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If Washington can’t do anything about jobs and infrastructure now, can it ever do anything about jobs? I think the answer is NO!

posted on September 6, 2011 at 8:30 am
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Global financial markets continue to expect the U.S. Federal Reserve to pull a rabbit out of its hat. For example, global stocks rallied on Wednesday, August 31, on the release of minutes from the Fed’s August 9 meeting that showed some members of the Fed’s Open Market Committee wanted to do go beyond the Fed’s promise to keep rates exceptionally low through the middle of 2013. Markets read that as a sign that the Fed would do something dramatic if problems deepened. (And, boy, did they deepen on Friday with news that the U.S. economy hadn’t added any jobs in August.)

But as Bullwinkle J. Moose repeatedly said when he pulled a snarling bear instead of a cuddly bunny out of his hat, Wrong hat.

Hasn’t anybody actually read through to the end of Fed chairman Ben Bernanke’s August 26 Jackson Hole speech? (That’s a purely rhetorical question, of course.)

Six paragraphs from the end he said, “Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.” Faster economic growth, Bernanke went on, depends on fiscal policy, and the design of intelligent tax and spending programs. We can’t grow our way “out of our fiscal imbalances, but a more productive economy will ease the tradeoffs that we face,” he said even closer to the end of his speech.

In other words, we’re in deep trouble. After all, we’re talking about the United States, a country where the President and the Speaker of the House have trouble scheduling a major Presidential speech on jobs. (That speech is now set for September 8.)

How dysfunctional is fiscal policy in the United States right now?

Let’s use the fight over extending funding for transportation as an example.

You’d think this would be an easy one.

Transportation legislation, set to expire on September 30, provides money to build and repair highways and bridges and to fund mass-transit projects. The expiring legislation also authorizes the government to collect the current 18.4 cents a gallon gas tax—which goes into the Highway Trust Fund to pay the federal share of highway projects.

In the Senate Democrat Barbara Boxer (California) and Republican James Inhofe (Oklahoma) have proposed a two-year, $109 billion extension of the act.

In the House Republican John Mica (Florida) has proposed a version of a reauthorization bill that would cut funding by about a third.

Frankly with the unemployment rate at 9.1% and the economy threatening to tip back into recession, I find the idea of cutting spending on transportation puzzling. This is spending that keeps people working and that’s one thing the economy needs right now. If you’re so gung-ho about cutting spending right now (and as much as I think we do need a deficit reduction plan in the mid-term, I think we need spending to stimulate growth now), there are lots of other places to cut government spending without costing jobs. Scaling back or eliminating tax breaks to companies would be one place to start. A recent study by the Institute of Policy Studies found that 25 of the 100 highest-paid corporate executives in the United States received more in pay last year than their companies paid in taxes. And how did companies such as Verizon, General Electric, Boeing, and eBay pull off this trick? By juggling revenue and expenses between the United States and subsidiaries operating in countries that the U.S. Government Accountability Office has characterized as tax havens.

As you’d expect, the political rhetoric in Washington is flying fast and furious. Democrats say that the House bill would cost 500,000 highway jobs and 100,000 additional transit jobs. Republicans say the Senate bill is yet another instance of runaway government spending. I think the Democrats have the better of this argument: The experience of the Great Depression says that when the problem with the economy is a slump in demand, then government spending that creates demand is an effective tool of fiscal policy.

But what drives me nuts about this debate isn’t the differences between the Democratic and Republican plans but their similarities. The vision of both sides is so crabbed, so pessimistic, so limited that it’s hard to see any hope for fiscal policy leading the country out of recession in the way that the Fed’s Ben Bernanke pleaded for in his Jackson Hole speech.

Take the federal gasoline tax. The 18.4 cents a gallon tax hasn’t been raised since 1993. In September 1993 regular gasoline sold for $1.05 a gallon so the federal tax represented 17.5% of the price of a gallon. In August 2011 regular sold for $3.60 a gallon so the tax represented just 5.1% of the price of a gallon.

Despite this, despite projections that show the Highway Trust Fund facing insolvency in 2012, despite strong arguments (agree or disagree, up to you) that gradually raising the price of a gallon on gas through taxes would be one way to reduce U.S. dependence on oil—despite all this—both President Barack Obama and the Congressional Republican have ruled out any increase in the federal gas tax. The vague plan is to make up the shortfall in the trust fund by attracting more private-sector funding. (Of course, if the government has to give away subsidies to attract this private funding, it wouldn’t count as a tax. Although it would be spending that adds to the deficit.)

If you can’t get an increase in the federal gas tax through Congress, you can’t increase taxes of any sort, I’d argue. Scratch that tool of fiscal policy then.

I’d also argue that if you can’t get a transportation bill—with a reasonable increase in spending—through Congress, you can’t get any spending bill passed on Capital Hill at all. And that would scratch another big tool of fiscal policy.

Even if you don’t buy the short-term jobs creation argument, I don’t see how you can ignore the long-term link between infrastructure spending and economic competitiveness. While the United States is debating an inadequate bill on transportation spending, our biggest economic competitor China is building airports, expanding its railway freight network, and adding thousands of miles of roads. U.S. ports fall further behind Hong Kong and Singapore and Vancouver by the day—and it’s not clear that any U.S. port will be ready for the bigger ships that will come sailing through an expanded Panama Canal. The 2009 “Report Card for America’s Infrastructure” by the American Society of Civil Engineers gave U.S. roads and bridges a grade of D- and the country’s transit systems got a D. According to the report 36% of major urban highways were congested—that means goods and people are sitting in traffic raising the cost of doing just about everything—and 33% of major roads were in poor or mediocre condition.

And yet the bill introduced by Republican Mica, the chair of the House Transportation and Infrastructure Committee, proposes less spending in the reauthorization than when the transportation legislation was first passed in 2005. That year’s bill authorized $286.5 billion over five years. Mica’s bill would authorize $230 billion over six years.

Boxer’s Senate bill at $109 billion over two years provides more money per year but it’s not even guaranteed to pass the Senate, let alone clear the House. Some Senate Republicans have threatened to block the bill unless all spending on highway beautification and bicycle transportation is stripped out of the bill. Besides the question of what these Senators have against bicycles, you’ve got to wonder after Republican performance on legislation to raise the debt ceiling if these are real objections or merely efforts to delay the bill that would be followed by other objections.

And this, spending on transportation, ought to be an easy piece of fiscal policy to get right. Jobs in a recession and long-term investment in infrastructure to increase competitiveness—it’s hard to imagine any fiscal initiative with more going for it.

If Congress can’t get this one right, I think Fed chairman Bernanke can forget about his call for intelligent fiscal policy to increase the productivity of the economy.

The trumpet will have sounded and no one in Congress will have answered the call. I’m not holding my breath waiting for anything visionary or dramatic from the President in his September 8 speech on jobs either. Small thinking for big challenges seems to be the flavor of the year in Washington.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post.  For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/


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  • bobisgreen on 6 September 2011

    Just like the line in a song says, “Where do I begin”? Short and sweet, here it is: 1. Shovel ready infrastructure spending without “b.s.” pet projects with owls and monkeys. 2. Administration needs to do a 180% on economic policy (hint: nothing they’ve tried in the name of sanity and common sense has convinced investors and employers to do anything positive). 3. Gas tax? a bump of 2 cents per gallon would help…wouldn’t be popular, but would impact anyone who drives a car. It might even generate $ for infrastructure projects (I can’t believe I suggested a tax bump…my fingers could barely hit the keys!). 4. Unfortunately, more pain until after 2012 elections; then, only time and wise policymaking will have a prayer. Washington hasn’t shown that it’s capable of wisdom.

  • BradTank on 6 September 2011

    When does the out of control spending at Washington stop? We’ve already been downgraded by S&P, and every other credit rating agency has given us a “negative” outlook.

    We have tried ridiculous “shovel-ready” stimulus projects and it has gotten us nowhere, with nothing but a downgraded credit rating to show for it.

    The less money Washington gets, the better our economic outlook will be.

  • dwswager on 6 September 2011

    @Bibusgreen, I agree Where to begin with this nonsense.

    Raising the gas tax would be a jobs killer, just as the doubling of the price of gas has been since the administration took office. This may or may not be advisable in the mid term when the economy recovers, but not now!

    Deficit spending does not create jobs or boost the economy. I will defend Keynes because even Keynesianism is Supply Side except for one theory, Keynes was dead before his policies were enacted, he advised that it would not work in the ‘long run’ (we have been doing it for over 50 years already), but most importantly because Keynes assumed the money would be saved wealth not already in the system. Why would anyone think that taking $1T out of the economy with the left hand, subtracting the requisite administrative, graft and misallocation charges, and then dumping the remainder back into the system with the right hand would make things better?

    The real killers of job creation have been the whimsical manner in which the government selected who survived, who merged and who failed in the bank bailouts, violation of bankruptcy law in the auto bailouts, and the tons of new federal regulation being heaped onto the economy. Who in their right mind would invest Billions in a system where the Government can just choose to take it from whom it legally belongs (Chrysler bond holders) and hand it to their campaign contributors (UAW)? I’m a lot less likely to invest in corporate bonds of marginal quality based on my determination of potential government interference.

    Jim, we are debating the conventional wisdom of some 80 years of mostly failed federal policy (New Deal, Great Society, Converting schools to social reeducation camps, Green at all cost, etc). It should be contentious. And we had a debt deal that did little (No cuts, but a $20B slow down in the increase of spending next year) because the winners of the last election only won control of 1/10th of one ½ of one branch of government.

  • AndyM789 on 6 September 2011

    Arguing with tea partiers is the new black. I’m not even going to touch claims that deficit spending doesn’t boost the economy, or that the New Deal failed, or whatever. It’s nothing more than revisionist history, and it is not worth the time of serious people looking for real answers. I understand being frustrated and disillusioned, but it’s no excuse for inventing your own version of reality. Since this post is about infrastructure, though, I would like to respond to BradTank.

    The first round of infrastructure spending in the 2009 economic stimulus bill had a significant positive effect on the economy. It wasn’t enough to return the entire world economy to good-as-new status, but you get what you pay for. We only spent just over a hundred billion dollars on actual infrastructure spending, with perhaps another 300-400 billion on things that could reasonably be called stimulative spending (as opposed to tax breaks and incentives, which have a much smaller stimulative effect than direct spending). All of which may have been enough to prevent a second Great Depression, but was not near enough to fix the damage to our economy (caused, I might add, by the culmination of decades of anti-regulation zealotry of just the sort the tea party is promulgating).

    Stimulative spending is exactly what’s needed right now; witness the massive capital hoarding going on in corporate America today. Everyone’s sitting on piles of money, scared to death to spend it because they don’t want to be the first guy to climb out of the trench and get mowed down by an uncertain economy. It’s a textbook case for a long-term program of government stimulus. Short term stimulus can give the economy a nudge, but it won’t convince corporations to spend or start hiring. For that to happen the time horizon on any stimulus program has to be long enough that they can’t see past it–ideally, the time horizon would be indefinite. A sustained, open-ended program of spending (like we had during the Great Depression) changes the calculus for a corporation; instead of thinking about whether and how badly they’re going to be screwed after the stimulus ends, they’re suddenly thinking about how they can’t afford NOT to start reinvesting their capital, lest they fall behind their competitors.

    The big huge problem, of course, is that since the stimulus has to be big, and it has to be open-ended, massive deficit spending is required. On a national credit card that no longer has enough space on it to support this kind of program because we ran it up unnecessarily when times were good (thanks Reagan and W!). But, spilled milk: we’re just going to have to do our best at stimulating the economy without running massive deficits, which will require a lot of reallocation of government spending and a lot of tax increases in the right places. Sadly, I don’t see that happening any time soon. When half of Congress refuses to do even the most basic, common-sense stuff–like, say, taking unnecessary military spending and tax breaks for oil companies and spending it on our crumbling bridges, aging ports, and inadequate energy infrastructure instead–we’re so far from where we need to be that I can’t even see there from here.

  • silly boy on 6 September 2011

    Thank you, thank you AndyM789!!

    It is beyond comprehension how some are prepared to indulge them self in their wet-dreams..

    We hear fantasies that are tailored to political agenda that claims that vacuum is the ideal state..

  • BradTank on 6 September 2011

    It’s incredibly gratifying to watch Keynesian economics fall flat on its face.

    I love all of the excuses, “it will work, we just need to keep trying” But Obama said with his stimulus package, unemployment would not exceed 8%, that’s what all of his “genious” Keynesian economists told us (wonder why they all left) Now we’re near 10% unemployment and looking at a double dip recession. So excuse me if I ignore calls for an even bigger stimulus that will only drive us deeper in debt.

  • rdemetrion on 6 September 2011

    bingo, AndyM. It’s a nation where most seem to have one hand on their wallet and the other between their legs either covering one hole or pleasuring the other (or, with sufficient dexterity, both). Too self-absorbed to indulge in anything visionary, and defiantly opposed to personal sacrifice. Maybe we’ve made life so good that it no longer pays to take risks for a better future, and efforts are best spent in protecting what we’ve got? That sounds like a short-term project.

  • TLA on 6 September 2011

    BradTank and his ‘believers’ are mistaken to lay the current economic malaise on Keynsian policies. We are suffering an attempt at misdirection by their insistence on deficit talk. The problem is that we are deleveraging and the economy has been modified over the past 25 years into a consumption driven economy. Previous spending on unproductive efforts has left no room to work. Housing Bubble most recently. That spending also includes Afghanistan, Iraq and the prescription drug plan that Bush lied about to congress. With no demand or ability to take risk by corporate America what will keep us from a death spiral? Collective saving by individuals is the solution? Ridiculous!!!

  • TimeMachine on 6 September 2011

    Jim, history is repeating itself. When I read about the Great Depression in college the historians kept saying that FDR should
    have spent more money on the infrastructure projects he started.
    The situation of the world economy and the failure of congress to act indicates another part of history will soon repeat, world war.
    The stresses caused by recent financial difficulties of high food prices, high gas prices, and high unemployment will lead to unrest in this country and other parts of the rest of the world. The end result may be a major war that finally brings this country out of its difficult financial situation but what a price to pay.
    There is only one thing I disagree with you on in this article. Bullwinkle J. Moose pulled a snarling lion out of his hat, not a bear.

  • peanutgallery on 6 September 2011

    Who is John Galt?

  • saludovencedorus on 6 September 2011

    Government spending does not “create” anything, least of all real (US) jobs. I’m not sure why this axiom is so difficult for most to understand. The world is deleveraging, and it’s going to take a long time. Hunker down.

  • RetREMF on 6 September 2011

    @AndyM “…not worth the time of serious people”? Oh really? Walter E. Williams, Professor of Economics at GMU is serious people and whose 8/17/11 article, Ominous Parallels contradicts “your own version of reality”. I’ll take the professor’s version.

  • RetREMF on 6 September 2011

    @time Do you know there are other versions of what you read in college? Start with the article by Walter Williams referenced above and follow with a publication from the Mackinac Center for Public Policy and the Foundation for Economic Education titled “Great Myths of the Great Depression.

  • USDAportfolio on 7 September 2011

    Many readers are confusing the stock market with the economy, or are simply not thinking rationally, or are pushing a political agenda.

    Last I checked, the US economy is still growing, and has been since 2009. The world economy is still growing. The total number of consumers in the world will have doubled (from roughly 1 billion to 2 billion) in the 20 years between 1995 and 2015. Worldwide employment and wages are rising.

    US corporate profits are at all time highs. I repeat: ALL TIME HIGHS. This is a matter of public record. Anybody who is willing to turn off the political spin and look up the facts can easily find that for themselves. The S&P500 earnings are at all time highs. US GDP is at an all time high.

    The ability to create jobs in the USA has never been better. The growth of the global consumer means the market for US-made goods — and we still make a lot of very good products — has excellent growth prospects.

    Many corporate CEOs are forecasting steady 5-10 growth over the next decade. They’re coming out and saying this publicly. And we all know that CEOs like to set the bar low so it’s easy to jump over and get a bonus.

    Interest rates are ridiculously low. In fact, they’re lower than the inflation rate.

    Corporate balance sheets are still fat with cash.

    There is a massive migration of individuals from rural living into the cities. (See the latest Scientific American.) Rural-to-urban migration creates economic growth, as production and distribution — not to mention idea exchange and innovation — are more efficient in cities. Consumers are eating more calories and higher on the food chain, driving growth in agriculture.

    We are NOT headed to the Great Depression, nor are we living through anything remotely similar. Those who are insinuating as much should be ashamed of themselves. Go get a history book and see what life was like back then. If this were the depression, you wouldn’t have a home, electricity, or a computer — or the time to post a comment to a website because you’d be searching for work or begging for food.

    The average person’s ability to see the future is terrible. That is why the average person underperforms the market. My recommendation is to learn how to do fundamental analysis, dollar-cost average into an index, or quit investing altogether. It is obvious that many of you have no idea how many screaming deals are out there right now. And if you’re not an investor or only have a political comment to make – why the heck are you posting on an investing website? Go find one about politics and quit cluttering our boards.

    It is obvious that we have an employment recession we need to crawl out of. We do not have a economic-profits recession, nor will we.

    Corporations are becoming more efficient. The use of computers and the internet, and the growth of TOC, Lean, and TQM has made corporations able to do more with less. The economic growth rate to jobs growth rate ratio is now larger than it used to be prior to the widespread adoption of these tools. If excess profits generated through their use aren’t recycled into the economy through spending cash on corporate balance sheets, spending of dividends / capital gains by the shareholders, and through taxation and spending, then the underemployment crisis will continue. And when I say “spending”, I don’t mean investing in derivatives, MBSs, stock-buybacks, or other non-productive methods of spending.

    There is a huge demographic trend of individuals preparing to enter retirement. All asset allocation models tell them to plow their money into bonds… and to convert more of their investments into bonds the older they get. Instead of going directly into the economy as it did in the 1970s and 1980s, the boomer generation’s money began to be used for investments in the 1990s; we saw paychecks which used to be spent on goods leave the economy and go into driving irrational bubbles — first through tech stocks, then mortgage backed securities, and now gold, treasuries, and bonds. Ask your coworkers. My coworkers who are near retirement are plowing into bonds after being burnt by stocks twice, and one of them loves to hoarde physical gold. It makes no sense.

    With the boomers plowing their money into bonds, interest rates will stay low as long as the trend continues — possibly until the boomers begin to really leave the workforce en masse and their 401k contributions cease.

    That is when interest rates will rise, and bond prices will fall. Boomers will get burned once again. The last person through the bond door will get burned, mark my words. (I don’t know if this will be a gradual, 10-yr process as boomers retire, or if once the trend begins, it will quicken… I suspect the latter.)

    When the boomer jobs are vacated, the unemployment crisis will ease. Demand for individuals to fill the boomer jobs will increase, pushing up pay for the next generation. As the next generation gets paid more, they will spend… and eventually begin to save. That saving — due to asset allocation models — will primarily be in stocks. The extra pay and spending will also drive inflation in the USA, which will further hurt fixed-income investors.

    This trend — over the next 5 to 10 years — will coincide with immense economic growth worldwide and an increase in US exports. Corporate profits will continue growing… have they ever not grown? Do you really think corporate boards really don’t know how to grow their profits and won’t be able to do so over the next 10 years, when the opportunity is so ripe?

    The growth in wages and spending will drive economic growth. The demographic trend to push investment dollars back towards stocks will lead to growth in stock prices, which the underlying growth in corporate profits will justify.

    Meanwhile, Internet 2.0 innovations, mobile internet and telecommunications, and medical breakthroughs will continue to make our lives better and products cheaper. All of these brilliant minds – the US and European, and Chinese and Indian scientists and engineers who are now entering the workforce – are going to invent things never even imagined.

    The future is so ripe for an investor it isn’t even funny.

  • skeith on 7 September 2011

    USDA: you speak truth. I understand your disgruntlement with the people who spout ideology, because I share it. However, I think it is a mistake to ignore the effects that government can have on the economy. Economics and politics are intimately intertwined, and the organic changes that you outline, while largely inevitable, can be turned to different ends depending on what actions the government takes.

    I think most people can agree (and certainly most people who invest can agree) that for most goods and services the free market is a great thing. It has failings, but an investor who can identify a company with a forward vision and an excellent product will – in an ideal free market – have a great investment opportunity.

    It is my observation, however, that the biggest firms actively hate the free market and will do everything in their power to subvert it. They don’t want competition. They don’t want to have to battle other firms to see who can produce a good most efficiently, or in a way that is most attractive to consumers.

    They will artificially lower their prices by pushing costs off onto third parties (hello Radium Girls). They will use non-market means to drive their competitors out of business (hello Microsoft). These market-subverting actions hurt consumers and often workers (and let’s not forget that workers are also consumers), and this is where government SHOULD step in. The free market has to be protected from business, as counterintuitive as that may seem. The actions that government does or does not take have an immense impact on, for instance, whether or not that small start-up with the great idea is actually a good investment. Will it have a fair opportunity to prove itself, or will the big boys be allowed to crush it through non-market means?

    Whenever firms do their best to keep everyone in the dark about what is going on, I have to suspect that they are up to no good. Companies don’t lie and hide their deals for benevolent reasons. Why, for instance, is it still impossible to determine which firm has what exposure to the credit-default-swap market? How can an investor make an intelligent decision on where to put money without that knowledge? This is one area where I wish government would step in. We all also depend on SEC filings to weigh our options. Can those filings be trusted? The SEC, like many government agencies, is both underfunded and has been partially captured by the industry it regulates. They didn’t notice Enron’s irregularities until it was already in the process of collapse. Investors who depended on those filings were taken for billions.

    TL;DR – to sum up, I think it’s a mistake to ignore the effects of political action or inaction on the economy. Somalia, for instance, has no government, and hasn’t for 20 years. If regulations were truly detrimental, Somalia ought to be a capitalist paradise. There are no regulations there to cramp anyone’s style. And Jim himself posted earlier about how Chile’s government takes some rather severe steps to smooth out what would otherwise be a highly cyclical economy (post is here: http://jubakpicks.com/2011/04/22/be-your-own-sp-heres-how-to-rate-the-debt-of-all-the-worlds-countries-and-then-use-your-ratings-to-guide-your-portfolio/). Your predictions are predicated on the assumption that the US government will do nothing about, for instance, the burgeoning bond bubble, which frankly I think is a pretty accurate assessment. But it doesn’t have to be that way. That is not the only way it could be.

  • bobisgreen on 7 September 2011

    USDA, opportunities are ripe for investors. I wonder what environment would cause a company (many of them) to sit on a huge horde of cash. Usually businesses use cash reserves to improve their bottom line. It seems like a defensive posture, sitting on that much cash.

    I’m a baby boomer and still love equities.

  • dwswager on 7 September 2011

    Bottom line is that Say’s Law of Markets trumps Keynes theory of deficit spending.

    “The encouragement of mere consumption is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption; and we have seen that production alone, furnishes those means. Thus, it is the aim of good government to stimulate production, of bad government to encourage consumption.”

    It’s not that people don’t want to buy a new home, car, iPad, etc. (the demand is there), it is that they have not the resources to indulge that demand (Their supply sucks). Example. Deere Stock. Farmers want tractors and equipment all the time, but they buy tractors and equipment when their net earnings go up. Hence, there is no need to stimulate their demand, but we want to stimulate their means of fulfilling their demand.


    While I agree with most of your argument concerning markets versus the economy, I must point out that the mass migration from rural to urban is what brought about the downfall of Rome! Mainly due to price controls on food, the rural food producers could no longer make a living and moved to the cities to benefit from the spoils.

    Our concern here is not corporate profits, but overall GDP and employment. We cannot maintain for long the stratified system where people who are employed are doing fairly well and the rest of the population is getting crushed. Revolutions start that way!

    Time Machine
    You were being taught Keynesianism by Keynesianists! Look at the current administration full of College professors like Alan Krueger, just appointed head of the Council of Economic Advisors. He was the architect of ‘Cash or Clunkers’ (Pay Billions of dollars in wealth to get Americans to destroy billions of dollars in wealth)…Brilliant!
    Also remember that economists back fit models to historic data. They are not necessarily predictive! The CBO head recently highlighted this in talking about the stimulus: “if the stimulus bill did not do what it was originally forecast to do, then that would not have been detected by the subsequent analysis.” What he is saying is they don’t look at real world output, only the output of their multiplier effect model! So when they CBO says the stimulus ‘saved or created’ 2.9 million jobs, all that means is they spent enough money so the model will pop out an answer of 2.9 million. Whether those jobs were actually ‘saved or created; they have no idea.

    You might try reading Hayek’s devastating refutation of Keynes’ Pure Theory of Money (Hayek never reviewed publicly the later General Theory until 1963. Hayek regretted it, but his two stated reasons where that in the 5 years between the two, Keynes had rethought his whole approach and Hayek figured he would just change his mind again and

    “As I saw it, an examination of the validity of The General Theory would have made it necessary to take issue with the whole macro dynamic approach, the treatment of the economic process in terms of aggregates and statistical totals, a theory which was concerned only with price levels and total income streams and in effect took the whole structure of relative prices for granted and provided no tools to explain changes in relative prices or their effects.”

  • kelvinator on 8 September 2011

    Wow! You folks are amazingly prolific over here! I’ve been commenting on the JAM blog for awhile, but now it looks like my free subscription may have run out today that I got when I invested in Jim’s fund a year ago. If so, I’ll move back here and hope I don’t spend as much time reading and writing here as I did there, though I do enjoy it. I thought I wrote long comments there, but I’ve got nothin’ on you all. I see we’ve got the same range of political views, but with more detailed articulation, at least today.

    To pick up and jump in, thanks skeith, very well put and you saved me a ton of writing. dwswager, i’m interested in and agree with a chunk of what you’re saying, but maybe we could just tidy up the paragraph under Time Machine to simply say “gov’t economic policy is being run by a bunch of intellectual bimbo’s with theories divorced from reality”, or something like that, though the examples are important. The last two paragraphs are intended for an audience other than me.

    My basic approach at this point is that now that traditional energy production peaked permanently in 2006 as now (finally) acknowledged by the IEA, and not coincidentally, four decades of exponential global ponzi credit peaked in 2007, we can grab our socks, toss our stocks and historic theories and hunker down for rully rocky ride through very uncharted territory. Actually, I’m kidding, somewhat. I’m not tossing all my stocks right now, since gov’ts are going to print money like there’s no tomorrow, I’m just trying to be very careful, which has been a great strategy since the credit crisis in 2007.

  • dwswager on 8 September 2011

    Let me be succinct:

    A big chuck of the stimulus went to state and local goverments and just transferred debt from them to the fed. No MULTIPLIER effect!

    Keyenes was opposed to large structural deficits because the chilled investment and employment.

    Keynes said the stimulus should be directed specifically at spurring PRIVATE investment and not large public works projects. Only private investment led to durable job growth and increased revenues that made the deficit spending ‘self liquidating’.

    Keynes was vauge on tax cuts, but the correct type will lead to the increase in private investment that he championed. [nix the payroll tax cut]

    Tax cuts must be permanent structural changes to have stimulative effect (Franco Modigliani [Keynsian], Milton Friedman[Monetarist]. This is why Kennedy and Reagan cuts worked great and Carter, GWB, & Obama’s have failed.

    Business and consumers have been deleveraging for a couple years. They are strengthening their balance sheets. It is the Fed Gov’s unwillingness to do the same that is leading to FUD about inflation, increased tax burden, increased regulation and Stagflation. Their efforts at non-keynsian stimulus is having the opposite effect than expected.

  • kelvinator on 8 September 2011

    Thanks, dwswager. I’m not familiar with details of Keynes’ theories, so will need to accept your summary of them. Overall, as noted in my previous comment, I think Keynes’ theories you’re talking about are discussing how to effectively address a major downturn in the on-going business cycle.

    But I think that the basis of traditional capitalism and modern economic theory has a more fundamental problem: it assumes that exponential economic growth can continue forever in a finite world – eg – all mainstream economists are expecting that after we deal with the dire deficits, defaults, dislocations, over-capacity, slow growth, and whatever the needed adjustments are, that we’ll return to the wonderful 3% annual growth that the entire fractional reserve banking and capital investment system depends on to not be a ponzi scheme. I think we should fuggetaboutit. We don’t see infinite exponential growth anywhere in the natural world. It only exists in the human imagination, including the mind of Bernie Madoff and the minds of capitalists who believe that we will always be able, with creativity and technology, to fund substitutes for fundamental inputs – like food, for example, and energy. This false view has been support by a century and a half of cheap petroleum, which ended in the last decade, and 40 years of ponzi debt, which ended in 2007. IMO, we’re still in bubble thought land in capitalism, almost as much as the carnival huckster banksters were when they were spinning their ponzi “financial innovation” inventions – the remarkable AAA CDO’s spun from sub-prime loans jacked out to part time janitors. It’s a good time to invest in gardening tools, since the brilliant clowns the brought us the crash are going to keep transferring debt with no multiplier effect, and printing money with no multiplier effect as they keep trying to run through the gamut of dead people’s theories of what to do in a panic, when the real problems are simpler: we’re running out of energy, food and water globally to support the foolish American high consumptive dream of what life should be like. The good news is that there’s actually enough of everything to make things work for everyone and to adjust for a long time into a new, steady state economic theory that includes community and spiritual values. The bad news is expectations: too many people worldwide now believe we all need to live a high consumptive, high energy lifestyles, and the share and bond holders won’t want to take their hits as that vision fades. So, unfortunately, we’re much more likely to go to war than to collaborate to come up with solutions that work for everyone. Like I say, I think it makes sense to buckle up for a long, rocky ride.

  • kelvinator on 8 September 2011

    Also, I guess I’ll have to disagree with Jim’s statement regarding the ultimate inability of Washington to “ever” create jobs – because of the world “ever” – maybe that’s more a sign of his frustration. I entirely agree that they can’t/won’t do a thing now. But I think a new recession and round of job losses would potentially push the level of social nastiness to the point where the gov’t will in fact start printing money and directly funding job creation as a means of by-passing banks and dropping Bernanke’s helicopter bales of money on streetcorners where people can actually get to it rather than in bank vaults and corporate balance sheets like the near-sighted banker with bad aim that he is, and count on the finer points of capitalism to start humming. I don’t think this necessarily creates any multiplier effect, but it does feed some folks and keep them in their houses for a bit and maybe there could even be some training involved, who knows. Maybe at some point, people in a position of power will start getting real about what’s really going on. Hard to have real solutions until that happens, IMO.

    Clearly, I disagree with USDAportfolio’s view of the world, which I think likely to be proven very wrong by economic events between now and the next election. Overall, my investment strategy has done great counting on Wall Street to yak about how great business earnings will be doing and surprising to the upside while sliding their money out the back door.

  • dwswager on 8 September 2011


    I disagree with Keynes, but my point is that the stimulus spending isn’t even Keynesian! It is on balance, wasteful spending. So don’t blame Keynes for this administrations incompetance.

    And based on Daley’s words today, the big job plan will be $400B in new spending paid for by tax hikes on the people we are expecting to create the new jobs!! Obama has got to be a Repubilcan plant sent to kill the Democratic party.

    I’m not a conspiracy nut, but I’m stating to think that the new media emphasis on Fast and Furious and the Solynda loan are insider efforts to topedo the guy.

  • kelvinator on 8 September 2011

    dwswager – sorry, I’m not one who buys the “job creator” baloney, although I’m quite willing to believe Obama is a Republican plant. The Democratic party seems to be killing itself, with Obama leading the mass hari-kari as he and the party greys into meaningless corporate politician-ness. Why are “the job creators” going to create jobs when there’s no demand? Why are taxes on the wealthy going to hurt their vaunted job creation when they aren’t creating and aren’t going to create jobs anyway, unless you literally take their money and directly use it to hire someone? Wealth transfer and job creation paid for by taxes on wealthier folks might help those would-be job creators by keeping poorer and struggling families in houses with food and the torches and pitchforks out of their more picturesque and maturely landscaped neighborhoods for awhile. I think there’s a good chance we’re going to see way more radical programs than what Obama will propose tonight approved with bi-partisan support before this is all over, tho likely not before the election. I personally believe it’s likely to get that serious eventually.

  • USDAportfolio on 9 September 2011

    Kevinator, when you say there’s “no demand”, can you please specify or provide evidence?

    On a previous post, I thought you agreed with me that the main reason we have inflation is because of increasing worldwide demand. The things that are sold in the global marketplace — food, energy, raw materials, commodities — are rising in price because global demand is rising faster than global supply. (On a side note, my thought when people say the Fed is exacerbating inflation is: maybe. But if so, it’s like Bernanke is, well… spraying a hose into a river.)

    Now let me be clear: I don’t have rose colored glasses. I do think individual stock picking will be more difficult in the future. But not because we’re entering another recession. Instead, it’s because of rapid innovation, emergent competition (look at Amazon’s affect over only the last 10 years), and bottlenecks in the global supply chains (often due to underinvestment in infrastructure but also due to mismanagement of corporations by managers trying to keep costs low).

    These affects are going to create a new winners and new losers faster than ever. It will make stock picking difficult. That said, the economy as a whole will continue to grow. US and worldwide GDP will grow.

    Life for many will become very difficult as inflation picks up and they find it harder to buy food, water, and shelter. Likely the gap between the haves and have-nots will continue to grow. The conditions could become ripe for riots and revolutions (and wars) in areas with extreme economic disparaties — witness the Arab Spring revolutions this year.

    I’m not a fool wearing blinders. It is obvious that these situations are very real. What I’m saying is that if you are an investor, as I think most people on this website are, that it would be wise to bet on the status quo — that is, to expect corporate profits (and eventually stock prices, when the demographic trends favor it) to continue to go up.

    And keep in mind that worldwide companies are very interested in buying American businesses to get access to our consumer market and technology. Stockholders will benefit from mergers and aquisitions, which should continue to happen with interest rates as low as they are.

    So, yes — we have challenges we need to face. But not all is gloom and doom. The total number of people living good lives is greater than it has ever been. Yes, disparity in total wealth between the poorest and richest is large and growing — but most US citizens (even those in the lowest income brackets and those who are unemployed) are living like kings compared to how folks lived during the Great Depression.

    Finally… we’re on Jim Jubak’s site. I’ll plug his book for him again. It’s a good one, and I highly recommend you read it.

    It can help you identify those macro-economic trends that should be steady and serve to guide your portfolio through the ongoing and upcoming economic changes.

    Its title is “The Jubak Picks”.

  • kelvinator on 9 September 2011

    Thanks for your thoughts and nuanced views, USDA, which are more understandable as you explained them. I do agree that the level of demand in Asia growth vs slowing is not clear at this point, and might surprise to the upside – tho my bet will be that it’s very hard for them to really decouple from the West, where the lack of demand I’m talking about is centered, since they still are export based economies and the world economy is indeed still globalized for now.

    When I say “there is no demand”, of course, I’m saying that relative to a healthy, normally functioning economy, there’s very little demand, and I’m focused on the US, Europe and Japan. If there were no demand, the economies would be dead & busted. Kind of like where they were headed when credit, the heartbeat of the global economy, had a heart attack and stopped beating in fall, 2008. I say there is very little demand because, beginning at that time, three years ago , governments around the world started pumping literally trillions of dollars of cash and guarantees into the global financial system to electro-shock economic activity back to life. Then last year, Europe had it’s first heavy burst of debt crisis but successfully can-kicked to this year, now its having very serious trouble kicking that can – instead, ITS can is getting kicked and its growth is stalling – why? fear, austerity and low demand. The US started to slow last summer in 2010, and then mighty Ben pulled $100 billion or so each month out of thin air for 6 months. Why did that old boy do that? Because he’s scared as a loon that demand and economic activity will die if he doesn’t apply the old electrodes. And he was worried for good reason, GDP fell to a 0.4% annual rate 2011 Q 1, and a now revised 1.0% 2011 Q2 — Comatose! Deleveraging! No demand! A 70% consumer based economy that isn’t buying, in spite of unending guarantees, bailouts, buyouts, specials, going-out-of-business sales, takeovers, free money, new credit cards sent to the bankrupt, debt shifts, rebates, renegotiations. The patient is still on the operating table and the vital signs aren’t good. Now Pres Obama is pushing to inject more pure adrenaline with the jobs program. That’s my evidence there’s little demand.

    Your point is that the stock market is not the same thing as the economy. That’s true, but ultimately, they correlate pretty strongly. That’s why people say, “Watch out! Stocks go down an average of 40% in a recession!” and things like that. That’s why the mkt did a nosedive last month.

    It’s possible to take Wall Street’s evidence of earnings and go out and smoke it if that’s the way you like to roll, but keep an eye on the GAAP earnings and the CEO’s who are straight shooters, not the frequently baloney operating earnings many companies trot out to support the bull case that miraculously beat by a penny every quarter. For me, your appraisal of an average 0.7% annual GDP rate for the first half of 2011 as robust & no prob (and as we’re getting macro signals the economy is slowing even more!) just because some companies are saying they’re okay for now makes me worry you’ve been drinking the Wall Street koolaid. My bearish bad weather portfolio is up a few points YTD while the fair weather SPX is down a few points YTD – that’s another bit of evidence that demand isn’t so hot using the stock metrics you favor – so I rest my case.

  • USDAportfolio on 9 September 2011

    kelvinator, I appreciate the response and the attempt to illustrate your point. I’d like to point out that you offered a lot of evidence, including half-hearted policy responses in Europe (in countries, like Greece, who fail to enforce their tax collection laws) and stimulative policies in the USA. You also referred to the credit freeze in late 2008 and early 2009, and you referred to two quarters of GDP numbers in the USA in 2011. Finally, you referred to the poor performance of the stock market over the last 6 months.

    I appreciate your strong argument that all is not rosy and fine.

    However, none of these items — none of them — is evidence that demand is very small with respect to what it would be in a perfectly healthy economy.

    Now I don’t want to start an argument and I’m not going to press you to further back up your point. Instead, what I’ll offer is a suggestion that demand, in and of itself, is where it normally would be. People still WANT just as much as they’ve ever wanted. In fact, worldwide demand is at an all-time high, and quickly rising, as consumers want more and more things and their ability to buy them is increasing (the average global consumer has more pay).

    So, the underlying force propelling sales (human desires) is still there and never went away.

    What is still lacking in many countries (the USA and Europe), for many people, is the means to satisfy that demand, which means well-paying jobs and often — like it or not — access to credit.

    That is why jobs will need to be expanding before we see a true, full-fledged economic rebound. And that will happen. It is happening, although more slowly than anybody would like. Look, jobs are increasing. While the unemployment rate (percentage) in the USA and Europe may be high and remain high, the total number of jobs and employed individuals is trending higher and will eventually mark an all-time high. Worldwide, the trend is strongly positive, and that is what matters in the global marketplace.

    But you want to own stocks BEFORE that happens, because you want to buy low. At least, I do.

    In fact, the malaise out there is exactly what tells me it IS ok to buy stocks. If everybody thought things were hunky-dory, I’d be much more pessimistic. I am a contrarian investor, and clearly we’re nowhere near the top of the cycle. So we’re still in what I consider the “buying” phase.

    So, in conclusion, my recommendation is to realize that things will remain uncomfortable for many, unemployment may remain high, and governments may have policy troubles inforcing tax laws for years, but that is all noise. As an investor, you need a way to filter through the noise.

    And demand — and the ability to satisfy demand — is what you should watch. Today’s marketplace is a global one. As more consumers are employed and wages rise around the world, they enter the global marketplace and buy products they never dreamed of owning. Now they have a taste for (relative) luxury, and they aren’t going back. Competition for products is outstripping businesses ability to respond, and we’re seeing price increases.

    Employment and wages are rising worldwide. And so is demand, prices, and corporate profits.

    We can sit this out, fooled because we personally have friends who are unemployed (and we’re frustrated because we genuinely would like to see them happy and in a good job), and because many governments are running deficits… or we can get in while the getting is good.

    The answer is clear to me.

  • kelvinator on 9 September 2011

    USDA – I think you’ve got a strong bullish bias and actually are disconnected from reality, but thank you. It’s people like you that are holding together the global economy and financial system in its Wiley Coyote moment as it floats on hopes and fumes while people like me are growing our gardens, putting our gold coins in the bank and getting ready for the economic winter to come. I hope that reality falls somewhere in between our views. The reason I don’t hope reality turns out as bullish as you project is because the world actually can’t stand further rapid expansion of high energy, high consumption lifestyles, in my opinion, which is the vision that drives sky up stock markets. Like any over-populated species – and we are over-populated – we are depleting our supports and soiling our litterbox and need to radically adjust. We are in the process of being forced to that, IMO.

  • USDAportfolio on 10 September 2011

    Just a comment… I was 100% cash between 2006 through mid-2008, when I began to dollar-cost-average into index funds. Only in February 2009 did I begin to go in strongly with both funds and individual stocks.

    From 2005 to 2008, things were just too good, and it was clear we were in a bubble. Everybody was exuberant.

    When we reach that level again, I’ll know it’s time to take profits. We’re nowhere near that phase of the cycle… too much pessimism.

  • USDAportfolio on 10 September 2011

    It seems like we’re proposing two potential hypotheses.

    Hypothesis 1: The normal business cycle will continue. We will have another crescendo, followed by another recession. Followed by another peak, etc.

    Hypothesis 2: The normal business cycle, as we know it, has ended. We are stuck in a bottomless pit. There will be no further economic growth, or growth in corporate profits…. the best we can hope for is a continuation of current levels, but more likely we are headed towards permanent decline.

    I clearly am a supporter of hypothesis 1. I think the business cycle as we know it will continue for the foreseeable future, certainly within our lives. We have had booms and busts before, as long we we’ve had markets.

  • kelvinator on 10 September 2011

    Yes, you’ve clearly identified one of the main differences in our views: you support the view that we’re still operating within the normal business cycle, and are at a low point, with up being the next direction. I believe we’re moving outside of the normal business cycle for at least a long while, but my view is a little more complicated than just that we’re headed into a bottomless pit with no further economic growth and the best we can hope for is continuation at current levels.

    First, I don’t think that “continuation at current levels” is really an option, beyond a brief period. Like Woody Allen said, “A relationship (I’ll add, between a person and their economy) is like a shark – either it moves forward or it dies.” I think it’s likely we’re beginning a radical, unpredictable transformation that, over a long period of time, is going to transform global and local economies and societies, because the current model of macro-financed model of globalized capitalism that is supposed to put an Ipad in every pot and keep the new billions in Asia moving up the socio-economic scale depends on leveraged credit and cheap energy, both of which are just flat gone and not coming back anytime soon.

    Higher energy costs are a complete game changer. The current economic world won’t really work for the medium and long term, probably starting even at current prices, I think, based on what we’re seeing – the natives (and the investors) are going to get more and more restless as expensive energy builds cost into every phase of economic activity, and particularly food production, and as energy continues to get tighter and more expensive. Check out the Hirsch report from the Dept of Energy in 2005 – commissioned by, but promptly buried by the Bush administration. According to it, global peak oil production, then thought to be 30 years off, but acknowledged last year by the IEA to have occurred in 2006, blasts the global economy into the worst and longest depression than we’ve ever seen:


    That’s why I say we’re in a Wiley Coyote moment and thank you – it’s only faith in our “dead system walking” that is keeping the economic world going right now. We can look at Greece defaulting this weekend, or next week or next year, buy US Treasuries or stocks and say “Tsk, tsk, those lazy socialist Greeks, I’m glad things are cozy here at home.” But, oh, The Mighty They Will Fall, it seems to me – Japan’s finances are absurd, much of Europe, and the US, of course, with no reality to its on-going finances for anyone who cares to look. Better to pretend that all the facts I’m talking about just don’t exist and just keep that all-American can-do optimism and denial going. How foolish, when there are real things that can be done! The market isn’t going to do them. Capitalism isn’t so smart, IMO, as we saw in 2008. Societies aren’t very good at looking ahead and planning, partly because the rich, those in power, think they’ve got the game stacked in their favor, which is true, and that they can ride out any rough spots with their cash, which is questionable. They, and everyone, better buckle up.

    If we had a bunch of cheap energy for a long time, I’d agree with you that they can keep the game going a long time, and this could easily be a real business cycle bottom. But I’ve watched the energy sitch since about 2003, and I think it’s unravelling. It’s much more likely we’ll eventually go to and through the kind of collapse we saw building in 2008. Stocks may not ultimately collapse completely, since money will be furiously printed, and some companies will still be adaptive and operating and perceived as a means of holding value vs universally devalued currencies. Better, tho, to hook up with your neighbors and make sure everyone is friendly helpful and all can get things they need around town, cause at some point the Tea Partiers saying gov’t should go away might get their wish, and we’ll all be like the folks in the Super Dome waiting for the gov’t buses and Nat’l Guard that never show up, courtesy of our new, slim, trim Federal Gov’t.

  • USDAportfolio on 10 September 2011


    Even if the world you describe comes to pass, there will still be pockets of wealth and relative successes and relative failures. All localities will not suffer equally. Some companies will benefit, especially ones which can still provide cheap energy – possibly coal / coal gasification / tar sands / solar / wind power companies. Technology which enables us to use power more efficiently will certainly flourish as consumers are forced to conserve — so LED light producers, for one, would benefit.

    My point is, as I’ve made before, we are on an INVESTING website. It is pointless to be here if you’re not offering some thesis which leads to a suggestion of how to invest.

  • kelvinator on 10 September 2011

    USDA – Good point: indeed we are an investing website. I believe my thesis is a critical frame for successful investing going forward, that’s why I’m blabbing and trying to share it – not just to be
    Debbie Downer. It’s worked great for me. Having a bearish over-arching frame based on the particular info and views I described helped me make a number of specific investments decisions that have literally changed my life drastically for the better in terms of financial, money-in-the-bank security, and last time I checked, beat all but a tiny fraction of stock newsletters for the past few years. Sounds like you made some really great decisions, too, if you went largely to cash from 2006-2008 and followed the re-investment progression you described. We just disagree about where things go from here.

    Regarding current specifics, I’m about 35% precious metals and have been for years, with other funds balanced at the moment long selected energy, ag, and other critical commodities and resource stocks, and short almost equally on various European & US index and other stock ETF’s – eg, I’ve been short RKH (Regional Banks) for months – so I’m near net stock neutral and looking for relative outperformance of some sectors and companies and ways to hedge the ultimate destruction of currencies and a whole bunch of companies, etc. A person can easily be wrong in this environment. Rules change all the time. I agree, tho, that with timing and specific investments are key, at least until the systemic breakdowns start and we’re using our financial statements for TP, our gold coins for checkers tokens and at that point it will have been good to invest in a luxurious garden, a home brewing system, a thriving and friendly local community, and maybe a horse or two.

  • USDAportfolio on 10 September 2011


    Interesting that despite our different outlooks, we have similar investment ideas. I, too, hold commodities-producing companies (re: energy, raw materials, and food stocks) as the largest portion of my portfolio.

  • dwswager on 11 September 2011


    To state that there is a “lack of demand” is to not understand the way the world works. Demand is ever present and is only contrained by the lack of resources to fullfil it.

    Thought experiment: Assume you just recieved a 30 year employment contract at double what you make today and increasing by 3% plus the rate of inflation. Would you consume more today than you would otherwise? Under all economic schools, the answer would be yes. I don’t have to goose your demand, I goosed the supply. For business, they are looking at ready supplies of captial, skilled labor, equipment, supplies, productivity enhancing equipment.

    Now there may be areas in which a previous misallocation of capital has led to an oversupply and until that oversupply is worked through, then additional production would be realtively pointless. Think housing in the US (at least in certain markets).

    I assure you that just as soon as the Fear, Uncertainty and Doubt is cleared from the process, especially from government and the unknown value of mortgaged backed securities, the economy will recover quite nicely.

    Finally, yes, corporate profits are up. But they are up do to increased business in emerging markets and due to massive cost cutting. But cost cutting only goes so far before those efforts hit a wall. And as soon as the ridicullously cheap credit dries up, the bottom will fall out. That was the cause of the Greenspan induced stock bubble. When he used the phrase ‘irrational exuberance’ he know exactly what was going on, but continued to pump the bubble.

  • kelvinator on 12 September 2011

    dwswager – You’re confusing demand and supply with people’s desires – a non-economic concept, as far as I know. In economics, it’s my understanding that demand is actually defined as what the buyers can and will buy at a particular price, not their desires of what would be rully nice. That’s why they say demand tends to vary inversely with price – as the price for computers go up over a few grand, for example, demand tends to fall to a very low level compared to the demand for low-priced consumer computers. If wishes were horses then beggars would ride – and that has no bearing, for economic purposes on the demand for horses. Their demand will be zip unless they can pony up the bucks.

    If I got a 100% raise, that makes me less price sensitive and I can buy more stuff, including horses, if I like – it doesn’t increase my supply of anything but money, but usually “supply” is used to talk about commodities or products in describing economic transactions – it increases my demand as a consumer. I can buy more worthless 21st century consumer trash – errr…more of the finer things in life.

    Overall, you’ve made up a story that less credit, less in savings, less income doesn’t affect consumptive demand – but, actually, it way does. That’s exactly what we’re seeing right now. Less demand for houses, for consumer goods, etc. And when you combine that with the other aspect of my position, which you don’t reference, which is that supplies of critical resources are actually finite and constrained, without ready substitutes – particularly liquid fuels like oil that are completely essential to every aspect of modern society – plastics, transportation, agriculture, you’ve got a long term trend of an increase in price for essential inputs and slack demand, as labor, income and savings are in oversupply due to over-population. Bad, bad juju for an economy if it plays out. I don’t see a reason that “the economy will recover quite nicely” any more than beggars around the world, a group including more and more middle class families, will be riding horses any time soon just because they think it would be cool.

    Also, you say then that once credit dries up, the bottom will drop out. I don’t get it. Are we recovering nicely or bottom dropping? I’m saying we’re in long term bottom dropping, and your position is unclear.

  • kelvinator on 12 September 2011

    correction in second to last paragraph, third from last sentence: labor is in oversupply due to over-population, lowering savings and income.

  • sigli on 12 September 2011

    Kelvinator wrote:

    “labor is in oversupply due to over-population, lowering savings and income.”

    Yes, because new population brings supply and no demand…

    Anyway, I’m late to the argument so I’ll throw my support to Jim’s comments and leave it at that. A $1.00 gas tax could be completely offset with a payroll tax cut/ss increase meaning it wouldn’t cost Americans a dime. What it would do, however, is scare the hell out of the futures markets, saving us all money at the pump while lowering our trade deficit in that area. It would increase government income if combined with a cut in all alternative energy subsidies as a $1.00 gasoline tax effectively subsidizes all forms of alternative energy. It does it in a market-based approach that allows traditional US innovation to find winners rather than hoping Washington picks the right ones. But hey, protecting American in a non-beggar thy neighbor approach while stimulating a market approach is too sensible for either party to accept.


  • sigli on 12 September 2011

    Ooh, and we could use a little bit of that increase to build some bigger roads. The time and energy savings from increasing traffic flow would be a permanent dividend to every American. But all we see is “TAX HIKE, YIKES!”.

  • kelvinator on 12 September 2011

    i’m all for a gas tax as well – IMO, anyone who knows wassup with the energy supply crunch has to realize that soon conservation is either going to be intelligently directed or chaotically enforced by the market – I’d prefer the former. Of course, the high taxes on “petrol” in Europe over many years helped them completely remake their transportation infrastructure to be based on the motivation to buy much more gas efficient cars and build and use much more public transportation. Though they have their own problems with demographics & large social costs, in transportation they’re in much better shape than the US, as I understand it.

    I disagree, tho, Sigli, with you view that alt energy shouldn’t be subsidized. It’s going to need rapid acceleration and gov’t support – as with conservation, the markets won’t provide support fast enough, until current energy disruption is creating major disruptions. The problem is getting intelligent subsidies or research out of a political process – eg, everyone seems to know the corn-ethanol subsidy is a pork-barrel and beyond wasteful, it raised food prices and is way counter-productive, but I don’t think it’s dead yet.

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