Is Growth Over? — MY COMMENT

by John Brian Shannon

Read Paul Krugman’s fascinating New York Times economics blog “Is Growth Over” which deals with the political, economic and social picture of the future.

Some nations are replacing retiring workers with robots at an accelerating pace — and for good reason.

In Germany, this is an absolute necessity as a huge pool of German workers are approaching retirement and there aren’t nearly enough Germans to replace them. Germany imports (low) millions of workers from Turkey and the MENA nations, but Germany still can’t keep up with the demand for labour in their export-driven economy.

What’s a country to do? Phone all their export customers and tell them they can’t produce all the widgets they ordered? Not the German way!

So, I understand, precisely, the position of the Germans and agree with their moral reasoning and their necessary choice.

While at the same time, I worry about other nations (us) making a massive shift to robotics – for very different reasons, and none of them moral — causing workers (who are human beings, after all) to become redundant while concentrating evermore billions into the hands of the infamous 1% of the population.

A switch to robots to improve the bottom line could become a threat to millions of workers in the coming decades and might become the most profound, social issue since the 1960’s anti-war movement.

Replacing retiring workers with robots (as is the case with Germany now) is a moral decision, which was made to ensure the German economy does not falter and thereby harm large numbers of citizens.

In this case, it is a completely understandable and moral decision, one that benefits vast numbers of German citizens.

Replacing presently-employed workers with robots so that 1% of the U.S. population can make more profit is an immoral decision, which will allow the 1% to keep evermore of the U.S. money supply for themselves at the expense of the other 99% of the population.

In this case, it is not understandable, nor is it a moral decision – as it primarily benefits 1% of citizens over 99% of citizens.

It will come down to this, will we assure human rights for American citizens who want jobs and want to contribute to their nation’s economy, or will we favour a small number of people (the 1%) who want more, more, more, for themselves?

Who is America in business for? The 1% or the 99% of American citizens? It is a political, economic and social decision that voters will need to make in the next election cycle.

Or, put another way, should 3.1 million citizens have near total employment and economic control over 315 million citizens? [315,091,138 U.S. Census Bureau Jan 1, 2013 estimate]

Unfortunately, the 1% may be holding all the cards by the time a full conversation can occur and by the time the masses fully realize this, it may be far too late to do anything about it.

There is a better way. Read the Financial Post‘s “Employee compensation is an integral part of corporate culture” by Marty Parker, for one shining example of a better way. While just the tip of the iceberg, this one example could foreshadow a quiet and heart-warming revolution, one that benefits workers and corporations, while strengthening the very fabric of our Western society.

JOHN BRIAN SHANNON

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Looking Through the Wrong End of the Telescope Won’t Fix the Economy

by John Brian Shannon

Quick, think fast! Why is there a huge liquidity trap in America?

If you can answer that question, then you’re not ‘looking through the wrong end of the telescope’ blaming the symptoms, instead of the root causes of the present American economic problem. Which, some other people (not you and me) are probably doing right now.

Let’s call some of those people 2012 Republican politicians.

The present excess-liquidity situation has come about as a result of some economic policies of the United States, which gained traction during President Reagan’s first term in office. It was a different world then and the 40th President acted swiftly and responsibly to restart the U.S. economy. I quote the New York Times reportage of President Reagan’s inauguration speech.

He said “progress may be slow,” but his “first priorities” would be to “get government back within its means, and to lighten out punitive tax burden,” a reference to his campaign pledge to balance the Federal budget and cut personal taxes to 30 percent in three years. – The New York Times, quoting President Ronald Reagan’s inaugural speech of January 20, 1981.

Personal and corporate tax rates have dramatically fallen since then and the plan to cut the tax rates and add unprecedented billions of dollars of stimulus spending to the economy (much of it went to U.S. defense contractors) worked to grow the American economy and the economies of other Western nations, such as the UK, Canada and Spain. Yes, it was that much stimulus.

Cold War allies such as Canada, received generous NASA and U.S. defense-related contracts from the administration, which in turn helped to boost the economies of Western alliesthereby helping the U.S. economy.

How’s that?

During Ronald Reagan’s terms in office, most cars and trucks registered in Canada were manufactured by U.S. corporations and the same held true for so-called ‘white goods’ (refrigerators, stoves, dishwashers, etc.) and large volumes of many other products — especially construction industry products and materials. Not to mention Canada’s purchase of 110 F-18’s in 1981.

When your allies have money, they place orders with U.S. corporations. When your allies don’t have enough money to purchase American goods and services, sales fall off dramatically.

Of course, there was much more to it than that. America was deep in the economic doldrums in 1980/81 and the American psyche was still reeling from the Vietnam War, a recession and a loss of American prestige following the dual shocks of the Arab Oil Embargo and the American hostages in Iran.

President Reagan stepped up and hit a ‘home-run’ every day for the U.S.A and got America to believe in itself again. The President authorized the Chrysler bailout, other bailouts and some exceptional mergers so that companies would not be forced to shut their doors and take all those middle-class jobs with them.

Economically speaking, by adding significant hundreds of billions of stimulus dollars to the U.S. economy (perhaps as much as 1 trillion dollars, depending on who is doing the counting) and lowering personal and corporate tax rates, the Reagan administration employed a two-pronged approach to foster growth in the American economy. And it worked.

Fast-forward to 2012. Trying to employ those same policies now when we have reached a state of diminishing returns on them (as there isn’t much left to cut without shutting down America) can only be called tinkering with the economy. Back in the 1980’s huge cuts in tax rates were possible and allowed a decade-long spending spree by American citizens and corporations.

Now that personal and corporate taxes are so low and have been for some time, there is no longer room for huge tax cuts of 10% or more. All the juice has been squeezed out of that lemon.

The policies which allowed huge growth in the 1980’s (mega-stimulus and tax cuts) were financed by running massive deficits which were never paid off — as President Reagan had responsibly promised would eventually happen.

When governments run obscene deficits designed to stimulate the economy during times of economic crisis it is an utterly logical thing to do. When successive governments don’t return to balanced budgets and don’t paydown the accumulated government debt during the ‘good times’ as John Maynard Keynes suggested, governments ability to assist in subsequent recessions are constrained (for a telling article on that, read here) – but this time around the constraint is the liquidity trap.

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Now we have people writing to members of Congress, to the media and to each other, asking for fixes to the symptoms of the economic problem, instead of the cause. It gets worse, we now have candidates for high office blaming the symptoms instead of the cause.

Why are we in a liquidity trap? The answer my friend, is right below.

A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth.

A liquidity trap is caused when people [or corporations] hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels. – Wikipedia

How can injections of cash into the private banking system by a central bank lower the interest rates when the interest rates are effectively zero?

What we are left with; The banks are full to the top with deposited money from individuals and corporations. There is low demand for goods and services. There is little demand for money to loan. There is little incentive for banks to loan money as there is presently such a small ‘spread’ between prime rate and mortgage rates. There is little room for personal and corporate tax rate cuts — as the largest cuts have already taken place over the past 30 years.

What all of this means is the government has little in the way of actual controls over the economy. When both major levers (monetary and fiscal) don’t work, all that is left is minor tinkering.

When two of the most important economic levers are temporarily out of order, we just can’t stand around blaming the symptoms or wishing for a better day. It is now the time to bring in other levers to spur the economy like a reasonable (export) tariff of say, 5-8% on all raw resource exports, such as petroleum (the U.S. is a net exporter of petroleum) coal, minerals and metals.

This would begin to add cash to the federal coffers from day one and every penny should be used to stimulate actual jobs.

The U.S. could hire 100,000 additional police as President Clinton once did – many of whom are still paying taxes and contributing to their local economies, by the way.

Also, more teachers, or teachers with higher credentials could be educating a better future workforce.

‘Shovel-ready’ national infrastructure programs could create jobs for out-of-work and under-employed labourers.

Want to create demand in the economy? Give a few million Americans jobs! Watch how much tax revenue is generated. Watch the sales of everything from work-appropriate clothing, to cars, gasoline, home appliances and so much more, skyrocket in less than a year and continue to contribute to the economy.

People don’t want food stamps if they have a good-paying job. People don’t want welfare if they have a decent job. And people don’t want to burden social agencies when they can afford to live independently.

Looking through the right end of the telescope, there’s nothing but solutions in all directions. A moderate tariff on raw resource exports is a good place to start.

John Brian Shannon

ABOUT JOHN BRIAN SHANNON

I write about green energy, sustainable development and economics. My blogs appear in the Arabian Gazette, EcoPoint, EnergyBoom, Huffington Post, United Nations Development Programme, WACSI — and other quality publications.

“It is important to assist all levels of government and the business community to find sustainable ways forward for industry and consumers.”

Green Energy blog: http://johnbrianshannon.com
Economics blog: https://jbsnews.wordpress.com
Twitter: @JBSCanada

 

Stimulus or Austerity: Can Either Succeed?

by John Brian Shannon

In the age-old debate between stimulus and austerity, many commentators fail to realize both schools of thought could be correct — and in fact, both are.

For one, look at the uncountable billions of stimulus added to the American economy during President Reagan‘s two terms. Unprecedented billions were directed towards defense, R&D, infrastructure — and even to Chrysler — although, strictly speaking, those were loan guarantees.

Do loan guarantees count as stimulus? Almost. And those guarantees tied up billions of U.S. Government dollars until they were no longer required — and served to establish and add gravitas to a new momentum in the U.S. economy. Courtesy of President Reagan’s leadership, I hasten to add.

When we look at historic stimulus, it works. When the stimulus is added at the first sign of recession it is most effective. Once all those factories are shuttered, trying to add stimulus to improve the economy is an uphill battle, every day.

The Marshall Plan to rebuild Europe at the end of WWII is a classic stimulus success story. Anyone who visited 1945 Europe and then visited again in 1960 can attest to that! About $40 billion dollars were used to stimulate the European economy — a lot of money in those days, even by United States’ standards.

Think of stimulus spending as emergency funding to keep the economy functioning. It really only works when applied immediately and at the first sign of recession.

For two, austerity does work. Although, it must be said, removing obscene debt and irresponsible deficits from a large economy constitute a major structural change. It is no band-aid solution — although as I said above, band-aids do work.

Austerity fixes the underlying structural problem — while stimulus fixes the symptoms, if you will.

There is no doubt about the Baltic austerity success story and there are others. You need only look as far as Canada in the 1990’s. Canada’s credit rating was on the rocks, the economy was in the tank and economic vital signs were heading in the wrong direction.

Prime Minister Jean Chretien and his astute Finance Minister Paul Martin, decided to adopt aggressive Canadian-style austerity and it worked (short-term pain for long-term gain) better than anyone had imagined. It just took some political leadership, unusually good communications with voters and some serious brainstorming.

A final word on economist’s everywhere. European economists work for Europe’s well-being, Chinese economists work for China, er, directly! While American economists work to arrange things to America’s advantage — you can’t begrudge any side for ‘playing for the home team’.

If the New York Times, Nobel Prize winning economist Professor Paul Krugman believes that it is in America’s best interests to float the economy with stimulus money, then he is right. Of course while agreeing with him, I always point out that stimulus is a merely a temporary fix and that additional deficit-financing (and accumulated debt) should be ‘pared down’ during the boom times.

Just as John Maynard Keynes suggested.

When this is not done, decade after decade, or should I say, recession after recession, it adds to the unbalanced economy and the entire economic structure is thereby weakened.

For now, stimulus — although it is almost too late for band-aids. Then, during the next boom, adroit movement towards zero-deficit financing — then, once that is achieved, regular scheduled debt paydowns after that.

Stimulus will stop the worst of the present economic malaise from taking an even higher toll — and later, austerity will begin to improve the entire structure of the U.S. economy.

John Brian Shannon

Crash of the Bumblebee — MY COMMENT

by John Brian Shannon

READ PROFESSOR PAUL KRUGMAN’S ARTICLE “CRASH OF THE BUMBLEBEE” HERE…

Supposedly, the bumblebee is not able to fly according to all the known laws of physics. But fly it does and it does so adroitly.

So too, according to all the known laws of working political models (those are called countries) Europe is not supposed to work. But it does so and is as adroit as any bumblebee will ever… be. Ahem.

Since the ashes of WWII, Europe has risen like the Phoenix of lore, from self-destruction to become a fully-fledged working model. Europe has many disparate parts, you would expect it to be unwieldy and it should definitely not fly. But it has surpassed everyone’s expectations – including the expectations of many European citizens and I daresay, some of Europe’s greatest leaders past and present.

A tip of the hat must always go to the foresighted American politicians of 1945-1950, who gave their blessing to the Marshall Plan to rebuild Europe and feed it’s people, until the Europeans could again feed themselves. Even after that the U.S.A. pursued a successful European project with vigour. There were many disagreements and even outright arguments between the Americans and the Europeans from 1945 right down ’till the present day. No doubt, there will always be differences of opinion, but so much more has gone right, than wrong over the past 67 years.

Differences aside, the U.S needs a successful Europe and Europe needs a successful America. Neither can afford a disaster on the other side of the pond.

The American Civil War can be considered America’s coming-of-age moment, while the gradually coalescing Europe, still fresh from reunification with it’s Eastern European counterparts, post-Cold War, must now forge some kind of coming-of-age moment for itself – or history will indeed pass Europe by.

One such test is the present ‘Eurozone Moment’ — where the wealthy northern European’s (where most of the euro-dollars live) must find a way to co-exist with their poorer southern cousins, who are in hock up to their nostrils.

If Europe can find a solution now, it may well be written down by future historians as Europe’s coming-of-age moment, the glorious moment when Europe realized that she is, in totality, greater than the sum of her individual parts thereof. Let’s hope Europe is self-aware at that level.

What time honoured political strategy could assist us here? I’m glad you asked. For one of the best-tested and time honoured practices for success is, the strategy of win-win.

But how to apply this to the present Eurozone Moment?

By simply finding many different things which will work to mutual advantage, where both sides can gain some amount of benefit. It doesn’t have to be an exact science. Forward progress is forward progress. On some matters, the north may gain more and on other things the south may gain more. What matters here is the need to not lose the Moment! And, to find multiple ways to succeed together.

The simplest idea in the world here is to create some kind of Euro-stock in order to ‘buy-down’ the interest rate of the southern European nations, especially the ones which are deeply in debt, or which have high unemployment and/or stagnant growth.

How could this profit the northern Euro stock-holders? The market works the same, anywhere you go. Price things over 5, 10, 15, 20 and 25 years. Investors will make money on the spread between the estimated price vs. the actual selling price.

If Spain, just for example, is having trouble affording the payments on the debt it owes, it doesn’t really matter that Spain isn’t carrying a lot of debt compared to some countries, what matters is, they can’t make the payments. How better to help Spain pay it’s debts, than to lower the interest rate on the money they owe? If 10% interest rates are killing them, then maybe those same multi-billions of debt financed at 2% interest, won’t.

If northern European’s can make money on buying down the interest rate for Spain, then Spain will be better able to fix it’s economy.

I would call that a win for northern European investors (whether sovereign, institutional or private) and a win for Spain.

That’s how to make a country (or a bloc of countries) pull together — instead of pulling itself apart. That is how to make Europe fly. The trick is to be there when needed, not after the crash.

John Brian Shannon writes about green energy, sustainable development and economics from British Columbia, Canada. His articles appear in the Arabian Gazette, EcoPoint Asia, EnergyBoom, the Huffington Post, the United Nations Development Programme – and other quality publications.

John believes it is important to assist all levels of government and the business community to find sustainable ways forward for industry and consumers.

Check out his personal blog at: http://johnbrianshannon.com
Check out his economics blog at:
https://jbsnews.wordpress.com
Follow John on Twitter: https://www.twitter.com/#!/JBSCanada

Loading the Climate Dice — MY COMMENT

by John Brian Shannon

MY COMMENT ON PROFESSOR PAUL KRUGMAN‘S ARTICLE BEGINS…

It’s always a treat when the world’s leading economist writes a column about the environment — which happens to be one of my favourite topics.

But why is an economist writing about “the great Midwestern drought” presently scorching many of the United States? And, what does economics have in common with the weather, climate and climate-change anyway?

Everything, as it turns out.

Professor of Economics Paul Krugman comments, “This drought has already sent corn prices to their highest level ever.”

Just for the record, corn does not exist in its own universe. If corn prices are at record levels you can bet that other crops are at or near, record highs too. Think of corn as the bellwether for other crops in America. Where corn trends, others follow.

Lack of rainwater to fill creeks, rivers, lakes and even to help restore underground aquifer levels, combined with weeks of relentless heat, define a drought condition.

Corn, a major crop grown in the United States, is used in many different ways. One, low-grade corn called maize is used to feed livestock, and millions of tons of it are produced and consumed each year. Cattle like the taste, its filling and its high sugar levels provide them with plenty of energy, or if they don’t expend enough energy, they eventually turn into nicely-marbled tenderloin. Mmmm…

Two, corn is widely available for consumers and is a tasty summer treat fresh from the field, or it can be frozen or canned.

Three, it is increasingly used by the petroleum industry as a fuel-feedstock. Over six billion litres of ethanol fuel was produced from U.S. corn last year. Not only that, some plastics are manufactured from corn cellulose, for example, many plastic soda-pop bottles are manufactured with 5% corn bio-content.

The thing about corn — it requires huge volumes of water, fertilizer and lots of sunshine. Water must come from the sky to supplement the always insufficient water available on the ground or underground. When it doesn’t get the water it needs, it quickly punishes farmers by dying within a week. End of crop.

Thousands, or even millions of acres of corn which had received months of hard work and expense – all gone within one week.

At that point, thousands of farmers face the end of their year and there is little for them to do except fill out their crop-insurance claim forms, praying they get an amount equal to 49% – 66% of their planned crop gross-revenue.

Which has a downstream effect on the economy, obviously.

If, in the space of one week and at about halfway through the year, you were suddenly forced to accept only about half of your total yearly pay — would your spending patterns change for the balance of the year?

This is how climate-change affects the well-being of a nation and by extension, the world, as Prof. Krugman rightly points out, “If [the drought] continues, it could cause a global food crisis, because the U.S. heartland is still the world’s breadbasket.”

But its not climate-change unless it happens again and again. True fact. One bad year, does not a climate-change make.

Professor Krugman cites a research paper by the world-renowned NASA scientist, Dr. James Hansen, “As documented in a new paper by Dr. Hansen and others, cold summers by historical standards still happen, but rarely, while hot summers have in fact become roughly twice as prevalent. And 9 of the 10 hottest years on record have occurred since 2000.”

Imagine that. Perhaps the climate-deniers can continue to obfuscate for another ten years the growing body of evidence which proves global warming is real. What they might not be able to explain away are the increasing billions of dollars of losses in the U.S. agriculture economy and in other nations which possess highly-accurate crop monitoring systems — including impressive ag-satellite technology it must be said!.

With the many technological achievements including improved crop species, more effective fertilizers/pesticides and astronomically better land management practices, why are our ag-related losses increasing over recent years? Surely we should be facing lower losses with the greater productivity afforded us by employing the latest technologies.

Its time for an economics team to step up and provide this answer, for there will be no fooling accurate ag-statistics and to-the-penny ag-accounting practices. Where is the U.S. Department of Agriculture team dedicated to plotting each year’s crop losses (whether a fully-failed crop, or only partially-damaged by drought) into 2010-equivalent dollars and presenting it to the President for his consideration — and to the media for their informed commentary?

I’ve said it before and I’ll say it again; “The Market is the perfect, self-correcting machine. It will get to the heart of every matter connected to it.” Though we may not always like what it says, if we choose to listen it can teach us much.

The market informs us about every step along the path of production for every crop and manufactured product. America’s ag-economy has been state-of-the-art for some time now and there is not a cent which is not fully accounted-for. The only unaccounted-for losses these days are climate-related. And almost everyone seems afraid to step up and say so.

John Brian Shannon writes about green energy, sustainable development and economics from British Columbia, Canada. His articles appear in the Arabian Gazette, EcoPoint Asia, EnergyBoom, the Huffington Post, the United Nations Development Programme – and other quality publications.

John believes it is important to assist all levels of government and the business community to find sustainable ways forward for industry and consumers.

Check out his personal blog at: http://johnbrianshannon.com

Check out his economics blog at: https://jbsnews.wordpress.com

Follow John on Twitter: https://www.twitter.com/#!/JBSCanada