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Article: HERE’S WHAT’S WRONG WITH THE ECONOMY… (And How To Fix It). What do you think ?

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Forum topic by David Grimes posted 1008 days ago 1239 views 0 times favorited 25 replies Add to Favorites Watch
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David Grimes

2072 posts in 1235 days


1008 days ago

I came across this yesterday. I happen to agree with most of it. What do you think ?

The article with video is found here: http://finance.yahoo.com/blogs/daily-ticker/wrong-economy-fix-181308391.html

The text of the article By Henry Blodget | Daily Ticker – Mon, Oct 3, 2011 follows:

The United States is in a very tough spot, economically and politically. The 25-year debt-fueled boom of 1982-2007 has ended, and it has left the country with a stagnant economy, massive debts, high unemployment, huge wealth inequality, an enormous budget deficit, and a sense of entitlement engendered by a half-century of prosperity.
After decades of instant gratification, Americans have also come to believe that all problems can be solved instantly, if only the right leaders are put in charge and the right decisions are made. And so our government has devolved into a permanent election campaign, in which incumbents blame each other for the current mess, and challengers promise change.
The trouble is that our current problems cannot be solved with a simple fix. They also cannot be solved quickly. It took 25 years for us to get to this point, and it will likely take us at least a decade or two to work our way out of it, even if we make the right decisions.
So it is time that we began to face reality.
THE PROBLEM: TOO MUCH DEBT
The biggest debt binge in US history, by a mile. Four years ago, when the debt-fueled boom ended and the economy plunged into recession, most economists and politicians misdiagnosed the problem.
They thought we were having just another post-War recession—a serious recession, yes, but a cyclical one, a recession that easy money, government stimulus, and a return of “confidence” could fix.
A handful of economists, meanwhile, argued that the recession was actually fundamentally different—a “balance sheet” recession resulting from a quarter-century-long debt-binge, one that would take a decade or more to fix.
In the past four years, it has become increasingly clear that the latter diagnosis was correct: The US economy is behaving exactly the way other economies have behaved after piling up mountains of debt and eventually going through a financial crisis. It is bumping along with disappointing growth, high unemployment, and, increasingly (and understandably) social unrest.
Total US debt, including households, companies, and the government. Can you say ”$50 Trillion”?
So how do you get out of a “balance sheet” recession triggered by too much debt? You reduce the debt.
More specifically—and here’s the critical point—you reduce the debt that is crippling the productive part of the economy. This is the part that creates most of the jobs, prosperity, and wealth. It is also the part that pays for the rest of the economy. That part is the private sector.
What debt is crippling the private sector?
Consumer debt. The household mortgages, credit cards, student loans, and other obligations that is forcing consumers to save and pay down debts instead of spend. Consumers still account for about 70% of the spending in the US economy, and that spending is now constrained.
Households are still in debt up to their eyeballs.
How can consumers reduce their debts?
By doing what they are doing right now:
• Spending less
• Saving more
• Paying down debt
• Restructuring debt
• Defaulting
Importantly, this process takes time. And unless you’re willing to just tear up the laws and contracts that have formed the basis of the country’s economy for the past two centuries, there’s no way to just wave a magic wand and make the debts go away.
Also importantly, this healing process has nothing to do with “restoring confidence.” Or “reducing regulation.” Even if you could suddenly cast a spell and make all Americans (irrationally) exuberant again, you can’t solve a debt problem with more debt. Specifically, you can’t reduce the amount you owe by borrowing more.
So where does that leave the economy?
It leaves the private sector, the productive engine of the economy, nursing its way back to health.
And it leaves the public sector—the government—trying to minimize the pain while the private sector heals itself.
The government also has debt coming out of its eyeballs.
Complicating the US’s problem, of course, is that the public sector—the government—has also racked up humongous debts in the past quarter century. For now, those debts are still manageable: Our creditors are still willing to lend us as much as we want, on ever-easier terms. But, eventually, these debts will have to be addressed. Specifically, at some point, the government will have to cut back spending and reduce its debts, at least as a percentage of GDP. Or the entire government will go bust.
Those facts should be relatively uncontroversial. Where the disagreement comes is when and where the government should cut back—and how much.
One side argues that the government should cut back immediately and completely, forcing the country to “take its medicine” in one quick dose. The other side argues that the government should continue spending to support the economy until the private sector is healthy enough to once again carry the torch.
The policies that arise from this argument affect the lives and livelihoods of hundreds of millions of people, so it’s not surprising that people feel strongly about them.
THE SOLUTIONS
So what’s the best approach to solving our problem?
Here’s where philosophical differences come into play. “Best” is, at least somewhat, in the eye of the beholder.
The two extreme solutions are these:
Do you want a violent, painful “adjustment” in which many million more Americans are thrown out of work and the incomes and spending of tens of millions of Americans are suddenly reduced, thus crushing American companies at the same time?
Then immediately cut government spending from ~20%+ of GDP to the 15% of GDP the government collected in taxes last year and hope (pray) that the resulting dislocation doesn’t further wallop GDP (which history suggests it almost certainly will).
Do you want to pretend we don’t have serious problems and just keep the government spending vastly more than it takes in every year until our government debt load finally becomes unmanageable and the currency collapses?
Then just keep doing what we’ve been doing for most of the past 30 years.
For obvious reasons, neither of those two approaches are appealing.
Fortunately, there’s a third option, which lies somewhere in the middle.
This solution consists of two parts:
1. Acknowledging the problem (and the problems with either extreme approach)
2. Designing an approach that addresses these problems and helps us work our way out of our predicament with the least possible pain, dislocation, and disruption.
THE “ACKNOWLEDGEMENT” PHASE…
• Acknowledge the real problem with the economy—that we’re in a “balance sheet” recession
• Acknowledge that, to fix the economy, consumers need to work off their debts
• Acknowledge that trend-line government spending is already too high relative to both GDP and the taxes that the government collects
• Acknowledge that, eventually, to fix the latter problem, government spending will have to drop and taxes will have to go up
• Acknowledge that, raising taxes and/or cutting spending sharply right now will wallop the economy
• Acknowledge that walloping the economy right now will make the problem worse, not better, at least over the short term (consumers will have less money to spend, so the economy will shrink, and tax collection will drop…and then this vicious cycle will repeat. See Greece.)
• Acknowledge that making the problem worse right now will increase social frustration and unrest (See Occupy Wall Street). It also won’t help the rich get richer.
• Acknowledge that denying the problem and continuing runaway government spending indefinitely will eventually lead to a debt and currency crisis (see Argentina)
• Acknowledge that, right now, the government can borrow as much money as it wants at historically low interest rates—rates that are getting lower all the time
• Acknowledge that the only spending in the economy that the government can directly control is government spending
• Acknowledge, therefore, that the “best approach” given our current reality involves two specific goals:
◦ Minimizing short-term pain while giving consumers time to nurse themselves back to health
◦ Getting the long-term deficit under control before the government implodes
THIS LEADS TO A SOLUTION THAT SEEMS THE MOST REASONABLE AND LEAST RISKY AND DISRUPTIVE GIVEN THE CURRENT REALITY…
• The government should construct and pass a long-term budget plan that
◦ Minimizes short-term pain, while
◦ Getting the long-term deficit under control
• This budget plan should be designed to benefit all Americans, not just special-interest groups or different classes or industries
• This budget plan can theoretically include an increase in short-term spending designed to minimize the country’s pain, as long as it also includes a decrease in long-term spending (again, right now, the world is willing to lend us as much money as we want)
• One form of government spending that unequivocally benefits all Americans is infrastructure spending (when the projects are finished, America has the infrastructure)
• Infrastructure spending would help America address another reality that has emerged in the past three decades—the reality that the infrastructure of many countries in Europe, Asia, and other regions has vaulted past that in the US and made the US look like a second-world country
• Infrastructure spending would boost employment in one sector of the economy hammered by the recession—construction
• Infrastructure spending would involve fewer of the conflicts and misaligned incentives that infuriate many Americans about “entitlement programs,” extended unemployment benefits, welfare, food stamps, and other government expenditures that seem to encourage sloth and laziness and “socialism”
• The 10-year government budget designed to get us out of our current predicament, therefore, should probably include a massive, multi-year infrastructure spending program.
There, I said it. I have now revealed that I find merit in an approach advocated by one side in the religious war (Keynesians). And this religious war is so emotional that I will immediately be flamed as an enemy of the state, despite also advocating the reduced-spending approach held by the other side (Austerians).
But so be it.
I think this is the most reasonable approach to solving our nation’s problems. I’ll explain more about why in the coming days.

-- If you're going to stir the pot, think BIG spoon or SMALL boat paddle. David Grimes, Georgia


25 replies so far

View Roger Clark aka Rex's profile

Roger Clark aka Rex

6940 posts in 2030 days


#1 posted 1008 days ago

Wow, David. Right on the (borrowed) money.

-- Roger-R, Republic of Texas. "Always look on the Bright Side of Life" - An eyeball to eyeball confrontation with a blind person is as complete waste of Time.

View tom427cid's profile

tom427cid

294 posts in 1066 days


#2 posted 1008 days ago

For once a proposal/plan that makes sence.
Now all that remains is to get the children in DC to play together.
tom

-- "certified sawdust maker"

View TopamaxSurvivor's profile

TopamaxSurvivor

14575 posts in 2271 days


#3 posted 1008 days ago

I wondered what happened to that B@$t@rd. He was going to write a book about his Wall Street days. It was suppose to center around his screwing the public when he told his peers to “sell the the fools garbage at $200 a share.” Which, they did!! He is banned from the securities business for life and seems to have lost his nerve about the book when Eliot Spitzer started exposing Wall Street Criminals. BTW, that half assed plan will not solve the problem, just prolong the agony. Until we have fair trade instead of one way free trade and get the money out of politics, we are screwed ;-(( Hopefully the “occupy (name a place)” movement will turn into another party which forces the Rs and Ds to unite into one party; “The corrupt B@$t@rds” they are.

-- "some old things are lovely, warm still with life ... of the forgotten men who made them." - D.H. Lawrence

View David Grimes's profile

David Grimes

2072 posts in 1235 days


#4 posted 1008 days ago

I think the term “movement” is certainly appropriate. ;=)

-- If you're going to stir the pot, think BIG spoon or SMALL boat paddle. David Grimes, Georgia

View muleskinner's profile

muleskinner

662 posts in 1032 days


#5 posted 1007 days ago

I don’t know when it was – 30 years ago, 50 years ago – but somewhere along the way Americans were persuaded that their primary role in the economic engine was consumption rather than production. It seems we are most often described as ‘consumers’ rather than ‘producers’ or even ‘citizens’. Maybe it is just my economic naivete but an economy that is 70 percent dependent on consumption seems unsustainable to me. It appears that the monetary policy of the last couple of decades has been to provide cheaper and cheaper credit to keep the consumption growing. The result was a negative savings rate, increasing debt and explosive bubbles.

So, yeah, it’s easy articulate the problem and posit a cause. A consensus solution seems harder to come by. My personal solution has been to lower my expectations from the consumer culture standard. I still find myself comfortable, engaged, busy and relatively happy. What bothers me is that I fear my children (and young people in general), who are just as hard working and probably smarter than I am, are going to have to lower theirs.

Oh, and just to highlight our decline, reading this article epitomizes short sightedness and false economy.
http://www.nytimes.com/2011/06/26/business/global/26bridge.html?pagewanted=all

-- Visualize whirled peas

View TopamaxSurvivor's profile

TopamaxSurvivor

14575 posts in 2271 days


#6 posted 1007 days ago

muleskinner, Do you think the 60+% of 20 somethings that can’t find a job should lower their expectations and just shrivel up and die?

-- "some old things are lovely, warm still with life ... of the forgotten men who made them." - D.H. Lawrence

View Howie's profile

Howie

2656 posts in 1518 days


#7 posted 1007 days ago

Don’t forget to vote!

-- Life is good.

View crank49's profile

crank49

3333 posts in 1566 days


#8 posted 1007 days ago

All we have to do is realize the Keynesians got us into this mess and get rid of them. The rest will fix itself.

-- Michael :-{| “If you tell a big enough lie and tell it frequently enough, it will be believed.” ― A H

View ShaneA's profile

ShaneA

5242 posts in 1193 days


#9 posted 1007 days ago

Cr1, while you are no doubt very intelligent. I am glad you dont have your finger on any buttons, if you know what I mean? Why cant we begin with a monster tax on imports from china, and others? Such a tax rate that would put american made products cheaper than china made products. Plus some sort of New Deal to put people to work fixing our rusting infastructure. Manufacturing and blue collar jobs could be created. Two things that would be a start.

View muleskinner's profile

muleskinner

662 posts in 1032 days


#10 posted 1007 days ago

Well Topa, I don’t think it is in human nature for a healthy specimen to shrivel up and die. On the other hand if they can’t find work then I would suspect their expectations (of material consumption) would have to be lowered.

-- Visualize whirled peas

View TopamaxSurvivor's profile

TopamaxSurvivor

14575 posts in 2271 days


#11 posted 1007 days ago

Yeah, real low, like living with their parents until employment returns to the US. 10-15 years ago I was telling people employment is dead and dying in this country. They all thought I was nuts. Wonder if they changed their minds?

-- "some old things are lovely, warm still with life ... of the forgotten men who made them." - D.H. Lawrence

View jeepturner's profile

jeepturner

920 posts in 1387 days


#12 posted 1007 days ago

Crank, I would disagree about the Keynesians getting us into this mess. If a remember my history correctly it was twenty-five years ago that a voodoo economic model was introduced by followers of Friedman.
When we stopped listening to reason and started pandering to greed, transferring wealth from the middle class to the upper class will lead to a shrinking economy.

Muleskinner, consumer and producer are not mutually exclusive terms. Prior to producing any product you must, if you have any business acumen, anticipate a demand. If there isn’t a demand your products will go wasted and any investment will be lost. If like Ford, you had a product that your workers would buy if they could afford it, you would have your producers, and consumers working for you and buying from you.

David, if you are looking for solutions, I have one. First I will relay the supporting things.
When I was a student studying political science one thing about elections always remained the same. This is that who ever spends the most money usually wins the most votes. There is a direct relationship to money spent and the amount of votes. This does not always hold true, but in most cases it does.
In DC for every person that we the responsible electorate place in office there are any where from twenty eight to a hundred lobbyist(depending on who’s facts your going by) vying for their attention. Those lobbyist have been reported to spend five million dollars per elected official. Do you think for even a second they are spending those dollars on altruistic causes, or are they expecting to get something for the effort. I contend that all those folks, who are pulling down some decent money themselves are getting more that little something for their effort.
I would like to see a constitutional amendment stating basically that if it can’t vote, it doesn’t have a right to lobby.
We as a people revolted due to taxation without representation, now we face a government married to a corporate world that represents only those who can afford it, while pitting those who vote them into office into a evenly divided blame game.
There is a reason for a steady stream of lawyers spending millions to get a job that pays thousands. It’s not because they are terrible at math.

I hope this concludes my political postings for the month, at least on my favorite wood working site.

-- Mel,

View Sawkerf's profile

Sawkerf

1730 posts in 1663 days


#13 posted 1007 days ago

Why cant we begin with a monster tax on imports from china, and others?

I remember this debate from an Economics class in college.

Ok, suppose that the steel industry lobbies for (and gets) a tax (tariff, duty, whatever) on cold rolled steel from China. Great – The steelworkers keep their jobs, and the price of cold rolled steel goes up.

In the next town, however, the hubcap plant is suddenly faced with a substantial increase in their steel and have to raise the prices on their hubcaps. Since their major customer is the auto industry, the price of cars goes up.

Or, do we let the domestic hubcap indusrty fail since we can import hubcaps.

No, wait a minute. Let’s tax imported hubcaps.

Now what? (If you don’t like the hubcap analogy, feel free to substitute any industry dependent on cold rolled steel.)

-- Adversity doesn't build character...................it reveals it.

View dakremer's profile

dakremer

2446 posts in 1686 days


#14 posted 1007 days ago

Our economy would be in much better shape if we could get the pharmaceutical companies out of politics and out of every major decision concerning “health care.” Most of our money troubles come from health care (Sickness care really). We spend the more money on “health care” than any other country; we take more drugs (because big pharma is telling us to..because they are running the show) than any other country, yet we rank like 40th (or something like that) in overall health. hmmmmm….seems to me if our SICKNESS CARE system truly worked, we should be the healthiest country in the world. If our healthcare shifted towards ACTUAL prevention (eating well, moving well, thinking well…teaching people to make good lifestyle choices) instead of “prevention” (i.e. early detection, which basically means…..”heres a drug or surgery”) we’d see health care costs disappear before our eyes. Of course this will never happen as long as Big Pharma (the biggest and most corrupt business on our planet) is in control of everything. Sorry David – I didnt read the article you posted (dont have time -finals week), but had to throw my two cents in about our economy. Hope all is well

PS – my vote will be for the candidate who is either THE LEAST involved with Big Pharma, or is against Big Pharma – is there such a guy???

-- Hey you dang woodchucks, quit chucking my wood!!!!

View ShaneA's profile

ShaneA

5242 posts in 1193 days


#15 posted 1007 days ago

There is no doubt raising import taxes will raise prices across the board. That will be unavoidable. However if more products are being produced here, there would be more jobs being created. More job means more disposable income, more chances for the govt to collect on taxes, sales and income. Part of the problem we are in now is caused by trying to achieve the lowest price possible on all things. The disposable mentality that allows china to overwhelm us with mostly substandard crap. If you want quality, we all know you have to pay for it. Paying for it becomes easier if you have a job. If you have a job, the govt also gets to collect more income tax. If we are going to wreck an economy, all I am saying make sure it is china’s first. What do we owe them? What do they do for us?

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