enrichment of bankers, corporate chiefs, flash traders and their cronies is testing tolerance of inequality, argues John Plender in the first part of an FT series

Greedy bankers, overpaid executives, anaemic growth, stubbornly high unemployment – these are just a few of the things that have lately driven protesters on to the streets and caused the wider public in the developed world to become disgruntled about capitalism. The system, in all its different varieties, is widely perceived to be failing to deliver.
Business in the leading English-speaking countries attracts misgivings. Fewer than half of the American and British people sampled in the 2011 Edelman Trust Barometer have faith in business to do what is right. The survey rates the US and the UK only marginally ahead of Russia on this score. So there is talk of a crisis of legitimacy and an erosion of business’s “licence to operate”.

On this story

Analysis Promises that proved ultimately empty
Gideon Rachman Why I’m feeling strangely Austrian
Comment A letter to capitalists from Adam Smith
FT series Capitalism in crisis
Lawrence Summers We need smart reinvention not destruction

FROM John Plender

Goethe’s masterpiece shaping Europe
John Plender Regulating the moneylenders
John Plender Banks face long path out of the woods
Incentive structures still favour risk-taking

Click to enlarge

This article, the first in a series on rethinking capitalism after the financial crisis that began in 2007, argues that popular acceptance – which is a basic condition for business success – has waned in the Anglosphere for good reason. At the heart of the problem is widening inequality. In a recent study, the Paris-based Organisation for Economic Co-operation and Development, the club of developed nations, declared that the wealthiest Americans “have collected the bulk of the past three decades’ income gains”. Much the same is true of the UK. In both cases, most of the spoils have gone to finance professionals and top executives.
As Stewart Lansley, author of a recent book on inequality*, puts it, the modern economy appears to consist of two tracks: a fast one for the super-rich and a stalled one for everyone else. Those in the slow lane enjoyed rising living standards before 2007, despite stagnant real incomes, thanks to increased borrowing on the security of their homes. Since the crisis, however, American and British homeowners have faced a long and deep squeeze on real living standards, while struggling to service an unprecedented level of indebtedness. At the same time, says Mr Lansley, finance has come to play a new role as “a cash cow for a global super-rich elite”.
In continental Europe, the increase in inequality is less pronounced and the legitimacy problem has more to do with the way imbalances in the eurozone are being addressed. Northern Europeans resent a monetary union that has permitted southern Europe to engage in what they see as fiscally profligate behaviour, while southern Europeans and the Irish are required to submit to extreme austerity programmes that exacerbate their sovereign debt problems.
As the German-led policy elite inches towards “more Europe” as a solution to the fissures in the eurozone, it is far from clear that more Europe is what the citizens of Europe want. Democratic legitimacy has been largely lacking from the outset of this gigantic monetary experiment. On both sides of the Atlantic there is now a risk that reasonable aspirations to equality of opportunity are being undermined, accompanied by a growing threat of political instability. Support for open trade and free markets is also being adversely affected.
Misery and money motive
The problem of consent in relation to capitalism is nothing new. In fact, it returns with nagging frequency. In the early years of the industrial revolution, average per capita incomes were slow to rise and the contrast between the plight of the working population and the lifestyle of rich manufacturers prompted savage diatribes such as that of Charles Dickens in Hard Times. Even when living standards did rise, David Ricardo and Karl Marx worried whether the free markets trumpeted by Adam Smith could produce an income distribution that was politically tolerable.
By the late 19th century the debate turned more heavily on the moral question posed by the unedifying behaviour of the American robber barons at a time of spectacular economic growth. The centrality of the money motive in wealth creation appeared to detract from capitalism’s legitimacy unless there was an implicit social contract between the rich and the rest of society, whereby the wealthy tempered ostentation and engaged in philanthropy.

Calculations, causes and costs

Income inequality in the developed world started to rise in the late 1970s, according to OECD. The trend was evident most notably in the US and UK, where inequality remains particularly pronounced.****
It then spread in the 2000s to such low-inequality countries as Germany, Denmark and Sweden. Household incomes have been increasing faster at the top, with earners in the top 10 per cent leaving middle earners more rapidly behind than the lowest earners have been drifting away from the middle. Only in France, Japan and Spain has the pay of the best paid failed to rise faster than that of the lowest paid.
Rising income inequality has been variously attributed to globalisation, skills-based technological change, regulatory reforms in labour and product markets, changing household structures and tax-benefit systems becoming less redistributive. The costs of inequality, say the OECD authors, include the stifling of upward mobility, leading to social resentment and potential political instability. It also fuels anti-globalisation and protectionist sentiment.
**** Divided We Stand: Why Inequality Keeps Rising

Then, in the unstable 1920s and the Depression of the 1930s, the efficacy as well as the moral basis of capitalism was once again called into question. While F. Scott Fitzgerald chronicled the moral vacuity of jazz age capitalism in The Great Gatsby, John Maynard Keynes, who provided a theoretical basis for the mixed economy and a more humane form of capitalism, was notably acerbic on what he called “individualist capitalism” and the money motive. Such questioning was sharpened by the existence for the first time of a seemingly successful alternative to capitalism in the Soviet Union; also of competing models, such as the corporatist approaches developed in Germany and Italy.
What, then, is different about today’s outbreak of disaffection? Perhaps the most important difference is that it is not the product of despair. The people in Manhattan’s Zuccotti Park and on the steps of St Paul’s Cathedral in London had no need of soup kitchens and took to their tents out of choice, unlike many in the 1930s US who slept in cardboard box colonies – Hoovervilles – out of necessity.
If there is no proliferation of soup queues, it is because in all the economies of the developed world capitalism has been humanised to a greater or lesser degree by forms of social democracy and by bank bail-outs. Unemployment in the US has gone nowhere near the 25 per cent rate that prevailed in 1933. While there are exceptionally high rates of youth unemployment, especially in southern Europe, there is more of a safety net for the victims than in the Depression. And if today’s protesters articulate no coherent programme, it seems clear that underlying frustrations are to do with perceptions of unfairness, not immiseration.
Much of that frustration relates to the banks. In contrast to the 1930s, when banking was about deposit-taking and lending, modern bankers engage in complex trading that they themselves do not always understand and whose social utility is not apparent to ordinary mortals – or even to the likes of Lord Turner, head of the UK Financial Services Authority, who famously declared that many parts of the banking business had “grown beyond a socially reasonable size”. Many have shown a disregard for their customers, while fiduciary obligation has become a casualty of deregulation and the shareholder value revolution. There is a widespread conviction that these bankers constitute a protected class who enjoy bonuses regardless of performance, while relying on the taxpayer to socialise their losses when they have taken excessive risks. At the same time, the public is aware that top executive rewards more generally are poorly related to performance and tend to go up even when profits fall.
Human capital or ‘hand’
Such resentment is not completely new. It bears some resemblance to the hostility towards profiteers after the first world war, which prompted Keynes to remark: “To convert the business man into the profiteer is to strike a blow at capitalism, because it destroys the psychological equilibrium which permits the perpetuance of unequal rewards. The businessman is only tolerable so long as his gains can be held to bear some relation to what, roughly and in some sense, his activities have contributed to society.”** On that basis, no one can be surprised that the legitimacy of capitalism is currently in question. And it would be wrong to call it a “winner takes all” form of capitalism, because privileged losers appear to be making off with the prizes too.
What is unquestionably novel is the ferocity with which US business sheds labour now that executive pay and incentive schemes are more closely linked to short-term performance targets. In effect, the American worker has gone from being regarded as human capital to a mere cost, or what was known in the 19th century as a “hand”. Yet this pursuit of a narrowly financial conception of shareholder value may destroy value for the ultimate pension beneficiaries – because of the disruption that slashing and burning causes, and the cost and time involved in hiring and retraining when conditions improve.
That underlines the “agency problem” at the heart of the banking and boardroom pay sagas. The accountability of management – the agent acting on behalf of the highly dispersed beneficiaries of equity ownership – is fundamentally flawed. While the public may not be aware of the details of the weak chain of accountability, or the growing number of investors such as high-frequency traders or hedge funds that have no interest in playing a stewardship role, it sees the outcome, which contributes to the wider inequality story.
So what to do? It is not as if there are attractive alternative models. While the west is chastened by the rise of Asia, few would wish to adopt the communist Chinese mixture of state ownership, red-in-tooth-and-claw private markets, wholesale corruption and even greater inequality than the US. As for the cleaner authoritarian approach of Singapore, despite delivering high economic growth, it has started to lose its appeal with the island’s electorate. Nor would many in the west find free-market Hong Kong a comfortable environment.
The real question, as Keynes argued in the 1930s, is therefore how to improve the existing model of capitalism. The snag is that there is minimal flexibility in macro policy after the crisis, especially in the US where broadly centrist politics have been replaced by a polarised, stalemated debate. And in both the US and UK there is a greater mistrust of big government, according to the Edelman Trust Barometer, than of business. Efforts to re-regulate the banking system, meantime, have failed to convince many experts that an even larger financial crisis can be avoided.
From distribution to decline
If Hyman Minsky, the expert on financial market fragility, provided the best route map for understanding events before the crisis, and Keynes offered the best guide to crisis management, Mancur Olson, a theorist on institutional economics, could now be a posthumous beacon on how to manage the aftermath. Olson argued that nations decline because of the lobbying power of distributional coalitions, or special-interest groups, whose growing influence fosters economic inefficiency and inequality.***
When he was writing, the main interest groups were trade unions and business cartels. Today, the pre-eminent interest group consists of finance professionals on Wall Street and in London. Through campaign finance and political donations, they have bought themselves protection from proper societal accountability. And they pose a continuing obstacle to the de-risking of banking of the kind recommended by the Vickers commission in the UK.
Tackling such interest groups both in the US and Europe is one of the biggest post-crisis tasks for policymakers and a key to addressing concerns about systemic legitimacy. The inchoate nature of the public’s complaints is another. Not the least of the difficulties, to reformulate Winston Churchill’s famous remark on democracy, is that capitalism is the worst form of economic management except for all those other forms that have been tried from time to time. The public relations problem implicit in that pale endorsement is an underlying reason why legitimacy crises recur.
* The Cost of Inequality, Gibson Square, 2011
** Quoted in Keynes and Capitalism, Roger E. Backhouse and Bradley W. Bateman, History of Political Economy, 2009
*** The Rise and Decline of Nations, Yale University Press, 1982

2012-01-10T12:37:00.000-08:00

The Insanity In Healthcare Costs!!

When I quit smoking cigarettes a very long time ago, the prevailing wisdom was that every two years you no longer smoked offset each year you did smoke. Turns out that is not true. You damage your lungs with the first puff and that damage stays for the rest of your life. Incidentally, that is also true for second hand smoke!!

Anyway, I now have to use an inhaler daily. A three month supply arrived today. I think you will find the mathematics of interest.

Benefit Provider Paid $601.68
Co-Pay Amount $ 40.00

Total Cost for this order $641.68

I spent enough of my life with pricing to know that the numbers above contain a huge amount of insanity. I just don't know where it is!!

2012-01-10T11:18:00.000-08:00

The Cost Of Healthcare is Truly Out Of Control

There are two numbers of particular importance in the article from today's Los Angeles Times. 1) Healthcare costs rose 3.9% in 2010. That is much faster than the economy grew in 2010 and it is way faster than inflation grew in 2010. 2) Healthcare spending grew 3.8% in 2009 and that 1% increase in the RATE of increase was the lowest in 51 years.

Healthcare costs are on track to bankrupt the U.S. in a few short years, and there is absolutely nothing in Obamacare to stop that growth, or to even slow it down. And the Republicans do not display any awareness of the impending doom.

Finally, remember that every 90 seconds, an American family declares bankruptcy because of medical costs they cannot pay!!

latimes.com

U.S. healthcare spending rises 3.9% in 2010

The increase represents the second-lowest rate on record as consumers avoided going to the doctor, taking expensive prescription drugs and undergoing costly elective procedures.

By Laurie McGinley, Los Angeles Times
7:00 PM PST, January 9, 2012
Reporting from Washington

U.S. healthcare spending grew at the second-lowest rate on record in 2010 as recession-spooked consumers avoided going to the doctor, taking expensive prescription drugs and undergoing costly elective procedures.

Public and private healthcare spending totaled $2.6 trillion, representing 17.9% of the U.S. economy, the same proportion as in 2009, according to a government report released Monday. That was a sharp departure from previous years, when healthcare consumed ever-larger shares of the economic pie.

But analysts said spending was likely to pick up as the economy improved and the healthcare law passed under President Obama begins to expand coverage to millions of people now uninsured.

Healthcare spending rose 3.8% in 2009, the smallest rise in the 51 years that the federal Centers for Medicare & Medicaid Services has been tracking the data. It rose 3.9% in 2010.

The figures reflected the "extraordinary" slow growth in consumption of medical services and products, said Anne Martin, one of the government economists who wrote the study published in the journal Health Affairs.

"Persistently high unemployment, continued loss of private health insurance coverage and increased cost sharing led some people to forgo care or seek less costly alternatives than they would have otherwise used," the report said.

The growth in health insurance premiums, while slowing slightly in 2010, exceeded the growth in insurers' spending on health benefits, according to the study. Insurers' spending rose 1.6%, compared with 3.7% the year before.

The report showed that the federal government footed 29% of the nation's healthcare bill in 2010, up from 23% in 2007. Part of that increase reflects a temporary increase in federal aid to states to enroll more uninsured people in Medicaid, which covers medical costs for the poor and disabled. The percentage of spending by private businesses and state and local governments declined.

Paul Ginsburg, president of the Center for Studying Health System Change, a Washington research group, said the report didn't address the biggest question: "When the economy gets strong again, do we just return to the old business as usual?"

"Probably," he said. "But there's a chance that the experience of people economizing may have longer-lasting effects."

Ginsburg said he believed healthcare spending remained slow last year, reflecting the lingering effects of the recession and sluggish recovery.

laurie.mcginley@latimes.com

2012-01-09T17:58:00.000-08:00

This Is Really Interesting!!

If you read The Great Recession Conspiracy, you know that the Business Cycle is driven by psychology. When everyone starts thinking everything is going to get better, it does. So this graph on consumer debt is either very encouraging, e.g., the recession is over, or very depressing, e.g., people are so desperate they are going into hock to stay alive.

What do you think?

2012-01-09T17:43:00.000-08:00

Something Worth Thinking About

I am sure you know about the 1%/99% split in the U.S. Two Tier Economy. That is the basic theme of the Occupy movement. It is a valid and repairable problem. We just need a Congress who gives a damn about it.

But there is another problem that has not got much attention. That is what is happening within the 99%. This article in today's Washington Post does a good job of presenting the problem and the research evidence available.

What do you think is going on here??

Harder for Americans to Rise From Lower Rungs

By JASON DePARLE

WASHINGTON — Benjamin Franklin did it. Henry Ford did it. And American life is built on the faith that others can do it, too: rise from humble origins to economic heights. “Movin’ on up,” George Jefferson-style, is not only a sitcom song but a civil religion.
But many researchers have reached a conclusion that turns conventional wisdom on its head: Americans enjoy less economic mobility than their peers in Canada and much of Western Europe. The mobility gap has been widely discussed in academic circles, but a sour season of mass unemployment and street protests has moved the discussion toward center stage.
Former Senator Rick Santorum of Pennsylvania, a Republican candidate for president, warned this fall that movement “up into the middle income is actually greater, the mobility in Europe, than it is in America.” National Review, a conservative thought leader, wrote that “most Western European and English-speaking nations have higher rates of mobility.” Even Representative Paul D. Ryan, a Wisconsin Republican who argues that overall mobility remains high, recently wrote that “mobility from the very bottom up” is “where the United States lags behind.”
Liberal commentators have long emphasized class, but the attention on the right is largely new.
“It’s becoming conventional wisdom that the U.S. does not have as much mobility as most other advanced countries,” said Isabel V. Sawhill, an economist at the Brookings Institution. “I don’t think you’ll find too many people who will argue with that.”
One reason for the mobility gap may be the depth of American poverty, which leaves poor children starting especially far behind. Another may be the unusually large premiums that American employers pay for college degrees. Since children generally follow their parents’ educational trajectory, that premium increases the importance of family background and stymies people with less schooling.
At least five large studies in recent years have found the United States to be less mobile than comparable nations. A project led by Markus Jantti, an economist at a Swedish university, found that 42 percent of American men raised in the bottom fifth of incomes stay there as adults. That shows a level of persistent disadvantage much higher than in Denmark (25 percent) and Britain (30 percent) — a country famous for its class constraints.
Meanwhile, just 8 percent of American men at the bottom rose to the top fifth. That compares with 12 percent of the British and 14 percent of the Danes.
Despite frequent references to the United States as a classless society, about 62 percent of Americans (male and female) raised in the top fifth of incomes stay in the top two-fifths, according to research by the Economic Mobility Project of the Pew Charitable Trusts. Similarly, 65 percent born in the bottom fifth stay in the bottom two-fifths.
By emphasizing the influence of family background, the studies not only challenge American identity but speak to the debate about inequality. While liberals often complain that the United States has unusually large income gaps, many conservatives have argued that the system is fair because mobility is especially high, too: everyone can climb the ladder. Now the evidence suggests that America is not only less equal, but also less mobile.
John Bridgeland, a former aide to President George W. Bush who helped start Opportunity Nation, an effort to seek policy solutions, said he was “shocked” by the international comparisons. “Republicans will not feel compelled to talk about income inequality,” Mr. Bridgeland said. “But they will feel a need to talk about a lack of mobility — a lack of access to the American Dream.”
While Europe differs from the United States in culture and demographics, a more telling comparison may be with Canada, a neighbor with significant ethnic diversity. Miles Corak, an economist at the University of Ottawa, found that just 16 percent of Canadian men raised in the bottom tenth of incomes stayed there as adults, compared with 22 percent of Americans. Similarly, 26 percent of American men raised at the top tenth stayed there, but just 18 percent of Canadians.
“Family background plays more of a role in the U.S. than in most comparable countries,” Professor Corak said in an interview.
Skeptics caution that the studies measure “relative mobility” — how likely children are to move from their parents’ place in the income distribution. That is different from asking whether they have more money. Most Americans have higher incomes than their parents because the country has grown richer.
Some conservatives say this measure, called absolute mobility, is a better gauge of opportunity. A Pew study found that 81 percent of Americans have higher incomes than their parents (after accounting for family size). There is no comparable data on other countries.
Since they require two generations of data, the studies also omit immigrants, whose upward movement has long been considered an American strength. “If America is so poor in economic mobility, maybe someone should tell all these people who still want to come to the U.S.,” said Stuart M. Butler, an analyst at the Heritage Foundation.
The income compression in rival countries may also make them seem more mobile. Reihan Salam, a writer for The Daily and National Review Online, has calculated that a Danish family can move from the 10th percentile to the 90th percentile with $45,000 of additional earnings, while an American family would need an additional $93,000.
Even by measures of relative mobility, Middle America remains fluid. About 36 percent of Americans raised in the middle fifth move up as adults, while 23 percent stay on the same rung and 41 percent move down, according to Pew research. The “stickiness” appears at the top and bottom, as affluent families transmit their advantages and poor families stay trapped.
While Americans have boasted of casting off class since Poor Richard’s Almanac, until recently there has been little data.
Pioneering work in the early 1980s by Gary S. Becker, a Nobel laureate in economics, found only a mild relationship between fathers’ earnings and those of their sons. But when better data became available a decade later, another prominent economist, Gary Solon, found the bond twice as strong. Most researchers now estimate the “elasticity” of father-son earnings at 0.5, which means if one man earns $100,000 more than another, his sons would earn $50,000 more on average than the sons of the poorer man.
In 2006 Professor Corak reviewed more than 50 studies of nine countries. He ranked Canada, Norway, Finland and Denmark as the most mobile, with the United States and Britain roughly tied at the other extreme. Sweden, Germany, and France were scattered across the middle.
The causes of America’s mobility problem are a topic of dispute — starting with the debates over poverty. The United States maintains a thinner safety net than other rich countries, leaving more children vulnerable to debilitating hardships.
Poor Americans are also more likely than foreign peers to grow up with single mothers. That places them at an elevated risk of experiencing poverty and related problems, a point frequently made by Mr. Santorum, who surged into contention in the Iowa caucuses. The United States also has uniquely high incarceration rates, and a longer history of racial stratification than its peers.
“The bottom fifth in the U.S. looks very different from the bottom fifth in other countries,” said Scott Winship, a researcher at the Brookings Institution, who wrote the article for National Review. “Poor Americans have to work their way up from a lower floor.”
A second distinguishing American trait is the pay tilt toward educated workers. While in theory that could help poor children rise — good learners can become high earners — more often it favors the children of the educated and affluent, who have access to better schools and arrive in them more prepared to learn.
“Upper-income families can invest more in their children’s education and they may have a better understanding of what it takes to get a good education,” said Eric Wanner, president of the Russell Sage Foundation, which gives grants to social scientists.
The United States is also less unionized than many of its peers, which may lower wages among the least skilled, and has public health problems, like obesity and diabetes, which can limit education and employment.
Perhaps another brake on American mobility is the sheer magnitude of the gaps between rich and the rest — the theme of the Occupy Wall Street protests, which emphasize the power of the privileged to protect their interests. Countries with less equality generally have less mobility.
Mr. Salam recently wrote that relative mobility “is overrated as a social policy goal” compared with raising incomes across the board. Parents naturally try to help their children, and a completely mobile society would mean complete insecurity: anyone could tumble any time.
But he finds the stagnation at the bottom alarming and warns that it will worsen. Most of the studies end with people born before 1970, while wage gaps, single motherhood and incarceration increased later. Until more recent data arrives, he said, “we don’t know the half of it.”

2012-01-09T16:04:00.000-08:00

Oh Boy, This Is Complicated!!

Since I thought Google had ended http://thegreatrecessionconpiracy.blogspot.com, I started cleaning out my files on this topic. In those files, I found that Google has given me a secret access code three years ago when I had published The Great Recession Conspiracy and started this up dating process.

It turns out that I can go to the secret site and post a rant which will appear at the site you log on to to read the rant of the day. It is a real pain in the ass procedure, but I will try it for awhile, unless someone has a better idea.

The Great Recession Conspiracy

The Man Without A Plan

Gingrich Stuck to Caustic Path in Ethics Battles

By SHERYL GAY STOLBERG

How the U.S. Lost Out on iPhone Work

By CHARLES DUHIGG and KEITH BRADSHER

"Paul Krugman Makes Housing Call He Will Likely Come to Regret

The iEconomy

Multimedia

The iPhone Economy

latimes.com

Obesity rates in U.S. appear to be finally leveling off

After three decades of climbing steadily, obesity rates appear to be stabilizing nationwide. Increases among certain demographic groups are still evident, however.

A real market economy ensures that greed is good

Why Is Europe a Dirty Word?

By NICHOLAS D. KRISTOF

HERE'S WHAT'S WRONG WITH THE ECONOMY... (And How To Fix It)

Henry Blodget

A QUESTION FOR PAUL KRUGMAN, Who Keeps Saying Our Huge Debt Mountain Is Of No Concern

See Also:

Global Debt To GDP: Europe Is Bust

HERE'S WHAT'S WRONG WITH THE ECONOMY... (And How To Fix It)

DAVID FRUM: It's Time We Republicans Finally Admitted That Paul Krugman Might Be Right

24 Stats To Crush Anyone Who Thinks America Has A Bright Economic Future

Sponsored Link:

The Map is Not the Territory: An Essay on the State of Economics

latimes.com

Federal Reserve missed signs as crisis loomed

Transcripts of 2006 policymaker meetings illustrate a glaring absence of alarm.

Survey Finds Rising Perception of Class Tension

By SABRINA TAVERNISE

Current woes call for smart reinvention not destruction

The A-List

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FROM The A-List

Capitalism in Crisis

Capitalism in crisis: The code that forms a bar to harmony

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FROM John Plender

Calculations, causes and costs

latimes.com

U.S. healthcare spending rises 3.9% in 2010

The increase represents the second-lowest rate on record as consumers avoided going to the doctor, taking expensive prescription drugs and undergoing costly elective procedures.

Harder for Americans to Rise From Lower Rungs

By JASON DePARLE