This Is Killing the Recovery

When economic activity declines, business investment declines as well. This makes sense, as people are buying fewer goods and services, so there isn't a need for companies to produce as much.

The problem, however, comes when businesses cut back so much that unemployment skyrockets. Unemployed people have less money to spend, which further reduces economic activity, leading to further layoffs.

That's an ugly, self-feeding scenario -- one we're faced with now, as unemployment remains high and is on track to be more protracted than at any point since the Great Depression. According to a variety of sources, we could easily be looking at another decade of high unemployment.

What's a bear to do?
To break such a cycle, the Federal Reserve ordinarily cuts interest rates to reduce the costs of investment and spur economic activity. But the Fed has already reduced short-term interest rates to 0%, and its ability and desire to provide additional economic relief are limited.

The other way to crack the unemployment/recessionary cycle is to take more direct action to lower unemployment or boost economic activity. All in all, stimulus has been responsible for saving at least two million jobs, according to Moody's economists and the Congressional Budget Office. But it wasn't big enough, and its boost to the economy is now ending.

The bottom line: Unless the Fed or Congress does more to stimulate the economy, unemployment will linger and the economy will remain weak.

That's unlikely to happen
The trouble is, that Washington refuses to help the economy because the economy is weak. I know this sounds stupid, so let me explain.

"Deficit hawks" in Congress are freezing unemployment insurance checks and federal aid to states. Since most state constitutions prohibit budget deficits, the loss of those funds mean that states will begin laying off thousands of workers. Instead of stimulating the economy, we're about to embark on a massive anti-stimulus. Yes, I know there are now finally enough votes in the Senate to pass the jobless benefits extension sometime this week. But it was been pared back significantly, will not cover 1.4 million Americans who have been out of work for 99 weeks, took months to pass, and will be even tougher to extend the next time. Any truly substantial stimulus is likely to be out of the question.

So the deficit hawks will not allow Congress to stimulate the weak economy because of the deficit, while the weak economy is causing the increase in budget deficits. It's a self-perpetuating dynamic, a fact to which Washington is both blind and deaf.

The following chart shows why projected budget deficits for the next decade jumped between 2008 and late 2009. It's mostly because of lost tax revenues due to a weak economy:

Source: Congressional Budget Office, Baselinescenario.com.

A good look at the pie chart will show that all this talk about how fixing the economy would explode the deficit is, mathematically speaking, bull.

In short, this is what's killing the recovery:

Crummy Economy -> Lower Tax Revenue -> Large Deficits -> Congressional Paralysis on Stimulus -> Crummy Economy

Happy times
A persistently weak economy would hurt most everyone, but who will be affected by it most?

Homeowners: High unemployment is a drag on the housing market. Foreclosures are on track to beat last year's record. The pain for PulteGroup (NYSE: PHM  ) and Toll Brothers (NYSE: TOL  ) may last longer than expected.

Consumer goods: Unemployed people have less money to spend on luxury and big-ticket items. My colleague Alyce Lomax tells me she would be particularly worried about high-end retailers, including Williams-Sonoma and Nordstrom. Coach (NYSE: COH  ) also comes to mind.

Wall Street: The big winner here, ironically, could be the industry most responsible for the recession. Granted, unemployment may not be great for traditional lending; I recently attended an interview hosted by Bloomberg where Citigroup (NYSE: C  ) Chairman Richard Parsons said unemployment and a weak economy were the biggest threats to his company. But others have already written the problem off -- Bank of America (NYSE: BAC  ) CEO Brian Moynihan recently claimed that his company is aggressively collecting debts and lending more conservatively, so as long as unemployment doesn't grow, persistent unemployment is manageable for Bank of America.

Meanwhile Wall Street's trading arms benefit enormously from the nearly free money they're able to borrow when short term interest rates are close to 0%. For this reason, a protracted recession, which is causing the Fed to hold interest rates low, would be a boon to firms that live off trading, such as Goldman Sachs (NYSE: GS  ) , Morgan Stanley (MS), and JPMorgan (JPM). Annaly Capital (NYSE: NLY  ) , which profits from the spread between short term rates and mortgages, seems like a great bet too. (I may even buy shares of Annaly sometime after my 10-day lockout expires.)

In short, the failure to stimulate the economy looks likely to prolong the recession. That's good for Wall Street … but bad for just about everyone else.

At the time of publication, Fool editor Ilan Moscovitz didn't own shares of any company mentioned. Coach is a Motley Fool Stock Advisor recommendation. Moody's is a Motley Fool Inside Value recommendation. Moody's is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended a stock repair position on Moody's. The Motley Fool has a disclosure policy.


Read/Post Comments (61) | Recommend This Article (64)

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  • Report this Comment On July 19, 2010, at 5:28 PM, PALH wrote:

    Thank you for a rational endorsement of sorely needed, massive additional federal stimulus. The narrow-minded, purely political hold-up of jobless benefits is a shining example of foolishness, of the lower-case ``F'' variety.

  • Report this Comment On July 19, 2010, at 5:33 PM, starfish36 wrote:

    Your article and Paul Krugman's analysis make the point well. We are committing economic suiicide by circling the wagons and tightening the money supply in various ways when we should be opening our purse strings to stimulate recoovery. I guess we should never underestimate the silliness or pigheadedness of Congress. Where were the "deficit hawks" when we were rubber stamping the wars in Afghanistan or Iraq? Why do they wait for an election year to negate the seeds of recovery?

  • Report this Comment On July 19, 2010, at 5:41 PM, vegastar wrote:

    It seems as through the Article was not fitted to the page because the ADs on the right side covered words in the text area hence damage to the understanding occurred.

    Don't walk in front of me - I may not follow

    don't walk behind me - I my not lead.

  • Report this Comment On July 19, 2010, at 5:57 PM, quagmire107 wrote:

    Calling something a stimulus does not make it one. Massive government spending turned a recession into the Great Depression in the 1930s, and politicians are repeating the error today to please ignorant voters who want them to "do something." Recovery requires stable predictable policies that will let businesses plan ahead and take reasonable risks. If each day brings disruption of health care costs, arbitrary tax credits for purchases of unnecessary goods, bailouts of your competitors who made stupid decisions, and similar silliness, there is no solid economic base on which to build. Let the Federal Reserve do what it does best (adjust the money supply), and tell Nancy Pelosi to butt out.

  • Report this Comment On July 19, 2010, at 7:08 PM, Keal7 wrote:

    You did not read nor try to even understand the article kmcmath. You are already stuck with your chosen ideaology and nothing witill penetrate the block brain. Not until we repeat again the policies from 2000-2007 with the same results.

    And your assertion that - "Each day brings disruption of health care costs - Each day has been bringing disruption to health care costs for decades. And business people are very strategic, and agressive and capitalist not some emotional types fretting about changes. Businesses adapt to and anticipate changes all timie time. It is not the anticipation of changes that is slowing down the recession - just that deep recessions take time to get out of (an of course the premature deficit focus). It took over 24months for the less deep REagan recession to return to positive job numbers. Here with a failure of housing, jobs, financial, we are already in positive territory within 12 months of the new administration.

  • Report this Comment On July 19, 2010, at 7:27 PM, TMFDiogenes wrote:

    Something to do with the pie chart messed up the formatting in Firefox. If you're getting weirdness, try internet explorer.

    Thanks for reading and commenting, everyone.

    Ilan

  • Report this Comment On July 19, 2010, at 8:10 PM, dbackroyal wrote:

    Despite the hate rhetoric of the right the stimulus saved 3 million jobs and the federal government is the only entity big enough to move the economy. Alack of leadership on the right doesn't help either. They knock Pelosi and want to replace her with bonehead Boener, that makes a lot of sense. At least Pelosi is a leader, the right has a bunch of failed opportunists as their leaders. We are all in huge troule if they get back in.

  • Report this Comment On July 19, 2010, at 8:10 PM, PositiveMojo wrote:

    I must be on a different planet than some of you folks. Don't the Dems have an overwhelming majority? If the ideas are so great why aren't they pushing them through? They did it for healthcare. The reality is that these ideas aren't so hot.

    It's complicated but not that complicated:

    1. Productivity improves an economy.

    2. Printing money causes inflation.

    3. Uncertainty scares people they stop investing and they hold onto their money (lots of uncertainty introduced by this Administration - boatloads)

    4. Too much debt is bad. Ask the Wall Street boys about this one.

    5. Centralized control in large governments doesn't work (ask Russia, China, Nazi Germany about this one).

    6. The U.S. is broke - it doesn't have any more money to spend.

    7. The consumer debt that increased between 2004 and 2008, which crushed Americans with credit card debt, is getting under control but will take another 12-18 months to get back to where it is proper balance with the economy. http://www.federalreserve.gov/releases/G19/Current/

    8. Well run companies continue to make money and grow - check out Netflix for example.

    In my opinion (and this is only my opinion) the government needs to back off and stop causing so much uncertainty. Let things stabalize for the next year. The numbers (which absolutely do not lie) show that Americans are getting out from under their debt. We need confidence and stability - not spending more money that we don't have - that is plain nonsense.

    The government needs to live within their budget. That would do more for America than a hundred stimulus packages.

  • Report this Comment On July 19, 2010, at 8:30 PM, plange01 wrote:

    ah the recovery!!every where you look another story on the recovery! that must be what they call a depression these days!!

  • Report this Comment On July 19, 2010, at 8:40 PM, log1020 wrote:

    sorry k7...

    kmcmath's comments are spot on. from your (politically motivated and ignorant) comments it is quite obvious that you have never run a business or made a payroll...businesses cannot "anticipate and adapt" to the chaos and ineptitude being

    exhibited in washington....and if you think we are in positive territory you are clearly intoxicated from too much koolaid!

  • Report this Comment On July 19, 2010, at 8:51 PM, xetn wrote:

    The problem with this article is that it assumes that government actually produces something; like jobs. The only jobs government can produce are government jobs. Or they can take over a private company (GM or Chrysler) and prop up union jobs.

    I don't believe that either Republicans or Democrats know anything about simple economics, and judging from what I read here, neither do most of you.

    For example, it is a given on this site that any government spending will breath life into a dying economy. The reality is government does not have any money of its own, it must either steal (tax) it from producers, have the Fed create some out of thin air or borrow it. For every dollar (that they don't really have) government spends is a dollar taken out of the productive economy. As an example, just take a green piece of paper out our your collective pockets and give it to government and then try to buy some food with it. Can you do it? Of course not.

    The only thing that government spending does is transfer wealth from one sector to other sectors. The only thing that the Fed does when it creates money out of thin air is inflate the money supply and reduces the value of the money. Is this just too simple to understand? Apparently.

  • Report this Comment On July 19, 2010, at 9:02 PM, jck101 wrote:

    Government can also create jobs by making the country more competitive by reducing regulations and corporate taxes.

  • Report this Comment On July 19, 2010, at 10:58 PM, Quantemonics wrote:

    I weep for my country and what it has become.

    Full employment and government run health care were not written into the U.S. Constitution as inalienable, undeniable rights, but a gold standard for money and basic commerce exchange WAS.

    For some peculiar reason, Americans have been led to believe that fiat money, endless money printing and debt creation are "necessary" and have NO repercussions. While at the same time, my countrymen now "expect" the government to bail out all bad decisions and provide for easy lifestyles and job creation without hard work... What happened?

    The "pursuit of happiness" wording has somehow morphed into "guaranteed success" for all citizens, no matter what?

    Perhaps Marx had better ideas to structure American society in the end than the founding fathers, I guess.

    My beloved mob rule may reassert itself in American politics in November 2010 for the first time since Ronald Reagan and the 1980 election against the insanity of expanding government and money printing at all "costs," and in favor of common sense by reasonable men and women across this formerly great land.

    I agree, the status quo in Washington and on Wall Street has much to fear from mob rule, and this is a good thing for the future of America.

    -Thomas Jefferson

  • Report this Comment On July 20, 2010, at 12:32 AM, Johnnicash wrote:

    Why are the stupid adds covering up the story? Did you layoff your Web designer and/or editor? Do you have any openings for an entry level web designer who could properly format a page?

  • Report this Comment On July 20, 2010, at 1:07 AM, Zade wrote:

    Why don't we try more direct stimulus and take it out of the hands of government as much as can be done? I have a friend who owns a small business and due to the impending labor costs that are going to skyrocket for him next year (the healthcare plan, taxes going up, etc.), he not only ISN'T hiring, he may layoff. A major problem is with every change in administration, Congress tries to rewrite the tax code and so there is no long-term tax planning possible. Using the textile industry as an example: when labor in the northeast became too expensive (due to union representation and tax liabilities), it moved South where it was cheaper. With globalization it moved to China. I owned stock in a tech contract manufacturer (labor intensive) during the tech boom. It was based in China (not the USA even though it was a US company) because labor was so much cheaper - it helped make up for the higher corporate tax rates the tech company was saddled with compared to its competitors. I held the stock about 3 years and during that time it moved its plants from China to Indonesia because the labor was cheaper in Indonesia and it could save more money for a job that could be done there just as well as in China or the USA. We have the 2nd highest corporate tax rate in the world and our companies are expected to compete internationally with companies from other countries that pay nowhere near what the rate is in the USA. My belief is the companies here try to make up for it to some degree by reducing labor costs. Why not offer US based companies a reduction from the current 38% corporate tax rate (the 2nd highest in the world) to say 5% or even less if they hire US citizens and open plants/stores, etc in the USA. up to 75% for a fiscal year of their business that year. Maybe if they were offered an incentive to base their new plants/stores and new hires within the USA, they would do more of it. This would also benefit many small businesses who may be choosing technology as a way to improve their bottom line rather than hiring new employees. At least it would directly address our unemployment problem rather than more "stimulus" that we a) have no control over where it goes and b) is often used for political favoritism by various members of Congress.

  • Report this Comment On July 20, 2010, at 7:05 AM, Pr0metheus wrote:

    The right side of the article is getting chopped off for me, too; in both Firefox AND Internet Explorer 8. Had to copy and paste the article into WordPad.

  • Report this Comment On July 20, 2010, at 7:34 AM, kjfried45 wrote:

    Stimulus...how about stimu-less. Politics distributes resources where politicians can get votes--like the Tesla plant in Delaware or a airport in West Virginia, not where they're really needed. It's business as usual, there's not been "change", for the better, if fact it's worse.

  • Report this Comment On July 20, 2010, at 8:35 AM, SAMSCREEK wrote:

    Kudo's to kmcmath, graybear1951, log1020

    and tickrtapeking.

    I would like to point out an observation I have witnessed concerning the stimulus money and all of the jobs that it has supposely created for the unemployed americans.

    Recently, the electric company that provides my electricity, trimmed the trees along the 11 mile road on which I live. It was a crew of Mexicans that did the work.

    The stimulus money provided to the state of Tennessee for new guard rails installed last year along this 11 mile road, was done by a crew of Mexicans.

    The pool my son bought this year was installed by a crew of Mexicans.

    The carport I purchased 2 years ago was installed by a crew of Mexicans out of Alabama.

    My point, if you haven't figured it out, is the stimulus money is not putting americans back to work, just going into the pockets of the business owners who use illegals to work for them.

    The business owners who hire these people must be penalized severly, to the point it isn't worth hiring the illegals. We are going to elect a govenor here in Tennessee that is going to pass a likewise law in November.

    Right on ARIZONA. The american people are

    rooting for you.

  • Report this Comment On July 20, 2010, at 10:45 AM, mhendley100 wrote:

    If the govt wants to stimulate the econmy for real and not to make political points...they will begin seriously aiding and promoting small business health, expansion, and hiring....and in general stimulating genuine commerce in every possible way......we did waste $900 billion creating shadow jobs...most of which are temporary, make work, or other trivial effects. Problem is we have so many business haters in the current administration....they don't have the perspective or gumption to do what is smart and effective...as opposed to stupid and political.

  • Report this Comment On July 20, 2010, at 11:18 AM, SundayRider wrote:

    Stimulus would be fine if it was really "capital expenditures"--fixing and updating roads and bridges, for example. Or even adding money to supplement workforce re-training, perhaps. But extending unemployment benefits even further is just pouring money down a rathole. It is the re-institution of unlimited welfare, plain and simple. The fact is that more than half of people receiving benefits "magically" find a job in the last week or two before the checks run out. Maybe they settle for a lesser job, or finally take that job in another State. Or they were just being a deadbeat. In any case, this is the only way the unemployment rolls will be cleared up. I suspect many in Washington don't want these rolls reduced--they now have a "chicken in every pot" constituency who will sell their votes for an additional unemployment check. And to whom they can point and say "those other guys are stingy and won't help them!".

  • Report this Comment On July 20, 2010, at 11:41 AM, hbofbyu wrote:

    Did Paul Krugman write this article? Because he is so far removed from basic economic reality that he has lost touch with the first line on the first page of the first text ever written on economics: "There aint no such thing as a free lunch". Ilan, stop reading him.

    What every politician or resident economist wants is to maintain their relevance and power. The solution for them is always a short term fix simply because they are elected to short terms. Their objective is to delay the pain - even as it allows the cancer (deficit) to grow.

    PelosObama and many other politicians truly believe that government is a creator of wealth. "Government is a necessary evil at best, at worst, an intolerable one."

  • Report this Comment On July 20, 2010, at 12:17 PM, Deepfryer wrote:

    +1 rec

    Revenues should indeed be our main concern.

    Stimulus programs are obviously quite necessary right now... and they have a very minimal effect on the long-term national debt.

    It's refreshing to see someone examine the facts behind the deficit, instead of the usual fearmongering that we always see from the right.

  • Report this Comment On July 20, 2010, at 12:44 PM, hbofbyu wrote:

    Quote from Democrat Erskine Bowles, leader of Obama's debt commission:

    "The entirety of the nation's current discretionary spending is consumed by the Medicare, Medicaid and Social Security programs."

    "This debt is like a cancer. It is truly going to destroy the country from within. .... if the U.S. makes no changes it will be spending $2 trillion by 2020 just for interest on the national debt.

    Just think about that: All that money, going somewhere else, to create jobs and opportunity somewhere else,..."

    What part of this is so difficult for the left to understand? Are we aspiring to become the Greece of the western hemisphere? No amount of manipulation can make 2+2=5.

  • Report this Comment On July 20, 2010, at 1:01 PM, 5000monkey wrote:

    When did Fool writers become socialist? And when did Fool readers blindly agree that government handouts will solve all our woes? More Uncle Obama money is not going to create jobs.

  • Report this Comment On July 20, 2010, at 1:36 PM, williamjacobs wrote:

    When a county or state government raises taxes to pay a company to fix a bridge or build a school, did the company create the job, or did the government create the job by producing a reward that companies wished to collect?

    If the government did not produce this payment, would the jobs have be created?

    I suppose you can say the government creates no jobs, but the idea behind stimulus is that private enterprise does not create jobs when no one has money. If the government offers some, a private company will try to earn it and that tends to produce people who must work for it, that is, make jobs.

    Is this a difference in semantics that we can concede to conservatives and agree to buy infrastructure improvements while workers are on sale (high unemployment)?

    Hey, whatever. Government sucks, let's hire some private companies to build us some schools, roads, railways, municipal water systems, smart electric grids, and bridges while they're cheap. Would that be okay?

  • Report this Comment On July 20, 2010, at 1:42 PM, mpendragon wrote:

    Government stimulus, chiefly in the form of extended unemployment benefits, helps buoy demand which in turn helps keep and create jobs. It's as simple as that. If you prefer the supply side argument then a huge chunk of the stimulus bill was a tax cut.

    The United States isn't Greece and the rest of the world knows that. Our10-year treasuries pay out about the same amount as a savings account these days because we're just about the safest game in town. The two biggest budget items driving us into this deep deficit are the Bush tax cuts and the two wars we're fighting and that's not just a matter of opinion. That's why sane people don't cut taxes on the wealthy to pay for a war. Over the long term the main threat to our budget and prosperity is health care costs growing at a few times the rate of inflation which is why we needed and nearly got meaningful health care reform.

    Prior to the stimulus the crowd was yelling about a depression. Now it's just a drawn out recession. Then the crowd started yelling about hyper-inflation and now we're hovering just above deflation with 10 year treasuries at a rate that rival savings accounts. It's just possible that the crowd doesn't know anything about macroeconomics.

  • Report this Comment On July 20, 2010, at 1:45 PM, damilkman wrote:

    I absolutely disagree with this article. The FOOL'S should take a look at any case study from LATAN America in the 70ties to see what happens when chronic stimulus is attempted to kick start an economy. It is essentially financial opium. And like opium it requires a bigger dose to get the same hit until chronic inflation becomes ingrained. Were only being saved by the China part of Chimerica who is buying our bonds and taking dollars out of circulation. When that ends there is going to be a serious inflation problem.

    Bailing out everyone and presuming an infinite money supply is a fantasy. Hard decisions need to be made because of years of easy living. The only fix is for America to take a beatdown for awhile. After all that is what the IMF demands for their help when devloping nations get in trouble.

    hfhmilkman

  • Report this Comment On July 20, 2010, at 2:59 PM, TMFDiogenes wrote:

    Just to clarify my view, "hard decisions" will have to be made. And they can be made about long term fiscal imbalances. But killing the economy in the short term, when we can borrow at insanely cheap rates and deflation is a bigger concern than inflation, would only exacerbate the problem by increasing increasing deficits (unemployed people and bankrupt businesses can't pay taxes) -- not solve it.

    Thanks everyone for reading and posting. Really interesting debate.

    Ilan

  • Report this Comment On July 20, 2010, at 3:18 PM, kmacattack wrote:

    Ticker takpe king, I respect your opinion, and evidentally you are a good stock picker, however, as a FORMER republican voter, I disagree with your philosophy, due to my own analysis of history. Some have suggested on this site that

    Roosevelt, not Hoover, was responsible for the Great Depression. This is ABSURD. Hoover, in fact, inherited the SEEDS which led to the deprssion from the preceding 8 year REPUBLICAN Harding administration, which was probably the most corrupt in American History, except "W" Bush and Nixon both were near equals. The issues which led to the Depression were primarily related to political philosophy. After Wilson, the republicans made an about face to all-out TRICKLE DOWN LAISSEZ-FAIRE DEREGULATION, just like "W" Bush, Nixon, and to a lesser extent, Reagan, Bush 1, and Eisenhower in the 1950's. Do you know how many republican administrations since Harding have presided over recessions? Answer-EVERY ONE OF THEM. We've seen the GREAT DEPESSION,TWO RECESSIONS UNDER EISENHOWER, NIXON, AND REAGAN, AND "W" BUSH (ALL THE TWO TERMERS) AND ONE EACH UNDER FORD AND BUSH 1. Their Laissez-Faire-steal all you want policies led to The S and L and Bank crisis under Reagan, along with 10% unemployment and a stock market crash in 1987, long with 18% fiexed mortgage rates in' 85 higher oil prices which fed the recessions and made the "misery index" far worse under Reagan than under Carter. The same scenereo repeated under "W" Bush, leading us to a NEAR DEPRESSION which Obama INHERITED. Obama has made far greater progress toward recovery than Roosevelt. It took only 7 moinths to achieve positive GDP growth and END THE RECESSION, which was estimated to take 18 months up to 5 years. Obama and EVERY economist warned in January of last year that job restoration would be the last factor to recover, especially due to the severity of the recession., the WORST IN AMERICAN HISTORY. Without the stimulus programs, we would have certainly been in a DEPRESSION by now, which would have delighted many sociopathic republicans because they would be certain to sweep the midterm elecions. The brightest shining star during the last 30 years has been Clinton, who reversed the trickle down policies and wealth-fare giveaways to the top 2%, cut taxes for the middle class and poor, raised minimu wage giving millions of Americans a small amont of discretionary income they coud SPEND and stimulate the economy. The end resutlt was the best economy in history, the best stock market, full employment, and a $4.25 trillion surplus, with NO REPUBLICAN HELP. Your analysis is contrary to historical facts. The democrats have always produced better economic growth, better stock market performance, and more prosperity for ALL AMERICANS, not just tthe top tier big political donors.

  • Report this Comment On July 20, 2010, at 3:28 PM, Demoncrat wrote:

    It's okay GreyBear1951, not everyone is supposed to understand how things work, and in this discussion you're the ship passed in the night.

    Productivity promotes a high ROI and subsequent share-price. A high profit margin though has little to do with a strong economy. If this relationship were true, we wouldn't have 80 years of data indicating that EVERY SINGLE TIME there is a spike in unemployment there is a correlative spike in worker productivity. It's simply a byproduct of the beast as prudent business practices predict slowed consumption and right-size to accomodate low growth or retraction.

    Printing money doesn't cause inflation until there is an inability to cover the money printed. 1920's Germany hyper-inflation occurs typically when the debt load reaches about 200% of GDP. Call me when we're approaching $30 trillion. The US is the largest and most dynamic economy in the world and controls its own currency. It is not subject to the same situations that Japan faced and Greece now faces.

    You are right about predictability. Except that you're wrong about what the predictors are. Healthcare? It's been budgeted for. Rising debt, it's been budgeted for. Rampant unregulated credit default swaps that didn't exist 20 years ago, ah here comes unpredictability. Regulation breeds predictability, deregulation unchains things and makes it a scary time for all. You're focusing on the micro-economic, but that's not where the fear is. Those who plan their taxes couldn't care less about 28%, 35% or 39%. They'll never pay more than 19% anyway.

    Debt and the minor inflationary pressures that comes with it are a GOOD THING FOR THE ECONOMY. I'm sure you remember Reagan talking about outgrowing his deficit... This is how you do it. Earnings and prices follow spending when properly stimulated.

  • Report this Comment On July 21, 2010, at 3:42 PM, dillon53 wrote:

    Although not directly related to the article's title, let me share my observations and questions about the USA:

    1.In this country I have seen more people and institutions asking for donations than in any other country I have lived.

    2.In this country I have seen more scamming than in any other country I have lived.

    3.In this country I have seen more tax-payer money used to aid other countries than in any other country I have lived (Haiti, etc.) My question: are we getting all these dollars back and how? Pershaps if we had kept most of it in our land, we could help those in our land that are right now chewing their fingernails as a meal.

    4.I keep hearing all these advertisements about loan forgiveness, IRS agreements to cut people's debts down to approx. 10% of the actual debt. My question: who pays the 90% difference?

    5.Why do I even turn every nickel twice to make ends meet when others allow themselves to live lavishly on other people's money?

    Why don't the schools teach the kids how to balance checkbooks, how to compare end-of-month bank statements with checkbook entries? To explain that everything on the debit/charges column has to be added to the final balance and everything on the right side (income) has to be subtracted from one's checkbook balance BECAUSE THE BANK DOESN

  • Report this Comment On July 21, 2010, at 3:46 PM, dillon53 wrote:

    DOESN'T "know" about these transactions yet?

    At least that's how I explained it to my daughter.

    (Sorry for this message's cut-off)

  • Report this Comment On July 21, 2010, at 5:35 PM, TMFDiogenes wrote:

    "Why don't the schools teach the kids how to balance checkbooks?"

    Awesome question. My guess is apathy and because banks make lots of their profits from fees. On a related note, I have an article out today about efforts to make fine-print actually readable:

    http://www.fool.com/investing/high-growth/2010/07/21/the-wee...

    Ilan

  • Report this Comment On July 22, 2010, at 4:00 PM, dillon53 wrote:

    Oh yes, I forgot this one when I wrote down my questions and observations yesterday. This one has been going through my mind often these past few months: Require of every financial contract and advertisement (Banks, Insurance, TV & else) currently out and to come in the future that all print right now smaller than the pages' main print be double the size of the main print. And to make it even more fair for the consumer, put it at the top of the page. If the authors of those papers have nothing to hide, then it shouldn't matter where on the page these *, notes, disclaimers, or exceptions go.

  • Report this Comment On July 22, 2010, at 4:44 PM, TMFDiogenes wrote:

    dillon,

    I wouldn't be surprised if the newly created CFPB would issue that rule for financial contracts within 2-5 years or so.

  • Report this Comment On July 22, 2010, at 4:57 PM, jd22284 wrote:

    I don't know why people keep saying that lowering corporate tax rates would lead to greater employment since last I checked payroll expenses actually lower a tax liability and lower tax rates on "Profits" actually encourage a company to keep the cah or pay out dividends and not to hire more people. The only major factor that encourages employment is demand outpacing productivity so if the government wants to create jobs then they need to create demand. Cash for Clunkers was extremely sucessful at rebuilding the auto sector and the home buyer tax credit caused a huge spike in people buying houses. Consumer driven stimulus helps to eliminate much of the waste and overhead involved when the government buys things directly.

    The best thing the government can do to stimulate the economy long term is simplify the tax code. Eliminate personal income tax for the low and middle class alltogether (they still pay taxes on a consumption basis to local state and federal levels including tariffs on the imports they buy) and create a flat tax rate with may 3 tiers at the most for Upper-class, rich and super rich.

    I do want to clarify that I am by no means an advocate of wealth redistrobution but I do feel the government spends allot of resources to protect the property of the rich and the all Americans should contribute to the prosperity of the nation as a whole to the extent they are able.

    -It may be laid down as a primary position, and the basis of our system, that every Citizen who enjoys the protection of a Free Government, owes not only a proportion of his property, but even of his personal services to the defense of it.

    -George Washington

    Lastly, Wars should be declared by congress and the spending for those wars should be clear an upfront so the American people can evaluate the costs of said conflicts. Osama Bin Laden has publicly stated that his mission on 9/11 was to inspire fear and mistrust in America, strech our military capacity and cripple us with debt by costing us trillions of dollars to chase after shadows. The end goal of which is to create a diminished and impotent U.S. which will not be capable in the future of defending its overseas interests (the Middle East and Europe in particular). This is a man and group which took on the Soviet Union (largest Army in the world) and faught to a stalemate with only small arms and won with a little American weapons aid.

    Again I want to clarify that I am not arguing for or against the wars just how we went about conducting them...

    -The constitution vests the power of declaring war in Congress; therefore no offensive expedition of importance can be undertaken until after they shall have deliberated upon the subject and authorized such a measure.

    -George Washington

    Over grown military establishments are under any form of government inauspicious to liberty, and are to be regarded as particularly hostile to republican liberty.

    -George Washington

    The marvel of all history is the patience with which men and women submit to burdens unnecessarily laid upon them by their governments.

    -George Washington

  • Report this Comment On July 22, 2010, at 10:18 PM, LatifK wrote:

    I cringe every time people try to equate the governments finances to running a local business or a home budget.

    Get it thru your thick skulls, the government running a deficit during down cycles is perfectly normal, it can make all that back on the tail end but if it does nothing and the negative loop continues it will loose even more money.

    With that thought, maybe government finances is something like regular businesses in that you have to spend money to make money!

  • Report this Comment On July 23, 2010, at 12:10 PM, Sum111 wrote:

    Perhaps Congress and the President should have in the beginning focused more on the economy and targeted more effectively the stimulus spending on creating jobs instead of squandering their time on a new health care bill. Maybe if they would have passed a financial reform bill that actually did things like address the sins of Freddie and Fannie and instead of inventing a raft of new regulations required the watchdog agencies to actually enforce current regulations (what makes us think they will do any better at enforcing these new ones) we would be much farther along in the recovery.

    But then if Congress would have not encouraged Freddie and Fannie to make sub prime loans (indirectly encouraging private financial institutions to follow suit) to people who could ill afford them, we would not be in this fix to begin with.

  • Report this Comment On July 23, 2010, at 3:15 PM, jwhitwell wrote:

    "So the deficit hawks will not allow Congress to stimulate the weak economy because of the deficit, while the weak economy is causing the increase in budget deficits. It's a self-perpetuating dynamic, a fact to which Washington is both blind and deaf."

    That's crap, friend.

    The 'deficit hawks' have been prepared to pass the bill so long as the money was found elsewhere in the budget to pay for it, so it would have zero impact on the deficit.

    The pro-deficit folks in Congress and the WH refused to look at a budget cut elsewhere, insisting instead on increasing the deficit to fund the bill.

    'Deficit hawks' will allow Congress to stimulate the economy all day long, and twice on Sundays, if Congress and the WH will go about doing it in a rational and sane manner. Obama himself said this was important when he signed this kind of bill back in November, stressing how wonderful that it was being done without adding to the deficit. The 'deficit hawks' are only asking the same thing this time - was it a good idea in November, but not now?

  • Report this Comment On July 23, 2010, at 3:57 PM, NoOracleHere wrote:

    I think it's ironic that by design, we typically apply stimulus to the point where it can do the least amount of good - interest rates. There's no doubt that low interest rates directly benefit the banking system. Trouble is, the banks are set up to store wealth, not spend it. And in this recession banks have clammed up and stored wealth most tenaciously, having learned the lesson of revalued risk. So we’ve given the stimulus to those who won't spend it. At the same time, any suggestion that we provide stimulus to the bottom of the economy, the consumer, is met with vigorous objection that it would be dangerously inflationary. It's no coincidence that stimulus at the bottom is more inflationary precisely because it is more effective. The reason the stimulus we provided the banks has not so far kicked off inflation is because they have stored it – for now. It will fuel inflation another day. The delays in our economy make it quite difficult to get stimulus to the point of need at a time when it will do some good. The stored inflation we have pumped into our banking system has not yet hit the street. So we’ve had to keep pumping more money into those banks, precisely because it is so ineffective. But there will come a day when the banks will begin lending again. And that money will become quite effective at stimulating - something. Trouble is, it will come out at a time when we don't need it and fuel the next bubble. I believe we have failed to distinguish “rescue” from “stimulus”. We had a temporary need to rescue the financial system. (Why? Because our money supply is based on debt - another topic for another day). When that need passed, we continued to pursue that same tactic, and called it stimulus. We could have used a tenth the amount of stimulus had we applied it where it would be effective – the consumer. And it would have been fuel for a tenth the amount of future inflation. And so the cycles continue.

  • Report this Comment On July 23, 2010, at 5:05 PM, TMFDiogenes wrote:

    NoOracle,

    Yeah, it seems odd to me too that the cost of credit seems to be the only lever we're pulling right now. For one, availability of credit seems to be important if small businesses can't get loans. But a bigger deal seems to be that there just isn't as much demand for goods and services because households are cutting back and people are unemployed. Under these conditions, boosting demand seems to me to be a necessary component of stimulating a recovery -- certainly as much as making credit cheap.

    Richard Koo has written some interesting stuff on this -- if I'm understanding him right (I haven't read his book yet) his theory is that low interest rates won't get the job done because cost of credit isn't the problem -- everyone's delevering, not profit maximizing.

    Ilan

  • Report this Comment On July 23, 2010, at 5:50 PM, HISC wrote:

    Print Back to story

    How to Make an American Job Before It's Too Late: Andy Grove

    By Andy Grove - Jul 1, 2010

    Bloomberg Opinion

    Recently an acquaintance at the next table in a Palo Alto, California, restaurant introduced me to his companions: three young venture capitalists from China. They explained, with visible excitement, that they were touring promising companies in Silicon Valley. I’ve lived in the Valley a long time, and usually when I see how the region has become such a draw for global investments, I feel a little proud.

    Not this time. I left the restaurant unsettled. Something didn’t add up. Bay Area unemployment is even higher than the 9.7 percent national average. Clearly, the great Silicon Valley innovation machine hasn’t been creating many jobs of late -- unless you are counting Asia, where American technology companies have been adding jobs like mad for years.

    The underlying problem isn’t simply lower Asian costs. It’s our own misplaced faith in the power of startups to create U.S. jobs. Americans love the idea of the guys in the garage inventing something that changes the world. New York Times columnist Thomas L. Friedman recently encapsulated this view in a piece called “Start-Ups, Not Bailouts.” His argument: Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he wrote, it should back startups.

    Mythical Moment

    Friedman is wrong. Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

    The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.

    Scaling used to work well in Silicon Valley. Entrepreneurs came up with an invention. Investors gave them money to build their business. If the founders and their investors were lucky, the company grew and had an initial public offering, which brought in money that financed further growth.

    Intel Startup

    I am fortunate to have lived through one such example. In 1968, two well-known technologists and their investor friends anted up $3 million to start Intel Corp., making memory chips for the computer industry. From the beginning, we had to figure out how to make our chips in volume. We had to build factories; hire, train and retain employees; establish relationships with suppliers; and sort out a million other things before Intel could become a billion-dollar company. Three years later, it went public and grew to be one of the biggest technology companies in the world. By 1980, which was 10 years after our IPO, about 13,000 people worked for Intel in the U.S.

    Not far from Intel’s headquarters in Santa Clara, California, other companies developed. Tandem Computers Inc. went through a similar process, then Sun Microsystems Inc., Cisco Systems Inc., Netscape Communications Corp., and on and on. Some companies died along the way or were absorbed by others, but each survivor added to the complex technological ecosystem that came to be called Silicon Valley.

    As time passed, wages and health-care costs rose in the U.S., and China opened up. American companies discovered they could have their manufacturing and even their engineering done cheaper overseas. When they did so, margins improved. Management was happy, and so were stockholders. Growth continued, even more profitably. But the job machine began sputtering.

    U.S. Versus China

    Today, manufacturing employment in the U.S. computer industry is about 166,000 -- lower than it was before the first personal computer, the MITS Altair 2800, was assembled in 1975. Meanwhile, a very effective computer-manufacturing industry has emerged in Asia, employing about 1.5 million workers -- factory employees, engineers and managers.

    The largest of these companies is Hon Hai Precision Industry Co., also known as Foxconn. The company has grown at an astounding rate, first in Taiwan and later in China. Its revenue last year was $62 billion, larger than Apple Inc., Microsoft Corp., Dell Inc. or Intel. Foxconn employs more than 800,000 people, more than the combined worldwide head count of Apple, Dell, Microsoft, Hewlett-Packard Co., Intel and Sony Corp.

    10-to-1 Ratio

    Until a recent spate of suicides at Foxconn’s giant factory complex in Shenzhen, China, few Americans had heard of the company. But most know the products it makes: computers for Dell and HP, Nokia Oyj cell phones, Microsoft Xbox 360 consoles, Intel motherboards, and countless other familiar gadgets. Some 250,000 Foxconn employees in southern China produce Apple’s products. Apple, meanwhile, has about 25,000 employees in the U.S. -- that means for every Apple worker in the U.S. there are 10 people in China working on iMacs, iPods and iPhones. The same roughly 10-to-1 relationship holds for Dell, disk-drive maker Seagate Technology, and other U.S. tech companies.

    You could say, as many do, that shipping jobs overseas is no big deal because the high-value work -- and much of the profits -- remain in the U.S. That may well be so. But what kind of a society are we going to have if it consists of highly paid people doing high-value-added work -- and masses of unemployed?

    Since the early days of Silicon Valley, the money invested in companies has increased dramatically, only to produce fewer jobs. Simply put, the U.S. has become wildly inefficient at creating American tech jobs. We may be less aware of this growing inefficiency, however, because our history of creating jobs over the past few decades has been spectacular -- masking our greater and greater spending to create each position.

    Tragic Mistake

    Should we wait and not act on the basis of early indicators? I think that would be a tragic mistake because the only chance we have to reverse the deterioration is if we act early and decisively.

    Already the decline has been marked. It may be measured by way of a simple calculation: an estimate of the employment cost- effectiveness of a company. First, take the initial investment plus the investment during a company’s IPO. Then divide that by the number of employees working in that company 10 years later. For Intel, this worked out to be about $650 per job -- $3,600 adjusted for inflation. National Semiconductor Corp., another chip company, was even more efficient at $2,000 per job.

    Making the same calculations for a number of Silicon Valley companies shows that the cost of creating U.S. jobs grew from a few thousand dollars per position in the early years to $100,000 today. The obvious reason: Companies simply hire fewer employees as more work is done by outside contractors, usually in Asia.

    Alternative Energy

    The job-machine breakdown isn’t just in computers. Consider alternative energy, an emerging industry where there is plenty of innovation. Photovoltaics, for example, are a U.S. invention. Their use in home-energy applications was also pioneered by the U.S.

    Last year, I decided to do my bit for energy conservation and set out to equip my house with solar power. My wife and I talked with four local solar firms. As part of our due diligence, I checked where they get their photovoltaic panels -- the key part of the system. All the panels they use come from China. A Silicon Valley company sells equipment used to manufacture photo-active films. They ship close to 10 times more machines to China than to manufacturers in the U.S., and this gap is growing. Not surprisingly, U.S. employment in the making of photovoltaic films and panels is perhaps 10,000 -- just a few percent of estimated worldwide employment.

    Advanced Batteries

    There’s more at stake than exported jobs. With some technologies, both scaling and innovation take place overseas. Such is the case with advanced batteries. It has taken years and many false starts, but finally we are about to witness mass- produced electric cars and trucks. They all rely on lithium-ion batteries. What microprocessors are to computing, batteries are to electric vehicles. Unlike with microprocessors, the U.S. share of lithium-ion battery production is tiny.

    That’s a problem. A new industry needs an effective ecosystem in which technology knowhow accumulates, experience builds on experience, and close relationships develop between supplier and customer. The U.S. lost its lead in batteries 30 years ago when it stopped making consumer-electronics devices. Whoever made batteries then gained the exposure and relationships needed to learn to supply batteries for the more demanding laptop PC market, and after that, for the even more demanding automobile market. U.S. companies didn’t participate in the first phase and consequently weren’t in the running for all that followed. I doubt they will ever catch up.

    Job Creation

    Scaling isn’t easy. The investments required are much higher than in the invention phase. And funds need to be committed early, when not much is known about the potential market. Another example from Intel: The investment to build a silicon manufacturing plant in the 1970s was a few million dollars. By the early 1990s, the cost of the factories that would be able to produce the new Pentium chips in volume rose to several billion dollars. The decision to build these plants needed to be made years before we knew whether the Pentium chip would work or whether the market would be interested in it.

    Lessons we learned from previous missteps helped us. Years earlier, when Intel’s business consisted of making memory chips, we hesitated to add manufacturing capacity, not being sure about the market demand in years to come. Our Japanese competitors didn’t hesitate: They built the plants. When the demand for memory chips exploded, the Japanese roared into the U.S. market and Intel began its descent as a memory-chip supplier.

    Intel Experience

    Though steeled by that experience, I remember how afraid I was as I asked the Intel directors for authorization to spend billions of dollars for factories to make a product that didn’t exist at the time for a market we couldn’t size. Fortunately, they gave their OK even as they gulped. The bet paid off.

    My point isn’t that Intel was brilliant. The company was founded at a time when it was easier to scale domestically. For one thing, China wasn’t yet open for business. More importantly, the U.S. hadn’t yet forgotten that scaling was crucial to its economic future.

    How could the U.S. have forgotten? I believe the answer has to do with a general undervaluing of manufacturing -- the idea that as long as “knowledge work” stays in the U.S., it doesn’t matter what happens to factory jobs. It’s not just newspaper commentators who spread this idea.

    Offshore Production

    Consider this passage by Princeton University economist Alan S. Blinder: “The TV manufacturing industry really started here, and at one point employed many workers. But as TV sets became ‘just a commodity,’ their production moved offshore to locations with much lower wages. And nowadays the number of television sets manufactured in the U.S. is zero. A failure? No, a success.”

    I disagree. Not only did we lose an untold number of jobs, we broke the chain of experience that is so important in technological evolution. As happened with batteries, abandoning today’s “commodity” manufacturing can lock you out of tomorrow’s emerging industry.

    Our fundamental economic beliefs, which we have elevated from a conviction based on observation to an unquestioned truism, is that the free market is the best economic system -- the freer, the better. Our generation has seen the decisive victory of free-market principles over planned economies. So we stick with this belief, largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modification that is even better.

    No. 1 Objective

    Such evidence stares at us from the performance of several Asian countries in the past few decades. These countries seem to understand that job creation must be the No. 1 objective of state economic policy. The government plays a strategic role in setting the priorities and arraying the forces and organization necessary to achieve this goal.

    The rapid development of the Asian economies provides numerous illustrations. In a thorough study of the industrial development of East Asia, Robert Wade of the London School of Economics found that these economies turned in precedent- shattering economic performances over the 1970s and 1980s in large part because of the effective involvement of the government in targeting the growth of manufacturing industries.

    Consider the “Golden Projects,” a series of digital initiatives driven by the Chinese government in the late 1980s and 1990s. Beijing was convinced of the importance of electronic networks -- used for transactions, communications and coordination -- in enabling job creation, particularly in the less developed parts of the country. Consequently, the Golden Projects enjoyed priority funding. In time, they contributed to the rapid development of China’s information infrastructure and the country’s economic growth.

    Job-Centric Economy

    How do we turn such Asian experience into intelligent action here and now? Long term, we need a job-centric economic theory -- and job-centric political leadership -- to guide our plans and actions. In the meantime, consider some basic thoughts from a onetime factory guy.

    Silicon Valley is a community with a strong tradition of engineering, and engineers are a peculiar breed. They are eager to solve whatever problems they encounter. If profit margins are the problem, we go to work on margins, with exquisite focus. Each company, ruggedly individualistic, does its best to expand efficiently and improve its own profitability. However, our pursuit of our individual businesses, which often involves transferring manufacturing and a great deal of engineering out of the country, has hindered our ability to bring innovations to scale at home. Without scaling, we don’t just lose jobs -- we lose our hold on new technologies. Losing the ability to scale will ultimately damage our capacity to innovate.

    Blade Didn’t Drop

    The story comes to mind of an engineer who was to be executed by guillotine. The guillotine was stuck, and custom required that if the blade didn’t drop, the condemned man was set free. Before this could happen, the engineer pointed with excitement to a rusty pulley, and told the executioner to apply some oil there. Off went his head.

    We got to our current state as a consequence of many of us taking actions focused on our own companies’ next milestones. An example: Five years ago, a friend joined a large VC firm as a partner. His responsibility was to make sure that all the startups they funded had a “China strategy,” meaning a plan to move what jobs they could to China. He was going around with an oil can, applying drops to the guillotine in case it was stuck. We should put away our oil cans. VCs should have a partner in charge of every startup’s “U.S. strategy.”

    Financial Incentives

    The first task is to rebuild our industrial commons. We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars -- fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations. Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability -- and stability -- we may have taken for granted.

    I fled Hungary as a young man in 1956 to come to the U.S. Growing up in the Soviet bloc, I witnessed first-hand the perils of both government overreach and a stratified population. Most Americans probably aren’t aware that there was a time in this country when tanks and cavalry were massed on Pennsylvania Avenue to chase away the unemployed. It was 1932; thousands of jobless veterans were demonstrating outside the White House. Soldiers with fixed bayonets and live ammunition moved in on them, and herded them away from the White House. In America! Unemployment is corrosive. If what I’m suggesting sounds protectionist, so be it.

    Choice Is Simple

    Every day, that Palo Alto restaurant where I met the Chinese venture capitalists is full of technology executives and entrepreneurs. Many of them are my friends. I understand the technological challenges they face, along with the financial pressure they are under from directors and shareholders. Can we expect them to take on yet another assignment, to work on behalf of a loosely defined community of companies, employees, and employees yet to be hired? To do so is undoubtedly naive. Yet the imperative for change is real and the choice is simple. If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.

    (Andy Grove, senior adviser to Intel, was the company’s chief executive officer or chairman from 1987 until 2005. The opinions expressed, featured in the July 5 issue of Bloomberg Businessweek, are his own.)

    For Related News and Information: Top technology stories: TTOP <GO> News on the U.S. labor market: TNI US LABOR <GO> News on the U.S. economy: NI USECO <GO> Bloomberg Businessweek: BUSW <GO>

    ®2010 BLOOMBERG L.P. ALL RIGHTS RESERVED.

  • Report this Comment On July 23, 2010, at 7:36 PM, Zebra366 wrote:

    The real issue here is whether or not force should be used to advance any theory of "how to fix things". Taxes are always collected under force. If you don't believe this, just try not paying your taxes. Eventually people with guns will come to talk to you about it.

    The underlying root of our current problems is when it was determined that people were less greedy and more honest than they were 60 years ago, so Glass-Steagall was no longer needed.

    Surprise!

    The author has a right to his own opinion. He does not have a right to make up his own facts to support his theory.

    J.M.Keynes was a brilliant economist. But today's politicians have selectively used his works to justify that which they had already decided to do... Interfere more in the economy.

    It isn't working, it won't work, it never has worked.

    Oh yes, government intervention has saved millions of jobs; a totally unprovable assertion. We would be much worse of without government intervention, well, some would without the extension of unemployment benefits. Everything else is speculation. I choose not to believe it.

    I run a small business. There is no way I will take on any employee until I see how the rules of employment have been determined. And since those rules have not only been changed but changed for several years into the future, we're coasting.

    Multi-year uncertainty has been introduced into the mix as far as employing people. More may be headed my way. I can't think of a better way to paralyze small business hiring than what has been done with the laws so far.

    And the morons who have done this damage to our economy continue to signal that they are not finished.

  • Report this Comment On July 23, 2010, at 8:14 PM, SFAmiler wrote:

    Wow...straight from Keynesian business school to online journalism with no real-world business experience.

    Unfortunately, our current administration consistently follows the advice of these under-experienced, over-privileged eggheads who believe that money grows on trees.

    The government does not create value by taking from the producers to bailout their friends. Hopefully a majority of Americans realize this in November and stop listening to the advice of the callow.

  • Report this Comment On July 24, 2010, at 12:20 AM, gnawbone wrote:

    "stimulus has been responsible for saving at least two million jobs, according to Moody's economists and the Congressional Budget Office"??? Moody's opinion of anything is no longer worth anything in my judgement and the CBO is little better. These are the same guys that were predicting a deficit of $165 billion only 12 months before it came in at $1.4 Trillion.

  • Report this Comment On July 24, 2010, at 7:32 AM, MrsCathyGF wrote:

    Who thought you had economic common sense, and let you write an article for this site ? Keynesian simply means spend what you don't have to generate imaginary economic activity, and hope people buy into it. Common sense economic decision-making means spend your own actual, real time capitol to create, employ, and sustain a profitable business plan. And do that in as many areas as possible, across the nation, in a sustainable manner. Maybe we aught to start a new movement called 'sustainable economics'. I'd rather read about how to heal, rather than how to keep the economic patient on life support.

  • Report this Comment On July 24, 2010, at 2:28 PM, philkek wrote:

    Thanks MF and fellow fools. Good serious article & many good comments that cause people to think. I find this reading better than watching a movie. I will investigate the businesses named and see if I dare invest my money in any of them.

    Supply and demand creates jobs...somewhere. That is how I found my American job. That is my 2c worth. Keep up the good writing. Fool on for profits.

  • Report this Comment On July 24, 2010, at 9:37 PM, guiron wrote:

    Thanks for writing an all-too-rare article on a financial-oriented site that's not about the religion of the Austrian School. It seems as if some economic ideas stop at the notion that someone doesn't want to pay taxes, although they do not explore how to make up that money in the budget nor do they ever compare tax cuts to spending. As long as less money is coming in, spending and tax cuts have the same effect on our balance sheet and our debt. Targeted stimulus is needed, not unsubstantiated nonsense that can be chalked up to fundraising by the GOP in an election year. The Republicans never reduce the debt when they're in power anyway, and in fact it tends to grow more. It's a red herring and meant to distract while they help redistribute wealth to the top, once again ...

  • Report this Comment On July 24, 2010, at 9:50 PM, guiron wrote:

    "Keynesian simply means spend what you don't have to generate imaginary economic activity, and hope people buy into it."

    No, it's a way to push and pull the economy with certain tools related to money supply. How can money supply be completely relevant when talking about hyperinflation, but Keynesian theory is imaginary? If interest rates and quantitative easing truly did not work, the system would have broken down long ago - there are very few serious economists who agree with the Austrians, and equity markets are not the economy. We have had bubbles and recessions since at least the 1600s when the tulip craze swept the Netherlands. The gold standard did not stop the Long Depression, the economic slump after the Civil War which was considered far worse than the Great Depression by those who saw both.

    "Common sense economic decision-making means spend your own actual, real time capitol to create, employ, and sustain a profitable business plan."

    So, you don't need financing or equity markets? Surely, that must be the case if you're only spending your own capital.

    Did you know that candlestick trading traces back to rice futures trading in Japan in the 18th century? Agriculture has needed the futures market for a very long time, and corporate capitalization comes largely from investors. That's what the stock market is.

  • Report this Comment On July 24, 2010, at 10:00 PM, guiron wrote:

    "The problem with this article is that it assumes that government actually produces something; like jobs. The only jobs government can produce are government jobs. Or they can take over a private company (GM or Chrysler) and prop up union jobs."

    Where do you think the highway system and oil come from? A big part of the cost of oil is all our problems with the Middle East, including war (very costly to all of us), which would never be an issue to us if they didn't have such a valuable resource in great supply. Who pays for the highway system? Who set it up and paid for it? Who set up the railways? Who established air traffic control and the postal system? Who set up the electrical grid, the phone system and established the Internet?

    Sure, government did nothing - nothing at all that helps with business. Yeah, right. Feel free to run your business on an island by yourself if you feel like being ideological. The rest of us have to live with each other, so we try to make it work for everyone by establishing the foundations of business: energy, transportation, communications, regulation (so that it's not kids running wild on a playground). Feel free to claim government does nothing to help business. I'd like to see what sort of money you'd make without it.

  • Report this Comment On July 24, 2010, at 10:05 PM, guiron wrote:

    By the way - who is the largest employer in the US?

    Hint: it's not a private sector employer.

    So, the government doesn't create jobs? Guess I'll have to tell my sister and brother-in-law, both probation officers, as well as another sister and brother in law in the Air Force and an uncle and grandfather in the Navy.

    So, these aren't jobs in a company designed to make a profit, but that's not the same as government. Essential services should not have the profit motive driving them or we end up with some very serious problems (e.g., Blackwater). And we do need essential services.

  • Report this Comment On July 24, 2010, at 10:12 PM, guiron wrote:

    "The only thing that government spending does is transfer wealth from one sector to other sectors. The only thing that the Fed does when it creates money out of thin air is inflate the money supply and reduces the value of the money. Is this just too simple to understand? Apparently."

    Quick: What was M2 in 2007?

    What was M2 in the summer of 2009?

    Now, subtract M2 in 2009 from M2 in 2007. Keep that number in your head.

    Now, how much money has been injected into the economy via treasury auctions? Is that number than the one you kept in your head from before? Hmmm ...

  • Report this Comment On July 24, 2010, at 10:14 PM, guiron wrote:

    "Full employment and government run health care were not written into the U.S. Constitution as inalienable, undeniable rights, but a gold standard for money and basic commerce exchange WAS."

    Tell it to the Supreme Court.

    This can't be your argument for everything. We're not going back to the gold standard, sorry.

  • Report this Comment On July 24, 2010, at 10:16 PM, guiron wrote:

    "The fact is that more than half of people receiving benefits "magically" find a job in the last week or two before the checks run out."

    Why didn't that happen this time? Do you suppose that when the unemployment rate was 5%, people were less lazy?

  • Report this Comment On July 24, 2010, at 10:24 PM, guiron wrote:

    "But then if Congress would have not encouraged Freddie and Fannie to make sub prime loans (indirectly encouraging private financial institutions to follow suit) to people who could ill afford them, we would not be in this fix to begin with."

    Fannie and Freddie were problems, but the mortgage mess is not due to the government.

    Are you saying we need more regulation and better enforced? Because I agree. By the way, the worst of those loans from 2004-2007 came from other places. Blaming the government for allowing you do do harm is a pathetic excuse. "Now look what you made me do!"

  • Report this Comment On July 24, 2010, at 10:30 PM, guiron wrote:

    "The pro-deficit folks in Congress and the WH refused to look at a budget cut elsewhere, insisting instead on increasing the deficit to fund the bill."

    The so-called "budget hawks" never do seem to be able to remember cutting the budget when they cut taxes. Whoops!

    Deficit trimming isn't necessary now. The Democrats got quite a lot done. The Reuplicans DID NOTHING and now are complaining that the sky isn't blue enough.

    Hey, I got news for you. ALL OF US are paying for the reckless economic policies of the last 10 years. It's time for the Republicans to keep quiet because we have to deal with their mess now, just like we always do. And, as always, the Republicans bitch and moan about taxes (that haven't been increased by Obama or the current Congress) and blame poor people. As always.

    Have some decency.

  • Report this Comment On July 24, 2010, at 10:38 PM, guiron wrote:

    "The real issue here is whether or not force should be used to advance any theory of "how to fix things". Taxes are always collected under force. If you don't believe this, just try not paying your taxes. Eventually people with guns will come to talk to you about it."

    Grow up.

    If you don't want to contribute to society, please, stop paying your taxes, and make sure to give the IRS that speech you just gave us.

    Taxes are the only certainty other than death. So, dummy up. Deal with it. We all do. Seriously, our tax rates are insanely low, even historically. Check out the top tax rate from 1933 to 1970 (it was 70-90% - due to WWII and the Depression).

    There is no such thing as a free lunch.

  • Report this Comment On July 26, 2010, at 12:49 PM, clydejazz wrote:

    Corporations are sitting on record amounts of cash.

    They are not spending it because they are afraid to expand in the face of incredibly weak demand.They are like the boys and girls lined up on opposite sides of the gym at a junior high dance, waiting for someone else to make the first move.

    The only thing that eventually cured the Great Depression was the massive government spending forced by World War 2. We don't need to go through that again.

    Moody's and several other independent organizations are right about the stimulus: it created or saved 2-3 million jobs. It did not go far enough. Let's revamp our dismal transportation system that is wasting billions of man-hours in stalled traffic, polluting our oceans and air, and sending billions of dollars to Saudi Arabia (and thus the Taliban). That will stimulate the economy, and facilitate much greater growth in the future.

  • Report this Comment On July 26, 2010, at 7:45 PM, ecloud wrote:

    samscreek: not only are you right about what's happening for the local jobs, but most companies are outsourcing every job that they can possibly get done outside the country.

    I have read the arguments against protectionism, and I think I disagree. As long as the world has poor parts and rich parts, it's not in the best interest of the rich parts to try to "level the playing field" - we will just bring ourselves down to their level. There may not be a surge in hiring of Americans until our wages are competitive with the sum of (wages + outsourcing costs) which those companies have gotten addicted to. (We can be paid more because we work in the company's home office, but only a little.) And the government does nothing at all about that. They are being lobbied hard all the time by those very companies, after all.

    We are plenty big enough and have such vast resources and technology and human talent available to us inside this country alone that there is no reason we _need_ to participate in the global economy. Compared to the current malaise, a bit of economic isolation would be like a breath of fresh air. Modern communications technology has made outsourcing too easy, which is why this is more of a pressing problem than it used to be.

    We are in a race to the bottom. Statistics make readily apparent the fact that the rich are getting richer and the poor are getting poorer. The middle class is shrinking.

    The gov't needs to stop throwing money around and focus on making sure the employment situation is FAIR for American workers. Direct financial meddling is against our principles of freedom, and has too many unintended consequences. Regulating industry, hiring policies, standards of quality, and imports and exports to benefit the people at the expense of conscience-free mechanical corporate entities, seems like the lesser of the evils at this point.

  • Report this Comment On July 26, 2010, at 10:37 PM, dbman5 wrote:

    To the many who think reducing tax rates will fix things, please explain how it fixes things for my friend....

    He owns a small business with about 8 employees but his sales have slumped recently (as they have for many small business) so his tax rate could be 50% but he still wouldn't pay anything in taxes because he isn't making any money and 50% of 0 is still 0. In fact, he has been taking money out of his personal savings to pay salaries. He may soon be forced to lay off one or more employees.

    So, let's say we cut his tax rate in half. This increases his after tax income by exactly $0.00 and he still can't hire anyone because (a) he didn't gain much [anything] by the tax cut and (b) the tax cut didn't cause customers to buy more of his product. If the tax cut was on his equipment rather than income, it still wouldn't do much because he doesn't have that much equipment in his particular business. (OK, I know some of you will argue that the tax cut will improve the economy and eventually increase his sales. But (a) it sounds good but the actual facts don't support it and (b) if it did, by the time it did he would probably be out of business.)

    Now let's say the govt stimulus money goes to someone who needs this guys product and his sales suddenly increase 50%. NOW he will have to hire someone to help with the increased business. And that person will be making more money and spending more money thus improving the economy.

    Nobody wants to increase govt spending indefinitely but everything I've read from real economists says that stimulus is required at this stage. Tax cuts may help the economy a little but they will hurt the deficit even more. Even though tax cuts sound good, according to statistics and even according to economists from the Bush administration stimulus money is what it need at this stage.

  • Report this Comment On July 31, 2010, at 9:51 AM, brofreck wrote:

    Unfettered financial entities circulating dubious products, real estate sales and borrowing inflated by borrowers with little or no credit worthiness, tax cuts with no offsetting spending reduction, transfer of wealth from the middle class drivers of our consumer economy, consumer debt overload, two wars on the credit card, health care costs skyrocket---What could go wrong? Cleaning up a train wreck takes time and is not pretty.

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