It’s the shortest day of the year today, and as we look ahead to 2014 there are reasons for a more positive outlook about the economy in America. There are indication that politically the country may be moving toward some solutions that will benefit Americans who need most, so they can be more productive. There are also reasons to believe that certain valleys have been passed such as in housing making the future more bright.
First, a look at a few economic indicators...
Housing Starts are Up - The number of housing starts has been one of the most dependable measures of economic recovery, and looking at the charts there is a near obvious observation that starts must return to previous averages, and when they do that means jobs and gdp increases. We may very well be getting a real uptick now.
LA Port Traffic up Year over Year - Not just inbound traffic but outbound is up even more.
Some Jobs Coming Back - With technological improvement that make worker productivity even higher, and reduced transportation costs of goods, there have been some companies seeing a benefit to bringing jobs back.
GDP up more than predicted - the US is growing faster than predicted and that means there is more likelihood of increasing investment going forward as there is more confidence in the US economy
On the political side, there are some good developments as well…
Budget Deal - For the first time in a long time the House passed a budget with little fanfare, and there seems to be an increasing feeling in the Republican party that they have lost the ability to attract new constituents. As a result there is a push back toward the center and away from some of the more radical elements, as seen in Boehner’s recent remarks.
While not quite on the national agenda yet, there are multiple efforts throughout the country to increase the minimum wage. Many state houses have already set minimum wages above the federal rate, and it seems likely that others will follow. There is growing evidence that at least in the current environment that raising the minimum wage will increase jobs, reduce the deficit, and grow the economy.
In the area of energy, the increase in shale production, and the move toward the United States to actually make more oil than they use is huge in the short term. This may not be maintainable, but it helps insure against shocks to the economy such as a conflict in the Middle East. It also helps keep the price of oil lower, which especially helps the middle class at the gas pump.
In the area of healthcare, the new law will especially help those in the Lower Middle Class. With less expensive healthcare costs, they can get the help they need and return to work, making them more productive. So often people on a minimum wage are one step away from homelessness or a similar fate, and a simple illness can push them over the edge. This law helps those that are a little below average in the middle class, and should strengthen the middle class as a whole in the years ahead.
While more of an addendum than central point, I think the legalization of cannabis could have far reaching effects that will reduce the deficit, increase productivity, and strengthen the governments.
The World is changing fast but the future is bright! Hopefully, 2014 will be the beginning of less political division accompanied by a renewed feeling that the country is ready to move forward again.
The Dysfunctional Relationship between Corporations and Governments
Corporate lobbyists pressure governments to keep interest rates low. This means it is less attractive to keep money in savings accounts or government bonds. As a result, money is instead invested in stocks and other equities where the return is higher. The investment in equities helps pump money into corporations driving up stock prices, and fueling bonuses for CEOs.
Corporate lobbyists pressure governments to impose austerity. As governments employ fewer workers it it puts downward pressure on wages, especially when unemployment is already high. Through lower wages, corporations are able to have better balance sheets, once again driving up stock prices, which insures the CEO will get paid well.
Corporate lobbyists pressure governments have few rules with regard to benefits and wages. Again, the reduced need to pay benefits means there is more money to be applied to the overall balance sheet, more profits, better CEO pay.
As wages have remained stagnant and unemployment as increased, productivity levels have declined. Still five years after the Great Recession started, productivity in the US is still 2% below the previous peak (see graphs). This situation is even worse in Southern Europe where unemployment the highest in recent recorded history. And both in Europe (more on Europe) and the United States long term unemployment is the highest in many decades.
The lack of workers doing something worthwhile combined with staying unemployed is a trend that makes future prospects more bleak. Workers who remain out of the workforce for an extended period have a much lower chance of returning to the workforce.
How this Creates a Self Fulfilling Implosion
When there are fewer workers, getting paid less, receiving fewer benefits, there is going to be less consumption in the economy. Everyone is forced into a “savings” philosophy. The fear of losing a job, of getting sick and having no coverage, of using up savings... this all adds up to people trying to spend as little as possible.
When people spend as little as possible, less money goes to back into the system. Most importantly, less money flows back to the very corporations that were trying to have great balance sheets to please investors so their CEOs would profit.
When less money flows into this already dysfunctional system, the short term solution is to do even more of the same. This includes creating even fewer good paying jobs, and lobbying even more for austerity. Laying off workers or sending jobs overseas help maintain the balance sheets a little longer.
But with no consumption, stagnant wages, high unemployment, and low productivity, there comes a point when people realize the current system is making things worse, and change is needed.
When Will it Happen?
This is the most difficult question, but one place to look is the next recession. With Europe already struggling with 12% unemployment that has yet to peak, one has to wonder how well it can withstand another recession. With the United States struggling to create jobs that pay well, what will happen when a few more of those jobs are lost?
And with so much money being put into equities now, what happens when a couple of corporations suddenly have a bad year?
It Can Get Better
The World is undergoing dramatic changes right now, and faster than ever before. It’s not all bad. We are in a time when corporations have more influence than governments, and they are leading the way, often to some exciting technologies and achievements. We may soon find that dependency on Middle East oil is a thing of the past. We soon have self driving cars or even the Hyperloop (an Elon Musk project). And many of these technologies may create jobs or make the world as a whole more stable.
First, we have some dysfunction to work out and it may not be pretty, but then as we always have done, we’ll find a better way. That better way must surely involve a change in the way we value corporate lobbying and governance.
As we look at the various nations that have high debt to gdp ratios, the one that can't be easily overlooked is Japan. As you can see in the chart below, Japan has a ratio of about 230%. Japan has been in what many call a liquidity trap for a long time. They would try to cut costs only to find they are worse off. They would try to add stimulus, but the benefit would only be temporary and they would fall behind even more
Thanks to curiouscat.com for offering the above image under the Creative Commons license.
Ron Finley has done some amazing things to help change the way people think about food in South Central LA, and area that has been mired by poverty and gangs in the past. As he puts it, growing your own food is money in your pocket. Not only has he pulled together hundreds of volunteers to help plant farms next to sidewalks and on vacant lots, he encourages people to pick and eat it for free. Get ready for an inspiring Ted Talk!