How To End The Great Recession

[aa3]

That’s because the real problem has to do with the structure of the economy, not the business cycle. No booster rocket can work unless consumers are able, at some point, to keep the economy moving on their own. But consumers no longer have the purchasing power to buy the goods and services they produce as workers; for some time now, their means haven’t kept up with what the growing economy could and should have been able to provide them.

This crisis began decades ago when a new wave of technology — things like satellite communications, container ships, computers and eventually the Internet — made it cheaper for American employers to use low-wage labor abroad or labor-replacing software here at home than to continue paying the typical worker a middle-class wage. Even though the American economy kept growing, hourly wages flattened. The median male worker earns less today, adjusted for inflation, than he did 30 years ago.

Full article at the New York Times.

http://www.nytimes.com/2010/09/03/opinion/03reich.html?_r=2&pagewanted=1

[Tired of Waiting]

Full article at the New York Times.

http://www.nytimes.com/2010/09/03/opinion/03reich.html?_r=2&pagewanted=1

Like many Keynesians, his mistake is to assume a closed economy (without imports/exports). Countries that run huge international deficits in these past years, and have accumulated a huge national debt, such as the USA and the UK, living beyond their means, will have to reduce theirs domestic consumption, to rebalance their international account.

Edit: I am not saying this will be easy, but unfortunately, there is no alternative. Running more fiscal deficits and increasing even further the debts will just make things even worse in the future. Printing more money will devalue the currency, bringing inflation and high interest rates.

Edited September 7, 2010 by Tired of Waiting

[aa3]

It looks like the highest level liberal thinkers in America are starting to put the pieces together. As myself and some others have done debating on this forum. There has been prodigious increases in productivity since the 1970's but your average man is actually making less money adjusted for inflation today than in 1970.

A fundamental question becomes how does the worker buy the new level of production? He can't on his low wages. It only kept up because of an ever growing credit bubble, which eventually had to blow up. Now that it blew up consumption falls to wage levels, which is far below production. Why did this divergence happen? Basically new labour replacing technologies, women entering the workforce and new trade policies meant that workers lost their bargaining power. But before the problem can be solved, it has to be identified. And it seems it is starting to be identified by some policy makers.

Robert Reich gives one example. Payroll taxes should be waived on the first 20k of income. And offset by increasing taxes on the highest earners.

[R K]

It can only be ended when China, Japan and Germany change their business model.

China in particular must stop recycling their capital into the US. If they refuse then the US must impose draconian trade sanctions to force them to play fair.

China won't/can't change fast enough 'cause they will put tens of millions out of work by so doing and have civil war on their hands.

The deficits are simply an accounting result of the surplus countries actions and thus there is no way out until trade is rebalanced.

Whingeing on and on endlessly about US (and other western) consumers is pathetically ignorant. They have no choice. That's the dangerous game China is playing.

Robert Reich gives one example. Payroll taxes should be waived on the first 20k of income. And offset by increasing taxes on the highest earners.

Yes they should. But that's still got nothing whatsoever to do with the cause, which is China's business model. Twiddling around with US taxes doesn't change that.

Stop China - end the problem.

Edited September 7, 2010 by Frank Sidebottom

[aa3]

Like many Keynesians, his mistake is to assume a closed economy (without imports/exports). Countries that run huge international deficits in these past years, and have accumulated a huge national debt, such as the USA and the UK, living beyond their means, will have to reduce theirs domestic consumption, to rebalance their international account.

Edit: I am not saying this will be easy, but unfortunately, there is no alternative. Running more fiscal deficits and increasing even further the debts will just make things even worse in the future. Printing more money will devalue the currency, bringing inflation and high interest rates.

I know this is going to sound strange but I think even the USA and the UK have been living below their means. Like millions of workers have been laid off of real goods producing industries and basically idled.. or put to work at low value jobs. Because the consumption isn't there to match the production.

A lot of people in the 1930's thought austerity was making up for the over-consumption of the 1920's. But few imagined the 1920's was just a taste of things to come in the following decades, and that consumption would explode upwards.

[DeepLurker]

It can only be ended when China, Japan and Germany change their business model.

China in particular must stop recycling their capital into the US. If they refuse then the US must impose draconian trade sanctions to force them to play fair.

China won't/can't change fast enough 'cause they will put tens of millions out of work by so doing and have civil war on their hands.

The deficits are simply an accounting result of the surplus countries actions and thus there is no way out until trade is rebalanced.

Whingeing on and on endlessly about US (and other western) consumers is pathetically ignorant. They have no choice. That's the dangerous game China is playing.

Yes they should. But that's still got nothing whatsoever to do with the cause, which is China's business model. Twiddling around with US taxes doesn't change that.

Stop China - end the problem.

Why is China deliberately keeping itself a low-wage workshop? I don't buy your explanation about "putting tens of millions out of work" - other SE Asian countries (Japan, Taiwan, South Korea) all successfully switched from low-wage to high-wage economies while still keeping very high levels of employment. The Chinese aren't idiots (far from it), no reason why they can't imitate their neighbours.

So what is the real reason?

[Gone baby gone]

So what is the real reason?

A population of 1.3billion that means life is cheap?

[aa3]

Chinese leaders are pushing very hard as we speak to raise wages in their nation. Their leaders know the problem and in high level speeches have talked about it, and how they plan on dealing with it. They know the only future driver of the Chinese economy is internal Chinese consumption. They have taken the export model as far as it can realistically go.. saturating the world.

But I think you make a good point, as part of the strategy to raise wages in America and the UK and similiar industrial nations.. they should not wait around for the Chinese to implement these new plans. They should not be afraid to slap tarriffs on Chinese goods until balance is restored in trade.

[Dorkins]

I know this is going to sound strange but I think even the USA and the UK have been living below their means. Like millions of workers have been laid off of real goods producing industries and basically idled.. or put to work at low value jobs. Because the consumption isn't there to match the production.

A lot of people in the 1930's thought austerity was making up for the over-consumption of the 1920's. But few imagined the 1920's was just a taste of things to come in the following decades, and that consumption would explode upwards.

Yes, I absolutely agree with this. Given the UK's technological base, good infrastructure, stable political and legal systems, well built housing stock and so on we could be living much better than we are, for example keeping the same standard of living while working fewer hours. Unfortunately our economy is well below optimum because there is a huge amount of mispricing: councils are paying £5k a pop to have garage roofs refelted while otherwise profitable local businesses are going under due to high rates.

I think in 10 or 20 years when we are having a 60s-style renaissance people will be amazed by how productive UK plc can be when it's not struggling under the weight of greedy banksters and a bloated and inefficient state.

[Lord Lister]

Do you really think it is a good idea to get into a trade war with the western worlds banker? China just has to stop buying US treasuries and whats left of the US economy is finished, they decide to start liquidating and you have hyperinflation. China is now in a very good position to sustain growth (albeit with a period of setback while converting to internal markets) without the wests consumption. They are very strong in Africa and South America, own vast commoditie resources, and frankly are not far off being ready to cream the western world out of its position of dominance on the global stage. We need to tread carefully.

Chinese leaders are pushing very hard as we speak to raise wages in their nation. Their leaders know the problem and in high level speeches have talked about it, and how they plan on dealing with it. They know the only future driver of the Chinese economy is internal Chinese consumption. They have taken the export model as far as it can realistically go.. saturating the world.

But I think you make a good point, as part of the strategy to raise wages in America and the UK and similiar industrial nations.. they should not wait around for the Chinese to implement these new plans. They should not be afraid to slap tarriffs on Chinese goods until balance is restored in trade.

[Tired of Waiting]

I know this is going to sound strange but I think even the USA and the UK have been living below their means. (...)

That is what I meant. We have been importing and consuming more that what we could pay for with our exports. We bridged the difference with debt. Now we will have to pay back this debt.

And we didn't have to import so much, and take so much debt, just because someone offers us goods and credit. It was our own collective decision. The link between the government's macro economic policy and the people's individuals' decisions (to get into debt) was: interest rates - too low.

Sterling was also too high, making foreign imports cheaper, and our products and services more expensive.

It was our own fault. There is no point in trying to blame other countries for it. They just offered us credit and goods, and we accepted - like all these irresponsible borrowers we criticise so much in this forum. And we accepted it much more than most (all?) countries in the world.

The main causes were sterling too high, and interest rates too low.

[Tired of Waiting]

Do you really think it is a good idea to get into a trade war with the western worlds banker? China (...)

There is no need for a trade war. Just bring the government's deficit down to zero, and we will consume much less. A balanced fiscal policy, and tight monetary policy will take sterling and interest rates to a sustainable level.

[Lone_Twin]

It looks like the highest level liberal thinkers in America are starting to put the pieces together. As myself and some others have done debating on this forum. There has been prodigious increases in productivity since the 1970's but your average man is actually making less money adjusted for inflation today than in 1970.

A fundamental question becomes how does the worker buy the new level of production? He can't on his low wages. It only kept up because of an ever growing credit bubble, which eventually had to blow up. Now that it blew up consumption falls to wage levels, which is far below production. Why did this divergence happen? Basically new labour replacing technologies, women entering the workforce and new trade policies meant that workers lost their bargaining power. But before the problem can be solved, it has to be identified. And it seems it is starting to be identified by some policy makers.

Robert Reich gives one example. Payroll taxes should be waived on the first 20k of income. And offset by increasing taxes on the highest earners.

He affords it since due to the increase in production the goods and services will be cheaper. Real wealth has increased.

This is only a problem when you are accounting for wealth in a debt based tokens which have priced future productivity based on a compound markup on old prices.

Splurging more tokens into the world to try to force people to produce and consume more to make up for the excess of earlier tokens is about the stupidest thing you could do.

Edited September 7, 2010 by Lone_Twin

[Gone baby gone]

He affords it since due to the increase in production the goods and services will be cheaper. Real wealth has increased.

Doesn't work for things that cannot be made in Chindia though. Like land for example. Or fuel.

[Lone_Twin]

Doesn't work for things that cannot be made in Chindia though. Like land for example. Or fuel.

True, finite resources will be bid up in price. But Land usage is kept artifically constrained.

I could afford a few more pence on petrol if my mortgage was half the cost. (assuming land bought in a truely free market)

[Gone baby gone]

I could afford a few more pence on petrol if my mortgage was half the cost. (assuming land bought in a truely free market)

Ever since humans discovered weapons, there has never been and will never be a 'free' market.

[Lone_Twin]

Ever since humans discovered weapons, there has never been and will never be a 'free' market.

Not true but I don't want to rehash a load of old arguments.

Which poster are you "realy"? thats a recent screen name.

[Executive Sadman]

Increasing taxes on the rich? Good luck.

Overheard a doc on saying he was taking home £150k the other night whinging about paying more tax, talking of £150k not being much when youve 'got to' pay for school fees etc.

They think theyre hard done by, theyre gonna leave.

Where theyll go, i dont know. The rest of the west has the same problems, and i doubt China/india pays £150k a year to its quacks.

[Traktion]

It looks like the highest level liberal thinkers in America are starting to put the pieces together. As myself and some others have done debating on this forum. There has been prodigious increases in productivity since the 1970's but your average man is actually making less money adjusted for inflation today than in 1970.

A fundamental question becomes how does the worker buy the new level of production? He can't on his low wages. It only kept up because of an ever growing credit bubble, which eventually had to blow up. Now that it blew up consumption falls to wage levels, which is far below production. Why did this divergence happen? Basically new labour replacing technologies, women entering the workforce and new trade policies meant that workers lost their bargaining power. But before the problem can be solved, it has to be identified. And it seems it is starting to be identified by some policy makers.

Robert Reich gives one example. Payroll taxes should be waived on the first 20k of income. And offset by increasing taxes on the highest earners.

Sure, which is what a land value tax would be best here.

Why focus only on income being earned, when much of the wealth is already in just a few hands?

It can only be ended when China, Japan and Germany change their business model.

China in particular must stop recycling their capital into the US. If they refuse then the US must impose draconian trade sanctions to force them to play fair.

China won't/can't change fast enough 'cause they will put tens of millions out of work by so doing and have civil war on their hands.

The deficits are simply an accounting result of the surplus countries actions and thus there is no way out until trade is rebalanced.

Whingeing on and on endlessly about US (and other western) consumers is pathetically ignorant. They have no choice. That's the dangerous game China is playing.

Yes they should. But that's still got nothing whatsoever to do with the cause, which is China's business model. Twiddling around with US taxes doesn't change that.

Stop China - end the problem.

Deficits only occur when governments borrow more than they tax. Stop the feckin' borrowing and there is nowhere for foreign money to park itself!

It is the governments spending more than they taxed, while promising a land of milk and honey which caused these problems. They just kicked the can a few decades down the road, while winning a few votes, rather than facing up to the problems*.

While there may have been other investments which the developing world piled into, they should take a hair cut on these too. No investment is risk free and some are far from it.

EDIT: * The problems being that our growth would have to slow and we wouldn't be as rich relative to the developing world as we once were. We've been living in suspended disbelief for too long and we're now getting the wake up call.

Edited September 7, 2010 by Traktion

[Traktion]

Why is China deliberately keeping itself a low-wage workshop? I don't buy your explanation about "putting tens of millions out of work" - other SE Asian countries (Japan, Taiwan, South Korea) all successfully switched from low-wage to high-wage economies while still keeping very high levels of employment. The Chinese aren't idiots (far from it), no reason why they can't imitate their neighbours.

So what is the real reason?

Exactly.

Do you really think it is a good idea to get into a trade war with the western worlds banker? China just has to stop buying US treasuries and whats left of the US economy is finished, they decide to start liquidating and you have hyperinflation. China is now in a very good position to sustain growth (albeit with a period of setback while converting to internal markets) without the wests consumption. They are very strong in Africa and South America, own vast commoditie resources, and frankly are not far off being ready to cream the western world out of its position of dominance on the global stage. We need to tread carefully.

I think we're getting warmer...

If we start a trade war, China can flick us the Vs, then finish us off with a currency crisis, especially so for the US. It would hurt China, but it would completely screw over the US.

[alexw]

Do you really think it is a good idea to get into a trade war with the western worlds banker? China just has to stop buying US treasuries and whats left of the US economy is finished, they decide to start liquidating and you have hyperinflation. China is now in a very good position to sustain growth (albeit with a period of setback while converting to internal markets) without the wests consumption. They are very strong in Africa and South America, own vast commoditie resources, and frankly are not far off being ready to cream the western world out of its position of dominance on the global stage. We need to tread carefully.

History has shown that in a trade war in such a circumstance, its the mechantalistic export based economy that gets hammered far worse than the deficit one. This is due to the fact its easier to change a countries work habits, i.e. make more goods to consume, than it is to change its entire culture, i.e. to go from being cautious savers to extravagant spenders, especially in a period of rising unemployment due to loss of exports.

[Alan B'Stard MP]

China can flick us the Vs, then finish us off with a currency crisis, especially so for the US. It would hurt China, but it would completely screw over the US.

What if the US fosters an environment where gold and other metal derivatives are seen as the only viable trading currency...then proceed to default? They might still hold some trumps cards yet?

Edited September 7, 2010 by Alan B'Stard MP

[scepticus]

History has shown that in a trade war in such a circumstance, its the mechantalistic export based economy that gets hammered far worse than the deficit one. This is due to the fact its easier to change a countries work habits, i.e. make more goods to consume, than it is to change its entire culture, i.e. to go from being cautious savers to extravagant spenders, especially in a period of rising unemployment due to loss of exports.

quite. anyone who thinks china is the west's banker has been sold a big stinking lie.

bankers, BTW, both borrow and lend.

china just lends so by definition can't be the world's banker.

bankers take deposits.

[alexw]

Exactly.

I think we're getting warmer...

If we start a trade war, China can flick us the Vs, then finish us off with a currency crisis, especially so for the US. It would hurt China, but it would completely screw over the US.

Sorry but this is wrong, ALL previous occasions where surplus/deficit nations have had a trade war its the surlplus nations that have come out worse.

[Dorkins]

Increasing taxes on the rich? Good luck.

Overheard a doc on saying he was taking home £150k the other night whinging about paying more tax, talking of £150k not being much when youve 'got to' pay for school fees etc.

They think theyre hard done by, theyre gonna leave.

Where theyll go, i dont know. The rest of the west has the same problems, and i doubt China/india pays £150k a year to its quacks.

The minute members of a profession start threatening to leave the country if they don't get their way, you know their power has peaked. It shows the arrogance that comes with too many years of having it too good. Unless you singlehandedly invented medicine/banking/corporate management, you learned how to do it and somebody else can learn to do it too. TTFN!