Where is the US economy headed?

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Chicago Tribune, December 31, 2005

Related online article: Wall Street's 2005 journey: An eventful trip going nowhere

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Just my personal opinion, but I think the stock market is still correcting for the internet craze and tech bubble of the 90's, wherein people drove up internet stocks and other tech stocks based on future earnings projections, while many projections never happened, many of them lost money, never did earn anything, and many went belly up. But then I am not an economist, just an observer.

Just another observation, I wonder if some want a housing bust, they keep predicting it. I don't see it. The population continues to grow, real estate is limited, and construction of new houses cannot come down due to the high cost of materials and labor. There may be a slight correction in super inflated areas, such as in California and other high dollar spots, and in the most severely inflated areas a more severe correction, but even that remains to be seen.

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We blew all that sh*t up for two years and where still in the same spot? Maybe we should start blowing up some other sh*t.

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The huge deficits from the Iraq misadventure is coming home to roost. The housing market was artificially stimulated with artificial low rates and Katrina. Antipathy towards GWB, has dried the market for American goods in some parts of the globe.

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marking this

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Just a thought to ponder - by the doomsayer's pronouncements, The US Economy has been headed toward collapse since the end of WW II. To be considered as a likely reason for the failure of such prognostications to come to fruition is the fact The US economy is the largest, most stable, most diverse, most free-market driven, most nearly self-sufficient economy on the planet - whole buncha redundancy and self-correction capability built in there. Another note of interest is that The US simultaneously is the Largest Debtor Nation and the largest Creditor Nation on the planet; the Global Economy depends on The US Economy.

And for those who's impression includes the notion The US is globally unpopular, well, thats pretty much the way it always has been. There have been "Love the USA" spikes from time to time, but in general, The US/US Policy is complained about, opposed, distrusted, and envied as matter of course.

The US led The Global Economy out of the slump brought on by the retraction at the turn of the present century of the Pacific Rim economies. Despite the impacts of 9/11, the military actions in the Middle East and Southwest Asia, 3 hard-fought, divisive domestic elections, unprecedented natural disasters, and staggering energy cost increases, the US Economy has clipped along at a growth rate in the 4% range, the US Deficit expansion even in the face of massive military expenditure, growth of entitlement spending and broad-based tax-rate cuts continues to slow as tax revenues continue to surpass expectatons.

Perhaps the most common mistake made globally re The US is to underestimate The US. Like it or not, The US takes care of itself, and in so doing largely sees to the pace and prosperity of the planet. That's not through altruism; it just makes good economic sense, and The US is a nation built on and maintained by good economic sense. Those who think otherwise always have been with us, and always continue to be puzzled by the failure of their negative assessments to find validation as history unfolds. There may be a lesson there.

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timberlandko wrote:

Just a thought to ponder - by the doomsayer's pronouncements, The US Economy has been headed toward collapse since the end of WW II.

I think, Timber, that that was a bit of a stretch, but it was a good opening line. You used the word "most" many times in your post. The US is the most stable, most diverse etc.
Yes, we are big and powerful but we are also vulnerable, Timber, because (1) we persist in living beyond our means and (2) because (well, I'll come back to that later).
As a country, we continue to run large budget deficits and trade deficits. Can we keep doing that endlessly? And individually, not you or me of course, we Americans are up to our eyeballs in personal debt. Credit card debt, interest only mortgage loans.
Yes, Timber, perhaps I am Chicken Little, but to me, we are headed for some tough times ahead.
And I never even got to (2).

I hope that we can keep this site civil, unlike the Spying one. I lost interest when the name-calling started. Thank you for starting this discussion. -johnboy-

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Yeah, I did use the word "most" a lot; it applies where no other word will suit. I understand where you're coming from, rjb - but I submit you're coming from the same place those who continually find themselves disappointed by the US and its Economy's failure to fail come from. Meanwhile, The US and its Economy continue to stride forward.

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[quote="timberlandko",rjb - but I submit you're coming from the same place those who continually find themselves disappointed by the US and its Economy's failure to fail come from.[/quote]

Enough for one day. Timber, I am not a liberal academic preaching economic theory from a tenured post at some ivy covered college. I run a small chain of retail stores (30 years). Four of them. Every two weeks each of the 32 employees gets a pay check. There is a mad rush to the bank to cash them.
And once a month I write a check for an amount that seems to get larger every month for their health insurance premiums.

I am not disappointed about the US economy, Timber. I am scared.

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I hear ya, rjb, and don't mean to minimize the reality of the apprehension you feel - I just don't see much basis for it, particularly given that with 30 years of history behind it, yours apparently is a viable business model. The future usually works out best for those who plan for it, as oposed to those who fear it.

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realjohnboy- I ask you to ponder these facts concerning the US economy and the future. Timberlandko has brought together an array of indisputable facts which point towards a good future. Indeed, the Unemployment Rate has fallen to 4.9%. There are loads of cites from the nineties(made by professional economists) which give 5% as the "irreducable figure for unemployment.

But-on to the deficits--

The government's ability to finance its debt is tied to the size and strength of its economy,or Gross Domestic Product. As a percentage of GDP, debt held by the public was highest at the end of World War II. It was actually higher than the GDP. It was 108% of GDP.

By 1974, debt fell to 24 % of the GDP.

Then, it rose again and now may be as much as 70% of GDP.

When we review the decline from 108% in 1945 to 24% in 1974, we find that ALTHOUGH the deficits did not stop and the total debt increased, the economy GREW FASTER.

That would mean that if we are to have a secure economic future, we must continue to keep taxes low so as to stimulate business so that the GDP can grow while simultaneously cutting as much waste in the yearly budget as possible. When all things are considered, this task may seem to be almost impossible, yet it must be done.

We now have a GDP which is over Eleven TRILLION and quickly headed for TWELVE Trillion since a 4% GDP growth per year( which is close to what we are getting) adds about 440,000 BILLION a year to our GDP.

We must somehow try to replicate the experience of the 1945-1974 era.

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All agreed. Excellent information. Rather than raise taxes, the answer is to control the rate of growth of government spending. We can grow ourselves out of extreme debt. Taxing ourselves out of it would only suppress the economy and increase the debt.

Mortkat and Timberlandko, you seem to be fairly proficient on the economy, there may be others, but I am fairly new to this forum. A question I have for you. There seems to be lots of economists proclaiming their wisdom, but to this day I've not run across a subject or a point that I've been curious about for a long time. It seems like the question would lend itself to some mathematical determination if the economists would simply shed their political bias and look at the facts of history. The question is this: and I will frame it with a couple of obvious assumptions:
If the tax rate is zero, the economy is unfettered, does great, but the government takes in no tax monies to fund its bureaucracy, some of which all of us desire and want, the argument is how much. At the other extreme, a 100% tax would suppress the economy so severely because nobody would see any reason to work very much if any at all, and there would be widespread starvation along with an underfunded government to support everybody, cases in point being failed communist systems around the world. My question is, somewhere in the middle is the most efficient rate of tax, above which the total tax revenues suffer, and below which the tax revenues also suffer. It is perhaps my thesis here that the optimum rate should dictate the maximum amount of government that we can and should afford. I have not heard anybody explain the scenario in this manner and then propose what that tax rate number would be, based on historical and mathematical figures. I believe we are well above that number already. Perhaps this argument is commonly known among economists, but I haven't encountered it myself, I have only come up with this line of thinking on my own from common sense. Do you have any thoughts on this?

This question has a very pertinent real world application in politics whereby Democrats see the economy as a zero sum game, so that if the government needs more money, simply raise taxes, without considering the very real likelihood that raising tax rates may actually reduce the tax revenues, which is the very oppositie effect than expected in their simplistic minds. The other possibility is that lowering the tax rates while increasing spending faster than tax revenues is not the answer either, as some Republicans may unwittingly support. I would simply like to see our fiscal responsibility tied to real world facts rather than political rhetoric.

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There has long been much conjecture - informed and otherwise - on what might constitute the "Optimum Tax Rate" - but not much in the way of meaningful conclusions. A rate which does not unduly burden business while providing government with adequate resources to perform necessay and legislated functions probably is impossible to figure out - too many variables, too many decision points, too many unknowns. However, The Laffer Curve demonstrates that at somewhere in the vicinity of 30%, taxation becomes counterproductive. It is not universally accepted.

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The notion that cutting taxes raises federal revenue is a lie. It has been disproven by the last 25 years of history.

Also, the unemployment rate is not a true measurement of economic success; it only tracks those who are looking for work, not those who have given up looking, not those who have found lower-paying jobs than their old ones.

Cycloptichorn

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Quote:

Bush's Job Growth WORST in 50 Years

by bonddad
Tue Jan 03, 2006 at 06:33:32 AM PDT
Bush's giant Right Wing Noise Machine (RWNM) loves to preach about the Bush economic miracle. In fact, the RWNM's current thinking is Bush doesn't spend enough time talking about his economic triumphs. If only he did, then everyone would fall in line and believe in the great Bush economic miracle. There is one problem with this argument: it's a lie. Any way you look at the Bush economy, it comes up short. Today, I want to compare Bush's job creation record with other economic recoveries. As usual, Bush comes up way short.

The national Bureau of Economic Research has identified 8 recessions since May 1954. For comparison purposed, I only used 5 of these periods because they are longer than the current expansion. Next, I used the total nonfarm employment numbers from the Bureau of Labor Statistics (BLS). I measured the jobs created from the trough (lowest point) to the next identified highest economic point. (The NBER states a "peak marks the end of an expansion and the beginning of a recession.") I compared the total number jobs created for the entire expansion as well as the total number of jobs created 49 months into the expansion (According to the NBER, the lowest point of the last trough was in November 2001, making December 2005 the 49th month of this expansion). Here's how the numbers (in millions) compare.

The expansion of 2/61 - 12/69 created 17,684 total jobs and 6,244 at 49 months.

The expansion of 3/75 - 7/80 created 13,183 total jobs and 12,831 at 49 months.

The expansion of 11/82 - 7/90 created 21,003 total jobs and 11,510 at 49 months.

The expansion of 3/91 - 3/01 created 23,969 total jobs and 8,266 at 49 months.

The current expansion which started in November 2001 has created a total of 3,410 jobs.

In other words, at 49 months into an expansion, Bush's job creation record is last. While we don't know when this expansion will end, the Bush economy would have to triple the total number of jobs created in order to get to 4th place on this list.

What's going on here? The basic problem is some areas of the economy are creating jobs. The BLS tracks 13 different job sectors. 7 (a little over half) have created jobs since November 2001 - natural resources/mining (37,000), construction (539,000), financial (550,000), professional services (238,000), education/health (2.1 million), leisure/hospitality (803,000) and governmental employees (1 million). Of all the jobs created three areas - government, education/health account for 57% of job growth. Of the jobs created outside of education, health and governmental employees (2,167,000), construction, professional services and financial services account for about 60% of the jobs created. Real estate is obviously related to all of these areas. Construction is obviously related to real estate, as are financial services (mortgage lending etc...) and professional services (real estate agents, appraisers etc...) So, real estate, governmental employees and health/education jobs are doing just fine.

6 areas - a little under half of the sectors the BLS tracks - have had a net loss in number of jobs: manufacturing (-2,800,000), information (-565,000), trade/transport/utilities (-353), whole sales trade (-107), retail (-157), and transportation/warehousing (67,000). Manufacturing and information are obviously the two biggest areas of job losses. Some of the information service jobs are the result of natural attrition from Y2K. However, I somehow doubt that is the only reason for the losses. While there is no information regarding outsourcing losses (because the government does not keep any statistics on the subject), I fell safe in assuming outsourcing is a big factor involved in the losses.

In summation, some people are doing well. They can find jobs and are probably financially somewhat secure. However, others have seen their jobs literally disappear overnight and are hurting to find new jobs that pay commensurate levels. These people are hurting from the current "expansion". Of course, Bush and the RWNM has forgotten about them.

http://dailykos.com/storyonly/2006/1/3/83332/75953

Bush's term has seen the loss of almost 3 million manufacturing jobs, and the rise of a million Gov't employees. And yet he's hailed as a conservative.

Refute the numbers, if you can.

Cycloptichorn

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Cycloptichorn wrote:

The notion that cutting taxes raises federal revenue is a lie. It has been disproven by the last 25 years of history.
Cycloptichorn

How about Reagans tax cuts? Revenues greatly expanded. The mistake was way too much expansion of government spending to go along with it.

Cycloptichorn, yep, its all Bush's fault. Thats a great analysis. I've been around since the 40's, and people are living better now than ever. As I learned long time ago, statistics don't lie but liars will figure. The reality is the economy is like a huge ocean liner. It is pretty much going to go where it goes. It does not turn on a dime, and the factors that determine where it goes are multiple and various in nature, some of which we can control and some which we can't. Some of the factors are entrenched from years ago and the president cannot change all the factors. Some factors are foreign, some are just the trend of the world, some are societal and cultural. Our education system as it is being conducted today will affect the economy many years down the road.

So if the economy booms, I do not think Bush deserves all the credit, nor did Clinton deserve all credit for the economy in the 90's. Furthermore, the economy by nature is cyclical. Compared to some European countries where tax rates are higher, their economies have higher unemployment and worse problems than ours. We are not doing badly. We can do better. And I believe the long term picture is not particularly great looking when you consider the emphasis of education these days.

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I never stated that it was all Bush's fault. I believe he has gotten some very bad advice.

But I believe the policies he champions don't help anyone but the rich; they certainly haven't helped the middle class.

As for the Reagan issue, go to the CBO website. Reagan cuts taxes in 1981 and raised them in 1983. From 1981 - 1983, tax revenue was 599 billion, 617 billion and 600 billion respectively. It wasn't until 1984 - after Regan raised taxes and the economy entered an expansion - that tax revenue increased.

Here's a link: http://www.cbo.gov/showdoc.cfm?index=1821&sequence=0

Cycloptichorn

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Do you at least see the logic that there is in fact an optimum tax rate somewhere between 0 and 100%, and if the current rate was optimum, then raising the rate would decrease revenues? We can argue what the number would be, but try to take politics blinders off and say what you believe about the math. After all, this is simple math here.

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I do agree with that logical statement, but the thing that you don't realize is that the optimum tax rate is to the right, or higher, than what our current tax rate is. We have a long, long way to raise taxes (especially amongst the wealthy) before we reach the point of diminishing Revenues due to taxation.

The idea that cutting taxes spurs the economy is false. Clinton raised taxes in 1994. That was followed by 6 years of economic expansion. Reagan raised taxes in 1984. That led to 6 years of expansion. Contrast this to Bush's tax cuts.

Cycloptichorn

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Cycloptichorn wrote:

I do agree with that logical statement, but the thing that you don't realize is that the optimum tax rate is to the right, or higher, than what our current tax rate is. We have a long, long way to raise taxes (especially amongst the wealthy) before we reach the point of diminishing Revenues due to taxation.

The idea that cutting taxes spurs the economy is false. Clinton raised taxes in 1994. That was followed by 6 years of economic expansion. Reagan raised taxes in 1984. That led to 6 years of expansion. Contrast this to Bush's tax cuts.

Cycloptichorn

Okay, we've established the basic fact that cutting tax rates may not decrease revenues. The argument then becomes whether we are currently above or below the optimum rate at the present time. If we can take politics out of it, which is virtually impossible I will admit, then perhaps we could get the country's foremost economists to simply look at the numbers throughout history in an unbiased manner and come up with their best guess, but with the guess based on actual figures.

I think you also need to get rid of your bias against the "rich" and quit caring whether they are richer than you. The fact is that rich people pay by far the vast majority of all income taxes, and in fact poor people pay absolutely no income tax at all. Actually, I think this actually bodes ill because that segment of society has no vested interest at all in cutting government spending and making government efficient. They don't care and thus will vote for people that promise to increase their entitlements.

Anyway, I don't see much profit in arguing the point further. You think our tax rates are far below the optimum. We are already paying over 50% tax if you add all the taxes up, and I think this figure is well over the optimum to have the most efficient economic policy.

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Where is the US economy headed?

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