What U.S. Economic Recovery? Five Destructive Myths

[mheslep]

I found this an interesting talk - Dr. Jeffrey Sachs @ The Commonwealth Club
Mon, Oct 10 2011 - 7:00pm

Dr. Jeffrey Sachs, Director, Earth Institute, Columbia University, Special UN Advisor; Author, The Price of Civilization

... Michael Moritz, Managing Member, Sequoia Capital - Moderator

Sachs gives a startling account of the inadequacies of US-style capitalism...

Sachs and historian/author Niall Ferguson had a http://www.distressedvolatility.com/2011/11/jeffrey-sachs-vs-niall-ferguson-on.html" that US revenue dipped down to 26% of GDP. However, US revenue from all government levels was 37% of GDP in 2007, and above 34% continuously from 1995 through 2001. The truth gap is the problem here. This year total revenue is back up to 31% of GDP.

 

[WhoWee]

Isn't it a bit deceptive to compare US spending to other countries in percentages rather than dollar amounts?

 

[mheslep]

Isn't it a bit deceptive to compare US spending to other countries in percentages rather than dollar amounts?

Yes.

 

[WhoWee]

Should we laugh or cry? my bold

http://www.washingtonpost.com/blogs...en-g20-summit/2011/11/03/gIQAIN6BiM_blog.html

"Yet Obama, facing his own economic problems at home, has few resources at his disposal to use as leverage, with the United States unlikely to offer significant financial assistance for the bailout.

Instead, Obama has been offering his European counterparts advice gleaned during his response to the U.S. recession two years ago.

“The U.S. and this administration acted with overwhelming force and put up the necessary resources to deal with the crisis--we insisted on robust stress tests, financial institutions dramatically increased by double their capital,” Froman said. “One thing we can contribute is our experience and ideas moving forward and support in doing so.”

After his bilateral meetings, the president took part in a gathering of the L-20, a collection of top labor leaders, before heading into a formal round of G-20 meetings Thursday afternoon.

Analysts said the president could have a difficult time rallying support for a common agenda, considering that the U.S. has offered a muddled message so far.

“On the one hand, you have both the president and Secretary Geithner saying, we have full confidence Europe can handle this issue; they have the resources; we know they can do it. And then you waffle back and [they are saying] Europe is scaring the world; get your act together,” said Heather Conley, director of the European program at the Center for Strategic and International Studies.

“Secretary Geithner has repeated visits to Europe . . . [but] European finance ministers have not been fully appreciative of U.S. advice and counsel on how to deal with the European crisis because of U.S. domestic challenges,” Conley added. “So it’s a point where we’re not seeing that coalescing of leadership to resolve the issue. We’re starting to see where tensions and nervousness are rising.”"

 

[rhody]

The $8 Trillion Internet: McKinsey's Bold Attempt to Measure the http://www.theatlantic.com/business...e-e-conomy/247963/?google_editors_picks=true"

The Internet -- that 200 million-person, $8 trillion global economy -- accounted for 21 percent of GDP growth in the world's largest economies over the last 5 years, McKinsey found in a report released this week.* As an entity, it accounts for more GDP than the Spanish or Canadian economies, and it's growing faster than Brazil. As a sector, it is now larger than these countries' agriculture or energy industries.

and

There is a lot of Internet to measure, with two million global consumers and $8 trillion in total revenue. So McKinsey's report limited its scope to the online economy in the G-8 countries plus five more: Brazil, China, India, South Korea and Brazil. It defined Internet activities as private consumption (electronic equipment, e-commerce, broadband subscriptions, mobile Internet, and hardware and software consumption); private investment (from the telecommunications industry and the maintenance of extranet, intranet, and Web sites); public expenditure (spending and buying by government in software hardware and services); and trade (which accounts for exports of Internet equipment plus business-to-business services with overseas companies).

If internet were a sector here's where it would fall as a percentage of total GDP, 2009
Interesting, no, assuming the data as reported is verifiable and accurate from the Atlantic Monthly source.

• Real estate 11.0
• Financial services 6.4
• Health care 6.3
• Construction 5.4
• Discrete manufacturing 5.2
• Transportation 3.9
• Internet 3.4
• Education 3.0
• Communication 3.0
• Agriculture 2.2
• Utilities 2.1
• Mining 1.7

Rhody...

 

[WhoWee]

The $8 Trillion Internet: McKinsey's Bold Attempt to Measure the http://www.theatlantic.com/business...e-e-conomy/247963/?google_editors_picks=true"


If internet were a sector here's where it would fall as a percentage of total GDP, 2009
Interesting, no, assuming the data as reported is verifiable and accurate from the Atlantic Monthly source.

• Real estate 11.0
• Financial services 6.4
• Health care 6.3
• Construction 5.4
• Discrete manufacturing 5.2
• Transportation 3.9
• Internet 3.4
• education 3.0
• Communication 3.0
• Agriculture 2.2
• Utilities 2.1
• Mining 1.7

Rhody...

I have to wonder how much of the commerce on your list was accounted for in this internet calculation?

 

[rhody]

I have to wonder how much of the commerce on your list was accounted for in this internet calculation?

WhoWee,

No guarantees but I plan to contact their research department to see if they can provide me with the source of the reported data. Will see if they respond. It can be a hit or miss process, depends on whose inbox the request lands and how swamped they are. Will report if I hear anything.

Rhody...

 

[JonDE]

A little late, but the October jobs report was less then spectacular in some areas, but maybe slightly improved overall. Job growth for the month was 80k (less then 125k needed to keep up with population growth). but previous months were revised up 102k.
Personally I like to add the revised numbers into the current month i.e. 80k +102k = 182. Which is better then the 125k needed. I do this because, I can't go back in time to change how I felt about previous jobs reports (stupid relativity).
The other bright spot I see is that government layoffs is starting to trend downwards. This has been one tough spot for employment as the government sector has laid off around 500k people since the beginning of 2010.

 

[Astronuc]

Poll: 76 percent think economic structure is out of balance
http://news.yahoo.com/blogs/lookout/poll-76-percent-think-economic-structure-balance-155330346.html

Polls taken in recent weeks have suggested that the basic message of the Occupy Wall Street protesters--that too much of country's economic gains go to the very richest Americans, and too little to ordinary folks--is popular. And a new survey offers further evidence.

, but the solutions vary.

 

[WhoWee]

Poll: 76 percent think economic structure is out of balance
http://news.yahoo.com/blogs/lookout/poll-76-percent-think-economic-structure-balance-155330346.html

, but the solutions vary.

From the link - how many times have we heard the second half of this argument?

"The government should not provide financial aid to corporations and should not provide tax breaks to the rich.""

If the "tax break" allows a person or a company to deduct money (they actually spent) from revenues - it's hardly a break. It's more a fair accounting. Most poor people don't need tax breaks - do they? On the other hand, poor people do receive tax money - that's something of a "break" perhaps?

As for the financial aid to corporations - does that include "jobs Bills", stimulus spending, "green energy investments" by the Government, financial aid to attend private schools, research grants, etc.?

 

[rhody]

Here is a new twist: http://online.wsj.com/article/SB100...2001207017044.html?google_editors_picks=true"

The advisers' pitch: For a lump-sum amount, investors could purchase pieces of the pensions—offered up by pensioners wanting instant cash in exchange for their future monthly checks—that could yield them 6% or 7% a year. The retiree would sign a contract pledging to hand over part of each month's check for a specific number of years.

The burgeoning business of investing in someone else's pension has never been easier—or more controversial and risky.

Does anyone want to jump in here ? What if the person repaying the debt has his pension go south through no fault of his own, where does that put the institution holding the note ? And the person getting the one time payment is not much better off either, giving up more than half his pension for the one time payout. Looks like legal Loan Sharking to me.

For some pension recipients, the deals seem like the way out of a financial crisis. Joseph Serina, a metal-fabrication worker who spent 21 years in the Navy, received $57,450 three years ago from a group of investors in return for promising them $125,280 in pension payments over eight years.

The difference of $67,830 is paid to investors as interest payments and as fees to the financial arrangers.

Rhody...

 

[WhoWee]

Here is a new twist: http://online.wsj.com/article/SB100...2001207017044.html?google_editors_picks=true"

Does anyone want to jump in here ? What if the person repaying the debt has his pension go south through no fault of his own, where does that put the institution holding the note ? And the person getting the one time payment is not much better off either, giving up more than half his pension for the one time payout. Looks like legal Loan Sharking to me.


Rhody...

Putting my insurance hat on - I have to wonder if they required a physical exam and access to his medical records?

 

[rhody]

Putting my insurance hat on - I have to wonder if they required a physical exam and access to his medical records?

Yep, that is one angle I failed to forsee. Your post reminds me of a story of a friend of mine who bought a house that had been abandoned by its previous owner who was a doctor who had incurable cancer. He went to a bank, took out the biggest home loan he could manage, and then disappeared and was never seen from again. Leaving the bank holding the bag.

Rhody...

 

[rhody]

http://moneyland.time.com/2011/11/21/nine-jobs-of-the-near-future/?iid=pf-article-latest"

• Precision Toolmaker
• Genetic Counselor
• Elder Care Worker
• Patent Lawyer
• Cyber Security Specialist
• Vertical Farmer (roof-top farms cropping up in urban areas)
• Statistician
• Underwater Welder
• Sustainability Professional

My guess is that the three items listed highlighted in blue above do not have matching college curriculum to prepare students for these jobs. I am sure there will be many more jobs created by changing demand in our rapidly changing times. This is an example of how fast paced our needs will be in the fuiture. The challenge as I see it is to develop strategies into our education system to deal with it. As always, the leaders in these emerging job categories will be bright forward thinking entrapaneurs (people like Bill Gates, the late Steve Jobs) who will lead the way without needing formal training to do so.

Rhody...

 

[WhoWee]

http://moneyland.time.com/2011/11/21/nine-jobs-of-the-near-future/?iid=pf-article-latest"

• Precision Toolmaker
• Genetic Counselor
• Elder Care Worker
• Patent Lawyer
• Cyber Security Specialist
• Vertical Farmer (roof-top farms cropping up in urban areas)
• Statistician
• Underwater Welder
• Sustainability Professional

My guess is that the three items listed highlighted in blue above do not have matching college curriculum to prepare students for these jobs. I am sure there will be many more jobs created by changing demand in our rapidly changing times. This is an example of how fast paced our needs will be in the fuiture. The challenge as I see it is to develop strategies into our education system to deal with it. As always, the leaders in these emerging job categories will be bright forward thinking entrapaneurs (people like Bill Gates, the late Steve Jobs) who will lead the way without needing formal training to do so.

Rhody...

I have a friend that's doing very well developing green rooftops. He has a method of sealing the roof and covering with multiple layers to create a working eco-system. His specialty is tall buildings (not certain of the limits of the pumping equipment).

It only makes sense this activity would create a need for "Vertical Farmers".

 

[rhody]

Sigh... as if we needed to be reminded why Congress's approval rating is 9%.

The 5 Biggest Failures of the 112th Congress

• The Supercommittee
• The FAA Shutdown
• The Near-Shutdown
• The Debt-Limit Stalemate
• Nominations

If the 113th Congress was a Shakespeare character, it would be Hamlet. Perhaps, on one of their April night-trips to the White House, where they negotiated around a probable government shutdown, John Boehner and Harry Reid saw the ghosts of Reagan and FDR, and were spooked.

Rhody...

 

[rhody]

WSJ Article: European debt crisis in eight graphs

The place to start with the European debt crisis is, well, with European debt. Put simply, the crisis in the euro zone is that the market doesn’t trust that Greece, Italy, Spain, Ireland and Portugal can pay back their debts, and so they don’t want to lend them more money except at exorbitant rates.

With the US economy inextricably linked to Europe, negative effects on us as a result of their debt crisis can only slow our economic recovery.

Rhody...

 

[lisab]

WSJ Article: European debt crisis in eight graphs

With the US economy inextricably linked to Europe, negative effects on us as a result of their debt crisis can only slow our economic recovery.

Rhody...

Great link, Rhody. The explanation of why Germany has done so well is really good, I think:

Typically, as a developed country becomes more productive and its exports become more popular, its currency appreciates, which makes its exports more expensive, and less popular. Conversely, when weaker countries see their economies fall apart, their currency depreciates, and that makes their exports cheaper and helps them recover.

But Germany’s currency hasn’t appreciated very much, because it’s tied to the euro, which is dragged down by the weak economies in southern Europe. And the southern European countries haven’t seen their currency depreciate very much, because they’re tied to the euro, which is propped up by stronger economies like Germany. The net result has been a big, artificial boost for Germany’s export sector, and a big obstacle to recover for much of the rest of Europe.

Also the graphs showing the exposure of French banks to Italian and Greek bonds are surprising.

 

[rhody]

That must be the reason I have engineering blood running through my veins, Lisa, when the economies of the major European countries can be described in a few crisp precisely worded sentences or paragraphs, exposing the big picture along with graphs of supporting data to back their claims, I am impressed. IMHO, the WSJ researchers (Ezra Klein and Sarah Kliff) did a good job with this story.

Rhody...

 

[mheslep]

... IMHO, the WSJ researchers (Ezra Klein and Sarah Kliff) did a good job with this story.

Rhody...

That's the Washington Post, not the Wall Street Journal.

 

[rhody]

That's the Washington Post, not the Wall Street Journal.

Yes, you are correct, I hope Ezra Klein and Sarah Kliff of the Washington Post can forgive me. Rhody face palms... knocks head against wall.

Rhody...

 

[MarcoD]

WSJ Article: European debt crisis in eight graphs

With the US economy inextricably linked to Europe, negative effects on us as a result of their debt crisis can only slow our economic recovery.

Rhody...

Personally, I agree with the analysis but not the conclusions. We have a fiscal union with fiscal ramifications for those who spend too much, that's exactly what the markets are doing now. There isn't even much need to change that, the markets were just late in understanding how the Eurozone system works. Second, we have stimulus funds for weaker economies.

Exposure and stuff is nice, but that's like studying the exposure of New York/Wall Street with respect to Michigan. It doesn't say a lot. (Okay, the exposures are real, the system might collapse that way, but that's about it.)

The only, but real, risk is that the whole system explodes; i.e., the Euro becomes worthless because no government bonds are trusted anymore. That's about it.

 

[SixNein]

WSJ Article: European debt crisis in eight graphs

With the US economy inextricably linked to Europe, negative effects on us as a result of their debt crisis can only slow our economic recovery.

Rhody...

I would wager it has already contributed greatly to our weak recovery.

 

[MarcoD]

I would wager it has already contributed greatly to our weak recovery.

And I would say that if anybody is to blame it is Wall Street and the (resulting) cheap borrowing costs in Europe. Seriously, the collapse of the housing bubble in the US left a debt hole partly owned by Europe, and that debt hole exploded because people got scared and withdrew funding. Let's guesstimate that on about 1-2 trillion. The whole problem in Europe now is the result of some debt-ridden governments -that's their own fault- and banks -same idiots here- trying to fix a debt hole without sufficient funds. The money is gone, and some people in Wall Street now must be exorbitantly rich.

No offense meant. It's not a blame game, it's just a US investment which went wrong.

(The Greeks rigged the books, so that's a different story, but I do feel a bit sorry for Italy. If money would have remained cheap, they could have gotten through with structural reforms (granted, not under Berlusconi). But the increase in costs of money, and a probable capital flight from that nation, means that they're stuck in a hole, maybe for decades.
And I wonder what percentage of pension funds evaporated in my own country because of the debt hole.)

 

[MarcoD]

And on a more serious note. The US is on a spending spree. To fund that, they borrow internationally, also from Europe, and spend it on oil and Chinese goods and assets.

Personally, I would prohibit any US funding from European side, since it now has become apparent that it is just a fine manner of giving money away. So I am not against decoupling the US and European economy, and I wasn't that in favor of the latest move of the national banks to stimulate international dollar transfer.

 

[turbo]

The major problem in the US is Wall Street. They are practically unregulated, and were allowed to bundle crap into derivatives, sell them to customers AND bet against their own customers, knowing that the derivatives would fail. Why aren't the major players in jail? Even country-club jails?

The second (and perhaps more damaging) problem is the Fed. When the cry-babies on Wall Street threaten to hold their breath, the Fed lowers interest rates again and again. This free money means that the investment banks can afford to pay almost zero interest, even on very large, stable accounts. Greenspan and Bernanke have a huge responsibility for the current debt crisis because they created it by driving wealth to the wealthy. Cheap borrowing came at the expense of the US taxpayers, for the benefit of the big banks and investment firms. And it is continuing. Is the Fed ever going to start charging reasonable interest rates for the borrowing of our money? Probably not, unless the taxpayers demand it.

 

[MarcoD]

The major problem in the US is Wall Street. They are practically unregulated, and were allowed to bundle crap into derivatives, sell them to customers AND bet against their own customers, knowing that the derivatives would fail. Why aren't the major players in jail? Even country-club jails?

God, yeah. I have nothing against the US, or the US public, but I think by now you can safely state that Wall Street managed to 'steal' money from literally everyone. There is a note that you can't blame them for the US trade deficit, so it was bound to happen, but the credit crunch was rather extravagant.

(And, contrary to what you think, I guess that the Fed keeps interest low to sponsor the trade deficit. I mean, cheap money means you got more to spend, right?)

(I mean, no offense. But if you really abstract from most details, then the US spends money in, say, China, and for every ten dollars maybe borrows eight dollars from China and two dollars from Europe. It can't pay back, so where will it default on? You can engineer it, or let it happen, but it will always default, also on Europe. It's just a law of nature that Europe can't invest in the US.)

(Ah well, editing again since I guess I should say I have no idea anyway since one would need to check the real numbers. Europe may be bankrupt, a part of Europe may be bankrupt, the US may be bankrupt, and nothing may have happened. Or maybe we're all filthy rich. No idea.)

 

[mheslep]

The major problem in the US is Wall Street.

... is the federal government

They are practically unregulated,

http://www.realclearpolitics.com/video/2011/09/20/ceo_tells_congress_he_was_fined_for_hiring_too_many_people.html.

In my own business, securities regulations have prohibited me from hiring brokers for more than three years. I was even fined fifteen thousand dollar expressly for hiring too many brokers in 2008. In the process I incurred more than $500,000 in legal bills to mitigate a more severe regulatory outcome as a result of hiring too many workers. I have also been prohibited from opening up additional offices. I had a major expansion plan that would have resulted in my creating hundreds of additional jobs. Regulations have forced me to put those jobs on hold.

and were allowed to bundle crap into derivatives,

Fannie and Freddie, created by the federal government, invented mortgage bundling. They still owe taxpayers $130B (unlike the WS banks who paid off), and after being seized by the government still pay themselves huge bonuses as effective government employees.

sell them to customers AND bet against their own customers, knowing that the derivatives would fail. Why aren't the major players in jail? Even country-club jails?

So you don't like them, whoever they may be. But before you throw people in jail, exactly what law are you saying was broken? I bought some stock the other day. It went down. I'd like to use the Turbo law to throw the CEO in jail.

 

[MarcoD]

On a side note. I decided that economics is essentially the same as women's studies. It is incredibly interesting and academically pleasing, you can study it for the rest of your life, the topic behaves whimsical and erratic, and at the end of your life, you end up concluding that your understanding was less than you started. But pleasing still.

 

[rhody]

exactly [/I] what law are you saying was broken? I bought some stock the other day. It went down.

Sixty Minutes had a segment on this featuring two whistleblowers, who reported that the way mortgages were being doctored, and reported were of dubious quality and a high percentage of their loans fell into this category, if I remember correctly this was somewhere above 50%. The problem was systemic and across the company's. The Sarbanes–Oxley Act of 2002 was supposed to address this.

In a nutshell, the CEO/CFO's of major financial institutions with over 500 million in assets were to sign a document at physcal year end that said all financial statements under their scrutiny were valid and accurate. If fraud could be proven, and they were tried and convicted they could be subject to:

(a) Certification of Periodic Financial Reports.— Each periodic report containing financial statements filed by an issuer with the Securities Exchange Commission pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m (a) or 78o (d)) shall be accompanied bySection 802(a) of the SOX a written statement by the chief executive officer and chief financial officer (or equivalent thereof) of the issuer.

(b) Content.— The statement required under subsection (a) shall certify that the periodic report containing the financial statements fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of [1] 1934 (15 U.S.C. 78m or 78o (d)) and that information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of the issuer.

(c) Criminal Penalties.— Whoever— (1) certifies any statement as set forth in subsections (a) and (b) of this section knowing that the periodic report accompanying the statement does not comport with all the requirements set forth in this section shall be fined not more than $1,000,000 or imprisoned not more than 10 years, or both; or

(2) willfully certifies any statement as set forth in subsections (a) and (b) of this section knowing that the periodic report accompanying the statement does not comport with all the requirements set forth in this section shall be fined not more than $5,000,000, or imprisoned not more than 20 years, or both.

You have to watch the Sixty Minutes program to get the full picture, but to date the Securities and Exchange Commission (SEC) the oversight branch and the US Justice Department, the judicial branch have not prosecuted or convicted any of the major banks involved in the Securities debacle, with exception of two people, one of which, Richard Scrushy is described below.

The laws are in place, and there appears to be substantial evidence to investigate, but as you can see from the fines and the periods for confinement have not been dealt to anyone accused and convicted of cooking the books at the expense of the shareholders. The financial penalty and incarceration time in proportion to the the amount of harm done to our economy and million's of people's lives seems out of whack to me.

One of the guy's who was prosecuted and convicted under Sarbanes–Oxley, Richard Marin Scrushy
recieved this penalty for his crimes. His criminal trial was in Montgomery, Alabama.

On June 28, 2007, Scrushy was sentenced to six years and ten months in a federal prison, ordered to pay $267,000 in restitution to United Way of Alabama, three years probation, and a fine of $150,000.[43] Scrushy is also expected to personally pay for his time in prison and perform 500 hours of community service

His civil trial was in Birmingham, Alabama.

Scrushy continued to assign blame to his subordinates and maintain that he did nothing wrong.[55] Closing arguments were heard in the trial on May 27, 2009.[56] On June 18, 2009, Judge Horn ordered Scrushy to pay $2.87 billion in damages.[57] Judge Horn stated, "Scrushy knew of and actively participated in the fraud" and referred to Scrushy as the "CEO of the fraud".[11] Scrushy is expected to appeal the judgment

After review of what Scrushy was ordered to serve and pay for his crimes (plea bargained down substantially from the maximum penalty) it hardly seems fair does it ? Do you think his punishments will deter others from continuing the practice of misreporting financial statements as a CFO ? Personally, I doubt it, the reward is too high and the risk and punishment too low. I might add as a final tribute the the Sixty Minute Investigators, they report that the Justice Department has for unknown reasons been unwilling to aggressively pursue other CEO's and CFO's of major US financial institutions.

Rhody...