Fahreed Zakaria has a long article on recession and how it might be accelerating longer-term trends.  It's couched in a "postive" set of policy recommendations, but I think too rosey and probably not politically do-able given the current political climate. 

 

How To Restore the American Dream

 

"But Americans are far more apprehensive than usual, and their worries seem to go beyond the short-term debate over stimulus vs. deficit reduction. They fear that we are in the midst of not a cyclical downturn but a structural shift, one that poses huge new challenges to the average American job, pressures the average American wage and endangers the average American Dream. The middle class, many Americans have come to believe, is being hollowed out. I think they are right."

 

...and the article goes on to make this case, with some impressive charts.  The number I am looking at in this set of charts is the relative drop in new-employment in chart #1, for the management, techincal, and professional subsectors, for th 2000-2007 time frame.  This was a recovery era...Zakaria calls it a "phantom recovery", and these should have been the "good jobs" people talk about. 

 

Set of Charts

 

(there are more graphics in the print version, like a one showing wage/salary growth flatlining in current-year dollars).

 

He goes on to say things we need to do are:

 

"Shift from consumption to investment"

 

"Training and Education"

 

"Fiscal Sanity" (mainly about health care costs and state/local pensions)

 

"Benchmarking" (against foreign economic competition).

 

(he explains these in more depth).

 

Yet, I'm thinking the intellectual/academic/media elite (people like Zakaria, his publishers & editors, and the rest of the people who shape opinion and otherwise help run the country) are getting a bit worried about the situation, mainly about a runaway populist political response.  That seems to be the big concern in Robert Reichs' new book (which I am just starting to read).

 

The way I see it if we move back to "economic growth"...if the GDP is growing and business of whatever type and sector, return to profitablity, that should be enough.  These other issues, of skewed income distribution and long-term unemployment, that's just the way things are going to be into the future.

 

The political response we are seeing, the Tea Party and fiscal conservatism in general, seems to me to be a reality check on things, a pretty expedient ideological rationalization that the governemnt will not be brining in enough tax revenue (even in good times) to afford entitlements any more, especially given that entitlement eligibility will be increasing during this era of structural adjustment.

 

 

 

 

 

 

 

 

 

Wow.  Good data, Jeffrey  :clap:

 

State and local government pensions increased 135% to $64 Billion/year from 2000-2008.  What about the Pentagon?  It doubled to ~$700 Billion/year.

 

And the Pentagon does not produce ANYTHING that contributes to the economy.  It creates salaries, but it creates NOTHING of long lasting value like training or infrastructure spending does. 

 

We would have to totally eliminate state and local pensions to have the impact that cutting the Pentagon by a mere 10% would have.

Pensions are not infrastructure, either, you know.

 

And if you think the military contributes nothing to the economy, you have a very rose-tinted view of the world.

^Of course, if government spending on the military does contribute to the economy, then government spending on non-military purchases does as well.

No.  The spending on the military isn't the issue; that is a drag on the economy.  Its capabilities as a warfighting force are.  A powerful military is a far greater economic asset than is commonly appreciated on the left.  The left is a comfortable home for idealists want to believe that humanity has moved past the point where naked power has significant utility.

 

If we could have the same military we have now for less, that would be better.  The issue is what capabilities we will lose if we start slashing defense spending.

So it's spending is a drag and but its existence is an asset- bottom line is that it nets out as an asset.  If this is true, in what ways, specifically does it act as an asset?  How do the capabilities create economic benefit?

 

Also, how do you separate the spending from its capabilities as a war-fighting force?

The spending and the war-fighting force are two very distinct concepts; they do not need to be separated, as they already are.  If we could get an aircraft carrier for $5 with the same capabilities that the Reagan has today, then that would be far less of a drag on the economy and would have no effect on our capabilities.

 

Of course, that's wishful thinking, but I just use it to illustrate the difference between spending and the benefits of spending.

 

The capabilities give us economic benefits because they give us significant leverage on the world stage, because they help contribute a kind of permanency to the currency and the country behind it that cannot be achieved by fiat money alone (or even gold-backed money, because gold can be taken from those too weak to defend it), because they keep our shipping lanes safe, and because they keep American people and property safe at home and abroad.  The economic benefits of security should be self-evident, so I seriously do not understand your question.

The spending and the war-fighting force are two very distinct concepts; they do not need to be separated, as they already are.  If we could get an aircraft carrier for $5 with the same capabilities that the Reagan has today, then that would be far less of a drag on the economy and would have no effect on our capabilities.

 

Of course, that's wishful thinking, but I just use it to illustrate the difference between spending and the benefits of spending.

 

It seems so obvious that getting something of value for less money is better than spending more money on a physical asset for the same value that I don't understand why you would even mention it.

 

The capabilities give us economic benefits because they give us significant leverage on the world stage, because they help contribute a kind of permanency to the currency and the country behind it that cannot be achieved by fiat money alone (or even gold-backed money, because gold can be taken from those too weak to defend it), because they keep our shipping lanes safe, and because they keep American people and property safe at home and abroad.  The economic benefits of security should be self-evident, so I seriously do not understand your question.

 

It seems like you do understand the question, in that you referenced the safety of shipping lanes, for example.  That such a large military establishment is necessary to keep American people and property safe at home and abroad is much more questionable.  The value of the military by creating "a kind of permanency to the currency" is more questionable as well- by this assumption there would be a level of military spending that, if we fell below it, would negatively effect our status as the premier reserve currency.  While this might be true, we don't know what that number is and other countries have been able to create stable reserve fiat currencies without such a large establishment (Germany for example). 

 

In addition, if a reserve currency is a military advantage why would the Soviets have maintained dollar reserves during the height of the Cold War, thereby creating the Eurodollar market.  It seems far more likely that our status as premier reserve currency stem from our status as the largest economy in the world and that we had the premier currency at the time that people shifted from gold backing to currency reserves, and that ongoing military spending (or lack thereof) wouldn't change that.

 

Aside from keeping shipping lanes clear and allowing Japan and South Korea the benefit of our protection and a common defense, defense spending is likely a net drain on the U.S. economy, which was why it decreased so dramatically after the collapse of the Soviet Union.

 

So while Boreas' comment was overblown, his intention that an increase in infrastructure spending that would be met by an equal decrease in defense spending and would be beneficial to the economy is true.  Really, if you want to decrease unemployment, you'd keep defense spending where it currently is (maybe even increase total troop levels with special Afghanistan deployment specific three-year enlistments if the Afghan mission is maintained as a priority) while increasing infrastructure spending.

for th 2000-2007 time frame.  This was a recovery era...Zakaria calls it a "phantom recovery",

 

Completely agree.  And so so a large number of other people.

 

The 2000 recession never really ended.  It was masked over by the housing/financial bubble.  We've already seen that real wages declined during that timeperiod.  And we've seen that the growth in GDP pretty much equals the growth in debt.  And a great number of jobs created during that period were housing related (construction, lending, materials, etc), somewhere around 40% I once read, and you see that it truely was a "phanom recovery".

 

I think it's a pretty good conclusion that we're in the midst of an economic  'structural change', not a recession.  It started 10 years ago and is really gaining steam now.

 

Polititions are right to be very afraid. The US voters don't normally take to the streets, but after 10 years, they are starting to take to the polls in a very angry way.

 

...A powerful military is a far greater economic asset than is commonly appreciated on the left.  The left is a comfortable home for idealists want to believe that humanity has moved past the point where naked power has significant utility....

That is projection.

 

 

Of course, that's wishful thinking, but I just use it to illustrate the difference between spending and the benefits of spending.

 

The capabilities give us economic benefits because they give us significant leverage on the world stage, because they help contribute a kind of permanency to the currency and the country behind it that cannot be achieved by fiat money alone...

Pernicious

 

 

So while Boreas' comment was overblown, his intention that an increase in infrastructure spending that would be met by an equal decrease in defense spending and would be beneficial to the economy is true.  Really, if you want to decrease unemployment, you'd keep defense spending where it currently is (maybe even increase total troop levels with special Afghanistan deployment specific three-year enlistments if the Afghan mission is maintained as a priority) while increasing infrastructure spending.

 

Pentagon spending is a drag on our economy.  Contractors and soldiers would find other places in the economy if we were not wasting resources with this pretentious and ineffectual imperial military. 

 

 

I still find it surprising that the 'experts' and the 'media' find this type of news unexpected. I realize we have talked about a lot of different forces at play, many of them for several years now, that have put a lot of pressure on the US economy. But at its simplist form, the US consumer is generally broke, highly leveraged, has falling or stagnate wages and many are unemployed or under employed. This makes current home prices, on average, still out of balance for consumer affordability. Even with some of the lowest interest rates in history, we still have afforablility issues.

 

Add in the data showing that many of the next 'buying' generations (X and Y, etc) are struggling to find good paying jobs out of college, are heavily in debt with college loans and are starting to challenge the concept that the American dream is owning a house and the future supply and demand chart just keeps looking sicker and so does prices.

 

Market Alert: Clear Capital Reports Sudden and Dramatic Drop in U.S. Home Prices

 

"First Index Report for October Shows a Two-Month 5.9% Price Decline Representing a Magnitude and Speed of Decline Not Seen Since March 2009; Similar Declines Expected to Appear in Other Industry Indices in Coming Months"

http://finance.yahoo.com/news/Market-Alert-Clear-CapitalTM-iw-2539670557.html?x=0&.v=1

LK:

 

I didn't say that a reserve currency was a military advantage; I said that a strong military was advantageous to the economy, including, but not limited to, its ability to help maintain the currency's status as a world reserve currency.  The German currency does not exist anymore, though it is possible that they would be able to revive the Deutschmark with minimal effort.  People want to believe that the euro is basically the Deutschmark for all, but it could just as easily be the drachma for all.  When the Deutschmark existed, Germany did have a strong defense establishment--one of the best in the world, though not up to facing the Red Army alone without American help.  It also benefited, and still benefits (albeit less so, as the alliance has atrophied with expansion) from its membership in NATO.

 

As for the decrease in defense spending after the Cold War, I would say rather that the level of defense spending that returned economic benefits greater than its costs, which can't be pinpointed specifically but which could be roughly estimated, decreased after the Soviet collapse.  Also, since my main point has been about capabilities and only secondarily about what we spend on those capabilities, I would also add that there were certainly some capabilities that were necessary in 1980 but not in 1995.

Naval Science 101:  The US has military and naval forces to protect our interests overseas.  NS101 does not say anything about "protecting" a "reserve currency".

And why should I trust anything you have to say about "naval science?"

 

Or anything remotely related to defense spending, military doctrine, or anything else related to the military, for that matter?  You're idea of a defense policy is to bare our chest to the world and trust that we can somehow make ourselves weak enough that no one will consider us worth bothering.

And why should I trust anything you have to say about "naval science?"

 

... You're idea of a defense policy is to bare our chest to the world and trust that we can somehow make ourselves weak enough that no one will consider us worth bothering.

Projection.  Embarassing.

I didn't say that a reserve currency was a military advantage; I said that a strong military was advantageous to the economy, including, but not limited to, its ability to help maintain the currency's status as a world reserve currency.

 

I just don't think you've really laid out any case for saying that our level of military spending has anything to do with our current level of military spending.  I think you'd be on safer ground arguing that a reserve currency is a military advantage, since it gives us extra borrowing capacity.

 

The German currency does not exist anymore, though it is possible that they would be able to revive the Deutschmark with minimal effort.  People want to believe that the euro is basically the Deutschmark for all, but it could just as easily be the drachma for all.  When the Deutschmark existed, Germany did have a strong defense establishment--one of the best in the world, though not up to facing the Red Army alone without American help.  It also benefited, and still benefits (albeit less so, as the alliance has atrophied with expansion) from its membership in NATO.

 

The Deutschmark was in circulation until 2002, so I don't think your assertion holds.  Also, there's no way the Euro is the Drachma since the Drachma never encompassed the German economy.  That's precisely why we are seeing a massive rise in the cost of borrowing by the Greek government but not a corresponding rise in the cost of borrowing to German debt.

 

As for the decrease in defense spending after the Cold War, I would say rather that the level of defense spending that returned economic benefits greater than its costs, which can't be pinpointed specifically but which could be roughly estimated, decreased after the Soviet collapse.  Also, since my main point has been about capabilities and only secondarily about what we spend on those capabilities, I would also add that there were certainly some capabilities that were necessary in 1980 but not in 1995.

 

Our capabilities haven't changed between 1980 and the present, except that they have greatly improved.  It's the scale of the force we are able to project that has changed.  And that changed precisely because a massive existential threat vanished.  Likewise our rather friendly relationship with China shifted because of the dissolution of the Soviets, and following again, our relationship to India has changed as well, despite the fact that India was always a more important economic partner than Pakistan ever would be.  While it is obvious that conquest by the Soviets would have been economically catastrophic, it's questionable that any military expenditure after the Korean War that did not contribute to the protection of Japan/S.Korea/Taiwan, Western Europe and Saudi Arabia was of any value to the U.S. economy.

And why should I trust anything you have to say about "naval science?"

 

... You're idea of a defense policy is to bare our chest to the world and trust that we can somehow make ourselves weak enough that no one will consider us worth bothering.

Projection.

 

You keep using that word.  I do not think it means what you think it means.

As for the decrease in defense spending after the Cold War, I would say rather that the level of defense spending that returned economic benefits greater than its costs, which can't be pinpointed specifically but which could be roughly estimated, decreased after the Soviet collapse. Also, since my main point has been about capabilities and only secondarily about what we spend on those capabilities, I would also add that there were certainly some capabilities that were necessary in 1980 but not in 1995.

 

Our capabilities haven't changed between 1980 and the present, except that they have greatly improved.

 

We had eighteen active divisions at the end of Reagan's term.  We have ten today.

 

As a percentage of GDP, our defense spending is lower now even with the war spending than it was during Reagan's arms build-up, despite no active wars of note at the time.

 

Our capabilities have definitely improved on net; I don't deny that for a moment.  In particular, our technology is greatly better now even than it was in 1991 when we steamrolled the Republican Guard, let alone 1980.  I also concede that the reduction in the number of divisions has been partially mitigated by the fact that divisions now are somewhat larger than they were then--but that mitigation has been only partial.  (This is one major reason we had to drag so many Guard and Reserve troops out of the civilian workforce into active duty for Iraq and Afghanistan.)  Therefore, while our overall capabilities may be higher, it's nevertheless true that some capabilities were deemed no longer necessary after the fall of the USSR.

And why should I trust anything you have to say about "naval science?"

 

... You're idea of a defense policy is to bare our chest to the world and trust that we can somehow make ourselves weak enough that no one will consider us worth bothering.

Projection.

 

You keep using that word. I do not think it means what you think it means.

 

Ok, I will tell you what I am trying to say:

 

Speak for yourself and don't put words in my mouth. 

Our capabilities haven't changed between 1980 and the present, except that they have greatly improved.

 

We had eighteen active divisions at the end of Reagan's term.  We have ten today.

 

I will reference the sentence after the one you quoted.

 

Our capabilities haven't changed between 1980 and the present, except that they have greatly improved.  It's the scale of the force we are able to project that has changed.

 

Sigh.

 

Our capabilities have definitely improved on net; I don't deny that for a moment.  In particular, our technology is greatly better now even than it was in 1991 when we steamrolled the Republican Guard, let alone 1980.  I also concede that the reduction in the number of divisions has been partially mitigated by the fact that divisions now are somewhat larger than they were then--but that mitigation has been only partial.  (This is one major reason we had to drag so many Guard and Reserve troops out of the civilian workforce into active duty for Iraq and Afghanistan.)  Therefore, while our overall capabilities may be higher, it's nevertheless true that some capabilities were deemed no longer necessary after the fall of the USSR.

 

Capabilities refer to the type of force we can project, not the amount of force you have at your disposal. 

 

We didn't have to transfer Guardsmen to combat zones, that was a choice made to increase manpower after it was decided to keep forces in Iraq and Afghanistan.

 

This conversation has veered off considerably from the starting point so that we are not even addressing the original topic, which was whether the U.S. military expenditure is net positive for the economy.

The 2000 recession never really ended.  It was masked over by the housing/financial bubble.  We've already seen that real wages declined during that timeperiod.  And we've seen that the growth in GDP pretty much equals the growth in debt.  And a great number of jobs created during that period were housing related (construction, lending, materials, etc), somewhere around 40% I once read, and you see that it truely was a "phanom recovery".

 

Yeah, recall my ongoing posting of those GMP and employment graphs for Ohio and the Ohio metros.  No recovery....or a minimal one.  That's were I first realized that the '00s was a lost decade for this state. 

 

 

 

 

This conversation has veered off considerably from the starting point so that we are not even addressing the original topic, which was whether the U.S. military expenditure is net positive for the economy.

 

I don't think that was the original topic.  In fact I think its sort of stupid issue.  Military spending is a cost of being a nation-state...national defense...and the issue of whether its good or bad is irrrelevant to the purpose of this kind of spending.  Whatever economic benefit or harm that comes from this is incidental.

 

When talking about the defense budget note this is part of the discretionary spending half of the overall budget pie.  Defense spending accounts for about half that, maybe more now.

 

The other half are the entitlements, things people are entitled to due to various demographic criterea.  This is a growing part of the budget pie too.

 

Now for defense spending, we are now above the Cold War high in defense spending in current-year dollars.  The highest since WWII.    I think everyone agrees this isn't sustainable.  This is too high given the technological superiority we have.

 

When push comes to shove and there are going to have to be cuts I think there will have to be cuts in defense spending if cuts are going to be taken in the discretionary part of the budget.  This is just where the money is.  Note I say cuts, not reallocation.  Boreas seems to be talking about reallocating existing spending to other parts of the discretionary budget.  But that's not an overall reduction, just reallocation. 

 

I'd say look at the defense budget and see where the cost growth is at and what area has the largest part of that budget (research, operations, military pay, etc), and look to that area to start cutting.

 

 

I'd say look at the defense budget and see where the cost growth is at and what area has the largest part of that budget (research, operations, military pay, etc), and look to that area to start cutting. 

 

Operations and personnel take up approximately 2/3 of the military's budget.

 

The Department of Defense is the nation's largest governmental department.  The second largest is the Department of Veterans' Affairs.  The third largest is the Department of Homeland Security.  Added together, the first two are larger than the rest of the Executive departments COMBINED..... even if you include independent agencies, like SSA.

 

  "Time - Charting the decline - why the U.S. is not the land of opportunity it once was..."

 

    Interesting that the word "decline" has gone mainstream and is no longer only to be found on doomer internet forums.

American decline has been a cyclical concept for at least 50 years - which theoretically means our Golden Age lasted for all of about 10 minutes sometimes in the 1950s - probably between '56 and '58.

 

Anyway, it would seem that a British 19C defense budget might be more in order than our current land war in Asia military. I want boats and planes and militarized satellites. It is still expensive but doesn't require nearly as much spending on places like the VA and the pensions.

>it creates NOTHING

 

Research for military systems has led directly to the development of countless serious and frivolous consumer products.  Further, the US Navy keeps virtually all sea lanes free from piracy.  You might think that's some kind of joke, but I've worked on the water and piracy is a big deal on a face-to-face level and of course from the perspective of shipping companies.  We had dudes tie up to our boat in bad weather, hop over to say hi and catch the last hour of Braveheart, then sneak in the bunks and steal cash out of our wallets.  One of their captains stole our captain's Microsoft Word 2004 installation CD.  Those guys were from a company named Florida Marine, so imagine what it's like with foreigners on the high seas where there is no Coast Guard (ha, thinking back, we used to crack up at their boats with those ridiculously oversized guns on the bow!). 

 

I am especially sensitive to this issue because NASA and military programs led directly to the undermining of photography as a viable profession, which is what I went to college for.  Basically if there had never been a Cold War, which means there never would have been an immediate need for the digitation of images by reconnaissance aircraft, satellites, and dudes hopping around on the moon, then film photography would have survived unchallenged for another few decades.  In the late 50's they were actually catching rolls of film in the ocean being dropped by the first satelites.  It took hundreds of guys and tons of diesel fuel to do this.  Now Google gives digital satellite imagery away for free. 

 

This is just one example of one part of America's endless postwar R&D story.  I am critical of specific parts of that story. But it is preposterous to assert that we have received no material return whatsoever on peacetime military spending.  If we have received a return similar to what might have been realized by private enterprise is another issue entirely. 

 

Then there is the whole social issue -- that American culture benefits from having people in its population who have been there.  By there I mean seeing people at their best and worst, sometimes at the same instant, which is is what I imagine military combat is.  I've gotten to know a lot of Europeans in college and since, and I hazard to say that their national cultures have suffered from not having individuals who have been through that.  Growing up, the dark cloud of the Vietnam War hung over my street in the form of dads and uncles with injuries of every description.  As a boy I couldn't help but be impressed by that and thinking when I was 18 I'd be herded off to get shot at and either be killed or stuck in a wheelchair forever, like the Vietnam vet who used to give me this really mean stare as a kid while he wheeled around in his canvas fatigue at Northgate Mall.  I don't think these Europeans boy-men grow up with the thought of the draft in their face every day.  In fact I think they're being fooled as much by their state media as much as they think we are by ours. 

 

I mean, Europe doesn't have anything like this:

 

^

On a more abstract basis, you had an economic boom time..the 1950s...when the defense budget was porportionally. Using the usual percentage of GDP metric, the defense budget was 18% of the GDP in 1952, during Korea, dropping down to around 9% in 1959 and staying there into the 1960s.  Yet we managed to have a growing economy and payed down the debt from WWII, while also having porportionally larger defense spending.  Now the defense budget is around 4.8% of the GDP.  I think that ends the story about how defense spending has a negative impact on the economy. 

 

The real issue, as was stated in the title of famous book on the subject, is "How Much is Enough"...and where to cut defense spending as a contribution to deficit reduction

 

Operations and personnel take up approximately 2/3 of the military's budget.

 

That's where the cuts are going to have to come from.

 

Robert Reichs new book is pretty interesting, and its wierd seeing that he is coming to some of the same conclusions and IDing the same things I was doing here on this thread, in those various graphs I was posting on the recent past of the economy, the postwar era and the times starting in 1970. 

 

He has some interesting insites on the psychology of downward mobility.  I also see he pretty much agrees with Ragerunner about the lowering of incomes affecting demand on things, like housing. 

 

He made an interesting point that that "stagnation of real wages" we talk about is a statistical artifact, that this is not so much people not getting raises, but people being made redundant and rehired into jobs that pay less....that famous switch from manufacturing to service employment that started to pick up in the 1970s.

 

 

American decline has been a cyclical concept for at least 50 years - which theoretically means our Golden Age lasted for all of about 10 minutes sometimes in the 1950s - probably between '56 and '58.

 

Reich calls it "The Great Prosperity" and dates it from 1947 to the mid 1970s.  Which is a good range, methinks.  I think it's real, whatever you want to call this era. 

 

American decline has been a cyclical concept for at least 50 years - which theoretically means our Golden Age lasted for all of about 10 minutes sometimes in the 1950s - probably between '56 and '58.

 

Reich calls it "The Great Prosperity" and dates it from 1947 to the mid 1970s. Which is a good range, methinks.   I think it's real, whatever you want to call this era.

 

 

And yet, would you rather live in 1970 or today, all things considered?

Fareed Zakaria is worrying over state and local pensions that ballooned to 65 million dollars per year.  That is peanuts compared to the Pentagon budget that ballooned to over 700 million dollar/year, IIRC. 

 

And these pensions are benefits that people earned.  I am sure that Lockheed or Litton would not be imperiled if we skipped building another million tons of battle ships or jet interceptors for shooting down MiGs.

 

Secretary of Defense Gates is right that the US can delete the huge flag rank command structure in Europe.  It is beyond ironic that the terrorists plotted 9/11 in Munich, right under the noses of that European command.  It is tragic.  We should have spent our money getting operatives into the cells of campus radicals in Germany and the Middle East instead of buying giganto-expensive satellites and intercontinental bombers.

 

The Homeland Security budget is a joke.  It turned into pork barrel projects in districts far from "the threat".  Can anybody who flies say that they are "happy" with the TSA?

 

 

I am going to write to Fareed

Boreas, you've taken this thread off-topic enough. If you continue, you will have some time off.

In case people missed it (like 99% of people out there probably did), the Treasury held an auction for TIPS (Treasury Inflation Protected Securities) recently, and for the first time in history, the selling yield of those TIPS was negative.

 

In this column, MarketWatch explains how this might actually not have been irrational from the perspective of the investor (lender).

 

http://www.marketwatch.com/story/tips-auction-reflects-profound-uncertainty-2010-10-26

 

The fact that this column makes sense to me is truly depressing.

 

The explanation is that TIPS represent a kind of bipolar hedge: they partially protect against deflation and protect against hyperinflation.  The soaring demand for them reflects the fact that the level of uncertainty out there is extremely high: people have expectations ranging all the way from a Japanese-style "lost decade" to a Latin American-style hyperinflation.  Uncertainty is among the worst things that can beset an economy, because those sitting on capital simply cannot know where to commit it--so they continue to sit, often investing in short-term Treasury bonds or money market accounts (which, in practice, often makes them largely investors in short-term Treasuries as part of the pool of easily liquidated securities that a money market fund represents) as a modestly superior alternative to a cash hoard.

 

The economic uncertainty almost has to stem from political uncertainty.

 

If fiscal and economic policy is guided by the likes of Paul Krugman over the next two years, hyperinflation (or at least some significant inflation) is a very real possibility.  Buying TIPS now could be good insurance against the devaluing of one's savings in that event.  However, if we try to emulate the Brits, who have undertaken a substantial retrenchment of government under the new Tory leadership, and as several conservative thinkers have advocated here as well, part of the price of readjusting to a government living within its means could be a deflationary period (depending primarily on the speed of the readjustment--if we tried to balance the budget by next year, we would definitely experience deflation; if we tried to do it over five years, as the UK is doing, we still might, or we might not).

 

Disclosure: I don't own any TIPS and don't plan on buying any.  Uncertainty bothers me, but that doesn't mean I'm going to start buying securities with negative yields as a hedges.  Sometimes certainty is worth the price.  Sometimes it isn't.  You just can never know.  (How's that for irony?)

"He made an interesting point that that "stagnation of real wages" we talk about is a statistical artifact, that this is not so much people not getting raises, but people being made redundant and rehired into jobs that pay less"

 

For the country as a whole, for the past decade, that may have been the general rule.  But for the MidWest, I think there's been a lot of stagnant sallaries for the same position.  My company went thru 2 years with no wage increases, followed by raises of less than 2%.  My wife's employer has frozen salaries for 2 years now, and refused to give her the federally mandated partial raise in her contract (they gave it to her as 'professional money' to be spent on research, but not on groceries).

 

When the financial crises hit, the media talked about all the job losses, foreclosures, etc.  But when they interviewed people in the MW, the #1 complaint was not job losses or foreclosures, but the lack of salary increases over the previous years. Apparently frozen wages have been a staple of MW employment for several years now.

 

I've been on other blogs over the past 5 years and the people from the MW would comment on lack of salary growth, while the rest of the country commented on 5-7 % annual increases.

 

Me thinks the rest of the country is about experience the type of wage stagnation that the MW has been seeing for some time.  If this is coupled with employment downsizing as Reich describes it, then we can expect significant real wage declines during this decade.

True as far as it goes, but if we have lack of wage growth coupled with lack of price growth, then the "damage" is comparatively minimal.

 

As best I can tell, using my Internets-eye view of things (birds are so last century), what we've got is lack of wage growth coupled with erratic price growth, i.e., fluctuations.  Housing prices have clearly declined.  Energy prices have clearly risen, though not to the levels at the height of the bubble in 2007-2008.  (Gasoline has risen a lot from its ~$1.50 lows, but fallen a lot from its ~$4.50 highs, for example.)

 

Obviously, the best of both worlds is to have rising wages and stable prices.  The worst is to have stable (or declining) wages and rising prices, which is what many in the Midwest suffered through the early and mid-2000s.

 

If we could guarantee that we'd face a period of just steady wages and steady prices, it wouldn't be the best thing, but it wouldn't be so bad as to justify all the doom and gloom in the punditosphere lately.  It's the prospect of starting to inflate our way out of debt that's problematic--that way leads stagnant or falling wages *and* rising prices.

"He made an interesting point that that "stagnation of real wages" we talk about is a statistical artifact, that this is not so much people not getting raises, but people being made redundant and rehired into jobs that pay less"

 

For the country as a whole, for the past decade, that may have been the general rule. But for the MidWest, I think there's been a lot of stagnant sallaries for the same position. My company went thru 2 years with no wage increases, followed by raises of less than 2%. My wife's employer has frozen salaries for 2 years now, and refused to give her the federally mandated partial raise in her contract (they gave it to her as 'professional money' to be spent on research, but not on groceries).

 

When the financial crises hit, the media talked about all the job losses, foreclosures, etc. But when they interviewed people in the MW, the #1 complaint was not job losses or foreclosures, but the lack of salary increases over the previous years. Apparently frozen wages have been a staple of MW employment for several years now.

 

I've been on other blogs over the past 5 years and the people from the MW would comment on lack of salary growth, while the rest of the country commented on 5-7 % annual increases.

 

Me thinks the rest of the country is about experience the type of wage stagnation that the MW has been seeing for some time. If this is coupled with employment downsizing as Reich describes it, then we can expect significant real wage declines during this decade.

 

Due to us being part of a global economy, I think we have a very good chance of seeing stagnation or decline in wages over the next decade that will be accompanied by noticable inflation in items like food, oil, energy, etc (this might happen due to the decline in the buying power of the dollar). With deflation continuing in things like housing and property values (residential and commercial). It could be a very nasty mixed.

People have often cited the decline in the housing market as a symptom of our national woe.  I actually think it's the reverse.  It is the lingering effects of the rise the housing market that are hurting the economy a lot more than is currently appreciated.

 

There are a lot of people who have lost their homes.  True.  The far less reported statistic, in part because of measurement difficulties, I'm guessing, is how many people remain in homes they can't afford.  There are many people out there who are just barely holding on; they're making their mortgage payments, but it takes everything they have to do so, leaving almost nothing for anything else other than bare necessities.

 

In better times, money that went from citizens' pockets to banks' in payment of mortgage indebtedness might have been lent back into the economy quickly.  That is clearly not happening; deleveraging is happening, in the first instance, at the financial institutional level.  Therefore, the money that you send to your bank each month in payment of the mortgage is very likely not circulating in the economy very quickly.  With millions of people sending high percentages of their take-home pay to their bank on mortgage payments from bubble-priced housing, the amount of discretionary income that could be spent in the economy at businesses where money circulates faster is sharply constricted.

I think we have a very good chance of seeing stagnation or decline in wages over the next decade

 

Rage (and others),  Do you think the decline in wages will be from salaries staying pretty flat (but losing to inflation) or from people being forced to trade-down from better paying jobs to poorer paying jobs, as Reich has suggested in Jeffrey's post above?

"With millions of people sending high percentages of their take-home pay to their bank on mortgage payments ...... the amount of discretionary income that could be spent in the economy at businesses where money circulates faster is sharply constricted. "

 

I have agrued this point to some degree since I joined the original "US Recession?" thread.  However, I have recently argued that there is a floor to what most people will cut because the requirements to function in today's society will not let them cut more (need car, internet, cell phone, etc to be functional in middle-class society and to land a new job as needed).  I think on the agregate that we have passed that point.

 

And as others have noted, restaurants seem to be doing as well or better than ever.  Aren't restaurants businesses with rapid money circulation?

 

And cell phones and other consumer electronics are still selling very well.

 

Certainly for middle-class America, there has been a trade-down of 'luxury' items, from big (new car, expensive vacation, motorcyles/jet skis, etc) to small (new cell phone, local vacations, etc).

 

And definetely to your point - money is being destroyed faster than it's being created right now due to bank write-offs and deleveraging overwhelming federal stimulous (of all sorts).

 

Do you (Gramarye or others)  feel that the reduced circulation of money is also coming from business that traditionally foster money circulation?  Or do you think most of the reduction in circulation is coming from financial deleveraging and write-offs.

 

 

Jeffrey's issue - a lot it does come from the downsizing cycle that many folks get trapped in (company downsizes, hired at a job w/ less seniority/downsized again and at some point maybe even out one's original career). The churn of the last 30 years in the economy has limited the number of mid-level white collar workers who can stay w/ a company long enough to really get sustained wage growth.

I think the wealth created by blue-collar workers in the post-war (World War II) world is actually the statistical anomaly more than the wage stagnation in the service sector of the last 30+ years. The idea that an industrial worker could be middle class had about the shortest shelf life of any economic development of the last 500 years. Urban trading economies (which most of the West has become since the mid-70s) have much higher levels of creative destruction and downward pressure on wages because of competition (local and global) than the nationalized and industrialized economy of the 3rd quarter of the 20C.

 

To future wage growth, if inflation starts to get some bite (and I think it will), I actually do think we'll see a pretty nasty wage-price spiral take hold - starting w/ the federal gov't and its employees and heading out to the private sector, because the whole point of the smashing the value of the dollar and flooding the market w/ cash is to drive down the value of debt and fix our long term budget problems and the easiest way to do that is by making the dollar much cheaper and if it causes the Chinese economy to overheat and melt down well so much the better - it might also drive the Japanese to get their act together and get those Germans spending a bit more at home. 

dmerkow, as always, great points.

 

I think we are all waiting for the Economists, Media, and general public to come around to our realization that 1945-1975 was the exception, not the rule.  Too many of our current assumptions about work/career/wages, too much of our financial planning assumptions and advice, and too much of our government-based social programs (SS, tax receipts) is based on the anomaly that was the postwar generation.

 

As to your prediction of a "pretty nasty wage-price spiral", I hope in a way you are right, but I fear what happens more if you are wrong.  Monetizing the debt thru inflation is definitely the name of the game being played by the Fed.  That will almost certainly give us the inflation spiral you are predicting (and I agree 100% with that)

 

But will it give us a corresponding wage spiral?  As the dollar declines, we get import inflation and raw material inflation.  As discretionary spending stagnates or falls, companies will have to keep wages down to make a profit (some will undoubtedly go out of business).  And as the rest of the world focuses on exports to stimulate their own economies, will the US be able to recoup lost domestic discretionary spending with exports?

 

I think we are all waiting for the Economists, Media, and general public to come around to our realization that 1945-1975 was the exception, not the rule.

 

I'm coming around to that too, but during the 19th & early 20th century the economy did produce living wage work, or we wouldn't see the physical evidence of that, in other words districts of single family houses for the working class....detached in the Midwest, rowhouses on the East Coast (Baltimore & Philadelphia)  Apparently jobs where paying enough for people to move into this housing vs living in shanty towns or multifamily tenments (with some exceptions in certain cities and neighborhoods)

I think if we see inflation it won't be a wage price spiral since that (in the 1970s) was supposedly due in part to COLA's in union contracts.  There is enough of a surplus labor population now to hold down wages. 

 

Monetizing the debt thru inflation is definitely the name of the game being played by the Fed.  That will almost certainly give us the inflation spiral you are predicting (and I agree 100% with that)

 

But will it give us a corresponding wage spiral?  As the dollar declines, [we get import inflation and raw material inflation.

 

...that's pretty much where I see inflation coming from, too. Also energy prices. 

When the financial crises hit, the media talked about all the job losses, foreclosures, etc.  But when they interviewed people in the MW, the #1 complaint was not job losses or foreclosures, but the lack of salary increases over the previous years. Apparently frozen wages have been a staple of MW employment for several years now.

 

This started in the 1970s and early 1980s, with two-tiered wage and benefits deals (like the one that GM got to convert the Frigidaire plant into the now-closed Moraine Assmebly operation).  So this is a long term phenomenon. 

 

 

The Cleveland Fed has released another report on the employment situation.

 

The Employment Report and Displaced Workers

 

The interesting thing here is that they do a compartive study based on a BLS survey of displaced workers.  They compare this and the previous recesssion.

 

"The Displaced Worker Survey also asks about the reason for the worker’s displacement, and in fact, only workers who respond that their plant or company closed or moved, that there was insufficient work, or that their position or shift was abolished are considered as displaced workers. During the last two recessions, there were marked differences in the reasons cited for displacement. In 2010, the most frequent response is insufficient work, whereas in 2002 it was the closing or moving of the plant or company. Responses from the 2008 survey (along with other recent nonrecession years) look similar to 2002. These different responses between 2010 and other survey years likely reflect the widespread nature of the aggregate shock that hit the economy in 2008 and 2009."

 

 

...however, they provide a caution in interpretation:

 

"It may be tempting to interpret the data on reasons for displacement as evidence that cyclical effects, as opposed to structural effects, are primarily driving unemployment; however, we would be cautious in making that inference. The survey is asking workers about the reason for their displacement but not about impediments to finding a new position. Thus, the low re-employment rates could be driven by weak current demand, by structural factors in the labor market, or by a combination of the two."

 

...they then discuss re-employment rates, by sector, concluding with this depressing observation:

 

" Still, while there is some evidence of increased variability in re-employment rates across industries in 2010 compared to early years, the overwhelming pattern is that re-employment rates have shifted sharply down across a broad range of industries."

 

 

 

 

"With millions of people sending high percentages of their take-home pay to their bank on mortgage payments ...... the amount of discretionary income that could be spent in the economy at businesses where money circulates faster is sharply constricted. "

 

And as others have noted, restaurants seem to be doing as well or better than ever. Aren't restaurants businesses with rapid money circulation?

 

And cell phones and other consumer electronics are still selling very well.

 

Some restaurants are doing well.  That said, I think that the main reason UO-philes might get the impression that restaurants are doing better than they are is that the kind of restaurants most people on these boards eat at regularly are likely not representative of "the restaurant industry."

 

In the past year or so, at least two restaurant chains with Ohio ties, Damon's and Max & Erma's, filed for bankruptcy protection.  Last year (2009) was the worst year for the restaurant industry in a generation, so same-store sales for most restaurants are up across the board this year, but that's off a trough.  Even there, the recovery has been mixed.  This recent article from the Chicago Tribune notes that <a href="http://articles.chicagotribune.com/2010-10-21/business/ct-biz-1022-mcdonalds-20101021_1_mcdonalds-mcrib-technomic">McDonald's has grown significantly, but other burger joints have struggled</a>.

 

And definetely to your point - money is being destroyed faster than it's being created right now due to bank write-offs and deleveraging overwhelming federal stimulous (of all sorts).

 

Do you (Gramarye or others) feel that the reduced circulation of money is also coming from business that traditionally foster money circulation? Or do you think most of the reduction in circulation is coming from financial deleveraging and write-offs.

 

I think those are two sides of the same coin: As I said earlier, the fact that so much money is going into low-velocity sectors (including banks, for the moment) necessarily means that, ceteris paribus, it's being kept out of higher-velocity sectors.  I'd like to get the stats over time for (a) the percentage of after-tax income devoted to mortgage payments, (b) the velocity of money passing through banks over time (my impression is that they were much higher-velocity years ago than they are now, which might mean that they could become higher-velocity again), and (b) how that compares to the average velocity over time for other industries.  Even at their peak, I doubt banks circulated money as quickly as most restaurants, mass-market retailers (physical and online), etc.

 

I think the wealth created by blue-collar workers in the post-war (World War II) world is actually the statistical anomaly more than the wage stagnation in the service sector of the last 30+ years. The idea that an industrial worker could be middle class had about the shortest shelf life of any economic development of the last 500 years. Urban trading economies (which most of the West has become since the mid-70s) have much higher levels of creative destruction and downward pressure on wages because of competition (local and global) than the nationalized and industrialized economy of the 3rd quarter of the 20C.

 

I definitely agree, assuming you meant "nationalized" to stand in contrast to "internationalized" today.

 

Of course, there are political reasons why this can't be talked about in public, unfortunately.

 

To future wage growth, if inflation starts to get some bite (and I think it will), I actually do think we'll see a pretty nasty wage-price spiral take hold - starting w/ the federal gov't and its employees and heading out to the private sector, because the whole point of the smashing the value of the dollar and flooding the market w/ cash is to drive down the value of debt and fix our long term budget problems and the easiest way to do that is by making the dollar much cheaper and if it causes the Chinese economy to overheat and melt down well so much the better - it might also drive the Japanese to get their act together and get those Germans spending a bit more at home.

 

I don't know if you're being tongue-in-cheek when you write this or not.  There are certainly going to be policymakers thinking that way when looking at the size of the national debt and deficit.  Unfortunately, it's highly unlikely to be effective (by which I mean that that way of getting out of debt has costs that are even harsher than austerity, just more indirect and therefore more politically evadable).

 

"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." --John Maynard Keynes, The Economic Consequences of the Peace (1919), Ch. 6, pp. 235-36.

I'll admit the wage-price spiral is a bit of wishful thinking (the key place where it would be most helpful is for the young adults who took out student loans for colleges that were far outpacing inflation in their costs). Undoubtedly weakening a currency is a risk, especially one w/out any specie behind it, but the hole is so deep and wide (and I'd argue that the strong dollar represented a form of regulatory capture of the federal gov't and treasury by the financial interests of the country). A manufacturing country likes a weak currency and high tariffs (hmm. . . I wonder who that describes today - China I'm looking at you). It was also the stated policy of the GOP for its first 100 years or so.

I'm a pretty close student of Weimar Germany - so I know where that goes.

 

To the built environment and wages, the U.S. was a high wage country at least up through the beginning of the 1880s - we really became a lower wage country w/ the second wave of European immigration. The labor unrest of the '80s and '90s (19C) was about the declining power of the skilled laborer who was being displaced by the unskilled European peasant - Phila. mostly missed out on that the second wave immigration as did Cincinnati (not sure about Baltimore, but my guess is they did as well - they were a major German port of entry but less so of southern and eastern Europeans).

 

There are lot of arguments to be had about what the built environment of the Great Lakes boomtowns reveal. (stretching from Pittsburgh to Milwaukee).

 

  "And yet, would you rather live in 1970 or today, all things considered?"

 

  Sure, we have cell phones, but opportunities for growth were greater in 1970. The rate of growth was higher.   

 

    "I think we are all waiting for the Economists, Media, and general public to come around to our realization that 1945-1975 was the exception, not the rule."

 

  Agreed.

 

   

To agree the 1970 notion is true, but they were long living on borrowed time by 1970 - at least 5 years and probably more. Just witness the speed w/ which it collapsed between 73 and 82.

There are lot of arguments to be had about what the built environment of the Great Lakes boomtowns reveal. (stretching from Pittsburgh to Milwaukee).

 

This could be its own topic, even.  But not in this thread.