In my last blog I highlighted an important statement made by Scott Brown, an obscure politician from Massachusetts, recently catapulted into the national spotlight, being elected in a remarkable victory for US Senator from the Commonwealth.
To reiterate, he said in his acceptance speech:
I will work in the Senate to put government back on the side of people who create jobs, and the millions of people who need jobs - and starts with an across the board tax cut for individuals and businesses that will create jobs and stimulate the economy. It's that simple!
There were early hints of this voter sentiment: tea party patriot rallies last summer and gubernatorial elections in Virginia and New Jersey last fall. The former were ridiculed by some, demonized by others, and the new governors were thought to be elected on account of local issues.
It took one person, Scott Brown, to crystallize and clarify the national concern of voters, a significant message from people not affiliated with either major political party. Their messages:
Stop health care in the questionable form pushed by Washington, this the greatest concern found in voter exit polling.
Don't Mirandize terrorists. After the election the nation was to learn that intelligence and homeland security leaders testified to Congress that they weren't even consulted about this protection given to the underwear bomber, 50 minutes after officials confronted him.
Cut out the secret backroom deals with special interests. There was the Louisiana Purchase, followed by the Cornhusker Kickback assented to by a senator from my home state. The creme de la creme shocked people recently when select unions were granted a 5-year tax exemption on their Cadillac health insurance plans.
These are issues that I do not analyze on these pages. But I do explore macroeconomic matters, to which we now turn to the fourth voter message from Massachusetts:
Don't raise taxes, cut them.
I have been holding onto a hallmark economic investigative report, produced last fall by Silvia Ardagna and Alberto Alesina, professors of Economics at Harvard University, and also members of the National Bureau of Economic Research (NBER), the group who makes the call of whether the US in in a recession, or not.
Their study examines how effective government, ie, fiscal, stimuli have been in alleviating economic difficulties. This far reaching study spans four decades, from 1970 to 2007, and examines remedies and results for twenty-one countries in a panel of OECD (Organisation for Economic Co-operation and Development) countries, such as Australia, Canada, France, Germany, Japan, United Kingdom and the United States.
Earlier this week Americans awaited, the White House wondered and certain citizens cast their ballots, in a state election of far reaching scope, both in Massachusetts and nationally.
A nominal Republican candidate was selected to represent the Commonwealth in the US Senate, the selection of a party affiliate for senate in that state that had not occurred for four decades, mostly on the strength of the unaffiliated, independent voter.
His name: Scott Brown.
Brown said in his acceptance speech, I will work in the Senate to put government back on the side of people who create jobs, and the millions of people who need jobs - and starts with an across the board tax cut for individuals and businesses that will create jobs and stimulate the economy. It's that simple!
In those remarks he referenced another US Senator from the Commonwealth of Massachusetts who several decades ago echoed these same remarks:
It is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now. We need an across-the-board, top-to-bottom cut in personal and corporate income taxes.
He called high tax rates a danger to the very essence of the progress of a free society.
In the speech he was scheduled to deliver on Nov. 22, 1963, he planned to report proudly: We have proposed a massive tax reduction, with particular benefits for small business.
He never got that chance to utter those encouraging words; that very day his life was snuffed out. But you can hear first hand what that great Senator, later to become a great US President, had to say...and those words are nearly identical to those expressed this week by Scott Brown.
So much for rhetoric: can tax cuts really help an economy, or can the preferred solution in recent months of TARP relief, auto bailouts, stimulus packages, Cash for Clunkers...and Caulkers, and still more costly initiatives the federal government plans to roll out, be more effective?
Next week we will examine a extensive, hallmark study encompassing many decades of observation over many economically developed countries, an analysis by skilled economists who reveal much about the efficacy of large changes in fiscal policy from taxes and from spending to spur an economy.
Marilyn Monroe starred in Some Like It Hot. This is a wacky, clever, farcical comedy that is brilliantly directed by Billy Wilder. It starts off like a firecracker and keeps on throwing off lively sparks till the very end. "Hot" refers to a style of music...rag.
If our economic future is hot, it is going to be anything but funny. A hot scenario will be one hallmarked by significant inflation--something we haven't experienced in the US since the late 1970s.
If we see run-away inflation, then the US dollar isn't going to be worth as much.
In order to counteract these two-fold problems of inflation and a very weak dollar, the Feds will have to raise interest rates, just like Paul Volcker did in the early 1980s to help us through that difficult time.
Volcker's Fed is widely credited with ending the United States' stagflation crisis of the 1970s. Inflation, which peaked at 13.5% in 1981, was successfully lowered to 3.2% by 1983.
The federal funds rate, which had averaged 11.2% in 1979, was raised by Volcker to a peak of 20% in June 1981.
These changes in policy contributed to the significant recession the U.S. economy experienced in the early 1980s, which included the highest unemployment levels since the Great Depression, even higher than today.
Volcker's Fed elicited the strongest political attacks and most widespread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of the high interest rates on the construction and farming sectors, culminating in indebted farmers driving their tractors into Washington for Tractorcade in 1979.
You can imagine the turmoil if this happens again. It will also lead to renewed problems in the housing market--and a stock market that will take it on the chin!
We already witnessed a bit of this last year with the tea party patriots rallies across the nation. Indeed, the election in Massachusetts today appears in part spurred on by voters concerns about run-away government in that state, and in Washington.
This is the second in a series of US recovery scenarios, or lack thereof. Notice in this one, we only have red and blue statistical indicators.
Red bars are fast rising statistics. Blue bars represent quickly falling indicators.
This particular scenario hurts because we would continue to see unemployment rise. Lately it seems unemployment has "moderated" at 10%. Optimists hope that we have reached the peak.
But let's take a look at what David Rosenberg, Chief Economist & Strategist at Gluskin Sheff, has to say. He has ranked first in economics in the Brendan Wood International Survey for Canada for the past seven years and was on the U.S. Institutional Investor All American All Star Team for the last four years.
He says there are serious structural issues undermining the US labor market. He thinks US unemployment is headed for 12-13%.
For the first time in at least six decades, private sector employment is negative on a 10-year basis. Hence, the changes are not merely cyclical or short-term in nature.
During this two-year recession, employment has declined a record 8 million. Even in percent terms, this is a record in the post-WWII experience.
There are now a record 9.3 million Americans working part-time because they have no choice. In past recessions, that number rarely got much above six million.
The work week has been sliced this cycle from 33.8 hours to a record low 33.0 hours--the labor input equivalent is another 2.4 million jobs lost.
The number of permanent job losses this cycle (unemployed but not for temporary purposes) increased by a record 6.2 million. In fact, well over half of the total unemployment pool of 15.7 million was generated just in this past recession alone. A record 5.6 million people have been unemployed for at least six months (this number rarely gets above two million in a normal downturn).
The longer it takes for these folks to find employment (and now they can go on the government benefit list for up to two years) the more difficult it is going to be to retrain them in the future when labor demand does begin to pick up.
Not only that, but we have a youth unemployment rate now approaching a record 20%. Again, this is going to prove to be very problematic for employers in the future who are going to be looking for skills and experience when the boomers finally do begin to retire.
So even if the recession is officially declared over one of these days, many Americans could be left out in the cold.
Even if we experience a recovery, it may be weak. Atlanta Fed President Dennis Lockhart said last year, The economy is stabilizing and recovery will begin in the second half (of 2009). The recovery will be weak compared with historic recoveries from recession. The recovery will be weak because the economy must make structural adjustments before the healthiest possible rate of growth can be achieved.
Lockhardt based his comments, in part, of work from the Blue Chip Economic Indicators, which which reports survey results from America's leading business economists.
The points within the red circle represent all previous postwar recessions, and they form a nice, neat, easily discernible pattern. That is, the pace of growth in the first year after a recession has, in our history, been reliably related to how bad the recession was. The deeper the recession, the faster the recovery.
Within the blue circle (from top left of the circle to bottom right), the points represent the 10 lowest forecasts of the most optimistic members of the 50 Blue Chip forecasting panel, the panel's consensus (or average) forecast, and the 10 highest forecasts of the most pessimistic panel participants.
According to David Altig, senior vice president and research director at the Atlanta Fed, Either we are about to continue making history—and not in a good way—or current guesses about the medium-term economy are way too pessimistic.
Finally, I invite you to examine the recent commentary by Pimco's Mohamed El-Erian, head of the premiere bond fund company in the world.
He says inconsistencies that the market faces include:
The tax on bailed out banks that President Obama announced Thursday and its effects on their ability to lend,
Long-term unemployment issues and the difficulty in fixing them due to the federal budget deficit, and
Larry is an avid golf & racquetball player. He enjoys developing web sites. He is president of Fox Valley Huskers, a Nebraska football fan club. He enjoys topical studies in diverse areas as ancient history, energy, German language, macro-economics, psychology, religion and science.
