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Economics Ain't Gymnastics: Why China Won't Overtake America
Tweet Share on Facebook August 13, 2008 Comment (10)New York Times columnist David Brooks has written one of the most depressing columns I've read in a long time. As he sees it, the 21st century is the Chinese century. Sorry, America, your time is up.
But first a bit of history: Back in the 1980s, liberals were desperately looking for a Big Economic Idea to combat Reaganomics. Instead of looking inward to the core American value of individualism and entrepreneurialism, they looked eastward to Japan and saw a high-tech, economic superpower where big government was dominant. Rather than relying on uncertain and uncontrollable market forces, Japan's elites apparently possessed the wisdom to choose which industries looked the most promising. They then harnessed and directed state resources and favor in their direction.
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Two Cheers for Russia's Invasion of Georgia
Tweet Share on Facebook August 12, 2008 Comment (37)The thoughts of a former expert on the former Soviet Union—that would be me, to crib a line from geopolitical guru Thomas Barnett—about the Russian invasion of Georgia:
1) It would be great if clarity came cheap. Sometimes it does, but often it doesn't. In our liberation of Iraq, for instance, late realization about troop strength and strategy cost us men, money, and the opportunity to more easily advance our foreign policy goals everywhere from North Korea to Iran to Venezuela. Now we all have clarity about the nasty nature of Putin's Russia (though I hope experts like Secretary Rice aren't surprised), just as 9/11 gave us the full matrix about the true reality of the world we live in. It will be democratic Georgia, however, paying the price this time.
2) There's a big long-term positive in all this. We also now have greater clarity on the need to dramatically reduce our dependence on foreign oil. As fast as possible without ruining the economy. It's "all of the above" time, gang—domestic drilling, nukes, concentrated solar, deep geothermal, clean coal, and whatever else Silicon Valley and heroic capitalists everywhere can dream up as we conduct a market-driven transition to a post-hydrocarbon economy. Now the inside-the-beltway types tend to pooh-pooh all this, as if anyone suggesting energy independence is an isolationist, nativist rube who wants to turn America into Juche North Korea. But why they would want to risk the American economy potentially held hostage to, say, a couple of oil pipelines running through Soviet-occupied—I mean, Russian-occupied—Georgia is baffling to me.
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Dude, Where's My Recession? The Series
Tweet Share on Facebook August 12, 2008 Comment (1)Thanks to today's trade numbers, it now looks as if the economy grew much faster than 1.9 percent in the second quarter. In their preliminary GDP estimate, government bean counters thought the trade deficit would increase. Instead, it narrowed as exports surged 4.0 percent vs. a 1.8 percent rise in imports. As result, the economy probably grew at least 2.9 percent in the second quarter, if not a bit more. How will this play out? The econ team at Global Insight is worried:
The question for the future is how much support trade can continue to provide. Recent signals from Europe and Japan have suggested a growing risk of recession. Of course, a key reason that these economies are suffering is that the U.S. is growing at their expense. But the more severe their slowdown, the greater the likelihood that it will begin to cool down the boom in exports.
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Do Most Companies Really Pay No Taxes?
Tweet Share on Facebook August 12, 2008 Comment (8)According to the Associated Press's interpretation of a new Government Accountability Office report, "Two thirds of U.S. corporations paid no federal income taxes between 1998 and 2005." Really, the guys over at the Tax Foundation beg to differ. They note that the actual report tells a different story.
In fact, what the report shows is that only 25% of large U.S. corporations paid no corporate income tax in 2005. In 85% of those cases, the large corporation paid no income tax because it had zero or negative net income for 2005. No income, no income tax. For example, in a "clever tax dodge," American Airlines avoided income tax for 2005 by losing $862 million. General Motors lost $10.5 billion in 2005; I bet those greedy fat cats didn't pay any corporate income tax, either.
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The Bush (Oil) Tax Cut of 2008
Tweet Share on Facebook August 11, 2008 Comment (9)Democrats are pretty eager to repeal (some) of the 2001 and 2003 Bush tax cuts. But what about the 2008 tax cut? By that, I mean the big drop in oil prices we are seeing right now. I think the president's lifting of the executive order banning offshore drilling was a key moment in reversing oil-market psychology. Since then, we've had McCain push the drilling issue hard, and even Obama has softened his anti-drill stance. For now, the political momentum is behind cheaper energy.
Energy is the economic issue, gang. What all this is doing is sending a message to the oil market that America will do whatever it takes to meet its energy needs—oil, nukes, renewables. "All of the above," you know? Now a couple of quick outside takes here. First, JPMorgan economist Jim Glassman:
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When the Housing and Credit Crisis Will End
Tweet Share on Facebook August 11, 2008 Comment (1)I think this bit of insight from economist Mike Darda of MKM Partners sums things up nicely:
The current credit crisis began after a rise in housing inventories weakened home prices and sent credit markets into a tailspin. It would seem only logical then to expect inventories to turn before house price trends become more favorable. Our model suggests new home inventories will have to fall below 7 months supply (from 10 months currently) before home prices begin to rise again. Unfortunately, this could take longer than anticipated given the current state of credit markets.... We believe improvement in corporate bond and mortgage markets is a crucial prerequisite to breaking the negative feedback loop between housing, the financial system, and the broad economy.
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This Will Surprise Most of You
Tweet Share on Facebook August 11, 2008 Comment (1)A revealing factoid and an insightful bit of analysis from market strategist Ed Yardeni:
With forward earnings around $100 currently, why isn't the S&P 500 at 1600 now? Investors clearly remain concerned about the credit crisis and the possibility of a longer and deeper recession. Why aren't they impressed that S&P 500 earnings excluding Financials were up 10.2% y/y during Q1 and 7.7% during Q2? The strength was largely attributable to profits from overseas, and many foreign economies are turning weaker, especially in Europe. The bearish concerns about earnings may continue to offset the bullish developments for valuation over the rest of the year.
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Obama and McCain’s Olympian China Error
Tweet Share on Facebook August 8, 2008 Comment (8)If you've been absorb-ing the ubiquitous media coverage of the Beijing Summer Olympics, you might be getting a bit China-ed out right about now. But if you're a presidential politics junkie, probably not so much. So far this campaign season, "Rising China" has been the panda in the corner, pretty much ignored despite being the obvious subtext to almost all of America's economic challenges.
Take Barack Obama, for instance. In his campaign's 59-page "Blueprint for Change," China is mentioned but twice, neither time in explicitly economic terms. And in a series of policy speeches this summer, Obama hasn't mentioned China at all. Nor has John McCain been any better. He didn't say a word about China in a showpiece economic speech last month.
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Dynamic Dollar Duo: Obama and Volcker
Tweet Share on Facebook August 8, 2008 Comment (1)The decline of the dollar has been an MIA issue in the presidential campaign, even though the public is aware of it and doesn't like it. So I find this interesting: The Wall Street Journal praises Barack Obama this morning for a bit of gabbing he's been doing about the greenback.
Apparently, Obama—who has taken on former Fed Chairman Paul Volcker as an economic adviser—has acknowledged the obvious fact that a weak dollar is fueling higher oil and gas prices. (Thank you, Mr. Chairman!) He also said that strengthening the economy would boost the dollar. The WSJ thinks it's just the opposite.
I think it works both ways: A stronger dollar would help the economy, and a stronger economy would help the dollar. Now, a strong-dollar president would be great. I wish we had one right now. But I worry that Obama's strong dollar talk is code for "Let's jack up government spending to boost the economy and that will boost the dollar." If that happens, the dollar might have farther to fall. Here is how I would boost the greenback.
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The 2009 Economy
Tweet Share on Facebook August 8, 2008 Comment (3)Have a gander at this bit of economic analysis from Macroeconomic Advisers (bold is mine):
The economic outlook for the second half is weak, at best. We expect domestic final demand to shrink at nearly a 1% pace over the second half and GDP growth to be barely positive, on average, over that period. The weakness in growth will push the unemployment rate up to 6¼% by the first quarter of 2009...Despite the weakness over the second half, we continue to believe that a sustained recovery will emerge next year. In particular, we expect growth to rebound to a 3% pace in the second half of 2009 and to above 3% in 2010...The considerable slack that emerges and the flattening-out of the dollar and energy prices that we anticipate create a very benign environment for inflation, allowing headline and core PCE inflation to fall all the way to 1.5% by the end of the forecast horizon.... The combination of falling headline inflation and weak economic growth should be sufficient to keep the Federal Reserve from tightening policy this year. However, once growth appears to turn the corner, the Committee will be quick to begin raising rates. We continue to expect the first tightening to take place in March 2009 and project the federal funds rate to reach 3½% by the end of that year.
Me: The flaw in this analysis is that it completely ignores possible huge tax hikes and huge budget deficits. Both would be bad for growth.
