Quick Summary of Underlying Economic Forces

The current state of the U.S. economy is one of growing income disparity and high unemployment. The underlying forces responsible for this situation are:

• Globalization
  
• Reaganism (ownership society)
  

Globalization has put U.S. labor in competition with much lower cost labor around the world, resulting in higher profits, lower wages, and higher unemployment in the U.S. Government efforts to mitigate these harsh effects have been prevented by the small government philosophy which took hold under President Reagan.

The economy is increasingly unstable as the small government philosophy prohibits government action to address issues such as:

1. Financial regulation
   
2. Exorbitant health care costs
   
3. Energy dependence
   
4. Environmental safety
   
5. Unemployment
   
6. Stagnant wages
   
7. Inadequate social services and safety net
   
8. Chronically overpriced assets

Chronically overpriced assets result from the greater pool of investment funds that result from the higher profits enabled by globalization, lack of regulation, and tax policies that provide favorable treatment of investment income. Economic growth, however, is limited due to the stagnation of wage dependent consumption. So more money is available for investment, while there are less productive investment opportunities. As a result, there have been repeated asset bubbles (dotcom, housing, commodities), which ultimately collapse.

In recent years, the Republican party has been holding the economy hostage. They have successfully used brinkmanship to continue the Reaganist policies which reduce government power and stop the government from addressing issues such as those listed above. While Democrats had some limited success in passing health care reform and financial regulation, the Republicans won politically and are now in a stronger position to block government action on these and other issues.

Other countries, not hindered by the small government philosophy that plagues the U.S., have been better able to deal with national issues. Health care is the prime example, with the U.S. having the highest cost and least effective system of any developed nation. With regard to employment and economic growth, the nations of east Asia generally follow mercantilist national policies which have resulted in more manufacturing jobs and trade surpluses with the U.S. European countries have addressed their energy supply issues more effectively through high taxes on gasoline and greater commitment to alternative energy sources.

Prognosis for the Economy and Political Landscape

We'll see what happens with the economy and the 2012 presidential election.

With regard to the payroll tax cut, I like that, as I'm not worried about the deficit. Most people don't understand that the so-called national debt is not really debt, and won't have to be paid back with higher taxes. U.S. Treasury bonds are more similar to cash than to debt. Treasury bonds pay interest and cannot be directly used as currency, but they are the most liquid of investments and are readily convertible to currency. The Federal Reserve exchanges Treasuries for cash, and vice versa, all the time. That is not really printing money, since both Treasuries and reserves are money for all practical purposes. You may have heard of Quantitative Easing 2 (QE2) which is an ongoing program in which the Fed is buying $600 billion of relatively long term Treasury bonds using cash reserves created out of thin air. This is merely exchanging one form of money for another and is basically a nothing burger.

The reduction in the payroll tax (along with the other tax reductions) does increase the government deficit and the net savings in the private sector, since by accounting identity the government deficit equals the private sector surplus. This is generally a good thing when unemployment is high and the private sector needs a boost. Since we now have an unprecedented 25 million people underemployed, continuing government stimulus is desperately needed. Given the widespread misunderstanding of how the monetary system works, and the Republicans' successful use of deficit hysteria to subvert needed governmental action and thereby torpedo the Obama Administration, I fear that the Obama Administration's economic program will continue to fall short. We'll see.

Here's just one example of our current economic problems, from CNN Money.com --

Las Vegas home prices won't return to their pre-recession peak until after 2032; in Phoenix, the rebound will take until 2034; and Salinas, Calif., and Naples, Fla., won't come back until sometime around 2038...
For non-bubble markets, the damage was usually much less severe. Cities such as Pittsburgh, Syracuse and Rochester, N.Y., Clarksville, Tenn., and Spokane, Wash. will be back to their peaks within three years or so, Chen said.
Many of the larger, older metro areas that saw moderate or even fairly high home price appreciation during the boom years will recover faster than the bubble markets but slower than the steady-eddie ones.
Washington will return to peak by around 2025, Chen said. Boston and Chicago will recover by about 2019, and New York by 2021.

Houses are frequently used as collateral for loans. Thus, high housing values resulted in a tremendously increased money supply in recent years, and this money source is going into reverse as housing prices fall. The recent tax cuts, including the payroll tax cut, will not be large enough to counteract the contraction of the money supply resulting from the collapse of the housing market and the larger contraction in consumer credit.

On a more upbeat note, we all seem to agree that the Republicans are living on borrowed time, as they are obviously hypocritical and ineffective at governing. Whether Obama gets the upper hand in the next two years, or the Democrats are forced to dig deeper while enduring another Republican presidency, the eventual outcome will hopefully be a move back to the center, and restored sanity in the national discourse...

Are You Ready for Four More Gloomy Years?

Here's my forecast. It's gloomy for the short run (next four years), but more optimistic for the longer term. The list below starts with observations about the recent past and present, then moves into the future.

1. Rubinites are good guys.
   
   I'm referring to the followers of Robert Rubin, Treasury Secretary in the Clinton Administration. Clinton was very successful, thanks in part to Rubin and company. Larry Summers was another prominent Democratic economist in this era.
   
   Barack Obama has relied upon Rubinites to manage the economy thus far in his administration. Larry Summers was his chief economic adviser, before resigning recently. The most likely candidate to succeed Summers is Gene Sperling, who held the position of director of the National Economic Council during the Clinton Administration. Sperling is a good guy, but his experience and views seem to be in the Rubinite mold.
   
   The previous director of the Office of Management and Budget (OMB) in the Obama Administration, Peter Orszag, recently left the Obama team to become Vice Chairman of Global Banking at Citigroup. The new director of OMB is Jacob Lew. Lew previously served as managing director and chief operating officer of Citi Global Wealth Management and then Citi Alternative Investments (CAI). Did I mention that Robert Rubin worked at Citigroup, including a stint as Chairman, after leaving the Clinton Administration?
   
   Obama's newly appointed chief of staff, Bill Daley, served as U.S. Secretary of Commerce from 1997 to 2000 and is a lawyer and business executive. Currently, he is serving on the Executive Committee of J.P. Morgan Chase & Co.
   
   These are some of the good guys on Wall St. Other Wall Street players are rabid and greedy Republicans (but I repeat myself). The Rubinites are wealthy, but want to use their resources to level the playing field, not only within the U.S. but around the world. That may be an exaggeration, but there is no doubt that there is big difference between the Democrats and Republicans on Wall Street.


2. The Rubinites have been wrong on a couple of the most important economic issues of our time.
   
   
   
   1. They understate the role that the federal government should play in addressing our economic problems. They worry excessively about the federal budget deficit.
      
   2. They have clearly misjudged the harm that would be done to the American middle class by opening up our economy to competition from countries such as China. Their vision of a fully employed knowledge-based economy is proving illusory.
      
   3. They failed to recognize the housing and finance bubbles that were propping up the U.S. economy during the aughts. In fact, they were participants in the financial bubble, though certainly not among the worst offenders.
      
   
   
3. Obama is in trouble, because of his excessive reliance on the Rubinites. Under Obama's leadership, the Democrats suffered devasting defeats in the 2010 midterm elections.
   
4. The Republicans are in even worse trouble. The Republicans are even more reliant on erroneous economic philosophies, and are less flexible. The Republicans were thrashed in 2008 for good reason, but show no signs of having learned any lessons and are headed even further in the wrong direction. Republicans are even more wedded to the status quo than are Democrats, and the public is becoming increasingly dissatisfied with that status quo.
   
5. The economy remains sick and the stock market will relapse in 2012, if not before. Recent improvements are cosmetic. Economic stagnation in the aughts was masked by housing and finance bubbles. Those bubbles have popped and economic activity has fallen back considerably, with no replacment engines of economic growth in sight.
   
6. The presidential election of 2012 will result in a Pyrrhic victory for the Republicans. Obama will be hobbled by the same general dissatisfaction with the status quo that clobbered the Democrats in 2010. Many progressives will jump ship and support a primary challenge, or just refuse to work for Obama's reelection. The Republican nominee will also be dogged by populist opposition from within his own party. Huckabee will probably be the most popular Republican, but the GOP runs on money and a corporatist such as Romney will probably get the nomination and win the election.
   
7. The economy will slip into a depression as Republican policies leave tens of millions jobless, while deflation becomes entrenched.
   
8. By 2014, Democratic progressives will be ascendant, with the Rubinomics practiced by Obama thoroughly discredited.
   
9. Progressive Dems will rack up big victories in 2014 and 2016, and strong government policies will lead the nation out of depression in the latter teens...