Monday, September 13, 2010

Is economic hard times teaching us anything?

GDP stands for gross domestic product.

Gross domestic product is the total value of goods produced and services provided in a country in one year.

Recession means a temporary economic decline, and is defined as having begun when a country’s GDP falls two quarters in a row.

Since demand for products and services drops during a recession, people lose their jobs; the unemployment rate rises.

The cure for an economic recession is not to “create” jobs but to recreate demand for goods and services; jobs follow.

Economic recessions seem almost cyclical without rhyme or reason, and without regard to what politcal party is in power, and often without being able to point to any specific things the party in power did wrong.

Certainly, logic tells us that the political party in power, or at least the federal government in general, CAN do things to hasten the advent of a recession.

“Uncertainty” is the enemy of both the stock market and robust economic growth in general.

Uncertainty means producers of good and services are reluctant to take chances on expanding their businesses or embark on new business ventures until they are more certain the rules of the game are not going to be changed in mid-investment. When uncertain, money tends to stay on the sidelines in the form of more secure investments such as Treasury Bills, and banks become more and more reluctant to lend money until they find out what the government is going to do.

If nothing bad happens for a while, money begins to seep back into the economy and producers of goods and services begin to take cautious chances little by little.

What can the federal goverment do to create fear and uncertainty in the marketplace, and thereby exacerbate a recession?

What can the federal government do to promote confidence and reduce fear?

If the federal goverment assumes huge paper debts (borrows on whatever is left of its good name) and “injects” that money into the economy to be used to hire and pay workers on temporary jobs, is this action likely to magically make these jobs turn permanent once the money runs out, and thereby make the recession go away?

True, it will put money into the pockets of workers and employers, and, true, they will go out and spend this money. George Bush did much the same thing by simply mailing out checks for $400 to everyone on the tax rolls, but that was hardly a permanent economic fix, either. It did put some money in lots of people's hands and they did spend it. That only works until that temporary money runs out, in my opinion.

No, mailing out money to Americans created only a temporary and false demand for products and services, not true long-term sustainable demand. It helped people sell their goods and services for a few weeks, and it helped a few people get temporary employment, but it didn’t really address the real causes of a recession.

I do realize that what Bush did and what Obama is doing is strictly textbook Keynesian economics, but I am arrogant enough to think I have enough common sense to fly in the face of the experts and enough ignorance to sit here and write my contrary opinions down.

My gut tells me, similarly, that the recent injection of borrowed money into make-work projects (some projects were sorely needed, many we could have lived without), though better than Bush's simple mailout, because we at least got some infrastructure repaired for our money, still didn’t address the real reason we are in a recession. Besides, the government can put billions of dollars into the economy overnight, if it wishes to do so, by simply declaring a payroll tax holiday. I don't think injections of any sort are really the permanent answer.


Another reason our current recession is deeper than most, borderline depression, is that, for a lot of high-rolling thieves and assorted bad managers, the bubble burst and the rent came due. Bankers and investment brokers had been screwing around with worthless paper for a very long time, without any meaningful oversight hassle from the goverment “watchdogs.” Finally, the Ponzi scam pyramid caved in on them. And did our government finally do the right thing and let them fail and drag them off to jail?

Some others weren’t especially dishonest, but were merely poor managers on a staggering scale: General Motors comes to mind. Did our government make them take their lumps for being terrible money managers?

What have we learned from this recession and its causes? One thing I hope we have learned is to put new laws in place that trigger automatic (mandatory) action on the government’s part, earlier on, when a large corporation or financial institution starts emitting smelly signs of mismanagement.

To me, if a company is truly “too big to be allowed to fail,” then that means that particular business is large enough to affect the lives of many America citizens, and the rules need to be different for that business. I’d like to see the government changing the boards of directors (Warren Buffett would have to sit on each such board, to pay him back for being so financially savvy) and setting up an emergency office there with government auditors and financial experts watching over and approving each contract and financial transaction as long as that large company stays unprofitable. I would like to see a “special master” appointed to oversee badly managed large businesses and brokerage houses. The symptoms in both cases are that common people begin losing their money and jobs because of executive mismanagement practices.

While I'm on this rant, huge corporations that are "too big to fail" should not have the option of building factories in Mexico and exporting American jobs to Mexico as one of their cost-saving measures. Think of something else, boys. Or don't expect a bailout from American workers down the road. And even smaller corporations like Stanley Tools and Polaris ATVs (never buy another snowmobile from Polaris as long as you live, or a screwdriver from Stanley, for that matter) should be sorely penalized when they move off-shore and strand hundreds of loyal American workers in Wisconsin without jobs. Fuck them. No more tax breaks. Tariffs on their now-foreign-made stinking products when they leave the country that made it possible for them to become big in the first place. May I have an amen?

We need to have learned enough to heed warning signs of recession and put rescue plans into place before the ship takes on too much water to save.

The Fed is not the answer anymore, if it ever was.

My opinion.


  1. This statement: "The cure for an economic recession is not to “create” jobs but to recreate demand for goods and services; jobs follow." shows you, at least, do not appear to be.

    Yet much of your rant seems in opposition to this statement (as well it should be). Japan overcame a recession much like ours twenty years ago (slowly and more painfully than they had to, largely because they followed the same kind of logic you keep using and were cautious).

    Look at the factors that really turned the depression around - the much maligned make-work /infrastructure projects that built much of the infrastructure crumbling now, the temporary job boom in war industry (we don't have because we had such a war materials glut and because our current wars affect our bottom line and only a small fraction of this country - which is living hell on that particular fraction).

    I DO agree with you on corporations too big to fail (but I don't think Warren Buffett is going to live long enough to serve on every major board indefinitely). As for exporting jobs, I tend to agree, but note that our slavish devotion and respect for profit at any cost (including the rabid defense of same regarding taxes) is, in my opinion, enabling it.

    How about costs incurred in another country not being counted in the allowable corporate expenses in THIS country for tax purposes? If half your wages are being paid in Taiwan (via contract or directly), our government doesn't see that as part of the net expenses.

    Of course, that would limit the extent of the multination global giants. On the other hand, is that a bad thing?

  2. Ooh this is getting complex!
    I'm right with you on "Companies too big to fail", however, I'm all in favour of those who led them to the brink being held accountable. No more big bonuses, no golden handshake goodbyes. Just a swift kick up the backside, much as experienced by the hard-working employees.
    Penalties on the exporters of jobs too.
    Here in Britain, in the aftermath of the fall of the iron curtain, it occurred to our captains of industry that eastern europeans would work hard and be very grateful for a fraction of a british worker's wage, and furthermore, there'd be hardly any safety or welfare legislation to bother about. Household names closed their factories here, opened new ones in Poland, Slovakia, Estonia...
    Seems good. Costs down, profits up, sell the factory sites for fancy apartments, bonus to shareholders, new yacht for chairman....
    But the bigger picture? A town suddenly has a thousand or so unemployed. A thousand fewer wages to buy goods and services from local businesses, A thousand families paying less or no tax, claiming unemployment, crime up, as unemployed kids get into trouble, I suppose the silver linings' that a Polish town becomes newly prosperous on the cash we're exporting.



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