Saturday, September 25, 2010

An Economics Lesson

Usually I write about moral, ethical or spiritual matters, but in this post I want to talk economics. While I’m not an economist, I did major in economics in college, I have an MBA, and spent 30 years in the business world. So I understand economics and business fairly well.

The reason I’m discussing this subject is because I’m sick of hearing candidates claiming they’ll fix the economy if they get elected. I’m also sick of hearing people blame Obama for the mess we’re in, when this deep economic recession was years in the making. There is little he can do, because very few tools are available to him.

Classic economic theory says the government has two major tools at its disposal to “manage” the economy: fiscal and monetary policy. Both of those have been tapped out, and there’s nothing more that can be done in those areas. Interest rates are extremely low (monetary) and the government is already heavily into deficit spending (fiscal). One other area is taxation, and the repeal of the Bush-era tax cuts will most likely hurt the economy even as it reduces the federal deficit.

Our economic problems go deep, and I see two major areas that must be addressed for any significant recovery to take place:

(1) Many jobs have been exported, so that manufacturing jobs, back office jobs, and customer service jobs have disappeared permanently. Any economic recovery that does take place won’t result in many these jobs opening up in the U.S., only in foreign countries. We must give some sort of incentive to companies to bring these jobs back to the U.S. and create new jobs in energy and emerging technologies.

You should be aware that the unemployment figure published by the government is grossly understated. Instead of 9.5% or so, the real number is closer to 15-20%. The higher number includes those who are hard-core unemployed or unemployable, those who have stopped looking for work, and those who are under-employed.

(2) We have an ongoing trade deficit with the world. We import more than we export. Some of this is due to importing vast quantities of oil, and some results from the fact that not much in the way of electronics, clothing, appliances, shoes, and many other goods are made here any more (see item #1 above). We can’t continue on such a path or we will literally go bankrupt as a country.

You should be aware that the only thing that’s keeping this country afloat financially is that other countries are buying our debt instruments. We buy stuff from these countries and they balance things out by lending us money. A major lender to us in China. So funds flow out of this country to China and others in the form of interest payments. The scary thing is that we are dependent of China for some measure of financial stability. That should keep you awake nights.

So when you hear politicians saying that they’ll fix the economy, don’t believe them. Unless they’re willing to tackle the two big items mentioned above, their efforts will result in nothing. Any recovery will come about as part of the natural economic cycle. Given our systemic economic problems, such a recovery may still be years away.

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