Earthside Comments: Here is what Earthside doesn't get: is the purpose behind stimulating the present economy with about another trillion dollars in spending and tax cuts meant to get us buying more Chinese-made consumer products? South American fruits, meat and vegetables? Burn more Saudi oil? Is it meant to get more people to borrow again to buy houses they really cannot afford? Is it meant to encourage you to get a loan for a Ford or Chrysler or GM car that you don't really want?
That's what it sounds like Barack Obama and Paul Krugman (article below) are aiming for -- in other words, the conventional economic establishment wants everything to go back to the way things were in 1998.
What is alarming is that the manufacturing that does exist in this country is following the pattern of the Great Depression -- but more importantly to understand is that we are reliant now on foreign producers for all the rest of our factory products. Take a look at the graphs at the bottom here to see this frightening trend. We say again that the key to getting out of this economic catastrophe is rebuilding manufacturing and production in the U.S., inserting real competition into the market place (ie., breaking-up big corporations and banks), and emphasizing community-based economics (sustainable, local business and production).
The lack of a grand vision that is NOT emerging from Obama is very worrisome -- unemployment and psychological depression are accelerating. Without a long term strategy to restore prosperity, this slump will continue getting deeper and deeper, no matter how much the federal government borrows to spend on new bridges and more energy efficient federal buildings.
The Obama Gap | Paul Krugman/New York Times
“I don’t believe it’s too late to change course, but it will be if we don’t take dramatic action as soon as possible. If nothing is done, this recession could linger for years.”So declared President-elect Barack Obama on Thursday, explaining why the nation needs an extremely aggressive government response to the economic downturn. He’s right. This is the most dangerous economic crisis since the Great Depression, and it could all too easily turn into a prolonged slump.
But Mr. Obama’s prescription doesn’t live up to his diagnosis. The economic plan he’s offering isn’t as strong as his language about the economic threat. In fact, it falls well short of what’s needed.
Bear in mind just how big the U.S. economy is. Given sufficient demand for its output, America would produce more than $30 trillion worth of goods and services over the next two years. But with both consumer spending and business investment plunging, a huge gap is opening up between what the American economy can produce and what it’s able to sell.
And the Obama plan is nowhere near big enough to fill this “output gap.”
Earlier this week, the Congressional Budget Office came out with its latest analysis of the budget and economic outlook. The budget office says that in the absence of a stimulus plan, the unemployment rate would rise above 9 percent by early 2010, and stay high for years to come.
Grim as this projection is, by the way, it’s actually optimistic compared with some independent forecasts. Mr. Obama himself has been saying that without a stimulus plan, the unemployment rate could go into double digits.
Even the C.B.O. says, however, that “economic output over the next two years will average 6.8 percent below its potential.” This translates into $2.1 trillion of lost production. “Our economy could fall $1 trillion short of its full capacity,” declared Mr. Obama on Thursday. Well, he was actually understating things.
To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that’s not enough.
Now, fiscal stimulus can sometimes have a “multiplier” effect: In addition to the direct effects of, say, investment in infrastructure on demand, there can be a further indirect effect as higher incomes lead to higher consumer spending. Standard estimates suggest that a dollar of public spending raises G.D.P. by around $1.50.
But only about 60 percent of the Obama plan consists of public spending. The rest consists of tax cuts — and many economists are skeptical about how much these tax cuts, especially the tax breaks for business, will actually do to boost spending. (A number of Senate Democrats apparently share these doubts.) Howard Gleckman of the nonpartisan Tax Policy Center summed it up in the title of a recent blog posting: “lots of buck, not much bang.”
The bottom line is that the Obama plan is unlikely to close more than half of the looming output gap, and could easily end up doing less than a third of the job.
Why isn’t Mr. Obama trying to do more?
Is the plan being limited by fear of debt? There are dangers associated with large-scale government borrowing — and this week’s C.B.O. report projected a $1.2 trillion deficit for this year. But it would be even more dangerous to fall short in rescuing the economy. The president-elect spoke eloquently and accurately on Thursday about the consequences of failing to act — there’s a real risk that we’ll slide into a prolonged, Japanese-style deflationary trap — but the consequences of failing to act adequately aren’t much better.
Is the plan being limited by a lack of spending opportunities? There are only a limited number of “shovel-ready” public investment projects — that is, projects that can be started quickly enough to help the economy in the near term. But there are other forms of public spending, especially on health care, that could do good while aiding the economy in its hour of need.
Or is the plan being limited by political caution? Press reports last month indicated that Obama aides were anxious to keep the final price tag on the plan below the politically sensitive trillion-dollar mark. There also have been suggestions that the plan’s inclusion of large business tax cuts, which add to its cost but will do little for the economy, is an attempt to win Republican votes in Congress.
Whatever the explanation, the Obama plan just doesn’t look adequate to the economy’s need. To be sure, a third of a loaf is better than none. But right now we seem to be facing two major economic gaps: the gap between the economy’s potential and its likely performance, and the gap between Mr. Obama’s stern economic rhetoric and his somewhat disappointing economic plan.
Manufacturing Collapse Reminiscent of Great Depression's Beginning | Edward Hugh/SeekingAlpha.com
Well, here's the chart I think everyone really needs to see (below). The JPMorgan Global Manufacturing PMI hit 33.2 in December, a series record. More to the point, you can get a comparison between what is happening now and the 2001 "recession lite" with only a swift glance, and of course, the 2009 long recession is only just getting started.
Now let's stick it alongside the one Paul Krugman put up last week of the US Great Depression:
Arguably, what we can see here is that the current collapse in industrial activity is starting to get near the US historic one in terms of proportions, but we still aren't quite there yet. ... MORE
Jobless Rate Jumps to 7.2 Percent in December | Associated Press/Yahoo News
The nation's unemployment rate bolted to 7.2 percent in December, the highest level in 16 years, as nervous employers slashed 524,000 jobs, capping one of the worst years in modern history for American workers.The Labor Department's report, released Friday, underscored the grim toll the deepening recession is having on workers and companies. And it highlights the difficulty President-elect Barack Obama faces in resuscitating the flat-lined economy. This year has gotten off to a rough start with a flurry of big corporate layoffs, pointing to another year of hefty job reductions.
For all of 2008, the economy lost a net total of 2.6 million jobs. That was the most since 1945, when nearly 2.8 million jobs were lost. Though the U.S. labor force has more than tripled since then, losses of this magnitude are still being painfully felt.
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