Thursday, June 03, 2010
Weeeeeell, it's June!
In previous posts about this recession as compared to 1980 and 1982, I mentioned that we would know in a couple of months which trajectory we'd be following: Click on the graph to open a larger version in another window or tab. This includes today's initial claims numbers. The four-week running average is up to 459,000.
We wanna be blue, but we're green. We wanna be 1982, but we look more like 1980, don't we?
So am I wrong about saying that the US economy is in a sustainable growth cycle (at least until the next episode of political/economic insanity)? Maybe. But freight says I'm right. Also H.8 Other Deposits say I'm right. WIET YoY from Treasury receipts says I'm right. FUT says the end of 2010 is gonna be ugly, so that says I'm wrong.
One of the keys is that government transfers, especially in the form of Social Security, are cushioning the income drops from reduced private employment. There are very obvious limits to this!
One thing is for sure - any sustainable growth cycle will occur at a very restrained pace, and I repeat that trend growth is below 2%.
The similarities between the 1980 recession and this one are that borrowing did not help lift the economy after 1980 due to the sharp rise in interest rates in the effort to combat inflation. In our current situation, it's just that we are overloaded with bad debt, so new debt can't help generate real economic growth. Even if 20% of people are taking on new good debt, it's unlikely that the amount of new good debt can compensate for and even overcome the amount of bad debt that must be written off.
The interesting thing about our current situation is that trend growth is so low. Keynes would be the answer except that you can only effectively use government stimulus to combat this sort of thing if you have shown prior restraint. We haven't. The government has to be running a surplus during the "good" times to be able to pull it off, and consumers and businesses have to have shown prior restraint as well. If not (our current situation) you don't get the multiplier effect from lending that a Keynesian tactic really uses to stimulate the economy.
When the economy can't absorb new stimulus in a widespread way (because consumers and/or businesses are overloaded with debt already), the only effect of dumping money into the economy is to generate inflation. That doesn't help, really, unless:
1) The debt is spread pretty evenly through the population,
2) The labor force is in some balance, and
3) The country madly printing money is a net exporter, plus
4) Covers most of its internal basic needs with domestic production.
We don't have 2, 3 and 4, so wholesale inflation is not an escape hatch for the US.
It should be obvious that illegal immigration must be curbed, because we can't balance our labor force without curbing it. We can very easily by slapping significant penalties upon employers using illegal labor. Of course, we also need to legalize a lot of our labor; currently our ideological poles prevent us from doing anything effective about a very real problem.
Obviously we are not a net exporter. We will have to see a continued drop in average living standards, plus a change in our taxation and business philosophies in order to become one.
Except for energy, we actually do pretty well on 4 - basic production. We can grow food and we can generate most our internal resource needs. However, we can't fix 4 until we decide on an economically viable path to get there, and there too we have a current ideological logjam.
PS: ISM non-manufacturing shows inventories that are far too high and that have jumped sharply from April (53.5 > 60.5). Manufacturing ISM was very good, but this is a warning sign. NACM, which measures the B2B credit side, showed an overall decline, but a large decline in services. If you look back at February in both surveys, you see similar indications. We cycled through that one, so this is just a warning sign. I do believe that it is an indication of much slower growth toward the end of the year as various elements of growth fade.
I am persuaded by the Austrians who hold that most money is debt. Since there is little private borrowing, the Treasury must sell to the Federal Reserve in order to get money (account credits) with which to stimulate.
How much more Treasury paper will the bankers that own the Fed be willing to absorb?
Without borrowers, there is no money created, and no inflation.
I don't know if the legality matters all that much. Legal or not, downward pressure on wages would decrease overall immigration. Where the illegal immigration matters is at the lowest end of the workforce - as long as minimum wage remains high it will encourage illegal immigration even if other wage levels see a decrease in immigration. The other problem with making illegal immigrants legal is that it immediately puts them into the entitlement programs which, at the lowest wage levels, makes the programs even more insolvent because the lowest wage level doesn't generate the income taxes. (Illegals already pay the same rates of sales and property taxes.) In other words, wages are prices and the central government is doing everything it can to discourage price discovery. It is as if price discovery is an illegal activity.
And considering #4, while we are still OK at it, our capacity for meeting our own needs is much more restricted today than it was in 1980.
There is one other Austrian consideration for printing new money - the largest benefit of new money is bestowed on the first recipients of it. If the Fed/FDIC/etc. were printing new money to make deposit accounts whole when closing banks or meeting entitlement obligations, the benefit goes to the citizens while the investor class feels the first effects of inflation; if the new money goes to the investor class in order to reverse their insolvency, it is the citizens that feel the first effects of inflation.
Bingo! Illegal immigration is a direct result of minimum wage laws and over-strict labor regulations. The charm of illegal immigrants lies in their willingness to flout such regulations with a clean conscience, because they don't need to live here and don't have a real psychological attachment to the society. If they get caught faking their SSID, they run home to the bank account they've been wiring cash into. Maybe they come back for another try later. Americans can't really do that.
We've tried for decades to increase pay scales by making low-paying jobs illegal. This is the result, precisely the same as curing alcoholism by making alcohol illegal. If we want to subsidize the lowest-skilled, we should use a reverse income tax, not just send them a check that gets yanked as soon as they find work.
It's like pulling a thread.
I think it's probably easier (and less intrusive) to make sure that only citizens get welfare, than to make sure that only citizens get jobs. If the "jobs Americans won't do" are being done largely by Americans, there's much less incentive to come north illegally.
I wouldn't call that a problem!
Instead of trying to prevent certain jobs from being done, we should be enabling price discovery as Charles put it. If we don't like the wages received by the low-skilled, we should either upgrade the skills or subsidize the people directly (without penalizing them when they get a better job, like we do now). In the end, it's more efficient and less intrusive.
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