Spending Like There IS A Tomorrow

There’s a growing consensus in the United States that this is no time to be waging war on deficits, just the opposite. The idea, proposed by Krugman and others, is that the US government needs to stimulate the economy by a variety of means, a key one being infrastructure projects. In essence they’re talking about a new New Deal.

Unlike government giveaways, infrastructure projects are an investment, the sort of thing designed to reap big dividends in years to come. They’re also a means to introduce major technology shifts.

Why restore obsolete or unproductive infrastructure? Maybe in the future the rising cost of fuel will mean you won’t need three highways in some places but only one. Restoring all three, therefore, would plainly be little more than a glorified, make work project.

However, past experience shows this sort of depression-era infrastructure spending can, by its very size, allow governments to introduce new technologies and major changes that would otherwise have been impossible.

Look at Germany in the 30’s. Monster that he was, Hitler’s Nazi government brought that country back to life through some key pre-war infrastructure projects ranging from public housing to autobahns. Similar benefits came to Americans from Roosevelt’s interventions which are neatly summarized in this from Newgeography.com:

“Together with a plethora of well-built public schools, libraries, post offices, parks, water systems, bridges, airports, hospitals, harbors, city halls, county courthouses, zoos, art works and more, New Deal initiatives spread the wealth and enriched the lives of uncounted Americans.”
http://www.newgeography.com/content/00170-excavating-the-buried-civilization-roosevelt%E2%80%99s-new-deal

Most of North America is well overdue for a serious makeover. There’s the essential infrastructure decay that needs fixing – water and sewer systems in many Canadian cities, for example. But there are also opportunities to get our nations aligned for the 21st century realities. I’ll give you an example.

Rail transport. We know that rail is up to five times more fuel efficient for transporting freight over great distances than long-haul truck transport. Unfortunately the rail system we have today isn’t up to the job. What if the government was to commit to a mega-project to construct a new, high capacity railway system for the 21st century? Use rail in lieu of trucks. Not only would it reduce fossil fuel consumption but it would make the transport of goods far more affordable. Trucks would be used for short and medium-haul delivery, not inefficient cross-Canada transport.

I’m sure there are several other equally sound ideas for overhauling and modernizing Canada’s infrastructure to meet the changes we’ll face this century. Let’s identify them, see what can be done and what rewards we’ll reap from them in the future.

If you see this as just standard, socialist babble, take a look at the 401 highway from Windsor to Montreal. Read about the old, pioneer path 2-lane routes it replaced and then learn about the role this one superhighway played in Ontario’s economic rise in the postwar decades. Once you’ve digested that, you can come back and rail on about socialism. Look at the expansion and development of secondary airports and microwave communications and the role they played in opening up Canada’s north and then you can bleat anti-socialist mantras.

We all pretty much realize that a real future lies in so-called green industries, everything from carbon capture technology to alternative, clean power projects. Those are industries that will create jobs and wealth. What better time to kickstart things like that?

Of course it will take a government with real vision to recognize the opportunities and exploit them for the benefit of the country. I doubt very much that’s within the scope of the one-dimensional administration we have today.

 

Jobs, Jobs, Jobs – What’s Going On?

Jobs are in the news today, in Canada and in the United States.

The good news is here at home where we added 43,000 more jobs last month, a fivefold increase over the 8,000 forecast. This comes atop 46,400 added in January.

The bad news is in the United States. The Americans lost 63,000 jobs in February, following a loss of 22,000 jobs in January. The New York Times calls it the, “…fastest falloff in the labor market in five years.”

“I haven’t seen a job report this recessionary since the last recession,” said Jared Bernstein, an economist at the Economic Policy Institute in Washington. “This is a picture of a labor market becoming clearly infected by the contagion from the rest of the economy.”

So, what’s going on in Canada? Are we defying gravity? From the Financial Post:

“Mind boggling,” said Derek Burleton, senior economist at Toronto-dominion Bank. “I’m obviously a little shocked right now.”
“The last two-months blowout in employment certainly goes against this notion that Canada’s economy is really beginning to slow, especially after the Bank of Canada statement earlier this week.”

The manufacturing sector, hit hard by the strong Canadian dollar, shed 23,700 workers in February but that was partially offset by job growth in the construction sector. The goods-producing sector lost 12,500 jobs while the services sector gained 55,800.”

Nobody seems to be able to account for the disparity between the Canadian and US numbers. With buoyant world grain markets and energy markets, are we better poised to withstand an American recession and, if so, for how long?

Canada’s good news would be a lot more welcome if it wasn’t for the weakening situation to the south. Now that NAFTA and Rust Belt unemployment have become a prominent issue in the presidential campaign I don’t think our job performance is going to be welcome to those who blame NAFTA for their misfortune.

 

The End of the World As We’ve Known It

These are fascinating times and we just may be witnessing a geopolitical power shift of seismic proportions; the decline of the West and the ascendancy of the East. The vehicle for this could be the looming recession.

There’s an excellent analysis of how empires rise and fall in a book I reviewed earlier, “American Theocracy, The Peril and Politics of Radical Religion, Oil and Borrowed Money in the 21st Century.” It’s author, a prominent Republican named Kevin Phillips, examined the consistent patterns found in the rise and fall of previous dominant states including the Dutch, the Spanish and the British empires and applied those patterns to his own country to conclude that America was approaching the end of its glory days.

One of Phillips’ key observations was how mighty nations fell into decline when they abandoned their own manufacturing base in favour of offshore production, thus using their wealth to grow another nation’s economy. Sound familiar? Accompanying this phenomenon, Phillips identified the shift from a production-based economy into a financialized economy (see “The Bubble Up Economy – Part Deux” posted here yesterday).

This transition is also discussed by Fareed Zakaria in his latest article in Newsweek entitled “The World Bails Us Out” in which he observes, “The United States is in the beginning of a period of relative decline. This is not defeatism, it’s math.”

“As the American economy slows down, there are no indications that other countries are tumbling. In particular, the fastest-growing big economies in the world – China, India, Brazil—appear set to continue with their robust growth. While a sharp American downturn will surely slow them down somewhat, those emerging markets will all continue to expand—to buy, sell and trade—and this will help the United States.

The quarterly results of many large American multinationals (other than banks) show how. Their profits are growing extremely slowly in the United States—at best a few percent—but are surging by 15 or 20 percent abroad. Adding all these companies together, we can see why America’s trade deficit—which ballooned for decades—has begun shrinking dramatically, by $100 billion over the past year. This trend will accelerate as the U.S. dollar’s decline continues to make American exports more affordable across the world.

The past few years have been very good to the world’s energy-rich lands—Kuwait, the United Arab Emirates, Saudi Arabia, Norway. Add to the list China and Singapore; they may not be big oil exporters, but they still have huge surpluses. These vast savings have to go somewhere, and sovereign wealth funds—the investment arms of these nations—have provided infusions of cash to otherwise desperate American financial firms. Imagine what the U.S. economy would look like without these investments. Many of its most illustrious banks and financial companies would have gone bankrupt, triggering cascades of gloom and doom across America.

These trends represent a large, ongoing shift in the global economic order. Power is moving away from the traditional centers of the global economy—the Western nations—to the emerging markets. To put it more bluntly: the United States is in the beginning of a period of relative decline. It may not be steep or dramatic, but the fact that it’s happening is clear. Even if one assumes a slowdown, the other big economies will still grow at two and three times the pace of the West.

All this means that the political and economic clout of the West—and centrally of the United States—is waning. You can see this reality in the discussions at Davos, where Indian businessmen, Russian officials, Saudi investment advisers and Chinese academics are moving to center stage.

On the American campaign trail, the candidates talk about a world utterly unrelated to the one that is actually being created on the ground. The Republicans promise to wage war against Islamic extremists and modernize the Middle East. The Democrats deplore the ills of globalization and free trade, and urge tougher measures against China. Meanwhile Middle Eastern fund managers and Asian consumers are quietly keeping the U.S. economy afloat.

 

It’s Mardi Gras in Washington

President George w. Bush has just the cure to avert America’s looming recession – borrow money. It’s the same answer he uses when he wants to wage war without end or let the very richest people in America slip their fair share of taxes – borrow money (just make sure you put it on the little guy’s tab). Oh sure it causes big deficits and enormous long-term debt but, hey, that’s for the kids to worry about 20 years from now, huh?

So here’s the deal. Bush wants to borrow America’s way out of recession to the tune of about $145-billion. That would be doled out in the guise of tax “rebates” although the idiocy of purporting to rebate money you don’t have isn’t being mentioned in the White House or in Congress for that matter. From the New York Times:

“Letting Americans keep more of their own money should increase consumer spending,” the president said, repeating a theme he has embraced time and again during his presidency, although perhaps never when, in the opinion of many analysts, the economy was teetering on the brink of recession.
There was speculation beforehand that the relief package would amount to $800 rebates for individual taxpayers and $1,600 for households. Based on the $140 billion to $145 billion range of the entire package, it appeared that the rebates would not exceed $800 and $1,600.

The president called again for Congress to make permanent the tax cuts that were enacted several years ago and are to expire in the next three years. Otherwise, he said, there will be such uncertainty that jobs and economic growth will be jeopardized. But the president did not insist on getting his way as a condition of negotiations on short-term relief.

Letting Americans keep more of their own money? No, chum, you’re doling out money you’re borrowing in their name, loans a lot of them couldn’t get right now. All you’re giving them is some cash and an equivalent in interest-bearing debt – leaving aside the question of how the working and middle class are going to repay that faux largesse to be sorted out by another government at another time. Meanwhile, let’s enshrine those tax cuts for the rich. They deserve them after all, they’re rich aren’t they?

 

Wringing In The New Year

In a debt-ridden, import-addicted, consumer-driven economy, any cut in consumer spending can be the economic equivalent of an aneurism. This is the very scenario that appears to be developing in the United States just as the president and congress try to come to grips with the aftershocks of the credit crunch resulting from the subprime mortgage meltdown.

About the only debate in the business news is whether America is already in a recession or on the eve of one. From the New York Times:

“Strong evidence is emerging that consumer spending, a bulwark against recession over the last year even as energy prices surged and the housing market sputtered, has begun to slow sharply at every level of the American economy, from the working class to the wealthy.

The abrupt pullback raises the possibility that the country may be experiencing a rare decline in personal consumption, not just a slower rate of growth. Such a decline would be the first since 1991, and it would almost certainly push the entire economy into a recession in the middle of an election year.

There are mounting anecdotal signs that beginning in December Americans cut back significantly on personal consumption, which accounts for 70 percent of the economy.

And consumer confidence, an important barometer of economic health, has plunged. Andrew Kohut, president of the Pew Research Center, says consumer satisfaction with the economy has reached a 15-year low, according to the firm’s polling.

Even wealthier consumers, who were seen as invulnerable to rising gasoline prices and falling home values, are feeling the squeeze.

Even in tough economic times Americans rarely reduce their consumption, preferring instead to slow the growth in their spending. Since 1980, they have cut spending in only five quarters — a total of 15 months — most of them in the depths of a recession. The 2001 recession passed without a cutback in consumer spending.

Fresh evidence of a pullback is pouring in from many quarters as Americans confront the triple threats of higher energy costs, falling home prices and a volatile stock market.

Perhaps the strongest barometer over the last 30 days is the performance of the country’s big chain stores. December turned out to be a blood bath for retailers at every rung on the economic ladder, with sales for the month growing at the slowest rate in seven years.

But it is the trouble at the highest reaches of retailing that has economists most worried about a recession. Over the last year, even as low-wage and middle-income consumers have cut back, the wealthy have spent freely, keeping high-end chains insulated from the economic turbulence.

That started to change in December, as shoppers held off on buying $300 designer shoes and $500 dresses. For example, store sales fell 4 percent at Nordstrom, the high-end department store.

A “made in America” recession would be felt globally throughout the developed world, probably in Canada as much as anywhere. This time, however, the effects may be softened by sustained, strong growth in the 7% range in the developing world which may offset some loss of trade to the United States.