Buy American

Buy American sounds good & it feels real good to say it. But wait, is there trouble lurking? If I have concern with the American Recovery and Reinvestment Act, it is trade protectionism.

It's difficult to come by an economist who thinks this is a smart thing to do. Harvard economics professor Greg Mankiw surveyed economists and found that 93% believe that tariffs and import quotas usually reduce general economic welfare.

Yes, it may protect a few steelworker jobs, and garner some higher prices for their goods sold for US infrastructure projects--of course, costing taxpayers even more.

But it's not the extra cost I'm concerned about. You have to look no further than Peoria, IL to discover that Caterpillar employees may be harshly effected...when foreigners retaliate for US protectionist policies. This provision may put far more workers out of jobs than it preserves for those in a couple industries.


In early February, 100 business groups and companies, such as the U.S. Chamber of Commerce, General Electric, Caterpillar and other major construction, defense and high-tech companies wrote a letter to Senate leaders.

They warned that a far-reaching Buy American rule will harm American workers and companies across the entire U.S. economy, undermine U.S. global engagement, and result in mirror-image trade restrictions abroad that would put at risk huge amounts of American exports.

I am very concerned that this Buy American clause will totally backfire on the US. There is a chance it could undo whatever stimulus comes from the $787 billion package.

I was very pleased to see that our Chinese trading partner will not adopt a "buy Chinese" products policy to stimulate its economy. That would be imposing trade protectionism, says Vice-Commerce Minister Jiang Zengwei. Domestic and foreign products will be treated on equal footing as long as there is demand.


Fortunately in the final version of this bill, the Buy American clause was watered down:

• The Buy American policy must not violate U.S. obligations under existing international trade agreements.
• The rule doesn't apply if American goods aren't available in sufficient quantities.
• Nor does it apply if the cost of the overall project will increase by more than 25%.

That's not how it was received overseas, however. Robert Zoellick, president of the World Bank, says it is crucial to avoid the protectionist policies of the 1930s. The Buy American provision is very dangerous, he said.

The Times of London says the symbolism of the clause is ugly. The Administration must give a stronger message domestically and to America's allies that it knows trade barriers destroy wealth and will impede recovery.

Czech Finance Minister Miroslav Kalousek denounced protectionism. At a press conference he said, It is our duty to explain, at the cost of our popularity, that this is the road to hell, that we need our neighbors more than ever before. We have to prevent populists from going on with the Buy Czech, Buy American, Buy French campaigns.


Let's learn a little from history. The Smoot-Hawley Tariff Act was signed into law in 1930. It that raised U.S. tariffs on over 20,000 imported goods to record levels.


After it was passed, many countries retaliated with their own increased tariffs on U.S. goods. American exports and imports plunged by more than half. In the opinion of leading economists, the Smoot-Hawley Act was a catalyst for the severe reduction in U.S.-European trade from its high in 1929 to its depressed levels of 1932 that accompanied the start of the Great Depression.

As a result of the Smoot-Hawley Tariff and other countries' responses to it, the world moved towards multilateral trading agreements that would prevent a similar situation from unfolding. This led to the Bretton Woods Agreement, in 1944.

US trade restriction was a hot topic at the 2009 World Economic Forum in Davos, Switzerland. Watch the following new video from Newsy.com to see what I mean.




More recently the Group of Seven leading industrialized nations vowed not to resort to protectionist measures as they seek to turn their economies around. In a published statement they said, The G-7 remains committed to avoiding protectionist measures, which would only exacerbate the downturn, to refraining from raising new barriers. This is fabulous news.

The G-7 nations are comprised of Canada, France, Germany, Italy, Japan, the U.K. and the United States.

Baltic Dry Index

People don't book freighters unless they have cargo to move.

The Baltic Dry Index (BDI) is calculated each day by the Baltic Exchange in London. The index assesses the price of moving raw materials like coal, iron ore and grain by sea.

The index measures the demand for shipping versus the supply of dry bulk carriers, reports Wikipedia.

The supply of cargo ships is generally both tight and inelastic — it takes two years to build a new ship, and ships are too expensive to take out of circulation the way airlines park unneeded jets in the California desert.

Marginal changes in demand quickly move the index. So the index indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers.

Dry bulk consists of materials used to produce concrete, electricity, steel and food. This index is an efficient economic indicator of future economic growth and production.

The BDI is a leading economic indicator because it predicts future economic activity.

Here's some good news. The Baltic Dry Index reveals a nice rebound in demand over the past month.


Economists have illustrated the rather close correlation of the BDI with stock market performance. If it is an efficient, leading indicator of future economic activity...then we could be seeing early signs of recovery from this recession.

That would support the view of economist Brian Wesbury (see my L U V article) of a V-shaped recession with recovery later this year.

Oil: Peace Dividend?

There is very good news from around the world. Our enemies are struggling due to dropping oil and gas prices. In Iran, Venezuela & Russia, the hold of the dictator is weakening as, one after the other, they face the consequences of dropping oil prices.

A few weeks ago, political analyst Dick Morris offered the following insights.

In Iran, the sanctions imposed by the United Nations, the aggressive efforts of the U.S. government, and the actions of states like California, Florida, and Missouri to ban pension investments in companies that do business with Iran are having a big effect.

Unable to expand its oil production for a lack of foreign investment, Iran faces the need to slash its budget drastically as energy revenues, the source of 85% of its income, crash. Iranian President Ahmadinejad is announcing harsh austerity measures.


Having based his budget on $50-$60 oil, he now must recast it for at a $40 per barrel level. He boasts of cash reserves of $23 billion, but that sum won’t last long unless he makes major cuts. (Do the math: a shortfall of $25/barrel per day x 4 million barrels a day x 365 days = $36.5 billion, more than he’s got on hand).

The question for Ahmadinejad and for the Ayatollah who stands behind him is: Can their regime survive economic collapse? Unable to buy social peace by handouts and subsidies, will the top blow off in a country that hates this regime--predominantly very young people & only 40% Farci?

Chavez, in Venezuela is not in any better shape. Because of corruption and incompetence, Venezuelan oil production has dropped from over 3 million barrels per day when Chavez took over to about 1.7 million today. As long as oil prices were quadrupling, it didn’t matter, but when they crashed, a harsh wind of reality blew in the door.


Chavez was losing popularity before the oil price dropped. He lost a constitutional referendum to give himself lifetime tenure and he just lost his municipal elections in the largest cities and states in the nation. After knocking out most of the major opposition candidates on phony charges of corruption, he managed to hang on to the governorships of the small, rural provinces, but he lost the cities – even the poor areas of the cities voted against him.

Putin’s Russia, which so recently threw its weight around by invading Georgia, faces perhaps the biggest hit of all to its economy. Producing 10 million barrels per day, Russia will be hit the hardest by the collapse of prices. (Again, do the math: Assume Russia budgeted at $60 oil prices and the price drops to $40. $20/barrel x 10 million barrels per day x 365 = a $73 billion annual shortfall).


With a GDP of only about $1.4 trillion, Russia faces the loss of about 5% of its economy. And Russian oil production has dropped by one million barrels per day for each of the past two years. With prices at rock bottom and nationalization an ever-present threat, who is going to invest in increasing Russian production?

This week we learned that a seven-year economic boom in Russia fueled by cheap credit and soaring commodity prices has come to an abrupt end, plunging the country into the worst financial crisis since its 1998 debt default.

Russia's economy is expected to contract by at least 2% in 2009 after growing at an average rate of 7% in recent years.

This vast nation with 142 million people owes its past success, and its current woes, to this decade's wild ride in commodities. Its economy depends on revenue from oil, natural gas and metals.

The commodities collapse is starting to hurt ordinary Russians. The unemployment rate jumped to 8.1% last month, with 6.1 million Russians currently out of work.

In these oil-producing nations the ruler buys social peace with oil money. The pressure to stay in power will be so intense that these leaders will force production as high as they can to offset the shortfall. The result is that there will be constant deflationary pressure on oil prices--and a potential "peace dividend" to freedom-loving countries because these rulers will not have the means nor perhaps the inclination to make war at this time.

Fear of Fear

In the beginning, economics was closely linked with psychology. My friend Phil likes Adam Smith, who described psychological principles of human behavior in The Theory of Moral Sentiments.

From those humble beginnings we now have the field of behavioral economics. It applies scientific research into people's cognitive and emotional factors to better understand economic decisions by consumers, borrowers & investors, and how they affect market prices, returns and the allocation of resources.

At the highest levels in government, behavioral engineering was applied during the Great Depression. President Herbert Hoover said that prosperity was just around the corner even as the economy continued to deteriorate.


Later in Franklin Delano Roosevelt's inaugural address he said that the only thing we have to fear is fear itself.


That same type of psychology is not being used today. The president has used jargon that risks making it worse.

In Elkhart, Indiana, President Obama warned that if we don't act immediately, our nation will sink into a crisis that, at some point, we may be unable to reverse.


During his first press conference he referred to potentially negative spiral that becomes much more difficult for us to get out of.

I understand that he needed to motivate Congress to act quickly on a stimulus package. But such rhetoric is also dangerous, and undermines one of the root causes of our recession--a slowdown in the velocity of money, which I've discussed before.

As people spend less, and save more, it makes it difficult for our economy to grow. This started last September following the difficulties with Fannie Mae & the meltdown of Lehman Brothers.

At that time President Bush came on TV...and he also frightened Americans. Our entire economy is in danger, he said. Without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold. Ultimately, our country could experience a long and painful recession.

Business cycles are often a product of human nature. The Administration needs to be more adept at recognizing & applying these psychological principles. Otherwise the R-word (let's hope not the D-word) becomes self-fulfilling prophecy...and actually prolongs the pain.

There are three main emotional motivators of stock markets and business behavior:

• Greed
• Herd instinct
• Fear

These in turn psychologically effect bull markets, business cycles & bear markets.

The ordinary Joe still has to eat...buy clothes...purchase a car. The president should not be afraid to tell them to spend. That's what President Bush recommended after 9/11.

We are far, far from a depression. Have you seen a food line lately? How about a woman selling apples on your local street corner?



There was a reason this positive outlook was emphasized when Bing Crosby, and the Andrews Sisters, sang:

You've got to accentuate the positive
Eliminate the negative
Latch on to the affirmative
Don't mess with Mister In-Between

You've got to spread joy up to the maximum
Bring gloom down to the minimum
Have faith or pandemonium
Liable to walk upon the scene

Today President Obama signed the American Recovery and Reinvestment Act.

In his Denver address he said, Today does not mark the end of our economic troubles. Nor does it constitute all of what we must do to turn our economy around. But it does mark the beginning of the end -- the beginning of what we need to do to create jobs for Americans scrambling in the wake of layoffs; to provide relief for families worried they won't be able to pay next month's bills; and to set our economy on a firmer foundation, paving the way to long-term growth and prosperity.

Let's hope he has turned over a new leaf--to Latch on to the Affirmative.

Stimulative Government Spending

In a published report on February 6, the US unemployment rate increased to 7.6%. That was enough to spur lawmakers to work into the weekend on a spending package--one that I hope will create some jobs, relieve some personal pain and help us through the current recession.

You might recall that I wrote about Christina Romer's study from the Council of Economic Advisors. Her group projects the creation of 3-4 million jobs by the end of 2010.


The $787 billion spending package is a whopping amount to spend. It was met with resistance by Republicans (and seven Democrats) in the House.

• They questioned whether the package would actually stimulate jobs.
• They believed more time was needed to debate this 1,071 page bill, instead of rushing headlong into a colossal spending program with no time for Congressmen to read it on Friday the 13th.
• They found considerable pork barrel spending that had nothing to do with job creation.
• They found that 26% of the proposed spending would take place after 2010--probably long after the recession has ended. (This is much better than the 40% allocation in the bill just a few days ago.)
  

Even the Congressional Budget Office (CBO), the official scorekeepers for legislation, said the bill will help in the short term but result in so much government debt that within a few years they would crowd out private investment, actually leading to a lower GDP over the next 10 years than if the government had done nothing.

Also, many Americans railed against several unnecessary items in the package--forcing President Obama into damage-control mode--and encouraging everyone to come together for the good of the country.


In the process he used some scare tactics to illustrate this point. If we drag our feet and fail to act, this crisis will turn into a catastrophe, Obama said. The bill before Congress isn't perfect, but it is absolutely necessary.



While we hope this will work to stimulate the economy...get us out of the recession...and help create jobs, it is also instructive to review what we've learned from the past.

For example, there is absolutely no long-term economic evidence that higher government spending creates jobs. In fact, it is exactly the opposite. More government spending is correlated with higher levels of unemployment. The Office of Management & Budget (OMB) and the Bureau of Labor Statistics (BLS) gives us insight.

• Every dollar the government spends must be borrowed or taxed from the private sector.
  
• As government takes resources from the private sector, fewer job are created.
• Most government spending is less efficient than private sector spending.
  

So why is government trying spending stimulus when evidence shows this does not work? I can think of two reasons.

1. Keynesian economics. There is an economic theory forwarded by British economist, John Manyard Keynes, which says goverment should stimulate economic growth and improve stability in the private secctor—through taxation and funding public projects.

   This was tried in during the Great Depression. In retrospect, such government spending did not work. The US finally emerged from that dreadful period with the advent of WWII.

   Likewise, Japan attempted numerous spending packages, yet its economy languished for years in the 1990s.

2. Political ideology. This was succinctly stated by Rahm Emanuel, now Chief of Staff for President Obama, during a November, 2008 Wall Street Journal CEO Council meeting.
   
   He said: You never want a serious crisis to go to waste. What I mean by that is that it is an opportunity to do things that you think you could not do before...This is an opportunity what used to be long term problems be they in the health care area, energy area, education area, fiscal area, tax area, regulatory reform area, things we had postponed for too long that were long-term are now immediate and must be dealt with.
   

My bottom line is that I hope this package helps us. I do have concerns with the consequences of paying for it, starting in a couple years with inflation likely to be a problem...and a likely increase in federal taxes which could hamper future growth.

On the other hand, there will likely be some worthwhile infrastructure projects that are completed, as Rahm Emanuel says because you never want a serious crisis to go to waste.

Personally, I believe the efforts of TARP I, various monetary measures taken by Fed Chairman Ben Bernanke and subsequent monetary measures, such as TARP II get to the root causes of this recession, and will be the most likely tools to extract the US from this recession.

It's plausible that this recession will be in its final phase before a majority of the government spending kicks in.

Behavioral Style

Do you know what motivates you? Would you like to know what makes others tick?

I have found this knowledge invaluable in my relations with people.

I have taught & lectured on this topic over the past 10 years--speaking to small groups of 20 people and to a couple larger groups--in one instance to a standing room only crowd of about 200 active participants.

I have discovered a simple image test that can help you pinpoint your own behavioral style. It is about 80% reliable in describing the predominant behavioral style of individuals.

I invite you to take this test. Most people are amazed at what they'll discover.

Please take a look at each of the nine images below--then select the one you find most appealing as you consider its shape and color. There is no right or wrong answer here. Every choice is a valid one--and there is one most appealing choice for everyone.

Now if you are truly torn between a couple of images, please choose the one that you feel most comfortable with.

Please note that there is no pattern or meaning to the order of the images represented below.













The information you are about to view is a high-level summary of psychological information based on the DISC model based on the work of William Moulton Marston Ph.D. (1893 - 1947) to examine the behavior of individuals in their environment or within a specific situation. DISC looks at behavioral styles and behavioral preferences.


The tests classify four aspects of behavior by testing a person's preferences--in our case with image association. DISC is an acronym for:

* Dominance - relating to control, power and assertiveness
* Influence - relating to social situations and communication
* Steadiness - relating to patience, persistence, and thoughtfulness
* Conscientiousness - relating to structure and organization

In a comprehensive DISC evaluation, each individual will have attribute scores in all four dimensions.

The following is a brief summary based on the image your found most appealing. At this point in the article, I recommend that you quickly scroll down to the image you found most appealing to discover what it reveals about your personality.


This is a cooperative behavioral style.

• You are easy going, yet discrete.


• You make friends effortlessly, yet enjoy privacy & independence.


• You like to get away from it all and be alone occasionally to contemplate the meaning of life and enjoy yourself.


• You need space and escape to beautiful hideaways but you're not a loner.


• You're at peace with yourself and the world.


• You appreciate life and what the world has to offer.

You are motivated by:

• Recognition for developing others.


• Support for decision-making.

This is a paced & patient behavioral style.

• You value a natural style and love the uncomplicated.


• You have both feet planted firmly on the ground.


• People can depend on you.


• You give others security and space.


• You're perceived as warm and human.


• You reject that which is garish and trite.


• You tend to be skeptical of the whims of fashion trends.


• Your clothing is practical and unobtrusively elegant.

You are motivated by:

• Validation of personal worth.


• Creativity.


• A steady, stable pace.


• Harmony and cooperation.

This is a rather unique mid-line behavioral style.

• You are a very sensitive person.


• You refuse to view things from only a sober, rational viewpoint.


• You rely on feelings to tell you what's important.


• You feel it's important to have dreams in life.


• You're perceived as warm and human.


• You reject people who scorn romanticism and are guided only by rationality.


• You refuse to let anything confine the rich variety of your moods and emotions.

This is a systematic, conforming behavioral style.

• You like that which is of high quality and durable.


• You surround yourself with little "gems" that you discover which have been overlooked by others.


• Culture plays a special role in your life.


• You have a personal style which is elegant and exclusive--free from the whims of fashion.

You are motivated by:

• Security of basic benefits.


• Praise for accomplishments.


• A structured environment.

This is a outgoing behavioral style.

• You love a free, spontaneous life.


• You attempt to fulfill it with the motto, "You only live once."


• You are very curious and open about everything new.


• You thrive on change.


• Nothing is worse than when you feel tied down.


• You enjoy a versatile environment and are always good for a surprise.

You are motivated by:

• Public recognition.


• Opportunities for money, status and territory.


• Being a team player.


• Interacting with people.

This is a reserved behavioral style.

• You come to grips more frequently and more thoroughly with yourself and your environment.


• You detest superficiality.


• You'd rather be alone than suffer through small talk.


• Your relationships with your friends is very strong. This gives you inner tranquility and harmony.


• You do not mind being alone for extended periods of time.


• You rarely become bored.

You are motivated by:

• Private recognition.


• Personal time alone.


• An opportunity to contemplate.


• A private, peaceful work setting.

This is a dominant, controlling behavioral style.

• You take charge of your life and place less faith in luck and more in your own deeds.


• You solve problems in a practical, uncomplicated manner.


• You take a realistic view of things in your daily life and tackle them without waivering.


• You're given much responsibility because people can depend on you.


• Your strength of will projects self-assurance.


• You're never fully satisfied until you've accomplished your ideas.

You are motivated by:

• Measured, tangible results.


• Position of power & prestige.


• Daily challenges.

This is a independent behavioral style.

• You demand a free, unattached life that allows you to determine your own course.


• You have an artistic bent in your work and leisure activities.


• Your urge for freedom can cause you to exactly the opposite of what's expected.


• You lifestyle is highly individualistic.


• You'd never blindly imitate what is "in."


• You seek to live according to your own ideas and convictions, even if it means swimming against the tide.

You are motivated by:

• Freedom of choice.


• Minimal rules and policies.


• Minimal supervision.


• Activities out of the norm.

This is a urgent, action-oriented behavioral style.

• You willingly accept risk and make a strong commitment in exchange for interesting and varied work.


• Routine tends to have a paralyzing effect on you.


• You like most to play an active role in events.


• Your initiative is highly pronounced.

You are motivated by:

• Action taking.


• A variety of work.


• Time pressure.

Russell Roberts on Stimulus

Russell Roberts is professor of economics at George Mason University in Fairfax, VA and a research fellow at Stanford's Hoover Institution.


He offers insights in a Boston Globe article, Stimulus just digs debt hole deeper. I think he does a fine job of pointing out why there are disagreements among economists when it comes to the effects of fiscal policy to stimulate the economy. These are excerpts from his article. At the end, he offers his opinions on what he wishes President Obama would do. I hope his comments will stimulate your thinking.

• Will government spending get the economy going or slow it down?

• How long will it take to have an impact?

• How many jobs will it create?

• Can we afford it?

You would think economists could answer these questions. And yet there is little or no consensus for what we should do right now. Some of the finest economists in the country, including Nobel laureates, are on opposite sides of the current debate.

I think the real divide between economists isn't over different macroeconomic theories but over underlying differences in philosophy and ideology.

Consider two different government programs for stimulating the economy. The first program borrows $819 billion and hires and pays groups of workers $819 billion to dig a bunch of holes and then fill them in. The second program spends $819 billion to repair a bunch of bridges on the verge of collapse, repair a bunch of sewers about to go bad, and revolutionize the energy and health sectors.

I think most economists would argue that the first program would be a bad use of federal money. Most economists would also agree that the second program would be a bargain.

I think the disagreement among economists is really over which of these two scenarios is closest to reality. The federal budget is about $3 trillion. Is the next $500 billion or so money well spent or money squandered?

I think it will be mostly squandered, so I'm against the stimulus. Plenty of people think it would be money well spent. Many people want a role for government closer to that of Europe's. Most of us against increased government spending want to move in the other direction.

There is an underlying presumption in this debate that if the spending package doesn't stimulate the economy, then tax cuts or monetary policy are better. But maybe we simply don't have the knowledge to repair the economy from Washington. The economy is complex and the interaction between the financial sector and the real economy - between Wall Street and Main Street - is not well understood.

Rather than spending money we don't have, I wish Obama would use his political capital to change the parts of our political system that are dysfunctional:

• Our entitlement programs that are demographically bankrupt
  
• Our broken budget system
  
• Our Byzantine tax system
  
• Our financial system that is in disarray.
  

These changes would be more likely to create the confidence and trust in the future that our economy needs to get healthy again rather than borrowing and spending. Borrowing and spending is how we got into this mess.

L U V

No, L U V is not some new fangled way to denote "love."

These are three prevailing thoughts about the US recession--and how quickly we will see recovery.

My favorite economist, Brian Wesbury, believes we will experience a "V" shaped recession. He is a member of the Academic Advisory Council of the Federal Reserve Bank of Chicago, and also an adjunct professor of economics at Wheaton College in Illinois.


Rather than being the first of several negative quarters of economic growth, Wesbury optimistic outlook is that this will be a temporary capitulation due to the credit crunch, with almost all of the economic losses postponing economic activity into what will turn out to be a healthy period of growth in the second half of 2009.

His rationale: This sharp drop in growth is due to a true credit crunch with some panic thrown in for good measure. It is not a typical recession caused by fundamental, economy-changing events such as higher tax rates, tighter money, protectionism, or other public policies that stifle innovation or entrepreneurship.

Contrary to Wesbury's rather optimistic view of this recession, the mainline economic thought is for an "L" shaped recession. Conventional wisdom believes that the current recession will be longer and deeper than any recession the US has experienced since the early 1980s, continuing through 2009 and probably into 2010.

Those who hold this view will eagerly look to a stimulus package from the Obama administration to help pull the US from this quagmire. It takes a long time for a multi-billion spending package to be implemented and have an effect.

These expenditures then dovetail with the idea of a long-term recession. If we use the National Bureau of Economic Research assumption that the recession started in December, 2007, then according to the "L" theory, the US could be in a recession for at least three years.

A "U" shaped recession is akin to the predication of Harry Dent, Jr. His pessimistic view is based on the demographic forces of retiring Baby Boomers.


Baby Boomer consumption has heretofore driven the US economy. Now Dent sees deflating real estate & stock prices as demand falls--and Baby Boomers seek to live off their investments.

He expects a brief economic recovery in the this year or next as a result of interventions led by Fed Chairman Bernanke & Treasury Secretary Paulson, but then with rising interest rates, high inflation and in his estimate, oil at as much as $225 per barrel, the US will drop back into a long recessionary period.

Where is the US Gross Domestic Product (GDP) right now? Here is the relative growth (or decline) in GDP for all the goods & services produced.

After a nice, long period of economic growth this decade, you now see an abrupt decline, particularly in the 4th quarter, 2008.


The -3.5% (annualized) change in the 4th quarter, 2008 is considerably less than the consensus estimate of -5.5%. But don't break out the bubbly just yet.

The drop in GDP was less than expected because of higher inventories. That leaves two alternatives:

1. Either the inventory increase will be revised away in future revisions to this initial GDP estimate (reducing Q4 real GDP growth), or
   
2. The inventory correction in the first half of 2009 will be extremely sharp, meaning real GDP in Q1 may be even weaker than in Q4.

Hence, the big question: Will this be an L U or V shaped downturn?