In the midst of terrible economic times, let’s raise energy prices dramatically and lay people off …
“Never let the reality of the situation stand in the way of a political agenda”, ought to be the slogan of the Obama reelection campaign.
In the midst of the worst economic downturn the executive branch of the Federal Government (the Obama administration), under the guise of the EPA is ratcheting up standards that will shut down many coal fired plants and their jobs as well as cost billions for utilities to keep other coal plants open. Result:
Consumers could see their electricity bills jump an estimated 40 to 60 percent in the next few years.
The reason: Pending environmental regulations will make coal-fired generating plants, which produce about half the nation’s electricity, more expensive to operate. Many are expected to be shuttered.
Of course the timing of the increase is predictable:
The increases are expected to begin to appear in 2014, and policymakers already are scrambling to find cheap and reliable alternative power sources. If they are unsuccessful, consumers can expect further increases as ore expensive forms of generation take on a greater share of the electricity load.
Yup, safely reelected (he hopes), Mr. Obama will smile benignly as he watches more of you hard earned money go for what should be cheap and plentiful energy based on incredibly abundant coal. Instead we’ll be chasing “reliable alternate power sources”. One would like to believe we’d go to natural gas, but then those abundant finds are also being slow walked through the red tape of the government approval process.
More than 8,000 megawatts of coal-fired generation capacity has been retired in the U.S. since 2005, according to data from industrial software company Ventyx. Generators have announced they plan to retire another 21,000 megawatts in the near future, and some industry consultant studies estimate 60,000 megawatts of power, enough for 60 million homes, will be taken offline by 2017.
This in the midst of projected energy shortages as demand increases while we shut down power generation assets.
Certainly we may want to, at some time in the future, shut down all coal fired plants. We may collectively wish to see other energy sources used as well. But that would require a coherent transition plan, viable alternatives, phasing and a little common sense (or essentially being in touch with the reality that one finds around them).
This is a agenda driven, safely-after-the-election, regulatory fiat that will cost workers their jobs and consumers a higher portion of their earned income in poor economic times.
Another, among a myriad of reasons why the man in the White House needs to be in his own house come 2014.
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Not only the real numbers, but the real reason:
Labor-force participation, the share of Americans who are working or looking for jobs, has fallen to its lowest percentage since the mid-1980s. That’s partly because people have grown discouraged about their ability to find jobs and have given up looking. With those workers on the sidelines, the unemployment rate has been lower than it otherwise would be.
The official unemployment rate hit 9.1% in May. Including all of those who had part-time jobs but wanted to work full-time as well as those who want to work but had given up searching, the rate was 15.8%.
Of course Dale has been saying that for some time with his own calculations. Discouraged workers, however, may also have taken another option – retirement – since it is the age of Baby Boomer retirement. So it’s not clear yet how many of those who were workers and lost their jobs are “discouraged” workers or retired workers. Bottom line, though – a lot of people have seen their lives drastically changed.
Here’s the inherent problem in long-term unemployment:
[T]he odds of finding a job steadily decreased the longer someone was out of work. Some 30% of Americans who had been out of work for less than five weeks found new jobs last year.
Those odds deteriorated for the long-term unemployed. Of those who had been unemployed for more than six months, slightly more than 10% found new jobs. Nearly 19% dropped out of the workforce.
The problem endures this year: As of May, 6.2 million had been out of work for more than six months and more than 4 million haven’t work in more than a year.
And the outlook, at least at the moment, doesn’t look like it will change anytime soon.
This is Obama’s political Achilles heel. This is what gets incumbent presidents an early retirement. I’m not hoping that this persists through the 2012 election, I’m suggesting that there is nothing to indicate it won’t.
That is Obama’s challenge. And it is also the GOP’s attack line. This is Obama’s record – something he has to run on for the very first time. Time to begin pointing it out now.
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What do they have in common? Well, you tell me (but my guess is onerous taxation, over-regulation and an anti-business climate). Here are the cities that have lost the most jobs recently according to the Daily Mail?
- Los Angeles, California, 17,393 workers
- New York, New York, 14,312
- Chicago, Illinois, 7,835
- San Francisco, California, 5,117
- Riverside, California, 4,852
- San Diego, California, 4,382
- Philadelphia, Pennsylvania, 2,747
- Seattle, Washington, 2,601
- Sacramento, California, 2,467
- Pittsburgh, Pennsylvania, 2,205
OK, you say, LA has a lot more jobs to lose than say, Montgomery AL. True and understood. But, there’s more. Take a look at the states in which you find the job losses. Now peruse the list of the “best/worst states to do business in”.
47 New Jersey
49 New York
All deep blue states. If you’re wondering, PA comes in at 39th just ahead of OH, WV, HI, CT and MA and behind MS. Yeah, that’s right, MS. Everyone’s 50th state in most every other comparison. WA was 34th.
Contrast that with the top 5 states – TX, NC, FL, TN and GA. All red, all right to work states, all southern states. Draw your own conclusions. By the way, the ratings of the “best/worst states” came from a group of people who ought to know and be able to make such a determination as it relates to business. The rankings are the product of surveying 550 CEOs.
And, as they indicate, it isn’t rocket science needed to attract and keep businesses in a state:
Business leaders graded the states on a variety of categories grouped under taxation and regulation, workforce quality and living environment. “Do not overtax business,” offered one CEO. “Make sure your tax scheme does not drive business to another state. Have a regulatory environment and regulators that encourage good business—not one that punishes businesses for minor infractions. Good employment laws help too. Let companies decide what benefits and terms will attract and keep the quality of employee they need. Rules that make it hard, if not impossible, to separate from a non-productive employee make companies fearful to hire or locate in a state.”
That, in my estimation, is the primary difference between Texas and California, and why Texas is booming and California is drowning.
Food for thought.
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The folks at e21 remind us of something that should be at the forefront of every person’s memory as they consider what this administration has and hasn’t accomplished in its promise to “stimulate” the economy and create jobs. I call it the “big promise”. I don’t call it a “lie” since I use the traditional definition of a lie (a known falsehood) vs. the more modern one in use today by activists on both sides (being wrong about something). But that’s fodder for a future post.
In this one I want to issue a reminder of what was promised and what has been delivered. Promise:
Back in January 2009, Christina Romer and Jared Bernstein produced a report estimating future unemployment rates with and without a stimulus plan. Their estimates, which were widely circulated, projected that unemployment would approach 9% without a stimulus, but would never exceed 8% with the plan.
They got their “stimulus” – $800 plus billion in mostly borrowed money with which they were to stem the tide of unemployment then rising and keep it under 8% as promised.
The result wasn’t even close. In fact, other than two months of this year, the unemployment rate has stayed above 9%. By this time, according to the administrations plan, we were told we’d be at about 6.5%.
So it is clear that the “plan” was a total and unmitigated but costly failure.
What’s their explanation for such a huge miscalculation?
Romer and Bernstein defend their estimates with the argument that the economic situation turned out worse than they had anticipated; and so the economy would have done even worse without a stimulus.
Is that so? Then, as e21 says, they owe us a much deeper explanation of why that was so and why they considered their solution at the time to be the proper thing to do. Because it is seeming more and more like a very expensive boondoggle at the moment:
The recession “officially” ended two years ago, yet the first quarter of 2011 only saw 1.8% growth. The Administration and Congress should have a more robust discussion about their self-proclaimed “2010 Recovery Summer” – if for no other reason than to better inform the public about the recovery challenges the U.S. still faces in 2011.
For example, there is new research that suggests that the stimulus may actually have resulted in a net loss of jobs. Regardless of the exact number of jobs lost or created, however, the fact that some economists are even arguing that it had a negative impact tells you that the stimulus may very well have been a wash overall.
Larry Lindsey offered his own review of the stimulus this week, arguing that it failed what’s colloquially known as the Sharp Pencil Test. As he explains, “if you sit down and do a back of the envelope calculation of the [stimulus] program’s costs and benefits, there is no way to conjure up numbers that allow it to make sense.”
Lindsey went on to offer this analysis:
[E]ven if you buy the White House’s argument that the $800 billion package created 3 million jobs, that works out to $266,000 per job. Taxing or borrowing $266,000 from the private sector to create a single job is simply not a cost effective way of putting America back to work. The long-term debt burden of that $266,000 swamps any benefit that the single job created might provide.
The 3 million claim is dubious at best with no mention of the type, quality or sector these jobs were supposed “saved or created” (the stimulus propped up a lot of state budgets which helped delay layoffs to government workers). And as Lindsey points out, the cost of what can only be a temporary “save” are way out of whack with the benefit. Instead, it appears the stimulus was a giant waste of money that did little if anything to create jobs in the private sector and mostly benefited government at a huge cost per job.
I’m not sure how anyone could economically justify such an outcome. But I sure would like to hear them try. I think they owe us some answers on this. And I’d like to see the GOP begin asking those questions. This is one part of the Obama record they need to pound on – starting now.
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I’m beginning to wonder if the Republicans can run just about anyone for President (note the qualifier – “just about” – not everyone, even among the declared candidates) and win given this economy and this president:
Americans’ disapproval of how President Barack Obama is handling the economy and its growing budget deficit has reached new highs amid broad frustration over the slow pace of economic recovery, according to a Washington Post-ABC New poll released on Tuesday.
The ratings boost Obama received after the killing of Osama bin Laden has dissipated with his job approval rating back to 47 percent. Forty-nine percent disapprove of his performance.
Obama’s approval rating bounced to 56 immediately after bin Laden was killed last month.
But it went back to a plurality very quickly. On the key issue, however, it hasn’t returned to a particular percentage – it’s gotten worse. Much worse:
Fifty-nine percent, a new high, gave Obama negative marks for his handling of the economy, up from 55 percent a month earlier.
Obama’s approval rating on the deficit issue hit a new low of 33 percent, down 6 points since April.
Anyone who doesn’t understand that is where the election will be decided hasn’t been paying attention to politics very long. Bill Clinton knew it when he rode to victory on his “It’s the economy, stupid”. Ronald Reagan knew it when he continually asked, “are you better off now than you were 4 years ago”? And Barack Obama would probably kill to have the economic problems Jimmy Carter faced – not that he’d do any better than Carter.
The point is, in bad economic times, incumbents have a tough road ahead of them at election time. That’s because economic issues, joblessness, insecurity and fear are felt and understood by everyone. Pocketbook issues are personal issues. And the public has always voted those issues in general elections – much to the disadvantage of incumbent politicians, especially presidents. There’s a number going around out there which claims that no president since FDR has been re-elected with unemployment over 7.2% . Of course keep in mind only a some of them since then have run for re-election and not all of them had bad unemployment numbers at the time. The point, however, is that this sort of issue is critical to re-election chances.
The survey reflects a broadly pessimistic public mood as high gasoline prices, sliding home values and high unemployment numbers raised concerns about the pace of the U.S. economic recovery, The Washington Post said.
Eighty-nine percent of Americans say the economy is in bad shape; 57 percent say the recovery has not started and 66 percent said the United States was seriously on the wrong track.
Forty-five percent said they trust congressional Republicans over Obama to handle the economy, up 11 points since March.
If much of what is listed in the first paragraph isn’t improving fairly dramatically when 2012 arrives, Obama is in for a long year and, just guessing here, an “upset” loss. The shine has worn off. The cache of electing a black president has run its course. History has been made. And now the results part of the show come to bear. Having been a moment in history won’t save Obama if the economy still sucks as badly as it does now.
My dad used to always tell us boys, “you live between your ears”, meaning attitude was critical to how you approached life and overcame obstacles. Attitude is also critical in economies. Pessimism isn’t the predominant mood one wants within the citizenry when they’re hoping to see it turn around. And it certainly isn’t the mood a president wants through out the lane when he’s running for re-election.
Yeah, this is going to be an interesting year and a half until election day 2012. I’m betting it’s not better economically and, again depending on who the GOP eventually nominates, Republicans stand to win the election. Or, and you heard it here first with all the caveats – it is most likely the Republican’s election to lose.
Of course, knowing them, I have little doubt they can manage to do that.
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In macro terms its really fairly simple. We have always come out of busts with booms. Wondering what the next boom is going to be and how to help it launch itself is where government should be looking and trying to act – not at deficit funding government make work projects and future energy schemes still some decades from reality.
For instance – a little look into the not to distant future and a scenario that would help us in both the balance of trade and employment, arenas (the latter almost immediately).
But also, we will help to satisfy burgeoning demand for petroleum in Asia, South America and Africa. Yes, the US is an oil importer. But if we import less, that will help to satisfy world demand just as much as if a new exporter appeared on the market. If we import a billion barrels a year (2.74 million barrels a day) less, at current prices that works out to $100 billion off of our huge trade deficit. This could also be a huge engine of job growth. We now have about 2,000 rigs drilling, and more are being added all the time. For each rig there are the roughnecks, the service companies, the drilling pipe and casing producers, the local service providers, etc. It is big business, and growing fast.
Fortunately, we have lots of places to drill, in various shale formations around the country. (It’s not “shale oil” in the classic sense, better to call it, “shale associated oil”). For those who think that Yankee ingenuity is a thing of the past, just look at our oil and gas industry. It serves as a powerful testament to the power of the free enterprise system that a great many people chipping away at the same problem can come up with creative new ways of extracting oil from the earth that a centralized government program of oil production would never (and has never) originated. You don’t see these new drilling techniques coming from Russia, which is still sadly statist in its efforts to exploit natural resources.
We have the resources, we could be exploiting them now (relatively speaking) and have them benefit our economy while we do the pie-in-the-sky energy research the Democrats think is the panacea to all our problems. I’ve never understood their insistence on ‘either/or’ in that regard. Why can’t we do both simultaneously – which seems both logical and would help do exactly what they claim they want – employ Americans.
Timothy Siegel’s point about innovation is well taken as well. One of the reasons we’re moving past the peak oil predictions of the past is because of innovation from private oil companies that is allowing them to extract harder to reach and exploit oil and gas at a reasonable price. We, as a nation, should be encouraging that instead of doing everything in our power to cripple such innovation.
Instead we get solutions like those below from the left. Government should spend money when one of the greatest engines for economic revival is left sitting at idle while the administration figures out how to get more sugar in its gas tank.
It’s freakin’ nuts.
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Ron Klain, former Chief of Staff for Joe Biden (and a Bloomberg View columnist) gives you a peek at the plan. Klain has a piece in Bloomberg where he puts the outline of what the administration needs to do to spin the car bailout properly if it hopes to make it a campaign positive. Klain’s suggestions are offered to form the basis of a narrative which will be polished and become a center-piece of the record of Barack Obama. The reason for beginning now is obviously an attempt to condition the public, which was very much against the bailout (and mostly remain so), to the supposed positive aspects of the takeover by government.
Of all the policy challenges I saw Obama tackle in my two years in the White House, none was more complex than turning around the U.S. auto industry. When the president took office, the industry was in free fall. Sales of cars and trucks, which had topped 17 million in 2006, fell to 10.6 million in 2009. Two of America’s three major automakers were insolvent, kept alive by weekly inflows of federal cash. U.S. automakers had an unsustainable cost structure, were badly trailing their foreign competitors in the production of fuel-efficient and electric vehicles, and seemed unable to make the hard choices needed to arrest their downward spiral.
The course the president chose was unexpected and risky. Most Americans remember that the administration decided to "bail out" the car companies — and indeed, the president did extend more loans and support to the industry. But he attached to the aid a series of controversial and painful conditions that ended business as usual in Detroit.
Call it “gutsy call II” if you will, but in reality, it is far from the picture that Klain ends up painting. Both the car companies were headed toward bankruptcy – a financial condition they had earned by their poor practices and sellouts to unions. Obama’s bailouts certainly ended “business as usual” for those two companies but not in a positive way.
One of the consistent memes is that had Obama not acted, GM and Chrysler would have gotten the equivalent of a death sentence by having to go into bankruptcy. By death sentence I mean the administration and its bailout supporters imply millions would have been thrown out of work and those two companies would have forever disappeared.
Uh, no. As Jim Manzi at NRO explains:
First, in the event of a bankruptcy, you don’t burn down the factories, erase all the source code on all the hard disks, make it illegal to use the brand name Chevrolet, and execute all of the employees. Others take ownership of the assets, and the employees go on with their lives. Some of these assets will be put to use generating revenues, profits, and taxes, and some of these former employees will get jobs or start businesses, and generate revenues, profits, and taxes. In order to measure the effect of the bailout over, say, five or ten years, you have to compare the actual taxes collected to what would happened over this same period in the counterfactual case where the bankruptcy was allowed to proceed. What owners would have bought the factories and IP assets, and what would they have done with them? What businesses would the former employees have started? Who would have moved to Arizona and retired? What new industry clusters will evolve in Arizona because of this transfer of people?
And what would have come out of the bankruptcy? Leaner companies better equipped to address the market and turn a profit. What wouldn’t have come out of the bankruptcy are the level of union pensions and benefits the administration preserved. Obama, through his bailout and modified bankruptcy made sure those were weren’t destroyed. Consequently you have pretty much the same conditions that existed prior to the bailout still in existence today with the added twist of more union control.
GM, for instance, just before it announced it had “paid off” its government loans, lost 3.4 billion dollars. Hans Bader, of the Competitive Enterprise Institute destroys the myth of GM’s loan payback with an extensive investigation into the real story. It is a story of known falsehoods being tacitly approved by the White House and the Treasury Department because the administration was desperate for some good news at the time. The Chrysler loan payback, as I noted recently, is of the same stripe. More smoke and mirrors from the “transparent” administration.
But back to the bailouts and the reasons. The defense offered for the bailout is this:
The White House report said the money invested in GM and Chrysler ultimately saved the government tens of billions of dollars in direct and indirect costs, including the cost of unemployment insurance and lost tax receipts that the government would have incurred had the big Detroit auto makers collapsed.
Again, that assumes nothing comes out of any bankruptcy proceedings. Nothing. And, as Jim Manzi of NRO explains above, that’s simply not how it works. It is an assumption without any real world foundation. We’re talking a zero sum assumption by the administration where no assets are bought, no one goes back to work, everyone is unemployed and no one can find a job. That’s just not the way bankruptcies (or the real world) work.
Second, some of the profit GM makes today would have been made by other companies that picked up some of the slack if the company lost market share after a bankruptcy. They would pay taxes on these profits, and as far as government receipts are concerned, money is money. How would auto industry structure evolve over time given whatever changes happened to the assets currently owned by the legal entity GM, or the employees currently paid by it?
Anybody who tells you they can answer all of these questions reliably is full of it.
Indeed. Again, the White House and its cronies must push the black and white version of this to make it saleable. If they can’t make you believe in their “either/or” scenario, then they can’t sell the lie. They’re banking on a large degree of economic ignorance to sell this. But they know that if they rely on the fact and figures they’re going to end up on the wrong side of the argument. So Klain says, break out the smoke and mirrors once again – sell it on emotion:
First, tell the story with fewer numbers and more emotion; less prose and more poetry. Rescuing the auto industry isn’t just a matter of saving jobs and factories — it means preserving a uniquely American manufacturing tradition. Cars are more American than apple pie or hot dogs (which, unlike the automobile, were both invented in Europe). We couldn’t have won World War II without this "arsenal of democracy"; as Walter Reuther famously said, "England’s battles were won on the playing fields of Eton, but America’s were won on the assembly lines of Detroit." The president needs to jujitsu Republican critics who accuse him of failing to understand American exceptionalism by pointing out his success in saving this exceptionally American industry.
You have to love the fact that even Klain doesn’t believe his own nonsense, but has no problem advising the president to use it. Note too that Klain seems not to remember that one of the reasons that GM and Chrysler were on the ropes had to do with the American public choosing competitive foreign cars over the American cars from those two companies (and with the VOLT, we see GM again in the same condition. But he feels if he wraps it all in emotions and not facts (a variation on “hope an change” that worked so well in 2008), they can fool enough voters into accepting the narrative or at least, not caring about it.
Second, equally emphasize the pain that was imposed as a condition of support, and the hard and unpopular choices the president made. It was a plan of “shared sacrifice,” in which executives were fired, workers lost jobs, benefits and pay were cut, and dealers were shut down. The story of the tough choices the president made along the way must be told to convince the public that this wasn’t a handout.
Of course, this plays into the part of the narrative in which you must believe their “either/or” scenario – that is had the government not acted, millions of jobs would have just vaporized. Of course, what Klain describes above would most likely have been the result of normal bankruptcy proceedings minus the $50 plus billion government money injected into GM. They don’t what that known though. And, naturally, they don’t want any speculation about what would have emerged, how many jobs would that would have entailed, etc.
If you start down that road and use the history of bankruptcies and the emergence of companies from that situation as a basis, you’ll have a very difficult time swallowing the administration’s story. So avoid those facts at all costs and concentrate on “emotion” and “pain”.
Finally – Klain advises the White House to crank up the propaganda:
Third, let the people of the auto communities tell their own stories — encouraging homegrown viral videos and other uses of social and new media. This is a lesson I learned the hard way during the 18 months I was part of the White House team that struggled to explain the benefits of the Recovery Act. We used visits by the president and vice president, videos posted on WhiteHouse.gov, as well as endless statistics and charts and maps and graphics on Recovery.gov — and yet nothing got the job done. Finally, two ice-cream shop owners made an iPhone video that told the story better than we ever had, by showing how a single small business loan rippled across their area to create jobs in countless other businesses.
The White House needs a similar personal narrative to tell the auto rescue story, or it will risk being denied a return to Victory Lane in 2012.
So there is the plan – “emotion, pain and propaganda” – that Klain claims the administration should use to sell something that is about as un-American as the internment of Japanese/American civilians during WWII. The most interesting part, of course, is Klain understands that if they get into the specifics of this “deal” and the facts come out, it ends up looking like a very poor decision. And Klain knows that the opposition, once it finally settles on a candidate and its own narrative, is going to seize on this subject as a part of their attack on the Obama record.
He instinctively knows that any chance of blunting that, or making it a non-issue, requires that the administration’s narrative be out there actively being pushed now and that it has to be spun properly for it to work.
How do you counter this? With facts. And the facts are aplenty. There is no shortage of factual information that can gut these arguments and show them for what they are – emotion and propaganda. The opposition also has to use “American exceptionalism” in its proper way and point to the fact that the administration misusing “exceptionalism” in its version.
And that doesn’t even start to get to the really long-run considerations of what effects this has on rule of law and moral hazard (or if you want to make the case for the bailout, social solidarity and degradation of the working class).
One of the things America prides itself on is “rule of law”. That is a large part of our exceptionalism. We also founded a country that attempts to avoid the moral hazards that abound in this sort of a situation. We are and for the most part always have been a meritocracy. You get what you earn. We don’t buy into exceptions because they’re “too big to fail”. We understand that freedom means the freedom to fail and we don’t bail out –selectively- failures. We don’t throw good money after bad, and we certainly don’t expect our government to interfere in that process.
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I’m sure they’re “unexpected”:
Private-sector employment growth decelerated sharply in May, according to Automatic Data Processing Inc.’s employment report released Wednesday, in another possible sign of a sputtering U.S. recovery.
Employment in the nonfarm private business sector rose a seasonally adjusted 38,000 in May, well below the 175,000 increase expected by economists. In April, private payrolls showed an increase of 177,000, ADP said.
“This is exceptionally weak,” said Eric Green, chief market economist at TD Securities Inc. in New York.
“This was a dismal report, indicating a significant slowdown in job creation after six months of solid gains,” said Nicholas Tenev, economist at Barclays Capital Research.
“Sold gains?” Yeah, not so much. We’ve yet to hit the threshold of job creation – about 300,000 or so – necessary to tread water, much less be adding jobs. The gains we’ve seen in the past six months have been “positive” in that there were net jobs created, but 38,000 is about 10% of what we need per month to begin to chip away at unemployment.
The government will report its version of the numbers on Friday (the above is the ADP report):
On Friday, the government will report on U.S. nonfarm payrolls for May, data that also include government workers.
Economists polled by MarketWatch are looking for a gain of 175,000 in payrolls and for the nation’s unemployment rate to tick lower to 8.9% from 9.0% in April.
That would mark a slowdown from the healthy 244,000 jobs added in April.
It would also tell us that there is no real slowdown in hiring government workers, wouldn’t it – you know, despite “budget woes”, etc. And note too that we again, despite “a dismal report”, see economists saying the unemployment rate will “tick lower” to 8.9%? Yup, the Ministry of Truth is available to feed you whatever data you want to believe (which may explain why “improvements” in the unemployment rate don’t seem to boost consumer confidence at all). Again, not being at the “tread water” level with job creation, you have to wonder how the calculations are figured and what is being considered and not considered to anticipate the unemployment rate coming down in the face of “a dismal report”.
Dale has covered the real numbers for quite some time – well into double digits. But there is indeed a larger question out there – is the workforce actually shrinking and the old norms no longer the standard by which we should measure unemployment. I.e. are older workers looking at the job market and saying, “to heck with it, I can retire and I’m going too”?
Don’t know for sure, but regardless, the numbers from ADP remain “dismal” for May.
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The one-trick pony that is Paul Krugman, constantly pushes massive government spending as the panacea for all recessionary ills. It is supposed to be the way one “manages the economy” from a central government position – as collectivist a thought as one can imagine.
In fact, one of Krugman’s criticisms – despite the fact that his estimate of the amount needed to stimulate the economy was $200 billion less than what was passed in the stimulus package – is that the government hasn’t borrowed and spent enough. And he certainly is no fan of austerity, claiming that the “pain caucus” has been in charge (what almost a year trying to address decades of borrowing and spending?), with no significant results and oh, by the way, look at the UK.
“In Europe,” he wrote last week, “the pain caucus has been in control for more than a year, insisting that sound money and balanced budgets are the answer … [But] Europe’s troubled debtor nations are … suffering further economic decline thanks to those austerity programs.”
Yes, friends, “sound money and balanced budgets” are, apparently, things to be avoided.
But curiously Krugman never says, “oh, by the way, look at Switzerland” because if he did, he’d have to explain their positive outcome based on austerity:
The Swiss have run a prudent fiscal policy throughout the economic crisis. They have had a structural surplus in each of the past five years. Their net debt is actually lower today than it was in 2005. And guess what? In 2009 their economy suffered the smallest contraction in Europe, with unemployment today below 4 percent. As for sound money, the Swiss franc is up 95 percent against the dollar since 2000.
The key point is the Swiss never let their economy get in the shape that is now plaguing the rest of Europe and the US. It has never spent and taken on debt like the UK, much less Portugal and Greece. It has been a program of economic austerity for years. Consequently, the debt level is miniscule compared to other Western economies and recovery was quick with minimal intrusion (if any) from government. We, on the other hand, were borrowing in good times and borrowing heavily to spend on things our government has no business involving itself in much less borrowing money to do so. And it points out that even if you buy into the Krugman theory that we ought to be borrowing and spending in “bad times” ala Keynes, the other borrowing that has taken place limits those options considerably:
The real lessons for the United States are clear. Those who run up debt in good times can borrow only so much more when a recession strikes. And heavily indebted governments postpone fiscal stabilization at their peril. If you wait to reform until the bond market calls time, you are—to use a technical term from economics—screwed.
And we’re headed toward that “technical term” more quickly than we can imagine, and yet the Krugman’s of the world still counsel more spending of borrowed money leading to more accumulation of debt.
At a certain point, the amount of debt begins to shave percentage points off the GDP as the debt is serviced. That, at least in my opinion, is where we are now and one of the reasons we’re seeing such a slow recovery. GDP growth, last quarter for instance, is not at all robust:
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.8 percent in the first quarter of 2011…
Economically we have to understand, at the highest levels, that despite the siren songs of Keynesians like Krugman, that the bill has come due – in fact it is past due- and must be addressed and paid. We can’t afford to ignore it anymore, nor pretend that spending borrowed money will do more good than harm. We and the can are at the end of the road. It can’t be kicked anymore without dire consequences. Unfortunately, while it seems we’ve at least recognized that fact – for the most part – what we can’t seem to make ourselves do is that which is necessary – cut spending deeply. We continue to hear from the false economic prophets that we can fix all this if we’ll just borrow and spend.
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As China’s middle class expands and as its business and manufacturing sector continue to grow, it is driving the price of commodities higher because of increased aggregate demand for relatively scarce commodities:
While China’s GDP is only 9.4% of the global economy, and its population is 19% of the world population…
- Cement demand represents 53.2% of global demand
- Iron ore = 47.7%
- Coal = 46.9%
- Pigs = 46.4%
- Steel = 45.4%
- Lead = 44.6%
- Zinc = 41.3%
- Aluminum = 40.6%
- Copper = 38.9%
- Eggs = 37.2%
- Nickel = 36.3%
Some of that demand is relatively stable, like food consumption. The world’s largest country has a middle class that can afford meat for the first time…..
Obviously this means that competition for these commodities will push prices higher and higher. It is these sorts of numbers that cause me to doubt seriously those who claim inflation is not a threat. Certainly the price for commodities is going to go up based on nothing more than China’s demand. And if it costs more for those commodities, that means costs for products based on them are going to rise as well – everywhere. Add in the money supply woes (i.e. literally dumping trillions in dollars into the economy to no real effect) and debt problems and you have a mix of reasons why, while it may not be evident just yet, inflation seems to be a certainty in our near future.
UPDATE: More on food commodities. Interesting article. Much that is produced in China in terms of grain is going toward feeding livestock. So that puts even more pressure on costs for grain, etc.
China was until recently self-sufficient in soybeans, for example. But now they are producing the same amount as they always have (15 million metric tons) but importing 3 times that to keep up. Corn, wheat and rice are headed in the same direction:
Xiaoping said that most of the land in China that can be farmed profitably is already under cultivation and that available land is actually shrinking in the face of development. In addition, yields are beginning to plateau, he said, with little expectation of major gains.
He said he expects China to increasingly import corn to keep up with demand resulting in part from dietary changes and its use in producing biofuels.
That means upward pressure on prices for everyone.
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