Industrial Insight

Spending not revenues is the problem

July 13, 2010
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The Bush Tax Cuts and the Deficit Myth
Runaway government spending, not declining tax revenues, is the reason the U.S. faces dramatic budget shortfalls for years to come.


The fact is that rapidly increasing spending will cause 100% of rising long-term deficits. Over the past 50 years, tax revenues have deviated little from their 18% of gross domestic product (GDP) average. Despite a temporary recession-induced dip, CBO projects that even if all Bush tax cuts are extended and the AMT is patched, tax revenues will rebound to 18.2% of GDP by 2020—slightly above the historical average. They will continue growing afterwards.

Spending—which has averaged 20.3% of GDP over the past 50 years—won’t remain as stable. Using the budget baseline deficit of $13 trillion for the next decade as described above, CBO figures show spending surging to a peacetime record 26.5% of GDP by 2020 and also rising steeply thereafter.

Putting this together, the budget deficit, historically 2.3% of GDP, is projected to leap to 8.3% of GDP by 2020 under current policies. This will result from Washington taxing at 0.2% of GDP above the historical average but spending 6.2% above its historical average.

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Stimulus destroys jobs?

July 12, 2010
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What If Stimulus Advocates Were (Half) Right?

By Louis Woodhill

It is possible to assess the efficacy of stimulus by looking at the experience of other nations during the current recession, which has been worldwide in scope. Examining twelve nations (Australia, Canada, France, Germany, Greece, Ireland, Italy, Japan, Portugal, Spain, the U.K., and the U.S.), it is possible to compare the percentage change in total employment of each country from the end of 2007 to the end of 2009 with the amount of fiscal stimulus applied. For the purposes of this analysis, the “net stimulus” of each nation is considered to be the sum of its 2008 and 2009 budget deficits minus twice its 2007 deficit, all expressed as a percent of GDP. This approach is designed to show the effectiveness of increasing a country’s fiscal deficit as a tool for countering rising unemployment.

The twelve-country comparison suggests that stimulus is actually counterproductive. Ranking the nations in ascending order of net stimulus, the six lowest-stimulus countries applied an average of 5.4 GDP percentage points of net stimulus and saw their total employment decline by an average of 0.6% over the two-year period. In contrast, the six highest-stimulus nations applied an average of 13.7 GDP percentage points of net stimulus while seeing their total jobs go down by an average of 5.21%. The three countries with the highest amount of net stimulus (the U.S., Spain, and Ireland) also had the highest percentage employment losses.

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The efficiency of the Post Office

July 9, 2010
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Source: Carpe Diem

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We need structural changes.

July 9, 2010
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America needs a growth strategy

By Michael Spence

Published: July 8 2010 21:53

Incomes in the middle-income range for most Americans have stagnated for more than 20 years. Manufacturing jobs are moving offshore. Globally the set of goods and services that is tradable is expanding, but the US and other advanced countries are not competing successfully for an adequate share of the tradable sector.

The employment effects of these trends over the past 15 years have been masked by excess consumption and the overdevelopment of sectors such as finance and real estate. The latter are now set to shrink, as multinational companies grow where they have access to high-growth emerging markets in Asia and Latin America. Such companies will locate their operations where market and supply chain opportunities lie. In the tradable sector, in manufacturing and in a growing group of services, that means outside advanced countries.

The availability of low-cost, disciplined labour forces in developing countries reduces the incentive for these companies to invest in technologies that enhance labour productivity in the tradable sectors of the advanced economies. As a result, the evolving composition of advanced economies is increasingly weighted towards the non-tradable sector, combined with a set of high-end tradable services where both human capital and proximity matter. The rest of the tradable sector is shrinking.

The shrinkage creates problems. Over-specialisation could threaten independence and national security. Spillovers between R&D, product development and manufacturing will be lost if manufacturers leave. Employment will stagnate. Income distribution will move adversely and the social contract will erode further.

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Are we getting what we pay for?

July 8, 2010
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June 27, 2010

Graph of the Day for June 27, 2010

Randall Hoven

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Globalization overstated.

July 8, 2010
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Ian Fletcher

Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council

Posted: July 7, 2010 05:13 PM

The Myth of the Global Economy

In reality, the world economy remains what it has been for a very long time: a thin crust of genuinely global economy (more visible than its true size due to its concentration in media, finance, technology, and luxury goods) over a network of regionally-linked national economies, over vast sectors of every economy that are not internationally traded at all (70 percent of the U.S. economy, for example). On present trends, it will remain roughly this way for the rest of our lives. The world economy in the early 21st century is not even remotely borderless.

Another stubborn reality is that, contrary to what some people seem to think, the nation-state is a long way from being economically irrelevant. Most fundamentally, it remains relevant to people because most people still live in the nation where they were born, which means that their economic fortunes depend upon wage and consumption levels within that one society. Unemployed Americans are learning this the hard way right now.

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Stimulus could be helpful if invested.

July 7, 2010
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*/*/Implications of a Likely Economic Downturn
/*/John P. Hussman, Ph.D./

If individuals are attempting to increase saving, and Keynesians view this as undesirable, an obvious but underutilized response is to promote productive investment through tax incentives, R&D credits, and other means. Private sector investments are often well-beyond the planning stages, and may provide a quick road to immediate economic activity in response to incentives that move their timing forward. We should not overlook productive forms of government-funded non-profit research. Among those avenues, one might consider restoring funding to the National Institutes of Health and the National Science Foundation, both which have historically been successful in advancing innovation and producing major discoveries in public health and technology.

We might also consider investments that cannot be easily made privately due to coordination failure. Various forms of public infrastructure, particularly those that increase the efficiency of large numbers of individuals (roadways, telecommunications) have been shown to have a good payoff over time in terms of output, relative to the cost of those investments. In contrast, one might view “rural broadband” as somewhat questionable, precisely because of the relatively high cost per beneficiary. In a challenging downturn such as this one, where the duration of economic difficulty may be extended, some amount of infrastructure expense makes sense. In contrast, during most post-war recessions, these have been difficult to coordinate on a timely basis.

In any case, numerous moderate investment-like projects – including infrastructure, research, alternative energy projects, and so forth –
are more likely to be effective than massive “pick the winner” approaches, not only because technology is usually too dynamic to pick a winner correctly, but also because the marginal returns from massive expenditure tend to diminish quickly. If the Keynesian problem is increased saving, the natural response should include incentives to initiate real, physical investment and research (not simply tax cuts on investment income). Moreover, projects having the capacity to spread their effects over a large number of beneficiaries should be heavily preferred to projects having a high cost per beneficiary. This should be obvious, but concentrated pork and bridges to nowhere are strikingly common.

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Rise in energy and metals in 2007 was the result of supply and demand, not speculation!

July 7, 2010
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Read the article!
No Theory? No Evidence?
No Problem!
University of Houston

The prices and inventories of six industrial metals (aluminum, copper, lead, nickel, tin, and zinc) did not behave as predicted by the speculative/bubble story. First,metals prices generally did not rise along with other commodity prices. The
prices of lead, zinc, and nickel actually declinedmore than 40 percent from July 2007 to July 2008. Aluminum and copper
prices rose, but only moderately — about 10 percent. Only tin rose substantially in price (over 70 percent), but tin inventories fell over 56 percent. Second, stocks rose for those metals that fell in price, remained approximately constant for copper, and rose slightly for aluminum.With the (mild) exception of aluminum, these price-inventory co-movements are more reflective
of fundamentals and inconsistent with a bubble.Third, contrary to the bubble story, metals inventories increased
dramatically when prices plunged as the financial crisis reached its apex. Fourth, I have examined copper in greater detail, and found that a fundamentals-based model explains well the
movements of prices and inventories over this period.

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Read the whole article, on target.

July 2, 2010
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How to Make an American Job Before It’s Too Late: Andy Grove

By Andy Grove – Jul 1, 2010

Friedman is wrong. Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.

Until a recent spate of suicides at Foxconn’s giant factory complex in Shenzhen, China, few Americans had heard of the company. But most know the products it makes: computers for Dell and HP, Nokia Oyj cell phones, Microsoft Xbox 360 consoles, Intel motherboards, and countless other familiar gadgets. Some 250,000 Foxconn employees in southern China produce Apple’s products. Apple, meanwhile, has about 25,000 employees in the U.S. — that means for every Apple worker in the U.S. there are 10 people in China working on iMacs, iPods and iPhones. The same roughly 10-to-1 relationship holds for Dell, disk-drive maker Seagate Technology, and other U.S. tech companies.

You could say, as many do, that shipping jobs overseas is no big deal because the high-value work — and much of the profits — remain in the U.S. That may well be so. But what kind of a society are we going to have if it consists of highly paid people doing high-value-added work — and masses of unemployed?

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The only question is whether we will make these products in the US.

July 2, 2010
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An Atrocious Policy Mix For A Global Economy

By MIKE COSGROVE Posted 07/01/2010 07:01 PM ET

For this global economy, the Obama economic policy portfolio is simply atrocious. U.S. companies are selling products and services to the global middle class — there’s no question about that. The only question is where production and hiring are going to occur — inside the U.S. or outside the U.S.?

Answer: The Obama economic policy portfolio is shifting production and employment outside the U.S. as policies jack up costs for U.S. companies.

Unemployment is near 10%. American economic policy should be focused on helping companies be cost-competitive by creating a tax-friendly climate to encourage business formation, business expansion and capital formation in order to create U.S. jobs.

Instead, ObamaCare increases both annual costs and taxes on businesses and households which at the margin shifts production and employment outside the U.S. Tax rate increases in 2011 on capital and income also work to shift production and employment abroad.

The administration wants to regulate and tax business and households at every turn. President Obama’s cap-and-trade tax proposal is another policy that would increase fossil fuel costs in the U.S. and shift production and employment out of the U.S. The proposed Dodd-Frank financial reform bill will increase costs and slow private- sector job growth.

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About author

I'm the executive vice president for a steel casting trade association, the Steel Founders' Society of America. I've got a crazy wife, five crazy children, three crazy people that married into the family, and two crazy fun little grandsons.