Economics, Portfolio Optimization, and Technical Analysis
Joined: 28 Dec 2005
|Posted: Tue May 26, 2009 3:10 pm Post subject: Obamanomics
|Part I is the real U.S. economy under Bush. Part II is Obamanomics:
Part I The Real U.S. Economy of the 2000s:
1. U.S. firms became substantially more efficient in producing more output with fewer inputs. Consequently, there was a record 20 consecutive quarters of double-digit U.S. earnings growth.
2. Enormous resources were shifted from older industries into the U.S. Information and Biotech Revolutions. Consequently, the U.S. leads the rest of the world combined in emerging industries (in both revenues and profits), while older U.S. industries concentrated on goods with market power.
3. There was a steep rise in U.S. living standards. Cheap capital and goods induced U.S. demand, resulting in abundant real assets and goods.
4. There was an enormous shift of real wealth from savers, including foreigners, to borrowers, including lower income Americans.
5. The U.S. captured enormous absolute "gains-of-trade" from international trade.
6. The largest global economic boom in history took place from 2002-08 resulting in over a 40% increase in world per capital real GDP (after 15 years without an increase).
The U.S. created 17.6 million jobs between 1993-98, and created only 3.7 million jobs between 2001-06. However, U.S. real GDP growth was only slightly higher from 1993-98 than from 2001-06. So, the U.S. became much more productive in the 2000s, i.e. using fewer inputs to produce more output.
The quick and massive U.S. Creative-Destruction process, generally between 2000-02, freed-up resources, e.g. labor, capital, raw materials, energy, etc. Freed-up capital was redeployed into firms that generated even more capital, including U.S. Agricultural and Industrial Revolution firms. Older U.S. firms gained greater market power, since they focused on higher quality "core" products, while offshoring less profitable goods to Third World countries for larger profits (rather than discontinue operations of those products). Consequently, U.S. corporations generated double-digit profit growth for a record 20 consecutive quarters in the 2000s, which resulted in strong balance sheets. Much of the redeployed capital flowed into business start-ups, which helped keep the U.S. unemployment rate low. U.S. Information and Biotech Revolution firms continued to lead the rest of the world combined (in both revenues and profits) after the Creative-Destruction process. The only way to move from one economic revolution into the next is through efficiencies, which free-up limited resources. It's all interrelated, and inevitable, which is why the U.S. leads the world in the Agricultural-Industrial-Information-Biotech Revolutions.
It's important to note that U.S. actual output has generally been below potential output throughout the 2000s. Export-led economies have been absorbing U.S. dollars to maintain acceptable levels of employment and output. Just like the volume of output in itself will cause declining prices and induce demand, the volume of capital will in itself cause interest rates to fall and induce demand. The gains of U.S. assets increased faster than the gains of U.S. liabilities. Similarly, the increases in U.S. output exceeded the rises in U.S. inflation, which induced demand and raised living standards. Export-led economies needed to accept small gains of trade to spur export growth (which imply the U.S accepts large gains of trade). Also, while the U.S. dollar depreciated, export-led economies were required to accept even smaller gains of trade to maintain export-led growth. The U.S. had abundant capital from foreign capital inflows and capital creation of U.S. firms. Much of that capital flowed into the U.S. housing market creating an oversupply of houses and causing a crisis, i.e. Americans who couldn't really afford to buy houses were able to buy them, and Americans who couldn't really afford to buy more expensive houses were able to buy them. The U.S. economy can be viewed as a Black Hole attracting imports and capital. Now, the U.S. is also attracting foreigners who own that capital, e.g. through the depreciated dollar, relatively low prices, low interest rates, etc.
U.S. GDP was $14 trillion in 2007, while U.S. exports were about $1.5 trillion (in 2000 dollars). Currently, 20% of U.S. households earn over $100,000 a year, while U.S. Agricultural and Industrial firms are producing higher quality/ higher paying/more profitable "core" goods. U.S. median family (household) income is $60,000 (half earn more and half earn less), including $50,000 from wages and salaries. With low interest rates and deflation in the housing market, along with falling prices of many goods, because of "excess" assets and goods, except for many commodities, U.S. living standards rose at a steeper rate. U.S. per capita income was $45,000 in 2007, which was over $10,000 more than E.U. per capital income. The U.S. with less than 5% of the world's population produces about 30% of the world's output, and consumes more than it produces. Americans have proven adept at maintaining autonomous consumption (or higher living standards). So, Americans in general will attempt to at least maintain their higher living standards, while some will lose and others will gain. Consequently, U.S. labor will work longer to pay-down debt and build-up saving, which will add to future economic growth and postpone retirements. U.S. income will be more than $160 trillion over the next 10 years and U.S. assets are over $100 trillion, while the U.S. captured real gains in assets and goods in the global economy. The U.S. is the largest manufacturer in the world.
The U.S. is a most diverse and fragmented society. There has been tremendous upward mobility and increases in absolute living standards. Millions of Third World immigrants moved to the U.S., and had tens of millions of children, to raise their living standards. Many of those immigrants, who earned less than $3 a day or didn't have jobs in their countries, earn $20,000 to $50,000 with overtime in the U.S. Major U.S. cities would have become ghost towns without Third World immigrants. Almost the entire overextended U.S. housing boom took place in upper and middle class neighborhoods, which expanded and new neighborhoods were created. It's important to understand the U.S. housing boom. Throughout the 2000s, U.S. actual output was generally below potential output. Without the housing boom, actual output would have been even lower. Deflated housing prices will also add to future economic growth and postpone retirements. The NeoKeynesians believe building pyramids benefits society when output is too low. Obviously, houses are more useful.
In 2007, U.S. per capita income was $45,000 and China's per capita income was $2,000. If the U.S. gains $700 and China gains $300 for each $1,000 in trade, then U.S. income rises less than 2% and China's income rises 15% (however, unfortunately for China, when social costs are included, the U.S. may capture all the gains in trade).
The U.S. had a virtuous cycle of consumption and investment. However, that cycle turned into a boom, which was unsustainable.
Basically, export-led countries overproduced by large margins and underconsumed by large margins, while the U.S. underproduced by a small margin and overconsumed by a large margin. In the 2010s, the U.S. will overproduce slightly and overconsume less, while export-led countries will underconsume less and overproduce less.
Part II Obamanomics and the U.S. Economy of the 2010s:
It's ironic. The U.S. is creating the same situation Japan did during its "Lost Decade." Japan's fiscal policy was so expansionary, in the form of government spending, that it crowded out the private sector. Today, Japan has the highest government debt to GDP ratio of any developed country by far.
The U.S. has been in a structural bear market since 2000. It's remarkable, in the 2000s, the U.S. had real asset booms, the real goods market expanded strongly, and living standards rose at a steeper rate than the '90s. I doubt there will be a third bubble, similar to 1995-00 and 2002-07.
Obama will likely achieve what he's attempting to avoid, i.e. a long-term L-shape recovery, that will look like Japan's "zig-zag" pattern in the '90s.
In the 2000s, it was wonderful to see poor Third World immigrants, who would have earned a few dollars a day in their home countries, if they could get a job, living in big houses, driving in almost new minivans or trucks, able to buy goods cheaply, etc. in the U.S., while 20% of U.S. households earned over $100,000 a year, e.g. in the high-tech industry. The U.S. created enormous capital and there were massive foreign capital inflows. The U.S. had a virtuous cycle of consumption and investment. Cheaper goods and cheaper capital induced demand. Currently, Americans are stocked-up with real assets and goods to weather this recession better than any other country.
However, the new adminstration wants China to trade its goods for U.S. goods rather than for worth less paper. Also, the cost of domestic production will rise, because of anti-business policies, which will raise prices and create less capital, resulting in less real output. Moreover, government will become a larger proportion of the U.S. economy, e.g. through the creation of "green" jobs, and many other high-cost jobs. So, Americans will work harder and longer for fewer and smaller real assets and goods. The cost of living will rise in many ways. The government is now micromanaging the economy, since the perception is the free market has been a complete failure.
How to prevent an economic contraction in 2009 (currently, roughly a 2% contraction is projected in 2009):
1. Obama should change his stimulus plan to a $2,000 tax cut per worker (e.g. a tax holiday), along with increasing unemployment benefits by a similar amount. This will help households strengthen their balance sheets, i.e. catch-up on bills, pay-down debt, increase saving, spur consumption of assets and goods, etc. This plan will have an immediate and powerful effect to stimulate the economy. When excess assets and goods clear the market, production will increase.
2. Shift "toxic" assets into a "bad bank." The government should pay premiums for toxic assets to recapitalize the banking industry and eliminate the systemic problem caused by global imbalances. The Fed has the power to create money out of thin air, to generate nominal growth, boost "animal spirits," and inflate toxic assets.
3. Government expenditures should play a small role in the economic recovery. For example, instead of loans for the auto industry, the government should buy autos and give them away to government employees (e.g. a fringe benefit). So, automakers can continue to produce, instead of shutting down their plants for a month. Auto producers should take advantage of lower costs for raw materials and energy, and generate a multiplier effect in related industries.
If the private sector spends $1 to produce $1.20 in output, then it creates $0.20 of capital. If the public sector spends $1 to produce $0.80 in output, then it destroys $0.20 of capital. If both tax cuts and government spending generate similar multiplier effects, e.g. $1 into $1.50, a tax cut will create $0.30 in capital, while government spending destroys $0.10 in capital (i.e. $0.10 gain in private sector and $0.20 loss in public sector). So, government spending will cause both interest rates and inflation to rise.
Throughout the 2000s, the increases in the quantity and quality of output exceeded the rises of inflation, there was enormous capital creation (e.g. through a record 20 consecutive quarters of double-digit U.S. corporate earnings growth, and massive foreign capital inflows), a huge expansion of the real goods market, real asset booms, and a steeper rise in U.S. living standards, that was greater than the 1995-00 superbubble. GW Bush showed how to raise U.S. living standards substantially, and in a structural bear market that began in 2000s.
However, history has been rewritten. Thanks to Obamanomics, after the market clears of excess capital and goods, there will be rising interest rates, accelerating inflation, and greater taxes, or the illusion of prosperity, e.g. through the creation of inefficient jobs.
James Fallows studied American history and literature at Harvard, where he was the editor of the daily newspaper, the Harvard Crimson. From 1970 to 1972 Fallows studied economics at Oxford University as a Rhodes scholar.
Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China.
Any economist will say that Americans have been living better than they should—which is by definition the case when a nation’s total consumption is greater than its total production, as America’s now is. Economists will also point out that, despite the glitter of China’s big cities and the rise of its billionaire class, China’s people have been living far worse than they could. That’s what it means when a nation consumes only half of what it produces, as China does.
Neither government likes to draw attention to this arrangement, because it has been so convenient on both sides. For China, it has helped the regime guide development in the way it would like—and keep the domestic economy’s growth rate from crossing the thin line that separates “unbelievably fast” from “uncontrollably inflationary.” For America, it has meant cheaper iPods, lower interest rates, reduced mortgage payments, a lighter tax burden. The average cash income for workers in a big factory is about $160 per month. On the farm, it’s a small fraction of that. Most people in China feel they are moving up, but from a very low starting point.
This is the bargain China has made—rather, the one its leaders have imposed on its people. They’ll keep creating new factory jobs, and thus reduce China’s own social tensions and create opportunities for its rural poor. The Chinese will live better year by year, though not as well as they could. And they’ll be protected from the risk of potentially catastrophic hyperinflation, which might undo what the nation’s decades of growth have built. In exchange, the government will hold much of the nation’s wealth in paper assets in the United States, thereby preventing a run on the dollar, shoring up relations between China and America, and sluicing enough cash back into Americans’ hands to let the spending go on.
American Prosperity and Price Deflation
Written by Richard M. Ebeling
Friday, 09 May 2008
The decades between 1865 and 1900 were the years of America’s industrial revolution. Before this time, America had an economy of primarily light industry and farming. By the beginning of the 20th century, however, the United States had surpassed all of the European nations in manufacturing, including Great Britain and Imperial Germany, the industrial giants of the time.
Mass immigration from Europe, huge capital investments, and technological improvements provided the means for America’s growth and rising standards of living that soon became the envy of the rest of the world.
During the years after 1865 prices in general slowly fell from their Civil War highs. A Consumer Price Index that stood at 100 in 1865 had declined to 57 by 1900, or a 43 percent decrease in prices over a 35 year period. On average prices went down around 1.2 percent each year over three and a half decades.
At the same time, indices of money wages in agricultural and manufacturing employment both rose during this period as labor was becoming more productive due to capital investments, even with a rising population resulting from millions of immigrants joining the American work force.
The index of money wages in agriculture rose by almost 40 percent between 1866 and 1900, while money wages in manufacturing went up 20 percent during this period. Thus, on average, money wages in general increased by about 30 percent for workers as a whole.
In combination with the productivity gains and the capital investments that resulted in the 43 percent decrease in the price level, this meant that in the last 35 years of the 19th century the real standard of living of the American people increased by almost 75 percent as measured by the positive change in the average American’s buying power in the market place.
Martin Feldstein at Harvard calculated that the elasticity of taxable income with respect to income tax rates is about 1, so that cutting the top rate from 40% to 30% would boost taxable income by about 16%. The result would be more work effort and less avoidance by entrepreneurs, doctors, scientists and others in the top quintile, which would greatly benefit the rest of us.
Unfortunately, President Obama wants to go in the other direction, raising the top two income tax rates, which would reduce production and increase avoidance by highly skilled people. Such economic damage from higher taxes is called deadweight loss. In the 2006 paper, Mr Feldstein argued that deadweight losses from a federal income tax rate increase would be $1.76 for every dollar of tax increase. That means that every new $1 billion spending programme in President Obama's budget will destroy about $1.76 billion of activities in the private sector.
That is the economics of tax hikes, but what about the politics? The Economist proposition suggests that "resentment over inequality is growing ever more vocal … is taxing the rich more heavily necessary to buy social peace?" Consider that 43% of American households do not pay any federal income tax, according to data from the Joint Committee on Taxation. That large group is doing little to support the huge burden of the welfare state, so it is laughable that they might be angry at the wealthy who do bear the burden. The CBO data show that the top one-fifth of households pay 69% of the entire costs of the federal government. Frankly, the rest of Americans are free-riders on the top quintile's enormous financial support of government.
FDR's policies prolonged Depression by 7 years, UCLA economists calculate:
Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.
In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.
Cole and Ohanian calculate that the NIRA (the National Industrial Recovery Act) and its aftermath account for 60 percent of the weak recovery. Without the policies, they contend that the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943.
Roosevelt's role in lifting the nation out of the Great Depression has been so revered that Time magazine readers cited it in 1999 when naming him the 20th century's second-most influential figure.
"This is exciting and valuable research," said Robert E. Lucas Jr., the 1995 Nobel Laureate in economics, and the John Dewey Distinguished Service Professor of Economics at the University of Chicago. "The prevention and cure of depressions is a central mission of macroeconomics, and if we can't understand what happened in the 1930s, how can we be sure it won't happen again?"
"The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes," Cole said. "Ironically, our work shows that the recovery would have been very rapid had the government not intervened."
Gregg Easterbrook, senior editor at the New Republic and contributing editor to The Atlantic, castigates the media for dwelling on minor problems without celebrating the broader, more upbeat context in which they exist. One of the broader, more upbeat events of recent years is the significant and dramatic increase in real GDP per-capita worldwide.
Using world GDP data from the IMF and world population data from the U.S. Census Bureau, the chart above shows real world GDP per-capita from 1985 to 2013 (data from 2008 - 2013 are estimated). After remaining constant at about $5,000 for 15 years from 1987 to 2002, real GDP per capita will increase 60% from $5,000 in 2002 to an estimated $8,000 this year. After leveling out for a year in 2009 due to the global economic slowdown, growth in per-capita real output is expected to resume in 2010 and exceed $9,000 by 2013.
Bottom Line: The 60% growth in world per-capita real GDP between 2002 and 2008 is probably one of the greatest periods of economic growth in such a short period of time in history, and is definitely part of the broader, more upbeat context of this period in history.
U.S. automakers have never been competitive in the small car market. Under Obama Motors, U.S. auto producers either need to invest thousands of dollars per vehicle to become competitive with Asian and European small cars, or spend thousands of dollars per vehicle to turn large cars into hybrids. Either way, it's an expensive way to lose market share at a faster rate.
Obama to unveil most aggressive auto fuel standards
Average fuel standards for all new passenger vehicles -- cars and light trucks -- will rise to 35.5 miles per gallon between 2012-16 ($600 or $1,300 additional cost per vehicle).
"The Congressional Budget Office (CBO) estimates that a 10 percent reduction in gasoline consumption could be achieved at a lower cost by an increase in the gasoline tax than by an increase in CAFE standards. Furthermore, an increase in the gasoline tax would reduce driving, leading to less traffic congestion and fewer accidents. This analysis stops short of estimating the value of less congestion and fewer accidents and, therefore, does not draw any conclusions about whether an increase in the gasoline tax would be warranted. However, CBO does find that, given current estimates of the value of decreasing dependence on oil and reducing carbon emissions, increasing CAFE standards would not pass a benefit-cost test. A gasoline tax is a good policy to compare with CAFE standards because it is the most direct way to reduce gasoline consumption. By raising the price of gasoline to consumers, a tax raises the cost of driving and encourages consumers to buy more-fuel-efficient vehicles."
The gas tax would provide greater immediate savings by encouraging vehicle owners (of both new and older vehicles) to drive less. In contrast, higher CAFE standards would give new-vehicle owners an incentive to drive more—because higher fuel economy would decrease their gasoline cost per mile—and would not alter the driving incentives for owners of existing vehicles at all."
Unintended Consequences: CAFE Standards Will Cause More Pollution and Increase Highway Deaths
An economic phenomenon called "price elasticity of demand" is well established when it comes to automobile purchases. In other words, if you raise the price of new cars, people will buy fewer of them or, at a minimum, put off the purchase for a year or so while they drive the old clunker for a few thousand more miles. And fewer new cars means more pollution, which can cause significant health problems. Yet environmentalists and the press have ignored this issue, so as not to inject a note of complexity or doubt into the chorus of glee that greeted the president's attack on greenhouse-gas emissions.
The Obama fuel efficiency plan may also contribute to a significant increase in highway deaths as vehicles are required to quickly meet the new CAFE standard and will likely become lighter in weight as a result. According to a study completed in 2001 by the National Research Council (NRC), the last major increase in CAFE standards, mandated by the Energy Policy and Conservation Act of 1975, required about a 50% increase in fuel economy (to 27.5 mpg by model year 1985 from an average of 18 mpg in 1978). The NRC study concluded that the subsequent downsizing and down-weighting of vehicles, "while resulting in significant fuel savings, also resulted in a safety penalty." Specifically, the NRC estimated that in 1993 there were between 1,300 and 2,600 motor vehicle crash deaths that would not have occurred if cars were as heavy as they were in 1976.
The president now proposes a fuel economy increase of similar magnitude in an even quicker time frame -- to 39 mpg by model year 2016 from 27.5 mpg now. Given the time it takes for new technologies to be developed, tested and incorporated into new car models, it is likely that down-weighting of cars will be an important means of meeting the new standard. And one result again could be highway deaths that might otherwise not have occurred.
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