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Guest Post: Innovation - America Has A Structural Problem
Submitted by Gordon T. Long of Tipping Points
Innovation - America Has A Structural Problem
I gave President Barrack Obama six months to roll-out his doomed Keynesian policies, twelve months to discover they were flawed and eighteen months to realize that the solution to America’s problems must lie within a different economic framework. I had hoped by the end of twenty-four months to see new policies closer to an Austrian economic philosophy emerge. I was wrong.
Though, even the Wall Street Journal recently featured an article on the re-emergence of the Austrian School of Economic philosophy, it would appear that President Obama’s administration still neither gets it, nor I am afraid ever will. Key defections by his leading economic advisors, talk of the need for QE II and a Stimulus II, and a political collapse in public confidence suggests a growing awareness that Keynesian policies are not working, as many predicted they wouldn’t. Obama's exciting rhetoric of Hope and Change has left myself and the majority of recent polled Americans disillusioned and disappointed. What I see the administration failing to grasp is twofold:
I-America has a Structural problem, not a cyclical business cycle problem. Though the cyclical business cycle was greatly worsened by the financial crisis, I would argue that the structural problem facing the US is actually a contributor to what caused the financial crisis.
II- America has a Credit demand problem, not a Credit supply problem. It isn’t that the banks won’t lend, but rather that few can any longer afford or qualify (on any reasonably and historically sound basis) to borrow.
A STRUCTURAL PROBLEM
1) Trade Balance: Insufficient Export/Import Ratio
We are all painfully aware that the US has not produced sufficient exportable product to support its standard of living for many years. Manufacturing in the US has been in steady decline since the 1960’s and the excess spending during the Vietnam War. It has been 50 years since the US had a balanced budget (forget Clinton's social security slight of hand). Over the last 10-15 years the US has seriously compounded this problem by accelerating the de-industrializaton of America without a strategy to replace salable export product. Corporate industrial strategies of outsourcing, downsizing, and off-shoring were never countered other than by an excess consumption splurge which fostered massive real estate and retail expansion distortions.
Simply said: A US Service Economy that is based on 70% GDP consumer consumption does not pay the bills!
For a brief period of time following the dotcom implosion, the US operated as a mercantile “Financial Economy” that turned out to have been nothing more than a historic illusion.
1999
2009
As the graphs below clearly show, since late 1999 with the surge in the adoption of the internet, unemployment in the US has spiked. Clerical, manufacturing and almost any job that could be further automated through networking advancements were replaced.
2) Creative Destruction: Slowing Innovation Rate
In my recent paper INNOVATION: What Made America Great is now Killing Her! , I described how the dotcom bubble ushered in a change in America that is still reverberating through the nation and around the globe. The Internet unleashed productivity opportunities of unprecedented proportions in addition to new business models, new ways of doing business and completely new and never before realized markets. Ten years ago there was no such position as a Web Master; having a home PC was primarily for word processing and creating spreadsheets; Apple made MACs and ordering on-line was a quaint experiment for risk takers.
In 1997 prior to the ‘go-go’ Dotcom era unfolding, America’s unemployment was less than half of what it is today at 4.7%. At that time the US added 3 Million net jobs which reflected the creation of 33.4 Million new positions while obsolescing or cutting 30.4 Million old positions. Job losses occurred in old vocations such as typists, secretaries, filing clerks, switchboard operators etc. Hired were new occupations such as C++ programmers, web masters, database managers, network analysts, etc.
As our research chart above however illustrates, the additions have fallen off precipitously while the job losses have stayed relatively flat. In 2009 job losses were 31M and only slightly larger than 1997, which would be expected with further internet application development. New job creation however was only 24.7M which is dramatically lower than the 33.4 in 1997.
Over 98% of all jobs created in America have traditionally been created by companies with less then 500 employees. Recent research by the Kaufman Foundation shows that in fact new start ups versus existing businesses dominated the creation of new positions.
America’s slowing ability to innovate which is reflected in published research papers, patents issued and numbers of college graduates with advanced math and science degrees has seriously fallen behind. I laid out the seriousness of this problem in my early 2010 paper: America - Innovate or Die!
It is more than a little disconcerting that after 13 Trillion in stimulus measures we see business spending on capital investment STILL shrinking in the US.
It can’t be any clearer, the US has a structural problem. The administration can not possibly fail to realize this. My sense is they just don't know what to do about it.
A DEMAND PROBLEM
1) Credit Available - Demand Flat.
According to the Federal Reserve's latest quarterly survey of banks' lending practices recorded during July 2010, “for the first time since 2006, banks are making commercial and industrial loans more available to small firms, with about one-fifth of large domestic banks having eased lending standards. This offset a net tightening of standards by a small fraction of other banks." Also, for the past six months, banks have continued easing lending to large and mid-sized firms. What's more, banks also reported that they stopped cutting existing lines of credit for commercial and industrial firms for the first time since the Fed added the question in its survey in January 2009. As for consumer loans, banks also reported easing standards for approving loans.
Credit is available, but demand remains flat.
Asked in the July survey how demand for commercial and industrial loans has changed over the past three months, 61% of banks responded "about the same," while 9% said "moderately weaker." While it was good news that 30% responded "moderately stronger," it's not exactly a surge in demand. Even in a slowly recovering economy, the growing distaste for credit among our debt-weary public has hampered the way for new purchases and investments.
This isn't all that is surprising. The latest economic indicators paint a very exhausted consumer: In the years leading up to the financial crisis, he bought too much house and too many cars. The consumer is in burn-out mode, more focused on either saving or paying down credit card debt than buying more appliances and gadgets.
The amount consumers owed on their credit cards during the three months ending in June dropped to its lowest levels in more than eight years, indicating that cardholders continue to pay off balances in the uncertain economy, according to TransUnion's second quarter credit card statistics.
The average combined debt for bank-issued credit cards fell by more than 13% to $4,951 over the previous year. This represented the first three-month period where credit card debt fell below $5,000 since the three months ending in March 2002. Meanwhile, personal savings have risen to 6.4% of after-tax incomes, about three times higher than it was in 2007.
Perhaps what the Fed's quarterly report is really saying is this:
"There's a growing distaste for credit. The American consumer is the child who ate too much and spoiled his dinner. And even if you hand him his favorite meal on a silver platter, he's just not that hungry.”
2) Shifting Demographics
Another obvious but seldom highlighted factor affecting demand is shifting demographics. The Baby Boomer generation is no longer the consumption engine it has been to the US economy.
We have a generation that, as has been predicted for some time, is reducing its expenses but it may be even more dramatic than forecasted. With home housing prices no longer being the wealth generation vehicle they had expected it to be, stocks not delivering the returns they had been told to expect for the 'long term’ investor and medical expenses climbing above their worst budgeted targets, the baby boomers are being forced to cut back even further than the expected demographics were warning about.
The demand for credit to finance new acquisitions is not the same priority it was only a few years ago. Harry Dent's extensive demographic research lays this out in indisputable detail.
All Federal Reserve and Government actions are about increasing credit supply. None effectively address demand.
THE RESULT
40.8 Million Americans on Food Stamps
Employment at Unprecedented Lows
Expect it to get worse until the administration finally realizes that we have both a structural and demand problem facing America, not a cyclical business cycle and credit availability problem. I personally don't believe for a minute that the Obama Administration haven't come to realize something is wrong. The White House simply doesn't know what to do about it. They are doing the only thing our Washington political machine knows what to do - throw money and credit at the problem, which is precisely what got us into this problem in the first place.
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"Run silent, run deep"
Create jobs, that's the problem.
US Multinationals may be generating record profits, but the "US" may no longer include "us" (unless of course you are one of them, the elite.)
Labor arbitrage dictates where the jobs flow. Americans are not going to compete with a Chinese peasant for factory jobs, especially when future aggregate demand is seen coming from China et al so it is is more efficient to locate plant outside of the US. What am I saying, Americans can't compete with Mexicans etc.
This is not rocket science. Something of course has to give and will, probably in the not too distant future. Or Americans will just have to be happy with less, content with their discontents.
Will you be?
Or the United States needs to actually start making offshoring to those places less palatable. In any way possible.
The one thing I absolutely don't get is why we don't focus on the fixed dollar-yuan rate.
I mean, fucking seriously: While China was getting its capitalist act together, sure, okay, give them a little slack. But, now, it's the most blatantly obvious distortion in the marketplace, and it allows the ongoing disembowlment of the U.S. economy (with Fortune 1000 collaboration in the name of quarterly earnings).
The US Treasury consistently says China isn't manipulating its currency. If that isn't manipulation, than the word has no meaning.
Yes, yes, yes, if we push Beijing too hard, they'll dump our bonds. So what? Get it the fuck over with. Because, if we don't end that rigged currency fix, we'll have no industry left, and our kids will be marching under a red flag within 50 years.
It is THE issue.
"The one thing I absolutely don't get is why we don't focus on the fixed dollar-yuan rate. "
Why are you upset that the Chinese want to give you a greater quantity of yuans in exchange for your dollar? Is it logical to get upset about someone giving you extra, at their expense? Is it OK if I take the extra yuans you don't want? Should we take the "excess" yuans we don't want, and burn them? Which other posessions should we destroy?
"I mean, fucking seriously...it's the most blatantly obvious distortion in the marketplace"
Yes, just like it would be a distortion if the supermarket gave you extra groceries for free.
"The US Treasury consistently says China isn't manipulating its currency."
Of course it is. Just like the US has manipulated its currency by destroying 95% of its value in the last 87 years.
"Create jobs, that's the problem."
Say's Law shows that a supply of labor creates its own demand. There would not be massive unemployment in an unhampered market - i.e. one without continual agression by the government against its citizens.
"What am I saying, Americans can't compete with Mexicans etc."
You fail to grasp the Ricardian Law of Comparative Advantage. Even if Mexicans are superior at everything (unlikely) compared to Americans, there will still be jobs for Americans - in an unhampered market. And both groups will be better off by allowing voluntary exchanges.
There won't necessarily be jobs, there is no guarantee of full employment. What can someone with an IQ of 85 do in a knowledge based economy?
While I understand the popular notion of kenynesian thought much of it really is distorted by the blogger community.
it isn't just about stimulus and printing money. it inbcludes how moneyis spent, saving for a rainy day, and understanding the faults in the economic system, and regulation
What we have is a bastard system that uses the chicago school, (markets are self regulating and efficient, limited regulation) combined with a warped kenyesian spending approach. This produces the worst of potential outcomes. we bail the failures, don't save for a rainy day, and don't protect well against systemic risk and don't regulate.
Minsky talk about it in his book stabilizing an unstable economy and goes into detail regarding what he calls the
"current standard theory" or after keynes synthesis. (chapter 6).
people post and they really don't know their economics, or what people actually said. Instead they call the current monstrosity Keynesian. It isn't. Keynesian thought involves much more than stimulus. By the way I don't know what they are doing, but it really isn't keynesian.
"people post and they really don't know their economics... . Instead they call the current monstrosity Keynesian. It isn't. Keynesian thought involves much more than stimulus. By the way I don't know what they are doing, but it really isn't keynesian."
"I have analyzed Keynes's General Theory in the following pages theorem by theorem, chapter by chapter, and sometimes even sentence by sentence... I have been unable to find in it a single important doctrine that is both true and original. What is original in the book is not true; and what is true is not original... I have found in Keynes's General Theory an incredible number of fallacies, inconsistencies, vaguenesses, shifting definitions and usages of words, and plain errors of fact.." - Henry Hazlitt, The Failure of the "New Economics" http://mises.org/books/failureofneweconomics.pdf
"an incredible number of fallacies, inconsistencies, vaguenesses, shifting definitions and usages of words, and plain errors of fact.."
Hey I recognize that language... it's from the bureaucrat tribe
Its all timing. Keynes ideas did not come in times when there was huge amounts of personal and public debt. The unions were not a special interst group demanding big pay and benefits. People had little debt, and fiat debasement had not taken off. Money put in the system back then actually did act as stimulus.
Barrack Hussein Obama: Poster Child for HOPIUM SPRINGS ETERNAL and DELUSIONS DIE HARD! His job is to perpetuate and propagate this illusion....
I had hoped by the end of twenty-four months to see new policies closer to an Austrian economic philosophy emerge. I was wrong.
Gentlemen: gold and the monarchy shall never fall!
I believe it was Winston Churchill who said "Americans can always be trusted to do the right thing... After they have tried everything else".
The only sad part is how long will it take for the administration to "try everything else"?
I believe it was Winston Churchill who said "Americans can always be trusted to do the right thing... After they have tried everything else".
The only sad part is how long will it take for the administration to "try everything else"?
I believe it was Winston Churchill who said "Americans can always be trusted to do the right thing... After they have tried everything else".
The only sad part is how long will it take for the administration to "try everything else"?
Why the surprise? Don't you research candidates? During his campaign he said that if you wanted to know where he stood, just look at whom he surrounds himself with, and they are mainly Communists/Maoists. So he told everyone he was a Socialist/Neo Commie and you moron voted for him because you thought it would be 'soooo cool to have a Black President'! Well you deserve what you get. Unfortunately after this disaster of a President, I think Americans will be very hesitant to vote for another black into that position for a VERY long time.
"Americans will be very hesitant to vote for another black into that position for a VERY long time."
He's a mulatto. I'm not sure which skin color the next president will have, but I wager he's going to be another socialist who loves welfare, viz. the welfare of favored banks and corporations and the military industrial complex.
The socialists agenda will demand much higher taxes from the well-off individuals and companies. The accelerating percentage of goverment workers in the new socialism will not be sustained by the dwindling tax base of the pvt small businesses.
SObamalism will create more indigent welfare recipients. He has a while longer in office to watch it all fail.
More bread and circuses!
Fact is no-one seems to really understand where he stands on anything.Take out the speeches and what has he done and what course does he intend to take.The longer he is a Mr Mystery the less options he,s got,unless he thinks the military will bail him out,maybe thats the plan.
I found out why Obama doesn't have his birth certificate. It can take decades to get it from Kenya.
Let's see what is wrong here...I have a business but I have a "partner"- the federal government. This partner considers me rich and takes 50% of my profits but takes no part in the risk. In fact they create laws that add to my risk if I don't follow everyone of their rules. There are so many rules the "partner" can investigate me and take what they feel they are owed. Then this partner tells me if I want to hire more than 50 people the rules get even more serious, the burden of proof much greater. This partner spends as much borrowed money as he extorts from all his collective partners, but then wastes over half of it. Then I have a junior partner- state government who wants income from franchise taxes that take a precentage of sales regardless of profit and every year he wants more money for the property I own.
Even though my partner and junior partner take now 60% through direct and indirect taxes at the corporate level, they now want more of my net personal income so they want to raise this tax as well. They will take 2/3rd's of my income for my entire working career, then If I managed to save anything to pass on to my kids they want 55% of that as well.
The partner's logic is: "if you can still make money given the hostile rules and taxes we put forth then it is clear you are working too hard". The partner won't tell me what is in store for next year, employee mandates- taxing my employees' health care, tax rates etc. but he is counting on his cash- he has already spent any money all his partners can provide if we gave him everything.
Insanity can only last so long, my partner does not understand that- He thinks he can be biggest debitor in the world and still have a stable currency. Bad things will happen to this partner who sticks his nose in everyone's business around the world. He is not liked (except by those he speads the wealth with) at home or abroad; he is nothing but a bullying shakedown artist worse than the Mafia and his days are numbered.
Now amazingly enough this partner conned an additional $2000 from every taxpayer/ employee in this country for 4 years all based upon a "guarantee" of healthcare... I won't be surprised when my partner tells me that because I worked too hard I won't be entitled to either healthcare or social security.
The last place a person could put their savings, (not to prosper- but just to maintain against the inflation/ quantitative easing) is physical gold. Now the parnter closed that "loop hole" as well and wants his cut if I sell coins. Capital controls on foreign markets (no more than 10k in an overseas account without new reporting rules), but the national casino is a joke. Impossible to make reasonable interest on savings. No protection, no hedging. Want to expatriate?? The partner wants his cut. Congress passed the Heroes Earning Assistance and Relief Tax (HEART) Act that will give you an anal exam covering 7 years of transactions before you leave. There is no way to beat the partner unless you are uber rich with political connections- the type whose UBS account in Switzerland won't be found.
Just sick of paying so much for nothing but more obstruction and then being called greedy. This country is starting to suck worse than Europe and I know things will only get worse. I long for the collapse- I hate the worthless partner and his police state...
Home of the Free; MY ASS.
"I was wrong."
god bless you for admitting error but what is in your belief system which would allow you to believe to believe such fantasies?
keynesianism is built on lies - so is obama's life.
www.obamacrimes.com
We are all complicit. Our world relies on never ending growth from a finite planet.
The Money Lenders systen of usury served us well, and them VERY WELL, while the Ponzy was growing. After we all got paid too much money for making, and selling each other stuff, we all got greedy, and no longer wanted to work for a living.
We all started to look for cheaper stuff, to make our relitively unproductive lives still easier, and to do less. We now find ourselves in a race to the bottom. The Ponzy we so carefully built has imploded, and we suddenly find ourselves in the vortex.
Bankers and their rich industrialists never changed their spots. We just allowed complicit politicians and the media to tell us what we wanted to hear, while blindly ignoring the world around us. We are now busily "manning the life boats". As my mum used to say:
"I'm all right Jack... Pull up the ladder!"
We WERE ALL complicit, it is just now, we are beginning to wake up to our greed.
As far as I am concerned the people who worked for a living earned it,to many people didn,t and were no worse off.
Figure out how to manufacture my own electricity and set up other people on the system= Piss off the Electric Companies
Buy tons of gold and silver= Piss of the bankers
Pay cash for a house= piss off bankers even more
Rig my car to get 100 miles per gallon+ help others do the same= infuriate oil companies
Grow my own fruits and veggies organically in large quantities= unlimited winner here.
Those are my goals.
Why the US government will default on its debt:
http://keynesianfailure.wordpress.com/2010/09/10/delayed-deleveraging-meets-the-keynesian-endpoint/
Hope?
Nope.
Dope!
Roap.
Soap.
Cope.
Time to rename the country -
SCAMerica!
Thank u, i found this for a long time.
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