Here we are, a scant few days following the re-election of President Obama. So, will this be the turning point in the annals of America's history? Will Barack Obama manage to reverse the eight years of W. Bush's folly in a two term push or will we sink further into the mire of economic malaise created by not one but two administrations? Time will tell of course, but as always, the past holds the keys to the future.
Japan is a harbinger of our future
For those that focus mostly on domestic issues, Japan
went is still going through a painful workout dealing with inflated asset pricing, primarily focusing on real estate, caused by poor interest rate policy by it's central bank (sound familiar?). Japan was the second largest economy on the face of the planet for nearly half of the 20th century. China bumped them out recently but I draw the comparison because there might be some that would like to say that this analogy isn't applicable to the US economy; that the two are apples to oranges. Well, Japan one of the few countries on earth that is comparable in size and scope. Using GDP as a very rough tool for contrasting, Japan's economy is approximately 1/3rd the size of our economy. I say rough tool because the actual GDP of any country is an arguable figure; much massaging goes into those statistics and it would be foolish to assume that no politics play into how they are calculated.
A blow by blow comparison between what happened in Japan between 1986 and 1991 with what happened in the US between 2001 and 2006 offer chilling parallels.
Interest Rate Policy
The Bank of Japan (BOJ) started 1986 off with a 5% benchmark interest rate (comparable to the Federal Reserve Fund Rate) and were rapidly reduced to 2.5% in the first quarter of 1987. Reasons for the reduction are based on central economic planning theories that create a multi-prong injection to the general economy; a reduction in the benchmark rate lowers how much money you can make saving, increases general liquidity (boosts the amount of money in circulation) and creates an environment conducive for lending. An unintended consequence of this activity is that stock market speculation increases when idle money can't find a roost. This creates a multiplier effect when lending becomes easier (or looser, depending on perspective) and the speculation starts driving prices higher, giving the impression that stocks are a sure bet. As with other affected assets, like real estate, speculation tied with loose lending drive prices higher until, like any Ponzi like structure, you run out of suckers.
Looking at interest rate policy, the BOJ apparently recognized the peril in 1989 and began raising the benchmark in order to cool the economy. This did little to defect the damage and the bubble burst. At the height of the Japanese asset bubble, the Nikkei average stood at 38,957.44 (interday, December 1989) and retraced 100% of its gains over the next four years. In 2009, the bottom of the global recession it stood at 7054.98 (interday, March 2009).
There are two camps when it comes to critics of Japan's fiscal policies in dealing with the economic Fukushima meltdown; those that feel the response was in error and those that believe they didn't do enough. Several prominent economists, including those currently at the helm, or responsible for much of the recovery planning, of the US economy (Bernanke, Summers, Krugman), believe that Japan got stuck in a liquidity trap (for your reading pleasure). For those wondering, a liquidity trap is basically a Keynesian idea that attempts to explain why economies fail to rebound from the bust component in the business cycle after receiving large capital injections, into private banks, from the government or central bank. The Keynesian distilled cause is when people decide to hoard the capital injection rather than reinvest. Now, according to Bernanke, what Japan did wrong was they didn't do enough:
I will argue here that, to the contrary, there is much that the Bank of Japan, in cooperation with other government agencies, could do to help promote economic recovery in Japan. Most of my arguments will not be new to the policy board and staff of the BOJ, which of course has discussed these questions extensively. However, their responses,when not confused or inconsistent, have generally relied on various technical or legal objections—-objections which, I will argue, could be overcome if the will to do so existed.
According to big Ben, the extended recession in Japan was the result of the central bank and legislatures failing to break the law in order to do what we did here. The parallels, aside from Bernanke's claim that Japan didn't do enough, are hauntingly familiar:
- Massive capital injections by the BOJ into private banks
- Saving several private companies because they were "too big to fail"
- Government sponsored public improvements (a.k.a., roads to nowhere
The result of these tactics resulted in a massively debt burden on the public (which is currently 220% of their GDP), zombification of those industries subsidized by government funding (which, notably, several failed anyway) and, possibly the only upside, very well maintained roads.
However, in the end, Japan is still no better than they were in 1985. Many economists call the Japanese recession "The Lost Decade". From where I'm standing it looks more like three decades.
Obama's Rally Cry
According to the Obama administration website, here's his teams road to recovery:
Manufacturing is an essential building block of our economy because it sparks innovation, generates higher-wage jobs, and strengthens entire communities. After declining for over a decade, the manufacturing sector has rebounded – led by President Obama’s rescue of the auto industry– and created 479,000 manufacturing jobs since January 2010. To build on this recovery, President Obama set a goal to create 1 million new manufacturing jobs by the end of 2016 and is working to double American exports over the next five years by promoting U.S. goods and removing trade barriers, expanding access to credit, and promoting strong growth.
First is the idea that the government will directly create jobs, which I won't argue that it can. The question is how? The passage goes on to explain that it helped out by "rescuing the auto industry" which is the nothing more than the zombification of an private firm that should have been forced, by law, to reorganize. I guess Bernanke's theory on not doing enough is evident here. A full paradox that is present in this passage is the idea that we can double exports with higher-wage jobs. The two are totally incompatible. Labor inputs are always the largest component of a good or service's final prices, are the biggest capital outflow for nearly all businesses and cannot lead to lower prices unless the good is subsidized or competition has heavy tariffs applied, taxed or otherwise made noncompetitive. In other words, the claims made by the Obama administration are likely not to be attainable. The BLS may continue to report dropping unemployment rates but it is more to do with a falling participation rate and surge in part-time employment (do large in part to healthcare reform) than a true recovery.
The President has put forward a specific, balanced plan of spending cuts and revenue increases that reduces the deficit by more than $4 trillion over the next decade, including $1 trillion in spending cuts he signed into law last summer as part of a deal with Congressional Republicans. His plan includes $2.50 in spending cuts for every dollar in revenue increases, while bringing annual domestic spending as a share of the economy to its lowest level in 50 years.
This passage is a bit misleading. I would assume that he is referring to the Federal Budget Deficit, which are still nearly three times larger (year over year) than W. Bush's overruns during his terms. What seems to confuse the statement is bringing in the trillion dollar figure that somewhat conflates the budget deficit with the national debt. As this is an offering from the highest office in the nation, I would believe that the intention is to confuse the two. A $4 trillion reduction to the national debt only returns it to what Obama assumed when he originally took office. Please note that this is over the course of a decade and repairs the damage done in four years. The last sentence is also misleading. Now his administration is mentioning the budget deficit and claims to have a plan to reduce spending as a component of GDP (which is what appears to be the statement) to what it was in 1962, or approximately 30% of GDP. Currently the government spends roughly 42% of GDP, so I'm curious as to what revenue streams Obama's team is looking to find that will fund the job creation above and the multiple spending schemes below all while reducing the tax rate on the middle and lower classes without biting the wealthy so hard they expatriate.
President Obama responsibly ended the war in Iraq and will end the war in Afghanistan in 2014—now is the time to rebuild America. The President’s plan uses half the money we’re no longer spending on war to put Americans back to work rebuilding road, bridges, runways and schools here at home and uses the other half to help pay down the debt.
While other nations are vastly outspending us on their infrastructure, American businesses are saddled with crumbling roads and bridges. The President is working to get rid of pet projects, government boondoggles, and bridges to nowhere. And he has proposed a new independent fund that will attract private dollars and issue loans for new construction projects based on: how badly are they needed, and how much good will they do for the economy.
The first paragraph is a step in the right direction, if he can pull it off. Bear in mind that Robert Gates, while still in the service of W. Bush, drafted the withdraw from Iraq. Obama actually broke from that plan and kept troops in country beyond the deadline set by Bush. The original promise made by the current administration called for a total draw down and exit within 16 months of Obama's election as president. That means all troops should have been home before the 4th of July, 2009. Bush's exit plan, which experts agreed was far more realistic, called for everyone to be back before the end of 2011. Lo and behold, that's when they came back.
The second paragraph is, roads to nowhere. To digress, only slightly, a few months back I was driving home from work late at night and saw CALTRANS sandblasting the sound barriers along I-10 in the city of Montclair. Sandblasting the sound barriers. Federal funds, paying to put some polish on a concrete wall while a few miles up the road towards Pasadena there are potholes, on the freeway, that can swallow SUVs. So, Japanese recession recovery tactic, check.
By ending government subsidies for oil companies and investing in cleaner sources, we can become a global leader in clean energy, creating American jobs and businesses while improving our environment and national security.
An unprecedented boom in domestic production has led to cheaper natural gas, and President Obama will take every possible action to safely develop this abundant source of American energy to support more than 600,000 jobs by the end of the decade. U.S. oil production is at a 14-year high and President Obama has charted a course to cut net oil imports in half between 2008 and 2020, lowering imports by 5.5 million barrels per day and reducing our reliance on foreign oil to its lowest level in almost three decades.
By ending government subsidies for oil companies, those losses will be carried forward at the pump. Granted, we end up paying for it either way, don't confuse the matter. Ending subsidies will cause the affected industry to offset those losses someplace else and that would likely be with the consumer.
Natural gas is an unknown. It is possible that we have decades of the stuff in the ground which will go a long way toward lowering our dependency on foreign oils. However, the problem is that nobody really knows what the size of the US natural gas reserve is. While the promise of natural gas is warming, my concern is that as production ramps up and satellite industries, in particular the automotive industry starts developing more alternatives to gasoline driven vehicles that will naturally drive consumption up as well. Regardless of how much we have, once it becomes mainstream consumption will rapidly deplete whatever we may have on tap.
There are several problems with other statements made in this passage, however. First is the claim that oil production is at a 14 year high, which is untrue. Oil production is at nearly a 10 year high, according to the EIA. Second is the hope to reduce foreign imports by a whopping 5.5 MBD. That would mean that our imports would be cut nearly in half (which is great, don't get me wrong) but this statement is incomplete without following up with where will it come from then? Are we hoping to increase our domestic production by 100%? I'm an optimist, but that is a ridiculous claim. With the headwind of peak oil still looming, this plan is void of anything approaching realistic or remotely possible. If the hope to stem the lost US decade is pinned to the belief that our domestic oil production is set to reverse the past 40 years of decline, that is a false hope indeed.
To help students better afford a college education, President Obama ended billions in subsidies wasted on banks and used the savings to double investments in Pell Grants. He established a college tax credit for students and their families worth up to $10,000 over four years of college. He set a goal to lead the world in college graduates by 2020, and cut the growth of college tuition and fees in half over the next 10 years, a goal that will save the typical student thousands of dollars a year, and proposed bringing together community colleges and businesses to train 2 million Americans for good jobs that actually exist now and are waiting to be filled.
There is no substitute for a great teacher. President Obama is fighting to help state and local governments save the jobs of hundreds of thousands of teachers and to provide states with resources to reward and attract great teachers while taking strides to improve teacher effectiveness. And he has set a goal to recruit and prepare 100,000 math and science teachers so we can out-compete countries in fields like science, technology, engineering, and math (STEM).
I'm all for education but I doubt that government spending on higher education costs is a good investment. If anything, I believe the entities that need to have their subsidies cut are the state and federal lending institutions. These loans cannot be cleared, even through bankruptcy and represent the biggest driver for higher education costs in the United States. In addition, $10K over four years at anything other than a junior college is laughable. A correspondence university tuition is around $40K, a low end university is about $70K and if you attend UC Berkeley or Harvard, expect to pay around $100K. Without some level of reform in how higher education institutions price their instruction and pay educators, all we are going to see is more jobs going to better educated workers coming from other countries. More notably, there is a notion throughout this passage that no real cut in spending has been made. Money that was sent to banks is now sent to the Pell program. The passage about cultivating a strong teacher workforce really goes into no detail as to how it intends to carry out the task. In a broader sense, there's no solid framework indicating when or if this stimulus will affect the general economy. At best it would be decades before the impact would be felt. Granted, making sure future generations are equipped to manage the situation we are making for them is of the utmost importance and I will be the last to criticize without adding something constructive. Obama's plan doesn't really do anything. As mentioned previously, focusing on reforming the lending programs and who benefits from those financial products should be the aim of this administration. Clearly, students saddled with debt entering the workforce are not the benefactors of these instruments.
Millions of Americans are already benefiting from Obamacare. From insurance rebates to expanded coverage, see how the President’s health reform benefits you.
The health care law that President Obama passed makes the health insurance system work better for everyone. It stops insurance companies from arbitrarily capping and cancelling our coverage, and provides access to recommended preventive care without co-pays or deductibles. It strengthens Medicare for our seniors and it helps young people get the health insurance they need.
Obamacare has a treasure chest full of unintended consequences that will be felt for decades to come. Everything from employers reducing full time employees and replacing them with part time workers in the case of small and medium sized businesses to larger firms looking to outsource completely to overseas work centers are issues that will need to be dealt with going forward. Again, much the same with educational lending, insurance reform should have been the target. All this move did was inject the government in the game making for another hand, this one with fiat powers, grabbing for your money.
The Road Forward
Nothing Obama's administration brings to the table is radically different from what the Japanese government attempted to deploy during their downturn. In fact, much of the posturing this president has shown us is just that, empty of anything that will be really useful. Some of the promises made for this term are born of fantasy. Doubling our oil production, job creation to full on praying that natural gas will be some sort of panacea in domestic energy are all spin aimed at hyping what stands to be an unproductive second term. With the lessons demonstrating what the result is going to be from what is at its roots, a Keynesian approach to the economic malady still facing this nation, why are we accepting this as the only answer? Why aren't we demanding something more substantial? Are we so satisfied with not having Romney in office that anything this man offers as an answer is automatically regarded as correct?
We are the people. Government is dependent on us for their power; our rights do not flow from them. We can always replace them, conversely they cannot replace us. If we are presented with an answer that does not satisfy the argument it is our right to demand better. Yet we allow the same actors to spin the same lie, and that is unacceptable.